choosing 401K options (new investor)

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choosing 401K options (new investor)

Postby RDB » Wed Apr 03, 2013 10:21 am

Emergency funds: 4 months
Debt: Sudent Loans: 300K (most locked at 6.8%), Mortgage: 400K (3.875%), Cars: 40 K (0.9%)
Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 7.85% State
State of Residence: MN
Age: 27
Desired Asset allocation: 90% stocks / 10% bonds????
Desired International allocation: 30% of stocks????

We are new investors so our portfolios are small. I just started mine (401(k)) 1/1/13, my wife also just seriously started 9/1/12. Her current portfolio (403b) is ~20K.

New Annual Contributions:
$17500 his 401(K) (plus a 1% match which should be around $2100)
$10000 her 403 (b) (plus a 1% match, most years: $550, this year due to maternity leave: ~$300)
Her Pension Plan: 1.65% of W-2 income each year she is above a certain hours worked. Should be $25,000-$30,000 per year (eligible at age 55)

Funds available in his 401(k)

Fund Name (ticker symbol)(expense ration)/my current allocation %

ING Money Market Portfolio-Class I (IVMXX)(0.34%)
ING Global Bond Portfolio-Initial Class (IOSIX)(0.71%)
ING PIMCO Total Return Portfolio-Initial Class (IPTIX)(0.59%)
American Funds The Income Fund of America-Class R-3 (RIDCX)(0.96%)
American Funds Washington Mutual Investors Fund(SM)-Class R-3 (RWMCX)(0.97%)
ING Davis New York Venture Portfolio-Initial Class (ISFIX)(0.90%)
ING Fidelity VIP Contrafund Portfolio-Service Class (VPCSX)(1.20%) 20%
ING U.S. Stock Index Portfolio-Institutional Class (INGIX)(0.26%)
Mutual Shares Fund-Class R (TESRX)(1.35%)
American Funds The Growth Fund of America-Class R-3 (RGACX)(0.97%)
Janus Forty Fund-Class S Shares (JARTX)(1.18%)
Columbia Mid Cap Value Fund-Class A Shares (CMUAX)(1.15%)
ING American Century Small-Mid Cap Value Portfolio-Initial Class (IACIX)(1.26%) 10%
ING Baron Growth Portfolio-Initial Class (INGIX)(1.09%) 15%
ING Clarion Real Estate Portfolio-Service Class (IVRSX)(1.13%) 10%
ING Fidelity VIP MId Cap Portfolio-Service Class (VPFSX)(1.21%) 15%
Lord Abbett Small Cap Blend Fund-Class A (LSBAX)(1.33%)
Vanguard Variable Insurance Fund-Small Company Grwth Port (VVIF?)(0.43%) 10%
Wanger Select (WATWX)(0.93%)
American Funds EuroPacific Growth Fund-Class R-3 (RERCX)(1.13%) 10%
American Funds SMALLCAP World Fund-Class R-3 (RSLCX)(1.41%)
ING Artio Foreign Portfolio-Service Class (IJBSX)(1.17%)
Oppeneheimer Developing Markets Fund-Class A (ODMAX)(1.30%) 10%

Funds Available in Her 403 (b)

Fidelity Contrafund -Class K (FCNKX)(0.63%)
Spartan 500 Index Fund-Institutional Class (FXSIX)(0.05%)
T. Rowe Price Blue Chip Growth Fund (TRBCX)(0.77%)
Vanguard Windsor II Fund Admiral Shares (VWNAX)(0.27%)
Fidelity Low-Priced Stock Fund-Class K (FLPKX)(0.76%)
Fidelity Mid-Cap Stock Fund-Class K (FKMCX)(0.69%)
Spartan Extended Market Index Fund-Fidelity Advantage Class (FSEVX)(0.07%)
Royce Pennsylvania Mutual Fund Institutional Class (RPMIX)(0.79%)
Fidelity Diversified International Fund-Class K (FDIKX)(0.84%)
Vanguard FTSE All-World ex-US Index Fund Admiral Shares (VFWAX)(0.15%)
Fidelity Balanced Fund-Class K (FBAKX)(0.48%)
Fidelity Freedom K 2000 Fund (FFKBX)(0.39%)
Fidelity Freedom K 2005 Fund (FFKVX)(0.46%)
Fidelity Freedom K 2010 Fund (FFKCX)(0.50%)
Fidelity Freedom K 2015 Fund (FKVFX)(0.51%)
Fidelity Freedom K 2020 Fund (FFKDX)(0.54%)
Fidelity Freedom K 2025 Fund (FKTWX)(0.58%)
Fidelity Freedom K 2030 Fund (FFKEX)(0.59%)
Fidelity Freedom K 2035 Fund (FKTHX)(0.62%)
Fidelity Freedom K 2040 Fund (FFKFX)(0.62%)
Fidelity Freedom K 2045 Fund (FFKGX)(0.63%)
Fidelity Freedom K 2050 Fund (FFKHX)(0.64%)
Fidelity Freedom K 2055 Fund (FDENX)(0.64%)
Fidelity Freedom K Income Fund (FFKAX)(0.39%)
Fidelity Government Income Fund (FGOVX)(0.45%)
Spartan U.S. Bond Index Fund-Institutional Class (FXSTX)(0.07%)
Fidelity Cash Reserves (FDRXX)(0.38%)

Questions
1. What funds should I choose in my 401(k)? The manger of my employers plan set up my initial allocation (% listed to the right of the Available Funds).

2. What funds should we my wife choose in her 403(b)? She is currently 100% in the Fidelity Freedom K 2055 Fund (FDENX)(0.64%

3. I posted a couple weeks ago and came up with the plan of maxing tax-advantaged plans and then aggressively paying down student loan debt. Any comments on this are appreciated as well.

FYI: I am new to Bogleheads and investing in general. I want to take a more active role our financial future.

Thanks for your time in reviewing this.
Last edited by RDB on Tue Apr 09, 2013 11:39 am, edited 3 times in total.
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Re: choosing 401K options (new investor)

Postby bdpb » Wed Apr 03, 2013 6:00 pm

RDB wrote:Debt: Sudent Loans: 300K (most locked at 6.8%), Mortgage: 400K (3.875%), Cars: 40 K (0.9%)
Tax Rate: 33% Federal, 7.85% State
Desired Asset allocation: 90% stocks / 10% bonds????

New Annual Contributions:
$17500 his 401(K) (plus a 1% match which should be around $2100)
$10000 her 403 (b) (plus a 3% match, most years: $1650, this year due to maternity leave: ~$900)

Funds available in his 401(k)
ING U.S. Stock Index Portfolio-Institutional Class (INGIX)(0.26%)


I would not bother with 10% bonds, I would go 100% stocks. Why invest in bonds yielding 2% when you are paying debts at 6.8%.

At these tax rates, I would try to put 17.5k in the 403b, too. This should be pretty close to dropping you into the 28% bracket. Everything else towards the school loans.

I would only invest in the one and only low cost fund in your 401k, the ING US Stock Index fund. Try to find Intl in the 403b.

Don't spend so much on cars.
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Re: choosing 401K options (new investor)

Postby RDB » Thu Apr 04, 2013 1:06 pm

If we max both accounts at $17500 per year and my wife's 403 (b) has a reasonable choice for for both US and Intl, would you suggest 70% US, 30% Intl? Thanks for the initial comments.
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Re: choosing 401K options (new investor)

Postby ofcmetz » Thu Apr 04, 2013 2:25 pm

I disagree with the other poster and highly recommend that you have some bonds in your portfolio. I would recommend about 20% or so at your age. The only two funds I see that appear pretty decent are the PIMCO Total Return Bond Fund and the ING stock index fund. If your wife's 403B has a better international choice maybe you can use her account for that part of your allocation.

Paying down those student loans seems very prudent to me vs the alternative of taxable investing.
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Re: choosing 401K options (new investor)

Postby ieee488 » Thu Apr 04, 2013 4:44 pm

ofcmetz wrote:Paying down those student loans seems very prudent to me vs the alternative of taxable investing.


+1
paying down $300K at 6.8% is no-brainer
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Re: choosing 401K options (new investor)

Postby JW Nearly Retired » Thu Apr 04, 2013 5:42 pm

What funds should I choose in my 401(k)? The manger of my employers plan set up my initial allocation (% listed to the right of the Available Funds).

Not surprising this guy picked a bunch of the funds with the highest expense. Now you know who not to ask about investing.

Agree with just investing in INGIX and looking for a place to put bonds/international elsewhere. Perhaps wife will have better options.
Pay down the loan aggressively.
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Re: choosing 401K options (new investor)

Postby ruralavalon » Thu Apr 04, 2013 5:54 pm

ROB wrote:Debt: Sudent Loans: 300K (most locked at 6.8%), Mortgage: 400K (3.875%), Cars: 40 K (0.9%)
. . . .
New Annual Contributions:
$17500 his 401(K) (plus a 1% match which should be around $2100)
$10000 her 403 (b) (plus a 3% match, most years: $1650, this year due to maternity leave: ~$900)

In my opinion your investing priorities each year should be, in this order, as follows:
1. Just enough into the 401k and 403b to get the full match; and
2. pay down the student loans as fast as you can.

In other words get the "free money" that is the employer match each year, then put everything else on the student loan. Paying the 6.8% student loan is like getting a guaranteed 6.8% return on investment; you can't get that kind of guaranteed return anywhere else.


ROB wrote:Age: 27
Desired Asset allocation: 90% stocks / 10% bonds????
Desired International allocation: 30% of stocks????
In my opinion, you should have at least 20-25% in bonds -- Wiki article link: Asset Allocation ; poll viewtopic.php?f=10&t=101010 ; and regression viewtopic.php?p=1217243#p1217243 . 30% of equities in international is within the range of what is reasonable, in my opinion.

In the 401k I suggest using only:
ING U.S. Stock Index Portfolio-Institutional Class (INGIX)(0.26%)
ING PIMCO Total Return Portfolio-Initial Class (IPTIX)(0.59%)

The expense ratios on almost all of the rest of the funds offered are too high to even consider using, in my opinion.

In your wife's 403b look for low cost index funds, especially an international index fund.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: choosing 401K options (new investor)

Postby pingo » Thu Apr 04, 2013 7:38 pm

I agree with holding at least 20% in bonds.

You and your spouse may want to discuss whether it is advantageous (or preferable) to view your accounts/assets as a single portfolio, for example...

Hypothetical #1 (not your situation)

His 401k
56% US Equities

Her 403b
24% International Equities

His IRA
10% Bonds

Her IRA
10% Bonds


...or as separate portfolios like...

Hypothetical #2 (not your situation)

His 401k (56%)
31% US Stocks
14% International Stocks
11% Bonds

Her 403b (24%)
13% US Stocks
06% International Stocks
5% Bonds

His IRA (10%)
06% US Stocks
02% International Stocks
02% Bonds

Her IRA (10%)
06% US Stocks
02% International Stocks
02% Bonds

The asset allocation of each hypothetical is identical, but the first one is simpler and locates asset classes according to which account configuration offers the lowest costs to obtain each asset class. In the second hypothetical, each account would be forced to purchase asset classes at higher costs when the same asset classes could be obtained for less in a different account. All else being equal, the arrangement with the lowest costs wins.

Another way to look at it: You're at a buffet and you have 4 plates: 1 large, 1 medium plus 2 saucers to hold your cornflakes, milk, strawberries, eggs and bacon. You can put each item on a different plate by matching each item with an appropriate plate, or you can cram each plate with small amounts of everything (even the saucers). Regardless, the amount of food is the same, but one option may make more sense than the other.

If you would like us to help you organize a portfolio that is more like Hypothetical #1 (even if you're not sure it's what you'd choose in the end), we'll need to see what options she has as well.

:beer
Last edited by pingo on Sun Jul 21, 2013 12:11 pm, edited 8 times in total.
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Re: choosing 401K options (new investor)

Postby RDB » Thu Apr 04, 2013 9:31 pm

Thanks for all the great advice so far. My wife is getting all the current information on her 403(b), I will add this to my original post when I get it. In regards to viewing our 401(k) and 403(b) as one portfolio, I like the idea. The only downside I see is when it comes to rebalancing, how would this work?
Thanks again, just cancelled our whole life policies that we were unfortunately persuaded into purchasing a few years back, felt nice to be done with that.
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Re: choosing 401K options (new investor)

Postby pingo » Thu Apr 04, 2013 10:36 pm

Rebalancing is another part of the big picture we take into account, but it's something that's easier to show based on the options.

Also, once you update your original post, be sure to add another post to let us know. That way we'll get notifications (editing alone will not send out a notification of the update).
Last edited by pingo on Fri Apr 05, 2013 9:43 am, edited 1 time in total.
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Re: choosing 401K options (new investor)

Postby BuckyBadger » Fri Apr 05, 2013 7:42 am

Starting a couple of Backdoor Roths wouldn't hurt, either. As long as you can stay away from having pretax money in any IRAs, you can start doing backdoor Roths for you and your wife for every year going forward.

Since you can put anything in it that you want, It'll give you space to put in whatever funds you can't find cheaply in the 401k or 403b. Its flexibility will also help when it comes time to rebalance. It'll also give you some Roth space, which is nice because it'll hedge your bets about future tax rates.
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Re: choosing 401K options (new investor)

Postby pingo » Fri Apr 05, 2013 11:33 am

Also when you update the post, will you clarify whether a pension is expected in retirement?
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Re: choosing 401K options (new investor)

Postby RDB » Fri Apr 05, 2013 9:33 pm

pingo wrote:Also when you update the post, will you clarify whether a pension is expected in retirement?


Will do, as of right now, my wife will have a pension. She is also getting me more information on her pension along with her 403 (b). I will have a buy-out of some sort, could be significant.
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Re: choosing 401K options (new investor)

Postby RDB » Tue Apr 09, 2013 8:06 am

pingo wrote:Rebalancing is another part of the big picture we take into account, but it's something that's easier to show based on the options.

Also, once you update your original post, be sure to add another post to let us know. That way we'll get notifications (editing alone will not send out a notification of the update).


I updated my original post to add my wife's available funds in her 403(b). We were previously discussing whether it would make the most sense to combine our funds into one large portfolio based on the lack of good funds in my 401(k). I also am editing her match. She switched hospitals (same employer) and is union now. Thus, her match is now 1% instead of 3%. She does however get a pension. The equation for the pension is 1.65% of W-2 income each year. She would reach the rule of 85 between 54 and 55 (in 29 years). I did some estimates (guessing how many hours when we have small kids) and figured it would be around $25,000-$30,000 per year.
Thanks, started reading the Bogleheads Guide to Investing
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Re: choosing 401K options (new investor)

Postby bdpb » Tue Apr 09, 2013 12:44 pm

Your wife has excellent choices in her 403b. Use these funds:

Spartan 500 Index Fund-Institutional Class (FXSIX)(0.05%)
Spartan Extended Market Index Fund-Fidelity Advantage Class (FSEVX)(0.07%)
Vanguard FTSE All-World ex-US Index Fund Admiral Shares (VFWAX)(0.15%)
Spartan U.S. Bond Index Fund-Institutional Class (FXSTX)(0.07%)

I would do the following:

100% stocks, 70/30 US/Intl, with US breakdown of 70/30 SP500/Extended market. That would essentially be:

His 401k
50% ING U.S. Stock Index Portfolio-Institutional Class (INGIX)(0.26%)

Her 403b
20% Spartan Extended Market Index Fund-Fidelity Advantage Class (FSEVX)(0.07%)
30% Vanguard FTSE All-World ex-US Index Fund Admiral Shares (VFWAX)(0.15%)


In a few years, when your portfolio becomes large compared to new contributions and you've paid down the high rate debt, I would add bonds to my portfolio.
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Re: choosing 401K options (new investor)

Postby grap0013 » Tue Apr 09, 2013 1:05 pm

bdpb wrote:I would not bother with 10% bonds, I would go 100% stocks. Why invest in bonds yielding 2% when you are paying debts at 6.8%.

At these tax rates, I would try to put 17.5k in the 403b, too. This should be pretty close to dropping you into the 28% bracket. Everything else towards the school loans.

I would only invest in the one and only low cost fund in your 401k, the ING US Stock Index fund. Try to find Intl in the 403b.

Don't spend so much on cars.


+1 I agree with everything here.

Some people are so debt averse I think it clouds their vision to maximizing wealth. If you are truly in the 33% federal tax bracket then you have a big salary. Max out those tax deferred accounts. It makes no sense not to with your high marginal rate. If you miss years worth of contributions you can't go back and do them later. You should still be able to pay down debt at a pretty fast rate with that salary AND max out those accounts. I say this all with the caveat that an emergency fund is a high priority with this plan.
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Re: choosing 401K options (new investor)

Postby Twins Fan » Tue Apr 09, 2013 1:18 pm

ruralavalon wrote:In my opinion your investing priorities each year should be, in this order, as follows:
1. Just enough into the 401k and 403b to get the full match; and
2. pay down the student loans as fast as you can.

In other words get the "free money" that is the employer match each year, then put everything else on the student loan. Paying the 6.8% student loan is like getting a guaranteed 6.8% return on investment; you can't get that kind of guaranteed return anywhere else.


I guess I am one of the debt averse folks? I agree with the above advice.

I see something about maternity leave for the wife in there, so there's at least one new child in the picture. Any other kids, or planning on more?

I would not want the student loan debt hanging around any longer than needed with the extra costs of children also being present. Knocking out the 6.8% student loan debt would be my main priority, in this case... JMHO
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Re: choosing 401K options (new investor)

Postby RDB » Tue Apr 09, 2013 1:43 pm

Twins Fan wrote:
ruralavalon wrote:In my opinion your investing priorities each year should be, in this order, as follows:
1. Just enough into the 401k and 403b to get the full match; and
2. pay down the student loans as fast as you can.

In other words get the "free money" that is the employer match each year, then put everything else on the student loan. Paying the 6.8% student loan is like getting a guaranteed 6.8% return on investment; you can't get that kind of guaranteed return anywhere else.


I guess I am one of the debt averse folks? I agree with the above advice.

I see something about maternity leave for the wife in there, so there's at least one new child in the picture. Any other kids, or planning on more?

I would not want the student loan debt hanging around any longer than needed with the extra costs of children also being present. Knocking out the 6.8% student loan debt would be my main priority, in this case... JMHO


We have twin boys coming in mid-June.....fitting to reply to "Twins Fan". I am also a big MN Twins fan. At this point we are not planning on having any more kids. I really wrestle with the debate between paying down debt and funding retirement. The interest rate is brutal, tax rate stinks. Initially I tend to gravitate towards doing both. In this situation I would fund the retirement to the max, or at least close and make additional payments to loans of at least $1000 extra per month, more when I have a good month. So we have both a high interest rate and high tax rate. I am not sure what the right move is?
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Re: choosing 401K options (new investor)

Postby RDB » Tue Apr 09, 2013 1:48 pm

grap0013 wrote:
bdpb wrote:I would not bother with 10% bonds, I would go 100% stocks. Why invest in bonds yielding 2% when you are paying debts at 6.8%.

At these tax rates, I would try to put 17.5k in the 403b, too. This should be pretty close to dropping you into the 28% bracket. Everything else towards the school loans.

I would only invest in the one and only low cost fund in your 401k, the ING US Stock Index fund. Try to find Intl in the 403b.

Don't spend so much on cars.


+1 I agree with everything here.

Some people are so debt averse I think it clouds their vision to maximizing wealth. If you are truly in the 33% federal tax bracket then you have a big salary. Max out those tax deferred accounts. It makes no sense not to with your high marginal rate. If you miss years worth of contributions you can't go back and do them later. You should still be able to pay down debt at a pretty fast rate with that salary AND max out those accounts. I say this all with the caveat that an emergency fund is a high priority with this plan.


I agree with a lot of this. I think I fall in the middle somewhere. I really do not like debt, but I am more than willing to use it to increase salary/wealth, hence the massive student loans. I just wish it was at a competitive interest rate and I think this would be a no-brainer. The combo of 6.8% and not being able to write-off the interest is killer.
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Re: choosing 401K options (new investor)

Postby Twins Fan » Tue Apr 09, 2013 1:56 pm

RDB wrote:We have twin boys coming in mid-June.....fitting to reply to "Twins Fan". I am also a big MN Twins fan.


Funny... it is a two part name for me also. The MN Twins are my favorite team, and I have twin daughters. :D

Congrats on the soon to be twin boys!!
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Re: choosing 401K options (new investor)

Postby RDB » Tue Apr 09, 2013 2:06 pm

Twins Fan wrote:
RDB wrote:We have twin boys coming in mid-June.....fitting to reply to "Twins Fan". I am also a big MN Twins fan.


Funny... it is a two part name for me also. The MN Twins are my favorite team, and I have twin daughters. :D

Congrats on the soon to be twin boys!!


That is great, what are the odds!
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Re: choosing 401K options (new investor)

Postby pingo » Tue Apr 09, 2013 10:22 pm

RDB,

What are the chances you will max both employer plans?

Or, if you are not going to do so, how do you feel about maxing Here 403b and contributing the lesser amount to your 401k? Is it possible to do given her maternity leave?
Last edited by pingo on Wed Apr 10, 2013 4:08 pm, edited 1 time in total.
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Re: choosing 401K options (new investor)

Postby RDB » Wed Apr 10, 2013 6:45 am

pingo wrote:RDB,

What are the chances you will max both employer plans?

Or, if you are not going to do so, how do you feel about maxing Here 403b and contributing the lesser amount to your 401k? Is it possible to do given her maternity leave?


We are discussing that right now. This was our first full year of both of us working, we did not plan well for taxes, and had to pay in a lot. So, realistically, we will probably max one plan and build our emergency fund back up. Once that is done, I think (still considering options) we will max both accounts and pay ~$2000 extra a month toward student loans. I ran some numbers last night: $2000 extra per month will reduce the payoff by 17 years and $250 K in interest. I do not know why, but I feel the most comfortable maxing accounts and paying down debt rather than focusing almost completely on debt. Still wrestling with this concept though and am open to more opinions. Then, if there is still left over money, that will also go towards student loans or other things we are saving for (vacations, furniture, etc.).

Her funds are much better, so I think it makes most sense to max her 403(b). We will still be able to max her plan, she can contribute up to 85% of her income and that will be enough even with the maternity leave to max it. For my 401(k), if I contribute 4% to get the full 1% match, that will still equate to $8500-9000 + 1% match ($2100+).

What do you think about asset allocation with all that said?

Thanks again for the great input
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Re: choosing 401K options (new investor)

Postby pingo » Wed Apr 10, 2013 2:16 pm

Tax Filing Status: Married Filing Jointly
Tax Rate: 33% Federal, 7.85% MN
Age: 27
Desired Asset allocation: 80% stocks / 20% bonds
Desired International: 30% of stocks

Translation: 45% S&P 500 / 11% Extended Mkt / 24% International / 20 Bond

His 401k ($6533)
25% ING U.S. Stock Index (INGIX) 0.26% <--$11,000/yr. (100% of 401k contributions.)

Her 403b ($20,000)
20% Spartan 500 Index Fund (FXSIX) 0.05% <--$4628. (26% of 403b contributions.)
11% Spartan Extended Market (FSEVX) 0.07% <--$2670. (15% of 403b contributions.)
24% Vanguard FTSE All-World ex-US (VFWAX) 0.15% <--$5696. (32% of 403b contributions.)
20% Spartan U.S. Bond (FXSTX) 0.07% <--$4806. (27% of 403b contributions.)

• Weighted ER = 0.13%
• Extremely low cost
• Maximum diversification
• Rebalance with a single account (Her 403b)

bdpb is exactly right concerning which funds to use. Personally, I'm not comfortable recommending less than 20% bonds, so you'll see a difference there. You can adapt any of our suggestions to achieve what you feel is appropriate.

I also tried to estimate how much money is in His 401k based on contributions from 1/1/13 ($6533). If anything is off, let me know and I'll adjust the numbers accordingly.

The funds you should choose in His 401(k)
ING U.S. Stock Index (INGIX) 0.26%
ING PIMCO Total Return (IPTIX) 0.59% <--If you ever need to place bonds in 401k.

The funds you should choose in Her 401(k)
Spartan 500 Index Fund (FXSIX) 0.05%
Spartan Extended Market (FSEVX) 0.07% <--50:50 Mid/Small; completes the S&P 500.
Vanguard FTSE All-World ex-US (VFWAX) 0.15% <--Equivalent to VG Total International. (See below.)
Spartan U.S. Bond Index Fund FXSTX) 0.07%

The only difference between Vanguard FTSE All-World ex-US Index Fund and Vanguard Total International is that VG Total includes small caps. Both cover all developed and emerging markets. (Perfect!) How do they compare?

Vanguard FTSE All-Wld ex-US - Adm (VFWAX)
Vanguard Total International - Adm (VTIAX)
Image

6 of one, half a dozen of the other.

RDB wrote:In regards to viewing our 401(k) and 403(b) as one portfolio, I like the idea. The only downside I see is when it comes to rebalancing, how would this work?


Rebalancing would occur inside Her 403b because His 401k places only 38% of new contributions into the S&P 500, and the S&P 500 is allowed to represent up to 45% of the whole portfolio. Even when his contributions increase, it would take a long time for His 401k to reach 45% of the portfolio, but I also expect you to eventually contribute beyond employer-sponsored plans (e.g. Backdoor Roth IRAs and/or taxable account) which will suppress the relative size of His 401k.

RDB wrote:She is currently 100% in the Fidelity Freedom K 2055 Fund (FDENX)(0.64%)


Personally, I wouldn't have a problem with this only if you had a stellar lifecycle/target fund your 401k. As things stand, using FDENX would diminish the diversification of the overall portfolio, make the desired international allocation impossible, and keep overall portfolio expenses higher (weighted ER 0.56%) even if His 401k uses it's least expensive options. Now, if she's not on board with our suggestions, FDENX is probably the way to go and you'd merely allocate between your ING Stock Index and Pimco TR.
Last edited by pingo on Wed Apr 10, 2013 10:49 pm, edited 4 times in total.
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Re: choosing 401K options (new investor)

Postby RDB » Wed Apr 10, 2013 2:33 pm

Thank you guys all very much for the advice. pingo, thanks for the very detailed response and the time you put into this. I am very comfortable with that asset allocation. My wife is totally on board as well.
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Re: choosing 401K options (new investor)

Postby pingo » Wed Apr 10, 2013 5:31 pm

^ Good news, indeed!

A follow-up post for future reference: when you're finally ready to invest outside of the 401k and 403b, you'll want to do the Backdoor Roth IRA (link), although I'm assuming you don't qualify for direct Roth contributions (you'll have to check whether you qualify on your own).

Normally I'd tell you to use current and/or new emergency savings to contribute $5500/yr to a Roth IRA for each of you, but that you house that money in a money market or short-term bond fund for emergency purposes. Roth contributions can be withdrawn penalty-free (not the earnings), so you gain the benefit of keeping that valuable tax-advantaged space open and available for when you inevitably have ploughed enough savings in a regular account to permit including the Roth accounts in the retirement portfolio. However, I think that backdoor Roth conversions are not available for penalty-free withdrawal until after 5 years in the account.

Why bring all of this up now? You should have a heads-up now that you might have the potential to place huge amounts of money in a Roth account(s) via the backdoor method and if either/both of your employer plans permit "after-tax contributions" and allow regularly rolling the money out of the employer account (again, do not confuse this with Roth 401k/403b contributions).

Check your Plan Document(s) to see if either one allows after-tax contributions as well as in-service withdrawals of (only) those after-tax contributions (again, not the same as Roth 401k contributions). They're contributions above and beyond Traditional/Roth 401k contributions and are useful for the Backdoor Roth. Here are 4 links talking about after-tax contributions: here, here, here and here.

If an employer allows one to make regular in-service withdrawals of 401k after-tax contributions, the money can be rolled directly to an outside Roth account where it would be tax-free and RMD-free forever. One does pay taxes on the after-tax earnings at the time of withdrawl from the 401k/403b, which is why withdrawls must be at least annually.

If in-service withdrawals are not allowed, don't bother with 401k after-tax contributions, but if in-service withdrawals are allowed one has the opportunity of landing very large amounts of after-tax retirement savings inside of one's Roth IRA.

His Hypothetical 401k Contributions
$17,500 Personal 401k Contribution (Traditional or Roth)
$2,100 Employer 401k Match
$31,400 After-Tax contributions <--Rolls out quarterly/yearly directly into one's Roth IRA
$51,000 max

Her Hypothetical 403b Contributions
$17,500 Personal 403b Contribution (Traditional or Roth)
$550 Employer 403b Match
$32,950 After-Tax contributions <--Rolls out quarterly/yearly directly into one's Roth IRA
$51,000 max

Her Hypothetical Roth IRA Contributions
$5,500 His Roth Personal Contribution (direct or via backdoor conversion)
$5,500 Her Roth Personal Contribution (direct or via backdoor conversion)

You'd be lucky if only one of you is allowed to do this, but I post this as an incentive to look long and hard at whether you can before you start investing for retirement in regular taxable accounts. All else being equal, contributing to a Roth (even indirectly) is preferable to contributing to a taxable account.

All the best!

:beer
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