Portfolio review request re: 1) Roth IRA, 2) allocating emergency fund, and 3) brokerage account for equity index

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InvisibleAerobar
Posts: 644
Joined: Mon Jan 15, 2018 11:33 am

Portfolio review request re: 1) Roth IRA, 2) allocating emergency fund, and 3) brokerage account for equity index

Post by InvisibleAerobar »

His (OP), 39: $180k/yr, stable federal civil servant position (10+ yrs of service, with FERS pension)
Her, 34: $125k/yr, newer position but should be relatively stable; first professional job and has been with the organization for one year
24% federal marginal bracket; ~5% state marginal bracket
Contribute maximum amount to his TSP, her 401(k), 2xRoth, and HSA (so $60k/yr for retirement and $6.3k/yr for HSA). We probably have to do backdoor Roth next year, but don’t have to worry about that just yet.
Presently no children but plan on having two.

Liquid assets:
-$25k in I-bonds (principal only);
-$30k in HYSA;
-$63k in various brokered CDs and Treasury obligations

Tax advantaged assets and pension:
-His TSP: ~$390k (70% in S&P 500 index, 30% in TSP G-fund);
-His Roth IRA: ~$64k (52% in S&P 500 index, 25% in TSM completion index, 3% in BRKB, 4% in money market, balance (16%) in various individual bonds);
-Her 401(k): ~$30k (all in Vanguard 2055 target fund, VFFVX );
-Her Roth IRA: ~$36k (70% in money market right and 30% in TRRMX, T Rowe Price 2050 retirement fund);
-HSA brokerage ~$11k; HSA cash ~$11k.
-His pension: premium is 0.8% of salary, employee payout determined as average annual high-three salary x duration of service x 0.011. I presently plan to work fulltime for 35 years and decide afterwards whether to work full-time for another three years (for full SS benefit), work part-time, or retire. Assuming immediate retirement, this would mean income replacement of ~37% for employee alone. Survivor benefit reduces payout by either 1) 5% (or ~35% income replacement) or 2) 10% (or ~33% income replacement); and the corresponding spousal benefit is either 9% income replacement for 1) or 16.5% income replacement for 2).

Life Insurance:
-Him, $1.5 M term life insurance, coverage ends at 60
-Her, $300 k term life insurance, coverage ends at 60

Expenses and obligations:
-$3,000/month in mortgage at 6.375%, 475k left;
-$950/month in property taxes and homeowner’s insurance (neither held in escrow);
-$3,250/month in all other spendings (utilities, grocery, household goods, etc.);
-$1,700/month in other self-imposed obligations (mainly helping out with in-laws, this item not open to discussion; and smaller proportion in donations).
We expect ~$5700/month left over, to invest and/or make extra principal payments.

Current plans, some concrete, others more nebulous:
-Expect to try for two children (and maybe three if we have twins when trying for the second).
-In-laws would help to look after children, with occasional day-care.
-We would like to pay off mortgage early, and current plan is extra $2,800/month toward principal, which leaves a comparable amount (~$2,900/month) for brokerage investment. We could be persuaded to reduce the monthly additional principal amount to $2,000, but no less.
-No intent for FIRE. Though we both would consider part-time work in our respective current capacities; for me, probably after 63, for my wife, probably late 50s/early 60s.

Add’l detail:
-It is highly likely my dad will gift me ~$225k toward the principal of the mortgage. It comes with no expectation of reciprocity (he takes in more than $10k/month in retirement from pension, SS, and rental income), but it does come with the expectation that we pay off the mortgage ASAP.

Questions re: various actionable changes:
-1) re: my wife’s Roth IRA. We (and by that I mean primarily yours truly) goofed a bit on my wife’s Roth IRA allocations, and it’s mostly in money market. Fortunately, it’s held at Fidelity as opposed to Schwab, so there has been some accrual. Would like concrete suggestions on how to turn 70% “cash” holding into something more like 75% equity (as in, all at once, over 0.5 to 2 years, etc). Alternative would be turning everything in the account into Vanguard 2055 retirement fund, but that still comes with the issue of exact mechanics.
-2) re: emergency fund and cash holdings. We have been cash-heavy (with aim to preserve principal so that we have enough to fund 25% for a house purchase of $825k), so we really haven’t needed to consider how much to put into emergency fund and how to allocate it. 12 months of living expenses at ($3,250 + $3,950)/month is ~$87,500/year. With $118k in liquid, cash equivalent holdings, how should I rearrange things? As in, how much in HYSA and how much in treasuries? And how do I stagger the treasuries? Right now, they mostly mature in October, should we look to have maturity every half year (so staggered April/ October)?
-3a) setting up a brokerage account for equities. We haven’t really touched equity in brokered accounts, and I guess with $87.5k in emergency fund, we probably don’t need too much more cash. So $2,900/month in funds left-over after extra principal payment can just all go to an equity index fund. Could someone remind me which is the most tax-efficient way of investing this? I would prefer something having dividends rolled right in, as opposed to receiving actual dividends and re-investing those (and paying ordinary income taxes).
-3b): as a follow-up, how should this $2,900 ($34,800) be divided up? My wife prefers simplicity above all else (alas the target date funds). I perhaps went too conservatively for someone expecting a pension after 35-years of service. Should we each do $3,750 in I-Bonds ($7,500 overall) and put the rest in an S&P 500 index? Such an allocation would be effectively 78% equity and 22% bonds. We could also just allocating all to equity, as we have quite a bit of bond holdings otherwise.
-3c): in view of the above (re: either tax efficient index), should we have our brokerage equity holdings in Schwab or Fidelity?

Many thanks in advance
Last edited by InvisibleAerobar on Mon Jun 10, 2024 11:48 am, edited 2 times in total.
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retired@50
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Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Requesting advice re: 1) Roth IRA allocation, 2) apportioning emergency funds, and 3) brokerage account for equity i

Post by retired@50 »

InvisibleAerobar wrote: Sun Jun 09, 2024 12:56 pm
-1) re: my wife’s Roth IRA.
...
With $118k in liquid, cash equivalent holdings, how should I rearrange things?
...
-3c): in view of the above (re: either tax efficient index), should we have our brokerage equity holdings in Schwab or Fidelity?

Many thanks in advance
With respect to the wife's Roth IRA, I'd move all at once into a total stock market fund. In other words, no cash or bond holdings in the Roth space.
For more detailed thinking on asset location, see the wiki page on tax efficient fund placement.

If you're going to be holding large amounts of cash for an extended period (or for an emergency fund) then I'd suggest you consider using VUSXX at Vanguard. Vanguard money market funds tend to pay a higher rate than Fido or Schwab. VUSXX is generally (mostly) exempt from state taxation, because it holds US Treasury products.

As for the taxable brokerage account, using a total US stock market fund, or a total international stock market fund, or an S&P 500 fund is suitable. Stick to US funds if you want to see a higher percentage of qualified dividends.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
Olemiss540
Posts: 2210
Joined: Fri Aug 18, 2017 8:46 pm

Re: Requesting advice re: 1) Roth IRA allocation, 2) apportioning emergency funds, and 3) brokerage account for equity i

Post by Olemiss540 »

I think your plan looks solid. Keep saving 66k/year in tax advantaged accounts, hold ALL equities (index stock mutual fund like s&p500) in your Roths with bonds positioned in your traditional 401k/IRA accounts, and pay down your mortgage aggressively given your father in laws generous gift/wishes and your current rate. Place the leftover in a brokerage account to give you flexibility once the kids arrive in case you or your spouse remain home or cut back on work. Once the kids are settled you could transition ALL of your remaining cash towards your mortgage balance each month if rates haven't went down and both of you continue working for the long haul.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
Topic Author
InvisibleAerobar
Posts: 644
Joined: Mon Jan 15, 2018 11:33 am

Re: Portfolio review, specifically re: 1) Roth IRA, 2) allocating emergency fund, and 3) brokerage account for equity in

Post by InvisibleAerobar »

Thanks for the helpful comments, in particular re: balancing everything in Roth to equity only. A memo I missed when starting out re: efficient fund placement.
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