How to mirror Vanguards with a pre-tax 457 retirement plan

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How to mirror Vanguards with a pre-tax 457 retirement plan

Post by glad_is_I » Thu Feb 13, 2020 12:56 pm

Hi there,

I am just beginning to learned about FI and investing your money to properly to achieve FI. I currently have a pre-tax 457 retirement plan through work. It's similar to a 401(k) with the difference being that I am the account can be withdrawn from without penalty after severance from City service, regardless of age (subject to income taxes). With the 401(k) I would have to wait until age 59 1/2 to withdraw. Here is link for more info and a comparison between the City of New York's 457 and 401(k) plans: ... arison.pdf

Okay so, as I said, I am current contributing to a pre-tax 457 plan (7.5% of my income goes here and I have a current balance of 34K). However, I never paid much mind into how my contributions were being invested until now. Previously I had chosen a pre-arranged Portfolio. Below is how this Portfolios was being invested:
Fixed Income Funds – 12%
Stable Income – 0.0%
TIPS - 0.0%
Bond - 11.8%

Equity Funds – 88%
Equity Index – 45.1%
Mid-Cap – 7.0%
International – 29.1%
Small-Cap – 7.0%

The fee for this portfolio is .20%.

After reading JL Collin's The Simple Path of Wealth, I panicked and decided to instead allocate 90% of my contributions to the Equity index Fund (which is a portfolio of equity securities of companies listed on the U. S. securities exchanges that replicates the composition and characteristics of the S&P 500 Index, fee: .05%) and 10% in Bonds (which is a portfolio designed to be a well-diversified portfolio of government, agency, corporate, and mortgage backed securities, fee .13%).

Any opinions/advise on my move? Should I be doing anything different? Thank you!

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Re: How to mirror Vanguards with a pre-tax 457 retirement plan

Post by lakpr » Thu Feb 13, 2020 3:12 pm

Your move is quite reasonable, no need to panic. Your original portfolio also is reasonable, although it could have used a slight tweak than your allocations.

Basically, with your move, you omitted investing in the international stocks. Here's the deal with the international stocks:
- By investing in them, you gain the "diversification benefit". So your funds, instead of being invested in only 3400+ stocks (US), they get invested in 7000+ stocks (entire world)
- But as an asset class, at least over the last two decades (working career time for most of us), they have lagged US returns, sometimes by a country mile. Take last year for example. US stocks returned close to 30%. International stocks, on the other hand, earned only about 10% odd.

Vanguard wrote a paper in 2012, that if you invest 20% of your stock allocation into international funds, you gain about 85% of the diversification benefit. If you invest 30%, you gain 99% of (almost the entire) diversification benefit.

Before you even consider investment into international stock funds, though, you need to examine your beliefs. Do you believe that the current under-performance of international stock funds is a temporary blip, or a manifestation of deep rooted malaise? Do you even want to invest in them in the first place?

**PERSONALLY**, I went for the 85% of diversification benefit, and my portfolio is 55:15:30. I am about to be 50 years old (birthday later this year). I cheerfully admit that my investment into international funds is only because of the FOMO factor.

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Re: How to mirror Vanguards with a pre-tax 457 retirement plan

Post by Wiggums » Thu Feb 13, 2020 3:28 pm

Do you have a 401k or are you comparing your 457 to a 401k?

The IRS Rule of 55 allows an employee who is laid off, fired, or who quits a job between the ages of 55 and 59 1/2 to pull money out of their 401(k) or 403(b) plan without penalty. 1 This applies to workers who leave their jobs anytime during or after the year of their 55th birthdays.

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Re: How to mirror Vanguards with a pre-tax 457 retirement plan

Post by retired@50 » Thu Feb 13, 2020 8:47 pm

As is usually the case, I'm with lakpr on this one. I too invest in international stocks, and I think either allocation, current or former, is decent. It appears you've got a plan with reasonable expense ratios, so you're lucky in that regard. Keep on saving with every paycheck and increase the amount you commit to the plan if allowed and you'll be amazed by the time you retire.

Boggle - a game from Parker Brothers. Bogle - investor, founder of Vanguard.

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