Recent Retiree Portfolio Advice: Allocation, Tax Efficiency

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Topic Author
kambyvk
Posts: 18
Joined: Wed Mar 06, 2019 11:47 am

Recent Retiree Portfolio Advice: Allocation, Tax Efficiency

Post by kambyvk »

BACKGROUND
I am retired since July 2017. I intend to work again in the future but not in a fulltime job. Received approx. a year’s severance pay and took the lumpsum option for pension. Our annual expenses average around $80K/year. Starting around the time of retirement, I started making changes to my portfolio based on my own knowledge. Recent readings on BH (last 6 months or so) have revealed that some of the changes I have made were not very wise from a tax efficiency standpoint e.g. buying Fidelity Puritan and Fidelity Total Bond Fund in Taxable so now looking to clean up my portfolio.

Emergency funds: 1 year expenses equivalent
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal for 2019 thereafter falling down to 12%?, 0% State
State of Residence: Texas
Age: 59 years, retired. Living overseas, for now

Portfolio Size: seven figures split roughly 55% taxable and 45% Retirement (401K, IRAs)
Current overall portfolio split is 66% stocks/21% Bonds/13% Cash

End in mind: a) Get closer to 60%/40% stock-bonds ratio, b) deploy the significant cash position in Taxable more gainfully c) get rid of individual stocks and consolidate mutual funds to the extent practical to result in a lower ER, and d) allocate resources in a tax efficient manner overall between Taxable and Retirement.

Current portfolio split looks close to the desired allocation but that is due to the large cash position in Taxable.


Taxable Portfolio Composition (Wted avg. ER: 0.43%)
CASH: 13.0%
DRYFS SMLCAP STK IND (DISSX): 1.9% (ER: 0.5%)
FID CNTRFND (FCNTX): 0.9% (ER: 0.74%)
FID NSDQ COMP IND (FNCMX): 6.1% (ER:0.3%)
FID PURITAN (FPURX): 4.4% (ER: 0.54%)
FID SEL SFTWR & IT SRVC(FSCSX): 1.6% (ER: 0.73%)
FID TOT MKT IND (FSKAX): 4.7% (ER: 0.015%)
FID MID CAP IND FUND(FSMDX): 2.1% (ER: 0.003%)
FID TOT BND (FTBFX): 4.8% (ER: 0.45%)
FID WRLDWID (FWWFX): 4.8% (ER: 0.94%)
FID ZERO TOT MKT IND (FZROX): 1.7%
IND ENERGY STKS (2 cos. +former empl): 5.2%
OTHER IND STKS (2 cos.): 3.4%

Retirement Portfolio Composition (Wted avg. ER: 0.29%)
FID PURITAN (FPURX): 10.1% (ER: 0.54%)
FID OTC POOL (FOCPX): 1.2% (ER: 0.48%)
FID GRTH CO POOL: (FDGRX): 3.2% (ER:0.43%)
FID SEL IT SERVICES (FBSOX): 2.4% (ER: 0.77%)
FID NASDAQ COMP INDX (FNCMX): 2.8% (ER: 0.3%)
FID SMALL CAP GR K6 (FOCSX): 0.8% (ER: 0.61%)
FID SEL HEALTHCARE (FSPHX): 2.2% (ER: 0.73%)
FID WORLDWIDE (FWWFX): 2.0% (ER: 0.94%)
FID US BOND IDX (FXNAX): 10.7% (ER: 0.025%)
US EQUITY INDEX: 4.5% (ER: 0.01%)
RUSSELL 2000 INDEX: 2.5% (ER: 0.04%)
LIFEPATH 2025: 0.8% (ER: 0.08%)
RUSSELL 2000 GROWTH : 2.0% (ER: 0.08%)

Both Pension Lumpsum (Rollover IRA) and Roth IRA are included in the Retirement Savings above (Roth IRA is a very small component of the above).

QUESTIONS:
1) ASSET ALLOCATION
My simple spreadsheet analysis suggests that there are a couple of ways to get close to a 60/40 allocation: a) exchange most of the equity funds in Retirement to bonds and hold mostly equities in Taxable. b) Carry bond positions in both taxable and retirement to get to the desired allocation. Option a) will address tax efficiency - some funds in the Taxable account, notably Fidelity Puritan and Fidelity Total Bond, currently generate a lot of dividends (FTBFX is all unqualified) which I would like to minimize. Option b) would require a tax-free bond fund in Taxable which will mitigate the impact of taxes but not minimize it to the extent of a). Although I have already started going in the direction of a), both in Taxable and Retirement, it seems too extreme of a measure to me to have the retirement account be all bonds. This is something I am struggling with. I have a read a lot of the advice on this forum including references to studies which suggest having fixed income in Taxable is not necessarily bad. Do I just need to get my head around one of the two options and go for it or is a) definitely better?
2) MINIMIZING NUMBER OF FUNDS
I recognize that I need to i) get rid of most of the individual stocks and reduce my somewhat heavy position in my company stock and ii) reduce the number of funds in both of my accounts. I have already started rationalizing these while at the same time moving to lower ER funds. A lingering doubt I have is this: When I look at the 3/5 year performance of some of the funds and the total stock market fund, their returns seem to often times make up the difference in ER. So why sell these funds, when the net effect is a wash?
3) ROTH IRA CONVERSIONS
I have a very small position in Roth IRAs, this is because income limitations prevented me from contributing while employed. I have now received the last installment of my severance pay and also the last of the company share proceeds and starting next year will have no earned income (unless I start working part-time). This will bump me down into a significantly lower tax bracket (12%?). Am I correct in assuming that starting next year is when it would make sense to do Roth conversions? I have the references from this forum on Roth IRA conversions but have not spent time educating myself yet.
User avatar
Duckie
Posts: 8088
Joined: Thu Mar 08, 2007 2:55 pm

Re: Recent Retiree Portfolio Advice: Allocation, Tax Efficiency

Post by Duckie »

kambyvk, welcome to the forum.
kambyvk wrote:Do I just need to get my head around one of the two options and go for it or is a) definitely better?
a) is definitely better if you have room, and you have room. If your "Retirement" accounts are 45% of your retirement assets and you want 40% in bonds, then put that 40% in the "Retirement" accounts. It looks like you're at Fidelity. So use (FXNAX) Fidelity U.S. Bond Index Fund (0.025%) and maybe some (FIPDX) Fidelity Inflation-Protected Bond Index Fund (0.05%) if you want. If you don't have those options in your old 401k consider rolling that into your Rollover IRA. You'll get cheaper options and have one less account to manage. For the other 5% use just (FTIHX) Fidelity Total International Index Fund (0.06%). That would be perfect for your Roth IRA.
So why sell these funds, when the net effect is a wash?
You have a mess in your taxable account. You have a bunch of high-expense-ratio funds and some bond funds that don't belong there. Sell them when you can afford the tax hit. Depending on taxes you could get down to just (FSKAX) Fidelity Total Market Index Fund (0.015%) and (FTIHX) Fidelity Total International Index Fund (0.06%)
Am I correct in assuming that starting next year is when it would make sense to do Roth conversions?
A 12% bracket is a great time to start Roth conversions.
Topic Author
kambyvk
Posts: 18
Joined: Wed Mar 06, 2019 11:47 am

Re: Recent Retiree Portfolio Advice: Allocation, Tax Efficiency

Post by kambyvk »

Duckie - many thanks for your review and suggestions. It helps me greatly and provides the validation to accelerate transitioning to a bond heavy Retirement account and an equity tilted Taxable account. Cheers!
Kam
delamer
Posts: 11070
Joined: Tue Feb 08, 2011 6:13 pm

Re: Recent Retiree Portfolio Advice: Allocation, Tax Efficiency

Post by delamer »

Ducky gave you good advice.

Don’t assume that because returns for your high ER funds over last few years have outpaced returns for the total market that that pattern will continue.

In the long run, low cost, index funds are the way to go.
Topic Author
kambyvk
Posts: 18
Joined: Wed Mar 06, 2019 11:47 am

Re: Recent Retiree Portfolio Advice: Allocation, Tax Efficiency

Post by kambyvk »

Delamer - good point. Things could be different in the future and low ER funds are better. Thanks!
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