Porfolio Check Up: FI Planning and Newborn

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Topic Author
DoctorPhysics
Posts: 171
Joined: Sun Jun 07, 2015 12:50 pm

Porfolio Check Up: FI Planning and Newborn

Post by DoctorPhysics »

Updated with life insurance info.

Hello Fellow Bogleheads,

Wife and I are expecting a newborn in ~ 5 months so I wanted to get a little portfolio/planning check up. My questions revolve around a) FI at 55, and b) ensuring wife/child are covered in case something happens to me. Here is our background info:

Age: DH 38, DW 34
Emergency funds: Three to six months of expenses.
Debt: Only debt is 20 year mortgage ~ 2.75% at $360k remaining.
Tax Filing Status: Married Filing Jointly, will file with dependent for 2021 taxes
Tax Rate: 24% Federal, 9.3% State
State of Residence: CA
Target Asset allocation: 90% stocks / 10% bonds/cash
Target International allocation: 30% of stocks

Porfolio Holdings:

His 401k
34.31% Fidelity FIAM Index Target Date 2050 Commingled Pool Class T, Expense Ratio 0.07%
Other options are available via brokerage link.

His Roth
9.01% Fidelity Freedom Index 2045 Fund - Investor Class FIOFX, Expense Ratio 0.120%
1.58% Fidelity Total Market Index Fund FZROX, Expense Ratio 0.000% (new money goes here)

Her Roth
1.11% Fidelity Total Market Index Fund FZROX, Expense Ratio 0.000% (new money goes here)
0.45% Fidelity International Index Fund FZILX, Expense Ratio 0.000% (new money goes here)
1.79% Fidelity Oxford Street Trust: Fidelity Four-In-One Index Fund FFNOX, Expense Ratio 0.110%

His HSA
0.81% Fidelity Total Market Index Fund FZROX, Expense Ratio 0.000% (new money goes here)
2.15% Fidelity Oxford Street Trust: Fidelity Four-In-One Index Fund FFNOX, Expense Ratio 0.110%
0.49% FDIC INSURED DEPOSIT, NOT COVERED BY SIPC QP***, Expense Ratio 0.000%

His Taxable
11.21% iShares Core S&P Total U.S. Stock Market ETF ITOT, Expense Ratio 0.030% (new money goes here)
19.92% Fidelity Total Market Index Fund FSKAX, Expense Ratio 0.015%
3.50% iShares Core MSCI Total International Stock ETF IXUS, Expense Ratio 0.090% (new money goes here)
3.78% Fidelity Total International Index Fund FTIHX, Expense Ratio 0.060%
3.64% Fidelity Global ex U.S. Index Fund FSGGX, Expense Ratio 0.055%
3.88% Fidelity Hereford Street Trust Spartan US Government Money Market SPAXX, Expense Ratio 0.200% (confirm fee reduced?)

Overall asset allocation:
Domestic Stock - 61.7%
International - 29.0%
Bond/Munis - 5.1%
Cash - 4.3%

New Annual Contributions:
FYI - I've indicated where new money goes for balancing above.
His 401k - Maxed + company match greater of: 50% of first $8k or 50% of first 5% eligible compensation contributed then 25% of next 5% of compensation contributed, with true-up.
His/Her Roth - Maxed
His HSA - Maxed
Taxable - ESPP + annual bonus, usually on order of mid-5 figures.

Portfolio Size: ~roughly 1M
Net Worth: ~roughly 1.5M with home equity

His Life Insurance: ~3x salary, through employer
His AD&D Insurance: ~2x salary, through employer

Notes:
1. Taxable is set aside for retirement goal. I am using ETFS in taxable now despite slightly higher expense ratio for portability and tax efficiency.
2. We have umbrella insurance for 1M.
3. Savings rate is roughly 45% of net after tax.
4. If it helps - annual income is low/mid 6 figures, DW does not work.
5. Cash a little high - however, will deploy for kitchen update this year.

Questions:

1. 401k is a commingled fund - prospectus indicates some mixture of active/index funds but very low expense ratio, any issues or thoughts with this?

2. 401k has option for after tax Roth, should I take advantage of this? Would this limit my ability to fund wife's spousal Roth?

3. Taxable - we convert ESPP contributions to balance the asset allocations. However, at this point (finally!) it represents ~2% of total portfolio as opposed to when I first started my career. I am inclined to let it run given strong industry outlooks. Thoughts?

4. Umbrella insurance - should it track net worth? e.g. should I go for higher coverage at 2M?

5. No (living/revocable) trust in place, is this essential now? Particularly with newborn on the way? What else should we consider?

6. Primary residence is in my name - what should I consider to ensure wife and child are taken care of in case something happens to me?

7. I've read plenty of posts here on funding 529s, it's highly likely that at my income/asset level we will not qualify for aid. I am leaning towards NOT funding a 529 (at least for the first 5 years) in order to give us maximum flexibility in reaching FI at ~55 years old. If financial circumstances change or I am convinced later that it would save some taxes, then we could superfund a 529 when child gets older. Thoughts?

8. We want to target FI/early retirement around 55 (~17 years from now, target ~5M in assets), my estimate with NPER formula with assumption of ~6.83% annual return (https://dqydj.com/sp-500-return-calculator/) along with current saving and spending rate to reach ~5M says we can reach in 14 years. Overall ROI is actually closer to 15% so it could happen sooner. With current contribution rate and possible addition of 2nd child, along with implications of funding college education for both childs, is this realistic? I am aware of the 20 year mortgage and may refininace again to 15 year or 10 year, or even lump sum pay off as date gets closer.

Anyways, thats all I have for now. Thanks for reading to the end. Your thoughts and insight are welcome.
Last edited by DoctorPhysics on Sun May 09, 2021 8:11 pm, edited 1 time in total.
User avatar
FiveK
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Re: Porfolio Check Up: FI Planning and Newborn

Post by FiveK »

1. Don't know if you have any "obviously better" choice but that one doesn't seem unreasonable.

2a. Yes.
2b. No.

3. Even if you lost all of that 2% you would be ok, so if you think it will outperform the market then have at it.Taxable - we convert ESPP contributions

4. Maybe some fraction (less than 1) of net worth. The specific fraction is related to your ability to sleep at night.

5. Not under current tax law.

6. Transfer deed to joint (you and wife). A will with instructions for care of your child if something happens to you and your wife.

7. The oxygen mask analogy seems apt: see "Why #8" in Investment Order.

8. The math is the math. Whether the future real return will match the past, ...?

-------------

"Keep up the good work!" is the short version of the above. :)
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RickBoglehead
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Re: Porfolio Check Up: FI Planning and Newborn

Post by RickBoglehead »

You need a term life insurance policy.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
humblecoder
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Re: Porfolio Check Up: FI Planning and Newborn

Post by humblecoder »

I am putting this comment at the top of my reply. If you read nothing else, please read it.

You didn't mention anything about life insurance in your post which I am surprised by, to be perfectly blunt. If you don't have any term life insurance, buy some. NOW! That is several orders of magnitude more important than any of the other items that you have asked about. You say that you want to make sure that your family is taken care of if something happens to you, so this is the #1 thing that you can do in order to do that. ESPP, Roth 401k, 529's, umbrella policies, living trusts, etc are insignificant if your family can't reliably pay the bills when you and your salary aren't there anymore.

With that out of the way, on to your questions!
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm Questions:

1. 401k is a commingled fund - prospectus indicates some mixture of active/index funds but very low expense ratio, any issues or thoughts with this?
Cannot comment on this other than to say that the expense ratio is low, so that is good.
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 2. 401k has option for after tax Roth, should I take advantage of this? Would this limit my ability to fund wife's spousal Roth?
I am in a similar tax bracket, and I have chosen not to direct any of my 401k into the Roth option. I am banking on the fact that my tax rate will be lower in retirement so I'll have an opportunity to do conversions in my early retirement prior to claiming Social Security. I am hedging a little bit by also fully funding a Roth IRA through the backdoor method (I assume you are doing the same since your income is likely too high to contribute to a Roth IRA the normal way).

Read this for more info: https://www.bogleheads.org/wiki/Traditional_versus_Roth
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 3. Taxable - we convert ESPP contributions to balance the asset allocations. However, at this point (finally!) it represents ~2% of total portfolio as opposed to when I first started my career. I am inclined to let it run given strong industry outlooks. Thoughts?
Generally I try to stay away from large stock positions in one stock, particularly the company for which I work. I do carry a non-trivial number of unvested RSU so that is enough for me! :-)
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 4. Umbrella insurance - should it track net worth? e.g. should I go for higher coverage at 2M?
I am not an expert in this area, but a Google search shows that some recommend having enough umbrella insurance to cover your net worth minus your existing homeowner's coverage minus what you have in retirement accounts that are shielded from lawsuits (401k's). I suggest doing your own homework on this one to confirm.
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 5. No (living/revocable) trust in place, is this essential now? Particularly with newborn on the way? What else should we consider?
Not an expert on this. I have a higher net worth than you but I don't have a living trust, for what it's worth.
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 6. Primary residence is in my name - what should I consider to ensure wife and child are taken care of in case something happens to me?
My wife and I hold our home jointly as Joint Tenant with Right of Survivorship. That way, if one of us passes, the title will automatically pass to the other.

Related to this, do you and your wife have a will? Power of attorney? Health care directive? Are the beneficiaries are your accounts assigned properly? If not, you should look into these items.
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 7. I've read plenty of posts here on funding 529s, it's highly likely that at my income/asset level we will not qualify for aid. I am leaning towards NOT funding a 529 (at least for the first 5 years) in order to give us maximum flexibility in reaching FI at ~55 years old. If financial circumstances change or I am convinced later that it would save some taxes, then we could superfund a 529 when child gets older. Thoughts?
If you have money left over after maxing out your retirement savings, I would consider funding a 529. At a minimum, consider funding enough to get the full state tax refund if your state gives you one. If you are planning to pay for your child's college anyway, you might as well take advantage of the additional tax free earnings space.
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 8. We want to target FI/early retirement around 55 (~17 years from now, target ~5M in assets), my estimate with NPER formula with assumption of ~6.83% annual return (https://dqydj.com/sp-500-return-calculator/) along with current saving and spending rate to reach ~5M says we can reach in 14 years. Overall ROI is actually closer to 15% so it could happen sooner. With current contribution rate and possible addition of 2nd child, along with implications of funding college education for both childs, is this realistic? I am aware of the 20 year mortgage and may refininace again to 15 year or 10 year, or even lump sum pay off as date gets closer.
If you did the math and this is what it tells you, then who am I to argue with math :-). That said, two things to note. First, past performance is not indicative of future results. In other words, you model is only as good as the assumptions you use. Second, while kids are great, they do tend to cost money. You say that your model is based upon your "current spending rate", but consider that your spending rate with kids is going to increase.

Some other observations:

Your holdings seem a bit complex. You have a mixture of target date funds, index funds, and other random funds. There is probably some opportunity to simplify your holdings (at least in your tax advantaged accounts where you don't have to pay capital gains tax). You might want to read this article from the wiki: https://www.bogleheads.org/wiki/Tax-eff ... _placement

That said, you generally seem to be a good shape. Not many people under 40 have the net worth that you have, so nice job! :beer
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FiveK
Posts: 11533
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Re: Porfolio Check Up: FI Planning and Newborn

Post by FiveK »

DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 2. 401k has option for after tax Roth, should I take advantage of this? Would this limit my ability to fund wife's spousal Roth?
After reading humblecoder's response: are you talking about a Roth 401k, or an After-tax 401(k)? The latter is sometimes referred to as "after tax non-Roth" but see the link for more.

Either way, it will not affect your wife's IRA situation.
Topic Author
DoctorPhysics
Posts: 171
Joined: Sun Jun 07, 2015 12:50 pm

Re: Porfolio Check Up: FI Planning and Newborn

Post by DoctorPhysics »

RickBoglehead wrote: Sun May 09, 2021 6:16 pm You need a term life insurance policy.
Thank you, I updated my OP with life insurance info. Is employer provided life insurance enough? I suppose it doesn't provide the "diversification" benefit often touted here!
Topic Author
DoctorPhysics
Posts: 171
Joined: Sun Jun 07, 2015 12:50 pm

Re: Porfolio Check Up: FI Planning and Newborn

Post by DoctorPhysics »

FiveK wrote: Sun May 09, 2021 6:14 pm 1. Don't know if you have any "obviously better" choice but that one doesn't seem unreasonable.

2a. Yes.
2b. No.

3. Even if you lost all of that 2% you would be ok, so if you think it will outperform the market then have at it.Taxable - we convert ESPP contributions

4. Maybe some fraction (less than 1) of net worth. The specific fraction is related to your ability to sleep at night.

5. Not under current tax law.

6. Transfer deed to joint (you and wife). A will with instructions for care of your child if something happens to you and your wife.

7. The oxygen mask analogy seems apt: see "Why #8" in Investment Order.

8. The math is the math. Whether the future real return will match the past, ...?

-------------

"Keep up the good work!" is the short version of the above. :)
Agreed - the math is the math, I am well aware the winds could blow one way or another, I like to plan ahead for whatever thats worth.

Thank you for your inputs, I have actionable items to check on and improve now!
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RickBoglehead
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Re: Porfolio Check Up: FI Planning and Newborn

Post by RickBoglehead »

Not enough insurance and if you lose your job you have none.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
Topic Author
DoctorPhysics
Posts: 171
Joined: Sun Jun 07, 2015 12:50 pm

Re: Porfolio Check Up: FI Planning and Newborn

Post by DoctorPhysics »

FiveK wrote: Sun May 09, 2021 8:04 pm
DoctorPhysics wrote: Sun May 09, 2021 5:57 pm 2. 401k has option for after tax Roth, should I take advantage of this? Would this limit my ability to fund wife's spousal Roth?
After reading humblecoder's response: are you talking about a Roth 401k, or an After-tax 401(k)? The latter is sometimes referred to as "after tax non-Roth" but see the link for more.

Either way, it will not affect your wife's IRA situation.
This is the plan I believe I have access to, it just became available recently. https://www.bogleheads.org/wiki/After-tax_401%28k%29

Due to income level I max the 401k first, get the company match also. I can contribute to a Roth 401k, but this will not be pre-tax, but will be eligible for a company match up up to my $19.5k limit. It makes sense to max the 401k, then consider the after tax 401k. This is tedious if I do it on a bi-weekly paycheck, so I would go for this with annual bonus money and roll it over once.
Topic Author
DoctorPhysics
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Re: Porfolio Check Up: FI Planning and Newborn

Post by DoctorPhysics »

RickBoglehead wrote: Sun May 09, 2021 8:21 pm Not enough insurance and if you lose your job you have none.
Thanks Rick, off I go to find term life insurance!
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FiveK
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Re: Porfolio Check Up: FI Planning and Newborn

Post by FiveK »

DoctorPhysics wrote: Sun May 09, 2021 8:29 pm This is the plan I believe I have access to, it just became available recently. https://www.bogleheads.org/wiki/After-tax_401%28k%29

Due to income level I max the 401k first, get the company match also. I can contribute to a Roth 401k, but this will not be pre-tax, but will be eligible for a company match up up to my $19.5k limit. It makes sense to max the 401k, then consider the after tax 401k. This is tedious if I do it on a bi-weekly paycheck, so I would go for this with annual bonus money and roll it over once.
That all looks good and reasonable.
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BolderBoy
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Re: Porfolio Check Up: FI Planning and Newborn

Post by BolderBoy »

DoctorPhysics wrote: Sun May 09, 2021 8:30 pm
RickBoglehead wrote: Sun May 09, 2021 8:21 pm Not enough insurance and if you lose your job you have none.
Thanks Rick, off I go to find term life insurance!
Look for $1.5 million term for you and your wife. 20 years should be enough.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
Topic Author
DoctorPhysics
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Re: Porfolio Check Up: FI Planning and Newborn

Post by DoctorPhysics »

BolderBoy wrote: Sun May 09, 2021 9:32 pm
DoctorPhysics wrote: Sun May 09, 2021 8:30 pm
RickBoglehead wrote: Sun May 09, 2021 8:21 pm Not enough insurance and if you lose your job you have none.
Thanks Rick, off I go to find term life insurance!
Look for $1.5 million term for you and your wife. 20 years should be enough.
Thanks BolderBoy, I was actually looking at this and trying to estimate it.
I understand it as (income to replace)/(withdraw rate) + (one time expenses e.g. education) - (present assets) - (present insurance coverage)

1.5M looks close enough and the need for that number goes down as I get closer to the end of the term.
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