Young retiree seeks your investment advice

[JohnBlake]

I'm 38 years old, and semi-retired since last year. I've managed to save enough over the last 18 years so that I don't need earned income as long as I keep my expenses inline. I live a modest lifestyle, finding pleasure in many activities that do not involve spending a lot of money.

I recently sold my home and am currently renting. The portfolio below represents practically all of my assets.

I've maintained this portfolio over the last 10 years or so. I didn't get hit too badly by the 1999/2000 selloff because I have a large portion of my portfolio in bonds,
and cash, and the stock portion is heavily weighted toward large caps. I rebalanced by portfolio yearly (this helped offset some of my losses).

My federal income taxes are low because:
- I sell funds every year that I want to get out of to offset any cap gains.
- I have a significant amount in municipals.
- I have a amt tax credit that I'm burning off.

I recently moved to a high tax state, and I want to adjust my portfolio to reduce the impact of state taxes.

I am a long term investor, although I put aside a small portion of funds for 'gambling' in the market, my primary interest is preserving, and living off my savings. I plan
on working again, but it's unlikely that my earned income will be significant relative to what I've saved in the past.

I want to reduce the number of funds I'm holding. To achieve this, I'm planning to sell my Janus funds, as I've lost confidence in the company. I'll reinvest into

Vanguard stock funds.
-- Sell, Janus, Janus-20, Janus WW
-- Buy, Oakmark International, Vanguard Mid Cap Index, Vanguard Index 500.

I'm considering investing in I-Bonds because I like the fact that they are exempt from state taxes, and I can control when the federal taxes hit, and I can ladder. I'm
also considering buying treasuries, and state munis
-- Sell 1/3 of Vanguard ST corp, and Vanguard Int Muni.
-- Buy I-Bonds, Treasuries, and State Muni Bonds

Unfortunately, most of my savings is in taxable accounts. Since I don't have earned income, I can't even contribute to an IRA.
Should I be moving my IRA funds over to a Roth, paying the tax penalty?

I'd like to buy a home, but am concerned as Real Estate seems to be rediculously overvalued in my area (I thought the same thing last year, and it keeps going up.) I expect interest rates will increase, and drive down prices. Then I'll put some cash into a home.

Thanks in advance for your suggestions.

--John


**are in tax deferred accounts

Cash 18%
Netbank

REIT 1%
**Vanguard REIT Index

Bonds 33%
Vanguard ST Corporate 14.5
Vanguard Int Muni 17
**Vanguard Total Bond 1.5

Stocks 48%

Large Cap - 31%
Vanguard Index 500 10
**Vanguard Total Stk Index 1.5
Vanguard Tax Mng Cap App 4.5
Janus Fund 1.9
Janus Twenty 1.9
AMerican Cent. Ultra 2.8
Oakmark Fund 2.5
HP .36
TWX .27
S .69
PFE .75
MRK .62
BAC 1.1
AXP 2.0
MSFT .7

Mid Cap - 6.9%
American Cent. Eq Income 2.2
American Cent. Heritage 1.6
Kaufmann 1.4
Vanguard Mid Cap Index 1.7

Small Cap - 5%
Baron Growth 2%
Misc. small caps 3%
experimental trading.

International - 4.3%
Janus Worldwide 1.3
Oakmark International 3

 

[Michael]

I'd like to buy a home, but am concerned as Real Estate seems to be rediculously overvalued in my area...

In many areas real estate is over valued because zoning laws restrict the building of new homes. To the extent that this may be true in your area, home prices may not fall as much as you think when interest rates go back up. Moving to another area of the country can often significantly reduce housing expenses, unless all of your friends and family reside where you live now.

 

[BigMoneyJim]

Welcome to the board, John! Wow, I think you could give us advice. Good job.

Unfortunately, most of my savings is in taxable accounts. Since I don't have earned income, I can't even contribute to an IRA.
Should I be moving my IRA funds over to a Roth, paying the tax penalty?

I would think this would make great sense. If you convert part your IRA to a Roth each year, you pay only the income taxes and not the penalty, then when you finally start drawing from the Roth you'll pay no taxes. You could pay 10% to 15% taxes on the conversion depending on how much you convert each year; I say go for it, unless there's some restriction I'm unaware of about converting when you have no earned income.

(Clarification: The reason there is no penalty is because it is a conversion. I almost made it sound like you avoid the penalty by converting only part of it, but that's not what I meant.)

 

[unclemick]

Counting REIT as stock, you're close to the classic 50/50 stock/fixed Ben Graham split. I'd been inclined to take my time, read, and begin to cut/consolidate the number of funds as taxes permit. Peruse this forum - more than one way to simplify. My prejudice is Vanguard balanced index funds plus REIT. But everybody's tax sit is different and I have a small defined pen.

 

[charlie]

When you sell your Janus stuff you might consider
Vanguard's Value Index instead of Index 500. Also
Vanguard has a new fund called Large Cap Index
which is similar to Index 500 but tracks the MSCI
750 index. There probably won't be much difference
between the two, but I like the extra diversification
of the Large Cap Index.

Get a copy of Bernstein's "4 pillars of investing". He
has a model portfolio for "taxable Ted" who has most
of his savings in taxable accounts. It might give
you some ideas on tax avoidance and asset allocation.

On balance, you are doing great and are far more
mature investment wise than most 38 year olds.

Cheers,

Charlie (aka Chuck-Lyn)

 

[johnblake]

Thank you for your feedback.

I've already read Bernstein's "The Intelligent Asset Allocator'. When the FOur Pillars came out, I did a 'quick read' in the bookstore. The ideas are consistent with what I learned from his previous book.

Yesterday I was in the bookstore and took another look at the 4 pilliars, hoping to gather information on I-Bonds. I was surprised that he doesn't mention I-Bonds at all (at least not in the index, or that I could find). Does anyone know what he thinks about using I-Bonds? He does mention laddered treasuries, and TIPS, but I-Bonds would help be differ federal taxes.


Thanks again.

 

[bongo2]

I'm a little confused. You say that your taxes are low, but at the same time you seem very concerned about taxes. If you aren't paying much in the way of taxes, then maybe you shouldn't worry about them very much.

I noticed that some of your funds have expense ratios of 1-2%. If your fund is expected to return, say 7% a year, then that's an effective "tax" of 14-28%. If you're a bliever that indexing is just as good, then you can save quite a bit of money by moving most of your money to vanguard. Even if you have to pay some capital gains, you may get the money back quite quickly in the expense ratio savings.

 

[johnblake]

I'm a little confused.  You say that your taxes are low, but at the same time you seem very concerned about taxes.  If you aren't paying much in the way of taxes, then maybe you shouldn't worry about them very much.

I've been paying very little in taxes because I have an amt credit, and a significant amt in munis. Problem is that I recently moved to a high tax state.

I realize that I have a few high cost funds (mainly Kaufmann) I'm planning to take care of that.

Thanks.

 

[John Galt]

I have posted on this before, but one happy
surprise for me was how I was able to control
my taxable income in ER. After trying to minimize
the income tax hit my whole working life, it never
crossed my mind that I could potentially get my
taxes down to -0- just by watching where my
income was coming from and capping the taxable
amount at a point when I could offset it with
deductions, exemptions and credits. You would think an
old accountant would have seen this. True
serendipity!

John Galt