AssetBuilder Inc. Registered Investment Advisor - Simple Investing. Smart Future.

My wife and I are 61 and are going to sell our business with a pretax capital gain of 2.8m in September. Taxes are estimated to be $400k. I want to invest most (perhaps $2m) for asset growth and income in the next 9 years. I will need about 60-70k per year. We have $1.7 of ira/401k.sep $$ with DFA now - to be accessed at age 71. We also own 5 rental properties that give us about 40k of income. I do need to pay off some mortgages (about 600k)...and ...I hate paying taxes so I would like to be in tax preference stuff so I can stay at 15% (without considering the Obama factor!) Your advice is greatly appreciated.

I've never met anyone who liked taxes unless someone else was paying them, so you've got a lot of company. That said, the most reliable source of big time losses and major IRS headaches that I've seen in the last 40 years has been the tax-avoidance-driven investment.

My suggestion: Forget staying within the 15 percent tax bracket. Focus, instead on investing to keep your taxable income at or slightly below the level that would take you out of the 25 percent tax rate. This year that income level is $131,450 on a joint return after $20,000 of standard deductions and exemptions (including the elderly exemption), or $151,450. With inflation running at close to 5 percent, that's likely to be approaching $160,000 for 2009.

Remember, in a taxable account you have substantial control over when, and how, you take your income. You could put $2 million in the S&P 500 and collect only $40,000 in dividend income for the year and have virtually nothing in capital gain distributions. Even the addition of your $40,000 of real estate income would keep your taxable income below the top of the 15 percent tax rate, $65,100 this year. Once you turn 70 1/2, however, it will be virtually impossible to escape the 25 percent tax bracket.

Scott

Scott - "You could put $2 million in the S&P 500 and collect only $40,000 in dividend income for the year and have virtually nothing in capital gain distributions."...this would trouble me....I would only consider an asset allocated model....Can we do a lazy portfolio with good dividends?..5-7%? ..does DFA have some hi yield funds we could asset allocate? What would you suggest in this regard. If I were to die first, I would want my wife to sleep well at night knowing her pot of gold is relatively safe!

In the current market there is no way to construct a portfolio that would produce a dividend/interest yield of 5 to 7 percent without taking very substantial risk. That's just the way it is. You can build a "yield tilt" portfolio that is biased toward higher income asset choices, but that won't be much higher than a typical index portfolio.

The yield of the S&P 500 Index is now about 2.1 percent. The yield on a 5 year Treasury is now about 3.2 percent. On a 50/50 portfolio that gives you an average yield of only 2.65 percent. Taking it even 100 basis points higher would put you deep into high risk investments.

In this environment the best path is to examine outgoing expenses and try to cut back so you are drawing less from your portfolio. Needless to say, that isn't as much fun as spending, but it will go a long way toward letting you sleep at night.

The Couch Potato portfolios are do-it-yourself portfolios that emphasize cost efficiency. I believe do-it-yourself investors will do as well, or better, than typical investors with managed accounts by virtue of their low costs. At AssetBuilder we start with that principal--- cost efficiency--- and add another, risk efficiency.

You can track the returns of both the Couch Potato Building Block portfolios and the AssetBuilder portfolios at this link:  http://assetbuilder.com/Investing/inv_potato.aspx. The figures are updated every month.

Scott