Retirement ideas from reading Bogleheads Guide to Investing

I figured with our current money situation, I could do with a refresh on retirement planning ideas.  You know, things that I used to ignore because we weren’t there yet like what to do with long-term money outside of retirement accounts or how to get more diversification once you have room to play with things that aren’t just the basics.

So I checked out Bogleheads Guide to Investing (all amazon links are affiliate).  (I actually own Bogleheads Guide to Retirement, but it is more scattered and not as useful.)  I skipped several chapters because like… I know low fees are important, I understand the basics of diversified portfolios using a small number of low-cost indexes etc.  Those are important, and they’re really all most people need to know– once you have that down and have enough money to put it into action, you’re likely going to have a nice retirement.

But right now we’re at a point in which adding to a Target-date fund doesn’t make sense– we have enough money set up for safety.  (I’m not saying that we could stop contributing to retirement, but we are at the point where if we keep doing what we’re doing we will be fine.)  And we have possibly too high of a percentage in the US Vanguard Total Stock Index because in some of our retirement accounts that was the cheapest broad-based fund in a sea of expensive alternate options.  (It’s also a really great choice on its own!  But a little more diversification at this point would not go amiss.)

What happened to cause this decision to go back to basics?  We had some extra money in savings that we hadn’t spent down when DH got re-employed, so I figured we should put it in taxable stocks since there wasn’t really anywhere else to put it.  I was like, maybe I should get more Nasdaq because historically I’ve tried to balance riskier stock indexes/ETFs with safer ones like the Dow or just the S&P 500.  (Back in the day!)  But then I had a hard time finding a cheap index and didn’t feel like dealing with the ETF aspects of QQQ (which is really just simple math– this is me not at all being logical).  And then I was like, if I’m going to have to think about this at all I might as well do a little more thinking.  So I thought… hey, this is a taxable fund, why don’t I buy some tax-advantaged Muni Bonds.  Which is adding LESS risk to the portfolio instead of more!  But also, I didn’t have any tax-advantaged bonds in taxable accounts, and it seemed reasonable to get some at this point since we have a sensible retirement plan locked up in our retirement accounts.  So I bought a Vanguard municipal bond fund.

At that point, I thought… I should get some rhyme and reason to these additions.  I shouldn’t be in a situation in which I go in to buy Nasdaq and end up buying municipal bonds instead.  That makes no logical sense.

So while I am really not wanting to go through all of our different accounts to figure out what’s small cap vs. large cap and so on, I really ought to at least figure out what we have in domestic vs. international, what we have in emerging markets, how much we have in bond funds and what kind of bond funds etc.

And it’s time to start thinking about increased diversification through funds that don’t just track the US stock or bond market and about increased tax advantaging via asset allocation.  Bogleheads makes it clear that these things are *OPTIONAL*.  If you’re not yet maxing out your retirement accounts, just stick to a Target-date fund or a mix of a total stock index and a total bond index based on your predicted retirement date and preferred asset allocations.

So things to think about:

munis (We now have some!  Bogleheads doesn’t seem to limit the amount but they do say that only people who have maxed out tax advantaged retirement should even consider these.)
REITs (They suggest no more than 10% of a portfolio should be this– currently our house is more than 10% of our total savings, so maybe we’re not ready for these yet.)
TIPS (we will probably never do this, but they recommend up to 40% based on where you are in retirement)
International funds (I have dipped into this, but I can’t remember where or how much.  Bogle says no more than 20%, but the book authors say 20-40%.)
Tax loss harvesting– I’m never going to do this myself because I will stick with broad-based indexes, but it is magical when it happens.  Still, it might be worthwhile looking into tax-advantaged funds to put in my taxable accounts.

I’m still not sure if it is better to have low yield/safer bond funds in taxable or tax-protected accounts.  The argument Bogleheads makes is that taxes on stocks that have been held a long time are currently capped at 15%, but they’re not capped for bonds.  The counter-argument is that the earnings on stocks are going to be a lot larger than the earnings on bonds, so it will be 15% of a larger number vs. whatever your tax rate is on bonds of a smaller number.  (And one’s tax rate in retirement could be 15%!  It’s hard to predict the future!)  Buying munis and putting those in taxable means that you’re not paying federal taxes so that kind of allocation is pretty obvious.

Several sections of the book have slightly different charts with most tax efficient vs. least tax efficient investments.  High yield bond funds (like junk bonds) should definitely only go in tax-advantaged (I think it is unlikely we will ever buy junk bonds since I prefer bonds to decrease, not increase, risk).  Then they say REITs should go in tax-advantaged, so that’s something I would eventually want to think about in terms of what Fidelity has to offer since that’s my work account.  Then balanced funds.  Then active stock funds (presumably because managers can realize losses?).  Then all the various stocks you can think of become more tax efficient, and finally low yield cash or cash equivalents.

Did you know that IRAs don’t get a step-up in cost-basis at death like taxable stocks do?  I did not!

Anyhow, this is just initial thinking– I do not have any recommendations for anybody yet including myself.  I do think that I need to come up with a plan though, otherwise cash will just sit in my saving account accumulating no interest until next summer.  I don’t get paid until October so I have a while to set out a strategy and I should do that before school starts up again while I have the mental space for it.

Next steps:
1. Update my asset allocation numbers (I have a spreadsheet, but I only tend to update when I log into the respective website, so I don’t have a snapshot of everything at any one point in time), especially the stocks vs. bonds percentages and the domestic vs. international percentages.
2. Think about how often I want to put money into taxable. Do I want every other month no matter what is in there? Do I want a benchmark of 10K or 30K over what I need for summer savings? I will also need to make sure we have enough for our backdoor Roths come January since those are tax-advantaged.
3. Related: I should figure out how much to put in the dependent daycare account for DC2. What will zie be doing next summer? I have no idea! Daycamp options in town aren’t the best for middle schoolers.  [Update:  decided just to go with the after school care costs and if daycamp happens we just won’t get tax credit for it.]
4. Figure out an investment strategy going forward based on diversification and what to put in taxable Vanguard vs. tax-advantaged Fidelity. (DH’s retirement option sucks so it’s all in their lowest cost S&P 500 and then my 457 is in its own weird thing we don’t have any choice over.)

How do you figure out your asset allocation?


25 Responses to “Retirement ideas from reading Bogleheads Guide to Investing”

  1. First Gen American Says:

    Yet again, we are in the same boat. We had a remodeling project and a car purchase planned that didn’t happen because of pandemic related issues so after sitting on the money for way too long, we finally decided to invest it.

    I decided on a dividend producing stock fund in my after tax account and then realized that is not tax efficient at all. But I’d like to try it out as an income producing stream for early retirement so this is my test drive.

    Our house equity already represents more than 10% of our savings, so no REITS for us either. Plus, Housing is in a bit of a bubble right now and my friend at the bank said there are a lot of properties in pre foreclosure.

    I worry about bonds and inflation and the bond value going down if rates creep up, so I decreased my allocation there recently as well. All the advisers say it’s a short term thing and I shouldn’t worry but my bonds have already lost 2.5% this year as everything else is going up and rates are already low. Need to do more homework here on alternatives.

    I have a goal of doing up to 10% in something riskier as well. Not Bitcoin or meme stocks but picking growth sectors via etfs. I have a retired friend who invested some money in Tesla when it was still an affordable stock and she’s been living off the earnings of that one risk for a few years now while the rest of her portfolio grew untouched. I decided the downside is 10% (or whatever fixed amount I choose) but the upside could be significant and I’ve been too conservative.

  2. mnitabach Says:

    OMG this all sounds way too complicated!

  3. teresa Says:

    So, I know you said you found the Boglehead’s guide to retirement scattered and not so helpful, but do you think it would be helpful for someone who knows almost nothing about retirement accounts and investing? Or would the guide to investing still be more useful? Does it make a difference if neither person in the household is technically employed (one 1099, one technically a partner rather than employee)? Have talked to a financial planner but I feel like I don’t have enough background knowledge to make informed decisions or evaluate quality of recommendations.

    • nicoleandmaggie Says:

      The guide to investing is really about retirement. I’d say covers retirement 101 to maybe retirement 202 level material. It does not talk about self-employment options much. Try JD Roth’s your money the missing manual (though note that actual numbers will have changed since it was written). I think people with self employment and co-ownership situations are best off talking to a tax accountant or tax attorney.

  4. Debbie M Says:

    “I should get some rhyme and reason to these additions. I shouldn’t be in a situation in which I go in to buy Nasdaq and end up buying municipal bonds instead. That makes no logical sense.” I laughed! But really, I think you just changed your mind as you remembered more variables.

    On REITs, I’m not sure I agree with the idea of no more than 10% of your funds being in REITs and real estate. (And not just because my house value keeps skyrocketing faster than all the other parts of my portfolio.) Part of me thinks that REITs compliment home ownership and can help me keep up with property taxes.

    A similar issue is whether a pension is bond-like enough to sub for bonds. For a long time I had no bonds, then I decided to have 10% in bond funds just for diversification (so I have some money to buy more stock funds with when stock prices plummet) and then I decided closer to 20% is better now that I’m retired.

    To answer your question, my asset allocation is pretty easy because when I retired I moved everything to Vanguard. The only weird thing is my HSA, which is in a Fidelity account invested in a no-fee US index fund (as with some of your work things, it’s the cheapest thing I actually like). Each month I put my balances in a spreadsheet (I think Vanguard lets you note holdings you have elsewhere, but I haven’t tried it). And then I use that information to fill in another chart to let me see how far out-of-whack my allocations have gotten.

    I currently want:
    2 parts bonds
    1 part emerging stocks
    1 part REITs
    1 part large cap
    1 part small cap growth
    1 part small cap value
    2 parts developed*

    * I used to have one part European and one part Pacific, but with a single “developed” fund I also get to have Canada.

    So my spreadsheet has 9 entries each month (2 for 1/2 my bond fund total, 1 for my emerging stock fund total, etc.), and then all the values should be close to each other. And then I do a few calculations to tell me how unbalanced my portfolio is. (These calculations just seem like a good idea to me; I haven’t read about them anywhere.)
    a) average value
    b) the difference between the highest and lowest values
    c) the above number as a percentage of the mean
    d) the standard deviation
    e) the above number as a percentage of the mean

    I still haven’t decided when it’s time to re-balance. My current thinking is when c) above is over 20% or when e) above is over 7% or definitely if it’s over 10%. (It’s all pretty random and doesn’t matter that much.)

    I currently rarely have extra money to add, and if I do, it has to go to taxable unless I take a job (as a retiree, none of my current income is considered “earned income”), so that simplifies things. I’m doing the dividend growth thing with my taxable money (a tiny percentage of my whole), because dividends (and long-term capitol gains) are tax-advantaged. Sometimes when I do take a job and I don’t have enough extra to contribute what I want to my IRA, I just take the money from my taxable part.

    Oh, I do also have TSLA stock (on the advice of my boyfriend) which originally was a negligible portion of my portfolio but is now almost 5%, oops. That got moved to my IRA over time.

    Yeah, I’m not thrilled with the traditional ideas for additional ways to diversify. If the market plummets, that would also affect my pension and probably the whole economy. I feel like I should have some actual goods that retain their value, like canned goods or weapons (ugh!) or I guess toilet paper, but having extra stuff has costs, too. Getting solar roof panels sounds good, especially with global warming/Texas electric grid shenanigans, but I think it’s not normal to still have access to the energy you’re making when the grid goes down, so that idea needs more research. (Friends have bought generators and even cars that can be used as generators. Plus grills.) Native fruit trees and other easily grown produce would also be good. I already have all the degrees I want. I keep up with the media I like (books, movies, music, board games), and I own it all non-digitally (which wouldn’t help in the event of a fire, but nothing’s 100% risk-free) so I do have fun things to do in, say, an electricity-free lockdown.

    • nicoleandmaggie Says:

      We need to get to the level of thought on this stuff that you have!

    • teresa Says:

      On a solar panel tangent- right now with panels alone you still don’t generally have access with an outage but you can get a panel + battery system, so your solar system charges a home battery first and you draw from that when the power is out or the panels aren’t actively generating energy. Tesla Powerwalls are probably the best known but seems like Tesla is only selling them bundled with their roof or panel systems now. The other solar company we got a quote from liked Panasonic’s batteries, and I believe LG and some more solar-specific companies also sell them.

      • Debbie M Says:

        Thanks teresa!

      • Cloud Says:

        Continuing on the solar tangent because asset allocation is one of the things we’re dithering about right now so I have no useful input there… and I happen to know a bit about solar panels and batteries because we’re in the process of deciding which to buy. At least in our area (San Diego, CA) you can also buy Powerwalls from other installers, so you can unbundle them from the Tesla panels (which I think are just some other company’s panels – I don’t think Tesla is making their own panels these days) but only if you don’t buy them from Tesla. One of our top contender systems is solar panels from the company that installed our electric heat pump and Powerwalls from a second installer. We like this better than Tesla because Tesla is a bit too “don’t worry your pretty little head” about the actual system config for my engineer husband and they won’t even talk to you until you pay $100 which also annoyed him. FWIW, I think Tesla’s install is probably just fine for most people and would be fine for us but I’ve been with my husband long enough to know there’s no point arguing about this for something I don’t actually care about. My opinion is “I want solar and a battery” and I am not that fussed about what type of panels or battery because honestly, I don’t think the differences are big enough anymore to matter for us.

        After much research, my husband has decided he thinks SunPower has the best panels and Tesla has the best batteries. That is, of course, not a combination we can easily get so we’re currently deciding what to compromise on.

        Powerwalls currently seem to be the cheapest battery option, but they have an enormous waiting list – something like 6 months in our area. However, you can run off grid without a battery as long as you have the right type of coupling to the grid and I think that if you are getting a system installed with the plan to eventually have batteries you’d end up with the right type of coupling even if you had to wait for the batteries. But it would be something to ask about when picking your installer.

      • teresa Says:

        Good point about the grid connection. My understanding about the powerwalls from watching youtube videos is they are maybe going to be integrating the inverter into the powerwall unit so compatibility something something that doesn’t apply to current powerwalls and really may not apply in future except for Tesla wanting to sell more panels instead of just batteries. I remember reading about Tesla not making their own panels also.

        I am also in the I just want solar + backup battery + as much electrified as possible camp. My husband is definitely not an engineer and feels very strongly about only dealing with one company and then we realized we really needed to replace our roof before doing any kind of installation…so we ended up ordering the tesla solar roof + powerwalls since it ended up being comparable to a new roof + any other system. Of course we ordered in Dec and are only now (as of ~2 weeks ago) in a waiting for the city to approve permits rather than waiting for Tesla stage, which, ugh. Supposedly panels are not quite so backlogged though, not sure about stand alone powerwalls.

  5. bethh Says:

    Good heavens, that’s all very dizzying. I’m a devotee of JL Collins’ approach – VTSAX all the time.

    My money buckets are: bonds, money market, cash, VTSAX. My plan in recent years has had me 80% in stocks, I might be changing that to 75% as I get closer to early retirement. I tolerated the 2008 and 2020 market dips without a flinch, so I do have good risk tolerance, but of course have less and less time for accounts to come back up when we have more gyrations.

    As of earlier this year, I’ve stopped saving in retirement accounts (I’m at about 6.5x my salary and growing rapidly even without contributions) and am instead saving to bridge the gap between early retirement and 59 1/2. Right now I have enough bridge to retire at 56 1/2. My health care plan is to take advantage of ACA tax credits by making sure my taxable income stays below the 400% federal poverty level, or $51k/year. That cap has the nice side benefit of keeping my bridge funds at an achievable number – I notice a lot of bloggers talk about how much it costs to maintain their lifestyle and they quickly spin up to 6 figures per year. That would be hard to save for!

    I plan to spend ~5 years living off my bridge funds, then ~3 years living off of retirement funds, then start pulling social security at 62 so I don’t have to tap my retirement funds so much. Once I am 65 and can access medicare I’ll be able to bump up my annual withdrawals to something over 51k if I want to, so I’ll do my fancy travel (if any) around then. Using my retirement funds will keep them at a healthy balance but not so much money that I have to take massive RMDs in my 70s.

    That’s all the plan, and it could change. I’ve found a lot of great resources at alloptionsconsidered – they’re great! lots of food for thought over there.

    • nicoleandmaggie Says:

      VTSAX is a perfectly good strategy too, though bonds are good to add for people who are close to retirement who cannot afford a 40% drop in the stock market.

      Are you still doing IRA Roths? (Since you can take out the principal without penalty, which makes them safer for people who want to pursue early retirement.)

      • bethh Says:

        No, I’m not ROTHing – I’m focusing on the bridge savings, and don’t have extra money aside from that goal amount to set aside in a ROTH. Plus I want to start using the money in 5-6 years so I’m not sure it would be worth it. Do you think I’m missing something?

      • nicoleandmaggie Says:

        You can use the ROTH principal as bridge savings is all. That way if your plans change you haven’t lost that tax advantage (and any earnings you accrue can continue accruing earnings tax free). You don’t have to put it in the stock market if you want to keep it as cash– it can still go in the roth bucket.

        Disclaimer: We are not financial professionals– talk to an actual professional and/or do your own research before making any important life decisions.

  6. Revanche @ A Gai Shan Life Says:

    We only have one tax advantaged account between the two of us so most of my catching up investing is necessarily in an after tax brokerage. It stinks but it’s better than nothing.

    Across all our accounts, I have approximately a 90/10 stocks/bonds allocation and aim for something like 75/25 domestic/international. The stocks are primarily VTSAX and VTIAX. I added back emerging markets this year but that’s a drop in the bucket. Maybe eventually I will add back real estate in some form, but I’m not sure when or how much.

    We have a year of cash. I assume that if we hit our investing goals over the next 7 years, I should then start to add to our cash equivalents for a 2-3 year cash bucket to start to ease into retirement time. My brain starts to jitter when I try to think through tax loss harvesting, though.

    It especially starts to fritz when I try to figure out how to deal with our IRAs because they have bizarre withdrawal rules – I made the mistake of mixing pre-tax and post-tax money over a decade ago. I almost wish I’d focused entirely on the post-tax brokerage account instead of the IRAs. EEEK.

    • nicoleandmaggie Says:

      Yeah, that’s good point– it is difficult to do backdoor Roths if you have taxable IRAs. I rolled all of ours over to Roth back in like 2010 so it’s easy to just backdoor new ones.

      I don’t actually know much about withdrawals! Probably won’t figure that out until we have to start taking RMDs. But who knows!

      I don’t mind paying taxes when Trump isn’t in charge. So not doing tax loss harvesting is plenty ok for me, especially if it means I can keep just buying broad-based indexes.

  7. This year I put IRA Roth money into REITs | Grumpy Rumblings (of the formerly untenured) Says:

    […] makes sense to diversify by branching out into things that most people need never invest in (see:  Munis), I thought it might be time to put some money into a real estate investment […]

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