New Retiree Seeking Portfolio Advice

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Topic Author
TeacherLady
Posts: 5
Joined: Mon Dec 14, 2009 12:42 am

New Retiree Seeking Portfolio Advice

Post by TeacherLady » Wed Oct 09, 2019 12:01 pm

Hello from a new retiree!

My hb and I just made a small mistake while moving our cash from Capital1 over to a new Vanguard brokerage account. Learning that Target Retirement 2015 fund is not the best for a taxable account has opened our eyes to our need to plan a sensible portfolio correctly, not by incremental short-sighted decisions.

Emergency funds: 6 months of expenses
Debt: None. House: paid for, equity upper 6-figures.
Tax Filing Status: Married Filing Jointly
Tax Rate: 22% Federal, 8% State (CA)
Age: Him: 67 (retired) Her: 60 (retired)
Income: Last month began withdrawing from Vanguard Traditional IRA
Desired Asset allocation: 30% stocks / 70% bonds
Desired International allocation: 15% of stocks
Portfolio size: low seven-figures.
Children's College: Graduated or already paid for

Current retirement assets
Taxable
2.5% Vanguard Target Retirement 2015 (VTXVX)(0.13%)

His 401k Rollover at Fidelity
15% Stable Value fund from previous employer (-n/a-) (0.27%)
15% PIMCO Total Return (PTTRX)(0.71%)
15.5% Vanguard Institutional Total Stock Market (VITPX)(0.02%)

His Roth IRA at Vanguard
3% Vanguard Intermediate-term Investment Grade Bond Admiral (VFIDX)(0.10%)

His Traditional IRA at Vanguard
28.5% Vanguard Intermediate-term Investment Grade Bond Admiral (VFIDX)(0.10%)

Her Roth IRA at Vanguard
0.5% Vanguard Inflation-Protected Securities Investor Shares (VIPSX)(0.20%)
2.0% Vanguard Total Bond Market Admiral (VBTLX)(0.05%)

Her 401(K) Rollover IRA at Vanguard
10 % Vanguard Total Stock Market Admiral (VTSAX)(0.04%)
2% Vanguard Total International Stock Market Admiral (VTIAX) (0.11%)
6% Vanguard Intermediate-term Investment Grade Bond Admiral (VFIDX)(0.10%)

Overall current retirement allocation: 29% stock, 71% bond

Notes/Questions:
A. He will begin drawing Social Security at age 70.5, in 2022.
B. Last month we set up a taxable trust Vanguard brokerage account named in our family trust,
to save all retirement income that exceeds our needed income.
C. Before RMD kicks in:
For 2019 - 2021, to even out taxes in retirement, he will annually withdraw from his Trad. IRA, after tax:
$65k into an outside checking account , 2b used as annual income
$40k into the taxable VG Brokerage Acct : for savings, new car, home improvements, modest vacations
In 2021 he will roll his Fidelity 401(k) into Vanguard.
D. It is likely we will always remain in the 22% tax bracket.
E. While at least one spouse is living (maybe 15 - 30 years), the taxable account likely will grow greatly each year.

QU#1: What is the best way to invest this taxable account for 15 - 30 years?
Should the taxable trust account be all in stock fund? We might contribute 40k per year. Adds up.
Or a portion kept in an acceptable international or bond fund for rebalancing during a stock market crash?
QU#2: Could our 6-month emergency fund also be in this VG Brokerage trust account, in a money market fund?
QU#3: Even though our overall asset allocation is pretty good, are there better choices of funds for each account?

Many thanks!

HomeStretch
Posts: 2052
Joined: Thu Dec 27, 2018 3:06 pm

Re: New Retiree Seeking Portfolio Advice

Post by HomeStretch » Wed Oct 09, 2019 12:22 pm

Do you have two Vanguard joint taxable accounts (one in Trust name and one held outside Trust) or just one held in Trust?

This is a revocable Trust taxed at your rate, correct?

lakpr
Posts: 2501
Joined: Fri Mar 18, 2011 9:59 am

Re: New Retiree Seeking Portfolio Advice

Post by lakpr » Wed Oct 09, 2019 12:43 pm

Just a few random thoughts.

1. Your Roth accounts are stacked with bond funds. The greatest advantage of Roth accounts is that growth is tax free. Why do you want to constrain growth in such accounts, by stocking them with bonds? Ideally you would want to have those asset classes with the greatest expected rate of growth: equities. Given the small(ish) balances in these accounts, I suggest you exchange them both to Vanguard Total Stock Market Index fund (VTSAX).
TeacherLady wrote:
Wed Oct 09, 2019 12:01 pm
His Roth IRA at Vanguard
3% Vanguard Intermediate-term Investment Grade Bond Admiral (VFIDX)(0.10%)

Her Roth IRA at Vanguard
0.5% Vanguard Inflation-Protected Securities Investor Shares (VIPSX)(0.20%)
2.0% Vanguard Total Bond Market Admiral (VBTLX)(0.05%)
2. I usually suggest, and follow in my own investments, a thumb rule of "Age-10" to "Age-15" in bonds. Given your ages, your overall allocation is "Age+3" to "Age+10" in bonds. Over conservative in my opinion, you can take some more risk with equities instead. With my above suggestion to switch Roth accounts from bonds to stocks, you might address this partly. Depending on your willingness, you might also want to increase equities in your other accounts.
TeacherLady wrote:
Wed Oct 09, 2019 12:01 pm
Overall current retirement allocation: 29% stock, 71% bond
3. With excess income you are forecasting, I suggest you use that to convert part (or parts) of your existing portfolio to Roth, paying the taxes out of this 'excess'. Since the effective tax rate is 30% (22% + 8%), you can convert up to 3 times the amount you save to Roth, where all future growth is tax free.

4. How open are you to relocating to another state, perhaps one with no income tax, like Nevada? I ask this question with a view towards your state taxes, I think you can save a bundle on Roth conversions I suggested above after establishing full residency in such a state (>180 days in that state).

5. The PTTRX fund invests more than necessary into high yield junk bonds. If interest rates rise, these junk bonds get hammered. As retirees, I do not think its investments are appropriate for your particular risk profile. I suggest your husband exchange the fund half and half to the Stable Value fund and the Total Stock Market fund that he's already invested in.
TeacherLady wrote:
Wed Oct 09, 2019 12:01 pm
His 401k Rollover at Fidelity
15% Stable Value fund from previous employer (-n/a-) (0.27%)
15% PIMCO Total Return (PTTRX)(0.71%)
15.5% Vanguard Institutional Total Stock Market (VITPX)(0.02%)
With a 7.5% increase to equities from this recommendation, and a 3% or so increase in equities from my earlier recommendation to move Roth accounts into equities, I think you will be at around 40:60 ratio, right appropriate for you ("Age-10" to "Age-15" in bonds, this will be about Age-7 in bonds, close enough to not quibble too much)

Topic Author
TeacherLady
Posts: 5
Joined: Mon Dec 14, 2009 12:42 am

Re: New Retiree Seeking Portfolio Advice

Post by TeacherLady » Wed Oct 09, 2019 1:21 pm

HomeStretch wrote:
Wed Oct 09, 2019 12:22 pm
Do you have two Vanguard joint taxable accounts (one in Trust name and one held outside Trust) or just one held in Trust?

This is a revocable Trust taxed at your rate, correct?
We have just one Vanguard taxable account which is held in our revocable Trust, taxed at our regular rate.

Topic Author
TeacherLady
Posts: 5
Joined: Mon Dec 14, 2009 12:42 am

Re: New Retiree Seeking Portfolio Advice

Post by TeacherLady » Wed Oct 09, 2019 1:29 pm

lakpr wrote:
Wed Oct 09, 2019 12:43 pm
Just a few random thoughts.

1. Your Roth accounts are stacked with bond funds. The greatest advantage of Roth accounts is that growth is tax free. Why do you want to constrain growth in such accounts, by stocking them with bonds? Ideally you would want to have those asset classes with the greatest expected rate of growth: equities. Given the small(ish) balances in these accounts, I suggest you exchange them both to Vanguard Total Stock Market Index fund (VTSAX).
TeacherLady wrote:
Wed Oct 09, 2019 12:01 pm
His Roth IRA at Vanguard
3% Vanguard Intermediate-term Investment Grade Bond Admiral (VFIDX)(0.10%)

Her Roth IRA at Vanguard
0.5% Vanguard Inflation-Protected Securities Investor Shares (VIPSX)(0.20%)
2.0% Vanguard Total Bond Market Admiral (VBTLX)(0.05%)
2. I usually suggest, and follow in my own investments, a thumb rule of "Age-10" to "Age-15" in bonds. Given your ages, your overall allocation is "Age+3" to "Age+10" in bonds. Over conservative in my opinion, you can take some more risk with equities instead. With my above suggestion to switch Roth accounts from bonds to stocks, you might address this partly. Depending on your willingness, you might also want to increase equities in your other accounts.
TeacherLady wrote:
Wed Oct 09, 2019 12:01 pm
Overall current retirement allocation: 29% stock, 71% bond
3. With excess income you are forecasting, I suggest you use that to convert part (or parts) of your existing portfolio to Roth, paying the taxes out of this 'excess'. Since the effective tax rate is 30% (22% + 8%), you can convert up to 3 times the amount you save to Roth, where all future growth is tax free.

4. How open are you to relocating to another state, perhaps one with no income tax, like Nevada? I ask this question with a view towards your state taxes, I think you can save a bundle on Roth conversions I suggested above after establishing full residency in such a state (>180 days in that state).

5. The PTTRX fund invests more than necessary into high yield junk bonds. If interest rates rise, these junk bonds get hammered. As retirees, I do not think its investments are appropriate for your particular risk profile. I suggest your husband exchange the fund half and half to the Stable Value fund and the Total Stock Market fund that he's already invested in.
TeacherLady wrote:
Wed Oct 09, 2019 12:01 pm
His 401k Rollover at Fidelity
15% Stable Value fund from previous employer (-n/a-) (0.27%)
15% PIMCO Total Return (PTTRX)(0.71%)
15.5% Vanguard Institutional Total Stock Market (VITPX)(0.02%)
With a 7.5% increase to equities from this recommendation, and a 3% or so increase in equities from my earlier recommendation to move Roth accounts into equities, I think you will be at around 40:60 ratio, right appropriate for you ("Age-10" to "Age-15" in bonds, this will be about Age-7 in bonds, close enough to not quibble too much)
Wow - many thanks for all this pertinent advice! #1,2 & 5 we can do straightaway. The Roth conversions we certainly will look into. Moving to another state would be unlikely in the next 2 years, but possible after our last child graduates university!

HomeStretch
Posts: 2052
Joined: Thu Dec 27, 2018 3:06 pm

Re: New Retiree Seeking Portfolio Advice

Post by HomeStretch » Wed Oct 09, 2019 2:21 pm

My suggestions do not take into account whether it’s better to hold your Taxable account inside or outside of your Trust or both ways.

Emergency Fund (EF) - with a 7-figure portfolio value it’s not necessary IMO to have a separate EF. I did away with mine but do like to hold 1-2 months expenses in my bank account in case of a Vanguard system glitch that delays access to my money. Vanguard money market funds (MMF) have good yields. Due to state taxes, a tax-exempt fund likely will give you a higher tax equivalent yield than a fully-taxable MMF or bank account. I use VUSXX Treasury MMF which is state/local tax-exempt. There may be a CA muni MMF that is 100% tax exempt. You can link your bank account to your Vanguard account(s) to transfer funds via wire/ACH easily between them. Initiate your transfers in your Vanguard accounts. You can request checks that allow to write occasional checks from your settlement money market fund (VMFXX) and one other designated MMF.

Spouse should claim SS at age 70, not 70-1/2, as benefit will not grow beyond age 70. Likely a typo but mention it in case it moves SS income into 2021 which in turn might affect your 2021 planned IRA withdrawals.

2019 - 2021 IRA withdrawals make sense to minimize RMDs but since you are saving most if not all, agree with lakpr that you should consider Roth conversions instead so earnings grow tax-free rather than subject to tax in a Taxable account.

In the 22% marginal tax bracket, are/will you be subject to IRMAA surcharges on spouse’s and your (when 65) Medicare Part B/D premiums?

Rolling over His Fidelity 401k to His Vanguard tIRA the year before RMDs start makes sense in order to simplify RMDs and reduce accounts.

For tax-efficient asset location of your desired 30/70 allocation, consider:

2.5% Taxable account
VTSAX US TSM and MMF for your EF $.

5.5% His/Her Roth IRAs
VTIAX International TSM for 100% of your international allocation with the remainder in VTSAX.

46.5% His/Her tIRAs
Hold 100% bonds like VBTLX US TBM to allow more equities to be held in 401k as 401k bond fund has a high ER

45.5% His 401k
Hold remaining 22% equities allocation in VITPX US TSM and the remainder in fixed income. Are there any low ER bond funds available? If not, consider rolling over 401k sooner to an IRA. You will get lower ER bond fund choices. ER savings on bonds held in the IRA will be slightly offset by higher IRA TSM ER. The US TSM Fund VTSAX has a higher ER .04% in an IRA versus the 401k’s Institutional TSM ER .02%. You could hold the VTI US TSM ETF in the IRA which has a lower ER of .03% than the mutual fund VTSAX

Topic Author
TeacherLady
Posts: 5
Joined: Mon Dec 14, 2009 12:42 am

Re: New Retiree Seeking Portfolio Advice

Post by TeacherLady » Wed Oct 09, 2019 9:26 pm

Many thanks for the wise advice. Have already fixed the Fidelity 401(k) and the Roth IRAs. Preparing for the Roth conversions.

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