Post retirement portfolio

[slowsaver]

Firecalc says I can retire. I'm not ready, but I'm now trying to wrap my brain around how my portfolio might need to change to actually retire.

Right now, I'm heavily invested in tax-avoiding funds that don't give (very much) dividends. Also, about 1/3 of my portfolio is in 401k/ira/roth ... so I can't really touch those for about 20 years.

Two questions:

(1) Any book or other reading recommendations to help me with this? I started to look at Bob Clyatt's book, but balked at the number of funds recommended.

(2) Anyone here just living off VWIAX and/or VWENX? Any tips for doing that?

 

[joylesshusband]

401k/ira/roth ... so I can't really touch those for about 20 years.

Your questions aside, this statement is not entirely correct. You could use all of the contributions you have made to the Roth account anytime.

 

[W2R]

(1) Any book or other reading recommendations to help me with this? I started to look at Bob Clyatt's book, but balked at the number of funds recommended.

Before I retired, I read a half dozen books from the Bogleheads list:

https://www.bogleheads.org/readbooks.htm

I think that any that appeal to you from that list are probably really good.

After reading those books, I devised a tentative asset allocation and the good folks at the Bogleheads board helped me to tweak it a bit.

(2) Anyone here just living off VWIAX and/or VWENX? Any tips for doing that?

Sure, there are people here that do that. I only have 30% VWIAX so I'll leave the tips to somebody else.

 

[SecondCor521]

Your questions aside, this statement is not entirely correct. You could use all of the contributions you have made to the Roth account anytime.

In addition, there are a number of techniques to access funds before retirement age:

1. 72(t) / SEPP.
2. Roth pipeline.
3. 401k rule of 55.
4. Pay the 10% penalty.

Personally I am using the Roth pipeline.

As to OP's question about which funds to use, I was basically 100% VTSAX before retirement and now am basically 90% VTSAX / 10% VBTLX.

You don't need to shift to dividend paying investments if you don't want to. What several (many?) here do is collect whatever dividends they happen to get with their investments and spend those, then sell shares to cover any shortfall. As long as you're spending 2-3-4% of your remaining balance, as you know, FIREcalc says you're probably fine.

That being said, in retirement your tax rate might very well drop, so the tax-avoiding funds may no longer be appropriate. But if they're in your taxable account, you'll have to consider any appreciation that might turn into gains and taxes if you sell/shift.

Beyond having a spending plan and an asset allocation, it's really not that complicated. I did a lot of reading and discussing before FIREing. After FIREing, I looked around and noticed that people really don't have to *do* much to maintain their FIRE program. I think many (including W2R) look at their assets at the end of the year, sell X%, transfer that to a checking account, rebalance the remainder of (100% - X%) to their chosen AA, then spend from that checking account. Probably takes all of an hour every January 1st. As a FIRE newbie, I'm a bit more active than that, but as time passes I do less and less as I realize that I was making it more complicated than I need to.

+1 to W2R's recommendation of bogleheads books.

Good luck!

 

[Gotadimple]

Firecalc says I can retire. I'm not ready, but I'm now trying to wrap my brain around how my portfolio might need to change to actually retire.

Right now, I'm heavily invested in tax-avoiding funds that don't give (very much) dividends. Also, about 1/3 of my portfolio is in 401k/ira/roth

So 70% of your portfolio is in non-dividend paying stocks (funds/etfs, etc). The 401k and IRA are tax-delayed, and the Roth is tax-free (until someone changes the rules).

You are avoiding current taxation with your brokerage account (the 70%) as they pay no dividends, but you will/may need to pay capital gains when you sell them. When you start drawing on your savings you will want to keep taxes low as you will be paying them for Social Security AND for the 401k and IRA distributions you have to take at age 70-1/2.

Your reading from the Bogelheads list of books will help you clarify where you are invested.
* You still need to set an asset allocation that provides growth and safety, * A strategy to address the investments in your 401k and IRA
* Assessing whether you should consider full/partial Roth conversion of the 401k/IRA before age 70 (or whatever age you plan on taking Social Security),
* and some idea of how much you'll need annually.

Good luck with the reading. Ask questions! We've all done some or part of what you are thinking about.

- Rita

 

[LOL!]

So it looks like 1/3rd of portfolio is in tax-advantaged accounts and 2/3rds in a taxable account. All you have to do is sell some shares every month or so and spend the money. Since FIRECalc says you are good to go, I don't think it is more complicated than that. Your 2/3rds of your portfolio should easily last 20 years and more.

I would stay tax-efficient in retirement and avoid dividends in your taxable account like you state you are doing now. Nothing wrong with that at all.

When you sell shares in taxable, select the shares to sell which give you the least tax hit. Rebalance as needed only in your tax-advantaged accounts. In theory you should not have to pay any income taxes, but you didn't give any info on your income (could be thousands or millions) nor your expenses (could be thousands or millions).

Wellesley and Wellington are not tax efficient and are to be avoided in a taxable account unless you love to pay taxes or have such low income that you don't pay taxes.

You might also consider converting more of the tax-deferred to Roth IRAs if you are in a low enough tax bracket while in early retirement.

 

[slowsaver]

Thanks for the reading list. I think I'll start with The Bogleheads' Guide to Retirement Planning. I've already read the 4 Pillars book, but it doesn't talk about retirement income that much.

I was thinking of VWIAX and/or VWENX because I expect to be in a much lower tax bracket during retirement. But it's a good point that I would need to sell funds (pay capital gains) to make a large investment in VWIAX and/or VWENX.

SecondCor521 & LOL, it sounds like you maintain the same (?) asset allocation in retirement? Then you sell to maintain that AA. If you happen to have a lot of cash (maybe you don't), when do you use cash instead of selling stocks or bonds?

 

[audreyh1]

No problem with the tax-avoiding funds and low dividends. Sell what you need for income, and have long term capital gains income instead. Best tax treatment.

 

[SecondCor521]

SecondCor521 & LOL, it sounds like you maintain the same (?) asset allocation in retirement? Then you sell to maintain that AA. If you happen to have a lot of cash (maybe you don't), when do you use cash instead of selling stocks or bonds?

My investments were 100/0 before FIRE and then I shifted to a 90/10 target shortly after FIRE because I felt like my risk tolerance was lower without an income.

Currently stocks/bonds is roughly 92/8, which is not far off enough to rebalance. If I were to rebalance, I keep my bond allocation in my traditional IRA and have enough stocks there so I can rebalance from/to stocks/bonds without any tax consequences.

I currently have about a year of expenses in cash. If you look at stock/bonds/cash, my allocation is roughly 88/8/4.

Most of my cash is in a savings account. Every month I have an automatic transfer from my savings account to my checking account that functions essentially like a paycheck or an allowance. I also have cash inflows into my savings/checking from side gigs, taxable dividends, and some other miscellaneous income.

Sometimes I'm over my allowance, sometimes I'm under. I don't worry about that too much as long as over a longer period I am spending under 4% of my FIRE stash.

When that savings account runs low, I will refill it from my investments. I will probably refill it with 3-6 months of expenses. Then when it runs low again, I will refill it from my investments with another 3-6 months of expenses. When I sell to refill I would consider my AA and sell from whatever needed trimming to get me more in balance.

Overall, the way to look at it for me is:

T-IRA -> Roth IRA -> taxable -> savings -> checking -> spending
[ ^ bonds/stocks ... stocks ... stocks ... cash ... cash ... gone ^ ]

Where the [] line below represents what is contained in each account and the horizontal "->" arrows represent in order:

Roth conversions
Roth withdrawals (contributions then conversions)
Tax gain/loss harvesting
Paycheck
Spending

Hope that makes some sort of sense. Once you start actually doing it, it's super easy and simple and doesn't take any time at all really. I mean, I watch it just because it's interesting, but 99% of the time I don't actually take any sort of action.

 

[pb4uski]

....I would stay tax-efficient in retirement and avoid dividends in your taxable account ....

However, one thing to keep in mind is that if one is in the 15% tax bracket or lower, qualified dividends and long-term capital gains are tax-free.... so contrary to your post I intentionally design my tax-efficient portfolio to have dividends in my taxable accounts.

While one would think that you can't get much more tax efficient than tax-free... you actually can by including some international equities in your taxable portfolio as, at least in my case, the foreign tax credit exceeds 15% of my non-qualfied dividends on international equities in my taxable account so my effective federal tax rate on my taxable portfolio is negative.

So if the OP's tax efficiency is due to munis and they are in the 15% bracket they may be better off swaping the munis for equities as over time it would produce higher after-tax returns.

Our tax return income was $103k last year including $26k of Roth conversions and our federal tax was less than $200 after the foreign tax credit.

 

[audreyh1]

IMO as long as your investment portfolio throws off about the same % as your withdrawal rate in distributions (interest, dividends, cap gains distributions), you don't really need to worry about more tax efficiency than that once you are retired. Some assets such as fixed income will generate ordinary income, but it's hard to avoid if you want a well diversified portfolio, unless a good chunk is in tax-deferred accounts, and those will have to be drawn from as ordinary income someday anyway.

If it generates less than that - no prob, just sell the additional you need and it will be be partially long-term cap gains if a little care is taken (and partially untaxed cost basis), which get the best tax treatment.

It's when your portfolio generates more in distributions than you need in annual income that tax inefficiency becomes a problem.

 

[Looking4Ward]

Anyone here just living off VWIAX and/or VWENX?

I am. Like you, two thirds of my portfolio is in after-tax and one third is tax advantaged.

The dividends and capital gain distributions of my after-tax holdings has been more than sufficient (so far over three years) to meet my needs with some actually left over each year.

Composition of my after-tax holdings:

73% Wellington
16% Wellesley
11% Vanguard Health Care

 

[LOL!]

However, one thing to keep in mind is that if one is in the 15% tax bracket or lower, qualified dividends and long-term capital gains are tax-free.... so contrary to your post I intentionally design my tax-efficient portfolio to have dividends in my taxable accounts.
[...]
Our tax return income was $103k last year including $26k of Roth conversions and our federal tax was less than $200 after the foreign tax credit.

Your AGI could be lower by having less dividend income and more LT capital gains because of previous tax-loss harvesting. With a lower AGI, you could convert more to a Roth IRA and stay in the 15% marginal income tax bracket.

That is, dividends and LTCG are NOT really the same. Consider the following made-up example:

Joe Taxpayer has $50,000 in carryover capital losses. He can only use up $3,000 a year in theory.

Scenario A: He has $120,000 in qualified dividend income. He takes the standard deduction, the $3,000 offset, exemption, etc. He is out of the 15% marginal income tax bracket.

Scenario B: He has $120,000 in LTCG, but reduces that by the $50,000 loss. So AGI is $70,000. After standard deduction and exemptions, he can still do some Roth conversions.

Scenario C: He has $30,000 in LTCG and $90,000 return of capital from selling $120,000 of shares. The $30,000 LTCG is offset by $30,000 of the carryover loss and he stills get to take another $3,000 loss against ordinary income leaving $17K for next year. So AGI is $0.00 without Roth conversions, so lots of Roth conversion happens.

Once again, they might be taxed at the same rate, but qualified dividends and LTCG are NOT really the same when it comes to taxes.

And the example is made up. One cannot escape dividend income if one owns index funds and ETFs.

@slowsaver, I don't keep very much cash around because there is no need to.

 

[VFK57]

Whatever I read on retirement income set up many economist advise income generating assets diversification: dividend paying stocks, rental property, bonds/CD, long term T-notes.

 

[pb4uski]

Your AGI could be lower by having less dividend income and more LT capital gains because of previous tax-loss harvesting. With a lower AGI, you could convert more to a Roth IRA and stay in the 15% marginal income tax bracket.....

My dividends are fairly modest, most of my income last year was LTCG, then Roth conversions then dividends, few months of my pension and a little bit of interest. Well over half of my income was LTCG.

BTW, what is a tax loss? You and others seem to have a lot of them but they are rare for me... I don't have s single purchase lot in my taxable portfolio that is a loss.

 

[LOL!]

BTW, what is a tax loss? You and others seem to have a lot of them but they are rare for me... I don't have s single purchase lot in my taxable portfolio that is a loss.

I also don't have a single purchase lot in my taxable portfolio that is a loss.

But back in March 2009 that was not the case.

For more on harvesting: https://www.bogleheads.org/wiki/Tax_loss_harvesting