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Help with allocation

Posted: Wed Jun 13, 2018 12:37 am
by zuga
Hi All,

First of all, thank you in advance for any insight you may share on my investments.

I'm planning to retire in the next ~3 months and move to a country in Europe that provides special tax benefits for new residents for 10 years.
It offers no tax on dividends, but there is a flat tax rate of 28% on capital gains (ouch). Taxes on capital gains are independent of location where assets are located.

Emergency funds: 4 months of expenses outside asset allocation
Debt: No debt
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 0% State
State of Residence: WA
Age: 42
Desired Asset allocation: 75% stocks / 22% bonds / 3% cash
Desired International allocation: 30% of stocks

Other details:
US citizen
I do not expect my retirement yearly withdraws/income to exceed the US 0% tax rate (significant less than the ~77k bracket limit )
Planning to keep investments in US

Current retirement assets

% Taxable
26.43% cash (for investing – do not include emergency funds) 
5.90% Vanguard European Stock Index Fund Admiral Shares (VEUSX) (0.10%)
2.31% Vanguard FTSE All-World ex-US Index Fund Admiral Shares (VFWAX) (0.11%)
15.98% Vangguard Total International Stock Index Admiral Shares (VTIAX) (0.11%)
15.93% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

His 401k
11.34% S&P500 Equity Index Fund (0.04%)
1.27% Investment Grade Bond Fund (0.16%)
0.29% Company stock (0.04%)

His Roth IRA at Vanguard
2.00% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%)
2.97% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

His Rollover IRA at Vanguard
4.85% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%)
4.69% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

Her Traditional IRA at Vanguard
1.77% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

Her Roth IRA at Vanguard
1.48% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%)
2.78% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

Current combined allocation is roughly:
38.60% Cash
9.50% Bonds
51.90% Cash

Questions:

1. I have a lump sum of cash I am preparing to invest. I need to significantly increase our bonds exposure, and have the following questions:
1a. Considering that interest rates are likely to increase in following year (may have an increase tomorrow), is it better to purchase short interest bonds vs intermediate bond funds?
I've read some threads on this subject, but they were more related to selling from intermediate to short term bonds. In this case I'm moving from cash to invest. Perhaps there is not much difference but I do get some paralysis on this.

1b. Is it better to move stock investments out of tax advantage accounts to maximize bond allocation in tax advantage accounts? Once I become resident in new location I do not expect to be taxed on dividends from taxable accounts.

2. Considering that I will be significantly more taxed on capital gains than on dividends, does it make sense with remainder of cash to buy into a fund like the Vanguard High Dividend Yield ETF (VYM) (0.08%) (dividend rate ~3.06%) instead of the Vanguard Total Stock Market (VTSAX) (0.04%) (dividend rate ~1.82%)?

3. Any other recommendations you may have regarding portfolio and allocations?

Thanks again.

Re: Help with allocation

Posted: Wed Jun 13, 2018 2:59 pm
by bloom2708
I may not be able to help much, but will provide a bump.

Are you a US citizen moving to Europe? Will you maintain your US citizenship? Will you return to the US?

75/25 is quite aggressive for retirement, but we don't have enough details to see the full picture. Are your expenses covered by a pension? Will you get SS benefits with your move?

In general, Total US + Total International in taxable is a good solution if you have space for bonds in your 401k/Traditional IRA/Roth IRA.

You may not want 100% stocks in taxable at 42. A 50% market dip at 75/25 would mean your taxable drops by 37% or so. Tough to take if you are depending on the dividends (withdrawal) from taxable.

You might consider clicking the Edit button and using this format for asking portfolio questions. I do not know how the citizenship aspects work in your scenario. Bump for others with more knowledge.

viewtopic.php?t=6212

Re: Help with allocation

Posted: Wed Jun 13, 2018 3:19 pm
by ExitStageLeft
Congratulations on your approaching retirement! Your plan is very intriguing, and I wish I could offer some helpful insight into what strategies you should employ. Based on the favorable tax treatment for dividends that you mention, your suggestion to move to high dividend funds seems appropriate.

Were I to undertake a similar adventure, I would double-check all my assumptions and develop a spreadsheet calculating income, taxes, and portfolio growth for the next ten years and beyond. Remember not to let the tail wag the dog when it comes to taxes. The important measures are how much spending money you'll have year to year, and that you're comfortable with the overall risk.

I'd also want to know that the favorable tax treatment applies whether assets and dividends are held and paid in the US or do they need to be in your new country.

Re: Help with allocation

Posted: Wed Jun 13, 2018 5:30 pm
by zuga
Thank you for your comments and insights.

I've updated the original post with more information.

I'm a US citizen and have no plans to change this. I don't have a pension, but will be entitled to SS benefits at retirement age. May be able to combine it with SS benefits from another EU contry, although there are windfall limits in US SS.

Could you share more insights on the bond allocation? The 25% bond allocation provides ~10 years worth of living expenses (not counting dividends income).

Also, on investing from cash to bonds: should I consider short term funds vs intermediate term funds, considering the higher probability of interest rates continuing to increase?

Thanks again

Re: Help with allocation

Posted: Wed Jun 13, 2018 7:40 pm
by ExitStageLeft
zuga wrote:
Wed Jun 13, 2018 5:30 pm
Thank you for your comments and insights.

I've updated the original post with more information.

I'm a US citizen and have no plans to change this. I don't have a pension, but will be entitled to SS benefits at retirement age. May be able to combine it with SS benefits from another EU contry, although there are windfall limits in US SS.

Could you share more insights on the bond allocation? The 25% bond allocation provides ~10 years worth of living expenses (not counting dividends income).

Also, on investing from cash to bonds: should I consider short term funds vs intermediate term funds, considering the higher probability of interest rates continuing to increase?

Thanks again
I'm afraid I'm trying to learn as much myself since my retiement horizon is about two years out. Would there be any benfit to purchasing a single premium immediate annuity (SPIA)? How would annuity income fare at your host country?

Re: Help with allocation

Posted: Thu Jun 14, 2018 9:36 pm
by zuga
Thanks for the suggestion, I'll check SPIAs.

Re: Help with allocation

Posted: Fri Jun 15, 2018 3:58 am
by TwstdSista
I don't know much about your specific situation, but consider moving your bond funds out of Roth accounts and into Traditional accounts. See: https://www.bogleheads.org/wiki/Tax-eff ... _placement