Need help to rebalance my complex (to me) portfolios

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Topic Author
tahap
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Joined: Fri Aug 21, 2020 7:39 pm

Need help to rebalance my complex (to me) portfolios

Post by tahap »

Hi, I am a newbie to this forum and seek your advise. We retired 6 years ago and are conservative investors. Due to concerns with the current economy we recently reduced equity holdings and are looking into rebalancing our portfolios. As you see we have a number of accounts at few institutions: Fidelity, Merrill, Employer 401k, Employer pensions, Synchrony Bank, CapitalOne, Bank Of America.

Thank you in advance for your assistance!

Emergency funds: 3 years of expenses
Non-retirement assets: House paid off.
Debt: None
Tax Filing Status: Married Filing Jointly
Tax Rate: 15% Federal, 2% State (earned income)
State of Residence: CA
Age: 66 and 65
Retirement assets: Low seven figures
Current asset allocation: 23.5% mutual/target funds and stocks, 49% bonds, 19% cash (CD, MM). I think only 15% of 20% mutual/target funds could be stocks.
Desired asset allocation: 30/70, 25% US stocks, 5% International stocks, 60% bonds, 10% cash

Goal:
-To greatly simplify the portfolio and to better understand asset location and retirement withdrawal strategies.
-Currently since bonds have low yields I swapped them from IRA/taxable portfolio to the Stable Value Funds in my employer 401k/pension and move mutual funds from 401k to taxable accounts. This strategy is to maximize fixed income returns.
- Sell high ER funds and get ETF or Index funds. Streamline and have less funds to track so as to determine if I can self manage my assets without help from paid financial advisor.
- AA across accounts: looking into using Portfolio #3 example as guide.

Current retirement assets

Taxable Joint Accounts at Fidelity/Merrill/Banks Various 13.35% CD/MM
Fidelity 0.41% Mutual Funds Fidelity Contrafund (FCNTX) 0.85
Fidelity 0.41% Mutual Funds Fidelity Dividend Growth(FDGFX) 0.50
Fidelity 0.51% Mutual Funds Fidelity Puritan(FPURX) 0.53
Fidelity 1.44% Stocks

His Tax-Deferred
Deferred Comp 6.59% Bonds STABLE VALUE FUND
Deferred Comp 0.20% Bonds Vanguard Inflation-Protected
Deferred Comp 0.67% Mutual Funds LIFEPATH Index retirement FD O

Pension 0.68% Mutual Funds BlackRock LifePath® Index 2025 Fund O 0.08
Pension 0.34% Mutual Funds BlackRock LifePath® Index Retirement Fund O 0.08
Pension 0.27% Bonds 6% INTEREST FUND
Pension 5.40% Bonds Corporate Bond Rate Choice (4% Annual Minimum)
Pension 1.65% Bonds INTEREST CREDIT 10YR

401k 26.15% Bonds STABLE VALUE FUND
401k 3.28% Mutual Funds LIFEPATH Index 2025 Fund O
401k 3.82% Mutual Funds LIFEPATH Index retirement FD O
401k 0.65% Stocks

Rollover IRA 2.52% Cash CD/MM
Rollover IRA 0.62% Mutual Funds Fidelity Contrafund (FCNTX) 0.85
Rollover IRA 0.12% Mutual Funds Fidelity Dividend Growth(FDGFX) 0.50
Rollover IRA 0.88% Mutual Funds Fidelity Puritan(FPURX) 0.53
Rollover IRA 1.46% Mutual Funds Fidelity Strategic Dividend Income (FSDIX) 0.71
Rollover IRA 1.08% Stocks

Roth IRA 0.23% Mutual Funds Fidelity Dividend Growth(FDGFX) 0.50

Hers Tax-Deferred
Pension 5.00% Bonds Employer

Rollover IRA 12.19% Cash MM
Rollover IRA 8.28% Bonds
Rollover IRA 0.12% Mutual Funds Fidelity Dividend Growth(FDGFX) 0.50
Rollover IRA 3.52% Mutual Funds Fidelity Puritan(FPURX) 0.53
Rollover IRA 1.95% Mutual Funds Fidelity Strategic Income Fund(FADMX) 0.68
Rollover IRA 1.71% Stocks

Roth IRA 0.15% Mutual Funds Fidelity Growth&Income (FGRIX) 0.61




Available Funds in his current 401(k)

EQUITY/STOCK
ACADIAN ALL WORLD EX-US EQUITY GGRRT 0.45
BLACKROCK EQUITY DIVIDEND CL M EDFMT 0.33
BLACKROCK RUSSELL 2000 FUND G1RRUST 0.43
BLACKROCK US FDMTL LRG CL T BUFTT 0.43
DODGE & COX STOCK FUND DODGX 0.52
FIAM SMALL MID CAP CORE II FD PYSMT 0.57
MFS INTERNATIONAL GROWTH MIGFT 0.38
NORTHERN GLBL SUSTAINABILITY I NSRIX 0.30
STATE STREET REAL ASSET C SGACT 0.22
T ROWE LARGE-CAP GR TRUS JAQNT 0.33
VANGUARD INSTL 500 INDEX TRUST VGINT 0.01
VANGUARD INSTL EXTENDED MKT VGIET 0.02
VANGUARD INSTL TTL INTL STOCK VGIST 0.06
BAC COM STK FUND BACSF 0.45

BOND/FIXED INCOME
PIMCO TOTAL RETURN PORT. INSTL PTTRX 0.71
VANGUARD INFLATION-PROTECTED VIPIX 0.07
VANGUARD INSTL TTL BD MKT IND VGITT 0.03
WESTERN ASSET CORE BOND R3 WACIT 0.25

ALLOCATION FUNDS
BLACKROCK GLOBAL ALLOC CL J BLIFT 0.46
LIFEPATH INDEX 2025 FUND O LNMMT 0.08
LIFEPATH INDEX 2030 FUND O LQMMT 0.08
LIFEPATH INDEX 2035 FUND O LFMTT 0.08
LIFEPATH INDEX 2040 FUND O LBMTT 0.08
LIFEPATH INDEX 2045 FUND O LNJTT 0.08
LIFEPATH INDEX 2050 FUND O LBMIT 0.08
LIFEPATH INDEX 2055 FUND O LGHMT 0.08
LIFEPATH INDEX 2060 FUND O LKMMT 0.08
LIFEPATH INDEX 2065 FUND O BLPTT 0.08
LIFEPATH INDEX RETIREMENT FD O LZMMT 0.08
PIMCO ALL ASSET FUND AAIX 1.24

STABLE VALUE FUND
STABLE VALUE FUND MLSVF 0.03



Planning/next steps:
1) Consolidate accounts to simplify, may be moving Merrill taxable account to the existing taxableaccount at Fidelity.
2) Seeking input from this forum and determine if I can self manage my assets or let a financial advisor handle the 2 rollover IRA accounts.


Questions:
1) What is better option to invest, should I simplify things and stick to the 3 funds option?
2) As you could see from the above, I am very conservative and will be very happy if I get 4% yield. I did sold some mutual funds in my 401k so i earn 2% in Stable Value. Should I get more bonds in the 401k or add more to the 2 IRA accounts?
3) Timing wise, when should I make the rebalancing by selling and buying mutual funds and get all ETFs assuming ETF is a better alternative?
4) In my 401k account, I mainly have 2 target funds and the Stable Value Fund. Should I keep the same 2 target funds or expand and get the longer target funds?
5) About RMD considerations in 6 years, what account(s) should I draw money first?
6) I have talked to few financial advisors, do you think it is good idea and if yes who would you recommend and why?
7) As to AA, what is the best approach in my situation? Use Portfolio #3 example in the Bogleheads Guide?

Thanks a lot for your assistance and input.
Last edited by tahap on Sun Aug 23, 2020 12:20 pm, edited 2 times in total.
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FiveK
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Re: Need help to rebalance my complex (to me) portfolios

Post by FiveK »

tahap, welcome to the forum.
tahap wrote: Sat Aug 22, 2020 4:24 pm Questions:
1) What is better option to invest, should I simplify things and stick to the 3 funds option?
2) As you could see from the above, I am very conservative and will be very happy if I get 4% yield. I did sold some mutual funds in my 401k so i earn 2% in Stable Value. Should I get more bonds in the 401k or add more to the 2 IRA accounts?
3) Timing wise, when should I make the rebalancing by selling and buying mutual funds and get all ETFs assuming ETF is a better alternative?
4) In my 401k account, I mainly have 2 target funds and the Stable Value Fund. Should I keep the same 2 target funds or expand and get the longer target funds?
5) About RMD considerations in 6 years, what account(s) should I draw money first?
6) I have talked to few financial advisors, do you think it is good idea and if yes who would you recommend and why?
1. Simplifying is good. The "3 funds option," or a target date fund, or other "fund of funds" would all count as "simplified."
2. Doesn't matter among traditional accounts. You might want to keep Roth IRAs for stocks.
3. Within tax-advantaged (either traditional or Roth) account ETFs are not better than index funds.
4. Completely up to you.
5. From the person's who is currently age 66.
6. As the saying goes, if you learn enough to distinguish a good advisor from a bad one then you no longer need an advisor. Start with Getting started - Bogleheads, and good luck!
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

tahap wrote: Sat Aug 22, 2020 4:24 pm His Tax-Deferred
Deferred Comp 6.59% Cash STABLE VALUE FUND
Deferred Comp 0.20% Bonds Vanguard Inflation-Protected
Deferred Comp 0.67% Mutual Funds LIFEPATH Index retirement FD O

Pension 0.68% Mutual Funds BlackRock LifePath® Index 2025 Fund O 0.08
Pension 0.34% Mutual Funds BlackRock LifePath® Index Retirement Fund O 0.08
Pension 0.27% Bonds 6% INTEREST FUND
Pension 5.40% Bonds Corporate Bond Rate Choice (4% Annual Minimum)
Pension 1.65% Bonds INTEREST CREDIT 10YR

Hers Tax-Deferred
Pension 5.00% Bonds Employer
tahap, What do you mean by "Deferred Comp" and "Pension"? Doesn't the employer/ their administrator control that instead of you? Do you have any "say" into how these are invested? Usually a pension just pays out a fixed amount of money each month (sometimes adjusted for inflation, sometimes not). In that case, it is not part of your portfolio, but is monthly income that reduces how much you need to withdraw each month.

If they, instead, are cash-outs of your pension, what kind of account(s) is the money in right now? How are the accounts titled [other than your name}?
Topic Author
tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

Hi Celia, Deferred Comp is the employer 457 plan in which you are allowed to contribute well beyond your 401k with tax deferred advantage, BUT when you quit or retire they ask you to take quarterly draw down in 10 years.
Pension is from our employers, you can get monthly installment payment or lump sum. My pension offers fund allocation options but not my wife's pension her employer manages it.
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

Before we go very far, I'd also like to make sure we're all using the same terminology. (Often I say, if you ask for something on the phone using the wrong terms [on a recorded line, no less], you'll get what you asked for instead of what you meant.)
tahap wrote: Sat Aug 22, 2020 4:24 pm Current asset allocation: 20% mutual/target funds, 4% stocks, 16% bond funds, 60% cash (CD, MM, Stable Value Fund in 401k and pension). I think only 15% of 20% mutual/target funds could be equity.
We all know you can own individual stocks or a group of stocks in a stock fund. For analysis purposes, we often call both of these "stocks", unless you have more than 5% of your portfolio in a particular company.
Similarly, you can own individual bonds or a group of bonds in a bond fund. For analysis purposes, we often call both of these "bonds", unless you have more than 5% of your portfolio in a particular company.

All the funds we talk about are "mutual funds", except some funds, such as target-dated funds, are funds that own funds. They usually own at least one stock fund, one bond fund, and one international fund. Saying you own something in a "fund" doesn't say anything about what is in the fund, but don't worry about that. Since we'll be re-arranging your asset allocation anyways, we are more concerned with the desired asset allocation.
Desired asset allocation: 28% US stocks, 7% International stocks, 3% stocks, 47% bonds, 15% cash
I notice you request a desired asset allocation of: 31% (28%+3%) US stocks, 7% International stocks, 47% bonds, 15% cash, in other words
38% (28%+7%+3%) stocks, 47% bonds, 15% cash. That sounds pretty good for your age and value of your portfolio. But there is some concern that you appeared to sell some assets only because the markets were volatile earlier this year. Do you know what your asset allocation was before you sold? (say, at the end of 2019) I want to be sure you have an asset allocation that allows you to sleep well, even when the markets are acting up. Do you think you will feel more confident next time with a 15% cash cushion?
Topic Author
tahap
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Joined: Fri Aug 21, 2020 7:39 pm

Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

Hi Celia, thank you for asking for clarifications. Before I can provide better answer, I need help in further classification:
- Stable Value Fund in my 401k, is it considered Bond or cash?
- Fidelity Contra, is it consider stock and should be lumped with individual stocks? Since there are some bonds in it, how do we count it?
ETF like VOO is all stocks so it's obvious.
Thanks
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

tahap wrote: Sat Aug 22, 2020 6:25 pm Hi Celia, thank you for asking for clarifications. Before I can provide better answer, I need help in further classification:
- Stable Value Fund in my 401k, is it considered Bond or cash?
- Fidelity Contra, is it consider stock and should be lumped with individual stocks? Since there are some bonds in it, how do we count it?
ETF like VOO is all stocks so it's obvious.
Thanks
Stable Value Funds are bonds. (You also wrote "cash" on the line which sounds contradictory)
Fidelity Contra is a Large Growth stock fund.

If you are going to edit your list, please edit the original post using the "pencil" button on the upper write corner of the post, once you are signed in.
Topic Author
tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

I updated the current allocation and target to reflect the correct cash/bond/stocks percentages.
Thanks
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

(I accidentally over wrote this post while meaning to copy it to my following post and editing it there. I edited it ok, but in this space, by mistake.)

Basically it was a list of accounts shown in the original post with all the assets in each account compressed to cash, stocks, and bonds (like shown in my edited post below).

Then I asked the OP about the Deferred Compensation and Pension accounts to see which were under his control (ie, has authority to change the holdings). The OP's response follows.

I apologize to the OP and other readers who may not be able to follow the thought process I was building.
Last edited by celia on Tue Aug 25, 2020 6:24 pm, edited 2 times in total.
Topic Author
tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

Thank you for continued following up too my post.
First of, I would like to clarify and answer your questions:

Clarification #1: His Rollover IRA (???) from a Deferred Comp employer plan <--what is the titling for this account??
7.46% bonds
- Deferred Compensation Plan- It is the 457 plan, I contributed extra tax deferred, when I retired 5 years ago they started to pay out quarterly in 10 years ending 2025. The pay out amount to $15k/Q, that and both of our Social Security payments are income and enough to cover expenses. Since they continue to payout until 2025, I prefer it stays as cash for safety and don't want to invest in stock.
Clarification #2: His Rollover IRA (???) from an employer pension plan <--what is the titling for this account??
- It is my Employer pension plan, managed by Fidelity. In this plan, the employer some high interest rate bonds (4% and 6% guaranteed) so I have most of my money in bonds.
Clarification #3: Her Rollover IRA (???) from an employer pension plan <--what is the titling for this account??
- It is my wife's pension plan maintain by the employer. I could not see what they invest in, I will look into it.

Answer to your Q1: see answer above.
Answer to your Q2: Our expense is around S9k/month, we both started SS 3 years ago, expenses paid by SS, interest, and my Deferred Comp (ending 2025). Both are taxable.
I will look into Roth conversion since starting 2026 the RMD will kick in. at that time I estimate my income from SS+RMD will be 40% higher than today and will be 60% higher than 2025/2026 (2025 is the year Deferred Comp stopped)

Hope this helps answering your questions.
Thanks!
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

Thanks for the answers. That means you have the following portfolio under your control: (rather than someone else managing it)

Taxable Joint Accounts at Fidelity/Merrill/Banks
13.35% cash
2.77% stocks/stock funds

His 401K
28.43% bonds
4.47% stocks

His Rollover IRA
2.52% cash
4.16% stocks

His Roth
0.23% stocks


Her Rollover IRA
12.19% cash
10.23% bonds
5.35% stocks

Her Roth
0.15% stocks

Your desired asset allocation was stated to be:
Desired asset allocation: 30/70, 25% US stocks, 5% International stocks, 60% bonds, 10% cash

Does this still apply even though a lot of the "cash" is under the employer's management? The part you can manage no longer adds up to 100% (which is ok for now since it shows the relative size of stocks and bonds split account the accounts. Removing the 10% cash could give you a 30/70 desired asset allocation of:

25 + 5 + 60 = 90 total
25 / 90 = 27.7
5 / 90 = 5.5
60 / 90 = 66.6

Does this asset allocation over the part you control sound right?
28% stocks, 6% international stocks, 66% bonds

Do the above 6 accounts still total about $1M?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

Answering your questions:
Does this asset allocation over the part you control sound right?
28% stocks, 6% international stocks, 66% bonds
YES

Do the above 6 accounts still total about $1M?
More than that, i did not state it right, my asset is low mid 7 figures.
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

Since I took out the three accounts that the OP and spouse do not control, the total of the above listed percentages now add up to 83.85%. If we "normalize" this back to 100%, we get:

Taxable:
19.22%

401K:
39.24%

His Rollover IRA:
7.96%

His Roth:
0.27%

Her Rollover IRA:
31.12%

Her Roth:
0.21%

After your Asset Allocation is known, it is then time to consider Tax-efficient Fund Placement. Basically, this says to put the fastest-growing assets (stocks) in Roth so you can maximize your tax-free growth, put International Stocks in taxable so that you can take the Foreign Tax Credit for foreign taxes the funds pays on your behalf, and put bonds in the tax-deferred account since there is no tax advantage for interest earned by bonds and this will make the tax-deferred accounts grow slower, thus reducing future RMDs a bit.

There's the challenge most people have of their desired asset allocation not matching the size of their accounts. OP has a desired Asset Allocation of:
28% stocks, 6% International Stocks, and 66% Bonds while the accounts corresponding to the "best locations" is
0.48% Roths (his and hers), 19.22% Taxable, and 80.32% Tax-deferred.

Placing the stocks and international stocks in the appropriate places gives:


Taxable:
19.22% <-- 6% International Stocks go here

401K: <---- this account can be rolled over to your Rollover IRA, if you want 1 less account
39.24%

His Rollover IRA:
7.96% <---- put about 7% stocks here (or go ahead and make it all stocks)

His Roth:
0.27% <---- all of this is stocks

Her Rollover IRA:
31.12% <---- put about 7% stocks here

Her Roth:
0.21% <---- all of this is stocks

Fill the rest of the space up with bond funds!

The reason I put the remaining stocks in Rollover IRAs instead of Taxable is that I'm going to encourage the OP to do some Roth conversions. The first thing to convert is those stocks in the Rollover IRAs, using some of the money in Taxable to pay the extra tax due to the Roth conversions. If that will not be done this year, put the extra stocks in taxable instead. Also note that anything sold in taxable will incur capital gains. And it is best if you hold only "Index" funds in Taxable, since they are more efficient in making much lower distributions, which would be taxable to you.

OP, I assume you were in a high tax bracket when working, so you tax-deferred as much as you could. Some would say you even tax-deferred "too much". Now that you are retired, you have a low tax rate, but have you considered your tax rate when RMDs start? I'm glad to see you withdrawing from your 457 account (see upstream) since that would have also been subject to RMDs. RMDs will start at about 4% when you are 72, so that will be at least $80K for you. Of course, you don't have to spend all that money, but at least pay taxes on each dollar as ordinary income. The percent to be withdrawn will increase each year like this:
4% at age 72
5% at age 78
6% at age 83
7% at age 86
8% at age 89 . . .etc

We can't change what happened in past years, but we can change from now until RMDs start at 72 and what RMDs are after age 72. Many of us find that instead of having a few low-tax years in early retirement followed by our RMD years being taxed much higher, it is better to "even out" our tax bracket from now through our remaining years. This is a short must-read thread: viewtopic.php?f=2&t=323753
along with understanding IRMAA (Medicare higher premiums): Medicare Premiums.

To get more room in your lower tax brackets, why not "suspend" your current SS benefits and use the space instead for Roth conversions? To make a meaningful dent in the tax-deferred balance, see what converting $100K per year does to your taxes. How about $150K? While SS is suspended, your SS monthly benefit will be higher when you resume it at age 70, because you took it for fewer months. If you need the SS for living expenses, withdraw the same amount from a tax-deferred account instead, which is another way to decrease those RMDs. (Paying taxes on a withdrawal is the same as paying taxes on that money being converted to Roth, then withdrawing it from Roth for living expenses.) Note that pensions starting up were not mentioned here.

tahap wrote: Sat Aug 22, 2020 4:24 pm Planning/next steps:
1) Consolidate accounts to simplify, may be moving Merrill taxable account to the existing taxable account at Fidelity.
Done, especially removing accounts you don't control from your list
2) Seeking input from this forum and determine if I can self manage my assets or let a financial advisor handle the 2 rollover IRA accounts.
There's no need to "manage" your rollover IRAs if each contains one or 2 bond funds (besides the stocks to be converted). Besides, your entire portfolio should be looked at as a totality. An advisor will start chopping up the accounts and put stocks and international there (since that is all they see). Then you'll be back where you started!

Questions:
1) What is better option to invest, should I simplify things and stick to the 3 funds option?
That would work. That's basically what I did except that I didn't name any mutual funds. You've probably been reading Three-fund Portfolio. Except, all your Taxable holdings should be "Index" funds.
2) As you could see from the above, I am very conservative and will be very happy if I get 4% yield. I did sold some mutual funds in my 401k so i earn 2% in Stable Value. Should I get more bonds in the 401k or add more to the 2 IRA accounts?
This plan already holds 2/3 of the portfolio in bonds. Look at the entire portfolio instead of one account.
3) Timing wise, when should I make the rebalancing by selling and buying mutual funds and get all ETFs assuming ETF is a better alternative?
I don't make a distinction between mutual funds and ETFs. You can choose either one, but keep each account simple. (No more 1% of anything!)
4) In my 401k account, I mainly have 2 target funds and the Stable Value Fund. Should I keep the same 2 target funds or expand and get the longer target funds?
(pass)
5) About RMD considerations in 6 years, what account(s) should I draw money first?
You and your spouse will have to take separate RMDs. (You can also use Qualified Charitable Distributions where your RMD (or part of it) can be given to a qualified charity. This QCD will not have taxes owed on it but you need to understand and follow the rules.
6) I have talked to few financial advisors, do you think it is good idea and if yes who would you recommend and why?
I'm pretty sure you can handle this yourself. When you have a question, come back and ask Bogleheads. (If you don't like our answer, you can get your $$$ back.) :D
7) As to AA, what is the best approach in my situation? Use Portfolio #3 example in the Bogleheads Guide?
Your 28%/6%/66% looks fine too me. It is different for each person as their need/willingness to take more risk may vary. In all cases, if someone worries about their AA such as they can't sleep at night, that is a sign it is not right for them.
Last edited by celia on Thu Aug 27, 2020 5:03 pm, edited 2 times in total.
Topic Author
tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

Sorry I did not make it clear, my total asset is low mid 7 figures.
Topic Author
tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

Taxable:
19.22% <-- 6% International Stocks go here

401K: <---- this account can be rolled over to your Rollover IRA, if you want 1 less account
39.24%

His Rollover IRA:
7.96% <---- put about 7% stocks here (or go ahead and make it all stocks)

His Roth:
0.27% <---- all of this is stocks

Her Rollover IRA:
31.12% <---- put about 7% stocks here

Her Roth:
0.21% <---- all of this is stocks

Fill the rest of the space up with bond funds!

From your comment above, it does not add up to 28% stock, so I assume I should increase Her Rollover IRA from 7% to 21%, or add 14% to my 401K?

As to RMD, I put together this spreadsheet:
2019 2020 2021 2022 2023 2024 2025 2026 2027
Effective Tax rate w/ Roth Conversion 13.96% 13.98% 16.19% 15.99% 16.39% 16.39% 15.99% 16.19% 16.34%
Effective Tax rate w/o Roth conversion 13.96% 13.98% 13.98% 13.58% 13.58% 13.58% 11.01% 16.19% 16.34%
Effective tax rate Roth+SS suspended til 2026 13.14% 12.64% 13.58% 13.58% 12.64% 16.19% 16.34% 16.19% 16.34%
Assumptions/comments:
1) Convert Roth early $50k from 2021-2025
2) Tax rate will go up from 13.98% to ~16%, a 2% saves or $2000, worth it?
3) If I defer SS for 5 yrs then I would not collect total of $250k, how long would the increase of SS $ later and tax saves make up to $250k? If will be a while.
4) If I convert more than $50k, then it will hit the Medicare IRMAA limit.
5) If I convert $100k for 5 year before my age turn 72, tax rate will go down 16.18% to 15.68% in 2026, which is not big savings.

I have a new question about Her pension, should we get $1100 monthly pension or get lump sump of $180k and roll it over to IRA? And when?
Thank you!
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BL
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Re: Need help to rebalance my complex (to me) portfolios

Post by BL »

I suggest you search other threads or Wiki for Social Security calculator(s). I believe you would increase the payout from age 67 to 70 by waiting for an amount about 3 x 8% for those 3 yrs, so it would be 24% greater amount than drawing at 67. If the higher income person waits, that means either survivor would get the largest possible amount for the longest possible lifetime of the two. (It may be less important for the lower paid spouse to wait.) There is something great about a COLA-enhanced payment in case one spouse lives a long time.

You may get better response on pension vs. lump sum if you give the numbers. Is pension a fixed amount or does it increase with inflation? Does spouse get some % if you die first? What are the costs of different options?

You could plug the lump sum into an immediateAnnuities.com calculator to see what kind of pension it would buy and compare that with pension to see if it is more or less. (Not saying you should follow through, just that it gives you an idea if they are relatively equal payout values.)
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tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

Here is the pension # of my wife:
Payable as of 9/1/2020 to:
You Your
Beneficiary
Single Life Annuity $1,120
10-Year Certain & Life Annuity $1,084 $1,084
50% Joint & Survivor Annuity $1,027 $513
75% Joint & Survivor Annuity $986 $740
100% Joint & Survivor Annuity $948 $948
Lump Sum $195,512

Should I get lump sum by rolling over to Her IRA? I assume lump sum is better since any amount not used from RMD can be inherited by our kids.
Please advise.
thanks
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

tahap wrote: Fri Aug 28, 2020 12:08 am From your comment above, it does not add up to 28% stock, so I assume I should increase Her Rollover IRA from 7% to 21%, or add 14% to my 401K?
You're right.

As to RMD, I put together this spreadsheet:
2019 2020 2021 2022 2023 2024 2025 2026 2027
Effective Tax rate w/ Roth Conversion 13.96% 13.98% 16.19% 15.99% 16.39% 16.39% 15.99% 16.19% 16.34%
Effective Tax rate w/o Roth conversion 13.96% 13.98% 13.98% 13.58% 13.58% 13.58% 11.01% 16.19% 16.34%
Effective tax rate Roth+SS suspended til 2026 13.14% 12.64% 13.58% 13.58% 12.64% 16.19% 16.34% 16.19% 16.34%
Assumptions/comments:
1) Convert Roth early $50k from 2021-2025
Converting only $50k each year will not make a dent in tax-deferred as the accounts will grow more than that each year.

2) Tax rate will go up from 13.98% to ~16%, a 2% saves or $2000, worth it?
$2,000 is "nothing" when discussing a multi-million portfolio. I also suggest using the "marginal" tax rate so you can see the highest tax bracket that applies each year. It is already assumed the tax brackets that are lower than that are filled up before the "marginal" one.

3) If I defer SS for 5 yrs then I would not collect total of $250k, how long would the increase of SS $ later and tax saves make up to $250k? If will be a while.
Good question! I'd call up SS to ask them for your numbers.

4) If I convert more than $50k, then it will hit the Medicare IRMAA limit.
If you DON'T convert a lot more than $50K in the earlier years, you will be in the IRMAA range every year you take RMDs unless you give them away as Qualified Charitable Distributions. Even then, you are each limited to $100,000 a year, so that when your RMDs are over $200K, you will have to pay taxes anyways.

5) If I convert $100k for 5 year before my age turn 72, tax rate will go down 16.18% to 15.68% in 2026, which is not big savings.
I don't see that. At 72, your RMD will be over $100K EVEN IF YOU DO ROTH CONVERSIONS as in the below example.

I have a new question about Her pension, should we get $1100 monthly pension or get lump sump of $180k and roll it over to IRA? And when?
Taxwise, it doesn't matter. If you roll it over to the Rollover IRA, it will increase the IRA balance and you will have to withdraw/convert more. If kept as a pension, you will be withdrawing some of it every month. Also consider what your pension will do to the Roth conversions. You need some income for living expenses, but you probably also want some control over the Roth conversion process and what is income is being taxed each year.
I started a chart showing how I see the upcoming years. This is using rough estimates and it focuses on the taxes (which are assumed to be paid from taxable), rather than the income streams being taxed. At the bottom, it attempts to show the year-end balances of the taxable, tax-deferred, and Roth accounts. To carry the balance forward each year, I multiplied the previous year balance by (1 + growth rate) then added/subtracted that year's converted amount. I started by taking a big whack at the tax-deferred by converting $200K for two years, thus incurring IRMAA surcharges for two people for only two years. Notice how the tax-deferred balance goes down when $200K is converted, stays relatively stable when $100K is converted, and increases when only $60K is converted. This was assuming the tax-deferred accounts grew a consistent 4% a year. Note that that the tax-deferred account will continue to grow until the amount withdrawn is more than the years' growth.

OP, If this makes sense to you, I encourage you to fill in the empty cells and adjust the converted amount and run the numbers for each year through tax software. You might consider converting to a higher tax bracket those two years or convert $200K for more than 2 years.

Also note that over time, I did not pay attention to your desired AA of 28% stocks, 6% international stocks, 66% bonds. I just let the Roths ride as all stocks, which your future spending and heirs should like. By the time RMDs start, you would have $1M in Roths!


Image
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

OP, Are you now ok with the portfolio simplification/rebalancing part of your original question? I know you weren't asking about Roth conversions, but that really is "the elephant in the room".
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

Thanks celia, I am ok with the allocation.
My follow up items:
1. Find out from employers if we can roll our pensions over to our IRA accounts.
2. Review your spreadsheet and fill in all the blank, then decide next steps.

I have more questions if you can help:
Q1: if we decide to take installment payments from pension, will pension balance still be part of RMD calculation?
Q2: you suggest to may be I should withdraw $200k RMD early, is there a $ limit for back door Roth IRA conversion?
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FiveK
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Re: Need help to rebalance my complex (to me) portfolios

Post by FiveK »

tahap wrote: Sat Aug 29, 2020 5:50 pm Q1: if we decide to take installment payments from pension, will pension balance still be part of RMD calculation?
If you choose to receive the pension as an annuity, you cease to have a pension balance.
Q2: you suggest to may be I should withdraw $200k RMD early, is there a $ limit for back door Roth IRA conversion?
There is a Traditional IRA Contribution Limit that applies to the backdoor IRA process.

But there is no IRS-imposed limit on traditional to Roth conversions. The marginal tax rate on larger conversions may however limit their usefulness.
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

Don't just fill in blanks on the spreadsheet. Adjust any numbers I entered, where needed. Check that the totals add up and what tax is owed according to 2019 tax software. (The yearly increases in limits and boundaries sort of mirror inflation, so it is ok to keep everything in 2019 numbers, while you will confirm actual Roth conversions each year before you do them. And the tax code may/may not revert to 2017 tax brackets in 2026.) I was just showing you one way to look towards the future to see what can happen since, from past experience, people don't take into account that the accounts grow each year, aside from money going in and out of the accounts.

tahap wrote: Sat Aug 29, 2020 5:50 pm I have more questions if you can help:
Q1: if we decide to take installment payments from pension, will pension balance still be part of RMD calculation?
If the account has "pension" as part of the account name, or there is already some written agreement to take certain amounts at predetermined intervals, it shouldn't count as part of the year-end balance (since you are already withdrawing from it), but check with the pension manager just to be sure. But, even it if was still counted as part of the tax-deferred balance, the yearly payout would then count towards the pension's RMD. Technically, each account has it's own RMD, but you can pull the RMD out of one account to cover all the other accounts of the same type (ie, all your traditional IRAs). This is done on a per-person level, so you can't cover your spouse's RMD by pulling from your account.
Q2: you suggest to may be I should withdraw $200k RMD early, is there a $ limit for back door Roth IRA conversion?
There is no limit to how much you can convert each year or how frequently you do it.

And this is not a "backdoor Roth" which is really just a two-step process involving making a non-deductible contribution, followed by doing a Roth conversion. That is for putting new (taxable) money into a Roth, not transferring it from an account that is already tax-advantaged.
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tahap
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Re: Need help to rebalance my complex (to me) portfolios

Post by tahap »

How would I do the Roth conversion? Withdraw from my tax deferred accounts and make a deposit to my existing Roth account OR requesting the institution initiating the transfer?
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FiveK
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Re: Need help to rebalance my complex (to me) portfolios

Post by FiveK »

tahap wrote: Thu Sep 03, 2020 10:13 pm How would I do the Roth conversion? Withdraw from my tax deferred accounts and make a deposit to my existing Roth account OR requesting the institution initiating the transfer?
Click on the "Convert your IRA online" link at Roth IRA conversion process, deadlines, and rules | Easy steps to converting | Fidelity for Fidelity.

Vanguard and others will have similar point and click capability.
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celia
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Re: Need help to rebalance my complex (to me) portfolios

Post by celia »

tahap wrote: Thu Sep 03, 2020 10:13 pm How would I do the Roth conversion? Withdraw from my tax deferred accounts and make a deposit to my existing Roth account OR requesting the institution initiating the transfer?
Just do a transfer / exchange from a fund in the Rollover / traditional IRA to your desired stock fund in the Roth. Do not move the money to taxable. You can usually do this online by yourself but if there is any uncertainty, call in and have a representative walk you through the steps the first time or two, because, if you make a mistake, it may not be able to be un-done. The most important thing is to pay attention if you are moving x shares vs x dollars.
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