"Equity Creep" - something I never factored in...

[Midpack]

Some here have undoubtedly grasped the idea, just dawned on me.

Yes I know we are very fortunate.

Fortunately it appears we've won the game, so most of our nest egg will go to our heirs and charity. My target AA was 50:50, but our taxable account is well over half our total.

It has really bothered me 5+ years that our stock allocation just keeps growing with no good way to stop it - for the first 60+ years of my life I considered that a good thing of course. It doesn't make sense for me to continue rebalancing, it just generates more taxes while I am already struggling to avoid higher brackets/IRMAA. All our equity funds have huge embedded capital gains, there's almost no chance I'd ever have a loss to use for tax purposes. I stopped reinvesting dividends years ago, all my charitable contributions are QCDs now, too old for DAFs, and our IRAs are already all fixed income. My stock allocation is now 63%...

Of course it will fluctuate, but I'm coming around to the realization that it may be OK to let our stock AA drift up for the rest of our lives. Our AA is no longer what we need, it's become what benefits our heirs and charities. Given they are younger, a higher stock exposure for the next 10-20 years is probably a good idea. They'll probably inherit more, and if things go seriously south, it won't hurt us - and while the heirs will get less, they have no idea what they're probably going to inherit anyway (they'll never realize it could have been more or less). And they'll have benefit of stepped up basis on all our holdings, something we'll never see again.

I may finally stop letting "equity creep" bother me. Too soon old, too late smart...

 

[athena53]

I'm 73 and about 70% in equities. It doesn't bother me. I think the most important factor is your total assets. If they're big enough to withstand a bear market without your having to dispose of a big chunk of equities to meet expenses, it's OK.

 

[TheWizard]

I realized this several years ago, after starting SS at age 70.
I'm presently 95%+ stock funds across all of my accounts.
I do invest excess income into my taxable account most months, so tax loss harvesting happens from time to time...

 

[jazz4cash]

This is part of what is driving the trend to use a direct indexing strategy to optimize tax loss harvesting if you aren't planning for the step-up in basis for heirs.

 

[TheWizard]

This is part of what is driving the trend to use a direct indexing strategy to optimize tax loss harvesting if you aren't planning for the step-up in basis for heirs.

Not quite sure what you mean.
I use ETFs to TLH when appropriate. I do sideways manuevers: sell ETF #1 at a loss and buy ETF #2 with the proceeds ten minutes later.
I did this most recently on March 20th.

And yes, my taxable account will get stepped up basis eventually...

 

[Focus]

Some here have undoubtedly grasped the idea, just dawned on me.

Yes I know we are very fortunate.

Fortunately it appears we've won the game, so most of our nest egg will go to our heirs and charity. My target AA was 50:50, but our taxable account is well over half our total.

It has really bothered me 5+ years that our stock allocation just keeps growing with no good way to stop it - for the first 60+ years of my life I considered that a good thing of course. It doesn't make sense for me to continue rebalancing, it just generates more taxes while I am already struggling to avoid higher brackets/IRMAA. All our equity funds have huge embedded capital gains, there's almost no chance I'd ever have a loss to use for tax purposes. I stopped reinvesting dividends years ago, all my charitable contributions are QCDs now, too old for DAFs, and our IRAs are already all fixed income. My stock allocation is now 63%...

Of course it will fluctuate, but I'm coming around to the realization that it may be OK to let our stock AA drift up for the rest of our lives. Our AA is no longer what we need, it's become what benefits our heirs and charities. Given they are younger, a higher stock exposure for the next 10-20 years is probably a good idea. They'll probably inherit more, and if things go seriously south, it won't hurt us - and while the heirs will get less, they have no idea what they're probably going to inherit anyway (they'll never realize it could have been more or less). And they'll have benefit of stepped up basis on all our holdings, something we'll never see again.

I may finally stop letting "equity creep" bother me. Too soon old, too late smart...

Seems like this would likely essentially result in the increasing-equity-exposure-over-retirement approach that Wade Pfau and Michael Kitces found can outperform the traditional glide-down-based-on-age approach. So why not?

 

[Al18]

You could sell stock funds in your tax deferred account and buy MYGA to rebalance. No tax consequences and interest from the MYGA remains tax deferred

 

[jim584672]

Rising equity glide path: The Benefits Of A Rising Equity Glidepath In Retirement

 

[three putt]

This is part of what is driving the trend to use a direct indexing strategy to optimize tax loss harvesting if you aren't planning for the step-up in basis for heirs.

Our Fido rep suggested this to us recently to mimic S&P 500. The idea is to tax loss harvest the losers while holding onto the winners. This was his pitch for us to start using their paid services, which we declined. To do it ourselves would be way too much work.

 

[jollystomper]

Given the alternative, "equity creep" is quite fine by me .

 

[mrfeh]

Somewhat similar situation...trying to keep income down for ACA purposes. Target AA is 60/40, but currently closer to 70/30.

Supposed to rebalance (5% bands), but that would require selling in taxable, triggering significant gains.

Just gotta wait until we reach Medicare age.

 

[Steelpony]

Some here have undoubtedly grasped the idea, just dawned on me.

Yes I know we are very fortunate.

Fortunately it appears we've won the game, so most of our nest egg will go to our heirs and charity. My target AA was 50:50, but our taxable account is well over half our total.

It has really bothered me 5+ years that our stock allocation just keeps growing with no good way to stop it - for the first 60+ years of my life I considered that a good thing of course. It doesn't make sense for me to continue rebalancing, it just generates more taxes while I am already struggling to avoid higher brackets/IRMAA. All our equity funds have huge embedded capital gains, there's almost no chance I'd ever have a loss to use for tax purposes. I stopped reinvesting dividends years ago, all my charitable contributions are QCDs now, too old for DAFs, and our IRAs are already all fixed income. My stock allocation is now 63%...

Of course it will fluctuate, but I'm coming around to the realization that it may be OK to let our stock AA drift up for the rest of our lives. Our AA is no longer what we need, it's become what benefits our heirs and charities. Given they are younger, a higher stock exposure for the next 10-20 years is probably a good idea. They'll probably inherit more, and if things go seriously south, it won't hurt us - and while the heirs will get less, they have no idea what they're probably going to inherit anyway (they'll never realize it could have been more or less). And they'll have benefit of stepped up basis on all our holdings, something we'll never see again.

I may finally stop letting "equity creep" bother me. Too soon old, too late smart...

We never allocated, rebalanced or diversified. We purposed investments and let them ride. I learned this from a seasoned investor long long ago.

We use VTI as backup for the income generating investments that we live on.

It’s purpose is for LTC. The more it creeps up the better I feel.

I do shift balances around in an IRA for yearly RMD’s though where taxes don’t matter.

 

[marko]

I'm anticipating an big increase in state/local taxes and generally higher inflation ahead.

Sort of stocking up with income that I currently don't need, expecting to need it sooner than later. Mo' money betta than no money.

 

[Doolish1]

Yep, the EFTs dont kick those late year cap gains.

 

[Midpack]

You could sell stock funds in your tax deferred account and buy MYGA to rebalance. No tax consequences and interest from the MYGA remains tax deferred

You missed “our IRAs are already all fixed income” in the OP.

 

[Dalton]

Yeah, equity creep is how buckets work so well... set your fixed, and spend interest, dividends, and equities as needed.

 

[GenXguy]

Yeah, equity creep is how buckets work so well... set your fixed, and spend interest, dividends, and equities as needed.

Yeah, easy peasy.

 

[Montecfo]

I have a problem.I have too much money. i have tried everything, nothing works.

Can anyone help me make some poor investments possibly?

Sorry OP, just having a little fun.

 

[TheWizard]

I have a problem.I have too much money. i have tried everything, nothing works.

Can anyone help me make some poor investments possibly?

Sorry OP, just having a little fun.

Edward Jones to the rescue!!

 

[MarieIG]

All else being equal, equity creep (in a upward direction) beats equity decay in my book.

 

[disneysteve]

I've encountered a similar issue to a degree. Over the last couple of years, I was trying to trim our equity exposure. I was selling off equity holdings in tax-sheltered accounts so there was no tax hit, but the market just kept climbing. Even though I sold over $200,000 worth of equities, in the end I didn't have any less than I started with due to market growth. Not a bad problem to have.

 

[gauss]

Agreed.

If you have more than enough "dry powder" in bonds /cash than you will need, then perhaps it doesn't make sense to look at AA ratios.

-
FWIW I have bonds mostly in tax-deferred accounts with equity mostly in after tax brokerage.

When I need $, I usually sell bonds or take the income from the bonds in the tax-deferred accounts and buy equity in the tax-deferred accounts with a corresponding/matching sale of equity in the after-tax holdings.

I realize that I will need to pay some income tax, but at the LTCG rate it seems reasonable.

I have Roth Converted to top of 24% bracket for many years, so I guess I have a history of paying large income taxes, but looking forward to lowering it in the future.

-gauss

 

[Texas Proud]

Somewhat similar situation...trying to keep income down for ACA purposes. Target AA is 60/40, but currently closer to 70/30.

Supposed to rebalance (5% bands), but that would require selling in taxable, triggering significant gains.

Just gotta wait until we reach Medicare age.

LOL... from experience something else will pop up

The last two years I have just not worried about ACA credits...

 

[foxfirev5]

Using an LMP with TIPS and Strips, the next 10-17 years are covered. Retirement accounts are currently 52/45/3 Equity/Bond/Cash. The equity has risen from 43% at retirement 10 years ago. It would be even higher but I have sold some at all time highs to beef up the 10 year TIPS ladder.

Tax management is quite simple with 49% in tIRA's, 48% in Roths and 3% taxable Cash. Equities are split between the Roths (60%) and tIRA's (40%) .

Currently at ages 70/69 we are living nicely off SS, a mini pension, interest and dividends. A portion of the maturing bonds are factored in for increasing inflation. Equities are no longer sold so I would anticipate equity creep to continue and hopefully accelerate.

 

[jazz4cash]

Not quite sure what you mean.
I use ETFs to TLH when appropriate. I do sideways manuevers: sell ETF #1 at a loss and buy ETF #2 with the proceeds ten minutes later.
I did this most recently on March 20th.

And yes, my taxable account will get stepped up basis eventually...

Are you familiar with direct indexing? It's a strategy to optimize TLH using most but not all components of an index. Fido and others offer the service for 25-50 bps. I am neutral on it but it is a newish strategy for taxable portfolios with very low cost basis or folks that need cap gains relief.