Portfolio review - couple nearing 40 y/o with life changes

[Livelife2fullest]

I’ve been learning a lot from the knowledgeable members of this forum for the last few years, this is my first post. My family has some life changes in the near future as we’re expecting our first child in March and becoming a one-income household. DW plans to stay out of the workforce for a few years. We have a modest income compared to most bogelheads it seems, but we’re pretty good savers, have low expenses, and live within our means.

We’re comfortable holding a higher percentage of equities, as we have been able to stay put and even have the desire to buy more stocks (index funds) in a down market. DW has had some financial help along the way from her folks with a large down payment on the previous house and getting a head start on her Roth at a younger age, which has helped our financial situation.

Emergency Funds: Yes, 6 months of expenses
Debt: Just the mortgage of $234k remaining @ 3.875%. ($1,680 monthly payment with escrow)
Tax filing status: Married Filing Jointly
Tax Rate: 22% Federal, 7.05% state
State: MN
Age: Him 40, Her 38
Desired Asset Allocation: 80-90% stocks, 10-20% bonds
Desired Intl Allocation: 30-35% of stocks
Income: Him $80k, Her: DW planning to leave workforce in March, was previously earning $36k/year.
Children: Expecting a baby in March, our first. Could be only child.

Total retirement portfolio: $499k
Home equity: Approx $175k
HSA: $7k in money market (contributing $150/month)

Current Retirement Assets
His 401k
49% VITLX-Vang Inst Target Retirement 2045 (.09 exp ratio)
His Roth 401k
11% VITLX-Vang Target Retirement 2045 (.09 exp ratio)
His Roth IRA @ Vanguard
3% VTIVX - Vang Target Retirement 2045 (.15 exp ratio)

Her 401k:
14% with Principal (Principal 2050 Target date fund, very high expense ratio)
Planning a roll-over to a Vanguard traditional IRA in spring 2019.
Her Roth @ Vanguard
4% VFIAX - Vang 500 Index Admiral (.04 exp ratio)
7% VTSAX - Vang Total Stock Admiral (.04 exp ratio)
6% VTTHX - Vang Retirement 2035 (.14 exp ratio)
6% VWELX - Vang Wellington (.25 exp ratio)

New Contributions in 2019
His 401k: $12,800 with a $3,200 company match
His Roth IRA @ Vanguard: $0 (may be able to contribute something, we’ll see)
Her 401k: $0
Her Roth IRA @ Vanguard: $0

Funds Available in his 401k
VINIX - Vang Inst 500 index 0.035
PRJIX - TRP New Horizons (Sm Cap) 0.65
VIMAX-Van Midcap Inx Adm 0.05
GSSUX-GS SM Cap Value R6 0.96
RRERGX-AF Europac Growth R6 0.49
VITWX -TRP INTL Discovery I 1.07
VITVX -Vang Inst TR2015 0.09
VITWX-Vang Inst TR2020 0.09
VRIVX-Vang Inst TR2025 0.09
VTTWX-Vang Inst TR2030 0.09
VITFX-Vang Inst TR2035 0.09
VIRSX-Vang Inst TR2040 0.09
VITLX-Vang Inst TR 2045 0.09
VTRLX-Vang Inst TR 2050 0.09
VIVLX-Vang Inst TR 2055 0.09
VILVX-Vang Inst TR 2060 0.09
VITRX-Vang Inst TR Income 0.09
MWTSX -Metwest Tot Rtn Bond 0.37
VBTLX-Van Tot Bond Mkt Adm 0.05
Stable Value Fund E 0.42

Questions

1. We’re planning to transfer the approx. $68k from DW’s 401k to a rollover IRA at Vanguard as she has her Roth there as well. What fund/s would you recommend putting this into @ Vanguard given our portfolio mix?
2. DW has her Roth IRA down to 4 funds; the number of funds in this acct was much higher a few years ago. Does this seem like an appropriate mix, given our goals and age?
3. Any portfolio sectors that we are neglecting or advice given our current situation? Wondering if I should put the small amount in his Roth @ Vanguard into the Total Stock Market Index vs. the current target date fund.
4. In my situation, with excess income likely to be tight the next few years, is putting as much as possible into his 401k and neglecting the Roth IRA’s the best plan? Or is contributing just up to the match in the 401k and trying to contribute as much as possible into the Roth’s more advantageous?

Thanks in advance!

[David Jay]

Welcome to the forum!

We are also moderate-income people so I understand where you are coming from. I think that overall you are doing well, here a few specific thoughts:

Questions

1. We’re planning to transfer the approx. $68k from DW’s 401k to a rollover IRA at Vanguard as she has her Roth there as well. What fund/s would you recommend putting this into @ Vanguard given our portfolio mix? I would recommend a TargetRetirement as you are using them elsewhere. The frequent recommendation here is to look at all your accounts as a single, integrated portfolio. It makes it more difficult if one is using TargetDate funds (which are internally diversified and rebalanced) and individual funds.
2. DW has her Roth IRA down to 4 funds; the number of funds in this acct was much higher a few years ago. Does this seem like an appropriate mix, given our goals and age? As above, I would not recommend mixing a TargetDate with other funds. We like simple portfolios (like the “3-fund”) here at BH but mixing TargetDate and individual funds adds complexity. If it was me I would either take out the TargetDate or take out the other 3 funds.
3. Any portfolio sectors that we are neglecting or advice given our current situation? Wondering if I should put the small amount in his Roth @ Vanguard into the Total Stock Market Index vs. the current target date fund. I strongly recommend you stay away from sector investments, individual sectors can underperform for long periods of time. That I turn tempts people to “fiddle” with their portfolio which almost always leads to underperformance. Instead stay with market indexes.
4. In my situation, with excess income likely to be tight the next few years, is putting as much as possible into his 401k and neglecting the Roth IRA’s the best plan? Or is contributing just up to the match in the 401k and trying to contribute as much as possible into the Roth’s more advantageous? In the 22% tax bracket and with good, low cost choices in your 401K, I would “take the money” of the tax deduction and use the 401K. But there is no “wrong” choice.

Thanks in advance!

[runner540]

Congrats on growing family!
First, your new tax bracket will probably be 12%, not 22%, making Roth more attractive. For 2019, the 22% starts at $78k MFJ, and you guys will probably be below that with 401k and standard deduction.

What is your income trajectory? Increasing income $20k will make a much bigger impact than tinkering among low cost funds.

You and wife need life insurance if you don't already have it.

[Oddball]

Congratulations on the new baby!

DW and I are in a very similar situation as you are: I am 40, DW is 36. We just had our first in Sept 2018. My income is $90k, DW was making $65 but stopped working after the child was born and is now going to college (night classes).

I would follow the advise outlined by David Jay, either use all target funds or set a "3-fund" portfolio. We have a "3-fund + 5% fun" portfolio and each account only has 1, 2, or 3 funds in it. For example, DW has the largest single account with her IRA (roll over 401k plans). That holds all of our bond VBTLX allocation and the remainder is US stocks VTSAX. Her Roth is 100% VTSAX. My IRA (roll over 401k) is 100% international stocks, 401k is 100% US stocks, and my Roth is a mix of International, US Stocks, and our 5% "fun" holdings. So when it is time to rebalance, we just need to adjust the holdings in her IRA and my Roth.

One change I would make to what you are doing to to max out the HSA funding, $150 a month is only $1800 a year. With a new baby, they could be cheap medically or they could drain your account very quickly. I would take the 401k to max out the match, max out the HSA, and then Max ROTH if you can.

One surprise for us is that losing DW income has been tougher than we expected, we always lived within our means but getting a couple of good sized ($1100 and $1200) car repairs, getting DW a laptop for school, and paying this first semester of college has strained us. Before with 2 incomes we would have been able to roll with these bumps much more easily. The margin for error is much tighter than before.

[Amadis_of_Gaul]

Your situation is extremely similar to mine, except that my children are older, so my wife has been out of the workforce for longer.

I think Target Retirement funds make wonderful sense for people who a) aren't interested in figuring out the intricacies of asset allocation, or b) have all of their retirement assets in one account. You don't strike me as belonging in either of those categories, so if I were you, i would create one asset allocation across all my accounts, with the goals of a) using as few funds as possible, b) enabling easy rebalancing, and c) being as tax-efficient as possible.

For instance, here's the plan I recently enacted. All funds are Vanguard funds, Admiral shares.

Desired allocation: 60 domestic/30 international/10 bond.

Taxable account: S&P 500 Index (not Total Stock Market because all the dividends in the S&P 500 fund are qualified)
Roth IRA: Total Stock Market Index
Rollover tIRA: Total Stock Market Index/ International Stock Market Index/ Total Bond Market Index
403(b): International Stock Market Index

I only have six fund holdings across four accounts, all of my bonds are in a tax-deferred account (which is where bonds belong), and I can do all of my rebalancing in the tIRA (at least until my 403(b) gets so big I can't do that anymore). It's simple, elegant, tax-efficient, and extremely low-expense. You may want to consider a similar arrangement.

[Livelife2fullest]

Welcome to the forum!

We are also moderate-income people so I understand where you are coming from. I think that overall you are doing well, here a few specific thoughts:

Questions

1. We’re planning to transfer the approx. $68k from DW’s 401k to a rollover IRA at Vanguard as she has her Roth there as well. What fund/s would you recommend putting this into @ Vanguard given our portfolio mix? I would recommend a TargetRetirement as you are using them elsewhere. The frequent recommendation here is to look at all your accounts as a single, integrated portfolio. It makes it more difficult if one is using TargetDate funds (which are internally diversified and rebalanced) and individual funds.
2. DW has her Roth IRA down to 4 funds; the number of funds in this acct was much higher a few years ago. Does this seem like an appropriate mix, given our goals and age? As above, I would not recommend mixing a TargetDate with other funds. We like simple portfolios (like the “3-fund”) here at BH but mixing TargetDate and individual funds adds complexity. If it was me I would either take out the TargetDate or take out the other 3 funds.
3. Any portfolio sectors that we are neglecting or advice given our current situation? Wondering if I should put the small amount in his Roth @ Vanguard into the Total Stock Market Index vs. the current target date fund. I strongly recommend you stay away from sector investments, individual sectors can underperform for long periods of time. That I turn tempts people to “fiddle” with their portfolio which almost always leads to underperformance. Instead stay with market indexes.
4. In my situation, with excess income likely to be tight the next few years, is putting as much as possible into his 401k and neglecting the Roth IRA’s the best plan? Or is contributing just up to the match in the 401k and trying to contribute as much as possible into the Roth’s more advantageous? In the 22% tax bracket and with good, low cost choices in your 401K, I would “take the money” of the tax deduction and use the 401K. But there is no “wrong” choice.

Thanks in advance!

Thank you for the warm welcome! I agree with your advice on using a target date fund for the rollover IRA. It might not be the most exciting investment pick, but it's simple and it's an easy way to stick with the 3-fund portfolio.

[Livelife2fullest]

Congrats on growing family!
First, your new tax bracket will probably be 12%, not 22%, making Roth more attractive. For 2019, the 22% starts at $78k MFJ, and you guys will probably be below that with 401k and standard deduction.

What is your income trajectory? Increasing income $20k will make a much bigger impact than tinkering among low cost funds.

You and wife need life insurance if you don't already have it.

Thank you! You're right, with the 401k we'll drop to the 12% Federal tax bracket. This would make Roth more attractive and will keep this in consideration.

I'm looking at a 2-5% annual raise for the next 2-3 years. If I stay in current position, in about 2-3 years with solid work performance, good fortune, and a job title bump reaching the six figures mark could be possible.

I do get a 1 x annual salary = $80k life insurance policy through my employer. Would you recommend more than this? If so, any tips on what kind of life insurance to look for? I know there are other threads that may go into this type of info, but if you have a personal or professional experience with this, let me know.

[Livelife2fullest]

Congratulations on the new baby!

DW and I are in a very similar situation as you are: I am 40, DW is 36. We just had our first in Sept 2018. My income is $90k, DW was making $65 but stopped working after the child was born and is now going to college (night classes).

I would follow the advise outlined by David Jay, either use all target funds or set a "3-fund" portfolio. We have a "3-fund + 5% fun" portfolio and each account only has 1, 2, or 3 funds in it. For example, DW has the largest single account with her IRA (roll over 401k plans). That holds all of our bond VBTLX allocation and the remainder is US stocks VTSAX. Her Roth is 100% VTSAX. My IRA (roll over 401k) is 100% international stocks, 401k is 100% US stocks, and my Roth is a mix of International, US Stocks, and our 5% "fun" holdings. So when it is time to rebalance, we just need to adjust the holdings in her IRA and my Roth.

One change I would make to what you are doing to to max out the HSA funding, $150 a month is only $1800 a year. With a new baby, they could be cheap medically or they could drain your account very quickly. I would take the 401k to max out the match, max out the HSA, and then Max ROTH if you can.

One surprise for us is that losing DW income has been tougher than we expected, we always lived within our means but getting a couple of good sized ($1100 and $1200) car repairs, getting DW a laptop for school, and paying this first semester of college has strained us. Before with 2 incomes we would have been able to roll with these bumps much more easily. The margin for error is much tighter than before.

Thanks for your reply! Yep, it sounds like we're in a very similar situations. Also, congrats to you on your recent addition in Sept! Great tip on the HSA contributions. What's funny is up until a few months ago, I had been contributing $400/month, but dropped it to $150/month to prepare for the loss of income. Knowing we could be reaching the out of pocket max this year, the $7k cushion in our HSA could get used up fairly quickly. I'll have to consider increasing the monthly contribution in our HSA.

[runner540]

Congrats on growing family!
First, your new tax bracket will probably be 12%, not 22%, making Roth more attractive. For 2019, the 22% starts at $78k MFJ, and you guys will probably be below that with 401k and standard deduction.

What is your income trajectory? Increasing income $20k will make a much bigger impact than tinkering among low cost funds.

You and wife need life insurance if you don't already have it.

Thank you! You're right, with the 401k we'll drop to the 12% Federal tax bracket. This would make Roth more attractive and will keep this in consideration.

I'm looking at a 2-5% annual raise for the next 2-3 years. If I stay in current position, in about 2-3 years with solid work performance, good fortune, and a job title bump reaching the six figures mark could be possible.

I do get a 1 x annual salary = $80k life insurance policy through my employer. Would you recommend more than this? If so, any tips on what kind of life insurance to look for? I know there are other threads that may go into this type of info, but if you have a personal or professional experience with this, let me know.

You need much more term life insurance (20 yr policy until kid is in college?). Look at the wiki on life insurance: without it, how will your wife and kid be cared for if your salary, health insurance, and care/support is gone?
https://www.bogleheads.org/wiki/Life_insurance

Your wife needs insurance so that you can cover child care or take extended time off work if something happens to her.

[cherijoh]

Emergency Funds: Yes, 6 months of expenses
Debt: Just the mortgage of $234k remaining @ 3.875%. ($1,680 monthly payment with escrow)
Tax filing status: Married Filing Jointly
Tax Rate: 22% Federal, 7.05% state
State: MN
Age: Him 40, Her 38
Desired Asset Allocation: 80-90% stocks, 10-20% bonds
Desired Intl Allocation: 30-35% of stocks
Income: Him $80k, Her: DW planning to leave workforce in March, was previously earning $36k/year.
Children: Expecting a baby in March, our first. Could be only child.

Total retirement portfolio: $499k
Home equity: Approx $175k
HSA: $7k in money market (contributing $150/month)

Current Retirement Assets
His 401k
49% VITLX-Vang Inst Target Retirement 2045 (.09 exp ratio)
His Roth 401k
11% VITLX-Vang Target Retirement 2045 (.09 exp ratio)
His Roth IRA @ Vanguard
3% VTIVX - Vang Target Retirement 2045 (.15 exp ratio)

Her 401k:
14% with Principal (Principal 2050 Target date fund, very high expense ratio)
Planning a roll-over to a Vanguard traditional IRA in spring 2019.
Her Roth @ Vanguard <-- This is not nearly as diversified as your wife probably thinks!!
4% VFIAX - Vang 500 Index Admiral (.04 exp ratio) <-- 90% Large Cap US stocks
7% VTSAX - Vang Total Stock Admiral (.04 exp ratio) <-- 80% S&P 500 or ~ 72% large cap stocks
6% VTTHX - Vang Retirement 2035 (.14 exp ratio) <--- currently 46% Total stock market index or 33% US Large Cap
6% VWELX - Vang Wellington (.25 exp ratio) <--- 53% US stocks or ~52% US Large Cap

New Contributions in 2019
His 401k: $12,800 with a $3,200 company match
His Roth IRA @ Vanguard: $0 (may be able to contribute something, we’ll see)
Her 401k: $0
Her Roth IRA @ Vanguard: $0

Funds Available in his 401k
VINIX - Vang Inst 500 index 0.035
PRJIX - TRP New Horizons (Sm Cap) 0.65
VIMAX-Van Midcap Inx Adm 0.05
GSSUX-GS SM Cap Value R6 0.96
RRERGX-AF Europac Growth R6 0.49
VITWX -TRP INTL Discovery I 1.07
VITVX -Vang Inst TR2015 0.09
VITWX-Vang Inst TR2020 0.09
VRIVX-Vang Inst TR2025 0.09
VTTWX-Vang Inst TR2030 0.09
VITFX-Vang Inst TR2035 0.09
VIRSX-Vang Inst TR2040 0.09
VITLX-Vang Inst TR 2045 0.09
VTRLX-Vang Inst TR 2050 0.09
VIVLX-Vang Inst TR 2055 0.09
VILVX-Vang Inst TR 2060 0.09
VITRX-Vang Inst TR Income 0.09
MWTSX -Metwest Tot Rtn Bond 0.37
VBTLX-Van Tot Bond Mkt Adm 0.05
Stable Value Fund E 0.42

Questions

1. We’re planning to transfer the approx. $68k from DW’s 401k to a rollover IRA at Vanguard as she has her Roth there as well. What fund/s would you recommend putting this into @ Vanguard given our portfolio mix?
2. DW has her Roth IRA down to 4 funds; the number of funds in this acct was much higher a few years ago. Does this seem like an appropriate mix, given our goals and age?
3. Any portfolio sectors that we are neglecting or advice given our current situation? Wondering if I should put the small amount in his Roth @ Vanguard into the Total Stock Market Index vs. the current target date fund.
4. In my situation, with excess income likely to be tight the next few years, is putting as much as possible into his 401k and neglecting the Roth IRA’s the best plan? Or is contributing just up to the match in the 401k and trying to contribute as much as possible into the Roth’s more advantageous?

Thanks in advance!

See comments above about your wife's Roth IRA. My recommendation would be to either stick with a target Retirement fund for simplicity or go with a split between total stock market and total international stock market index. There is no need to have bonds in Roth at your age. Definitely don't have a conservative fund like Wellington in a Roth account.

[bltn]

In your position, I would try to strike a balance between an ideal amount of insurance and something more affordable. I would look into 500,000 of twenty year level premium term insurance for myself and 200,000 of 20 year level premium term for my wife.

[Livelife2fullest]

Emergency Funds: Yes, 6 months of expenses
Debt: Just the mortgage of $234k remaining @ 3.875%. ($1,680 monthly payment with escrow)
Tax filing status: Married Filing Jointly
Tax Rate: 22% Federal, 7.05% state
State: MN
Age: Him 40, Her 38
Desired Asset Allocation: 80-90% stocks, 10-20% bonds
Desired Intl Allocation: 30-35% of stocks
Income: Him $80k, Her: DW planning to leave workforce in March, was previously earning $36k/year.
Children: Expecting a baby in March, our first. Could be only child.

Total retirement portfolio: $499k
Home equity: Approx $175k
HSA: $7k in money market (contributing $150/month)

Current Retirement Assets
His 401k
49% VITLX-Vang Inst Target Retirement 2045 (.09 exp ratio)
His Roth 401k
11% VITLX-Vang Target Retirement 2045 (.09 exp ratio)
His Roth IRA @ Vanguard
3% VTIVX - Vang Target Retirement 2045 (.15 exp ratio)

Her 401k:
14% with Principal (Principal 2050 Target date fund, very high expense ratio)
Planning a roll-over to a Vanguard traditional IRA in spring 2019.
Her Roth @ Vanguard <-- This is not nearly as diversified as your wife probably thinks!!
4% VFIAX - Vang 500 Index Admiral (.04 exp ratio) <-- 90% Large Cap US stocks
7% VTSAX - Vang Total Stock Admiral (.04 exp ratio) <-- 80% S&P 500 or ~ 72% large cap stocks
6% VTTHX - Vang Retirement 2035 (.14 exp ratio) <--- currently 46% Total stock market index or 33% US Large Cap
6% VWELX - Vang Wellington (.25 exp ratio) <--- 53% US stocks or ~52% US Large Cap

New Contributions in 2019
His 401k: $12,800 with a $3,200 company match
His Roth IRA @ Vanguard: $0 (may be able to contribute something, we’ll see)
Her 401k: $0
Her Roth IRA @ Vanguard: $0

Funds Available in his 401k
VINIX - Vang Inst 500 index 0.035
PRJIX - TRP New Horizons (Sm Cap) 0.65
VIMAX-Van Midcap Inx Adm 0.05
GSSUX-GS SM Cap Value R6 0.96
RRERGX-AF Europac Growth R6 0.49
VITWX -TRP INTL Discovery I 1.07
VITVX -Vang Inst TR2015 0.09
VITWX-Vang Inst TR2020 0.09
VRIVX-Vang Inst TR2025 0.09
VTTWX-Vang Inst TR2030 0.09
VITFX-Vang Inst TR2035 0.09
VIRSX-Vang Inst TR2040 0.09
VITLX-Vang Inst TR 2045 0.09
VTRLX-Vang Inst TR 2050 0.09
VIVLX-Vang Inst TR 2055 0.09
VILVX-Vang Inst TR 2060 0.09
VITRX-Vang Inst TR Income 0.09
MWTSX -Metwest Tot Rtn Bond 0.37
VBTLX-Van Tot Bond Mkt Adm 0.05
Stable Value Fund E 0.42

Questions

1. We’re planning to transfer the approx. $68k from DW’s 401k to a rollover IRA at Vanguard as she has her Roth there as well. What fund/s would you recommend putting this into @ Vanguard given our portfolio mix?
2. DW has her Roth IRA down to 4 funds; the number of funds in this acct was much higher a few years ago. Does this seem like an appropriate mix, given our goals and age?
3. Any portfolio sectors that we are neglecting or advice given our current situation? Wondering if I should put the small amount in his Roth @ Vanguard into the Total Stock Market Index vs. the current target date fund.
4. In my situation, with excess income likely to be tight the next few years, is putting as much as possible into his 401k and neglecting the Roth IRA’s the best plan? Or is contributing just up to the match in the 401k and trying to contribute as much as possible into the Roth’s more advantageous?

Thanks in advance!

See comments above about your wife's Roth IRA. My recommendation would be to either stick with a target Retirement fund for simplicity or go with a split between total stock market and total international stock market index. There is no need to have bonds in Roth at your age. Definitely don't have a conservative fund like Wellington in a Roth account.

Thank you for the tip! I agree with you on wife’s Roth and I think these comments will help convince DW that we need to consolidate funds and and diversify here, where we can. Her dad was a Wellington fan and that was made known to her, so I have my work cut out for me.

[Livelife2fullest]

In your position, I would try to strike a balance between an ideal amount of insurance and something more affordable. I would look into 500,000 of twenty year level premium term insurance for myself and 200,000 of 20 year level premium term for my wife.

Thank you for these suggestions on term life insurance, will be looking into this. Appreciate your feedback, I haven’t thought much about life insurance until now.