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

[Route246]

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...

There is a good way to stop it. You sell and pay taxes. That is a good way to stop it. Those taxes were deferred and the time to pay it is when you cash it out. We bit that bullet two years ago and it should be completed in 2026. We paid low-7-figure taxes in order to reallocate equities to real estate (new upgraded primary residence). We went from liquid asset to illiquid asset. It puts a roof over our head, a very nice roof over our head and we can enjoy that. Like you, we won the game and it is time to stop saving and deferring taxes. You can only do so much tax planning, tax massaging and tax avoidance but at what cost? Heirs get less because you paid taxes? Does that matter? I came to the realization that the heirs will enjoy it while Mom and Dad sacrificed because we didn't want to pay taxes? Once I rationalized it that way it became easy to place those sell orders and pay CG tax. I'm at peace with that.

 

[Koolau]

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

But, isn't the opposite of equity creep actually (wait for it) rebalancing?

Just wondering as I'm as guilty as many here of just letting my winnings in equities ride. Never thought I'd have this much equity in my AA! Gaaaaahhhhcck!

I've tried everything (like Montecfo) including spending MORE. I've even tried to do "some" rebalancing. I thought taxes would take a bigger bite what with my ever increasing RMD's - but then there was that "pesky" OBBB with its attendant and infernal tax cuts! What's a person to do. I know. Just give thanks and enjoy the ride!

 

[Midpack]

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.

I get it. But WADR I wasn't asking for pity or 'poor investment' ideas - I was recognizing that after a lifetime of setting AA based on what we need, it's dawned on me maybe our AA should now shift to what's best for heirs/charities. Whole different new mindset. I needn’t worry anymore. That was my point...

 

[Koolau]

There is a good way to stop it. You sell and pay taxes. That is a good way to stop it. Those taxes were deferred and the time to pay it is when you cash it out. We bit that bullet two years ago and it should be completed in 2026. We paid low-7-figure taxes in order to reallocate equities to real estate (new upgraded primary residence). We went from liquid asset to illiquid asset. It puts a roof over our head, a very nice roof over our head and we can enjoy that. Like you, we won the game and it is time to stop saving and deferring taxes. You can only do so much tax planning, tax massaging and tax avoidance but at what cost? Heirs get less because you paid taxes? Does that matter? I came to the realization that the heirs will enjoy it while Mom and Dad sacrificed because we didn't want to pay taxes? Once I rationalized it that way it became easy to place those sell orders and pay CG tax. I'm at peace with that.

What an interesting take. Here's something I wish I could do: I wish I could find someone who would buy my condo and then rent it back to me for market rate! I'd love to cash out all that gain in equity and have it all be tax exempt!

The only glitch is that there would be no way to enforce an agreement that 1) the new owner would allow me to stay as long as I desire and 2) the new owner would only charge market rent. Other than that, I think it's a great idea!

 

[Koolau]

I get it. But WADR I wasn't asking for 'poor investments' - I was acknowledging our AA is no longer guided by what we need, it's now what's best for heirs/charities. That was my point...

Have you looked into Charitable Remainder Trusts? If a large portion of your "left-overs" will go to charities, CRTs just might be an option.

I've recently been thinking about CRTs and just beginning to look into the details.

Not so much a suggestion as it is a "musing" about CRTs for myself, I guess.

 

[Midpack]

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

Good read thanks! However, it seems to show equity creep can be beneficial if you start with a low allocation to equity and end high, e.g. from 30% to 70%. With me starting at 50%, it doesn’t get better letting it drift up, but it really doesn’t get significantly worse.

It also shows decreasing equity exposure with age isn’t likely to improve results, holding constant would fare better - challenging the “100/120 - age allocation” trope.

 

[CalBird]

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...

There is theory that the equity should drift up gradually as there is less and less need to protect from SORR with fewer years of life left.

 

[steelhead]

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.

This is pretty much our situation as well. Started retirement at 60/40 and are now about 70/30. Hold VTSAX only in a taxable account and have to date been unwilling to forgo APTCs to rebalance. Might work out (as it has so far) or it might not, but with a low WR we should be able to weather a big downturn. We could do some selling around the edges without jeopardizing the APTCs, but it won't make a dent.

 

[mrfeh]

This is pretty much our situation as well. Started retirement at 60/40 and are now about 70/30. Hold VTSAX only in a taxable account and have to date been unwilling to forgo APTCs to rebalance. Might work out (as it has so far) or it might not, but with a low WR we should be able to weather a big downturn. We could do some selling around the edges without jeopardizing the APTCs, but it won't make a dent.

Yeah, I'm really not that concerned about it. In the end, there isn't much difference between 60/40 and 70/30. Our WR is very low, so it really doesn't matter.

I'd just like to follow my rebalancing rule, if I could.

 

[Route246]

What an interesting take. Here's something I wish I could do: I wish I could find someone who would buy my condo and then rent it back to me for market rate! I'd love to cash out all that gain in equity and have it all be tax exempt!

The only glitch is that there would be no way to enforce an agreement that 1) the new owner would allow me to stay as long as I desire and 2) the new owner would only charge market rent. Other than that, I think it's a great idea!

The take regarding not fussing over paying taxes comes from a starting point that we were essentially buy and hold for our entire adult life. Throughout the 45 productive work years in my career I only recall paying capital gains twice. Once was to buy a home traded up from a condo. The other time was to pay off the mortgage on our existing home. My feeling was if funds went into Vanguard it would not come out until retirement. It was our virtual lockbox. We lived well below our means and had working capital in other accounts but Vanguard was untouchable in terms of withdrawal. That said, I never sold anything that had LTCG so my take regarding taxes is borne out of never paying them to maintain lifestyle (i.e. cars, vacations, credit card debt, etc.).

That's why my recent payments to FTB and IRS were new, novel and I never gave them a thought. Just did what our CPA told us in term of making the payments. Not a common take, I realize, but the origins come from never really paying LTCG (with the two exceptions noted).

 

[joesxm3]

Midpack and Route246,

I fall into the 30% equity and large amount of cash and fixed income. My plan has been that spending from the cash portion of my taxable account would little by little make my equity percentage go up. It has gone up a little, but donating PLTR to my charitable gift fund and some valuation worry selling has slowed it down.

I had that same view of my Fidelity account before retiring - Hotel California - money from the paycheck went in and never came out except to go to money heaven during market crashes.

 

[Dash man]

We’re almost to 90% equities since as bonds/CDs mature I’ve been purchasing equities. With dividends, mostly from our Roth accounts, and SS plus a small fixed pension covering most of our expenses, we’ll be able to control our taxes pretty well. QCDs should eliminate RMDs that will begin in three years. We can ride out any market fluctuations without any problems.

 

[Koolau]

The biggest factor in my equity creep has been the meteoric rise of megacorp stock (actual shares given as compensation back in the day plus matching shares in my 401(k)). Over the years, I've pared and pared Megacorp stock as it's risen to my largest holding several times. Megacorp stock seems to be determined to be my largest holding - no matter what I do.

It's been a great ride. I hope I can ride it out as I've pretty much given up on keeping the stock to a "reasonable" level in my portfolio. As I think back on the number of times I've pared the stock (for "valid" financial reasons) I realize that I could now be "fractional jets rich" instead of just FireForum Rich had I just kept every share of the stock. I tell myself that I ended up doing the wrong thing but for the right reason.

 

[bonvoyage]

In January 2023, soon after a big rebalancing move, we had an allocation of 58% Stock, 31% bonds and the rest in cash.
Now, three and a half years later with minimal rebalancing, we have 68% stock, 25% bonds and the rest in cash.
Our tax deferred accounts are now heavily skewed to bonds while our all-stock taxable brokerage has been growing like crazy!

 

[marko]

Of course a decent solid correction could make this thread moot.

 

[freedomatlast]

Against the advice of the "experts", I haven't rebalanced in decades and as it turns out, it was a very good decision. Unlike OP, it doesn't bother me a bit "that our stock allocation just keeps growing with no good way to stop it". I don't understand why OP would wish to stop the growth. If he really wants to stop the growth, a couple of taps on the keyboard would trigger a sale and it would be done. I have no problem with a high allocation of stock given the incredible growth over the years.

 

[VanWinkle]

I've let equities rise to 60% from my 50% allocation but also find
that I am mostly saving for inheritance so the runway is much longer
before they land the plane. I have been using bond interest reinvested to MM for RMDs next year, and selling bonds to buy foreign stock funds in my Roth at 5K per month. This will likely get me to 65% equities in another couple years if the market doesn't adjust it downward for me. I am not really accessing the portfolio for living expenses at all.

 

[RunningBum]

I struggle with the concept of an AA percentage vs. having enough non-equities to ride out a fairly long down market period. I guess the latter is a bucket strategy. When you have more than you'll ever need it makes sense to me to invest for heirs, going higher in equities on that excess.

Next year I'm no longer on ACA so I'll sell equities up to the next barrier. For the first couple years it will probably be the start of the phaseout on the extra senior deductible. After that it will probably be IRMAA. You said you were already approaching IRMAA and higher tax brackets (don't forget that LTCGs do no use the regular income tax brackets) so you won't have much room for that. If you do hit an IRMAA level it could be worth taking income to near the next IRMAA level if you don't hit some other barrier.

 

[Koolau]

Of course a decent solid correction could make this thread moot.

I think I would call that an "indecent" correction.

 

[Koolau]

Against the advice of the "experts", I haven't rebalanced in decades and as it turns out, it was a very good decision. Unlike OP, it doesn't bother me a bit "that our stock allocation just keeps growing with no good way to stop it". I don't understand why OP would wish to stop the growth. If he really wants to stop the growth, a couple of taps on the keyboard would trigger a sale and it would be done. I have no problem with a high allocation of stock given the incredible growth over the years.

It's great until it isn't. I think the issue is that a 2008 could happen again. We all marvel at the financial progress most of us have made in equities. But that's not guaranteed to continue.

 

[audreyh1]

A couple of years ago I’d kind of given up as equities are generally so much more tax efficient and I’m simply unwilling to pay the extra taxes and IRMAA hit to rebalance to something less tax efficient. It’s definitely a function of portfolio growth over a long period of time. So I’ve morphed into a lopsided rebalancing plan in taxable accounts - let the equities run on their rollercoaster, and only rebalance to buy more when they drop significantly. Tax-deferred accounts are fixed income which grows much more slowly.

 

[freedomatlast]

It's great until it isn't. I think the issue is that a 2008 could happen again. We all marvel at the financial progress most of us have made in equities. But that's not guaranteed to continue.

You're right. We all know this won't go on forever. I guess not everyone has the discipline to avoid panic selling during a 2008 type downturn or has a stash of cash to use while the market recovers.

 

[slowsaver]

I have been rebalancing my entire portfolio just inside my traditional IRA, which is about 25% of my holdings. I expect my IRA will be 100% bonds in several years. That's ok. It will cut down on RMDs.

 

[big-papa]

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...

When I left the accumulation years behind, we moved to an "income centric" portfolio for daily spending consisting of SS, TIPS ladders, and dividends thrown off the stock we own in our taxable account. This covers our basic spending needs, leaving us with stock in our taxable account, TIRA and Roth for everything else. No need to even think about an AA anymore - stock can do whatever it wants (except go to $0 of course) and we'll be fine.

Kinda liberating, actually.

Cheers

 

[Chuckanut]

I think I would be willing to pay some extra taxes if it meant I could free up long-term earnings to help enjoy life. IRMAA still annoys me a lot because of the way they implemented it. But, bypassing enjoying life would annoy me a lot more.