Creating a portfolio as we retire

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
AZKathy
Posts: 9
Joined: Tue Mar 23, 2021 2:15 pm

Creating a portfolio as we retire

Post by AZKathy »

We are in the process of retiring and rolling over our 403b to a Vanguard IRA account. We have also inherited some money that will need to be invested. I am looking at the 2 fund portfolio, perhaps 65% VTI, 35% bnd? If the market crashes we will not panic and sell, well, maybe panic but not sell. :happy

Emergency funds: a few thousand

Debt: none

Tax Filing Status: Married Filing Jointly

Tax Rate: 12% Federal, xx% State Our income is low enough that we often don't pay state or federal taxes.

State of Residence: AZ

Age: 69, 65

Desired Asset allocation: 60% stocks / 35% bonds
Desired International allocation: 5% of stocks maybe?

Please provide an approximate size of your total portfolio (as in 50K, 700k, 1.4M, etc.) or as (high four-figures, mid five-figures, low six-figures, etc.). 300,000ish


Taxable
32% cash (for investing) will be putting in Vanguard
7% fund name (VTTHX) (.13)


53% His Rollover IRA not funded yet... We are moving all our 403b to Vanguard, in process. We only have one.

His Roth IRA at Vanguard
6% fund name (VTI) (.03)

Her Roth IRA at Vanguard
2% fund name (VTI) (.03)
_______________________________________________________________
Pension--10,000/year We own our home, no mortgage. We get 2000/month in SS. We might need another $500/month to live. We are used to living on about $30,000/year so perhaps not.


Questions:

1. If we do the 2 fund breakdown, is it better to have the IRA in VTI or BND for our taxes? And the same for our taxable account. Does it make a difference at our low level?

2. I am wondering about rolling over some portion to a Roth, keeping the tax rate under 12%. I am assuming tax rates will go up so this could help us but also it could help our kids when they inherit.

3. Assuming we need to have additional income -- I think it is better to leave VTI alone, reinvest those gains, and take it from the "other" fund but I don't understand the tax implications.

4. I have been reading and see there are lots of opinions on the percentages for the two fund portfolio, and which 2 funds to use. Since VTI has done better historically than bond funds it does not seem risky to me. We can stand a down year or 2. What else should I be considering?

Key points--we will be investing about 300,000 in the next month or so, about half in an IRA, half not. That is the total of our portfolio.

Thank you!

Kathy
User avatar
Watty
Posts: 28813
Joined: Wed Oct 10, 2007 3:55 pm

Re: Creating a portfolio as we retire

Post by Watty »

AZKathy wrote: Wed Jul 28, 2021 10:07 pm 1. If we do the 2 fund breakdown, is it better to have the IRA in VTI or BND for our taxes? And the same for our taxable account. Does it make a difference at our low level?
Usually you would own stocks in your taxable account and bonds in your retirement accounts for tax efficiency.

There is a wiki on this.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

You are right that since you will be in a low tax bracket it may not make a lot of difference because of taxes.

One advantage though of having stocks in your taxable account is if they go down you can take the loss and deduct $3,000 of the lost against your ordinary income.

AZKathy wrote: Wed Jul 28, 2021 10:07 pm 2. I am wondering about rolling over some portion to a Roth, keeping the tax rate under 12%. I am assuming tax rates will go up so this could help us but also it could help our kids when they inherit.
If you can do Roth conversions and pay zero taxes that would be an easy choice and you may very well be able to do that by structuring your income for the next few years especially before you have RMDs.

For example if you pay any needed living expenses out of your taxable account then your only income would be Social Security, the pension, and any dividends or interest in the taxable account. The way Social Security is taxed is complex, I did not dig into your numbers but I really doubt that any of your Social Security will be taxed. It would be good for you to read up on this and maybe do some dummy tax returns to figure out the details of how your Social Security will be taxed. There is a wiki on this.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

An over 65 couple has a standard deduction of almost $27K so you really want to have that much taxable income each year since you would not pay any federal income taxes on that. If your expenses are $30K a year and most of that is Social Security you are not likely exceed your standard deduction.

I would not do any Roth conversions if you needed to pay any taxes to do them.

Don't worry about your kids tax situation if they inherit your money. That could be 30+ years from now and there is no way to tell what the tax rates and laws will be then, and you are not dealing with millions of dollars.
AZKathy wrote: Wed Jul 28, 2021 10:07 pm 3. Assuming we need to have additional income -- I think it is better to leave VTI alone, reinvest those gains, and take it from the "other" fund but I don't understand the tax implications.
One thing to do is to set the mutual funds in your taxable account to not automatically reinvest any dividends. That will make that money available for spending if you need it and all your gains will be long term after a year.

You would be in a 0% federal tax bracket and there is a special 0% federal long term capital gains tax bracket that goes up to about $80K.

Most likely there will be no tax issues with your federal tax but you would also need to look at how your state tax works.
AZKathy wrote: Wed Jul 28, 2021 10:07 pm 4. I have been reading and see there are lots of opinions on the percentages for the two fund portfolio, and which 2 funds to use. Since VTI has done better historically than bond funds it does not seem risky to me. We can stand a down year or 2. What else should I be considering?
You only have a few thousand in an emergency fund which is really low, there is not a magic "right number" but I would think something like $15K to $20K would be better. You may want to also have a car und for when you eventually need to replace a car. I would consider that money to be seperate from the rest of your retirement money.

For your retirement money you might consider just using a target date fund instead of trying to have a two fund portfolio. Often people will not use these in a taxable account because they are not very tax efficient but you will likely be in low tax bracket so this would not matter for you. A big advantage of these is that they will be easier to manage when you are older and may be less capable, or if the less financially knowledgeable spouse has to manage it some day. If you have one someplace other than Vanguard make sure they have a low expense ratio of less than 0.2%.

There is a wiki on if you should do lump sum investing or dollar cost average your money into the investments you want.

https://www.bogleheads.org/wiki/Dollar_cost_averaging
AZKathy wrote: Wed Jul 28, 2021 10:07 pm Age: 69, 65

Desired Asset allocation: 60% stocks / 35% bonds
For comparison the Vanguard 2020 fund is 47% stocks and 53% bonds.

https://investor.vanguard.com/mutual-fu ... olio/vtwnx

There are all sorts of opinions about what asset allocation is best and no clear consensus but 60% stocks is on the aggressive side for someone your age. It isn't crazy high and it is OK as long as you realize that it is aggressive and you want to be aggressive.
User avatar
ruralavalon
Posts: 26297
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Creating a portfolio as we retire

Post by ruralavalon »

AZKathy wrote: Wed Jul 28, 2021 10:07 pmAge: 69, 65

Desired Asset allocation: 60% stocks / 35% bonds
Desired International allocation: 5% of stocks maybe?
. . . . .
Pension--10,000/year We own our home, no mortgage. We get 2000/month in SS. We might need another $500/month to live. We are used to living on about $30,000/year so perhaps not.
I suggest not bothering with just 3% of portfolio in international stocks.

In my opinion an asset allocation of 65/35 is within the range of what is reasonable given the pension income Social Security which cover about 80% of your expected retirement living expenses.


Please read the wiki article Tax-efficient fund placement
AZKathy wrote: Wed Jul 28, 2021 10:07 pmTaxable
32% cash (for investing) will be putting in Vanguard
7% fund name (VTTHX) (.13)
In the taxable account I suggest using:
32%, Vanguard Total Stock Market ETF (VTI).

Do not reinvest distributions.

Take the cash from distributions to help pay your retirement living expenses as needed in addition to your pension and Social Security benefits.

With a large taxable account (~ $150k???) I would not suggest a significant cash emergency fund.

AZKathy wrote: Wed Jul 28, 2021 10:07 pm53% His Rollover IRA not funded yet... We are moving all our 403b to Vanguard, in process. We only have one.
In the rollover IRA I suggest using:
18%, Vanguard Total Stock Market ETF (VTI), or the mutual fund (VTSAX); and
35%, Vanguard Total Bond Market ETF (BND), or the mutual fund (VBTLX).

Reinvest the distributions.

In my opinion any diversified, good credit quality, intermediate-term or short-term bond fund with a low expense ratio will do the job of reducing portfolio volatility. Don't worry a lot about which bond fund to use, Vanguard offers many good choices. I use Vanguard Intermediate-term Bond Index Fund (VBILX), the ETF share class is (BIV).


AZKathy wrote: Wed Jul 28, 2021 10:07 pmHis Roth IRA at Vanguard
6% fund name (VTI) (.03)

Her Roth IRA at Vanguard
2% fund name (VTI) (.03)
In the Roth IRAs I suggest using:
08% Vanguard Total Stock Market ETF (VTI), or the mutual fund (VTSAX).

Reinvest the distributions.
Last edited by ruralavalon on Thu Jul 29, 2021 12:39 pm, edited 3 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
delamer
Posts: 17348
Joined: Tue Feb 08, 2011 5:13 pm

Re: Creating a portfolio as we retire

Post by delamer »

One aspect of retirement planning that should be considered is what happens to the survivor’s income (and expenses) when one spouse dies.

The survivor will receive less Social Security income and the pension amount could be affected.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Topic Author
AZKathy
Posts: 9
Joined: Tue Mar 23, 2021 2:15 pm

Re: Creating a portfolio as we retire

Post by AZKathy »

Thank you Watty for the detailed response. I will read the Wikis you referred to. I have run the numbers on our future income potential and it seems we won't pay tax for the next 5 years or so, and after that it depends on the market and tax code. So perhaps you are right and it is not worth trying to figure out. I will watch to see that we get as much as we can over to a Roth at 0% tax.

We have had some money in the target date fund, 2020 but it has a higher bond percentage than I liked, and growing. So I bought some VTI to compensate and it has done so well that we moved more money over. I was thinking that if we had a bond fund and VTI that we could use the bond fund as emergency cash, but I was planning on having 10-20,000 set aside in cash too, for emergencies. I know that VTI has lost money some years but since it has made over 8% since inception it seems like a reasonable risk for most of our money. I know it is aggressive but it doesn't seem all that risky to me since we don't think we will need to draw much. We can watch and readjust if we find we are spending more in retirement than we did before.

Thank you again for going through my questions. I have more reading to do...

Kathy
Topic Author
AZKathy
Posts: 9
Joined: Tue Mar 23, 2021 2:15 pm

Re: Creating a portfolio as we retire

Post by AZKathy »

ruralavalon--In the taxable account I suggest using:
32%, Vanguard Total Stock Market ETF (VTI).

Do not reinvest distributions.

Take the cash from distributions to help pay your retirement living expenses as needed in addition to your pension and Social Security benefits.

With a large taxable account (~ $150k???) I would not suggest a significant cash emergency fund.


This money is from an inheritance. Thank you for the VTI advice for it instead of bonds. And for the advice on not reinvesting the distributions on the taxable account. We are currently reinvesting all distributions for all accounts.

Thank you, the breakdowns were very helpful to us.

Kathy
Topic Author
AZKathy
Posts: 9
Joined: Tue Mar 23, 2021 2:15 pm

Re: Creating a portfolio as we retire

Post by AZKathy »

by delamer » Thu Jul 29, 2021 10:36 am

One aspect of retirement planning that should be considered is what happens to the survivor’s income (and expenses) when one spouse dies.

The survivor will receive less Social Security income and the pension amount could be affected.


Thank you--I have considered this but I don't know how to plan for it exactly, except to be cautious in our spending in retirement. Our SS would drop to 1500/month and the pension is likely to decrease. But our ongoing expenses are quite low as well.
User avatar
Eagle33
Posts: 2383
Joined: Wed Aug 30, 2017 3:20 pm

Re: Creating a portfolio as we retire

Post by Eagle33 »

You should begin looking into what Required Minimum Distributions. These RMDs {added ordinary income) need to be taken from the rollover IRA each year starting in the year your husband turns 72 and there is a 50% penalty if not taken. I suggest you start digging into the RMD details next year because the new RMD tables will be applicable starting next year, plus this year's focus should be in understanding the difference between taxes on ordinary income (pension, taxable SS, BND dividends, RMDs) vs long capital gains/qualified dividends (VTI). For now reading the Required Minimum Distribution to get a general understanding of what is to come at 72.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: Creating a portfolio as we retire

Post by dbr »

AZKathy wrote: Thu Jul 29, 2021 1:14 pm by delamer » Thu Jul 29, 2021 10:36 am

One aspect of retirement planning that should be considered is what happens to the survivor’s income (and expenses) when one spouse dies.

The survivor will receive less Social Security income and the pension amount could be affected.


Thank you--I have considered this but I don't know how to plan for it exactly, except to be cautious in our spending in retirement. Our SS would drop to 1500/month and the pension is likely to decrease. But our ongoing expenses are quite low as well.
The plan for this contingency would be to estimate the income needed by the survivor compared to the now changed sources of income. It is just doing the retirement analysis again but with a different situation. Sometimes people suggest a single person lives on about 2/3 what the couple did before, but that could be quite variable. Put some numbers on the situation.
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Creating a portfolio as we retire

Post by Grt2bOutdoors »

Your key words - if the market falls, we will panic but won’t sell. Either 65/35 is too aggressive for you OR you will panic and fail to rebalance as required. In light of that, consider a one fund diversified portfolio- either Lifestrategy Moderate Growth, Wellington or Balanced Index. Research them and see what you think. You can use PortfolioVisualizer dot com to see how they performed over the last 20 years or so through multiple bear markets.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
delamer
Posts: 17348
Joined: Tue Feb 08, 2011 5:13 pm

Re: Creating a portfolio as we retire

Post by delamer »

dbr wrote: Fri Jul 30, 2021 9:19 am
AZKathy wrote: Thu Jul 29, 2021 1:14 pm by delamer » Thu Jul 29, 2021 10:36 am

One aspect of retirement planning that should be considered is what happens to the survivor’s income (and expenses) when one spouse dies.

The survivor will receive less Social Security income and the pension amount could be affected.


Thank you--I have considered this but I don't know how to plan for it exactly, except to be cautious in our spending in retirement. Our SS would drop to 1500/month and the pension is likely to decrease. But our ongoing expenses are quite low as well.
The plan for this contingency would be to estimate the income needed by the survivor compared to the now changed sources of income. It is just doing the retirement analysis again but with a different situation. Sometimes people suggest a single person lives on about 2/3 what the couple did before, but that could be quite variable. Put some numbers on the situation.
Exactly. A simple example is that, assuming the survivor stays in the same home, there will be very little change in housing costs. But the costs for food and health insurance will drop substantially.

It actually shouldn’t be that difficult to do an estimate of expenses and compare that to income if you survive your husband and vice versa.

You definitely want to find out what will happen to the pension, since it is a significant portion of your income.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
tennisplyr
Posts: 3700
Joined: Tue Jan 28, 2014 12:53 pm
Location: Sarasota, FL

Re: Creating a portfolio as we retire

Post by tennisplyr »

This is a Vanguard tool for general AA guidance.

https://retirementplans.vanguard.com/VG ... -YYA4-CW3H
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀
Topic Author
AZKathy
Posts: 9
Joined: Tue Mar 23, 2021 2:15 pm

Re: Creating a portfolio as we retire

Post by AZKathy »

dbr wrote: Fri Jul 30, 2021 9:19 am
AZKathy wrote: Thu Jul 29, 2021 1:14 pm by delamer » Thu Jul 29, 2021 10:36 am

One aspect of retirement planning that should be considered is what happens to the survivor’s income (and expenses) when one spouse dies.

The survivor will receive less Social Security income and the pension amount could be affected.


Thank you--I have considered this but I don't know how to plan for it exactly, except to be cautious in our spending in retirement. Our SS would drop to 1500/month and the pension is likely to decrease. But our ongoing expenses are quite low as well.
The plan for this contingency would be to estimate the income needed by the survivor compared to the now changed sources of income. It is just doing the retirement analysis again but with a different situation. Sometimes people suggest a single person lives on about 2/3 what the couple did before, but that could be quite variable. Put some numbers on the situation.
Thank you. Good ideas. I suppose I meant that assuming we are looking 10 years ahead, hopefully more!, I don't know if we will still be able to live in our home or will have moved in with kids or what health the survivor will be in, etc. We lived on less than our SS is now for most of our lives and are not big spenders. We are good savers who don't know much about investing so I appreciate your advice. (But I have read enough of these threads over the last couple of years to learn about VTI, RMDs, and Roth IRAs.)
Topic Author
AZKathy
Posts: 9
Joined: Tue Mar 23, 2021 2:15 pm

Re: Creating a portfolio as we retire

Post by AZKathy »

Eagle33 wrote: Fri Jul 30, 2021 9:11 am You should begin looking into what Required Minimum Distributions. These RMDs {added ordinary income) need to be taken from the rollover IRA each year starting in the year your husband turns 72 and there is a 50% penalty if not taken. I suggest you start digging into the RMD details next year because the new RMD tables will be applicable starting next year, plus this year's focus should be in understanding the difference between taxes on ordinary income (pension, taxable SS, BND dividends, RMDs) vs long capital gains/qualified dividends (VTI). For now reading the Required Minimum Distribution to get a general understanding of what is to come at 72.
I have found good calculators for the RMD and understand that but you are right that I am way behind on understanding the way all the taxes will affect us. I use Turbotax to do the taxes but since we rarely pay taxes I haven't paid attention to, or learned about, qualified dividends, etc. Thanks!
User avatar
Eagle33
Posts: 2383
Joined: Wed Aug 30, 2017 3:20 pm

Re: Creating a portfolio as we retire

Post by Eagle33 »

AZKathy wrote: Sat Jul 31, 2021 12:41 am
Eagle33 wrote: Fri Jul 30, 2021 9:11 am You should begin looking into what Required Minimum Distributions. These RMDs {added ordinary income) need to be taken from the rollover IRA each year starting in the year your husband turns 72 and there is a 50% penalty if not taken. I suggest you start digging into the RMD details next year because the new RMD tables will be applicable starting next year, plus this year's focus should be in understanding the difference between taxes on ordinary income (pension, taxable SS, BND dividends, RMDs) vs long capital gains/qualified dividends (VTI). For now reading the Required Minimum Distribution to get a general understanding of what is to come at 72.
I have found good calculators for the RMD and understand that but you are right that I am way behind on understanding the way all the taxes will affect us. I use Turbotax to do the taxes but since we rarely pay taxes I haven't paid attention to, or learned about, qualified dividends, etc. Thanks!
You may find this Michael Kitces article beneficial to you.
The Tax Impact Of The Long-Term Capital Gains Bump Zone
Post Reply