Our Finances - A "Check Up" Post

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Topic Author
20Dukes11
Posts: 71
Joined: Mon Dec 10, 2012 8:25 am

Our Finances - A "Check Up" Post

Post by 20Dukes11 » Tue May 19, 2020 7:54 pm

Hello all,

I’ve been a lurker on the site here for roughly 9 or so years. I made an initial post years ago and gained a lot of insight and advice from the responses I received. I thought now would be an appropriate time for a “check-up” post here on our current financial situation.

Tax Filing Status: Married Filing Joint
State of Residence: NC
Age: 30/31 (him/her)
Combined Annual Salary, before taxes: $135k
Tax bracket: 22%
Emergency funds: roughly 12 months
Debt: Mortgage of $150k, 30 years @ 3.75%, home value $283k
Portfolio size: ~$240k
Desired Asset allocation: 90/10 stocks/bonds

Portfolio
His Employer 401k (~$90k) – Employer matches 8%, regardless of how much I contribute. Contributions can either be Roth or Trad’l
- Vanguard Institutional Index Fund (VINIX): $81,600
- Vanguard Total Int’l Stock Index Fund (VTSNX): $8,400

Her employer 457B (~$37.6k)
- Vanguard Extended Market Index (VEMPX): $20,500
- Vanguard Total Bond Market Institutional Shares (VBMPX): $17,100

His Roth IRA (~$43.2k)
- Vanguard Total Bond Market Index (VBTLX): $$3,100
- Vanguard Extended Market Index Fund (VEXAX): $9,300
- Vanguard 500 Index Fund Admiral Shares (VFIAX): $30,800

Her Roth IRA ($31.6k)
- Vanguard Total Bond Market Index Fund (VBTLX): $6,300
- Vanguard 500 Index Fund Admiral Shares (VFIAX): $8,100
- Vanguard Total International Stock Index Fund (VTIAX): $17,200

Her NC State Employer Retirement Pension: $37k

Expense ratios on the funds listed above are all very low, with an average of 0.06. Not counting my wife’s pension, the allocation above is roughly 73/13/13 (US/Int’l/Bonds), which I’m OK with.

Current Contributions (roughly a 15% savings rate)
His 401k: $7,800 + Employer Contribution (8% match)
Max His Roth IRA: $6,000
Max Her Roth IRA: $6,000

Here are my thoughts and questions:
1. I know most folks will look at our current contributions and ask why we aren’t maxing out our 401k/457b plans before the Roth IRAs. We have a 1 year old baby, and I was reading that it is better to max out your Roth IRAs for use as education funds before 529 funds. So, that’s where my head is at with the fully funded Roth IRAs – some of that money is for the kiddo.

2. After having read a handful of posts here about the Roth vs Traditional 401k debate, I’m pretty sure most folks would suggest I switch my contributions over to be entirely traditional and leave it alone. I've wrung my hands over this for years and, from the portfolio shown above, I probably have close to a 50/50 split of Roth vs Traditional right now. One curve ball might be my wife’s pension, so I’m curious to hear folks’ thoughts on this.

3. I realize there is a lot of redundancy in some of the funds we’re using across these different accounts. Over the years, its just ended up this way – I’m really not sure if this is an issue or not.


Anyways, thanks in advance for any advice or guidance you all can provide.

retired@50
Posts: 2543
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Our Finances - A "Check Up" Post

Post by retired@50 » Tue May 19, 2020 8:31 pm

20Dukes11 wrote:
Tue May 19, 2020 7:54 pm
Hello all,
...
Portfolio
His Employer 401k (~$90k) – Employer matches 8%, regardless of how much I contribute. Contributions can either be Roth or Trad’l
- Vanguard Institutional Index Fund (VINIX): $81,600
- Vanguard Total Int’l Stock Index Fund (VTSNX): $8,400

Her employer 457B (~$37.6k)
- Vanguard Extended Market Index (VEMPX): $20,500 <-- Sell $9,400 of this to buy VBMPX below.
- Vanguard Total Bond Market Institutional Shares (VBMPX): $17,100 <-- BUY more bonds here by selling VEMPX ~ $9,400

His Roth IRA (~$43.2k)
- Vanguard Total Bond Market Index (VBTLX): $$3,100 <-- Sell these bonds and buy VEXAX~ $3,100
- Vanguard Extended Market Index Fund (VEXAX): $9,300
- Vanguard 500 Index Fund Admiral Shares (VFIAX): $30,800

Her Roth IRA ($31.6k)
- Vanguard Total Bond Market Index Fund (VBTLX): $6,300 <-- Sell these bonds and buy VEXAX ~$6,300
- Vanguard 500 Index Fund Admiral Shares (VFIAX): $8,100
- Vanguard Total International Stock Index Fund (VTIAX): $17,200
...
Here are my thoughts and questions:
1. I know most folks will look at our current contributions and ask why we aren’t maxing out our 401k/457b plans before the Roth IRAs. We have a 1 year old baby, and I was reading that it is better to max out your Roth IRAs for use as education funds before 529 funds. So, that’s where my head is at with the fully funded Roth IRAs – some of that money is for the kiddo.

2. After having read a handful of posts here about the Roth vs Traditional 401k debate, I’m pretty sure most folks would suggest I switch my contributions over to be entirely traditional and leave it alone. I've wrung my hands over this for years and, from the portfolio shown above, I probably have close to a 50/50 split of Roth vs Traditional right now. One curve ball might be my wife’s pension, so I’m curious to hear folks’ thoughts on this.

3. I realize there is a lot of redundancy in some of the funds we’re using across these different accounts. Over the years, its just ended up this way – I’m really not sure if this is an issue or not.


Anyways, thanks in advance for any advice or guidance you all can provide.
You should read this wiki page which discusses the Traditional 401k vs. Roth 401k. Many people misunderstand this important choice. If you've read and understood this page already, then okay.
https://www.bogleheads.org/wiki/Traditional_versus_Roth

See my additional notes above in blue. The basic idea is to hold bonds in the tax-deferred accounts like 457b and 401k. Then use the Roth IRA space just for stock index funds. See this important wiki page that discusses the tax efficient fund placement.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
This is one person's opinion. Nothing more.

JamesJonesJrJr
Posts: 63
Joined: Sun Apr 19, 2020 3:00 pm

Re: Our Finances - A "Check Up" Post

Post by JamesJonesJrJr » Tue May 19, 2020 8:45 pm

Noble of you to put so much money toward your kid's education. I whipped up an estimate of the effect your wife's pension will have on your retirement. I assumed she won't receive it until she's 67. I also assumed you're spending will remain roughly at your current level. Here's a link to the analysis.

As you can see from the last chart on the page, your wife's pension will end up being a relatively small component of your retirement income. Just eyeballing it, I think I can confirm your suspicion that you probably should be putting more away pre-tax.

EDIT: I may have misunderstood your wife's pension. Is it a defined benefit plan in which she'll receive $37k/year at 67?

HomeStretch
Posts: 4345
Joined: Thu Dec 27, 2018 3:06 pm

Re: Our Finances - A "Check Up" Post

Post by HomeStretch » Tue May 19, 2020 8:56 pm

20Dukes11 wrote:
Tue May 19, 2020 7:54 pm
His Employer 401k (~$90k) – Employer matches 8%, regardless of how much I contribute.
Current Contributions (roughly a 15% savings rate)
His 401k: $7,800 + Employer Contribution (8% match)
Max His Roth IRA: $6,000
Max Her Roth IRA: $6,000
Do you mean your employer matches 8% of your contributions or your employer contributes 8% of your salary? If the former, you are leaving free money from your employer on the table by not contributing more than $7,800 to your 401k up to the annual limit of $19,500.

Topic Author
20Dukes11
Posts: 71
Joined: Mon Dec 10, 2012 8:25 am

Re: Our Finances - A "Check Up" Post

Post by 20Dukes11 » Wed May 20, 2020 7:16 am

Going to try and respond to a few questions below:

HomeStretch wrote:
Tue May 19, 2020 8:56 pm
Do you mean your employer matches 8% of your contributions or your employer contributes 8% of your salary? If the former, you are leaving free money from your employer on the table by not contributing more than $7,800 to your 401k up to the annual limit of $19,500.
The latter - employer contributes 8% of my salary, regardless of how much I put in.

JamesJonesJrJr wrote:
Tue May 19, 2020 8:45 pm
Noble of you to put so much money toward your kid's education. I whipped up an estimate of the effect your wife's pension will have on your retirement. I assumed she won't receive it until she's 67. I also assumed you're spending will remain roughly at your current level. Here's a link to the analysis.

As you can see from the last chart on the page, your wife's pension will end up being a relatively small component of your retirement income. Just eyeballing it, I think I can confirm your suspicion that you probably should be putting more away pre-tax.

EDIT: I may have misunderstood your wife's pension. Is it a defined benefit plan in which she'll receive $37k/year at 67?
Correct about the pension, it is a defined benefit plan, where its calculated as an average of the highest 4 years' compensation, and divided somehow by the number of years' service. I estimate my wife's highest average 4 year salary would be something around $70k, and I imagine her total years' service will likely be something around 10-12 years. She's not planning to stay with current employer too much longer.

To clarify on the kiddo's education funding - the Roth IRAs are being funded in part for this education, but also for our retirement as well. I suppose a better approach here would be to contribute to the Roth IRAs as much as we can for these educational purposes, but then everything else we're putting towards retirement should instead first be placed in the rest of 401k/457b space (traditional)?

retired@50 wrote:
Tue May 19, 2020 8:31 pm

You should read this wiki page which discusses the Traditional 401k vs. Roth 401k. Many people misunderstand this important choice. If you've read and understood this page already, then okay.
https://www.bogleheads.org/wiki/Traditional_versus_Roth

See my additional notes above in blue. The basic idea is to hold bonds in the tax-deferred accounts like 457b and 401k. Then use the Roth IRA space just for stock index funds. See this important wiki page that discusses the tax efficient fund placement.
https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
Thanks for this - the shifting around of funds makes total sense, I will get work on that. I will also re-read both of the referenced Wiki posts; I've read them in the past, but admittedly they are dense for me and I will take a more focused look this time around.

jm1495
Posts: 37
Joined: Thu Feb 25, 2016 1:06 pm

Re: Our Finances - A "Check Up" Post

Post by jm1495 » Wed May 20, 2020 10:42 am

Are you in year one of the mortgage? I would consider a refi for a better rate.

HomeStretch
Posts: 4345
Joined: Thu Dec 27, 2018 3:06 pm

Re: Our Finances - A "Check Up" Post

Post by HomeStretch » Wed May 20, 2020 11:11 am

+1 to retired@50's suggestion to move bonds from His/Her Roth IRAs to Her 457b.

You could also simplify the accounts a bit by reducing the # of holdings held in each account and set up His 401k to hold all 4 funds so you can do all rebalancing, as needed, in just that one account. For example, you could hold:
1. only 1 fund (VFIAX) in each Roth IRA,
2. 1 or 2 in Her 457b (VEMPX, VBMPX)
3. 3 or all 4 funds in His 401k depending on 401k fund choices. Does His 401k offer a US Total Bond Market fund and an U.S. Emerging Markets fund?

After you adjust your holdings by account, adjust the allocation, if necessary, of your new contributions to help keep your portfolio in balance.

Right now it looks like 12% of your portfolio is held in international equities. Is that your desired allocation %?

Topic Author
20Dukes11
Posts: 71
Joined: Mon Dec 10, 2012 8:25 am

Re: Our Finances - A "Check Up" Post

Post by 20Dukes11 » Wed May 20, 2020 9:28 pm

jm1495 wrote:
Wed May 20, 2020 10:42 am
Are you in year one of the mortgage? I would consider a refi for a better rate.
We're in year 5 of the mortgage. I considered a re-fi, but its possible we'll be selling the home in the next 2 years and I thought perhaps the re-fi wouldn't be worth it. But perhaps if I'm not 100% sure we'll be selling, a re-fi makes sense? Good question.
HomeStretch wrote:
Wed May 20, 2020 11:11 am
+1 to retired@50's suggestion to move bonds from His/Her Roth IRAs to Her 457b.

You could also simplify the accounts a bit by reducing the # of holdings held in each account and set up His 401k to hold all 4 funds so you can do all rebalancing, as needed, in just that one account. For example, you could hold:
1. only 1 fund (VFIAX) in each Roth IRA,
2. 1 or 2 in Her 457b (VEMPX, VBMPX)
3. 3 or all 4 funds in His 401k depending on 401k fund choices. Does His 401k offer a US Total Bond Market fund and an U.S. Emerging Markets fund?

After you adjust your holdings by account, adjust the allocation, if necessary, of your new contributions to help keep your portfolio in balance.

Right now it looks like 12% of your portfolio is held in international equities. Is that your desired allocation %?

Thanks. I'm going to do some work on this over the weekend, and at least try to get through step 1 of moving the bonds around, etc. Then I will also look closely at simplifying the accounts.

I really appreciate all the input on this! Thanks to each of you for your time and insight.

Fishing50
Posts: 400
Joined: Tue Sep 27, 2016 1:18 am

Re: Our Finances - A "Check Up" Post

Post by Fishing50 » Fri May 22, 2020 8:13 am

Some Roth 401k contributions is probably a good idea with the future pension. Re-evaluate the Roth contributions when current tax rates expire after 2025.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

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