Help with investment strategy - newly retired

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Topic Author
dunworkin
Posts: 1
Joined: Sun Oct 27, 2019 12:26 pm

Help with investment strategy - newly retired

Post by dunworkin » Thu Nov 07, 2019 2:42 pm

We are newly retired and we are trying to structure our lump sum proceeds from the sale of a business as well as restructuring our existing IRA’s to be more appropriate for our retirement. We would love any and all suggestions as to how to structure a portfolio that is tax efficient and suggested funds our retirement.

Emergency funds:
Thoughts are to have at least one year’s worth of expenses (as seen below that is $142,000) and maybe a bit more. The idea is that it will be a spending money in market down cycles and added to if market has a sharp increase. In other words would like to take a conservative stance with cash reserves (assume these are in a money market - currently earning 1.89%).

Debt:
Mortgage only with a 3.375% interest for 11 more years. $320,000 to pay off and home worth $1.2M. Thoughts on paying this off right away vs not

Tax filing status:
Married filing jointly

Tax rate:
Has been 24% , hoping to stay below this in retirement

State of residence:
Florida

Ages:
59 and 60

Desired asset allocation:
We think 60/40 but looking for recommendations. Not really sure about the International mix. We have a long retirement so OK with more of a moderate portfolio rather than completely conservative.

Current Assets:

Taxable:
$2,300,000 all in money market for now (this includes the emergency fund since we are looking for suggestions as to how much. )

Her IRA:
DISSX BNY MELLON SMALL CAP STOCK INDEX INV $42,339.79
FMIJX FMI INTL FD $29,794.85
PONAX PIMCO INCM CL A $46,973.78
POGRX PRIMECAP ODYSSEY GROWTH $25,019.94
VDADX VANGUARD DIV APPR INDEX FD ADM CL SHRS $58,851.29
VHYAX VANGUARD HIGH DIV YIELD INDEX ADM $56,362.33
VWIGX VANGUARD INTL GROWTH FD INVESTOR SHARE $30,968.54
Cash & Cash Investments -- $21,377.64
Account Total -- $311,688.16

His IRA:
DISSX BNY MELLON SMALL CAP STOCK INDEX INV $58,047.83
FMIJX FMI INTL FD $17,299.71
LGILX LAUDUS U.S. LARGE CAP GR OWTH FUND $41,812.11
MAPTX MATTHEWS PACIFIC TIGER FD INV $13,287.93
PONAX PIMCO INCM CL A $53,146.94
VWIGX VANGUARD INTL GROWTH FD INVESTOR SHARE $33,855.67
VTSAX VANGUARD TOTAL STOCK MKT INDEX FD ADMIRAL SHARE $201,978.56
SWVXX SCHWAB VALUE ADVANTAGE MONEY FUND $124,636.57
Cash & Cash Investments -- $10.22
Account Total -- $544,075.54


Social Security and Pension:
Her SS taken at 67 is $2371 per month
His SS taken at 66 and 10 months is $2500 per month
Her pension at 65 with no COLA increases is $950 per month

Annual expenses :
Annual expenses including fixed, discretionery and vacations is $142,000 after tax
If pay off mortgage which is $2955/month that would make annual expenses $106,535, and absolute minimum expenses are $44,000 w/o mortgage

Questions:
1) Currently all of our money is at Schwab. Would not have a problem moving to Vanguard but would be easier to keep in one place as we bank through schwab as well. We are looking for the allocation and funds that you would recommend for us. We do like what we have read in the boglehead threads related to the index fund investing and wondering about ETFs as well. But obviously we are very interested in being as tax efficient as possible. (we have heard the ishares ETF’s are higher expense but tax efficiency makes up for this????)
2) Speaking of tax efficiency, have wondered about finding a CPA (other than our current CPA who was geared toward our business) to advise on how best to start withdrawing on the accounts, ie; IRAs vs taxables. Maybe someone here has a rule of thumb on tax rates to be expected vs amount of money and allocation in the market????
3) Do we dollar cost average the lump sum into the market? Seems the market is so volatile currently that it might make sense to do this over some course of months.
4) Is it best to pay off the mortgage or let it ride? The interest does not help us in itemizing, will end up with standard deduction of $24,400 . It makes me feel better not to have that big nut to crack every month in bad stock market years for sure!!


Thank you for any advice and counsel you may have!

retired@50
Posts: 486
Joined: Tue Oct 01, 2019 2:36 pm

Re: Help with investment strategy - newly retired

Post by retired@50 » Thu Nov 07, 2019 8:26 pm

dunworkin wrote:
Thu Nov 07, 2019 2:42 pm
We are newly retired and we are trying to structure our lump sum proceeds from the sale of a business as well as restructuring our existing IRA’s to be more appropriate for our retirement. We would love any and all suggestions as to how to structure a portfolio that is tax efficient and suggested funds our retirement.

Emergency funds:
Thoughts are to have at least one year’s worth of expenses (as seen below that is $142,000) and maybe a bit more. The idea is that it will be a spending money in market down cycles and added to if market has a sharp increase. In other words would like to take a conservative stance with cash reserves (assume these are in a money market - currently earning 1.89%).

Debt:
Mortgage only with a 3.375% interest for 11 more years. $320,000 to pay off and home worth $1.2M. Thoughts on paying this off right away vs not

Tax filing status:
Married filing jointly

Tax rate:
Has been 24% , hoping to stay below this in retirement

State of residence:
Florida

Ages:
59 and 60

Desired asset allocation:
We think 60/40 but looking for recommendations. Not really sure about the International mix. We have a long retirement so OK with more of a moderate portfolio rather than completely conservative.

Current Assets:

Taxable:
$2,300,000 all in money market for now (this includes the emergency fund since we are looking for suggestions as to how much. )

Her IRA:
DISSX BNY MELLON SMALL CAP STOCK INDEX INV $42,339.79 ER = .50% Annual cost = $211.70
FMIJX FMI INTL FD $29,794.85 ER = .90% Annual cost = $268.15
PONAX PIMCO INCM CL A $46,973.78 ER = 1.45% Annual cost = $611.12
POGRX PRIMECAP ODYSSEY GROWTH $25,019.94 ER = .65% Annual cost = $162.63
VDADX VANGUARD DIV APPR INDEX FD ADM CL SHRS $58,851.29 ER = .08% Annual cost = $47.08
VHYAX VANGUARD HIGH DIV YIELD INDEX ADM $56,362.33 ER = .08% Annual cost = $45.09
VWIGX VANGUARD INTL GROWTH FD INVESTOR SHARE $30,968.54 ER = .45% Annual cost = $139.36
Cash & Cash Investments -- $21,377.64 ER = Unknown, should verify this cash is earning a competitive rate of interest.
Account Total -- $311,688.16 Total annual cost for this account = $1,484.93

His IRA:
DISSX BNY MELLON SMALL CAP STOCK INDEX INV $58,047.83 Annual cost = $290.24
FMIJX FMI INTL FD $17,299.71 Annual cost $155.70
LGILX LAUDUS U.S. LARGE CAP GR OWTH FUND $41,812.11 ER = .75% Annual cost = $313.59
MAPTX MATTHEWS PACIFIC TIGER FD INV $13,287.93 ER = 1.04% Annual cost = $138.19
PONAX PIMCO INCM CL A $53,146.94 Annual cost = $770.63
VWIGX VANGUARD INTL GROWTH FD INVESTOR SHARE $33,855.67 Annual cost = $152.35
VTSAX VANGUARD TOTAL STOCK MKT INDEX FD ADMIRAL SHARE $201,978.56 ER = .04% Annual cost = $80.79
SWVXX SCHWAB VALUE ADVANTAGE MONEY FUND $124,636.57 ER = Unknown, should verify this cash is earning a competitive rate of interest.
Cash & Cash Investments -- $10.22
Account Total -- $544,075.54 Total annual cost for this account = $1,901.49
Based on the above calculations, it appears you're paying a dollar weighted average of .395% in expense ratios for the funds you own. My own account averages out to .08% in expense ratios. This could easily be an area to generate savings over the years by using low cost mutual funds.

Social Security and Pension:
Her SS taken at 67 is $2371 per month
His SS taken at 66 and 10 months is $2500 per month
Her pension at 65 with no COLA increases is $950 per month

Annual expenses :
Annual expenses including fixed, discretionery and vacations is $142,000 after tax
If pay off mortgage which is $2955/month that would make annual expenses $106,535, and absolute minimum expenses are $44,000 w/o mortgage

Questions:
1) Currently all of our money is at Schwab. Would not have a problem moving to Vanguard but would be easier to keep in one place as we bank through schwab as well. We are looking for the allocation and funds that you would recommend for us. We do like what we have read in the boglehead threads related to the index fund investing and wondering about ETFs as well. But obviously we are very interested in being as tax efficient as possible. (we have heard the ishares ETF’s are higher expense but tax efficiency makes up for this????)
2) Speaking of tax efficiency, have wondered about finding a CPA (other than our current CPA who was geared toward our business) to advise on how best to start withdrawing on the accounts, ie; IRAs vs taxables. Maybe someone here has a rule of thumb on tax rates to be expected vs amount of money and allocation in the market????
3) Do we dollar cost average the lump sum into the market? Seems the market is so volatile currently that it might make sense to do this over some course of months.
4) Is it best to pay off the mortgage or let it ride? The interest does not help us in itemizing, will end up with standard deduction of $24,400 . It makes me feel better not to have that big nut to crack every month in bad stock market years for sure!!


Thank you for any advice and counsel you may have!
See above expense ratio calculations. This is an easy area to save. Use simple broadly diversified index funds to own U.S. Stocks, International stocks, and U.S. Bonds. You don't need to pay more than .15% for any fund. VTSAX, VTIAX, VBTLX are the popular choices on this forum. 45/15/40 might be a decent place to start if you're comfortable with a 60% stock / 40% bond allocation.

Based on your total portfolio of $3,155,763, (assuming I have this number correct based on what you provided) the 4% withdrawal rate would allow $126,230 per year. Your desire to spend $142,000 per year could put you in some jeopardy during your early years of retirement until your SS payments kick in later on.

Regards,

Thesaints
Posts: 2919
Joined: Tue Jun 20, 2017 12:25 am

Re: Help with investment strategy - newly retired

Post by Thesaints » Thu Nov 07, 2019 8:49 pm

The "year worth of expenses in cash" applies to working people. The rationale being that if they lose their job, there is no need to withdraw from a retirement account to survive until they get a new one.

For a retired person it is kind of meaningless. It would be better to estimate actual possible emergencies cost, if their likelihood is above the extremely improbable level.

NancyABQ
Posts: 268
Joined: Thu Aug 18, 2016 3:37 pm

Re: Help with investment strategy - newly retired

Post by NancyABQ » Thu Nov 07, 2019 9:13 pm

dunworkin wrote:
Thu Nov 07, 2019 2:42 pm
1) Currently all of our money is at Schwab. Would not have a problem moving to Vanguard but would be easier to keep in one place as we bank through schwab as well. We are looking for the allocation and funds that you would recommend for us. We do like what we have read in the boglehead threads related to the index fund investing and wondering about ETFs as well. But obviously we are very interested in being as tax efficient as possible. (we have heard the ishares ETF’s are higher expense but tax efficiency makes up for this????)
Just to address this one -- if you like Schwab, you can stay there and still invest in just about any ETF you want (including the Vanguard ones) for no fees. So I would suggest you just stay at Schwab since you are already there. I don't think it would be controversial to say you will probably get better customer service at Schwab than at Vanguard, should you need it.

ETF's might be more tax-efficient than Mutual Funds, but if they are index funds I don't think it will matter much. I personally like ETFs, and trades on all ETF's now have no trading fee/commission at Schwab, so you can take your pick.

User avatar
Watty
Posts: 17449
Joined: Wed Oct 10, 2007 3:55 pm

Re: Help with investment strategy - newly retired

Post by Watty » Thu Nov 07, 2019 10:52 pm

dunworkin wrote:
Thu Nov 07, 2019 2:42 pm
Would not have a problem moving to Vanguard but would be easier to keep in one place as we bank through schwab as well.
Schwab is a fine company but I feel more comfortable with keeping my banking seperate from my investing. The reason for this is that if there is a problem with your banking that can spill over into your other accounts. For example if you have credit card fraud and when you dispute if the bank does not agree, then they have the "right of offset" and can transfer money from your other accounts to pay off the credit card. I also do not have credit cards at the local brick and mortar bank that I bank with.

That could just be me but I feel more comfortable keeping things seperate.
dunworkin wrote:
Thu Nov 07, 2019 2:42 pm
4) Is it best to pay off the mortgage or let it ride?
Pay it off. A risk free tax free 3%+ return is pretty good these days.
dunworkin wrote:
Thu Nov 07, 2019 2:42 pm
Social Security and Pension:
Her SS taken at 67 is $2371 per month
His SS taken at 66 and 10 months is $2500 per month
Her pension at 65 with no COLA increases is $950 per month
See this web site to get a suggested Social Security claiming strategy.

https://opensocialsecurity.com/
dunworkin wrote:
Thu Nov 07, 2019 2:42 pm
Her IRA:
.....

His IRA:
Your IRAs are way to complex. Look at switching to a three fund portfolio.

https://www.bogleheads.org/wiki/Three-fund_portfolio

I have not read it but one of the founders of the Bogleheads has written a book on three fund portfolios.

https://www.amazon.com/Bogleheads-Guide ... 708&sr=8-2
dunworkin wrote:
Thu Nov 07, 2019 2:42 pm
3) Do we dollar cost average the lump sum into the market? Seems the market is so volatile currently that it might make sense to do this over some course of months.
If you pay off the house you will have roughly;

1) $2 million in taxable in cash.
2) $850K in IRAs mostly in stocks.

Right now you could put money in the investments;
1) In the taxable;
a) $850k in total domestic and international stock index funds.
b) Keep $1.15 million in cash

2) In the IRAs, put $850K into total bond index funds.

That would be a minimal change to your overall asset allocation but it would reduce the amount of money that you need to decide what to do with down to the $1.15 million in cash.
dunworkin wrote:
Thu Nov 07, 2019 2:42 pm
Thoughts are to have at least one year’s worth of expenses (as seen below that is $142,000) and maybe a bit more. The idea is that it will be a spending money in market down cycles and added to if market has a sharp increase.

If pay off mortgage which is $2955/month that would make annual expenses $106,535,
Your expenses will be different at different ages but eventually you will have the pension, two Social Security checks, interest, and dividends that probably more than cover your expenses with a paid off mortage.

Trying to juggle money based on if it is an up or down cycle is a fool's errand that is pretty much impossible to do. You don't really need to do that. With 2% in dividends and interest you will have around $50K a year in income. I would keep things simple and buy a CD ladder where $60K matures each year for the next five years. That would cost $300K and would further reduce the amount of money that you need to figure out how to invest. At the end of five years the pension and Social Security would be starting to kick in and your expenses may be lower then when you get on Medicare.

That is probably not the optimal way to invest the money but it is super conservative and simple.

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