Portfolio review please!!

[Teton]

Hi!

I've been reading posts for several years. I’ve tried to follow the Boglehead way. It is high time I jumped in to get some advice about my own portfolio—as I glide toward retirement. I’ll be shifting to a lower paying job for a few years, and then retire, although my spouse may be working another decade.
I did not include the expense ratios, as almost everything is a low fee Vanguard fund. The Vanguard funds held in the 457 are likewise very low fee (.08).

Emergency funds: 6 months
Debt: None.

Tax filing status: Married filing jointly.

Tax Rate: 22% federal, 5.25% state

State of Residence: Kansas
Age: 63, wife 51

Desired Asset allocation: 50% stocks / 50% bonds

Portfolio size: approximately 1 M.

Current portfolio

His Taxable Vanguard account
6.8% Vanguard ESG US Stock (ESGV)
.2 % Ishares Global Clean Energy (ICLN)
.8% Vanguard Short-term treasury (VGSH
1.5% Vanguard Sht-term Inflation Protected (VTIP)

His traditional IRA at Vanguard
2.0% Vanguard Intermediate-term treasury

His Roth IRA at Vanguard
1.2% Vanguard FTSE Social Index (VFTAX)
2.5% Vanguard Federal Money Market (VMFXX)
2.2% Vanguard Target Retirement 2025 (VTTVX)

His 457 work retirement account at Empower Retirement(deferred compensation)
16.9 Vanguard Target Retirement 2035
13.5% Vanguard Institutional Index I
2.4 % Schwab Treasury Infl. Protected
1.2 Vanguard Target Retirement income

His 457 plan at Empower (Roth)
4.1 Vanguard Target Retirement 2050
2.8% Vanguard Target Retirement 2035
2.2% Vanguard Institutional index I
1.7 Schwab Treasury Infl. Protected Secs
.2 % Vanguard Target Retirement Income


Her taxable at Vanguard
2.8% Vanguard ESG US Stock (ESGV)
4.5% Vanguard Intermediate term treasury (VGIT
2.0% Vanguard short term treasury (VGSH)
3.2% Vanguard federal money market fund (VMFXX)
2.6% Vanguard total stock market (VTI)
3.1% Vanguard shrt-term inflation protected (VTIP)

Her two Roth IRAs--(I don't know much about these.)
2.5% Hennessy Cornerstone Value Fund (HFCVX)
3.5% Victory International Fund (USIFX)

Her Roth IRA at Vanguard
.8% vanguard federal money market (VMFXX)
.6% Vanguard Sht-term Inflation-protected (VTAPX
1.2% Vanguard Target Retirement 2035 (VTTHX)

Bank CD (his and hers)
4.3% ( 4% interest matures August 2025)

Joint US Treasury IBonds
6.0%

_______________________________________________________________
Contributions:
Probably continue 10k per year into our IRAs at Vanguard

Non Portfolio:
My wife is a teacher. I am planning to leave my current job this year, and take a lower-paying job for a few years before retirement. So our combined income from jobs (not including pension) will be significantly lower than now. I will get a state pension on retirement of 45k per year. She will receive half that pension after I'm gone. It's non-COLA. She will be eligible to receive her own 20k yearly pension in six years. I plan to wait until I can receive maximum social security. With the various income sources, hopefully we will not need to dip into this portfolio for quite a while.

Questions:
1. I’d like any advice or observations. I think I should look at tax efficiency. The fixed income in each of our taxable Vanguard accounts is generating taxes. The Bank CD is also generating taxes. I plan to begin selling those bond funds soon—maybe a little each year-- and replace with VTI. To keep the 50/50 balance I need to buy bonds in my 457 deferred. However the adjustment tool in that interface adjusts the whole fund across both the deferred account and Roth. I think I'll do it anyway, adjust down the Institutional index fund across both accounts. I'll replace with BND (Vanguard total bond fund).
2. Next, although it's not critical, I'm not happy with so many accounts. Perhaps moving her two separate Roth accounts (Hennessey and Victory fund) to Vanguard? I don’t know much about these two funds. Also, maybe I should get the bank cd into a Vanguard fund?
3. Any other observations about the portfolio or retirement?

Thank you so much!

[bonesly]

Desired Asset allocation: 50% stocks / 50% bonds
...
1. I’d like any advice or observations. I think I should look at tax efficiency. The fixed income in each of our taxable Vanguard accounts is generating taxes. The Bank CD is also generating taxes. I plan to begin selling those bond funds soon—maybe a little each year-- and replace with VTI. To keep the 50/50 balance I need to buy bonds in my 457 deferred. However the adjustment tool in that interface adjusts the whole fund across both the deferred account and Roth. I think I'll do it anyway, adjust down the Institutional index fund across both accounts. I'll replace with BND (Vanguard total bond fund).

You didn't specify a desired int'l exposure as a % of stocks, so I've assumed 20% for now.

Your Current layout is clear of Wash Sales issues (with the possible exception of ESGV in both his and her Taxable accounts highlighted in red, just coordinate selling this fund if auto-reinvest is turned on), but as you noted it's not very good for Tax-Efficient Fund Placement (highlighted in purple). The synopsis of that tax-efficiency Wiki topic is that you want Taxable and Roth to be 100% stocks while all your bonds (and the balance of stocks) are in Tax-Deferred. That's not going to be possible given that your 457 ties the Trad and Roth fund choices together (some do, some don't; yours does which is sub-optimal but it's the lesser evil of bonds in Taxable). All the funds highlighted in purple are NOT tax-efficient placement. I've also highlighted the two funds in your wife's Roth IRA that have very high costs (backlight in yellow with ER in red). They might be from a former advisor (they tend to pick high-cost funds that the get a commission for recommending).

In the Proposed layout there's a more ideal end-state that reduces the complexity from 30 funds down to 12 (still too many for my liking but more easily assessed) and eliminates the high-cost funds (she should transfer that Roth account to Vanguard to consolidate and get lower-cost choices). You still have sub-optimal placement of bonds because putting them in your Trad 457 (where you want them) also puts them in your Roth 457 (where you do NOT want them). You also still have an issue with wash sales since I've suggested VTI in Joint, His, and Hers Taxable accounts (again if you don't sell VTI there's no issue, if you need to sell turn off auto-reinvest in all the accounts, make the sale, turn on auto-reinvest 31 days later). You could likely simplify a little more if you both just use a single Joint Taxable account, but perhaps you have separate accounts for estate planning purposes. Also the consolidation in this hypothetical proposed layout will incur a tax-cost to cleanup all the clutter of funds (the bonds funds should not have appreciated too much, but the stock-only funds might have a big tax-dollar cost to swap).

You don't HAVE to do everything in the proposed layout (you could leave the stock funds in Taxable as is), and if you choose to adopt this you don't have to do it all in one year (perhaps selling one clutter fund per year up to your "tax pain" threshold, especially after there's been a steep market decline). I'll agree with the comment in your second question that 30 funds is just way too many funds to easily assess and rebalance. As an aside, holding multiple TDF "years" (e.g., Income, 2025, 2035, and 2050) that occupy multiple columns in the weighting of US/Int'l/Bonds adds to the complexity; TDFs are great if you pick ONE that most closely matches your desired AA and use that same TDF everywhere (e.g., 2025 in all accounts as the only holding), which is typically not tax-efficient but it's very easy as there's no rebalancing effort).



A link to a spreadsheet with your data to help with asset allocation assessment and rebalance planning is linked below. Make a copy in your local GoogleSheets space to edit (or download to your local machine if you have Excel).
Asset Allocation Sheet
AA Current and Proposed_Teton

[Teton]

Thank you so much Bonesly, for this thoughtful, detailed, and very helpful analysis! I like the idea of combining our taxable accounts. I’m not sure why I opened separate ones for us to begin with. Thanks for highlighting the tax inefficient funds, so I can identify and tackle them methodically. I agree with moving her Roths to low fee Vanguard funds instead. I like trying to get rid of the clutter, using one fund for stocks. I like the way you’ve got the 457 in a single bond fund— the Schwab inflation Protection. I am wondering whether this fund follows with the general advice I’ve read on bond funds here, that there is little to no difference in the long run on which to choose. Does it seem equal whether one uses. Schwab vs. BND vs. something else? I didn’t realize I couldn’t balance the 457 accounts separately until recently, but it seems like you’re in agreement that adjusting to a less than ideal Roth in that is probably worth getting the better tax efficiency overall.

I’ll probably think of some question or other this week as I study this more, but this is a wonderful blueprint to improve things. I deeply appreciate your help and insight.

[PottedPlant]

At your ages, you should be 100% stocks.

[bonesly]

I am wondering whether this fund follows with the general advice I’ve read on bond funds here, that there is little to no difference in the long run on which to choose. Does it seem equal whether one uses. Schwab vs. BND vs. something else?

I chose Inflation Protected Securities because you were already holding that in your 457. If you had listed the 457 fund choices available to choose from and there is a low-cost "total bond index" I'd likely have recommended that because that's the bond component in a 3-Fund Portfolio. However, given a relatively conservative AA of 50/50 and the use of Vanguard TDFs, TIPS might be more suitable for you than a Total Bond Market fund as TIPS are likely to have lower returns but guaranteed to keep pace with inflation.

From 1928-2017 the S&P-500 returned 11.5% on average while the 10y T-Note returned 5.2%. You don't buy bonds because you're worried about their total return (Total Bond vs Int-Term Treasuries vs TIPS); you buy them because they are (mostly) uncorrelated with stocks, so when the two are combined there's a risk-adjusted improvement over what you'd expect from the sum of the parts. Subsequently any asset class with a positive average return and near-zero correlation will do the trick. It'd be nice if the non-stock asset was also 11.5% average, but that's a magical unicorn (no such asset class exists) and the difference between 5.x% for corporate + gov't bonds or 5.y% for gov't-only bonds or 4.z% for TIPS (relatively new) isn't nearly as important as the fact that these are all bonds and thus are not correlated (much) with stocks. Stocks are where you're getting your major growth rate. Bonds dampen the volatility of stocks to a level of stomach-churning you can handle.

See note b) below this chart.

a. For a long time-frame (>10 years) AAs below 20% stock are dominated (red dots) by another AA with similar risk but higher reward (blue dots).
b. The dotted line represents a hypothetical linear risk-reward from 100% stocks down to 100% bonds; the historical risk-reward curve has an improvement for risk-adjusted return due to the lack of correlation between stocks & bonds.

My standard rant on bonds...

Bonds are not safe, are not ballast that can never lose principal/purchasing power, and are greatly misunderstood. Stocks and bonds are uncorrelated (not negatively correlated). They move independently (not inversely) and can, by chance, move the same direction. Stocks & bonds both had negative returns in 1931, 1941, 1969, 2018, and 2022. They will likely both have negative returns in the same year at some point in the future. Uncorrelated does not mean "can never go down in value."

At your ages, you should be 100% stocks.

They're 63 & 51, not in their 20s or 30s. Not to mention that risk-tolerance trumps age when assessing a desired AA. How much you save and for how long you save matters much, much more than your AA.

[Teton]

This all makes perfect sense. Yes, I didn’t list all the 457 options. I believe there were only two more low fee ones after the Schwab for fixed income/bonds: a stable value fund, and VBTIX (total bond market index). Your comment about bonds and how they are used makes sense to me. Interesting, how I’ve read over these principles here in the past, but nothing makes me understand them quite as well as having them applied to my own portfolio. Thanks!