Strategy to increase bond allocation

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Topic Author
SpiritDitch
Posts: 11
Joined: Sat Sep 21, 2013 10:34 pm

Strategy to increase bond allocation

Post by SpiritDitch » Sun Jun 09, 2019 1:05 am

I see a possibility for early semi-retirement in the next few years (e.g. an extended break from employment, or switching to part-time contracting). This suggests I might want to start increasing my fixed income allocation, and I'm wondering how I could achieve that.

Age: 31
Current wages: ~400K/y
Rental income: 18K/y
State: CA
Taxable 1.25M VASGX, 50K VMMXX
401k: 285K VFFVX
Roth IRA: 60K VFFVX

This works out to about 80/20. Let's say I want to move towards 60/40. Should I:
1) Exchange all my tax-advantaged accounts to total bond market?
2) Start buying CA muni bonds in taxable?
3) Sell some shares of taxable to buy bonds (and incur the tax hit)?

I didn't know about tax-efficient placement when I started, and went with all-in-one funds everywhere.
It still feels a bit counterintuitive to me to keep retirement accounts mostly in bonds and taxable mostly in stocks, if I plan to draw from taxable much earlier. Does this make sense or am I misguided?

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: Strategy to increase bond allocation

Post by MotoTrojan » Sun Jun 09, 2019 2:16 am

You can always buy more stock in 401K as you sell equity in taxable but a few muni bonds won’t hurt at your income. What do you anticipate your annual expenses being? Does it include healthcare?

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Tyler Aspect
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Location: California
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Re: Strategy to increase bond allocation

Post by Tyler Aspect » Sun Jun 09, 2019 1:55 pm

SpiritDitch wrote:
Sun Jun 09, 2019 1:05 am
I see a possibility for early semi-retirement in the next few years (e.g. an extended break from employment, or switching to part-time contracting). This suggests I might want to start increasing my fixed income allocation, and I'm wondering how I could achieve that.

Age: 31
Current wages: ~400K/y
Rental income: 18K/y
State: CA
Taxable 1.25M VASGX, 50K VMMXX
401k: 285K VFFVX
Roth IRA: 60K VFFVX

This works out to about 80/20. Let's say I want to move towards 60/40. Should I:
1) Exchange all my tax-advantaged accounts to total bond market?
2) Start buying CA muni bonds in taxable?
3) Sell some shares of taxable to buy bonds (and incur the tax hit)?

I didn't know about tax-efficient placement when I started, and went with all-in-one funds everywhere.
It still feels a bit counterintuitive to me to keep retirement accounts mostly in bonds and taxable mostly in stocks, if I plan to draw from taxable much earlier. Does this make sense or am I misguided?
Exchange tax-advantaged accounts to total bond market. When you are at an age that you have the alternatives of selling stock from taxable account versus tax advantaged account, then you can see selling stock from taxable has a chance of being tax-free, but selling stock from tax advantaged account is taxed at your marginal tax rate. That is why you mostly want to keep your bonds in tax deferred account, in order to squeeze stocks to your taxable account. The only exception is to keep your emergency cash in the taxable account.

Young retirees need to withdraw at a lesser rate than regular retirees, for details see the web site "Early Retirement Now".
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

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grabiner
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Re: Strategy to increase bond allocation

Post by grabiner » Mon Jun 10, 2019 7:02 pm

In CA, in your high tax bracket, I would prefer CA munis in taxable and stocks in tax-deferred over stocks in taxable and taxable bonds in tax-deferred.

How much of a capital gain do you have on VASGX (LifeStrategy Growth)? It has the wrong bonds for a CA taxable investor, but those bonds are only 20% of the fund, so they don't add too much of a tax cost. If you have shares with a relatively small gain, sell those shares to buy CA munis, and adjust the bond allocation in your 401(k) and IRA accordingly. Otherwise, just direct new money in the taxable account to CA munis.

If you are charitably inclined, you can use the LifeStrategy Growth to make large charitable donations. However, check with Vanguard before doing this; you need to use specific identification of shares. If Vanguard insists on average-cost basis for donations, this would average out all your other shares as well, which would make it impossible to sell the shares for the lowest capital gain in later years.)
Wiki David Grabiner

Topic Author
SpiritDitch
Posts: 11
Joined: Sat Sep 21, 2013 10:34 pm

Re: Strategy to increase bond allocation

Post by SpiritDitch » Tue Jun 11, 2019 7:26 pm

Thanks everyone for the great tips.
For now, I've converted my money market funds into muni, and also changed my recurring contributions to be in muni instead of LifeStrategy.
Next I'll consider exchanging some existing lots from LifeStrategy, and perhaps part of the tax-advantaged accounts too.
MotoTrojan wrote:
Sun Jun 09, 2019 2:16 am
You can always buy more stock in 401K as you sell equity in taxable but a few muni bonds won’t hurt at your income.
This makes sense, and helped me understand the logic of tax-efficient placement.
MotoTrojan wrote:
Sun Jun 09, 2019 2:16 am
What do you anticipate your annual expenses being? Does it include healthcare?
Hard to say. Right now it's about 35k-40k in a HCOL area, though I would consider moving back to my home country (lower COL and public healthcare).
grabiner wrote:
Mon Jun 10, 2019 7:02 pm
In CA, in your high tax bracket, I would prefer CA munis in taxable and stocks in tax-deferred over stocks in taxable and taxable bonds in tax-deferred.
This also makes sense, and is why I find my specific scenario confusing. There seem to be arguments for both strategies.

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abuss368
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Re: Strategy to increase bond allocation

Post by abuss368 » Tue Jun 11, 2019 8:21 pm

I would start to buy California munis with Vanguard. Sell the LifeStrategy fund now before you have larger capital gains in the future.
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