Multiple Goals and Bond Allocation to Ret Account

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Garbanzo
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Joined: Thu Apr 04, 2019 5:34 pm

Multiple Goals and Bond Allocation to Ret Account

Post by Garbanzo » Thu Apr 04, 2019 6:04 pm

Hello, I am a recent devotee and (not coincidentally) have recently read the Boglehead Guide to the Three Fund Portfolio. I am about 40 years old, and have 2 main financial goals: (1) saving for retirement; and (2) non-retirement personal savings, which I want to use to eventually buy a home. My retirement account is invested in a target date fund, and I want to invest my non-retirement personal savings with the 3 fund approach.

So I understand that it is generally thought (though not without some dissent) that it is better from a maximizing total return perspective to put all bond holdings in a tax-advantaged retirement account (to the extent feasible) to minimize income taxes on the bond yield. The reasoning behind this approach makes total sense to me.

My question is how to handle the bond allocation when (as explained above) I have 2 separate financial goals. Should I think of my retirement savings and savings to buy a home as 2 separate buckets that should each have their own separately held allocation of bonds? Or, is it more common to treat all savings (regardless of purpose) as a single bucket, and have the investments in bonds held in my retirement account (to the extent there is room).

I have been leaning towards the 2 bucket approach: I keep thinking that if I invest a portion of my retirement account in bonds, in the event of a market downturn it would not really help protect my savings toward buying a home. The reason is that I would not be able to access my retirement savings to buy a home (putting aside the option to take out a loan), so I shouldn't treat any part of the assets in my retirement account as if they could be used to buy a home. Therefore, I was thinking it may be better to hold a portion of my non-retirement savings in a tax free bond fund. However, then I start thinking that my goal is to maximize all of my assets, and the best way to do that is to hold bonds in my retirement account.

So for resolution, I seek the collective wisdom of my fellow bogleheads. Any thoughts on where to hold bonds where are intended to protect a portion of my non-retirement savings?

Thanks!!!

Triple digit golfer
Posts: 3464
Joined: Mon May 18, 2009 5:57 pm

Re: Multiple Goals and Bond Allocation to Ret Account

Post by Triple digit golfer » Thu Apr 04, 2019 6:19 pm

If you need the money short term, it should not be in a retirement account and should not be in equities.

Tax efficient placement is great for long term savings, not so relevant for cash needed in the near term.

There's nothing wrong with keeping some money in cash or bonds in a taxable account. Personally if you'll be using it in the next five years, I'd just put it in Vanguard Prime Money Market or a high yield online savings account.

Whether this means viewing it as a separate bucket or just a cash/bond portion in a taxable account that is part of your overall portfolio is up to you.

Some more knowledgable posters will certainly chime in, but that's my opinion.

mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: Multiple Goals and Bond Allocation to Ret Account

Post by mega317 » Fri Apr 05, 2019 12:23 am

How far off is this eventual home purchase?

My own strategy has been to hold enough bonds in taxable accounts so that even a stock crash would not affect my ability to meet my short- and intermediate-term financial goals (as well as maintain some emergency buffer). I count these bonds in taxable as part of my overall allocation. If I sell a bunch of bonds in taxable to buy something, I will exchange some stocks for bonds in tax-advantaged to bring the overall allocation back to where I want.

I think "buckets" is fine if the purchase is in sight. If you know that in a year you'll be spending 50k in cash, then it doesn't change much if you just pretend you already don't have that money. But if it might be 10 years then I wouldn't want a ton of fixed income that I don't consider in my overall picture.

Also just to note, even if you decide to hold a bond fund in taxable, a tax-free (municipal) fund is not necessarily the correct choice. It depends on your tax bracket among other things.

hornet1
Posts: 30
Joined: Sun Oct 21, 2018 11:01 am

Re: Multiple Goals and Bond Allocation to Ret Account

Post by hornet1 » Fri Apr 05, 2019 9:49 am

Triple digit golfer wrote:
Thu Apr 04, 2019 6:19 pm
If you need the money short term, it should not be in a retirement account and should not be in equities.

Tax efficient placement is great for long term savings, not so relevant for cash needed in the near term.

There's nothing wrong with keeping some money in cash or bonds in a taxable account. Personally if you'll be using it in the next five years, I'd just put it in Vanguard Prime Money Market or a high yield online savings account.

Whether this means viewing it as a separate bucket or just a cash/bond portion in a taxable account that is part of your overall portfolio is up to you.

Some more knowledgable posters will certainly chime in, but that's my opinion.
Besides high interest checking accounts (like ally or 2%+ interest checkings) and CDswhat are some good “cash equivalent” assets you can do easily? Like are there E*TRADE or TD Ameritrade cash accounts that are higher than the high interest checking 2%?

3funder
Posts: 1082
Joined: Sun Oct 15, 2017 9:35 pm

Re: Multiple Goals and Bond Allocation to Ret Account

Post by 3funder » Fri Apr 05, 2019 9:54 am

Triple digit golfer wrote:
Thu Apr 04, 2019 6:19 pm
If you need the money short term, it should not be in a retirement account and should not be in equities.

Tax efficient placement is great for long term savings, not so relevant for cash needed in the near term.

There's nothing wrong with keeping some money in cash or bonds in a taxable account. Personally if you'll be using it in the next five years, I'd just put it in Vanguard Prime Money Market or a high yield online savings account.

Whether this means viewing it as a separate bucket or just a cash/bond portion in a taxable account that is part of your overall portfolio is up to you.

Some more knowledgable posters will certainly chime in, but that's my opinion.
+1. This is good advice. Our taxable "slush" fund is 1/3 VTIAX, 2/3 VMMXX.

dbr
Posts: 30798
Joined: Sun Mar 04, 2007 9:50 am

Re: Multiple Goals and Bond Allocation to Ret Account

Post by dbr » Fri Apr 05, 2019 10:11 am

As posted above three fund approach is for long term investing. Savings for a short term objective should be in money markets, savings accounts, CDs, Tbills, etc. Arbitrarily speaking five years is short term. Also note that as time goes by the time to objective becomes less and less.

This issue is significantly affected by what proportion of the total assets is involved. At some point, maybe for illustration, if the savings involved are less than 20% of total assets maybe there should not even be a separation in purpose. That presumes one can still access the money rather than have it tied up entirely in tax deferred accounts or some such.

Triple digit golfer
Posts: 3464
Joined: Mon May 18, 2009 5:57 pm

Re: Multiple Goals and Bond Allocation to Ret Account

Post by Triple digit golfer » Fri Apr 05, 2019 12:10 pm

hornet1 wrote:
Fri Apr 05, 2019 9:49 am
Triple digit golfer wrote:
Thu Apr 04, 2019 6:19 pm
If you need the money short term, it should not be in a retirement account and should not be in equities.

Tax efficient placement is great for long term savings, not so relevant for cash needed in the near term.

There's nothing wrong with keeping some money in cash or bonds in a taxable account. Personally if you'll be using it in the next five years, I'd just put it in Vanguard Prime Money Market or a high yield online savings account.

Whether this means viewing it as a separate bucket or just a cash/bond portion in a taxable account that is part of your overall portfolio is up to you.

Some more knowledgable posters will certainly chime in, but that's my opinion.
Besides high interest checking accounts (like ally or 2%+ interest checkings) and CDswhat are some good “cash equivalent” assets you can do easily? Like are there E*TRADE or TD Ameritrade cash accounts that are higher than the high interest checking 2%?
There's no "cash equivalent" or nearly risk-free investment paying much more than 2.5% right now. That's why I just use Vanguard Prime Money Market and call it a day.

hornet1
Posts: 30
Joined: Sun Oct 21, 2018 11:01 am

Re: Multiple Goals and Bond Allocation to Ret Account

Post by hornet1 » Fri Apr 05, 2019 6:06 pm

Triple digit golfer wrote:
Fri Apr 05, 2019 12:10 pm
hornet1 wrote:
Fri Apr 05, 2019 9:49 am
Triple digit golfer wrote:
Thu Apr 04, 2019 6:19 pm
If you need the money short term, it should not be in a retirement account and should not be in equities.

Tax efficient placement is great for long term savings, not so relevant for cash needed in the near term.

There's nothing wrong with keeping some money in cash or bonds in a taxable account. Personally if you'll be using it in the next five years, I'd just put it in Vanguard Prime Money Market or a high yield online savings account.

Whether this means viewing it as a separate bucket or just a cash/bond portion in a taxable account that is part of your overall portfolio is up to you.

Some more knowledgable posters will certainly chime in, but that's my opinion.
Besides high interest checking accounts (like ally or 2%+ interest checkings) and CDswhat are some good “cash equivalent” assets you can do easily? Like are there E*TRADE or TD Ameritrade cash accounts that are higher than the high interest checking 2%?
There's no "cash equivalent" or nearly risk-free investment paying much more than 2.5% right now. That's why I just use Vanguard Prime Money Market and call it a day.
Triple you certainly know your stuff man I appreciate that. Everywher eI look VMMXX looks like best and largest fund with stabile 2-2.5% yield.

I just use TD AMeritrade so I have to pay $49.99 fee for mutual funds like VMMXX. Do you know what the difference between prime money market fund and money market-taxable is?
Last edited by hornet1 on Fri Apr 05, 2019 6:25 pm, edited 1 time in total.


Triple digit golfer
Posts: 3464
Joined: Mon May 18, 2009 5:57 pm

Re: Multiple Goals and Bond Allocation to Ret Account

Post by Triple digit golfer » Fri Apr 05, 2019 6:24 pm

hornet1 wrote:
Fri Apr 05, 2019 6:06 pm
Triple digit golfer wrote:
Fri Apr 05, 2019 12:10 pm
hornet1 wrote:
Fri Apr 05, 2019 9:49 am
Triple digit golfer wrote:
Thu Apr 04, 2019 6:19 pm
If you need the money short term, it should not be in a retirement account and should not be in equities.

Tax efficient placement is great for long term savings, not so relevant for cash needed in the near term.

There's nothing wrong with keeping some money in cash or bonds in a taxable account. Personally if you'll be using it in the next five years, I'd just put it in Vanguard Prime Money Market or a high yield online savings account.

Whether this means viewing it as a separate bucket or just a cash/bond portion in a taxable account that is part of your overall portfolio is up to you.

Some more knowledgable posters will certainly chime in, but that's my opinion.
Besides high interest checking accounts (like ally or 2%+ interest checkings) and CDswhat are some good “cash equivalent” assets you can do easily? Like are there E*TRADE or TD Ameritrade cash accounts that are higher than the high interest checking 2%?
There's no "cash equivalent" or nearly risk-free investment paying much more than 2.5% right now. That's why I just use Vanguard Prime Money Market and call it a day.
Triple you certainly know your stuff man I appreciate that. Everywher eI look VMMXX looks like best and largest fund with stabile 2-2.5% yield.

I just use TD AMeritrade so I have to pay $7 for the VMMXX. Do you know what the difference between prime money market fund and money market-taxable is?
I'm not sure I understand your question. VMMXX is Prime Money Market. Are you asking the difference between a bank money market account and VMMXX? VMMXX is not FDIC insured like a money market account. Income from both is taxable at ordinary income rates when held in a taxable account. What a money market fund is could best be explained by somebody else. I don't fully understand it myself. I just know VMMXX is popular, offers a good yield, and is considered safe by Vanguard. Good enough for me.

hornet1
Posts: 30
Joined: Sun Oct 21, 2018 11:01 am

Re: Multiple Goals and Bond Allocation to Ret Account

Post by hornet1 » Fri Apr 05, 2019 6:28 pm

Triple digit golfer wrote:
Fri Apr 05, 2019 6:24 pm
hornet1 wrote:
Fri Apr 05, 2019 6:06 pm
Triple digit golfer wrote:
Fri Apr 05, 2019 12:10 pm
hornet1 wrote:
Fri Apr 05, 2019 9:49 am
Triple digit golfer wrote:
Thu Apr 04, 2019 6:19 pm
If you need the money short term, it should not be in a retirement account and should not be in equities.

Tax efficient placement is great for long term savings, not so relevant for cash needed in the near term.

There's nothing wrong with keeping some money in cash or bonds in a taxable account. Personally if you'll be using it in the next five years, I'd just put it in Vanguard Prime Money Market or a high yield online savings account.

Whether this means viewing it as a separate bucket or just a cash/bond portion in a taxable account that is part of your overall portfolio is up to you.

Some more knowledgable posters will certainly chime in, but that's my opinion.
Besides high interest checking accounts (like ally or 2%+ interest checkings) and CDswhat are some good “cash equivalent” assets you can do easily? Like are there E*TRADE or TD Ameritrade cash accounts that are higher than the high interest checking 2%?
There's no "cash equivalent" or nearly risk-free investment paying much more than 2.5% right now. That's why I just use Vanguard Prime Money Market and call it a day.
Triple you certainly know your stuff man I appreciate that. Everywher eI look VMMXX looks like best and largest fund with stabile 2-2.5% yield.

I just use TD AMeritrade so I have to pay $7 for the VMMXX. Do you know what the difference between prime money market fund and money market-taxable is?
I'm not sure I understand your question. VMMXX is Prime Money Market. Are you asking the difference between a bank money market account and VMMXX? VMMXX is not FDIC insured like a money market account. Income from both is taxable at ordinary income rates when held in a taxable account. What a money market fund is could best be explained by somebody else. I don't fully understand it myself. I just know VMMXX is popular, offers a good yield, and is considered safe by Vanguard. Good enough for me.
Yeah that's the gist of it for question about money market funds.. It's just weird cuz some are called Prime Money Markets and some are called Taxable Money Markets just categorized different by my brokerage... if VMMXXs considered safe then that should be good i just wonder if i could lose money or the value could go down. but it seems like it has not in past. But I also heard tehy're tied to bonds some how.

I was wondering if are other similar funds that are like VMMXX by other companies too that could be commission free on TD ameritrade as well do you or anyone know?

Triple digit golfer
Posts: 3464
Joined: Mon May 18, 2009 5:57 pm

Re: Multiple Goals and Bond Allocation to Ret Account

Post by Triple digit golfer » Fri Apr 05, 2019 6:44 pm

hornet1 wrote:
Fri Apr 05, 2019 6:28 pm
Triple digit golfer wrote:
Fri Apr 05, 2019 6:24 pm
hornet1 wrote:
Fri Apr 05, 2019 6:06 pm
Triple digit golfer wrote:
Fri Apr 05, 2019 12:10 pm
hornet1 wrote:
Fri Apr 05, 2019 9:49 am


Besides high interest checking accounts (like ally or 2%+ interest checkings) and CDswhat are some good “cash equivalent” assets you can do easily? Like are there E*TRADE or TD Ameritrade cash accounts that are higher than the high interest checking 2%?
There's no "cash equivalent" or nearly risk-free investment paying much more than 2.5% right now. That's why I just use Vanguard Prime Money Market and call it a day.
Triple you certainly know your stuff man I appreciate that. Everywher eI look VMMXX looks like best and largest fund with stabile 2-2.5% yield.

I just use TD AMeritrade so I have to pay $7 for the VMMXX. Do you know what the difference between prime money market fund and money market-taxable is?
I'm not sure I understand your question. VMMXX is Prime Money Market. Are you asking the difference between a bank money market account and VMMXX? VMMXX is not FDIC insured like a money market account. Income from both is taxable at ordinary income rates when held in a taxable account. What a money market fund is could best be explained by somebody else. I don't fully understand it myself. I just know VMMXX is popular, offers a good yield, and is considered safe by Vanguard. Good enough for me.
Yeah that's the gist of it for question about money market funds.. It's just weird cuz some are called Prime Money Markets and some are called Taxable Money Markets just categorized different by my brokerage... if VMMXXs considered safe then that should be good i just wonder if i could lose money or the value could go down. but it seems like it has not in past. But I also heard tehy're tied to bonds some how.

I was wondering if are other similar funds that are like VMMXX by other companies too that could be commission free on TD ameritrade as well do you or anyone know?
It technically could lose money. One fund in the financial crisis lost 3% I believe, although not a Vanguard fund. I believe there are now some new protections in place.

I have no experience with TD Ameritrade so I can't speak to that.

majiaknight
Posts: 114
Joined: Tue Jan 26, 2016 2:55 pm

Re: Multiple Goals and Bond Allocation to Ret Account

Post by majiaknight » Fri Apr 05, 2019 7:15 pm

It depends on when you plan to buy the house: whether it is within 2 years or 5 years? For downpayment savings, I'd consider safety first so mainly high yield online savings, 1-3 year CDs, Muni and iBond.

https://www.mymoneyblog.com/best-intere ... -2019.html

hornet1
Posts: 30
Joined: Sun Oct 21, 2018 11:01 am

Re: Multiple Goals and Bond Allocation to Ret Account

Post by hornet1 » Sat Apr 06, 2019 11:45 am

Triple digit golfer wrote:
Fri Apr 05, 2019 6:44 pm
hornet1 wrote:
Fri Apr 05, 2019 6:28 pm
Triple digit golfer wrote:
Fri Apr 05, 2019 6:24 pm
hornet1 wrote:
Fri Apr 05, 2019 6:06 pm
Triple digit golfer wrote:
Fri Apr 05, 2019 12:10 pm


There's no "cash equivalent" or nearly risk-free investment paying much more than 2.5% right now. That's why I just use Vanguard Prime Money Market and call it a day.
Triple you certainly know your stuff man I appreciate that. Everywher eI look VMMXX looks like best and largest fund with stabile 2-2.5% yield.

I just use TD AMeritrade so I have to pay $7 for the VMMXX. Do you know what the difference between prime money market fund and money market-taxable is?
I'm not sure I understand your question. VMMXX is Prime Money Market. Are you asking the difference between a bank money market account and VMMXX? VMMXX is not FDIC insured like a money market account. Income from both is taxable at ordinary income rates when held in a taxable account. What a money market fund is could best be explained by somebody else. I don't fully understand it myself. I just know VMMXX is popular, offers a good yield, and is considered safe by Vanguard. Good enough for me.
Yeah that's the gist of it for question about money market funds.. It's just weird cuz some are called Prime Money Markets and some are called Taxable Money Markets just categorized different by my brokerage... if VMMXXs considered safe then that should be good i just wonder if i could lose money or the value could go down. but it seems like it has not in past. But I also heard tehy're tied to bonds some how.

I was wondering if are other similar funds that are like VMMXX by other companies too that could be commission free on TD ameritrade as well do you or anyone know?
It technically could lose money. One fund in the financial crisis lost 3% I believe, although not a Vanguard fund. I believe there are now some new protections in place.

I have no experience with TD Ameritrade so I can't speak to that.
gotcha thanks. I'll probably just hold the money in cash for now as the payout isn't that high at 2% and I have to pay lots of fees.

RetiredCSProf
Posts: 296
Joined: Tue Feb 28, 2017 4:59 pm

Re: Multiple Goals and Bond Allocation to Ret Account

Post by RetiredCSProf » Sun Apr 07, 2019 11:03 pm

I advise against holding your savings for a home in a bond fund if you are planning to purchase a home in the near term (1-3 years). I made that mistake in the mid-80's. Here's what happened:

I had been saving for 2 to 3 years in a Dreyfus bond fund when I saw my "dream house," which was $25K more than I thought I could afford. The interest rate on home loans was 7% for 30-year fixed. That was on a Friday. On Monday, interest rates jumped to 9%; the bond fund declined, effectively wiping out all dividends that I had accumulated. The double whammy of less savings and higher mortgage payments disrupted any chance of closing the gap on my dream house.

When interest rates go up; bonds go down.

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