Portfolio help requested re allocation and expenses

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Topic Author
federalretiree
Posts: 3
Joined: Wed Apr 10, 2013 7:30 pm

Portfolio help requested re allocation and expenses

Post by federalretiree »

1. Have emergency Fund
2. Debts- balance of $120,000 on home equity line of credit (pay interest only 2.25%), $170,000 first mortgage on 2nd home, 3.75% interest- 15 years left; credit cards paid in full each month
3. Filing Status: Married filing jointly
4. Tax Rate: Federal 15% State: 0 (Retirement/IRA money not taxed in IL)
5. State of Residence: IL
6. Desired Asset Allocation: 75% stocks, 25% bonds
7. Desired International allocation: 20-25% of stocks
8. Age: 62; spouse 62; both retired
9. Have federal/state pension/social security income of in high 5-low 6 figures adjusted annually for inflation; currently also withdraw about $2k per month from Federal Thrift Savings Plan
10. Current retirement assets in high 6 figures consisting of the following:

My Federal Thrift Savings Plan (TSP): Info on each fund may be found at http://www.tsp.gov

G Fund: 7.1% (Expense ratio 0.025%)
L income Fund: 19.1% (Expense ratio 0.025%)
L 2030 Fund 9.1% (Expense ratio 0.025%)

My Vanguard Taxable Account:
V. Emerging Market Fund (VIEX Expense Ratio 0.33% ) 0.5%
V. Energy Fund ( VGENX Expense Ratio 0.34%) 0.7%
V. High Yield Corp Fund (VWEHX Expense Ratio 0.23%) 0.6%
V REIT Admiral Fund (VWSLX Expense Ratio 0.10%) 1.6 %
V. Target 2040 Fund (VFORX Expense Ratio 0.18%) 0.9%

My Stock Brokerage Traditional IRA
(all individual stocks) 6.9%

Spouse’s Vanguard SEP IRA & Traditional IRA:

V. Diversified Equity Fund (VDEQX Expense Ratio 0.40%) 0.6%
V. Inflation Protect Bond Fund (VIPSX Expense Ratio 0.20%) 0.9%
V. Target 2040 (VFORX Expense Ratio 0.18%) 7.3%
V. Energy Fund (VGENX Expense Ratio 0.34%) 1.3%
V. Health Care Fund (VGHCX Expense Ratio 0.35%) 4.8%
V. High Yield Corp Bond (VWEHX Expense Ratio 0.23%) 4.5%
V. Precious Metals Fund (VGPMX Expense Ratio 0.29%) 1.1%
V. REIT Admiral Fund (VGSLX Expense Ratio 0.10%) 3.9%
V. Star Fund (VGSTX Expense Ratio 0.34%) 1.3 %
V. Target 2020 (VTWNX Expense Ratio 0.16%) 3.4%
V. Wellington Admiral Fund (VWENX Expense Ratio 0.17%) 9.1%

Spouse’s Vanguard Roth IRA

V. FTSE Social Index Fund (VFTSX Expense Ratio 0.29%) 0.8%
V. Target Retirement 2045 (VTIVX Expense Ratio 0.18%) 6.5%
V. Target 2030 (VTHRX Expense Ratio 0.17%) 1.6%

Spouse’s Taxable Vanguard Account

V. Index 500 Fund (VFINX Expense Ratio 0.17%) 0.3%
V. Capital Value Fund (VCVLX Expense Ratio 0.47%) 0.9%
V. REIT Fund (VGSLX Expense Ratio 0.10%) 1.6%
V Target 2020 (VTWNX Expense Ratio 0.16%) 0.9%
V Target 2030 (VTHRX Expense Ratio 0.17%) 0.9%
V. Wellington Fund (VWELX Expense Ratio 0.25%) 1.9%


Contributions: No new contributions to retirement accounts

QUESTIONS:

In general, because of our fairly significant inflation protected pension income (in addition, my spouse has not applied for social security and will likely defer taking it for several years; she should receive between $750 to $1000 a month when she does apply), I feel we can be fairly aggressive in our stock to bond allocation. Our health is good and we hope to live to 90+, so we have a fairly long time horizon to withstand recessions etc without losing too much sleep. We stayed the course during the recent recession and came out fine. We have excellent health care coverage due to my past federal employment and private long term care insurance. We have one child who is single and early in his professional career. He is saving more than 25% of his six figure income and we intend to leave most of what we don’t spend to him. We anticipate receiving an inheritance in the mid six figures in the next 5-10 years.

1. Does a 75%/25% stock to bond allocation seem appropriate in light of the above? Is it too conservative?

2. I realize we have too many Vanguard Funds. I would like to reduce the number of funds and lower the overall expense ratio ( perhaps by moving most of our funds into an appropriate target fund, or to reduce expenses even further by moving into individual index funds such as total stock index, total international stock index, and total bond index) while still maintaining adequate diversification- but not having too much of the bond allocation in long term bonds. ) I remain open to some sector funds to try to “bump” the overall return. What changes would you recommend in the Vanguard/TSP portfolios to achieve these cost savings and allocation?

3. The balance in the Federal Thrift Savings Plan is invested much more conservatively than the Vanguard Funds. My rationale was since that is where current withdrawals of about $24,000 per year are coming from, I wanted it to last and not get hit too hard if there was a significant market collapse. However, since the expense ratio for the TSP is much lower than any Vanguard funds, should I begin taking money, as needed , from the Vanguard funds and stop withdrawing from the TSP? Should I also change the allocation of the TSP to align it closer to my proposed stock/bond allocation?

Any thoughts would be appreciated.I look forward to hearing from you.
NYBoglehead
Posts: 1588
Joined: Fri May 25, 2012 9:38 am

Re: Portfolio help requested re allocation and expenses

Post by NYBoglehead »

I think 75/25 is way too aggressive for you. While you have nice pension income, in my opinion there is no need to take added risk. Everyone wants to increase their stock allocation when the market is on fire, but I think you should pick an AA for the long haul and stick with it no matter what.

So to answer Question #1, I don't think 75/25 is too conservative, I believe it is too aggressive.

Question #2: I wouldn't try to pick individual sectors. I see you used the word "bump" in the question. Picking an individual sector is just as likely to be a drag on your returns as it is to add a bump. I'd stick with the big 3: TSM, TISM and TBM. Given the lower ER of the TSP funds, you might be able to get a way with just TSM and TISM at Vanguard and keep the G Fund / L Income Fund with TSP for your fixed income needs.

Question #3: I would map out what you expect to need for the rest of your lives. If you have a current account surplus you can have a more aggressive AA for those funds since you intend to leave those to your son. While the TSP has incredibly low ERs, so does Vanguard. I'm not sure I would make the switch just to save the 3 bps, but that's just me.

Overall it looks like you are well positioned to enjoy retirement. I'd simplify your portfolio by consolidating the excessive amount of funds you have. Have the Mrs. wait as long as possible to take Social Security. Best of Luck to you.
Tamahome
Posts: 2325
Joined: Wed Feb 27, 2013 12:03 pm
Location: Atlanta, GA

Re: Portfolio help requested re allocation and expenses

Post by Tamahome »

1- I am very aggressive in my portfolio. I have had a 100% stock portfolio and am just now getting to the point of adding bonds at age 35. I do not like bonds, but I understand their utility. That being said, I have to agree that you are likely being too aggressive at your age.

Another thought is that you mentioned that you are taking money from the bonds. Make sure that you are balancing so that your asset allocation does not drift to a lower bond ratio. Over time, your bond portion does not grow as fast as the equity portion (typically). If you are also taking money out of the bond portion, your bonds will drift lower even faster.

If you did not feel comfortable increasing your bond allocation, taking money out of the stock portion may be a good move to help keep the portfolio in step with your asset allocation (and possibly drift slightly towards bonds, depending on the amount you are withdrawing).

2- I am still seeking advice on my own with asset allocation, so I will not pretend to be the best to advise here. As far as long term bonds, however, I would move those to short term and intermediate term based on what I read yesterday in Larry Swedroe's book The Only Guide to a Winning Bond Strategy You'll Ever Need. I highly recommend picking up a copy and knocking it out one Saturday. It is well written, well thought out, and explains a lot of concepts that you might not otherwise consider. Based on what I have read, however, I would ditch the long term bonds.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
Topic Author
federalretiree
Posts: 3
Joined: Wed Apr 10, 2013 7:30 pm

Re: Portfolio help requested re allocation and expenses

Post by federalretiree »

Thank you for your thoughtful comments, NYBoglehead and Dulocracy. You have given me good food for thought that I will certainly consider.

Best regards.
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retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Portfolio help requested re allocation and expenses

Post by retiredjg »

Welcome to the forum!
4. Tax Rate: Federal 15% State: 0 (Retirement/IRA money not taxed in IL)
I don't see any way for you to be in the 15% tax bracket. Compare your taxable income (line 43 on Form 1040) to this chart. I think you will find you are in the 25% tax bracket.

1. Does a 75%/25% stock to bond allocation seem appropriate in light of the above?
Maybe. Maybe not. If you were sure you would never need this money, 75/25 is a reasonable number to use to invest for your heir. I'm just not convinced you will never need the money. Especially since you are actually using it every month. :happy
Is it too conservative?
Not only no, but heck no. Even if you are investing only for your heir, not yourself, 75/25 is not too conservative.
2. I realize we have too many Vanguard Funds. I would like to reduce the number of funds and lower the overall expense ratio ( perhaps by moving most of our funds into an appropriate target fund, or to reduce expenses even further by moving into individual index funds such as total stock index, total international stock index, and total bond index) while still maintaining adequate diversification- but not having too much of the bond allocation in long term bonds. ) I remain open to some sector funds to try to “bump” the overall return. What changes would you recommend in the Vanguard/TSP portfolios to achieve these cost savings and allocation?
This can be reduced to just a handful of funds, but I think I'd wait on that for just a bit. I think some other thinking/decisions are higher priority.
3. The balance in the Federal Thrift Savings Plan is invested much more conservatively than the Vanguard Funds. My rationale was since that is where current withdrawals of about $24,000 per year are coming from, I wanted it to last and not get hit too hard if there was a significant market collapse. However, since the expense ratio for the TSP is much lower than any Vanguard funds, should I begin taking money, as needed , from the Vanguard funds and stop withdrawing from the TSP? Should I also change the allocation of the TSP to align it closer to my proposed stock/bond allocation?
Ordinarily, people spend down their taxable account first. What is your thinking about spending the TSP first?
Topic Author
federalretiree
Posts: 3
Joined: Wed Apr 10, 2013 7:30 pm

Re: Portfolio help requested re allocation and expenses

Post by federalretiree »

retiredjg wrote:Welcome to the forum!

Thank you for that and your comments.
4. Tax Rate: Federal 15% State: 0 (Retirement/IRA money not taxed in IL)
I don't see any way for you to be in the 15% tax bracket. Compare your taxable income (line 43 on Form 1040) to this chart. I think you will find you are in the 25% tax bracket.

Actually was in the 15% bracket in 2012 due to very high property tax in IL (Chicago suburbs), other schedule A deductions, and schedule C losses from a part time home based business my wife started mid-year 2012. May hit 25% in 2013 due to start of my small SS earlier this year, spouse's small state pension beginning later this year, and smaller anticipated schedule C losses.

1. Does a 75%/25% stock to bond allocation seem appropriate in light of the above?
Maybe. Maybe not. If you were sure you would never need this money, 75/25 is a reasonable number to use to invest for your heir. I'm just not convinced you will never need the money. Especially since you are actually using it every month. :happy
Is it too conservative?
Not only no, but heck no. Even if you are investing only for your heir, not yourself, 75/25 is not too conservative.
2. I realize we have too many Vanguard Funds. I would like to reduce the number of funds and lower the overall expense ratio ( perhaps by moving most of our funds into an appropriate target fund, or to reduce expenses even further by moving into individual index funds such as total stock index, total international stock index, and total bond index) while still maintaining adequate diversification- but not having too much of the bond allocation in long term bonds. ) I remain open to some sector funds to try to “bump” the overall return. What changes would you recommend in the Vanguard/TSP portfolios to achieve these cost savings and allocation?
This can be reduced to just a handful of funds, but I think I'd wait on that for just a bit. I think some other thinking/decisions are higher priority.

I understand.
3. The balance in the Federal Thrift Savings Plan is invested much more conservatively than the Vanguard Funds. My rationale was since that is where current withdrawals of about $24,000 per year are coming from, I wanted it to last and not get hit too hard if there was a significant market collapse. However, since the expense ratio for the TSP is much lower than any Vanguard funds, should I begin taking money, as needed , from the Vanguard funds and stop withdrawing from the TSP? Should I also change the allocation of the TSP to align it closer to my proposed stock/bond allocation?
Ordinarily, people spend down their taxable account first. What is your thinking about spending the TSP first?
Perhaps fuzzy thinking on my part. I was planning to use some of our taxable funds plus proceeds of the sale of a condo I own with my two siblings that is now on the market to pay down/off the home equity line of credit later this year in anticipation of rising interest rates and reduce/eliminate the TSP withdrawals in 2014 as the SS and state pension income come on line this year. (monthly TSP withdrawals can only be changed annually unless entire fund is rolled over)

Any further thoughts?
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retiredjg
Posts: 54082
Joined: Thu Jan 10, 2008 11:56 am

Re: Portfolio help requested re allocation and expenses

Post by retiredjg »

Just as an aside, I'm not sure you can stop the TSP withdrawals, can you? I suppose there are work-arounds though (you could reduce it to a very small number and/or roll the withdrawal into an IRA each year instead of spending it).

My overall impression is that you might have more money than you'll need. That is not clear though. If we assume your portfolio is $700k and you are taking out $24k a year, that's 3.4% which is not much lower than rough maximum of 4% recommended. I'm not saying you will run out of money, but you don't have enough wiggle room, in my opinion, to be investing as if you can afford to risk big losses.

My suggestion is for you to invest your money in a stock to bond ratio that is appropriate for your ages for the time being. Something more like 50 stocks/50 bonds or 40% stocks/60% bonds. When/if you receive the mid-six figure inheritance, it will be clearer that you will never need all your money. At that point, you could change your stock to bond ratio to something more appropriate for your heir's age. Or segregate your investments - some for you (invested more conservatively) and some for him (invested more aggressively).

I just don't see any point in putting your own future at risk (even a small one) for the possibility that there will be more to leave to a son who likely will be fine without an inheritance anyway.

Your current stock to bond ratio is unknown (at least to us) and I'm not willing to figure it out. Do you know what it is? That is the problem when you have a portfolio this complex and containing so many balanced funds. You are wise to be thinking of simplification.

Spending from the TSP first (or an IRA or 401k) is not a problem, especially if you may use the taxable money to pay off the house. The other benefit is that you will decrease the amount of money subject to RMDs when that time comes.

About having different stock to bond ratios in different accounts.... This is purely mental accounting. Your risk is tied to the stock to bond ratio in your entire portfolio, not per account. If you want to maintain a steady stock to bond ratio, if you spend only from a conservative account, you need to be adjusting something in another account to keep the stock to bond ratio steady. If you don't, the portfolio could get more aggressive over time.

In this case, mental accounting (essentially looking at your portfolio as separate buckets of money) is not really hurting you. You should just realize that is what you are doing. Don't fool yourself into believing that keeping some accounts more conservative is giving you some protection because it is not.

It would be helpful to know a few things before making a portfolio suggestion.

1) You list His Taxable and Her Taxable. Do you want to keep those separate or can that money all be folded into one account?

2) How likely is it that money will be used to pay off the house?

3) Do you want to keep the individual stocks in His tIRA?

4) What type of portfolio do you want? I'd suggest a three fund portfolio (total stock, total international, bonds), but there are other reasonable and simple alternatives .
YDNAL
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Location: Biscayne Bay

Re: Portfolio help requested re allocation and expenses

Post by YDNAL »

federalretiree wrote: 6. Desired Asset Allocation: 75% stocks, 25% bonds
7. Desired International allocation: 20-25% of stocks
8. Age: 62; spouse 62; both retired
9. Have federal/state pension/social security income of in high 5-low 6 figures adjusted annually for inflation; currently also withdraw about $2k per month from Federal Thrift Savings Plan
10. Current retirement assets in high 6 figures consisting of the following:...
Federal, welcome!

Lets summarize:
  • 1. Retired, Pension/SS of high $xx,xxx to low $xxx,xxx.

    2. High $xxx,xxx portfolio, consuming $24,000 annually. At 4% withdrawal = $600,000 portfolio - only you know this number and this %.

    3. You said:
    "We have one child who is single and early in his professional career. He is saving more than 25% of his six figure income and we intend to leave most of what we don’t spend to him."
    It depends on #2.
    "Does a 75%/25% stock to bond allocation seem appropriate in light of the above? Is it too conservative?"
    It depends on #2.

    4. You said: "I realize we have too many Vanguard Funds. I would like to reduce the number of funds and lower the overall expense ratio ( perhaps by moving most of our funds into an appropriate target fund, or to reduce expenses even further by moving into individual index funds such as total stock index, total international stock index, and total bond index) while still maintaining adequate diversification- but not having too much of the bond allocation in long term bonds."
    Vanguard Target Fund would be higher cost than a small few individual Index Funds using Admiral Shares.
Basically, a LOT depends on #2. With regards to #4, look at the 3 Fund portfolio or Lazy Portfolios in general.
Link: http://www.bogleheads.org/wiki/Three-fund_portfolio
Link: http://www.bogleheads.org/wiki/Lazy_Portfolios
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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retiredjg
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Re: Portfolio help requested re allocation and expenses

Post by retiredjg »

Here's an idea to consider. It assumes the money in taxable is used to reduce/eliminate the mortgage. It also assumes you are willing to sell the individual stocks and that you are willing to migrate to 50/50 for the time being (until it is much clearer that you will never need all your money).

TSP 39.6%
9.6% C Fund (500 Index)
30% G Fund and/or F fund (total bond market)

My Traditional IRA 7.7%
7.7% Total Stock Market

Spouse’s Vanguard SEP IRA & Traditional IRA 42.8% :
7.8% Total Stock Market
15% Vanguard Total International Stock Index
20% Total Bond Market or TIPS

Spouse’s Vanguard Roth IRA 9.9%
9.9% Total Stock Market

This is a basic 3 fund portfolio. It is set up at 50% stocks, 50% bonds, with 30% of the stocks (15% of the portfolio) in international. Spending would be from the TSP and from Spouses SEP and tIRA.

If you wanted to tilt to REIT, some or all of My tIRA could be put in REIT. If you wanted to tilt to small cap value, Spouse's Roth IRA could be invested in SCV to give a little tilt (not all would be tilt, some would be completing the C Fund).


Another alternative is to simply fill each account with a Target Fund or LifeStrategy fund that is consistent with the stock to bond ratio you pick. Or do some mix and match between the two. This would be incredibly easy investing - you would never really need to rebalance. There is a very small downside that the international stocks in TSP would be missing emerging markets and small cap, but that would be such a small lack that I would not worry much about it.

Some people like to mix and match a Target Fund with Wellesley Income or the Wellington fund - that's another idea to consider since you seem to like Wellington.

As mentioned by Landy, using the Target/LifeStrategy options would have a slightly higher cost.

There's an almost infinite number of ways to set up a simple portfolio depending on your particular preferences. Now that you've seen this idea, what do you like? What would you like better?
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