Military Investor. Want to Move to Passive Funds

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Military Investor. Want to Move to Passive Funds

Postby Passthedamnhamplease » Thu May 02, 2013 1:38 pm

Hi, I've been lurking on this forum for the past couple months. I've
read a number of the books recommended here and feel ready to make the
switch from a number of actively managed mutual funds handled through
a financial advisor to a passive portfolio handled by myself.

I'm 26 yrs old and currently in the military. I never had time to do a
lot of serious research or really even coordinate with my financial
advisor due to my boat's deployment schedule and frequent periods out
at sea with zero ability to communicate. I've recently transitioned to
a new job with better hours.

Interestingly, I now have more time to figure out how to spend less
money and plan to save 40-50k a year. I have not used TSP to this
point and set it up last week. My current investments are in the high
5 figures with another 25k in various cash accounts.


Emergency funds: Yes, but my job is quite secure and I think that I
could reduce it from the 9-12 months I have to about 4-6 months.
Debt: None
Tax Filing Status: Single
Tax Rate: 25% Federal (Comes out to about 18% when you include
my non taxed income), 5.95% State
State of Residence: DE, working on switching to WI
Age: 26

I would like to take my currently invested assets, split between a
taxable acct and the Roth IRA and divide it like this:

Total US Stock Market, 30% - taxable acct, VSTMX
US REIT, 10% - Roth IRA, VGSIX
Small Cap Value, 10% - Roth IRA, VISVX
International Developed Mkts, 20% - Taxable, VDMAX
Emerging Mkts, 5% - Taxable, VEIEX
Total US Bonds, 25% - one third in Roth, two thirds in taxable, VBMFX

The only problem I have is that I will not be able to contribute to
the Roth IRA anymore this year. My plan as far as monthly
contributions is to split between TSP (30% C/S, 20% I, 25% F/G) and
taxable (5% Emg Mkts, 10% Small Cap Value, 10% Total US). Doing this
will cause my asset allocation to drift throughout the year, but I'm
not sure of the best way to control this other than during a yearly
rebalance when I can contribute my bonus to my Roth IRA and
other accounts.

I plan to max out both Roth IRA and TSP and put everything extra into
taxable. Additionally, near term (in the next 2-3 years) I need 11k-48k total
over 3 yrs for a graduate program I intend to pursue once I leave the
military. The wide band is created through uncertainty with respect to
GI Bill benefits and my ability to get in-state versus out of state
tuition. My plan was to contribute as much as I can to my portfolio
now and start saving during my last year in the military. I may also
go to the reserves for 2-3 yrs and there's a bonus associated with
that as well.

In conclusion, my biggest concerns are trying to maintain my asset
allocation across three different accounts. Is there a better way than
what I have proposed? Additionally, are my assets allocated across my
accounts in a way that minimizes taxes?

Finally, what's the best way to move everything from my current mutual
funds to the ones at Vanguard? Most of them I've only had 1-2 months.
A couple I've had for 5 yrs. (I put in a lot in 2008 and then the
recession made me nervous about adding more especially given the lack
of time to research appropriate investments.)

I appreciate everyone's help. If anything is unclear or you need more
information, please let me know.
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Re: Military Investor. Want to Move to Passive Funds

Postby patriciamgr2 » Thu May 02, 2013 6:08 pm

welcome to the forum. Thank you so much for your service to our country!

i know other forum members will have more detailed suggestions. I'll just throw out a few thoughts & invite forum members to comment:

1. I wouldn't put the money you may need for education within the next few years into Total Bond market at this time. Given today's low rates & the duration of that fund, there is a risk of loss of principal. You might want to consider a CD ladder (see Wiki) for that money.

2. I don't like seeing bond funds in taxable accounts unless there's no other choice. For the money not reserved for education, perhaps Limited Term Tax Exempt might be an option to use immediately.

Also, as "space" opens up in the future as you add to your tax-deferred accounts, consider the fund Vanguard is opening for hedged, high-quality sovereign debt for part of the money which you would otherwise allocate to Total Bond Market; you can then reduce the tax-exempt holding and invest more taxable money in total stock index fund. [I also have a large allocation to TIPS; for new money, I'd use a short-term TIPS fund, but I realize that negative yields are difficult to stomach. You can look at the allocations for the Vanguard's Target Retirement Funds to get an idea on percentage allocations to the various debt offerings for someone as young as you].

3. I assume you have cap gains in the funds you have currently in your taxable accounts. Do you have any losses in your taxable account you could "harvest" this year to offset the gains? You may want to do the transition over two tax years to reduce the tax burden--unless you're really concerned about the quality of the existing investments. Please check the funds you have held for just a few months to be sure that there are no "exit" fees (some funds have holding periods & charge a fee if you withdraw money within a certain time period).

good luck for the future.
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Re: Military Investor. Want to Move to Passive Funds

Postby BL » Thu May 02, 2013 7:05 pm

Passthedamnhamplease wrote:



The only problem I have is that I will not be able to contribute to
the Roth IRA anymore this year. Why?


Finally, what's the best way to move everything from my current mutual
funds to the ones at Vanguard? Most of them I've only had 1-2 months.
A couple I've had for 5 yrs. (I put in a lot in 2008 and then the
recession made me nervous about adding more especially given the lack
of time to research appropriate investments.)

First, find out the basis of your taxable funds that you wish to transfer. You can probably have Vanguard brokerage handle a transfer without cashing them in (I can't see what you have at the "other" place.) Then you could take your time in selling and buying as you choose. Even if you have your broker sell first, have Vanguard "pull" it to them.
Consider I-Bonds ($10,000 per year) for either short or longer-term savings. You are allowed to sell them after holding one year and they yield better than most CDs.


I appreciate everyone's help. If anything is unclear or you need more
information, please let me know.

Be sure to contribute $5500 to Roth IRA, even if you have to do Backdoor (see Wiki)

Study the Wiki. Take a look at the 3-fund or 4-fund portfolio for simplicity.

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Re: Military Investor. Want to Move to Passive Funds

Postby grabiner » Thu May 02, 2013 8:12 pm

Passthedamnhamplease wrote:Finally, what's the best way to move everything from my current mutual
funds to the ones at Vanguard? Most of them I've only had 1-2 months.
A couple I've had for 5 yrs. (I put in a lot in 2008 and then the
recession made me nervous about adding more especially given the lack
of time to research appropriate investments.)


It's usually best to move things all at once if you aren't making a significant change in your allocation. If you have US stock funds that you don't want to keep, you can sell the stock funds and buy Vanguard Total Stock Market Index, or the C and S funds in your TSP; you'll keep your exposure to the stock market.

For investments you have held 1-2 months, any gains on the sale will be short-term (taxed at your full rate), but there won't be much in gains. For investments you made in 2008, there will be large gains, but the gains are long-term and taxed at 15% federal almost independent of how much they are.

Total US Stock Market, 30% - taxable acct, VSTMX
US REIT, 10% - Roth IRA, VGSIX
Small Cap Value, 10% - Roth IRA, VISVX
International Developed Mkts, 20% - Taxable, VDMAX
Emerging Mkts, 5% - Taxable, VEIEX
Total US Bonds, 25% - one third in Roth, two thirds in taxable, VBMFX


View all your investments, including the TSP, as one portfolio. The TSP is the best place to hold bonds, because of the G fund; if you want to hold 25% in bonds, put your entire TSP contribution into the G fund until you reach that 25%. Once you have the 25%, you can add the C and S funds.

There is no need to hold developed and emerging markets separately in a ratio close to the market allocation, unless you plan to hold the I fund in the TSP for your developed markets allocation. (I would recommend using the TSP for US stock in preference to foreign stock, as you lose the foreign tax credit on international stock held in the TSP, and this offsets the expense advantage of the I fund.). You might as well put everything in Total International, particularly if it is in your taxable account; this also gets you small-caps.
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Re: Military Investor. Want to Move to Passive Funds

Postby Duckie » Thu May 02, 2013 11:09 pm

Passthedamnhamplease, your AA looks like 75% stocks, 25% bonds, with 33% of stocks in international, breaking down to 50% US stocks, 25% international stocks, and 25% bonds. Here is a possible retirement portfolio:

Taxable at Vanguard -- 72%
47% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%)
25% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.16%)

Thrift Savings Plan -- 0%
0% F Fund (0.027%)
0
% G Fund (0.027%)

Roth IRA at Vanguard -- 28%
3
% (VGSIX) Vanguard REIT Index Fund Investor Shares (0.24%) <-- For now.
25% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.10%)

My comments:
  • This has TISM in taxable to take advantage of the 
Foreign tax credit and because it's a better international fund than the TSP I Fund.
  • I recommend you split the TSP contributions 50% F Fund/ 50% G Fund until you hit your 25% bond AA (slowly reducing TBM in the IRA).
  • Skip Small Cap Value until you have more assets.
  • Any money needed in the next two to three years should be set aside in savings accounts, CDs, money market accounts, or 
I Savings Bonds through Treasury Direct. You could use the excess of your emergency fund for this.
  • As for transferring assets, if they are in IRAs, just open an account at Vanguard and have them pull the money. For taxable you need to figure out the tax cost of selling and decide when you want to sell.
Passthedamnhamplease wrote:The only problem I have is that I will not be able to contribute to the Roth IRA anymore this year. My plan as far as monthly contributions is to split between TSP <snip> and taxable <snip>. Doing this will cause my asset allocation to drift throughout the year, but I'm not sure of the best way to control this other than during a yearly rebalance when I can contribute my bonus to my Roth IRA and other accounts.
Why won't you contribute to your Roth IRA this year but will contribute to taxable for retirement? That doesn't make sense. As for the AA drifting, rebalancing just once or twice a year to get everything back in line is fine.

Since you plan to max your retirement accounts consider this: Most TSP Participants Should Switch To The Roth TSP.

If you haven't already, check out this thread on Military Investing and this Wiki article on Military finances.

Something to think about.
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Re: Military Investor. Want to Move to Passive Funds

Postby patriciamgr2 » Fri May 03, 2013 2:17 am

Mr. Grabiner's 10,000th post (above) was excellent as usual. Many thanks to him for this advice and for all the knowledge I've gained from his posts through the years. Thank You!
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Re: Military Investor. Want to Move to Passive Funds

Postby Spades » Fri May 03, 2013 7:00 am

Duckie's suggested portfolio is a great plan and I second it.

One thing to consider and prepare for as a military member is when you want to buy a home. For me, I'm planning on buying a house when I retire with my family. Having investments in your taxable accounts will help you pay outright for house like I'm planning.

Oh and max out your TSP if you can, those expense ratios are killer, but you're already tracking.

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Re: Military Investor. Want to Move to Passive Funds

Postby Passthedamnhamplease » Mon May 06, 2013 1:58 pm

I thank you all for the thoughtful suggestions.

For those asking about why I don't contribute to my Roth IRA, it is already maxed out for the year.

patriciamgr2:

I am not sure if I have any losses to 'harvest' at all. Certainly there were some in 2008 and 2009 but they've since recovered. I guess my question is, are taxes really something to get too concerned about with the amount of money I have invested? I feel like in the long run it won't make much of a difference. Additionally, most of the money in my taxable account has only been invested for 1-2 months, so the gains aren't that large to begin with. I would rather get everything moved over and not have to worry about it. Do you think this is imprudent?

I appreciate the heads up and will look into any "exit-fees". Would this be in the prospectus?

grabiner and Duckie:

I think pushing everything into the F/G Fund in TSP until I get to my target is a good idea. I guess my main question and what is causing the most indecision is over the best way to handle my AA.

Should I divide my investments in accordance with my ideal AA right away and then divide my monthly investment in a way that maintains it as closely as possible (disregarding gains/losses) or should I move my money in a way that puts it in the best available funds and most efficient account types with an eye toward getting the AA right by the end of the year? The problem is that I need to contribute a much greater percentage of my monthly savings to TPS (to max it out for the year) and this throws off my AA.

To use numbers, because I think I'm being a little vague, if I'm investing 3k/1k TSP/Taxable each month, there's no way for me to really split the money in a way that maintains my AA, especially if I'm foregoing the I fund in TSP for the VTIAX in taxable. Am I making sense?

Anyway, I'll probably crunch the numbers myself and give you an updated plan once I've figured things out. Duckie, I appreciate the slightly simplified portfolio you're suggesting and will look at determining the best way to incorporate it.

Again, thank you everyone for your help so far, and I appreciate any more insight you can provide.
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Re: Military Investor. Want to Move to Passive Funds

Postby patriciamgr2 » Mon May 06, 2013 5:33 pm

Yes, any exit fees would be noted in the prospectus. You can just call the fund company and ask about them as well.

You need to sell a mutual fund at a loss to be able to recognize it for tax purposes. Given your short investment horizon, taxes probably aren't a major concern to you (I think Grabiner correctly pointed that out).

Best of Luck.
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Re: Military Investor. Want to Move to Passive Funds

Postby Spades » Mon May 06, 2013 7:18 pm

Passthedamnhamplease wrote:grabiner and Duckie:

I think pushing everything into the F/G Fund in TSP until I get to my target is a good idea. I guess my main question and what is causing the most indecision is over the best way to handle my AA.

Should I divide my investments in accordance with my ideal AA right away and then divide my monthly investment in a way that maintains it as closely as possible (disregarding gains/losses) or should I move my money in a way that puts it in the best available funds and most efficient account types with an eye toward getting the AA right by the end of the year? The problem is that I need to contribute a much greater percentage of my monthly savings to TPS (to max it out for the year) and this throws off my AA.

To use numbers, because I think I'm being a little vague, if I'm investing 3k/1k TSP/Taxable each month, there's no way for me to really split the money in a way that maintains my AA, especially if I'm foregoing the I fund in TSP for the VTIAX in taxable. Am I making sense?

Anyway, I'll probably crunch the numbers myself and give you an updated plan once I've figured things out. Duckie, I appreciate the slightly simplified portfolio you're suggesting and will look at determining the best way to incorporate it.

Again, thank you everyone for your help so far, and I appreciate any more insight you can provide.


I recommend that you set up your monthly investments to get you to your AA. This will slowly get you to the AA you want and won't cause you to sell anything and take capital gains on it.

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