Portfolio Review Request

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Topic Author
hadron
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Portfolio Review Request

Post by hadron »

Hello Everyone,

Been a long term follower of the forum and learned a bunch from others here. I wanted get a quick review of my current portfolio and see if there are any recommendations for change/simplification.

Age: 41/39. Kids 9 & 7.
HHI: 500-600K (Single income)
Taxable: 3.1m (2.1m in VTSAX/VTCLX/VFIAX; 700k in VFWAX; 300k in VTBLX)
401(K): 430K (all of it in Target 2040 fund) - I max out every year + doing mega backdoor Roth starting this year)
Roth (his and hers): 110K (65K in VTSAX and 45K in VTIAX) - I do backdoor roth for both of us every year
Kids 529 Plan: 120K
Home: 1.5M (estimated) (Mortgage Bal: 1.05M at 3.125%; 29 yrs remaining)

Questions:
- Any tweaks I can do to my fund placement? My allocation target is 80/20. I am a bit off right now due to the run up in stocks.
- I do want to pull back/down scale from my job in tech in around 4 years time when I am 45. Am I on track? Anything do I need to do in advance for that to be easier? My target number to "retire" is 6M. Not sure if I can get there by 45. But I definitely want to scale back from my work in some fashion.


Thanks
livesoft
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Re: Portfolio Review Request

Post by livesoft »

I wonder if you saw this about portfolio review requests:
viewtopic.php?f=1&t=6212
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Topic Author
hadron
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Re: Portfolio Review Request

Post by hadron »

I can repost in that format. Thanks.
Topic Author
hadron
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Re: Portfolio Review Request

Post by hadron »

Emergency funds: 40K in checking

Debt: 1.05M mortgage 3.125% fixed 29 years remaining. No other debt.

Tax Filing Status: MFJ

Tax Rate: 35% Federal, 0% State

Age: 41/39
Kids: 9 & 7

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks

HHI: 500-600K (Single income)

Taxable 3.1M
2.1M in VTSAX/VFIAX/VTCLX (did TLH in the past)
700K in Vanguard FTSE All-World ex-US Index
300K in Vanguard Total Bond Index

His 401k
430K in Target 2040 fund.
Company match? 4K

His Roth IRA at Vanguard
65K in VTSAX

Her Roth IRA at Vanguard
45K in VTIAX

Kids 529 Plan
120K in an aggresive growth fund.

New contributions (expected over the next year):
19.5K into 401K
12K into his/her Roth (Backdoor)
37K into his Roth (Mega Backdoor)
~ 250K Taxable Account

Questions:
1. Any tweaks I can do to my fund placement? My allocation target is 80/20. I am a bit off right now due to the run up in stocks.
2. I do want to pull back/down scale from my job in tech in around 4 years time when I am 45. Anything I can do in advance for that to be easier? My target number to "retire" is 6M. Not sure if I can get there by 45. But I definitely want to scale back from my work in some fashion.
3. Should I make paying down mortgage a priority? Does it make financial sense? I do like the feeling of being debt free.
Last edited by hadron on Thu Jun 10, 2021 8:04 pm, edited 1 time in total.
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BolderBoy
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Re: Portfolio Review Request

Post by BolderBoy »

hadron wrote: Thu Jun 10, 2021 7:45 pm Tax Rate: 35% Federal, 0% State
Between your original post and this one, VBTLX in taxable disappeared.

If it is still there, you must be getting punished at that tax rate. Consider a tax-exempt bond fund instead.

I don't have all those symbols memorized.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
Topic Author
hadron
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Re: Portfolio Review Request

Post by hadron »

Between your original post and this one, VBTLX in taxable disappeared.
Right. Edited my post.
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retired@50
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Re: Portfolio Review Request

Post by retired@50 »

hadron wrote: Thu Jun 10, 2021 7:45 pm
Questions:
1. Any tweaks I can do to my fund placement? My allocation target is 80/20. I am a bit off right now due to the run up in stocks.
I'd consider holding the bond fund inside "His 401k" instead of the target date fund, which would get it out of the taxable account, assuming a decent bond index fund is available in the 401k plan. If you need help choosing, list the bond funds you have to choose from.

If you want to hold a bond fund in your taxable space, consider a municipal bond fund. VTEAX is one possibility.

The emergency fund (40k in checking) seems a bit low for a family of four. How many months would that last? If less than 6, consider adding a bit. As a single earner household you are a bit more vulnerable than a dual income household.

See wiki link for information on tax-efficient fund placement: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
This is one person's opinion. Nothing more.
Topic Author
hadron
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Re: Portfolio Review Request

Post by hadron »

Thank you. My 401K plan does have a Vanguard Institutional Total Bond Market Index Trust.

So here's my plan:
1. Exchange the bond fund in taxable for a total stock fund. I will have 18K in cap gain here. But I do have some losses I harvested last year I can use to offset this.
2. Exchange the target 2040 retirement fund in my 401k for a total bond fund.

Does that sound appropriate?
Topic Author
hadron
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Re: Portfolio Review Request

Post by hadron »

retired@50 wrote: Thu Jun 10, 2021 8:18 pm The emergency fund (40k in checking) seems a bit low for a family of four. How many months would that last? If less than 6, consider adding a bit. As a single earner household you are a bit more vulnerable than a dual income household.
Thanks. Agreed. However, I have been viewing my taxable account as a source of emergency funds in case I need them.
wetgear
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Re: Portfolio Review Request

Post by wetgear »

hadron wrote: Thu Jun 10, 2021 10:53 pm Thanks. Agreed. However, I have been viewing my taxable account as a source of emergency funds in case I need them.
Beef it up with iBonds then from some of the money you are pulling out of the taxable bond fund, won't be available for a year but that's a solid choice long term to have the EF in them.

Also seems like you should be able to refinance that mortgage down a bit and even if you do it might be worth paying it down over adding new bonds to the portfolio. You can only deduct from your taxes the interest on the first 750k so anything over that you are paying ~4.2%. You could also consider throwing some of the money from the taxable bond sale to knock this down. If you view the mortgage as a negative bond this is a pretty good deal for bonds.
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retired@50
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Re: Portfolio Review Request

Post by retired@50 »

hadron wrote: Thu Jun 10, 2021 10:31 pm Thank you. My 401K plan does have a Vanguard Institutional Total Bond Market Index Trust.

So here's my plan:
1. Exchange the bond fund in taxable for a total stock fund. I will have 18K in cap gain here. But I do have some losses I harvested last year I can use to offset this.
2. Exchange the target 2040 retirement fund in my 401k for a total bond fund.

Does that sound appropriate?
Yes. However, after looking at your numbers again, 80/20 allocation and over $3.6 million in assets, you'll need over $700,000 in bonds to achieve that desired allocation. So, you might need to switch the taxable total bond market fund for a municipal bond fund. Otherwise, maybe you can juggle something else I'm not seeing.

Regards,
This is one person's opinion. Nothing more.
lakpr
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Re: Portfolio Review Request

Post by lakpr »

Are you aware that the interest on mortgage principal balance in excess if $750k is not tax deductible, cannot include it as an itemized deduction?

In other words, of the $1.05 million mortgage, on a balance of $300k, you are paying an after-tax interest of 3.125%.

Just to break even, in your tax bracket you need to be earning 4.8% taxable equivalent yield, or find a municipal bond fund that yields 3.125%.

Pretty sure you aren't going to find any.

Therefore, revise your plan slightly. Do sell that Total Bond Index fund in taxable. But instead of reinvesting in taxable into equities, paydown the mortgage to a principal balance of just $750k. In effect you are buying a guaranteed 4.8% CD for 29 years (remainder of the mortgage term).

I would go further and say that you use the $250k expected contributions to taxable account to pay off the mortgage in 3 more years. That is the equivalent of earning 3.125% in a tax exempt municipal bond fund. That is a very good deal, urge you to take it. But I can also understand if you rather take the chances in stock market instead of paying down the mortgage. Just be aware that you must earn that 3.125% at least on the $750k balance on an annual basis, to break even. If there are any down years (sorry, not IF, but WHEN), you miay wish you had paid down the mortgage instead.

It would also let your asset allocation on the remainder of your portfolio close to the desired 80:20. Paying off the mortgage also would mean your emergency fund will be a higher multiplier in terms of number of months expenses.

It would also fit squarely with your plans of downsizing in 4 years ... It gets rid of the biggest monthly expense allowing you more freedom to downsize.

Edited to add additional suggestion: buy I bonds with the $40k emergency fund, $10k limit per SSN (with 4 members in the household, you can exhaust that all in a single purchase). They are fully liquid after the first year, and they are yielding 3.54% guaranteed for the first 6 months. With the recent inflation figures in April and May, it is likely that you will get at least that much for the next 6 months too. Best deal for cash equivalents available right now.
Topic Author
hadron
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Re: Portfolio Review Request

Post by hadron »

Thank you @lakpr, @retired@50 and @wetgear for your feedback.
lakpr wrote: Fri Jun 11, 2021 3:46 am Therefore, revise your plan slightly. Do sell that Total Bond Index fund in taxable. But instead of reinvesting in taxable into equities, paydown the mortgage to a principal balance of just $750k. In effect you are buying a guaranteed 4.8% CD for 29 years (remainder of the mortgage term).
Thanks for the suggestion. Also, I think by paying it down and refinancing it as a non-jumbo loan I might get a better/lower interest rate. Am I correct?
lakpr wrote: Fri Jun 11, 2021 3:46 am I would go further and say that you use the $250k expected contributions to taxable account to pay off the mortgage in 3 more years. That is the equivalent of earning 3.125% in a tax exempt municipal bond fund. That is a very good deal, urge you to take it. But I can also understand if you rather take the chances in stock market instead of paying down the mortgage. Just be aware that you must earn that 3.125% at least on the $750k balance on an annual basis, to break even. If there are any down years (sorry, not IF, but WHEN), you miay wish you had paid down the mortgage instead.
I'll consider contributing more towards the principal balance going forward.
lakpr wrote: Fri Jun 11, 2021 3:46 am Edited to add additional suggestion: buy I bonds with the $40k emergency fund, $10k limit per SSN (with 4 members in the household, you can exhaust that all in a single purchase). They are fully liquid after the first year, and they are yielding 3.54% guaranteed for the first 6 months. With the recent inflation figures in April and May, it is likely that you will get at least that much for the next 6 months too. Best deal for cash equivalents available right now.
I'll look into splitting the bond fund from taxable between mortgage downpayment and i-bonds purchase for EF.

Thanks.
lakpr
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Re: Portfolio Review Request

Post by lakpr »

hadron wrote: Fri Jun 11, 2021 11:28 am Thanks for the suggestion. Also, I think by paying it down and refinancing it as a non-jumbo loan I might get a better/lower interest rate. Am I correct?
Yes you are correct. In my neck of the woods, confirming mortgages are going for 2.375% to 2.625% for 30-years depending on the lender and the number of points / negative points you are willing to pay/accept. But then again, I'd urge you to think like a person who is about to retire in 4 years (I know you said only downsizing, not retiring, but still ... ). I am not sure if you would gain anything by refinancing to a confirming loan rather than paying it off at the rate of $250k per year. Any term less than 4 years you should not be investing in the stock market, but take the guaranteed yields instead. Even if you did refinance, I doubt the tax savings would be any significant (again, courtesy of the super low yields on bonds and super low rates on the mortgages).

Especially with a single income household, it is better to secure the future first before swinging for the fences.
Outer Marker
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Re: Portfolio Review Request

Post by Outer Marker »

lakpr wrote: Fri Jun 11, 2021 11:39 am
hadron wrote: Fri Jun 11, 2021 11:28 am Thanks for the suggestion. Also, I think by paying it down and refinancing it as a non-jumbo loan I might get a better/lower interest rate. Am I correct?
Yes you are correct. In my neck of the woods, confirming mortgages are going for 2.375% to 2.625% for 30-years depending on the lender and the number of points / negative points you are willing to pay/accept. . . .
Paying down the mortgage to conforming is an excellent idea. I'm not seeing rates close to that on 30 year loans -- unless you are paying a lot of points. 30 year money is more like 3%+ without points.

I would refi to a 15 year term which can be had for 2.5% at no cost from lenders such as AmeriSave and Loan Depot, i.e. with the lender paying all closing costs in negative points.
lakpr
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Re: Portfolio Review Request

Post by lakpr »

Outer Marker wrote: Sat Jun 12, 2021 10:17 am Paying down the mortgage to conforming is an excellent idea. I'm not seeing rates close to that on 30 year loans -- unless you are paying a lot of points. 30 year money is more like 3%+ without points.
Rates have risen slightly over the previous day, but I still see some 2.625% rates with only 0.2 points to half a point in my neck of the woods ....

https://www.bankrate.com/mortgages/refi ... Code=08854
Outer Marker
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Re: Portfolio Review Request

Post by Outer Marker »

lakpr wrote: Sat Jun 12, 2021 10:28 am
Outer Marker wrote: Sat Jun 12, 2021 10:17 am Paying down the mortgage to conforming is an excellent idea. I'm not seeing rates close to that on 30 year loans -- unless you are paying a lot of points. 30 year money is more like 3%+ without points.
Rates have risen slightly over the previous day, but I still see some 2.625% rates with only 0.2 points to half a point in my neck of the woods ....

https://www.bankrate.com/mortgages/refi ... Code=08854
Those are surprisingly good rates. I still prefer the 15 year term, which should be less still. I like the idea of having the mortgage liability reduced to little or nothing prior to retiring.

I'd start on the refi yesterday, whether for a 15 or 30 year. With inflation on the rise, I sure would not want to be lending money on a long term basis at less than 3%.
Topic Author
hadron
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Re: Portfolio Review Request

Post by hadron »

Outer Marker wrote: Sat Jun 12, 2021 11:04 am
lakpr wrote: Sat Jun 12, 2021 10:28 am
Outer Marker wrote: Sat Jun 12, 2021 10:17 am Paying down the mortgage to conforming is an excellent idea. I'm not seeing rates close to that on 30 year loans -- unless you are paying a lot of points. 30 year money is more like 3%+ without points.
Rates have risen slightly over the previous day, but I still see some 2.625% rates with only 0.2 points to half a point in my neck of the woods ....

https://www.bankrate.com/mortgages/refi ... Code=08854
Those are surprisingly good rates. I still prefer the 15 year term, which should be less still. I like the idea of having the mortgage liability reduced to little or nothing prior to retiring.

I'd start on the refi yesterday, whether for a 15 or 30 year. With inflation on the rise, I sure would not want to be lending money on a long term basis at less than 3%.

Thanks for the advice.

Update: I sold the total bond fund in my taxable. This should net me around 311K

Plan is to pay down my current 30-yr mortgage by 300K this week. That will leave me with a balance of 750K.

I got few refinance quotes for a 15-yr fixed mortgage. The best one so far is from better.com
2.125% (APR: 2.148%). Loan costs: 2895 (D+E in Loan Estimate). Lender Credits: 473. Amex has a 2k credit offer for refinancing with better so that should also help.

Does that above sound like a good offer or can I do better?

If I refinance with better, my monthly payment (with escrow included) will be 400 more than what I pay with my current loan. This extra monthly payment should not be an issue for me. Even after refinance, I still plan to pay down the mortgage aggressively so as to be mortgage free in 4 years time.
lakpr
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Re: Portfolio Review Request

Post by lakpr »

That is an excellent rate. I would take that in a heartbeat.
livesoft
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Re: Portfolio Review Request

Post by livesoft »

wetgear wrote: Thu Jun 10, 2021 11:25 pm
hadron wrote: Thu Jun 10, 2021 10:53 pm Thanks. Agreed. However, I have been viewing my taxable account as a source of emergency funds in case I need them.
Beef it up with iBonds then from some of the money you are pulling out of the taxable bond fund, won't be available for a year but that's a solid choice long term to have the EF in them.
The OP has millions of dollars in their taxable account with all of it available in about 2 days. The OP couldn't get any money out of Treasury Direct any faster than they can get it out of VTSAX found in their taxable account. Also, it is likely they would pay no taxes from selling shares in taxable because they should have been doing some tax-loss harvesting along the way here.
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Re: Portfolio Review Request

Post by Outer Marker »

hadron wrote: Tue Jun 15, 2021 1:34 am I got few refinance quotes for a 15-yr fixed mortgage. The best one so far is from better.com
2.125% (APR: 2.148%). Loan costs: 2895 (D+E in Loan Estimate). Lender Credits: 473. Amex has a 2k credit offer for refinancing with better so that should also help.

Does that above sound like a good offer or can I do better?

If I refinance with better, my monthly payment (with escrow included) will be 400 more than what I pay with my current loan. This extra monthly payment should not be an issue for me. Even after refinance, I still plan to pay down the mortgage aggressively so as to be mortgage free in 4 years time.
That's a very solid rate offer! Basically 2.125% at zero cost with the lender and amex credits. I'll PM you the names of a few loan officers at AmeriSave and Loan Depot if you want to "shop" the offer. Many will try to beat a competitor's offer and you might save $500 or $1,000 if that's worth your time. Back in November, I was able to get $700k at 2.125% with a $10,500 lender credit -- but rates aren't quite that good anymore.

Normally, I'm a "pay off the mortgage" guy, but at 2.125% tax-deductible interest, I'm in no hurry. I'm just going to keep paying it on schedule, at least to the point it is no longer deductible interest. This not only gives me more money to invest -- it serves as a useful inflation hedge. I'm paying the bank 2.125%, with an effective rate of 1.38% after-tax. I can earn 2.25% in my stable value fund, tax-deferred. If inflation rates tick up to 4%, it really pays to have the mortgage. I don't have to "beat the market" to make money. I just have to beat my stable value fund. If you're invested at 80/20 AA, you're likely to come out way ahead.

In order to maintain your target AA, put new money you would have applied to the mortgage to stocks in taxable. Offset this by moving money out of the target date fund (mostly stocks) in your 401K into stable value. It's hard managing a portfolio with both target date and regular funds. You might want to split up 401K now into Stable Value and S&P 500, so it's easier to keep track of your AA.
lakpr
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Re: Portfolio Review Request

Post by lakpr »

+1 to Outer Marker's note, mostly. I am also a "pay off your mortgage" guy, a lot of my posts on the topic would bear this out. But at 2.125% tax-deductible interest, effective after-tax 1.38%, it is better to keep the mortgage and invest. I bonds are yielding more than that, so to the extent that you want bonds, keep maxing out the annual limits on the I-bonds (that would be $40k per year for a family of four, and another $5k if you deliberately overpay your tax liability by $5k and ask for refunds in the form of I bonds).
usnavysar
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Re: Portfolio Review Request

Post by usnavysar »

Impressive numbers. I'm curious as to what monthly strategy you used to obtain those numbers, set % of monthly goes to brokerage and such?
Topic Author
hadron
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Re: Portfolio Review Request

Post by hadron »

Outer Marker wrote: Tue Jun 15, 2021 8:38 am In order to maintain your target AA, put new money you would have applied to the mortgage to stocks in taxable. Offset this by moving money out of the target date fund (mostly stocks) in your 401K into stable value. It's hard managing a portfolio with both target date and regular funds. You might want to split up 401K now into Stable Value and S&P 500, so it's easier to keep track of your AA.
lakpr wrote: Tue Jun 15, 2021 8:49 am +1 to Outer Marker's note, mostly. I am also a "pay off your mortgage" guy, a lot of my posts on the topic would bear this out. But at 2.125% tax-deductible interest, effective after-tax 1.38%, it is better to keep the mortgage and invest. I bonds are yielding more than that, so to the extent that you want bonds, keep maxing out the annual limits on the I-bonds (that would be $40k per year for a family of four, and another $5k if you deliberately overpay your tax liability by $5k and ask for refunds in the form of I bonds).
Thanks for the suggestion. I have also exchanged the target 2040 fund in my 401K with a total bond market fund. That has definitely simplified the AA tracking a bit more.

Once the refinance goes through, I'll take some time to reflect on these suggestions. But overall, it makes good sense.
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hadron
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Re: Portfolio Review Request

Post by hadron »

usnavysar wrote: Tue Jun 15, 2021 2:19 pm Impressive numbers. I'm curious as to what monthly strategy you used to obtain those numbers, set % of monthly goes to brokerage and such?
Thanks. Started in 2012. Small monthly contributions in the initial years + reinvesting RSU sale proceeds in recent years is what worked for me. Growth in company stock has certainly helped.
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Re: Portfolio Review Request

Post by Outer Marker »

hadron wrote: Tue Jun 15, 2021 6:51 pm I have also exchanged the target 2040 fund in my 401K with a total bond market fund. That has definitely simplified the AA tracking a bit more.
You may want to investigate whether your 401K has a stable value option vs. Total Bond. The 30 day SEC yield on TBM is 1.3% and has significant interest rate risk to principal if rates rise. My 401K Stable Value fund pays 2.2% and is insured against interest rate risk. TBM has suffered a 3.1% decline in Net Asset Value year to date. To me, that's irrational and uncompensated risk, particularly when rates seemingly have nowhere to go but up. I moved all of my fixed income from Total Bond to Stable Value last December. I'll reconsider when total bond is paying a 50% rate premium vs. stable value for 2 consecutive quarters.
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