Building the Income Base

The DivAgent Tier Allocation Framework

Your target allocation depends on your risk tolerance and income needs. Here are three model portfolios for pre-retirees.

Conservative (Low Risk, 4-5% Target Yield)

Balanced (Medium Risk, 6-8% Target Yield)

Aggressive (High Risk, 9-12% Target Yield)

The 3-Year Transition Plan

Spread your rebalancing over 3 years to manage taxes and dollar-cost average into income positions.

Year 1 (5 Years to Retirement)

• Redirect new contributions: Stop buying growth ETFs. All new money goes to T2-T3 positions.
• Build the cash cushion: Shift 10% of portfolio to T1 (SGOV, BIL, money market).
• Harvest losses: If any growth positions are underwater, sell and swap to similar assets (VOO → IVV) to lock in tax losses.
• Start T3 positions: Add SCHD, DGRO, VIG to build dividend growth base.

Year 2 (4 Years to Retirement)

• Sell growth winners in low-income year: If you have a year with unusually low income (layoff, sabbatical), sell growth positions to stay in 0% or 15% cap gains bracket.
• Add T3 exposure: Begin positions in JEPI, O, ARCC, EPD.
• Max out tax-advantaged space: Contribute maximum to 401(k) and IRA to shelter income.

Year 3 (3 Years to Retirement)

• Finalize tier allocation: Target your chosen allocation (conservative/balanced/aggressive).
• Prune growth positions: Trim remaining VOO/QQQ down to 10-20% for some upside optionality.
• Add T4 if needed: If income gap remains, cautiously add JEPQ, QQQI, DIVO.
• Test-drive the income: Stop reinvesting dividends. Take distributions as cash to simulate retirement income.

Tax-Loss Harvesting Strategy

Market downturns are your friend during the transition. Use volatility to your advantage.

The Wash Sale Rule

You cannot sell an asset at a loss and buy a "substantially identical" security within 30 days before or after the sale. But you CAN swap to a similar-but-not-identical fund:

• VOO (S&P 500) → IVV (S&P 500): Same index, different issuer.
• QQQ (Nasdaq-100) → QQQM (Nasdaq-100): Same holdings, lower expense ratio.
• VTI (Total Market) → ITOT (Total Market): Maintains equity exposure.

Loss Stacking for Big Transitions

If you're sitting on $100K in unrealized gains in VOO, you can offset them with harvested losses:

1. Sell $100K of underwater positions (e.g., ARKK down 40%).
2. Book $40K in capital losses.
3. Sell $100K of VOO (books $100K gain).
4. Net taxable gain: $60K instead of $100K.
5. Tax savings: $6,000 at 15% cap gains rate.

Account Placement Optimization

Where you hold assets matters just as much as what you hold. The wrong placement costs thousands in taxes every year.

Tax-Deferred Accounts (Traditional 401k/IRA)

Put here:

• T3-T5 high-yield assets (REITs, BDCs, covered call ETFs)
• Assets that pay non-qualified dividends (taxed at ordinary income rates)

Why: Shields high-income distributions from current taxation.

Tax-Free Accounts (Roth IRA/401k)

Put here:

• Your highest-growth potential assets (keep some QQQ/VOO)
• T5 speculative positions if you're aggressive

Why: Growth compounds tax-free forever. No RMDs to force withdrawals.

Taxable Brokerage

Put here:

• T2 dividend growth stocks (SCHD, VIG, individual aristocrats)
• Assets with qualified dividends (taxed at 0-20% vs. 10-37%)

Why: Most tax-efficient. Qualified dividends + long-term cap gains treatment.

Action Items