457b deferred comp proposal

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2044bound
Posts: 3
Joined: Sun Feb 18, 2018 10:30 am

457b deferred comp proposal

Post by 2044bound » Tue Feb 20, 2018 9:56 am

Hello folks, first post.

I have been swallowing my fear and diving into this topic for the last 2-3 months. I am planning to enroll in Deferred Comp 457(b) with my next raise, this summer. I am wishing I had enrolled when I began employment at my current place of work (civil servant). My income is low end and I am divorced, so I want to sock away as much as I am capable of without destabilizing my financial recovery.

Emergency funds: Currently at 2 months’ expenses, but plan to have 3mo by enrollment date, and continue from there (my pay is auto-split into checking, set amount for expenses, and remainder into savings, so this should be doable)
Debt: Zero debt, but don’t congratulate me, I’m a recent BK7 (dc 2017). Determined to stay on the right path.
Tax Filing Status: Single
Tax Rate: 15% Federal, 3.07% State
State of Residence: PA
Age: 32
Desired Asset allocation: age -10 so 78% stocks / 22% bonds.
Desired International allocation: I am thinking 20%
Risk Tolerance (I added this): Tbh, I am highly risk-averse. However, I am also patient, and decent in stressful situations. I want to go with a riskier profile (for now) due to my age and the fact that I plan to retire some years away.

Current Investments
Defined Benefit Pension, total account balance (8.8 years of service): $19,300
Outside that, zero.

Contributions *updated
No employer match, $50/pay to start, beginning summer 2018 (next pay raise). = $1,300/year
Future pay increases I will alternate between either adding an additional $25 to deferred comp, or letting the pay increase go to cash savings. (I typically receive one pay increase per year, occasionally two, although they must be negotiated in contracts and that is very administration-specific)

Available Funds

Portfolios…
Great West Aggressive MXAPX 0.0152%
Great West Moderate MXMPX 0.0164%
Great West Conservative MXCPX 0.0143%

Indexes…
EAFE Equity MXINX 0.02%
S&P Mid Cap 400 MXMDX 0.0200%
S&P Large Cap 500 MXVIX 0.0100%
60/40 Balanced Stock & Bond MXSBX? 0.0140%
US Bond MXBIX 0.0200%

Money Market…
Short-Term Investment MXSDX 0.0000%

Fixed Investment…
Great West Stable Value (can’t find ticker?) 0.3050%

Fees: The account already has an annual fee of $24, deducted monthly, which basically negates one of my payments, and a 0.07% asset based fee. Additionally, opting for a managed account or a “help me manage my account” option adds a 0.45% fee.

Proposals - image or code format

click to go to image format - https://imgur.com/a/XwTY7

Code: Select all

Proposal 1
Pct	Fund Name		ER			US St	Intl St	Bond	Cash/Oth
75%	GWL Aggressive					71.02%	25.63%	0.07%	3.28%
	GWL Moderate					43.63%	14.83%	18.96%	22.58%
	GWL Conservative				23.04%	6.65%	38.23%	32.08%
2%	EAFE Equity					1.19%	92.38%	0.00%	6.43%
	S&P MidCap 400					98.51%	0.72%	0.00%	0.77%
	S&P LargeCap 500				98.79%	0.99%	0.00%	0.22%
	Balanced Fund					45.92%	13.47%	34.42%	6.19%
23%	US Bond						0.00%	0.00%	99.08%	0.92%
	Short Term 					0.00%	0.00%	91.79%	8.21%
	Stable Value			100.00%				
							
	Total/avg		0.02%			53.29%	21.07%	22.84%	2.80%

Proposal 2
Pct	Fund Name		ER			US St	Intl St	Bond	Cash/Oth
	GWL Aggressive					71.02%	25.63%	0.07%	3.28%
	GWL Moderate					43.63%	14.83%	18.96%	22.58%
	GWL Conservative				23.04%	6.65%	38.23%	32.08%
22%	EAFE Equity					1.19%	92.38%	0.00%	6.43%
55%	S&P MidCap 400					98.51%	0.72%	0.00%	0.77%
	S&P LargeCap 500				98.79%	0.99%	0.00%	0.22%
	Balanced Fund					45.92%	13.47%	34.42%	6.19%
23%	US Bond						0.00%	0.00%	99.08%	0.92%
	Short Term 					0.00%	0.00%	91.79%	8.21%
	Stable Value			100.00%				
							
	Total/avg		0.02%			54.44%	20.72%	22.79%	2.05%
Questions and please forgive me for being new to all this. I've never had anyone to guide me in these sorts of questions but am eager to learn :-)

1. Before I even discovered what a three-fund portfolio was, that was almost what I’d chosen. However, due to the contents of the funds, the allocations are wonky (Proposal 1), so I also put together Proposal 2 – which uses what I believe are more straightforward, but slightly higher cost funds. I’d personally rather use lower cost even if wonkier percentages to get my target allocations, but do let me know your thoughts.

2. Are these ERs any good? From what little searching I’ve done, they appear on the good side.

3. My deferred comp rep mentioned that some folks use their deferred comp not as a supplement for their retirement/SSA, but to fill the gap between when they actually leave their job and when their (pension/IRA) and SSA kick in. What are your thoughts on the wisdom of this? I would be eligible to retire from my job in 2044 (58yo), but intend to keep working until SS eligible (if able; current disabilities permitting), if that aids your answer.

4. Obviously newbie question, but do I also decrease my international exposure as I age?

p.s. I want to thank you for transcribing all of your videos on the main wiki. Not everyone does, and it matters a great deal that you take the time and effort to do this so that your content is accessible to all.
Last edited by 2044bound on Thu Feb 22, 2018 6:48 am, edited 2 times in total.

Mudpuppy
Posts: 5889
Joined: Sat Aug 27, 2011 2:26 am
Location: Sunny California

Re: 457b deferred comp proposal

Post by Mudpuppy » Tue Feb 20, 2018 12:37 pm

2044bound wrote:
Tue Feb 20, 2018 9:56 am
Desired Asset allocation: age -10 so 78% stocks / 22% bonds.
Desired International allocation: I am thinking 20%
Risk Tolerance (I added this): Tbh, I am highly risk-averse. However, I am also patient, and decent in stressful situations. I want to go with a riskier profile (for now) due to my age and the fact that I plan to retire some years away.
I personally prefer to keep my AA in 5% increments. So I'd say to set this at 75% stock / 25% bonds or 80% stocks / 20% bonds. I also use the 5% increment rule for triggering rebalances in response to market conditions. For example, if you choose 75 / 25, you wouldn't rebalance until your AA reached 80 / 20 or 70 / 30.
2044bound wrote:
Tue Feb 20, 2018 9:56 am
Portfolios…
Great West Aggressive MXAPX 0.0152%
Great West Moderate MXMPX 0.0164%
Great West Conservative MXCPX 0.0143%

Indexes…
EAFE Equity MXINX 0.02%
S&P Mid Cap 400 MXMDX 0.0200%
S&P Large Cap 500 MXVIX 0.0100%
60/40 Balanced Stock & Bond MXSBX? 0.0140%
US Bond MXBIX 0.0200%

Money Market…
Short-Term Investment MXSDX 0.0000%

Fixed Investment…
Great West Stable Value (can’t find ticker?) 0.3050%
These are all very good options. The balanced funds are not a good match for your desired AA though. Looking later in the post, the Great West Aggressive fund appears to be 95/5, so that's too aggressive for you. Looking at Morningstar, the Great West Moderate fund appears to be 60% stock, 20% bond, and 20% cash. That would be too conservative for you.
2044bound wrote:
Tue Feb 20, 2018 9:56 am
Fees: The account already has an annual fee of $24, deducted monthly, which basically negates one of my payments, and a 0.07% asset based fee. Additionally, opting for a managed account or a “help me manage my account” option adds a 0.45% fee.
Don't opt for the "help me manage my account" option. The rest of the fees are pretty typical for a governmental 457(b) plan. The monthly administrative fee will have less of an impact over time as you build up contributions.
2044bound wrote:
Tue Feb 20, 2018 9:56 am
Questions and please forgive me for being new to all this. I've never had anyone to guide me in these sorts of questions but am eager to learn :-)

1. Before I even discovered what a three-fund portfolio was, that was almost what I’d chosen. However, due to the contents of the funds, the allocations are wonky (Proposal 1), so I also put together Proposal 2 – which uses what I believe are more straightforward, but slightly higher cost funds. I’d personally rather use lower cost even if wonkier percentages to get my target allocations, but do let me know your thoughts.
When you first start out, your balances will be low, so simplicity should rule over mathematics. Choose one or two funds that are close to your desired AA, even if it's not a perfect match. When you have built up your balance and increased your contribution rates, then you can rethink the allocation, but keep it simple at first.

50% S&P Large Cap 500 and 50% 60/40 Balanced Stock & Bond Fund would be an 80/20 split, which is close enough to your desired AA. While an S&P 500 fund is not a perfect match to the total stock market, it is close enough. You'd also be a little bit low on the international exposure (only gained through the 60/40 fund), but again, we're looking for simplicity here, not perfection. Close enough is good enough when it comes to keeping things simple.

Another possibility is to do 50% Great West Aggressive and 50% Great West Moderate. That will also be close to 80/20, with a higher international exposure. It that will be slightly more expensive since these two funds have higher ERs than the S&P 500 and 60/40 Balanced funds.
2044bound wrote:
Tue Feb 20, 2018 9:56 am
2. Are these ERs any good? From what little searching I’ve done, they appear on the good side.
Yes, they are good ERs.
2044bound wrote:
Tue Feb 20, 2018 9:56 am
3. My deferred comp rep mentioned that some folks use their deferred comp not as a supplement for their retirement/SSA, but to fill the gap between when they actually leave their job and when their (pension/IRA) and SSA kick in. What are your thoughts on the wisdom of this? I would be eligible to retire from my job in 2044 (58yo), but intend to keep working until SS eligible (if able; current disabilities permitting), if that aids your answer.
It sounds like the rep poorly described one benefit of a 457(b) plan over other retirement plans. When you separate from the employer, you can withdraw funds from a 457(b) plan and only pay ordinary income taxes regardless of your age at the time. With other retirement plans, if you withdraw before age 59.5, you pay ordinary income taxes PLUS a 10% penalty for early withdrawals.

So you can use the 457(b) plan as a "gap" to cover expenses if you plan to retire early but you want to wait until you're older to draw SS. It also means the 457(b) plan can act as a backup emergency fund if something should happen to force you out of the workplace earlier than expected (e.g. illness, injury, etc).
2044bound wrote:
Tue Feb 20, 2018 9:56 am
4. Obviously newbie question, but do I also decrease my international exposure as I age?
Your AA expresses international exposure as a fraction of your overall stock percentage. So it will naturally decrease as you change your overall percentage of stocks. For example, 20% international for a 80/20 AA would mean you hold 16% international stock overall. But 20% international for a 50/50 AA would mean you hold 10% international stock overall.

Minty
Posts: 164
Joined: Sun Mar 24, 2013 3:19 pm
Location: NorCal

Re: 457b deferred comp proposal

Post by Minty » Tue Feb 20, 2018 12:56 pm

The ERs on the funds aren't too bad, but I hate the idea (if I am reading the post correctly) of investing $300 per year, and paying $24 in account fees. That is a significant haircut right off the top. Anybody think OP should consider saving in a Roth IRA instead? Or maybe taxable for a couple of years first, until there is enough of a nest egg to minimize the effect of that account fee?
Core Four with nominal bonds and TIPS.

chevca
Posts: 1918
Joined: Wed Jul 26, 2017 11:22 am

Re: 457b deferred comp proposal

Post by chevca » Tue Feb 20, 2018 1:04 pm

Those are great ERs actually!

No offense, but to be honest, with the savings rate of $25/pay period, it doesn't really matter what you choose or the AA. I'd simply throw it all in the S&P 500 fund and call it good. If you can up the contributions later, or when the balance gets a good bit higher, you could look into splitting it to a 3 fund set up.

2044bound
Posts: 3
Joined: Sun Feb 18, 2018 10:30 am

Re: 457b deferred comp proposal

Post by 2044bound » Thu Feb 22, 2018 6:58 am

Thanks all to the responses, especially for the detail! I am looking forward to learning more on investment topics, so it helps a lot.

We recently received information at work that withholding amounts were updated due to new tax law. At least for this year, my pay goes up by about $30 net starting this coming pay. So I am gonna start off with $50 instead of $25, still beginning this summer. I know that's still not a lot, but it's what I can do for the current moment. (We are paid biweekly, so 26/year = $1300) And I do plan to continue increasing contributions with further raises, but future raises are always uncertain.

TY all again!

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