First Time Poster: Help me Plan my Financial Future

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

First Time Poster: Help me Plan my Financial Future

Postby LFKB » Mon Dec 24, 2012 8:55 pm

Live with my girlfriend and each of us are 26 and very fortunate to have great jobs. We are both financially savvy (corporate finance degrees in undergrad) and understand what mutual funds, ETF, 401ks, etc. are but are not very savvy when it comes to the intricacies of how we should be investing are money and loopholes like the roth conversion for those making over IRS limits (just learned about this recently). My question is simple but the answer of course is probably complex, what should we be doing with our money? More specifically, how should I be investing my cash on hand and handling my retirement accounts? We live in southern California and our major expense will be buying a house in the next 5 years, probably going to be $1-$2 million for a nice house near the location we work. Below are the details:

Financial Info
Total cash: $670k (right now, some of this is in the market but the vast majority is in ING Direct earning ~1%. Regardless of current allocations, my main question is what I should be doing with this cash)
410k: $120k (me: $80k, her: $40k). More details in my 401k below
Traditional IRA (her): $40k
Annual combined salary: $550-$600k

401k (his)
Company matches 2% of 4% of my salary. I contribute the IRS limit

Below are the options and my current allocations:

20.00% Columbia Mid Cap Index Fund Z (NMPAX) - .43% expenses
20.00% Putnam S & P 500 Index Fund Y - .26% expenses
12.00% Invesco Real Estate R5 (IARIX) - 86% expenses
10.00% American Funds EuroPacific Gr R4 (REREX) - .85%
10.00% Oppenheimer Developing Markets Y (ODVYX) - 1%
7.00% Invesco Small Cap Discovery Y (VISCX) - 1.17%
7.00% Royce Total Return Invmt (RYTRX) - 1.15%
7.00% Oppenheimer International Bond Y (OIBYX) - .74%
7.00% PIMCO Total Return Instl (PTTRX) - .46%
0.00% Fidelity Advisor Strategic Income (FSRIX) - .76%
0.00% Ivy High Income I (IVHIX) - .73%
0.00% CRM Mid Cap Value Instl (CRIMX) - .82%
0.00% George Putnam Balanced Fund Class Y - .79%
0.00% Oppenheimer Global Fund (YOGLYX) - .92%
0.00% Pioneer Fundamental Growth (YFUNYX) - .78%
0.00% Putnam Equity Income (YPEIYX) - .87%
0.00% Putnam Money Market (APDDXX) - .50%
0.00% Putnam Stable Value Fund: 25bps - .35%
0.00% Waddell & Reed New Concepts (YUNEYX) - 1.05%

Other Information
Emergency funds: Yes, have over 6 months
Debt: No debt, pay off the CCs every month
Tax Filing Status: Single
Tax Rate: 35% Federal, 10% State
State of Residence: California
Age: 26
Desired Asset allocation: Not sure, this is part of the reason I am posting this thread
Desired International allocation: Not sure, this is part of the reason I am posting this thread

Questions
1. What should my asset allocation look like on the $670k that I will primarily be using as a downpayment for a house. % Equity vs % Debt, % US vs international, % small cap vs medium and large cap, etc. What funds or stocks should I be investing in? Should I manage on my own or through an advisor?
2. How should I allocate my 401k between the funds listed? Should I be using the Roth conversion loophole I've read about?
3. Any other advice?

Thanks in advance for the help
LFKB
 
Posts: 300
Joined: Mon Dec 24, 2012 8:06 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby livesoft » Mon Dec 24, 2012 10:08 pm

Tell me about your risk tolerance. If you only need 20% downpayment on a $2million house, that's only $400K. That means your $670K could lose 30% or more and you would still be able to buy the house. Also with a combined salary of $600K, you could recover your loss in less than a year of saving, but you've given yourself 5 years to save up. In such a situation, my risk tolerance would be so high that I would not even worry about saving for a house. Instead, I would just have an overall asset allocation like this:

75% equities, 25% bonds. Of the equities I would have half US and half International, half small-cap value, half large-cap. A sample portfolio might be (using ETFs which you can look up, but you could use corresponding mutual funds):
19% VTI
19% VBR
19% VXUS
19% VSS
24% (a tax-exempt muni bond fund or two)

Others will be aghast at my risk tolerance, but so what?

We can't answer your question about an advisor. Most folks responding on this forum would not use an advisor.

As for 401(k), since you will have lots of your portfolio outside the 401(k), you might as well use one single fund in the 401(K): PIMCO Total Return. That's it. Otherwise, the 401(k) is a just a distraction.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 34303
Joined: Thu Mar 01, 2007 9:00 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby LFKB » Mon Dec 24, 2012 10:20 pm

Thanks that is helpful. I agree with you and would say that my risk tolerance is pretty high so am willing to load up on mainly equities. I will look into the portfolio you mentioned.

One question would be, how long should I invest cash on hand in a portfolio for dollar cost averaging purposes? Every other month for the next two years?

Agree with you, I don't want to use an advisor and that is why I have come to this site.

Also, why would I put all my 410k into the Pimco total return fund (a bond fund)? It's not a distraction for me to leave my current allocation as is (even if I have too many funds picked) because it is just automatically invested through my paycheck and Putnam. I did not understand that point of yours.

Thanks for the response
LFKB
 
Posts: 300
Joined: Mon Dec 24, 2012 8:06 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby letsgobobby » Mon Dec 24, 2012 10:32 pm

LFKB wrote:Thanks that is helpful. I agree with you and would say that my risk tolerance is pretty high so am willing to load up on mainly equities. I will look into the portfolio you mentioned.

One question would be, how long should I invest cash on hand in a portfolio for dollar cost averaging purposes? Every other month for the next two years?

Agree with you, I don't want to use an advisor and that is why I have come to this site.

Also, why would I put all my 410k into the Pimco total return fund (a bond fund)? It's not a distraction for me to leave my current allocation as is (even if I have too many funds picked) because it is just automatically invested through my paycheck and Putnam. I did not understand that point of yours.

Thanks for the response

Because bonds are tax inefficient and you want them in your 401k, but your 401k is small relative to your portfolio, so you should hold only bonds there.

I wouldn't dollar cost average one year's salary, I would lump sum.

I agree with everything livesoft wrote.
letsgobobby
 
Posts: 7163
Joined: Fri Sep 18, 2009 2:10 am

Re: First Time Poster: Help me Plan my Financial Future

Postby livesoft » Mon Dec 24, 2012 10:41 pm

LFKB wrote:One question would be, how long should I invest cash on hand in a portfolio for dollar cost averaging purposes? Every other month for the next two years?

The ol' DCA vs Lum-sum question. LS is better than DCA about 2/3rds of the time, but only on average about 2% better or less.

So if you invest 50% now and LS the rest over the next 10 months (10% of remainder every month no matter what), you might be "losing" 1% versus LS all now. If market has a really bad day, you should accelerate your DCA schedule.

OTOH, who knows what is really going to happen over the next 10 months?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 34303
Joined: Thu Mar 01, 2007 9:00 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Mon Dec 24, 2012 11:03 pm

Your retirement portfoio should be 80/20 stocks/bonds or even 75/25. My rule of thumb is bonds equals 110 minus age.
In my early 50's, I am at 2/3 stocks and 1/3 bonds mainly because bonds are expensive and interest rates low. I have chosen to be a bit more aggressive than what is recommended for someone my age.

I think your stocks should be 70 percent US and 30 percent International. You could work that up as high as a 50/50 US/International split. Within the US portion, I like to have REITs in there. Within the International portion, I like to have emerging markets. I myself have overweighted towards mid-caps and small caps. I like my US Stocks to be 60% large and 40% mid and small caps. In a US Total Market Index the ratio is 70% large cap, 20% mid cap, and 10% small cap.

Mid-caps act a lot like small-caps with a bit less return and a bit less risk. Overweighting my portfolio to small-caps and mid-caps puts the tiger in my tank. It has given my portfolio extra performance. Small caps correlate with the S&P 500 at about 70 percent and mid-caps correlate at 80 percent. They zig a bit when large caps zag. For an international portion of your portfolio, Emerging Markets also put the tiger in your tank.

REITs return maybe a bit more than the S&P 500 and have a correlation of 12 percent to the S&P 500. An almost perfect diversifier to the S&P 500.

Your bonds should be mainly US Bonds. Most Bogleheads don't like International Bonds but I do. I recommend 20% Bonds for you. If you haven't been through a bear market, you really don't know what your risk tolerance is. Better to err on the side of conservatism.

So here is my model portfolio for your 401k

30% Putnam S&P 500 Index
10% Columbia Mid Cap Index Fund Z
10% Invesco Real Estate R5
5% Royce Total Return (barely a small cap fund, has lots of mid-caps)
20% American Funds EuroPacific Gr R4
5% Oppenheimer Developing Markets Y
15% PIMCO Total Return Instl
5% Oppenheimer International Bond Y

Pretty good, not great choices.
Last edited by nedsaid on Tue Dec 25, 2012 12:18 am, edited 2 times in total.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Mon Dec 24, 2012 11:21 pm

The monies set aside for your house downpayment should be in money markets, in the bank, and/or short term bond funds. Five years is too short of a time for stocks. Keep in mind that short term bond funds will fluctuate in value a little bit. Your house down payment needs to be conservatively invested.

For the non-retirement part of your portfolio, you should consider putting a portion of those funds in a California Tax-Free Bond Fund. You are in a 45 percent state and federal tax bracket. For the tax-free bond fund, you want a time horizon of 5-7 years. If interest rates rise, your Net Asset Value of the fund will decline and you want to give reinvested dividends time to work their magic. Your tax-free fund should not be used to store your house down payment unless it is in a short term fund.

You should use the backdoor ROTH IRA Conversion that you have read about. This works as long as you do not have any pre-tax monies in a Traditional IRA account. This will work for you until you roll your 401k into a traditional IRA when you change jobs. If you have pre-tax money in any traditional IRA's you must pay tax on the conversion on the ratio of pre-tax traditional IRA funds/total value of your traditional IRAs. For example, you roll $45K from your 401k into a tranditional IRA. You make a $5K contribution to a non-deductible traditional IRA. You convert the $5K to a Roth. Using the ratio, $4.5K of the conversion is taxable and $0.5K is not taxed. The IRS deems that $4.5K of the conversion came from the 401k rollover. Pretty sneaky of the IRS, huh?

If you have pre-tax money in any of your traditional IRAs, you cannot just convert the non-deductible contributions. You have to pay tax based on the ratio described above.

Keep in mind that ROTH Conversions don't make sense if they put you in an even higher tax bracket. This is not a factor for you now but once you have pre-tax monies in a Traditional IRA you need to look at this. In your situation now, you can make a non-deductible Traditional IRA contribution and then convert it to a ROTH. Very easy.

If you have a ROTH 401k option, you should take it. You are still subject to the same IRS limits, the ROTH 401k and the Regular 401k are combined under the same limit.
Last edited by nedsaid on Tue Dec 25, 2012 12:03 am, edited 1 time in total.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Mon Dec 24, 2012 11:50 pm

Do you need an advisor?

I would recommend that you go to a fee only financial advisor and spend a few hundred dollars to get your questions answered. You will learn a lot and the money will be well spent. You will learn a lot about how the financial planning process works.

Some mutual fund companies like Vanguard, Fidelity, T Rowe Price, and American Century offer advice services for free or for a modest charge if you are invested through them. I have read on these forums that Vanguard charges $500. A lot of this advice is cookie-cutter advice but you learn the basics of asset allocation and how to use the Morningstar Analytical Tools. I have been through this process several times and I have learned something every time.

Put your portfolio through the Morningstar Portfolio X-Ray. That will tell you how your funds are actually distributed. You will find that small-cap funds often are really mid-cap funds. Domestic funds often have International Investments in them. That a fund is "US" or "Small Cap" or whatever doesn't tell you enough. Funds sometimes drift away from their original investment policy and morph into something else. Small cap funds have become large cap funds for example and their investors have not always realized this. The famous Ultra fund at American Century is a great example of this.

I think you can mostly do this on your own. It is helpful to seek out advice. You can afford to pay for advice, and initially should get some. No matter how smart you are, there are always things you overlook.

I don't think you need an advisor to invest through. The large no-load fund companies all offer advice at some level and often for free. No sense in paying loads on a fund when you can buy similar quality or better funds with no sales charge.

I have to fess up that I started with a friend that was a stockbroker. The friend is long out of the business but I had two other excellent brokers that I learned a lot from. Yes I paid some commissions, but I got great advice and knowledge in return. I wouldn't recommend you go this route, I just fell into a couple really good ones that helped me out. I still have my brokerage account but I am mostly invested in no-load mutual funds, index funds, and ETF's based on indexes. I actually do own a few load funds but the expense ratios are reasonable and I figured I paid the loads in exchange for advice. I would recommend that you instead go to a fee only planner. Invest on your own through one of the large no-load fund companies.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Mon Dec 24, 2012 11:59 pm

I would steer you clear of buying individual stocks. It takes lots of time to properly analyze the stocks and to run a portfolio. If I had it to do over again, I would have started at Vanguard and mostly invested in their index funds. Stock index funds over time are in the top quartile. The longer the time horizon, the fewer and fewer managed mutual funds that outperform the market indexes.

I still have individual stocks but they are a smaller and smaller part of my investments. Indexing and low-cost managed mutual funds are the way to go. For myself, I index more and more as I get older.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Tue Dec 25, 2012 12:16 am

I have been investing for almost 30 years. I have owned a lot of things: individual stocks, no-load funds, load funds, index funds, ETF's, zero coupon bonds, CD's, a variable annuity, savings bonds, and good old fashioned money in the bank. I have had IRAs, a Roth IRA, 401k, and a 403b. I know how these investments and accounts work. This has given me a great financial education. And yes, I have made a lot of mistakes. I tell you this so that you know where I am coming from. I am a believer that a person should eat his own cooking. And I have fessed up where I deviated from the Boglehead philosophy in my own investing life.

I am amazed at the amount of money you and your girl friend make. You are doing really, really well at a young age. I have worked most of my life in the non-profit sector and it is hard to relate to the dollars you are talking about. You and your girlfriend are off to a great start.

It is also important that you educate yourself about Federal and California income taxes and how they affect your investments. A simple mistake can cost you lots in tax dollars. This is why I say that a person should seek out competent advice. Just don't overpay for the advice, and be on an arms-length relationship with whoever you are getting advice from.

The problem with most "financial advisors" is that many of them make their money through commissions and quite often will steer you to the products with the highest commissions. There is a conflict of interest in most of these relationships. This is why a fee-only planner might be of good help to you.

So hopefully my comments have been of some use to you. Best of luck.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby LFKB » Tue Dec 25, 2012 12:33 am

Nedsaid, awesome responses and thanks for all the help. One option I am considering is one I just read on here, the three fund approach. I'm sure you know what it is so need to waste your time on it. Based on your posts, I assume you agree with this philosophy to an extent but would be interested to get your thoughts. Seems like a thought free, low cost way to perform better than most out there.

I need to read more out there on the Roth IRA conversion. I don't have any money in a traditional IRA at this point so sounds like it should be readily available to me. Is there a way I can do it for 2012? I thought I read that I may be able to for 2012 up until April 15. Is there anything I would need to do prior to year end? Do I still have time?

I am going to look more into the 401k allocation you proposed. It actually bares some resemblance to mine so sounds like I didn't screw up too bad when I came up with my allocations.

My girlfriend and I are in a very fortunate position for our age. We both went to a top undergrad, graduated with honors and spent two years working 100 hours a week, all of which has allowed us to have the jobs and income levels we have now.

Appreciate you taking the time to write out those responses.
LFKB
 
Posts: 300
Joined: Mon Dec 24, 2012 8:06 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby TRC » Tue Dec 25, 2012 12:34 am

Read millionaire next door and think long and hard abut buying a 1-2M house.
TRC
 
Posts: 1359
Joined: Sat Dec 20, 2008 6:38 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Tue Dec 25, 2012 12:48 am

The three fund approach is beautiful. Total US Stock Market, Total US Bond Market, Total International Stock. You can't go wrong with that.

One of my weaknesses as an investor is that I collected investing styles. I started with a value approach with individual stocks. Then I went to no-load funds. Then I learned about indexing. So my portfolio has grown to be a mish-mash of a bunch of stuff. There is a fund company I have invested a lot with over the years and I really like those guys, great service and wonderful people. I have had the same stock broker for 14-15 years and have learned an awful lot from him. He is established and I get almost zero sales pressure from him. So I have a fund company and a stock broker that I like and I don't want to leave them. So my portfolio is more complicated than it should be. Guess I am too sentimental. Attachment issues. :D

What happens is that everytime you read a really great investment book or learn of a great investment idea, you want to put it into your portfolio. It it sort of like running your portfolio by Money magazine, investment books, and seminars.

You can save all that and go simple. You can't go wrong with a three fund portfolio.

You have until April 15, 2013 to make your Traditional IRA Contribution for 2012. You can do your Roth Conversion anytime after your Traditional IRA Account is set up. It is wonderful that you can do a non-deductible Traditional IRA Contribution and convert it to a Roth with no additional taxes.
Last edited by nedsaid on Tue Dec 25, 2012 12:50 am, edited 1 time in total.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby LFKB » Tue Dec 25, 2012 12:49 am

TRC wrote:Read millionaire next door and think long and hard abut buying a 1-2M house.


I just read a synopsis online. Based on where I live, it's not like I would be buying something over the top. Just a standard 2000-3000 square foot house most likely. I guess my question is, what general rules exist for determining how much house you can afford? What percentage of my savings (excluding retirement accounts) should be used for a doenpayment? What multiple of pre-tax total annual income should a house cost (I've heard no more than 3 times)? Can you elaborate on your post a bit?

Thanks
LFKB
 
Posts: 300
Joined: Mon Dec 24, 2012 8:06 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Tue Dec 25, 2012 1:02 am

I don't know. The people that I have known over the years that were financially successful had non-descript automobiles and nice homes. Automobiles tend to depreciate and homes (until the subprime crisis) tended to appreciate.

Get yourself a nice home. Look at it as a place to live and if you make money on it when you sell then that is a bonus.

It is just that houses need to be maintained and cleaned. Lawns need to be mowed. I have seen people rattle around in large dream homes and I ask why? Why tie up your life on maintaining and fixing something bigger than what you need?

My dad's best friend was a successful farmer and they had a huge home that had something like five or more bathrooms. They had a large family and the farmer's wife was extremely efficient as a housekeeper. They kept it up beautifully and it was a showplace. For them it worked.

A 2,000 to 3,000 square foot home is not over the top particularly if you plan to start a family. You could afford to have a maid service come in once a month. You guys have money.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Tue Dec 25, 2012 1:15 am

I think the poster is concerned about people that overbuy their house and are "house poor." What I mean by that is that the payments are so high that people sit in a beautiful house but can't afford to do anything or go anywhere. Housepayments, property tax, maintenance, cleaning all costs money.

In past years, the rule of thumb was that a house shouldn't cost more than 2.5X salary. With low interest rates, it has been bumped up to 3X Salary. I think the rule of thumb for down payments was 10% and now after the subprime crisis, it is more like 20%. Gee whiz, you and your girlfriend might be able to pay all cash and not take out a mortgage in five years at the rate you are going. I think you have a lot of options.

It is always a good idea to buy less house than you can afford. Give yourselves room to manuever in case something goes wrong. Get a 30 year mortgage with no pre-payment penalties and if you want you can make it into a 15 year mortgage or less by making extra payments. If times get tight, go back to making the regular payment.

The key is to make sure you have sterling credit. My dad taught me the importance of good credit. It has saved me lots of money over the years.

Go look at some houses, talk to realtors, learn about bank financing. Go to some open houses. Even if buying a house is a few years off get yourself educated and you will have a better idea of what you really want.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Tue Dec 25, 2012 1:39 am

Like Columbo, always one more thing.

I gave the 401k model portfolio as a starting place. Don't get hung up on the detail and getting the portfolio perfect. That is one reason my portfolio got complicated. I kept tinkering and trying to improve it. With tinkering came complexity.

Get the big picture right and the details will fall into place. I would go to the Morningstar website and get their Investment Policy Worksheet. Fill it out. It covers things like Investment objectives, risk tolerance, asset allocation, investing style. What is your investing philosophy about risk, core and non-core investments, diversification, trading, expenses, taxes? What are your criteria for selecting investments (mutual funds and stocks)? How often will you monitor portfolio performance? How do I measure whether my investments are succeeding or not? What benchmarks do I use?

It is pretty much knowing yourself as a person and as an investor. What works for you and doesn't work for you? I am a believer in looking at the big picture first. Whether you have 5.6789% or 6.0751% in Emerging Markets is probably not going to make a significant difference in life. Big picture is how much in stocks and how much in bonds?

One of the Ivy League schools (Harvard, Yale??) did a study and found that those that had written their financial goals written down did a lot better than those that didn't. The difference comes out to hundreds of thousands of dollars in a lifetime. If you knew that putting an investment plan in writing might be worth $500,000 to you or more in your lifetime, wouldn't that be a big incentive to spend a few hours putting pen to paper? It doesn't have to be perfect the first time. It is okay to keep making it better. But it gets you to thinking.

I also like the Boglehead's Guide to Investing and the Boglehead's Guide to Retirement Planning. Excellent books. I have read a lot of investment and personal finance books and these are two of the best.

After doing that, going to a fee-only planner would be a benefit to you. Good advice will save you gobs and gobs of money. The key is finding someone who is good.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby livesoft » Tue Dec 25, 2012 1:44 am

nedsaid: A question for you: Why should someone with $670,000 and the ability to save invest $300,000 a year from their salaries split up a starting 401(k) of $120,000 that gets another $40,000 a year into 7 funds?

To me at least, the 401(k) will be small potatoes in such a person's investing portfolio. I think the 401(k)s should be used for the tax-inefficient assets of the overall portfolio, namely a bond fund and probably a single bond fund at that for simplificity.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 34303
Joined: Thu Mar 01, 2007 9:00 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Tue Dec 25, 2012 2:06 am

Great question. There are different schools of thought about how to allocate portfolios.

I am of the school of thought that taxable and tax deferred portfolios should be allocated the same after taking into account emergency funds. I think Rick Ferri is of this school of thought.

From a purely tax standpoint, you are right. Tax inefficient investments like REITs and bonds are best in tax-deferred accounts and investments with large capital gain potential like stocks are better held in taxable accounts.

In practice for most people, most of their savings are probably in tax deferred accounts. I have had relatively modest earnings in my lifetime and I used tax deferred vehicles as much as I could to save for retirement. The other problem is that tax laws change. Who knows what will happen with capital gains tax rates or tax rates in general over the years?

Plus, I feel that retirement accounts should be invested to get the best returns for the least risk possible. Who cares exactly where those returns come from?

Sometimes we let the tax tail wag the dog. In this case it is a big tail, I admit.

I actually think the 401k is a good training ground for LFKB to learn how to construct a portfolio. Let him construct a total portfolio from the funds available to him in the 401k and it will be a lesson in investing. In addition, LFKB has stated that he is saving for a home and a good portion if not all of his taxable portfolio needs to be in conservative investments. $40,000 a year in 401k's are not small potatoes even for this couple. Their situation might change, maybe they will get married and one of them will elect to be a stay at home parent.

I know this is blasphemy to a lot of folks on the forum, but I do think this couple could benefit from a good fee-only planner. The tax issue you brought up is an excellent example of something that should be looked at. I am not sure that this forum, no matter how good it is can plan this couple's entire financial life.

I think we have given this couple an awful lot to think over.

So you have raised an excellent point. I don't disagree with you at all. We are of different schools of thought. Who knows ultimately what the right answer is? There is no final exam.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby livesoft » Tue Dec 25, 2012 2:10 am

Yes, this couple might benefit from a fee-only advisor. We have no idea if they can be non-emotional about managing a portfolio. Can they tax-loss harvest? Can they rebalance in the face of a falling stock market and mounting losses? How about if equities do really well: Can they sell big winners, pay the taxes when rebalancing? Can they stay the course with a given asset allocation? Who knows? They themselves may not even know at this time.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
livesoft
 
Posts: 34303
Joined: Thu Mar 01, 2007 9:00 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby nedsaid » Tue Dec 25, 2012 2:23 am

Thanks for your thoughtful reply.

As we get discussing this, I just see more and more issues come up. Someone that could help them see the big picture could be a real benefit to them. These guys can afford a good fee-only planner.

Me, I went the cheap route because I didn't have the money to pay advisors. Learned a lot on my own. I wish the Bogleheads where around when I started.

Ultimately, if I can help stimulate someone's thinking and make a difference in their life it will be worth it.

As for me, I have learned an awful lot from Mr. Bogle, the Bogleheads, the books, and this forum.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2622
Joined: Fri Nov 23, 2012 1:33 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby abuss368 » Tue Dec 25, 2012 2:45 am

nedsaid wrote:Great question. There are different schools of thought about how to allocate portfolios.

I am of the school of thought that taxable and tax deferred portfolios should be allocated the same after taking into account emergency funds. I think Rick Ferri is of this school of thought.

From a purely tax standpoint, you are right. Tax inefficient investments like REITs and bonds are best in tax-deferred accounts and investments with large capital gain potential like stocks are better held in taxable accounts.

In practice for most people, most of their savings are probably in tax deferred accounts. I have had relatively modest earnings in my lifetime and I used tax deferred vehicles as much as I could to save for retirement. The other problem is that tax laws change. Who knows what will happen with capital gains tax rates or tax rates in general over the years?

Plus, I feel that retirement accounts should be invested to get the best returns for the least risk possible. Who cares exactly where those returns come from?

Sometimes we let the tax tail wag the dog. In this case it is a big tail, I admit.

I actually think the 401k is a good training ground for LFKB to learn how to construct a portfolio. Let him construct a total portfolio from the funds available to him in the 401k and it will be a lesson in investing. In addition, LFKB has stated that he is saving for a home and a good portion if not all of his taxable portfolio needs to be in conservative investments. $40,000 a year in 401k's are not small potatoes even for this couple. Their situation might change, maybe they will get married and one of them will elect to be a stay at home parent.

I know this is blasphemy to a lot of folks on the forum, but I do think this couple could benefit from a good fee-only planner. The tax issue you brought up is an excellent example of something that should be looked at. I am not sure that this forum, no matter how good it is can plan this couple's entire financial life.

I think we have given this couple an awful lot to think over.

So you have raised an excellent point. I don't disagree with you at all. We are of different schools of thought. Who knows ultimately what the right answer is? There is no final exam.



Yes you are correct. Rick Ferri has posted threads where he recommends the same asset allocation in each portfolio. This provides support during a portfolio downturn. Equal results for equal accounts.

Another poster - Jerry_lee recommends that exact same approach to his clients.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
User avatar
abuss368
 
Posts: 6584
Joined: Mon Aug 03, 2009 3:33 pm
Location: At the Beach

Re: First Time Poster: Help me Plan my Financial Future

Postby sometimesinvestor » Wed Dec 26, 2012 9:10 pm

I think you have received excellent advice and are fortunate that some of the most competent individuals have commented on your thread.
I would suggest that you and your wife put 20k into I bonds before jan 1.(Will have to act quickly ) www.savingsbonds.gov Look at left hand column on the home page. I bonds will almost certainly pay a higher return than your ing account over 5 years and the interest will be tax deferred and not subject to California taxes. You also might look at the fidelity municipal target funds. They invest in muni bonds that mature in a particular year.
For example the fidelity municipal income fund 2017 Fmifx has a tax equivalent yield of 1.4% and might provide a capital gain. It is tax free as far as the Feds are concerned but might be taxed by california.

Slightly riskier (because of more interest rate risk )will be the Vanguard California intermediate tax exempt fund vcaix with probably an even better performance and lower expense ratio. than the fido fund.
Finally five years is too far away to speculate on interest rates but it is probable that the mortgage interest rates on mortgages higher than 500 -700k will be higher than on smaller amounts. That might provide you a reason to buy a smaller house or on putting more money down.Still if you become as or even more successful than you are today I would buy the house you want .
User avatar
sometimesinvestor
 
Posts: 897
Joined: Wed May 13, 2009 7:54 am

Re: First Time Poster: Help me Plan my Financial Future

Postby LFKB » Thu Dec 27, 2012 12:08 pm

sometimesinvestor wrote:I think you have received excellent advice and are fortunate that some of the most competent individuals have commented on your thread.
I would suggest that you and your wife put 20k into I bonds before jan 1.(Will have to act quickly ) http://www.savingsbonds.gov Look at left hand column on the home page. I bonds will almost certainly pay a higher return than your ing account over 5 years and the interest will be tax deferred and not subject to California taxes. You also might look at the fidelity municipal target funds. They invest in muni bonds that mature in a particular year.
For example the fidelity municipal income fund 2017 Fmifx has a tax equivalent yield of 1.4% and might provide a capital gain. It is tax free as far as the Feds are concerned but might be taxed by california.

Slightly riskier (because of more interest rate risk )will be the Vanguard California intermediate tax exempt fund vcaix with probably an even better performance and lower expense ratio. than the fido fund.
Finally five years is too far away to speculate on interest rates but it is probable that the mortgage interest rates on mortgages higher than 500 -700k will be higher than on smaller amounts. That might provide you a reason to buy a smaller house or on putting more money down.Still if you become as or even more successful than you are today I would buy the house you want .


Thanks for your response. I will check these out.
LFKB
 
Posts: 300
Joined: Mon Dec 24, 2012 8:06 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby Peter Foley » Thu Dec 27, 2012 1:49 pm

Thinking long term, you should pursue the backdoor Roth option. In retirement it is to one's benefit to have taxable savings, tax deferred savings and tax free (Roth) savings. This allows one to pick the source of withdrawals each year in retirement to manage one's marginal tax rate (and maximize spendable income).

I would endorse the suggestion to use a minumum number of funds to meet your goals. I recommend 4: total stock, total international stock, total bond, and a TIPs fund. IBonds are a reasonable alternative to TIPs, but the amount you can invest is limited.
User avatar
Peter Foley
 
Posts: 2342
Joined: Fri Nov 23, 2007 11:34 am
Location: Lake Wobegon

Re: First Time Poster: Help me Plan my Financial Future

Postby abuss368 » Thu Dec 27, 2012 3:11 pm

Peter,

TIPS even if it means taxable due to space limitations?
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
User avatar
abuss368
 
Posts: 6584
Joined: Mon Aug 03, 2009 3:33 pm
Location: At the Beach

Re: First Time Poster: Help me Plan my Financial Future

Postby LFKB » Thu Dec 27, 2012 3:12 pm

Peter Foley wrote:Thinking long term, you should pursue the backdoor Roth option. In retirement it is to one's benefit to have taxable savings, tax deferred savings and tax free (Roth) savings. This allows one to pick the source of withdrawals each year in retirement to manage one's marginal tax rate (and maximize spendable income).


Thanks. What are considered 'taxable savings?' I get that a 401k is tax deferred and Roth is tax free so I guess taxable is just typical brokerage accounts not held through a retirement account? I realize this is a dumb question but just want to make sure I understand.
LFKB
 
Posts: 300
Joined: Mon Dec 24, 2012 8:06 pm

Re: First Time Poster: Help me Plan my Financial Future

Postby dbr » Thu Dec 27, 2012 3:45 pm

LFKB wrote:
Peter Foley wrote:Thinking long term, you should pursue the backdoor Roth option. In retirement it is to one's benefit to have taxable savings, tax deferred savings and tax free (Roth) savings. This allows one to pick the source of withdrawals each year in retirement to manage one's marginal tax rate (and maximize spendable income).


Thanks. What are considered 'taxable savings?' I get that a 401k is tax deferred and Roth is tax free so I guess taxable is just typical brokerage accounts not held through a retirement account? I realize this is a dumb question but just want to make sure I understand.


Taxable just means assets that are not held under any special provision of tax code that provides some deferment or exemption on tax liability for income generated by the asset or on income deposited in the account. Even then, the terminology can confuse as, for example, a taxable account can hold tax exempt bonds. In that case it is the investment that is tax favored and not the account.
dbr
 
Posts: 14433
Joined: Sun Mar 04, 2007 10:50 am

Re: First Time Poster: Help me Plan my Financial Future

Postby LFKB » Thu Dec 27, 2012 3:50 pm

dbr wrote:
LFKB wrote:
Peter Foley wrote:Thinking long term, you should pursue the backdoor Roth option. In retirement it is to one's benefit to have taxable savings, tax deferred savings and tax free (Roth) savings. This allows one to pick the source of withdrawals each year in retirement to manage one's marginal tax rate (and maximize spendable income).


Thanks. What are considered 'taxable savings?' I get that a 401k is tax deferred and Roth is tax free so I guess taxable is just typical brokerage accounts not held through a retirement account? I realize this is a dumb question but just want to make sure I understand.


Taxable just means assets that are not held under any special provision of tax code that provides some deferment or exemption on tax liability for income generated by the asset or on income deposited in the account. Even then, the terminology can confuse as, for example, a taxable account can hold tax exempt bonds. In that case it is the investment that is tax favored and not the account.


Thanks for the explanation
LFKB
 
Posts: 300
Joined: Mon Dec 24, 2012 8:06 pm


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: jared and 28 guests