Asset Allocation - Inherited Assets, newly Semi-Retired

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Emmylou
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Joined: Fri Dec 30, 2016 11:27 am

Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Emmylou » Sun Jun 18, 2017 6:42 pm

Hi, Bogleheads! Thanks for taking a look at my portfolio and (in advance) for your recommendations, suggestions, and thoughts.

I am a single 58-year-old woman and recently inherited from deceased parents. Due to my new socio-economic status, I am now semi-retired and intend to live off of dividends, as well as a modest pension, supplemented by part-time work as needed. My largest expenses are health insurance (as I am too young for Medicare) and maintenance of two houses (owned, no mortgages), one of which was inherited and currently houses family.

I have been following the BH forum and am reading the recommended books. I am all-in with the investing philosophy of Vanguard, Bogleheads, and the Three-Fund Portfolio. Currently, I am mid-stream in getting assets placed at their best advantage, and I have a few questions regarding allocation, given the specifics on the inheritance (includes a very large holding of one stock, JNJ). I have done my best to adhere to Lady Geek’s “Asking Portfolio Questions” template, so the questions are at the end of this post.

Well, here goes, and thanks again for your time and consideration …

Emergency funds: Three to six months of expenses.  Yes, I have this.
Debt: Indicate if you have any debt.  I do not have any debt and pay off credit cards in full each month.
Tax Filing Status:  Single.
Tax Rate:  15% Federal, 0% State
State of Residence:  Florida
Age:  58
Desired Asset allocation:  50% stocks / 50% bonds
Desired International allocation:  20% of stocks
Please provide a hint as to the size of your current total portfolio:  Low seven-figures.

Current investment assets (followed by expense ratio %)

Taxable
My Vanguard brokerage account
8% Cash V Money Market Fund (VMFXX)
3% V Total Stock Market Index Fund Adm (VTSAX) (0.04%)
4% V Total International Stock Index Fund Adm (VTIAX) (0.11%)
10% V Total Bond Market Index Fund Adm (VBTLX) (0.05%)
41% Johnson & Johnson stock (JNJ)

Tax-Exempt
My USAA bond funds
12% USAA T-E Intermediate-term Bond Fund (USATX) (0.54%)
2% USAA T-E Long-term Bond Fund (USTEX) (0.51%)

Current retirement assets

Tax-Exempt retirement assets
My Roth IRA at Vanguard
2% V S&P 500 Index Fund Adm (VFIAX) (0.04%)
2% USAA World Growth Fund (USAWX) (1.17%)

Tax-deferred retirement assets
My Inherited IRA at Vanguard
9% V Total Bond Market Index Fund Adm (VBTLX) (0.05%)
5% V Total International Bond Index Fund Adm (VTABX) (0.12%)

My Rollover IRA at Vanguard
1% V Total Bond Market Index Fund Adm (VBTLX) (0.05%)

My SEP IRA at Vanguard
1% V Total Bond Market Index Fund Adm (VBTLX) (0.05%)


Contributions
New annual Contributions
$Variable up to $6,500 – My IRA/Roth IRA
$Variable – My SEP IRA

Questions:

1. About stock allocation (goal 50% / 10% Int’l): I inherited a large holding of JNJ (41% of portfolio), which I am planning to keep. (The capital gains to sell would be too great, as the stock is currently up 34% above cost basis.)

My question is: In considering my 50% / 50% AA split in the TFP, is it wiser to include or exclude the JNJ in my AA for stock %? If I include the JNJ, my room for V Total Stock Market Index Adm and Total International Stock Adm % may be so low that I miss out on the advantage of diversification in the total stock and international stock market indices. Your thoughts?

2. About bond allocation (goal 50% / 0% Int’l): I inherited tax-exempt Intermediate- and Long-term bond funds held at USAA (USATX & USTEX), which make up 14% of my portfolio. I also have Total Bond and Total International Bond at Vanguard. It is my intention to sell my Total International Bond Fund shares (VTABX) and to sell the USAA bonds and buy into Vanguard bond products, but I am uncertain of which are the best products. I don’t need tax-exempt, as I am currently in a 15% tax bracket.

My question is: Is VBTLX the best for my entire bond holdings? If not, which V bond fund(s), percentages, would you recommend and for which of my accounts?

Thanks!! :sharebeer
Last edited by Emmylou on Sun Jun 18, 2017 11:26 pm, edited 1 time in total.

Gill
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Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Gill » Sun Jun 18, 2017 8:22 pm

Are you sure of your basis in JNJ? Didn't it receive a new basis? I would not hold any stock that is 41% of my portfolio.
Gill

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Taylor Larimore
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Location: Miami FL

Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Taylor Larimore » Sun Jun 18, 2017 8:44 pm

I am all-in with the investing philosophy of Vanguard, Bogleheads, and the Three-Fund Portfolio.
Emmylou:

Welcome to the Bogleheads Forum!

I am sorry about the recent death of your parents. However, I am pleased to learn that you are "all-in with the investing philosophy of Vanguard, Bogleheads, and the Three-Fund Portfolio."

You have done an excellent job following the forum format for asking portfolio questions. I am sure you will get many replies.

In my opinion, you are an excellent candidate for Vanguard's low-cost Professional Advisory Service (at least for a year). Not only will you get professional advice to meet your goals, but they will also help you move your securities to Vanguard in the best and most tax-efficient way. It will also be good to have professional advice about what to do with your large JNJ stock holding which probably has a new capital gain basis.

Your reading has made you knowledgeable about investing. After using the PAS service for a year, the and with your portfolio in place, you may decide you can manage your simplified portfolio yourself.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

aristotelian
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Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by aristotelian » Sun Jun 18, 2017 8:48 pm

Please consider liquidating the JNJ stock. In 15% tax bracket you should liquidate as much as you can up to the limit of the tax bracket and you will pay no tax. Certainly once you have stopped working for a full year you will have a lot of room in the 15% bracket and I would use it all to liquidate the JNJ.

Also consider getting rid of USAA World Growth and replacing with an index fund with lower expense ratio.

For Vanguard, Total Bond Market Index is a standard recommendation and you can't really go wrong with it. Also consider Intermediate Bond Index (VBIIX).

As an investor that is very heavy in bonds, you might want to read a good book on the different types. I found Swedroe's Winning Bond Strategy immensely helpful although it is somewhat technical.

You mention pension but I don't see it in your assets. How much of your income will it cover and when does it kick in?

Do you have a withdrawal plan for pre- and post-Social Security? Based on your portfolio it appears you are set, but it couldn't hurt to model it out.

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Misenplace
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Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Misenplace » Sun Jun 18, 2017 8:51 pm

EmmyLou,

First, welcome to the forum! Your proposed 50:50 portfolio looks great to me and appropriate for your age and situation. I will take a shot at your two questions.

1. If you recently inherited the JnJ stock, then your cost basis is the market price on the date that the parent who willed it to you died. You say that you "recently" inherited. You probably have a slight loss in that stock right now.

You need to sell the JnJ stock and invest the proceeds in a Total Stock Market Index and a Total International Index as soon as possible. Now. Yesterday.

[Instead of putting the above 3 sentences in all-caps, I decided to restrain myself and just set it off in it's own separate paragraph in italics.] Please take a look at this page in the Wiki. https://www.bogleheads.org/wiki/Step-up_in_basis
If you don't sell that stock, I would not even include it in your asset allocation- a concentrated position in one stock is not a substitute for your equity allocation. Also, if you don't sell that stock, you might as well keep working because it is a gamble, not an investment.

2. I agree with you that it is a good idea to move into some better bond funds than the ones in your inherited accounts. As for whether you should or should not use a tax exempt bond fund in your taxable, you will need to consider how the income kicked off from the bond fund might affect your tax bracket. If you have a lot of taxable bond funds in your taxable account, you can easily be kicked into a higher tax bracket from the income received in a bond fund (which is all regular income), especially since you file single. You can look and see how much each fund you are considered distributed last year to get an estimate for the amount of shares you are considering purchasing.

Ask away if you have more questions.
best,
Misenplace

Emmylou
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Joined: Fri Dec 30, 2016 11:27 am

Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Emmylou » Sun Jun 18, 2017 10:36 pm

Gill wrote:Are you sure of your basis in JNJ? Didn't it receive a new basis? I would not hold any stock that is 41% of my portfolio.
Gill
Thanks, Gill. The cost basis is $101, from the time stepmom passed in November 2015. Probate took some time, so I received the inheritance fairly recently. JNJ is now at $134. Oops, I stand corrected on the increase over the cost basis. It is closer to 34% (than the 40% that I stated in my post). :oops:

Emmylou
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Joined: Fri Dec 30, 2016 11:27 am

Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Emmylou » Sun Jun 18, 2017 11:24 pm

Taylor Larimore wrote:
I am all-in with the investing philosophy of Vanguard, Bogleheads, and the Three-Fund Portfolio.
Emmylou:

Welcome to the Bogleheads Forum!

I am sorry about the recent death of your parents. However, I am pleased to learn that you are "all-in with the investing philosophy of Vanguard, Bogleheads, and the Three-Fund Portfolio."

You have done an excellent job following the forum format for asking portfolio questions. I am sure you will get many replies.

In my opinion, you are an excellent candidate for Vanguard's low-cost Professional Advisory Service (at least for a year). Not only will you get professional advice to meet your goals, but they will also help you move your securities to Vanguard in the best and most tax-efficient way. It will also be good to have professional advice about what to do with your large JNJ stock holding which probably has a new capital gain basis.

Your reading has made you knowledgeable about investing. After using the PAS service for a year, the and with your portfolio in place, you may decide you can manage your simplified portfolio yourself.

Best wishes.
Taylor
Thanks for your condolences, Taylor! And thank you for your suggestions and vote of confidence. (OMG, I'm talking to Taylor Larimore!! :shock: :D )

I have been working with Vanguard advisers, who have helped me roll over the Inherited IRA, two employer retirement accounts, and the ROTH IRA. All that is left outside Vanguard are the two t-e bond funds at USAA. I will consider the PAS for help with selling the USAA holdings in my Vanguard brokerage and in selling or transferring the bonds still at USAA.

I will also reconsider selling the JNJ but have already spoken with my CPA about the tax implications. The increase in value from the cost basis is closer to 34% (rather than the 40% in my post -- I will correct that). In Nov. 2015, on the day when stepmom passed, JNJ was at $101. Today it is at $134. Probate took some time to complete, so I received the inheritance fairly recently. I have to say, the quarterly dividends are lovely!! ($0.84)

But as I stated in my post, I am all-in on the TFP, so professional advice on the JNJ (as in help with letting it go) may be in order.

Thanks again, Taylor!!

Emmylou
Posts: 7
Joined: Fri Dec 30, 2016 11:27 am

Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Emmylou » Mon Jun 19, 2017 12:48 pm

aristotelian wrote:Please consider liquidating the JNJ stock. In 15% tax bracket you should liquidate as much as you can up to the limit of the tax bracket and you will pay no tax. Certainly once you have stopped working for a full year you will have a lot of room in the 15% bracket and I would use it all to liquidate the JNJ.

Also consider getting rid of USAA World Growth and replacing with an index fund with lower expense ratio.

For Vanguard, Total Bond Market Index is a standard recommendation and you can't really go wrong with it. Also consider Intermediate Bond Index (VBIIX).

As an investor that is very heavy in bonds, you might want to read a good book on the different types. I found Swedroe's Winning Bond Strategy immensely helpful although it is somewhat technical.

You mention pension but I don't see it in your assets. How much of your income will it cover and when does it kick in?

Do you have a withdrawal plan for pre- and post-Social Security? Based on your portfolio it appears you are set, but it couldn't hurt to model it out.
Thanks, Aristotelian! I am reconsidering the holding onto of the JNJ, given the strong and swift reaction here against doing so. Your suggestion based on my tax status shows a viable pathway to selling it without creating a tax fiasco. The tax-exempt bonds I have at USAA are currently lower than their cost-basis, so selling them simultaneously with the JNJ makes sense. :idea:

What else makes sense is making use of the Professional Advisory Services. I do not have a withdrawal plan for pre- and post-Social Security. My pension has already kicked in but covers only about 15% of my income needs. :?

Also, thanks for the recommendation on the bonds and the book. My education continues!!

Best regards,
Emmylou

psteinx
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Joined: Tue Mar 13, 2007 2:24 pm

Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by psteinx » Mon Jun 19, 2017 1:22 pm

So, when considering cost basis and capital gains, perhaps it's better, rather than thinking about how much it's gone up, to think about what you'd owe in taxes if you sold.

So:

Let's say it has gone up exactly 34% versus basis. That doesn't mean you'd owe 34% in taxes if you sold, far from it.

First, your gains, as a % of dollars realized on sale, are not 34%, but rather, (1-(1/1+34%))= ~25%. [EDIT: should be (1-(1/(1+34%)))= ~25%]

(A simpler set of numbers illustrate this point. If the stock had gone up 100%, and you sold $20K worth, only $10K of that would be gains).

OK, so, if your marginal tax bracket was 100%, you'd owe about 25 cents on the dollar, for each dollar's worth you sold.

But, without knowing all your details (fed, state and local rates, taxable income, etc), its probably more likely that your combined marginal rates on long term capital gains are in the 20% range.

If that's about right, then you'd owe about 20% * 25%, or about 5% of the dollar value sold, in taxes. So, you could sell ~$100K and owe about $5K in taxes.

If I were in your shoes, I doubt I would stay at 41% allocation to JNJ.
Last edited by psteinx on Thu Jun 22, 2017 9:53 am, edited 1 time in total.

Emmylou
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Joined: Fri Dec 30, 2016 11:27 am

Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Emmylou » Thu Jun 22, 2017 8:12 am

Misenplace wrote:You need to sell the JnJ stock and invest the proceeds in a Total Stock Market Index and a Total International Index as soon as possible. Now. Yesterday.

[Instead of putting the above 3 sentences in all-caps, I decided to restrain myself and just set it off in it's own separate paragraph in italics.] Please take a look at this page in the Wiki. https://www.bogleheads.org/wiki/Step-up_in_basis
If you don't sell that stock, I would not even include it in your asset allocation- a concentrated position in one stock is not a substitute for your equity allocation. Also, if you don't sell that stock, you might as well keep working because it is a gamble, not an investment.
Thanks for the reality check, Misenplace. The JNJ is up 34% over its cost basis from the date of death (Nov. 2015). Intellectually, I know the large holding is risky. A CPA had asked me why I would want to sell my championship racehorse, which supported holding onto the stock. But then a CFP asked me what I would do if my championship racehorse broke its leg. As “Cry” was my answer, I recognize that selling the JNJ fits better into my risk tolerance.

I have set up an appointment with a Vanguard advisor to help with the portfolio changes.

Emmylou
Posts: 7
Joined: Fri Dec 30, 2016 11:27 am

Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Emmylou » Thu Jun 22, 2017 8:20 am

psteinx wrote:Let's say it has gone up exactly 34% versus basis. That doesn't mean you'd owe 34% in taxes if you sold, far from it.

First, your gains, as a % of dollars realized on sale, are not 34%, but rather, (1-(1/1+34%))= ~25%.

(A simpler set of numbers illustrate this point. If the stock had gone up 100%, and you sold $20K worth, only $10K of that would be gains).

OK, so, if your marginal tax bracket was 100%, you'd owe about 25 cents on the dollar, for each dollar's worth you sold.

If that's about right, then you'd owe about 20% * 25%, or about 5% of the dollar value sold, in taxes. So, you could sell ~$100K and owe about $5K in taxes.
Thanks for taking the time to map this out, psteinx! It helps alleviate my fear of a tax dystopia. I have set up an appointment with a Vanguard advisor to help with the portfolio changes.

letsgobobby
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Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by letsgobobby » Thu Jun 22, 2017 8:27 am

it sounds like you have a sharp CPA. Sell the JNJ at least down to 10% or less of your portfolio.

psteinx
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Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by psteinx » Thu Jun 22, 2017 9:52 am

psteinx wrote:First, your gains, as a % of dollars realized on sale, are not 34%, but rather, (1-(1/1+34%))= ~25%.
Should be one more set of parentheses in there, like this:

(1-(1/(1+34%)))= ~25%.

Emmylou
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Re: Asset Allocation - Inherited Assets, newly Semi-Retired

Post by Emmylou » Thu Jun 29, 2017 9:36 am

letsgobobby wrote:it sounds like you have a sharp CPA. Sell the JNJ at least down to 10% or less of your portfolio.
Interesting strategy, letsgobobby! I am exploring with a Vanguard FA how best to sell off the JNJ, which may take some time due to tax exposure. As the JNJ draws nearer to 10%, I should have a better idea of whether I want to keep any or keep selling. Thanks!

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