Portfolio Reallocate Help

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retfolio
Posts: 6
Joined: Thu Jul 05, 2018 4:51 pm

Portfolio Reallocate Help

Post by retfolio » Fri Jul 06, 2018 9:42 am

Hi Bogleheads!

We need your help with re-allocating our portfolio into Vanguard funds - three fund portfolio. Our plan is to retire in 2 or 3 years. Portfolio has been ignored along life's way. But it's time to get back on track and get funds working.

Thanks in advance for your help.

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Emergency funds: yes 12 months
Debt: none
Tax Filing Status: Married Filing Jointly Tax Rate: 24% Federal, 0% State
State of Residence: no state tax
Age: Him: 60 (still working) Her: 54
Desired Asset allocation:
30% stocks
50% total bond market
10% short term bonds
10% fixed income
Desired International allocation: 20 (??) % of stocks
Overall Portfolio: Low 7 figures


Current retirement assets

Taxable
17.61% Money Market
9.47% Dodge and Cox Income Fund (DODIX) (.44%) 
0.34% Dodge and Cox Stock Fund (DODGX) (.52%)
14.02% Company Stock (5 different stocks after mergers/splits)

His 401k at Fidelity
4.05% All-Cap Equity Fund (Multi Manager/Trust )(.36%) 
2.03% US Large Cap Equity Index Fund (Blackrock Manager) (.0554)

2.32% Non US Equity Index Fund (Blackrock Manager) (.0904%)

6.4% Core Plus Bond Fund (Collective Investment/Trust) (.21%)
2.23% Intermediate Bond Index- (Blackrock Manager) (.0629%)

1.95% Diversified Real-Asset (Multi-Manager/Trust) (.48%)
22.50% Vanguard Federal Money Market Fund (VMFXX) (.13%)

Company match?  Yes 6%

His Roth IRA (TD Ameritrade)
4.37% money market

His Rollover IRA (TD Ameritrade)
5.24% money market

Her Traditional IRA (TD Ameritrade)
3.82% money market

Her Roth (TD Ameritrade)
3.65% money market


New annual Contributions 

$28000 (including company match) 
$6500 his IRA/Roth IRA
$6500 her IRA/Roth IRA
$40000 taxable (for retirement)

Available funds 

Funds available in his 401(k)

All-Cap Equity Fund (Multi Manager/Trust)(.36%) 
Non-US All-Cap Equity Fund (Multi Manager/Trust) (.54%)
Core + Bond Fund (Collective Investment/Trust) (.21%)

US Large Cap Equity Index Fund (BlackRock) (.0554)
Non US Equity Index Fund (BlackRock) (.0904%)
US Small/Mid Cap Equity Index Fund (BlackRock) (.0654%)
Intermediate Bond Index- (BlackRock) (.0629%)

Diversified Real-Asset (Multi-Manager/Trust) (.48%)
Vanguard Federal Money Market Fund (VMFXX) (.13%)


Questions:
1. How would you allocate this portfolio into a 3-fund portfolio using Vanguard funds (or ETF's) with the most efficient tax placement?
2. Would you change the current fund choices in "his 401K" ?
3. Large and small/mid value fund suggestions for a value tilt?
4. In taxable, do Vanguard funds have the same tax efficiency as the corresponding ETF?
Last edited by retfolio on Sun Jul 08, 2018 12:26 am, edited 4 times in total.

retiredjg
Posts: 33588
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio Reallocate Help

Post by retiredjg » Fri Jul 06, 2018 10:02 am

retfolio wrote:
Fri Jul 06, 2018 9:42 am
Age: Him: 60 (still working) Her: 54
Desired Asset allocation:
30% stocks
50% total bond market
10% short term bonds
10% fixed income
Desired International allocation: 20 (??) % of stocks
This is a very conservative portfolio. Is that what you are aiming for?

A portfolio with only 30% stocks is not going to grow much. It may only keep up with inflation. If your "low 7 figures" means $2.5 million and your living expenses are low, your portfolio does not need to grow much. If your "low 7 figures" means $1 million and your living expenses are $80k a year, you may need to consider adding more stocks.

I don't mean to imply that it is too conservative - just trying to get a handle on what you actually want and need.



Overall Portfolio: Low 7 figures


Current retirement assets

Taxable
17.61% Money Market
9.47% Dodge and Cox Income Fund (DODIX) (expense ratio) <---what capital gains does this fund have?
0.34% Dodge and Cox Stock Fund (DODGX) <---what capital gains does this fund have?
14.02% Company Stock (5 different stocks after mergers/splits)<---is is possible to sell some of this without a great deal of capital gains?

His 401k at Fidelity
4.05% All-Cap Equity Fund (Multi Manager/Trust )(.36%) <--unneeded, overlaps with fund below
2.03% US Large Cap Equity Index Fund (Blackrock Manager) (.0554)

2.32% Non US Equity Index Fund (Blackrock Manager) (.0904%)

6.4% Core Plus Bond Fund (Collective Investment/Trust) (.21%)
2.23% Intermediate Bond Index- (Blackrock Manager) (.0629%)

1.95% Diversified Real-Asset (Multi-Manager/Trust) (.48%)<--probably not needed and too expensive
22.50% Vanguard Federal Money Market Fund (VMFXX) (.13%)

Company match?  Yes

His Roth IRA (TD Ameritrade)
4.37% money market <--a low cost REIT fund could go here

His Rollover IRA (TD Ameritrade)
5.24% money market

Her Traditional IRA (TD Ameritrade)
3.82% money market

Her Roth (TD Ameritrade)
3.65% money market


New annual Contributions 

$28000 (including company match) 
$6500 his IRA/Roth IRA<--can you contribute directly to Roth IRA or are you doing something else?
$6500 her IRA/Roth IRA
$40000 taxable (for retirement)




Questions:
1. How would you allocate this portfolio into a 3-fund portfolio using Vanguard funds (or ETF's) with the most efficient tax placement?
We'll come back to this. It partly depends on how willing you are to change your taxable account (which will incur taxes).
2. Would you change the current fund choices in "his 401K" ?
I would. More later.

4. In taxable, do Vanguard funds have the same tax efficiency as the corresponding ETF?
For Vanguard funds, yes. For other company's funds - maybe not.


Welcome to the forum!

retfolio
Posts: 6
Joined: Thu Jul 05, 2018 4:51 pm

Re: Portfolio Reallocate Help

Post by retfolio » Fri Jul 06, 2018 11:39 am

retiredjg, thanks for replying.
This is a very conservative portfolio. Is that what you are aiming for? 

A portfolio with only 30% stocks is not going to grow much. It may only keep up with inflation. If your "low 7 figures" means $2.5 million and your living expenses are low, your portfolio does not need to grow much. If your "low 7 figures" means $1 million and your living expenses are $80k a year, you may need to consider adding more stocks.
 
Portfolio is just under $2 million. Living expenses are around $50K a year.

I was thinking of keeping the allocation conservative as we head into retirement (maybe in 2 years) so as to prevent sequence of returns risk. Plan is a reverse stock glide path. As we approach SS at 67 or 70 we move to a 50-50 allocation or even a 60-40.

Plan is to spend down the fixed and short term bond holdings as a bridge to SS/pensions. Then live off SS/pensions and an SWR of < 2% on a 50-50 or 60-40 portfolio.

Please correct flaws in the above thinking.

Regarding Capital Gains

in the Dodge and Cox funds

Not much capital gains and we could sell. Was thinking of using these funds as part of the bridge to SS (years 5+ to 67 or 70). Intermediate bonds + income assets in DODIX and some stock in DODGX. Account was opened a long time ago and we moved between their funds through the years. Only recently kept DODIX and DODGX.

Open to re-allocation suggestions.

In the individual stocks
Here we do have gains and this portion will have to be sold in parts each year. So may have to count this % as part of the stock allocation until we can sell all and reallocate into a fund/ETF. We could probably sell 1/3.

Regarding Funds in "his 401K"
You are right on overlapping stock with the index. Reason for adding it is that it has a value tilt. So was combining an index and managed value.
But, open to re-allocation.

Will get rid of the Real-Asset fund.

Regarding Roth IRA
Yes directly as income is not over the contribution limit.


I was so lucky to find this forum and have spent many hours reading the information shared. I have a big picture in mind, but am struggling to fit all the pieces together. So thank you for your help.

Big picture:
Thinking of a bridge to SS from 62 to 67/70. Allocation in fixed income for the initial years and then short/intermediate term bonds until SS/pensions.
For assets not in the bridge: initially a conservative 30-70 allocation . But with a reverse stock glide path to 50-50 once SS/pensions start and the fixed income/ST bonds are spent.

retiredjg
Posts: 33588
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio Reallocate Help

Post by retiredjg » Fri Jul 06, 2018 4:38 pm

retfolio wrote:
Fri Jul 06, 2018 11:39 am

This is a very conservative portfolio. Is that what you are aiming for? 

A portfolio with only 30% stocks is not going to grow much. It may only keep up with inflation. If your "low 7 figures" means $2.5 million and your living expenses are low, your portfolio does not need to grow much. If your "low 7 figures" means $1 million and your living expenses are $80k a year, you may need to consider adding more stocks.
 
Portfolio is just under $2 million. Living expenses are around $50K a year.

I was thinking of keeping the allocation conservative as we head into retirement (maybe in 2 years) so as to prevent sequence of returns risk. Plan is a reverse stock glide path. As we approach SS at 67 or 70 we move to a 50-50 allocation or even a 60-40.

Plan is to spend down the fixed and short term bond holdings as a bridge to SS/pensions. Then live off SS/pensions and an SWR of < 2% on a 50-50 or 60-40 portfolio.

Please correct flaws in the above thinking.
I don't see any flaws in thinking. The above idea makes sense to me. It makes even more sense if the $50k expenses is before pension and SS which would make your withdrawal rate extremely low even if your expenses go up some.

About the rest of it, I'll look at it again this weekend and maybe have a portfolio suggestion for you. Others are likely to comment as well.

retfolio
Posts: 6
Joined: Thu Jul 05, 2018 4:51 pm

Re: Portfolio Reallocate Help

Post by retfolio » Fri Jul 06, 2018 7:06 pm

It makes even more sense if the $50k expenses is before pension and SS which would make your withdrawal rate extremely low even if your expenses go up some.
When both our SS and pensions start we may be able to live off it. But don't know future medical insurance costs. Also SS could be cut by 25% (in 2037 ?).
About the rest of it, I'll look at it again this weekend and maybe have a portfolio suggestion for you. Others are likely to comment as well.
Portfolio suggestion(s) will be very helpful. Thank you.
If we keep 10% in fixed (in taxable) and 10% in short term bonds (in taxable?). Then a 3 fund style allocation for the rest is what I am thinking. But open to any other allocation suggestions.

megabad
Posts: 507
Joined: Fri Jun 01, 2018 4:00 pm

Re: Portfolio Reallocate Help

Post by megabad » Fri Jul 06, 2018 8:04 pm

retfolio wrote:
Fri Jul 06, 2018 9:42 am
Questions:
1. How would you allocate this portfolio into a 3-fund portfolio using Vanguard funds (or ETF's) with the most efficient tax placement?
2. Would you change the current fund choices in "his 401K" ?
3. Large and small/mid value fund suggestions for a value tilt?
4. In taxable, do Vanguard funds have the same tax efficiency as the corresponding ETF?
I would keep it simple and probably land something like this:

Taxable
17.61% Money Market (sell and switch to short term bond index and money market)
9.47% Dodge & Cox Income (sell and switch to Total Bond in years 62/63 to 70)
0.34% Dodge & Cox Stock (sell and switch to Total Stock in years 62/63 to 70)
14.02% Company Stock (sell and switch to Total International Stock or Total Stock in years 62/63 to 70)

401k
41.48% Intermediate Bond Index

His Roth IRA
4.37% Vanguard Total Stock Market Index

His IRA
5.24% Vanguard Total Stock Market Index

Her IRA
3.82% Vanguard Total Stock Market Index

Her Roth IRA
3.65% Vanguard Total Stock Market Index

---

I would probably wait until 62/63 when you retire to start selling taxable holdings, then convert to Vanguard funds.

Probably would hold total international in taxable for FITC.

I might personally be more inclined to hold money market in 401k in your case, but since you already have money market in taxable, I do not show this in my proposed portfolio above. I don't feel super strongly about this either way, but basically my line of thought is that you want limited growth in your RMD account since spouse is younger and you may end up with someone filing single eventually (if you know what I mean).

You look like your planning is going to bring you into the 12% bracket in retirement (I think but not sure), which is great. Awesome savings rate, great accumulation, and reasonable expenses will make for an enjoyable retirement in my opinion.

retfolio
Posts: 6
Joined: Thu Jul 05, 2018 4:51 pm

Re: Portfolio Reallocate Help

Post by retfolio » Sat Jul 07, 2018 2:48 pm

megabad, thanks for taking the time to reply.

- I like your suggestion to wait to sell taxable and convert to Vanguard. Will take a lower tax hit that way. DODIX is a good bond/income fund and we could hold it for another 2 years. Or start to sell a small amount until 62/63. I may exit DODGX as the Vanguard index seems to be a better option.
- FITC for international in taxable makes sense.
- I like how you have stocks and bonds in tax-advantaged. This will allow for re-balancing without having to sell stock in taxable assets.
I might personally be more inclined to hold money market in 401k in your case, but since you already have money market in taxable, I do not show this in my proposed portfolio above. I don't feel super strongly about this either way, but basically my line of thought is that you want limited growth in your RMD account

Excellent point. I never thought about limiting growth in the RMD account. I think my husband will do Roth conversions (to the max of tax bracket) when he retires to reduce the RMD account. But also limiting growth in this account makes sense.
You look like your planning is going to bring you into the 12% bracket in retirement (I think but not sure), which is great.
I think we will be in the 12% bracket (initial years at least). Maybe higher when both SS, pensions and RMD start. I still have to understand all this.

Based on your allocations:
Fixed + ST bonds + Bonds = 68.56%
Stock = 31.44%


Once the fixed + ST bonds are spent via the bridge the allocation moves to 50-50%
I finally see how the pieces (%flow and allocation) fit together. Thanks!

We could add international in taxable when we sell the individual stocks (20% of stock allocation).

So allocation would be:
Fixed + ST bonds + Bonds = 68.56%
US Stock = 25.44%
International Stock = 6%


Questions:
1) If I added in a value tilt - small/mid cap value and large cap value. Would these funds be placed in tax-advantaged accounts?
2) Would one use Vanguard dividend funds/etf's for the value tilt or the Vanguard value funds?
3) Would REITS provide further diversification or are they already included in the Total Stock Market Index?

Thanks again for replying. I have been struggling to put all the pieces together (and it's slowly getting clearer).
Trying to re-allocate from scratch and want to implement it the right way, so all help is much appreciated.
Last edited by retfolio on Mon Jul 09, 2018 7:21 pm, edited 1 time in total.

megabad
Posts: 507
Joined: Fri Jun 01, 2018 4:00 pm

Re: Portfolio Reallocate Help

Post by megabad » Mon Jul 09, 2018 5:31 pm

retiredjg wrote:
Fri Jul 06, 2018 10:02 am
retfolio wrote:
Sat Jul 07, 2018 2:48 pm
Questions:
1) If I added in a value tilt - small/mid cap value and large cap value. Would these funds be placed in tax-advantaged accounts?
2) Would one use Vanguard dividend funds/etf's for the value tilt or the Vanguard value funds?
3) Would REITS provide further diversification or are they already included in the Total Stock Market Index?
1) I am inclined to put factor funds in tax-advantaged but it depends on fund turnover and distributions. Some funds are worse with taxable distributions than others.

2) Well, dividend funds have a different objective than value funds so it depends on your goal. If your tilt goal is toward value (not dividends) than I would certainly tend toward a fund that has an objective aligned with this tilt. A fund where the primary factor is dividend distribution/growth may have very different performance from a fund where the primary factor is relative earnings.

3) Pertaining to diversity (not outperformance), you will find two primary viewpoints on this topic: A) Publicly traded REITs are already held in Total Stock Market Index (in proportion to market cap) so no separate holding is needed, or B) The real estate market has a large privately traded component that is not reflected in Total Stock Market Index so a heavier than market cap weighting toward REITs is justified. In my opinion there is some merit to both arguments. In my case, when my individual real estate holdings were smaller, I did in fact hold REIT Index separately. Now I do not, but you will have to make this call yourself. If you hold REITs, don't hold in taxable.

retfolio
Posts: 6
Joined: Thu Jul 05, 2018 4:51 pm

Re: Portfolio Reallocate Help

Post by retfolio » Wed Jul 11, 2018 2:33 pm

1) I am inclined to put factor funds in tax-advantaged but it depends on fund turnover and distributions. Some funds are worse with taxable distributions than others.
I will check the turnover and distributions on each fund. Makes sense to place them in tax-advantaged.

2) Well, dividend funds have a different objective than value funds so it depends on your goal. If your tilt goal is toward value (not dividends) than I would certainly tend toward a fund that has an objective aligned with this tilt. A fund where the primary factor is dividend distribution/growth may have very different performance from a fund where the primary factor is relative earnings.
Good point regarding objectives. I saw "large value" on one of Vanguard's dividend funds and thought it could go in this space. But our goal is a performance tilt with value and so will use an actual value fund or ETF.

3) Pertaining to diversity (not outperformance), you will find two primary viewpoints on this topic: A) Publicly traded REITs are already held in Total Stock Market Index (in proportion to market cap) so no separate holding is needed, or B) The real estate market has a large privately traded component that is not reflected in Total Stock Market Index so a heavier than market cap weighting toward REITs is justified. In my opinion there is some merit to both arguments. In my case, when my individual real estate holdings were smaller, I did in fact hold REIT Index separately. Now I do not, but you will have to make this call yourself. If you hold REITs, don't hold in taxable.
I did not know that privately traded REITs are not part of TSM - so holding some REITs could make sense. I think I will keep a small $ amount as a portfolio enhancer which will be added to the best performing 2 sectors at the time. So a core 3-fund portfolio and an explore fraction.
Thanks megabad for taking the time to answer all of my questions. Much appreciated.

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