Early 40's need help

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Early 40's need help

Postby anng » Wed Nov 11, 2009 6:09 pm

Hi-

I wrote in a while ago when thing were a total disaster, lots of various funds with no rhyme or reason. We still have a bit of a hodge-podge, but I’m trying to get things in order. We have most of our money in TIAA-CREF and Fidelity, though we recently opened a Vanguard account. I don’t think I want to switch everything over to Vanguard unless there’s something we can’t get a comparable at TC or Fido.


Emergency funds: at least 9-12 months (not included in allocation)
Children’s 529 not included in allocation
Debt: 355K 30 yr. mortgage at 4.75%
Tax Filing Status: Married filing Jointly
Tax Rate: 35% Federal 10.5% State & City (N.Y.C.)

Age: 41/40
Desired Asset allocation: 80/20
Desired Intl allocation: 20% of stocks (??)
Current portfolio – mid six figures

Taxable – 52%

7% cash
11 %TIAA Inst’l Equity Index (TINRX) (0.44%)
6% TIAA Mid Cap Growth (TCMGX) (0.95%)
14% Fidelity Total market Index (FSTMX) (0.1%)
3% Janus Twenty (JAVLX) (0.84%)
1% VG Total Int’l Stock Index (VGTSX) (.34%)
5% Fidelity Spartan Int’l Index Investor Class (FSIIX) (.10%)
3% Fidelity NY Muni Income (FTFMX) (.47%)
2% PR Muni Bond @5.125% due 2024
Small amounts in individual stocks just for the ‘fun’ of it


Tax Advantaged – 48%

His 403b- maxed out with full match
1% TIAA Traditional
17% CREF Stock (0.62%)
2% CREF Growth (0.63%)
2% CREF Equity Index (0.56%)
9% CREF Global Equities (0.66%)
3% TIAA Real Estate (0.84%)

His Traditional IRA (non-deductible, hoping to convert in 2010 to Roth)
1% CREF Inflation Linked Bond (0.50%)

His SEP IRA
1% TIAA-Cref Inflation Linked Bond- Retirement Class (0.59%)

Her GSRA (lying dormant from a former job)
1% TIAA Traditional
3% CREF Inflation Linked Bond (0.50%)

Her Roth IRA
5% Fidelity Spartan 500 Index (FSMKX) (0.1%)

Her Traditional IRA (non-deductible, hoping to convert in 2010 to Roth)
3% Fidelity Spartan 500 Index (FSMKX) (0.1%)


**Total of All Accounts Together (not each account individually) equals 100%

New annual Contributions
$33,000 his 403b (including matching contributions)
$5000 her IRA (non-deductible – hoping to convert to Roth in 2010)
$5000 his IRA (non-deductible – hoping to convert to Roth in 2010)
His SEP-IRA – varies, dependent on SE income
~$18,000 taxable

Funds available in his 403b and her GSRA (from former job)
TIAA Traditional
CREF Stock (0.62%)
CREF Growth (0.63%)
CREF Equity Index (0.56%)
CREF Global Equities (0.66%)
TIAA Real Estate (0.84%)
CREF Bond Market (0.58%)
CREF Inflation Linked Bond (0.50%)
CREF Money Market (0.54%)
CREF Social Choice (0.59%)


Questions:
1. Should I roll my TIAA GSRA into an IRA? I haven’t touched it in years

2. We’re not eligible for Roth or deductible IRA’s currently because of the income limit. We’ve both contributed to a non-deductible, hoping to convert to a Roth in 2010. Is this a good idea?

3. We need more in bonds to reach our desired AA but I’m not sure what to buy and where. Because of our high tax bracket the NY Muni seems like a good option. I’m not sure if we should put more there or something else somewhere else. The PR Muni bond seems like probably a mistake in retrospect (we didn’t know better at the time) but I’m not sure it’s worth selling.

4. I'm not sure what international funds we should be in and in which accounts.

5. What’s the best way to implement our reallocation with minimal tax implications (or some tax advantages) beyond changing our current contributions?

Thanks so much!!
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Re: Early 40's need help

Postby Default User BR » Wed Nov 11, 2009 7:26 pm

anng wrote:His Traditional IRA (non-deductible, hoping to convert in 2010 to Roth)
1% CREF Inflation Linked Bond (0.50%)

His SEP IRA
1% TIAA-Cref Inflation Linked Bond- Retirement Class (0.59%)

Her GSRA (lying dormant from a former job)
1% TIAA Traditional
3% CREF Inflation Linked Bond (0.50%)

Her Roth IRA
5% Fidelity Spartan 500 Index (FSMKX) (0.1%)

Her Traditional IRA (non-deductible, hoping to convert in 2010 to Roth)
3% Fidelity Spartan 500 Index (FSMKX) (0.1%)

1. Should I roll my TIAA GSRA into an IRA? I haven’t touched it in years!

Not if you're planning a Roth conversion next year. That will mess up the basis due to the pro-rata rule. If you have IRAs with both taxable and non-taxable money, you can't selectively convert just the non-taxable part. Of course, you could convert all and pay the taxes. Similarly, I think "his" SEP IRA will be a problem for conversion.


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Re: Early 40's need help

Postby retiredjg » Wed Nov 11, 2009 9:46 pm

anng wrote:1. Should I roll my TIAA GSRA into an IRA? I haven’t touched it in years

Yes, in general. But as already mentioned, it will add to the total of your IRA and the conversion is done on a pro-rata basis. I'm pretty sure the SEP IRA is considered in the total too.

2. We’re not eligible for Roth or deductible IRA’s currently because of the income limit. We’ve both contributed to a non-deductible, hoping to convert to a Roth in 2010. Is this a good idea?

Edit: Yes, since most is already taxed. See post below about including the value of the SEP IRA in the basis.

3. We need more in bonds to reach our desired AA but I’m not sure what to buy and where. Because of our high tax bracket the NY Muni seems like a good option. I’m not sure if we should put more there or something else somewhere else. The PR Muni bond seems like probably a mistake in retrospect (we didn’t know better at the time) but I’m not sure it’s worth selling.

In general, you should not buy bonds in a taxable account if you can fit them into a tax-advantaged account. So, the munis may not be the best idea.
4. I'm not sure what international funds we should be in and in which accounts.

You want your international to contain emerging markets - Fidelity Spartan does not contain emerging markets.

Your portfolio contains some nice funds, but it has a lot of overlap. There is no need to hold one of everything in most of your accounts. It could be simplified greatly. Also, you are paying higher expense ratios than necessary on several funds, especially the funds in taxable.

How big a change are you willing to make? Also, can you sell the taxable fund without too much in capital gains? Would you?
Last edited by retiredjg on Thu Nov 12, 2009 12:28 pm, edited 1 time in total.
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Postby LH » Thu Nov 12, 2009 1:29 am

The conversion to Roth there is no right answer per se

1)your tax bracket now
2)your tax bracket in the future
3)the percentage of your IRA money that is after tax currently
4)changes in US tax laws, how they will treat Roths and IRAs in reality (means testing), changes in tax rates, etc.
5)How much money is subject to tax in your IRA. If all the money is pretax, ie traditional IRA, or a 401k rollever, etc, its all pretax, then all of it is subject to taxation in a IRA to ROTH IRA rollover. in your case, some of it is has already been taxed since you used nondeductible IRA, of that money, only gains would be taxed in conversion. Pretax money = taxed. Post tax money(nondeductible ira) = not taxed. Gains = Taxed.

The way I look at it, is to just get some Roth, even in your situation where you are high tax bracket now. I would not do a lot of a Roth conversion, but I would do some just for tax risk diversification. But its a marginal thing. The answer that: You are in a high tax bracket now, and will likely be in a lower tax bracket when you retire, do not do a Roth, is fine too. there are too many variables. I am going to opt for maybe 10-20 percent of my IRA to Roth IRA, I am in 28 percent AMT tax bracket myself.

If you do elect to convert some ROTH this year, hold off converting your non-IRA tax advantaged accounts to IRAs this year, or it will increase your tax hit.

Now if your IRA only hold money that is already after tax, and have little gains, then convert it, you are not going to take much of a tax hit anyway.
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Postby LH » Thu Nov 12, 2009 2:35 am

Taxable – 52%

7% cash
11 %TIAA Inst’l Equity Index (TINRX) (0.44%)
6% TIAA Mid Cap Growth (TCMGX) (0.95%)
14% Fidelity Total market Index (FSTMX) (0.1%)
3% Janus Twenty (JAVLX) (0.84%)
1% VG Total Int’l Stock Index (VGTSX) (.34%)
5% Fidelity Spartan Int’l Index Investor Class (FSIIX) (.10%)
3% Fidelity NY Muni Income (FTFMX) (.47%)
2% PR Muni Bond @5.125% due 2024
Small amounts in individual stocks just for the ‘fun’ of it






Tax Advantaged – 48%

His 403b- maxed out with full match
1% TIAA Traditional
17% CREF Stock (0.62%)
2% CREF Growth (0.63%)
2% CREF Equity Index (0.56%)
9% CREF Global Equities (0.66%)
3% TIAA Real Estate (0.84%)



For the taxable stuff, you would have to know how much of a tax hit you would take, how much profit are in the funds? Also, since capital gains is going to go from 15 to 20 per reports, it may be a good time to switch out, but it gets dicey to talk about it since I have no clue how much taxable gains you have in the taxable accounts.

For the above tax advantaged, its easier.

You need to figure out an asset allocation first I would posit:
So far its

80 stocks 20 bonds

1)How much international do you want. I would go with a 50/50 US foreign split, some recommend 30 percent, you mention 20 percent. Seems like a lot of one country risk to me, the US may not be dominant going forward, I would go with 30-50 percent internation of your stock allocation.

2)Do you want a REIT allocation or not? I go by the rule that if its not 5 percent or more, do not mess with it.

3)Bonds- I would go with aggregate bonds and tips bonds, split 50/50. You would put your Bond allocation in your tax advantaged space.

Just a random guess here:

80/20 stock/bonds split

40 percent US, 40 percent World
10 percent Aggregate US TBM, 10 percent TIPS

That would be the simplest goal.

Decide want you want to do first, whats your goal allocation, then make it fit, and if you really cant, then change your allocation so it fits. Like if no TIPS available to your in tax advantaged, us 20 percent Aggregate bonds and 0 TIPS. If you want REITS, throw a 10 percent allocation in there and subtract it out from your stock.

Put Index US and index Foriegn stock funds in taxable.

Bonds and REITS go in tax advantaged.

Skip the municiples, you do not need them. You have plenty of space.

Really, in taxable, with new money, and any money cash you generate from selling old stuff, I would either

1)go vanguard mutual fund
2)buy vanguard ETFS

The expense ratios are better. But I will stick with your funds below.

Now, the way I would approach the taxable stuff, is if you think the tax hit is too high to sell it, then keep it, maybe put it "off portfolio" in a lump, and leave it there forever. I assume your new investments will make whatever you choose to do this with increasingly irrelevant as new money is added in. I would be biased towards just clearing all the junk out though, maybe take a small tax hit, but its your call. I still hold exxon stock, and PG stock that is now only 1 percent of my portfolio, whereas earlier on, it was more like 10 percent. Its off portfolio, and is becoming more and more irrelevant.

Below, I tried to keep your funds you selected for the asset classes above. I got rid of all the "clutter" including the annuities, which you may not be able to get rid of easily, you may take them off allocation. Anyway, here it is:

80/20 stock bond
-40 internation
-40 US TSM (using sp500 as a proxy for 8 percent of it)
-10 US TBM
-10 US TIPS

Via:

Taxable 52 percent

12 Fidelity Total market Index (FSTMX) (0.1%)
40 Fidelity Spartan Int’l Index Investor Class (FSIIX) (.10%)

Tax Advantaged – 48%

His 403b- 34%
20% CREF Equity Index (0.56%) US index
10 CREF Bond Market (0.58%)
4 CREF Inflation Linked Bond (0.50%)

His Traditional IRA 1 percent
1% CREF Inflation Linked Bond (0.50%)

His SEP IRA 1 percent
1% TIAA-Cref Inflation Linked Bond- Retirement Class (0.59%)

Her GSRA 4 percent
4% CREF Inflation Linked Bond (0.50%)

Her Roth IRA 5 percent
5% Fidelity Spartan 500 Index (FSMKX) (0.1%)

Her Traditional IRA 3 percent
3% Fidelity Spartan 500 Index (FSMKX) (0.1%)

I believe that adds up to a 80/20 portfolio with: 40 international, 40 US, 10 TIPS 10 US TBM split.

That is one way to simplify your portfolio at present. It would be nice to roll over some of the seperate accounts into one IRA at say vanguard or fidelity if you prefer. But its not really necessary per se, especially if you can use a spreadsheet to integrate the portfolio easily. I have mine spread over 8 accounts at present.

Hope that gives you some ideas. the main thing is to get a goal/allocation, then stick to it going forward.

LH
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Postby LH » Thu Nov 12, 2009 2:50 am

I don’t think I want to switch everything over to Vanguard unless there’s something we can’t get a comparable at TC or Fido.


If you are adept with spreadsheets, this is doable. Maybe quicken or something can help you do it as well. But if you are going to have multiple accounts, multiple funds, balancing is going to be quite painful.

I would consider moving as much as possible to vanguard, keep same accounts and such, unless you can put it together with a spread sheet. Or keep it all at fidelity, whatever. But its going to get somewhat complex keeping track if you have to do it manually.

Right now, on my spreadsheet, I have:

8 accounts going down the side, wifes nondeductible ira, wifes rollover pretax ira, wifes taxable brokerage, wifes vanguard ira, wifes vanguard taxable.... then my nondeductable IRA, HSA, and Vanguard ERISA rollover IRA
16 funds going across the top, as I have 8 asset classes in vanguard funds as well as in thier ETFs equivalent.

The spreadsheet automatically updates with stock prices pulled off yahoo, and states how much I would need to buy or sell of each class to get into perfect balance. So I just put new money into the class which is currently the lowest.

It would be a nightmare I think for me to do it without the spreadsheet. Just something to consider when thinking about REITS or not REITS, etc. Simplicity can be nice, higher complexity does not necessarily get one much.
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Re: Early 40's need help

Postby YDNAL » Thu Nov 12, 2009 9:03 am

anng wrote:Hi-

I wrote in a while ago when thing were a total disaster, lots of various funds with no rhyme or reason. We still have a bit of a hodge-podge, but I’m trying to get things in order. We have most of our money in TIAA-CREF and Fidelity, though we recently opened a Vanguard account. I don’t think I want to switch everything over to Vanguard unless there’s something we can’t get a comparable at TC or Fido.

Emergency funds: at least 9-12 months (not included in allocation)
Children’s 529 not included in allocation
Debt: 355K 30 yr. mortgage at 4.75%
Tax Filing Status: Married filing Jointly
Tax Rate: 35% Federal 10.5% State & City (N.Y.C.)

Age: 41/40
Desired Asset allocation: 80/20
Desired Intl allocation: 20% of stocks (??)
Current portfolio – mid six figures
ann,

You have duplicity all over the place and want high Equity risk (80/20 Stocks/Bonds).
- Can you stomach 40% (or more) drop in your mid 6-fig portfolio?
- I suggest you consider 2/3 Stocks 1/3 Bonds now and gradually work towards 60/40 maximum (or 50/50 better) in the next decade by the time your are 50yo.

Taxable – 52%

38% Fidelity Total market Index (FSTMX) (0.1%)
12% Vanguard FTSE ex US (VFWIX)
2% PR Muni Bond @5.125% due 2024
Small amounts in individual stocks just for the ‘fun’ of it

Tax Advantaged – 48%

His 403b- maxed out with full match
29% CREF Bond Market (0.58%)
5% CREF Equity Index (0.56%)

His Traditional IRA (non-deductible, hoping to convert in 2010 to Roth)
1% CREF Inflation Linked Bond (0.50%)

His SEP IRA
1% TIAA-Cref Inflation Linked Bond- Retirement Class (0.59%)

Her GSRA (lying dormant from a former job)
4% TIAA Real Estate (0.84%)
I would leave this account alone and let TIAA RE ride for a long time

Her Roth IRA
5% Vanguard FTSE ex US Small (VFSVX)

Her Traditional IRA (non-deductible, hoping to convert in 2010 to Roth)
3% Vanguard FTSE ex US Small (VFSVX)

**Total of All Accounts Together (not each account individually) equals 100%

Overall: 67/33 Stocks/Bonds
Stocks: 70/30 Domestic/Foreign
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Postby JW Nearly Retired » Thu Nov 12, 2009 10:04 am

retiredjg wrote: Possibly not (on the conversion part anyway). You are in the highest tax bracket and your city/state taxes are high as well. It is quite likely that you could convert at a later date (early retirement) and pay less in taxes.

anng,
Agree with retiredjg, only I would put it more like you would be nuts to convert at a 45% marginal tax rate. Is there really much chance you will still be in the top bracket after retirement?

A big consideration is how much control you will have over your retirement income. Will there be a big DB pension or some such that eats up all the lower tax brackets, or will the IRAs be the main thing? If it is the latter, you have to remember that most of the IRA income will not get taxed at the top bracket rate. Some is not taxed at all, some is taxed at 15%, 25%, 28%, and so on. Only the last amount in the top bracket gets taxed at your highest marginal rate. However, if you convert from a before-tax IRA to a Roth now all of this money gets taxed at 45%.
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Postby anng » Thu Nov 12, 2009 11:07 am

Thanks to everyone for your input. I have a lot to absorb and need to go over your recommendations, but I have a few questions/comments so far.

1- I have a fairly organized spreadsheet, so don't mind keeping things spread out a bit. My husband likes TC and since that's where his 403b is finds it convenient to have his automatic investing done there. If we can get the right AA with their funds I don't want to rock the boat. If their funds are substantially inferior I am willing to shift stuff around. Does anyone have insight into TC's funds? Also, I think we can't mess with TC Traditional, so was considering that as part of our bond/fixed income allocation.

2-We have a pretty big carryover loss from last year, so can sell off stuff where it makes sense.

3- Our traditional IRA's are non-deductible, so we'd only pay tax on the income. I guess we'll figure out how much of a tax hit it would be at the time of the conversion. A few months ago it was looking like a great idea.

4- I'm still not clear why the MUNI isn't a good idea. From my calculations we're earning the equivalent of 6.5% on a 3.6% yield. Is it an absolute that you should keep bonds in tax advantaged?

5-We have TIAA Real Estate (3% of our AA) and TIAA TIPS (5% of our AA). Are these decent funds? And is the Real Estate comparable to a REIT allocation?

6- I feel fine with the 80/20 AA. We were able to stomach the losses last year and continued to invest at the lows.

thanks again! I'll have to go over everything again and absorb it.

ann
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Postby retiredjg » Thu Nov 12, 2009 12:09 pm

anng, first, an apology. I gave you the wrong answer above when I said it might not be a good idea to convert IRAs to Roth. LH caught it (thanks!). When I think of Roth conversion, sometimes I forget that some of the money has already been taxed. My answer was appropriate for completely untaxed IRAs, not your situation (some taxed, some untaxed).

If you do make a Roth conversion, I think the IRS will look at the basis for your IRA in all these places:

His Traditional IRA (non-deductible, hoping to convert in 2010 to Roth)
1% CREF Inflation Linked Bond (0.50%)

His SEP IRA
1% TIAA-Cref Inflation Linked Bond- Retirement Class (0.59%)

Her Traditional IRA (non-deductible, hoping to convert in 2010 to Roth)
3% Fidelity Spartan 500 Index (FSMKX) (0.1%)

So as it stands, 80% has been taxed already. When you convert, you will pay taxes on 20% of whatever amount you convert. Caveat: the way I read Form 8606, the SEP IRA is considered part of the basis. I could be wrong. LH should know the answer to that one.

If you roll the GSRA over to IRA, that will be considered in the basis too.

LH has given you a good recommendation using only TC and Fidelity. The only weakness I see is that the Spartan International in taxable does not contain emerging markets. I think EM is an important part of a portfolio. You can get EM at Fido, but it is not as cheap as Vanguard. Em can be put in a taxable location. I probably would not go 50/50 on US/international, but that is personal preference.

Landy has also given you a good recommendation - using Vanguard and Fido. The FTSE funds (both large cap and small cap) he suggested both contain EM.
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Postby retiredjg » Thu Nov 12, 2009 12:24 pm

anng wrote:If their funds are substantially inferior I am willing to shift stuff around. Does anyone have insight into TC's funds?

TC's funds are not inferior at all, they just cost more. I have not made an exact comparison, but if you used only TC (for the 403) and Vanguard, I believe your overall portfolio would be cheaper.

Also, I think we can't mess with TC Traditional, so was considering that as part of our bond/fixed income allocation.

Correct.

3- Our traditional IRA's are non-deductible, so we'd only pay tax on the income. I guess we'll figure out how much of a tax hit it would be at the time of the conversion. A few months ago it was looking like a great idea.

I think this is almost right. Get clarification on whether the SEP IRA is included in the basis. Even if it is, you would not be paying taxes on all of the conversion, just a portion.

4- I'm still not clear why the MUNI isn't a good idea. From my calculations we're earning the equivalent of 6.5% on a 3.6% yield. Is it an absolute that you should keep bonds in tax advantaged?

In general, you make more money putting taxable bonds in a tax-advantaged location than putting tax-exempt bonds (munis) in a taxable location. For this reason, we generally recommend holding all your bonds in tax-advantaged if possible. I'm not sure if the Munis that you currently have are an exception. You could use the bond calculator at the Morningstar site (under "tools") to figure it out.

Others will need to help on your other questions.
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Postby House Blend » Thu Nov 12, 2009 6:27 pm

anng wrote:Thanks to everyone for your input. I have a lot to absorb and need to go over your recommendations, but I have a few questions/comments so far.

1- I have a fairly organized spreadsheet, so don't mind keeping things spread out a bit. My husband likes TC and since that's where his 403b is finds it convenient to have his automatic investing done there. If we can get the right AA with their funds I don't want to rock the boat. If their funds are substantially inferior I am willing to shift stuff around. Does anyone have insight into TC's funds? Also, I think we can't mess with TC Traditional, so was considering that as part of our bond/fixed income allocation.

2-We have a pretty big carryover loss from last year, so can sell off stuff where it makes sense.

3- Our traditional IRA's are non-deductible, so we'd only pay tax on the income. I guess we'll figure out how much of a tax hit it would be at the time of the conversion. A few months ago it was looking like a great idea.

4- I'm still not clear why the MUNI isn't a good idea. From my calculations we're earning the equivalent of 6.5% on a 3.6% yield. Is it an absolute that you should keep bonds in tax advantaged?

5-We have TIAA Real Estate (3% of our AA) and TIAA TIPS (5% of our AA). Are these decent funds? And is the Real Estate comparable to a REIT allocation?

6- I feel fine with the 80/20 AA. We were able to stomach the losses last year and continued to invest at the lows.

Anng,

Here's my take on your questions.

Regarding your selection of T-C funds, especially in His 403(b) it looks like there was no strategy involved.

The Boglehead approach involves first settling on which asset classes you want to invest in, and in what proportions. Then you look for the cheapest way to invest in those asset classes. This can get complicated, thanks to limited fund choices, and the various tax implications. That said, I agree with LH's recommendation. It makes good use of what is available at T-C.

Edited to add: I like Landy's suggested portfolio also.

Some of the Traditional may be hard to transfer, but your GSRA doesn't have this problem--you can move it whenever you like. (In His 403b, if it's an RA or GRA, you can either keep at as part of your bond allocation, or set up a 9 year Transfer Payout Annuity if you want to exit. Either choice is reasonable.)

BTW: your expense ratios are out of date: for example, CREF Stock is 0.59%. Equity index is 0.49%.
Link: http://www.tiaa-cref.org/performance/retirement/index.html

Regarding TIAA Real Estate: this is absolutely not like an REIT. Surely you've noticed that it has dropped steadily like an anchor for the past year, with almost no volatility. As long as you are ok with that, and plan to hold this asset class for a decade or two, it's OK.[*]

But in that case, you really need to educate yourself about this account if you are going to stay in it. For starters, you must read the Account FAQ--look at the pointy-clicky stuff on the right hand side of this page: http://www.tiaa-cref.org/performance/retirement/profiles/1009.html.

[*] This may be a controversial opinion. Plenty of Bogleheads have posted self-congratulations about how long ago they exited this fund.

The CREF TIPS fund is OK. It is pricier than the Vanguard equivalent (0.50% versus 0.25% for investor class shares) and tracks the same index. However, they're experiencing some mighty serious tracking error these days, trailing the index by about 1.9% YTD! They did beat the index last year (by ~0.75% I think), so some of this may just be trades that were inconveniently timed relative to when measurements were taken.

Note that the 5 and 10 year returns do look sane: very close to capturing the returns of the index, minus expenses.

I'm no Muni expert, but I think that under normal circumstances, even for someone like you in the top tax bracket, Muni's are primarily of use only after you have run out of tax-advantaged space.

I agree that 3.6% is pretty nice tax-exempt rate today, but intermediate taxable bond funds like VBIIX are yielding 3.86%. This means that if you pay the same or lower taxes when the money is withdrawn in retirement, you're still better off holding VBIIX in a tax-deferred account. (But CREF Bond is yielding 3.3%--it more closely resembles Vanguard's VBMFX. Now the decision -- 3.3% in tax-deferred versus 3.6% after-tax but tax-exempt is murkier. It depends on how many years before the tax-deferred money is withdrawn, and how much less tax is paid on it.)

Hope this helps.
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Postby LH » Sun Nov 15, 2009 6:34 pm

4- I'm still not clear why the MUNI isn't a good idea. From my calculations we're earning the equivalent of 6.5% on a 3.6% yield. Is it an absolute that you should keep bonds in tax advantaged?


Bonds are usually the considered the "safety" part of the portfolio.

Traditionally in boglehead books bonds are:

1)Aggregate Bonds (basically US nominally "risk free" Treasuries, some mortgage backed are in there too, but near "risk free")

2)TIPS (US real/inflation protected, "risk free" bonds)

(sometimes people say have some short term treasuries, more rarely, long term treasuries. )

Munis are usually mentioned ONLY as an alternative if you do not have the tax advantaged space. You have the space, ergo I would not recommend munis, it may be marginal perhaps.

I have not focused on this in a bit but basically

1)Munis are not as "safe" as Treasuires
-look at california, can they print money? No. will they default, possibly. Munis can default, there is not a printing press behind it.

2)Munis are not as "liquid" as Treasuries - when the going gets tough, will people want to buy your munis?

3)Munis may be more difficult to rebalance in times of stress.

Basically, to me, its like saying why not go High Yield/"junk" bonds? Yeah, you get higher yield, but why not just put more in stock? When things crash down, you want rock hard safety and liquidity to fallback on.

Munis, compared to Treasuries, fall short of that standard.

I guess the brief answer to your question, is if you want more yield expectantly, why not go 81 percent stock, 19 percent bonds (tips/aggregate) instead? For bonds, aim for "risk free"......

The above is my gestalt, nothing is universal. I think Ferri for example does say some high yield is ok, so its not universal, maybe some munis are fine for your bond portion, even if you have space for TIPS and/or nominals in your tax sheltered space, but the argument above made sense to me. Bonds = disaster "hedge"/risk free investment you can use to rebalance/preserve wealth when stocks/financial world go haywire.

LH
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Postby anng » Mon Nov 16, 2009 12:17 pm

LH wrote:

I have not focused on this in a bit but basically

1)Munis are not as "safe" as Treasuires
-look at california, can they print money? No. will they default, possibly. Munis can default, there is not a printing press behind it.

2)Munis are not as "liquid" as Treasuries - when the going gets tough, will people want to buy your munis?

3)Munis may be more difficult to rebalance in times of stress.

LH


Thanks, LH. That's the sort of explanation I was looking for. I will keep that in mind while rejiggering our AA.
anng
 
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