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I know the answer, but have to ask again...
Old 12-22-2015, 05:06 AM   #1
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I know the answer, but have to ask again...

Back to the end of another year and I am once again getting ready to rebalance per my AA and review my overall assets and FIRE strategy. I'm still 4 yrs from launching into retirement (goal is 55) so I am still in the accumulation mode. Short of having some debt on my home (by design since it is at 3% with plans to downsize at RE and pay cash for next home), my NW is a little over $5mm and is heavy in the market (taxable and tax deferred accts) and I am also in about 5 real estate investments. I have spent some time reviewing some of everyone's strategies/advice to determine what/how I might adjust my own strategy. Right now I am sitting on more cash than I would like to as the "Dark Side" is seducing me into market timing... I know, steer away from the Dark Side, but it feels like the metrics guiding our markets has changed from years past (perhaps another lie I tell myself?). Options (from my own experience and you all on this site)...

- Stay the course with my AA, turn away from the Dark Side?
- Start adjusting some of my equities in more dividend producing funds/etfs, although, this may be better for post FIRE?
- Go heavier into RE, although I know first hand the risks there?

Has anyone found a better mouse trap? Or, do I listen to the Force and stay the course with my boring AA?
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Old 12-22-2015, 05:19 AM   #2
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Back to the end of another year and I am once again getting ready to rebalance per my AA and review my overall assets and FIRE strategy. I'm still 4 yrs from launching into retirement (goal is 55) so I am still in the accumulation mode. Short of having some debt on my home (by design since it is at 3% with plans to downsize at RE and pay cash for next home), my NW is a little over $5mm and is heavy in the market (taxable and tax deferred accts) and I am also in about 5 real estate investments. I have spent some time reviewing some of everyone's strategies/advice to determine what/how I might adjust my own strategy. Right now I am sitting on more cash than I would like to as the "Dark Side" is seducing me into market timing... I know, steer away from the Dark Side, but it feels like the metrics guiding our markets has changed from years past (perhaps another lie I tell myself?). Options (from my own experience and you all on this site)...

- Stay the course with my AA, turn away from the Dark Side?
- Start adjusting some of my equities in more dividend producing funds/etfs, although, this may be better for post FIRE?
- Go heavier into RE, although I know first hand the risks there?

Has anyone found a better mouse trap? Or, do I listen to the Force and stay the course with my boring AA?
Stay the course.

From what I understand, it is best to write down a financial plan and then stick to it. So, this is what I strive to do. My plan included a gradual shift in AA over three years as I approached retirement since I wanted a different AA in retirement than in the accumulation years.

It is always tempting to just go with a hunch instead of following my boring old written plan. So, I decided to do what UncleMick does - - I have a small separate account (actually it is a tiny Roth IRA, about half of 1% of my portfolio) in which I invest just as I want to instead of following the plan. I am always sure before I mess around in the Roth that it will do better than my main portfolio. It NEVER does. But this is a good way to get these ideas out of my system.
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Old 12-22-2015, 05:22 AM   #3
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GA Dawg or MS ST Dawg? I had to ask.
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Old 12-22-2015, 05:34 AM   #4
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GA Dawg or MS ST Dawg? I had to ask.
GA.... Didn't know there was another one....
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Old 12-22-2015, 05:44 AM   #5
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GA.... Didn't know there was another one....
Yale also has a bulldog. His name is Handsome Dan.
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Old 12-22-2015, 06:29 AM   #6
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it seems to me the big question is something along the lines of "how much more do you need to accumulate before you reach 'game won'?"..

With 5 million in NW, many people would have enough to support their retirement income, invested in the safest of options. If that is you, then you really don't need to time the market, or put very much of your NW at risk, do you?

Looking at it similarly, but from a slightly different perspective, given your NW, what % gain do you need to make on your investments between now and FIRE day, and what is the safest way to achieve that?
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Old 12-22-2015, 06:37 AM   #7
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Stay away from the Dark Side. Timing is a fool's errand. If you are concerned about equities in general going forward, and you do not really need the growth due to your NW, you can stick to the plan but revise your AA to reduce equities. That would keep you with the Force and help you sleep better too.
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Old 12-22-2015, 06:45 AM   #8
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it seems to me the big question is something along the lines of "how much more do you need to accumulate before you reach 'game won'?"..

With 5 million in NW, many people would have enough to support their retirement income, invested in the safest of options. If that is you, then you really don't need to time the market, or put very much of your NW at risk, do you?

Looking at it similarly, but from a slightly different perspective, given your NW, what % gain do you need to make on your investments between now and FIRE day, and what is the safest way to achieve that?
Understand your point. In my case (and as it is for everyone), it's all relative to what kind of FIRE income you want to plan for. In my case, I am planning for an after tax income of $200K (+/- $250K ish taxable). Right now, I don't hate my job and it can be very lucrative. One of my issues right now that I am exploring with my DW is determining what I/ we will RE too. We are doing some test runs with our bucket list to do just that. But yes, you are correct, at some point the game is won, but everyone's "win number" will be different relative to their objectives.
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Old 12-22-2015, 07:16 AM   #9
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Dividends instead of unrealized capital gains increase one's income taxes. I am trying hard to avoid dividends in my taxable accounts.

Suppose we need $250,000 per year for expenses. If I sell $250,000 of investments that have about $100,000 of realized capital gains and $150,000 return of capital, then I don't have to pay income taxes.
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Old 12-22-2015, 07:34 AM   #10
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Not knowing what your AA is it is hard to respond. I think it is typical for people to be equity heavy for most of their career and then divert new money into fixed income in the last 5-10 years of working to add stability to their overall portfolio.

What I would suggest is that you sit down and write a DawgMan Investment Policy and decide on a target AA and then assess how your current AA compares to that target AA and proceed accordingly. I did something like this a number of years ago, initially as a roadmap for DW and DD should something happen to me but I find it helpful to read it every so often to remind me of the endgame.

May the Force be with you.
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Old 12-22-2015, 07:51 AM   #11
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Understand your point. In my case (and as it is for everyone), it's all relative to what kind of FIRE income you want to plan for. In my case, I am planning for an after tax income of $200K (+/- $250K ish taxable). Right now, I don't hate my job and it can be very lucrative. One of my issues right now that I am exploring with my DW is determining what I/ we will RE too. We are doing some test runs with our bucket list to do just that. But yes, you are correct, at some point the game is won, but everyone's "win number" will be different relative to their objectives.
in your initial post you said you were 4 years from RE. If that is a real firm goal, you might consider modifying your approach from what you refer to as being still in the "accumulation" phase. If 4 years is just what you say out loud, but you aren't really committed to it, (which may be the case based upon other things you say, such as you aren't sure what you will be REing to, and that you don't hate your job and it can be lucrative etc), then your approach can accept more risk, because if it loses money you can just keep working.
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Old 12-22-2015, 08:32 AM   #12
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Dividends instead of unrealized capital gains increase one's income taxes. I am trying hard to avoid dividends in my taxable accounts.

Suppose we need $250,000 per year for expenses. If I sell $250,000 of investments that have about $100,000 of realized capital gains and $150,000 return of capital, then I don't have to pay income taxes.
Usually "realized capital gain" is taxable so how you are ending up not paying the tax?
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Old 12-22-2015, 08:38 AM   #13
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Not knowing what your AA is it is hard to respond. I think it is typical for people to be equity heavy for most of their career and then divert new money into fixed income in the last 5-10 years of working to add stability to their overall portfolio.

What I would suggest is that you sit down and write a DawgMan Investment Policy and decide on a target AA and then assess how your current AA compares to that target AA and proceed accordingly. I did something like this a number of years ago, initially as a roadmap for DW and DD should something happen to me but I find it helpful to read it every so often to remind me of the endgame.

May the Force be with you.
I actually have been doing what you reference, hence, why I lead with I think I know the answe to my own question. That being said, it never hurts to be looking for a better mouse trap.
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Old 12-22-2015, 12:57 PM   #14
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Usually "realized capital gain" is taxable so how you are ending up not paying the tax?
Tax rate is 0%. Check it out for yourself.
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Old 12-22-2015, 02:22 PM   #15
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Your response is a bit misleading. Maybe $100k of LTCG would be tax of $0 in your case due to NOL carryforwards, but typically there would be some tax.

A single under 65 with standard deduction would pay $7,605 in taxes on $100k of LTCG if they had no other income.

Even a 65 yo married couple with MFJ and standard deductions would pay more than $0 (albeit only $300).
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Old 12-22-2015, 02:42 PM   #16
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Usually "realized capital gain" is taxable so how you are ending up not paying the tax?
up to the top of the 15% bracket qualified dividends and LTCG are taxed at zero.

I tend to like Q-dividends and LTCG as long as I can stay below the top of the 15% bracket.

LTCG can also be offset with realized capital losses.
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Old 12-22-2015, 03:35 PM   #17
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Even a 65 yo married couple with MFJ and standard deductions would pay more than $0 (albeit only $300).
I think we could use the foreign tax credit to cover that $300.
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Old 12-22-2015, 04:27 PM   #18
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I think we could use the foreign tax credit to cover that $300.
In that event you would have a capital gains tax offset by a foreign tax credit... but only if your equity portfolio included international. So your tax rate (even your effective tax rate) would not be zero....but your tax would be zero.
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Old 12-22-2015, 05:34 PM   #19
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Tax rate is 0%. Check it out for yourself.
May be I miss something but long term realized capital gain is taxed at 20% by the IRS and State Tax depends on State you live in. If you invested $150K and it gained over the years another $100K for a total of $250K after sale of your assets the realized capital gain is $100K. A minimum what IRS takes from it is 20% ($20K). It is better than ordinary dividend tax rate but only if your income is in higher bracket. Are you doing your Taxes yourself?
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Old 12-22-2015, 05:49 PM   #20
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May be I miss something but long term realized capital gain is taxed at 20% by the IRS and State Tax depends on State you live in. If you invested $150K and it gained over the years another $100K for a total of $250K after sale of your assets the realized capital gain is $100K. A minimum what IRS takes from it is 20% ($20K). It is better than ordinary dividend tax rate but only if your income is in higher bracket. Are you doing your Taxes yourself?
What you missed... or it may not be your situation... if that 100k is your only income and your file MFJ, there will be near 0 tax( is is a bit above the limit assuming no other events).

If you are in the 15% bracket, LTCG are taxed at 0% federal (state tax may be different).

I think 20% is the max tax rate on LTCG, not the minimum
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