Asset Allocation - Help with %s | Traditional vs. Roth 401k

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MindTheGAAP
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Asset Allocation - Help with %s | Traditional vs. Roth 401k

Post by MindTheGAAP » Tue Jun 20, 2017 11:15 am

Hey all -

Wanted to get some hot sports opinions on the best Asset Allocation for my/our situation. See fact pattern below:

Emergency funds: Got it. On lower end but building it up
Debt: Couple of medical bills at 0% but remaining debt is just the mortgage - $220k o/s at 4.5%
Tax Filing Status: MFJ
Tax Rate: 28/33% (est.) Federal, 0% State (TX)
State of Residence: TX
Age: 29
Desired Asset allocation: TBD - currently working off of the 120-age model (roughly): 90%/10%
Desired International allocation: 40% of stocks

Currently have a 1/3 tilt to small cap index for both domestic and int'l equities using VSMAX/NAESX and VFSVX

Approx. Balance: $121k

Current retirement assets
His Solo 401ks:
14.08% Vanguard Total Stock Market (VTSMX) - .15% ER
10.85% Vanguard Total Int'l Stock (VGTSX) - .18% ER

His Roth IRA at Vanguard
16.64% Vanguard Small-Cap Index (VSMAX) - .06% ER
19.14% Vanguard Total Stock Market (VTSAX) - .04% ER

His Rollover IRA at Vanguard
10.33% Vanguard Intermediate-Term Bond Index (VBILX) - .07% ER
2.47% Vanguard Total Int'l Stock (VGTSX) - .18% ER

Her Solo 401k
5.90% Vanguard Total Stock Market (VTSMX) - .15% ER
4.49% Vanguard Total Int'l Stock (VGTSX) - .18% ER

Her Roth IRA at Vanguard
4.59% Vanguard Small-Cap Index (NAESX) - .06% ER
11.51% Vanguard FTSE All World Ex-US Small Cap (VFSVX) - .27%

Contributions
New semi-monthly contributions
$750 his Roth Solo 401k and $440 match from Co
$750 her Roth Solo 401k and $440 match from Co

$1k/mo (currently) taxable for retirement/ college/ etc.

Questions:
1. Can I get some feedback on my current AA? I'm not sure if 9% in bonds is too aggressive, not aggressive enough, etc. We have, through my new venture, been able to put a lot more into retirement since November 2016 and as such, want to be sure we're going about it in the smartest way (when it comes to AA) since (for us) the balance is growing at a decent clip now.
We're both 29, have 3 young daughters (<5 yo). We obviously have the time horizon to take some risk but want to be sure we're balancing it appropriately. We don't bank on my consulting work to continue to be this profitable and be able to put $55k into tax advantaged accounts every year.

2. Personal Capital (I know) is one site I use to aggregate my information (also use a spreadsheet). They "recommend" I increase allocation to alternatives. I know VSMAX/NAESX has about 10% of it's assets in RE, and VTSAX has some in RE so that, per Personal Capital, results in approx 5.13% of the portfolio being in Alts. At only $125k, I don't think I'm at the portfolio size that any 10% shift to Alts is going to really change my outcome but I'm open to suggestions.

3. Should I be making Traditional or Roth contributions to my Solo 401k? In the 28% bracket, I think it's close to a toss-up (especially given tax rates at historically low levels) - we max out both of our limits ($18k/each) and then obviously have the Co match the max in pre-tax dollars.

Thank you in advance for your help and insights.
Last edited by MindTheGAAP on Wed Jun 21, 2017 8:17 am, edited 2 times in total.
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Thesaints
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Re: Assistance with AA

Post by Thesaints » Tue Jun 20, 2017 11:22 am

If that's only your retirement AA you are talking about, that's fine.
If that's all of your AA, you are missing expenses for three daughters at a minimum. They'll go to college almost at the same time.
Also you need to build a contingencies fund.

MindTheGAAP
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Re: Assistance with AA

Post by MindTheGAAP » Tue Jun 20, 2017 11:30 am

Thesaints wrote:If that's only your retirement AA you are talking about, that's fine.
If that's all of your AA, you are missing expenses for three daughters at a minimum. They'll go to college almost at the same time.
Also you need to build a contingencies fund.
Just the Retirement AA. We also share the view that Retirement is priority 1 and their schooling is priority 2. Besides, who knows what the higher education landscape looks like in 15 years (hopefully different).

By contingencies fund do you mean an EF? We have one, we're just adding to it each month so it'll build. That's outside of the retirement contributions and transfers to our taxable account.
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

Thesaints
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Re: Assistance with AA

Post by Thesaints » Tue Jun 20, 2017 11:34 am

Try to build a substantial EF quickly; emergencies come at their convenience. That should be your first priority now, more than retirement.

MindTheGAAP
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Re: Assistance with AA

Post by MindTheGAAP » Tue Jun 20, 2017 12:02 pm

Thesaints wrote:Try to build a substantial EF quickly; emergencies come at their convenience. That should be your first priority now, more than retirement.
Can you define "substantial" in your world? Not necessarily $s but # of mos., etc.
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ruralavalon
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Re: Asset Allocation - Help with %s

Post by ruralavalon » Tue Jun 20, 2017 12:24 pm

I suggest around 20% in bonds even for the young aggressive investor. That is expected to significantly decrease portfolio risk, with only a relatively minor impact on portfolio performance. This is expected to substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, "Never bear too much or too little risk", and "Asset allocation".


I don't think that adding another 5-10% in real estate will have a significant impact.

Given your tax bracket (28/33 estimated) I suggest traditional contributions to your solo 401ks, rather than Roth contributions. For most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

I agree with you that retirement saving and investing should currently be the priority over saving for educational expenses. If your retirement accounts are in order then when the time comes for college with your good income level you may be able to fund college expenses out of income. And your current $1k per month to taxable/college/etc. isn't too shabby.

About how many months of basic living expenses would be covered by your current emergency fund?

EDITED to add links.
Last edited by ruralavalon on Tue Jun 20, 2017 2:01 pm, edited 1 time in total.
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MindTheGAAP
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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Tue Jun 20, 2017 1:00 pm

ruralavalon wrote:I suggest around 20% in bonds even for the young aggressive investor. That is expected to significantly decrease portfolio risk, with only a relatively minor impact on portfolio performance.

I don't think that adding another 5-10% in real estate will have a significant impact.

Given your tax bracket (28/33 estimated) I suggest traditional contributions to your solo 401ks, rather than Roth contributions. For most people traditional 401k contributions are better.

I agree with you that retirement saving and investing should currently be the priority over saving for educational expenses. If your retirement accounts are in order then when the time comes for college with your good income level you may be able to fund college expenses out of income. And your current $1k per month to taxable/college/etc. isn't too shabby.

About how many months of basic living expenses would be covered by your current emergency fund?
I believe 28% is the correct bracket once we take all of our expenses into account. This will be before itemized deductions and whatnot but I'd be shocked if we got down from a projected ~$185 net to the required $153k as it currently stands. I will be sending my tax accountant an email now to let him know that I think we really need to examine the Roth vs. Traditional 401k options. We could then save the add'l to go into taxable or EF to build that cash balance. The thought at the time was that we'd be contributing $3k/mo Roth and $1,760/mo in Co. match so we'd have somewhat of best of both worlds to play with going down the road. FWIW, we put it in Traditional during Q1 so we have only done Roth for Q2 - this means of the ~$43k in Solo 401ks, only $9k will be Roth contributions.

We're at about 4-mos of EF at the moment with the goal to bolster it to 6+. I wouldn't be surprised if we don't get to 12-mos in a savings account at a certain point to give peace of mind. That's 4-mos of current spending, not 4-mos of "we're using EF to live" spending. Does that make sense?
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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ruralavalon
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Re: Asset Allocation - Help with %s

Post by ruralavalon » Tue Jun 20, 2017 2:13 pm

MindTheGAAP wrote:I believe 28% is the correct bracket once we take all of our expenses into account. This will be before itemized deductions and whatnot but I'd be shocked if we got down from a projected ~$185 net to the required $153k as it currently stands. I will be sending my tax accountant an email now to let him know that I think we really need to examine the Roth vs. Traditional 401k options. We could then save the add'l to go into taxable or EF to build that cash balance. The thought at the time was that we'd be contributing $3k/mo Roth and $1,760/mo in Co. match so we'd have somewhat of best of both worlds to play with going down the road. FWIW, we put it in Traditional during Q1 so we have only done Roth for Q2 - this means of the ~$43k in Solo 401ks, only $9k will be Roth contributions.
I edited my post to add links.

For most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." This is because of the higher value of the deduction now at your marginal tax rate, as compared to the lower effective tax rate later resulting from the progressive nature of the tax code.
MindTheGAAP wrote:We're at about 4-mos of EF at the moment with the goal to bolster it to 6+. I wouldn't be surprised if we don't get to 12-mos in a savings account at a certain point to give peace of mind. That's 4-mos of current spending, not 4-mos of "we're using EF to live" spending. Does that make sense?
I don't understand your distinction, "current spending" vs "using the EF to live". In general I mean using the EF to cover basic essential living expenses, like -- food, shelter, utilities, necessary insurance, medicine or the like.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

MindTheGAAP
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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Tue Jun 20, 2017 2:17 pm

ruralavalon wrote:
MindTheGAAP wrote:We're at about 4-mos of EF at the moment with the goal to bolster it to 6+. I wouldn't be surprised if we don't get to 12-mos in a savings account at a certain point to give peace of mind. That's 4-mos of current spending, not 4-mos of "we're using EF to live" spending. Does that make sense?
I don't understand your distinction, "current spending" vs "using the EF to live". In general I mean using the EF to cover basic essential living expenses, like -- food, shelter, utilities, necessary insurance, medicine or the like.
I'm making the distinction of we have 4-mos of current spending but should we need to use the EF to live, we could obviously cut back spending in that scenario. Therefore, we have 4-mos of typical spending but that isn't "barebones" spending that covers basic essentials. Does that help at all?
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

MindTheGAAP
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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Tue Jun 20, 2017 2:24 pm

ruralavalon wrote: For most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)." This is because of the higher value of the deduction now at your marginal tax rate, as compared to the lower effective tax rate later resulting from the progressive nature of the tax code.
Thanks for the link. Interesting read and it fits along the lines of what I was thinking. By contributing via Traditional, we'd more likely be able to contribute, even if at a lesser amount, to the Roth IRA this year. Also helps in regards to Child Tax Credit, etc.

Further, since I've been on a very stable project, this could be one of my better years so paying tax in this year probably makes little sense.
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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ruralavalon
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Re: Asset Allocation - Help with %s

Post by ruralavalon » Tue Jun 20, 2017 4:46 pm

MindTheGAAP wrote:
ruralavalon wrote:
MindTheGAAP wrote:We're at about 4-mos of EF at the moment with the goal to bolster it to 6+. I wouldn't be surprised if we don't get to 12-mos in a savings account at a certain point to give peace of mind. That's 4-mos of current spending, not 4-mos of "we're using EF to live" spending. Does that make sense?
I don't understand your distinction, "current spending" vs "using the EF to live". In general I mean using the EF to cover basic essential living expenses, like -- food, shelter, utilities, necessary insurance, medicine or the like.
I'm making the distinction of we have 4-mos of current spending but should we need to use the EF to live, we could obviously cut back spending in that scenario. Therefore, we have 4-mos of typical spending but that isn't "barebones" spending that covers basic essentials. Does that help at all?
About how many months of barebones spending does your emergency fund amount to?
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MindTheGAAP
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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Tue Jun 20, 2017 4:52 pm

Conservatively I'd say 5/6 months
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Re: Asset Allocation - Help with %s

Post by PFInterest » Tue Jun 20, 2017 5:22 pm

At your bracket...Why are you doing Roth 401k?

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Re: Asset Allocation - Help with %s

Post by ruralavalon » Tue Jun 20, 2017 6:04 pm

MindTheGAAP wrote:Conservatively I'd say 5/6 months
People usually suggest 3-12 months in an emergency fund. In my view 12 months is a bit excessive. Your 5-6 months is probably reasonable for an emergency fund, but consider a bit more for peace of mind and because you are self-employed.
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MindTheGAAP
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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Tue Jun 20, 2017 6:40 pm

PFInterest wrote:At your bracket...Why are you doing Roth 401k?
In our bracket it seems like many believe it to be a toss-up as to which contribution to use. Particularly since we both max out. Part of the reason for the post was to verify if we were going about it the correct way - our tax accountant actually recommended the Roth - as noted in earlier post, I had been doing traditional contributions in Q1...
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Re: Asset Allocation - Help with %s

Post by jbow44 » Tue Jun 20, 2017 8:20 pm

To your first question, I'd say you are doing fine, keep it up.

To your second, if you haven't played around with https://www.portfoliovisualizer.com/backtest-portfolio spend a little time on it. I recently did and was amazed how making what I thought was significant portfolio changes regarding AA made little difference to the resulting money accumulated at various time frames. Of course what I call significant portfolio changes and what I call difference in the result is subjective and of course back testing isn't suggestive of future returns etc. etc. etc. Anyway, a good exercise for perspective.

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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Tue Jun 20, 2017 8:47 pm

jbow44 wrote:To your first question, I'd say you are doing fine, keep it up.

To your second, if you haven't played around with https://www.portfoliovisualizer.com/backtest-portfolio spend a little time on it. I recently did and was amazed how making what I thought was significant portfolio changes regarding AA made little difference to the resulting money accumulated at various time frames. Of course what I call significant portfolio changes and what I call difference in the result is subjective and of course back testing isn't suggestive of future returns etc. etc. etc. Anyway, a good exercise for perspective.
I've actually played around a little on that today. Part of the problem I faced is two fold:

1. It's really easy to just shoot for highest return (I'd be using long term bonds over intermediate bonds if I wanted that) - I did pay close attention to Sharpe Ratios though

2. Limited to 2009-today by the Genesis of the Int'l Small Cap fund. Doesn't really give a long horizon to look back over but I suppose I could just redact that from my comparison and use all Total Int'l Stock Mkt for the Int'l equity allocation...

Any thoughts on the above?
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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Re: Asset Allocation - Help with %s

Post by jbow44 » Tue Jun 20, 2017 9:44 pm

MindTheGAAP wrote:
jbow44 wrote:To your first question, I'd say you are doing fine, keep it up.

To your second, if you haven't played around with https://www.portfoliovisualizer.com/backtest-portfolio spend a little time on it. I recently did and was amazed how making what I thought was significant portfolio changes regarding AA made little difference to the resulting money accumulated at various time frames. Of course what I call significant portfolio changes and what I call difference in the result is subjective and of course back testing isn't suggestive of future returns etc. etc. etc. Anyway, a good exercise for perspective.
I've actually played around a little on that today. Part of the problem I faced is two fold:

1. It's really easy to just shoot for highest return (I'd be using long term bonds over intermediate bonds if I wanted that) - I did pay close attention to Sharpe Ratios though

2. Limited to 2009-today by the Genesis of the Int'l Small Cap fund. Doesn't really give a long horizon to look back over but I suppose I could just redact that from my comparison and use all Total Int'l Stock Mkt for the Int'l equity allocation...

Any thoughts on the above?
True, it easy to just look at returns. The other metrics tell the story of the journey to get to that return, which of course takes into account emotion, staying the course etc. Easy to say when looking at a graph of hypotheticals. My point was simply that I think sometimes we get bogged down in the weeds of details. In the end, having a low cost, well diversified portfolio is most important. The rest isn't worth losing that much sleep over.

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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Wed Jun 21, 2017 8:19 am

jbow44 wrote:
True, it easy to just look at returns. The other metrics tell the story of the journey to get to that return, which of course takes into account emotion, staying the course etc. Easy to say when looking at a graph of hypotheticals. My point was simply that I think sometimes we get bogged down in the weeds of details. In the end, having a low cost, well diversified portfolio is most important. The rest isn't worth losing that much sleep over.
Think your last point is likely a good one. Especially if inputs are sufficiently big enough, the rest should take care of itself...

Are you in the Traditional or Roth 401k contribution camp?
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Re: Asset Allocation - Help with %s

Post by ruralavalon » Wed Jun 21, 2017 11:02 am

MindTheGAAP wrote:
jbow44 wrote:To your first question, I'd say you are doing fine, keep it up.

To your second, if you haven't played around with https://www.portfoliovisualizer.com/backtest-portfolio spend a little time on it. I recently did and was amazed how making what I thought was significant portfolio changes regarding AA made little difference to the resulting money accumulated at various time frames. Of course what I call significant portfolio changes and what I call difference in the result is subjective and of course back testing isn't suggestive of future returns etc. etc. etc. Anyway, a good exercise for perspective.
I've actually played around a little on that today. Part of the problem I faced is two fold:

1. It's really easy to just shoot for highest return (I'd be using long term bonds over intermediate bonds if I wanted that) - I did pay close attention to Sharpe Ratios though

2. Limited to 2009-today by the Genesis of the Int'l Small Cap fund. Doesn't really give a long horizon to look back over but I suppose I could just redact that from my comparison and use all Total Int'l Stock Mkt for the Int'l equity allocation...

Any thoughts on the above?
Don't focus on past returns, which may not recur.

Instead focus on broad diversification (to reduce risk) and low investing expenses (to increase net return). Low expense ratios are the best predictor of good future performance.
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Re: Asset Allocation - Help with %s

Post by FiveK » Wed Jun 21, 2017 11:14 am

MindTheGAAP wrote:In our bracket it seems like many believe it to be a toss-up as to which contribution to use. Particularly since we both max out.
Just curious: who are the many (or any) who believe someone in the 28% bracket (and perhaps higher marginal rate), without a defined benefit pension, should contribute to a Roth 401k? And if they so believe, what is the reasoning? See Traditional versus Roth - Bogleheads.

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Re: Asset Allocation - Help with %s

Post by jbow44 » Wed Jun 21, 2017 11:29 am

MindTheGAAP wrote:
jbow44 wrote:

Are you in the Traditional or Roth 401k contribution camp?
To be honest, I'm in a higher tax bracket, am 37 yoa and do both 401k & Roth. I understand all the arguments why 401k would be better to reduce taxable income however the idea of tax free money later in life is appealing. So, I do both. Right now I have more money in the 401k but hope to balance that as I accumulate.

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Re: Asset Allocation - Help with %s

Post by KlangFool » Wed Jun 21, 2017 11:40 am

jbow44 wrote:
MindTheGAAP wrote:
jbow44 wrote:

Are you in the Traditional or Roth 401k contribution camp?
To be honest, I'm in a higher tax bracket, am 37 yoa and do both 401k & Roth. I understand all the arguments why 401k would be better to reduce taxable income however the idea of tax free money later in life is appealing. So, I do both. Right now I have more money in the 401k but hope to balance that as I accumulate.
jbow44,

Do both as in

A) Trad. 401K and Roth IRA?

Or,

B) Trad. 401K and Roth 401K?

<<however the idea of tax free money later in life is appealing. >>

Which you get from Roth IRA. So, why would you want to contribute to Roth 401K? It does not make any sense. Especially for folks in higher tax bracket. Trad. 401K is the only opportunity to defer your tax.

KlangFool

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Re: Asset Allocation - Help with %s

Post by jbow44 » Wed Jun 21, 2017 11:57 am

KlangFool wrote:
jbow44 wrote:
MindTheGAAP wrote:
jbow44 wrote:


jbow44,

Do both as in

A) Trad. 401K and Roth IRA?

Or,

B) Trad. 401K and Roth 401K?

<<however the idea of tax free money later in life is appealing. >>

Which you get from Roth IRA. So, why would you want to contribute to Roth 401K? It does not make any sense. Especially for folks in higher tax bracket. Trad. 401K is the only opportunity to defer your tax.

KlangFool
Approximately 70% of my retirement assets are in a traditional 401k. I've also opened a backdoor Roth just this year so it takes up a small portion of my retirement assets. My wife's employer offers a Roth 401k in which we plan to max out this year with Roth contributions (there is no match).

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Re: Asset Allocation - Help with %s

Post by KlangFool » Wed Jun 21, 2017 12:13 pm

jbow44 wrote:
KlangFool wrote:
jbow44 wrote:
MindTheGAAP wrote:
jbow44 wrote:


jbow44,

Do both as in

A) Trad. 401K and Roth IRA?

Or,

B) Trad. 401K and Roth 401K?

<<however the idea of tax free money later in life is appealing. >>

Which you get from Roth IRA. So, why would you want to contribute to Roth 401K? It does not make any sense. Especially for folks in higher tax bracket. Trad. 401K is the only opportunity to defer your tax.

KlangFool
Approximately 70% of my retirement assets are in a traditional 401k. I've also opened a backdoor Roth just this year so it takes up a small portion of my retirement assets. My wife's employer offers a Roth 401k in which we plan to max out this year with Roth contributions (there is no match).
jbow44,

How does that make any sense if the tax bracket is 28% or higher? It should be Trad. 401K too.

KlangFool

MindTheGAAP
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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Wed Jun 21, 2017 1:38 pm

FiveK wrote:
MindTheGAAP wrote:In our bracket it seems like many believe it to be a toss-up as to which contribution to use. Particularly since we both max out.
Just curious: who are the many (or any) who believe someone in the 28% bracket (and perhaps higher marginal rate), without a defined benefit pension, should contribute to a Roth 401k? And if they so believe, what is the reasoning? See Traditional versus Roth - Bogleheads.
Those who believe that since you can invest a greater number of dollars (for retirement spending) in the Roth 401k, they believe it to be a positive for Roth.

Honestly at 29, I have a long time until retirement so who knows what tax rates will look like come retirement age for me...
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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Re: Asset Allocation - Help with %s

Post by KlangFool » Wed Jun 21, 2017 2:34 pm

MindTheGAAP wrote:
FiveK wrote:
MindTheGAAP wrote:In our bracket it seems like many believe it to be a toss-up as to which contribution to use. Particularly since we both max out.
Just curious: who are the many (or any) who believe someone in the 28% bracket (and perhaps higher marginal rate), without a defined benefit pension, should contribute to a Roth 401k? And if they so believe, what is the reasoning? See Traditional versus Roth - Bogleheads.
Those who believe that since you can invest a greater number of dollars (for retirement spending) in the Roth 401k, they believe it to be a positive for Roth.

Honestly at 29, I have a long time until retirement so who knows what tax rates will look like come retirement age for me...
MindTheGAAP,

Those folks miscalculated. They forgot that they paid tax for their Roth 401K contribution. They could contribute to Trad. 401K and put their tax savings into the Roth IRA.

<< Honestly at 29, I have a long time until retirement so who knows what tax rates will look like come retirement age for me...>>

In order for you to have a retirement tax rate of 28%/33%, you would need to have the investment of more than 10 4 million. You probably would have retired before you ever hit that number.

KlangFool
Last edited by KlangFool on Wed Jun 21, 2017 2:54 pm, edited 2 times in total.

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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Wed Jun 21, 2017 2:36 pm

KlangFool wrote:Honestly at 29, I have a long time until retirement so who knows what tax rates will look like come retirement age for me...>>

In order for you to have a retirement tax rate of 28%/33%, you would need to have the investment of more than 10 million. You probably would have retired before you ever hit that number.

KlangFool
That's assuming static marginal rates and bands though, no?
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Re: Asset Allocation - Help with %s

Post by KlangFool » Wed Jun 21, 2017 2:43 pm

MindTheGAAP wrote:
KlangFool wrote:Honestly at 29, I have a long time until retirement so who knows what tax rates will look like come retirement age for me...>>

In order for you to have a retirement tax rate of 28%/33%, you would need to have the investment of more than 10 million. You probably would have retired before you ever hit that number.

KlangFool
That's assuming static marginal rates and bands though, no?
MindTheGAAP,

If we do not assume static marginal rate and band, the number is even higher due to annual inflation adjustment. So, tell me how likely for you to have retirement income tax rate of 28%/33%?

KlangFool

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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Wed Jun 21, 2017 2:45 pm

KlangFool wrote:
MindTheGAAP wrote:
KlangFool wrote:Honestly at 29, I have a long time until retirement so who knows what tax rates will look like come retirement age for me...>>

In order for you to have a retirement tax rate of 28%/33%, you would need to have the investment of more than 10 million. You probably would have retired before you ever hit that number.

KlangFool
That's assuming static marginal rates and bands though, no?
MindTheGAAP,

If we do not assume static marginal rate and band, the number is even higher due to annual inflation adjustment. So, tell me how likely for you to have retirement income tax rate of 28%/33%?

KlangFool
Not disagreeing. That's assuming that the change in marginal rates and bands are correlated to the inflation rates. Just trying to evaluate.
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Re: Asset Allocation - Help with %s | Traditional vs. Roth 401k

Post by pingo » Wed Jun 21, 2017 2:50 pm

Please clarify: are the i401ks Roth-only? Or, are they a Traditional and Roth? I can't find whether you specify it or not. I only see that your current contributions are to Roth i401k accounts.

Please edit your initial post to indicate what percent of your portfolio is in Roth i401ks and what percent is in Traditional i401ks.
Last edited by pingo on Wed Jun 21, 2017 2:56 pm, edited 1 time in total.

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Re: Asset Allocation - Help with %s | Traditional vs. Roth 401k

Post by KlangFool » Wed Jun 21, 2017 2:50 pm

https://taxfoundation.org/2017-tax-brackets/

OP,

Using 2017 married tax bracket, in order to hit 28% tax bracket, a person would need a gross retirement income of approximately 170K. In order to generate that amount of income using 4% SWR, that person needs at least 25X 170K = 4.25 million.

In order to hit 33% tax bracket, a person would need at least gross retirement income of 250K. In order to generate that amount, a person would need 25 X 250K = 6.25 million.

This is before the tax bracket/band adjusted upward annually for the inflation.

So, my number was wrong. It is not 10 million.

KlangFool

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FiveK
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Re: Asset Allocation - Help with %s

Post by FiveK » Wed Jun 21, 2017 2:57 pm

MindTheGAAP wrote:
FiveK wrote:Just curious: who are the many (or any) who believe someone in the 28% bracket (and perhaps higher marginal rate), without a defined benefit pension, should contribute to a Roth 401k? And if they so believe, what is the reasoning? See Traditional versus Roth - Bogleheads.
Those who believe that since you can invest a greater number of dollars (for retirement spending) in the Roth 401k, they believe it to be a positive for Roth.
Yes, it is a positive and can be a tiebreaker in the case of equal or nearly-so contribution and withdrawal marginal rates. Otherwise, it doesn't change things. See Maxing out your retirement accounts and Roth 401(k) vs. 401(k) Spreadsheet Attempt - Critique Please - Bogleheads.org for the math behind it.
MindTheGAAP wrote:That's assuming static marginal rates and bands though, no?
Yes. Of course, one can justify anything depending on what one chooses to assume.

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Re: Asset Allocation - Help with %s

Post by KlangFool » Wed Jun 21, 2017 3:00 pm

MindTheGAAP wrote:
KlangFool wrote:
MindTheGAAP wrote:
KlangFool wrote:Honestly at 29, I have a long time until retirement so who knows what tax rates will look like come retirement age for me...>>

In order for you to have a retirement tax rate of 28%/33%, you would need to have the investment of more than 10 million. You probably would have retired before you ever hit that number.

KlangFool
That's assuming static marginal rates and bands though, no?
MindTheGAAP,

If we do not assume static marginal rate and band, the number is even higher due to annual inflation adjustment. So, tell me how likely for you to have retirement income tax rate of 28%/33%?

KlangFool
Not disagreeing. That's assuming that the change in marginal rates and bands are correlated to the inflation rates. Just trying to evaluate.
I made a mistake. Please see my actual calculation.

KlangFool

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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Wed Jun 21, 2017 3:08 pm

FiveK wrote:
MindTheGAAP wrote:
FiveK wrote:Just curious: who are the many (or any) who believe someone in the 28% bracket (and perhaps higher marginal rate), without a defined benefit pension, should contribute to a Roth 401k? And if they so believe, what is the reasoning? See Traditional versus Roth - Bogleheads.
Those who believe that since you can invest a greater number of dollars (for retirement spending) in the Roth 401k, they believe it to be a positive for Roth.
Yes, it is a positive and can be a tiebreaker in the case of equal or nearly-so contribution and withdrawal marginal rates. Otherwise, it doesn't change things. See Maxing out your retirement accounts and Roth 401(k) vs. 401(k) Spreadsheet Attempt - Critique Please - Bogleheads.org for the math behind it.
MindTheGAAP wrote:That's assuming static marginal rates and bands though, no?
Yes. Of course, one can justify anything depending on what one chooses to assume.
So it seems like my best option might be to max out traditional contributions and use that to lower our taxable income enough to contribute to Roth IRAs with tax savings, correct?
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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Re: Asset Allocation - Help with %s | Traditional vs. Roth 401k

Post by Nate79 » Wed Jun 21, 2017 3:09 pm

Traditional most definitely makes more sense than Roth in your case. Search the many threads and wiki on this subject.

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Re: Asset Allocation - Help with %s

Post by FiveK » Wed Jun 21, 2017 3:13 pm

MindTheGAAP wrote:So it seems like my best option might be to max out traditional contributions and use that to lower our taxable income enough to contribute to Roth IRAs with tax savings, correct?
Yes - good luck!

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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Wed Jun 21, 2017 5:49 pm

ruralavalon wrote:I suggest around 20% in bonds even for the young aggressive investor. That is expected to significantly decrease portfolio risk, with only a relatively minor impact on portfolio performance. This is expected to substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, "Never bear too much or too little risk", and "Asset allocation".
So I'm currently in VBILX (Intermediate Term Bonds) since that seems to be a popular alternative to the Total Bond Fund. Is there a reason I wouldn't just use a Long Term Bond fund (ex. VBLTX or VWESX)? It seems I'd get a decent-enough yield and I have the runway to see these through to maturity, I'd imagine.

Thanks
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Re: Asset Allocation - Help with %s

Post by TropikThunder » Wed Jun 21, 2017 6:23 pm

MindTheGAAP wrote: So I'm currently in VBILX (Intermediate Term Bonds) since that seems to be a popular alternative to the Total Bond Fund. Is there a reason I wouldn't just use a Long Term Bond fund (ex. VBLTX or VWESX)? It seems I'd get a decent-enough yield and I have the runway to see these through to maturity, I'd imagine.

Thanks
Well, there's the yield/duration trade-off of course:
  • - VBLTX (Vanguard Long-Term Bond Index Fund): SEC yield 3.53%; average duration of 15.3 years
    - VBTLX (Vanguard Total Bond Market Index Fund): SEC yield 2.35%; average duration of 6.1 years
    - VBILX (Vanguard Intermediate-Term Bond Index Fund): SEC yield 2.49%; average duration of 6.5 years
So, ~120bp higher yield (~1.5x) for Long Term comes at the expense of much higher interest rate risk (~2.5x). Now, from what we have seen with the last few FFR increases, the NAV of bond funds has not really behaved as predicted by the "FOMC raises rates, bond funds drop" crowd (for a longer list of reasons than I want to get into) so perhaps in the future the increased yield will be more apparent than the increased risk for the Long Terms. We shall see.

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Re: Asset Allocation - Help with %s

Post by MindTheGAAP » Wed Jun 21, 2017 7:01 pm

TropikThunder wrote:
MindTheGAAP wrote: So I'm currently in VBILX (Intermediate Term Bonds) since that seems to be a popular alternative to the Total Bond Fund. Is there a reason I wouldn't just use a Long Term Bond fund (ex. VBLTX or VWESX)? It seems I'd get a decent-enough yield and I have the runway to see these through to maturity, I'd imagine.

Thanks
Well, there's the yield/duration trade-off of course:
  • - VBLTX (Vanguard Long-Term Bond Index Fund): SEC yield 3.53%; average duration of 15.3 years
    - VBTLX (Vanguard Total Bond Market Index Fund): SEC yield 2.35%; average duration of 6.1 years
    - VBILX (Vanguard Intermediate-Term Bond Index Fund): SEC yield 2.49%; average duration of 6.5 years
So, ~120bp higher yield (~1.5x) for Long Term comes at the expense of much higher interest rate risk (~2.5x). Now, from what we have seen with the last few FFR increases, the NAV of bond funds has not really behaved as predicted by the "FOMC raises rates, bond funds drop" crowd (for a longer list of reasons than I want to get into) so perhaps in the future the increased yield will be more apparent than the increased risk for the Long Terms. We shall see.
Appreciate the comment. So would you suggest it may be worth the LT Bonds after all? You obviously have some inherent safety from the duration (even if exposed to IR risk) and it may be less risk given recent movements after all...
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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Re: Asset Allocation - Help with %s | Traditional vs. Roth 401k

Post by livesoft » Wed Jun 21, 2017 7:54 pm

MindTheGAAP wrote:Thank you in advance for your help and insights.
This all looks good to me.

I'd go with at least 20% bonds. I suppose when you contribute/buy in your Roths or other accounts, you buy the asset class that is underweighted.

1. 20% bonds, otherwise AA seems great.

2. I wouldn't worry about what Personal Cap says. I like a portfolio that is small-cap value tilted, so I use Small-cap value index which was great in 2016, but sucks in 2017. Oh, well. I do have "alternatives" in the form of TIAA Real Estate account, but I would not own a REIT fund nor a commodity fund at the present time. Occasionally, when a REIT index fund (VNQ) drops a lot in one-day, then I will buy some, but it hasn't done that in a quite a while. So I just use the equivalents VTSAX, VTIAX, VSIAX, VFSVX, plus bond funds which appears to be essentially what you are doing.

3. We go traditional ourselves and I think that's best for you now. In the future, you may be able to do Roth conversions in a lower tax bracket, but who really knows?

So bottom line: You get this and don't appear to have any issues.
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Re: Asset Allocation - Help with %s | Traditional vs. Roth 401k

Post by MindTheGAAP » Wed Jun 21, 2017 8:48 pm

livesoft wrote:
MindTheGAAP wrote:Thank you in advance for your help and insights.
This all looks good to me.

I'd go with at least 20% bonds. I suppose when you contribute/buy in your Roths or other accounts, you buy the asset class that is underweighted.

1. 20% bonds, otherwise AA seems great.

2. I wouldn't worry about what Personal Cap says. I like a portfolio that is small-cap value tilted, so I use Small-cap value index which was great in 2016, but sucks in 2017. Oh, well. I do have "alternatives" in the form of TIAA Real Estate account, but I would not own a REIT fund nor a commodity fund at the present time. Occasionally, when a REIT index fund (VNQ) drops a lot in one-day, then I will buy some, but it hasn't done that in a quite a while. So I just use the equivalents VTSAX, VTIAX, VSIAX, VFSVX, plus bond funds which appears to be essentially what you are doing.

3. We go traditional ourselves and I think that's best for you now. In the future, you may be able to do Roth conversions in a lower tax bracket, but who really knows?

So bottom line: You get this and don't appear to have any issues.
Thanks for the affirmation and advice. Any preferences/ thoughts on the Intermediate vs LT Bond Fund??
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

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Re: Asset Allocation - Help with %s | Traditional vs. Roth 401k

Post by livesoft » Wed Jun 21, 2017 8:52 pm

I would not use a LT bond fund myself, but there must be folks that do. Presently, I own 4 fixed income investments:
BND|AGG|VBMFX|VBTLX|FBIDX (total US bond index)
BIV (intermediate-term)
VCSH (short-term corporate bond index)
TIAA Traditional Annuity

I trade between VCSH and the other ETFs in response to one-day market moves which is something that you probably will not do. So only when certain things happen maybe 2 or 3 times a year do I make such market timing trades.
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Re: Asset Allocation - Help with %s | Traditional vs. Roth 401k

Post by MindTheGAAP » Wed Jun 21, 2017 9:07 pm

livesoft wrote:I would not use a LT bond fund myself, but there must be folks that do. Presently, I own 4 fixed income investments:
BND|AGG|VBMFX|VBTLX|FBIDX (total US bond index)
BIV (intermediate-term)
VCSH (short-term corporate bond index)
TIAA Traditional Annuity

I trade between VCSH and the other ETFs in response to one-day market moves which is something that you probably will not do. So only when certain things happen maybe 2 or 3 times a year do I make such market timing trades.
Good feedback, thanks. I was interested to see when I used the Portfolio Visualizer tool, my market was less correlated to the US Mkt simply by changing from BIV to a LT Bond Fund. Appeared to be more stable, too
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Re: Asset Allocation - Help with %s

Post by TropikThunder » Wed Jun 21, 2017 10:21 pm

MindTheGAAP wrote: Appreciate the comment. So would you suggest it may be worth the LT Bonds after all? You obviously have some inherent safety from the duration (even if exposed to IR risk) and it may be less risk given recent movements after all...
That's a good question, and for me at least it's not as much of a slam-dunk in favor of intermediate term anymore. There was an interesting article on Morningstar back in January that kind of reframed the issue for me (even though most of it was over my head):
For those who worry, the message from our analysis is: Worry indeed, but not as much perhaps as your fund’s duration would let you think you should. The last sentence shouldn’t be taken to mean that we are taking a position on the future course of interest rates. Rather, it should be taken conditionally. If rates do go up, most bond categories will likely lose money. They are just likely to lose less than their duration numbers would suggest.
http://news.morningstar.com/articlenet/ ... ?id=786602

That said, all of my fixed income is in BIV (Vanguard Intermediate Term ETF) and TIAA Traditional. I just don't know enough to advise differently than the masses.

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Re: Asset Allocation - Help with %s

Post by ruralavalon » Thu Jun 22, 2017 8:45 am

MindTheGAAP wrote:
ruralavalon wrote:I suggest around 20% in bonds even for the young aggressive investor. That is expected to significantly decrease portfolio risk, with only a relatively minor impact on portfolio performance. This is expected to substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph, "An Efficient Frontier: the power of diversification". Please see the wiki articles Bogleheads® investment philosophy, "Never bear too much or too little risk", and "Asset allocation".
So I'm currently in VBILX (Intermediate Term Bonds) since that seems to be a popular alternative to the Total Bond Fund. Is there a reason I wouldn't just use a Long Term Bond fund (ex. VBLTX or VWESX)? It seems I'd get a decent-enough yield and I have the runway to see these through to maturity, I'd imagine.

Thanks
My suggestion is to stay with Vanguard Intermediate-term Bond Index Fund (VBILX) by itself, and not add a long-term bond fund. Intermediate-term is safer, and the primary reason to have a bond allocation is to reduce portfolio risk.

I use only intermediate-term bonds, and Vanguard Intermediate-term Bond Index Fund is the primary fund I use.
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