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45 minutes ago, stbugs said:

Definitely a big difference between hot stock tips and managing investments yourself. I am self directed for most of my money but I use some services to give me recommendations not Reddit. It doesn’t sound like your sister does that, more of a penny stocks mentioned on Twitter. Not that hot tips can’t pan out, but most times those are crappy companies you are hoping to get out of before the rest of the people who hopped in do. Had a great 2020, been meh so far this year but long term I like my odds but again it’s not “me” picking stocks. It’s like when I used to play fantasy and used FBGs. I absolutely did way better than average and made some good choices but clearly I wasn’t doing my own stats and spreadsheets. 
 

Didn't you start most of your self-directed stuff in 2020?

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13 minutes ago, Charlie Harper said:

Didn't you start most of your self-directed stuff in 2020?

2019, but only a few stocks then, but close enough. Since I had to rollover some 401k money, I decided to go with stocks. I had subscribed to this service a long time ago but unfortunately for me my wife stopped working so free cash was very low for a while. I’m bigger on tech than most and unfortunately I would have fit right into their wheelhouse and been retired already.

Anyway, last year was great. Even with the drubbing this month, I’m still well over 100% since the start of 2000. I’m a little different than the sister below in that I use the recommendations to add stocks that I want to hold for years. I wouldn’t be surprised if I lag the index this year because of the “rotation”, but I think I’ll be good over the long haul. We’ll see. I definitely don’t think I’ll lose it all. 

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39 minutes ago, BigJim® said:

I get it, but there’s a big difference between placement of trust re: fantasy football and retirement funds. I know I can’t do it on my own. I also know my ignorance makes it impossible to identify whether a virtual I-stranger is giving great or horrific advice. And I don’t mean that as a slight to anyone, including BNB. I could never feel confident doing anything but set/forget in a basic fund.

Again, I’m talking about a paid reputable service not taking advice from online sites or from random internet strangers. It did work out on one stock that I got out of quick enough but still that was a tiny portion. I’m pretty risk averse when it comes to stuff like that. Amazon is my largest holding.

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2 minutes ago, stbugs said:

Again, I’m talking about a paid reputable service not taking advice from online sites or from random internet strangers. It did work out on one stock that I got out of quick enough but still that was a tiny portion. I’m pretty risk averse when it comes to stuff like that. Amazon is my largest holding.

So boat anchors are the key huh?

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Just now, ConstruxBoy said:

So boat anchors are the key huh?

Sometimes boat anchors keep you from washing away during tough times so you can reel them in and go to the next place when the storm is over.


 

 

Damn that was borderline poetic.

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5 hours ago, -OZ- said:

Fwiw, I have a bit less than 5% bonds, 5% REIT, and some utilities. 

Do you think you will keep that as you get closer to retirement? Do you treat the REIT like a safer option like a bond? Same with utilities?

With me being new to the stock thread I think I’ve gotten a little carried away with the individual stocks. Will hold them for remainder of the year I’m pretty sure and there’s a handful still in the red so may hold longer, but I think I just find comfort in the total market set and forget for the most part.

my problem is with the bond type investments. It looks like you could just put the cash into a cd and get a little less but not lose.

vanguard does have a utility fund as well as a REIT but I’m not in those yet.

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2 hours ago, The Z Machine said:

Why is this?

That is a really interesting question.  My guess is that the direct plan administration fees are lower if the fees built in to the underlying investment options are higher so it saves the company money at the expense of the employees.  But the people responsible for selecting the plan advisor most likely have their own money in the plan so you would think there is an incentive to pick lower cost fund options.  :shrug:

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Just now, Tom Hagen said:

That is a really interesting question.  My guess is that the direct plan administration fees are lower if the fees built in to the underlying investment options are higher so it saves the company money at the expense of the employees.  But the people responsible for selecting the plan advisor most likely have their own money in the plan so you would think there is an incentive to pick lower cost fund options.  :shrug:

I bet you're on to something with it costing the company less.  As that's not the part compounded through market gains, saving every year makes sense for the company.

It's also possible that those laying the decisions don't have the majority of their retirement savings locked up in the company's 401k, instead being in an IRA or something. 

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5 hours ago, BigJim® said:

I get it, but there’s a big difference between placement of trust re: fantasy football and retirement funds. I know I can’t do it on my own. I also know my ignorance makes it impossible to identify whether a virtual I-stranger is giving great or horrific advice. And I don’t mean that as a slight to anyone, including BNB. I could never feel confident doing anything but set/forget in a basic fund.

You could, you just choose to not devote the time or have better use for your time. Nothing wrong with that. All I’m suggesting is that people currently invested in target funds that have other options available follow up on that. I also would suggest that anyone double digit years away from retirement avoid bonds. 
 

Of course after today’s market action you may not want to listen to me

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12 minutes ago, BassNBrew said:

You could, you just choose to not devote the time or have better use for your time. Nothing wrong with that. All I’m suggesting is that people currently invested in target funds that have other options available follow up on that. I also would suggest that anyone double digit years away from retirement avoid bonds. 

Yeah, I get it. I actually love this thread to expand my understanding/awareness, even if ever so slightly. My game plan up to now has been target fund for a 20 year younger person.  

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54 minutes ago, BigJim® said:

Yeah, I get it. I actually love this thread to expand my understanding/awareness, even if ever so slightly. My game plan up to now has been target fund for a 20 year younger person.  

If you have any IRAs stranded at old companies, move those to Fidelity or Vanguard. You’ll save fees and have more investment options. It’s not that much work. Wish I’d done it years ago.

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6 hours ago, steelerfan1 said:

Do you think you will keep that as you get closer to retirement? Do you treat the REIT like a safer option like a bond? Same with utilities?

With me being new to the stock thread I think I’ve gotten a little carried away with the individual stocks. Will hold them for remainder of the year I’m pretty sure and there’s a handful still in the red so may hold longer, but I think I just find comfort in the total market set and forget for the most part.

my problem is with the bond type investments. It looks like you could just put the cash into a cd and get a little less but not lose.

vanguard does have a utility fund as well as a REIT but I’m not in those yet.

I'll probably be around 70/20/10 when I retire, with REITs and utes being the 10%. But that's partly because pensions (fixed income) account for roughly half our plan. Most people should be closer to 60/40. IMO

There's a lot of benefit to just going all total market index. The simplicity, if you stick with it, helps keep you from decision fatigue and second guessing. If you're constantly trying to beat the market, there are so many different options and you're guaranteed to not pick the best one. 

 

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10 hours ago, BigJim® said:

Yeah, I get it. I actually love this thread to expand my understanding/awareness, even if ever so slightly. My game plan up to now has been target fund for a 20 year younger person.  

Seriously consider following the 2 fund for life plan: https://paulmerriman.com/two-funds-for-life-podcast-2/

He has provided updates but iirc this episode gives the details you need. 

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11 hours ago, -OZ- said:

I'll probably be around 70/20/10 when I retire, with REITs and utes being the 10%. But that's partly because pensions (fixed income) account for roughly half our plan. Most people should be closer to 60/40. IMO

There's a lot of benefit to just going all total market index. The simplicity, if you stick with it, helps keep you from decision fatigue and second guessing. If you're constantly trying to beat the market, there are so many different options and you're guaranteed to not pick the best one. 

 

Was looking at vanguard lastnight and under Bonds they had a GNMA option that i mat pair with BND for that allocation. Do you have a pref for bond funds? we have about 8 more years before i retire and we are very low on bonds right now as they just look unappealing to me for some reason right now.

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1 hour ago, steelerfan1 said:

Was looking at vanguard lastnight and under Bonds they had a GNMA option that i mat pair with BND for that allocation. Do you have a pref for bond funds? we have about 8 more years before i retire and we are very low on bonds right now as they just look unappealing to me for some reason right now.

We only have BND right now, but VTIP might be better.

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On 3/24/2021 at 9:01 PM, BassNBrew said:

If you have any IRAs stranded at old companies, move those to Fidelity or Vanguard. You’ll save fees and have more investment options. It’s not that much work. Wish I’d done it years ago.

My only IRA is at TIAA. I have 401K's at each of Vanguard/Fidelity. I'd previously looked into whether I could convert the 401K's to IRAs for a different reason (estate planning, as my experience inheriting a roll over IRA under a parent's estate was so much better than immediate taxation). However, stopped looking into that when I was told roll over rules had changed in recent years. 

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I got a very late start on getting serious about investing for retirement (didn't open an IRA until mid-2019 right before I turned 40), but I'm proud to say that even with a 4-month closure of my restaurant, 2020 just became the first year that I maxed out both my Roth and HSA. And the 2021 contributions have been running automatic to hit the max while playing 2020 catch up.

On investing, I saw some mention of bonds. I'm obviously a very new investor, but to this point, I haven't seen a scenario where it makes sense for me to own any bonds. 

In fact, I was wondering what you guys thought of just hitting boring dividend stocks heavy, sort of in lieu of bonds. I'm mainly talking about regular brokerage account. Roth and HSA are all invested in a range of index funds/ETF's. 

But for the regular brokerage, it's on top of emergency funds, and I don't put money in there that I plan to need within 5 years or so (and all the money I do, I pretend just lost 50%). But I'd still like to keep it more conservative than retirement assets. And I also think the growth stocks are due to take the hardest hit. Not trying to time the market, but since December, I've mostly just getting big boring dividend payers for that account.

Obviously, any security is a risk, but just wondering what you guys thought focusing on dividend stocks over bonds for right now. 

 

 

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43 minutes ago, pollardsvision said:

I got a very late start on getting serious about investing for retirement (didn't open an IRA until mid-2019 right before I turned 40), but I'm proud to say that even with a 4-month closure of my restaurant, 2020 just became the first year that I maxed out both my Roth and HSA. And the 2021 contributions have been running automatic to hit the max while playing 2020 catch up.

On investing, I saw some mention of bonds. I'm obviously a very new investor, but to this point, I haven't seen a scenario where it makes sense for me to own any bonds. 

In fact, I was wondering what you guys thought of just hitting boring dividend stocks heavy, sort of in lieu of bonds. I'm mainly talking about regular brokerage account. Roth and HSA are all invested in a range of index funds/ETF's. 

But for the regular brokerage, it's on top of emergency funds, and I don't put money in there that I plan to need within 5 years or so (and all the money I do, I pretend just lost 50%). But I'd still like to keep it more conservative than retirement assets. And I also think the growth stocks are due to take the hardest hit. Not trying to time the market, but since December, I've mostly just getting big boring dividend payers for that account.

Obviously, any security is a risk, but just wondering what you guys thought focusing on dividend stocks over bonds for right now. 

 

 

Yes.  A lot of these have been trading at the low end of their range.

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48 minutes ago, pollardsvision said:

I got a very late start on getting serious about investing for retirement (didn't open an IRA until mid-2019 right before I turned 40), but I'm proud to say that even with a 4-month closure of my restaurant, 2020 just became the first year that I maxed out both my Roth and HSA. And the 2021 contributions have been running automatic to hit the max while playing 2020 catch up.

On investing, I saw some mention of bonds. I'm obviously a very new investor, but to this point, I haven't seen a scenario where it makes sense for me to own any bonds. 

In fact, I was wondering what you guys thought of just hitting boring dividend stocks heavy, sort of in lieu of bonds. I'm mainly talking about regular brokerage account. Roth and HSA are all invested in a range of index funds/ETF's. 

But for the regular brokerage, it's on top of emergency funds, and I don't put money in there that I plan to need within 5 years or so (and all the money I do, I pretend just lost 50%). But I'd still like to keep it more conservative than retirement assets. And I also think the growth stocks are due to take the hardest hit. Not trying to time the market, but since December, I've mostly just getting big boring dividend payers for that account.

Obviously, any security is a risk, but just wondering what you guys thought focusing on dividend stocks over bonds for right now. 

 

 

Sorry about your restaurant and happy to hear you made it through!

Bonds are ballast for your portfolio and a source of "dry powder" if you have the stomach to rebalance during stock market drawdowns. For an early accumulator they are not as important as closer to retirement. And as a small business owner I am guessing you have some debt, which can be thought of as negative bonds. Hopefully you have a large emergency fund and if that is the case than no bonds is reasonable.

But high dividend stocks are not bonds and I don't think there's any evidence that they are less prone to big drops than the broader market. Vanguard's high dividend yield fund (VYM) did worse vs it's S&P fund (VOO) during the big drawdowns in March 2020. So don't expect them to be "safer" than your indexes in your IRA (assuming you have total market funds).

And don't forget taxes. They are a major factor in returns. Dividends are basically forced capital gains. If you want to implement a dividend-focused strategy it makes more sense to do it in your tax-protected space as you won't pay any taxes on dividends.

One way to do this is to sell off lots of your indexes in your IRAs and buy equivalent amounts of the same index in your taxable. Then use the freed up cash in your IRA to invest in the dividend stocks you like.

Index funds are also easier to tax-loss harvest (which you can only do in your taxable accounts) than are individual securities.

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2 hours ago, pollardsvision said:

I got a very late start on getting serious about investing for retirement (didn't open an IRA until mid-2019 right before I turned 40), but I'm proud to say that even with a 4-month closure of my restaurant, 2020 just became the first year that I maxed out both my Roth and HSA. And the 2021 contributions have been running automatic to hit the max while playing 2020 catch up.

On investing, I saw some mention of bonds. I'm obviously a very new investor, but to this point, I haven't seen a scenario where it makes sense for me to own any bonds. 

In fact, I was wondering what you guys thought of just hitting boring dividend stocks heavy, sort of in lieu of bonds. I'm mainly talking about regular brokerage account. Roth and HSA are all invested in a range of index funds/ETF's. 

But for the regular brokerage, it's on top of emergency funds, and I don't put money in there that I plan to need within 5 years or so (and all the money I do, I pretend just lost 50%). But I'd still like to keep it more conservative than retirement assets. And I also think the growth stocks are due to take the hardest hit. Not trying to time the market, but since December, I've mostly just getting big boring dividend payers for that account.

Obviously, any security is a risk, but just wondering what you guys thought focusing on dividend stocks over bonds for right now. 

 

 

I get the allure. But they're not "safe", although they could be decent values right now. 

If you don't need the money within 5 years, but want it safer than your other investment accounts, it's probably best to use a conservative split. Something like 50% VTI, 50% VTIP (Vanguard Sht-Term Inflation-Protected Sec Idx ETF) or if taxes are an issue, VTEB (Vanguard Tax-Exempt Bond Index Fund ETF) might work for you.  Even though you don't want bonds, they do offer the safety net.

 

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Anyone doing anything fun/exciting in investing?  This has become one of my favorite threads--slow week it looks like haha.  

We should get a decent tax return--accountant got sick and had to reschedule.  Once that's done, I'm hoping we're able to pay off the wife's jeep.  And the only debt we'll have is the mortgage.  

Torn between starting to pay down the mortgage vs investing in taxable accounts.  Maybe a mix of both?

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5 hours ago, jm192 said:

Anyone doing anything fun/exciting in investing?  This has become one of my favorite threads--slow week it looks like haha.  

Check the penny stocks or stock trading threads if you want exciting. There has been success there. 

5 hours ago, jm192 said:

.  

Torn between starting to pay down the mortgage vs investing in taxable accounts.  Maybe a mix of both?

Totally depends on your risk tolerance.  I have no desire to pay down my mortgage quick.  Instead, automatically put whatever amount you can afford every month into a regular brokerage. I do an amount equal to our mortgage. Same day as the mortgage. I do plan to have as paid off mortgage when I retire but it's not a top priority.

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On 3/25/2021 at 9:21 AM, steelerfan1 said:

Was looking at vanguard lastnight and under Bonds they had a GNMA option that i mat pair with BND for that allocation. Do you have a pref for bond funds? we have about 8 more years before i retire and we are very low on bonds right now as they just look unappealing to me for some reason right now.

GNMA fund honestly doesn’t get me that excited.  If you pair that with BND you are going to overweight Agency MBS (spec GNMA).  If you really like MBS, I’d use MBB.  Bigger pool of MBS, cheaper and better yield (I believe).  I’d personally just stick with BND unless you want to actively rotate sectors.  I’d rather own investment grade and high yield corporates than MBS.  
 

If you want an active fund, GIBIX (can’t remember the investor class ticker) is one of my favorite.  I’ve used it for many years.  It can be volatile so you need to be ready and willing to ride out a tough patch.  

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7 hours ago, jm192 said:

Torn between starting to pay down the mortgage vs investing in taxable accounts.  Maybe a mix of both?

I'm a big fan of building the money up, then cutting a big check to pay off a mortgage.  If you just pay it off at an accelerated rate you lose both investable cash (or emergency cash) without the advantage to having the mortgage gone - increased cashflow.

 

On 3/24/2021 at 1:00 PM, BigJim® said:

My sister OTOH fancied herself as more shrewd/"internet group informed" and has become broke twice. She actually had one situation where she had gains in the range of $250K which she lost nearly overnight re-investing the gain toward another hyped stock that tanked... resulting in a monumental tax consequence, and a bankruptcy. 

The only way this happens is with margin.  Maybe mixed with YOLO options.  

This doesn't speak so much to active vs. passive, but just to basic rules of portfolio construction and risk control.

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I'm also a big fan of just investing the mortgage savings instead of paying down.   I think the only way you won't come out ahead is if you really have your heart set on paying off the mortgage by that date it would've been paid off if you were paying it down and the market happens to take a turn for the worse during that time.

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1 hour ago, Sand said:

I'm a big fan of building the money up, then cutting a big check to pay off a mortgage.  If you just pay it off at an accelerated rate you lose both investable cash (or emergency cash) without the advantage to having the mortgage gone - increased cashflow.

 

 

This is the point many miss, especially followers of Ramsey.

"Paying down the mortgage gives you security!"  

No. It doesn't. A paid off mortgage does. but paying it down is akin to buying a bond at the rate of the mortgage. (Not accounting for tax benefits which most of us don't get anyway)

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1 hour ago, Sand said:

The only way this happens is with margin.  Maybe mixed with YOLO options.  

This doesn't speak so much to active vs. passive, but just to basic rules of portfolio construction and risk control.

I know a lot of people in those internet forums like wsb that mostly just buy longer dated options all the time. I had a roommate 8 years ago that made and lost a mini-fortune several times. At least he always paid rent.

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9 hours ago, -OZ- said:

This is the point many miss, especially followers of Ramsey.

"Paying down the mortgage gives you security!"  

No. It doesn't. A paid off mortgage does. but paying it down is akin to buying a bond at the rate of the mortgage. (Not accounting for tax benefits which most of us don't get anyway)

This is my thought, also.  I refi’d last year 4 years into a 30yr.  I wanted to go 15yr but my company had frozen salaries and said if revenues dropped below a certain amount there would be across-the-board cuts in comp.  I didn’t want to lock in a 15 year with that over my head.  
 

Fast forward a year and everything is great.  I think about paying down the mtge on a 15 year pace but all it does is suck up cash flow.  I itemize so my after tax cost is around 2% or so. I just can’t do it.  I guess my plan is to pay it off when I retire in 15-18 years.  

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18 minutes ago, Andrew74 said:

This is my thought, also.  I refi’d last year 4 years into a 30yr.  I wanted to go 15yr but my company had frozen salaries and said if revenues dropped below a certain amount there would be across-the-board cuts in comp.  I didn’t want to lock in a 15 year with that over my head.  
 

Fast forward a year and everything is great.  I think about paying down the mtge on a 15 year pace but all it does is suck up cash flow.  I itemize so my after tax cost is around 2% or so. I just can’t do it.  I guess my plan is to pay it off when I retire in 15-18 years.  

If most of your retirement income is from investments (so, most people), lowering your fixed costs makes a lot of sense. 

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2 hours ago, -OZ- said:

If most of your retirement income is from investments (so, most people), lowering your fixed costs makes a lot of sense. 

:yes:

I paid mine off last year and so far this year I'm sitting at 60x expenses.  It's been a light set of months, but still it does make the ratios better.

If one hopes to use ACA subsidies and stay under the 400% cliff getting these fixed expenses down makes sense, as well.

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11 hours ago, Desert_Power said:

I know a lot of people in those internet forums like wsb that mostly just buy longer dated options all the time. I had a roommate 8 years ago that made and lost a mini-fortune several times. At least he always paid rent.

The bankruptcy part of that at least implies that the investment activity drove them below zero.  Margin or naked options are really the only ways to get there.

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2 hours ago, -OZ- said:

If most of your retirement income is from investments (so, most people), lowering your fixed costs makes a lot of sense. 

That's something I'm going to give some thought when the time comes.   Just refinanced into a 30 so would be looking at 16 more years in retirement if I retire at 60.  I understand what you're saying but maybe the smarter play is to just sock say 4 years of mortgage payments into a money market and if a downturn hits, just tap into that for the mortgage payments.   This way you're still aggressive with the remainder while giving you that security blanket.  

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1 hour ago, NutterButter said:

That's something I'm going to give some thought when the time comes.   Just refinanced into a 30 so would be looking at 16 more years in retirement if I retire at 60.  I understand what you're saying but maybe the smarter play is to just sock say 4 years of mortgage payments into a money market and if a downturn hits, just tap into that for the mortgage payments.   This way you're still aggressive with the remainder while giving you that security blanket.  

That's certainly an option. I don't think I'd call it smarter unless you're getting better interest than most bank accounts have now.  

If you move at retirement your plan makes more sense than if you had 5-10 years left on the mortgage.  With 16 years left I think it's basically a toss up. 

If we stay here and retire at 60, I'll have 14 years left on the mortgage. The only reason I'd keep it is my current fixed income is a little more than 4x the mortgage, the income is inflation adjusted, the mortgage isn't. 

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9 minutes ago, -OZ- said:

That's certainly an option. I don't think I'd call it smarter unless you're getting better interest than most bank accounts have now.  

If you move at retirement your plan makes more sense than if you had 5-10 years left on the mortgage.  With 16 years left I think it's basically a toss up. 

If we stay here and retire at 60, I'll have 14 years left on the mortgage. The only reason I'd keep it is my current fixed income is a little more than 4x the mortgage, the income is inflation adjusted, the mortgage isn't. 

I'm talking the interest you're getting from having the remainder still in market investments rather than just in your home equity.  In my case, I'd still have 162K left on the mortgage.  Mortgage payments are roughly 14k per year for 14 years.   So if I stash 56k in the bank, that's 106K I'm leaving in my investments.   Plugged that into my retirement spreadsheet and that gives me a pretty nice return over just paying off the mortgage upon retirement.   

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17 minutes ago, NutterButter said:

I'm talking the interest you're getting from having the remainder still in market investments rather than just in your home equity.  In my case, I'd still have 162K left on the mortgage.  Mortgage payments are roughly 14k per year for 14 years.   So if I stash 56k in the bank, that's 106K I'm leaving in my investments.   Plugged that into my retirement spreadsheet and that gives me a pretty nice return over just paying off the mortgage upon retirement.   

I get it. You're willing to accept the risk.  So many of us underestimate the risk of a long term down market because we haven't experienced a truly long term down market.  

I only assume 4% plus inflation for my investments, so it might not look as good in my chart as yours, I'm probably overly conservative in my forecast. I'm not even saying I will pay it off, but it is a risk mitigation play.

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9 minutes ago, -OZ- said:

I get it. You're willing to accept the risk.  So many of us underestimate the risk of a long term down market because we haven't experienced a truly long term down market.  

I only assume 4% plus inflation for my investments, so it might not look as good in my chart as yours, I'm probably overly conservative in my forecast. I'm not even saying I will pay it off, but it is a risk mitigation play.

Yes on the risk in a large part b/c I do have a decent amount of cushion built into my spending as it is.  If a downturn were to exceed that 4 year stockpile, I have other ways to absorb that cost that wouldn't involve some austere lifestyle changes; no family trip to disney world this year on grandpa's dime :)

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22 hours ago, Andrew74 said:

GNMA fund honestly doesn’t get me that excited.  If you pair that with BND you are going to overweight Agency MBS (spec GNMA).  If you really like MBS, I’d use MBB.  Bigger pool of MBS, cheaper and better yield (I believe).  I’d personally just stick with BND unless you want to actively rotate sectors.  I’d rather own investment grade and high yield corporates than MBS.  
 

If you want an active fund, GIBIX (can’t remember the investor class ticker) is one of my favorite.  I’ve used it for many years.  It can be volatile so you need to be ready and willing to ride out a tough patch.  

Thanks Andrew, after doing some back tests it looks like just staying in BND is the answer for now. Sometimes I think I just like to make things more complicated than they are.

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Very late to this thread, so I'll apologize if this topic has been covered somewhere in the previous 115 pages but it is way to much for me to wade through.

I've been doing my own investments (401(k), IRAs, a few other mutuals) since my wife and I got married a dozen years ago. The results have been good, certainly no complaints. But now I have hit a bit of a snafu. My ex-wife had been getting half of my military retired pay for the past 15 years or so. She passed away unexpectedly early last year and so that half of my retired pay reverted to me.

The issue, that money being returned to me, along with pay raises and a healthy work bonus, pushed me over the limit for contributing to a Roth IRA. I didn't realize it until I did my taxes and Turbo Tax basically informed me of the fact. I understand I can "recharacterize" my 2020 IRA contributions (both mine and the wife's) to a traditional IRA. One is with Vanguard, the other with T Rower Price.

Has anyone gone through this? Am I going to be able to do this? I understand recharacterizations from Roth to Traditional are no longer permitted, but may be in a case like this? Or am I going to be stuck withdrawing those contributions and paying a penalty, or using them to "pay ahead" subsequent years or IRA contributions?

Needless to say, this was unexpected, caught me off guard and has me a bit nervous, so hoping maybe someone in here has experience with this.

Thanks.

Edited by DallasDMac
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On 3/28/2021 at 9:49 AM, D_House said:

Sorry about your restaurant and happy to hear you made it through!

Bonds are ballast for your portfolio and a source of "dry powder" if you have the stomach to rebalance during stock market drawdowns. For an early accumulator they are not as important as closer to retirement. And as a small business owner I am guessing you have some debt, which can be thought of as negative bonds. Hopefully you have a large emergency fund and if that is the case than no bonds is reasonable.

But high dividend stocks are not bonds and I don't think there's any evidence that they are less prone to big drops than the broader market. Vanguard's high dividend yield fund (VYM) did worse vs it's S&P fund (VOO) during the big drawdowns in March 2020. So don't expect them to be "safer" than your indexes in your IRA (assuming you have total market funds).

And don't forget taxes. They are a major factor in returns. Dividends are basically forced capital gains. If you want to implement a dividend-focused strategy it makes more sense to do it in your tax-protected space as you won't pay any taxes on dividends.

One way to do this is to sell off lots of your indexes in your IRAs and buy equivalent amounts of the same index in your taxable. Then use the freed up cash in your IRA to invest in the dividend stocks you like.

Index funds are also easier to tax-loss harvest (which you can only do in your taxable accounts) than are individual securities.

On the taxes and placement of dividend focused stocks, I've been really torn on that. 

I don't love the idea of incurring a tax bill, but here's my thinking in focusing them in a taxable account.....I use my tax protected accounts (Roth/HSA) for investments that are likely to have more capital appreciation (range of index funds). 

For the dividend payers in the taxable account....so far, it's stocks that are not likely to have huge price growth (stuff like AT&T, Pfizer, Coke, grocery chains, some financials, etc). These are also assets that I'm more likely to sell in the intermediate future (say, 5-15 years from now if I want to start investing in rentals or another business). These are less likely to incur huge capital gains bills compared to indexes or growth assets. 

Also, I don't plan on ever doing it, but if I needed to access any of the funds in less than a year, I'd be even more happy that it's a slow grower that I'd be selling.  And I'd prefer to sell them than an index fund that's been going bonkers. 

Another factor is that I'm not in a typical FBG tax bracket. For me, taking a tax hit on dividends isn't goine to be as large as a high income earner. 

I do about 50/50 (dividend payers/index funds) in the taxable account now and plan to keep it that way, so I'll have some loss harvesting chances.

I agree with what you are saying, and like I said, I've been struggling with the right path on that issue. But that's why I've chosen this route for now. 

 

 

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2 hours ago, DallasDMac said:

Very late to this thread, so I'll apologize if this topic has been covered somewhere in the previous 115 pages but it is way to much for me to wade through.

I've been doing my own investments (401(k), IRAs, a few other mutuals) since my wife and I got married a dozen years ago. The results have been good, certainly no complaints. But now I have hit a bit of a snafu. My ex-wife had been getting half of my military retired pay for the past 15 years or so. She passed away unexpectedly early last year and so that half of my retired pay reverted to me.

The issue, that money being returned to me, along with pay raises and a healthy work bonus, pushed me over the limit for contributing to a Roth IRA. I didn't realize it until I did my taxes and Turbo Tax basically informed me of the fact. I understand I can "recharacterize" my 2020 IRA contributions (both mine and the wife's) to a traditional IRA. One is with Vanguard, the other with T Rower Price.

Has anyone gone through this? Am I going to be able to do this? I understand recharacterizations from Roth to Traditional are no longer permitted, but may be in a case like this? Or am I going to be stuck withdrawing those contributions and paying a penalty, or using them to "pay ahead" subsequent years or IRA contributions?

Needless to say, this was unexpected, caught me off guard and has me a bit nervous, so hoping maybe someone in here has experience with this.

Thanks.

You can re-characterize your contributions.  If you contributed to a roth--you can re-characaterize that to a non-roth contribution. 

You can still contribute to your roth accounts by way of the "back door."  Contribute up to the max in post-tax dollars in your traditional IRA--then do a roth "conversion."  On most websites, this will be transferring money from 1 account to the other.  It seems superfluous that you can go through the steps and end up the same place you are today--but it's all about tracking the steps.  But once you've got the re-characterization done--you can do the conversion so that's in the roth account and your gains are growing tax free.  

 

https://www.irs.gov/retirement-plans/ira-faqs-recharacterization-of-ira-contributions

Important to note--if you've invested the money--you'll probably have to pay taxes on the gains when you convert to roth.  But assuming it's all post-tax dollars you contributed--you won't have to pay any taxes on the invested amount.  

Edited by jm192
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Finally to piggyback on the backdoor ROTH since I have extra income from a promotion. My retirement will be pension (60% annual pay), maxing out my defferred comp (19k per year), and hopefully I can maintain maxing out the ROTH. 

If I understand correctly I already have a ROTH IRA at Vanguard. All I have to do is open a traditional IRA and then send the funds over to my ROTH? Also, I assume I can still contribute to 2020 in the traditional and the backdoor?

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4 hours ago, Charlie Harper said:

Finally to piggyback on the backdoor ROTH since I have extra income from a promotion. My retirement will be pension (60% annual pay), maxing out my defferred comp (19k per year), and hopefully I can maintain maxing out the ROTH. 

If I understand correctly I already have a ROTH IRA at Vanguard. All I have to do is open a traditional IRA and then send the funds over to my ROTH? Also, I assume I can still contribute to 2020 in the traditional and the backdoor?

You contribute to the Traditional.  There's a button on Vanguard that says "Roth conversion" or something to that effect.  Make sure you contribute to the traditional first and convert it.  

You can contribute up to 6,000$ a year total for all IRA's.  So if you didn't do your 2020 contributions yet, you have until April 15th to make those contributions.  You can do the conversion whenever. 

I recommend you don't invest the money until you've made the conversion.  If you put it in the traditional and invest it before the conversion, you'll owe taxes on the gains.  

Once you've contributed and made you conversions, it's just a matter of doing it appropriately on tax form 8606.  Your 2020 form will be pretty straight forward, 2021 will be a bit more involved.  

**Also very important to note.  Make sure all of your traditinonal/sep/simple IRA's have a zero balance at the end of the year.  Otherwise you'll be subject to the pro-rata rule and the taxes will negate a lot of the benefits of having a roth IRA.  This comes into play any year you're doing Roth conversions.  It ONLY matters for the year you do the conversion--a lot of people get confuse by this.  Say you do your 2020 contributions now in 2021, and do a conversion--it won't trigger the pro-rata rule because you didn't do a roth conversion in 2020.  

Here's a really good guide that explains the process and filling out form 8606.  

https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/?fbclid=IwAR1VzjDHUSV3W4e0XjEqWFCvvNa9wmtv7chxFF6fmSVxt5fTj_ZC_QYYn_Y

Edited by jm192
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6 hours ago, jm192 said:

You can re-characterize your contributions.  If you contributed to a roth--you can re-characaterize that to a non-roth contribution. 

edited for brevity

Important to note--if you've invested the money--you'll probably have to pay taxes on the gains when you convert to roth.  But assuming it's all post-tax dollars you contributed--you won't have to pay any taxes on the invested amount.  

Thank you so much. One quick question, if you happen to know the answer. I contributed to a Roth, meaning post tax dollars. A traditional is pre-tax. I assume then that this will be handled by adjusting my AGI when I have to file an amended return?

Edited by DallasDMac
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3 hours ago, DallasDMac said:

Thank you so much. One quick question, if you happen to know the answer. I contributed to a Roth, meaning post tax dollars. A traditional is pre-tax. I assume then that this will be handled by adjusting my AGI when I have to file an amended return?

If you and/or your spouse are covered by a work retirement plan the traditional IRA contribution may not be deductible based on your income. If that is the case your AGI and tax would not change and you can file Form 8606 as a stand-alone form to report a non deductible traditional IRA contribution instead of amending. 

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4 hours ago, DallasDMac said:

Thank you so much. One quick question, if you happen to know the answer. I contributed to a Roth, meaning post tax dollars. A traditional is pre-tax. I assume then that this will be handled by adjusting my AGI when I have to file an amended return?

For a Traditional, there's 2 types of contributions.  

1.  You can put pre-tax dollars/your employer can match a certain percentage of your contributions

2.  You can put post-tax dollars into your own directed traditional IRA.  

If your issue is that you make too much for the roth IRA--then the re-characterization should fix your issue.  It's all post-tax money--just a matter of where you put it.  

You can do a roth conversion or "back door roth IRA."  As long as you don't have any gains on the money, you won't owe further taxes--again it's post tax money.  If your AGI is too high, I think this is your best option in the long run--unless you've just got a ton in traditional/non-roth IRA's.

IF you do the roth conversion, you have to be aware of the pro-rata rule.  Basically, your total amount of money in non-roth IRA's needs to be zero by December 31st of the year in which you made the conversion.  If not, it's a "partial" conversion, and a lot of math happens and they tax a percentage of the pre-tax money.  You can just convert it all to roth and pay taxes on the pre-tax money.  You can withdraw it but there's withdrawal penalties.  

ALL of that said--if you're looking at multiple accounts, this stuff becomes fairly complicated IMO.  I'd let an accountant do the taxes to sort the headaches.  

Edited by jm192
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28 minutes ago, jm192 said:

For a Traditional, there's 2 types of contributions.  

1.  You can put pre-tax dollars/your employer can match a certain percentage of your contributions

2.  You can put post-tax dollars into your own directed traditional IRA.  

If your issue is that you make too much for the roth IRA--then the re-characterization should fix your issue.  It's all post-tax money--just a matter of where you put it.  

You can do a roth conversion or "back door roth IRA."  As long as you don't have any gains on the money, you won't owe further taxes--again it's post tax money.  If your AGI is too high, I think this is your best option in the long run--unless you've just got a ton in traditional/non-roth IRA's.

IF you do the roth conversion, you have to be aware of the pro-rata rule.  Basically, your total amount of money in non-roth IRA's needs to be zero by December 31st of the year in which you made the conversion.  If not, it's a "partial" conversion, and a lot of math happens and they tax a percentage of the pre-tax money.  You can just convert it all to roth and pay taxes on the pre-tax money.  You can withdraw it but there's withdrawal penalties.  

ALL of that said--if you're looking at multiple accounts, this stuff becomes fairly complicated IMO.  I'd let an accountant do the taxes to sort the headaches.  

Both of our IRAs are Roth. We've never contributed any money to Traditional.

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27 minutes ago, DallasDMac said:

Both of our IRAs are Roth. We've never contributed any money to Traditional.

Ok, yeah so the fix is super easy.  

I think you have to go through the steps for tax purposes, unfortuntately.  But yeah, just re-characterize.  Don't invest any of the amount.  Do roth conversion.  You won't have to pay anymore in taxes since it's post-tax dollars.  Once it clears, you're good to invest it.  Fill out 8606 for 2020, and 2021.

Assuming you stay over the income limits--you'll have to do a backdoor roth every year instead of contributing directly.  Which is just a few steps and a few lines on 8606.  

Here's a really good guide that explains the process and filling out form 8606.  

https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/?fbclid=IwAR1VzjDHUSV3W4e0XjEqWFCvvNa9wmtv7chxFF6fmSVxt5fTj_ZC_QYYn_Y

Edited by jm192
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22 hours ago, jm192 said:

Ok, yeah so the fix is super easy.  

I think you have to go through the steps for tax purposes, unfortuntately.  But yeah, just re-characterize.  Don't invest any of the amount.  Do roth conversion.  You won't have to pay anymore in taxes since it's post-tax dollars.  Once it clears, you're good to invest it.  Fill out 8606 for 2020, and 2021.

Excuse the ignorance here, but what do you mean by the bolded? The money has to be placed in a mutual or some investment vehicle does it not? All of current contributions go to a target fund. I do an automated monthly contribution. When I recharacterize, I'll have to have a designated mutual for the Traditional IRA that I will need to have set up will I not?

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