Please Help with Portfolio

[Pedsmd]

This is an edit of my initial post with my current thoughts and questions. I would greatly appreciate any input and I thank you in advance. I currently I understand investments just enough to be dangerous but I want to learn. My goal is to simplify my portfolio and position my funds for retirement in 1-3 years. I could retire @ 60 with full benefits (including medical) but I still very much enjoy my profession. Right now my plan is to reduce my hours and continue to work another couple of years. That could change if the frequency of RBD’s (really bad days) increases. I hope this isn't too long, I have tried to include all the necessary information.

EF/House fund: @ least 12 month. Currently all in cash. Most is earmarked for a housing upgrade (complicated family issues) within 1-2 years.
Debt: Home. $27,000 @ 5.5 % interest. Home worth about $350,000.
Tax Filing Status: Single, no children
Federal Tax Rate: 28% State tax rate: 4.63% State: CO
Age: 59
AA goals: 50E/50B with 3 years of income needs in STB’s (bucket approach for early retirement years, psychologically this makes me more comfortable )
Desired International allocation: 25%-30%.
Current portfolio is: ~$1.4 million excluding EF’s.
Current household income: low-mid 100k
Retirement Income Needs: ~ 80k
Pension: either annuity (no COLA) of ~$62,000/yr or lump sum of ~870k. I need to learn more about the pros/cons of annuities vs lump sum before I decide.

Here are my working plans and questions. Current allocations are listed below. Am I on the right track? Any suggestion regarding better options?
Mortgage- will pay off using taxable bond funds (slight capital losses) and some ER funds.

VANGUARD 401k: (Currently 18% ROTH)
Equities: 50%
26% Vanguard Institutional Index Fund Institutional Shares- VINIX ER 0.04
11.5% Vanguard Small-Cap Value Index Fund Institutional Shares VSIIX ER 0.19
12.5% Vanguard International Growth Fund Admiral Shares- VWILX ER 0.36
Bonds: 50% Vanguard Total Bond Market Index Fund Institutional Shares- VBTIX ER 0.07
Would you recommend continuing to fund as ROTH contributions? I am thinking no as my tax bracket will most likely be lower in retirement.
OR I could just go with Vanguard 2015 Target Retirement (.17) TSM 38.9%, Intl 16.7% Bonds 44.4% (TBM 39.4%, TIPS 5%);

SCHWAB IRA's- (no ROTH funds). Currently in actively managed funds. I would like to move to lower cost options unless some are worth keeping.
Equities: 50%
37.5% SWTSX -Total Stock Market Index (.09)
11.5% SWISX – International Developed Market Index + SFENX Emerging Market Index Not sure what ratio of developed to emerging to use.
Bonds: 50%: 7.5% Short term bond fund, reminder in SWLBX – Total Bond Index
Would ETF’s be better? I have never used ETF’s before but the expense ratios are lower. Any better choices for index funds?

Other questions:
- Would you recommend some inflation protection? I bonds or TIPS?
- Thoughts on need for long term care insurance? I think I can self fund this. I have good medical coverage for retirement.
- ROTH’s confuse me. My impression is that it is advantageous to have both pre and post tax dollars available in retirement. I cannot fund a ROTH IRA for 2012 due to income. I may be able to going forward. I have looked into doing a backdoor conversion but the only way I can see to do one would be to transfer pre-tax IRA contributory dollars to my rollover IRA @ Schwab and then move the rollover dollars into my pre-tax Vanguard 401k. Can I do this? Is it worth the effort?

Current Allocations: 54% Equities (8% Mid-Small Cap, 12% International), 46% Bonds

VANGUARD 401K – 63% of retirement savings (18% is ROTH)
13% Vanguard Institutional Index Fund Institutional Shares- VINIX ER 0.04
3% Vanguard Mid-Cap Index Fund Institutional Shares- VMCIX ER 0.08
2% Royce Low-Priced Stock Fund Institutional Class- RLPIX ER 1.19
6% Vanguard International Growth Fund Admiral Shares- VWILX ER 0.36
37% Vanguard Total Bond Market Index Fund Institutional Shares- VBTIX ER 0.07

[b]ROLLOVER IRA- SCHWAB 30% of retirement savings
Mix of Oakmark Equity Income (OAKBX ER 0.77), Parnassus Equity Income (PRBLX ER 0.94), and Oakmark International (OAKIX ER 1.06)
TRADITIONAL IRA-SCHWAB (7% of retirement saving, mixed pre and post tax)- SCHWAB 7% of retirement savings
Mix of Royce Premier Investment Class (RYPIZ ER 1.09) and Harbor Bond (HABDX ER 0.55)

TAXABLE ACCOUNTS
0.5% DWS Short Duration Fund-S PPIAX ER 0.86 ~9k
0.5% American Century Gvt Bond CPTNX ~8k
2% Harbor International- Instn HAINX ~25k

Other available funds in Vanguard 401K
Domestic Stock Options- I omitted some funds with really high ER’s
- Vanguard PRIMECAP Fund Admiral Shares VPMAX ER 0.36
- Vanguard Windsor II Fund Admiral Shares VWNAX ER 0.27
- Vanguard Mid-Cap Growth Index Fund Admiral VMGMX ER 0.1
- Vanguard Small-Cap Value Index Fund Institutional Shares VSIIX ER 0.19
- Vanguard Small-Cap Growth Index Fund Admiral VSGAX ER 0.1
International Options
- Dodge & Cox International Stock Fund DODFX ER 0.64
- American Funds New Perspective Fund Class R-5 RNPFX ER 0.51
- Vanguard Developed Markets Index Fund Institutional Shares VIDMX ER 0.08
Bond Options
- Vanguard Short-Term Investment-Grade Fund Institutional Shares VFSIX ER 0.07
- Vanguard Long-Term Investment-Grade Fund Admiral Shares VWETX ER 0.12
- Vanguard GNMA Fund Admiral Shares VFISX ER 0.11
- Vanguard Inflation-Protected Securities Fund Institutional Shares VIPIX ER 0.07
Other
- Vanguard REIT Index Fund Signal Shares VGRSX ER 0.1
- Vanguard Target Retirement 2010, 2015 etc ER 0.17

[celia]

You have a lot of questions and even though you list your current assets, it is hard to figure out where to start.

I'd suggest that you figure out what your asset allocation should be. Once you have that, your current assets can be compared with it to see what changes should be considered, to reach that "goal". Some of your questions could then be covered while discussing how to re-arrange things (Roth conversion, pay off mortgage). To understand asset allocation and find out what yours should be, start with The Truth About Risk. Near the end, there is a link that takes you to Vanguard's questionnaire. Follow that, then answer the questions.

After you're done, post your result here and let us know if you agree with the assessment of what your asset allocation should be.

[JW Nearly Retired]

I have mixed pre/post tax funds in the tIRA @Schwab. Can I move the pre-tax dollars to my rollover IRA @ Schwab and then convert the post-tax dollars to a ROTH? I have read the wiki about backdoor ROTH’s but am still a little uncertain about this. I cannot rollover pre-tax tIRA dollars into my 401k, I checked.

Sorry, the rolloverIRA and the TIRA are one and the same in IRS eyes. You effectively have just one IRA no matter how many accounts it is split into. When you convert to a Roth or take RMDs the prorata cost basis is determined from the total of all your IRAs. See form 8606 to understand.

Have you filed 8606's all along so your post-tax cost basis is documented?
JW

[Pedsmd]

Bump.I am hoping for some replies. I edited my initial post with updated information based on some further reading and research.
@ Celia- Thanks for the link, it helped me clarify my target asset allocation.
@ JW Nearly Retired- I was afraid that was the answer. Thanks for responding.

[JW Nearly Retired]

Bump.I am hoping for some replies. I edited my initial post with updated information based on some further reading and research.
@ Celia- Thanks for the link, it helped me clarify my target asset allocation.
@ JW Nearly Retired- I was afraid that was the answer. Thanks for responding.

I find your initial post still very confusing as it is now. You appear to have two different versions of your assets for the 401ks and the IRAs. Can you edit it down to just one version of everything?
JW

[Peter Foley]

If I understand your post correctly, the first listing is your "working plan" aka proposed future allocations, and the second listing is your current allocation. If that is the case, your proposed allocation looks fine to me. I would add some TIPS for inflation protection on the bond side.

As to mutual funds or ETF's, the differences in expense ratios are relatively minor at Schwab. They make a big difference over a 20-30 year period, not much of a difference over shorter time frames

You are really in excellent shape financially. If you go the pension route you need to withdraw very little from your savings to support your retirement. If you only spend at that rate, RMDs will likely push you into a very high tax rate. I would suggest waiting until you retire and then convert some of your traditional IRA into Roth.

Do you have a financial advisor at Schwab? Mine was free (I'm not sure if there is a minimum asset level for this) and was helpful with Roth conversion questions. You can do a straight conversion of TIRA to Roth at Schwab - no need to do anything with Vanguard. I did a Roth coversion on line at Schwab earlier this year - it was easy. I worked out the details of how much I wanted to convert and the timing of multiple conversion with a Schwab investment advisor last year. Schwab also has a Roth conversion tool for its clients - you have to log into your account to get to it.

[Pedsmd]

Thanks to both of you for your replies.
@JWNearlyRetired- sorry I made things more confusing in my attempt to clarify. I will try again below, hopefully more successfully . I have found your input on other threads to be very helpful.
@ Peter Foley- I will make an appointment with Schwab. I think that as I have reduced my hours this year that I will be able to contribute to a ROTH and to start some ROTH conversions in the coming years until RMD's start. This is a good problem to have I know.

I am so glad I found this forum. Going through the process of creating my initial post was one of the most helpful things I have done financially. Luckily it was reassuring to me.

CURRENT
VANGUARD 401K – 63% of retirement savings (18% is ROTH)
13% Vanguard Institutional Index Fund Institutional Shares- VINIX ER 0.04
3% Vanguard Mid-Cap Index Fund Institutional Shares- VMCIX ER 0.08
2% Royce Low-Priced Stock Fund Institutional Class- RLPIX ER 1.19 - can now change to Vanguard Small Value Index
6% Vanguard International Growth Fund Admiral Shares- VWILX ER 0.36
37% Vanguard Total Bond Market Index Fund Institutional Shares- VBTIX ER 0.07

SCHWAB IRAS- (2) one a rollover from a previous 401k (60% of IRA funds), the other a contributory IRA with mixed pre/post tax fund
TAXABLE ACCOUNTS - most in MMF as EF/house fund. Reminder in Harbor International (2% of total investments, 24k)
- I have liquidated the 2 bond funds as of yesterday and will use to pay off my mortgage.

PROPOSED CHANGES I would like an AA of 50:50 with 3 years of retirement income needs in STB's. I think for simplicity I would like to create this asset allocation in each of my accounts unless there is a compelling reason not to.

Vanguard 401k- Keep the funds I have except for using Vanguard Small Value index instead of Royce. Will change the allocations to the following:
37.5% Domestic Equities: 70% VINIX (follows S&P 500) + 15% VMCIX (Mid Cap index) + 15% VSIIX (Small Cap Value index)
12.5% International: 25% of the equities
50% Bonds: VBTIX (Total Bond index)
Schwab IRA: would like to recreate above asset allocations here.
Taxable: no changes

QUESTIONS: Please feel free to correct me if my assumptions are incorrect.
1. I think having more ROTH funds would be advantageous to me especially after RMD's start. However, I am not sure continuing to channel my current 401k contributions to ROTH is the best idea. I will still be in the 28% tax bracket this year and probably the next 3 years. From 62-70 I will probably be in the 25% bracket. Am I thinking correctly that it would be better to change my 401k contributions to pre-tax dollars and then increase my ROTH funds after I retire via contributing to a ROTH and doing conversions?
2. I would appreciate suggestions for the Schwab funds. I am not that familiar with ETF's so would prefer index funds unless there is a strong reason for using ETF's.
3. If I want to be fully diversified, do I have enough emerging markets? Vanguard Intl Growth has 23% emerging markets. SWISX the Schwab International Index Funds seems to be just developed markets as best I can tell.
4. I have put the decision of annuity vs lump fund for pension payout on hold right now pending more education on my part. Any good resources? Opinions also welcome.
5. Am I missing anything else that I should be thinking about?

Thanks again.

Oops- Forgot about TIPS and I bonds. Would it be a good idea to add a TIPS fund or better to just buy I bonds yearly for now and move into TIPS if/when their price goes down.

[Peter Foley]

Regarding Schwab - They also have a proprietary calculator available to their advisors that can help you plan your withdrawals. It can test various sequences of withdrawals to accertain which work better for you in your tax situation. For example, do you withdraw from taxable, then tax deferred then Roth - the most common order - or is another order of withdrawal better in your situation. Good luck.