Better late than never

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Topic Author
akom
Posts: 6
Joined: Sun Sep 13, 2020 5:23 pm

Better late than never

Post by akom »

Emergency funds: Yes

Debt: None (but considering buying a house shortly).

Tax Filing Status: Head of Household (unmarried domestic partner)

Tax Rate: 24% Federal, 5.25% State

State of Residence: NC

Age: 43

Desired Asset allocation: ?
Desired International allocation: ?

Current Total Portfolio: mid 6 digit

Current Retirement Assets:

(% of total across retirement accounts shown)

His Traditional IRA:
6.96% : MainStay CBRE Real Estate Fund Class (CLARX) (1.18)
11.9% : Voya Large Cap Value Fund Class A (IEDAX) (1.1)
5.92% : Voya Intermediate Bond Fund Class A (IIBAX) (0.72)
13.58% : Voya MidCap Opportunities Fund Class (NMCAX) (1.26)
0.75% : 1919 Financial Services Fund Class A (SBFAX) (1.37)
11.47% : Voya Corporate Leaders 100 Fund Class (VYCAX) (0.81)
2.31% : Voya Global Multi-Asset Fund Class A (VYGJX) (1.15)
7.58% : Voya Mid Cap Research Enhanced Index (VYMQX) (0.95)

His Roth
0.94% : Voya Intermediate Bond Fund Class A (IIBAX) (0.72)
2.73% : Voya MidCap Opportunities Fund Class (NMCAX) (1.26)
0.47% : Voya Corporate Leaders 100 Fund Class (VYCAX) (0.81)
2.08% : Voya Mid Cap Research Enhanced Index (VYMQX) (0.95)

His 401k: (Tickers not available):

5.05% : (Large Cap Value / LSV Asset Management) (0.51)
5.05% : (Large Cap Growth I Fund (managed by T. Rowe Price)) (0.52)
1.86% : (Mid Cap Value Fund (sub-advised by Wellington Management)) (?)
1.86% : (Mid Cap Growth / Artisan Partners Fund) (0.77)
1.59% : (Vanguard Small-Cap Value Index Fund Institutional Shares) (0.06)
1.59% : (Small Cap Growth / TimesSquare Fund) (0.8)
9.56% : (T. Rowe Price Overseas Stock Fund I Class) (0.66)

Available funds in employer-provided retirement plans:

Vanguard Wellington Fund Admiral Shares (inception date 05/14/2001) (0.17%)
Core Bond Core Bond Enhanced Index / PGIM Fund (inception date 03/15/1999) (0.16%)
Invesco Oppenheimer Developing Markets Fund Class R6 (inception date 12/29/2011) (0.83%)
T. Rowe Price Overseas Stock Fund I Class (inception date 08/28/2015) (0.66%)
Dryden S&P 500 Index Fund (inception date 12/31/1987) (0.04%)
Large Cap Growth I Fund (managed by T. Rowe Price) (inception date 07/01/2001) (0.52%)
Large Cap Value / LSV Asset Management (inception date 07/28/2002) (0.51%)
Vanguard Mid-Cap Index Fund Admiral Shares (inception date 11/12/2001) (0.05%)
Mid Cap Growth / Artisan Partners Fund (inception date 09/29/2000) (0.77%)
Mid Cap Value Fund (sub-advised by Wellington Management) (inception date 09/30/1999) (0.71%)
Delaware Small Cap Core Fund Class R6 (inception date 05/02/2016) (0.72%)
Small Cap Growth / TimesSquare Fund (inception date 12/04/1997) (0.80%)
Vanguard Small-Cap Value Index Fund Institutional Shares (inception date 12/07/1999) (0.06%)

Cash
Some (mid 5 digit) cash is available for investment or (more) for house purchase (TBD), not included in totals.

_______________________________________________________________
Note: Total percentage of all the above accounts together (not each account individually) should equal 100%.

Contributions

New annual Contributions
(max) his 401k (employer matches 3%)

Questions:
1. My IRA and 401k Mutual fund selections are unlikely to be optimal (chosen at random). What should I change?

2. I'm considering buying a house this year (mid 6-digits) with 20% down in a desirable area at below market price (my current rent would equal anticipated 30 year mortgage payment), planning to stay 4+ years. Rent-vs-buy calculators predict 2 year break-even at anticipated gains and current interest rates. Are there compelling reasons not to (ie in favor of other investing)? Closing on the house would consume 70% of available liquid and would make me less likely to invest additional funds in anything that is hard to liquidate.

3. I'm in an unmarried domestic partnership (filing as head-of-household with one dependent), paying my non-working partner's complete college tuition (2 more years) and all expenses. Am I missing out on any tax breaks (I haven't found any besides head-of-household)?
Last edited by akom on Mon Sep 14, 2020 1:10 pm, edited 1 time in total.
mhalley
Posts: 8360
Joined: Tue Nov 20, 2007 6:02 am

Re: Better late than never

Post by mhalley »

You are paying too much in fees. The go to funds around here are low ER passive index funds, specifically a total stock market, total international stock market and total bond market fund. You could move your iras to fidelity, Vanguard or Schwab to get the best deal.
As for the 401k, you could just go with the. S and P 500 fund and core bond index, or try to replicate the total stock market as per the wiki. You could put the intl in your iras or use the cheapest one available in the 401k.
https://www.bogleheads.org/wiki/Approxi ... ock_market
I recommend reading the wiki, esp the asset allocation, three fund portfolio and getting started sections.
https://www.bogleheads.org/wiki/Getting_started
https://www.bogleheads.org/wiki/Asset_allocation
https://www.bogleheads.org/wiki/Three-fund_portfolio
Owning your own home is a great way to build wealth, but it is a lifestyle choice. The wiki discusses this also.

https://www.bogleheads.org/wiki/Owning_vs_renting
4 years is cutting it close, most financial experts advise buying when staying 5 plus years.

Further tax breaks: do you have access to a high deductible Hsa compatible health insurance?
Compound
Posts: 833
Joined: Mon May 26, 2014 1:32 pm

Re: Better late than never

Post by Compound »

You could do much better (that is to say you could easily find cheaper funds) for your Roth and traditional IRA accounts. Consider moving those accounts to Vanguard or another broker that will give you access to low cost index funds (such as Schwann or Fidelity). You could also pick lower cost funds in your 401k. For instance you have access to a very cheap S&P500 fund, which could be your primary holding in that account. Cost matters, a lot!

It seems you need to give some thought to what overall asset allocation you could stick to over time. That would then guide your individual fund selections over the whole portfolio.
Topic Author
akom
Posts: 6
Joined: Sun Sep 13, 2020 5:23 pm

Re: Better late than never

Post by akom »

Thank you all, I'll review the wiki, finish reading the Boggleheads Guide and work on a strategy.
lakpr
Posts: 5959
Joined: Fri Mar 18, 2011 9:59 am

Re: Better late than never

Post by lakpr »

Repeat @mhalley's advice.
  1. Not sure where your Traditional IRA is currently held, but investigate if it can be rolled over into the 401k plan. With a 24% tax bracket, you are likely beyond the limits of contributing directly to the Roth IRA. By moving your Traditional IRA to the 401k plan, you get the pre-tax assets out of the way. Once that's done, you contribute to a Traditional IRA again (which is now empty of all pre-tax assets). Since you are also contributing to a 401k in the same year, this contribution is likely non-deductible. Two days later convert to Roth IRA. The only extra tax you would pay would be on the small amount of gains in the two days time between when your contribution hit the account and when the Roth conversion takes place.

    This is called Backdoor Roth, and the URL I linked to is the Wiki entry on the topic. Please be sure to read thoroughly.
    Workaround to insert blank line in a list
  2. Consider investing all the Roth money into stocks. The basic premise of the Roth account is that, in exchange for paying taxes here and now, all future growth is tax free. As such it is in your interest to maximize that tax free growth. Stated in other words, your Roth IRA should be packed with those asset classes on which you reasonably expect higher growth: stocks. Not bonds. Adding bonds into the Roth IRA is only going to slow down that growth. Why would you want shoot yourself in the foot?
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  3. I noticed that you have not indicated your desired asset allocation and desired international allocation. In cases like these where the poster is not sure how to invest, I usually recommend Age-15 in bonds, rounded up or down to the nearest 5%. That would mean 30% in bonds for you. I also recommend starting off with 20% of the stocks allocation to international equities, for diversification purposes. 20% of 70% is 14%.

    So a good balanced portfolio for your age would be 56% domestic stocks, 14% international stocks, and 30% bonds. You don't need international bonds, domestic bonds are good enough to fit the purpose of stabilizing your portfolio.

    If you are agreeable with this suggestion, I also suggest that all bonds be placed in your 401k plan (just like I suggested Roth IRA be packed with stocks), since eventually on withdrawal of 401k funds you need to pay taxes, and the slower growth in 401k = lower taxes at the back end. You are still sticking to your asset allocation all through, just skewing the growth and tax advantages in your favor.
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  4. Within your 401k, these are the best choices I see:
    1. Large Cap - Blend Dryden S&P 500 Index Fund (inception date 12/31/1987) (0.04%)
    2. Fixed Income - Core Bond Core Bond Enhanced Index / PGIM Fund (inception date 03/15/1999) (0.16%)
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    The only international equities fund I see in your 401k plan has very high expense ratio of 0.86% so I suggest you skip them in your 401k. Get your international equities in your Roth IRA.

    You can omit the rest of the funds as they are either loaded with high expense ratios, or cover only small sectors of the total market. S&P 500 index covers about 83% of the market, so all those mid-cap and small-cap and growth and value sectors there in cover only the remainder 17%. You CAN invest in those funds if you want to, but my guess is that it won't make a difference in the eventual returns on your portfolio.
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  5. As has been advised by @mhalley, again, move your Roth IRA to a Vanguard or Fidelity or Schwab. Invest that Roth IRA entirely in a total stock market fund (tickers VTSAX, FSKAX and SWTSX at the respective providers).
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  6. Assuming you will max your 401k contribution and your Roth IRA (through Backdoor), your total annual contributions = $19,500 + $6000 = $25,500. Let me round it to $25k for ease. A 56:14:30 split of this portfolio means $14k : $3500 : $7500 allocation respectively. Of these, $7500 goes entirely into your 401k into the Core Bond fund. $3500 will go into your Roth IRA for international equities, and the remainder $2500 in Roth IRA will be invested in a total stock market index. ($14k - $2.5k = $11.5k) will be allocated to the Dryden S&P500 index in the 401k.
Topic Author
akom
Posts: 6
Joined: Sun Sep 13, 2020 5:23 pm

Re: Better late than never

Post by akom »

Really appreciate the detail, thanks!
tashnewbie
Posts: 678
Joined: Thu Apr 23, 2020 12:44 pm

Re: Better late than never

Post by tashnewbie »

Good advice above.

I agree that the S&P 500 index fund is the best US stock fund option in your 401k.

Bloomberg Barclays US Aggregate Bond Index* (N/A) - this may be a good bond option - what is the ticker symbol and expense ratio?

MSCI Emerging Markets Net Dividend Index* (N/A) - this may be a good international fund option in your 401k. What's the ticker symbol and expense ratio?
lakpr
Posts: 5959
Joined: Fri Mar 18, 2011 9:59 am

Re: Better late than never

Post by lakpr »

tashnewbie wrote: Mon Sep 14, 2020 10:04 am Good advice above.

I agree that the S&P 500 index fund is the best US stock fund option in your 401k.

Bloomberg Barclays US Aggregate Bond Index* (N/A) - this may be a good bond option - what is the ticker symbol and expense ratio?

MSCI Emerging Markets Net Dividend Index* (N/A) - this may be a good international fund option in your 401k. What's the ticker symbol and expense ratio?
I think the OP just listed the index the particular fund attempts to follow, not that there is a fund with that name.
So for example, "Vanguard Wellington Fund Admiral Shares (inception date 05/14/2001) (0.17%)" attempts to follow the benchmark "Morningstar Moderate Target Risk TR USD*"
Similarly, the "Fixed Income - Core Bond Core Bond Enhanced Index / PGIM Fund (inception date 03/15/1999) (0.16%)" attempts to follow the benchmark "Bloomberg Barclays US Aggregate Bond Index* (N/A)".
Lastly, "Mid Cap Growth / Artisan Partners Fund (inception date 09/29/2000) (0.77%) " attempts to follow "Russell MidCap Growth Index"
Topic Author
akom
Posts: 6
Joined: Sun Sep 13, 2020 5:23 pm

Re: Better late than never

Post by akom »

Exactly right, I mistakenly pasted "reference" entries from the PDF. I've now removed them in the original post.
Topic Author
akom
Posts: 6
Joined: Sun Sep 13, 2020 5:23 pm

Re: Better late than never

Post by akom »

lakpr wrote: Sun Sep 13, 2020 8:30 pm
  1. Not sure where your Traditional IRA is currently held, but investigate if it can be rolled over into the 401k plan. With a 24% tax bracket, you are likely beyond the limits of contributing directly to the Roth IRA. By moving your Traditional IRA to the 401k plan, you get the pre-tax assets out of the way. Once that's done, you contribute to a Traditional IRA again (which is now empty of all pre-tax assets). Since you are also contributing to a 401k in the same year, this contribution is likely non-deductible. Two days later convert to Roth IRA. The only extra tax you would pay would be on the small amount of gains in the two days time between when your contribution hit the account and when the Roth conversion takes place.

    This is called Backdoor Roth, and the URL I linked to is the Wiki entry on the topic. Please be sure to read thoroughly.
    Workaround to insert blank line in a list
Turns out that my 401k does not accept IRA rollovers. Is it safe to assume that Backdoor Roth is off the table?
lakpr
Posts: 5959
Joined: Fri Mar 18, 2011 9:59 am

Re: Better late than never

Post by lakpr »

akom wrote: Tue Sep 15, 2020 12:11 pm Turns out that my 401k does not accept IRA rollovers. Is it safe to assume that Backdoor Roth is off the table?
With nearly 60% of your portfolio stuck in the Traditional IRA, I am afraid so!

But we can still make good lemonade out of the lemons. It does call for a slight revamp of the portfolio.

If you can move the Traditional IRA to Vanguard / Fidelity / Schwab, you will have access to bond index funds with much lower expense ratios than what is available in your 401k. Bonds are best placed in a tax-deferred account (401k or Traditional IRA). The stock index funds can be anywhere.

Given that you already have access to the stock funds are equivalent or better expense ratios in your 401k (Vanguard 500 index fund retail has 0.04% expense ratio, same as your Dryden fund, for example), perhaps it is best for you to focus your 401k contributions exclusively to the Dryden fund and have all your bond allocations within the Traditional IRA.

A reduction in expense from 0.16% to 0.04% (at Vanguard for VBTLX) or even 0.025% (at Fidelity for FXNAX), you will save at least 0.12% and may be 0.14%. Given that the bond funds are yielding approximately 1.2%, you will earn 10% more in your IRA than in the 401k.

You can even house your international equities within the Traditional IRA for a lower expense ratio. I know I recommended that these be placed in your Roth IRA earlier. But if the backdoor Roth is off the table ... *AND* if you share my pessimistic outlook for international equities in the near future, then it makes sense to pack the highest growth asset classes in your Roth IRA (US Equities), and lower growth asset classes (which now includes not only bonds but also international equities) into your Traditional IRA.

Taking the same example as my previous post: $25k to invest per year, with $3500 to international equities and $7500 to bonds. Your contribution would be 100% US equities in both 401k plan and in the Roth IRA. But you will sell US equities in your Traditional IRA $11,000; then buy bonds and international equities with that money. Same end result, just takes 2 transactions instead of one set-and-forget settings on your contributions for the 401k.
Topic Author
akom
Posts: 6
Joined: Sun Sep 13, 2020 5:23 pm

Re: Better late than never

Post by akom »

Many thanks again to all who replied, I've implemented many of the suggestions and am in what I hope to be a much better shape as a result. I wound up going with the recommended allocation (30% Bonds, 56% Domestic, 14% International) all in low cost index funds. I plan on annual rebalancing.
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