Older and Wiser - Allocation Advice After Rookie Mistake

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Topic Author
glst0rm
Posts: 5
Joined: Tue Apr 01, 2014 11:27 pm

Older and Wiser - Allocation Advice After Rookie Mistake

Post by glst0rm »

Thank you so much for offering your feedback and guidance. I’ve been a long time reader and this is my first post. I’ve had good retirement savings habits for the past 15 years but have just now decided to get smart about my allocation and finding good low-cost funds.

I foolishly tried to time the market in March 2013 and moved my retirement funds to cash equivalent. It was a rookie move and I missed a the 12% run-up in late 2013. I’ve decided to chalk that up to ignorance and I’ve used the lesson to educate myself and adopt the Boglehead way.

My main questions are below and revolve around ideal portfolio allocation across my company 401k plan and two Vanguard IRA plans.

——————————
- Emergency funds: Have $8k and will have $20k (six months) saved by summer
- Debt: Debt free except the house. $170k mortgage, 15 years @ 2.875 (13 years remain). House is worth $215k.
- Tax Filing Status: Married Filing Jointly
- Tax Rate: 25% Federal, 7.5% State
- State of Residence: WI
- Age: 33 and 29
- Desired Asset allocation: 75% stocks / 25% bonds (looking for suggestions)
- Desired International allocation: (unsure right now, looking or suggestions)

Current retirement assets

His 401k at The Standard: $77k (in cash equivalent awaiting allocation)
His Roth 401k at The Standard: $23k (in cash equivalent awaiting allocation)
Company match: 4%

Available funds (available to both traditional and Roth 401k plans)

FMDCX - Federated Mid Cap Index Svc (0.56)
GSMCX - Goldman Sachs Md Cp Val Inst (0.74)
GSSIX - Goldman Sachs Sm Cp Val Inst (0.98)
HAINX - Harbor International Inst (0.74)
JMGRX - Janus Enterprise I (0.74)
PRFDX - T.Rowe Price Equity-Income (0.68)
PRGFX - T.Rowe Price Growth Stock (0.7)
RPBAX - T.Rowe Price Balanced (0.65)
SICWX - Sentinel Common Stock I (0.75)
UMBWX - Scout International (1.02)
VBTLX - Vanguard Total Bond Market Index Adm (0.08)
VFIAX - Vanguard 500 Index Admiral (0.05)
VSGAX - Vanguard Sm Cap Grth Idx Adm (0.1)

His IRA at Vanguard
$14k - in cash equivalent awaiting allocation

Her IRA at Vanguard
$9k - in cash equivalent awaiting allocation

Total of All Accounts Together: $123k

New annual Contributions
$4,600 his 401k + $4,600 employer match
$5,500 his IRA/Roth IRA
$5,500 her IRA/Roth IRA
——————————

Questions:

1. What is my ideal fund allocations within 401k plan? The low cost Vanguard index funds are good choices but I’d like a little advice on the rest.

2. What allocation within the Vanguard funds at his / hers IRA is recommended?

3. I’m a little gun shy to jump back in and allocate all at once. Should I be? Should I just go ahead and allocate immediately?

4. Should I make new 401k contributions to my Roth or Traditional 401k? I like the idea of tax free growth but when I read advice touting the Roth 401k it’s usually aimed at people in lower tax brackets.

5. Should I make new IRA contributions or forego the tax deduction and contribute to new Roth IRAs?

Thanks again for your time and assistance.
Last edited by glst0rm on Wed Apr 02, 2014 11:26 am, edited 1 time in total.
Johm221122
Posts: 6394
Joined: Fri May 13, 2011 6:27 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by Johm221122 »

Welcome to forum,
1.Use three Vanguard funds(500 index, small cap growth index, bond index)

http://www.bogleheads.org/wiki/Three-fund_portfolio
2.total international index
3.pick AA you are comfortable with and jump right in

http://www.bogleheads.org/wiki/Dollar_cost_averaging
From WIKI
"
According to an investopedia article, [6] studies indicate that lump sum investing has produced higher returns 66% of the time."


4.Definitely more traditional and even cut Roth IRA.Don't pay 25% in taxes
5.Max 401 then Roth IRA

John
jimkinny
Posts: 1856
Joined: Sun Mar 14, 2010 1:51 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by jimkinny »

In your 401 options you have vanguard's 500 and small cap index funds. Consider the allocation to each suggested in this link to approximate a total stock market index:
http://www.bogleheads.org/wiki/Approxim ... ock_market

jim
Stan Dup
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Joined: Fri May 10, 2013 10:25 am

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by Stan Dup »

glst0rm wrote: 1. What is my ideal fund allocations within 401k plan? The low cost Vanguard index funds are good choices but I’d like a little advice on the rest.
You are lucky to have good low cost funds that you can use
75% stocks:
83% VFIAX - Vanguard 500 Index Admiral (0.05)
17% VSGAX - Vanguard Sm Cap Grth Idx Adm (0.1)
25% bonds:
VBTLX - Vanguard Total Bond Market Index Adm (0.08)

Your international choices are not the best. Use your other accounts for this.

http://www.bogleheads.org/wiki/How_to_b ... _portfolio
glst0rm wrote: 2. What allocation within the Vanguard funds at his / hers IRA is recommended?
Treat all your accounts as one big pie. Allocate funds where they are most efficient. This is simpler and lower cost. Read this: http://www.bogleheads.org/wiki/Asset_Al ... e_Accounts
glst0rm wrote: 4. Should I make new 401k contributions to my Roth or Traditional 401k? I like the idea of tax free growth but when I read advice touting the Roth 401k it’s usually aimed at people in lower tax brackets.
Get the 401k matching funds, then fill up the Roth, then fill up the remainder of the 401k.
glst0rm wrote: 5. Should I make new IRA contributions or forego the tax deduction and contribute to new Roth IRAs?
See above
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti
Johm221122
Posts: 6394
Joined: Fri May 13, 2011 6:27 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by Johm221122 »

roth vs traditiona ira site:bogleheads.org is my ideal fund allocations within 401k plan? The low cost Vanguard index funds are good choices but I’d like a little advice on the rest.[/quote]

You are lucky to have good low cost funds that you can use
75% stocks:
83% VFIAX - Vanguard 500 Index Admiral (0.05)
17% VSGAX - Vanguard Sm Cap Grth Idx Adm (0.1)
25% bonds:
VBTLX - Vanguard Total Bond Market Index Adm (0.08)

Your international choices are not the best. Use your other accounts for this.

http://www.bogleheads.org/wiki/How_to_b ... _portfolio
glst0rm wrote: 2. What allocation within the Vanguard funds at his / hers IRA is recommended?
Treat all your accounts as one big pie. Allocate funds where they are most efficient. This is simpler and lower cost. Read this: http://www.bogleheads.org/wiki/Asset_Al ... e_Accounts
glst0rm wrote: 4. Should I make new 401k contributions to my Roth or Traditional 401k? I like the idea of tax free growth but when I read advice touting the Roth 401k it’s usually aimed at people in lower tax brackets.
Get the 401k matching funds, then fill up the Roth, then fill up the remainder of the 401k.
glst0rm wrote:
5. Should I make new IRA contributions or forego the tax deduction and contribute to new Roth IRAs?
See above[/quote]
Roth IRA vs traditional IRA

http://www.bogleheads.org/wiki/Traditional_versus_Roth

" Most retirees have the same or lower marginal tax rate than when they were working, and thus should prefer a traditional account to a Roth if the options are comparable."

John
Twins Fan
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Joined: Fri Mar 08, 2013 12:02 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by Twins Fan »

I'm a little confused with what is going on now for the his/her IRAs at Vanguard. The way I read it, those are Traditional IRAs and you wonder if you should start Roth IRAs there?

It seems you might be doing 6 of one, half dozen of the other... as in, not contributing more to your traditional 401k so you can contribute to the Trad. IRAs for the tax deduction, and then contributing to the Roth 401k to add into that bucket. Do you get the full traditional deduction being in the 25% bracket and having a 401k available? I don't know I'd have to look it up. When you could contribute more to the Traditional 401k, deferring more of your payroll taxes, and lowering your tax liability that way, and then have Roth IRAs at Vanguard to fill that bucket.

I don't know which is better. Explain more on all that and we'll see what others say.
Topic Author
glst0rm
Posts: 5
Joined: Tue Apr 01, 2014 11:27 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by glst0rm »

Thanks everyone for your responses.

Addressing TwinsFan's questions:

The his/her Vanguard Traditional IRAs contain funds transferred there from old IRAs from various jobs that didn't offer 401K plans. We haven't contributed much to them but are considering fully funding them going forward.

You make a good point about getting the full traditional deduction. My wife does get the full deduction being a freelancer / work-at-home mom. I don't believe I would get the full deduction so that would affect where I put new funds.

My clarified questions on Roth versus Traditional 401k and IRA would be:

- In my tax bracket should I be contributing to my Roth 401k or stick with the traditional 401K?
- Should I put new money toward new his / her Roth IRAs or stick with traditional
dailybagel
Posts: 553
Joined: Tue Feb 15, 2011 7:35 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by dailybagel »

You can find a lot of information on Roth vs traditional on the forums. What made the most sense to me was an article by "The Finance Buff" which argues that, with our progressive income tax, traditional has a strong advantage.
http://thefinancebuff.com/case-against-roth-401k.html

The optimal choice could be different for each individual, depending on circumstances, of course. As an example, if you expected to retire with a very large income through some windfall inheritance, then the advice might not apply.

So, to give you some quick advice, based on your current tax rate, I'd suggest traditional 401(k) investing.

As for the IRA, which will likely have smaller balances and receive smaller contributions each year, I think either Roth or traditional is okay. I personally use a Roth IRA for tax diversification, but most retirement savings goes into the traditional 401(k) plan for me.
DVMResident
Posts: 1814
Joined: Mon Aug 01, 2011 8:15 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by DVMResident »

Johm221122 wrote: Get the 401k matching funds, then fill up the Roth, then fill up the remainder of the 401k.
With a marginal rate of 25% + 7.5% and solid 401(k) options, why should the OP pass up the tax savings with a ROTH?
It seems like a traditional 401(k) is the way to go.
Johm221122
Posts: 6394
Joined: Fri May 13, 2011 6:27 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by Johm221122 »

DVMResident wrote:
Johm221122 wrote: Get the 401k matching funds, then fill up the Roth, then fill up the remainder of the 401k.
With a marginal rate of 25% + 7.5% and solid 401(k) options, why should the OP pass up the tax savings with a ROTH?
It seems like a traditional 401(k) is the way to go.
You quoted wrong person, I clearly told OP to max 401
Johm221122 wrote:
4.Definitely more traditional and even cut Roth IRA.Don't pay 25% in taxes
5.Max 401 then Roth IRA

John
You quoted Stan Dup, who I told to check WIKI

John
Mountain Man
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Joined: Sun Mar 09, 2014 8:34 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by Mountain Man »

Out of curiousity: What made you move to cash in 2013?
Topic Author
glst0rm
Posts: 5
Joined: Tue Apr 01, 2014 11:27 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by glst0rm »

Mountain Man wrote:Out of curiousity: What made you move to cash in 2013?
To be honest I watched some people I respected go to cash back in 2007 before the crash and had it in my head to go to cash when I perceived the top of the bull market. Combine that with listening to online scuttlebutt about the market topping out in 2013 caused me to make a rash move.

Emotional move.
Topic Author
glst0rm
Posts: 5
Joined: Tue Apr 01, 2014 11:27 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by glst0rm »

I just wanted to follow up and say thanks to everyone for the advice. I believe I've settled on the following portfolio (across all accounts). Any comments before I lock it in?

- 44% VFIAX Vanguard 500 Index Admiral (0.05)
- 9% VSGAX Vanguard Sm Cap Grth Idx Adm (0.1)
- 21% VGTSX Vanguard Total International Stock Index Fund (0.22%)
- 25% VBTLX Vanguard Total Bond Market Index Adm (0.08)

I appreciate all the help and look forward to giving back over the coming years. :D
Twins Fan
Posts: 2775
Joined: Fri Mar 08, 2013 12:02 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by Twins Fan »

Looks good to me!

My own feelings, I wouldn't bother with the 9% small cap growth index. That's not going to do much in the way of under or over performing the S&P 500. Savings rate is more important now than a 9%'er being added in there. Just me though...
kerplunk
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Joined: Sun Apr 17, 2011 9:58 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by kerplunk »

In this case, I would have to agree with Twins Fan: No need for a "small-cap growth" fund.
Topic Author
glst0rm
Posts: 5
Joined: Tue Apr 01, 2014 11:27 pm

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by glst0rm »

Is it ok to hold just US large equities with VFIAX Vanguard 500 Index Admiral? I'm concerned that I don't have enough US market coverage. I wish I had access to a Vanguard total US market index fund in my 401k.
dickenjb
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Location: Philadelphia PA

Re: Older and Wiser - Allocation Advice After Rookie Mistake

Post by dickenjb »

glst0rm wrote:Is it ok to hold just US large equities with VFIAX Vanguard 500 Index Admiral? I'm concerned that I don't have enough US market coverage. I wish I had access to a Vanguard total US market index fund in my 401k.
Six of one, half a dozen of the other. I personally would add the SC to the mix.

But as the great Taylor Larimore often says, "When experts disagree, it is often because it does not matter".

The argument over S&P500 vs Total Stock is one of those cases.

Your proposed portfolio is excellent. As is one that relies entirely on S&P500 for domestic stock.

Only flaw I see is it only adds up to 99%.
- 44% VFIAX Vanguard 500 Index Admiral (0.05)
- 9% VSGAX Vanguard Sm Cap Grth Idx Adm (0.1)
- 21% VGTSX Vanguard Total International Stock Index Fund (0.22%)
- 25% VBTLX Vanguard Total Bond Market Index Adm (0.08)
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