The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: sser on May 01, 2015, 03:02:04 PM
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I originally brought up a similar question (and gave more details) on another post: http://forum.mrmoneymustache.com/investor-alley/best-place-for-short-medium-to-potentially-long-term-savings/msg642424/#msg642424 (http://forum.mrmoneymustache.com/investor-alley/best-place-for-short-medium-to-potentially-long-term-savings/msg642424/#msg642424)
Starting this new one because my understanding and thus questions have shifted a bit.
After searching through the forum and reading a number of threads, I am considering a strategy slightly more complicated than just transferring my savings into a Vanguard taxable account with its own, more conservative allocation.
Other items to note:
- plan to use the VTSAX, VTIAX, and VBTLX index funds.
- will still have 10k or so in a savings account (with Ally) as the emergency fund, some of that will likely go into CDs until needed.
- currently, I intend to transfer my target monthly savings amount into the taxable account each month.
- the Roth is getting the maximum yearly contribution
- have a TSP spread between the 2040 and 2050 target date funds; I will be upping the contribution for this as I can (thank you, forummm) and hopefully will not touch the account until retirement.
Because the savings would be going into a taxable Vanguard account, and because I am considering a more conservative ratio for that set money, it sounds like maybe I should:
- Move the 35k to 45k savings into the taxable Vanguard account.
- Take the current balance of my Vanguard Roth IRA (all in Vanguard 2045 and 2050 Target Date funds) plus the savings and determine an allocation based on that number.
- Move all funds from the 2045 and 2050 Target Date funds into the new allocation. All bonds will be in the Roth, and the stocks will be between the Roth and the taxable account.
This way, I will have a lower expense ratios and more control over the allocation. It would also be more tax efficient.
The hard part will be determining the allocations. For the retirement ratio, I would want the typical 80 stocks / 20 bonds. However, the 35k to 45k savings that I am transferring could be used for a large purchase at an unknown time (maybe for a used car or down payment). Currently, I do not plan to make one in the near future, but I like to have options open as I do not know how long I will be in this area (high COL) - maybe another year or two, maybe 10!
Questions:
- How do I balance the funds intended for the long-term with those for the intermediate in one big allocation? How will it change over time (assuming that the retirement funds would continue to be much greater than the intermediate funds)? I guess the real question is: How do I keep the two intentions separate when combining the funds over two accounts? Or should they be?
- I think that I will be comfortable maintaining the balance between the three funds as I continue to contribute money for the most part. It should be relatively straight forward until later in the year when much more would be going into the taxable account. Assuming that I would then have to make the contribution to bonds by replacing stock with bonds in the Roth, and then buying more stock in the taxable. Yikes! Any tips?
- If I needed to withdraw funds (for emergency, car, down payment, etc), should I just take out whatever is needed from the taxable account and then re-balance with whatever is left between the taxable and Roth?
- Am I making this too complicated.... (just go with a taxable account and use a more conservative ration like 25/20/55 or something and not worry about tax efficiency)?
Phew, those seem a bit loaded but I definitely appreciate any advice. Want to make better use of my savings, but also want to do it right. So, thank you!
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After playing around with the numbers for a bit, a possibly half-way decent (and not ridiculous complicated) way to properly allocate new funds might be to create a combined ratio that weighs the two based on expected contributions. Given the $5,500 max Roth contribution and that I estimate I could put roughly three times that into the taxable account, then a ratio of 34/23/44 might work (where the initial funds are already properly allocated between the two accounts).
One less-than-desirable aspect is that it looks like the Roth IRA account in total can only hold a portion of bonds I would need under this allocation. So, the Roth would be all bonds, and the taxable would be the remaining bonds, and then the stocks.
Given the complexity / chance for messing up, I think that I am leaning towards just keeping the two accounts separate. I will continue to max out the Roth IRA (for now, in the Target Date funds - may switch to my own allocation after awhile), and put savings into the Taxable account with something close to a 25/20/55 ratio.
Still have a few questions, but hopefully they are more straight-forward:
1) For the bond index fund, it was mentioned somewhere that VBTLX is fairly tax efficient. However, I am also considering the Intermediate-Term Tax Exempt fund VWITX instead. It looks like it has done alright in comparison, but I'm not sure if that is due to low interest rates? One downside is that VWITX has a 0.2% expense ratio and $50k is needed for Admiral with a 0.12% expense ratio. Which would be more appropriate (currently in 25% tax bracket)?
2) If I were to need to make a withdraw from the taxable account, should I take it from the bonds first and then reallocate what is left? Would there be big tax hit from reallocating (not including the tax associated with the withdraw)?
Sorry, know that there are somewhat novice questions. Still have a lot to learn, and I keep getting stuck in circular arguments with myself on this.
Self note - savings Daniel1973's 'Taxable account advice' thread for future reference:
http://forum.mrmoneymustache.com/investor-alley/taxable-account-advice/
Edit (another potentially useful post): http://www.bogleheads.org/forum/viewtopic.php?f=1&t=122101&p=1786450