529 and asset allocation questions

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Simbilis
Posts: 55
Joined: Sat Nov 03, 2012 12:29 pm

529 and asset allocation questions

Post by Simbilis » Thu Dec 20, 2012 12:23 pm

I'm working on getting our personal finances sorted out after years of willful ignorance and benign neglect. Thanks to the wonderful information here on the wiki and forums, I think I'm making progress. However, I'd be grateful for an informed spot-check on a few things.

Our finances in a nutshell:

Emergency funds: Six months of expenses
Debt: Mortgage $93K @ 2.75%, Car $16K @ 1.9%
Filing status: Married Filing Jointly
Tax rate: 33% federal, 8.8% state
State of residence: Vermont
Ages: 49 & 41
Portfolio size: Upper six figures
Desired asset allocation (generally 80 stocks/20 bonds):
  • 10% TIPS - TSP G Fund (I know it’s not exactly TIPS, but it’s close enough)
  • 10% Bond Index - Vanguard Total Bond Market Index Adm (VBTLX) & TSP F Fund
  • 40% US Stock Index - Vanguard Total Stock Market Index Adm (VTSAX) & TSP C Fund
  • 30% Int’l Stock Index - Vanguard Total Int’l Stock Index Adm (VTIAX) & TSP I Fund
  • 10% REIT Index - Vanguard REIT Index Fund Adm (VGSLX)
Questions:

1. We have two kids nearing college age. We already contribute enough to 529 accounts to get the $250 per kid Vermont tax credit, and I’m not too worried about the risk of the kids deciding to be professional snowboarders or whatever instead of going to school. What do you all think of directing a significant share of ongoing taxable savings into 529 funds?

2. I like my job and don’t object to the risk of having to work until, say, age 70 in exchange for a chance at higher portfolio returns. Given that, is an 80/20 split at my age grotesquely risky?

3. We’ve been in our home for 15+ years, and have no plans to move. We just refinanced our mortgage from a 30 year fixed rate at 5.625% to a 5/1 ARM at 2.75%, intending to pay it off over 5 years (having no debt will make us happier). Considering the carnage in the housing market and the extremely low interest rates, is this a terrible idea?

Thanks!

dad2000
Posts: 642
Joined: Fri Feb 03, 2012 7:04 pm

Re: 529 and asset allocation questions

Post by dad2000 » Thu Dec 20, 2012 1:29 pm

How would you characterize your job security until retirement age? For example, I think a tenured professor could easily ride with that AA.

Simbilis
Posts: 55
Joined: Sat Nov 03, 2012 12:29 pm

Re: 529 and asset allocation questions

Post by Simbilis » Thu Dec 20, 2012 1:48 pm

dad2000 wrote:How would you characterize your job security until retirement age? For example, I think a tenured professor could easily ride with that AA.
I didn't realize how tough that question was until I started typing what I thought would be a simple answer :) Thanks for making me quantify that.

70-75% of our employment income is secure. The remainder depends on demand for a scarce skill set, and I don't know how to predict whether both the demand and the scarcity will continue.

dad2000
Posts: 642
Joined: Fri Feb 03, 2012 7:04 pm

Re: 529 and asset allocation questions

Post by dad2000 » Thu Dec 20, 2012 2:14 pm

1. If you are confident that at least one of your kids will go to school, I don't see why you wouldn't take the 529 tax break.

2. You have quite a bit saved up, so I don't think you need to take the risk of 80/20, but with your level of human capital, you certainly could.

3. I just took a PenFed 5 year 1.99% HEL, and plan to pay off my $200K mortgage within 3 years. It's probably not mathematically the right thing to do, but I'll sleep better. Keeping that $93K as an inflation hedge probably isn't going to offer dramatic protection anyway?

Side note on the investments. Consider buying $20K in I-bonds annually. No principal risk as with a TIPS fund and similar inflation protection.

letsgobobby
Posts: 11692
Joined: Fri Sep 18, 2009 1:10 am

Re: 529 and asset allocation questions

Post by letsgobobby » Thu Dec 20, 2012 3:05 pm

80/20 is grotesque risk for your situation, but only in my opinion. I'm 60/40 and ten years younger. How about 70/30??? The biggest risk as you get older is not necessarily that you'll bail at the wrong time due to volatility, it's that your stocks will decline and never recover during the time frame you have left. Think of a 50% decline *without* the 100%+ snapback of 09-12.

Yes a 529 is a no brainer in your tax bracket and family situation. You are going to have higher investment taxes, income taxes, and special Medicare taxes beginning in 12 days. Starting in June I stopped making any more taxable investments and contributed everything to 529s. I'm in the same federal tax bracket as you.

I like your refi.

Simbilis
Posts: 55
Joined: Sat Nov 03, 2012 12:29 pm

Re: 529 and asset allocation questions

Post by Simbilis » Thu Dec 20, 2012 4:31 pm

I'm embarrassed to admit that I just discovered 529's. Glad there aren't any obvious gotchas.

The TSP G Fund isn't really TIPS - for my tax deferred savings, it's better. It has nearly the same interest rate, but with no principal risk. However, I do like I-bonds for the emergency fund if the rate comes up in May. In the meantime, the rate on my FDIC insured savings account is 0.8% and it has no holding period.

Sounds like 80/20 may be imprudently risky. I'm not exactly sure why I chose that particular mix, other than a combination of greed and blithe failure to quantify the possible outcomes. I'm seriously considering shifting 5% each from US and international stocks back to TIPS and bonds while I figure it out. Are there any tools that you guys particularly prefer for modeling retirement outcomes? I've played with several (AARP, Ballpark Estimator, ESPlanner Basic, Fidelity, T Rowe Price, Vanguard) and the outcomes vary so much that I'm not confident I'm using them correctly.

dad2000
Posts: 642
Joined: Fri Feb 03, 2012 7:04 pm

Re: 529 and asset allocation questions

Post by dad2000 » Thu Dec 20, 2012 5:19 pm

It may not help you with AA per se, but I like the free tool from Voyant for modelling out your full financial lifecycle.

dickenjb
Posts: 2941
Joined: Tue Jan 05, 2010 1:11 pm
Location: Philadelphia PA

Re: 529 and asset allocation questions

Post by dickenjb » Thu Dec 20, 2012 6:04 pm

It seems to me that "age in bonds" is a pretty good rule of thumb, or 100-age in stocks. Personally, I am 57 and 60% in stocks which represents "120-age" in stocks.

80/20 at your age feels a little risky to me.

I like Fidelity Retirement Income planner. I am not particularly fond of FIREcalc or the Vanguard plans.

Simbilis
Posts: 55
Joined: Sat Nov 03, 2012 12:29 pm

Re: 529 and asset allocation questions

Post by Simbilis » Sun Dec 23, 2012 3:20 pm

I revised our AA for now to:
  • 15% TIPS
  • 15% Bond Index
  • 35% US Stock Index
  • 25% Int’l Stock Index
  • 10% REIT Index
And tried out the Voyant calculator - definitely the most comprehensive and comprehensible I've worked with so far. Now to go do the AA reading homework over again, and figure out why I feel this need to roll the dice with our retirement funds...

Thanks!

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