Municipal Bond Ladder / Tax Efficient Allocation of New Funds

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mike127
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Joined: Sun Aug 19, 2012 1:26 am

Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by mike127 » Wed Aug 22, 2018 11:01 pm

Hi Bogleheads - thanks to some incredibly valuable advice from this forum I've managed to convert a complex, costly portfolio into a lower-cost Boglehead-style approach that I feel much more comfortable with and, luckily, have had the chance to grow quite a bit since I first posted here years ago. I've recently gotten some additional cash after selling an equity grant from my employer (which I'd been -- and potentially am still) overweighted in, and am looking for advice on how to allocate across my accounts.

Here's my situation:

Emergency funds: Six months of expenses (not reflected in percentages below)
Debt: $25k car loan @ 2.49%; $550k mortgage @ 3.75%; $20k student loan @ 0.63%
Tax Filing Status: Married Filing Jointly
Tax Rate: 32% Federal, 5% State
State of Residence: VA
Age: 38 and 37
Desired Asset allocation: 75% stocks (broken out as 52.5% US, 15% intl, 7.5% real estate) / 25% bonds
Portfolio size: low-mid 7 figures

Current retirement assets

Taxable @ Schwab
12% Vanguard Total Stock Market Index (VTSAX, 0.04%)
15% Schwab International Equity ETF (SCHF, 0.06%)
7% employer stock
33% Schwab US Broad Market ETF (SCHB, 0.03%)
11% municipal bond ladder (paying 0.35% management fee for this)

His 401(k) and Mega Backdoor Roth @ Fidelity
3% Vanguard Real Estate Index (VGSNX, 0.10%)
1% Vanguard Total Bond Market Index (VBTIX, 0.04%)

Her 403(b) @ TIAA-CREF
5% TIAA Traditional

Her 457(b) @ TIAA-CREF [her employer allows pre-tax contribution at $18.5k to BOTH the 403(b) and 457(b), currently maxed on both]
2% TIAA Traditional
3% TIAA Real Estate Account

His Rollover IRA @ Schwab
5% Vanguard Total Bond Market (BND, 0.11%)

Her Roth IRA @ Schwab
1% Vanguard REIT (VNQ, 0.10%)

Her Rollover IRA @ Schwab
1% Vanguard REIT (VNQ, 0.10%)
1% Vanguard Total Bond Market (BND, 0.11%)

[529 plans for two kids (4 and 7) not reflected here]

Contributions

New annual Contributions
$18,500 his 401k (also specify any employer matching contributions)
$25,000 his mega backdoor Roth
$18,500 her 403(b)
$18,500 her 457(b)
variable amount (based on bonus/employer stock performance) saved into taxable

Available to spend: cash equivalent to 6% of existing portfolio

Questions:

1. What is the group's opinion of the municipal bond ladder? I've done a bunch of research here and elsewhere, and while I don't like paying the 35 bp management fee it seems like there's support for using muni ladders to fill bond allocation when the taxable portion of a portfolio is significantly larger than the tax-advantaged portion, which is my case.

2. As reflected above, I just sold employer stock equal to about 6% of my portfolio that I need to put somewhere. (The percentages above are calculated without this additional cash.) At this stage I'm overweighted on equities relative to my desired allocation, so this money should go into the bond allocation. Should I add it to the muni ladder or do something else with it?

3. I have enough cash to pay off much of my debt -- particularly, the student and car loans. I've maintained this debt because it's relatively low rate (0.63% and 2.49%) and I'm making more money on my investments than I'd save on interest. Does the group agree with maintaining the debt and paying it off over time, or do people think I should write the check and be done with it? (I have 3 years on my car loan and am trying to spread out the student loan payment over many years because of the extremely low rate.)

4. I live in a HCOL area but despite that calculate that we have enough saved at a 4% withdrawal rate to support our existing expenses. Neither of us is planning to retire anytime soon (though it feels good to be in a position where we could), and anticipate we'll work (though potentially at jobs that make meaningfully less) at least until our kids are through college. Our instinct is to stay fairly heavily invested in equities to let our assets grow over our pre-retirement period, but I often see the idea that "if you've won the game, stop playing" reflected here. Any views on whether our 75/25 asset allocation is too risky (or not risky enough) given our situation?

5. We historically have held bond index funds in his 401(k) and mega backdoor Roth at Fidelity but recently switched to hold real estate there, in favor of the muni ladder and the idea that having the Roth grow over time would be valuable. Good call or not?

6. We have an accountant and often ask him about strategies we can use to minimize our tax exposure. His general perspective is that since most of our income comes through W-2 (my employer stock grants are RSUs and so taxed as ordinary income) there's not much to do here other than pay the taxes -- but I'd welcome feedback if this group has ideas.

Thanks in advance for everyone's feedback.

PFInterest
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by PFInterest » Thu Aug 23, 2018 6:58 am

mike127 wrote:
Wed Aug 22, 2018 11:01 pm

Questions:

1. What is the group's opinion of the municipal bond ladder? I've done a bunch of research here and elsewhere, and while I don't like paying the 35 bp management fee it seems like there's support for using muni ladders to fill bond allocation when the taxable portion of a portfolio is significantly larger than the tax-advantaged portion, which is my case.
- compare what you have to VWIUX. i dont see why you need to pay someone to do that.

2. As reflected above, I just sold employer stock equal to about 6% of my portfolio that I need to put somewhere. (The percentages above are calculated without this additional cash.) At this stage I'm overweighted on equities relative to my desired allocation, so this money should go into the bond allocation. Should I add it to the muni ladder or do something else with it?
- you can buy VWIUX, IBonds yes.

3. I have enough cash to pay off much of my debt -- particularly, the student and car loans. I've maintained this debt because it's relatively low rate (0.63% and 2.49%) and I'm making more money on my investments than I'd save on interest. Does the group agree with maintaining the debt and paying it off over time, or do people think I should write the check and be done with it? (I have 3 years on my car loan and am trying to spread out the student loan payment over many years because of the extremely low rate.)
- just pay them off. its kinda weird you are like collecting them. its not like you are poor and trying to decide cash flow to help pay rent.

4. I live in a HCOL area but despite that calculate that we have enough saved at a 4% withdrawal rate to support our existing expenses. Neither of us is planning to retire anytime soon (though it feels good to be in a position where we could), and anticipate we'll work (though potentially at jobs that make meaningfully less) at least until our kids are through college. Our instinct is to stay fairly heavily invested in equities to let our assets grow over our pre-retirement period, but I often see the idea that "if you've won the game, stop playing" reflected here. Any views on whether our 75/25 asset allocation is too risky (or not risky enough) given our situation?
- seems fine. it is slightly risky, but not overly so.

5. We historically have held bond index funds in his 401(k) and mega backdoor Roth at Fidelity but recently switched to hold real estate there, in favor of the muni ladder and the idea that having the Roth grow over time would be valuable. Good call or not?
- the Roth's should be all equities, REITs yes.

6. We have an accountant and often ask him about strategies we can use to minimize our tax exposure. His general perspective is that since most of our income comes through W-2 (my employer stock grants are RSUs and so taxed as ordinary income) there's not much to do here other than pay the taxes -- but I'd welcome feedback if this group has ideas.
- yup. max retirement accounts. buy a house. have kids.
Thanks in advance for everyone's feedback.

jebmke
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by jebmke » Thu Aug 23, 2018 7:12 am

Tax Exempt Bond funds have an ER of 9bp. For that you get all your free time back, diversification and liquidity. It is a pretty fair price.
When you discover that you are riding a dead horse, the best strategy is to dismount.

skeptical
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by skeptical » Thu Aug 23, 2018 7:23 am

mike127 wrote:
Wed Aug 22, 2018 11:01 pm

1. What is the group's opinion of the municipal bond ladder? I've done a bunch of research here and elsewhere, and while I don't like paying the 35 bp management fee it seems like there's support for using muni ladders to fill bond allocation when the taxable portion of a portfolio is significantly larger than the tax-advantaged portion, which is my case.
Regarding muni bond ladders - you can have Fidelity put together several (based on various criteria) for free (probably need an account there, I am a Vanguard customer, but have some old accounts with Fidelity), and you can then evaluate. For example, you can specify desired maturity, credit quality, desired income, state vs national, GO or not, etc. You will get a specific ladder and also get a detailed report on all kinds of stats and how the ladder works over time.

They will also execute the ladder for "free" - they probably make the money through their trading desk.

I did this two years in a row, using criteria that would match VWIUX (Vanguard Intermediate Muni) as best as I could. Decided to stay with VWIUX. The ladders were hard to compare even with same/similar credit/maturity (best described as that the ladders SEC yield was closer to the annual yield than VWIUX has), but in the end, VWIUX is just a lot easier and seemed to be at least as "good"

NYC_Guy
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by NYC_Guy » Thu Aug 23, 2018 7:35 am

The OP is in Virginia. Is your muni ladder just VA munis? If it isn’t, then comparing to a national muni fund (like the Vanguard fund that several posters mention above) isn’t appropriate. You’ll have tax leakage of +/- 15 basis points. Just something to consider.

mike127
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by mike127 » Thu Aug 23, 2018 10:44 am

NYC_Guy wrote:
Thu Aug 23, 2018 7:35 am
The OP is in Virginia. Is your muni ladder just VA munis? If it isn’t, then comparing to a national muni fund (like the Vanguard fund that several posters mention above) isn’t appropriate. You’ll have tax leakage of +/- 15 basis points. Just something to consider.
Yes, I'm located in Virginia so the muni bond ladder is almost exclusively VA bonds. I haven't found a low cost VA bond fund (would welcome pointers if anyone has thoughts on this) so I'm in part having to trade off the management fee for the ladder vs. tax impact for having a non-VA exempt portfolio.

How would you compare a VA-specific bond ladder against a bond fund?

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alec
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by alec » Thu Aug 23, 2018 11:15 am

mike127 wrote:
Thu Aug 23, 2018 10:44 am
NYC_Guy wrote:
Thu Aug 23, 2018 7:35 am
The OP is in Virginia. Is your muni ladder just VA munis? If it isn’t, then comparing to a national muni fund (like the Vanguard fund that several posters mention above) isn’t appropriate. You’ll have tax leakage of +/- 15 basis points. Just something to consider.
Yes, I'm located in Virginia so the muni bond ladder is almost exclusively VA bonds. I haven't found a low cost VA bond fund (would welcome pointers if anyone has thoughts on this) so I'm in part having to trade off the management fee for the ladder vs. tax impact for having a non-VA exempt portfolio.

How would you compare a VA-specific bond ladder against a bond fund?
David Grabiner showed how to compare a MD muni bond fund with a national muni bond fund.

viewtopic.php?t=162676

For a mini ladder that you're just rolling over when bonds mature, I think you can just compare the characteristics like a fund. For example, duration of combined ladder, credit quality, etc
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

ofckrupke
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by ofckrupke » Thu Aug 23, 2018 11:26 am

mike127 wrote:
Thu Aug 23, 2018 10:44 am
How would you compare a VA-specific bond ladder against a bond fund?
The closer the fund's (or combination of multiple funds') duration and distribution of credit across the various letter grades to the issues in your portfolio, the more appropriate the comparison. Differences in tax cost, management fee, and ongoing management transactional cost can be pitted directly against one another but if the portfolios are not sufficiently similar then there is an apples (portfolio dissimilarity) vs oranges (effective relative cost of ownership) problem.
Ongoing management transactional costs will be harder to get a handle on. Huge funds like vanguard's national limited, intermediate and long term muni funds these costs should probably be treated as a baseline because the manager has scale power and much more importantly, does not benefit from self dealing. Frankly I can't believe that 0.35% of a portfolio of this size is worth the burden of managment, so I suspect that the manager has also built it in such a fashion that a blindered view of the OP's interest calls for regular substitutions from middle rungs, to the degree that "ladder" is a misnomer. And the manager makes the bulk of his money in industry-standard obfuscated ways on these transactions. If these issues are really buy and hold rungs then costs of selection and transactional cost of acquisitions may be a fair bargain, leaving the nondiversity risk.

Consider putting the 6% new money on the vanguard national muni fund or combination of funds to to most closely match the "ladder's" duration (subject to the requirement of holding admiral shares), and track the behavior of the two for a couple of years, during which time spending probably more than 0.35% worth of one's own time studying individual portfolio manager's actions and the properties of the issues chosen and the pertinent tax matters including amortization of bond premia....and only after such period of study decide whether the differences in after-tax, after-fee return justify holding the granular portfolio (here the matching of duration is intended to minimize difference in capital value due to broad interest rate changes). Because it doesn't sound like the most compelling reason for accepting the low-diversity risk exposure of the granular portfolio (a known target maturity date for a portfolio liquidation for large outlay) is present here.

Bear in mind that pre-maturity liquidation of the existing portfolio will probably be costly, particularly if done in haste, owing to relative illiquidity of small lot munis, and the most economical way to extricate may involve letting it sink - letting lower rungs mature and letting some middle rungs get called. Will be tough to get good advice on cost-efficient liquidation though, once the manager understands that the program is to dissolve and invest elsewhere.

mike127
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by mike127 » Sat Aug 25, 2018 9:48 am

PFInterest wrote:
Thu Aug 23, 2018 6:58 am
mike127 wrote:
Wed Aug 22, 2018 11:01 pm
3. I have enough cash to pay off much of my debt -- particularly, the student and car loans. I've maintained this debt because it's relatively low rate (0.63% and 2.49%) and I'm making more money on my investments than I'd save on interest. Does the group agree with maintaining the debt and paying it off over time, or do people think I should write the check and be done with it? (I have 3 years on my car loan and am trying to spread out the student loan payment over many years because of the extremely low rate.)
- just pay them off. its kinda weird you are like collecting them. its not like you are poor and trying to decide cash flow to help pay rent.
Thanks. The reason I’ve done this is that I’ve read two somewhat conflicting things on this board:

1. If you have high interest loans, pay them off ASAP because that’s a guaranteed immediate return on your money.

2. If you have low interest loans and would make more (say, more than 0.63%) if you invested, use the loan as leverage so you can earn more in the market.

I’ve considered that I’m in category 2 (these are <1% and <2.5% loans) so better to keep them. But your point is that the total dollar value is so low as a percentage of overall assets that it’s just not worth dealing with this. Is that fair?

Related: theoretically I could use my 6% cash and knock out a bunch of mortgage debt. I’m inclined not to do this because I value longer term liquidity plus this is one of my only tax benefits, but based on the “don’t hold debt if you have cash to cover it” principle I should just retire my mortgage. I’m not sure I’m persuaded this is right in my situation but would welcome feedback if this is misguided.

mike127
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by mike127 » Sat Aug 25, 2018 10:33 am

skeptical wrote:
Thu Aug 23, 2018 7:23 am
mike127 wrote:
Wed Aug 22, 2018 11:01 pm

1. What is the group's opinion of the municipal bond ladder? I've done a bunch of research here and elsewhere, and while I don't like paying the 35 bp management fee it seems like there's support for using muni ladders to fill bond allocation when the taxable portion of a portfolio is significantly larger than the tax-advantaged portion, which is my case.
Regarding muni bond ladders - you can have Fidelity put together several (based on various criteria) for free (probably need an account there, I am a Vanguard customer, but have some old accounts with Fidelity), and you can then evaluate. For example, you can specify desired maturity, credit quality, desired income, state vs national, GO or not, etc. You will get a specific ladder and also get a detailed report on all kinds of stats and how the ladder works over time.

They will also execute the ladder for "free" - they probably make the money through their trading desk.

I did this two years in a row, using criteria that would match VWIUX (Vanguard Intermediate Muni) as best as I could. Decided to stay with VWIUX. The ladders were hard to compare even with same/similar credit/maturity (best described as that the ladders SEC yield was closer to the annual yield than VWIUX has), but in the end, VWIUX is just a lot easier and seemed to be at least as "good"
I think I like this strategy - try both over 2 years and see what happens. This takes more time short-term but willl help me understand this better than I do; I feel comfortable with equities but don’t have a good enough grasp of bond markets to be comfortable I’m making a well informed decision.

To the questions about the 35bp management fee — this isn’t an actively managed strategy in the traditional sense; they just select VA munis, buy and hold, and then when one expires select a new one that meets criteria I’ve set. The 35bp compares favorably against Schwab’s comparable fund costs but I did not compare VWIUX.

What is the best way for me to understand the Virginia tax cost I’m paying by going with VWIUX in taxable vs a Virginia bond fund? I don’t need this money for 20-30 years so I would rather just keep the money stable/growing than get income (that might be taxed) from coupons in the immediate term or pay taxes when individual bonds in the fund turn over.

jvini
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by jvini » Sat Aug 25, 2018 10:35 am

Hi. I'm in a similar situation, although I and my wife are 51 and live in the NYC area.

As far as a muni bond ladder in a taxable account, due to maintaining your asset allocation, I opt for the Vanguard Intermediate muni bond fund. The longer I have invested, the more I've come to appreciate simpler investments and portfolios.

I also do not pay off low interest debt because I'm disciplined and would rather invest the money (or keep it invested) in order to get a higher long term return. I could pay off a car we just got (we buy cheaper cars and keep them forever-Honda CRV in this case) but I'd rather play the law of averages and watch the money grow at a higher percentage.

I think your asset allocation, based on your age is correct (assuming you're comfortable with a bit of risk). For me, I do age - 13 in bonds, which is where you are. So I am 38% bonds 62% equities. This has worked well for us and now that I'm approaching 60/40 equities to bonds, that is where I plan to stay for a very long time in order to beat inflation. We have saved enough to weather a big drop in stocks. We don't spend a ton, but do enjoy life. At some point, hopefully not for a couple decades at least, I may go 50/50.

As far as question 5, I'm a bit confused. I also do a mega backdoor Roth and have in service transfers, which not many allow. I understand holding REITS in there (I gave up REITS for simplicity after much research), but why hold equities in there? I understand that you aren't taxed on earnings and can take everything out tax free after 59.5, but wouldn't you hold bonds in there rather than a brokerage account? There are different thoughts on this, but traditionally, bonds and REITS are held in tax advantaged accounts.

As an aside, are you funding your kids' college educations in a 529? We started early and have enough to fund 2 private colleges (which is a bleeping fortune). Glad we did this.

There's also not much we can do about paying taxes.

Just to maybe help (or confuse you) here is a general view of our holdings and future holdings.

Taxable
Small cap index (ijr)
Mid cap index (ijh)
Large Cap index (I like the small cap tilt, but others use a total US index which is good, but a bit less good in my opinion).
International fund (ixus)
Intermediate tax exempt muni fund

Tax advantaged (including Roth from Mega back door)
Total US bond fund (bnd)
same equity index funds rolled over from 401ks, same as above along with some small caps I like (but only a small percentage of our portfolio).

Heretically, we don't have an emergency fund. Taylor Larimore concurs in a post I believe. We could sell stock or use a home equity line of credit. At some point, when you're fortunate to have saved a bit, I think this might make sense.

mike127
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by mike127 » Sat Aug 25, 2018 11:11 am

jvini wrote:
Sat Aug 25, 2018 10:35 am
Hi. I'm in a similar situation, although I and my wife are 51 and live in the NYC area.
Thanks so much for this post. It helps to hear from someone in a similar situation but who has the benefit of a few more years of hindsight :)
jvini wrote:
Sat Aug 25, 2018 10:35 am
As far as question 5, I'm a bit confused. I also do a mega backdoor Roth and have in service transfers, which not many allow. I understand holding REITS in there (I gave up REITS for simplicity after much research), but why hold equities in there? I understand that you aren't taxed on earnings and can take everything out tax free after 59.5, but wouldn't you hold bonds in there rather than a brokerage account? There are different thoughts on this, but traditionally, bonds and REITS are held in tax advantaged accounts.
I think I may not have explained this correctly, but what you’re suggesting is what I am doing. I was historically BND-equivalent or TIAA Traditional in tax-advantages but recently shifted to add greater weighting of real estate in tax-advantaged, counterbalanced by the munis in taxable. I’m not holding any stock funds in tax-advantaged (though please let me know if I am wrong about this based on the portfolio I outlined above!).
jvini wrote:
Sat Aug 25, 2018 10:35 am
As an aside, are you funding your kids' college educations in a 529? We started early and have enough to fund 2 private colleges (which is a bleeping fortune). Glad we did this.
Yes, we have 529s for both of the kids (not reflected in the portfolio listed above). We get a small state tax benefit for contributions we make each year, but it also feels good to know that they won’t have to worry about college expense when the time comes. It is insane how much college costs (I went to state schools and got a good education at them, but it’s way too early in my kids’ lives to know what is right for them), and I feel lucky to be able to plan for this now.
jvini wrote:
Sat Aug 25, 2018 10:35 am
Heretically, we don't have an emergency fund. Taylor Larimore concurs in a post I believe. We could sell stock or use a home equity line of credit. At some point, when you're fortunate to have saved a bit, I think this might make sense.
We’ve gone back and forth about this. Our jobs are relatively secure (though I do worry about overweighting of company stock combined with company performance, which I’m going to deal with by taking cap gains over time to sell the company stock). Right now the psychological benefit of being able to write a check for what I might realistically need outweighs the value of using that money elsewhere since it’s not a huge percentage — we used to have a bunch of CDs that were much more than needed, and I cut that out — but I think you’re right that I might knock that out as I get more experienced. It’s a good idea.

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welderwannabe
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by welderwannabe » Sat Aug 25, 2018 12:04 pm

I have decided to stay away from individual muni bonds due to concerns I have with their liquidity. I instead do Treasury ladders and save my fees there.

Vanguard 'ladders' munis for you with VWITX - Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares. Let them do the worrying for you.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

sambb
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by sambb » Sat Aug 25, 2018 12:30 pm

In the top tax bracket, with advatngaes of munis over regular bonds, in many cases stock index can reside in tax deferred and munis in taxable.

Ron Scott
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by Ron Scott » Sat Aug 25, 2018 1:47 pm

I'd prefer to see a bit more diversification in munis than relying on VA alone, taxes notwithstanding. Maybe a third short-term, a third intermediate, and a third VA.

Kill the loans.

The thought of retiring based on the size of your portfolio is foolish IMO. It's not a game to win or lose and that perspective (based on assessments of "need")...is for losers. Live a productive life. You may realize in 10 years that the few million you have now isn't all that.

Paying the tax on restricted shares is a drag. Not getting the shares is worse. Enjoy.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

jvini
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by jvini » Sat Aug 25, 2018 3:00 pm

mike127 wrote:
Sat Aug 25, 2018 11:11 am
jvini wrote:
Sat Aug 25, 2018 10:35 am
Hi. I'm in a similar situation, although I and my wife are 51 and live in the NYC area.
Thanks so much for this post. It helps to hear from someone in a similar situation but who has the benefit of a few more years of hindsight :)

It sounds like we are in very similar situations, although yes, I have a few more years under my belt. :) We have a high school senior and freshmen whose educations will be fully funded through 529s. That is very important to us. The oldest verbally committed to a D3 school for soccer, for which she will get no money. Not even an academic merit based grant. Dang it. So it goes. The younger could end up with some soccer money, but not counting on it.

We feel extremely blessed to be in the situation we are in.

I would say keep doing what you're doing.
Appreciate all you have, don't be too lavish but do enjoy experiences with the money you've worked hard for, and keep investing simple. All that will let you sleep at night.

mike127
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by mike127 » Mon Aug 27, 2018 12:47 pm

Ron Scott wrote:
Sat Aug 25, 2018 1:47 pm
Kill the loans.
Totally get the “kill the loans” perspective. Seems interesting that people are mostly landing in the other direction in this thread: viewtopic.php?f=2&t=256519.

Is the main difference between the two overall portfolio size (I disclosed mine but the poster there didn’t)?

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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by mcraepat9 » Mon Aug 27, 2018 4:51 pm

mike127 wrote:
Mon Aug 27, 2018 12:47 pm
Ron Scott wrote:
Sat Aug 25, 2018 1:47 pm
Kill the loans.
Totally get the “kill the loans” perspective. Seems interesting that people are mostly landing in the other direction in this thread: viewtopic.php?f=2&t=256519.

Is the main difference between the two overall portfolio size (I disclosed mine but the poster there didn’t)?
I think the real issue with the loans (for me at least) is your fixed income holdings. A mortgage is similar in concept to a negative bond. So you are effectively borrowing funds at 3.75% (slightly less to give effect to the tax deduction) to lend it out at whatever you are getting from your muni ladder and Total Bond (both of which are not riskless). So from my perspective, paying down your mortgage gives you a better return with less risk.

Liquidity of course is still valuable to you, and you should decide how much liquidity you need.
Amateur investors are not cool-headed logicians.

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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by grabiner » Tue Aug 28, 2018 8:04 pm

mcraepat9 wrote:
Mon Aug 27, 2018 4:51 pm
I think the real issue with the loans (for me at least) is your fixed income holdings. A mortgage is similar in concept to a negative bond. So you are effectively borrowing funds at 3.75% (slightly less to give effect to the tax deduction) to lend it out at whatever you are getting from your muni ladder and Total Bond (both of which are not riskless). So from my perspective, paying down your mortgage gives you a better return with less risk.
If the mortgage interest is tax-deductible, it's 2.36% after federal and state tax. Since it is a long-term loan, the fair comparison is to long-term munis, and Admiral shares of Vanguard Long-Term Tax-Exempt yield 2.90%, which is 2.71% after VA tax. Thus there is a net gain for holding munis while keeping a deductible mortgage in this high a tax bracket.
Wiki David Grabiner

desiderium
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by desiderium » Wed Aug 29, 2018 9:15 am

grabiner wrote:
Tue Aug 28, 2018 8:04 pm
mcraepat9 wrote:
Mon Aug 27, 2018 4:51 pm
I think the real issue with the loans (for me at least) is your fixed income holdings. A mortgage is similar in concept to a negative bond. So you are effectively borrowing funds at 3.75% (slightly less to give effect to the tax deduction) to lend it out at whatever you are getting from your muni ladder and Total Bond (both of which are not riskless). So from my perspective, paying down your mortgage gives you a better return with less risk.
If the mortgage interest is tax-deductible, it's 2.36% after federal and state tax. Since it is a long-term loan, the fair comparison is to long-term munis, and Admiral shares of Vanguard Long-Term Tax-Exempt yield 2.90%, which is 2.71% after VA tax. Thus there is a net gain for holding munis while keeping a deductible mortgage in this high a tax bracket.
The negative bond argument is relevant here. OP is using his house to buy stocks. His asset allocation is currently more aggressive than he calculates. Holding bonds to offset the mortgage would make sense if it paid significantly; otherwise what is the point?

The OP can re-do this tax calculation in light of the current tax law. He/she may not have deductions much over the standard amount.

The argument about holding debt to maximize liquidity is relatively weak at this total asset level. I would move in the direction of eliminating all the debt once and for all.

Cash
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by Cash » Mon Sep 03, 2018 7:29 am

skeptical wrote:
Thu Aug 23, 2018 7:23 am
mike127 wrote:
Wed Aug 22, 2018 11:01 pm

1. What is the group's opinion of the municipal bond ladder? I've done a bunch of research here and elsewhere, and while I don't like paying the 35 bp management fee it seems like there's support for using muni ladders to fill bond allocation when the taxable portion of a portfolio is significantly larger than the tax-advantaged portion, which is my case.
Regarding muni bond ladders - you can have Fidelity put together several (based on various criteria) for free (probably need an account there, I am a Vanguard customer, but have some old accounts with Fidelity), and you can then evaluate. For example, you can specify desired maturity, credit quality, desired income, state vs national, GO or not, etc. You will get a specific ladder and also get a detailed report on all kinds of stats and how the ladder works over time.

They will also execute the ladder for "free" - they probably make the money through their trading desk.

I did this two years in a row, using criteria that would match VWIUX (Vanguard Intermediate Muni) as best as I could. Decided to stay with VWIUX. The ladders were hard to compare even with same/similar credit/maturity (best described as that the ladders SEC yield was closer to the annual yield than VWIUX has), but in the end, VWIUX is just a lot easier and seemed to be at least as "good"
Interesting. This is the first time I've heard of this service. Is there a minimum investment amount?

skeptical
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by skeptical » Wed Sep 12, 2018 5:00 pm

Cash - sorry for late reply.

I would expect the minimum to be about $250,000, as the binds seem to be purchased in $25K lots in my proposals, and you I would think you would need at least 10 for diversity and ladder building.

I would call and ask.

BigJohn
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by BigJohn » Wed Sep 12, 2018 5:25 pm

Another vote for a high quality intermediate term municipal bond fund for three reasons. In addition to the stated fees, there is also a “hidden” cost in the bid/ask spread that can be significant for smaller lots of bonds. The fund will be far more diversified than your ladder. The liquidity of individual muni bonds can be an issue but not so with a fund.

stlutz
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Re: Municipal Bond Ladder / Tax Efficient Allocation of New Funds

Post by stlutz » Wed Sep 12, 2018 11:41 pm

It's not that hard to put together a muni bond ladder yourself at Fidelity once you learn more about muni bonds in general (e.g. call provisions, taxation of things like market discount etc.). If you're not willing to learn about such things, then I wouldn't let anyone put a muni bond ladder together for you as munis are an investment you'll want to hold until maturity (due to poor overall liquidity), so whatever you buy you're stuck with for a while.

One problem with individual munis is what do you do if your tax situation changes? Sure, you're in a high bracket now but what if you are in the 12% bracket 7 years from now? At that point munis don't make sense but you have all of these bonds you've purchased.

Ladders tend to give you the illusion of control but in reality you're giving up a lot of control and ability to make a quick change to your bond holdings if required

I think a fund makes the most sense. VWIUX is a good option, but the ETFs from Vanguard and iShares have ERs of .09% and .07%, respectively, and are great options as well.

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