Jonathan Clements clarification

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
BusterScruggs
Posts: 49
Joined: Wed Aug 21, 2019 10:00 am

Jonathan Clements clarification

Post by BusterScruggs »

I just read an article by Jonathan Clements, who I like a lot. It is about a year old and in it he claims his AA is about 75/25 but claims he considers his private mortgage to his daughter a bond of sorts. To what is he referring?

Also, he mentions having all his Roth in Stocks. I assume the wisdom of this is no tax upon withdrawel, but how does that compare to the advice of holding bonds in tax deferred accounts, or at the least, non taxable accounts?

Any help is appreciated and comments about what he said are welcome. THanks!
User avatar
David Jay
Posts: 14587
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Jonathan Clements clarification

Post by David Jay »

BusterScruggs wrote: Mon Apr 26, 2021 1:34 pmAlso, he mentions having all his Roth in Stocks. I assume the wisdom of this is no tax upon withdrawel, but how does that compare to the advice of holding bonds in tax deferred accounts, or at the least, non taxable accounts?
Holding no bonds in Roth accounts is totally compatible with the advice to hold bonds in tax-deferred accounts. There is no "compare".

Bonds are best located in tax-deferred (to minimize growth), rather than in taxable (interest taxed as regular income) or Roth (where bonds reduce tax-free growth).

There is a full Wiki on efficient fund placement: https://www.bogleheads.org/wiki/Tax-eff ... _placement
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
BusterScruggs
Posts: 49
Joined: Wed Aug 21, 2019 10:00 am

Re: Jonathan Clements clarification

Post by BusterScruggs »

thank you! Very helpful!
deltaneutral83
Posts: 2455
Joined: Tue Mar 07, 2017 3:25 pm

Re: Jonathan Clements clarification

Post by deltaneutral83 »

I assume he has paid his daughter's mortgage and considers her ability to repay at probably 3-4% to behave like his bonds with similar risk and return profiles while also provide benefit to his daughter.

Stocks in Roth is probably because they are anticipated (but not guaranteed) to have the greatest ROI and balances will be larger and already taxed. Bonds in tax deferred still have to be taxed and they are anticipated to have lower returns creating a smaller balance to tax.
retiringwhen
Posts: 4743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Jonathan Clements clarification

Post by retiringwhen »

deltaneutral83 wrote: Mon Apr 26, 2021 1:44 pm I assume he has paid his daughter's mortgage and considers her ability to repay at probably 3-4% to behave like his bonds with similar risk and return profiles while also provide benefit to his daughter.
If I remember correctly, he actually issued a private (person to person) mortgage to his daughter. In other words he holds a note for a loan he made to her, collateralized by her home.
Leesbro63
Posts: 10640
Joined: Mon Nov 08, 2010 3:36 pm

Re: Jonathan Clements clarification

Post by Leesbro63 »

retiringwhen wrote: Mon Apr 26, 2021 2:20 pm
deltaneutral83 wrote: Mon Apr 26, 2021 1:44 pm I assume he has paid his daughter's mortgage and considers her ability to repay at probably 3-4% to behave like his bonds with similar risk and return profiles while also provide benefit to his daughter.
If I remember correctly, he actually issued a private (person to person) mortgage to his daughter. In other words he holds a note for a loan he made to her, collateralized by her home.
I see no problem counting this as a bond. The only wrinkle is if his daughter (and/or her spouse, if any) loses her job, has a catastrophic illness etc, is Jonathan REALLY gonna throw her out of her house? So there's a bit more risk, but assuming it's a normal situation....good house, responsible adult daughter, low risk of not being able to pay...this seems like a reasonable thing and is bond-like.

As to stocks in a Roth, yeah, today it makes sense. The old advice to put bonds in tax-deferred accounts was much more important when interest rates were not near zero and the max cap gains tax was 15%. In today's world, having a Roth account with highly appreciated stock (that's the goal) can make a lot of sense. Avoiding capital gains taxes on stocks could be more valuable than avoiding puny taxable interest on bonds.
User avatar
ResearchMed
Posts: 16795
Joined: Fri Dec 26, 2008 10:25 pm

Re: Jonathan Clements clarification

Post by ResearchMed »

Leesbro63 wrote: Mon Apr 26, 2021 3:17 pm
retiringwhen wrote: Mon Apr 26, 2021 2:20 pm
deltaneutral83 wrote: Mon Apr 26, 2021 1:44 pm I assume he has paid his daughter's mortgage and considers her ability to repay at probably 3-4% to behave like his bonds with similar risk and return profiles while also provide benefit to his daughter.
If I remember correctly, he actually issued a private (person to person) mortgage to his daughter. In other words he holds a note for a loan he made to her, collateralized by her home.
I see no problem counting this as a bond. The only wrinkle is if his daughter (and/or her spouse, if any) loses her job, has a catastrophic illness etc, is Jonathan REALLY gonna throw her out of her house? So there's a bit more risk, but assuming it's a normal situation....good house, responsible adult daughter, low risk of not being able to pay...this seems like a reasonable thing and is bond-like.

As to stocks in a Roth, yeah, today it makes sense. The old advice to put bonds in tax-deferred accounts was much more important when interest rates were not near zero and the max cap gains tax was 15%. In today's world, having a Roth account with highly appreciated stock (that's the goal) can make a lot of sense. Avoiding capital gains taxes on stocks could be more valuable than avoiding puny taxable interest on bonds.
IF it should come to pass that they can't pay, it might end up as an early inheritance, so maybe not as bad as if he needed the income for his own living expenses. I'm guessing he doesn't.
In that case, it makes even more sense. Probably better terms for each of them than regular "savings/bonds" and "mortgage rates".

RM
This signature is a placebo. You are in the control group.
Leesbro63
Posts: 10640
Joined: Mon Nov 08, 2010 3:36 pm

Re: Jonathan Clements clarification

Post by Leesbro63 »

ResearchMed wrote: Mon Apr 26, 2021 3:31 pm
Leesbro63 wrote: Mon Apr 26, 2021 3:17 pm
retiringwhen wrote: Mon Apr 26, 2021 2:20 pm
deltaneutral83 wrote: Mon Apr 26, 2021 1:44 pm I assume he has paid his daughter's mortgage and considers her ability to repay at probably 3-4% to behave like his bonds with similar risk and return profiles while also provide benefit to his daughter.
If I remember correctly, he actually issued a private (person to person) mortgage to his daughter. In other words he holds a note for a loan he made to her, collateralized by her home.
I see no problem counting this as a bond. The only wrinkle is if his daughter (and/or her spouse, if any) loses her job, has a catastrophic illness etc, is Jonathan REALLY gonna throw her out of her house? So there's a bit more risk, but assuming it's a normal situation....good house, responsible adult daughter, low risk of not being able to pay...this seems like a reasonable thing and is bond-like.

As to stocks in a Roth, yeah, today it makes sense. The old advice to put bonds in tax-deferred accounts was much more important when interest rates were not near zero and the max cap gains tax was 15%. In today's world, having a Roth account with highly appreciated stock (that's the goal) can make a lot of sense. Avoiding capital gains taxes on stocks could be more valuable than avoiding puny taxable interest on bonds.
IF it should come to pass that they can't pay, it might end up as an early inheritance, so maybe not as bad as if he needed the income for his own living expenses. I'm guessing he doesn't.
In that case, it makes even more sense. Probably better terms for each of them than regular "savings/bonds" and "mortgage rates".

RM
Agreed that's probably how many would handle that kind of situation/problem. I think I've heard Clements speak about being divorced and the cost etc. It MIGHT be the case that he actually does need that income.
JBTX
Posts: 11228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Jonathan Clements clarification

Post by JBTX »

Putting stocks in Roth is a way to increase your stock asset allocation without seeming like you've increased your stock allocation. I do it too.
Leesbro63
Posts: 10640
Joined: Mon Nov 08, 2010 3:36 pm

Re: Jonathan Clements clarification

Post by Leesbro63 »

JBTX wrote: Mon Apr 26, 2021 5:31 pm Putting stocks in Roth is a way to increase your stock asset allocation without seeming like you've increased your stock allocation. I do it too.
How so?
retiringwhen
Posts: 4743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: Jonathan Clements clarification

Post by retiringwhen »

Leesbro63 wrote: Mon Apr 26, 2021 7:11 pm
JBTX wrote: Mon Apr 26, 2021 5:31 pm Putting stocks in Roth is a way to increase your stock asset allocation without seeming like you've increased your stock allocation. I do it too.
How so?
If you do a marginal tax adjustment for taxable, tax deferred and Roth accounts, Roth has zero discount, Tax Deferred is discounted by your marginal income tax rate and taxable accounts by a combination of your marginal income tax and capital gains/qualified dividends rate. Therefore $1 of Roth > $1 Taxable > $1 IRA/401K.
Leesbro63
Posts: 10640
Joined: Mon Nov 08, 2010 3:36 pm

Re: Jonathan Clements clarification

Post by Leesbro63 »

retiringwhen wrote: Mon Apr 26, 2021 8:38 pm
Leesbro63 wrote: Mon Apr 26, 2021 7:11 pm
JBTX wrote: Mon Apr 26, 2021 5:31 pm Putting stocks in Roth is a way to increase your stock asset allocation without seeming like you've increased your stock allocation. I do it too.
How so?
If you do a marginal tax adjustment for taxable, tax deferred and Roth accounts, Roth has zero discount, Tax Deferred is discounted by your marginal income tax rate and taxable accounts by a combination of your marginal income tax and capital gains/qualified dividends rate. Therefore $1 of Roth > $1 Taxable > $1 IRA/401K.
Under current law, if your plan is to keep your equity index funds until death, there is no capital gains tax issue. So I’m not sure there needs to be any discount of your taxable equity allocation.
Always passive
Posts: 1267
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: Jonathan Clements clarification

Post by Always passive »

Leesbro63 wrote: Mon Apr 26, 2021 3:17 pm
retiringwhen wrote: Mon Apr 26, 2021 2:20 pm
deltaneutral83 wrote: Mon Apr 26, 2021 1:44 pm I assume he has paid his daughter's mortgage and considers her ability to repay at probably 3-4% to behave like his bonds with similar risk and return profiles while also provide benefit to his daughter.
If I remember correctly, he actually issued a private (person to person) mortgage to his daughter. In other words he holds a note for a loan he made to her, collateralized by her home.
I see no problem counting this as a bond. The only wrinkle is if his daughter (and/or her spouse, if any) loses her job, has a catastrophic illness etc, is Jonathan REALLY gonna throw her out of her house? So there's a bit more risk, but assuming it's a normal situation....good house, responsible adult daughter, low risk of not being able to pay...this seems like a reasonable thing and is bond-like.

As to stocks in a Roth, yeah, today it makes sense. The old advice to put bonds in tax-deferred accounts was much more important when interest rates were not near zero and the max cap gains tax was 15%. In today's world, having a Roth account with highly appreciated stock (that's the goal) can make a lot of sense. Avoiding capital gains taxes on stocks could be more valuable than avoiding puny taxable interest on bonds.
I did exactly that. My married daughter could not qualify, so I got the mortgage and gave a p-to-p loan to them. All well, kisses and more kisses, until Covid-19 and they could not afford the payments. Bottom-line: loans to family, specially your children are not loans. You better get used to it, they are gifts (that is what I told my wife)
User avatar
dwickenh
Posts: 2304
Joined: Sun Jan 04, 2015 8:45 pm
Location: Hills of Eastern Tennessee

Re: Jonathan Clements clarification

Post by dwickenh »

Family real estate loans backed by mortgage liens on the property are collectible in the same manner as the bank collects. The property can be sold and the proceeds used to pay off the loan. This may cause some friction in the family, but so does not paying your loan payments. I use minimum interest rates per IRS guidelines in exchange for timely payments. If they miss payments, they will go to the bank and refi at a much higher rate.
I love my kids, but they know they have to be responsible adults.

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett
JBTX
Posts: 11228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Jonathan Clements clarification

Post by JBTX »

Leesbro63 wrote: Mon Apr 26, 2021 7:11 pm
JBTX wrote: Mon Apr 26, 2021 5:31 pm Putting stocks in Roth is a way to increase your stock asset allocation without seeming like you've increased your stock allocation. I do it too.
How so?
Retiring when touched on it. Basically the real allocation would be an after tax allocation. By having stocks in Roth, you have more in stocks than in traditional. You could get to the same place just having more stocks in traditional.

Same to a degree with taxable. Yes, you could in theory hold all your taxable stocks and wait to die to get a step up, but that becomes estate Planning, not retirement planning. Most plan to use a good deal of their funds in retirement. For those that can stay in 12% bracket they be able to avoid most or all of capital gains.

And let's also just say there is a non trivial chance the step up is eliminated.
Leesbro63
Posts: 10640
Joined: Mon Nov 08, 2010 3:36 pm

Re: Jonathan Clements clarification

Post by Leesbro63 »

JBTX wrote: Tue Apr 27, 2021 11:29 am
Leesbro63 wrote: Mon Apr 26, 2021 7:11 pm
JBTX wrote: Mon Apr 26, 2021 5:31 pm Putting stocks in Roth is a way to increase your stock asset allocation without seeming like you've increased your stock allocation. I do it too.
How so?
Retiring when touched on it. Basically the real allocation would be an after tax allocation. By having stocks in Roth, you have more in stocks than in traditional. You could get to the same place just having more stocks in traditional.

Same to a degree with taxable. Yes, you could in theory hold all your taxable stocks and wait to die to get a step up, but that becomes estate Planning, not retirement planning. Most plan to use a good deal of their funds in retirement. For those that can stay in 12% bracket they be able to avoid most or all of capital gains.

And let's also just say there is a non trivial chance the step up is eliminated.
I concede that having stocks in a Roth is a "more robust stock portion" from an allocation perspective. I'm just saying that for the typical Boglehead, any drawdown during their lifetime will be slow. The difference between having long-term-held stock index funds in a taxable account versus tax-deferred (tIRA) or tax-free (Roth), at least in my mind, isn't worth the extra accounting as far answering the question "what's my stock allocation?".
JBTX
Posts: 11228
Joined: Wed Jul 26, 2017 12:46 pm

Re: Jonathan Clements clarification

Post by JBTX »

Leesbro63 wrote: Tue Apr 27, 2021 12:17 pm
JBTX wrote: Tue Apr 27, 2021 11:29 am
Leesbro63 wrote: Mon Apr 26, 2021 7:11 pm
JBTX wrote: Mon Apr 26, 2021 5:31 pm Putting stocks in Roth is a way to increase your stock asset allocation without seeming like you've increased your stock allocation. I do it too.
How so?
Retiring when touched on it. Basically the real allocation would be an after tax allocation. By having stocks in Roth, you have more in stocks than in traditional. You could get to the same place just having more stocks in traditional.

Same to a degree with taxable. Yes, you could in theory hold all your taxable stocks and wait to die to get a step up, but that becomes estate Planning, not retirement planning. Most plan to use a good deal of their funds in retirement. For those that can stay in 12% bracket they be able to avoid most or all of capital gains.

And let's also just say there is a non trivial chance the step up is eliminated.
I concede that having stocks in a Roth is a "more robust stock portion" from an allocation perspective. I'm just saying that for the typical Boglehead, any drawdown during their lifetime will be slow. The difference between having long-term-held stock index funds in a taxable account versus tax-deferred (tIRA) or tax-free (Roth), at least in my mind, isn't worth the extra accounting as far answering the question "what's my stock allocation?".
Like I said. I do the same thing.

It ends up being a logical circular loop. First, we don't account for our true after tax allocation, because it would be difficult to do and is fraught with assumptions. So we reasonably choose to ignore it.

But then once we decided to ignore it, it is almost always better to have stocks in Roth. However theoretically it should not make any difference between traditional and Roth, because you would have more traditional invested to get the same after tax allocation.

Having said all that, there are other reasons to have stocks in Roth- such as lack of rmds, future estate planning, etc.
User avatar
Ocean77
Posts: 800
Joined: Wed Oct 23, 2019 3:20 pm

Re: Jonathan Clements clarification

Post by Ocean77 »

He probably accounts for his private mortgage to his daughter as a gift, and any payment coming in from that as a windfall. That's what I would do. But he can't very well write that in his blog, lest his daughter reads it.
30% US Stocks | 30% Int Stocks | 40% Bonds
User avatar
TimeRunner
Posts: 1939
Joined: Sat Dec 29, 2012 8:23 pm
Location: Beach-side, CA

Re: Jonathan Clements clarification

Post by TimeRunner »

The Bogleheads Wiki has a page on Tax-Adjusted Asset allocation here: https://www.bogleheads.org/wiki/Tax-adj ... allocation

See also grabiner's spreadsheet at the end of the article, first bullet in External Links.

I use a Google sheet to track non-adjusted and tax-adjusted asset allocation. When re-balancing or doing Roth IRA conversions, looking at the tax-adjusted asset allocation, which is the result I care most about, is useful.
One cannot enlighten the unconscious. | "All I need are some tasty waves, a cool buzz, and I'm fine." -Jeff Spicoli
User avatar
grabiner
Advisory Board
Posts: 35307
Joined: Tue Feb 20, 2007 10:58 pm
Location: Columbia, MD

Re: Jonathan Clements clarification

Post by grabiner »

Leesbro63 wrote: Tue Apr 27, 2021 6:16 am
retiringwhen wrote: Mon Apr 26, 2021 8:38 pm
Leesbro63 wrote: Mon Apr 26, 2021 7:11 pm
JBTX wrote: Mon Apr 26, 2021 5:31 pm Putting stocks in Roth is a way to increase your stock asset allocation without seeming like you've increased your stock allocation. I do it too.
How so?
If you do a marginal tax adjustment for taxable, tax deferred and Roth accounts, Roth has zero discount, Tax Deferred is discounted by your marginal income tax rate and taxable accounts by a combination of your marginal income tax and capital gains/qualified dividends rate. Therefore $1 of Roth > $1 Taxable > $1 IRA/401K.
Under current law, if your plan is to keep your equity index funds until death, there is no capital gains tax issue. So I’m not sure there needs to be any discount of your taxable equity allocation.
You still pay tax on dividends, which is about 0.3% per year, or 0.5% if you are in a high-tax state. This is a cost you would avoid in the Roth.

In addition, if you intend to sell stocks before your death, you will pay capital-gains tax, but you will then have sold the stocks and no longer pay dividend tax on them. Thus the total tax cost on stocks you plan to leave to your heirs is not that much greater than on stocks you plan to sell in your own retirement. (The total tax cost on stocks you eventually donate to charity is lower than either one, since you will may make the decision to donate to charity long before your death.)
Wiki David Grabiner
joetro29
Posts: 265
Joined: Sat Dec 05, 2015 10:10 pm

Re: Jonathan Clements clarification

Post by joetro29 »

Is he divorced? I read his columns weekly and today’s made me think,so.
Post Reply