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.
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?