New poster looking for advice from smart people

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New poster looking for advice from smart people

Postby squeakywheel » Fri May 03, 2013 10:26 am

Hello, this is my first time posting and I am hoping that someone has time to give some advice. All of the info is given first and then there are several questions at the bottom of the post. Thanks in advance for any help/direction you can provide!

• Family—2 adults, approx 50 years old + 2 kids middle-school age
• Income—2 wage-earners (approx equal pay)
• Jobs—one relatively secure, one relatively shaky
• Tax Filing Status—Married Filing Jointly
• Tax Rate—highest brackets, both federal and state
• State of Residence—CA
• Maximum ongoing contributions to 401ks and non-deductible IRA’s
• 529 college funds not included in portfolio, but fully funded and in age-based index funds (Fidelity)
• Term life insurance for both wage earners
• Total investable portfolio—$2M+
• Usual investment style—buy and hold (did not sell during either of the major crashes in the last 15 years). Rebalance a bit, but otherwise no trading.
• Modest lifestyle allows relatively large savings rate
• Completely uninterested in buying real estate other than our home
• Have never had an accountant or advisor and don’t really want to start now, but this is getting to be a lot of money and don’t want to make any stupid mistakes.
• Potential for early retirement, but not sure yet if we want to or not.

Debt—none (house and cars paid off)

Assets—taxable
CD at credit union at 0.95%, expires 7/2014 4%
Savings at credit union at 0.25% 8%

Vanguard joint account
VFIAX 500 Index 7%
VWILX Intl Growth Index 5%
VIMAX Mid-Cap Index 2%
VSMAX Small-Cap Index 4%
VSEQX Strategic Equity Index 1%
VTSAX Total Stock Market Index 6%

Assets--non-taxable
Fidelity Roth 401k
Vanguard Target Retirement 2030 6%

Vanguard traditional IRA (non-deductible)
VBTLX Total Bond Market Index 4%

Vanguard traditional IRA (rollover from old 401k)
VAIPX Inflation-Protected Securities Fund 14%
VBTLX Total Bond Market Index 6%
VTSAX Total Stock Market Index 8%

Spouse Fidelity 401k
Retirement 2025 Fund (Fidelity) 1%

Spouse Vanguard traditional IRA (non-deductible)
VBTLX Total Bond Market 4%

Spouse Vanguard traditional IRA (rollover from old 401k)
VSCGX LifeStrategy Conservative Growth Fund 20%

Questions
1. We have been shooting for a relatively conservative 50% stocks/40% bonds/10% cash portfolio. However, all the warnings about bond funds having nowhere to go but down (since inflation is so low) are worrying. What other options do we have? Should we consider (slowly) moving more into stocks?
2. Or is it better to buy bonds directly, instead of using bond funds? Is there an easy way to do this?
3. We’re putting all new additions into our 401k into the combo funds listed above (Fidelity Retirement 2025, Vanguard Target Retirement 2030). Does that make sense?
4. Should we move more of our non-401k funds into these same (or similar) combo funds, just for ease of management?
5. Are there any recommended moves that would potentially save us some tax $, since we are in the highest brackets (at least for the next few years while we are both still working)?
6. We considered converting to Roth IRA's, but the tax bill is scary, so we have not. Is that the right move?
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Re: New poster looking for advice from smart people

Postby MindBogler » Fri May 03, 2013 12:08 pm

Is the 10% cash your emergency fund or do you have a separate one? If it isn't your emergency fund, why are you holding cash?

The bond question goes around and around in circles here. The truth is nobody really knows how it will play out. In theory as interest rates rise, NAV of bond funds will fall. Many of us are holding intermediate or short term bonds to mitigate as much of that risk as possible.

My only other thought is that you have quite a few funds. Have you thought about simplifying that a bit?
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Re: New poster looking for advice from smart people

Postby squeakywheel » Fri May 03, 2013 1:23 pm

MindBogler wrote:Is the 10% cash your emergency fund or do you have a separate one? If it isn't your emergency fund, why are you holding cash?


This is partly emergency fund and partly just because we don't know what else to do with these $. I think for an emergency fund, we would likely need only about 4% of the portfolio, leaving 8% potentially to be invested elsewhere.

MindBogler wrote:My only other thought is that you have quite a few funds. Have you thought about simplifying that a bit?


This is a good point, hence my question about using more of the Target Date or combo fund approach. Might simplify things. Of course any move we make at this point in our taxable accounts will have tax consequences due to appreciation.

Thanks so much MindBogler for your comments!
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Re: New poster looking for advice from smart people

Postby ieee488 » Fri May 03, 2013 2:12 pm

I am not big about target funds, but whether to use them in 401K depends on what else is avaiable.
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Re: New poster looking for advice from smart people

Postby squeakywheel » Fri May 03, 2013 2:22 pm

ieee488 wrote:I am not big about target funds, but whether to use them in 401K depends on what else is avaiable.


Fidelity has a very wide selection of funds that we could switch the 401K funds to (see below). But the 401K funds are only 7% of the portfolio.

DODGE & COX STOCK (DODGX)
FID GROWTH COMPANY (FDGRX)
SPTN 500 INDEX INST (FXSIX)
SPTN TOT MKT IDX ADV (FSTVX)
CRM MID CAP VAL INV (CRMMX)
COLUMBIA ACORN USA Z (AUSAX)
FID DIVERSIFD INTL K (FDIKX)
VANG TOT INTL STK IS (VTSNX)
VANG TARGET RET 2010 (VTENX)
VANG TARGET RET 2015 (VTXVX)
VANG TARGET RET 2020 (VTWNX)
VANG TARGET RET 2025 (VTTVX)
VANG TARGET RET 2030 (VTHRX)
VANG TARGET RET 2035 (VTTHX)
VANG TARGET RET 2040 (VFORX)
VANG TARGET RET 2045 (VTIVX)
VANG TARGET RET 2050 (VFIFX)
VANG TARGET RET 2055 (VFFVX)
VANG TARGET RET 2060 (VTTSX)
VANG TARGET RET INC (VTINX)
PIM TOTAL RT INST (PTTRX)
VANG INFL PROT ADM (VAIPX)
VANG PRIME MM INST (VMRXX)
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Re: New poster looking for advice from smart people

Postby Userdc » Fri May 03, 2013 2:25 pm

Looks pretty good to me. Your allocation seems fine, I wouldn't tinker if you are comfortable enough with current allocation.

Bond funds are fine.

You may be able to fine more tax advantaged space with after tax 401k or HSA or Savings bonds.


Do either of your 401k plans accept incoming rollovers? You could roll over the deductible IRAs into a 401k which would allow you to convert the non-deductible IRA to Roth at a much lower cost.

In your tax bracket, I would not recommend contributing to Roth 401k over deductible 401k.
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Re: New poster looking for advice from smart people

Postby ieee488 » Fri May 03, 2013 2:27 pm

I use the 3-fund lazy portfolio approach, so the funds that jump out at me in the 401K are Fidelity Spartan Total Stock Market Index, Vanguard Inflation Protect, and Vanguard Total International Stock Index.
Which one(s) you choose will depend on the rest of your portfolio.
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Re: New poster looking for advice from smart people

Postby squeakywheel » Fri May 03, 2013 2:31 pm

Userdc wrote:Do either of your 401k plans accept incoming rollovers? You could roll over the deductible IRAs into a 401k which would allow you to convert the non-deductible IRA to Roth at a much lower cost.

Wow, I never heard of this option! I will definitely investigate, thank you!

Userdc wrote:In your tax bracket, I would not recommend contributing to Roth 401k over deductible 401k.

Am only doing this for diversification purposes. Just in case somehow our future tax rates are actually higher than our current tax rates. It is not a large % of the $. But thanks for the feedback, maybe I am incorrect on this.
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Re: New poster looking for advice from smart people

Postby letsgobobby » Fri May 03, 2013 2:52 pm

squeakywheel wrote:
Userdc wrote:Do either of your 401k plans accept incoming rollovers? You could roll over the deductible IRAs into a 401k which would allow you to convert the non-deductible IRA to Roth at a much lower cost.

Wow, I never heard of this option! I will definitely investigate, thank you!

Userdc wrote:In your tax bracket, I would not recommend contributing to Roth 401k over deductible 401k.

Am only doing this for diversification purposes. Just in case somehow our future tax rates are actually higher than our current tax rates. It is not a large % of the $. But thanks for the feedback, maybe I am incorrect on this.


you're voluntarily paying 44.x% on your income when you don't have to. I believe that is incorrect.
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Re: New poster looking for advice from smart people

Postby nedsaid » Fri May 03, 2013 11:30 pm

You should be giving the rest of us advice. Congratulations on your successes.

A 50% stocks/40% bonds/10% cash portfolio is not bad for your age. I would not utilize cash in a retirement portfolio as it has a zero return right now. Use cash (money market funds, cash in the bank, short term CDs, savings bonds, etc) for your emergency funds. I am a big believer in having good old fashioned money in the bank. The older you are and still working, the more you need. You should shoot atleast for 6 months of living expenses in emergency funds. I think a year is even better.

Since Bonds are expensive, I am not enthusiastic about them. I own them because they reduce the risk of my portfolio. Bonds are the investment equivalent of eating your spinach. You do it because it is good for you. I would not sell bonds to buy more stocks just because you think bonds are expensive.

The maximum stocks for a portfolio for someone your age is about 70%. 60% stocks is more appropriate and 50% is okay.
I am at about 2/3 stocks and 1/3 bonds and cash at age 53. That is what I am doing.

If you are in the highest tax brackets, do not do Roth conversions. Your tax rate in retirement is likely to be lower than during your career.

You might consider tax free municiples. I would do some of your tax free investing in a National Muni Fund (you will pay CA taxes on this) and some in a California Muni Fund (getting tax free treatment for both Federal and CA). Treasury instruments are not California taxed.

You might consider using your entire allotment of $10K each in I Bonds for each spouse. Set up a Treasury Direct account. When you cash them in, there is no State Income Tax on these. These offer tax deferral until you cash them in.
A fool and his money are good for business.
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Re: New poster looking for advice from smart people

Postby squeakywheel » Sat May 04, 2013 10:22 am

nedsaid wrote:You might consider tax free municiples. I would do some of your tax free investing in a National Muni Fund (you will pay CA taxes on this) and some in a California Muni Fund (getting tax free treatment for both Federal and CA). Treasury instruments are not California taxed.

Thank you Nedsaid for your thoughtful advice. I am thinking it might make sense to put some of our too-heavy cash holdings into tax-free municiple funds with Vanguard as you suggest. Great idea!
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