REIT strategy

Do you contribute beyond the company match to your 401(k)? If so, how much percentage etc.-wise?

A taxable account may be just fine for your REIT exposure, especially compared to the costs of annuities. Do not forget that one drawback of annuities is they can land you in a social security yada high taxation bracket. For an introduction to this pitfall, see joetaxpayer's site at

Lastly, you are using the catchup provision for contributing to your Roth IRA, right? That is, because you are 50 or older, you can contribute up to $5000 a year to your Roth IRA for 2007. The younger folks can only put in up to $4000 for 2007.

What about your marginal tax bracket? If you use Turbo Tax, add $100 of non-qualified dividend income to last year's return...how much extra federal and state tax results?

The annuity/IRA rationale for REITs has to do with their above-average dividends (as you may know they need to pay out at least 90% of their income to qualify as REITs). Holding them that way defers the tax on the dividends. But if your tax bracket isn't high, that may not be much of a concern for you.

-Tad

Yeah, I do. I contribute the max.

Good, I'll look at that.

I've been with the same company 26 years, it's the only 401K I have.

Correct. I qualified for $5000 this year. Looks like next year is $6000. I can also do catch-up in the 401K if I want, as I'm maxing there.

Brian

I would agree with that advice.

If you want to get more real estate exposure but don't have room for it in a tax-sheltered account, for a taxable account consider a fund like TAREX that invests primarily in REOCs rather than REITs. Because this sector has had a big run-up in the last few years, though, a lot of real estate funds are sitting on big piles of capital gains right now -- which means that, in a taxable account, you might end up paying taxes on profits you didn't make. This time of year, especially, it often makes sense to wait to buy until after funds have made their annual distributions.

-Sandra the cynic

I don't have access to that here. I believe in the 25% bracket for Fed, and Missouri's rate is 6%.

The expense differences (just looking at Vanguard products) is 0.12% for VNQ (ETF) and 0.61% for their REIT VA. So on say $20k that'd be about $100 a year in extra expense.

Brian

I would re-assess contributing beyond the match, with attention to:

-- your anticipated tax bracket in retirement (admittedly for lots of folks this can be tough to estimate). The rule of thumb for your situation being that if you expect to be in a lower tax bracket in retirement, contribute to the

-- your 401(k) plan's choices and the fees associated with them. What are the expense ratios of the mutual funds? If they are not say about 0.5% a year or lower, a taxable account may make more sense for that excess beyond the match.

-- the aforementioned social security trap. Drawing from your 401(k) can also trigger it.

The one caveat is of course that REIT dividends do not generally enjoy the same tax break that most other dividends currently enjoy.

No doubt others will have good comments to add. Stay tuned, of course.

I too am currently watching VNQ, by the way. VGSIX's dividends have been growing at a rate of about 6% a year, on average, for some years, which exceeds the rate at which the dividends from my current basket of REITs is growing. Of course, the yield from my six (mostly large, all older) REITS is a bit higher, too. They are about 10% of my portfolio.

Based on today's rates, I wouldn't expect it to be higher. However, there's a decent possibility that rates will increase.

Any information is welcome. I'll think about that.

In general they are very good. Here are the index fund expenses (actually projected ones, including the management expenses and transaction costs). Life-cycle and actively managed ones are higher, of course,

Bond Market Index Fund 0.0810% S&P 500 Index Fund 0.0502% International Index Fund 0.1167% Russell 2000 Index Fund 0.0598%

My biggest problem with the 401K selection is more what's not in it, rather than what is. REITs we've mentioned, also no small value, no small international, no emerging market index. There is an active foreign fund (Julius Baer II) that is a touch expensive at about .6% expenses, but does have about 25% of its composition as emerging markets.

Definitely something for me to look at, I'm grateful that it was brought up.

Brian

Similarly, I think it's likely tax rates will rise, because the country needs to pay the debt; deal with social security baby boomers and the rising costs of Medicare yada. As an aside: You seem to be suggesting your income in retirement will be similar to what it is right now. For others, their needs and numbers may warrant planning such that their income will be lower. They can 'fudge their guessing' about tax rates accordingly.

You indicate roughly a ten-year window, give or take, for retirement. That's a long-enough time that, were I in your shoes, I too would be somewhat disheartened that I was not achieving my ideal asset allocation. Still, how far off are you from your desired ideal REIT allocation of 15% (= 10 domestic and 5 foreign, if I read your first post correctly)? If not too far off, I'd stay in a holding pattern (doing what you are doing now) for a few more years.

If your window were shorter, then with all you say I would suggest considering continuing to max out the 401(k) and then, upon retirement, rolling it over to a Traditional IRA, whence you could do with it as you pleased (including buying REITs), including slowly converting it to a Roth IRA. But I am betting again that you are already aware of this.

Sorry there's not an easy solution here. Maybe you could put a bug in the ear of your 401(k) manager about offering at least one REIT choice, and a few years from now...

I agree the fees of the choices your 401(k) offers are mighty good.

Not sure you're aware of it, but depending, an expense ratio of 0.6% for a foreign fund is pretty good these days. They tend to be more expensive than domestic funds, generally speaking.

Re annuities: From my reading, and as you evidently have heard, the word is that Vanguard and Fidelity do offer the best, least-likely-to-rip-a-buyer-off packages. (Other annuity companies seem to be catching up, too.) But for reasons already mentioned, I think I'd rather max out the

Elle Individual investor who's bought stocks and bonds and studied investing in private for some 20+ years.

Brian, I wish this had an easy answer, but it doesn't. As you probably know REIT returns come from both capital gains and dividends. Roughly 40% of total return, historically, has been gains. The current asset-class dividend rate is about 4.5%.

If you're paying 31% tax on those dividends, you're paying 0.31 x 4.5% 1.4% of principal "out" each year to taxes. This money that isn't reinvested represents "tax drag" on returns.

The VA introduces, per your numbers, only 0.49% in "cost drag" so seems to win the horse race. But it's more complicated than that...the VA is turning the capital gains into ordinary income. You need to make assumptions for tax rates along the way and when you liquidate to see which wins. That's partially based on your net-worth trajectory, but also on unknown tax policies many years from now. You'd also need to know the dividend rate along the way, and your actual plans for liquidation (e.g. lump sum, over a period of years, never). The best you can do is come up with an Excel model, see effects and make a subjective decision.

Generally speaking, the VA should win unless you assume a high component of total return as capital gains, low future tax rates on those gains, and high tax rates on the VA's pent-up income and gains. Which may be a valid assumption, incidentally - one such scenario is "passed to heirs". Another is a very long holding period, low "other income" in retirement, and a preservation of the 2008 capital gains rate (which is 0% at low bracket).

-Tad

I don't have a good projection for my salary at retirement. I should pension, and eventually SS, depending on when retirement takes place and when I start benefits. I doubt it will be higher unless things go really well with investing, which I certainly wouldn't bet on.

That's a rough guess. One doesn't know what will happen health-wise. A possible solution will be a retirement from the current job then or sooner, and a part-time consulting position if a useful opportunity arises.

I have none at the moment. I've really just been conceptualizing the portfolio these past months, with the reading I mentioned. I really didn't even know much about REITs prior to that.

I've done most of the "easy" part, stuff that goes in taxable, but I'm sorting out the questionable REITs/Bonds (see other thread) question vis-a-vis taxable/tax-advantaged accounts.

Yeah. A strategy would be to underweight REITs for now, using the available Roth space, and add over the next few years to get the allocation towards my goal.

I could try, but it's a big company. The last major change in offerings was years ago. There've been switches in fund management, but not basic funds available recently.

Yes. I'm seriously considering it. I had been just using the suggestions found in Merriman's 401K model portfolios, and he only recommended the International Index Fund. I looked the JBII, and it's pretty new. The JBI was successful, but it had foreign small caps and they closed it due to lack of opportunities. JBII is all large cap.

Ok, I really appreciate the input. I was in the position for way to many years of not knowing anything about investing. My parents didn't invest (we had eight kids in the family) and as a young feller starting out there wasn't all this information you can find nowdays.

Consequently, because I didn't know anything I was scared to DO anything, so my investments were way too conservative for my age. Even my 401K was a mess for a long. There's nothing I can do about that now.

I straightened out the 401K to a degree some years back (see my mention of Merriman above) and now I'm finally getting the rest finalized. I even made a spreadsheet to track stuff, including a Swedroe-style

Once I get these decisions made, I can finish the hard part and get it more or less into cruise control, with just new invest/rebalance periodically.

Brian

There's not a whole lot of information on the Vanguard site about this, at least that I can figure out (which may not mean anything). Here's the link to VGSIX. I'd assume the VA would just hold shares of it, and the VA page didn't seem to have a "distributions" link.

Yeah, a lot of variables there. I wouldn't call my horizon "very long", more on the order of 10-15 years.

As I mentioned to Elle, perhaps a strategy of underweighting REITs for now, and "catching up" as more Roth capacity becomes available would be sensible.

Brian