comments on my Plan?

[DayDreaming]

Does this sound like a reasonable plan, particularly where I split my funds mainly between Fidelity and Vanguard, and set the AA differently for each?

age: 47, single, no debt
need about $35k / year to live on
Hoping to retire sometime this year.

current savings:

• 560k in a Fidelity 401k of pre-tax and after-tax $$
• 60k Ameriprise annuity
• 240k MFs at Ameriprise which I am moving to Vanguard
• 22k PNC Investements account which I'll move to Vanguard
• 10k Vanguard account that I just started
• 110k CDs and savings

Because of age + years of service at my last job, I'm entitled to 'enhanced retirement benefits', meaning I can take my full pension at age 60, or take it earlier with greatly reduced penalties:

• age 60: 53k/year or 644k lump sum
• age 55: 42k/year of 556k lump sum

And I'd get something decent from social security at age 67

I also earn a small income from painting (landscapes) - something I intend to do even more of in retirement. But I don't want to figure that income into my plans. If I do well, great. If not, I don't want it to be a financial worry. (The art world can be very fickle).


So, to allocate my savings for my golden years:

Move my 560k Fidelity 401k into an IRA at Fidelity, AA set for growth (80/20?) since I won't need to touch this for some time.

Move Ameriprise and PNC Investements to Vanguard, giving me 272k there. AA set conservative (60/40?) because this is what I live on for the next 7 years, plus the 110k CDs and savings

age 48 to 55: living expenses come from CDs and Vanguard account. I'd be paying my own individual health insurance.

age 55: possibly start taking my pension as single life annuity. (Or I might wait until 60.) Also, my 'enhanced retirement benefits' entitle me to company subsidized health care, so I'd investigate this and see if it's the best option for me.

age 67 onward: I'd have my pension + SS + Fidelity IRA which should have been untouched at this point. And there's also that Ameriprise annuity sitting out there.

I'm still doing a lot of reading on investments, but I think I'm in good shape in the long run, with room to splurge once one a while. As long as I don't screw something up in that age 48 to 55 period. Comments?

 

[travelover]

Joe, it looks like you have thought it out thoroughly.

Is the pension secure? This might influence your decision to take it early or late.

Congratulations.

 

[LOL!]

Why bother with Fidelity and Vanguard? Why not just pick one of the two?

 

[DayDreaming]

Is the pension secure? This might influence your decision to take it early or late.

I had asked about that here and my gut feeling is that it's pretty save. Nevertheless, I may take it as a lump sum at 55 or 60, just to be sure. I could actually take a lump sum now at age 47 but it's greatly reduced, so I'd be better off waiting.

 

[DayDreaming]

Why bother with Fidelity and Vanguard? Why not just pick one of the two?

I've read pros and cons here about investing all one's funds in one company vs 2 and opinions seem to go either way. I decided to go with the 2 so I can compare their features, website ease of use, etc. Maybe later I'll settle on one.

 

[travelover]

I've read pros and cons here about investing all one's funds in one company vs 2 and opinions seem to go either way. I decided to go with the 2 so I can compare their features, website ease of use, etc. Maybe later I'll settle on one.

I use both and take advantage of Fidelity Spartan funds for their low ER. I also like having a local Fido office if I need a little hand holding , which I did when I was separating my pre and post tax money in my 401(k).

 

[walkinwood]

Since its valentine's day, I have to ask... what happens if DW comes along?

 

[myself]

Since its valentine's day, I have to ask... what happens if DW comes along?

Remember, he's dreaming here.

Seriously though, Joe I think you've done an excellent job! But a minor curious question is, does the $35k cover rent, or a house. In other words, how much do you have to worry about housing expenses to change?

 

[FinanceDude]

As long as I don't screw something up in that age 48 to 55 period. Comments?

Don't get married,or if you do, make sure she has the same LBYM philosophy..........

 

[DayDreaming]

Since its valentine's day, I have to ask... what happens if DW comes along?

Then she better be FIRE'd too!

...Joe I think you've done an excellent job! But a minor curious question is, does the $35k cover rent, or a house. In other words, how much do you have to worry about housing expenses to change?

I own my house, no mortgage, so housing expenses won't change. Actually I don't expect that my expenses will change much at all, other than individual medical insurance - that should be my only big new expense and I have that covered in the $35k.

 

[jIMOh]

Have you looked into converting the larger IRA to a Roth between now and age 59.5?

If you are single, withdrawing 35k leaves you in 25% bracket for single. You are at very bottom (base is $31,850, cap is $77,100). This gives you $77100-$35000=$42100 of room in 25% bracket to convert the traditional (taxable) IRA to a Roth. In about 13 years you could have the whole thing in a Roth, and never pay taxes on it again from age 60 going forward.

In addition 5 years after the first conversion, you would be able to withdraw the deposits from the Roth.

So after age 59.5, it's possible you would only be paying taxes on the pension, and not paying taxes on the Roth portion.

In addition, the 53k/42k pensions will lose about 1/3 of their earning power between now and then to inflation. They are not as big as they appear (relative to 35k need).

 

[DayDreaming]

Have you looked into converting the larger IRA to a Roth between now and age 59.5?...

Thanks, jIMOh. No I hadn't considered that yet, but the way you put it, it sounds like a good option. Thanks - that's the sort of advice I'm hoping for.

In addition, the 53k/42k pensions will lose about 1/3 of their earning power between now and then to inflation. They are not as big as they appear (relative to 35k need).

Well that's a little depressing, but hopefully I won't have depleted too much of my savings yet and those investments will be able to grow again, once I start tapping into my pension.

 

[DayDreaming]

Update: my Fidelity 401K has just been converted to a Fidelity IRA, my Ameriprise funds are on their way to Vanguard (only a $50 account closing fee).

Here's the AA I'm thinking of - what do you think?

-------------------------------------
For the long term:
Fidelity IRA, $537k total:

1. 21% stock in my former employer (don't want to trade this just yet, as the company may be bought out and stock might shoot up)
2. 7% FBIDX Fidelity US Bond
3. 16% FDGRX Fidelity Growth Company
4. 9% FLTMX Fidelity Intermediate Municipal Income
5. 19% FFNOX Fidelity 4-in-1 Idx
6. 19% FSMKX Fidelity Spartan 500 Idx
7. 9% FIEUX Fidelity Europe

results in:

• 3.61% Cash
• 64.27% U.S. Stock
• 13.28% Foreign Stock
• 16.64% Bonds
• 2.21% Other

-----------------------------------------
For more immediate needs over the next 7 years until I start collecting a pension at age 55 (or later):

Vanguard, $350k total:

1. 17.14% VBMFX Vanguard Total Bond Mkt Idx
2. 5.71% VFIIX Vanguard GNMA
3. 5.71% VGSIX Vanguard REIT Idx
4. 11.43% VGTSX Vanguard Total International Stock
5. 8.57% VNJTX Vanguard NJ Long-term Tax Exempt
6. 17.14% VTSMX Vanguard Total Stock Mkt Idx
7. 5.71% VTMSX Vanguard Tax Managed Small Cap
8. 28.57% cash - VMMX money mkt + bank CDs

results in:

• 29.44% cash
• 28.22% U.S. Stocks
• 11.23% Foreign Stock
• 30.84% Bonds
• 0.21% Other

I'm on a steep learning curve here, so if this is really screwed up, please say so! Most of this has not been put into place yet, as some funds are still in transit.

 

[LOL!]

One should NOT use a municipal bond fund in an IRA. May I suggest that you do not select funds at all at first. Instead simply write down an investment policy statement -- something like:

I would like to have E% equities, B% bonds/fixed income, R% to be real estate and C% cash.
Of my equities, I would like them to be D% domestic stocks and F% foreign stocks.
Of my equities, I would like them to be L% large cap and M% mid/small cap.
Of my equities, I would like V% to be value, G% to be growth.
Of my fixed income, I would like I% to be intermediate and S% to be short term, and T% to be TIPS.

Then after you have all that, one can select not only the funds, but all which accounts to hold all these.

 

[Dawg52]

Looks to me you could accomplish your desired mix with less funds. For example, you can pretty much do the same thing with Fidelity's 4 in 1 fund on the Fidelity portion. But looks like you have obtained a balanced mix with everything you show. I might add a natural resource or commodity fund in addition to what you have.

 

[LOL!]

Also for tax-efficiency, you want to use your IRA for the bonds, the fixed income, the GNMA, the REITs, small cap value. You want to put into the taxable account the large cap index funds, the international index funds, then other index funds. You will end up paying almost no taxes with such a scheme.

 

[brewer12345]

So you are contemplating having in excess of $100k in stock in your former employer? Maybe I am a nasty, cynical, GenX job-hopper, but I have yet to work for a company I would be willing to hold that much stock in (and I have been an employee at a company where the largest holder is Warren Buffet of Berkshire Hathaway fame).

You are taking way too much single name risk for someone your age so close to retirement. I have that much exposure to a single name, but I am 13 years younger and cotinue to dump more cash into the kitty and will eventually sell down that position (and I don't work for them). Chop the employer stock to no more than $50k, even if its the best investment since Christ was a child.

 

[DayDreaming]

One should NOT use a municipal bond fund in an IRA. May I suggest that you do not select funds at all at first. Instead simply write down an investment policy statement -- something like:

I would like to have E% equities, B% bonds/fixed income, R% to be real estate and C% cash.
Of my equities, I would like them to be D% domestic stocks and F% foreign stocks.
Of my equities, I would like them to be L% large cap and M% mid/small cap.
Of my equities, I would like V% to be value, G% to be growth.
Of my fixed income, I would like I% to be intermediate and S% to be short term, and T% to be TIPS.

Then after you have all that, one can select not only the funds, but all which accounts to hold all these.

Thanks, LOL, I have a good idea of what I want in equities/bonds, but not a very good feel for how I want those split domestic / foreign / large cap / small cap / etc, other than that I need some diversity. But I'll give this more thought, and I'll get rid of that municipal bond fund in the IRA.

Looks to me you could accomplish your desired mix with less funds. For example, you can pretty much do the same thing with Fidelity's 4 in 1 fund on the Fidelity portion. But looks like you have obtained a balanced mix with everything you show. I might add a natural resource or commodity fund in addition to what you have.

Wow, you're right aboout that 4-in-1 FFNOX fund, and it looks like a well performing fund, with very low expense ratio of 0.08. Even though it looks like a good fund for me, I'm wondering if it makes sense to put everything into 1 fund, or is it safer to spread across a range of funds?

Also for tax-efficiency, you want to use your IRA for the bonds, the fixed income, the GNMA, the REITs, small cap value. You want to put into the taxable account the large cap index funds, the international index funds, then other index funds. You will end up paying almost no taxes with such a scheme.

But if my taxable account is for my immediate needs, is it good to have all equities there? I'm hoping to retire soon at the young age of 47 or 48, and won't have a pension income until 55, so the taxable account is where my income would be coming from. Doesn't that need bonds/fixed for stability?

So you are contemplating having in excess of $100k in stock in your former employer? Maybe I am a nasty, cynical, GenX job-hopper, but I have yet to work for a company I would be willing to hold that much stock in...

I know what you mean, but here's the situation: I'd been at the same job for 25 years. For the first 20 years or so, all company matching contributions to the 401k were in company stock. It was a great stock and was doing incredibly. And since it was free money, I took a chance in leaving it alone. Then bad things happened, and the stock was suddenly worth about 1/3 of it's former value. At this point, the company let us take matching contributions in something other than company stock, so I made that change, but was still hoping my existing stock would go up a bit in value again. I think there is a good chance that company will be bought out soon, and I'm hoping that gives the stock a little boost again. I guess that qualifies as the sin of market timing, but I'll take the risk a little bit longer on this. (And it pays good dividends).

 

[cardude]

I would like to have E% equities, B% bonds/fixed income, R% to be real estate and C% cash.
Of my equities, I would like them to be D% domestic stocks and F% foreign stocks.
Of my equities, I would like them to be L% large cap and M% mid/small cap.
Of my equities, I would like V% to be value, G% to be growth.
Of my fixed income, I would like I% to be intermediate and S% to be short term, and T% to be TIPS.

LOL,

This seems like a hugely important step, but how in the heck do you decide on the allocation? I mean, if you get it wrong doesn't it really affect your return and risk profile? Instead of just saying "I would like" x% equities and x% bonds, shouldn't you copy some tested portfolio that actually works?

Are there some tested portfolios out there out there that are actually working that people like me could copy? I'm going through the same process as JoeDreaming, so that's why I ask.

 

[LOL!]

LOL,

This seems like a hugely important step, but how in the heck do you decide on the allocation? I mean, if you get it wrong doesn't it really affect your return and risk profile? Instead of just saying "I would like" x% equities and x% bonds, shouldn't you copy some tested portfolio that actually works?

Are there some tested portfolios out there out there that are actually working that people like me could copy? I'm going through the same process as JoeDreaming, so that's why I ask.

How: You go read some books. In the end though, you have to pick based on your the risk level you can tolerate and your desired return.

There is an entire asset allocation tutorial with links to things to read, links to model portfolios to copy, and links to tools to use. You gotta read: http://www.early-retirement.org/forums/f28/asset-allocation-tutorial-31324-2.html#post578722 Then why not post questions in that thread?

 

[LOL!]

But if my taxable account is for my immediate needs, is it good to have all equities there? I'm hoping to retire soon at the young age of 47 or 48, and won't have a pension income until 55, so the taxable account is where my income would be coming from. Doesn't that need bonds/fixed for stability?

I think it is a big mistake to divide your money up in buckets because money is money. Money in your left pocket is the same as money in your right pocket is the same as money in your back pocket. You can easily move money around as I will show how below. You should consider your portfolio as all one big bucket of money and put assets in the most tax-efficient places. That means bonds/fixed go in your tax-advantaged accounts. Even your emergency fund can go in a tax-advantaged account. And tax-efficient equity index funds go in your taxable account.

Here's how it might work. Say you need $50K for living expenses in 2009, but have only a total market index (TMI) fund in your taxable account and no bonds there because all your bonds are in your IRA. You can sell some of your TMI fund in your taxable account every few months to pay for your expenses. In your IRA you sell bonds and buy the TMI fund. From the outside, it looks like you sold bonds in your IRA to pay for expenses because you still have the same total amount of the TMI fund. You have just moved shares from taxable to the IRA. There are several advantages to this:

1. If TMI fund has gone up, you pay Long Term capital gains taxes and not ordinary income taxes.
2. If TMI fund has gone down, you get a tax deduction for the loss on your income taxes and do not pay cap gains taxes nor income taxes on the sale. You might worry that "I sold low and lost money" but that cannot be true because you turned around in the IRA and bought it back for the same price. There are some nuances about replacement shares and wash sales which are easily avoided.
3. If TMI fund has been flat, then you have very little cap gains or losses and your taxes are probably zilch.

With all this you still have bonds for stability and reducing volatility and smoothing your returns, but you have exequisite control on your taxes.

See also https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf

Anyways, you gotta think outside the box.

 

[ats5g]

I know what you mean, but here's the situation: I'd been at the same job for 25 years. For the first 20 years or so, all company matching contributions to the 401k were in company stock. It was a great stock and was doing incredibly. And since it was free money, I took a chance in leaving it alone. Then bad things happened, and the stock was suddenly worth about 1/3 of it's former value. At this point, the company let us take matching contributions in something other than company stock, so I made that change, but was still hoping my existing stock would go up a bit in value again. I think there is a good chance that company will be bought out soon, and I'm hoping that gives the stock a little boost again. I guess that qualifies as the sin of market timing, but I'll take the risk a little bit longer on this. (And it pays good dividends).

IMO, it doesn't matter. By having so much in 1 stock you are taking risks you're not compensated for, or risks that can be diversified away. For example, you mention that the stock pays good dividends. You can probably achieve a similar goal of high/good dividends by using a high dividend fund/etf or LV value fund and greatly reduce the individual firm risk.

Of course, you can always turn the question of "Should I keep holding this one stock as 21% of my portfolio?" around and ask "Would I put 21% of my portfolio in it now if I didn't own it?"


- Alec

 

[Bestwifeever]

RE OP having company stock that has lost value:

We were in a similar situation with company stock, maybe 30% of 401K. The company was involved in a takeover but as the buyer and their stock never recovered. We just decided to bite the bullet and move chunks out into the index funds available over about six months. It hurt but we were able to recover that way, vs. some who are still waiting. Hard choice--but even if it did recover now we would be even (it ain't gonna recover, though--maybe yours is in a more promising industry).

 

[W2R]

I think it is a big mistake to divide your money up in buckets because money is money. Money in your left pocket is the same as money in your right pocket is the same as money in your back pocket. You can easily move money around as I will show how below. You should consider your portfolio as all one big bucket of money and put assets in the most tax-efficient places. That means bonds/fixed go in your tax-advantaged accounts. Even your emergency fund can go in a tax-advantaged account. And tax-efficient equity index funds go in your taxable account.

Here's how it might work. Say you need $50K for living expenses in 2009, but have only a total market index (TMI) fund in your taxable account and no bonds there because all your bonds are in your IRA. You can sell some of your TMI fund in your taxable account every few months to pay for your expenses. In your IRA you sell bonds and buy the TMI fund. From the outside, it looks like you sold bonds in your IRA to pay for expenses because you still have the same total amount of the TMI fund. You have just moved shares from taxable to the IRA. There are several advantages to this:

1. If TMI fund has gone up, you pay Long Term capital gains taxes and not ordinary income taxes.
2. If TMI fund has gone down, you get a tax deduction for the loss on your income taxes and do not pay cap gains taxes nor income taxes on the sale. You might worry that "I sold low and lost money" but that cannot be true because you turned around in the IRA and bought it back for the same price. There are some nuances about replacement shares and wash sales which are easily avoided.
3. If TMI fund has been flat, then you have very little cap gains or losses and your taxes are probably zilch.

With all this you still have bonds for stability and reducing volatility and smoothing your returns, but you have exequisite control on your taxes.

See also https://institutional.vanguard.com/iip/pdf/WP_TotalRet.pdf

Anyways, you gotta think outside the box.

What an interesting post! I really enjoyed reading the Vanguard pdf, too, and learned from it. I believe I had read it before, but for some reason saw it in a new and different light this morning. The discussions in the Vanguard article about taxation of dividends vs. capital gains, and the best order for withdrawal, really clarify and reinforce the points you are making above.

 

[DayDreaming]

LOL - Thanks for that great explanation of how to allocate and withdraw funds. I never would have figured that out on my own. I revised my possible portfolio, thinking of it as one big bucket. Using Vanguard's investor questionnaire for AA, it's telling me I should have 50% stock / 50% bonds but that seems a little too conservative for me so I'm shooting for 60% stocks.

Alec and Bestwifeever - you're probably right about that one big holding in company stock. I revised my possible portfolio to assume I'm getting rid of that stock, but I may do that in stages.

My latest plan:

Fidelity IRA, $537k total:

1. 31.34% FBIDX Fidelity US Bond
2. 12.29% FDGRX Fidelity Growth Company
3. 11.27% FFNOX Fidelity 4-in-1 Idx
4. 5.64% FRESX Fidelity Real Estate Investment Portfolio

taxable: Vanguard, $350k total:

1. 7.89% VGTSX Vanguard Total International Stock
2. 5.64% VNJTX Vanguard NJ Long-term Tax Exempt
3. 9.36% VTSMX Vanguard Total Stock Mkt Idx
4. 11.27% VTMSX Vanguard Tax Managed Small Cap
5. 3.38% VGENX Vanguard Energy Fund Investor Shares
6. 2.82% cash - VMMX money mkt + bank CDs

results in:

• 10.78% cash
• 45.42% U.S. Stocks
• 12.82% Foreign Stock
• 30.07% Bonds
• 0.92% Other

stock style box thingy:
15 19 23
4 9 9
8 8 6

I assume that the VNJTX in my taxable account is okay?
I also greatly reduced the amount I have in cash (money mkt + CDs).

Any comments on this allocation?