Transitioning to post-FIRE: stocks, bonds, international

[GreenSheep]

I just finished a free session with a Vanguard financial advisor, which I used as sort of an "am I really ready to do this?" double-check. He answered that question with an emphatic "yes," but he did have a couple of bits of advice. I'm coming here to see if my fellow Mustachians agree with him.

If it makes any difference, I'm 40 years old, married, no children, homeowner/no mortgage, but my finances are separate from my husband's. He will continue to work, and I don't want to rely on his income except in the most dire of emergencies, so other than filing taxes jointly, please treat this as if I'm single!

I'm currently in 90% stocks, 10% bonds in all of my accounts (brokerage account, SEP IRA, Roth IRA), and I plan to draw down on my brokerage account first, for as long as it lasts (he says it'll get me to 59.5). He recommends changing that to mostly bonds in the IRAs and mostly stocks in the brokerage account, for an overall balance of 60% stocks and 40% bonds. He says this will protect me from capital gains taxes and from wild fluctuations in the stock market, but to me it seems like I might be giving up a lot of potential earnings, too...?

Also, I have 100% domestic stocks/bonds now, and he recommends changing that to about 30% international. The only reason I hadn't done that before is that I thought it was wise when someone here said that the large U.S. companies (Coca-Cola, Apple, etc.) are international companies, too, so owning VTSAX is kind of like having international stocks as well. Though I suppose the U.S. stock market could crash and possibly not take the rest of the world with it...?

If these are solid pieces of advice, then I have a dumb question... how do I go about fixing this without incurring major fees, taxes, etc. upon making the switch? Can I just sell some stocks and then turn around and buy bonds? I'm currently in VTSAX and the bond equivalent (can't remember the 5 letters off the top of my head).

[Radagast]

If your taxable brokerage account is large enough that you will not deplete it for 20 years then probably keeping bonds in an IRA is the logical thing to do, beyond the next few month's expenses. It will save you a lot of taxes.

For 50-year retirements 40% bonds is the upper end of an acceptable bond allocation, it has historically lowered your chances of success and your expected return compared to lower bond allocations. But it is (barely) within the reasonable range. I usually recommend 25% bonds as the starting point based on quite a bit of reading and playing around and contemplating, but I am not the biggest expert on the planet. Some people here say they want 10% or even 0% bonds, but all the people I consider bigger experts recommend 20% bonds or higher.

Watching the recent "trade war" has demonstrated that US stocks are not very highly exposed to foreign markets. US stocks have been flat and small companies have been gaining, while international stocks have been losing value. Vanguard and others have shown the optimal ex-US stock allocation to historically have been around 35%, but within a range of 0% to 70% over various periods. Your guess of the future is about as good as anybody's, but 35% is a good center of gravity. Based on the above I have been recommending a base allocation of 45% US stocks, 30% international, 25% bonds. As guidelines I say that at least 50% in stocks, not more than 50% in US stocks, and 10%-40% in bonds is the reasonable range based on history thus far. Lots of flexibility there.

If all your accounts are at Vanguard there will be little to no cost to moving things around. Don't sell in taxable accounts if you have large capital gains. That is the big one, but we have some actual tax professionals around here who can give better advice.

[MustacheAndaHalf]

Vanguard has a white paper on international diversification.  If you're nervous, 20% international provides the most certain diversification benefit.  But the white paper shows a benefit up to 40% international.
https://www.vanguard.com/pdf/ISGGEB.pdf

There's a second reason you should avoid depending on your husband's income: your retirement will have an influence.  When he sees you retired every day, he might lose some of his motivation to keep working, and also seek to retire early.

Vanguard's website has a "cost basis" page in your account where you can view your "unrealized gains".  It's a list of how much profit you'd make off selling each asset - and that's also a good estimate of the amount to be taxed.  When you hold assets for 366 days or more, you get a better tax rate ("long-term capital gains" tax rate, 15% for most people).

To emphasize one point made by this adviser - you are ready to retire when your investments are ready for retirement.  Right now they're not.  If the markets correct severely, the 90% of your retirement in stocks will drop severely as well.  With 50+ years to go, it might alter your ability to retire.  So that's why the adviser mentioned 60% stocks and 40% bonds.

At least try to hit 20-30% bonds before you retire.  Right now you're earning an income, saving for retirement - and everything is about gains and profit.  That's why you're worried about giving up profits in the future.  But look ahead to how you think in retirement.  If you have enough to retire, doesn't your priority become making sure you can stay retired?   If your nest egg doubles you can still retire - but if it's cut in half, it's time to go back to work.  You want to take risk off the table when you don't need to take risk any more.  So if you don't go all the way to 40% bonds, at least go partway there.

You can also run Vanguard's "nest egg calculator" to see how various stock/bond allocations play out in retirement.  The calculator just needs the number of years and percentage you spend each year.  No calculator is a guarantee, but it's a useful tool for seeing how your decisions (like 10% or 40% bonds) might play out.
https://www.vanguard.com/nesteggcalculator

[GreenSheep]

Thank you both for your thoughtful replies. There's a ton of helpful information here, and I'm going to put it to good use today.

[Much Fishing to Do]

For the allocation its just what you feel good about.  I was about 85/15 stocks/bonds but have been transitioning now to my post-FIRE allocation which is more 70/20/10 (stock/bond/cash). Doing the 10% cash is really a combination of the VG MM now paying above 2%, and bonds dropping with rising interest rates right now, and just in seeing the almost no difference it seems to make in backtesting success I may just end up spending down that cash and being more of a regular 75/25 or 70/30 over time.  For US/INtl I'm about 2 to 1 in both stocks and bonds.

For how to efficiently make the moves do what you can with the freedom you have of moves in the retirement accounts and base the moves in the taxable accts on your basis and marginal tax rate, etc.  Don't feel like it has to all be done immediately as opposed to spreading out over a few years if needed.