Here at MFO I often read a thread devoted to, "What are you buying/selling now?". More often than not lately I have been asking myself, "What should I sell now?". I believe I have officially moved from the "Accumulation Stage of life (buying)" to the "Distribution Stage of life (selling)".
During the "Accumulation Stage of life"; income savings, rather than investment returns, played a bigger role in how much I accumulated. Likewise, during the "Distribution Stage of life", I believe my spending will have a much bigger impact on my preservation of wealth.
Managing how much we spend, what part of our portfolio we spend first, at what age, and from which accounts are all complicated further by our health and mental capacity.
Here is an article by Raymond James that is a good primer on distributions decisions:
"How will you preserve the retirement funds you have accumulated to provide the income stream you will need for your future?"Link:
https://raymondjames.com/wealth-management/advice-products-and-services/financial-and-retirement-planning/individual-retirement-accounts-iras/making-the-right-distribution-decisionI have asked the question before, but much like the thread mentioned above, I wondered how others have approached this stage of life?
Comments
Derf
Here is what I do. I hope, in some way, it is helpful.
For me, now retired and in the distribution phase of investing I found it beneficial to take all mutual fund distributions in cash and let these build in the demand cash sleeve of my portfolio. In this way, when money is needed it can easily be withdrawn or held until needed for investment purposes. Thus far, in the close to three years I've now been retired I've not had to sell any securties to meet distribution needs. And, I generally do not take more than a sum equal to one half of my five year average return. In this way the portfolio continues to grow in its value over time.
If you are faced with selling securities to meet your distribution needs then I'd sell assets in a taxable account which has the least capital gains attached to them; and, I'd also be keeping in mind your asset allocation so that it does not become unbalanced. This is one of the things I like about the sleeve management system as it helps to see the overall investment landscape of the combined portfolios.
If you feel it helpful I'll gladly, again, post my sleeve management system as it details a lot about how it funds the cash sleeve and also a good bit on managing a portfolio geared towards distribution.
Old_Skeet
Sleeve Management System
Now being in retirement here is a brief description of my sleeve management system which I organized to help better manage the investments held within mine & my wife’s combined portfolios. Currently, the master portfolio is comprised of two taxable accounts, two self directed ira accounts, a health savings account plus two bank accounts. With this I came up with four investment areas. They are a cash area which consist of two sleeves … an investment cash sleeve and a demand cash sleeve. The next area is the income area which consists of two sleeves … a fixed income sleeve and a hybrid income sleeve. Then there is the growth & income area which has more risk associated with it than the income area and it consist of four sleeves … a global equity sleeve, a global hybrid sleeve, a domestic equity sleeve and a domestic hybrid sleeve. An finally there is the growth area, where the most risk in the portfolio is found and it consist of five sleeves … a global sleeve, a large/mid cap sleeve, a small/mid cap sleeve, a specialty/theme sleeve plus a special investment (spiff) sleeve. Each sleeve (in most cases) consists of three to six funds (one with less, a few with more) with the size and the weight of each sleeve can easily be adjusted, from time-to-time, by adjusting the number of funds and amounts held. By using the sleeve system one can get a better picture of their overall investment landscape and weightings by sleeve and area. In addition, I have found it beneficial to Xray each fund, each sleeve, each investment area, and the portfolio as a whole quarterly. Again, weightings can be adjusted form time-to-time as to how I might be reading the markets along with using an adaptive allocation matrix as an aid to help set the stock allocation weighting. All funds pay their distributions to the cash area of the portfolio with the exception being those in my health savings accounts where reinvestment occurs. With the other accounts paying to the cash area builds the cash area of the portfolio to meet the portfolio’s monthly cash disbursement amount (if necessary) with the residual being left for new investment opportunity. Generally, in any one year, I take no more than a sum equal to one half of my portfolio’s average five year return. In this way, principal builds over time. In addition, most buy/sell trades settle from, or to, the cash area with some nav exchanges between funds taking place.
Last revised: 01/01/2017 Master Portfolio
Here is how I have my asset allocation broken out in percent ranges, by area. My neutral allocation weightings are cash 20%, income 30%, growth & income 35%, growth & other assets 15%. I do an Instant Xray analysis on the portfolio quarterly (sometimes monthly) and make asset weighting adjustments as I feel warranted based upon my assessment of the market, my risk tolerance, cash needs, etc. Currently, according to Xray, I am about 20% in the cash area, 25% in the income area, 35% domestic stocks area, 15% foreign stocks area & 5% in the other asset area. In addition, I have the portfolio set up in Morningstar’s Portfolio Manager by sleeve and as a whole for easy monitoring plus I use the brokerage account statements and some other Morningstar reports as well.
Cash Area (Weighting Range 15% to 25% with neutral weighting being 20%)
Demand Cash Sleeve… (Cash Distribution Accrual & Future Investment Accrual)
Investment Cash Sleeve … (Savings & Time Deposits)
Income Area (Weighting Range 25% to 35% with neutral weighting being 30%) #15
Fixed Income Sleeve: CTFAX, FMTNX, GIFAX, LALDX, LBNDX, NEFZX, THIFX & TSIAX
Hybrid Income Sleeve: BAICX, CAPAX, DIFAX, FKINX, ISFAX, JNBAX & PGBAX
Growth & Income Area (Weighting Range 30% to 40% with neutral being 35%) #20
Global Equity Sleeve: CWGIX, DEQAX & EADIX
Global Hybrid Sleeve: CAIBX, TEQIX & TIBAX
Domestic Equity Sleeve: ANCFX, FDSAX, INUTX, NBHAX, SPQAX & SVAAX
Domestic Hybrid Sleeve: ABALX, AMECX, DDIAX, FBLAX, FRINX, HWIAX & LABFX
Growth Area (Weighting Range 10% to 20% with neutral weighting being 15%) #13
Global Sleeve: ANWPX, SMCWX & THOAX
Large/Mid Cap Sleeve: AGTHX, BWLAX & SPECX
Small/Mid Cap Sleeve: PCVAX, PMDAX & TSVAX
Specialty & Theme Sleeve: LPEFX, PGUAX & NEWFX
Spiff Sleeve: VADAX
Total Number of Mutual Fund Positions = 48
Roth: In most cases, let it be the last account I "raid".
T.IRAs: Consider Roth conversion strategies explained further in this article:
paytaxeslater.com/rothira_uncertainty.php.
If not working (no earned income) consider distributing T.IRA dollar that then fund an H.S.A. This can be helpful for any "retiree" up until age 65. @msf has argued correctly that an H.S.A can be funded with non-earned income. My point here is to tap into T. IRA dollars as the funding source especially for those who are finding it already difficult to fund their H.S.A.. Think of it as a tax free conversion from T.IRA to H.S.A.
T.IRA & R.M.D: At age 70.5 Required Minimum Distributions begin. Obviously, these distributions may not be needed for income, but it will need to be "sold" so that taxes can be collected. Have a strategy as to where these dollars go if not used for income. If these dollars now reside in taxable accounts be sure you hold tax efficient investments in those taxable accounts.
H.S.A: One type of retirement account that has some special considerations is the Health Savings Account. Those that do have a Health Savings Account need to manage this account with a different set of glasses on (reimbursable by the way). Distributions are tax free for Health related expenses at any age. Personal record keeping (for out of pocket medical expenses using non H.S.A dollars) can provide a method of allowing an H.S.A to grow. An H.S.A can bridge two lives (you and your spouse if inherited) reimbursing both spouses tax free. A non - spouse inherits an H.S.A as a taxable event so if you are widowed, divorced or otherwise single reimburse yourself for medical expenses long before your dying breath (sorry a little morbid).
now in distribution and also RMD stages (my wife hits the latter in 2y), I think and calculate along the same lines as you.
I have Roth and trad (rollover) and brokerage and SS.
Brokerage has currently unusable losses (meaning there are significant prior ones carried over, and little gain).
I already sold some things in rollover to have a few years of cash to join w SS stream.
I will do more of this over time and as the brokerage hopefully recovers.
Roth sales are way down the road.
(Everything is fully auto-reinvested.)
In my particular case, I am fortunate to have approximately equal funds between taxable and tax-advantaged accounts. About 5 years before my recent retirement, I began collecting dividend paying stocks in a taxable account, partially aided by inheritance. In retrospect, I should have done earlier what my dad did for many decades...buy boring, dividend paying stocks.
During this run-up to retirement, I funded a bucket of cash (short term bonds) to include 3 years of expense dollars. I did this by trimming MFs when they hit a dollar threshold. This was in both the taxable and tax advantaged accounts.
So..like you...I am now in harvesting mode. Being only 61, I do not need to withdraw from an IRA, but I do. I take an amount which keeps me below a tax ceiling of my choosing. This is from trimmings as described previously, or from distributions from REITs or other funds. If insufficient, the shortfall is taken from the short term cash/bond bucket.
On the taxable side, similar trimmings from funds occur, added to by a slug of divi's as described earlier to supplement the IRA distribution. An intermediate muni holds the cash bucket.
Bee...I really wish I had a more cogent plan for Roth conversion...I need to consult someone smarter than me. Of course, if one of my 2 equity fliers hits, then all is well and conversion is a breeze.
As for an HSA...I am completely lost. This healthcare thing drives me nuts.
That's true, but I've never seen a clear statement on how past qualified medical expenses of the deceased spouse are treated. As noted by bogleheads: " there is some ambiguity regarding the language around payment of the decedent's medical expenses"
Say your spouse has qualified expenses and dies. Can you pay those expenses out of the inherited HSA (or out of your own)? You're allowed to pay for past qualified expenses of your spouse. But after death, you only have an ex-spouse. Pardon my morbid humor, but what keeps coming to mind is John Cleese - "this parrot (spouse) is no more, it has ceased to be."
HSA for dummies
and found some of the results clarifying
e.g., this rudimentary thing
http://www.dummies.com/personal-finance/insurance/health-insurance/10-reasons-to-start-a-health-savings-account-hsa/
Although this was a while ago and two of the best hits (gov docs) were from like 2008 or so
Thanks for the question(s).
To me, etf's are for trading and are usually held in accounts where wrap fees apply. They themselves, may be low cost but when you add the wrap fee, to me, they might indeed cost more plus you have the cost of advisor fees and cost of trading. Morningstar estimates my mutual fund expense ratio at 0.86% and there are currently no direct cost for me at my brokerage house where I hold these funds. Plus, I have owned these funds for a good number of years, several of them more than forty.
With this, a number of them are held in taxable accounts with sizeable capital gains. So, if I sold these funds I'd be facing a huge tax bill to switch to etfs and then have wrap and advisor fees plus perhaps trading cost apply.
Think, I'll continue as I have ... with my mutual funds. Please note, I don't pay another commission when I do a nav exchange from one fund to another as long as I stay within the same fund family. No cost what-so-ever!
And, so it goes ... I'm keeping my mutual funds.
Skeet
Tax Treatment for Stock Dividends:
https://wellsfargoadvisors.com/tax-center/dividend-income-tax.htm
Stepped up Basis for Inherited Stock:
kiplinger.com/article/taxes/T055-C001-S002-cost-basis-for-inherited-stock.html
Two valuable strategies that @Old_Skeet has mentioned: Also, I like both. Thanks Old_Skeet
Hi Old_Skeet , just curious why you think this. ETF's being like index funds certainly can be used for long term investments, just like index funds with slightly better fees in some cases. And wrap fees? I have 1/2 my nest egg in the Schwab robo-account using all ETFs. There are no wrap fees. Wrap fees I'm familiar with use mutual funds the the fee basically pays for the investment advise in forming the portfolio-wrap.
I'm thinking this varies with brokerage firms. At Schwab, I expect you pay a fee for the robo account?
https://investorjunkie.com/42668/true-costs-robo-advisors/
Skeet
Of course the HSA of the deceased spouse is adopted as one's own in much the same way as spousal IRA can be adopted as one's own IRA. But when I look at a spousal IRA that I adopt as my own, I lose the rights that my spouse had. (For example, if I'm over 70.5 I must take RMDs, while my spouse might have been younger and not yet subject to RMDs. That's a reason why it's not always advantageous for a spouse to adopt an inherited IRA as one's own.)
Morningstar claims that the deceased spouse's rights transfer with the HSA (unlike a transferred IRA): "The account becomes the account of the surviving spouse, and he or she has all the same rights as the original owner."
But I'm not convinced (without a better citation) that this is correct either. For example, my spouse may have had a child who had qualified medical expenses before we were married. My spouse's HSA (assuming it had been established early enough) could have been used to pay for the child's expenses. I have no relationship with that offspring. Now that I've adopted my deceased spouse's HSA as my own, do I get with that the right to draw funds for that offspring's expenses?
The real test case I was interested in: I'm 64, spouse is 67 and dies. Spouse paid Medicare premiums. While we were alive, I could not use my HSA to pay for spouse's premiums (since I am under 65), but my spouse was allowed to use his/her HSA for those premiums. If I inherit all my spouse's rights, then I can use what is now my HSA to pay for those Medicare premiums, even though I couldn't pay for them out of my HSA when my spouse was alive.
Even if a more narrow rule is suggested, viz. that I'm allowed to pay for qualified medical expenses incurred by spouse (but not spouse's dependents) before death, it's not clear whether that includes the Medicare premiums. While spouse was alive, I was not allowed to pay for these qualified medical expenses of my spouse. So why should I be allowed to use what is now my HSA to pay for these premiums that I couldn't pay before death?
Not only does this reduce the difference in costs, but it highlights a conflict of interest problem that Schwab has, in contrast with Fidelity and others. That is, Fidelity doesn't get anything extra for using its own funds; Schwab does. Schwab's page also shows that the most expensive funds are found in Schwab's offering.
As you noted, another problem with Schwab is that they keep too much in cash. As the NYTimes observed, "Under the new program, Schwab might recommend ... hold[ing] 7.3 percent of [a] portfolio in cash. But it suggests only 1.9 percent in cash for someone the same age whose portfolio is invested in its target-date mutual fund."
The Times article also suggests that Schwab might be inclined to take greater risks with its bond holdings in order to compensate for the cash dead weight. That's the same concern often expressed about any high expense fund that has to compete with peers. That's reasonable speculation; your portfolio might show otherwise.
I think Skeet's point was that, once having paid the load (or having enough in a fund family to have the load waived), using OEFs in the account is nearly free. No wrap fee, no robo fee, no cash drag. On the other hand, that account is still generating trailing fees from 12b-1 expenses.
http://www.seninvest.com/
Skeet
And as for taking out of the IRA, that's a great question. Most material you read says to withdrawal from taxable, then an IRA, then a Roth (if you have one). However, those same articles also mention a situation where a dynamic distribution method can minimize taxes long term. Defaulting to the taxable first then IRA can be a mistake.
I am 61. If I waited until RMDs kicked in I would get crushed with taxes. So, I manage my income to stay in a lower bracket while still draining the IRA while I can.
This is mentioned on page 10 in the Vanguard guide to withdrawals:
http://www.vanguard.com/pdf/icrsp.pdf
And this is well explained with some good examples here:
https://www.kitces.com/blog/tax-efficient-retirement-withdrawal-strategies-to-fund-retirement-spending-needs/
So I'm hoping there's some method to my madness. My current challenge is to see if a Roth conversion can provide benefit, which would give me another tool to use to fight the tax man.
In a similar manner to a Roth conversion strategy, I will be funding my HSA with T.IRA dollars from 59.5 - 65. I consider this a tax free conversion if I use these HSA dollars for healthcare. Also, there are no RMDs on HSAs so these "T.IRA to HSA conversions" lower RMDs as a result. An HSA can always be distributed as a taxable event if not used for healthcare.
I have been reluctant to rev up a Roth conversion strategy since the ACA subsidy rules are income specific (right now Roth conversion would negatively impact my ACA subsidy). If ACA income subsidy rules change I will revisit Roth conversion options. I also believe that the best time to consider Roth conversions is after of market pullback which is anyone's guess.
thanks