Planning for home purchase and simplifying investments

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Topic Author
arch94110
Posts: 4
Joined: Fri Feb 24, 2017 11:52 am

Planning for home purchase and simplifying investments

Post by arch94110 » Fri Feb 24, 2017 3:41 pm

Hello, I'm new to the forum and would appreciate any advice on the questions at the end of this post.

Emergency funds: numbers below assume 5 months emergency
Debt: No current debt
Tax Filing Status: Married filing jointly with 2 dependent children
Tax Rate: 39.6% Federal, 9.3% State
State of Residence: CA
Age: 39
Desired Asset allocation: Unknown (it is one of my questions)
Desired International allocation: Unknown (it is one of my questions)
Goals: Home purchase in 2-3 years. Save for retirement.

- Current portfolio is mid 6 figures. Includes joint brokerage account and company stock.
- We were counting on our financial advisor to help manage. He left the firm abruptly and our account is no longer actively managed. We also don’t feel we can trust the path he put us on. He put us into dozens of individual stocks and funds. I started reading more about Bogleheads and spoke with friends and believe that simplification is a better

Current total assets

Taxable
19% - Cash (in 0% interest Money market account)

18% - Joint Brokerage Account - mixed: dozens of individual stocks and mutual funds. No longer actively managed. 53% US Large Cap, 18% US Mid Cap, 4% US Small Cap, 10% Developed Markets (Europe), 3% Emerging markets, 12% Mutual Funds

27% Company stock (AAPL) This % will grow each year I stay at the company based on vesting. Hypothetically this would go up ~4%/year using current asset status as a snapshot.

My 401k
12% - Joint Brokerage IRA Account - mixed: dozens of individual stocks and mutual funds. No longer actively managed.

12% - Employer 401k - LIHAX (LifePath Index 2045 fund)

Spouse 401k
6% Joint Brokerage IRA Account - mixed: dozens of individual stocks and mutual funds. No longer actively managed.

5% Fidelity 401k Targeted Retirement Fund

<1% Employer 401k - AGTHX (American Fund Growth Fund for America)

Contributions

New annual Contributions
$18000 my 401k (6% employer match on base salary)
$5000 spouse 401k (4% employer match on contribution)

Questions:
1. What should we do with our current cash?

Note the goal of having a housing down payment in 2-3 years. Home purchase price will likely be up to 1.5M. We would like to maximize our down payment in order to reduce our mortgage (we plan on putting much more than 20% down). 

The general advice I’ve heard is to move to low risk due to timeline (CDs, bonds, municipal bonds). Is that assumption correct? If so, what should I be looking for and what should I be avoiding?

2. How much of the brokerage account stocks should we be converting to cash and other types of lower risk investments due to home buying timeline?


3. How much AAPL company stock should we be converting to cash and other investments to diversify?

4. Should we consolidate our investments in our self-directed E-trade account?



We would like to simplify and move our Joint brokerage account investments to my E-trade account due to our bad experience with the financial institution and our former financial advisor. Advice from other Bogleheads and books I’ve read indicates that we can simplify our investments and manage the brokerage account ourselves. 

Based on the information provided above, what allocation do you recommend?


5. Should my spouse be maxing out their 401k and/or switching to a targeted retirement fund?



Spouse is concerned that their fund (AGTHX) has too high of an expense ratio (0.66%) and doesn’t like the targeted retirement funds due to perceived low growth and high expense ratio. Considering our tax bracket, my instinct says that we should max this out and go into the targeted retirement fund offered by the company and we would be better off tax wise.


6. We would like to find a “fee only” CFP to help us with these questions and work with us a few times a year to review our portfolio. If you have any recommendations for remote or San Francisco Bay Area based advisors it would be appreciated.

FoolStreet
Posts: 772
Joined: Fri Sep 07, 2012 12:18 am

Re: Planning for home purchase and simplifying investments

Post by FoolStreet » Thu Mar 09, 2017 9:35 pm

Pulling my comments from the local sub chapter thread.....

arch94110 wrote:
I think that we can cover these topics on this board if you repost the questions and background to the main page.

a. Pick vanguard (board approved!) or fidelity or Schwab
1. Keep it in a short term bond fund or high yield savings account. Depending on your income tax rate, consider 50/50 short term CA mini / short term national muni.
2. Sell upon vest is the overwhelming answer. Depending on AMT exposure, you could time sales for fat/lean years every other year. But no one really does that, so sell on vest
3. No time like the present! Make 3 buckets. E-fund, home-buying fund and "rest of portfolio". The first two buckets should be in a high yield savings account or short term bond funds. The rest should be governed by your overall asset allocation into the 3-fund portfolio.

Other comments: make sure you max out 401k, participate in ESPP and Backdoor Roth...all before 529s.
Thanks very much for the response.

a. Thanks, I had looked in Vanguard and Fidelity but will also check out Schwab.

1. Are there specific sites that give info on bonds? I have E-trade for my employee stock plan and it is a bit overwhelming to pick bond funds when going to the bonds section of that site.

2. Is there a downside to selling upon 1+ year of vest to avoid short term gains? My marginal tax bracket wavers between 33% and 39.6% depending on how many stocks happen to vest & the value so going from that to 15% for long term gains is pretty significant. We don't need the cash right away so I haven't done any short term sales.

3. Thanks for the advice on splitting the current taxable investments. I found 3 fee only financial advisor firms that I will be interviewing within the month to help with the detailed implementation and will re-post on my experiences with them if there is interest. I picked one community focused firm, one smaller personalized firm, and one mid sized service geared towards techies with stock plans like me.

Other comments: yes I'm maxing out 401k (just convinced spouse to do the same), maxing ESPP. Backdoor Roth I am going to need to think about and get more answers. We have ~300k in other IRAs and I am unsure about how the pro-rata rule impacts the benefits of using the backdoor. From my understanding if we put in 10k then 96.7% of what we put in would be taxable? Not sure if it is better to put that in the regular taxable bucket of investment.

Here is a link to my original post (not sure if that is what you meant for me to do):
viewtopic.php?f=1&t=212054

1. Check the wiki on this site. Great info on bonds. The prevailing wisdom is to simply choose TBM as part of the 3-fund folio. In this case you are asking about bonds for your efund ad down payment fund, in a taxable account with at mid to high tax exposure. In that case, the prevailing wisdom is to use a chunk in a high yield savings account and just be happy with the safety in case of emergencies, or Short term CDs. Many create tranches or layers to eke out a little more. That's what I do. I put a chunk in high yield savings and the rest I split 50/50 in California long term muni bond fund and limited term national muni fund. Both vanguard. There is risk in fluctuation, but it is not as severe as stock funds. If you want to be safer go shorter duration. The strategy with this setup is to have a low blended (average) duration and receive the higher yield on the state specific fund for the tax advantage. Again, any short term duration fund is fine. As you go shorter duration, yields get close to hi yield savings rates or CD rates. Bond fund Duration can very roughly be compared to CD duration, for context. (That is not at all technically true, but is a first order comparison). So don't pick a duration longer than your time period before you expect to buy the house. Philosophically, you are being conservative with this money because no one wants to go house shopping, find a dream house then realize you can't afford it because the stock market dropped.

2. That is a red herring. The DAY you vest is the day you incur income tax liability for the value of the RSU. You can't change the tax treatment of earned income for that amount. Done. Put a yellow stickie on your monitor to with the day of sale value and a note saying you will owe earned income on that value. Any gains on top of the day of vest price, gets into short term or long term gains. If you sell on day 1, there are no gains and you owe zero short term capital gains taxes. (You owe the earned income no matter what). Therefore, holding the stock is simply you betting that the stock will appreciate rapidly beyond the day of vest price. So, go back to the classic acid test, "would you buy the stock with your efund?" If not, then don't keep it. Sell on day 1. Fine, day 2 is okay.

It is slightly more complicated because typically RSUs are sold to cover taxes by ETrade as a default. So come tax time you will see two transactions. The first from when the sell to cover occurs. And the second when you actually sell. And the earned income from the RSU is tracked on your w-2

3. This board is all about do it yourself. We love vanguard. If you truly believe in the power of the 3-fund portfolio, then you don't need an advisor. If you want a manager, many here recommend vanguard advisory services which charge a slim .3% annual fee. Well worth the hand holding and you can always cancel. Some like using an advisor for all the other financial questions that pop up in life, like life insurance, estate planning, etc etc. again, you can get those answered here if you enjoy the community style.

Regarding the Backdoor, you have your arms around much of it. If you have an IRA already, then a backdoor Roth can be a headache. This is one reason I have not rolled my old 401k over. However, if you have a current 401k with low expense ratios that match the 3-fund folio (likely, if you work for a bigger firm, doubtful if you don't), then roll your IRA back into your current work 401k. Then you can start doing Backdoor Rothschild. That's what we did.

Why don't you post what you are currently invested in with their expense ratios, and your desired risk level (to come up with your overall stock v bond mix), and make sure you tell us what funds and expense ratios are available in your work account. We will give you some free advice.
Last edited by FoolStreet on Thu Mar 09, 2017 9:44 pm, edited 1 time in total.

FoolStreet
Posts: 772
Joined: Fri Sep 07, 2012 12:18 am

Re: Planning for home purchase and simplifying investments

Post by FoolStreet » Thu Mar 09, 2017 9:38 pm

Oh, and see if you can find these ETFs in your ETrade account

https://www.bogleheads.org/wiki/Three-fund_portfolio

Topic Author
arch94110
Posts: 4
Joined: Fri Feb 24, 2017 11:52 am

Re: Planning for home purchase and simplifying investments

Post by arch94110 » Thu Mar 16, 2017 5:04 pm

Thanks for the detailed reply.

Let's start with the 401k / IRA
Why don't you post what you are currently invested in with their expense ratios, and your desired risk level (to come up with your overall stock v bond mix), and make sure you tell us what funds and expense ratios are available in your work account. We will give you some free advice.
employer 401k - 100% in LIHAX (LifePath 2045). Expense Ratio 0.05%

- my IRA (Wells Fargo Advisors (no longer actively managed)) - it is a mess. Inception was 4/14/2014 from a previous rollover and it has 0.22% total ROI.
- ~100k in 18 individual stocks including questionable ones for a retirement account like GILD and FEYE. I assume my spouse's portfolio is very similar.
- ~18K in mutual funds
  • - ARBNX (Expense Ratio 1.22%)
    - JSOSX (Expense Ratio 0.68%)
    - DBLTX (Expense Ratio 0.47%)
- ~20k cash

I would appreciate advice on 2 questions:
1. Should I roll my messy Wells IRA into the employer 401k, transfer to E-trade, or keep it at Wells but manage it myself.
2. Should I keep everything in my 401k in the target fund (LIHAX) or create my own 3 fund portfolio out of the options below?

My original plan was to roll the Wells IRA over to a new IRA in E-trade and create a 3 or 4 fund portfolio, but you brought up the option of rolling it into my employer 401k (didn't know I could do that). I would also need my spouse to do the same with their account I imagine. They work for a smaller non-profit that does not have as many options.

Our risk level for the 401k / IRA is moderate to high since we are both 39 so at least 20 years from retirement.

Here are the options in my employer 401k plan other than the LifePath target funds.
  • Wells Fargo Stable Return Fund E
    Vanguard Total Bond Market Index Trust
    Eaton Vance Trust Co CIT High Yield Cl V
    Loomis Sayles Core Plus Bond Y
    Vanguard Windsor II Fund - Admiral
    Vanguard Institutional 500 Index Trust
    Fidelity Contrafund Commingled Pool
    William Blair SmallMid Cap Growth CIT II
    Vanguard Extended Market Index Trust
    Nuveen NWQ Small-Cap Value I
    Vanguard Total Intl Stock Idx InstlPls
    Dodge & Cox International Stock
    BNY Mellon EB Global Real Estate Sec II
    Schwab SDB Sweep Program
    Schwab SDB Securities

FoolStreet
Posts: 772
Joined: Fri Sep 07, 2012 12:18 am

Re: Planning for home purchase and simplifying investments

Post by FoolStreet » Sat Mar 25, 2017 11:18 am

arch94110 wrote:Thanks for the detailed reply.

Let's start with the 401k / IRA
Why don't you post what you are currently invested in with their expense ratios, and your desired risk level (to come up with your overall stock v bond mix), and make sure you tell us what funds and expense ratios are available in your work account. We will give you some free advice.
employer 401k - 100% in LIHAX (LifePath 2045). Expense Ratio 0.05%

- my IRA (Wells Fargo Advisors (no longer actively managed)) - it is a mess. Inception was 4/14/2014 from a previous rollover and it has 0.22% total ROI.
- ~100k in 18 individual stocks including questionable ones for a retirement account like GILD and FEYE. I assume my spouse's portfolio is very similar.
- ~18K in mutual funds
  • - ARBNX (Expense Ratio 1.22%)
    - JSOSX (Expense Ratio 0.68%)
    - DBLTX (Expense Ratio 0.47%)
- ~20k cash

I would appreciate advice on 2 questions:
1. Should I roll my messy Wells IRA into the employer 401k, transfer to E-trade, or keep it at Wells but manage it myself.
2. Should I keep everything in my 401k in the target fund (LIHAX) or create my own 3 fund portfolio out of the options below?

My original plan was to roll the Wells IRA over to a new IRA in E-trade and create a 3 or 4 fund portfolio, but you brought up the option of rolling it into my employer 401k (didn't know I could do that). I would also need my spouse to do the same with their account I imagine. They work for a smaller non-profit that does not have as many options.

Our risk level for the 401k / IRA is moderate to high since we are both 39 so at least 20 years from retirement.

Here are the options in my employer 401k plan other than the LifePath target funds.
  • Wells Fargo Stable Return Fund E
    Vanguard Total Bond Market Index Trust
    Eaton Vance Trust Co CIT High Yield Cl V
    Loomis Sayles Core Plus Bond Y
    Vanguard Windsor II Fund - Admiral
    Vanguard Institutional 500 Index Trust
    Fidelity Contrafund Commingled Pool
    William Blair SmallMid Cap Growth CIT II
    Vanguard Extended Market Index Trust
    Nuveen NWQ Small-Cap Value I
    Vanguard Total Intl Stock Idx InstlPls
    Dodge & Cox International Stock
    BNY Mellon EB Global Real Estate Sec II
    Schwab SDB Sweep Program
    Schwab SDB Securities
Sorry for the delay.

LIHAX is not bad. It is an aggressive index fund of index funds. I don't mean to be pedantic, but it is a good exercise to check the asset allocation for that fund by googling it to see what it is comprised of, in terms of % ratio stocks to bonds. <go google lihax now, find the Blackrock prospectus and see if you can estimate it, then come back>

Let's discuss that concept a bit because you glossed over it in your write up (it's ok many do). One of the fundamental Boglehead philosophies is that we set an appropriate asset allocation based on our risk profile. Some say, 100% minus age in bonds, which is super conservative. I am basically age minus 20 in bonds. This creates a glide path such that you increase bonds as you get older and don't wake up to a layoff at 50 coinciding with a stock meltdown when you were 95% equities. Also, implicit in the asset allocation is max loss in a stock crash. If an ugly crash drops equities 50%, but you are only 50% equities, then your weighted max portfolio loss is 25%. There are other posts on the subject. In generally, I think. It's people are ok with more aggressive portfolios.....until they aren't. So, pick what works for you, but plan for a glide. No one wants to wait until 3 years before kids in college to go conservative to only find the market against them. The glide path takes the emotion out of it.

By now you should see LIHUx is 97.5 equity to 2.5 bond. Super aggressive. As long as you are ok with that and the expense ratio is low (.05 is low). Is it too aggressive? Only you can tell, but *if* you want to create your own, you should know that you have the building blocks between the cor 3 funds:

- Vanguard TBM
- Vanguard 500
- Vanguard Total Int'l

So you can pick from those 3 based on the 3-fund link I published earlier.

Having said all that as a preface - yes- you can roll your IRA into this 401k. We had to discuss that to make sure you are good with the decision. Rolling your IRA into your 401k then allows you to do Backdoor Roth IRA.

Let's go back to your other accounts. You mentioned,


- ~100k in 18 individual stocks including questionable ones for a retirement account like GILD and FEYE. I assume my spouse's portfolio is very similar.
- ~18K in mutual funds
- ARBNX (Expense Ratio 1.22%)
- JSOSX (Expense Ratio 0.68%)
- DBLTX (Expense Ratio 0.47%)
- 20k cash

My comments:

1. Individual stocks and mutual funds. Are these in taxable accounts? Tax loss harvest them and use the proceeds to fund your Backdoor Roths. Otherwise, buy more of the 3 fund portfolio in your taxable account. Just align with your overall asset allocation. Read the wiki on tax advantage fund placement. Consider either an international index fund or us stock index fund.
2. Taxable bonds and e-fund. At some point the bond portion of your AA will blend into your cash position. For high earners, consider Vanguard CA Prime Money Market fund. And/or some of the vanguard CA muni funds blended with Natl muni funds.

What do you think so far?

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