Moving from managed portfolio to Vanguard - have questions

[ocean view]

We have been using a FA for many years, mostly because we didn't have time to deal with it ourselves. Now we are in our retirement and are ready to take this on and move to a Vanguard 2-3 fund portfolio. I've been trying to learn as much as possible (books from library, searching this forum, Vanguard, Bogleheads, etc)...but I have questions and would appreciate your input.

We've run Firecalc and other calculators and are in great shape for LT success.

We will have 2 investment accounts: non-retirement with ~$930K and a Rollover IRA with $550K (8 yrs until 59.5). We also have $120K in a REIT (non-ret), not sure if we can liquidate that or just move it to Vanguard. Oh, and FA left us with a gift of ~$40K of cap loss carryover after we liquidate the non-ret portfolio in the move.

1. Should both accounts be invested in the same funds or should they have different objectives? Growth for the IRA and Income for the non-retirement? Does it matter?

2. Should we carry a cash balance equal to our annual spending needs and then re-balance annually after dividends are paid? I think I've even read that perhaps you should carry 2 years of cash, so that you don't have to sell an investment in a down period to meet your needs.

3a. I know ACA is uncertain (understatement to say the least), but assuming that my state CA will continue to offer coverage with a subsidy, we need a minimum income of $28K in order to stay off of medicare. For 2016 we had to pull money out of the IRA and pay the penalty in order to get a 79% premium subsidy, net of penalty. In the long run, is pulling from the IRA an acceptable strategy for this? The money we withdrew went right into the non-ret portfolio, not spent.

3b. If using IRA withdrawls to meet income thresholds is BAD and given that we have a sizable loss carryover, should our investments in the non-ret account focus on dividend producing, rather than appreciation. This way we know that we need to generate at least $30K of income in order to get $27K of AGI after the $3K cap loss offset. The strategy would change after the loss is utilized or ACA is replaced.

I'm sure I'll come up with other questions as you all chime in, but this a good starting point.
thanks.

 

[pb4uski]

1. Taxable accounts and tax-deferred accounts are typically NOT invested in the same funds because of tax efficiency (not investment objectives). Typically, tax-deferred accounts are invested in less tax efficient assets and taxable accounts are invested in tax efficient assets. So in your case, your tax-deferred accounts would be in bonds and taxable accounts would be in stocks and bonds. See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

2. While how much cash to carry is a matter of personal preference, many of us carry some cash. I didn't carry any while I was working but moved 5% of my fixed income allocation to cash once I retired as a peace of mind thing IOW, went from 60/40/0 to 60/35/5). I use an online savings account that pays about 0.95% but 1% or even more can be found if you shop around. Between this 5% and dividends from my taxable accounts, I can cover 2-3 years of spending. I have a monthly "paycheck" transferred from the online savings account to the local credit union account that we use to pay our bills and then replenish the cash when we rebalance... usually annually late in the year.

3a. What you describe that you did was a very suboptimal way of generating income. A much better way would to do a Roth conversion... moving money from your rollover tIRA to a new Roth IRA account... the amount transferred is income but it totally avoids the penalty.

3b. As previously mentioned, Roth conversion are magic in your situation since the result in income but avoid the penalty.

You should be aware that since your taxable income will be under the 15% tax bracket that all LTCG and qualified dividends from your taxable account will be tax-free.

 

[ocean view]

pb4uski - thanks for your input. I had never considered a Roth, and didn't know about conversions, since I have always participated fully in a 401k. When I rolled my last 401k into the tIRA I had worked part year, so my tax bracket would not have made this a favorable option, but now the time is right. The fact that in 2016 we took at distribution from the tIRA rather than do a conversion is another strike against the FA that we will fire in the near future. I especially like the fact that I can wait until December to see how ACA shakes out before determining how much I want to convert in 2017, yet get counted for a full year of the 5-yr waiting period.

I'm still digesting the rest of your post, but this helps greatly.

 

[pb4uski]

So your FA was the one who suggested that to generate income that you do a withdrawal knowing that you would pay the 10% penalty rather than just doing a Roth conversion that would achieve the same end in terms of generating income but would avoid the penalty?

If so, I would ask them to reimburse you for the penalty since you were damaged by their bad advice. Probably never happen but it would be fun to ask and watch them squirm.

 

[Cobra9777]

2. Should we carry a cash balance equal to our annual spending needs and then re-balance annually after dividends are paid? I think I've even read that perhaps you should carry 2 years of cash, so that you don't have to sell an investment in a down period to meet your needs.

When we first retired, we had 5% cash in the AA just because most people were recommending it. I never really thought it through. We've now worked that down to near zero. We do carry about $20-25K operating cash between Ally and our cash management account at Fidelity just to buffer against occasional large swings in cashflow. The cash balance is replenished from 2 pensions, rental income, and dividends from our taxable brokerage account. We rarely sell shares except in conjunction with some large discretionary item (home improvement, new car, international travel). In a sharp market decline, we would likely just defer discretionary spending rather than sell shares. So I came to realize there was no benefit from carrying all that cash in our situation. If we were more heavily reliant on portfolio withdrawals to pay bills, then we would probably carry enough cash for at least 2 years of non-discretionary.

 

[pb4uski]

I'm somewhat torn on the amount of cash to carry. It is a peace of mind thing for me... but probably not necessary as we have plenty of investments that could be sold and even if some are at a loss then we could use the tax benefit.

However, at worse, my 5% cash has a negligible impact on portfolio return. If I assume that stocks return 7%, bonds 4% and cash 1%, then a 60/40/0 portfolio returns 5.80% and a 60/35/5 portfolio returns 5.65% so the cost of peace of mind is 0.15%.

But the longer that I am retired the more comfortable I am getting so it woudl not surprise me if I ultimately transition back towards 60/40/0.