Saving for something 20 years from now

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Freshdo
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Saving for something 20 years from now

Post by Freshdo » Sat Nov 03, 2018 11:58 pm

Hey guys! I'm planning to put 800 monthly contributions to save for a payment about 20 years from now.

At first I heard that putting monthly contributions in a Vanguard target date fund 2040 taxable account would be a good idea. However after some reading around this seems very tax inefficient due to the bonds being in a taxable account.

Would it be better to invest fully only in the VTSAX Total Stock and VTIAX International? Basically everything in the target date but the bonds since they are taxed at a marginal rate yearly and re-balancing of the target date funds also creates tax inefficiencies. I know it's a little more risky, but it's a lot more tax efficient than having more and more money going into bonds and being taxed at a larger rate.

This is not for retirement. I will continue to funnel money into 401k and other tax deferred accounts separately, but need to have cash ready about 20 years from now.

Thoughts?

Thanks

Edit:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX)
Last edited by Freshdo on Wed Nov 07, 2018 5:20 pm, edited 4 times in total.

ExitStageLeft
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Re: Saving for something 20 years from now

Post by ExitStageLeft » Sun Nov 04, 2018 9:32 am

Welcome to the forum!

You're right that a target date fund, or any balanced fund for that matter, is not the most tax efficient fund for a taxable account. There are ways to mitigate those taxes, but there is no free lunch. The options I see for you are:
  1. Acknowledge that it's not efficient but go with the 2040 fund anyhow due to its simplicity.
  2. Manage a three-fund or four-fund portfolio using a I-bonds and/or a tax-exempt muni bond fund. After tax return will probably be lower than for #1.
  3. Manage a three-fund or four-fund portfolio using a total bond fund. Returns will be the same as for #1 but you will have some control to make use of tax loss harvesting.
  4. Just treat it as part of your overall portfolio, adjusting your allocation as needed to accommodate the 20-year target. Keep bonds in tax-deferred and stocks in taxable.
  5. Have it be 100% stocks. Increased risk but reward should be greater if you can live with the risk.

3funder
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Re: Saving for something 20 years from now

Post by 3funder » Sun Nov 04, 2018 10:02 am

ExitStageLeft wrote:
Sun Nov 04, 2018 9:32 am
Welcome to the forum!

You're right that a target date fund, or any balanced fund for that matter, is not the most tax efficient fund for a taxable account. There are ways to mitigate those taxes, but there is no free lunch. The options I see for you are:
  1. Acknowledge that it's not efficient but go with the 2040 fund anyhow due to its simplicity.
  2. Manage a three-fund or four-fund portfolio using a I-bonds and/or a tax-exempt muni bond fund. After tax return will probably be lower than for #1.
  3. Manage a three-fund or four-fund portfolio using a total bond fund. Returns will be the same as for #1 but you will have some control to make use of tax loss harvesting.
  4. Just treat it as part of your overall portfolio, adjusting your allocation as needed to accommodate the 20-year target. Keep bonds in tax-deferred and stocks in taxable.
  5. Have it be 100% stocks. Increased risk but reward should be greater if you can live with the risk.
I recommended option 1, as it's quite simple. There might be more tax-efficient options, but by no means is this tax-inefficient.

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Sun Nov 04, 2018 10:47 am

3funder wrote:
Sun Nov 04, 2018 10:02 am
ExitStageLeft wrote:
Sun Nov 04, 2018 9:32 am
Welcome to the forum!

You're right that a target date fund, or any balanced fund for that matter, is not the most tax efficient fund for a taxable account. There are ways to mitigate those taxes, but there is no free lunch. The options I see for you are:
  1. Acknowledge that it's not efficient but go with the 2040 fund anyhow due to its simplicity.
  2. Manage a three-fund or four-fund portfolio using a I-bonds and/or a tax-exempt muni bond fund. After tax return will probably be lower than for #1.
  3. Manage a three-fund or four-fund portfolio using a total bond fund. Returns will be the same as for #1 but you will have some control to make use of tax loss harvesting.
  4. Just treat it as part of your overall portfolio, adjusting your allocation as needed to accommodate the 20-year target. Keep bonds in tax-deferred and stocks in taxable.
  5. Have it be 100% stocks. Increased risk but reward should be greater if you can live with the risk.
I recommended option 1, as it's quite simple. There might be more tax-efficient options, but by no means is this tax-inefficient.
Great to hear that it isn't that bad of an option. After doing my research people talk about the best way to invest to gain an extra .2% or so but simplicity is underrated imo.

I might just stick to the 2040 fund to keep it simple and not have to worry about it. 100% stocks in a taxable account sounds like a lot of risk that I can't deal with mentally/emotionally.

retiredjg
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Re: Saving for something 20 years from now

Post by retiredjg » Sun Nov 04, 2018 3:20 pm

It is not really possible to answer this question without knowing if you are in a low or high tax bracket and how that is likely to change over the 20 years.

If you are in a high tax bracket, using the 2040 fund is going to cause a tax drag for 20 years. And it will increase as the fund increases its bond allocation. There is no point in that because there are other options.

1) Using the Vanguard Tax-Managed Balanced fund. If the 50/50 stock to bond ratio does not suit you just add on a stock fund...an international stock fund if you want foreign stocks (because the Tax-Managed Balanced fund does not contain any).

2) Use Total Stock, Total International, and a tax-exempt bond fund. Rebalancing is not difficult. If they numbers get out of kilter, just change your contributions until it's right again.

3) Fold this into your retirement portfolio and manage it tax-efficiently instead. As the purchase comes into view, sell the stocks and put the money into a safe place until you need it. Readjust the rest of your portfolio.

If your tax bracket is low, other options might be better.

If you do not know how to figure out your tax bracket (not effective rate) just ask.

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Duckie
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Re: Saving for something 20 years from now

Post by Duckie » Sun Nov 04, 2018 5:16 pm

Freshdo wrote:I'm planning to put 800 monthly contributions to save for a payment about 20 years from now.
<snip>
Thoughts?
The need for this money is 20 years away. I would invest the contributions according to my current retirement AA for now. That money might be all in stocks, all in bonds/cash, or mixed. In ten years I would revisit the allocation.

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Sun Nov 04, 2018 11:31 pm

retiredjg wrote:
Sun Nov 04, 2018 3:20 pm
It is not really possible to answer this question without knowing if you are in a low or high tax bracket and how that is likely to change over the 20 years.

If you are in a high tax bracket, using the 2040 fund is going to cause a tax drag for 20 years. And it will increase as the fund increases its bond allocation. There is no point in that because there are other options.

1) Using the Vanguard Tax-Managed Balanced fund. If the 50/50 stock to bond ratio does not suit you just add on a stock fund...an international stock fund if you want foreign stocks (because the Tax-Managed Balanced fund does not contain any).

2) Use Total Stock, Total International, and a tax-exempt bond fund. Rebalancing is not difficult. If they numbers get out of kilter, just change your contributions until it's right again.

3) Fold this into your retirement portfolio and manage it tax-efficiently instead. As the purchase comes into view, sell the stocks and put the money into a safe place until you need it. Readjust the rest of your portfolio.

If your tax bracket is low, other options might be better.

If you do not know how to figure out your tax bracket (not effective rate) just ask.
I will be in a relatively high tax bracket (200k+ AGI).

Wow I never heard of this fund before. How come it isn't suggested as much if the returns are so high and it's exempt from federal taxes? I guess the high bond ratio scares some younger investors off huh

Which tax-exempt bond funds would you recommend for California?

retiredjg
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Re: Saving for something 20 years from now

Post by retiredjg » Mon Nov 05, 2018 7:37 am

Freshdo wrote:
Sun Nov 04, 2018 11:31 pm
I will be in a relatively high tax bracket (200k+ AGI).
If you are single, it appears you would be in the 32% bracket and that tax-exempt bonds would be appropriate.

If you are married filing jointly, it appears you would be in the 24% bracket where tax-exempt bonds might not be so great.

Wow I never heard of this fund before. How come it isn't suggested as much if the returns are so high and it's exempt from federal taxes?
This is not a tax-exempt fund. It is a tax-managed fund - the goal is to reduce taxes. Only the bonds in the fund are tax-exempt. The stock portion will still generate some taxable income and the fact that the fund is actively managed will contribute as well.

Which tax-exempt bond funds would you recommend for California?
If you are single and want bonds in taxable, I'd suggest Grabiner's idea - half long term CA tax-exempt bond and half Vanguard Short Term Tax Exempt bond fund. This gives wide diversification with most of the income being exempt from state taxes.

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Mon Nov 05, 2018 9:38 am

retiredjg wrote:
Mon Nov 05, 2018 7:37 am
Freshdo wrote:
Sun Nov 04, 2018 11:31 pm
I will be in a relatively high tax bracket (200k+ AGI).
If you are single, it appears you would be in the 32% bracket and that tax-exempt bonds would be appropriate.

If you are married filing jointly, it appears you would be in the 24% bracket where tax-exempt bonds might not be so great.

Wow I never heard of this fund before. How come it isn't suggested as much if the returns are so high and it's exempt from federal taxes?
This is not a tax-exempt fund. It is a tax-managed fund - the goal is to reduce taxes. Only the bonds in the fund are tax-exempt. The stock portion will still generate some taxable income and the fact that the fund is actively managed will contribute as well.

Which tax-exempt bond funds would you recommend for California?
If you are single and want bonds in taxable, I'd suggest Grabiner's idea - half long term CA tax-exempt bond and half Vanguard Short Term Tax Exempt bond fund. This gives wide diversification with most of the income being exempt from state taxes.
I am currently single so 32% bracket. Wouldn't the VFTMX still be better than tax-exempt bonds? The returns still seem better than the VCAIX and VWSTX after taxes.

retiredjg
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Re: Saving for something 20 years from now

Post by retiredjg » Mon Nov 05, 2018 9:54 am

Freshdo wrote:
Mon Nov 05, 2018 9:38 am
I am currently single so 32% bracket. Wouldn't the VFTMX still be better than tax-exempt bonds? The returns still seem better than the VCAIX and VWSTX after taxes.
You seem to be comparing the return of tax-exempt bonds to a balanced fund that contains both stocks and tax-exempt bonds.

My suggestion would be to use
  • only the tax managed balanced fund if 50/50 and no international suits you

    use tax managed balanced with some total international to get a higher percentage of stocks and foreign stocks

    use total stock + total international + tax-exempt bonds if you want to use 3 or 4 individual funds


Please keep in mind that people don't know all the tickers and may not be willing to look them up to answer your questions. It is helpful to all to include fund names in your posts.

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Mon Nov 05, 2018 10:04 am

retiredjg wrote:
Mon Nov 05, 2018 9:54 am
Freshdo wrote:
Mon Nov 05, 2018 9:38 am
I am currently single so 32% bracket. Wouldn't the VFTMX still be better than tax-exempt bonds? The returns still seem better than the VCAIX and VWSTX after taxes.
You seem to be comparing the return of tax-exempt bonds to a balanced fund that contains both stocks and tax-exempt bonds.

My suggestion would be to use
  • only the tax managed balanced fund if 50/50 and no international suits you

    use tax managed balanced with some total international to get a higher percentage of stocks and foreign stocks

    use total stock + total international + tax-exempt bonds if you want to use 3 or 4 individual funds


Please keep in mind that people don't know all the tickers and may not be willing to look them up to answer your questions. It is helpful to all to include fund names in your posts.
I guess I got some more reading to do about the taxes of investing.

For the third option, would you do a 75/25 ratio and rebalance every year as the date closes in? It seems like the best choice since I have freedom to choose my asset allocation.

I'll edit my first post to reflect that. Thanks

Edit: I forgot to mention that I am in Oklahoma until end of 2020 and will be back in California then. This is another reason why I'm leaning towards all in Vanguard Tax-Managed Balanced Fund (VTMFX) since I won't use the Cali Tax-exempt funds til later.

retiredjg
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Re: Saving for something 20 years from now

Post by retiredjg » Mon Nov 05, 2018 10:29 am

Freshdo wrote:
Mon Nov 05, 2018 10:04 am
For the third option, would you do a 75/25 ratio and rebalance every year as the date closes in? It seems like the best choice since I have freedom to choose my asset allocation.
75/25 or even 80/20 is a fine place to start a 20 year goal. As the date gets closer, add more bonds. When you have the real date in sight, move it all to high interest savings, short term bonds, or other safe investments so the money will actually be there when you wan it.

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Mon Nov 05, 2018 2:07 pm

retiredjg wrote:
Mon Nov 05, 2018 10:29 am
Freshdo wrote:
Mon Nov 05, 2018 10:04 am
For the third option, would you do a 75/25 ratio and rebalance every year as the date closes in? It seems like the best choice since I have freedom to choose my asset allocation.
75/25 or even 80/20 is a fine place to start a 20 year goal. As the date gets closer, add more bonds. When you have the real date in sight, move it all to high interest savings, short term bonds, or other safe investments so the money will actually be there when you wan it.
So taxable account (~2040 goal) would be total US market, total international, tax-exempt bonds

Tax deferred retirement total bonds would be fine, or even Target date fund due to the bonds not being taxed at our ,marginal tax bracket?

Thanks

H-Town
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Re: Saving for something 20 years from now

Post by H-Town » Mon Nov 05, 2018 2:40 pm

Freshdo wrote:
Sat Nov 03, 2018 11:58 pm
Hey guys! I'm planning to put 800 monthly contributions to save for a payment about 20 years from now.

At first I heard that putting monthly contributions in a Vanguard target date fund 2040 taxable account would be a good idea. However after some reading around this seems very tax inefficient due to the bonds being in a taxable account.

Would it be better to invest fully only in the VTSAX Total Stock and VTIAX International? Basically everything in the target date but the bonds since they are taxed at a marginal rate yearly and re-balancing of the target date funds also creates tax inefficiencies. I know it's a little more risky, but it's a lot more tax efficient than having more and more money going into bonds and being taxed at a larger rate.

This is not for retirement. I will continue to funnel money into 401k and other tax deferred accounts separately, but need to have cash ready about 20 years from now.

Thoughts?

Thanks

Edit:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
Vanguard Tax-Managed Balanced Fund Admiral Shares (VTMFX)
My approach is to look at my portfolio as a whole and manage it in the most efficient way. Having things in buckets just keeps it more complicated. As long as you save enough, in 20 years from now you should be able to have that funds across your tax advantage, brokerage, and saving accounts.

retiredjg
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Re: Saving for something 20 years from now

Post by retiredjg » Mon Nov 05, 2018 2:41 pm

Freshdo wrote:
Mon Nov 05, 2018 2:07 pm
retiredjg wrote:
Mon Nov 05, 2018 10:29 am
Freshdo wrote:
Mon Nov 05, 2018 10:04 am
For the third option, would you do a 75/25 ratio and rebalance every year as the date closes in? It seems like the best choice since I have freedom to choose my asset allocation.
75/25 or even 80/20 is a fine place to start a 20 year goal. As the date gets closer, add more bonds. When you have the real date in sight, move it all to high interest savings, short term bonds, or other safe investments so the money will actually be there when you wan it.
So taxable account (~2040 goal) would be total US market, total international, tax-exempt bonds

Tax deferred retirement total bonds would be fine, or even Target date fund due to the bonds not being taxed at our ,marginal tax bracket?

Thanks
Yes.

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Tue Nov 06, 2018 10:17 pm

retiredjg wrote:
Mon Nov 05, 2018 2:41 pm
Freshdo wrote:
Mon Nov 05, 2018 2:07 pm
retiredjg wrote:
Mon Nov 05, 2018 10:29 am
Freshdo wrote:
Mon Nov 05, 2018 10:04 am
For the third option, would you do a 75/25 ratio and rebalance every year as the date closes in? It seems like the best choice since I have freedom to choose my asset allocation.
75/25 or even 80/20 is a fine place to start a 20 year goal. As the date gets closer, add more bonds. When you have the real date in sight, move it all to high interest savings, short term bonds, or other safe investments so the money will actually be there when you wan it.
So taxable account (~2040 goal) would be total US market, total international, tax-exempt bonds

Tax deferred retirement total bonds would be fine, or even Target date fund due to the bonds not being taxed at our ,marginal tax bracket?

Thanks
Yes.
For the 33% bracket (In California), is there a way to calculate how much tax-drag there will be for the Target Fund 2040 (VFORX) and Tax-Managed funds (VTMFX) each year?

retiredjg
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Re: Saving for something 20 years from now

Post by retiredjg » Wed Nov 07, 2018 6:47 am

Not that I know of. But it will be higher for a target fund than the tax-managed fund.

Freshdo
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Re: The Three-Fund Portfolio

Post by Freshdo » Wed Nov 07, 2018 12:00 pm

[Post moved into here from: The Three-Fund Portfolio. see below. --admin LadyGeek]

I'm planning to start a 3-fund portfolio in my taxable account. I'm currently 25 and will owe a tax bomb in ~20 years of about 250k? I plan to start off with 90% stocks (80% US, 20% international) and eventually taper more to bonds (tax-exempt intermediate). When would it be wise to start rebalancing more into bonds? Or would it be wise to take everything out completely around 3 years prior and just put into high yield Savings/CDs?

The complication is that I will probably not need to take out the whole nest egg since I will be investing a little extra than what is needed considering a 5-6% return. Maybe 50-80% of what I invest into my taxable will be needed for the tax bomb in ~20 years and subject to long-term capital gains.

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Wed Nov 07, 2018 2:11 pm

retiredjg wrote:
Wed Nov 07, 2018 6:47 am
Not that I know of. But it will be higher for a target fund than the tax-managed fund.
I agree with your reasoning for the self-directed 3 fund portfolio. Who knows what might happen 15-20 years from now if I want to change my allocation, but I'm stuck in the Target Date Fund or 50/50 tax managed fund unless I pay a big capital gains tax bomb. My biggest fear was of the emotional aspects of rebalancing and bear markets since I'm a very young investor. I'll probably start with 10-20 bonds just in case.

Thanks

Iorek
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Re: Saving for something 20 years from now

Post by Iorek » Wed Nov 07, 2018 2:17 pm

I am all for simplicity and convenience (shhh don't tell anyone I use average cost basis and don't TLH), but I'd just suggest you could consider savings bonds for the bond component-- if you know the thing you are saving for is 20 years away then EE bonds might be attractive, and if you want more flexibility then i-bonds might be attractive.

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Re: Saving for something 20 years from now

Post by LadyGeek » Wed Nov 07, 2018 4:33 pm

Freshdo - In order to give appropriate advice, it's best to keep all the information in one spot. I moved your post into your original thread. If you have any questions, ask them here. This isn't a big deal, don't worry about it.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

XS650
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Re: Saving for something 20 years from now

Post by XS650 » Wed Nov 07, 2018 8:12 pm

Freshdo, it sounds as though you plan to retire early, like at 45. So your large tax bill will be due to removing out from a tax-sheltered account. If this is the case, you can invest into a pre-taxed account (Roth 401k, Roth IRA), and only withdraw the portion that you contributed, and save the earnings until older. The funds withdrawn can be re-invested into income-producing funds which you then will be taxed on dividends only. Just a thought.

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Wed Nov 07, 2018 9:21 pm

XS650 wrote:
Wed Nov 07, 2018 8:12 pm
Freshdo, it sounds as though you plan to retire early, like at 45. So your large tax bill will be due to removing out from a tax-sheltered account. If this is the case, you can invest into a pre-taxed account (Roth 401k, Roth IRA), and only withdraw the portion that you contributed, and save the earnings until older. The funds withdrawn can be re-invested into income-producing funds which you then will be taxed on dividends only. Just a thought.
It's not so much retirement as it is a big purchase/tax bomb. I plan to retire at ~55-60, but will need around 250k that I plan to invest~800-1000/mo for.

inbox788
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Re: Saving for something 20 years from now

Post by inbox788 » Wed Nov 07, 2018 9:32 pm

Freshdo wrote:
Wed Nov 07, 2018 9:21 pm
It's not so much retirement as it is a big purchase/tax bomb. I plan to retire at ~55-60, but will need around 250k that I plan to invest~800-1000/mo for.
It's comparable time and scale to a college plan. You might compare the strategy there and see if it fits your needs.

https://investor.vanguard.com/529-plan/ ... ed-options

Freshdo
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Re: Saving for something 20 years from now

Post by Freshdo » Thu Nov 08, 2018 9:38 am

inbox788 wrote:
Wed Nov 07, 2018 9:32 pm
Freshdo wrote:
Wed Nov 07, 2018 9:21 pm
It's not so much retirement as it is a big purchase/tax bomb. I plan to retire at ~55-60, but will need around 250k that I plan to invest~800-1000/mo for.
It's comparable time and scale to a college plan. You might compare the strategy there and see if it fits your needs.

https://investor.vanguard.com/529-plan/ ... ed-options
This is great thanks! I'll adjust my glide path according to something like this, but a tiny bit more aggressive since it's a ~20 year plan compared to an 18.

Now debating between 80/20 US/International or a litte more Intl..

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