Advice for "Little Old Lady" revised

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JLNichol
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Advice for "Little Old Lady" revised

Post by JLNichol » Mon Dec 24, 2018 3:36 pm

I am an unsophisticated investor age 78 with total assets of $75,000 invested in Vanguard funds as noted below. My monthly income is $900 SS
plus whatever dividends these funds yield. I have $2000 cash-on-hand and live in Pennsylvania. I am frightened by what I am reading about the financial markets. This is "all the money in the world," and what I have to see me through the remainder of my life.
What adjustments, if any, should I make to my current asset allocations?
.......................................................... Shares........ Cost.....Total G/L.....Market Value
VBTLX.....Vanguard Bond Index Fd Inc........... 1,565........$16,792.....(-2.94%).....$16,298
VDAIX......Vanguard Specialized Ptfl...............218........ 7,009.....(17.97%)..... 8,269
VGTSX......Vanguard Total Intl Stock...............393........ 6,551.....(-11.00%)..... 5,830
VTI.............Vanguard Total Stock Market Etf.....20........ 2,204.....(8.58%)...... 2,394
VTIBX........Vanguard Charlotte Fds................519........ 5,332..... (5.31%).......5,615
VTSMX......Vanguard Index Trust....................421........ 20,009.....(25.81%)..... 25,173
VWELX......Vanguard Wellington Fd Inc..............121........ 3,835.....(15.41%)..... .4,426
VWINX.....Vanguard Wellesley Income................171........ 3,893.....(6.54%) ..... .4,148

Thank you.
Last edited by JLNichol on Mon Dec 24, 2018 5:01 pm, edited 1 time in total.

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David Jay
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Re: Advice for "Little Old Lady"

Post by David Jay » Mon Dec 24, 2018 3:47 pm

Welcome to the forum!

If you give us the dollar value of each fund, we can better comment. Asset allocation is typically done by percentage of dollars in each fund.

(You can edit your first post by using the “pencil” icon in the upper right hand corner of your original post)
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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Re: Advice for "Little Old Lady" revised

Post by David Jay » Mon Dec 24, 2018 6:38 pm

I ran your numbers - you have a very “vanilla” portfolio allocation, it is about 60% stocks and about 40% bonds.

One “upside” to your income is that your bond fund dividends are continuing to go up as interest rates increase. The very low interest rates over the last 10 years has really been hard on retirees.

Regarding your fears for the markets, don’t take any action. One of the biggest mistakes investors can make is selling stocks AFTER stocks have dropped, permanently locking in the loss. You need to ride it out at this time. This is not to say that a more income-focused portfolio may make sense going forward, but this is not the time to make changes, this is the time to “stay the course”.

One observation: three of your funds can be upgraded to Admiral class - that will lower your costs a little bit with no other impact. Those upgradable funds are VDAIX, VGTSX and VTSMX. Are you holding these funds in a Vanguard account or with another broker? If you are with Vanguard, I am surprised that your VTSMX was not automatically upgraded some time ago.
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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JLNichol
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Re: Advice for "Little Old Lady" revised

Post by JLNichol » Mon Dec 24, 2018 7:37 pm

Thank you very much for taking the time to respond to my request, especially on Christmas Eve
You certainly have made me feel a bit more secure.
To answer your question: my funds are with a broker. If I read you correctly, I should perhaps transfer to Vanguard directly?

I hope you have good holidays. You've certainly done your good deed.

JLN

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JLNichol
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Re: Advice for "Little Old Lady" revised

Post by JLNichol » Mon Dec 24, 2018 7:40 pm

One more question: Is that a Boeing Stearman I see??

ReadyOrNot
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Re: Advice for "Little Old Lady" revised

Post by ReadyOrNot » Mon Dec 24, 2018 8:07 pm

I don't want to make any offensive assumptions, but at that level of income, you should be eligible for many forms of government assistance. (And depending on the amount of dividends, you could be near the income borderline for some.) Many do not have limitations on assets, some do. You probably are aware of this already, but in case you are not, you should look into it. There should be senior service organizations which will be happy to give more information.

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CAsage
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Re: Advice for "Little Old Lady" revised

Post by CAsage » Mon Dec 24, 2018 8:11 pm

One should always check the total fees/expenses of what you are invested in. If your broker charges you any more just to hold those funds, then, yes, you should transfer. You can check Vanguards expense ratios online. You might separately consider just a simple three-fund portfolio of Total Bond, Total Stock and Total International - less to juggle as you withdraw funds over time and run down the balance.
Salvia Clevelandii "Winifred Gilman" my favorite. YMMV; not a professional advisor.

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JLNichol
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Re: Advice for "Little Old Lady" revised

Post by JLNichol » Mon Dec 24, 2018 8:21 pm

Thank you. I'll certainly consider the "three fund" approach.

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dratkinson
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Re: Advice for "Little Old Lady" revised

Post by dratkinson » Mon Dec 24, 2018 8:27 pm

It would help to have a little more information.
--What are your total annual living expenses?
--Do you predict any changes to your annual livings expenses?
--Do you own your home?
--Where are the funds located? In a taxable account? Or in a tax-advantaged account like an IRA?
--Are you paying any fees that you could otherwise avoid? Example: bill payment fees, monthly banking fees, brokerage fees, financial advisor fees,...?



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d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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JLNichol
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Re: Advice for "Little Old Lady" revised

Post by JLNichol » Mon Dec 24, 2018 8:49 pm

Thank you for your response.
I own my house and there is no mortgage. Given my limited income, there is little mutabily in my expenditures. Non-discretionary and taxes total about $10,000. Those expenses are pared to the bone -- no banking fees, no credit cards, a granny flip-phone, no cable tv. I may be a novice in the stock market, but I have signifcant experience handling financial matters.
I own my car outright, but it is becoming increasingly "needy." I see no obvious future changes in expenses, but there's always the need for home repairs and, given my age and health history, for paid daily living assistance.

Olemiss540
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Re: Advice for "Little Old Lady" revised

Post by Olemiss540 » Mon Dec 24, 2018 9:29 pm

What's the value of your house?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

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JLNichol
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Re: Advice for "Little Old Lady" revised

Post by JLNichol » Mon Dec 24, 2018 9:38 pm

Current market value of house is <150k

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David Jay
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Re: Advice for "Little Old Lady" revised

Post by David Jay » Mon Dec 24, 2018 9:47 pm

JLNichol wrote:
Mon Dec 24, 2018 7:37 pm
To answer your question: my funds are with a broker. If I read you correctly, I should perhaps transfer to Vanguard directly?
Yes, you could transfer your assets to Vanguard. Your broker is almost certainly charging you an annual fee that absorbs a significant portion of your dividends every year.

Since all your funds are Vanguard funds, they can all transfer without any tax implications. This is called an “in kind” transfer.

[edit] if you want to explore a transfer, talk with Vanguard. The rule for transfers is to always work with the firm that is receiving the transfer, they have the incentive to make things go smoothly.
Last edited by David Jay on Mon Dec 24, 2018 10:15 pm, edited 1 time in total.
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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Re: Advice for "Little Old Lady" revised

Post by David Jay » Mon Dec 24, 2018 9:48 pm

JLNichol wrote:
Mon Dec 24, 2018 8:21 pm
Thank you. I'll certainly consider the "three fund" approach.
Be careful and make sure you understand the tax implications before you change funds.
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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Re: Advice for "Little Old Lady" revised

Post by David Jay » Mon Dec 24, 2018 9:58 pm

JLNichol wrote:
Mon Dec 24, 2018 7:40 pm
One more question: Is that a Boeing Stearman I see??
Very similar appearance - they come from the same era. The aircraft in the avatar is a Naval Aircraft Factory N3N.

Comparison of the two aircraft here: https://notastearman.wordpress.com/about-2/
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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onthecusp
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Re: Advice for "Little Old Lady" revised

Post by onthecusp » Mon Dec 24, 2018 10:35 pm

JLNichol wrote:
Mon Dec 24, 2018 3:36 pm
My monthly income is $900 SS plus whatever dividends these funds yield.
Since you are currently limiting yourself to dividends you are not spending very much from your savings. Since the current troubles seem to be more with the "market" than with the "economy" your dividend income should be pretty stable, letting you work this out without making any sudden changes.

Over the next few weeks or months, your schedule, not ours, you should consider the advice above. Ask specific questions and this site will help you through:
1. Deciding if your broker fees should be avoided by moving to Vanguard direct.
(Probably, but lets get the facts.)

2. If transferring, how to transfer the funds to avoid additional taxes.
(Not hard for some people here, once we know the facts regarding your current broker.)

3. Deciding if a change to the 3 fund method is advisable.
(Likely, but your current allocation is not bad. It is a little complicated in the number of funds but spending only dividends is a very simple withdrawal method. The 3 fund method comes with a plan for steady withdrawals, increasing with inflation. I don't know if that will be more or less than the dividends your funds currently provide.)

Good luck and have a Merry Christmas. Please do not let the current market turmoil spoil it because your allocation is leaving you in decent shape. Maybe in a happy new year we can help you optimize it and improve your confidence in the future. :happy

finite_difference
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Re: Advice for "Little Old Lady" revised

Post by finite_difference » Mon Dec 24, 2018 10:36 pm

David Jay wrote:
Mon Dec 24, 2018 9:48 pm
JLNichol wrote:
Mon Dec 24, 2018 8:21 pm
Thank you. I'll certainly consider the "three fund" approach.
Be careful and make sure you understand the tax implications before you change funds.
Is the money in a 401k, IRA, or a taxable brokerage account?

If the money is in a taxable brother account, then definitely spend some time understanding the tax implications of moving from this portfolio to a 3-fund portfolio.

The good news is that you have expenses under control so that you can live off of SS.

Thus you only need your investments for emergencies. $75k at an asset allocation of 60/40 should allow you to withdraw safely about $3k/year (4%) if not a little more, to give you some idea. That’s assuming you have it invested at a low-cost broker like Vanguard and not a high-cost broker which can charge 1% or more. If a broker charges you 1% then you’d only be able to withdraw 3% safely compared to 4% otherwise.

So before you make any changes, I’d recommend posting your ideas here as a quick double-check.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

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Peter Foley
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Re: Advice for "Little Old Lady" revised

Post by Peter Foley » Tue Dec 25, 2018 12:09 am

At your level of assets and income you should be moving to a simplified portfolio. You own a number of funds that hold the same stocks (this is called overlap). Getting down to 3-5 funds should be doable with incurring taxation of your social security benefits nor long term capital gains.

For someone who needs dividend income Wellesley and Wellington are good choices. I would make that a starting point. I would be tempted to round out the portfolio with the Vanguard Bond Index fund and Vanguard Index Trust. I admit I'm not familiar with all the funds you hold. Others may chime in with more knowledge of the other funds.

As an aside. If I were starting from scratch I would hold Wellesley, Vanguard Total Stock Market, I-bonds, and a CD ladder. I don't think that is practical based on your current holdings. You have very limited room (aka ability) to take risk.

Bfwolf
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Re: Advice for "Little Old Lady" revised

Post by Bfwolf » Tue Dec 25, 2018 1:19 am

The great news here is that you have spending under control so are not at dire risk of going broke.

The good news is that your broker/advisor has put you in pretty reasonable, low cost funds, better than what 95% of advisors would do probably. It could be simpler and we have no idea what you're being charged, but at least the asset allocation and fund choice is decent.

Do you know if this is a regular taxable account or if this is an IRA? I'm suspecting the former.

Chuffly
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Re: Advice for "Little Old Lady" revised

Post by Chuffly » Tue Dec 25, 2018 1:25 am

If you'd like to see your portfolio, I plugged it into Portfolio Visualizer for you. One note - I swapped out VTIBX for BWX since the latter had more data to backtest.

All in all, I think it's a pretty reasonable portfolio, especially for someone who claims to be a novice at this stuff. Well done. My comments are the following:
  • You essentially have the equivalent of a 60/40 portfolio. That isn't unreasonable for someone your age, although it may be a little more aggressive than the Boglehead peers in your age group might go for.
  • Following from the last point, your specific allocation had a 30% drawdown during the Great Financial Crisis. You may want to make sure you are comfortable with that large of a drawdown, should one happen in the next decade or so.
  • VTI and VTSMX are essentially the same fund, so you may want to swap one for the other.
  • I wouldn't necessarily be in a rush to change up your asset allocation, although see points #1 and #2.
  • As the other folks said, if you are just taking the dividends without selling shares, you shouldn't really need to worry about the recent turbulence.
  • Even with the recent turbulence, you should be able to withdraw 4% of your portfolio (combining dividends plus sales of shares) every year without any real concern. At your age, you could probably get a little more aggressive with withdrawals, but we'd probably need a little more info before recommending that.
As others have mentioned, it might be helpful to know what Broker you are using before you switch funds to Vanguard. Not every broker charges high fees, but a number of them do. That said, if you are going to strictly use Vanguard funds, Vanguards is likely going to be the cheapest place to do that.

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Re: Advice for "Little Old Lady" revised

Post by dratkinson » Wed Dec 26, 2018 5:17 am

BH Advice for "Little Old Lady" revised


A couple of ideas come to mind.



1. Reverse mortgage.

Since your home is paid for, you should have the option to get a reverse mortgage.

My neighbor used a reverse mortgage, and took it as monthly payments to reduce the withdrawal pressure on her other investments.

Recall she had to pay for a current appraisal, after which I believe she could withdraw 2/3 (?) of the appraised value. Believe a reverse mortgage may also require a hefty fee. Both were taken from the reverse mortgage.

Since your home is worth ~$150K, and assuming similar conditions apply for you, I'm guessing you might be able to withdraw ~$100K by reverse mortgage from your home.



Recommended book. I recall reading a section in the book How to Make Your Money Last, by Jane Bryant Quinn, that talked about reverse mortgages and how to get one.

The book is quite thick and covers many options to help us pay for our retirement. (Most sections did not apply to me so I only skimmed those sections, but read in depth the sections that did.)


Recommended book. Forum members have also written a book, The Boglehead's Guide to Retirement Planning, but I have not yet read it. It may provide you with other ideas to extend your money, or provide an alternate understanding of your options.


Get the books from your local library or through inter-library loan.



2. SPIA (single-premium immediate annuity).

I hesitate to mention this option because I know nothing about it. But I've heard forum member speak of using an SPIA to get a guaranteed income stream for the remainder of their life and so reduce the withdrawal pressure on their other investments. I'm certain both books above discuss it. Where would you get the money to buy an SPIA? From (part of) your reverse mortgage.

But I don't know which is the better option: (1) to use a reverse mortgage to reduce the monthly withdrawals from your investments, or (2) to buy an SPIA to do the same thing.

Seem to recall the SPIA may be preferred if we believe we WILL run out of money (will exhaust investments + reverse mortgage), and the reverse mortgage may be preferred if we believe we WILL NOT run out of money.

Before deciding on either option, read both books, search the forum, and ask specific questions of knowledgeable forum members.



Heirs. Do you want to plan for heirs? Recall:
--Any residual home value, after paying off a reverse mortgage, can go to our heirs.
--But any residual SPIA value remains with the insurance company that sold it to you.



Code: Select all

                                               Cost   Market  G/L  Stocks  Bonds
VBTLX  Total Bond Market Index, Adm            16792  16298  -494          16298
VDAIX  Dividend Appreciation Index, Inv         7009   8269  1260    8269	
VGTSX  Total International Stock Index, Inv     6551   5830  -721    5830	
VTI    Total Stock Market ETF                   2204   2394   190    2394	
VTIBX  Total International Bond Index, Inv      5332   5615   283           5615
VTSMX  Total Stock Market Index, Inv           20009  25173  5164   25173	
VWELX  Wellington Income*                       3835   4426   591    2213   2213
VWINX  Wellesley Income*                        3893   4148   255    2074   2074
       Totals                                                6528   45953  26200
                                                                      64%    36%
* I assumed your financial advisor was trying for a 50/50 split with Wellington and 
  Wellesley---recall one is 60/40, the other 40/60---so assumed 50/50 stock/bond split.
But for now we are still trying to understand your situation: where your money is---at Vanguard or somewhere else, in a taxable account or IRA, what type of IRA, and which funds are in each account.
--Having VBTLX, an Admiral share class fund, suggests this fund is at Vanguard.
--Having the Investor class funds suggests they are not at Vanguard, since VTSMX should have been upgraded by Vanguard to Admiral share class (VTSAX), but can't be bought outside of Vanguard.
--If the money is in an IRA, it's tax-free to make changes, so we don't need to worry about G/L.
--If the money is in a taxable account, then we must consider G/L before making changes.
--If you have a traditional IRA, then you must make annual RMDs (required minimum distributions). Not an issue since you probably need the money for living expenses. So only real issue is to ensure RMD is made---instead of withdrawing from a taxable account---to avoid IRS penalty for failing to make RMD.
--If you have a Roth IRA, then RMDs are not required.
--What cost basis method are you using in your taxable account(s)? In your IRA account(s)? (“Average cost basis” would be the easier to use and supported by brokerages---one less thing to worry about---but is that the way you set up your accounts?)
--....

Are there are any costs* (loads, fees, taxes) which can be eliminated by moving your money elsewhere? (Taxes on your investments would seem to be the smaller issue.)

So there is still much we don't know about your situation that should be considered before offering advice.



* Disclosure. While house sitting for a neighbor and authorized to open mail and call someone when a bill was received, I discovered her financial advisor was churning her account to earn a $20 fee on every sell and every buy transaction. In one month he would sell one fund and buy two funds ($60). Then next month he would sell two funds and buy one fund ($60). Since the funds were indistinguishable bond funds, the churning was obvious to me, but not to her, until I pointed it out.

She moved her money to Fidelity to stop the churning.
Last edited by dratkinson on Wed Dec 26, 2018 7:55 pm, edited 3 times in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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Peter Foley
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Re: Advice for "Little Old Lady" revised

Post by Peter Foley » Wed Dec 26, 2018 4:20 pm

dratkinson wrote:
Recommended book. I recall reading a section in the book How to Make Your Money Last, by Jane Bryant Quinn, that talked about reverse mortgages and how to get one.

The book is quite thick and covers many options to help us pay for our retirement. (Most sections did not apply to me so I only skimmed those sections, but read in depth the sections that did.)
I would agree. The book is very true to its title and its primary audience, in my opinion, is for those in situations similar to the one described. Many options are discussed.

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