Opportunity For Portfolio Adjustments

[chinaco]

I would not call it a silver lining in the storm clouds... but it might be as good as it gets.

From time to time, I look at my portfolio and wish I had structured it differently (Taxable Account). But I was reluctant to do radical changes because of the cap gains I would incur. Now that my cap gains equal my losses... I can do so.

I am not making any moves yet... but it seems like it might be a good time.


For example: If you have been slicing and dicing and were holding a mix of mutual funds but would prefer a target retirement fund... now is probably your time to move the money around and position yourself for the future.

Or... if you think you are nearing Early Retirement and have a taxable account and a tax deferred account. Need more fixed in the taxable account so you have a stable income and the 72(t) from tax deferred is not enough, you might be able to shift the tax deferred assets to stocks and move the taxable to bonds and cash so you can have penalty free money. Yes there are trade-offs on cap gains vs income tax. But for some it might workout better in balancing out risk of having to sell stock in a down market.

Anyone have any thoughts or ideas to share?

[chinaco]

{Bump} Pulling this one back up.

No one is rethinking their investments and going to use this as an opportunity to restructure or switch investments in taxable accounts?

[LOL!]

I restructured in 2000-2002. I am pretty much only tax-loss harvesting now. The SPY, MDY, IWM that I bought in 2000 to replace VTSMX can now be sold for a loss and moved to VTI. It's the same asset allocation though.

There is absolutely no need to have bonds and cash in taxable if there is room for them in tax-deferred. To get the benefits of tax-loss harvesting, you need equities in taxable. Even if you sell at a loss in taxable, you can exchange bonds in your tax-deferred for equities. Thus, if you sell low, you buy low. This is all explained at Placing Cash Needs in a Tax-Advantaged Account - Bogleheads

[chinaco]

Quote:

Originally Posted by LOL! ... There is absolutely no need to have bonds and cash in taxable if there is room for them in tax-deferred. To get the benefits of tax-loss harvesting, you need equities in taxable...

Good point. That is our approach except for the emergency fund.

If I ER at 55... I will need at least enough fixed in taxable to provide income through to 59.5 (and not be subject to selling stock in market swings). During that period our income would be derived from (15% Pension + 35% Tax-def 72t + 50% taxable sources).

I was thinking that now might be the time to position it since I am about 3 years away from ER.

I was planning to sell stock and restructure (taking the gain) anyway and hold a bit more stock in the tax deferred to keep the target portfolio in balance.

Any thoughts on this approach?

[LOL!]

Quote:

Originally Posted by chinaco Good point. That is our approach except for the emergency fund.

You missed the point. You don't even need your emergency fund in taxable. And you don't need enough fixed in taxable to provide income through age 59.5. Go read the link carefully. Very carefully. Otherwise you will be paying more in taxes than you need to. If you pay lower taxes, that means you get to keep more money.

[chinaco]

Quote:

Originally Posted by LOL! You missed the point. You don't even need your emergency fund in taxable. And you don't need enough fixed in taxable to provide income through age 59.5. Go read the link carefully. Very carefully. Otherwise you will be paying more in taxes than you need to. If you pay lower taxes, that means you get to keep more money.

Ah hah! The strange thing is that I read that tip once before in this forum... but forgot. Thanks.

[chinaco]

Quote:

Originally Posted by LOL! You missed the point. You don't even need your emergency fund in taxable. And you don't need enough fixed in taxable to provide income through age 59.5. Go read the link carefully. Very carefully. Otherwise you will be paying more in taxes than you need to. If you pay lower taxes, that means you get to keep more money.

I was thinking about this a little more. I agree it is a good way to approach it. And it will work for me.


But there is one small caveat. It is really not about the basic technique but individuals situations where they might try to apply it.


You must have enough taxable funds to ride out a bad market dip or bear.

For example: I need a $3k emergency fund or $3k for retirement income.

Taxable: $5k in stock
Tax Deferred: $5k Stock and $5k Bonds

Market Drops by 50% (of course that never happens )

Taxable: $2.5k in stock
Tax-Deferred: $2.5k Stock and $5K bonds


Now the taxable account has insufficient funds until the market recovers.

It seems to me that the technique depends somewhat on how much assets you have in taxable and that there is a sizable cushion for temporary (maybe a few years) paper loss scenarios.

This may be more the case with emergency funds. The market and economy are interlinked. (But the economy and markets are a bit out of phase... market is a bit forward looking). For example right now if you lost your job and needed those emergency funds with the stock market drop... You would have insufficient funds.

On the other hand... if you have 2 or 3x the funds (in taxable) you plan to need in a certain time period... the risk is probably mitigated.