Help with retirement portfolio

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ForTheFuture
Posts: 5
Joined: Sat Aug 20, 2016 7:31 pm

Help with retirement portfolio

Post by ForTheFuture » Mon Aug 06, 2018 9:06 am

Hello everyone! I’ve been reading this forum for quite some time and it has been very helpful to me. I need some help with my parent’s retirement. My mom retired early but not taking SS until she reaches 65-67 which is around 5 years and my dad retired already (taking SS). When both my parents take SS, they will need to withdraw $12,000 yearly (they don’t spend much) to cover their extra expenses. Currently, they will need to use $70,000 from the emergency fund for the 5 years period before my mom takes SS. They started contributing to IRA late so they don’t have that much in IRAs. I want to make sure that they are set for retirement. But I would also help them in the future if they need any assistance with expenses.

Emergency funds: 300k cash in 0.01% checking/savings account! (Can’t convince them to put more in investments, online savings or CD!!…)
Debt: None. Mortgage paid off.
Tax Filing Status: Married Filing Jointly
Tax Rate: 12% Federal, 6.5% State
Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: Not sure. Need help with this.

Current retirement assets

Taxable
$120k to invest now, not including the emergency fund.
$20,000 Total Stock Market Index Fund (VTSAX), ER: 0.04%

Roth IRA at Vanguard
$7,000 Target Retirement 2025 Fund (VTTVX), ER: 0.14%

Traditional IRA at Vanguard
$70,000 Target Retirement 2025 Fund (VTTVX), ER: 0.14%
$10,000 Total Bond Market Index Fund (VBTLX), ER: 0.05%

Questions:
1. Should they convert all their tIRA to Roth IRA now? In case the market goes down for a long time, they won’t be forced to take RMDs and just let it compound.
2. Is it better to switch the VTTVX in the IRA accounts to VBTLX and hold VTSAX in the taxable account?
3. Which funds should that put with the 120k in the taxable account?
4. Is it wise to automatically reinvest the dividends in the taxable account?
5. If there is anything to change, what would you change?

Thanks in advance!!

bloom2708
Posts: 4909
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Help with retirement portfolio

Post by bloom2708 » Mon Aug 06, 2018 8:05 pm

Hello,

I'll take a stab at your questions.

Questions:
1. Should they convert all their tIRA to Roth IRA now? In case the market goes down for a long time, they won’t be forced to take RMDs and just let it compound.

Maybe to the top of the 12% bracket? What will their income look like when both are on SS? SS + RMD is where they might move up a bracket. The IRA balance is not so big that a huge RMD is lurking. I might be ok with just staying the course and seeing where the income tops out at.

2. Is it better to switch the VTTVX in the IRA accounts to VBTLX and hold VTSAX in the taxable account?

Typically I would say bonds in Traditional IRA. They have the space to do it. In the 12% bracket, they might be ok with the cash and a mix of stocks/bonds in taxable

3. Which funds should that put with the 120k in the taxable account?

A mix of Total US, Total International (20% to give them international exposure) and Total US Bond index. No need to get more complicated. They could use LifeStrategy Conservative Growth (40/60) or LifeStrategy Moderate Growth (60/40). Those are 4 in one funds.

4. Is it wise to automatically reinvest the dividends in the taxable account?

I think it best to send taxable dividends/interest to the settlement account. Send to checking or re-buy in larger lots. You end up with less small tax lots to tinker with by doing this. It is just a setting on the account/accounts.

5. If there is anything to change, what would you change?

With the amount saved, I might think about 50-50 as a good landing spot. Will combined SS cover most of their expenses? I would hate to see a big drop here in the next 2-5 years and see the account values plummet.

Adding LifeStrategy Conservative Growth (40/60) would get them closer to that 50-50 split. My parents are low 70s and I have them at 40/60. They are comfortable there and feel like they are still "in the stock market" with a bit less downside (and upside too).


Tough questions. I hope others chime in. I don't see huge RMDs being an issue. Keep the cash they feel secure with. Invest the rest with the 3 fund or LifeStrategy (or mix) that matches how much stock risk they can take.
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

ForTheFuture
Posts: 5
Joined: Sat Aug 20, 2016 7:31 pm

Re: Help with retirement portfolio

Post by ForTheFuture » Tue Aug 07, 2018 1:30 pm

bloom2708 wrote:
Mon Aug 06, 2018 8:05 pm
Hello,

I'll take a stab at your questions.

Questions:
1. Should they convert all their tIRA to Roth IRA now? In case the market goes down for a long time, they won’t be forced to take RMDs and just let it compound.

Maybe to the top of the 12% bracket? What will their income look like when both are on SS? SS + RMD is where they might move up a bracket. The IRA balance is not so big that a huge RMD is lurking. I might be ok with just staying the course and seeing where the income tops out at.

2. Is it better to switch the VTTVX in the IRA accounts to VBTLX and hold VTSAX in the taxable account?

Typically I would say bonds in Traditional IRA. They have the space to do it. In the 12% bracket, they might be ok with the cash and a mix of stocks/bonds in taxable

3. Which funds should that put with the 120k in the taxable account?

A mix of Total US, Total International (20% to give them international exposure) and Total US Bond index. No need to get more complicated. They could use LifeStrategy Conservative Growth (40/60) or LifeStrategy Moderate Growth (60/40). Those are 4 in one funds.

4. Is it wise to automatically reinvest the dividends in the taxable account?

I think it best to send taxable dividends/interest to the settlement account. Send to checking or re-buy in larger lots. You end up with less small tax lots to tinker with by doing this. It is just a setting on the account/accounts.

5. If there is anything to change, what would you change?

With the amount saved, I might think about 50-50 as a good landing spot. Will combined SS cover most of their expenses? I would hate to see a big drop here in the next 2-5 years and see the account values plummet.

Adding LifeStrategy Conservative Growth (40/60) would get them closer to that 50-50 split. My parents are low 70s and I have them at 40/60. They are comfortable there and feel like they are still "in the stock market" with a bit less downside (and upside too).


Tough questions. I hope others chime in. I don't see huge RMDs being an issue. Keep the cash they feel secure with. Invest the rest with the 3 fund or LifeStrategy (or mix) that matches how much stock risk they can take.
Thanks for the response! Their combined SS should be around $55,000 annually and it should cover most of their expenses.

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Peter Foley
Posts: 4588
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Help with retirement portfolio

Post by Peter Foley » Tue Aug 07, 2018 3:00 pm

bloom provided a very complete answer, much along the lines of my humble opinion.

A couple additional thoughts: Will Roth conversions cause more of your father's SS benefits to be taxed? It could be that with the right mix of income that some small conversions would not cause taxation at a higher marginal tax rate (12% + 85% of SS benefits being taxed = a higher than 12% tax rate.

RMD's start at a little less than 4% so you are likely talking about an additional $4000 in income. With their income needs that will not bump them into a higher tax bracket. I personally think it is a good idea to hold some funds in a tax deferred account. If they had a year with high medical expenses those fund could likely be tapped tax free. So in short, I would look at converting modest amounts, certainly not more than half.

I would use total bond in the IRA and total stock market with a little international in taxable. I would use total stock market in the Roth. (Make adjustments to fit their desired AA.)

I agree that in retirement one should not reinvest dividends in a taxable account. Use that as tax free income to spend in their tax bracket. Ideally you want all the taxable account to be eligible for long term capital gains at no tax.

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