Detailed finance background with rebalancing questions

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immunologycls
Posts: 8
Joined: Sun Feb 11, 2018 10:37 pm

Detailed finance background with rebalancing questions

Post by immunologycls » Sun Feb 11, 2018 11:14 pm

How old are you?
  • 26
Are you employed/making income? How much?
  • Yes. Double job. 114,400 and 96,600 (base pay - no holiday,overtime, etc)
What are your objectives with this money? (buy a house? Retirement savings?)
  • Accumulate as much wealth as possible.
What is your risk tolerance? (Do you mind risking it at blackjack or do you need to know its 100% safe?)
  • I need to know it's 100% safe but willing to see it all plummet -90% as long as I know that it will be higher at the end (65y/o)
What are you current holdings? (Do you already have exposure to specific funds and sectors?)
  • As of now, my risk tolerance is very high so most of my money is in FSTVX. I plan to have a 3 bond portfolio based on my research with 85% Total market, 10% total international, and 5% US bonds. Will rebalance annually as I get closer to retirement or when certain bear markets/corrections occur. (I use FSTVX because it's the 401k my employer has and it's easier to have. But if necessary, I can make a vanguard account as well. I read somewhere that vanguard accounts are more tax efficienct if you have taxable accounts?)
Any other assets? House paid off? Cars? Expensive girlfriend? (not really an asset)
  • I am an only child and currently live with my parents. My parents do not mind me living there. I plan to live with my parents for the next 5-6 years or until they kick me out. As far as assets, I will most likely inherit my parents house, remaining retirement accounts, cars, etc.
  • I also have a girlfriend who makes similar amount as me. We are both very immaterialistic (Not sure if that's a word?) and simply enjoy the beauty of life (Sitting in the back yard, sipping wine while listening to music and enjoying the view)
What is your time horizon? Do you need this money next month? Next 20yrs?
  • I have an emergency fund for 3 months and will most likely not need any real money for the next 10 years.
Any big debts? No big debts.
  • Only my student loan which is around 20k at 4% interest rate. I've already paid off my high interest student loan.

Any other relevant financial information will be useful to give you a proper answer.

Here is my question. My work offers me two separate 403b plans so i can contribute a total of $37,000 tax deferred- has to do with something about being federal (This is not two 403b from two different companies) I'm only using one company as the other company has no matching at all. I will try to utilize the back door IRA next year as I started working around July 2017.

Theoretically, my gross income is around 211,000. After pre tax deductions, taxable income is around 174,000. I only put around 1,000 in our FSA (I think this is like HSA? but you lose it if you don't use it). So my effective taxable income prior to standard deduction is 173,000. I think my effective tax rate is 15.9% and my marginal tax rate is 32.0% ish with the standard deduction of 12,000. leaving me with 140,000 net income.

I budget around 20,000 expenditures every year leaving me with 114,000 to invest in taxable accounts +the 37k from pre taxed accounts + 5.5k back door roth. From what I understand, you want your bonds in the 401k and total market in roth iras/taxable accounts. How would I rebalance if most of my bonds are in 401k? Are we allowed to move it from 401k to taxable accounts or will that action be considered withdrawing from your retirement account and thus would incur a penalty.

Also, if my total market out performs the bonds and international, do I sell those so that I can revert to my 85-10-5 allocation before I infuse with new cash?

- or -

Do I simply keep the accounts the way they are and infuse the account that is underperforming with new cash (In this case bonds and total market). In this case, doesn't that mean that I'm only buying low and not selling high whereas the case above would mean that I am selling high and buying low?

if we use the fidelity 3 fund portfolio, Wouldn't selling some funds to rebalance your accounts trigger a taxable event? If im in it for the long haul ans have a time horizon of 40 years, isn't going 100% fusvx, fstvx, and ftipx better than having bonds?

Am I doing something wrong? I’m not very entrepreneur savvy so I can only do index funds. I plan to buy maybe 1-3 properties to rent out and simply leverage out the loans. Is there anything else I can do?

Sorry for such a long post. I am genuinely lost as far as optimizing the accounts.


TL;DR:



Income is around 211k. Pre tax acounts = roughly about 38k. Net take home about 140k. Budget is 20k. Plan to invest 114k in taxable accounts + 37k retirement accounts +5.5k backdoor roth I plan to use 3 fund portfolio. Rebalance annually when there is a large correction. How do I rebalance from taxable to roth? Do you rebalance with new cash or both? Am I doing something wrong


Next question:

These are your retirement accounts 5,500 Backdoor roth, 37,000 tax deferred programs and Taxable accounts.
Total to invest is around 156k/year there are 26 pay checks in 1 year. You can invest roughly 6k/pay period
is it better to evenly infuse your taxable accounts/roth/tax deferred accounts through out the year or is it better to front load certain accounts first? For example.

Scenario 1:

Roth account: $211 per pay period
tax deferred: $1,384 per pay period
Taxable accounts: $4,384 per pay period

Scenario 2:
Roth account: Max first pay period
tax deferred: $500 from first pay check, plus the next 6 pay period
Taxable accounts: The rest of the year.

- keep in mind that, based on my research, roth/taxable accounts will be total market/international, tax deferred will be bonds. But this can change depending on how I actually rebalance.

Cheers

Rom1b
Posts: 36
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Re: Detailed finance background with rebalancing questions

Post by Rom1b » Tue Feb 13, 2018 9:44 am

Hi,

I hope Im not rude, but just want to say: very long message!

I guess it means you gave it a long thought which is worth a 100 replies here (..maybe more like 10-20).

I just add that I like FSTVX, so good choice. Although here we love Vanguard. Also its nice that you and your GF both have money and can invest some now, so young. Sure, a bit of bonds wont hurt.
Cant help you with taxes calculations..

Good luck and keep it up and reasonable
Dr Bernstein - If You Can / free PDF, google it | 3Fund Portfolio www.bogleheads.org/forum/viewtopic.php?f=10&t=88005 | CollectiveThought www.bogleheads.org/forum/viewtopic.php?f=10&t=7353

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Tyler Aspect
Posts: 1083
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Re: Detailed finance background with rebalancing questions

Post by Tyler Aspect » Wed Feb 14, 2018 1:43 am

immunologycls wrote:
Sun Feb 11, 2018 11:14 pm

Age: 26

Double job. 114,400 and 96,600 (base pay - no holiday,overtime, etc)

As of now, my risk tolerance is very high so most of my money is in FSTVX. I plan to have a 3 fund portfolio based on my research with 85% Total market, 10% total international, and 5% US bonds. Will rebalance annually as I get closer to retirement or when certain bear markets/corrections occur. (I use FSTVX because it's the 401k my employer has and it's easier to have. But if necessary, I can make a vanguard account as well. I read somewhere that vanguard accounts are more tax efficient if you have taxable accounts?)
For a Fidelity taxable account if you care about tax efficiency you can purchase iShares ETFs that are equivalent to the Three Fund Portfolio: ITOT, AGG, and IEFA.

I have an emergency fund for 3 months and will most likely not need any real money for the next 10 years.

Only my student loan which is around 20k at 4% interest rate. I've already paid off my high interest student loan.

Any other relevant financial information will be useful to give you a proper answer.

Here is my question. My work offers me two separate 403b plans so i can contribute a total of $37,000 tax deferred- has to do with something about being federal (This is not two 403b from two different companies) I'm only using one company as the other company has no matching at all. I will try to utilize the back door IRA next year as I started working around July 2017.
I read that the maximum 403b employee contribution is $18500 per year. You will probably have excess contribution if your employee contribution goes to $37000.

Theoretically, my gross income is around 211,000. After pre tax deductions, taxable income is around 174,000. I only put around 1,000 in our FSA (I think this is like HSA? but you lose it if you don't use it). So my effective taxable income prior to standard deduction is 173,000. I think my effective tax rate is 15.9% and my marginal tax rate is 32.0% ish with the standard deduction of 12,000. leaving me with 140,000 net income.

I budget around 20,000 expenditures every year leaving me with 114,000 to invest in taxable accounts +the 37k from pre taxed accounts + 5.5k back door roth. From what I understand, you want your bonds in the 401k and total market in roth iras/taxable accounts. How would I rebalance if most of my bonds are in 401k? Are we allowed to move it from 401k to taxable accounts or will that action be considered withdrawing from your retirement account and thus would incur a penalty.
Since you are a high income earner you have sizable taxable accounts. Your 401k account might eventually become full of bonds. Then you are forced to buy IBonds, and municipal bond funds in the taxable account. Might be a good idea to start buying IBonds now, so you are ahead of the curve.

Also, if my total market out performs the bonds and international, do I sell those so that I can revert to my 85-10-5 allocation before I infuse with new cash?
Normally you would prefer to re-balance using new contributions so that you minimize realized capital gains.

If i am in it for the long haul ans have a time horizon of 40 years, isn't going 100% fusvx, fstvx, and ftipx better than having bonds?
Bonds are there for stability. In fact high income earners can have a higher percentage of bonds and still hit their retirement target.

Am I doing something wrong? I’m not very entrepreneur savvy so I can only do index funds. I plan to buy maybe 1-3 properties to rent out and simply leverage out the loans. Is there anything else I can do?
I am not in favor of rental property investments, but that is my personal assessment.

For traditional non-deductible IRA contribution you probably want to do a one-time lump sum contribution, then immediately convert it to Roth IRA. You want to suppress the unwanted dividends as much as possible.

Cheers
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.

immunologycls
Posts: 8
Joined: Sun Feb 11, 2018 10:37 pm

Re: Detailed finance background with rebalancing questions

Post by immunologycls » Wed Feb 14, 2018 11:59 pm

Tyler Aspect - thank you very much for the insight.
I have a question from your post though

"Since you are a high income earner you have sizable taxable accounts. Your 401k account might eventually become full of bonds. Then you are forced to buy IBonds, and municipal bond funds in the taxable account. Might be a good idea to start buying IBonds now, so you are ahead of the curve." Why bonds? Wouldn't that stagnate the growth? As you said, bonds are there for stability. However, I'm not interested in stable. I am interested in high growth long term.

Cheers

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Tyler Aspect
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Joined: Mon Mar 20, 2017 10:27 pm
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Re: Detailed finance background with rebalancing questions

Post by Tyler Aspect » Thu Feb 15, 2018 11:42 am

immunologycls wrote:
Wed Feb 14, 2018 11:59 pm
Tyler Aspect - thank you very much for the insight.
I have a question from your post though

"Since you are a high income earner you have sizable taxable accounts. Your 401k account might eventually become full of bonds. Then you are forced to buy IBonds, and municipal bond funds in the taxable account. Might be a good idea to start buying IBonds now, so you are ahead of the curve." Why bonds? Wouldn't that stagnate the growth? As you said, bonds are there for stability. However, I'm not interested in stable. I am interested in high growth long term.

Cheers
An all stock portfolio would have seen a near 60% drop in value during the last recession. Even for young investors, holding 20% of portfolio as bonds still make sense, because that reduces the draw-down to merely -48% during the last recession.

You will probably know your true risk tolerance better once you experience one recession with money in the stock market. Keeping a beefy emergency cash position when a recession grow near can allow you to keep holding an aggressive portfolio during a recession.
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.

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