Income investing in Taxable

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El Greco
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Income investing in Taxable

Post by El Greco »

Hi All:

I'm looking to help a family member set up a taxable account at Vanguard that will pay her income on $200K. She is in her late 60s and retired. A few years ago she received about 200K from the sale of an inherited property. Since then, it has been sitting in a regular savings account earning virtually nothing. I recently suggested to her that she should invest the money and get some income from it and she wants to do this. She is not financially literate and needs something that is "set it and forget it". She is not the type to manage the money in any way nor is she likely to ever sell shares of a fund or stock if she needs money. But she will take dividends and distributions if they are sent to her automatically.

What I am going to propose to her is that she takes the 200k and splits it evenly between Wellesley Admiral and Wellington Admiral shares giving her roughly a 50/50 mix. Then, have Vanguard send her a quarterly check of all the distributions (dividends, ST cap gains, LT cap gains).
Looking at 2017 year distributions for both with about 100K in each fund it looks as if they paid out roughly 10.5K in distributions in total. 2017 was a very good year stock-wise, so I assume payouts won't be so generous in subsequent years, but I estimate she could expect to receive between 4K and 10k per year assuming she never touches principal. Am I making a correct assumption?
livesoft
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Re: Income investing in Taxable

Post by livesoft »

I would not use W & W in a taxable account at all. She will probably have more of a tax hit and lower after-tax return if she uses those funds.

Instead, I would pick a single LifeStrategy fund for the whole $200K and have Vanguard do automatic withdrawals at the interval /amounts she wants.

In other words, "income investing" is NOT what one should do. Once again, "Total Return Investing" is absolutely what one should do.
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El Greco
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Re: Income investing in Taxable

Post by El Greco »

In other words, "income investing" is NOT what one should do. Once again, "Total Return Investing" is absolutely what one should do.
Livesoft:

Fundamentally, I agree with you, but she is not me. Tax issues are not really an issue as her income is not very high. She is also the ultimate buy and hold investor as she never sells or lets go of ANYTHING. It is a psychological problem.

Through the years the only way I have been able to get her any benefit from her investments is to get her to stop reinvesting the dividends and to take them as income.

My reasoning with Wellesley and Wellington is that they seem to be good funds that pay out substantial distributions that she will be able to benefit from. More distributions than she would get from a similarly balanced Lifestrategy fund. Total return would mean nothing to her because she would never sell shares.

This is going to be an even bigger problem when she has to start taking RMDs out of her IRA. That account is all invested in shares of her former company stock. I can't get her to sell those shares and diversify, but at least I convinced her to take the dividends as income.
dbr
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Re: Income investing in Taxable

Post by dbr »

I believe Vanguard as most other brokers will arrange to distribute any arbitrary regular amount from a holding. That does not have to be related to dividend and capital gains distributions and is still set it and forget it from the point of view of the investor. A difference is that the disbursement really will be fixed and regular rather than a matter of guessing what the fund distributions will be.
renue74
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Re: Income investing in Taxable

Post by renue74 »

My aunt asked me to help her with your 401K rollover and setting up a taxable account for a life insurance $ she received. About $175K in total.

I set her up a Vanguard account with the Life strategy 2015 fund. She retired last year or so.

I set it up to disburse $300/month and Vanguard automatically sells the appropriate # of shares and deposits the funds in her checking account.

She mainly lives off of SS.

She's happy. Everybody likes to see $ hit their account. :)
dan1953
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Re: Income investing in Taxable

Post by dan1953 »

livesoft,

Are you saying that Wellesley is not that tax efficient because it owns a portion of dividend-paying stocks? I am 65 and was getting
set to have Wellesley Admiral Shares Fund as a core holding due to their excellent longtime returns and low expenses.
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goingup
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Re: Income investing in Taxable

Post by goingup »

El Greco-
Your idea seems reasonable given the constraints. I'd expect about 3% in dividends and whatever capital gains distributed in December.
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retiredjg
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Re: Income investing in Taxable

Post by retiredjg »

El Greco, there is a fund you might want to look at even though it is not well received by Bogleheads....Vanguard's Managed Payout Fund. I know nothing about it. Just thought it might appeal to her.
jebmke
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Re: Income investing in Taxable

Post by jebmke »

dan1953 wrote: Tue Apr 24, 2018 4:11 pm livesoft,

Are you saying that Wellesley is not that tax efficient because it owns a portion of dividend-paying stocks? I am 65 and was getting
set to have Wellesley Admiral Shares Fund as a core holding due to their excellent longtime returns and low expenses.
Wellesley is over 60% bonds and the bond holdings have a duration of 6+
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dwickenh
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Re: Income investing in Taxable

Post by dwickenh »

jebmke wrote: Tue Apr 24, 2018 4:23 pm
dan1953 wrote: Tue Apr 24, 2018 4:11 pm livesoft,

Are you saying that Wellesley is not that tax efficient because it owns a portion of dividend-paying stocks? I am 65 and was getting
set to have Wellesley Admiral Shares Fund as a core holding due to their excellent longtime returns and low expenses.
Wellesley is over 60% bonds and the bond holdings have a duration of 6+
The 60% bonds interest will be taxable. Not sure what 6+ duration has to do with someone who never sells?
Please explain why that is a problem for a long term investor.
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jebmke
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Re: Income investing in Taxable

Post by jebmke »

Someone who is not financially literate might panic when the value of the account drops as rates rise.
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livesoft
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Re: Income investing in Taxable

Post by livesoft »

dan1953 wrote: Tue Apr 24, 2018 4:11 pm livesoft,

Are you saying that Wellesley is not that tax efficient because it owns a portion of dividend-paying stocks? I am 65 and was getting
set to have Wellesley Admiral Shares Fund as a core holding due to their excellent longtime returns and low expenses.
When investing in a taxable account and using the money to pay expenses, one usually has to pay taxes on the withdrawals and other distributions. Therefore, one should want to have the best after-tax performance for the same risk. One should not blindly buy Wellington nor Wellesley nor a LifeStrategy fund without comparing the after-tax results.

For example, suppose W & W distribute 4% a year, but create 1% in taxes, so net is 3% while L distributes 3.5%, but creates 0.25% in taxes. That means one nets about 8.3% more per year with LifeStrategy even though before taxes it would look like W&W yields about 14% more than L. One will have to run their own numbers to see how taxes affect them. (Note: I made up the numbers.) Do the calculations. There is no need to guess.
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avoidingdumbmistakes
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Re: Income investing in Taxable

Post by avoidingdumbmistakes »

jebmke wrote: Tue Apr 24, 2018 4:32 pm Someone who is not financially literate might panic when the value of the account drops as rates rise.
I was thinking the same thing. Need some empathy on the OP's question. What most of us here would do and what the op's family member might be comfortable with are probably 2 very different things. An immediate annuity comes to mind or something like that and not an investment subject to market fluctuations.
Mike Scott
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Re: Income investing in Taxable

Post by Mike Scott »

You might check out the Vanguard Tax Managed Balanced Fund.
montanagirl
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Re: Income investing in Taxable

Post by montanagirl »

Mike Scott wrote: Tue Apr 24, 2018 4:38 pm You might check out the Vanguard Tax Managed Balanced Fund.
I was thinking about that one for my rmd next year, but is the tax managed part really necessary if one is in the zero tax bracket?
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Tyler Aspect
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Re: Income investing in Taxable

Post by Tyler Aspect »

Maybe $120k in Balanced Index, and $80k in Two Year US Treasury Notes.
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dbr
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Re: Income investing in Taxable

Post by dbr »

montanagirl wrote: Tue Apr 24, 2018 4:43 pm
Mike Scott wrote: Tue Apr 24, 2018 4:38 pm You might check out the Vanguard Tax Managed Balanced Fund.
I was thinking about that one for my rmd next year, but is the tax managed part really necessary if one is in the zero tax bracket?
No, it is mainly about using munis instead of regular bonds, as far as I know.
dbr
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Re: Income investing in Taxable

Post by dbr »

avoidingdumbmistakes wrote: Tue Apr 24, 2018 4:36 pm
jebmke wrote: Tue Apr 24, 2018 4:32 pm Someone who is not financially literate might panic when the value of the account drops as rates rise.
I was thinking the same thing. Need some empathy on the OP's question. What most of us here would do and what the op's family member might be comfortable with are probably 2 very different things. An immediate annuity comes to mind or something like that and not an investment subject to market fluctuations.
An SPIA in part or in whole would be something to consider. This depends a lot on what other assets she has and on what other sources of income she has. Where she stands on other annuities, specifically Social Security, would be a factor. Late sixties might still be a bit young to take too much risk with a fixed payout that is not inflation indexed.
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