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Old 01-24-2008, 07:44 AM   #21
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Would you mind telling us how you invested the money? If that is too personal, just ignore me!!! I don't intend to pry but I am SO curious.

Although I would not want to copy anyone else's plan, right now it is interesting to me to see how others deal with windfalls since I am coming into one as well. So far, just one small partial distribution has appeared but more is on the way, and I won't have the taxes/car/remodeling expenses that you are expecting. Creating a plan for investing a windfall is an interesting exercise. I am reading like crazy and working on my plan. I plan to ER in 22 months, so I am considering this to be an ER investment plan.

My asset allocation will be about 45:55 (equities:fixed).

In my still tentative plan, almost everything is in Vanguard.

20% Total Stock Market Index VTSAX - (taxable account)
10% FTSE All-World Ex-US Index VFWIX - (taxable account)
30% Vanguard's Wellesley VWIAX - (taxable account, unfortunately)
16% Prime Money Market VMMXX or perhaps eventually CD's (taxable account)
21% "G Fund" Government Securities Fund (my entire TSP)
2.5% either REIT VGSIX or Small Value Index VISVX (my entire tiny Roth)

As you can see, I am constrained by the fact that over 3/4ths of my portfolio will have to be in my taxable account. The Roth, especially, is still up in the air since I'm not sure that 2.5% is really enough to see any benefit from additional diversification and apparently putting either of these funds in taxable would be an exercise in self-flagellation. Maybe I will just abandon the idea of extra small value or extra REIT, and consider the Roth to be money to play with and invest in whatever seems cool to me at the time so that I am not tempted to vary from my overall plan. I think Uncle Mick said he does that with part of his funds, and that makes sense.

I will probably DCA into the (VTSMX)/VTSAX and VFWIX, and lump sum into the VWIAX and VMMXX. Or not. Still thinking.
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Old 01-24-2008, 08:21 AM   #22
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Quote:
Originally Posted by Want2retire View Post
Would you mind telling us how you invested the money? If that is too personal, just ignore me!!! I don't intend to pry but I am SO curious.

Although I would not want to copy anyone else's plan, right now it is interesting to me to see how others deal with windfalls since I am coming into one as well. So far, just one small partial distribution has appeared but more is on the way, and I won't have the taxes/car/remodeling expenses that you are expecting. Creating a plan for investing a windfall is an interesting exercise. I am reading like crazy and working on my plan. I plan to ER in 22 months, so I am considering this to be an ER investment plan.

My asset allocation will be about 45:55 (equities:fixed).

In my still tentative plan, almost everything is in Vanguard.

20% Total Stock Market Index VTSAX - (taxable account)
10% FTSE All-World Ex-US Index VFWIX - (taxable account)
30% Vanguard's Wellesley VWIAX - (taxable account, unfortunately)
16% Prime Money Market VMMXX or perhaps eventually CD's (taxable account)
21% "G Fund" Government Securities Fund (my entire TSP)
2.5% either REIT VGSIX or Small Value Index VISVX (my entire tiny Roth)

As you can see, I am constrained by the fact that over 3/4ths of my portfolio will have to be in my taxable account. The Roth, especially, is still up in the air since I'm not sure that 2.5% is really enough to see any benefit from additional diversification and apparently putting either of these funds in taxable would be an exercise in self-flagellation. Maybe I will just abandon the idea of extra small value or extra REIT, and consider the Roth to be money to play with and invest in whatever seems cool to me at the time so that I am not tempted to vary from my overall plan. I think Uncle Mick said he does that with part of his funds, and that makes sense.

I will probably DCA into the (VTSMX)/VTSAX and VFWIX, and lump sum into the VWIAX and VMMXX. Or not. Still thinking.
I might suggest bumping up equity allocation in Roth (VFINIX??) and let it ride (no withdraw requirements). As the Roth gets bigger, you will have the peace of mind that money will never get taxed.

Is VMMX a taxable fund? Have you considered a muni money market fund?
Wellesley is a 40-60 fund, correct?

Do you reinvest dividends and capital gains? I might suggest sending dividends, interest and capital gains into a money market, and use that fund to live off of and rebalance from.

Is the TSP tax deferred growth? Can it be converted to a Roth? Is the G fund subject to RMDs?
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Old 01-24-2008, 08:45 AM   #23
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I might suggest bumping up equity allocation in Roth (VFINIX??) and let it ride (no withdraw requirements). As the Roth gets bigger, you will have the peace of mind that money will never get taxed.
Good idea! I could do that. I guess that is pretty highly correlated with VTSMX, but who cares since it is so small.

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Is VMMX a taxable fund? Have you considered a muni money market fund?
Yes it is, and no, didn't think of that. I'll read more about them and look into them. Thanks!

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Originally Posted by jIMOh View Post
Wellesley is a 40-60 fund, correct?
Correct, essentially. 39.9% equities, 60.1% bonds.

Quote:
Originally Posted by jIMOh View Post
Do you reinvest dividends and capital gains? I might suggest sending dividends, interest and capital gains into a money market, and use that fund to live off of and rebalance from.
I was thinking of doing that with the Wellesley dividends and the TSP, since that will give me several times more than I have been living on lately. I was thinking of not touching the Roth, as you suggest. Also I thought maybe I'd just let VTSAX and VFWIX ride as my inflation protectors and not take any dividends, interest, or capital gains out.

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Is the TSP tax deferred growth? Can it be converted to a Roth? Is the G fund subject to RMDs?
Yes, it is tax deferred growth.

It is expected that TSP can be converted to Roth in 2010. Right now withdrawal rules are pretty specific and rigid, and I had planned to take the equal monthly payment option (the amount of which can be changed once a year). Maybe I will be able to move my equal monthly sums into a Roth - - no way do I want to take the tax hit of moving it all at once into a Roth anyway. The G Fund is probably the safest fixed income investment on the face of the earth, which is why I am thinking of keeping it for these crucial first 10 years of ER. It is guaranteed to never lose principal. Last year's rate was 4.87%, and the year before 4.93%. I believe the lowest in history was 4.11% in 2003.

Yes, the G Fund is subject to RMD's at age 70 1/2, which is 11 years from now.
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Old 01-24-2008, 08:57 AM   #24
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Wellesley is a 40-60 fund, correct?
2/3 bond, 1/3 high dividend stocks

If tax is of concern, try Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX).
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Old 01-24-2008, 09:40 AM   #25
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Good idea! I could do that. I guess that is pretty highly correlated with VTSMX, but who cares since it is so small.
I recomended S&P 500 because it is
a) more concentrated
b) more conservative
c) has higher yield

than the overall market. As you get into retirement, I would expect more large cap holdings and fewer small and mid cap holdings. The recomendation to S&P 500 was because that choice is a move in that direction.

But don't let my risk profile suggest what you should do.





Quote:
Originally Posted by Want2retire View Post
Yes, it is tax deferred growth.

It is expected that TSP can be converted to Roth in 2010. Right now withdrawal rules are pretty specific and rigid, and I had planned to take the equal monthly payment option (the amount of which can be changed once a year). Maybe I will be able to move my equal monthly sums into a Roth - - no way do I want to take the tax hit of moving it all at once into a Roth anyway. The G Fund is probably the safest fixed income investment on the face of the earth, which is why I am thinking of keeping it for these crucial first 10 years of ER. It is guaranteed to never lose principal. Last year's rate was 4.87%, and the year before 4.93%. I believe the lowest in history was 4.11% in 2003.

Yes, the G Fund is subject to RMD's at age 70 1/2, which is 11 years from now.
Here is my suggestion- if you can convert TSP to a Roth, use the income tax cap to roll more money into a Roth.

For example, if you withdraw 40k from TSP (based on your need), the income tax cap for 25% bracket is 78,850 (link: Reference Room). This assumes filing single, the cap is different for married filing jointly.

You have 38850 to cap out 25% tax bracket, convert that amount from TSP to a Roth. Money is taxed at 25%, you will never pay taxes on that money again.

You could go with a more complex plan. If you need 40k and the taxable accounts generate 15k of this need, you could withdraw 25k from TSP. That 25k is taxable as ordinary income at 15% tax rate. The cap for that bracket is 32550. Convert 7550 to a Roth (paying 15% tax) and never pay tax on that money again.

I would start doing the TSP toRoth conversion well before age 70.5. The goal would be to gradually convert TSP to a Roth, paying as little tax on the TSP as possible (if you can convert whole TSP to Roth at 15% bracket over a 20 year period, it is probable you will have a higher income from Roth (tax free) than you do from the TSP (because decrease in taxes is more money in your pocket).
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Old 01-24-2008, 09:41 AM   #26
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My asset allocation will be about 45:55 (equities:fixed).


As you can see, I am constrained by the fact that over 3/4ths of my portfolio will have to be in my taxable account.
This is pretty much my situation. I like Wellesley as well but wanted to minimize my capital gains so I purchased DVY for my dividend play and BND(bond etf) along with a couple of muni etf's which hopefully all combined, performs close to Wellesley. DVY is a little heavy with financial stocks, as compared to Wellesley, so I have added a few non-financial dividend stocks to offset.

A little more work to get to the same place but hey, I'm retired. Gives me something to monitor when I'm not chasing the golf ball. Like today.....it's raining again!
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Old 01-24-2008, 10:35 AM   #27
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JIMOh thanks for those ideas. I have a couple of years to think about them since it is not presently possible to do any such conversion and the TSP hasn't made the withdrawal rules applicable to these future, still hypothetical conversions public yet. Definitely food for thought.

Dawg52, that is great to see a more tax efficient substitute for Wellesley. I'll check it out, too!

This board is FULL of good ideas to bounce around and consider, which I greatly appreciate! I'm currently giving myself a "crash course" in investing and so these ideas are very timely - - I can think about them while I read and digest.
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Old 01-24-2008, 10:43 AM   #28
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2/3 bond, 1/3 high dividend stocks
I checked with Vanguard, and my figures were incorrect. Yours were closer. According to Vanguard, Wellesley is

60.99% bonds
35.37% stocks
03.64% short term reserves.

So, I would suppose that means 64.63% fixed and 35.37 equity.

Thanks, Spanky!

So, that changes the percentages slightly, to

21% Total Stock Market Index VTSAX - (taxable account)
10% FTSE All-World Ex-US Index VFWIX - (taxable account)
30% Vanguard's Wellesley VWIAX - (taxable account, unfortunately)
15% Prime Money Market VMMXX or perhaps eventually CD's (taxable account)
21% "G Fund" Government Securities Fund (my entire TSP)
02% either REIT VGSIX or Small Value Index VISVX (my entire tiny Roth)

(after rounding to the nearest %)
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Old 01-24-2008, 01:36 PM   #29
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Would you mind telling us how you invested the money? If that is too personal, just ignore me!!! I don't intend to pry but I am SO curious.
Edited: I was able to copy and paste the allocations here. It's the same as I had originally posted, mostly because I got busy, then just came back from a two-week vacation, and wanted to take care of the allocations right away.

10% Long-Term Investment-Grade Fund Investor Shares
10% Short-Term Investment-Grade Fund Investor Shares
15% International Value Fund
25% Windsor II Fund Investor Shares
10% Total Bond Market Index Fund Investor Shares
25% Capital Value Fund
5% Money Market

All the money is technically earmarked towards retirement. We both work (although I'm working part-time as a contractor), so that pays our mortgage and other expenses. I also put aside some money into a liquid CD for a future car and home remodeling. We decided that we want to remodel our home for US and not for the next buyers!

Several people mentioned tax-free bonds, but when I had looked into that, it seemed like paying taxes would still yield me more money based on my tax rate. Maybe I'm not calculating things correctly?

I'm just hoping to see the positive in all this soon! I had invested in late June through mid-July during a high, and now it seems so low. The international fund has dropped about 22%... and yes I bought more yesterday, but I just want to get to the part where I can sit back and notice a nice return finally. Otherwise, I get that sick feeling of "I should have left it all in money market!"

I've got to do more reading! I was getting lost reading your post and then the answers that came afterwards! Still a long way to go!
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Old 01-24-2008, 02:17 PM   #30
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Thank you so much, retiringby50!! It's fascinating to see what others in similar situations have done.

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I'm just hoping to see the positive in all this soon! I had invested in late June through mid-July during a high, and now it seems so low. The international fund has dropped about 22%... and yes I bought more yesterday, but I just want to get to the part where I can sit back and notice a nice return finally. Otherwise, I get that sick feeling of "I should have left it all in money market!"

I've got to do more reading! I was getting lost reading your post and then the answers that came afterwards! Still a long way to go!
I can really relate to your statement "I'm just hoping to see the positive in all this soon!" With the markets acting so flaky, it's a nerve-wracking time to invest. I think that until a person actually has something like this happen, it's hard to realize that (1) planning for it takes time and work that wasn't expected, and (2) having it just doesn't sink in overnight! I think that in my case, it will sink in more when I actually HAVE the windfall. Right now, it seems like mine is coming in bit by bit. My life hasn't changed at all, and probably won't for some time if ever.
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Old 01-24-2008, 07:39 PM   #31
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Several people mentioned tax-free bonds, but when I had looked into that, it seemed like paying taxes would still yield me more money based on my tax rate. Maybe I'm not calculating things correctly?
Use this formula: Current yield ÷ (100 – your federal income tax rate)

Fund - yield
Inter-Term Tax-Exempt Inv - 3.45%
Total Bond Mkt Index Inv - 4.48%


Marginal tax rate = 28%

The equivalent yield of Inter-Term Tax-Exempt: 3.45/(100-28) = 4.79% which is higher than that the yield of Total Bond Market fund.
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