VG Financial Plan

[explanade]

Since they provide it for free and since I've never really gone through the exercise, I went through the process.

So they recommend going from 23/28/49 (stocks/bonds/short-term reserves) to 60/40 (stocks/bonds).

For the period from 1926 to 2009, my current allocation averages 6% return while the target allocation averages 8.7%.

Best year 19% (1982) vs. 36.7% (1933)
Worst year -9.9% (1931) vs. -26.6% (1931)
Years with loss 10/84 (11.9%) vs. 21/84 (25%)

By sectors:

Individual stocks 4% vs. 0%
US Large 7% vs. 33%
US Mid/Small 6% vs. 15%
International 7% vs. 12%

Short-term bonds 2% vs. 0%
Intermediate-term 24% vs. 40%
Long-term/High-Yield 1% vs. 0%

Short-term reserves 49% vs. 0%


They suggest an Integrated or Consolidated Portfolio. The latter promises lower annual costs, greater tax-efficiency and simplicity. Here is the table of current vs. integrated vs. consolidated:

Number of holdings 43 38 14
Projected annual costs $2600 $5700 $5400
Avg. Net expense ratio .15% .33% .31%

Taxable capital gain N/A ($10k) ($3200)
to implement

Already have big holdings with VG, approximately $900k out of $1.4 to $1.5 million in taxable assets. 401K and IRA add another $250-300k.

So the biggest suggestion is to move $556k or $644k into Total Stock Market Index Fund Admiral Shares and move all or most of my 401k to "Intermediate-Term Bond Fund" depending on whether I choose integrated or consolidated portfolio and about 1/6 in to a "Developed International Fund"


In the questionnaire they ask at what age you want to retire and what you want for annual income. I put down 55 (currently 49) said about $70k (probably should have put a little more).

So given that, they list the projected balances at retirement (5-6 years away) for Integrated vs. Consoidated portfolios:

Best scenario: $3,914,400 $3,918,900
Avg. scenario: $2,536,700 $2,539,600
Worst scenario: $1,315,000 $1,316,500


Then they list the approx. amount needed by retirement of $1,379,500 (which seems real low, considering I already have more than that.).


They also have a "Estimated amount you will accumulate at current savings rate" for which they cite my 401k contributions and match and IRA. The figures are $2,536,700 for Integrated Portfolio and $2,539,600 for Consolidated, which match the "Average Scenario" above.

Those figures are about 50% higher than my current assets so assume about a 10% growth per year, it seems, which is higher than the average 8.7% annual return of a 60/40 allocation.

Should I be surprised/concerned that they'd have me move money from other investments into VG funds?

Or the big reliance into large-cap, especially their Total Stock Market Index fund?

[Moemg]

I had Vanguard do a plan for me years ago when it was not free but at a reduced price for Voyager clients . I got to ask them tons of questions and basically was given a lesson in diversity over different classes .That was well worth the money . I later had one of the free reviews and they wanted me to make a lot of changes which were not good for me tax wise so I basically ignored the advice . I think you need to look at their advice and whether it makes sense to your financial plan .

[IndependentlyPoor]

When I FIREd in 2004, Vanguard did a financial plan for us. It was very thorough and professional. The plan they produced was a complex slice-and-dice portfolio, diversified six ways to Sunday. I implemented it, but was dissatisfied when it came time to rebalance. It was just too complicated. Vanguard offered a checkup the next year, but the new recommendations were completely different: a very simple three way split between Total Stock Market, Total Bond Market, and Total International Stock Market. The adviser could not explain why there was such a dramatic shift in philosophy from one year to the next. Our financial condition had not changed, and everything was progressing according to plan.

Since I had already decided to do pretty much the same thing, I took the tax hit and changed strategies. I have since been pleased with the results, but have not accepted any further consulations with Vanguard's advisors.

[explanade]

So you're still in just those 3 funds Independently?

At the same allocations?

[IndependentlyPoor]

Last rebalancing I added some TIPs. Otherwise, pretty much the same.

[donheff]

I just read William Bernstein's Investor's Manifesto, recommended in another post. He essentially agrees that a very simple couch potato type portfolio is satisfactory although he thinks it is slightly better to consider slicing it up a bit more (adding a dollop more small value, etc) But he thinks by far the major decision is the stock/bond allocation and he basically supports the idea that your bond allocation should match your age. There are a lot of reasons some of us deviate from that rule but in any event it would seem your equity portion is way low. Since you are very conservative now maybe you should follow Bernstein's age based allocation of 50/50 and not go all the way to the VG recommended 60/40. Short term reserves need to be a part of the picture. I assume VG anticipates that they are contained within the 40% (or 50%, or whatever) portion you allocate to "bonds."

By the way, I recommend the book. It covers most of the ground addressed in his Four Pillars in a very accessible, short tome.

[WilliamG]

I think Vanguard assumes your short term reserves are already allocated as appropriate for your situation and the allocation they recommend is for the rest of the portfolio. In other words, if you are retired have a year or so of spending needs in cash as well as some emergency reserve/ big ticket cash.

I prefer to include cash in overall allocation; six of one and half dozen of the other, but you do need to know which approach you are discussing.

[explanade]

Had my phone consultation with the VG financial advisor, who filled in more details on the plan.

The amount needed by retirment of $1,379,500 was calculated on the basis of my starting to withdraw $70k a year starting at age 55.

They assumed a 3.04% inflation rate and calculated that I could withdraw $70k in real terms until I was 90.

Figure still seems way low and $70k is well above a 3% or even 4% SWR of that figure.

EDIT: One key thing, they assume I would take SS at age 62 and reduced the withdraw amounts from my portfolio, so maybe it would fit 3-4% of that required amount.


He did say I could DCA but recommended doing all the conversion to the suggested AA in 6-12 months. I talked about possibly using more of a 50/50 AA, in which case I'd move less into the Total Stock Market Index Fund and more into bond funds.