Let it Rip’: 2.6M Portfolio

[Phinance]

Always appreciate learning from this forum, could really use feedback on below portfolio, thank you in advance

Me: 40
Wife: 36
2 kids (2mo + 2yr old)
No liabilities

Total Assets: ~ 2.6M @ ~ 60/30/10 (stocks/bonds/cash)
Expenses/Yr: ~100K

Me:
500K - Vang Total US Market - Taxable
500K - Vang Total Intern Market - Taxable
500K - Vang Tax-Exempt Muni Bonds - Taxable

400K - BlackRock Target Fund 2050 - 401K (Empower)

75K - Vanguard Balanced Index Fund - Roth IRA

50K - I-Bonds

300K - Cash (Ally Bank @ 0.6%)

Wife:
15K - Vang Total World Market - Taxable

130K - Fidelity Target Fund 2050 - 401K (Fidelity)

35K - Vanguard Balanced Index Fund - Roth IRA

20K - IBonds

25K - Cash (Ally Bank @ 0.6%)

We were considering buying a house in Portland, OR but home hysteria has kept us as renters and we’re not sure we’ll be here past 2025. Goal is to reduce cash position with more stock and bond purchase to maintain 60/30/10. Not sure where I came up with this AA but it feels like it fits our risk threshold.

Our goal is to achieve financial independence and start working less over time, retiring at 50/46. We are contributing to 529s for both kids @ 1K each per month. Would like to keep some cash around in case housing becomes more affordable and we find a home we love. (Not keeping my fingers crossed )

[Kookaburra]

Looking solid. One relatively minor adjustment you might consider relates to asset location: you may want to concentrate your Roth accounts with 100% stocks instead of the balanced fund. Then, to stay at AA, you could shift to a slightly different Target Date fund in your 401ks.

[mervinj7]

We were considering buying a house in Portland, OR but home hysteria has kept us as renters and we’re not sure we’ll be here past 2025. Goal is to reduce cash position with more stock and bond purchase to maintain 60/30/10. Not sure where I came up with this AA but it feels like it fits our risk threshold.

Our goal is to achieve financial independence and start working less over time, retiring at 50/46. We are contributing to 529s for both kids @ 1K each per month. Would like to keep some cash around in case housing becomes more affordable and we find a home we love. (Not keeping my fingers crossed )

Fantastic job! 26x expenses by age 40. You are definitely on track to partially retire in 10 years if you can work out housing and medical. For the $300k in cash, I would at least keep some of it in short-term treasuries (<1 year bills) if you don't have immediate plans to buy a house.

[gatorking]

Not related to your asset allocation: have you looked at the unrealized gains/losses of the Muni fund to see if it's worth tax loss harvesting?

[Harry Livermore]

I think you are firmly in rock-star territory here on BH.
Hard to say what to do about the housing situation, but if you even have the slightest whiff that you're relocating in 2025, my instinct would be to continue renting.
I agree with Kookaburra regarding moving Roths to all-equity.
You may want to ponder what life will be like when your kids are in high school, and if it's realistic to retire so early. Although, like you, I was 40 when our youngest was born. I am surprised sometimes by how my outlook and energy have changed in the intervening 15 years. That is a motivator for us to retire soon. So I get it...
Cheers

[Phinance]

Cheers and thank you, will start implementing your suggestions.

[HomeStretch]

Consider holding:
- 100% equity in your Roth IRAs (for highest expected tax-free growth) , and
- 100% of your bond allocation in your IBonds + tax deferred accounts (to likely slow the growth and reduce future RMDs).

[Phinance]

Got it, just converted both Roth IRA to 100% equities.

On the bonds suggestion, makes sense, we have target funds for both our tax deferred 401Ks, do you think that is sufficient to slow growth over time? Do you think carrying tax exempt muni bond fund as part of 3 fund portfolio (in taxable) is a mistake? I always assumed 3 fund portfolio was referring to taxable accounts. Thanks for clarifying.

[HomeStretch]

As your/spouse’s tax deferred account balances total $530k, you probably don’t have “too much” in tax deferred today (especially if you don’t have long-term care insurance) but not enough information provided to be sure.

Consider projecting your RMDs based on your age 72 tax deferred balance making assumptions about future contributions and the returns for the target date fund (which looks to hold 90% equity). If your RMDs will increase your marginal tax rate in retirement, consider holding bonds (aside from I-bonds) in your tax deferred accounts as one tool to minimize RMDs and your marginal tax rate in retirement. Another tool is Roth conversions.

[Phinance]

Tax Exempt Muni Fund in Taxable Account has a total loss of -33K, I’m embarrassed to say I don’t really understand tax loss harvesting, are you saying that if I sold all shares of it and incurred the -33K loss I could obtain a 3K per year tax deduction when it’s time to file taxes? Then up my bond % in tax deferred (401K) account?

[aristotelian]

Got it, just converted both Roth IRA to 100% equities.

That was fast! Now consider rebalancing your 401k's so that you haven't changed your overall allocation. If you prefer target date funds, you would want to choose an earlier target date to get more bonds.

[Phinance]

Got it, will do. Another question; Why would you want to slow down tax deferred growth (401K) and future RMDs? I thought the whole point was to grow the largest goose egg possible in retirement accounts. Thanks again

[terran]

Got it, will do. Another question; Why would you want to slow down tax deferred growth (401K) and future RMDs? I thought the whole point was to grow the largest goose egg possible in retirement accounts. Thanks again

I doubt they mean slow down in general, but rather slow down in relation to other accounts. You'll pay tax at ordinary income tax rates for any withdrawals from traditional, you won't pay tax at all on withdrawals from Roth, and you'll pay tax at lower long term capital gains rates (and only on the gains) on withdrawals from taxable. Therefore, when given the choice you want Roth to grow most, taxable to grow next most, and traditional to grow least. Of course, you still want it all to grow as much as possible, but if you're already planning to invest in an asset class you expect to grow less then putting that in the account you want to grow least in relation to other account makes sense.

[retired@50]

Got it, will do. Another question; Why would you want to slow down tax deferred growth (401K) and future RMDs? I thought the whole point was to grow the largest goose egg possible in retirement accounts. Thanks again

There is a good wiki page on all this if you want more background.

Tax efficient fund placement: https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,

[gatorking]

Tax Exempt Muni Fund in Taxable Account has a total loss of -33K, I’m embarrassed to say I don’t really understand tax loss harvesting, are you saying that if I sold all shares of it and incurred the -33K loss I could obtain a 3K per year tax deduction when it’s time to file taxes? Then up my bond % in tax deferred (401K) account?

You could up the bond % in tax deferred or use a substitute muni fund like Limited or Intermediate Term tax exempt.
Link to wiki on TLH: https://www.bogleheads.org/wiki/Tax_loss_harvesting
I let my tax program deal with the yearly tax deduction.

[RetiredAL]

Always appreciate learning from this forum, could really use feedback on below portfolio, thank you in advance

Me: 40
Wife: 36
2 kids (2mo + 2yr old)
No liabilities

Me:
75K - Vanguard Balanced Index Fund - Roth IRA
50K - I-Bonds

Wife:
35K - Vanguard Balanced Index Fund - Roth IRA
20K - IBonds

I don't know the starting dates for you vs. your wife, but the difference in the Roth and I-bond balances really stands out.

I hope going forward that equal contributions are being made for each of you.

DW's and my Roth's were pretty much step in step until I retired and started converting some of my IRA $ into my Roth. DW was a stay-at-home Mom and only had a small IRA since for near 20 years our Roths were fully funded. My IRA $ came from my 401K.

[Phinance]

Very helpful. The growth rate difference (Roth>Taxable>Tax-Deffered) makes a lot of sense. We both back door Roth 6K per year, she just started later than me. Thanks again

[jharkin]

I’m sure you know this, but you won’t need another 10 years to hit FI. You are close already at 100k expenses.

Wildcards for you will be college expenses and pre-Medicare health ins.

Keep up the great work….

[Phinance]

Tax Exempt Muni Fund in Taxable Account has a total loss of -33K, I’m embarrassed to say I don’t really understand tax loss harvesting, are you saying that if I sold all shares of it and incurred the -33K loss I could obtain a 3K per year tax deduction when it’s time to file taxes? Then up my bond % in tax deferred (401K) account?

You could up the bond % in tax deferred or use a substitute muni fund like Limited or Intermediate Term tax exempt.
Link to wiki on TLH: https://www.bogleheads.org/wiki/Tax_loss_harvesting
I let my tax program deal with the yearly tax deduction.

I don’t have any capital gains to offset (assuming I sell Tax Exempt Muni Bond Fund at a loss) are dividends from Total US Market and Total International Market considered capital gains? If so would it essentially mean I get a 3K deduction? I will read the article in more depth, thanks for sharing.

[Watty]

We were considering buying a house in Portland, OR but home hysteria has kept us as renters and we’re not sure we’ll be here past 2025.

Since you are not going to buy a house now you may want to have a separate house fund as a separate portfolio with money to buy a house at some point the future. For some people it would help to actually have that money in a separate account.

If that might be in 5 to 7 years(???) then you would want to invest that money more conservatively than money that you have earmarked for retirement or some other longer term goal. Maybe 40% stocks and 60% bonds(or munis if they make sense).

You can look at the Vanguard life stragety funds to see what asset allocation they use for different time frames.

https://investor.vanguard.com/investmen ... tegy-funds

[dogagility]

400K - BlackRock Target Fund 2050 - 401K (Empower)
130K - Fidelity Target Fund 2050 - 401K (Fidelity)

What are the expense ratios of these funds compared to total market funds available in your 401Ks? Many target funds have significantly higher expenses.

Do you have access to a Health Savings Account?

[Phinance]

400K - BlackRock Target Fund 2050 - 401K (Empower)
130K - Fidelity Target Fund 2050 - 401K (Fidelity)

What are the expense ratios of these funds compared to total market funds available in your 401Ks? Many target funds have significantly higher expenses.

Do you have access to a Health Savings Account?

Great questions, thank you.

-Forgot about HSA, Yes! We have a combined HSA at 25K invested in Vanguard REIT (alternative asset?), is that a reasonable investment? Should I count that as a bond in my AA or “other”?

-All our investments, including target date funds, have an expense ratio of <0.15%

-On the home front, plan is maybe buying a home in 2025 (when our rent lease ends), where should I place that money? Assuming it doesn’t change my AA too much and bond values continue to decline, could I sell part of my Vang Tax Exempt Muni Bond (tax loss harvesting?) for the home deposit (my guess around ~200K)?

Thanks again.

[Raspberry-503]

Just like the Roth, you want fast growing assets in you HSA since they will not be taxed if used properly.
That assumes you use it as a retirement tool rather than paying medical bills with it now though, otherwise volatility in the account could have you draw for medical when the market is depressed and rob you of future growth.

[Phinance]

Just like the Roth, you want fast growing assets in you HSA since they will not be taxed if used properly.
That assumes you use it as a retirement tool rather than paying medical bills with it now though, otherwise volatility in the account could have you draw for medical when the market is depressed and rob you of future growth.

Thank you. We do not draw from HSA but rather use it as a retirement tool. Under that line of reasoning, would you recommend changing our HSA from REIT fund to Total Stock Market Fund (or similar). I chose REIT because I figured it was a minor diversification since we don’t own real estate.

[retired@50]

Just like the Roth, you want fast growing assets in you HSA since they will not be taxed if used properly.
That assumes you use it as a retirement tool rather than paying medical bills with it now though, otherwise volatility in the account could have you draw for medical when the market is depressed and rob you of future growth.

Thank you. We do not draw from HSA but rather use it as a retirement tool. Under that line of reasoning, would you recommend changing our HSA from REIT fund to Total Stock Market Fund (or similar). I chose REIT because I figured it was a minor diversification since we don’t own real estate.

The stocks contained in the Vanguard REIT index are already contained in the Total Stock Market fund. So, technically, it's a concentrated bet on the real estate sector, and not really adding diversification. In other words, it's a tilt toward real estate.

Some financial authors, like Burton Malkiel, urge investors to consider a REIT fund. I think like most sector bets, they have their moments of out-performance, and their moments of under-performance. Over the past 20 years or so, it appears the REIT index has bested the "total market" fund.

See link: https://www.portfoliovisualizer.com/bac ... ion2_2=100

Keep in mind that back-testing isn't always predictive of the future, so it's really up to you to decide if you have the patience to stick with a tilt toward real estate or not. Some people regret not matching the overall stock market.

Regards,

[mrk]

-Forgot about HSA, Yes! We have a combined HSA at 25K invested in Vanguard REIT (alternative asset?), is that a reasonable investment? Should I count that as a bond in my AA or “other”?

The Vanguard REIT fund is a stock fund with a concentration in real estate companies. You could consider it an "alternative" asset in your asset allocation if you want, but it is definitely not a bond-like asset and should not be included in your bond allocation.

Invests in stocks issued by real estate investment trusts (REITs), companies that purchase office buildings, hotels, and other real property.

Compare VTI (Total Stock Market), VNQ (Real Estate), and BND (Total Bond Market):

https://www.portfoliovisualizer.com/bac ... ion3_3=100

[mr_brightside]

get a bunch of that bond money into the market : VTI / VOO, etc. especially after the recent drop. also -- way too much in Int'l. totally wrong % IMO.

great time to 'buy the dip' as a 40 year old.

40% in bonds / cash at your age is not right imo

otherwise -- congrats -- y'all are doing great

---------------------------------------

[Phinance]

Thank you. 40 percent bonds fits my risk threshold, I've learned I'm different from most 40 yos (more conservative).

If I did sell bond fund in taxable (currently at 33K loss) and use that money to buy stocks (assuming we maintain our target asset allocation), does that mean I can deduct 3K from overall taxes for approx 11 more years? I have no capital gains to offset. Is this "Tax Loss Harvesting"?

Your point is well taken on the HSA Reit. I will convert it to Total Market if it fits my asset allocation. I don't want to sector tilt towards real estate.

[mrk]

If I did sell bond fund in taxable (currently at 33K loss) and use that money to buy stocks (assuming we maintain our target asset allocation), does that mean I can deduct 3K from overall taxes for approx 11 more years? I have no capital gains to offset. Is this "Tax Loss Harvesting"?

"Tax loss harvesting" is intentionally selling an investment at a loss to realize the tax benefit (while usually maintaining your overall asset allocation). Using capital losses to reduce ordinary income is one way you can realize a tax benefit from tax loss harvesting.

Yes, you can realize (i.e. harvest) the $33k in capital losses this year and use the losses to reduce your ordinary income by $3k per year for the next 11 years (assuming you never realize any capital gains). If you do realize any capital gains, the carry-forward losses will be applied to the capital gains first and with no limit.

To avoid a "wash sale," make sure that the bond funds you buy in your tax advantaged accounts to maintain your asset allocation are not "substantially identical" to the bond funds you sell in your taxable account. If you sell municipal bond funds and buy total bond funds, you will be OK.

https://www.bogleheads.org/wiki/Wash_sale

I don’t have any capital gains to offset (assuming I sell Tax Exempt Muni Bond Fund at a loss) are dividends from Total US Market and Total International Market considered capital gains? If so would it essentially mean I get a 3K deduction? I will read the article in more depth, thanks for sharing.

Dividends are not capital gains. Qualified dividends are taxed at the capital gains rate, but they are not capital gains. If you have no captial gains, your excess capital losses will be applied against your regular income (up to $3k/year) that is taxed at your regular income tax rate.

[moneywise3]

Target find 2050 is too aggressive if you plan to retire in 10 years

[moneywise3]

Target fund 2050 is too aggressive if you plan to retire in 10 years

[Phinance]

If I did sell bond fund in taxable (currently at 33K loss) and use that money to buy stocks (assuming we maintain our target asset allocation), does that mean I can deduct 3K from overall taxes for approx 11 more years? I have no capital gains to offset. Is this "Tax Loss Harvesting"?

"Tax loss harvesting" is intentionally selling an investment at a loss to realize the tax benefit (while usually maintaining your overall asset allocation). Using capital losses to reduce ordinary income is one way you can realize a tax benefit from tax loss harvesting.

Yes, you can realize (i.e. harvest) the $33k in capital losses this year and use the losses to reduce your ordinary income by $3k per year for the next 11 years (assuming you never realize any capital gains). If you do realize any capital gains, the carry-forward losses will be applied to the capital gains first and with no limit.

To avoid a "wash sale," make sure that the bond funds you buy in your tax advantaged accounts to maintain your asset allocation are not "substantially identical" to the bond funds you sell in your taxable account. If you sell municipal bond funds and buy total bond funds, you will be OK.

https://www.bogleheads.org/wiki/Wash_sale

I don’t have any capital gains to offset (assuming I sell Tax Exempt Muni Bond Fund at a loss) are dividends from Total US Market and Total International Market considered capital gains? If so would it essentially mean I get a 3K deduction? I will read the article in more depth, thanks for sharing.

Dividends are not capital gains. Qualified dividends are taxed at the capital gains rate, but they are not capital gains. If you have no captial gains, your excess capital losses will be applied against your regular income (up to $3k/year) that is taxed at your regular income tax rate.

Super helpful, makes sense. Can I sell my intermediate tax exempt muni bond fund in taxable then buy an intermediate bond fund index (non-muni) in 401K? I will read the linked article, but what is the 30 day limit?

You’re right, I will need to change my target 2050 fund, it’s too aggressive, currently fits my AA but that will change. Thank you all