Early Retirement Income Allocation Portfolio Recommendations

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
bluewatervoyage
Posts: 5
Joined: Thu Aug 02, 2018 2:37 pm

Early Retirement Income Allocation Portfolio Recommendations

Post by bluewatervoyage » Thu Aug 02, 2018 4:44 pm

I'm 57, single, and got an unforeseen early retirement (layoff) last November. Looking to change my investment portfolio mix to focus on Income Allocation Portfolio and learn how to draw down for the least taxes and most efficient way of utilizing assets.

Tax Advantaged Account (IRA) 36%
After Tax Accounts 64%

I currently have my IRA invested:

Vanguard Total Bond (VBTLX) = 14%
Vanguard REIT = 7%
Vanguard Total Stock = 4%
Vanguard TR 2025 = 11%
Vanguard Prime Money = 1%

My after tax accounts are holding mostly cash positions right now:

Vanguard Target Retirement 2020 = 15%
Vanguard Money Market = 26%
WP Carey REIT = 3%
High Yield MM (paying 1.75%) = 8%
Checking/Savings accounts = 12%

Expenses including mortgage are about 3% of total portfolio/year
- No other debt
- I may buy a car in a few years
- I have 3 grown children that I would hope to leave an inheritance

I want to know the following:
- How should I reallocate to keep a conservative portfolio that would last until I am 92? I'm hesitant to put cash into the market now - waiting for a correction or may do dollar cost averaging and start investing a portion every quarter.
- Should I roll over my IRA into a ROTH IRA since my income will be low (only interest and dividends) until age 70 when I take social security? My plan would be to roll only the amount that keeps me in the 15% tax bracket annually.
- I'm thinking of adding a CD ladder with some of the cash - thoughts on this?
- Is having a REIT in an after tax portfolio recommended?

Other relevant data
I will take Social Security at 70.
I may also use some of the cash to pay off my mortgage and thus save $12K per year in interest expenses.

User avatar
Peter Foley
Posts: 4498
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by Peter Foley » Thu Aug 02, 2018 11:26 pm

Just a couple comments.

Your stock allocation is way too low for your age and potential length of retirement. That should be your starting point for decision making. While some might recommend a minimum of 25% in stocks, my low end is 40%.

I too think the market is high. I would suggest dollar cost averaging on a monthly basis over a couple years until you get to the 40% mark. Accelerate purchases if the market has a significant correction.

Look into tax efficient fund placement. If you have a couple low income years where capital gains are tax free, put the target retirement account in your IRA and your total stock market account in taxable.

ExitStageLeft
Posts: 803
Joined: Sat Jan 20, 2018 4:02 pm

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by ExitStageLeft » Fri Aug 03, 2018 10:17 am

Welcome to the forum! To echo what Peter Foley said, there is a guy who blogs at Early Retirement Now who has done a series on safe withdrawal rates for folks taking an early retirement. He presents a graphic that compares success rates (not running out of money) for various withdrawal rates, allocations, and time frames.
https://earlyretirementnow.com/2016/12/ ... t-1-intro/

For a 35 year retirement at a 3% withdrawal rate and 25% stocks, you would have about 100% chance of success but the likelihood of leaving much inheritance is not as good. If you bump it up to a 50/50 allocation then you can pretty much go forever at that rate. That means if you want to leave something in your estate a higher stock allocation would be the best way to ensure it, up to a 50% allocation. There is no need to have more than 50% unless you want to spend more than 3%.

With mutual fund investments you'll want to focus not on income but on total return. By trying to build an income portfolio you can lose some tax efficiency and end up paying in taxes what you could otherwise keep.

I'm personally not a fan of REIT funds and don't know how they fare regarding tax efficiency. Vanguard posts annual reports on how their funds growth is reported. The most tax-efficient funds have 100% qualified dividends and 0% short term capital gains.
https://personal.vanguard.com/us/insigh ... ncome-2017

Because bond funds generate income they are not tax-efficient and are best kept in an IRA or other tax-deferred asset. If you opt for a 50/50 allocation, the portion of your portfolio in tax-deferred is not big enough to hold all of your bonds. For now I would fill the tIRA with bonds, put 14% or so in taxable CDs or money market, and 50% in a ratio of VTSAX and VTIAX.

For the future I would consider:

1) Work a little bit over the next few years so that you have enough earned income to put $6500 each year into your IRA. Spend from your taxable funds while doing so. This should move the needle on your tIRA so that in five years its up to being closer to half your portfolio.

2) Draw up a schedule in a spreadsheet for each year until age 92 showing your assets, expected income, expected expenses, and estimated income tax. That should help you figure out what is a good target for how much in Roth IRA you want to have when you reach age 70. I'm a couple years younger than you and have only a trivial amount in a Roth IRA. My plan is to hit age 70 with roughly 50/50 ratio between tax-deferred and Roth.

3) Simplify your portfolio so you can enjoy life with no worries.

pkcrafter
Posts: 13013
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by pkcrafter » Fri Aug 03, 2018 12:07 pm

Welcome, comments below in blue.
bluewatervoyage wrote:
Thu Aug 02, 2018 4:44 pm
I'm 57, single, and got an unforeseen early retirement (layoff) last November. Looking to change my investment portfolio mix to focus on Income Allocation Portfolio and learn how to draw down for the least taxes and most efficient way of utilizing assets.

Tax Advantaged Account (IRA) 36%
After Tax Accounts 64%

I currently have my IRA invested:

Vanguard Total Bond (VBTLX) = 14%
Vanguard REIT = 7%
Vanguard Total Stock = 4%
Vanguard TR 2025 = 11%
Vanguard Prime Money = 1%

My after tax accounts are holding mostly cash positions right now:

Vanguard Target Retirement 2020 = 15%
Vanguard Money Market = 26%
WP Carey REIT = 3%
High Yield MM (paying 1.75%) = 8%
Checking/Savings accounts = 12%

Don't hold a TR fund or REIT in taxable. When you have employment income, you should have a spending account and an emergency in case of job loss. When you don't have regular income, these accounts become part of your overall asset allocation as withdrawals are always coming from total assets.

I agree that your equity allocation is too low as stated. I would suggest a minimum of 35% equity (REITS are equity), but 40% is better as Peter Foley suggested. I tried 30-35% equity when I retired, but discovered that 40% was better without much additional down side.

Usual REIT recommendations are 15% of equity max.

Tax-efficient fund placement.


https://www.bogleheads.org/wiki/Tax-eff ... _placement

Expenses including mortgage are about 3% of total portfolio/year
- No other debt
- I may buy a car in a few years
- I have 3 grown children that I would hope to leave an inheritance

I want to know the following:
- How should I reallocate to keep a conservative portfolio that would last until I am 92? I'm hesitant to put cash into the market now - waiting for a correction or may do dollar cost averaging and start investing a portion every quarter.

AA of ~40/60. Why do you worry about a correction now? What if there is no major drop? Won't you be facing the same problem, a possible market drop, when you plan to get in a year or two? But OK, DCA in if keeps your emotional side in check, but be aware that you will have to ride several market upsets as retirement life continues.

When considering risk, think of need, ability, and willingness. With a 3% withdrawal rate, you don't have much need, but ability is higher. This means if you could safely have an equity allocation of 60-70% with no problem, but you don't need to, although you still have need for some growth potential to sustain your portfolio. 30% equity might be a bit too low to sustain long term withdrawals, and that is why we are recommending close to 40%


- Should I roll over my IRA into a ROTH IRA since my income will be low (only interest and dividends) until age 70 when I take social security? My plan would be to roll only the amount that keeps me in the 15% tax bracket annually.

You could do that.

- I'm thinking of adding a CD ladder with some of the cash - thoughts on this?

Probably a good idea.

- Is having a REIT in an after tax portfolio recommended?

No.

Other relevant data
I will take Social Security at 70.
I may also use some of the cash to pay off my mortgage and thus save $12K per year in interest expenses.

How much owed on mortgage and what is interest rate?

Paul

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

bluewatervoyage
Posts: 5
Joined: Thu Aug 02, 2018 2:37 pm

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by bluewatervoyage » Fri Aug 03, 2018 4:52 pm

Hi Peter and Paul, Thanks for the great info and analysis. Wow - I feel like I've got two Saints in my court. :D I'm a lucky girl!

MORTGAGE
Mortgage is currently $325K at 4%. I have two scenarios in mind here. One is I stay where I am and pay it off so I save the interest annually. Given the current administrations penchant to kill most deductions I probably will end up with only standard deductions going forward so mortgage interest may not be deductible. That said, I also am not sure this is my permanent location for retirement. Since I am no longer working and retired early, it will be difficult for me to get another mortgage so I may have to pay cash for a home if I move. My thought was that maybe I keep this home regardless of whether I move and rent it thus keeping the leverage of the mortgage while having someone else pay it since I really don't need the equity out of the home at this point (which is another $200k+). The second scenario would be to sell this house and use the equity to pay in part for the new house.

REIT
I've had the WP Carey REIT since 2006 and reinvested all dividends since then. The cost basis is pretty low on it so if I have no earned income for 2018 then I'm thinking I can cash it out and as long as I'm in the 15% or below tax bracket I shouldn't have to pay capital gains on it. Is that an accurate assumption? If I liquidate that I can add those funds to the Equity allocation.

AA
Right now with REITs and STOCK the total percentage of Equities is ~ 28% if my calculations are accurate so I know I need to increase there. I've been hesitant because I fear the policies of this administration are setting us up for a major FUBAR in the markets. Why are TR funds not good for after tax accounts? If I want to use the following allocations, which should I have in the after tax accounts vs. IRA? I like the concept of a TR fund but if it isn't good for the after tax accounts, what would you suggest there?

Equities: VGSLX (10%) VTSAX (25%), VHGEX (10%)
Bonds: VBTLX (25%)
Cash and equivalents (CD Ladder, High Yield MM, and 2 years cash for living expenses): (25%)

Swimming in trying to figure this all out. Thanks for your help!
MaryBeth

bluewatervoyage
Posts: 5
Joined: Thu Aug 02, 2018 2:37 pm

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by bluewatervoyage » Fri Aug 03, 2018 4:55 pm

Typo on VTSAX, I should have put VTIAX.

bluewatervoyage
Posts: 5
Joined: Thu Aug 02, 2018 2:37 pm

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by bluewatervoyage » Fri Aug 03, 2018 7:36 pm

Thanks ExitStageLeft for further advice. I'm slowly getting it.

Can you give more detail on Roth rollover discussion. I would like to not work any further if possible but understand the benefits of being able to add more to the retirement pot. Why wouldn't I want to have as much as possible in after tax funds so that growth would be tax free going further as long as I can keep my income including the rollover in the 15% bracket? Am I missing something in the IRA to Roth thoughts?

Thanks!

User avatar
Peter Foley
Posts: 4498
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by Peter Foley » Fri Aug 03, 2018 9:15 pm

bluewatervoyage wrote:
The cost basis is pretty low on it so if I have no earned income for 2018 then I'm thinking I can cash it out and as long as I'm in the 15% or below tax bracket I shouldn't have to pay capital gains on it. Is that an accurate assumption?
Yes. Although as noted REITs are considered equities.
Why are TR funds not good for after tax accounts? If I want to use the following allocations, which should I have in the after tax accounts vs. IRA? I like the concept of a TR fund but if it isn't good for the after tax accounts, what would you suggest there?
Target Retirement Funds are a mix of stocks and bonds. The bonds pay interest which is taxable at your regular earned income rate every year. It is better to hold bonds in a tax deferred account. Generally one should hold stocks in a taxable account. If you want to hold bonds, I-bonds are not a bad option because taxes are deferred. Higher income individuals might hold tax free bonds in taxable if they don't have space in tax deferred for their desired bond allocation. Holding a target retirement fund in an IRA is fine.

bluewatervoyage
Posts: 5
Joined: Thu Aug 02, 2018 2:37 pm

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by bluewatervoyage » Sun Aug 05, 2018 2:44 pm

One other consideration I forgot to ask about. Since I'll need healthcare when my COBRA runs out and I won't be eligible for medicare for 8 years, is there a calculator to compare whether it makes sense to roll into a ROTH and generate the extra income or to not have the income and get the subsidy for the ACA, assuming it isn't killed by the current administration.

ExitStageLeft
Posts: 803
Joined: Sat Jan 20, 2018 4:02 pm

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by ExitStageLeft » Mon Aug 06, 2018 12:37 pm

bluewatervoyage wrote:
Fri Aug 03, 2018 7:36 pm
Thanks ExitStageLeft for further advice. I'm slowly getting it.

Can you give more detail on Roth rollover discussion. I would like to not work any further if possible but understand the benefits of being able to add more to the retirement pot. Why wouldn't I want to have as much as possible in after tax funds so that growth would be tax free going further as long as I can keep my income including the rollover in the 15% bracket? Am I missing something in the IRA to Roth thoughts?

Thanks!
Please note that there is no 15% federal tax bracket. The recent changes to the tax law, which are set to sunset in 2025, put you in the 12% bracket. In addition the standard deduction is much higher, making it likely that 90%+ of tax filings will be using the standard deduction.

The standard deduction is the reason to have part of your retirement savings in a tax-deferred account. That is $12,000 that has a zero tax rate. If you could subsist on an income of $12k per year from your traditional IRA, your AGI would be $12k and after your standard deduction your taxable income would be zero.

If instead you were to pull that $12k from a Roth account, you would pay no taxes on the withdrawal because you would have paid taxes up front on it at your marginal rate. If taxed at 12%, that amounts to $1,440 that you otherwise would not have had to pay.

The right proportion of tax-deferred to have when you retire is the amount that ensures you will always have enough reportable income to make full use of the standard deduction, yet won't be impacted negatively when your reach age 70 and start taking the required minimum distribution.

There are further complicating factors such as the degree to which your social security benefits are taxed, any state income taxes, Medicare premium, and managing your AGI to retain eligibility for a healthcare subsidy. I don't have the answer. Your individual circumstance will indicate how zealously you should proceed with Roth conversions on your tax-deferred savings.

User avatar
Peter Foley
Posts: 4498
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by Peter Foley » Mon Aug 06, 2018 2:49 pm

ExitStageLeft wrote:
The standard deduction is the reason to have part of your retirement savings in a tax-deferred account. That is $12,000 that has a zero tax rate. If you could subsist on an income of $12k per year from your traditional IRA, your AGI would be $12k and after your standard deduction your taxable income would be zero.
It is actually a bit better than the subsistence described above because SS Benefits for a single person are not taxable until you exceed $25,000 MAGI. So a combination of tax deferred withdrawals, SS Benefits, and Roth withdrawals would provide a reasonable standard of living for some individuals in some parts of the US.

Dottie57
Posts: 4288
Joined: Thu May 19, 2016 5:43 pm

Re: Early Retirement Income Allocation Portfolio Recommendations

Post by Dottie57 » Mon Aug 06, 2018 3:04 pm

Re: Roth Conversions

I am 61. I retired this year and plan to do some Roth Conversions. I hope to convert an IRA of 350 k. There are 3 years of ACA. SS at 70. Hope to get enough converted to avoid the 85% of SS . I have cash to pay for conversions.

Post Reply