Portfolio review. Windfall and transitioning from individual stocks to Bogleheads approach.

[someonesmum]

Emergency funds: $200K

Debt: None.

Tax Filing Status: Head of household

Tax Rate: 12% Federal, 0% State

State of Residence: Florida

Age: 62

Desired Asset allocation: 60% stocks / 40% bonds (open to suggestions)
Desired International allocation: 30% of stocks (same as above)

Size of portfolio: $1.5M

Taxable
66% Cash (recent windfall looking to invest)
31.5% Professionally managed by Fisher Investments. Currently in about 80 individual stocks with an 80/20 split between S&P stocks and large cap international. In the process of disengaging from them to transition to a Boglehead approach.


Traditional IRA
2% Vanguard 500 Index Fund ETF (VOO) (0.03%)
0.5% Vanguard Tax Managed Fund Ftse Developed Markets ETF (VEA) (0.06%)


Additional Info
Social Security - $23,000 per year
Receiving ACA benefits
Semi-retired (no steady income stream)
Desired spending is about $100K a year. Currently using emergency funds for this. Planning to earn $24K a year starting next year.

Appreciate any insights. Thank you!

[runner3081]

Sorry, don't see a question.

[123]

On a 1.5M properly diversified portfolio a safe withdrawal rate of 4% would allow a draw down of 60K a year. Easy to use a Total Stock Market fund for equity allocation and a bond fund, like Vanguard Total Bond, for fixed income.

Fisher is undoubtedly costs you 1%+ a year which you could eliminate (easily $5K+). Of course they make money from the AUM fee plus generally using higher cost investment products (the same practices as the other advisory firms). The existing individual stock positions could be sold over time if there are significant capital gains.

[lgs88]

...
Taxable
66% Cash (recent windfall looking to invest)
31.5% Professionally managed by Fisher Investments. Currently in about 80 individual stocks with an 80/20 split between S&P stocks and large cap international. In the process of disengaging from them to transition to a Boglehead approach.
...

Chiming in to say that you could consider leaving the 80 individual stocks well enough alone, if there are significant capital gains, and investing the windfall in accordance with Boglehead principles. Try your new brokerage's portfolio analysis tool (at Fidelity, it's account view > Analysis > Stock Analysis) and see whether the 80 stocks you have roughly approximate a total-market index anyway.

I have a bunch of old, low-basis inherited stock with the rest managed along Boglehead principles. I cap my exposure to any individual stock at 8% of the total portfolio, so if it runs up beyond that I sell it down to the threshold/use the excess for charitable contributions. Perhaps 5% would be a more sensible threshold, depending on your risk tolerance - high flyers can go to zero!

Point being that you shouldn't feel compelled to liquidate the stocks Fisher has purchased on your behalf, unless there's a good reason to do so.

[Sandtrap]

Use any of these portfolio projection tools for your needs.

Engaging Data Site:
https://engaging-data.com/early-retirem ... and-tools/
TestFolio Website:
https://testfol.io/
Portfolio Visualizer site:
https://www.portfoliovisualizer.com/bac ... allocation

Read:
How Financial Advisors Make Money
http://www.pamkrueger.com/how-does-my- ... ake-money/

How do Brokerages Make Money
Investopedia
https://www.investopedia.com/terms/b/b ... %20order.

j

[retired@50]

Age: 62
Size of portfolio: $1.5M

Additional Info
Social Security - $23,000 per year
Receiving ACA benefits
Semi-retired (no steady income stream)
Desired spending is about $100K a year. Currently using emergency funds for this. Planning to earn $24K a year starting next year.

Appreciate any insights. Thank you!

Welcome to the forum.

Sorry to be the bearer of bad news but...
To keep up the spending level of $100k per year, you're going to need that $24k of earnings next year (and for the foreseeable future).

As a very rough guide, if you consider the 4% rule, then a $1.5 million portfolio can support about $60k of withdrawal each year over a 30 year retirement.

So, $60k from portfolio + $23k from Social Security + $24k of earnings = $107,000 - (Federal income taxes) should put you in a good spot. However, if you don't earn the $24k you're going to need to review your spending.

Regards,

[Watty]

Professionally managed by Fisher Investments. ......In the process of disengaging from them to transition to a Boglehead approach.

It is a good decision to leave them.

There are all sorts of assumptions and qualifications but academic studies have show that in the past someone who is starting a 30 year retirement would have likely be OK starting out with about a 4% "safe withdrawal rate"(SWR). There is a wiki about this but you do not need worry about all the details.

https://www.bogleheads.org/wiki/Safe_withdrawal_rates

The problem with this is that if Fisher is charing you a 1.25% assets under management(AUM) that needs to come out of your 4% so they are costing you 31%(1.25/4) of your spendable income each year. With taxes it may be even worse because taxes comes out of your 4% too.

Their moving your money between taxes and any higher cost funds that they select for you may make the percentage of your spendable money even less.

If you feel that you must have a financial advisor then a much less expensive option would be to use Vanguard which only charges 0.3% and will use low cost mutual fund.

There is a wiki on managing a windfall and one of the big points in it is to not be a hurry to invest the money and that it is a good idea to put it into something ultra safe for 6 months or a year while you get used to having the money and learn and come up with a long term plan.

https://www.bogleheads.org/wiki/Managing_a_windfall

There is also a getting started wiki which you should look into if you have not seen that.

https://www.bogleheads.org/wiki/Getting_started

Age: 62
.....
Social Security - $23,000 per year

It would be worth double checking to see if starting your Social Security at 62 was the best choice. If you can delay starting it you can get a higher inflation adjusted Social Security check later. I am not sure of the details but there are way to either suspend your SS or totally undo starting it by paying back what you have already received if starting it later would make sense now that you have the windfall.

Deciding when to start Social Security is a complex decision especially if you are married, widowed, divorced after being married 10 year, or have kids still living with you. See this web site to see when it suggests that you should start it.

https://opensocialsecurity.com/

Once you see its suggestion you can scroll to the bottom of the web page to see what the impact would be if you started it at a different date.

Social Security calculations are gender neutral but statistically females tend to live a lot longer than males so delaying starting Social Security if usually an even better deal for females. Based on your Sumeonesmum username I would assume that you are female so be sure to look into this.

Receiving ACA benefits

If you are getting a subsidy then the interest and dividends on the money from your windfall may impact your subsidy so be sure to fact that into your decisions on what to do with the money.

Appreciate any insights.

With the end of the year coming up there are a couple of things to watch out for.

1) Many mutual funds pay large dividends in December so that you do not want to buy the mutual fund right before the dividend date because you will be taxed on it. This is called "buying the dividend". For example if you buy $100K of a mutual fund on December 15th and it pays a $4,000 dividend on December 20th then the mutual fund will drop in price to $96K but with $4000 dividend you will still have your $100K. The problem is that you will pay taxes on the $4,000 dividend.

2) Look into doing Roth conversions before the end of the year. With the way your Social Security is taxed and getting an ACA subsidy it may not make sense but you should be sure to look at the numbers. If you are self employed you may be able to put up to $50K into a Roth or a traditional retirement account before the end of the year.

3) Making large deductible retirement account contributions might also get you a larger ACA subsidy but you want to make sure that your taxable income does not get too low. A potential problem is that if your income is too low you will lose the ACA subsidy because it will be assumed that you are on Medicaid but if your state has not expanded Medicaid then you might not be able to actually get on Medicaid.

4) The preliminary versions of tax software is now available so be sure to start doing dummy tax returns soon so that you can see if there any problems which you might be able to fix before the end of the year. There is a penalty for not having withheld enough taxes which can be avoided using what is called "safe harbour" rules, there details but it is basically based on withholding around enough taxes to pay the prior years taxes.