Wellesley Income Fund

[laurence]

A lot to ponder, I'll have to think and do a lot of reading. Thanks for the great rsponses to my questions. This is heavy stuff, I've had three rum and cokes, and my wife is requesting my presence in the bedroom, so I'm hitting the sack. Cheers,

Laurence

 

[cute fuzzy bunny]

Well heck, when my wife requests my presence in the bedroom, 3 drinks or not, I leave skid marks on the floor.

Theres a huge difference between "consensus investment right and wrong" when working and when ER'ed. I just smacked into some. I had some muni bond holdings until I found our tax rate too low to worry about them. Made a buttload of sense when I was taxed at the 50-something percent level. I also had my wife maxing out her 403b (like a 401k, only for hospital workers, teachers and the like, and usually less pleasing) until I also noted that we were basically saving a small bit of tax dollars in order to invest in lousy funds with high annual fees. Yuck. And as noted, instead of being able to take the gains 20 years from now as a long term capital gain, we'd have to take them as ordinary income tax levels, when we're also taking social security and have all sorts of other income out the wazoo.

Its all different after ER. And its very different from one joe to another.

 

[laurence]

LOL! Well, I'm paying for those drinks today! Depending on our raises this year (review time is April for both of us) we'll get the after tax set up either this year or next year. I hear you on the poor fund choices. Thanks everybody.

 

[smooch]

Now I'm confused. I thought that one should max out one's 403(B), then IRA, then any taxable savings you can manage. This thread seems to be saying that may not be correct. I have both Fidelity and Vanguard as options in my 403(B). I'm currently with Fidelity. My husband is a contractor, but becoming an employee soon, and I've been telling him to start up his 403(B) contributions again as soon as possible. Is that not a good idea?

 

[cute fuzzy bunny]

You have to balance the tax savings of the 401k/403b/ against your investment choices.

If you're paying 15% combined tax rate and your investment choices are 1-2% annual fee funds that underperform and are wrapped in an annuity, you rethink the brightness of the 403b.

If you're paying 35% combined tax rate and have access to nice vanguard funds or other low cost, well performing index funds...you max the crap out of your 401k/403b.

If you're getting employer matching funds, definitely go there.

When you leave that job, look strongly at rolling that 401k/403b over to an IRA at the cheap fund shop of your choice.

Lastly you have to balance the withdrawal "penalties". If you invest in an S&P500 index fund in an after tax account, hold the shares until you ER in a decade, then withdraw, you pay long term capital gains rates. If you put the money into a 401k/403b/IRA and withdraw in a decade...you pay ordinary income tax rates on those. Only way to escape that is to convert the IRA to a Roth, in which case you're going to be mighty pissed if the Fed Govt institutes a flat sales/value added tax and junks income tax before you retire.

For someone in the accumulation phase, the pre-tax deals are probably automatically the best choices. In our case my wife works 3 nights a week, and that gives us enough income to pay the monthly bills, health care, and earned income to allow us to max fund our Roths. I did have her maxing her 403b but at this point we're better off keeping the cash and throttling down the withdrawals from our taxable portfolio.

 

[cute fuzzy bunny]

LOL! Well, I'm paying for those drinks today!

Laurence...I learned some time ago that the best Rum is Vodka

Unless you're in mexico, you're waist deep in warm water at a pool bar where a fine bartender assures you that he makes the very finest rum and cokes on the planet earth, in which case you drink 6 of them, go pass out in your room and have to get up at dawn next morning to go scuba diving...where its all rendered a-ok when you discover that the only other diver is a gorgeous blonde who forgot her dive skin so will be diving in a skimpy leopard skin bikini with poorly designed ties that cause the top to keep falling off underwater. And after the 5th time it happens she quits bothering to put it back on. I imagine the coral and fish and other underwater stuff in Cabo San Lucas is lovely. I wouldnt know.

Whoops...that one got away from me...

 

[Rich]

Forgive my ignorance, but with either of those two funds (Wellington/Wellesley), would they be wise to use for after-tax money? If so, instead or taking the dividends out, could the money be permitted to grow inside the funds for some later withdrawl (yes, I understand I'd pay tax on money I haven't yet touched).

Thanks all,

 

[laurence]

LMAO! Now THAT is a vacation! I had a bad experience with vodka at age 17, still can't drink the stuff, nothing exciting, unless you count how "excited" my buddy was to try and clean his oriental rug before his parents got home .

Rich, are you referring to setting up a DRIP? I thought dividend producing funds in after tax accounts were not good in accumulation phase due to the tax burden incccured that you mentioned, but this thread makes me think it might be worth it to avoid the risk of a high tax burden in the future...dunno...

 

[charlie]

Rich,

The short answer is yes, you can have your distributions
automatically reinvested if you wish.

The long answer is that these funds are not very
tax efficient and are generally better suited for
tax sheltered accounts.

Having said that, I use Wellesley in a taxable account
because I need the income. TH mentioned in another
post that he likes Wellesley in a taxable account
because he is in a low tax bracket.

As previously mentioned, it would be wise to
look carefully at your own situation and decide if
these funds in a taxable account make sense for
YOU.

If you decide to use them in a taxable account, I
would suggest that you have the distributions
invested in a MM fund. This can be done automatically
as well. The income can then be spent or reinvested
as you wish without causing a "taxable event".

Cheers,

Charlie

 

[charlie]

Laurence, I had a similar experience with gin. One
weekend several of my buddies and I had a party
at a friend's house and tapped his dad's gin bottle
pretty hard and got sick all over the place .... really
gross. We were stupid enough to think that his
dad would not notice that we added water to the
gin bottle to make up the difference. He caught hell
and fingered the rest of us. I was grounded but
could not help notice the amused glint in my dad's
eye.

Cheers,

Charlie

 

[Rich]

>>>have the distributions invested in a MM fund. This can be done automatically as well. The income can then be spent or reinvested as you wish without causing a "taxable event".

Charlie, why would putting the proceeds in a money market fund result in no taxes?? You've really got my attention on this one!

Rich

 

[cute fuzzy bunny]

You have to pay taxes on the dividends issued by the fund in the year issued. I think charlies point is if you slush the money into a checking or MM fund, you can then spend those funds without generating a taxable event. If you reinvest the monies into fund shares, then later sell fund shares to create cash, that would be a taxable event (a sale of fund shares).

I have all the dividends and capital gains paid out by all of my funds sent straight to my checking account. I'm paying taxes on it anyhow. If I can live on that output (and I can, especially if you consider the addition of my wifes income), then I dont have to sell any fund shares in my taxable account. As long as the taxable account continues to appreciate in value in excess of inflation, and my spending needs dont rise above what the dividend/gains throw off from the funds generate, I never need to sell a share. Having no debt to service helps me live very well on a smaller withdrawal. So far so good for almost 4 years. Two of them pretty crappy ones.

Given the range of write-offs I can come up with, I manage to offset a lot of this income with deductions. Hence a low tax rate.

If I had higher spending needs and/or was in a higher tax bracket, I'd probably focus on dividend bearing stock funds, like vanguard equity-income, and have to periodically sell shares, but just pay the capital gains rates on the withdrawals. As long as your federal rate is <15%, the strategy I'm using works.

 

[charlie]

Rich, sorry about the clumsy way I tried to
say what TH so succinctly said.

 

[cute fuzzy bunny]

I'm sorry, you used the word "succinct" far too close to my name...

That rarely happens.

 

[wallygator69]

Old Fuzzy Wuzzy post Re: Wellesley Income Fund

This an old Fuzzy post that really got my attention.

I have all the dividends and capital gains paid out by all of my funds sent straight to my checking account.  I'm paying taxes on it anyhow.  If I can live on that output then I dont have to sell any fund shares in my taxable account.

Given the range of write-offs I can come up with, I manage to offset a lot of this income with deductions.  Hence a low tax rate.

Hi Fuzzy/Folks

Hope I'm not becoming a nuissance but this resource/you folks are great. (Thanks Dory).

I realize you can have Dividends sent to your checking account.

Is Fuzzy saying that in December when the mutual Fund companies report Cap gains you can have this cash redirected and sent to your checking account also? Is this unique to Vanguard or can you do it with all MF's (ie American funds, Oppenheimer etc)?

Last one "Given the range of write-offs I can come up with".....

Been looking at the Tax thing. What kinds of "write offs" do some of you more creative FIRE's have.

I am way to cute for prison but obviously want to be in the 15% or less bracket?

Thanks again,

Wally

 

[Nords]

Re: Old Fuzzy Wuzzy post Re: Wellesley Income Fund

Last one "Given the range of write-offs I can come up with".....
Been looking at the Tax thing.  What kinds of "write offs" do some of you more creative FIRE's have.

Well, the best way to lower your tax bracket is to get rid of all that pesky W-2 income. That usually eliminates the need for the deduction dance.

Then there's the child tax credit.

We have a mortgage (which is a whole 'nother thread) and that interest deduction has given us more room to convert our conventional IRAs a little each year to Roths.

We have a rental property which, as long as we're taking the depreciation, will never show a positive cash flow.

As you divest yourself of all your work-related crap office attire & equipment, giving it away is a deductible charitable donation.

Some of us have long-term rollover cap losses from the 2000-2003 "Dark Ages". We finished that business off last year.

Set up your retirement portfolio to throw off long-term gains & qualified dividends instead of short-term gains & interest.

Energy conservation legislation has added a lot of tax deductions for hybrid vehicles & renewable-energy home improvements. We're going to max those out this year & next.

Gosh, I love talking about this stuff when I can use it as an excuse it distracts me from actually having to enter the data into TurboTax...

 

[cute fuzzy bunny]

Yes, vanguard lets you direct capital gains and/or dividends into your checking acct. I ended up having all of it go to my vanguard prime MM fund, and have a regular 'paycheck' automatically transferred to my checking acct on the first of every month. I tweaked that to the point where I had just enough and a bit more to cover our average monthly bills. All but one of my bills 'autopays', so its almost a touch-free system.

Spouses, babies, taxes on homes, taxes on cars, charitable donations and the usual other suspects help. Keeping the income from ever being taxable income in the first place by using 401ks/ira/403b's, medical savings accounts, and taking your investment income as qualified dividends that have a low income tax cap also makes sense.

Make the egg small in the first place by using tax deferrals, then trim it down using good old deductions.

We hit high five figures in total money. Our AGI was half of that. The taxable income was almost half of that. Child tax credit and foreign tax credits, along with a couple of other small ones...cut the tax bite on that taxable income in half.

Right now, qualified dividends are the best free lunch I can see and I cant believe more people arent taking advantage of them. Your taxes are capped at 0/5/15% this year and next, and the following year unless a tax code revision is put in place (which is likely) they're untaxed.

As far as wellesley goes, I dont own it anymore. Its an excellent fund for a fully retired person of almost any age that wants a 4% withdrawal rate, low volatility, no sudden moves and no loud noises. You're not going to get 12% out of it on a sustained basis, but you'll get your 4% paid as a dividend, part of it qualified, and the principal should keep up with inflation and maybe a bit more. Its turned back 8%+ a year on average through some turbulent up and down times, with no big loss years and no sequential losing years.

With a working wife providing all the income we need, I didnt need the low volatility and could handle some sudden moves and loud noises in exchange for potentially stronger long term returns.

Edit: whoops, nords posted while i was typing. The curse of the long-winded. What he said.

 

[wallygator69]

Yes, vanguard lets you direct capital gains and/or dividends into your checking acct.  I ended up having all of it go to my vanguard prime MM fund, and have a regular 'paycheck' automatically transferred to my checking acct on the first of every month.  I tweaked that to the point where I had just enough and a bit more to cover our average monthly bills.  All but one of my bills 'autopays', so its almost a touch-free system.

Fuzzy,

Brilliant! I switched Banks few weeks ago finally going to on line bill pay and this is even better than what I expected to be able to do. (Is it too early in our relationship to tell you I love deeply respect you.

One more very important clarification I hope you'll help with.

Since long term cap gains are 15%, why do you care if Wellesly is not very tax efficient. I know it's conservative but if I grind the numbers.

$1M in Wellesly last year would have kicked of $40800 in Dividends.

It would have also distributed $17756.00 in Long term Capital Gains.

If you take it all, the total is $58,556.00 for the year.

Am I missing something?

Doesn't this potentially do something like the Gummy SWR. More in Good times, less in bad. ie:

Use the Yield last year of $40,800 as your base. If it's a good year there should be Long term Cap gains as your mad money. If not since it was a good year, you could sell off shares as needed, but no more than back to the Original Portfolio value at the start of the year.

If it's a bad year you just live off the $40800....

This is getting very interesting. For me anyways.

Thanks,

Wally

 

[cute fuzzy bunny]

Is it too early in our relationship to tell you I love deeply respect you.

Only if you're a chick. If you're a guy, we should grunt a little and talk about football or cars or something for a few minutes until nobody's looking anymore.

Since long term cap gains are 15%, why do you care if Wellesly is not very tax efficient.

A lot of wellesleys dividends are from intermediate term bonds, and are taxed as ordinary income. That could be a lot more than 15%.

Am I missing something?

Nope.

Doesn't this potentially do something like the Gummy SWR. More in Good times, less in bad.

You could do that, but then you'd be digging into your inflation protection; by reinvesting the capital gains, your principal keeps up with inflation (at least it has historically in that fund), so your next years 4.xx% yield is against that higher principal (the gains reinvested, plus share appreciation). You -could- take the capital gains, and hey, you're paying taxes on them so theres no extra hit for doing so, if you need the money and want to play it a little close, or have other stock holdings you wont touch for a long time. When I was knee deep in wellesley, I was taking everything that came off of it, but I had 1/3 of my net worth in an IRA that was all rocket stocks like small cap value, reits, healthcare and so forth. Even if my wellesley nestegg depleted between my retirement at 39 and 59.5 when I could access the IRA without penalty, the IRA should have doubled or better in that 20 years and easily carry me through another 20 years. Plus any social security that might show up.

Seemed like a plan at the time.

Thanks

S'allright

 

[cute fuzzy bunny]

Oh yeah, one other thing...look at 'target retirement income' from vanguard. Same approximate idea but no long track record as its new. Instead of 65% bonds and 35% large cap value its got some inflation protected bonds, some total bond market and some total stock market. Might do better in a high inflation environment, maybe not so much if inflation stays low.

maybe half in wellesley and half in target retirement income wouldnt be so bad.

If you can handle a little less regular income and want better potential long term growth, split half in wellesley and half in wellington, you'll end up with ~50% stocks and ~50% bonds, picked by the same people, same strategies. Your yield will drop to about 3.2% or so on average, but you have a better shot at having a bigger port in 10-20 years.

Rebalance between the two every couple of years.

 

[wallygator69]

Only if you're a chick.  If you're a guy, we should grunt a little and talk about football or cars or something for a few minutes until nobody's looking anymore.

Sorry, Dory probably wouldn't change the name to Brokebak website anyway..

That would be wrong...

 

[cute fuzzy bunny]

I wish I could quit posting with you.