Asset Allocation and a slew of questions

[dsanders79]

Emergency Fund: 3 months of expenses
Debt: 2 years in on a 30 year mortgage $170k left @ 5.125%
Tax filing status: Single
Tax Rate: 25% (I think)
State of Residence: GA
Age: 32
Desired Asset Allocation: 80% stocks / 20% bonds (open to suggestions)
Desire International Allocation: 50% (not sure about this, open to suggestions)

Current retirement asset allocation - ~$75,000, annual income ~$80,000

Traditional IRA:
Vanguard REIT Index Fund Investor Shares (VGSIX): 7%
Vanguard Total Bond Market Investor Shares (VBMFX): 8%
Vanguard Total International Stock Index Admiral Shares (VTIAX): 16%
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX): 29%

Roth IRA:
Vanguard LifeStrategy Growth (VASGX): 38%

Current employer 401k:
BlackRock LifePath Index 2045: 2%

New Annual Contributions:
$8,000 total 401k - I contribute 5% for $4,000 + employee match $4,000 (100% match up to 5%)

$5,500 Roth IRA

HSA - I signed up for an HSA for next year and I hope I can pay for medical expenses with taxable money. My employer puts in $400 and I plan to max out the rest.

401k fund options (I will be glad to look up specifics for any of these):
BlackRock LifePath Index Funds 2015 - 2055 (available in 5 year increments, 0.17% expense)
BlackRock Money Market (0.082% expense)
BlackRock US Debt Index NL Fund (0.058% expense)
PIMCO Global Bond Institutional Fund (0.55% expense)
BlackRock Russell 2000 Index NL Fund (0.070% expense)
DFA US Small Cap Portfolio (0.40% expense)
BlackRock Russell 1000 Index Fund (0.035% expense)
Domini Social Equity Fund (0.80% expense)
Wellington Opportunistic Core Fund (0.48% expense)
American Funds New Perspective Fund (0.48% expense)
BlackRock MSCI ACWI ex-US Index Fund (0.13% expense)
Thornburg International Equity Fund (0.60% expense)
Templeton Foreign Smaller Companies Fund (0.95% expense)

I consider myself to be fairly risk tolerant. Ignorantly I went through 2008 probably in 95% equities, when the market is down I consider that a good time to buy.

Questions:
1. I'm not sure I figured my tax rate correctly; how do I calculate that?

2. I have a few taxable stocks. Right or wrong, I don't really consider these to be part of my retirement (I could be convinced otherwise).

KO - ~$750 (enrolled in DRIP), gift from grandmother, somewhat sentimental
GPC - ~$3,900 (enrolled in DRIP), former employee stock purchase plan, slightly sentimental (but not too much)
SPY - ~$1,000 - bought as a gamble in 2008
F - ~$880 - bought as a gamble in 2008
Goog - 1 share (recent purchase)

Should I sell any or all of these and invest in something else? I kind of like gambling a bit on individual stocks (particularly when they drop), but I only do it with money I don't mind losing. Feel free to convince me I'm being stupid.

3. REITs, should I dump that from my portfolio and go with a simpler 3 fund approach?

4. My company offers a Roth 401k, should I contribute to that instead of the regular 401k?

5. Emergency fund - I know this needs to be readily available and invested safely. If I bumped my emergency fund to 6 months, do you think it would be ok to put 3 months in a Mango savings account? Or is there something else I should consider?

6. Windfall - $10,000 this year (just sitting in savings until I figure out what to do) and another $13,000 the beginning of next year. What should I do with this?

Right now I am planning on fully funding next year's Roth - $5,500

I plan on purchasing a new to me car (a fairly old Civic from a friend with relatively low miles) - $3,500. For the time being, I am also planning on keeping my truck (200k miles so it is worth more to me for hauling dogs, plywood, etc. than I could get selling it). My job's commute is pretty long so I want something with better MPG - I calculated the Civic may pay for itself within two years just in gas savings. I am also testing public transportation as an even cheaper option (my company has an option for a commuter savings account, so I can pay for this with pre-tax $).

I have also thought about bumping my emergency fund up to 6 months.

Besides those three things I don't really have any plans for the money.

7. House (ugh) - sadly I already tried to refi and found out I was pretty far underwater. I was in the middle of doing some repairs so the interior of the house looked pretty rough, so I am contemplating fixing up the house a bit and trying again in a couple months. Should I and at what point should I start adding extra to the principle?

8. Should I strive to max my 401k, or is there something else I should be doing first?

9. Should I dump the VASGX and focus on loading my Roth IRA with equities and then balance the Traditional IRA accordingly?

10. What should I invest my future 401k contributions in?

Thanks for taking the time to read this and I greatly appreciate any input and advice.

[nirvines88]

1. I'm not sure I figured my tax rate correctly; how do I calculate that?

Check out this table: http://www.moneychimp.com/features/tax_brackets.htm Match your income level to your tax bracket.

2. I have a few taxable stocks. Right or wrong, I don't really consider these to be part of my retirement (I could be convinced otherwise).

KO - ~$750 (enrolled in DRIP), gift from grandmother, somewhat sentimental
GPC - ~$3,900 (enrolled in DRIP), former employee stock purchase plan, slightly sentimental (but not too much)
SPY - ~$1,000 - bought as a gamble in 2008
F - ~$880 - bought as a gamble in 2008
Goog - 1 share (recent purchase)

Should I sell any or all of these and invest in something else? I kind of like gambling a bit on individual stocks (particularly when they drop), but I only do it with money I don't mind losing. Feel free to convince me I'm being stupid.

It's really up to you. You can let them ride if you like them and think they're a good choice. If they have losses I would consider selling in order to harvest tax losses, and reallocate to your 3 fund portfolio. Regardless of what you decide to do, I would keep individual stocks to 5% of your total portfolio or less.

3. REITs, should I dump that from my portfolio and go with a simpler 3 fund approach?

Some people overweight REITs because they think they add diversification to a stock/bond portfolio. Some people argue that total market funds don't adequately capture the real estate market, so they add REITs. In my opinion, adding a bit of REITs is fine, but I wouldn't overdo it. Similar to your individual stocks question, it's really up to you!

4. My company offers a Roth 401k, should I contribute to that instead of the regular 401k?

No. If you are truly in the 25% federal income tax bracket (don't forget to check the link posted above!) and live in Georgia with a 6% income tax, that adds up to 31%, which is probably a higher tax rate than you would have to pay in retirement when you withdrawal from a 401k or Traditional IRA. In fact, in addition to your 401k, you MAY want to consider going with a Traditional IRA rather than a Roth IRA. If you think tax rates are certain to rise in the future, then maybe go with a combination of 401k and Roth IRA. Check out this link for more info: http://thefinancebuff.com/case-against-roth-401k.html

5. Emergency fund - I know this needs to be readily available and invested safely. If I bumped my emergency fund to 6 months, do you think it would be ok to put 3 months in a Mango savings account? Or is there something else I should consider?

Wasn't sure what Mango was, so I searched it on DuckDuckGo (weird not using the Google verb anymore!). It looks like TFB is a fan (http://thefinancebuff.com/mango-prepaid ... n-gem.html), so I say go for it - just make sure to carefully follow all the rules. 6 months should be a good size emergency fund if you have a stable job.

6. Windfall - $10,000 this year (just sitting in savings until I figure out what to do) and another $13,000 the beginning of next year. What should I do with this?

Definitely use it to fund $5,500 for your IRA for 2013. If you need a new used car, then buy it. If you think you need to bump up your emergency savings, then do it. If you end up holding off on the latter 2 options, then I would put it towards this:

Debt: 2 years in on a 30 year mortgage $170k left @ 5.125%

7. House (ugh) - sadly I already tried to refi and found out I was pretty far underwater. I was in the middle of doing some repairs so the interior of the house looked pretty rough, so I am contemplating fixing up the house a bit and trying again in a couple months. Should I and at what point should I start adding extra to the principle?

At 5.125%, if this was ME, I would:

1) Invest in 401k up to company match
2) Max out IRA
3) Add extra money to mortgage principal
4) Continue to fill up 401k

8. Should I strive to max my 401k, or is there something else I should be doing first?

See above. Some might disagree with doing #3 before #4; however, you have to ask yourself: Will my 401k investments make more than the 5.125% return from paying off my mortgage? What is the advantage of deferring taxes in my 401k versus getting a guaranteed 5.125% return on paying off the mortgage? Not necessarily easy questions.

9. Should I dump the VASGX and focus on loading my Roth IRA with equities and then balance the Traditional IRA accordingly?

If you want! Some people like to hold the underlying funds of the Lifestrategy funds, as you have done in your Traditional IRA. If you a slightly lower expense ratio with the possibly added responsibility of rebalancing every year or so (instead of having a fund manager doing it for you), then it may be better to hold the underlying funds (Total Bond, Total U.S., Total International). It's really up to your personal preference. I like holding the individual underlying funds because it makes it easier to rebalance across multiple accounts (IRAs, 401ks, taxable, etc.).

10. What should I invest my future 401k contributions in?

I can tell you that you will get much more feedback on this question if you post expense ratios for ALL of your 401k mutual fund choices. Do for the other choices as you have done it with one particular listed option:

BlackRock LifePath Index Funds 2015 - 2055 (0.17% expense)

Hope that helps. Welcome to the Bogleheads forum!

[hoppy08520]

1. I'm not sure I figured my tax rate correctly; how do I calculate that?

Look at line 37 on your 1040. That's your Adjusted Gross Income (AGI). Then look at a tax bracket table for 2012, look at the "single" column, and that's your Federal tax rate. Where this can be significant in this forum is trying to advise you on going Roth vs. Traditional. You're almost certainly in the 25% tax bracket at your salary.

2. I have a few taxable stocks. Right or wrong, I don't really consider these to be part of my retirement (I could be convinced otherwise).

Your call. You'll find that the prevailing sentiment on this site is to hold broad market index funds instead of individual stocks. It looks like you have more than 10% of your retirement assets in individual stocks. That's a bit high.

3. REITs, should I dump that from my portfolio and go with a simpler 3 fund approach?

A lot of people here like that asset class. A conventional opinion would be, if you want to hold REIT, then do so, but not much more than 10% - 25% of your total stock allocation.

4. My company offers a Roth 401k, should I contribute to that instead of the regular 401k?

Your marginal tax rate (the tax rate you pay on your last dollar of earnings) is around 30% (25% + 6% of GA, but you can deduct your GA taxes from your Federal taxes). Most people here would say you should go traditional, not Roth, in your situation. Read Traditional versus Roth for more.

8. Should I strive to max my 401k, or is there something else I should be doing first?

With your high marginal tax rate, I'd do all you can to get $17,000/$17,500 in there. You mention the $23,000 windfall. Why not put part of that toward maxing your 401(k)?

9. Should I dump the VASGX and focus on loading my Roth IRA with equities and then balance the Traditional IRA accordingly?

Did you know that you might be able to contribute to a deductible traditional IRA, depending on your modified AGI? Again, at your tax rate, I'd consider doing that over Roth IRA. See this for details. Also, see comment to #10 below:

10. What should I invest my future 401k contributions in?

You didn't list all your expense ratios, but the 0.17% ER for the LifePath funds is pretty low. In your shoes, I'd consider doing LifePath in the 401(k) and an equivalent LifeStrategy in your IRAs, reflecting your desired overall AA (80/20, which probably is fine for a 32-year-old who has proven that he can stomach risk). If you want REIT, then hold a separate REIT fund at an appropriate percentage. Doing all-in-one funds is a simple and almost maintenace-free portfolio.

The only advantage of splitting into separate funds is if you want to weight international differently (Vanguard puts it at 30% of stocks; BlackRock is close to that), or if you want to shave another 0.1% from your ER (holding separate funds reduces ER slightly for Vanguard (not sure if the same is true for BlackRock), but then you have to do a bit more management/rebalancing).

Actually, another reason you might want to split funds is if you do build up a taxable investment account. In that case, you'll probably want to hold Total Intl Stock Market index fund in taxable, as it has the lowest tax burden. You'd then need to start splitting out your funds in the other accounts to get your overall AA across your entire portfolio to where you want it. This is why many investors can't hold all-in-one funds, because they have one account where they don't have that option, or there's a tax penalty for doing so; in that case, you might need to split into separate funds.

If you need to do this, then focus on these three funds in your 401(k) f you want to go 3-Fund Portfolio:

BlackRock US Debt Index NL Fund
BlackRock Russell 2000 Index NL Fund
BlackRock Russell 1000 Index Fund

The first one is equivalent to the Vanguard Total Bond Market Index Fund. The second two, held in the right proportion, is pretty close to the Vanguard Total US Stock Market Index Fund. I don't know what the right ratio would be if you wanted to replicate that fund; possibly 75% on Russell 1000 (large cap) and 25% on Russell 2000 (small cap).

[Default User BR]

SPY is not a stock, it's an ETF, an S&P 500 index fund.


Brian

[BL]

"BlackRock LifePath Index Funds 2015 - 2055 (0.17% expense)"

sounds like a great rate. Just be sure it is not just added unto the expenses of the funds within it. That was my case.

[pkcrafter]

You said you wanted an AA of 80/20, but that's not what you have. You have 60% at 92% stock, 2% at 90% stock, and 38% at 80%.

If it turns out you are in the 25% tax bracket, then stay with the traditional 401k.

Your approach looks fine, but if you do need to use a taxable account for tax efficient equity funds, then holding the TR and LS funds might give you problems meeting your AA and rebalancing.

Paul

[dsanders79]

Thank you to everyone for your insight. Sorry I am late to reply, I wanted to read over everything a few time to make sure it was all sinking in. I'm still not sure it is

I have added the expense ratios for all the funds available in my 401k.

I confirmed I am in the 25% tax bracket.

The BlackRock 2045 fund that I am currently putting my 401k in is made up of the following:
Russell 1000 Index Non-lendable E - 48.01% (0.035% expense)
BlackRock MCSI ACWI ex-US IMI Index Non-Lendable Fund F - 24.62% (0.13% expense)
US Debt Index Non-Lendable Fund E - 12.159% (0.058% expense)
Developed Real Estate Index Non-Lendable Fund E - 8.17% (unknown expense)
BlackRock Dow Jones-UBS Commodity Index Daily Fund E - 3.9% (unknown expense)
Russell 2000 Index Non-Lendable E - 2.17% (0.035% expense)

Am I correct that if I am willing to drop the Real Estate and Commodity portions of the 2045 fund and make those allocations myself, I could get a lower expense ratio?

For example:
20% BlackRock US Debt Index NL Fund (0.058% expense)
40% BlackRock MSCI ACWI ex-US Index Fund (0.13% expense)
30% BlackRock Russell 1000 Index Fund (0.035% expense)
10% BlackRock Russell 2000 Index NL Fund (0.070% expense)

Until I wrote all this down, and hoppy0852 pointed it out, it didn't occur to me how high of a % I had in individual stocks. I think I will probably sell everything, with the possible exception of KO. I understand SPY is also an index fund, but I think I will probably sell that too so I can simplify a bit. I'll probably move all that money to Vanguard.

Since I will have some taxable money at Vanguard, should I use it to fulfill part of my international allocation? Further, should I do something like:
Taxable: Vanguard total international
Roth IRA: more Vanguard total international if needed, REIT (if I decide to keep it), Vanguard total stock market
Traditional IRA: more Vanguard total stock market if needed, Vanguard total bond market

I am going to read and think about the Traditional vs Roth some more. On one hand I like the emotional aspect of having some Roth to hedge against a tax increase. But there are certainly some good arguments, from much more knowledgable people than myself, against it.

If I decide to drop the Roth contributions, should I max out my 401k first before the traditional

How should I handle assest allocations for my future contributions? For example, if I still plan to contribute to my Roth, should I put that money into international as it goes in and lower the international portion of my 401k?

If I decide to fully fund my Roth at the beginning of the year, should I just distribute according to my AA?

Thanks again for everyone's help.

[dsanders79]

I had a few follow up questions related to my post a few weeks ago http://www.bogleheads.org/forum/viewtopic.php?f=1&t=107346.

Tax efficiency - do I need to be concerned about any tax efficiency differences between my rIRA, tIRA and 401k? Somewhat along those lines, should I consider selling my taxable stock to live off so that I can maximize my 401k contribution?

My next question is related to my future 401k contributions.
I am currently putting my 401k into the BlackRock 2045 target fund (0.17% expense ratio). It is made up of the following:
Russell 1000 Index Non-lendable E - 48.01% (0.035% expense)
BlackRock MCSI ACWI ex-US IMI Index Non-Lendable Fund F - 24.62% (0.13% expense)
US Debt Index Non-Lendable Fund E - 12.159% (0.058% expense)
Developed Real Estate Index Non-Lendable Fund E - 8.17% (unknown expense)
BlackRock Dow Jones-UBS Commodity Index Daily Fund E - 3.9% (unknown expense)
Russell 2000 Index Non-Lendable E - 2.17% (0.035% expense)

It looks like if I am willing to drop the REIT and Commodity portions, I could make my own allocations and lower my expense ratio. With my planned AA of 80 / 20 with 50% in international I was looking at something like:

20% BlackRock US Debt Index NL Fund (0.058% expense)
40% BlackRock MSCI ACWI ex-US Index Fund (0.13% expense)
37% BlackRock Russell 1000 Index Fund (0.035% expense)
3% BlackRock Russell 2000 Index NL Fund (0.070% expense)

If I am looking at it correctly, using Morningstar's x-ray I think a 93% Russell 1000 / 7% Russell 2000 mix is the closest approximation to VTSMX. I could not find the BlackRock funds so I used the iShares Russell 1000 and 2000 funds for my comparison. Am I looking at that correctly? Does this look like a good plan?

Thanks for all the insight.

[LadyGeek]

Hi,

I merged your questions with the old thread, as it's best to keep all the information in one spot. This way is much easier; it will also flag the members who posted in this thread (View your posts will show at the top of the list).

[hoppy08520]

I had a few follow up questions related to my post a few weeks ago http://www.bogleheads.org/forum/viewtopic.php?f=1&t=107346.

Tax efficiency - do I need to be concerned about any tax efficiency differences between my rIRA, tIRA and 401k? Somewhat along those lines, should I consider selling my taxable stock to live off so that I can maximize my 401k contribution?

Generally, I'd say that if you have taxable investments targeted for retirement, and you are unable to maximize your tax-advantaged investments (401(k) + IRA) because you just can't save that much, then I think it makes sense to withdraw from taxable investments and increase your tax-advantaged investments (assuming any tax events caused by selling taxable investments is acceptable/manageable). This is essentially transferring money from your left pocket (taxable) into your right pocket (tax-advantaged) -- the benefit is that you're better off (almost always) to have a dollar in a tax-advantaged account than a dollar in a taxable account.

Even better: try to find a way to squeeze your expenses so you can contribute the max to your 401(k) and IRA without touching your taxable investments.

My next question is related to my future 401k contributions.
I am currently putting my 401k into the BlackRock 2045 target fund (0.17% expense ratio). It is made up of the following:
Russell 1000 Index Non-lendable E - 48.01% (0.035% expense)
BlackRock MCSI ACWI ex-US IMI Index Non-Lendable Fund F - 24.62% (0.13% expense)
US Debt Index Non-Lendable Fund E - 12.159% (0.058% expense)
Developed Real Estate Index Non-Lendable Fund E - 8.17% (unknown expense)
BlackRock Dow Jones-UBS Commodity Index Daily Fund E - 3.9% (unknown expense)
Russell 2000 Index Non-Lendable E - 2.17% (0.035% expense)

It looks like if I am willing to drop the REIT and Commodity portions, I could make my own allocations and lower my expense ratio. With my planned AA of 80 / 20 with 50% in international I was looking at something like:

20% BlackRock US Debt Index NL Fund (0.058% expense)
40% BlackRock MSCI ACWI ex-US Index Fund (0.13% expense)
37% BlackRock Russell 1000 Index Fund (0.035% expense)
3% BlackRock Russell 2000 Index NL Fund (0.070% expense)

Yes, it looks like your customized portfolio is around a 0.1% blended ER, compared to the 0.17% ER of the target date fund. I don't know if yours is a better portfolio, but if it works for you, that's your choice. Here's what I would say:
* If you want this portfolio because you think it has a better mix of investments (in particular, the larger holding in international stocks), then do it.
* If you want this portfolio because you want to trim 0.07% from your ER, then I would stick with the target date fund because it's easier to manage. Saving 0.07%, at least for me, almost not worth it.

If I am looking at it correctly, using Morningstar's x-ray I think a 93% Russell 1000 / 7% Russell 2000 mix is the closest approximation to VTSMX. I could not find the BlackRock funds so I used the iShares Russell 1000 and 2000 funds for my comparison.

According to Russell Investments, their Russell 2000 index is:

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. (As of 11/30/2012)

But then I read a slightly different number on their Russell 1000 page:

The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.

So, it looks like your 93/7 estimate is not far from the mark. I might go for 90/10 to have a nice round number.

Interestingly, the target date fund weights the two in a 96/4 (!) ratio. But, I wonder if the holdings in precious metals and REIT might be classified into the small-cap portion of that ratio.