Move from managed to self-directed investments

[pb4uski]

You seem to be savvy enough to DIY and save yourself 0.8% (or even 0.3%).

As you've noted, you'll want to transfer your taxable accounts in-kind so there are no tax consequences to moving your taxable account assets from your current FA, and then decide the way forward for your taxable account assets.

For tax-deferred, you can liquidate the investments in your current FA account, do a rollover to Vanguard (via a trustee-to-trustee transfer) and then invest the proceeds in VTI or similar and a fixed income ETF.

IF your AA includes international equity ETFs, then you want those in your taxable account.

I would suggest an online savings account for your $100k liquidity fund... they currently yield 0.4-0.5% and are FDIC insured. I have had DiscoverBank for years and they are pretty good... rarely the highest rate but usually in the hunt enough that it isn't worth switching for 10 bps and the service has beeen very good.

If you want more yield and are willing to take a little credit risk, you could check out GM RightNotes, Dominion Energy Reliability Investment Notes or Toyota IncomeDrive Notes... yielding 1.50%, 1.25% and 1.35%, respectively.

I wouldn't bother with VBIAX... just go with VTI and a fixed income ETF in your tax deferred account.

 

[OldShooter]

FWIW, I believe Schwab's threshold for "Pinnacle" class service is $1M of household account assets held there. There is a second level at the $10M point but I don't remember the name; accounts at this level are assigned to dedicated staff in New York.

We're Pinnacle and have a dedicated local rep. Also our customer service calls are routed (based on account number we key in) to a higher-capability support staff. It's not a big deal but both benefits are nice to have.

I'm sure Fido has something similar.

 

[RetiredHappy]

Thank you everyone for the tremendous information. I have learned alot from all of you. In fact, our thinking of moving away from managed portfolio has been triggered by this forum. I am sharing this thread with my husband so that he gets the same information/shared wisdom.

 

[RetiredHappy]

A question regarding dividends. If I do not re-invest dividends and they are large enough to meet additional cash or emergency needs, would that substitute the need for setting aside cash reserves so that we are not forced to sell in a down market?

 

[pb4uski]

If they are large enough and don't get cut in a recession, then yes.

Most of us do not reinvest dividends in taxable accounts if we are at th same time relying on taxable account money for spending... why reinvest to just later take it out?... doesn't make sense. I had my taxable account dividends automatically sent to my checking account.

 

[RetiredHappy]

If they are large enough and don't get cut in a recession, then yes.

Most of us do not reinvest dividends in taxable accounts if we are at th same time relying on taxable account money for spending... why reinvest to just later take it out?... doesn't make sense. I had my taxable account dividends automatically sent to my checking account.

Thank you so much! We told the Vanguard FA yesterday that we do not want to re-invest dividends and he said they could not do that. Under managed service, all dividends will be re-invested. That was one of the deal breakers for us.

 

[MichaelB]

I’m not sure an expected future dividend is a reasonable substitute for an emergency fund. The emergency fund needs to be available on demand and guaranteed.

It’s reasonable to expect a dividend to fund some of the annual budget, but there is no guarantee, and if the dividend is suddenly unavailable, it’s pretty certain the stock price has fallen as well.

 

[RetiredHappy]

I’m not sure an expected future dividend is a reasonable substitute for an emergency fund. The emergency fund needs to be available on demand and guaranteed.

It’s reasonable to expect a dividend to fund some of the annual budget, but there is no guarantee, and if the dividend is suddenly unavailable, it’s pretty certain the stock price has fallen as well.

Our plan is to just let dividends sit in the Vanguard taxable accounts and accumulate through the years until it is too much and then we will re-invest or buy a Ferrari. IRA accounts where we need to make RMD withdrawals are the only ones which we will have a gap between dividends and RMD amount. We will probably ensure we have about 100K+ cash sitting in the account all the time. Our income needs will be fully met between 4 years to 7 years from now, without necessary additional withdrawals from taxable accounts. Our total withdrawal rate is less than 2% for our retirement.

 

[mrfeh]

A question regarding dividends. If I do not re-invest dividends and they are large enough to meet additional cash or emergency needs, would that substitute the need for setting aside cash reserves so that we are not forced to sell in a down market?

Dividends are merely a portion of total return. I don't see how they relate to having cash reserves.

If you hold equity index funds and the dividends (roughly 2% these days) are enough to cover your annual expenses, then you've got way more money than you'll ever need.

 

[RetiredHappy]

Dividends are merely a portion of total return. I don't see how they relate to having cash reserves.

If you hold equity index funds and the dividends (roughly 2% these days) are enough to cover your annual expenses, then you've got way more money than you'll ever need.

Yes, we have more than we need but just withdrawing dividends from taxable accounts over the next few years will tide us over our gap until I turn 65. After that we can just leave the dividends as cash reserves until we build enough of it and then we will reinvest again. IRA is a different story as the withdrawal percentage is higher to meet RMD requirement.

 

[mrfeh]

Yes, we have more than we need but just withdrawing dividends from taxable accounts over the next few years will tie us over our gap until I turn 65. After that we can just leave the dividends as cash reserves until we build enough of it and then we will reinvest again. IRA is a different story as the withdrawal percentage is higher to meet RMD requirement.

As others have said, simply don't re-invest them. Then use the funds for whatever makes sense (expenses, rebalancing, etc).

 

[Scuba]

It sounds like with your total assets, being over $1M, you can get Fidelity Private Client services.
Private Client is free advisor, but the advisor won't give you specific investments like your fee based guy does. The advisor will give guidance to help with planning and general investments, but ultimately as a self directed you make the final decisions and execution of trades or withdrawals. The fidelity advisor can help you transfer funds from your current fee based advisor. Fidelity doesn't charge for the advisor, they gain by getting your money under their umbrella, and especially if you invest in Fidelity mutual funds or ETFs. Fidelity has many good low cost funds, some even zero fees.
Another advantage to Fidelity is they have more physical locations than some others. A lot if people also like Fidelity's website better.

This is the approach we take and we’ve been very happy with our free FA. You can also hold Vanguard funds and ETF’s in your Fidelity account if you like. We have several Vanguard ETF’s in our taxable account.

We like to keep about 3 years of spending needs in cash or relatively safe fixed income, and are fine with the remainder being in equities. We’ve been retired almost 5 years and this has worked well for us so far. One caveat is that we haven’t been through an extended bear market yet since retiring, but we have some income sources we could turn on - a pension and SS - if we didn’t want to withdraw assets in a declining market (similar to your annuities).

If your equities took a serious hit in value, would you be comfortable holding them until valuations increased? If so, then I think your equity allocation is fine. If you’d want to sell on a big decline, then perhaps you should reduce your equity allocation to a 70/30 or 60/40 allocation and you could sleep better at night, albeit you’d likely be giving up some growth.

 

[Badger]

Thank you so much! We told the Vanguard FA yesterday that we do not want to re-invest dividends and he said they could not do that. Under managed service, all dividends will be re-invested. That was one of the deal breakers for us.

We manage our own investments and we both use Vanguard for tIRA, Roth, and a taxable cash account. We don't reinvest dividends but have them swept into a cash account within the tIRA account. The tIRA cash is then used for automatic RMD each year and moved to the taxable account.
I don't know why your investments with Vanguard should be any different.



Cheers!

 

[TheWizard]

I’m not sure an expected future dividend is a reasonable substitute for an emergency fund. The emergency fund needs to be available on demand and guaranteed.

It’s reasonable to expect a dividend to fund some of the annual budget, but there is no guarantee, and if the dividend is suddenly unavailable, it’s pretty certain the stock price has fallen as well.

I completely agree on what constitutes a proper Emergency Fund.

And the most significant emergency folks should be targeting is Job Loss and the resulting loss of most income for a while.
But job loss isn't an issue for Retired Folks.

So, with decent insurance coverage, along with a modest bank account balance, Retired Folks no longer need an E Fund...

 

[OldShooter]

For us, automatic reinvestment in a tIRA is a no-brainer. Those dollars are no different taxwise or any other way than the dollars invested we in other assets. I couldn't tell you how much our dividends are or even what month they get paid. And I don't care.

When we need cash, we sell tactically-chosen assets in the tIRA. If that sale involves assets that were bought with dividends last week, so what?

In a taxable account it is different because each dividend reinvestment results in a lot with a different tax basis. Not a big deal to fool with when selling from the account, but IMO an unnecessary complication.

 

[TheWizard]

In a taxable account it is different because each dividend reinvestment results in a lot with a different tax basis. Not a big deal to fool with when selling from the account, but IMO an unnecessary complication.

Right.
So what I do is have taxable account dividends go to my settlement fund. And then I typically put additional new money in there as well and do a purchase or limit order of whichever fund strikes my fancy -- one good sized lot...

 

[RetiredHappy]

I completely agree on what constitutes a proper Emergency Fund.

And the most significant emergency folks should be targeting is Job Loss and the resulting loss of most income for a while.
But job loss isn't an issue for Retired Folks.

So, with decent insurance coverage, along with a modest bank account balance, Retired Folks no longer need an E Fund...

Well said. For us, I should have better phrased it. Instead of Emergency Funds, maybe I should have used something like unplanned expenses fund, and in our case it is typically for discretionary spending. We are well funded by various income sources for our annual budget, although there is a small shortfall until I reach 65.

 

[RetiredHappy]

In a taxable account it is different because each dividend reinvestment results in a lot with a different tax basis. Not a big deal to fool with when selling from the account, but IMO an unnecessary complication.

Don't the brokerage firms automatically keep track of cost basis?

 

[TheWizard]

Well said. For us, I should have better phrased it. Instead of Emergency Funds, maybe I should have used something like unplanned expenses fund, and in our case it is typically for discretionary spending. We are well funded by various income sources for our annual budget, although there is a small shortfall until I reach 65.

I've been doing something similar in retirement, aiming to keep my checking account balance around $10,000 or so, which is quite higher than in my bad old working days.
This has proven adequate to fund past and future travel expenses on top of other expenses.

Excess income beyond that $10k gets tossed into my taxable investment account...

 

[Whisper66]

Don't the brokerage firms automatically keep track of cost basis?

They are required by law to track cost basis for mutual funds bought after 1/1/12 and stocks after 1/1/11.
You can direct them to keep track of the cost of each individual lot purchased or just keep track of the average cost. The former is done if you wish to choose which lots to sell to better control how much tax you incur with each sale.

 

[Escapevelocity]

OP,, I’m a big advocate of DIY but at your level of wealth I would be more or at least equally concerned with the possibility of declining faculties over the years and less about paying 80 basis points to a trusted FA.

 

[RetiredHappy]

OP,, I’m a big advocate of DIY but at your level of wealth I would be more or at least equally concerned with the possibility of declining faculties over the years and less about paying 80 basis points to a trusted FA.

It is a good point. I know what you are saying but since there are 2 of us, if mental capacity of one declines, I figure the other can go back to some sort of auto pilot managed portfoilio before it becomes an issue. I think the whole investment management fee model is changing quickly. The younger generation does not want to go with a fee-based model. The older generation who use this service is reducing, either dying off or deciding to go with cheaper alternatives.

 

[Escapevelocity]

It is a good point. I know what you are saying but since there are 2 of us, if mental capacity of one declines, I figure the other can go back to some sort of auto pilot managed portfoilio before it becomes an issue. I think the whole investment management fee model is changing quickly. The younger generation does not want to go with a fee-based model. The older generation who use this service is reducing, either dying off or deciding to go with cheaper alternatives.

I’m retiring at age 55 next Spring and I’m working a much tighter plan in terms of withdrawal rate so DIY is more of a necessity to optimize returns. My point with your situation is that you can afford a higher level of care so to speak. The extra return on those 80 bps won’t make much difference in terms of outcomes.

 

[Mansderm]

Many of you have posted the reduced cost of managing your own investments. We have our investments managed since 2008. The fees are getting so large that it is hard to ignore even though we pay "only" 0.8%. The fees are enough to support a person's living expenses! Remember the advertisement, we make more when your investments grow more? Well, they have grown to a level that we no longer feel that we should continue to spend the money.

We have been thinking of moving to a lower cost investment management fee company like Vanguard. We also spent some time to research Vanguard ETFs which we are liking what we see.

We interviewed a Vanguard FA today and we definitely came away with why the hell do we want Vanguard FA to manage our portfolio. At this point we are leaning towards the self-directed route unless our current wealth management company comes back with much reduced fees.

Anyway, here is a rough investment strategy that we are thinking of going with. Our understanding of various ETFs is still very elementary at this point and hence the question.

Currently we have annuities which make up 18% of our investments. We consider those as part of fixed income. We need a total of about $100K of funds from our taxable investments to cover the next 7 years until all income streams kick in. Besides the $100K, our income needs will be met by SS, annuities and RMD.

We have equal amount of taxable investments and tax deferred investments, not counting the annuities. We are at the 22% to 24% tax bracket.

We are thinking of going with 85% to 90% equities for both taxable and tax deferred investments, with the remainder in a balanced fund like VBIAX and $100K in VTIP or something like that which acts like cash. We need help in understanding how VTIP works. We figure that $100K in VTIP in taxable account will cover the next 7 years, plus always funding it at about $100K to cover emergency needs. In tax deferred accounts, we will turn off dividend reinvesting and also keep another $100K in VTIP (2 to 3 years of withdrawal) to make up for the difference in RMD and dividends.

I need veterans here to help critique our strategy.

Thanks!

I've been using Vanguard FA for years. Not sure who you talked to, but it does not sound right. They manage 1/2 of my assets...mainly my ROTH AND TRADITIONAL IRA. I manage the other half, mainly taxable accounts.Since I'm not a pro, they should do as well or better than I do. I'm more "aggressive" in that I manage individual stocks, they manage Vanguard EFTs. They concentrate on asset allocation, maintaining my net worth, some tax advice, planning ahead. But since I've retired in 2017, I've been able to get by on SS, dividends from my stocks, and some stock sales and have continued to increase my net worth...the market has been good. I have never had a problem getting hold of my advisor when I had a question. We do have scheduled meetings quarterly.

Vanguard does assign an advisor or contact person if you have self managed accounts, so I actually have 2, but I just usually ask the one that is paid, I've never contacted the other one.

So you do not have to have everything managed. All your Vanguard investments are on one screen that the advisor can see whether he manages them or not. You can also list other non-Vanguard assets in a separate area that they can also consider, ie. I have a Fidelity HSA and some savings bonds.

My main reason for having managed accounts is protection. If I start getting senile or have someone pressuring me for money, he knows to start investigating if suddenly I'm wanting to cash out or move big sums. He knows my long term plans, how much I'm budgeted for each year and that I am not considering moving the money. With the quarterly meetings, he knows what my kids are doing, and asks about potential big expenses. I don't anticipate needing what he manages, but will have them do my RMD, when I'm that age. I'm not doing any further ROTH conversions. This may sound like a crazy reason to have an advisor, but perhaps I watch too much American Greed on TV.

Plus, all other financial planners I tried to work with always wanted to take over my stocks and I always said no. It started as a "fun group" of DRIPS when I first started investing and basically has become my own mutual fund. I recently discussed gifting some of my stocks to my son, who also has a Vanguard account. My advisor said just call and we will get both advisors on phone and set up the gift transfer. I have found them very easy to work with. One huge feat they helped with was getting all my individual DRIP stocks transfered to a Vanguard brokerage account. So we can both follow how I'm managing.

 

[RetiredHappy]

I've been using Vanguard FA for years. Not sure who you talked to, but it does not sound right. They manage 1/2 of my assets...mainly my ROTH AND TRADITIONAL IRA. I manage the other half, mainly taxable accounts.Since I'm not a pro, they should do as well or better than I do. I'm more "aggressive" in that I manage individual stocks, they manage Vanguard EFTs. They concentrate on asset allocation, maintaining my net worth, some tax advice, planning ahead. But since I've retired in 2017, I've been able to get by on SS, dividends from my stocks, and some stock sales and have continued to increase my net worth...the market has been good. I have never had a problem getting hold of my advisor when I had a question. We do have scheduled meetings quarterly.

Vanguard does assign an advisor or contact person if you have self managed accounts, so I actually have 2, but I just usually ask the one that is paid, I've never contacted the other one.

So you do not have to have everything managed. All your Vanguard investments are on one screen that the advisor can see whether he manages them or not. You can also list other non-Vanguard assets in a separate area that they can also consider, ie. I have a Fidelity HSA and some savings bonds.

My main reason for having managed accounts is protection. If I start getting senile or have someone pressuring me for money, he knows to start investigating if suddenly I'm wanting to cash out or move big sums. He knows my long term plans, how much I'm budgeted for each year and that I am not considering moving the money. With the quarterly meetings, he knows what my kids are doing, and asks about potential big expenses. I don't anticipate needing what he manages, but will have them do my RMD, when I'm that age. I'm not doing any further ROTH conversions. This may sound like a crazy reason to have an advisor, but perhaps I watch too much American Greed on TV.

Plus, all other financial planners I tried to work with always wanted to take over my stocks and I always said no. It started as a "fun group" of DRIPS when I first started investing and basically has become my own mutual fund. I recently discussed gifting some of my stocks to my son, who also has a Vanguard account. My advisor said just call and we will get both advisors on phone and set up the gift transfer. I have found them very easy to work with. One huge feat they helped with was getting all my individual DRIP stocks transfered to a Vanguard brokerage account. So we can both follow how I'm managing.

Thank you for sharing your experience with Vanguard. We have spoken to several reps on the phone and they are telling me something different for sure. We will start the ball rolling tomorrow with transfers and see where it takes us.