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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 457440  
Subject: Structuring assets in a portfolio Date: 3/19/2013 1:59 PM
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The METAR Board is dedicated to ensuring that each member has the maximum money available when needed. This is complex, since non-retirement accounts, retirement accounts, and other cash streams (such as annuities, insurance, pensions and Social Security) are all taxed differently.

Other assets, such as real estate, are even more complex because a primary residence has different costs if rented vs. owned, as well as different treatment in various situations (e.g. bankruptcy, evaluating assets for Medicaid, etc.) that differ by state. Non-primary-resident real estate is even more complex.

I would like to stick to financial assets in this post because that is simpler. Let's talk about real estate in a different post.

What is the best way to structure assets in a portfolio to maximize money over a lifetime?

Let's assume that tax law will stay the same regarding retirement accounts and dividend/ capital gain treatment.

There is an important benefit to holding a stock in a non-retirement account: capital loss in the non-retirement account can be carried over to subsequent years and subtracted from capital gains, reducing taxes.

Also, qualified dividends in a non-retirement account receive a lower tax rate. When the money is withdrawn from an IRA, it is taxed at the higher, ordinary income rate.

That is why I usually buy stocks in a non-retirement account. I buy bonds that I expect to hold to maturity in my IRAs, since the interest would be taxed as ordinary income in a non-retirement account.

I assume that taxes overall will rise because of the rise in government spending, especially entitlements. Because of this, I am gradually shifting assets from my Traditional IRA to my Roth IRA. I am paying current taxes in the expectation that future taxes would be higher. If the government reneges on the Roth promise and taxes the increase, I will be no worse off because I will have already paid taxes on the principal (of course I keep careful records).

I hope that many METARs will chime in with new ideas. So far, this is my thinking.

Non-retirement accounts -- stocks

I-Bonds are not in retirement accounts, but they act sort of like a retirement account because the interest is not taxed until the bond is cashed in. My I-Bonds pay 3% + inflation and mature in 2031 (when I would be age 78 if I live that long). I intend to hold them for their entire term because there is no way to replace them.

Retirement Accounts
Traditional IRA (this would include a 401(k) if I was still working). The money in the Traditional IRA has never been taxed. It will be taxed at the ordinary income rate when withdrawn. The law requires taxable Minimum Required Distributions beginning at age 70.5.

Roth IRA. The money contributed to the Roth IRA has been taxed. It will not be taxed when withdrawn and can be left indefinitely, which makes it a resource for old old age.

I have bonds in both the Traditional and Roth IRA. This is where I bought the TIPS in 2008. The considerable interest paid by these TIPS is thus tax-sheltered.

My husband has a whole-life insurance policy that he bought before we met (over 25 years ago). I'm not sure what use this is.

We do not have an annuity. I avoid variable annuities due to their high expenses. I could see a low-cost fixed annuity if real interest rates were high (as they were in 2007) since locking in a good fixed rate at low cost makes sense...if I thought my life expectancy would be significantly higher than 85 years...unlikely, since both my parents died slightly over age 70 and even my beloved Grandma only lived to age 89.

DH and I will need to carefully discuss when to begin Social Security. We can delay the age we begin. Like any annuity, the person who lives longest wins. It doesn't help to delay to get higher payments if you die before the payments start...so expected longevity is an important factor. Our Social Security will easily cover our cost of living, especially once we are on Medicare in about 5 years. Currently, our highest household expense is health insurance.

DH and I don't have any children, so our intention would be to enjoy life as much as possible but not leave an inheritance. (Realistically, I would never spend down to zero because it would drive me crazy to be broke, let alone in debt.)

I won't talk about inheritance taxes because the situation is bound to change in the future.

If I was younger, I would maximize contributions to a 401(k) up to the employer's match, but probably not above because many 401(k)s have high hidden expenses. I would maximize contributions to a Roth IRA. I would save at least 20% of my gross income by automatic deduction from my paycheck. (This is what I did during my working life.) Needless to say, I would not carry consumer debt, but would pay all bills every month. (Mortgage debt is OK as long as PITI does not exceed 25% of gross income.)

I would live a top-down LBYM lifestyle, keeping the big expenses (house, car, education, etc.) low. I would also live a bottom-up LBYM lifestyle (keeping the small expenses low), but I would be flexible with this because a new set of watercolors, a new lipstick or a new jacket (especially when on sale) is a nice treat that won't break the bank.

I would keep an e-fund of at least 1 year's expenses in cash.

Please chime in, METARs, with your suggestions.
Wendy
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Author: PosFCF Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418390 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/19/2013 2:59 PM
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Wendy

This discussion, IMO, centers around one major pivot: is the individual in accumulation mode (i.e. doesn't have enough yet to feel secure in retirement) and/or is the individual in the more enviable position of having what they believe will be more than sufficient and now wants to engage in a safe level of drawdown that will accomplish both of the goals of having the individual not outlive their money and, perhaps, even leave a legacy for their heirs.

Poz

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Author: flyerboys Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418392 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/19/2013 3:11 PM
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Wendy, I agree with all of your investment outline. I will add two things:

1. Primarily invest in yourself as human capital -- free of tax, portable in emergencies, and fits the criteria of investing in what you know.

2. Mere LBYM frugality is often just a slogan. Being frugal from the depths of your soul is usually the result of a catastrophe or careful upbringing.


My family has a strong tradition that was invaluable to me: for over a century we have told the children (including yours truly) that they will be subsidized through attaining a BA BS or "equivalent" but that they WILL NOT INHERIT ONE DIME and will be on the street at age 23, and that all have to work all their lives.

We lie.

After I had graduated college and finished a year of gainful employment parents let me know about the family's passed down emergency fund - with the understanding that I could not touch it unless my parents and aunts and uncles agreed that Satan Hitler and/or the 4 horsemen of the apocalypse had attacked me.

By the time I knew I had a safety net certain independent and frugal habits had taken hold.

david fb

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418398 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/19/2013 3:53 PM
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<This discussion, IMO, centers around one major pivot: is the individual in accumulation mode (i.e. doesn't have enough yet to feel secure in retirement) and/or is the individual in the more enviable position of having what they believe will be more than sufficient and now wants to engage in a safe level of drawdown that will accomplish both of the goals of having the individual not outlive their money and, perhaps, even leave a legacy for their heirs.>

Poz, this is such an important point that I will post two new threads, one for each. Thank you for your wisdom!
Wendy

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418402 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/19/2013 4:04 PM
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If I was younger, I would maximize contributions to a 401(k) up to the employer's match, but probably not above because many 401(k)s have high hidden expenses.

That's the usual advice, and I don't see anything really wrong with it, but I have slightly different viewpoint. That is, go ahead and max out 401(k). The reason is that you get a tax break right now and because you get a tax break right now, you have more total dollars you can invest right now. That's good. You might be losing a little bit on high fees that you wouldn't have to pay outside the 401(K), but you are more than making up for that with the tax savings.

The sticky wicket is that upon withdrawal 401(k)s are taxed as ordinary income which is typically higher than the capital gains rate, so people often recommend investing those dollars beyond the employer match outside the 401(k).

However it is a reasonable assumption (but of course impossible to say for sure) that your tax rate in retirement will be lower than your tax rate while working. If that turns out to be the case, then it was a mistake to invest the money outside the 401(K). You did insert the caveat that for purposes of discussion assume tax rates will be constant. But I don't think that's a good assumption. Tax rates have changed a lot over the last three decades. I don't know how they will change in the future, but I'm positive they will change. So which do you do? Unless you have a crystal ball there's no way to say for sure, so I like the "bird in the hand" advantage of getting the tax deduction right now.

Obviously, it is a good idea to have a Roth and regular investment accounts beyond the 401(K). That way you can more easily manage your withdrawals for tax purposes when it comes time for that.

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Author: steve203 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: 418408 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/19/2013 4:43 PM
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My two cent's worth:

-penalty free withdrawls from an IRA can be started at 59 1/2

-the longer Social Security benefits are deferred, the larger the payments will be

Action: start pulling from the IRA at 59 1/2, which will be this Thursday for me. The more pulled now reduces the size of the manditory withdrawls and the taxes, later. Apply for SS either when the IRA is exhausted, or at age 70, whichever comes first

Steve...who fully expects to see the high side of 90

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Author: PolymerMom Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418431 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/19/2013 8:23 PM
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If you invest in foreign assets, put them in regular accounts, rather than retirement accounts. Mutual funds pay whatever foreign taxes are due to the ex-US country. These can be noted on your income tax return, so you can take advantage of already paying foreign taxes. If they are in your retirement account, they still get paid, but you can't use them on your income tax return.

PM

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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: 418449 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/20/2013 3:11 AM
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-the longer Social Security benefits are deferred, the larger the payments will be

Addendum: the longer Social Security benefits are deferred, the greater the chance that Congress will muck with them before you start drawing them.

Those who have already started drawing SS have a better chance of their benefits being grandfathered, than those who are eligible to start drawing benefits but haven't done so - let alone those who aren't eligible yet.

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Author: notehound Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418455 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/20/2013 7:22 AM
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...the longer Social Security benefits are deferred, the greater the chance that Congress will muck with them before you start drawing them.

Bingo!

This is the main reason I suspect that many people take benefits at 62 even if they don't need to.

They know Congress will never take away an "entitlement" already being received by any voter, regardless of what happens to those not yet receiving benefits and who therefore won't "miss anything" if the benefits are reduced or eliminated now.

;-)

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Author: steve203 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: 418477 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/20/2013 11:38 AM
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Addendum: the longer Social Security benefits are deferred, the greater the chance that Congress will muck with them before you start drawing them.

Every "reform" proposal I have seen cuts off the "reform" at age 55 or so, with everyone above the cutoff receiving "promised" benefits. So I expect any future "reform" would have an age cutoff, rather than a cutoff depending on whether or not someone was currently receiving benefits.

Of course, if there was a proposal to cut off people between 62 and 66 from their "promised" benefit, if they were not already receiving it, there would be a wave of sudden retirements, which would increase demands on the system, and, of course, I would register for benefits before the legislation passed.

Steve

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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: 418484 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/20/2013 11:55 AM
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...the longer Social Security benefits are deferred, the greater the chance that Congress will muck with them before you start drawing them.

Bingo!

This is the main reason I suspect that many people take benefits at 62 even if they don't need to.

They know Congress will never take away an "entitlement" already being received by any voter, regardless of what happens to those not yet receiving benefits and who therefore won't "miss anything" if the benefits are reduced or eliminated now.


I don't know Congress won't touch Social Security benefits to people already drawing them. It's likely, but not definite.

On the other hand, it's rather more likely that those people will get treated somewhat better than people not drawing benefits.

And Congress is going to muck with Social Security benefits, somehow, eventually. (Although it may be subtle and indirect. Change how the inflation adjustment is calculated, so that it falls significantly short of inflation?)

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Author: PSUEngineer Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418492 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/20/2013 12:39 PM
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If I was younger, I would maximize contributions to a 401(k) up to the employer's match, but probably not above because many 401(k)s have high hidden expenses.
--------------------------
That's the usual advice, and I don't see anything really wrong with it, but I have slightly different viewpoint. That is, go ahead and max out 401(k). The reason is that you get a tax break right now and because you get a tax break right now, you have more total dollars you can invest right now. That's good. You might be losing a little bit on high fees that you wouldn't have to pay outside the 401(K), but you are more than making up for that with the tax savings.

The sticky wicket is that upon withdrawal 401(k)s are taxed as ordinary income which is typically higher than the capital gains rate, so people often recommend investing those dollars beyond the employer match outside the 401(k).


Another possibility is to invest through a Roth 401k. You won't have the extra total dollars to invest right now as you mention but you will have tax-free earning during the accumulation stage and tax-free withdrawals in retirement. Will the tax-free earnings in the Roth 401k offset the possible high hidden expenses in a 401k and the limited investment options? I don't know. My crystal ball is cloudy.

PSU

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Author: DufusGoneSplat Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 418513 of 457440
Subject: Re: Structuring assets in a portfolio Date: 3/20/2013 3:00 PM
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Here are some of my thoughts. First, I'm a huge fan of retirement plans. Not only can they provide retirement income, but they offer some protections (depending on the state) from bankruptcy and lawsuits. I think that's an important consideration.

My #1 pick is an employer sponsored 401k, 403b, 457, etc. In an easy and oversimplified example, assuming $10,000 savings and 30% income tax;
- in a 401k (for example) you save $10,000 plus any employer match, plus interest/capital gains accrue tax free
- in a regular savings you save $7,000 after paying $3,000 in income tax. There is no employer match and the interest/capital gains is also taxed.
Repeat that for a few decades and see the difference.

Generally IRAs require earned income BUT a spouse's earned income may allow you to contribute to an IRA, even if you don't have earned income.

Depending on circumstances, all / part / none of a Traditional IRA may be tax deductible. Be sure to keep good records of any taxed vs not-taxed contributions.

Beware of income limits on Roth IRAs.

You MIGHT be able to withdraw from an IRA early without penalty. Several exceptions to this penalty include:
- You die and the account is paid to your beneficiary
- You become disabled
- You withdraw an amount less than is allowable as a medical expense deduction
- You begin substantially equal periodic payments
- Your withdrawal is related to a qualified domestic relations order (QDRO)
- Your withdrawal is used to pay qualified higher education expenses
- Your withdrawal is used for a qualified “first-home” purchase (up to $10,000)

http://retireplan.about.com/od/iras/a/ira-withdrawal.htm

It is my opinion that a couple making, for example, $100,000 per year will probably not have a drawdown of $100,000 per year. In other words, I would expect that in many (most) cases, the tax rate in retirement years should be less. But even IF the tax rates were higher, I would expect that decades of tax deferred retirement savings would more than offset those rates in the long run.

Disclaimer: This is a quick down-and-dirty post done in a hurry and without the benefit of much research. I may not know what I'm talking about.

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Author: sailrmac Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 419398 of 457440
Subject: Re: Structuring assets in a portfolio Date: 4/1/2013 5:03 PM
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I think you've got the major stuff pretty well dialed in.

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Author: sailrmac Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 419401 of 457440
Subject: Re: Structuring assets in a portfolio Date: 4/1/2013 5:19 PM
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This doesn't apply to most people but may to you. If you can roll IRA money into Roth IRA money and "only" pay 15% taxes; you should do it. You pretty unlikely to ever see a lower tax rate but could see one much higher.

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Author: sailrmac Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 419403 of 457440
Subject: Re: Structuring assets in a portfolio Date: 4/1/2013 5:31 PM
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This is the main reason I suspect that many people take benefits at 62 even if they don't need to.

They know Congress will never take away an "entitlement" already being received by any voter, regardless of what happens to those not yet receiving benefits and who therefore won't "miss anything" if the benefits are reduced or eliminated now.<i/>

I agree with you. To take it one step further, this means social security will run out even faster than it would have otherwise. It's creates a self fulfilling system. The less social security is sustainable, the more people will take it out as early as possible. The earlier people take it out, the less likely it will be sustainable.

Now if this were truely an investment account, then the previous would not necessarily be true. People taking money out earlier, means they would also be taking out less and the account could have gains offsetting. However, there is no money in the account. There is no investment. The money just comes from current payers. Any previous income in excess of expenditure was spent on government services: security, education, infrastructure, support, etc.

Put another way, imagine this were a illegal Ponzi scheme (it's not only because the government runs it). The Ponzi falls appart when inputs exceed withdraws. The less confidence, the more withdrawals and the sooner the Ponzi fails.


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