Allocation and bonds

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Lizbiz
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Joined: Tue Feb 11, 2020 10:07 pm

Allocation and bonds

Post by Lizbiz » Tue Feb 11, 2020 10:29 pm

Hello! I am 33 years old and pretty new to investing. Until recently, I had my retirement savings in a 401k with 100% of the funds allocated to a target date mutual fund.

Last year I quit my job and went into business for myself, so I rolled my 401k into a T Rowe Price SEP IRA at the advice of my accountant. Not knowing much about investing, I just put it all into a Target 2050 retirement fund at the time. But now! I am learning about the magic of low cost index funds and am reading the Bogleheads Guide to Investing, so I am looking to move my money out of the managed fund and into index funds. I currently have about $40,000 in my SEP IRA.

I am lazy overall, so I would like to make this simple. Set it and forget it for awhile. It seems to me that an appropriate asset allocation for my age and risk tolerance, using the general rule of “invest in bonds at your age percentage” rule, would be about 70-80% allocated to an S&P 500 index fund (T Rowe price equity 500 fund) and 20-30% to a bond index fund. My question is, how to choose the easiest, laziest Bond fund to invest in? This may be a simple question, but does it have to be a T Rowe price bond fund since my account is with T Rowe Price? And, I’m thinking if so, is the T Rowe Price US Bond Enhanced Index Fund the appropriate choice? That bond fund states that it seeks to match or exceed the performance of the US investment grade bond market.

My next set of possibly dumb questions is, since bonds have year terms, when I allocate a portion of my IRA into a bond fund, do I have to make a selection for how long the bond will be invested (10 years? More? What should I choose, given my age?) or does investing in a bond fund (as opposed to just a bond) somehow just keep going, like leaving money in an S&P index fund?

Thanks in advance for your help!

bloom2708
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Re: Allocation and bonds

Post by bloom2708 » Wed Feb 12, 2020 2:04 pm

Welcome!

Are you locked into T Rowe Price?

Are you still contributing to the SEP IRA? If self employed, you could look into a Solo or i401k.

T Rowe should have a Total US market mutual fund (or ETF). Your US Bond index would be a good choice if the expense ratio is low.

Have you opened a Roth IRA? It might be better to start putting dollars in a Roth for the tax free growth if you are in a lower tax bracket.

As to your last question, the bond funds do all the work for you. They are constantly buying/selling bonds. You don't have to worry about that as long as you pick an intermediate duration bond index like the Total US Bond. It has shorter and longer duration bonds that average out to ~6 years.

Your savings rate will determine how things go. Save more. IRA, Roth IRA, Taxable. The 2 fund plan would work just fine. At some point you can consider a Total International index. A lot of discussion if international is needed for a US investor. Just keep saving and use your tax advantaged accounts.

Hopefully others have ideas to add. Welcome again!
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ruralavalon
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Re: Allocation and bonds

Post by ruralavalon » Wed Feb 12, 2020 4:48 pm

Welcome to the forum :) .

Congratulations on starting your own business.

When young and just starting establishing a high rate of contributions is probably the most important investing decision you can make. So contribute as much as practical to your SEP IRA.


Lizbiz wrote:
Tue Feb 11, 2020 10:29 pm
Hello! I am 33 years old and pretty new to investing. Until recently, I had my retirement savings in a 401k with 100% of the funds allocated to a target date mutual fund.

Last year I quit my job and went into business for myself, so I rolled my 401k into a T Rowe Price SEP IRA at the advice of my accountant. Not knowing much about investing, I just put it all into a Target 2050 retirement fund at the time. But now! I am learning about the magic of low cost index funds and am reading the Bogleheads Guide to Investing, so I am looking to move my money out of the managed fund and into index funds. I currently have about $40,000 in my SEP IRA.

I am lazy overall, so I would like to make this simple. Set it and forget it for awhile. It seems to me that an appropriate asset allocation for my age and risk tolerance, using the general rule of “invest in bonds at your age percentage” rule, would be about 70-80% allocated to an S&P 500 index fund (T Rowe price equity 500 fund) and 20-30% to a bond index fund. My question is, how to choose the easiest, laziest Bond fund to invest in? This may be a simple question, but does it have to be a T Rowe price bond fund since my account is with T Rowe Price? And, I’m thinking if so, is the T Rowe Price US Bond Enhanced Index Fund the appropriate choice? That bond fund states that it seeks to match or exceed the performance of the US investment grade bond market.
For lower expense ratios you could rollover your SEP IRA to a SEP IRA at Vanguard, Fidelity or Schwab. My personal preference is Vanguard.

If you keep your SEP IRA at T. Rowe Price, then those are the appropriate funds to use for both domestic stocks and bonds. Wiki article, "T. Rowe Price ".

Despite deviating from the Bloomberg Barclays U.S. Aggregate Bond Index, T. Rowe Price U.S. Bond Enhanced Index Fund (PBDIX) has performed comparably to a total bond market index fund. Portfolio Visualizer, 2001-2020.

For additional diversification you could also add T. Rowe Price International Equity Index Fund (PIEQX), which invests in developed markets.

At age 33 I suggest around 20% in bonds. I suggest around 20-30% of stocks in international stocks.



Lizbiz wrote:
Tue Feb 11, 2020 10:29 pm
My next set of possibly dumb questions is, since bonds have year terms, when I allocate a portion of my IRA into a bond fund, do I have to make a selection for how long the bond will be invested (10 years? More? What should I choose, given my age?) or does investing in a bond fund (as opposed to just a bond) somehow just keep going, like leaving money in an S&P index fund?

Thanks in advance for your help!
When you buy a bond fund you do not need to make a selection for how long the bond will be invested. You just leave your money in the bond fund, and the fund managers buy new bonds as pre-existing bonds mature.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
Lizbiz
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Joined: Tue Feb 11, 2020 10:07 pm

Re: Allocation and bonds

Post by Lizbiz » Wed Feb 12, 2020 10:41 pm

Thanks for answering my questions! I am not tied to T Rowe Price, if it makes sense to rollover to Vanguard, which it sounds like it would due to the low cost funds. Is there any disadvantage to rolling over? Keeping in mind that I just rolled my 401k over last April/May from American Funds (isn’t there a rule against too many rollovers in a 12 month period?)

If I rollover to Vanguard, it looks like these would be appropriate to start, right?
Vanguard total bond market index fund - 20%
Vanguard 500 index fund - 80%

Thanks!

sgm7091
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Joined: Mon Dec 30, 2019 10:42 pm

Re: Allocation and bonds

Post by sgm7091 » Thu Feb 13, 2020 1:39 am

Lizbiz wrote:
Wed Feb 12, 2020 10:41 pm
Thanks for answering my questions! I am not tied to T Rowe Price, if it makes sense to rollover to Vanguard, which it sounds like it would due to the low cost funds. Is there any disadvantage to rolling over? Keeping in mind that I just rolled my 401k over last April/May from American Funds (isn’t there a rule against too many rollovers in a 12 month period?)

If I rollover to Vanguard, it looks like these would be appropriate to start, right?
Vanguard total bond market index fund - 20%
Vanguard 500 index fund - 80%

Thanks!
lizbiz - congrats on starting business.

No limitations on rollover if you do trustee-to-trustee transfer/rollover. The limitation of one per 12 month applies to 60-day rollover where you take distribution in your name and then rollover to a retirement plan. In this case, you also have to fund any tax witheld at source when you rollover. You should avoid this method of rollover and instead do trustee-to-trustee.

Also Solo-401k (I think) will give you better options than SEP IRA, e,g Roth conversions. When I had self-employment income, I had researched and found Solo-401k best option. Since it is a 401k, so it is not included in the aggregate IRA assets by IRS (I am not a tax expert, however) for pro-rata rule when Roth conversion is done. I had opened solo-401k at Schwab, which was good and worked like a brokerage account. Now I am consolidating at Fidelity and will allow me to rollover my IRAs to solo-401k, so I can do backdoor Roth. If this is not important, SEP may be fine for you.

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ruralavalon
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Re: Allocation and bonds

Post by ruralavalon » Thu Feb 13, 2020 10:38 am

Lizbiz wrote:
Wed Feb 12, 2020 10:41 pm
Thanks for answering my questions! I am not tied to T Rowe Price, if it makes sense to rollover to Vanguard, which it sounds like it would due to the low cost funds. Is there any disadvantage to rolling over? Keeping in mind that I just rolled my 401k over last April/May from American Funds (isn’t there a rule against too many rollovers in a 12 month period?)

If I rollover to Vanguard, it looks like these would be appropriate to start, right?
Vanguard total bond market index fund - 20%
Vanguard 500 index fund - 80%

Thanks!
My suggestion is Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04% for a little more diversification with the same very low expense ratio, instead of Vanguard 500 Index Fund (VFIAX) ER 0.04%.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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LadyGeek
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Re: Allocation and bonds

Post by LadyGeek » Thu Feb 13, 2020 4:50 pm

New member Careful Daughter has a question which I've moved into a new thread. See: [Help for my parents' taxable account]
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Topic Author
Lizbiz
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Joined: Tue Feb 11, 2020 10:07 pm

Re: Allocation and bonds

Post by Lizbiz » Fri Feb 14, 2020 12:08 am

Thanks all for you replies! I will be looking into these vanguard funds.

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