Alberta’s Money

Steve Abramowitz

I PAY FOR MY OWN partial retirement with a university pension, income from rental properties, income from the remnants of my private psychology practice and, of course, Social Security. I long ago emptied my retirement accounts to pay for our son Ryan’s college education and to help launch his career.

What about my wife Alberta? She has income from her fulltime psychology practice, her share of our rental income and Social Security. But unlike me, Alberta is also awash with traditional retirement accounts, where all withdrawals are taxable as ordinary income. She has a Roth in name only because, as we say in Yiddish, it’s “bupkes,” or hardly anything at all.

Too many decades ago, we opted to forgo funding Alberta’s Roth in favor of investing in rental real estate. Property owners, like stock investors, have enjoyed a bountiful if bumpy long bull run. But our zeal to redirect excess cash to real estate rather than stocks was overdone.

Now, more than three-quarters of our combined wealth sits in relatively illiquid rental properties. After 40 years of uninterrupted appreciation, selling would mean big tax bills—or, at least, it will until my passing means a step-up in basis on the properties and hence relief from the tax burden.

Here in California—a community property state—my death will eliminate the entire embedded tax bill on our jointly owned properties and not just half, which is the case in most states. Still, in retrospect, adopting my parents’ investment ideology, that owning real estate is the gold standard for retirement, wasn’t the wisest course of action.

I have concerns about Alberta’s income once she decides to stop seeing patients and if she lives well into her senior years. Perhaps greedily and unrealistically, we’re reluctant to cut back our (hardly extravagant) lifestyle at this late stage. Still, that means we’re currently a little strapped for cash unless we start withdrawing from Alberta’s traditional retirement accounts. Her upcoming required minimum distributions may, ironically, force our hand at just the right time.

As the money nerd in our relationship, I manage Alberta’s retirement accounts. I rely almost exclusively on exchange-traded funds (ETFs), largely because of their liquidity, low cost, and freedom from the cumbersome and annoying restrictions that fund families sometimes impose on mutual fund investors.

I have dual and sometimes conflicting goals, aiming both to generate income for us and to increase Alberta’s portfolio for our son Ryan’s eventual inheritance. Since both Alberta and I are in our 70s, I’ve embraced a moderate growth strategy. I aim for an overall dividend yield above 3% and a total return that’s two-thirds of the broad market’s advance or decline—similar to the goal I have for my taxable account.

To that end, I’ve invested Alberta’s retirement accounts in two core low-cost Vanguard Group ETFs: Total World Stock (symbol: VT) and International High Dividend Yield (VYMI). Together, they represent a third of Alberta’s portfolio.

I’ve bought eight other ETFs for Alberta. In the interest of diversification, only two account for more than 10% of her portfolio: Technology Select Sector SPDR (XLK), a meat-and-potatoes sector ETF, and Schwab U.S. Dividend Equity (SCHD), a dividend-and-growth ETF with enviable 10-year relative performance.

Two of the other six funds deserve special mention. Avantis U.S. Small Cap Value (AVUV) has a promising record since its inception four years ago, and it lost only half as much as its Vanguard peer (VBR) in 2022’s market bloodletting. Although an actively managed ETF, it has an uncharacteristically low 0.25% expense ratio and only 24% turnover. Meanwhile, Vanguard Real Estate ETF (VNQ) seems like a timely investment after a stretch of weak performance, plus it offers Alberta an opportunity to become comfortable with real estate investment trusts, should she ever decide to relinquish direct real estate ownership in favor of this hassle-free alternative.

For insights into Alberta’s fund mix, I give thanks to Morningstar’s Portfolio Manager platform, especially the Portfolio X-Ray tool. To make sure I’ve achieved a desirable amount of diversification, I use Portfolio X-Ray to check what percentage of Alberta’s overall fund mix is in each of Morningstar’s nine style boxes. You can see the result in the accompanying chart.

My goal is a sensible allocation, with a slight value tilt and meaningful small and midcap exposure, and that’s what the portfolio has. Morningstar’s X-Ray also tells me that international stocks comprise an intended one-third of the portfolio. The average cost is 0.18%, which I consider very acceptable, although it may not satisfy a Bogle purist. The technology allocation is 24%, compared with the S&P 500’s 29%, a deliberate underweight dictated by my anxious temperament.

What about that Holy Grail called performance? As a benchmark, I use 70% in a total U.S. stock market index fund and 30% in a total international stock fund. Over the past year, Alberta’s portfolio earned 69% of the benchmark’s return, in line with my target of capturing two-thirds of the overall market’s movement.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.

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