Advice on implementing a PP in multiple retirement plans

[sophie]

I know this topic has come up before, but can anyone offer suggestions on how to deal with some retirement account conundrums?  I've much appreciated all the thoughtful/insightful comments on this forum, and it's helped me decide to jump from holding PRPFX to converting part of my retirement portfolio to the PP.

About half my retirement portfolio is in an active account at TIAA-CREF, which is absolutely hopeless from a PP standpoint.  Investing options are limited to a stock index with ER of 0.50, an active stock fund, total bond index, guaranteed annuity, and target retirement funds - no brokerage window.  I decided to just put it in target retirement and hope for the best.  At least that way I don't have to look at it, which is the only way I survived 2008  .

The other half is divided among several accounts, with about half (20% of the total) at a brokerage and most of the remainder in a Vanguard retirement account that I cannot roll over (it's under my current employer's plan).  The Vanguard account has excellent stock index funds, but the only useful bond funds are VUSTX and VFISX (and no brokerage window there either).  There have been previous posts talking about spreading the allocations among the various accounts, so I won't bore you all with the details.  I just had a couple of questions for the group:

First, I'm having to rely on VUSTX for the majority of the bond allocation.  To compensate, I'm buying 30 year Treasuries directly in the brokerage accounts with the idea of keeping them at 25 years or longer, and also counting half of VUSTX as cash.  Is that reasonable?  I've also seen some suggestions about balancing VUSTX with the EDV fund or zeros.

Second, with the plans splintered among several accounts, I'm trying to keep each one close to 50/50 between two asset classes so that I don't have problems rebalancing down the road.  I also tried to put together different combinations, e.g. stocks + gold into one account, bonds + cash in another, etc.  Has anyone dealt with this?  It's almost maddening how these very nice retirement benefits can turn the beautifully simple PP into something more like the qualitative SAT.

Finally, there is a small account at TIAA-CREF that I could roll over and that would simplify things a bit, but it would be a one-way trip and I'd be giving up the option of using the annuity plan for cash allocation.  That annuity is looking awfully good right now (paying just over 3%), and it's likely to be an advantage in future as well.

Thanks all for reading this far!

[AdamA]

I know this topic has come up before, but can anyone offer suggestions on how to deal with some retirement account conundrums?

These are very common problems.  I suspect the majority of people on this board have to deal with them in some form or another.

The most important thing is to get as close as you can.  You'll be surprised at how more options will seem to open up to you once you get things started.

First, I'm having to rely on VUSTX for the majority of the bond allocation.  To compensate, I'm buying 30 year Treasuries directly in the brokerage accounts with the idea of keeping them at 25 years or longer, and also counting half of VUSTX as cash.  Is that reasonable?  I've also seen some suggestions about balancing VUSTX with the EDV fund or zeros.

I would probably go 50/50 with EDV and VUSTX.  I might even consider using just EDV.  

I don't think that you should count VUSTX as cash.  It's not cash.  VFISX is a reasonable choice for cash, though.

Second, with the plans splintered among several accounts, I'm trying to keep each one close to 50/50 between two asset classes so that I don't have problems rebalancing down the road.  I also tried to put together different combinations, e.g. stocks + gold into one account, bonds + cash in another, etc.  Has anyone dealt with this?  It's almost maddening how these very nice retirement benefits can turn the beautifully simple PP into something more like the qualitative SAT.

I wouldn't worry too much about this.  Just start as close to 25% x 4 as you can.  As long as each asset class is reasonably represented, your performance won't suffer that much.  

Does your TIAA-CREF have a money market account?

If so, I might consider 25% stocks in the stock index fund (even though the ER's a little high) and 25% in the money market.  

I'd buy EDV or VUSTX in the vanguard retirement account and then some gold in your regular brokerage.  

My next step would be to buy a bunch of T-bills or open a treasury only money market fund.  

[alvinroast]

I agree with AdamA about just getting as close as you can to start with. While the .50 ER index fund may not be ideal, it's really not the worst problem when it comes to these retirement accounts. I would use that for the stock portion. Like Adam said, if there's a money market option in the TIAA go with that.

From my experience, EDV acts like it's leveraged compared to TLT. I'm counting mine as double for the LT bonds. If you're creative it may be easier to get close than it looks like at first. That depends on what options that VG account allows.

It can become quite a puzzle, but it's not like a jigsaw puzzle with only one right answer. There are many ways to work it. If you're still accumulating, you can fill in any gaps as you go.

[sophie]

Thanks, that is probably pretty good advice.  Jigsaw time.  TIAA's annuity fund, by the way, serves very well for the cash allotment.

I would probably go 50/50 with EDV and VUSTX.  I might even consider using just EDV. 

I don't think that you should count VUSTX as cash.  It's not cash.  VFISX is a reasonable choice for cash, though.

EDV isn't an option in the Vanguard account, more's the pity.  Sounds like treating VUSTX as a mixture of long bonds and cash is considered inferior to counterbalancing it with EDV or zeros, is that right?  About which, wouldn't buying zeros directly be just as good as EDV?


 

[AdamA]

TIAA's annuity fund, by the way, serves very well for the cash allotment.

You really want US Treasury bills for the cash portion if you can do it.  How does the annuity fund work?  I don't really know enough about annuities to comment.  

I would probably go 50/50 with EDV and VUSTX.  I might even consider using just EDV.  

I don't think that you should count VUSTX as cash.  It's not cash.  VFISX is a reasonable choice for cash, though.

EDV isn't an option in the Vanguard account, more's the pity.  Sounds like treating VUSTX as a mixture of long bonds and cash is considered inferior to counterbalancing it with EDV or zeros, is that right?  About which, wouldn't buying zeros directly be just as good as EDV?

I might just use VUSTX to start and then add 30 year bonds later.  I was just suggesting EDV because I thought you could get it through Vanguard in your situation.  Zeroes really aren't ideal.  

[sophie]

Thanks.  I went and looked at VUSTX more closely.  I'd thought it should behave like a combination of long term bonds and cash, because of the shorter duration, but that doesn't seem to be the case.  That must be the 20% of that fund that is something other than long treasuries.  Anyway,  I figured out a swap that will let me keep EDV in another account.

TIAA's annuity fund is effectively an insurance plan that guarantees the principle and pays at least a given rate of interest depending on the plan (3% in this case).  According to the website it has been operating continuously since 1918, so while I concede it's not exactly like treasuries, the risk appears minimal.  The idea is that you're supposed to invest with them throughout your career, and then convert your holdings to an annuity for retirement income.  Not that I'm advocating this, or any annuity - it's just a feature of this particular 403(g) plan.  It's sort of like an I-bond equivalent for retirement accounts.

[AdamA]

TIAA's annuity fund is effectively an insurance plan that guarantees the principle and pays at least a given rate of interest depending on the plan (3% in this case). 

How liquid is this cash?  If one of the other asset classes crashed today, how accessible would the cash be for rebalancing purposes?

[sophie]

TIAA's annuity fund is effectively an insurance plan that guarantees the principle and pays at least a given rate of interest depending on the plan (3% in this case). 


How liquid is this cash?  If one of the other asset classes crashed today, how accessible would the cash be for rebalancing purposes?

As liquid as anything else in the account.  Just do an exchange to buy whatever else you want.  Not that there's a lot of "whatever else" choices  .  The philosophy seems to be minimalist in this regard, which I can kind of understand. 

[sophie]

I would probably go 50/50 with EDV and VUSTX.  I might even consider using just EDV. 

I don't think that you should count VUSTX as cash.  It's not cash.  VFISX is a reasonable choice for cash, though.

I found the answer to my question, in the long thread on the bogleheads forum:

http://www.bogleheads.org/forum/viewtop ... &start=850

There are backtesting posts on page 18 with comparison charts.  A mix of equal parts short term bonds and long term bonds (say, the SHY and TLT combo) performs similarly to the same proportion in intermediate term bonds.  The PP with 25% STT, 25% LTT  yielded CAGR 9.27%, SD 8.36, Sharpe 0.47 from 1970-2009.  Substituting 50% ITT resulted in CAGR 9.56%, 8.21, 0.51.

So - no, VUSTX isn't cash and neither is it intermediate bonds, but if you grant that short term bonds (e.g. VFISX) can substitute for cash, then you might use those two funds for the cash/bonds allocation in a fixed ratio.  I'm not sure what the optimal ratio is - certainly 50/50 would be easiest and probably just fine, but probably something like 60/40 would be more accurate.

[AdamA]

TIAA's annuity fund is effectively an insurance plan that guarantees the principle and pays at least a given rate of interest depending on the plan (3% in this case). 


How liquid is this cash?  If one of the other asset classes crashed today, how accessible would the cash be for rebalancing purposes?

As liquid as anything else in the account.  Just do an exchange to buy whatever else you want.  Not that there's a lot of "whatever else" choices  .  The philosophy seems to be minimalist in this regard, which I can kind of understand. 

Is its value effected by interest rate changes?

[sophie]

TIAA's annuity fund is effectively an insurance plan that guarantees the principle and pays at least a given rate of interest depending on the plan (3% in this case). 


How liquid is this cash?  If one of the other asset classes crashed today, how accessible would the cash be for rebalancing purposes?

As liquid as anything else in the account.  Just do an exchange to buy whatever else you want.  Not that there's a lot of "whatever else" choices  .  The philosophy seems to be minimalist in this regard, which I can kind of understand. 

Is its value effected by interest rate changes?

No.  Balance cannot go down.  Goes up only because of compounding reinvested interest.