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Author: PlanningMoose Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76097  
Subject: Please Help me Optimize! Date: 12/11/2001 9:03 PM
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Hello all,

I'm a regular on the fool boards, but established a new profile because I'm not comfortable posting such sensitive information on my recognizable account. I'm happy with my current direction in retirement planning, but also wanted some objective advice, so I thought I would post this synopsis and let people provide feedback. Any thoughts are, of course, appreciated and recognized with a rec!!! (whoopee!).

Background:

1) I am 24 years old

2) I work in the financial services industry in a large city with a reasonable cost of living. It's not Houston, but very similar to Houston (i.e., big, but not expensive to live).

3) My gross pay is $66,235 per year. State taxes average, all other taxation average.

4) Cash bonus can range from $5,000 to $50,000. Was $20,000 this year in a weak environment.

5) Have been proactive in my savings and now looking to diversify, but still maintain an active, high-risk, high-reward philosophy.

6) Extensive knowledge of equity markets. Confident in stock-picking ability.

Goals:

1) Retirement at a reasonable age (58-62) with ability to travel frequently, live very comfortably, but not lavishly, and ability to leave substantial assets to heirs at death.

2) Plan to buy engagement ring at approx. cost of $8,000 near end of 2002. Will finance if rate is sub-9%, pay cash otherwise.

3) Plan to return to top-notch MBA program in 2004-2006. Company will fund education, but will have a two year gap in income.

4) Girlfriend and I plan to have a large family and want to start sometime in the next 5 years.

Fixed Expenses:

1) Not a homeowner. Rent a house with two friends - rent share is $433 per month, utilities an extra $100 - nothing exorbitant.

2) Owe about $5,000 on a 1996 Honda Accord. Interest rate of loan is 13%.

3) Minimal credit card debt ($500 or so). Typically pay off at the end of each month.

4) Other expenses about $600 - $700 per month.

Luxuries:

1) Avid wine collector. Average expenditure about $50-$100 per month.

2) Eat out at least once a week. Nothing super fancy, but for girlfriend and I, will probably spend $40 - $50.

3) One nice ski trip per year: Average cost prob. about $2,000.

4) $1,000 - $2,000 in charitable giving per year. I plan to increase this over time, but want to give something now.

Current Assets:

Pension Plan (defined contribution): $3,700 in diversified mutual funds.

401K and Rollover IRA: $11,900 in aggressive mutual funds.

Roth IRA: $6,200 in aggressive equities (MCHP, SUNW, COSN).

Taxable Brokerage Account: $11,000. $4,500 in cash, $6,500 in growthy, diversified equities (IR, CCU, CYMI, COSN).

Company Stock Purchase Program: $1,000 in cash. Will be converted to company equity sometime in future. Currently 40% in the money.

Other Stock Options: 10,000 options in company stock, at the money. Company is not Goldman Sachs, but equity trades in very similar fashion to GS.

Wine collection: Worth $3,000 - $5,000. Difficult to monetize for true value (no plans to do so anytime soon).

Current Plan of Action:

1) Roth IRA contribution of $3,000 to be made on Jan 1st. Will purchase another aggressive equity with the proceeds, thinking of LAMR, IPG or VIA.

2) 401K contributions at 15% of salary in 2002. Allocated into aggressive, yet diversified mutual funds. Focus on small-cap and sector funds (Leisure, Health Care and Technology).

3) Pension contributions (from company) continue at 10% of base salary (not including bonus). Invested in diversified mutual funds.

4) $800 - $1,000 per month savings in taxable brokerage account. Focus on diversification through long-term, low-yield individual equities. Thinking about PFE, MRK, more IR or PLL for my next purchase.

5) Plan to pay off $5,000 car loan by June 2003. Want to continue driving this Honda Accord for another 4-5 years.

6) Manage personal expenses with more discipline. Cut back on eating out and other variable expenses.

Questions and Thoughts:

1) Is is possible to place additional income in tax-deferred vehicles? Can I put money into an educational IRA, even though I have no children (I hope to have at least a dozen in the future ;-) )

2) Should I actively look for a house for the tax benefits? My girlfriend is a home owner and I will likely be living there 18-24 months from now. Premarital cohabitation is not an option (her father is good with a gun).

3) Should I pay off my car loan at 13% instead of making an incremental equity investment in my taxable brokerage account?

4) One big expense is insurance. I pay about $200 a month, despite a clean driving record (more a function of age). I'm very happy with the quality of service of my insurance provider and would rather not switch, but for a $500 annual savings, I might. Any thoughts on how I can get this rate down?

5) Should I hold my more aggressive investments in a different account? I currently have my most aggressive and most volitile investments in my Roth IRA. I figure I can sell these stocks for a quick gain if they rapidly appreciate and avoid the tax liability..... My most conservative investments, over time, will be in my taxable account, where I want to minimize turnover, thus capital gains.

6) Am I getting the diversity I need through multiple mutual fund holdings?

7) At what age should I start looking for yield in the stocks I select? When should I start allocating funds to fixed income holdings?

Any other thoughts or advice are GREATLY appreciated! I'm very happy with my progress so far, but I am always looking for ways to improve my savings plans and ways to avoid paying Uncle Sam that extra dollar.

Thanks again for reading this!

My best,

PlanningMoose



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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32802 of 76097
Subject: Re: Please Help me Optimize! Date: 12/11/2001 9:34 PM
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Sounds like you've given much thought and have a good plan. Here's my $0.02 on some things I know a little about.

<<<2) Should I actively look for a house for the tax benefits? My girlfriend is a home owner and I will likely be living there 18-24 months from now. Premarital cohabitation is not an option (her father is good with a gun).>>>

I wouldn't look for a house unless this is the place you will live after you're married. It's big risk to try to turn around and sell after only two years. Housing market could tank and you'd take a loss, not a good way to start a marriage. Plus, the closing costs, etc., would offset any "tax benefit" unless you stayed in the house for about 5 years, as a rule of thumb.

<<<3) Should I pay off my car loan at 13% instead of making an incremental equity investment in my taxable brokerage account?>>>

Yes. Debt is bad, especially high interest debt.

<<<4) One big expense is insurance. I pay about $200 a month, despite a clean driving record (more a function of age). I'm very happy with the quality of service of my insurance provider and would rather not switch, but for a $500 annual savings, I might. Any thoughts on how I can get this rate down?>>>

It wouldn't hurt to shop around and then tell your agent you've found a policy for $X. They may or may not match you. There are about four things that will help drop your rate: be accident free, your next birthday, getting married, and having multi-car-house-boat insurance with the same carrier. Of course when you have kids, the rates go back up.

<<<6) Am I getting the diversity I need through multiple mutual fund holdings?>>>

You're probably over diversified. Plus, you're paying multiple expenses and most of the time gettting market loosing returns. I'd stick to either index funds (cheap expense ratios with market returns) or pick my own stocks.

<<<7) At what age should I start looking for yield in the stocks I select? When should I start allocating funds to fixed income holdings?>>>

Essentially you're asking asset allocation. To me, you should either hold equities or CDs. Money you need in the next 5 years, put into CDs or moneymarket account. That way, principle is protected and it's easily accessable, but most of all, you won't have to sell anything during a market down turn and loose principle. The rest of the money goes to equities. This strategey would hold for any time of life and any situation.

Hope this helps.

JLC














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Author: jhuangwithnmr One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32803 of 76097
Subject: Re: Please Help me Optimize! Date: 12/11/2001 9:47 PM
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Thanks for all the details. The plan is quite extensive and it is quite clear that you have given this much thought. It is also quite clear that you are aggressive, since you want to add money to an Education IRA when the kids don't even exist yet! [note: I don't think it is legal to add money in the name of the unborn.]

There is one thought that I have, in addition to JLC's comments in the previous post. You mentioned that you are confident in your ability to pick stock, and your bonus seems awfully good. Why do you split your aggressive investment and your lower-return investment into separate accounts? Unless your overall strategy calls for splitting your investment, and it is not merely a tax issue, the different strategies seem odd. Presumably, a person is good at one particular style--fundamental, technical, a mix, aggressive, passive, index, etc.--and not at many styles at the same time. Currently, you have the aggressive investments in Roth IRA to minimize tax, long-term investments in taxables, and mutual funds.

Unless your high-level planning calls for this spread, consider consolidating into mutual/index and aggressive investment categories only, regardless of your tax concerns. This will focus your mind and your strategies. The caveat occurs if the aggressive investment is so aggressive that the tax erosion will simply eat up all advantages of trading aggressively in the taxable account. In which case, you can switch over to an index and focus your time and skills on trading the Roth IRA.

I also noticed that you don't have a "ring fund." Is that coming from investments or savings or bonuses? I would also advise against a house. 18 - 24 months is a very short time to own the house and the hassle of the paperwork.


jhuangwithnmr

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32804 of 76097
Subject: Re: Please Help me Optimize! Date: 12/11/2001 9:48 PM
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Here's my reply: you are asking the wrong people first.

There is NOTHING in that list about your girlfriend's finances, or about her interests either, other than having kids beginning when you're in school with little or no income. (Perhaps not the best scheduling.)

Take it up with her. Remember that your housing arrangement & expenses will change dramatically when you are sharing space with your lady rather than a couple of friends, and then may change again when the two of you start popping out the mooselets. Factor her other interests and desires - and sanity leave from the kids - into your plans.

Before you do that, there isn't much other advice you should be listening to.

But here's some of it anyway: either find an investment which pays a GUARANTEED 13%, or pay off the car loan.


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Author: PlanningMoose Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32805 of 76097
Subject: Re: Please Help me Optimize! Date: 12/11/2001 10:28 PM
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Thanks to those that have already answered my questions! I greatly appreciate it....

Warrl -

I'll talk about your recommendations first, because they are probably the most important as they deal, not with my plan, but with my planning process.

I agree that I the interests of my girlfriend absolutely need to be incorporated into my plans! We've discussed finances at a high level in the past and she too has developed thoughts on her future, but we need to work on an integrated plan! We've talked about my future educational plans and it would make sense that we would be thinking about children immediately after, not during, graduate school - dealing with newborns and finance theory at the same time probably wouldn't make anyone happy.

I appreciate that thought and I'll make that an absolute priority! Tomorrow, we break out the calculator!

Jhuangwithnmr -

I didn't think it was possible to start an educational IRA before a child's birth, but what about a 529 College Savings account? It's my understanding that those funds can be used to pay the college expenses of any designiated beneficiary.... Anything to shield additional funds from taxation....

The seperate accounts I currently have, and my risk budgeting within the accounts, are a function of the tax shield limitations. If I could, I'd love to have 100% of my assets in my Roth IRA, but that isn't possible. I figured as long as the assets are in place, I should try to maximize return in the account with no capital gains tax and work on diversification (with returns in mind) in the other accounts.

Regarding the "ring fund" - hadn't thought of that. Very good point.

JLC -

The car payment needs to go! I need the credit history, so immediately after my Roth contribution, I'll aggressively pay this down to a $200 balance. I'll let that payment ride until maturity and essentially pay $50 in total interest cost to add 100 points on my credit score. MAYBE I could get a 13% return on my investments, but hey, it's not often that you get that kind of return with no risk (unless it's T-bills in the 1970's).

Insurance: I'll shop around. Guess it couldn't hurt.

Index funds: if I could hold them in my 401K, I would. Is it possible to rollover funds into a traditional IRA even if you are still employed at the company funding the plan? If so, I might do that to avoid the 1% average management fee. I could own exchange traded funds, index funds or individual equities in a traditional IRA....

Again, thanks to all for the advice!!! Any additional input is greatly appreciated!

Moose


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Author: jbking Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32807 of 76097
Subject: Re: Please Help me Optimize! Date: 12/11/2001 10:31 PM
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Greetings PlanningMoose,

1) Is is possible to place additional income in tax-deferred vehicles?

Yes, there are variable annuities that may be worth a thought if you are sure there is some high-yielding asset class you want to invest in and don't want it in your 401k or Roth. Note this defers taxes on gains and may or may not be worthwhile after costs and taxes upon withdrawal are factored into things.

2) Should I actively look for a house for the tax benefits? My girlfriend is a home owner and I will likely be living there 18-24 months from now. Premarital cohabitation is not an option (her father is good with a gun).

I agree with the others in discussing this with your girlfriend and even then after you are married.

3) Should I pay off my car loan at 13% instead of making an incremental equity investment in my taxable brokerage account?

How confident are you at getting over 13% post-tax investment returns on your stocks?

4) One big expense is insurance. I pay about $200 a month, despite a clean driving record (more a function of age). I'm very happy with the quality of service of my insurance provider and would rather not switch, but for a $500 annual savings, I might. Any thoughts on how I can get this rate down?

Again, I'd side with other replies in the general answer of shop around.

5) Should I hold my more aggressive investments in a different account? I currently have my most aggressive and most volitile investments in my Roth IRA. I figure I can sell these stocks for a quick gain if they rapidly appreciate and avoid the tax liability..... My most conservative investments, over time, will be in my taxable account, where I want to minimize turnover, thus capital gains.

Depending on YOUR strategy for turnover in stock holdings, the answers would vary as if someone planned on holding Berkshire Hathaway and REITs for their investment approach, I'd say put the REITs into the Roth and hold Berkshire in a taxable account.

6) Am I getting the diversity I need through multiple mutual fund holdings?

There are 2 parts to that and you didn't list the funds so it is kinda hard to answer what degree of diversification the funds give which is one part. The other is what in the world is necessary diversification for you?

7) At what age should I start looking for yield in the stocks I select?

Depends on what approach you plan on having in retirement as in some cases I could picture a case here being never. The investor would hold non-dividend paying stocks and use a bond ladder for an income cushion if you want one example. OTOH, some people may plan their retirement to use dividends from stocks as income at the other extreme.

When should I start allocating funds to fixed income holdings?


Once again, this should be a function of your risk tolerance, time horizon, investment approach and savings rate, IMO. Some people may suggest gradually easing into bonds over the whole time you invest and others may say if you are aggressive to wait till you are 5 years from retirement.

Any other thoughts or advice are GREATLY appreciated!

Is the cash in the taxable brokerage account your e-fund or don't you have one?

I am always looking for ways to improve my savings plans and ways to avoid paying Uncle Sam that extra dollar.

So, your cash is in a municipal money market fund? Are you sure you want to cut what the taxes are no matter what? For example, if after taxes you'd have more from a prime money market fund you would not want this? Also, will you never sell the taxable holdings until they are part of a Charitable Remainder Trust to avoid paying any dollars in capital gains?

Just checking on what the objective is here as I tend to maxmize my money which while it factors in post-tax returns, I don't let the taxes dominate my portfolio construction.

Those would be my thoughts,
JB

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32808 of 76097
Subject: Re: Please Help me Optimize! Date: 12/11/2001 11:22 PM
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Is it possible to rollover funds into a traditional IRA even if you are still employed at the company funding the plan?

The law does not prohibit it, but almost all 401(k) plans do not allow it.

Once separated from service, you can roll it into a "rollover IRA" (a Traidtional IRA funded with money transferred there from a 401(k), 403(b), or similar plan). If you do this, arrange for a "custodian-to-custodian transfer" so you won't have to worry about any 20% withholding.

If you are taking a "leave of absence" from your current employer instead of quitting, I don't know how that would affect your ability to transfer your 401(k) to an IRA.


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Author: decath Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32811 of 76097
Subject: Re: Please Help me Optimize! Date: 12/12/2001 9:33 AM
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Owe about $5,000 on a 1996 Honda Accord. Interest rate of loan is 13%.

Buy paying off the 13% car loan you can also shop around for liability only auto insurance. This would probably reduce your cost significantly by more than half, especially if you get it with a high deductible. You would have to factor in a few things before making your decision:

- How much the car is worth
- Could you afford a total loss by self-insuring? (sounds like you have plenty of assets)
- Your driving habits
- Your tolerance for risk

I am 40 years old and have always put my cars on liability once they are paid off and worth less than $5000. I've come out way ahead in the past 20 years.

decath


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Author: phantomdiver Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32812 of 76097
Subject: Re: Please Help me Optimize! Date: 12/12/2001 10:00 AM
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The car payment needs to go! I need the credit history, so immediately after my Roth contribution, I'll aggressively pay this down to a $200 balance. I'll let that payment ride until maturity and essentially pay $50 in total interest cost to add 100 points on my credit score. MAYBE I could get a 13% return on my investments, but hey, it's not often that you get that kind of return with no risk (unless it's T-bills in the 1970's).

I understand that you need the credit history, especially at your age. So how about you shop around for a $5,000 loan at your credit union (if you have one) or your bank? You should be able to get a really good rate just now. Then you could pay off that awful 13% car note but still get a nice notation on your credit rating.

phantomdiver

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Author: jjbklb Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32814 of 76097
Subject: Re: Please Help me Optimize! Date: 12/12/2001 11:51 AM
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You can put upn to $60,000 in BOSTON CAPITAL .The fund purchases housing developments for low income families (fed insured).It have generated thousands of dollars in tax credits for me in the past 8 years.Plus,there is a strong possibility that I will get the principle back.

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Author: jhuangwithnmr One star, 50 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32819 of 76097
Subject: Re: Please Help me Optimize! Date: 12/12/2001 3:45 PM
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In addition to the spousal relationship at the end of next year, there is also the cost of MBA schooling. MBA folks here at my school are not known for being frugal. Party expenses add up, so watch those dollars and your goal. There needs to be balance, of course, and by thinking ahead you can achieve that balance. Getting an MBA is a time to make business relationships that will tremendously help in later years, so a certain "social budget" is the norm for an MBA student. Kids and schools is a tough combination, but you can also get suckered into the MBA life and just work super-hard after graduation. These things need to be discussed with your spouse-to-be and we wish you the best.

Since you are concerned with capital gains taxes, it is useful to consider the full range of options:

Roth IRA -- fit for your aggressive style
tax-deferred accounts -- limited choices
taxable equities -- currently, you have lower-turnover strategies here

taxable bonds -- less volatility, but it does not sound like that was your concern
taxable corporate bonds/bond mutual funds -- same
tax-free bonds -- something to think about, depending on the after-tax returns you are after

housing development (as in Boston Capital) **start your own, legitimate business -- lots of tax savings, but lots of differenent kinds of headaches [and joys]


In the end, though, I don't mind paying taxes. The government has helped me in the past, and I am willing to help the government. I tend to maximize my profits first, and then pay the tax. The tax, after all, is never 100% of your profit, so you always get to keep something.

One last thought on the "ring fund". I know it is not logical to treat money in different bins as different entities, but I have a CD for a "ring fund". It prevents me from touching it even though the market is good. It has its separate account even, to create a clearly defined entity. I don't know if that will help you at all, but for my personality, it helps.

jhuangwithnmr

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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 32820 of 76097
Subject: Re: Please Help me Optimize! Date: 12/12/2001 6:42 PM
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1) Is is possible to place additional income in tax-deferred vehicles? Can I put money into an educational IRA, even though I have no children (I hope to have at least a dozen in the future ;-) )

EIRA is out. You could use a 529 plan, naming yourself as beneficiary. After you have children, youo can switch beneficiaries without penalty. The proceeds from 529 plans can be used tax-free for qualified educational expenses.



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