Portfolio Review: Very conservative, primarily interested in capital preservation

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AerialWombat
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Portfolio Review: Very conservative, primarily interested in capital preservation

Post by AerialWombat » Tue May 29, 2018 1:23 pm

Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

"Long-time listener, first-time caller." I have read these forums for three years, and am very greatful for the wisdom that you all freely share. This really is an amazing community, and I have learned a lot.

The sob story: In 2008, I was dead broke, foreclosed on, filed Chapter 7 bankruptcy, and lived in my crappy car for about a year and a half.

The fix: Took a $10/hr office job in a new occupational field; moonlighted and side-hustled best I could. Eventually traveled the world for three years, came back in 2014 to be a "responsible adult" and build wealth. Started several tiny businesses. Personal net income has doubled each year for the past three years, funding buy-and-hold rental property acquisition.

Current situation: Age 40, single, no kids that I know of, no heirs. 2018 personal net income will be somewhere in the $225k-$350k range. I still essentially live a poverty-level lifestyle, but have added some small luxuries such as several domestic vacations per year, eating out several times per week, and top shelf booze. I live in the basement of one of my rental properties, so expenses are low. Base lifestyle is about $25,000 a year, real expenses are about $35,000 per year.

Objectives/Risk Assessment: Tax reduction and capital preservation. I'm currently high-income, but low-wealth, and want to fix that. Given my past experiences, I fear capital loss much more than I seek capital gain, BUT I have shiny object syndrome. Small downturns, like today, cause me panic, but at the same time I cry over missing the big runup from the last several years. I realize I can't have both, so the safety is more important.

I plan to cut back to semi-retirement within two years and go back overseas, which will drop my COL even lower, but I'll still likely generate an $80k-$150k per year income. I view my rental properties as my true retirement plan, but I'm one of those people that will *always* generate active income from some self-employment activity. I will do this until I am incapacitated, institutionalized, or incinerated. Barring major financial disaster, I assume that most of my assets will pass on to a charitable foundation. I do not have LTC insurance.


Emergency Fund: Currently 9 months worth of personal expenses ($20,000), earning 1.6% in online savings account.
Debt: No debt besides mortgages on rental properties, totaling about $570,000. Rates are 3.875%, 4.125%, 4.625%. Debt is 100% serviced by tenant rent.
Real estate equity: About $100,000, but I treat it as imaginary since I buy rentals for income, not the equity.
Tax Filing Status: Single
Tax Rate: 35% federal (2018, for the first time), 0% state
Age: 40
Desired Asset Allocation: That's the question...I'm feeling I should be in the 30/70 to 50/50 range.
Desired International Allocation: 10% to 30% (also a guess)


Traditional IRA at Vanguard - Opened in 2016, so only 3 years of contributions
$15,346.77 Vanguard Wellesley Income Fund (VWINX) (0.22%)
$2,690.43 Vanguard FTSE All World ex-US Small Cap ETF (VSS) (0.13%)


Solo 401k at eTrade - Opened account April 2018 as a tax planning move due to the recent surge in my net income. Contributing $4500/mo to this right now. Will contribute the maximum allowed $55k combined for 2018 before year end. Using Schwab funds to avoid $20 eTrade transaction charge when buying.

$1,500 Schwab Total Stock (SWTSX) (0.04%)
$1,500 Schwab Total International (SWISX) (0.06%)
$1,000 T. Rowe Price Growth (PRGFX) (shiny object, will be selling)
$500 Schwab Aggregate Bond Index (SWAGX) (0.04%)


Taxable brokerage at Vanguard - Buying tax exempt due to my new tax bracket. Currently contributing $6,000 per month to this on auto-draft, and an additional $1k-$5k per month depending upon business revenue for the month.

$20,306.98 Vanguard Total Stock Market Index Admiral Shares (VTSAX) (0.04%)
$10,082.79 Vanguard Long-Term Tax Exempt (VWLTX) (0.19%)
$20,112.66 Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) (0.19%) (all my research and reading here leads me to believe this is the single best fund for my taxable account, given my risk tolerance, rising interest rates, and tax bracket -- but definitely open to other opinions/correction)

--
Key questions, with thanks to @Desiderium for pointing in this direction of clarification:

1). What AA will give me the least possible volatility while still capturing a sliver of equity upside?

2). Would it be the worst thing to hold only VTSAX and VWITX in my taxable account, given my suddenly high tax bracket and that being my fastest growing account?


Thank you so much, I look forward to being part of the community (instead of just a lurker).

--
2018-05-30: Edited for clarity, brevity, closer to proper forum format, and updated balances/positions to reflect trades that executed yesterday.
Last edited by AerialWombat on Wed May 30, 2018 1:53 pm, edited 3 times in total.

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Tyler Aspect
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by Tyler Aspect » Tue May 29, 2018 5:28 pm

Welcome to Bogleheads.

I would suggest treating real-estate asset as sector stocks, and the associated mortgage as negative bonds. This perspective can explain why investors who own multiple real-estate rentals are invariably very conservative with the rest of their investments. Certainly it can be an eye opener when you can get a leveraged figure as high as 200% stock / -100% bond allocation.
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averagedude
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by averagedude » Tue May 29, 2018 8:08 pm

What a wonderful story. I really liked it. I agree with your statement that you need a plan, but i think you should focus on a life plan instead of an investment plan. I suggest you read a few books, do some soul searching, and set some goals. You seem to be smart and i believe you could accomplish anything you set your mind on.

krow36
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by krow36 » Tue May 29, 2018 8:44 pm

Can we assume that your income is from more than just being an owner of some rental properties? I'm not knowledgeable in this area, but have read that rental income is not "earned income" unless there's a particular business structure. Only earned income can be contributed to tax-advantaged retirement accounts.

AerialWombat
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by AerialWombat » Tue May 29, 2018 9:38 pm

Tyler Aspect wrote:
Tue May 29, 2018 5:28 pm
Welcome to Bogleheads.

I would suggest treating real-estate asset as sector stocks, and the associated mortgage as negative bonds. This perspective can explain why investors who own multiple real-estate rentals are invariably very conservative with the rest of their investments. Certainly it can be an eye opener when you can get a leveraged figure as high as 200% stock / -100% bond allocation.
Thanks for the suggestion. That’s an interesting way of looking at the whole picture. I will need to assemble a spreadsheet to figure out the numbers.

I personally view real estate as one of the safest investments there is, so my skittishness doesn’t come from that. It has more to do with my “poverty mentality” and wanting to protect what I scrounge up. :)

AerialWombat
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by AerialWombat » Tue May 29, 2018 9:41 pm

averagedude wrote:
Tue May 29, 2018 8:08 pm
What a wonderful story. I really liked it. I agree with your statement that you need a plan, but i think you should focus on a life plan instead of an investment plan. I suggest you read a few books, do some soul searching, and set some goals. You seem to be smart and i believe you could accomplish anything you set your mind on.
Thank you for the kind words.

I do have a general life plan and an objective I’m trying to reach, but it’s not a glamorous one or one that’s generally acceptable to most people. Thus, I don’t mention it. :)

AerialWombat
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by AerialWombat » Tue May 29, 2018 9:45 pm

krow36 wrote:
Tue May 29, 2018 8:44 pm
Can we assume that your income is from more than just being an owner of some rental properties? I'm not knowledgeable in this area, but have read that rental income is not "earned income" unless there's a particular business structure. Only earned income can be contributed to tax-advantaged retirement accounts.
The rentals spin off about $20k per year right now, and I purchase one new rental per year to grow that.

The majority of my income comes from an active consulting business that I own.

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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by Tyler Aspect » Tue May 29, 2018 11:44 pm

AerialWombat wrote:
Tue May 29, 2018 9:38 pm
Tyler Aspect wrote:
Tue May 29, 2018 5:28 pm
Welcome to Bogleheads.

I would suggest treating real-estate asset as sector stocks, and the associated mortgage as negative bonds. This perspective can explain why investors who own multiple real-estate rentals are invariably very conservative with the rest of their investments. Certainly it can be an eye opener when you can get a leveraged figure as high as 200% stock / -100% bond allocation.
Thanks for the suggestion. That’s an interesting way of looking at the whole picture. I will need to assemble a spreadsheet to figure out the numbers.

I personally view real estate as one of the safest investments there is, so my skittishness doesn’t come from that. It has more to do with my “poverty mentality” and wanting to protect what I scrounge up. :)
Historically real-estates had similar returns compared to stocks. Its risk profile must be similar to stocks. In a local region where certain business types are very strong, then the real-estate price in that region would become tied to the fate of that business type. For example, the real-estate market in the Silicon Valley is heavily tied to FANNG type stocks. How can very safe investments produce these eye popping returns?

Image

Imagine if Vanguard sold their sector real-estate stock fund as a very safe bond fund; they would get into trouble right away.
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manedark
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by manedark » Wed May 30, 2018 12:26 am

AerialWombat wrote:
Tue May 29, 2018 1:23 pm
Will contribute the maximum allowed $55k combined for 2018 before year end.
How can you do that? Do you have a 457 plan (or other such provision) which allows a 18.5K limit over and above the 18.5K limit of the 401K (atleast that is my understanding).
AerialWombat wrote:
Tue May 29, 2018 1:23 pm
SWTSX (Schwab Total Stock): $1500
SWISX (Schwab Total International): $1500
PRGFX (T. Rowe Price Growth): $1000 (shiny object)
SWAGX (Schwab Total Bond): $500
Beware of the shiny object - it has a ER of 0.67% which is roughly 10 times that of a Vanguard Index fund.

You can go for whatever asset allocation you are comfortable with - but important part is to stick to it and arrange it tax efficiently. Simple rule is that bond funds should be in tax deferred account like 401K and stock funds in a taxable brokerage account (but there are exceptions like tax exempt bonds etc.).
AerialWombat wrote:
Tue May 29, 2018 1:23 pm
VTSAX (Vg Total Stock Admiral): $10,584.11
VWLTX (Vg Long Term Tax Exempt): $10,047.54
VWITX (Vg Intermediate Tax Exempt): $30,503.72 (all my research and reading here leads me to believe this is the single best fund for my taxable account, given my risk tolerance, rising interest rates, and tax bracket -- but definitely open to other opinions/correction)
You got this mostly right, I think. It would be good to know your tax bracket though, tax exempt funds are justified roughly close to 25% marginal tax bracket.

BTW - good job with the turn-around, and kudos to America that allows people such chances, that is why I say inspite of all the problems, America is Already Great! :beer

desiderium
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by desiderium » Wed May 30, 2018 7:27 am

AerialWombat wrote:
Tue May 29, 2018 9:41 pm

Thank you for the kind words.

I do have a general life plan and an objective I’m trying to reach, but it’s not a glamorous one or one that’s generally acceptable to most people. Thus, I don’t mention it. :)
Wombat, your sense of humor is remarkable. I hope you will eventually elaborate on your story.

Your situation may call for some "bucket" thinking. Because of your leveraged real estate business, you need a solid safe backstop. I would figure this out from a business perspective, based on your properties, cashflow, odds of vacancy, repairs etc. Be conservative. Put this bucket into cash and bonds. After that, you can view your other portfolio in more ordinary terms, perhaps with a more common asset allocation between 50 and 70% equities.

Best of luck

AerialWombat
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by AerialWombat » Wed May 30, 2018 7:40 am

Tyler Aspect wrote:
Tue May 29, 2018 11:44 pm
AerialWombat wrote:
Tue May 29, 2018 9:38 pm

I personally view real estate as one of the safest investments there is, so my skittishness doesn’t come from that. It has more to do with my “poverty mentality” and wanting to protect what I scrounge up. :)
Historically real-estates had similar returns compared to stocks. Its risk profile must be similar to stocks.
Thanks for the response. My personal belief about real estate safety is one that I recognize isn’t necessarily shared on this site. For me, it boils down to the fact that I can touch it, physically. I have active control over factors that directly impact it’s value and income potential (improvements). Also, everyone needs a place to live, sonatvthe right price, somebody will move in.

Notice that I do not own REITs. Those are definitely equities to me. I have no control over property, tenants, etc.

Owning real estate also provides tremendous leverage, tax benefits, equity buildup via debt paydown paid by tenants, income from cash flow, etc. My annual cash on cash return from my property is around 40% per year.

Basically, I’m a control freak and don’t like intangibles. :)

But I digress. My mission here wasn’t to evangelize about real estate.

AerialWombat
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by AerialWombat » Wed May 30, 2018 7:51 am

desiderium wrote:
Wed May 30, 2018 7:27 am

Wombat, your sense of humor is remarkable. I hope you will eventually elaborate on your story.

Your situation may call for some "bucket" thinking. Because of your leveraged real estate business, you need a solid safe backstop. I would figure this out from a business perspective, based on your properties, cashflow, odds of vacancy, repairs etc. Be conservative. Put this bucket into cash and bonds. After that, you can view your other portfolio in more ordinary terms, perhaps with a more common asset allocation between 50 and 70% equities.
Haha, thanks.

I think I kinda-sorta do the bucket thing. But at the same time, I think I want an anti-volatility tilt more than anything else. Starting to realize my entire OP could have been two sentences instead of a novel:

1). What AA will give me the least possible volatility while still capturing a sliver of equity upside?

2). Would it be the worst thing to hold only VTSAX and VWITX in my taxable account, given my suddenly high tax bracket and that being my fastest growing account?

AerialWombat
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by AerialWombat » Wed May 30, 2018 8:07 am

manedark wrote:
Wed May 30, 2018 12:26 am
AerialWombat wrote:
Tue May 29, 2018 1:23 pm
Will contribute the maximum allowed $55k combined for 2018 before year end.
How can you do that? Do you have a 457 plan (or other such provision) which allows a 18.5K limit over and above the 18.5K limit of the 401K (atleast that is my understanding).
I’m self-employed. In a Solo 401k, you can add the $18.5k employee cap, plus the $36.5k employer cap. Megacorp can add that much to your 401k also, just few of them will. So, total of $55k/yr.

Regarding PRGFX: I agree, I don’t need it. I really should just 3-Fund that account and tilt the SWAGX piece to get my ultra-conservative AA.
manedark wrote:
Wed May 30, 2018 12:26 am

You can go for whatever asset allocation you are comfortable with - but important part is to stick to it and arrange it tax efficiently. Simple rule is that bond funds should be in tax deferred account like 401K and stock funds in a taxable brokerage account (but there are exceptions like tax exempt bonds etc.).
This furthers the case for much higher SWAGX holding in the 401k.
manedark wrote:
Wed May 30, 2018 12:26 am
You got this mostly right, I think. It would be good to know your tax bracket though, tax exempt funds are justified roughly close to 25% marginal tax bracket.
Since I’m single, I will be in the 35% bracket this year, for the first time ever. Thus, the tax exempt muni funds and VTSAX in taxable.

Thanks!

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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by Lafder » Wed May 30, 2018 8:19 am

What about moving your IRA to your solo401k. If etrade does not allow you to roll other IRAs into your solo401k, Fidelity does.

Then you can use a backdoor Roth to put 5500$ away every year that you will never pay tax on again. It will add up over the years.

Yes keep maxing your solo401k.

Note the year you turn 50 the max contributions to both increase

I agree with you that I like being able to see and touch real estate. My other investments are just numbers on paper :).

I like the idea of index funds versus your "shiny" growth fund picked by human fund managers. Don't we all want growth stocks? But how can they really be picked? Human fund managers are likely to make some wrong guesses in with their right guesses that cancel each other out. So I am happy to just go with the index instead of stock picking by an "expert"

lafder

AerialWombat
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Re: Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

Post by AerialWombat » Wed May 30, 2018 11:40 am

Lafder wrote:
Wed May 30, 2018 8:19 am
What about moving your IRA to your solo401k. If etrade does not allow you to roll other IRAs into your solo401k, Fidelity does.
Then you can use a backdoor Roth to put 5500$ away every year that you will never pay tax on again. It will add up over the years.
I'm assuming that when I enter semi-retirement in a couple years, that my business revenue will naturally drift down to the point where I can't make the massive annual Solo 401k contributions anymore. In fact, I probably only have 3 years of those $55k contributions before I drops dramatically. At the same time, my MAGI will decrease again to the point where I can deduct traditional IRA contributions, so I'll want the tax benefits. I do plan on eventually doing backdoor Roth, but I want to do it in a year in which I'm in a much lower tax bracket, not while I'm at 35%.
Lafder wrote:
Wed May 30, 2018 8:19 am
I agree with you that I like being able to see and touch real estate. My other investments are just numbers on paper :).
Glad I'm not the only person that feels that way. I figure if nothing else, I'll always have firewood. :D
Lafder wrote:
Wed May 30, 2018 8:19 am
I like the idea of index funds versus your "shiny" growth fund picked by human fund managers. Don't we all want growth stocks? But how can they really be picked? Human fund managers are likely to make some wrong guesses in with their right guesses that cancel each other out. So I am happy to just go with the index instead of stock picking by an "expert"
Yeah, that was a stupid purchase. The order executed overnight, and I've already lost nine bucks on it. I just spent $15 on lunch, but the $9 PRGFX loss bugs me 100x more. :oops:

I'm leaning heavily towards a 30/70 or 40/60 overall split. Maybe call it 35/65 to replicate the AA of Wellesley. Do this with just the Schwab Total US Stock and Aggregate Bond funds in the 401k at 35/65. Leave the TIRA at mostly Wellesley, not touch the FTSE ex-US Small Cap and call that my international allocation. Pump taxable into VWITX, VWLTX, and VTSAX at a 50:20:30 ratio. This should leave me at approximately 35/65 overall.

I think this is where I'm heading.

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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by Sandtrap » Wed May 30, 2018 12:11 pm

CAP rate on your rentals. Net???

AerialWombat
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by AerialWombat » Wed May 30, 2018 1:52 pm

Sandtrap wrote:
Wed May 30, 2018 12:11 pm
CAP rate on your rentals. Net???
My cap rates across the three properties right now are 9.97% (duplex), 5.24%, and 5.09%, but it's a metric that only has significant meaning in commercial real estate. It's considered a largely irrelevant metric by the majority of direct, residential, single-family buy-and-hold investors.

What really matters is the monthly net positive cash flow and the cash-on-cash return. My cash-on-cash return is 106% for property #1 (duplex), and almost 20% for property #2, since the first two properties I purchased with 100% financing on VA loans. Property #3 is essentially at breakeven, but I live in the basement, so it's harder to calculate.

I also need to note that I made a typo on my original post: My RE equity is $100k, not $200k.

Lafder
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by Lafder » Wed May 30, 2018 10:04 pm

You have to have earned income to do a solo401k or IRA. So it is hard to imagine a year you can not do a solo401k and can do an IRA. Unless you get a part time not self employed job that year.

In the future, if you have just a solo401k and do want an IRA, you can open a new IRA then.

The thing about a Roth, if you can do it now, is the long term benefit of never paying tax on it again, versus a taxable investment. The 5500$ a year will really add up in the next ten years.

You can not have an IRA balance to do a back door Roth. So you might as well roll IRA into the solo401k. What is the disadvantage of consolidating the IRA into the solo401k?

lafder

AerialWombat
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by AerialWombat » Thu May 31, 2018 1:46 am

Lafder wrote:
Wed May 30, 2018 10:04 pm
You can not have an IRA balance to do a back door Roth. So you might as well roll IRA into the solo401k.
This here is new information. Definitely did not know that. That does change things a bit. Thanks for pointing this out!

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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by Lafder » Thu May 31, 2018 7:39 am

LOL to your houses as firewood comment. I have had the same thought about books, in an apocalypse they can be used as kindling or toilet paper :)

Yes it is called the pro rata rule. If you have any IRA (not 401k).

I think of it as: max tax advantaged retirement accounts such as your solo401k. Then if you have another 5500$ to invest and have a sufficient emergency fund, put that 5500$ into a Roth via back door non deductible IRA.

Read about Roths.

The comparison for this $5500 is Roth versus taxable investing now.

With a Roth, you can not take out without penalty the first 5 years. But then there is tax free growth and withdrawals (after retirement age) vs capital gains with a taxable account. It does matter if you have sufficient taxable money/emergency funds since a Roth has restrictions that a regular taxable account does not. It is just a vehicle to minimize long term taxes, and it does not have RMDs. It also has inheritance advantages vs an IRA.

lafder

AerialWombat
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by AerialWombat » Thu May 31, 2018 1:36 pm

Lafder wrote:
Thu May 31, 2018 7:39 am
Yes it is called the pro rata rule. If you have any IRA (not 401k).

I think of it as: max tax advantaged retirement accounts such as your solo401k. Then if you have another 5500$ to invest and have a sufficient emergency fund, put that 5500$ into a Roth via back door non deductible IRA.
I really appreciate this information. Definitely going to have to research this. I'll need to withdraw my 2018 traditional IRA contribution (already made), since it will be will be non-deductible this year due to my sudden income surge.

AerialWombat
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by AerialWombat » Thu May 31, 2018 1:59 pm

AerialWombat wrote:
Thu May 31, 2018 1:36 pm
Lafder wrote:
Thu May 31, 2018 7:39 am
Yes it is called the pro rata rule. If you have any IRA (not 401k).

I think of it as: max tax advantaged retirement accounts such as your solo401k. Then if you have another 5500$ to invest and have a sufficient emergency fund, put that 5500$ into a Roth via back door non deductible IRA.
I really appreciate this information. Definitely going to have to research this. I'll need to withdraw my 2018 traditional IRA contribution (already made), since it will be will be non-deductible this year due to my sudden income surge.
OK, so here's my understanding... I can withdraw my 2018 contribution with no effect. That contribution actually has a slight loss YTD, it looks like, so I'll have no taxable gain from earnings. Then I'm left with my pre-tax contributions in the Traditional, so roll that over to the Solo 401k. Then open a Roth, add back the $5500 to the traditional, and convert that to the Roth.

Am I doing this right? :)

Thanks!

Lafder
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by Lafder » Sat Jun 02, 2018 1:23 pm

I am not sure so I don't want to lead you wrong. See what others say as someone will know for sure :)

Might a "deductible" contribution be recharacterized as "nondeductible" ?

I know for the pro rata rule they look at the IRA balance on 12/31, so you have time to make the balance zero by rolling it into your 401k.

It might be simpler to reverse the contribution if allowed, and make a new contribution into a new IRA account where your 401k is, so that the money is more clearly separate from your existing IRA, and easier to move into your new Roth you also make at the same company. There is a way to keep a zero balance IRA open so you can use it again next year. When you make the transfer there should be an option "keep account open".

lafder

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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by dharrythomas » Sat Jun 02, 2018 2:50 pm

LieStrategy Income Fund has an asset allocation of 20/80, Target Retirement Income is at 30/70. That would provide you a sliver of equity risk/return.

Frankly, if you're interested in risk control, leverage reduction is probably the way to go. It also provides a little flexibility when you go back to the bank next year to borrow additional money. The people who got in trouble in real estate in the 1980s and in the 2000s had one thing in common, high leverage. You may do better with more leverage, but it is harder to go broke if you don't owe money.

Good luck.

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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by Earl Lemongrab » Sun Jun 03, 2018 3:15 pm

Lafder wrote:
Sat Jun 02, 2018 1:23 pm
Might a "deductible" contribution be recharacterized as "nondeductible" ?
Not exactly. From the standpoint of the contribution and the IRA, there are only traditional or Roth contributions. What make it non-deductible is whether it was deducted from your taxes or not. So for a 2018 contribution, just don't deduct it. But there's no real reason to do that. I'm not sure what the benefit would be.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

AerialWombat
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by AerialWombat » Sat Jun 09, 2018 2:39 pm

Just as an update, here's what I've done:

1). Withdrew the $5500 traditional IRA contribution that would have been non-deductible this year. I'll have to file a form 8606 on my tax return next year, but there is no tax impact.

2). I've opened a new traditional IRA at e-Trade, so that I can roll the Vanguard account over to eTrade, then roll that traditional IRA into the solo 401k. I spoke with eTrade reps about this, and this turned out to be the simplest way to do things.

3). I'll then open a Roth IRA at Vanguard and backdoor it.

4). I've decided upon a 30/70 overall AA. Since my accumulation will come mostly from my savings rate, my "retirement" horizon is so short, and I have other investment risk concentrated in real estate and private equity, I'll just stick to an "in retirement" style AA for my paper/public portfolio.

Many thanks to all of you for the advice!

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Earl Lemongrab
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by Earl Lemongrab » Sat Jun 09, 2018 3:00 pm

If you were going to do backdoor, why not leave the TIRA contribution alone? Now you have to redeposit.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

WanderingDoc
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Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by WanderingDoc » Sat Jun 09, 2018 5:10 pm

I wanted to congratulate you on your success so far.

Reading your post, I felt like I was reading something I would write. Real estate investing and travel are, and will continue to be, two of my greatest passions.

I started investing in real estate in late 2014, and now own a 7-figure real estate portfolio which generates $35-40K in net income, exceeding my living expenses. This is an exciting and approachable path to wealth. And it doesn't take 25 or 30 years. It took me 3.5 years with a small amount of effort.

I am curious which countries you traveled to, as well as which impressed you the most that you would settle in longer term? Feel free to share on here or send me a PM. I plan on living overseas in 3-5 years in each of a couple select places. No idea how this would affect my U.S. assets but that is part of the fun right. :D

AerialWombat wrote:
Tue May 29, 2018 1:23 pm
Portfolio Review Request: Very conservative, primarily interested in capital preservation, unlikely to ever "retire"

"Long-time listener, first-time caller." I have read these forums for three years, and am very greatful for the wisdom that you all freely share. This really is an amazing community, and I have learned a lot.

The sob story: In 2008, I was dead broke, foreclosed on, filed Chapter 7 bankruptcy, and lived in my crappy car for about a year and a half.

The fix: Took a $10/hr office job in a new occupational field; moonlighted and side-hustled best I could. Eventually traveled the world for three years, came back in 2014 to be a "responsible adult" and build wealth. Started several tiny businesses. Personal net income has doubled each year for the past three years, funding buy-and-hold rental property acquisition.

Current situation: Age 40, single, no kids that I know of, no heirs. 2018 personal net income will be somewhere in the $225k-$350k range. I still essentially live a poverty-level lifestyle, but have added some small luxuries such as several domestic vacations per year, eating out several times per week, and top shelf booze. I live in the basement of one of my rental properties, so expenses are low. Base lifestyle is about $25,000 a year, real expenses are about $35,000 per year.

Objectives/Risk Assessment: Tax reduction and capital preservation. I'm currently high-income, but low-wealth, and want to fix that. Given my past experiences, I fear capital loss much more than I seek capital gain, BUT I have shiny object syndrome. Small downturns, like today, cause me panic, but at the same time I cry over missing the big runup from the last several years. I realize I can't have both, so the safety is more important.

I plan to cut back to semi-retirement within two years and go back overseas, which will drop my COL even lower, but I'll still likely generate an $80k-$150k per year income. I view my rental properties as my true retirement plan, but I'm one of those people that will *always* generate active income from some self-employment activity. I will do this until I am incapacitated, institutionalized, or incinerated. Barring major financial disaster, I assume that most of my assets will pass on to a charitable foundation. I do not have LTC insurance.


Emergency Fund: Currently 9 months worth of personal expenses ($20,000), earning 1.6% in online savings account.
Debt: No debt besides mortgages on rental properties, totaling about $570,000. Rates are 3.875%, 4.125%, 4.625%. Debt is 100% serviced by tenant rent.
Real estate equity: About $100,000, but I treat it as imaginary since I buy rentals for income, not the equity.
Tax Filing Status: Single
Tax Rate: 35% federal (2018, for the first time), 0% state
Age: 40
Desired Asset Allocation: That's the question...I'm feeling I should be in the 30/70 to 50/50 range.
Desired International Allocation: 10% to 30% (also a guess)


Traditional IRA at Vanguard - Opened in 2016, so only 3 years of contributions
$15,346.77 Vanguard Wellesley Income Fund (VWINX) (0.22%)
$2,690.43 Vanguard FTSE All World ex-US Small Cap ETF (VSS) (0.13%)


Solo 401k at eTrade - Opened account April 2018 as a tax planning move due to the recent surge in my net income. Contributing $4500/mo to this right now. Will contribute the maximum allowed $55k combined for 2018 before year end. Using Schwab funds to avoid $20 eTrade transaction charge when buying.

$1,500 Schwab Total Stock (SWTSX) (0.04%)
$1,500 Schwab Total International (SWISX) (0.06%)
$1,000 T. Rowe Price Growth (PRGFX) (shiny object, will be selling)
$500 Schwab Aggregate Bond Index (SWAGX) (0.04%)


Taxable brokerage at Vanguard - Buying tax exempt due to my new tax bracket. Currently contributing $6,000 per month to this on auto-draft, and an additional $1k-$5k per month depending upon business revenue for the month.

$20,306.98 Vanguard Total Stock Market Index Admiral Shares (VTSAX) (0.04%)
$10,082.79 Vanguard Long-Term Tax Exempt (VWLTX) (0.19%)
$20,112.66 Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (VWITX) (0.19%) (all my research and reading here leads me to believe this is the single best fund for my taxable account, given my risk tolerance, rising interest rates, and tax bracket -- but definitely open to other opinions/correction)

--
Key questions, with thanks to @Desiderium for pointing in this direction of clarification:

1). What AA will give me the least possible volatility while still capturing a sliver of equity upside?

2). Would it be the worst thing to hold only VTSAX and VWITX in my taxable account, given my suddenly high tax bracket and that being my fastest growing account?


Thank you so much, I look forward to being part of the community (instead of just a lurker).

--
2018-05-30: Edited for clarity, brevity, closer to proper forum format, and updated balances/positions to reflect trades that executed yesterday.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

retiredjg
Posts: 34202
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by retiredjg » Sun Jun 10, 2018 9:02 am

AerialWombat wrote:
Sat Jun 09, 2018 2:39 pm
1). Withdrew the $5500 traditional IRA contribution that would have been non-deductible this year. I'll have to file a form 8606 on my tax return next year, but there is no tax impact.
What do you mean when you say "withdrew"? If you simply took the money out, that does not accomplish what you want.

AerialWombat
Posts: 196
Joined: Tue May 29, 2018 1:07 pm

Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by AerialWombat » Mon Jun 11, 2018 9:18 pm

Earl Lemongrab wrote:
Sat Jun 09, 2018 3:00 pm
If you were going to do backdoor, why not leave the TIRA contribution alone? Now you have to redeposit.
To keep non-deductible contributions out of the 100% rollover to the 401k.

retiredjg
Posts: 34202
Joined: Thu Jan 10, 2008 12:56 pm

Re: Portfolio Review: Very conservative, primarily interested in capital preservation

Post by retiredjg » Tue Jun 12, 2018 5:45 am

retiredjg wrote:
Sun Jun 10, 2018 9:02 am
AerialWombat wrote:
Sat Jun 09, 2018 2:39 pm
1). Withdrew the $5500 traditional IRA contribution that would have been non-deductible this year. I'll have to file a form 8606 on my tax return next year, but there is no tax impact.
What do you mean when you say "withdrew"? If you simply took the money out, that does not accomplish what you want.
I'm posting this again in case you just happened to miss the post.

If you simply took the money out, that does not solve your problem. It will still be considered a contribution and your withdrawal will be an early withdrawal subject to penalty.

You must ask the custodian to return a specific contribution and it will be sent to you along with any earnings that occurred. I think this might be fixable if taken care of quickly.

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