Help with investing

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Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Help with investing

Post by Stevens » Wed Apr 19, 2017 10:17 am

Hi All,

I am hoping to get started on investing. I am almost done reading the Bogleheads guide to investing and was hoping to get some advice for a personal investment fund (for house or other purchases).

My profile is as follows:

Age is 30. Married in San Francisco bay area.

I am in corporate strategy with an income of 150k with an annual bonus average of 40k. My wife is making 126k base and 10k bonus. These numbers might seem high but we live in a very high cost of living area.

Expenses monthly include rent ~$3000 (so i have budgeted 1500 for this) which we split evenly. I personally also have a 30k car loan at 1.25% interest with a 2 year term. My emergency fund is $110k. I have about $45k in retirement accounts. No other loans and other expenses amount to ~$800 a month for food and travel.

I want to be a set it and almost forget it guy. Im thinking about the three fund portfolio with equal distribution in each fund (1/3 to international stocks, 1/3 to domestic stocks, 1/3 o bonds) with biannual redistribution. I am personally looking to save another 250k for a downpayment within the next few years and a dream car (i know this is against the boglehead mantra). Im curious if i should start a personal account with vanguard now, if you guys agree with my approach, if i am ok letting the car loan sit since interest is so
Low, and how much i should invest a month?

Also does anyone have historical returns on the three month fund portfolio?

Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Re: Help with investing

Post by Stevens » Wed Apr 19, 2017 11:25 am

And just to add, I'm hoping to accrue $250k on top of the 110k emergency fund I have now within the next say 5 years..=). My only investment experience has been with CDs at 1-2% unfortunately. My take home currently is about $8000 a month (after rent, expenses, car payment,, I'm left with only $4800 a month without taking into account the bonus). I would love to hear what you guys feel is the optimal approach to reach this goal.

Thanks!!

random_walker_77
Posts: 412
Joined: Tue May 21, 2013 8:49 pm

Re: Help with investing

Post by random_walker_77 » Wed Apr 19, 2017 11:30 am

Welcome to bogleheads! 3 fund portfolio is really nice. 1/3 bonds is about right for your age, but make sure you understand and can stomach the inevitable plunge in your invested portfolio. Figure on the stocks taking a 50% haircut at some point in the future.

You might also consider more domestic stocks to international. Most suggest keeping 2/3 of the stock portion in domestic stocks (most of which already have lots of international exposure, i.e. boeing, coca cola, microsoft, mcdonald's, etc), which would leave you 4/9 domestic stock, 2/9 international, and 1/3 in bonds.

Is this all going to be in your 401k? I'd strongly suggest max'ing out your 401, especially since your taxes are high.

The 3 fund shines in that it gives you broad, low cost diversification, and allows you to tune it to your desired allocation while facilitating the placement of bonds in tax-deferred accounts for tax efficiency. After all, you're paying those high state income taxes too.

On the other hand, if you want set it and forget it, there's also the target date funds. Especially if the account is in taxable, this will allow the ratio of stocks and bonds to rebalance and adjust automatically, and you won't have to pay taxes on gains just to rebalance. That said, the Vanguard 2050 fund is a 90-10 fund, so they're really counting on you to not panic and sell before 2050: https://personal.vanguard.com/us/funds/ ... 0699#tab=2

I'd keep the car loan -- the interest rate is less than inflation. Just make sure you've got the cash to pay it off, and still have an emergency fund afterwards.

For near-term expenses, and that includes your down-payment, keep those funds out of stocks. Maybe bonds, if you're several years out, otherwise CDs are pretty good.

The dream car is a different subject altogether, but... everyone needs to decide what they value, and weigh out the alternative purchases that would be sacrificed. viewtopic.php?f=10&t=214509&newpost=3293861

How much you should save/invest is an entirely personal decision. At least 10% of your take home would be a good minimum to shoot for, preferably in tax-deferred accounts. Some people manage close to 50% of their gross income. viewtopic.php?t=215276.

Free time is one of the most expensive luxury goods you can buy. If you want to retire early, it's all about saving, and with your high incomes, it's entirely possible to do, if you decide you want to do so. This is a good article: http://www.mrmoneymustache.com/2012/01/ ... etirement/

Historical returns depend entirely on what ratios you use in the 3 fund portfolio, and what historical period you're looking at. https://www.bogleheads.org/blog/three-f ... o-returns/

random_walker_77
Posts: 412
Joined: Tue May 21, 2013 8:49 pm

Re: Help with investing

Post by random_walker_77 » Wed Apr 19, 2017 11:41 am

Stevens wrote:And just to add, I'm hoping to accrue $250k on top of the 110k emergency fund I have now within the next say 5 years..=). My only investment experience has been with CDs at 1-2% unfortunately. My take home currently is about $8000 a month (after rent, expenses, car payment,, I'm left with only $4800 a month without taking into account the bonus). I would love to hear what you guys feel is the optimal approach to reach this goal.

Thanks!!


So the 2 of you are making $276K base, maybe 50K bonus, and you're saving 4.8K/month? Or you're keeping accounts separate, so off of your 150K, you're taking home 8K/month (96K/yr) and after 3.2K/month for your half of expenses, are down to 4.8K/month in savings? Plus maybe 40K in bonus?

57K/year in baseline savings, is more than the average household's gross income...

That said, if you are keeping it separate, do you know how your wife's finances are doing? Even if you do the accounting separately, it's good to make sure that the two of you are always on the same page...

Lou354
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Re: Help with investing

Post by Lou354 » Wed Apr 19, 2017 11:44 am

Money you'll need in three years should not be invested in stocks. Something like CDs or a high-yield savings account that is FDIC-insured would be good choices. Investments with high expected return can drop in value a lot in the short term.

mcraepat9
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Joined: Thu Jul 16, 2015 11:46 am

Re: Help with investing

Post by mcraepat9 » Wed Apr 19, 2017 12:01 pm

Need to understand how spouse fits into all this -- ordinarily it makes sense to consider everything as a single unified portfolio, but sometimes there are reasons not to do it that way.
Amateur investors are not cool-headed logicians.

Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Re: Help with investing

Post by Stevens » Wed Apr 19, 2017 12:03 pm

Sorry not sure why my reply went in as a private message.

We have kept things separate but we do file jointly. She has maybe 5k in savings as she has been maxing out 401k and has just paid off her student loans. She's now ready to save maybe 2k a month until she finds her footing to get more.

Since i'm the one that wants the dream car and in better shape to save for the down payment though, I'm mainly focusing on what I can do..=).

Another thing to consider is I've been more interested in having cash on hand and avoiding cashflow volatility. So I'm literally contributing 4% to 401k - company match is 4% of this. I'm thinking I should max it out but prefer to have more cash on hand for a down payment later

pkcrafter
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Re: Help with investing

Post by pkcrafter » Wed Apr 19, 2017 12:06 pm

Aw, come on, you can't leave us hanging, what is the dream car? A Mercedes-AMG GT S?

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

mcraepat9
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Re: Help with investing

Post by mcraepat9 » Wed Apr 19, 2017 12:07 pm

Stevens wrote:Sorry not sure why my reply went in as a private message.

We have kept things separate but we do file jointly. She has maybe 5k in savings as she has been maxing out 401k and has just paid off her student loans. She's now ready to save maybe 2k a month until she finds her footing to get more.Does she have a Roth IRA?

Since i'm the one that wants the dream car and in better shape to save for the down payment though, I'm mainly focusing on what I can do..=).

Another thing to consider is I've been more interested in having cash on hand and avoiding cashflow volatility. So I'm literally contributing 4% to 401k - company match is 4% of this. I'm thinking I should max it out but prefer to have more cash on hand for a down payment later Nothing wrong with having extra cash but your cost of capital is significant - you are paying your marginal fed+state income tax rate to save that cash. Maxing it out makes more sense to me.
Amateur investors are not cool-headed logicians.

random_walker_77
Posts: 412
Joined: Tue May 21, 2013 8:49 pm

Re: Help with investing

Post by random_walker_77 » Wed Apr 19, 2017 12:18 pm

Stevens wrote:Sorry not sure why my reply went in as a private message.

We have kept things separate but we do file jointly. She has maybe 5k in savings as she has been maxing out 401k and has just paid off her student loans. She's now ready to save maybe 2k a month until she finds her footing to get more.

Since i'm the one that wants the dream car and in better shape to save for the down payment though, I'm mainly focusing on what I can do..=).

Another thing to consider is I've been more interested in having cash on hand and avoiding cashflow volatility. So I'm literally contributing 4% to 401k - company match is 4% of this. I'm thinking I should max it out but prefer to have more cash on hand for a down payment later


401K also counts as saving. And there are ways to access 401k funds.

Having cash on hand for an emergency fund is good, but you're in good shape in that regards. Given your high tax rate, I'd suggest maxing out that 401k. And contributing to a non-deductible IRA on top of that (see backdoor Roth -- which, after being opened for 5 years, can also be tapped).

What's the budget for the house? 1.2 -1.5 (M) ?

And what's the dream car? :)

Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Re: Help with investing

Post by Stevens » Wed Apr 19, 2017 1:07 pm

I'm keeping the wife's finances separate as she still has a ways to go before her finances are in order..=). But she is maxing out her Roth 401k and remaining funding are in other 401ks

House budget is ~1 Mil (we need about 20% down plus closing costs in the bay area to be competitive in offers hence the 250k which I may need to supplement a bit with my current emergency fund for the dream car as well haha). Within the next few years (is 3 possible?), I'm hoping I can get to an additional 250k in available funds by myself by doing the following:

Assumption: My take home ($9600 a month assuming bonus) after all expenses (rent plus car payment plus expenses) = $5800

My plan to get to $250k within 3 years from a monthly plan perspective:

1) Continue to payoff car loan at 1.25% at about $1300 a month (after 3 years, this will be straight money back in pocket)
2) Maintain rent level at $1500 a month
3) Keep remaining expenses at around 1k a month
4) Invest 50% ($5800) of remaining take home income plus bonus in three fund portfolio = $2900
2) Save additional 30% in emergency fund (1% CD) to reduce risk volatility = $1740
4) Consider investing remaining portion in 401k = $1160

I have no idea if the math works out in the above haha.

I definitely get the tax savings perspective since we're paying lots and lots of tax. I'm curious though, is there a calculator (i've tried searching but have not found a great one) that tells me how much I save in taxes if I max out the 401k along with the take home differential post tax liabilities?

In my head, I'm thinking a house and dream car is that much farther away if I max out the 401k (since it's loss of purchasing power for now), but maybe it's not as severe as i think?

Dream car is a used Porsche 911 GT3 RS (hoping to spend no more than $150k on this 5 years from now haha).

Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Re: Help with investing

Post by Stevens » Wed Apr 19, 2017 1:17 pm

And wow - I'm clueless on backdoor Roth IRAs but it does sound very interesting. To me it seems like the backdoor Roth is like a long term portfolio plan since you contribute post tax but can withdraw without penalty only after 5 years (whereas the former is taxed during withdraw on gains)?

random_walker_77
Posts: 412
Joined: Tue May 21, 2013 8:49 pm

Re: Help with investing

Post by random_walker_77 » Wed Apr 19, 2017 2:48 pm

>> 4) Invest 50% ($5800) of remaining take home income plus bonus in three fund portfolio = $2900

I'd strongly urge you to think harder about this one. The stock part is volatile. In the short term, you might lose 50% of the stock portion right when you need it. Anything you want to use in the next 5 years should not be in stocks. Further, even though market timing is discouraged b/c it's counterproductive and doesn't matter for the long term investor. In the short term, we're in the 2nd longest bull market on record. The markets are cyclical and your odds that the market keeps going up for another 3 years... well, I wouldn't want to depend on that!

I'd imagine that bonus income also might tend to go down if the stock market crashes...

The roth ira is a way to get more tax-sheltered investing space. You could've withdrawn principal penalty free for a new house, but I think you had to have a Roth IRA (of some sort) open for 5 tax years, so probably won't help you, but is worth reading in more detail. Might be a good idea to open a small Roth IRA now in any case so that this 2nd 5 year limitation goes away. https://www.kitces.com/blog/understandi ... onversions. Roth's are nice in that you put in after tax money and never pay taxes on it again. Works better if you're in a lower tax bracket and might be in a higher tax bracket later, but if you've already max'd your 401k, you're already using after-tax money, so a Roth is just goodness for long term investing.

Checkout the turbotax taxcaster app or web calculator. But roughly, if you're in the 33% bracket and 10% state, you'd expect 43% marginal tax. Taking 36K out from 401k contributions would be expected to save you over 15K in taxes. That's non-trivial, and means that putting 36K into your 401k's will cause only 21K to disappear from your paychecks.

Finally, a word to the wise, expenses have a way of going up when you buy a house. Especially an old bay area house. So make sure you've got a healthy emergency fund available immediately after the house purchase.

Good luck!

nlecaros
Posts: 15
Joined: Sat Jul 11, 2015 8:28 pm

Re: Help with investing

Post by nlecaros » Wed Apr 19, 2017 9:52 pm

Stevens wrote:I'm keeping the wife's finances separate as she still has a ways to go before her finances are in order..=). But she is maxing out her Roth 401k and remaining funding are in other 401ks

House budget is ~1 Mil (we need about 20% down plus closing costs in the bay area to be competitive in offers hence the 250k which I may need to supplement a bit with my current emergency fund for the dream car as well haha). Within the next few years (is 3 possible?), I'm hoping I can get to an additional 250k in available funds by myself by doing the following:

Assumption: My take home ($9600 a month assuming bonus) after all expenses (rent plus car payment plus expenses) = $5800

My plan to get to $250k within 3 years from a monthly plan perspective:

1) Continue to payoff car loan at 1.25% at about $1300 a month (after 3 years, this will be straight money back in pocket)
2) Maintain rent level at $1500 a month
3) Keep remaining expenses at around 1k a month
4) Invest 50% ($5800) of remaining take home income plus bonus in three fund portfolio = $2900
2) Save additional 30% in emergency fund (1% CD) to reduce risk volatility = $1740
4) Consider investing remaining portion in 401k = $1160

I have no idea if the math works out in the above haha.

I definitely get the tax savings perspective since we're paying lots and lots of tax. I'm curious though, is there a calculator (i've tried searching but have not found a great one) that tells me how much I save in taxes if I max out the 401k along with the take home differential post tax liabilities?

In my head, I'm thinking a house and dream car is that much farther away if I max out the 401k (since it's loss of purchasing power for now), but maybe it's not as severe as i think?

Dream car is a used Porsche 911 GT3 RS (hoping to spend no more than $150k on this 5 years from now haha).


We were in the same boat as you are now a couple of years ago. Not really going to give you any more advice as you're receiving plenty of good ones on this forum. Just consider the following:

1. Keep your marginal tax rate in mind when determining the interest income you're getting from your CDs. So, if you think you're making 1%, multiply that by (1-your marginal tax rate). At the same time, keep in mind that any interest payments you're making, like your car payments, are after-tax.
2. Since you're renting, I'm assuming that you're not itemizing on your tax return? If not, then your taxable income must be pretty high. You'll want to get that down somehow, like a house (instead of a car) with mortgage interest and property taxes, and maxing out your 401K contributions.
3. How many months of living expenses are you comfortable with for an emergency fund? That 110K sounds like a lot given your expenses, and you're planning to put more into it. Is it really just for emergencies or are you dipping into it for other things as well?
4. If you're planning to open an investment account, you might want to think of putting some of your cash into a short-term muni fund which is not as volatile and is free from federal tax.

Lobster
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Re: Help with investing

Post by Lobster » Wed Apr 19, 2017 10:15 pm

Stevens wrote:I personally also have a 30k car loan at 1.25% interest with a 2 year term. My emergency fund is $110k. I have about $45k in retirement accounts.

Your car loan represents 2/3 the amount of your current retirement savings.

Stevens wrote:So I'm literally contributing 4% to 401k - company match is 4% of this.

Your current marginal tax rate is 44% (33% federal plus 11.3% state). Every dollar you 'save' after tax is costs you 44 cents. The math is not working out in your favor. Your wife should also be 100% pre-tax on her 401k/IRA.

I highly recommend the book The Millionaire Next Door by Thomas Stanley. It's hard to understand planning for 150k car purchase with only 45k saved for retirement.
Submit to the relentless rules of humble arithmetic and have the wisdom to avoid the tyranny of compounding costs.

mcraepat9
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Re: Help with investing

Post by mcraepat9 » Thu Apr 20, 2017 9:38 am

Stevens wrote:I'm keeping the wife's finances separate as she still has a ways to go before her finances are in order..=). But she is maxing out her Roth 401k and remaining funding are in other 401ks


Why Roth 401k? This should almost certainly be a pre-tax traditional 401k given your tax attributes (in particular, the fact that you are married filing jointly).
Amateur investors are not cool-headed logicians.

Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Re: Help with investing

Post by Stevens » Thu Apr 20, 2017 11:35 am

Thank you guys for the tremendous advice. I really appreciate it. I definitely agree my 401k can be stronger. To mitigate the impending stock shortcut for the near term, should I pivot to a 70/30 bond stock distribution and then invert after the market correction?

And I used some take home calculator estimates last night to estimate 401 impact on take home pay: https://www.adp.com/tools-and-resources ... lator.aspx:

It seems based on $276k base salary as a couple (married filing jointly with 2 exemptions), we can both take around $14k (combined or $7k each) less in annual take home pay and save $36k in pre-tax 401k instead. Essentially $14k (post-tax take home) trade-off for $36k (pre-tax) in 401k savings. That sounds insane to me - does this pass the smell test? Makes me feel awful about not having maxed out my 401k.

Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Re: Help with investing

Post by Stevens » Thu Apr 20, 2017 11:38 am

mcraepat9 wrote:
Stevens wrote:I'm keeping the wife's finances separate as she still has a ways to go before her finances are in order..=). But she is maxing out her Roth 401k and remaining funding are in other 401ks


Why Roth 401k? This should almost certainly be a pre-tax traditional 401k given your tax attributes (in particular, the fact that you are married filing jointly).


Recently married, but I think she is now ineligible for roth given our income limit threshold..=(.

nlecaros
Posts: 15
Joined: Sat Jul 11, 2015 8:28 pm

Re: Help with investing

Post by nlecaros » Thu Apr 20, 2017 5:10 pm

Stevens wrote:
mcraepat9 wrote:
Stevens wrote:I'm keeping the wife's finances separate as she still has a ways to go before her finances are in order..=). But she is maxing out her Roth 401k and remaining funding are in other 401ks


Why Roth 401k? This should almost certainly be a pre-tax traditional 401k given your tax attributes (in particular, the fact that you are married filing jointly).


Recently married, but I think she is now ineligible for roth given our income limit threshold..=(.


Even if you're ineligible for a Roth, you can always do back-door contributions. Here's a link explaining the process: https://thefinancebuff.com/the-backdoor ... ow-to.html. Given your high tax bracket, you should really be maxing out the pre-tax 401K first instead of contributing to a Roth 401K.

Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Re: Help with investing

Post by Stevens » Thu Apr 20, 2017 6:40 pm

nlecaros wrote:
Stevens wrote:
mcraepat9 wrote:
Stevens wrote:I'm keeping the wife's finances separate as she still has a ways to go before her finances are in order..=). But she is maxing out her Roth 401k and remaining funding are in other 401ks


Why Roth 401k? This should almost certainly be a pre-tax traditional 401k given your tax attributes (in particular, the fact that you are married filing jointly).


Recently married, but I think she is now ineligible for roth given our income limit threshold..=(.


Even if you're ineligible for a Roth, you can always do back-door contributions. Here's a link explaining the process: https://thefinancebuff.com/the-backdoor ... ow-to.html. Given your high tax bracket, you should really be maxing out the pre-tax 401K first instead of contributing to a Roth 401K.


Does my estimate above make sense in terms of the trade off of 14k post tax for 36k pre-tax 401k??

nlecaros
Posts: 15
Joined: Sat Jul 11, 2015 8:28 pm

Re: Help with investing

Post by nlecaros » Thu Apr 20, 2017 10:13 pm

Stevens wrote:
nlecaros wrote:
Stevens wrote:
mcraepat9 wrote:
Stevens wrote:I'm keeping the wife's finances separate as she still has a ways to go before her finances are in order..=). But she is maxing out her Roth 401k and remaining funding are in other 401ks


Why Roth 401k? This should almost certainly be a pre-tax traditional 401k given your tax attributes (in particular, the fact that you are married filing jointly).


Recently married, but I think she is now ineligible for roth given our income limit threshold..=(.


Even if you're ineligible for a Roth, you can always do back-door contributions. Here's a link explaining the process: https://thefinancebuff.com/the-backdoor ... ow-to.html. Given your high tax bracket, you should really be maxing out the pre-tax 401K first instead of contributing to a Roth 401K.


Does my estimate above make sense in terms of the trade off of 14k post tax for 36k pre-tax 401k??


Only if your marginal tax rate is 39% (14/36). Given your high tax bracket, try to max out your pre-tax contributions before contributing to a back-door Roth.

Stevens
Posts: 9
Joined: Wed Apr 19, 2017 9:56 am

Re: Help with investing

Post by Stevens » Fri Apr 21, 2017 4:19 pm

And would you guys say to do a 70/30 bond/stock split for now for the three funds?

random_walker_77
Posts: 412
Joined: Tue May 21, 2013 8:49 pm

Re: Help with investing

Post by random_walker_77 » Fri Apr 21, 2017 10:09 pm

Stevens wrote:Thank you guys for the tremendous advice. I really appreciate it. I definitely agree my 401k can be stronger. To mitigate the impending stock shortcut for the near term, should I pivot to a 70/30 bond stock distribution and then invert after the market correction?

And I used some take home calculator estimates last night to estimate 401 impact on take home pay: https://www.adp.com/tools-and-resources ... lator.aspx:

It seems based on $276k base salary as a couple (married filing jointly with 2 exemptions), we can both take around $14k (combined or $7k each) less in annual take home pay and save $36k in pre-tax 401k instead. Essentially $14k (post-tax take home) trade-off for $36k (pre-tax) in 401k savings. That sounds insane to me - does this pass the smell test? Makes me feel awful about not having maxed out my 401k.


Does it pass the smell test? No -- 14K probably would be the taxes on 36K, leaving you 22k post-tax. So it's 22K post-tax savings vs 36K in 401k savings. A big difference, but not as extreme as you've stated, unless you're at a 60% marginal tax rate!

Pivoting to 70/30 because of an impending market correction? No... that's market timing. How do you know the market won't go up another 50%, drop to 110% of today's level, and then stay flat for 10 years? Remember, Greenspan was famous for calling the tech bubble and warning about "irrational exuberance"... in 1996, 4 years before the bubble burst. It turns out that buying then actually wouldn't have been that bad; buying at a lower price on a future dip would be quite challenging to time right and you'd probably still end up with a higher price. If there's a correction, how do you determine when to buy back in, and how do you know it's "the big correction" and not one of the smaller, but notable dips? Timing the market is hard...
http://www.macrotrends.net/1320/nasdaq-historical-chart

And for the truly long-term investor, it doesn't matter that much. Better to have more time in the market. Read about the hypothetical worst market timer ever, who only buys at the market peaks before the most famous and severe market crashes: viewtopic.php?t=166730

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