Portfolio review and ESPP

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Topic Author
juro
Posts: 12
Joined: Mon Aug 19, 2019 2:56 am

Portfolio review and ESPP

Post by juro » Wed Jul 29, 2020 2:44 pm

I am seeking on advice on an Employee Stock Purchase Plan (ESPP), overall contribution recommendations and asset allocation.

Emergency funds: HYSA @ 1% 60k EF~6-7 mo expenses (plan to increase to 12) + $15K for sinking funds

Debt: Mortgage 225K remaining 15 yr @ 3% [current Zestimate= $725K]; In the process of refinancing to a 30 yr @ 2.68%

Tax Filing Status: Married Filing Jointly

Income: ~$270k combined gross

Tax Rate: 24% Federal, 9.3% State

State of Residence: CA

Age: 42 and 41 (+2 young children)

Desired Asset allocation: 70% stocks / 30% bonds (?)
Desired International allocation: 20-25% of stocks (?)

Current total portfolio: ~$725K

Current retirement assets

Taxable
None

His 401k
2.2% Fidelity Extended Market Index [0.04%]
28.2% Fidelity 500 Index [0.02%]
8.4% Fidelity International Index [0.04%]
20.2% Fidelity US Bond Index [0.3%]

Her 403b, 457b & 401a
19.8% UC Domestic Equity Index (tracks to Russell 3000) [0.005%]
6.9% UC International Equity Index (tracks to MSCI World) [0.01%]
10.8% UC Bond (tracks to Bloomberg Barclays US Aggregate Bond Index) [0.03%]

His Roth IRA
1.7% Fidelity Zero Total Market Index FZROX [0%]

Her Roth IRA
1.8% Fidelity Zero Total Market Index FZROX [0%]
_______________________________________________________________

Contributions

New annual Contributions
1) $19.5K his 401k (Company match: 100% of first 1%, 50% of next 5%; Ability to do after-tax (mega backdoor Roth) for ~$32K but we do not contribute to that currently)
2) $19.5k her 457b (no match)
3) $15K her 401a after tax (no match) - This allows up to the full $57K, with in-service withdrawls (mega backdoor Roth) so the 15K is rolled over into her Roth IRA.
4) ~$9K (8%) her mandatory pension contribution.
- Based on current salary would be ~$39K/yr @ 50 [min. retirement age], $88k @ 55 [anticipated retirement age]. Anticipated pension income is immediate upon retirement, COLA adjusted each year after retirement + medical benefits until eligible for Medicare.
5) $6K his (backdoor) Roth IRA

Available funds

Funds available in his 401(k)
 FID 500 INDEX (FXAIX) [0.02%]
FID US BOND IDX (FXNAX) [0.03%]
FID INTL INDEX (FSPSX) [0.04%]
FID EXTD MKT IDX (FSMAX) [0.04%]
MIP CL 1 7 day yield as of0 6/30/2020   1.57% [0.72%]
FID LOW PRICED STK K (FLPKX) [0.43%]
LOOMIS CORE PL BD Y (NERYX) [0.48%]
WA CORE BOND I (WATFX) [0.54%]
FID DIVERSIFD INTL K (FDIKX) [0.63%]
FID FREEDOM 2005 K (FSNJX) [0.42%]
FID FREEDOM INC K (FNSHX) [0.42%]
FID FREEDOM 2010 K (FSNKX) [0.45%]
FID FREEDOM 2015 K (FSNLX) [0.49%]
FID FREEDOM 2020 K (FSNOX) [0.52%]
FID FREEDOM 2025 K (FSNPX) [0.56%]
FID FREEDOM 2030 K (FSNQX) [0.59%]
FID FREEDOM 2035 K (FSNUX) [0.63%]
FID FREEDOM 2040 K (FSNVX) [0.65%]
FID FREEDOM 2045 K (FSNZX) [0.65%]
FID FREEDOM 2050 K (FNSBX) [0.65%]
FID FREEDOM 2055 K (FNSDX) [0.65%]
FID FREEDOM 2060 K (FNSFX)  [0.65%]
FID FREEDOM 2065 K (FFSDX) [0.65%]
NB SUSTAIN EQ I (NBSLX) [0.68%]
COL DIVIDEND INC I (GSFTX) [0.71%]
FID CONTRAFUND K (FCNKX) [0.77%]
FID OTC K (FOCKX) [0.79%]
JPM US SMALL CO L (JUSSX) [0.82%]
J H ENTERPRISE T (JAENX) [0.91%]
PIF DVRSD REAL AST I (PDRDX) [0.96%]

Funds available in her 403(b)/457/401a
UC Pathway 2020 [0.04%]
UC Pathway 2025 [0.04%]
UC Pathway 2030 [0.03%]
UC Pathway 2035 [0.02%]
UC Pathway 2040 [0.02%]
UC Pathway 2045 [0.02%]
UC Pathway 2050 [0.02%]
UC Pathway 2055 [0.02%]
UC Pathway 2060 [0.02%]
UC Pathway 2065 [0.02%]
UC Pathway Income [0.04%]
UC Gr Co Fund [0.35%]
UC Domes Eq Index [0.005%]
UC Social Equity [0.01%]
UC Domes Sm Cp Eq [0.01%]
UC Div Intl Fund [0.48%]
UC Intl Eq Index [0.01%]
UC Emrg Mkts Equity [0.01%]
UC Real Estate Fund [0.01%]
UC Tips Fund [0.01%]
UC Short Term Tips [0.01%]
UC Bond Fund [0.01%]
UC Savings Fund [0.03%]

Roth IRAs are at Fidelity

Questions:
1. ESPP: His employer just announced an ESPP. It's a 15% discount, 6 month offering period with a look back of either the beginning or end of offering period share prices, whichever is lower. Beyond the $25K/yr IRS limit, the company has an additional limit of 2K shares. As current prices, the cap at 2K shares would be ~$23K.
a. Where should this fall in our contribution priority among our various options? More important than the mega backdoor Roth contributions?
b. It seems the general consensus is to sell as soon as you are able to in order to ensure you realize the discount rate. I believe we would likely do an immediate sale upon purchase. We would then live off those funds but put an equivalent amount into her 401a/mega backdoor Roth. Should we redirect any current 401a contributions to fully fund this as it will end up back there anyway? We are also in the process of refinancing which would free up an additional $600/mo that we could also use towards this or any other "bucket".

2. Future buckets: We currently do not have enough available income to fully utilize the tax advantaged buckets (~$148K) before this ESPP option arose.
a. Anticipating further salary increases and reducing childcare costs overtime, what would be the best strategy for higher levels of contributions in the future? What should we work to max out next? I am assuming the Roth options since we are about 96% pretax and will have immediate pension income upon retirement.
b. Would you consider reducing the pre-tax options ($38K/yr combined) during this lower TJCA tax rate period to get more Roth exposure or just continue with contributing only those funds beyond maxing the 401k/457?

3. Asset Allocation:
a. On an overall basis, I continue to be conflicted on what our asset allocation should be, particularly factoring in the pension. If she retires at 55, that would cover about 75% of our current expenses. While the pension program itself is secure, it's not guaranteed until at least 50 which is what gives me pause. It seems there are two trains of thought - you have the ability to take more risk or you are already set so why incur any additional risk. We tend to be more on the risk adverse side in general but am open to both options. Recommendation on how to think about AA given the potential pension?
b. Would you recommend any changes to the current AA? I open to something other than 70/30 or 20-25 of International.

Thank you!

lakpr
Posts: 5708
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio review and ESPP

Post by lakpr » Wed Jul 29, 2020 4:49 pm

1. With the ESPP, you are being guaranteed a 30% return on the money year-on-year. It's all taxable income of course, but it's foolish to let that opportunity pass up. Where did I come up with 30%? That's based on two cycles per year, to which you have to commit $23k (or $25k). You will gain all that money back when you sell at the end of 6-month period, which you will plow back into the next ESPP cycle. So 2 cycles, with no more commitment than $25k at a time. You get 15% discount the first time, and another 15% discount the second time, for a total of 30%.

I mean, NO QUESTION that ESPP should be your first order of funding priority, even ahead of 401k / 403b / 401a etc.

2. I would NOT invest in taxable account when the Mega Backdoor Roth (hereafter abbreviated MBR) is available. Of course, it requires that your EF be beefed up first, and you are already doing that. Once your EF is at about 12 months of expenses, go all in on MBR.

If you lose your job (which you can classify as an emergency), *AND* you deplete your emergency fund, the *contributions* to the MBR can be withdrawn tax free. Not sure which flavor of MBR you have -- Roth conversion in plan, or rollover to external Roth IRA. In the first case, you need to roll the MBR funds over to Roth IRA, and then withdrawal rules of Roth IRA govern (all contributions can be withdrawn tax-free, earnings will attract tax and penalties, etc.). You will need to keep good records of how much is converted to Roth, and on what date.

3. The ratio of 500 index fund to extended market index fund, to replicate the Total Stock Market, is 82:18 according to the Wiki. By that criterion, you should increase the allocation to your Fidelity Extended Market Index fund, in your 401k. Other than this, your 401k selections are spot-on, as are the selections in Her 403b, 457b, 401a.

Topic Author
juro
Posts: 12
Joined: Mon Aug 19, 2019 2:56 am

Re: Portfolio review and ESPP

Post by juro » Fri Jul 31, 2020 6:39 pm

lakpr wrote:
Wed Jul 29, 2020 4:49 pm
1. With the ESPP, you are being guaranteed a 30% return on the money year-on-year. It's all taxable income of course, but it's foolish to let that opportunity pass up. Where did I come up with 30%? That's based on two cycles per year, to which you have to commit $23k (or $25k). You will gain all that money back when you sell at the end of 6-month period, which you will plow back into the next ESPP cycle. So 2 cycles, with no more commitment than $25k at a time. You get 15% discount the first time, and another 15% discount the second time, for a total of 30%.

I mean, NO QUESTION that ESPP should be your first order of funding priority, even ahead of 401k / 403b / 401a etc.

2. I would NOT invest in taxable account when the Mega Backdoor Roth (hereafter abbreviated MBR) is available. Of course, it requires that your EF be beefed up first, and you are already doing that. Once your EF is at about 12 months of expenses, go all in on MBR.

If you lose your job (which you can classify as an emergency), *AND* you deplete your emergency fund, the *contributions* to the MBR can be withdrawn tax free. Not sure which flavor of MBR you have -- Roth conversion in plan, or rollover to external Roth IRA. In the first case, you need to roll the MBR funds over to Roth IRA, and then withdrawal rules of Roth IRA govern (all contributions can be withdrawn tax-free, earnings will attract tax and penalties, etc.). You will need to keep good records of how much is converted to Roth, and on what date.

3. The ratio of 500 index fund to extended market index fund, to replicate the Total Stock Market, is 82:18 according to the Wiki. By that criterion, you should increase the allocation to your Fidelity Extended Market Index fund, in your 401k. Other than this, your 401k selections are spot-on, as are the selections in Her 403b, 457b, 401a.
Thank you very much! I appreciate the response and how to order the contributions. ESPP first it is! I'm also glad for the confirmation that a taxable account isn't needed with the MBR bandwidth we have available. My MBR plan allows rollovers to an external Roth IRA which is what we have been doing. My partners is in-plan only. Luckily, I started a spreadsheet when we began the MBR rollovers so we'll have records from the start. Thanks again.

dbr
Posts: 33129
Joined: Sun Mar 04, 2007 9:50 am

Re: Portfolio review and ESPP

Post by dbr » Sat Aug 01, 2020 8:22 am

An ESPP is not a contribution but based on selling as soon as allowed is just a transaction that averages a small gain all the time. People often choose to participate but it has nothing to do with investing at all. I would probably just account for whatever holdings are there as if it was some cash stuffed in my drawer and forgotten.

Do not under any circumstances allow those stock holdings to accumulate.

masrepus
Posts: 41
Joined: Fri Apr 24, 2015 12:14 pm

Re: Portfolio review and ESPP

Post by masrepus » Sat Aug 01, 2020 3:03 pm

dbr wrote:
Sat Aug 01, 2020 8:22 am
An ESPP is not a contribution but based on selling as soon as allowed is just a transaction that averages a small gain all the time. People often choose to participate but it has nothing to do with investing at all. I would probably just account for whatever holdings are there as if it was some cash stuffed in my drawer and forgotten.

Do not under any circumstances allow those stock holdings to accumulate.
Agreed, this is how I view the ESPP. My cash into a 6 month CD for 15% (before taxes or other loss/gain). Sell as soon as you get it and go for the next 6 month cycle. Very little risk if you can sell right away.

Topic Author
juro
Posts: 12
Joined: Mon Aug 19, 2019 2:56 am

Re: Portfolio review and ESPP

Post by juro » Sat Aug 01, 2020 4:59 pm

dbr wrote:
Sat Aug 01, 2020 8:22 am
An ESPP is not a contribution but based on selling as soon as allowed is just a transaction that averages a small gain all the time. People often choose to participate but it has nothing to do with investing at all. I would probably just account for whatever holdings are there as if it was some cash stuffed in my drawer and forgotten.

Do not under any circumstances allow those stock holdings to accumulate.
Understood. My wording was not correct. I was thinking of it in terms of our overall retirement savings. We plan to sell as soon as we are able to do so and will likely use it to offset equivalent contributions to the MBR.

KyleAAA
Posts: 8419
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Portfolio review and ESPP

Post by KyleAAA » Sat Aug 01, 2020 9:54 pm

If there is no holding period, ESPP is by far the higher priority. It's free money. With the lookback, you could wind up getting a huge discount if the stock performs very well.

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