Boglehead trainee has questions!

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Topic Author
jjordan
Posts: 9
Joined: Thu Jul 31, 2008 4:25 pm

Boglehead trainee has questions!

Post by jjordan »

Hi All,

I’ve been studying the forum a lot the last 2-3 months and hope I’m ready to overhaul my portfolio. I’m 45 years old, widowed as of Jan ’07, putting one child thru college and saving for the other’ child’s education. Currently able to invest 17% of my income into my 401k with a 2.5% company match. Here’s my current situation:


Emergency funds = 6 months living expenses in CDs and MMA at Corus Bank.

Debt: Mortgage - $88K @ 5.25% fixed rate, 9 yrs remaining
Home Equity - $33K @ 6.5% variable rate
Car loan - $13K @ 2.9% fixed rate, 2 yrs remaining

Tax Filing Status: Qualifying widower with Dependent Children, one currently in college and one 4 yr old.

Tax Rate: 15% Federal 7% State North Carolina

Age: 45

Desired Asset allocation: 70/30

Intl allocation: 25-30% of stocks

Current portfolio – low to mid 6 figures

Taxable
55.28% cash (life insurance proceeds from my wife’s death)

His traditional IRA
2.25% Local Credit Union (expense ratio unknown)

His traditional IRA
1.70% Alliance Growth Fund Class B (AGBBX) (2.23%)

His 401k
7.73% Fidelity Magellan (FMAGX) (.72%)
4.47% MainStay ICAP Equity CL I (ICAEX) (.88%)
8.10% Hotchkis and Wiley Mid-Cap Value Fund Class I (HWMIX) (1.02%)
10.27% American Funds® EuroPacific Growth Fund® Class R5 (RERFX) (.55%)
10.13% BlackRock International Value Fund Class I (MAIVX) (.98%)
.08% T. Rowe Price Real Estate (TRREX) (.74%)
Company Match 2.5%

New annual Contributions
$15,500 his 401k (plus matching contributions)

Funds available in his 401(k)
Fidelity Magellan (FMAGX) (.72%)
Harbor Cap Appreciation Instl CL (HACAX) (.67%)
MainStay ICAP Equity CL I (ICAEX) (.88%)
Spartan U.S. Equity Index Fund - Investor Class (FUSEX) (.10%)
Van Kampen Comstock CL A (ACSTX) (.78%)
Fidelity Low-Priced Stock Fund (FLPSX) (.99%)
Hotchkis and Wiley Mid-Cap Value Fund Class I (HWMIX) (1.02%)
American Beacon Sml Cap Val PlanAhd CL (AVPAX) (1.06%)
Managers Special Equity Inv CL (MGSEX) (1.51%)
American Funds® EuroPacific Growth Fund® Class R5 (RERFX) (.55%)
BlackRock International Value Fund Class I (MAIVX) (.98%)
T. Rowe Price Real Estate (TRREX) (.74%)
Fidelity Balanced Fund (FBALX) (.60%)
Fidelity Freedom 2000 Fund (FFFBX) (.51%)
Fidelity Freedom 2005 Fund (FFFVX) (.64%)
Fidelity Freedom 2010 Fund (FFFCX) (.65%)
Fidelity Freedom 2015 Fund (FFVFX) (.67%)
Fidelity Freedom 2020 Fund (FFFDX) (.72%)
Fidelity Freedom 2025 Fund (FFTWX) (.73%)
Fidelity Freedom 2030 Fund (FFFEX) (.76%)
Fidelity Freedom 2035 Fund (FFTHX) (.77%)
Fidelity Freedom 2040 Fund (FFFFX) (.78%)
Fidelity Freedom 2045 Fund (FFFGX) (.78%)
Fidelity Freedom 2050 Fund (FFFHX) (.80%)
Fidelity Freedom Income Fund (FFFAX) (.49%)
Vanguard Short-Term Federal Fund Admiral Shares (VSGDX) (.10%)
Vanguard Total Bond Mrkt Index Inv CL (VBMFX) (.19%)
Vanguard Total Bond Market Index Fund SignalTM (VBTSX) (.10%)
Fidelity Money Market Trust Retirement Money Market Portfolio (FRTXX) (.40%)

Questions:

1. I inherited the two IRA’s from my wife’s estate. I want to convert them to a single Roth account. Fund recommendations?

2. My daughter’s college savings, 13k, currently sits in a money market account earning 2.5%. This account will be drained over the next 1.5 – 2 years. Any investments I can get a better rate and still have easy access? I’m considering a MMA at Corus Bank earning 3.78%.

3. What would be a good Roth account to open for my daughter? She earned only $700 last year but should have at least $2500 income this year.

4. My son's college savings is currently invested in the North Carolina 529 plan, with Vanguard. It seemed to be the best deal for me because of the tax breaks. Is that still true?

This is a great forum and I'm excited about finally making some investment decisions. Thanks in advance for your help!
SamLJ
Posts: 233
Joined: Sun Feb 10, 2008 11:06 pm

Post by SamLJ »

Welcome to the forum jjordan, and sorry to hear about the loss of your wife.

You have some good options in your 401k so you can set up a nice low cost portfolio.

Here's a suggested portfolio:

Taxable totals 55.28%
19.82% FTSE All-World Ex-US (VFWIX)
35.46% Total Stock Market Index (VTSMX)

IRAs -> Vanguard totals 3.95%
3.95% Vanguard REIT Index (VGSIX)

401k totals 40.77%
30% Vanguard Total Bond Market Index Fund SignalTM (VBTSX) (I think this is your best bond fund but I can't find the details quickly to hand on your institutional level options)
10.77% Spartan U.S. Equity Index Fund - Investor Class (FUSEX)


My main piece of advice is that you should be investing in a Roth IRA - you can do this by shifting money in your taxable portfolio over to a Roth IRA. In the Roth IRA you will want to house the Vanguard REIT Index and Total International Stock Index (VGTSX) (good in a tax preferred account over the FTSE All-World fund).

If you could post how much the 2.5% match comes to then one can work out the new contributions (including money converted from taxable to a Roth) fairly easily.

To address some of your other questions, I would move the college money for your daughter into a 529 plan if it isn't in one. At the worst you can use a very conservative allocation in the 529 plan and not get taxed on the income over the next year or two.

Your daughter could open a Roth at Vanguard and start investing in a target retirement fund.

Hope this helps,
Sam

Edit - forgot to mention, you may want to consider paying down that HELOC with some of the taxable money to start with.
SamLJ
Posts: 233
Joined: Sun Feb 10, 2008 11:06 pm

Post by SamLJ »

I missed you said that 17% = $15500 so the 2.5% match is ~$2280 for a total of $17780 per year of new money plus a conversion $5000 per year from taxable to Roth.

New contributions

401k
$5334 Vanguard Total Bond Market Index Fund SignalTM (VBTSX)
$12446 Spartan U.S. Equity Index Fund - Investor Class (FUSEX)

To Roth IRA from taxable
Exchange $5000 from Total Stock Market Index and put $3524 in Total International Index and the rest in Vanguard REIT Index.

This will increase your asset allocation to the REIT Index (I think 5% is a good number for your long term allocation).

Sam
Topic Author
jjordan
Posts: 9
Joined: Thu Jul 31, 2008 4:25 pm

Post by jjordan »

Hi Sam, thanks for the quick response and kind condolences. Here are some followup questions - I apologize in advance if they seem basic!

Taxable
I had considered paying down the home equity loan some or all to reduce/eliminate the monthly payment, but was unsure since I can currently deduct the interest on my return. Still straddling the fence on this decision.

IRAs
Split funds between VGTSX and VGSIX. Currently all new contributions are going into 401k. Think I'll switch to the advice offered here to contribute to 401k up to the company match, contribute to Roth until maxed out and then contribute back into 401k.

401k
Convert current contributions to VBTSX and FUSEX. This option stunned me at first because my 401k is down 42% YTD and I hate to switch with fund prices near the bottom (I hope!). But I see how this option helps my overall allocation.

College Savings
I like the idea of moving my daughter's college savings into a 529 and will be checking into that. Hopefully I can set it up exactly like the 529 plan already in place for my younger son.

Roth for Daughter
Any advantages time wise as to when the Roth is opened for my daughter, or for myself? She may prefer to open hers after year end. I had considered Vanguard Star for her account but also like the idea of a target retirement fund.
SamLJ
Posts: 233
Joined: Sun Feb 10, 2008 11:06 pm

Post by SamLJ »

Hi again jjordan,

Regarding the Roth IRA, then because you have such a large taxable account you can afford to max out your 401k and max out your Roth IRA (the idea here is to protect as much of your money as possible from taxes). For instance, you could immediately invest $5000 in a Roth IRA for yourself (from the taxable money), and just continue with monthly contributions to your 401k. I hope this makes sense.

Don't worry about switching a large chunk of your 401k to a bond fund. Your 70/30 allocation calls for bonds and they need to be held in tax protected accounts. There are very tax efficient stock funds that you can hold in your taxable account.

Regarding the Roth IRAs, you can open them anytime before April 5th to contribute for 2008. You could average your money in every month or just lump sum it in straight away.

Hope this helps,
Sam
Topic Author
jjordan
Posts: 9
Joined: Thu Jul 31, 2008 4:25 pm

Post by jjordan »

Can I convert my two existing traditional IRAs into a single Roth, and also contribute $5000 taxable to it for 2008?
SamLJ wrote: Regarding the Roth IRAs, you can open them anytime before April 5th to contribute for 2008. You could average your money in every month or just lump sum it in straight away.
Laura
Posts: 7975
Joined: Mon Feb 19, 2007 6:40 pm

Conversions

Post by Laura »

jjordan,

Roth conversions and contributions are not related so you can do a conversion and make a $5k contribution in the same year. Your income must be below $100k in order to convert to a roth. Doing it now is probably a good idea since they will have lost value and tax rates are low.

SamLJ has given you good advice on the roth and 401k. You are correct that the normal rule of thumb for investing priority is:

1. 401k to the match (you are doing this)
2. Max out roth
3. Max out 401k
4. Taxable investing

You have done 1, 3, and 4 but skipped step 2. By taking $5k of your taxable money and putting it in a roth you can continue to max out your 401k and you end up by doing steps 1, 2, and 3. This is a better long term strategy. You can put $5k into the roth now and another $5k in January. These funds can go in the same roth from the conversion of the two IRAs you inherited.

On the 529 for your daughter you don't want to use the same allocation you have for your son. The time frames are very different so you would want to select a money market or bond fund for your daughter while you son should have a much more broadly diversified portfolio.

A roth for your daughter is a great move but remember you can only use earned income from this year for a contribution. This means that her $700 in earnings from last year can no longer be contributed to a roth. She can open a roth with Vanguard using the $2500 from this year and invest in the Star fund ($1k minimum). If you has more earned income next year she can add $500 then switch to one of the Target Retirement funds at that time.

I hope this all makes sense.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.
Topic Author
jjordan
Posts: 9
Joined: Thu Jul 31, 2008 4:25 pm

Post by jjordan »

Thanks again Laura and SamLJ! I really appreciate this forum. I've been very skeptical of some of the commission based advice I've been given by others!
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