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Old 08-22-2013, 12:29 PM   #21
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My summary is you are close, most of issues are asset location, not asset allocation. Meaning location of which assets are in which accounts.

These are questions I would ask you:

You have $625k in a taxable account in equities, what is the BASIS of these investments? What is the large cap/small cap foreign allocation of these?


Cost basis is $574K.

total US market: 42%, 11% unrealized gains
total int'l market: 30%, 0% unrealized gains
US small value: 22%, 7% unrealized gains
int'l small cap: 6%, 10% unrealized gains


You stated expenses, but did not state income or current tax situation. Most of my advice would center around tax planning for next 3 years, not an investment strategy. Most financial planners are tax illiterate, so my second bit of advice is to find a tax professional you trust.

What is the detailed allocation of the fixed income? Treausuries, short term bonds, long term bonds, junk bonds, foreign, domestic, cash etc...

Fixed income is 83% intermediate US bonds, 17% bank loan fund.

What is the dollar amount (monthly and annual) of contributions to Roth, 401k, and taxable accounts?

Have been maxing 401K for a very long time. Have been maxing IRAs also, but may not be able to this year, due to income ceiling. Taxable contributions vary, depending on how much extra cash we have. In total, we can save roughly $40K/year, until I retire.

Then I would advise to do the following:

1) Move fixed income investments out of long term bonds and into short term or corporate notes. I would also look for alternative income income investments you are comfortable with (long-short, convertibles, short selling).

Can you explain why? Our bonds are in our IRAs and won't be touched for years.

2) I would allocate new money (amount depends on answers to preliminary questions) to fixed income in taxable accounts, with a bias towards short term bonds, inflation bonds and alternative income strategies.

Yes, I'm starting to think the same thing. My current thoughts are I-bonds and short-term munis.

3) I would consider taking a mortgage out on house and investing proceeds into short term cash reserves. Within 3 years you should be able to find CDs which yield higher than a 3% loan, and this is a good inflation hedge.

Ooh, this is unlikely. It may make financial sense, but we've been mortgage-free for 10 years, and I don't want to go back.

4) I would revisit budget for replacement costs- roof, car, HVAC, Healthcare, Dental care, vision etc...

Yes, will do.

Thanks!
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Old 08-22-2013, 02:30 PM   #22
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Thanks!
Quote:
Quote:
What is the detailed allocation of the fixed income? Treausuries, short term bonds, long term bonds, junk bonds, foreign, domestic, cash etc..

Fixed income is 83% intermediate US bonds, 17% bank loan fund.
You want more cash, and want more than just government bonds
Quote:

Quote:
What is the dollar amount (monthly and annual) of contributions to Roth, 401k, and taxable accounts?
You did not answer this question, and my specific advice focuses on this variable more than the others.
Quote:

Have been maxing 401K for a very long time. Have been maxing IRAs also, but may not be able to this year, due to income ceiling. Taxable contributions vary, depending on how much extra cash we have. In total, we can save roughly $40K/year, until I retire.
I would allocate new money in taxable accounts to munis, corporate bonds, convertibles and other income instruments.
Quote:

Quote:
Then I would advise to do the following:

1) Move fixed income investments out of long term bonds and into short term or corporate notes. I would also look for alternative income income investments you are comfortable with (long-short, convertibles, short selling).
Can you explain why? Our bonds are in our IRAs and won't be touched for years.
You suggested in 3 years you will be touching taxable accounts, and you have no fixed income in taxable accounts. Whatever tax problem is created will be minimal (because the balances will be low), and short in time (3 years) .

By adding this, you will add flexibility to the plan- its possible you could live off income from taxable investments (and not sell $625 equities at a loss) while doing Roth conversions and getting asset location set up properly.
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Old 08-22-2013, 02:38 PM   #23
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You want more cash, and want more than just government bonds

Sorry, didn't mean to give the impression it was just government. They are intermediate US bond market, not just government. PTTRX and FSITX.

You did not answer this question, and my specific advice focuses on this variable more than the others.

I thought I did - maxing 401K (about $20K including employer match) and IRAs ($11K).

I would allocate new money in taxable accounts to munis, corporate bonds, convertibles and other income instruments.


You suggested in 3 years you will be touching taxable accounts, and you have no fixed income in taxable accounts. Whatever tax problem is created will be minimal (because the balances will be low), and short in time (3 years) .

I think the plan will be to place some fixed income assets in our taxable account over the next 3 years. Does that make sense?

By adding this, you will add flexibility to the plan- its possible you could live off income from taxable investments (and not sell $625 equities at a loss) while doing Roth conversions and getting asset location set up properly.
Could you provide more detail on your last point? I don't think our taxable account is large enough to live off just dividends.

Thanks again.
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Old 08-22-2013, 02:50 PM   #24
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This is my initial shot at living off our taxable account for 10 years. Does it make sense? Would you take a completely different route?

Thanks.

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Old 08-22-2013, 02:56 PM   #25
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Could you provide more detail on your last point? I don't think our taxable account is large enough to live off just dividends.

Thanks again.
My suggestion would be add about $30k to taxable accounts each of the next 3 years. This would increase bond exposure of portfolio from about 30% to 35-40% in same timeframe without selling or rebalancing rest of portfolio.

The 100k added could yield 4-6% and generate $6000 of the needed $45k in income without cashing any investment out. It would lower the risk of the portfolio as well.

If that same 100k was invested in dividend paying stocks, its possible you could shift strategies to live off dividends... (3% of $725k would generate half the income you need at possibly lower tax rates).

I would focus on your tax situation each of the next 5-6 years first, see what you can do then which might be not in your favor now (Roth conversions, dividend tax rates, capital gains rates) and build that into the whole decision making process.
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Old 08-22-2013, 03:08 PM   #26
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My suggestion would be add about $30k to taxable accounts each of the next 3 years. This would increase bond exposure of portfolio from about 30% to 35-40% in same timeframe without selling or rebalancing rest of portfolio.

The 100k added could yield 4-6% and generate $6000 of the needed $45k in income without cashing any investment out. It would lower the risk of the portfolio as well.
Understood. I thought you were suggestion we might be able to live off taxable dividends without touching the principle.

So, if you look at my previous post, you'll see my plan is to add about $120K in fixed income to the taxable account over 3 years. Is that the kind of plan you were envisioning?
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Old 08-22-2013, 04:10 PM   #27
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This may not be true. If you sell whatever amount of equities in taxable you want (take a loss even) then sell bonds in taxadvantaged but use the proceeds to buy similar (not exactly the same to avoid wash sale) you have in fact accessed the same amount of money as selling the bonds, but moved the equity position into the tax advantaged space.
You did say to be careful of the wash sale rule, but I'll re-emphasize that it indeed applies even though the purchasing was being done in a tax-free account, many don't know that!
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Old 08-22-2013, 04:43 PM   #28
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...
  • wife and I both 47
  • I plan on retiring in 3 years, at 50
  • wife will retire in 5 years, at 52
  • annual expenses: $40-45K
  • tax bracket in retirement: 15%

My wife's salary doesn't quite cover our expenses, so we'll need to start partially living off of savings for a couple years. In five years, we'd be living completely off of our taxable account until we have access to IRAs, 8 years later.
.....
  • taxable account: $625K (100% equities)

...My primary concern is getting from 52 to 60. What would your advice be?
....
Seems to me that you are in good shape as your existing taxable account balances will cover over 14 years of your living expenses ($625/$45 ~ 14 years), which gets you from 52 to 60 with room to spare.

You should model it out but I suspect your tax rate will be much less than 15%. Mine went from over 28% to 0%. You can get a good idea by taking last year's tax return and zero out your earnings and make any other appropriate adjustments.

I don't understand the advice to favor taxable savings over tax deferred at this point in your journey. Your marginal tax rate today while you are both working is probably much higher than it will be between 52-60 so defer taxes today and do Roth conversions later to take advantage of your low tax rate in retirement.
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Old 08-22-2013, 05:59 PM   #29
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IYour marginal tax rate today while you are both working is probably much higher than it will be between 52-60 so defer taxes today
+1.
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Old 08-26-2013, 12:46 PM   #30
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I don't understand the advice to favor taxable savings over tax deferred at this point in your journey. Your marginal tax rate today while you are both working is probably much higher than it will be between 52-60 so defer taxes today and do Roth conversions later to take advantage of your low tax rate in retirement.
The advice I gave to boost taxable accounts is because 100% of those accounts are in equities now, and if the plan is to live off 100% equities for 8 years, I think we all could agree that asset class is too volatile for such plan.

The goal of add to taxable accounts is based on diversifying the asset class which can be sold to supply income from age 52-60. The tax consequences over the next 3 years would not be that high, IMO.
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