Retired - stay with 3 funds? how best to liquidate?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
jpc912
Posts: 5
Joined: Tue Oct 16, 2018 6:16 pm

Retired - stay with 3 funds? how best to liquidate?

Post by jpc912 »

Would appreciate feedback and value the opinions given here.

We are retired with projected income from pensions, social security and RMD (at age 72) to sufficiently cover expenses. For next few years, taxable savings ( not included below) will be used to cover expenses.

Emergency funds: Have six months of expenses
Debt: none and home is mortgage free.

Tax Filing Status: Married Filing Jointly
Tax Rate: 22% Federal, 3.07% State
State of Residence: PA

Age: Him 68, Her 61

Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 20% of stocks

Approximate size of total portfolio $3.0M

Joint Taxable
1% Vanguard Total Stock Market Index Fund Admiral Shares VTSAX

Her traditional IRA
7% Vanguard Total International Stock Index Fund Admiral Shares VTIAX
20% Vanguard Total Bond Market Index Fund Admiral Shares VBTLX
21% Vanguard Total Stock Market Index Fund Admiral Shares VTSAX
Her Roth
2% Vanguard Total Stock Market Index Fund Admiral Shares VTSAX

His traditional IRA
5%. Vanguard Total International Stock Index Fund Admiral Shares VTIAX
20% Vanguard Total Bond Market Index Fund Admiral Shares VBTLX
14% Vanguard Total Stock Market Index Fund Admiral Shares VTSAX
His Roth
11% Vanguard Total Stock Market Index Fund Admiral Shares VTSAX
=====
100%


Questions:

1. Should the entire 40 % bond allocation be invested in only the Total Bond Market Index Fund?
2. Would you recommend keeping the 3 fund portfolio while in retirement or should other funds be added… ie TIPS, Intermediate Treasuries or Dividend Funds?
3. Should we be doing anything to prepare for projected withdrawals or is it recommended we just sell funds at the time cash is needed?
dbr
Posts: 46181
Joined: Sun Mar 04, 2007 8:50 am

Re: Retired - stay with 3 funds? how best to liquidate?

Post by dbr »

I guess the unfortunate answer about bond investing is that you can select any of a large number of choices but it is hard to find a should.

FWIW I chose to invest half my bonds in an intermediate Treasury fund and half in an intermediate TIPS fund, going back the last twenty years. But I am not going to stand up and argue that is the "should" choice.

I am more prepared to suggest there is no reason whatsoever to hold dividend stock funds, but that does not mean it will be some kind of big mistake to do that, at least as long as you don't increase tax costs in a taxable account.
shess
Posts: 2165
Joined: Wed May 17, 2017 12:02 am

Re: Retired - stay with 3 funds? how best to liquidate?

Post by shess »

jpc912 wrote: Mon Nov 29, 2021 9:07 pm Questions:

1. Should the entire 40 % bond allocation be invested in only the Total Bond Market Index Fund?
2. Would you recommend keeping the 3 fund portfolio while in retirement or should other funds be added… ie TIPS, Intermediate Treasuries or Dividend Funds?
3. Should we be doing anything to prepare for projected withdrawals or is it recommended we just sell funds at the time cash is needed?
For 1 and 2 in general, I spent a long time figuring out a decent way to invest (3-fund portfolio, basically total-stock, total-intl, total-bond), then it served me well for many years, so why would I change that in retirement? Of course, it probably makes sense to adjust your equity/fixed-income allocation as you get find good reasons to be more conservative, but the form of each side can remain the same.

For TIPS versus nominal bonds, I honestly don't know. I can see arguments in either direction, but I find it hard to make a really convincing argument either way. Bond markets are pretty good at making workable short-to-mid-term predictions, I think. Also, I don't think TIPS have really been tested by inflation as of yet, so I'm not really willing to go all-in on them. So I just aim for 50/50 inflation-protected vs nominal and move on. I tend to err on the nominal side, usually, simply because I have access to nominal bond indices in my 401k, and I feel the difference is slight enough that I'd prefer to lower ER I have in my 401k to the better selection I'd have if I rolled it over to a tIRA.

IMHO dividend funds are a false argument. People try to make an argument that they are bond-like but also stock-like. Unfortunately, if things go wrong, you stand to lose the dividend payouts AND take capital losses. Cutting dividends is a stop on the way to defaulting on bonds, and there is no dividend-stock comparable at all for Treasury bonds. Don't get me wrong, I agree that dividend funds are probably going to be more boring than a total-market fund, but I just don't think that's automatically a good thing at all.

For 3, my main change at retirement was to finally start targeting the asset allocation I would have objectively recommended for anyone my age. My tendency has always been to be way more aggressive than that. I'm still aggressive, but thinking about retirement helped me dial it back to something more reasonable. Of the increased fixed-income allocation, I keep a big chunk towards the cash end, mostly CDs (Ally no-penalty and select CDs when they have an offer), aiming for 12 to 18 months of runway. I suppose you could build a longer-term ladder, but the rate increment doesn't seem worth it to me. Since the market keeps rising, so far I've just harvested gains and rolled over the CDs, but I am anxiously anticipating the first time I get to start spending things down!

I think the biggest thing I'd be looking at with your portfolio is how distributions are going to map to taxes over time. You'll be taking RMDs in a few years, and if one of you passes the RMDs will stay the same but a single payer will have higher taxes. But you're probably too late to really get a ton done with Roth conversions. Also such conversions may impact your health-insurance costs. Still, it probably would be worthwhile to use a modelling tool to see what the costs will be to get some tIRA moved into Roth IRA for estate-planning purposes. Like maybe conversion to the edge of your marginal bracket, or to where it impacts your Medicare, things like that.
User avatar
mhc
Posts: 5261
Joined: Mon Apr 04, 2011 10:18 pm
Location: NoCo

Re: Retired - stay with 3 funds? how best to liquidate?

Post by mhc »

Your holdings look great. Some people like TIP funds and some don't. I think this is something you need to decide for yourself. I'm still on the fence.

You could look at doing Roth conversions to the top of the 22% tax bracket. You may want to look at how RMDs may affect your taxes.
52% TSM, 23% TISM, 24.5% TBM, 0.5% cash
sycamore
Posts: 6360
Joined: Tue May 08, 2018 12:06 pm

Re: Retired - stay with 3 funds? how best to liquidate?

Post by sycamore »

jpc912 wrote: Mon Nov 29, 2021 9:07 pm Questions:

1. Should the entire 40 % bond allocation be invested in only the Total Bond Market Index Fund?
2. Would you recommend keeping the 3 fund portfolio while in retirement or should other funds be added… ie TIPS, Intermediate Treasuries or Dividend Funds?
3. Should we be doing anything to prepare for projected withdrawals or is it recommended we just sell funds at the time cash is needed?
1. There are many reasonable ways to get your bond exposure. Using only TBM is one of them and is more than likely going to be good enough.

A better but more complicated way to approach this question (and #2) is to consider the various risks that come with bonds along the two main dimensions: credit quality and duration. One camp of investors says Treasury only is best because there's not enough reward to be gained from the risk of corporate bonds or mortgage-backed securities. And some investors think the best duration is one tailored to your personal spending horizon rather than one based on the overall market's need for bonds -- this usually means (for TBM) that you're using fund with a duration that's too short to accommodate your interest rate risk. But again, TBM as an intermediate duration fund is probably good enough.

If you don't fall into one of those camps (or any of the other ones) and you've stuck with TBM so far, I'd continue to stick with it.


2. See above for bond choices. Also, regarding inflation protection, is your pension inflation adjusted or does it come with a COLA? That, plus Social Security benefits that are inflation-adjusted may mean you already have enough of your spending needs covered with inflation protection.

Regarding dividends, your existing funds (Total US Stock and Total International Stock) already include those dividend-paying companies. That's probably good enough.


3. Doing some Traditional-to-Roth IRA conversions now (before you collect SS and take RMDs) may help you stay out of higher tax brackets a few years down the road. For one thing, tax rates are scheduled to revert to their higher rates in 2026 so you could at least pay on some of your portfolio now at 10, 12, and 22% rates now to avoid paying at 10, 15, and 25% rates 5 years from now. For another, your RMDs may push you up into a higher tax bracket.
Post Reply