I received the financial plan from the Vanguard advisor a week after I submitted the questionnaire. The plan was for my review before a 45-minute appointment with the advisor. As I understand it, the advisor would be able to make adjustments and create the final plan based on our conversation.
What’s In The Plan
Here’s an outline of the plan:
- Vanguard’s 3-step process for developing a financial plan
- Investment recommendations in summary and details
- Your retirement outlook
- Information you provided
- Recommendations broken down by account
- Transactions to achieve the recommendations
- Allocation for future savings
- Legal disclosures
The plan recommended two portfolios:
- an integrated portfolio that tries to keep most of the existing positions; and
- a consolidated portfolio in case you are more willing to sell existing holdings and consolidate
The consolidated portfolio still took into account any tax consequences. In my case, it didn’t recommend selling any stock fund with unrealized gains. It also kept my muni bond fund.
The funds chosen for the recommended portfolios were not surprising to me. They were all broadly diversified Vanguard index funds, as seen in Vanguard’s Target Retirement funds: Total Stock, Total International, Total Bond, and Total International Bond. The international stock fund was 30% of the total equity allocation. The international bond fund was 20% of the fixed income allocation.
The plan devoted one page to the big-picture question — “Are you on track?” It ran the recommended portfolio and our estimated post-retirement spending through history. It then showed the success rate of meeting our retirement spending goal together with the best, average, and the worst cases.
An online interactive feature lets you change some variables and see how the success rate and the best, average, and the worst cases would change with different inputs. You can change these on a slider:
- pre-retirement savings
- retirement age
- post-retirement spending goal
- post-retirement employment income
Recommendations by Account
This section listed what to do in each account in order to move from the current portfolio to the recommended integrated portfolio or the consolidated portfolio. It was laid out clearly and easy to follow.
The plan treated all accounts as one portfolio, as it should. It gave moves in each account, whether it’s a Vanguard account or not.
The plan recommended only Vanguard funds, not even Vanguard ETFs in a Fidelity IRA account, let alone Fidelity Spartan index funds that are similar to Vanguard funds. You can substitute if you know how.
It would be better if they can recommend at least Vanguard ETFs in non-Vanguard accounts in the integrated portfolio. Although it isn’t that difficult to look up the equivalent ETF of any Vanguard fund, it would be nice if they took that extra step for the customer or, in the true spirit of a fiduciary, recommended Fidelity Spartan index funds in Fidelity accounts.
There’s one other quirk, which I added to the previous article about the questionnaire. By law Vanguard can’t give specific advice about a 401k plan if your plan has Vanguard funds as an option. It has something to do with conflict of interest. In such case Vanguard can only treat your 401k plan as cash and give you generic advice on asset classes. This limit only applies to employer plans, not to IRA or taxable accounts.
If you want specific advice for your 401k account, don’t list Vanguard funds as current holdings or as available options in the questionnaire. Replace them with similar funds from a different company, say Fidelity.
This section specified how we should invest our future savings. It was only listed in broad asset classes. It didn’t give a breakdown by account by fund. It would be better to have specific instructions for each account: put X% of your 401k contributions to this fund, Y% to that fund; put Z% of your IRA contribution in this fund, etc.
I wrote down a list of questions for the consultation session with the advisor.
[Follow-up post: Vanguard Financial Plan Review: (3) The Consultation]
[Photo credit: Flickr user SalFalko]