Check up and contribution/portfolio advice

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mopman78
Posts: 24
Joined: Fri Jan 06, 2017 2:46 pm

Check up and contribution/portfolio advice

Post by mopman78 » Tue Jan 17, 2017 10:31 am

Once again, the insight I've already gained from reading the forums is amazing. I'd love to get some advice specific to my portfolio.

First, a little background information. My wife and I are very fortunate to be doing quite well financially but this is a relatively recent set of circumstances. We spent a lot of extra years working on graduate degrees, took low paying jobs right out of school, had some major setbacks and lived beyond our means for many years, betting on being able to earn our way out of it. If we had it to do over again, we would definitely change a few things but that's all behind us now. We've managed to right the ship but don't have quite the retirement accounts that we would like to at this point (~$100k split between our two 401k's). We are long-term investors and are willing to take on a considerable amount of risk for the next few years and will probably moderate that risk in our 40's.

Emergency funds: six months of expenses
Debt: Mortgage $415k @ 3.8% fixed, HELOC $96k at 5.75% variable, $120k in combined his and hers student loans @ ~3%, $23k car loan @ 4%, no credit card debt
Tax Filing Status: Married Filing Jointly, no kids
Tax Rate: 33% Federal

Age: 38
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 20-40% of stocks

His 401k
100% Vanguard 2045 Target Date fund (0.16%)

Her 401k
100% Vanguard 2045 Target Date fund (0.16%)

New annual Contributions
$18k + $7.5k match - his pre-tax 401k (current)
$15k - his post-tax, non-Roth 401k (haven't started yet and any post-tax contributions must be in the same funds as pre-tax)
$18k + $4.2 match - her pre-tax 401k (current)

We both receive annual bonuses as well as variable awards of restricted stock units each year from our respective employers. The variability and the vesting schedules make it complicated to figure out the exact amount but it's probably in the range of $75k in bonuses and $15k -$25k a year in RSU's.

So it seems to me, again after doing a lot of reading here and from other sources including both Boglehead books, that we have some decisions to make. My immediate plan is to pay off our HELOC asap. The rate is 5.75% and it's probably going up in the near future. The good news is we should be able to do it this year with aggressive monthly payments, vesting RSU's and lump sum bonuses going towards it. This gives us a year of runway to figure out how to handle next year's retirement contributions.

1-Do I start maxing out my post-tax, non-Roth contributions? I can roll these over into a Roth IRA 4 times a year. My thoughts were I would roll the pre-tax to a tIRA and the post-tax to a rIRA annually. I love the simplicity of the target date funds but I was thinking of a different balanced fund at about 80%/20%.

2-What can I do with the bonuses and RSU's? I want to immediately sell the RSU's as they vest because the idea of having that much money in our employers' stock doesn't sit well and I want to diversify. Should this all go into a taxable account? Future circumstances could change if we have kids so it may go into 529's or to some other non-retirement investments.

3-If I dollar cost average into different accounts, pre-tax, post-tax non-Roth, taxable, how do I handle balancing my portfolio? It seems like it gets complicated quickly and seeking out balanced funds may be a good idea.

If you've stuck with this long post all the way, I'd love to hear your advice. Also, if there's any more information that I may have omitted that would help, please let me know.

lazylarry
Posts: 347
Joined: Sat Apr 04, 2015 10:35 pm
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Re: Check up and contribution/portfolio advice

Post by lazylarry » Tue Jan 17, 2017 10:43 pm

$18k + $7.5k match - his pre-tax 401k (current)
$15k - his post-tax, non-Roth 401k (haven't started yet and any post-tax contributions must be in the same funds as pre-tax)


Hmmm this is interesting, I thought you could only contribute 18k to a 401ks in total, are you sure about this? Nice match by the way. Obviously go for the pretax 401k in your situation
http://whitecoatinvestor.com/multiple-401k-rules/

My immediate plan is to pay off our HELOC asap. The rate is 5.75% and it's probably going up in the near future. The good news is we should be able to do it this year with aggressive monthly payments, vesting RSU's and lump sum bonuses going towards it.


That seems like an excellent plan.
1-Do I start maxing out my post-tax, non-Roth contributions? I can roll these over into a Roth IRA 4 times a year. My thoughts were I would roll the pre-tax to a tIRA and the post-tax to a rIRA annually. I love the simplicity of the target date funds but I was thinking of a different balanced fund at about 80%/20%.


Only if you have maxed out other tax advantaged accounts. It really just depends on you, if rebalancing is too much work and you enjoy other things in life..then a target date is perfectly fine.

2-What can I do with the bonuses and RSU's? I want to immediately sell the RSU's as they vest because the idea of having that much money in our employers' stock doesn't sit well and I want to diversify. Should this all go into a taxable account? Future circumstances could change if we have kids so it may go into 529's or to some other non-retirement investments.


I don't think you have other options than taxable (investing in equtiies/bonds). Could use CDs if there are some short term needs you know you will have. Utilize things like tax loss harvesting. I think a 529 would be beneficial for you, but would read up on this as it only helps if you are more wealthy (e.g. not getting financial aid) and can contribute a good bit. Could be useful for kiddos graduate school also.

3-If I dollar cost average into different accounts, pre-tax, post-tax non-Roth, taxable, how do I handle balancing my portfolio? It seems like it gets complicated quickly and seeking out balanced funds may be a good idea.


That seems super difficult. I think easiest honestly just to lump sum it if possible. Usually 401ks have paycheck deductions, thus that should be automatic. For taxable, you could just invest when you have money or monthly. You could just rebalance all portfolios at the end of the year. I think there are some studies showing that more frequent rebalancing doesn't really help that much.
Asking questions: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212 | My profile: https://www.bogleheads.org/forum/memberlist.php?mode=viewprofile&u=86026

Compound
Posts: 435
Joined: Mon May 26, 2014 1:32 pm

Re: Check up and contribution/portfolio advice

Post by Compound » Wed Jan 18, 2017 6:23 am

mopman78 wrote:Once again, the insight I've already gained from reading the forums is amazing. I'd love to get some advice specific to my portfolio.

1-Do I start maxing out my post-tax, non-Roth contributions? I can roll these over into a Roth IRA 4 times a year. My thoughts were I would roll the pre-tax to a tIRA and the post-tax to a rIRA annually. I love the simplicity of the target date funds but I was thinking of a different balanced fund at about 80%/20%.

2-What can I do with the bonuses and RSU's? I want to immediately sell the RSU's as they vest because the idea of having that much money in our employers' stock doesn't sit well and I want to diversify. Should this all go into a taxable account? Future circumstances could change if we have kids so it may go into 529's or to some other non-retirement investments.

3-If I dollar cost average into different accounts, pre-tax, post-tax non-Roth, taxable, how do I handle balancing my portfolio? It seems like it gets complicated quickly and seeking out balanced funds may be a good idea.

If you've stuck with this long post all the way, I'd love to hear your advice. Also, if there's any more information that I may have omitted that would help, please let me know.


1. Yes, definitely start going with this. This is the "mega-backdoor Roth" and, if available, is a great way for high income earners like yourself to diversify into Roth space. That Roth space is so valuable that you probably should do this starting this year, even if it means a slight delay in paying off the HELOC. That said, once your retirement buckets are filled, put every available dollar to ending the HELOC, the car loan, and (arguably) the student loans.

2. See answer to #1. Once loans are done, and all retirement buckets are filled (you could also consider the regular "backdoor Roth" as well), then start dumping money into taxable accounts.

3. I can relate to the concern about complexity. However, in reality having multiple asset locations really isn't that bad. Set your target asset allocation and then rebalance once a year. This requires a bit of forethought at the start to setup, but maintaining it really isn't a big chore. Don't be afraid to make some mistakes with this -- just get started, you will figure it out.

mopman78
Posts: 24
Joined: Fri Jan 06, 2017 2:46 pm

Re: Check up and contribution/portfolio advice

Post by mopman78 » Wed Jan 18, 2017 8:17 am

Thanks for the insights. I'm sure my worry over the complexity stems from all of this being relatively new territory for us. I'm eager to get started and hope it will seem less daunting after I've jumped in.

student
Posts: 1161
Joined: Fri Apr 03, 2015 6:58 am

Re: Check up and contribution/portfolio advice

Post by student » Wed Jan 18, 2017 8:34 am

lazylarry wrote:
Hmmm this is interesting, I thought you could only contribute 18k to a 401ks in total, are you sure about this? Nice match by the way. Obviously go for the pretax 401k in your situation
http://whitecoatinvestor.com/multiple-401k-rules/


My understanding is that employer's match does not count against the limit.
http://www.bankrate.com/finance/retirem ... limit.aspx

mopman78
Posts: 24
Joined: Fri Jan 06, 2017 2:46 pm

Re: Check up and contribution/portfolio advice

Post by mopman78 » Wed Jan 18, 2017 8:51 am

The limit is $18k pre-tax or Roth plus whatever the employer matches. The government limit for a 401k including after tax non-Roth is $54k if I recall correctly but my employer caps it at 10% of income.

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Earl Lemongrab
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Joined: Tue Jun 10, 2014 1:14 am

Re: Check up and contribution/portfolio advice

Post by Earl Lemongrab » Wed Jan 18, 2017 11:00 am

lazylarry wrote:
$18k + $7.5k match - his pre-tax 401k (current)
$15k - his post-tax, non-Roth 401k (haven't started yet and any post-tax contributions must be in the same funds as pre-tax)

Hmmm this is interesting, I thought you could only contribute 18k to a 401ks in total, are you sure about this?

See the many threads on Mega Backdoor Roth. Here's one:

https://www.bogleheads.org/forum/viewtopic.php?t=137366
This week's fortune cookie: "The stock market may be your ticket to success." I sure hope so!

mopman78
Posts: 24
Joined: Fri Jan 06, 2017 2:46 pm

Re: Check up and contribution/portfolio advice

Post by mopman78 » Wed Oct 11, 2017 7:11 pm

I'm enjoying coming back to this thread and as always, the great advice in the forums.

Since my original posting I've started rIRAs for myself and my wife and have done the max backdoor contribution. I've also used the mega backdoor IRA strategy with my post-tax contributions. Other than HSA's I think I've exhausted my tax-protected investments and am contemplating taxable investments.

I still worry a lot about our late start to retirement savings. However, I'm starting to feel more optimistic. Hopefully I don't screw anything up when it comes to tax season.

Oh, the HELOC balance is also down to ~$35k and should be paid off in March '18

dcarste
Posts: 113
Joined: Mon Apr 27, 2015 4:55 pm

Re: Check up and contribution/portfolio advice

Post by dcarste » Wed Oct 11, 2017 8:43 pm

Tackle all debt except your mortgage as aggressively as you can and have 6 to 8 months of emergency savings in cash/online savings account, its a life changer. I'd still during this time contribute only as much as your company would match, no more. That match, is essentially a free 50% or 100% instant return...depending on their match level, so you can't pass that up...other than that pay off all debt. Paying off that car loan is essentially you getting a 4% return on that money you pay them to pay off the note (you don't pay that interest so that is your "return on investment" on that debt). Same as HELOC. Same as student loans. Those are guaranteed rates of return based on your interest rate you pay them. Life is very different without debt....

I HATE HATE personally target retirement funds. You should be 100 minus your age in bonds (according to Bogle) give or take a 5 to 10 points. For example for a 44 year old, 40% bonds...when you get to age 55, go to 50% bonds...7 years or so before retirement go to 60% bonds, and then never go more than 60 to 65% bonds (so 35% to 40% stocks during retirement). International somewhere between 20% and 33% of your STOCK portion. You do know he puts his grandsons money in the Balanced Index fund (60% stocks/40% bonds).

My favorite portfolio is something like this, easy to remember. 40% total us stock, 20% total int'l stock index, 40% US bond index. Crap you could keep it like that until you are 10 years from retirement and then add more bonds.

Don't take excess risk, save more, and save more - if you are concerned about retirement.

I'd just recommend paying off all debt like above (plus 6 to 8 months emergency savings), and only contributing what they match you.

It's like being retired when you don't have debt. Thats just my opinion.

mopman78
Posts: 24
Joined: Fri Jan 06, 2017 2:46 pm

Re: Check up and contribution/portfolio advice

Post by mopman78 » Thu Oct 12, 2017 7:57 pm

Why is the morgage exempt from your debt payoff recommendations when it has a higher interest rate the the student loans? Tax deduction?

That bond recommendation is much more conservative than im comfortable with. Target date has us around 10% bonds. With 25 years of work ahead of us, that seems plenty. I’m very willing to ride out the ups and downs.

Also, at our incomes we don’t get to contribute to many tax protected investments outside of our company plans so I really don’t get your advice to only contribute to the match. Target date funds with extremely low expense ratios and the benefit of pre-tax or tax deferred contributions seem to totally outweigh any negatives. The company match is 5%. I’m able to get five times that in tax advataged contributions through my company plan.

I appreciate that youre offering your opinion but i don’t think it fits my risk tolerance or goals.

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