Help with porfolio rebalance and simplification

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Mathemagician
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Joined: Thu Nov 02, 2017 9:51 pm

Help with porfolio rebalance and simplification

Post by Mathemagician » Sun Nov 12, 2017 2:17 pm

Hi everyone,

I’ve tried to put some effort into investing over the last decade or so since earning my degree, and have made what seem now like some arbitrary choices. I’ve been working up the motivation to reorganize and rebalance my portfolio, and would greatly appreciate any advice to help me accomplish this. My details are outlined below:

Emergency fund: Six months of expenses in cash
Debt: 30 year fixed mortgage. ~90k remaining at 3.8% with ~100k in equity
Tax Filing Status: Married Filing Jointly
Tax Rate: 15% Federal (this will be changing to 25% in ~ 1 year when my spouse finishes school)
State of Residence: WA
Age: 32
Desired Asset allocation: 90% stocks / 10% bonds (this is what I understand is currently desirable looking decades out, but I’m open to considering less stock allocation)
Desired International allocation: 20% of stocks (this is more of a guess than anything else on my part)

Planning on buying a new home and selling current one in about 2 years. I currently have approximately 20% of our prospective price range in cash for a down payment in a high yield savings account (1.5%)

Current retirement assets:
I am only including my own assets here, I will revisit my partner’s once they are employed. My portfolio size is a bit north of 200k

Taxable (Vanguard)
13.7% Vanguard Balanced Index Admiral (VBIAX) (.07%)
2.3% Vanguard Inflation Protected Securities (VIPSX) (.2%)
4.3% Vanguard International Value Fund (VTRIX) (.43%)
15.3% Vanguard Retirement 2050 (VFIFX) (.16%)
2.3% Vanguard Total International Stock Index (VGTSX) (.18%)
10% Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)

His 403(b)
20% TIAA-CREF Lifecycle 2040 (TCOIX) (.44%)
Company matches 5% of salary

His Roth IRA (Vanguard)
17.7% Vanguard 500 Index Fund Admiral (VFIAX) (.04%)
14.4% Vanguard Target Retirement 2050 (VFIFX) (.16%)

Contributions

Current new annual contributions
$2700 his 403b (employer matches this amount, so really $5400)
$5500 his Roth IRA

All of my excess cash beyond these contributions has been going toward my new home down payment fund, but since this has now been met and my spouse’s school expenses will be ending soon I may be able to begin making up to the maximum allowed contribution to my 403b

Available funds

Funds available in 403(b)
The Various TIAA Lifecycle Funds such as the one listed above - TIAA-CREF Lifecycle 2040 (TCOIX) (.44%)
TIAA International Equity Index Fund (TCIEX) .06%
TIAA Large-Cap Value Index Fund (TILVX) .06%
TIAA Mid-Cap Value Fund (TIMVX) .41%
Vanguard Small-Cap Growth Index (VSGAX) .07%
Vanguard Total Stock Market Index (VITSX) .04%
Vanguard REIT Index Fund (VGSNX) .10%
TIAA Bond Fund (TIBDX) .31%

Questions:

1. How might I best change my asset allocation across accounts to simplify/rebalance my portfolio?

2. I’d like to eventually retire before the traditional age. I’ve read that a backdoor Roth IRA conversion is a good way to use funds from a 403b before you would normally be eligible. My employer says I can make either pre or post tax contributions past the matching amount up to the annual 18k cap. With this in mind, which type of contribution would be best?

Thank you for your time!

EDIT: Thank you so much for the responses. You've provided lots of great resources for me to look at. To clarify and answer some questions that were asked:

My employer told me I have the option for my contributions in my 403b past what they match to be roth or traditional (the matching amount is all traditional, and then you can choose what type you'd like beyond that). I will not be receiving a pension, and I think that I do have the option for a 457 (deferred compensation) plan but I haven't fully explored it yet.

The taxable account was something I started quite a few years ago before I knew about tax advantaged accounts, but it is all meant to be long-term investments.

I'd like to retire by 50, but circumstances change and I'm trying to be mindful of this each day and keeping myself open to modifying "the plan" as necessary.
Last edited by Mathemagician on Mon Nov 13, 2017 7:50 pm, edited 2 times in total.

mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: Help with porfolio rebalance and simplification

Post by mega317 » Mon Nov 13, 2017 1:15 am

1. The general idea is bonds in tax-deferred and stocks in taxable/Roth. I am a fan of the three fund portfolio and so that would be my recommendation. You have a lot of redundant holdings. I would at least eliminate target date funds since they complicate the math when trying to determine what you have, how to rebalance, and where to put new money. In the 15% bracket you pay no capital gains taxes and so (as long as you remain under that income level) can sell funds in taxable now with no tax consequences.

Sample portfolio:
403b: 20% TIAA bond
Taxable 16% total international stock, 32% total US stock
Roth 32% total US stock
Easy peasy. With new contributions you'll add stock positions in the 403b which will make rebalancing easy.

2. I think you might be confusing a few concepts/terms, or at least you've confused me. You can not contribute more than 18.5k (next year) pre-tax. Many employers will allow you to contribute more than that after-tax. If you're going to do that make sure you can do in-service rollovers to Roth.

Are you sure you'll be in the 25% bracket next year? If so I would sell what you can in taxable before the end of this year to simply your holdings. And I would contribute as much as you can pre-tax to the 403b next year.

Also:
Many of us typically recommend 20-25% bonds at a minimum (hence my sample portfolio) which reduces volatility more than it reduces expected gains.
20-40% is the most common recommendation for international. You are fine here in my book.

retiredjg
Posts: 30570
Joined: Thu Jan 10, 2008 12:56 pm

Re: Help with porfolio rebalance and simplification

Post by retiredjg » Mon Nov 13, 2017 10:13 am

Mathemagician wrote:
Sun Nov 12, 2017 2:17 pm
Taxable (Vanguard)
13.7% Vanguard Balanced Index Admiral (VBIAX) (.07%)
2.3% Vanguard Inflation Protected Securities (VIPSX) (.2%)
4.3% Vanguard International Value Fund (VTRIX) (.43%)
15.3% Vanguard Retirement 2050 (VFIFX) (.16%)
2.3% Vanguard Total International Stock Index (VGTSX) (.18%)
10% Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)
What is this account for? If this is money is for a short term goal, suggestions will be different.

Assuming this account is for long term goals such as retirement....The funds in blue do not belong in a taxable account long term if you are in a higher bracket. For you, that means they are OK now, but will be less so when you move into the 25% bracket.

I'd use the remainder of this year and January 2018 to sell these with little or no tax if you can. Do you know how much your capital gains are? I'd also get rid of the International value, but you may have some reason you want to keep that.

Total Stock and Total International are good choices for a taxable account.

More comments after knowing what the taxable account is for.

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ruralavalon
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Location: Illinois

Re: Help with porfolio rebalance and simplification

Post by ruralavalon » Mon Nov 13, 2017 10:51 am

Asset allocation.
Mathemagician wrote:
Sun Nov 12, 2017 2:17 pm
Age: 32
Desired Asset allocation: 90% stocks / 10% bonds (this is what I understand is currently desirable looking decades out, but I’m open to considering less stock allocation)
Desired International allocation: 20% of stocks (this is more of a guess than anything else on my part)
At age 32 I suggest about 20 - 25% in bonds. 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, part 3 "Never bear too much or too little risk", and "Asset allocation".

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). You can find lots of debate here on international allocation, opinions rangeing all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box (upper right, this page).

That works out to about 20% bonds, 20% international stocks, and 60% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.


Contributions.
Mathemagician wrote:
Sun Nov 12, 2017 2:17 pm
Planning on buying a new home and selling current one in about 2 years. I currently have approximately 20% of our prospective price range in cash for a down payment in a high yield savings account (1.5%)
. . . . .
All of my excess cash beyond these contributions has been going toward my new home down payment fund, but since this has now been met and my spouse’s school expenses will be ending soon I may be able to begin making up to the maximum allowed contribution to my 403b
You have some excellent funds offered in your 403b, so It is a very good idea to start making maximum contributions to your 403b.


Mathemagician wrote:
Sun Nov 12, 2017 2:17 pm
2. I’d like to eventually retire before the traditional age. I’ve read that a backdoor Roth IRA conversion is a good way to use funds from a 403b before you would normally be eligible. My employer says I can make either pre or post tax contributions past the matching amount up to the annual 18k cap. With this in mind, which type of contribution would be best?
Does your 403b plan permit Roth contributions? (That may or may not be what they meant by saying you can make "post tax contributions past the matching amount up to the annual 18k cap". Roth contributions and post tax contributions are not exactly the same thing, you need to find out for sure.)

Will you be eligible for a substantial pension?

Does your employer also offer a 457 plan? Is your employer a governmental body, or a charity?

What retirement age were you thinking about?

You can simply add this to your original post using the edit button, it helps a lot if all of your information is in one place.



Fund selection and placement.
In selecting funds strive for a combination of broad diversification (to reduce risk) and low expense ratios (to increase your net gain). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Wiki article "Three-fund portfolio". Forum discussion, "The Three-Fund Portfolio".

For domestic stocks I suggest using a total stock market index fund where available, because a little more diversified than a S&P 500 index fund.

In the taxable account I usually suggest using Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04% and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11%. Both are very tax-efficient. Wiki article "Tax-efficient fund placement". You are already using those two funds and also Vanguard International Value Fund (VTRIX) ER 0.43%, which you could continue to use. Those funds are also well suited to any type of account. Both are very diversified with very low expense ratios.

Bond funds and balanced funds are not very tax-efficient, so ordinarily are better placed in tax-advantaged accounts.

I do not suggest using TIPS fund at age 32, your inflation protection is your earning capacity and your relatively high stock allocation.

To make portfolio management and rebalancing easy its sometimes helpful to have a one or more accounts which contain all three basic asset types (bonds, international stocks, and domestic stocks).



Example portfolio.
Mathemagician wrote:
Sun Nov 12, 2017 2:17 pm
Questions:

1. How might I best change my asset allocation across accounts to simplify/rebalance my portfolio?
Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to accommodate the fund offerings in your 403b plan. Current portfolio size = "a bit north of 200k". New annual contributions = about $10.9k. The asset allocation is: 20% bonds, 20% international stocks, and 60% domestic stocks . The percentages given are percentages of the total portfolio, not of a given account. The suggestion is to switch both the existing balances and the new contributions to the funds indicated. All percentages and dollar amounts are rounded off, so may not add up exactly.

Taxable account @ Vanguard (48% of total)
33%, Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)
10%, Vanguard International Value Fund (VTRIX) (.43%)
05%, Vanguard Total International Stock Index (VGTSX) (.18%)

His 403(b) (20% of total; adds $2.7k/yr + employer match of $2.7k = $5.4k total)
10%, Vanguard Total Stock Market Index (VITSX) .04%
05%, TIAA International Equity Index Fund (TCIEX) .06%
05%, TIAA Bond Fund (TIBDX) .31%

His Roth IRA @ Vanguard (32% of total; adds $5.5 k/yr)
05%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
15%, Vanguard Total Bond Market Index Adm (VBTLX) ER 0.05%

Rebalancing.
Because the funds will grow at different and unpredictable rates, it may be necessary every year or two to rebalance in order to maintain the desired asset allocation. Wiki article, "Rebalancing". You can easily adjust the asset allocation by exchanging between funds inside the 403b.

Avoid exchanging between funds in the taxable account, which can create income tax liability.

. . . . .

I suggest that you read one or two books on general investing. Wiki article, "Books: recommendations and reviews". When I first stated managing my own investments, I found this tutorial very helpful in learning investing terminology/jargon and some of the investing basics. Morningstar, "Investing Classroom".

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Mathemagician
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Joined: Thu Nov 02, 2017 9:51 pm

Re: Help with porfolio rebalance and simplification

Post by Mathemagician » Mon Nov 13, 2017 8:46 pm

Thank you all, I've edited my original post to answer some questions that were brought up.

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ruralavalon
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Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Help with porfolio rebalance and simplification

Post by ruralavalon » Tue Nov 14, 2017 7:35 am

Mathemagician wrote:
Sun Nov 12, 2017 2:17 pm
EDIT: Thank you so much for the responses. You've provided lots of great resources for me to look at. To clarify and answer some questions that were asked:

My employer told me I have the option for my contributions in my 403b past what they match to be roth or traditional (the matching amount is all traditional, and then you can choose what type you'd like beyond that). I will not be receiving a pension, and I think that I do have the option for a 457 (deferred compensation) plan but I haven't fully explored it yet.

The taxable account was something I started quite a few years ago before I knew about tax advantaged accounts, but it is all meant to be long-term investments.

I'd like to retire by 50, but circumstances change and I'm trying to be mindful of this each day and keeping myself open to modifying "the plan" as necessary.
I sounds like they are indicating that you can make Roth contributions to your 403b. You could ask for a copy of the "plan document" if you do not already have a copy.

The maximum annual employee contribution for a 403b account is $18k now, $18.5k starting next year. I think it's a very good idea to make the maximum employee contribution to your 403b, it may better to make traditional contributions since you will not be receiving a pension.

If there is a 457 plan, and you work for a governmental body, and the plan offers decent funds to invest in, then contributing to the 457 plan can be very helpful in funding early retirement. "Government 457(b) plans are subject to income tax upon withdrawal but are not subject to the 10% early withdrawal penalty. Funds can be withdrawn at retirement, upon severance from the employer . . . . . . Different rules apply if you work for a tax-exempt organization (you must see the employer plan document for the details.)". Wiki article, "457b". So it would be good find out if a 457b plan is offered and if so the investments available in it.

Under a 403b plan "[p]enalty-free withdrawals are allowed upon retirement (assumed to be in or after the year in which you reach age 55", so that can also be used for retirement before normal retirement age. Wiki article, "403b".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Help with porfolio rebalance and simplification

Post by retiredjg » Tue Nov 14, 2017 8:32 am

Mathemagician wrote:
Sun Nov 12, 2017 2:17 pm
My employer told me I have the option for my contributions in my 403b past what they match to be roth or traditional (the matching amount is all traditional, and then you can choose what type you'd like beyond that).
It is possible there was a miscommunication about this. The match MUST be traditional. However, it is common for the employer to match either traditional or Roth contributions, not just traditional. Not sure this changes anything - once you hit the 25% tax bracket, you likely should use mostly or all traditional anyway, complemented by Roth IRA.

My suggestion looks different from ruralavalon's but it is only because I've put together the puzzle pieces a little differently. In reality, the suggestions are very similar. I prefer to use 500 index in the Roth IRA to avoid wash sales if you sell Total Stock at a loss in taxable.

Taxable account @ Vanguard (48% of total)
33%, Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)
10%, Vanguard International Value Fund (VTRIX) (.43%) <--keep if tilting to value; otherwise sell if you can with low taxes and combine with
05%, Vanguard Total International Stock Index (VGTSX) (.18%)

His 403(b) (20% of total; adds $2.7k/yr + employer match of $2.7k = $5.4k total)
5% Vanguard Total Stock Market Index (VITSX) .04%
15%, TIAA Bond Fund (TIBDX) .31%

His Roth IRA @ Vanguard (32% of total; adds $5.5 k/yr)
21% Vanguard 500 Index Fund Admiral (VFIAX) (.04%)
6% Vanguard Extended Market Index (or small cap value if you are trying to tilt to value)
05% Vanguard Total Bond Market Index Adm (VBTLX) ER 0.05%

About the 457....if it is a governmental plan and you have more money to save, I'd use it. However, I would not fill both the 403b and 457 with tax-deferred contributions - some Roth might be in order.

When your spouse starts employment, you should revisit this and fit the two plans together for lowest costs and best choices.

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