Help Rebalancing Retirement Accounts

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Help Rebalancing Retirement Accounts

Postby squidler4 » Fri Apr 05, 2013 1:10 am

I would like some advise on rebalancing mine and my wife's retirement accounts. :

Emergency fund - 1yr
Debt: Mortgage $310,000 12 yrs remaining @ 3.75% - No other debt
Tax Status: Married filing Jointly
Tax Rates: 33%/9.3%
State: CA
Age: 49/48
Desired Allocation: 65% stock /35% bond
International Allocation: 10%
REIT: ??? Undecided if I need this

The total of the retirement funds listed below is approximately $1.1mil. We plan to retire in 1 & 2 yrs respectively. We will max out contributions for all accounts in 2013 & 2014 or $45,000 per year and $22,500 in 2015. We do not anticipate withdrawing any funds until 2019 when we turn 55. Then we will start to draw down the funds. We anticipate being in the same tax bracket when we retire as we are now. We both have local pensions we can comfortable live on. There is a strong possibility we may move to another state in 8-10 years but still undecided or might be part time in CA and part time another state. The 457B accounts are with pre-tax compensation, the traditional IRAs are post-tax contributions. I am also considering converting the traditional IRA's to Roth IRA's.

His 457B - ICMA-RC
4.1% Vanguard Total Bond Market Idx VBTIX 0.07% BOND
23.4% Vanguard Institutional Index VINIX 0.04%
8.3% Vanguard Mid-Cap Index Instl VMCIX 0.08%
4.6% Vanguard Total Intl Stock Idx VTSGX 0.16%
4.2% Vanguard International Growth VWILX 0.36%
3.4% Vanguard Small Cap Index Instl VSCIX 0.08%

His Roth IRA - Vanguard
0.4% Vanguard Total International Stock Inx Investors VGTSX 0.22%
His Traditional IRA - Vanguard - After Tax Contributions
8.5% Vanguard Total Stock Market Index Admiral VTSAX 0.06% :happy

Her 457B - ICMA-RC
24.6% Vanguard Total Bond Market Idx VBTIX 0.07% BOND
8.2% Vanguard Institutional Index VINIX 0.04%
1.0% Vanguard Mid-Cap Index Instl VMCIX 0.08%
1.0% Vanguard Total Intl Stock Idx VTSGX 0.16%

Her Roth IRA - Vanguard
0.4% Vanguard Total International Stock Inx Investors VGTSX 0.22%
Her Traditional IRA - Vanguard - After Tax Contributions
7.8% Vanguard Total Stock Market Index Admiral VTSAX 0.06%

Current Allocation:
Bond Accounts 28.5%
Stock Accounts 71.5% (18.4% International stocks & 53.1% Domestic stocks)

Questions:
1. Should I simplify the accounts?
2. Do I really need to break the funds into mid cap/small cap etc?

Thanks

Lewis
squidler4
 
Posts: 9
Joined: Tue Apr 02, 2013 11:22 pm

Re: Help Rebalancing Retirement Accounts

Postby House Blend » Fri Apr 05, 2013 5:15 pm

A few comments:

1. "Age: 49/48" and
"We plan to retire in 1 & 2 yrs respectively. We will max out contributions for all accounts in 2013 & 2014 or $45,000 per year and $22,500 in 2015."

Numbers look a bit off to me. One of you will perhaps turn 50 this year, so can max out at $23,000 in 2013, the other is limited to $17,500 until 2014 at the earliest. (Depends on the years of your 50th birthdays.)

And these numbers get adjusted for inflation each year.

2. Unclear why you have made non-deductible IRA contributions and did not convert to Roth as you go. (See "Backdoor Roth".) Perhaps it is because you have been doing this for a long time; it was only a few years ago (2010?) that conversions were first allowed for people with AGI > $100K.

This is only hindsight, but non-deductible IRAs are not useful as long term holdings except in limited circumstances. An example would be if you don't have enough tax-advantaged space to hold all of your bonds (and REITs, if you have 'em).

As it stands, since your portfolio is essentially 100% tax advantaged, you would have been better off buying shares of TSM in a taxable account until 2010. At that point, you could have started using an IRA to do a backdoor Roth.

3. I don't think it is strictly necessary to hold Large, Mid, and Small caps to get market returns. If it were me, I probably would do it anyway, putting the Mid and Small funds in only one account--perhaps his 457, and just use 500 Index (= same as "Institutional Index"), or TSM in other accounts.

The wiki article on approximating TSM may be helpful:
http://www.bogleheads.org/wiki/Approxim ... ock_Market

4. Your international allocation target is 15.4% (= 10/65) of stocks. IMO that is too low. To be in the Boglehead mainstream, you need something more like 20% to 50% of stocks. Even then, at the low end of 20%, you should expect to be browbeaten by market-weight zealots eager to accuse you of US bias. (Or worse, you could be accused of market-timing due to recent under-performance of international.)

My $0.04.
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Re: Help Rebalancing Retirement Accounts

Postby squidler4 » Sat Apr 06, 2013 1:01 pm

House Blend wrote:A few comments:

1. "Age: 49/48" and
"We plan to retire in 1 & 2 yrs respectively. We will max out contributions for all accounts in 2013 & 2014 or $45,000 per year and $22,500 in 2015."

Numbers look a bit off to me. One of you will perhaps turn 50 this year, so can max out at $23,000 in 2013, the other is limited to $17,500 until 2014 at the earliest. (Depends on the years of your 50th birthdays.)

And these numbers get adjusted for inflation each year.
I have an early birthday and she has a later one. We will both turn 50 next year. She might actually stay another year so she can contribute more to her retirement account. So you are right about the numbers being a little off.][

2. Unclear why you have made non-deductible IRA contributions and did not convert to Roth as you go. (See "Backdoor Roth".) Perhaps it is because you have been doing this for a long time; it was only a few years ago (2010?) that conversions were first allowed for people with AGI > $100K.

This is only hindsight, but non-deductible IRAs are not useful as long term holdings except in limited circumstances. An example would be if you don't have enough tax-advantaged space to hold all of your bonds (and REITs, if you have 'em).

As it stands, since your portfolio is essentially 100% tax advantaged, you would have been better off buying shares of TSM in a taxable account until 2010. At that point, you could have started using an IRA to do a backdoor Roth.

It wasn't until I found this forum about a week ago that I realized I could convert to a Roth as of 2010. The same with the backdoor strategy. I should have paid more attention. I have had two Vanguard financial plans completed and neither person mentioned not contributing to a Traditional IRA. So I need to start figuring out a strategy to convert it to a Roth taking taxes into account. I think my original intent way back in the 90's was to max out our 457b plans then put more money into another type of retirement investment account, so traditional IRA was what was available to us. We made too much for Roth contributions.

3. I don't think it is strictly necessary to hold Large, Mid, and Small caps to get market returns. If it were me, I probably would do it anyway, putting the Mid and Small funds in only one account--perhaps his 457, and just use 500 Index (= same as "Institutional Index"), or TSM in other accounts.

The wiki article on approximating TSM may be helpful:
http://www.bogleheads.org/wiki/Approxim ... ock_Market
This makes sense. ICMA-RC does not have TMI available so I will have to figure out an equivalent. They have International TMI and Bond TMI but not stocks.
4. Your international allocation target is 15.4% (= 10/65) of stocks. IMO that is too low. To be in the Boglehead mainstream, you need something more like 20% to 50% of stocks. Even then, at the low end of 20%, you should expect to be browbeaten by market-weight zealots eager to accuse you of US bias. (Or worse, you could be accused of market-timing due to recent under-performance of international.)
I will need to do some more research on this to figure to the boglehead strategy. So I need at least 20% of my 65% stocks in international. My 457b plan has the Vanguard Total International Stock index. So this will probably be my choice.

Thanks HB for your advice! it gave me plenty to think about.
:happy
My $0.04.
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