Suggestions for 70-year-old retiree's portfolio

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zuma
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Suggestions for 70-year-old retiree's portfolio

Post by zuma » Sat Jan 07, 2017 4:21 pm

I am in the beginning stages of helping my mother transfer her portfolio from Morgan Stanley to Vanguard. We are trying to simplify as much as possible and I'd love to get some Boglehead input.

Emergency funds: 3 months
Tax filing status: single
Tax rate: 15% federal, 3.3% state
Age: 70, retired

Desired asset allocation: 30% stocks / 70% bonds
International allocation: 20% of stocks

Current retirement assets

About $400k total in various funds at Morgan Stanley, none of which are low-cost. We plan to convert everything to low-cost Vanguard funds.

Taxable: $165k
Rollover IRA: $230k
Roth IRA: $9k

We are considering this:

Taxable - $165k
23% ($96k) - Total Stock Market Index Fund Admiral Shares (VTSAX)
6% ($24k) - Total International Stock Index Fund Admiral Shares (VTIAX)
11% ($45k) - Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX)

Rollover IRA - $230k
34% ($138k) - Total Bond Market Index Fund Admiral Shares (VBTLX)
24% ($97k) - Short-Term Inflation-Protected Securities Index Fund Admiral Shares (VTAPX)

Roth IRA - $9k
2% ($9k) - Total Bond Market Index Fund Investor Shares (VBMFX)

---

Questions:
1. Her primary goal is to generate $1,200 in monthly income. Would this 4-fund 30/70 approach be a good way to achieve that goal? Income stability is more important than potential growth.
2. Re: TIPS – is the short-term VTAPX a good choice here? Should we consider leaving TIPS out altogether and sticking with a classic 3-fund portfolio?
3. Given that she will be 70.5 soon, are there specific RMD considerations we should be thinking about?

Cheers and thanks for any suggestions!

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galeno
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Re: Suggestions for 70-year-old retiree's portfolio

Post by galeno » Sat Jan 07, 2017 4:40 pm

1. Easily. AWR = 3.6%. Very conservative for a 70 y/o.

2. Forget TIPS.

3. I'm not an US American so clueless regarding RMD.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.4%. Port Yield = 2.0%. Term = 35 yr. FI Duration = 6.2 yr. Portfolio survival probability = 100%.

zuma
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Re: Suggestions for 70-year-old retiree's portfolio

Post by zuma » Sat Jan 07, 2017 6:25 pm

Thanks, galeno.

Another option we're considering is the 20/80 LifeStrategy Income fund (VASIX) with some extra VTSAX to hit our target AA. That might be even easier to manage.

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CAsage
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Re: Suggestions for 70-year-old retiree's portfolio

Post by CAsage » Sat Jan 07, 2017 6:42 pm

Fewer funds are easier to manage, and probably not that different in long term outcome. Suggest skipping the International stock, just total bond/total U.S. stock will get you plenty of diversification (and that little bite is harder to maintain as the account is spent). Suggest putting the Roth completely in U.S. Total stock fund - that is where you want the growth long term, if at all possible, and your Mom is in the lowest tax bracket so the 'hit' on interest probably not that bad (just IMHO). I would also look at converting some of that T-IRA into the Roth over time, to really shield it from taxes! Up to the top of the 15% bracket, but only if there is any headroom there. Personally, if it was my Mom, I would probably go with Total Stock, and then split the bond portion across Total Bond and something shorter, either a CD ladder or a Short Term bond fund - but not critical. Spend the taxable first, and yes she is (statistically) fine with spending 4% annually.
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zuma
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Re: Suggestions for 70-year-old retiree's portfolio

Post by zuma » Sat Jan 07, 2017 7:42 pm

Thanks for the suggestions.

The more I think about it, I agree with you about skipping the international fund.

I haven't done my research yet on short-term bond funds (how they compare to CDs and so on), but I could imagine something like 30% Total Stock, 50% Total Bond, 20% Short-Term Bond.

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Peter Foley
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Re: Suggestions for 70-year-old retiree's portfolio

Post by Peter Foley » Sat Jan 07, 2017 8:48 pm

Just to give you a feel for RMDs, they average about 4%/year in ones early 70's. So expect roughly $10,000/year in RMD's (obviously a little less initially, and little more later on).

I would put the Roth IRA in total stock market. The Rollover IRA could be in a combination of Total Bond Fund and Intermediate Treasuries. While a 30/70 AA is okay, I'd be a little more inclined to go 40/60. The Rollrover IRA should be nothing but bonds (57.5% based on your numbers). This allows for some bonds in taxable. If you want to be conservative in taxable use I-bonds to the extent possible.

deikel
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Re: Suggestions for 70-year-old retiree's portfolio

Post by deikel » Sat Jan 07, 2017 9:04 pm

Here is a different way to look at it if security would truly be the guiding factor:

Her life expectancy at this point is another 16 years, she wants 15k per year out of the portfolio - that is only 230k. You could leave the 400k portfolio in cash to get that ! ...or in bonds to get it and probably be inflation protected....or in 70/30 bond/stock to be inflation protected or almost anything in between with absolute no market risk to speak of...

So, really what you are doing and asking for is, what is a good strategy to get 15k per year AND maximize the inheritance (without being blamed in case the market will crash like it did in 2008)....that would be my guide in this endeavor since technically, no risk is needed whatsoever.

Based on that I would increase your intended bond allocation - you are giving up inheritance money to trade for the assurance that no one can claim you overdid the risk factor to benefit from the inheritance.
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Re: Suggestions for 70-year-old retiree's portfolio

Post by Ace1 » Sat Jan 07, 2017 9:05 pm

Zuma,
Since she will be taking the first RMD this year, which for an ira of 230k would be something around 8700, depending on how soon it will be withdrawn, consider holding that much in the cash settlement fund once the account is established at Vanguard.
This avoids buying whatever funds and then turning right around and "selling" to meet the RMD.
And make sure the full RMD is withdrawn BEFORE any funds might be converted to Roth.

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David Jay
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Re: Suggestions for 70-year-old retiree's portfolio

Post by David Jay » Sat Jan 07, 2017 9:24 pm

Zuma:

I really like the LifeStrategy funds.

I think that 30% is the minimum equity that your Mom should consider (among others, Larry Swedroe says 30% is the "sweet spot" for retirees). Instead of adding VTSAX, I would go 50% LifeStrategy Income (20% stocks) and 50% LifeStrategy ConservatIve'(40% stocks). That gives you an effective 30% stocks with all of the benefits of the LS funds.
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zuma
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Re: Suggestions for 70-year-old retiree's portfolio

Post by zuma » Sun Jan 08, 2017 4:26 am

deikel wrote:Here is a different way to look at it if security would truly be the guiding factor:

Her life expectancy at this point is another 16 years, she wants 15k per year out of the portfolio - that is only 230k. You could leave the 400k portfolio in cash to get that ! ...or in bonds to get it and probably be inflation protected....or in 70/30 bond/stock to be inflation protected or almost anything in between with absolute no market risk to speak of...

So, really what you are doing and asking for is, what is a good strategy to get 15k per year AND maximize the inheritance (without being blamed in case the market will crash like it did in 2008)....that would be my guide in this endeavor since technically, no risk is needed whatsoever.

Based on that I would increase your intended bond allocation - you are giving up inheritance money to trade for the assurance that no one can claim you overdid the risk factor to benefit from the inheritance.
That's a good perspective – thanks.

I'm not really concerned about my inheritance. I'm looking for some moderate growth to offset any potential changes in her income requirements later in life (e.g. assisted living costs). I could be ultra-conservative and probably be fine, but a 30/70 AA feels comfortable to me (and her).

zuma
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Re: Suggestions for 70-year-old retiree's portfolio

Post by zuma » Sun Jan 08, 2017 4:29 am

David Jay wrote:Instead of adding VTSAX, I would go 50% LifeStrategy Income (20% stocks) and 50% LifeStrategy ConservatIve'(40% stocks). That gives you an effective 30% stocks with all of the benefits of the LS funds.
Good idea. Thanks :-)

zuma
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Re: Suggestions for 70-year-old retiree's portfolio

Post by zuma » Sun Jan 08, 2017 5:15 am

Thanks to everyone for your comments.

I am drawn to David's idea of combining two LifeStrategy funds for an effective 30/70 AA. Maximum simplicity and no need for rebalancing.

trasmuss
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Re: Suggestions for 70-year-old retiree's portfolio

Post by trasmuss » Sun Jan 08, 2017 5:50 am

If you are considering the route of going with two balanced funds I would suggest at least considering the Wellesley Income fund as one of them. The last time I checked it had about 18% of stocks as foreign and has had a good record since 1970.

As soon as you deviate from Total Stock and Total Bond the expenses go up. I like the idea of Total Stock in the Roth. I'm not sure about the idea of doing Roth conversions, however. That would be more to the benefit of heirs than your Mother in my opinion.

It is nice having a short term bond fund for taking RMD's from if rates go up fast and bonds and stocks are hit. Nice but probably wouldn't make a huge difference.

I'm 67 now so I'll be looking at RMD's soon. I don't have Wellesley at this time (I have Total Stock, Total Bond, and a small portion of Total International). If your Mother looked at the contents of Wellesley she may find it comforting and it has stood the test of time.

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bertilak
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Re: Suggestions for 70-year-old retiree's portfolio

Post by bertilak » Sun Jan 08, 2017 6:32 am

RMD:

Just because you are required to take money out of the IRA doesn't mean you can't keep it invested. Put it in the taxable account. (You can't use the RMD to fund the Roth.)

You can maintain your AA by selling assets you would like to have in the taxable account. That usually means equities. Owning a fund with mixed assets (like the LifeStrategy fund, with both stocks and bonds) can make this tricky because you can't choose which asset class to sell. If your tax situation is such that holding bonds in the taxable account is no big deal than LifeStrategy is simpler.

You DO lose whatever taxes you need to pay but not the whole thing. This makes maintaining your AA a bit more complicated.
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Miriam2
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Re: Suggestions for 70-year-old retiree's portfolio

Post by Miriam2 » Sun Jan 08, 2017 2:35 pm

You might look at the Vanguard Target Retirement Income Fund (VTINX), which has an allocation of 30% stocks and 70% bonds with an expense ratio of .14.

It holds 5 Vanguard funds: Total Bond Market, Total Stock Mkt, TIPS, Total Int'l Stock and Total Int'l Bond. The difference between Vanguard Target Retirement and the LifeStrategy funds is that LifeStrategy does not include TIPS.

Vg Target Retirement Income Fund (VTINX) Allocation to underlying funds as of 11/30/2016
Ranking by Percentage
Fund Percentage
1 Vanguard Total Bond Market II Index Fund Investor Shares 36.8%
2 Vanguard Total Stock Market Index Fund Investor Shares 18.6%
3 Vanguard Short-Term Inflation-Protected Securities Index Fund Investor Shares 16.8%
4 Vanguard Total International Bond Index Fund Investor Shares 15.8%
5 Vanguard Total International Stock Index Fund Investor Shares 12.0%
Total — 100.0%

https://personal.vanguard.com/us/funds/ ... IntExt=INT

bogleenigma
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Re: Suggestions for 70-year-old retiree's portfolio

Post by bogleenigma » Sun Jan 08, 2017 11:06 pm

Zuma,
It seems pretty simple to just sell all the Morgan Stanley funds and switch to Vanguard funds. She's in the 15% federal tax rate, therefore she is in the 0% capital gains rate. I would skip the TIPS fund and just stick to a 3 fund portfolio. I'm a big fan of the target retirement or lifestrategy income funds, but with a taxable account it would seem to me to add further complication in terms of re-balancing. The Roth account should be 100% stock. In the 15% tax bracket you could hold total bond market in taxable, but for simplicity I would just keep all bonds in the Traditional IRA. It's entirely up to you whether you have any of her funds in international, but I, personally, would at least give her a 10% allocation to Total International Stock Market Index. She has sufficient funds to generate a $1200 monthly income. A safe withdrawal rate of 4% on a $400,000 portfolio is $1333. So, you're definitely in the clear here. I am also in agreement with you that a 30% stock/70% bond portfolio would be ideal for her situation. It would be NICE to be a bit more aggressive in her situation and hold a 40% stock/60% bond portfolio, but the difference between the income she needs to generate from the portfolio ($1200) and the SWR ($1333) is such that I, personally, would not be comfortable with that risk.

zuma
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Re: Suggestions for 70-year-old retiree's portfolio

Post by zuma » Mon Jan 09, 2017 4:43 am

Thanks for all the additional comments.

We have several good options to consider and we'll continue to think about what works best for us.

I think the biggest decision will be balanced vs. individual funds. The set-it-and-forget-it appeal of a balanced fund portfolio is hard to ignore, but I know that a 3-fund approach would be more cost-efficient and also give us more flexibility to adjust our strategy down the road.

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BL
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Re: Suggestions for 70-year-old retiree's portfolio

Post by BL » Mon Jan 09, 2017 7:04 am

If she gives money to charities, she can take advantage of the QCD (qualified charitable distribution) after she turns 70 1/2 to take the place of some/all of her RMD. It reduces tax on the RMD by the amount given. I just give them a phone call and tell them to make out checks on the IRA account to charities c/o me. I can't use it in itemized deductions, since it already reduces taxes.

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Re: Suggestions for 70-year-old retiree's portfolio

Post by Dandy » Mon Jan 09, 2017 7:57 am

Have you looked into what portion of her nest egg would be needed to fund all or most of her $1200 a month requirement with an immediate annuity? If she is in good health with good genes that might be worth looking into. My guess is about $200k will yield about $1000/month. Helps with funding a long life, takes some pressure off the portfolio and less stress about market volatility (for both of you). The remaining assets could be invested a bit more aggressively.

If this is a possibility I would get more advice from this forum. There are some strategies like not buying the total amount all at once but spreading it out e.g. 50k per year for 4 years. Also, only putting enough with 1 insurance company equal to her state's "guarantee" program, etc.

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