Personal Investments • Fired AUM advisor - now what? (portfolio questions)

Hi folks,

First I’d like to thank the members of this forum for all the great advice you’ve given people. Your generosity with your time and knowledge is inspiring. You’ve been a great resource for me that’s finally given me the confidence me to fire our AUM advisor and move all my wife’s and my retirement investments to Fidelity, where we intend to invest it in a 3-fund portfolio. My questions are about where to hold stock vs bond funds, and what strategy to use to avoid SOR risk for our anticipated retirement in about 8 years.

Emergency funds: $200k

Debt and other liabilities
Mortgage (3.25%, 15 years, 10 years remaining): $225k
Postgraduate education expense for child graduating college this year (after using up 529 plan funds): $150k in near-future expenses
Capital gains tax from liquidating individual stocks in current taxable portfolio: $50k

Tax filing status and marginal rate: married, 24% federal, 6% state (NY)

Ages: both 54

Desired AA: 70% stocks, 30% bonds; 20% of stocks international

Retirement portfolio
(I’m not describing asset allocations because we intend to liquidate all taxable and IRA positions and buy VTI, VXUS and BND in taxable and IRA accounts)

Current total portfolio (excluding 529 plan): $3m
Near-future expenses (education, capital gains taxes): $200k
Net amount available to invest: $2.8m

Taxable: $1.1m

Spouse 1 tIRA: $290k
Spouse 2 tIRA: $350k
Inherited tIRA: $70k
Total tIRA: $710k

Roth IRA: $125k

Spouse 1 401k: $680k
FXAIX $275k Fidelity 500 Index (0.015% expense ratio)
FSPSX $170k Fidelity International Index (0.035%)
FSMAX $134k Fidelity Extended Market Index (0.035%)
FXNAX $101k Fidelity US Bond Index (0.025%)

Spouse 2 401k: $182k
BSPAX $60k iShares S&P 500 Index Fund (0.35%)
MDIHX $41k MFS International Diversification Fund (1.09%)
PTTAX $35k PIMCO Total Return Fund (0.83%)
JVMAX $19k John Hancock Funds Disciplined Value Mid Cap Fund (1.12%)
FSCDX $18k Fidelity Advisor® Small Cap Fund (1.32%)
FRINX $9k Fidelity Advisor® Real Estate Income Fund (0.96%)

Education savings for child now in college
529 plan: $125k

Contributions
Spouse 1 401k annual contribution: $42k (including employer match)
Spouse 2 401k annual contribution: $34k (including employer match)
529 plan annual contribution: $10k (for the next 4 years only)

Future social security, assuming we both retire at 62:
SS Strategy 1: One spouse claims at 62, the other at 70: $28k/year to age 70, $84k/year after, $56k/year after one spouse dies
SS Strategy 2: Both spouses claim at 70: $105k/year, $56k/year after one spouse dies
SS Strategy 3: Both spouses claim at 62: $60k/year, $33k/year after one spouse dies

Goals
1.Pay for child’s professional school and stop making 529 contributions
2.Retire in about 8 years (age 62) with at least $125k/year spending, not including taxes and pre-Medicare health insurance

Questions
These questions are interrelated and one can’t be answered without considering the others:

1.What to do with the 401K accounts?

1. Spouse 1 is already invested in low-cost index funds, but should the allocations across these change?
2. Spouse 2 has no low-cost investment options at all; the lowest cost fund is BSPAX (iShares 500 index fund), with an expense ratio of 0.35%. I’m thinking we should just allocate 100% of this account, including future contributions, to this fund. If we do that, we could increase the allocation of FSMAX (Fidelity Extended Market Index Fund) in Spouse 1’s 401k because FSMAX includes only stocks that aren’t in the S&P 500 index (which BSPAX tracks). But how much FSMAX for each dollar of BSPAX?

2.How to allocate VTI, VXUS and BND across taxable, tIRA and Roth IRA accounts? I’m thinking that the Roth IRA should be 100% stock because it would be the last account to be spent down. The tIRAs and Spouse 1’s 401k, which total $1.4m, could contain all the bonds ($850k) via BND and FXNAX, respectively, and the balance in stock index funds. But are there disadvantages to having no bonds at all in taxable?

3.What are the possible ways to minimize sequence-of-returns risk and bridge the years between retirement at 62 and getting full social security benefits at 70? I’m thinking I like Strategy 2 the best (both of us claim at 70) because $105k/year in an inflation-adjusted annuity gets us very close to the $125k/year after-tax minimum (in today’s dollars) I think we’d need. Basically we’d need maybe another $50k/year from investments, which should be pretty doable even after drawing down quite a bit to fund those 8 years without income – at $150k/year, that’s $1.2m in today’s dollars. The strategies I can think of to prepare for this are:

1. Maintain the 70/30 allocation in index stock/bond funds for the next 8 years with yearly rebalancing, then annually draw spending money from stock and/or bond funds in such a way that it rebalances the allocations. (For example, if the allocation is 72/28, withdraw more stock than bond so that it ends up at 70/30; if the allocation is 68/32, withdraw more bond than stock.) This way, we withdraw more stocks when they’ve gotten expensive relative to bonds, and less when they’re weak relative to bonds.
2. “Pre-fund” those 8 years now (or starting in 2 or 3 years) by, instead of buying all bond index funds, using some of the bond allocation to set up a bond ladder and/or a TIPS ladder. When we retire, spend the maturing bonds and adjust the asset allocation. Presumably, this means that if stocks have done well, the allocation will be considerably higher than 70% stock, and we sell those gains to buy more bonds. But in a really crummy year for stocks, we could have <70% stock even after cashing in $150k of bonds. We wouldn’t want to sell more bonds to buy stock because the whole point of the bond ladder was to provide a known, stable income in future years. So our asset allocation will favor bonds until the stock market recovers. Is this any better than strategy a?
3. Any other ideas?

4.Do any strategies for bridging the pre-social security years favor keeping more than 0% bonds in taxable?

Statistics: Posted by AavocadoArdvark — Sat Mar 16, 2024 7:20 am — Replies 0 — Views 65

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