Author Topic: Balancing between retirement and taxable accounts  (Read 3592 times)

Lapine

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Balancing between retirement and taxable accounts
« on: October 13, 2014, 10:50:44 AM »
I've been curious for a while on how other mustachians balance between their retirement and taxable accounts. I've just made it to the point in my taxable account of getting my total stock market index to Admiral status with the lower expense ratio, and at this point, it's unbalanced with my retirement account, which I try to max out every year. As things currently are, after contributions to my retirement account at work and my Roth IRA, I don't have a lot left over to put into the taxable account, and it's also getting a much later start.

In expectations of early retirement, however, should you try and keep a taxable portfolio that is balanced for risk independent of the retirement portfolio, or do you just look at the total allocation including both taxable and retirement accounts? To keep the taxable account balanced, I've considered adding VBMFX (total bond market) vs. VWAHX, or VWLTX (tax-exempt bond funds), not sure how much I should be worrying about the tax considerations of either.

matchewed

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Re: Balancing between retirement and taxable accounts
« Reply #1 on: October 13, 2014, 10:57:00 AM »
Regarding tax efficiency and location of investments.

Regarding where to put the money first, it all depends on your plan. Have you figured how you'll draw down assets? How will you access your funds in FIRE prior to 59.5? Roth pipeline? SEPP? Just pay the penalty? This all relates to your time to FIRE as well since saving pre-tax money makes you hit your FIRE number faster for most scenarios.

Lapine

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Re: Balancing between retirement and taxable accounts
« Reply #2 on: October 13, 2014, 11:53:33 AM »
Too many outstanding variables for me to determine an exact plan at the moment, but I'd like to imagine the most optimistic scenario, that my taxable account could overtake the retirement account, I live off the taxable account, and I don't touch the retirement account until >59.5, using it as 'old man/woman money'. Depending on promotions, inheritance, or my what kind of work my currently unemployed partner finds, my savings rate could double/triple.

If things don't go as well,  and the taxable account never really grows that much, then maybe I'd take the pipeline or SEPP strategy instead . . .

matchewed

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Re: Balancing between retirement and taxable accounts
« Reply #3 on: October 13, 2014, 01:03:16 PM »
Well winging it certainly is an option, probably not a good one. If you can't come up w/ a plan then there is no reason to give advice, nor any way to give advice as it would all depend on your goals, i.e. your plan. It certainly pays to be flexible with your plan, but to not have one is to stumble blindly [not necessarily] forward. I'd sit down and put some numbers behind the "outstanding variables". I'd be willing to bet they're not so incredibly difficult to make educated guesses/ranges from.

ender

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Re: Balancing between retirement and taxable accounts
« Reply #4 on: October 13, 2014, 01:23:51 PM »
Roth principal kinda is the same as taxable.

Eric

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Re: Balancing between retirement and taxable accounts
« Reply #5 on: October 13, 2014, 02:56:48 PM »
In expectations of early retirement, however, should you try and keep a taxable portfolio that is balanced for risk independent of the retirement portfolio, or do you just look at the total allocation including both taxable and retirement accounts? To keep the taxable account balanced, I've considered adding VBMFX (total bond market) vs. VWAHX, or VWLTX (tax-exempt bond funds), not sure how much I should be worrying about the tax considerations of either.

I think it's a good question.  Based on what you've stated, most of your money will be in tax sheltered accounts.  Therefore, you'll need to come up with 5 years of living expenses in your taxable (or taxable + Roth contributions) to fund your first 5 years of retirement before you can access your tax sheltered accounts.

So it boils down to if you're going to have only about 5 years of expenses in your taxable (and not 10 or 15), is it advantageous to look at your taxable account allocation separately from your total allocation?  (i.e. add bonds to reduce volatility)  I can see why this would be an issue.  If in year 1 or 2 the markets go down a lot, you could end up with fewer than 5 years of living expenses in your taxable which could force you to pay some fees to access your money.

I'm not sure there's a right answer here.  It depends on how far above the 5 year target amount you are, how many other options you'd have, and what expenses you could cut if necessary.  If you have 5 years in taxable plus 5+ years of Roth contributions plus the ability/willingness to earn a small income, you're probably covered.  But it's hard to say for sure without real numbers.  Plus, the bond funds only help some, not a ton.  If you're 80/20 and the market drops a bunch in your first 5 years, you're probably still going to be short of 5 years of expenses if you're going in with little margin for error. 


foobar

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Re: Balancing between retirement and taxable accounts
« Reply #6 on: October 13, 2014, 08:26:55 PM »
Too many outstanding variables for me to determine an exact plan at the moment, but I'd like to imagine the most optimistic scenario, that my taxable account could overtake the retirement account, I live off the taxable account, and I don't touch the retirement account until >59.5, using it as 'old man/woman money'. Depending on promotions, inheritance, or my what kind of work my currently unemployed partner finds, my savings rate could double/triple.

If things don't go as well,  and the taxable account never really grows that much, then maybe I'd take the pipeline or SEPP strategy instead . . .

Ignore the fancy names the government gives your accounts. They are all big piles of money with various rules. Figure out how to use those rules to minimize your current and future tax burdens while maximizing your spendable cash.

This is the type of thing that you can sort of avoid thinking about until a couple years before retirement.When you get within 5 years run the math and decide if it is time to start converting IRAs to ROTHs and so on. Frankly I expect most people would be better off paying the 10% penalty than passing up the tax deduction at low income levels. You would need to run you math to verify that.