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Where should I put taxable after-emergency fund money?
Old 03-24-2007, 05:23 PM   #1
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Where should I put taxable after-emergency fund money?

Hi all,

I'm feeling sorta restless with my investments. I have added the max to the IRA for 2006 and will do 2007 soon. I also max out the 401k.

I'm pretty frugal which pairs well with having a high income. I'm off to a good start as far as RE.

Right now I am trying to keep my investments simple, as I am good at researching but bad at implementing. So I finally threw in the towel and tossed most of it into the vanguard target retirement 2045. I also put 5% into the vanguard REIT and another 5% in DJP in the tax sheltered accounts.

I've also got a sizable chunk in the taxable account in the 2045. It has a pretty healthy gain so I don't want to sell it and take a capital gain, although looking back it might be more tax efficient if I sliced-and-diced.

But after the emergency cushion of 6 months of expenses, I still have about $60k to do something with. At least it is currently earning 5% in emigrant direct.

Should I just throw this 60k into the Target retirement 2045 as well? I have been thinking I'd like to add a more small/value tilt to my portfolio, but am worried that if I just add a few mix and match funds, then I am not getting the benefits of the target retirement allocation and changing the asset %ages.

So, I am thinking either throw everything into the Target Retirement, or add some slice and dice in the taxable account. What do you guys think? If I want to add Small/value, I should probably sell some of the Target retirement in the tax sheltered accounts, and put it there instead, correct?

Thanks!



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Re: Where should I put taxable after-emergency fund money?
Old 03-24-2007, 05:35 PM   #2
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Re: Where should I put taxable after-emergency fund money?

First, I would abandon Emigrant Direct and put that money into Vanguard Prime Money Market.

The other $60K, I would just put into Target Retirement.

But you have point ... if you ever want to do slice-n-dice, you had better start now. Once your target retirement builds up significant unrealized capital gains, you will never want to sell it because of the tax hit.
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Re: Where should I put taxable after-emergency fund money?
Old 03-24-2007, 05:49 PM   #3
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Re: Where should I put taxable after-emergency fund money?

Quote:
Originally Posted by LOL!
First, I would abandon Emigrant Direct and put that money into Vanguard Prime Money Market.
Can you explain why you prefer Vanguard Prime Money Market over Emigrant Direct? I have read a lot of good comments about Vanguard on these forums.
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Re: Where should I put taxable after-emergency fund money?
Old 03-24-2007, 05:56 PM   #4
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Re: Where should I put taxable after-emergency fund money?

Thanks for the pointer, LOL! I am just wondering why you say abandon Emigrant for Prime money market. This is more of a question as to "how do I compute the difference in return", and any help is appreciated.

From: https://flagship.vanguard.com/VGApp/...FundIntExt=INT
Prime Money Market:
Yield: 5.09% [SEVEN DAY AVERAGE INCOME YIELD NET OF EXPENSES]
Compound Yield: 5.21%
Expense Ratio: 0.29%

EmigrantDirect:
Interest Rate: 4.93 %
Annual Percent Yield: 5.05 %

So, if I just compare the Yield in both, I would say it is negligible between the two. Am I reading it accurately? (5.09 vs 5.05)

Any real reason except getting rid of another account?


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Re: Where should I put taxable after-emergency fund money?
Old 03-24-2007, 05:57 PM   #5
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Re: Where should I put taxable after-emergency fund money?

Good timing Sue! I wondered the same thing
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Re: Where should I put taxable after-emergency fund money?
Old 03-24-2007, 07:07 PM   #6
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Re: Where should I put taxable after-emergency fund money?

I'd compare 5.21% to 5.05% -- both are after compounding.

If you are going to have money floating around and some of it is at Vanguard, you might as well put all your emergency fund there as well. You will have a larger number which helps at Vanguard to avoid other fees. You will have an easier/quicker time of exchanging into Vanguard funds from Vanguard Prime MMF. You can write checks on the MMF as well. Indeed, I can write a check to myself and deposit it in person to my WellsFargo checking account and WF puts no hold on that check for me.

So better benefits and a higher interest rate means Vanguard to me.
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Re: Where should I put taxable after-emergency fund money?
Old 03-24-2007, 08:35 PM   #7
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Re: Where should I put taxable after-emergency fund money?

I've done alot of reading of old posts on this board concerning how people use Target Retirement funds as part of their portfolios, and there are a few strategies that stand out to me at the moment, that I'll throw out for ideas:

1) Put 85% in a Target Retirement fund and remaining 15% in individual stocks to try to hit "the home run" and burn off the testosterone, seems sensible to me.....leave the bulk of your portfolio alone to chug along, auto rebalancing and getting more conservative as you approach your early retirement date.

2) Another, as I recall, could be done if you have IRA(s) and taxable account. 2/3 of each account is in a Target Retirement fund. The remaining 1/3 of the IRA(s) is in a low-cost small cap value index fund. The remaining 1/3 of the taxable account is in a low-cost large cap value index fund. Of course, you pick the fractions you're comfortable with.

3) Or, you could be like Jack Bogle, who it is said has about 75% of his stash in index funds and 25% in actively managed funds.....you could use your Target Retirement as your 75% and pick one or two low-cost actively managed funds for your tilts and see if the managers can beat your TR benchmark.

If you decide to use the small value and large value tilts.....I think you're right you want the small in your IRA/401k because it would be relatively tax inefficient.

Currently I have my 401(k) funds (1/2 my stash) invested in Fidelity Freedom 2035, which is a purely actively-managed life-cycle fund. The other 1/2 of my stash is in Roth IRAs in Vanguard Target Retirement 2035 which as you know is purely indexed. The expense ratio on the Fidelity fund is a little high and I'm pretty convinced that indexing is the way to go, so I plan to move some of the Fidelity fund into a mix of index funds that will mimic the Target Retirement fund but with an even lower expense ratio (I have a few pretty good options in my 401k including a 0.05% ER S&P 500 index fund that will play a large part in the "mimic" collection of funds). The only problem with this is that I lose the automatic rebalancing of the TR fund and I have to manually get more conservative over time with stock/bond ratio. Still mulling this over.....

I could see myself winding up with either #2 or #3 above.....not sure I want to mess with individual stocks, but maybe. You probably can't go too wrong as long as you stay well diversified.

Well, just thought I'd throw some thoughts out there, as you know there are lots of ways to do it, good luck!
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