AA advice for USG employee

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Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

AA advice for USG employee

Post by Tatupu »

Hello all,

This is an unbelievable forum. It is extremely informative and I only wish that I had learned this stuff 10 years ago. Thank you to all for helping investment amateurs like myself! I've been lurking for about a year and have read the books commonly recommended on this site.

I’d appreciate your review of our portfolio and assistance in pinning down an updated asset allocation. About a year ago I took advantage of Vanguard’s advisory service, which is the basis of my current allocation. My goals and knowledge have evolved, however, and I would like to nail down a more diversified, cohesive and tax-efficient plan to stick with for the long haul.

I am willing to slice and dice a bit to get the best portfolio and fortunately have access to some good funds (thanks to the TSP), but also wouldn’t be unhappy with simplicity.

Most of our career will be spent overseas working for the USG (non-military) where we won’t have any housing costs. I work full-time and my wife’s employment situation varies depending on our assignment. She currently works part-time for the USG and we are maxing out her TSP contributions.

We’d like to purchase a house sometime down the road (most likely way down the road) and therefore have a separate taxable real estate investment “bucket” that I’m not including in this plan. We own a condo that I plan on unloading within 1-2 years. Any profit from the sale will be invested in this real estate “bucket”.

Emergency Funds: Yes (not included below)
Debt: Mortgage on condo we are renting (will be sold soon)
Tax Status: Married, filing jointly
Tax Rate: Federal - 25% tax bracket, State – 0% (Washington state)
Age: Him 34, Her 40 (1 child on the way)

His Pension: Estimated to be 41% of high year salary with COLA. Because of the secure nature of my pension and tolerance for risk, we’ve decided at this time to pursue a 100% equity position for this portfolio. We do hold bonds in our account that is dedicated to future real estate purchase. I’m not factoring in Social Security although we will be eligible for such income at retirement.

Desired Asset Allocation:
Equity Allocation Goal: 100%
International Equity Position Goal: 40%

The total is a bit less than mid 6 figures.

Current Asset Allocation:
Taxable:
VG Prime Money Market (VMMXX) 4.51% 0.24
VG Total International Index (VGTSX) 11.54% 0.27

His Roth (Vanguard)
VG Total Stock Market Index (VTSMX) 4.85% 0.15
VG Total International Index (VGTSX) 4.36% 0.27

His TSP
C Fund (Common Stock) 13.76% 0.03
I Fund (International) 5.06% 0.03
S Fund (Small Cap) 5.76% 0.03

Her IRA Rollover (Vanguard)
VG Diversified Equity (VDEQX) 25.18% 0.38
VG Total Stock Market Index (VTSMX) 21.04% 0.15

Her TSP
C Fund (Common Stock) 2.20% 0.03
I Fund (International) 0.81% 0.03
S Fund (Small Cap) 0.93% 0.03

Total 100.00%

New Annual Contributions
His TSP - $15,500 + matching
Her TSP - $15,500
His Roth - $5,000
Taxable - $10,000 (Estimated)

Fund available in TSP:
Common Stock Index (C Fund)
International Stock Index (I Fund)
Small Cap Stock Index (S Fund)
Fixed Income Index (F Fund)
Government Securities (G Fund)

Once our child is born we will open up a 529 or something else for their college costs.

1. What do you recommend with regard to structuring this retirement portfolio? What funds?

2. I’ve done a bit of reading but am still pretty weak when it comes to understanding tax efficiency. I’m worried that my current portfolio is not tax efficient. Do you have any recommendations on how to improve the tax efficiency of this portfolio?

3. With regard to my taxable account dedicated to future real estate purchase, I prefer to keep it fairly simple. What would be your recommended equity/bond split and fund choices for such an account? I probably won’t buy for at least 10 years but can’t say for sure.

4. Any other thoughts/ideas/suggestions?

Sorry for the length of the post. Thanks again to everybody for your time and greetings from sunny West Africa!
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PiperWarrior
Posts: 4068
Joined: Fri Dec 21, 2007 4:55 am
Location: right on course

Post by PiperWarrior »

Welcome to the forum!

How about something like this?

Taxable:
16.05% VFWIX/VEU FTSE All-World ex-US

His Roth (Vanguard)
9.21% VGTSX Total International

His TSP
17.45% TSP C
7.13% TSP S

Her IRA Rollover (Vanguard)
10% VGSIX REIT Index
14.74% VGTSX Total International
21.48% VTSMX Total Stock Market

Her Roth IRA
0%

Her TSP
3.94% TSP C

Total: 100.00%

New Contributions ($46,000):

Taxable - $10,000 (Estimated)
$10,000 VFWIX FTSE All-World ex-US

His Roth - $5,000
$5,000 VGTSX Total International

His TSP - $15,500 + matching
$8,600 TSP C
$6,900 TSP S

Her TSP - $15,500
$15,000 TSP C

This adds up to:

50% domestic stocks
10% REIT
40% international stocks

I put VFWIX/VEU FTSE All-World ex-US in your taxable account so that you can get foreign tax credit. I put Total International in tax-advantaged accounts. For a comparison between the two funds, see the FAQ at the bottom of International Stocks.

If you have losses in VGTSX Total International in your taxable account, you can exchange it to VFWIX FTSE All-World ex-US and write off the loss on your tax return. Otherwise, leave it alone. You may still want to take dividends from VGTSX in cash to prevent it from growing too fast. Note that VGTSX is not eligible for foreign tax credit.

I've designated Her Rollover IRA as a rebalancing hub if you will. You should be able to do all the rebalancing there.

Is there any reason you are not planning to contribute to Her Roth IRA? Even if you are planning to buy a real estate property, you can withdraw contributions (but not earnings) from a Roth IRA without penalty. If you do contribute to Her Roth IRA, you can contribute to VGTSX Total international.

For your age, I recommend at least 15% to 20% of bonds. You may be willing to take risk, but you may not be able to take risk. That is, you may feel OK with ups and downs of the market, but your portfolio may not recover on time if the stock market tanks by 50% in the next 20 years. If you would like to put bonds, I would use TSP G in one of your TSP accounts and VIPSX Inflation Protected Securities in Her Rollover IRA. If you are not adding bonds at this time, I would strongly recommend you to come up with a plan on how to add bonds, say "1% a year", "2% a year starting 15 years before retirement", or something. If you are planning to switch from stocks/bonds=100/0 to 50/50 upon retirement, and the market crashes just one year before your retirement, you may be forced to work for a few more years.

If you probably do not buy a real estate property for 10 years at least, I would pretend that the plan does not exist and continue to max out TSPs and Roth IRAs and put the remaining money in a taxable account.

Meanwhile, take good care of your wife. Enjoy your exciting time!
Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Post by Tatupu »

Piper,

Thanks very much for your comprehensive response. You've given me some great info to mull over.

I agree that it makes sense to fund a Roth IRA for her. Done.

With regard to bonds, if I did decide to go to 20% bonds, what's the best approach? Do you recommend I just start putting all new TSP money into the G Fund until reaching the desired? Or should I convert some of my current TSP money into the G Fund?

I really like the idea of using her Rollover IRA as a rebalancing hub. Thanks.

I'll research some of the funds you recommended, review any other responses, and do some more homework.

Thanks again. Very helpful.
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PiperWarrior
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Joined: Fri Dec 21, 2007 4:55 am
Location: right on course

Post by PiperWarrior »

Tatupu wrote:I agree that it makes sense to fund a Roth IRA for her. Done.
Just checking here. Your wife can contribute to 2007 Roth IRA until April 15, 2008. If you just contributed to 2008, you might also do 2007. The contribution limits for 2007 and 2008 Roth IRA are $4,000 and $5,000, respectively.
Tatupu wrote:With regard to bonds, if I did decide to go to 20% bonds, what's the best approach? Do you recommend I just start putting all new TSP money into the G Fund until reaching the desired? Or should I convert some of my current TSP money into the G Fund?
Either should do fine. Which one is the best? That depends on what happens to the market in the future. I personally wouldn't worry about this because I don't have a crystal ball. Both professional and amateur investors claim to have crystal balls, but they haven't been able to consistently time the market. It's not worth worrying about, so do what you feel comfortable with.

I forgot to say a few things in the original post, so here we go.

- 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.

- In Her Rollover IRA, I suggested VTSMX Total Stock Market. If your portfolio is at mid 6 figure, your wife may be eligible for Admiral Shares. It's a way of Vanguard saying "thank you for investing a lot of money with us." If you are eligible, you can use VTSAX Total Stock Market Admiral Shares. Don't worry too much about this because you can request a conversion from VTSMX to VTSAX for free by calling up Vanguard if you have at least $100K in VTSMX.

- Admiral Shares is the reason I filled up His Roth IRA with Total International. By putting Total International in His Roth IRA, I don't have to put as much Total International in Her Rollover IRA. This in turn makes it likely for you to attain Admiral Shares.

- The reason why I went with an international fund from Vanguard is because both Total International and FTSE All-World ex-US include emerging markets. TSP has an excellent low-cost international fund, but it does not include emerging markets. Enjoy TSP C, S, and G instead.

- The ratio of 3:1 between TSP C and TSP S more or less replicates Total Stock Market -- the entire domestic stock market. You might want to take this into account when you rebalance.
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AnimalCrackers
Posts: 436
Joined: Mon Mar 19, 2007 1:37 pm
Location: Northern Front Range, Colorado

Post by AnimalCrackers »

PiperWarrior wrote:- The ratio of 3:1 between TSP C and TSP S more or less replicates Total Stock Market -- the entire domestic stock market. You might want to take this into account when you rebalance.
To replicate TSM, the C (S&P500) to S (Wilshire 4500) ratio is now closer to 4:1 than 3:1. It took me way too long to figure this out.

https://personal.vanguard.com/us/funds/ ... statistics

Regardless, excellent advice as always PiperWarrior.

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

Post by PiperWarrior »

AnimalCrackers wrote:To replicate TSM, the C (S&P500) to S (Wilshire 4500) ratio is now closer to 4:1 than 3:1. It took me way too long to figure this out.
Thank you for pointing this out.
Joe S
Posts: 64
Joined: Thu Mar 13, 2008 5:07 pm

Post by Joe S »

My advice: Don't quit your job, you'll be fine if you handle the boredom, uncle takes care of its own like no other employer in the world.
Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Post by Tatupu »

With regard to uncle taking care of his own, whether I agree with you depends on the day. With regard to boredom, believe me, West Africa ain't boring. DC on the other hand ...

Cheers!
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alec
Posts: 3084
Joined: Fri Mar 02, 2007 2:15 pm

Post by alec »

Tatupu wrote:With regard to uncle taking care of his own, whether I agree with you depends on the day. With regard to boredom, believe me, West Africa ain't boring. DC on the other hand ...

Cheers!
I take it you haven't been on the beltway in a while, eh? :wink:
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