New(ish) to investing - Too much cash? - Need guidance

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Pavlov101
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Joined: Fri Jun 09, 2017 4:00 pm

New(ish) to investing - Too much cash? - Need guidance

Post by Pavlov101 » Fri Jun 09, 2017 4:20 pm

Hello Friendly Bogleheads!

I started my first “real” job in 2013 and I am now in a place where I am starting to generate significant savings, however, I don’t really know what to do! My specifics are below (please take mercy - I know I have too much exposure to cash. I have been hesitant to invest given the current state of the market. For what it’s worth, I do realize these “I am smarter than the market” thoughts are nonsense).

My Details:

Emergency funds: Too much cash - that is one of my main questions ~$175K outside of retirement accounts
Debt: None (currently renting $4k/mo in the Bay Area)
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 9.3% State
State of Residence: CA
Age: 31 (wife 32, stay-at-home mom)
Children: 3 young children

Desired Asset allocation: Uncertain - I feel that the bond market isn’t the safe haven many make it out to be when the FED is at very low interest rates and the only direction to go is up. For retirement accounts, I am not uncomfortable in 100% stocks unless there is a convincing argument for why I should be more heavily invested in bonds or other similar investments.

Desired International allocation: Not certain...

Taxable Investments
~$100-120k that I feel comfortable investing, currently all cash

Current retirement assets (Total ~$100k)

His 401k
#1 $57k 50% company match up to fed max
$14k (VEMPX) Vanguard Extended Market Index Fund Institutional Plus Shares (.05% exp. ratio)
$29k (VIIIX) Vanguard Institutional Index Fund Institutional Plus Shares (.02% exp. ratio)
$14k Vanguard Retirement Savings Trust II (.3% exp. ratio)

#2 $20k (old 401k from very large company that creates their own funds for 401k investments- funds are not publicly traded, so no tickers)
$14k S&P 500 Index Fund (.05% exp ratio)
$5k Russell 2500 Index Fund (.29% exp ratio)
$1k Global REIT Fund (.21% exp ratio)

#3 $18k (old 403b)
$7.5k (FSEVX) FID EXT MKT IDX PR (exp ratio .07%)
$1k (FSIVX) FID INTL INDEX PR (exp ratio .08%)
$10k (FUSVX) FID 500 INDEX PR (exp ratio .045%)

His Roth IRA at Scottrade ($2k - no longer qualify to contribute)
Not invested (cash)


Her ROTH IRA at Scottrade ($5k - no longer qualify to contribute)
Not invested (cash)

Her Traditional IRA at Scottrade ($5K - no longer qualify to contribute tax deductible)
Not invested (cash)

Her Pension - Very small pension (like $200/mo starting at age 65)


New annual Contributions
$27k his 401k ($18k + $9k employer match)
~$50k taxable (currently just accumulating in cash account)

Funds available in his 401(k)

Vanguard Target Ret 2040 Trust Select (exp ratio .05%)
Vanguard Ext Mkt Index Inst Plus (VEMPX) (exp ratio .05%)
Vanguard Inst Index Fund Inst Plus (VIIIX) (exp ratio .02%)
Vanguard Tot Intl Stock Ix Inst Pl (VTPSX) (exp ratio .07%)
Vanguard total bond mkt Ix Pls (VBMPx) (exp ratio .03%)
American Funds Growth Fund of Amer R6 (RGAGX) (exp ratio .33%)
CRM Small Cap Value Instl (CRISX) (exp ratio .90%)
Dodge & Cox Stock (DODGX) (exp ratio .52%)
Fidelity Diversified International K (FDIKX) (exp ratio .92%)
Metropolitan West Total Return Bd Plan (MWTSX) (exp ratio .38%)
Vanguard Retire Savings Trust II (exp ratio .30%)
WB Small Mid Growth (exp ratio .90%)
Fidelity Low-Priced Stock K (FLPKX) (exp ratio .78%)
TIAA-CREF Social Choice Eq Instl (TISCX) (exp ratio .19%)
Vanguard REIT Index Fund Inst (VGSNX) (exp ratio .10%
Vanguard Wellesley Income Fund Adm (VWIAX) (exp ratio .15%)

Background:
We are currently renting in the Bay Area. We are still uncertain whether we will call this place home, or move on at some point. If we decide to settle down, we want to buy a house, however, the rent to buy ratio is insane here. We are currently paying $4k/mo in rent, and it would cost us $6.5k-$7k/mo to buy the same property (not including the opportunity cost of a ~$300k down payment). The only way that we would be willing/able to purchase a home would be if there was a ~20% dip in the market. The problem is that a 20% dip in the Bay Area real estate market would likely be paired with a sizeable dip in equities as well. So, it seems that if I am interested in eventually purchasing in this area, I should have $200-300k in liquid assets, hence my large cash position now.

Questions:
1. [CASH] Removing the emotional aspects of owning a house: Given the current state of the stock market (near all time highs) and the Bay Area real estate market (also at crazy highs), would you continue to stockpile in cash, invest in stocks/bonds/etc, or do something else entirely? Why? I am open to giving up on owning in the Bay Area if it is likely that I will be better off financially.

2. [CASH] If you recommend investing over hoarding cash and purchasing a home, what is your recommended investment mix for after-tax accounts and why? I am sensitive to investing a large sum at the height of the market, but also understand the logic behind opportunity costs and that in the long run I am better to have that money invested. Over what period of time would you invest the ~$100k in cash currently sitting in the bank that is not part of my emergency fund.

3. [College] I currently do not have any sort of dedicated savings accounts for my 3 young children’s college as I do not receive a tax deduction for any contributions into the California 529 plan. What are your thoughts on contributing to 529 plans for the kids vs using mega Backdoor contributions. Which would you do first?

4. [Retirement] I have the option to do Mega Backdoor Roth contributions through my employer, but don’t currently take advantage of this. I think I am a good candidate for this, but wanted to get your collective opinion. What are your thoughts on saving in a cash account vs Mega Backdoor?

My current thoughts are invest in this priority:
Max my 401k ($18k w/ $9k match - $27k total)
Mega backdoor contributions ($27k to max out overall 401k contribution limit of $54k)
Invest in some mix of Kids’ 529 accounts and cash accounts as funds remain.
Thoughts?

5. [Retirement] Investment mix
For retirement accounts I am ok with quite a bit of fluctuation if it results in better returns. I am also kind of skeptical of bonds right now due to very low interest rates, and what will happen as they rise. What are your thoughts on the ideal investment mix? Should I include some bonds? What is your reasoning?

6. [Retirement] Rollover
We have many retirement accounts between the two of us, should we consider rolling some of them over? If so, which ones?

7. Do you have any other suggestions or recommendations for me?


I realize this is a long post and I am incredibly thankful for your thoughtful opinions!

-Pavlov

Pavlov101
Posts: 4
Joined: Fri Jun 09, 2017 4:00 pm

Re: New(ish) to investing - Too much cash? - Need guidance

Post by Pavlov101 » Sun Jun 11, 2017 4:45 pm

Bumping this question. I realize I asked a lot of questions, so I can simplify if that would be helpful...

Thank you very much for your help!

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David Jay
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Location: Michigan

Re: New(ish) to investing - Too much cash? - Need guidance

Post by David Jay » Mon Jun 12, 2017 12:11 pm

Welcome to the BH forum.

It's a little hard to be helpful when you say you have too much cash but you don't want to put any money in equities or bonds.

May I recommend the BH startup kit on the Wiki here: https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

Read a few of the books - start with the free download of Bernstein's "If You Can", referenced there.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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ruralavalon
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Location: Illinois

Re: New(ish) to investing - Too much cash? - Need guidance

Post by ruralavalon » Mon Jun 12, 2017 12:14 pm

Welcome to the forum :) .

I cannot address all of your issues, but will give this a shot.

Pavlov101 wrote:Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 9.3% State
State of Residence: CA
Age: 31 (wife 32, stay-at-home mom)
Children: 3 young children

Desired Asset allocation: Uncertain - I feel that the bond market isn’t the safe haven many make it out to be when the FED is at very low interest rates and the only direction to go is up. For retirement accounts, I am not uncomfortable in 100% stocks unless there is a convincing argument for why I should be more heavily invested in bonds or other similar investments.

Desired International allocation: Not certain...

At ages 31 and 32 I suggest around 20% in bonds. That is expected to significantly reduce portfolio risk, with a relatively smaller reduction in portfolio performance.

Many here expect that expected Federal Reserve OMC actions on interest rates will have a small and temporary impact on bond fund values. A good credit quality intermediate-term bond fund is considerably less risky than a good stock fund. I don't believe that there is a good reason to defer setting up a bond allocation. A 100% stock portfolio would be much riskier.

I generally suggest in the area of 20-30% of stocks in international stocks. Historically 20% of stocks in international stocks would have captured about 84% of the maximum diversification benefit; and 30% of stocks in international stocks would have captured about 99% of the maximum diversification benefit. Other people suggest as high as 50% of stocks in international stocks, in fact there is endless discussion about this. You can use the search box (upper right) to find a lot of discussion on international allocation.


Pavlov101 wrote:Taxable Investments
~$100-120k that I feel comfortable investing, currently all cash

If you invest this cash I suggest using Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05% and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%. Both are very tax-efficient. Please see the wiki article "tax-efficient fund placement".


Pavlov101 wrote: His 401k
#1 $57k 50% company match up to fed max
$14k (VEMPX) Vanguard Extended Market Index Fund Institutional Plus Shares (.05% exp. ratio)
$29k (VIIIX) Vanguard Institutional Index Fund Institutional Plus Shares (.02% exp. ratio)
$14k Vanguard Retirement Savings Trust II (.3% exp. ratio)

#2 $20k (old 401k from very large company that creates their own funds for 401k investments- funds are not publicly traded, so no tickers)
$14k S&P 500 Index Fund (.05% exp ratio)
$5k Russell 2500 Index Fund (.29% exp ratio)
$1k Global REIT Fund (.21% exp ratio)

#3 $18k (old 403b)
$7.5k (FSEVX) FID EXT MKT IDX PR (exp ratio .07%)
$1k (FSIVX) FID INTL INDEX PR (exp ratio .08%)
$10k (FUSVX) FID 500 INDEX PR (exp ratio .045%)

I assume the old 401k and old 403b are both his accounts. Is that correct?

Will his current 401k accept incoming rollovers from his old work-based accounts?

If so, then I suggest rolling over his old 401k and his old 403b into his current 401k. Low investing expenses are a critical factor in fund selection, and are very important to portfolio performance. The current 401k offers excellent fund choices with very low expense ratios, and combining the accounts gives you a simpler portfolio with two fewer accounts to keep track of.

In your current 401k consider using these funds:
Vanguard Institutional Index Fund Institutional Plus (a S&P 500 index fund) (VIIIX) ER 0.02%
Vanguard Total International Stock Index Fund Institutional Plus (VTPSX) ER 0.07%
Vanguard Total Bond Market Index Fund Institutional Plus (VBMPX) ER 0.03%


Pavlov101 wrote:His Roth IRA at Scottrade ($2k - no longer qualify to contribute)
Not invested (cash)


Her ROTH IRA at Scottrade ($5k - no longer qualify to contribute)
Not invested (cash)

Her Traditional IRA at Scottrade ($5K - no longer qualify to contribute tax deductible)
Not invested (cash)

To further simplify, I suggest rolling over these accounts to IRAs at Vanguard. Just call Vanguard and they can help with the rollovers. Ask for "trustee to trustee" transfers.



Pavlov101 wrote:Her Pension - Very small pension (like $200/mo starting at age 65)


New annual Contributions
$27k his 401k ($18k + $9k employer match)
~$50k taxable (currently just accumulating in cash account)

You could consider $5.5k per year to each of the two Roth IRAs. Please see the wiki article "Backdoor Roth IRA".



Pavlov101 wrote:Background:
We are currently renting in the Bay Area. We are still uncertain whether we will call this place home, or move on at some point. If we decide to settle down, we want to buy a house, however, the rent to buy ratio is insane here. [emphasis added] We are currently paying $4k/mo in rent, and it would cost us $6.5k-$7k/mo to buy the same property (not including the opportunity cost of a ~$300k down payment). The only way that we would be willing/able to purchase a home would be if there was a ~20% dip in the market. The problem is that a 20% dip in the Bay Area real estate market would likely be paired with a sizeable dip in equities as well. So, it seems that if I am interested in eventually purchasing in this area, I should have $200-300k in liquid assets, hence my large cash position now.

Questions:
1. [CASH] Removing the emotional aspects of owning a house: Given the current state of the stock market (near all time highs) and the Bay Area real estate market (also at crazy highs), would you continue to stockpile in cash, invest in stocks/bonds/etc, or do something else entirely? Why? I am open to giving up on owning in the Bay Area if it is likely that I will be better off financially.

2. [CASH] If you recommend investing over hoarding cash and purchasing a home, what is your recommended investment mix for after-tax accounts and why? I am sensitive to investing a large sum at the height of the market, but also understand the logic behind opportunity costs and that in the long run I am better to have that money invested. Over what period of time would you invest the ~$100k in cash currently sitting in the bank that is not part of my emergency fund.

I am not all all familiar with your local real estate market. Perhaps others from your area will comment.

However you did say that you were uncertain if you would stay in the area or move. I suggest that you not buy unless you are relatively certain that you will live there long-term. If not then you should be investing your cash in my opinion.



Pavlov101 wrote:3. [College] I currently do not have any sort of dedicated savings accounts for my 3 young children’s college as I do not receive a tax deduction for any contributions into the California 529 plan. What are your thoughts on contributing to 529 plans for the kids vs using mega Backdoor contributions. Which would you do first?

4. [Retirement] I have the option to do Mega Backdoor Roth contributions through my employer, but don’t currently take advantage of this. I think I am a good candidate for this, but wanted to get your collective opinion. What are your thoughts on saving in a cash account vs Mega Backdoor?

529s did not exist when we put our 4 children through college, so I have no experience with them. We cash flowed the college expenses. Also I was never in a position to use a mega backdoor Roth, so have no experience with that either.

My guess is that the mega backdoor Roth might be preferable. If your retirement saving is in order then when the time comes with your good income you can probably cash flow college expenses.


Pavlov wrote:My current thoughts are invest in this priority:
Max my 401k ($18k w/ $9k match - $27k total)
Mega backdoor contributions ($27k to max out overall 401k contribution limit of $54k)
Invest in some mix of Kids’ 529 accounts and cash accounts as funds remain.
Thoughts?

As stated above, you could also consider backdoor contributions to the two Roth IRAs.
Last edited by ruralavalon on Mon Jun 12, 2017 12:23 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

bigred77
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Joined: Sat Jun 11, 2011 4:53 pm

Re: New(ish) to investing - Too much cash? - Need guidance

Post by bigred77 » Mon Jun 12, 2017 12:21 pm

Well a couple of thoughts.

I do think you are a good candidate to do a mega backdoor Roth IRA if your employer plan allows this. I would do this before I did anymore taxable investing (unless you make buying a house a goal and want to set money aside specifically for a down payment).

I think you are even a candidate for a regular backdoor Roth IRA (even if you have to take a small tax hit to move your wife's traditional IRA balance). It's small enough to me that I would just do it.

In regards to your taxable AA, I would consider the portfolio as one and keep any fixed income that you desire in tax advantaged accounts and keep equities in taxable. You can always benefit from tax loss harvesting in a market downturn. I am a big proponent of lump sum investing but if you have to dollar cost average over a period of time I would make a plan and stick to it. Just get the funds invested as soon as you can.

Good luck.

aristotelian
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Joined: Wed Jan 11, 2017 8:05 pm

Re: New(ish) to investing - Too much cash? - Need guidance

Post by aristotelian » Mon Jun 12, 2017 12:33 pm

The most tax efficient approach is to invest taxable dollars in Total Stock Market Index, then increase your bond allocation in your 401K(s) to compensate. You end up with the same overall allocation but with most of the ordinary dividends (which would be taxed as normal income) paid out your deferred account.

Is there a reason you are not consolidating your old 401k's?

WhiteMaxima
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Re: New(ish) to investing - Too much cash? - Need guidance

Post by WhiteMaxima » Mon Jun 12, 2017 12:51 pm

Use your cash to pay living expense. Then mega 401k after tax. Rollover to Roth everyear. Pick Vanguard or Fidelity. Keep it in a balance fund 1/3 US 1/3 Intl 1/3 Bond. Consolidate everything into one company (Vanguard or Fidelituy) Keep renting in Bay area, Do 529 of lump of 70k spread 5 years ( I choose Utah or New York for their Vanguard selection. Then you are done.

Chadnudj
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Joined: Tue Oct 29, 2013 11:22 am

Re: New(ish) to investing - Too much cash? - Need guidance

Post by Chadnudj » Mon Jun 12, 2017 1:40 pm

My advice:

Move forward.

You have too much in cash? So what? Treat it as a VERY large emergency fund (almost surely more than 1 year expenses, probably 2-3). Everyone needs one anyway and typically builds it at the same time as building their other retirement/taxable savings....you just took a different path and built the emergency fund (a very large one) first. Not unreasonable at all, given your family obligations and the difficult position you'd be in if you lost you job....

So what now? Well, stop contributing to the emergency fund, and start diverting every new dollar of savings into a smart AA that makes sense for you (I'd look long and hard at the Vanguard LifeStrategy Growth, which is 80/20, or LifeStrategy Moderate Growth, which is 60/40).

Will this be ideal? Probably not, but the perfect is the enemy of the good here. Just get started investing...that's the important part.

Pavlov101
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Re: New(ish) to investing - Too much cash? - Need guidance

Post by Pavlov101 » Wed Jun 14, 2017 11:20 am

Thank you everyone for your very thoughtful responses! After reading your posts and doing a lot of follow-on reading, am starting to generate a plan for moving forward (but I do have some follow up questions).

Just to clarify - based on the above posts, it appears that I can do both a backdoor and mega backdoor at the same time - is this correct?

Assuming this is correct, here is my plan for moving forward:

Investment order
1) pre-tax 401k ($27k - $18k with $9k employer match)
2) Mega backdoor contribution ($27k)
3) Backdoor contribution ($5.5k for both me and my wife (note- will need to pay small amount of taxes to convert wife's existing IRA)
4) 529 Contributions for our 3 children / taxable investments (ideally we will cash roll most of the kid's college expenses, but for at least one year we will have 3 kids in college :shock:)

AA:
20% Bonds (VBMPX or VBIIX)
30% International (VTIAX)
50% US (VTSAX)

Strategy:
1) Roll over his old 401k and 403b to current employer 401k
2) Roll over his Roth IRA and her Roth IRA and her Traditional IRA to Vanguard
3) Increase Post-tax 401k contributions so that they will equal 27k by the end of the year (live off of some of our savings if needed)
4) Backdoor Roth contributions from savings
5) 529 (Utah or NY) and taxable investments from savings until cash on hand = desired emergency fund

Remaining Questions:
1) My wife's existing Traditional IRA has both pre-tax and post-tax contributions in it :( How should we go about getting rid of/rolling over this account so that we can do backdoor contributions (note - she is a stay-at-home mom, so she does not have a 401k)
2) Would contributions from the mega backdoor and backdoor both end up in the same (his) Roth?
3) What do you think of my AA and the funds that I have listed?

Thank you all for your help!

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ruralavalon
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Re: New(ish) to investing - Too much cash? - Need guidance

Post by ruralavalon » Wed Jun 14, 2017 12:01 pm

I believe that you can do both backdoor Roth IRA contributions and the mega backdoor Roth at the same time. Perhaps one of the real tax gurus here will comment.

1) & 2) I don't really understand these questions.

3) Both your desired asset allocation and fund selections are reasonable in my opinion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Pavlov101
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Re: New(ish) to investing - Too much cash? - Need guidance

Post by Pavlov101 » Mon Jun 19, 2017 9:12 am

ruralavalon wrote:I believe that you can do both backdoor Roth IRA contributions and the mega backdoor Roth at the same time. Perhaps one of the real tax gurus here will comment.

1) & 2) I don't really understand these questions.


Sorry for the miscommunication - both of these questions are relating to logistics of backdoor roth contributions.

1) It is my understanding that if you have an IRA with pre-tax contributions, it makes the tax reporting really difficult and that the general guidance is to roll it over into a 401k (if your employer allows). My wife has a (small) IRA with both pre-tax and post-tax contributions in it. Moreover, she does not have a 401k, as she is a stay at home mom. Given this situation, what is the best way for us to remove the pre-tax contributions from this IRA so that tax reporting is easier when we employ the backdoor roth strategy?

2) For someone doing both mega backdoor and backdoor roth contributions in the same year, it is my understanding that both of these contributions eventually get rolled over into a roth ira. Is this correct? If so, is it ok to use the same roth IRA for both the Mega backdoor and backdoor conversions?

Thank you everyone for your help! I really appreciate it!

Erik

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