My Portfolio?

[Seattle]

I read a lot of these threads and I spent some time putting together my FIRE portfolio. I am going to speak to a Vanguard financial advisor next week about this and I wanted your thoughts on the portfolio I came up with. I have played with FireCalc but I am really terrible at it.

I'm 51, wife 52, no kids, no debt.

$4.4M in after tax portfolio, $800K in my 401K, house is worth $800K and is paid off and we need $150K a year to live comfortably.

All VANGUARD - 55/45 mix

STOCKS:

Vanguard Total Stock Market - VTSAX 25%
Vanguard REIT - VGSLX 10%
Vanguard International Stock - VTIAX 10%
Vanguard Health - VGHCX 5%
Vanguard Dividend Growth - VDIGX 5%

BONDS:

Vanguard Total Bond - VBTLX 31%
Vanguard Tax Exempt - VTEAX 7%
Vanguard GNMA - VFIIX 7%

I am going to pull out $300K to cover 2 years of living expenses and invest the rest of the $5M in the above format.

I realize this is (8) different funds, and could be a bear to balance. I was going to go with a more simple 4 fund portfolio, but I like exposure to Health, Dividends and REITs stocks and on the bond side, I like some exposure to tax exempt muni's and also GNMAs.

The other thing I will mention is that I am 100% fine with not leaving a dime inheritance when we both pass. Our will is setup to donate any left over assets to charity but our goal isn't to just live off the return and keep the principal intact for heirs.

But I am not an expert and am probably making some mistakes with this portfolio.

Thoughts? Thanks in advance to all of you. You guys have been great support to me as i go through this very difficult transition. And yes, it's raining in Seattle today

 

[rodi]

To my unschooled eyes it looks like a good portfolio... I don't have any specific Healthcare sector funds because I figure the total stock or large cap stock funds include healthcare companies... but that's just me... REITs make sense as you don't mention any real estate outside of your primary home.

Your withdrawal rate - not even considering SS or other possible income sources looks good, too... 2.88%... It should survive pretty much anything.

I assume if there were an extended downturn outside of historical records you'd be able to pull in the spending from $150k for 2 people in a paid for home.

 

[Seattle]

I assume if there were an extended downturn outside of historical records you'd be able to pull in the spending from $150k for 2 people in a paid for home.

Absolutely. $150K gives us a nice vacation/trip budget plus doesn't really make us change our social, eating out, maintenance/insurance on nice cars, pays for the landscape maintenance etc. So yes, in a very ugly downturn, I could probably literally cut that almost in half and still be fine.

Property taxes, healthcare, insurance and the basics is all I would have to really cover...

 

[pb4uski]

That looks fine to me, tilts and all.

I would put more into international equities... another 5-10%. I would also trim down Total Bond 10% or so and put it into intermediate term investment grade bonds.

While I know there are skeptics out there, I do hold some international bonds and small amounts emerging market equities and bond funds.

I assume that your 401k will be all REITs and bonds for tax efficiency?

 

[Seattle]

That looks fine to me, tilts and all.
I assume that your 401k will be all REITs and bonds for tax efficiency?

Actually - that is a very good point. I was just going to mirror my 55/45 investment options for my 401K since I wont dig into it until I am forced to in 20 years.

Curious - with 20 years until I need it, why wouldn't I keep my 401K in all equities? What is the advantage to use all REITs and bonds for tax efficiency? Wouldn't the stock market increase over 20 years be a much better return then bonds and REITs and do I really care about tax efficiency at that point? Or are you just talking about compounded interest over 20 years with no tax hit for it until I withdraw being the advantage?

Really appreciate your insight here because that statement confused me because I hadnt thought in that way...

Thanks in advance.

 

[pb4uski]

While I'm sure others will comment, to me it is because qualified dividends and LTCG from equities are tax preferenced and are taxed at 15%. Also, for international equities while some dividends are not qualified, you get the foreign tax credit. The foreign tax credit is wasted if you hold international equities in tax-deferred. Bonds and REITs are taxed at ordinary tax rates.

I don't like equities in tax-deferred if it can be avoided because it automatically converts tax preferenced growth into ordinary taxed growth.

See Principles of tax-efficient fund placement

 

[LOL!]

The portfolio is perfectly fine.

I predict the Vanguard person will not like your choices of REIT, HealthCare, GNMA, and Dividend Growth. They will suggest you add an international bond fund, too. I'll bet you lunch on that.

 

[RockyMtn]

While I'm sure others will comment, to me it is because qualified dividends and LTCG from equities are tax preferenced and are taxed at 15%. Also, for international equities while some dividends are not qualified, you get the foreign tax credit. The foreign tax credit is wasted if you hold international equities in tax-deferred. Bonds and REITs are taxed at ordinary tax rates.

I don't like equities in tax-deferred if it can be avoided because it automatically converts tax preferenced growth into ordinary taxed growth.

See Principles of tax-efficient fund placement

+1. Put the bonds and REITS in the tax deferred. Top off your after tax accounts with municipal bonds to get to your desired overall AA.

 

[Midpack]

There's nothing wrong with your choices, you're following time-tested principles with your own preferences. There is no absolute right answer.

Owning less than 5% of any fund is kinda pointless WRT portfolio returns, but you've cleared that 'hurdle.' I don't understand 5% Dividend Growth (especially with 10% of the more volatile REIT fund, which I also own), I'd have more or zero - but again 5% would be considered legit by Bogle and all the disciples.

Best of luck, again nothing wrong with your choices as-is.

 

[Fermion]

Just out of curiosity (also living in Seattle), what are your retirement plans? Do you love the area and plan to stay? How do you cope with November to April (yes, I write this looking out at the gray rainy Seattle sky).

A $800K house in Seattle probably is getting dinged $8,000 just in property tax (we are paying $4300 on a bit over $300K house).

Of course Seattle is great from June to September.

 

[nun]

With $4.4M in after tax have you thought about taxes. Is your portfolio and asset allocation arranged for tax efficiency rather than just total return?
I'll also add something else as you say you have no desire to leave money to heirs, have you considered allocating some of your fixed income to SPIAs?

 

[Cobra9777]

+1. Put the bonds and REITS in the tax deferred. Top off your after tax accounts with municipal bonds to get to your desired overall AA.

I agree with what you and pb4uski are saying. But the OP has $800K in tax-deferred, which is only 15% of his investable portfolio. Yet, he desires 45% bonds plus 10% REITs. I don't see a tax-efficient solution without a huge allocation to tax-exempt, which may not be desirable.

If it was me, I'd probably increase equity to 60% and drop the REIT plan. Take international up to 20% and increase VTSAX by 5%. I'd fill up tax-deferred with the higher-yielding bond fund (probably VBTLX). And use a much larger allocation of tax-exempt to fill out the taxable side. With 40% bonds, and 15% in tax-deferred, I'd probably split the remaining 25%... 15% tax-exempt and 10% taxable.

OP's planned AA is fine from a risk/return perspective. But, with a fairly large portfolio overall, and so little in tax-deferred, planning for tax efficiency is extremely important. I'd play around with some alternatives and run the results through taxcaster before deciding on a final AA.

 

[Badger]

If you and/or your wife worked and contributed to SS wouldn't this mean it would add $20-40+k to the mix in about 10 to 15 years? That gives you quite a bit of breathing room in your annual financial requirements.

Cheers!

 

[stepford]

Interestingly Seattle is very close to exactly 2x me. Twice the NW, almost twice the home value (also paid off) and twice the expected expenses in retirement. Our asset allocations are similar (55/45) so assuming finance is linear, since I believe I'm good to go, Seattle must be as well.

 

[Seattle]

Just out of curiosity (also living in Seattle), what are your retirement plans? Do you love the area and plan to stay? How do you cope with November to April (yes, I write this looking out at the gray rainy Seattle sky).

A $800K house in Seattle probably is getting dinged $8,000 just in property tax (we are paying $4300 on a bit over $300K house).

Of course Seattle is great from June to September.

I love Seattle and I actually like the gray and gloomy Seattle weather too. This is home so I dont see us moving for quite awhile. And we love our house, its paid off so that is a bonus. And yes our prop taxes are around $8000 a year but that is written into our budget and not an issue.

Good thing is that if we ever do want to sell the house, with the Seattle market going crazy, we can easily split the proceeds into a condo in Seattle and a condo in Palm Springs or Scottsdale and have the best of both worlds.

 

[Whisper66]

Portfolio is well diversified. Only thing I'd consider is converting your tax deferred 401K assets to a tax exempt ROTH account. You have several years to do this before taking SS and could potentially avoid future higher tax rates by paying current tax rates (should be low in your early retirement years). If interested, the I-ORP tool might provide some guidance on how much converting each year would be tax efficient.

 

[Seattle]

I agree with what you and pb4uski are saying. But the OP has $800K in tax-deferred, which is only 15% of his investable portfolio. Yet, he desires 45% bonds plus 10% REITs. I don't see a tax-efficient solution without a huge allocation to tax-exempt, which may not be desirable.

If it was me, I'd probably increase equity to 60% and drop the REIT plan. Take international up to 20% and increase VTSAX by 5%. I'd fill up tax-deferred with the higher-yielding bond fund (probably VBTLX). And use a much larger allocation of tax-exempt to fill out the taxable side. With 40% bonds, and 15% in tax-deferred, I'd probably split the remaining 25%... 15% tax-exempt and 10% taxable.

OP's planned AA is fine from a risk/return perspective. But, with a fairly large portfolio overall, and so little in tax-deferred, planning for tax efficiency is extremely important. I'd play around with some alternatives and run the results through taxcaster before deciding on a final AA.

This is awesome advice. Thank you. Never really considered tax planning into my scenario. I will absolutely incorporate this into my strategy. Thanks much!

 

[pb4uski]

Just curious... have you done a pro forma tax return as if you were retired and had a tax efficient portfolio placement? I suspect your taxes will be quite low and perhaps even nil.

Taxcaster is a good tool. Or Income Tax Calculator - Tax-Rates.org if you want to cover off state taxes as well. Or if you have Turbotax then just make up a proforma return.

 

[Seattle]

If you and/or your wife worked and contributed to SS wouldn't this mean it would add $20-40+k to the mix in about 10 to 15 years? That gives you quite a bit of breathing room in your annual financial requirements.

Cheers!

Yes, actually, I didnt factor in SS at all in any of my models. Personally, I dont count on it. If it is there, fantastic, just adds to the model and I take a few more nice trips with it. And I will absolutely take it at 62.5 years of age because God knows what will happen to it. Just my luck that I wait till max age of 70 and the government blows it up somehow or worse, I get some kind of incurable disease at 69 and never see it. Who knows. With my plan and net worth, SS is all gravy to me but you are absolutely correct - I would qualify for a nice payout if SS is still around in the same form factor in 11.5 years...

 

[Seattle]

Just curious... have you done a pro forma tax return as if you were retired and had a tax efficient portfolio placement? I suspect your taxes will be quite low and perhaps even nil.

Taxcaster is a good tool. Or Income Tax Calculator - Tax-Rates.org if you want to cover off state taxes as well. Or if you have Turbotax then just make up a proforma return.

I have played around with taxes alittle, but per the advice on this thread, need to do alot more of it.

Good thing is that I still have $400K in stock loses (some stupid moves in the past) that I can still bounce gains against which is nice. Wish I had the $400K back - but at least it is something.

And you are right, good chance I will pay very little in taxes in the next 5 years and even after that, if I do tax management correctly, I will pay little after that as well. Very bizarre feeling for me because I have paid a TON of taxes every year and thanks to Obama's little tax jab a couple of years ago, was routinely writing $70K tax checks in April after already paying an obscene amount thru the years.

 

[pb4uski]

Yes, the change in taxes was one of the big positive surprises in retirement.

You may want to look into doing Roth conversions of your tax-deferred balance. You can get an idea of the tax you would pay on conversions by taking a pro forma return without conversions and then just adding in various amount of conversions and see the incremental tax.

I'm paying about 10% on my (both federal and state) which is much better than the 30+% I avoided when I deferred that income but I suspect you will pay more because your taxable portfolio is larger.

 

[kcowan]

Think you are a great decision-maker? Think again!

“Postdictive” illusions of this sort are typically explained by noting that there’s a delay in the time it takes information out in the world to reach conscious awareness: Because it lags slightly behind reality, consciousness can “anticipate” future events that haven’t yet entered awareness, but have been encoded subconsciously, allowing for an illusion in which the experienced future alters the experienced past.

Commonly known as rationalization!