40 and Finally Getting Serious (Portfolio Review)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
eltonk
Posts: 3
Joined: Tue Dec 17, 2013 11:29 pm

40 and Finally Getting Serious (Portfolio Review)

Post by eltonk »

Hi everyone,
I just found this site and it has been quite eye-opening. I just turned 40 this year, and realized I need to get serious about my investing. My goal is to retire at age 50 but I'm still working out what that entails. I currently have a good stable job with comfortable compensation and am living well within my means. I've been with Vanguard for years but have not done much rebalancing or allocation analysis. I have learned (the hard way) that investing in stocks is not one of my skills.

Here is my info:

Emergency Fund:
$30k cash
Debt
House 1, $350k @ 4.75%
House 2, $525k @ 3.625%
Student Loans, $42k @ 2.0%
Auto, $20k @ 2.5%
Tax
Married, Filing Jointly, 1 child
California
Age
me 40
wife 40
child 2
Proposed Allocation (from Vanguard tool)
40% Vanguard Total Bond Index (VBMFX)
35% Vanguard Total Stock Index (VTSMX)
15% Vanguard Total International Stock Index (VGTSX)
10% Vanguard Total International Bond Index (VTIBX)
Current Assets
IRA $162k (Vanguard index funds)
401k $50k (Spartan S&P 500 index)
Funds $124k (Vanguard index funds)
RSU $150k (vest over next 4 years)
House $600k (primary)
House $800k (rental)
House $110k (rental, in IRA)
Income
Salary $170k + 20%
Salary $40k(wife)
House $3100 rent
House $1200 rent

Questions:
1. The Vanguard recommended allocation seems overly high in bonds due to the international exposure -- am I being irrational?
2. Any advice on balancing across 3 IRA's, 2 401k's and 2 brokerage accounts?
3. Should I adjust anything due to heavy exposure to my real estate holdings?
4. How do I figure in rental income / real-estate into my retirement calculations (ie. capital vs. income)

I greatly appreciate any and all comments on my situation. Finances perplex me and I really feel I need some guidance on this next big step.

Thanks in advance!
Beantown85
Posts: 1264
Joined: Wed Oct 07, 2009 9:11 am

Re: 40 and Finally Getting Serious (Portfolio Review)

Post by Beantown85 »

eltonk wrote:Questions:
1. The Vanguard recommended allocation seems overly high in bonds due to the international exposure -- am I being irrational?
2. Any advice on balancing across 3 IRA's, 2 401k's and 2 brokerage accounts?
3. Should I adjust anything due to heavy exposure to my real estate holdings?
4. How do I figure in rental income / real-estate into my retirement calculations (ie. capital vs. income)

I greatly appreciate any and all comments on my situation. Finances perplex me and I really feel I need some guidance on this next big step.

Thanks in advance!
1. I certainly wouldn't call a 50/50 split irrational, although if you plan on retiring at 50 you may want to do some serious looking into what AA is going to support 40+ years of withdrawals. I don't think there is a correct answer in terms of US/Int'l split, but yours looks well within reason to me.

2. Look at them as one portfolio. If you have 100% of your bond holdings in the 401k, and 100% of your stock holdings in the other accounts that's percectly fine (and usually optimal given fund choices). Don't make the mistake of trying to have each account diversified according to your AA.

3. I wouldn't.

4. I would look at it as income in retirement. So if you expect to need $X a month in retirement, and you get $Y profit from RE, then you need to withdraw $(X-Y) monthly from your portfolio. I wouldn't try and convert the value of the houses into assets and include in your AA. They can't easily be rebalanced or liquidated....just look at them as income.
User avatar
hand
Posts: 2201
Joined: Sun May 17, 2009 8:42 pm

Re: 40 and Finally Getting Serious (Portfolio Review)

Post by hand »

Welcome and congratulations.

It appears that you have many of the key attributes needed to build the wealth needed for a comfortable retirement: 1) strong income, 2) ability to live below your means, 3) ability to save, 4) recognition that stockpicking is a loser's game for you (as it is for most people).

That being said, your post jumped out at me as your situation (age/assets/income) is not too dissimilar from my own, and the aspiration to retire at 50 seems on the aggressive side unless you are living on well less than $100k/ yr today.

Apologies for not answering your questions directly, but here's how I would approach (most of this is motherhood and apple pie from the Wiki).

I would suggest working backwards:

1) Determine your monthly expenses now and expected monthly expenses in retirement (in today's dollars, don't forget college!)
2) Look into safe withdrawal rates (I would use 4% max for a 30 year retirement, lower for a longer retirement)
3) Determine what level of assets would be required to safely retired
4) Put together a plan of savings per year and number of years that will get you to the amount of savings needed to retire at a specific age.
5) Put together a low cost asset allocation that makes sense for your age/risk tolerance / years to retirement (your proposed asset allocation confuses me as it appears to ignore the rental properties and be more bond heavy than I would expect.)

A couple of other notes:
1) Assuming you are maxing your retirement accounts, look into a "Backdoor Roth IRA"
2) Showing rental revenue as income is misleading for readers, and possibly also yourself. Income is monthly rent less expenses (including interest and allowances for vacancies and large one-time expenses)
3) Emergency fund looks low considering 3 houses, and one primary income. From experience, job stability and rental occupancy both go down when the economy goes south.
Topic Author
eltonk
Posts: 3
Joined: Tue Dec 17, 2013 11:29 pm

Re: 40 and Finally Getting Serious (Portfolio Review)

Post by eltonk »

Thanks for the insightful replies! Definitely some more homework for me. Based on this (and some more reading) I'm going to adjust to a 60/40 portfolio split, and work with a withdrawal rate of 3.5% for my calculations.

I doubt I'll actually be able to retire at 50, but it's my starting point for planning. Even if I could switch to part-time/contract work at that age I'd consider it a win. I imagine my wife would work longer because she actually loves her job.

@hand:
Excellent note re: emergency funds and houses. At some point I'll likely sell the one rental with a mortgage and use the equity to buy 2+ houses in a cheaper location with equivalent income. At least if I own it outright there is no foreclosure risk.

The proposed AA was created using Vanguard's tool as a starting point. How would I roll the real-estate into my AA considerations?

More questions:
5. Does withdrawal rate remain constant over the retirement years, or tick upwards as your, um, timeframe decreases?
6. When calculating expenses, how do I factor in taxes given the mish-mash of deferred and non-deferred accounts?
7. Does anyone recommend the use of sector ETF's to increase diversification?
User avatar
hand
Posts: 2201
Joined: Sun May 17, 2009 8:42 pm

Re: 40 and Finally Getting Serious (Portfolio Review)

Post by hand »

eltonk wrote: More questions:
5. Does withdrawal rate remain constant over the retirement years, or tick upwards as your, um, timeframe decreases?
6. When calculating expenses, how do I factor in taxes given the mish-mash of deferred and non-deferred accounts?
7. Does anyone recommend the use of sector ETF's to increase diversification?
Regarding #6, recognize there are a ton of unknowns and it is impossible to accurately model. My personal approach is to simplify as much as possible and add a conservative margin of error to my calculations. For me this means assume current expenses (which include plenty of wants) & avg. tax rate less mortgage and retirement savings. Healthcare is a big question mark, but hopefully somewhat offset by assumption of high taxes given that in retirement my income (& hopefully avg tax rate) will be lower and some "income" will be from tax advantaged sources (Roth, long term capital gains).

To some extent the assumptions you make and the nuances of the calculation are immaterial right now. It is unlikely you make enough to maximize your current lifestyle spending (on wants), save for college for your kid and save enough to retire significantly early. On the positive side, you are unlikely to be in the catfood for retirement camp.

For this reason any reasonable calculation you do will tell the same story - maximize savings into retirement accounts, choose a reasonable and low cost asset allocation, and revisit in several years. The more you save each year the earlier you can retire / the more you'll have in retirement.

Worth noting, is that retiring early can pose challenges accessing your retirement accounts. If you are committed to this path, you should research further.
Topic Author
eltonk
Posts: 3
Joined: Tue Dec 17, 2013 11:29 pm

Re: 40 and Finally Getting Serious (Portfolio Review)

Post by eltonk »

Thanks again for your reply. Now the planning begins...
Post Reply