A little help on which funds to sell...

[tominboise]

I need to sell some of our funds to pay for our living expenses next year. This is our aftertax brokerage account. We are 22 months retired, age 62/60, no pension or SS yet (small pension starts at 65, SS will start at 70). We are living off our after tax account until RMD's start to kick in, or it runs out, whichever comes first. Given our budget and the account balance, we are good for around 6.5 years, give or take what happens with inflation and the market.

Anyway, ignoring for the moment that all of these are have positive long term capital gains, the portfolio looks like this:

Symbol % of Portfolio
VWIAX 28%
VHYAX 16%
VTSAX 9%
VIGAX 9%
VFIAX 8%
VEXAX 8%
VOOG 8%
VVIAX 7%
IDA 7%

Which fund(s) would you consider selling at this time? I know it's not an ideal time to sell stocks, etc. If I didn't need to, I wouldn't.

 

[OldShooter]

I would take this opportunity to simplify. Ditch small holdings and sell funds that duplicate or nearly duplicate other holdings. For example, VTSAX and VFIAX. You can play with PorffolioVisualizer to identify funds that behave nearly identically. You can also go to https://www.callan.com/periodic-table/ and see why trying to tilt toward sectors like growth and value is not likely to yield much.

Really, one or two broad US funds seasoned to taste with a broad international fund ought to do it for your equity side.

Obviously, you'll have to consider tax ramifications as you simplify but simple is still IMO a good goal. FWIW 95% of our equity tranche is in VTWAX. One fund, all the stocks in the world. You can't get more diversified than that.

 

[marinauser]

What asset allocation do you want - for example % large cap; % small cap; % foreign large/small; % fixed income. Once you know what you want, what is you current asset allocation? Then determine where there are differences and sell from those funds where you are over your desired allocation. You may even need to sell in excess of what you need to withdraw and invest some of the proceeds into assets that are under your desired allocation - what gets termed rebalancing. If your investments currently match your desired asset allocation, then I would withdraw from all of the funds while keeping your desired allocation.

 

[marinauser]

You can plug your holdings into Morningstar Instant XRay and get a good sense of what your overall allocation is. It would give you some information such as:

Stock Style Diversification| Holdings Detail

Value Core Growth

18 24 22 Large Cap
5 7 5 Mid Cap
4 12 2 Small Cap


Asset Allocation | Holdings Detail



Cash 1 0 1
U.S. Stocks 81 0 81
Foreign Stocks 2 0 2
Bonds 15 0 15
Other 1 0 1
Not Classified 0 0 0
Total 100 0 100

Show Short Position

 

[youbet]

I would take this opportunity to simplify.............
Obviously, you'll have to consider tax ramifications as you simplify

+1 Great advise!

 

[pb4uski]

I would take this opportunity to simplify. Ditch small holdings and sell funds that duplicate or nearly duplicate other holdings. For example, VTSAX and VFIAX. You can play with PorffolioVisualizer to identify funds that behave nearly identically. You can also go to https://www.callan.com/periodic-table/ and see why trying to tilt toward sectors like growth and value is not likely to yield much.

Really, one or two broad US funds seasoned to taste with a broad international fund ought to do it for your equity side.

Obviously, you'll have to consider tax ramifications as you simplify but simple is still IMO a good goal. FWIW 95% of our equity tranche is in VTWAX. One fund, all the stocks in the world. You can't get more diversified than that.

+2 Simplify... you have too many funds... I would simplify towards VTSAX. If some of them other than VTSAX have lots with losses, I would sell them and then reinvest in VTSAX... aka tax loss harvesting. If you have VTSAX lots with losses then sell them as part of your cash raise for 2023 and then sell other winners to generate offsetting gains.

Finally, I would work towards divesting of Wellesley in your taxable account for tax efficiency.... some of its dividends are non-qualified dividends and therefore not subject to preferrential income tax rates available for qualified dividends.

 

[tominboise]

These are all good comments. None of them are in a loss position at the moment, although I do have around $3100 in tax loss harvesting i did from earlier this year. I do watch LTCG's as I sell, to manage our income for ACA subsidies. I may just have to bite the bullet one year on income. Also good advice on Wellesley - I didn't realize the non qualified dividend issue existed.

I am not trying to time the market, but it seems that there is a bit of a bounce going on. Would you guys sell all at once or do a partial sale now and monitor the market going forward?

 

[TheWizard]

Choosing which funds to sell depends on the situation.
In my case, I've been growing my taxable account using excess retirement income.
So when I need $40k for a new car, I'll sell the lots with the lowest LTCG, or even the lots with a loss.

But the OP plans to sell his entire taxable account over the next seven years.
So which of those stock funds to sell hardly matters, so long as they've gotten to LTCG status, or a loss.

I'm assuming OP has been using Specific ID for each of those funds and has not been automatically reinvesting dividends, but has been accumulating them in his settlement fund and then making a single purchase of one stock fund each quarter. This reduces the number of small lots to manage.

So sell whatever mix of funds you want every few months, but keep track of your taxable gains each year.
Assuming you're also doing Roth conversions each year, this allows you to manage your AGI for various purposes.

And I would just sell what you need to raise cash every two months. Leave the rest invested...

 

[tominboise]

Yes, I quit automatically reinvesting dividends a couple of years ago and have them sent to my settlement account. All the funds are in LTCG status.

Your point about all of the funds going away over the next 7 years is a good one.

 

[tominboise]

I decided to liquidate the VVIAX now, and then shave off some of the VWIAX if/as required next year, depending on what we need and how the markets are going. I will repeat in a year, with one of the other funds. The cash will go into 6 and 12 month CD's this year.

 

[OldShooter]

I decided to liquidate the VVIAX now, and then shave off some of the VWIAX if/as required next year, depending on what we need and how the markets are going. I will repeat in a year, with one of the other funds. The cash will go into 6 and 12 month CD's this year.

A pretty good plan, but you might want to sell some more equities if you are not holding enough fixed income to withstand a market downturn. Generally, equities are not a good place to hold money that will be needed within a few (like 5) years.

 

[Phroig]

Your tax rate on long-term capital gains is probably zero, so that shouldn’t be a constraint if you want to simplify a bit or build up more cash.

 

[tominboise]

A pretty good plan, but you might want to sell some more equities if you are not holding enough fixed income to withstand a market downturn. Generally, equities are not a good place to hold money that will be needed within a few (like 5) years.

Your tax rate on long-term capital gains is probably zero, so that shouldn’t be a constraint if you want to simplify a bit or build up more cash.

Yes, it makes sense to sell some more and bank the cash in CD ladders or similar. However, to get 5 years worth it would mean selling off 75% of my aftertax portfolio this year.

 

[pb4uski]

You might look at how much you can sell to the top of the 0% capital gains tax bracket and target selling that amount each year.

 

[travelover]

Since you mentioned RMDs, might it not make sense to bleed down your IRA / 401(k) now to minimize RMDs later?

 

[tominboise]

Since you mentioned RMDs, might it not make sense to bleed down your IRA / 401(k) now to minimize RMDs later?

It might. I had that thought myself this morning and am doing a few tax / income calculations to see. I've sort of been fixated on spending down the after tax account and saving the IRA for later, but that may not be the best strategy.

Our ACA subsidy strategy requires management of income. Drawing down the aftertax account limits the income hit to the LTCG (and any dividends, etc through the year). Drawing from the IRA, the entire withdrawal is considered income. In our case, we get about $25k per year subsidy, so I would have to add the loss of that subsidy to the amount that we withdraw.

Here is our planned withdraw rates by year. They contain a lot of assumptions regarding rates of return and the inflation rate, but I believe it's at least a road map. This contemplates SS starting at age 70 and a constant spending rate until we die.

Year Withdraw rate
2022 3.75%
2023 3.85%
2024 3.95%
2025 4.07%
2026 4.00%
2027 4.12%
2028 3.88%
2029 3.99%
2030 2.91%
2031 2.35%
2032 1.34%
2033 0.82%