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bk10s

403b Allocation

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Hello - New to the Forum! My allocation currently includes a mix of low cost index funds (65%) and a fixed (5.25% guaranteed for 2009) account (total about $200K now). In this climate, would you recommend that I continue this allocation with new contributions, or should I leave what is already in funds alone and put all new money into the fixed account for a while? I fully fund a Roth each year and have 10K in I-Bonds. I am 47 years old and could retire in 8 years with a defined benefit pension. Many thanks for your suggestions.

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BK

 

 

I wouldn't change your current strategy. It seems wise. Of course the speculator in me says you should commit

all new money to stock funds especially since the market is at a low level and it is a great time to buy stocks.

 

 

Don't let the current market scare you into doing something you wouldn't normally do. Keep on keeping on.

 

 

 

Tony

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OK, Here is what my current allocation for my contributions:

 

20% Vanguard 500 Index

15% Fidelity Diversified International

10% Vanguard Mid Cap Index

10% Vanguard Small Cap Index

5% Vanguard Prime Cap

5% T. Rowe Price New Era

 

And then 35% goes into the Fixed (guaranteed 5.25%) for 2009.

 

I re-balance annually, as recently as January 2009.

 

Thank you so much for looking at this for me. I greatly value your thoughts.

 

 

 

 

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Vanguard Prime Cap or Vanguard Prime Cap core? The reason I ask is that I thought the former was closed to new investment.

 

Also, why did you choose to include this fund in your portfolio?

 

Also, is there any particular reason that you want a natural resources and commodities fund?

 

And one more question, what type of product and what are the details for the fixed income account?

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Hi Chrys -

 

It is Prime Cap. I was in this fund years ago before I went to a low cost index approach. The returns were good and the fees were small compared to other managed funds, so I stayed in.

 

Same with the Price New Era.

 

The guaranteed account is 5.25% for 2009 through Prudential. The rate re-sets annually. It was 4.95% for 2008.

 

My 403b is adminstered through: www.weatrust.com

 

So, what do you think? I will continue to contribute the max. However, I am wondering if I should continue to contribute in the current allocation, re-balancing annually? Or should I leave everything where it is and put new contributions into the guaranteed for a while? The only reason I am considering this is because of the extreme times we are in. I have never felt like this before.

 

 

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I tend to recommend strategic allocations for the simple reason that I have yet to find a tactical allocation strategy that sufficiently satisfies me that it will hold up and provide better performance over the many different market conditions that we might find. Therefore, I would tend to recommend that you choose an allocation and stick with it.

 

In a down market, this strategy can be psychologically difficult because your gut might tell you that you are losing all your hard earned money. In a rising market, the strategy can be psychologically difficult because your gut might tell you that you are missing out on higher returns. For this reason, I believe that you should carefully consider your investment objectives and write a plan before investing so that you can make a clear decision with a look to your over all returns and not be suckered into an emotionally driven short term decision.

 

With that said, I don't know enough about your investment goals or time horizon to say whether your allocation is appropriate for you.

 

Looking at your choices, your allocation suggests a bias towards certain market sectors (e.g. large-cap growth and natural resource and commodity stocks). Is this bias intentional?

 

 

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Hi Chrys -

 

It is Prime Cap. I was in this fund years ago before I went to a low cost index approach. The returns were good and the fees were small compared to other managed funds, so I stayed in.

 

Same with the Price New Era.

 

The guaranteed account is 5.25% for 2009 through Prudential. The rate re-sets annually. It was 4.95% for 2008.

 

My 403b is adminstered through: www.weatrust.com

 

So, what do you think? I will continue to contribute the max. However, I am wondering if I should continue to contribute in the current allocation, re-balancing annually? Or should I leave everything where it is and put new contributions into the guaranteed for a while? The only reason I am considering this is because of the extreme times we are in. I have never felt like this before.

 

 

Hi bk10,

Looks like your plan is good to me. One concern: the 5.25% for 2009 sounds too good to be true. I have seen a few institutions fail and they were offering higher than the market returns. Always be careful. BTW, do not listen to the prudendial sales person talk about why the 5.25% is safe. Find out for yourself by going to the prudential website and look up prudential's credit rating and the fees you are paying for that fixed account.

Hope this helps,

Steve

 

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You said you are looking to retire in 8 years and have a defined benefit plan.

 

So are the above funds you are investing to be used over the course of your retirement or for a specific event in retirement?

 

Also, will you be comfortable living just on your defined benefit plan? That is, would you be willing to forgo a distribution (re-investing any RMD's) if your portfolio lost a certain percentage of its value, or would you be able to live comfortably if you completely drew down your portfolio?

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You said you are looking to retire in 8 years and have a defined benefit plan.

 

So are the above funds you are investing to be used over the course of your retirement or for a specific event in retirement?

 

Also, will you be comfortable living just on your defined benefit plan? That is, would you be willing to forgo a distribution (re-investing any RMD's) if your portfolio lost a certain percentage of its value, or would you be able to live comfortably if you completely drew down your portfolio?

 

 

I came to this allocation by going through the survey-style evaluation of risk tolerance on the website of the 403b adminstrator - WEATrust (www.weatrust.com). The results suggested that I pick investments in Large, Mid, Small, and the guaranteed categories. Within each category there are various options. I chose to pick the indexes to go for lower fees. I used to be in managed funds years ago - That is why I stayed in Primecap and New Era - The fees were relatively low and they both had a good record for me. The 5.25% for 2009 is great.....There have been no signs that anything will change. That rate resets every year.

 

My wife and I do not have any specific goal for the TSA money. I should have mentioned that we are both teachers and both of us will have our own defined benefit pension in retirement. She is able to retire in 10 years. Our house will be paid off so our expenses will be lower. I would hope that we could live off the pension and use the TSA for.....health insurance/emergency/? Haven't thought about that - I guess we should.

 

I plan to keep a summer job in retirement that currently pays me about 30K/year.

 

So.......In these extreme times.......Stay the course or place future contributions in the fixed/guaranteed?

 

BTW, I am incredibly impressed with everyone's ideas and interest. Thank you so much!

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It's good to see that your retirement appears to be in excellent shape.

 

" I would hope that we could live off the pension and use the TSA for.....health insurance/emergency/? Haven't thought about that - I guess we should."

 

I agree. The first step should be to determine the purpose of the funds and the time frame or potential time frames for using them.

 

In general [and I am obviously not saying anything new here], if you need your money sooner, you will want to put a greater percentage in fixed income, shorter duration, higher credit quality investments; and if you need you money later, you will want to put a greater percentage in longer duration, potentially lower credit quality fixed income and/or stock investments.

 

When you determine the time frame for needing the funds (and don't be afraid to use a broad time frame like anywhere between the next 8 and 30 years if that is indeed the case), you should look at the sort of returns that various investments have made historically over these time frames to make an informed decision.

 

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