Help with Asset Allocation

[investingholder]

I am going around and around in circles trying to decide on an general asset allocation strategy for my family. I have read a lot, but could use some more recommendations.

Thank you for the responses so far. I have edited this post to add the portfolio information.

[EDITED TO ADD PORTFOLIO INFORMATION]
Emergency funds: Three to six months of expenses
Debt: 30 year mortgage at 3.685% fixed with 29 years left; 30 year mortgage on rental property at 3.875 plan to sell in a year or two, about $250-300k equity in that property
Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 6% State
State of Residence: VA
Age:33
Desired Asset allocation: 70% stocks / 30% bonds ?? (see questions below)
Desired International allocation: 25% of stocks ??

Low seven figures portfiolio.

Current retirement assets

Taxable
1% cash
1% Vanguard Growth Index Fund Admiral Shares VIGAX 0.10% [0 basis so entire sale would be subject to long term cap gains]
1% Vanguard Total Stock Market Index Fund Admiral Shares VTSAX 0.06
9% Franklin Income Series Class Advisor FRIAX 0.48% [I think this has about 30k in long term gains]
7% Franklin Virginia Tax-Free Income Fund Advisor Class FRVZX 0.54% [I plan to sell this soon]
11% Lord Abbett Short Duration Income Fund Class F (LDLFX) 0.49% [I plan to sell this soon]
1% Loomis Sayles Investment Grade Bond Fund Class Y LSIIX 0.56%
2% Hartford Balanced Income Fund Class I (HBLIX) 0.89% [I plan to sell this soon]
1% VANGUARD TOTAL STOCK MARKET ETF VTI 0.06%
0.5% ISHARES CORE S&P 500 ETF IVV 0.07%
1% ISHARES IBOXX $INVESTMENT GRADE CORP BOND FUND LQD 0.15%
4% CONSOLIDATED EDISON INC (ED)
1.5% COSTAMARE INC (CMRE)
2% EATON VANCE MUNICIPAL BOND FUND (EIM)
0.5% GENERAL ELECTRIC COMPANY (GE)
5% RICHMOND VA PUBLIC IMPROVEMENT SER A AGM B/E CPN 5.00000
4% T. Rowe Price Growth Stock Fund PRGFX 0.70% [0 basis so entire sale would be subject to long term cap gains]
3% T. Rowe Price Mid-Cap Growth Fund RPMGX 0.80% [0 basis so entire sale would be subject to long term cap gains]
0.5% BlackRock Long Term Municipal Advantage Trust (BTA) [I plan to sell this soon]
0.5% Chevron Corp (CVX)
0.5% CVS Caremark (CVS)
0.5% Dun & Bradstreet Corp (DNB)
1% Exelon Corp (EXC)
2% Exxon Mobile Corp (XOM)
1.5% Noble Energy Inc (NBL)
1.5% Sempra Energy (SRE)

His Roth 401k & His 403B
2% Fidelity Spartan International Index Fund Institutional Class (FSPNX) 0.09%
2% Fidelity Spartan Total Market Index Fund Fidelity Advantage Class (FSTVX) 0.07
1% PIMCO Total Return Fund Institutional Class (PTTRX) 0.46%
1% T. Rowe Price Institutional High Yield Fund (TRHYX) 0.50%
1% Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX) 0.11%
13% Vanguard Institutional Index Fund Institutional Shares (VINIX) 0.04%
5% Vanguard Mid-Cap Index Fund Institutional Shares (VMCIX) 0.08%
1% Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX) 0.07%
Company match of about 5k per year

His Traditional IRA at Fidelity
1% SPRTN TOTAL MKT INDX INVESTOR CLASS (FSTMX) (0.10%)

Her 401k
1% Vanguard Target Retirement 2045 Fund (VTIVX) (0.18%)
Small company match (not every year, profit sharing)

Her Rollover IRA at Vanguard
6% Vanguard Target Retirement 2045 Fund (VTIVX) (0.18%)

Her Traditional IRA at TIAA-CREF
1.5% TIAA-CREF Equity Index Fund TINRX (0.40%)

Her ROTH IRA at Fidelity
1% SPRTN TOTAL MKT INDX FID ADVANTAGE CLAS (FSTVX) (0.06%)

Contributions

New annual Contributions
$17,500 his 401k ($5k match))
$17,500 her 401k (3k match)
$2400 taxable
edited: $6000 to 529s
$12,000 cash emergency fund or allocated at the end of the year

Available funds
His 401/403 at Fidelity
Fidelity Freedom K 2000 Fund (0.39)
Fidelity Freedom K 2005 Fund (0.46)
Fidelity Freedom K 2010 Fund (0.5)
Fidelity Freedom K 2015 Fund (0.51)
Fidelity Freedom K 2020 Fund (0.54)
Fidelity Freedom K 2025 Fund (0.58)
Fidelity Freedom K 2030 Fund (0.62)
Fidelity Freedom K 2035 Fund (0.63)
Fidelity Freedom K 2040 Fund (0.63)
Fidelity Freedom K 2045 Fund (0.64)
Fidelity Freedom K 2050 Fund (0.64)
Fidelity Freedom K 2055 Fund (0.64)

Cohen & Steers Instl Realty Stock Investments (0.75)
DFA Emerging Markets Value Portfolio Institutional Class (0.61)
Fidelity Spartan International Index Fund - Institutional Class (0.09)
Vanguard Institutional Index Fund Institutional Shares (0.04)
Vanguard Mid-Cap Index Fund Institutional Shares (0.08)
Vanguard Small Cap Index Fund Signal Shares (0.10)

PIMCO Total Return Inst CL (0.46)
T. Rowe Price Institutional High Yield Fund (0.5)
Vanguard GNMA Fund Admiral Shares (0.11)
Vanguard Inflation-Protected Securities Fund Admiral Shares (0.11)
Vanguard Total Bond Market Index Fund Institutional Shares (0.07)

Her 401k Fund Options
Bond Funds
DREYFUS INTERMEDIATE-T ERM INCOME INST/Intermediate - Term Bond DITIX
FEDERATED TOTAL RETURN GOVERNMENT INST/ Intermediate Government FTRGX
PIMCO TOTAL RETURN A/ Intermediate - Term Bond PTTAX
VANGUARD INFLATION PROTECTED SECURITIES INV/Inflation Protected Bond VIPSX
VANGUARD SHORT TERM BOND INDEX INV/ Short - Term Bond VBISX
VANGUARD TOTAL BOND INDEX INV/ Intermediate - Term Bond VBMFX
WESTERN ASSET TOTAL RETURN UNCONSTRAINED I/Multisector Bond WAARX

Equity Funds
BLACKROCK GLOBAL ALLOCATION INST/WorldAllocation MALOX
BLACKROCK LATIN AMERICA INST/Latin America
Stock MALTX
COLUMBIA ACORN INTL Z/Foreign Small/Mid Growth ACINX
COLUMBIA GREATER CHINA Z/China Region LNGZX
DODGE & COX INTERNATIONAL STOCK/Foreign Large Value DODFX
DWS EAFE EQUITY INDEX INST/Foreign Large Blend BTAEX
DWS ENHANCED COMMODITY STRATEGY INST/ Commodities Broad Basket SKIRX
DWS RREEF REAL ESTATE SECURITIES INST/ Specialty - Real Estate RRRRX
FEDERATED MID CAP INST/Mid - Cap Blend FMDCX
LORD ABBETT INTERNATIONAL DIVIDEND INCOME I/Foreign LargeValue LAIDX
OPPENHEIMER DEVELOPING MARKETS Y/ Diversified Emerging Markets ODVYX
OPPENHEIMER GLOBAL OPPORTUNITIES Y/World Stock OGIYX
PRUDENTIAL JENNISON NATURAL RESOURCES Z/ Specialty - Natural Res PNRZX
SCHWAB INTERNATIONAL INDEX/ Foreign Large Blend SWISX
SCHWAB S&P INDEX/ Large Blend SWPPX
SCHWAB TOTAL STOCK MARKET INDEX/ Large Blend SWTSX
SNOW CAPITAL OPPORTUNITY I/ Large Value SNOIX
T. ROWE PRICE HEALTH SCIENCES/ Specialty -Health PRHSX
VANGUARD GROWTH INDEX INV/Large Growth VIGRX
VANGUARD MID-CAP GROWTH INDEX INV/ Mid - Cap Growth VMGIX
VANGUARD MID-CAP VALUE INDEX INV/Mid - Cap Value VMVIX
VANGUARD SMALL CAP GROWTH INDEX INV/ Small Growth VISGX
VANGUARD SMALL CAP VALUE INDEX INV/ Small Value VISVX
VANGUARD TARGET RETIREMENT 2015/ Target Date 2011 - 2015 VTXVX
VANGUARD TARGET RETIREMENT 2025/ Target Date 2021 - 2025 VTTVX
VANGUARD TARGET RETIREMENT 2035/ Target Date 2031 - 2035 VTTHX
VANGUARD TARGET RETIREMENT 2045/ Target Date 2041 - 2045 VTIVX
VANGUARD TOTAL STOCK MARKET INDEX INV/
Large Blend VTSMX
VANGUARD WINDSOR II INV/Large Value VWNFX
VIRTUS PREMIIUM ALPHA SECTOR INST/ Large Blend VAPIX

Money Market Funds
FEDERATED AUTOMATED CASH MANAGEMENT TRUST CASH SERIES II/ Money Market ACCXX


Questions:

1. Books you would recommend to help me make this AA decision? I have read Allan Roth's Second Grader and the Boglehead's Guide. (Or perhaps this is analysis paralysis?)

2. Personal information: We are a young family (early thirties) with three very young children (all under five).

We consider ourselves very fortunate to have inherited some money a few years ago but the portfolio was a mess and between having so many kids between then and now, we didn't have time to really analyze it. In the past year I have started learning more about investing and I really appreciate your help with this.

We also have both sets of grandparents offering to pay for most or all of college expenses (though we don't count on this and do save towards college). We max out retirement. We used to save more before we had children, more like 50-60% of net. Childcare expenses etc. really are taking up a lot. [edit: we also own a rental property with about $250-300k in equity that we plan to sell in the next few years, I did not include that in this anaylsis].

Right now (simplifying) we have about 60% equity and 39% bond with 1% emergency/cash. Part of the heavy bond holdings are due to the recently inherited money which was allocated heavily to bonds and which I have not changed (yet). I am thinking of slowly bumping this AA up to 70/30 or even 75/25. Our retirement portfolios are more like 80/20 if taken in isolation. Is this AA being greedy, or is it worthwhile over the long run (think 30+ years) because we have the ability to do this (if not the need)? Or is this distinction without a difference? When I look at statistics of past long term returns on Vanguard's site, It makes more sense to me to go 70/30 or even higher and adjust lower closer to retirement. I think I could sleep with this portfolio, because in 2008/09 we bought equity, did not sell. (At the time I did not quite realize what importance AA was, just knew you should "buy low sell high".) However, I don't want to take unnecessary risks with our money because as I said, we technically don't "need" that type of asset allocation, and what if we cannot count on college assistance, or future job loss, etc. What else should i be thinking about in making this decision?

[coinflip]

80/20, 70/30, or 60/40 could all be fine. It really depends on your best assessment of your risk preferences, balanced against your ability and need to seek higher returns.

You will probably get better advice if you post the details of your portfolio using the following template: viewtopic.php?f=1&t=6212

[retiredjg]

What else should i be thinking about in making this decision?

You are already thinking about much of it.

Need to take risk (your need appears to be low)

Willingness to take risk (you appear to be willing), and

Ability to take risk (how well would you come through a big crash and how long would it take you to recover, assuming there is time to recover?)

My personal view is that willingness might increase your risk taking some, but to let willingness completely overshadow need would just be greed and not wisdom.

[Peter Foley]

I would suggest either 70/30 or 75/25. As you suggest, glide to a larger bond AA when approaching retirement - 70/30 should be fine until age 50 by which time you may want to reassess anyway. One thought is that once you have saved enough for retiement you have no need to take risk and can take a more conservative approach. As frugal and disciplined as you both appear to be, you are likely to be in good shape by age 50.

[Grt2bOutdoors]

I'll suggest 65/35 - and ride it until you get to ages 50-55, then start dialing back. You should be in great shape. Age in bonds if you don't like the 65/35 approach. Don't get greedy, the downside can hurt even more - you are putting away 20% today, but if your portfolio declined by 35% and did not improve for a period exceeding 5 years or more how would you feel?

[investingholder]

Thanks for the replies! Great advice. I have edited the post to add more detailed portfolio information.

[livesoft]

You have a lot of poor choices in your taxable account. Sorry if that is impolite, but that's the way it is. I will guess that most of it is inherited (hopefully recently) which could be good because that means you can unload it with few taxable gains. Is that the case? Have you thought much about these things? Do you wish to get rid of individual stocks, actively-managed funds, etc? Make a clean break?

[Grt2bOutdoors]

Thanks for the replies! Great advice. I have edited the post to add more detailed portfolio information.

It appears that 67% of your holdings are in that taxable account. Of that you have a hodgepodge of individual equities and a single municipal bond issue, a quasi junk bond fund (Franklin Income), etc. Tell me that collection of funds was not designed by a financial adviser! Do you have a sentimental attachment to any of those holdings? Are you open to a redesign?

[investingholder]

Thank you. Yes most of the taxable that you see which is not Vanguard, was inherited. The good news is that it was relatively recent ~ 3 years so not huge cap gains and certainly not on the bonds....Yes they were designed by a financial advisor charging 1% who I fired when I got a grip on the amount he was charging.

The "bad" news is that a lot of the individual stocks (XOM, CVS for example) were given to me by my father years ago and have a basis of almost zero making BIG long term cap gains. Believe it or not I had more and have made some in-roads on selling them gradually over the years.

So I plan to leave those alone for now, but am very open to unloading, for example, the LDLFX.

I am editing the original post to show some of the larger cap gains. Some of them by my calculations are not worth selling due to the tax implications. Correct me if I'm wrong, I'm using the Wiki on tax cost to switch funds.

[livesoft]

If you donate cash to charity, stop doing that and donate appreciated stock shares instead. You can even have a "donor advised fund" at Fidelity or elsewhere and donate stocks shares to it, take the tax deduction, and have it donate cash to your charities. That is, there are ways around paying taxes on those shares held a long time.

[letsgobobby]

If $17.5 + $17.5 + $2.4 = 20% of your income, how are in the 33% tax bracket? Are you sure about that?

[investingholder]

Yes we are in the 33% marginal bracket, I am quite sure.

[letsgobobby]

$38,400 x 5 = $192,000. With standard deduction and 2 exemptions, that isn't the 33% bracket. I am only going by the information you provided in your original post; maybe that information is not correct?

Edit: I see you have corrected your post - that makes more sense now, with an additional $18,000 per year to 529s and emergency fund.

[investingholder]

Yes I was calculating the savings rate based on our net salaries. I am not sure that our tax bracket or our savings rate really matters for purposes of my real question which is about AA (or does it?), but good to think about nonetheless...I am also not including investment income as "income" in that calculation, nor including company matches as "savings" I was just trying to give a rough estimate of our savings rate.

[letsgobobby]

optimizing tax efficiency and portfolio simplicity requires knowing all your accounts and at least approximately how much is being contributed to each one each year. I suspected there were additional contributions to other accounts that you hadn't revealed, hence my question.

In the 33% tax bracket I would suggest maxing out all available tax-preferred space each year. This includes I bonds ($25k per married couple) and 529s (no limit). Taxable investing is more expensive now, and with bond yields so low there is also an argument to be made for holding muni bonds in taxable and stocks in tax-deferred. Myself, I stopped contributing to taxable accounts last summer and just put everything in 529s, since that is tax free forever and has additional protections from creditors, estate taxes, etc.

[retiredjg]

Asset Allocation: You are young, you already have over $1 million in savings, and you have a high income. To me that signals a low need for risk. There is also a tone of "don't want to do something stupid and lose this good fortune" in your post.

From these things, it sounds to me like you should invest somewhat conservatively. 70/30, 65/35, and 60/40 are the numbers that come to my mind. Obviously, you'll need to come to your own conclusion on this, but I thought I'd toss this opinion in to show that your 70/30 idea is a least in the right ball park.


Your taxable account: It's true that your taxable account is a mess, but it can be worked with and it can be improved and it can be simplified. You'll need to think of it as "how do you eat an elephant?". One bite at a time, of course. Things that you can do are:

-Turn off automatic reinvestment of dividends; reinvesting just causes a lot of tiny tax lots and it means that you will almost always have some short term capital gains to work around or pay tax on; instead, send all dividends to a money market account and once a year, buy something - just one thing - you have too little of.

-If you give money to charity, give appreciated stocks instead; livesoft already mentioned the "donor advised fund" at Fido and elsewhere; you get to take the tax-deduction and you don't have to pay taxes on your capital gains; it's a win-win-win.

-If you haven't already, find out if you have any losses and sell them; then sell gains to match the losses; I'm assuming you've already done some of this and know how it all works.

-In the long run, unless you just liquidate everything, just assume you are going to have a collection of mutual funds and individual stocks in that account; try to leave the ones that are more tax efficient and get rid of the mutual funds that have the higher expense ratios; just find a way to come to terms with this and don't let your blessing be a burden.

Your large number of accounts: I come up with 8 accounts. That can be simplified (probably). What kind of money is in His tIRA and Her tIRA? I'm asking if the contributions were deductible, non-deductible, or a combination. (I'm assuming Her Rollover IRA is all untaxed at this point). It is possible His tIRA can be rolled into either His 401k or His 403b. And that Her tIRA and Her Rollover IRA can be rolled into Her 401k. This would leave you with fewer accounts.

What's the story with His 401k and His 403b? Are they at the same job? Are they both active? What percentage is in His 401k and what percentage is in His 403b?

His Roth 401k: In the 33% tax bracket, I think traditional 401k would be a better choice than Roth 401k. It does not make good sense to pay 33% now to get money into Roth status if you could pay 15% or 25% or 28% later to take that same money out of traditional status. If you consider that much of your retirement money could be from your taxable account (already taxed or taxed at 15% or whatever the cap gains rate is then), you might have a very low tax rate during part or all of your retirement (at least until RMDs kick in). That would be the time to systematically convert traditional 401k/IRA to Roth status - when the tax hit is lower. This all assumes you don't have a pension coming. A significant pension might change some of this.

Mortgages: You didn't mention the amount of either mortgage. Have you considered it might be best to just liquidate some of the taxable account and pay down one or the other mortgage? If you do decide to liquidate some, try not to push yourself into the next higher tax bracket which is fairly narrow. If I recall correctly, if you end up in the highest bracket (39.6%) the capital gains rate jumps from 15% to 20% so you surely want to avoid that.


His 401k/403b: It seems like this could be reduced to 1 or 2 funds if you want.

[retiredjg]

Myself, I stopped contributing to taxable accounts last summer and just put everything in 529s, since that is tax free forever and has additional protections from creditors, estate taxes, etc.

Tax free forever? Isn't there both tax and a penalty if the money is not used for qualified educational expenses? Or maybe you are just assuming you'll spend it all on that?

[letsgobobby]

In the OP's situation, I would encourage him to think of a 529 as a multigenerational tax free family education fund/mini-foundation. Our traditional 529s are 100% invested in stocks and I don't see that changing anytime soon. The consequences of a shortfall are nil, and the time horizon is indefinite or at least 40 years.

[investingholder]

Asset Allocation: You are young, you already have over $1 million in savings, and you have a high income. To me that signals a low need for risk. There is also a tone of "don't want to do something stupid and lose this good fortune" in your post.

From these things, it sounds to me like you should invest somewhat conservatively. 70/30, 65/35, and 60/40 are the numbers that come to my mind. Obviously, you'll need to come to your own conclusion on this, but I thought I'd toss this opinion in to show that your 70/30 idea is a least in the right ball park.

Thank you, I appreciate the feedback and agree. This is all great advice!!

Your large number of accounts: I come up with 8 accounts. That can be simplified (probably). What kind of money is in His tIRA and Her tIRA? I'm asking if the contributions were deductible, non-deductible, or a combination. (I'm assuming Her Rollover IRA is all untaxed at this point). It is possible His tIRA can be rolled into either His 401k or His 403b. And that Her tIRA and Her Rollover IRA can be rolled into Her 401k. This would leave you with fewer accounts.

What's the story with His 401k and His 403b? Are they at the same job? Are they both active? What percentage is in His 401k and what percentage is in His 403b?

Yes the 403/401 are active from the same job, same funds, so I combined for purposes of posting. About 60% in 403b and 40% in 401.

You are correct the rollover IRA was not taxed it was from a 401k but is held at Vanguard with some of our taxable so I don't mind leaving it there. Same thing with the Fidelity Roth and Traditional IRA because the 403b/401 are held at Fidelity.

I agree with you about the Roth 401k suggestion and will implement as that makes sense. We do not expect any pension.

Mortgages: You didn't mention the amount of either mortgage. Have you considered it might be best to just liquidate some of the taxable account and pay down one or the other mortgage? If you do decide to liquidate some, try not to push yourself into the next higher tax bracket which is fairly narrow. If I recall correctly, if you end up in the highest bracket (39.6%) the capital gains rate jumps from 15% to 20% so you surely want to avoid that.

I have thought about paying down the mortgage for the primary - amount owed is around $570k, and the assessed value is $850 (or was when we refied late last year and seems like market value given recent sales). For the rental we owe about $265 and it was assessed at $575 last year when we also refied (and two other homes in that neighborhood recently sold for more). We plan to sell the rental in the next few years because: 1. We don't want to be landlords and should have probably just sold when we bought our primary house but we had some emotional attachments to the first place and 2. We anticipate some long term repairs needed on that home eventually (furnace, other costs). We do make a small amount from the rental each year -- again I have not factored that into our savings. So setting aside the rental, which we plan to sell next year or year after, my thinking is that we are getting the good tax deduction on the primary mortgage and that we are not sure if we are putting any of our kids in private high/elementary schools (most likely not). I guess the after tax rate is something like 2.8%. Perhaps we could do better in a bond fund, maybe not. In a maybe 5-10 years, once we know more about our liquidity needs, we think we will begin paying down the primary with excess funds. We may also use some of the equity from the rental sale to start paying down the primary early too. Maybe I am looking at this wrong? Any other suggestions on thinking about that? I like having a lot of liquidity while the kids are young, but would also love to pay off the primary before the first child enters college in about 13 years.

His 401k/403b: It seems like this could be reduced to 1 or 2 funds if you want.

Maybe something like a target date fund from fidelity? Any suggestions?

In the OP's situation, I would encourage him to think of a 529 as a multigenerational tax free family education fund/mini-foundation. Our traditional 529s are 100% invested in stocks and I don't see that changing anytime soon. The consequences of a shortfall are nil, and the time horizon is indefinite or at least 40 years.

This is a very interesting idea and I will think about it. Thanks!!

[retiredjg]

Same thing with the Fidelity Roth and Traditional IRA because the 403b/401 are held at Fidelity.

Not sure what this means. Does it mean you don't mind holding all the little accounts when they could be combined into fewer accounts? Seems to me like a hassle to be holding 3 separate accounts (that aren't getting any bigger) at 1%, 1%, and 1.5%.

What I'm headed for is clearing the decks of any tIRA accounts. That would leave you each as good candidates for "back door Contributions to Roth IRA". Are you familiar with that? If not, this link explains it pretty well. http://thefinancebuff.com/the-backdoor- ... ow-to.html

I have thought about paying down the mortgage for the primary.... Any other suggestions on thinking about that? I like having a lot of liquidity while the kids are young, but would also love to pay off the primary before the first child enters college in about 13 years.

I don't really have a suggestion. It seems you have thought it through and value the liquidity more than lack of debt. I was thinking you might not be getting much of a tax deduction for the interest on the primary residence (due to AMT) and didn't know if you had positive cash flow on the rental. I didn't mean to suggest you should pay off one or the other, just that you consider it. And apparently you already have.

Maybe something like a target date fund from fidelity? Any suggestions?

We don't know what is available in his 401k/403b. You mentioned Vanguard funds and Fido funds. Either might work well. I need to take a closer look at what is in taxable for a final suggestion, but I'm thinking just 1 stock fund and 1 bond fund in the 401k/403b might be much easier than what you have now. It would be helpful to know what is offered.

[retiredjg]

P.S. Not many here will suggest a Fido target date fund unless it is a Fidelity Freedom INDEX fund and those seem to be few and far between.

[investingholder]

Thanks again for all these suggestions. I edited the original post to show the "his 401/403" fund options. I can do the same for hers if that needs fixing, but I like the target 2045 fund.

[retiredjg]

Thanks again for all these suggestions. I edited the original post to show the "his 401/403" fund options. I can do the same for hers if that needs fixing, but I like the target 2045 fund.

I'm probably going to try to talk you out of it...

Yes, a list of the funds you have available would be great.

[retiredjg]

So do you want to keep all those little accounts or do you want to combine them? Or undecided?

[investingholder]

I am undecided about trying to roll these IRAs into 401ks. I thought you said ROTH might not be a great option at the 33% tax bracket. I agree, which is (partly) why we haven't been doing backdoor ROTH the other reason being the existence of the tIRAs. [EDIT: How hard is it to roll an IRA into a 401k? Are there any disadvantages that I am not thinking of?]

Ok please convince me on changing funds. I am listening. I added the options. Thanks!

[letsgobobby]

if your 401k accepts TIRA rollovers then you definitely want to do that. If you can clear out all your non-basis money, you can do backdoor Roth IRAs. Note: backdoor Roth IRAs are always better than the alternative of taxable investing (except for the small loss of the foreign tax credit, as applicable). The decision about whether to use a Roth IRA/401k or a traditional IRA/401k is a *completely* different decision.

I agree with jan that you should be using a traditional 401k/403b, not a Roth.

[retiredjg]

I am undecided about trying to roll these IRAs into 401ks. I thought you said ROTH might not be a great option at the 33% tax bracket. I agree, which is (partly) why we haven't been doing backdoor ROTH the other reason being the existence of the tIRAs. [EDIT: How hard is it to roll an IRA into a 401k? Are there any disadvantages that I am not thinking of?]

Ok please convince me on changing funds. I am listening. I added the options. Thanks!

You should prefer traditional over Roth, but you should prefer Roth over taxable. In the second case, it will be taxed either way, but if the money goes to taxable, the gains will eventually be taxed. The gains won't be taxed if the money goes to Roth.

You definitely want to get some money into Roth status. The question is how much you will pay to get it there. When possible, you want to avoid it at 33%. When not possible, Roth is a good option.

For your first $17,500 (each), you want to defer taxes. Since you cannot deduct contributions to tIRA, everything you save after the 401ks/403b will be taxed - so it might as well end up in the best place possible for money that has already been taxed. Some of that could go to 529 accounts (where the tax on earnings will be deferred). Some will go to taxable (where the gains will be taxed). But as much as you can should go to Roth (because the gains will not be taxed).

I suppose if you have access to a HSA (health savings account), that would be an excellent place to put some money too and I believe (not sure) that would be tax-deferred (and never taxed if used for medical care).

How hard is it to roll an IRA into a 401k? Are there any disadvantages that I am not thinking of?

If the 401k/403b will accept the money (not all do), usually, it's just getting some paperwork done and sending it to the right people. Disadvantages? Not that I can think of if you have good choices in the 401k/403b. In some states, the money might even have more protection from creditors in a 401k than an IRA.

Ok please convince me on changing funds. I am listening. I added the options.

It boils down to this. If something is a stock fund, you count it on the stock side. If it is a bond fund, you count it on the bond side. A target fund has to be teased out 3 ways (US stock, foreign stock, bonds) in order to know what percentage of stuff you have. It just mucks up the math.

The exception to this would be if ALL of your accounts were filled with a similar target type fund that has the stock to bond ratio you want. Then everything would be easier. But with your taxable account the way it is, I'm not sure that will work out (you don't want the bonds in taxable if you have a different choice). However, as I figure out just what is in your taxable account, I'll see if that is a good option (a target fund in all the other accounts). I don't know the stuff in your taxable account so it will take some time to get to "know" it and make a suggestion.

[retiredjg]

investingholder, I've taken a look at your taxable account and have some questions. I'm curious about what you want the taxable account to look like when you finish. Different people have different priorities, so I'm curious about what is valuable to you.

Do you want to end up with only a handful of holdings or is a bunch of different holdings OK with you?

Would you rather sell things with tiny percentages or sell things that have less capital gain?

How important is tax-efficiency to you?

How important is the expense ratio?

Here's what I'm thinking.

For the individual stocks - just keep them (but don't reinvest dividends) if you don't mind holding them and if there is any tax cost to sell. The individual stocks seem to be about 13.5% of your overall portfolio. That's OK. We like to see that at a little lower percentage (5% to 10%) but it is not worth the tax cost to "fix it" and the percentage will drop anyway as the portfolio gets larger.

I'd sell the balanced funds (9% Franklin Income Series Class Advisor FRIAX 0.48% [I think this has about 30k in long term gains] and 2% Hartford Balanced Income Fund Class I (HBLIX) 0.89% [I plan to sell this soon]) because they are not tax-efficient and teasing out the stock and bond portions is an unnecessary pain in the rear. However, the 30k in gains gets my attention, although I'm not sure what that means in the overall scheme of things.

I'd probably keep the 7% Franklin Virginia Tax-Free Income Fund Advisor Class FRVZX 0.54% [I plan to sell this soon] if there is any tax cost to selling it and maybe even if there isn't a tax cost to selling it. It pays you a lot, tax free for both fed and state. The duration is relatively short 5.27 years, so the value won't drop a lot when/if interest rates rise. I don't see a great benefit in dumping this one. Do you mind sharing why this one is on the block?

I'd probably like to sell the 3% T. Rowe Price Mid-Cap Growth Fund RPMGX 0.80% [0 basis so entire sale would be subject to long term cap gains] because it is not tax-efficient and the expense ratio is unnecessarily high. The capital gains part does give pause, though. Maybe you could send this one to charity over a couple of years.

I'd like to sell the 4% T. Rowe Price Growth Stock Fund PRGFX 0.70% [0 basis so entire sale would be subject to long term cap gains]
but oddly enough, it has been very tax-efficient. So even though the expense ratio is .7%, it is probably worth keeping since there would be a tax cost to sell it.

There are a couple of other things I'd sell just because they are too tiny to bother with. And a few things I'm not sure what to do with.

I calculated your taxable account to be 46% stocks and 54% bonds. Do you want to try to get this one account to 70/30 (or whatever you finally settle on) or do you just want your overall portfolio (all 8 accounts) to average out at 70/30?

Have you given more thought to whether you want to start doing back door contributions to Roth IRA?

In His case, it means you'd need to get the tIRA out of the way by either rolling it into His 401k/403b or simply converting it to Roth at 33%. I know I earlier advised against this, but in this case it could be ok since that is only 1% of the portfolio and there will be a benefit in getting to make future contributions to Roth IRA.

In Her case, it means doing something with both Her Rollover IRA and Her tIRA. Since this totals 7% of the portfolio, I would not suggest converting this to Roth - that' just too much.

I'll put a couple of ideas in another post for you to take a look at.

[retiredjg]

This would be a way to get started. You would exchange all the accounts (except taxable) to what is below.

Taxable 63.5%
28.9% Stock
34.6% Bonds

His Roth 401k and 403b 26%
5% Vanguard Institutional Index Fund Institutional Shares (0.04)
16% Fidelity Spartan International Index Fund - Institutional Class (0.09)
5% DFA Emerging Markets Value Portfolio Institutional Class (0.61)
0% Vanguard Total Bond Market Index Fund Institutional Shares (0.07)

His tIRA at Fidelity 1%
1% Total Stock Market

Her 401k 1%
1% VANGUARD TOTAL STOCK MARKET INDEX INV
0% VANGUARD TOTAL BOND INDEX INV/ Intermediate - Term Bond VBMFX

Her Rollover IRA at VG 6%
6% Total Stock Market

Her tIRA at TIAA-CREF 1.5%
1.5% Stock Index

Her Roth IRA at Fidelity 1%
1% Total Stock Market Index

This idea is about 66% stocks and 34% bonds, because right now you have 34% bonds already in your taxable account. It increases your international allocation (very low in your current holdings) to 32% of stocks (21% of portfolio). As you sell things in your taxable account, you would buy Vanguard's Total International Index in the taxable account and then make adjustments in His 401k/403b to reduce the international stocks there. The goal is to eventually have all of your international stocks in the taxable account (in the form of Vanguard's Total International Stock Index) where you can take advantage of the foreign tax credit.

With all the dividends that accumulate in the taxable account, you would also buy the Vanguard International Index - once or maybe twice a year.

As you sell things in taxable, your stock to bond ratio will change. You can adjust this in either His 401k/403b or Her 401k by selling one to buy the other.

I'm not sure how to show your contributions since I don't know what to do with "$12,000 cash emergency fund or allocated at the end of the year". That money sort of needs to go to International each year if possible.



You mentioned that you like using the Target Retirement funds. It would be possible to do that if you hold a similar fund in each of your 7 tax-advantaged accounts. But....

-you would be using a mediocre (at best) choice in His 401k/403b instead of some really excellent choices in that account

-your international allocation would be extremely low since you have essentially 0% international in the taxable account which is most of your portfolio; but that could eventually be fixed over a couple of years

So I wouldn't really recommend that approach myself. However, something could be cobbled together if you really have a strong preference.

Here is the "dream goal" I have in mind for you. However, I'm not sure it is aligned with your dream goal.

Taxable <--getting contributions each year
Total Stock Market
Total International Stock
Tax-exempt muni bonds (optional)
small collection of individual stocks

His 401k/403b <--getting contributions each year
US stock fund
Bond Fund

His Roth IRA <--getting contributions each year
whatever you want

Her 401k <--getting contributions each year
US Stocks
Bonds

Her Roth IRA <--getting contributions each year
whatever you want



Her Rollover IRA <--gone

Her tIRA at TC <--gone

[investingholder]

First of all thank you so much for taking the time to go through all of this. I am considering your suggestions and will try to reply once I have decided what to do (in the new few weeks if not sooner).

Do you want to end up with only a handful of holdings or is a bunch of different holdings OK with you?

Would you rather sell things with tiny percentages or sell things that have less capital gain?

I am ok with a bunch of holdings if the long term result is more money. So that is how I look at the capital gains. If it is going to take me over 10 years to make up for capital gains, then I don't know if i can deal with selling it all now.

How important is tax-efficiency to you?

How important is the expense ratio?

Important, but again, if it is going to take me over 10 years to recoup a capital gain, maybe not as important.

Here's what I'm thinking.

For the individual stocks - just keep them (but don't reinvest dividends) if you don't mind holding them and if there is any tax cost to sell. The individual stocks seem to be about 13.5% of your overall portfolio. That's OK. We like to see that at a little lower percentage (5% to 10%) but it is not worth the tax cost to "fix it" and the percentage will drop anyway as the portfolio gets larger.

I'd sell the balanced funds (9% Franklin Income Series Class Advisor FRIAX 0.48% [I think this has about 30k in long term gains] and 2% Hartford Balanced Income Fund Class I (HBLIX) 0.89% [I plan to sell this soon]) because they are not tax-efficient and teasing out the stock and bond portions is an unnecessary pain in the rear. However, the 30k in gains gets my attention, although I'm not sure what that means in the overall scheme of things.

I'd probably keep the 7% Franklin Virginia Tax-Free Income Fund Advisor Class FRVZX 0.54% [I plan to sell this soon] if there is any tax cost to selling it and maybe even if there isn't a tax cost to selling it. It pays you a lot, tax free for both fed and state. The duration is relatively short 5.27 years, so the value won't drop a lot when/if interest rates rise. I don't see a great benefit in dumping this one. Do you mind sharing why this one is on the block?

I'd probably like to sell the 3% T. Rowe Price Mid-Cap Growth Fund RPMGX 0.80% [0 basis so entire sale would be subject to long term cap gains] because it is not tax-efficient and the expense ratio is unnecessarily high. The capital gains part does give pause, though. Maybe you could send this one to charity over a couple of years.

I'd like to sell the 4% T. Rowe Price Growth Stock Fund PRGFX 0.70% [0 basis so entire sale would be subject to long term cap gains]
but oddly enough, it has been very tax-efficient. So even though the expense ratio is .7%, it is probably worth keeping since there would be a tax cost to sell it.

There are a couple of other things I'd sell just because they are too tiny to bother with. And a few things I'm not sure what to do with.

Ok this makes sense. I guess I was thinking the Franklin Virginia Tax-Free Income Fund Advisor Class FRVZX could be replaced with a Vanguard Muni Bond fund, though they don't have one for VA. There would not be much tax cost if any to sell from what I have calculated.

I calculated your taxable account to be 46% stocks and 54% bonds. Do you want to try to get this one account to 70/30 (or whatever you finally settle on) or do you just want your overall portfolio (all 8 accounts) to average out at 70/30?

Overall.

Have you given more thought to whether you want to start doing back door contributions to Roth IRA?

In His case, it means you'd need to get the tIRA out of the way by either rolling it into His 401k/403b or simply converting it to Roth at 33%. I know I earlier advised against this, but in this case it could be ok since that is only 1% of the portfolio and there will be a benefit in getting to make future contributions to Roth IRA.

In Her case, it means doing something with both Her Rollover IRA and Her tIRA. Since this totals 7% of the portfolio, I would not suggest converting this to Roth - that' just too much.

I'll put a couple of ideas in another post for you to take a look at.

Thanks. I am still thinking about this. I think I agree with your suggestions on the IRA and will implement it (if possible I need to check if we can roll into the 401 or 403).

[retiredjg]

Ok this makes sense. I guess I was thinking the Franklin Virginia Tax-Free Income Fund Advisor Class FRVZX could be replaced with a Vanguard Muni Bond fund, though they don't have one for VA. There would not be much tax cost if any to sell from what I have calculated.

A Vanguard Muni Bond fund would have an ER near .12%. The Virginia fund is .54% - for a difference of .42% which is sort of a lot. For every $100k you have in that fund, you would pay $420 a year more to hold the Virginia Fund. You'll have to judge if the difference in your state taxes are worth it, but remember to consider that the Virginia muni is paying more.

Since there would be little to no tax cost to get rid of this, it brings up the question of whether you want to hold muni bonds at all. Conventional wisdom in Bogleheadland is to hold all your bonds in your tax-advantaged accounts if you can. This is because most of the time, taxable bonds in a 401k/403b/IRA pay more than muni bonds in a taxable account, even after considering you'll pay tax on the taxable bonds. Since 36.5% of your portfolio is tax-advantaged, you would easily do this if you choose 70/30 or 65/35 and maybe do it in the next few years if you choose 60/40 (depending on how large that "low 7 figures" is).

Go back to the taxable bonds paying you more thing - this doesn't happen to be true right now - muni bonds have been paying higher returns, even without considering eventual taxes on the taxable bonds. So right now, mini bonds in a taxable account is not a bad choice at all. But there may come a time when it is no longer your best choice. So, for now, I can't really recommend one choice over the other in your situation. I suspect since your taxable account is so large, it won't matter much (or it could not be predicted easily) in the long run if some of your bonds are held there. But it is something you need to decide. That's why I put "optional" on the tax-exempt bonds entry in the "dream goal" above.

If it is going to take me over 10 years to make up for capital gains, then I don't know if i can deal with selling it all now.

Sounds like you'd rather pay less tax and have some clutter in your portfolio. Not a problem - the individual stocks and the mutual funds don't care at all.

There will be a time, in the next market crash, when you can just slide sideways (no loss, no gain) over to different holdings while paying little in capital gains tax to get there. If this does not immediately make sense to you, start wrapping your brain around it. A lot of people won't sell in a crash "because I'd lose money". But if you just turn around and buy some other fund that is also at a lowered price, you have not lost anything. Make sense?

Your answers indicate that you are gaining confidence about what you want. Good for you!

[investingholder]

Thanks again for all of your help with my portfolio. I decided on a 70/30 ratio and I feel comfortable with that. I sold some of the balanced/managed funds (the Hartford Balanced Income, Lord Abbot Fixed Income, and Loomis) and bought more of the franklin municipal bond (VA), VTI, and Vanguard Total International Stock to get my international holdings up a bit. I am holding off on selling others with large capital gains for now and am going to leave my portfolio alone for awhile, with the exception of a small work windfall/bonus that I plan to invest in a mix of Total International, Total Stock Market, and possibly municipal bonds, to keep up my asset allocation. We will continue to work on consolidating accounts and thinking about simplifying where possible. Thank you again for all your help!

[retiredjg]

Sounds like you are headed in the right direction. Good luck!