Portfolio Allocation Advice - 31 in OR

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maddingcrowd
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Joined: Wed Aug 21, 2013 5:05 pm

Portfolio Allocation Advice - 31 in OR

Post by maddingcrowd » Wed Sep 04, 2013 7:47 pm

Hello there, I am new to this forum, lead here after reading All About Asset Allocation which I picked up from the local library (great book - thanks Rick!).

As you can see below, I took a stab at an allocation strategy recently with my Vanguard taxable account. After reading a little more, I’d realized I need to take a more holistic view and think across accounts. I was planning on spreading out the allocation I started with my Vanguard account across all my accounts, but thought I'd get some advice first!

----

Emergency Funds: ~$25,000 in checking accounts

Debt: Home Mortgage ($220,000 owed, refinanced last year into new 30yr, 3.5% fixed)
School Loans ($6,000 owed, 1.62% fixed)

Tax Filing Status: Head of Household

State of Residence:
Oregon

Tax Rate: 25%

Age: 31

Desired Asset allocation: 85% stocks / 15% bonds or 80% / 20%

Desired International allocation
: 30%

My Portfolio Accounts:



457b
JPMorgan SmartRetirement 2045 Fund, JSASX, 0.94% -------------------------------- 30%

Vanguard taxable
Vanguard REIT Index Fund Investor Shares, VGSIX, 0.24%---------------------------- 4%
Vanguard Total Bond Market Index Fund Investor Shares, VBMFX, 0.20%----------- 8%
Vanguard Total International Stock Index Fund Investor Shares, VGTSX, 0.22%---- 10%
Vanguard Total Stock Market Index Fund Admiral Shares, VTSAX, 0.05%------------ 19%

ROTH IRA
Assortment of Vanguard EFTs --------------------------------------------------------- 2%

OPSRP IAP*
PERS ----------------------------------------------------------------------------------------- 27%

Total portfolio = ~$75k

*OPSRP IAP (~$21k) I’m public employee. I have no control of the investments in this account. It’s managed by the Oregon’s treasury dept as part of their pension program.


Contributions
- $7k a year into 457b

- My employer contributes 6% of my salary into the OPSRP IAP (see above).

- Additionally, as a public employee if I work for another 25 years or so, I’ll receive a pension of ~45% of my final salary.

---

Q1. Do you have suggestions on which assets should be in which accounts? I’ve read that some make more sense in taxable accounts than others…

Q2. I’m currently paying what ends up being extra mortgage payment a year – should I be putting this into my 457b instead?

Q3. I’ve got two kids, both under 3. Should I mix up my contributions and start a 529? Or continue to save as much as possible for retirement at this stage, and finances allowing contribute more to my 457b?

Q4. Is there anything else I should be considering? I'm new at this!

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tainted-meat
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Location: Kentucky

Re: Portfolio Allocation Advice - 31 in OR

Post by tainted-meat » Wed Sep 04, 2013 9:02 pm

Q1. Do you have suggestions on which assets should be in which accounts? I’ve read that some make more sense in taxable accounts than others…
Generally, put REITs and Bonds in Tax Preferred Accounts and put International in Taxable AccountsQ2. I’m currently paying what ends up being extra mortgage payment a year – should I be putting this into my 457b instead? I'd fund the 457 first. I would not pay more than the minimum mortgage payment at that low of an interest rate.
Q3. I’ve got two kids, both under 3. Should I mix up my contributions and start a 529? Or continue to save as much as possible for retirement at this stage, and finances allowing contribute more to my 457b?Fund your retirement before your kid's education. The best gift a parent can give a child is for the parent to be financially sound.
Q4. Is there anything else I should be considering? I'm new at this! Fund a Roth or Traditional IRA up to $5,500/yr for someone your age. Check the income limits on this before funding the account!


See above:

One question for you - are you eligible for Social Security?

maddingcrowd
Posts: 6
Joined: Wed Aug 21, 2013 5:05 pm

Re: Portfolio Allocation Advice - 31 in OR

Post by maddingcrowd » Wed Sep 04, 2013 10:29 pm

One question for you - are you eligible for Social Security?


I will be when I'm old enough.

Follow up question, are you suggesting maxing out an IRA before my 457b? Or rather max out 457b, then IRA, before moving to something else?

Thanks for the advice!

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steve roy
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Re: Portfolio Allocation Advice - 31 in OR

Post by steve roy » Wed Sep 04, 2013 11:07 pm

One suggestion: lose the REITs and Total Bond in taxable. You can replace TB with Tax Exempt Intermediate, or even Limited Term Tax Exempt.

And I wouldn't focus on the kids' college savings. Put a bit in now but concentrate on overall savings.

pingo
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Re: Portfolio Allocation Advice - 31 in OR

Post by pingo » Wed Sep 04, 2013 11:35 pm

Where are the other 457 options with their corresponding tickers (if available) and expense ratios?

How did you end up with investments for a taxable account when the 457 was not being maxed out?

How much do you have in the way of unrealized capital gains/losses in the taxable funds?

Which method did you use to determine your marginal tax bracket? The one where you look at your gross income and compare it to the marginal tax brackets is common, but wrong. The second (and correct method) is to pull out your 2012 tax return and find the line for "taxable income" (line 43 on the 1040 form). Then go to the link below to see what tax bracket you fall into with that number.

http://www.bankrate.com/finance/taxes/tax-brackets.aspx

How close are you to the 15% bracket? Maxing your 457 reduces your taxable income by another $10,500. If it gets you into the 15% tax bracket, how much headroom to you have before hitting 25% again?

Would you mind sharing the general size of the portfolio?

maddingcrowd
Posts: 6
Joined: Wed Aug 21, 2013 5:05 pm

Re: Portfolio Allocation Advice - 31 in OR

Post by maddingcrowd » Thu Sep 05, 2013 12:20 am

Where are the other 457 options with their corresponding tickers (if available) and expense ratios?


Money Market
ING Money Market Portfolio - Class I - 0.34%
   High Yield Bond
Hotchkis and Wiley High Yield Fund - Class I - 0.7%
   Inflation-Protected Bond
PIMCO Real Return Fund - Institutional Class - 0.45%
   Intermediate-Term Bond
PIMCO Total Return Fund - Administrative Class - 0.71%
Vanguard® Total Bond Market Index Fund - Institutional - 0.07%

   Lifecycle
JPMorgan SmartRetirement® 2015 Fund - Select Class Shares - 1861  0.81%
JPMorgan SmartRetirement® 2020 Fund - Select Class Shares - 1862  0.84%
JPMorgan SmartRetirement® 2025 Fund - Select Class Shares - 1863  0.88%
JPMorgan SmartRetirement® 2030 Fund - Select Class Shares - 1864  0.91%
JPMorgan SmartRetirement® 2035 Fund - Select Class Shares - 1865  0.94%
JPMorgan SmartRetirement® 2040 Fund - Select Class Shares - 1866  0.94%
JPMorgan SmartRetirement® 2045 Fund - Select Class Shares - 1867  0.94%
JPMorgan SmartRetirement® 2050 Fund - Select Class Shares - 1868  0.94%
JPMorgan SmartRetirement® Income Fund - Select Class Shares - 1869  0.74%

   Large Blend
Vanguard® Institutional Index Fund - Institutional Shares - 0.04%

   Large Value
Hotchkis and Wiley Large Cap Value Fund - Class I - 1.05%
Managers AMG Systematic Value Fund - Institutional Class - 0.81%

   Large Growth
Fidelity® Contrafund® - 0.74%
JPMorgan Large Cap Growth Fund - Select Class Shares -  0.91%
Neuberger Berman Socially Responsive Fund - Investor Class - 0.89%
Vanguard® FTSE Social Index Fund - Investor Shares - 0.29%

   Mid-Cap Blend

Vanguard® Mid-Cap Index Fund - Institutional Shares - 0.08%

   Mid-Cap Growth
Munder Mid-Cap Core Growth Fund - Class Y Shares - 1.07%

   Mid-Cap Value
ING JPMorgan Mid Cap Value Portfolio - Initial Class - 429  0.91%

   Small Blend
Vanguard® Small-Cap Index Fund - Institutional Shares - 0.08%

   Small Growth
Wanger USA - 0.96%

   Small Value

DFA U.S. Targeted Value Portfolio - Institutional Class - 0.38%

   Specialty - Real Estate
ING Real Estate Fund - Class I - 0.9%

   Foreign Large Blend

American Funds EuroPacific Growth Fund - Class R-4 - 0.85%
Dodge & Cox International Stock Fund - 0.64%
TIAA-CREF International Equity Index Fund - Institutional Cl - 0.08%

   World Stock
ING Oppenheimer Global Portfolio - Initial Class - 0.75%

How did you end up with investments for a taxable account when the 457 was not being maxed out?


I had a Putnam mutual fund (PINVX) given to be by my grandmother. I'd had since college and it struck me as poorly performing so I sold it. Then I needed to figure out what to do with the $$$. Hence going to the library and then ending up here!

How much do you have in the way of unrealized capital gains/losses in the taxable funds?


I just started with the Vanguard account, so none really. Although I will have some capital gains (I haven't figured out how much yet) from the sale of the Putnam fund this year.

Which method did you use to determine your marginal tax bracket?


The wrong one. According to your method, I'm in the 15% bracket with $2-3k of headroom before hitting 25%.

Would you mind sharing the general size of the portfolio?


~$75k

ofckrupke
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Re: Portfolio Allocation Advice - 31 in OR

Post by ofckrupke » Thu Sep 05, 2013 12:50 am

The index funds available in the 457 are great, and you almost certainly should exchange out of the 2045 fund into these. The annual cost disparity may not be much now but in just a few years the account will be much larger.

I break down the IAP into component fractions in my assets spreadsheet....because although I have no control over its composition I do bear the associated market risks, and this is relevant to balancing the discretionary assets. From docs available at the PERS site and Oregon treasury dept, I model the IAP (today) as about 42% US equity (18% public, 24% private), 20% public ex-US equity, 25% fixed income, 10% real estate, and 3% junk. (I also have some cells that treat the real estate+junk as half equity, half fixed income, for days when I'm not inclined to consider RE as a separate asset class....and treating the private equity slice as strictly domestic is a WAG on my part.)

pingo
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Re: Portfolio Allocation Advice - 31 in OR

Post by pingo » Thu Sep 05, 2013 4:02 pm

+1

The IAP is 72-85% equity (depending on how you count the "junk" and real estate, which in such plans is often a property fund or more stable property income fund, rather than REITs). For simplicity, I would probably ignore IAP assets until OP desires to have a portfolio that is below 72% equities, at which point it may make more sense to arrange other retirement accounts in conjunction with the risk profile of the IAP.

OP,

If you get on the ball and arrange to have your 457 maxed by 2013 end, you might manage to be taxed 0% federal on capital gains for liquidating the Putnam fund (assumes you liquidated in 2013 and that you'd still have that $2k to $3k headroom like last year plus another $10,500 for increasing 457 contributions to the limit this year, giving you $12,500 to $13,500 of headroom in the 15% bracket). If adding the amount of capital gains to your taxable income wouldn't push you out of the 15%, you pay zero in federal capital gains taxes. (I'm not a pro. Always check with a tax professional.)

Regardless, increasing your deductible contributions would relieve your total tax bill significantly.

Upon maximizing 457 contributions, it is presumed that your take home pay will fall short, so you withdraw the money that you need from your taxable account. It becomes the equivalent of withdrawing money from taxable and putting it into tax-deferred. As is often said in these parts, money is fungible.

I wouldn't worry too much about whether the "right" or "wrong" types of bonds are in your taxable account right now because of your tax bracket and the huge tax relief you'll get if you maximize contributions. If liquidating taxable assets would cause short-term capital gains taxes, I'd wait until you've have the funds for over a year. Then you can probably sell all or most with no capital gains (again, given the higher contributions scenario), or merely spend down the assets as needed until they disappear and have reappeared inside your Roth and 457.
Last edited by pingo on Tue Sep 10, 2013 5:14 pm, edited 3 times in total.

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tainted-meat
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Location: Kentucky

Re: Portfolio Allocation Advice - 31 in OR

Post by tainted-meat » Thu Sep 05, 2013 8:52 pm

maddingcrowd wrote:
One question for you - are you eligible for Social Security?


I will be when I'm old enough.

Follow up question, are you suggesting maxing out an IRA before my 457b? Or rather max out 457b, then IRA, before moving to something else?

Thanks for the advice!



I'd max the 457 first.

pingo
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Joined: Sat Sep 19, 2009 8:24 pm

Re: Portfolio Allocation Advice - 31 in OR

Post by pingo » Thu Sep 05, 2013 10:03 pm

^ The Roth may be pretty important since OP is in the 15% tax bracket. With a pension, s/he may never be able to convert assets to Roth (or withdraw 457 assets) at a lower rate in retirement, and OP will only have so much time before SS and RMDs make Roth conversion costly during retirement. That means that right now may be as good as it gets, so s/he should take advantage to build up the tax-free space while it's possible.

OP should be able to contribute the max to the Roth account (along with maxing the 457) for at least 3 years, which is about how long it would take to spend down the taxable account in order to have enough money for expenses when payroll contributions increase enough to max the 457.
Last edited by pingo on Tue Sep 10, 2013 5:16 pm, edited 4 times in total.

pingo
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Re: Portfolio Allocation Advice - 31 in OR

Post by pingo » Thu Sep 05, 2013 10:15 pm

There are too many variables to create a simple statement of when and where to put your allocations and contributions. Below I created a rough sketch where/how you're trying to end up. The account end-sizes won't cooperate fully, but you can probably achieve something kind of like it. (Come back for some more specific portfolio help as you get closer.) Anyway, here is more or less what you're trying to work toward in the 457 and Roth accounts over the next 3-ish years:

Desired Asset allocation: 80 / 20
Desired International allocation: 30%
Translation: 50 US / 22 Int'l / 8 REIT / 20 Bond


Annual Contributions
$17,500 to 457b
+$5,500 to Roth


Taxable
00% <--In ~3 years it's all inside the 457.

457b <--$17,500/yr.
41% Vanguard Institutional Index Fund ER .04
03% Vanguard Mid-Cap Index Fund ER .08
06% Vanguard Small-Cap Index Fund ER .08
18% TIAA-CREF International Equity Index Fund ER .08 <--Lacks Emerging Markets.
20% Vanguard Total Bond Index Fund ER .07

Vanguard Roth <--$5,500/yr.
04% Vanguard Emerging Markets Index Fund (VEIEX) .33 <--Converts to VEMAX ER .19 @ $10,000.
08% Vanguard REIT Index Fund (VGISX) ER .24 <--Converts to VGSLX ER .10 @ $10,000.

* Weighted ER = 0.08%
* Some prefer to skip the Mid Cap Fund, in which case you'd use 41.5% Institutional Index and 8.5% Small Cap Index per Wiki suggestions. Don't worry, you'd still be holding the mid cap asset class. (See Approximating Total Stock Market.)
* I usually prefer VG Total International (VGTSX/VTIAX) in the Roth, but using TIAA-CREF International with a splash of Emerging Markets (4:1) is more cost effective and it leaves room in for the REITs. Based on your current portfolio, the REITs have priority over International Small Caps (which VG Total Int'l includes but which would have a relatively insignificant effect on risk/return) and the additional cost savings is nice.
Last edited by pingo on Tue Nov 05, 2013 6:52 pm, edited 2 times in total.

maddingcrowd
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Re: Portfolio Allocation Advice - 31 in OR

Post by maddingcrowd » Tue Sep 10, 2013 3:46 pm

Thank you all for the thoughtful and thorough advice. It is very much appreciated.

pingo
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Joined: Sat Sep 19, 2009 8:24 pm

Re: Portfolio Allocation Advice - 31 in OR

Post by pingo » Tue Sep 10, 2013 5:18 pm

And welcome to the the forum! :D

nwffdiver
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Re: Portfolio Allocation Advice - 31 in OR

Post by nwffdiver » Wed Sep 11, 2013 9:36 pm

I break down the IAP into component fractions in my assets spreadsheet....because although I have no control over its composition I do bear the associated market risks, and this is relevant to balancing the discretionary assets. From docs available at the PERS site and Oregon treasury dept, I model the IAP (today) as about 42% US equity (18% public, 24% private), 20% public ex-US equity, 25% fixed income, 10% real estate, and 3% junk. (I also have some cells that treat the real estate+junk as half equity, half fixed income, for days when I'm not inclined to consider RE as a separate asset class....and treating the private equity slice as strictly domestic is a WAG on my part.)

Ofckrupke where did you find these stats? I too am an OR public employee, and the OIC doesn't post the breakdown anywhere I have been able to find. My IAP is around $75k as I have been in it since it started. Just curious. I don't count it in my AA as I cannot control anything to do with it.

ofckrupke
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Re: Portfolio Allocation Advice - 31 in OR

Post by ofckrupke » Thu Sep 12, 2013 8:40 pm

nwffdiver wrote:Ofckrupke where did you find these stats?


If the IAP were to be composed distinctly from the main PERF, this would have to be documented. Since it's not, I infer that the composition of the IAP is simply that of the entire fund (less the tiny Tier1 variable account). These fractions, as well as OIC's target ranges, can be found in monthly investment return reports at the PERS site and the treasury site as well as in the CAFRs; you've surely seen these (It's just a shame, and a disgrace to the public, that the treasurer has so plainly turned his agency's index page into a personal publicity organ).

maddingcrowd
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Re: Portfolio Allocation Advice - 31 in OR

Post by maddingcrowd » Tue Nov 05, 2013 6:26 pm

Hi folks,

My 457b plan options just changed. It seems like the fees are significantly lower - yay!
Thoughts on a good 85% stocks / 15% bonds or 80% / 20% portfolio with the new funds/fees?

thx!
MC

Money Market
Vanguard® Prime Money Market Fund – Investor Shares , 0.16
Stability of Principal
ING Fixed Plus III - 457/401 (1)(16)

High Yield Bond

TIAA-CREF High-Yield Fund - Institutional Class ,0.38
Inflation-Protected Bond
PIMCO Real Return Fund - Institutional Class (3), 0.45
Intermediate-Term Bond
PIMCO Total Return Fund - Institutional Class, 0.46
Vanguard® Total Bond Market Index Fund - Institutional, 0.07

Lifecycle
JPMorgan SmartRetirement® Blend 2015 Fund – Class R6 Shares, 0.45
JPMorgan SmartRetirement® Blend 2020 Fund – Class R6 Shares , 0.45
JPMorgan SmartRetirement® Blend 2025 Fund – Class R6 Shares , 0.45
JPMorgan SmartRetirement® Blend 2030 Fund – Class R6 Shares , 0.45
JPMorgan SmartRetirement® Blend 2035 Fund – Class R6 Shares , 0.45
JPMorgan SmartRetirement® Blend 2040 Fund – Class R6 Shares , 0.45
JPMorgan SmartRetirement® Blend 2045 Fund – Class R6 Shares, 0.45
JPMorgan SmartRetirement® Blend 2050 Fund – Class R6 Shares, 0.45
JPMorgan SmartRetirement® Blend Income Fund -Class R6 Shares, 0.45

Large Blend
TIAA-CREF Social Choice Equity Fund – Institutional Class, 0.19
Vanguard® Institutional Index Fund – Institutional Shares, 0.04
Large Value
Becker Value Equity Fund - Institutional Class, 0.69

Large Growth

JPMorgan Large Cap Growth Fund - Class R6 Shares, 0.65
Vanguard® Growth Index Fund - Institutional Shares, 0.08

Mid-Cap Blend
Vanguard® Mid-Cap Index Fund - Institutional Shares, 0.08
Mid-Cap Growth
Munder Mid-Cap Core Growth Fund - Class R6 Shares ,0.85
Mid-Cap Value
Vanguard® Selected Value Fund - Investor Shares, 0.38
Small Blend
Vanguard® Small-Cap Index Fund - Institutional Shares,0.08
Small Growth
Vanguard® Small-Cap Growth Index Fund – Institutional Shares,0.08
Small Value
DFA U.S. Targeted Value Portfolio - Institutional Class,0.38
Specialty - Real Estate
Vanguard® REIT Index Fund - Institutional Shares, 0.08

Foreign Large Blend
American Funds EuroPacific Growth Fund® - Class R-6, 0.50
TIAA-CREF International Equity Index Fund - Institutional Class , 0.08
Foreign Large Value
MFS® International Value Fund - Class R5, 0.86
World Stock
Oppenheimer Global Fund - Class I, 0.73

ofckrupke
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Re: Portfolio Allocation Advice - 31 in OR

Post by ofckrupke » Wed Nov 06, 2013 11:34 am

If you're going to shift funds from taxable to the 457 account, then Pingo's model post-transition portfolio above seems basically as sound as before. Expenses appear slightly lower now to hold the REIT fund in the 457 and just Vanguard total international in the Roth...but that might flip again when the Roth grows large enough to hold multiple funds in Admiral class.

Other variations might include 10% or more to DFA US targeted (small) value instead of 3+6% to the vgd mid+small index funds, and/or splitting the bonds between the VBTIX, the cost-reduced Pimco Total Return, and the ING Stable Value vehicle....but that is just observation, not endorsement. These deviate from the course of accepting market risk and return at lowest expense.

nwffdiver
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Joined: Mon Oct 01, 2012 9:26 pm

Re: Portfolio Allocation Advice - 31 in OR

Post by nwffdiver » Wed Nov 06, 2013 2:38 pm

Wow I wish my 457 was this good. :(

maddingcrowd
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Joined: Wed Aug 21, 2013 5:05 pm

Re: Portfolio Allocation Advice - 31 in OR

Post by maddingcrowd » Wed Nov 06, 2013 3:18 pm

Wow I wish my 457 was this good. :(


It's a pretty marked improvement on the fee side - I'm currently using one of the Target Date funds, but the expenses were almost 1%, now they've dropped in half...

pingo
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Joined: Sat Sep 19, 2009 8:24 pm

Re: Portfolio Allocation Advice - 31 in OR

Post by pingo » Thu Nov 07, 2013 11:30 pm

Nice to hear from you, again! :happy

If you are using the plan to spend down your taxable holdings, I suppose the simplest plan is to have 100% of the 401k in a JPM SmartRetirement fund that is closest to your desired stock-bond weights and to have 100% of the Roth in the Vanguard Target Retirement 2035 (VTTHX) until the taxable account is down to $0. Then you don't have to worry about juggling too many details at a time. Taxable is drained, you could easily allocate among the different funds.

If you're considering my idea above (which I don't assume), it's still valid, but I post two alternatives to make things a tinge simpler and perhaps shield your eyes from volatile (certainly not all).

Alternative 1: Eliminate the separate Emerging Markets holding because EuroPacific Growth includes them at a very reasonable ER for this fund, and it does a good job of tracking Vanguard Total International. This is made possible because you no longer need to rely on the Roth to hold REITs. Here's how it changes my prior idea:

Taxable
00% <--In ~3 years it's all inside the 457.

457b <--$17,500/yr.
41% Vanguard Institutional Index Fund ER .04
03% Vanguard Mid-Cap Index Fund ER .08
06% Vanguard Small-Cap Index Fund ER .08
08% Vanguard REIT Index - Institutional ER .08
10% EuroPacific Growth ER .50
20% Vanguard Total Bond Index Fund ER .07

Vanguard Roth <--$5,500/yr.
12% Vanguard Total International (VGTSX) ER .22 <--Converts to VTIAX ER .16 @ $10k.

* Since 31% of contributions would be going to the Roth, my hope is that it will eventually become large enough to hold all of your international equities, eliminating the need for EuroPacific Growth in the 457.
* Some prefer to skip the Mid Cap Fund, in which case you'd use 41.5% Institutional Index and 8.5% Small Cap Index per Wiki suggestions. Don't worry, you'd still be holding the mid cap asset class. (See Approximating Total Stock Market.)



Alternative 2: Use separate EM and use the Roth to hold the rest of the U.S. Market (via Extended Market Index) instead of using small and mid caps in the 457:


Taxable
00% <--In ~3 years it's all inside the 457.

457b <--$17,500/yr.
41% Vanguard Institutional Index Fund ER .04
08% Vanguard REIT Index - Institutional ER .08
18% EuroPacific Growth ER .50
20% Vanguard Total Bond Index Fund ER .07

Vanguard Roth <--$5,500/yr.
04% Vanguard Emerging Markets Index Fund (VEIEX) .33 <--Converts to VEMAX ER .19 @ $10k.
08% Vanguard Extended Market Index Fund (VEMX) .28 <--Converts to VEXAX ER .14 @ $10k.

I'm happy to work through whatever scenarios you'd like, such as liquidating only part of the taxable account. (Total Stock and Total International are actually tax-efficient if you'd prefer to leave them alone.) If so, it would help to know you want to do with your portfolio and even what you've been doing with it since starting the thread.

:beer

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