MME And Macro Asset Perspective

[lark_L]

Well, these guys (Money Management Educators) came to my place of employment and gave their one hour "Tax Favored Investing" seminar. Interesting. The guys are financial professionals doing this on a volunteer basis and supposed not selling anything. Big part of the presentation is the "Macro Asset Perspective", here's a pdf.

Here's my take-away:

• Keep your assets split 50:50 between tax-deferred and taxable. This is the "horizontal diversification" Assumptions that tax rates may be lower when you retire may not be true. By splitting the assets, you have more flexibility. This made sense to me.

• Set the asset allocation or "vertical diversification" based on age. No problem here.

• Keep the equities (risk) in the tax-deferred accounts and the lower risk (income) in the taxable accounts. Thinking is that then you take half your distribution each year from each vertical part (Half taxable and half not), and this can reduce your total tax load. Seeing that I'm practically the opposite (at 53 years old), with most of the bonds in the tax-deferred to reduce my current taxes, this was a shocker.

Any words of wisdom here? How is this approach, it is valid? How in the heck would you get there, are they fishing for Roth IRA conversion commission?

[growing_older]

Conventional wisdom on equity/bond taxable/tax-deferred is with you, not with them. But it's not that hard to make a case either way, depending on what you assume for future rates of return. In other words, guessing.

The general idea to diversify and that includes splitting assets between taxable and tax deferred makes good sense. Assuming that the purpose isn't to predict the best way to maximize income, but rather to figure out the best way to assure at least adequate income no matter how future tax rates and economy develop.

[target2019]

The presentation seems balanced. I did not read anything revolutionary in the paper.

The charts would be useful in explaining asset allocation to anyone, so I bookmarked for future use.

[lark_L]

They've been back for their second session. This one was focused on retirement income planning. same MAP business, but now we're looking at getting our age% on retirement income into the bottom part of the map, which is the fixed income and steady income stream. This wasn't ground-breaking Talk about harvesting gains to cash/MM if you're three years or less from retirement.

I signed up for a free individual session, but I was quite wary. The session was interesting, he went over my portfolio, insurance, retirement budget. He's saying things like "what would you do if I got you $20-30,000 more each year after you retire". He tells me that 4% is too low a withdrawal rate, wow! He was a decent guy and I really enjoyed the talk. However, I have so little trust for anyone that makes their living doing this kind of work (excepting a fee-only financial planner), that I just can't get over this hurdle. After he sees my numbers, the sell gets to be fairly aggressive, not too bad, but it's a noticeable difference.

After the session, I get on his web page. Shame on me for not doing this sooner. He sells life insurance and annuities. Hmm - now I understand all the "steady income stream" talk. I don't have anything against annuities. Like anything, they have their place and can be a good tool. I think I'm done with MME.

[LOL!]

Tax-wise in the past, it has been better to keep tax-efficient equities in taxable and tax-inefficient fixed income in tax-advantaged. So I think they have things backwards.

Things may have changed now that bond funds pay so little and equity funds often have yields higher than bond funds. Thus some folks recommend keeping the same asset allocation (at least stocks:bonds ratio) in both taxable and tax-advantaged accounts.

Advantages of equities in taxable:

• Equities are volatile, so there are generally more tax-saving tax-loss harvesting opportunities if they are held in a taxable account.
• Unrealized capital gains are not taxed.
• Realized long-term cap gains are taxed at favorable rates as low as 0%.
• Equities get a stepped up basis for heirs if you die.
• Losses offset gains and excess losses are deductible on your tax return.
• Qualified dividends are taxed at favorables rates as low as 0%.
• You get a credit for foreign taxes paid.

Disadvantages of non-tax-exempt bonds in taxable:

• You pay taxes on your bond dividends at your marginal income tax rate.

But with interest rates turned upside-down nowadays and tax-exempt munis paying more than CDs and Treasuries, perhaps bonds in taxable is the way to go for new money. If bond funds lose money, then tax-loss harvest. If things change so that bonds are paying a higher yield, then the share prices of bond funds will drop and allow one to sell at a loss and go back to the old way of bonds in tax-deferred.

Of course, one might say "Put things that stand to gain the most in a Roth IRA", but even that has problems. The things that are possibly going to gain the most are also the things that are going to lose the most. A Roth is precious future tax-free space, so you don't want to lose money in it if you can help it.

We write about Roth conversions all the time on this forum. With a heavy dose of stock funds in taxable, one can use those funds for expenses and pay hardly any taxes at all which in turn allows one to do Roth conversions and pay hardly any taxes at all.

So our taxes have been relatively low because we have been doing equities in taxable and keeping bonds in tax-deferred. On our Schedule B we have essentially no interest income, no taxable bond income, and mostly qualified dividends. With our bond allocation in tax-deferred our IRAs have not become enormous, but that also means our future RMDs (if any) will not be enormous and our conversions to Roth will be manageable.

I think the MME advice would cost us an extra $10K to $20K more a year in taxes.

[MichaelB]

Quote:

Originally Posted by lark_L Any words of wisdom here? How is this approach, it is valid? How in the heck would you get there, are they fishing for Roth IRA conversion commission?

Thanks for sharing that.

Quote:

Originally Posted by growing_older Conventional wisdom on equity/bond taxable/tax-deferred is with you, not with them. But it's not that hard to make a case either way, depending on what you assume for future rates of return. In other words, guessing.

+1

I don't have any tax deferred accounts, but if I did there are many investments I would want to have there that are not equities. As long as capital gains are so much lower than ordinary rates I would keep equities in taxable accounts.

[Animorph]

It's easy enough to sell bonds in your tax advantaged accounts, sell equities in your taxable accounts and then buy the equties in your tax advantaged accounts. Net is that you sell some bonds, the cash ends up in your taxable account, you didn't make a withdrawal from your tax advantaged account, and you have the same number of equity shares as before.

Keep stuff where it makes sense. Worry about accessing it when the time comes.