My Vanguard funds: duplicative and too conservative?

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djd1950
Posts: 39
Joined: Thu Mar 30, 2017 3:08 pm

My Vanguard funds: duplicative and too conservative?

Post by djd1950 » Thu Jan 11, 2018 6:07 pm

Hello all, please bear with my ignorance, and thanks in advance for advice,

I retired last year and moved my 401k to an IRA through Merrill Edge (in part to get the $900 bonus which I learned about here). I have $160k in VTXVX; $31k in VSCGX and $108k in VSMGX. If I am calculating correctly, this just about balances 50/50 bonds/stocks.

Despite VSCGX and VTXVX having similar 60 bonds/40 stocks, they performed very differently, which I am thinking is because VTXVX is invested much more conservatively. Because I need to start drawing from the IRA - approx $1500/month - I am re-thinking my allocation among these three funds or whether I should follow a "real" three-fund strategy (e.g. VTSMX, VGTSX, VBMFX). If I stay with the funds I have, I am thinking of moving a large chunk from the Target fund to VSCGX, keeping the same 50/50 mix but looking for a better return. Looking for advice on these possibilities or others you suggest.

Aside from the three Vanguard Funds, I have $10k in a CD in the IRA, $5k in savings account, and $3k in stocks I picked for "fun" - (the Ross Stores increased 50% over six months). I have about $350k in equity in my home, and am getting $1200/month SS on ex-spouse's account, holding off on collecting my own, which would be twice as much this year and $2,800 or so at age 70. My expenses are around $3k/month. (I am doing a bit of consulting but that's not lucrative or steady.)

This forum - meaning you folks - is an amazing resource.

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cfs
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Re: My Vanguard funds: duplicative and too conservative?

Post by cfs » Thu Jan 11, 2018 6:17 pm

Let me decode this for our readers.

VTXVX - Vanguard Target Retirement 2015 Fund
VSCGX - Vanguard LifeStrategy Conservative Growth Fund
VSMGX - Vanguard LifeStrategy Moderate Growth Fund
VTSMX - Vanguard Total Stock Market Index Fund
VGTSX - Vanguard Total International Stock Index Fund
VBMFX - Vanguard Total Bond Market Index Fund

Good luck, and thanks for reading ~cfs~
~ Member of the Active Retired Force since 2014 ~

Emily1980
Posts: 132
Joined: Wed Jan 27, 2016 1:48 pm

Re: My Vanguard funds: duplicative and too conservative?

Post by Emily1980 » Thu Jan 11, 2018 6:34 pm

Hi,

If you want to keep your portfolio at 50/50, simply spitting it between VSMGX (60/40) and VSCGX (40/60) should do the trick. I think, though I could very well be wrong, that the Target Retirement funds continue shifting their allocations after the retirement date. Holding a fund that continually shifts its allocation would make it a pain in the butt to try to hold your allocation steady. I wouldn't worry about switching funds to boost performance however. Whatever made one fund perform better last year might make it perform worse next year.

Withdrawing $1,500 per month (or $18,000 annually) from an approximately $300,000 portfolio constitutes a withdrawal rate of around 6%. This is higher than the generally recognized safe withdrawal rate of 4%. But I see you have monthly expenses of around $3,000 and expect to have more than this once you start taking social security. So I don't see a major problem here. If you hold off until you receive your highest possible social security payment, then your income will be $4,000 per month, creating an excess without even needing to touch your portfolio.

You should be alright.

djd1950
Posts: 39
Joined: Thu Mar 30, 2017 3:08 pm

Re: My Vanguard funds: duplicative and too conservative?

Post by djd1950 » Thu Jan 11, 2018 6:41 pm

Thanks for your advice. Maybe I was unclear. My maximum social security will be $2800/month and to get that, I give up the current $1,200/month SS payment, so I will not have a $4,000/month income...it's one or the other, not both, unfortunately. I have no pension.

Emily1980
Posts: 132
Joined: Wed Jan 27, 2016 1:48 pm

Re: My Vanguard funds: duplicative and too conservative?

Post by Emily1980 » Thu Jan 11, 2018 8:25 pm

Ah, yes, I missed that. Ex-spouse. For some reason I thought about it like you were still married, with a spouse collecting, and then you later collecting...

Sorry!

Still, if your expenses will be $3,000 and your social security income will be $2,800, then you should be alright. You have two to three years before you can collect your full benefits at age 70? (From your previous posts it seems you are in this age range. And I'm just guessing that 1950 refers to your birth year.) This is a relatively short time period to draw down your portfolio at 6%, so as long as you keep your withdrawals to a minimum after you begin collecting social security, there doesn't seem to me to be a major problem.

But I'm hoping an older, more experienced Boglehead will say something about the math.

Here's one way I can think of it: Withdrawing $18,000 per year times 3 years removes $54,000 from your portfolio, ignoring market fluctuations. At the standard 4% annual withdrawal rate (not the 6% rate you'll be using for the next three years), that $54,000 is equivalent to $180 per month in future income. That is, $54,000 times 4% divided by 12 months. For this, you are gaining $400 per month in social security income. You said if you took social security now, you would have double $1,200 per month, which is $2,400 per month. But that, if you waited, you would have $2,800 per month. So you are potentially costing yourself $180 per month in future portfolio income to gain $400 per month in future social security income. It seems like an okay deal to me. If you still have $250,000 in your portfolio, you can safely take $750 per month and stay below the annual 4% withdrawal rate. But you don't have to take that much if you don't need it. You can just let your IRA build back up. And if your expenses are $3,000 per month while your social security is $2,800 per month, then you won't need to take $750 per month from your portfolio to meet your expenses.

Another way to think of it: calculate the difference between the standard 4% withdrawal rate and the 6% withdrawal rate you would be taking over the next three years. That is, $54,000 (at the 6% rate for three years), minus $36,000 (which would be the 4% rate for three years), is a difference of $18,000. That equates to an even smaller amount of monthly portfolio income you'd be trading for a $400 gain in social security income.

But either way, I wouldn't think of withdrawals as necessarily a straight up loss anyway. Portfolios are meant to withstand some withdrawals. The 4% rule is just considered the most safe rate at which to withdraw from a portfolio. If we have a huge stock market surge over the next 3 years, the 6% rate during that time period won't hurt you at all.

Another factor to consider, though: If you take social security now instead of waiting, at $2,400 per month, you would lower your portfolio withdrawal rate to 2.5%. That is: you would need $600 per month from your portfolio to meet your monthly expenses, times 12 months, which is $7,200 per year. Divide that by the $300,000 you have in your portfolio now. A 2.5% withdrawal rate is golden. This might be the better option. Especially since a 6% withdrawal rate is higher than the historically safe rate and, in combination with a bear market in the beginning of your retirement (if we have one), it might make things uncomfortable going forward. You need someone with more experience than I have to tell you which option is better.

The last thing you want to be doing, though, is changing your mind a lot about your asset allocation. Especially at this stage of the game.

Edit: Another factor to consider is whether your $3,000 per month has a built in amount (of savings) for large expenditures like medical copays if you become sick, or a water heater, furnace, or roof for the house. Etc. A more complete financial picture will help others give you better advice.

djd1950
Posts: 39
Joined: Thu Mar 30, 2017 3:08 pm

Re: My Vanguard funds: duplicative and too conservative?

Post by djd1950 » Thu Jan 11, 2018 10:12 pm

Thanks, Emily, for the thoughtful post and the different ways of looking at the numbers...very helpful.

Yes, I am 67.5, so 2.5 more years to maximum SS. As to when to take Social Security, you know that the common wisdom is to avoid taking it, letting the amount increase 8% per year, until 70, because nothing else guarantees that yearly gain. It's a bit more complicated than that, of course, considering time value of money and the impossibility of knowing how long one will live, but it is tempting to take it earlier to avoid taking so much from the IRA. It would be a much harder decision if I didn't have the ex-spouses SS. I own a condo, so won't be paying for a new roof, got a new hot water heater this year, but it's of course possible that I'll need a new furnace or other home repairs, not to mention a newer car. I do have very good health coverage through Kaiser Medicare Advantage, and I have kept my long term care insurance through my past employer, for which I pay $70/month.

The $3,000 does not include any allocation to savings.

Would be great to do some updates in the house but that's not possible with the current income. I could get a HELOC (no cost upfront and not use it till I need it) or a reverse mortgage...have thought about all these angles.

If anyone else could weigh in on the original question about Vanguard funds, I would much appreciate it.

djd1950
Posts: 39
Joined: Thu Mar 30, 2017 3:08 pm

Re: My Vanguard funds: duplicative and too conservative?

Post by djd1950 » Fri Jan 12, 2018 4:19 pm

cfs wrote:
Thu Jan 11, 2018 6:17 pm
Let me decode this for our readers.

VTXVX - Vanguard Target Retirement 2015 Fund
VSCGX - Vanguard LifeStrategy Conservative Growth Fund
VSMGX - Vanguard LifeStrategy Moderate Growth Fund
VTSMX - Vanguard Total Stock Market Index Fund
VGTSX - Vanguard Total International Stock Index Fund
VBMFX - Vanguard Total Bond Market Index Fund

Good luck, and thanks for reading ~cfs~
I apologize for not reading and following the etiquette.

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