Proposed Retirement Portfolio Critique Solicited

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amiller7x7
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Proposed Retirement Portfolio Critique Solicited

Post by amiller7x7 » Fri Sep 21, 2018 11:53 am

Title: Proposed Retirement Portfolio Critique Solicited



The following portfolio is being proposed by an investment advisory group for the father of a close friend of our family.  This portfolio will be replacing a very out-of-date and disjointed eclectic collection of investments which he accumulated over many years.   We are looking for the collective Boglehead wisdom in evaluating this proposed portfolio in light of the investor's age (83) and medical expense issues as described below.  Thank you in advance for your inputs.  I plan to share this "crowd sourced" set of insights with our friend who is helping him organize his finances and his planning going forward.



Emergency Funds - Have 6 months of expenses

Debt: No outstanding debts

Condominium - no Debt - valued at an additional 60% of total portfolio described below although it is NOT included in the numbers below

Tax Filing Status - Married Filing Jointly

Tax Rate: 11% Federal

Income:  Social Security - Him $1900/monthly    Her $900/monthly

State of Residence: Washington

His Age: 83  Her Age:80



Desired Asset Allocation:  This is what is being recommended by the investment advisers - 40% Equity - 60% Fixed Income

Desired International allocation of stocks: This is what is being recommended by the investment advisers - 61.7% US & 38.3% Foreign

Portfolio is in the high 6 figures



A key issue is that his wife has just recently entered long term care for medical reasons, will not return home and could be in care potentially for a long time.  The recurring costs of this care are still unfolding but they drive a need by him to value income more highly than just general long term investment asset appreciation.



(X% Portfolio represents the % of the total portfolio as requested.  ER represents the Expense Ratio for the fund.  All funds listed appear to be mutual funds and not ETF's as far as I can tell). 



Her assets are small and have already been earmarked for near-term medical care costs so I have not included them in the financial picture below. 



Taxable Account  


US Equities

SEI Tax-Managed Large Cap Fund (STLYX)  - 4.6% Portfolio - ER=0.66%

SEI Tax-Managed Small/Mid Cap Fund (STMPX)  - 2.0% Portfolio - ER=0.9%

SEI Tax-Managed Managed Volatility Fund (STVYX) - 10.5% Portfolio - ER=0.75%



Foreign Equities

SEI World Equity ex-US Fund (WEUSX)  - 2.0% Portfolio  - ER=0.32%

SEI Tax-Managed International Managed Volatility Fund  (SIMYX)  - 7.2% Portfolio  - ER=0.86%



Fixed Income

SEI Short Duration Municipal Bond (SHYMX) - 15.7% Portfolio  - ER=0.38%

SEI Intermediate Term Municipal Bond (SINYX) - 15.0% Portfolio  - ER=0.38%

SEI Tax Advantaged Income Fund (STAYX) - 6.5% Portfolio  - ER=0.61%

SEI Emerging Markets Debt Fund (SEDAX) - 2.0% Portfolio  - ER=0.43%





His IRA


US Equities

SEI Large Cap Fund (SLYCX) - 2.8% Portfolio  - ER=0.20%

SEI US Managed Volatility Fund (SVYAX) - 4.5% Portfolio  - ER=0.24%



Foreign Equities

SEI Global Managed Volatility Fund (SGMAX) - 5.9% Portfolio  - ER=0.25%



Fixed Income

SEI Ultra Short Duration Bond Fund (SUSAX) - 1.7% Portfolio  - ER=0.12%

SEI Limited Duration Bond Fund (SLDBX) - 4.8% Portfolio  - ER=0.11%

SEI Opportunistic Income Fund (ENIAX) - 1% Portfolio  - ER=0.26%

SEI Core Fixed Income Fund (SCOAX)  - 5.5% Portfolio  - ER=0.12%

SEI Real Return Fund (RRPAX) - 1.0% Portfolio  - ER=0.08%

SEI Multi-Asset Real Return Fund (SEIAX) - 2.8% Portfolio  - ER=0.53%

SEI High Yield Bond Fund (SGYAX) - 3.1% Portfolio  - ER=0.30%

SEI Emerging Markets Debt Fund (SEDAX) - 1.4% Portfolio  - ER=0.43%



Contributions: None at this time



Questions:

1) We would appreciate any guidance on how the Tax-Managed accounts "work" - ie what is it they do to be "tax-managed"?  And then how appropriate are these kind of holding for someone in his relatively low income tax bracket (11%) and with his need for income.  We have seen Boglehead forum posts asserting the general tax efficiency of ETF's (and indexed mutual funds?) and wanted to understand the extra value created by the tax-managed fund approach versus a tax-efficient fund approach.



2) My friend thought there were a lot of funds for the size of the portfolios.  What would be a good rule of thumb for having a diversified portfolio concerning the number of funds needed for a modest portfolio like this?  Does anyone have a kind of generic suggestion as to what would constitute a similar and perhaps simpler candidate portfolio to meet the likely performance of the above suggested portfolio



3)  What would be a likely safe withdrawal rate for this kind of portfolio if you wanted it to notionally last 17 years?



4) What are your thoughts about an annuity for a person in his situation? 





Thank you in advance for your inputs!  This is a very trying time for the family and getting the best inputs for their consideration is a key enabler to helping them through the current situation.  Your assistance is much appreciated!!

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David Jay
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Re: Proposed Retirement Portfolio Critique Solicited

Post by David Jay » Fri Sep 21, 2018 12:39 pm

Obviously the advisor is using only high-cost SEI funds. This is likely in addition to the advisors' AUM fee.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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David Jay
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Location: Michigan

Re: Proposed Retirement Portfolio Critique Solicited

Post by David Jay » Fri Sep 21, 2018 1:03 pm

amiller7x7 wrote:
Fri Sep 21, 2018 11:53 am
Questions:

1) We would appreciate any guidance on how the Tax-Managed accounts "work" - ie what is it they do to be "tax-managed"?  And then how appropriate are these kind of holding for someone in his relatively low income tax bracket (11%) and with his need for income. They are not appropriate for someone in the 12% (there is no 11% tax bracket) tax bracket.

2) My friend thought there were a lot of funds for the size of the portfolios.  What would be a good rule of thumb for having a diversified portfolio concerning the number of funds needed for a modest portfolio like this?  Perhaps a half dozen...

Does anyone have a kind of generic suggestion as to what would constitute a similar and perhaps simpler candidate portfolio to meet the likely performance of the above suggested portfolio.
Vanguard LifeStrategy Conservative. One Fund, 40% stock/60% bond. Done. I have included this suggestion for my spouse in my "now that I am gone" letter.

3)  What would be a likely safe withdrawal rate for this kind of portfolio if you wanted it to notionally last 17 years?
In low cost, self managed Vanguard account - perhaps 6%. If the advisor is receiving a 1% AUM fee with these high cost funds, perhaps 4.5%. In a Vanguard PAS account, perhaps 6.7% (PAS fee is 0.3%)

4) What are your thoughts about an annuity for a person in his situation?  An SPIA annuity may make sense. It will have quite a high payout due to the relatively high mortality credits at these ages. NO OTHER TYPE OF ANNUITY SHOULD BE CONSIDERED.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

delamer
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Re: Proposed Retirement Portfolio Critique Solicite

Post by delamer » Fri Sep 21, 2018 1:49 pm

Even if this portfolio was absolutely appropriate in terms of allocation (stocks/bonds) and number of funds, there are many similar funds/ETFs that have much lower ERs that would accomplish the same thing. Vanguard, for example, has similar funds that are available with ERs of 0.1% or less.

That said, there is no reason to hold so many funds in their portfolio. The general rule of thumb is that any holding that makes up 5% or less of a portfolio is too small to have a material impact on the portfolio’s performance.

The wiki has several ideas for lazy portfolios, which are portfolios made up of low cost, index funds. Take a look at some of those options; the components can be weighted to accommodate risk level. For instance, the two fund portfolio could 30% stocks/70% bonds.

https://www.bogleheads.org/wiki/Lazy_portfolios

Index funds are by definition quite tax efficient because they have very low turnover of assets. The Vanguard S&P500 ETF is a large cap index fund with an ER of 0.04%.

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Nestegg_User
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Re: Proposed Retirement Portfolio Critique Solicited

Post by Nestegg_User » Fri Sep 21, 2018 2:13 pm

to be blunt, I’d have to agree with the above posters

The allocation vis-a-vis stock/ bond and domestic versus international is within bounds.... but the er’s are WAY TOO HIGH, and way too many funds especially in bonds where there’s some at 1% of total. a couple of bond funds or use Wellesley or VSCGX (Lifestrategy Conservative Growth, which has 40% equities/60% bond, at a much lower er)

at 83, with spouse under reduced health, he’s clearly a candidate for a SPIA. (other posters can chime in on whether that helps preserve his cash flow wrt long term costs for her ). Obviously, not all would be annuitized but at his age the mortality credits would allow for a very high payout (and likely could be made for single life rather than joint, based on the lower expected lifespan for wife, which then yields even more) { I’d consider SPIA to the bounds of required cash flow and invest the rest as above using, say VSCGX }

Dottie57
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Re: Proposed Retirement Portfolio Critique Solicited

Post by Dottie57 » Fri Sep 21, 2018 2:34 pm

Too complicated. ER is too high. SPIA is a great idea. ( immediateannuities.com )

I also agree with using Lifestrategy funds which have stocks and bonds. . There are four with different allocations ( 80/20, 60/40, 40/60, 20/80).

Vanguard link. https://investor.vanguard.com/mutual-fu ... estrategy/#/

BoglePablo
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Re: Proposed Retirement Portfolio Critique Solicited

Post by BoglePablo » Fri Sep 21, 2018 11:03 pm

1) I believe a "tax-managed" fund is intended to minimize capital gains distributions (there may be multiple techniques, eg minimizing the sale of appreciated stocks, harvesting losses against gains, etc). I do not consider the higher-expense ratio for such active mgt as worthwhile

2) I concur the proposed funds are too complex; instead, consider a simpler 3- or 4-fund composition of the same allocation, and achieve the desired income needs with total return, eg from both selling shares as well as yield

Expounding on the concerns already raised: why are all these suggested (high ER) funds SEI? Is the advisory group a fiduciary, serving the constituent's best interest? Are these loaded funds? Why isn't the constituent being presented the same asset allocation/strategy using a simpler set of low-cost, no-load index funds? Something to consider

I wish your friend the best outcome; kudos for helping with research

"Hope you make a lot of nice friends out there
Just remember there's a lot of bad everywhere"

jclear
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Re: Proposed Retirement Portfolio Critique Solicited

Post by jclear » Sat Sep 22, 2018 1:40 am

OP doesn’t say anything about the cost of living, but mentioning wanting highest reasonable withdrawal rate implies that it’s not easy. It’s possible that the ordinary living expenses and LTC could drag the portfolio down by nearly 100k per year. Decade long LTC is not unheard of. Has an elder care attorney been consulted? Moving a significant amount of the assets into a plain SPIA payable to the spouse not in LTC is a distinct possibility. A trust might be useful, and it would help to set up the trust as soon as possible. Maybe the laws in Washington are particularly friendly though.

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