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Index or Retirement fund?
Old 02-12-2008, 06:12 AM   #1
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Index or Retirement fund?

I've learned a lot from this board, and still have some investing questions. I'm thinking of investing monthly in a taxable mutual fund using excess emergency cash reserves and general savings. Choices so far include Vanguard Total Stock Market Index Fund and Target Retirement 2010 or 2015.

I'm 52, DW is 53. We plan on fully retiring in 2011. Investments include 260k in cash, 1.35m in 401k's and IRA's, 110k in misc equities, 210k in investment real estate, 400k of business stock. No debt. 401k's and IRA's are generally 80% equities, 20% bonds/income.

Plans are to withdraw from cash the first 2-3 years of retirement, and begin withdrawing from the new index/ retirement fund around 2014. Proceeds from business stock and investment real estate within the next 5 years will be rolled into this new account.

I like the Target Retirement funds for their allocation diversification. But it seems like advice from this board steers people away from these types of funds in taxable accounts. Is the index or retirement fund better for me?

I also question if my initial investment should be 100k in order to immediately qualify for admiral shares, or if I should invest over several months to qualify?

Thanks
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Old 02-12-2008, 06:36 AM   #2
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I went with ETF's in my taxable account. Less capital gain distributions with those. To accomplish an allocation similar to Target 2015(65/35 mix) you need more than VG's total stock market index fund. Below is a link to their etf's. At the very minimum I would go with VTI(65%) and BND(35%).

https://personal.vanguard.com/us/funds/etf/byname
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Old 02-12-2008, 07:10 AM   #3
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Quote:
Originally Posted by Ronstar View Post
I've learned a lot from this board, and still have some investing questions. I'm thinking of investing monthly in a taxable mutual fund using excess emergency cash reserves and general savings. Choices so far include Vanguard Total Stock Market Index Fund and Target Retirement 2010 or 2015.

I'm 52, DW is 53. We plan on fully retiring in 2011. Investments include 260k in cash, 1.35m in 401k's and IRA's, 110k in misc equities, 210k in investment real estate, 400k of business stock. No debt. 401k's and IRA's are generally 80% equities, 20% bonds/income.

Plans are to withdraw from cash the first 2-3 years of retirement, and begin withdrawing from the new index/ retirement fund around 2014. Proceeds from business stock and investment real estate within the next 5 years will be rolled into this new account.

I like the Target Retirement funds for their allocation diversification. But it seems like advice from this board steers people away from these types of funds in taxable accounts. Is the index or retirement fund better for me?

I also question if my initial investment should be 100k in order to immediately qualify for admiral shares, or if I should invest over several months to qualify?

Thanks
Why not both? I am planning to put about 35% in index funds, and 30% in Wellesley (which is similar to a retirement fund in that it is mostly bonds). Then, when the market has not done well I can tighten the belt and live on dividends from Wellesley and I won't have to sell index funds when they are down.

My Wellesley has to be in my taxable account, too, which is not the best but there will be no room in my (smaller) retirement accounts which will be full with the rest of the bond portion of my AA. So, it is what it is. After I am retired I plan to look into ETF's and play around with them, and very likely may transition towards what Dawg52 is recommending. But right now I feel more comfortable with Wellesley for whatever reasons (mostly inexperience).

I have the same dilemma with the Admiral shares. From what I have read on the Vanguard website, Vanguard reviews your balance in each fund each quarter, and automatically makes the changes to put you into Admiral. I am going to put less than $100K in each of some of my funds to begin with, investing 20% of my inheritance each month for five months. I will just wait the 3 months for Admiral if I have to, since I think the risk of investing large amounts on the wrong day is probably greater than the amount I would lose.
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Old 02-12-2008, 07:17 AM   #4
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I like the Target Retirement funds for their allocation diversification. But it seems like advice from this board steers people away from these types of funds in taxable accounts. Is the index or retirement fund better for me?
There are a lot of 'do it yourselfers' on this board. So they tend to compile their own 'retirement funds' using index funds (or GASP, even crafting individual stock portfolios).
IMO, it's up to you how much time and energy you want to devote to doing this.
Also the TSM index and the retirement funds you cited are completely different animals. So it depends upon what you are trying to accomplish. Since it seems you have a fairly high risk tolerence (AA of 80/20) and you have a bunch of cash on hand, I see no problem with you investing the 'extras' as you put it, in the TSM Index. If you want a 'self-adjusting' balanced fund then go with the 2010 or 2015. IMO, you have the luxury of choice.
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I also question if my initial investment should be 100k in order to immediately qualify for admiral shares, or if I should invest over several months to qualify?
Again, it depends. If you think that the market is going to gyrate a bit yet, then go ahead and DCA in. If not, then no harm in plumping it all down now. If it were me, I'd plump it down.
Full disclosure: I have never been lucky at market timing. So I'm probably wrong.

In any case, it sounds like you have a working plan. Looking forward to you joining our ranks. Good luck to you Ronstar
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Old 02-12-2008, 08:54 AM   #5
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First do not confuse index funds with equity funds. Index funds can hold bonds or stocks. Target retirement funds can hold only index funds as well. Equity funds could be index funds, but do not have to be.

Since your tax-advantaged accounts have plenty of room for any fixed income funds or any funds that contain a portion of fixed income such as balanced fund and target retirement funds, there is no need even during your early retirement to have any of these kinds of funds in your taxable accounts. I repeat: For you there is no need to have any fixed income, balanced funds or target retirement funds in your taxable account.

You should hold only tax-efficient stock index funds in your taxable account during your early retirement. Even so, you will have all the access to your tax-advantaged cash and fixed income that you need through a simple double-trade that works like this:

1. You need some cash to pay your utility bills. In the first part of the double-trade, you sell some stock in your Vanguard Total Stock Market index fund. You use the proceeds to pay your utility bill.

2. You say, wait a minute, what if stocks are down! Did I not just screw myself by selling low? The answer is no. In the second part of the double trade, you take some of the cash in your retirement account and buy the same amount of the total stock market fund that you sold in step 1.

The net result is that you have the same total amount of the total stock market index fund in your portfolio and you have paid your utility bill.

Let me describe 3 additional circumstances related to taxes.
Your VTSMX has gone up before you sell it. (a) If you sell shares held long-term you pay the lower capital gains tax rate. (b) If you sell shares held short-term you pay ordinary income taxes on the gains, but this is the same rate you would've paid on cash earning interest or a fixed income fund paying taxes. (c) If your VTSMX has gone down when you sell it, then you get to do something called tax-loss-harvesting and the IRS helps pay for your loss.

So the double-trade gets you what you need with the highest probability of paying the lowest (or even no) taxes.
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Old 02-12-2008, 08:57 AM   #6
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..............I like the Target Retirement funds for their allocation diversification. But it seems like advice from this board steers people away from these types of funds in taxable accounts. Is the index or retirement fund better for me? ....................
Target funds hold bonds, which should be held in a tax deferred account for minimal taxes. TSM should be more tax efficient.

Edit: Oops posted same time as LOL.
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Old 02-12-2008, 01:19 PM   #7
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Note that most of Vanguard's ETFs are just share classes of its already existing funds. For example, like Vanguard's TSM admiral shares [VTSAX] is just a cheaper version of the investor shares [VTSMX], likewise VTI is just another share class of VTSMX. So, any distributions will be equal across all shares classes [i.e. VTSAX, VTI, VTSMX], and VTI will be exactly as tax efficient as VTSMX + VTSAX.

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Old 02-12-2008, 09:33 PM   #8
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Thanks for the help! I see that the consensus says the target retirement funds should be in a tax deferred account. And I see how I can get better bond exposure by reallocating my current tax deferred accounts instead of investing in bonds in a new taxable account. I'll look into ETF's for the new account.
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Old 02-12-2008, 11:49 PM   #9
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I repeat: For you there is no need to have any fixed income, balanced funds or target retirement funds in your taxable account.


What about tax-free municipal bond funds?
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Old 02-13-2008, 10:06 AM   #10
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[/b]

What about tax-free municipal bond funds?
The after tax return of the portfolio with taxable bonds in tax deferred [and tax efficient equities in taxable] will probably be higher than the portfolio with muni bonds in taxable [and equities in tax deferred]. See pages 18-19 of Vanguard's Portfolio Construction for Taxable Investors.

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Old 02-13-2008, 11:38 AM   #11
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I think one would use tax-exempt bonds only if there was not enough room in one's tax-advantaged accounts to hold bonds. Don't you?

I even keep my emergency fund in a tax-advantaged account, so that I don't pay any taxes now on its earnings.

(My statement had the "For you" in there for a reason.)
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Old 02-14-2008, 06:12 AM   #12
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I think one would use tax-exempt bonds only if there was not enough room in one's tax-advantaged accounts to hold bonds. Don't you?

I even keep my emergency fund in a tax-advantaged account, so that I don't pay any taxes now on its earnings.

(My statement had the "For you" in there for a reason.)
I am not sure I would put tax-exempt bonds in a tax-advantaged account.
You don't pay taxes on them anyways ... you get a lower interest rate ... and when you take the funds out of the tax-advantaged account you pay at earned income tax rates.
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