28, Single, No Debt, Seeking Portfolio Advice

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arowback
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Joined: Mon Jun 19, 2017 2:09 pm

28, Single, No Debt, Seeking Portfolio Advice

Post by arowback » Mon Jun 19, 2017 3:38 pm

Emergency funds: 6 months of expenses
Debt: $0
Tax Filing Status: Single
Tax Rate: 25% Federal, 6.45% State
State of Residence: New York
Age: 28
Income: ~80k (variable with commission)

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30% of stocks

Current retirement assets
Size of the portfolio: Mid five-figures

401k at Fidelity Company matches up to 6% contributions
52% State Street S&P 500® Index Non-Lending Series Fund Class K (CMDVQ) (0.013%)

Roth IRA at Vanguard
11% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) (0.150%)
29% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.110%)
8% Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) (0.150%)

HSA (started contributing this year)
1% Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX) (0.02%)

New annual Contributions
$18k 401k + 6% company match (will max for the year)
$5500 Roth IRA (already maxed for the year)
$3400 HSA (will max for the year)
$5-10k Taxable account (this is where I'm a bit lost)

Available funds

Funds available in 401(k)
JPMCB SmartRetirement® Passive Blend Income Fund CF (0.26%)
JPMCB SmartRetirement® Passive Blend 2015 Fund CF (0.26%)
JPMCB SmartRetirement® Passive Blend 2020 Fund CF (0.26%)
JPMCB SmartRetirement® Passive Blend 2025 Fund CF (0.25%)
JPMCB SmartRetirement® Passive Blend 2030 Fund CF (0.25%)
JPMCB SmartRetirement® Passive Blend 2035 Fund CF (0.25%)
JPMCB SmartRetirement® Passive Blend 2040 Fund CF (0.25%)
JPMCB SmartRetirement® Passive Blend 2045 Fund CF (0.25%)
JPMCB SmartRetirement® Passive Blend 2050 Fund CF (0.26%)
JPMCB SmartRetirement® Passive Blend 2055 Fund CF (0.29%)
State Street S&P 500® Index Non-Lending Series Fund Class K (CMDVQ) (0.013%)
State Street Russell Small/Mid Cap® Index Non-Lending Series Fund Class K (0.04%)
State Street Global All Cap Equity Ex-U.S. Index Non-Lending Series Fund Class K (0.11%)
State Street U.S. Bond Index Non-Lending Series Fund Class K (0.04%)
Small Cap Blend Fund (0.7056%)
International Equity Blend Fund (0.2935%)
Capital Preservation Fund (0.3493%)

Sorry for the lack of ticker symbols on most of these. The website does not make it easy to find these at all. Hopefully the expense ratio + full description is enough.

Funds available in HSA
VANGUARD SMALL CAP VALUE INDEX ADMIRAL (VSIAX) (0.07%)
VANGUARD TARGET RETIREMENT 2060 INV (VTTSX) (0.16%)
VANGUARD GROWTH INDEX INSTITUTIONAL (VIGIX) (0.05%)
VANGUARD TARGET RETIREMENT 2020 INV (VTWNX) (0.14%)
VANGUARD WELLESLEY INCOME ADMIRAL (VWIAX) (0.15%)
VANGUARD TARGET RETIREMENT 2040 INV (VFORX) (0.16%)
VANGUARD TARGET RETIREMENT INCOME INV (VTINX) (0.13%)
VANGUARD EXTENDED MARKET INDEX INSTLPLUS (VEMPX) (0.05%)
VANGUARD TOTAL INTL STOCK IDX INSTLPLS (VTPSX) (0.07%)
VANGUARD SHRT-TERM INFL-PROT SEC IDX ADM (VTAPX) (0.07%)
VANGUARD INSTITUTIONAL INDEX INSTL PL (VIIIX) (0.02%)
VANGUARD EMERGING MKTS STOCK IDX INSTL (VEMIX) (0.11%)
VANGUARD SHORT-TERM BOND INDEX ADM (VBIRX) (0.07%)
VANGUARD TARGET RETIREMENT 2030 INV (VTHRX) (0.15%)
VANGUARD MATERIALS INDEX ADMIRAL (VMIAX) (0.10%)
VANGUARD MID-CAP VALUE INDEX ADMIRAL (VMVAX) (0.07%)
VANGUARD SMALL CAP INDEX ADM (VSMAX) (0.06%)
VANGUARD TOTAL INTL BD IDX ADMIRAL (VTABX) (0.12%)
VANGUARD INFLATION-PROTECTED SECS I (VIPIX) (0.07%)
VANGUARD TARGET RETIREMENT 2050 INV (VFIFX) (0.16%)
VANGUARD REIT INDEX INSTITUTIONAL (VGSNX) (0.10%)
VANGUARD VALUE INDEX ADM (VVIAX) (0.06%)
VANGUARD TOTAL BOND MARKET IDX INSTLPLS (VBMPX) (0.03%)

Questions:
1. Given I'm going to be maxing out my 401k, HSA, and Roth this year what's the best route to take if I want to save more? Given my current expenses are low I can afford to likely put away another 10k+ and still live comfortably, but I am not sure the best approach to take. My employer does allow after tax contributions to my 401k (I'm not sure if I can do in-service withdraws). The other option would just being opening a regular taxable account.

2. Once I determine where to contribute the money what would the best fund option(s) be for the taxable account given my current portfolio and situation? Any glaring issues with my current allocation? To give a bit of background and goals, the thought of early retirement does interest me, but ultimately at this point I'm just trying to save as much as I can while I'm young, don't have high expenses, and can afford to. Kind of to makeup for the lack of significant savings in my early 20's.
Last edited by arowback on Sun Jul 02, 2017 7:36 am, edited 5 times in total.

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Tamarind
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by Tamarind » Mon Jun 19, 2017 4:30 pm

Nice options you have there in your employer plans!

I'm not familiar with after tax contributions to a 401k and their rules, but anything that would let you make further use of those State Street funds with super low ERs would probably be good.

If you can't do that, add a taxable account at Vanguard and use the same funds you are using in your Roth IRA. You may need to shift your holdings around to keep the bond portion of your AA out of the taxable account.

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flamesabers
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by flamesabers » Mon Jun 19, 2017 4:40 pm

1. At your tax bracket I don't think making Roth 401k contributions would be ideal. As for where to invest in, I think it depends on what your priorities are now that you maxed out your tax-advantaged accounts. One option would be to invest in a secondary emergency fund just in case you have a rough year in which you don't earn as much in commissions as your normally do. This secondary emergency fund could be established with something like a CD ladder or I-Bonds. Alternatively, if you choose to go with a taxable account, I would recommend investing in a tax-efficient fund like an equity index fund.

2. In general I think any equity index fund would be a good choice to put in a taxable account. For simplicity you could use the equity funds you have in your Roth IRA.

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Meg77
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by Meg77 » Mon Jun 19, 2017 4:41 pm

How are you able to save so much on an $80K income in New York?

If the answer is that you are still living at home with your parents, then my suggestion would be to "invest" some of your extra cash flow into getting your own apartment. The independence, experiences and growth you will have will be well worth it.

If the answer is that you live with roommates or are just very frugal, then good job! Keep at it. Boost your emergency fund to $25K (if it's not there already) and then dump the rest into a brokerage account. It's "best" to hold international index funds in brokerage versus in retirement accounts so that you can take advantage of the foreign tax credit and in order to limit taxable distributions.

Overall though your AA and your fund choices look great to me. Don't worry too much about exact AA targets at this point though; your new contributions are the main thing driving your portfolio growth for the forseeable future. AA and fees and fund choices matter, but not nearly as much as your contribution rate until you've got investments well into the 6 figure range. Keep up the good work, and you'll be there in no time!

Just make sure you keep enough dry powder (aka cash) for all the life stuff that could come at you in the short term - real estate purchases, business start ups, marriage/wedding, children, etc.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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badbreath
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by badbreath » Mon Jun 19, 2017 5:27 pm

Your HSA should be more aggressive then bounds. I would put VANGUARD INSTITUTIONAL INDEX INSTL PL (VIIIX) (0.02% in it
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

Masterblaster
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by Masterblaster » Mon Jun 19, 2017 5:45 pm

If you do after tax contributions they can be later (provided your employer allows) rolled into a Roth IRA as in service withdrawals. That's the so-called backdoor Roth-IRA. Note that any gains from the after tax contributions can either be split off into a ordinary (taxable) IRA or can be distributed then as taxable income.

My recommendation is to do deductible 401k contributions up to your limit. Then do either a deductible IRA or a ROTH IRA depending on your situation. Then if you have extra money contribute to your 401k as after-tax contributions of which these are later rolled off into a ROTH IRA.

Note also that your employer probably has some upper bound of taxable and deductible income that you can contribute to your 401k.

retiredjg
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by retiredjg » Mon Jun 19, 2017 5:57 pm

arowback wrote: My employer does allow after tax contributions to my 401k (I'm not sure if I can do in-service withdraws). The other option would just being opening a regular taxable account.
This is the first thing for you to look at. If you can make after-tax contributions and roll that into Roth IRA once a year or so, that is far superior to putting the money (if it is for retirement) into a taxable account.

If you cannot do the in-service distributions, use taxable. The best funds there would be total stock index and/or total international stock index. There are other choices, but those are the ones to start with. This would likely reduce the amount of US stocks needed in your 401k and your bonds might need to move into the 401k to fill the space.

If the money going into taxable is for something other than retirement, there are a couple of ways to approach that.

jbranx
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by jbranx » Mon Jun 19, 2017 5:59 pm

Congratulations on the progress you have made already. You have excellent fund choices. For the taxable account you might consider one of the Vanguard Lifestrategy funds or do two funds, Vanguard total domestic and V. total international. One option I like is Vanguard Total World. Since you are in a high tax state, you might also consider V.'s NY muni fund. In all these funds I would set up an auto-investment plan to put money in every month. If you don't have the minimums for the funds, you could open a discount brokerage account and buy the ETF's from Vanguard or Ishares Core, for ex.

The fewer funds, the broadest diversification, the lowest expenses, and determined investment discipline and saving are what it takes. Live below your means. Joking here, but worth considering: don't get married, and if you do, don't get divorced. Get an imaginary dog. They don't need vet care, daily walking, or require pet vacuums. If you must eat out, do Denny's or Ruby Tuesday's, and make sure you get the free birthday meals and clip all their coupons. If you must have a spouse, choose one that agrees with all of the above, wants to also retire very early, and will love that dog.

I lived/worked in Manhattan for 25 years. You'll never need a car, and I'd wait for one of those inevitable real estate slumps before buying any real estate.

arowback
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by arowback » Sat Jun 24, 2017 7:53 pm

Thank you to everyone that took the time to respond. You've given me quite a bit to think about and I've been doing quite the reading to get a better understanding of everything.
flamesabers wrote:1. At your tax bracket I don't think making Roth 401k contributions would be ideal. As for where to invest in, I think it depends on what your priorities are now that you maxed out your tax-advantaged accounts. One option would be to invest in a secondary emergency fund just in case you have a rough year in which you don't earn as much in commissions as your normally do. This secondary emergency fund could be established with something like a CD ladder or I-Bonds. Alternatively, if you choose to go with a taxable account, I would recommend investing in a tax-efficient fund like an equity index fund.

2. In general I think any equity index fund would be a good choice to put in a taxable account. For simplicity you could use the equity funds you have in your Roth IRA.
It does seem like a Traditional IRA would be better given my situation to reduce taxable income. Given I've already maxed out the Roth this year I could open a Traditional IRA in 2018 and contribute to that and just leave the Roth alone?

Also, I've been giving the secondary emergency fund some thought. What are some of the considerations for using a CD ladder vs. I-Bonds? Perhaps take 10k and split it into 5 individual 2k CD's each 1 yr apart? This would be in addition to the 6+ months expenses I have earning 1.05% in an Ally savings account plus I always have a 1 month buffer in my checking account (following the YNAB rule of living on last months income).
Meg77 wrote:How are you able to save so much on an $80K income in New York?

If the answer is that you are still living at home with your parents, then my suggestion would be to "invest" some of your extra cash flow into getting your own apartment. The independence, experiences and growth you will have will be well worth it.

If the answer is that you live with roommates or are just very frugal, then good job! Keep at it. Boost your emergency fund to $25K (if it's not there already) and then dump the rest into a brokerage account. It's "best" to hold international index funds in brokerage versus in retirement accounts so that you can take advantage of the foreign tax credit and in order to limit taxable distributions.

Overall though your AA and your fund choices look great to me. Don't worry too much about exact AA targets at this point though; your new contributions are the main thing driving your portfolio growth for the forseeable future. AA and fees and fund choices matter, but not nearly as much as your contribution rate until you've got investments well into the 6 figure range. Keep up the good work, and you'll be there in no time!

Just make sure you keep enough dry powder (aka cash) for all the life stuff that could come at you in the short term - real estate purchases, business start ups, marriage/wedding, children, etc.
I live upstate so living expenses are probably 1/3 of what they would be if I lived in NYC. Also, since moving jobs and tripling my income a couple years ago I did my best to try to avoid lifestyle creep too much which has allowed me to save the majority of it. It helps that the HSA and 401k are deducted before my paycheck hits my checking account, so I don't feel like I'm missing it. The only thing I do spend quite a bit of money on is food which I'm trying to cut back on. Besides that I consider myself pretty frugal.

Good point in keeping enough cash laying around as well. Currently I have about 10k in my emergency fund and about 12k set aside for when I do pop the question to the girl. No plans for children. I could bump my emergency fund up to 25k though. Do you think utilizing a CD ladder like mentioned above is the best option?
badbreath wrote:Your HSA should be more aggressive then bounds. I would put VANGUARD INSTITUTIONAL INDEX INSTL PL (VIIIX) (0.02% in it
What would the reasoning be? Sorry if it's fairly obvious, just want to make sure I fully understand.
Masterblaster wrote:If you do after tax contributions they can be later (provided your employer allows) rolled into a Roth IRA as in service withdrawals. That's the so-called backdoor Roth-IRA. Note that any gains from the after tax contributions can either be split off into a ordinary (taxable) IRA or can be distributed then as taxable income.

My recommendation is to do deductible 401k contributions up to your limit. Then do either a deductible IRA or a ROTH IRA depending on your situation. Then if you have extra money contribute to your 401k as after-tax contributions of which these are later rolled off into a ROTH IRA.

Note also that your employer probably has some upper bound of taxable and deductible income that you can contribute to your 401k.
retiredjg wrote:
arowback wrote: My employer does allow after tax contributions to my 401k (I'm not sure if I can do in-service withdraws). The other option would just being opening a regular taxable account.
This is the first thing for you to look at. If you can make after-tax contributions and roll that into Roth IRA once a year or so, that is far superior to putting the money (if it is for retirement) into a taxable account.

If you cannot do the in-service distributions, use taxable. The best funds there would be total stock index and/or total international stock index. There are other choices, but those are the ones to start with. This would likely reduce the amount of US stocks needed in your 401k and your bonds might need to move into the 401k to fill the space.

If the money going into taxable is for something other than retirement, there are a couple of ways to approach that.
I'm going to see if I can speak with someone just to verify I can do in-service withdrawals. If it turns out to be the case, I'll definitely go that route, perhaps after building up my emergency fund a tad more.
jbranx wrote:Congratulations on the progress you have made already. You have excellent fund choices. For the taxable account you might consider one of the Vanguard Lifestrategy funds or do two funds, Vanguard total domestic and V. total international. One option I like is Vanguard Total World. Since you are in a high tax state, you might also consider V.'s NY muni fund. In all these funds I would set up an auto-investment plan to put money in every month. If you don't have the minimums for the funds, you could open a discount brokerage account and buy the ETF's from Vanguard or Ishares Core, for ex.

The fewer funds, the broadest diversification, the lowest expenses, and determined investment discipline and saving are what it takes. Live below your means. Joking here, but worth considering: don't get married, and if you do, don't get divorced. Get an imaginary dog. They don't need vet care, daily walking, or require pet vacuums. If you must eat out, do Denny's or Ruby Tuesday's, and make sure you get the free birthday meals and clip all their coupons. If you must have a spouse, choose one that agrees with all of the above, wants to also retire very early, and will love that dog.

I lived/worked in Manhattan for 25 years. You'll never need a car, and I'd wait for one of those inevitable real estate slumps before buying any real estate.
Since I live in rural upstate NY I definitely need the car to get around, but I live within my means driving a 07 Ford Focus that hasn't given me any trouble since I've owned it and is now closing in on 190k miles. Not sure the wife/dog is one I will avoid given the current GF of 4 yrs has a pet chihuahua! lol. Food is about the only thing I spent a bit more than I'd like on (groceries and eating out) which I'm working on cutting down to increase savings even further. Thank you for the fund suggestions, this is all helpful and again gives me quite a bit to think about.
Last edited by arowback on Wed Jun 28, 2017 5:40 pm, edited 1 time in total.

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flamesabers
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by flamesabers » Sun Jun 25, 2017 12:32 am

arowback wrote:
flamesabers wrote:1. At your tax bracket I don't think making Roth 401k contributions would be ideal. As for where to invest in, I think it depends on what your priorities are now that you maxed out your tax-advantaged accounts. One option would be to invest in a secondary emergency fund just in case you have a rough year in which you don't earn as much in commissions as your normally do. This secondary emergency fund could be established with something like a CD ladder or I-Bonds. Alternatively, if you choose to go with a taxable account, I would recommend investing in a tax-efficient fund like an equity index fund.

2. In general I think any equity index fund would be a good choice to put in a taxable account. For simplicity you could use the equity funds you have in your Roth IRA.
It does seem like a Traditional IRA would be better given my situation to reduce taxable income. Given I've already maxed out the Roth this year I could open a Traditional IRA in 2018 and contribute to that and just leave the Roth alone?

Also, I've been giving the secondary emergency fund some thought. What are some of the considerations for using a CD ladder vs. I-Bonds? Perhaps take 10k and split it into 5 individual 2k CD's each 1 yr apart? This would be in addition to the 6+ months expenses I have earning 1.05% in an Ally savings account plus I always have a 1 month buffer in my checking account (following the YNAB rule of living on last months income).
An issue with a traditional IRA is the income eligibility requirements to be able to deduct the contribution. The 2018 figures haven't been released yet, but as of 2017, your MAGI would have to be $62k or less to be able to deduct the full $5.5k deduction.

https://www.irs.gov/retirement-plans/20 ... an-at-work

Assuming you don't have any issues with the Treasury Direct website, I think there is a bit of simplicity of buying $10k of I-Bonds. The interest on I-Bonds are tax-deferred and have a final maturity of 30 years. You don't have to deal with 1099s for the interest every year nor do you have to decide where you want to reinvest your CDS as they mature every year. You do have to wait a year before you can redeem I-Bonds and the current fixed rate is 0%. Depending on the rate of inflation, I-Bonds can have a high variable rate or have a total rate of 0% for a period of six months or more.

If you go with CDs, you may be able to get higher interest rates then with the I-Bonds. However, this interest will be taxable every year and it'll be more paperwork for you to deal with when you file your taxes.

Ultimately, if you really want simplicity with the secondary emergency fund, I suggest going with I-Bonds. If you're willing to shop around for CDs every year and don't mind the additional 1099s, I suggest going with the CD ladder.

arowback
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by arowback » Sun Jun 25, 2017 10:24 am

flamesabers wrote: An issue with a traditional IRA is the income eligibility requirements to be able to deduct the contribution. The 2018 figures haven't been released yet, but as of 2017, your MAGI would have to be $62k or less to be able to deduct the full $5.5k deduction.

https://www.irs.gov/retirement-plans/20 ... an-at-work

Assuming you don't have any issues with the Treasury Direct website, I think there is a bit of simplicity of buying $10k of I-Bonds. The interest on I-Bonds are tax-deferred and have a final maturity of 30 years. You don't have to deal with 1099s for the interest every year nor do you have to decide where you want to reinvest your CDS as they mature every year. You do have to wait a year before you can redeem I-Bonds and the current fixed rate is 0%. Depending on the rate of inflation, I-Bonds can have a high variable rate or have a total rate of 0% for a period of six months or more.

If you go with CDs, you may be able to get higher interest rates then with the I-Bonds. However, this interest will be taxable every year and it'll be more paperwork for you to deal with when you file your taxes.

Ultimately, if you really want simplicity with the secondary emergency fund, I suggest going with I-Bonds. If you're willing to shop around for CDs every year and don't mind the additional 1099s, I suggest going with the CD ladder.
I wasn't aware of the income eligibility requirements in order to deduct the contribution. So if my MAGI is over the limit would this make Roth the better option and likewise if it's under traditional being the better option? As you said, we don't know the 2018 limits, but my MAGI should end up being below 62k this year.

Also, I like simplicity so going with I-Bonds for the secondary emergency fund sounds the way to go. Thank you for the explanation.

Fishing50
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by Fishing50 » Sun Jun 25, 2017 3:02 pm

retiredjg wrote:If you cannot do the in-service distributions, use taxable. The best funds there would be total stock index and/or total international stock index. There are other choices, but those are the ones to start with. This would likely reduce the amount of US stocks needed in your 401k and your bonds might need to move into the 401k to fill the space.
[/quote]

While you're young and single, get extra savings invested to increase time in the market. Tax loss harvesting may provide opportunities if you need the money for life stuff that happens, but you can also reduce your savings rate. Heck if the market is higher, LTCG is only taxed at 15%.

I'm against increased EF due to performance drag & tax implications. :beer
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

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Meg77
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by Meg77 » Sun Jun 25, 2017 4:57 pm

arowback wrote:Thank you to everyone that took the time to respond. You've given me quite a bit to think about and I've been doing quite the reading to get a better understanding of everything.
Meg77 wrote:How are you able to save so much on an $80K income in New York?

If the answer is that you are still living at home with your parents, then my suggestion would be to "invest" some of your extra cash flow into getting your own apartment. The independence, experiences and growth you will have will be well worth it.

If the answer is that you live with roommates or are just very frugal, then good job! Keep at it. Boost your emergency fund to $25K (if it's not there already) and then dump the rest into a brokerage account. It's "best" to hold international index funds in brokerage versus in retirement accounts so that you can take advantage of the foreign tax credit and in order to limit taxable distributions.

Overall though your AA and your fund choices look great to me. Don't worry too much about exact AA targets at this point though; your new contributions are the main thing driving your portfolio growth for the forseeable future. AA and fees and fund choices matter, but not nearly as much as your contribution rate until you've got investments well into the 6 figure range. Keep up the good work, and you'll be there in no time!

Just make sure you keep enough dry powder (aka cash) for all the life stuff that could come at you in the short term - real estate purchases, business start ups, marriage/wedding, children, etc.
I live upstate so living expenses are probably 1/3 of what they would be if I lived in NYC. Also, since moving jobs and tripling my income a couple years ago I did my best to try to avoid lifestyle creep too much which has allowed me to save the majority of it. It helps that the HSA and 401k are deducted before my paycheck hits my checking account, so I don't feel like I'm missing it. The only thing I do spend quite a bit of money on is food which I'm trying to cut back on. Besides that I consider myself pretty frugal.

Good point in keeping enough cash laying around as well. Currently I have about 15k in my emergency fund and about 10k set aside for when I do pop the question to the girl. No plans for children. I could bump my emergency fund up to 25k though. Do you think utilizing a CD ladder like mentioned above is the best option?
I don't think a CD ladder is worth the hassle. Just dump your EF into Ally or even Vanguard's Prime money market fund which pays over 1% now.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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flamesabers
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by flamesabers » Sun Jun 25, 2017 8:16 pm

arowback wrote:
flamesabers wrote: An issue with a traditional IRA is the income eligibility requirements to be able to deduct the contribution. The 2018 figures haven't been released yet, but as of 2017, your MAGI would have to be $62k or less to be able to deduct the full $5.5k deduction.

https://www.irs.gov/retirement-plans/20 ... an-at-work

Assuming you don't have any issues with the Treasury Direct website, I think there is a bit of simplicity of buying $10k of I-Bonds. The interest on I-Bonds are tax-deferred and have a final maturity of 30 years. You don't have to deal with 1099s for the interest every year nor do you have to decide where you want to reinvest your CDS as they mature every year. You do have to wait a year before you can redeem I-Bonds and the current fixed rate is 0%. Depending on the rate of inflation, I-Bonds can have a high variable rate or have a total rate of 0% for a period of six months or more.

If you go with CDs, you may be able to get higher interest rates then with the I-Bonds. However, this interest will be taxable every year and it'll be more paperwork for you to deal with when you file your taxes.

Ultimately, if you really want simplicity with the secondary emergency fund, I suggest going with I-Bonds. If you're willing to shop around for CDs every year and don't mind the additional 1099s, I suggest going with the CD ladder.
I wasn't aware of the income eligibility requirements in order to deduct the contribution. So if my MAGI is over the limit would this make Roth the better option and likewise if it's under traditional being the better option? As you said, we don't know the 2018 limits, but my MAGI should end up being below 62k this year.

Also, I like simplicity so going with I-Bonds for the secondary emergency fund sounds the way to go. Thank you for the explanation.
When your MAGI is over the limit to deduct the contribution, Roth IRA is a better deal. The only reason to make a non-deductible contribution to a traditional IRA is if you're doing a backdoor Roth because your MAGI exceeds the limit to contribute to a Roth IRA. If in future years you're expecting your MAGI to exceed the Roth IRA income limits, you'll want to be careful about contributing to a traditional IRA. The reasoning is you don't want to do a backdoor Roth when you already have one or more traditional IRAs.

Here's more information on doing backdoor Roth IRAs:

https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

arowback
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by arowback » Wed Jun 28, 2017 10:17 am

I double checked with my 401k and I'm able to make in-service withdrawals of after tax contributions, the only limitation being I can only do 1 withdraw every 6 months. I'll plan to take advantage of this and roll it over to my Roth every 6 months to minimize taxes on the growth of the after tax contributions.

I'm thinking the best way to handle the contributions is add a bond and international fund to the 401k so it looks like this:

State Street U.S. Bond Index Non-Lending Series Fund Class K (0.04%) <-- 10% Pre-Tax Salary Deferral
State Street S&P 500® Index Non-Lending Series Fund Class K (CMDVQ) (0.013%) <-- 17% Pre-Tax Salary Deferral + 13% After Tax Contribution
State Street Global All Cap Equity Ex-U.S. Index Non-Lending Series Fund Class K (0.11%) <-- 10% After Tax Contribution

Then I figure I could roll the after tax contributions into my Vanguard Total Stock Market Index Fund and Total International Stock Index Fund once every 6 months.

Thoughts? Hopefully I'm not completely off base here. If I am, please let me know! If money gets tight I can pull back on the after tax contributions. Also, I went ahead and converted my international investor shares to admiral shares through Vanguard as it meets the 10k minimum to reduce expense ratio and I swapped my HSA from bonds to domestic stocks. Since I don't expect my MAGI to be above the limit to deduct IRA contributions next year either I'll also open a Traditional IRA then if that's still the case with the 2018 limits.

retiredjg
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by retiredjg » Wed Jun 28, 2017 2:15 pm

Seems like what you want to do will work, but only if your 401k allows it. Most (not all) require that your after-tax account is invested the same as your tax-deferred account.

About the tIRA....If you think you'll ever be in a position where you will exceed the income limit for Roth IRA, you might want to use the "back door". Having a tIRA will interfere with that. So rather than using tIRA, just put more into the tax-deferred account in your 401k.

In fact, you really should be maxing that out before considering using a taxable account or using the after-tax account.

Scooter K
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by Scooter K » Wed Jun 28, 2017 2:27 pm

I use a CD ladder at Ally for my emergency fund, and since it looks like you already bank there it would be pretty easy for you to set up. I've found it really easy to renew, and have been steadily ramping up my EF, opening/renewing every six months for the past six years. Anyway, others have addressed many of your questions, but I'd like to upvote Ally as an easy place to do a CD ladder; I personally find it very satisfying and highly recommend. It will take you about 10 minutes to set up, and 5-10 minutes per year to maintain. For an extra 1% return that's a pretty good deal I bet.

-Scooter
"If you act on the assumption that every financial advisor you encounter is a hardened criminal, you will do just fine." Bernstein

arowback
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by arowback » Wed Jun 28, 2017 3:46 pm

retiredjg wrote:Seems like what you want to do will work, but only if your 401k allows it. Most (not all) require that your after-tax account is invested the same as your tax-deferred account.
Well there goes that plan. I just checked and you're right. I can choose different investment options for Roth 401k, Rollover, and 401k contributions but pre-tax salary deferrals and after-tax are lumped into the same category.

What's the best way to handle it then?
retiredjg wrote:About the tIRA....If you think you'll ever be in a position where you will exceed the income limit for Roth IRA, you might want to use the "back door". Having a tIRA will interfere with that. So rather than using tIRA, just put more into the tax-deferred account in your 401k.
Good point. I'll keep this in mind.
retiredjg wrote:In fact, you really should be maxing that out before considering using a taxable account or using the after-tax account.
I followed this order in terms of priority:

1. 401k up to company match
2. Max out HSA
3. Max out Roth
4. Max out 401k
5. Invest in a taxable account

I could see maxing out the 401k before Roth in my situation though. I've already maxed out the Roth this year and am on pace to max out the 401k and HSA. That's why I've been looking at taxable as that seems like the next logical step given I have debt and emergency fund in order. If I do need to cut back my savings rate I'll cut back on the taxable investing. Everything else will still be maxed out though.
Scooter K wrote:I use a CD ladder at Ally for my emergency fund, and since it looks like you already bank there it would be pretty easy for you to set up. I've found it really easy to renew, and have been steadily ramping up my EF, opening/renewing every six months for the past six years. Anyway, others have addressed many of your questions, but I'd like to upvote Ally as an easy place to do a CD ladder; I personally find it very satisfying and highly recommend. It will take you about 10 minutes to set up, and 5-10 minutes per year to maintain. For an extra 1% return that's a pretty good deal I bet.

-Scooter
For now I think I feel comfortable just leaving the EF in the Ally savings account, but I'm going to be giving a lot more thought to doing some sort of multi tiered emergency fund down the line.

Thanks for chiming in. :beer

retiredjg
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by retiredjg » Wed Jun 28, 2017 4:22 pm

arowback wrote:What's the best way to handle it then?
As I understand it, what rolls to the Roth IRA is cash. You invest it in the Roth IRA in such a way as to bring the whole portfolio close to the portfolio target. I'm not sure that answers your question though.

retiredjg wrote:In fact, you really should be maxing that out before considering using a taxable account or using the after-tax account.
I followed this order in terms of priority:

1. 401k up to company match
2. Max out HSA
3. Max out Roth
4. Max out 401k
5. Invest in a taxable account
OK. I was fooled by the $9k - apparently you meant that is what you have left to put in this year, not for the whole year. So yes, your next step for retirement investing is the after-tax to Roth IRA route (the "mega back door"). But if you want to save for a car or down payment or some other short term goal, put it in taxable.


Back to the IRA issue. Yes, you could use tax-deferred (deductible) contributions to IRA to reduce your taxable income. I would not do that unless you are pretty sure you can get it "out of the way" by rolling it into a 401k if you ever want to use the back door. But if you can and if more tax-deferral is your preference, that's fine.


Just to check one thing. You are saving more money that most people with your income are able to save. If you have essentially no expenses, that probably explains it. The other possibility is that you are not really in the 25% federal bracket (taxable income less than $91,900). If you've got your tax bracket wrong, now is a good time to find out.

arowback
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by arowback » Sun Jul 02, 2017 8:48 am

retiredjg wrote:
arowback wrote:What's the best way to handle it then?
As I understand it, what rolls to the Roth IRA is cash. You invest it in the Roth IRA in such a way as to bring the whole portfolio close to the portfolio target. I'm not sure that answers your question though.
My main question was really what funds I should allocate the money to within my 401k if I were to go this route but I guess it isn't a huge deal if I kept it as is with just the State Street S&P 500 and re-balanced every 6 months when rolling into the Roth.
retiredjg wrote:OK. I was fooled by the $9k - apparently you meant that is what you have left to put in this year, not for the whole year. So yes, your next step for retirement investing is the after-tax to Roth IRA route (the "mega back door"). But if you want to save for a car or down payment or some other short term goal, put it in taxable.
I edited the OP so the new annual contributions were a little more clear, but yea I plan on maxing out all tax advantaged accounts first. Ultimately I think what I need to do is figure out what my long term goals are to determine the optimal strategy here (duh). As I said in the OP I'm intrigued by the idea of early retirement / financial independence, but I'm not set on this being my goal. Again, ultimately at this point I'm just trying to save as much as I can while I'm young, don't have high expenses, and can afford to.

Given my situation I'm thinking continuing to max out HSA/Roth/401k while putting the rest in taxable might be the route to take? This way I'm still on my way to early retirement but have have money in taxable accounts for any shorter term goals that come up. Down the road if I decide maximizing retirement is my goal I can take advantage of the mega backdoor Roth instead.

If I were to go this route would you suggest just opening an individual general investing account at Vanguard using the same total stock index and total international stock index as my Roth? As you mentioned earlier, this might mean moving bonds to and re balancing my 401k.
retiredjg wrote:Back to the IRA issue. Yes, you could use tax-deferred (deductible) contributions to IRA to reduce your taxable income. I would not do that unless you are pretty sure you can get it "out of the way" by rolling it into a 401k if you ever want to use the back door. But if you can and if more tax-deferral is your preference, that's fine.
I'll have to check to see if this is possible with my employer. I'm quickly realizing Roth vs Traditional isn't nearly as cut and try as I thought it was! I'll keep all of this in mind when determining where I want to contribute next year. It's sounding like sticking with the Roth for now might be the way to go if I'm not entirely sure where my income will end up in the future.
retiredjg wrote:Just to check one thing. You are saving more money that most people with your income are able to save. If you have essentially no expenses, that probably explains it. The other possibility is that you are not really in the 25% federal bracket (taxable income less than $91,900). If you've got your tax bracket wrong, now is a good time to find out.
I'm in the 25% bracket, I just currently have little expenses. My average over the last six months has been about $1,700 monthly. Also my entire tax refund from last year was put into the Roth for 2017 which is why I maxed it so early. This year I've increased my allowances to 2 on my W-4 though to be closer to target and avoid the large return.

retiredjg
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by retiredjg » Mon Jul 03, 2017 11:52 am

arowback wrote:Given my situation I'm thinking continuing to max out HSA/Roth/401k while putting the rest in taxable might be the route to take? This way I'm still on my way to early retirement but have have money in taxable accounts for any shorter term goals that come up. Down the road if I decide maximizing retirement is my goal I can take advantage of the mega backdoor Roth instead.
Maxing out HSA/Roth IRA/401k is a very good plan. If you still have more to save after that, either taxable or the mega back door will do. Or do a little of each.
If I were to go this route would you suggest just opening an individual general investing account at Vanguard using the same total stock index and total international stock index as my Roth? As you mentioned earlier, this might mean moving bonds to and re balancing my 401k.
Yes, those are the best funds for the taxable account.

A word of caution though. If you plan to tax loss harvest in your taxable account, you have the possibility of a wash sale by holding the exact same funds in the Roth IRA. This may be a topic that is entirely new to you so I won't overwhelm you with it now. But it might be something you want to read about in the Wiki.

ef11
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by ef11 » Mon Jul 03, 2017 3:41 pm

Hello!

We are in very similar situations (I'm 28, single, no debt as well) and the best investment change I have made this year is implementing the MEGA BACK DOOR ROTH IRA.

I contribute 18% to my Traditional 401K and 22% (total limit is 40%) to my After-Tax 401K which I am allowed to roll to my Roth IRA once every six months just as you are. Now, I put my After-Tax portion into Target Date 2025 at a 0.1% ER because I want it separated from my Traditional 401K holdings and I'm allowed to invest it separately. For you, just invest it the same as your Traditional 401K I would think as it will not be much money and only in the account an average of 3 months before you roll it.

This year alone I will be:
- Rolling over $21,000 from After-Tax 401K into my Roth IRA
- Contributing $5,500 to my Roth IRA
- Maxing my Traditional 401K with $18,000 plus another $8,000 from employer

This is $52,500 in retirement savings for 2017 with $26,500 going into a Roth account. I love being able to put so much money into a Roth as otherwise it would just be lumped into my taxable account. Even with funneling 18% of my salary into Traditional 401K, 22% into After-Tax, and $5,500 into Roth IRA, I still project my taxable account will grow by ~ $40,000 in 2017 for any non-retirement goals I can think up.

I hope you can get the After-Tax portion going and do the Mega Back Door Roth IRA soon, I really think it is an amazing tool.
45% Vang S&P500 Fund ER .011% | 10% Vang Extended Market Fund ER .038% | 25% ACWI EX US IMI NL R ER .10% | 10% Vang Total Bond Market ER .027% | 10% Fidelity MSCI Real Estate ER 0.084%

arowback
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Re: 28, Single, No Debt, Seeking Portfolio Advice

Post by arowback » Tue Jul 04, 2017 8:13 am

I went ahead and opened up a brokerage account at Vanguard, invested the $9200 I had sitting in my Ally account (still leaving EF with 6 months expenses) to total stock and international index funds, added the bond index to my 401k for a portion of future contributions to be allocated to in order balance out my AA, and set future 401k contributions slightly above what should max it out for the year. In my case anything contributed over 18k automatically gets invested as after-tax dollars so it'll give me a little extra which I can later roll into my Roth.

Thank you very much to everyone who offered advice, it was a great help!
:sharebeer

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