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Side fund for student loan payoff if PSLF doesn't work out

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  • Side fund for student loan payoff if PSLF doesn't work out

    Our situation:

    I’m a PGY-2, with at least 4-5 more years of training.

    Wife travels a lot for work, which may not be sustainable once children enter the picture (hopefully sooner rather than later), so her income may drop significantly before mine picks up.

    $300k in student loans at 6.8%

    Taxes: Him 25%, Her 33%; MFS for the time being, while PSLF is on the table

    Ages: 33, 32

    Maxed out 403b, 401k, and Backdoor Roth’s in 2016, on track to do the same in 2017

    Sufficient Emergency fund in place

    Current savings rate: about 60%

     

    Taxable side fund in case PSLF blows up:

    17% VSIAX – small cap value ($1800 LTCG, $250 STCG)

    14% VTIAX – total international (small loss)

    26% VBTLX – total bond market ($700 ST/LT losses)

    43% VTSAX – total stock market ($4800 LTCG, $600 STCG)

     

    At our current contribution rate, we would have almost enough to pay off the entire loan at the end of my training. But, as mentioned before, wife may stop working or take a lower paying position if she gets tired of traveling (no definite time table on this).

    For the past few months I have been mulling over the idea of changing the AA to something more conservative. I’ve read a lot over on Bogleheads about Wellesley, with its track record of decent returns and low volatility. The downside is it’s not very tax efficient. I can’t predict its future performance, but this seems like a pretty good choice for the given time horizon (certainly we could do a lot worse). I don’t think the tax efficiency of our current portfolio with TBM in taxable wouldn’t be that much different than consolidating down to Wellesley. We are willing to take some risk, rather than keep everything in HY savings and CDs. If the market did tank, we’d be ok to stretch the time horizon a couple years while attacking the loan with new attending cash flow.

     

    Option 1: Convert current holdings over to Wellesley over the next few months

    Option 2: Continue with same funds, increasing bond allocation with new contributions (perhaps switch to tax exempt bonds)

    Option 3: Something else.

     

    Am I crazy to put Wellesley in taxable?

    With the relatively short time horizon and either being in the same or lower tax bracket when we sell (likely in the last year of training), would the tax drag really be that bad?

    Thanks for the help. Any and all advice is appreciated.

  • #2
    Trade VBTLX for the tax-exempt fund VWITX. There remainder of those are tax-efficient enough.

    For money I might actually need within 5-10 years and don't want to risk losing, I use VTMFX (50/50 stock/bond) in taxable.

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    • #3
      Those are both good options. Thanks for the help DMFA.

      It's hard to make AA allocation changes. No matter what I do I feel like I'm going to be a market timer, even though it makes sense since the time horizon is narrowing.

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