New member: help with asset allocation and fund selections

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DaMama
Posts: 5
Joined: Wed Aug 08, 2018 7:22 pm

New member: help with asset allocation and fund selections

Post by DaMama » Sun Aug 12, 2018 8:03 am

Hello! I've been lurking, reading, and learning from this forum for a few weeks and am blown away by the community and the spirit of sharing knowledge with others. Thank you!

I could really use some help in reviewing our current portfolio and figuring out what asset allocation is needed to achieve our goal, and then which investment options to choose to rebalance the portfolio. We are good savers but have mostly lucked into a lot of growth as the market has been strong and we have been mostly in equities. Here's our story.

Emergency funds: 4 months’ expenses
Non-retirement assets: House equity of ~$350K; EE bonds maturing in 2021 @$18K; 529 savings @$132K
Debt: Car loan, $5k, 1.5% interest
Tax Filing Status: Married Filing Jointly
Tax Rate: 22% Federal, 5.1% State (earned income); 12% State (capital gains)
State of Residence: MA
Age: 51 and 52
Retirement assets: High six figures, when calculating for tax rate on withdrawal (per David Grabiner’s asset allocation worksheet)
Current asset allocation: 66% stocks/5% international, 7% bonds, 22% cash
Desired asset allocation: 70-75% stocks / 25-30% bonds (but moving over the next ten years toward 60/40)
Desired international allocation: 20-25% of stocks

Goal
To be in a position to retire in 10 years. If we double our money, I think that gets us there. What asset allocation would we need to give ourselves the best chance of reaching our goal? Is 70/30 reasonable without being unnecessarily risky?

Current Retirement Assets:

Taxable
13.33% Cash (currently in savings account -- was a recent inheritance)

His 401k @Fidelity – Current employer
12.20% Fidelity Growth Company Fund Class K (FGCKX) (.75%)
8.87% Baron Small Cap Fund Institutional (BSFIX) (1.05%)
8.02% Fidelity Contrafund Class K (FCNKX) (.65%)
7.54% Fidelity 500 Index Fund Institutional (FXSIX) (.015%)
6.53% Fidelity Mid Cap Index Fund Premium (FSCKX) (.025%)
4.75% Fidelity Small Cap Index Fund Premium (FSSVX) (.025%)
4.01% Fidelity Low Priced Stock Fund Class K (FLPKX) (.58%)
4.45% Morley Stable Value Fund (.55%)
2.16% Fidelity US Bond Fund Institutional (FXSTX) (.025%)
3.44% T. Rowe Price Capital Appreciation Fund (PRWCX) (.71%)
2.87% Fidelity Freedom Fund 2020 Class K (FSNOX) (.54%)
Company match? 50% matching of first 6% of employee contributions

His 401k Past Employer@ Fidelity
4.28% Vanguard Inst. Index (VINIX) (.035) $53K (large cap)
Company match? N/A

Her SEP IRA @ Vanguard
1.13% Vanguard Total Stock Market Index Fund Admiral (VTSAX) (.04%)
Company match? N/A

Her 401K Past Employer @ Fidelity
0.89% Fidelity 500 Index Fund Premium (FUSVX) (.015%)
0.76% Vanguard Real Estate Index Fund Admiral (VGSLX) (.12%)
0.67% Fidelity Small Cap Index Fund Premium (FSSVX) (.025%)
0.66% Fidelity Blue Chip Growth Fund Class K (FBGKX) (.59%)
Company match? N/A

Her 401K Past Employer @ Voya
3.46% Vanguard Extended Market Interest Trust Premium (VIEIX) (.05%)
3.73% Vanguard Institutional Index Trust Admiral (VINIX) (.20)
Company match? N/A

Her Inherited Traditional IRA @UBS
2.56% $32,000 cash
0.53% Victory Floating Rate Fund CL C (Cusip:92647K564) (RSFCX) (1.87%)
0.08% Loomis Sayles Strategic Income Fund Class C NECZX) (1.71%)
0.01% JP Morgan Core Bond Fund Class C (OBOCX) (1.41%)
0.29% John Hancock Bond Fund Class C (JHCBX) (1.59%)
0.30% Fidelity Advisor Floating Rate High Income Fund Class C (FFRCX) (1.745%)
1.5% Victory Incore Low Duration Bond Fund CL C (RLDCX) (1.65%)
0.32% Thornburg Income Builder Class C (TIBCX) (1.93%)
0.15% Blackrock Multi-Asset Income Portfolio Fund Class C (BCICX ) (1.68%)
0.21% AB High Income Fund Class C (AGDCX) (1.56%)

Her Inherited Roth IRA @ Local Bank
0.43% Savings account

Contributions

New Annual Contributions
$24,000 + 3,000 employer match, his 401K

Available Funds

Funds available in his current 401(k)
Fidelity 500 Index Fund Institutional (FXSIX) (.015%)
Fidelity Contrafund Class K (FCNKX) 05/17/1967
Fidelity Growth Company Fund Class K (FGCKX) (.75%)
Vanguard Equity Income Fund Admiral (VEIRX) (.17%)
American Beacon Midcap Value Fund Institutional (AACIX) (.9%)
Artisan Midcap Fund Institutional (APHMX) (.95%)
Fidelity Low-Priced Stock Fund Class K (FLPKX) (.58%)
Fidelity Midcap Index Fund Premium (FSCKX) (.025%)
Wells Fargo Discovery Fund Institutional (WFDSX) (.88%)
American Beacon Small Cap Value Fund Institutional (AVFIX) (.83%)
Baron Small Cap Fund Institutional (BSFIX) (1.05%)
Fidelity Small Cap Index Fund Premium (FSSVX) (.025%)
Fidelity Diversified International K6 Fund (FKIDX) (.6%)
Fidelity Global Ex-US Index Fund Premium (FSGDX) (.06%)
Oppenheimer Developing Markets Fund Class 1 (ODVIX) (.88%)
Vanguard International Value Fund Investor (VTRIX) (.4%)
Third Avenue Real Estate Value Fund Institutional (TAREX) (1.11%)
Fidelity Real Estate Index Fund Institutional (FSRNX) (.07%)
Fidelity Freedom Fund 2020 Class K (FSNOX) (.54%)
Fidelity Freedom Fund 2030 Class K (FSNQX) (.61%)
Fidelity Freedom Fund 2040 Class K (FSNVX) (.65%)
Fidelity Freedom Fund 2050 Class K (FNSBX) (.65%)
Fidelity Freedom Fund 2060 Class K (FNSFX) (.65%)
Fidelity Freedom Income Fund Class K (FNSHX) (.62%)
T. Rowe Price Capital Appreciation Fund (.71%)
Morley Stable Value Fund (.65%)
Fidelity Capital and Income Fund (FAGIX) (.67%)
Fidelity US Bond Index Fund Institutional (FXSTX) (.025%)
Oppenheimer International Bond Fund Class I (OIBIX) (.63%)
Pimco Real Return Fund Institutional (PRRIX) (.88%)
Pimco Total Return Fund Institutional (PTTRX) (.55%)

Funds available in his past employer’s 401(k)
Fidelity Growth Company Comingled Pool (.43%)
Vanguard Windsor II Fund Admiral (VWNAX) ( .26%)
Vanguard Institutional Index Fund Institutional (VINIX) (.035)
Artisan Midcap Growth Trust Institutional (.85%)
JPM Midcap Value Fund Class L (FLMVX) (.86%)
Vanguard Extended Market Index Fund Institutional (VIEIX) (.06%)
Vanguard Explorer Fund Admiral (VEXRX) (.32%)
American Funds EuroPacific Growth Fund Class R6 (RERGX) (.49%)
Vanguard Total International Stock Fund Institutional (VTSNX) (.09%)
Vanguard Target Retirement 2015 Trust II (.08%)
Vanguard Target Retirement 2020 Trust II (.08%)
Vanguard Target Retirement 2025 Trust II (.08%)
Vanguard Target Retirement 2030 Trust II (.08%)
Vanguard Target Retirement 2035 Trust II (.08%)
Vanguard Target Retirement 2040 Trust II (.08%)
Vanguard Target Retirement 2045 Trust II (.08%)
Vanguard Target Retirement 2050 Trust II (.08%)
Vanguard Target Retirement 2055 Trust II (.08%)
Vanguard Target Retirement 2060 Trust II (.08%)
Vanguard Target Retirement 2065 Trust II (.08%)
Vanguard Target Retirement Income Trust II (.08%)
Vanguard Total Bond Market Fund Institutional (VBTIX) (.04%)
Vanguard Inflation-Protected Securities Institutional (VIPIX) (.07%)
Fidelity Investments Money Market Treasury Only Institutional (FRSXX) (.18%)

Funds available in her past employer 401K @Fidelity
Fidelity® 500 Index Fund Premium Class (FUSVX) (.015%)
Fidelity Blue Chip Growth Fund Class K (FBGKX) (.59%)
John Hancock Funds Disciplined Value Fund Class I (JVLIX) (.81%)
Fidelity Mid Cap Index Fund Premium Class (FSCKX) (.025%)
MFS® Mid Cap Value Fund Class R4 (MVCJX) (.86%)
Wells Fargo Discovery Fund Class R6 (WFDRX) (.78%)
American Beacon Small Cap Value Fund Class Institutional (AVFIX) (.83%)
Fidelity® Small Cap Index Fund Premium Class (FSSVX) (.025%)
Fidelity® Small Cap Growth K6 Fund FOCSX (.60%)
American Funds New World Fund® Class R-6 (RNWGX) (.64%)
MFS® International Value Fund Class R4 (MINHX) (.76%)
Oppenheimer International Growth Fund Class I (OIGIX) (.69%)
Vanguard Real Estate Index Fund Admiral Shares (VGSLX) (.62%)
Vanguard Target Retirement 2015 Fund Investor Shares (VTXVX) (.13%)
Vanguard Target Retirement 2020 Fund Investor Shares (VTWNX) (.13%)
Vanguard Target Retirement 2025 Fund Investor Shares (VTTVX) (.14%)
Vanguard Target Retirement 2030 Fund Investor Shares (VTHRX) (.14%)
Vanguard Target Retirement 2035 Fund Investor Shares (VTTHX) (.14%)
Vanguard Target Retirement 2040 Fund Investor Shares (VFORX) (.15%)
Vanguard Target Retirement 2045 Fund Investor Shares (VTIVX) (.15%)
Vanguard Target Retirement 2050 Fund Investor Shares (VFIFX) (.15%)
Vanguard Target Retirement 2055 Fund Investor Shares (VFFVX) (.15%)
Vanguard Target Retirement 2060 Fund Investor Shares (VTTSX) (.15%)
Vanguard Target Retirement 2065 Fund Investor Shares (VLXVX) (.15%)
Vanguard Target Retirement Income Fund Investor Shares (VTINX) (.13%)
BlackRock High Yield Bond Portfolio Institutional Shares (BHYIX) (.63%)
Merganser Short-Term Bond Institutional Trust R1 (.40%)
Metropolitan West Total Return Bond Fund Class I (MWTIX) (.45%)
PIMCO Real Return Fund Institutional Class (PRRIX) (.88%)
Vanguard Federal Money Market Fund Investor Shares (VMFXX) (.11%)

Funds Available in her past employer 401K @Voya:
LifePath Index Retirement NL Fund M (.90%)
LifePath Index 2020 NL Fund M (.90%)
LifePath Index 2025 NL Fund M (.90%)
LifePath Index 2030 NL Fund M (.90%)
LifePath Index 2035 NL Fund M (.90%)
LifePath Index 2040 NL Fund M (.90%)
LifePath Index 2045 NL Fund M (.90%)
LifePath Index 2050 NL Fund M (.90%)
LifePath Index 2055 NL Fund M (.90%)
LifePath Index 2060 NL Fund M (.90%)
Wells Fargo Govt Money Market Fund (WFFXX) (1.6%)
Vanguard Total Bond Market Index Fund Institutional (VBMPX)(.30%)
Vanguard Short Term Bond Index Fund Institutional (VBITX) (.50%)
Dodge & Cox Income Fund (DODIX) (.43%)
State Street Real Asset Fund; Class A (.50%)
Vanguard Institutional Index Trust (.20%)
T. Rowe Price Blue Chip Growth Separate Account (.37%)
MFS Large Cap Value Separate Account (.42%)
Wellington SMID Research Equity Fund (.80%)
Vanguard Extended Market Index Trust (.50%)
Vanguard Total International Stock Market Index Trust (.70%)
American Funds EuroPacific Growth Fund (RERGX) (.50%)

Her beneficiary IRA @UBS
I’d like to move these funds out of UBS.

Her SEP IRA
Currently at Vanguard.

Questions
1. I need help getting the allocation set up properly -- choosing particular funds but also with understanding how it all works together and how to keep it simple, overall.

2. We are finally going to begin making Roth contributions. We will start this year but may need to stop for the following four years if our son goes away to college. A second son is taking a break from college and could also choose to go back in the next year or two. So, for now, I didn’t add Roth contributions to our list of annual contributions above. However, we would welcome recommendations for where to put that money.

3. I’m freelancing right now and will make about $13-15K this year from that. If I open a solo 401K, I can put all of those earnings in there pre-tax. Pros/cons of solo 401Ks? It looks like Vanguard and Schwab, at least, have very low administration fees. (Unless I’m missing something.) If my kid goes to college next year, pretty much all of my earnings will go toward that expense for the next 4 years. Is it worth it to open a 401K for what might be one year followed by a few years of no contributions?

4. I need help understanding whether it’s a good idea move my old 401Ks to IRAs and then to Roth IRAs. (Or can you convert directly from a 401K to a Roth?) We are just so heavily weighted toward pre-tax savings. We are at the 22% federal tax bracket this year, but I am not working full-time. If I go back to full-time next year, we will likely go up a tax bracket. If instead we wait to do Roth conversion starting about 10 years from now, to potentially be in a lower tax bracket after retiring, will we have enough time to move “enough” money to Roth before RMDs start? Is there a benefit to being in Roths sooner and paying potentially higher tax rate on fewer dollars vs. waiting until later and paying a lower tax rate on more dollars? Is there a percentage of a portfolio recommended to be in Roth vs. pre-tax IRAs and 401Ks?

5. The inherited IRA and Roth are from my mother, who passed away last year. I have to take RMDs each year from these. Should they be considered separate from the rest of our retirement savings, with a strategy of their own for maximizing the opportunity to stretch them out over my lifetime? Or should we just keep them lumped in with the rest of the portfolio, from a strategy and portfolio balance standpoint?

Thank you for your time!
Slouching toward retirement.

ExitStageLeft
Posts: 799
Joined: Sat Jan 20, 2018 4:02 pm

Re: New member: help with asset allocation and fund selections

Post by ExitStageLeft » Sun Aug 12, 2018 12:07 pm

Welcome to the forum! You're well on your way to reaching your retirement goals. Hopefully we can help you simplify, reduce your fees, and increase your chances. I have a few thoughts on your five questions...

1. On asset allocation you are the ones that can best decide how much risk you can live with. A 70/30 portfolio is very reasonable albeit a little more equity-rich than money would prefer given your desire to retire in 10 years. I think Bogleheads tend to err on the side of recommending a more conservative allocation. The Vanguard 2030 target date fund VTHRX currently has a 30% bond allocation and is on a glide path to have 50% in bonds at the target date.

2. Roth IRA contributions would be a great idea. Because it is tax-advantaged you don't really have to worry about tax-efficiency so any mutual fund would work fine. You will do yourself a small favor though if you place the higher-earning assets in Roth accounts so that the funds yielding the most growth are in accounts where you won't pay any more taxes.

3. I would definitely explore the feasibility of a solo 401k. There is an increased paperwork burden in that it requires regular filings with the IRS that the SEP and SIMPLE IRAs do not. But it will give you a much greater space to save tax-deferred. It also could be a vehicle to roll in other accounts.

4. Your #4 question is really two questions: a) should you roll over old 401k accounts, and b) should you do Roth conversions? The answer to a) is usually yes when the fees with the old 401k are too high. That isn't the case for most of the past 401ks as they have excellent low-fee index funds available. The exception is Her past 401k at Voya. The selection of index funds is poor and the fees are high. I would roll it into an IRA or a new 401k.

The answer to b) is probably yes, maybe, but it depends. You'll want to pay income tax when it is most advantageous to you. To know whether that is now or in the future depends greatly on what your income sources will be in retirement. If neither of you will be receiving a pension then your income will come from your portfolio and from social security. If you follow the typical strategy of delaying social security until age 70 then you will have about 8 years when your income is entirely from your portfolio. During that 8-year window your income tax rate will probably be 12% and it will be an excellent time to convert some of your tax-deferred assets to Roth.

5. I would lump the inherited IRAs into the overall portfolio. You have control over the assets and you have to take the RMDs, so you might as well work them into the rest of your plan.


Okay, now for an in-depth look at your portfolio. Here is a comparison of your current compared to a three-fund lazy portfolio.
https://www.portfoliovisualizer.com/bac ... ion34_2=30

If you scroll down to the Exposures tab in that Portfolio Visualizer link you can get a good sense of where you are currently and where you would be with a three-fund portfolio. You currently tilted heavily to small and mid cap stocks, and your fixed income holdings are of a low quality. But the thing that will eat your lunch in the long run are the high fund expenses. If you move towards a total-market portfolio built on low-cost index funds you will increase your diversification significantly.

I recommend a three-fund portfolio with a 70/30 allocation and 35% of stocks in international markets. That would net you:
  • 45% US Stocks
  • 25% International Stocks
  • 30% US Bonds
The three-fund portfolio is potent yet deceptive in its simplicity. Here is a backtest of such a portfolio using Vanguard funds: https://www.portfoliovisualizer.com/bac ... tion3_1=30

The success lies in the selection of total market index funds. You can get that with your individual accounts at Vanguard, Fidelity, etc because you can choose from their entire selection of funds. Not all retirement plans offer total stock market funds so one has to approximate it by buying a S&P 500 index fund and also a completion fund for small cap or mid cap exposure.

I hope to follow up with a simplified portfolio to show you just how elegant the three-fund concept can be. But my honey-do list is calling so that will have to be another time. Again, welcome to the forum.

retiredjg
Posts: 33521
Joined: Thu Jan 10, 2008 12:56 pm

Re: New member: help with asset allocation and fund selections

Post by retiredjg » Sun Aug 12, 2018 12:19 pm

Welcome to the forum!

First a big "thank you" for posting your information in the format we use to help people with their portfolio questions. Following the format makes it much easier to help you. It is possible many people with jump in with suggestions.

1. I need help getting the allocation set up properly -- choosing particular funds but also with understanding how it all works together and how to keep it simple, overall.
No problem. Your portfolio could use considerable simplification. You have more accounts than needed and many more funds than needed in several of the accounts. Once simplified, I think you'll see how it all works together if you already understand the "3 fund portfolio" concept. Do you?

2. We are finally going to begin making Roth contributions. We will start this year but may need to stop for the following four years if our son goes away to college. A second son is taking a break from college and could also choose to go back in the next year or two. So, for now, I didn’t add Roth contributions to our list of annual contributions above. However, we would welcome recommendations for where to put that money.

3. I’m freelancing right now and will make about $13-15K this year from that. If I open a solo 401K, I can put all of those earnings in there pre-tax. Pros/cons of solo 401Ks? It looks like Vanguard and Schwab, at least, have very low administration fees. (Unless I’m missing something.) If my kid goes to college next year, pretty much all of my earnings will go toward that expense for the next 4 years. Is it worth it to open a 401K for what might be one year followed by a few years of no contributions?
I would put any extra money into Roth IRAs instead of a Solo 401k. First, you want to get your Roth IRAs 5 tax year clock started and now is as good a time as any. Second, if the money is needed for college, you can withdraw your contributions (not earnings) to Roth IRA any time for any reason.

If you meant you will contribute to Roth IRAs and a Solo 401k both, I don't see a problem opening the Solo 401k even if you don't make contributions each year. This assumes the start up and annual fees are low or $0.

4. I need help understanding whether it’s a good idea move my old 401Ks to IRAs and then to Roth IRAs. (Or can you convert directly from a 401K to a Roth?)
Yes, you can go from 401k to Roth IRA.

We are just so heavily weighted toward pre-tax savings.
Yes, you are. In fact, in this lower 22% bracket, it might be more important to put more into Roth IRA and maybe a little less into his 401k.

We are at the 22% federal tax bracket this year, but I am not working full-time. If I go back to full-time next year, we will likely go up a tax bracket.
Will your income go high enough that you won't be able to contribute directly to Roth IRA?

If instead we wait to do Roth conversion starting about 10 years from now, to potentially be in a lower tax bracket after retiring, will we have enough time to move “enough” money to Roth before RMDs start?
You don't need to convert all of it. In fact, it is best to have some left in traditional because that money can sometimes never be taxed if used for medical bills.

Is there a benefit to being in Roths sooner and paying potentially higher tax rate on fewer dollars vs. waiting until later and paying a lower tax rate on more dollars?
Very good question. In general, if the tax rate is the same now as later, there is no benefit. If you feel you will drop into the lower 15% (now 12%) in retirement, better to wait.

Is there a percentage of a portfolio recommended to be in Roth vs. pre-tax IRAs and 401Ks?
There is no one recommendation although I think most agree that having money in each is a good thing. I kind of like about 1/3 to 1/5 Roth but that is simply personal preference.

5. The inherited IRA and Roth are from my mother, who passed away last year. I have to take RMDs each year from these. Should they be considered separate from the rest of our retirement savings, with a strategy of their own for maximizing the opportunity to stretch them out over my lifetime? Or should we just keep them lumped in with the rest of the portfolio, from a strategy and portfolio balance standpoint?
I don't see any reason to treat them separately with their own strategy. I'd fill the IRA with 1 bond fund and forget it. Not sure yet what I'd put in the Roth IRA - depends on how the rest of the portfolio falls together.

Beehave
Posts: 327
Joined: Mon Jun 19, 2017 12:46 pm

Re: New member: help with asset allocation and fund selections

Post by Beehave » Sun Aug 12, 2018 1:41 pm

Regarding moving funds from 401k to IRA, please be aware that 401k funds have federal law protections from lawsuits that IRAs do not. IRAs depend on state law.

I took a quick look at Massachusetts to see the level of protection. What I saw in a very cursory look-see was not encouraging:

https://www.irahelp.com/forum-post/2719 ... sachusetts

This info is from 2017 and from one website I just happened on so there's no way I can say it is definitive. But this is an avenue well-worth your exploring before moving money out of your 401K plans.

Best wishes.

DaMama
Posts: 5
Joined: Wed Aug 08, 2018 7:22 pm

Re: New member: help with asset allocation and fund selections

Post by DaMama » Sun Aug 12, 2018 4:05 pm

ExitStageLeft wrote:
Sun Aug 12, 2018 12:07 pm
Welcome to the forum! You're well on your way to reaching your retirement goals. Hopefully we can help you simplify, reduce your fees, and increase your chances. I have a few thoughts on your five questions...

Thank you!

1. On asset allocation you are the ones that can best decide how much risk you can live with. A 70/30 portfolio is very reasonable albeit a little more equity-rich than money would prefer given your desire to retire in 10 years. I think Bogleheads tend to err on the side of recommending a more conservative allocation. The Vanguard 2030 target date fund VTHRX currently has a 30% bond allocation and is on a glide path to have 50% in bonds at the target date.

I guess my issue is that I don't fully understand how risky a 70/30 is or how much less risky a 60/40 is than a 70/30.

2. Roth IRA contributions would be a great idea. Because it is tax-advantaged you don't really have to worry about tax-efficiency so any mutual fund would work fine. You will do yourself a small favor though if you place the higher-earning assets in Roth accounts so that the funds yielding the most growth are in accounts where you won't pay any more taxes.

I hadn't thought of that, but it makes perfect sense.

3. I would definitely explore the feasibility of a solo 401k. There is an increased paperwork burden in that it requires regular filings with the IRS that the SEP and SIMPLE IRAs do not. But it will give you a much greater space to save tax-deferred. It also could be a vehicle to roll in other accounts.

That's true. And I won't ever make enough as a freelancer to make an SEP the better choice. I didn't realize this years ago when I set up my SEP when I first freelanced.

4. Your #4 question is really two questions: a) should you roll over old 401k accounts, and b) should you do Roth conversions? The answer to a) is usually yes when the fees with the old 401k are too high. That isn't the case for most of the past 401ks as they have excellent low-fee index funds available. The exception is Her past 401k at Voya. The selection of index funds is poor and the fees are high. I would roll it into an IRA or a new 401k.

Until your answer to #3, I wasn't sure that I could combine self-employment retirement savings with other 401K and IRA savings. Thank you.

The answer to b) is probably yes, maybe, but it depends. You'll want to pay income tax when it is most advantageous to you. To know whether that is now or in the future depends greatly on what your income sources will be in retirement. If neither of you will be receiving a pension then your income will come from your portfolio and from social security. If you follow the typical strategy of delaying social security until age 70 then you will have about 8 years when your income is entirely from your portfolio. During that 8-year window your income tax rate will probably be 12% and it will be an excellent time to convert some of your tax-deferred assets to Roth.

Neither of us has a pension, so our retirement income will come entirely from SS and our portfolio. My concern is that if the pre-tax retirement is the vast majority of our portfolio that the RMDs could push us past the 12% bracket. I suppose it would be unlikely to push us higher than where we are now, although I don't really know. Is there a tool for checking anticipated RMDs? (I realize the tax brackets could always change.)

5. I would lump the inherited IRAs into the overall portfolio. You have control over the assets and you have to take the RMDs, so you might as well work them into the rest of your plan.

Thank you. Should I anticipate that these funds won't grow a whole lot over time because of the RMDs?

Okay, now for an in-depth look at your portfolio. Here is a comparison of your current compared to a three-fund lazy portfolio.
https://www.portfoliovisualizer.com/bac ... ion34_2=30

If you scroll down to the Exposures tab in that Portfolio Visualizer link you can get a good sense of where you are currently and where you would be with a three-fund portfolio. You currently tilted heavily to small and mid cap stocks, and your fixed income holdings are of a low quality. But the thing that will eat your lunch in the long run are the high fund expenses. If you move towards a total-market portfolio built on low-cost index funds you will increase your diversification significantly.

Thank you. I'm just starting to dig in to and trying to understand the Portfolio Visualizer results.

I recommend a three-fund portfolio with a 70/30 allocation and 35% of stocks in international markets. That would net you:
  • 45% US Stocks
  • 25% International Stocks
  • 30% US Bonds
The three-fund portfolio is potent yet deceptive in its simplicity. Here is a backtest of such a portfolio using Vanguard funds: https://www.portfoliovisualizer.com/bac ... tion3_1=30

The success lies in the selection of total market index funds. You can get that with your individual accounts at Vanguard, Fidelity, etc because you can choose from their entire selection of funds. Not all retirement plans offer total stock market funds so one has to approximate it by buying a S&P 500 index fund and also a completion fund for small cap or mid cap exposure.

I hope to follow up with a simplified portfolio to show you just how elegant the three-fund concept can be. But my honey-do list is calling so that will have to be another time. Again, welcome to the forum.

Thank you so much!
Slouching toward retirement.

DaMama
Posts: 5
Joined: Wed Aug 08, 2018 7:22 pm

Re: New member: help with asset allocation and fund selections

Post by DaMama » Sun Aug 12, 2018 4:38 pm

Welcome to the forum!

First a big "thank you" for posting your information in the format we use to help people with their portfolio questions. Following the format makes it much easier to help you. It is possible many people with jump in with suggestions.
Thank you. When I saw the format and all the information needed, I was a little worried that I'd never get it figured out. But I dug in and found all the info, and it was incredibly illuminating. Now I have it in a spreadsheet so I can just update it as I implement changes to the portfolio. So in retrospect, I'm glad you ask for all this info.

1. I need help getting the allocation set up properly -- choosing particular funds but also with understanding how it all works together and how to keep it simple, overall.
No problem. Your portfolio could use considerable simplification. You have more accounts than needed and many more funds than needed in several of the accounts. Once simplified, I think you'll see how it all works together if you already understand the "3 fund portfolio" concept. Do you?

As much as a newbie can. My understanding: You split your portfolio across three index funds that cover domestic stocks, international stocks, and bonds. The index funds have low fees and provide exposure to thousands of individual stocks and bonds.
2. We are finally going to begin making Roth contributions. We will start this year but may need to stop for the following four years if our son goes away to college. A second son is taking a break from college and could also choose to go back in the next year or two. So, for now, I didn’t add Roth contributions to our list of annual contributions above. However, we would welcome recommendations for where to put that money.

3. I’m freelancing right now and will make about $13-15K this year from that. If I open a solo 401K, I can put all of those earnings in there pre-tax. Pros/cons of solo 401Ks? It looks like Vanguard and Schwab, at least, have very low administration fees. (Unless I’m missing something.) If my kid goes to college next year, pretty much all of my earnings will go toward that expense for the next 4 years. Is it worth it to open a 401K for what might be one year followed by a few years of no contributions?
I would put any extra money into Roth IRAs instead of a Solo 401k. First, you want to get your Roth IRAs 5 tax year clock started and now is as good a time as any. Second, if the money is needed for college, you can withdraw your contributions (not earnings) to Roth IRA any time for any reason.

If you meant you will contribute to Roth IRAs and a Solo 401k both, I don't see a problem opening the Solo 401k even if you don't make contributions each year. This assumes the start up and annual fees are low or $0.

We can do both this year. So I will prioritize maxing out the Roths -- I hadn't thought about being able to use the principal for college if we need it -- and then add the solo 401K, if possible.
We are just so heavily weighted toward pre-tax savings.
Yes, you are. In fact, in this lower 22% bracket, it might be more important to put more into Roth IRA and maybe a little less into his 401k.

I hadn't thought about doing that. We've just programmed ourselves to max out the pre-tax option, but now we may be too heavily weighted in that area.
We are at the 22% federal tax bracket this year, but I am not working full-time. If I go back to full-time next year, we will likely go up a tax bracket.
Will your income go high enough that you won't be able to contribute directly to Roth IRA?

Luckily, I don't have that kind of earning power. :happy
Is there a benefit to being in Roths sooner and paying potentially higher tax rate on fewer dollars vs. waiting until later and paying a lower tax rate on more dollars?
Very good question. In general, if the tax rate is the same now as later, there is no benefit. If you feel you will drop into the lower 15% (now 12%) in retirement, better to wait.

I think I need to do some projections of what our RMDs would be to see what tax bracket we might be looking at.
Is there a percentage of a portfolio recommended to be in Roth vs. pre-tax IRAs and 401Ks?
There is no one recommendation although I think most agree that having money in each is a good thing. I kind of like about 1/3 to 1/5 Roth but that is simply personal preference.

Thank you for that example.
5. The inherited IRA and Roth are from my mother, who passed away last year. I have to take RMDs each year from these. Should they be considered separate from the rest of our retirement savings, with a strategy of their own for maximizing the opportunity to stretch them out over my lifetime? Or should we just keep them lumped in with the rest of the portfolio, from a strategy and portfolio balance standpoint?
I don't see any reason to treat them separately with their own strategy. I'd fill the IRA with 1 bond fund and forget it. Not sure yet what I'd put in the Roth IRA - depends on how the rest of the portfolio falls together.

Thank you for your help!
Slouching toward retirement.

DaMama
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Joined: Wed Aug 08, 2018 7:22 pm

Re: New member: help with asset allocation and fund selections

Post by DaMama » Sun Aug 12, 2018 5:06 pm

Beehave wrote:
Sun Aug 12, 2018 1:41 pm
Regarding moving funds from 401k to IRA, please be aware that 401k funds have federal law protections from lawsuits that IRAs do not. IRAs depend on state law.

I took a quick look at Massachusetts to see the level of protection. What I saw in a very cursory look-see was not encouraging:

https://www.irahelp.com/forum-post/2719 ... sachusetts

This info is from 2017 and from one website I just happened on so there's no way I can say it is definitive. But this is an avenue well-worth your exploring before moving money out of your 401K plans.

Best wishes.
I did not realize that. I will check with my estate attorney. Thank you!
Slouching toward retirement.

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Duckie
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Re: New member: help with asset allocation and fund selections

Post by Duckie » Sun Aug 12, 2018 6:39 pm

DaMama wrote:Her 401K Past Employer @ Voya
3.46% Vanguard Extended Market Interest Trust Premium (VIEIX) (.05%)
<snip>
Funds Available in her past employer 401K @Voya:
Vanguard Extended Market Index Trust (.50%)
Which is it, 0.05% or 0.50%?
Funds available in his current 401(k)
The best options are:
  • Fidelity 500 Index (FXSIX) (.015%) -- Large caps, 80% of US stocks
  • Fidelity Midcap Index (FSCKX) (.025%) -- Mid caps, 6% of US stocks
  • Fidelity Small Cap Index (FSSVX) (.025%) -- Small caps, 14% of US stocks
  • Fidelity Global Ex-US Index (FSGDX) (.06%) -- Almost complete international stocks
  • Fidelity US Bond Index (FXSTX) (.025%) -- US bonds
Funds available in his past employer’s 401(k)
The best options are:
  • Vanguard Institutional Index (VINIX) (.035%) -- Large caps, 80% of US stocks
  • Vanguard Extended Market Index (VIEIX) (.06%) -- Mid/small caps, 20% of US stocks
  • Vanguard Total International Stock Index (VTSNX) (.09%) -- Complete international stocks
  • Vanguard Total Bond Market Index (VBTIX) (.04%) -- US bonds
  • Or the Vanguard Target Retirement fund that meets your AA (0.08%)
Funds available in her past employer 401K @Fidelity
The best options are:
  • Fidelity 500 Index (FUSVX) (.015%)
  • Fidelity Mid Cap Index (FSCKX) (.025%)
  • Fidelity Small Cap Index (FSSVX) (.025%)
  • Or the Vanguard Target Retirement fund that meets your AA (.14%)
Funds Available in her past employer 401K @Voya:
The best options are:
  • Vanguard Institutional Index (.20%)
  • Vanguard Total Bond Market Index (VBMPX) (.30%)
Can this be rolled into her current SEP IRA?
Her beneficiary IRA @UBS
I’d like to move these funds out of UBS.
Absolutely move the inherited IRA out of UBS.
I need help getting the allocation set up properly -- choosing particular funds but also with understanding how it all works together and how to keep it simple, overall.
See below.
We are finally going to begin making Roth contributions. We will start this year but may need to stop for the following four years if our son goes away to college. A second son is taking a break from college and could also choose to go back in the next year or two. So, for now, I didn’t add Roth contributions to our list of annual contributions above. However, we would welcome recommendations for where to put that money.
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. So put a total US stock index fund and/or a total international index fund in the Roth IRAs.
I’m freelancing right now and will make about $13-15K this year from that. If I open a solo 401K, I can put all of those earnings in there pre-tax. Pros/cons of solo 401Ks? It looks like Vanguard and Schwab, at least, have very low administration fees. (Unless I’m missing something.) If my kid goes to college next year, pretty much all of my earnings will go toward that expense for the next 4 years. Is it worth it to open a 401K for what might be one year followed by a few years of no contributions?
Yes, it's worth it. It appears you are the one with the SEP IRA. You could open a solo 401k at Fidelity and roll the SEP IRA into it. (Vanguard's solo 401k does not take rollovers from IRAs.) You could also roll your old Voya and Fidelity 401k assets into it. Combining accounts simplifies things. And Fidelity has some excellent low-cost index funds. Or if you want the ability to have a Roth solo 401k then you could go to TDAmeritrade.
I need help understanding whether it’s a good idea move my old 401Ks to IRAs and then to Roth IRAs. (Or can you convert directly from a 401K to a Roth?)
You can convert directly.
The inherited IRA and Roth are from my mother, who passed away last year. I have to take RMDs each year from these. Should they be considered separate from the rest of our retirement savings, with a strategy of their own for maximizing the opportunity to stretch them out over my lifetime? Or should we just keep them lumped in with the rest of the portfolio, from a strategy and portfolio balance standpoint?
They are part of the portfolio, don't keep them separate when figuring your AA and rebalancing.

----------------------------

The following example has an AA of 70% stocks, 30% bonds, with 25% of stocks in international. That breaks down to 52% US stocks, 18% international stocks, and 30% bonds. You could have:

Taxable at Fidelity -- 13%
13% (FSTVX) Fidelity Total Market Index Fund Premium Class (0.015%)

His 401k at Fidelity -- 69% <-- Includes rollover from his old Fidelity 401k.
31% (FXSIX) Fidelity 500 Index Fund Institutional Class (0.015%)
7% (FSSVX) Fidelity Small Cap Index Fund Premium Class (0.025%) <-- This could be skipped.
7% (FSGDX) Fidelity Global ex U.S. Index Fund Premium Class (0.06%)
24% (FXSTX) Fidelity U.S. Bond Index Fund Institutional Class (0.025%)

Her Self-Employed 401k at Fidelity -- 11% <-- Includes rollover from her SEP IRA, her old Fidelity 401k, & her old Voya 401k.
11% (FTIPX) Fidelity Total International Index Fund Premium Class (0.06%)

Her Inherited Traditional IRA at Fidelity -- 6%
6% (FSITX) Fidelity U.S. Bond Index Fund Premium Class (0.025%)

Her Inherited Roth IRA at Fidelity -- <1%
<1% (FSTVX) Fidelity Total Market Index Fund Premium Class (0.015%)

Something to think about.
Last edited by Duckie on Mon Aug 13, 2018 4:37 pm, edited 1 time in total.

ExitStageLeft
Posts: 799
Joined: Sat Jan 20, 2018 4:02 pm

Re: New member: help with asset allocation and fund selections

Post by ExitStageLeft » Mon Aug 13, 2018 12:38 pm

DaMama wrote:
Sun Aug 12, 2018 4:05 pm
I guess my issue is that I don't fully understand how risky a 70/30 is or how much less risky a 60/40 is than a 70/30.
There's a lot more to it than picking a ratio such as 70/30 or 60/40. The nature of your bond holdings will greatly affect how your portfolio responds to major market shifts. Here is a Portfolio Visualizer (PV) link to three bond funds, two in your current portfolio and the Vanguard total bond fund VBTLX.

In the PV Summary it shows the returns for the last 16 years and nicely captures the 2008 recession. Compare how JP Morgan bond fund OBOCX remains fairly steady while the John Hancock bond fund JHCBX plunged about 15%. Consider which of these bonds funds you would rather have as a backstop in a bear market.

The indicator that I like to look at in comparing bond funds is the rightmost column in the Results table, showing correlation with the US stock market. A correlation of zero means two time series are completely independent. A positive correlation means that the two time series tend to go up and down together. A negative correlation means the time series move in opposite directions, thus a bond fund with a negative correlation is not likely to decrease in value when the market plunges, and may actually increase. That is what I look for in a bond fund. The OBOCX fund, at first look, delivers much of what I want in a bond fund. It's a shame it has such a high expense ratio. The Vanguard VBTLX fund is very similar in stability and performance but it has expenses that are 1/28 as much.

DaMama
Posts: 5
Joined: Wed Aug 08, 2018 7:22 pm

Re: New member: help with asset allocation and fund selections

Post by DaMama » Tue Aug 14, 2018 7:24 pm

ExitStageLeft wrote:
Mon Aug 13, 2018 12:38 pm
DaMama wrote:
Sun Aug 12, 2018 4:05 pm
I guess my issue is that I don't fully understand how risky a 70/30 is or how much less risky a 60/40 is than a 70/30.
There's a lot more to it than picking a ratio such as 70/30 or 60/40. The nature of your bond holdings will greatly affect how your portfolio responds to major market shifts. Here is a Portfolio Visualizer (PV) link to three bond funds, two in your current portfolio and the Vanguard total bond fund VBTLX.

In the PV Summary it shows the returns for the last 16 years and nicely captures the 2008 recession. Compare how JP Morgan bond fund OBOCX remains fairly steady while the John Hancock bond fund JHCBX plunged about 15%. Consider which of these bonds funds you would rather have as a backstop in a bear market.

The indicator that I like to look at in comparing bond funds is the rightmost column in the Results table, showing correlation with the US stock market. A correlation of zero means two time series are completely independent. A positive correlation means that the two time series tend to go up and down together. A negative correlation means the time series move in opposite directions, thus a bond fund with a negative correlation is not likely to decrease in value when the market plunges, and may actually increase. That is what I look for in a bond fund. The OBOCX fund, at first look, delivers much of what I want in a bond fund. It's a shame it has such a high expense ratio. The Vanguard VBTLX fund is very similar in stability and performance but it has expenses that are 1/28 as much.
Thank you -- this is fascinating.

I have printed out all the replies to my post, as well as the wiki page "Asset allocation in multiple accounts," so I can really focus and read more closely. I'll come back in a few days with a proposed plan for moving forward based on all the feedback I've received thus far.
Slouching toward retirement.

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