Portfolio advice

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Portfolio advice

Postby On the way » Sat Aug 31, 2013 3:48 pm

First time post, long time lurker.

I have just made the change of lowering my 401k contribution to fully fund my ROTH. I based this decision looking at federal taxes on social security, thinking that I might be able to reduce the amount of social security subjected to tax at retirement. I ran this by a Vanguard CFP and he thought it was a good idea.

Emergency funds: Three months
Debt: $146,000 mortgage @5.25%.
Tax Filing Status: Married Filing Jointly
Tax Rate: 15% marginal Federal, 3.04% State
State of Residence: PA
Age: 56
Planned retirement age 67
Desired Asset allocation: 70% stocks / 30% bonds - moving this way with small rebalancing and future contributions
Desired International allocation: 10-15% of stocks
Pension @65 $13,800/yr

Current retirement assets

Total in all accounts high 6 figures


401k

9% Vanguard Retirement Savings Trust Fund – VRSTF – 0.51%
5% Vanguard Total International Stock Index Fund – VGTSX - 0.22%
12% Vanguard Extended Market Index Fund – VEXMX – 0.28%
18% Vanguard Instutional Index Fund – VINIX – 0.04%
14% Vanguard Primecap Fund – VPMCX - 0.45%
40% Vanguard Wellington Fund – VWELX – 0.25%

Roth IRA at Vanguard
< 1% Vanguard Short Term Investment Grade Bond Fund - VFSTX – 0.20%

H.S.A
< 1% PIMCO Low Duration Fund Institutional Class – PTLDX – 0.46%


Contributions

New annual Contributions
$33,000 401k
$6,500 Roth IRA
$2,400 H.S.A. over max out of pocket in health care plan.
Paying an additional 400/month over P&I on mortgage


Funds available in 401(k)

Vanguard Prime Money Mkt Fund – VMMXX – 0.16%
Vanguard STerm Inf Pro Sec Idx Adm – VTPAX – 0.10%
Vanguard Total Bond Mkt Idx Signal – VBTSX – 0.10%
Vanguard Explorer Fund Investor – VEXPX – 0.51%
Vanguard Growth Index Fund Inv – VIGRX – 0.24%
Vanguard Value Index Fund Inv – VIVAX – 0.24%
Vanguard Emerging Mkts Stk Idx Sig – VERSX – 0.18%
Vanguard International Growth Inv - VWIGX – 0.49%


Questions:

1. Was it a good move to lower the 401K and fully fund the Roth?
2. Opinions on my current allocations and fund choices.
Last edited by On the way on Sat Aug 31, 2013 10:43 pm, edited 1 time in total.
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Re: Portfolio advice

Postby JW Nearly Retired » Sat Aug 31, 2013 9:28 pm

On the way wrote: I have just made the change of lowering my 401k contribution to fully fund my ROTH. I based this decision looking at federal taxes on social security, thinking that I might be able to reduce the amount of social security subjected to tax at retirement. I ran this by a Vanguard CFP and he thought it was a good idea.
Age: 56
Planned retirement age 67
Desired Asset allocation: 70% stocks / 30% bonds - moving this way with small rebalancing and future contributions
Desired International allocation: 10-15% of stocks

Total in all accounts high 6 figures
New annual Contributions
$33,000 401k
$6,500 Roth IRA
$2,400 H.S.A. over max out of pocket in health care plan.

Since you have next to nothing in the Roth now, funding that would be my choice too.

However, I didn't run the numbers, but it is hard to see that you won't be forever in the 85% of SS taxed group. After 11 more years of contributions and growth, the 401k is going to be something like a $1.5M to $2M size. If so, RMDs will surely put you at 85% of SS taxed.

Won't they?
JW
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Re: Portfolio advice

Postby Duckie » Sat Aug 31, 2013 10:13 pm

On the way, you want an AA of 70% stocks, 30% bonds (low), with 10-15% of stocks in international (low). I'll pick 15% but I think it should be higher. That breaks down to 49% US stocks, 21% international stocks, and 30% bonds. Here is a possible retirement portfolio:

His 401k -- 98%
39% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.04%)
10% (VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) Roughly 80% large caps (Institutional Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market.
19% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)
30% (VBTSX) Vanguard Total Bond Market Index Fund Signal Shares (0.10%)

His Roth IRA at Vanguard -- 1%
1% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)

Her Roth IRA at Vanguard -- 1%
1
% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)

My comments/questions:
  • It's a good idea to fund not only His Roth IRA but to fund Her Roth IRA. Once you get to $10K in the accounts you can buy cheaper admiral shares in both Total Stock and Total International.
  • At your age I think you should have at least 40% bonds.
  • Is the HSA being used for current medical costs or are all costs paid out of pocket and the HSA is being saved for retirement? See here.
  • You wrote: "Desired Asset allocation: 70% stocks / 30% bonds - moving this way with small rebalancing and future contributions"
    These are all tax-sheltered accounts. There's no reason to wait to get your AA, especially when going more conservative. Just shift stuff.
  • Vanguard has found that between 20% and 40% of stocks in international to be the "sweet spot". See the discussion and the Vanguard paper link. Vanguard splits the difference and uses 30% in their Target Retirement and LifeStrategy funds. 15% is low.
Something to think about.
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Re: Portfolio advice

Postby On the way » Sat Aug 31, 2013 10:15 pm

Thanks JW

That's what I am afraid of at this point. I am a little late to the party in looking at retirement taxes, makes me question what else I am missing. However, with the change I am contributing only 13% of income to the 401k the rest is contributed by my company. With 11 years to go I can possibly look at a 401k to IRA to Roth conversion after 59 1/2. I could also delay ss for a couple of years and draw down the 401K.
Last edited by On the way on Sat Aug 31, 2013 11:40 pm, edited 1 time in total.
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Re: Portfolio advice

Postby On the way » Sat Aug 31, 2013 11:39 pm

Duckie wrote:On the way, you want an AA of 70% stocks, 30% bonds (low), with 10-15% of stocks in international (low). I'll pick 15% but I think it should be higher. That breaks down to 49% US stocks, 21% international stocks, and 30% bonds. Here is a possible retirement portfolio:

His 401k -- 98%
39% (VINIX) Vanguard Institutional Index Fund Institutional Shares (0.04%)
10% (VEXMX) Vanguard Extended Market Index Fund Investor Shares (0.28%) Roughly 80% large caps (Institutional Index) plus 20% mid/small caps (Extended Market) makes up the total US stock market.
19% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)
30% (VBTSX) Vanguard Total Bond Market Index Fund Signal Shares (0.10%)

His Roth IRA at Vanguard -- 1%
1% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)

Her Roth IRA at Vanguard -- 1%
1
% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)

My comments/questions:
  • It's a good idea to fund not only His Roth IRA but to fund Her Roth IRA. Once you get to $10K in the accounts you can buy cheaper admiral shares in both Total Stock and Total International.
  • At your age I think you should have at least 40% bonds.
  • Is the HSA being used for current medical costs or are all costs paid out of pocket and the HSA is being saved for retirement? See here.
  • You wrote: "Desired Asset allocation: 70% stocks / 30% bonds - moving this way with small rebalancing and future contributions"
    These are all tax-sheltered accounts. There's no reason to wait to get your AA, especially when going more conservative. Just shift stuff.
  • Vanguard has found that between 20% and 40% of stocks in international to be the "sweet spot". See the discussion and the Vanguard paper link. Vanguard splits the difference and uses 30% in their Target Retirement and LifeStrategy funds. 15% is low.
Something to think about.



Thanks Duckie,

I forgot to mention my pension at 65 of $13,800/yr (edited orginal post). Would you lower your bond requirement based on this?
My wife is not employed so I do not think she qualifies for a roth.
The HSA is funded at $7,450, with $5,000 going to current medical expenses.
The gradual move started in 2006 from about 85/15 stock/bond ratio to the current 75/25, mostly with new contributions, but in 2012 I started to move money in the small increments. I just felt more comfortable moving slowly.
I count the stable value fund as part of the bond allocation. Is this correct?
Would you count the mortgage prepayment towards the bond allocation? (added on Sunday morning)
I know some of my existing funds contain international stocks. Does this contribute to the total international allocation?
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Re: Portfolio advice

Postby On the way » Sun Sep 01, 2013 12:30 pm

Taking this a step further. Is there any logic in further reducing my 401K contribution and directing this to prepaying the mortgage? Contributions to the 401k would then be $25,000/yr and the mortgage prepayment would increase from $400/mo to $950/mo.
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Re: Portfolio advice

Postby BL » Sun Sep 01, 2013 1:21 pm

My wife is not employed so I do not think she qualifies for a roth.


She would qualify for a spousal Roth.
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Re: Portfolio advice

Postby On the way » Sun Sep 01, 2013 2:31 pm

Thanks BL.

This is why I like this site so much. I was unaware of a spousal IRA. I am going to try to set this up by the end of the year (need to save the minimum to open an account).
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Re: Portfolio advice

Postby Duckie » Sun Sep 01, 2013 7:01 pm

On the way wrote:I forgot to mention my pension at 65 of $13,800/yr (edited orginal post). Would you lower your bond requirement based on this?

It's not a requirement, it's a suggestion, but no. Some people think of a pension as a (potential) bond which means they feel they can take more risks and therefore hold fewer actual bonds. Some think of it as a reliable income stream which means they have less need for risk and therefore hold fewer stocks. I've always thought of my pension as an income stream which lessens my need to pull money from my other retirement assets, but it doesn't affect my AA either way. In your case it's a future benefit but right now you can't use it for rebalancing or anything else.

My wife is not employed so I do not think she qualifies for a roth.

I am going to try to set this up by the end of the year (need to save the minimum to open an account).

She qualifies for a "Spousal IRA" either Roth or traditional. See here. (This publication was for 2012 so the limit is $5,500 now.) If you use a Target Retirement fund the minimum is only $1,000. It'll do for a start. (If you choose a TR fund pick by the AA inside, not the date in the title.)

The HSA is funded at $7,450, with $5,000 going to current medical expenses.

Given that, I'm not going to consider the HSA part of the retirement portfolio. Is the PIMCO fund the best/cheapest bond/stable value option in the HSA?

The gradual move started in 2006 from about 85/15 stock/bond ratio to the current 75/25, mostly with new contributions, but in 2012 I started to move money in the small increments. I just felt more comfortable moving slowly.

Well, I can understand comfort level. But don't drag it out too long. You're pretty low on fixed income for your age. That's a little risky.

I count the stable value fund as part of the bond allocation. Is this correct?

I assume you mean the Retirement Savings Trust. It is part of the fixed income allocation which includes bonds, so basically yes. But 0.51% is a high e.r. when TBM is only 0.10%.

Would you count the mortgage prepayment towards the bond allocation?

No. Paying debt is not the same as buying or not buying bonds. They are two totally separate things.

I know some of my existing funds contain international stocks. Does this contribute to the total international allocation?

Per Morningstar (and I don't know how accurate that is) Primecap has about 12% international and Wellington has about 10%. Yes they do add to the international, but they're managed funds with mixed assets (US stocks, international stocks, bonds). Using them makes it harder to keep your AA straight and harder to rebalance. They're also a little more expensive than the index funds.
Last edited by Duckie on Mon Sep 02, 2013 8:16 pm, edited 1 time in total.
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Re: Portfolio advice

Postby On the way » Sun Sep 01, 2013 8:27 pm

Thanks again Duckie,

I was never a fan of Target Retirement funds, but with that low minimum, I can open a spousal Roth and exchange once the contributions add up the $3000 minimum for other funds. This is great.

For the HSA the Pimco fund is the best for short term funds. I am considering the Pimco portion as retirement since it holds my excess contributions over my max out of pocket. Current medical expenses are held in the savings account portion of the HSA.

Yes Retirement Savings Trust is a stable value fund. Agreed at 0.51% the ER is high and since I have moved more into it over the last year and a half it's beginning to be a concern.

Agreed again with the expense for VPMCX. Comfort level again, I started to invest in this fund in the mid 90's before I knew enough to look at ER's. Same with Wellingtion. I am an avid buy and hold investor. It takes a lot for me to make a change. That being said, looking at your suggestions and the lower overall ER, this is definatley something I need to consider.
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