AA and income for ER

[nun]

I'm a long time conservative dollar cost averaging index fund investor. My asset allocation has always been around 50/50 and I'm thinking about early retirement at age 50 (in 2 years) as my mortgage is almost paid off and I would like some advice about my AA and taking money out of my accounts rather than putting it in. Once the mortgage is gone I estimate that my annual expenses will be $30k. I get $15k a year from rent and have $500k invested in retirement accounts and $200k after tax. At 62 I'll get a $5k/year pension, $10k from US SS, and $10k from UK pension when I hit 65.

I'm single and a Lazy investor, so part of my question is would you add anything to the small number of funds I have now to improve diversification or income (I plan to take a total return approach to income in ER). I also obviously plan to take dividends and gains form my after tax accounts first and spend them down until I'm 59.5

After tax account

Vanguard Total Stock Market Index ($100k)
Vanguard Total International market Index ($100k)

ROTH
Vanguard Wellesley ($50k)

IRA/401k etc
Vanguard Total Stock Market Index ($75k)
Vanguard Total International market Index ($75k)
Vanguard Total Bond Market ($200k)
Vanguard Wellesley ($100k)

[LOL!]

I saw your same post on Bogleheads with some good answers. I was thinking that you have made up your mind already and are just shopping your decision around to different accounting firms (Bogleheads, EarlyRetirement) until you find an accounting firm that completely agrees with you. Ken Lay, Jeffrey Skilling, and Andrew Fastow did that. More recently, so did the folks at Lehmann.

You decision is just fine. I'm on record here as liking more small caps myself, but it probably won't change things much for you at all.

[nun]

Quote:

Originally Posted by LOL! I saw your same post on Bogleheads with some good answers. I was thinking that you have made up your mind already and are just shopping your decision around to different accounting firms (Bogleheads, EarlyRetirement) until you find an accounting firm that completely agrees with you. Ken Lay, Jeffrey Skilling, and Andrew Fastow did that. More recently, so did the folks at Lehmann. You decision is just fine. I'm on record here as liking more small caps myself, but it probably won't change things much for you at all.

Yes, I'm looking for opinions in the 2 places that I think will give me relevant answers. I'm certainly never going to be an active investor, but I am definitely open to adjusting my funds and allocation. The answers on Bogleheads were useful and I hope to get input from here that might be a little more biased towards ER rather than just general investing

[LOL!]

Because you are using Wellesley, I cannot tell what your AA is. What % bonds? What % domestic? What % foreign?

Personally, I would move that International out of IRA/401(k) because you end up paying tax twice on dividends: First when the foreign government takes it bite and then again when you withdraw the funds during the decumulation years. If held in taxable, you should get the foreign tax credit. So switch $75K of international in 401(k)/IRA with total stock market (TSM) and in taxable move $75K of TSM into International.

It's just a tweak, but could save you $500 or more per year.

[nun]

Quote:

Originally Posted by LOL! Because you are using Wellesley, I cannot tell what your AA is. What % bonds? What % domestic? What % foreign? Personally, I would move that International out of IRA/401(k) because you end up paying tax twice on dividends: First when the foreign government takes it bite and then again when you withdraw the funds during the decumulation years. If held in taxable, you should get the foreign tax credit. So switch $75K of international in 401(k)/IRA with total stock market (TSM) and in taxable move $75K of TSM into International. It's just a tweak, but could save you $500 or more per year.

Thanks for the input

Wellesley is 60% bonds (weighted to investment grade corporate) and 40% dividend paying stocks, most I think are US.

The international rearrangement is an interesting idea, it'll add to the volatility of my after tax.

[jdw_fire]

Quote:

Originally Posted by nun I'm a long time conservative dollar cost averaging index fund investor. My asset allocation has always been around 50/50 and I'm thinking about early retirement at age 50 (in 2 years) as my mortgage is almost paid off and I would like some advice about my AA and taking money out of my accounts rather than putting it in. Once the mortgage is gone I estimate that my annual expenses will be $30k. I get $15k a year from rent and have $500k invested in retirement accounts and $200k after tax. ... After tax account Vanguard Total Stock Market Index ($100k) Vanguard Total International market Index ($100k) ROTH Vanguard Wellesley ($50k) IRA/401k etc Vanguard Total Stock Market Index ($75k) Vanguard Total International market Index ($75k) Vanguard Total Bond Market ($200k) Vanguard Wellesley ($100k)

it seems to me that asset allocation when using 3 pools of money in different tax un/favored accounts (i.e. non tax favored, TIRA, and Roth IRA) can be much more complicated than if all your money is in 1 of them. the reason is that one dollar in a Roth IRA is more valuable than one dollar in a non tax favored account which is more valuable than one dollar in a TIRA (all due to taxes).

let me explain, any dollar (whether it be principle from the previous year or some type of income earned this year) taken out of a Roth (in order to spend it) is a dollar you can spend, however a dollar taken from the non tax favored account (to spend) may be a dollar, if the taxes have already been paid on it (spending principle), or more likey may be worth something less than a dollar because taxes need to be paid on it (spending interest, dividends or capitol gains). and any dollar taken out of a TIRA is never (unless you are paying 0% taxes on income) a dollar since all WDs will be taxed as ordinary income. so if your tax rate is 50% (just an example to make the math easy) then $1 in a Roth is equal to $2 in a TIRA and unless you compensate for taxes your asset allocation isnt what you think it is. one easy way to compensate is for you to have all the same funds in all 3 pools of money at the same proportion, however doing this means you cant use tax favored accounts for more complex tax planning.

thoughts?

[nun]

Quote:

Originally Posted by jdw_fire it seems to me that asset allocation when using 3 pools of money in different tax un/favored accounts (i.e. non tax favored, TIRA, and Roth IRA) can be much more complicated than if all your money is in 1 of them. the reason is that one dollar in a Roth IRA is more valuable than one dollar in a non tax favored account which is more valuable than one dollar in a TIRA (all due to taxes). let me explain, any dollar (whether it be principle from the previous year or some type of income earned this year) taken out of a Roth (in order to spend it) is a dollar you can spend, however a dollar taken from the non tax favored account (to spend) may be a dollar, if the taxes have already been paid on it (spending principle), or more likey may be worth something less than a dollar because taxes need to be paid on it (spending interest, dividends or capitol gains). and any dollar taken out of a TIRA is never (unless you are paying 0% taxes on income) a dollar since all WDs will be taxed as ordinary income. so if your tax rate is 50% (just an example to make the math easy) then $1 in a Roth is equal to $2 in a TIRA and unless you compensate for taxes your asset allocation isnt what you think it is. one easy way to compensate is for you to have all the same funds in all 3 pools of money at the same proportion, however doing this means you cant use tax favored accounts for more complex tax planning. thoughts?

Interesting point, but it won't be a big deal for me as my annual income only needs to be $30k so I'll be in the 15% bracket. I'll probably take out a bit extra from my IRA and convert it to a ROTH while my income is low.

[LOL!]

Quote:

Originally Posted by nun The international rearrangement is an interesting idea, it'll add to the volatility of my after tax.

Probably not much since int'l large cap stocks are highly correlated with US large cap stocks. In any event, higher volatility means more tax-loss harvesting opportunities which are important.

[nun]

So I'm going to move the International fund from my tax deferred account and buy it in my after tax. I'm also thinking of buying an index growth fund and a TIPS fund as those "flavors" aren't well represented in my AA.