Eureka! 3 to 4% rule and managed account not working

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Topic Author
Az pal
Posts: 2
Joined: Thu Apr 16, 2020 5:04 pm

Eureka! 3 to 4% rule and managed account not working

Post by Az pal »

Hi. My first post. I’ve been trying to read here and catch up, educate myself. Most posts are way over my head.

Neither my wife nor I are at all finance/investment literate or inclined. Though we are careful spenders. This weekend I have read both “Bogleheads Investing” and “Bogleheads Three Fund Portfolio”, and I’m convinced and ready to pull the trigger.

Summary: We have had a managed account, same manager, mid-6 figure nestegg, for over 10 years since I retired early at 55. We are now 65 and 66. We are debt free, comfortable house good cars, very good health insurance from last employer (though no long-term care coverage).

The nest egg was at $600K ten years ago. It’s now $400K. In addition, we have combined $90K Roth IRAs. For the first 5 years, we were drawing it down by $3K/mo. Now, having comfortably downsized, and having SS, we only pull $1500/mo from it. We may reduce that to 1K/mo as my wife’s small SS kicks in.

Last week, we spoke with our funds manager, who was doing his job of encouraging us, after this past month. He was forecasting that in the next 5 years he will grow the nest egg back to $600K. Meanwhile..., as he’s talking, I’m looking at my own simple spreadsheet and graph that I maintain of said nest egg. Suddenly the light went on! It’s not going to last!

The downward attrition over the past 10 years has averaged $20K/year. At that rate, it will be gone when I’m 78. If we just drop our manager’s fees ($6K/yr) and all else stays equal, that would extend it another 7 years.

I’m going to discuss this this afternoon with our MBA son-in-law who IS fiscally minded and conservative and has his young family’s savings in EFTs. But I thought I’d post here as well for any other comments. Please keep them simple :happy With my limited grasp atm, I’m simply considering the two books’ advise: putting our $400K in VTSAX, VTIAX and VBTLX. Several online calculators, one at Vanguard, suggested anywhere from 40/60 mutual/bond to 60/40.

Our life situation is so stable now that I don’t think we need to spend the extra .4% for Vanguard’s ongoing “Personal Adviser”. I just need a little direction getting started. Maybe Vanguard offers that much advise, free of charge, when starting. (you see why we’ve stayed with a manager all these years :? )

Thanks in advance for your thoughts!

Ps… this may be too vague, but would anyone hazard a guess… suppose we had been in that 3 fund portfolio these past ten years, spending $3k/mo for 5 and $1.5K for 5, what WOULD it be worth now? My wife would really like to know.
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FiveK
Posts: 10874
Joined: Sun Mar 16, 2014 2:43 pm

Re: Eureka! 3 to 4% rule and managed account not working

Post by FiveK »

Az pal wrote: Sun Apr 19, 2020 1:05 pm Ps… this may be too vague, but would anyone hazard a guess… suppose we had been in that 3 fund portfolio these past ten years, spending $3k/mo for 5 and $1.5K for 5, what WOULD it be worth now? My wife would really like to know.
A quick look using Backtest Portfolio Asset Allocation, starting with $600K 31-Dec-2010, 40% VTSAX, 10% VTIAX, and 50% VBTLX, no rebalancing, and withdrawing $2500/mo until 31-March-2020 gives ~$700K.
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JaneyLH
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Joined: Wed Oct 16, 2013 7:16 pm

Re: Eureka! 3 to 4% rule and managed account not working

Post by JaneyLH »

Congratulations on finding the Bogleheads resources and making a very sound decision to move to a simple portfolio of low-cost index funds. And especially to rid yourself of your financial advisor! Depending on what investments your FA placed you in, you will likely save more than their fee of $6K/year -- you will probably also save fees on higher cost funds as well. :moneybag This is what I discovered.

I made this move 5 years ago, and it has worked out extremely well for my husband and I. I also learned the lesson of asset allocation based on acceptable risk, and changed my AA from 70/30 stocks/bonds to 50/50 last November. I didn't hit the peak of the market, but I'm grateful that I had moved a good amount of money over to bonds before the recent plunge in stocks occurred. Now at age 65 I feel comfortable enough with this asset allocation not to feel I have to look at my accounts every day at what the market is doing and worry. That's a really good feeling!

The Boglehead investment strategy is simple enough that you don't really need any paid advice to stay on top of it, once you get the portfolio transitioned. Depending on your current situation, you might require tax advice to avoid creating tax liability through selling appreciated funds if you have taxable accounts. (Even now after 5 years, I still have a couple of individual stocks and one large-balance fund that I've yet to get rid of.) I have confidence you will get excellent advice on how to proceed from the generous and very experienced people on this forum -- as did I. The best way to get useful responses is to post your portfolio information in the standard format that this forum suggests here. bogleheads.org/forum/viewtopic.php?f=1&t=6212

You will be amazed at the value of free advice you will get!

Best of luck to you ... and hopefully someone who is better at math and spreadsheets than I will provide the answer about backtesting your desired portfolio over the last 10 years! :happy
TravelforFun
Posts: 2270
Joined: Tue Dec 04, 2012 11:05 pm

Re: Eureka! 3 to 4% rule and managed account not working

Post by TravelforFun »

Az pal wrote: Sun Apr 19, 2020 1:05 pm Hi. My first post. I’ve been trying to read here and catch up, educate myself. Most posts are way over my head.

Neither my wife nor I are at all finance/investment literate or inclined. Though we are careful spenders. This weekend I have read both “Bogleheads Investing” and “Bogleheads Three Fund Portfolio”, and I’m convinced and ready to pull the trigger.

Summary: We have had a managed account, same manager, mid-6 figure nestegg, for over 10 years since I retired early at 55. We are now 65 and 66. We are debt free, comfortable house good cars, very good health insurance from last employer (though no long-term care coverage).

The nest egg was at $600K ten years ago. It’s now $400K. In addition, we have combined $90K Roth IRAs. For the first 5 years, we were drawing it down by $3K/mo. Now, having comfortably downsized, and having SS, we only pull $1500/mo from it. We may reduce that to 1K/mo as my wife’s small SS kicks in.

Last week, we spoke with our funds manager, who was doing his job of encouraging us, after this past month. He was forecasting that in the next 5 years he will grow the nest egg back to $600K. Meanwhile..., as he’s talking, I’m looking at my own simple spreadsheet and graph that I maintain of said nest egg. Suddenly the light went on! It’s not going to last!

The downward attrition over the past 10 years has averaged $20K/year. At that rate, it will be gone when I’m 78. If we just drop our manager’s fees ($6K/yr) and all else stays equal, that would extend it another 7 years.

I’m going to discuss this this afternoon with our MBA son-in-law who IS fiscally minded and conservative and has his young family’s savings in EFTs. But I thought I’d post here as well for any other comments. Please keep them simple :happy With my limited grasp atm, I’m simply considering the two books’ advise: putting our $400K in VTSAX, VTIAX and VBTLX. Several online calculators, one at Vanguard, suggested anywhere from 40/60 mutual/bond to 60/40.

Our life situation is so stable now that I don’t think we need to spend the extra .4% for Vanguard’s ongoing “Personal Adviser”. I just need a little direction getting started. Maybe Vanguard offers that much advise, free of charge, when starting. (you see why we’ve stayed with a manager all these years :? )

Thanks in advance for your thoughts!

Ps… this may be too vague, but would anyone hazard a guess… suppose we had been in that 3 fund portfolio these past ten years, spending $3k/mo for 5 and $1.5K for 5, what WOULD it be worth now? My wife would really like to know.
Wait! Your asset is $490k and you only need $20k now then $12k when your wife's SS kicks in. Your asset would last you more than 25 years if your it can just keep up with inflation. I don't see a problem here. Get rid of the manager, decide on an allocation you're comfortable with, and invest in two to three funds; and you'll be fine.

TravelforFun
Ambitious994
Posts: 109
Joined: Fri Mar 13, 2020 10:33 pm

Re: Eureka! 3 to 4% rule and managed account not working

Post by Ambitious994 »

Az pal wrote: Sun Apr 19, 2020 1:05 pm Hi. My first post. I’ve been trying to read here and catch up, educate myself. Most posts are way over my head.

Neither my wife nor I are at all finance/investment literate or inclined. Though we are careful spenders. This weekend I have read both “Bogleheads Investing” and “Bogleheads Three Fund Portfolio”, and I’m convinced and ready to pull the trigger.

Summary: We have had a managed account, same manager, mid-6 figure nestegg, for over 10 years since I retired early at 55. We are now 65 and 66. We are debt free, comfortable house good cars, very good health insurance from last employer (though no long-term care coverage).

The nest egg was at $600K ten years ago. It’s now $400K. In addition, we have combined $90K Roth IRAs. For the first 5 years, we were drawing it down by $3K/mo. Now, having comfortably downsized, and having SS, we only pull $1500/mo from it. We may reduce that to 1K/mo as my wife’s small SS kicks in.
Welcome :D.

So correct me if I'm wrong on the numbers, but you retired at 55 starting with $600k in one account and another $90k in IRAs, for a total of $690,000? Is that right? What investments were these monies held in and what was the CAGR over the period of time? If for the initial 5 years you were pulling $36,000 a year, then if the balance of $690,000 is correct, you had a 5% withdrawal rate which is way too high considering you retired at 55. In general, the rule is 4%, but with early retirement you could be more conservative at 3%.

With Social Security kicking in, that helps out because if you are only pulling $18,000 from it now, that takes your withdrawal rate down to less than 3% again if we are talking about a balance of $690,000 (correct me if I'm right on that balance).

If the fund is now down to $400,000 and you are pulling $18,000 from it, then that's a 4.5% withdrawal rate which is too high.

Az pal wrote: Sun Apr 19, 2020 1:05 pm Last week, we spoke with our funds manager, who was doing his job of encouraging us, after this past month. He was forecasting that in the next 5 years he will grow the nest egg back to $600K. Meanwhile..., as he’s talking, I’m looking at my own simple spreadsheet and graph that I maintain of said nest egg. Suddenly the light went on! It’s not going to last!

The downward attrition over the past 10 years has averaged $20K/year. At that rate, it will be gone when I’m 78. If we just drop our manager’s fees ($6K/yr) and all else stays equal, that would extend it another 7 years.
$6,000 a year in fees? On a $400k to $600k portfolio? What is this guy charging, a 1% to 2% fee? Drop the Fund Manager immediately. Immediately, literally, tomorrow.

Az pal wrote: Sun Apr 19, 2020 1:05 pm I’m going to discuss this this afternoon with our MBA son-in-law who IS fiscally minded and conservative and has his young family’s savings in EFTs.
You mean ETFs?

Az pal wrote: Sun Apr 19, 2020 1:05 pm But I thought I’d post here as well for any other comments. Please keep them simple :happy With my limited grasp atm, I’m simply considering the two books’ advise: putting our $400K in VTSAX, VTIAX and VBTLX. Several online calculators, one at Vanguard, suggested anywhere from 40/60 mutual/bond to 60/40.
You absolutely do not need a Fund Manager. Yes, sign up on Vanguard as a Personal Investor. You can look at the following

- Total Bond Index for your Bonds
https://investor.vanguard.com/mutual-fu ... view/vbtlx

- Total US Stock Market Index or S&P 500 Index for your Stocks
https://investor.vanguard.com/mutual-fu ... view/vtsax
https://investor.vanguard.com/mutual-fu ... view/vfiax

Technically for the stocks, The Total US Stock Market is about 80% The S&P 500 Index anyway, I personally just use the S&P 500 Index because I like large cap stocks and don't feel the need to have all of the additional diversification. But either one works fine.

Determine your risk tolerance and note that your risk tolerance differs from your risk capacity.

Your risk capacity is based on your time horizon for investing. So in general, a younger investor with a 30 year time horizon before they need to start withdrawing monies has time to go through The Roller Coaster of market booms, busts, crashes, bulls, bears, etc. An investor at your age doesn't have much of a risk capacity due to the shorter time horizon.

Your risk tolerance though, is what truly matters. It's your appetite for volatility. If you can't handle a 50% drop in your portfolio due to a market crash and you are going to panic and sell.....that means that a stock heavy allocation isn't right for you.

I would recommend based on your age and entrance to this, that you stay at 40% stocks and 60% bonds.

So of the $400,000 you can put $160,000 into either The Total US Stock Market or The S&P 500 Index, then put the $240,000 into The Total Bond Index Fund. That should workout great for you going forward. As you get older, you could rebalance into a 25% stock and 75% bonds holding.

Now, with this being said, you have to read up on The Trinity Study or similar studies, to understand Withdrawal Rates. https://earlyretirementnow.com/2016/12/ ... t-1-intro/

Assuming you will remain at 25% to 40% stocks going forward, with the rest in bonds, you don't want to go over a 3% withdrawal rate on this portfolio in any given year. This means the portfolio will last you at least 30 years give or take. So if you are coming in starting with $400,000 you can't pull out more than $12,000 a year on this portfolio at least for now. So you are going to have to rely on Social Security and cutting your expenses.

Az pal wrote: Sun Apr 19, 2020 1:05 pm Our life situation is so stable now that I don’t think we need to spend the extra .4% for Vanguard’s ongoing “Personal Adviser”. I just need a little direction getting started. Maybe Vanguard offers that much advise, free of charge, when starting. (you see why we’ve stayed with a manager all these years :? )
You don't need any Advisory services because you are using Index Funds. Index Funds just match an Index, which is why the Expense Ratios are very low.

Az pal wrote: Sun Apr 19, 2020 1:05 pm Thanks in advance for your thoughts!

Ps… this may be too vague, but would anyone hazard a guess… suppose we had been in that 3 fund portfolio these past ten years, spending $3k/mo for 5 and $1.5K for 5, what WOULD it be worth now? My wife would really like to know.
Hmmm, it's hard to calculate but I think your withdrawal rates would have still been too high.
LeftCoastIV
Posts: 253
Joined: Wed May 01, 2019 7:19 pm

Re: Eureka! 3 to 4% rule and managed account not working

Post by LeftCoastIV »

What funds do you own right now, in both taxable and IRA? Actual fund names and expense ratios would be helpful for more specific advise.

Also, if you are with an advisory firm like Edward Jones, there are threads on this forum on how to "break up" effectively.
Topic Author
Az pal
Posts: 2
Joined: Thu Apr 16, 2020 5:04 pm

Re: Eureka! 3 to 4% rule and managed account not working

Post by Az pal »

Thank you FiveK, Janey, Travelforfun, Ambitious, and Leftcoast. Your responses were so thoughtful and generous!! So much to review and links to follow-up. For sure the consensus is to leave our manager. Or, to quote Ambitious: "Drop the Fund Manager immediately. Immediately, literally, tomorrow. " :happy

In addition to all of your thoughts, as I said, I went to discuss this with our MBA son-in-law yesterday. I think he was quite thrilled to impart his knowledge to his father-in-law who has never seriously engaged in this subject with him.

He is primarily using Betterment for his index funds, bonds, IRAs, cash etc, because he loves watching their allocation tool "Robo" on his phone as it makes adjustments based on market conditions, using it's algorithm factoring in risk, and all his various plans (kids college, future car purchase etc etc) He can adjust his situation and needs anytime in his phone app and Robo algorithm will give advise and make adjustments as needed. That Robo service costs .4%. But he loves that stuff. It apparently just made a change that saved him $600 on his taxes. So it's helping pay for itself. He agrees, active Fund Managers are becoming a thing of the past.

I've also been reading on here about complaints of Vanguard's lack of customer service. We also have the family trust issue with our investment. So, I think the consensus is that we will probably find a local Fidelity office to begin discussions with as we continue to educate ourselves, here in this forum especially (thanks for the tip on threads about "How To Leave Your Investment Manager". I think that we agreed that it would be worth our while to pay maybe .25% to get SOME professional guidance with bonds, index funds, cash and our IRA.

Thank you again all for taking so much time and effort to give your feedback. I will continue to refer to it.
Deblog
Posts: 89
Joined: Mon Nov 05, 2018 6:16 am

Re: Eureka! 3 to 4% rule and managed account not working

Post by Deblog »

I have my rollover with vanguard but opened an HSA with fidelity and a Roth to roll work after tax money to. Fidelity then called me trying to get me to use them to manage the Roth. I was curious and asked what their fees were and was told 1- 1.5% so you need to decide if you will be managing them yourself or not to save that %. At least fidelity funds have better costs than what your advisor may have you in.
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