Asset Allocation Review Requested

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Asset Allocation Review Requested

Postby EJE » Tue Jul 02, 2013 12:49 am

Hi all. Just joined the forum. I actually found this forum a few weeks ago after stumbling across the Boglehead Guide to Investing book at the local library. I'm enjoying the reading. I've been a big fan of Mr. Bogle and have read his books. But there is a lot of new content here and I am learning a lot. I'm 42, married and 3 kids ages 12, 10 and 5. We have saved and invested very aggressively for retirement ever since we started working and now find our portfolio may be in a bit of a unique situation:

Income: ~$150k / year + bonus up to ~$50k

401(k): ~$600k
Roth IRAs: ~ $200k
Taxable Investments & Savings: ~ $100k
Home Equity: ~ $150k
Mortgage Balance: ~ ($200k); no other debt
Children's UGMAs & Education IRAs: ~ $50k [our goal would be to fund 75% of 4 years at a State university for all three kids which I estimate to be a need of ~$250k]

Current Portfolio Target Allocation: 25% Large Cap Stock; 22% Cash & Bonds; 18% Company Stock; 12.5 Mid Cap Stock; 12.5 Small Cap Stock; 10% Foreign Stock

One major concern is that almost all of our net worth is in our retirement accounts. I have thought about the possibility of early retirement (or perhaps a career change to a much lower paying / more gratifying position); say in the next 4 to 8 years. Looking for suggestions about how I could avoid penalties for early withdrawals from 401(k) or IRAs if I do choose retire early. Should I reduce my 401(k) contributions to only the level of company match (6%) and then start saving more aggressively in after tax accounts ? Other suggestions ? Thanks in advance.
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Re: Asset Allocation Review Requested

Postby Jim180 » Tue Jul 02, 2013 2:14 pm

There is a way to take money out of retirement accounts early without penalty. This is known as IRS Rule 72(t) . If you take "substantially equal periodic payments" such as monthly or annually, based on your life expectancy then you avoid the 10% penalty. I think the IRS has tables for you to determine that. I noticed you have 18% in company stock. If possible you should try to diversify that into mutual funds. How much longer does your spouse plan to work?
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Re: Asset Allocation Review Requested

Postby ruralavalon » Tue Jul 02, 2013 3:46 pm

Welcome to the forum :) .

You are on the right track by starting with Mr.Bogle's writings. Also its great that you have no debt other than the mortgage loan.

EJE wrote:I'm 42, married and 3 kids ages 12, 10 and 5. We have saved and invested very aggressively for retirement ever since we started . . .
. . . . .
Current Portfolio Target Allocation: 25% Large Cap Stock; 22% Cash & Bonds; 18% Company Stock; 12.5 Mid Cap Stock; 12.5 Small Cap Stock; 10% Foreign Stock

As to asset allocation, in my opinion you should consider a higher allocation to bonds perhaps in the area of 30 - 35%. Wiki article link: Asset Allocation ; and 2011 regression, % stocks vs age .

On asset allocation, I would also be concerned about having 18% of the portfolio in company stock, thats far too risky in my opinion.


EJE wrote:401(k): ~$600k
Roth IRAs: ~ $200k
Taxable Investments & Savings: ~ $100k
. . . . .
One major concern is that almost all of our net worth is in our retirement accounts. I have thought about the possibility of early retirement (or perhaps a career change to a much lower paying / more gratifying position); say in the next 4 to 8 years. Looking for suggestions about how I could avoid penalties for early withdrawals from 401(k) or IRAs if I do choose retire early. Should I reduce my 401(k) contributions to only the level of company match (6%) and then start saving more aggressively in after tax accounts ? Other suggestions ? Thanks in advance.
.
Here is a fairly standard view of the general investing priority (best priority plan depends on individual tax situation, quality of 401k offerings, etc.), that could help you accomodate the idea of career change/job change/early retirement while avoiding the dilemma about early withdrawals from the 401k or IRAs:

1. Company plan (401k, 403b, etc.) up to the company match. The company match is free money. Take it!
2. Roth IRA or deductible Traditional IRA up to maximum contribution limit, depending on personal circumstances and eligibility. In an IRA you can select the investments yourself; low-cost index funds that may not be available in your company plan.
3. Company plan up to maximum contribution limit. Most plans have some low-cost options. You can balance your asset allocation with your IRA.
4. Taxable Investing
This is a broad outline suitable for most (beginning) investors. If you are fortunate enough to yet have funds available for taxable investing, you may wish to learn about using tax-advantaged HSA, Coverdell, and 529 accounts.
Wiki article link: Prioritizing investments ; and umfundi's post, Savings and Investing Precedence

On item #2, if you are eligible for a Roth IRA, and it otherwise makes sense for you, using a Roth IRA builds up money you can withdraw early. "Regular Contributions can be withdrawn at any time with no tax and no penalty." Wiki article link: Roth IRA

Sometimes when the company plan (401k/403b) has only very high cost choices, its best to skip maxing the 401k or 403b (#3) and go directly to taxable investing (#4). 401k, Expensive or mediocre choices

In any event you are already doing the most important thing, that is saving aggressively. Forum thread, The Savings Rate


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: Asset Allocation Review Requested

Postby EJE » Tue Jul 02, 2013 6:07 pm

Jim180 wrote:There is a way to take money out of retirement accounts early without penalty. This is known as IRS Rule 72(t) . If you take "substantially equal periodic payments" such as monthly or annually, based on your life expectancy then you avoid the 10% penalty. I think the IRS has tables for you to determine that. I noticed you have 18% in company stock. If possible you should try to diversify that into mutual funds. How much longer does your spouse plan to work?


Jim180,

Thanks for the reply. I looked up the IRS Rule 72(t) and that the opportunity for substantially equal periodic payments is great news for me. This path also led me to learn that I can take penalty free withdrawals from my IRA accounts to apply toward my kids college expenses. That is big news for me. I will stop putting money in the kids names in UGMA and Education IRA accounts and instead plow it into my 401(k) and IRA accounts knowing that I can pull it out penalty free to put toward their college expenses. Not sure how I missed that one previously.

My wife has been a stay-at-home mom since our first child was born. She may go back to work part time or as a volunteer when our youngest starts elementary school, but I don't want to count on this income in my financial planning.

-EJE.
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Re: Asset Allocation Review Requested

Postby Jim180 » Tue Jul 02, 2013 6:18 pm

EJE wrote:
My wife has been a stay-at-home mom since our first child was born. She may go back to work part time or as a volunteer when our youngest starts elementary school, but I don't want to count on this income in my financial planning.

-EJE.
Then you may also want to start to pare back your stock market allocation. You have about 70% right now. People at or near retirement should have around a 50/50 mix, or maybe even 40/60.
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Re: Asset Allocation Review Requested

Postby Bob's not my name » Tue Jul 02, 2013 8:51 pm

You don't have anywhere near too much in retirement accounts. You can withdraw from them in many different ways, including, as you discovered, to pay for college, but I expect you'll still need to work to pay for college, and will therefore be in a bracket which makes this unattractive. Roth contributions can be withdrawn for any reason, penalty-free, and since you already paid the tax they're tax-free.

Look into gifting appreciated stocks to your kids and having them recognize the capital gains every year, staying under the kiddie tax threshold. But consider the financial aid implications -- having the oldest two in college at the same time could give you a shot at having wealth redistributed your way.
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Re: Asset Allocation Review Requested

Postby EJE » Tue Jul 02, 2013 9:04 pm

ruralavalon wrote:As to asset allocation, in my opinion you should consider a higher allocation to bonds perhaps in the area of 30 - 35%. Wiki article link: Asset Allocation ; and 2011 regression, % stocks vs age .

On asset allocation, I would also be concerned about having 18% of the portfolio in company stock, thats far too risky in my opinion.


Ruralavalon;
Thank you very much for your great response. I appreciate the time you put into such a thorough reply. I am taking some time to follow all of the links you provided and thoroughly digest your comments. I wanted to reply first to this portion.

I am aware that my current target allocation is very aggressive. I am currently using [age -20] in bonds allocation and I also include all my emergency fund and operating cash in the "bonds" figure. I will give this more thought and may take your advice and go more toward [age-10].

I understand the concern about my 18% allocation in company stock (also mentioned by Jim180). I am familiar with the financial planning advice about not having your income and investments tied to the same company and especially considering my wife is not working outside of the home. The counter point in my mind is the famous advice from Peter Lynch of "buy what you know" and I do feel like I know the company very well. I understand that this is not an accepted doctrine and there are horrible examples such as Enron and the like. I will also give this more thought and may take your advice and trim this back further at next opportunity.

I'll respond again to the second half of your post after I finish studying all the links you provided.

-EJE
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Re: Asset Allocation Review Requested

Postby EJE » Tue Jul 02, 2013 9:17 pm

Bob's not my name wrote:You don't have anywhere near too much in retirement accounts. ....

Look into gifting appreciated stocks to your kids and having them recognize the capital gains every year, staying under the kiddie tax threshold. But consider the financial aid implications -- having the oldest two in college at the same time could give you a shot at having wealth redistributed your way.


Bob's not my name: Thanks for your advice. I had not considered gifting appreciated stocks to the kids - great idea. I have been recognizing gains each year up to the kiddie tax limit in their UGMA accounts for the past couple of years. I have donated appreciated stocks to charity on a couple of occasions (and then held back normal cash donation up to the same amount) which worked out great as a tax benefit.
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Re: Asset Allocation Review Requested

Postby nedsaid » Wed Jul 03, 2013 12:07 am

Congratulations, you are doing well and should be giving the rest of us advice.

A few observations. Reduce your company stock if you can. This might be your 401k match and the company may not allow you to sell. 18% of your retirement in one company is too much.

Your asset allocation looks good. Start tapering your stocks down and get more bonds. If you want to retire in 4-8 years, then you need to invest more like someone who is in their late 50's. If your job is wearing you down, your idea of going into something different is a good one. So how much less aggressive to invest depends on your retirement date.

Make some realistic projections of what you need to retire on. Your probably should get your kids through college first before retiring. People often are not realistic about what it really takes. The other important issue is health insurance. If your lifestyle is relatively modest, your goals will of course be a lot easier to achieve.

Gosh, I think you are doing things right. Congratulations.
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Re: Asset Allocation Review Requested

Postby ruralavalon » Wed Jul 03, 2013 2:53 pm

EJE wrote: understand the concern about my 18% allocation in company stock (also mentioned by Jim180). I am familiar with the financial planning advice about not having your income and investments tied to the same company and especially considering my wife is not working outside of the home. The counter point in my mind is the famous advice from Peter Lynch of "buy what you know" and I do feel like I know the company very well. I understand that this is not an accepted doctrine and there are horrible examples such as Enron and the like. I will also give this more thought and may take your advice and trim this back further at next opportunity.

Two points as you further consifer the company stock:

1. Keep in mind that Mr. Lynch's tenure as high performing investor and guru was only 13 years, from 1977 thru 1990 as manager of Fidelity's Magellan fund. Not a very long tenure. For long term investing think in terms of 30 - 40 years or more.

2. Most Enron employees thought they knew their company very well, enough so that some put all their 401ks in company stock. You may very well be right about the bright prospects of your own company, but the idea is to reduce the risk of being incorrect. Not saying to eliminate company stock, just reduce the exposure.
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Re: Asset Allocation Review Requested

Postby EJE » Thu Jul 04, 2013 8:22 pm

ruralavalon wrote:Welcome to the forum :) .

Here is a fairly standard view of the general investing priority (best priority plan depends on individual tax situation, quality of 401k offerings, etc.), that could help you accommodate the idea of career change/job change/early retirement while avoiding the dilemma about early withdrawals from the 401k or IRAs:

1. Company plan (401k, 403b, etc.) up to the company match. The company match is free money. Take it!
2. Roth IRA or deductible Traditional IRA up to maximum contribution limit, depending on personal circumstances and eligibility. In an IRA you can select the investments yourself; low-cost index funds that may not be available in your company plan.
3. Company plan up to maximum contribution limit. Most plans have some low-cost options. You can balance your asset allocation with your IRA.
4. Taxable Investing
This is a broad outline suitable for most (beginning) investors. If you are fortunate enough to yet have funds available for taxable investing, you may wish to learn about using tax-advantaged HSA, Coverdell, and 529 accounts.
Wiki article link: Prioritizing investments ; and umfundi's post, Savings and Investing Precedence

On item #2, if you are eligible for a Roth IRA, and it otherwise makes sense for you, using a Roth IRA builds up money you can withdraw early. "Regular Contributions can be withdrawn at any time with no tax and no penalty." Wiki article link: Roth IRA

Sometimes when the company plan (401k/403b) has only very high cost choices, its best to skip maxing the 401k or 403b (#3) and go directly to taxable investing (#4). 401k, Expensive or mediocre choices

In any event you are already doing the most important thing, that is saving aggressively. Forum thread, The Savings Rate


I hope that this helps.


Ruralavalon,
I have studied all of the links you provided and am ready now to reply to the second half of your post. Thanks again.

The prioritization of investment dollars 1 thru 4 is well aligned with what I have been doing up until now (which is why I have much less in my taxable accounts than my 401k and Roth IRAs). My concern about having most of my net worth in retirement accounts has been lessened with the new understanding that I can use IRA dollars to fund college expenses and draw money out penalty free with substantially equal payments and withdraw Roth IRA principal penalty free. So I will continue using the same prioritization for new contributions.

One thing I learned from the Wiki article http://www.bogleheads.org/wiki/Roth_versus_Traditional is that I should probably flip the priority of item #2 (Roth IRA) and #3 (max out 401(K)). Here my reasoning is that my marginal tax rate will be lower in the future and my investment choices are pretty good in my 401(k). It probably won't matter anyway since I will plan to fully fund both, but some other folks may want to consider that.
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Re: Asset Allocation Review Requested

Postby EJE » Thu Jul 04, 2013 8:29 pm

nedsaid wrote:Congratulations, you are doing well and should be giving the rest of us advice.

A few observations. Reduce your company stock if you can. This might be your 401k match and the company may not allow you to sell. 18% of your retirement in one company is too much.

Your asset allocation looks good. Start tapering your stocks down and get more bonds. If you want to retire in 4-8 years, then you need to invest more like someone who is in their late 50's. If your job is wearing you down, your idea of going into something different is a good one. So how much less aggressive to invest depends on your retirement date.

Make some realistic projections of what you need to retire on. Your probably should get your kids through college first before retiring. People often are not realistic about what it really takes. The other important issue is health insurance. If your lifestyle is relatively modest, your goals will of course be a lot easier to achieve.

Gosh, I think you are doing things right. Congratulations.


Nedsaid: Thanks for the encouraging words ! I have had a few aggressive investments that worked out well for me and accelerated the growth of my investments. But, I have already gotten a bit more conservative as I turned 40 and as my kids are getting older and closer to college and as my portfolio has grown to the point where I can start dreaming about retirement or career changes. And after recent study and the feedback you and others in this thread, I will probably move again another notch more conservative.
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Re: Asset Allocation Review Requested

Postby EJE » Thu Aug 01, 2013 11:16 pm

Just wanted to thank the Bogleheads again for contributing to this thread and this forum and the wiki. I have learned a lot in the last couple of months since I found this place.

I developed an IPS which includes a self imposed restriction on alterations of my AA (no changes greater than 5% points per category per quarter) that is intended to prevent excessive attempts at market timing. Based on this new IPS and after digesting a lot of information from this sight, I have revised my AA as below which is a notch more conservative by reducing company stock by 5% points. I also improved the tax efficiency of my portfolio significantly and opened a Vanguard account for my taxable investments (moving a portion of my taxable portfolio over from E*Trade).

Baseline Portfolio Target Allocation as of 7/1: 25% Large Cap Stock; 22% Cash & Bonds; 18% Company Stock; 12.5 Mid Cap Stock; 12.5 Small Cap Stock; 10% Foreign Stock

Revised Portfolio Target Allocation as of 8/1: 26% Large Cap Stock; 22% Cash & Bonds; 13% Company Stock; 14% Mid Cap Stock; 13% Small Cap Stock; 12% Foreign Stock

Next quarter, I'll re-evaluate again and see if I want to take another step in this direction and/or consider bumping up my cash & bond allocation a bit. Comments welcome / requested.

-EJE
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