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Need advice re FIRE Investment strategy
Old 10-16-2013, 02:17 PM   #1
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Need advice re FIRE Investment strategy

Thanks for maintaining this helpful website. The best comprehensive source of information re: FIRE issues I have found. I would like some advice.

Here is my situation. I FIRE'd in July of this year. Anticipating FIRE, we put our main home on the market and it just closed. We have net proceeds from the sale of about $1.2 m; my questions relate to what to do with this sudden influx of significant cash.

I am 51 and my life partner is 40. Combined, we have about $1.2 m in a traditional IRA. This money is invested about 70/30.

With the proceeds from the house sale, we have about $1.3 m in investable assets. I intend this to be our primary source of living expenses for the next 12 to 15 years. Our recurring monthly expenses are about $7000 a month, but we have a few large purchases on the horizon (new car, travel, partner's schooling).

My plan is to put about $200k in cash to fund a year or two's worth of expenses plus the big ticket items. The question is what to do with the other $1.1 million that I want to invest, probably more conservatively, for expenses 3 to 15 years out.

My Fidelity rep has recommended that I put this money in a Fidelity managed account, with directions to invest about 50/50. The annual fee is 1% of corpus, measured quarterly. One advantage is the manager will manage the fund to reduce tax impact.

The common wisdom here seems to be not to use a fee manager. And I am tempted to divide the $1m between a managed and self-directed account. Here are my questions:
1) Have any others here used money managers and been glad that they did?
2) If I don't use a money manager, how can I accomplish my investment goals for this $1 million (again, the 3-15 years money) with the least amount of fund management time on my part?

Thanks! Tim
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Old 10-16-2013, 03:46 PM   #2
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For me.

1. No.

2. An easy as pie way would be to just put the $200k in an online savings account or CDs that mature when you need the funds and put the other $1m in Vanguard Wellington or Wellesley. However, this might not be very tax efficient.

Putting the IRA and taxable accounts together you would have ~ $2.3m in investable funds. Under your current plan if the taxable accounts are 50/50 you would end up ~ 60/40 overall with 8% of the 40% in fixed income in cash. That is pretty similar to my AA.

From a tax efficiency viewpoint it might better to have your fixed income allocation totally in your IRA and have your taxable accounts hold your domestic and international equities. So $1m of your $1.2 m IRA would be fixed income and the rest would be equities and your $1.1m would be all equities. Those, along with your $200k of cash would get you to 60/40 looking across all of your accounts and would be tax efficient as well.

Vanguard can help steer you through the process and will also do a complementary financial planning session for you given the amount of assets you have. I would forgo an FA and their 1% fee - with a little reading and thinking you can DIY and save yourself $5,500 a year that you can use on other stuff you enjoy. IMO efficient tax placement as I describe above and using low cost index funds will provide more benefits than any tax management your FA can provide.

Leave it be and then rebalance to your target AA annually and it will take very little time.
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Old 10-16-2013, 05:26 PM   #3
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Vanguard can help steer you through the process and will also do a complementary financial planning session for you given the amount of assets you have. I would forgo an FA and their 1% fee - with a little reading and thinking you can DIY and save yourself $5,500 a year that you can use on other stuff you enjoy. IMO efficient tax placement as I describe above and using low cost index funds will provide more benefits than any tax management your FA can provide.

Leave it be and then rebalance to your target AA annually and it will take very little time.
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Old 10-16-2013, 05:36 PM   #4
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Some here talk about buckets

your cash is a short term bucket
your 3-15 year horizon is another bucket
your long term assets are another bucket

Is there a reason in your head you separated house sale proceeds from the already invested assets?
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Old 10-16-2013, 06:28 PM   #5
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I wouldn't get too stuck on the two pools of money with slightly different time period goals. It's one portfolio, split between tax advantaged and taxed accounts, that has to last your lifetimes.

One of the easiest things you could do is put it all into a Fidelity Freedom retirement date fund, with a date that is about 2015 or so. A later date gets you more stock, an earlier date gets you less stock. That's it. You can look on the Fidelity website and figure out which date is at 50/50 if that sounds good. Vanguard will be cheaper, but you seem to be at Fidelity already.

Or create your own equivalent portfolio, with U.S. total stock market, International total stock market ex-U.S., and bond low cost index funds. Three funds in proportions you select and that's it. Once a year you rebalance to maintain your selected proportions. Two years cash outside of that in your taxable account (or online money market account with 0.9% interest rate) is perfectly OK and can reduce your worries. But keep in mind that if you always have two years of cash on hand it is essentially a part of your portfolio's asset allocation (essentially a very short-term bond).

Either of these two things works fine for as long as you want. As you become a more confident investor you can adjust things more to your liking in a few years.
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Old 10-16-2013, 09:21 PM   #6
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Originally Posted by TimSF View Post
...(snip)...
The common wisdom here seems to be not to use a fee manager. And I am tempted to divide the $1m between a managed and self-directed account. Here are my questions:
1) Have any others here used money managers and been glad that they did?
2) If I don't use a money manager, how can I accomplish my investment goals for this $1 million (again, the 3-15 years money) with the least amount of fund management time on my part?

Thanks! Tim
Do you really want to give away $10,000 every year for someone to do this stuff? As others said above you might try Vanguard and/or go with Fidelity but with a set of index like funds. You are looking for low ER's in the neighborhood of 0.2% per year (example, VWENX is 0.17% or $1700 on $1M).

For tax considerations, talk to a decent CPA about planning and pay only on an hourly basis. After a year or two this shouldn't be really necessary but is a place to start.

Just a few thoughts.
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Old 10-17-2013, 10:46 AM   #7
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Thanks all for your helpful suggestions. "No" I don't want to give away $10k a year to a money manager. The problem for me is that I am a bit of a securities tinkerer - buying this, selling that -- and do not fully trust myself to buy 3 funds and let it alone. Case in point: I currently have about 25 positions in my IRA, accumulated over about 10 years. Also, I am not entirely convinced that a FA might not be able to save me taxes. Has anyone looked into the tax impact of buying and holding several funds in a taxable account? Years ago, when I held mutual funds in a taxable account, I learned a hard lesson about tax realization in a fund despite loss in the fund's value.
(Also, I view the money from the home sale as 'different' only because it represents the great majority, more than 90%, of my non-retirement investment pool.)
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Old 10-17-2013, 10:57 AM   #8
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Also, I view the money from the home sale as 'different' only because it represents the great majority, more than 90%, of my non-retirement investment pool.
A common problem is focusing on the present and not thinking of next 30-50 years. Model the next 30 years financially, think about social security, investments, both taxable and not, income taxes and risks with all of the above.

That might generate a new set of questions which makes you realize some of problems you are solving will be like trying to contain smoke or herd cats.
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Old 10-17-2013, 11:05 AM   #9
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I hope my past answer did not come across as too harsh. I went through somewhat similar stages in my investments. I can truly sympathize with the desire to tinker. Tax planning can be a bit frustrating. That is why I think one needs to take one's time and develop a long term strategic plan.

Mine plan is very unique but all my investments are basically in tax free or tax deferred so I don't have a switching tax hit. Most people are not in that position.

You might take a look at your past results and compare them to the results you would have gotten from a similar stock/bond allocation in VG's offerings. Maybe funds like Wellington, Wellesley or some combos. One has to think in terms of years with possibly some underperforming years where one has to stick with the same horse. If one is underperforming because of a low international equity percentage (as an example), it would be good to at least know this and to have considered the implications ahead of time rather then to suddenly move to international as it starts to outperform. If switching, maybe that should have been built in beforehand as a tactic.
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Old 10-17-2013, 11:38 AM   #10
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Again, helpful response. I have run some long-term models using firecalc and I will look into the funds you note and do some comparing. (No, not too harsh at all!)

My tax question relates not so much to the tax consequences of switching but the taxable events that occur within mutual fund holdings, even when you do not sell the fund or withdraw money to use. My concern is that if I buy $333k each of three different mutual funds in a taxable account I will experience significant tax liability as a result of dividend/capital gains realization within the funds, even without having withdrawn a cent. A manager may be helpful here. Am I off base about this?
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Old 10-17-2013, 12:00 PM   #11
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Thanks all for your helpful suggestions. "No" I don't want to give away $10k a year to a money manager. The problem for me is that I am a bit of a securities tinkerer - buying this, selling that -- and do not fully trust myself to buy 3 funds and let it alone. Case in point: I currently have about 25 positions in my IRA, accumulated over about 10 years. Also, I am not entirely convinced that a FA might not be able to save me taxes. Has anyone looked into the tax impact of buying and holding several funds in a taxable account? Years ago, when I held mutual funds in a taxable account, I learned a hard lesson about tax realization in a fund despite loss in the fund's value.
(Also, I view the money from the home sale as 'different' only because it represents the great majority, more than 90%, of my non-retirement investment pool.)
Index funds are generally as tax efficient as you can get. Vanguard just rolled a couple of tax managed funds into their index funds because of the very small differences between them.

If you set up your asset allocation explicitly, with percentage of portfolio targets for each fund and asset type, that can reduce your tendency to play with it. And if you use enough funds, you will have opportunities to rebalance. And there is nothing wrong with using a small portion of your portfolio to play with. Just track your performance and see if you are actually helping or hurting yourself. I also use some active (non-index) funds to see if I can do a little better.
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Old 10-17-2013, 01:07 PM   #12
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Originally Posted by TimSF View Post
Again, helpful response. I have run some long-term models using firecalc and I will look into the funds you note and do some comparing. (No, not too harsh at all!)

My tax question relates not so much to the tax consequences of switching but the taxable events that occur within mutual fund holdings, even when you do not sell the fund or withdraw money to use. My concern is that if I buy $333k each of three different mutual funds in a taxable account I will experience significant tax liability as a result of dividend/capital gains realization within the funds, even without having withdrawn a cent. A manager may be helpful here. Am I off base about this?
I would try to put these concerns into a way to compare the alternatives. For instance, suppose you come up with the following table:
1) effective ER with advisor
2) effective ER by full indexing
3) effective ER with active VG funds like Wellington

By "effective ER" I mean the ER you normally think of and the taxable gains effect on ER. You know you will eventually pay taxes on portfolio gains. So whether they are in yearly distributions or deferred for years to get cap gains treatment, you do have to pay the piper.

Naturally some assumptions will have to be made about yearly forward distributions, tax rates, etc. Some of this (tax rates) are very individual. That may be where some TurboTax runs come in if you do your own taxes. Helps with the "what ifs".

You could also consider having carving a part of the portfolio out that you manage with some switching or whatever. Maybe 80% buy-hold, 20% your own experimental choices. Might satisfy your urges and be a good learning tool.

I think VG does have some "tax managed" funds too. Don't know much about them. Morningstar shows the a "tax cost ratio" under the fund tab titled "Tax". Might help. I would be leery of letting the tax dog wag the tail (or however that saying goes).
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Old 10-17-2013, 03:48 PM   #13
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...
I think VG does have some "tax managed" funds too. Don't know much about them. Morningstar shows the a "tax cost ratio" under the fund tab titled "Tax". Might help. I would be leery of letting the tax dog wag the tail (or however that saying goes).
We've had some taxable $$ in two of the VG tax-managed funds over the years and have found that they throw off minimal capital gains and dividends with low expenses as well and decent performance. But as mentioned in another post, many index funds are also quite tax efficient.

I also agree with Lsbcal regarding priorities - I am financially better off if I get a $1000 taxable distribution and have to pay $250 in taxes (25% marginal rate) than if I get a $500 distribution and stay in the 15% bracket. (Leaving ACA subsidies out of this, which I agree does complicate things.)
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Old 10-18-2013, 02:11 PM   #14
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.....My tax question relates not so much to the tax consequences of switching but the taxable events that occur within mutual fund holdings, even when you do not sell the fund or withdraw money to use. My concern is that if I buy $333k each of three different mutual funds in a taxable account I will experience significant tax liability as a result of dividend/capital gains realization within the funds, even without having withdrawn a cent. A manager may be helpful here. Am I off base about this?
I think you're fretting about taxes too much. If you have $200k in an online savings account or CDs the tax implications are not meaningful because interest rates are so low - perhaps $2-4k of income at the most. If the other $1.1m was in an indexed equity fund the dividends would be qualified (0% tax if you stay in the 15% tax bracket) and would be ~$22-28k a year if the equity funds you hold have a 2.0-2.5% dividend yield. If this was the majority of your income then your tax bill would be nothing so the FA isn't bringing any benefit to the table by "managing for taxes". Am I missing something?

There are no tax implications to the tax-deferred funds until you start withdrawing from them.

If you have significant other sources of income (pensions, etc) then taxes might be a relevant issue.
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Old 10-18-2013, 03:25 PM   #15
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My experience is 99% of investment professionals do not have a strong tax background. The CFP exam has questions about tax brackets, but even the CFP I worked for would refer this to a CPA.
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