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Rebalancing - what would you do?
Old 03-09-2013, 07:30 AM   #1
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Rebalancing - what would you do?

With it looking like we'll be able to retire in three years or less, I'm shifting us to a less aggressive AA. We're currently at 60/40, but I'm moving us to 50/50. Between that shift and the recent stock market run up, our AA is overweight in equities by 8% and under in bonds by the same percent.

Now my delimma. Our tax deferred accounts are 100% bond index funds and we have no Roths due to our income level, so I have no room in tax deferred or tax free accts to add bonds.

So all that's left is our taxable accounts. I'm a 100% indexer, like to keep the investments as simple as possible and our taxable account is in Vanguard.

So knowing that I need to sell equities what would you buy? Some options include buying Total Mkt Bond Index even though it's not tax effecient, possibly a tax exempt municipal fund which I'm not crazy about (also in Vanguard), or some other option I haven't thought of yet.
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Old 03-09-2013, 07:38 AM   #2
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If your tax bracket is such that munis are not attractive, I like a mix of the Vanguard intermediate term investment grade fund and the high-yield corporate fund.

Or alternatively, you could stay in equities but go with the dividend appreciation fund since the qualified dividends would be tax efficient.

While I am also 60/40, the problem I have with increasing my bond allocation is that I'm not being adequately compensated for the risk I am assuming, particularly interest rate risk.
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Old 03-09-2013, 09:30 AM   #3
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While it is great to have an asset allocation where you can isolate certain investments solely to certain accounts, sometimes it isn't possible.

My recommendation: do your rebalancing within one account, rather than across accounts -- at least for now. That is what you have to do for now.

When you get ready for distributions, you can straighten out the allocation among accounts when you take your withdrawal.

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Old 03-09-2013, 09:52 AM   #4
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Quote:
Originally Posted by Lisa99 View Post

Now my delimma. Our tax deferred accounts are 100% bond index funds and we have no Roths due to our income level, so I have no room in tax deferred or tax free accts to add bonds.
Both of you are able to contribute to a non-deductible tIRA and then immediately do a tIRA to ROTH conversion. That's $13k/year if you are both over 50.

I-Bonds are another consideration since the interest accrues tax deferred, and you can contribute a combined $20k/year between the 2 of you.
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Old 03-09-2013, 12:19 PM   #5
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Even though I-bonds are at 0-pct fixed rate they are still a really good deal and I have been shoveling my excess cash there.

Another option might be to pay down a mortgage if you have one.
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Old 03-09-2013, 12:52 PM   #6
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I would have no hesitation to buying I-bonds and/or tax-exempt munis.

Also, I would consider "back-door Roth" but that may not be possible.
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