Portfolio Advice for a Retiree

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Topic Author
JustAnotherInvestor
Posts: 2
Joined: Sun Jan 10, 2021 1:39 pm

Portfolio Advice for a Retiree

Post by JustAnotherInvestor »

Emergency funds: One years expenses, about $75,000.

Debt: No Debt

Tax Filing Status: Single

Tax Rate: 24% Federal, 0% State

State of Residence: TX

Age: 70

Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 25% of stocks

Total portfolio is about $5 million

Current retirement assets

Taxable
$1,400,000 Cash (27.5% of total portfolio)
$1,600,000 S&P 500 Index (31.4% of total portfolio) - Basis is around $500,000
$1,500,000 Dow Jones Index (29.4% of total portfolio) - Basis is around $600,000
$50,000 individual bond expiring in 5 years that's got about $3,000 loss.

Rollover IRA
$500,000 cash (10.0% of total portfolio)
$100,000 individual stock (1.7% of total portfolio)

House
$450,000 Paid in full with no mortgage

Questions:
Family member is looking to me for recommendations on what to do with the cash. About half of the assets are with Vanguard so I recommended Vanguard PAS. The advisor recommended selling the $1.5M in the taxable account that's invested in DIA and moving to a combination of domestic and international stock funds. This surprised me given the tax bill. They seemed open to diversifying over two years but anything over that would require approval from their oversite committee. He did seem fine with the roughly 63% of the portfolio being stock

1. Is the asset allocation appropriate for a 70 year old? The family member knows very little about stocks and bonds and rarely looks at account statements. They likely would be shocked to see balance dropping early part of the year.

2. Is DIA sufficiently diversified or would there be true value in selling it and moving to a mix of domestic and international stock? A $200k or so tax bill along with an increase in medicare premium seems like a lot for diversification. Is there an optimal time to spread the diversification out to minimize the tax hit, maybe over 4-5 years?

3. Any thoughts on what to do with the cash? Presumably a bond fund with minimal tax implications?

Thank you in advance for recommendations!
megabad
Posts: 3625
Joined: Fri Jun 01, 2018 4:00 pm

Re: Portfolio Advice for a Retiree

Post by megabad »

Here is my boring opinion--I would do nothing given the information you provided. Portfolio generates about enough automatically each year in distributions and it likely isn't overly high fee (I hope). An estate plan is of extreme import. DIA index would not be my preference but I don't see much reason to generate a huge tax burden given the likely short time horizon. Also, speaking from experience, older folks hate change.
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retired@50
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Location: Living in the U.S.A.

Re: Portfolio Advice for a Retiree

Post by retired@50 »

JustAnotherInvestor wrote: Sun Jan 10, 2021 2:13 pm
Questions:
Family member is looking to me for recommendations on what to do with the cash. About half of the assets are with Vanguard so I recommended Vanguard PAS. The advisor recommended selling the $1.5M in the taxable account that's invested in DIA and moving to a combination of domestic and international stock funds. This surprised me given the tax bill. They seemed open to diversifying over two years but anything over that would require approval from their oversite committee. He did seem fine with the roughly 63% of the portfolio being stock

1. Is the asset allocation appropriate for a 70 year old? The family member knows very little about stocks and bonds and rarely looks at account statements. They likely would be shocked to see balance dropping early part of the year.

2. Is DIA sufficiently diversified or would there be true value in selling it and moving to a mix of domestic and international stock? A $200k or so tax bill along with an increase in medicare premium seems like a lot for diversification. Is there an optimal time to spread the diversification out to minimize the tax hit, maybe over 4-5 years?

3. Any thoughts on what to do with the cash? Presumably a bond fund with minimal tax implications?

Thank you in advance for recommendations!
Welcome to the forum. :happy
Answers:
1. Given the high net worth and the low annual expenses ($75,000) almost any allocation between 30% stock and 70% stock seems fine. It's unlikely that this portfolio will have trouble dealing with an annual $75,000 withdrawal.

2. I'd rather see the DIA money invested in something more diversified, but given the large capital gains (and related taxes) this could be managed over the remainder of the retirees life, or left completely alone too.

3. I'd certainly invest the cash in the Rollover IRA. I'd probably buy a total bond market fund given the desired allocation mentioned was 40% bonds, and I only see one small bond in the portfolio. You could also add a bond fund in taxable, but you might want to consider a municipal bond fund to avoid Federal taxes.

I'm not sure what PAS can do to help. The biggest issue is the DIA fund, but leaving it alone wouldn't be the worst outcome in my opinion. Maybe save the .30% fee...

Regards,
This is one person's opinion. Nothing more.
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GerryL
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Re: Portfolio Advice for a Retiree

Post by GerryL »

The advisor recommended selling the $1.5M in the taxable account that's invested in DIA and moving to a combination of domestic and international stock funds. This surprised me given the tax bill.
Observation: Based on other posts I've seen, financial advisors don't seem to pay much mind to the tax consequences (much less IRMAA consequences) of moves they recommend. Not their job?
Topic Author
JustAnotherInvestor
Posts: 2
Joined: Sun Jan 10, 2021 1:39 pm

Re: Portfolio Advice for a Retiree

Post by JustAnotherInvestor »

GerryL wrote: Sun Jan 10, 2021 4:42 pm Observation: Based on other posts I've seen, financial advisors don't seem to pay much mind to the tax consequences (much less IRMAA consequences) of moves they recommend. Not their job?
Thanks GerryL that's kind of the impression I've gotten too after meeting with Ameriprise and PAS advisors. They both acknowledged potential tax consequences but don't bother to explain the magnitude.
retired@50 wrote: Sun Jan 10, 2021 4:30 pm
Welcome to the forum. :happy
Answers:
1. Given the high net worth and the low annual expenses ($75,000) almost any allocation between 30% stock and 70% stock seems fine. It's unlikely that this portfolio will have trouble dealing with an annual $75,000 withdrawal.

2. I'd rather see the DIA money invested in something more diversified, but given the large capital gains (and related taxes) this could be managed over the remainder of the retirees life, or left completely alone too.

3. I'd certainly invest the cash in the Rollover IRA. I'd probably buy a total bond market fund given the desired allocation mentioned was 40% bonds, and I only see one small bond in the portfolio. You could also add a bond fund in taxable, but you might want to consider a municipal bond fund to avoid Federal taxes.

I'm not sure what PAS can do to help. The biggest issue is the DIA fund, but leaving it alone wouldn't be the worst outcome in my opinion. Maybe save the .30% fee...

Regards,
Thanks retired@50, I was thinking along the same lines myself. I've had good luck over the years with VBTLX in my own account over the years. Do you think "Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)" would be appropriate for taxable?
megabad wrote: Sun Jan 10, 2021 3:45 pm Here is my boring opinion--I would do nothing given the information you provided. Portfolio generates about enough automatically each year in distributions and it likely isn't overly high fee (I hope). An estate plan is of extreme import. DIA index would not be my preference but I don't see much reason to generate a huge tax burden given the likely short time horizon. Also, speaking from experience, older folks hate change.
Thanks megabad. This has been the approach I've recommended over the years. The last time any changes were made to the individual's accounts was about 9-10 years ago so I'm wondering if there is anything that could be done to keep inflation from eating in to what remains.
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retired@50
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Location: Living in the U.S.A.

Re: Portfolio Advice for a Retiree

Post by retired@50 »

JustAnotherInvestor wrote: Sun Jan 10, 2021 4:55 pm
Thanks retired@50, I was thinking along the same lines myself. I've had good luck over the years with VBTLX in my own account over the years. Do you think "Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)" would be appropriate for taxable?
VTEAX is a solid choice for a national municipal bond fund. Maybe read up on it, or share the relevant risks with the "retiree".
See link: https://investor.vanguard.com/mutual-fu ... file/VTEAX


Regards,
This is one person's opinion. Nothing more.
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