About to Jump - Please Evaluate our Portfolio Plans

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About to Jump - Please Evaluate our Portfolio Plans

Postby TroutMD » Sun Jan 20, 2013 2:40 pm

We (wife and I) have been doing various readings of this site and others; we posted some questions not long ago and after gathering more data, I am placing it in a more 'approipate' manner to this forum for feedback. We are both professionals, I work full time, she recently started working part time from home. We have one 18 month old child with likely plans of another within the next few years and intend to end up with 3 total kids. We are planted securely in our current living location for at least 5 years; our personal goals will be to reevaluate options, net worth, and other options at that time before our child begins to get too involved into school to decide if a move is a good idea. We have no family here, so a move is a possiblity at some point. If we make a move it would be in the 5-7 year range from now.

Emergency Funds: Covered
Debt: 330K primary mortgage - 15 year note @ 4.375%; 2 years into it - Considering a refinance. Appraisal when bought was 500K; paid 455K.
Tax Filing Status: Married filing jointly
Tax Rate: 35% federal, 0% State
State: Texas
Age: Me - 32, Her 31
Desired Assest Allocation: 68% Stocks / 32% Bonds (We used the Age idea)
Desired International Allocation: 20.4% (We like the 'core 4' model which has a slight tilt towards REIT, etc)
Desired Allocation Overall: Bonds: 32%, US Stock: 40.8%, Int Stock: 20.4, REIT/other Tilts: 6.8%

Current Retirement Assets

On our numbers below, we have subtracted out an emergnecy fund, and although we have in the past had well over 50% of our net worth in cash in a savings account, we are continuing to keep a sizable chunk of cash in a savings account for now. 1.) We often loan to a family business (very secure, no issues with that), 2.) We just like having a decent cash chunk and we cannot come to terms with investing near everything. We may funnel more cash towards investments, but this is a big step for us as it is and obviously want to trend carefully.

HIS & HER TAXABLE:
29.47% CASH we have set aside for 'investing'
4.15% HER Company Stock

HIS Roth 401K - Original Company no longer worked for, currently held with 'Northwestern Bank'.
1.49% Vanguard Life Strategy
1.44% Vanguard Total International

HIS Employee Retirement Account - Old company I worked for, held with ING Investments.
2.46% Fidelity VIP Contrafund
2.00% Fidelity Templeton Foreign
1.64% Fidelity VIP Equity Income
1.38% Fidelity Global Resource

HIS Roth IRA - No longer qualify to contribute ot this.
1.18% Vanguard Emerging Markets
0.93% Copart Stock
0.24% Vanguard Prime Money Market

HIS Traditional IRA
0.98% Vanguard Money Market Fund

HIS SEP IRA - This is my primary retirement vehicle at this point and time
1.18% Vanguard Total International Index Fund
19.35% Vanguard Prime Money Market

HER Traditional IRA
1.02% Vanguard Total Stock Market Index Fund

HER 401 K - Primary Investment vehicle by her current company; there is a match and we fund this fully.
27.53% Fidelity Target Retirement Date 2045
0.36% Fidelity International Equity Index
3.19% HER Company Stock

CHILDS 529 Plan Not sure where to stick this in, but figured this works.
Currently worth $21,413. Lived in a prior state that had a tax advantage by making a contribution of 20K so we did. Will save this for another thread, but plan is to start contributing on his birthday to a Utah 529 plan and try to allocate it appropiately.

Contributions:

New Annual Contributions
$50,000 HIS Sept IRA - Already funded it; included above in the Money Market Account of the SEP.
$? HIS/HER Traditional IRA - Last year we both contributed to a Traditional IRA; is there any reason that we should continue to do this?
$12,095 HER 401K - Missed the max this year; she took a leave after pregnancy complications and we failed to adjust the contribution.
$200,000 taxable - This is the taxable cash we are comfortable with investing somewhere. I have included it in the above percentage calculations.

Avaliable Funds:

Funds for HER 401K
Fidelity Target Dates 2015, +5 years up to 2055. Net Exp Ratio is 0.09%
Equity Index Growth 0.04%
Equity Index Value 0.04%
Intl Equity Index 0.09%
Russell 2000 Index 0.04%
S&P 500 Index 0.02%
Emergency Markets Index 0.18%
Income 0.40%
US Fixed Income 0.05%
US Fixinc Short Dur 0.05%
US TIPS Bond Index0.07%
World Government Bond Index 0.07%
HER Company Stock 0.02%

Funds for HIS SepIRA
Everything is with Vanguard so I have all those options moving forward


Thoughts followed by Questions:

We have been very heavy towards Cash and want to get away from that as we understand that is losing us money with inflation and such. We have very high incomes from our primary employments; we are both stable high income earners and even if there was something that happened local, we can move elsewhere and have similiar incomes. Reading around, we would like to retire with at least 2,000,000 in retirement accounts; using some methods I have ready about, that allows us to withdraw 80K a year and hopefully not affect its growth. Thats our minimum, I'd rather see close to double that in true net worth; and this allow 160K per year. I do not have a particular retirement age, but would love to be 'able to' at 55 if we wanted to.

Primary Questions:
1.) I think we need to rollover some things. Such as those old retirement accounts into Vanguard?
2.) Should we refinance the house? I called our bank the other day, a 15 year note is sub 3% but we would have a few thousand in closing costs. Regardless its probably at least a 1% reduction and more like a 1.3-1.5% reduction in rate.
3.) I posted my wifes possiblities for investments. She has less flexiblity since its a company 401K. We have significant amount in Fidelity Target 2045; is there somewhere else in the avaliable funds we should move that to?
4.) One of the biggest issues we have right now with asset allocation goals are BONDS! Are we better to buy bonds with my SEP IRA cash or my taxable account cash or does it matter?
5.) I know it goes against everything, but people on here keep saying "Crap, we are at an all time high and Crap, the bond market is going to bust." I understand bogleheads ideas.. but someone just help convince me that its ok to essentially dump 250K or so into such funds this next week or so.

*Thanks for the help, we have long known our retirement plans are in shambles and we have really enjoyed this process and look forward to making a true leap of faith!
Last edited by TroutMD on Sat Feb 02, 2013 11:59 pm, edited 4 times in total.
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Re: About to Jump - Please Evaluate our Portfolio Plans

Postby Rainier » Sun Jan 20, 2013 2:46 pm

Are you moving anytime soon? If not you should refinance. Look at the Penfed 5/5 and just plan on paying it off in 15 years or less.
- Bill
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Re: About to Jump - Please Evaluate our Portfolio Plans

Postby nimo956 » Sun Jan 20, 2013 4:29 pm

See this post in the wiki on Backdoor Roth IRA conversions: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

It explains how you can contribute to a Roth IRA when your income exceeds the limit. Also, does your 401k allow for after-tax contributions? Let's say you contribute $17.5k and receive a $2.5k match ($20k total). You can contribute $30k after-tax (for a total of $50k) and then do an in-service withdrawal to a traditional IRA and immediately convert this to a Roth, paying tax only on the gains. Using the numbers in this example, you could contribute $30k + $5.5k = $35.5k to a Roth every single year.

Your 401k plan has to allow this, so double check the rules. Also, I'm not an expert on this, but there are tax implications if you already have other traditional IRAs, so look into that as well.

To answer your questions:

1. Yes, rollover your old accounts so you have more freedom to invest in what you want. Also note though that if you are going to do the backdoor Roth option you might want to roll some of your existing traditional IRAs into your 401k to avoid the tax issues I mentioned earlier
2. I'll let others answer this.
3. I don't like target retirement funds because it makes it hard to determine what you are holding overall. I prefer to break it up into its component parts, but the option you currently have is low cost enough so you could just leave it.
4. Buy bonds in your IRA if you can help it because the interest is taxed at your marginal rate. Stocks held in taxable can be taxed at the long-term capital gains rate.
5. If you hold a total bond market type fund, the bond market going "bust" is equivalent to something like a 5-10% drop. By comparison, in 2008-9, some stock funds dropped 50-60%. Also, you are investing for the long term, so you won't access these funds for 20+ years. You hope that the stock market will be higher in 20 years than it is now. However, note that there have been 10 year periods where stocks haven't returned anything (1970s, 2000s). For this reason, I personally don't place such a high percentage of my portfolio in stocks, in case they don't perform as expected on my particular timeframe.

Personally, I don't like breaking up my money into different buckets with different allocations. I like to think of everything as one portfolio. For this reason, I'd be inclined to include the cash you want to keep on the sidelines and simply adopt a more conservative allocation. Nevertheless, I'll give you an example of how to allocate what you asked for:

Roughly 70/30 stock bond split with 20% intl and a tilt to REIT. I'd only work in multiples of 5%, so this works out to:

45% US stock
15% Intl stock
10% REIT
30% Bonds

35% HIS & HER TAXABLE:
20% Vanguard Total Stock Market Index Fund
15% Vanguard Total International Stock Market Index Fund

3% HIS Roth 401K - Original Company no longer worked for, currently held with 'Northwestern Bank'.
3% Vanguard Total Stock Market Index Fund (rollover to VG)

8% HIS Employee Retirement Account - Old company I worked for, held with ING Investments.
8% Vanguard Total Stock Market Index Fund (rollover to VG)

HIS Roth IRA - No longer qualify to contribute ot this.
2% Vanguard Total Stock Market Index Fund

HIS Traditional IRA
1% Vanguard Total Stock Market Index Fund

HIS SEP IRA - This is my primary retirement vehicle at this point and time
10% Vanguard Total Stock Market Index Fund
10% Vanguard REIT Index Fund (make sure REITs are in a tax-sheltered vehicle as they are not tax-efficient)

HER Traditional IRA
1% Vanguard Total Stock Market Index Fund

HER 401 K - Primary Investment vehicle by her current company; there is a match and we fund this fully.
30% US Fixed Income 0.05% (direct future contributions here)
25% S&P 500/ 25% 30 year US Treasury Bond/ 25% Gold/ 25% Cash
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Re: About to Jump - Please Evaluate our Portfolio Plans

Postby Duckie » Sun Jan 20, 2013 8:05 pm

TroutMD, you want an AA of 48% US stocks (including REITS, etc.), 20% international stocks, and 32% bonds. Here is a possible retirement portfolio:

Taxable at Vanguard -- 34%
14% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
20% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

His SEP IRA at Vanguard -- 21%
13% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
7% (VGSLX) Vanguard REIT Index Fund Admiral Shares (0.10%)
1% (VBMFX) Vanguard Total Bond Market Index Fund Investor Shares (0.22%)

Her 401k -- 31%
21% US Fixed Income Fund (0.05%)
10% US TIPS Bond Index Fund (0.07%)

His Traditional IRA at Vanguard -- 8% <-- This includes the rollover from His old Employee Retirement Account.
8% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)

His Roth IRA at Vanguard -- 5% <-- This includes the rollover from His old Roth 401k.
5% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)

Her Roth IRA at Vanguard -- 1% <-- Convert Her Traditional IRA.
1% (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%)

My comments:
-- This ignores the tax cost of selling in taxable.
-- This assumes you have enough assets to use mostly admiral shares.
-- This has TISM in taxable to take advantage of the 
Foreign tax credit.
-- If she converts her 1% Traditional IRA to a Roth IRA she would be able to do Backdoor Roth IRAs
 in the future without worrying about the pro-rata rule. Unfortunately because of His SEP IRA, he would not.
-- Roll both His old plans over.
-- If you are a doctor (and MD implies it) EmergDoc has a blog, The White Coat Investor, you may find useful.

Your questions:
1. I think we need to rollover some things. Such as those old retirement accounts into Vanguard?
-- Yes, roll them over. See above.

2. Should we refinance the house? I called our bank the other day, a 15 year note is sub 3% but we would have a few thousand in closing costs. Regardless its probably at least a 1% reduction and more like a 1.3-1.5% reduction in rate.
-- Can't help here.

3. I posted my wifes possiblities for investments. She has less flexiblity since its a company 401K. We have significant amount in Fidelity Target 2045; is there somewhere else in the avaliable funds we should move that to?
-- I'd put it all in bonds. See above. Having one balanced fund (both stocks and bonds) with everything else separate makes things more difficult.

4. One of the biggest issues we have right now with asset allocation goals are BONDS! Are we better to buy bonds with my SEP IRA cash or my taxable account cash or does it matter?
-- You put bonds (and REITs) in tax-sheltered accounts unless there's no room. For now you have room. At the point where you have no more room you could buy 
I Savings Bonds through Treasury Direct and VWITX Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares (0.20%) in taxable. REITs need to stay in tax-sheltered.

5. I know it goes against everything, but people on here keep saying "Crap, we are at an all time high and Crap, the bond market is going to bust." I understand bogleheads ideas.. but someone just help convince me that its ok to essentially dump 250K or so into such funds this next week or so.
-- Studies have found that lump-summing works best two-thirds of the time. But if you don't want to do it that fast, split it up over four to six months. But if you do split it up, don't pay attention to the market. Set it up to go in whatever's happening.

Something to think about.
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Re: About to Jump - Please Evaluate our Portfolio Plans

Postby letsgobobby » Sun Jan 20, 2013 9:54 pm

definitely refi. your rate is *way* too high; you can probably lose 1% and not pay any closing costs, or 1.5% with normal costs.

The $2,000,000 you say you want might work today but understand you will have to allow for inflation over the years. If you want $2M real in 30 years in a world with 3% inflation, you actually need 2.48 * $2M = $4,960,000. Just keep that in mind.

If you can't stomach drop kicking a quarter million into your asset allocation, then don't; write down a dollar cost averaging plan that gets the money invested over 8 weeks or 4 months or whatever you want. But write it down and follow your plan. There will always be a reason to wait longer. There are a plethora of threads addressing this issue, just in the last few days. Something about a 130% stock market rally really gets people interested in investing again. :wink:

In the 35% bracket you will pay 3.8% on all your investment gains and 0.9% Medicare add on tax on wage income > $250k. I don't know how this all works out as far as your marginal dollar earned, but it does impact your taxable investing. I recommend you buy I bonds x $20,000 every year, to expand your tax advantaged space.

Yes, traditionally bonds in tax advantaged and stocks in taxable. However with the above tax rates and increasing stock yields and low bond yields, in might make sense in your bracket to buy municipal bonds in taxable and put stocks in tax-deferred. There are some advocates for this approach on this forum (the finance buff, weblink below, though the assumptions in his article are debatable), and EmergDoc has a good thread on it at his website (which you should read) - read especially the comments at the end.

http://thefinancebuff.com/tax-efficienc ... olute.html

http://whitecoatinvestor.com/rethinking ... n-taxable/

"she" should make backdoor Roth IRA contributions - she only has a teeny traditional IRA; make the 2012 and 2013 non deductible contributions, convert everything to a Roth IRA, and pay the tax on that teeny TIRA so she can make backdoor Roth IRA contributions forever. You won't be able to do this because you have a large SEP IRA.
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