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Old 11-03-2015, 02:45 AM   #61
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Statsman, I think you are making this more difficult than it really is. I think we have established that you will need a WR of 2% and that relying on cash and bonds alone to sustain that over the long term is risky. We've also reached a consensus that the bonds should go in your tax sheltered account.

Step 1: Decide on your asset allocation.
Step 2: Fill up your tax sheltered account with your bond allocation. If there is space, top it up with equities. If there is overflow, put some bonds into the taxable account and top that up with equities. Choose low cost indexed funds.
Step 3: Enjoy your life.
Step 4: Look at your portfolio after a year. If your asset allocation is off target by more than 5%, adjust it.
Step 5: Repeat Steps 3 and 4.

FWIW, my portfolio is approximately the same size as yours, but I have no pension. I have equities, and I sleep at night.
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Old 11-03-2015, 04:39 AM   #62
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according to michael kitces keeping bonds in a deferred account at these levels could be a waste of valuable space .

when financial planning dictated in the beginning that bonds and cash should be in the deferred accounts and equity's in the taxable account not only were rates higher but no one looked under the hood any farther .

even a 1% dividend over decades in the taxable account can eat up any tax savings . depending on tax bracket and stock turnover it gets worse .

kitces found that almost any kind of distribution over time be it dividends or capital gains in the taxable account destroyed the tax advantage of lower capital gains rates . anything above zero was a deal breaker most of the time . equity's usually did better in the deferred accounts and bonds and cash in the taxable accounts , especially at these low levels .

https://www.kitces.com/blog/are-the-...es-overstated/
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Old 11-03-2015, 05:10 AM   #63
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.....Having 100% bonds in the tax deferred account, while great from a tax efficiency standpoint, makes keeping whatever AA we decide on more difficult. Odds are we probably would need separate stock and bond funds in the taxable rather than something like Wellington in order to maintain this type of conservative investing. Or maybe convert some bonds to stocks in the tax deferred accounts. Still better than 0/100, right?
Think of AA and rebalancing across both taxable and tax-deferred. You want to have your tax inefficient investments (like bonds) in tax-deferred and rest in taxable. The reason for viewing it across taxable and tax-deferred is that when you redeem taxable investments and take cash to live on you can rebalance by buying or selling equities as necessary.

You are right that having equity and bond funds makes it easier to rebalance. I think you might be able to do it with Wellington being 2/3rds or so of your taxable account and then use equity and bond funds for the other 1/3 for rebalancing... or if you let your equity allocation float within a range (say 25% to 35%). But I concede that I have never done it.

Below is an example that I used for someone else last month of rebalancing. In your case, since your equity allocation is so low that your tax-deferred is all bonds your rebalancing would occur in taxable accounts for some time which may have some tax implications. A workaround might be to simply carry 10%-15% of your tax deferred account as equities to mitigate the tax implications of rebalancing in a taxable account.

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Let's say at the beginning of retirement you want to have a little over a year in cash so your overall AA is 60% equities, 36% bonds and 4% cash. So your taxable account would be 1,496 of equities and 104 of cash and your tax-deferred account would be 64 of equities and 936 of bonds for a total of 2,600.

A year later, equities have increased 10%, bonds 3% and you used 78k for living expenses... so in your taxable account equities are 1,646 (110% of 1,496) and cash is 26 (104-78) and in your tax deferred account equities are 70 (110% of 64) and bonds are 964 (103% of 936) for a total of 2,706.

When you rebalance, your new targets are 60%/36%/4% of 2,706 or 1,623 equities, 974 bonds and 109 cash. In your taxable account, you sell 83 of equities and put it into cash, bringing your cash balance to 109 (and reducing the equities in your taxable account to 1,563). You then sell 10 of equities in your tax-deferred account and buy 10 of bonds in your tax deferred account.

After those two transactions you are now back to 60/36/4 with 1,623 in equities (1,563 in taxable and 60 in tax deferred), 974 in bonds (all tax-deferred) and 109 in cash (all in taxable).

Rinse and repeat each year.

Sometimes a picture is easier

  Begin Activity Before rebal Rebal Ending
Taxable     
Equities 1,496 150 1,646 (83) 1,563
Cash 104 (78) 26 83 109
  1,600 72 1,672 - 1,672
Tax-deferred     
Equities 64 6 70 (10) 60
Bonds 936 28 964 10 974
  1,000 34 1,034 - 1,034
      
      
Equities 1,560 156 1,716 (93) 1,623
Bonds 936 28 964 10 974
Cash 104 (78) 26 83 109
  2,600 106 2,706 - 2,706
      
Equities60% 63% 60%
Bonds36% 36% 36%
Cash4% 1% 4%
 100% 100% 100%
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Old 11-03-2015, 07:50 AM   #64
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Since we are not going to approach 50/50, we will need something other than stocks in our taxable account. That's where the tax inefficiencies can kick in. ...
Having 100% bonds in the tax deferred account...
You are overthinking it, making it harder than it really is. You are agonizing over minutia.

Pick an asset allocation, say 30% stocks/70% bonds. In your taxable accounts go 30% VTI and 70% AGG. In your IRA accounts go 30% VTI and 70% AGG. Done and done.

When you make your (annual?) withdrawals, take from a combination of VTI & AGG such that they get back toward your chosen AA.

Vanguard or somebody wrote a paper on optimal withdrawal sequencing (taxable vs. IRA) methods. IIRC, overall there's not a major difference. Try googling "Optimal Withdrawal Strategies for Retirees"
But that's a minor item. Your major issue is the AA.
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Old 11-03-2015, 07:56 AM   #65
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Agreed, which is why I started this thread. We are not about to keep it at 0/100, but we won't go 100/0 even if there is the belief we have the assets to do it. Some of the cash will be slotted for stocks. How much in stocks remains to be seen.

Since we are not going to approach 50/50, we will need something other than stocks in our taxable account. That's where the tax inefficiencies can kick in. If we go with the suggestion to go all Wellington in the taxable account to get to 30/70 overall, we run into the problem I alluded to in my previous post. If the need arises to have sell in the taxable account (Wellington), a 30/70 AA starts to head towards 25/75.

Having 100% bonds in the tax deferred account, while great from a tax efficiency standpoint, makes keeping whatever AA we decide on more difficult. Odds are we probably would need separate stock and bond funds in the taxable rather than something like Wellington in order to maintain this type of conservative investing. Or maybe convert some bonds to stocks in the tax deferred accounts. Still better than 0/100, right?
You're aversion to equities is making your portfolio riskier than it needs to be. Your portfolio is large enough compared to your income needs that you have almost no chance of running out of money, but you are setting yourself up for poor returns and will probably have to spend some of your capital. I would rather see you average into some SPIAs that carry so much in bond funds. But, as I said, you have enough for that not to be an issue.....at least until your wife reaches 70 and you start taking that larger deferred SS check. If you can't bring yourself to fill the taxable up with equity index funds at least keep it tax efficient and look at municipal bonds.....although they are usually quite sensitive to interest rates. If you can buy individual bonds and hold to term that would be good.
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Old 11-03-2015, 08:02 AM   #66
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... Which I see is what Meadbh posted. ... Great minds think alike.

Look, I think most people are being silly about tax efficiency in retirement. Our thinking is colored by having to pay income taxes on our W-2 paychecks for the last 30+ years. Retirement is not like that.

When I retired I was amazed to see that most of our income was in the 10% bracket and unless we did hefty IRA->Roth conversions we were way below the top of the 15% bracket.

So no LTCG tax or tax on dividends in the taxable accounts. But IRA withdrawals are ordinary income, so those get hit by 10% and 15% tax.
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Old 11-03-2015, 08:14 AM   #67
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Statsman, I think you are making this more difficult than it really is. I think we have established that you will need a WR of 2% and that relying on cash and bonds alone to sustain that over the long term is risky. We've also reached a consensus that the bonds should go in your tax sheltered account.

Step 1: Decide on your asset allocation.
Step 2: Fill up your tax sheltered account with your bond allocation. If there is space, top it up with equities. If there is overflow, put some bonds into the taxable account and top that up with equities. Choose low cost indexed funds.
Step 3: Enjoy your life.
Step 4: Look at your portfolio after a year. If your asset allocation is off target by more than 5%, adjust it.
Step 5: Repeat Steps 3 and 4.

FWIW, my portfolio is approximately the same size as yours, but I have no pension. I have equities, and I sleep at night.
This. Although it is good to think about taxes, and be as tax-efficient as possible, don't let the tax-tail wag the investment/AA dog.
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Old 11-03-2015, 09:30 AM   #68
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My feeling as well. I like the game. Gives me a little something to do, not that I need such. Really I do this for my heirs (daughter).
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Old 11-03-2015, 10:04 AM   #69
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If we can get you up to something like 40/60 overall what about this allocation

Tax deferred: Wellesley
Taxable: 40% US stock index, 60% tax free municipals

Psst........or even just put everything in Wellesley and don't worry about paying a bit of tax in the taxable account. That gives you a very simple 40/60 split that will rebalance itself. A pension, SS and $2.3M in Wellesley to produce $45k/year looks like a pretty enviable setup and maybe the Wellesley managers will do something to head off the bond headwinds (sorry for the profanity). But the obvious thing for you to do is defer SS, no one has mentioned that or commented on it.
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Old 11-03-2015, 10:41 AM   #70
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Yes spending form taxable is usually done first.
I've been wondering it that rule always makes sense given the RMD rules many of us will face. It might be wiser to balance spending between taxable money, Reg IRA, and Roth IRA in some situations. Or maybe not?

The idea of being able to use money I have already paid taxes on to help keep me out of a higher tax bracket seems appealing.
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Old 11-03-2015, 10:57 AM   #71
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Statsman, have you tried running your plan through a retirement planner like the Fidelity Retirement Planner (FRP)? You can model different portfolios there and see the results. You can also put in your non-COLA pension and see what that does to your retirement income over time. (We have our non-COLA pensions matched with a low interest, fixed rate mortgage.) You can also play around with taking SS at different ages (that one's for you, nun).

If you are risk adverse and can max out your retirement readiness score with a 10/90 type portfolio in an underperforming market, then maybe you don't need anything riskier. It doesn't seem like significantly more stocks would suit your personality type.

There are many discussions here on mortgage or not, when to take SS, needing stocks for the long run, etc. but really the final answer is in the planners and your own spreadsheets, if you know how to do that. We kept a mortgage, plan on SS at 62, have a low AA for stocks, don't have a bazillion dollar portfolio and yet we can max out the FRP score with an estate leftover because our retirement expenses are low in relation to our retirement income.
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Old 11-03-2015, 11:16 AM   #72
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according to michael kitces keeping bonds in a deferred account at these levels could be a waste of valuable space .
[…]
Thanks for the Kitces link. I had seen it before and figured out it did not apply to me mostly because of the tax-loss harvesting I have done. Essentially, I have no taxable turnover in my taxable account. Also, I have equities and bonds in my tax-advantaged accounts, so all rebalancing can be done in those accounts leaving the taxable account to grow virtually untaxed.

I really like the articles of Kitces, but one has to really study them in order to decide for themselves what he leaves out and whether they really apply to one's personal situation. They make you think and I really like that.
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Old 11-03-2015, 11:51 AM   #73
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I've been wondering it that rule always makes sense given the RMD rules many of us will face. It might be wiser to balance spending between taxable money, Reg IRA, and Roth IRA in some situations. Or maybe not?

The idea of being able to use money I have already paid taxes on to help keep me out of a higher tax bracket seems appealing.
On this board, quite likely yeah. Most people here plan for worst case so 1-4% portfolio real returns, conservative withdrawals to protect against sequence of return risks, no or greatly diminished social security benefits, sky-high health and LTC costs, etc. During accumulation, you try to save as much as possible because while you can't control returns, inflation and entitlements, you do have a lot of control on your savings and spending. Alas, I reckon more often than not, this scenario probably leads to RMDs + SS being far greater than one's pre-retirement salary. Imho, it's a good problem to have. Certainly far better than scraping by on just SS.

Mind, there are plenty of folks here who retired before 55/59.5 so spending from taxable is often the best option. Well, there's Roth IRA contributions and 72t, too, but using taxable first is just easier.

@statsman
As nun has suggested, consider putting both IRAs and taxable accounts in the same fund and just take the tax hit. That way, you don't have to worry about rebalancing. Some good options are:
  • Wellesley VWIAX 35/65
  • Target Retirement Income VTINX 30/70
  • LifeStrategy Conservative Growth VSCGX 40/60
  • LifeStrategy Income VASIX 20/80

I'm not familiar with non-Vanguard fund families so can't make recommendations on those. Using a single fund is not going to be tax efficient but I think in your case, the peace of mind of not seeing the volatility of a total stock index fund will more than make up for the tax inefficiency and should help you stay the course.

And yes, going bond-heavy means lower returns compared to equities long term but why take the risk if you don't need to?

Here's some interesting reading:

How Do You Know When You Have Enough? - CBS News
Are You Taking Too Much Risk? - CBS News
Are the Rewards Worth the Risks? - CBS News

And some backtesting:
https://www.portfoliovisualizer.com/...Amount=1000000
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Old 11-03-2015, 12:29 PM   #74
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...I think most people are being silly about tax efficiency in retirement. Our thinking is colored by having to pay income taxes on our W-2 paychecks for the last 30+ years. Retirement is not like that.When I retired I was amazed to see that most of our income was in the 10% bracket and unless we did hefty IRA->Roth conversions we were way below the top of the 15% bracket......
Tax efficiency considerations appear to be mainly important for those with high IRA asset levels since they may end up in higher tax brackets when RMD's kick in. If one is worried about future escalation of tax rates (due to the country's debt situation), then making Roth conversions and considering which accounts hold what type of funds becomes a bit more important if one wishes to optimize tax payments to Uncle Sam.
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Old 11-03-2015, 12:29 PM   #75
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@statsman
As nun has suggested, consider putting both IRAs and taxable accounts in the same fund and just take the tax hit. That way, you don't have to worry about rebalancing.
.
.
.
Using a single fund is not going to be tax efficient but I think in your case, the peace of mind of not seeing the volatility of a total stock index fund will more than make up for the tax inefficiency and should help you stay the course.

And yes, going bond-heavy means lower returns compared to equities long term but why take the risk if you don't need to?
I appreciate everyone's responses the past day. I have been taking the time to think over what advice has been offered along with the articles being linked to.

I will respond to the part I quoted above. The idea of having balanced funds as the basis of both taxable and tax deferred accounts may be a good plan for us. As was commented on, if it helps us get into sufficient equities in our portfolio and stay there, that may more than offset any tax inefficiencies.

Is there a risk in using the same fund for all investments? I don't want to get into the situation of having a half dozen balanced funds across all accounts, but how risky is using just one?

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Wellesley does well in this backtesting. I subbed in Wellington for one of the two Lifestyle funds, and it does quite well for 2000-2009 despite being 64/36. More volatile than the other funds, but better returns than the Lifestyle funds. A bit less than the Wellesley fund.

Seriously, I generated several portfolios with separate bond, income (ie. DODIX), and stock funds at 36/64, and they all lack the overall performance of Wellesley for this 10 year period. I see why Wellesley is often recommended (realizing past performance is not an indication of future results).
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Old 11-03-2015, 02:10 PM   #76
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The idea of having balanced funds as the basis of both taxable and tax deferred accounts may be a good plan for us. As was commented on, if it helps us get into sufficient equities in our portfolio and stay there, that may more than offset any tax inefficiencies.

Is there a risk in using the same fund for all investments? I don't want to get into the situation of having a half dozen balanced funds across all accounts, but how risky is using just one?


Wellesley does well in this backtesting. I subbed in Wellington for one of the two Lifestyle funds, and it does quite well for 2000-2009 despite being 64/36. More volatile than the other funds, but better returns than the Lifestyle funds. A bit less than the Wellesley fund.
Funds like

Target Retirement Income VTINX 30/70
LifeStrategy Conservative Growth VSCGX 40/60
LifeStrategy Income VASIX 20/80

are just made up of other Vanguard funds. By investing in them you are getting very broad equity and bond market indexes.

Wellesley and Wellington are different as they are actively managed and hold a range of high quality stocks and bonds, but they are well diversified too. I think you sound like a good Wellesley candidate, you'll get the stability of the bonds (if rates don't go sky high) and some return from high quality dividend paying stocks.
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Old 11-03-2015, 03:06 PM   #77
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Is there a risk in using the same fund for all investments? I don't want to get into the situation of having a half dozen balanced funds across all accounts, but how risky is using just one?
Vanguard LifeStrategy Funds Components:
Total Stock Market Index
Total Bond Market II Index
Total International Stock Market Index
Total International Bond Market Index

Vanguard Target Retirement Fund Components:
Total Stock Market Index
Total Bond Market II Index
Total International Stock Market Index
Total International Bond Market Index
Short-Term Inflation Protected Securities Index

Those balanced funds are very, very diversified so they're no more riskier than investing in the individual components at similar AA.

Wellesley and Wellington are actively managed but they seem to operate on pixie dust. That said, both are sufficiently diversified that I reckon it should be safe enough to have all investment funds in either.
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Old 11-03-2015, 03:58 PM   #78
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I think you sound like a good Wellesley candidate, you'll get the stability of the bonds (if rates don't go sky high) and some return from high quality dividend paying stocks.
While I don't do this myself, but I know some very conservative investors who have most or all of their $$'s in Wellesly. They get less volatility, and at a 3-4% WR, descent income, and a bit of inflation protection. Mostly, they get to sleep well at night, something they would not do if they had to ride the market's gyrations.

It's very personal.
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Old 11-03-2015, 04:05 PM   #79
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[B][U]
Wellesley and Wellington are actively managed but they seem to operate on pixie dust. That said, both are sufficiently diversified that I reckon it should be safe enough to have all investment funds in either.
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While I don't do this myself, but I know some very conservative investors who have most or all of their $$'s in Wellesly. They get less volatility, and at a 3-4% WR, descent income, and a bit of inflation protection. Mostly, they get to sleep well at night, something they would not do if they had to ride the market's gyrations.

It's very personal.
+1

I have roughly 1/3 of our portfolio in Wellesley and 1/3 in Wellington. A bit more volatile than 100% Wellesley but the pixie dust those fund managers use is also a sleep aid.
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Old 11-03-2015, 04:22 PM   #80
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While I don't do this myself, but I know some very conservative investors who have most or all of their $$'s in Wellesly. They get less volatility, and at a 3-4% WR, descent income, and a bit of inflation protection. Mostly, they get to sleep well at night, something they would not do if they had to ride the market's gyrations.

It's very personal.
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Wellesley and Wellington are different as they are actively managed and hold a range of high quality stocks and bonds, but they are well diversified too. I think you sound like a good Wellesley candidate, you'll get the stability of the bonds (if rates don't go sky high) and some return from high quality dividend paying stocks.
+1

I have roughly 1/3 of our portfolio in Wellesley and 1/3 in Wellington. A bit more volatile than 100% Wellesley but the pixie dust those fund managers use is also a sleep aid.
I have read some suggest both Wellesley and Wellington like you have. I also gather there are some here who are not fans of either. I would imagine the two funds have some overlap. Did you require a blend of the two to achieve your AA? Or was this an availability issue (ie. some 401(k) plans have a limited number of Vanguard funds)?
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