Overall Picture & Investments - What Am I missing?

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Spacoli
Posts: 3
Joined: Fri Mar 03, 2017 7:27 pm

Overall Picture & Investments - What Am I missing?

Post by Spacoli » Sat Jul 15, 2017 4:19 pm

Hello. I found Bogleheads about 6 months ago, and I’m very thankful this community exists. My first post!
I’d love some help thinking through a few questions related to our finances and investing strategy.
  • Emergency funds: $40K cash. We also think of our taxable account as an emergency fund if needed.
  • Debt: Only mortgages
  • Taxes: Filing jointly
  • Tax rates: 33% federal, 5.75% state
  • Age 40, wife age 38
  • Children: 8, 7, 5
  • My income is ~$340K (variable on commission). Total income has been increasing each year. DW is a full-time mom.
  • Home: $620K value, $420K remaining on loan @ 4.375%
  • Rental Property: $400K value, $274K remaining on loan @ 4.00%. Purchase price $353K plus $10K in capital improvements. Monthly loan payment $2,750 (15 years remaining). $7K annual taxes. $2,000/month in rental income. Losing money every year on paper, but value is increasing. $35K total in passive losses.
  • 529 accounts total: $130K
  • Current investing: Max out my 401K, and backdoor Roth for DW each year. Investing $5,000 per year in each child’s 529 (2 separate accounts for me and DW for tax purposes).
  • I chose not to use my employer’s PPO + HSA insurance plan option. The straight PPO plan better met our needs.
  • EDITED: I have a $2M term life policy. Had Northwestern Mutual whole life for a while - learned my lesson the hard way and surrendered the policies.
Current Retirement Assets
$982K total (US 67%, International 14%, Bond/MM 16%, Cash 3%)

My Taxable
% is % of Total Retirement Assets
AAPL (apple) 10%
VEU (Vanguard All World ETF) 1%
VHT (Vanguard Health Care ETF) 1%
VTI (Vanguard total market ETF) 2%
VFORX (Vanguard target retirement 2040) 4%
Cash 3%

My IRA (all pretax from a 401k rollover)
% is % of Total Retirement Assets
VXUS (Vanguard total International ETF) 6%
VTI (Vanguard total market ETF) 19%
BND (Vanguard Total Bond ETF) 3%
Cash <1%

My Roth IRA
% is % of Total Retirement Assets
VB (Vanguard Small Cap ETF) 2%
VNQ (Vanguard REIT ETF) <1%
VTI (Vanguard total market ETF) 5%
VFORX (Vanguard target retirement 2040) 1%
Cash <1%

DW Roth
% is % of Total Retirement Assets
VB (Vanguard Small Cap ETF) 2%
VXUS (Vanguard total International ETF) 1%
VTI (Vanguard total market ETF) 2%
Cash <1%

My 401K
% is % of Total Retirement Assets
Stable Value Money Market * 13%

DW 403B
% is % of Total Retirement Assets
VITSX (Vanguard total stock market index) 21%
VTIAX (Vanguard total international stock index) 4%

* My employer’s 401K plan options are terrible. Total fund fees range from 2.17% to 2.65% and most are underperforming their benchmarks. Therefore, I have all my money in the plan’s Stable Value Money Market that has 0% fees and a current rate of return of 3.00%.

Questions
  1. My goal is to simplify our IRA accounts and taxable account to use a three-fund portfolio (VTI, VXUS, BND). I eventually want to sell Apple, and get rid of my target retirement funds to further reduce costs (VFROX is 0.16%). However, in order to do that in my taxable account, I’d be looking at a $78K long-term capital gain on Apple, and an $18K gain on VFROX. Is it worth selling the VFROX and paying the taxes now in order to reduce the expense ratio? I don’t have any cap gains losses to offset.
  2. Should I be gradually converting IRA money to Roth money each year? I have no idea what my future tax brackets will be. I assume lower…
  3. Where should we be putting extra money (maybe ~$25K per year)? Paying down mortgages, investing in our taxable account?
  4. Given my poor 401K options, is the MM fund the right choice?
  5. Any red flags or big opportunities I’m missing?
Thank you!
Last edited by Spacoli on Sun Jul 16, 2017 7:22 am, edited 1 time in total.

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Tyler Aspect
Posts: 480
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
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Re: Overall Picture & Investments - What Am I missing?

Post by Tyler Aspect » Sat Jul 15, 2017 10:57 pm

Spacoli wrote:Hello. I found Bogleheads about 6 months ago, and I’m very thankful this community exists. My first post!
I’d love some help thinking through a few questions related to our finances and investing strategy.
Welcome to Bogleheads!
  • Emergency funds: $40K cash. We also think of our taxable account as an emergency fund if needed.
  • Debt: Only mortgages
  • Taxes: Filing jointly
  • Tax rates: 33% federal, 5.75% state
  • Age 40, wife age 38
  • Children: 8, 7, 5
  • My income is ~$340K (variable on commission). Total income has been increasing each year. DW is a full-time mom.
  • Home: $620K value, $420K remaining on loan @ 4.375%
  • Rental Property: $400K value, $274K remaining on loan @ 4.00%. Purchase price $353K plus $10K in capital improvements. Monthly loan payment $2,750 (15 years remaining). $7K annual taxes. $2,000/month in rental income. Losing money every year on paper, but value is increasing. $35K total in passive losses.
  • 529 accounts total: $130K
  • Current investing: Max out my 401K, and backdoor Roth for DW each year. Investing $5,000 per year in each child’s 529 (2 separate accounts for me and DW for tax purposes).
  • I chose not to use my employer’s PPO + HSA insurance plan option. The straight PPO plan better met our needs.
Current Retirement Assets
$982K total (US 67%, International 14%, Bond/MM 16%, Cash 3%)
Perhaps you can consider dialing down the risk level to 70% stock / 30% bond. It would be typical for age 40.

My Taxable
% is % of Total Retirement Assets
AAPL (apple) 10%
VEU (Vanguard All World ETF) 1%
VHT (Vanguard Health Care ETF) 1%
VTI (Vanguard total market ETF) 2%
VFORX (Vanguard target retirement 2040) 4%
Cash 3%
In the taxable you only really need the VTI. Consider selling off Apple and VFORX over two or three years.

My IRA (all pretax from a 401k rollover)
% is % of Total Retirement Assets
VXUS (Vanguard total International ETF) 6%
VTI (Vanguard total market ETF) 19%
BND (Vanguard Total Bond ETF) 3% Exchanging VXUS to BND.
Cash <1%

My Roth IRA
% is % of Total Retirement Assets
VB (Vanguard Small Cap ETF) 2%
VNQ (Vanguard REIT ETF) <1%
VTI (Vanguard total market ETF) 5%
VFORX (Vanguard target retirement 2040) 1%
Cash <1% Exchanging everything to VXUS.

DW Roth
% is % of Total Retirement Assets
VB (Vanguard Small Cap ETF) 2%
VXUS (Vanguard total International ETF) 1%
VTI (Vanguard total market ETF) 2%
Cash <1% Exchanging everything to VXUS.

My 401K
% is % of Total Retirement Assets
Stable Value Money Market * 13%

DW 403B
% is % of Total Retirement Assets
VITSX (Vanguard total stock market index) 21%
VTIAX (Vanguard total international stock index) 4% Allocate 10% bond here and 15% VITSX.

* My employer’s 401K plan options are terrible. Total fund fees range from 2.17% to 2.65% and most are underperforming their benchmarks. Therefore, I have all my money in the plan’s Stable Value Money Market that has 0% fees and a current rate of return of 3.00%.

Questions
  1. My goal is to simplify our IRA accounts and taxable account to use a three-fund portfolio (VTI, VXUS, BND). I eventually want to sell Apple, and get rid of my target retirement funds to further reduce costs (VFROX is 0.16%). However, in order to do that in my taxable account, I’d be looking at a $78K long-term capital gain on Apple, and an $18K gain on VFROX. Is it worth selling the VFROX and paying the taxes now in order to reduce the expense ratio? I don’t have any cap gains losses to offset.
    Selling over two or three years should be doable.
  2. Should I be gradually converting IRA money to Roth money each year? I have no idea what my future tax brackets will be. I assume lower…
    Not at this time. You can convert during retirement.
  3. Where should we be putting extra money (maybe ~$25K per year)? Paying down mortgages, investing in our taxable account?
    You can do it half and half.
  4. Given my poor 401K options, is the MM fund the right choice?
    From your description it is the best option among bad choices.
  5. Any red flags or big opportunities I’m missing?
Do you have term life insurance for yourself?
Thank you!
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

InsideTheBeltway
Posts: 12
Joined: Mon Jul 03, 2017 2:01 pm

Re: Overall Picture & Investments - What Am I missing?

Post by InsideTheBeltway » Sat Jul 15, 2017 11:08 pm

Sell the rental house ASAP and put the $100K profit on your primary mortgage. Try getting your primary home paid off in 7-10 years. You need about 20 years of term-life worth around $3M, if you don't already have a policy. You already know AAPL is a red flag, sell it first thing Monday. Put your extra $25K into a diversified index portfolio / the primary mortgage.

MotoTrojan
Posts: 792
Joined: Wed Feb 01, 2017 8:39 pm

Re: Overall Picture & Investments - What Am I missing?

Post by MotoTrojan » Sun Jul 16, 2017 2:42 am

VXUS is also great in taxable, along with VTI. Tax-efficient, and you get foreign tax-credit. I'd hold VTI/VXUS in taxable, then all three in tax-advantaged, to make annual rebalancing tax free.

Spacoli
Posts: 3
Joined: Fri Mar 03, 2017 7:27 pm

Re: Overall Picture & Investments - What Am I missing?

Post by Spacoli » Sun Jul 16, 2017 7:31 am

I have a $2M term life policy. Updated my original post.

Hadn't considered selling our rental property anytime soon. I've liked having it for diversification, and it's likely to continue gradually increasing in value. But perhaps the cost is too great. I'll have to start giving it some serious thought.

Thanks

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WoodSpinner
Posts: 307
Joined: Mon Feb 27, 2017 1:15 pm

Re: Overall Picture & Investments - What Am I missing?

Post by WoodSpinner » Sun Jul 16, 2017 8:34 am

Spacoli wrote:I have a $2M term life policy. Updated my original post.

Hadn't considered selling our rental property anytime soon. I've liked having it for diversification, and it's likely to continue gradually increasing in value. But perhaps the cost is too great. I'll have to start giving it some serious thought.

Thanks
OP,

You should consider how you can payoff the rental mortgage earlier. This would be a good use for the excess $25k/year plus some extra from reducing expenses.

Speaking of expenses, how many months of expenses is covered by your Emergency Fund? Just wondering if you have enough there?

Good Luck 8-)

deskjockey
Posts: 83
Joined: Sat Dec 03, 2016 11:15 am

Re: Overall Picture & Investments - What Am I missing?

Post by deskjockey » Sun Jul 16, 2017 8:46 am

Spacoli wrote: Hadn't considered selling our rental property anytime soon. I've liked having it for diversification, and it's likely to continue gradually increasing in value. But perhaps the cost is too great. I'll have to start giving it some serious thought.

Thanks
Spacoli--welcome to the forum! My thoughts on the rental: it really doesn't diversify you at all--what it does is concentrate your portfolio in the same manner that a single stock does. You also can't know if it will continue to appreciate or not, much like we don't know if the stock market will keep going up or sink 40% next month. In addition, the property is not just "losing money on paper"--it's losing money, full stop. You pay more to own it that it generates in income. That means you're having to devote even more money to this asset in a single neighborhood in one city that you could be using to diversify your holdings across the entire stock market.

As for the Apple stock, sell it, but do it over the course of a couple of years. Another option, if you're OK with using it to fund college costs and want to decrease capital gains, is to gift it to your kids in a UTMA account (the threshold is $14,000 per kid, per parent, per year, so you could, in theory, gift $84,000 of it this year), the sell it gradually over the course of several years (being careful not to trigger the kiddie tax) and buy index funds with the proceeds. You can either keep the money in the UTMA account or use it to fund a custodial 529 (I learned about this recently myself). Either type account would allow you pay for their schooling. If you want to take this approach, make sure to gift the most appreciated shares to your youngest, as they will have more time in which to realize gains (and you'd need every bit of time to whittle down such a large capital gain).

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grabiner
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Joined: Tue Feb 20, 2007 11:58 pm
Location: Columbia, MD

Re: Overall Picture & Investments - What Am I missing?

Post by grabiner » Sun Jul 16, 2017 9:07 am

Spacoli wrote:Tax rates: 33% federal, 5.75% state
Do you live in Maryland (which does have a 5.75% state tax bracket at your income level)? If so, your actual state tax rate, including local taxes, is much higher, probably 8.95%. This makes it particularly important to minimize taxable dividends.
My Taxable
% is % of Total Retirement Assets
AAPL (apple) 10%
VEU (Vanguard All World ETF) 1%
VHT (Vanguard Health Care ETF) 1%
VTI (Vanguard total market ETF) 2%
VFORX (Vanguard target retirement 2040) 4%
Cash 3%
You want to get rid of Apple because of the risk, and the target-date fund because it will become tax-inefficient. It is best to sell these as soon as possible, since you expect the market to rise and make the capital gains worse.

VHT doesn't have a tax problem, but such a small holding doesn't do much to your portfolio, so you might as well sell it. Likewise, in order to simplify, you could switch VEU for VXUS.[/quote]
My IRA (all pretax from a 401k rollover)
% is % of Total Retirement Assets
VXUS (Vanguard total International ETF) 6%
VTI (Vanguard total market ETF) 19%
BND (Vanguard Total Bond ETF) 3%
Cash <1%
You cannot use the backdoor Roth IRA unless you get rid of this. However, I don't think it is worth getting rid of. You have a bad 401(k), so you don't want to move this money into the 401(k). And you are in a very high tax bracket (39% if I have your state tax rate, even including deductibility), so it isn't worth converting an IRA this large into a Roth IRA to open the backdoor. DW, who doesn't have a traditional IRA, can use a backdoor Roth.
My 401K
% is % of Total Retirement Assets
Stable Value Money Market * 13%
Count this as part of your bond holding in your overall asset allocation. And since this seems to be a decent option, and the tax savings is valuable, you should continue to max it out.
Where should we be putting extra money (maybe ~$25K per year)? Paying down mortgages, investing in our taxable account?
What is the rate? Given your high tax bracket, it may not be worth paying down, as it isn't costing you much after tax.
David Grabiner

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grabiner
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Location: Columbia, MD

Re: Overall Picture & Investments - What Am I missing?

Post by grabiner » Sun Jul 16, 2017 9:15 am

deskjockey wrote:As for the Apple stock, sell it, but do it over the course of a couple of years.
Selling over multiple years will help only if selling everything this year would push your taxable income into the 39.6% tax bracket; in that bracket, you pay 23.8% rather than 18.8% federal tax on the capital gain. If your capital gain is large enough that this might apply, then it makes sense to split the sale over multiple years.

If you sell the rental, that will also affect your capital gain.
David Grabiner

Spacoli
Posts: 3
Joined: Fri Mar 03, 2017 7:27 pm

Re: Overall Picture & Investments - What Am I missing?

Post by Spacoli » Mon Jul 17, 2017 9:07 am

Spacoli--welcome to the forum! My thoughts on the rental: it really doesn't diversify you at all--what it does is concentrate your portfolio in the same manner that a single stock does. You also can't know if it will continue to appreciate or not, much like we don't know if the stock market will keep going up or sink 40% next month. In addition, the property is not just "losing money on paper"--it's losing money, full stop. You pay more to own it that it generates in income. That means you're having to devote even more money to this asset in a single neighborhood in one city that you could be using to diversify your holdings across the entire stock market.
deskjockey - You're right, a single property isn't really diversification. I guess my mindset has been that I like having an investment outside of the stock market. Yes I could invest in a REIT, but those tend to move in correlation to the overall market. A single property value may or may not. So if the market corrects significantly, I would feel good about owning a property that probably stays steady in value during that period. It's in a downtown area of a relatively large city. Perhaps that's a short term view of things.

And yes, it's hard to consider a property that's losing money an investment. But what if I paid down the mortgage over the next 12-18 months to get the property cash flow positive. Does that change things, or should I still be looking to sell?

thanks

deskjockey
Posts: 83
Joined: Sat Dec 03, 2016 11:15 am

Re: Overall Picture & Investments - What Am I missing?

Post by deskjockey » Mon Jul 17, 2017 1:54 pm

Spacoli wrote: And yes, it's hard to consider a property that's losing money an investment. But what if I paid down the mortgage over the next 12-18 months to get the property cash flow positive. Does that change things, or should I still be looking to sell?

thanks
I'm not an expert on being a landlord and analyzing rental properties, but we are renting out our house (which we plan to return to in a couple of years). I'd suggest you look at it strictly like a business (which it is). Here's an example of someone who did just that. The replies in that thread should help you frame the decision appropriately. It all depends on what your expenses are and what you are looking for in terms of ROI, diversification, annuitized income, etc. Personally, I wouldn't tie up so much of my investment portfolio in a single asset like that (after all, real estate tanked just as much as the market during the 2008 downturn--worse in some places--and is generally correlated to the state of the economy, which is roughly correlated to the market). Then again, plenty of other bogleheads own rental property, so there are arguments in favor of it. Bottom line, decide what you are looking for, run the numbers, and see where it comes out.

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