Revisiting and Revising the Investor Policy Statement

 
In 2016, I published a post with an authoritative, almost demanding title: You Need an Investor Policy Statement. Did you listen? Or even hear me? Most likely not, as my readership then was a fraction of what it is now.

Either way, I encourage you to go back and consider the original post. While you may not need an IPS, this simple document will help you define your goals and the strategies you intend to implement to achieve stated goals.

An IPS is a set of guiding principles. Asset allocation is a vital piece, and if you don’t have an IPS, this is where you should start. I shared a few tools on how to arrive at your desired asset allocation in my 20 Step DIY guide. Once you’ve got that piece figured out, you can add components above and below it, like so many Lego pieces.

 

Lego Pet Town

 

Eventually, you’ll have your very own highly personalized masterpiece. Of course, it doesn’t have to be complicated; in fact, it could easily fit on a single page. Mine does.

The IPS is a living document. It should grow along with you and your money. But, remember, it represents a set of guiding principles and those principles shouldn’t be altered on a whim. One blog post, one book, one conversation with a colleague should not have you running for the word processor.

I recommend revisiting, and perhaps revising your IPS once a year. If ideas come up mid-year, keep a log of them. Write them down or type them in, and after a year has elapsed, review those ideas and decide which ones make the cut.

Over the last year, I’ve done a whole lot of reading, reflection, and writing, which has led me to make some changes in my IPS. Below is my updated IPS, with the changes in red.

I’ll go through each of the changes, explaining my rationale.

 

Revisiting and Revising the Investor Policy Statement

 

2019 Investor Policy Statement

Updates Explained

 

Objective:

 

Retire early from clinical medicine. Last shift scheduled ends at 0600 8/12/2019
Acquire a comfortable cushion, with > 36x annual expenses.
$1,500,000 between a taxable account and 457(b)
$1,000,000 between Roth IRAs and 401(k)
$250,000 in our Donor Advised Fund 
$200,000 between two 529 Plans
These goals have been met!

 

Since the last revision in 2017, I have set a retirement date, and it’s less than six months away!

The target of > 36x annual expenses based on the math in my financial freedom post. I believe we are there, and we have met or surpassed each of the outlined goals.

 

Philosophy:

 

Invest in a diverse portfolio of Passive Index Funds, keeping expenses low.
Accept market returns, rebalancing with monthly investments.
Risk tolerance quite high. Anticipate withdrawal rate < 3% 

 

No changes here. If I were to stop earning an income immediately upon retiring from medicine, we might be withdrawing from 3 to 3.5% per year, but I’m not about to stop blogging, and I can cover our living expenses with online income while allowing the nest egg to continue to grow.

 

Asset Allocation:

 

60%  US Stocks, 20% International, 10% REIT & Crowdfunded RE, 10% Bond / Cash
U.S. stocks:  Lean toward small and mid-cap value to maximize potential long-term return
International stocks: 50% Developed, 50% Emerging Markets

 

This has remained relatively steady. I’ve toyed with increasing the international allocation and decreasing the REIT allocation, but now that I’ve invested in a number of crowdfunded real estate deals, I’m comfortable maintaining that combined allocation at 10%.

 

Other:

 

Maximize tax deductions via 401(k), 457(b), HSA. Front load 457(b). Final year as W-2 in 2019.
In future years, maximize solo 401(k) contributions. Roth may be best as tax-deferred reduces QBI deduction.
Annual backdoor Roth contributions of $6,000 each (spouse and I) in January
Tax loss harvest when possible, which will require some attention to balances.
Contribute to boys’  529 accounts to the maximum state income tax deduction.
$10,000+ to taxable account monthly.  Accumulate cash to help pay for home construction.
Forego monthly taxable deposits to cover large expenses (vehicles, home improvement)

This section is under maintenance as I transition from a W-2 employee to earning an income primarily online.

I’ve generally tried to defer taxes whenever possible, but with the final regulations on the Section 199A Qualified Business Income Deduction, it appears that Roth contributions might make more sense for me in the future.

I’ve stopped contributing monthly to a taxable account as we prepare to build our “semi-retirement home” on our lakefront property purchased in 2017. We’d like to do this without taking out another physician mortgage loan.

Drawdown Plan:

 

Set up 457(B) to pay $3,000 to $4,000 per month starting in 2020.
Receive dividends and capital gains as cash transfers to bank account
When cash is needed, sell taxable assets and minimize / optimize capital gains
0% capital gains tax bracket would avoid taxes on most taxable dividends. Outside income will negate the possibility for now.
Convert 401(k) / IRA to Roth as income / tax bracket allows
Donate appreciated securities to Donor Advised Fund per charitable mission.
At 59.5, evaluate 401(k) / IRA and estimate RMD’s, which kick in age 70.5
Roth Conversions to fill 0% capital gains tax bracket (will count as IRA distribution for tax purposes) if possible.
Pay for boys’ college with $2000 to $4000 cash (to obtain tax credits), then tap 529 Plans

 

 

Why draw from the tax-advantaged 457(b) so soon? Technically, until the money from a non-governmental 457(b) is dispersed, it belongs to the employer, and could be at risk in the event of a bankruptcy.

While that may seem unlikely, I’ve worked at a hospital that went bankrupt. I didn’t have retirement accounts with them, but I was burned in other ways that continue to burn me years after.

I could take a lump sum, but adding about $200,000 to my taxable income in one year is poor tax planning. Taking $36,000 to $48,000 a year will have a lesser effect on my taxes in those first five to seven years as compared to receiving it all at once. Withdrawing most or all of the money by 2025 while we have the current relatively low tax brackets is probably a good idea.

How much interest are you earning in your checking and savings accounts? Explore accounts offering 20x what many banks are offering. High Interest Savings Accounts
I had to change “15% federal income tax bracket” to “0% capital gains tax bracket” as the 15% bracket is now the 12% bracket and the two brackets aren’t perfectly coupled anymore. I’ve also realized that I likely won’t be in it, even with large annual donations. I will be donating half of my profits from the website.

Someday, I may no longer have online income or significant passive income sources other than dividends from our taxable account. At that point, Roth conversions in the 0% capital gains tax bracket makes perfect sense, and they could be worth doing in the 24% federal income tax bracket, which goes up to over $320,000 in taxable income for married couples filing jointly (MFJ) in 2019.

Finally, assuming the tax credits for paying for your children’s college education still exist in the current form, and I’m not phased out by income, we’ll pay for the first $2,000 to $4,000 (for the American Opportunity Tax Credit).

The first $2,000 spent on a child’s college education is fully refunded as a tax credit. The next $2,000 is refunded at 25% (an additional $500 tax credit). The AOTC currently phases out at an income (MAGI) of $160,000 to $180,000 for MFJ.

 

Consider Retirement When:

 

Objectives achieved. Done!
Consider what’s best for the boys. We have and they’re excited for the transition.
Research health insurance options. High priority!
Work part-time as a transition to retirement. Done.

 

This section will be heavily revised when I revisit the IPS in 2020.

 

Retirement Asset Allocation

 

5 years expenses in bonds (in 457(B) and 401(K)), roughly $400,000)
Remainder in Equities, maintaining US / International Ratio
Enact this plan if and when online income is finished.

 

Since I will be “retired not retired” when I leave medicine, I won’t initially make this transition to the full retirement asset allocation.

There is a distinct possibility that my current 10% bond allocation will eventually match or exceed the prescribed 5 years worth of expenses. If I’m eventually holding 50 years of expenses invested, that will the point where those are one and the same.

If we reach that point, I’ll probably transition to keeping 5 years in bonds and perhaps watching the percentage dwindle to less than ten percent.

 


Track your investments for free with Personal Capital. That's how I track the PoF portfolio

 

Have you written your IPS yet? Made any recent revisions? This last year has been a year of revelation, study, and discovery for me. I don’t anticipate making nearly as many changes on an annual basis as I have this go-round. How about you?

59 comments

  • I’ll admit, I have not written an investment policy statement for myself! Looks like I have some homework to do…

  • Subscribe to get more great content like this, an awesome spreadsheet, and more!
  • This is great! It’s actually more than an IPS – It’s pretty close to a one-page financial plan. Having metrics written out like this is awesome and helps clarify where you are on track and where you might not be, so you can make course corrections. Almost everyone would benefit from taking a little time to go through this exercise. So many people haven’t even totally clarified their goals, so then of course they have no idea whether they are on track or not. :-/

  • I don’t have an IPS, but I’m constantly going through different scenarios on paper and in my head.

    I just started a side consulting gig and as a result, will be increasing my contributions to my various retirement accounts. This should be very interesting as I haven’t messed around with an IRA yet!

    Thanks for sharing, I love reading posts like these because they give me a snapshot of my potential future.

    • Congrats on the side hustle and increased opportunities to boost your savings. I recently opened an individual 401(k) and plan to fund it for 2016 any day now (I submitted paperwork in December). I’ll have to add that to next year’s revision.

      Cheers!
      -PoF

  • I like how you made the changes in red. I think it’s prudent to make the changes obvious and slowly. That gives you visibility and time to evaluate.

    It’s bummer you can’t roll a non-governmental 457(b) plan into an IRA to avoid those assets being technically subject to your employer’s creditors. Governmental 457(b)s really are superior options.

    • Thank you, BLI.

      You are correct. I don’t love the idea of liquidating the account, but it seems like the wisest option. Get the money under my control in a reasonably short period of time. The silver lining is I should be well able to live on that plus the 2% or so in dividends from my taxable account for those first ~5 years without touching any other funds.

      Cheers!
      -PoF

  • Nicely done, My Friend.
    I couldn’t agree more. IPS is especially important for us DIY investors. If you don’t have an adviser to talk you off the ledge of making a rash change in your investments, this can help.
    This is timely too. I just pulled mine up this weekend and thought that I should update it. I haven’t yet, but this inspires me to make some changes.
    Here is another sample IPS if people are interested:

    • Thank you, WealthyDoc. It’s a good way to remain consistent. Even if you have some ideas of what you’re trying to do, it’s important to write them down, or you can be more easily influenced by whatever you’ve read or seen most recently.

      Cheers!
      -PoF

  • Sorry, not sure why the link didn’t show? I used your “link” button?
    http://wealthydoc.com/blog/we-all-need-a-written-investment-plan

  • I haven’t set up an IPS yet but it’s definitely something that I need to do. I like how you have a detailed spreadsheet in each category. I feel like I have overall goals but getting down into the weeds hasn’t been one of them. I think it will definitely help me in the long run to take a closer look. Thanks for sharing!!!

  • Have been looking at our allocations closely the last few weeks and this might be a good exercise to go through – I think they are a little off and our portfolio is a little complicated right now.

    We are still to far out to come up with draw down plans or even know what our expense multiple would be (have a strong feeling the kid will throw a big wrench into our current world)

  • We have an IPS. No major changes at this time. We haven’t changed it in about five years. I agree that adding the changes in red is important. The whole point of such a document is to hold yourself to the plan rather then following emotions. Sure plans need to be flexible, like your part time discussion, but they need to change for the right reasons only. Calling those changes out makes you accountable later to those changes. It should be a motivator not to change for the wrong reasons. If not it gives you a lesson learned for next time.

  • I have something similar set up for us, and it’s also in Excel. It feels so old school, but it works. The one big question that nags us is how we will handle health insurance after I leave my W2 job. As we get closer, this is something we need to put some time and effort into figuring out.

    Overall, our plan mostly hinges on rental property income until we hit our golden years. Gotta love those spreadsheets!

  • I like the idea of an IPS as putting something down on paper makes you really take a hard look and evaluate the feasibility of your plan. Kind of like writing down your goal and a plan for achieving it vs just having a goal in your head.

    I think about everything in the IPS quite a bit and have run through the numbers of my plan, but writing everything down in one spot should make it easier to evaluate.

  • Jody Foster

    How do you address long term care for you and your wife? A policy or self-insured?

    As you said about health insurance, it would be nice to have some sort of catastrophic coverage for long term care, but I don’t think that’s an option…

    Thanks! Love the site!

    • Yes, self-insured for LTC. Since we should have enough to live on ~$100,000 with a safe withdrawal rate, I’m not particularly concerned about the cost of a nursing home years down the road.

      The best we can do is a high deductible plan — the options are in flux. We’ll see what’s out there when the time comes.

      Cheers!
      -PoF

  • Hi, PoF!
    Very impressive! Very few retirees or FIRE planners have an IPS. Mine is only floating around loosely in my head. How embarrassing! So, I will definitely write it all down really soon!
    Thanks for the shout-out on the Safe Withdrawal Rules! Yes, I completely agree: Over longer horizons, 40% bonds could be risky. Especially when you have part-time income in the beginning, there is less concern about the dreaded sequence of return risk! Very excited to read more about that part-time opportunity! Domestic or international? 🙂

    • I’ll bet you’ve got a pretty good idea of what it will say when thoughts hit the page, though, ERN. I do encourage you to write it up (and post it) — I’ll be curious to know what it says.

      I’m starting to cool to the idea of working internationally. I’d just as soon go there and not work. Between clinical work, family time, and writing for you all, I don’t know that I’d find the time to enjoy my exotic surroundings!

      Cheers!
      -PoF

  • TheGipper

    Nice post. A few questions
    1) Is your 457b distribution scheduled fixed in stone once you set it (mine is). If so, how did you go about calculating how much to draw per month, based on a 5 year period. What return assumptions? Will you make your 457b AA more conservative/bond heavy given the 5 year shorter drawdown period? Seems one would want to avoid underestimating and having to take a large final year distribution.
    2) No Roth conversions to brackets above 15%?
    3) Curious what type of bonds you plan to use for your 5-year buffer. I see an appeal in using shorter duration and Treasuries for this purpose, but also see the counterargument.
    4) Any plans to more heavily diversify among academic factors beyond small/value. Do you prescribe to Boglehead keep it simple mentality or to the theory that increasing factor diversification including “new factors” such as momentum and profitability can squeeze up to another 1% out of your safe withdrawal rate (guess it doesn’t matter much for you if you plan to use <3% anyway, but could increase the amount you can spend).

    • Answers:

      1) It is fixed, but the initial setup is flexible. I can take a set dollar amount per month, quarter, half-year, or year. The money will continue to come until the account is dry, so there is no risk of a lump sum at the end. I will shift to more bonds there.

      2) Maybe up to the 25% bracket, or whatever brackets we have under the new administration. Fortunately, only ~ 17% of my portfolio is tax deferred, and a third of it is the 457(b).

      3) I prefer to hold bonds in tax-deferred, and my entire bond allocation is in my 401(k). Assuming I roll that over to either an IRA or my new individual 401(k), I’ll have more options. It’s currently all in the Vanguard Total Bond Fund, as I like to keep things simple. While I won’t be able to directly use that money, money is fungible, so I could spend from stocks, and sell bonds in the tax deferred account to buy stocks.

      4) I’m more of a Boglehead and if anything, might simplify further. I suppose I’m open to “proven” strategies to gain an edge, but we all know about past performance / future results.

      Cheers!
      -PoF

  • Huh. I didn’t know this was a thing, but it makes complete sense to have a goal and plan with your investments.
    I hope you’ll be able to score a great part-time schedule for your job! I’m drooling at the very thought. 🙂

  • I do have one and I just call it the Plan. IPS is much more impressive. I will hold a (re)baptism ceremony today.

    I have a question about asset allocation and bonds. Do you hold your bonds in tax advantaged accounts, or in both kinds of accounts? Here is what is bugging me: according to Bogleheads tax efficient placement strategy, bonds should be in tax advantaged accounts. However, bonds are also supposed to be accessible to help you through tough market times. Is the tax efficient placement of bonds not a good guideline for early retirees? Should we be keeping bonds more easily accessible?

    • Two ways to handle it, Mrs. BITA.

      WCI says bonds go in taxable. Hold tax-free municipal bonds (or bond index funds) in a taxable account.

      I keep mine in tax deferred. How can I access the bond fund locked up in an IRA? Indirectly, but easily.

      Let’s say markets are down and I only have VTSAX (total stock market fund) in taxable. IRA has both VTSAX and VBTLX (total bond fund). I want to live off VBTLX rather than sell stocks low.

      The solution is to sell VTSAX from taxable and exchange from VBTLX into a stock fund in the IRA. To keep it simple, you could exchange into VTSAX for the same amount you just sold.

      However, if you have a capital loss when you sold VTSAX in taxable, you don’t want to buy the same fund in the IRA (you just tax loss harvested). Buy something that correlates highly, but is not substantially identical to avoid a wash sale. VFIAX fits the bill nicely.

      Cheers!
      -PoF

      • Thanks Pof, much appreciated!

        I was planning on muni bonds for my taxable, but I had not considered the swap scheme that you’ve outlined above for bonds held in tax deferred accounts. It is so obvious in hindsight, as the simplest, most elegant solutions tend to be.

  • I’m like you, I have an engineering degree, and I enjoy some aspects of my industry, so I don’t want to retire completely, but I am enjoying the benefits of being financially flexible where I can work part time and have long stretches of time off to travel. I recently read an article in a local publication from a holistic medical practitioner in the area. She is an M.D., but the article was about how the modern work culture is causing stress and medical problems. As a physician, you could probably get some cool gigs consulting to large corporations to help people stress less, or do one-on-one mentoring or executive coaching. I’d certainly love to see more M.D.’s make that connection.

  • I really like your format and updates here, POF. I have a mental version of this, but I’ve never put pen to paper (or fingers to keys, as it were). The biggest value I see is serving as a reminder of guiding principles during market downturns. It’s easy to say “yeah, 80% stock is great!” right now when markets keep hitting new highs every day, but it will also be easy to deviate from the plan when they turn downward in the next recession. Even if it’s not panicked selling, it might be “well, now I think a 30% stock allocation is more appropriate.” The more barriers we can put in place to changing course on a whim, the better.

  • Brian

    I reformatted my lengthy IPS as an Excel file using similar categories as you. Mind taking a look at it to see how feasible it is? 🙂

  • Hey Doc. Interesting seeing the “tweaks”, all good. I write a “Love Letter” to my wife every year (as soon as I update our year end net worth statement) which serves as my IPS (also on Excel!).

    Important to consider instructions to loved ones, in addition to having the guard rails of an IPS for personal use.

    Good article (as usual!).

    • Nothing says romance like a spreadsheet full of numbers!

      I do need to put together a “here’s what to do if I kick the bucket” list. Line Item #1: Schedule an Irish wake, despite the fact that I’m not Irish.

      Cheers!
      -PoF

  • Ron Sanders Jr

    Really nice post. Enjoyed reading it 🙂

  • Great post, I am nowhere near having an IPS but have thought about things on similar lines. I don’t see that we can achieve FIRE before the kids have left school at this point. Pros and cons of being in Australia, healthcare is less of an issue, schooling however is more expensive if you go down the private school path.

    • You’re very close to having an IPS, HobbyJobber. Like an hour away. Just sit down and start with something basic.

      Have you gone down the private school path? I’ve been told public education is generally good there. I suppose it depends on where you are, just as it does in the States.

      Cheers!
      -PoF

  • Good post POF. We all need an IPS even if not so detailed as yours. It’s a goalpost and a guidepost depending on how you use it. My IPS is focused on growing dividend income and I have mapped it out for 10 years, and compare ‘budget vs actual’ income each year. So far, nice positive variance! Also, a good IPS keeps the IRP away! ?

  • I started writing my IPS after reading your (and I think WCI’s) posts encouraging it. Only problem? Never really got around to finishing it. Should probably rectify that!

  • Nice post as always. I will have to say that I don’t exactly have an IPS spelled out like yours mostly because I am so far away from retirement I don’t want to distract myself with worries about the withdrawal phase that will change in the next 20-30 years anyway.

    I have found the best use of my limited time is to focus on the major problems at hand and adjust my financial course each year to reach my goals.

    I keep my goals for Life, 10, 5 and current year updated every year. This would be your Objective and Philosophy parts.

    I keep my asset allocation up to date and retirement accounts balanced to make sure my risk is appropriate and my costs are contained. But beyond that, I will have to say that I haven’t given any thought to the withdrawal phase . I think at this point its a waste of time given that I will be able to juggle these accounts over the next 20 years as I get closer to retirement.

    For your situation it makes total sense since you are about enter the withdrawal phase.

    I just wonder if some folks on the accumulation side waste too much time and energy stressing out over nuances on the withdrawal side that will change 10 more times before they are ready to retire when they could be looking for ways to save or earn a little more that might make the decision between a 4% or a 3% withdrawal rate insignificant.

    • I agree, Doc. It’s the same with tax planning. I often add a disclaimer, “assuming tax code remains unchanged, which it won’t.” this is how I plan to handle it. The further away you are timewise, the less the details matter.

      Cheers!
      -PoF

  • BetweenTwoElephants

    Thanks for the virtual Facepunch! New goal this week. Draw up a real live IPS and show it to Mrs. B2E. Then change IPS with the sure to be vastly improved Mrs. B2E suggestions.

  • As strange as it sounds, I would urge you to do the “math” to determine if the Roth conversions in the 15% bracket make any sense at all. I have done math that suggests paying a 10% tax penalty later on (after year 5 of early retirement) is no big deal, vs. doing conversions in the 15% bracket. The reason for this seemingly counter intuitive math is that paying 15% taxes on conversions in year 0 or year 1 means that, that money is gone and can’t compound for investment purposes. Also, you pay taxes with “after tax” money and those taxes are not deductible for federal/state income tax purposes.

    My scenarios for ER now include our paying some 10% penalties in year 6, combined with “harvesting” some Roth conversions at 0% from early years (0-5). However, all my Roth conversions are foretasted to be done at the 0% tax bracket. Since the child tax credits are not “refundable,” it makes sense to up the Roth conversions in the early years in order to “use up” child tax credits that we would otherwise be leaving on the table.

    • Free Roth conversions are a no-brainer. I’m not sure taking a penalty on an IRA / 401(k) is wise when there are ways it can be avoided. The Roth conversion ladder, SEPP, etc… I assume you’ve examined all those scenarios, but I can’t imagine a situation in which you would want to pay the penalty.

      I will plan on doing the math for my particular situation when the time comes. I know I won’t need the tax deferred money. The 457(b) will be drained, leaving only a 401(k) or rollover IRA, which will represent maybe 10% to 12% of my portfolio. Roth conversions would be done mainly to avoid RMDs much later.

      Best,
      -PoF

  • Pingback: You Need an Investor Policy Statement - Physician on FIRE

  • Pingback: Money Used to Buy Me Stuff. Now It Buys Time. - Physician on FIRE

  • Pingback: You Need an Investor Policy Statement - Stocks Masters

  • Pingback: A Quarter Million in DAFs: A Retirement Goal Achieved - Physician on FIRE

  • After seeing about 100 references to your original “You Need an Investor Policy Statement”post I finally took mine out of my head and put it to paper. I added it to my Legacy Binder, as I think it is likely that its highest and best use will be to guide my trustee as how I want my funds directed for the benefit of my special needs daughter. I look at is as a supplement to the trust – more of a procedural manual.

  • Pingback: The Donor Advised Fund : A Smarter Way to Give - Physician on FIRE

  • Pingback: The Sunday Best (10/28/2018) - Physician on FIRE

  • Pingback: Christopher Guest Post: Jim Wang of Wallet Hacks - Physician on FIRE

Leave a Reply

Your email address will not be published. Required fields are marked *