Advice for 30yr old with limited knowledge-Calling all Bogleheads

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beachbum5011
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Joined: Thu Apr 06, 2017 8:26 am

Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby beachbum5011 » Thu Apr 06, 2017 9:59 am

Hello all,

Although this is my first post, I have been reading this wonderful forum on-and-off for many months. Today I'm looking for some clarity and some knowledge moving forward, as I feel like I'm being pulled in many different directions. I just got done reading unshakeable (Tony Robbins), and it shocked me how impactful fees really are. I'm just looking for simple-ticket fixes I can do moving forward, that will help jumpstart my financial success. Anyway, here is my breakdown:

30yr old single renting in Philadelphia. Income over 150k+ per year so Roth IRA is out of the mix. Maxed out 401k this past year and plan on doing so moving forward, unfortunately company does not contribute. I do have access to HSA in which I contribute to (although not maxing).

401K no match 26K in contributions
FID 500 INDEX PR (Large Cap)-30% Expense Ratio .045%
AM Cent MDCPVAL (MID Cap)-20% Expense Ratio 1.01%
FID SM CAP IDX PR (Small Cap)-10% Expense Ratio .07%
FID EM MKTS IDX PR (International)-10% Expense Ratio .14%
FID INTL INDEX PR (International)-10% Expense Ratio .08%
FRANKLIN US GOVT A (BOND)-10% Expense Ratio .78%
TMPL GLOBAL ST BOND A (BOND)-10% Expense Ratio .96%

I have a small Vanguard rollover IRA with Vanguard (Target Retirement 2050 Fund)
12k contributions Expense ratio of .16%

I also just started seeing a financial advisor, referral through a friend, who is putting a little money in a individual taxable account as follows:
15k in contributions with 1k going in each month. I am not happy with the 1.5% yearly fee plus the EP's. Plus I don't think he is really doing anything special. He's only up 4.83% since November 16'

Metropolitan West Total Return Bond Fund Expense Ratio .66%
T. Rowe Price Diversified Mid-Cap Growth Fds, Inc. Expense Ratio .87%
T. Rowe Price Small-Cap Value Fd Inc. Expense Ratio .80%
T.Rowe Price Global Real Estate Fund Expense Ratio 1.05%
T. Rowe Price Overseas Stock Fund Expense Ratio .84%
T. Rowe Price U.S. Large-Cap Core Fund Expense Ratio .81%

Lastly, I am in thinking of purchasing my first home, which will help with taxes next year. I have 92k in savings that's earnings nearly squat.

Any Recommendations for a backdoor IRA? Or put some money in some passive low-cost index funds? I am the type who one wants to set something up once and forget about it knowing I made the right choice! I was thinking maybe VTSAX as well?!

Any insight would be greatly appreciated!

lazylarry
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby lazylarry » Thu Apr 06, 2017 8:43 pm

-would read boglehead guide to investing/getting started in my links
-don't look at income, verify that your MAGI is out of range for Roth. Just looking at your 401k contributions, you should be able to contribute somewhat to Roth.
-your 401k is unnecessarily complicated. I would get rid of the Mid cap fund given the high expense ratio. That ER is not trivial. If you really desire taxable, you can get something in a taxable.
-You should max out HSA prior to investing in taxable? HSA functions as a traditional IRA and you will have greater savings undoubtedly compared to a taxable account.
-Yes dump your advisor. Your asset allocation in your 401k was better than whatever random funds with high ERs that he found.
-Good luck with the home! Some people take mortgage at lower interest rate and use the saved money to invest in stocks at theoretical higher return rate. You could do that or just pay off mortgage.
-92k in savings is not bad but also you are losing money because of inflation. I'd 1) get an emergency fund for 9 mo 2) invest the rest in taxable/Roth IRA/CDs based on your desired risk preferences
-Backdoor roth is possible, but your rollover IRA is going to make you pay taxes on all of that, if that's something you're willing to do
-Look at my profile for links to my website which has getting started and the 3-fund portfolio which would be a good place to start.
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

mhalley
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby mhalley » Thu Apr 06, 2017 8:50 pm

Run away from the fa before he gets any more of your money. If the money is for a down payment, it should be saved instead of invested.
Although Mel loves midcap , that 1% er is sad. Consider dumping it altogether or use your ira for them. You could use 82% s&p and 18% small cap to approximate total stock market. (Or more if you wish to tilt)

https://www.bogleheads.org/wiki/Approxi ... ock_market

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BL
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby BL » Thu Apr 06, 2017 9:02 pm

https://www.etf.com/docs/IfYouCan.pdf
has a lot of good basic information in just 16 pages of free pdf.

Costs matter. Eliminate higher ER funds in 401k. Can you find a low ER bond fund, maybe index, or other fixed income or low-ER target date fund in 401k? List along with name, ticker, ER for assistance.

Get away from advisor if you want to keep the difference for yourself. The 3-fund portfolio is a good basis for all investing. If you must have bonds in taxable, you may want (non-taxable) muni bonds. Target date or other balanced funds at Vanguard are a good alternative, mainly for Roth or trad IRA.

Can you roll over your IRA to your 401k? Then you could do backdoor Roth.

onourway
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby onourway » Fri Apr 07, 2017 5:23 am

I would consolidate your 401k choices to the Fidelity 500 Index fund and Fidelity International Index. If you have any bond options below, say 0.6% I might consider those as well.

Roll over the IRA to the 401k as suggested, allowing you to do the backdoor Roth IRA from now on.

Run as fast as you can from that 'advisor'. Get out of those fund choices now while there isn't too much cost.

Max out your HSA if you have additional funds after maxing the 401k/Roth IRA.

If anything still left, then do taxable. All you need in taxable is a single Total Market Index fund. Possibly an intermediate term muni bond fund if your 401k doesn't have a good bond option.

sweeden22
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby sweeden22 » Fri Apr 07, 2017 5:38 am

Not advice, but if my 401k, I would try to find the low and mid cap stocks with lower expense ratios. If none exist, I might go all in on the 500 index for my U.S. stocks portion. Likewise, on the bond funds, I would try to find bond funds with lower expense ratios, look for an index fund.

As others suggested, if me, I would leave the financial advisor and get my own taxable account at Vanguard, should I have enough leftover to need a taxable account.

beachbum5011
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Joined: Thu Apr 06, 2017 8:26 am

Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby beachbum5011 » Mon Apr 17, 2017 6:32 pm

lazylarry wrote:-would read boglehead guide to investing/getting started in my links
-don't look at income, verify that your MAGI is out of range for Roth. Just looking at your 401k contributions, you should be able to contribute somewhat to Roth.
-your 401k is unnecessarily complicated. I would get rid of the Mid cap fund given the high expense ratio. That ER is not trivial. If you really desire taxable, you can get something in a taxable.
-You should max out HSA prior to investing in taxable? HSA functions as a traditional IRA and you will have greater savings undoubtedly compared to a taxable account.
-Yes dump your advisor. Your asset allocation in your 401k was better than whatever random funds with high ERs that he found.
-Good luck with the home! Some people take mortgage at lower interest rate and use the saved money to invest in stocks at theoretical higher return rate. You could do that or just pay off mortgage.
-92k in savings is not bad but also you are losing money because of inflation. I'd 1) get an emergency fund for 9 mo 2) invest the rest in taxable/Roth IRA/CDs based on your desired risk preferences
-Backdoor roth is possible, but your rollover IRA is going to make you pay taxes on all of that, if that's something you're willing to do
-Look at my profile for links to my website which has getting started and the 3-fund portfolio which would be a good place to start.


Lazylarry-Thank you for the reply. To answer some of your questions--
-My MAGI is out of range for roth IRA. Would you advise a backdoor roth, even with a tax bracket of 28% and averaging 23%?? Or or just sticking extra money into a taxable account with low fees (ie Vanguard)?

To answer your 401k question, here are the rest of my 401k options within my accounts limits: (I was thinking of just going to the Freedom 2050 fund??)

-T. Rowe Price Equity Income Fund Advisor Class (Large Cap) ER of .93%
-Wells Fargo Growth Fund - Class Admin(Large Cap) ER of 1.07%
-Columbia Acorn Fund Class Z(Mid Cap)
ER of .82%
-Fidelity® Mid Cap Index Fund - Premium Class (Mid Cap) ER of .07%
-Columbia Acorn International Fund (International) ER of .99%
-Invesco International Growth Fund R5 Class (International) ER of .99%
-Fidelity® U.S. Bond Index Fund - Premium Class (Bond) ER .05%
-Fidelity Freedom® 2050 Fund ER .77%
-Fidelity Freedom® 2055 Fund ER .77%

Thank you for taking the time to explain everything in depth!

beachbum5011
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby beachbum5011 » Mon Apr 17, 2017 6:40 pm

mhalley wrote:Run away from the fa before he gets any more of your money. If the money is for a down payment, it should be saved instead of invested.
Although Mel loves midcap , that 1% er is sad. Consider dumping it altogether or use your ira for them. You could use 82% s&p and 18% small cap to approximate total stock market. (Or more if you wish to tilt)

https://www.bogleheads.org/wiki/Approxi ... ock_market


Mhalley- Thank you for responding!

I see the light and am running from this advisor. To answer your question, the money that I gave him thus far was not for my house fund. Rather, extra money because I maxed-out my 401k this year and I cannot contribute to a Roth. I am just trying to jumpstart my savings now considering I am single, debt-free, and without any big expenses at the moment. Looking for all the help I can get!

Thanks again

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BL
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby BL » Mon Apr 17, 2017 8:39 pm

For simplicity, you could go with the first 2 colored funds or add the 3rd for a 3-fund portfolio. Any/all of the others could be added if you choose, maybe later. This target fund is pretty expensive but Vanguard or Fidelity Index target funds would work in a Roth IRA. Total Stock market (or S&P500) and/or Total International are fine in a taxable account. Just put more bonds into 401k.

-Fidelity® Mid Cap Index Fund - Premium Class (Mid Cap) ER of .07%

-Fidelity® U.S. Bond Index Fund - Premium Class (Bond) ER .05%
FID 500 INDEX PR (Large Cap)-30% Expense Ratio .045%


FID SM CAP IDX PR (Small Cap)-10% Expense Ratio .07%
FID EM MKTS IDX PR (International)-10% Expense Ratio .14%
FID INTL INDEX PR (International)-10% Expense Ratio .08%

lazylarry
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby lazylarry » Mon Apr 17, 2017 11:10 pm

BL wrote:For simplicity, you could go with the first 2 colored funds or add the 3rd for a 3-fund portfolio. Any/all of the others could be added if you choose, maybe later. This target fund is pretty expensive but Vanguard or Fidelity Index target funds would work in a Roth IRA. Total Stock market (or S&P500) and/or Total International are fine in a taxable account. Just put more bonds into 401k.

-Fidelity® Mid Cap Index Fund - Premium Class (Mid Cap) ER of .07%

-Fidelity® U.S. Bond Index Fund - Premium Class (Bond) ER .05%
FID 500 INDEX PR (Large Cap)-30% Expense Ratio .045%


FID SM CAP IDX PR (Small Cap)-10% Expense Ratio .07%
FID EM MKTS IDX PR (International)-10% Expense Ratio .14%
FID INTL INDEX PR (International)-10% Expense Ratio .08%

+1
To answer your backdoor Roth question, the answer is probably yes. The 11k you have in IRA will be taxed more than in retirement when you are converting now - true. (Or you could roll it over into your current 401k in which case you definitely would do backdoor roth ira). But the backdoor roth IRA is with post-tax dollars and capital gains and dividends are NOT taxed compared to a regular taxable account (in which you face 15% LT capital gains tax and 15-28% dividend tax) which makes for a huge difference at retirement due to compounding.
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

aristotelian
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby aristotelian » Mon Apr 17, 2017 11:16 pm

Get away from the advisor now! Taxable is too important, because any decision made now will be costly to get out in the future because of taxes on capital gains. Better to stay in cash until you come up with your own plan.

Fishing50
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby Fishing50 » Tue Apr 18, 2017 1:18 am

Keep a savings cushion then keep only equities in taxable for favorable treatment of dividends and control capital gains. Low cost total stock market index and total international stock index work well.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

beachbum5011
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby beachbum5011 » Tue Apr 18, 2017 7:43 pm

lazylarry wrote:
BL wrote:For simplicity, you could go with the first 2 colored funds or add the 3rd for a 3-fund portfolio. Any/all of the others could be added if you choose, maybe later. This target fund is pretty expensive but Vanguard or Fidelity Index target funds would work in a Roth IRA. Total Stock market (or S&P500) and/or Total International are fine in a taxable account. Just put more bonds into 401k.

-Fidelity® Mid Cap Index Fund - Premium Class (Mid Cap) ER of .07%

-Fidelity® U.S. Bond Index Fund - Premium Class (Bond) ER .05%
FID 500 INDEX PR (Large Cap)-30% Expense Ratio .045%


FID SM CAP IDX PR (Small Cap)-10% Expense Ratio .07%
FID EM MKTS IDX PR (International)-10% Expense Ratio .14%
FID INTL INDEX PR (International)-10% Expense Ratio .08%

+1
To answer your backdoor Roth question, the answer is probably yes. The 11k you have in IRA will be taxed more than in retirement when you are converting now - true. (Or you could roll it over into your current 401k in which case you definitely would do backdoor roth ira). But the backdoor roth IRA is with post-tax dollars and capital gains and dividends are NOT taxed compared to a regular taxable account (in which you face 15% LT capital gains tax and 15-28% dividend tax) which makes for a huge difference at retirement due to compounding.



Any suggestions for asset allocation? I am trying to drill-down a specific plan, as I am getting a lot of great information! I was reading through another thread and noticed the age of the person (30yrs old just like me). "I recommend 80% stocks, 20% bonds, with 30% of stocks in international. That breaks down to 56% US stocks, 24% international stocks, and 20% bonds."

Do you agree with this?

beachbum5011
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby beachbum5011 » Tue Apr 18, 2017 7:46 pm

Fishing50 wrote:Keep a savings cushion then keep only equities in taxable for favorable treatment of dividends and control capital gains.
Low cost total stock market
index and total international stock index work well.


Would you recommend VTSAX???

lazylarry
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby lazylarry » Tue Apr 18, 2017 8:39 pm

A sample plan:

401k
20% Fidelity® U.S. Bond Index Fund - Premium Class (Bond) ER .05%
64% FID 500 INDEX PR (Large Cap)-30% Expense Ratio .045%
16% FID SM CAP IDX PR (Small Cap)-10% Expense Ratio .07%

Taxable
-Sell all and rebuy:
20% VBTLX
60% VTSMX
20% VGTSX
-You will pay some marginal capital gains tax here.

92k
-Put this in a 2% CD for a year or a no-fee CD /savings and let it stew.

Rollover IRA
-convert this to a Roth. You will pay taxes on this (counts as taxable)

-going forward:
1. contribute to 401k
2. contribute to tIRA -> backdoor Roth IRA
3. taxable

**So this is just an example. As the above posters said, foreign equities and less so equities are more tax efficient - you could have a higher foreign equity allocation there and less bonds in the 401k. But really your expense ratios and your savings are going to be the most important things. Tax efficiency IMHO is secondary, particularly with smaller accounts. Would definitely read the major boglehead books though as well as :
https://www.bogleheads.org/wiki/Tax-eff ... _placement
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
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

birdy
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Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby birdy » Tue Apr 18, 2017 8:55 pm

Great advice LazyLarry!!! This newby boglehead investor can't go wrong with your advice!

birdy

beachbum5011
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Joined: Thu Apr 06, 2017 8:26 am

Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby beachbum5011 » Thu Apr 20, 2017 7:08 pm

lazylarry wrote:A sample plan:

401k
20% Fidelity® U.S. Bond Index Fund - Premium Class (Bond) ER .05%
64% FID 500 INDEX PR (Large Cap)-30% Expense Ratio .045%
16% FID SM CAP IDX PR (Small Cap)-10% Expense Ratio .07%

Taxable
-Sell all and rebuy:
20% VBTLX
60% VTSMX
20% VGTSX
-You will pay some marginal capital gains tax here.

92k
-Put this in a 2% CD for a year or a no-fee CD /savings and let it stew.

Rollover IRA
-convert this to a Roth. You will pay taxes on this (counts as taxable)

-going forward:
1. contribute to 401k
2. contribute to tIRA -> backdoor Roth IRA
3. taxable

**So this is just an example. As the above posters said, foreign equities and less so equities are more tax efficient - you could have a higher foreign equity allocation there and less bonds in the 401k. But really your expense ratios and your savings are going to be the most important things. Tax efficiency IMHO is secondary, particularly with smaller accounts. Would definitely read the major boglehead books though as well as :
https://www.bogleheads.org/wiki/Tax-eff ... _placement
https://www.bogleheads.org/wiki/Three-fund_portfolio
https://www.bogleheads.org/wiki/Backdoor_Roth_IRA


Lazylarry-This is EXACTLY what I was looking for! I greatly appreciate you taking the time and showing a newbie the way. And I will start on the reading ASAP!

Chip
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Joined: Wed Feb 21, 2007 4:57 am

Re: Advice for 30yr old with limited knowledge-Calling all Bogleheads

Postby Chip » Fri Apr 21, 2017 6:33 am

lazylarry wrote:A sample plan:

401k
20% Fidelity® U.S. Bond Index Fund - Premium Class (Bond) ER .05%
64% FID 500 INDEX PR (Large Cap)-30% Expense Ratio .045%
16% FID SM CAP IDX PR (Small Cap)-10% Expense Ratio .07%

Taxable
-Sell all and rebuy:
20% VBTLX
60% VTSMX
20% VGTSX
-You will pay some marginal capital gains tax here.

92k
-Put this in a 2% CD for a year or a no-fee CD /savings and let it stew.

Rollover IRA
-convert this to a Roth. You will pay taxes on this (counts as taxable)

-going forward:
1. contribute to 401k
2. contribute to tIRA -> backdoor Roth IRA
3. taxable


I think your suggestion gives up quite a bit in tax efficiency due to trying to allocate across all asset classes in every account. Bonds in a taxable account are costly for someone in the 28% tax bracket when they have space in tax-deferred.

OP, consider the following:

1. YOU have to decide the appropriate stock/bond ratio for yourself. No one else can do that for you. But I would say that 80/20 is pretty aggressive. Just because it's appropriate for someone else the same age doesn't mean it's right for you.

2. Segregate your emergency fund and house fund and put them in a high yield (~1%) savings account. Don't consider them as part of your retirement portfolio.

3. How are you contributing 26k/year to your 401k when the annual limit is 18k?

4. How large is your taxable account and how much will you contribute to it each year?

5. Here's a sample low cost, tax efficient portfolio (at a 70/30 stock bond allocation, with 30% of stocks in international):

401k
30% Fidelity US Bond Index Fund Premium Class
XX% Fidelity 500 Index (49% less VTSAX allocation in taxable)
17% Fidelity International Index Fund Premium Class
04% Fidelity Emerging Markets Index Fund Premium Class

Taxable (move account to Vanguard)
YY% Vanguard Total Stock Market Admiral Shares (VTSAX)

A. You need the emerging markets fund because the Fidelity international fund doesn't contain them. The ratio I suggested is roughly the market cap ratio.
B. You could also put all international in taxable and the domestic in the 401k. In that case, use VTIAX (Vgd Total International) in taxable and the Fidelity 500 index plus some of the Fidelity small cap index to approximate a total market fund.
C. Depending on your contribution levels and the amounts you have in taxable vs. tax-deferred, you may have to have domestic and international total market funds in both places. That's okay. But keep the bonds in tax-deferred. Always.

Converting your existing IRAs to Roth will cost you $3400 in federal taxes. The good news is that PA doesn't tax Roth conversions.

As others have mentioned repeatedly, find out if you can roll your IRA into your existing 401k, which would save you that $3400. You'll have to ask your employer 401k contact.


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