Help a beginner

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Topic Author
Maglib11
Posts: 5
Joined: Wed Jul 23, 2014 3:34 pm

Help a beginner

Post by Maglib11 »

Hi,

Do you have any suggestions for this situation?

Washington State public school employee. 45 years old.

In 2014:
1. Just set up and funded a Roth IRA for the first time: $5424.00. Vanguard Lifecycle 2035 fund. It's through Charles Schwab.

2. Just set up a 403b. I had the option to use Vanguard and went with it. I will contribute $17,500.00 per year. Plus August-Dec of this year.

3. $4,500.00 sitting in Schwab, waiting for me to decide what to do.

4. $53,000.00 in a savings/checking account--2 years of living expenses including mortgage. $10,700.00 in a Mutual Fund account I was talked into by my bank last winter. School Employees TRS III retirement plan (15 years). $73,000.00 plus pension.


My questions:
I need to figure out what to invest in through my Vanguard 403b. I believe I qualify for some super-low expense index funds (.09 or something). I could choose a Lifecycle fund. Or I could do a high bond Lifecycle fund like 2015, plus the super-low-expense index fund. I am not at a level that I would feel comfortable trying to balance more than a few funds.

Any ideas of a good investment for my taxable Schwab account that has $4500.00 sitting in it? Should my taxable account have bonds rather than stocks?
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ruralavalon
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Location: Illinois

Re: Help a beginner

Post by ruralavalon »

Welcome to the forum :)

Its great to see that you are making the maximum contributions to your retirement accounts. You are fortunate to have Vanguard as an option in your 403b.

Maglib11 wrote:My questions:
I need to figure out what to invest in through my Vanguard 403b. I believe I qualify for some super-low expense index funds (.09 or something). I could choose a Lifecycle fund. Or I could do a high bond Lifecycle fund like 2015, plus the super-low-expense index fund. I am not at a level that I would feel comfortable trying to balance more than a few funds.

Any ideas of a good investment for my taxable Schwab account that has $4500.00 sitting in it? Should my taxable account have bonds rather than stocks?
We will need more information, like this: "Asking Portfolio Questions". Please just amend your original post using the "edit" button, so that all of your information is in one place.

Please be sure to give the choices (fund names, tickers & expense ratios) offered in the 403b.

In general its not a good idea to hold bonds in a taxable account, so a stock index fund is likely to be better there.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Duckie
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Re: Help a beginner

Post by Duckie »

Maglib11 wrote:Just set up and funded a Roth IRA for the first time: $5424.00. Vanguard Lifecycle 2035 fund. It's through Charles Schwab.
Why not add the extra $76 to make it an even $5500 contribution? Why Schwab? The Vanguard Target Retirement 2035 Fund at Schwab will cost you a transaction fee to purchase. It doesn't at Vanguard.
Just set up a 403b. I had the option to use Vanguard and went with it. I will contribute $17,500.00 per year. Plus August-Dec of this year.
List the options in the plan. We need the names, ticker symbols if available, and most important the expense ratios. Costs matter. You could push as much as possible into the 403b this year and use the $4500 at Schwab and some of your savings to live on.
$4,500.00 sitting in Schwab, waiting for me to decide what to do.
You have a mortgage. What is the interest rate? Do you have any other debt?
$53,000.00 in a savings/checking account--2 years of living expenses including mortgage.
Two years is a lot. Do you really need that much?
$10,700.00 in a Mutual Fund account I was talked into by my bank last winter.
Is this a taxable account? What fund is it? Do you have a gain or loss right now? What would it cost tax-wise to sell it?
I need to figure out what to invest in through my Vanguard 403b.
It partly depends on your options in the plan. It also depends on what you hold or could hold elsewhere. The 403b and the Roth IRA are for retirement. The savings/checking accounts are not. What about the bank mutual fund and the money at Schwab? What are they for?
Should my taxable account have bonds rather than stocks?
Bonds do not belong in a taxable account for retirement purposes unless you have no room in tax-sheltered and you have room.
bcjb
Posts: 453
Joined: Wed Aug 21, 2013 7:01 pm

Re: Help a beginner

Post by bcjb »

Since you say you probably won't want to have more than a few funds (and I agree wholeheartedly; it's good to keep things simple!), the Three Fund Portfolio might be perfect for you: http://www.bogleheads.org/wiki/Three-fund_portfolio . Alternatively, Lifecycle / Target Retirement funds (which have a mix of domestic equities, international equities, and bonds) are also good, except perhaps in a taxable account, because it's best not to hold bonds there for tax reasons.

Before you repost/modify your question along the lines of the "Asking Portfolio Questions" link posted by ruralavalon, you may want to read this: http://www.bogleheads.org/wiki/Asset_allocation
Topic Author
Maglib11
Posts: 5
Joined: Wed Jul 23, 2014 3:34 pm

Re: Help a beginner

Post by Maglib11 »

Thanks, all, for your responses.

Below is my attempt at the Portfolio Questions survey:
Emergency funds: Yes for two years of expenses.
Debt: Mortgage only. $260,000 at 3.5%. I pay $400.00 per month extra on principal.
Tax Filing Status: Single
Tax Rate: 25% Federal; no state income tax
State of Residence: WA
Age: 45
Desired Asset allocation: 75% stocks / 25% bonds. I think.
Desired International allocation: ?% of stocks

Please provide a hint as to the size of your current total portfolio:
Taxable:
Mutual Funds: SABPX Sam Balanced (1.36 % expense ratio) $10,741.00
Chevron stock: $3,500.00 (childhood gift, never touched, thought of only at tax time)
$4,500.00 in Schwab Money Market waiting to be invested.

Retirement/Tax advantaged
92% Washington State TRS Plan3 (WSIB). I’m not sure of the expense ratio. I have $63,000.00 currently.
There is also a pension component to TRS3. I believe I will receive 1/3 of my three highest years of pay, averaged.

Roth IRA at Schwab
8% Vanguard 2035 Lifecycle Fund (VTTHX) (.18%)

403b
Contribution begins 8/2014.

Contributions
Annual Contributions
$3,817.00 WA State Retirement Plan TRS3 (WSIB)
$17,500.00 403b (no matching) No fund chosen
$5,424 Roth IRA (VTTHX)

As far as my investment options for Vanguard 403b custodial mutual funds, the link offered goes here:
https://investor.vanguard.com/mutual-fu ... tclass=all

It appears I could purchase any on that page, which seems to be almost everything they have.

My apologies in advance if I have overlooked anything.
Topic Author
Maglib11
Posts: 5
Joined: Wed Jul 23, 2014 3:34 pm

Re: Help a beginner

Post by Maglib11 »

Investment percentages:
4% Chevron (taxable)
5% Money market
12% SABPX Sam balanced Mutual fund (taxable)
6% Roth IRA VTTHX Vanguard Lifecycle (tax advantaged)
72% WSIB WA State Retirement plan WSIB TAP (tax advantaged)

Duckie asks:
Concerning my savings/checking<<Two years is a lot. Do you really need that much?...You could push as much as possible into the 403b this year and use the $4500 at Schwab and some of your savings to live on.>>
I was going to do that, and had even decided on an amount. But I chickened out. But you are right and I will revisit this idea.

Concerning the Sam balanced mutual fund <<Is this a taxable account? What fund is it? Do you have a gain or loss right now? What would it cost tax-wise to sell it?>>
I invested $10,000.00 with an added $550.00 load fee in November 2013. It is taxable. In June 2014, the total was $10,741.96. It has a 1.38 expense ratio. I am open to opinions as to whether this is a good investment, or if there would be better options.

<<What about the bank mutual fund and the money at Schwab? What are they for?>>
The bank mutual fund was a result of my banker telling me that I needed to get some of my money out of savings and into investments. It was an uninformed decision made before I read "The Coffeehouse Investor" three months ago, which explained index funds. So, I had no plan whatsoever for that money, except that it would make more money than if I left it in savings, and I was $10,000.00 over my safety-blanket goal of $50,000.00 in savings. Plus, I could go into the bank without being afraid she would corner me! The money in Schwab was for a "non-retirement" investment of some kind.
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in_reality
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Joined: Fri Jul 12, 2013 6:13 am

Re: Help a beginner

Post by in_reality »

Maglib11 wrote:Investment percentages:
4% Chevron (taxable)
5% Money market
12% SABPX Sam balanced Mutual fund (taxable)
6% Roth IRA VTTHX Vanguard Lifecycle (tax advantaged)
72% WSIB WA State Retirement plan WSIB TAP (tax advantaged)
Schwab does have a number of really good low cost ETFs. (SCHB total market 0.04%ER, SCHF int large cap 0.08%ER, SCHC int small cap bond 0.14%ER, total bond, tips, REITS etc.) http://www.schwab.com/public/schwab/inv ... index_etfs It's difficult to suggest anything without knowing your AA (asset allocation). Vanguard ETFs are available for $8.95.
Maglib11 wrote: Concerning the Sam balanced mutual fund <<Is this a taxable account? What fund is it? Do you have a gain or loss right now? What would it cost tax-wise to sell it?>>
I invested $10,000.00 with an added $550.00 load fee in November 2013. It is taxable. In June 2014, the total was $10,741.96. It has a 1.38 expense ratio. I am open to opinions as to whether this is a good investment, or if there would be better options.
Well, you have 10,550 in basis so about $242 to pay capital gains on if you sold. You are paying about $125 per year to hold it over what you'd pay to put it into more cost efficient index funds. So you'll recover your taxes within a year. I think the load is lost anyway. I doubt the fund would outperform index funds (kinda tough to compare as it's a mix of stocks, international stocks and bonds), so I would sell.

How is the WSIB WA State Retirement plan invested? I want to figure out your current AA if you sold SABPX to know where to put the 403b contribution and Schwab money.

Are you figuring the TRS3 pension as part of your bonds?
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Duckie
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Joined: Thu Mar 08, 2007 1:55 pm

Re: Help a beginner

Post by Duckie »

Maglib11, you're single, age 45, and with not a lot in retirement assets but you do expect to have a pension. I'm going to recommend an AA of 65% stocks, 35% bonds, with 30% of stocks in international. That breaks down to 45% US stocks, 20% international stocks, and 35% bonds. If you really can hold any of the options in the 403b link then here is a possible retirement portfolio as of the end of the year:

Taxable at Vanguard -- $15K -- 15%
10% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%)
5
% (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%)

403b at Vanguard -- $15K -- 15%
0% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.05%) <-- For future use.
0% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.14%) <-- For future use.
15% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.08%)

Washington State TRS Plan (WSIB) -- $63K -- 64% <--Roughly 78% stocks and 22% bonds.
50% US & international stocks
14% US & international bonds

Roth IRA at Vanguard -- $5.5K -- 6%
6% (VBMFX) Vanguard Total Bond Market Index Fund Investor Shares (0.20%)

My comments/questions:
  • Check your 403b plan. The expense ratios I listed are for retail. Your plan costs may differ.
  • I looked up the Washington State TRS Plan and see you chose the WSIB TAP option. This appears to be roughly 78% stocks and 22% bonds. You'll have to overweight bonds in the other accounts to make up for this.
  • This has TISM in taxable to take advantage of the 
Foreign tax credit.
  • Sell the $10.5K mutual fund at your bank and move the cash to Vanguard. You'll have a small taxable gain but it's worth the move.
  • Sell the Chevron stock. You don't need it. This will probably be a bigger tax hit.
  • Move the $4.5K in cash from Schwab to Vanguard.
  • Roll the Roth IRA to Vanguard.
  • The pension portion of the Washington State TRS Plan while an asset is not part of the retirement portfolio. You have no control over it and cannot use it for rebalancing. When you retire it will be an income stream like social security. Do you pay into social security?
  • Once you have a taxable account for retirement purposes using a balanced fund is not optimum. Use the individual funds.
  • If you can get the taxable account up to $20K you could have both funds with cheaper admiral shares.
Topic Author
Maglib11
Posts: 5
Joined: Wed Jul 23, 2014 3:34 pm

Re: Help a beginner

Post by Maglib11 »

I just wanted to thank you for the additional advice. I am spending some time reading through it to make sure I understand.

Duckie, I have two paycheck deductions listed as Fed OASDI/EE and Fed Med/EE which I understand to be Social Security payments.
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Duckie
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Joined: Thu Mar 08, 2007 1:55 pm

Re: Help a beginner

Post by Duckie »

Maglib11 wrote:I have two paycheck deductions listed as Fed OASDI/EE and Fed Med/EE which I understand to be Social Security payments.
Fed OASDI/EE stands for Old Age Survivors and Disability Insurance Employee share. This is Social Security. Fed MED/EE stands for Federal Medicare/Employer-Employee. This is Medicare. So yes, you are covered.
Maglib12
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Joined: Sat Apr 11, 2015 6:03 pm

Re: Help a beginner

Post by Maglib12 »

Okay. I have done most of the recommended steps above. This year, I am on target to contribute to my 403b the full allowable amount plus some extra due to some sort of make-up clause. This is all going into the Vanguard funds suggested above. I will fund my ROTH this month.

After that, I am in the position of having about $24,000 still in savings. I also have not sold the $11,000 SAM Mutual Fund yet. It has a 1.33 expense ratio. Too high, I know.

I have another tax deferred opportunity through my employer: a government 457b. By living off some of my savings and/or proceeds from selling the mutual fund, I could push money into the 457b this summer. I do not know how much I should reserve in my savings account as emergency funds.

Eliminating the lifecyle-type funds, 457b investment options are:
Washington State Bond Fund
– Socially Responsible Balanced Fund
– U.S. Large Cap Equity Index Fund (S&P)
– Global Equity Index Fund
– U.S. Small Cap Value Equity Index Fund (Russell 2000)
– Emerging Market Equity Index Fund
https://washington.gwrs.com/link.do;jse ... nvestments

I heard the Bond fund is not a great choice, due to the quality of the bonds. Small cap, large cap, emerging and global equity are all BlackRock. As I understand, these are "collective trust" investments and that's why they have no tickers.

There is an either/or element to this decision: either I will use the cash reserves and mutual fund proceeds to fund a 457b this summer, or I will use them to fully fund my 403b next year. Without supplementing my income with savings, I can only afford to fund my 403b about $13,000 per year.

Advice?
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