New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

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Topic Author
BirdieMan
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Joined: Thu Dec 12, 2019 10:25 pm

New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

Last year, this board was extremely helpful in educating me on our financial livelihood and investing, so thank you for that. I also read/listened to several books and have a pretty good grasp on our financial situation. Ultimately we left our financial advisor(had us mostly in cash) for greener pastures at Vanguard. Here is our current status:

Emergency Fund: yes
Debt: Mortgage @ 4.25% fixed interest rate (may be selling house soon, therefore don't want to refi)
Tax Filing Stauts: married filing jointly with one dependent child
Tax Rate: 24% federal 6% state
State of Residence: Louisiana
Age: 40
Desired assets allocation: 90%/10% with a decreasing amount of equities as time goes on
Total Portfolio: $322K
We pay 0.3% for Vanguards PAS for the rollover IRAs only

His insurance:
20 year term 2million dollar life insurance
own occ disability insurance
Her insurance:
20 year term 1million life insurance
We own together an umbrella policy as well.

His Rollover IRA at Vanguard:
5.5% BND Total Bond Market ETF
2.4% BNDX Total Intl Bond Index ETF
19.7% VXUS Total Intl Stock Index Fund ETF
25.1% VTI Total Stock Market ETF

Her Rollover IRA at Vanguard:
28.1% VTI Total Stock Market ETF

Joint Brokerage Taxable Account at Vanguard:
1.8% VXUS Total Intl Stock Index Fund ETF
4.4% VTI Total Stock Market ETF

2.9% AAPL on E*TRADE

6.2% VMFXX (emergency fund)

0.7% VASGX (529 plan)

His HSA:
0.6% mandatory cash balance
1.0% VFIFX
0.97% VGSNX

Contributions:
$6,000 to his IRA per year
$6,000 to her IRA per year
$12,000- $18,000 to taxable account per year (depending on bonuses)
$2000 to AAPL on etrade
$3500 to his HSA (through cafeteria plan at his job)

(401Ks are no longer offered at either job - Husband's job may be getting this back in 2021)
(Cannot use Roth due to income limit)

1. I would like to be educated on how I can discontinue PAS at Vanguard and how to rebalance our IRAs on my own. I understand the general concept of trying to keep a desired AA. However the actual logistics of completing this is what I'm unfamiliar with (how often, how to actual complete the process, and when to consider decreasing equities as time goes on)

2. Or another option I am considering is moving both of our IRAs and possibly our brokerage account to a target retirement account so that I would not have to rebalance anything. What are the advantages/disadvantages to doing this?

3. I was presented with a opportunity of transferring my term life policy into whole life. I know this board and many other recommendations say stay far away from whole life and use that money to invest. The basic theme of the presentation was to use "two ecomomic powers" (retirement assets combined with life insurance) as a way to increase cash flow. There are a lot of graphs, calculations, and simulations that went over my head. I know this guy is a good salesman because he made a pretty good argument for balancing our retirement plan with this option. I am needing someone that doesn't have a vested interest(I know he will make money off whole life) to give me the reason why I shouldn't (or arguments for it, if there are any) consider this plan. I am just hearing him out right now, not planning on buying it. I just purchased a cheap 2million$ 20 year term policy and good disability policy from his company. I know there are probably a lot of details that need to be disclosed here, but I do not know what they are.

Thanks for any input!
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by Jack FFR1846 »

My 10,000 explanation of rebalancing is that first, you need to write down your plan in an IPS. Then stick to it. Examples: Rebalance on your birthday. Ex2: Rebalance if any asset gets 5% away from the target. The simpler your portfolio, the easier it is to do this. Rebalance inside tax advantaged accounts so you're not paying tax to do so. If you must keep stocks, I guess, you'll need to tag each with what they are and then rebalance as needed. Target date funds in tax advantaged accounts do this automatically for a bit higher ER.

Whole Life Insurance: Look for the looooong thread on this by searching. Again, my 10,000 view: Whole life gives you the same insurance at 10 times the cost. You will be buying your sales person a new BMW with commissions. Unless you're a Billionaire, looking to transfer your wealth to your offsprings, it mostly makes no sense. Sure, there might be some investing going on, but there are huge fees and the insurance company will typically invest in T bills, paying you far below market rate. Just keep term and invest yourself.
Bogle: Smart Beta is stupid
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ruralavalon
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by ruralavalon »

BirdieMan wrote: Thu Oct 15, 2020 10:29 am(401Ks are no longer offered at either job - Husband's job may be getting this back in 2021)
(Cannot use Roth due to income limit)
You can use the backdoor Roth technique.

"If you cannot contribute to a Roth IRA because your income exceeds the income eligibility limit, you can still choose to contribute indirectly through a two step process known informally as the Backdoor Roth. To do the backdoor Roth, you:

(1) Make a nondeductible (i.e. taxed and not deducted) contribution to a Traditional IRA.
(2) Then convert the Traditional IRA to a Roth IRA.
The net effect of performing these two steps is equivalent to contributing to a Roth IRA. Since there are no income limits for either of these steps, you can use this Backdoor Roth technique to effectively contribute to a Roth IRA regardless of how high your income is."

Wiki article, "Backdoor Roth" .

BirdieMan wrote: Thu Oct 15, 2020 10:29 amDesired assets allocation: 90%/10% with a decreasing amount of equities as time goes on
. . . . .
1. I would like to be educated on how I can discontinue PAS at Vanguard and how to rebalance our IRAs on my own. I understand the general concept of trying to keep a desired AA. However the actual logistics of completing this is what I'm unfamiliar with (how often, how to actual complete the process, and when to consider decreasing equities as time goes on)
Rebalancing is not as difficult or time consuming as you might think. We have 4 accounts (my rollover IRA, 2 Roth IRAs, and a joint taxable account), I probably spend less than 1/2 hour per year in rebalancing.

Establish a desired asset allocation for equity/fixed income, and domestic/international stocks. Decide on a schedule (once per year?) and/or a rebalancing band (+/- 5%?). Wiki article, " Rebalancing".

Then rebalance according to that plan. Younger people use spreadsheets to keep track and rebalance. Old people like me use a pen, paper, and cheap pocket calculator. It's not hard.

It's easy if you have at least one large tax-advantaged account which contains all elements of the desired asset allocation (your rollover IRA, with 53% of the portfolio). You simply rebalance just by exchanging between funds inside that one large tax-advantaged account.


BirdieMan wrote: Thu Oct 15, 2020 10:29 amTax Rate: 24% federal 6% state
. . . . .
$12,000- $18,000 to taxable account per year (depending on bonuses)
. . . . .
2. Or another option I am considering is moving both of our IRAs and possibly our brokerage account to a target retirement account so that I would not have to rebalance anything. What are the advantages/disadvantages to doing this?
Since you will have significant money in a taxable account, and are in the 24% federal tax bracket, that would not be very tax-efficient.

Wiki article, " Tax-efficient Fund Placement ".

BirdieMan wrote: Thu Oct 15, 2020 10:29 am3. I was presented with a opportunity of transferring my term life policy into whole life. I know this board and many other recommendations say stay far away from whole life and use that money to invest. The basic theme of the presentation was to use "two ecomomic powers" (retirement assets combined with life insurance) as a way to increase cash flow. There are a lot of graphs, calculations, and simulations that went over my head. I know this guy is a good salesman because he made a pretty good argument for balancing our retirement plan with this option. I am needing someone that doesn't have a vested interest(I know he will make money off whole life) to give me the reason why I shouldn't (or arguments for it, if there are any) consider this plan. I am just hearing him out right now, not planning on buying it. I just purchased a cheap 2million$ 20 year term policy and good disability policy from his company. I know there are probably a lot of details that need to be disclosed here, but I do not know what they are.
Do not switch to whole life, stay with low cost term life insurance. Whole life insurance is not a good investment vehicle. (Try the Google search box, upper right this page.)

Whole life insurance is almost never a good idea. White Coat Investor, "Appropriate Uses of Permanent Life Insurance". In the few cases where it's reasonable "you are buying the insurance because you want the death benefit." It's not a good way to invest.
Last edited by ruralavalon on Thu Oct 15, 2020 11:46 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
Topic Author
BirdieMan
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Joined: Thu Dec 12, 2019 10:25 pm

Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

"BirdieMan wrote: ↑Thu Oct 15, 2020 10:29 am
Tax Rate: 24% federal 6% state
. . . . .
$12,000- $18,000 to taxable account per year (depending on bonuses)
. . . . .
2. Or another option I am considering is moving both of our IRAs and possibly our brokerage account to a target retirement account so that I would not have to rebalance anything. What are the advantages/disadvantages to doing this?
Since you will have significant money in a taxable account, and are in the 24% federal tax bracket, that would not be very tax-efficient.

Wiki article, " Tax-efficient Fund Placement "."

What about using Target Retirement Account for both IRAs and then keeping the taxable account as only VTI, and VXUS to avoid tax issues?
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ruralavalon
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by ruralavalon »

BirdieMan wrote: Thu Oct 15, 2020 11:43 am
ruralavalon wrote:
BirdieMan wrote: Thu Oct 15, 2020 11:43 am "BirdieMan wrote: ↑Thu Oct 15, 2020 10:29 am
Tax Rate: 24% federal 6% state
. . . . .
$12,000- $18,000 to taxable account per year (depending on bonuses)
. . . . .
2. Or another option I am considering is moving both of our IRAs and possibly our brokerage account to a target retirement account so that I would not have to rebalance anything. What are the advantages/disadvantages to doing this?
Since you will have significant money in a taxable account, and are in the 24% federal tax bracket, that would not be very tax-efficient.

Wiki article, " Tax-efficient Fund Placement ".
What about using Target Retirement Account for both IRAs and then keeping the taxable account as only VTI, and VXUS to avoid tax issues?
The main advantage of a target date fund is that it can be used as a single fund all-in-one portfolo. You lose that benefit of you mix it with regular index funds in your portfolio.

It becomes more difficult rebalance when you use a mix of both a target date fund and regular index funds. It just makes it hard to keep track of your asset allocation, to determine if you need to rebalnce. If you just use regular index funds in your accounts, you can see your asset allocation at a glance.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
afan
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by afan »

A target date fund in your retirement accounts would be perfectly fine. As you say, it would eliminate the need to rebalance within the retirement accounts.

As noted, if you use a target date fund for all of your investments, then you should take it into account when rebalancing the rest. This is not difficult. Vanguard tells you what percent of the fund is in each asset class. That is all you need to know to rebalance.

It is better to rebalance in the retirement accounts since you don't pay capital gains taxes when selling the asset that has grown above your target allocation.

In the accumulation phase, rather than selling , you can simply direct new investments to the asset classes that are below target. No tax effects.

There is no perfect answer to how or how often to rebalance. There are studies indicating that nothing is gained by doing it more often than once per year. The allocations are based on estimates of risk and return of the asset classes. These are at best educated wild guesses. One would be amazed if they were ever correct.

For that reason, there is little point in having tight bands for rebalancing. Permitting only small deviations from the target implies that you are highly confident that, say, 70% stocks is right and 75% is wrong. But you cannot project risk and return with anything close to that precision. So don't worry about it.

I check my allocation twice a year but rarely find the need to sell to rebalance. Instead, I shift new investments and call it good.
Last edited by afan on Fri Oct 16, 2020 6:09 am, edited 1 time in total.
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Topic Author
BirdieMan
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Joined: Thu Dec 12, 2019 10:25 pm

Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

To simplify, here are my options going forward:
1. Don't do anything, continue with VG PAS for the IRAs only
2. Keep my exact current setup, except discontinue VG PAS and handle rebalancing, and buying of the ETFs myself. If I go with number 2, since we are in ETFs, that would mean each month I will have to manually go into our accounts and buy the appropriate AA amounts of each fund (7 altogether: 4 in my IRA, 1 in my wifes, and 2 in the taxable account, since ETFs can't be bought automatically from my understanding.)
3. Convert both IRAs and our taxable account to target date retirement fund and leave it at that for 20+ years. This seems like the easiest set it and forget it method which would be easier for me.

Basically it boils down to, does the PAS cost more than the increased expense ratio and tax implications of moving to a target date retirement fund across the board? For that I need some help figuring it out. How would you guys and gals handle it if it were you own accounts?

Whole life is definitely out, thanks for the input.
Topic Author
BirdieMan
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

4. Convert our 4 fund ETF portfolio in a 3 or 4 fund mutual fund portfolio that can be automatically invested into that way I wouldn't need to manually buy all of our ETFs each month on our contribution date.
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Duckie
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by Duckie »

BirdieMan wrote:I understand the general concept of trying to keep a desired AA. However the actual logistics of completing this is what I'm unfamiliar with (how often, how to actual complete the process, and when to consider decreasing equities as time goes on)
To rebalance once or twice a year you need to:
  1. Add up the current value in each account. Write down the dollar amounts per account, not per fund.
  2. With those numbers figure the percentage of your portfolio in each account.
  3. Knowing your desired AA try to put the entire bond/fixed income in pre-tax accounts and just stocks in Roth and taxable accounts. Since his Rollover IRA is the biggest account it can be used for all rebalancing for now. The other accounts can hold just one fund/ETF. Once you figure the bond portion (how much and where), then figure the international stock portion, then the remainder is US stocks. You figure, you write it down, then you go online and shift.
  4. Avoid selling in taxable to rebalance.
For example, in your case you already have the percentages so after refiguring to remove non-portfolio assets** you have:

Taxable at Vanguard -- 7%
Taxable at E*Trade -- 3%
His Rollover IRA at Vanguard -- 57%
Her Rollover IRA at Vanguard -- 31%
His HSA -- 2%

**The emergency fund, the 529 plan, and at minimum the HSA mandatory cash balance are not included in the retirement portfolio. Whether or not the remaining HSA assets are included depends on whether you plan to save the HSA for retirement and pay current medical expenses out of pocket or not. The following example includes them.
__________________

With a 70/20/10 AA you could have something like this:

Taxable at Vanguard -- 7%
5% (VTI) Vanguard Total Stock Market ETF (0.03%)
2% (VXUS) Vanguard Total International Stock ETF (0.08%)

Taxable at E*Trade -- 3%
3% (AAPL) Apple Inc.

His Rollover IRA at Vanguard -- 57%
29% (VTI) Vanguard Total Stock Market ETF (0.03%)
18% (VXUS) Vanguard Total International Stock ETF (0.08%)
10% (BND) Vanguard Total Bond Market ETF (0.035%)

Her Rollover IRA at Vanguard -- 31%
31% (VTI) Vanguard Total Stock Market ETF (0.03%)

His HSA -- 2%
2% (VGSNX) Vanguard Real Estate Index Fund Institutional Shares (0.10%)

Something to think about.
otinkyad
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by otinkyad »

BirdieMan wrote: Thu Oct 15, 2020 1:37 pm How would you guys and gals handle it if it were you own accounts?
The problem with that type of question here is that people think that riding a unicycle while juggling is easy, since there’s only one wheel and three clubs. Your choices are all fine. Optimizing 0.3% isn’t worth it. Your overall AA and behavioral errors are more important things to focus on.

You might like this thread: viewtopic.php?t=287967

Personally, I liked the idea of a single fund in the IRAs and leaving VTI/VXUS in the taxable account. Yes, you would have to adjust which fund you had in the IRA to rebalance and move along your glide slope. All you have to do is pick the TRF or Life Strategy fund that gives you the desired percentage of bonds (taking your zero bonds in taxable into account). Do it once a year and be done with it.

I don’t know about reinvesting in ETFs, but using the mutual funds if necessary to get that seems fine. It’s a $2 annual fee to not have to do anything.
backpacker61
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by backpacker61 »

BirdieMan wrote: Thu Oct 15, 2020 10:29 am Contributions:
.
.
$3500 to his HSA (through cafeteria plan at his job)
If I understand correctly, you can bump this up to $7100/year ($7200 next year). I would do that.

https://www.fidelity.com/go/hsa/faqs
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BirdieMan
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

backpacker61 wrote: Thu Oct 15, 2020 6:57 pm
BirdieMan wrote: Thu Oct 15, 2020 10:29 am Contributions:
.
.
$3500 to his HSA (through cafeteria plan at his job)
If I understand correctly, you can bump this up to $7100/year ($7200 next year). I would do that.

https://www.fidelity.com/go/hsa/faqs
I have an individual health plan so my limit will be $3600 in 2021
Topic Author
BirdieMan
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

otinkyad wrote: Thu Oct 15, 2020 6:35 pm
BirdieMan wrote: Thu Oct 15, 2020 1:37 pm How would you guys and gals handle it if it were you own accounts?
The problem with that type of question here is that people think that riding a unicycle while juggling is easy, since there’s only one wheel and three clubs. Your choices are all fine. Optimizing 0.3% isn’t worth it. Your overall AA and behavioral errors are more important things to focus on.

You might like this thread: viewtopic.php?t=287967

Personally, I liked the idea of a single fund in the IRAs and leaving VTI/VXUS in the taxable account. Yes, you would have to adjust which fund you had in the IRA to rebalance and move along your glide slope. All you have to do is pick the TRF or Life Strategy fund that gives you the desired percentage of bonds (taking your zero bonds in taxable into account). Do it once a year and be done with it.
Can you explain this a little more? Does this mean that as my taxable account grows that I will have to possibly change my TRF in the IRAs from time to time to keep the AA correct?

Would something like this work?
His IRA: VFIFX
Her IRA: VFIFX
Taxable: VTI, VXUS

The advantage to this setup is that I can automatically invest in the IRAs and will not need PAS to rebalance and I wouldn’t have to change the taxable. However as the taxable account grows, the overall percentage of equities will as well.

Another option:
His IRA: VTSAX
VTIAX
VBTLX
Her IRA: VTSAX
Taxable: VTSAX
With a 90/10 AA, and the 90% equities split 70/30 domestic(VTSAX) and international(VTIAX). This way I could rebalance at my own pace and not rely on TRF. If I convert my taxable account from ETFs ( currently VTI and VXUS) to VTSAX will I have to pay capital gains taxes if I’m just converting to a similar fund?
otinkyad
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by otinkyad »

BirdieMan wrote: Fri Oct 16, 2020 5:55 am Would something like this work?
His IRA: VFIFX
Her IRA: VFIFX
Taxable: VTI, VXUS

The advantage to this setup is that I can automatically invest in the IRAs and will not need PAS to rebalance and I wouldn’t have to change the taxable. However as the taxable account grows, the overall percentage of equities will as well.
This is what I meant. The issue here is that to rebalance, you will essentially need to trade VFIFX for something else with more bonds as your taxable account grows, such as VFORX. This is a middle ground, a little more work for lower cost, and less exposed to behavioral errors.
If I convert my taxable account from ETFs ( currently VTI and VXUS) to VTSAX will I have to pay capital gains taxes if I’m just converting to a similar fund?
Yes, it’s a taxable event. Converting Vanguard mutual funds held at Vanguard to their equivalent ETF is an exception, but the reverse conversion is not possible, so it’s just an ordinary exchange.

If you want the auto investment without PAS, you could use the mutual funds, and pay the taxes one time, or better, just leave the existing VTI and VXUS sitting there, or as some people do, periodically convert the mutual funds to their ETFs to save a few bucks.

You’re wandering in a sea of options for which the costs are all pretty low. You need to define what your goals are. If you are willing to rebalance in some way, you have lots of options. If you want to be completely hands-off, then either using TDFs or PAS everywhere works, but both probably cost more. Between the two, I would lean toward PAS since you can turn it off without having any hard-to-undo investments. Using TDFs everywhere requires some conviction, which is not widely shared here, so it might be less comfortable.
Katietsu
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by Katietsu »

Do you have the IRA’s in PAS but not the brokerage account? I would consider doing it the other way. Take the IRA’s out of PAS. Put the IRA’s into target date retirement funds. Have PAS manage the brokerage account. If the purpose of the brokerage account is also retirement, go ahead and let PAS aim for the same allocation as the TDF. They can handle the monthly purchase of ETF’s. I assume they can do it by directing the new contributions to the categories that are below their desired allocation thus avoiding selling for a realized cap gain. The only part of this that is not optimized is that you will have some bonds in the taxable brokerage account. However, with today’s low interest rates, your low allocation to bonds, your moderate tax bracket, and potential future changes to tax rates, this is likely to be a small enough factor that I would not worry about it.
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BirdieMan
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

Thank you all for the replies. After considering all the options, I feel like I really do like my current setup and AA so I am going to concentrate on how and if I am able to discontinue PAS and just manage and rebalance my portfolio on my own. I will also have to do all of my buying of funds due to the fact that they are all in ETFs. I have been buying them on my own in taxable account, but it will be more complicated in the IRAs. So basically I will have to take a few minutes each month and buy our ETF funds when we contribute and then once a year rebalance. Then in the future I will have to find the correct glide path we wish to take and adjust the AA.
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BirdieMan
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

After further considering options, I down to 3 options:

1. Leave everything as is and continue with PAS for IRAs

2. Leave everything as is and buy and rebalance my Vanguard ETFs on my own.

3. Switch IRAs to TRFs and keep taxable accounts as VTI , and VXUS.

I think what it really boils down to is, as time goes on what will be the cheaper option: using PAS for the next 20-25 years, or buying the more expensive TRFs but not using PAS? Then on the other side of things, if I discontinue PAS and manage the funds myself, will I be leaving money on the table somewhere unknowingly? I understand these are all low cost options, but struggling on which way to continue. Thanks for any help.
Tattarrattat
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by Tattarrattat »

It would be reasonable to have target date funds in all accounts. No more agonizing. Can set it and forget it. At 24% tax bracket, the tax efficiency arguments are not that compelling. Whatever debatable tax inefficiencies there are in the future, it will still be cheaper than PAS and may very well be less expensive than any behavioral mistakes that might otherwise arise. An obsessive optimizer might not be happy but it is a very reasonable and very easy to execute strategy.
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BirdieMan
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Re: New Vanguard investor: 3 questions(1. d/c'ing PAS 2. using Target retirement 3. whole life

Post by BirdieMan »

Good advice, I will certainly bring this possibility up during my meeting with Vanguard in 3 weeks. Seems like a reasonable option.
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