Best bond fund for taxable account to allow more conservative AA

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Topic Author
TheDogFather
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Joined: Sun Jul 14, 2019 11:02 am

Best bond fund for taxable account to allow more conservative AA

Post by TheDogFather » Sun Jul 14, 2019 12:23 pm

First time poster ... but Boglehead by birth. 8-)

My question is about choosing the most appropriate bond fund for my taxable account given recent changes in my situation.

As as result of a recent very significant windfall (which is currently sitting in treasuries) I'm thinking of moving to a more balanced (or moderate) asset allocation (60/40) that would result in a sizable bond component in my taxable account. My current allocation (excluding the treasuries) is much more growth oriented at 80/20 looking across retirement and taxable, but the current taxable account allocation is 100% stock.

I plan to have 80% VBTLX/VTABX in my Rollover IRA and 401k accounts and retain 20% stock there to allow rebalancing. The stock component will be VTSAX/VTIAX (in a 70/30 ratio). For my taxable account I will have VTSAX/VTIAX and a bond component to get to the overall desired asset allocation. My thinking was to use VTEAX in the taxable account. To achieve the 60/40 allocation across retirement and non-retirement accounts I would have about $700k in taxable bonds.

I live in VA and in 2018 I had 24% Federal marginal rate and 5.75% state. I'm in my mid 50s and will probably retire at 60.

Thoughts on the approach and choice of bond fund for taxable?

For quick reference to the funds:
Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
Vanguard Total International Bond Index Fund Admiral Shares (VTABX)
Vanguard Tax-Exempt Bond Index Fund Admiral Shares (VTEAX)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
Last edited by TheDogFather on Sun Jul 14, 2019 4:20 pm, edited 5 times in total.

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welderwannabe
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Re: Best bond fund for taxable account to allow more conservative AA

Post by welderwannabe » Sun Jul 14, 2019 1:10 pm

With that low of a Federal rate municipals aren't worth it. For your fixed income:

100% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

or

100% Vanguard Intermediate-Term Treasury Fund Investor Shares (VFITX) (100% state tax free!)

There is also a nice balanced fund called Vanguard LifeStrategy Moderate Growth Fund (VSMGX). Its a 60/40 with a mix of domestic international equities and bonds. At your tax rate it would work just fine in taxable, and its a set-it and forget-it type fund.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Topic Author
TheDogFather
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Re: Best bond fund for taxable account to allow more conservative AA

Post by TheDogFather » Sun Jul 14, 2019 1:46 pm

I fixed an error in the tax rate. My marginal Federal rate was 24% in 2018. I also added the estimated value of bonds in the taxable account to get the 60/40 overall allocation.

If I avoid tax exempt bonds, a mix of VTSAX and VBTLX would give me a lower cost (0.05% vs 0.13%) than VSMGX, which would be worth a couple of $k savings.

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welderwannabe
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Re: Best bond fund for taxable account to allow more conservative AA

Post by welderwannabe » Sun Jul 14, 2019 5:00 pm

TheDogFather wrote:
Sun Jul 14, 2019 1:46 pm
I fixed an error in the tax rate. My marginal Federal rate was 24% in 2018. I also added the estimated value of bonds in the taxable account to get the 60/40 overall allocation.

If I avoid tax exempt bonds, a mix of VTSAX and VBTLX would give me a lower cost (0.05% vs 0.13%) than VSMGX, which would be worth a couple of $k savings.
24% doesnt change my recommendations a bit.

Agreed. You can save money by slicing and dicing yourself.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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Wiggums
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Re: Best bond fund for taxable account to allow more conservative AA

Post by Wiggums » Sun Jul 14, 2019 5:06 pm

I use the VBTLX fund. The intermediate fund that was suggested is also good.

100% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

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Watty
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Re: Best bond fund for taxable account to allow more conservative AA

Post by Watty » Sun Jul 14, 2019 5:07 pm

A few points that have not come up;

1) If you have a mortage you could pay it off.

2) You can also buy $10K a year per person in iBonds that will not be taxed until you cash them.
TheDogFather wrote:
Sun Jul 14, 2019 12:23 pm
....I would have about $700k in taxable bonds.

I live in VA and in 2018 I had 24% Federal marginal rate and 5.75% state. I'm in my mid 50s and will probably retire at 60.
A really important question is what your tax brackets will be in five years when you retire and if you might retire in a different state with lower taxes.

If they will not be high enough then to make muni bonds be worthwhile for the long term then you might want to reconsider using muni bond mutual funds now since you will have to redo your investments again when you retire. The problem is you might need to pay some capital gains taxes if you sell $700K in muni mutual funds then to buy normal bond mutual funds.

You should also look at you investments in dollar terms. $700K invested in taxable bond funds that are paying 2.5% would only generate $17,500 in taxable income. You would need to crunch the numbers but with a muni bond fund after the tax savings you might only net a couple of hundred dollars each year until you retire which might not be worth it for just a few years.

bluquark
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Re: Best bond fund for taxable account to allow more conservative AA

Post by bluquark » Sun Jul 14, 2019 5:13 pm

TheDogFather wrote:
Sun Jul 14, 2019 12:23 pm
I plan to have 80% VBTLX/VTABX in my Rollover IRA and 401k accounts and retain 20% stock there to allow rebalancing.
I don't think there is exists a scenario where this "allows" rebalancing in a way that you could not do with a 100% bond allocation in your tax-sheltered. You are planning to save taxes at rebalancing time but this is outweighed by the extra taxes you will pay until you rebalance. If your tax-sheltered is significantly smaller than your taxable then it should be very simple -- one or two bond funds.

(It may be OK if the stock portion is entirely in Roth, although I've never really bought the argument for stocks-in-Roth personally.)

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TheDogFather
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Re: Best bond fund for taxable account to allow more conservative AA

Post by TheDogFather » Sun Jul 14, 2019 5:32 pm

That's a good point ... 100% in bonds in retirement accounts should still give me plenty of flexibility to rebalance across the whole portfolio as the non retirement will be 3x the total of retirement accounts, especially as I continue to invest.

And lowering the taxable bond portion would make VBTLX an easier choice.

Yes, I have paid off our mortgage and have no debt.

I'm still struggling with whether 60/40 is too conservative given the current bond returns, but that's a whole other discussion. :D

bluquark
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Re: Best bond fund for taxable account to allow more conservative AA

Post by bluquark » Sun Jul 14, 2019 6:10 pm

TheDogFather wrote:
Sun Jul 14, 2019 5:32 pm
I'm still struggling with whether 60/40 is too conservative given the current bond returns, but that's a whole other discussion. :D
You are close to retirement. It makes perfect sense IMO.

Personally I fear the effect of low interest rates on stocks because the chase for yield drives P/E ratios upwards. This makes stock prices more fragile. That is a good reason to have a healthy bond allocation in a low rate environment.

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