Need to rebalance out of an expensive target date fund

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Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Need to rebalance out of an expensive target date fund

Post by a5ehren »

Emergency funds: We're comfortable here
Debt: 191k in 15-year mortgage @ 2.875%, good amount of positive equity
Tax Filing Status: MFJ
Tax Rate: ~25% Federal, 6% State
State of Residence: GA
Age: 31
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 20% of stocks, or whatever a good number is now. I don't really care.

Total retirement portfolio is currently around $250k. Assume all listed funds are Vanguard unless otherwise stated.

Current retirement assets

Taxable
None

His 401k at Schwab - 39% total
14% 500 Institutional - 0.04%
8% Extended Mkt Inst - 0.06%
12% Total Intl Stock - 0.09%
5% Total Bond - 0.04%

His Roth IRA at Vanguard - 29% total
4% LifeStrat Con Growth - 0.13%
9% Mid-Cap Value Idx - 0.07%
5% REIT Idx - 0.12%
11% Value Idx - 0.06%

Her 403b at Fidelity - 22%
22% Fidelity Freedom 2050 K - 0.67%

Her Roth IRA at Vanguard - 9%
9% Vanguard Target Date 2050 - 0.16%

Total asset allocation after diving into the various funds-of-funds: 23% intl stock, 9% bonds, 68% domestic stock

Contributions

New annual Contributions
8700 his 401k
7500 her 403b
5500 his Roth IRA
5500 her Roth IRA
0 taxable

Available funds

Funds available in his 401(k)
The 4 401k funds above are the only cheap indexes offered.

Funds available in her 403(b)
I've left out the expensive stuff that's over 0.5% from this list:
Fidelity 500 Index Fund - 0.035%
Fidelity U.S. Bond Index Fund - 0.05%
Vanguard Small-Cap Index - 0.06%
Fidelity Extended Market Index - 0.07%
Vanguard Balanced Index - 0.07%
Vanguard Mid-Cap Value Index - 0.07%
Fidelity International Index - 0.08%
Fidelity Emerging Markets - 0.14%

Questions:
1. I want to get out of that Fidelity 2050 fund while also keeping my overall balance.

2. I'd also like to reduce the value tilt I've put in my Roth IRA and move closer to a 4-fund portfolio that roughly approximates TR 2050 at a lower cost. This is obviously easy in our IRAs, but a little advice on how to organize her 403b to that goal would be nice.

3. Should I switch to traditional IRAs? (Edit: Never mind, we make too much to qualify for a deduction here due to income + both having plans at work)
Last edited by a5ehren on Wed May 31, 2017 9:00 pm, edited 1 time in total.
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Meg77
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Re: Need to rebalance out of an expensive target date fund

Post by Meg77 »

The good news is that she has great options in her 403b.

The Fidelity 2050 is 64% domestic stocks and 32% international stocks with about 4% in bonds. That's easily replicable with the other funds. Simply put 32% in the Fidelity international index, 4% in the fidelity bond index, and split the remaining 64% between the 500 Index and the extended market index (which encapsulates small and mid cap stocks).

It might be easier to diversify across accounts rather than within each individual account though, especially because you have good, cheap options in each account. For example you could put 100% of your 401k in the S&P 500 Index, then put 100% of your Roth IRA in international. Then put 100% of her 401k in the extended market index (small and mid caps) and 100% of her Roth in bonds. This happens to give you a pretty ideal asset allocation:

39% large cap
22% small/mid cap
29% international
9% bonds
(adds up to 99% due to rounding in your figures below)

I would be very comfortable with that AA - in fact I'm about your age and that's what mine is.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

Yeah, the %ages here are 2nd-order approximations, but I have the actual numbers in an Excel sheet and I promise it all adds up :D

Balancing across accounts is probably a good idea, though I have to admit a 29% weight on international makes me a bit uncomfortable. My version might look something like this (I've re-run the decimals compared to the OP):

His 401k -> S&P 500 40.1%
His Roth -> Total Bond 6.1%
Total Intl Stock 23%
Her 403b -> Extended Mkt 21.9%
Her Roth -> Total Bond Mkt 8.9%

This would end up overweight in US equity over a few years due to higher inflow to the work accounts, though I guess that's pretty easily fixable when it comes up.

It also gives an 85/15 stock/bond weight, which probably won't hurt me too badly...might find room in my Roth to keep 5% in a REIT Idx and basically track the Core 4 idea.
Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

Going to give this a quick bump to see if there's any other advice now that we're back from the holiday.

Probably going to pull the trigger on my allocation from the last post this weekend if no major objections.
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retiredjg
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Re: Need to rebalance out of an expensive target date fund

Post by retiredjg »

I don't think your portfolio idea is going to work.

Well, yes, you can set it up that way, but no....it will not stay that way as you add money to it. The larger accounts will probably need at least 2 funds, not one. Also, I'd suggest you put the bonds into one of the 401k plans, not the Roth IRA.

When considering your contributions, percentages don't work. You have to consider how many dollars you are adding to each account per year. If you can tell us that, someone could help you figure this out.
Topic Author
a5ehren
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Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

His 401k -> ~$8700/year (working on bumping this up)
Her 403b -> ~7500/year

I'll add it to the OP.
rkhusky
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Re: Need to rebalance out of an expensive target date fund

Post by rkhusky »

If you expect to be in the 15% bracket in retirement, I suggest maxing 401K and 403b before adding to Roth IRA (or at least putting enough in those to get down to the 15% bracket, if possible).
Topic Author
a5ehren
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Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

That's a good point that I hadn't thought about. I created the Roth accounts under the assumption that taxes would have to go up at some point in the next 30 years, but that may not be true.

I don't expect to need to withdraw more than the 2045-equivalent of $75k/yr in retirement.
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retiredjg
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Re: Need to rebalance out of an expensive target date fund

Post by retiredjg »

I've gone around and around on this and can't come up with an idea I really like. This one will work. There are dozens of other variations that will work too.

His 401k at Schwab - 39% total
9% 500 Institutional - 0.04%
13% Extended Mkt Inst - 0.06%
12% Total Intl Stock - 0.09%
5% Total Bond - 0.04%

His Roth IRA at Vanguard - 29% total
24% 500 Index
5% REIT

Her 403b at Fidelity - 22%
17% Fidelity 500 Index Fund - 0.035%
5% Fidelity U.S. Bond Index Fund - 0.05%

Her Roth IRA at Vanguard - 9%
9% Total International

Total asset allocation is almost the same as before: 68% domestic, 10% bonds, 21% international

Contributions

New annual Contributions = $27,200

8700 his 401k<--$1360 to bonds rest to 500 Index and Extended Market as needed
7500 her 403b<--$1360 to bonds, rest to 500 Index
5500 his Roth IRA<--$1,360 to REIT, rest to 500 Index
5500 her Roth IRA <--all to international



I'm thinking the easier way to manage this is to put the 2 Roth IRAs into a target or LifeStrategy Fund and just add money to those accounts without worrying about how much to go where. Then combine the 401k and 403b into one portfolio, putting all the international into His 401k because it is the more complete fund.

Other ideas would work too.
Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

Thanks for the idea.

Right now I'm weighing a plan where I would stop the IRA contributions in favor of ramping up the pre-tax accounts. In that scenario I'd probably convert both Roth accounts to Target 2050 and make aggressive 4-fund AAs in the main accounts.

Something like this?:
His 401k at Schwab - 39% total
17% 500 Institutional - 0.04%
8.5% Extended Mkt Inst - 0.06%
8.5% Total Intl Stock - 0.09%
5% Total Bond - 0.04%

His Roth IRA at Vanguard - 29% total
19% Target 2050
10% REIT (with the idea that it becomes a smaller piece as the 401k and 403b grow)

Her 403b at Fidelity - 22%
8.5% Fidelity 500 Index Fund - 0.035%
4.25% Fidelity Extended Mkt - 0.07%
4.25% Fidelity Intl - 0.08%
5% Fidelity U.S. Bond Index Fund - 0.05%

Her Roth IRA at Vanguard - 9%
9% Target 2050

New contributions:
~14000 His 401k (with an eye to ramping to ~20k after employer match over the next few years) Split 40/20/20/10 among the funds
~13000 Her 403b (with no ramp until above is done) Split 40/20/20/10 among the funds
0 His Roth
0 Her Roth
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retiredjg
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Re: Need to rebalance out of an expensive target date fund

Post by retiredjg »

An idea like this works but you'd need to change all your calculations and base the new calculations on just the 401k and 403b. Meaning that the 401k and 403b would be the 100% that all your percentages are now based on.

The target funds would not be included in the calculations at all although they would obviously still be in the accounts.

Did that make sense?
rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Need to rebalance out of an expensive target date fund

Post by rkhusky »

a5ehren wrote: New contributions:
~14000 His 401k (with an eye to ramping to ~20k after employer match over the next few years) Split 40/20/20/10 among the funds
~13000 Her 403b (with no ramp until above is done) Split 40/20/20/10 among the funds
You'll be able to put a bit more in these accounts, because moving the $11000 from Roth to Traditional will provide an additional $2750 in tax savings if still in the 25% bracket, which should be invested too.

The limit on 401K contributions is $18000 if under age 50.
Last edited by rkhusky on Thu Jun 01, 2017 10:57 am, edited 1 time in total.
Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

Yep. With the way the %ages lie once you remove the Roths it actually makes the math read a lot easier, too.

His 401k at Schwab - 65% total
30% 500 Institutional - 0.04%
15% Extended Mkt Inst - 0.06%
15% Total Intl Stock - 0.09%
5% Total Bond - 0.04%

Her 403b at Fidelity - 35%
15% Fidelity 500 Index Fund - 0.035%
7.5% Fidelity Extended Mkt - 0.07%
7.5% Fidelity Intl - 0.08%
5% Fidelity U.S. Bond Index Fund - 0.05%
Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

rkhusky wrote:
a5ehren wrote: New contributions:
~14000 His 401k (with an eye to ramping to ~20k after employer match over the next few years) Split 40/20/20/10 among the funds
~13000 Her 403b (with no ramp until above is done) Split 40/20/20/10 among the funds
You'll be able to put a bit more in these accounts, because moving the $11000 from Roth to Traditional will provide an additional $2750 in tax savings if still in the 25% bracket, which should be invested too.
That's true. Maybe I'll send that to the kid's 529 :D

(I didn't include that here because I already have a plan that I'm executing, etc)
rkhusky
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Re: Need to rebalance out of an expensive target date fund

Post by rkhusky »

a5ehren wrote: That's true. Maybe I'll send that to the kid's 529 :D
It's commonly advised to max out your retirement accounts before funding college accounts, since the latter are more restrictive and you can't easily get a loan to pay for retirement.
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retiredjg
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Re: Need to rebalance out of an expensive target date fund

Post by retiredjg »

a5ehren wrote:Yep. With the way the %ages lie once you remove the Roths it actually makes the math read a lot easier, too.

His 401k at Schwab - 65% total
30% 500 Institutional - 0.04%
15% Extended Mkt Inst - 0.06%
15% Total Intl Stock - 0.09%
5% Total Bond - 0.04%

Her 403b at Fidelity - 35%
15% Fidelity 500 Index Fund - 0.035%
7.5% Fidelity Extended Mkt - 0.07%
7.5% Fidelity Intl - 0.08%
5% Fidelity U.S. Bond Index Fund - 0.05%
You could, in fact, run each account as its own little portfolio if you like that math better.

The Fidelity International you have does not contain emerging markets (although the emerging markets fund is available in that plan). I'd hold all the international in His 401k myself. And maybe put all the extended market into Her 403b. But this is just personal preference. You obviously have figured out how this works - just do what makes sense to you. The important part is to save money. :happy
Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

rkhusky wrote:
a5ehren wrote: That's true. Maybe I'll send that to the kid's 529 :D
It's commonly advised to max out your retirement accounts before funding college accounts, since the latter are more restrictive and you can't easily get a loan to pay for retirement.
I'm only putting enough in now to get the state tax deduction (up to $4k contributed), so it isn't a big impact on my retirement plans. Especially if I'm about to be dumping it all in the 401k, I'd like to avoid the 10% penalty there.
Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

retiredjg wrote:
a5ehren wrote:Yep. With the way the %ages lie once you remove the Roths it actually makes the math read a lot easier, too.

His 401k at Schwab - 65% total
30% 500 Institutional - 0.04%
15% Extended Mkt Inst - 0.06%
15% Total Intl Stock - 0.09%
5% Total Bond - 0.04%

Her 403b at Fidelity - 35%
15% Fidelity 500 Index Fund - 0.035%
7.5% Fidelity Extended Mkt - 0.07%
7.5% Fidelity Intl - 0.08%
5% Fidelity U.S. Bond Index Fund - 0.05%
You could, in fact, run each account as its own little portfolio if you like that math better.

The Fidelity International you have does not contain emerging markets (although the emerging markets fund is available in that plan). I'd hold all the international in His 401k myself. And maybe put all the extended market into Her 403b. But this is just personal preference. You obviously have figured out how this works - just do what makes sense to you. The important part is to save money. :happy
Cool, thanks for the help!
rkhusky
Posts: 17764
Joined: Thu Aug 18, 2011 8:09 pm

Re: Need to rebalance out of an expensive target date fund

Post by rkhusky »

a5ehren wrote:
rkhusky wrote:
a5ehren wrote: That's true. Maybe I'll send that to the kid's 529 :D
It's commonly advised to max out your retirement accounts before funding college accounts, since the latter are more restrictive and you can't easily get a loan to pay for retirement.
I'm only putting enough in now to get the state tax deduction (up to $4k contributed), so it isn't a big impact on my retirement plans. Especially if I'm about to be dumping it all in the 401k, I'd like to avoid the 10% penalty there.
One other thing, since you are in the 25% bracket with a child, you may be in the child tax credit phaseout if your MAGI is >$110K (not indexed for inflation). That would add an additional 5% to your marginal tax rate, making a 30% savings from using a Traditional account.
Topic Author
a5ehren
Posts: 76
Joined: Fri May 26, 2017 7:48 am

Re: Need to rebalance out of an expensive target date fund

Post by a5ehren »

rkhusky wrote:
a5ehren wrote:
rkhusky wrote:
a5ehren wrote: That's true. Maybe I'll send that to the kid's 529 :D
It's commonly advised to max out your retirement accounts before funding college accounts, since the latter are more restrictive and you can't easily get a loan to pay for retirement.
I'm only putting enough in now to get the state tax deduction (up to $4k contributed), so it isn't a big impact on my retirement plans. Especially if I'm about to be dumping it all in the 401k, I'd like to avoid the 10% penalty there.
One other thing, since you are in the 25% bracket with a child, you may be in the child tax credit phaseout if your MAGI is >$110K (not indexed for inflation). That would add an additional 5% to your marginal tax rate, making a 30% savings from using a Traditional account.
Yes, we're above the child tax credit phaseout. I'd have to check the numbers from last year's return to see what more I'd have to put in to get under the line though.
rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: Need to rebalance out of an expensive target date fund

Post by rkhusky »

a5ehren wrote: Yes, we're above the child tax credit phaseout. I'd have to check the numbers from last year's return to see what more I'd have to put in to get under the line though.
In any case, your marginal rate would then be 30%, which is even more incentive to use Traditional accounts now, rather than Roth. If you remain in the phaseout, even with moving the Roth to Traditional, you would have $3300 in tax savings by moving the Roth IRA contributions to the Traditional accounts.
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