Your current allocations
Note: The above illustrations are all courtesy of Personal Capital, from their website and are not from an actual client account.
At a glance now you’ll see what’s working and what you might want to change. As I say, very cool.
So what’s the catch?
Skeptic that you are (or should be) right about now you’re thinking:
“If this is all free, how do they make their money?”
Boy howdy! You sound like me!
This is a lot of cool and sophisticated stuff to provide for free and around here we know even we can be conned. When offered free stuff, it always pays to understand how the money flows. While my pals had already filled me in, this still was one of the key questions I had when I met with them at FinCon (see Sidebar below). Nothing like hearing it personally.
Turns out they are also financial advisors and several buttons on their site will direct you to this service. So what is happening here is, by offering these tools, they are also collecting data and in the process cultivating a very clean prospect list for their services. If your assets are large enough they will reach out to you and offer to sign you up.
My independent sources who have experienced this assure me it is very low key and low pressure. They don’t want to alienate anyone. The thinking is that as people get used to using their tools over the years, should they ever decide to engage professional guidance, Personal Capital will be the first in mind and the “go to” place. Seems a smart approach to me.
Meanwhile you can happily use the free tools and ignore the advisory service for as long as you like.
So should you use their advisory service?
Well, the the annual fees are:
.89% for portfolios up to $1 million and then…
- .79% for the first $3 million
- .69% for the next $2 million
- .59% for the next $5 million
- .49% over $10 million
Let’s look at it this way:
- If you are coming from a traditional advisor and paying upwards of 1% a year, Personal Capital looks very good and is worth your serious consideration. Especially if you find value in personal attention.
- If you just want some guidance setting your asset allocation and rebalancing it automatically, Betterment is a less expensive option.
- If you have read the Stock Series here and are comfortable with what you’ve learned, you should be able to handle this yourself. Go directly to Vanguard and their low-cost index funds. This is your least expensive option and at a million plus invested you’ll even qualify for their Flagship Service and some personal guidance.
Part 2: How to unload your unwanted stocks and funds
OK, now that you have the tools in place to assess what you own…
…once you do you might not like what you see.
But before dumping everything and moving on to better choices, you’ll want to think about some important considerations, mostly around the tax implications of selling an investment. But also how and where you want your assets invested going forward. Ideally you want to get this set up right and then, other than occasionally rebalancing, leave it alone.
First you’ll want to decide what your asset allocation should be. Selecting your asset allocation discusses ways to approach this and in it I share what we do personally.
When thinking about your allocation, think across all your investments and, if you are married, across all your investments for the both of you. For instance, our personal allocation to bonds is 25% and I hold our bond fund in my IRA. We could just as easily hold it in my wife’s IRA. Either way, it is 25% of our total holdings and keeping it in one place makes rebalancing easier.
Once you’ve decided where you want your investments to be, it is time to figure out how to move them around.
For those stocks and funds you hold in your tax-advantaged accounts, this is easy and there will be no tax consequences to your moves.
In your IRAs you are free to buy and sell without tax considerations. However:
- If you are moving from one IRA custodian to another be sure you do this as a “rollover” that goes direct from the one to the other. Vanguard, or any other custodian, will be happy to help you move to them. Just give them a call and they’ll walk you thru the process.
- The above also applies if you are moving an old 401(k) to an IRA.
- If you have a Roth IRA and decide you want to use a traditional IRA (T-IRA) for the tax deduction going forward, create a new T-IRA.
- Do not transfer your Roth into a T-IRA. You’ve already paid tax on the money in the Roth. Just keep it and let it grow.
Employer sponsored plans: 401(k), 403(b) and the like
Here again you can move your investments around without tax considerations. You will, of course, be restricted to the choices offered by your plan.
- My suggestion is to look for the total stock market and or total bond market index funds in your plan, if offered.
- S&P 500 index funds are more frequently offered in these plans than the total stock market funds. No worries, these will serve your needs just fine.
- The easiest way to find these index funds in your plan is to scan down the column on ERs (expense ratios). The lowest ERs will be the index funds.
Here again it is easy to make changes to your holdings, but now you must consider the tax consequences. If any.
First, look at your tax bracket. If you are in the 15% bracket or lower, great news:
There is no capital gains tax for you!
Capital gains enjoy favorable tax treatment and the rate is tied to the tax brackets for ordinary income. For 2015 it looks like this:
- 10% or 15% tax bracket = 0% long-term capital gains rate
- 25%, 28%, 33%, or 35% tax bracket = 15% long-term capital gains rate
- 39.6% tax bracket = 20% long-term capital gains rate.
2015 Federal Tax Rates, Personal Exemptions and Standard Deductions
If you have short-term capital gains, these will be taxed at your ordinary income tax rate. Short-term gains are gains on assets held less than one year before being sold.
If you are facing capital gains taxes on the sale of your assets, only you can decide if making a change is worth it and you’ll have to do some math. But here are some considerations:
- Figure out how much in capital gains you have in each fund or stock.
- Do any have capital losses you can take to offset the gains?
- Are they long-term or short term?
- What is your tax bracket?
- Can you defer income to 2016 and get down to the 15% bracket for 2015?
- Just how ugly are the investments you have and how critical is getting rid of them?
Your capital losses offset your capital gains dollar for dollar.
From Turbo Tax:
“Losses on your investments are first used to offset capital gains of the same type. So short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.”
After you run the numbers, if you find you have a net capital loss you can apply up to $3000 of that loss against your ordinary income. If the loss is more than $3000 you can carry the leftover balance forward for use in future years.
Selling the cats and dogs in retirement
If you are currently living on your portfolio and you have holdings with taxable gains you’d like to unload, you might consider the simple strategy we used.
Assuming your unwanted investments aren’t too horrible, sell them off a little at a time to cover your living expenses in the first year or two. Start with your least favorite assets first and work on thru them bit by bit. This keeps the tax impact low and allows your preferred assets to grow unmolested.
There you have it. If you have experience using Personal Capital and/or your own strategies for unloading investments with taxable capital gains, please let us know in the comments below.
Meanwhile I’ll close with this instructional how-to clip:
May 9, 2018
In the comments below, reader Dave provides an excellent update mini-review on Personal Capital
Sidebar: On the affiliates here
I link to lots of stuff; basically anything I see that I think might be useful, interesting or entertaining to you the reader. A few of these links are affiliates and these, along with the AdSense ads at the top and imbedded in some posts, pay the bills around here.
Personal Capital (PC) is the most recent of these and one of only six I have accepted. If you are curious immediately below is a list of the others.
PC first came to my attention ~10 months ago when a couple of financial bloggers I deeply respect suggested it would be a good fit here.
While impressed with what I saw, I waited until this past FinCon (financial bloggers conference) where I had a chance to spend an hour+ face-to-face with Michael the Director of Marketing, quizzing him closely and getting my questions answered.
While the affiliates here are companies and products I have personally vetted, those in the AdSense ads are not. Please see: Disclaimers
- Vanguard.com (unfortunately Vanguard doesn’t have an affiliate program)
- Personal Capital* is a free tool to manage and evaluate your investments. With it’s great visuals you can track your net worth, asset allocation, and portfolio performance, including costs. At a glance you’ll see what’s working and what you might want to change.
- Betterment* is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
- YNAB* has the best budgeting tools going and just might be the Best Place to Work Ever
- Republic Wireless* is my $10 a month phone plan. My daughter is in South East Asia and is on the $5 a month plan. We talk whenever can and for ever long we please. My RW Review tells you how.
- Tuft & Needle* helps me sleep at night. A very cool company and a great product.
*These are affiliate links and should you chose to do business with them, this blog will earn a small commission.
Unrelated, but here’s what I’m currently or have just finished reading and enjoyed*:
First line: “People do not give it credence that a fourteen-year-old girl could leave home and go off in the wintertime to avenge her father’s blood but it did not seem so strange then, although I will say it did not happen every day.”
Last Line: “This ends my true account of how I avenged Frank Ross’s blood over in the Choctaw Nation when snow was on the ground.”
How we came to be what we are, behave the way we do and believe what we believe. My favorite in this group.
Where people who live to be 100+ live, how they live and what they eat.
Bad monkeys are Sapiens that need killing, and Jane is on the job. If you are already paranoid, you might want to skip chapter: white room (iv)
Why the future might be incredibly good. Unless the grey goo gets us.
This might be the most enlightening and entertaining take on American history I’ve yet to read.
And here are three of my all time favorites:
The book that has most influenced how I live my life.
Deceptively simple, but really all you need to know about becoming wealthy.
Very possibly my all-time favorite novel.
*If you click on the books you’ll go to Amazon, an affiliate partner. Should you choose buy them, or anything else while you there, this blog will receive a small commission. This doesn’t affect what you pay.
If you have come here, read thru the Stock Series and decided the simple low-cost approach described makes sense, you are now faced with the problem of how do you get from where you are to where you want to be. That is, what do you do with all the investments you already have? How, exactly, do you move from point “A” to point “B”?
If you are like many readers, you’ve come to this blog having already spent years, maybe even decades, investing. You very likely have a wide range of stocks and/or funds that seemed like a good idea at the time but now, maybe not so much.
The first order of business is to get a grasp on exactly what you currently own, what it is costing you in fees and how/if it might fit into your new and future plans.
You may already have this well organized and at your fingertips. If so, well done and you can skip ahead to Part 2.
Part 1: Personal Capital
If not you’ll probably want to use one of the free tools out there, and Personal Capital is the coolest I’ve seen and one of the easiest. It is the one I recommend and it is the newest affiliate here on the blog. What that means is, if you choose to use it, this blog will earn a commission.
To use Personal Capital‘s free tools, click on the link and log in. Next you’ll enter your investments and bank accounts. While I don’t use Mint, some of my FI friends tell me entering your data into PC is even easier.
Once your info is entered, you’ll be able to keep track of all your accounts and the data will be updated automatically. You can even enter any paintings, antiques, jewelry and/or any other valuables you might own. Of course with those you’ll have to decide on their value and it won’t be automatically updated.
Your PC dashboard then automates your net worth calculation and updates every time you log in on your desktop, phone or tablet.
Once you are done, assuming you’ve entered everything correctly, you’ll have complete handle on your financial situation:
Fees on your funds