college saving and portfolio review

[jonab]

Hello,

I was researching and found this board. I've been reading a lot and learning some great ways to invest. Thank you.

My dear wife passed away earlier this year and I received wife's life insurance pay out of $100,000 from my company's benefit. From this amount I've taken $10,000 and deposit it to each of my boy's 529 account. I have a 18 years old who is a senior and will be attending college next year.


Emergency funds: six months of expenses
Debt: Mortgage $570,000 at 3.5% for 30 years
Co-sign for 18 years old son's car to help him build credit. Financed $8,000 at 3.5% and will be paying off in 6 months.
Tax Filing Status: Widower with 2 dependents (18 and 14)
Tax Rate: 25% Federal, 9.3% State
State of Residence: California
Age: 42
Desired Asset allocation: 45% stocks / 20% bonds
Desired International allocation: 35% of stocks

Current 401K / Roth 401k are in mid six-figures

Taxable - Personal brokerage account at Scott Trade
CSCO Qty 44


His 401k
Harbor Capital Appreciation Instl 12%
Vanguard Total Stock Market Idx I 23%
Allianz NFJ Small Cap Value Instl 8%
Invesco Small Cap Growth R5 4%
T. Rowe Price Mid-Cap Growth 6%
DFA Emerging Markets I 5%
Harbor International Instl 12%
Vanguard Developed Markets Index I 5%
PIMCO Total Return Instl 4%
Vanguard Inflation-Protected Secs I 7%
Vanguard Total Bond Market Index I 3%


Your Personal Profile
Savings Rate - Pre-Tax 401(k) Deferral 5%
Savings Rate - Roth 401(k) Contribution 7%
Savings Rate - Pre-Tax 401(k) Bonus 5%
Savings Rate - Roth 401(k) Bonus 7%

Total of All Accounts Together (not each account individually) should equal 100%.

Fidelity 529
18 Yrs old
$22,000

14 Yrs old
$23,000

Available funds
$80,000 cash

Questions:

1. I'm thinking of putting $50K in to my Scott trade account and setup a Growth portfolio (80%stock / 20%bond). When the 18 years old graduate from college, I will take half of the money in the account and transfer it to his own account. Continue investing the remaining half and transfer to 14 years old's own account after his college. Does it make sense to do it this way? Other option I was thinking is to put the $50K in to a 5 year CD.

2. What other option do I have in terms of investing for retirement on top of my 401k / Roth 401k? My salary is just over limit for Roth IRA.

TYIA
jona

[livesoft]

I'm sorry for your loss.

Based on your reported tax bracket, I wonder why you are contributing to a Roth 401(k). I think you should probably contribute to a traditional 401(k) and get the tax break. You can also contribute to a Roth IRA. If your mAGI is too high (would not be if you are now just over limit and you switch to contributing to traditional 401(k)), just do the so-called back door Roth IRA. Year 2012 is over, so you can't change anything for this year, but maybe do things differently next year.

I would not use Scottrade nor would I hold CSCO stock. If you read around on the forum, most folks advocate a passively-managed index fund approach in the most tax-efficient way possible. It appears that you have invested in every 401(k) fund available to you. I would trim that back to 3 funds:

Total Stock Market Index
Developed Market Index
Total Bond Market Index
because they are passively-managed low-expense ratio funds. You would be missing emerging markets, so add the passively-managed DFA emerging markets fund if you like.

Instead of Scottrade, I would use Vanguard for the mutual funds or WellsFargo for funds and ETFs. Both of these would be less expensive than Scottrade and probably better service. If you want to stay at Scottrade, use index ETFs such as VTI, VXUS, BND.

Also, if you intend to pay for college, I would increase 529 plan contributions. You may see how financial aid pans out in April before adding more to the 529 plans.

Good luck!

[retiredjg]

jonab, welcome to the forum!

I think you might be able to reduce the cost of your portfolio by eliminating some of the funds. There is really no need to hold all of those. I pretty much agree with livesoft's choices although I would not make the emerging markets fund optional.

Age: 42
Desired Asset allocation: 45% stocks / 20% bonds

I consider this too aggressive. Many here would consider it way too aggressive.

I think you should consider adding a bit more in bonds - maybe 75/25 until the age of 45, then 70/30 for 5 years, etc. This way, you would always stay within "age minus 20" in bonds. This is the same as 120 minus age in stocks - the most aggressive "rule of thumb" I can recall seeing. Of course a rule of thumb is only that, but there is no obvious reason to be more aggressive than the aggressive end of the generally accepted spectrum.

Current 401K / Roth 401k are in mid six-figures

I too would suggest that you stop using Roth 401k. It is quite likely that you are paying taxes at a higher rate to get that money into Roth status than you would pay later taking it out of traditional 401k. Also, switching all your contributions over to traditional 401k will probably keep you within Roth IRA range - and you'll have the money saved from taxes to put in the Roth IRA.

Taxable - Personal brokerage account at Scott Trade
CSCO Qty 44

The rest of your portfolio only adds up to 89%. Is this 11% of your portfolio? Do you wish to keep this stock? If not, can you sell any or all of it at a loss (to avoid taxes)? Or are the 529 accounts and the cash mixed in there too?


The best choices in my opinion:
Vanguard Total Stock Market Idx
Vanguard Developed Markets Index
DFA Emerging Markets <---what is the expense ratio of this fund?
Vanguard Total Bond Market Index
Vanguard Inflation-Protected Secs (if desired)

What is the money in the taxable account for? Both the $80k and the stocks.

How much money can you save for retirement each year? Your goal should be $17.5k in the 401k (plus match) and $5,500 in the Roth IRA (either directly or through the back door). Can you do that? How much is your match?

[jonab]

Thank you livesoft and retiredjg for your input.

My 401k is with Schawab and the selections were automatically allocated by their tool Guided Choice. I do have the option to make changes on my own and will look into your recommendations. Contribution between 401k and Roth 401k was a recent change (end of November this year). I've always contributed fully to the traditional 401k. It was recently after consulting one of their advisers, he recommends that I start contributing to Roth 401k. I see the point of paying tax in a higher rate in contributing to Roth 401k. I will also look into changing it back, especially if it lowers my mAGI which could allow me to start a Roth IRA.

I don't need to keep the CSCO stocks. It's just that I bought it a few years ago at the tail end of the boom at very high price. I was hoping it'll get back to where it was but it doesn't look like it will.

I'm not sure how to calculate the percentage of my investment. the portfolio I've included is basically a copy and paste from my account. Outside of my 401k, I only have one brokerage account with Scottrade and only own that 44 CSCO stocks. 80K is from the life insurance that I plan to invest for the boys. My thought is to invest it in some way and transfer to them after college so they have money to put down on a house or invest it themselves.

For myself, I max out my 401k contribution and if I can, I like to start Roth IRA. I don't think we have a match but instead we have profit-sharing. it's at 7.5%.

[retiredjg]

I will also look into changing it back, especially if it lowers my mAGI which could allow me to start a Roth IRA.

If the change was that recent, it may not lower your mAGI enough to get you into roth IRA territory. However, there is a back door way to make contributions that you might be interested in. http://thefinancebuff.com/the-backdoor- ... ow-to.html

I don't need to keep the CSCO stocks. It's just that I bought it a few years ago at the tail end of the boom at very high price. I was hoping it'll get back to where it was but it doesn't look like it will.

This is what we call "chasing returns" and is a good example of why that does not work. And a good example of why individual stocks are not your best choice.

the portfolio I've included is basically a copy and paste from my account.

I wonder if something fell off the list.

I'm not sure how to calculate the percentage of my investment.

You can skip that part and just tell us this:

how much money in the stocks in your taxable account
other money you want to invest for retirement (I assume this is in your taxable account)
how much money in 401k

and we'll figure that part out

I don't think we have a match but instead we have profit-sharing. it's at 7.5%.

How much is that?

[jonab]

You can skip that part and just tell us this:

how much money in the stocks in your taxable account
other money you want to invest for retirement (I assume this is in your taxable account)
how much money in 401k
and we'll figure that part out

In my taxable account which consists of the 44 CSCO stock is roughly about $900. I keep roughly $25k in checking for expenses and emergency.
I have $80K in cash of which I would like to invest at least $50K, possibly more, on boys' behalf and divide it up after they graduate from college. At which time I will transfer to their own account.
In my 401k, I have $409,000.

I don't think we have a match but instead we have profit-sharing. it's at 7.5%.

How much is that?

For profit sharing, every $100 earned in pay, company will contribute $7.50 into 401k. It's roughly $10k / year.

[retiredjg]

Ok. Here's a suggestion to consider. You would change what you currently have invested to what is below and then try to maintain it with your new contributions. I'm leaving out the CSCO stock because it is too small to do much with and the $80k which I think you want to invest separately.

401k
45% Vanguard Total Stock Market Idx
23% Vanguard Developed Markets Index
7% DFA Emerging Markets
25% Vanguard Total Bond Market Index (could be combined with Vanguard Inflation-Protected Secs if desired)

Roth IRA <--set up where you don't have to pay transaction fees (Vanguard would be best if you want to use mutual funds instead of ETFs)
Vanguard's Emerging Markets Index VEIEX .33% (cost will go down when you reach $10k)

This idea is 75% stocks and 25% bonds with 40% of stocks (30% of portfolio) in international. It contains all you need and is lower cost than what you are using now. As you build up more Emerging Markets in the Roth IRA, you could reduce the higher cost Emerging Markets in your 401k.

For the Roth IRA, you would have to use the back door approach mentioned in a link above. If you don't have enough each year to fill both a 401k and an IRA, you could just use the 401k or you could use both by just contributing less to your 401k. Putting all your money into the 401k will lower your taxes the most.



For the $80k you want to invest for your children, consider Vanguard's Tax Managed Balanced Fund which is about half large and mid cap US stocks and half muni bonds. I suggest this because it is one fund investing and should not affect your taxes too much. Or you could make your own mixture using Total Stock, Total International and a federally tax exempt bond fund.

Let me know if you have any questions.

[jonab]

Ok. Here's a suggestion to consider. You would change what you currently have invested to what is below and then try to maintain it with your new contributions. I'm leaving out the CSCO stock because it is too small to do much with and the $80k which I think you want to invest separately.

401k
45% Vanguard Total Stock Market Idx
23% Vanguard Developed Markets Index
7% DFA Emerging Markets
25% Vanguard Total Bond Market Index (could be combined with Vanguard Inflation-Protected Secs if desired)

I wonder if something fell off the list.

It just dawned on me what you meant by something fell off the list. All the funds available in the 401k to choose from are as follow:

Vanguard Target Retirement 2010 Inv
Vanguard Target Retirement 2015 Inv
Vanguard Target Retirement 2020 Inv
Vanguard Target Retirement 2025 Inv
Vanguard Target Retirement 2030 Inv
Vanguard Target Retirement 2035 Inv
Vanguard Target Retirement 2040 Inv
Vanguard Target Retirement 2045 Inv
Vanguard Target Retirement 2050 Inv
Vanguard Target Retirement 2055 Inv
Vanguard Target Retirement Income I

Dodge & Cox Stock
Harbor Capital Appreciation Instl
Vanguard Institutional Index I
Vanguard Total Stock Market Idx I
Allianz NFJ Small Cap Value Instl
Goldman Sachs Mid Cap Value Instl
Invesco Small Cap Growth R5
T. Rowe Price Mid-Cap Growth
DFA Emerging Markets I
Harbor International Instl
Vanguard Developed Markets Index I
Dodge & Cox Balanced
PIMCO Total Return Instl
Vanguard Inflation-Protected Secs I
Vanguard Total Bond Market Index I
Morley Stable Value Fund Net 20
Vanguard Prime Money Market Instl

Should I consider any of the funds other than the four you've recommended?

For the $80k you want to invest for your children, consider Vanguard's Tax Managed Balanced Fund which is about half large and mid cap US stocks and half muni bonds.

I went on Vanguard's site to look up Tax Managed Balanced Fund but the closest I can find is Tax-Managed Balanced Admiral Shares - VTMFX. Are they one and the same?

Thank you.

[retiredjg]

I wonder if something fell off the list.

It just dawned on me what you meant by something fell off the list. All the funds available in the 401k to choose from are as follow

Actually, that is not what I meant. Your cut and paste of what you currently own does not add up to 100% - it only adds up to 89%. I was wondering if something fell off that list.

Should I consider any of the funds other than the four you've recommended?

No. The 4 already listed cover pretty much everything required. Nothing else on the list is needed.

I went on Vanguard's site to look up Tax Managed Balanced Fund but the closest I can find is Tax-Managed Balanced Admiral Shares - VTMFX. Are they one and the same?

That's the one. I'm not sure it fits your needs, but it is the only balanced fund that I know of that is tax-managed and I was thinking you might like the 1 fund approach. There could be other funds of this type at other companies that I don't know about.