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I'm saving up to pay off a sum of money ($86,000) in about the next year using some index and bond funds through Vanguard in a taxable account. The portfolio for this account is balanced at 40% VFTSX, 40% BND, and 20% PORTX. There's also a money market account, which I keep next-to-nothing in and only use as a settlement account. I reinvest all earnings back into their funds and contribute a regular additional amount and rebalance the funds monthly.

The current account balance is around $71,000. I'm trying to estimate how much I will need to contribute each month in order to (in about a year from now) pay the money I owe plus any taxes incurred when I withdraw it. I want to consider a best-guess estimate for returns I'll get. What's a formula to use for this? To give an idea of the level of fidelity I'm looking for, I just want to know how many hundreds of dollars to contribute each month to get close to the target amount in a year.

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Here's what I tried below. It may not be relevant if I'm totally off-base though, so feel free to disregard and just answer based on the above.

It seems there are two pieces to this.

1. Estimating returns

I looked at my transaction history for the past year in Vanguard to try to understand the schedules for how I am getting returns on these various funds. From what I can tell:

  • BND returns:
    • (monthly) dividends
    • (yearly, in December) capital gain (LT)
  • VFTSX returns (quarterly) dividends
  • PORTX returns:
    • (yearly, in December) dividends
    • (yearly, in December) capital gain (ST)
    • (yearly, in December) capital gain (LT)

Looking into a couple of the dividend transactions for BND, I can see that the dividend amount was the "shares on record date" times the "rate per share". On 8/5/16, the "rate per share" was 0.16546. On 9/8/15, the "rate per share" was 0.16847. I'm guessing "rate per share" is based on the price of the fund, so it fluctuates a bit but doesn't change much.

I also looked into the transaction details for the capital gains, and I don't understand how they are determined.

2. Determining capital gains tax liability I used this capital gains tax calculator, and it's pretty straightforward, but it seems I'll need to run it twice: once for the initial value and sale value of whatever I've owned for less than a year plus another time for initial value and sale of whatever I've owned for more than a year (at time of sale).

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One year is short term -- short enough that trying to predict returns is a crap shoot. Frankly, if you will need the money in one year I wouldn't touch anything riskier than a money market account.

$5000 also isn't enough to give you much flexibility in achieving a balanced portfolio, since the minimal initial purchase for mutual funds is often around $2500. (I'm not sure whether ETFs would give you any more flexibility.)

So on grounds of both size and time horizon, I have to recommend against this plan. The risk of losing money, with insufficient time for gains to balance that risk, is simply too high.

Others may feel differently, of course. But that's the best advice I can offer.

  • The original numbers were not actual ones - just made up for an example. I updated the question with actual amounts. – Mike Eng Aug 15 '16 at 1:32
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    One year remains a short enough time that my best advice is "don't." Or, if the money is already invested, take your pick of either managing it normally as part of the overall portfolio until you need it, or moving it into something lower-risk at whatever time you think is appropriate if you believe you know enough to "time the market" (which I consider a losing game). – keshlam Aug 15 '16 at 1:45
  • I suppose it would be wise to shift more of the portfolio to bonds at least. I am willing to accept a fair amount of risk since the one year timeframe would be nice, but it is not critical. I understand your point, but I would still like to know how to estimate this goal using some more conservative combination of the funds mentioned. – Mike Eng Aug 15 '16 at 2:57
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One estimate is to sell today, estimate the taxes, and determine how much cash you need to set aside over the next 12 months.

The is no way to calculate what impact dividends and capital gains the funds will have, because unlike interest they aren't guaranteed.

The other complexity is that the funds themselves could drop in value. In that case the dividends and capital gains may not even be enough to get you back to even.

I use mutual funds to invest over the long term, with the idea of spending the funds over decades. When needing to save for a short term goal, I use banking products. They are guaranteed not to lose value, and the interest changes are slowerand thus easier to predict.

  • We have a consensus so far. We can't predict the returns of index funds in the short term, period, and can only make general predictions in the longer term. It's possible to make some general recommendations about what is likely to be your best bet in the long term, but even that is not a guarantee. If you want more solid answers, the market is not the place to look for them; in seeking higher returns you must accept higher risk and less predictability. – keshlam Aug 15 '16 at 4:31
  • In other words: Your guess is as good as ours. What do you think the prices are going to do during the next year, how comfortable will you be if you lose money for a while, how comfortable will you be if you have to delay your planned purchase, etc. The historical average "market rate of return" is around 8%, but short-term volatility can exceed that, and your exact mix of investments will trade off returns against safety. – keshlam Aug 15 '16 at 8:46
  • @keshlam okay, so how would I estimate the returns for this combination of funds over 3 or 5 years? My confusion is mainly around how to deal with the different schedules (monthly, quarterly, yearly) and capital gains versus dividends. – Mike Eng Aug 15 '16 at 18:52
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    The proper answer is repeated monte-varlo simulation, to derive a bell curve you'll probably fall within. A good financial advisor can run those numbers and suggest tweaks to your holdings that might improve you odds or reduce your risk, depending on what your priorities are. Failing that, I either use 8% APR (long-term market-rate average), or let my financial software use whatever formula it's authors used, and accept that this is strictly a guess. – keshlam Aug 15 '16 at 19:29
  • Thanks. @keshlam . I think you mean a repeated Monte Carlo simulation? – Mike Eng Aug 18 '16 at 13:59

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