Portfolio review looking to retire in 1-2 years

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omibogle
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Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 1:48 am

I’ve been winging it up to now and have gotten fairly lucky in the bull market. After reading up on bogleheads for the last couple of months, I am finally getting serious about managing my portfolio more carefully as I’m contemplating early/partial retirement in the next 1-2 years. I would kindly appreciate any advice on the questions below.

Emergency funds: Yes (3 mo. expenses)
Debt: $451k Mortgage @ 3.625%
Tax Filing Status: Married Filing Jointly, 2 dependent children under age 8
Tax Rate: 37% Federal, 0% State
State of Residence: WA
Age: 43
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks
Additional information:
Each child has 529s worth ~$150k ea
2 investment homes, both rented covering all expenses incl mortgages
Life insurance purchased thru employer @ $1.5M coverage

Portfolio: approx $5M (53% Taxable, 47% Tax-Advantaged)

His Taxable
Vanguard Total Stock Market VTSAX 3%
Vanguard Municipal Money Market VMSXX 11%
Individual Stocks (70% RSU vest, 23% China) 31%

Her Taxable
Cash 2%

Her IRA
Vangaurd Total Stock Market VTI 1%

Her 401k
Vangaurd Total Stock Market VTI 1%
Individual Stocks 1%

His 401k
Vangaurd Total Stock Market VTI 5%
Individual Stocks 1%

His 401Roth
Vangaurd Total Stock Market VTI 3%
Individual Stocks 1%

His DCP (pre-tax, limited investment choices)
Vangaurd Institutional Index Plus VIIIX 29%
Vanguard Emerging Markets Stock Index VEMIX 3%
PIMCO Total Return Fund Institutional PTTRX 9%

Estimated remaining contributions thru 2018:
His taxable: ~$450k (additional RSUs vesting)
His 401Roth: ~$20k
His DCP: ~$250k

Questions:

1. Although individual stocks have done extremely well over last 3 years, I feel I should reduce exposure I have there. Thinking selling majority of vested RSUs long-term lots in his taxable and converting to VTI, intl, or bonds. This will result in a large tax hit, but I believe taking this 20% tax hit now is worth the rebalance benefit, vs 2+ years in future when I would be in lower 15% long-term bracket? Conversely, I assume it isn’t worth selling vested RSUs that are short-term lots in my current tax bracket and better to wait for those to get to long-term before selling.

2. Outside of the vested RSUs I plan to sell, I’ll probably keep the 3 other individual stocks I own in his taxable as I view those as a few big bets, for which I’m ok to risk 10% of my portfolio. I know this is counter to the general bogelheads philosophy, but I’d like to hear if anyone else puts a small % of their portfolio in higher risk to make some bets and what a reasonable small % is?

3. Also looking to invest cash and money market in his/her taxable to VTI, intl or bonds. Would it be better to buy bonds in taxable or up bond mix in DCP and buy VTI/intl in taxable?

4. In recent months the municipal money market returns look quite attractive and somewhat comparable to bond returns. I’m assuming over the long run bonds do better, so it doesn’t make sense to keep a large sum in municipal money market in any long-term scenario – right?

5. Up to now, I have tilted almost everything towards stock market vs bonds. At 43, contemplating retirement in 1-2 years, does a 80/20 mix make sense, or would a 100% stock strategy still be reasonable? I’m probably looking to retire when I can be at no more than 3% annual drawdown rate, which I think I can achieve in 1-2 years.

6. I don’t know much about bond investing. If I do decide to invest more in bonds, what is best way to decide what bond funds to invest in?

7. I’d like to get more money into Roth through backdoor. I assume its better to do that post retirement when I’ll be in lower income brackets, and the downside of waiting 2+ years to do the conversion is worth the potential tax savings.

Thank you in advance for any advice provided.
Last edited by omibogle on Wed Apr 18, 2018 3:55 pm, edited 3 times in total.

Daryl
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Re: Portfolio review looking to retire in 1-2 years

Post by Daryl » Wed Apr 18, 2018 6:17 am

Estimated Annual Expenses in Retirement? Without that number, it is impossible to determine if you have enough, or should consider working longer.

FrankLUSMC
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Re: Portfolio review looking to retire in 1-2 years

Post by FrankLUSMC » Wed Apr 18, 2018 7:10 am

With 2 children under 8, anything can happen between now and THEIR independence (18 or 22). I know you are itching to retire, but I think you have 2 reasons (responsibility) to wait at least ten more years.

There really is not a good way to estimate your budget for them for 10 years. Just my .02

Edited to add: I don't see any life insurance listed, with your high income it probably should be 3-5 million 10 or 20 year term.

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goodenyou
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Re: Portfolio review looking to retire in 1-2 years

Post by goodenyou » Wed Apr 18, 2018 8:48 am

Expenses are the key to this analysis. I thought kids were expensive when they were under 10 years of age. For us, the expenses of 3 young adults around the age of 20 are tremendous. Retiring before 50 with young children, in my opinion, would require a conservative withdrawal plan. Your plan on supporting your children into their 20s may be different. Cars, insurance, college (outside the 529 expenses), sports, activities etc. are very expensive and can extend well into their 20s (if that is a priority).
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 9:54 am

Daryl wrote:
Wed Apr 18, 2018 6:17 am
Estimated Annual Expenses in Retirement? Without that number, it is impossible to determine if you have enough, or should consider working longer.
Sorry I should have included this, my main questions are more about the re-balance options for my portfolio, but I understand retirement assumptions play into that. Right now my portfolio is fairly imbalanced so looking for right way to adjust it.

I'm not sure if it will be full retirement or partial retirement, I may ask spouse to work for a few years to get some supplemental income and health coverage. My plan would be to pay off mortgage, and target about $200k/yr in expenses including taxes, that feels generous for a family of four. The expense amount will certainly go down a lot after kids are in college, but keeping the calculation simple for now. I'm trying to get portfolio to $6M+ before considering the retirement decision, although I could do at current value if its only a semi-retirement with spouse working. I believe I can get to $6M+ portfolio value with planned contributions and some growth over next 1-2 years.

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 1:49 pm

FrankLUSMC wrote:
Wed Apr 18, 2018 7:10 am
With 2 children under 8, anything can happen between now and THEIR independence (18 or 22). I know you are itching to retire, but I think you have 2 reasons (responsibility) to wait at least ten more years.

There really is not a good way to estimate your budget for them for 10 years. Just my .02

Edited to add: I don't see any life insurance listed, with your high income it probably should be 3-5 million 10 or 20 year term.
Thank you FrankLUSMC for the insight. For life insurance I edited post - I have life insurance purchased thru employer @ $1.5M coverage.

Regarding 10 years versus 1-2 years, I agree that is something to carefully think thru given variability of child expenses. I'm interested in portfolio re-balance advice (per my questions above) to help accelerate time to retirement to be as soon as possible given retirement parameters below.

My working assumption is $200k per year needed before taxes with no mortgage to retire. I feel that is fairly conservative for a family of 4 with kids. I see that figure going down significantly once kids go to college, but for simplicity just keeping it flat at $200k in my model. I'm mentally thinking $6M portfolio with no mortgage is a solid foundation for retirement. I can see myself getting to that in next 1-2 years with upcoming contributions. I ran briefly thru Firecalc without any customization and its showing 99% success for 45 years with $6M @ 200k/year.

Any advice on the re balancing to do now would be highly appreciated.
Last edited by omibogle on Wed Apr 18, 2018 2:49 pm, edited 1 time in total.

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 1:56 pm

goodenyou wrote:
Wed Apr 18, 2018 8:48 am
Expenses are the key to this analysis. I thought kids were expensive when they were under 10 years of age. For us, the expenses of 3 young adults around the age of 20 are tremendous. Retiring before 50 with young children, in my opinion, would require a conservative withdrawal plan. Your plan on supporting your children into their 20s may be different. Cars, insurance, college (outside the 529 expenses), sports, activities etc. are very expensive and can extend well into their 20s (if that is a priority).
Thank you goodenyou for the response. Your reply seems to be inline with what others are stressing -- i.e. be conservative re: potential future expense of children. I've tried to do some of that by super-funding 529s to point of $150k for each child. Each child has over 12 yrs to get to college, so I'm hoping 529 growth can hopefully cover most of the college expense by then. I should re-review my 529 strategy, but I'm assuming total stock market is best way to go, with maybe bond shift closer to high school years.

Beyond that 529 funding, I'm conservatively modeling $200k/yr expenses (before taxes) with no mortgage payment. I'm hopefully that is fairly buffered to handle expenses for family with 2 kids going to public schools. I know its very hard to model, but is there any rule of thumb people use to estimate child expenses over time?
Last edited by omibogle on Wed Apr 18, 2018 2:49 pm, edited 1 time in total.

GAAP
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Re: Portfolio review looking to retire in 1-2 years

Post by GAAP » Wed Apr 18, 2018 2:06 pm

I would be nervous about keeping those RSUs -- I'm assuming they're from your current employer, or at least in the same industry.

I sell all employer stock grants, matching fund donations, etc. as soon as I get them -- one employer has since gone bankrupt, and I do remember Enron.

bradpevans
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Re: Portfolio review looking to retire in 1-2 years

Post by bradpevans » Wed Apr 18, 2018 2:12 pm

GAAP wrote:
Wed Apr 18, 2018 2:06 pm
I would be nervous about keeping those RSUs -- I'm assuming they're from your current employer, or at least in the same industry.

I sell all employer stock grants, matching fund donations, etc. as soon as I get them -- one employer has since gone bankrupt, and I do remember Enron.
At my company, the RSUs vest at three years and trigger the sale/conversion. Roughly speaking (because they take taxes at this point) it ends up being "keep ~ 60-61 shares for every 100 held". This sets the basis going forward.

It may be wise (or not) to keep the Options longer due to leverage: https://www.stockopter.com/a-new-look-a ... k-options/

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 3:00 pm

bradpevans wrote:
Wed Apr 18, 2018 2:12 pm
GAAP wrote:
Wed Apr 18, 2018 2:06 pm
I would be nervous about keeping those RSUs -- I'm assuming they're from your current employer, or at least in the same industry.

I sell all employer stock grants, matching fund donations, etc. as soon as I get them -- one employer has since gone bankrupt, and I do remember Enron.
At my company, the RSUs vest at three years and trigger the sale/conversion. Roughly speaking (because they take taxes at this point) it ends up being "keep ~ 60-61 shares for every 100 held". This sets the basis going forward.

It may be wise (or not) to keep the Options longer due to leverage: https://www.stockopter.com/a-new-look-a ... k-options/
Thank you GAAP and bradpevans.

I used to have similar plan on liquidating RSUs as soon as I got them. But more recently, I'm bullish on my employer so holding for a bit before selling and rebalancing. My general philosophy has changed to hold for 1yr, and then sell to keep additional gains in long-term bucket. When the RSUs vest and come into my account (primarily twice a year), the company withholds 22% for income tax, and I pay the remaining income tax on tax day.

Given my income bracket and the fact that I'm bullish on my employer, I'm less inclined to take additional income by selling my current RSUs that have had significant short-term gains made in the last 12 months. For the RSUs in the long term gains bucket that roughly represents 12-15% of my total portfolio so it would still be a significant rebalance to elsewhere in taxable.

Is it better to focus on VTI, intl, or bonds in taxable? Or just keep the same split in taxable and tax-advantaged?

GAAP
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Re: Portfolio review looking to retire in 1-2 years

Post by GAAP » Wed Apr 18, 2018 3:17 pm

omibogle wrote:
Wed Apr 18, 2018 3:00 pm
Is it better to focus on VTI, intl, or bonds in taxable? Or just keep the same split in taxable and tax-advantaged?
"focusing" on bonds in taxable would probably generate a lot of immediate taxable income -- is that what you want? It also looks like you would be subject to potential capital gains to actually implement that focus.

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goodenyou
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Re: Portfolio review looking to retire in 1-2 years

Post by goodenyou » Wed Apr 18, 2018 4:05 pm

omibogle wrote:
Wed Apr 18, 2018 1:56 pm
goodenyou wrote:
Wed Apr 18, 2018 8:48 am
Expenses are the key to this analysis. I thought kids were expensive when they were under 10 years of age. For us, the expenses of 3 young adults around the age of 20 are tremendous. Retiring before 50 with young children, in my opinion, would require a conservative withdrawal plan. Your plan on supporting your children into their 20s may be different. Cars, insurance, college (outside the 529 expenses), sports, activities etc. are very expensive and can extend well into their 20s (if that is a priority).
Thank you goodenyou for the response. Your reply seems to be inline with what others are stressing -- i.e. be conservative re: potential future expense of children. I've tried to do some of that by super-funding 529s to point of $150k for each child. Each child has over 12 yrs to get to college, so I'm hoping 529 growth can hopefully cover most of the college expense by then. I should re-review my 529 strategy, but I'm assuming total stock market is best way to go, with maybe bond shift closer to high school years.

Beyond that 529 funding, I'm conservatively modeling $200k/yr expenses (before taxes) with no mortgage payment. I'm hopefully that is fairly buffered to handle expenses for family with 2 kids going to public schools. I know its very hard to model, but is there any rule of thumb people use to estimate child expenses over time?
Just be aware that a “fully funded” 529 Plan is often not enough to cover college expenses. If you exceed the published costs of housing, that will not qualify as a qualified expense. That happens in a HCOL college town where apartments are very expensive. You can share with roommates, but that always doesn’t work out. If you have enough in there, you could just declare it and pay the taxes. Cars are expensive and so is car insurance, if that is in the future. Adult kids are really expensive for the years prior to their first job and maybe for a few years after. That has been the great unknown for us. Without dependents, the calculation would have been a lot easier. We are the parents that are inclined to help, so we have wanted a cushion to be able to do so.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 5:53 pm

GAAP wrote:
Wed Apr 18, 2018 3:17 pm
omibogle wrote:
Wed Apr 18, 2018 3:00 pm
Is it better to focus on VTI, intl, or bonds in taxable? Or just keep the same split in taxable and tax-advantaged?
"focusing" on bonds in taxable would probably generate a lot of immediate taxable income -- is that what you want? It also looks like you would be subject to potential capital gains to actually implement that focus.
Thank you GAAP this makes sense. My cursory understanding is something like VTI is tax-favorable in taxable account versus bonds, as most of the dividends in are qualified hence taxed as long-term capital gains, versus bonds where it would be treated as ordinary income. Given that I'll plan to sell as many RSUs as I can and convert to VTI/intl on taxable. Will use DCP account to up bond % in portfolio as needed.

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 5:57 pm

Thank you everyone for the replies so far, already learned a bunch, and I have more clarity on what else to consider.

I didn't see any response to my questions 2, 4, 5, 7 in the original post. Would appreciate any thoughts/advice on those specific questions from anyone who may be reading and has input. Thanks.

jwaxjwax
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Re: Portfolio review looking to retire in 1-2 years

Post by jwaxjwax » Wed Apr 18, 2018 6:10 pm

I know there are a lot of discussion points going on here, but what jumped out to me most was the 80/20 stock/bond allocation. At 43, if you were going to retire at 60, I'd say that allocation makes sense. But if you're retiring in the next few years, you'd want to be in capital preservation mode. At an 80/20 allocation, a 20% loss for you would be almost a million dollars. These losses aren't hard to imagine given recent history (-22.1% in 2002, -37.0% in 2008). (See also https://www.americanfunds.com/individua ... lines.html)

Best bet IMO would be to shift to a less risky allocation, and then at least continue to work part time for at least a few more years.

GAAP
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Re: Portfolio review looking to retire in 1-2 years

Post by GAAP » Wed Apr 18, 2018 6:33 pm

I'm roughly on the same timing as you, my approach to those questions:

#2: Some of my decisions (and changes over the years) are based upon my wife's comfort level and a lot on simplification. Therefore, I have a fixed asset allocation that needs only 4 ETFs in my IRAs, combined with three similar funds in my 401(k). I don't see a need for additional higher risk investments. If I did feel the need, I would use the 5-10% range, since less will likely not change anything, and more would be a lot of risk exposure. You might want to think about what your wife would do if something happens to you...

#4: I woudn't keep any long term needs in short term investments -- and would handle my cash needs based on portfolio income and asset sales when necessary. When retired, I will maintain a very small cash position in case of short term liquidity or volatility events -- basically enough to keep me from selling in extremely bad situations (around 1-3 months of income needs).

#5: How comfortable are you (and your wife) with the implications of a significant (>25%) drop in the stock market on your income? A 25% drop in the stock market, with no change in bonds, would yield a 20% haircut on income with that allocation. Recovering would require a 33% jump in the stock market...

#7: Are you sure you don't mean Roth Conversion? A backdoor Roth requires contributions to non-deductible IRAs, which required earned income. If you don't want to get nailed on taxes, you also need to not have any TIRA balances. You might want to check out https://www.physicianonfire.com/backdoor/. My approach is to maximize contributions while employed, which could include the backdoor method. Combined with that, I do Roth conversions to the limit of my current tax bracket or what I can afford (as the case may be). Once I'm retired, I plan to do much larger Roth conversion to the limit of the tax bracket, using taxable accounts for income.

A couple of other thoughts:
You have sufficient assets that could cause RMDs to drive your wife into higher tax brackets. Roth Conversions will help there.

You easily have enough assets to trigger WA estate taxes. Roth Conversions would at least keep your wife from paying estate taxes on monies that will eventually go to the IRS. Take at look at https://dor.wa.gov/find-taxes-rates/oth ... tax-tables, and consider the potential impact.

bradpevans
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Re: Portfolio review looking to retire in 1-2 years

Post by bradpevans » Wed Apr 18, 2018 7:23 pm

omibogle wrote:
Wed Apr 18, 2018 3:00 pm
bradpevans wrote:
Wed Apr 18, 2018 2:12 pm
GAAP wrote:
Wed Apr 18, 2018 2:06 pm
I would be nervous about keeping those RSUs -- I'm assuming they're from your current employer, or at least in the same industry.

I sell all employer stock grants, matching fund donations, etc. as soon as I get them -- one employer has since gone bankrupt, and I do remember Enron.
At my company, the RSUs vest at three years and trigger the sale/conversion. Roughly speaking (because they take taxes at this point) it ends up being "keep ~ 60-61 shares for every 100 held". This sets the basis going forward.

It may be wise (or not) to keep the Options longer due to leverage: https://www.stockopter.com/a-new-look-a ... k-options/
Thank you GAAP and bradpevans.

I used to have similar plan on liquidating RSUs as soon as I got them. But more recently, I'm bullish on my employer so holding for a bit before selling and rebalancing. My general philosophy has changed to hold for 1yr, and then sell to keep additional gains in long-term bucket. When the RSUs vest and come into my account (primarily twice a year), the company withholds 22% for income tax, and I pay the remaining income tax on tax day.

Given my income bracket and the fact that I'm bullish on my employer, I'm less inclined to take additional income by selling my current RSUs that have had significant short-term gains made in the last 12 months. For the RSUs in the long term gains bucket that roughly represents 12-15% of my total portfolio so it would still be a significant rebalance to elsewhere in taxable.

Is it better to focus on VTI, intl, or bonds in taxable? Or just keep the same split in taxable and tax-advantaged?
Once your RSU's vest, you *could* sell them the same day and then buy whatever you want. If you believe company stock is a better investment than some other fund/equity, then leave em. But selling the day the vest won't trigger any tax impact (just slight fees and any bounce between vesting and selling). Of course if they perform well you might want to hold longer than 1 year; selling just short of one year is usually sub-optimal since you go from LTCG rates to Ordinary Income rates.

As for asset allocation my view is YOU have one plan for YOU (and mine is aggressively in funds with high % stock as well as *individual* stocks, much more than the typical poster here)

Then you have the second question of asset *location*, where you can avoid "tax drag" or fill up tax brackets etc.

build up as much during money IN phase ... find the best way to pay the least taxes coming out.

veindoc
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Re: Portfolio review looking to retire in 1-2 years

Post by veindoc » Wed Apr 18, 2018 7:28 pm

First off, why are you calculating your expenses before taxes? To see if you can really retire you need to model all expenses: taxes and healthcare included.

To retire young I think a more aggressive portfolio is advised. The most I would scale back to is 65/35. If your spouse continues to work you should be able to weather a near-term stock drop or recession.

I have a small amount of our portfolio in “risky” investments such as peerstreet, individual stocks and bitcoins. It’s a small percentage of my portfolio. Small enough that if i lose money I will be fine but also small enough that if it does well it won’t really impact my portfolio either which makes me wonder why I do it. I’m thinking of just keeping it simple.

I would not put bonds in taxable. If you are looking to increase bond allocation, look to tax deferred. I would only consider municipal bonds in taxable. That brings me to another point.

You mentioned converting money to ROTHS. The problem is you are in a high tax bracket now and you will continue to be in one if you are looking to withdraw 200k+ from your overall portfolio. Even more so if spouse continues to work. Not sure what the right answer is for you but would paying taxes now be better than RMDs later? I would model it if you can.

As far as kids I think you are fine. Kids are as expensive as you make them. If you insist on all four of you going to Europe twice/year or giving them Ferrari’s at age 16, then maybe you should keep on working. But if you plan a generic upper middle class life with kids, $200,000k should do it. One blogger is raising three kids on 30k, that would make me nervous. I spend several hundred a month on tutoring, music and art lessons, and sports. Not that it’s necessary but kids enjoy these activities and I like taking them to do it. They are getting ready to take the belt test to get to a green belt and it’s nice to see them practicing and making goals.

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 8:15 pm

GAAP wrote:
Wed Apr 18, 2018 6:33 pm
I'm roughly on the same timing as you, my approach to those questions:

#2: Some of my decisions (and changes over the years) are based upon my wife's comfort level and a lot on simplification. Therefore, I have a fixed asset allocation that needs only 4 ETFs in my IRAs, combined with three similar funds in my 401(k). I don't see a need for additional higher risk investments. If I did feel the need, I would use the 5-10% range, since less will likely not change anything, and more would be a lot of risk exposure. You might want to think about what your wife would do if something happens to you...

#4: I woudn't keep any long term needs in short term investments -- and would handle my cash needs based on portfolio income and asset sales when necessary. When retired, I will maintain a very small cash position in case of short term liquidity or volatility events -- basically enough to keep me from selling in extremely bad situations (around 1-3 months of income needs).

#5: How comfortable are you (and your wife) with the implications of a significant (>25%) drop in the stock market on your income? A 25% drop in the stock market, with no change in bonds, would yield a 20% haircut on income with that allocation. Recovering would require a 33% jump in the stock market...

#7: Are you sure you don't mean Roth Conversion? A backdoor Roth requires contributions to non-deductible IRAs, which required earned income. If you don't want to get nailed on taxes, you also need to not have any TIRA balances. You might want to check out https://www.physicianonfire.com/backdoor/. My approach is to maximize contributions while employed, which could include the backdoor method. Combined with that, I do Roth conversions to the limit of my current tax bracket or what I can afford (as the case may be). Once I'm retired, I plan to do much larger Roth conversion to the limit of the tax bracket, using taxable accounts for income.

A couple of other thoughts:
You have sufficient assets that could cause RMDs to drive your wife into higher tax brackets. Roth Conversions will help there.

You easily have enough assets to trigger WA estate taxes. Roth Conversions would at least keep your wife from paying estate taxes on monies that will eventually go to the IRS. Take at look at https://dor.wa.gov/find-taxes-rates/oth ... tax-tables, and consider the potential impact.
Thank you GAAP for detailed reply. Its reassuring to hear from someone on similar timing, and things you are considering. Lots of stuff I didn't think about.

#2 - I'm currently around 10% will aim to get to closer to 5% or maybe even zero.
#7 - I clearly don't understand backdoor Roth versus Roth conversions well enough so I need to read up on these and come back with a separate post on what's possible. Mainly I'm trying to figure out how to get as much money into Roth as possible, but I think there is no silver bullet here, constrained by what contribution/conversion limits will allow.

I haven't thought about RMDs or estate taxes in WA, will need to read more on those as well, thank you for the links!

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 8:32 pm

Thank you GAAP, veindoc, jwaxjwax for the comments on stock vs bond split in total portfolio. I'm feeling that is probably the most important near term decision for me given timing and length of retirement I'm considering. Given long length of retirement per veindoc's comment I do think being aggressive is better, so maybe 70/30 (versus 80/20) might be a good initial shift for me to take now and then revisit in 6 months.

The only place where I can significantly up tax-advantaged bond allocation relative to portfolio size is in DCP, where my choices are somewhat limited:

PIM TOTAL RT INST (PTTRX)
VANG ST BD IDX IS PL (VBIPX)
PIM UNCONSTRNED BD I (PFIUX)
PIMCO REAL RTN BD AD (PARRX)
VANG HI YLD CORP ADM (VWEAX)

Any insight how how to think about a 30% of portfolio in bonds allocation across these choices?
Last edited by omibogle on Wed Apr 18, 2018 9:31 pm, edited 1 time in total.

omibogle
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Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Wed Apr 18, 2018 9:31 pm

veindoc wrote:
Wed Apr 18, 2018 7:28 pm
First off, why are you calculating your expenses before taxes? To see if you can really retire you need to model all expenses: taxes and healthcare included.
Thank you veindoc, I'm basically calculating 160k/yr needed for all expenses, and then estimating I'll need about 200k a year before taxes assuming 24% tax rate. If I withdraw 200k a year before taxes, think I'll do a bit better than 160k post taxes as will get benefit from qualified dividends and deductions.
veindoc wrote:
Wed Apr 18, 2018 7:28 pm
You mentioned converting money to ROTHS. The problem is you are in a high tax bracket now and you will continue to be in one if you are looking to withdraw 200k+ from your overall portfolio. Even more so if spouse continues to work. Not sure what the right answer is for you but would paying taxes now be better than RMDs later? I would model it if you can.
Right now I'm in 37% bracket. After retirement, hopefully 2 years out I should be in 24% bracket. Hence I'm thinking any tax implications of a Roth conversion would be better suited to the lower bracket if its only a 2 years out. If I had to wait a long time to get to a lower bracket, I'd certainly think about the conversions now. I didn't consider RMDs, I will look into how to model that.

GAAP
Posts: 549
Joined: Fri Apr 08, 2016 12:41 pm

Re: Portfolio review looking to retire in 1-2 years

Post by GAAP » Thu Apr 19, 2018 9:55 am

omibogle wrote:
Wed Apr 18, 2018 8:32 pm
The only place where I can significantly up tax-advantaged bond allocation relative to portfolio size is in DCP, where my choices are somewhat limited:

PIM TOTAL RT INST (PTTRX)
VANG ST BD IDX IS PL (VBIPX)
PIM UNCONSTRNED BD I (PFIUX)
PIMCO REAL RTN BD AD (PARRX)
VANG HI YLD CORP ADM (VWEAX)

Any insight how how to think about a 30% of portfolio in bonds allocation across these choices?
From their webpages:
  • PTTRX: Intermediate-term, investment grade bonds, ER: 0.46%
  • VBIPX: Invests in U.S. Treasury, agency, and investment-grade corporate securities with short duration, ER: 0.04%
  • PFIUX: The average portfolio duration of this Fund will normally vary from (negative) 3 years to positive 8 years, ER: 0.79%
  • PARRX: Inflation-indexed bonds, ER: 0.70%
  • VWEAX: Diversified portfolio of medium- and lower-quality corporate bonds, often referred to as “junk bonds, ER: 0.13%
I don't like PIMCO funds, they seem to be much more actively managed to mimic an index, rather than actually follow it. See their blog article on their "unconstrained" approach: https://blog.pimco.com/en/2018/02/uncon ... volatility. It looks like they're using derivatives to a significant degree. They're also expensive compared to other index funds.

I'm also not a fan of inflation-protected funds, others are. The PIMCO choice is also expensive -- for comparison, Vanguard's most expensive investor class shares cost 0.20%.

I've made money with VWEAX in the past, but it's highly volatile, and may not do what you actually want it to do when stocks go down.

Of the choices available, I would probably choose VBIPX. I might add some of PARRX, probably not more than 20% of my bond allocation. The TIPS fans here will almost certainly disagree...

Senorwc1
Posts: 3
Joined: Sun Jan 21, 2018 7:43 pm

Re: Portfolio review looking to retire in 1-2 years

Post by Senorwc1 » Thu Apr 19, 2018 1:58 pm

Very similar situation on almost all fronts. A few thoughts:
- At this asset level, not sure how much life insurance you need. I feel comfortable being ‘self insured’.
- While the commentary around kids expenses are interesting (mine are a few years ahead), at some level you will provide what you can but that will be what is left (this is the post college/excess help after 529s) and what you afford.

I am interested in how you are thinking about healthcare costs. When I think about retirement I just add 20k/yr to my expenses. You?

omibogle
Posts: 18
Joined: Wed Apr 18, 2018 1:34 am

Re: Portfolio review looking to retire in 1-2 years

Post by omibogle » Thu Apr 19, 2018 7:59 pm

Senorwc1 wrote:
Thu Apr 19, 2018 1:58 pm
Very similar situation on almost all fronts. A few thoughts:
- At this asset level, not sure how much life insurance you need. I feel comfortable being ‘self insured’.
- While the commentary around kids expenses are interesting (mine are a few years ahead), at some level you will provide what you can but that will be what is left (this is the post college/excess help after 529s) and what you afford.

I am interested in how you are thinking about healthcare costs. When I think about retirement I just add 20k/yr to my expenses. You?
Agreed on not needing life insurance at this asset level, that said it felt realitively inexpensive thru my workplace benefits so just ticked the box. I think it’s like $30/mo.

For healthcare I read on here to look at DD on your W2 for what your employer pays which is about $15k. I added another $5k to that for HSA out of pocket. So yes $20k sounds close. Key for me is to have no mortgage to feel comfortable with 200k / yr for expenses all up including taxes.

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