Please Help me Update my Financial Plan!

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
sonowwhat?
Posts: 43
Joined: Sat Jan 02, 2010 10:39 am

Please Help me Update my Financial Plan!

Post by sonowwhat? »

Back in early 2010 I fired my broker with UBS and have moved all my assets to self directed accounts (Fidelity, Vanguard and banks). I am a now a full fledged Boglehead and other than a boring financial life I have time to actually spend time with the kids instead of watching the financial shows. I went from literally 30 funds (all with high fees) to four low fee funds and one CD. I do need some help though as the one CD is expiring and reinvestment into CDs seems well pointless.

So, in Laura’s format (or close to it) here you go:

Background:

Employment Status: Retired since Dec 2007
Age:48
Married w/ 3 Children: Ages 18, 15, 13
Home (Paid for)
Income: Only source of income is from investments

Withdrawal Rate Needed as % of Investment Portfolio (Excluding Real Estate) in Today's dollars:
For the Next 8 Years = 4% (Need to fund kids education)
Thereafter estimate 2% rate

Investment Expertise: Novice but I do have a CPA license and MBA in taxation so some finance background

Max % of Equity I can handle without selling in panic markets = 40%

Emergency funds = Yes

Debt: No debt or mortgage (One guarantee on a bad R/E deal that has exposure of up to 4% of Net worth in the worst case).

Tax Filing Status: Married filing Jointly w/ 3 dependent children

Tax Rate:
Federal Taxes: Effective (Tax/AGI)- 15%; Marginal (Tax/Taxable Income)- 25%
State Taxes: Effective 4%; Marginal 6%

No preference on subcategory breakdowns

Current portfolio size = X,XXX,XXX (the mid 7 Figures)

Investment other than Stocks and Bonds is in real estate as follows:
Personal Home - 11.9% of Net Worth
Rental home - 3.4% of Net Worth



Summary of Liquid Investments (85% of Net Worth) (Amounts are % of Investment Portfolio Excluding Real Estate):

Cash & Equivalents 13% (Includes CDs that are maturing in the next several weeks)
Equites 41%%
Bonds 43%%
529 Plans (Balanced) 4%
-------------------------
Total 100%


XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

TAXABLE

Bond Funds (37%)
19% Vanguard Intermediate-Term Investment-Grade Fund Admiral Shares
18% Vanguard Total Bond Market Index Fund Admiral SharesVBTLX

Cash & Equivalents (13%)
0.2% Cash
13.0% CD (Matures NOW and must figure where to reinvest)

Equity Funds (41%)
33% SPRTN TOTAL MKT INDX FID ADVANTAGE CLASS
8% SPARTAN INTL INDEX FID ADVANTAGE CLASS

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

HIS IRA (All Bond))

5% Vanguard Total Bond Market Index Fund Admiral SharesVBTLX

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

HER IRA (All Bond))

0.4% Vanguard Total Bond Market Index Fund Admiral Shares

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

4% 529 COLLEGE PLANS (Balanced Managed Allocation Funds)

Questions:

1) I need an updated look at my portfolio to see if there are any suggestions for tweaking it.
2) I was always a little nervous about throwing a ton into treasuries given the low rates, that’s why I choice to diversify some of the bond holding into the Intermediate Grade Investment Grade fund to decrease the overall percentage of Federal Government Exposure. It I had chosen “Total Bond Market” it had a heavy weighting in US back obligations. Also that is why I chose to invest 13% in CDs. At the time I could get a 4% return for a 1 year CD. I then renewed at 2%. Now it looks can get about 1% (woo hoo). That all being said, where would you throw this renewing CD money? (Bonds????? Or back into CDs at 1%) What about Gold or is that a sin in the Boglehead code of morality?



Thanks Guys!
User avatar
woof755
Posts: 3178
Joined: Sun Aug 05, 2007 2:03 pm
Location: Honolulu

Post by woof755 »

My best guess:

TIPS. You are in a portfolio range where you could buy individual TIPS. You are also in a range where there would be no shame in sending Larry Swedroe a PM and asking for professional advice!

VG ETFs: VTI, VEU, and short-or intermediate-term munis in whatever proportion allows you to keep your 40/60 allocation

(at the very least, this post will serve as a bump to the top for your very well thought out post)
"By singing in harmony from the same page of the same investing hymnal, the Diehards drown out market noise." | | --Jason Zweig, quoted in The Bogleheads' Guide to Investing
Bob's not my name
Posts: 7416
Joined: Sun Nov 15, 2009 9:24 am

Re: Please Help me Update my Financial Plan!

Post by Bob's not my name »

sonowwhat? wrote:I do have a CPA license and MBA in taxation so some finance background

Federal Taxes: Marginal (Tax/Taxable Income)- 25%
Then you should know that this is not the definition of marginal rate.

Furthermore, I don't think there are any income numbers that would allow this to be true:
sonowwhat? wrote:Effective (Tax/AGI)- 15%; Marginal (Tax/Taxable Income)- 25%
I think your AGI would have to be on the order of $75,000 and your taxable income on the order of $45,000, which would put you in the 15% bracket and have you paying about $6,000 in taxes, which would yield 8% and 13% for your formulas, so it doesn't make sense.
Last edited by Bob's not my name on Fri Jul 22, 2011 5:36 am, edited 1 time in total.
livesoft
Posts: 76851
Joined: Thu Mar 01, 2007 8:00 pm

Post by livesoft »

As you have probably found out, with your assets it is very unlikely that any of your kids will get any financial aid for college. If you are intending to pay for some of their college expenses, I would suggest that you roll the 529 plans into your asset allocation. In that case, your might consider filling up three 529 plans with bond funds and eschew balanced funds. With the current law and "front-loading" the contributions (give today some future year contributions), you can get more bonds in tax-free accounts and reduce some of your taxes.

OTOH, maybe you have all the college expenses you are willing to pay already completely funded.

Rather than CDs, I have preferred short-term corporate bond funds. When CD rates go back up, then CDs would be fine for some of your money.
Wiki This signature message sponsored by sscritic: Learn to fish.
Bob's not my name
Posts: 7416
Joined: Sun Nov 15, 2009 9:24 am

Re: Please Help me Update my Financial Plan!

Post by Bob's not my name »

sonowwhat? wrote:one CD
the one CD is expiring

Current portfolio size = X,XXX,XXX (the mid 7 Figures)

Cash & Equivalents 13% (Includes CDs that are maturing in the next several weeks)

13.0% CD (Matures NOW and must figure where to reinvest)
This is confusing. If it's really one CD it must be over the FDIC insured limit. I suspect you mean that you have several identical CDs titled differently.
Topic Author
sonowwhat?
Posts: 43
Joined: Sat Jan 02, 2010 10:39 am

Clarification

Post by sonowwhat? »

"Bob's not my name"

- Tax Rate.....I would not give much consideration to my background as I have not practiced in the tax field in many years. I was not trying to define marginal tax rate but I have always understood it to mean that it is what your next dollars would be taxed at in comparison to the "effective rate" which is what you are actually paying. I took a guess at this as I have NOL carryovers etc.. that kind of sway the short term feel of this.

- CD.... Your right, I am well over the FDIC limit on this particular CD. Very careless on my part, but I sit all my investments inside of an LLC for both asset protection purposes and estate valuation planning. In the past I have gotten very creative in how I hold these to ensure FDIC protection. Good thing this particular bank is on good footing.


"livesoft"
Yea, I went through the financial aid exercise as it was required in my state of Georgia to get the Hope. Unfortunately, my daughter chose an expensive private college (in my opinion to punish me! lol). The way Ga's 529 plans work they work out the allocation given the child's age. I do think front loading these makes alot of sense regardless of the allocation though so thanks for the idea.

"woof755"
TIPS - I am definitely going to research these and consider how they fit into the puzzle. Good Suggestion.


Everyone Else: Still looking for some additional thoughts on where to put that expiring CD money??????
money
retiredjg
Posts: 44855
Joined: Thu Jan 10, 2008 12:56 pm

Re: Clarification

Post by retiredjg »

sonowwhat? wrote:Still looking for some additional thoughts on where to put that expiring CD money??????
Have you looked at I-Bonds? I know little about them, but I seem to recall they can be cashed in tax free for educational expenses. Although I'm not sure you need more for education.

Not everybody can do this, but if it is based on income (yours seems moderate) rather than wealth, you might have a chance. Obviously, it would not be helpful for the 18 year old, but maybe for the other two.

Or you could just hold 13% of your portfolio in I Bonds or in individual TIPS since you don't have a lot of tax-advantaged space to hold a TIPS fund. It does seem like you need some inflation protection in your portfolio somewhere.

Like the others, something is just not adding up for me. To get into the 25% marginal bracket, if you are using money from your taxable account and only being taxed on gains, that seems like more than a 4% withdrawal rate. But perhaps you inherited the money when you were 5 years old and it is almost all gains. Not trying to be nosy - just hoping you've got your numbers figured right.

Check out this wiki article I Savings Bonds and also check out the links down the right side and the links to Forbes articles at the bottom.
Topic Author
sonowwhat?
Posts: 43
Joined: Sat Jan 02, 2010 10:39 am

Marginal Tax Rate

Post by sonowwhat? »

With approximately 60% of my taxable portfolio in Bonds and CDs, I get a 1099INT for these that are taxed at Ordinary rates. The starting level for the 25% tax bracket for married filing jointly begins at $69,000. My portfolio of interest bearing instruments is sufficient to trigger this as my marginal tax rate. When I refer to marginal tax rate, I think of it in terms of the rate you pay on the "last dollar" you earned of ordinary income. Long term capital gains are statutorily fixed in my mind at 15% for most brackets so I do not consider them when I refer to a marginal rate.
livesoft
Posts: 76851
Joined: Thu Mar 01, 2007 8:00 pm

Re: Marginal Tax Rate

Post by livesoft »

sonowwhat? wrote:With approximately 60% of my taxable portfolio in Bonds and CDs, I get a 1099INT for these that are taxed at Ordinary rates. The starting level for the 25% tax bracket for married filing jointly begins at $69,000. My portfolio of interest bearing instruments is sufficient to trigger this as my marginal tax rate.
Taxes are quirky. A family of 5 can make $65,000 in interest and $20,000 in dividends and pay no taxes if they have college expenses. And they get a refund from the government as well. That is, the IRS pays them money even though they paid no taxes. And that's not including the foreign tax credit.

One has to get closer to $100K of income to get into the 25% marginal income tax bracket with the standard deduction. But I suspect the OP is really in the 25% marginal income tax bracket. Maybe some tax-exempt bonds can make a big difference though.
Wiki This signature message sponsored by sscritic: Learn to fish.
willift
Posts: 91
Joined: Wed Apr 28, 2010 4:25 pm

Re: Please Help me Update my Financial Plan!

Post by willift »

sonowwhat? wrote:Current portfolio size = X,XXX,XXX (the mid 7 Figures)
I've got a question about mid 7 figures.

Does that mean 4-6 million dollars or does it mean more like 1.4 to 1.6 million?

I often see the phrase "Mid 7 figures" and am never sure what the OP means.

Willift
retiredjg
Posts: 44855
Joined: Thu Jan 10, 2008 12:56 pm

Re: Marginal Tax Rate

Post by retiredjg »

sonowwhat? wrote:With approximately 60% of my taxable portfolio in Bonds and CDs, I get a 1099INT for these that are taxed at Ordinary rates. The starting level for the 25% tax bracket for married filing jointly begins at $69,000. My portfolio of interest bearing instruments is sufficient to trigger this as my marginal tax rate. When I refer to marginal tax rate, I think of it in terms of the rate you pay on the "last dollar" you earned of ordinary income. Long term capital gains are statutorily fixed in my mind at 15% for most brackets so I do not consider them when I refer to a marginal rate.
Ahh, my oversight. I was thinking capital gains from selling stocks rather than interest and dividends. Now it is making much more sense and it is not too difficult to see how you could be in the 25% marginal bracket.
Does that mean 4-6 million dollars or does it mean more like 1.4 to 1.6 million?
Cant speak for others, but it means about 3.5 to 6.5 million to me.
livesoft
Posts: 76851
Joined: Thu Mar 01, 2007 8:00 pm

Re: Marginal Tax Rate

Post by livesoft »

retiredjg wrote:Cant speak for others, but it means about 3.5 to 6.5 million to me.
You can speak for me. :)
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
sonowwhat?
Posts: 43
Joined: Sat Jan 02, 2010 10:39 am

Mid 7 Figures

Post by sonowwhat? »

Yes, I was referring to the around 5 million dollar range give or take. I guess with all the deducts I do feel I am in the 25% marginal range but just over the edge so that is why I said the effective was 15%. Some years and the way interest rates have been trending, I might be back in the 15% marginal if not already. In my mind, unless my taxable income increases, I am not that focused on trying to avoid taxes.
Bob's not my name
Posts: 7416
Joined: Sun Nov 15, 2009 9:24 am

Post by Bob's not my name »

You appear to be budgeting about a million dollars for your three kids' college. It may indeed cost that much if there's graduate school involved (but you say "8 years", which covers your 13-year-old only through undergraduate, so I'm not sure what your assumptions are), but kids who go to top schools typically can make a lot of money in the summers to help pay their tuition. My kids have averaged over $10,000/summer, including some summers in which they didn't earn very much but got good experience. So you could estimate $100,000 from all three working 3-6 summers each (depending on graduate school again).

You should look into gifting appreciated stock funds to your kids and having them sell enough each year to stay under the kiddie tax threshold.

I was asking about the size of the CD and your marginal rate because you'll get better advice once folks appreciate that we're talking about $650,000 and a 30% marginal rate (although your statements about marginal rate are still confusing :)). With those numbers I think it makes sense to put at least some of it in a Vanguard municipal bond fund. You should also read threads here on taking out longer term CDs.
Post Reply