Review My Traditional IRA

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Topic Author
Thundering Man
Posts: 29
Joined: Fri Nov 03, 2023 8:15 am

Review My Traditional IRA

Post by Thundering Man »

I have dropped out of Vanguard PAS last year due to the fact they would no longer let me set my the international allocation amount or percentage in my portfolio. I don't want to exceed more than 20% in international stocks in my portfolio. I am also not a fan of bond funds at this point in my life. I am fine with staying in Vanguard at this point in my life. I have entertained moving my IRA accounts back to Fidelity. I am concerned about the continuing changes at Vanguard and its direction concerning smaller accounts like my holdings.

Some information about me. I am 74 years old in good health. I have a pension and SS and have adequate cash reserves.
Tax rate of 12% but approaching 22%. No state income tax.

Debt: Mortgage of $160,000 at 2.5% with 26 years left. I could pay it off if I so desired.
Desired allocation of between 50% to 60% stocks and the balance in bonds and cash. I have about $553,000 in Vanguard account and an additional $162,000 in cash.

Vanguard accounts an percentages.
Taxable brokerage account
2.7% VRMXX (cash)
22% VTI (total stock market ETF)
1% VVXUS (total international stock ETF)

Traditional IRA
9% VBTLX ($49,000) (total bond market admiral)
7% VFIDX ($37,000) (intermediate bonds)
4% VFSUX ($25,000) (short term bonds)
2% BND ($10,000) (total bond ETF)
10% BNDX ($57,000) (international ETF)
0.4% VTI ($2,000) (total stock market)

Roth Ira
30% VTI
11% VXUS

Vanguard has my asset mix at 63% stocks (81% US stocks 19% international stocks); 32% bonds (63% US bonds and 17% international) and 3% cash. If you include my other cash accounts (CD; savings and checking accounts) my asset mix is about 52% stocks; 26% bonds and 22% cash. I have been reinvesting all RMD since I have turned 70.5 since I haven't needed the money. I live simply and I am still a saver.

Questions
1. What do you think of the Traditional IRA set up by Vanguard? Would leave it the same as VPA has it currently set up or make changes?
2. I have to take about $7,500 RMD in 2024 and I usually take the RMD in August. What accounts would you use take the RMD?
3. I am thinking of reinvesting my next RMD in a new account VBIAX since I have enough to open the account. I have looked at the possibility of using VTMFX but I would have take some of my cash to make the investment minimum of $10,000 or open an account of VWKEX at the higher ER of 0.26%. I would be investing in these accounts since I don't want to rebalance the accounts and it would control my asset mix. I could also take the distributions from VBIAX is so desired.

I would appreciate your thoughts or suggestions for my questions.
mhalley
Posts: 10478
Joined: Tue Nov 20, 2007 5:02 am

Re: Review My Traditional IRA

Post by mhalley »

I think the multiple bond funds is overly complicated and would just change to total bond. I don’t like balanced funds in taxable accounts.
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retiredjg
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Joined: Thu Jan 10, 2008 11:56 am

Re: Review My Traditional IRA

Post by retiredjg »

Thundering Man wrote: Mon May 13, 2024 10:25 am1. What do you think of the Traditional IRA set up by Vanguard? Would leave it the same as VPA has it currently set up or make changes?
I think this is entirely personal preference. It's a little clutter but not hurting anything. It's a little less risky than just holding intermediate term bonds. For people who are disappointed in what intermediate term bonds have done the last few years, having the short term fund tempers that a little.

To me, bonds are bonds for the most part. I would not worry about keeping any kind of balance between them. And I'd probably sell the ETF and combine that with the Total Bond mutual fund just to reduce the clutter.

What would you consider to be an ideal holdiing? What would you change to?

2. I have to take about $7,500 RMD in 2024 and I usually take the RMD in August. What accounts would you use take the RMD?
Depends on what you want the account to look like in the end. Sell whatever fund you want to get rid of.

3. I am thinking of reinvesting my next RMD in a new account VBIAX since I have enough to open the account. I have looked at the possibility of using VTMFX but I would have take some of my cash to make the investment minimum of $10,000 or open an account of VWKEX at the higher ER of 0.26%. I would be investing in these accounts since I don't want to rebalance the accounts and it would control my asset mix. I could also take the distributions from VBIAX is so desired.
Again, personal preference. If you want to maintain your AA, if you sell bonds you need to buy bonds. So I might buy a short term treasury fund in taxable with that RMD. You might like something else.
bonesly
Posts: 1423
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Review My Traditional IRA

Post by bonesly »

Thundering Man wrote: Mon May 13, 2024 10:25 am 1. What do you think of the Traditional IRA set up by Vanguard? Would leave it the same as VPA has it currently set up or make changes?
I think PAS has setup more bond diversification than necessary given the huge cash holdings you also have (maybe they don't know about the $162K "other" cash or you told them you were spooked by the bond decline in 2022). The percentages you gave only summed to about 99% and I couldn't reconcile the dollar amounts you cited for the Trad IRA against the $553K for all Vanguard accounts + $162K "other" cash (should sum to $715K). As best I can tell, this is what you have along with a proposed allocation that is a little bit simpler for the Trad IRA. It adds bonds in the Roth IRA which is sub-optimal but assumes you want 55% stocks, 20% bonds, and 25% cash, with 20% of stocks being in international (so needed some funds from Roth IRA to get to 20% bonds; nice to zero out the deltas but not strictly necessary). I highlighted VBTLX and BND in the Trad IRA as they're 100% the same thing; pick one or the other--PAS has a tendency to prefer ETFs and may not have touched your prior position in VBTLX, but there's no reason to avoid consolidation in a tax-deferred account; holding both just adds clutter.
Image

A template spreadsheet to do this kind of thing yourself is given below.
Asset Allocation Sheet
AA Current and Proposed
Thundering Man wrote: Mon May 13, 2024 10:25 am 2. I have to take about $7,500 RMD in 2024 and I usually take the RMD in August. What accounts would you use take the RMD?
RMDs are only required from the Trad IRA... if you go with the simplification above, the only holding in that account would be BND. Otherwise I would draw from the individual holdings in proportion to maintain their % allocation.
Thundering Man wrote: Mon May 13, 2024 10:25 am 3. I am thinking of reinvesting my next RMD in a new account VBIAX since I have enough to open the account. I have looked at the possibility of using VTMFX but I would have take some of my cash to make the investment minimum of $10,000 or open an account of VWKEX at the higher ER of 0.26%. I would be investing in these accounts since I don't want to rebalance the accounts and it would control my asset mix. I could also take the distributions from VBIAX is so desired.
Balanced funds (like VBIAX or any of the LifeStrategy funds) aren't particularly tax-efficient in a taxable account, which might have been why you were considering Tax-Managed Balanced (VTMFX). If your motivation to consider balanced funds like these is because you "don't want to rebalance the accounts," that purchase is likely not going to achieve the auto-rebalance goal. The only way to avoid manual rebalancing is to hold balanced funds in all the accounts, which again is typically not tax-efficient. If you hold any pure-asset class funds, then rebalancing is typically required at some point since the stock-only funds will appreciate faster than bond-only funds (or balanced funds holding bonds), and your AA will become stock-heavy, requiring that you purchase bond-only funds to regain balance.

Given the vast sums of cash in Taxable (also not tax-efficient), I'd say you should reinvest the RMDs into the pure stock funds you already own (e.g., VTI and VXUS). If you're willing to reduce you cash position from 25% to say 10%, then that could also go into VTI+VXUS in taxable (you don't need the money for spending, so why not be more tax-efficient with it?).
Topic Author
Thundering Man
Posts: 29
Joined: Fri Nov 03, 2023 8:15 am

Re: Review My Traditional IRA

Post by Thundering Man »

Thanks for the responses!

I want to thank you bonesly for your input! You really went above and beyond my expectations! Thank you for the spreadsheet.

I am not sure if Vanguard PAS was aware of my cash holdings when I transferred over my funds from Fidelity and American Century about 10 years ago. I did sell a house and downsize a few years ago which did increase my cash position. I did add the money account last year to Vanguard last year, but PAS didn't ask me any questions in regards to my cash holdings. To be honest, after PAS set up my accounts there was not much contact from them until they told me I had to use their formula and increase my international exposure last year. I had my international allowance at 20% of my equities and PAS told me that they wouldn't allow me to set my exposure.

I am not a big fan of bond funds. I always thought it was better to purchase a bond than buy a bond fund. I am not happy with the risk/reward factor of bond funds the last few years. I think I lost money in my traditional IRA because of my bond holdings. Another factor is at my age of 74, I would rather take risk in equities than bond funds. By the way, I was in a chat with Bob Berger and he also suggested putting my RMD in VTI. I am going to consider your suggestions and I will probably implement them, even with dislike for bond funds.

You have offered much better advice than PAS, I am glad I pulled out of their service and I am saving the fees they would charge me. Fidelity has an office in the city where I live and I am thinking of putting some of my extra cash in FBALX instead of VBIAX. I am a believer in index funds, but a smaller portion of holdings in a manged fund will not hurt my overall position. I realize the tax consequences of such a move and I watched Bob Berger's video on the two funds comparison and understand the risks. I think doing this would give me exposure to bonds and stocks without rebalancing. At my age, I like using Jack Bogle's theory of not rebalancing. If I don't use any of my holdings, my son can deal with the it after I pass.

Again, thanks for your advice! I think I will wait until August to make any changes in portfolio. I know you shouldn't time the market, but I think a correction is coming.
bonesly
Posts: 1423
Joined: Mon Dec 18, 2017 9:28 pm
Location: WA

Re: Review My Traditional IRA

Post by bonesly »

Thundering Man wrote: Wed May 15, 2024 6:57 am I am not a big fan of bond funds. I always thought it was better to purchase a bond than buy a bond fund. I am not happy with the risk/reward factor of bond funds the last few years. I think I lost money in my traditional IRA because of my bond holdings. Another factor is at my age of 74, I would rather take risk in equities than bond funds. ... I am going to consider your suggestions and I will probably implement them, even with dislike for bond funds.
There's nothing wrong with changing Total Bond Market Index for a ladder of individual Treasuries of say 3-7 year maturity. Vanguard should have a tool to build a ladder, but it's never been obvious to me when I log into my account (but I haven't really looked for it). You could also call them and ask for the bond desk and see if they can point you to the tool to setup a ladder. Once it's setup, replacing maturing rungs should be fairly straightforward. If you can meet your bond allocation with Fidelity, they also have a tool (as does Schwab), but Fidelity's tool is pretty evident without even logging in.

Fidelity Bond Ladder Tool
Fidelity article on how to build a bond ladder

In contrast Vanguard's individual bond article doesn't even mention if they have a tool or not (I know they do from other posters).

Given your dislike of bond funds (you're not alone here on that sentiment), a bond ladder might be suitable if you're up to the overhead of managing it. I still think bond funds are also suitable, but I'm not going to try and convince you if you'll sleep better at night with a ladder of individual T-Notes.
Thundering Man wrote: Wed May 15, 2024 6:57 am Fidelity has an office in the city where I live and I am thinking of putting some of my extra cash in FBALX instead of VBIAX. I am a believer in index funds, but a smaller portion of holdings in a manged fund will not hurt my overall position. I realize the tax consequences of such a move and I watched Bob Berger's video on the two funds comparison and understand the risks. I think doing this would give me exposure to bonds and stocks without rebalancing. At my age, I like using Jack Bogle's theory of not rebalancing.
VBIAX as a passive fund, is auto-rebalancing every day and yet has a 12m-trailing turnover of 19.2%. As an actively managed fund, FBALX doesn't have to rebalance everyday, but it does have a prospectus goal of maintaining a 60/40 split and allows for "Engaging in transactions that have a leveraging effect on the fund.", but that same prospectus shows 29% turnover last fiscal year. I would expect 29% turn over being higher than 19.2% would be a higher tax liability for Fidelity's fund unless the manager's are being smart about offsetting winners and losers. Tax-efficiency like that is not an objective/strategy of that fund, but perhaps Bob Berger's seeing something I'm missing.

I'd look into building a ladder of T-Notes at Fidelity over investing in their actively managed balanced fund (at six times the ER of VBIAX).
Topic Author
Thundering Man
Posts: 29
Joined: Fri Nov 03, 2023 8:15 am

Re: Review My Traditional IRA

Post by Thundering Man »

bonesly wrote: Wed May 15, 2024 1:22 pm
Thundering Man wrote: Wed May 15, 2024 6:57 am I am not a big fan of bond funds. I always thought it was better to purchase a bond than buy a bond fund. I am not happy with the risk/reward factor of bond funds the last few years. I think I lost money in my traditional IRA because of my bond holdings. Another factor is at my age of 74, I would rather take risk in equities than bond funds. ... I am going to consider your suggestions and I will probably implement them, even with dislike for bond funds.
There's nothing wrong with changing Total Bond Market Index for a ladder of individual Treasuries of say 3-7 year maturity. Vanguard should have a tool to build a ladder, but it's never been obvious to me when I log into my account (but I haven't really looked for it). You could also call them and ask for the bond desk and see if they can point you to the tool to setup a ladder. Once it's setup, replacing maturing rungs should be fairly straightforward. If you can meet your bond allocation with Fidelity, they also have a tool (as does Schwab), but Fidelity's tool is pretty evident without even logging in.

Fidelity Bond Ladder Tool
Fidelity article on how to build a bond ladder

In contrast Vanguard's individual bond article doesn't even mention if they have a tool or not (I know they do from other posters).

Given your dislike of bond funds (you're not alone here on that sentiment), a bond ladder might be suitable if you're up to the overhead of managing it. I still think bond funds are also suitable, but I'm not going to try and convince you if you'll sleep better at night with a ladder of individual T-Notes.
Thundering Man wrote: Wed May 15, 2024 6:57 am Fidelity has an office in the city where I live and I am thinking of putting some of my extra cash in FBALX instead of VBIAX. I am a believer in index funds, but a smaller portion of holdings in a manged fund will not hurt my overall position. I realize the tax consequences of such a move and I watched Bob Berger's video on the two funds comparison and understand the risks. I think doing this would give me exposure to bonds and stocks without rebalancing. At my age, I like using Jack Bogle's theory of not rebalancing.
VBIAX as a passive fund, is auto-rebalancing every day and yet has a 12m-trailing turnover of 19.2%. As an actively managed fund, FBALX doesn't have to rebalance everyday, but it does have a prospectus goal of maintaining a 60/40 split and allows for "Engaging in transactions that have a leveraging effect on the fund.", but that same prospectus shows 29% turnover last fiscal year. I would expect 29% turn over being higher than 19.2% would be a higher tax liability for Fidelity's fund unless the manager's are being smart about offsetting winners and losers. Tax-efficiency like that is not an objective/strategy of that fund, but perhaps Bob Berger's seeing something I'm missing.

I'd look into building a ladder of T-Notes at Fidelity over investing in their actively managed balanced fund (at six times the ER of VBIAX).
Thanks for the suggestions for the options for replacing the bond funds! I will look at that option.

Sorry, I wasn't clear on statement of "not rebalancing". What I meant was I could just follow Jack Bogle's advice of not rebalancing my portfolio (not make any changes to my current portfolio) and just let it ride. In the link below Berger explores Bogle's thoughts on not re balancing.
https://www.youtube.com/watch?v=sO8SLwDOvCk

Regarding VBIAX; FBALX has constantly outperformed VBIAX even with the higher fees. As you noted, VBIAX is a strict US 60-40 split but FBALX and has option of going higher than the 60% equity level. It is currently 4.07% in international equities and 59.39% in US equities (63.46% in total stocks). It also has lower rated bonds than VBIAX. I agree with your comment on the tax consequences and if Fidelity changes managers, the results could change like any other actively managed fund. If you watch Beger's video, he says he wouldn't purchase FBALX for himself since it would change his overall allocation of stocks (he owns VBIAX in a non taxable account), but thinks it is a good fund. Berger does a good job of comparing the two funds in the below link.
https://www.youtube.com/watch?v=NhdV3uWo-sE
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