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ROUGHLY A QUARTER of my investment portfolio sits in three Roth retirement accounts. Ever since I first funded a Roth a dozen years ago, I’ve thought of this as money I’d avoid spending for as long as possible, so I milk maximum gain from the tax-free growth. But lately, it’s dawned on me that it’s highly unlikely I’ll ever dip into these accounts—and that realization has triggered a slew of investment decisions.
My three Roth accounts are all at Vanguard Group. They consist of a solo 401(k) that I continue to fund each year, a nondeductible IRA I converted to a Roth in 2010, and a rollover Roth 401(k) from my time at Citigroup. Because a Roth’s growth is tax-free, that’s the place where you want to earn your portfolio’s highest returns—and that’s why I have my Roth accounts invested 100% in stocks.
But until December, I managed my Roth accounts as part of my overall investment portfolio. That meant I used my Roth to own part of my portfolio’s allocation to, say, small-cap value stocks, small-cap international stocks, emerging markets and so on.
Now that I realize I’ll almost certainly never spend my Roth accounts, and instead they’ll go to my two children, I’ve changed my approach. In essence, I’m now managing two portfolios—the Roth accounts that my kids will inherit and the rest of my portfolio, almost all in a traditional IRA, which will fund my own retirement.
To be sure, a Roth isn’t quite as good an inheritance as it once was, now that Congress has nixed the ability for many beneficiaries to draw down inherited IRAs over their lifetime. Still, for my kids, my Roth accounts will come free of income taxes, plus they could get 10 more years of tax-free growth from the accounts after my death.
Meanwhile, as I’ve written about before, I’m aiming to simplify my investment portfolio—and, indeed, my overall financial life—as I look ahead to retirement. In my recent portfolio revamping, I didn’t change my asset allocation. I still have the same percentage in U.S. stocks, foreign shares and bonds, and I kept my various portfolio tilts, such as overweighting smaller companies, value stocks and emerging markets.
But I moved all of these portfolio tilts to my traditional IRA—and invested each of my three Roth accounts entirely in one fund. It’s a fund I believe I’ll be happy to hold for the rest of my life, and this part of my portfolio shouldn’t require any maintenance whatsoever. The fund: Vanguard Total World Stock Index Fund, which is available both as a mutual fund that charges 0.1% in annual expenses and as an exchange-traded fund that costs 0.08%.
The fund represents, I believe, the ultimate in stock market diversification. With it, you get exposure to every stock around the world of any significance. Right now, the fund has roughly 60% in U.S. stocks, 30% in developed foreign markets and 10% in emerging markets. It represents the global market portfolio for stock investors—a single fund that holds what all other stock investors hold and in the percentages that they collectively hold them.
Does my strategy have drawbacks? I can think of five:
Many—and perhaps most—parents strive to leave behind something of value for their kids. Still, I consider myself to be in a privileged position. I can’t give my kids full financial security and, in any case, I’m not sure that’s desirable, because we all need something to strive for. But I can give them the sense that, down the road, a financial safety net awaits them. It’s my gift to my kids. My hope: They’ll pay it forward to their children.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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Using My Roth and future conversions for LTC if needed; otherwise the kids get it
Would you still convert at age 72?
It would depend, in part, on my tax bracket at age 72 — and how that compared to my kids’ likely tax bracket after my death.
I opened Roths for my teenage kids 25 years ago giving them office jobs and now in their mid-late 30’s a quarter of a million in total stock mkt index funds.
I cannot imagine Roths ever being taxed; RMDS might be reduced to 5 yrs possibly. Roths are the best thing since apple pie
Regarding “ROUGHLY A QUARTER of my investment portfolio sits in three Roth retirement accounts.”: Why did you chose this fraction?
I didn’t choose that fraction. That’s just how things have turned out. If Roth accounts had been available from early in my career, I’d have probably aimed for more like 50% Roth-50% traditional retirement accounts.
Thanks for the informative post Jonathan. I really like the concept of carving out the Roth savings that my wife and I can earmark for our kids from the rest of the portfolio that we will most likely use and need to balance.
May I ask what rough stock/bond mix you target in your portfolio? I apologize if I missed that somewhere in another post.
Today, I’m at roughly 80% stocks and 20% bonds — probably a bit high for somebody who is almost 60. But I’m still working, plus I have two pools of cash that aren’t included in those percentages: the mortgage I wrote for my daughter and the proceeds from selling a piece of real estate that I hope to receive in the weeks ahead.
Thanks for sharing that. I’m at 60/40 stocks/bonds but already into the official retirement phase. With the bond outlook seemingly not so great, I’ve been considering taking on a bit more risk by shifting slightly. That is also why I liked carving out the Roth part of the portfolio that is looking like it could go the kids. That way I can keep “our” part at 60/40 and feel like I’m at least being a little more aggressive with the Roth portion.