Lots of Cash / Portfolio Help [Military]

[jugbutle]

I have been saving for retirement now for about 7 years. I haven’t really messed with any of my investments much except for the occasional rebalancing of my TSP through the military. I wanted to see if I could get some feedback on my portfolio and what I should do with all this EXTRA CASH. My asset allocation is 85% Stocks and 15% Bonds which is right about where I want to be.

In regards to my personal situation, I am 30 years old and still plan on working for another 30 years or so. I have no debt. No plans on buying a house or any other big expenditure in the next 3-5 years. I just recently had a baby (Yah!) and will start a College Savings Plan (I'll post of this later) here shortly. I am currently deployed to Afghanistan and am participating in the Savings Deposit Program. I am currently maxing out my wife's and my Roth IRA and my TSP. We are a single income family. I work hard to pay the bills and my wife works even harder raising our 4 month old baby by herself right now.

My portfolio is the following:

ROTH IRAs: $92,000 Vanguard Tgt Date 2050 VFIFX (90% Stocks and 10% Bonds)
- 63.1% Vanguard Total Stock Mkt Index
- 27.0% Vanguard Total Int Stock Index
- 9.9% Vanguard Total Bond Index

Military TSP: $125,000
- 10% G Fund: Government Securities
- 10% F Fund: Fixed Income Index
- 30% C Fund: Common Stock Index
- 20% S Fund: Small Cap Stock Index
- 30% I Fund: International Stock Index

Savings Account: $175,000 (Earning 0.80% APR)

I don’t really know what to do with all the cash that I currently have on hand. I have a big chunk of money just sitting and earning a measly .80% APR and I feel like I should be doing something else with it. I was considering getting out of VFIFX and maybe doing some kind of slice and dice portfolio but I haven’t really taken the plunge yet. I consider myself pretty aggressive but I don’t really know what to do. Any recommendations on what to do with the cash or portfolio?? Thanks in advance!!

Semper Fi,
Justin

[NYBoglehead]

Justin,

Congrats on the baby, and it looks like your portfolio is off to a good start. I'm assuming you max out Roth IRAs for both you and your wife (if that's not the case, you definitely should). If you're not maxing out your TSP you should be doing that as well.

After that I'd go with I-bonds, and start a taxable account with TSM and TISM (I'd try to not to put bonds in taxable for tax purposes).

After that, things are largely dependent on what you want to do. You have a ton of cash right now. If you plan on buying a house in 3-5 years I think you should keep whatever you want to use as a down payment in your savings accounts. Starting a 529 for the baby is easily doable for someone in your situation with that much cash on hand, and you might get a tax deduction on your state income tax returns depending on your home of record.

You are doing awesome right now, keep up the good work. Good luck on the rest of your deployment.

[jugbutle]

NYBoglehead,

Thanks for the response. I do max out both my wife's and my ROTH IRA's and TSP every year. I'm not really familiar with I Bonds, can you buy those through Vanguard's web site? I guess I'll need to do some more research. I think I might start a taxable account with Vanguard with TSM and TISM. I've read a few other posts and I guess there is some kind of Foreign Tax Credit you can claim with TISM.

I have looked into 529 plans for Indiana. From what I have read, it looks like I can get a 20% tax credit up to $1000. I wish I would have done that for 2012 since the little one was born in September. It probably won't do me much good this year since I'll be in a tax free zone for 11 months out of the year. Thanks again

Justin

[sapocanhoto]

You can open an account at treasurydirect.gov to get I bonds. You can buy $10,000 of I bonds per year, $20,000 for you and your wife. They have some advantages like being tax free if you use the money for education, but they have some limitations like you can't cash them in for the first year after you bought them. Read up on them and decide if you want to use them, I would in your situation.

I agree with NY Boglehead, put some money in a 529 for your kid and start putting money in a taxable account, just make sure you leave enough liquid to handle any surprises in the future.

[PoeticalDeportment]

Justin,
If I were you I would have 100% of my bond exposure be through the TSP G Fund. If you were going to buy I-bonds, as someone else suggested, I would mainly do so as a better place to stash my emergency fund, not because you have a strong need for extending your tax advantaged bond exposure. The caveat being, you wouldn't be able to use I bond or EE bond purchases for one year (so it isn't really a part of your emergency fund until one year is up).

After taking emergency fund out of the $175K, I would use the rest to dollar cost average into whatever desired asset allocation you have chosen (it appears you are 90% stock in Roths and 80% stock in TSP).

For example, if you wanted to have $30,000 emergency fund, that would leave you with $145k taxable to invest. If your desired asset allocation were stocks/bonds 80/20 with 30% of your portfolio in international stock index it might look something like this:

TSP
$72,400 G fund
$52,600 C fund

Roth IRA
$92,000 (Total Stock Mkt Index plus whatever small cap tilt you want)

Taxable account
$108,600 Total Int Stock Index
$36,400 Total Stock Mkt Index

Note:
1. Bond exposure through G fund in TSP
2. International stocks in taxable account
3. Small cap stocks in Roth IRA

I think these would be useful articles for you to read:
Wiki article link: G Fund
Wiki article link: Principles of Tax-Efficient Fund Placement

[retiredjg]

Welcome to the forum and thank you for your service!

Since you have no goal for the $175k, I think you can consider investing part or all of it as part of your retirement nest egg. If you change your mind and see that you'll need the money for a house down payment or something, you can adjust then. However, you could not make an adjustment this large during a market crash. So before going this route, be sure you can do what you want if a large part of that $175k is not available for several years.

Investing it all and staying at 85/15, it would look like this:

Taxable 44.6% $175
18.6% Total Stock
26% Total International Stock

Roth IRAs 23.5% $92k
23.5% Total Stock

TSP 31.9%$125k
15% G fund and F fund
16.9% C Fund and S Fund (to make Total stock market)

However, since some of this money might be for a house (or other shorter term goal), I believe the smarter move would be to invest it all, but dial back to 70/30 or even 60/40 to account for the safer investments needed for a shorter term goal. This would still keep all of the money invested. It would grow slower than at 85/15, but probably faster than how your total is growing now.

This arrangement has two advantages.

-All of your international is in taxable where it is eligible for the foreign tax credit (see the Wiki).

-All of the international is invested in a complete fund containing all of the international market instead of just what the I Fund contains. The I Fund is missing small cap stocks and the entire emerging markets universe.

I think I Bonds are a good choice too, but you have some pretty good inflation protection if you are using the G Fund.

Regarding "investing it all", I didn't take out any for an emergency fund, but you should do that before investing what is left.

[jugbutle]

Thank you all so much for the feedback and responses. They were all very insightful and gave me the much needed encouragement to do a little more research. After looking at your suggestions and comments I have taken away the following:

- Rethink my asset allocation. Before I was only looking at my retirement portolio and did not include all my cash in savings. So what I thought was a 85% Stocks to 15% Bonds was really more like 8% Bonds, 47% Stocks, and 45% Cash.

- I never really thought about having a taxable investment account until all of you mentioned it. Thanks for enlightening me and have me look at it more holistically.

- Thanks for the tip in regards to putting all the International in the taxable to take advantage of the Foreign Tax Credit

- Never new the G Fund was so great. Thanks!

- I did a little reading on I-Bonds and I think I might include them in my portfolio

So after all of that and reading your recommendations I came up with the following:

Savings 65,000

Emergency Fund $20,000.00 (I-Bonds)

Target Asset Allocation
70% Stocks
30% Bonds

Portfolio Break Down
International Stock 25% $85,000.00
Domestic Stock 45% $153,000.00
Gov Securities 15% $51,000.00
Bonds 15% $51,000.00
TOTAL 100% $340,000.00

Taxable
$40,000.00 12% VTSAX Vanguard Total Stock Index Admiral Shares
$85,000.00 25% VTIAX Vanguard Total International Stock Index Admiral Shares

Roth IRAs
$92,000.00 27% VTSAX Vanguard Total Stock Market Index Fund Admiral

TSP
$51,000.00 15% G Fund Government Securities
$51,000.00 15% F Fund Fixed Income Securities
$10,000.00 3% C Fund Common Stock Index
$11,000.00 3% S Fund Small Cap Index


Hopefully I'm not way off base here and the things above look pretty logical. Any other suggestions or comments would be more than welcome. Thanks again!!

Semper Fi
Justin

[retiredjg]

I think the idea is excellent, but it doesn't seem to correlate with starting with $175k in taxable. Your idea adds up to $210k. Maybe there was some money on the side?

For the I Bonds - that can be your emergency fund, but that money is not available at all for the first year. So your emergency fund the first year would only be the $65k in savings. Does that work for you?

[jugbutle]

RetiredJg,

Thanks for the feedback, you probably think its a excellent idea because you pretty much made the recommendation. There is an extra 35K in the taxable because i didn't include my emergency fund in my original post and i had a little more money then what i originally thought.

I'm not to worried about not being able to touch the I-Bonds for the first year. Between the 65K in Savings and everything I'm able to save with me being deployed, I should be in pretty good shape. Expenses are pretty low with the wife moving back home to be with family for the year while i'm gone.

Semper Fi
Justin

[NYBoglehead]

I'd go with the Roth TSP in years in which you are deployed. Since you won't be paying either state or federal income taxes in the months that you are gone your effective tax rate will be very low.

[retiredjg]

Does the military have access to Roth TSP yet? If so, this is an excellent idea.

[jugbutle]

RetiredJG & NYBoglehead,

They have made a ROTH TSP available very recently. For 2013 everything is now going in my ROTH TSP instead of just the regular TSP. Do you think it makes since to convert my TSP that i currently have now over to the Roth TSP? I haven't really looked into it but I should probably do some research into the matter.

Thanks again.

Justin

[retiredjg]

Do you think it makes since to convert my TSP that i currently have now over to the Roth TSP?

I'm guessing probably not.

Just for everyone in general, when you arrive at retirement, it is a good thing to have some money that has been taxed and some that has not been taxed. Your traditional TSP money is your only bucket of money that has not yet been taxed. I don't see a need to change that myself.


When considering whether to switch your new contributions, the things you need to take into account are your tax bracket and whether you will have a pension. We don't know those things, but I would not jump on the Roth TSP bandwagon unless you expect to have a pension. If you won't have a pension, I would continue on filling the traditional TSP and the Roth IRAs.

The exception would be the years in which you are in a very low tax bracket - such as being deployed.

This article will help you understand.

http://thefinancebuff.com/most-tsp-part ... h-tsp.html

[Dandy]

Congrats on having a baby and thank you for your service to our country. You have done quite well as far as saving for the future. I don't recall you having an emergency fund, if not then you should consider one. This is expecially true for those in the military since you may not be able to deternine how long you stay in uniform and what post military jobs may be available. This may or may not apply to your situation.

I would offer a word of caution about having such a high allocation to equities -- make sure you are truely comfortable with it and remember to consider ramping it down as you grow older and as your portfolio grows. Think of the impact of a 40% drop in equities at various equity levels and ages and make sure it still fits your approach. e.g. at age 50 with 1,000,000 in equities can you tolerate a $400,000 drop in portfolio value?

If you are comfortable with your allocation, have no need for augmenting and emergency fund or funding a large purchase you can invest it based on your allocation. With your risk tolerance you should have little problem doing that in a lump sum. If that is a concern, perhaps dollar cost averaging it into your portfolio allocation over a 6 to 9 month period.

Good luck and stay safe.

[NYBoglehead]

RetiredJG & NYBoglehead,

They have made a ROTH TSP available very recently. For 2013 everything is now going in my ROTH TSP instead of just the regular TSP. Do you think it makes since to convert my TSP that i currently have now over to the Roth TSP? I haven't really looked into it but I should probably do some research into the matter.

Thanks again.

Justin

I'd keep what you've got in the Traditional TSP and make the contributions to the Roth TSP in years that you deploy, since your effective tax rate will be very low. Maxing out the Roths every year for both you and your wife combined with a mix of traditional and Roth in the TSP is going to provide you plenty of tax diversification.

Keep up the good work, you are doing absolutely awesome to this point.

[jugbutle]

Dandy,

Thank you for the congratulations on the baby and it is my honor to serve the country in the Military. In regards to your comments, they are much appreciated. I do have my emergency fund, my plan for that was to put 20K in I-Bonds (which I cannot touch for a year) and keep about 65K in my savings account. I don't really don't have too much concern for job security in regards to the military but there is a possibility of me getting out so I don't have to keep deploying and going back for a MBA and JD.

In regards to my asset allocation, I would like to say I'm 100% comfortable with a 70/30 mix but I guess you really don't know until it actually happens. In the last 8 years, I've stuck with what I planned and didn't really have any doubt.

NYBoglehead,

I'll defintely keep maximizing all Roth Contributions while i'm in a tax free zone. Once I'm out, then I'll defintely have to take a look at going back to the regular TSP. Thank you for the advice and it defintely makes sense.

Thanks again,

Justin