6M retirement asset allocation and tax advice

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RiffRaff
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Joined: Sun Jul 29, 2018 8:11 pm

6M retirement asset allocation and tax advice

Post by RiffRaff » Sun Jul 07, 2019 8:17 am

Hello, and thank you.
Looking for asset allocation and tax advice prior to impending retirement.

Age 57 yrs
Married filing jointly
Retirement 1-2 yrs
Marginal tax brackets: Fed 37% / NY 6.8%
Residence: NY

Two homes
Debt free

$6,000,000 liquid assets

Tax advantaged accounts 401(k):
Vanguard Target Retirement 2025 34%

Taxable accounts:
Vanguard 500 Index Fund Adm 16.80%
Vanguard Extended Mkt Index Adm 16.40%
Vanguard Devel Markets Idx Admiral 4.40%
Vanguard Emerging Mkts Stk Idx Adm 3.50%
Vanguard Mid-Cap Index Fund Adm 1.20%

Vanguard New York Muni Money Mkt 10.30%
Vanguard Inter-Term Tax-Exempt Adm 5.80%
Vanguard Tot Intl Bond Ix Admiral 4.20%
Vanguard Total Bond Mkt Index Adm 3.40%

Estimated yearly post-tax living expenses $150,000

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TomatoTomahto
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Re: 6M retirement asset allocation and tax advice

Post by TomatoTomahto » Sun Jul 07, 2019 8:42 am

Just my opinion, others will have a more complicated method.

Put $3M in Fixed income in tax deferred.
Put everything else in a mix of Total Stock or Total World Stock or Total International Stock depending on your preferences.

Easy Peasy.

ETA: I see you have $2M in tax deferred space. Fill it with fixed income, and put $1M in taxable with tax appropriate fixed income.
Okay, I get it; I won't be political or controversial. The Earth is flat.

livesoft
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Re: 6M retirement asset allocation and tax advice

Post by livesoft » Sun Jul 07, 2019 8:49 am

Tax advice: Move away from NY state to a no-income-tax state.
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stan1
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Re: 6M retirement asset allocation and tax advice

Post by stan1 » Sun Jul 07, 2019 8:51 am

Taxable accounts:
Vanguard 500 Index Fund Adm 16.80%
Vanguard Extended Mkt Index Adm 16.40%
Vanguard Devel Markets Idx Admiral 4.40%
Vanguard Emerging Mkts Stk Idx Adm 3.50%
Vanguard Mid-Cap Index Fund Adm 1.20%

Vanguard New York Muni Money Mkt 10.30%
Vanguard Inter-Term Tax-Exempt Adm 5.80%
Vanguard Tot Intl Bond Ix Admiral 4.20%
Vanguard Total Bond Mkt Index Adm 3.40%
Is this what you own now or what you are proposing? What are the capital gains like?

Holding under 5% of any asset class won't make a difference.

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Sandtrap
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Re: 6M retirement asset allocation and tax advice

Post by Sandtrap » Sun Jul 07, 2019 8:52 am

66% of 6M in taxable?

Is this correct?

j
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steve roy
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Re: 6M retirement asset allocation and tax advice

Post by steve roy » Sun Jul 07, 2019 9:03 am

We moved from high tax to low tax state. Two private pensions. Husband took SS at 70 and wife (lower earner) took hers at 63.

Result: our cash flow more than meets our needs and our liquid assets (AA 30/70) don't need to be touched.

Every situation is different but you have enough assets to develop any number of strategies, all of which would work. Using a Target Date fund is good. We do the same.

Topic Author
RiffRaff
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Re: 6M retirement asset allocation and tax advice

Post by RiffRaff » Sun Jul 07, 2019 12:23 pm

Thank you for the responses and questions.

Yes, 66% of the 6M is on the taxable side. I have consistently maxed out the tax advantaged side over the years.

Desired AA 65/35. Current AA is close to that.

These are my current holdings.

No capital gains yet - haven't sold anything yet. I plan to fill the lowest tax brackets after retirement via tax gain harvesting until RMD's kick in at 70.

Yes, I plan to domicile outside NY when retired! :D :beer

just1question
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Re: 6M retirement asset allocation and tax advice

Post by just1question » Sun Jul 07, 2019 12:47 pm

RiffRaff wrote:
Sun Jul 07, 2019 8:17 am
Hello, and thank you.
Looking for asset allocation and tax advice prior to impending retirement.

Age 57 yrs
Married filing jointly
Retirement 1-2 yrs
Marginal tax brackets: Fed 37% / NY 6.8%
Residence: NY

Two homes
Debt free

$6,000,000 liquid assets

Tax advantaged accounts 401(k):
Vanguard Target Retirement 2025 34%

Taxable accounts:
Vanguard 500 Index Fund Adm 16.80%
Vanguard Extended Mkt Index Adm 16.40%
Vanguard Devel Markets Idx Admiral 4.40%
Vanguard Emerging Mkts Stk Idx Adm 3.50%
Vanguard Mid-Cap Index Fund Adm 1.20%

Vanguard New York Muni Money Mkt 10.30%
Vanguard Inter-Term Tax-Exempt Adm 5.80%
Vanguard Tot Intl Bond Ix Admiral 4.20%
Vanguard Total Bond Mkt Index Adm 3.40%

Estimated yearly post-tax living expenses $150,000
I have a couple of thoughts, but would like to see other people weigh in (rather than relying on my non-expert advice):
1. It seems to me that you would be better off having bonds/fixed income in your 401(k). Vang TR2025 is 60/40 stock/bonds, so you might make better use of the 401k.
2. If you are about to retire, will the tax-exempt bonds still provide the same benefit, since your income will presumably go way down? Same with munis? I'd be interested in what people think of this idea.

Otherwise, congratulations. Well done.

cacophony
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Re: 6M retirement asset allocation and tax advice

Post by cacophony » Sun Jul 07, 2019 1:02 pm

TomatoTomahto wrote:
Sun Jul 07, 2019 8:42 am
Just my opinion, others will have a more complicated method.

Put $3M in Fixed income in tax deferred.
Put everything else in a mix of Total Stock or Total World Stock or Total International Stock depending on your preferences.

Easy Peasy.

ETA: I see you have $2M in tax deferred space. Fill it with fixed income, and put $1M in taxable with tax appropriate fixed income.
Any thoughts on this: https://thefinancebuff.com/tax-efficien ... olute.html ?

delamer
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Re: 6M retirement asset allocation and tax advice

Post by delamer » Sun Jul 07, 2019 1:10 pm

I agree with the idea of moving bonds to your 401(k) and keeping stocks in taxable.

Taxable dividends and interest should be going to your settlement accounts rather than being reinvested.

The rule-of-thumb is that any investment that makes up less than 5% of your assets adds to your portfolio complexity without having any material effect on your return. So, for example, your Mid-Cap Index fund isn’t worth holding onto given the small
position.

Luckywon
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Re: 6M retirement asset allocation and tax advice

Post by Luckywon » Sun Jul 07, 2019 1:19 pm

Asset allocation: I think 65/35 is a good AA for your situation.

Regarding taxes:
You have at a good runway for Roth conversions of your 401(k) funds before RMD's begin at 70 1/2. (Or maybe even later depending on legislation pending this year.) You should spend some time examining to what extent this makes sense for you. Worth noting that holding some tax exempt funds in taxable will have the effect of preserving space for Roth conversions, via reduced taxable dividends.
SS most likely should be deferred until age 70, also to maximize Roth conversions.

Does your estimate of $150k/year expenses include health insurance? What is your estimate for health insurance expenses?

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TomatoTomahto
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Re: 6M retirement asset allocation and tax advice

Post by TomatoTomahto » Sun Jul 07, 2019 1:31 pm

cacophony wrote:
Sun Jul 07, 2019 1:02 pm
TomatoTomahto wrote:
Sun Jul 07, 2019 8:42 am
Just my opinion, others will have a more complicated method.
Put $3M in Fixed income in tax deferred.
Put everything else in a mix of Total Stock or Total World Stock or Total International Stock depending on your preferences.
Easy Peasy.
ETA: I see you have $2M in tax deferred space. Fill it with fixed income, and put $1M in taxable with tax appropriate fixed income.
Any thoughts on this: https://thefinancebuff.com/tax-efficien ... olute.html ?
I’m assuming (yes, I know what that leads to) that OP has a bequest motivation. There likely will be a good amount of assets left over. So, the part of the linked article I concur with is quoted below. Btw, is it me, or is that article less clear than it could be?
Don’t do the swap if you have more money than you can spend in your lifetime and you will leave your vast fortune behind to your heirs very soon. Assets left behind in a regular taxable account receive a step-up in basis at death. Unrealized capital gains are forgiven when you die. In such case you will want to have stock funds in taxable accounts in order to maximize tax free unrealized capital gains.
I’m assuming most people will need and use the money themselves.
Okay, I get it; I won't be political or controversial. The Earth is flat.

cacophony
Posts: 484
Joined: Tue Oct 16, 2007 9:12 pm

Re: 6M retirement asset allocation and tax advice

Post by cacophony » Sun Jul 07, 2019 1:51 pm

TomatoTomahto wrote:
Sun Jul 07, 2019 1:31 pm
cacophony wrote:
Sun Jul 07, 2019 1:02 pm
TomatoTomahto wrote:
Sun Jul 07, 2019 8:42 am
Just my opinion, others will have a more complicated method.
Put $3M in Fixed income in tax deferred.
Put everything else in a mix of Total Stock or Total World Stock or Total International Stock depending on your preferences.
Easy Peasy.
ETA: I see you have $2M in tax deferred space. Fill it with fixed income, and put $1M in taxable with tax appropriate fixed income.
Any thoughts on this: https://thefinancebuff.com/tax-efficien ... olute.html ?
I’m assuming (yes, I know what that leads to) that OP has a bequest motivation. There likely will be a good amount of assets left over. So, the part of the linked article I concur with is quoted below. Btw, is it me, or is that article less clear than it could be?
Don’t do the swap if you have more money than you can spend in your lifetime and you will leave your vast fortune behind to your heirs very soon. Assets left behind in a regular taxable account receive a step-up in basis at death. Unrealized capital gains are forgiven when you die. In such case you will want to have stock funds in taxable accounts in order to maximize tax free unrealized capital gains.
I’m assuming most people will need and use the money themselves.
Thanks for the input and good point regarding the assumption. I agree that the article is not written very clearly.

Bacchus01
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Re: 6M retirement asset allocation and tax advice

Post by Bacchus01 » Sun Jul 07, 2019 2:09 pm

Roth conversions

Move

Topic Author
RiffRaff
Posts: 3
Joined: Sun Jul 29, 2018 8:11 pm

Re: 6M retirement asset allocation and tax advice

Post by RiffRaff » Sun Jul 07, 2019 2:49 pm

Thank you all for your insights.

cacophony: Great article. Thank you!

just1question: Tax exempt funds preserve tax space in post-retirement planning.

delamer: I like your 5% rule of thumb. But, until retirement, I cant shift these assets without incuring maximal capital gains.

Luckywon: The $150K estimate is based on current expenditures and includes a $20K/yr combined heath care insurance cost estimate for my wife and I.

Question for you all:
I currently have ~$1M in unrealized capital gains basis/tax liability on the taxable side.
Which should be my priority in early retirement:
1. Filling the lowest tax brackets with tax gain harvesting/basis reset from the taxible side?
or
2. Filling the lowest tax brackets with Roth converstions from the 401(k) side?

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TomatoTomahto
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Re: 6M retirement asset allocation and tax advice

Post by TomatoTomahto » Sun Jul 07, 2019 3:15 pm

Question for you all:
I currently have ~$1M in unrealized capital gains basis/tax liability on the taxable side.
Which should be my priority in early retirement:
1. Filling the lowest tax brackets with tax gain harvesting/basis reset from the taxible side?
or
2. Filling the lowest tax brackets with Roth converstions from the 401(k) side?
2 - save those appreciated shares for your heirs or later use in RMDs. Roth conversions are a fleeting thing.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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goodenyou
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Re: 6M retirement asset allocation and tax advice

Post by goodenyou » Sun Jul 07, 2019 4:18 pm

Is your 2nd home in Florida, or another tax-friendly state? If so, change your domicile to live there at least 183 days. It will save you a bundle.
Last edited by goodenyou on Sun Jul 07, 2019 4:21 pm, edited 1 time in total.
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ram
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Re: 6M retirement asset allocation and tax advice

Post by ram » Sun Jul 07, 2019 4:20 pm

TomatoTomahto wrote:
Sun Jul 07, 2019 8:42 am
Just my opinion, others will have a more complicated method.

Put $3M in Fixed income in tax deferred.
Put everything else in a mix of Total Stock or Total World Stock or Total International Stock depending on your preferences.

Easy Peasy.

ETA: I see you have $2M in tax deferred space. Fill it with fixed income, and put $1M in taxable with tax appropriate fixed income.
Your desired asset allocation is 65:35.
Your savings are 66% taxable and 34% tax deferred.

Suggest :
Taxable = 65% stocks ( I agree with Tomato above about choices) and 1% in ST bonds or MM account

Tax deferred: 34% bonds. You will get a slightly higher interest rate as you will be using taxable bonds in the tax deferred space.
Ram

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celia
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Re: 6M retirement asset allocation and tax advice

Post by celia » Sun Jul 07, 2019 4:24 pm

It's not how much you have that matters but how much you can spend. Those tax-deferred dollars are worth less than a dollar because the taxes haven't yet been paid on them. Here's how to get a handle on those future taxes:

Small Law Survivor's thread

About 3/4 the way down the second page of that thread, I describe one way of calculating how much Roth conversions you should consider doing before age 70. This thread is now outdated due to the changes in the tax law, but focusing on the method of analysis rather than the results can give you an idea of what to look for. Many other Bogleheads contributed important concepts to be understood (such as possibly avoiding high Medicare premiums after age 65 by having lower income) so reading the whole thread can be worthwhile, even if the tax brackets no longer apply.

To be noted, the current tax brackets and income tax rules are due to expire at the end of 2025 and revert back to 2017 levels, unless Congress moves to make the current rules permanent or come up with a third alternative.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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grabiner
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Re: 6M retirement asset allocation and tax advice

Post by grabiner » Mon Jul 08, 2019 8:33 pm

delamer wrote:
Sun Jul 07, 2019 1:10 pm
I agree with the idea of moving bonds to your 401(k) and keeping stocks in taxable.
And while this is good general advice, I don't think it is correct here. You pay 30.6% tax on qualified dividends (20% base federal + 3.8% NIIT + 6.8% NY), double the tax rate for most investors; meanwhile, you pay the same 0% tax on NY munis as everyone else. Thus, in your situation, I would prefer NY munis in taxable. You may not want to hold all your bonds as NY munis because of the diversification issue; in that case, an even split between Vanguard Limited-Term Tax-Exempt and NY Long-Term Tax-Exempt gives you an intermediate-term duration with 50% of your bonds outside NY but more than 50% of your bond income exempt from NY tax.
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smectym
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Re: 6M retirement asset allocation and tax advice

Post by smectym » Tue Jul 09, 2019 4:47 am

“It’s not how much you have that matters, but how much you can spend”

Sound advice for many, who must wring every dollar of potential spending out of their store of capital, because otherwise they’d be hard pressed to pay the rent, the butcher, the doctor and so on. But let’s face it, once you get past a couple million in assets plus Social Security you’ve enough to meet the necessities of life plus a desirable quantum of comfort and discretionary spending. Past that point, you certainly CAN elect to spend more, but the assumption that the only point of it all, at the end, is “to spend it,” is flawed. Dynastic aspirations and strategic charity are two alternative destinations for money you have, but don’t want to allocate to personal consumption.

Luckywon
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Re: 6M retirement asset allocation and tax advice

Post by Luckywon » Tue Jul 09, 2019 2:03 pm

RiffRaff wrote:
Sun Jul 07, 2019 2:49 pm
Thank you all for your insights.

cacophony: Great article. Thank you!

just1question: Tax exempt funds preserve tax space in post-retirement planning.

delamer: I like your 5% rule of thumb. But, until retirement, I cant shift these assets without incuring maximal capital gains.

Luckywon: The $150K estimate is based on current expenditures and includes a $20K/yr combined heath care insurance cost estimate for my wife and I.

Question for you all:
I currently have ~$1M in unrealized capital gains basis/tax liability on the taxable side.
Which should be my priority in early retirement:
1. Filling the lowest tax brackets with tax gain harvesting/basis reset from the taxible side?
or
2. Filling the lowest tax brackets with Roth converstions from the 401(k) side?
Regarding Roth conversions, the marginal tax rate you will pay on Roth conversions will be dependent on your other sources of income and will not be intuitive due to peculiarities/cliffs in the tax code.

Some rough numbers that might be applicable to you: Assume you retire and have no more earned income and file MFJ with standard deduction. Assume further your $4 million in taxable is throwing off 60k in qualified dividends and you realize 20k in capital gains each year in order to withdraw enough from your taxable accounts to live on. Using 2019 tax rates:

The first approx 24k in conversions will be taxed almost 0 %
The next approx 20k in conversions will be taxed around 25 % federal
The next approx 80k in conversions will be taxed around 27 % federal
The next approx 70k in conversions will be taxed around 22 % federal
Above that conversions will be taxed at least 27.8% federal

Add about 6.5 % NY state tax to your conversions

So after the first 25k converted per year, you are looking at a marginal tax rate combined federal and state of over 31 % on your Roth conversions (at least up till total 124k converted).

Assuming you delay RMD's until you are already collecting social security, because of various peculiarities in the tax code. your marginal federal tax rate on your RMD's would be probably be 22 %, i.e less than the federal tax rate on Roth conversions over the first 24k.

So, it is unlikely that it will make sense for you to do more than 24k/year Roth conversions, unless you open up some space by have lower capital gains realizations and dividends per year than the numbers I used. However the numbers I used are fairly conservative.

Would be interested in what you project your capital gains/dividends will be annually once you retire.

You can use this website to do some pro forma calculations and check for yourself.

https://www.irscalculators.com/tax-calculator

The "what if" function in Turbotax can also be used.

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