Young (29) investor - Asset Allocation discussion and help

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Gustie13
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Young (29) investor - Asset Allocation discussion and help

Post by Gustie13 » Tue Jul 24, 2012 8:13 pm

Hi, i'm looking for some help and discussion around Asset Allocation goals. I've recently taken a renewed interest in my retirement funds so I'm trying to strike while the iron is hot and set some AA goals. As for the basics:

Emergency Fund: Yes, about 5-6 months worth of expenses
Debt: School Loan - $11,650 balance with 2.6% interest rate. No other debts.
Tax filing: Single
Tax Rate: Fed- 25%, State- 7.05%
Age: 29
Desired Allocation: 90/10 stocks/bonds
International: 35-40%

I have the goal of getting to the following Allocation (% of Total, Asset Class, Exp Rate):
15% US Large Cap (.06% exp rate)
15% US Mid Cap (.13%)
15% US Small Cap (.13%)
15% Intl Developed Mkts (.13%)
15% Intl Emerging Mkts (.25%)
5% Intl Frontier Mkts (.7%)
5% Intl Bonds (.6%)
5% TIPS (.18%)
5% REIT (.10%)
5% Commodities (.6%)

Current Portfolio is $75k:
$55k in a 401K
$8k in a Roth IRA
$12k in a 'retirement account'.
My 401K has access to Schwab and all the funds therein, my IRA is with Fidelity.

Contributions:
My plan is to discontinue future contributions to the $12k 'retirement account' and use the balance to make my annual contributions to my Roth as I've recently decided its not worth having all 3 types of retirement vessels. As a result of stopping my third 'retirement account' contributions (and using its $12k balance as my Roth contributions for the next 2+ years) I'll be upping my 401k contributions to $14,500 annually (my company will match with a few grand).

Questions:
1) Asset Allocation thoughts? My plan is a bit more involved than some of the suggestions I see on here (Lazy Portfolio, Core Four, etc), but as long as I'm indexing and not paying expense rates too high isn't the extra exposure/diversification worth it?
2) I'm pretty set on my plan to A) Keep the Roth and B) Use the $12k in the third account to make Roth contributions for the next 2+ years but I suppose I'll open it up for discussion. I view having both pre-tax (my 401k) and post-tax (Roth) retirement accounts as a type of diversification.

Thanks,
M

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mhc
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Re: Young (29) investor - Asset Allocation discussion and he

Post by mhc » Tue Jul 24, 2012 10:27 pm

Welcome to the forum.

It makes sense to tax shelter as much money as you can; therefore, using your taxable account to get more money into the 401k and Roth makes sense. Good move.

You investment choices are interesting. It seems reasonable, but it is very complex. I'm not really sure you are better diversified. It depends on how you define the term. I'm partial to the 3-fund portfolio, but different strokes for different folks.

I would say skip the frontier, intl bonds, and commodities. I would also skip the mid-cap.

If you can stay the course with your investments, you'll be fine. No one knows what the best portfolio is.

bdpb
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Re: Young (29) investor - Asset Allocation discussion and he

Post by bdpb » Wed Jul 25, 2012 1:18 am

Gustie13 wrote: Emergency Fund: Yes, about 5-6 months worth of expenses

Tax Rate: Fed- 25%, State- 7.05%

Contributions:
My plan is to discontinue future contributions to the $12k 'retirement account' and use the balance to make my annual contributions to my Roth as I've recently decided its not worth having all 3 types of retirement vessels. As a result of stopping my third 'retirement account' contributions (and using its $12k balance as my Roth contributions for the next 2+ years) I'll be upping my 401k contributions to $14,500 annually (my company will match with a few grand).

Questions:
2) I'm pretty set on my plan to A) Keep the Roth and B) Use the $12k in the third account to make Roth contributions for the next 2+ years but I suppose I'll open it up for discussion. I view having both pre-tax (my 401k) and post-tax (Roth) retirement accounts as a type of diversification.
Better yet. Contribute your EF to Roth (and mentally set aside this amount in the Roth to a low risk fund). Roth contributions can be removed tax and penalty free at any time. Then use the 12k to max your contribution to pre-tax 401k.

At your age and those tax rates I would aim to tax shelter as much of my EF and retirement assets as possible.

Gustie13
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Re: Young (29) investor - Asset Allocation discussion and he

Post by Gustie13 » Wed Jul 25, 2012 9:02 am

mhc wrote:Welcome to the forum.

It makes sense to tax shelter as much money as you can; therefore, using your taxable account to get more money into the 401k and Roth makes sense. Good move.

You investment choices are interesting. It seems reasonable, but it is very complex. I'm not really sure you are better diversified. It depends on how you define the term. I'm partial to the 3-fund portfolio, but different strokes for different folks.

I would say skip the frontier, intl bonds, and commodities. I would also skip the mid-cap.

If you can stay the course with your investments, you'll be fine. No one knows what the best portfolio is.

MHC,
Are you down on the Frontier, Intl Bonds, and Commodities because their exp rates are higher than the others? I tried to find the lowest exp rate funds for those 3 sectors. Would Total Market funds (US Eq, Int Eq, Bond) really expose me to those areas? Why skip the mid-cap?

bdpb wrote: Better yet. Contribute your EF to Roth (and mentally set aside this amount in the Roth to a low risk fund). Roth contributions can be removed tax and penalty free at any time. Then use the 12k to max your contribution to pre-tax 401k.

At your age and those tax rates I would aim to tax shelter as much of my EF and retirement assets as possible.

BDPB,
How quickly and easily can you access Roth funds for removal? My EF is a bank account that I keep 5-6 months of expenses in but that I make semi-regular deposits and withdrawals from - if my credit card ever has a balance more than I can pay off with my paycheck (after booking vacations, etc) I use the EF to get the cc balance to zero and then replenish the EF (I don't let the EF go below 3 months expenses).



Thanks for the help MHC and BDPB!

Gustie13
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Re: Young (29) investor - Asset Allocation discussion and he

Post by Gustie13 » Wed Jul 25, 2012 10:19 am

BDPB,

Just read the following in the Emergency Fund Wiki:
In some situations, a Roth IRA can be used as emergency fund. Contributions (that is, the money that you put into your Roth) can come out at any time, free of taxes and penalties. This is not true of earnings on your contributions, which are subject to more complex rules. See IRS Publication 590 and the Instructions for Form 5329.
It is also possible to withdraw penalty-free (but not tax-free) from a traditional IRA for certain excepted emergencies and major life events. See IRS Publication 590.
A Roth IRA is primarily intended for retirement, not to store emergency funds. One should consider the impact to portfolio allocations and potential custodial costs. There are behavioral considerations, as well. If a choice is to be made between funding a Roth IRA and an emergency fund, a Roth IRA can be used as an emergency fund in the appropriate situation.

I'm a little leery of using the Roth for my full EF given the above, but perhaps some portion.

Any thoughts on short term CD ladder for the rest of the EF?

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mhc
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Re: Young (29) investor - Asset Allocation discussion and he

Post by mhc » Wed Jul 25, 2012 11:55 am

Gustie,

the Total market indices would not expose you to frontier, intl bonds, and commodities. I'm just unsure the added complexity of holding those funds would pay off. In my original post, I said there is probably nothing wrong with them, just not my style.

I hold S&P500 and small cap and leave out the mid-cap because S&P500 and small cap each have mid-cap. Nothing wrong with holding mid-cap, but I don't think it is worth the extra effort.

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Rainier
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Re: Young (29) investor - Asset Allocation discussion and he

Post by Rainier » Wed Jul 25, 2012 12:08 pm

I paid a fair amount for my wife's engagement ring, at least the two month salary rule. I actually wish I paid a little more and bumped it up to the next even carat.

Even so, I have never regretted the purchase or even missed that money. I have spent far less on other items and had buyer's remorse, but never for the ring.

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mhc
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Re: Young (29) investor - Asset Allocation discussion and he

Post by mhc » Wed Jul 25, 2012 3:51 pm

Rainier wrote:I paid a fair amount for my wife's engagement ring, at least the two month salary rule. I actually wish I paid a little more and bumped it up to the next even carat.

Even so, I have never regretted the purchase or even missed that money. I have spent far less on other items and had buyer's remorse, but never for the ring.
Did you put this in the right place? :?

Gustie13
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Re: Young (29) investor - Asset Allocation discussion and he

Post by Gustie13 » Wed Jul 25, 2012 3:54 pm

mhc wrote:
Rainier wrote:I paid a fair amount for my wife's engagement ring, at least the two month salary rule. I actually wish I paid a little more and bumped it up to the next even carat.

Even so, I have never regretted the purchase or even missed that money. I have spent far less on other items and had buyer's remorse, but never for the ring.
Did you put this in the right place? :?
My girlfriend would probably be happy to hear your plug for buying a bigger ring, but thats not really on my horizon... :happy

bdpb
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Re: Young (29) investor - Asset Allocation discussion and he

Post by bdpb » Wed Jul 25, 2012 5:26 pm

Gustie13 wrote: Just read the following in the Emergency Fund Wiki:
..., a Roth IRA can be used as an emergency fund in the appropriate situation.

I'm a little leery of using the Roth for my full EF given the above, but perhaps some portion.

Any thoughts on short term CD ladder for the rest of the EF?
I think you fit the appropriate situation.

If you are using your EF as a cash flow buffer, then short term CDs don't work that well and you can probably earn more in a savings account. I would isolate what you think you need for EF and cash flow buffer and keep the cash in the savings account. You could put the rest of the EF in the Roth.

The main goal of my post was to put the full 17k max in to your tax deductible 401k. At these tax rates, that is what I would do. In other words, if you're going to use the taxable 12k for something, put it in tax deductible 401k first.

Gustie13
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Re: Young (29) investor - Asset Allocation discussion and he

Post by Gustie13 » Wed Jul 25, 2012 10:37 pm

bdpb wrote: I think you fit the appropriate situation.

If you are using your EF as a cash flow buffer, then short term CDs don't work that well and you can probably earn more in a savings account. I would isolate what you think you need for EF and cash flow buffer and keep the cash in the savings account. You could put the rest of the EF in the Roth.

The main goal of my post was to put the full 17k max in to your tax deductible 401k. At these tax rates, that is what I would do. In other words, if you're going to use the taxable 12k for something, put it in tax deductible 401k first.

Ok, so the top point being take full advantage of the pre-tax benefits of my 401k since the Roth and third 'retirement account' are post-tax?

http://www.bogleheads.org/wiki/Roth_IRA ... gency_fund Is the biggest benefit from the Roth-IRA-as-EF situation that it allows me to make sure I'm maxing the Roth contribution (since once that is gone, its gone)?
Any specific suggestions on low risk funds, as I don't have much of an appetite for swings or reductions in my EF. Here is what I have access to through my Roth:

PIMCO 1-3 YR US Treasury ETF (TUZ) .09% exp rate
Vanguard Total Bond ETF (BND) .1%
Vanguard Short Term Bond ETF (BSV) .11%
Vanguard Int Term Bond ETF (BIV) .11%
Vanguard Long Term Bond ETF (BLV) .11%
There are other ones from Barclays, Schwab, and Vanguard in varying groupings of Govt or Corp but the above seem like the best candidates.

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mhc
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Re: Young (29) investor - Asset Allocation discussion and he

Post by mhc » Wed Jul 25, 2012 10:52 pm

Gustie,

in general, the shorter the duration on the bond fund the lower the risk. As a test, plot these funds for the past 10 years. You will see how much they move up and down. I'm guessing the 1-3 yr Treasury has the smallest ups/downs. The short term bond is probably next.

Plot them and see. Then, just for fun then plot a stock fund with the bond funds.

Gustie13
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Re: Young (29) investor - Asset Allocation discussion and he

Post by Gustie13 » Wed Jul 25, 2012 11:38 pm

MHC,

Just took a look, the 1-3 YR did have more muted swings than the others.

Is there a benefit of putting the EF into the Roth this year that I'm not seeing, other than to make sure I make the max contribution to the Roth? I've read the Roth as EF wiki and thats what I got out of it.
From a strict rate/return standpoint I could get a better return by simply investing in a savings account getting 1% (and have less risk since I know my savings account won't fluctuate).

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mhc
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Re: Young (29) investor - Asset Allocation discussion and he

Post by mhc » Thu Jul 26, 2012 8:49 am

I would recommend getting as much money as possible into tax sheltered accounts. You may not ever need the emergency fund. If you put the money into the Roth and in 10 years you no longer need a dedicated emergency fund, then you will have more money in the Roth for investing. Also, take your 1% you can get on a savings account and subtract a third for taxes.

Once your assets reach a certain point, a dedicated EF is not necessary. For example, say you have $300k in 401k, $100k in Roth, $50k in HSA, and $300k in taxable account. Do you still need $50k sitting around allocated as an EF? I don't think so. Invest it. If you have an emergency, you have a lot of options to access money.

I max out all of my tax advantaged accounts every year and wish I still had more. I think that is a lot of peoples thinking. If you skip a year of contributing to a Roth or tIRA, you can never get it back. In the big picture, skipping a year is not a big deal. It is just probably less than optimal.

You have to weigh the cost of your comfort and time in trying to find an optimal solution for you.

Gustie13
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Re: Young (29) investor - Asset Allocation discussion and he

Post by Gustie13 » Thu Oct 04, 2012 12:04 pm

Thanks for the tips. Wanted to follow up and say I've got my AA just about to where I want it, I'm going to max my pre-tax 401k and IRA contributions this year (thanks to the Roth as EF idea), and am looking into the idea discussed in this thread http://www.bogleheads.org/forum/viewtop ... &start=100 as a way to get even more money into tax-advantaged accounts with the extra $$ I will have from a promotion.

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mhc
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Re: Young (29) investor - Asset Allocation discussion and he

Post by mhc » Thu Oct 04, 2012 7:40 pm

If your plan allows it, that is great. Also, congrats on the promotion. :sharebeer

Gustie13
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Re: Young (29) investor - Asset Allocation discussion and help

Post by Gustie13 » Thu Aug 20, 2015 9:48 am

Well here I am, a few years older, hopefully a little wiser. Thought I'd provide an update after taking some advice I got here and also seek out some more wisdom:

INTRO INFO
Emergency Fund: $20,000
Debt: $128/month (his student loan) Balance: $7,426. Int Rate: 2.625% Will soon have $2000 monthly mortgage payment
Tax Filing Status: Married filing jointly
Tax Rate: 28% Federal, 7.85 State
State of Residence: MN
Age: M- 32. F- 30.
Desired Asset Allocation:
45% US Equity (15/15/15 Large/Mid/SmallCap)
25% Intl Equity (10/10/5 Developed/Emerging/Frontier)
20% Bonds
5% Commodity
5% REIT
Portfolio Size: ~$250,000

CURRENT RETIREMENT ASSETS
401Ks
Fidelity (her current employer)
9.5% Principal LargeCap S&P 500 Index (PLFPX) (0.41%)
Schwab (her former employer)
18.5% JP Morgan Target Date 2040 (SMTIX) (0.81%)
Fidelity (her former employer)
4.3% Spartan 500 Index (FXSIX) (0.04%)
1.9% Fidelity Diversified International Fund (FDIKX) (0.78%)
1.8% Spartan US Bond Index (FXNAX) (0.05%)
Fidelity (his current employer)
2.0% Spartan 500 Index (FXSIX) (0.04%)
.3% Corporate Stock
Schwab (his former employer)
2.1% Charles Schwab US REIT ETF (SCHH) (0.07%)
1.4% UBS ETRACS Bloomberg Commodity Index Total Return (DJCI) (0.5%)
.4% Guggenheim Frontier Markets ETF (FRN) (0.71%)
.7% IShares International Inf Link Bond ETF (ITIP) (0.4%)
11% Schwab Emerging Markets Equity ETF (SCHE) (0.14%)
6.3% Schwab International Equity ETF (SCHF) (0.08%)
10.3% Schwab US Broad Market ETF (SCHB) (0.04%)
6.3% Schwab US MidCap ETF (SCHM) (0.07%)
7% Schwab US SmallCap ETF (SCHA) (0.08%)
2.4% Schwab US Tips ETF (SCHP) (0.07%)
.8% Wasatch Frontier Emrg SM Countries Inv (WAFMX) (2.24%)
2.7% Cash
IRA
Schwab Roth IRA (his)
2.8% UBS ETRACS Bloomberg Commodity Index Total Return (DJCI) (0.5%)
.9% Charles Schwab US REIT ETF (SCHH) (0.07%)
.4% Guggenheim Frontier Markets ETF (FRN) (0.71%)
.7% Schwab US Tips ETF (SCHP) (0.07%)
.7% Vanguard REIT ETF (VNQ) (0.12%)
1.7% Vanguard Total International Bond (BNDX) (0.19%)
2.9% Cash

Here is what the actual asset allocation looks like-
US Large: 35%
US Mid: 7%
US Small: 8%
Intl Dev: 11%
Intl Em: 12%
Intl Frt: 2%
Bonds/Tips: 10%
REIT: 4%
Comm: 4%
Cash: 7%

CONTRIBUTIONS
New annual Contributions
$17,500 his 401k (+$6,400 company match)
$17,500 her 401k
$5,500 his Roth IRA

AVAILABLE FUNDS
Too many to list. In general the options are-
His Current Employer Fidelity 401k: OK (27 options)
His Former Employer Schwab 401k: Great (Basically everything Schwab has access to)
His Schwab Roth IRA: Great (Basically everything Schwab has access to)
Her Current Employer Fidelity 401k: OK (36 options)
Her Former Employer Fidelity 401k: OK (28 options)
Her Former Employer Schwab 401k: OK (28 options)

OTHER
- In process of purchasing $500k home. Put $100k down (from cash reserves).
- In process of selling condo. Post-fees, pre-tax proceeds should be ~$100k.
- Planning to invest $10k - $20k of condo sale proceeds in taxable retirement account. Rest will be used for purchases related to the house or kept in cash reserves for future home improvements or other future big purchases
- Not included in the above Retirement Assets is ~$17k from my previous employer’s pension plan. I still need to tell them that I’d like to roll this into an IRA, which I believe is one of the options they gave me (along with leaving it as is, or cashing it out).
- We’d like to have our first kid within 2-3 years.
- We’ll be upgrading her car when the first kid comes.
- In the next 5-20 years we should both see inheritances in low to mid six figures. I try not to plan with the inheritances in mind (I’m aware sometimes these things don’t materialize as expected) but because of their size in relation to our income I thought they were worth mentioning.

PRIORITIES
- Rollover her old 401ks to an IRA with better options
- Rollover his pension to an IRA
- Fund her 2015 Traditional IRA contribution
- Reallocate on 9/1 (rebalance dates of 3/1 and 9/1 each year)
- Optimize recurring contributions – right now all contributions (his/her 401k and his IRA) go in to funds that cause us to get over-weighted in US Large Cap

QUESTIONS
- Feedback on priorities?
- Is it advisable to start a 529 before having kids?
- What will happen with my Roth contributions since the sale of our condo will push us above $193K income limit? Do I need to ‘recharacterize’ them to a Traditional IRA?
- Anything else I should think about or am missing?

Gustie13
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Re: Young (29) investor - Asset Allocation discussion and help

Post by Gustie13 » Mon Apr 17, 2017 10:44 am

Thought I'd post another update, about 18mos after the last one.

INTRO INFO
Emergency Fund: $20,000
Debt: $2600/month mortgage w Balance: $390k at 4.125%. $128/month (his student loan) w Balance: $5,133 @ 2.625%
Tax Filing Status: Married filing jointly
Tax Rate: 28% Federal, 7.85 State
State of Residence: MN
Age: M- 33. F- 31.
Desired Asset Allocation:
45% US Equity (20/15/10 Large/Mid/SmallCap)
25% Intl Equity (15/10 Developed/Emerging)
20% Bonds
5% Commodity
5% REIT
Portfolio Size: ~$400,000

CONTRIBUTIONS
New annual Contributions
$17,500 his 401k (+$6,400 company match)
$17,500 her 401k
$5,500 his Roth IRA

UPDATES on OTHER/PRIORITIES
- Sold the condo and used all the proceeds (~100K) towards down payment of current house
- Rolled over pension balance (~17k) from previous employer to IRA
- Upgraded wife's car
- Rolled over her multiple old 401Ks to single account at Vanguard
- Expecting first child any day now :D

PRIORITIES
- Continue maximizing 401K contributions for both plus IRA contribution for him
- Start 529 plan for upcoming child

QUESTIONS
- Life insurance - how much do we need? Have read a few posts on here that recommend Term to the tune of 8x-12x income.
- Wife is part of a trust that owns a small parcel of land in Iowa that is farmed and receives a check each year from farm proceeds. Trust could be dissolved in a few years, how should we think about pros/cons of continuing in the trust vs selling off?

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