PortlandHead wrote:On the retirement front:
I am convinced to begin maxing out my 401k contributions and will make that change. My wife will be doing 5.5k worth of backdoor Roth per year, in addition to the minimum 401k contribution to get her employer match. I'm moving her old IRA over to Vanguard.
That will be an annual retirement contribution of $31,750 (conservatively assuming a 4k discretionary match from my employer), presumably increasing to some extent as the 401k and Roth caps increase.
The questions are:
What is the argument that we should be saving more than this? And if we should be saving more, where should it go?
How should I allocate the assets? Should the allocation take into account investments with other goals (like college savings)?
I'm glad to see you are going to be maxing his 401k (it has some nice investing choices), maxing her IRA contribution, and contributing at least enough to get the full match in her 401k, for a total into retirement savings/investing of about $31,750/yr.Should you be saving more?
First, I am of the view that its impossible at your age (30) to predict with reasonable accuracy how much is enough. There are simply too many variables to predict over 4 - 6 decades (inflation rates, rates of return for stocks & bonds or other potential investments, the sequence of the changes in those rates, tax law changes, future earnings, health and disability issues, life expectancy, personal preferences that may change, etc
.) to turn the question into an arithmetic problem. There are, however, some on-line calculators that can help give you a very general range of possible outcomes for various rates of investing input : FIREclac, http://firecalc.com/firecalc.php
; Optimal Retirement Planner, http://www.i-orp.com/
; and many more viewtopic.php?t=1638&mrr=1225308693
Second, my general advice is that in the beginning its best to keep your savings rate as high as you can comfortably maintain. That is for two reasons. (A) At the start portfolio growth is determined more by savings input than by any other factor you can control. We endlessly talk about priorities, asset allocation, fund selection, indexing, expense ratios, tax efficiency and fund location, but at the start nothing will influence portfolio growth more than savings input. (B) Because of the benefits of compounding; in other words a dollar saved/invested now is going to be worth more than a dollar saved/invested later simply because of the longer time it has to compound. For a more detailed discussion, please see -- viewtopic.php?t=6833&mrr=1291908362
. I don't advocate being a miser and skipping the enjoyment of whatever it is you enjoy in life, just putting aside whatever you can on a consitent basis. In other words if you can comfortably save/invest more you should.
Third, There are some good diversified index investing choices with low expense ratios in her 401k, being -- Principal LargeCap S&P 500 Index er = 0.31%; and Principal MidCap S&P 400 Index er = 0.31%. A common reason not to invest beyond the match in a 401k is poor choices, but there are good choices here.
Fourth, the value of tax-protected investing space. Loss of gain/earnings to taxes is just as important as any other loss. Certain types of investments, like bonds and REITs, are very tax INefficient, because they generate lots of dividends or interest taxable at ordinary income rates. Wiki article link: Principles of Tax-Efficient Fund Placement
. In the 25% tax bracket you lose 1/4 of your yield to taxes, which matters little at todays rates but will matter a lot if/when rates go back to say 6%. Without tax protected space you have no good place to hold that type of investment, and in future years you cannot go back and capture the tax protected space you can create now. No backsies.
Fifth, 401k contributions are tax deductible.Where should Add'l Savings Go? How to Allocate?
As mentioned I would suggest additional savings in her 401k. I would suggest using Principal LargeCap S&P 500 Index, er = 0.31%, as its the best combination in her 401k of low cost and broad diversification.
To get the rest of the desired domestic stock allocation couple that with the Fifelity Spartan S&P 500 and Extended Market funds in his 401k, again for their combination of low cost and broad diversification. For bonds the use Fidelity Spartan US bond index and Vanguard's Total Bond Market, they both follow Barclays Agg. US Bond index, an intermediate term bond index which covers most U.S. traded investment grade bonds including Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. Vanguard's total International is the best and most diversified international stock index fund available anywhere, so I suggest primarily that for international stocks.
Assuming that all or most of your current taxable account will go for eventual pay off of the loan in 2023 or other shorter term goals (you said "I wanted to have an account from which I can take money for living life while I'm relatively young, not to mention upgrading our house, etc."), and that only the 4 retirement accounts are available for long term investing, using an asset allocation of 70/30 stocks bonds with international at 25% of total stocks, the account and fund allocations could look like this at one year out
(51%; $36.5k; add $17.5k/yr plus ~ $4k employer match)
19%, SPTN US BOND IDX ADV (FSITX), er = 0.17%
03%, SPTN INTL INDEX ADV (FSIVX), er = 0.17%
18%, SPTN 500 INDEX ADV (FUSVX), er = 0.07%
11%, SPTN EXT MKT IDX ADV (FSEVX), er = 0.07%, <= 4:1 ratio of S&P 500 to Ext Mkt approximates domestic total stock market
Wiki article link: Approximating Total Stock Market Her old 401k
(11%; $8k; no further contributions)
11%, Vanguard Total Bond Mkt Index Inv VBMFX, er = 0.20%Her current 401k
(26%; $19k; add $17.5k/yr plus $1.75k employer match)
26%, Principal LargeCap S&P 500 Index, er = 0.31% Her IRA @ Vanguard
(12%; $8.5k; add $5.5k/yr)
12%, Vanguard Total International Stock Index Fund Investor Shares (VGTSX), er = 0.22%, <= IMO the best int'l index fund available anywhere, covers developed markets including Canada, emerging markets, and mid/small caps; er drops to 0.16% when you reach $10k and Admiral class shares
The portfolio is broadly diversified (to reduce risk), with very low expenses overall (to increase net returns) using just a few funds. The portfolio should be easy to manage. Because all 3 major asset types are in his 401k, all or almost all rebalancing can be done inside his 401k. Wiki article link: Rebalancing
. Its important to do any rebalancing inside tax protected accounts, to avoid creating unnecessary tax liability from realizing the investment gains.
If some future money (initially you indicated perhaps $10k/yr "unallocated") can go to taxable investing for long term goals like retirement, that should go into large cap or total market type stock index funds, Wiki article link: Principles of Tax-Efficient Fund Placement
, such as Vanguard Total International Stock Index Fund or Vanguard Total Stock Market Index Fund.Should the allocation take into account investments with other goals (like college savings)?
In general short term goals require more conservative allocations. Other than that, I'll skip this question. My children are long out of college, there were no tax preferred vehicles for saving or investing for college expenses available back then, and we always paid college expenses out of my current income. So I have no background that would help me answer this further.
Finally, I suggest reading a couple of the books from the General Investing section of this reading list -- http://www.bogleheads.org/readbooks.htm
. That will help you understand the reasons for the above suggestions, and help you manage the portfolio going forward.
I hope that this helps.