Where to Put "Extra" Taxable Savings

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NoVa Lurker
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Where to Put "Extra" Taxable Savings

Post by NoVa Lurker » Tue Oct 15, 2019 11:25 am

Basic question: What would you do with a bunch of taxable savings, assuming all your tax-advantaged buckets are full up, you have no need for additional retirement savings, and you have no foreseeable big expenses for which to save?

Background: After many years on Bogleheads, my wife and I are in a good position - in our early 40s with very stable jobs (no desire to retire until at least 60, barring any completely unforeseen health issues), a nice home with mortgage already paid off, retirement savings well on-track (with 4 total pensions and 15 years of maxed-out 401k's etc.), and 529s probably over-funded for 3 kids at this point. We are gradually exiting the stage of expensive child care and entering the stage of expensive kids' activities.

My wife is back working full-time, happily, and we've been saving about $6000/month over our incomes, after funding all of our savings buckets. We never really had a plan of what to do with this "extra" money, but it keeps building up. It's now over $90,000 and will just keep going. We are not particularly tight with expenses (don't ask what we spend on travel soccer for the older two boys), but overall I think we've done a decent job avoiding too much "lifestyle creep."

We put a lot of thought into every other element of our financial lives, and we did see this coming, but we always figured that some new expenses might pop up (health care, a desire for some big expenditure, who knows?) But right now, there's just not much on the horizon. We could do a major remodel, buy a second home, etc., but we honestly don't have the time/energy/desire for any of that.

These taxable funds currently sit in an online Ally savings account earning 1.8%. That was okay when this was purely an emergency fund, but we are now getting well beyond any feasible emergency fund - especially considering my wife and I both work in the public sector, where we would see any job loss coming from a mile away, most likely with a generous severance.

With all that said, what should we do? Should we take risks with this money, investing in S&P 500-type funds? Is it best to move a lot of this to money market funds? Where should we look first?

Thanks! It's so helpful to have an online forum, filled with friendly, intelligent folks who we trust to help us with these types of questions.

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bertilak
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Re: Where to Put "Extra" Taxable Savings

Post by bertilak » Tue Oct 15, 2019 11:29 am

NoVa Lurker wrote:
Tue Oct 15, 2019 11:25 am
With all that said, what should we do? Should we take risks with this money, investing in S&P 500-type funds? Is it best to move a lot of this to money market funds? Where should we look first?
You don't need to go to either of those extreems. Invest in a moderate portfolio, somewhere between 40/60 and 60/40. Look at that money as a tool that you might want to use someday. (charity?) Let it grow to become an ever more potent tool. It's nice to have a legacy that can be put to good use.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

KlangFool
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Re: Where to Put "Extra" Taxable Savings

Post by KlangFool » Tue Oct 15, 2019 11:35 am

OP,

A) Invest as per your AA.

B) 100% stock in your taxable account for maximum tax efficiency. Adjust your investment in your tax-advantaged account to maintain your AA. Aka, buy more fixed income in your tax-advantaged accounts.

KlangFool

fuddbogle
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Re: Where to Put "Extra" Taxable Savings

Post by fuddbogle » Tue Oct 15, 2019 11:45 am

I don't have a good international fund in my tax advantage accounts so I'm international free in those.

I'm slowly building up VXUS in my taxable account.

Austintatious
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Re: Where to Put "Extra" Taxable Savings

Post by Austintatious » Tue Oct 15, 2019 12:11 pm

What about maxing out on EE bonds and/or I bonds? Considering your current age, maxing out on EE bonds for a couple of years would provide a very safe investment with a guaranteed 3.5% rate (as long as allowed to reach maturity in 20 years) that could start paying off just about your retirement time.

Then, there's I bonds, which would provide a nice little hedge on inflation. Just with that cash on hand, you could max out on both kinds of bonds for 2019 and then, in a couple of months, for 2020.Since you've been on the forum for so long, I assume that you've read Mel Lindauer's piece on creating your own annuity with EE bonds". You might decide to keep investing in EE bonds in order to have your own, annuity-like and very dependable income stream to start paying off around your early 60's.

Topic Author
NoVa Lurker
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Re: Where to Put "Extra" Taxable Savings

Post by NoVa Lurker » Tue Oct 15, 2019 12:22 pm

Thanks very much for the answers so far.

Investing these funds in a way that mirrors our AA makes perfect sense; it had honestly not occurred to me. Along the lines of what bertilak suggests, maybe we can start with roughly our AA, but then make it just a bit more simple/safe.

We have some I-bonds, but I never liked the Treasury Direct interface, and with the relatively low maximum annual buys, we hadn't considered EE bonds or I bonds in awhile. The trade-off of added complexity for a small benefit, in the scheme of things, made it feel not worthwhile. I will take another look myself, but I appreciate any further views on these, since I am way behind on looking into them.

soccerrules
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Re: Where to Put "Extra" Taxable Savings

Post by soccerrules » Tue Oct 15, 2019 12:29 pm

here are a few thoughts to chew on, if I were you.

Keep EF as is.
Create a budget for discretionary spending ( trip,splurges) if you are truly on a solid path to FI then it is OK to enjoy life now.
I would invest the remaining according to your AA.

One idea might be to set aside some money for the larger out of pocket expenses, a few you could cash flow with your $6K a month "extra" savings. (wow that's great!)
A few expenses that will come up with kids: Braces, Wisdom Teeth, Cars (for them or replace yours you hand down), International travel (for school or soccer)

Looks like you guys have a high income and a low expense level; good combo. :beer
Don't let your outflow exceed your income or your upkeep will be your downfall.

teamDE
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Re: Where to Put "Extra" Taxable Savings

Post by teamDE » Tue Oct 15, 2019 12:41 pm

To me, all money is retirement money. I invest it to our desired AA. The sooner we hit the number, the sooner we retire.

Thegame14
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Re: Where to Put "Extra" Taxable Savings

Post by Thegame14 » Tue Oct 15, 2019 12:46 pm

you said you don't have "time" for a second home, so if time is an issue, id put that money towards doing things to give you more time, having someone mow the lawn every other week, a cleaning person once a month, outsourcing chores that you don't enjoy.

On the opposite end, upgrading things you do enjoy, get the new IPhone 11 Pro max, if you enjoy taking pictures/using your phone, you said your boys play soccer, hire a private coach to help them improve.

So overall, spend money to have someone else do the things you don't enjoy, spend more money on the things you do enjoy.

KlangFool
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Re: Where to Put "Extra" Taxable Savings

Post by KlangFool » Tue Oct 15, 2019 12:53 pm

NoVa Lurker wrote:
Tue Oct 15, 2019 12:22 pm
Thanks very much for the answers so far.

Investing these funds in a way that mirrors our AA makes perfect sense; it had honestly not occurred to me. Along the lines of what bertilak suggests, maybe we can start with roughly our AA, but then make it just a bit more simple/safe.

We have some I-bonds, but I never liked the Treasury Direct interface, and with the relatively low maximum annual buys, we hadn't considered EE bonds or I bonds in awhile. The trade-off of added complexity for a small benefit, in the scheme of things, made it feel not worthwhile. I will take another look myself, but I appreciate any further views on these, since I am way behind on looking into them.
NoVa Lurker,

<<we can start with roughly our AA, but then make it just a bit more simple/safe.>>

That will costs you a lot of taxes every year. And, it is neither simple or safe.

A) 100% stock gives you about a 2% dividend/distribution at a long-term capital gain tax rate of 0%/15%

B) Any bond generates interest that will be taxed at your marginal tax rate.

C) It is not safer anyhow. You have one portfolio and money is fungible.

If the stock market crashes and you need money, you could sell stock at you taxable account and exchange bond with stock in your tax-advantaged account.

A) The net effect is you sell bonds from your portfolio.

B) On top of that, you get tax losses to write off your income.

D) I have 500K in my taxable account. I had made that mistake before. It cost me a few thousand in taxes every year until I switch to 100% stock in my taxable account.

KlangFool

inbox788
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Re: Where to Put "Extra" Taxable Savings

Post by inbox788 » Tue Oct 15, 2019 1:00 pm

Don't assume. Verify that you've truly exhausted and/or eliminated all tax advantaged space options. Roth (?backdoor)? HSA? I bonds? EE bonds? Are the 529 plans individual or custodial? Are you really overfunded 3 x 4 year private universities (very expensive and rising faster than inflation http://www.finaid.org/savings/tuition-inflation.phtml ) starting 5 or 10 years from now? Any plans for graduate or professional school for the kids?

I'm looking into UTMA as next step after 529, with potentially more flexibility in uses. So far, I haven't found a comprehensive thread that answers my questions, so I'm piecing together answers from here and there. I think there are tax savings, especially from appreciated stock, but limited by kiddie tax and other complications.
viewtopic.php?f=1&t=292096&p=4784582#p4784589

Before you set sail on taxable account, consider tax efficient placement decision. What percentage of retirement will come from pensions? What's the 401k AA? That could help you decide what to invest in taxable to round out your overall AA.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

What is your desired AA? Calculate your current AA (counting all your cash with bonds). This tells you whether you should be adding more stocks or bonds. For tax efficiency, you may benefit from keeping more bonds in your 401k and more stocks in taxable. I went the other way buying tax-exempt bonds in taxable, but I'm anticipating using the funds sooner than later and wanted to reduce my tax liability. I'm still uncertain if that's optimal, and I'm not better off keeping stocks and paying capital gains when needed to avoid higher income taxes later.

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goodenyou
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Re: Where to Put "Extra" Taxable Savings

Post by goodenyou » Tue Oct 15, 2019 1:01 pm

OP:
What is the percentage breakdown of taxable assets to tax-privileged assets in your overall portfolio?
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

Topic Author
NoVa Lurker
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Re: Where to Put "Extra" Taxable Savings

Post by NoVa Lurker » Tue Oct 15, 2019 1:13 pm

Lots of good further thoughts here. Thanks.

Klangfool, I will have to think a lot harder about what you are saying. I haven't really thought of money being fungible between taxable and tax-advantaged savings, but that's probably because we just have never had taxable savings except (1) true emergency fund money and (2) big chunks that were ear-marked for home downpayment and cars. Fwiw, my wife already thinks our AA is too aggressive. We are heavily shifted to stocks because we'll have roughly 70% of our income paid as pensions if we both work until 62. And we spend less than 50% of our income right now, not counting all the various savings buckets. We will also both be fully eligible for social security. So we don't really "need" the 401(k) money, if we work to 62. Ideally, I'd like to be in a position to retire a bit earlier, but not any time soon.
Thegame14 wrote:
Tue Oct 15, 2019 12:46 pm
you said you don't have "time" for a second home, so if time is an issue, id put that money towards doing things to give you more time, having someone mow the lawn every other week, a cleaning person once a month, outsourcing chores that you don't enjoy.

On the opposite end, upgrading things you do enjoy, get the new IPhone 11 Pro max, if you enjoy taking pictures/using your phone, you said your boys play soccer, hire a private coach to help them improve.

So overall, spend money to have someone else do the things you don't enjoy, spend more money on the things you do enjoy.
This is exactly what my wife and I have been talking about every night for the past two months, with our remaining energy after the kids go to sleep! It is hard for us to change our mindset.

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NoVa Lurker
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Re: Where to Put "Extra" Taxable Savings

Post by NoVa Lurker » Tue Oct 15, 2019 1:20 pm

goodenyou wrote:
Tue Oct 15, 2019 1:01 pm
OP:
What is the percentage breakdown of taxable assets to tax-privileged assets in your overall portfolio?
If you count our home and pensions along with the various tax-advantaged funds, then taxable assets are only about 3-4% of the overall portfolio. I appreciate the question -- I hadn't ever thought that through.

What does that mean, from your perspective?

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goodenyou
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Re: Where to Put "Extra" Taxable Savings

Post by goodenyou » Tue Oct 15, 2019 1:54 pm

NoVa Lurker wrote:
Tue Oct 15, 2019 1:20 pm
goodenyou wrote:
Tue Oct 15, 2019 1:01 pm
OP:
What is the percentage breakdown of taxable assets to tax-privileged assets in your overall portfolio?
If you count our home and pensions along with the various tax-advantaged funds, then taxable assets are only about 3-4% of the overall portfolio. I appreciate the question -- I hadn't ever thought that through.

What does that mean, from your perspective?
It is important to look at your entire portfolio when choosing your asset classes in your AA. If you had a small tax-privileged percentage in relation to your taxable, then you may end up filling your entire tax-privileged space with fixed income with space left over in your taxable space for more fixed income. In that case, you "couldn't" be 100% stocks in taxable without disrupting your AA. Personally, I don't consider home equity in calculating my AA. As far as considering pensions, I think it's fair to include them as fixed income and reduce the need for that allocation accordingly.
"Ignorance more frequently begets confidence than does knowledge" | Do you know how to make a rain dance work? Dance until it rains.

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NoVa Lurker
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Re: Where to Put "Extra" Taxable Savings

Post by NoVa Lurker » Tue Oct 15, 2019 2:28 pm

goodenyou wrote:
Tue Oct 15, 2019 1:54 pm
NoVa Lurker wrote:
Tue Oct 15, 2019 1:20 pm
goodenyou wrote:
Tue Oct 15, 2019 1:01 pm
OP:
What is the percentage breakdown of taxable assets to tax-privileged assets in your overall portfolio?
If you count our home and pensions along with the various tax-advantaged funds, then taxable assets are only about 3-4% of the overall portfolio. I appreciate the question -- I hadn't ever thought that through.

What does that mean, from your perspective?
It is important to look at your entire portfolio when choosing your asset classes in your AA. If you had a small tax-privileged percentage in relation to your taxable, then you may end up filling your entire tax-privileged space with fixed income with space left over in your taxable space for more fixed income. In that case, you "couldn't" be 100% stocks in taxable without disrupting your AA. Personally, I don't consider home equity in calculating my AA. As far as considering pensions, I think it's fair to include them as fixed income and reduce the need for that allocation accordingly.
Got it. I agree with everything you say about AA, although we think of it more as the pensions will be future income that reduce our future income needs. So we calculate the AA excluding (but being aware of) our home equity and pensions.

On that basis, taxable is about 15% of our overall "AA" portfolio, but that will likely increase over time, to be 20-25% within a few years, unless we change our spending approach. Still plenty of room for stocks in the taxable for a long time!

digit8
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Re: Where to Put "Extra" Taxable Savings

Post by digit8 » Wed Oct 16, 2019 9:14 am

teamDE wrote:
Tue Oct 15, 2019 12:41 pm
To me, all money is retirement money. I invest it to our desired AA. The sooner we hit the number, the sooner we retire.
+1, with caveats. Well, being cynical, I always think of all money as emergency fund money. In either case, there is some value in fiddling with location. Opening, say, a new taxable international equity fund makes more sense then a new taxable bond fund in most cases. But yes, always invest with the total picture in mind, and to me there is no value added in cordoning off this or that amount as being somehow special and cut off from the rest.
"You can't latte yourself to bankruptcy. The bladder won't allow it." | -Katherine Porter

xiangg_li
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Re: Where to Put "Extra" Taxable Savings

Post by xiangg_li » Wed Oct 16, 2019 6:40 pm

KlangFool wrote:
Tue Oct 15, 2019 12:53 pm
NoVa Lurker wrote:
Tue Oct 15, 2019 12:22 pm
Thanks very much for the answers so far.

Investing these funds in a way that mirrors our AA makes perfect sense; it had honestly not occurred to me. Along the lines of what bertilak suggests, maybe we can start with roughly our AA, but then make it just a bit more simple/safe.

We have some I-bonds, but I never liked the Treasury Direct interface, and with the relatively low maximum annual buys, we hadn't considered EE bonds or I bonds in awhile. The trade-off of added complexity for a small benefit, in the scheme of things, made it feel not worthwhile. I will take another look myself, but I appreciate any further views on these, since I am way behind on looking into them.
NoVa Lurker,

<<we can start with roughly our AA, but then make it just a bit more simple/safe.>>

That will costs you a lot of taxes every year. And, it is neither simple or safe.

A) 100% stock gives you about a 2% dividend/distribution at a long-term capital gain tax rate of 0%/15%

B) Any bond generates interest that will be taxed at your marginal tax rate.

C) It is not safer anyhow. You have one portfolio and money is fungible.

If the stock market crashes and you need money, you could sell stock at you taxable account and exchange bond with stock in your tax-advantaged account.

If you are fully loaded bonds in the tax-advantage account, how to buy more bonds while selling stocks in the taxable account?

A) The net effect is you sell bonds from your portfolio.

B) On top of that, you get tax losses to write off your income.

D) I have 500K in my taxable account. I had made that mistake before. It cost me a few thousand in taxes every year until I switch to 100% stock in my taxable account.

KlangFool

KlangFool
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Re: Where to Put "Extra" Taxable Savings

Post by KlangFool » Wed Oct 16, 2019 6:57 pm

xiangg_li wrote:
Wed Oct 16, 2019 6:40 pm


If you are fully loaded bonds in the tax-advantage account, how to buy more bonds while selling stocks in the taxable account?
xiangg_li,

Let's keep it simple and assume the portfolio is 100K, AA = 60/40.

60K stock in the taxable account and 40K in the tax-advantaged account.

The stock market crashes 50% and the bond stays the same. You have 30K stock and 40K bond now. Your overall portfolio is 30K + 40K = 70K now. To maintain the AA of 60/40, your bond needs to be 40% of 70K = 28K. Your stock needs to be 60% of 70K = 42K.

Before rebalancing.

A) Taxable = 30K stock.

B) Tax-advantaged = 40K bond.

You sell 12K of bond in the tax-advantaged account to buy stock.

After rebalancing.

A) Taxable = 30K stock.

B) Tax-advantaged = 28K bond and 12K stock.

KlangFool

P.S.: In a stock market crash, if you maintained a fixed AA, you will have too much bond.

xiangg_li
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Re: Where to Put "Extra" Taxable Savings

Post by xiangg_li » Wed Oct 16, 2019 10:46 pm

@KlangFool,

Thanks for your explanation!

gr7070
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Re: Where to Put "Extra" Taxable Savings

Post by gr7070 » Wed Oct 16, 2019 11:59 pm

Give a bunch to some very worthy charities.

Topic Author
NoVa Lurker
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Re: Where to Put "Extra" Taxable Savings

Post by NoVa Lurker » Thu Oct 17, 2019 12:06 pm

gr7070 wrote:
Wed Oct 16, 2019 11:59 pm
Give a bunch to some very worthy charities.
Yes, we have started doing this more, as well. It felt a bit shameful to realize that we both gave more to worthy causes before we got married and had kids, when our incomes were lower. Since we discuss pretty much all significant discretionary spending, and we are always so tired at the end of the night, it's easier just to not give and not bring it up for discussion. "Charitable giving" fell behind "mulch" as an evening conversation topic. But we're starting to do better now.

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bligh
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Re: Where to Put "Extra" Taxable Savings

Post by bligh » Thu Oct 17, 2019 12:43 pm

NoVa Lurker wrote:
Tue Oct 15, 2019 12:22 pm
We have some I-bonds, but I never liked the Treasury Direct interface, and with the relatively low maximum annual buys, we hadn't considered EE bonds or I bonds in awhile. The trade-off of added complexity for a small benefit, in the scheme of things, made it feel not worthwhile. I will take another look myself, but I appreciate any further views on these, since I am way behind on looking into them.
I agree with the Treasury direct interface not being very user friendly. But I only really interact with it like twice a year or so. Small price to pay for the benefit I get.

Also do not discount the relatively low maximum annual amounts. Your wife and you can each put away $10K in EE Bonds and $10K in I-Bonds. That is $40k/year, or well over half of the excess savings you are trying to put to work. Just be sure that you wont need to touch the EE Bonds for the next 20 years. After maxing out the EEBonds and I Bonds, I would put the rest in my taxable brokerage account at 100% stocks.

Just keep in mind the advice earlier in the thread about monitoring your overall portfolio asset allocation. You don't want it to get too out of whack.

gr7070
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Re: Where to Put "Extra" Taxable Savings

Post by gr7070 » Thu Oct 17, 2019 1:11 pm

NoVa Lurker wrote:
Thu Oct 17, 2019 12:06 pm
Yes, we have started doing this [giving] more, as well.
Y'all are awesome.

jvini
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Re: Where to Put "Extra" Taxable Savings

Post by jvini » Thu Oct 17, 2019 1:31 pm

KlangFool wrote:
Tue Oct 15, 2019 11:35 am
OP,

A) Invest as per your AA.

B) 100% stock in your taxable account for maximum tax efficiency. Adjust your investment in your tax-advantaged account to maintain your AA. Aka, buy more fixed income in your tax-advantaged accounts.

KlangFool
Totally agree. If this money is for your retirement, put it in to your brokerage account and rebalance your tax advantaged accounts so it becomes a consistent part of your current asset allocation.

lazerhead
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Re: Where to Put "Extra" Taxable Savings

Post by lazerhead » Thu Oct 17, 2019 2:01 pm

we are always so tired at the end of the night, it's easier just to not give and not bring it up for discussion
Here’s a process I follow (recommended elsewhere) that might help split up the saving for charity decision from the which charities decision. This split makes me a lot happier with the process.


1. Setup a donor advised fund (I used Vanguard Charitable)
2. Decide how much to save a year
3. Schedule weekly withdrawals to a different bank account labeled Charitable Giving (I use Capital One for this because they make scheduled saving and multiple accounts so easy)
4. In December, send the full balance of the bank account to your donor advised fund
5. Once or twice a year, setup “grants” from your donor advised fund to charities you like (could also schedule these to be automatic)


You seem very disciplined about saving so perhaps following the same practices with charity would make it easier. I also appreciate this approach because it provides a little more emergency fund safety (although I have enough, so this is somewhat irrational) through the year if something went drastically wrong. It also makes it easier for me to respond to some humanitarian crisis, since I have established a balance in my fund.

SovereignInvestor
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Re: Where to Put "Extra" Taxable Savings

Post by SovereignInvestor » Thu Oct 17, 2019 4:44 pm

I buy ultra short term investment grade bond ETFs. Tickers are ICSH and ULST. Yields are in the 2.3% to 2.4% range.

Essentially no duration risk since they're short term and it's all IG paper which has tiny default rate over such a short period. 50bps or so higher than most money markets..worth it to me.

To go totally risk free BIL invests only in T Bills. 1.7% yield but it's exempt from state income tax.

djeayzonne
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Re: Where to Put "Extra" Taxable Savings

Post by djeayzonne » Thu Oct 17, 2019 4:59 pm

bligh wrote:
Thu Oct 17, 2019 12:43 pm
NoVa Lurker wrote:
Tue Oct 15, 2019 12:22 pm
We have some I-bonds, but I never liked the Treasury Direct interface, and with the relatively low maximum annual buys, we hadn't considered EE bonds or I bonds in awhile. The trade-off of added complexity for a small benefit, in the scheme of things, made it feel not worthwhile. I will take another look myself, but I appreciate any further views on these, since I am way behind on looking into them.
I agree with the Treasury direct interface not being very user friendly. But I only really interact with it like twice a year or so. Small price to pay for the benefit I get.

Also do not discount the relatively low maximum annual amounts. Your wife and you can each put away $10K in EE Bonds and $10K in I-Bonds. That is $40k/year, or well over half of the excess savings you are trying to put to work. Just be sure that you wont need to touch the EE Bonds for the next 20 years. After maxing out the EEBonds and I Bonds, I would put the rest in my taxable brokerage account at 100% stocks.

Just keep in mind the advice earlier in the thread about monitoring your overall portfolio asset allocation. You don't want it to get too out of whack.
As someone who just recently started a taxable account, I would really like to know know more about this? Why would buying these bonds be better than just throwing as much money into taxable as possible to be invested 100% in equities???

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bligh
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Re: Where to Put "Extra" Taxable Savings

Post by bligh » Tue Oct 22, 2019 12:36 pm

djeayzonne wrote:
Thu Oct 17, 2019 4:59 pm
As someone who just recently started a taxable account, I would really like to know know more about this? Why would buying these bonds be better than just throwing as much money into taxable as possible to be invested 100% in equities???
You cannot really substitute one of these for the other. They are very different forms of investments.

One (EE & I Bonds) are essentially what one would consider Risk Free assets. Stocks are not. If you want to and are able to take on the risks (and unknown returns) associated with going 100% Stocks, go for it. One gives you as close to a guaranteed return and safety of principal as you can get. The other gives you no such thing, but, historically has outperformed the safer investments.

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