We are homeowners with a pretty sizeable mortgage but we also accumulated a nice retirement nest egg, which is actually many times larger that our mortgage. Even our taxable investments are several times larger than the mortgage. Still, we don’t pay off the mortgage because we like the benefit of leverage. We have a liability with a low interest rate and assets with a much higher expected rate of return, so our overall expected rate of return is higher than without a mortgage. Our friend FinanciaLibre did some nice number crunching on this topic recently and we agree wholeheartedly.
Moreover, if you follow our blog you’ll also remember that we take a pretty dim view on bonds:
So, personally, we skip the bond allocation altogether. Others have written about this, too, check Physician on Fire’s 2-part guest post here and here. In light of all of this, here’s one question that occurred to us:
Why would anybody have a 30-year mortgage at about 3.50% and a bond portfolio currently paying around 1.8 to maybe 2.5% interest for safe government bonds?
Leverage works only when the asset has a higher expected return than the liability! Read More »
There is a popular car insurance commercial featuring someone who “just saved a ton of money by switching to GEICO.” How much is a ton of money? $400? Well, by that measure we just saved more than “100 tons of money” or a whole century worth of car insurance savings. And we didn’t do so by switching, but by not switching our brokerage account. Ka-Ching, how easy was that?Read More »
Tax Loss Harvesting is the rage now. Robo-advisers do it for you, and every DIY saver should seriously consider the benefits. Let’s look at what Tax Loss Harvesting is, how and why it works and how large (or small) the expected benefits can be.Read More »
Running some income tax scenarios for when we finally retire in 2018, we ran into a situation where our ordinary income would be taxed at a whopping 30% marginal rate on our federal return, despite having a total income of “only” around $100,000 (married filing jointly). How is that possible? There is no 30% bracket, only 10, 15, 25, 28, 33, 35, and 39.6%. Moreover, the 30%+ rates don’t even start until $231,450 taxable income for married joint filers, right?
Some people argue that there is a rule of thumb for which account is more attractive when saving for retirement (both early retirement and “normal” retirement). Go Curry Cracker like the 401(k) and are skeptical about Roth IRAs, while someone on Kiplinger recently recommended the Roth and trash-talked the regular 401(k) in light of higher projected future tax rates. Who is right? Nobody. There are likely no universally true answers to the following (and many other) questions:
Taxable account vs. Roth IRA?
Roth 401(k) vs. regular 401(k)?
After-tax 401(k) contributions or taxable account?
Should I invest in a high-fee 401(k) at work or a low fee taxable account?
What is the drag in after-tax returns from having to pay taxes on dividends throughout the accumulation phase?
If you have a lot of money to invest and already max out the regular 401(k), should you shift more money into a Roth 401(k), to get more “bang for the buck?”
Should I roll over an IRA to a Roth IRA?
Should I use a deferred variable annuity to boost tax-deferrals?
Pay down credit card debt first before saving for retirement?
It all depends on the individual situation, tax rates, expected return assumptions, account fees/expense ratios, etc. The only way to tell which account is more attractive is to get out the spreadsheet, punch in your particular parameters and compare. But how do you do that? Others did it before but sometimes we have the feeling they compare apples and oranges. A Roth 401(k) is best because you can withdraw tax-free? Not necessarily because you have to take into account the taxes you pay upfront when contributing to the Roth IRA.
We came up with an easy way to make sure you compare apples to apples to gauge the relative attractiveness of different accounts. Read More »
I remember recent posts by Plan Invest Escape and Slowly Sipping Coffee about bad advice from the experts, the so-called financial planners. The post itself and the comments from others about bad experiences with advisers can really raise your blood pressure. But you don’t even have to hire them. Sometimes just reading their posts online is enough to expose the empty suits. One of those nuggets was on Kiplinger (via Yahoo! Finance) today on why, ostensibly, the 401(k) is not a good option to save for retirementRead More »
Tired of contributing a paltry $5,500 per year ($11,000 for couples) to your Roth? If you like to contribute more than that, why not find a way to generate returns in a taxable account that mimic those of a Roth IRA? Impossible, you say? Under very specific conditions it is possible to generate after-tax returns in a taxable account that replicate those of a Roth IRA. We call it the Synthetic Roth IRA.Read More »
Most investors will get much smaller excess returns from the tax savings than what the Robo-advisers claim.
Robo-advisers pick an asset allocation that may have tax inefficiencies built in for some investors, worth at least several basis points of annualized returns.
Smart investors should still perform Tax Loss Harvesting, but it’s best to DIY because the benefits may not outweigh the Robo-adviser fees, especially if taking into account some of the potential inefficiencies introduced in the Robo-adviser target portfolios.
A list of (relatively) low cost index ETFs and mutual funds, their tickers, benchmark index, provider, current fee and yield (as of 12/31/2015 in most cases), dividend payment schedule and link to the fund fact sheet. I haven’t ascertained the dividend schedule for most of the funds yet.Read More »
We don’t use Robo-advisers because their services can be easily replicated with zero fees by smart frugal retirement savers. Tax loss harvesting, one of the Robo-adviser tasks, is also easy to perform yourself and we have been doing it since beginning to save in taxable accounts. Of course, once we are retired, tax loss harvesting is much less useful and for some early retirees, it is even completely ineffective. Moreover, investing only a small portion of your portfolio with a Robo-adviser, and managing the rest yourself is a bad idea because, among other reasons, some of your own trades could potentially invalidate the tax losses in the Robo account.