A little portfolio advice for a novice?

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rav2fi
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Joined: Fri Jan 02, 2015 11:15 am

A little portfolio advice for a novice?

Post by rav2fi » Fri Jan 02, 2015 11:50 am

Hello everyone,

I was wondering if I could get some help regarding how to structure my portfolio. I am a little late to the investing/retirement planning game (I am 33), but I guess it's better late and never. I recently started contributing to my employers 401K plan (25% match on the first 6% of my income) and I also have a IRA (traditional) and a taxable investment account.

I plan to max out my 401K and the IRA this year and then also invest in the taxable account. I do not hold any individual stocks in any of my accounts and it all consists of Vanguard funds. I am having a difficult time as to how to go ahead and structure the funds between these accounts as efficiently as possible. As per the advice here, I should be doing the following:

1. Put the most tax-inefficient funds in my tax-deferred and tax-free accounts.
2. Use only tax-efficient funds in my taxable accounts.

Here is what my current structure looks like and for some reason I don't feel like this is the most efficient of structure I could possibly have based on the points above. Also, I am ready to take some risk right now and am thinking I don't have to put a lot into bonds for the next 7-8 years or so therefore, I am thinking more like a 90/10 allocation. Since I started my taxable account before my 401K, I am a little low on bonds right now. My currently allocation mix is 97/3 but I am working on fixing this.

A bit about myself:
Age: 33 and married. (Spouse is a student and without any income at the moment)
Salary: 105K/year
Tax status: Married Filing Jointly
Emergency funds: Saved (6 mos of expenses into a high yield savings account)

Portfolio structure - Current: 97% stocks/3% bonds. Desired: 90% stocks/10% bonds

Employer 401K: (30% out of every paycheck)
• Vanguard Total Stock Market Index Fund Institutional Shares (Exp R: 0.05) - 80.0% into this per paycheck
• Vanguard Total Bond Market Index Fund Institutional Plus Shares (Exp R: 0.04) - 20.0% into this per paycheck but I am thinking about upping this and reducing the total stock market fund

Traditional IRA:
• VTIVX – Target Retirement 2045 (Exp R: 0.18) - Maxed out in 2014 and plan the same for 2015

Taxable account: (Going forward, invest in these after what is left over after monthly expenses)
• VTSAX – Total Stock Market Admiral (Exp R: 0.05)
• VTIAX – International Stock Admiral (Exp R: 0.14)

Based on my portfolio structure above, could I be investing more efficiently and possibly reduce the overall expense ratio? As I am not an expert on investing, my goal is to set it and forget it and maybe re-balance my portfolio every 6 or 12 months).

Also please let me know if I can provide any further information.

Thanks in advance.

Grt2bOutdoors
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Re: A little portfolio advice for a novice?

Post by Grt2bOutdoors » Fri Jan 02, 2015 1:16 pm

Hello and welcome to the forum!
Expense ratios of above listed funds are about as low as one could expect. Your portfolio is aggressive, I would seriously consider holding an 80/20 portfolio and rebalancing as needed. Your portfolio funds are well diversified, low cost. Great job on fund selection! :beer
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Novine
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Re: A little portfolio advice for a novice?

Post by Novine » Fri Jan 02, 2015 1:33 pm

You could dump the Target Retirement fund and use one of the funds from the 3 fund portfolio that you otherwise have. But without knowing what percentage each of your buckets (401k, tIRA, Roth IRA) holds of your total portfolio, it's hard to get more specific than that. Otherwise, it's hard to beat what you're doing today when it comes to the ERs.

From what you have posted, you're on the right track for 33. If you can successfully max out your 401k and IRA contributions every year, by investing in low-cost index funds, you should be in great shape come retirement time. Even if you have to dial back those contributions in the future because of kids, home, etc., the more you save now,the better.

Logan T
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Re: A little portfolio advice for a novice?

Post by Logan T » Fri Jan 02, 2015 1:57 pm

I would drop the Target Retirement fund and exchange it for one of your other funds (Total US, Total International, or Total Bond). Also remember that you can max out an IRA for your wife. So in 2015, you can do $18,000 in your 401k, $5,500 for your IRA, and $5,500 for your wife's IRA. Only after maxing out all of those should you contribute to your taxable account. You still have until April 15, 2015 to open and max your wife's IRA for 2014.

Another note is that if you have a high deductible health plan, you should open and max an HSA. Like the IRA, you have until April 15 to max your HSA for 2014.
You really don't need to begin saving for retirement before you reach 60. At that point, simply save 250 percent of your income each year and you'll be able to retire comfortably at 70. -Jonathan Pond

rav2fi
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Re: A little portfolio advice for a novice?

Post by rav2fi » Fri Jan 02, 2015 2:50 pm

Thank you everyone. So far based on all of your feedback, I think I have the right mix. That feels good to hear. :happy

I think Logan's and Novine's advice of dropping the Target Retirement Fund makes sense. Maybe hold the bond and international stocks in Tax Deferred (IRA and 401K) (heavily at least) and Total Stock Admiral in Taxable? What do you guys think?

Also, can I simply dump the target retirement fund and just transfer the money in a different fund within my IRA? Are there any penalties associated with this usually?

-------
@Novine: Thanks for your advice. My total investments so far is around 58K. I hold most of the money in taxable since I started that a while back and didn't quite open a 401K recently, which I kind of regret but have definitely learned from my mistake. Here is how it currently looks:

Taxable: ~46K (15K in International stock admiral and 31K in Total stock admiral)
IRA: ~11.5K
401K: 1.2K :(

I am going to focus simply on maxing out 401K and IRA first before I put more money into the taxable account.

-------
@Logan: Thanks for your advice. I wasn't aware that I could open an IRA for my wife as well. I will definitely look into this. So does this account have to be under my account or can this be solely on my wife's name, as in a seperate Vanguard account for her? Thanks again.

Logan T
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Location: Colorado

Re: A little portfolio advice for a novice?

Post by Logan T » Fri Jan 02, 2015 3:02 pm

rav2fi wrote:@Logan: Thanks for your advice. I wasn't aware that I could open an IRA for my wife as well. I will definitely look into this. So does this account have to be under my account or can this be solely on my wife's name, as in a seperate Vanguard account for her? Thanks again.
DEFINITION OF 'SPOUSAL IRA'
A type of individual retirement account that allows a working spouse to contribute to a nonworking spouse's retirement savings. A spousal IRA creates an exception to the provision that an individual must have earned income to contribute to an IRA. The working spouse's income, however, must equal or exceed the total IRA contributions made on behalf of both spouses.


INVESTOPEDIA EXPLAINS 'SPOUSAL IRA'
To qualify to make spousal IRA contributions, the couple also must file a joint tax return. Spousal IRAs can be either traditional or Roth IRAs, and are subject to the same annual contribution limits, income limits and catch-up contribution provisions as traditional and Roth IRAs. While IRAs cannot be held jointly in both spouse's names, spouses can share their account distributions in retirement.
Just open an IRA in her name and make your contributions as normal. Just make sure to choose 2014 for the contribution year until you max it out, then switch to 2015.
You really don't need to begin saving for retirement before you reach 60. At that point, simply save 250 percent of your income each year and you'll be able to retire comfortably at 70. -Jonathan Pond

Logan T
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Location: Colorado

Re: A little portfolio advice for a novice?

Post by Logan T » Fri Jan 02, 2015 3:06 pm

rav2fi wrote:I think Logan's and Novine's advice of dropping the Target Retirement Fund makes sense. Maybe hold the bond and international stocks in Tax Deferred (IRA and 401K) (heavily at least) and Total Stock Admiral in Taxable? What do you guys think?

Also, can I simply dump the target retirement fund and just transfer the money in a different fund within my IRA? Are there any penalties associated with this usually?
There are no penalties or taxes when you buy/sell in an IRA. You should actually be able to exchange straight from your Target Date fund to the new fund, without ever going to cash. Since you have $11.5k in your IRA, you'll be able to purchase an admiral shares fund to save on fees.
You really don't need to begin saving for retirement before you reach 60. At that point, simply save 250 percent of your income each year and you'll be able to retire comfortably at 70. -Jonathan Pond

rav2fi
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Joined: Fri Jan 02, 2015 11:15 am

Re: A little portfolio advice for a novice?

Post by rav2fi » Fri Jan 02, 2015 3:23 pm

There are no penalties or taxes when you buy/sell in an IRA. You should actually be able to exchange straight from your Target Date fund to the new fund, without ever going to cash. Since you have $11.5k in your IRA, you'll be able to purchase an admiral shares fund to save on fees.
This sounds great. Thank you. :happy

yosef
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Re: A little portfolio advice for a novice?

Post by yosef » Fri Jan 02, 2015 3:35 pm

If your existing IRA is not your wife's, is it a non-deductible IRA? As I understand it, you are not eligible to deduct Traditional IRA contributions if you are eligible for a 401k plan with your employer. In this case, your IRA should be a Roth. The spousal IRA can be either Roth or Traditional until she has access to a company plan.

rav2fi
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Re: A little portfolio advice for a novice?

Post by rav2fi » Fri Jan 02, 2015 5:05 pm

yosef wrote:If your existing IRA is not your wife's, is it a non-deductible IRA? As I understand it, you are not eligible to deduct Traditional IRA contributions if you are eligible for a 401k plan with your employer. In this case, your IRA should be a Roth. The spousal IRA can be either Roth or Traditional until she has access to a company plan.
I believe you are correct. Last year my IRA was tax deductible but this year it won't be. Is it still bad to have a traditional IRA as I understand Roth is not tax deductible either.

Logan T
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Re: A little portfolio advice for a novice?

Post by Logan T » Fri Jan 02, 2015 5:21 pm

rav2fi wrote:
yosef wrote:If your existing IRA is not your wife's, is it a non-deductible IRA? As I understand it, you are not eligible to deduct Traditional IRA contributions if you are eligible for a 401k plan with your employer. In this case, your IRA should be a Roth. The spousal IRA can be either Roth or Traditional until she has access to a company plan.
I believe you are correct. Last year my IRA was tax deductible but this year it won't be. Is it still bad to have a traditional IRA as I understand Roth is not tax deductible either.
A Roth IRA is not deductible, but it grows tax-free and is tax-free when you withdraw from it in retirement. Therefore, you pay the taxes now and never again.

But yosef is wrong. You can deduct a Traditional IRA as long as your MAGI (Modified Adjusted Gross Income) is below a certain level. Here's a link: http://www.irs.gov/Retirement-Plans/IRA ... ion-Limits

401k contributions lower your MAGI. So in 2015, since you'll now be maxing out your 401k, you should be able to fully deduct you and your wife's Traditional IRA, if you so choose that route. Otherwise you can contribute to Roth IRAs to diversify your future taxes a bit.

For example...

In 2015, your MAGI must be $98,000 or less to take the full IRA deduction if you are married filing joint. So if you make $105,000 in 2015 and contribute $18,000 to your traditional 401k, your MAGI is $87,000. You can then max out Traditional IRAs for both you and your wife and take the full deduction.

I'm not tax expert and I'm sure there's more that goes into calculating your MAGI, but that's just a quick example.
You really don't need to begin saving for retirement before you reach 60. At that point, simply save 250 percent of your income each year and you'll be able to retire comfortably at 70. -Jonathan Pond

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Duckie
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Re: A little portfolio advice for a novice?

Post by Duckie » Fri Jan 02, 2015 5:22 pm

rav2fi wrote:Last year my IRA was tax deductible but this year it won't be. Is it still bad to have a traditional IRA as I understand Roth is not tax deductible either.
The difference is that when you take the money out, the earnings from the TIRA will be taxable but the earnings from the Roth IRA will not. If you can't take the deduction, make the contribution to the Roth IRA.

Novine
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Re: A little portfolio advice for a novice?

Post by Novine » Fri Jan 02, 2015 11:26 pm

"I wasn't aware that I could open an IRA for my wife as well. I will definitely look into this. So does this account have to be under my account or can this be solely on my wife's name, as in a seperate Vanguard account for her?"

Although this was touched on, just to clarify this a bit further. IRA = Individual Retirement Account/Arrangement. The account belongs to the individual so you and your wife will have separate IRAs and separate Vanguard accounts for those IRAs. Because she's not currently working and thus doesn't have earned income, it's considered a spousal IRA because you'll be funding the IRA. But the IRA will belong to her and would be hers even if you were to divorce. Otherwise, the general rules regarding contributions, etc. are the same for the spousal IRA as they are for your standard IRA.

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BL
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Re: A little portfolio advice for a novice?

Post by BL » Sat Jan 03, 2015 12:18 am

Some might consider using a Roth for one or both IRAs. If she doesn't have any tIRAs, she could easily do the Backdoor Roth (see Wiki) when your combined income is too high for direct Roth contributions. That is simply converting a non-deductible tIRA to Roth.

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carorun
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Re: A little portfolio advice for a novice?

Post by carorun » Sat Jan 03, 2015 12:42 am

Looks like uou are on the right track. Do you get a 401k match? If so, I don't recommend making your 401k early. At a 30% contribution rate, you'd hit the 18k maximum by summer, and most companies don't let you collect the match if you aren't participating that pay period. A better contribution percentage would be 18,000/105,000= 17.14%. If your plan only allows whole number percentages (like mine) then go with 17% and do the math at the end of the year to get as close as you can.

rav2fi
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Re: A little portfolio advice for a novice?

Post by rav2fi » Sat Jan 03, 2015 1:59 pm

Novine wrote:"I wasn't aware that I could open an IRA for my wife as well. I will definitely look into this. So does this account have to be under my account or can this be solely on my wife's name, as in a seperate Vanguard account for her?"

Although this was touched on, just to clarify this a bit further. IRA = Individual Retirement Account/Arrangement. The account belongs to the individual so you and your wife will have separate IRAs and separate Vanguard accounts for those IRAs. Because she's not currently working and thus doesn't have earned income, it's considered a spousal IRA because you'll be funding the IRA. But the IRA will belong to her and would be hers even if you were to divorce. Otherwise, the general rules regarding contributions, etc. are the same for the spousal IRA as they are for your standard IRA.
Thanks for the explanation. I think I am now I am pretty clear on this. I will definitely be opening an account for her soon.
Some might consider using a Roth for one or both IRAs. If she doesn't have any tIRAs, she could easily do the Backdoor Roth (see Wiki) when your combined income is too high for direct Roth contributions. That is simply converting a non-deductible tIRA to Roth.
Thanks. Just did some reading on this. I guess I won't have to think about backdoor for a while since I don't see us crossing that income threshold for a year or two. :happy

rav2fi
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Re: A little portfolio advice for a novice?

Post by rav2fi » Sat Jan 03, 2015 2:02 pm

vachica wrote:Looks like uou are on the right track. Do you get a 401k match? If so, I don't recommend making your 401k early. At a 30% contribution rate, you'd hit the 18k maximum by summer, and most companies don't let you collect the match if you aren't participating that pay period. A better contribution percentage would be 18,000/105,000= 17.14%. If your plan only allows whole number percentages (like mine) then go with 17% and do the math at the end of the year to get as close as you can.
I actually do get a 25% match on the first 6% of my income. I wasn't aware about the employer not matching for non participating months. I thought as long as I make 18K this year, they will match the 25%. I need to do some follow-up's on this I guess. Thanks for bringing this to my attention.

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