Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

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Topic Author
texasgal47
Posts: 86
Joined: Thu Apr 25, 2013 11:30 am

Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

Post by texasgal47 »

Hello fellow bogleheads. I'm looking for thoughts as considering a change to meet an investment goal in my Roth ira accounts which are planned for my heirs, two adult sons who will be ages 43 and 50 in the first portion of 2021.

I am a retired 73 year old widow here with a self-directed 2.9M portfolio at Vanguard, about equally divided between taxable and non-taxable. No debts and living in Texas with no state income tax. Desired total portfolio AA is 60 /38/ 2 but with Prime MMA about 2% until this year, current AA is 61.4 /28/ 10.6. Maximum drift of + or - 5% allowed before rebalancing but usually keep it close to 60%. Plan is to gradually change total AA to 50/50 beginning the process at age 80. A good quality long-term care insurance policy is in place, allowing current AA.
61.4% -- all VTSAX -- No foreign stock desired. $992,000 in taxable which generates about $16,000 to $19,000 yr in
dividends.
28% -- 16.8% is in VBTLX (Tot Bnd Adm) --$406,000 in t-ira and $41,600 in each of the two r-ira accounts
-- VFIDX (Intermediate-Term Investment Grade Fund Adm) -- $95,200 in t-ira
-- I bonds in taxable -- $228,400 ($95,000 base) generating about $700 interest/month
10.6% -- All Prime MMF. $210,000 in taxable for rebalancing and can use some for some expenses, including taxes,
but have never needed to spend any so far.
Income is from Social Security, retirement funds, and RMDs which meet yearly budget requirements.

I've been doing large conversions to Roth accounts for about the last 5 years. Current tax bracket is 22% but am usually converting to the top of the 24% bracket which is about $160,000 for singles. My plan is to convert $44,000 to each of the two roths for this year and the next two years for a total of $264,000 converted. In 2021 and 2022 my entire RMD would be a qualified charitable distribution (QCD) which would allow room in the 24% tax bracket for desired conversions. Money for expenses would come from the MMF in taxable and my retirement income covers most of my taxes. Despite the past large conversions $1,000,000 is currently in the traditional ira.

On page 15, in the 2006 version of The Bogleheads Guide to Investigating, a chart shows that $315,241.70 is needed in an account at age 50, with an 8% annual return, to accumulate $1 million at age 65. That got me to thinking that with $234,000 currently in each Roth, if my plan were implemented as stated, I might get within striking distance of hitting that 1 million mark for each son. However, I would need to move everything to VTSAX in those accounts this year, instead of keeping about 20% in VBTlX, and make all conversions to VTSAX this year and next to reach that desired amount at age 50. In 2022, the entire conversion would be in bonds and continue smaller conversions within my 22% tax bracket until I reach the desired 20% bonds in those funds again. I know there are many variables so the goal may not be reached as planned but it seems a reasonable plan and goal. My dad was active until age 96 and mom is now 92, living in an assisted living facility to I may make it another 15 years. I've been widowed since 2004 so did fine through the black swan event of 2008 without selling or losing too much sleep. I know projected returns are expected to be below 8% for the future. My question is do you think it is poor planning to forgo any bonds in the roth accounts until 2022 given that VTSAX is at an all time high? I may be above my desired AA for a few years with this plan.
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David Jay
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Re: Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

Post by David Jay »

I see no problem going to 100% VTI in the Roth accounts, in fact many place their highest expected yielding assets in Roth.

Make sure you have at least 5 years worth of expenses in bonds/CDs in tax-deferred space so you will not need to withdraw any equities during a downturn. Bonds are best held in tax-deferred, not in taxable (or Roth).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
texasgal47
Posts: 86
Joined: Thu Apr 25, 2013 11:30 am

Re: Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

Post by texasgal47 »

David Jay, thank you for taking the time to read and respond. Your tip regarding having 5 years of available funds is a good one. I believe I have that
I have expenses covered for that period without having to sell stock in a downturn. Your feedback is really appreciated.
shess
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Re: Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

Post by shess »

texasgal47 wrote: Sun Aug 30, 2020 6:56 pm On page 15, in the 2006 version of The Bogleheads Guide to Investigating, a chart shows that $315,241.70 is needed in an account at age 50, with an 8% annual return, to accumulate $1 million at age 65. That got me to thinking that with $234,000 currently in each Roth, if my plan were implemented as stated, I might get within striking distance of hitting that 1 million mark for each son.
Now, I'll lead with the point that you can have your goals in life! But ... $1M is just a round number, there's no magic about it. I will admit that I get fascinated when my portfolio exceeds (and maybe later falls below) some magic number, but I strive really hard not to make portfolio changes in order to facilitate that. Just like I try to avoid making an investment because I can make "more", but instead try to focus on whether I can develop a story about how it's appropriate on multiple fronts (risk, reward, how it relates to other portfolio components, etc).

Something else to consider is whether your sons would prefer $1M when you die, or $20k here or there while you're still alive. I know my mom found it frustrating that my grandmother held her money so close and tight (she was a depression-era kid) and then had a substantial portfolio to leave. But by then her kids had their own retirements in hand, and her grandkids all were fully established. Mom says that it was nice to inherit that money at grandma's death, but that it honestly would have been more useful to have had her spend some of it in life, helping out the grandkids with college, or things like that.
GMT-8
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Joined: Fri Mar 26, 2010 5:11 pm

Re: Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

Post by GMT-8 »

I have to agree with Shess.

My grandmother (grandpa's second wife) was quite wealthy when he died, but considered the money really belonged to my mom and my aunt. Thus while she lived well enough, she was very careful with the money and even more careful not to say ANYTHING whatsoever about the funds and how much there was.

The sad thing was my mom was in a dementia care facility for 4 years before my grandmother died, and she never knew that she received her inheritance, nor got a chance to spend any of it.

I am grateful the money arrived because it let me pay all her bills and have some left for my siblings when mother passed away. But it might have been nicer if my mother had gotten to see it.

I think your plan is reasonable though, so don't change it on our account.

GMT
Topic Author
texasgal47
Posts: 86
Joined: Thu Apr 25, 2013 11:30 am

Re: Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

Post by texasgal47 »

I agree that it is important to pass some of the assets on now. The QCD are earmarked for a scholarship endowment fund, as are other QCD planned in the future. I also have money allocated to pay half of the college expenses for my two grandchildren, Roth contributions for them both now as well as some for my children. There are very nice family vacations planned from that pot of money, including a trip to Maui. Both children already have a nice size portfolio on their own so sometimes I do wonder how much an inheritance will mean to them in the future. I believe Taylor posted that he has already distributed the inheritance to his children. Doing so has given him great pleasure. What has given me pause is that my children and I live in a community property state and that each child has been through a divorce so no stable relationships for them yet. My estate lawyer has informed me that even with a pre or post nuptual agreement, it is extremely difficult to keep assets separate in a community property state. I won't go into the details here as to why that is the case.
000
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Re: Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

Post by 000 »

I don't think performance chasing is a good idea. Neither you nor your heirs "deserve" a million dollars in the Roth. The market gives what it gives.

Maybe stocks drop 50% over the next month. Are you ready for that?
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celia
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Re: Considering change from 80% to 100% VTSAX in Roth to reach investment goal for heirs

Post by celia »

I found the original post above difficult to read because it does not follow the standard format described in Asking Portfolio Questions. In particular, I was trying to see how much of the portfolio is in taxable, tax-deferred, and Roth (eg, 50% taxable, 35% tax-deferred, 15% Roth).

The best I can tell is that the OP has a million in tax-deferred, with:
$406,000 in VBTLX (Tot Bnd Adm) and
$95,200 in VFIDX (Intermediate-Term Investment Grade Fund Adm)
but don't know what the other half of the tIRA is.

There are two Roths each with;
$41,600 in each (probably Total Bond fund???)
and possibly some VTSAX here.
texasgal47 wrote: Sun Aug 30, 2020 6:56 pm I've been doing large conversions to Roth accounts for about the last 5 years. Current tax bracket is 22% but am usually converting to the top of the 24% bracket which is about $160,000 for singles. My plan is to convert $44,000 to each of the two roths for this year and the next two years for a total of $264,000 converted.
This tells me, the Roth conversion plan is to convert $88K, which has been done for one year already, still to be done this year and for 2021 and 2022.

If my understanding is correct, it seems like the OP should put only bonds in the tax-deferred and VTSAX in the Roth. This would keep the IRA from growing so fast while the Roth can roar along growing tax-free. I say this because the $88K that is being converted each year is a 8.8% withdrawal rate from the IRA but the account seems to be growing at almost the same rate. If true, the OP is just "treading water" and paying taxes without bringing down the tIRA value. The tIRA growth rate should be slowed down with VTSAX placed elsewhere. Then the OP will see substantial progress with a decreasing year-end value. After 5 years of owning a Roth, withdrawals can be made from it, if taxable does not provide enough income for living expenses.

OP, If you want to edit the original post (to keep your info in one place but re-format it to the suggested format), use the edit "pencil" icon at the top of that post, seen when you are signed in.
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