30s couple - need help starting a portfolio

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Topic Author
mombo
Posts: 10
Joined: Sat Dec 31, 2011 8:34 pm

30s couple - need help starting a portfolio

Post by mombo »

We are a couple in our early 30s just out of school and started making real money 4 months ago. We are also newlyweds so we're trying to consolidate our accounts if possible. We are completely new to investing/financial planning and were hoping for some advice about what to do with our new incomes. So far, we've read the Bogleheads Guide to Investing, the Bogleheads Guide to Retirement Planning, and a few other finance books but are still very new to the area so we'll welcome any advice we can get :)

About us:
- Emergency funds = 3 months of expenses
- Debt:
No credit card debt, no car loans, no mortgage (yet).
She has $58,000 is school loans at 3.25%
- Tax Filing Status: Married filing jointly. No children (yet).
- Tax Rate: 33% Federal, 9% state (Living in San Francisco, California)
Age: Him: 31, Her: 34

Desired Asset allocation: 67% stocks/33% bonds

Intl allocation: 30-40% of stocks (not sure what a good intl allocation would be - any input is welcome)

Current portfolio: ~50K

Taxable
0% cash
- Should other savings be included here? We are saving for a downpayment of approx $100K in 2012-2013. We also have an additional $50K expense coming up in 4 years. We are keeping these two expenses in savings accounts at a credit union earning 0.25% and aren't including these accounts as investable money - should we be including it here? Should we be saving it somewhere besides a savings account?

His Roth IRA at Fidelity
3% Ishares emerging markets index fund, EEM, 0.69% ER
4% Ishares S&P 400 mid-cap value index fund, IJJ, 0.27% ER
4% Ishares S&P 600 small-cap value index fund, IJS, 0.25% ER
2.5% SPDR DJ REIT, RWR, 0.25%
(We'd like it to be: 3.5%% REIT, 10% International index)

Her Roth IRA at Vanguard
42% Cash
- We're thinking of putting it into:
1) 35% Vanguard Total Stock Market Index Fund (VTSMX), 0.26% ER
2) 7% REIT. We'll try for VG REIT Index Fund Investor Shares VGSIX 0.26% ER for now. Once we have > 10K, we'll switch over to VG REIT Index Fund Admiral Shares VGSLX, 0.12% ER.

His 401k at Fidelity
11% Target retirement 2045, 0.15% ER
Company match: 4% (+ a 2% additional contribution that's not a match but is just provided by the company)
- We were thinking to change this from the target retirement date to an International index offered through his company, called "International Index Fund" (no ticker). The description is: "Seeks to approximate the risk and return characteristics of the Morgan Stanley All Country World ex-US (MSCI ACWI ex-US) Index. This Index is commonly used to represent the large and medium cap segment of the non-U.S. equity developed and emerging markets." ER 0.18%


Her 401k at Fidelity
25% Target Retirement 2040, 0.025% ER
Company Match: none
- We were thinking of changing this to 25% "FR Fixed income fund." This fund is offered by her company and doesn't have a ticker. It seems to consist entirely of "FRTC (Frank Russell Trust Company) Fixed income fund" (100% bonds), 0.3% ER.
- She also has the option of a Roth 401K - should we be considering this? We were trying to minimize our taxes now since we're in a 33% marginal tax rate but would love your advice/opinions

Her 401a at Fidelity (from an old job that just ended in 2011)
9% Cash (We are thinking of rolling this over into her Roth IRA - any other/better ideas about where to put this?)

Total of All Accounts Together (not each account individually) equals 100%

New annual Contributions planned for 2012:
$17k his 401k
$17k her 401k
$5K his backdoor Roth IRA
$5K her backdoor Roth IRA
$48K taxable investments

Both of our 401Ks have funds that are don't have tickers (it seems like these funds were created for our companies and aren't publicly traded funds) so sorry that many of the listed funds don't have tickers.

Funds available in his 401(k)
(none of these have tickers)
There is 1 index fund in each of the following categories, each index fund has an ER of 0.07%:
Large cap growth index
Large cap Index
Total Stock Market Index
Large Cap Value Index
Mid Cap Index
Small Cap Growth Index
Small Cap Index
Small Cap Value Index
Foreign Index
International Index
Emerging Markets Index

Funds available in her 401(k)
FRTC (Frank Russell Trust Company) Fixed income fund (100% bonds), (no ticker) 0.3% ER
PIMCO high-yield institutional CL (Bonds), PHIYX, 0.55% ER
Black Rock US Equity Market Fund (Large Cap), (no ticker), 0.02% ER
VG Primecap fund Admiral Shares (Large Cap), VPMAX, 0.35%
Russell Small Cap Fund, (no ticker) 0.74%
Capital Guardian International Equity Fund Class S, (no ticker) 0% (is that right?!)
Templeton International Foreign Fund, (no ticker) 0.55%
Russell Global REIT, (no ticker) 0.73%
** We can also have access to Brokerage Link if we choose to buy that service.

Starting 2012, we are hoping to continue to max out our 401Ks, and Roth IRAs, continue to pay down her student loan, continue to save for a downpayment, start investing in a non-tax-advantaged account.

Our questions are:
1. Should we be including our short-term savings (i.e. house downpayment and 50K expense in 4 years) in our current portfolio?
2. We have 3 months of emergency savings because her job is very stable (She is an MD in a very stable job position). With a very stable job, is 3 months of savings ok? Where should we keep our emergency savings - it's currently in a savings account.
3. What do you think of our suggested allocations?
4. Should we be funding her Roth 401k? We were thinking of just using the regular 401K to minimize taxes now, but are open to suggestions.
5. What should we do with her 401a? We were thinking of rolling this over into her Roth IRA so that we would have more flexibility about where to invest.
6. Does anyone use Brokerage Link? Would anyone recommend it for us?
7. We want to get rid of the target date funds in our 401Ks and change them to: her 401K (25%) would be all bonds, his 401K (11%) would be all international index fund. Any thoughts?
8. Should we prioritize getting rid of her student loan ($58K at 3.25%) before we consider purchasing a house?
9. We are thinking of starting our family soon - any recommendations on the best way for a high-income family to save for college?

Thanks in advance for any help! And Happy New Year!
Last edited by mombo on Sun Jan 01, 2012 11:01 pm, edited 1 time in total.
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ruralavalon
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Location: Illinois

Re: 30s couple - need help starting a portfolio

Post by ruralavalon »

Welcome to the forum :) .

Congratulations on being debt free, other than the $58k student loan. You are fortunate to have some nice choices in your 401ks. You have made some good choices in the books read to start your investing education. Here is a reading list if you want to go further -- http://www.bogleheads.org/readbooks.htm .
Our questions are:
1. Should we be including our short-term savings (i.e. house downpayment and 50K expense in 4 years) in our current portfolio?
No you should not include savings for shorter term goals in your retirement portfolio.
2. We have 3 months of emergency savings because her job is very stable (She is an MD in a very stable job position). With a very stable job, is 3 months of savings ok? Where should we keep our emergency savings - it's currently in a savings account.
Since you are only 4 months into your first job "making real money", I would not worry too much about the emergency fund being small. Build it up slowly over the next year, but do not neglect getting started on your tax-protected investing. Just my opinion. A savings account, very short term CDs, or short term high credit quality bond fund would be OK to hold your emergency fund.
3. What do you think of our suggested allocations?

We are a couple in our early 30s . . .

Desired Asset allocation: 67% stocks/33% bonds

Intl allocation: 50% of stocks (not sure what a good intl allocation would be - any input is welcome)
In my opinion your desired asset allocation is within the range of what is reasonable. Here is a Vanguard paper which suggests int'l equities be in the range of 20 - 40% of total equities: https://institutional.vanguard.com/iam/ ... lbrief.pdf . See also : Wiki article link: Domestic/International .
4. Should we be funding her Roth 401k? We were thinking of just using the regular 401K to minimize taxes now, but are open to suggestions.
At your combined tax rate of 42% (33% Federal, 9% state) I would think that you should maximize contributions to the regular 401k to minimize taxes.
5. What should we do with her 401a? We were thinking of rolling this over into her Roth IRA so that we would have more flexibility about where to invest.
Yes, you should move this to a rollover IRA. I am not sure of the tax consequences if you put it in a Roth.
6. Does anyone use Brokerage Link? Would anyone recommend it for us?
I used the brokerage feature of my 401k for many years, but would not suggest that for you. You have many excellent low-cost choices in your 401ks so there is no reason, in my opinion, to go to the trouble and extra expense of using the brokerage feature. And if you desire some investment in that is not available in the 401ks, you can use your IRAs or taxable account to address that.
7. We want to get rid of the target date funds in our 401Ks and change them to: her 401K (25%) would be all bonds, his 401K (11%) would be all international index fund. Any thoughts?
I would get rid of the TR funds, using them in conjunction with regular index funds only makes it harder to monitor your portfolio and keep to your desired asset allocation.


As I understand it your portfolio would look look like this (I only see 93.5%, there is some error). It would help if you could answer the questions I have posed, you can add the data to your original post using the "edit" button.

His Roth IRA at Fidelity <= I would suggest moving this Roth IRA to Vanguard for ease of management, also for easy access to Vanguard's excellent REIT and Total Int'l funds
10% REIT,
3.5% International index

Her Roth IRA at Vanguard
35% Vanguard Total Stock Market Index Fund (VTSMX), 0.26% ER <= with this amount invested you can buy lower cost Admiral shares, VTSAX er = 0.07%

His 401k,Company match: 4% (+ a 2% additional contribution that's not a match but is just provided by the company), <= who handles this 401k?
11% International index. <= what fund is this? Name? Ticker symbol? Expense ratio?

Her 401k ,Company Match: none, <= who handles this 401k?
25% FRTC Fixed income fund (100% bonds), 0.3% ER, <=Not familiar with FRTC, what fund is this? Name? Ticker symbol ?

Her 401a (from an old job that just ended in 2011)
9% Cash (We are thinking of rolling this over into her Roth IRA - any other/better ideas about where to put this?)

I like the general outlines of your plan, and like the funds selected where the funds are specifically identified, but can't really comment further without answers to the questions posed. You can add the data to your original post using the "edit" button.
8. Should we prioritize getting rid of her student loan ($58K at 3.25%) before we consider purchasing a house?
9. We are thinking of starting our family soon - any recommendations on the best way for a high-income family to save for college?
I am an old guy and never had a student loan, nor did my children, so I will defer to anyone more experienced on this. I only note that the student loan rate of 3.25% is lower than what your mortgage interest rate would be.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Default User BR
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Joined: Mon Dec 17, 2007 6:32 pm

Re: 30s couple - need help starting a portfolio

Post by Default User BR »

mombo wrote:5. What should we do with her 401a? We were thinking of rolling this over into her Roth IRA so that we would have more flexibility about where to invest.
Assuming that this is all taxable money, I would not put it in Roth. That would taxed at your full rate. Either a rollover IRA or a roll into her 401(k) would be better.


Brian
Topic Author
mombo
Posts: 10
Joined: Sat Dec 31, 2011 8:34 pm

Re: 30s couple - need help starting a portfolio

Post by mombo »

Wow, ruralavalon - thanks so much for the prompt reply! We really appreciate it! Thanks for the reading list -- that should help get us started.
In my opinion your desired asset allocation is within the range of what is reasonable. Here is a Vanguard paper which suggests int'l equities be in the range of 20 - 40% of total equities: https://institutional.vanguard.com/iam/ ... lbrief.pdf . See also : Wiki article link: Domestic/International .
Thanks forthe link - we'll read it over!
5. What should we do with her 401a? We were thinking of rolling this over into her Roth IRA so that we would have more flexibility about where to invest.
Yes, you should move this to a rollover IRA. I am not sure of the tax consequences if you put it in a Roth.
With a rollover IRA, do you know if we could then fund a backdoor Roth? Or is it not worthwhile tax-wise to aim for the Roth (is it better to just take a rollover traditional IRA?
I used the brokerage feature of my 401k for many years, but would not suggest that for you. You have many excellent low-cost choices in your 401ks so there is no reason, in my opinion, to go to the trouble and extra expense of using the brokerage feature. And if you desire some investment in that is not available in the 401ks, you can use your IRAs or taxable account to address that.
Thanks for the advice. We were hoping to avoid the extra brokerate feature and fees.
As I understand it your portfolio would look look like this (I only see 93.5%, there is some error). It would help if you could answer the questions I have posed, you can add the data to your original post using the "edit" button.
Thanks - wow, good catch! I had inadvertenly left out some of her IRA allocations. I've edited the original post so it all adds up to 100% now.
Her Roth IRA at Vanguard
35% Vanguard Total Stock Market Index Fund (VTSMX), 0.26% ER <= with this amount invested you can buy lower cost Admiral shares, VTSAX er = 0.07%
Great idea - we'll go with the admiral shares!
His 401k,Company match: 4% (+ a 2% additional contribution that's not a match but is just provided by the company), <= who handles this 401k?
11% International index. <= what fund is this? Name? Ticker symbol? Expense ratio?
I've updated the original post to show that his 401K is through Fidelity. I'm not sure if other people's employers have this, but both of our employers offer funds through our 401Ks that don't have ticker symbols and don't seem to be publicly traded funds. I suspect that these funds are set up specifically for our companies and are only offered to employees. I've updated the original post to show which funds don't have tickers and which funds do.
Her 401k ,Company Match: none, <= who handles this 401k?
25% FRTC Fixed income fund (100% bonds), 0.3% ER, <=Not familiar with FRTC, what fund is this? Name? Ticker symbol ?
This is another one of those funds where I can't find the ticker symbol. This fund is supposedly 100% FRTC Fixed income fund (which sounds like a publicly traded fund but I can't find any information about it on google). The overview for this fund says:

- Objective: Seeks to provide income by investing in debt securities.
- Strategy: Primarily invests in investment grade U.S. fixed-income securities. The fund generally holds fixed income securities issued or guaranteed by the U.S. government, mortgage-backed securities, corporate debt securities, and to a lesser extent non-US government backed securities. The fund is managed by multiple fixed-income money managers. Unit price, yield and return will vary.
- Additional Disclosures: The investment option is a collective investment trust. It is managed by Russell. This description is only intended to provide a brief overview of the fund.

Thanks again for all the great advice!
Topic Author
mombo
Posts: 10
Joined: Sat Dec 31, 2011 8:34 pm

Re: 30s couple - need help starting a portfolio

Post by mombo »

Default User BR wrote:
mombo wrote:5. What should we do with her 401a? We were thinking of rolling this over into her Roth IRA so that we would have more flexibility about where to invest.
Assuming that this is all taxable money, I would not put it in Roth. That would taxed at your full rate. Either a rollover IRA or a roll into her 401(k) would be better.


Brian
Thanks for the advice! We'll probably end up putting it into her 401K.
Default User BR
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Joined: Mon Dec 17, 2007 6:32 pm

Re: 30s couple - need help starting a portfolio

Post by Default User BR »

With a rollover IRA, do you know if we could then fund a backdoor Roth? Or is it not worthwhile tax-wise to aim for the Roth (is it better to just take a rollover traditional IRA?
A "back-door Roth" is actually short-hand for a non-deductible contribution to a traditional IRA, followed by a conversion to Roth. When conversions are made, all non-Roth IRAs are considered. So a rollover IRA containing taxable money that is in existence on 12/31 of the year of conversion, would be included in calculations.

Example: Rollover IRA with 45k (taxable), traditional IRA with 5k (non-taxable). If you converted 5k, then from a tax standpoint, the conversion would be 90% taxable regardless of which account the conversion dollars came from. This is called the pro-rata rule. This is messy and undesirable. However, money in a qualified plan like a 401(k) is not involved, even it if started out as a IRA and was rolled in.



Brian
Topic Author
mombo
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Joined: Sat Dec 31, 2011 8:34 pm

Re: 30s couple - need help starting a portfolio

Post by mombo »

Default User BR wrote:
With a rollover IRA, do you know if we could then fund a backdoor Roth? Or is it not worthwhile tax-wise to aim for the Roth (is it better to just take a rollover traditional IRA?
A "back-door Roth" is actually short-hand for a non-deductible contribution to a traditional IRA, followed by a conversion to Roth. When conversions are made, all non-Roth IRAs are considered. So a rollover IRA containing taxable money that is in existence on 12/31 of the year of conversion, would be included in calculations.

Example: Rollover IRA with 45k (taxable), traditional IRA with 5k (non-taxable). If you converted 5k, then from a tax standpoint, the conversion would be 90% taxable regardless of which account the conversion dollars came from. This is called the pro-rata rule. This is messy and undesirable. However, money in a qualified plan like a 401(k) is not involved, even it if started out as a IRA and was rolled in.



Brian
Wow, this gets complicated really quickly. It's obvious that we need to read a bit more about taxes on IRAs. We'll plan to roll her 401a into her 401K.

Thanks for all the input!
Default User BR
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Joined: Mon Dec 17, 2007 6:32 pm

Re: 30s couple - need help starting a portfolio

Post by Default User BR »

You can also leave it in the 401(a). What are the investment options there?


Brian
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ruralavalon
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Re: 30s couple - need help starting a portfolio

Post by ruralavalon »

New annual Contributions planned for 2012:
$17k his 401k
$17k her 401k
$5K his backdoor Roth IRA
$5K her backdoor Roth IRA
$48K taxable investments
Is this $48k the money you are putting aside for a down payment on a home? Or other money intended for longer term investment?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
mombo
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Joined: Sat Dec 31, 2011 8:34 pm

Re: 30s couple - need help starting a portfolio

Post by mombo »

Is this $48k the money you are putting aside for a down payment on a home? Or other money intended for longer term investment?
This extra $48k is supposed to be retirement money. We are currently keeping the down payment money separate (it's just in a savings account at the bank now) and aren't including it in the retirement AA.
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ruralavalon
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Re: 30s couple - need help starting a portfolio

Post by ruralavalon »

Desired Asset allocation: 67% stocks/33% bonds

Intl allocation: 30-40% of stocks . . . .
As mentioned before, I suggest moving his Roth IRA to Vanguard for ease of management. I think that her 403a is best rolled over into her 401k, to reduce the # of accounts to manage. I suggest using Total Int'l from Vanguard, because it includes mid/small cap int'l (which the total international fund offered in his 401k apparently does not).

Given that you are a going to add $48k/yr in taxable investing, you need to consider tax efficiency in fund placement. Vanguard's Total Stock Market and Total International are very tax efficient ( Wiki article link: Principles of Tax-Efficient Fund Placement ) so start buying those funds in the taxable account. As you do that decrease the TSM and TInt'l holdings in your tax protected accounts, increasing the amount of the bond and REIT holdings there so as to keep to your desired asset allocation.

Your 401ks have many low cost options, so there are probably several good ways to do build a portfolio. Here is one portfolio idea.

Taxable at Vanguard (currently 0%)
0%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX), er = 0.20%
0%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), 0.07%

His Roth IRA at Vanguard, formerely w/ Fidelity, (13.5%)
10%, Vanguard REIT Index Fund Admiral Shares (VGSLX), er = 0.12%
3.5%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX), er = 0.20%, <=includes mid/small cap int'l

Her Roth IRA at Vanguard (42%)
20%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX), er = 0.20%, <=includes mid/small cap int'l
22%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), er = 0.07%

His 401k at Fidelity,Company match: 4% + a 2% additional contribution that's not a match but is just provided by the company, (11%)
11%, Total Stock Market Index, er = 0.07%

Her 401k at Fidelity, incl her old 403a (34%)
34%, FRTC (Frank Russell Trust Company) Fixed income fund, intermediate term bonds, er = 0.3%

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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