Retirement trouble [Portfolio help]

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Art Vandelay
Posts: 9
Joined: Fri Mar 29, 2013 9:00 am

Retirement trouble [Portfolio help]

Post by Art Vandelay » Sat Mar 30, 2013 2:33 pm

Hello, all. First and foremost, thank you for your time and insight. After sticking my head in the sand for far too long, I'm trying to take the bull by the horns and get a handle on our retirement savings and plans.

After being hit by a couple of layoffs, my husband has been a successful small business owner for 3 years (50% owner). Prior to his layoffs we were young and stupid, and didn't put much consideration towards retirement (maybe up to his match, 4%?, but that's all), during his unemployment we held tight to liquid savings but neglected retirement, and since he's been a business owner I started putting some emphasis into our retirement savings but really started to focus on it these last few months. Needless to say, we are behind, VERY behind!

I've read Bogleheads Guide to Investing, done some lurking here and other sites, and learned a lot, but still recognize I have a way to go. I plan to read more books as recommended by this website but I'm hoping I can get some of our savings allocated and invested, with some guidance from you.

Emergency funds: 8.5 months liquid
Debt: student loan (3.5% fixed), vehicle (2.75% fixed), mortgage (3.875% fixed, 30 yr)
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 7.05% State
State of Residence: MN
Age: Both 32
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 30% of stocks (looking for advice on this allocation)

Current retirement assets

His 401k
5.5% Large U.S. Equity (no ticker, objective: replicate S&P 500 Index) (.034%)
15% Mid U.S. Equity (no ticker, objective: replicate S&P Mid Cap 400 Index) (.036%)
7.5% International (no ticker, objective: replicate MSCI EAFE ND Index) (.137%)
No longer employed

His Roth IRA at Fidelity
13.5%, In the process of selling mutual funds to reallocate to index funds

His Rollover IRA at Fidelity
16%, In the process of selling mutual funds to reallocate to index funds

Her Rollover IRA at Fidelity
4.5% Nuveen Strategy Aggressive Growth Allocation Fund Class B (FSGBX) (2.09%)

Her Roth IRA at Fidelity
34.5%, In the process of selling mutual funds to reallocate to index funds
3.5% Cash available to invest

=100%
Total of All Retirement Accounts Together = approaching mid-five figures

Other Investments:

HSA
2/3 the value of Retirement Accounts
Been maxing contributions yearly, and paying for medical costs out of pocket. Would like to keep $5,000 liquid and invest the rest as a stealth IRA, ideally not tapping until retirement (knock on wood we remain healthy enough to accomplish this-- if we are that lucky, I will consider this gravy).

Contributions

New annual Contributions
$5,500 his IRA/Roth IRA
$4,000 her IRA/Roth IRA (already contributed $1,500 for the current year)
HSA is already maxed for the current year

As we are 50% owner of the business, we are at the mercy of the other owner to give consent to initiate a SIMPLE IRA, and that doesn't look likely. We are considering a game plan of maxing out our IRA's/HSA, paying off the student loan and vehicle, then saving for a rental property with the intention of accumulating a few properties to be paid for by retirement, and using that income as supplemental retirement income (I know this sounds much more simplistic than it actually will be). I am out of the workforce while our children are young, and unsure of what kind of job/benefits I will have available when I do go back to work, and I don't want to sit on my hands waiting for that to happen, either.

Available funds

Funds available in his 401(k) (in addition to those listed above)
Short Term Bond Fund (.041%)
Long Term Bond Fund (.035%)
Balanced Fund I- mixed asset target allocation mod funds- 48% S&P 500/12% MSCI EAFE ND/40% BC Agg TR (.048%)
Balanced Fund II- mixed asset target allocation growth funds- 60% S&P 500/15% MSCI EAFE ND/25% BC agg TR (.051%)
Small Company Equity- objective Russell 2000 Index (.045%)

Funds available for HSA
any of the commission free ETF's here:
https://research.tdameritrade.com/grid/ ... ftNav=true

Questions:

1. I am sold on investing in index funds, but even that seems overwhelming to me. Beyond knowing how I want to allocate, how do I determine appropriate funds? Is it really as simple as the funds recommended in the three fund portfolio? What's the advantage, if any, to breaking it down further to large caps, small caps, etc? I like simplicity, and am adverse to making decisions if that influences your response :wink:

2. I am thinking that with our income, we may be in a smaller tax bracket in retirement, for now should we perhaps consider traditional IRA's instead of Roth's? Ideally, once I go back to work, I'll have a 401(k) available to allow for tax diversification in retirement, but like I said, I'm not counting on that at that moment.

3. Would you consider the HSA as a part of the total portfolio? I am struggling if I should use that as part of my bond allocation as it could potentially be a short term investment (if we would need to draw from it for any unforeseen health reasons), or take advantage of the tax shelter and be more aggressive with it...? Or do you suggest another strategy all together...?

4. I am not in love with Fidelity, and although I don't dislike them, would it be worth it to switch to Vanguard for their Admiral shares (or potentially Life Strategy/Target Retirement funds)? I recognize Fidelity has similar fund offerings, but it sounds as though Vanguard may have lower expense ratios?

5. I fully plan to dump FSGBX as soon as I can, but unfortunately there is a back load to it, I will be checking on Monday to see how soon I can get out of there. Would you take the hit on the back load just to get the money out of there?

Wow, this turned into a novel. Thanks for muddling through it (if you made it this far!). I sincerely appreciate any insight and advice you have!

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zebrafish
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Re: Retirement trouble [Portfolio help]

Post by zebrafish » Sat Mar 30, 2013 3:40 pm

#1. Don't beat up on yourself. You're not even in your mid 30s yet. Becoming aware of things now is waaaaay better than 10, 20, or 30 years down the road. You are ahead of virtually everyone your age just by thinking about things.

#2. I use a three fund portfolio. It is just as simple as it seems. The more I read about investing, the more convinced I become that a three fund portfolio is the right approach.

#3. I would roll over your 401k from previous employer to wherever you feel you will take your retirement funds, either Vanguard or Fidelity

#4. I think you can do fine at either Vanguard or Fidelity. Most people around here prefer Vanguard, but Fidelity has some low-cost index options available.

#5. For international, if you go with a three-fund approach and Vanguard-- Total International Stock Market Index is what you would consider

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Peter Foley
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Re: Retirement trouble [Portfolio help]

Post by Peter Foley » Sat Mar 30, 2013 5:43 pm

Art worte:
Questions:

1. I am sold on investing in index funds, but even that seems overwhelming to me. Beyond knowing how I want to allocate, how do I determine appropriate funds? Is it really as simple as the funds recommended in the three fund portfolio? What's the advantage, if any, to breaking it down further to large caps, small caps, etc? I like simplicity, and am adverse to making decisions if that influences your response . My preference is four funds as a minimum rather than three. I like to have some inflation protection on the bond side so I would recommend total bond market and TIPS for bonds and total stock and total international for stocks.

2. I am thinking that with our income, we may be in a smaller tax bracket in retirement, for now should we perhaps consider traditional IRA's instead of Roth's? Ideally, once I go back to work, I'll have a 401(k) available to allow for tax diversification in retirement, but like I said, I'm not counting on that at that moment. I would use a TIRA rather than a Roth in your tax bracket.

3. Would you consider the HSA as a part of the total portfolio? I am struggling if I should use that as part of my bond allocation as it could potentially be a short term investment (if we would need to draw from it for any unforeseen health reasons), or take advantage of the tax shelter and be more aggressive with it...? Or do you suggest another strategy all together...? I do not, but my circumstance is different. I'm retired and use it to pay for my health insurance. I'm not making any contributions. Mine is invested in bonds as I expect to draw it down over then next 4-5 years.

4. I am not in love with Fidelity, and although I don't dislike them, would it be worth it to switch to Vanguard for their Admiral shares (or potentially Life Strategy/Target Retirement funds)? I recognize Fidelity has similar fund offerings, but it sounds as though Vanguard may have lower expense ratios? I have no opinion here - I think the major firms (Vanguard, Fidelity, and Schwab) are all pretty competitive and low cost.

5. I fully plan to dump FSGBX as soon as I can, but unfortunately there is a back load to it, I will be checking on Monday to see how soon I can get out of there. Would you take the hit on the back load just to get the money out of there? You don't have a large portion fo your portfolio in FSGBX so I wouldn't worry about the expense ratio too much. If the back end load goes away in a few years I would wait.
I think what will help you the most long term is for one or both of you to have access to something other than IRAs to shelter more income when you are both working. You seem to be doing a good job of living below your means and that is an important first step.

Art Vandelay
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Joined: Fri Mar 29, 2013 9:00 am

Re: Retirement trouble [Portfolio help]

Post by Art Vandelay » Sun Mar 31, 2013 8:43 pm

A sincere thank you both, Zebra and Peter. You have given me a bit more direction and I very much appreciate it!

Zebra, I was impressed with the offerings/expense ratios available in the 401(k), but agree, it would probably be best to roll that to the rest of our funds.

I agree, Peter, that we need something beyond IRA's to shelter our income. Thankfully (for now) we have the HSA in addition, but those in themselves are not enough...

I read something earlier on this site, someone mentioned-- analysis paralysis. I feel like that's where I was/am evolving out of, and it feels good to have some direction and conviction that I am making sound decisions.

I am curious if anyone else has advice RE: allocating the HSA funds.

Again, thank you, this site has been a wealth of knowledge. As I was reading the prospectus for FSGBX, I actually got angry... how could anyone recommend a fund like that and still sleep at night?! My naiveté no doubt cushioned his commission check that pay period. Chalk it up to stupid tax I suppose... thank goodness I didn't have any more invested there!!

livesoft
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Re: Retirement trouble [Portfolio help]

Post by livesoft » Sun Mar 31, 2013 8:48 pm

Maybe FSGBX was a typo and they recommended FSGDX which is a rather decent int'l index fund?
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Art Vandelay
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Re: Retirement trouble [Portfolio help]

Post by Art Vandelay » Sun Mar 31, 2013 8:59 pm

livesoft wrote:Maybe FSGBX was a typo and they recommended FSGDX which is a rather decent int'l index fund?
Unfortunately, it's not. I actually pulled out the hard copy paper work in my files and the advisor (on three separate occasions, and three consecutive years) recommended FSGBX, to which my unwitting mind purchased :|

Live and learn, right?! :confused

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Dale_G
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Location: Central Florida - on the grown up side of 81

Re: Retirement trouble [Portfolio help]

Post by Dale_G » Sun Mar 31, 2013 9:23 pm

Art, you may (or not) be behind in dollars, but you are way ahead of your peers in understanding the concepts of successful investing.

You'll do fine.

Dale
Volatility is my friend

dbr
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Re: Retirement trouble [Portfolio help]

Post by dbr » Sun Mar 31, 2013 10:17 pm

Are you the architect or the judge in Latham, MA?

Art Vandelay
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Re: Retirement trouble [Portfolio help]

Post by Art Vandelay » Mon Apr 01, 2013 3:18 pm

Dale_G wrote:Art, you may (or not) be behind in dollars, but you are way ahead of your peers in understanding the concepts of successful investing.

You'll do fine.

Dale
Thanks for the vote of confidence, it means more than you realize.
dbr wrote:Are you the architect or the judge in Latham, MA?
Not the judge (at least then there'd be a possibility of a pension :wink: ). Actually, not the architect either. I listed my occupation in my profile... importer/exporter.

dbr
Posts: 27207
Joined: Sun Mar 04, 2007 9:50 am

Re: Retirement trouble [Portfolio help]

Post by dbr » Mon Apr 01, 2013 3:37 pm

Art Vandelay wrote:
dbr wrote:Are you the architect or the judge in Latham, MA?
Not the judge (at least then there'd be a possibility of a pension :wink: ). Actually, not the architect either. I listed my occupation in my profile... importer/exporter.
Ah, thanks. I know better than to ask whether you import or export and what it is you import/export.

To answer one of your questions, you decide what funds to choose after you have a concept for what kind of asset allocation you want and in what kind of accounts you are able to put the money. In the specific instance regarding large vs small caps, that is a decision based on whether you decide you believe that in the long run you can construct a better returning portfolio at the same risk or a less risky portfolio at the same return by some combination of assets different from simple total market portfolios. The basic decision before that, though, is just want proportion of stocks vs bonds (in the general sense, including cash-like) you want. After that you can decide how much in stocks to allocate to international. All of that can be implemented with total market type index funds. If you think you can improve your situation with a more complex array of assets, you can do that after you have learned enough to decide it makes sense without someone else telling you it is the thing to do. The three fund portfolio allows a person to make all those basic selections.

Art Vandelay
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Joined: Fri Mar 29, 2013 9:00 am

Re: Retirement trouble [Portfolio help]

Post by Art Vandelay » Mon Apr 08, 2013 11:35 am

dbr wrote:
Art Vandelay wrote:
dbr wrote:Are you the architect or the judge in Latham, MA?
Not the judge (at least then there'd be a possibility of a pension :wink: ). Actually, not the architect either. I listed my occupation in my profile... importer/exporter.
Ah, thanks. I know better than to ask whether you import or export and what it is you import/export.

To answer one of your questions, you decide what funds to choose after you have a concept for what kind of asset allocation you want and in what kind of accounts you are able to put the money. In the specific instance regarding large vs small caps, that is a decision based on whether you decide you believe that in the long run you can construct a better returning portfolio at the same risk or a less risky portfolio at the same return by some combination of assets different from simple total market portfolios. The basic decision before that, though, is just want proportion of stocks vs bonds (in the general sense, including cash-like) you want. After that you can decide how much in stocks to allocate to international. All of that can be implemented with total market type index funds. If you think you can improve your situation with a more complex array of assets, you can do that after you have learned enough to decide it makes sense without someone else telling you it is the thing to do. The three fund portfolio allows a person to make all those basic selections.
Thank you dbr, for your answer and discretion regarding my occupation :wink: , both are sincerely appreciated. Your explanation was very helpful. I apologize for the delayed gratitude, I have been reading and researching as much as possible this past week in preparation to posting again. Each day I am feeling more confident in my ability to sort through the available options.

In researching the Fidelity Spartan Global ex-U.S. Index fund, it appears as though there are no small caps included with the fund... would it be worthwhile to utilize iShares MSCI EAFE Small Cap Index Fund ETF (SCZ) (.4%) in addition to FSGDX to capture that part of the market? If so, in what ratio?

And I plan to designate our HSA as a separate portfolio, but as of yet am unsure how aggressive I want to be in my AA. I plan to invest in:

Vanguard Total Stock Market ETF (VTI) (.06)
Vanguard FTSE All-World ex-US ETF (VEU) (.18) as 90% of my international
Vanguard FTSE All-World ex-US Small Capital Index Fund ETF Class (VSS) (.28) as 10% of my international
Vanguard Total Bond Market ETF (BND) (.10)

Am I making any newbie mistakes here? VXUS isn't available as a commission free choice, and according to my research the 90/10 combo of VEU/VSS might be an acceptable alternative.

Also, I know I could use VSS as a part of my small cap international for our retirement portfolio, but for some reason feel like I should keep our HSA and retirement portfolios separate at this time. I appreciate any dissenting opinions or advice here though, too.

dbr
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Re: Retirement trouble [Portfolio help]

Post by dbr » Mon Apr 08, 2013 2:38 pm

It is totally reasonable to complete a market portfolio by adding something that is missing from what you already have. I don't remember exactly how VEU and VXUS differ, but what you wrote sounds about right. This is completely different from deciding to overweight small caps, which would require a hugely larger dose of VSS.

I think I would invest the HSA and the main portfolio as if they were one overall portfolio except that the HSA is a tax preferred location just like a 401K or an IRA, so it could hold tax inefficient investments. Maybe someone else has some special angle on that.

Art Vandelay
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Re: Retirement trouble [Portfolio help]

Post by Art Vandelay » Mon Apr 08, 2013 4:06 pm

dbr wrote:It is totally reasonable to complete a market portfolio by adding something that is missing from what you already have. I don't remember exactly how VEU and VXUS differ, but what you wrote sounds about right. This is completely different from deciding to overweight small caps, which would require a hugely larger dose of VSS.

I think I would invest the HSA and the main portfolio as if they were one overall portfolio except that the HSA is a tax preferred location just like a 401K or an IRA, so it could hold tax inefficient investments. Maybe someone else has some special angle on that.
Thanks again, dbr.

What are your thoughts on Fidelity International Index funds not including small caps? If I decide to include the HSA as an overall part of our portfolio then I could skip Fidelity and use VEU/VSS as our international allocation, but I'm not sure I want to be that aggressive with those funds. If I don't utilize the HSA for international allocation then I'm stuck with Fidelity. I hope I'm making sense here...

We don't hold any taxable accounts at this point, so that doesn't come into play as far as designating where to allocate tax efficient/inefficient investments. I guess my rationale for keeping the HSA separate from retirement investments is that as much as I would *like* for these funds to be used towards retirement, there seems to be too many variables involved where we may have to tap into these funds prior to then. Which is where I'm struggling... I'd love to take advantage of the tax shelter and aggressively invest these funds but not knowing if (or when) we might need to tap them makes it difficult, which is another reason I thought keeping them separate might make sense. But again, I appreciate opposing opinions and advice.

dbr
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Re: Retirement trouble [Portfolio help]

Post by dbr » Mon Apr 08, 2013 6:09 pm

I think worrying too much about having international small caps is in fact worrying too much, even though in an ideal world . . .

The trick with the HSA seems to me is that when you withdraw, then you have to rebalance a little somewhere else, so that gets awkward. But you can't hide that what you have overall is what you have overall. You don't get to decide that one account or another isn't part of your portfolio if that account exists. Is the total amount of assets in the HSA very large compared to everything else? Maybe it doesn't make much difference.

I would just be approximately where you want to be and move on.

Art Vandelay
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Re: Retirement trouble [Portfolio help]

Post by Art Vandelay » Mon Apr 08, 2013 8:02 pm

Good points, dbr, and thank you.

The HSA is about 2/3 the value of the retirement accounts.

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