26 yr old pension / 401 rollover

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amythius
Posts: 27
Joined: Wed Jun 06, 2012 9:31 am

26 yr old pension / 401 rollover

Post by amythius »

Hello,

I am currently 26, married to a 27 year old, we both work and contribute to savings plans:

Him:
1) Company 401k 3% match on 3%, current contribution 9% {Fidelity -- high Expense Ratios, 2040 Target}
2) 5k Roth Annualy (sitting in money market)
3) Company Pension (Pay Based Credit)

Her:
1) Company 403b, no match, 4% currently, plan on 8-12% within 3 months
2) 5k Roth Annually (sitting in money market)
3) Company Pension (average pay based formula [Health industry])

I have recently taken a new job. This leaves me with two pieces of 'straggling' retirement vehicles:
1) A company 401k, roughly 22k, sitting in a target retirement fund at Hewitt
2) A company vested pension, roughly 11k, which can be Lump Sum Offered only through this year in October


I am really struggling with putting the 401k rollover into my work Fidelity account. I do not like the high expense ratios there compared to vanguard. Should I open my own IRA at Vanguard and pick my own funds / AA? Should I drop down my work contributions to 3% for minimum to get their match, then contribute the rest that I desire to my own IRA if I were to open one.

I would like to rollover the pension into my Roth IRA and pay the taxes at the end of the year. Yes I understand the liability, but due to so many bonuses this year I am just using those amounts to pay this. I really want to bloat my ROTH as much as possible. I guess another option would be to roll this pension into a 401k or my own personal IRA, but not as preferred.

Any great advice is appreciated. I am still just learning and trying to figure out which funds to pick to build my own AA in my ROTH and my own investments. I traditionally picked Windsor II in my Roth when the time is right (contrary to my new Boglehead approach I am trying to adopt). Any help with picking a good portfolio for all of the above vehicles is greatly appreciated.

Thanks
Valuethinker
Posts: 49038
Joined: Fri May 11, 2007 11:07 am

Re: 26 yr old pension / 401 rollover

Post by Valuethinker »

At your age, given the small amount, it is probably worth taking the pension lump sum.

If you can do your own 401k with Vanguard, I would. Picking funds is easy: 3 fund model (Total Bond, Total Stock, Total international + Prime MMF for asset allocation etc.**).

It all boils down to taxable location: if you are going to have significant bonds, it needs to be tax sheltered.

Otherwise you just dump it into 2/3rds Total Stock Market, 1/3rd Total International* and basically sit on it and ignore it, certain that in 35 years it will be worth a lot more than it is now (nothing is certain in life, of course, but the odds are the 10 year bear market (we might be halfway through a 20 year one) will be followed by some dramatic collapse (when Madagascar invades Iran and the world sisel market collapses in panic) and then very good returns.

If I look at my father's portfolio I see that pattern, stocks bought in the 60s and 70s that were dogs (some went bust) and then in the 80s and 90s became worth a lot of money.

I can't really advise you (non USian) on location etc. etc. for Roth etc.

Just establish the general principle that you do not need to be afraid of having a Vanguard account, and asset allocation can be dead simple, and the 3 (4) fund model is easy to implement and will give excellent confidence that you have passed the '80% test' in life (ie that you've got 80% of the right answer and the best answer will only be known in retrospect-- you are making decisions 'ex ante' (forecasting the future) about an outcome that will be 'ex post' (after the fact)).

* strictly speaking 45% US/ 55% international would be the current global split. I don't think it will make a huge difference to your long run outcome.

** in the land of bells and whistles half your bond allocation would be in TIPS-- a 5th fund. But TIPS looking spectacularly unimpressive right now unless you can individually invest in the very long maturity ones, which even then don't look great value. So just leave it.
bdpb
Posts: 1622
Joined: Wed Jun 06, 2007 3:14 pm

Re: 26 yr old pension / 401 rollover

Post by bdpb »

What are your federal and state marginal tax rates?
What funds and their ER are available in 401k and 403b?

Assuming 25%/5% tax rates, I would:

Roll the old 401k to an IRA at Vanguard.
Roll the old pension to a separate (may not be necessary, but may retain some rights, I'm not sure) IRA at Vanguard.
Contribute to the 401k/403b to get the company match.
If eligible for deductible IRA, contribute 5k each to deductible IRA.
Contribute the max to the 401k/403b with acceptable costs.
If haven't contributed to deductible IRA, contribute 5k each to Roth.

The order of deductible IRA/401k/403b vs Roth contributions may change based on your tax rates.

At these assumed tax rates, I would not convert any IRAs to Roth. The bonuses may increase your marginal tax
rates this year which would make doing it this year even worse.

Choose an AA (stock/bond ratio) that you can live with realizing stocks can go down by half or more very quickly.
I would choose somewhere between 80/20 and 60/40. Initially, this won't matter much because your new contributions
will be a large part of your portfolio. Use a three fund portfolio, Total US stocks, Total International stocks, Total US bonds.
Fill up each asset class starting with your lowest cost funds in your 401k and 403b. Use the flexible Vanguard IRAs
to complete the AA.

Here is an illustration:

AA 80/20 (30% Intl) for a three fund split of 56% US, 24% Intl, 20% bonds.
Assume Total US is 70% SP500 and 30% mid/small (extended) caps.
So, US SP500/Extended portions about 40/16.

40% SP500
16% US mid/small
24% Total Intl
20% Total bond

His 401k:
20% SP500

Her 403b:
20% SP500

His IRA
16% US mid/small
24% Total Intl

Her IRA
20% Total bond
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