Puzzled by my portfolio: Can you help me prioritize and maximize?

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Topic Author
OkanePlease
Posts: 110
Joined: Tue Apr 21, 2015 12:05 pm

Puzzled by my portfolio: Can you help me prioritize and maximize?

Post by OkanePlease » Sun Jan 12, 2020 12:04 pm

I’m trying to prioritize what to do with our (my wife's and my) portfolio and what to do with our lives. Hopefully you can help with the first, which might help me help myself with the second!

Emergency funds: 6 months in 1.15% savings account (separate from what’s described just below)
Debt: None
Tax Filing Status: Married filing jointly (no children)
Tax Rate: 12% Federal, 0% State
State of Residence: WA
Age: 56/53
Current overall asset allocation: 38% stocks / 62% bonds (a bit conservative but sleeping okay)
Current total portfolio: $1,750,000

No mortgage, with house fully paid and therefore an additional asset (figure value about $900,000).
Annual expenses are about $3,500 per month or $42,000 per year, excluding any federal income tax.
His future anticipated social security benefit (delaying until age 70): $2,503/month.
Her future anticipated social security benefit (delaying until age 67): $1,009/month. (NOTE: This is half of his age 67 amount, as it exceeds the likely benefit based on her short earnings record.)

Portfolio breakdown

Combined taxable: $1,200,000 (within this amount: about 38% Vanguard Total Stock Market Admiral, 15% Vanguard FTSE All-World ex-US Index Admiral, and 47% Vanguard Intermediate Term Tax Exempt Bond Admiral). In addition to this, there’s about $100,000 cash (currently in online savings at about 2% interest rate.

His SEP-IRA: ~$275,000 Vanguard Total Bond Market Admiral (VBTLX) – no future contributions anticipated

His Roth IRA: ~$55,000 Vanguard Total International Bond Market Admiral (VTABX)

Her 401K: ~$83,000 Fidelity U.S. Bond Index Institutional (FXSTX)

Her Roth IRA: ~$31,000 Vanguard Total Bond Market Admiral (VBTLX)

Income and Contributions

I’m working part-time in a tenuous situation (academic, so work depends on enrollment and other factors). If all goes well, gross income is $30,000 per year, enabling a 10% 401K contribution (matched by employer) and access to low-cost health insurance.

My wife is leaving her job to take a deserved break, but may be inclined to work a low-paying part-time job to supplement income and stay stimulated. But playing things conservatively, I’m not counting on it, so it would be “bonus” money.

Also, no future inheritance expected. And...no children, so can die broke or leave money to good causes.

Questions:

1. If I can (and want) to continue in my job (health insurance is attractive!), what changes should I make to our portfolio? Some things:
(a) How is my overall asset allocation? Given my low tax bracket, I’m not sure that the tax-exempt bond fun makes sense in my taxable account. Perhaps I should switch to Total Bond Fund? I don’t like the idea of paying taxes on all the monthly dividends, but maybe it’s worth it for the higher yield?
(b) Should I/we be doing Roth contributions? Still not sure if I/we should do this for 2019.
(c) Should we be considering Roth conversions?
(d) Related to (b), I’ve been doing tax gain harvesting as much as possible (utilizing 0% space) the past few years.

2. If I want to get past the uncertainties of my current job, could we consider retirement right now? I ran a couple of models and see a good potential success rate but am open to opinions. Some things:
(a) I foresee similar living expenses in retirement (we’re not big spenders).
(b) We’d need to include an allocation of about $12,000 per year for combined health insurance. But maybe less if lowered income means ACA eligibility?
(c) From what (little) I understand, trying for ACA would mean attentiveness to overall income, which might mean less tax gain harvesting, Roth conversions, etc.?
(d) Anything else I should consider if considering retirement? (I know that continuing to work, even part-time, will help ensure a higher success rate, but trying to assess early retirement as a “worst-case scenario.” I/we might want to work just to be active/stimulated and for more security.)

I look forward to your ideas, insights, and inspiration. Thanks!
Last edited by OkanePlease on Sun Jan 12, 2020 10:08 pm, edited 1 time in total.

Jablean
Posts: 460
Joined: Sat Jun 02, 2018 2:38 pm

Re: Portfolio puzzle: Can you help me prioritize and maximize?

Post by Jablean » Sun Jan 12, 2020 7:10 pm

Budgeting health care at private pay you probably need $2000 a month or $24,000 a year. But yes, your new income level should qualify you for ACA.

For 2 people you should qualify for ACA if your income is above 17,000 and less than $67,640. If you are under the max you should qualify for some premium subsidy. In my state we make a few thousand under the max and pay 0 in premiums for my family of 3. I use SEP, IRA, HSA to make sure I stay under the max. If i were to go over I would fall off what we call the ACA cliff and would have to pay back all the subsidy we received.

I think you need to transition your current Roths to total stock market index either at 100% or at least 50/50 with what you've got now. And if you really want to stay at 40/60 then exchange your taxable stock to bonds and use the income to help with your yearly expenses. This income will count toward your ACA max but you are already use to this when doing your tax loss harvesting. Big thing is that the ACA limit is lower than the 0% cap gains limit. Tax harvesting on ACA is a bit harder because you have to do that before year end while the SEP/IRAs allow you to adjust while you are doing your taxes. We are both sole props so calculating year end is difficult.

Because you are over 10 years from Medicare and you have an outsized taxable portfolio as it is so looking for tax advantaged or free space is a priority. Roth when possible - not forgetting that one of you will soon qualify for catch-up contributions but using the IRA/SEP/401K permutations too if available and or needed to balance for ACA.

lakpr
Posts: 3515
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio puzzle: Can you help me prioritize and maximize?

Post by lakpr » Sun Jan 12, 2020 8:42 pm

+1 to the recommendation from Jablean above, move your Roth 401k and Roth IRA accounts to total stock market index. Even if it pushes you slightly above the 40:60 allocation, it's worth doing so. Combined, it is only $86k, and on a 1.75 million portfolio it is less than 5%. Really does not move the needle in terms of risk, but gives you tax free growth.

The defining feature of Roth accounts is that all growth is tax free (the only constraint is that withdrawals can happen without penalty or taxes only at age 59.5). As such, you should be looking to maximize such tax free growth. In other words, you should pack your Roth account with only those asset classes that are expected to give you the maximum returns.

Topic Author
OkanePlease
Posts: 110
Joined: Tue Apr 21, 2015 12:05 pm

Re: Portfolio puzzle: Can you help me prioritize and maximize?

Post by OkanePlease » Sun Jan 12, 2020 11:23 pm

Hmm...now a little more confused. Jablean and Lakpr, I appreciate your advice. What confuses me is that it runs counter to other advice I've read at this site and elsewhere, which states that I should put bonds/bond funds in tax-advantaged buckets first (hence our Roth IRA holdings) and as a last resort put them in taxable buckets if there's "overflow." Maybe someone can straighten me out on this?!?
Jablean wrote:
Sun Jan 12, 2020 7:10 pm
I think you need to transition your current Roths to total stock market index either at 100% or at least 50/50 with what you've got now. And if you really want to stay at 40/60 then exchange your taxable stock to bonds and use the income to help with your yearly expenses. This income will count toward your ACA max but you are already use to this when doing your tax loss harvesting. Big thing is that the ACA limit is lower than the 0% cap gains limit. Tax harvesting on ACA is a bit harder because you have to do that before year end while the SEP/IRAs allow you to adjust while you are doing your taxes. We are both sole props so calculating year end is difficult.

Because you are over 10 years from Medicare and you have an outsized taxable portfolio as it is so looking for tax advantaged or free space is a priority. Roth when possible - not forgetting that one of you will soon qualify for catch-up contributions but using the IRA/SEP/401K permutations too if available and or needed to balance for ACA.
lakpr wrote:
Sun Jan 12, 2020 8:42 pm
+1 to the recommendation from Jablean above, move your Roth 401k and Roth IRA accounts to total stock market index. Even if it pushes you slightly above the 40:60 allocation, it's worth doing so. Combined, it is only $86k, and on a 1.75 million portfolio it is less than 5%. Really does not move the needle in terms of risk, but gives you tax free growth.

Northern Flicker
Posts: 5072
Joined: Fri Apr 10, 2015 12:29 am

Re: Puzzled by my portfolio: Can you help me prioritize and maximize?

Post by Northern Flicker » Mon Jan 13, 2020 12:38 am

His future anticipated social security benefit (delaying until age 70): $2,503/month.
Her future anticipated social security benefit (delaying until age 67): $1,009/month. (NOTE: This is half of his age 67 amount, as it exceeds the likely benefit based on her short earnings record.)
She probably should file at age 62 based on her own earnings. When you file at age 70, her SS benefit will adjust to the same spousal benefit she would have received if delaying, but she will also get a presumably smaller benefit from age 62 to age 67.

I don’t agree with the recommendation of needing to hold stock in Roth space instead of taxable space. With no state income tax, and with the foreign tax credit, capital gains on withdrawals and dividends on the two stock index funds are likely to be tax free in the taxable space in the spending bracket of $42K/yr. Take advantage of Roth space to get tax free interest from taxable bonds. You also get tax loss harvest opportunities, and a bond index fund is more diversified and a little less risky than muni bonds.
Index fund investor since 1987.

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Watty
Posts: 18115
Joined: Wed Oct 10, 2007 3:55 pm

Re: Puzzled by my portfolio: Can you help me prioritize and maximize?

Post by Watty » Mon Jan 13, 2020 1:12 am

You can check this web site to get a suggested Social Security claiming strategy. It can vary but it will likely involve one of your starting earlier.

https://opensocialsecurity.com/

I would do as many roth conversion as you can up to the top of the 12% federal tax bracket. One thing you need to take into account is that if one of you survives the other then they will be be filing in the higher single tax brackets.

OkanePlease wrote:
Sun Jan 12, 2020 12:04 pm
Annual expenses are about $3,500 per month or $42,000 per year, excluding any federal income tax.
People live on that especially with a paid off house but that is pretty modest and you will have periodic large expenses like replacing a car, home repairs, dental work(!!!), hearing aids, medical expenses that insurance does not cover, etc.

When you start Medicare you will still have medicare premiums, Part d drug coverage, and likely a supplement too so be sure to budget for that.

You should take a hard look at that number and you might want to increase it some in your planning.
OkanePlease wrote:
Sun Jan 12, 2020 12:04 pm
No mortgage, with house fully paid and therefore an additional asset (figure value about $900,000).
That is a huge safety net since you can tap the home equity if you need to.

Jablean
Posts: 460
Joined: Sat Jun 02, 2018 2:38 pm

Re: Portfolio puzzle: Can you help me prioritize and maximize?

Post by Jablean » Mon Jan 13, 2020 1:37 am

OkanePlease wrote:
Sun Jan 12, 2020 11:23 pm
Hmm...now a little more confused. Jablean and Lakpr, I appreciate your advice. What confuses me is that it runs counter to other advice I've read at this site and elsewhere, which states that I should put bonds/bond funds in tax-advantaged buckets first (hence our Roth IRA holdings) and as a last resort put them in taxable buckets if there's "overflow." Maybe someone can straighten me out on this?!?
Strategies for pre-tax (IRA, regular 401k etc) would be different from post-tax (Roth, Roth401k, even taxable) What I see on here is usually bonds in the pre-tax, with the Roth and taxable more up for grabs with both leaning toward stocks. You don't have anything that can grow without tax harvesting right now so you don't have any long-term stock plays. But you are doing index funds, as a good boglehead should, so stock plays really aren't a thing.

Now, also not adverse to @NorthernFlickers suggestions, shows why all the details matter with state, income, tax rate etc and they've indicated why some of those may make better sense for what you hold where in your specific situation. You may decide that with ACA you don't want an income stream coming out of taxable so that you can play with tax harvest headroom because with my suggestion you'd have to tax harvest to get into bonds in the first place anyway.

I learn by posting and seeing what other people say in response. Every day I learn more about what I don't know and I make further steps to taming my own portfolio.

lakpr
Posts: 3515
Joined: Fri Mar 18, 2011 9:59 am

Re: Puzzled by my portfolio: Can you help me prioritize and maximize?

Post by lakpr » Mon Jan 13, 2020 11:27 am

To clarify myself ... I am only suggesting that you revise your asset allocation from 38:62 currently, to 43:57 after conversion of bonds in the Roth account to stocks. I was trying to say it would not move the needle much.

I did see your Traditional accounts are all already maxed out with bonds, and that you stuffed additional bonds into Roth accounts. Yes moving bonds into Roth is more tax efficient than putting them in taxable, but it has the side effect of lowering your, what could be tax free growth.

Topic Author
OkanePlease
Posts: 110
Joined: Tue Apr 21, 2015 12:05 pm

Re: Puzzled by my portfolio: Can you help me prioritize and maximize?

Post by OkanePlease » Mon Jan 13, 2020 4:40 pm

Northern Flicker wrote:
Mon Jan 13, 2020 12:38 am
His future anticipated social security benefit (delaying until age 70): $2,503/month.
Her future anticipated social security benefit (delaying until age 67): $1,009/month. (NOTE: This is half of his age 67 amount, as it exceeds the likely benefit based on her short earnings record.)
She probably should file at age 62 based on her own earnings. When you file at age 70, her SS benefit will adjust to the same spousal benefit she would have received if delaying, but she will also get a presumably smaller benefit from age 62 to age 67.
Good point, thanks!
Northern Flicker wrote:
Mon Jan 13, 2020 12:38 am
I don’t agree with the recommendation of needing to hold stock in Roth space instead of taxable space. With no state income tax, and with the foreign tax credit, capital gains on withdrawals and dividends on the two stock index funds are likely to be tax free in the taxable space in the spending bracket of $42K/yr. Take advantage of Roth space to get tax free interest from taxable bonds. You also get tax loss harvest opportunities, and a bond index fund is more diversified and a little less risky than muni bonds.
This is helpful, as a different perspective from that of the previous comments in this thread (which were also helpful and appreciated!).

Northern Flicker
Posts: 5072
Joined: Fri Apr 10, 2015 12:29 am

Re: Puzzled by my portfolio: Can you help me prioritize and maximize?

Post by Northern Flicker » Mon Jan 13, 2020 7:50 pm

I agree with Watty on using the social security optimizer. But an identified strategy also should be vetted with SSA either on the SSA website or by going to a SSA office.
Index fund investor since 1987.

Topic Author
OkanePlease
Posts: 110
Joined: Tue Apr 21, 2015 12:05 pm

Re: Puzzled by my portfolio: Can you help me prioritize and maximize?

Post by OkanePlease » Tue Jan 14, 2020 1:37 pm

Watty, thanks so much for that website. That site and its links to related websites are really helpful.

Yes, I should be a little more conservative in planning for future annual expenses. Also, before too long, will probably sell the house (property taxes keep climbing, and maintenance costs will only increase!) and move into something less expensive, or perhaps rent.
Watty wrote:
Mon Jan 13, 2020 1:12 am
You can check this web site to get a suggested Social Security claiming strategy. It can vary but it will likely involve one of your starting earlier.

https://opensocialsecurity.com/

I would do as many roth conversion as you can up to the top of the 12% federal tax bracket. One thing you need to take into account is that if one of you survives the other then they will be be filing in the higher single tax brackets.

OkanePlease wrote:
Sun Jan 12, 2020 12:04 pm
Annual expenses are about $3,500 per month or $42,000 per year, excluding any federal income tax.
People live on that especially with a paid off house but that is pretty modest and you will have periodic large expenses like replacing a car, home repairs, dental work(!!!), hearing aids, medical expenses that insurance does not cover, etc.

When you start Medicare you will still have medicare premiums, Part d drug coverage, and likely a supplement too so be sure to budget for that.

You should take a hard look at that number and you might want to increase it some in your planning.
OkanePlease wrote:
Sun Jan 12, 2020 12:04 pm
No mortgage, with house fully paid and therefore an additional asset (figure value about $900,000).
That is a huge safety net since you can tap the home equity if you need to.

Topic Author
OkanePlease
Posts: 110
Joined: Tue Apr 21, 2015 12:05 pm

Re: Portfolio puzzle: Can you help me prioritize and maximize?

Post by OkanePlease » Tue Jan 14, 2020 8:26 pm

Jablean, I totally agree with your sentiment below. Thanks for contributing to my growing knowledge!
Jablean wrote:
Mon Jan 13, 2020 1:37 am
I learn by posting and seeing what other people say in response. Every day I learn more about what I don't know and I make further steps to taming my own portfolio.

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