Portfolio Allocation Assistance

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Portfolio Allocation Assistance

Postby mmicha » Mon Jul 01, 2013 10:08 pm

Hello,

I'm 31 years old, and I've finally got my money out of the hands of others and am ready to do it on my own. I've read Bogleheads Guide to Investing and am just wanting to get feedback before I click the buy button. My thought was to go 70/30 on the allocation.

Below is my assets:

Taxable Account: (Currently Money Market)
$89,575.99

Roth IRA: (Currently Money Market)
$44,399.75

Savings:
$45,000

I believe this should be my allocation:

Taxable:

65,648.11
Total Stock Market Index Admiral (VTSAX)

23,927.88
Total International Stock Market Index Admiral (VTIAX)

Roth IRA:

4207.03
Total International Stock Market Index (VGTSX)

32,154.18
Total Bond Market Index Admiral (VBTLX)

8,038.54
Total International Bond Market (VTIBX)

I've not put any money in my Roth IRA for 2013. I was looking for the taxable account to feed that yearly. Is that proper?
mmicha
 
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Re: Portfolio Allocation Assistance

Postby EJE » Tue Jul 02, 2013 1:50 am

Hello mmicha,

I'm probably a lot more aggressive than many posters, but I like to consider my savings as counting toward my cash & bonds allocation.

By doing this, I would come up with following for you:

Total Investable Funds: ~ $180k
70% stock allocation: ~$126k
30% cash & Bonds: ~ $54k

Using the numbers in your post, you would have 53% in stocks, 22% in bonds and 25% in savings. That seems pretty conservative for someone that is 31 years old; but of course I don't know you situation and if you have some near term major expenses that you are planning to use the savings for, then your approach might be just right.

Also, you might want to consider a short term corporate bond fund rather than total bond market index since the yields are currently so low.
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Re: Portfolio Allocation Assistance

Postby retiredjg » Tue Jul 02, 2013 9:01 am

mmicha wrote:I've not put any money in my Roth IRA for 2013. I was looking for the taxable account to feed that yearly. Is that proper?

Sometimes it is "proper", but it is not clear if that is a good choice in your case.

You have not shown any kind of plan at work such as a 401k, 403b, or SIMPLE IRA. If you have such a plan available, you should be putting some of your income there. Some of your income could also be going to Roth IRA as well. If you can't save enough to do both, it is fine to fill your work plan with income and transfer money from a taxable to Roth each year.

It would be helpful to have more information. Do you know your tax bracket? Are you married or single? Is there a plan at work? Etc.

As for what you have proposed, I'd probably put Total Stock Market in the Roth IRA instead of international. If your international is held in a taxable account, it is eligible for the foreign tax credit (see the Wiki).
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Re: Portfolio Allocation Assistance

Postby mmicha » Tue Jul 02, 2013 9:55 am

retiredjg wrote:
mmicha wrote:I've not put any money in my Roth IRA for 2013. I was looking for the taxable account to feed that yearly. Is that proper?

Sometimes it is "proper", but it is not clear if that is a good choice in your case.

You have not shown any kind of plan at work such as a 401k, 403b, or SIMPLE IRA. If you have such a plan available, you should be putting some of your income there. Some of your income could also be going to Roth IRA as well. If you can't save enough to do both, it is fine to fill your work plan with income and transfer money from a taxable to Roth each year.

It would be helpful to have more information. Do you know your tax bracket? Are you married or single? Is there a plan at work? Etc.

As for what you have proposed, I'd probably put Total Stock Market in the Roth IRA instead of international. If your international is held in a taxable account, it is eligible for the foreign tax credit (see the Wiki).


I'm currently have a 401k at my work currently with no matching. It has around 8k in it currently. I am in the 25% tax bracket and am single. I put 6% into it.
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Re: Portfolio Allocation Assistance

Postby retiredjg » Tue Jul 02, 2013 10:11 am

Is the 6% all you are able to save in a year? What is the 401k invested in?
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Re: Portfolio Allocation Assistance

Postby mmicha » Tue Jul 02, 2013 10:19 am

retiredjg wrote:Is the 6% all you are able to save in a year? What is the 401k invested in?


Right now it is in Vanguard Target Retirement 2050. I try to put money in my savings when possible. 25 or 50 dollars a week if lucky, or a chunk when there are 5 weeks in a month.
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Re: Portfolio Allocation Assistance

Postby retiredjg » Tue Jul 02, 2013 11:18 am

I know you think you answered the question, but is the 6% all you can afford to save each year (other than an occasional $25 or $50 going into savings when you get lucky)?

What is the savings for?
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Re: Portfolio Allocation Assistance

Postby mmicha » Tue Jul 02, 2013 11:37 am

retiredjg wrote:I know you think you answered the question, but is the 6% all you can afford to save each year (other than an occasional $25 or $50 going into savings when you get lucky)?

What is the savings for?


Honestly, it probably is currently. I don't think I'd be able to bump it to 7-8%.

My debts are:

Student Loans: 14-15k @ 2.5%
Mortgage: 1,200 monthly.

The savings is for rainy day and emergency. I try to live off my paycheck for the most part and only barrow from savings on occassion and work to pay it back. A new car would be the only thing I see in the future. Currently driving an 2005 which is doing fine at the moment.
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Re: Portfolio Allocation Assistance

Postby retiredjg » Tue Jul 02, 2013 11:53 am

So that leaves you with this for retirement:

Taxable $89,575.99

401k $8,000

Roth IRA $44,399.75

About how much money, in dollars, is your contribution and the employer match together?
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Re: Portfolio Allocation Assistance

Postby mmicha » Tue Jul 02, 2013 12:19 pm

retiredjg wrote:So that leaves you with this for retirement:

Taxable $89,575.99

401k $8,000

Roth IRA $44,399.75

About how much money, in dollars, is your contribution and the employer match together?


Since I started working at this company, they haven't matched. I guess with the economic slowdown. So it is just what I'm able ot contribute. Which is 6%, or about 3,600 a year.
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Re: Portfolio Allocation Assistance

Postby retiredjg » Tue Jul 02, 2013 12:50 pm

This would be the usual suggestion. However, I don't know what is available in your 401k, so it is just a guess.

Total of these 3 accounts = $141,974 (percentages below are derived from this number)

Taxable 63.1% ($89,575.99)
42.1% Vanguard Total Stock Market
21% Vanguard Total International

401k 5.6% ($8,000)
0% 500 Index
5.6% Bonds

Roth IRA 31.3% ($44,399.75)
6.9% Total Stock Market
24.4% Total Bond Market

Each year you would contribute about $1,080 to bonds and $2,520 to 500 Index in your 401k. Each year, you would sell $5,500 in TSM in taxable and buy the same in your Roth IRA. In the years when the sale in taxable would be a gain, you'd pay taxes on the gain at tax time.

In years when the sale in taxable would be at a loss (which you can take off your taxes), you could not buy the exact same fund in the Roth IRA without creating a wash sale, so you'd have to buy something else for the 30 day wait time or wait out 30 days in money market.



An option using a target fund (which you seem to like) in the 401k would work as well, but you'd just do the math without including that account.



401k ($8,000)
Vanguard TR 2025 <--this is the fund that is allocated at 70/30



Total $133,974 for these 2 accounts (percentages below are derived from this number):

Taxable 66.9% ($89,575.99)
45.9% Vanguard Total Stock Market
21% Vanguard Total International

Roth 33.1% ($44,399)
3.1% Vanguard Total Stock Market
30% Vanguard Total Bond Market

This last idea is essentially the same as your current idea but the Target Fund in the 401k is changed so that it is consistent with the stock to bond allocation you said you want. Again, you'd have to watch for wash sales if you sell Total Stock Market at a loss to put money into Roth IRA.

Do you like either of these ideas?
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Re: Portfolio Allocation Assistance

Postby mmicha » Tue Jul 02, 2013 2:50 pm

retiredjg wrote:This would be the usual suggestion. However, I don't know what is available in your 401k, so it is just a guess.

Total of these 3 accounts = $141,974 (percentages below are derived from this number)

Taxable 63.1% ($89,575.99)
42.1% Vanguard Total Stock Market
21% Vanguard Total International

401k 5.6% ($8,000)
0% 500 Index
5.6% Bonds

Roth IRA 31.3% ($44,399.75)
6.9% Total Stock Market
24.4% Total Bond Market

Each year you would contribute about $1,080 to bonds and $2,520 to 500 Index in your 401k. Each year, you would sell $5,500 in TSM in taxable and buy the same in your Roth IRA. In the years when the sale in taxable would be a gain, you'd pay taxes on the gain at tax time.

In years when the sale in taxable would be at a loss (which you can take off your taxes), you could not buy the exact same fund in the Roth IRA without creating a wash sale, so you'd have to buy something else for the 30 day wait time or wait out 30 days in money market.



An option using a target fund (which you seem to like) in the 401k would work as well, but you'd just do the math without including that account.



401k ($8,000)
Vanguard TR 2025 <--this is the fund that is allocated at 70/30



Total $133,974 for these 2 accounts (percentages below are derived from this number):

Taxable 66.9% ($89,575.99)
45.9% Vanguard Total Stock Market
21% Vanguard Total International

Roth 33.1% ($44,399)
3.1% Vanguard Total Stock Market
30% Vanguard Total Bond Market

This last idea is essentially the same as your current idea but the Target Fund in the 401k is changed so that it is consistent with the stock to bond allocation you said you want. Again, you'd have to watch for wash sales if you sell Total Stock Market at a loss to put money into Roth IRA.

Do you like either of these ideas?


I like the second option... Though right now I'm not against the risk of the Target 2050 since it isn't a lot of money.

I've got to think more about what you are saying with the wash concept... I'm trying to make this as simple as possible for myself. I just got out of a "managed portfolio" and so much of it is new.

I'm used to the set it and forget it funds. Such as the Target funds where it allocates and keeps it aligned. Probably need some help in a year or so to make sure I'm in the 70/30 spot.
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Re: Portfolio Allocation Assistance

Postby retiredjg » Tue Jul 02, 2013 3:45 pm

mmicha wrote:I like the second option... Though right now I'm not against the risk of the Target 2050 since it isn't a lot of money.

That's fine too. It puts your overall portfolio a little more aggressive than 70/30, but you've got room to be more aggressive if you want.

I've got to think more about what you are saying with the wash concept... I'm trying to make this as simple as possible for myself. I just got out of a "managed portfolio" and so much of it is new.

See if this helps. Wiki article link: Wash sale


One thing I didn't think of earlier but you might want to consider is to use some of the money in your taxable account for living expenses while you contribute the max ($17.5k) to your 401k each years. This effectively transfers money from the taxable account into the 401k and will lower your taxable income each year by about $13.9k (17,500 minus 3,600). Since you are in the 25% bracket, this would lower your federal taxes about $3,475 each year. That money could be saved and invested in Roth IRA (reducing the transfer to Roth each year) or your savings.

It would take you several years to completely deplete the taxable account and in the end, your 401k would be larger. When you reach retirement, if you do not have a pension, there is a good possibility you will fall into a lower tax bracket - you might pay 15% on the money coming out of the 401k. Since you saved 25% putting the money into the 401k, you would end up with more money in the long run.

Does this interest you?
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Re: Portfolio Allocation Assistance

Postby mmicha » Tue Jul 02, 2013 4:44 pm

retiredjg wrote:
mmicha wrote:I like the second option... Though right now I'm not against the risk of the Target 2050 since it isn't a lot of money.

That's fine too. It puts your overall portfolio a little more aggressive than 70/30, but you've got room to be more aggressive if you want.

I've got to think more about what you are saying with the wash concept... I'm trying to make this as simple as possible for myself. I just got out of a "managed portfolio" and so much of it is new.

See if this helps. Wiki article link: Wash sale


One thing I didn't think of earlier but you might want to consider is to use some of the money in your taxable account for living expenses while you contribute the max ($17.5k) to your 401k each years. This effectively transfers money from the taxable account into the 401k and will lower your taxable income each year by about $13.9k (17,500 minus 3,600). Since you are in the 25% bracket, this would lower your federal taxes about $3,475 each year. That money could be saved and invested in Roth IRA (reducing the transfer to Roth each year) or your savings.

It would take you several years to completely deplete the taxable account and in the end, your 401k would be larger. When you reach retirement, if you do not have a pension, there is a good possibility you will fall into a lower tax bracket - you might pay 15% on the money coming out of the 401k. Since you saved 25% putting the money into the 401k, you would end up with more money in the long run.

Does this interest you?


It is certainly something to think about... Though there is something comforting knowing that money is accessible. If I move it to a 401k and such I feel like it is gone till I'm in my 60's. It doesn't seem so bad to take out 5,500 a year and move it as the rest grows and is accessible.

I also forgot to mention I've got around 8-9k in IBM stock. I'd really like to get rid of my student loans and wonder if you think this might be a good place to sell and pay down the loan? It's 2.5% and around 14-15k...
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Re: Portfolio Allocation Assistance

Postby retiredjg » Wed Jul 03, 2013 9:51 am

mmicha wrote:It is certainly something to think about... Though there is something comforting knowing that money is accessible. If I move it to a 401k and such I feel like it is gone till I'm in my 60's. It doesn't seem so bad to take out 5,500 a year and move it as the rest grows and is accessible.

The contributions in your Roth IRA (not the earnings) are available to you any time for any reason with no penalty. The money in a 401k is available without penalty for several different emergency situations.

I also forgot to mention I've got around 8-9k in IBM stock. I'd really like to get rid of my student loans and wonder if you think this might be a good place to sell and pay down the loan? It's 2.5% and around 14-15k...

With a low interest rate, paying off the loan over time is not going to hurt you a lot as compared to investing the money. But for people who really want to get rid of debt, it is rarely a bad idea to just pay it off if you can.

Holding individual stock carries a higher risk than holding a mutual fund. Even if you didn't pay down the loans, selling the stock (if the gains are long term instead of short term) is probably a good idea.
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Re: Portfolio Allocation Assistance

Postby retiredjg » Wed Jul 03, 2013 9:52 am

Here's one last idea to consider. You could hold each of your 3 accounts at the 70/30 allocation that you want (or whatever).

Taxable ($89,575.99)
$43,891 Vanguard Total Stock Market
$18,801 Vanguard Total International
$26,872 Intermediate Term Tax-exempt bonds

401k ($8,000)
Target Retirement 2025 (or whatever one you want)

Roth IRA ($44,399.75)
Target Retirement 2025 (or whatever one you want)

In this case, each account is set at about 70/30 (or whatever number you decide on). Once a year, you would sell some of each of the funds you have in taxable and put it in the Roth IRA. Done. No worry about wash sale.

Your only issue would be to figure out how much to sell - sell whatever you need to so that the account is about 70/30 when you are finished. It should be roughly 49% US, 21% International and 30% bonds, but that could change some if there is a serious upswing or downturn of the market.
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