Retirement Portfolio Discussion

In My Humble Opinion
22

Yes, Mr. Otto. In my post with the symbols+allocations, at the bottom I mention that, unlisted individually, are bonds and CDs that in total make up about 20% of my total portfolio, plus another 5% cash/money market that currently earns about 5% interest via Fidelity’s money market sweep (that level of interest will obviously start declining next year).
So, you could call it a 75/25 portfolio at the moment.

In theory, I never have to sell any of my equities, ever (I likely would sell to rebalance my portfolio or focus, but not to generate cash). They generate enough dividends that I can easily support my current comfortable lifestyle, just with the cash they throw off. And I italicize theory, but my top holdings - particularly SCHD, but also O (REIT) for sure - were chosen because they have a long, long history of not only not cutting dividends, but increasing dividends every year, plus some price growth. I recognize some “black swan” event may happen and my portfolio value goes down by 50%, but I am quite confident that if mine goes down by 50%, most everyone else with a growth portfolio will go down by 75%. Just to be clear: I am a champion of growth-oriented portfolios, but I don’t have a few million to risk, so capital preservation is a must for people in my position.

Quite true, although they may hold, say, Apple, in different allocations (i.e. 18% of one ETF but 4% in another). That is why I blend in some REITs and BDCs, as well as just a bit of international. SCHD, in particular, is extremely focused on well-established dividend payers; its top holdings at the moment are Coke, Pepsi, AbbVie, Verizon, Home Depot, Broadcom - quite a bit different from the S&P 500 top holdings.

23

Just a person who can do math so I’m no more expert than yourself. I can’t currently look through your portfolio but I do note that you haven’t mentioned inflation. $36k a year now isn’t the same thing as it was in 1980 and it won’t be the same thing in 2060.

I believe that there are annuities with inflation adjustment rules so, if I was looking at them, I’d want to investigate exactly how the works and what the options are. I’d assume that they’re less impressive sounding than fixed annuities.

Inflation-Adjusted Annuity: What It Is & Why It Matters.

That said, I’d generally assume that such annuities are basically structured on top of various investments. The bank/brokerage takes the money than you give them, invest it, and take a percentage off the top to pay themselves. In theory, you could make those same investments and cut out the middle man.

But, likewise, in theory the bank/brokerage is able to use money from good years to patch over bad years. For them, the income is going to be variable but they’ll borrow or horde as necessary to give you a (inflation adjusted) flat income so that you don’t have to adjust your lifestyle from month to month. So besides their professional bean counting that underlay the specific investments - which you might not be able to match - you’re also getting that in return for allowing them to profit off of your money.

Personally, I’d try to find a bond fund that grows in price at a rate equal to or greater than inflation, has stayed fairly stable through financial crisis, and then try to find the largest dividends per one. But an annuity really isn’t a bad option.

You might also look at things like reverse mortgages if you don’t plan to give your house to your children or anyone.

If you have a yard, you can reduce your dependency on finances and external factors by food gardening. Likewise, you can do things like upgrading your insulation, adding solar, etc. so that you further decrease reliance on the outside world. As a non-prepper, though, I’d say that the key benefit of projects like this is to have something to continue working on during retirement, to keep busy.

24

You are quite right that inflation is a factor that must be considered and planned for.

Some of the ETFs in my portfolio, such as the top % SCHD (Schwab US Equity Dividend ETF) very specifically and officially focus on dividend-paying companies that historically increase their dividends every year; from their prospectus: “eligible stocks must have sustained at least 10 consecutive years of dividend payments […] are then
selected by evaluating the highest dividend yielding stocks based on
four fundamentals-based characteristics — cash flow to total debt,
return on equity, dividend yield and 5-year dividend growth rate.” [bolding mine]

Another, O (Realty Income Corp.) a REIT, has a long history of increasing dividends; generally, I’d predict that all of my top 50% (except QQQ, my growth pick) have a history of increasing dividends - actual dividends, not simply dividend yield.

So your point is important for me to remember, but I think I’m pretty well positioned regarding inflation at the moment. But, I also have ~20% in bonds and CDs paying 4.5% or more, and as these mature (at varying times) that is additional cash that can be directed as it seems appropriate at that time.

Thank you very much for your thoughts and analysis; I very much appreciate it.

Robert “Raza”

25

I was about to start a thread with the exact same title, and Discourse directed me to this thread.

I have a specific question. Now that we’re retired, we’re making well below the amount which would shut us off from making contributions to a Roth IRA. We both have Roth IRAs contained within our Schwab “Intelligent Income” retirement portfolios. We are not taking distributions from our Roths at this time, just from our regular IRAs. We’re letting the Roth accounts grow untouched for now and will take from them at a later date, when tax-free income will be welcome.

Would it make sense, at our age, to contribute money now to our Roth IRAs?

26

Contributions to IRAs are limited to earned income. So unless you are working, you can’t contribute. You can, however, convert funds from your regular (traditional) IRAs to a Roth IRA.

Whether you do this or not depends on a few variables, such as your marginal tax rate, and income limitations on ACA subsidies, Medicare IRMAA thresholds, and taxation on any Social Security benefits.

27

So income from Social Security and investments do not fall under the definition of “earned income”, I assume. Huh. Well, that clears that up, thanks.

28

There are some groups that stress rolling funds from tax-advantaged accounts into a Roth, but at our age AND tax bracket it doesn’t seem to be worth the tax hit on conversion. I will pay comparatively little tax on my regular IRA withdrawals.

Further, for us, I’d rather have extra cash available to us as a cushion/emergency repair/vacation pot rather than adding a very small bit to our retirement fund.

But I may well be wrong. On both counts.

29

I’ve delayed taking SS for a few years just so there is headroom to do Roth conversions from my IRA without making my taxes too high. The idea is to do it now rather than take a big tax hit later when you have required withdrawals in your 70s.

30

I’ve considered Roth conversions, and similar to Raza I have determined that the juice isn’t worth the squeeze, and at this point it’s just rearranging deck chairs on a sinking ship.The tax rules are unnecessarily stupid and complex in retirement, but the tax itself isn’t too bad and certainly nothing that I didn’t plan for. For others, it may make sense to do conversions.

One thing that occurs to me is that about 15 or so years ago, most financial advisors were really good about telling you how to save for retirement, with very little advice on how to spend it down. Nowadays, they have noticed this need and tried to fill the gap, but it seems that IRA conversions and tax avoidance is just about all they talk about. I suppose this is the area where they can make money and frighten their customers with scary tax stories, but I don’t see much utility in that. Paying tax isn’t the worst thing in the world.

31

This. If I were to convert my IRAs to Roth IRAs, I would pay tax on the conversion now, and the amount that I might convert each year would just add to my current tax bill. So I pay taxes now or pay them later.

Of course, should my wife and I both pass before our IRAs are drawn down, our kids will have to pay taxes on that money when they close the accounts. If those accounts were Roth IRAs, that money would be tax-free to our kids. That might be a consideration for some…but not me.

32

OTOH, there is a substantial difference in future tax brackets when one partner of a marriage passes and the survivor’s filing status changes from “married filing jointly” to “filing singly”, so there is some value on conversions. Knowing when you will die is the best way to navigate this situation.

33

This was a really tough concept for me and a lot of clients to first understand. Of course, people should always be aware of pushing withdrawals (either for a Roth conversion, or for later withdrawals in retirement) into a higher tax bracket,

But the whole “pay now or later” is a tough concept for some people to do the math on. Sure - paying $1000 on a $4000 Roth conversion now may be less than $2,500 on a $10,000 withdrawal in 10 years, but it’s the same chunk of money.

34

True. This year the difference in the standard deduction in those two statuses is about $14,000, which would mean $14k more in taxable income. That would probably mean about $1500 more in taxes each year.

35

I’m not sure I understand this comment.
I put money into a Roth that I was taking out of an IRA anyway to reduce the balance of my IRAs which helps when I do my required withdrawals next year. I think it was a good move because my Social Security is way up now since I waited until 70 to take it and was only getting spousal benefits before.
Plus, earnings on the Roth are less taxed than earnings on the IRA once I take them out.

36

If you saved yourself from bumping into another tax bracket, that’s great - it’s a good reason to do a Roth conversion. But to explain my statement more, let’s use some round numbers:

Teddy Traditional dedicates $10,000 into a Traditional IRA. In 10 years, it has done gangbusters, multiplying up to $100,000. When he draws it out for retirement, he pays 20% in taxes, and has a net income of $80,000.

Roderick Rothschild dedicates $10,000 to a Roth IRA. He’s also in the 20% tax bracket, so pays $2,000 in taxes, and the remaining $8,000 goes into the Roth. He invested identically to Teddy, and his account also grows by 10x to $80,000. When he withdraws the money for income, he pays $0 in additional taxes, and has a net income of $80,000.

Roderick can claim the moral high ground that he “paid less taxes”, but their income is the exact same.

37

My IRA has $1M in it. Does that change the calculus at all? Is it foolish to slowly do Roth conversions over 10 years to spread out the taxes? (I’m 61)

38

I’m by no means a financial whiz, nor an advisor, nor a tax professional, but here’s my take.

Let’s say you do convert that $1M in your IRA to a Roth over a 10-year period. That’s $100k the first year, and (hopefully) more than that each succeeding year, as your investments within the IRA grow. Using Munch’s figure of a 15% tax rate, you will be adding at least $15,000 to your tax burden each year for the next 10 years, without any added take-home income. Can you afford that?

If not, then I would advise against doing the conversion. You’ll pay taxes when you begin to draw out of the IRA, but at least you’ll have the money in your pocket that you can use to pay those taxes.

Again, I’m not a professional in these matters, so take my advice with multiple grains of salt.

39

We retired at age 62-ish. I kept my stock portfolio active until 2020, then closed it all out and put it all in cash. Between the cash buffer, the retirement money coming in, and the fact that we had zero debt, we had more than enough to live on and none of the anxiety that comes with investing. The only investment I made were in I-bonds when the rates were high. I briefly considered getting back into the market, but then we sold our home for a ridiculous amount and there is no way we’ll spend that money before kicking the proverbial bucket. Just another option to consider.

40

One question; can you convert part of a conventional IRA to a Roth IRA each year or must you convert the entire account balance?

41

You can convert in chunks, however you like.