Rolled Mom's Portfolio to VG - income strategy? funds?

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Meg77
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Rolled Mom's Portfolio to VG - income strategy? funds?

Post by Meg77 » Tue Feb 27, 2018 11:53 am

Hi Bogleheads,

My mother received a windfall of muni bonds from her parents early this year, and I've completed the transfer of it plus her Edward Jones portfolio to Vanguard. Now comes the fun part - rebalancing and optimizing! I'm all for the three fund portfolio - or as close as I can get to it given her substantial capital gains - but I wanted to run her situation by all you smart Bogleheads for feedback.

FYI here's my original post on this from December for background: viewtopic.php?f=1&t=233887&p=3650925#p3650925 I created a new one rather than updating that one since my questions have changed and the primary ones I asked there about in kind transfers have been resolved.

Emergency funds/checking account: $140k (will last through this year at least)
Debt: None
Tax Filing Status: Single
Tax Rate: 28% in 2017; 24% projected in 2018 due to dividends and high distributed mutual fund cap gains in her taxable portfolio - could drop to 22% once the portfolio is more tax efficient (but will take recognizing gains to sell to get there...)
State of Residence: AL
Age: 60
Desired Asset allocation: She was 80/20 until this windfall which put her at 50/50. Target is 60/40 or 65/35
Desired International allocation: She's at 17% of stocks now which feels about right. She's ambivalent.

Taxable Brokerage - Vanguard

$1,628,000 mutual funds
VFIAX Vanguard 500 Index Fund Admiral Shares  (0.04%) $161,463.82
VPCCX Vanguard PRIMECAP Core Fund Investor Shares  (0.46%) $140,155.55
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares  (0.04%) $351,500
VTIAX Vanguard Total International Stock Market Index Admiral (0.11%) $153,500
ABALX American Funds American Balanced Fund® Class A  (0.60%) $72,620.63
ANCFX American Funds Fundamental Investors® Class A  (0.62%) $100,127.87
AIVSX American Funds Investment Company of America® Class A  (0.60%) $73,453.80
ANWPX American Funds New Perspective Fund® Class A  (0.75%) $75,178.88
SMCWX American Funds SMALLCAP World Fund® Class A  (1.07%) $71,323.56
AGTHX American Funds The Growth Fund of America® Class A  (0.64%) $79,100.04
AMECX American Funds The Income Fund of America® Class A  (0.56%) $68,660.51
ANEFX American Funds The New Economy Fund® Class A  (0.78%) $67,179.03
LIDAX Lord Abbett International Dividend Income Fund Class A  (1.12%) $106,824.66
LAVLX Lord Abbett Mid Cap Stock Fund Class A  (0.97%) $106,050.36

$855k individual stocks
ABT $60,950.00
ABBV $92,990.00
AMZN $152,481.00
AAPL $134,160.68
T $17,800.00
BRK B $249,987.50
CSCO $44,425.00
FB $33,772.00
VZ $25,413.14
WMT $43,899.35

$2,237,000 in 39 individual muni bonds mostly at 5.0% coupons (2 are at 5.5% and one is at 3.5%). Weighted average yield to maturity is 1.92%.

Maturity Schedule:
6 bonds mature remaining in 2018 - $235K
6 bonds mature in 2019 - $195k
5 bonds mature in 2020 - $245k
2021 - $325k
2022 - $50k
2023 - $360k
2024 - $20k
2025 - $45k
2026 - $50k
2027 - $165k
2028 - $75k
2029 - $115k
2030 - $50k
2039 - $50k
2043 - $50k


Traditional IRA at Vanguard
$168K VTSAX (0.04%) (sold 2 individual stocks and moved to this fund already)

Other Investments
$154K 30 year mortgage note receivable from me - fixed at 3% (mature 2042)
$143k 30 year mortgage note receivable from - fixed at 3% (mature 2040)
$100k real estate syndication (apt building in GA) - 4.5% yield

Total Investable Assets: $5,285,932 (excluding $100K EF)

Other details:
---She's retired, single (and planning to stay that way), healthy
---She should receive another $1,000,000 approximately when her parents die.
---She owns a $400K new construction homestead outright
---She spends about $237k per year: $37k taxes (will drop once portfolio is optimized), $29k bills & utilities, $87K giving, $61k travel & social, $24k personal & misc. Most of her expenses are discretionary so she could easily reduce spending in a downturn or if her portfolio dwindles.

---Her Non-Portfolio Income:
$5k from RE syndication
$6K from teaching she does online part time (will continue for a few years probably)
$17K Principal and interest I pay her on 2 mortgages (will continue until 2041 unless I prepay, which I've offered to do)
$11K Pension Income
$19K Social Security if she claims at age 70

Questions:
1. My first thought was to sell $480K of the longer term muni bonds which have total capital losses of $16k currently. That would decrease her bond allocation from 50% to about 40% and give us some losses to use to offset gains we'd incur from selling some more of the crappy mutual funds (I've already sold the 2 worst and offset with the sale of a few individual stocks with losses). However a 2% tax free yield to maturity is pretty good, all things considered. And about 10% of the bond holdings mature each year anyway. Should we just hold these bonds and use for her living expenses for the foreseeable future? Her AA would gradually get more aggressive as she spends down bonds, and she'd have income covered for 9 years including all income sources. Her spending would likely decrease in her 70s and we could re-evaluate as we approach that phase.

2. I plan to sell LAVLX and LIDAX next, which would realize $48k in long term cap gains. They both have high ERs and 1-2 star Morningstar ratings. After those sales, the decisions get harder. I'd still have $150k in cap gains on the remaining funds (spread pretty evenly).

How do I determine what's worth paying cap gains to sell? She'll be in the 22% tax bracket no matter what just from dividends and other basic income with around $57k AGI. Another $25K in other income or cap gains will push her into the 24% bracket. That gives me room to sell about 1 holding a year without going into the 24% bracket - but 24% isn't that different from 22%, and the expense ratios on some of her funds are super high...

3. The IRA is interesting because it's such a small percentage of her portfolio. Normally it would make sense to hold bonds there I know, but in this case that'll be the last account she will touch, and it will likely just pass to us kids in 20+ years (except for RMDs she'll be forced to take in 11 years). That's why I dumped the whole thing into VTSAX. Other ideas?

4. Does it make sense to try to convert the T-IRA to Roth over time if/when her tax bracket drops to 22%? What about in the 24% bracket? Should I forget it and just leave in traditional? If/when she qualifies I'll make sure she contributes to a Roth IRA while she's still earning too.

Any other suggestions or comments are welcome. Please and thank you!!
Last edited by Meg77 on Fri Apr 20, 2018 3:12 pm, edited 1 time in total.
"An investment in knowledge pays the best interest." - Benjamin Franklin

123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Rolled Mom's Portfolio to VG - income strategy? funds?

Post by 123 » Tue Feb 27, 2018 12:32 pm

I have to complement you on the thoroughness of the itemization of her assets.

My main area of concern would be the muni bonds. While the collective interest rates sound good I would be concerned about the bond rating/credit quality of the issuers. If any of the muni bonds were bought on the secondary market I might get suspicous about them, brokers selling "used" bonds to individual investors typically do so with a higher markup. Bonds that the professionals (mutual funds and pensions) won't buy get offered to individuals. Some of the muni bonds might be "junk".

Edited to add:
If all the muni bonds were from her state of AL (which wouldn't be unusual to get both the federal and state income tax exemption ) that might represent a very large concentration of risk. If economic circumstances go downhill there could be trouble.

Further edited to add:
I would be sure to stop all dividend investments for the funds in taxable accounts you don't intend to hold. You don't need additional purchase lots to do tax account for.

All the liquidations in taxable can be spread over more than one year. Maybe 2 or 3 years would make sense to avoid the upward creep of the tax bracket. How do you and her feel about leaving a lot of money in less desireable investments in the hope of saving taxes? Maybe it's not an issue for her, or maybe it is.

I would probably put the IRA entirely in VTSAX, it's simple.

I wouldn't try to do a Traditional IRA to Roth conversion at this point. It just adds more immediate taxes. Whether it's a good idea long-term would largely depend on the number, ages, and financial status of the beneficiaries. Might not be an easy decision to make.
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Meg77
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Re: Rolled Mom's Portfolio to VG - income strategy? funds?

Post by Meg77 » Tue Feb 27, 2018 2:23 pm

123 wrote:
Tue Feb 27, 2018 12:32 pm
My main area of concern would be the muni bonds. While the collective interest rates sound good I would be concerned about the bond rating/credit quality of the issuers. If any of the muni bonds were bought on the secondary market I might get suspicous about them, brokers selling "used" bonds to individual investors typically do so with a higher markup. Bonds that the professionals (mutual funds and pensions) won't buy get offered to individuals. Some of the muni bonds might be "junk".

Edited to add:
If all the muni bonds were from her state of AL (which wouldn't be unusual to get both the federal and state income tax exemption ) that might represent a very large concentration of risk. If economic circumstances go downhill there could be trouble.
Thanks. I should note that this bond portfolio was designed and managed by Breckinridge Capital Advisors, which is apparently a well-respected fixed income manager. The original portfolio was much larger and was designed for my grandparents (who also live in AL), though it has now been split among their children. Each bond was split to keep the portfolio in tact versus certain bonds being awarded to each kid to avoid messing up the diversification of quality, duration, etc. Part of my hesitation to pick and choose random bonds to sell is screwing up the construction of this bond ladder since I don't know much about those elements (or even how to research them properly).
123 wrote:
Tue Feb 27, 2018 12:32 pm
Further edited to add:
I would be sure to stop all dividend investments for the funds in taxable accounts you don't intend to hold. You don't need additional purchase lots to do tax account for.
Yep, already done.
123 wrote:
Tue Feb 27, 2018 12:32 pm
All the liquidations in taxable can be spread over more than one year. Maybe 2 or 3 years would make sense to avoid the upward creep of the tax bracket. How do you and her feel about leaving a lot of money in less desireable investments in the hope of saving taxes? Maybe it's not an issue for her, or maybe it is.
She's been in the same funds for years, and they have performed well despite the high fees so she is happy. She trusts me to make changes for her though. I think I'll take it slow for now and sell the initial funds ($300k) I highlighted which can be partially offset with losses. Then I'll either wait a year or wait until the next correction to pull the trigger again on some transfers. It's definitely not urgent; I just hate to see her paying so much in expense ratios which could be avoided.
123 wrote:
Tue Feb 27, 2018 12:32 pm
I would probably put the IRA entirely in VTSAX, it's simple.
Thanks so much; this is what I'm leaning toward as well.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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