Helping GF move to 3-fund portfolio

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snordquist
Posts: 10
Joined: Sat Feb 24, 2018 1:09 pm

Helping GF move to 3-fund portfolio

Post by snordquist » Sat Jul 28, 2018 1:29 am

Got some really helpful advisement from forum members earlier in the year and happy to report that I implemented a plan I'm pretty comfortable with, at least for the next three to five years.

I'm now helping my girlfriend with her situation and hoping for some more advisement.

We have a somewhat unorthodox relationship: we've been together over twenty years, co-parented a daughter that's off to college in about a month, maintain separate residences, and don't co-mingle our finances.

She's self-employed, working freelance as a writer. By 2020 she'll have completed a couple big projects that I expect will raise her professional profile and hopefully also her income. She's a very frugal person and her housing costs are low by NYC standards.

She began accumulating in the early aughts, jump-started by a windfall and followed by irregular contributions since then. She's never worked for an employer that provided a pension or 401(k) or anything like that. Outside of two annuities and a small amount in a Roth IRA, everything is in taxable MFs and ETFs.

She has mid-six figures in financial assets, not including cash and a couple CDs.

Except for the Roth, everything was set-up by FAs at her bank, HSBC. For numerous reasons she wants to wind down her relationship with this institution.

We went over the Bernstein essay together and discussed index funds and simplicity and costs. She is inclined towards a three fund portfolio. Outside of basic budgeting, she really dislikes thinking about finances and financial matters. Took me a few months to get her to set down and help make an inventory of her financial assets and review them. I'm wondering if a target date fund or lifestyle-type strategy fund would be a better recommendation for her. She's really a set it and forget it type person.

EF: Over three years of expenses in readily available cash, plus another half year of expenses in 2 CDs, one maturing in 3/2020 and the other in 10/2020.

Debt: None

Tax Filing Status: HoH; (from birth thru 2017 daughter was my dependent; beginning 2018 daughter will be claimed by her).

Tax Rate: 12 or 22% Fed TBD; 6% State + Local

State of Residence: New York

Age: 41

Desired Asset allocation: TBD
Desired International allocation: TBD


EQUITIES
MFs
JP Morgan Emerging Markets Equity - JEMSX (ER .99) 2%
JEMSX includes a 3.5k capital gain

Lord Abbett Int. Equity - LICFX (ER .94) 7%
LICFX includes a 2.8k capital gain

MFS Value Fund - MEIIX (ER: .59) 13%
MEIIX represents an approx 35% capital gain.

ETFs
IShares TR Russel 1000 Growth - IWF (ER: .2) 14%
Value of IWF represents an approx 35% capital gain

IShares TR Russell 2000 - IWM (ER: .2) 2%
Includes a 2.2k capital gain

SPDR Index SHS FDS Dow Jones Global R.E. - RWO (ER: .5) 3%
Includes 1k capital gain

BONDS
MFs
Franklin Total Return - FBDAX (ER .68) 16%
FBDAX includes a -5k capital loss

MFS Emerging Market Debt - MEDIX (ER .84) 2%
MEDIX includes a -$150 capital loss

ETF
SPDR Index SER TR Bloomberg Barclays High Yield BD - JNK (ER: .4) 3%
JNK includes a $500 capital gain


Roth IRA 3%
This is three CDs of varying durations at three different banks, all of which mature in April 2020.


Annuities
Allstate Variable Annuity 1 30%
Allstate Variable Annuity 2 5%


QUESTIONS
1.
We want to migrate her financial assets to Vanguard and/or Fidelity and move towards 3 Fund Portfolio. I know the mutual funds will need to be sold, but am I correct in understanding that the ETFs can be transferred "in-kind"?

If so, is it better to transfer and than sell, or sell first and then use the cash to buy the desired funds at Vanguard and/or Fidelity, or is it immaterial?

Any recommendations as to how best to get out of the MFs and ETFs she's currently in will be appreciated.

2.
GF is reliant on ACA for health insurance, so have some concern re. impact of capital gains on income. Likely will have to hold off on liquidating IShares TR Russel 1000 Growth - IWF and MFS Value Fund - MEIIX due to gains in both.

The loss with Franklin Total Return - FBDAX will mitigate some of the gains, but we're wondering if losses offset gains in determining MAGI, or if the losses are applied later, in determining tax liability.

3.
I do think GF can manage three-fund portfolio and take care of necessary re-allocations, but do want to make sure she's aware of options like target date funds or lifestyle-type strategy funds. Would welcome opinions on the pros + cons of each.

She seems to have a high tolerance for risk based on our conversations and in one online survey used to determine risk tolerance, but I'm wondering if that may be due to a sort of cavalier attitude towards financial matters. I did ask her to spend some time thinking about her financial goals, and shared with her my own three sentence IPS.

GF is 41, She comes from a family in which folks live into their 90s. I think she'd be OK waiting to recover from a dramatic fall in the value of her assets.

I'm thinking to recommend to her 70/30 AA, with 25-30% equities in international, and plan to move to 60/40 by the time she's 50.

That make sense?

4.
I'm planning to encourage her to set-up a Roth IRA this year with total market or total international. In 2020 she can roll the proceeds from the CDs into that. Is there a better choice?

I'm also gonna recommend she look into an individual 401(k).

My understanding is that the "employer" contributions to an individual 401(k) can't be claimed as expenses on her Schedule C.

Given that, she's best off contributing max to the Roth first, and then to the Individual 401(k), correct? And we should use this for part of her bond allocation, right?

5.
Not sure why they set her up with two annuities. How to deal with this maybe warrants its own thread. Unfortunately GF was not able to locate the contract or prospectus, so I need her to contact Allstate to request the docs.

There is no surrender charge for Annuity 1. The surrender charge for Annuity 2 is $250.

Annuity 1 has an Accumulation Benefit Rider that matures on 6/8/2020. The death benefit value and the equivalent cash surrender value are greater than the value of the Accumulation Benefit Rider.

Annuity 2 does not have an Accumulation Benefit Rider.

Any idea as to what to do with these things? If she cashes them out, the gains are taxed as ordinary income, correct?

Is it worth investigating a 1305 transfer of these annuities to Vanguard and just hold them where the costs are lower?


We welcome any additional comments and are open to advisement from all perspectives. Thanks.

--Snordquist

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Duckie
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Re: Helping GF move to 3-fund portfolio

Post by Duckie » Sat Jul 28, 2018 2:28 pm

snordquist wrote:We want to migrate her financial assets to Vanguard and/or Fidelity and move towards 3 Fund Portfolio. I know the mutual funds will need to be sold, but am I correct in understanding that the ETFs can be transferred "in-kind"?
Both ETFs and mutual funds can usually be transferred "in kind". You can type the ticker symbols into both Vanguard's and Fidelity's search boxes. If the company can't take it, it will say so.
If so, is it better to transfer and than sell, or sell first and then use the cash to buy the desired funds at Vanguard and/or Fidelity, or is it immaterial?
Sell wherever it's cheaper.
Any recommendations as to how best to get out of the MFs and ETFs she's currently in will be appreciated.
In taxable sell everything with a loss ASAP, then sell some funds/ETFs with a gain up to the loss making it wash. Then sell more with gains up to the amount on which you are willing to pay the taxes. This can be spread out over a few years if necessary.
GF is reliant on ACA for health insurance, so have some concern re. impact of capital gains on income. Likely will have to hold off on liquidating IShares TR Russel 1000 Growth - IWF and MFS Value Fund - MEIIX due to gains in both.

The loss with Franklin Total Return - FBDAX will mitigate some of the gains, but we're wondering if losses offset gains in determining MAGI, or if the losses are applied later, in determining tax liability.
Losses offset gains immediately. Schedule D flows to line 13 on the 1040 form. That is "above the line". (The line being "adjusted gross income" on line 37.)
I do think GF can manage three-fund portfolio and take care of necessary re-allocations, but do want to make sure she's aware of options like target date funds or lifestyle-type strategy funds. Would welcome opinions on the pros + cons of each.
Balanced funds (funds containing both stocks and bonds) do not belong in a taxable account because of the taxable bond component. If you need to put bonds in taxable because there is not enough room in tax-sheltered, most of the time the bonds should be tax-exempt.
She seems to have a high tolerance for risk based on our conversations and in one online survey used to determine risk tolerance, but I'm wondering if that may be due to a sort of cavalier attitude towards financial matters. I did ask her to spend some time thinking about her financial goals, and shared with her my own three sentence IPS.

GF is 41, She comes from a family in which folks live into their 90s. I think she'd be OK waiting to recover from a dramatic fall in the value of her assets.

I'm thinking to recommend to her 70/30 AA, with 25-30% equities in international, and plan to move to 60/40 by the time she's 50.
This is reasonable.
I'm planning to encourage her to set-up a Roth IRA this year with total market or total international. In 2020 she can roll the proceeds from the CDs into that. Is there a better choice?
Do you mean which is better, a Roth IRA or a Traditional IRA? Or something else? In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. But that's in general. If the choice is between Roth or taxable for bonds, then there are some decisions to make.
My understanding is that the "employer" contributions to an individual 401(k) can't be claimed as expenses on her Schedule C.
They are reported and deducted on line 28 of Form 1040 (or they used to be, the new form will have that line somewhere else).
Given that, she's best off contributing max to the Roth first, and then to the Individual 401(k), correct? And we should use this for part of her bond allocation, right?
A pre-tax solo 401k is a perfect place to have bonds. Fidelity has a good solo 401k plan.
Not sure why they set her up with two annuities.
Because it was to the salesman's financial advantage to do it that way.

snordquist
Posts: 10
Joined: Sat Feb 24, 2018 1:09 pm

Re: Helping GF move to 3-fund portfolio

Post by snordquist » Fri Aug 03, 2018 2:58 pm

Thanks Duckie. We appreciate the feedback, which of course has prompted some additional thought and questions.

Asset Allocation + Fund Placement Questions

Roth IRA and Solo 401(k)
Because almost all GF's financial assets not in the annuities are in taxable, I'm thinking of recommending that for at least next year she utilize her ready cash for life expenses and sink as much of her income as is allowed into a total bond fund in a solo 401(k) in order to get that jumpstarted, and at end of year once she has idea of income, contribute as employer as much as is allowed.

I'd recommend she use Roth for Total Stock or Total International, which I think makes snese for someone in their early 40s with the likelihood of a long life. There's no way around also having bonds in taxable.

Since the "employer" contribution isn't really "free money" since she's self-employed, shouldn't she first prioritize the Roth, then the solo 401(k), then taxable in unlikely event she maxes out 401k?

Is there an approach to this I'm not seeing?

What's the advantage/rationale for having Roth in the 401(k) rather than just having a separate Roth IRA?

The idea would be 50% total stock, 20% total int., 30% total bond.


ANNUITIES
How are variable annuities generally treated in terms of determining an asset allocation? I suspect it's gonna take us a few months at best to figure out what, if anything, to do with 'em.

We do know their constituent parts. The larger annuity is a bit less than 20% bonds, a bit less than 10% cash, with the rest in equities (about 10% of this annuity is international stocks).

The smaller annuity is all stocks, with about 12% international.

The annuities represent 35% of her financial assets. Do we ignore them while working on everyhting else and moving her towards a 70/30 AA or should we take them into account?

How does one determine what in the annuity is "investment" and what's "insurance"?


Sale of MFs + ETFs
It's difficult to find on their website the cost to sell the ETFs at HSBC (for accounts that are not self directed or online brokerage accounts). I'm certain it will be less expensive at either Fidelity or Vanguard to sell ETFs.

Of the MFs, it appears that 4 of 5 can be transferred to Vanguard, 1 of 5 to fidelity, and 1 to neither. There are two MFs with losses, so likely best to sell those at HSBC. None of the MFs have sales loads, but can there be hidden costs to redeeming/liquidating at HSBC?

For the ETFs, best thing is just for me to recommend GF just call reps at both Fidelity and Vanguard about transfer process, right?


Vanguard vs Fidelity
I have my own financial assets split bout evenly between the two. Was planning to recommend same to GF.

Setting up 401k at Fidelity seems the better option for GF, but Vanguard can take the one MF we wouldn't want to sell straight-off due to unrealized capital gains. Fidelity has actual offices in NYC she could go to when I not around to assist, but we both favor the ownership structure of Vanguard. Fido of course just made things cheaper...

I know there's no "answer" to this question, but we open to opinions/recommendations.

Thanks again.

ExitStageLeft
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Joined: Sat Jan 20, 2018 4:02 pm

Re: Helping GF move to 3-fund portfolio

Post by ExitStageLeft » Fri Aug 03, 2018 4:19 pm

snordquist wrote:
Fri Aug 03, 2018 2:58 pm
Roth IRA and Solo 401(k)
Because almost all GF's financial assets not in the annuities are in taxable, I'm thinking of recommending that for at least next year she utilize her ready cash for life expenses and sink as much of her income as is allowed into a total bond fund in a solo 401(k) in order to get that jumpstarted, and at end of year once she has idea of income, contribute as employer as much as is allowed.
Excellent plan! I would shop for plans at Vanguard, Fidelity and Schwab.

snordquist wrote:
Fri Aug 03, 2018 2:58 pm
Since the "employer" contribution isn't really "free money" since she's self-employed, shouldn't she first prioritize the Roth, then the solo 401(k), then taxable in unlikely event she maxes out 401k?
Hehe, yeah her match is 0%. So skip to the next step like you did, Roth IRA.
snordquist wrote:
Fri Aug 03, 2018 2:58 pm
What's the advantage/rationale for having Roth in the 401(k) rather than just having a separate Roth IRA?
It's an option that might make sense, depending on current and future tax brackets. It also allows you to adjust the proportion of tax-deferred to Roth while also maximizing the annual savings. Very rarely does it make sense for someone to have 100% Roth savings, or 100% tax-deferred savings. Adding that flexibility into a plan allows adjusting the balance of tax-deferred and after-tax as time progresses and situations change.

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Duckie
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Re: Helping GF move to 3-fund portfolio

Post by Duckie » Fri Aug 03, 2018 6:04 pm

snordquist wrote:Because almost all GF's financial assets not in the annuities are in taxable, I'm thinking of recommending that for at least next year she utilize her ready cash for life expenses and sink as much of her income as is allowed into a total bond fund in a solo 401(k) in order to get that jumpstarted, and at end of year once she has idea of income, contribute as employer as much as is allowed.
Sounds good to me.
I'd recommend she use Roth for Total Stock or Total International, which I think makes sense for someone in their early 40s with the likelihood of a long life. There's no way around also having bonds in taxable.
Agree. Stocks in Roth accounts are best.
Since the "employer" contribution isn't really "free money" since she's self-employed, shouldn't she first prioritize the Roth, then the solo 401(k), then taxable in unlikely event she maxes out 401k?
Yes. First Roth IRA, then pre-tax solo 401k, then taxable.
What's the advantage/rationale for having Roth in the 401(k) rather than just having a separate Roth IRA?
For most people it's better to have pre-tax 401k and Roth IRA.
The idea would be 50% total stock, 20% total int., 30% total bond.
Reasonable.
Of the MFs, it appears that 4 of 5 can be transferred to Vanguard, 1 of 5 to fidelity, and 1 to neither.
Vanguard states that FBDAX is "Closed to new investors." I'm not sure whether or not that means it can't be transferred there since she already owns it, but since it has a loss she should sell it anyway.
There are two MFs with losses, so likely best to sell those at HSBC. None of the MFs have sales loads, but can there be hidden costs to redeeming/liquidating at HSBC?
Yes, she should sell the two funds with losses. That's -$5150. Then sell JEMSX (+$3500) for -$1650, then RWO (+$1000) for -$650, then JNK (+$500) for -$150 leftover loss. The next one to go would be LICFX because of the expense ratio. Make sure anything kept and transferred doesn't have dividends reinvested. Don't buy more.
For the ETFs, best thing is just for me to recommend GF just call reps at both Fidelity and Vanguard about transfer process, right?
Not just the ETFs. Whichever ETFs and mutual funds she doesn't sell at HSBC will be transferred at the same time.
Setting up 401k at Fidelity seems the better option for GF, but Vanguard can take the one MF we wouldn't want to sell straight-off due to unrealized capital gains. Fidelity has actual offices in NYC she could go to when I not around to assist, but we both favor the ownership structure of Vanguard.
It does look like Fidelity won't take MEIIX, but she could call them just to make sure. They may be like Vanguard and can take a transfer but not purchase more. Vanguard will do just fine if Fidelity won't take it. She could always have the taxable account at Vanguard and open the solo 401k and the Roth IRA at Fidelity. Fidelity's solo 401k is better than Vanguard's although Fidelity doesn't have a Roth solo 401k option.

snordquist
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Re: Helping GF move to 3-fund portfolio

Post by snordquist » Thu Aug 09, 2018 8:05 pm

Thanks Exit and Duckie. We got started this week on a Roth and solo 401k for her at fidelity. FTIPX in the Roth, with FSITX going in the 401k.

As to the costly MFs and the ETFs, is it alright to transfer funds in-kind to another brokerage (Vanguard) and then immediately sell-off some (but not others)?

If not, I think we'll be selling FBDAX, MEDIX, JEMSX, RWO and JNK before transferring LICFX, MEIIX, IWF and IWR in-kind to Vanguard. That means she'll have to speak with her FA at HSBC. I'm planning on some coaching and moral support. Any helpful hints for that?

Hopefully in a few weeks I can share how well this all went. I'll also likely make a separate post re. the variable annuity once we get the documentation about what exactly is this product she got.

Thanks again.

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Duckie
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Re: Helping GF move to 3-fund portfolio

Post by Duckie » Fri Aug 10, 2018 7:15 pm

snordquist wrote:As to the costly MFs and the ETFs, is it alright to transfer funds in-kind to another brokerage (Vanguard) and then immediately sell-off some (but not others)?
Yes, it's alright. She needs to find the selling fees at the current brokerage and the selling fees at the new brokerage. Then sell wherever it's cheaper.
If not, I think we'll be selling FBDAX, MEDIX, JEMSX, RWO and JNK before transferring LICFX, MEIIX, IWF and IWR in-kind to Vanguard. That means she'll have to speak with her FA at HSBC. I'm planning on some coaching and moral support. Any helpful hints for that?
If she really needs to speak with her FA she just tells him she has changed her strategy and is moving in a new direction, and thank him for his help. If questioned she just repeats changed strategy, new direction. She really doesn't need to explain this, it's her money.

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