27 yo AA Assistance

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UMHockeyFan
Posts: 12
Joined: Wed Mar 12, 2008 12:22 pm

27 yo AA Assistance

Post by UMHockeyFan » Wed Mar 12, 2008 12:25 pm

Hello Bogleheads! Thank you all so much for contributing to this online community. I have been working now for about 4 years and got married to a doctor (intern/first year resident) this past May. For the past four years, I’ve been simply putting money into my 401K as my retirement savings without really looking into the details of the funds themselves. My grandfather gave me Common Sense on Mutual Funds for Christmas, and my eyes have been opened! I have followed that up with Bogle’s Little Book and started reading the Bogleheads’ Guide. Here is our current situation:

Emergency Funds:
4 months expenses in credit union savings acct earning 0.95%

Debt:
30 year home mortgage @ 5% (Purchased in June ’07 w/ 10% down payment)
5 year car loan @ 5.3% (Almost done with year 2)
Medical school debt (in deferment) @ 3.375% (Rate drops to 2.375% after paying first 6 months without late payment)

Tax Info: Married filing jointly, 25% Fed tax rate, 7.75% NC State tax rate

Age: Both 27 years old

Taxable:
4% Janus Fund (JANSX, 0.91%)
2% DTE Energy Stock (DTE)
1% Occidental Petroleum Stock (OXY)

Non-Taxable:
My 401K (50% employer match up to 6%, currently contributing 9%):
35% Fidelity Spartan US Equity Index (FUSEX, 0.10%)
18% Fidelity Magellan (FMAGX, 0.54%)
18% Morgan Stanley Institutional Fund Trust (MPVAX, 0.87%)
9% Fidelity International Discovery Fund (FIGRX, 1.04%)
9% PIMCO Total Return Fund (PTRAX, 0.68%)

Her Roth IRA:
5% Fidelity Dividend Growth (FDGFX, 0.61%)

Other funds available in My 401K:
Fidelity Capital Appreciation (FDCAX, 0.83%)
Oppenheimer Developing Markets (ODMAX, 1.32%)
Fidelity Real Estate Investment Portfolio (FRESX, 0.83%)
Fidelity Balanced Fund (FBALX, 0.61%)
Fidelity Low Priced Stock Fund (FLPSX, 0.97%)
Robertson Stephens Partners Fund (RSPFX, 1.50%)
Fidelity High Income Fund (SPHIX, 0.75%)
Fidelity New Market Income Fund (FNMIX,0.91%)
All Fidelity Freedom Funds

Questions:
My credit union is offering 24-month CD’s with a minimum 5% APY (the rate is adjustable, but guaranteed to never go below 5%). They are actually 4 6-month CD’s in succession, so I could remove my money every 6 months with no penalty. The only penalty for early withdrawal outside of the four 6 month windows is a loss of up to 90 days of dividends. Is this an appropriate place to put my emergency funds?

My ideal target allocation is 60% domestic stock, 20% international stock, 20% bonds. However, it looks like the only fund I should put money in for my 401K is the Spartan fund. So, I was thinking I should combine all my 401K funds into the Spartan index and max out both of our 2007 Roth IRA. That would result in the following asset allocation:

My 401K:
76% Spartan US Equity Index (FUSEX, 0.10%)

Her Roth IRA:
11% Spartan International Index Fund (FSIIX, 0.20%)

My Roth IRA (new):
7% Vanguard Intermediate-Term Bond Index Fund (VBIIX, 0.18%)

Taxable:
3% Janus Fund (JANSX, 0.91%)
2% DTE Energy Stock (DTE)
1% Occidental Petroleum Stock (OXY)

Does this make sense? Also, what should I do with my taxable investments? Should I cash them in and redistribute to the Roth IRA’s (as 2008 contributions) or just sit on them? Also, given that I only like one of the funds available through my 401K, should I reduce my contributions to 6% and open up a traditional IRA and put in the other 3% (or more) in that? I think that would help me achieve my “ideal” asset allocation more quickly. Thanks in advance for the help!
Last edited by UMHockeyFan on Wed Mar 12, 2008 2:02 pm, edited 1 time in total.

x36900
Posts: 220
Joined: Fri Sep 21, 2007 12:47 pm
Location: Oklahoma City, OK

Sorry that I cannot be too specific

Post by x36900 » Wed Mar 12, 2008 1:11 pm

but I don't know very much about you and your spouse.

I think you have a decent asset allocation plan in terms of structure; I would question some of the specifics.

In particular, I see that you only want to devote 7% to fixed-income. I think that is a little too light, personally. If you have some free time coming up, go back to calendar years 2000 through 2002, and check the performance of various stock index funds, such as Vanguard's Total Start Market Index or Vanguard's 500 Index. Would 7% in fixed-income have been enough for you then?

Also, I see that you want to put roughly 11% of your 82% stock allocation (or roughly 13% of the stocks) into an international fund. People have widely varying opinions on how much ought to be domestic versus international, but few advocate less than 20% of the stocks ought to be international. Personally, I like 30% or so, but you will find some folks that argue for 40% to 50%. Check into upping your international stock allocation a little bit if possible; at the very least, think about it.

Lastly, you mentioned that your 401k gives you access to all of the Fidelity Freedom funds. I don't know much about them at all, but they could possibly be a very good choice for you. You might be able to select one that has both more bonds, and more international stocks too. But, I don't know, you will have to do the legwork.

Best of luck, regardless.
Brian

Topic Author
UMHockeyFan
Posts: 12
Joined: Wed Mar 12, 2008 12:22 pm

Post by UMHockeyFan » Wed Mar 12, 2008 2:12 pm

Brian, thanks for the reply. Was the beginning of your response cut off?

I agree, 7% is too low for fixed income. My goal is to achieve 60% domestic stock, 20% international and 20% fixed income (bond) as my allocation. However, I don't like my options in my 401K, which is where the bulk of my investments currently reside.

I think I can simplify the question a bit: Is it better to get my stated goal of 60% domestic stock, 20% international stock and 20% bond right away and eat the higher expense ratios of the funds available in my 401K .... OR .... is it better to put all of my 401K money in the Spartan US Equity fund and reduce contributions and simultaneously ramp up my non-401K investments into international and bond funds with the goal of achieving my goal allocation (60/20/20) over the next year or two?

I personally don't care for the Fidelity Freedom funds: expense ratios too high and distribution of funds too complex (the 2045 fund is divided amongst 23 individual funds!)

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PiperWarrior
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Location: right on course

Post by PiperWarrior » Wed Mar 12, 2008 2:29 pm

Welcome to the forum!

Are you maxing out both Roth IRAs and 401(k)? If not, I would sell your taxable holdings and use them to fund Roth IRAs.

Other than that, your proposed asset allocation looks OK. I'd say it's a little light on bonds and international, but you have plenty of time of work on them.

According to Investment Planning,
The general rule of thumb for investing priority is:
1. 401k/403b up to the company match
2. Max out Roth
3. Max out 401k/403b
4. Taxable Investing
With this in mind, could you post how much you are planning to contribute to each account like so?

$15,500 His 401(k)
$5,000 His Roth IRA
$5,000 Her Roth IRA

I wouldn't open a Traditional IRA. Given your tax bracket and the fact that you are contributing to 401(k), there is a good chance that contributions to a Traditional IRA are non-deductible, at which point a Roth IRA is strictly better.

As you said, I wouldn't go with Freedom Funds. They are too expensive. I don't see any logic on how they choose underlying funds.

Topic Author
UMHockeyFan
Posts: 12
Joined: Wed Mar 12, 2008 12:22 pm

Post by UMHockeyFan » Wed Mar 12, 2008 8:31 pm

Currently, I am planning on the following for 2008:
His 401K: $7,000
His IRA: $5,000
Her IRA: $5,000

Laura
Posts: 7975
Joined: Mon Feb 19, 2007 7:40 pm

International

Post by Laura » Wed Mar 12, 2008 8:37 pm

Instead of using the Fidelity Spartan Intl index that covers developed markets only I suggest you open the roth at Vanguard and invest in the Total Intl Stock Market fund. The TISM fund includes both developed and emerging markets.

Assuming you are going to be using the taxable money to fund the roths you have another option. You could use Vanguard Target Retirement Funds in each roth and a Fidelity freedom fund in the 401k. No need to worry about maintaining your desired asset allocation if you let these companies manage the money.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

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PiperWarrior
Posts: 4068
Joined: Fri Dec 21, 2007 4:55 am
Location: right on course

Post by PiperWarrior » Wed Mar 12, 2008 11:15 pm

How about something like this?

My 401K:
81% FUSEX Spartan US Equity Index

Her Roth IRA (Transfer to Vanguard)
12% VGTSX Total International

My Roth IRA at Vanguard
7% VBIIX Intermediate-Term Bond Index
0% VGSIX REIT Index
0% VEXMX Extended Market

The expense ratio of VGTSX is a bit higher than FSIIX, but VGTSX includes emerging markets. Also, VGTSX has a much smaller cash position than FSIIX. If you want to stick to Fidelity, you can buy an ETF, VEU FTSE All-World ex-US, but you would have to pay a commission, which is not suitable for frequent periodic investments.

Note that Fidelity may charge you $50 or so as a transfer-out fee.

New contributions:

His 401K: $7,000
$7,000 FUSEX Spartan US Equity Index

His Roth IRA: $5,000
$5,000 VGTSX Total International

Her Roth IRA: $5,000
$1,700 VBIIX Intermediate-Term Bond Index
$3,300 VGSIX REIT Index

I put REIT as a diversifier. In the past, the stock market went down for several years while REIT was going up, and vice versa. It has low correlation to just about any other asset class.

You don't need to keep buying REIT at this rate. In fact, next year, you might want to take a break on REIT and buy VEXMX Extended Market to cover small- and mid-cap stocks, which are not covered by FUSEX. A ratio of 3:1 between FUSEX and VEXMX more or less replicates the entire domestic stock market.

For annual rebalancing, I would suggest sticking to something like:

54% domestic stocks (FUSEX and VEXMX)
9% REIT (VGSIX)
27% international stocks (VGTSX)
10% bonds (VBIIX)

x36900
Posts: 220
Joined: Fri Sep 21, 2007 12:47 pm
Location: Oklahoma City, OK

UMHockeyFan: no, it wasn't cut off...

Post by x36900 » Thu Mar 13, 2008 4:26 am

...I frequently cut up a long beginning sentence between the title and the first line (such as this post does).

Anyway, like I wrote last time, I like the structure you've chosen. In general, my opinion is that you are best served getting as close as you can to your desired allocation immediately.

Now, for you particularly, I believe that you and your spouse are pretty new to the investing world, and thus your total funds are not anything close to what they will be 40+ years from now. So, you may have an issue right now if you can't meet the minimums for all the funds in all of the asset classes that you'd like to have.

If that is the case, I would advise you to focus first on the stocks (in total) versus fixed-income split. If I'm reading correctly, you want 80% stocks and 20% fixed-income. You may want to see how much you can put into the IRA accounts for bond funds; looks like you could get about 18% or 19% into your two IRA's, is that correct? That way, you wouldn't need to put much of your 401(k) contributions into an inferior bond fund choice, but you'd have something close to 20% fixed-income within a year. Possibly a little more than that today, although your 401(k) contributions will bring you down to 80/20 by next year if you go all equities with the 401(k).

So, if you want 80% stocks, and of that 20% in international (25% of the stocks, in other words), I'd ask how good or bad do you feel about the international stock funds in your 401(k)? If you really like one or more of them, and if you basically go all stock funds with the 401(k), you may as well go 75% domestic stock fund(s) and 25% international stock fund(s),
and basically use the IRA accounts for fixed-income.

I do not know how much flexibility that would give you, or if that is truly workable, but that is my first thought.

Hope that gives you something to consider. Best of luck to you,
Brian

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