Time to rebalance/reconsider

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vanguardabc
Posts: 25
Joined: Thu May 05, 2011 10:56 am

Time to rebalance/reconsider

Post by vanguardabc » Fri Aug 10, 2018 3:42 pm

Hi,

I'm a single parent who has handled/invested my money myself without outside guidance, using the principles generally used by this board. Total portfolio including cash is in the very low seven figures.


Emergency funds/cash: This is part of my problem, in that I keep a lot of cash around. First, because I was buying a house and making a 20%+ down payment and doing some work on the house. Then, because I was unemployed for nearly a year. I'm working now, but still have the cash and generally keep enough cash around to throw off easy percentages. I tend to do the math with and without cash, and also do a bonds plus cash percentage, as you will see below.

Debt: none, other than my mortgage. Credit cards are paid in full each month. A car loan/cash purchase may be in my future, but not immediately.

Tax filing status: Head of Household with one dependent

Tax rate: this year, I suspect 32%. Tiny chance of 24%. In the ordinary course, 2019 and forward, should be 35%. State tax rate 5%

State of residence: Illinois

Desired asset allocation: open to suggestions. Generally looking at age in bonds, but although I am pretty risk-averse, this feels very risk-averse, but then this of course is skewed by all of the cash.

Desired international allocation: usually aiming at 20% of stocks, though I haven't rebalanced in a while. Open to suggestions.

Portfolio: See below. Have generally put bonds in retirement accounts first and then when exhausted, international stocks, and then stocks. Percentages are of total portfolio, including all cash

Retirement Assets
Rollover IRA plus a small inherited IRA:

20% VBTLX (Vanguard Total Bond Index) .05% expense ratio
4.5% VTSAX (Vanguard Total Stock Index) .04% expense ratio
0.6% VTIAX (Vanguard Total International Index) .11% expense ratio (this is the small inherited IRA)

Roth IRA
2% VTIAX (Vanguard Total International Index) .11% expense ratio

In a 401(k) that I could choose to rollover, managed by State Street:
7% S&P 500 Index Fund .02% expense ratio
3% Bond Index Fund .04% expense ratio
3% International Stock Index Fund .08% expense ratio

In a 401(k) that I am planning to rollover, b/c it is too small to justify having another account floating around, thus all of this math
A small amount that I left out of all of the math. I am rolling it over, so can reallocate however is needed, and the total is a rounding error.

New 401(k) -- will be managed by Fidelity. Will set allocations accordingly once I get this all figured out. They have a 500 Index Fund, an international stock index fund, and a bond index fund.

529 -- not huge, left out of all math, as I don't consider it my money. Invested in age-based index funds.

No traditional IRA, as I have been over income limits.

Taxable
18% cash/CDs (I know, it's just how I am, though once I am in this job for a while and the balance starts going up, I will be investing again in taxable accounts, which I haven't done in a while, and the % may go down. This would include emergency funds.)
6% VTIAX (Vanguard Total International Index) .11% expense ratio
35% VTSAX (Vanguard Total Stock Index) .04% expense ratio

This gets to 99%, but I had to do some rounding, so I think it is as close as I can get it to 100%

Here is some overall asset allocation math:

including cash
All Stocks: 59%
US Stocks: 47%
Intl Stocks: 12%
Bonds alone: 23%
Bonds plus cash: 41%
Cash: 18%

not including cash
All Stocks: 71%
US Stocks: 57%
Intl Stocks: 14.5%
Bonds: 28%



Questions:
1. This is not necessarily my ideal asset allocation. I haven't rebalanced anything in a while, but now that I am rolling over that small 401(k) and setting up a new 401(k), I have the opportunity and desire to work on this. Last time I rebalanced, I had it at about 70% stocks/30% bonds, with 17% of stocks being international stocks.

2. Should I rollover the other 401(k)? I have a general preference for having as few accounts as possible, but these funds offer great expense ratios, and I haven't felt like it was a necessity to do so.

3. Should I rollover some affordable part the IRAs/401(k)s (except the inherited IRA) into my new 401(k), managed by Fidelity, so that I can do the backdoor Roth IRA trick to have as many retirement assets as possible when financial aid for college comes into play? I keep putting off deciding on this. It seems like a big deal, and I don't know that I can max out my 401(k), contribute to 529, and max out the Roth IRA each year. I do have the opportunity to speak to a financial advisor through work, or to a Vanguard advisor, but I am so torn on whether or not this is a good idea/worth the trouble. It worries me that this is the bulk of my assets, and if my employer chooses a bad plan, I am stuck.

4. Open to any other thoughts you may have! Thanks so much!

livesoft
Posts: 62707
Joined: Thu Mar 01, 2007 8:00 pm

Re: Time to rebalance/reconsider

Post by livesoft » Fri Aug 10, 2018 4:04 pm

It seems to me that you have a great handle on what you have and how you feel as an investor. I don't think you need any advice at all and can just do what you want and you will be just as fine as you would if you got some advice. That is, advice is not going to make any difference to you I think.
Wiki This signature message sponsored by sscritic: Learn to fish.

vanguardabc
Posts: 25
Joined: Thu May 05, 2011 10:56 am

Re: Time to rebalance/reconsider

Post by vanguardabc » Fri Aug 10, 2018 4:10 pm

livesoft wrote:
Fri Aug 10, 2018 4:04 pm
It seems to me that you have a great handle on what you have and how you feel as an investor. I don't think you need any advice at all and can just do what you want and you will be just as fine as you would if you got some advice. That is, advice is not going to make any difference to you I think.
I have given this a lot of thought, but I did post here last time I rebalanced, and I got a lot of useful information.

ExitStageLeft
Posts: 899
Joined: Sat Jan 20, 2018 4:02 pm

Re: Time to rebalance/reconsider

Post by ExitStageLeft » Fri Aug 10, 2018 4:29 pm

vanguardabc wrote:
Fri Aug 10, 2018 3:42 pm
2. Should I rollover the other 401(k)? I have a general preference for having as few accounts as possible, but these funds offer great expense ratios, and I haven't felt like it was a necessity to do so.
I would favor the low expenses and let it ride. Roll it over when it becomes financially advantageous.


3. Should I rollover some affordable part the IRAs/401(k)s (except the inherited IRA) into my new 401(k), managed by Fidelity, so that I can do the backdoor Roth IRA trick to have as many retirement assets as possible when financial aid for college comes into play? I keep putting off deciding on this. It seems like a big deal, and I don't know that I can max out my 401(k), contribute to 529, and max out the Roth IRA each year. I do have the opportunity to speak to a financial advisor through work, or to a Vanguard advisor, but I am so torn on whether or not this is a good idea/worth the trouble. It worries me that this is the bulk of my assets, and if my employer chooses a bad plan, I am stuck.
I would position myself for the backdoor Roth. Burn down taxable if that is what it takes to max out 401k and Roth contributions. Contributions to the 529 plan should be lowest priority.

vanguardabc
Posts: 25
Joined: Thu May 05, 2011 10:56 am

Re: Time to rebalance/reconsider

Post by vanguardabc » Fri Aug 10, 2018 4:35 pm

Oh, another question: new job offers Roth 401(k). Should I do that, even if I can’t max it out? I generally haven’t been persuaded that I should, but I can’t figure out what the general consensus on this is.

ExitStageLeft
Posts: 899
Joined: Sat Jan 20, 2018 4:02 pm

Re: Time to rebalance/reconsider

Post by ExitStageLeft » Fri Aug 10, 2018 7:46 pm

vanguardabc wrote:
Fri Aug 10, 2018 4:35 pm
Oh, another question: new job offers Roth 401(k). Should I do that, even if I can’t max it out? I generally haven’t been persuaded that I should, but I can’t figure out what the general consensus on this is.
Generally folks in the higher tax brackets prefer to max out the 401k savings tax-deferred. Putting a portion of your 401k contribution into a Roth account does not increase the amount you are saving in a tax-deferred account, but it does increase the taxes you pay this year. If you instead defer paying taxes on those funds, the tax rate you pay when you withdraw in retirement will likely be much lower.

Adding a backdoor Roth contribution makes sense when you are already maxing out the 401k tax-deferred. It takes money that would be going into a taxable account and instead puts it in a Roth account where it can grow and no taxes will ever be paid.

Just to make certain we've got a good understanding of your situation, how much are you saving each year in all your accounts?

vanguardabc
Posts: 25
Joined: Thu May 05, 2011 10:56 am

Re: Time to rebalance/reconsider

Post by vanguardabc » Fri Aug 10, 2018 7:50 pm

Generally folks in the higher tax brackets prefer to max out the 401k savings tax-deferred. Putting a portion of your 401k contribution into a Roth account does not increase the amount you are saving in a tax-deferred account, but it does increase the taxes you pay this year. If you instead defer paying taxes on those funds, the tax rate you pay when you withdraw in retirement will likely be much lower.

Adding a backdoor Roth contribution makes sense when you are already maxing out the 401k tax-deferred. It takes money that would be going into a taxable account and instead puts it in a Roth account where it can grow and no taxes will ever be paid.



Just to make certain we've got a good understanding of your situation, how much are you saving each year in all your accounts?
I will be maxing out my 401(k), but it’s hard to say how much I will save in addition to that. My income has fluctuated a ton the last few years. Nevertheless, I do expect to be able to save in excess of the pre-tax $18,500.

Re: Your comment about Roth 401(k)s, I’m not sure I understand your point. In a Roth 401(k), aren’t the tax benefits the same as in a Roth IRA? Meaning, all future withdrawals would be tax-free?
Last edited by vanguardabc on Fri Aug 10, 2018 7:54 pm, edited 1 time in total.

MotoTrojan
Posts: 2276
Joined: Wed Feb 01, 2017 8:39 pm

Re: Time to rebalance/reconsider

Post by MotoTrojan » Fri Aug 10, 2018 7:53 pm

livesoft wrote:
Fri Aug 10, 2018 4:04 pm
It seems to me that you have a great handle on what you have and how you feel as an investor. I don't think you need any advice at all and can just do what you want and you will be just as fine as you would if you got some advice. That is, advice is not going to make any difference to you I think.
Agreed. Since you don’t seem to have a strict rebalancing plan I would put something in place.

Rebalance via tax-advantaged every quarter, half, year. Rebalance bands (5/25 for example). Use new contributions to balance each month. Any combination of these or other systems will at least keep you honest. Also with how much cash you have, do what you can to maximize the yield it’s earning.

Good luck! How old are you by the way? AA isn’t crazy for a risk adverse person with your assets.

MotoTrojan
Posts: 2276
Joined: Wed Feb 01, 2017 8:39 pm

Re: Time to rebalance/reconsider

Post by MotoTrojan » Fri Aug 10, 2018 7:54 pm

vanguardabc wrote:
Fri Aug 10, 2018 7:50 pm
Generally folks in the higher tax brackets prefer to max out the 401k savings tax-deferred. Putting a portion of your 401k contribution into a Roth account does not increase the amount you are saving in a tax-deferred account, but it does increase the taxes you pay this year. If you instead defer paying taxes on those funds, the tax rate you pay when you withdraw in retirement will likely be much lower.

Adding a backdoor Roth contribution makes sense when you are already maxing out the 401k tax-deferred. It takes money that would be going into a taxable account and instead puts it in a Roth account where it can grow and no taxes will ever be paid.

Just to make certain we've got a good understanding of your situation, how much are you saving each year in all your accounts?
I will be maxing out my 401(k), but it’s hard to say how much I will save in addition to that. My income has fluctuated a ton the last few years. Nevertheless, I do expect to be able to save in excess of the pre-tax $18,500.
Aim to get the Roth along with pretax 401k and you’ll be in a good spot.

vanguardabc
Posts: 25
Joined: Thu May 05, 2011 10:56 am

Re: Time to rebalance/reconsider

Post by vanguardabc » Fri Aug 10, 2018 7:56 pm

MotoTrojan wrote:
Fri Aug 10, 2018 7:53 pm
livesoft wrote:
Fri Aug 10, 2018 4:04 pm
It seems to me that you have a great handle on what you have and how you feel as an investor. I don't think you need any advice at all and can just do what you want and you will be just as fine as you would if you got some advice. That is, advice is not going to make any difference to you I think.
Agreed. Since you don’t seem to have a strict rebalancing plan I would put something in place.

Rebalance via tax-advantaged every quarter, half, year. Rebalance bands (5/25 for example). Use new contributions to balance each month. Any combination of these or other systems will at least keep you honest. Also with how much cash you have, do what you can to maximize the yield it’s earning.

Good luck! How old are you by the way? AA isn’t crazy for a risk adverse person with your assets.
I’m 44. What do you mean by AA? (Never mind, I figured it out. :))

MotoTrojan
Posts: 2276
Joined: Wed Feb 01, 2017 8:39 pm

Re: Time to rebalance/reconsider

Post by MotoTrojan » Fri Aug 10, 2018 7:58 pm

vanguardabc wrote:
Fri Aug 10, 2018 7:56 pm
MotoTrojan wrote:
Fri Aug 10, 2018 7:53 pm
livesoft wrote:
Fri Aug 10, 2018 4:04 pm
It seems to me that you have a great handle on what you have and how you feel as an investor. I don't think you need any advice at all and can just do what you want and you will be just as fine as you would if you got some advice. That is, advice is not going to make any difference to you I think.
Agreed. Since you don’t seem to have a strict rebalancing plan I would put something in place.

Rebalance via tax-advantaged every quarter, half, year. Rebalance bands (5/25 for example). Use new contributions to balance each month. Any combination of these or other systems will at least keep you honest. Also with how much cash you have, do what you can to maximize the yield it’s earning.

Good luck! How old are you by the way? AA isn’t crazy for a risk adverse person with your assets.
I’m 44. What do you mean by AA?
Sorry, asset allocation. Not trying to imply you drink too much. At your age 60/40 is reasonable for a risk adverse person. Some people use that their entire life. I wouldn’t be eager to go higher in bonds/cash but nothing wrong with holding here if it feels good.

vanguardabc
Posts: 25
Joined: Thu May 05, 2011 10:56 am

Re: Time to rebalance/reconsider

Post by vanguardabc » Fri Aug 10, 2018 8:00 pm

Incidentally, I just checked, and the expense ratios are either the same or better for my new employer‘s 401(k) than Vanguard’s. Which was the same with my last employer. Kind of surprised – isn’t Vanguard’s whole thing low fees (and index funds, but you know what I mean)? The main difference is that there’s no total stock index fund, so I would have to do an S&P 500 index fund.

ExitStageLeft
Posts: 899
Joined: Sat Jan 20, 2018 4:02 pm

Re: Time to rebalance/reconsider

Post by ExitStageLeft » Fri Aug 10, 2018 8:30 pm

vanguardabc wrote:
Fri Aug 10, 2018 7:50 pm
Re: Your comment about Roth 401(k)s, I’m not sure I understand your point. In a Roth 401(k), aren’t the tax benefits the same as in a Roth IRA? Meaning, all future withdrawals would be tax-free?
The nature of the Roth accounts is the same, correct. But contributing to your Roth 401k means you are contributing less to your tax-deferred 401k. My feeble explanation was an effort to convince you that isn't a good idea when in the 32% or higher tax bracket.

With 32% federal and 5% state, here's what you will pay in taxes now based on how you save a $24k contribution:
  1. $18.5k in 401k and $5.5k in taxable ===> $2,035 in taxes
  2. $18.5k in 401k and $5.5k in Roth IRA via backdoor ===> $2,035 in taxes
  3. $10k in 401k, $8.5k in Roth 401k and $5.5k in Roth IRA via backdoor ===> $5,180 in taxes
  4. $18.5k in Roth 401k and $5.5k in Roth IRA via backdoor ===> $8,880 in taxes
Taxes paid when you retire will likely be at a much lower bracket, and if you relocate may also have a lower state income tax rate. I'm guessing you might be in the 12% or 22% bracket in retirement. If that is the case it pays to defer taxes as much as you can by maximizing the traditional 401k.

The Roth IRA is an excellent way to further save in tax-advantaged space after you have maxed out the traditional 401k. It makes sense because you have already paid taxes on it, as in item (1) but if saved in a Roth account it will grow tax-free.

ExitStageLeft
Posts: 899
Joined: Sat Jan 20, 2018 4:02 pm

Re: Time to rebalance/reconsider

Post by ExitStageLeft » Fri Aug 10, 2018 8:32 pm

vanguardabc wrote:
Fri Aug 10, 2018 8:00 pm
Incidentally, I just checked, and the expense ratios are either the same or better for my new employer‘s 401(k) than Vanguard’s. Which was the same with my last employer. Kind of surprised – isn’t Vanguard’s whole thing low fees (and index funds, but you know what I mean)? The main difference is that there’s no total stock index fund, so I would have to do an S&P 500 index fund.
Your 401k is probably a large enough plan that your company gets institutional shares. That seems to come when 10s of $millions are invested in a single fund.

vanguardabc
Posts: 25
Joined: Thu May 05, 2011 10:56 am

Re: Time to rebalance/reconsider

Post by vanguardabc » Fri Aug 10, 2018 8:49 pm

ExitStageLeft wrote:
Fri Aug 10, 2018 8:30 pm
vanguardabc wrote:
Fri Aug 10, 2018 7:50 pm
Re: Your comment about Roth 401(k)s, I’m not sure I understand your point. In a Roth 401(k), aren’t the tax benefits the same as in a Roth IRA? Meaning, all future withdrawals would be tax-free?
The nature of the Roth accounts is the same, correct. But contributing to your Roth 401k means you are contributing less to your tax-deferred 401k. My feeble explanation was an effort to convince you that isn't a good idea when in the 32% or higher tax bracket.

With 32% federal and 5% state, here's what you will pay in taxes now based on how you save a $24k contribution:
  1. $18.5k in 401k and $5.5k in taxable ===> $2,035 in taxes
  2. $18.5k in 401k and $5.5k in Roth IRA via backdoor ===> $2,035 in taxes
  3. $10k in 401k, $8.5k in Roth 401k and $5.5k in Roth IRA via backdoor ===> $5,180 in taxes
  4. $18.5k in Roth 401k and $5.5k in Roth IRA via backdoor ===> $8,880 in taxes
Taxes paid when you retire will likely be at a much lower bracket, and if you relocate may also have a lower state income tax rate. I'm guessing you might be in the 12% or 22% bracket in retirement. If that is the case it pays to defer taxes as much as you can by maximizing the traditional 401k.

The Roth IRA is an excellent way to further save in tax-advantaged space after you have maxed out the traditional 401k. It makes sense because you have already paid taxes on it, as in item (1) but if saved in a Roth account it will grow tax-free.
This is very helpful, thank you.

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