Bond Allocation in 401(k) / Check-in

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Columbia1996
Posts: 1
Joined: Sat Feb 09, 2019 9:24 pm

Bond Allocation in 401(k) / Check-in

Post by Columbia1996 » Sat Feb 09, 2019 10:15 pm

Good evening, all.

I have been lurking on this forum off and on for a decade and have learned a great deal from the folks who post here. Thanks to all of you who have shared your wisdom over the years.

I am writing this evening with a question regarding how to handle the bond allocation in my portfolio. Any general suggestions on our investment approach (especially thinks we may be missing) would also be much appreciated.

Background:

My spouse and I are both in our early 30s. We file taxes jointly and are in the 35% tax bracket.

We each presently have the entirety of our 401(k)s invested in the VANG INST TR 2045 (VITRLX). Our only investment accounts outside our 401(k)s are VTSAX (65%) and VTIAX (35%).

Our target investment asset allocation is 90% stocks and 10% bonds. We like the idea of a "lazy" three fund portfolio.

Problem:

Over the past few years, our monthly taxable investments have dwarfed our 401(k) contributions. As a result, we have deviated substantially from our target allocation. We are trying to determine how to rectify this in the most tax efficient manner.

Considerations:

Based in large parts of insights gleaned from this forum, we do not wish to add a bond fund to our taxable portfolio. If folks think we should consider muni funds, happy to entertain the idea, but the general consensus here seems to be that it is not advisable to have fixed income in taxable in the higher tax brackets.

We have also learned from this forum to think about our entire household portfolio (taxable, 401(k)s, cash, etc.) as one portfolio, and to think about this broader portfolio in adjusting our asset allocation (as opposed to trying to maintain a set asset allocation in both taxable and non-taxable).

Potential Solution:

Our potential solution is to divert 100% of our future 401(k) contributions into "fixed income" investments.

The only bond funds available are the following:

a)TRP STABLE VALUE A (0.30% Expense Ratio)
b) PIMCO Income Fund Institutional Class (PIMIX) (0.74% Expense Ratio)
c) Western Asset Core Plus Bond CIT Unit Class 4 (0.25% Expense Ratio)
d) Vanguard Inflation-Protected Securities Fund Admiral Shares (VITWX) (0.1% Expense Ratio)

We also have available the following bond heavy target date fund:

a) Vanguard Institutional Target Retirement 2020 Fund Institutional Shares (Exp Ratio (0.09%) (Vanguard Total Stock Market Ix I, 31.80%; Vanguard Total Bond Market II Indx Iv., 29.14%, Vanguard Total Intl Stock Index Inv., 20.76%, Vanguard Total Intl Bd Idx Admiral, 12.46% and Vanguard Shrt-Term Infl-Prot Sec Idx Adm, 5.84%)

How would the Boglehead community proceed with these options? It seems to me that none of the options align well the Boglehead philosophy. I am toying with splitting future allocation between PIMIX and the 2020 target date fund, but don't have a good rationale for this decision.

Once we figure out our go-forward allocation, we will re-balance our 401(k)s among the identified funds to hit our target asset allocations.

Thanks in advance for any input.

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Duckie
Posts: 6276
Joined: Thu Mar 08, 2007 2:55 pm

Re: Bond Allocation in 401(k) / Check-in

Post by Duckie » Sun Feb 10, 2019 7:00 pm

Columbia1996, welcome to the forum.
Columbia1996 wrote:Over the past few years, our monthly taxable investments have dwarfed our 401(k) contributions. As a result, we have deviated substantially from our target allocation. We are trying to determine how to rectify this in the most tax efficient manner.
<snip>
The only bond funds available are the following:

a)TRP STABLE VALUE A (0.30% Expense Ratio)
b) PIMCO Income Fund Institutional Class (PIMIX) (0.74% Expense Ratio)
c) Western Asset Core Plus Bond CIT Unit Class 4 (0.25% Expense Ratio)
d) Vanguard Inflation-Protected Securities Fund Admiral Shares (VITWX) (0.1% Expense Ratio)
<snip>
How would the Boglehead community proceed with these options?
Put your 10% bond allocation in the 401k. Use Western Asset Core Plus Bond for all of it. It's a decent bond fund and 0.25% is reasonable. (If you want a slightly lower combined expense ratio and potentially lower earnings you could split it with VITWX, but I wouldn't bother.)

pward
Posts: 61
Joined: Fri Dec 21, 2018 8:18 pm

Re: Bond Allocation in 401(k) / Check-in

Post by pward » Sun Feb 10, 2019 7:08 pm

If you can fit it in your 401k do that in C. At only 10% bonds, they really aren't doing much for you so it wouldn't be the end of the world if you had less bonds overall if you want to save the hassle. Until an asset class is at least 20% of my portfolio I generally don't take it too seriously because it's not really providing any meaningful diversification.

If you are a really heavy saver you may eventually find yourself in a point where you have to include bonds in your taxable account (especially when you do decide to increase bond allocation). And then at that point you gotta do what you gotta do. Muni's are not necessarily better, because the yields are priced down to pretty much even out in most cases. And in the case that muni's would pay more after tax, they are more risky, so you would have to do the math and decide on whether or not the tiny bit extra is really worth it considering the extra credit and call risk vs treasuries (that are not taxed at the state level).

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