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Allocation Question
Old 10-24-2013, 08:22 PM   #1
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Allocation Question

Greetings!

I've been reading ERF posts for several years and occasionally comment or post to the site. I'll be 56 in January and DH is 55. I plan to retire within the next 6 - 16 months. DH will retire in May 2016 under FERS. We will be debt free and don't live a lavish lifestyle. Like the majority of you here, we live below our means and should have a comfortable retirement.

I rolled an ER package and 401k from a former employer with a FP in 2004. They did a reasonable job with my portfolio and charged 1% fee. After following posts on this site for several years, I finally got the courage to move my IRA from the FP to a Vanguard IRA in 2009. I've been reading several of the books recommended on this site and just recently read "The Investor's Manifesto". I plan to read it again to make sure I didn't miss any key points. I believe my allocation is pretty good based on my level of comfort with risk and my age. Below is my allocation in Vanguard Admiral funds:

7%Inflation protected securities fund 25%Total Bond Mkt Index Fund 18%Total International Index Fund 38%Total Stock Mkt Index Fund 12%Wellesly Income Fund

59% in stocks and 41% in bonds

This isn't too far off from a recommended portfolio in the book. However, Bernstein recommends short term bonds and I am invested in intermediate term bonds. I feel like this needs my attention wth all the press warning about bond exposure, but I don't want to overreact either. If I'm going to be in bonds - I want to be in the best possible position with bonds.

I'd appreciate any input and feedback.

Thanks!

dog
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Old 10-24-2013, 08:59 PM   #2
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VG Total Bond Index isn't all intermediate term. Apparently they have to or want to classify it under a term category and since over half is intermediate, they call it that. If you dig into the Portfolio & Management tab on this fund in VG, you'll see 28.1% is 3 years or less maturity. Whether that's ideal, I don't know, but just realize you ARE at least somewhat invested in ST bonds.
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Allocation and Tax bracket
Old 10-25-2013, 03:08 PM   #3
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Allocation and Tax bracket

pardon me if this doesn't belong in this thread..

I find it surprising that most asset allocation recommendations do not ask for or take into account the tax bracket one is in.

The question of leaving the money in equities vs. bonds *has* to be viewed taking into consideration the 0% tax treatment afforded to qualified dividends under certain brackets.

For a buy and hold ETF guy like me almost 100% dividend income is qualified dividend. You can have $50K+ in dividend income and pay zero Fed taxes.

For MFJ the taxable income limit is $72.5K; if you have about $20K worth of deductions and exemptions you are talking about income almost pushing $100K. For bond yields which are taxed at ordinary income rates, you will be paying possibly 25-30% on taxes at the margin.

Because of this fact, I am really weighted towards equities.
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Old 10-25-2013, 03:21 PM   #4
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Bonds are more for safety and comfort, to smooth out some of the worst equity dips. That applies regardless of taxes. Tax-deferred or tax-free retirement accounts are also a good place for income-producing bonds and dividends.

Absolutely, get as much as you can through the 0% capital gains brackets and lower marginal rates. If you have an IRA/401k you should also be considering Roth conversions, which may (or may not) be more valuable to you than 0% capital gains.
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Old 10-25-2013, 03:22 PM   #5
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Originally Posted by 47Percent View Post
pardon me if this doesn't belong in this thread..

I find it surprising that most asset allocation recommendations do not ask for or take into account the tax bracket one is in.

The question of leaving the money in equities vs. bonds *has* to be viewed taking into consideration the 0% tax treatment afforded to qualified dividends under certain brackets.

For a buy and hold ETF guy like me almost 100% dividend income is qualified dividend. You can have $50K+ in dividend income and pay zero Fed taxes.

For MFJ the taxable income limit is $72.5K; if you have about $20K worth of deductions and exemptions you are talking about income almost pushing $100K. For bond yields which are taxed at ordinary income rates, you will be paying possibly 25-30% on taxes at the margin.

Because of this fact, I am really weighted towards equities.
Does it really matter here? The OP is talking about an IRA. All withdrawals are taxed as regular income, not as capital gains or qualified dividends etc. (at least that is what happens with our IRA withdrawals).
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Old 10-25-2013, 03:32 PM   #6
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Originally Posted by 47Percent View Post
pardon me if this doesn't belong in this thread..

I find it surprising that most asset allocation recommendations do not ask for or take into account the tax bracket one is in.

The question of leaving the money in equities vs. bonds *has* to be viewed taking into consideration the 0% tax treatment afforded to qualified dividends under certain brackets.

For a buy and hold ETF guy like me almost 100% dividend income is qualified dividend. You can have $50K+ in dividend income and pay zero Fed taxes.

For MFJ the taxable income limit is $72.5K; if you have about $20K worth of deductions and exemptions you are talking about income almost pushing $100K. For bond yields which are taxed at ordinary income rates, you will be paying possibly 25-30% on taxes at the margin.

Because of this fact, I am really weighted towards equities.
It is a clever observation. If you have enough equities to generate dividend income stream from which you can live.....than who cares about bonds smoothing out market dips. In addition SS is waiting for you at 62-67.
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Old 10-25-2013, 03:55 PM   #7
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Originally Posted by Dog View Post
Greetings!

I've been reading ERF posts for several years and occasionally comment or post to the site. I'll be 56 in January and DH is 55. I plan to retire within the next 6 - 16 months. DH will retire in May 2016 under FERS. We will be debt free and don't live a lavish lifestyle. Like the majority of you here, we live below our means and should have a comfortable retirement.

I rolled an ER package and 401k from a former employer with a FP in 2004. They did a reasonable job with my portfolio and charged 1% fee. After following posts on this site for several years, I finally got the courage to move my IRA from the FP to a Vanguard IRA in 2009. I've been reading several of the books recommended on this site and just recently read "The Investor's Manifesto". I plan to read it again to make sure I didn't miss any key points. I believe my allocation is pretty good based on my level of comfort with risk and my age. Below is my allocation in Vanguard Admiral funds:

7%Inflation protected securities fund 25%Total Bond Mkt Index Fund 18%Total International Index Fund 38%Total Stock Mkt Index Fund 12%Wellesly Income Fund

59% in stocks and 41% in bonds

This isn't too far off from a recommended portfolio in the book. However, Bernstein recommends short term bonds and I am invested in intermediate term bonds. I feel like this needs my attention wth all the press warning about bond exposure, but I don't want to overreact either. If I'm going to be in bonds - I want to be in the best possible position with bonds.

I'd appreciate any input and feedback.

Thanks!

dog
Look at the past performance & the duration of the short-term & bond-index funds to see if you're comfortable with difference in volatility. Burton Malkiel & the couch-potato portfolios use the bond index, so I don't think you're that far off.

You may also want to understand asset location - what assets should be in tax deferred, tax exempt (ROTH) & taxable.

All the best
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Old 10-25-2013, 04:24 PM   #8
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Originally Posted by Bestwifeever View Post
Does it really matter here? The OP is talking about an IRA. All withdrawals are taxed as regular income, not as capital gains or qualified dividends etc. (at least that is what happens with our IRA withdrawals).
You are absolutely right. It makes no difference inside Tax sheltered accts. I did miss the fact that OP was asking specific to her Rollover IRA.

My point was related to AA more generally.

I guess we can keep all the Fixed Income income stream inside tax sheltered accts and dividend streams in regular taxable account. It may provide the safety and comfort in the abstract, but may not work if you need the full income stream for current expenses. It will work quite well if can live off just the dividend yields plus any other predictable income stream you have such as pension/annuity/RMD and can afford to leave the fixed income stuff inside an IRA just as a cushion.
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Old 10-26-2013, 08:45 PM   #9
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Thanks for the feedback and responses. I do plan to eventually move $ from IRA to my Roth. Just need to wait until I'm not employed to help minimize impact to taxes.
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Old 10-26-2013, 10:18 PM   #10
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Quote:
Originally Posted by 47Percent View Post
pardon me if this doesn't belong in this thread..

I find it surprising that most asset allocation recommendations do not ask for or take into account the tax bracket one is in.

The question of leaving the money in equities vs. bonds *has* to be viewed taking into consideration the 0% tax treatment afforded to qualified dividends under certain brackets.

For a buy and hold ETF guy like me almost 100% dividend income is qualified dividend. You can have $50K+ in dividend income and pay zero Fed taxes.

For MFJ the taxable income limit is $72.5K; if you have about $20K worth of deductions and exemptions you are talking about income almost pushing $100K. For bond yields which are taxed at ordinary income rates, you will be paying possibly 25-30% on taxes at the margin.

Because of this fact, I am really weighted towards equities.
WADR I think it is foolish to let the tax tail wag the asset allocation dog. Your AA should be based on your risk tolerance. Once your target AA is decided, then decide the most tax efficient placement of your portfolio.

While one typically would not have bonds in taxable accounts, if your tax-deferred and tax-free accounts exceed your total bond allocation so you end up with bonds in your taxable accounts and you are at a high marginal tax rate, then you would consider munis (a tax-efficient alternative to bonds).
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Old 10-26-2013, 10:24 PM   #11
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....I'd appreciate any input and feedback.....
Have you run a Portfolio Watch report for your target AA? If so, did Portfolio Watch flag any warnings for you?
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Old 10-27-2013, 07:46 PM   #12
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pb4uski, no I have not. I'll have to check that out. Thank you.
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Old 10-28-2013, 09:56 PM   #13
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Bernstein wrote that book in 2009. Would probably suggest a different bond selection now.
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Old 10-29-2013, 07:21 PM   #14
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Dog

The asset allocation suggestions I've seen have all been basic guidelines, and it depends on your particular situation, plus how much, IMO, you plan to withdraw annually and how long you plan to make withdrawels.

Popular guidelines suggest I should 57% invested in bonds. I'm retired, but established a 60% stock/40% bond AA, because I don't need to access my investments to live. I may take out 1 - 2% annually because I like to travel. My preference, for now, is for the principal to continue growing despite small withdrawels to leave money for my son. But that's me - your situation may be different.

Choose an AA to meet your needs - one that makes you feel comfortable. Do a little critical thinking (not implying you aren't) and run differ possibilities through Firecalc.

As for your choices, I like them. We currently have 52% VTSAX, 9% VTIAX and the bonds are in VBTLX. When last I looked at the average duration, VBTLX was pretty much intermediate term, but thinking way down the road, that doesn't bother me.
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