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Post by Mustang on Apr 11, 2022 15:25:05 GMT
Finally someone who thinks like I do. In the past I have disagreed with Morningstar analysts who write gloom and doom stories about the 4% Rule based on Monte Carlo simulations. They can't dispute the guideline based on historical data because historical data is fixed. Inputs to the computer simulations can be adjusted. According to Bengen's original paper, the Trinity Study, and Pfau's update of the Trinity Study the 4% Rule is very conservative since it was designed around the worst case scenario in history. The Trinity Study also made it clear that 5% was a good initial withdrawal rate if inflation was expected to be under control or if the expected payout period was 20 years instead of 30. I don't think 5% should be used right now. Inflation is not yet under control.
The worst case scenario doesn't happen every day. An investor is far more likely to end the payout period with a large portfolio balance than run out of money. That is why I like Kitces' ratchet up system. If the portfolio's balance reaches 150% of its initial balance after the withdrawal then it is safe to increase the withdrawal 10%. But Kitces' said that the increase should be used only once every three years.
I also also agree with Collins about dollar-cost-averaging. It is a good way to invest when you are making regular investments out of your paycheck. You are building a retirement portfolio as you earn the money. But it is not really a good idea to dollar-cost- average a lump sum windfall if you expect the market to go up like it had been. The only time he recommended dollar-cost-averaging a lump sum is if you expect the market to go down.
I am currently dollar-cost-averaging the money we received from the sale of a house because I fully expect the market to go down. If my view of the market changes I will put all the excess cash in.
If you are interested here is the complete interview. He even has my view on real estate. I lost money on my first rental house. I was living in a different state. My parents were suppose to watch the house for me because it was next door to theirs. In the end, the renters left on the midnight express after doing significant damage to the house. I repaired it and sold it swearing that I would never do that again. Renting is not a passive investment. Either you have to work to manage the property or hire someone to do it for you. Then you have the paperwork associated with employees.
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galeno
Commander
KISS & STC
Posts: 221
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Post by galeno on Apr 11, 2022 17:33:13 GMT
According to FireCalc our 50/50 port has a 95% SWR = 4.0%.
When we add our government pensions this SWR goes to 5.3%.
We try to keep our AWR ~ 4.0%.
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Post by FD1000 on Apr 11, 2022 21:05:10 GMT
Mustang , I agree with everything Collins says. Most investors should be buy and hold and hardly trade + use stock+bond funds or allocation funds. Predicting what markets will do is difficult. I also posted many times most should avoid DCA a lump sum. If someone is really worry, then I posted there is a compromise solution. Let's use 3 funds SPY(100% stocks), VWENX (60/40), VWIAX (40/60). The purpose is to invest it all NOW. Suppose you want to invest your lump sum in 100% stocks(SPY), instead invest it in VWENX (60/40) and covert 10-20% every a few/several months to SPY. Similar case it if you like 60/40, invest in VWIAX (40/60) and covert 10-20% every a few/several months to VWENX. If you find great cheap funds, you get better risk/reward than indexes. There are always exceptions, and VWENX + VWIAX are at the top and can be held for decades. If SS+other income sources don't supply all your money needs, you sell the fund (VWENX or VWIAX) that has done better lately. That also helps to keep your AA + risk as planned. All the rest, such as buckets, too much cash, CEFs are all unnecessary complications. This is what I think about RE, see ( Why I never owned real estate (rentals or flipping).
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Post by Mustang on Apr 12, 2022 8:24:21 GMT
On of my goals is simplification. To me it is reducing the number of funds and using balanced funds. Collins talked about index funds. I read a few years ago that stock index funds outperformed stock managed funds but that bond funds and balanced funds were a different story. Since I didn't hold any index funds I didn't worry about it but after reading Collins' interview I decided to check. Vanguard Balanced Index Fund (VBINX) is a moderate-allocation fund that Morningstar says gives exposure to nearly every available stock as well as broad exposure to the taxable, investment-grade U.S. fixed-income market. Here is a comparison of that moderate-allocation index fund to my two managed moderate-allocation funds
12-MO 3-YR 5-YR 10-YR 15-YR YTD 2008
VBINX -0.1% 10.2% 9.5% 9.3% 7.5% -8.2% -22.2%
VWENX 2.6% 10.6% 9.8% 9.9% 8.0% -8.2% -22.2%
ABALX 3.4% 9.9% 9.3% 9.8% 7.6% -5.4% -25.7%
Note: The 15-YR returns includes 2008.
I look at 2008 to get an idea of how a fund performs during a market crash. The index fund beat American Funds Balanced Fund (ABALX) in 3- and 5-YR returns but Balanced Fund wins in recent performance and long term performance. The index fund doesn't beat Wellington (VWENX) in any category. So if this quick test is representative then what I read a few years ago is true. I think I will stick with my managed funds.
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Post by FD1000 on Apr 12, 2022 13:17:19 GMT
Mustang , It's a very old debate, indexes vs managed. The biggest problem when looking at managed is the fact they look at all funds. That's like looking at all basketball players instead of the best 10 players. There are good points about both. My 2 favorite allocation for many years are PRWCX for moderate and VWIAX for conservative. I have used PRWCX for years, almost none for VWIAX because I buy my own managed bond funds. Attachments:
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Deleted
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Post by Deleted on Apr 12, 2022 16:27:55 GMT
I also posted many times most should avoid DCA a lump sum. If someone is really worry, then I posted there is a compromise solution. Let's use 3 funds SPY(100% stocks), VWENX (60/40), VWIAX (40/60). The purpose is to invest it all NOW. Suppose you want to invest your lump sum in 100% stocks(SPY), instead invest it in VWENX (60/40) and covert 10-20% every a few/several months to SPY. Similar case it if you like 60/40, invest in VWIAX (40/60) and covert 10-20% every a few/several months to VWENX. How would you adapt this strategy for the current environment, given the bond portions of the balanced funds will likely continue to fall? I know equities may fall too, but I don't mind that risk. |
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Post by Chahta on Apr 12, 2022 17:51:38 GMT
How would you adapt this strategy for the current environment, given the bond portions of the balanced funds will likely continue to fall? I know equities may fall too, but I don't mind that risk. @skip , it is "funny" you should say you don't mind equity risk but bond fund risk does bother you. I feel the same way. I am trying to get past that and own a mostly B&H bond fund allocation. It may be because bond funds are relatively new to me. I owned 100% equity until 2 years before retiring (until 65) and now 70. One thing that makes bond fund risk easier to accept is buying low, as most funds are now. I am not suggesting to buy now but they are low. They may go lower but most are well below their highest prices. I am holding back to add more bond allocation as things settle down. I will take a little heat for saying this, but bond funds are mainly for yield (income). A huge CG should not be expected. |
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bf22
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Post by bf22 on Apr 12, 2022 18:02:34 GMT
@skip , it is "funny" you should say you don't mind equity risk but bond fund risk does bother you. I feel the same way. I am trying to get past that and own a mostly B&H bond fund allocation. It may be because bond funds are relatively new to me. I owned 100% equity until 2 years before retiring (until 65) and now 70. One thing that makes bond fund risk easier to accept is buying low, as most funds are now. I am not suggesting to buy now but they are low. They may go lower but most are well below their highest prices. I am holding back to add more bond allocation as things settle down. I will take a little heat for saying this, but bond funds are mainly for yield (income). A huge CG should not be expected. Agreed. The problem with bonds is that they are lower volatility (right now they are going down in a straight line). Thus, it is harder for bonds to make up the current losses. Also, as you said, with the shift in rates for the foreseeable future, yield is all we can hope for. A lot of the gains in bonds over the last 30 years were CG. However, at some point yields will be high enough to get back into bonds. Good investing...
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Post by Chahta on Apr 12, 2022 23:18:56 GMT
@skip , it is "funny" you should say you don't mind equity risk but bond fund risk does bother you. I feel the same way. I am trying to get past that and own a mostly B&H bond fund allocation. It may be because bond funds are relatively new to me. I owned 100% equity until 2 years before retiring (until 65) and now 70. One thing that makes bond fund risk easier to accept is buying low, as most funds are now. I am not suggesting to buy now but they are low. They may go lower but most are well below their highest prices. I am holding back to add more bond allocation as things settle down. I will take a little heat for saying this, but bond funds are mainly for yield (income). A huge CG should not be expected. Agreed. The problem with bonds is that they are lower volatility (right now they are going down in a straight line). Thus, it is harder for bonds to make up the current losses. Also, as you said, with the shift in rates for the foreseeable future, yield is all we can hope for. A lot of the gains in bonds over the last 30 years were CG. However, at some point yields will be high enough to get back into bonds. Good investing...
I don't necessarily agree. Yes bond funds have been going down but the managers don't sit and try to do nothing. They are trading as well making their own opportunities for the fund. It is not "buy a bond yielding 2% and wait for it to mature". |
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galeno
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KISS & STC
Posts: 221
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Post by galeno on Apr 13, 2022 9:33:22 GMT
For long term B&H investors the NAV of an INDEXED investment grade bond fund simply does not matter.
Does it REALLY matter if my TWBM fund goes from NAV = $100 with a yield = 1% to NAV = $50 with a yield = 2%?
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Deleted
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Post by Deleted on Apr 13, 2022 22:15:13 GMT
For long term B&H investors the NAV of an INDEXED investment grade bond fund simply does not matter. Does it REALLY matter if my TWBM fund goes from NAV = $100 with a yield = 1% to NAV = $50 with a yield = 2%? Only if the yield is sufficient to meet your needs. Some folks may need the principal to pay for expenses in retirement. |
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hondo
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Post by hondo on Apr 20, 2022 22:24:48 GMT
On of my goals is simplification. To me it is reducing the number of funds and using balanced funds. Collins talked about index funds. I read a few years ago that stock index funds outperformed stock managed funds but that bond funds and balanced funds were a different story. Since I didn't hold any index funds I didn't worry about it but after reading Collins' interview I decided to check. Vanguard Balanced Index Fund (VBINX) is a moderate-allocation fund that Morningstar says gives exposure to nearly every available stock as well as broad exposure to the taxable, investment-grade U.S. fixed-income market. Here is a comparison of that moderate-allocation index fund to my two managed moderate-allocation funds 12-MO 3-YR 5-YR 10-YR 15-YR YTD 2008 VBINX -0.1% 10.2% 9.5% 9.3% 7.5% -8.2% -22.2% VWENX 2.6% 10.6% 9.8% 9.9% 8.0% -8.2% -22.2% ABALX 3.4% 9.9% 9.3% 9.8% 7.6% -5.4% -25.7% Note: The 15-YR returns includes 2008. I look at 2008 to get an idea of how a fund performs during a market crash. The index fund beat American Funds Balanced Fund (ABALX) in 3- and 5-YR returns but Balanced Fund wins in recent performance and long term performance. The index fund doesn't beat Wellington (VWENX) in any category. So if this quick test is representative then what I read a few years ago is true. I think I will stick with my managed funds. I assume the funds above are in tax-deferred accounts. All three are very good funds, but have you looked at how they do in taxable accounts? I believe VBINX will be the winner in a taxable account.
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hondo
Commander
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Post by hondo on Apr 20, 2022 22:34:58 GMT
@skip , it is "funny" you should say you don't mind equity risk but bond fund risk does bother you. I feel the same way. I am trying to get past that and own a mostly B&H bond fund allocation. It may be because bond funds are relatively new to me. I owned 100% equity until 2 years before retiring (until 65) and now 70. One thing that makes bond fund risk easier to accept is buying low, as most funds are now. I am not suggesting to buy now but they are low. They may go lower but most are well below their highest prices. I am holding back to add more bond allocation as things settle down. I will take a little heat for saying this, but bond funds are mainly for yield (income). A huge CG should not be expected. I agree. My bond funds are for yield not CGs. If they go down, I get more shares for my money when I reinvest the dividends. |
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Post by Mustang on Apr 20, 2022 23:48:48 GMT
On of my goals is simplification. To me it is reducing the number of funds and using balanced funds. Collins talked about index funds. I read a few years ago that stock index funds outperformed stock managed funds but that bond funds and balanced funds were a different story. Since I didn't hold any index funds I didn't worry about it but after reading Collins' interview I decided to check. Vanguard Balanced Index Fund (VBINX) is a moderate-allocation fund that Morningstar says gives exposure to nearly every available stock as well as broad exposure to the taxable, investment-grade U.S. fixed-income market. Here is a comparison of that moderate-allocation index fund to my two managed moderate-allocation funds 12-MO 3-YR 5-YR 10-YR 15-YR YTD 2008 VBINX -0.1% 10.2% 9.5% 9.3% 7.5% -8.2% -22.2% VWENX 2.6% 10.6% 9.8% 9.9% 8.0% -8.2% -22.2% ABALX 3.4% 9.9% 9.3% 9.8% 7.6% -5.4% -25.7% Note: The 15-YR returns includes 2008. I look at 2008 to get an idea of how a fund performs during a market crash. The index fund beat American Funds Balanced Fund (ABALX) in 3- and 5-YR returns but Balanced Fund wins in recent performance and long term performance. The index fund doesn't beat Wellington (VWENX) in any category. So if this quick test is representative then what I read a few years ago is true. I think I will stick with my managed funds. I assume the funds above are in tax-deferred accounts. All three are very good funds, but have you looked at how they do in taxable accounts? I believe VBINX will be the winner in a taxable account.
ABALX is in a tax deferred account. VWENX is in a taxable account. I'm not sure VBINX would be better in a taxable account. I just looked at the last four years of distributions for each in Morningstar. 67% of VBINX distributions were dividends taxed as ordinary income. Only 31% of VWENX distributions were dividends. 63% were LT capital gains.
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Post by fishingrod on Apr 21, 2022 0:37:05 GMT
I assume the funds above are in tax-deferred accounts. All three are very good funds, but have you looked at how they do in taxable accounts? I believe VBINX will be the winner in a taxable account.
ABALX is in a tax deferred account. VWENX is in a taxable account. I'm not sure VBINX would be better in a taxable account. I just looked at the last four years of distributions for each in Morningstar. 67% of VBINX distributions were dividends taxed as ordinary income. Only 31% of VWENX distributions were dividends. 63% were LT capital gains.
If one is in a high enough tax bracket VWENX will under perform VBINX after tax.
VBINX dividends are qualified and taxed at long term capital gains rates. VBINX distributes little or no capital gains. Large unexpected capital gains from funds are a no no in a taxable account.
VWENX has a much higher tax cost ratio.
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Post by Mustang on Apr 21, 2022 11:19:44 GMT
I don't know why capital gains would be a no no. I found these sentences a little confusing, "VBINX dividends are qualified and taxed at capital gains rates. VBINX distributes little or no capital gains. Capital gains are a no no in a taxable account." If the capital gains tax rate is bad then how could dividends taxed as capital gains be good? I have always preferred capital gains to dividends. Capital gains have always been taxed at a lower rate than ordinary dividends. As far as VBINX’s qualified dividends. I tried to look it up. Morningstar said this, “The bond sleeve tracks the Bloomberg U.S. Aggregate Float Adjusted Bond Index, which provides broad exposure to the taxable, investment-grade U.S. fixed-income market.” I couldn’t find what proportion of dividends were qualified but I suspect it wouldn’t be all since it is an index. And, if VBINX had such a tax advantage I would have expected every writer comparing the two funds to have pointed it out. I couldn't find one that did. Perhaps you have more information on this. I just looked at the tax brackets for 2022 to see what has changed. The tax brackets for qualified dividends and capital gains are basically the same. Both are lower than the tax rates for ordinary income. Since dividends are taxed as ordinary income and qualified dividends are taxed as capital gains qualified dividends do have a lower tax consequence. Ordinary Income: taxfoundation.org/2022-tax-brackets/Qualified Dividends: www.nerdwallet.com/article/taxes/dividend-tax-rateCapital Gains: finance.yahoo.com/news/2022-capital-gains-tax-rate-194341395.html
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Post by fishingrod on Apr 21, 2022 12:27:12 GMT
VBINX and VWENX both distribute taxable "ordinary income" from the bond interest payments in the portfolio. VBINX and VWENX both distribute taxable "qualified dividends" which is good, from stock divis in the portfolio. VWENX distributes both short term and long term large capital gains year after year. Short term is taxed as ordinary income.
VBINX has distributed very small capital gains.
Capital gains are fine in a tax-deferred account, but in a taxable acct. they can cause unexpected and unwanted tax burdens. These are the tax cost ratios from M* Data from 3/31/2022 VWENX 1yr.-2.23/ 3yr.-1.86/ 5yr.-1.93/ 10yr.-1.77/ 15yr.-1.50 VBINX 1yr.- .86/ 3yr.- .84/ 5yr.- .77/ 10yr.- .72/ 15yr.- .71 So as a result of those, the aftertax adjusted return is... VWENX 1yr.-5.30/ 3yr.-9.60/ 5yr.-8.05/ 10yr.-7.98/ 15yr.-6.58 VBINX 1yr.-4.30/ 3yr.-10.68/ 5yr.-9.28/ 10yr.-8.61/ 15yr.-6.94
Use VBIAX instead of VBINX
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Deleted
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Post by Deleted on Apr 21, 2022 13:27:06 GMT
Mustang, Short term capital gains are taxed like ordinary income, so unless there are current year or carryover losses to match them and any long term capital gains, they become a tax burden best avoided. ETFs, index, and tax managed funds are supposedly less prone to distributing capital gains.
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Post by fishingrod on Apr 21, 2022 13:30:18 GMT
So while both VWENX and VBINX(VBIAX) have done really well before and after taxes have been accounted for, VWENX has lost more to taxes due to large short term and long term capital gains distributions that are taxable every year.
While VBINX has held its' stocks in the portfolio longer owing to more capital appreciation within the fund, that isn't taxable until you sell the fund, or until the fund sells its' appreciated stock.
This is shown by the amount of unrealized capital appreciation of NAV% VWENX at 26.01% and VBINX at 42.17% as of 3/31/2022.
VWENX also has a higher payout from qualified divis from stocks, but again VBINX has more capitally appreciated (growth) stocks that have lower divis within the portfolio that leads to it being more tax-efficient. |
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Post by Mustang on Apr 21, 2022 22:06:53 GMT
Mustang , Short term capital gains are taxed like ordinary income, so unless there are current year or carryover losses to match them and any long term capital gains, they become a tax burden best avoided. ETFs, index, and tax managed funds are supposedly less prone to distributing capital gains. Yes, I know. But neither fund had enough ST capital gains to speak of. Over the last four year both fund's distributions consisted of only 6% ST capital gains.
fishingrod , You are talking about unrealized capital gains. You are correct. They are not yet taxable. But you are wrong about which fund has the most. Again looking at the last four years
Share Price April 1, 2022 $45.98 $78.39
April 1, 2018 33.79 69.89
Cap Gain if sold 23.91 8.50 Percent Increase 71% 12%
This the opposite of what you are suggesting. And I have seen nothing that indicates it is more tax efficient. Do you have any numbers that would help me understand your point of view?
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Post by fishingrod on Apr 21, 2022 22:45:27 GMT
Mustang , Short term capital gains are taxed like ordinary income, so unless there are current year or carryover losses to match them and any long term capital gains, they become a tax burden best avoided. ETFs, index, and tax managed funds are supposedly less prone to distributing capital gains. Yes, I know. But neither fund had enough ST capital gains to speak of. Over the last four year both fund's distributions consisted of only 6% ST capital gains.
fishingrod , You are talking about unrealized capital gains. You are correct. They are not yet taxable. But you are wrong about which fund has the most. Again looking at the last four years
Share Price April 1, 2022 $45.98 $78.39
April 1, 2018 33.79 69.89
Cap Gain if sold 23.91 8.50 Percent Increase 71% 12%
This the opposite of what you are suggesting. And I have seen nothing that indicates it is more tax efficient. Do you have any numbers that would help me understand your point of view?
I have taken all my numbers from M* and explained it to the best of my ability.
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Post by fishingrod on Apr 21, 2022 22:46:46 GMT
Mustang , Sorry, M* numbers are changing by the minute. I can't rely on them.
Now they have VWENX unrealized capital gains at 37.12% And VBINX at 45.75% unrealized capital gains
As of 3/31/2022
I don't know what is up. Besides M* crap.
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Post by fishingrod on Apr 21, 2022 23:04:00 GMT
Mustang , If you were to buy VWENX right now and then they distributed a large capital gain, you would be paying taxes on gains that you did not enjoy because you were not in the fund before they bought it. One ends up paying taxes on gains from years ago. When a fund distributes a capital gain the fund NAV declines by the same amount, except for any market moves.
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Post by Mustang on Apr 21, 2022 23:20:31 GMT
Yes, I know. But neither fund had enough ST capital gains to speak of. Over the last four year both fund's distributions consisted of only 6% ST capital gains.
fishingrod , You are talking about unrealized capital gains. You are correct. They are not yet taxable. But you are wrong about which fund has the most. Again looking at the last four years
Share Price April 1, 2022 $45.98 $78.39
April 1, 2018 33.79 69.89
Cap Gain if sold 23.91 8.50 Percent Increase 71% 12%
This the opposite of what you are suggesting. And I have seen nothing that indicates it is more tax efficient. Do you have any numbers that would help me understand your point of view?
I have taken all my numbers from M* and explained it to the best of my ability.
I see what you mean. According to the hypothetical investor and using the highest tax rates (required by the SEC) Morningstar's tax adjusted returns for VBINX are better. I started to find out why but fell asleep reading their 20 paper of mathematical formulas. Since I'm not sure my circumstances parallel the hypothetical investor and I am very far from the highest tax bracket the tax advantage would be much smaller. You made valid theoretical points but they didn't apply when looking at the actual data. Morningstar's formulas must be including something else. admainnew.morningstar.com/directhelp/Methodology_AfterTaxReturn.pdf |
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Post by Mustang on Apr 21, 2022 23:24:33 GMT
Mustang , If you were to buy VWENX right now and then they distributed a large capital gain, you would be paying taxes on gains that you did not enjoy because you were not in the fund before they bought it. One ends up paying taxes on gains from years ago. When a fund distributes a capital gain the fund NAV declines by the same amount, except for any market moves. This is true for any investment made just before a distribution. You are basically getting your own money back and paying taxes for the privilege.  |
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Deleted
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Post by Deleted on Apr 21, 2022 23:49:54 GMT
I looked up the Dec 2021 Capital Gains for VWENX and VBIAX on the Vanguard fund distributions page
VWENX LT CG $4.53950 and ST CG $1.1744
VBIAX LT CG $0.67090 and ST $0.3330 and on 3/22 LT CG $0.19630
This illustrates the difference in tax liabilities.
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Post by fishingrod on Apr 21, 2022 23:52:32 GMT
Mustang , Short term capital gains are taxed like ordinary income, so unless there are current year or carryover losses to match them and any long term capital gains, they become a tax burden best avoided. ETFs, index, and tax managed funds are supposedly less prone to distributing capital gains. Yes, I know. But neither fund had enough ST capital gains to speak of. Over the last four year both fund's distributions consisted of only 6% ST capital gains.
fishingrod , You are talking about unrealized capital gains. You are correct. They are not yet taxable. But you are wrong about which fund has the most. Again looking at the last four years
Share Price April 1, 2022 $45.98 $78.39
April 1, 2018 33.79 69.89
Cap Gain if sold 23.91 8.50 Percent Increase 71% 12%
This the opposite of what you are suggesting. And I have seen nothing that indicates it is more tax efficient. Do you have any numbers that would help me understand your point of view?
Why is this the opposite of what I am saying. Looks like VBINX has a much larger NAV increase than VWENX, but VWENX has distributed more taxable divis. Did I not say that? VBINX is the one with the 71% increase. |
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Deleted
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Post by Deleted on Apr 21, 2022 23:58:31 GMT
By the way, both long term and short term capital gains are taxed (not just short term).
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Post by Mustang on Apr 22, 2022 15:00:28 GMT
Yes, I know. But neither fund had enough ST capital gains to speak of. Over the last four year both fund's distributions consisted of only 6% ST capital gains.
fishingrod , You are talking about unrealized capital gains. You are correct. They are not yet taxable. But you are wrong about which fund has the most. Again looking at the last four years
Share Price April 1, 2022 $45.98 $78.39
April 1, 2018 33.79 69.89
Cap Gain if sold 23.91 8.50 Percent Increase 71% 12%
This the opposite of what you are suggesting. And I have seen nothing that indicates it is more tax efficient. Do you have any numbers that would help me understand your point of view?
Why is this the opposite of what I am saying. Looks like VBINX has a much larger NAV increase than VWENX, but VWENX has distributed more taxable divis. Did I not say that? VBINX is the one with the 71% increase. I had missed your edit on unrealized gains when I wrote that. As far as unrealized gains and distributing less each year you are correct. But, in an earlier post you said, “If one is in a high enough tax bracket VWENX will under perform VBINX after tax.” And I confirmed in my research that Morningstar is required to use the highest tax brackets when calculating after-tax returns. If an investor makes a half million dollars per year then I could see how it would make a difference. A portion of ordinary income including ordinary dividends and ST capital gains would be taxed at 35% and a portion of qualified dividends and LT capital gains at 20%. (Links to the tax tables were posted earlier.) Most of the people I know don’t make a half million in taxable income per year so their top tax brackets would be a little lower. If their taxable income was $80,000 their top tax bracket is 12% for ordinary income and 0% (zero) for qualified dividends and capital gains. If their taxable income is $100,000 then their top tax bracket is 22% for ordinary income and 15% for qualified dividends and LT capital gains… but that is only for that portion that is above roughly $80,000. (The tax brackets vary a little.) By the way, taxable income of $80,000 is after deductions. For that to happen gross income would have to be $100,000+. The standard deduction is $25,100. The deduction for those who itemize would be even greater. For simplicity’s sake let’s assume all of this retiree’s income is from distributions. Over the last four years Wellington’s distributions were 31% dividends, 6% ST capital gains and 63% LT capital gains. Vanguard Balanced Index was 67% dividends, 6% ST capital gains and 27% LT capital gains. Taxable income is $80,000. Wellington Balanced Index Dividends $28,100 @ 12% = $3,000 $53,600 @ 12% = $6,400 ST Cap Gns $ 4,800 @ 12% = 600 4,800 @ 12% = 600 LT Cap Gns 50,400 @ zero%= 0 21,600 @ zero% = 0 Total tax $3,600 $7,000 If none of Wellington’s dividends were qualified dividends and a little over half of Balance Index’s dividends were qualified dividends then the taxes would be approximately the same but that is unlikely. This is why I like LT capital gains. The average investor cannot just look a Morningstar’s after tax calculations and assume that they apply to them. As my example shows there are a lot of variables. Wellington has slightly higher returns and, for those around my income level, lower taxes. I’m sticking with Wellington. |
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