Asset Allocation & Withdrawals - What would you do?

[davebarnes]

I am seeking advice regarding recommendations for our asset allocation in our retirement accounts.

We are Homer (71) and Marge (62).

Our pre-tax non-investment income is:
$36K Homer's Social Security
$4K non-cola pension
$28K Marge's part-time job. Her SS will be about $24K at age 64.
$5K small business (Homer consulting, 1099)
We pay estimated taxes of 20% on SS, pension, small biz. Marge has taxes (and some excess) withheld.

We take $60K/yr from Homer's tIRA. We [over] pay estimated taxes of 20% on those withdrawals. Our state tax rate is about 2%.
We pay for ObamaCare at the unsubsidized rate of $10K. We have $15K in our HSAs.
One of our goals is to have 7 years of projected withdrawals in bonds/cash.
Planned death ages are Homer 90 and Marge 96.

Based on the table (image) below, what would you recommend we do?
Roth conversions? More stocks? More bonds? More stocks for Marge and more bonds for Homer? Should we have more/less than a 7 year withdrawal cushion?
What do you recommend for a withdrawal strategy?

 

[OldShooter]

Well, I'd start by comparing an equity portfolio comprising your US equities in their current proportions to a single US total market fund. (https://www.portfoliovisualizer.com/backtest-portfolio) I think you'll find that you don't need all those funds.

I would do the same exercise with your bond funds; probably you can cut back to one fund there too.

I would ditch FSGGX and FIPDX because they are so tiny they really have no effect on your results. Plus both those categories make excellent investment sense IMO but only if they are significant players in your portfolio. For example, we are 50% US and 50% international and all our bonds are TIPS.

Simplification of the portfolio will make your withdrawal strategy question much easier to answer and your life in general better.

 

[Animorph]

While I don't feel like running numbers just now, I do have a few thoughts.

If you are securely married and comfortable with it, you should be treating all retirement accounts as one portfolio. So whatever AA you target, you only have to achieve it for your total portfolio, not every account.

You have a significant age difference. Your RMD flexibility will be much better if you Roth convert/withdraw from Homer's tIRA before Marge's. I'm 5 years older than my DW. I now have no tIRA accounts, delaying RMD's by 5 years.

My AA is actually very close to yours, although our taxable accounts are a mess as we sell off older assets and try to minimize capital gains.
FXAIX (S&P 500 index) 25%
FSMAX (Total U.S. - S&P 500) 25%
FSGGX (Global - U.S.) 25%
FXNAX (Bond index) 25%

I used to be 100% equities, but the bonds have been nice. They serve as my withdrawal cushion. If stocks are down I can sell just bonds for expenses (or buy more stocks). When stocks are high I can sell stocks (or buy more bonds). Or I can just leave the AA balanced. So my AA is somewhat flexible.

Per FIRECalc you should be OK with 40%-100% equities in your portfolio. I think within that range it is sort of a personal choice. More bonds to avoid portfolio fluctuations, more stocks to possibly grow your estate or spend more.

 

[OldShooter]

...
FXAIX (S&P 500 index) 25%
FSMAX (Total U.S. - S&P 500) 25%
...

Interesting. With IIRC the S&P being 80% of the US market cap you have chosen to substantially underweight it in your AA. I don't have an opinion pro or con whether this is a good idea, but I am curious to know your rationale for doing it. Would you explain?

 

[LOL!]

Do you spend all that income? What does your tax refund look like as it sure seems to me that your income taxes paid are way way over your actual tax.

Does Marge max out her traditional IRA in order to defer taxes? Does she use her income to contribute to Homer's Roth IRA?

Does Homer use a QCD to avoid taxable income from his RMD?

Since Homer has self-employment income, does he contribute [almost] all of it to his solo Roth 401(k)? Or does he defer it to his solo traditional 401(k)? see also: https://www.fidelity.com/viewpoints/retirement/save-for-retirement-after-70

Since you have things at Fidelity, what is the current asset allocation of the portfolio? (Simply click on the "Analysis" tab at the top when you login to Fidelity.)

 

[davebarnes]

Do you spend all that income?
Yes
What does your tax refund look like as it sure seems to me that your income taxes paid are way way over your actual tax.
$9K last year. $4K is sent to Marge's HSA.

Does Marge max out her traditional IRA in order to defer taxes?
No. We don't make IRA contributions.
Does she use her income to contribute to Homer's Roth IRA?
No. She spends it all.

Does Homer use a QCD to avoid taxable income from his RMD?
Not yet.

Since Homer has self-employment income, does he contribute [almost] all of it to his solo Roth 401(k)?
No IRA contribution.
Or does he defer it to his solo traditional 401(k)?

Since you have things at Fidelity, what is the current asset allocation of the portfolio?
Domestic Stock 67%
Foreign Stock 4%
Bonds 23%
Short Term 7%

We have not been adding to our IRAs as the contribution amounts would be tiny in comparison to our overall assets.

 

[LOL!]

Although she spends all her income, the fact that she has compensation means that other money can be contributed to Roth IRA. The fact that you all are contributing to an HSA suggests that you you have plenty of money to send to a Roth 401(k) or a Roth IRA or both. This will keep the money out of RMD-land and perhaps benefit any heirs.

Since your tax refund is $9,000, I would stop paying $9,000 extra each year and use the money for something else.

Your asset allocation is about 70% stocks and 30% bonds. That's fine. I use 60/40 myself.

I haven't looked at your tax return in detail, but I would think you should have to pay less than $3,000 in income taxes each year if you arranged your affairs the way I have arranged mine for that level of income.

 

[davebarnes]

Well, I'd start by comparing an equity portfolio comprising your US equities in their current proportions to a single US total market fund. I think you'll find that you don't need all those funds.

I would do the same exercise with your bond funds; probably you can cut back to one fund there too.

I would ditch FSGGX and FIPDX because they are so tiny.

Thanks.
I played with the Backtester and almost every scenario came out about the same. So, you are correct: simplify.

 

[OldShooter]

Thanks.
I played with the Backtester and almost every scenario came out about the same. So, you are correct: simplify.

Yeah. I thought so. It is fairly common for an "active" mutual fund manager to buy enough of the market that he has little downside/has good CYA vs his benchmark but the cost of that is little upside plus the shareholders are paying bigger fees and getting only this "closet indexing."

You fell into it by accident so your only extra cost is managing the extra complexity. I have seen other accidental closet indexing portfolios posted here, so don't feel too bad about it.

DW and I are lazy, so 90% of our equities are in just three funds. VTWAX which is the world and a 50/50 pair of total market international and US funds. If we weren't so lazy we would have sold the two funds by now and put everything into VTWAX. Probably we will do that after our year-end portfolio review. One fund is about as simple as it can be.

 

[pb4uski]

Yeah. I thought so. It is fairly common for an "active" mutual fund manager to buy enough of the market that he has little downside/has good CYA vs his benchmark but the cost of that is little upside plus the shareholders are paying bigger fees and getting only this "closet indexing."

You fell into it by accident so your only extra cost is managing the extra complexity. I have seen other accidental closet indexing portfolios posted here, so don't feel too bad about it.

DW and I are lazy, so 90% of our equities are in just three funds. VTWAX which is the world and a 50/50 pair of total market international and US funds. If we weren't so lazy we would have sold the two funds by now and put everything into VTWAX. Probably we will do that after our year-end portfolio review. One fund is about as simple as it can be.

You're referring just to your equities portfolio, right?

 

[OldShooter]

You're referring just to your equities portfolio, right?

Yup. Overall 75/25. On the fixed side its TIPS plus probably a little too much in SWVXX MM fund. We'll probably adjust that when we do our year-end review. Maybe some t-notes or brokered CDs. Maybe just more TIPS. Still thinking about strategy for intermediate 2-5 year $$.

 

[Animorph]

Interesting. With IIRC the S&P being 80% of the US market cap you have chosen to substantially underweight it in your AA. I don't have an opinion pro or con whether this is a good idea, but I am curious to know your rationale for doing it. Would you explain?

I've always had lots of small caps. I'm 50% S&P 50% everything else, instead of 80/20. It keeps the allocations simple. And it was one of the few choices I had for diversification with the broadest indexes.

 

[davebarnes]

Took your advice. Simplify.

I read your replies. Thank you. I took most of your advice.