I’m sure I’m overthinking this but wanted to bounce ideas around.
I noticed in PoF’s drawdown during RE that he’ll have a decent 457 to draw down from. I also see from his investments that his 457 only invests in a VG midcap and VG small cap fund. We just started a 457 this year. It’s a government one with good options from Vanguard. Our plan right now is to retire at age 54, when all kids are out of the house. I suppose at that point maybe it makes sense to work 1 more year just to reach 55 to have early access to the 401k money penalty-free so maybe that makes this all a moot point. Unlike most people here, we’ll probably not have a huge taxable account because we have access to so many different retirement plans between the two of us. Maybe the taxable account will get to $100-$200k by the time we retire. There should be more than enough in the 457 plan to “bridge” us from RE to 59.5 years.
Anyway, two struggles I’m having. One of our 401k plans is awesome when it comes to fees. The total ER is .027. It’s a mix of mid cap, small cap, S&P, and bonds. The bond fund ER is .02. I’ll get to why I mention that.
The 457 is at vanguard. The total ER for that based on the current setup is .107. That’s still very low but it’s “higher” because while 50% is going to VG Institutional Index, 30% is going to a VG small cap with an ER of .19 and 20% is going to VG Total Bond Market with an ER of .15.
These are the only two accounts that hold any bonds, as our other 401k has bond funds but the lowest ER is .34. We are also young so only 10% in bonds right now.
So here’s my question with that laid out: if the plan is to draw down the 457 first, should we be more aggressive with the allocation there, or less so? We’re still ~15-18 years out from RE. If we do need to be more aggressive the “problem” is that means more money goes to a small cap fund with an ER of .19. I could also add a midcap here. Or, park the bonds all in the 457 plan because we want less volatility because this’ll be the first account we draw from? The ER on that bond fund is .15 vs the .02 in the 401k bond fund. That seems like a big difference to me. But I want to keep our overall allocation at 10% bonds.
so yeah, no doubt all of the funds have low ERs…even .19 isn’t bad. I’m trying to think more holistically about balancing risk and ERs and these two accounts but like I said at the beginning, I’m probably overthinking this and really splitting hairsApril 11, 2019 at 7:36 am MST #205692PedsModeratorStatus: PhysicianPosts: 4695Joined: 01/08/2016if the plan is to draw down the 457 first, should we be more aggressive with the allocation there, or less so?Click to expand…
you put the best options into the fund available that fits your overall plan.
money is fungible.
it makes no difference if you are withdrawing bonds or stocks in the 457 as you are going to re-balance across the rest of the portfolio.We’re still ~15-18 years out from RE.Click to expand…
you might not even have these same accounts that far in the future….But I want to keep our overall allocation at 10% bondsClick to expand…
if you are worrying about SOR and draw down, then the problem isnt the location, but the overall allocation you have chosen…The ER on that bond fund is .15 vs the .02 in the 401k bond fund. That seems like a big difference to me.Click to expand…
yes its 7x as much…..but its likely to be inconsequential.I’m probably overthinking this and really splitting hairsClick to expand…
yes.jzParticipantStatus: PhysicianPosts: 680Joined: 01/09/2016
3-5 years prior to your planned use, you should be mostly out of the stock markets. Execute your 457 plan until 3-5 years prior to usage; then reallocate to primarily bonds. Don’t obsess over ER rates; they have small impact compared to your chosen asset allocation.jhwkr542ParticipantStatus: PhysicianPosts: 1338Joined: 02/15/2016
As you draw down, you’ll adjust your asset allocation accordingly in your other tax-protected accounts. Don’t adjust your allocation currently. You’re overthinking this. 0.1% difference in ER over 20 years isn’t really that much in bonds.April 11, 2019 at 7:58 am MST #205700Don’t obsess over ER rates; they have small impact compared to your chosen asset allocationClick to expand…
yes, you are both right. I was also influenced by PoF’s piece today on ERs where he says the difference between an ER of .02 and .15 is “huge.” From a relative standpoint that is correct but from an absolute standpoint I’m overthinking this. hopefully the funds in the 457 have their ERs go down over time too, as I can see VG doing that to stay competitive. staying the course….April 11, 2019 at 8:05 am MST #205706LordosisParticipantStatus: PhysicianPosts: 2186Joined: 02/11/2019
I have thought about this as well. I get that money is fungible but I keep thinking that you do not have access to some of your money if you RE. However I think it does not matter as long as you do not run out of the money you do have access too. Please correct me if I am wrong.
“Never let your sense of morals prevent you from doing what is right.”April 11, 2019 at 8:38 am MST #205732PedsModeratorStatus: PhysicianPosts: 4695Joined: 01/08/2016I keep thinking that you do not have access to some of your money if you REClick to expand…
what money do you not have access to?April 11, 2019 at 8:40 am MST #205734q-schoolParticipantStatus: PhysicianPosts: 2640Joined: 05/07/2017
POF has also posted that you can access retirement money at younger ages as long as you are retired. don’t have to be at the nominal age cutoff to access monies.LordosisParticipantStatus: PhysicianPosts: 2186Joined: 02/11/2019I keep thinking that you do not have access to some of your money if you REClick to expand…
what money do you not have access to?Click to expand…
Well I meant 401k/IRA money. I guess you do have access but it may be limited depending on your situation.
“Never let your sense of morals prevent you from doing what is right.”April 11, 2019 at 8:44 am MST #205737
yes, you can get access to IRA/401k money early but the only 3 ways I’m aware are:
1) SEPP rule, which locks you into whatever amount you want for years until you get to 59.5, and must be exactly the same amount each year. Sound easy to screw this up and then face stiff penalties
2) Roth conversions, which then have a 5-year waiting period, which means you need to have 5 years’ of expenses in cash or a taxable account
3) you get your 401k (but not IRA) money if you retire from your company the year you turn 55.
Unlike PoF, we don’t want to retire with kids still in the house. We don’t want to be responsible for homeschooling. That would drive us nuts! So since we need to wait until the youngest is out of the house for college that fall when it happens will be 4 months shy of the year when we turn 55. So it seems to me we might as well just wait. And even then, yeah maybe we’ll just leave that 401k alone because we’ll have enough in the 457 to cover us for 4 years and just convert the 401k over to an IRAspiritriderParticipantStatus: Small Business OwnerPosts: 1974Joined: 02/01/2016
Keep in mind that 457b penalty free distributions at any time after separation and 401k penalty free distributions after separation in a year >= age 55 are only required to be lump sum. It is up to the plan whether and what other distribution options they support. Even if they allow other than lump sum distributions, they may only support additional equal and/or RMD periodic distributions.
It is a minority of plans that support unlimited partial withdrawals. For example, the TSP has only allowed one total partial withdrawal of either an in-service withdrawal or a post-separation withdrawal. It will only be this September 15th that unlimited partial withdrawals will be allowed.
If you rollover either the 457b or 401k balances to another employer plan or IRA you lose the early withdrawal penalty exception.
thank you for the clarification, spirit. I suspected rolling either over to an IRA or another employer 401k would then not make the age 55 rule an option anymore. Last I checked the 457b allows for a whole range of distribution options over a 10 year period so the plan is to set that up when the time comes. Maybe we’ll quit before age 55 because we know the 457 has enough to handle expenses for all of the years before 59.5. In fact I think there’s a very decent change of that happening. It’ll probably be equal amounts to draw it down over 5-10 years. We’ll also probably need to do roth conversions during this time too which is just another complicating factor that is too hard to predict this far out.April 11, 2019 at 10:48 am MST #205780Larry RagmanParticipantStatus: Other ProfessionalPosts: 639Joined: 08/30/2018
JBME, back to the original question about what allocation to make in the 457b as you approach retirement (hence whatever mandatory withdrawals your plan requires), I have concluded that once I start my 457b withdrawals any SOR risk for those funds will be incurred. Hence, I intend to adjust those 457b funds to be weighted towards bonds, and adjust the rest of the tax deferred portfolio to a slightly higher risk accordingly to maintain the same over all portfolio risk. Those arguing that the money is fungible as a rationale not to adjust within the 457b account are making a logical error. The risk to the 457b funds is present, while the risk to the rest of the funds is delayed. AS an aside, this is somewhat plan specific. In my case, I can withdraw over 15 years, but I intend to withdraw all the 457b funds as a bridge from retirement to SS.PhysicianOnFIREModeratorStatus: PhysicianPosts: 1545Joined: 01/08/2016
Some good advice above, and it doesn’t matter what you’re invested in now (in the 457(b)) as long as it fits into your overall plan, as it seems to.
When you’re 53 or 54 and you plan to live on that 457(b) for a number of years, that’s when you may want to have a closer look at what you own there specifically. A good rule of thumb is not to invest the money aggressively if you’ll be spending it within 5 years.
Also noted above is that you can easily access the 401(k) in the year in which you turn 55. If you’re a Christmas baby, you could be 54 + 1 week on 1/1 and have full access when you leave your employer.
One final note is that a lot will probably change between now and 15-18 years from now — in your lives especially, and perhaps with the rules on retirement accounts.
40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire
FIRE. Financial Independence. Retire Early.spiritriderParticipantStatus: Small Business OwnerPosts: 1974Joined: 02/01/2016
It’ll probably be equal amounts to draw it down over 5-10 years. We’ll also probably need to do roth conversions during this time too which is just another complicating factor that is too hard to predict this far out.Click to expand…
Yes, POF is correct that a lot can change in 15 -18 years, but it is still a good idea to have a plan based on current laws and adjust as necessary. Under current law, you would not want to take RMDs or a SEPP with the distribution period < 10 years if you want to do any Roth conversions from those distributions.
An eligible rollover distribution does not include any RMD distribution or one of a series of substantially equal periodic payments made (not less frequently than annually) over a specified period of ten years or more.April 11, 2019 at 2:46 pm MST #205861