How to create 60/40 portfolio?

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go2
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Joined: Sun May 10, 2020 10:57 am

How to create 60/40 portfolio?

Post by go2 » Thu May 21, 2020 11:50 am

Please look over my situation and give advice me.

Our current portfolio holding are as follow:

Total Bond Fund 42% (TIRA)
Money Market 44%, earning .030%
Stock funds 4% TIRA, 10% is in taxable account.

I am 76 years old and my husband is 81 years old. All our lifetime, we have invested our TIRA in the stock fund which created a tax trap. Due to taking the RMD, our tax bracket is pushed up, so this year to delay the growth, I moved all mine and 50% of my husband’s TIRA to Total Bond fund which caused bond heavy. My husband other 50% of TIRA is in the Total Stock Market Fund.

19% of money market fund is set aside for buying a house. When this Coronaviurs is over, we will move and buy a house.

For emergency fund and to reduce the tax, I am considering moving 10% of Money Market fund to tax exempt bond fund in the taxable account; which is better option between intermediate term tax exempt bond fund or Tax Exempt Bond Fund?

The remaining Money Market Fund, I want to put into stock fund to balance out portfolio but due to current economy and virus situation, I do not know I should be buying stock fund now?

Our goal is to grow this portfolio. We depend on this portfolio as a long-term care fund. For now, we don’t need to take out savings for living expenses.



Thank you for your help.

bloom2708
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Re: How to create 60/40 portfolio?

Post by bloom2708 » Thu May 21, 2020 12:44 pm

At late 70s/early 80s, no need to be 60/40 anymore.

I think 20% stocks would be a good amount. No more. It would be easy to get ~15% more stocks. Exchange either cash or bonds.

Paying tax isn't the end of the world. You deferred the tax on those investments and made it to 80 something. Not really that bad of an outcome.

I know people don't like paying tax now or then, but "then" isn't guaranteed for anyone. Good luck! Hopefully others give you advice.
Last edited by bloom2708 on Thu May 21, 2020 1:17 pm, edited 1 time in total.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

mhalley
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Re: How to create 60/40 portfolio?

Post by mhalley » Thu May 21, 2020 12:48 pm

Do you mean total bond vs tax exempt bond? Or prime mm vs muni mm? Whether it is advisable to use a muni vs regular bond fund depends on your tax bracket. Let’s look the current yields.
Vanguard Total bond fund vbtlx 7 day yield 1.49%
Vanguard int muni Vbilx 1.43%
Now let’s figure the taxable equivalent yield from https://www.calcxml.com/calculators/inc11?skn=#results
At 12% the tax eq yield is 1.625%
At 22% 1.83%
MM funds
Prime 0.38%
Muni 0.31%
12% tax eq yield 0.352
22% 0.387%

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Re: How to create 60/40 portfolio?

Post by abuss368 » Fri May 22, 2020 12:15 pm

Considering your age range I would look at the overall asset allocation. A 60/40 portfolio may (or may not) be appropriate.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

Topic Author
go2
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Re: How to create 60/40 portfolio?

Post by go2 » Fri May 22, 2020 6:37 pm

Thank you for all your replies.

This is my very first post and I really don’t know what I am doing, therefore. I am trying to learn from the wise people on this website.

Only our ITRA is in the Total bond fund and we are planning to leave it there.

25 % of our entire portfolio is in Treasury M. M. earning .027%, and this is in the taxable account. Is there any way I can do better than this? 19% out of 25% is set aside for purchase of house near future. Our tax bracket is 24%.

CD at banks hardly pays anything now; therefore, not much choices.

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WoodSpinner
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Re: How to create 60/40 portfolio?

Post by WoodSpinner » Fri May 22, 2020 7:52 pm

OP,

Can you share a bit about your expenses? Goals besides buying a house?

WoodSpinner

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go2
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Re: How to create 60/40 portfolio?

Post by go2 » Sat May 23, 2020 5:30 pm

Thank you for asking. Our goal is to grow without losing a lot. Due to our age, if we lose a lot, we don’t have time to wait for market to go up and recover the loss.

Currently we live in a small town so cost of living is much cheaper compare to where our kids live where we want to move to be closer to them.

Our annual cost of living expense is $55K, for now we can pay without getting money out of savings.

lakpr
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Re: How to create 60/40 portfolio?

Post by lakpr » Sat May 23, 2020 8:54 pm

I would suggest investment of your money market fund that is earning 0.027%, into Vanguard Target Retirement Income fund. It is a fund that invests in a 30% stocks, 70% bonds blend. It is a slightly more addition of stocks to your portfolio (your current portfolio is 14:86 blend, you will move approximately to 25:75 on your overall portfolio)

That fund is slight tax inefficient, but in your case with a $55k income you are in 12% bracket (just barely out of 10% bracket), so tax inefficiency is the least of the concerns. Try it out for an year or two before deciding to add more stock exposure. Unless you intend to earmark some of the portfolio as your heirs' future inheritance (in which case you should convert that amount to Roth, as SECURE act forces your heirs to liquidate t-IRA in 10 years, potentially costing more to your heirs than what you would pay if you do Roth conversion now) -- you should not be looking to increase stocks in your portfolio.

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grabiner
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Re: How to create 60/40 portfolio?

Post by grabiner » Sat May 23, 2020 9:58 pm

go2 wrote:
Thu May 21, 2020 11:50 am
Please look over my situation and give advice me.

Our current portfolio holding are as follow:

Total Bond Fund 42% (TIRA)
Money Market 44%, earning .030%
Stock funds 4% TIRA, 10% is in taxable account.

I am 76 years old and my husband is 81 years old. All our lifetime, we have invested our TIRA in the stock fund which created a tax trap. Due to taking the RMD, our tax bracket is pushed up, so this year to delay the growth, I moved all mine and 50% of my husband’s TIRA to Total Bond fund which caused bond heavy. My husband other 50% of TIRA is in the Total Stock Market Fund.
You can't help the tax situation much now by moving the traditional IRA to stock. The large tax bill is caused by the TIRA itself being large and creating large RMDs, because the stock market has done so well. (However, if the RMDs are more than you need, and you are charitably inclined, you can get them out of your income by making qualified charitable distributions, donating them to charity.)

But going forward, it would be better to have stock in your taxable account than in your IRA. The reason is that the stock tax cost for you will be relatively low; you will pay tax on dividends, but likely not pay any tax on the capital gains because you will leave the stock to your heirs.
For emergency fund and to reduce the tax, I am considering moving 10% of Money Market fund to tax exempt bond fund in the taxable account; which is better option between intermediate term tax exempt bond fund or Tax Exempt Bond Fund?
What is your tax bracket? If you are in the 22% or lower bracket (and at your ages, you would need about $4M in the IRAs to have RMDs pushing you out of that bracket), it's better to use taxable bonds for any bonds you have in the taxable account.
The remaining Money Market Fund, I want to put into stock fund to balance out portfolio but due to current economy and virus situation, I do not know I should be buying stock fund now?
You previously had the money in stock, and that was consistent with your risk tolerance, so it should still be in stock. You want the best investment use of the X dollars you have now.
Wiki David Grabiner

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grabiner
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Re: How to create 60/40 portfolio?

Post by grabiner » Sat May 23, 2020 10:00 pm

mhalley wrote:
Thu May 21, 2020 12:48 pm
Do you mean total bond vs tax exempt bond? Or prime mm vs muni mm? Whether it is advisable to use a muni vs regular bond fund depends on your tax bracket. Let’s look the current yields.
Vanguard Total bond fund vbtlx 7 day yield 1.49%
Vanguard int muni Vbilx 1.43%
Bond investors do not consider this a fair comparison now. Normally, the yield on the muni fund is about 25% lower than the yield on Total Bond Market, representing comparable risk. The much smaller yield gap implies that investors currently expect more risk on munis than on Total Bond Market which is 63% Treasury and GNMA bonds and only 37% corporate.
Wiki David Grabiner

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