Aspiring Boglehead - Seeking Guidance

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Topic Author
sandlot
Posts: 2
Joined: Tue Mar 12, 2019 7:05 pm

Aspiring Boglehead - Seeking Guidance

Post by sandlot » Wed Mar 13, 2019 2:03 pm

Looking for some guidance for someone that is new to managing my own investments. Below is my situation.

Emergency funds: Have about $35K in cash/emergency fund currently in bank account earning virtually no interest.
Debt: My only debt is $70K balance ($706.00 pmt) on 5/1 ARM at 3.625%. Should have this paid off in next 3-5 years. Aggressively paid down over the last year, but in retrospect probably should have channeled this money to taxable account
Net worth: $1.1M ($580K home equity, $360K in retirement accounts, $120K cash invested in our small business)
Savings rate: 70%
Tax Filing Status: Married Filing Jointly, Head of Household, with 4 Dependent Children)
Tax Rate: 35% Federal, 4.95% State
State of Residence: UT
Age: 42
Desired Asset allocation: Leaning toward 80% stocks / 20% bonds (Vanguard risk profile questionnaire recommends 70/30)
Desired International allocation: 20% of stocks is where I am leaning, but see that this is a very heated debate in the community

Current retirement assets ($360K)

Vanguard Taxable ($25K)
100% Vanguard Total Stock Market (VTSAX) (.04 ER)
Just started this account this month. Currently $25K, but contributing $1K per month auto investment into Vanguard Total Stock Market (VTSAX) and intend to invest $100K - $130K per year into this account for next 3-4 years

Fidelity 401k ($30K)
100% Vanguard Target Retirement 2045 Trust Select (Symbol: 1681) (.05 ER)
-Vanguard Total Stock Market Index Fund Institutional Plus (VSMPX .02 ER) (51.1%)
-Vanguard Total International Stock Index Fund Institutional Plus (VTPSX .07 ER) (35.6%)
-Vanguard Total Bond Market II Index Fund Institutional (VTBNX .02 ER) (7%)
-Vanguard Total International Bond Index Fund Institutional (VTIFX .07 ER) (3%)
Company match up to 6%
Currently contributing max of $18,500 per year plus company match

Rollover IRA at Merrill Lynch ($305K)
Left my employer about 6 months ago and rolled 401K in Merrill IRA. Paying about 1.3% of assets under management. Realized this was big mistake due to fees and am planning to transfer this to Vanguard IRA and manage myself moving forward. Funds and stocks are too numerous to list, but below is the current asset allocation (Roughly 80/20 Stock to Bonds). Planning to transfer this to Vanguard in the next couple weeks.
-US Stocks 63.98%
-International Stocks 14.18%
-US Bonds 13.91%
-International Bonds 3%
-Alternatives 3.64%
-Cash .52%
-Unclassified .77%

Total of All Accounts Together
-US Stocks 63.84%
-International Stocks 14.49%
-US Bonds 13.02%
-International Bonds 3.21%
-Alternatives 3.38%
-Cash 1%
-Unclassified 1%

Questions:
My goal is to reach $1M in retirement savings in the next 3-4 years and explore possibility of early retirement, or retirement from full time work. Anticipate annual expenses at that time roughly $40K per year x 25 = $1M required for 4% Safe Withdrawal rate. Hoping in 3-4 years, our small business will be producing enough cash to cover our living expenses in full or partially to reduce or eliminate the required withdraws from our retirement funds and can let those continue to grow.

I will have about $305K transferring from Merrill to Vanguard and need to determine how to invest these assets. Here is how I was thinking of allocating my total portfolio. Trying to keep it simple with Core 4 at 20% Bonds, 20% International, 10% REIT

-20% Vanguard Total Bond Admiral (VBTLX .05 ER)
-16% Vanguard Total International Admiral (VTIAX .11 ER)
-56% Vanguard Total Stock Market Admiral (VTSAX .04 ER)
-8% Vanguard Real Estate Index Fund Admiral (VGSLX .12 ER)

1. Is this a reasonable allocation strategy for someone in my position, or should I simplify further given I am relatively new to managing this myself?
2. I have multiple accounts and will have large sums ($100K - $130K) flowing into the taxable Vanguard account each year, which makes rebalancing more challenging. Obviously want to hold the bonds and REITs in tax advantaged accounts and focus the taxable account on Total Stock Market and Total International Stock Market index funds (VTSAX and VTIAX) and try to rebalance as best as possible with new funds flowing in. What is the best approach here? Should I buy more of Bonds and REIT initially, that will get balanced with the new money flowing into the taxable account or simply adjust by buying and selling in the IRA as funds flow into the taxable account? Maybe muni-bond fund in taxable?
3. Given that I may try to retire early and will need the funds to last for 50+ years, how should I approach my allocation over time? It seems that many early retirees maintain a fairly aggressive equities allocation of 75% plus for extended periods. At what point should I look at adjusting this to be more conservative? I know the age in bonds rule of thumb, but not sure if I should be that conservative right now given the long time horizon and the need to grow assets.
4. Should I include TIPS in by bond allocation, or just keep it simple for now with total bond fund?
5. Any other advice you would have or things to look out for? I am sure there are probably lots of things I am overlooking.

Thanks for your guidance and input. I’m a little nervous about taking the plunge and managing myself and have been reading a lot on the subject to try to educate myself more. Just want a gut check from some more seasoned veterans in the community.

megabad
Posts: 1202
Joined: Fri Jun 01, 2018 4:00 pm

Re: Aspiring Boglehead - Seeking Guidance

Post by megabad » Wed Mar 13, 2019 5:22 pm

sandlot wrote:
Wed Mar 13, 2019 2:03 pm
1. Is this a reasonable allocation strategy for someone in my position, or should I simplify further given I am relatively new to managing this myself?
2. I have multiple accounts and will have large sums ($100K - $130K) flowing into the taxable Vanguard account each year, which makes rebalancing more challenging. Obviously want to hold the bonds and REITs in tax advantaged accounts and focus the taxable account on Total Stock Market and Total International Stock Market index funds (VTSAX and VTIAX) and try to rebalance as best as possible with new funds flowing in. What is the best approach here? Should I buy more of Bonds and REIT initially, that will get balanced with the new money flowing into the taxable account or simply adjust by buying and selling in the IRA as funds flow into the taxable account? Maybe muni-bond fund in taxable?
3. Given that I may try to retire early and will need the funds to last for 50+ years, how should I approach my allocation over time? It seems that many early retirees maintain a fairly aggressive equities allocation of 75% plus for extended periods. At what point should I look at adjusting this to be more conservative? I know the age in bonds rule of thumb, but not sure if I should be that conservative right now given the long time horizon and the need to grow assets.
4. Should I include TIPS in by bond allocation, or just keep it simple for now with total bond fund?
5. Any other advice you would have or things to look out for? I am sure there are probably lots of things I am overlooking.

Thanks for your guidance and input. I’m a little nervous about taking the plunge and managing myself and have been reading a lot on the subject to try to educate myself more. Just want a gut check from some more seasoned veterans in the community.
Can you roll the Rollover IRA into your 401k? This would allow you to do backdoor Roth without tax consequences.

It seems that you only have 2 retirement accounts but there may be more available to you. What about spouse Roth IRA and spouse 401k? I would recommend using all available tax advantaged space you can given your high tax bracket.

If you are short on bonds you could buy munibonds in taxable since this is likely advantageous at 35% fed tax rate, however, my concern is that your indicated that your future tax rate may drop dramatically (you indicated 40k/yr expenses). This means that you might be locked into a lower TEY later on when it is not advantageous. As such, I would try to hold bonds in tax advantaged as much as possible. Growing the tax advantaged space with more accounts would help with this. If you run out, I would then purchase I-bonds. If you run out of those, then I might consider munis.

Asset allocation is very personal. If I were an early retiree, I would likely have a more equity heavy portfolio than most (say 70%), but I would also use something like VPW so my withdrawals fluctuated with the portfolio value. This is just me. Everyone is different here though.

I don't like TIPS until you are spending down the portfolio personally. I might inch up a little every year, but I wouldn't go crazy. Just a personal preference there, if you value the inflation protection and think we might see just a crazy unexpected inflation swing than you might prefer TIPS more than me.

Topic Author
sandlot
Posts: 2
Joined: Tue Mar 12, 2019 7:05 pm

Re: Aspiring Boglehead - Seeking Guidance

Post by sandlot » Wed Mar 13, 2019 9:40 pm

megabad wrote:
Wed Mar 13, 2019 5:22 pm
Can you roll the Rollover IRA into your 401k? This would allow you to do backdoor Roth without tax consequences.

It seems that you only have 2 retirement accounts but there may be more available to you. What about spouse Roth IRA and spouse 401k? I would recommend using all available tax advantaged space you can given your high tax bracket.

If you are short on bonds you could buy munibonds in taxable since this is likely advantageous at 35% fed tax rate, however, my concern is that your indicated that your future tax rate may drop dramatically (you indicated 40k/yr expenses). This means that you might be locked into a lower TEY later on when it is not advantageous. As such, I would try to hold bonds in tax advantaged as much as possible. Growing the tax advantaged space with more accounts would help with this. If you run out, I would then purchase I-bonds. If you run out of those, then I might consider munis.

Asset allocation is very personal. If I were an early retiree, I would likely have a more equity heavy portfolio than most (say 70%), but I would also use something like VPW so my withdrawals fluctuated with the portfolio value. This is just me. Everyone is different here though.

I don't like TIPS until you are spending down the portfolio personally. I might inch up a little every year, but I wouldn't go crazy. Just a personal preference there, if you value the inflation protection and think we might see just a crazy unexpected inflation swing than you might prefer TIPS more than me.
Hi Megabad,

Thanks for your reply. I really appreciate it.

I don't believe my current employer will accept rollovers, but that is a great suggestion. I will double check on this to confirm.

We only have the three accounts right now, which will be the Vanguard taxable and IRA accounts plus Fidelity 401K. My spouse does not have any retirement accounts set up yet. Though we do own a small business, and could potentially set one up depending on the costs. We have 4 employees currently but don't offer a $401K plan. We are nearing break even and have not wanted take on additional cost until we cross that point.

If I do opt to go the early retirement route, my income will drop significantly in the next 4-5 years. I hadn't thought about the tax equivalent yield impact on the munis with the drop in income at that point.

I totally agree with you on the VPW, I would hate to jeopardize the portfolio by blindly drawing 4%/year regardless of portfolio value. I think 3.25% is a safe number that I am aiming for given the length of retirement and then vary this depending on portfolio value. We should hopefully have income from our small business that will provide flexibility in withdrawal rates and hopefully not require any withdraws.

Thanks for your perspective on TIPS. I will likely leave this out initially. Trying to keep things simple, especially at the start of taking this on myself.

So, when I receive the funds into my Vanguard IRA from Merrill and apply my allocation percentages, the values across the accounts and funds would look like this.

Image

Knowing that I will have about another $100K flowing into the taxable Vanguard account by year end, how would I best handle the reallocation? Just sell Vanguard Total Stock (VTSAX) in my IRA to buy the increase in bonds and REIT needed to get to allocation % and use new money in the taxable account to buy Total International (VTIAX) up to that allocation percentage? I am not clear on the optimal way to handle this. Should I be re-balancing more often with large sums of money coming in or wait and do once or twice a year? Thanks for guidance.

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