Portfolio Help for a Teacher

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
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dillybar1999
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Joined: Wed Apr 09, 2008 11:45 am

Portfolio Help for a Teacher

Post by dillybar1999 »

Thank you in advance for your help!

I am a 39m year old teacher 20 years from retirement. The breakdown is as follows:

Emergency fund: 3 months

Debt: mortgage-owe 94000, worth 155000, I add another 300-400 to the mortgage each month; no other debt

Tax: single

Tax rate: 25% federal and 3% Illinois state tax

39 years old

Asset allocation: 60% stock, 40% bond

International allocation: not sure here-should it be 50% of stocks?


Current Portfolio:

Taxable
40% Vanguard Prime Money Market Fund (VMMXX) (.24%)
20% Vanguard Short-Term Investment-Grade Bond Fund (VFSTX)
(.21%)
40% Vanguard Total Stock Market Fund (VTSMX) (.15%)

Total-
$20,000 dollars


Roth IRA
100% Vanguard Star Fund (VGSTX) (.32%)

Total-
25,000 dollars

Note: All totals rounded and accurate as of Oct. 11th. P.S.-Of course the amounts were much high two weeks ago.

Pension through work: I put 9% in, no choice where month goes. At this time I will be receiving about 65-70% of my last three year average salary when I retire in 20 years. Right now that is about $75,000-$80,000 a year so I should get about $50,000 a year starting in 20 years and it will be for the rest of my life. Unfortunately, social security, which I put in for almost 20 years, will apparently be lessened as a result of this pension.

Annual contributions: I plan to put about $700 to $1000 a month into my taxable account and $450 roughly to fund the Roth IRA each month.

Questions:

I want to re-balance this weekend. I'm one to plan thoroughly and sit back and leave alone. I've had my Roth IRA for 6 years and the Star fund has been the only fund in the account. I've read much over the years, but would still appreciate some advise.

I'm debating if I should add Tips (VIPSX), Reits (VGSIX), FTSE All-World ex-US Index (VFWIX)?

What should go in my taxable?

What should go in my Roth IRA?

Thank you for your time!

Scott Dillard
Pangloss
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Joined: Sun Mar 04, 2007 9:57 pm

Post by Pangloss »

Hi Scott.

Bonds should be in the Roth and stocks in the taxable account. I would probably aim for something like this:

20% FTSE all-world ex-US (taxable and Roth)
30% Total Stock Market (taxable)
10% REIT (Roth)
20% TIPS (Roth)
20% Total Bond Market (Roth)

Having part of you allocation to the FTSE index in taxable and part in Roth will make rebalancing easier. Also, I think you could get along about as well without the REIT fund. It's a pretty volatile fund lately, and if that bothers you, don't add it to the portfolio. You can add that 10% allocation to the total stock market index fund. Regarding the TIPS and FTSE funds, I would absolutely include those holdings in the portfolio. Good luck.
YDNAL
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Location: Biscayne Bay

Re: Portfolio Help for a Teacher

Post by YDNAL »

dillybar1999 wrote:Tax rate: 25% federal and 3% Illinois state tax
39 years old
Asset allocation: 60% stock, 40% bond
International allocation: not sure here-should it be 50% of stocks?
Annual contributions: I plan to put about $700 to $1000 a month into my taxable account and $450 roughly to fund the Roth IRA each month.
Dillybar,

Welcome to the forum.

You are paying too much in taxes by having taxable Bonds/Cash in a Taxable account. Consider this.

Current Portfolio:

Taxable
44.4% Vanguard Total Stock Market Fund (VTSMX) (.15%)

Roth IRA
15.6% Vanguard Total International Stock Index Fund (VGTSX) (.27%)
20% Vanguard Short-Term Investment-Grade Bond Fund (VFSTX) (.21%)
20% Vanguard Short-Term Treasury Fund Investor Shares (VFISX) (.22%)

100% Total ($45K)

You can sell VFSTX in Taxable* and I would buy it in Roth NOT to lock-in losses. Then, complement with Treasuries to complete a 50/50 Treasury/Corporate mix in your Bonds. Otherwise, the ST Bond Index (VBISX) or IT Bond Index (VBIIX) would be preferred for the entire 40%.

Hope that works.

* possibly at a loss since its price has been hit pretty hard this year.

Regards,
Landy
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Post by retiredjg »

Scott, I think Pangloss has given you a good portfolio suggestion. I have comments on a couple of things
International allocation: not sure here-should it be 50% of stocks?
Probably not for you. 50% is at the aggressive end of the range we usually see here (20% to 50%) and would be out of step for what seems to be your investing style which is more mid-range to conservative. Pangloss put you at 33% of equity which is more middle of the road.
Unfortunately, social security, which I put in for almost 20 years, will apparently be lessened as a result of this pension.
I don't think so. Your SS will be based on your highest paid years of working a job that contributes to SS. If you are currently making FICA contributions, your highest years will most likely be your last teaching years. So, nothing lost. If you are not currently making FICA contributions, your SS will be based on the years you did make FICA contributions. Again, nothing lost since you didn't contribute the last 20 or so years.

You pension possibly will, however, make more of your SS taxable, assuming the laws don't change by then. Hope this was not too confusing an explanation. jg
krmann
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Windfall Elimination Provision

Post by krmann »

If you do not now (as a teacher) pay social security taxes each payday, then you will get caught up in the Windfall Elimination Provision. You have to have "substantial earnings" for 30 or more years to receive your full social security in addition to your public pension. In my case I paid into social security for 28 years, so my social security check will be reduced by 20%. According to the chart, if you have paid in 20 years or less your check will be reduced by 60%. If you get a relatively low pension you are protected. The reduction in your social security benefit cannot be more than 1/2 of the amount of your pension.

Kate
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celia
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Post by celia »

You are young enough that between now and your full retirement age, social security will change. That's for sure. Most likely benefits will be reduced and/or contributions will rise. The reason you will not get your full social security benefits is that you will not be contributing to it for the next 20+ years. You will be contributing to an alternate retirement plan.

I disagree with those who say bonds should be in your Roth account. I would put the assets that you expect to growth the most in your Roth. In many cases, people put bonds in their tax-deferred accounts (traditional IRAs, 401ks, etc) but since you don't have one, I'd leave it in your taxable account. The amount you have in bonds and the interest earned each year is not that much dollar-wise. If you had a much larger portfolio, that would be another story. But possibly these taxable funds also double as your emergency funds, I assume. So if there was an emergency, you'd want to be able to withdraw from something that holds a stable value.

So, I'd leave your taxable funds as they are, especially if they double as emergency funds, and re-allocate your Roth to
add Tips (VIPSX), Reits (VGSIX), FTSE All-World ex-US Index (VFWIX).
Note that VIPSX is bonds, so I'd put that in taxable instead.

For those who disagree with me, note that the amounts we are talking about (20K and 25K) don't have a very big impact on taxes at this point.
Topic Author
dillybar1999
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Joined: Wed Apr 09, 2008 11:45 am

Post by dillybar1999 »

Thank you for the responses so far! I was reading my message and can't tell if the last three sentences came through or not. These new Netbooks have touchy keyboards. It seems like everybody got the gist of my message anyway, but to add the last three sentences:

What should go in my taxable account?

What should go in my Roth IRA?

Thank you for your time!

It's been a rough two weeks. I've lost about 9 thousand to the best of my estimate recently. I still can contribute $1000 to the Roth this year and will continue to pay down my mortgage and fund my taxable account, despite the recent drop. I'd go to the store to buy something on sale at 40% off, why not stocks!

Scott
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PiperWarrior
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Post by PiperWarrior »

dillybar1999 wrote:What should go in my taxable account?

What should go in my Roth IRA?
Usually, you should put tax-inefficient assets like taxable bonds and REITs in a Roth IRA and tax-efficient assets like stocks in a taxable account, but you may come out ahead if you put bonds in a taxable account and stocks in a Roth IRA in some cases. You would have to run numbers.

Once I bonds become available with a positive real yield, you might consider using them for a part of your bond allocation. You can buy up to $10,000 (paper and electronic combined) of I bonds every year. You can check the real yield on Nov 1. This way, you can avoid losing too much to taxes.
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celia
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Post by celia »

Dilly, It looks like you have about $4,000 in the Total Bond fund in your taxable account. That should give you about $200 in taxable earnings that would be taxed at your current rate (not eligible for long term capital gains rates like stocks are). Forget about putting that in your Roth at this point.

The potential for growth in your Roth is so much more than that and will grow tax-free. You will have to pay taxes on new contributions for the year they are added, regardless what those Roth contributions are invested in, but after that the growth is what you are trying to maximize. If you are eligible to contribute another $1,000 to the Roth and have it available now, put it in (a stock/REIT/international fund). You are right, there is currently a sale!
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celia
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Post by celia »

PiperWarrior wrote:Once I bonds become available with a positive real yield, you might consider using them for a part of your bond allocation. You can buy up to $10,000 (paper and electronic combined) of I bonds every year. You can check the real yield on Nov 1. This way, you can avoid losing too much to taxes.
You don't lose out because of taxes, you just defer the taxes, with U.S. bonds, until they are sold.
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PiperWarrior
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Post by PiperWarrior »

celia wrote:
PiperWarrior wrote:Once I bonds become available with a positive real yield, you might consider using them for a part of your bond allocation. You can buy up to $10,000 (paper and electronic combined) of I bonds every year. You can check the real yield on Nov 1. This way, you can avoid losing too much to taxes.
You don't lose out because of taxes, you just defer the taxes, with U.S. bonds, until they are sold.
Sure. Maybe I should have said you would miss time value of money with taxable bonds held in a tax-advantaged account, which may or may not matter depending on one's situation.
muddlehead
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Post by muddlehead »

at age 39, not needing money for 20 years, i would have zero in fixed income.
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