Portfolio advice

[VB123]

Emergency funds: 6 months

Debt: ~$1.4mm mortgage (2.5% fixed 30 yrs, 28 yrs remaining)

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, No state tax

Age: 45 (him), 43 (her), 2 kids (15, 10)

Desired Asset allocation: 25% stocks / 75% bonds

403b (his): ~$125K (JPM SmartRetirement Blend 2040 Fund Class)
Defined Contribution Plan (his): ~$45K (JPMCB SmartRet Passive Blend 2040 CF-Z)
401k (hers): ~$100K (FID FRDM INX 2045 T)
Savings Account (4.15%): ~$150K
2-year Treasury Notes: ~$210K
Treasury I-bonds: ~$80K
Her employer stocks: ~$50K

We maximize our 401k/403b contributions and our mortgage (plus prop tax and home insurance) is about 40% of our combined monthly earnings (after tax). We both have relatively stable jobs (assuming the economy is not going to get any worse).

Seeking advice on:

- Will it make sense to downsize our home as soon as our older one goes to college?
- Considering our kids are not as young, does it make sense to start 529 contributions now?
- Any other advice for retirement planning?

Thanks!

[dan7800]

75% bonds at 45? Seems awfully high to me. I'd think something in reverse of the allocation you have would be appropriate, but to each their own.

[chassis]

Emergency funds: 6 months

Debt: ~$1.4mm mortgage (2.5% fixed 30 yrs, 28 yrs remaining)

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, No state tax

Age: 45 (him), 43 (her), 2 kids (15, 10)

Desired Asset allocation: 25% stocks / 75% bonds

403b (his): ~$125K (JPM SmartRetirement Blend 2040 Fund Class)
Defined Contribution Plan (his): ~$45K (JPMCB SmartRet Passive Blend 2040 CF-Z)
401k (hers): ~$100K (FID FRDM INX 2045 T)
Savings Account (4.15%): ~$150K
2-year Treasury Notes: ~$210K
Treasury I-bonds: ~$80K
Her employer stocks: ~$50K

We maximize our 401k/403b contributions and our mortgage (plus prop tax and home insurance) is about 40% of our combined monthly earnings (after tax). We both have relatively stable jobs (assuming the economy is not going to get any worse).

Seeking advice on:

- Will it make sense to downsize our home as soon as our older one goes to college?
- Considering our kids are not as young, does it make sense to start 529 contributions now?
- Any other advice for retirement planning?

Thanks!

What is your total household income and the market value of your house?

It always makes sense financially to downside the principal dwelling when it is no longer needed from a size or school district point of view. it's basic living expense cost control. A universal good.

[VB123]

@dan7800, thanks

@chassis, thanks

Gross household income ~$400K
Market value of house ~$1.9mm

[chassis]

@dan7800, thanks

@chassis, thanks

Gross household income ~$400K
Market value of house ~$1.9mm

Thanks. Agree you have a high bond allocation for your age. I am a max equity person so recommend as high an equity position as you are willing to stomach.

I would cash flow college for your kids. Unless your state has a tax deduction for 529 contributions. I still might skip the 529 because of the hassle.

[Ed 2]

you have very high income and very low net worth at age over 40. Agree with other that your bond allocation is too high. Need to work on your risk tolerance and start aggressive savings and investing into equity’s. It’s not too late.

[DesertDiva]

Your 401k/403b balances seem low, especially if you are high earners and are maximizing your contributions. Perhaps you started saving late. After age 50, your allowable contributions increase, so make sure you take advantage of this provision when the time comes. It seems that you may need to work longer to have enough to cover your needs in retirement, especially with a large mortgage that eats into your overall savings rate and extends until you are 73.

Remember that the future value of your investments are dependent on 1) the length of time you invest, 2) your savings rate, and 3) your rate of return.

[Outer Marker]

- Will it make sense to downsize our home as soon as our older one goes to college?

Yes. Despite your high income, you are "house poor" and have too much of your net worth tied up in the house. It's complicated by the fact that you ahve a very attractive interest rate, so in order to downsize and realize substantial savings, you'd ideally want to move somewhere that required little or no mortgage.

Agree with others that your equity allocation is low. You should probably be closer to 75/25 than 25/75 at your age, unless you are the nervous type and prone to panic selling.

[dogagility]

I agree with others to consider increasing your equity allocation.

With your income level (400K/year), you also should be maximizing your IRA contributions, HSA contribution (if you use an appropriate health plan), and I-bond contribution. If you have additional income after this for savings, then contribute to a 529.

[Hacksawdave]

If your household income is $400K and MFJ, your highest tax bracket is 32% plus the NIIT tax for an effective rate of 35.8%. At your mid-40s your portfolio is only 1.9 times your annual income. If the tax-deferred accounts are at maximum contribution levels, start on contributing to taxable accounts.

Look to increasing your stock equity exposure and reducing the large amount of taxable ordinary interest. Index funds in a taxable account do not spawn off capital gains or ordinary dividends and I would explore municipal fund offerings if you still desired high bonds and savings interest. Municipals are not subject to the NIIT tax.

[VB123]

@chassis, @Ed 2, @DesertDiva, @Outer Marker, @dogagility, @Hacksawdave,

Thank you for your advice. I get what you’re saying about the 401k balance and net worth – without getting into the details, let’s just say some of our problems were circumstantial and others silly mistakes. We both have only recently started to realize our full income potential.

We’re considering 75/25 seriously. So after maximizing 401k contributions, should we invest up to $6K + $6K in traditional IRA and then remaining in taxable brokerage account? I’ll skip the 529 – I had the same concern about the hassle.

[BPnWhiskey]

Since you are relatively new, welcome to the Forum.

<snip>without getting into the details, let’s just say some of our problems were circumstantial and others silly mistakes. We both have only recently started to realize our full income potential.

Don't let these past realities discourage you. Read enough of BH and you'll realize we all have plenty of past circumstances and "I wish I had"s in our lives.

We’re considering 75/25 seriously. So after maximizing 401k contributions, should we invest up to $6K + $6K in traditional IRA and then remaining in taxable brokerage account? I’ll skip the 529 – I had the same concern about the hassle.

Your plan to fund IRAs after your 401ks, and then investing in a taxable account is a good one. It is in keeping with the standard advice around here. Here's the wiki page on Prioritizing Investments, if you'd like to read more.

And, since your asset allocation has been raised as an area of concern, here's the relevant section of the BH Investing Start-up Kit on the Wiki.

All the best and keep asking questions. This forum is full of incredible wisdom--all for free.

BP

[VB123]

Thank you @BP!

[dogagility]

We’re considering 75/25 seriously. So after maximizing 401k contributions, should we invest up to $6K + $6K in traditional IRA and then remaining in taxable brokerage account? I’ll skip the 529 – I had the same concern about the hassle.

You're likely not eligible to deduct contributions to a traditional IRA. https://www.nerdwallet.com/article/inve ... ion-limits

In that case, performing a Backdoor Roth IRA contribution is the preferred choice. You won't get to deduct the contribution from your income for tax purposes, but the money will grow tax free and withdrawals will be tax free. https://thefinancebuff.com/the-backdoor ... ow-to.html

In addition to the contributions you mentioned and since you seem to have more money to invest than tax-deferred space, I suggest also investing a portion of your fixed income in I-bonds (10k/spouse/year plus 10k/year contribution for each trust). https://tipswatch.com/i-bond-manifesto/

[VB123]

@dogagility, thank you. Back door Roth appears complicated but I’ll get educated on the topic.

[Hacksawdave]

@dogagility, thank you. Back door Roth appears complicated but I’ll get educated on the topic.

The White Coat Investor who is a poster on this site has a fabulous section on the backdoor Roth IRA with illustrations on his own site. As I don’t see any IRAs listed, you would be a great candidate for the backdoor Roth.

[VB123]

Thank you @Hacksawdave, I'll check out this website.

[BPnWhiskey]

And, since your asset allocation has been raised as an area of concern, here's the relevant section of the BH Investing Start-up Kit on the Wiki.

VB123, I stumbled across this thread again and was prompted to reply once more. I hope your investment planning is coming along!

Regarding the asset allocation, though 25/75 may be too low for your needs, you don't have to swing all the way to 75/25, either. Many use 60/40, for example. On the other hand, we use 80/20. Besides the amount you save, AA is the most important component of your investing life. And, if you aim too high with your AA and it results in fear and panic during a steep downturn enough that you sell low, you would have been better off with a lower AA. Don't rush the decision. Read specifically about risk tolerance (Risk Tolerance on wiki), if you haven't. This should include thinking through Larry Swedroe's "ability, willingness, and need" categories.

All the best.

[VB123]

Thanks again @BPnWhiskey. This is my plan (welcome any feedback):

1. Move emergency funds to higher yield savings
2. Move current savings balance ($150K) to the taxable account (VFIAX)
3. Move 401k and 403b ($270K) to a bond fund (any suggestions?) from the current target date funds
4. Move 2-year treasury notes ($210K) to the taxable account (VFIAX)
5. No change in the I-bond holdings ($80K). Keep purchasing maximum allowed I-bonds every year. This will serve as our backup emergency fund in case of a bank run
6. Maximize HSA contributions and continue to maximize 401k/403b contributions

That will put us as about $350K in bonds and $360K in stocks to start with. I could even have #3 above in 25/75 stock and bond. And we plan to downsize our home once our older son goes to college and pay for college from our income/I-bonds. I'll consider Roth conversion at some point, but I think most of these changes are independent of that.

[dogagility]

This is my plan (welcome any feedback):
3. Move 401k and 403b ($270K) to a bond fund (any suggestions?) from the current target date funds

What choices do you have for bond funds?

[VB123]

@dogagility, I am seeing only these two bond funds. thanks

Vanguard Core Bond Fund Admiral Shares (VCOBX)
Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX)

[Jmc1260]

Thanks again @BPnWhiskey. This is my plan (welcome any feedback):

1. Move emergency funds to higher yield savings
2. Move current savings balance ($150K) to the taxable account (VFIAX)
3. Move 401k and 403b ($270K) to a bond fund (any suggestions?) from the current target date funds
4. Move 2-year treasury notes ($210K) to the taxable account (VFIAX)
5. No change in the I-bond holdings ($80K). Keep purchasing maximum allowed I-bonds every year. This will serve as our backup emergency fund in case of a bank run
6. Maximize HSA contributions and continue to maximize 401k/403b contributions

That will put us as about $350K in bonds and $360K in stocks to start with. I could even have #3 above in 25/75 stock and bond. And we plan to downsize our home once our older son goes to college and pay for college from our income/I-bonds. I'll consider Roth conversion at some point, but I think most of these changes are independent of that.

Solid plan! Would highly recommend backdoor roth contributions annually. You also might want to consider some international diversification of your stock exposure (vtiax, vxus as an etf), although granted that is a personal choice and you won’t find a consensus on the forum.

JC

[rg3]

My 2 cents...#3 this still feels conservative. Rather than moving them , I would keep them in the target date retirement fund (TDFs). TDFs will increase bond allocation over time, so it should help your overall portfolio lean more bonds over time.

As others have mentioned -- I would consider Backdoor Roth. Yes, it is a small hassle during tax time but worth it. There are blogs that have step by step instructions with pictures on how to execute this transaction. (Totally understand if you don't want to take on the added complexity).

#6 - HSA can be lucrative in the long run. Consider your health care needs (given the high deductible of HSA) before you switch to an HSA.

[dogagility]

@dogagility, I am seeing only these two bond funds. thanks

Vanguard Core Bond Fund Admiral Shares (VCOBX)
Vanguard Total Bond Market Index Fund Institutional Plus Shares (VBMPX)

Either of these is a fine choice.

[Wiggums]

AA of 75/25 is reasonable.

How much of the 400k do you save each year? It seems like your savings rate is low. I.e., your annual expenses are very high

A backdoor Roth is just a non-deductible IRA Contribution followed by a Roth conversion. Only two steps.

Should you sell the house after the oldest goes to college? I think the better question is “do you really want a 1.9M house and all the costs associated with it?” Whatever you do, your children need a place to call home until they graduate and they support themselves. Should find a less costly housing? I would.

[VB123]

Thank you @dogagility, @JC, @rg3, @Wiggums. I really appreciate the advice and guidance.

About backdoor Roth, I read the suggested articles and have a couple of questions:

1. Can I move money from my savings account (obviously after tax) to a traditional IRA and then Roth IRA - is there no limit on how much money I can move?
2. Can I contribute money from our income (after-tax) to traditional IRA and then to Roth IRA - even when we have maximized our contributions to 401k/403b?

These may be very basic questions, but I am not able to grasp the concept of why I'd need to have any money in taxable brokerage account and not in Roth IRA when I can do either or both of the above?

I'll also consider keeping part our 401k/403b in TDFs as you suggested while moving most of it to bond funds.

@Wiggums, our biggest expense is mortgage and is likely much higher than it should be because of what we paid for our home (we have a pretty low interest rate). We are conservative in our spending/savings approach, but home prices are through the roof where we live (esp. the timing of when we upgraded to a bigger home). Thanks for your comments!