Portfolio Review & is My Taxable Conversion Plan Sound?

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Portfolio Review & is My Taxable Conversion Plan Sound?

Postby 4th and Inches » Sun Feb 10, 2013 7:57 pm

Greetings,

Since the end of October, 2012 I have been reading and researching about personal investment and retirement planning. I have read numerous recommended Boglehead books, read the Wiki, poured over other forum posts around here and other sources of information. I have learned a substantial amount of information thanks to this community and I feel that I am better equipped going forward to create a long and financially sound retirement for my wife and I using the Bogleheads principles of investing, but I am far from an expert. Although I really do not post much, I enjoy lurking on here and learning about the intricacies of topics being discussed. Thank you so much for all the great information available here and I now have some portfolio questions.

Thank you for your responses.

Emergency funds: Fully funded with 9 months of expenses.

Credit Card Debt: $0, cards always paid in full every month. Credit Scores are both above 800.

Student Loan Debt: Hers $0. His: $20,500 @ 1.625 %, $2,950 @ 6.55%. (Not bad for a Ph.D and three Master's degrees between us.) I am paying the second loan off to the tune of $538 a month. After this is paid off, the plan is to allocate 100% of pretax dollars to my wife’s 403b.

Car Loan: $14,450 @ 2.9%

Mortgage: None. At this time we are not actively saving for a home. It will be three years before we are in a city that we want to buy in and we also learned a $38,000 lesson in selling our previous home for less than we owed on the mortgage.

Tax Filing Status: Married Filing Jointly, no children yet.

Tax Rate: 25% Federal, 4.7% State

State of Residence: Ohio

Age: Her: 27, Him: 33

Desired Asset allocation: 80% stocks / 20% bonds

Desired International allocation: 30% of stocks

Portfolio Size: Just under $100,000

Current retirement assets

His 401k Administered by Ameritas:
5.6% PIMCO TOTAL RETURN FUND ADMINISTRATIVE CLASS (PTRAX) (.71%+1.46%).

There is not single index fund in the available AND all fund expense ratios have 1.46% tacked on for the administrative fees. Because of this I am only contributing 5% of gross pay in order the get the 4% company match. I am 100% vested in the company match from day one. I will continue to only contribute to the employer match limit until all other retirement accounts are fully funded.


Her 403b Administered by TIAA-CREEF:
.6% VANGUARD TOTAL BOND MARKET INDEX FUND SIGNAL SHARES (VBTSX) (.10%)

The administrative fee is $24.95 a year. The options here are much better than his 401k. The employer match is 50% of the first 3% contributed by the employee, a 1.5% company match. Once the second student loan is paid off ($2950 @ 6.55%, paying $538 per month), the plan is to contribute 100% of those pretax dollars to the 401b. Once we have built up our bond holdings to 20% of the total portfolio, we would like to do some small tilts (see questions section).

Her Taxable at LDL Financial
1.5% Cash doing nothing.
7.4% Invesco International Growth A (AIIEX) (1.37%)
12% JP Morgan Chase Cap X (JPMPRJ)
6.9% Morgan Stanley CP TR III 6.25% (MWR)

Lots of individual stock risk here. The plan is to fully liquidate all of the LDL Financial funds. The funds will be used to fully fund her newly created Roth IRA for 2012 and 2013 for a total of $10,500. These funds will go into VTIAX. The remaining after tax funds will go into his Roth IRA and into the VTSAX fund.

Proctor and Gamble Stock
26.8% Proctor and Gamble (PG)

Lots of individual stock risk here. Whatever space is left in his Roth IRA for 2012 and 2013, the according amount after taxes will be put into his Roth IRA up to the limit of $10,500. We will also sell additional shares in September and live off of the proceedings while bumping up my wife’s 403b contributions to hit the $17500 limit for 2013. Whatever is left will be sold in 2014 and put into our Roth IRAs.

His Roth IRA at Vanguard
21.7% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.06%)

His Traditional IRA at Vanguard
17.5% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (.18%)

Her Roth IRA at Vanguard
This is not set-up yet. The plan is to liquidate all of the LDL Financial funds and put 10,500 representing her 2012 and 2013 Roth IRA contribution in (VTIAX).

Contributions

New annual Contributions
$5950=$3300+$2650 company match to his 401k. Because of the very high expenses associated with my 401k we will exhaust other accounts before contributing additional funds to this one.

$1180=940+$240 company match to her 403b. This is how much we will be contributing until the end of August. Starting in September we will have paid off my second student loan freeing up an additional ~$650 per month pre-tax. She will also transition into a post-doc role at her work resulting in a $14,000 a year raise. Combined, these two things will increase our income by $21,800. Our plan is to bump up her 403b contribution to hit the $17,500 403b limit in 2014. We plan to start the trajectory for fully filling her 403b in September by putting $673.06 x 26 pay periods. Additionally, we will sell the amount of PG stock needed to hit the $17,500 403b limit for 2013. This will be done by selling the stock and living off of those funds while doing a short-term bump in the contribution to her 403b beyond the $673.06 per pay period. For example we may sell $5,000 of PG stock and then put 100% of her pretax paychecks into the 403b until the equivalent of ~$6500 pretax goes into her 403b. After that we will scale down the contribution to be back on the trajectory to contribute $17500 for 2014.

Available funds

Funds available in his 401(k) (All funds have a 1.46% administrative fee)

Calvert Long-Term Income Fund (CLDAX) (1.25%) (3.75% sales fee)
5.6% PIMCO TOTAL RETURN FUND ADMINISTRATIVE CLASS (PTRAX) (.71%).
PIMCO High Yield Fund (PHYAX) (.8%)
Fidelity Advisor Strategic Income Fund (FSTAX) (.99%) (4% sales fee)
Morgan Stanley IF US Real Estate Portfolio (MUSDX) (1.24)
American Century Equity Income Fund (TWEIX) (.96%)
American Funds Fundamental Investors Fund (RFNEX) (.66%)
Fidelity VIP Contrafund Portfolio (Not Available) (.90%)
Alger Capital Appreciation Portfolio (ALVOX) (.98%)
Fidelity Advisor New Insights Fund (FNIAX) (1.14%) (5.75% sales fee)
American Century Mid Cap Value Fund (ACMVX) (1.01%)
Neurberger Berman Regency Fund (NBREX) (1.25%)
American Century Heritage Fund (TWHIX) (1.01%)
Perkins Small Cap Value Fund (JSCVX) (1.11)
Fidelity Advisor Small Cap Value Fund (FSCDX) (1.44%) (5.75% sales fee)
Royce Total Return Fund (RYTFX) (1.41%)
Baron Small Cap Fund (BSCFX) (1.31%)
Thornberg International Value Fund (THVRX) (1.25%)
Invesco Developing Markets Fund (GTDDX) (1.45%) (5.5% sales fee)
Calvert Cash Reserves Institutional Prime Fund (CCIXX) (.33)
T. Rowe Price Capital Appreciation Fund (PACLX) (1.00%)
American Funds Capital Income Builder Fund (RIREX) (.66%)
Oppenheimer Global Securities Fund/VA (Not available) (.76%)
T. Rowe Price Retirement Income Fund (PARIX) (.81%)
T. Rowe Price Retirement 2010 Fund (PARAX) (.86%)
T. Rowe Price Retirement 2020 Fund (PARBX) (.94%)
T. Rowe Price Retirement 2030 Fund (PARCX) (.99%)
T. Rowe Price Retirement 2040 Fund (PARDX) (1.01%)
T. Rowe Price Retirement 2050 Fund (PARFX) (1.01%)


Funds available in her 403(b)

Vanguard Mid-Cap Index Fund (VMISX) (.1%)
Vanguard Small-Cap Index Fund (VSISX) (.16%)
AMERICAN FUNDS EUROPACIFIC GROWTH FUND R6 (RERGX) (.5%)
EAGLE SMALL CAP GROWTH I FUND (HSIIX) (.82%)
NEUBERGER BERMAN REALESTATE IN (NBRIX) (.85%)
WILLIAM BLAIR SMALL CAP VALUE N (WBVDX) (1.60%)
VANGUARD INSTITUTIONAL INDEX (VINIX) (.04%)
INVESCO CHARTER FUND INSTITUTIONAL CLASS (CHTVX) (.75%)
TIAA Real Estate (Not Available) (.83%)
VANGUARD TOTAL BOND MARKET INDEX FUND SIGNAL SHARES (VBTSX) (.1%)
BLACKROCK INFLATION PROTECTED BOND PORTFOLIO INSTITUTIONAL CLASS (BPRIX) (.45%)
CREF Money Market Account (Not Available)(.42%)
VANGUARD TARGET RETIREMENT INCOME (VTINX) (.17%)
VANGUARD TARGET RETIREMENT 2010 (VTENX) (.17%)
VANGUARD TARGET RETIREMENT 2015 (VTXVX) (.17%)
VANGUARD TARGET RETIREMENT 2020 (VTWNX) (.17%)
VANGUARD TARGET RETIREMENT 2025 (VTTVX) (.18%)
VANGUARD TARGET RETIREMENT 2030 (VTHRX) (.18%)
VANGUARD TARGET RETIREMENT 2035 (VTTHX) (.19%)
VANGUARD TARGET RETIREMENT 2035 (VTTHX) (.19%)
VANGUARD TARGET RETIREMENT 2040 (VFORX) (.19%)
VANGUARD TARGET RETIREMENT 2045 (VTIVX) (.19%)
VANGUARD TARGET RETIREMENT 2050 (VFIFX) (.19%)
VANGUARD TARGET RETIREMENT FUNDS INV 2055 (VFFVX) (.19%)
VANGUARD TARGET RETIREMENT 2060 INVESTOR (VTTSX) (.18%)

Questions:

1. I realize that we only have 6.2% bond holdings right now with 20% being the desired allocation. Currently we plan to focus our contributions on building our bond holdings through out 401k and 403b accounts until we are there. It would take us less than a year to get there. Does this sound like an okay plan?

2. While I do think the 3-fund portfolio should be the core of our portfolio, I would like to do two small tilts after we have our bond holdings built up. The first one I am thinking of doing is a small value tilt to be 10% of stocks (7% of portfolio). I also am thinking of adding an REIT totaling 5% of the portfolio. I would be doing these two tilts for the long run and understand the repercussions in the long and short-term. What are your thoughts on this?

3. We are loading up on my second student loan ($2950 @6.55%, paying $538 a month) to get rid of it. Does it make sense to take 100% of this money-pretax and put it into my wife’s 403b once the loan is paid off? The other student loan totaling $20,500 has an interest rate of 1.625%. We plan to just continue making the required payments for the time being.

4. At this time, we are not going to pay the 2.9% car loan or the 1.625% student loan off early since the interest rates are relatively low. Perhaps I will tack on an extra $40 a month to the car loan to make it a round number, but that is all. I know a lot of you would like to get rid of the loan ASAP, but for now we are comfortable with pretty much paying it off as scheduled. Is this a good idea?

5. Does it make sense to exhaust all other tax-protected retirement accounts before contributing above my company match due to the high expense ratios + the 1.46% administrative fee?

6. It is correct to say that we have too much individual stock exposure with MSW, JPMPRJ, and PG?

7. Does the liquidation strategy of the LDL Financial holdings and the PG stock make sense? There is just too much individual stock risk here and I think it would be good to get this money after taxes into our Roth IRAs. Any other suggestions or something I am missing?

8. Any other recommendations for this portfolio?

Thank you in advance for your suggestions. If there is anything I left out please respond and I'll track down the information or clarify.

Thanks!
4th and Inches
 
Posts: 59
Joined: Mon Nov 12, 2012 8:53 pm

Re: Portfolio Review & is My Taxable Conversion Plan Sound?

Postby 4th and Inches » Mon Feb 11, 2013 3:57 pm

Bump back up to the first page. 126 views and no responses. Please let me know if anything lacks clarity in what I am describing.

Thanks!
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Re: Portfolio Review & is My Taxable Conversion Plan Sound?

Postby livesoft » Mon Feb 11, 2013 5:07 pm

All your ideas seem very sound to me.

Does your 401(k) allow for a loan? If so, then once you get enough assets in the 401(k), you may find it beneficial to take out a loan and invest the money elsewhere. This preserves tax-advantaged "space" in case you switch jobs, but saves the 2+% expense ratio on the loaned money.
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.
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Re: Portfolio Review & is My Taxable Conversion Plan Sound?

Postby NYBoglehead » Mon Feb 11, 2013 5:22 pm

I think all of your ideas are sounds as well. I would make some noise with your HR department about the terrible 401k choices. Those ERs are absolutely absurd. You are wise to not contribute any more other than what is required to get the company match.

I like the 3-fund portfolio + REITs. I know a lot of Bogleheads like a Small-Cap tilt, so I don't think that is an unreasonable AA.

As to your questions, I think you are doing everything just about right. You definitely need to diversify away from individual stocks, you've got too much risk there in my opinion.

As to your student loans and car loans, while the interest rates are incredibly low, the yields on bonds right now are very low and you are underweight in bonds. If you've got the extra cash flow each month I don't see anything wrong with paying these off early.
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Re: Portfolio Review & is My Taxable Conversion Plan Sound?

Postby 4th and Inches » Mon Feb 11, 2013 9:38 pm

livesoft wrote:All your ideas seem very sound to me.

Does your 401(k) allow for a loan? If so, then once you get enough assets in the 401(k), you may find it beneficial to take out a loan and invest the money elsewhere. This preserves tax-advantaged "space" in case you switch jobs, but saves the 2+% expense ratio on the loaned money.


My plan does allow for loans. This is something I had not looked into. For now we are still a few years away from filling all other retirement accounts after the individual stocks are sold and the funds are put into the Roth IRA.

Thanks for your response!
Last edited by 4th and Inches on Mon Feb 11, 2013 9:53 pm, edited 1 time in total.
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Re: Portfolio Review & is My Taxable Conversion Plan Sound?

Postby 4th and Inches » Mon Feb 11, 2013 9:49 pm

NYBoglehead wrote: I think all of your ideas are sounds as well. I would make some noise with your HR department about the terrible 401k choices. Those ERs are absolutely absurd. You are wise to not contribute any more other than what is required to get the company match.


I have. We are a very small company and our CFO is our HR Director as well. The contract was in place before she arrived and she knows that it is pretty absurd. I'll be in on the process when it is time to change.



NYBoglehead wrote:As to your student loans and car loans, while the interest rates are incredibly low, the yields on bonds right now are very low and you are underweight in bonds. If you've got the extra cash flow each month I don't see anything wrong with paying these off early.


We have considered this. We are paying off the second loan balance of $2950 which started with a balance of $10,000 in just over 4 years on a 10 year loan. Once I got our emergency fund fully funded, I switched those funds over to the loan and now we are paying like x5.5 per month to get rid of it. It feels good to be standing on its throat! We do feel like we should add to our bond holdings, but once the loan of $2950 is paid off the car loan payment will get increased slightly with the bulk going to the 401k.

Thank you to both of you for responding! It was really good to hear from others that our plan makes sense. This community is the best thing that has happened to our retirement planning :)
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