Almost there - portfolio checkup

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Topic Author
tman9999
Posts: 72
Joined: Tue May 20, 2008 1:06 pm

Almost there - portfolio checkup

Post by tman9999 »

I quit working last May, will turn 60 this fall, and my wife is 8 years younger than me, still working. We're hoping she can hang on for another year, and then she'll quit as well. I'm a bit concerned about funding the next 11 years (me=70, she=62), at which point I'll start SS, and we'll decide then whether we need hers. I'm modeling a 4% annual withdrawal rate, with life expectancy of 100 for each of us.

About half of our investable amount is in after-tax stock/bond portfolios and cash which are available to us now to invest however we want; the other half is in retirement accounts (IRA, ROTH, her 401k, small pensions). Most of our portfolio is managed by a robo, with automatic TLH and dividend reinvestment. The robo manages across all our individual portfolios to maintain a target 50-50 AA for us, which we currently very nearly have:

Domestic Stock 37%
Foreign Stock 15%
Bonds 38%
Short-term/ Cash 10%

The robo is designed to select the best price/performance options for each section of our portfolio to maintain desired AA. I am told it is also sensitive to tax-effective placement of the investments.

The Available Now portion of our portfolio is a lot more diversified, and is what we're planning on drawing from for the next 11 years to fund 100% of annual expenses:
Domestic Stock 47%
Foreign Stock 30%
Bonds 6%
Cash (high-yield savings) 17%

These funds and equities comprise around 79% (plus 17% cash for 96% of the total):
SCHE SCHWAB STRATEGIC TR EMERGING MKTS EQUITY ETF
FNDF SCHWAB STRATEGIC TR FUNDAMENTAL INTL LARGE CO INDEX ETF
IVV ISHARES CORE S&P 500 ETF
IJR ISHARES CORE S&P SMALL-CAP E
IT GARTNER (IT)
FXAIX FIDELITY 500 INDEX FUND
SCHF SCHWAB STRATEGIC TR INTL EQUITY ETF
SCHV SCHWAB STRATEGIC TR US LARGE CAP VALUE ETF
IBM IBM
MUB ISHARES NATIONAL MUNI BOND ETF
IEMG ISHARES INC CORE MSCI EMERGING MKTS ETF
STPZ PIMCO ETF TR 1-5 YR US TIPS INDEX FD
The IBM and IT positions are leftovers from our pre-robo era, and both are sitting very positive capital gains, so we haven't liquidated them (yet).

Retirement Account Portfolios (ROTHS, IRAs) look like this:
Domestic Stock 28%
Foreign Stock 0%
Bonds 69%
Short-term/Cash 3%

Two funds comprise over 90%:
AGG ISHARES CORE U.S. AGGREGATE BOND ETF
BND VANGUARD BD INDEX FUND INC TOTAL BOND MARKET ETF

Questions:
1. Since the Retirement side includes funds that we are going to try to leave alone for at least 11 years, should we rethink how we use the robo? It seems to me like there could be some merit in moving The Available Now half out of the robo and into a more conservative AA in a simple portfolio. Then we could task the robo with only managing the Retirement side at a more aggressive 80/20 AA?
2. If we do that, what would the best way for us to handle the Available Now half, which we need for both income replacement and ideally some growth over the next 11 years?
3. Should we be looking at doing ROTH conversions for either one or both of our IRAs? Right now we each have about 5x more in our IRAs than our ROTHs due to changing jobs and rolling over our 401ks each time.
4. In terms of tax effectiveness, do the placements look right (particularly funds in the ROTHs and IRAs?

Thanks in advance for your input.
retiredjg
Posts: 42767
Joined: Thu Jan 10, 2008 12:56 pm

Re: Almost there - portfolio checkup

Post by retiredjg »

tmann9999, I'm having trouble figuring out what you have and where you have it. Since you have gotten no other replies, perhaps others are having that problem as well.

In order to see what you have, we need to know what accounts you have and what is in them. See the link at the bottom of this message for how to show that. Please note that you should show each position as a percentage of your portfolio, not as a percentage of the account it is in.

The Roth conversion question cannot be answered without knowing something about your tax bracket now (with 1 salary) and what you expect it to be after your wife retires.

Please note that there can be some problems with wash sales if you are using a Robo for one bucket of money and managing the other yourself.
Topic Author
tman9999
Posts: 72
Joined: Tue May 20, 2008 1:06 pm

Re: Almost there - portfolio checkup

Post by tman9999 »

Thank you, @retiredg, for your reply, and suggestions/requests for clarification.
retiredjg wrote: Sat Feb 23, 2019 2:55 pm In order to see what you have, we need to know what accounts you have and what is in them. See the link at the bottom of this message for how to show that. Please note that you should show each position as a percentage of your portfolio, not as a percentage of the account it is in.
Retirement Funds: IRA, ROTH, wife 401k.....................% IRAs*......% ALL
AGG ISHARES CORE U.S. AGGREGATE BOND ETF......................64%.....33%
BND VANGUARD BD INDEX FUND INC TOTAL BOND MARKET ETF....25%.....13%
(no symbol-401K) MIXED ASSET TD2030 FUND 65/35AA..............5%.......2%
FDRXX FIDELITY GOVERNMENT CASH RESERVES.......................4%........2%
IJR ISHARES CORE S&P SMALL-CAP E....................................2%........1%
IVV ISHARES CORE S&P 500 ETF..........................................1%........1%
Total Retirement Funds..............................................100%......52%
*IRAs, ROTHs, wife's 401k

Taxable Portfolio.......................................................% of Taxable Port......% ALL
CASH....................................................................................17%............8%
SCHE SCHWAB STRATEGIC TR EMERGING MKTS EQUITY ETF ..................11%............5%
FNDF SCHWAB STRATEGIC TR FUNDAMENTAL INTL LARGE CO INDEX ETF......9%............4%
IVV ISHARES CORE S&P 500 ETF......................................................9%............4%
IJR ISHARES CORE S&P SMALL-CAP E................................................8%............4%
IT GARTNER (stock)....................................................................8%............4%
FXAIX FIDELITY 500 INDEX FUND.....................................................8%............4%
SCHF SCHWAB STRATEGIC TR INTL EQUITY ETF....................................7%............3%
SCHV SCHWAB STRATEGIC TR US LARGE CAP VALUE ETF..........................6%............3%
IBM (stock)...............................................................................6%............3%
MUB ISHARES NATIONAL MUNI BOND ETF............................................3%............2%
IEMG ISHARES INC CORE MSCI EMERGING MKTS ETF................................2%............1%
STPZ PIMCO ETF TR 1-5 YR US TIPS INDEX FD.......................................2%............1%
ITOT ISHARES CORE S&P TOTAL US STOCK MARKET ETF............................1%............1%
EFA ISHARES MSCI EAFE ETF.............................................................1%............0%
SUB ISHARES SHORT-TERM NATIONAL MUNI BOND ETF..............................1%............0%
Total Investable Now Fund............................................................99%...........47%
retiredjg wrote: Sat Feb 23, 2019 2:55 pm The Roth conversion question cannot be answered without knowing something about your tax bracket now (with 1 salary) and what you expect it to be after your wife retires.
We are in the 24% tax bracket for the 2019 tax year. In 2020 we expect to be in the 12% (or possibly 22%) bracket since our only earnings will be from unqualified dividends and interest from the after-tax side of our portfolio.
retiredjg wrote: Sat Feb 23, 2019 2:55 pm Please note that there can be some problems with wash sales if you are using a Robo for one bucket of money and managing the other yourself.
Thanks for heads up on that.

So to reiterate and refine my questions, we are primarily focused on completely overhauling both the above groups, each of which comprises about half of our total.

The above asset allocation was done automatically by the robo, which we set up before we had a clear idea of our retirement timing. We now feel good that we are closing in on "winning", and can stop work by end of this year, at which time I'll be 60.

My immediate concern is how we fund our next 11 years. We have just about enough in the After Tax bucket to fund 11 years based on our projected expenses/spending, without any growth at all. If we do that, however, it will mean we need to get some significant growth from the Retirement bucket - which we aim to do by overhauling the AA on those to something like 80/20 since we won't be needing them for 11 years (or more).

So given all that:
1. How should we set up the After Tax bucket so we have security for near-term withdrawals?
2. Should we divide that bucket into sub-buckets? i.e.:
- cash only to cover 2020-2022
- CD ladder; or investments in moderately conservative (30/70?) AA, to cover 2022 to 2025
- CD ladder; or investments in moderate to moderately aggressive AA, to cover 2025 to 2030.

Thank you, again, for taking the time to respond to my post.
Last edited by tman9999 on Sun Feb 24, 2019 4:23 pm, edited 1 time in total.
Living Free
Posts: 567
Joined: Thu Jul 19, 2018 7:31 pm

Re: Almost there - portfolio checkup

Post by Living Free »

tman9999 wrote: Fri Feb 22, 2019 3:58 pm
Questions:
1. Since the Retirement side includes funds that we are going to try to leave alone for at least 11 years, should we rethink how we use the robo? It seems to me like there could be some merit in moving The Available Now half out of the robo and into a more conservative AA in a simple portfolio. Then we could task the robo with only managing the Retirement side at a more aggressive 80/20 AA?
2. If we do that, what would the best way for us to handle the Available Now half, which we need for both income replacement and ideally some growth over the next 11 years?
3. Should we be looking at doing ROTH conversions for either one or both of our IRAs? Right now we each have about 5x more in our IRAs than our ROTHs due to changing jobs and rolling over our 401ks each time.
4. In terms of tax effectiveness, do the placements look right (particularly funds in the ROTHs and IRAs?
This overall is an interesting question and one that I haven't had to consider for myself as I'm pretty far from that age.

But in general I'd say put all stocks (or nearly all stocks) in the Roth accounts.

In you tax deferred you could keep all your bonds. Or nearly all your bonds. Then keep an amount of short term reserves in taxable (such as 1 to a few years expenses in online savings, CDs, short term bond fund, possibly muni bond fund if appropriate, etc). But overall you can rebalance in your 401k if you need. It's really all one portfolio, so if you sell some taxable stocks at a loss then you just can buy some stocks in your 401k by selling bonds. Plus you'd get the tax loss harvest out of selling at a loss. This is the general idea so I don't see why it would not work just because you are getting close to withdrawing social security in a decade or so.

I'd also prefer to use a DIY lazy portfolio (https://www.bogleheads.org/wiki/Lazy_portfolios) rather than a robo advisor. Aside from worrying about possibly creating wash sales as mentioned above, I also worry about needles complexity, difficulty to extricate yourself from their portfolios if you have gains, and the ongoing expenses. But I don't want to sidetrack the conversation too much...
retiredjg
Posts: 42767
Joined: Thu Jan 10, 2008 12:56 pm

Re: Almost there - portfolio checkup

Post by retiredjg »

tman9999 wrote: Sat Feb 23, 2019 6:34 pm We are in the 24% tax bracket for the 2019 tax year. In 2020 we expect to be in the 12% (or possibly 22%) bracket since our only earnings will be from unqualified dividends and interest from the after-tax side of our portfolio.
Regarding Roth conversions, I would not do any in the 24% bracket. Wail till you drop in a lower bracket.

Your statement that "our only earnings will be from unqualified dividends and interest from the after-tax side of our portfolio" indicates you plan an "income approach" rather than a "total return" approach to paying your retirement expenses. Is there a reason for that? Do you just not know there is another way? Are you afraid to sell stocks?

Unqualified dividends and interest are all taxed at your marginal tax rate which you expect to be 12% or 22%. Capital gains (from selling stocks in taxable) may not be taxed at all (if your income is low enough) or taxed at only 15%. In other words, an income approach will likely cost you more in taxes each year meaning you get to spend less. For this reason, I suggest you learn about and consider a total return approach to having money to pay your expenses.


So what is this "total return" approach? Your portfolio grows in two ways. Some money comes from dividends (qualified and unqualified) and interest. Other comes from the fact that your shares can increase in value (a capital gain).

Let's say you are taking $10k from your portfolio this year. Your portfolio does not care whether you take it from unqualified dividends and interest or if you sell some shares to get the $10k. Either way, your portfolio will have exactly $10k less than it had.

You should care because the unqualified dividends and interest will be taxed at a higher rate than the capital gains.. That leave less money for you to spend. Note that I'm only talking about money taken from a taxable account. This difference does not apply to money taken from an IRA.

So should you take all of the $10k from selling shares? No. Because you are going to be taxed on the unqualified dividends and interest anyway - might as well spend it. But take the rest of what you need from selling shares rather than trying to set up a portfolio that will try to pay you the full $10k in dividends each year.

See this Vanguard paper on this issue. https://personal.vanguard.com/pdf/s557.pdf


As for the rest of your questions, you apparently intend to use a "bucket" approach to your portfolio. I don't do that and do not know how to help you with it. I think it is better to set up one overall portfolio with a reasonable stock to bond ratio and spend from it in the most tax efficient way possible. This does not exclude having a year or two in cash if you like that idea.


So to reiterate and refine my questions, we are primarily focused on completely overhauling both the above groups, each of which comprises about[ half of our total.
If you do this, keep in mind that you will pay taxes on the gains in your taxable account.
User avatar
Watty
Posts: 21350
Joined: Wed Oct 10, 2007 3:55 pm

Re: Almost there - portfolio checkup

Post by Watty »

Your portfolio is a lot more complex than it needs to be. I would try to move towards just having a handful of index funds. Even if you have a robo advisor managing it the portfolio may be difficult to handle when you are 80, or if something happens to one of you and the less financially knowledgeable spouse has to manage it someday.
Topic Author
tman9999
Posts: 72
Joined: Tue May 20, 2008 1:06 pm

Re: Almost there - portfolio checkup

Post by tman9999 »

retiredjg wrote: Sun Feb 24, 2019 12:06 pm
tman9999 wrote: Sat Feb 23, 2019 6:34 pm We are in the 24% tax bracket for the 2019 tax year. In 2020 we expect to be in the 12% (or possibly 22%) bracket since our only earnings will be from unqualified dividends and interest from the after-tax side of our portfolio.
Regarding Roth conversions, I would not do any in the 24% bracket. Wail till you drop in a lower bracket.

Your statement that "our only earnings will be from unqualified dividends and interest from the after-tax side of our portfolio" indicates you plan an "income approach" rather than a "total return" approach to paying your retirement expenses. Is there a reason for that? Do you just not know there is another way? Are you afraid to sell stocks?
On the Roth conversions, that's what I was thinking, too.

Regarding your other point, about total return vs. income approach, this is where I do need to get a bit more advanced in my understanding. Thank you for pointing that out - I'll read up on it as you suggest. I think it's similar to the point that @livingfree was making.

Thank you for the primer! I'm having trouble getting my head around it, but you've helped me focus on what I need to get smarter about next.

As for the robo, I don't mind the complexity so much because I don't have to deal with it. The robo is essentially free for me, and does TLH and auto-rebalances for me, so it's set it and forget it. I tell it what my target AA is, and it does the rest. Plus, they just added a new feature that allows me to set different AAs for various accounts within the portfolio, which I can use to help me establish a bucketing approach. I'm still not sure that's my best option, but that's what I've been mulling.

I am going to revisit my thinking on that once I learn a bit more about the total return approach you've highlighted. Either way, we need to draw on the principle from our portfolio since we will have no significant sources of income until we start SS, which is a ways off. So goal is to maximize return on the portfolio and minimize taxes, while minimizing risk exposure to the parts of the portfolio that we'll need to draw from in the next few years while leaving other parts of the portfolio exposed to more risk for the long term.
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