Author Topic: Conservative Taxable Suggestions?  (Read 2378 times)

OlDogface

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Conservative Taxable Suggestions?
« on: February 15, 2014, 04:12:59 PM »
Hi all. I need a few suggestions for what Vanguard fund to use as a "starter fund" in a taxable account. Looking primarily for protection of principle with some growth.

Background:  I have had about $10k sitting in an "emergency fund" combo of MM and CDs for years...which I have rarely ever touched. While doing my 2013 taxes I realized I found more money walking my dog than I earned in interest from these accounts last year. (In addition to the normal pocket change I find, I also found three $20 bills last year!). So, I would like to take about $5k of my EF and put it into a Vanguard fund with additional bi-weekly contributions of $200  thereafter (or, $5,200 additional/year). I don't have a specific goal or time frame in mind for this money. That said, I am more interested in protecting the principle than growth.

Reason:  I might (60% probability) need to play the "Bank of Dad" in 2 - 7 years to help out my son with a down-payment on a house or otherwise get himself established in the world. Currently, he works PT minimum wage and pays towards his education (and his xBox addiction). I pay his tuition; he pays for books, gas, and whatever else...be it lunch, games, or a new laptop. He is saving a little of each paycheck....but basically has no debt or assets at this point. His mother is not in the picture at all.

My own financial situation is solid. Happily divorced, secure job, excellent health, and no debt with the exception of primary mortgage which is currently on track to pay off concurrent with my minimum early-retirement age. My car is an almost Mustashian VW Passat wagon with 105k on the clock that I paid off years ago and which will likely last another 7-10 years. I have money 'stashed in my retirement accounts now and contribute the max to TSP (80/20 AA) and a Roth account (100% VTSAX @ Vanguard) each year. All in all, I am on track to retire at 57 with a bit over seven figures 'stached (conservatively calculated) and a sizable pension.

To the point:  I have been looking pretty hard at the Vanguard Target Retirement Income Fund (VTINX) for this money. It is comprised of 70% bonds and 30% equities and historically has slightly higher performance (due to greater equity exposure) than the 60/40 conservative life strategy fund (VSCGX). I know that having bonds in a taxable account is considered a poor tax move, but again, I am more concerned with protecting the principle than paying a few percentage points in taxes. (I am in the 25% bracket.)

Once my son finally spreads his wings and is solidly in flight I will probably just change this fund to VTSAX and let it ride until I retire. My question is what to do between now and....7-ish years?....from now when he is flying steadily (more or less) on his own power.

Thanks in advance, OlDogface

Cheddar Stacker

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Re: Conservative Taxable Suggestions?
« Reply #1 on: February 15, 2014, 08:19:19 PM »
Welcome to the forums Dogface! I hope you claimed those 3 $20 bills on your taxes. Uncle sam needs his cut too. ; )

It sounds like you have a nice stache built up, so good job there. As for the plan personally I would tweak it a bit. You mentioned you are paying tuition, and can still put away $5,200/year into this "son fund". How much is that tuition - not asking you to disclose, but consider how much extra cash you will have once that expense is gone. Let's assume for the discussion it's $15K/year, cool.

Ok, so now your son just graduated 3 years from now. You've already stashed your $5K EF + $5K/year, so you have $20K stashed. Let's assume you went stock heavy and it got hit hard - like a 25% loss. You still have $15K. Now your son moves back home and you start looking for a house for him. Maybe he stays with you for 1 year after of college, and now you aren't paying tuition you can save the $15K, plus the $5,200 you were already saving. That's another $20K on top the the $15K you have after the investment loss. $35K is not bad for a down payment on a starter home for your son.

I think you are in a perfect position to be aggressive with this. If the market drops, have him stay with you a bit longer and wait for it to go back up, or have him kick in a bit extra on the down payment. If it goes up, he can move out right away. I think you should go stock heavy because of all the reasons above, because you will likely be better off in the long run, and because of the lower tax rate on qualified dividends and long-term capital gains compared to interest income.

However, if you do decide to go bond heavy, I see no problem with VTINX or VSCGX. Good luck!

OlDogface

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Re: Conservative Taxable Suggestions?
« Reply #2 on: February 16, 2014, 05:34:18 AM »
Thanks for the warm welcome!

I did agonize over what to put on my 1040 for the found money. Honestly. It almost even kept me up one night. I even talked with my best friend about it. She can listen to talk about finances all day and is very forthright and frugal. She suggested that I  didn't need to claim it as income at all. In fact, she determined that the money was actually hers. Go figure. Her reasoning was that I probably would not have found the money anyway had she not needed walked. I thought it over but couldn't really argue. She's a good dog. :-)

Good point on the extra cash once the tuition expense is gone. I actually hadn't considered it (insert face-punch here). Seems I have been saving and paying tuition dollars for so long that it hadn't really occurred to me that I wouldn't have that expense once he graduates! Woo Hoo! Unfortunately, college costs advanced a bit faster than I was able to save back in the day so, while he will graduate without any loans, his last tuition payments will be straight out of my checking account.

His tuition runs about $6k per year and he should graduate in about two years so your numbers are pretty close. Here's the back of my envelope:

In Vanguard:
$5,000 - EF reallocation (Feb 2014)
$5,200 - year 1 contributions (2014)
$5,200 - year 2 contributions (2015....finishes school in December)
= about $15.5k (...."bull/bear" range of 5% equals $14.7 - $16.2k; 20% equals ~$12.5k - $18.5k)

Assume he stays home the first 6 months of 2016 to get situated in a new job, etc....that's an additional $3k from "tuition avoidance" and $2.5k new contributions....total of $5.5k....I'd keep in cash.

So yes, about $21k overall with $5.5k in cash. If he decided to rent an apartment I could just give him some of the cash for his deposits and keep building the VG fund. If he decided to buy...a 2BR/1BA condo home in this area would cost about $25k for a 20% down payment plus utility deposits. Plus some new furniture and two or three new televisions, a new Escalade,  new xBox 15, new speed boat....or, hopefully, not.

Either way, he have some of his own skin in the game.

You are correct that I can safely take on somewhat more risk than I was considering. Even in a pretty bad market, I would still have my current $5k EF plus the $5.5k "tuition avoidance" cash acting as a boat anchor to at least $12.5k in the market. I'm not convinced that 100% VTSAX for only 5-ish years is where I want to be.....I stayed in during 2008 but it was a scary ride.

I think I could sleep with VBINX or VSMGX.........any other thoughts are welcome.

 Thanks again!





Fireman

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Re: Conservative Taxable Suggestions?
« Reply #3 on: February 16, 2014, 05:58:41 AM »
Welcome to the forum, OlDogFace!  As a son whose dad put him through school, I say kudos for doing that for your son!

OlDogface

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Re: Conservative Taxable Suggestions?
« Reply #4 on: February 16, 2014, 06:38:28 AM »
Thanks Fireman.