Qualified Account Allocation Guidance

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Senior Miguel
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Joined: Tue Nov 13, 2018 3:42 pm

Qualified Account Allocation Guidance

Post by Senior Miguel » Tue Nov 13, 2018 4:47 pm

My wife and I have (56 and 49) have accumulated qualified accounts (Total $695K) with and employer 401K ($315K), 2 Broker assisted accounts ($330K) and a self directed account ($50K). I have not managed the broker's or our accounts as well as I would have liked. After recently reading Bogle's Common Sense Investing I am convinced that we need to do things differently. I recently moved the self directed $ into Vanguard S&P 500 index fund. The 401K is comprised of about 10 different mutual funds (90/10 equity/bond mix). The 401K has the option to open a brokerage-link account that allows us to invest in most all of the Vanguard funds. The 2 broker assisted accounts we are being charged 1% for what I feel is very poor advice of which I take responsibility for not being more proactive The broker assited accounts are comprised mutual funds-70% / private REITs 20% / Bonds 10%. The private REITs are ones that have limited opportunities to get out of them. We do get offers from outside Investors to sell these REITs at around 60% discounted rates; These REIT investments have not performed very well for 7 years now. We also have $3M of residential real estate with $500K of debt.

It is our plan re-allocate and self manage all of the qualified accounts in using the 3 or 4 fund portfolio using low cost index funds. We do not anticipate needing this money for another 15 years.

Questions we have:
1) Our real estate investments are a substantial portion of our investments and not sure how to factor this into asset allocation for our equity/bond ratios. What would be a good recommended asset allocation?
2)We want to keep it simple; 3 or 4 fund portfolio - what would be good recommended funds?
3) Private REITS have performed poorly for 7 years now (declining dividends and declining share value). Does it make sense to cut our losses and sell at a discount?

We appreciate any guidance and thoughts.

Thank you in advance for your help

Thank you. I will try and reformat and repost as you suggested.
Last edited by Senior Miguel on Sat Nov 17, 2018 6:30 am, edited 1 time in total.

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alec
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Joined: Fri Mar 02, 2007 2:15 pm

Re: Qualified Account Allocation Guidance

Post by alec » Thu Nov 15, 2018 8:46 pm

I have a few responses, but bumping for more interested.
1) Our real estate investments are a substantial portion of our investments and not sure how to factor this into asset allocation for our equity/bond ratios. What would be a good recommended asset allocation?
2)We want to keep it simple; 3 or 4 fund portfolio - what would be good recommended funds?
Here's a good link with a format to ask portfolio questions: Asking Portfolio Questions. I think if you use that format you'll get a whole lot more responses, especially if you have both tax deferred and tax exempt money.
3) Private REITS have performed poorly for 7 years now (declining dividends and declining share value). Does it make sense to cut our losses and sell at a discount?
I'd cut the losses and move on.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

Senior Miguel
Posts: 7
Joined: Tue Nov 13, 2018 3:42 pm

Re: Qualified Account Allocation Guidance

Post by Senior Miguel » Sat Nov 17, 2018 6:31 am

Thank you. I will try and reformat and repost as you suggested.

Senior Miguel
Posts: 7
Joined: Tue Nov 13, 2018 3:42 pm

Re: Qualified Account Allocation Guidance

Post by Senior Miguel » Sat Nov 17, 2018 3:15 pm

We have 12 months of emergency funds

The only personal debt is 33% debt on personal home

Investment debt - 20% debt on $3M of residential rental income property

Married filing jointly

Tax Rate: Fed 25% State 3.2%

Indiana

Portfolio Size: All of if is Qualified
76.1% Stocks / 13.9% Bonds / 8.4% Private REITS

Breakdown
401K $315K 91% Stocks / 9% Bonds
IRA $323K 62% Stocks / 20% Bonds / 18% Private REITs
Roth IRA $57K 75% Stocks / 6% Bonds / 19% Private REITS

Contribute 12% to company 401K where employer matches 2% of annual income
Contribute 6.5k to Roth IRA
Contribute 5.5K to spouse IRA

Employer 401K is Fidelity. I recently opened up a brokerage link with Fidelity which allows me to move all of existing 401k balances to. From here I can buy all of the market which includes the Vanguard suite of products.

We do not intend to need to draw on the portfolio for another 14 years

The residential rental real estate generates 6 figure income annually

Questions:
1)We want to simplify our portfolio and are looking for a 3 or 4 fund portfolio made up of index funds. Looking for a recommended Asset Allocation and Index Fund Recommendaiton
2) How do we factor in the rental real estate into the picture for asset allocation? As a bond? ....?
3) the Private REITs that we own have not been good investments over the past 7 years. Should we liquidate at a 60% discount and cut our losses?

Please advise.

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alec
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Re: Qualified Account Allocation Guidance

Post by alec » Sun Nov 18, 2018 9:30 pm

Senior Miguel wrote:
Sat Nov 17, 2018 3:15 pm

Questions:
1)We want to simplify our portfolio and are looking for a 3 or 4 fund portfolio made up of index funds. Looking for a recommended Asset Allocation and Index Fund Recommendaition.
see question #2 first. The allocation of the investment portfolio is a later step.
2) How do we factor in the rental real estate into the picture for asset allocation? As a bond? ....?
I think what you should do is to:

1) how much do you need to spend in retirement - usually about the same as you spend in the years leading up to retirement, minus retirement savings, SS taxes, etc.
2) from that, minus the amount you get (after all expenses) from the rental real estate and (potentially) social security and pensions.
3) the remaining amount is the amount you will need to withdraw from the investment portfolio (discussed below).

After you've done this [quite simple] math, now you know you much the investment portfolio will need to generate. For example, let's say that you need $40,000 yearly from the investment portfolio when you stop working. There are generally a few strategies put forth for this:

1. Diversification strategy - Keep between a 40% stock/60% bonds to 60% stocks/40% bonds portfolio, and withdraw between 3-5% per year. This generally entails using a total US stock market fund, a total Int'l stock market fund, and a total bond market index fund (say 30%, 24%, and 50% respectively). There is no guarantee that you'll be able to continue to be able to withdraw the same inflation adjusted amount over your remaining lifetime; however, back testing has shown (in the past) that this may work. This is essentially a diversification strategy where the retiree relies on the fact that stocks and bonds don't go up and down together to sustain the portfolio while making withdrawals. Hence, all the withdrawal rate backtests data mining "studies". :wink:

If you choose to go this route, the asset allocation is very simple. For example, let's say that you decided on a 50/50 stock/bond allocation, and 60% US stocks and 40% int'l stocks. Great! Just go with:

30% - total US stock fund <-- Fidelity should have this.
24% - total international stock fund <-- Fidelity should have this.
50% - total bond fund <-- Fidelity should have this.

... And you're done. 5 minutes. Check back once a year. There have been some recent conversations about Fidelity having zero expense ratio index funds. FIND THESE! Don't need Vanguard index funds in tax-deferred accounts here.

2. Liability matching - Rather than relying on diversification, this tries (and I stress tries) to guarantee a minimum level of retirement consumption/income through liability matching strategies like (1) buying a life annuity (i.e. a personal pension), or (2) using TIPS. This requires a bit more math because you have to be able to do simple Present Value functions in excel, etc. But, for those of us that can do basic algebra, this is more precise and less "hand-wavy". Anyhoo, the change in portfolio (at your age) is basically replacing the total bond market with TIPS. Here's an example:

30% - total US stock fund <-- Fidelity should have this.
24% - total international stock fund <-- Fidelity should have this.
50% - inflation protected bonds **

** because you have access to a brokerage account, you can buy either (1) very cheap TIPS funds, (2) or individual TIPS bonds for cheap or no cost.

An alternative to this (not really hard math) that some have come to realize is to just delay, for as long as possible, their Social Security. This basically converts part of their portfolio into an inflation adjusted pension. :idea:
3) the Private REITs that we own have not been good investments over the past 7 years. Should we liquidate at a 60% discount and cut our losses?
Given the history of these, I'd cut your losses and sell them. Because they're in your tax-deferred accounts, you won't be able to claim capital losses, unfortunately. Sorry.

-Alec
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

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alec
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Re: Qualified Account Allocation Guidance

Post by alec » Sun Nov 18, 2018 9:33 pm

Senior Miguel,

As you can see, the mutual funds to use is the very last step in this whole process, after you decide what % of stocks to use and what % of bonds to use. Which is why the Bogleheads generally recommend using the cheapest versions of funds as possible. This usually means using the index funds.

-Alec
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

Senior Miguel
Posts: 7
Joined: Tue Nov 13, 2018 3:42 pm

Re: Qualified Account Allocation Guidance

Post by Senior Miguel » Tue Nov 20, 2018 7:43 am

Currently we have my W2 income and rental income. We currently live on 45% of that total combined income. The rest we invest in 401k,s, IRA and Roth IRA, and investing in more RE (real estate) and paying down RE mortgages. Getting bargains on RE has been challenging the past few years so we have begun paying down RE mortgages, thus increasing cash flows on RE. The plan we have for now is to have zero debt on RE in the next 4 - 5 years.

The RE currently is more than sufficient to fund our lifestyle today. We do not intend to draw on the qualified accounts until I reach 70. That being said I feel that we do not need to be as conservative since we have a 15 year time horizon, but also want to be a good steward of those investments.

Questions:
1)Is the 60/40 stocks/bonds still a good diversification?
2) would a more aggressive diversification of say 80/20 be okay knowing that there is still a 15 year time horizon? And perhaps change those allocations to a 60/40 in about 7-10 years?
3) Are the Fidelity Total Market Fund and Fidelity Total Bond Fund pretty comprable to the Vanguards?

Thanks for all of your guidance

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alec
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Re: Qualified Account Allocation Guidance

Post by alec » Wed Nov 21, 2018 1:20 pm

Senior Miguel wrote:
Tue Nov 20, 2018 7:43 am

Questions:
1)Is the 60/40 stocks/bonds still a good diversification?
Yes
2) would a more aggressive diversification of say 80/20 be okay knowing that there is still a 15 year time horizon? And perhaps change those allocations to a 60/40 in about 7-10 years?
Given your income needs compared to your RE investments, you're reasoning for 80/20 now seems reasonable to me.
3) Are the Fidelity Total Market Fund and Fidelity Total Bond Fund pretty comprable to the Vanguards?
Yes. Fidelity even has some zero expense ratio index funds. There was a recent discussion about them
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

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