Help With TSP and Roth IRA AA

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Help With TSP and Roth IRA AA

Postby ibis888 » Sat Jul 27, 2013 7:32 am

I'm currently a civilian federal employee, aged 33 with 15 years of government service under my belt (my time at the Naval Academy and in the military all counted towards government service). I am currently planning on staying with the government until retirement. As such, if I retire at 62, I will receive a 48% pension. If I left today, I would receive a ~15% pension (although it wouldn't be adjusted for inflation until I turn 62).

I have been maxing out a Roth IRA with Vanguard since 2002, and started contributing to the TSP about 5 years ago. I was almost 100% US stocks (VTSAX) until about 5 years ago, when I started reading up on asset allocation and shifted to the below allocation. I continue to max out the Vanguard Roth IRA, and contribute 5% of my income to TSP and receive a 5% match. This works out to a total of a little over 15% of my income per year (invested monthly) between the two accounts.

I was hoping for a critique of my asset allocation. I believe that I have a good risk tolerance, I made it through the 2008 downturn without changing anything. In fact, I have never made any attempts to time the markets... I've only moved money around a few times and that was to rebalance into my desired asset allocation.

Across the 2 accounts, I currently maintain the following allocation (with an annual rebalance on January 1st):

US Equities - 54% [Vanguard US Total Stock Market (VTSAX) and TSP C Fund & S fund. (TSP funds are split to 70% C Fund and 30% S Fund)]
REITs- 9% [Vanguard REIT Fund (VGSIX)]
International Equities - 27% [Vanguard Total International Stock (VTIAX) and TSP I fund]
Bonds- 7% [Vanguard Total US Bond (VBTLX) and TSP F fund]
G Fund - 3% [TSP G Fund]

I am planning on maintaining this allocation until I am ~45, after which I will start slowly shifting the allocation towards a more conservative allocation (I have a lot of time to figure out the best way to do that!).

I have been lately questioning my decision to weight REITs so heavily (I know they are represented in the total US market funds) and my bond/G fund allocations. My risk tolerance is high, and I have some form of a pension coming, but I'm still not entirely comfortable with having only 10% to Bonds/G funds.

I have read up on Fama/French and factor tilting, but am not convinced that it is worth the effort at this point, especially considering that I don't have access to the DFA funds without leaving Vanguard and paying an advisor.

Thanks for your help!
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Re: Help With TSP and Roth IRA AA

Postby MnD » Sat Jul 27, 2013 12:59 pm

Pairing total international with the I fund overweights large cap developed international stocks, since that's what the I fund is only composed of.
A better pairing is the I fund with Vanguards emerging markets and international small cap funds or ETF's. perhaps someone smarter than me can suggest the proper proportion of each to mimic total international.

If it was me I'd flip your allocation to bonds funds (both total bond market) and the G fund.
Given the G fund yield is actually higher than TBM and F fund yield, you are taking uncompensated interest risk by being in either TBM fund or F.
A 50-50 combination of the G fund and an investment grade corporate bond fund like VCIT will boost yields (you'll actually be paid more for taking interest and some credit risk) and will address the indexing flaws in total bond market that Jack Bogle and others have raised recently.
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Re: Help With TSP and Roth IRA AA

Postby ibis888 » Sat Jul 27, 2013 1:03 pm

Interesting points, thank you.

Would you leave the non equity percentage of the portfolio at ~50/50 G fund/Bonds forever, regardless of market conditions? (i.e. is the shift you recommend due to current market conditions, or would it apply for the long haul)?

I'll take a look at the international equity portion as well, I didn't realize how much of the I fund was large caps.
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Re: Help With TSP and Roth IRA AA

Postby MnD » Sat Jul 27, 2013 1:33 pm

ibis888 wrote:
Would you leave the non equity percentage of the portfolio at ~50/50 G fund/Bonds forever, regardless of market conditions? (i.e. is the shift you recommend due to current market conditions, or would it apply for the long haul)?

I'll take a look at the international equity portion as well, I didn't realize how much of the I fund was large caps.


Shifting would be bond market timing. That said, I'm currently hiding out 100% in G ie. market timing.
My preferred long-term fixed income AA is a mix of something like 60% G, 25% corporate int-term investment grade and 15% corporate high yield.
That's probably not for everyone and I'm not advocating it, or for bond market timing via the G fund hideaway. :mrgreen:

I fund is 100% developed nation large cap stocks (EAFE index). No int. small cap and no emerging market.
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Re: Help With TSP and Roth IRA AA

Postby M_to_the_G » Sat Jul 27, 2013 1:59 pm

I don't know your personal situation, but the amount you are saving seems low to me. If you are maxing out a ROTH IRA, then that is $5,500/year. If you are (and I am making a big assumption here) GS-14 Step 1, then your annual salary is $84,697 X 5% into TSP = $4,234.85 into TSP. That means that you are only investing $9,734.85 per year ($13,969.70 with TSP match). If you run those numbers through an IRA growth calculator--and the TSP website has one that factors in agency matches for TSP--you may be surprised at the results.

You have the option of maxing out your TSP to $17,500 per year. There are taxable accounts once you've maxed out all tax-advantaged accounts.
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Re: Help With TSP and Roth IRA AA

Postby ibis888 » Sat Jul 27, 2013 2:29 pm

Well, between the Vanguard Roth IRA and TSP (5% + 5% match=10%) I'm saving a little over 15% of my gross income, which works out to be ~$16,500 per year. You may be looking at the pay scales that don't include the cost of living adjustment.... you are correct though, I still have quite a bit of room before hitting the $17,500 cap.

There's currently ~$170,000 between the two accounts. Assuming a 5% return, and assuming that I contribute $16,500 per year (in reality, I plan on increasing this as my salary increases and Roth limits increase), 30 years from now I will have ~$1.8 million. If my retirement accounts don't earn a single dollar from the day I retire at 62, a 4% per year withdrawal rate would net $72,000 per year.

Of course, this all assumes inflation doesn't happen... I'm not sure what $72,000 will be worth in 30 years.
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Re: Help With TSP and Roth IRA AA

Postby M_to_the_G » Sat Jul 27, 2013 4:13 pm

Oh, I wasn't suggesting any urgency. You'll be fine, as you've clearly illustrated. But by not maxing out your TSP (which it sounds like you can do), you're foregoing decades of tax-free growth. I'd at least max the TSP and then call it good. Besides the tax-free growth, there's the extremely favorable expense ratio, G Fund option, etc. It's worth maxing it out if you can.
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Re: Help With TSP and Roth IRA AA

Postby ibis888 » Sat Jul 27, 2013 8:11 pm

Sound advice... I hope to increase my contributions in the near future.

I'm going to also explore alternatives to the TSP I Fund (lack of small and mid cap) and my allocation to Bonds and G fund. Good food for thought so far.. thanks for everyone's advice.
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