Portfolio help (late 20s)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
fivel
Posts: 4
Joined: Tue Aug 28, 2012 7:10 pm

Portfolio help (late 20s)

Post by fivel »

AGE: Late 20s, single. 15% Tax Bracket
Mid 5-figure retirement portfolio

Taxable
Although I do have a taxable investment account with Vanguard, none of this money is intended for retirement.

401k
Conpany match 3.5% on 6% contribution.
6% NTGI S&P 500 Index Fund (not sure of ticker symbol) 0.07% ER
9% Vanguard International Value (VTRIX) 0.39% ER
11% Company Stock


Roth IRA at Vanguard

68% Target Retirement 2050 (VFIFX) 0.19% ER

TSP (No longer eligible to make payroll contributions)
6% G-Fund


Contributions

New annual Contributions
6% salary plus 3.5% matching = 9.5%
Maximum contribution Roth IRA
TSP no longer eligible for payroll contributions

Available funds

Funds available in his 401(k)
Vanguard Target Retirement Funds (ER 0.13%, normal vanguard TR funds seem to be 0.19%)
Vanguard Extended Market Index ER 0.12%
Northern Trust Bond Index Fund ER 0.08%
JPMorgan Stable Value Fund ER 0.35%

Funds available in his Roth IRA
Vanguard's selection of funds, although it looks like some of the ER% are lower through my 401(k) plan.

Questions:
1. What is the best way to achieve a 35% US stock, 35% international stock, 30% bond split, given the funds I have access to in my 401(k)/Vanguard Roth IRA/TSP?

I would prefer to have less than 10% invested in company stock (which is a US large cap stock), preferably 5%, and could entertain arguments of 0%.

2. Can I periodically rollover funds into my TSP, even though I am unable to make payroll contributions (no longer a federal employee). If not, should I take my TSP funds and roll them over into one of my other retirement accounts?

3. I don't understand the advice to never hold bonds in a taxable account. Is this only referring to retirement funds that happen to be in a taxable account (for instance, if someone has already reached their contribution limits for 401k and IRA and would like to continue to invest money towards retirement)? In other words, is it okay to hold bonds in a taxable account if this money is not for retirement, and intended to be spent in 5-10-15 years, etc?
Last edited by fivel on Wed Aug 29, 2012 6:18 pm, edited 1 time in total.
User avatar
damjam
Posts: 955
Joined: Thu Mar 25, 2010 7:46 am
Location: Brooklyn, NY

Re: Portfolio help (late 20s)

Post by damjam »

Welcome to the forum.
fivel wrote:1. What is the best way to achieve a 35% US stock, 35% international stock, 30% bond split, given the funds I have access to in my 401(k)/Vanguard Roth IRA/TSP?

I would prefer to have less than 10% invested in company stock (which is a US large cap stock), preferably 5%, and could entertain arguments of 0%.
See the Three Fund Portfolio. Since you are most limited in your 401k I would pick the best that plan offers then fill out the rest of the portfolio with the other accounts. Since you don't have the ticker for NTGI S&P 500 Index Fund I can't say anything about it. You need to do some research. If it has been tracking it's index well you could compliment it with Vanguard Extended Market Index to cover the total US stock market. That would give you 26% of US stock...I'll leave the rest to you, or others who may chime in.
If I were you, I would dump the company stock. Holding individual stocks goes against the Boglehead principle of diversification. If you must hold this stock limit it to no more than 5% of your portfolio.
fivel wrote:2. Can I periodically rollover funds into my TSP, even though I am unable to make payroll contributions (no longer a federal employee). If not, should I take my TSP funds and roll them over into one of my other retirement accounts?
You can rollover IRA and 401k funds into your TSP account. However you can only rollover 401k funds when you either change employers or if your current 401k plan allows in-service distributions.
From the WIKI "the TSP offers the lowest cost funds available anywhere, it provides a better value than Vanguard. I would definitely hold onto access to the TSP and not close the account.
fivel wrote:3. I don't understand the advice to never hold bonds in a taxable account. Is this only referring to retirement funds that happen to be in a taxable account (for instance, if someone has already reached their contribution limits for 401k and IRA and would like to continue to invest money towards retirement)? In other words, is it okay to hold bonds in a taxable account if this money is not for retirement, and intended to be spent in 5-10-15 years, etc?
The whole idea in placing bonds in tax deferred accounts is to minimize taxes. See Principles of Tax-Efficient Fund Placement. If you must hold bonds in your taxable account consider tax-exempt bond funds which may give you a greater after tax return. See the Taxable Equivalent Yield Calculator.
You could also invest up to 10K a year in I-Bonds which are tax deferred. However they are only deferred for 30 years, so given your age the I-Bonds will mature when you might still be in a high tax bracket. But if you need funds for educational expenses you may be able to cash in I-Bonds tax free.
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Re: Portfolio help (late 20s)

Post by Bob's not my name »

In the 25% bracket, with excellent 401k options, young, and already overweight in Roth, you should max your 401k before contributing more to Roth. If you have a state income tax the argument is even more compelling. If you can't max your 401k you might even want to "convert" some of your Roth to 401k. See: http://www.bogleheads.org/forum/viewtop ... 10&t=98625

Regarding saving in taxable when you are not maxing your tax-advantaged contributions, you may wish to consider that Roth contributions (but not earnings) can be withdrawn penalty-free at any time.

I agree with damjam on dumping the company stock and holding on to the TSP.
cals400ex
Posts: 207
Joined: Wed Aug 01, 2012 8:38 pm

Re: Portfolio help (late 20s)

Post by cals400ex »

What is the benefit of investing more heavily in the 401 vs. the roth, besides the company price match? For example, would you still recommend investing more heavily in the 401k if they didn't have a match?
NYBoglehead
Posts: 1588
Joined: Fri May 25, 2012 9:38 am

Re: Portfolio help (late 20s)

Post by NYBoglehead »

cals400ex wrote:What is the benefit of investing more heavily in the 401 vs. the roth, besides the company price match? For example, would you still recommend investing more heavily in the 401k if they didn't have a match?
Investing more heavily in the 401k reduces your tax liability now. Many believe that they will be in a lower tax bracket when they retire. I'm hedging by bets by maxing out the Roth IRA and contributing to a 401k (not going to be able to max it for a while, but enough to get the match).
Bob's not my name
Posts: 7417
Joined: Sun Nov 15, 2009 8:24 am

Re: Portfolio help (late 20s)

Post by Bob's not my name »

cals400ex wrote:What is the benefit of investing more heavily in the 401 vs. the roth, besides the company price match? For example, would you still recommend investing more heavily in the 401k if they didn't have a match?
Yes. Did you read the thread I provided the link to? Some examples are explained there.

Most people make less money when they stop making money. Put another way, most people pay a lower tax rate in their retirement years (especially early and late in retirement). Furthermore, many states (most, I think) exempt some or all retirement plan withdrawals, so even if your federal tax rate didn't go down, your state likely will.

Choosing Roth is choosing to pay taxes now that might be avoidable later. Since you are young, the chances are greater that some time in the next forty years you will be laid off, disabled, have a serious medical issue, retire early, return to school, or move to a lower tax state. Here are some more threads and an article to read on this topic:

http://www.bogleheads.org/forum/viewtopic.php?t=61529

http://www.bogleheads.org/forum/viewtopic.php?t=69833

http://www.bogleheads.org/forum/viewtop ... =2&t=87683

http://www.bogleheads.org/forum/viewtop ... 10&t=86262

http://thefinancebuff.com/case-against-roth-401k.html
Topic Author
fivel
Posts: 4
Joined: Tue Aug 28, 2012 7:10 pm

Re: Portfolio help (late 20s)

Post by fivel »

Bob's not my name wrote:
cals400ex wrote:What is the benefit of investing more heavily in the 401 vs. the roth, besides the company price match? For example, would you still recommend investing more heavily in the 401k if they didn't have a match?
Yes. Did you read the thread I provided the link to? Some examples are explained there.

Most people make less money when they stop making money. Put another way, most people pay a lower tax rate in their retirement years (especially early and late in retirement). Furthermore, many states (most, I think) exempt some or all retirement plan withdrawals, so even if your federal tax rate didn't go down, your state likely will.

Choosing Roth is choosing to pay taxes now that might be avoidable later. Since you are young, the chances are greater that some time in the next forty years you will be laid off, disabled, have a serious medical issue, retire early, return to school, or move to a lower tax state. Here are some more threads and an article to read on this topic:

http://www.bogleheads.org/forum/viewtopic.php?t=61529

http://www.bogleheads.org/forum/viewtopic.php?t=69833

http://www.bogleheads.org/forum/viewtop ... =2&t=87683

http://www.bogleheads.org/forum/viewtop ... 10&t=86262

http://thefinancebuff.com/case-against-roth-401k.html
Thanks for replying to cals400ex's question, and providing more info on 401k vs roth. I'm a visual guy, and the article from thefinancebuff.com helped paint the picture. I think I better understand how the Roth IRA won't begin to help me, until after I fill the bottom tax brackets when taking retirement distributions. I also neglected to take into account the standard deduction, which actually means I'm in the 15% tax bracket (not 25% as I indicated previously).

It seems like my strategy going forward should be to maximize contributions to my 401(k), and see if it's possible to move any funds to the TSP. I will also need to read more about non-retirement withdrawls from the Roth IRA, which may lead me to reroute my taxable (non-retirement goal) investments into the Roth IRA.
Post Reply