Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

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withrye
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Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

I am considering in Vanguard LifeStrategy Moderate Growth (VSMGX) in my taxable brokerage account. I wanted to see whether my accounting of the tax cost in 2019 for my hypothetical scenario is accurate.

Tax Filing Status: MFJ

Tax Rate: 32% Federal, 5% State, 15% LTCG, 3.8% NIIT

VSMGX paid out the following distributions in 2020:
Dividend: $0.31 Share Price: $31.60
ST Cap: $0.13 Share Price: $31.60
LT Cap: $0.42 Share Price: $31.60
Dividend: $0.23 Share Price: $27.86

I calculated those percentage distributions as follows:
Div: 0.98%
ST: 0.42%
LT: 1.33%
Div: 0.82%

For the dividends, I estimated that around 52% were qualified, based on what I read here. I applied the LTCG rate (plus NIIT) to LT Cap and qualified dividends, and a 37% rate (plus NIIT) to ST cap and unqualified dividends.

That gave me the following tax costs for the various distributions:
Div: 0.27% 0.29%
ST: 0.16% 0.17%
LT: 0.25%
Div: 0.23% 0.25%
Sum: 0.90% 0.95%

Please let me know if I've made a logical or calculation error.

Assuming the above is correct, is it correct to say that in my tax brackets the tax cost of VSMGX would have been around 0.9%, and that I could consider holding VSMGX in taxable as having an annual 0.9% "tax expense ratio" on top of the ordinary 0.13% ER?

Edit: Forgot to include NIIT with the ST cap gains and non-qualified dividends.
Last edited by withrye on Mon Jun 14, 2021 10:14 am, edited 1 time in total.
sycamore
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by sycamore »

withrye wrote: Mon Jun 14, 2021 9:09 am Assuming the above is correct, is it correct to say that in my tax brackets the tax cost of VSMGX would have been around 0.9%, and that I could consider holding VSMGX in taxable as having an annual 0.9% "tax expense ratio" on top of the ordinary 0.13% ER?
That's correct. And for completeness' sake you could also say that 0.9% is the premium you pay for various benefits of VSMGX: daily rebalancing, simplicity (like if one has a spouse who wouldn't know how to manage separate bond & stocks funds), etc.
nolesrule
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by nolesrule »

Short term gains and non-qualified dividends are also subject to NIIT. It wasn't clear by the way you worded it if you included that in your calculations.
dbr
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by dbr »

Without actually checking your arithmetic that should be right.

For sake of comparison the tax cost published by Vanguard is here: https://investor.vanguard.com/mutual-fu ... ance/vsmgx

It looks like they usually have about a 1% hit on return. They usually assume high tax rates but your tax brackets are high as well except still being in 15% LTCG.
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withrye
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

nolesrule wrote: Mon Jun 14, 2021 9:22 am Short term gains and non-qualified dividends are also subject to NIIT. It wasn't clear by the way you worded it if you included that in your calculations.
Thank you (and others) for the feedback and confirmation. I did not include NIIT for the ST cap and non-qualified dividends, so I've re-run the numbers and come to a 0.95% bottom line number. I'll edit the main post for posterity.

Now to decide whether I can live with a 1% tax drag in VSMGX when compared to the roughly 0.3-0.5% tax drag of VTSAX or VTWAX. On the generous side, this is a 0.5% add-on AUM (for the taxable portion of my portfolio only) for rebalancing and radical simplicity. Might just be worth it to me.
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goingup
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by goingup »

Only you can decide if holding that fund is worth it to you. You obviously have a very good grasp of taxes, which we never did so precisely. However, I knew that our taxable account would far outpace all other accounts and that capital gains distributions would burdensome at our rate.

I would think a total stock market fund combined with muni bond fund would be less costly, allow more flexibility, and provide better opportunities to TLH. Blended and balanced funds are simple and easy, but are better kept in tax-advantaged, especially at your rates.
dbr
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by dbr »

You haven't allowed for the possibly very high cost in capital gains taxes should you decide you no longer want to stay in that fund in your taxable account. It probably is not a good idea to put yourself in handcuffs like that unless you are really sure that is what you want for the long run.
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withrye
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

goingup wrote: Mon Jun 14, 2021 11:04 am I would think a total stock market fund combined with muni bond fund would be less costly, allow more flexibility, and provide better opportunities to TLH. Blended and balanced funds are simple and easy, but are better kept in tax-advantaged, especially at your rates.
It sounds a little strange to say, but I actually want to avoid too much flexibility. I don't want to tax-loss harvest; I never want to think about the timing of my dividends and whether they'll cause a partial wash sale. I never want to think about rebalancing either with new cash flows or with efficient sales in accumulation or decumulation. Without expressly paying a third-party advisor (robot or otherwise), I'd like to contribute to a single taxable brokerage mutual fund in whole dollar amounts whenever it's convenient to me, check the account balance once every few months out of curiosity, and take distributions in decumulation by just selling whatever shares make the most sense for my tax situation at the given moment.

The cost of this radical simplicity may be 0.5-7% above and beyond what I could do myself with total stock combined with a muni bond. That might be OK for me.

I would very much like to use the Vanguard Tax-Managed Balanced Fund (VTMFX) as a 50/50 split is tolerable, but I don't think the complete lack of international exposure is tolerable. If they made a 50/50 Tax-Managed Balanced Fund with international exposure that would be my holy grail.
dbr wrote: Mon Jun 14, 2021 11:28 am You haven't allowed for the possibly very high cost in capital gains taxes should you decide you no longer want to stay in that fund in your taxable account. It probably is not a good idea to put yourself in handcuffs like that unless you are really sure that is what you want for the long run.
Am I not in handcuffs with any other high-equity mutual fund? All will have substantial capital gains after 10+ years. I want to use mutual funds in my taxable account due to the ease of periodic investing in whole dollar amounts, and given Vanguard's shareholder structure and somewhat unique LifeStrategy fund options I'd like to stick with them. If I were to purchase VTSAX instead and ended up wanting to change to a different asset or different broker, wouldn't I be in a similar position?

In my mind there will always be a cost to changing paths. When I chose my line of work, where I live, and who I live with I tried to make the best decisions possible with the assumption that I would likely live with those decisions for decades. If I believe that Vanguard will continue to exist and continue to be reasonable stewards of their funds for the remainder of my life, I think it could be a reasonable choice.
etfan
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by etfan »

OP,

I'm not giving advice, just curious: Have you considered a different life strategy fund in retirement account(s) that has more bonds, and then having no bonds in taxable (and just have VT - Total World in taxable)?
dbr
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by dbr »

withrye wrote: Mon Jun 14, 2021 1:23 pm
Am I not in handcuffs with any other high-equity mutual fund? All will have substantial capital gains after 10+ years. I want to use mutual funds in my taxable account due to the ease of periodic investing in whole dollar amounts, and given Vanguard's shareholder structure and somewhat unique LifeStrategy fund options I'd like to stick with them. If I were to purchase VTSAX instead and ended up wanting to change to a different asset or different broker, wouldn't I be in a similar position?

I left out the part that people would more often not want to change a taxable account holding in total stock rather than something like a LS fund. An all stock total market fund offers on average the best tax advantages of all the taxable choices most of the time for most people.

I have read enough posts on this forum where people are stuck on exactly such issues simply to be giving advice based on experience, but that is all it is, advice, worth what you paid for it.
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withrye
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

etfan wrote: Mon Jun 14, 2021 1:38 pm OP,

I'm not giving advice, just curious: Have you considered a different life strategy fund in retirement account(s) that has more bonds, and then having no bonds in taxable (and just have VT - Total World in taxable)?
I had briefly considered this, but it provides no option for a one-fund portfolio in retirement, which is a strong preference of mine. Even if I were willing to manage the rebalancing of the portfolio for the next several decades (and second-guessing my allocation decisions through each bear and bull market), in the statistically-likely case that I predecease my spouse she would be left with a taxable account that is all stock and retirement accounts that are a mix of this and that.

In that scenario, she is either forced to pick up after me in rebalancing the account for who knows how long or forced into realizing potentially large capital gains in order to switch to a simpler LS-based portfolio.

I have not yet calculated the approximate cost of holding LS-based funds in taxable for the next several decades vs just holding equities and having my spouse take a big tax hit all at once when switching to a one-fund LS-based portfolio after my death.
etfan
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by etfan »

withrye wrote: Mon Jun 14, 2021 2:23 pm In that scenario, she is either forced to pick up after me in rebalancing the account for who knows how long or forced into realizing potentially large capital gains in order to switch to a simpler LS-based portfolio.
That's a good point.

For my understanding: Does your math include any tax consequences that result from rebalancing in life strategy funds? For example: if your LS fund has to sell stocks to buy bonds (in order to maintain its advertised AA), there is taxable capital gain there, correct?
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withrye
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

etfan wrote: Mon Jun 14, 2021 2:36 pm For my understanding: Does your math include any tax consequences that result from rebalancing in life strategy funds? For example: if your LS fund has to sell stocks to buy bonds (in order to maintain its advertised AA), there is taxable capital gain there, correct?
I believe it does, and I believe those are folded into the annual LT and ST cap gains at the end of the year. They can keep taxable rebalancing events to a minimum by making purchases with new inflows (i.e. when I buy more VSMGX each month, the fund managers can use those dollars to purchase underweighted assets rather than selling overweighted ones).
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by tomsense76 »

withrye wrote: Mon Jun 14, 2021 1:23 pm
goingup wrote: Mon Jun 14, 2021 11:04 am I would think a total stock market fund combined with muni bond fund would be less costly, allow more flexibility, and provide better opportunities to TLH. Blended and balanced funds are simple and easy, but are better kept in tax-advantaged, especially at your rates.
I would very much like to use the Vanguard Tax-Managed Balanced Fund (VTMFX) as a 50/50 split is tolerable, but I don't think the complete lack of international exposure is tolerable. If they made a 50/50 Tax-Managed Balanced Fund with international exposure that would be my holy grail.
One could hold international separately with Vanguard Total International (VTIAX). This actually works out better than holding it with VTMFX as one can claim the foreign tax credit. There's a rule about the percentage of foreign income relative to total income generated by the fund needed to get this credit.
"Anyone who claims to understand quantum theory is either lying or crazy" -- Richard Feynman
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Artsdoctor
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by Artsdoctor »

withrye wrote: Mon Jun 14, 2021 2:23 pm
etfan wrote: Mon Jun 14, 2021 1:38 pm OP,

I'm not giving advice, just curious: Have you considered a different life strategy fund in retirement account(s) that has more bonds, and then having no bonds in taxable (and just have VT - Total World in taxable)?
I had briefly considered this, but it provides no option for a one-fund portfolio in retirement, which is a strong preference of mine. Even if I were willing to manage the rebalancing of the portfolio for the next several decades (and second-guessing my allocation decisions through each bear and bull market), in the statistically-likely case that I predecease my spouse she would be left with a taxable account that is all stock and retirement accounts that are a mix of this and that.

In that scenario, she is either forced to pick up after me in rebalancing the account for who knows how long or forced into realizing potentially large capital gains in order to switch to a simpler LS-based portfolio.

I have not yet calculated the approximate cost of holding LS-based funds in taxable for the next several decades vs just holding equities and having my spouse take a big tax hit all at once when switching to a one-fund LS-based portfolio after my death.
Very thoughtful planning.

You've gotten some good advice above. The thing to remember is this: when you buy something/anything in your taxable account, you obviously need to be super-aware of the tax consequences. As a general rule, especially if you're a buy-and-hold investor, try to buy something that you can keep for decades.

We've all had experiences buying an actively managed fund in a taxable account, having it do well, and then the manager and/or mission of the fund changes and you're trapped. You're sitting on very large capital gains and then you have a difficult decision to make.

LifeStrategy funds are not actively managed, but Vanguard can change the make-up of the fund anytime they feel it's warranted. For example, they did not offer international bonds initially but then added them and changed percentages as their research supported. Some people may not have really been interested in adding such a decisive % of international bonds so they had a decision to make. In a tax-advantaged account, it was easy; not so much in a taxable account.

The concept of a single fund is very, very attractive. But you might find yourself boxed in when you're older. Will the asset allocation still be suitable for you? Will Vanguard change the make-up of the fund? Will your tax rates change and make the distributions uncomfortable for you?

LS funds are really excellent in terms of ease. They are superb for tax-advantaged accounts. I'm not crazy about them in a taxable account because the distributions can be unpredictable (you're quoting numbers from last year but sometimes the distributions can vary from year to year).

If you anticipate being in a hefty marginal tax bracket in the future, I would not characterize LS funds as tax-efficient for you.
canucksmoney
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by canucksmoney »

I hold the equivalent of the 80/20 Lifestrategy ETF in all my accounts. I am Canadian.

I think of my 80/20 asset allocation ETF like Costco. It might not be the most optimal but it is good enough for me.

Anything that allows me to make less decisions, the better.
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withrye
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

Artsdoctor wrote: Mon Jun 14, 2021 6:55 pm Very thoughtful planning.

You've gotten some good advice above. The thing to remember is this: when you buy something/anything in your taxable account, you obviously need to be super-aware of the tax consequences. As a general rule, especially if you're a buy-and-hold investor, try to buy something that you can keep for decades.

We've all had experiences buying an actively managed fund in a taxable account, having it do well, and then the manager and/or mission of the fund changes and you're trapped. You're sitting on very large capital gains and then you have a difficult decision to make.

LifeStrategy funds are not actively managed, but Vanguard can change the make-up of the fund anytime they feel it's warranted. For example, they did not offer international bonds initially but then added them and changed percentages as their research supported. Some people may not have really been interested in adding such a decisive % of international bonds so they had a decision to make. In a tax-advantaged account, it was easy; not so much in a taxable account.

The concept of a single fund is very, very attractive. But you might find yourself boxed in when you're older. Will the asset allocation still be suitable for you? Will Vanguard change the make-up of the fund? Will your tax rates change and make the distributions uncomfortable for you?

LS funds are really excellent in terms of ease. They are superb for tax-advantaged accounts. I'm not crazy about them in a taxable account because the distributions can be unpredictable (you're quoting numbers from last year but sometimes the distributions can vary from year to year).

If you anticipate being in a hefty marginal tax bracket in the future, I would not characterize LS funds as tax-efficient for you.
Thank you for the feedback. If there's one thing that gives me pause regarding the LifeStrategy fund series (or really any fund of funds that's not strictly passively indexed) is the manager risk. The short history of the LS fund series has always had its changes trend in a direction that I either agree with or am ambivalent toward, but there's no guarantee that it'll stay that way for the next several decades.

On the topic of the expense for wanting to change one's mind: your post and most others have raised this possibility. I think of it very differently. If I start with the radical simplicity of a one-fund LS portfolio and I dislike my approach 20 years from now, I can always add more complexity to meet my new asset allocation goals. I can start purchasing VTSAX or VTWAX in taxable to increase my stock allocation. I can purchase more bonds in taxable or tax-advantaged (wherever they are suited best based on my crystal ball). Importantly, I can do so very quickly and with no tax cost by making any necessary large shifts in asset allocation within my tax-advantaged accounts. The only downside of continuing to hold the LS fund in taxable is that it's not the most tax-efficient holding, but it is very unlikely to be an outright inappropriate part of a low-cost indexed portfolio.

In contrast, if I start with the multi-fund rebalancing approach I can never subtract complexity. If I decide that I'm tired of rebalancing and just want to hold a single fund across all accounts, I am forced to either keep the so-called tax-efficient stock index funds or realize a large capital gain to be able to switch, likely undermining all that tax efficiency.

In my mind, if I can find a way to end my portfolio on my asset allocation of choice with just a single fund that would be ideal. I get something I can't otherwise buy for cheap (the option of a radically simple one-fund portfolio) and I always keep the option of creating a more complex rebalanced portfolio by purchasing more of this or that down the line.
tomsense76 wrote: Mon Jun 14, 2021 2:51 pm One could hold international separately with Vanguard Total International (VTIAX). This actually works out better than holding it with VTMFX as one can claim the foreign tax credit. There's a rule about the percentage of foreign income relative to total income generated by the fund needed to get this credit.
This is a very interesting idea, and I took some time to tinker with implementation. If I were to hold VTMFX and VTIAX in a 2:1 ratio, that would create a roughly 67/33 stock/bond split and a roughly 50/50 US/International split among equities.

By happy coincidence, this ends up being where Dr. Bernstein recommends the millennial investor start in If You Can, with a 1:1:1 portfolio of US/Int/Bond.

On the first point, a 67/33 allocation is close enough to the 60/40 of LifeStrategy Moderate Growth that I'd find it acceptable.

On the second point, a 50/50 allocation between US/Int is currently acceptable given the current market cap weight of each. That being said, I haven't been able to easily find a graph of the historical split between US/Int to get a sense of how that allocation as drifted. I believe a fund like VTWAX would "go wherever the wind blows" over the next several decades, whether that means a 70/30 split in favor of US/Int or vice versa (or anything else). With my "lazy tax-efficient" approach of 2:1 VTMFX:VTIAX, I would have no such flexibility.

The improvement in tax-efficiency would mean locking me into a particular US/Int ratio for the foreseeable future. I'm not principally opposed to a 50/50 US/Int allocation for good, but I certainly have to think about it longer. Thank you for the food for thought.
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withrye
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

withrye wrote: Tue Jun 15, 2021 8:47 am
tomsense76 wrote: Mon Jun 14, 2021 2:51 pm One could hold international separately with Vanguard Total International (VTIAX). This actually works out better than holding it with VTMFX as one can claim the foreign tax credit. There's a rule about the percentage of foreign income relative to total income generated by the fund needed to get this credit.
This is a very interesting idea, and I took some time to tinker with implementation. If I were to hold VTMFX and VTIAX in a 2:1 ratio, that would create a roughly 67/33 stock/bond split and a roughly 50/50 US/International split among equities.

By happy coincidence, this ends up being where Dr. Bernstein recommends the millennial investor start in If You Can, with a 1:1:1 portfolio of US/Int/Bond.

On the first point, a 67/33 allocation is close enough to the 60/40 of LifeStrategy Moderate Growth that I'd find it acceptable.

On the second point, a 50/50 allocation between US/Int is currently acceptable given the current market cap weight of each. That being said, I haven't been able to easily find a graph of the historical split between US/Int to get a sense of how that allocation as drifted. I believe a fund like VTWAX would "go wherever the wind blows" over the next several decades, whether that means a 70/30 split in favor of US/Int or vice versa (or anything else). With my "lazy tax-efficient" approach of 2:1 VTMFX:VTIAX, I would have no such flexibility.

The improvement in tax-efficiency would mean locking me into a particular US/Int ratio for the foreseeable future. I'm not principally opposed to a 50/50 US/Int allocation for good, but I certainly have to think about it longer. Thank you for the food for thought.
I asked around and the historical US market cap has fluctuated between around 25%-70% in the past. Given this range, I don't think I'm comfortable with the fixed US/International split that would be achieved with a 2:1 ratio of Vanguard Tax-Managed Balanced and Total International. It's a shame, because rebalancing at a 2:1 ratio is quite easy (no calculator required!) and it'd be great if that compromise ended up being both functional and appropriate for my needs in the long term.
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by retiredjg »

withrye wrote: Tue Jun 15, 2021 8:47 am If there's one thing that gives me pause regarding the LifeStrategy fund series (or really any fund of funds that's not strictly passively indexed) is the manager risk.
I think this fund of funds is completely passively indexed now.

I agree with your comment about how it has changed over the years. I'm under the impression Vanguard is done changing it other than maybe something minor. Perhaps that's naive. :D

Either way, this is not a fund I'd want in taxable long term unless already retired and permanently in a lower tax bracket.


I asked around and the historical US market cap has fluctuated between around 25%-70% in the past. Given this range, I don't think I'm comfortable with the fixed US/International split that would be achieved with a 2:1 ratio of Vanguard Tax-Managed Balanced and Total International. It's a shame, because rebalancing at a 2:1 ratio is quite easy (no calculator required!) and it'd be great if that compromise ended up being both functional and appropriate for my needs in the long term.
I get your point here, but there is another way to see this.

If you used the 2:1 ratio of Tax-Managed Balanced and Total International, your percentage of international stock (compared to the total amount of stock) would not change. Holding a consistent percentage of US to foreign is actually a very reasonable choice.

My argument to you would be the ratio dances around 50:50 and rather than trying to dance with it, why not just maintain a consistent ratio?
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withrye
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

retiredjg wrote: Wed Jun 16, 2021 9:19 am
withrye wrote: Tue Jun 15, 2021 8:47 am If there's one thing that gives me pause regarding the LifeStrategy fund series (or really any fund of funds that's not strictly passively indexed) is the manager risk.
I think this fund of funds is completely passively indexed now.

I agree with your comment about how it has changed over the years. I'm under the impression Vanguard is done changing it other than maybe something minor. Perhaps that's naive. :D

Either way, this is not a fund I'd want in taxable long term unless already retired and permanently in a lower tax bracket.
By the looks of it, the LS series went fully passive before later adding International Bonds and then ramping up International allocations overall. I'm ok with both of those changes, but I think the history shows that they're not done tinkering even though it's all passive now.

I think I can reconcile myself to the slight manager risk over the years. I'm still mulling over the tax cost (especially versus the alternative below) and I think I'll have to run some numbers on exactly how much I anticipate putting in taxable each year and what the dollar amount is estimated to be. For these sorts of things, I think percentage calculations only go so far and it'll help to see a dollar amount for a different perspective.
If you used the 2:1 ratio of Tax-Managed Balanced and Total International, your percentage of international stock (compared to the total amount of stock) would not change. Holding a consistent percentage of US to foreign is actually a very reasonable choice.

My argument to you would be the ratio dances around 50:50 and rather than trying to dance with it, why not just maintain a consistent ratio?
I'm still thinking about this as well. On face value a 50/50 split sounds very reasonable. I asked myself "if I lived in Japan or the UK, would I want a permanent 50/50 split between my home country and global?" I think the answer is no, and I think an answer to the contrary implicitly accepts an argument for continued American (financial) exceptionalism, at least for the next several decades. I don't think that's an outlandish view to hold; I just need to decide whether I truly hold it.

Thank you for your thoughtful input. I've clearly got more ruminating to do.
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by retiredjg »

Ruminate on!

But watch for analysis paralysis. :happy
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by Artsdoctor »

I'm impressed by your thoughtful approach.

I've been investing for about 35 years so I will give you one last thing to think about since it only occurs to someone who's been investing for decades. You mentioned that you can start with the LS funds and then adapt later on in your investing life if the need allows. I take that to mean that if you're interested in trimming your equity allocation from 60% to 50% (or 40%), you can simply add to your fixed income holdings independently. In my experience, that it is not easily done. Hopefully, you will have a long investing life and your assets will balloon; there will come a point when you really won't be able to move the needle much when it comes to adding new money to your portfolio. If you're fixed at 60/40, changing your asset allocation to 40/60 with new money will not be logistically possible unless you have a huge influx of cash (sale of a house, for example). With the LS funds, you will have that fixed allocation and will not change with market movements; changing the asset allocation with supplemental money will be relatively easy early on, but will not be possible later on.

I should say that I used LS funds for many years in my tax-advantaged accounts, and I was very happy with them. In fact, I used them in my health savings accounts at one point; since I'm a California resident and had to pay taxes on the distributions, I became aware of their tax-inefficiency, at least for us.
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withrye
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Re: Am I calculating the tax cost of Vanguard LifeStrategy fund correctly?

Post by withrye »

Artsdoctor wrote: Wed Jun 16, 2021 1:27 pm I'm impressed by your thoughtful approach.

I've been investing for about 35 years so I will give you one last thing to think about since it only occurs to someone who's been investing for decades. You mentioned that you can start with the LS funds and then adapt later on in your investing life if the need allows. I take that to mean that if you're interested in trimming your equity allocation from 60% to 50% (or 40%), you can simply add to your fixed income holdings independently. In my experience, that it is not easily done. Hopefully, you will have a long investing life and your assets will balloon; there will come a point when you really won't be able to move the needle much when it comes to adding new money to your portfolio. If you're fixed at 60/40, changing your asset allocation to 40/60 with new money will not be logistically possible unless you have a huge influx of cash (sale of a house, for example). With the LS funds, you will have that fixed allocation and will not change with market movements; changing the asset allocation with supplemental money will be relatively easy early on, but will not be possible later on.

I should say that I used LS funds for many years in my tax-advantaged accounts, and I was very happy with them. In fact, I used them in my health savings accounts at one point; since I'm a California resident and had to pay taxes on the distributions, I became aware of their tax-inefficiency, at least for us.
This is a good point, thank you for raising it.

If I make a mistake with regard to my desired asset allocation and I'm willing to increase the complexity of my portfolio, I can rebalance using my tax-advantaged accounts. That provides a tax-free lever through which I can effect a large change in my asset allocation.

I've run some napkin projections on my tax-advantaged vs taxable account balances, and the two halves of this portfolio are unlikely to outweigh each other by more than 1.5:1 in either direction. The "worst-case" scenario where the lever is smallest (tax-advantaged accounts are outweighed by taxable by 1.5:1) still affords an equity allocation flexibility from 36-76%. That is to say, if I have a taxable account that is 1.5x larger than my tax-advantaged space, I can tune my equity allocation anywhere between 36% and 76% by shifting those tax-advantaged holdings between 100% bond to 100% stock, respectively.

I think it is unlikely that I will want more than a 76% equity allocation in retirement, but it is possible. I think I am willing to accept that risk and I'd probably preferentially sell LS-Moderate from taxable whenever possible if I wanted to shift to >76%.

If I make a mistake with regard to my desired asset allocation and I'm not willing to increase the complexity of my portfolio, I'm stuck. Choosing my desired asset allocation in retirement (i.e. which LS fund to hold) is a decision that's causing a little sleep loss, but not a phenomenal amount.
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