How New Online Tools Will Save One Woman Tens of Thousands of Dollars Per Year

April 30, 2015

Last week, I wrote about my three favorite online investment services. This week, I’ll show you an example of how a couple of those tools saved a friend’s mother tens of thousands of dollars. When I spoke to my friend, his mother had just retired with a $1 million portfolio and he wanted to know how she should invest it for retirement. Since we can’t provide specific investment advice at Financial Finesse, this was a rare opportunity for me to be more hands-on. Here’s what we did:

1) Make sure she’s properly diversified. We determined that her current 60/40 split of stocks to bonds was suitable for her moderate risk tolerance.

2) Minimize costs. Her current portfolio of individual bonds aren’t costing her anything and the taxes are minimal since almost all of them are tax-free municipal bonds. However, her stocks were in very expensive actively managed funds that were costing her tens of thousands of dollars each year in fund fees, transaction costs, and unnecessary capital gains taxes.

To replace the stocks funds, we found a high-dividend motif at Motif Investing of stocks that are currently paying a 4.1% dividend yield and have a history of not cutting dividends in the last 10 years, including during the financial crisis of 2008-2009. This should make the dividend income safer than stocks with higher yields that are likely not sustainable. Her income will also be safer than if she were to liquidate some of her funds each year and face the risk of depleting her capital.

With the interest of her existing portfolio of individual bonds, the dividends should provide her enough after-tax income to meet her retirement expenses. In fact, very little of the income should be taxable at all since the municipal bond interest is tax-free and the mostly qualified dividends would be tax-free at her tax bracket. Her only expenses would be the one-time $9.95 fee for the motif and the occasional $9.95 fee to update the portfolio as necessary.

3) Rebalance. The re-balancing will take place in her IRA to avoid the tax consequences of selling investments that have gone up in value. To do that, we’ll use Future Advisor, which can make free investment recommendations that are based on her risk tolerance and that complement her individual stocks  and bonds. The tool will likely recommend investments like real estate, international investments, and whatever else she may not otherwise have enough of. Since Future Advisor uses almost all Vanguard ETFs, she plans to transfer the IRA to Vanguard so she can avoid transaction fees on the trades. The only cost will be the very low expenses in the ETFs.

She now has a portfolio that matches her risk tolerance, provides her sufficient retirement income without touching her principal, and minimizes her taxes, fees, and trading costs. There was a time that you would need to pay an advisor about 1% a year to get that result. (In her case, that would be about $10k per year or more than half the income she’s receiving from the portfolio, which could cause her to deplete her taxable in account in less than 20 years.) Now, you can do it for significantly less with just a keystrokes.