Portfolio Review Request

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Topic Author
investor_8675309
Posts: 13
Joined: Sun Jun 23, 2019 1:19 pm

Portfolio Review Request

Post by investor_8675309 » Wed Jul 17, 2019 12:09 am

Emergency funds: Yes, I have this

Debt: None

Tax Filing Status: Married Filing Jointly

Tax Rate: 37% Federal (+ NIIT), 13.3% State

State of Residence: California

Age: 49 (he), 54 (she)

Desired Asset allocation: 60% stocks / 40% bonds

Desired International allocation: 40% of stocks

Current portfolio: $4 million. Does not include home (paid for: $1.7M) or emergency fund.

CURRENT RETIREMENT ASSETS

Taxable
(all vanguard funds)
(complexity reflects TLH activity)

02% total stock market (VTSAX)
15% large cap index (VLCAX)
02% mid cap ETF (VO)
04% FTSE all world ex-US (VEU)
14% total international stock (VXUS)

His employer stock plan
06% megacorp ESPP (will sell in retirement: using discount as a way of deferring income)
02% megacorp RSUs (very low basis - holding these: may use to top up DAF in 5 years)

Treasury Direct
06% I Bonds
04% EE Bonds

Credit Union
03% high yield CD

His standard 401k
09% Vanguard total bond (VTBSX)
09% CD Ladder
Company match? Yes

His in-plan rollover Roth 401(k) (megaback door)
1% vanguard extended market (VSEMX)

His Roth IRA at Vanguard
05% total international stock (VTIAX)
04% total stock (VTSAX)
01% small cap value (VSIAX)

Her 401(k) at Vanguard
02% total bond index (VBTLX)

Her previous 403(b) at TIAA-CREF
06% CREF Guaranteed

Her Roth IRA at Vanguard
04% Vanguard Real Estate (VNQ)

Their HSA
01% Vanguard Total Stock (VTSAX)
_______________________________________________________________
Note: Total percentage of all the above accounts together (not each account individually) should equal 100%. CONFIRMED

NOT COUNTED ABOVE
Non Qualified Deferred Compensation
02% BlackRock LifePath Index 2025
(account has access to Vanguard S&P 500, total bond, total international, extended market)

CONTRIBUTIONS

New annual Contributions
$27,000 his 401k (including employer matching contributions)
$14,000 his Mega backdoor Roth
$28,000 her 403b (including employer matching contributions)
$6,000 his IRA/Roth IRA
$7,000 her IRA/Roth IRA
$7,000 their HSA
$35,000 their I-bonds
$30,000 their EE-bonds
$25,000 his ESPP (15% discount on purchase)
$200,000 NQ Deferred Compensation
$500,000 taxable (for retirement, not short term goals)

OTHER
Kids' education (529) fully funded, majoring in field with high likelihood of being independent
Likely to receive a low six-figure inheritance within next 10 years (preferably more!)


QUESTIONS
How soon can I quit? Have been thinking 55 (in six years), but could I exit sooner?
Should I disclaim the IRA part of the anticipated inheritance, in favor of kid (longer drawdown time) ?
Both are healthy now. Should I plan on buying LTIC or can I self-insure?
When should I start Roth conversions from 401(k)s?
In what marginal tax brackets do conversions make sense and when do they not? (Obviously the top tier doesn't make sense)
I'd like some feedback on the drawdown plan below


PROPOSED DRAWDOWN PLAN
ages used are his, for simplicity. She is 5 years older

He turns 50
Start making catchup contributions to 401(k) and Roth

He retires at 55
NQDC drawdown begins for next 10 years
Can also begin draw down of ESPP shares

He turns 62
She is now 67, FRA for social security -- start taking

He turns 65
She is now 70.5 RMDs begin
EE bonds hit doubling point: $60K/year in $ at the time.

He turns 70
His social security begins;
EE bonds stop
Rollover his Roth 401(k) to Roth IRA to avoid RMD requirement
RMDs start at 70.5

He turns 75
She is now 80: maybe consider purchasing an SPIA

EXPENSES

During our most active years, figure I’d like to replace 120-180k after taxes. Big variable is travel and much will depend on location of eventual grandchildren. Likely that we would move closer at some point.

As we slow down that number will drop. Still, here are some big ticket items:
  • Will need to pay for health insurance
  • property tax of about 10K
  • few thousand for insurance, including earthquake, umbrella, home, one car
  • replace car every 15-20 years. Current one is 15 years old and going strong.
  • home is mostly new construction (remodel) but paint and roof repairs happen. I’m handy but will outsource those jobs.
  • major expense is likely travel
We may well not get another car. We are walking distance to transit, various on demand car uses, and we bike for groceries. Lyft is also an option.
Last edited by investor_8675309 on Wed Jul 17, 2019 6:12 am, edited 1 time in total.

Luckywon
Posts: 490
Joined: Tue Mar 28, 2017 10:33 am

Re: Portfolio Review Request

Post by Luckywon » Wed Jul 17, 2019 12:28 am

Question for clarification: you are making close to $900k in new annual contributions, including $500k in taxable?
And you don't mention what your expenses are. You cannot get an answer to your question about when you could retire without that information.

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Tyler Aspect
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Re: Portfolio Review Request

Post by Tyler Aspect » Wed Jul 17, 2019 1:06 am

Generally you should fund early retirement with taxable stock sales. You can start doing Roth conversion at year 2 of retirement; convert enough so that you do not exceed the 22% tax bracket.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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Wiggums
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Re: Portfolio Review Request

Post by Wiggums » Wed Jul 17, 2019 4:46 am

Luckywon wrote:
Wed Jul 17, 2019 12:28 am
Question for clarification: you are making close to $900k in new annual contributions, including $500k in taxable?
And you don't mention what your expenses are. You cannot get an answer to your question about when you could retire without that information.
I agree. Knowing your projected expenses in retirement would help. Do you need to pay your medical in retirement. That could be a big expense, for example.

Topic Author
investor_8675309
Posts: 13
Joined: Sun Jun 23, 2019 1:19 pm

Re: Portfolio Review Request

Post by investor_8675309 » Wed Jul 17, 2019 6:20 am

Luckywon wrote:
Wed Jul 17, 2019 12:28 am
Question for clarification: you are making close to $900k in new annual contributions, including $500k in taxable?
And you don't mention what your expenses are. You cannot get an answer to your question about when you could retire without that information.
I have edited to add a section on expenses. I hope it is sufficient.

Yes, I am contributing at least that much. I have a MM savings account. Every six months I top it up to 100k with proceeds from RSU sales and burn that down for living expenses. Seems to be going at $10k/month. Everything else goes to savings.

Topic Author
investor_8675309
Posts: 13
Joined: Sun Jun 23, 2019 1:19 pm

Re: Portfolio Review Request

Post by investor_8675309 » Wed Jul 17, 2019 6:21 am

Wiggums wrote:
Wed Jul 17, 2019 4:46 am
Luckywon wrote:
Wed Jul 17, 2019 12:28 am
Question for clarification: you are making close to $900k in new annual contributions, including $500k in taxable?
And you don't mention what your expenses are. You cannot get an answer to your question about when you could retire without that information.
I agree. Knowing your projected expenses in retirement would help. Do you need to pay your medical in retirement. That could be a big expense, for example.
Edited to include. Definitely need to pay medical.

Topic Author
investor_8675309
Posts: 13
Joined: Sun Jun 23, 2019 1:19 pm

Re: Portfolio Review Request

Post by investor_8675309 » Wed Jul 17, 2019 6:23 am

Tyler Aspect wrote:
Wed Jul 17, 2019 1:06 am
Generally you should fund early retirement with taxable stock sales. You can start doing Roth conversion at year 2 of retirement; convert enough so that you do not exceed the 22% tax bracket.
Why the 22% bracket specifically?

retiredjg
Posts: 37184
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio Review Request

Post by retiredjg » Wed Jul 17, 2019 11:03 am

I am thinking you may need to go into the 24% bracket, maybe even to the top, to make any progress on converting your huge pile of tax-deferred assets.

With a $1 million savings account, you can live essentially tax free on that for many years and convert a good amount while staying in the 22% bracket. However, if you are using the drawdown on the non-qual deferred money, you won't make any progress on reducing the tax-deferred account while staying in the current 22% bracket.

It appears you have over $1 million in tax deferral right now and it is growing very quickly and will easily be over $2 million in 5 years. Keep an eye on that total and compare it to how much you think you can convert in the 15 or so years before RMDs. For example, if you can only convert $100k in a year and the market gods are kind, your RMDs are going to be significant.

You should start converting as soon as your tax bracket goes down. This might happen in the calendar year you retire if you don't work very long that year.

I noticed that you have two of the exact same funds in taxable and Roth IRAs. Are you taking measures to prevent wash sales with those funds in the Roth IRA when you tax loss harvest? If not, this is something you need to consider.

How soon can you quit? I'd have at least 25 times your expected expenses including state and federal taxes. At a minimum. For such a long retirement, you may need more than that.

You are doing an outstanding job of managing your finances! And thanks so much for presenting your material in the format requested. It makes it very quick and easy to see exactly what you have.

Luckywon
Posts: 490
Joined: Tue Mar 28, 2017 10:33 am

Re: Portfolio Review Request

Post by Luckywon » Wed Jul 17, 2019 11:45 am

I live in California as well and am similar age and projected expenses. So my thoughts and calculations are in many ways applicable to your situation.

Regarding Roth conversions: I have spent quite a bit of time modeling how Roth conversions may work and have found that for me (and you) they will unfortunately have extremely limited utility.

Because of the various tax cliffs it is difficult to intuitively know what your Roth conversions will be taxed at. The best way to model it is by inputting numbers into a a tax calculator. I like this one:

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

Let's say you stop working when your pretax accounts are around $6 million. Those may throw off around $120k in qualified dividends. Let's say you have to liquidate $90k, of which $18k is long term capital gains, from pre tax accounts to cover living expenses of $180k plus $30k taxes. Assume filing taxes MFJ with standard deduction $24,400.

The marginal federal tax rate on your Roth conversions will be as follows:

First $20k: 15%
Next $10k: 20%
Next $10k: 25%
Next $10k: 26%
Next $50k: 27%

California will tax all of your conversions at 9.3 % so add that to get the combined tax rate on your Roth conversions.

The value of Roth conversions is in the anticipated delta between the tax rate you pay when you convert and the tax rate you would pay if you withdrew it after RMD's begin. The way the numbers work out for you, Roth conversions will have no value beyond the first 30k. This result is contrary to what many people may think. What I would say is run the numbers in a tax calculator before stating they are incorrect. Your situation is the same as mine in this respect and I would love to be proven wrong.

When can you retire:

To retire around age 55, I would be comfortable with a withdrawal rate of no more than 3 %. Annually, you may roughly have to withdraw $220k to pay expenses of $180k. (Again using the tax calculator above.) So you should have a minimum of about $7.3 million. The balance of money between the pretax and retirement accounts and the amount of capital gains vs cost basis in your pretax accounts will all be in play affecting then numbers so these are rough estimations. At your saving rate, you should get there soon!

LTIC: The value of its benefits, should you need them, are insignificant in your situation. You can self insure.

Question:
Why are you doing mega backdoor Roth? The MBR is advantageous in very specific situations. At the 50 % marginal tax bracket currently, your situation is unlikely to be one of them. I would suggest maximizing your pretax 401k contributions and not doing the MBR.

Question out of curiosity:
You have about $400k in a Roth IRA and your wife $160k? That is unusual at your age. How were you able to accumulate that high a balance in a Roth IRA?

Congratulations on your successes.

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Tyler Aspect
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Re: Portfolio Review Request

Post by Tyler Aspect » Wed Jul 17, 2019 1:00 pm

investor_8675309 wrote:
Wed Jul 17, 2019 6:23 am
Tyler Aspect wrote:
Wed Jul 17, 2019 1:06 am
Generally you should fund early retirement with taxable stock sales. You can start doing Roth conversion at year 2 of retirement; convert enough so that you do not exceed the 22% tax bracket.
Why the 22% bracket specifically?
I eyeballed some of your figures, but 5 years away from retirement can still have quite some variability. Running i-ORP at age 55 should give more accurate recommendations than if you run it today.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

ExitStageLeft
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Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio Review Request

Post by ExitStageLeft » Wed Jul 17, 2019 3:46 pm

investor_8675309 wrote:
Wed Jul 17, 2019 12:09 am
...
QUESTIONS
How soon can I quit? Have been thinking 55 (in six years), but could I exit sooner?
Disregarding Social Security and the inheritance, I think you could retire in 2.5 years. With a 60/40 allocation your nest egg is likely to be just a sniff under $7.2M at that time. Using the estmator at http://cfiresim.com/, you could draw $240k per year assuming you live to age 95. That's a 3.3% withdrawal rate, which is just about the number that will allow you to draw indefinitely (see article at https://earlyretirementnow.com/2016/12/ ... t-1-intro/ ). If all of that is taxable, your after tax spend would be something under $200k.

If one throws in SS benefits of $30k at age 70, then you could retire in two years and still spend $233k per year including taxes.

If one assumes her SS benefit at FRA is $30k and he gets $40k in benefits at age 70, then you could retire in one year and spend $252k each year including taxes.

All of the above scenarios are from CFIRESim using your numbers. There's still plenty of uncertainty about future tax rates, social security, etc. But I'd probably start thinking about retiring when the nest egg hits $6M. I'd definitely be a short-timer when it tops $7M.

Topic Author
investor_8675309
Posts: 13
Joined: Sun Jun 23, 2019 1:19 pm

Re: Portfolio Review Request

Post by investor_8675309 » Wed Jul 17, 2019 8:24 pm

First off -- you all are amazing. I am so grateful for the thoughtful guidance here -- sincerely.

On Luckywon's questions...
Luckywon wrote:
Wed Jul 17, 2019 11:45 am
Question:
Why are you doing mega backdoor Roth? The MBR is advantageous in very specific situations. At the 50 % marginal tax bracket currently, your situation is unlikely to be one of them. I would suggest maximizing your pretax 401k contributions and not doing the MBR.
I'm maxed on the pretax 401(k). Because of the NQDC plan, my employer match is reduced (that's why they like these NQDC plans -- pass the costs to Uncle Sam, but I modeled it out and I came out ahead). So, the total is "only" $27K, leaving me room to tack on the after-tax 401(k), which I then convert to MBR.
Luckywon wrote:
Wed Jul 17, 2019 11:45 am
Question out of curiosity:
You have about $400k in a Roth IRA and your wife $160k? That is unusual at your age. How were you able to accumulate that high a balance in a Roth IRA?
When no-income cap Roth conversions became possible, there was a one time opportunity to convert and split the tax across a couple of years. I was sitting on a Rollover IRA from a. previous 401(k) plan and pushed all in. Good thing because I was in a much lower tax bracket. Since then I have diligently done backdoor Roths and, per BH doctrine, have placed higher appreciating assets in those.

Her IRA has REITs in it and as you know, those are more about yield than appreciation. So, at some point I'll want to move those to tax deferred, push equities into the Roth. Problem is that I don't have room in deferred, so I'll have to sell bonds there (to make room for REITs) and start using munis in taxable.

Luckywon
Posts: 490
Joined: Tue Mar 28, 2017 10:33 am

Re: Portfolio Review Request

Post by Luckywon » Wed Jul 17, 2019 8:50 pm

investor_8675309 wrote:
Wed Jul 17, 2019 8:24 pm
Luckywon wrote:
Wed Jul 17, 2019 11:45 am
Question:
Why are you doing mega backdoor Roth? The MBR is advantageous in very specific situations. At the 50 % marginal tax bracket currently, your situation is unlikely to be one of them. I would suggest maximizing your pretax 401k contributions and not doing the MBR.
I'm maxed on the pretax 401(k). Because of the NQDC plan, my employer match is reduced (that's why they like these NQDC plans -- pass the costs to Uncle Sam, but I modeled it out and I came out ahead). So, the total is "only" $27K, leaving me room to tack on the after-tax 401(k), which I then convert to MBR.
Hats off to you for capturing the opportunity. Placing the 27k in a Roth account instead of a non tax advantaged account where it would have gone if you had not executed the MBR will pay off handsomely.

investor_8675309 wrote:
Wed Jul 17, 2019 8:24 pm
Luckywon wrote:
Wed Jul 17, 2019 11:45 am
Question out of curiosity:
You have about $400k in a Roth IRA and your wife $160k? That is unusual at your age. How were you able to accumulate that high a balance in a Roth IRA?
When no-income cap Roth conversions became possible, there was a one time opportunity to convert and split the tax across a couple of years. I was sitting on a Rollover IRA from a. previous 401(k) plan and pushed all in. Good thing because I was in a much lower tax bracket. Since then I have diligently done backdoor Roths and, per BH doctrine, have placed higher appreciating assets in those.
Ah I see, many roads to Rome!

Topic Author
investor_8675309
Posts: 13
Joined: Sun Jun 23, 2019 1:19 pm

Re: Portfolio Review Request

Post by investor_8675309 » Wed Jul 17, 2019 10:12 pm

retiredjg wrote:
Wed Jul 17, 2019 11:03 am
I am thinking you may need to go into the 24% bracket, maybe even to the top, to make any progress on converting your huge pile of tax-deferred assets.

With a $1 million savings account, you can live essentially tax free on that for many years and convert a good amount while staying in the 22% bracket. However, if you are using the drawdown on the non-qual deferred money, you won't make any progress on reducing the tax-deferred account while staying in the current 22% bracket.

It appears you have over $1 million in tax deferral right now and it is growing very quickly and will easily be over $2 million in 5 years. Keep an eye on that total and compare it to how much you think you can convert in the 15 or so years before RMDs. For example, if you can only convert $100k in a year and the market gods are kind, your RMDs are going to be significant.

You should start converting as soon as your tax bracket goes down. This might happen in the calendar year you retire if you don't work very long that year.

I noticed that you have two of the exact same funds in taxable and Roth IRAs. Are you taking measures to prevent wash sales with those funds in the Roth IRA when you tax loss harvest? If not, this is something you need to consider.

How soon can you quit? I'd have at least 25 times your expected expenses including state and federal taxes. At a minimum. For such a long retirement, you may need more than that.

You are doing an outstanding job of managing your finances! And thanks so much for presenting your material in the format requested. It makes it very quick and easy to see exactly what you have.
Thanks a ton. On your question, yes I'm alert about wash sales. The Roth transaction happens on Jan 2nd (or next business day) and I have (most of) the rest of the year to TLH.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio Review Request

Post by retiredjg » Thu Jul 18, 2019 6:26 am

Thanks a ton. On your question, yes I'm alert about wash sales. The Roth transaction happens on Jan 2nd (or next business day) and I have (most of) the rest of the year to TLH.
Are you considering revinvestment of dividends in the Roth Accounts? That's not once a year.

Topic Author
investor_8675309
Posts: 13
Joined: Sun Jun 23, 2019 1:19 pm

Re: Portfolio Review Request

Post by investor_8675309 » Fri Jul 19, 2019 5:24 am

retiredjg wrote:
Thu Jul 18, 2019 6:26 am
Thanks a ton. On your question, yes I'm alert about wash sales. The Roth transaction happens on Jan 2nd (or next business day) and I have (most of) the rest of the year to TLH.
Are you considering revinvestment of dividends in the Roth Accounts? That's not once a year.
Ah, now I understand. Yes.

blahblahsunshine
Posts: 55
Joined: Sun Jan 14, 2018 8:11 pm

Re: Portfolio Review Request

Post by blahblahsunshine » Sat Jul 20, 2019 8:31 am

Our situation is similar to yours. I think you can wrap things up earlier if you want. You have a lot of flexiblity already in terms of potential to make adjustments (i.e where you live and what you spend). That said, you also have what looks like a remarkable gravy train of income coming in so I can understand wanting to hold on for another period of time. Then again, being your age and having a partner the same age as yours, you might want to reassess the clock time remaining dimension. We have certainly felt the last five years... In my mind you are in a difficult situation re:health and income.

I'll add this link to this retirement calc. I am meh on the financial parts of it, but the "death curve" is useful to set some context. At some point derisking the portfolio dimension becomes clearly silly compared to the much bigger elephant in the room... (the gray section).

https://engaging-data.com/will-money-last-retire-early/

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