3 fund portfolio

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Topic Author
PickitPaul
Posts: 61
Joined: Sat Jan 24, 2015 12:17 am

3 fund portfolio

Post by PickitPaul »

I am interested in the 3 fund portfolio, but does it work for income generation in retirement? Would it be as good as setting up a CD ladder and having dividend ETF or index fund?

If the 3 fund portfolio is used, do you duplicate it for taxable side as well as the IRA (one of which is under RMD distribution, only taking RMD's from one IRA for now, leaving the other IRA alone because its invested in stock funds, but both are counted for RMD purposes)
kenner
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Joined: Sat Mar 01, 2008 8:45 am

Re: 3 fund portfolio

Post by kenner »

[quote="PickitPaul"]I am interested in the 3 fund portfolio, but does it work for income generation in retirement?

First and foremost, it seems that the best long-term retirement investment portfolio approach may be to maximize total investment return (as opposed to just income, depending on the amount of investment assets and income needs) over the relevant time period. Of course, an asset allocation can be designed to emphasize income, but that may not be the best approach.

You might receive the most helpful input by following this suggested format:

viewtopic.php?f=1&t=6212


Posting in the above format will likely lead to the best input from forum contributors.
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ruralavalon
Posts: 19687
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Location: Illinois

Re: 3 fund portfolio

Post by ruralavalon »

PickitPaul wrote:I am interested in the 3 fund portfolio, but does it work for income generation in retirement? Would it be as good as setting up a CD ladder and having dividend ETF or index fund?
Without more information it's not possible to say what would work best for you. Please post your details using the format in the link that kenner gave you.

PickitPaul wrote:If the 3 fund portfolio is used, do you duplicate it for taxable side as well as the IRA (one of which is under RMD distribution, only taking RMD's from one IRA for now, leaving the other IRA alone because its invested in stock funds, but both are counted for RMD purposes)
Again it depends on the details of your accounts.

For example I have our joint taxable account entirely in a very tax-efficient stock index fund, take RMDs from my much larger rollover IRA, and rebalance occasionally by exchanging between funds inside the rollover IRA.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
PickitPaul
Posts: 61
Joined: Sat Jan 24, 2015 12:17 am

Re: 3 fund portfolio

Post by PickitPaul »

Thanks to everyone who tried to help - here are the particulars that I should have included.

I am trying to help a close family member with retirement planning and thought the 2 or 3 fund portfolio sounded good, but does it work in this instance?

I think there is too much in cash, but still don't want to go into bond funds since they will loose principle when rates rise. I was talking to a Schwab rep. about setting up a CD ladder, but not as liquid, need to keep the RMD requirement every year.

Expenses are being met now, but how to keep up with inflation and get some growth but not at the expense of loosing money (principle) that cannot be replaced - because there is no new money coming in.
*was looking into selling the TRoe Price small growth fund, but the cost basis is missing. Owned for 30 yrs, and would be a large job to figure out, so keeping it. Same with the Troe Price Equity Income Fund.

Living Expenses (year): 35,000
Car Loans: None
House Mortgage: None
Social Security: Yes / 12K
Pension: None
Other Income: None
IRA RMD Distribution: Yes / 23K
Emergency funds: Yes
Tax Filing Status: Single
Tax Rate: 15% Federal, 0% State
State of Residence:NY
Age: 77
Health: Good
Desired Asset allocation: xx% stocks / xx% bonds - I was going to aim for 25 / 75
Desired International allocation: 5-10% of stocks - not sure?
Total of all accounts: approx 1.4M

Held at Vanguard: Taxable accounts:

VFIJX Vanguard GNMA admiral shares dividends / cap. gains transfer to checking acct. 10.76% of portfoli o
VFSTX Vanguard Short Term Investment Grade admiral shares (div./gains transferred into checking) 6.08% of portfolio
VTSAX Vanguard Total Stock Market Index admiral 4.92% of portfolio - reinvesting dividends


Held at Schwab: - Taxable accounts
MO Altria % of portfolio: .50
COP ConocoPhillips .52
IP International Paper .37

Bonds: Mortgage Backed Bond % of portfolio: .06
Schwab Cash Reserve / Money Market % of portfolio: 20.86
Checking account: % of portfolio: 8.67 (this is where living expenses and emergency funds are located)

Held at TRoe Price Taxable
PRFDX TRoe Price Equity Income Fund : % of portfolio: 3.59 Exp. Ratio: .66 - L. Value
PRNHX T. Rowe Price New Horizons : % of portfolio: 3.13 Exp. Ratio: .79 - Small Growth
Capital gains & dividends are swept into checking account

Tax Deferred account IRA : Taking RMD from only the Schwab IRA: total / yr. about 23,000
Funds: GLD- SPDR Gold ETF % of portfolio: 0.82% Expense Ratio: .40%
PTTDX PIMCO Total Return Fund Class D 0.87% Expense Ratio: .76%
Schwab Cash Reserves: % of port.: 22.75%

Tax Deferred / IRA held at TRoe Price
PRFDX TRoe Price Equity Income % of Portfolio: 8.51% Exp. Ratio: .66% - L. Value

USAA Retirement Annuity Single Premium 4% Interest rate - Non Qualified re -investing interest %of port: 7.58%


I know this is quite a task and if anyone can give some insight as to what areas I should look in - esp. for the cash that is just sitting there - I thank you all very much.

Paul
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willthrill81
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Location: USA

Re: 3 fund portfolio

Post by willthrill81 »

PickitPaul wrote:I am interested in the 3 fund portfolio, but does it work for income generation in retirement? Would it be as good as setting up a CD ladder and having dividend ETF or index fund?
Read to see what Warren Buffett says about dividends. They are not usually the best way to generate income in retirement or at any other time.
http://www.businessinsider.com/warren-b ... nds-2013-3
PickitPaul wrote:If the 3 fund portfolio is used, do you duplicate it for taxable side as well as the IRA (one of which is under RMD distribution, only taking RMD's from one IRA for now, leaving the other IRA alone because its invested in stock funds, but both are counted for RMD purposes)
Read the page below on that. It can get complicated, and it's not usually completely objective either.
https://www.bogleheads.org/wiki/Tax-eff ... _placement
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
kenner
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Joined: Sat Mar 01, 2008 8:45 am

Re: 3 fund portfolio

Post by kenner »

PickitPaul wrote: I think there is too much in cash, but still don't want to go into bond funds since they will loose principle when rates rise. I was talking to a Schwab rep. about setting up a CD ladder, but not as liquid, need to keep the RMD requirement every year.

USAA Retirement Annuity Single Premium 4% Interest rate - Non Qualified re -investing interest %of port: 7.58%

Paul
I'm a bit confused by this post. You express an interest in a 2- or 3-fund asset allocation (which typically consists of Total Stock and Total Bond funds), but then seem to say that even bond funds are too risky in your opinion because they can lose net asset value when interest rates go up (even if temporary).

That seems to limit choices to things like insured CDs, SPIAs, treasury debt, money market funds, etc.

Your family member apparently already has an SPIA. How is that working out for her?

SPIAs can be very good choices, but money used to buy them will not be passed on to heirs. So estate planning is important.

A 2-fund would certainly work, given the apparent $1.4 million portfolio. But only you and your family member can assess risk tolerance and goals for the investments.

Depending on long-term goals and financial needs, an investor who wants more investment return to keep up with inflation, grow the investment portfolio, etc. must be willing to take at least some risk.
Topic Author
PickitPaul
Posts: 61
Joined: Sat Jan 24, 2015 12:17 am

Re: 3 fund portfolio

Post by PickitPaul »

I was thinking out loud - I suppose you can't escape risk if you want some sort of return, and am willing to accept some risk. (listening to Suze Orman didn't help with my bonds comment, saying that going into bond funds now principal would go down in this historically low rate & soon to be rising environment)

If you can take the hit without selling - it all settles down after awhile, and the yields go up in the meantime.

When RMD's are required in IRA, do most people have money set aside in money market for this, or do they sell a totally invested position to get the RMD? Ideally, the account would have some income / growth to replace what is taken out - not all of it replaced, but fill it in a bit?

What do you mean when you say the SPIA money can't be passed on to heirs?

I just want to know if the 2-3 fund is a good way to preserve with some modest growth and generate income. If anyone can look at the funds that i listed, what is there should I change?


kenner wrote:
PickitPaul wrote: I think there is too much in cash, but still don't want to go into bond funds since they will loose principle when rates rise. I was talking to a Schwab rep. about setting up a CD ladder, but not as liquid, need to keep the RMD requirement every year.

USAA Retirement Annuity Single Premium 4% Interest rate - Non Qualified re -investing interest %of port: 7.58%

Paul
I'm a bit confused by this post. You express an interest in a 2- or 3-fund asset allocation (which typically consists of Total Stock and Total Bond funds), but then seem to say that even bond funds are too risky in your opinion because they can lose net asset value when interest rates go up (even if temporary).

That seems to limit choices to things like insured CDs, SPIAs, treasury debt, money market funds, etc.

Your family member apparently already has an SPIA. How is that working out for her?

SPIAs can be very good choices, but money used to buy them will not be passed on to heirs. So estate planning is important.

A 2-fund would certainly work, given the apparent $1.4 million portfolio. But only you and your family member can assess risk tolerance and goals for the investments.

Depending on long-term goals and financial needs, an investor who wants more investment return to keep up with inflation, grow the investment portfolio, etc. must be willing to take at least some risk.
Compound
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Re: 3 fund portfolio

Post by Compound »

If I'm reading this correctly, the person you're talking about has a very low withdrawal rate: $23k/$1.4M = 1.6%.

Seems to me that the first task to address is defining goals. There are many factors to consider: does this person expect expenses to increase over time (health, long term care, etc); desire to spend more (travel, splurge on family, etc); or perhaps invest for future generations (inheritance, charitable giving, etc)? If they simply want and expect to main the status quo, then they've won the game several times over and adjustments to the portfolio seem academic.

That said, simplifying the portfolio makes some sense, particularly if you will be taking over management and want to make things easy on yourself. Assuming things don't change based on the person's need or desire to increase risk, I like the idea of a conservative allocation with a bond heavy portfolio. In this particular circumstance, I see nothing wrong with holding a significant amount of cash or cash equivalents (TIPS perhaps).
kenner
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Joined: Sat Mar 01, 2008 8:45 am

Re: 3 fund portfolio

Post by kenner »

PickitPaul wrote: What do you mean when you say the SPIA money can't be passed on to heirs?
I recommend you read this article by highly respected Boglehead, Mike Piper: http://www.obliviousinvestor.com/single ... e-annuity/

The issue regarding heirs/inheritance appears about half-way down the article. There are numerous other sources of information that can explain this in more detail.

Essentially, my understanding is that once the SPIA is purchased, that money belongs to the insurance company, which is then under a contractual obligation to fulfill the terms of the annuity agreement (generally paying a stream of income to the SPIA purchaser during his/her lifetime).
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ruralavalon
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Location: Illinois

Re: 3 fund portfolio

Post by ruralavalon »

PickitPaul wrote:I am trying to help a close family member with retirement planning and thought the 2 or 3 fund portfolio sounded good, but does it work in this instance?

I think there is too much in cash, but still don't want to go into bond funds since they will loose principle when rates rise. I was talking to a Schwab rep. about setting up a CD ladder, but not as liquid, need to keep the RMD requirement every year.

Expenses are being met now, but how to keep up with inflation and get some growth but not at the expense of loosing money (principle) that cannot be replaced - because there is no new money coming in.
*was looking into selling the TRoe Price small growth fund, but the cost basis is missing. Owned for 30 yrs, and would be a large job to figure out, so keeping it. Same with the Troe Price Equity Income Fund.

Living Expenses (year): 35,000
Car Loans: None
House Mortgage: None
Social Security: Yes / 12K
Pension: None
Other Income: None
IRA RMD Distribution: Yes / 23K
Emergency funds: Yes
Tax Filing Status: Single
Tax Rate: 15% Federal, 0% State
State of Residence:NY
Age: 77
Health: Good
Desired Asset allocation: xx% stocks / xx% bonds - I was going to aim for 25 / 75
Desired International allocation: 5-10% of stocks - not sure?
Total of all accounts: approx 1.4M
Asset allocation.
In my opinion any asset allocation in the range 60/40 to 40/60 would be reasonable. An allocation that is very low in stocks any very high in bonds is actually more risky. In the example portfolio I will use an asset allocation of 50/50 as an illustration.

I usually suggest in the range of 20 - 30% of stocks in international stocks. But there is an enormous range of opinion here on the proper international stock allocation.

This works out to about: 50% bonds; 10-15% international stocks; and 35-40% domestic stocks.


Taxable accounts.
I think that you have already identified the issue (cost basis and income tax liability) concerning selling funds from the taxable accounts.

In the T. Rowe Price taxable account the family member could keep the two T. Rowe Price funds where the cost basis is unknown, and where I assume that the capital gain is large over the 30+ years they have been held.

In the Schwab taxable account, the three stocks held are a very small percentage of the portfolio, so I suggest selling if that will not push the family member up out of the 15% tax bracket. As long as the family member stays in the 15% tax bracket, there is no federal income tax on long-term capital gains. The family member has about 21% of portfolio in cash, I suggest that be invested in something that could give a positive real return after inflation. I suggest using a very tax-efficient total market stock index fund.

In the Vanguard taxable account I suggest selling the two bond funds. I suggest investing in very tax-efficient total market stock index funds, such as Vanguard Total Stock Market Index Fund, or the equivalent if the accounts are consolidated elsewhere.

For convenience it might be best to consolidate the three taxable accounts at one location. I suggest either Vanguard or Schwab, my personal preference would be Vanguard. Both have good selections of broadly diversified low expense ratio funds, Vanguard has the larger selection of such funds to choose from. The two funds from the T. Rowe Price account (or the Vanguard Total Stock Market Index Fund) might be transferred "in kind" to avoid creating any unnecessary income tax liability, check with Vanguard (or Schwab if consolidating at Schwab) to see if that's possible.

I would not count the checking account/emergency fund (8.67%) as a part of the investing portfolio. Making that adjustment would mean that the investing portfolio is about: 3 taxable accounts = 52%; 2 IRAs = 40%; and annuity = 8%.


IRAs.
For convenience I suggest that the two IRAs be consolidated at one location, I would prefer Schwab over T. Rowe Price. This should be done in a "trustee to trustee" rollover, to make sure there is no inadvertent creation of income tax liability.


Example portfolio.
Here is an example portfolio that he could consider, it is a three-fund type portfolio using an asset allocation of 50% bonds, 10% international stocks and 40% domestic stocks. The single premium annuity counts as part of the "bond" allocation. This example assumes consolidation of the accounts at Schwab, assumes that the three stocks can be sold, and also assumes that the two Schwab funds in the Schwab taxable account are kept.

Taxable account @ Schwab, consolidates 3 accounts (52% of total)
04%, T. Rowe Price Equity Income Fund (PRFDX) ER 0.66%
03%, T. Rowe Price New Horizons Fund (PRNHX) ER 0.79%
33%, Schwab Total Stock Market Index Fund (SWSTX) ER 0.09%
10%, Schwab International Index Fund (SWISX) ER 0.19%
02%, Schwab Tax Free Bond Fund (SWNTX) ER 0.49%

IRA @ Schwab, consolidates 2 IRAs (40% of total)
40%, Schwab Total Bond Market Fund (SWLBX) ER 0.29%

USAA annuity (8% of total)
08%, single premium annuity

. . . . .

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
PickitPaul
Posts: 61
Joined: Sat Jan 24, 2015 12:17 am

Re: 3 fund portfolio

Post by PickitPaul »

Compound wrote:If I'm reading this correctly, the person you're talking about has a very low withdrawal rate: $23k/$1.4M = 1.6%.

Seems to me that the first task to address is defining goals. There are many factors to consider: does this person expect expenses to increase over time (health, long term care, etc); desire to spend more (travel, splurge on family, etc); or perhaps invest for future generations (inheritance, charitable giving, etc)? If they simply want and expect to main the status quo, then they've won the game several times over and adjustments to the portfolio seem academic.

That said, simplifying the portfolio makes some sense, particularly if you will be taking over management and want to make things easy on yourself. Assuming things don't change based on the person's need or desire to increase risk, I like the idea of a conservative allocation with a bond heavy portfolio. In this particular circumstance, I see nothing wrong with holding a significant amount of cash or cash equivalents (TIPS perhaps).
It would be nice to increase spending for travel and spending on granddaughter. A college 529 plan NY state had been set up for 200 per month. No long term health care insurance, it would cost much more now at 77, and health is great now, so no increase in spending on health care.

As for the funds that exist already in taxable - am i right in not wanting to sell anything, too many cap gains and the thought of figuring out cost basis for the last 30 yrs. - the fund co. doesn't have the info., i checked.

So my questions would be for the cash now in mm funds both in taxable and IRA. Shouldn't cash in mm funds be no more than 100,000, because the FDIC doesn't insure for more than that? TIPS would be a fund holding just that?
Open to bond funds, or conservative income funds also.

I will look into the SPIA to see if that should be distributed / anuitized now, because it is just dollar cost re-investing the 4% interest, and not being counted as income.
Topic Author
PickitPaul
Posts: 61
Joined: Sat Jan 24, 2015 12:17 am

Re: 3 fund portfolio

Post by PickitPaul »

ruralavalon wrote:
PickitPaul wrote:I am trying to help a close family member with retirement planning and thought the 2 or 3 fund portfolio sounded good, but does it work in this instance?

I think there is too much in cash, but still don't want to go into bond funds since they will loose principle when rates rise. I was talking to a Schwab rep. about setting up a CD ladder, but not as liquid, need to keep the RMD requirement every year.

Expenses are being met now, but how to keep up with inflation and get some growth but not at the expense of loosing money (principle) that cannot be replaced - because there is no new money coming in.
*was looking into selling the TRoe Price small growth fund, but the cost basis is missing. Owned for 30 yrs, and would be a large job to figure out, so keeping it. Same with the Troe Price Equity Income Fund.

Living Expenses (year): 35,000
Car Loans: None
House Mortgage: None
Social Security: Yes / 12K
Pension: None
Other Income: None
IRA RMD Distribution: Yes / 23K
Emergency funds: Yes
Tax Filing Status: Single
Tax Rate: 15% Federal, 0% State
State of Residence:NY
Age: 77
Health: Good
Desired Asset allocation: xx% stocks / xx% bonds - I was going to aim for 25 / 75
Desired International allocation: 5-10% of stocks - not sure?
Total of all accounts: approx 1.4M
Asset allocation.
In my opinion any asset allocation in the range 60/40 to 40/60 would be reasonable. An allocation that is very low in stocks any very high in bonds is actually more risky. In the example portfolio I will use an asset allocation of 50/50 as an illustration.

I usually suggest in the range of 20 - 30% of stocks in international stocks. But there is an enormous range of opinion here on the proper international stock allocation.

This works out to about: 50% bonds; 10-15% international stocks; and 35-40% domestic stocks.


Taxable accounts.
I think that you have already identified the issue (cost basis and income tax liability) concerning selling funds from the taxable accounts.

In the T. Rowe Price taxable account the family member could keep the two T. Rowe Price funds where the cost basis is unknown, and where I assume that the capital gain is large over the 30+ years they have been held.

In the Schwab taxable account, the three stocks held are a very small percentage of the portfolio, so I suggest selling if that will not push the family member up out of the 15% tax bracket. As long as the family member stays in the 15% tax bracket, there is no federal income tax on long-term capital gains. The family member has about 21% of portfolio in cash, I suggest that be invested in something that could give a positive real return after inflation. I suggest using a very tax-efficient total market stock index fund.

In the Vanguard taxable account I suggest selling the two bond funds. I suggest investing in very tax-efficient total market stock index funds, such as Vanguard Total Stock Market Index Fund, or the equivalent if the accounts are consolidated elsewhere.

For convenience it might be best to consolidate the three taxable accounts at one location. I suggest either Vanguard or Schwab, my personal preference would be Vanguard. Both have good selections of broadly diversified low expense ratio funds, Vanguard has the larger selection of such funds to choose from. The two funds from the T. Rowe Price account (or the Vanguard Total Stock Market Index Fund) might be transferred "in kind" to avoid creating any unnecessary income tax liability, check with Vanguard (or Schwab if consolidating at Schwab) to see if that's possible.

I would not count the checking account/emergency fund (8.67%) as a part of the investing portfolio. Making that adjustment would mean that the investing portfolio is about: 3 taxable accounts = 52%; 2 IRAs = 40%; and annuity = 8%.


IRAs.
For convenience I suggest that the two IRAs be consolidated at one location, I would prefer Schwab over T. Rowe Price. This should be done in a "trustee to trustee" rollover, to make sure there is no inadvertent creation of income tax liability.


Example portfolio.
Here is an example portfolio that he could consider, it is a three-fund type portfolio using an asset allocation of 50% bonds, 10% international stocks and 40% domestic stocks. The single premium annuity counts as part of the "bond" allocation. This example assumes consolidation of the accounts at Schwab, assumes that the three stocks can be sold, and also assumes that the two Schwab funds in the Schwab taxable account are kept.

Taxable account @ Schwab, consolidates 3 accounts (52% of total)
04%, T. Rowe Price Equity Income Fund (PRFDX) ER 0.66%
03%, T. Rowe Price New Horizons Fund (PRNHX) ER 0.79%
33%, Schwab Total Stock Market Index Fund (SWSTX) ER 0.09%
10%, Schwab International Index Fund (SWISX) ER 0.19%
02%, Schwab Tax Free Bond Fund (SWNTX) ER 0.49%

IRA @ Schwab, consolidates 2 IRAs (40% of total)
40%, Schwab Total Bond Market Fund (SWLBX) ER 0.29%

USAA annuity (8% of total)
08%, single premium annuity

. . . . .

If you have any questions just ask.

I hope that this helps.
Thank you very much for your analysis, it does help. Just a few questions / comments:

One thing I like at Schwab more is the interest checking at Schwab Bank, which Vanguard doesn't have.

If I sell the two bond funds at Vanguard: Both of these are paying every month to checking account, what could i find to have monthly to help re-plenish the checking acct.? Could start to have the USAA annuity pay out, instead of reinvesting interest (which isn't taxable until payout begins)

What about the quick rule of having your age in bonds, in this case 70 bonds / 30 stock? Or 65 bond / 30 us stock / 5 international stock?

Total Stock Market at Vanguard: If transferred to Schwab, would just keep this there like both the TRoe Price funds in the Schwab taxable?

IRA: Since this would be all in bonds, wouldn't there be a need to keep a liquid portion for the RMD's every year, or just sell part of bond fund when needed?

Consolidate the TR Price IRA into Schwab IRA: Once it is transferred in kind to Schwab, Schwab would charge to sell TR Price funds - better to sell at TR Price place into MM - then have the transfer done over to Schwab?
bigred77
Posts: 2042
Joined: Sat Jun 11, 2011 4:53 pm

Re: 3 fund portfolio

Post by bigred77 »

I will go one further and propose the following.

Sell all current positions (depending on capital gains in taxable accounts), annuitize what is needed to meet current income needs with a SPIA (annuitize the USAA one and then buy a second to meet 100% of current needs), and then put everything else in the Vanguard Target Retirement Income Fund across all accounts. Sell and withdraw from traditional IRA whatever the RMD is each year and then reinvest in the same fund in a taxable account. If you need additional money to spend, sell shares in taxable and spend what you need.
User avatar
ruralavalon
Posts: 19687
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: 3 fund portfolio

Post by ruralavalon »

PickitPaul wrote:I am trying to help a close family member with retirement planning and thought the 2 or 3 fund portfolio sounded good, but does it work in this instance?

I think there is too much in cash, but still don't want to go into bond funds since they will loose principle when rates rise. I was talking to a Schwab rep. about setting up a CD ladder, but not as liquid, need to keep the RMD requirement every year.

Expenses are being met now, but how to keep up with inflation and get some growth but not at the expense of loosing money (principle) that cannot be replaced - because there is no new money coming in.
*was looking into selling the TRoe Price small growth fund, but the cost basis is missing. Owned for 30 yrs, and would be a large job to figure out, so keeping it. Same with the Troe Price Equity Income Fund.

Living Expenses (year): 35,000
Car Loans: None
House Mortgage: None
Social Security: Yes / 12K
Pension: None
Other Income: None
IRA RMD Distribution: Yes / 23K
Emergency funds: Yes
Tax Filing Status: Single
Tax Rate: 15% Federal, 0% State
State of Residence:NY
Age: 77
Health: Good
Desired Asset allocation: xx% stocks / xx% bonds - I was going to aim for 25 / 75
Desired International allocation: 5-10% of stocks - not sure?
Total of all accounts: approx 1.4M
I should say that I should have used a different bond fund for the taxable account in the example portfolio. Since the family member is in the 15% bracket a municipal bond fund will not be the best idea, a regular bond fund like Schwab Total Bond Market Fund (SWLBX) would be preferred.

PickitPaul wrote:One thing I like at Schwab more is the interest checking at Schwab Bank, which Vanguard doesn't have.
In my opinion that's not a compelling reason to consolidate at Schwab. We have all our accounts at Vanguard, and use electronic transfers to a checking account at our local bank. That works very well for us.

Is the family member particularly attached to Schwab? Is there a local Schwab office or Schwab advisor that the family member deals with and wants to continue? Some people prefer Schwab customer service to that at Vanguard.

My personal preference for Vanguard over Schwab is based on the lower expense ratios for the funds in question, and in better diversification in some funds. If the accounts were consolidated at Vanguard then the funds to use would be:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.12%
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.06%

PickitPaul wrote:If I sell the two bond funds at Vanguard: Both of these are paying every month to checking account, what could i find to have monthly to help re-plenish the checking acct.? Could start to have the USAA annuity pay out, instead of reinvesting interest (which isn't taxable until payout begins)
I may have misunderstood. You said annual expenses = $35k/year, Social Security = $12k/yr, and RMD from IRA = $23k/yr, so that currently all annual expenses are met from that.

So why the need to replenish the checking account (currently about $120k????) from any source other than SS and RMDs?

You mentioned expected inflation of annual expenses. Are there other additional future needs anticipated, and about how much would that be annually?

If the family member starts payout from the USAA annuity now, then what would the annual payout be?

PickitPaul wrote:What about the quick rule of having your age in bonds, in this case 70 bonds / 30 stock? Or 65 bond / 30 us stock / 5 international stock?
Asset allocation is a very personal decision, and must be based on the family member's own ability, willingness, and need to take risk. What the family member is comfortable with is important to this decision.

There is no formula or "rule" involved, just "rules of thumb" or rough general guidelines, adjusted for personal circumstances and goals. Please see the wiki articles "Bogleheads Investment Philosophy" part 3 " never bear too much or too little risk", and "asset allocation".

You indicate that the goals are "to keep up with inflation and get some growth but not at the expense of losing money (principal)". The desire for some growth and keeping up with inflation are both factors weighing in favor of a somewhat higher stock allocation. The certain and stable income of the Social Security benefit and annuity also are factors favoring a smaller bond allocation.

What asset allocation is your family member currently using? (Counting cash and annuity as part of the "bond" allocation, it looks like currently the family member is allocated about 50/50 or 40/60.)

A 50/50 asset allocation is not aggressive. For what it's worth, we are both 71 and our asset allocation is 50/50. But the real question is what suits the needs and preferences of your family member.


PickitPaul wrote:Total Stock Market at Vanguard: If transferred to Schwab, would just keep this there like both the TRoe Price funds in the Schwab taxable?
Yes, if the consolidation is at Schwab then transfer the Vanguard fund "in kind" and continue to hold it in the Schwab account so that no unnecessary income tax liability is created.

In the example portfolio I should have included in the taxable account a holding in Vanguard Total Stock Market Index Fund as transferred from the Vanguard account.

PickitPaul wrote:IRA: Since this would be all in bonds, wouldn't there be a need to keep a liquid portion for the RMD's every year, or just sell part of bond fund when needed?
I don't think that there is a need to keep anything in cash for the RMDs. Just sell part of the bond fund when needed. I have this done automatically from my rollover IRA at Vanguard, and I assume that Schwab can also do the same automatically.

Please check to see what the procedure is at Schwab.

PickitPaul wrote:Consolidate the TR Price IRA into Schwab IRA: Once it is transferred in kind to Schwab, Schwab would charge to sell TR Price funds - better to sell at TR Price place into MM - then have the transfer done over to Schwab?
Yes, sell funds in the T. Rowe Price IRA at T. Rowe Price if the sales expense is lower there.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
yngdoc
Posts: 13
Joined: Mon Feb 13, 2017 11:04 am

Re: 3 fund portfolio

Post by yngdoc »

PickitPaul wrote:I am interested in the 3 fund portfolio, but does it work for income generation in retirement? Would it be as good as setting up a CD ladder and having dividend ETF or index fund?

If the 3 fund portfolio is used, do you duplicate it for taxable side as well as the IRA (one of which is under RMD distribution, only taking RMD's from one IRA for now, leaving the other IRA alone because its invested in stock funds, but both are counted for RMD purposes)
I am new here but I think a 3 fund portfolio almost always works, it is just a matter of the percentages in each of the three funds.
Topic Author
PickitPaul
Posts: 61
Joined: Sat Jan 24, 2015 12:17 am

Re: 3 fund portfolio

Post by PickitPaul »

ruralavalon wrote:
PickitPaul wrote:I am trying to help a close family member with retirement planning and thought the 2 or 3 fund portfolio sounded good, but does it work in this instance?

I think there is too much in cash, but still don't want to go into bond funds since they will loose principle when rates rise. I was talking to a Schwab rep. about setting up a CD ladder, but not as liquid, need to keep the RMD requirement every year.

Expenses are being met now, but how to keep up with inflation and get some growth but not at the expense of loosing money (principle) that cannot be replaced - because there is no new money coming in.
*was looking into selling the TRoe Price small growth fund, but the cost basis is missing. Owned for 30 yrs, and would be a large job to figure out, so keeping it. Same with the Troe Price Equity Income Fund.

Living Expenses (year): 35,000
Car Loans: None
House Mortgage: None
Social Security: Yes / 12K
Pension: None
Other Income: None
IRA RMD Distribution: Yes / 23K
Emergency funds: Yes
Tax Filing Status: Single
Tax Rate: 15% Federal, 0% State
State of Residence:NY
Age: 77
Health: Good
Desired Asset allocation: xx% stocks / xx% bonds - I was going to aim for 25 / 75
Desired International allocation: 5-10% of stocks - not sure?
Total of all accounts: approx 1.4M
Asset allocation.
In my opinion any asset allocation in the range 60/40 to 40/60 would be reasonable. An allocation that is very low in stocks any very high in bonds is actually more risky. In the example portfolio I will use an asset allocation of 50/50 as an illustration.

I usually suggest in the range of 20 - 30% of stocks in international stocks. But there is an enormous range of opinion here on the proper international stock allocation.

This works out to about: 50% bonds; 10-15% international stocks; and 35-40% domestic stocks.


Taxable accounts.
I think that you have already identified the issue (cost basis and income tax liability) concerning selling funds from the taxable accounts.

In the T. Rowe Price taxable account the family member could keep the two T. Rowe Price funds where the cost basis is unknown, and where I assume that the capital gain is large over the 30+ years they have been held.

In the Schwab taxable account, the three stocks held are a very small percentage of the portfolio, so I suggest selling if that will not push the family member up out of the 15% tax bracket. As long as the family member stays in the 15% tax bracket, there is no federal income tax on long-term capital gains. The family member has about 21% of portfolio in cash, I suggest that be invested in something that could give a positive real return after inflation. I suggest using a very tax-efficient total market stock index fund.

In the Vanguard taxable account I suggest selling the two bond funds. I suggest investing in very tax-efficient total market stock index funds, such as Vanguard Total Stock Market Index Fund, or the equivalent if the accounts are consolidated elsewhere.

For convenience it might be best to consolidate the three taxable accounts at one location. I suggest either Vanguard or Schwab, my personal preference would be Vanguard. Both have good selections of broadly diversified low expense ratio funds, Vanguard has the larger selection of such funds to choose from. The two funds from the T. Rowe Price account (or the Vanguard Total Stock Market Index Fund) might be transferred "in kind" to avoid creating any unnecessary income tax liability, check with Vanguard (or Schwab if consolidating at Schwab) to see if that's possible.

I would not count the checking account/emergency fund (8.67%) as a part of the investing portfolio. Making that adjustment would mean that the investing portfolio is about: 3 taxable accounts = 52%; 2 IRAs = 40%; and annuity = 8%.


IRAs.
For convenience I suggest that the two IRAs be consolidated at one location, I would prefer Schwab over T. Rowe Price. This should be done in a "trustee to trustee" rollover, to make sure there is no inadvertent creation of income tax liability.


Example portfolio.
Here is an example portfolio that he could consider, it is a three-fund type portfolio using an asset allocation of 50% bonds, 10% international stocks and 40% domestic stocks. The single premium annuity counts as part of the "bond" allocation. This example assumes consolidation of the accounts at Schwab, assumes that the three stocks can be sold, and also assumes that the two Schwab funds in the Schwab taxable account are kept.

Taxable account @ Schwab, consolidates 3 accounts (52% of total)
04%, T. Rowe Price Equity Income Fund (PRFDX) ER 0.66%
03%, T. Rowe Price New Horizons Fund (PRNHX) ER 0.79%
33%, Schwab Total Stock Market Index Fund (SWSTX) ER 0.09%
10%, Schwab International Index Fund (SWISX) ER 0.19%
02%, Schwab Tax Free Bond Fund (SWNTX) ER 0.49%

IRA @ Schwab, consolidates 2 IRAs (40% of total)
40%, Schwab Total Bond Market Fund (SWLBX) ER 0.29%

USAA annuity (8% of total)
08%, single premium annuity

. . . . .

If you have any questions just ask.

I hope that this helps.

In regard to your comment of selling in the taxable account at Vanguard: GMNA (VFIJX) the cost per share is $10.49 so the unrealized loss will be around $1425.00. The loss for the VFSUX Vanguard Short Term Inv. Grade Fund would be around $725.00 if sold. Interest rates are rising, so probably will be more loss if i wait longer.

While these funds are better to be in a tax advantaged IRA, the tax bracket is at 15%.
Is it still worth selling these two?
I would just buy less Total Bond Fund or a CD ladder in the IRA if I kept these.
Topic Author
PickitPaul
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Re: 3 fund portfolio

Post by PickitPaul »

I truly am grateful for the advice given so far...but wanted to bump up again for this last question :happy
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ruralavalon
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Location: Illinois

Re: 3 fund portfolio

Post by ruralavalon »

PickitPaul wrote:I truly am grateful for the advice given so far...but wanted to bump up again for this last question :happy
You are correct that in the 15% tax bracket bond funds can be kept in the taxable account if necessary. You could use Schwab U.S. Aggregate Bond Index Fund (SWAGX).

Since the two bond funds in the taxable account have unrealized capital losses they can be sold without income tax liability.

For clarity a "bond" allocation could include any fixed income investment such as bond funds, CDs, fixed annuity, etc.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
PickitPaul
Posts: 61
Joined: Sat Jan 24, 2015 12:17 am

Re: 3 fund portfolio

Post by PickitPaul »

You are correct that in the 15% tax bracket bond funds can be kept in the taxable account if necessary. You could use Schwab U.S. Aggregate Bond Index Fund (SWAGX).
Is this the equiv. of the Vanguard Total Bond Market Index?

Since the two bond funds in the taxable account have unrealized capital losses they can be sold without income tax liability. Given the tax bracket what would you do? I am thinking of selling 1/2 of GNMA and 1/2 of Short Term Inv. Grade, investing proceeds into the Total Stock Market at Vanguard, then go over to Schwab IRA and grab some of the SWAGX Bond Index. Or just keep them & ride the share price lower as interest rates rise - which is a paper loss, but then is offset with higher yeilds?

(But i still plan on buying more total bond index and CD ladder in ira @ Schwab to beef up bond allocation there.)


For clarity a "bond" allocation could include any fixed income investment such as bond funds, CDs, fixed annuity, etc.[/quote]
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Leif
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Re: 3 fund portfolio

Post by Leif »

I have more funds then 3 and also CDs. It is not an either/or situation. No magic with a 3 fund portfolio.

As far as CDs I keep a significant amount in a CD ladder. I will use those funds from retirement until I reach 70 when I will begin social security. I have CDs coming due every year. That way I take out what I need and what I don't need I can roll over to a new 5 year CD. That keeps the interest rate higher due to the longer term, and it also provides cash on a regular basis.
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