Roth TSP Contribution Allocations

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Roth TSP Contribution Allocations

Postby TVKNSC » Sat Feb 09, 2013 9:27 am

I currenlty have %100 of my monthly contribution going into the TSP Lifecycle 2040, a fund which invests in the G, S, C, F, and I Funds. With my moderately aggressive style, is this a good course of action or should I just focus on 2-3 of the funds vs. a 2040 which dabbles in all 5?
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
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Re: Roth TSP Contribution Allocations

Postby hoppy08520 » Sat Feb 09, 2013 10:50 am

TVKNSC wrote:I currenlty have %100 of my monthly contribution going into the TSP Lifecycle 2040, a fund which invests in the G, S, C, F, and I Funds. With my moderately aggressive style, is this a good course of action or should I just focus on 2-3 of the funds vs. a 2040 which dabbles in all 5?

Hello TVKNSC, I looked back at your earlier posts and saw that you have just started the TSP and that it's currently 2.5% of your investable assets of ~$200,000.

viewtopic.php?f=1&t=110120&p=1601191#p1603732

I recommend that you think of your combined (marital) portfolio as a unified whole and not as a several mini accounts.

Now, that being said, I see that in your earlier post, you're doing all-in-one funds (Vanguard Target Dates and Vanguard Wellington) in your other accounts, so that would make it appropriate to choose a target date fund in your TSP as well to keep your portfolio management simple and (more or less) on auto-pilot. You should pick the Lifecycle fund that most closely matches your desired asset allocation (not necessarily the year in the fund name). In your earlier post, you indicated that it is 70/30 which seems about right for a 38-year-old. That would suggest choosing the L 2040 which is currently at 71/29.

However, as written above, you need to see how this fits into your overall AA. In your IRAs, you have the Vanguard 2040 target date fund, which is actually a 90/10 AA. So you might want to take a closer look at these funds to make sure that the overall AA across all your accounts is where you want it to be. You could do that in a spreadsheet, or in something like Morningstar X-Ray.

EDIT: I took a look at your other posts and see you have a substantial holding of Wellington in your taxable account. Other posters advised against that. OP, I recommend you post your complete portfolio. You need to consider EVERYTHING and not just isolated questions, absent any context, like, "Should I choose the L 2040 or L 2030 in my TSP?" That's not the right question to ask. You need to think about your whole portfolio first, and then choose the right funds in the right accounts to make that happen.
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Re: Roth TSP Contribution Allocations

Postby TVKNSC » Sat Feb 09, 2013 11:11 am

Hoppy,
Great help! Yes, I prefer to be in that 80/20 range..My main concern with the L2040 is I really haven't gotten a great return over the past 3 years. I really look at it as more of a savings account with great potential for growth and tax efficiency, so I am not overly upset about it. I did the math and it's been about 3% return over a 3-year period. In a different thread, someone questioned why i wanted to put money into the total stock market index for my taxable account when I havent maxed-out my TSP, and that is the main reason. I am a patient investor that has been a bit disappointed with TSP 2040, but I intend to stay the course.
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
TVKNSC
 
Posts: 53
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Re: Roth TSP Contribution Allocations

Postby TVKNSC » Tue Apr 02, 2013 3:35 pm

I have a concern about my bond allocation. I am well aware of the "age in bonds," but I recently moved to the "3-fund" approach. The issue is, I am not balanced with my bonds. I can only contribute $17,500 to this TSP each year, so I am kind of in a pickle. I only have $5,800 in my TSP G-Fund because I recently chose ot max that out after several years on minimum contributions.

I have $27,000 in VTIAX and $35,000 in VTSAX, so I am lagging behind by about $25,000 if we're talking a balanced 3-fund approach.

Do you recommend opening a VG total bond market index fund so I may get balanced more quickly? I dont have as many restrictions with this fund and could probably get up-to-speed a bit quicker.

FWIW, i also have about $41,000 in my VG 2040.
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
TVKNSC
 
Posts: 53
Joined: 1 Feb 2013

Re: Roth TSP Contribution Allocations

Postby hoppy08520 » Tue Apr 02, 2013 7:30 pm

TVKNSC, could you post your entire retirement portfolio in the format described in this post: viewtopic.php?f=1&t=6212.

It's hard to give advice without understand all your accounts (IRAs, TSP, taxable, etc.) and their relative weights.
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Re: Roth TSP Contribution Allocations

Postby TVKNSC » Wed Apr 03, 2013 8:55 am

Hoppy,
No problem. I posted this in one of my initial posts, but I had to make some tweaks to it.

Emergency funds: Yes. 6 months worth and it is in ING
Debt: school loan = $8,000 (2.9%), car loan = $17,000 (1.9%) , and 30-year mortgage = $250,000 (3.4%)
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% fed/7% state
State of Residence: SC
Age: 35
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 30% of stocks
Portfolio size = low six-figures (IVO $175,000)

Current retirement assets

His 401k at TSP = 2.5%
$5,800 in G Fund-2040 (0.025%). I contribute about $17,500 per year in Roth IRA and max this out. I have all my bond allocation in this tax efficient fund.
Company match? NO

His Roth IRA at Vanguard = 17.5%
$40,000 in VG 2040 (0.18%) 62% total stock market / 27 % in international stock index/10% in total bond market (max out each year)

Her Roth IRA at Vanguard = 30%
$60,000 at VG 2040 (0.18%) 62% total stock market / 27 % in international stock index/10% in total bond market (max out each year)

VG Total Stock Market Index = 25%
$34,000 (0.06%)

VG Total International Stock = 25%
$27,000 (0.16%)

$15,000 emergency fund

Contributions

New annual Contributions
$5,500 his Roth IRA
$5,500 her Roth IRA
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
TVKNSC
 
Posts: 53
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Re: Roth TSP Contribution Allocations

Postby hoppy08520 » Wed Apr 03, 2013 11:19 pm

TVKNSC, it looks like you aspire to a 70/30 stock bond asset allocation but you've gotten yourself into a very aggressive portfolio. If my math is right, you look like you're 91% stocks, 9% bonds. I'm not including the $15K emergency fund in this, just the assets in the TSP, IRAs and the two Vanguard funds in your taxable account.

To get yourself to a 70/30 asset allocation, you can get close to that (72/28) simply by exchanging your Vanguard Target Date 2040 funds in both IRAs with Vanguard LifeStrategy Moderate Growth (VSMGX) which has the same funds at the target date funds, only at a 60/40 stock/bond ratio. That gets you to 72/28. With ongoing contributions, your AA will gradually change, though, so you'll need to make some adjustments every 6 to 12 months for the next year or two (depending on returns) before you can get into more of an auto-pilot mode.

Depending on returns, you'll soon get to 70/30 as your TSP contributions to the G Fund pile up. In about one year, your contributions will pile up and your asset allocation will get too bond-heavy. So, you can start exchanging from the LifeStrategy Moderate Growth into the LifeStrategy Growth Fund (VASGX), which has an 80/20 asset allocation. So, after one year, you might wind up holding half of your IRAs in Growth and half in Moderate Growth.

After two years, assuming no gains or losses (which of course won't happen, but we're just doing some forecasting guesses), if you transfer the remaining half of your IRAs from VSMGX (Moderate Growth) to VASGX (Growth), and contribute another $5,500 to each plus $17,500 to the G Fund, then you'll still be at around 70/30 with a total balance of around $195,000.

After two years of contributions, your bond allocation will continue to climb because you're loading up so much on the G Fund, so eventually you could get to this to keep your portfolio at 70/30 (shown in Row 72 of spreadsheet, see below):
* Hold enough G Fund (around $25,000 or so, whatever it takes to be 30% of the sum of G Fund + VTIAX + VTSAX) to complement your taxable holdings of Total US Stock and Total International Stock to compose a virtual 3-Fund portfolio from those three funds
* Shift the rest of your TSP balance into a L Fund with a 70/30 AA (L2030 comes closest)
* In your IRAs, select the appropriate target date funds in your IRA that is 70/30, or else hold a mix of LifeStrategy Growth and Moderate Growth -- enough to get you to 70/30 in your overall portfolio

With the portfolio described above, after 2 years of contributions and depending on your gains/losses, you'll be on more of an auto-pilot mode where your three single funds (G Fund, VTIAX, VTSAX) can make up their own little 3-Fund portfolio, while the remainder of your TSP and your IRAs can be in set-it-and-forget-it all-in-one funds that match your desired AA. Until you get to that point, you will need to do a rebalance every 6 months or so.

To keep VTIAX and VTSAX in balance to keep your desired 70/30 US/International ratio, I recommend you NOT reinvest the dividends from these funds. Instead, direct the dividends to the Vanguard money market fund and then reinvest them into whichever fund needs the money to keep your desired asset allocation between US and International. It's not that important to keep them perfectly balanced, just do the best you can. US and International stocks have a pretty strong correlation (similar returns) anyway, so they will probably stay relatively close to each other. You'll probably wind up needing to direct dividends to Total US Stock Market, because the ratio between US and International right now is 56/44. So, this means that your international holdings are a bit more than 30% of stocks.

I computed this in a Google spreadsheet that you can take a look at.

I hope this makes sense and please reply if you have any questions.
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Re: Roth TSP Contribution Allocations

Postby TVKNSC » Thu Apr 04, 2013 8:50 am

Hoppy.
Wow. What a detailed and helpful response. I will sit down to look at making these moves. One issue is that Google spreadsheet wouldnt open. Thanks again!
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
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Posts: 53
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