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Here are two free online calculators that can help you determine which type of bond or bond fund (muni or taxable) would give you the greatest after-tax return: Visit https://investor.vanguard.com/home and search for “taxable-equivalent yield calculator” (without the quotes). Visit www.TRowePrice.com and search for “Tax-Free Equivalent Yield Calculator” (without the quotes).
Mr. Bogle suggests that owning your age in bonds is a good starting point. So, a 20-year-old would hold 20 percent of his/her portfolio in bonds. By the time this investor reaches 50, the bond portion of the portfolio would have gradually increased, in 1 percent increments, to now represent 50 percent of his portfolio. Increase your percentage of bond holdings if you are a more conservative investor, and decrease your percentage of bond holdings if you want to be more aggressive with your portfolio.
Funds of Funds In an attempt to simplify investing, a recent trend has developed that allows investors to obtain a nicely diversified portfolio by choosing a single mutual fund that meets their desired asset allocation. These offerings invest in other mutual funds, normally from the same company, and usually include stock, bond, and money market mutual funds—thus the name funds of funds.
Bogleheads Forum regular contributor, author Richard Ferri, CFA, of Portfolio Solutions, LLC, has prepared a 30-year market forecast, which Rick has graciously allowed us to share with you. It can be viewed online at www.portfoliosolutions.com.
One of the simpler online calculators you might want to try can be found at www.bankrate.com/calculators/retirement/retirement-calculator.aspx.
Morningstar’s Style Box, Table 8.3, is a useful tool that shows how your portfolio’s equity holdings are divided between the different styles and sizes. You can use the Style Box to analyze your portfolio at no charge at www.morningstar.com. You will find it listed under “Tools/X-Ray.”
CONCLUSION In this chapter we learned about the critical importance of low cost when selecting mutual funds. Accordingly, we will avoid all load funds and we will favor low-cost index funds. We will always read the prospectus to determine the published costs of any fund we are considering. We will always know a fund’s turnover so that we have an idea of the fund’s hidden transaction costs—the higher the turnover, the higher the cost is likely to be. We will not use wrap accounts. We will remember that low cost is the best predictor for selecting funds with above-average performance. Above all,
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The lower rates on qualified dividends increase the tax-efficiency of stocks relative to bonds whose yield is taxed at ordinary income tax rates. For this reason, and the fact that stocks benefit from the lower capital gains tax rates, we generally recommend placing stocks in taxable accounts and bonds in tax-advantaged accounts.
A short-term capital gain is a profit on the sale of a security or mutual fund share that is held for 12 months or less. A long-term capital gain is a profit on the sale of a security or mutual fund share that is held for more than one year.
Short-term capital gains are taxed as ordinary income at the shareowner’s highest marginal income tax rate, while long-term capital gains enjoy a maximum tax rate of 15 percent—approximately half.
For maximum tax efficiency in taxable accounts, you should do the following: Favor funds with low dividends. Favor funds with “qualified” dividends. Favor funds with low turnover. Favor tax-efficient index funds and tax-managed funds.
A good source for locating a fund’s tax efficiency rating is www.morningstar.com. Morningstar provides a “Tax-Cost Ratio,” which is the actual percentage point reduction in fund return resulting from taxes for an investor in the maximum federal tax bracket.
Your 401(k) Summary Plan Description (SPD) will tell you what the plan provides and how it operates. It may tell you if administrative expenses are paid by your plan (you) or by your employer. If paid by your employer, it’s a good sign that the employer cares about his employees. A
high-income individuals who are not eligible to contribute to a Roth IRA can now directly do what’s become known as a back-door Roth. Here’s how it works. If the investor doesn’t have an existing TIRA because they weren’t eligible to contribute to one due to the income limitations, they would first contribute to a nondeductible IRA and then immediately convert that to a Roth IRA, effectively working around the income limits on a direct Roth IRA contribution. Now you understand why it’s called a “back-door Roth.”
TAX-SAVVY IDEAS We suggest 14 tax-reducing ideas for tax-savvy investors. Most are easy to understand and to implement. We can think of no better way for most taxpayers to maximize their after-tax returns. Use tax-advantaged accounts (401(k), 403(b), IRAs, 529 tuition plans, etc.). Buy fund shares after the distribution date. Place tax-INefficent funds in retirement accounts, and tax-Efficient funds in taxable accounts. Use tax-managed or tax-efficient index funds in taxable accounts. Avoid balanced funds (stocks and bonds) in taxable accounts. Keep taxable fund turnover low to avoid
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A good place to begin seeking advice is from a Certified Public Accountant who does not sell investment products.
If you want to check out the credentials of an attorney, Martindale & Hubble (www.martindale.com) is the place to go.
Two of the professional designations that fall into this highly regarded category include the Chartered Financial Advisor (CFA) and the Certified Financial Planner (CFP).
Rebalancing forces us to sell high and buy low. We’re selling the outperforming asset class or segment and buying the underperforming asset class or segment. That’s exactly what smart investors want to do.
There are a number of ways to track your portfolio’s performance and asset allocation. Personal finance programs, such as Quicken, can handle that task for us. Many mutual fund companies also routinely offer a portfolio tracking service. For instance, if you’re a client, Vanguard offers Portfolio Watch, a free online service that shows the percentages of the various asset classes in your portfolio each time you log on to your account. And since Vanguard allows you to include any non-Vanguard holdings in your online portfolio, Portfolio Watch can give you an accurate picture of your entire
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if you use a portfolio manager, such as Vanguard’s Asset Management Service, or an even lower-cost advisor such as Portfolio Solutions of Troy, MI, you won’t have to worry about doing the rebalancing because it’s part of their service. However, as with all portfolio management services, there is a cost involved and a minimum investment required.
Two of the best individuals to follow for financial advice are Jason Zweig and Jane Bryant Quinn. Jason Zweig offers excellent investing advice regularly in his column, “The Intelligent Investor” in the Wall Street Journal. Jane Bryant Quinn has been writing outstanding financial and investment advice for decades. Today you can read her thoughts at her blog, janebryantquinn.com. Both writers are also authors of excellent books.
Not surprisingly, there are two simple ways to remain financially flexible and reduce the odds of running out of money. First, keep your fixed living expenses as low as possible. Retirement is not the time to have an enormous mortgage, expensive car payments, credit card debts, or the like.
The second way to increase spending flexibility is to have a viable way to earn income if needed. We aren’t suggesting going back to work full-time or becoming a Walmart greeter. Technology makes it possible to do many paid tasks from the comfort of our home, working as much or as little as we want.
Other ways to increase the odds of solvency are delaying retirement, waiting until full retirement age to draw Social Security, and purchasing an immediate annuity.
Specifically, you need to consider the following types of insurance: Life insurance for anyone in your family on whom others depend for financial support Health care coverage for everyone in your family Disability insurance on any breadwinner whose future income is vital Property insurance in case of fire, theft, or other disasters Auto insurance Liability protection against expensive lawsuits Long-term care for older family members to prevent nest-egg erosion
You can greatly reduce or eliminate common insurance mistakes by following three simple rules: Only insure against the big catastrophes and disasters that you can’t afford to pay for out of pocket. The cheapest insurance is self-insurance. Carry the largest possible deductibles you can afford. The larger the deductible, the more you are self-insuring and the cheaper the premium will be. Only buy coverage from the best-rated insurance companies. You need insurance companies you can depend on when you need to file a claim.
If you need life insurance, buy term insurance. Term insurance is basic pay-as-you-go, no-frills insurance. It’s the cheapest way to go and serves the purpose. When you tell an insurance salesperson that you want to purchase term insurance, get ready for lengthy sales pitch about how term insurance is insufficient, penny-wise, and pound-foolish. They will likely try to sell you more expensive policies that build cash value, such as whole life, universal life, and variable universal life. They may tell you that it’s a good investment in addition to life insurance: “You don’t have to die to
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Term insurance is purchased at a fixed rate for specified periods of time such as 5, 10, 15, or 20 years. The longer the period, the higher the rates will be. Buy the longest period that you can afford and need. Make sure the policy is guaranteed renewable, meaning that you will be able to purchase future coverage regardless of your health.
Here are some other features a good disability policy will have: It covers your inability to work in your own occupation. It requires a waiting period of no more than 90 days before coverage begins. It carries a cost-of-living adjustment. Benefits are provided for partial disability. It provides the longest benefit in your own occupation for as long as possible or at least until age 65.
The two words you need to remember when buying this type of coverage are replacement cost. For example, maybe you purchased your home years ago for $100,000 but it would cost three or four times that amount to rebuild if it was destroyed. Be sure to insure your home and the contents in it based on the amount it would cost you to replace the assets insured.
Third, you need to protect yourself against potential lawsuits that could wipe you out. In our litigious society, it’s an absolute must. Purchase a personal liability umbrella policy of at least $1 million, or an amount to cover your total net worth. Umbrella policies are relatively cheap for the amount of protection and usually sold in $1 million increments.
If you find yourself with liquid assets of between $200,000 and $2 million when you reach your mid- to late fifties, give serious consideration to buying long-term care policies for you and your spouse. With continuing advancements in health and medical care, more of us will be living longer. Add 76 million baby boomers who have retired or will be retiring to the mix, and it’s a sure bet that many more people are going to require nursing home, assisted living, or home health care for extended periods of time.
Here are some of the better insurance websites where you can learn more about insurance and shop for quotes: www.answerfinancial.com www.insure.com www.insurance.com www.pivot.com www.quickquote.com
To check the financial strength and overall quality rating of an insurance company, go to www.ambest.com. Other companies that provide insurance ratings are Fitch Ratings (www.fitchratings.com), Moody’s Investor Services (www.moodys.com), and Standard & Poor’s (www.standardandpoors.com).
There are a number of ways to avoid probate, including placing your assets in a trust; distribution by title (joint accounts, POD or TOD, for example); and having a beneficiary and contingent beneficiaries listed on your tax-deferred accounts, such as an IRA or annuity. U.S. Savings Bonds allow you to list a beneficiary or a co-owner. Some mutual fund companies also allow you to designate a beneficiary for your taxable accounts, which means those accounts would also avoid probate. At Vanguard, this feature is known as the Directed Beneficiary Plan. You need to understand, though, that avoiding
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An advance health care directive conveys your specific wishes to medical personnel regarding certain medical treatments and life-prolonging efforts when you’re unable to communicate your wishes to them. This document is also known as a living will or a medical directive.
Under the current tax code, this step-up in cost basis means that your heirs would pay no taxes on the gains you’ve accumulated over a lifetime, since their new cost basis would be the value of the inherited assets at the time of your death.
By leaving these appreciated taxable assets to your heirs, you (and they) would avoid paying the capital gain taxes on these investments.
The Bogleheads are around if you need additional help. We hang out online at www.bogleheads.org.
