I am retired and 100% stocks, need help

[Digger1000]

I retired 3.4 years ago at age 51 on April 3,2017 and am 99% in stock mutual funds. If this is the wrong forum move it, I thought those retired would be the biggest help.

Long post ahead.

I guess my 2 questions will mainly involve:
1. Taxes
2. Bonds. I know nothing about bonds.


On the taxes part, I have a question on long term capital gains loss carryover and capital gains. I currently have an $80,000 long term capital gains loss that I get to deduct $3,000 every year(been doing so since 2000). I have never had to sell any shares yet(I lived on dividends and a small cash amount I had when I retired) so I have a question, if say for example I sell something that has a $20,000 capital gain would I then deduct that from the 80k and then have 60k to carry over the next year? I would pay $0 taxes on the 20k capital gains that I sold in that year? I actually sold a few thousand dollars of capital gains in the past 2 months so I have never had to report capital gains yet on a tax return yet.

I always thought I would remain 100%(98% or more) in stocks even in retirement. I had thought I would work till 65 as I loved my work. But the politics and people made for such a toxic environment that it was impossible for me to even consider continuing to work. 4 months before I quit I did some research for the 1st time on early retirement and ACA. I saw how doable it was for me to FIRE. Things got better for a short time at work so I waited for 4 months to retire when things took a worse than ever turn at work. I pulled the plug and I have been happier and happier each and everyday that I did so. Things have been easier than I thought they would be and I thought things would go well but not this well.

I am a bachelor. I dont have a lot of money like some people on here do. I still am under a million. I am very frugal. I have always had the philosophy of invest aggressively and live very,very conservatively. So far in retirement the most I spent of my original retirement amount was 2.6% in year 1 when I moved out of state. The 2nd year was 2.1%. Year 3 was 2.5% as I had a very unexpected hernia surgery. I drove 365 miles to have it done more inexpensively as I have an 8k deductible and $0 premium ACA health insurance. I paid for the surgery with my debit card.

What has made me start to think seriously about moving out of the stock market was my call to SS at the beginning of Feb. With $0 dollars earned for every year going forward my benefit at 62 would be the same amount I lived on in year 2 of my retirement. At age 70 the amount of SS alone would be very comfortable for me to live on. More than I am spending now. I was shocked. Once again that is with $0 earned in every year going forward. I have always planned on taking SS at age 70.

I'm up 41% net worth since retirement. I currently live on 1.6% of my current net worth. Thats why getting out could be attractive to me. I have always lived with the preparedness of the market tumbling 50-66%. So I have always lived bare bones. But if I could get out and find something with a 3% return I could live a little more comfortably. I have always approached stocks as putting all your chips in the middle of the table and willing to lose everything. Its happened to me before. In 2000. Went from 276k to 15k.

Since 2000 I have been 98% S&P 500 and 1% semiconducters. Going down over 30% earlier this year didnt faze me or worry me. Didnt change my life 1 iota. I get worried when things are going well. In times like January I always pull up old articles on the worst bear markets in history to prepare myself for whats ahead and realize that I have half as much money as I think I have. Its all on paper.



I have been in the stock market since 1992. But I know nothing about bonds or how they work. What is most confusing is they talk about rates being low and how that is bad for bonds but dont they mean treasuries? Are low rates good or bad for bonds?



Is the Vanguard Total Bond Index the way to go? They show the past results are 3.84% the last 10 years and 4.5% since Nov 2001.

Is 3% average return a realistic expectation going forward for bonds? Are there better bond funds than vbtlx? I see other vanguard bond funds with better returns over the past 10 years.

So how do dividends work? Is it monthly from looking at vbtlx online? I'm use to quarterly with S&P 500. How much is that dividend in vbtlx? Is it a little over 2 cents per share each month from reading it? Sorry I'm so dense.

Currently I have:
23.67% 403b/ira
16.6% roth ira
58.6% taxable
1% cash

Obviously I can take the 403b/ira portion out of the market no problem. I would expect I would want to leave the roth ira in the market. I currently convert $15,400 annually and I still pay $0 federal taxes. Also $0 in state taxes in Ohio since they dont tax poor people like me.

My type personality is all or nothing. If I were to make the decision to get out of the market I would prefer to get out completely. That of course is not possible when taking taxes into consideration. Its important to make sure I understand my longterm capital gains loss carryover when I sell taxable shares going forward. If I'm understanding my long term capital gains loss correctly I believe I could sell enough to get to 37% bonds pretty comfortably including the ira portion. I could get to 40% bonds if I pushed it to the edge of my long term loss. But I have always used the loss to add another $3000 dollars to my roth conversion every year. Plus my LT loss can continue to give my $0 gain when I start having to sell to live on going forward as the state would tax me some if I eventually have to have actual capital gains(remember I had my 1st sell this summer). Eventually I want to move to Tennessee. No state taxes period. I want to live in East Tennessee anyway. Snake fears have kept me from doing so thus far. Also I am going to keep things where I pay $0 health insurance premiums. That will not be a problem for years if ACA keeps going.

Another question. So for federal taxes you can have $51,000 in capital gains and dividends without paying taxes right? Thats as a single $12,400 deductible in 2020. Thats a question for years down the road if I'm living in a no tax state and trying to keep moving money out of the market.

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

Is the bond return in this link the same as the vtblx? Or is there a different bond fund that it is comparable too?

Please give me recommendations for bond funds. And what the expectations,etc of investing in bonds/bond funds might be. Or any other investment ideas outside of bonds if you think they would be better.

Sorry for the terrible rambling. It was even harder than I thought. I probably forgot some questions too.

 

[pb4uski]

It seems that you are aware that if you had no other income that you could have as much as $52,400 of long-term capital gains and qualified dividends and still be in the 0% preferenced income tax bracket.... and actually $55,400 in your case since you have that $3,000/year loss carryover deduction. I also see that you have been doing Roth conversions.

For the moment I'll assume that you have no sources of income other than qualified dividends. It is a no-brainer to do Roth conversions for at least the standard deduction and annual loss carryover. If you did a Roth conversion for $15,400 in 2020 the $12,400 standard deduction and your $3,000 loss carryoverwould offset it and your ordinary income from the Roth conversion would be zero.

If you manage your total taxable income to be $40,000 (the top of the 0% preferenced tax bracket for 2020), you could do sales of stock for gains equal to $40,000 less your qualified dividends and still pay zero tax. So you should do at least that amount of gains even if you don't need the money, because you can always take the proceeds that you don't need in the next year and just rebuy the same stock. Wash sale rules apply to losses but not to gains.

Do you know how much you have in unrealized gains in your taxable accounts?

 

[pb4uski]

Fixed income is a really difficult space right now. It would seem that interest rates have nowhere to go but up since they are currently near zero and the Fed has said that it doesn't want to go negative. Bond yields are pathetic with the benchmark 10-year UST yielding about 1/2%.

At this writing the best thing that I know of is online savings account that are fully FDIC insured... no credit or interest rate risk, highly liquid and they yield 0.8% to 1.0%. I personally am hesitant of corporate bonds due to credit and interest rate risk.

Another thing to keep in mind when you are looking at bond returns is that there are two main components.... interest and change in value.... the interest income component is stable but the change in value component can be volatile. below is the change for BND.

Of the 8.6% total return for BND in 2019, about 2.8% was from interest income, 5.6% was from changes in value and the rest was other stuff.

 

[Digger1000]

It seems that you are aware that if you had no other income that you could have as much as $52,400 of long-term capital gains and qualified dividends and still be in the 0% preferenced income tax bracket.... and actually $55,400 in your case since you have that $3,000/year loss carryover deduction. I also see that you have been doing Roth conversions.

For the moment I'll assume that you have no sources of income other than qualified dividends. It is a no-brainer to do Roth conversions for at least the standard deduction and annual loss carryover. If you did a Roth conversion for $15,400 in 2020 the $12,400 standard deduction and your $3,000 loss carryoverwould offset it and your ordinary income from the Roth conversion would be zero.

If you manage your total taxable income to be $40,000 (the top of the 0% preferenced tax bracket for 2020), you could do sales of stock for gains equal to $40,000 less your qualified dividends and still pay zero tax. So you should do at least that amount of gains even if you don't need the money, because you can always take the proceeds that you don't need in the next year and just rebuy the same stock. Wash sale rules apply to losses but not to gains.

Do you know how much you have in unrealized gains in your taxable accounts?

38.2% of the taxable accounts is my cost basis. 61.8% is gains.

 

[davebarnes]

I have a different thought.
Take your annual expenses and multiply by the numbers of years that you want to have as safety cushion if the stock market craters.
For example, $50K * 4 years. So, change $200K of stocks into short-term bonds.

We have 23% of our portfolio in short-term bonds which is 7+ years of withdrawals. I sleep well at night know that we can survive 7 years of a terrible stock market.

 

[RunningBum]

Regarding taxes and your cap loss carry over, you first use it against all gains you have for the year. If there is still a loss available, you subtract $3,000 from your regular income. So in that case where you have $20K in gains, those are canceled out by your carryover, plus another $3K is used, leaving you with 80-20-3=$57K carried over to the next year.

Without reading it in detail it seems that between you and pb4 you have a good plan for using tax space for Roth conversions, 0% cap gains, and ACA subsidies.

I don't have a good answer to tell you about fixed income. It's complicated right now, as pb4 says. I use a combination of bond funds, TIPS, online savings accounts, and a CD ladder which I started in higher interest days. I would not tie up money in a CD very long right now with such low rates.

One thing that concerns me is this statement:

My type personality is all or nothing. If I were to make the decision to get out of the market I would prefer to get out completely.

I would strongly recommend a diversified portfolio. You might chose something like 50% stocks, 50% bonds+TIPS+cash. It may take you some time to get there without incurring cap gains, but transactions in your IRA accounts are not taxable events. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement is a good read on which types of investments go in which types of accounts for best tax management.

 

[Digger1000]

Regarding taxes and your cap loss carry over, you first use it against all gains you have for the year. If there is still a loss available, you subtract $3,000 from your regular income. So in that case where you have $20K in gains, those are canceled out by your carryover, plus another $3K is used, leaving you with 80-20-3=$57K carried over to the next year.

Without reading it in detail it seems that between you and pb4 you have a good plan for using tax space for Roth conversions, 0% cap gains, and ACA subsidies.

I don't have a good answer to tell you about fixed income. It's complicated right now, as pb4 says. I use a combination of bond funds, TIPS, online savings accounts, and a CD ladder which I started in higher interest days. I would not tie up money in a CD very long right now with such low rates.

One thing that concerns me is this statement:


I would strongly recommend a diversified portfolio. You might chose something like 50% stocks, 50% bonds+TIPS+cash. It may take you some time to get there without incurring cap gains, but transactions in your IRA accounts are not taxable events. https://www.bogleheads.org/wiki/Tax-efficient_fund_placement is a good read on which types of investments go in which types of accounts for best tax management.

Thank you for the info on the carryover. I wanted to make sure I was understanding it right as that is a hugely important part of going forward.

I may just stay in the market for now. Dont fight the fed I guess. I will consider taking the 403b and ira out. And I can always take portions of the taxable out as we go. I imagine I'll leave everything where it is since I have no earthly idea how bonds work anyway. If someone could explain bonds to me that would be great.

If the market goes down 67% that would mean I would be living on 4.8% of that current value as opposed to living on 1.6% of my current amount.

 

[Retch The Grate]

If the market goes down 67% that would mean I would be living on 4.8% of that current value as opposed to living on 1.6% of my current amount.

That sort of buffer really means stock volatility isn't a problem for you. If the market goes down 67% it will be at valuations that traditionally support a much higher withdrawal rate, so if you are temporarily at 4.8% for a year or two at the bottom of the market, you are doing just fine.

 

[mrWinter]

Run some scenarios through firecalc to see how holding equities vs bonds performs on average over the long haul. On average equities return more over the long term. Bonds have lower volatility, but volatility does not equal risk. The real risk is earning 3% less over decades. My opinion.



I was an anti-bond for long-term investments person before covid. Now with interest rates what they are and risk of bankruptcies abounding I don't want to touch them with a 10 foot pole. My retirement accounts are 100% equity and I intend to keep it that way, I have a short term pile for house down payment in cash and money market now. I'm just a kid on this forum though so take my opinion with a grain of salt. Also I'm in savings mode, not spending mode which changes the viewpoint, but my opinion today is that if I were spending I'd still ride equities 100%.

 

[pb4uski]

Not sure if you're seen this but it is FIRECalc success ratios at various AAs. In short, success is pretty similar from 50/50 to 90/10... but terminal values are significantly different.

50/50:

FIRECalc looked at the 120 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-167,964 to $3,108,798, with an average at the end of $862,708. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.

For 90/10:

FIRECalc looked at the 120 possible 30 year periods in the available data, starting with a portfolio of $750,000 and spending your specified amounts each year thereafter.

Here is how your portfolio would have fared in each of the 120 cycles. The lowest and highest portfolio balance at the end of your retirement was $-507,733 to $5,193,687, with an average at the end of $1,780,352. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)

For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 95.0%.