100% Equities Portfolio for very early retirees

[utrecht]

During RMDs you are forced to sell from an IRA because the government doesn't allow you to defer taxes forever. Normally you don't want to sell equities during a big downturn but there's nothing that says you cant immediately re-buy the same stocks or funds in a regular after tax account. If you do it that way, you are losing the tax deferral on the amount that you were forced to sell due to RMDs but the fact that stocks are way down at the moment has no effect.

 

[papadad111]

I started out as a Bogglehead (way back when it was on morningstar forums, although I have always been essentially just a lurker) and switched to individual stocks because I could sleep better at night when I started investing in companies as opposed to financial instruments.

I think the challenge with this approach is that one has to select the right stocks individually - stocks that each pay a dividend yield above the market average, that each are financially sound and each not going to suspend the dividend, etc. That's not easy for all to do .. If it is for you, then great !

Unless holding a portfolio of 50-75 individual dividend paying stocks, I would be too nervous that a single failure would be too disruptive to portfolio dividend returns. But that's just me personally. Others have much fewer stocks and higher risk tolerance.

Eastman Kodak used to pay a good dividend. Diamond Offshore too. For a while Ford cancelled their dividend etc.

Back to funds. Are the actively managed "dividend oriented" income funds an option ? Possibly. But while they may yield 3 or 4 percent it seems the cap appreciation / principle growth is very low. Much less than the more balanced SP500 (growth and income ).

Would be curious how your own stock by stock portfolio performed in 2014 on aggregate - gains and dividends reinvested ... compared to SP500 (on a total return basis).

it's the classic active versus passive argument, I think ..

 

[nun]

During RMDs you are forced to sell from an IRA because the government doesn't allow you to defer taxes forever. Normally you don't want to sell equities during a big downturn but there's nothing that says you cant immediately re-buy the same stocks or funds in a regular after tax account. If you do it that way, you are losing the tax deferral on the amount that you were forced to sell due to RMDs but the fact that stocks are way down at the moment has no effect.

Ahh obviously, problem solved

 

[haha]

During RMDs you are forced to sell from an IRA because the government doesn't allow you to defer taxes forever. Normally you don't want to sell equities during a big downturn but there's nothing that says you cant immediately re-buy the same stocks or funds in a regular after tax account. If you do it that way, you are losing the tax deferral on the amount that you were forced to sell due to RMDs but the fact that stocks are way down at the moment has no effect.

You often will not even have to sell and rebuy. I take RMDs in kind. I still get a 1099 that causes me to pay taxes, but there are no extra expenses or frictional losses.

Ha

 

[audreyh1]

RMDs don't force you to sell equities! You can transfer in kind whether it's individual stocks or mutual funds.

I see Ha already explained that. But I had also mentioned that above.

 

[NW-Bound]

It will be a while yet till I have to worry about RMD, but I have been doing Roth conversion by transferring stocks.

As I have both an TIRA and a Roth IRA at Schwab, with just one click, the selected stocks jump from one account to the other.

 

[utrecht]

You often will not even have to sell and rebuy. I take RMDs in kind. I still get a 1099 that causes me to pay taxes, but there are no extra expenses or frictional losses.

Ha

Well, there you go. RMDs have nothing to do with whether or not you want to be 100% equities.

 

[FUEGO]

You often will not even have to sell and rebuy. I take RMDs in kind. I still get a 1099 that causes me to pay taxes, but there are no extra expenses or frictional losses.

So how does this work in practice? As simple as it sounds?

Assume the RMD is $100,000. Transfer in kind 500 shares of something like SPY etf at $200/sh for $100,000 total value.

Then you have $100k of taxable income in the form of an IRA "withdrawal"? Basis of the in kind transferred shares becomes what, the value when you transferred them out of the IRA?

One would have to pay the tax on the $100k by selling some shares or using cash on hand I assume.

I'm nowhere near RMDs but I'll be helping my parents out with this in another 8 years.

 

[FUEGO]

It will be a while yet till I have to worry about RMD, but I have been doing Roth conversion by transferring stocks.

As I have both an TIRA and a Roth IRA at Schwab, with just one click, the selected stocks jump from one account to the other.

That's good to know. I'll be firing up the Roth IRA conversions this year or in 2016, and this will make things a little easier.

 

[nun]

That's good to know. I'll be firing up the Roth IRA conversions this year or in 2016, and this will make things a little easier.

At Vanguard the conversion is as simple as selling in the IRA and buying in the ROTH

 

[FUEGO]

At Vanguard the conversion is as simple as selling in the IRA and buying in the ROTH

I'm at Vanguard and just tried to do a conversion (then cancelled on the last screen). Pretty cool how simple it is.

 

[audreyh1]

So how does this work in practice? As simple as it sounds?

Assume the RMD is $100,000. Transfer in kind 500 shares of something like SPY etf at $200/sh for $100,000 total value.

Then you have $100k of taxable income in the form of an IRA "withdrawal"? Basis of the in kind transferred shares becomes what, the value when you transferred them out of the IRA?

One would have to pay the tax on the $100k by selling some shares or using cash on hand I assume.

I'm nowhere near RMDs but I'll be helping my parents out with this in another 8 years.

You have to work with a brokerage that can handle this.

The basis is set by the price of the security on the day you withdraw it.

Yes, you need to pay the taxes from other cash, or sell some securities or also withdraw cash to cover the taxes.

 

[NW-Bound]

At Schwab, if you do Roth conversion by selling in TIRA, transferring the proceed to Roth IRA, then buying, there will be fees as applicable for buying and selling.

Instead, you just earmark n shares of X stock to be transferred, or all of X stock or MF. You just keep selecting more stocks/MFs until you have enough in total dollar amount that you want to pay taxes on, which is based on the present values of these shares as if you sell and rebuy. They show you the running total as you keep adding. Then hit transfer.

There is no fee with the transfer-in-kind as above. I have not withdrawn from IRA into an after-tax account, but imagine it will be the same way.

Then, at tax time, you get a 1099 confirming the dollar amount to declare to Uncle Sam as income.

PS. I was shown the share values in real time quotes for stocks, and the last day closing NAV for MF shares as I did the Roth conversion. Just now, wonder if the official dollar value reported in 1099 was updated with share prices at market closing of that day for either MF or stocks. I did not write down the values to compare with the 1099 later to see if they changed by the small fluctuations of that trading day. This price change is small and not material, but I just now wonder out of curiosity what the IRS allows.

PPS. If one cuts really close to the ACA subsidy cliff, the above detail becomes important. I would not come that close to any cliff.

 

[FUEGO]

Thanks Audrey and NW Bound.

 

[papadad111]

One thought that came to mind as I read this thread -- perhaps asset allocation does not have to depend on retirement but rather is more just a function of time available to be in the market / a function of age.

Eg. The older someone is, the more likely to move away from equities. Irrespective if they are FIREd or not ...

30-40. 100 pct equity
40-45. 90 pct
45-50. 85 pct
50-55. 80 pct
55-60. 70 pct
60-70. 60 pct
70+. 50 pct


up to maybe age 70 after which a move back into equities may be reasonable with other annuitized income fully online from SS or Pensions etc.

Just a thought ...

 

[nun]

One thought that came to mind as I read this thread -- perhaps asset allocation does not have to depend on retirement but rather is more just a function of time available to be in the market / a function of age.

Eg. The older someone is, the more likely to move away from equities. Irrespective if they are FIREd or not ...

30-40. 100 pct equity
40-45. 90 pct
45-50. 85 pct
50-55. 80 pct
55-60. 70 pct
60-70. 60 pct
70+. 50 pct


up to maybe age 70 after which a move back into equities may be reasonable with other annuitized income fully online from SS or Pensions etc.

Just a thought ...

You could argue that once SS/pensions come on line you don't need to generate as much income from investments and so can reduce risk and move away from equites to more fixed income.

 

[Animorph]

PS. I was shown the share values in real time quotes for stocks, and the last day closing NAV for MF shares as I did the Roth conversion. Just now, wonder if the official dollar value reported in 1099 was updated with share prices at market closing of that day for either MF or stocks. I did not write down the values to compare with the 1099 later to see if they changed by the small fluctuations of that trading day. This price change is small and not material, but I just now wonder out of curiosity what the IRS allows.

For my Roth conversions at Fidelity (in-kind as you described) the 1099-R's were for prices at the end of the day.

One interesting thing I saw somewhere at Fidelity was that you could make the request online within about 2 hours of market close and get that day's closing prices. I haven't tried that.

 

[Running_Man]

Perhaps I am looking at this article wrong but are long term retirees here really counting on 7 percent real returns over 60 years? 10 percent nominal return and inflation fixed at only 3 percent per year. The reason that equities seem to be great over long periods is the assumption of massive returns for major periods of years that occurred in the past. Using 1900 data when social security and medical costs and federal reserve banks and index funds were not even in play yet as the basis for justifying a 100% asset allocation for a retirement portfolio is not sound in my judgement. It is the most likely way to massive wealth. If one was alive in 1908 and using the prior 115 years of data would have been interesting to see what portfolios would have been reccomended. At that point gold and silver were merely currency to be invested not an asset class. Inflation was flat over the period from 1800 to 1910.

This article also makes the same mathematical mistake many make in stating that a portfolio with 80% success is as good as one with 100% success because black swan chance = 80%. The results are multiplicative so that a 80% success becomes 64% success not 80% success. Anything under 67 percent is a 50/50 proposition that it will work out.

 

[nun]

Perhaps I am looking at this article wrong but are long term retirees here really counting on 7 percent real returns over 60 years? 10 percent nominal return and inflation fixed at only 3 percent per year. The reason that equities seem to be great over long periods is the assumption of massive returns for major periods of years that occurred in the past. Using 1900 data when social security and medical costs and federal reserve banks and index funds were not even in play yet as the basis for justifying a 100% asset allocation for a retirement portfolio is not sound in my judgement. It is the most likely way to massive wealth. If one was alive in 1908 and using the prior 115 years of data would have been interesting to see what portfolios would have been reccomended. At that point gold and silver were merely currency to be invested not an asset class. Inflation was flat over the period from 1800 to 1910.

This article also makes the same mathematical mistake many make in stating that a portfolio with 80% success is as good as one with 100% success because black swan chance = 80%. The results are multiplicative so that a 80% success becomes 64% success not 80% success. Anything under 67 percent is a 50/50 proposition that it will work out.

The problem with these mathematical models is they are constrained to use past market performance. We all know that "past performance does not.....etc etc" so many retirees will be conservative and put in inflation and return numbers that are lot more pessimistic to stress test their plan. I use 3% inflation and 4% return, thats 1% real return, as my worst case scenario.

 

[Fred123]

Perhaps I am looking at this article wrong but are long term retirees here really counting on 7 percent real returns over 60 years? 10 percent nominal return and inflation fixed at only 3 percent per year. The reason that equities seem to be great over long periods is the assumption of massive returns for major periods of years that occurred in the past. Using 1900 data when social security and medical costs and federal reserve banks and index funds were not even in play yet as the basis for justifying a 100% asset allocation for a retirement portfolio is not sound in my judgement. It is the most likely way to massive wealth. If one was alive in 1908 and using the prior 115 years of data would have been interesting to see what portfolios would have been reccomended. At that point gold and silver were merely currency to be invested not an asset class. Inflation was flat over the period from 1800 to 1910.

This article also makes the same mathematical mistake many make in stating that a portfolio with 80% success is as good as one with 100% success because black swan chance = 80%. The results are multiplicative so that a 80% success becomes 64% success not 80% success. Anything under 67 percent is a 50/50 proposition that it will work out.

There are many problems with this article -- too many to itemize. I actually laughed when I read the part about 80% success being as good as 100% because ... well, because something awful might happen in the future and if I say that 80% is the same as 100% then my numbers turn out the way I'd like.

BTW, ******** appears to have a serious MC bug. If you run the "success rate with various allocations" several times, the results are quite different. There should be a small difference, but these differences are huge. For the example in the original article (60 year retirement, 4% withdrawal rate) I got a success rate of 30% at 50% equities in one run and 60% in one run.

 

[daylatedollarshort]

Our current thinking is to live off less than (SS + pensions + hobby job income + 1% real + 1.5% portfolio drawdown). We bought a lot of individual TIPS over the years, some at over 2% real, so we think the 1% real return won't be too hard to achieve.

Even at a 0% real return, a 2.5% WR would last us 40 years.