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Help with Rebalance and Retire soon questions
Old 09-23-2018, 08:45 AM   #1
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Help with Rebalance and Retire soon questions

Lots of background information to convey, but I hope someone has time to read the whole thing and advise.

I am 60.5, still working, have a great job, but hoping to retire in 2 years, max 3. Health care is the issue, but may be able to get Cobra for great price 18 months and to best estimates are we will have to initially draw around $1100/month from retirement accounts to cover expenses until age 65. Trying to retire sooner rather than later due to husband’s age and physical condition. I am also not apposed to working part time; we just have to buy, get moved and sell. Once I hit 65, we could possibly live on his SS and Pension without depending on retirement accounts, but what is the point then.

I plan on waiting to take SS to get the full amount since hubby shorted his and I am in pretty good health. My thinking is the full amount will pay quite a bit more than his if he is not around. I will also get is full pension. I have never had any medical issues whatsoever other than now a mildly elevated blood pressure. I expect to live well into 80’s.

Hubby is 67, retired early at 63.5. He took SS early but also has a pension. He is in fair health, while no critical health issues, he is moderately overweight (but not fat), smokes a cigar, high blood pressure, elevated glucose readings, moderate bone, joint and back aches and pains, so not the perfect picture of health. Hoping he makes 85.

We are both fairly frugal, come from lower income backgrounds, married 21 years ago and generally like to stay around the house. Best way to describe us is we re-use foil and baggies, love to shop Wal-Mart clearance isle, all the thrift stores and don’t go out much unless we have a coupon LOL. That being said, neither one of us, due to previous lives, had much of any money but in that 21 years, have managed to go from nothing to nice large house, 4 acres, cars, trucks, trailers, tractors, vacation mobile home and roughly $360,000 in retirement accounts. All will be paid off except around $50,000 on mortgage due to recent truck purchase.

We will sell all and downsize out of state to small farm of 3 acres next door to vacation home. Sale of current home should cover price of farmhouse, any remodeling needs and a shop. Other than the move and maybe $10,000 repairs to current home, I am hoping that should cover all anticipated expenses. The first Taxable account is backup money.

Travel in retirement will consist of one or two trips in the 5th wheel 600 miles or less. Don’t see that we will spend that much as long as we trim down the vehicles, insurance and taxes. Also the current vacation mobile home (next door) has the potential to provide $400+ month in rent income if we choose to rent it out.

Now to investments and why I am here asking the good folks of this blog. I started investing in 1999. I have gone through what, two market crashes? 2000 and 2008? 2000 was pretty scary, but have always stuck with growth and barely even noticed 2008 crash. I do remember buying some, but had no cash at the time. I do have a high tolerance for risk as our investments have always been in the background somewhere. While I have learned a lot, I am now facing some critical choices and I am beginning to feel some urgency that I need some input on. We’ve been 100% growth large and small cap, really – no bonds, until recently. I am now re-balancing our accounts. I am really struggling backing out of the growth world, but am smart enough to know I need something to hold the fort down (recently adding Wellesley and Wellington) and some cash for either retirement draw and/or scooping up buys on the next downturn while at the same time I do still want my foot in the ring on growth. I quite possibly may be retiring into a bear market. Even as I say that, I struggle to get below a 70/30 mix, but trying my best.

I am struggling with some questions: Of course opinion on new allocations, but also should I change current dividend reinvestments to deposit to cash account? Should I now roll some investments to cash? Where should I put that money? Money Market, Intermed Corp Treasury, Hi Yield Corp Fund? Or would a balanced fund such as Wellesley be a good compromise between safety and growth?

Next question is where is my retirement draw going to come from and what money should I use to load up the truck next crash? I was looking at VHDYX High Yield Div (3%), VDAIX Div Apprec (1.8%) and VEIPX Equity Income (2.8%), but then compare to VWELX Wellington (2.62%) and VWINX Wellesley (3.17%) and wonder do I need any of those? Should I use the funds in previous paragraph? I am also thinking I should have some REIT in there somewhere. I am really not a fan of foreign funds.

Previously I was entering all our investments in Morningstar and analyzing as a whole, but am changing over to each portfolio balanced individually. It’s just easier for me to do it that way.

Current Investments are:

Taxable Account $31,000 (recently added Wellington and Wellesley), roughly 69S/31B mix:
20% NAESX Small Cap Growth
20% VIGRX Large Cap Growth
5% VITRX Intnl Value
33% VWELX Wellington (65/35)
30% VWINX Wellesley (35/65)

My IRA $43,000 (recently rebalanced added Wellington), roughly 73S/17B mix:
32% VIGAX Growth Index
26% VTSAX Total Mkt Index
26% VWELX Wellington (this is new)
17% VWIGX Intnl Growth

My 401K $55,000 (limited choices, recently added bonds)
35% RMCBA SSGA S&P 500 Index
25% VSGAX Vanguard Small Cap Growth Index
20% RADMA Retirement Advocate Mod Aggressive (70/30?)
20% RMCBA Global Trust IRM Core Bonds

Hubby 401K $52,000 (old)
49% VSMAX Small Cap Index
13% VIMSX Mid Cap Index
16 % VBIIX Intermed Term Bond
21% VBTLX Total Bond Index
Hubby 401K $52,000 (proposed changes)(70S/20B/10C)
25% VIGAX Lg Cap Growth Index
20% VSMAX Small Cap Index
25% VWELX Wellington
20% VWINX Wellesley
10% Cash or?

Hubby 401k $155,000 (old-limited choices), roughly 96% stocks
30% VINIX Market Index
27% VWNAX Windsor II
21% VIMAX Mid Cap
21% VSMAX Small Cap
Hubby 401k $155,000 (proposed changes) roughly (66S/22B/11C)
33% VBIAX Balanced Index
23% US Growth Index
26% VSMAX Small Cap Index
8% VBTLX Total Bond Mkt
10% Cash or?

Taxable Account – Folio Investing $27,000, not part of the whole picture. Was intended to be my play money, and still is, but has grown and not to be ignored. Mix of VDE, VDI and 3 folios of stocks: growth, dividend, and the old 2000 group, which did recover nicely thank you. I make 3 small purchases per month with my “allowance”, now focusing on out of favor dividend payers.

Well if you made it here, thank you so much for taking the time to read the whole way through.
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Old 09-23-2018, 09:06 AM   #2
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Hi klucish,


I see fund choice as an outlier to more important decisions. I think as a couple controlling expenses is paramount. It sounds like you are leading a fairly frugal life style, but any interest being paid out is a weight on your Net worth and portfolio gains.

Tax efficient fund placement is also important to control the taxes and the income in the future.

This link may help:https://www.bogleheads.org/wiki/Tax-...fund_placement



You may have the chance to control some health care expenses for yourself by using the taxable account to keep taxable income low enough to get subsidies for your health insurance on the Affordable Care Act. This may require building up the taxable account prior to an early retirement date.

Try to get the balanced funds and bond funds into your tax sheltered accounts and your broad index funds into your taxable account.

What amount of the portfolio do you intend to draw for travel, extras, etc.?

Lots of things to think about, but planning in advance is the best way to reduce the stress.

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Old 09-23-2018, 10:02 AM   #3
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Good question. I already have spending allowances, vacation, slush, tax and insurance "buckets" coming out of monthly income/budget for a total expense picture. I have budgeted like this for many years and works well. Retirement funds will probably only supplement any shortfalls and major expenses.

Thanks for the link. Looks like some good info here.
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Old 09-23-2018, 11:19 AM   #4
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You have a heavy tilt towards growth funds. Growth is cyclical, trading off with value in which one out-performs. You either have to time the market (which is very hard) and switch to value at some point, or suffer when growth stops growing. Something to think about.

Personally, I would simplify your portfolio to mostly VTSAX and VBTLX. But I follow boglehead philosophy that in the long run, it is very hard to beat the total market. It would simplify things for you considerably for withdrawals as you either sell some of VTSAX or VBTLX, depending on where your current AA is relative to your target AA.

There is no advantage to living off dividends over selling equities. This has been analyzed over and over. The tax hit is the same and the the ending asset value is the same when generating cash by selling as opposed to dividends.
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Old 09-23-2018, 11:53 AM   #5
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Since I am fairly heavy into growth and we've had a good run, wouldn't it be best to trim some profits to build a cash account to avoid pulling from portfolio on a downturn?
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Old 09-23-2018, 12:23 PM   #6
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Your taxable account invested in those funds will create needless extra income taxes for you.

Your other accounts look complicated. I'd pick one single fund for each account such that all accounts together give you the asset allocation that you desire.

For instance, if you want Wellesley, then put it in one single account all by itself. In another account put Wellington all by itself. In another put a Vanguard LifeStrategy fund and in another a Target Date fund. Yes, you could have the same fund in two accounts. For instance, you could have Wellesley in two separate accounts, but nothing else in those accounts.

For the taxable account, I'd just make it 100% Vanguard Total Stock Market index fund which is reasonably tax efficient and requires no fiddling with.
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Old 09-23-2018, 12:44 PM   #7
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OK, I get that I could simplify. Balanced funds in tax sheltered accts, broad market in taxable acct. Will work on that. Do need to sit and read the Bogle link yet. Question is also about building cash and how to go about drawing some in those initial years without pulling from investments in a bear market. Getting ready to leave town in a few days so may be a couple weeks before I can get back to this.
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Old 09-23-2018, 12:58 PM   #8
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Quote:
Originally Posted by klucich View Post
Since I am fairly heavy into growth and we've had a good run, wouldn't it be best to trim some profits to build a cash account to avoid pulling from portfolio on a downturn?
There's another thread around here on whether cash accounts are a good idea. My preference is to just follow my AA and rely on rebalancing to push money from equities to fixed-income (which includes cash, usually) when the market is up, and to sell FI to buy equities when the market is down. I see no reason, personally, to have a special cash bucket when rebalancing achieves the same goal. "Trimming profits" is just another term for rebalancing, I believe. But that assumes you have a target AA in mind and you are balancing towards that target.
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Old 09-23-2018, 01:06 PM   #9
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Question is also about building cash and how to go about drawing some in those initial years without pulling from investments in a bear market. Getting ready to leave town in a few days so may be a couple weeks before I can get back to this.

I simply do not worry about pulling from investments in a bear market. If you pull from bonds, you still need to rebalance from bonds to stocks that have dropped. The balanced funds will do that for you automatically. I see many investors "freeze up" and do nothing when they should be buying equity funds when they drop.

Conversely, I also see many investors "freeze up" and do nothing when they should be buying equity funds when they are at all time highs.

Furthermore, just because you withdraw cash or sell bond shares does not mean that your equities didn't drop.

So don't get fooled by all this. Just let things rebalance automatically when you cannot do the rebalancing yourself for whatever reasons.
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Old 09-23-2018, 01:37 PM   #10
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I simply do not worry about pulling from investments in a bear market. If you pull from bonds, you still need to rebalance from bonds to stocks that have dropped.
For us, everything is rebalancing. Our target AA is 60/40, so when I need to make a withdrawal, if equities are over 60%, I sell those. If equities are under 60% I sell bonds. If I am right at 60/40, I sell equities and bonds in that proportion. It is pretty easy and the end result is I will never sell equities when the market is down. This is mostly driven by withdrawals.

I rarely rebalance at other times, maybe once every 2 years. So far, due to the 10-year bull market, that has resulted in a one-way flow of money from equities to FI. Not sure that I will ever buy equities again. We are near 70 and I like the idea of slowly ramping down risk as we age.
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Old 09-23-2018, 01:52 PM   #11
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"You may have the chance to control some health care expenses for yourself by using the taxable account to keep taxable income low enough to get subsidies for your health insurance on the Affordable Care Act. This may require building up the taxable account prior to an early retirement date"

Forgive me as I have been trying to figure this one out. How do I do that. How in the world can I keep my income low enough and pay expenses at the same time? I think the last time I looked, jointly it was something like $64,960. In budgeting, NOT including health care for me, I figured we need right around $76,695 annual gross, but this does include monthly expenses of a few hundred bucks allowance for each of us, a few hundred bucks going into a slush fund for short term, unexpected expenses, and another few hundred going into annual tax and insurance fund
(total $1200). Do I need to re-think this strategy?
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Old 09-23-2018, 03:06 PM   #12
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With pensions, I am not sure you can keep your adjusted gross income low enough.

But consider this: Return of capital does not appear on your tax return at all.

Example: You have a taxable account worth $100,000 for which you paid $80,000 to buy those investments. If you sell all of those investments, then you get $100,000 to spend, but your tax return sees only $100K -$80K = $20K of income. If that $20K of income is all Long-Term capital gains, then you may even pay zero taxes because for low income taxpayers LTCG are taxed at 0%.

Look at your tax return for more information and read the IRS instructions to Form 1040 and the Schedules and Forms that are also used.
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Old 09-23-2018, 03:58 PM   #13
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Since I am fairly heavy into growth and we've had a good run, wouldn't it be best to trim some profits to build a cash account to avoid pulling from portfolio on a downturn?
Better to re-balance into a total market(growth and value) fund and establish enough bonds to pull from during a downturn. A cash cushion for 6-9 months would be good too.
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Old 09-23-2018, 04:02 PM   #14
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"You may have the chance to control some health care expenses for yourself by using the taxable account to keep taxable income low enough to get subsidies for your health insurance on the Affordable Care Act. This may require building up the taxable account prior to an early retirement date"

Forgive me as I have been trying to figure this one out. How do I do that. How in the world can I keep my income low enough and pay expenses at the same time? I think the last time I looked, jointly it was something like $64,960. In budgeting, NOT including health care for me, I figured we need right around $76,695 annual gross, but this does include monthly expenses of a few hundred bucks allowance for each of us, a few hundred bucks going into a slush fund for short term, unexpected expenses, and another few hundred going into annual tax and insurance fund
(total $1200). Do I need to re-think this strategy?
Per LOL!'s post, you can use money you already paid taxes on to supplement your pension/SS income to stay below the 65,000 ACA cliff. It takes a little planning, but could save you 10-20,000 in premiums.
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Old 09-23-2018, 06:09 PM   #15
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Thanks LOL and VanWinkle. That makes sense. Only LTCGs are reported on our taxes. Looks like I need to do some reading on income and taxes as well. Zero taxes??
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Old 09-23-2018, 07:00 PM   #16
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Yes, in 2018 if your income is below $101,200 ($77,200 in taxable income after $24,000 standard deduction) and qualified dividends (generally dividend from domestic stocks and domestic stock funds) and LTCG are tax-free (aka 0% tax rate).

That is why many of us only put bonds in tax-deferred accounts.

Also, international equity funds in taxable accounts can sometimes be even better... some of their dividends are qualifed and some are non-qualified but you also get the foreign tax credit. Usually, the foreign tax credit exceeds the slight tax on non-qualified dividends.
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Old 09-25-2018, 06:51 AM   #17
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So, if I understand correctly, if need to build cash in the taxable account to draw on a downturn to pay for initial expenses and maybe health care, what is the best way to build that in 2 years before I do retire? Right now, most available cash is focusing on paying a truck off. Does it make sense to start drawing a little from retirement accounts to move over there? I see the point in reporting SS and Pension and then drawing the cash to keep income low to possibly qualify for ACA subsidies.

I'll have lots of time to read on the flight in a few days, so I am stocking up on articles if you have any good ones.

Thanks for all your help!
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Old 09-25-2018, 08:14 AM   #18
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So, if I understand correctly, if need to build cash in the taxable account to draw on a downturn to pay for initial expenses and maybe health care, what is the best way to build that in 2 years before I do retire? Right now, most available cash is focusing on paying a truck off. Does it make sense to start drawing a little from retirement accounts to move over there? I see the point in reporting SS and Pension and then drawing the cash to keep income low to possibly qualify for ACA subsidies.

I'll have lots of time to read on the flight in a few days, so I am stocking up on articles if you have any good ones.

Thanks for all your help!
Not necessarily cash, but index stock funds work fine as long as you can sell specific lots that have less capital gains(low income). Don't worry about selling stocks low(it will actually help reduce taxable income), because you can buy stock funds in your tax deferred to keep your asset allocation in line. I keep about 87% stock index funds in my taxable along with 13% short term bond to draw living expenses. I have been able to live off the dividends and bond fund draw without selling any stock funds. I do this by controlling expenses, small pension, and holding on SS draw till full retirement age.

This may not be for you as it does require some sacrifice on the spending side. In less than 2 years, my DW and I will be on Medicare and be able start all of the income streams. It is currently saving me 2592.00 per month in health Insurance costs.

Best to you,

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Old 09-25-2018, 11:13 AM   #19
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Well, that sounds like something I could do. I'll review my budget and see where I come out now that I know a little more. I do have several buckets for expenses and spending money I could have another look at.

Thanks
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