My husband and I are due for a rebalancing of our portfolio and would like to get some ideas before we pull the trigger. Info first, questions below. Thank you!
Emergency Funds: ~ 5 months expenses for the two of us now; not sure what our expenses will be when Baby #1 comes in August
Mortgage, primary residence: $260,000 @ 3.5%, 2nd year of 7-year ARM (planning on moving prior to adjustment)
Mortgage, rental property: $190,000 @ 3.5% IO ARM, adjusts to P&I in 3 years (planning on selling if possible before this adjustment); tenants currently pay approx. twice the mortgage (one of the benefits of the ARM adjusting down)
Student Loans: total $37,500 @ 4.5%
Tax Filing Status: Married Filing Jointly, first child due this year
Tax Rate: 25% Federal, 7.75% State; anticipate marginal federal tax rate to go up to 33% next year
State of Residence: NC
Desired Asset allocation: 99% stocks / 1% bonds
Desired International allocation: 33% of stocks
Desired Asset Allocation: goal to rebalance annually
15% Large Value
15% Large Growth
10% Mid Value
8% Mid Growth
10% Small Value
8% Small Growth
1% Total Bond Index [this 1% bonds comes from his 401k options, the best of which has some allocation in the VTBIX (Total Bond Index)]
Current Retirement Portfolio (by the end of 2013, maxing out 401(k)s and IRAs):
~$350,000, currently all in tax-advantaged accounts, all in Vanguard index funds closely approximating desired asset allocation
Current retirement assets
Roth 401k/IRA: ~25% total (50% of hers, 10% of his)
Traditional 401k/IRA: ~75% total (50% of hers, 90% of his)
New annual Contributions
$17,500 his Roth 401k (+$900 employer matching contributions)
$17,500 her 401k (+$1500 employer matching contributions)
$5,500 his IRA/Roth IRA
$5,500 her IRA/Roth IRA
Funds available in his 401(k)
Best option, and where the money is now: Target 2045, holdings 63% VITSX (TSM index), 27% VTSIX (total international index), 10% VTBIX (total bond index); (can’t find info on true expense ratio, but lists an ‘investment management fee’ of 0.083%)
Next best option: Equity fund, large cap, 97.5% stock and 2.5% cash – can’t find much info about it or even ticker symbol -- 41% of holding is ten stocks including Exxon, Johnson & Johnson, Disney, Sigma-Aldrich, Chevron, Proctor & Gamble, IBM, Walmart, etc. (supposedly 0% as ‘fees’ paid by employer, but can’t find info on expense ratio, and overall returns have not been close to total stock market index)
Funds available in her 401(k)
Best option, and where the money is now: Vanguard Total Stock Market Index Signal (VTSSX) (0.06%)
1. STOCKS/BONDS: Is 99%/1% reasonable at this time? [The 1% bonds is due to his chosen 401k option.] We are 33 with another 25-30 years before retirement. I would rather be more aggressive earlier on to realize the historically higher gains of stocks. However, if we rebalanced regularly, would incorporating more bonds actually make more sense to take advantage of up/down markets? If so, is the total bond index a good way to start?
2. STOCK ASSET ALLOCATION: What suggestions would you have? My proposed allocation to me feels somewhat arbitrary. For some reason, I have in my head that value and small caps tilt is good (I think this comes from the influence of my fairly conservative father, who reads a lot, but whose advice may be outdated or unduly influenced). How do we determine what % international we should do? Should we go developed vs emerging, or Europe vs Pacific, or something else?
3. VALUE/GROWTH vs BLEND: If we don’t have enough money to qualify for the Admiral funds for the value and growth slices of each asset class, should we go with the Admiral Blend funds to take advantage of the lower expense ratios? Or is the possible advantage of better performance in one slice enough to balance out the increased expenses? We would likely rebalance annually (unless you all had different suggestions). Does a blend fund generally mean 50/50 value/growth?
4. ROTH VS TRADITIONAL: I still don’t understand all the rules regarding mandatory distributions and taxation in retirement. Again, it is a ways off for us and I’m not convinced rules won’t change. Likewise, converting a traditional to a Roth IRA down the road may be possible, but I’m not sure if it will make sense as we will be in a higher tax bracket for all of our career than we are now. I have heard that we want to have a variety of monies in Roth vs non-Roth accounts when we retire for flexibility purposes, though I’m not sure what the breakdown should end up being. Note our current distribution in the info above. Does is make sense for us to contribute to a Roth now while we aren’t phased out and while our marginal bracket is lower than it will be for the rest of our career?
5. NOTA BENE: At some point, we will likely need to add taxed accounts to our retirement savings, but at this point in time we just want to max out what we can with the tax-advantaged accounts. We also have not yet looked into HSAs, college savings plans, etc. We’re just trying to get a handle on where we are now before we research the next step. Hopefully I’ll be back sometime down the line to ask all those related questions.
Last edited by RinTinTin
on Sun Mar 24, 2013 2:09 pm, edited 2 times in total.