401k and roth allocation

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401k and roth allocation

Postby playtothebeat » Fri May 17, 2013 3:17 pm

First post here, but have been reading the forum and the Boglehead philosophy for many years.
I wanted to get your take on my current allocation in my retirement accounts.

I'm 27, with gross income of about $110k/yr. Getting married this summer, with combined gross income of ~$250k.

Here's what I have so far in my portfolio:
401k
About $70k total balance.
Company matches up to 6%; I've been contributing 6% since day one, but increased to 10% a couple of weeks ago since we've been given some new investment options.
Up to this point, I was about 65% in a Target 2050 fund (Wells Fargo Advantage 2050; 0.37% net ER since employer covers about 0.30 of the overall 0.67% fee), 20% in Russell Small Cap Index (0.06% ER), 5% in Emerging Market Fund (0.89% ER), and 10% in company stock. All the match is done with company stock on a quarterly basis, so every year my allocations get slightly out of whack and in a 12 month span, company stock starts taking up about 20% of the porfolio.

Recently more index funds have been offered in the 401, so my new allocation is as follows:
60% S&P 500 Index (0.02% ER)
25% Russell Small Cap Index (0.06% ER)
10% Emerging Markets Equity Fund (0.89% ER)
5% Employer stock

Here are all the options we have in the 401:
Target Funds (Today-2055) - 0.30% to 0.37% Net ER on each
100% Treasury MM Fund - 0.06% ER
Stable Value Fund - 0.212%
US Bond Index - 0.06%
Large Cap Value Fund - 0.40%
S&P 500 Index - 0.02%
Large Cap Growth Fund - 0.50%
S&P Mid Cap Index - 0.06%
Russell Small Cap Index - 0.06%
Small Cap Fund - 0.59%
NASDAQ 100 Index - 0.07%
International Index - 0.09%
EuroPacific Growth Fund - 0.50%
Emerging Markets Fund - 0.89%

ROTH IRA
Current balance about $22k, of which ~$15k is contributions.
Since about October 2007, and through last year, i've been contributing into a Roth through Vanguard, with 100% of the contributions going into the S&P500 Index (VFIAX). I'm no longer contributing to the ROTH since my/our projected income is above the ROTH income limits.

OTHER
In addition I have about $13k in an etrade account, consisting 50% of cash and 50% of a handful of individual stocks (this was my "play money" at one point which I used as a way to get more engaged and involved in the market and learn a little bit about trading).

I'd like to hear what you guys think about this "portfolio". I recognize that I have 100% exposure to stocks - for someone my age, is that still too risky? Should I divert maybe 10%-20% into the bond fund? For what it's worth, wife is 11 years older, so not sure if that should be taken into account, knowing that the funds in my portfolio may be needed earlier than if it was just me or someone of age closer to mine.
I need to review the wife's portfolio as well, but if i recall correctly most of hers is either in a target fund or in a mid-cap fund (not index though).

Thanks
Last edited by playtothebeat on Fri May 17, 2013 7:18 pm, edited 2 times in total.
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Re: 401k and roth allocation

Postby ruralavalon » Fri May 17, 2013 5:42 pm

Welcome to the forum :) .

Congratulations on your upcoming wedding.

You have some very nice low cost index funds offered in your 401k.

This is what you have looking at both accounts (your 401k and your IRA) together, with percentages rounded off. Total portfoio = $92k.

401k (76%; %70k; contributes $11k/yr, plus match of ~ $7k/yr)
46% S&P 500 Index (0.02% ER)
19% Russell Small Cap Index (0.06% ER)
08% Emerging Markets Equity Fund (0.89% ER)
04% Employer stock

Roth IRA (24%; $22k; no longer contributing)
24%, S&P 500 Index (VFIAX)

Random thoughts:

1. Do add a bond allocation, at about 25% of the total portfolio. Please see -- regression
viewtopic.php?p=1217243#p1217243; and Wiki article link: Asset Allocation .
2. the large cap/small cap split (~ 4:1) is within reason in my opinion.
3. Instead of emerging markets, use the international index, ER = 0.09% for broader diversification and much lower expense ratio.
4. Make international about 30% of the total equities. Please see -- Vanguard paper, https://personal.vanguard.com/pdf/icriecr.pdf ; and poll viewtopic.php?p=98922 .
5. After the marriage, do adjust so that wife's 401k and your accounts "fit" together when considered as a unified whole.
6. What is your debt situation, if any? That could change prioities, depending on amounts and interest rates.
7. What index is used by the international index fund in your 401k? That could influence the decision on whether to use the international index fund in your 401k vs. buy the Vanguard Total International fund in your IRA.

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: 401k and roth allocation

Postby playtothebeat » Fri May 17, 2013 6:42 pm

@ruralavalon:
Thanks for the links; I'll go through the material!

I can't recall what the International index fund is exactly, but the notes I have on it from our 401k prospectus is the following: The International Index Fund (“fund”) is managed by State Street Global Advisors and seeks to match as closely as possible, before expenses, the performance of the MSCI EAFE Index (“index”) over the long term.

As for your question about debt - this is where the story does get more interesting.
I myself don't have a lot - about $8k in student loans, with $3k at under 1% interest rate and $5k at 5%.
Additionally, my parents have $43k for my education which I'm paying for (they're getting the benefit of interest on their taxes, however, since they're under their names). There's about $3k at 8.5% and $40 at 5.6%.
No credit card debt or car debt.

My wife-to-be has substantially more: mortgages on our southern california home (i'm not on the note or title as she's owned it for a while) - two mortgages, a 1st and a 2nd, with the 2nd at 8% or so with a major balloon payment in about 7 years; the first is at around 6%; refinancing is not an option due to them being underwater (I'd estimate 120% LTV), and due to the fact that the mortgages are not Fannie/Freddie (thus, no HARP eligibility). Additionally, modification has so far been impossible given that her income (even without mine) is considered fairly high, and she's never missed a payment. Once we get married, lenders are likely to look at my income as "supplemental income" even though I'm not on the note or title.
She also has some credit card debt - approx $20k, but at 0-3% rate for "life of the loan"; plus substantial law school debt.

As you can tell, debt is definitely an issue, although our income (and earning potential) make it all manageable without any major issues while still allowing us to put away a decent amount for retirement (we'd love to put away more, of course).

We are expecting our first kid shortly, so we'll need to think about college funds and things of that nature as well..
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Re: 401k and roth allocation

Postby connya » Fri May 17, 2013 8:39 pm

A couple of minor points:

I agree with ruralavalon that a total international fund would be a better place for your international stocks, but if you do want to tilt to emerging markets (in addition to total international), do it in your Roth. Vanguard's EM fund is 0.33% ER even without qualifying for Admiral shares, and the S&P 500 fund is cheaper in your 401k anyway.

You can still contribute to your Roth IRA after exceeding your limit: http://www.bogleheads.org/wiki/Backdoor_Roth_IRA - however, with debts at 8% you probably shouldn't be contributing anything more than the matched 6% in your 401k. I would hold off on any Roth or 529 contributions until the high-interest debts are gone.

Good luck!
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Re: 401k and roth allocation

Postby playtothebeat » Wed May 22, 2013 12:11 pm

connya, if i transfer my Roth IRA from the S&P index to an emerging markets or international fund, do I have to "convert" (i.e. sell s&p, buy international) the entire balance right away? or can I do it over the course of a few months? I'm not sure what kind of restrictions there are on selling and buying within the Roth IRA..

Also, my company offers a Roth 401k plan in addition to the standard 401k. If at some point I do decide to contribute additional funds to the Roth accounts, does it make sense to do it through the 401, or better off to do it through Vanguard via the backdoor method? Does contributing to the Roth 401k limit how much I can contribute to the regular 401k (in other words, is the $17.5k limit for 401k contributions for both accounts, or for traditional 401k only?)?

Thanks.
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Re: 401k and roth allocation

Postby mnvalue » Wed May 22, 2013 1:52 pm

At your combined income, you must be in a high tax bracket. See this page for the guidance on which to choose: http://www.bogleheads.org/wiki/Traditional_versus_Roth
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Re: 401k and roth allocation

Postby WHL » Wed May 22, 2013 2:05 pm

playtothebeat wrote:connya, if i transfer my Roth IRA from the S&P index to an emerging markets or international fund, do I have to "convert" (i.e. sell s&p, buy international) the entire balance right away? or can I do it over the course of a few months? I'm not sure what kind of restrictions there are on selling and buying within the Roth IRA..


The Roth IRA itself shouldn't have any restrictions on buying and selling, but it's likely that the funds you have in the IRA will. Example: two weeks ago I rebalanced in my tIRA. I sold TSM and bought TBM. Vanguard has a nice little note that says to reduce frequent trading of the TSM fund, I cannot buy back in for a period of two months (IIRC).

I would create your total plan and implement it all at once.
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Re: 401k and roth allocation

Postby ruralavalon » Wed May 22, 2013 4:07 pm

There are many nice low cost index funds in your 401k, so there are probably several good ways to build a portfolio that will make sense for you.

A 4:1 mix of S&P 500 to small cap will approximate the total domestic stock market.
Wiki article link: Approximating Total Stock Market .

I prefer Vanguard's Total International over the EAFE fund. An EAFE (Europe, Asia, Far East) fund covers large cap companies in developed markets outside of North America. The Vanguard Total International fund covers all that plus Canada, emerging markets, and international small cap stocks, and so is more diversified.

Nevertheless I suggest owning some international in the 401k. The 401k is the largest account, and the IRA will not be recieving any more contributions. Its important to have all basic fund types in the 401k for ease of managrement, so that you can easily do your rebalancing. Wiki article link: Rebalancing .

Here is a portfolio idea for your consideration, using a 75/25 stock/bond allocation, with international at about 30% of total equities, all percentages rounded off.

401k (76%; $70k; contribute enough for match, ~ $7k/yr, plus match of ~ $7k/yr)
25%, US Bond Index, er = 0.06%
27%, S&P 500 Index, er = 0.02%
10%, Russell Small Cap Index, er = 0.06%
10%, International Index, er = 0.09%,
04%, Employer stock, <= assuming you are required to or want to keep this

Roth IRA (24%; $22k; no longer contributing)
12%, S&P 500 Index Admiral Shares (VFIAX), er= 0.05%
12%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX), er= 0.16%

Once you decide on a plan, its best to execute it all at once rather than in stages over many months.

Here is some information for you about pros/cons of Roth 401ks -- http://thefinancebuff.com/case-against-roth-401k.html ; and viewtopic.php?f=1&t=104122&newpost=1523869 . I would suggest continuing to use the traditional 401k.

I do also suggest that you read one or two 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 suggestions given, and also help you to manage the portfolio in the future.

The debts do present a challenge. In general the investing priority should be :
1. Contribute enough to the 401k(s) to get the full match offered (its free money, never turn down free money);
2. Pay off higher interest debt (anything higher than the rate for ultra safe bonds).
Wiki article link: Paying down loans versus investing ; and Wiki article link: Prioritizing investments . In other words, after getting the free money in the match of the 401k(s), the next best "investment" is paying off the loans, and that should take prioity over any other investing. Paying off a 5% loan is like getting a risk-free guaranteed return of 5% on your investment, you can't get a 5% guranteed reurn on investment anywhere else that is safe.

As mentioned sometime after the marriage you both should take a look at this again, so that you can make the best possible joint portfolio by mixing together the best choices in both 401ks.

I hope that this helps.
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