Review Requested:[Revised] Proposed Allocations in Prep for Retirement

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WoodSpinner
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Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Mon Jun 19, 2017 11:51 am

All,

I would love to pick the collective BH wisdom on the proposed allocations.

Background:
Plan to retire: Dec2017 from a Mega-Corp.
Expected Withdrawal Rate: Under 3%
Social Security: Me - 70, DW - 67 (and then shift to spousal)

Assets:
IRA/401K: Mid 7 figures
Roth: Low 5 figures
Taxable: Mid 6 figures.

Emergency Funds: $50,000
Debt: Mortgage, $130,000 remaining, paid off in Feb2028 - 15 year 2.75%
Tax Filing: Married Filing Jointly
Children: Daughter, already launched (hoping for marriage and grand-babies)
Fed Tax Rate:28%
CA Tax Rate: 9.3%
Age: Me-58, DW-57

Desired Asset Allocation: 57%/39%/4% (start of Retirement)
Desired International allocation: 33% of Equities

Current Asset Allocation: 57%/39%/4%

Currently funds are partially invested with an FA at Merrill Lynch and the other portion is part of my 401K at my Mega-Corp. Plan is to Roll-over the 401K in Jan2018 (after retirement) to an IRA already at Merrill Lynch. In late 2018 I will shift all of the funds to Merrill Edge and begin managing them myself. In addition, I plan a series of Roth Conversions from age 58-70 to fund living expenses and reduce the expected Taxes when RMDs begin.

**Note the Asset breakdown has been revised based on feedback in this thread-revision posted as response below**
In the meantime, I have been working with my FA and have come up with a proposed allocation strategy:
Equities
    5% IEMG ISHARES INC CORE MSCI EMERGING MKTS ETF
    14% EFA ISHARES MSCI EAFE
    14% VUG VANGUARD GROWTH ETF
    5% VBK VANGUARD SMALL CAP GROWTH ETF
    14% VTV VANGUARD VALUE ETF
    5% VNQ VANGUARD REAL ESTATE

Fixed Income - this represents 12 years of expenses which will take me to age 70 when SS begins. Plan is to reduce this over time to 10 years of expenses and hold there through retirement
    5% PONPX PIMCO INCOME FUND
    27% BIV VANGUARD INTERMEDIATE TERM BOND ETF 31L53
    7% BSV VANGUARD SHORT TERM BOND 31L60

Cash - this represents 1 year of expenses + emergency fund
    4% CASH Cash (USD)

My plan will be to shift my IRA holdings (managed by Merrill Lynch) to the portfolio proposed above once it has been finalized. When the 401K is rolled over in Jan2018, I will re-balance those funds into this portfolio as well. In the mean-time, I do not plan to adjust any holdings in the 401K since none of the options in my desired portfolio is available. We have been managing the portfolio as a whole despite the fact that only a portion is with Merrill Lynch.

Questions:
    1. What are your thoughts on the proposed portfolio?

    2. Any thoughts on the Asset Allocation Strategy?

    3. Any concerns with the International Exposure?

    4. Other suggestions or concerns?

Last edited by WoodSpinner on Tue Jun 20, 2017 3:44 pm, edited 2 times in total.

Chip
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by Chip » Mon Jun 19, 2017 3:15 pm

A couple of thoughts/questions:

Is your mid-6 figure taxable account going to last until you take Social Security? I note you mentioned that you're going to perform Roth conversions "to fund living expenses". I don't understand this. Unless you withdraw from the Roth (or additional funds from the tIRA), all that conversions will do is reduce your taxable funds by the amount of extra taxes you have to pay. Re-reading, I guess you're going to withdraw from tax-deferred, as you've allocated your fixed income to covering your expenses.....

EFA and PONPX are expensive choices. Consider IEFA, SCHF, VXUS, IXUS, etc. for EFA. Maybe more of BIV instead of PONPX. But definitely something less than .1% ER.

I would think having both growth and value funds in the same portfolio is at cross purposes. To some extent it creates a more expensive blend fund. Most who tilt here do so towards value.

60/40 in retirement seems reasonable, especially since that's where I am. :) 20% in international is reasonable; low by some standards, high for those who think it isn't necessary. Since your international weighting is that low, why not just buy 19% VXUS and be done with it, avoiding the complexity of a separate EM weighting?

Is there any low basis company stock in the 401k that might be eligible for NUA tax treatment?

WoodSpinner
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Mon Jun 19, 2017 3:29 pm

Chip,

Thanks for the reply !

Chip wrote:A couple of thoughts/questions:
Is there any low basis company stock in the 401k that might be eligible for NUA tax treatment?


There is some of the MegaCorp Stock available for NUA and this will be part of the 401K Rollover to the IRA (NUA stock will go to Taxable, its about $50,000 with a basis of $10,000).

Chip wrote:
Is your mid-6 figure taxable account going to last until you take Social Security? I note you mentioned that you're going to perform Roth conversions "to fund living expenses". I don't understand this. Unless you withdraw from the Roth (or additional funds from the tIRA), all that conversions will do is reduce your taxable funds by the amount of extra taxes you have to pay. Re-reading, I guess you're going to withdraw from tax-deferred, as you've allocated your fixed income to covering your expenses.....


My plan is to be fairly aggressive in Roth Conversions and pay out expenses and taxes from Taxable until that runs out. After that I will tap the Roth funds that I have converted for expenses and taxes until RMDs begin. This way I have enough to live on and will build up a nice Roth account which I can pass on.

Chip wrote:I would think having both growth and value funds in the same portfolio is at cross purposes. To some extent it creates a more expensive blend fund. Most who tilt here do so towards value.


Can you help me understand your analysis? This is definitely an area where I have lots to learn. Probably should have mentioned that I am a relative NooB ...

TIA

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Duckie
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by Duckie » Mon Jun 19, 2017 5:20 pm

WoodSpinner wrote:Desired Asset Allocation: 57%/39%/4% (start of Retirement)
Desired International allocation: 19% of Equities

So you want 57% stocks, 43% bonds/cash, with 19% of stocks in international. That breaks down to 46% US stocks, 11% international stocks, and 43% bonds/cash. Below you list 19% of the portfolio in international. So which is it? 19% of stocks (19% x 57% = 11%) or 19% of the portfolio (19% x 100% = 19%)? 19% of the portfolio is 33% of stocks. Both are reasonable.

In the meantime, I have been working with my FA and have come up with a proposed allocation strategy:
Equities
    5% IEMG ISHARES INC CORE MSCI EMERGING MKTS ETF
    14% EFA ISHARES MSCI EAFE
    14% VUG VANGUARD GROWTH ETF
    5% VBK VANGUARD SMALL CAP GROWTH ETF
    14% VTV VANGUARD VALUE ETF
    5% VNQ VANGUARD REAL ESTATE
Fixed Income - this represents 12 years of expenses which will take me to age 70 when SS begins. Plan is to reduce this over time to 10 years of expenses and hold there through retirement
    5% PONPX PIMCO INCOME FUND
    27% BIV VANGUARD INTERMEDIATE TERM BOND ETF 31L53
    7% BSV VANGUARD SHORT TERM BOND 31L60
Cash - this represents 1 year of expenses + emergency fund
    4% CASH Cash (USD)

The above is a lot more complicated than it needs to be. You could have:
  • 33% (VTI) Vanguard Total Stock Market ETF (0.04%)
  • 5% (VNQ) Vanguard REIT ETF (0.12%) <-- This could be skipped.
  • 19% (VXUS) Vanguard Total International Stock ETF (0.11%)
  • 39% (BND) Vanguard Total Bond Market ETF (0.05%)
  • 4% Cash

jebmke
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by jebmke » Mon Jun 19, 2017 5:26 pm

WoodSpinner wrote:Fixed Income - this represents 12 years of expenses which will take me to age 70 when SS begins. Plan is to reduce this over time to 10 years of expenses and hold there through retirement

So you are planning to increase your equity percentage over time? Nothing wrong with that - just wondered if that is what you are intending.
When you discover that you are riding a dead horse, the best strategy is to dismount.

WoodSpinner
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Mon Jun 19, 2017 6:04 pm

jebmke wrote:
WoodSpinner wrote:Fixed Income - this represents 12 years of expenses which will take me to age 70 when SS begins. Plan is to reduce this over time to 10 years of expenses and hold there through retirement

So you are planning to increase your equity percentage over time? Nothing wrong with that - just wondered if that is what you are intending.


Sitting here at 58 about to retire, my answer is currently My Investment Policy Statement dictates that I remain somewhere between 50%-70% in Equities as long as I have sufficiently funded Fixed Income and Cash.

Seems right for now, not 100% sure if it will be right when I am 85 and ready to really boogie :happy

Thanks for the question...

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Hyperborea
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by Hyperborea » Mon Jun 19, 2017 6:11 pm

Duckie wrote:The above is a lot more complicated than it needs to be. You could have:
  • 33% (VTI) Vanguard Total Stock Market ETF (0.04%)
  • 5% (VNQ) Vanguard REIT ETF (0.12%) <-- This could be skipped.
  • 19% (VXUS) Vanguard Total International Stock ETF (0.11%)
  • 39% (BND) Vanguard Total Bond Market ETF (0.05%)
  • 4% Cash


I would even consider simplifying more. Round everything to multiples of 5% and take cash out of the allocation percentages. Make the cash (money market/CDs) a fixed multiple of the living expenses - maybe 1-3 years worth with the current allocation. I am moving my portfolio in retirement towards simplicity.

The bond amount seems kind of high. Sure, a 60/40 portfolio did ok for a 30 year retirement but the OP isn't even 60 yet. He needs to be thinking about the possibility of a 40 year retirement. There's a 10% chance that at least one is alive after 40 years. The Early Retirement Now study points to higher stock allocations for the longer retirements. I retired last year nearly a decade younger the OP and I'm looking at 10% odds of one of us being alive after 50 years. My stock allocation is much higher still.

WoodSpinner
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Mon Jun 19, 2017 6:19 pm

Duckie,

So you want 57% stocks, 43% bonds/cash, with 19% of stocks in international. That breaks down to 46% US stocks, 11% international stocks, and 43% bonds/cash. Below you list 19% of the portfolio in international. So which is it? 19% of stocks (19% x 57% = 11%) or 19% of the portfolio (19% x 100% = 19%)? 19% of the portfolio is 33% of stocks. Both are reasonable


I updated my post to reflect 33% of Equities, 19% of portfolio....

Appreciate the catch and the advice on simplification.

Hyperborea
I am not comfortable with a higher Equity position at this time. I am much more focused on a bulletproof retirement if a major downturn happens before I am 70. In addition in the EarlyRetirement Analysis, my rate of withdrawal before 70 is under 3% and should be easily sustainable. Lastly, I don't think I will be living to 98- highly unlikely given my family history.

This can change in the future--especially after SS begins and my withdrawal rate falls below 2%

Thanks for helping me see some additional approaches

Chip
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by Chip » Tue Jun 20, 2017 3:54 am

WoodSpinner wrote:There is some of the MegaCorp Stock available for NUA and this will be part of the 401K Rollover to the IRA (NUA stock will go to Taxable, its about $50,000 with a basis of $10,000).


Okay, sounds like you have that covered. Do you plan to use that low basis stock for charitable contributions, living expenses, or both?

My plan is to be fairly aggressive in Roth Conversions and pay out expenses and taxes from Taxable until that runs out. After that I will tap the Roth funds that I have converted for expenses and taxes until RMDs begin. This way I have enough to live on and will build up a nice Roth account which I can pass on.


Certainly reasonable, though it may be simpler to just pull at least a basic amount of living expenses from the tIRA once taxable is depleted, rather than converting AND pulling from the Roth. With a mid 7 figure tIRA do you plan to convert to the top of the 25% bracket or higher? Don't forget that once you turn 63 your income will begin to be used to determine your Medicare premiums at age 65. It's sort of like an additional tax, and it's a cliff; once you exceed the limit by $1 you pay the premium increase.

Since you are planning a bequest, have you considered the tax rates of your heirs vs. yours? If theirs is higher you should consider converting even more. Lower, not so much.

Can you help me understand your analysis? This is definitely an area where I have lots to learn.


Growth and value are often splits of the same blend fund. In your case, consider your equal allocations to VUG and VTV vs. a single allocation to VV (Vanguard Large Cap ETF). VUG+VTV isn't exactly the same as VV, but not far off. Head over to Portfolio Visualizer and analyze a 50/50 portfolio of VUG/VTV vs. a 100% portfolio of VV (or VTI). Past performance isn't identical, but it's darn close. VUG, VTV and VV all have the same .06% ER now, so the split doesn't cost you anything but portfolio complexity. But VTI is .04% if you choose that route.

You have an additional allocation to small cap growth. Many here avoid that asset class based on the work of Fama and French. Though it is endlessly debated here. Take a look at the wiki article on value tilting. I personally enjoy Robert T's take on small and value tilts. Here is one of his many excellent posts on the subject.

While you're at Portfolio Visualizer, compare a 74/26 portfolio of VEA/VWO (very similar to your 19%/5% EFA/IEMG) vs. 100% VEU. I chose those funds to give you the longest history. IEMG is relatively new, as is VXUS, so those comparisons would be only a few years.

Emerging markets are about 20% of ex-US market cap, so your allocation is pretty close to what you'd get from allocating all of your international to VXUS, albeit with a slight tilt to EM. But if you're going to tilt to EM you're going to need more than you have allocated to really move the needle.

There are an infinite number of ways to build a portfolio, but I think it's reasonable to start with a 3 fund portfolio, then tilt from that based on your research, convictions and temperament.

The Wizard
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by The Wizard » Tue Jun 20, 2017 4:25 am

Put together a spreadsheet projecting your taxable income each year through age 72 or so. The one I put together projects my AGI which is fine for my purposes.

An IRA/401k balance of $5M at age 70.5 will have an RMD of $182,500 the first year. With $60,000 of SS, your AGI would be around $233,000.

As you mentioned, Roth conversions for 12 years are a good idea, but I wouldn't go overboard. Aim for approximately level AGI each year, increasing a few percent at most.
Try $150,000/year Roth conversion in your spreadsheet and see what that does. It lowers your tax deferred by $1.8M, but it will still be growing as well, though we don't know how much.

So AGI first retirement year would be $150k + maybe $10k? of dividends and LTCG taxed at 15%.

If you got tax deferred down to $3.2M by age 70.5 then see what your RMD + SS would be then.
Spreadsheet makes it easy to play with the numbers and update with actual account balances each January...
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WoodSpinner
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Tue Jun 20, 2017 7:02 am

The Wizard wrote:Put together a spreadsheet projecting your taxable income each year through age 72 or so. The one I put together projects my AGI which is fine for my purposes.


We are on the same page--my mega-retirement spreadsheet handles this, plus a fairly effective tax calculator for Fed/State. I will be following a similar approach except using Effective tax since I have some large deductions in a few of these years. This gives me rooom for a bit more in conversions but I do plan is to back off and avoid AMTs.

Appreciate the advice .....

jebmke
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by jebmke » Tue Jun 20, 2017 7:23 am

WoodSpinner wrote:
The Wizard wrote:Put together a spreadsheet projecting your taxable income each year through age 72 or so. The one I put together projects my AGI which is fine for my purposes.


We are on the same page--my mega-retirement spreadsheet handles this, plus a fairly effective tax calculator for Fed/State. I will be following a similar approach except using Effective tax since I have some large deductions in a few of these years. This gives me rooom for a bit more in conversions but I do plan is to back off and avoid AMTs.

Appreciate the advice .....

I have a similar approach but I don't rely on effective rates or even eyeballed marginal rates because the tax system is too convoluted to make decisions this way.

Every December I do a pro-forma tax return for the current year, next year and two inflection points. The two inflection points are 2018 when my pension starts and 2023 when my RMDs begin. In fact, I have spent more time on 2017, 2018 and 2023 tax returns than I have on 2016 (I have not even filed 2016 yet). These proformas I use to make decisions on ROTH conversions every December.

It is a bit of an "art" since there is nothing firm in the way of deductions in out years.

WoodSpinner wrote:
jebmke wrote:
WoodSpinner wrote:Fixed Income - this represents 12 years of expenses which will take me to age 70 when SS begins. Plan is to reduce this over time to 10 years of expenses and hold there through retirement

So you are planning to increase your equity percentage over time? Nothing wrong with that - just wondered if that is what you are intending.


Sitting here at 58 about to retire, my answer is currently My Investment Policy Statement dictates that I remain somewhere between 50%-70% in Equities as long as I have sufficiently funded Fixed Income and Cash.

Seems right for now, not 100% sure if it will be right when I am 85 and ready to really boogie :happy

Thanks for the question...

When I retired at 55 I set our plan for 40% equity with an eye to review the entire allocation as I approached 65 and my pensions starts. I wanted stability for the 10 years with no outside income. By the end of 2009 I had enough losses harvested to allow me to re-balance back to 40% with no tax consequences. Those losses are now gone as is the need for stability. As the pension kicks in and SS kicks in in another 5 years, I am considering moving our equity target back up.
When you discover that you are riding a dead horse, the best strategy is to dismount.

WoodSpinner
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Tue Jun 20, 2017 7:29 am

Chip wrote:Okay, sounds like you have that covered. Do you plan to use that low basis stock for charitable contributions, living expenses, or both?


Good question-- I am not sure. I hadn't considered the advantages of simply contributing this stock to a DAF and using it for a few years of charitable giving. Let me run the numbers in TT and get back to you. :oops:

Chip wrote:Certainly reasonable, though it may be simpler to just pull at least a basic amount of living expenses from the tIRA once taxable is depleted, rather than converting AND pulling from the Roth. With a mid 7 figure tIRA do you plan to convert to the top of the 25% bracket or higher? Don't forget that once you turn 63 your income will begin to be used to determine your Medicare premiums at age 65. It's sort of like an additional tax, and it's a cliff; once you exceed the limit by $1 you pay the premium increase


I will be into the 28% bracket and do expect to pay about $260/month (combined) additional. It seems a reasonable price to pay for getting funds into the Roth and avoiding much larger taxes once RMDs begin. It is still less than what I have to pay for medical before 65 so it feels like a bargain. Thoughts?

Chip wrote:Since you are planning a bequest, have you considered the tax rates of your heirs vs. yours? If theirs is higher you should consider converting even more. Lower, not so much.

Definitely lower--fortunately DD has a good head on her shoulders and should be able to make good use of the money.

Chip wrote:Growth and value are often splits of the same blend fund. In your case, consider your equal allocations to VUG and VTV vs. a single allocation to VV (Vanguard Large Cap ETF). VUG+VTV isn't exactly the same as VV, but not far off. Head over to Portfolio Visualizer and analyze a 50/50 portfolio of VUG/VTV vs. a 100% portfolio of VV (or VTI). Past performance isn't identical, but it's darn close. VUG, VTV and VV all have the same .06% ER now, so the split doesn't cost you anything but portfolio complexity. But VTI is .04% if you choose that route.

You have an additional allocation to small cap growth. Many here avoid that asset class based on the work of Fama and French. Though it is endlessly debated here. Take a look at the wiki article on value tilting. I personally enjoy Robert T's take on small and value tilts. Here is one of his many excellent posts on the subject.

While you're at Portfolio Visualizer, compare a 74/26 portfolio of VEA/VWO (very similar to your 19%/5% EFA/IEMG) vs. 100% VEU. I chose those funds to give you the longest history. IEMG is relatively new, as is VXUS, so those comparisons would be only a few years.

Emerging markets are about 20% of ex-US market cap, so your allocation is pretty close to what you'd get from allocating all of your international to VXUS, albeit with a slight tilt to EM. But if you're going to tilt to EM you're going to need more than you have allocated to really move the needle.

There are an infinite number of ways to build a portfolio, but I think it's reasonable to start with a 3 fund portfolio, then tilt from that based on your research, convictions and temperament.


Let me think about this for a bit and get back to you--it seems like good advice...

Thanks

The Wizard
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by The Wizard » Tue Jun 20, 2017 8:05 am

WoodSpinner wrote:...I will be into the 28% bracket and do expect to pay about $260/month (combined) additional. It seems a reasonable price to pay for getting funds into the Roth and avoiding much larger taxes once RMDs begin. It is still less than what I have to pay for medical before 65 so it feels like a bargain. Thoughts?

I'm also in a higher Medicare tier at age 67. The advice still stands unless you are in the top tier: avoid having MAGI just a few thousand $$ over a tier threshold.
Note also that they have lowered the upper tier thresholds starting in 2018 for income in 2016, thus getting more high income retirees in upper tiers.
Plus there is likely some inflation-adjustment change coming in 2020, but I'll believe it when I see it...
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Chip
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by Chip » Tue Jun 20, 2017 1:23 pm

WoodSpinner wrote:I will be into the 28% bracket and do expect to pay about $260/month (combined) additional. It seems a reasonable price to pay for getting funds into the Roth and avoiding much larger taxes once RMDs begin. It is still less than what I have to pay for medical before 65 so it feels like a bargain. Thoughts?


It is absolutely your trade-off to make. I was just making sure that it wouldn't be a surprise for you.

Definitely lower--fortunately DD has a good head on her shoulders and should be able to make good use of the money.


Then you might consider whether you want to leave her tIRA assets vs Roth. Does it make sense for you to pay tax at 28% to avoid having her pay tax at, say, 15%?

Have you also considered tax rates that a surviving spouse would face on RMDs plus SS? That might point you in the direction of larger conversions. Take a look at this joint mortality spreadsheet on Michael Kitces website. According to it there's only a 36% chance both of you will be alive when you turn 80. This information changed my Roth conversion planning somewhat.

WoodSpinner
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Tue Jun 20, 2017 4:16 pm

Revision
Chip and Hyperborea, many thanks for the feedback, its much appreciated. I reviewed your suggestions, did some analysis with Portfolio Visualizer, some suggested reading and discussed this with my FA. The result is a simpler profile with a lower expense ratio and less International exposure.

Equities - 57%

Code: Select all

10% VXUS Vanguard Total International Stock ETF
30% VV Vanguard Large-Cap ETF
7% VO Mid-Cap ETF (VO)
5% VBK Small-Cap Growth ETF
5% VNQ Vanguard REIT Index Fund

Fixed Income- 39%

Code: Select all

25% BIV Vanguard Intermediate-Term Bond ETF
14% BSV Short-Term Bond ETF


Cash - 4%

Code: Select all

4% CASHX Cash Equivalents


I did a Backtest Analysis using Portfolio Visualizer Portfolio-1 Original Proposal, Portfolio -2 This Revision, Portfolio-3 Boglehead 3-Fund. This seems like a good improvement. As always, suggestions are appreciated.

Chip, many thanks for pointing me to this tool, it is really very helpful.

WoodSpinner
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Tue Jun 20, 2017 4:25 pm

Chip wrote:Then you might consider whether you want to leave her tIRA assets vs Roth. Does it make sense for you to pay tax at 28% to avoid having her pay tax at, say, 15%?

Have you also considered tax rates that a surviving spouse would face on RMDs plus SS? That might point you in the direction of larger conversions. Take a look at this joint mortality spreadsheet on Michael Kitces website. According to it there's only a 36% chance both of you will be alive when you turn 80. This information changed my Roth conversion planning somewhat.

So did this make you convert more aggressively?

Dealing with the mortality tables makes me twitch, I know I can't ignore it but I sure hope we both die together in bed when we are 90. Next up is a trust, reading Beyond the Grave made both of us quite nervous--there are some horrible stories he has collected.

Chip
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by Chip » Tue Jun 20, 2017 4:55 pm

WoodSpinner wrote:Backtest Analysis using Portfolio Visualizer Portfolio-1 Original Proposal, Portfolio -2 This Revision, Portfolio-3 Boglehead 3-Fund. This seems like a good improvement. As always, suggestions are appreciated
.

Just the usual caveats about past performance vs. future results. Something in me doesn't want you to allocate to SCG, but it is your portfolio after all. :)

Chip
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Re: Review Requested: Proposed Allocations in Prep for Retirement

Post by Chip » Wed Jun 21, 2017 6:15 am

WoodSpinner wrote:So did this make you convert more aggressively?


It probably will, but I haven't finished analyzing it yet. Up until this year we were regularly converting to the top of a bracket. Though we took some years off when other income filled that bracket (including 2013-16). So 2017 is the first conversion year in quite a while. But we're much closer to RMDs and SS so the tax picture is getting clearer.

Dealing with the mortality tables makes me twitch, I know I can't ignore it but I sure hope we both die together in bed when we are 90.


Right. Another twitchy thing to consider is the probability that one or both of you need long term care that isn't covered by insurance. Those medical deductions can reduce your tax rate substantially. I've mentioned it here before, but my mother's tax rate went from 25% to 0% when she entered assisted living.

WoodSpinner
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Wed Jun 21, 2017 11:00 am

Chip,

The PortfolioVisualizer is pretty addictive--I decided to take another stab and simplify things further by shifting the US Equities positions to use VTI - Total Market. Also to take a bit more risk on the Short Term bonds and shift from BSV - Short Term Bonds to VCSH, Short Term Corporates.

My latest thinking is:

    47% VTI Vanguard Total Stock Market ETF
    10% VXUS Vanguard total International Stock
    25% BIV Vanguard Intermediate-Term Bond
    14% VCSH Vanguard Short-Term Corporate Bond
    4% CASHX Cash Equivalents

Here is the Backtest against the previous iteration.

It seems to be a bit simpler and has a better Sortino & Sharpe Ratio -- so more efficient risk.

This decision is definitely making me twitchy as well. So many variables and different ways of arranging things.

Thoughts?

Chip
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by Chip » Wed Jun 21, 2017 1:31 pm

WoodSpinner wrote:My latest thinking is:

    47% VTI Vanguard Total Stock Market ETF
    10% VXUS Vanguard total International Stock
    25% BIV Vanguard Intermediate-Term Bond
    14% VCSH Vanguard Short-Term Corporate Bond
    4% CASHX Cash Equivalents

Here is the Backtest against the previous iteration.

It seems to be a bit simpler and has a better Sortino & Sharpe Ratio -- so more efficient risk.

This decision is definitely making me twitchy as well. So many variables and different ways of arranging things.

Thoughts?


It's my personal preference, but I do like the new portfolio better. But again, use caution with the backtesting tool. It DOES NOT predict the future. And the backtest you linked only has five years of data because that's how long VXUS has been available. Some of the "improved results" you're seeing may solely be a result of the timeframe chosen. For example, if you sub in VGTSX for VXUS and BSV for VCSH, you'll get a start date of Jan 08 and different results than you saw. The difference is not because of the different funds, it's the time frame chosen. Also, your #3 portfolio has a higher allocation to international, so it's going to suffer in any comparison done over the last 8 years. Different story if you looked at 2000-2008.

Rather than get into the nitty gritty of fund selection immediately, I would suggest approaching this from a high level perspective first. Do you want a 3 fund approach or slice & dice? If slice & dice, why, and what sort of tilts do want (and how much)? How much will tracking error matter to you? For your bonds, what sort of duration do you want? And why? Do you want safe bonds (i.e. Treasuries, FDIC backed CDs) or risky? How risky (AAA corporate or high yield)? Do you want TIPS?

I would suggest using Portfolio Visualizer without putting in an annual draw amount and using whatever long history, low cost funds you can find that fit your asset class choices from the above exercise. Then fiddle with start and end dates and see how the results change.

Once you've decided on the asset class allocations, THEN choose the funds, based on the best currently available.

WoodSpinner
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Wed Jun 21, 2017 3:12 pm

Chip wrote:It's my personal preference, but I do like the new portfolio better. But again, use caution with the backtesting tool. It DOES NOT predict the future. And the backtest you linked only has five years of data because that's how long VXUS has been available. Some of the "improved results" you're seeing may solely be a result of the timeframe chosen. For example, if you sub in VGTSX for VXUS and BSV for VCSH, you'll get a start date of Jan 08 and different results than you saw. The difference is not because of the different funds, it's the time frame chosen. Also, your #3 portfolio has a higher allocation to international, so it's going to suffer in any comparison done over the last 8 years. Different story if you looked at 2000-2008.

Good idea -- I did exactly that and saw a small difference. The simplified portfolio (latest thinking) is tightly correlated with my earlier proposal but slightly different outcome. Given the shift in funds to get to the earlier dates I am not sure if the Sharpe or Sortino Ratios are useful. BSV and VCSH are pretty different animals.


Chip wrote:Rather than get into the nitty gritty of fund selection immediately, I would suggest approaching this from a high level perspective first. Do you want a 3 fund approach or slice & dice? If slice & dice, why, and what sort of tilts do want (and how much)? How much will tracking error matter to you? For your bonds, what sort of duration do you want? And why? Do you want safe bonds (i.e. Treasuries, FDIC backed CDs) or risky? How risky (AAA corporate or high yield)? Do you want TIPS?


Now you are getting to the heart of my problem. I am much better at what I don't want, than what I do.

For instance, I know that:
    1. I don't want a portfolio that has 39 separate holdings across my IRA/401K space. As part of shifting from using a FA, I want to simplify and reduce expenses. Limited slice-and-dice would be ok--if I had a really compelling vision.
    2. Willing to be a bit more risky for Short Term Bonds since its a rolling year 2-3 of Expenses. One of the reasons I shifted from BSV to VCSH. Its a bit more risk (Corporate Bonds) but not in the junk bond category.
    3. Not willing to take on much risk for the Intermediate Bonds -- BIV seems to fit that bill
    4. See no need for TIPs and will look to the Equity side to generate enough returns to deal with inflation.
    5. To be honest, I really have no idea how much International I want. 10% of the portfolio seemed like a safe choice given that many say you don't need any, while others are suggesting 40%.
    6. I know I need to have at least 50% Equities in the Portfolio to preserve capital as outlined in Ultimate Guide to Safe Withdrawal Rates
    7. I think I have adjusted my Asset Allocation to reflect my real ability to withstand risk and suspect only time will tell at how well I have accomplished that. I do know that I stayed the course through 2008-2009 drop and didn't have much :| trouble sleeping at night. Of course the sleeping troubles might have been the fact I got married and adopted a daughter in 2008 as well 8-) .
    8. Doing nothing is not an option even if I do feel overwhelmed by the choices and the variety of solutions.

Chip wrote:I would suggest using Portfolio Visualizer without putting in an annual draw amount and using whatever long history, low cost funds you can find that fit your asset class choices from the above exercise. Then fiddle with start and end dates and see how the results change.
Once you've decided on the asset class allocations, THEN choose the funds, based on the best currently available.


Appreciate the advice and guidance. I will do some more research--its been a really valuable learning experience so far.

Chip
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by Chip » Thu Jun 22, 2017 6:25 am

WoodSpinner wrote:For instance, I know that:
    1. I don't want a portfolio that has 39 separate holdings across my IRA/401K space. As part of shifting from using a FA, I want to simplify and reduce expenses. Limited slice-and-dice would be ok--if I had a really compelling vision.
    2. Willing to be a bit more risky for Short Term Bonds since its a rolling year 2-3 of Expenses. One of the reasons I shifted from BSV to VCSH. Its a bit more risk (Corporate Bonds) but not in the junk bond category.
    3. Not willing to take on much risk for the Intermediate Bonds -- BIV seems to fit that bill
    4. See no need for TIPs and will look to the Equity side to generate enough returns to deal with inflation.
    5. To be honest, I really have no idea how much International I want. 10% of the portfolio seemed like a safe choice given that many say you don't need any, while others are suggesting 40%.
    6. I know I need to have at least 50% Equities in the Portfolio to preserve capital as outlined in Ultimate Guide to Safe Withdrawal Rates
    7. I think I have adjusted my Asset Allocation to reflect my real ability to withstand risk and suspect only time will tell at how well I have accomplished that. I do know that I stayed the course through 2008-2009 drop and didn't have much :| trouble sleeping at night. Of course the sleeping troubles might have been the fact I got married and adopted a daughter in 2008 as well 8-) .
    8. Doing nothing is not an option even if I do feel overwhelmed by the choices and the variety of solutions.


This is a great start on an investment policy statement (IPS).

Yes, time will tell about comfort with risk. After retirement you may feel differently in a severe downturn than you did when you while working with an income that fully supported you. I still slept well in 2008/9, but I certainly increased my intake of antacids. :) Rebalancing back then felt like throwing pitchforks full of money onto a bonfire.

WoodSpinner
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Thu Jun 22, 2017 6:48 am

Must admit I did nothing--just let it ride. At the time I was using my pension lump sum as a substitute for bond holdings.

Thanks for the help ! I learned a great deal.

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Hyperborea
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by Hyperborea » Thu Jun 22, 2017 11:47 am

WoodSpinner wrote:For instance, I know that:
[list]1. I don't want a portfolio that has 39 separate holdings across my IRA/401K space. As part of shifting from using a FA, I want to simplify and reduce expenses. Limited slice-and-dice would be ok--if I had a really compelling vision.


Chip's advice has been very good. I only want to add a little bit. I think you've hit the nail on the head here. You need a really compelling vision to deviate from a simple market weight. If you don't have that vision then how are you going to endure a couple (or more) years of one of your slices under-performing? Are you going to be able to rebalance into it? If you won't do it then you've not only not got the gain from the slicing, you're doing worse than holding market weight.

Simplification is also important. I think many younger investors (i.e. sub 60 or 70) think that we (hey, I'm only 52) are going to be hale and hearty forever but it isn't so. I want to build a portfolio for retirement that I can manage when I'm not as astute as I am now. Or that my smart but not investing savvy wife can handle. Not just mentally but one that won't require her to have incredible fortitude and faith in my allocation to keep rebalancing into down asset categories for years in the hope that they will return. I'm moving my assets over the next few years as taxes allow into a simpler portfolio (and erasing some long held mistakes).

WoodSpinner
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Re: Review Requested:[Revised] Proposed Allocations in Prep for Retirement

Post by WoodSpinner » Mon Jun 26, 2017 9:31 am

All,

I thought I would post my revised target portfolio with many thanks to everyone's contributions.

Overall a 57%/39%/4% Asset Allocation
    10% VXUS Vanguard Total International Stock ETF
    37% VTI Vanguard Total Stock Market ETF
    10% VPMAX Vanguard PRIMECAP Fund Admiral Shares
    32% BIV Vanguard Intermediate-Term Bond ETF
    7% VCSH Vanguard Short-Term Corporate Bond ETF
    4% CASHX Cash

A few slight adjustments ...
1. I decided to keep a stake in VPMAX since it has performed so well over the years and enhances the Equity Portfolio
2. Reduced Short Term Bonds to 2 years of expenses

This provides me a glide path from Retirement (Dec2017 at age 58) to age 70 when I start taking SS that could be entirely funded from Fixed Income if necessary. Another important step on the road to taking control over my portfolio and shifting to a more DIY approach.

Appreciate the help

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