Author Topic: Newbie's complex questions for experienced Mustachians  (Read 2750 times)

joer1212

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Newbie's complex questions for experienced Mustachians
« on: February 21, 2013, 05:05:08 PM »
I need help finalizing my asset allocation, but it's all getting so complicated and multilayered that I'm becoming overwhelmed.


Some brief background:

I am 43 years-old, no wife, no kids, no debt.
My living expenses are only about 17k a year because I live rent-free (I only pay for utilities) in an apartment of my father's multi-family house in Brooklyn, New York.

My goal is to retire by age 50 (the earliest) to age 55, (the absolute latest) then live off the interest from my investments (plus a partial pension from my job and, hopefully, Social Security, both of which would kick in at age 62).
I earn about $70,000 a year.
Recently, I started maxing out my 401k, 457b, and my Roth IRA.
My net worth is about 149k.

My current asset allocation:

401k/457b (about 36k)
4.32% stable value fund
18.14% total bond index fund
25.06% large-cap index fund
9.50% mid-cap index fund
8.64% small-cap index fund
20.74% total international (ex-US) index fund

Vanguard Roth IRA (about 12k)
6.79% Vanguard REIT index fund (VGSIX)
6.79% Vanguard TIPS (VIPSX)

Checking account
About $102,000 (I just sold several corporate bonds, and I'm keeping this money here until I figure out where to reinvest it.



I will be investing $94,000 from my checking account into a Vanguard taxable brokerage account.
Since I am in the 25% tax bracket, I will have to be careful of the tax consequences of the funds I chose to invest in.
I would like to maintain my current invested allocation of about 70% stocks and 30% fixed income using roughly the same funds I already have at about the same percentages. But, where should I place these funds for maximum tax efficiency?

Here are the 3 options I have right now, none of which seem satisfactory:

(1) Place Vanguard Total Stock Market Admiral Shares (VTSAX); Vanguard Total International Market Admiral Shares (VTIAX), and Vanguard TIPS Investor Shares (VIPSX) in my taxable account and eat the tax hit every year from the TIPS.
I would also increase my total bond fund allocation in my retirement accounts to offset the increased exposure to stocks, TIPS and real estate.
The reason I would place TIPS in taxable in this scenario is to make more room for REITs in my Roth, so that, both TIPS and REITs would make up at least 6%-7% of my overall portfolio.

(2) Keep my Roth exactly as it is, and place VTSAX and VTIAX in my taxable account. I would also increase my total bond fund allocation in my retirement accounts to offset the increased exposure to stocks.
In this scenario, REITs and TIPS would end up comprising an unacceptably tiny percentage of my portfolio.

(3) Do either of the above, but add Vanguard New York Long-Term Tax-Exempt Fund Investor Shares (VNYTX) in my taxable account instead of increasing my total bond fund allocation.
This bond fund would be federal & state/local tax-free.
(I know that we are at historically low interest rates, but The duration of VNYTX is only 6 years, compared to 8.5 years for VIPSX, which every expert wholeheartedly recommends .
Why would everyone think investing in a long-term bond fund is risky with today's low interest rates, yet they eagerly endorse Vanguard TIPS? Does it have something to do with the inflation adjustment in TIPS that would offset the principal loss in a rising interest rate environment?).


*my employer does not offer REITs or TIPS


Thoughts?
« Last Edit: February 21, 2013, 05:08:27 PM by joer1212 »

Mike

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Re: Newbie's complex questions for experienced Mustachians
« Reply #1 on: February 22, 2013, 12:56:06 AM »
Your taxable bond funds should be in your 401(k) and/or Roth.  Otherwise you will be paying a 25% marginal rate on the interest that they generate, which is tax inefficient.

Your taxable brokerage account should have the most tax efficient investments.  Stock funds are good for that, since they generate long term capital gains.  If you still want more bond exposure after whatever you have invested in your tax deferred and Roth accounts, then this would be the place to get the tax-free bonds, IMHO.


jpo

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joer1212

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Re: Newbie's complex questions for experienced Mustachians
« Reply #3 on: February 26, 2013, 12:03:33 PM »
Your taxable bond funds should be in your 401(k) and/or Roth.  Otherwise you will be paying a 25% marginal rate on the interest that they generate, which is tax inefficient.

Your taxable brokerage account should have the most tax efficient investments.  Stock funds are good for that, since they generate long term capital gains.  If you still want more bond exposure after whatever you have invested in your tax deferred and Roth accounts, then this would be the place to get the tax-free bonds, IMHO.

Thanks. I will do this.