Exit accumulation, Enter consumption

[portney]

Dear Bogleheads

I am not a beginning investor, but after spending the past several months looking at retirement as a reality, I feel like one. I have spent ~40 years investing in various stocks, bonds, long-shots, sure things, and white elephants. I feel however like I must now invest much more rationally, primarily because of my station in life. I have just finished reading The Bogleheads Guide to Investing, The Four Pillars (great insights in the Third section which, if I had read and applied 40 years ago, would have made me a lot wealthier), and perhaps most difficultly, Against the Gods (I’ll have to re-read it a few times). So I have been coming to this website for the past couple of months, reading and following various posts, threads, and links, and I am about ready to take a shot at setting up a truly rational asset allocation plan. I have written myself an IPS, and before I make some substantial (to me) moves with my pile of cash, I decided to run the following up the flagpole, using Laura, or Lady Geek’s guide as best as I am able:

Emergency funds: 1 year desired (100k)

Debt: Home Mortgage – 210k at 3.375% (Home appraised at ~650k on recent refi)

Tax Filing Status: (Single, widowed 2012)

Tax Rate: estimated for 2013, using Tax Foundation’s calculator, 24% Federal, 6% State (VA)

Note: I have sheltered much of my income for the past 4 years in a Cash Balance Plan and 401(k) at my business, which I have just completed the sale of, and am rolling these plans over into my existing Vanguard and BB&T IRA’s. Thus, the large cash percentages below, because I have just really started to think about how to do this. It is the confusion about tax efficiency and which asset classes to place in which account that has me most confused. I have read the wiki “Principles of Tax-Efficient Fund Placement”, will re-read it several times to try to make more sense of it, but I have to admit that it confuses me a lot. I anticipate 2013 income of about 100k, about half of which will be earned income, and the remainder cap gains and then full retirement in 2014 (no more human capital, although this could change).

State of Residence: VA

Age: 62; 3 children, all completed education, 2 married.

Desired Asset allocation: 50/40 stocks/bonds, with 10 % REIT, Precious Metals as inflation hedge

Desired International allocation: 1/3 of the stocks (i.e., 16%)

Current Investment Assets (following rollover of CBP and 401(k) plans = approximately 2M. Of that amount, the majority (2/3) is in “qualified” money, chiefly rollover IRA’s.)

Taxable (approx 30% of total):
10% cash
14% VTSAX (Total Stock Market Index Fund) – ER 0.06%
01% VTIAX (Total International (ex-US) Stock Index Fund) – ER 0.18%
03% “legacy” stocks – BRK B, MSFT, T, VZ (T, VZ inherited from Mom – been in family for generations)
01% VGSLX (REIT Index Fund) – ER 0.10%

Non-Taxable (approx 70% of total):
49% Cash
14% VTSAX (Total Stock Market Index Fund) – ER 0.06%
03% “legacy” stocks, as above
05% USAGX (also a legacy, USAA Gold/Precious Metals) – ER 1.17%!

Contributions – I anticipate no new significant contributions, as I am entering the “consumption phase”. It is important to note, however, that I am currently receiving a US Navy retirement pension of $25k annually, and as near as I can estimate, I can now start Soc Sec withdrawals at about the same rate($25k/yr), or wait another 7 years and add maybe 40% to that figure.

Goals: Income from these accounts over my remaining days, whilst minimizing my tax burden, is my primary goal. Leaving residual estate to the kids will follow. Or not.

Questions:

1. My primary goal is income of 100k per year. ½ of that will come from Soc Sec and USN pension, so 50k from retirement funds listed above would mean withdrawal at 2.5% per year on average, which seems to me to be pretty conservative. How does one time the withdrawals from the accounts in up vs. down years?

2. Also, I would ask for advice/strategies for moving qualified funds to the taxable side in the most tax-efficient manner, both in the near-term, and in 7 years when the RMD kicks in. I think the current breakpoint for 15-25% federal is 36,250, and after that I hit the 25% break to 28% at 87,850. It seems possible that I have been caught in a tax trap – I put so much into qualified accounts that I will end up paying the piper (IRS) more than I would have if I had just avoided the “tax shelter.”

3. Finally, the question I addressed above, i.e., help with which accounts to put which assets in for maximum tax efficiency. As I noted, I will re-read the wiki article, probably several times, but any sound advice or further explanation would be much appreciated.

Thank you for your help

[livesoft]

My standard advice follows ....

1. Use a calculator like http://www.i-orp.com to help determine withdrawals: which amounts from which accounts PLUS double-check the assumptions with tax software such as TurboTax. One should consider conversions to Roth IRA, but with your pension you need to be careful.

2. Delay SS benefits in order to provide time to do Roth conversions while in a lower tax bracket.

3. Don't be emotional about "legacy" stocks. Do NOT saddle your children with this legacy either. Give away those stocks to charity. One can do it a little bit each year or en masse to a donor-advised fund.

Here is a thread on how to pay ZERO income taxes in retirement: viewtopic.php?t=87471 some of which will not apply to you.

[NYBoglehead]

Welcome to the forum and sorry to hearing about the passing of your wife. While you may have just discovered the Boglehead way of investing you are significantly better off than the overwhelming majority of Americans when it comes to having accumulated a retirement nest egg. So congratulations are definitely in order.

One thought before getting to your specific questions: I honestly do not believe that you need precious metals as a hedge against inflation. For starters, your Navy pension and Social Security are COLA'd, so right off the bat 50% of your desired annual income is indexed to inflation. Equities should provide additional protection against inflation if P/E rations stay the same and companies have higher EPS due to more devalued dollars chasing after the same amount of goods, and REITs should do well as rents rise with inflation. So I think you should be covered there.

Now on to your questions:

1. If you only anticipate needing/wanting 100k per year and will be getting half of that from Social Security and your pension, a $2M portfolio with your desired AA should yield about $40k in just dividends and interest. If you start off with 50k in a "sweep account" and have all dividends and interest directed to that account, you can gradually amortize that sweep account to provide for your income needs without having to sell anything for ~5 years (obviously a larger beginning balance in the sweep account gives you more time where you won't have to sell anything).

As far as selling in good times vs. bad, with the size of your portfolio and the fact that you don't need to take much risk I think eliminates much of this problem. Let's say your equity portion has an amazing 2013...there is no reason why you can't take some of it off the table and shift it into bonds or to cash within your tax-advantaged accounts. If you keep a decent cash balance within your tax-advantaged space then when you have to take RMDs you won't be forced to sell equities in a down market, but will instead be drawing on cash to meet the RMD number.

2. This is a tougher one to answer. Since you won't need to sell much in order to reach your number, you really will only need to take the interest/dividends until the RMD requirement sets in. That said, you can sell enough over the next 7 years to get you right to the cusp of the bracket you'd like to stay in. RMDs are just a fact of life when the time comes.

3. For tax-efficiency, right now holding your stocks in the taxable account is the most tax-efficient. Dividends are taxed at 15% for those in your tax bracket while bond interest would be ordinary income. REITs should be in tax-advantaged space as well when you re-work your portfolio.

You have done very well and should have a very nice retirement. I understand your desire to leave a good amount to your children and it appears there will be no barriers to that whatsoever. I'm not familiar with Virginia's estate/inheritance tax (if there is any) so you might want to look at gradually gifting some away in order to mitigate that.

And I agree with livesoft's advice about delaying SS in order to convert more to Roth in the lower income years. You will have more room to fill in the lower brackets and with the size of your portfolio there really isn't the risk of withdrawing too much to leave a sizable inheritance down the road to the kids. And +1 on the legacy stocks as well.

[Grt2bOutdoors]

I'll let the others opine on strategy.
My only suggestion is to change your personal info on the bottom of your posts - I certainly hope you are not using any identifying information such as your real name. It could make you a target for identity theft and other things.

[portney]

Sig removed (didn't notice it in the preview) Thanks grt.

Also, Thanks for the links livesoft. The legacy things I'll just have to think about a bit, but I suspect I'll sell them at some point, or perhaps donate. I think the first to go will be BRK B, before WB bites the dust...

NY, I had forgotten about the fact that these investments do spin off int/div/cap gain income lol. I shall indeed count my cupons for a bit. Will be reading these forums every day for quite some time to come, i suspect

[Duckie]

portney, given your desired AA, here is a possible retirement portfolio:

Taxable at Vanguard -- 30%
14% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
16% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

Rollover/Traditional/Roth IRAs at Vanguard -- 70%
20% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
5% (VGSLX) Vanguard REIT Index Fund Admiral Shares (0.10%)
5% (VGPMX) Vanguard Precious Metals and Mining Fund (0.29%)
30% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.10%)
10% (VAIPX) Vanguard Inflation-Protected Securities Fund Admiral Shares (0.11%)

My comments:
-- This ignores the tax cost of selling in taxable.
-- This has TISM in taxable to take advantage of the 
Foreign tax credit.
-- REITs belong in tax-sheltered accounts. There are alternatives for bonds in taxable (tax-exempts like (VWIUX) Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (0.12%) and 
I Savings Bonds through Treasury Direct), but not for REITs.
-- I personally wouldn't bother with the REITs or Precious Metals, but you want them, so they're here.
-- Don't get emotionally involved with your assets. "Legacy" stocks are just stocks. They're not the family farm or great-grandma's cedar chest. The original owner bought them for a reason. That reason may or may not still be relevant.

[portney]

Clean, Simple - I like it a lot, Duckie. Gonna sell the stocks, I guess.

Question - Where is the best place to read up on Roth conversions (I currently have all traditional IRA)

[Duckie]

Where is the best place to read up on Roth conversions (I currently have all traditional IRA)

Roth IRA conversion
Category: IRAs
Roth IRA Conversion Calculator
IRS Publication 590
IRS Form 8606
Ed Slott's IRA Discussion Forum
Transfer your IRAs to Vanguard
Roth IRA conversions

[gneeby]

My standard advice follows ....

1. Use a calculator like http://www.i-orp.com to help determine withdrawals: which amounts from which accounts PLUS double-check the assumptions with tax software such as TurboTax. One should consider conversions to Roth IRA, but with your pension you need to be careful.

Is there another calculator "like" i-orp.com that computes a withdrawal plan including IRA to Roth IRA conversions? Multiple sources would be useful for comparison and validation.

I don't consider the idea of leaving a large estate to my children particularly useful. When my plan comes to an end in my nineties my children will be in their sixities and beginning their own retrement. They won't need a large inheritenance at that point unless they are planning on me funding their retirement allowing them to avoid saving for retirement. Planning on a large estate cuts into my travel and beer consumption. However, if I don't make it to my nineties then they will get a reasonable inheritence from my unspent IRA.

[portney]

Thanks again, Duckie.

gneeby I found a couple of them:

https://www.personalcapital.com/
http://www.flexibleretirementplanner.com/wp/

I haven't really tried any of them, I am just now entering the serious thinking phase of my retirement. I'm sure I will, but in an effort to not "overthink", I am really liking the idea that one can keep a very simple plan AND have the best chance of success, all at the same time. These Bogleheads are the best!

"Think too much, and you will create a problem that was not there in the first place"