Vanguard portfolio review

[trapperjohn]

As a Flagship member, I can request an annual portfolio review from Vanguard, which I did. Recently I had that review, and thought I'd share their recommendations. Sorry for the length, but perhaps it will be of value to someone.

First, our background situation:

I retired 8 months ago at 60. DW is 56 and will still w*rk for another 6 years by choice. I receive a nice pension which she will continue to receive at the same level once I check out of this world. When she retires, she will also receive a small pension of her own.

I will start taking SS at 62 (because of chronic health issues). Because DW w*rks in the public sector, she will not receive much SS other than whatever she gets because she's married to me.

I have a 7-figure tIRA and no debt. Right now, I'm withdrawing a small amount for living expenses. When my SS kicks in, SS plus pensions will take care of our living expenses. DW has a very small tIRA.

My tIRA consists of 10% US bonds, 10% cash, and 80% stocks. Within the stock allocation, 90% are US stocks, and 10% are international stocks. I consider myself a very aggressive investor ... definitely more aggressive than I should be at this stage in our lives - and the Vanguard adviser agreed.

Vanguard recommendations for my situation:

They recommend the following stock/bond ratios for a retiree < 80 yo:
Very aggressive: 65% / 35%
Aggressive: 60% / 40%
Moderate: 50% / 50%
Conservative: 40% / 60%
Very conservative: 35% / 65%
If I want an optional bucket of cash, they recommend no more than 2 years worth held in the tIRA. In addition, they feel that having the correct stock/bond ratio is more important than anything else we discussed.

They recommend that you re-balance quarterly if your holdings exceed the targets by 5%. If not quarterly, then certainly re-balance at least yearly.

SWR: 3.5% if your money must last 40 years; 4% if your money only has to last 30 years.

Stocks: They recommend 60% in US stocks and 40% in international stocks. They recommend their Total Stock Market Index Fund (VTSAX) for the US stocks, and their Total International Stock Index Fund (VTIAX) for the international stocks. This can vary, but they never recommend < 20% in international stocks.

Bonds: They recommend 70% US bonds and 30% international bonds. They recommend their Total Bond Market Index Fund (VBTLX) for the US bonds, and their Total International Bond Market Index Fund (VTABX) for international bonds.

Roth conversions: they understand and agree with the idea of converting tIRA funds to Roth, as long as it is done over several years and does not kick me into a higher tax bracket than I would already be in anyway. I think that most people on this forum agree with this. In addition, they suggest that I may want to "diversify my tax risk": Nobody knows what future tax rates will be, but I may want to only convert 1/2 of my tIRA funds, and not all of them.

Roth vs tIRA: Assuming there are funds in both a Roth and a tIRA, he suggests that all withdrawals for living expenses first come from the tIRA as long as it has funds, and only from the Roth once there are no longer any funds in the tIRA. In addition, withdrawals should come out of cash first (if you have the bucket), then bonds, then stocks. In general, have the tIRA hold whatever bond funds are in the overall mix, and have the Roth hold whatever stock funds are in the overall mix.

Again, this was Vanguard's recommendations for my situation. Hopefully I've communicated everything correctly. YMMV.

Sorry for the length of the post, but hopefully it will be of interest to someone.

 

[Sunset]

Thanks for the detailed report, and the background which puts it in perspective.

When you say:
In addition, they suggest that I may want to "diversify my tax risk": Nobody knows what future tax rates will be, but I may want to only convert 1/2 of my tIRA funds, and not all of them.

Is this because your wife will retire and your income will drop in 6 years, so you will possibly pay less tax on tIRA withdrawals ? Otherwise as long as tax rate does not increase why not convert all tIRA to Roth ?

 

[SoReady]

In general, have the tIRA hold whatever bond funds are in the overall mix, and have the Roth hold whatever stock funds are in the overall mix.

I'm assuming this is general knowledge, but not for me! What is the reasoning around this?

 

[travelover]

I'm assuming this is general knowledge, but not for me! What is the reasoning around this?

I think this is the reasoning - Bonds are taxed as regular earned income, so you want bonds in a deferred account which is also taxed as regular earned income.

Stock long term gains and dividends are only taxed at maximum 15%, so it is better to hold them in a taxable account. Since no taxes owed on a Roth, it is best to have your highest appreciating investment in a Roth.

 

[Whisper66]

Thanks for sharing. Provides a good example against which we can test our own thinking.

I've been overly aggressive for most of my life (85%+ equities) and moved more recently to buying more bonds and limiting a large portion of my equities to those which pay a dividend similar to bonds and are low priced when I buy. Also making sure I have enough bonds / cash that I shouldn't have to sell equities at a low point. Even so, feels too aggressive which would agree with VG's general recommendations for asset allocation. I recently started to sell off some of the equity winners and purchase bonds instead so slowly plan to move more toward the Vanguard concepts....will take me a couple years to do this. Thanks for sharing.

 

[trapperjohn]

Thanks for the detailed report, and the background which puts it in perspective.

When you say:
In addition, they suggest that I may want to "diversify my tax risk": Nobody knows what future tax rates will be, but I may want to only convert 1/2 of my tIRA funds, and not all of them.

Is this because your wife will retire and your income will drop in 6 years, so you will possibly pay less tax on tIRA withdrawals ? Otherwise as long as tax rate does not increase why not convert all tIRA to Roth ?

The adviser mentioned this at the very end of our session. We were not talking about my wife's retirement in 6 years. Rather, all he said was that he sometimes suggests that to investors because we don't know if tax rates will be more or less in the future.

I'm not so sure that my income will drop in 6 years when my wife retires. I'm doing Roth conversions. When she retires, that will open up more room for me to convert. If I *didn't* do the conversions, I would be hit with RMDs which would also keep my income at even higher levels.

Personally, I don't see how taxes can be anything but higher. I agree with you that it makes sense to do the conversion, but I also know that there are others who would disagree.

 

[trapperjohn]

I'm assuming this is general knowledge, but not for me! What is the reasoning around this?

His only reasoning for keeping stocks in the Roth and bonds in the tIRA was because stocks have a higher upside potential, so they should be in the Roth where they will grow tax-free.

 

[DEC-1982]

Thanks for posting this trapperjohn. Although it is for your personal situation, some of the information (like 3.5% SWR for 40 years) is generic and useful for anybody.

 

[Gearhead Jim]

Bond funds are subject to net asset value losses when rates go up, eventually the higher rates help you but for a period of time you are in the hole.


Individual bonds avoid that problem but getting a properly diversified portfolio of individual bonds is difficult.


So, if your age and health do not suggest a long time ahead to ride out bond fund (and stock fund) losses, you might consider using a CD ladder instead of a bond fund(s). I have been able to do better buying my own CD's than Vanguard's, last time I looked. A bit of work, but not overwhelming to get one new five year CD each year.

 

[EpicRider]

I appreciate the information! Just confirms my current allocation of investments with Vanguard; although, my % are more aggressive in VTSAX based on my military retirement and TSP funds. Thank you.

 

[JOHNNIE36]

Just checked my returns for the first time ever. VWIAX has returned 5.9% for the 2 1/2 years I have been invested and 3.3% for VWINX in which I have only been invested for 10 months. I'm happy as it's better than any CD out there. Since I don't rely on these funds for ordinary living expenses, I can't complain. On VWIAX I have to take a RMD and the gains more that cover that withdrawal. So, for the two years in which I took withdrawals, I have more invested than when I started.

 

[LOL!]

Thanks for posting. The suggestions seem to be the things recommended over and over on these forums, so are right in line with typical conventional thinking, but that is to be expected. So no surprises at all.

[...]

They recommend that you re-balance quarterly if your holdings exceed the targets by 5%. If not quarterly, then certainly re-balance at least yearly.
[...]

Roth vs tIRA: Assuming there are funds in both a Roth and a tIRA, he suggests that all withdrawals for living expenses first come from the tIRA as long as it has funds, and only from the Roth once there are no longer any funds in the tIRA. In addition, withdrawals should come out of cash first (if you have the bucket), then bonds, then stocks. In general, have the tIRA hold whatever bond funds are in the overall mix, and have the Roth hold whatever stock funds are in the overall mix.

I suppose if one is rebalancing all along then after a withdrawal, one will rebalance eventually, so taking withdrawals out of cash or bonds first doesn't really mean anything. One could also take withdrawals out of stocks first if one had to rebalance from stocks to bonds anyways.

 

[karen1972]

The only thing I don't get about Vanguard is their huge push to international, I know what they are trying to do especially with currency, etc.. but they pulled the trigger on this in January and its not done well for them in their target date funds. Only in the last weeks has the foreign market really started to make some ground, but with whats going on with Euro money policy and of course England/Euro .. I just don't think I'd be dipping my toe in, certainly not at the levels they recommend.