Also, in my quest to keep things simple, a 2 fund portfolio at Vanguard may cost a few more minutes of time, but save $$ in the long runthe ETF VT (vanguard total world ETF-exp ratio 0.17%) has a comparable return to a Betterment 100% stock portfolio. I'm often amazed at how many people are willing to carry around debt like this. Supersavers might benefit more from a Roth than someone who started saving late. I think that if you want instant diversification, rebalancing, and TLHing, for a reasonable fee and no additional advice, hand holding, or frills. Theres definitely the option to turn it onits not available for sub-$50k accounts, and is an option that one proactively enables for supra-$50k accounts. And, though its my own article, this analysis of the Millionaire Next Door Tom Stanley Wealth Equation has a bunch of tables with numbers in in that your readers might find interesting: https://www.designindependence.com/articles/2016/10/25/book-review-the-millionaire-next-door-by-thomas-j-stanley-and-william-d-danko-and-tackling-the-stanley-wealth-equation-what-should-your-net-worth-be. It builds your net worth. I am curious how much you have invested? The only debt I have remaining is sub 2% student loans which I go back and forth on whether to pay off or not. I have an IRA and 401(k) in my name with some overlap of the same funds that are in the taxable account. My biggest issue with Betterment is that they don't do a 401(k). I do wonder how big a balance one would need of a well-diversified portfolio to harvest the $3k with betterment, on average. I like your four part split though, even if it isnt right for you! Not sure why it has to be a safe account. I mean, theres a good chance you will just be adding it to your retirement portfolio. That investment better be very compelling if I'm not paying off this sucker ASAP. From what I read the 10 year window is being hit now so you will find out soon if it really applies to docs. With the caveat that docs will have to adjust for their late start earning money, here are three great resources on whether your net worth is keeping up: https://dqydj.com/net-worth-by-age-calculator-united-states/, https://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/. I see the error has already been pointed out. Therefore the net benefit for me so far is: In other words, Betterments tax loss harvesting has made me $342 after its fees even if one ignores the time value of money in that taxes not paid now are worth more than the equivalent value paid in the future. I stand corrected. They're OK, but honestly you'd be better off just investing with a simple index fund portfolio with Vanguard and tax loss harvesting on your own. We were both military, so close to nil student debt (I paid off my squat undergrad loan with my first few paychecks as an intern).but we are kind of older and when we built our home interest was 8% for mortgage. TLH at every opportunity and use the most appreciated shares for your tithing. From that link, over 2 months a $150,000 taxable account will have harvested $716 in losses, per Betterments data. There should be a breakeven point at a lower balance. A few years ago I started some mutual funds to watch grow for fun but I need to 1. diversify then maintain the balance, 2. [This updated post was originally published in 2020.]. I still find a 5%8% guaranteed return to be a very attractive use for my dollars. Happy New Year everyone and thank you to the WCI you are a big reason we have the net worth we have. While 2500 people read each post by email, most of those who will read this post will do so on the website (it sees 350K page views a month.) I think it is hard to go wrong paying off debt because once it is gone those returns are locked in. With this plan, I would be done with paying my student loans in 4 yrs. For instance, if I know I want to tithe 10% of my income and want to flush out, say, 20k of capital gains can I somehow combine that logically with TLH strategy in an automated way? On the other hand, Im thankful to debt. The Mad FIentist has the scoop: http://www.madfientist.com/moving-my-money-to-betterment/. THAT is a big deal! The White Coat Investor's Post - LinkedIn The White Coat Investor's Guide to Asset Protection: How to Protect Anyway just some thoughts. The Importance of Continuing Financial and Wellness Education | White As with many things financial, you can run the numbers many ways to make your favorite point stick. Financial Wellness and Burnout Prevention for Medical Professionals. I finished off the last of my debt last month. Yes, its very easy, depending on the charity. Original White Coat Investor Book; WCI Treasury Boot Stay; Guide available Students; Asset Protection (Newest Book) Audiobook Resources; Great Books by Others; WCI Plus! I know those are specific examples that fit into your qualifier of it depends, but the first one at least is a major consideration for most. Learn to invest on your own and you will avoid these fees and come out way ahead Yes, it seems silly to buy 2% treasuries while paying 4% on a mortgage doesnt it? Great, now my blog is decreasing the quality of medical care and medical education. The White Coat Investor | April 4, 2023 at 11:04 pm MST. Thought there was a case on that, and since its the exact same holdings, I dont think this would stand up in court. buy target date funds in one's tax-deferred accounts. One cant hold the same exact funds in tax-deferred and taxable accounts and perform tax loss harvesting. The thought of doing that for the next 25 years does not sound fun. I agree that 0.15% does not include underlying fund fees. I agree the potential is very low. Goals definitely help, but you could set a saving/investing goal too. So its really only on recent (say last 2-8 years or so) contributions that you do all your tax loss harvesting. We refinanced student loans into 5% variable loans in residency because we knew we werent going to do PSLF. Social Group - Whiten Coat Investors; Twitter; Facebook Page; WCI on Reddit! What about over your entire investing horizon? Pay Off Debt or Invest? | White Coat Investor The debt pay off vs invest question is a more minor one. I just love the peace of mind of truly having no debt, especially as I near my military retirement date. There should be plenty of money in investment accounts to cover mortgage payments, but the security of knowing in a down market that the military pension will cover most if not all core expenses will both let me sleep better at night and allow me to keep most of the retirement accounts invested in equities. IIRC, for that same mix that I spelled out in the spreadsheet link scattered in the comments, the ER differential was over 0.5%. This tax loss harvesting is only applicable by definition to taxable investment accounts. Here's the other thing to keep in mind. You want an algorithm that will tell you exactly what to do. Mix and match and you have a good quality portfolio in my opinion. I am clearly a fan of them. However, my question is whether I should save the extra funds in a low risk account in case PSLF falls through? 03-03-2016, 07:53 AM They're OK, but honestly you'd be better off just investing with a simple index fund portfolio with Vanguard and tax loss harvesting on your own. (She has no retirement accounts). $716 in harvested losses at a 33% marginal rate is $236. Hmmmthat is puzzling. If you haven't yet contributed to your backdoor Roth IRA, here's the help you need to get it done today. Not much too it with the help of websites like this and the Boglehead forum. The idea behind doing this is that unified management would allow for intelligent rebalancing between asset classes across one's entire portfolio, as referenced in WCI's original 2012 post referencing Betterment, for optimal distribution of assets such as bonds between the accounts based on maximizing post-tax return, and that their algorithm will be able to automatically avoid violation of the Wash Sale Rule globally. Today we're going to address the most common question I see on this blog, in my email inbox, and on forums. Reverse Mortgages Problems | White Coat Investor In the next few months/years, depending on whats going to become on the program, I will have more clarity as to what my priorities should be. I worked out what the underlying ETF fees are for their portfolio at a fixed allocation (so might not be true across whole rangethey might have more buffer elsewhere), and in this case their margin is all of 0.04% (! Ill have to rebalance manually, but I dont have an option for in-service rollovers so must make do with what I have. I dont own any individual stocks either, just funds. Do this via Vanguard Index funds or ETFs. At its worst, one is a little more right than the other. This algorithm is good enough to lead you to financial success. Im currently on #7, looking to pay off a 2.75% mortgage aggressively. Then the extra 0.15% fee is $1500 per year. However, for most pre-retirement attendings reading WCI this will be a welcome trade off due to their current high marginal income tax rates, and there's the further benefit of the interest one might earn in the future on the money saved through deferring income taxes. I am planning to start Tax Loss Harvesting in my taxable account. So I'm not as financially savy as most here but I am working on it and its timeto make some changes to my "non-retirement, non-emergency stash" funds. The comments about the tlh and 3k limit for income and break evens really misses a very important longer term compounding part that is far more important. I am still saving 20% of my income but putting an equal amount (or more) of my money towards debt because of not being able to get individual disability (have group) because of a mistake I made as a medical student. What would you add to it? that seem to support my contention that ETF and mutual fund holdings: https://www.fidelity.com/learning-center/investment-products/etf/tax-rules-for-losses-etfs, It could also be argued that a sale of mutual fund shares at a loss, followed by the purchase of an ETF that is similar to the mutual fund, is outside the wash sale ban. The new offer is 500K base with 8500 RVU, $60/RVU. You've heard the phrase before, When you win the game, stop playing. We carried our mortgage a couple of years longer than we had to so we could invest in a taxable account. Cant say the same about investments. The other thing I noticed in the comments is the tlh only being done at depostis? Reasonable people are going to disagree with the placement of some items on this list. But until you become debt-free, you're going to struggle with this question just like everybody else does, especially if you owe student loans and will have to start repaying them later in 2023. And if the market tanks AND PSLF disappears, you could just carry the debt a little longer until the market recovers. In order to leverage this debt I have to pay 1k a month to my lender which means I need more money in my emergency fund, limits how much I could I can cut back at work etc. I have to say while maybe that makes sense, I kind of hate the idea of still having a mortgage that long after residency. This investment comes with a high rate of return, and it's also guaranteed. I really think people who have not experienced the high interest rate mortgages and even school loans (my federal loan was over 6% in the 1980s) just have become comfortable with debt. Your email address will not be published. That is bad math. This calculation will tell you what that $40,000 tuition bill will be in 15 years. Betterment wrote a white paper on TLH+, which presents data that suggests their algorithm, with very reasonable assumptions on marginal tax rates given an attending physician audience, will produce gains of about twice that of simpler automated tax loss harvesting algorithms extant. For us, paying off some smaller debts makes a lot of sense, as it frees up cash flow and gives more cush in the budget. Thus, my cash flow is relatively limited for monthly payments. So while the math is one consideration, psychology plays a large role too. I actually think thats a pretty good rule of thumb! What about real estate? Sorry, I didnt refresh my browser prior to posting. And a good new years resolution to think up some serious financial planning decisions! But because I am hoping to apply for PSLF, I have continued the income based payment plans. Its the first fork in the road: refinance? Not much arbitrage there. These robo advisors seem optimized for TLH and taxable accounts to gain their advantage and without TLH benefits you'd likely be better off with a DIY approach. The White Coat Investor - YouTube Alaska Air has a pretty sweet companion ticket deal if you have multiple tickets to buy, as well. This excerpt from the FAQ section of their website makes it sound like the fund fees are separate. Bear in mind that the only returns that count are the after-expense, after-tax, after-inflation returns. What Does Your Financial Report Card Look Like? For one thing, anything above that 3k can be used against capital gains, as much as you have. Reply. Whoop whoop. I would certainly pay it off before dumping a ton of money into a bond fund paying 2% or a savings account paying 1%. I of course maximized retirement accounts. Hard to say. If you're really paralyzed from doing either of them, just split the difference and put half of your extra money toward debt and half toward your investments. Im not military, but might have done the active duty thing you mention to avoid debt. Now that I am eligible for PSLF, I am tempted to pay as little as possible on my student loans a have them forgiven in 5 years (which is a great thing!!). Also, inflation and such working for you in the house long term. Options to invest your HSA funds - Optum Bank Some people hate debt. I get the longer term points, but this could even be stretched out some with this approach possibly. My order was refinance loans under 4%, then fill HSA/bdRoth/i401k yearly, then pay off loans over taxable account with any money not spent keeping lifestyle inflation in check. If I could turn it off for the 30 days before and after I contribute to the IRA and 401K then it would be something I would try out. At some point I crossed into the world of debt as a tool. Guess I need to get over that bc I really want to go to hawaii? Personal Capital Vs. Vanguard - A Personal Experience, Top Ten Reasons to Invest in a Taxable Account. Your email address will not be published. The Felder Report. The fee for two months is $37.50. For sure, losing that tax subsidy makes it more attractive to pay off debt. But even if I do have to pay the taxes later, Im paying taxes at a 20%ish rate, or lower, but getting the deduction at a 40%+ rate. I built up a taxable account and then in my forties I paid off all loans. Thank you for all your expertise! They get rid of the guilt. Good summary. Plus, I enjoy rebalancing and playing with my money. So if one fund goes up 25,000 in a quarter and another drops 40,000 the same year, I can sell them both, rebuy the one that went up and something similar for what went down. So I have little tolerance for debt because of a lack of protection. Or should I aggressively invest this money?? Capital Gains and Losses Timing Is Everything! I was way more excited about paying mine off (i.e. Good post. That reflects the fact that a perfect list can't be made. Each of these ETFs has an expense ratio (they range from .04%-.17% depending on your allocation this is about 15 cents for every $100 you invest), which you would pay no matter where you purchased these funds. The 0.3 mile road leads only to my land and cabin. You should compare the expense ratios that youre paying with what youd pay with Betterment (0.15%, inclusive of underlying fund fees). Then what? document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); A Doctor's Guide To Personal Finance And Investing, 2023 - The White Coat Investor Investing & Personal Finance for Doctors. Its interesting isnt it when its your debt and your future. This is a testament both to them picking low-cost funds, and the efficiencies of robo-adviser setups in general. With the new tax law, I will no longer be able to deduct mortgage interest, moving the empty land to the top of the pay this debt as quickly as possible list. 0.15% is their fee. Therefor I am paying $1500 to save $1188 in taxes. That isnt going to continue unless you continue making similarly sized contributions. However, the likelihood of the IRS catching that is probably pretty darn low. We wouldnt mind eating out less, traveling less, borrowing for college, or delaying new car/ sailboat purchase as much as wed mind HAVING to move if we suddenly had a drop in income and were unable to pay the prior mortgage each month. But I can guarantee you this: If you just follow this list, you're not going to do anything stupid. In general, it also builds your net worth. This is a great way to look at low interest student loan debt. Nice review. Since we have a moderate portfolio and have debt instruments, he said we should take the guaranteed return 3.5% from paying off our mortgage and then invest what would have gone towards our monthly payment. I have no taxable retirement accounts. Is it market timing? Here's 150 of the best investing blogs on the planet for 2018, plus a couple more (In no particular order): Abnormal Returns. Betterment? - The White Coat Investor Forum - Investing & Personal So the new contract offer Our free financial planning resource covers a variety of topics from doctor mortgage loans and refinancing. Also, when you flush out capital gains how is that separated from the principal investment? My dad is one of those that doesnt want to handle anything, but he makes enough money that he can save it, but then he looses it on weird investments that he gets talked into. Your level of wealth can affect whether you should pay off debt. How is getting to save first 3-6 months in fees a $900 value on $100K investment at 0.15% per year? If you're not competent, you're not competent to do any of it. I believe if your portfolio is large enough the fee outweighs the benefits since you can only utilize $3K per year. But even so, $3K a year at a 33% marginal tax rate, even if you get it every year for 50 years, is only $50K in lifetime tax savings. While the fees haven't changed since 2012, TLH+ is a new offering as of 2014 that is arguably very relevant to attending physicians with taxable investment accounts. How would this work for long-term capital losses: can they only be used for offsetting long-term gains, or also short-term gains? Whether to use a service such as Betterment ultimately is an individual choice, but I think their introduction of TLH+ makes their 0.15% fee seem reasonable for management of taxable investment accounts. It felt great to invest so much in retirement, start a taxable account, have a nice car to drive (paid with cash), hike the Tour du Mont Blanc, take a fancy pants small boat cruise in Alaska, and go to Hawaii 2x a year! I will be able to retire from the military in 4-6 years, and I would like to pay off the mortgage because it will reduce core expenses dramatically. What do you mean how to incorporate it? In fact, they're both different from this list. Sign in and start investing. This page was generated at 03:56 AM. Your email address will not be published. White Coat Investor Podcast on Apple Podcasts Robert Green, CEO of GreenTraderTax.com, argues strongly that since ETFs trade intraday and have different levels of liquidity and market depth, they are not at all substantially identical to mutual funds, which are priced and sold daily.. 529 and UTMA contributions may also be prioritized. Currently, it represents less than 1% of my investible assets in the taxable portion of my portfolio. I originally didnt anticipate this and was planning to basically split my attending salary in 4 equal parts (~85k) to pay for taxes, savings, living, and student loans. I am not TLHing, and 3. the fees for my MFs are higher than ETFs would be (or perhaps higher than other MFs, beginners mistake). I agree. For me, interest rate isnt so bad on school loans (4.5%) but the absolute dollar amount, combined with daycare, combined with primary care field of work has led us to meld #2 and 3 together: max a couple (but not all available) retirement accounts (still saving >15%) and focusing raises, bonuses, etc onto student loans. There are even people who think you should stay in debt your entire life. Forgot to mention plans apply for forgiveness. They offer an automated tax loss harvesting service, TLH+, as part of their standard management fee for accounts with holdings greater than $50,000 (including both taxable account and traditional IRA holdings). Extrapolate that to a year's worth and you can get carried losses to offset quite a few gains even in "smooth seas.". While its a low interest rate and I can clearly make more investing its still a required bill every month and it cuts into cash flow. For example, if they can make it to where I can write off $3,000 (maximum allowed) on my taxes on a $100k account (that I am paying $150 fee on), that seems like a good deal. Your email address will not be published. If you cant, well, I can see why that would cause you to dedicate more of your income to building wealth. But if you're expecting to make 15%-20% on an investment, it can make sense to not pay off 5% debt and invest instead. WCI is right though, harvesting is done towards the beginning, rather than after holding a fund for a long time. An update on my experience with Betterment TLH+: Since December 2014 (when I started using Bettermentafter this original post was penned but before it was published by WCI) it has charged me $80.92 in fees. Expected return benefits from tax loss harvesting, continual rebalancing seems to more than make up for the small fee involved. We are the only automated investing service to provide this tax-reduction strategy, once only available to the wealthiest, for all investors. If the only benefit you see from Betterment is the TLHing, and you actually care about the fees, I think youre in the minority of their customers. In that scenario, it would make sense NOT to liquidate the taxable assets to get the step up in basis at death. Sometimes you just have to go with what feels better emotionally as long as its not a stupid decision. High-Interest Rates Make Reverse Mortgages Much Less Attractive. Youre paying the fund fees either way, so they shouldnt factor in to your decision. Since the Vanguard Total Stock Market fund is one of the holdings, is there a potential conflict (re: tax loss harvesting), if I also own TSM in a Vanguard Target Date fund within my IRA. Im still learning about this option. Whatever you choose, make sure you're thinking about debt the right way. Ive been sitting on cash for the last 6 months struggling with what to do with it. Anyway, student loans are paid. lAt some point 1 of the Robos will program holistic investment location in to their software -for now you are on your own but they get you most of the way there- from my viewpoint Betterment is better than Schwabs new free offering where the most important issue -asset class selection is compromised as they have a strategic cash allocation where they make more than the Betterment fee. But no reasonable, knowledgeable person is going to move something from the bottom of the list to the top of the list. So in 2014, over 2 months, Betterment's TLH+ was able to harvest the above. Im with Louis on this one. It is a fine option. If you dont need to harvest losses due to large paper losses from 2008 or other large events, then perhaps this isnt for you. In addition to mutual funds, Optum Bank is now offering a new investment option: digitally managed investments with Betterment. I wonder where Amazon would be today if they had the policy: minimum order $695. The second is the number of years. The higher the valuations, the lower the expected returns may be. - The WCI Online Course, How to Live Like a Resident as a Resident, Dave Ramsey's Investing Advice May Be Leading You Astray, 3(b) Tax-deferred accounts first in peak earnings years, 3(c) Tax-free first in non-peak earnings years. Like usual would work best if making consistent contributions. 0.15% of $100,000 = $150 Annually, or $12.50 per month, right. to really minimize taxes including possible step up one day: If you are in the tax efficient assets belong in taxable accounts and tax inefficient in retirement camp -AKA the Bogelheads -why not choose an all equity Betterment option (with loss harvesting) in your taxable account and buy the rest of your portfolio to get to your targeted overall allocation in your retirement? If my investments are $1million dollars. I have a loan on vacant land (10 acres) adjoining my retirement cabin on an additional 11 acres. Home | White Coat Investor It would be similar to buying investor, then switching to admiral shares, its the same fund. Paying off debt is a good thing to do. Vanguard doesn't let you buy fractional shares of ETFs? Congrats on finishing off your student loans. I have used Betterment for the past two years as a savings account where I park some of my reserve funds to get a better rate of return. Doing so would violate the Wash Sale Rule. They're both good things to do. For anyone else maybe my friend M.s advice of put 50% towards debt and 50% towards investments might help. For accounts >50k but 100k but 200k but 300k but 400k but <500k, average harvested to date = $2609 Remember there is a decent amount of capital gains that are excluded from taxation with a house. 1) should you refinance and if you didnt refinance and are planning PSLF, what should you do? How would this work for short-term capital losses: can I use the harvested short-term losses to offset any type of gains (long and short), or only short-term gains? Yes, you must be aware of what you own in the IRAs to avoid a wash sale. However, you can swap Vanguard TSM for Fidelity TSM, or Vanguard TSM for Vanguard 500 etc etc. I think the way you laid out this debt:invest topic is superb and anyone who can do simple math and express an emotion should be able to make a solid decision from this. As far as the Silicon Valley vs Wall Street tilt I don't think it matters much, I just find it interesting where some companies come from, who runs them and what their backgrounds are. Don't sell something because it just went down 75%. I love how you have seven principles and The List to help people figure out for themselves Should I invest in A or pay off B. Heck, if you're expecting 20%, it might make sense not to max out the retirement accounts first (or figure out a way to put the investment inside the retirement account). To me I cant stomach taxable bonds with keeping loans. The problem I have is that anytime I think about buying a nice car or going to Hawaii I think that would be nice but that money would knock x amount of months/years off my loans and from a purely financial point of view paying off even low interest student loans is better than an expensive trip. Im sure they say they add value in other ways, but I only bring it up since article is about tax loss harvesting. Youll be sad to know that graduate/medical student loans have been mostly over 6% for the entire time Ive been blogging. Keep your taxable money n munis long term, If I did that I would have about 80% of my portfolio in munis. Sorry, Im saying I would compare paying off debt at 4.375% to a taxable investment gain of 5.6% because the taxable investment would net about 4.4% after capital gains. I think simply waiting for another recession, then tax loss harvesting could very well be enough to last you for a lifetime making the extra fee unnecessary. Im not sure what the right answer is for you MDRadOnc but I know a lot of people who are setting money aside in safer accounts just in case PSLF falls through. A Wealth of Common Sense. trugs | April 5, 2023 at 7:47 am MST. Factoring in capital gains its like buying a bond at 5.6% with no risk of default. After that point, youre unlikely to ever do it again. Your site provided us with the foundations to make key decisions that will set us up financially for the rest of our lives. We paid ours off after maxing qualified accounts, 529, and going into taxable.
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