Portfolio Advice: 6 years to retirement

[Carolinagurl]

Emergency Fund: Yes

Debt: $20k car loan (2.6% APR)

Tax Filing Status: Married Filing Jointly, kids are grown!

Tax Rate: 32% Federal, NC does not have tax bracket. Rate is 4.99%

State of Residence: North Carolina

Age: Spouse and I are 59 years.

Desired Asset allocation: 60% stocks /40% bonds or cash
Desired International allocation: 15% of stocks (might go higher) not big on the international market

Approximate size of total portfolio: $3,646,460

Current retirement assets

Taxable-Joint
3% cash VMRXX Vanguard
14% Vanguard S&P 500 Index (VFIAX) (0.04%)
3% Vanguard Small Cap Index (VSMAX) (0.05%)

His 401K
26% S&P Index (Fidelity) (0.01%)
7% US Bond Index (Fidelity) (0.02%)
6% US Small/Mid Index (Fidelity) (0.02%)
5% Non-US Stock Index (Fidelity) (0.06%)
Company match:16%

His Roth IRA at Vanguard
4% Total Stock Mkt (VTSAX) (0.04%)
1% S&P Index 500 (VFIAX) (0.04%)

His Trad IRA at Vanguard
5% Total Stock Mkt (VTSAX) (0.04%)
2% S&P Index 500(VFIAX)(0.04%)

Her Roth at Vanguard
6% Total Stock Mkt (VTSAX) (0.04%)

Her Trad IRA at Vanguard
8% Total Stock Mkt (VTSAX) (0.04%)
3% S&P Index 500 (VFIAX) (0.04%)

His TSP (Thrift Savings Plan)
5% G Fund
2% C Fund
_______________________________________________________________
Equals 100%.

Contributions:

New annual Contributions
$29,409 his 401k YTD ($27,635 employer matching contributions YTD)
$3000 per month taxable contributions (for retirement)

Available funds:

Military Pension received monthly
Savings: $6000 per month

Additional Funds available in His 401(k) via Fidelity

Lifecycle 2030 (0.11%)
Contrafund Pool(0.35%)
US Large Stock (0.37%)
US SM/MID Stock Fund (0.51%)
Emerg Mkt Stock Fund (0.61%)
INT’L Stock Fund (0.54)
MultiInflation Stock (0.50)
Stable Value Fund (0.24%)
Diversified Bond Fund (0.19%)
High Income Bond Fund (0.47%)

Questions:
1. I am 6 years from retirement, with overall 85% equities and 15% Bonds/Cash. Can you please advise how I should re-allocate my portfolio to reflect a 60/40 (equities/bond percentage)?

2. Are there any other modifications you would recommend for my investment strategy?

Thank you for recommendations!

[Watty]

Questions:
1. I am 6 years from retirement, with overall 85% equities and 15% Bonds/Cash. Can you please advise how I should re-allocate my portfolio to reflect a 60/40 (equities/bond percentage)?

I agree with the change but all you need to do is to sell stocks in your retirement accounts where taxes are not an issue and buy bonds with the proceeds. I would do that right away all at once.

2. Are there any other modifications you would recommend for my investment strategy?

You have both a total stock market fund and an S&P 500 fund in some of your accounts. I would just use the total stock market fund since it is very similar to the S&P 500 fund but a bit more diversified.

Unless I missed it but I did not see any international stocks. Opinions differ but I would suggest that maybe 20% of your stocks be international and that is lower than some people would use.

[HomeStretch]

You can rebalance from equity to bonds in the 401k and TIRAs without tax consequences to achieve your desired asset allocation of 60/40.

Consider rolling over His TIRA into His 401k, if it accepts rollovers in, to simplify. He can then do an annual back door Roth. Prioritize Roth contributions (which grow tax free) over Taxable contributions (which do not).

Does His 401k offer a mega back door Roth?

Have you looked into your Social Security claiming strategy?

Look into whether Roth conversions in retirement will make sense.

Pay off the car loan to simplify. The after tax yield on VMRXX in your Taxable account is not significantly higher than the car loan rate.

[Fishing50]

G Fund is unique. Consider rollover from 401K or tIRA accounts to TSP for G Fund.
Pros & cons of TSP are often discussed on this forum, so I’ll avoid that topic.
You can search the forum and decide for your self.

[Carolinagurl]

Questions:
1. I am 6 years from retirement, with overall 85% equities and 15% Bonds/Cash. Can you please advise how I should re-allocate my portfolio to reflect a 60/40 (equities/bond percentage)?

I agree with the change but all you need to do is to sell stocks in your retirement accounts where taxes are not an issue and buy bonds with the proceeds. I would do that right away all at once.

Thank you for your insight. I intend to re-allocate funds from the S&P Idx into the US Bond Idx (expense ratio is 0.02%).

2. Are there any other modifications you would recommend for my investment strategy?

You have both a total stock market fund and an S&P 500 fund in some of your accounts. I would just use the total stock market fund since it is very similar to the S&P 500 fund but a bit more diversified.

Unless I missed it but I did not see any international stocks. Opinions differ but I would suggest that maybe 20% of your stocks be international and that is lower than some people would use.

More good suggestions. It makes sense with the US global interests to increase my int'l exposure. Thank you for taking the time to respond.

[Carolinagurl]

G Fund is unique. Consider rollover from 401K or tIRA accounts to TSP for G Fund.
Pros & cons of TSP are often discussed on this forum, so I’ll avoid that topic.
You can search the forum and decide for yourself.

I need to do more research on the G Fund. Thank you for mentioning it.

[privateID]

As someone who has just a few years to retirement too, I think developing a plan is a good idea. There are tools on this site (ie., RPM) and other places where you can go to develop a plan. Such a plan would map out from 65 till some end date in the future (I like to go to 100) expenses and where money would come to pay for those expenses (SS, RMDs, pension, etc). You can then draw some suggested actions from the plan. As an example, such a plan may indicate 1) From 65-70 to do Roth conversions and pay for expenses out of taxable; 2) From 70-RMDs begin, if you start to collect SS at 70, maybe slow down conversions if they affect SS taxation or maybe not if they don't; 3) From RMD time and later stop conversions and maybe start to tap Roth money if need extra to pay for expenses.

[Hacksawdave]

You look to be in great shape to reach your goal. I like that you have a good balance between the account types of taxable, tax-deferred, and Roth. Smart move to start a transition plan now as I started mine on an expected 5 years out.

If you are at the high end of the 32% tax bracket, you are getting close to the NIIT tax. I would not be a seller out of the taxable account to rebalance now as this may invoke an additional 3.8% tax due. Rebalance through the tax deferred as others have mentioned. New contributions to taxable is how to approach rebalancing and sales should take place after exiting the 32% bracket.

Do you have a detailed current budget now? This will give an initial idea of how much will be needed to start considering a withdrawal strategy.

What I did with my plan was to determine what income each holding would produce and keep tracking it prior to when I was given early retirement. This gave me a solid plan when they cut me loose before I was going to retire. I would recommend that you understand what produces how much income for cashflow so you can position over time.

At this point you can decide on a withdrawal strategy. Would you optimize for lower taxes, asset preservation, or having exotic ventures. Some years the strategy may be realizing 0% QD/LTCGs while some could be to do Roth conversions. There may be a year or two where you do not want to sell any assets due to market conditions and just use after tax cash. Last year fell into that category.

All I see is some rebalancing and perhaps adding some extra after-tax cash for down years that you don’t want to sell assets.

It is still a little early to consider healthcare, but I am guessing that you would already be on Medicare, and he would be on VA as you mentioned a military pension? SS is still quite a way out and you both have sufficient assets to defer taking it anytime soon.

[Carolinagurl]

You can rebalance from equity to bonds in the 401k and TIRAs without tax consequences to achieve your desired asset allocation of 60/40.
Yes, thank you. I plan on using the bond fund within the 401k since the expense ratio is lower.

Consider rolling over His TIRA into His 401k, if it accepts rollovers in, to simplify. He can then do an annual back door Roth. Prioritize Roth contributions (which grow tax free) over Taxable contributions (which do not).
Definitely a priority to take advantage of backdoor Roth opportunities.

Does His 401k offer a mega back door Roth?
I looked up the process however the company offers a 16% match so after tax contributions are not available due to their generous contributions.

Have you looked into your Social Security claiming strategy? Can you please elaborate on the SS claiming strategies?

Look into whether Roth conversions in retirement will make sense. Increasing my Roth holdings are paramount. I just made an appointment with my tax advisor for a little more guidance. Thank you for taking the time to offer insight.

Pay off the car loan to simplify. The after tax yield on VMRXX in your Taxable account is not significantly higher than the car loan rate.

[Carolinagurl]

As someone who has just a few years to retirement too, I think developing a plan is a good idea. There are tools on this site (ie., RPM) and other places where you can go to develop a plan. Such a plan would map out from 65 till some end date in the future (I like to go to 100) expenses and where money would come to pay for those expenses (SS, RMDs, pension, etc). You can then draw some suggested actions from the plan. As an example, such a plan may indicate 1) From 65-70 to do Roth conversions and pay for expenses out of taxable; 2) From 70-RMDs begin, if you start to collect SS at 70, maybe slow down conversions if they affect SS taxation or maybe not if they don't; 3) From RMD time and later stop conversions and maybe start to tap Roth money if need extra to pay for expenses.

Great advice on creating a plan. I will definitely take that under advisement. Thank you for offering your suggestions!

[Carolinagurl]

You look to be in great shape to reach your goal. I like that you have a good balance between the account types of taxable, tax-deferred, and Roth. Smart move to start a transition plan now as I started mine on an expected 5 years out.

If you are at the high end of the 32% tax bracket, you are getting close to the NIIT tax. I would not be a seller out of the taxable account to rebalance now as this may invoke an additional 3.8% tax due. Rebalance through the tax deferred as others have mentioned. New contributions to taxable is how to approach rebalancing and sales should take place after exiting the 32% bracket.

I definitely do not want to pay anymore for taxes than I do now! Thanks for mentioning that!

Do you have a detailed current budget now? This will give an initial idea of how much will be needed to start considering a withdrawal strategy.

I am working on a budget and doing a "look back" on all expenditures. Sound advice!

What I did with my plan was to determine what income each holding would produce and keep tracking it prior to when I was given early retirement. This gave me a solid plan when they cut me loose before I was going to retire. I would recommend that you understand what produces how much income for cashflow so you can position over time. I'm developing a spreadsheet to track that now. Thank you!

At this point you can decide on a withdrawal strategy. Would you optimize for lower taxes, asset preservation, or having exotic ventures. Some years the strategy may be realizing 0% QD/LTCGs while some could be to do Roth conversions. There may be a year or two where you do not want to sell any assets due to market conditions and just use after tax cash. Last year fell into that category.

All I see is some rebalancing and perhaps adding some extra after-tax cash for down years that you don’t want to sell assets.

It is still a little early to consider healthcare, but I am guessing that you would already be on Medicare, and he would be on VA as you mentioned a military pension? SS is still quite a way out and you both have sufficient assets to defer taking it anytime soon. Thank you for your in depth explanation! It's invaluable.

[HomeStretch]

Does His 401k offer a mega back door Roth?

I looked up the process however the company offers a 16% match so after tax contributions are not available due to their generous contributions.

Assuming eligible compensation, your spouse’s 2023 401k contribution limit for employEE and employER contributions is $66,000 plus age 50+ catch-up contribution of $7,500.

Is your spouse’s 2023 employER contribution $43,500? If your spouse makes an employEE elective deferral of $22,500, your spouse’s employER contribution would have to be $43,500 to reach the $66,000 limit.

However, this only matters if your spouse’s 401k plan offers a mega backdoor Roth. It isn’t clear to me whether it does or not.

Have you looked into your Social Security claiming strategy?

Can you please elaborate on the SS claiming strategies?

This BH wiki page about SS may be helpful:
https://www.bogleheads.org/wiki/Social_Security

You and your spouse will need to decide when to claim SS, if eligible, between ages 62 (earliest, minimum benefit) and age 70 (maximum benefit). A common strategy is for the higher earner to claim at age 70 (so the surviving spouse will have the maximum SS benefit with COLA for life) and for the other spouse to claim between ages 62 and 70. Your decision may be affected by factors such as life expectancy, income needs, etc.

The calculator at opensocialsecurity.com is useful to help make a decision when to claim.

[Carolinagurl]

Does His 401k offer a mega back door Roth?

I looked up the process however the company offers a 16% match so after tax contributions are not available due to their generous contributions.

Assuming eligible compensation, your spouse’s 2023 401k contribution limit for employEE and employER contributions is $66,000 plus age 50+ catch-up contribution of $7,500.

Is your spouse’s 2023 employER contribution $43,500?

Yes, in fact last year, his employer contributions were $40,500 and the employEE contributions were $27,000 for a total of $67,500. The IRS has increased the employer contributions to $43.500 for 2023 and his company will max out their contributions.

If your spouse makes an employEE elective deferral of $22,500, your spouse’s employER contribution would have to be $43,500 to reach the $66,000 limit.

However, this only matters if your spouse’s 401k plan offers a mega backdoor Roth. It isn’t clear to me whether it does or not.

His company does offer a mega backdoor Roth.

Have you looked into your Social Security claiming strategy?

Can you please elaborate on the SS claiming strategies?

This BH wiki page about SS may be helpful:
https://www.bogleheads.org/wiki/Social_Security

You and your spouse will need to decide when to claim SS, if eligible, between ages 62 (earliest, minimum benefit) and age 70 (maximum benefit). A common strategy is for the higher earner to claim at age 70 (so the surviving spouse will have the maximum SS benefit with COLA for life) and for the other spouse to claim between ages 62 and 70. Your decision may be affected by factors such as life expectancy, income needs, etc.

Thank you for the SS information! I appreciate all the great information you have provided!

The calculator at opensocialsecurity.com is useful to help make a decision when to claim.

[dratkinson]

The case for more bonds and cash in taxable.



Recall forum topics about SoRR (sequence of returns risk)---being forced to sell stocks from our retirement plans for livings expense during a down market. To avoid this risk (selling low), we need many years of bonds and cash in taxable as a backstop. (Exception. Some retirees use an SPIA---single premium immediate annuity---but believe you have enough that you don't need to consider this.)

Recall most market crashes recover within ~4yrs. So if you have >4yrs of livings expense in cash, then you should not need to tap your retirement nest egg for living expenses during a down market.

To this end, some retirees report keeping 5yrs in cash (checking, savings, CDs,...) to avoid needing to tap retirement funds during a crash. Then they refill cash from bonds (in taxable) after bonds recover, and refill bonds (in taxable) from stocks after stocks recover.



Idea: More bonds.

I believe you could use more bonds, >5yrs of livings expenses, in taxable. I'm assuming you will not be in a low tax bracket in retirement, so suggest a municipal bond fund. Why?
--It's dividends are fed tax-exempt, don't add to AGI, so don't push you toward next higher tax bracket.
--Chosen properly, should return more after-tax than TBM (VBTLX, 3fund portfolio's standard).
--It's dividends do affect MAGI for SS taxation, but since SS MAGI is based on actual dollars (not taxable-equivalent dollars) and since TBM's yield (more dollars) is higher than muni yield, then muni dividends should affect SS taxation less than TBM dividends.
--Having more bonds in taxable, means you could have less bonds in your TA (tax-advantaged) accounts to maintain higher tax-sheltered growth.

Conclusion. You could benefit from having several years of bonds in taxable, and a muni (more after-tax income) should work better for you than TBM, ...or treasuries (fed taxed lower yield/after-tax income, state-tax benefit that you can't use).

N.B. The IRS has lots of holding period requirements (TLHing, QDI, STCL, TE dividends,...) and annoying tax-reporting/investment tracking complications for violating them; but they can all be sidestepped if we hold ALL share lots (stocks/bonds) in taxable for >half-year. Easy peasy. This will become important if you are selling/refilling investments (bonds) in taxable.


My favorite muni is VWLTX (LT national muni fund). For my 22% fed tax bracket, it returns more after-tax than TBM, with only slightly more risk. Since dividends are the major component of bond fund total return (capital gains + dividends), and since I live on dividends, I prefer more to less. But I have TLH'd VWLTX when I had the chance, and enjoy the annual $3K income deduction.

Recall the forum favors VWITX (IT national muni fund). Why? Its IT duration is reported to be on the sweet spot of the risk/reward yield curve ...which is good if you will be selling munis---counting on bond fund total return (capital gains + dividends). Since VWITX is safer/less risk/price fluctuations than VWLTX, I've not yet had a large enough loss (%) to justify TLHing mine.



Idea: More cash.

Recall some retirees report keeping 5yrs of livings expenses in a 5yrs CD ladder. Why? Higher yield than savings. Each year one CD matures, and they live on it. And each year they buy a new 5yr-CD (indexed for expected inflation) from bonds/stocks, whichever is up. And if both bonds/stocks are down, then they have 5yrs of living expenses in CDs to wait for one/both to recover.



Idea. ABP by CC technique.

If you have not already done so ...consider setting up all of your monthly bills from your trusted (no billing mistakes) creditors to be paid by their ABP (automatic bill payment) plans; with payments tied to your cashback CC (2%) where you can, and to your checking where you must. Your CC ABP is tied to your checking. This sets up this cash flow...

   Creditor (ABP) --> CC (2%, ABP) --> Checking (~0%)

Since money is fungible---$1 from dad is worth the same as $1 from mom---if your checking is low-yield, then you can boost its yield by putting a cashback CC in your payment flow. (If you can't get money from mom, then get it from dad. This ameliorates my FOMO---fear of missing out---because I don't chase bank teaser rates; helps to keep my life simple.)

Cash-equivalents.
--If you can keep 1yr of living expenses in your 1st-tier EFs (low-interest checking/savings) and boost their yield by CC cashback, then you're earning ~2%/yr tax free on your first year of living expenses. And since the ABP math doesn't care in which accounts you keep the money, then might as well keep a few months in checking to make ABP run smoothly.
--If the remainder of your cash is in a 5yr CD ladder, then it should be earning more than HY savings.*
--Your muni bonds in taxable should be earning more after-tax than TBM.
--So all of your cash-equivalents should be earning more than you would normally expect, and without the complexity of chasing bank teaser rates.
--Also, since all of your bills are paid by ABP, you could take a long vacation without worrying about them being unpaid in your absence.

* Exception. We are currently in an inverted-yield environment with shorter term investments paying more than longer. But I would expect this to self-correct eventually as banks can not long lend, businesses borrow, and the economy to prosper, if it lasts too long.

See: https://home.treasury.gov/resource-cent ... nth=202305

[Carolinagurl]

The case for more bonds and cash in taxable.



Recall forum topics about SoRR (sequence of returns risk)---being forced to sell stocks from our retirement plans for livings expense during a down market. To avoid this risk (selling low), we need many years of bonds and cash in taxable as a backstop. (Exception. Some retirees use an SPIA---single premium immediate annuity---but believe you have enough that you don't need to consider this.)

Recall most market crashes recover within ~4yrs. So if you have >4yrs of livings expense in cash, then you should not need to tap your retirement nest egg for living expenses during a down market.

To this end, some retirees report keeping 5yrs in cash (checking, savings, CDs,...) to avoid needing to tap retirement funds during a crash. Then they refill cash from bonds (in taxable) after bonds recover, and refill bonds (in taxable) from stocks after stocks recover.



Idea: More bonds.

I believe you could use more bonds, >5yrs of livings expenses, in taxable. I'm assuming you will not be in a low tax bracket in retirement, so suggest a municipal bond fund. Why?
--It's dividends are fed tax-exempt, don't add to AGI, so don't push you toward next higher tax bracket.
--Chosen properly, should return more after-tax than TBM (VBTLX, 3fund portfolio's standard).
--It's dividends do affect MAGI for SS taxation, but since SS MAGI is based on actual dollars (not taxable-equivalent dollars) and since TBM's yield (more dollars) is higher than muni yield, then muni dividends should affect SS taxation less than TBM dividends.
--Having more bonds in taxable, means you could have less bonds in your TA (tax-advantaged) accounts to maintain higher tax-sheltered growth.

Conclusion. You could benefit from having several years of bonds in taxable, and a muni (more after-tax income) should work better for you than TBM, ...or treasuries (fed taxed lower yield/after-tax income, state-tax benefit that you can't use).

N.B. The IRS has lots of holding period requirements (TLHing, QDI, STCL, TE dividends,...) and annoying tax-reporting/investment tracking complications for violating them; but they can all be sidestepped if we hold ALL share lots (stocks/bonds) in taxable for >half-year. Easy peasy. This will become important if you are selling/refilling investments (bonds) in taxable.

Our goal is to increase our bond holdings considerably. We are looking at a 60/40 however my husband prefers a 70/30 mix.

My favorite muni is VWLTX (LT national muni fund). For my 22% fed tax bracket, it returns more after-tax than TBM, with only slightly more risk. Since dividends are the major component of bond fund total return (capital gains + dividends), and since I live on dividends, I prefer more to less. But I have TLH'd VWLTX when I had the chance, and enjoy the annual $3K income deduction.

Recall the forum favors VWITX (IT national muni fund). Why? Its IT duration is reported to be on the sweet spot of the risk/reward yield curve ...which is good if you will be selling munis---counting on bond fund total return (capital gains + dividends). Since VWITX is safer/less risk/price fluctuations than VWLTX, I've not yet had a large enough loss (%) to justify TLHing mine.

Gracious, a wealth of information contained within this response! Thank you so much for the detailed and specific recommendations- as well as, the tax advice!

Idea: More cash.
eRecall some retirees report keeping 5yrs of livings expenses in a 5yrs CD ladder. Why? Higher yield than savings. Each year one CD matures, and they live on it. And each year they buy a new 5yr-CD (indexed for expected inflation) from bonds/stocks, whichever is up. And if both bonds/stocks are down, then they have 5yrs of living expenses in CDs to wait for one/both to recover.

Love the CD ladder. The priority over the next 6 years is to stash more cash! Thank you for mentioning!

Idea. ABP by CC technique.

If you have not already done so ...consider setting up all of your monthly bills from your trusted (no billing mistakes) creditors to be paid by their ABP (automatic bill payment) plans; with payments tied to your cashback CC (2%) where you can, and to your checking where you must. Your CC ABP is tied to your checking. This sets up this cash flow...

   Creditor (ABP) --> CC (2%, ABP) --> Checking (~0%)

Since money is fungible---$1 from dad is worth the same as $1 from mom---if your checking is low-yield, then you can boost its yield by putting a cashback CC in your payment flow. (If you can't get money from mom, then get it from dad. This ameliorates my FOMO---fear of missing out---because I don't chase bank teaser rates; helps to keep my life simple.)

Cash-equivalents.
--If you can keep 1yr of living expenses in your 1st-tier EFs (low-interest checking/savings) and boost their yield by CC cashback, then you're earning ~2%/yr tax free on your first year of living expenses. And since the ABP math doesn't care in which accounts you keep the money, then might as well keep a few months in checking to make ABP run smoothly.
--If the remainder of your cash is in a 5yr CD ladder, then it should be earning more than HY savings.*
--Your muni bonds in taxable should be earning more after-tax than TBM.
--So all of your cash-equivalents should be earning more than you would normally expect, and without the complexity of chasing bank teaser rates.
--Also, since all of your bills are paid by ABP, you could take a long vacation without worrying about them being unpaid in your absence.

* Exception. We are currently in an inverted-yield environment with shorter term investments paying more than longer. But I would expect this to self-correct eventually as banks can not long lend, businesses borrow, and the economy to prosper, if it lasts too long.

See: https://home.treasury.gov/resource-cent ... nth=202305

Again, thank you for the extensive explanations and information.

Out of curiosity, what is your opinion on the percentage of international stocks in the average portfolio?

[dratkinson]

...
Out of curiosity, what is your opinion on the percentage of international stocks in the average portfolio? [/color]

Additional allocation to international.

Recall S&P500 is reported to earn ~40% of annual income from international sales. Recall S&P500 is ~80% of TSM. So TSM already contains ~30%
(= 40% x 80%) exposure to international. (We just don't get FTC from international embedded in TSM.)

The question becomes, how much additional exposure to international works best? This can only be known after the fact---we're guessing before then.
--The recommended range is 0-50%: 0% because you believe TSM contains enough international exposure, 50% because US is ~50% of world economy.
--Recall Mr Bogle recommended 0% for many years, but in later years tolerated ~20% additional allocation to international.
--Believe Vanguard uses ~30%.

I know nothing, but have ~10% additional exposure to international. Why? Because when my AA says I need to buy stocks and US is higher, then I buy international; makes me think I'm clever to buy stocks low.

Your choice.



SWR (Safe Withdrawal Rate).

Recall recommended 4% SWR is reported to exhaust our retirement nest egg within 30yrs. This is okay if our family has short genes, but could be a problem for a long-lived surviving spouse.

However, recall reading that a SWR of <3% is reported to be a perpetual SWR---should never be exhausted. Why? Because annual outflows should be replenished by dividends and capital appreciation.


Student exercise. Wag your retirement cost of living. If it's covered by <3% SWR (after subtracting: pension, SS, taxable dividends,...), then you should never run out of money.

If your withdrawals were <3% of your taxable account, then you'd not need to tap your traditional accounts except to do Roth conversions and RMDs. This implies growing your taxable account would be more beneficial, vs contributing more to traditional/Roth. Your choice.



Prioritizing investments, from now to retirement.

Above could mean that your biggest bang for your next dollar might be to:
--Prioritize taxable contributions to get needed bonds/cash in place by your retirement.*
--If you are still eligible for 100% deductible traditional contributions, then do them for the tax benefit.*
--Don't make (direct/backdoor) Roth contributions. Why? You are too close to retirement for investment growth to offset the tax cost to get into a Roth. May be better to wait to convert to Roth in retirement, while in lower tax bracket before taking SS.**
--If eligible for mega-backdoor Roth, that would be hard to give up. Why? It's a rare contribution limit that would grow your Roth total faster than otherwise, so maybe it is worth the tax cost.**

* I'm reasonably certain the first two are good ideas.

** The next two I'm uncertain about. Why? Because both have arguments for/against.
--You are too close to retirement for the Roth growth to retirement, to outweigh the tax cost to get into the Roth;
--however, Roth contribution limits (direct/backdoor/mega-backdoor) are a rare thing that I'd hate to waste.

What to do? There may be no perfect answer, there is only the answer that is right/works for you. Your choice.

Roths?
--If you prioritize tax efficiency, then wait until after retirement to contribute/convert to Roths while in lower tax bracket before SS.
--If you prioritize maximizing Roths (for legacy), then use all available contribution limits now, and convert more to Roths after retirement.

Traditional?
--If your traditional contributions are 100% tax deductible, then use them, especially if you stay in a lower tax bracket.
--If your traditional contributions are NOT tax deductible, then maybe focus on growing your taxable contributions. Why?
(1) Taxable get QDI/LTCG/FTC tax benefits, traditional contributions lose these benefits and are taxed as ordinary income for withdrawals/Roth conversion/RMD on surviving spouse. (2) But! on the other hand, if you favor growing your Roth, then turn a lemon (non-deductible tIRA) into lemonade (backdoor Roth). Your choice.

Taxable?
--I can think of no reason NOT to prioritize taxable investing ...after you decide what you want to do with your Roth/traditional accounts.


Idea. Recall some, when faced with no clear choice---in an attempt to minimize regret---do a little of each, by investing in: some traditional, but not the max; some Roth, but not the max; and putting the difference in taxable. Your choice.



Equilibrium tax rate---tax rate on surviving spouse.

See: https://www.kitces.com/blog/tax-rate-eq ... nversions/

When planning Roth conversions in retirement, it's okay to advance tax brackets if doing so reduces the equilibrium tax rate on a surviving spouse. Just don't go over the equilibrium tax rate to do Roth conversions.


Student exercise. Use Excel to model each retirement year (income: pension, SS, taxable distributions (2%?); living expenses; expected investment growth (6%?); withdrawals: RMDs, Roth conversions, uncovered living expenses; tax rate and tax bracket headroom) to wag your road ahead.

In your model (and real life), you'd want to do the majority* of RMDs/conversions/withdrawals in January of each retirement year. Why? To sooner reduce growth of the traditional accounts, and sooner transfer annual growth to the taxable/Roth accounts.

* Recall some retirees report making full RMD** and large withdrawals (buy new 5yr CD?)/Roth conversions in January. Then wait until late in the year (Nov-Dec) to wag their tax situation resulting from investment distributions to-date + forecast end-of-year distributions, to tweak*** their final Roth conversions and withdrawals to fill taxable. The goal is:
--To fill their current tax bracket headroom.
--Or to advance and fill the next tax bracket(s) headroom, if beneficial to do so to reduce the equilibrium tax rate on a surviving spouse.

** IRS requirement, so get it out of the way early and transfer that growth sooner from traditional to taxable.

*** Recall some retirees report playing a game to see how close they can get to filling their tax bracket headroom, without going over. How?
--They know their total distributions to date.
--Bond distributions happen end of month, are generally stable, easy to wag. (Exception: bonds sometimes pay CGs, it's rare, but happens.)
--End of year TSM/TISM distributions happen ~24-26th of December.
--So they wait until =>27th of December to make their last traditional withdrawals (Roth conversions/top up taxable), to max tax bracket headroom.

If they guess right, Yea! they won. If they go over the tax bracket headroom, it's only by a little (unexpected CGs from bonds) and the additional tax owed only applied to the dollars that went over, so no biggie. So again, Yea! they won.



Edit. Oops, second thoughts.

[steadyosmosis]

I try to keep my ~60/40 portfolio simple and efficient.
Retired several years ago, well below age 59.5, and still delaying SS until age 70.
During these years of very low income, I do Roth conversions at federal tax cost of 12%, and less.
Without Roth conversions, I would pay zero in federal taxes.
See my signature line below for more info on my setup.

[Carolinagurl]

...
Out of curiosity, what is your opinion on the percentage of international stocks in the average portfolio? [/color]

Additional allocation to international.

Recall S&P500 is reported to earn ~40% of annual income from international sales. Recall S&P500 is ~80% of TSM. So TSM already contains ~30%
(= 40% x 80%) exposure to international. (We just don't get FTC from TSM investment.)

The question becomes, how much additional exposure to international works best? This can only be known after the fact---we're guessing before then.
--The recommended range is 0-50%: 0% because TSM contains enough international exposure, 50% because US is ~50% of world economy.
--Recall Mr Bogle recommended 0% for many years, but in later years tolerated ~20% additional allocation to international.
--Believe Vanguard uses ~30%.

I know nothing, but have ~10% additional exposure to international. Why? Because when my AA says I need to buy stocks and US is higher, then I buy international; makes me think I'm clever to buy stocks low.

Your choice. You make very solvent points and I concur!

SWR (Safe Withdrawal Rate).

Recall recommended 4% SWR is reported to exhaust our retirement nest egg within 30yrs. This is okay if our family has short genes, but could be a problem for a long-lived surviving spouse.

However, recall reading that a SWR of <3% is reported to be a perpetual SWR---should never be exhausted. Why? Because annual outflows should be replenished by dividends and capital appreciation.


Student exercise. Wag your retirement cost of living. If it's covered by <3% SWR (after subtracting: pension, SS, taxable dividends,...), then you should never run out of money.

If your withdrawals were <3% of your taxable account, then you'd not need to tap your traditional accounts except to do Roth conversions and RMDs. This implies growing your taxable account would be beneficial---instead of traditional/Roth. Your choice.

I've already done an extensive budget "look back" and have a fairly good idea where we stand. I definitely think we can scale back our withdrawal rate.

Prioritizing investments, from now to retirement.

Above could mean that your biggest bang for your next dollar might be to:
--Prioritize taxable contributions to get needed bonds/cash in place by your retirement.*
--If you are still eligible for 100% deductible traditional contributions, then do them for the tax benefit.*
--Don't make (direct/backdoor) Roth contributions. Why? You are too close to retirement for investment growth to offset the tax cost to get into a Roth. May be better to wait to convert to Roth in retirement, while in lower tax bracket before taking SS.**
--If eligible for mega-backdoor Roth, that would be hard to give up. Why? It's a rare contribution limit that would grow your Roth total faster than otherwise, so maybe it is worth the tax cost.**

* I'm fairly certain the first two are good ideas.

** The next two I'm uncertain about. Why? Because both have arguments for/against.
--You are too close to retirement for the Roth growth to retirement, to outweigh the tax cost to get into the Roth;
--however, Roth contribution limits (direct/backdoor/mega-backdoor) are a rare thing that I'd hate to waste.

What to do? There is no perfect answer, there is only the answer that is right/works for you. Your choice.

Roths?
--If you prioritize tax efficiency, then wait until after retirement to contribute more to your Roths.
--If you prioritize maximizing your Roths, then use all of your available contribution limits for that.

Traditional?
--If your traditional contributions are 100% tax deductible, then use them, especially if you stay in a lower tax bracket.
--If your traditional contributions are NOT tax deductible, then maybe focus on growing your taxable contributions. Why?
(1) Taxable get QDI/LTCG/FTC tax benefits, traditional contributions lose these benefits and are taxed as ordinary income for withdrawals/Roth conversion/RMD on surviving spouse. (2) But! on the other hand, if you favor growing your Roth, then turn a lemon (non-deductible tIRA) into lemonade (backdoor Roth). Your choice.

Taxable?
--I can think of no reason NOT to prioritize taxable investing ...after you decide what you want to do with your Roth/traditional accounts


Idea. Recall some, when faced with no clear choice---in an attempt to minimize regret---would do a little of each by investing in: some traditional, but not the max; some Roth, but not the max; and put the difference in taxable. Your choice.

Taxable bond investing in the aforementioned Muni fund is a priority followed by the Roth conversions after retirement. Unfortunately, we cannot participate in the Mega backdoor Roth as the employee and employer contributions are maxed out. In fact, we have already maxed out the $30K employee limit.


Equilibrium tax rate---tax rate on surviving spouse.

See: https://www.kitces.com/blog/tax-rate-eq ... nversions/

When planning Roth conversions in retirement, it's okay to advance tax brackets if doing so reduces the equilibrium tax rate on a surviving spouse.


Student exercise. Use Excel and model each year of retirement (income: pension, SS, taxable distributions; living expenses; expected investment growth (6%?); withdrawals: RMDs, Roth conversions, uncovered living expenses; tax rate and tax bracket headroom) to wag your road ahead.

Absolutely imperative and stellar advice-I'm already working on a speadsheet now!

In your model (and real life), you'd want to do the majority* of RMDs/conversions/withdrawals in January of each retirement year. Why? To sooner reduce growth of the traditional accounts, and sooner transfer annual growth to the taxable/Roth accounts.

* Recall some retirees report making full RMD** and large withdrawals (buy new 5yr CD?)/Roth conversions in January. Then wait until late in the year (Nov-Dec) to wag their tax situation resulting from investment distributions to-date and forecast end-of-year distributions, to tweak*** their final Roth conversions and withdrawals to fill taxable. The goal is:
--To fill their current tax bracket headroom.
--Or to advance and fill the next tax bracket(s) headroom, if beneficial to do so to reduce the equilibrium tax rate on a surviving spouse.

** IRS requirement, so get it out of the way early and transfer that growth sooner from traditional to taxable.

*** Some retirees report playing a game to see how close they can get to filling their tax bracket headroom, without going over. How?
--They know their total distributions to date.
--Bond distributions happen last day of month, are generally stable, easy to wag. (Exception: bonds sometimes pay CGs, a rare thing, but happens.)
--End of year TSM/TISM distributions happen ~24-26th of the month.
--So some retirees wait until =>27th of the month to make their last Roth conversions/withdrawals for the year.

Timing is everything!

And if they do go over the tax bracket headroom, the additional tax owed only applied to the few dollars that went over, so no biggie.

I can't thank you enough for the wealth of information you have imparted. I've actually copied it to a word doc so I can begin working on the various pieces. I feel like I hit the jackpot! Thank you again!

Edit. Oops, second thoughts.