Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
AA Question - Taxable and Tax Advantaged
Old 01-03-2021, 06:27 PM   #1
Dryer sheet wannabe
 
Join Date: Aug 2020
Posts: 11
AA Question - Taxable and Tax Advantaged

Hi All,

I have been researching the recommended approach to thinking about asset allocation as I prepare to leave the corporate world. My portfolio currently sits as:

Taxable - $1.8M (90% Stock Index Funds / 10% Cash)
Tax Advantaged - $1.52M (IRA/401K)
Annual expenses are $72K before taxes

Any thoughts on treating my two accounts as two separate income sources? For example; is the thinking accurate that I can view my taxable account as my singular retirement "phase one" income source for the next several years and set an asset allocation that would be representative as a single source?

Or should my AA be set for my total $3.3M portfolio and it treat as one master account? I am planning to set an AA of 70% Stock Index Funds / 20% Bonds / 10% Cash.

Thanks in advance for any feedback and please let me know if I can clarify my intentions if helpful.

Thanks!
ItsTime is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-03-2021, 07:11 PM   #2
Recycles dryer sheets
PaunchyPirate's Avatar
 
Join Date: Feb 2014
Location: NW Pennsylvania
Posts: 409
Most advice that I read suggests that you view all of your accounts together when setting up your asset allocation. In other words, find a way to spread your 70/20/10 allocation across the $3.3m.

I retired at 56 with only 1 taxable account and 1 traditional IRA and a savings account. MY desired allocation is 55/45 stocks/bonds. My entire IRA is in bond plus another $275k of bonds in my taxable account to reach my goal of 45%. I treat the cash in my savings account as bonds in the AA. I adjust between the 3 accounts as necessary to maintain my AA.

For now, I am living off dividends from the taxable account plus some withdrawals from the savings account.
PaunchyPirate is offline   Reply With Quote
Old 01-03-2021, 07:14 PM   #3
Recycles dryer sheets
SnowballCamper's Avatar
 
Join Date: Aug 2019
Posts: 287
I think the general consensus is that the asset allocation is for the entire portfolio. I'd consider the tax implications though. Depending on what you have in the taxable account and the tax basis, it might make sense to harvest out of it if you have some loosers to sell, before having to pay taxes on bond interest. Other folks know more about this than me though...
__________________
--At what age does spending less now in order to have more later stop making sense?
SnowballCamper is offline   Reply With Quote
Old 01-03-2021, 07:24 PM   #4
Dryer sheet wannabe
 
Join Date: Aug 2020
Posts: 11
Thanks for the replies, PaunchyPirate and Snowball Camper. Makes sense that viewing the accounts together for establishing AA is the optimal approach.

I am struggling on the mental side with moving from the accumulation stage of my career to the distribution stage. I literally think about this several times a day playing scenarios in my head. I am hoping this is just part of the imminent transition process after having a paycheck for the past thirty years.
ItsTime is offline   Reply With Quote
Old 01-03-2021, 07:28 PM   #5
Recycles dryer sheets
PaunchyPirate's Avatar
 
Join Date: Feb 2014
Location: NW Pennsylvania
Posts: 409
Quote:
Originally Posted by ItsTime View Post
Thanks for the replies, PaunchyPirate and Snowball Camper. Makes sense that viewing the accounts together for establishing AA is the optimal approach.

I am struggling on the mental side with moving from the accumulation stage of my career to the distribution stage. I literally think about this several times a day playing scenarios in my head. I am hoping this is just part of the imminent transition process after having a paycheck for the past thirty years.
My first year was filled with my mind racing thru the “how to’s” of the finances. But after that I found I was in a well-oiled machine that I had set up. Now I just enjoy watching myself execute my planning.
PaunchyPirate is offline   Reply With Quote
Old 01-03-2021, 10:04 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 29,138
So I would treat as one fungible pot of money and go:

Taxable: $332k cash and $1,468k stock
Tax-Deferred: $664k bonds and $856k stock

for tax efficiency.

Then rebalance cash to 10% periodically by selling stock in taxable account, then rebalance bonds as needed in tax-deferred account to or from stocks in the tax-deferred account.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA TBD
pb4uski is offline   Reply With Quote
Old 01-03-2021, 11:40 PM   #7
Thinks s/he gets paid by the post
Out-to-Lunch's Avatar
 
Join Date: Jan 2020
Location: Milwaukee
Posts: 1,140
Quote:
Originally Posted by ItsTime View Post
I am struggling on the mental side with moving from the accumulation stage of my career to the distribution stage. I literally think about this several times a day playing scenarios in my head. I am hoping this is just part of the imminent transition process after having a paycheck for the past thirty years.
Totally normal! (Or I am messed up, too, which is eminently possible! )

I believe that, unsurprisingly, the plan @pb4 outlined is advisable.
Out-to-Lunch is offline   Reply With Quote
Old 01-04-2021, 12:53 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Koolau's Avatar
 
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 5,529
I agree with combining the two as far as figuring asset allocation. On a somewhat different front, I suggest thinking of tax advantaged accounts as being worth less than their nominal amounts (this doesn't change asset allocation).

Realistically, tax-advantaged accounts are worth their value minus the taxes which will be due when cashing out. I mention this since OP has a significant allocation within tax advantaged. Only the owner can make the calculation if desired as YMMV.
__________________
Ko'olau's Law -

Anything which can be used can be misused. Anything which can be misused will be.
Koolau is offline   Reply With Quote
Old 01-04-2021, 07:28 AM   #9
Thinks s/he gets paid by the post
 
Join Date: Jul 2013
Posts: 1,125
Quote:
Originally Posted by PaunchyPirate View Post
Most advice that I read suggests that you view all of your accounts together when setting up your asset allocation.
+1

https://www.bogleheads.org/wiki/Tax-...fund_placement
mrfeh is offline   Reply With Quote
Old 01-04-2021, 10:23 AM   #10
Thinks s/he gets paid by the post
Out-to-Lunch's Avatar
 
Join Date: Jan 2020
Location: Milwaukee
Posts: 1,140
Quote:
Originally Posted by Koolau View Post
I agree with combining the two as far as figuring asset allocation. On a somewhat different front, I suggest thinking of tax advantaged accounts as being worth less than their nominal amounts (this doesn't change asset allocation).

Realistically, tax-advantaged accounts are worth their value minus the taxes which will be due when cashing out. I mention this since OP has a significant allocation within tax advantaged. Only the owner can make the calculation if desired as YMMV.
I agree with your points, except to say that you certainly CAN use this information to tailor your AA, if desired: https://www.bogleheads.org/wiki/Tax-...set_allocation
Out-to-Lunch is offline   Reply With Quote
Old 01-04-2021, 12:44 PM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 10,875
Quote:
Originally Posted by Out-to-Lunch View Post
I agree with your points, except to say that you certainly CAN use this information to tailor your AA, if desired: https://www.bogleheads.org/wiki/Tax-...set_allocation
Good to see that I'm not the only one to do this. Even if I was the only one, I wouldn't change what I'm doing.
RunningBum is offline   Reply With Quote
Old 01-04-2021, 12:59 PM   #12
Thinks s/he gets paid by the post
Out-to-Lunch's Avatar
 
Join Date: Jan 2020
Location: Milwaukee
Posts: 1,140
Quote:
Originally Posted by RunningBum View Post
Good to see that I'm not the only one to do this. Even if I was the only one, I wouldn't change what I'm doing.
You may remember a "battle of wits" you and I had with Mr. pb4, which was my first real foray onto this forum. I was shocked that this viewpoint wasn't more widely held, or at least known. (https://www.early-retirement.org/for...al-101915.html)
Out-to-Lunch is offline   Reply With Quote
Old 01-04-2021, 01:16 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 10,875
Quote:
Originally Posted by Out-to-Lunch View Post
You may remember a "battle of wits" you and I had with Mr. pb4, which was my first real foray onto this forum. I was shocked that this viewpoint wasn't more widely held, or at least known. (https://www.early-retirement.org/for...l-101915.html)
I had to refresh my memory, but I do!

btw, you had a ')' sneak in at the end of your url. The thread, if anyone else cares, is at https://www.early-retirement.org/for...al-101915.html

My use of post-tax numbers goes back to when I had a lot of unexercised stock options, most of which were going to be taxed at 39.6% fed and 7.75% state. It would have been totally foolish to look at that money at full value. And it would've been foolish to ignore those options since that's what put me on the fast track to ER.

Nowadays, my taxes are much lower so it matters less if I use post-tax numbers, but I don't see a reason why not to use them, if I can make a reasonable guess at future taxes.
RunningBum is offline   Reply With Quote
Old 01-04-2021, 02:08 PM   #14
Thinks s/he gets paid by the post
Out-to-Lunch's Avatar
 
Join Date: Jan 2020
Location: Milwaukee
Posts: 1,140
Quote:
Originally Posted by RunningBum View Post
btw, you had a ')' sneak in at the end of your url. The thread, if anyone else cares, is at https://www.early-retirement.org/for...al-101915.html
Argh, I hate when that happens. Thanks for the heads-up; I got it fixed before the edit button went away.


Quote:
My use of post-tax numbers goes back to when I had a lot of unexercised stock options, most of which were going to be taxed at 39.6% fed and 7.75% state. It would have been totally foolish to look at that money at full value. And it would've been foolish to ignore those options since that's what put me on the fast track to ER.
Yes, that would do it!

For me, I am planning to start a 5-year course of Roth conversions. Same idea, but not as extreme as your situation. This regimen will "wipe out" about $300k of my portfolio (in taxes paid). But, of course, the conversions will not change my real financial position. So, it becomes natural to strive to start thinking in post-tax dollars. Natural to strive, that is, not natural to do. I will continue to struggle with this. I admit that I prefer anchoring on the pretax portfolio value!

All that having been said, I was a bit surprised how little difference it made in my AA. My goal now is about 50/50, and about 1/4 of my money is post-tax, and 3/4 is pretax, and that is where the bonds are. If I count all dollars "the same," my AA is 48/52. Calculated on a post-tax basis, it is 52/48.
Out-to-Lunch is offline   Reply With Quote
Old 01-04-2021, 03:21 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
ivinsfan's Avatar
 
Join Date: Feb 2007
Posts: 6,923
Regarding AA does anyone care that the OP and spouse are in their early 50's and will need HI for around 15 years before Medicare. I think they have one or two kids on HI at this time as well. I realize they have ample means to pay rack rate for HI. I'm just curious if AA for subsidy managing is turning into a thing...

The OP doesn't have access to much after tax cash IMO/
ivinsfan is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Reverse taxable & tax advantaged holdings? tmitchell FIRE and Money 6 06-21-2020 09:20 PM
Taxable vs Tax Advantaged Retirement Savings Regulator FIRE and Money 23 02-10-2017 06:55 PM
Wellington in a tax advantaged account or taxable acct? modhatter FIRE and Money 6 02-05-2016 09:27 PM
What to keep in after-tax and what to keep in tax advantaged? LakeTravis FIRE and Money 5 10-23-2013 06:04 AM
Taxable vs. tax-advantaged kyounge1956 FIRE and Money 24 08-02-2010 08:17 AM

» Quick Links

 
All times are GMT -6. The time now is 11:23 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.