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Help with Vanguard fund choices
Old 01-04-2014, 03:34 PM   #1
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Help with Vanguard fund choices

In December, we met with a Vanguard CFP through Voyager Select program and went over our situation and their recommended funds. I am about to send Vanguard some significant money to get to the 500K minimum they require for the consultation to be no cost. Their fund recommendations were basically index funds with our AA at 40/60 (stock/bond)
Since that time, I have purchased Pen Fed 5 year CD's (thanks to this forum!) to the tune of 20% of our portfolio. Am thinking of going with a mix of Wellesly and Wellington for the balance of that 500K ( I like the simplicity) DH's 401K has been put 100% in Fidelity Freedom 2015 which is a 40/60 balanced fund.
We are both 57, and looking for DH to go part time with his company next year. Plan on both taking SS at 62, which will reduce our WR to around 2.6%, which seems prudent. We are solidly in the 15% tax bracket, and will continue to be in that bracket in retirement.
After we fund our Roths for this year, the balance of the new money being sent to Vanguard will be in taxable funds. Can anyone advise if holding Wellington and Wellesly in taxable funds is somehow a bad idea? We will need some income to fill the gap once DH goes part time, but don't want to generate too much taxable income. In our bracket, long term gains are taxed zero, and qualified divs are taxed at a lower rate as well, I believe. So maybe there's no problem?
Thanks in advance for your thoughts and advice-I'm very grateful for this forum, as I've learned a ton here.
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Old 01-04-2014, 03:45 PM   #2
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To maximize tax efficiency, bonds should be in tax deferred accounts. Wellington and Wellesley both have significant bond components. The earnings on bonds are taxed at earned income rates.

If you haven't posted at the Boglehead forum, as well, I'd recommend it.
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Old 01-04-2014, 05:17 PM   #3
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Personally, I prefer keeping my stocks and bonds in separate funds - requires occasional rebalancing on my part, but allows a bit of flexibility in withdrawing, depending on which asset clas performed better, and should you decide you need to change your AA for some reason. Check out Vanguards municipal bonds for a taxable account - might save you some taxes on income. We're in a similar situation, except we've already retired, and chose to go 60 stocks, for a bit more earning power. We maintain a cash account for the occasional year when both stocks and bonds do poorly, so we're not selling at a loss.

Just some thoughts. Good luck.
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Old 01-04-2014, 06:14 PM   #4
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Since you are in the 15% tax bracket it is only moderately inefficient to hold Wellesley and Wellington in a taxable account. They are fine funds.

Still I'd be inclined to put some of the money into Vanguard Total Stock Market and the rest in Wellington. If Wellesley is an option in the 401K I'd move my money into that. If not and you end up having more equities than you are comfortable, I look at moving some of the 401K money into a bond fund (personally I'd stick to shorter term bonds)
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Old 01-04-2014, 06:32 PM   #5
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From my understanding, qualified dividends are treated like LTCGs wrt 0% for those in the 15% bracket. As long as qualified dividends are at 0%, in a taxable account is a great place to hold those funds. How could you do any better? If you had it in an IRA, it would be taxed as ordinary income when withdrawn.

Just be aware that if you are on the top edge of the 15% bracket, any dividends or cap gains that spill over are taxed at 15%. The Qualified Dividend and Capital Gain Tax worksheet you fill out with your 1040 shows this.
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Old 01-04-2014, 06:43 PM   #6
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If you want simplicity, why have 2 funds when you could have a single fund: Pick Target Retirement fund or a LifeStrategy fund with the asset allocation that complements your PennFed CDs. The Vanguard rep could tell you which fund would get you to overall 40/60. Hint: it will be more than 40/60 for the fund since the CDs are 0/100 and the Freedom fund is 40/60.
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Old 01-04-2014, 10:22 PM   #7
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Thank you all for taking the time to respond. The only bond fund in DH's 401k is Pimco, and the expenses are really high, so I moved money out of there. I was a bit miffed at the Vanguard CFP, who suggested 100% of the 401k money there (and miffed at myself for not looking at the expenses sooner-oh well) Much lower expenses in the Fidelity Freedom Fund. Secondly, my thought was to put all the new taxable money in Wellington, and the balance in Wellesley (tax deferred accts) but I will take a look at where this leaves the AA. I have a spreadsheet going to look at all of it. I think we will have another chat with Vanguard about all this, but wanted to bounce our situation off of you all. I like that having all in a couple of balanced funds, the rebalancing is done for us, but I see the value in having separate funds for stocks and bonds, as Seraphim pointed out. Also, thanks for the referral over to Bogleheads. Good discussions and info there.
Finally, I have to say that I can hardly believe we are moving soon from the accumulation phase to early semi retirement. It's very exciting but a little nervewracking at the same time! Thanks again, all!
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Old 01-04-2014, 11:04 PM   #8
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....Check out Vanguards municipal bonds for a taxable account - might save you some taxes on income. ....
They are in the 15% bracket and expect to be there in retirement too. Qualified dividends and capital gains are both tax free.

I don't see munis as being sensible in their situation as their tax bracket is so low.
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Old 01-05-2014, 10:00 AM   #9
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If the markets were in "normal" mode....I'd have pretty well all our money in Wellington. I am just so shy of bonds right now that even that fund makes me twitch.
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Old 01-05-2014, 10:23 AM   #10
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I see a lot of people recommending Wellesley and Wellington on this forum, but I've never understood why. These are actively managed funds mixing equities and bonds. Why not buy VG Total Stock Market and Total Intl Stock Market for your equities, and then choose your bond funds based on your requirements. This way you can keep your taxable bonds in a tax deferred account, and your muni bonds in a taxable account, and easily rebalance once in a while to keep your AA in tact. I see no advantage to using Wellesley or Wellington to accomplish this, unless I am missing something.
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Old 01-05-2014, 12:08 PM   #11
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I suspect they get recommended a lot because they are easy, relatively low cost, well managed funds with good track records. I agree if you are keen on optimizing return and tax efficiency, then slice and dicing with index funds is preferable, but a lot of people don't want to be bothered with tax efficient allocation, rebalancing, etc.

I recently recommended Wellesley to BIL's mom whose income is low enough that she doesn;t pay taxes and wanted something easy and safe but would still grow.
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Old 01-05-2014, 12:20 PM   #12
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And.....I am in the 15% bracket which it appears is not so much of a detriment in taxable accounts. I also have a few issues with staying to my AA (as well as it being just plain easier)......put it in one of these funds and close your eyes. Yes....if you don't mind re-balancing......and have nerves of steel when things go kaput. I exercise plenty....I don't know why everybody doesn't exercise more (yes....actually I do....but to make a point)......I eat waaaay too much crap and people wonder why I am stupid enough to do that. Good question.....I often ask myself the same thing. Those Wellington/Wellsley type funds are like being put in a health spa.....the choices are taken out of your hands, just do what they tell you and smile. If you want the absolute most from your savings....then they might not be the best thing. But then again.....they just might be.
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Old 01-05-2014, 02:15 PM   #13
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I suspect they get recommended a lot because they are easy, relatively low cost, well managed funds with good track records. I agree if you are keen on optimizing return and tax efficiency, then slice and dicing with index funds is preferable, but a lot of people don't want to be bothered with tax efficient allocation, rebalancing, etc.

I recently recommended Wellesley to BIL's mom whose income is low enough that she doesn;t pay taxes and wanted something easy and safe but would still grow.
Certainly, if we were in a higher tax bracket, I would consider other options. But given our situation, and the fact that I want the "spa treatment" then W & W will work fine for us. Honestly, I'd rather be out paddling my kayak, or hiking on the Pacific Crest trail than tinkering with investments and trying to squeeze every last drop of money out.
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Old 01-07-2014, 10:00 AM   #14
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My Wellesley fund is in a Roth IRA. I don't have to worry about taxes, right.
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Old 01-07-2014, 10:58 AM   #15
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My Wellesley fund is in a Roth IRA. I don't have to worry about taxes, right.
No worries unless the government changes the rules.
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