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New Job, Portfolio Help

Posted: Thu Feb 24, 2011 6:24 pm
by medicevans
I recently switched jobs after my previous employer cut wages by 20%. It was a financially forced move, but I ended up at a much better job with better hours, about a 55% pay raise (before the pay cut) and better equipment. We really have had someone looking out for us. It is with this in mind that I ask your help.

Emergency funds = Covered

Debt: Car Loan: ~$18,000 @ 4.5%

Tax Filing Status: Married with 4 kids
My wife is currently a mostly SAHM. She works 2-4 days a month outside the home. Of course, she works 35-40 days a month inside the home.

Tax Rate: 15% Federal 6% State in IL **edited: Didn't realize that married filing jointly was different than single.

Age: 25 (wife 30)

Desired Asset allocation: 70/30


I would like to do similar to the Coffeehouse Investor/Coward’s Portfolio style of investing, only with 70/30 instead of 60/40. To be rebalanced at 75/25 on the high end and 65/35 on the low end.


Equities
10% Large Cap
15% Large Value
10% Small Cap
15% Small Value
10% International
10% REIT
10% Gold (Just Kidding)

Bonds
10% TIPS
20% Intermediate/Total Bond Fund

Current portfolio: $11, 900 ($600 from old job that will be transferred into an IRA, $11,300 at Vanguard split pretty much 50/50 in Roth and Trad IRAs. The Vanguard is 100% invested in TR2020. The $600 from the old job can be considered new money and allocated as such.)

We will have about $5800/year (next year, only about $2900 total for the rest of this year) to invest within my 401(a) and 457(b). I am pushing to invest another $2400 this year in a Trad IRA, or possibly into the 457(b). I don’t really like the options in my plan at work, so I might put money into a trad IRA as it’s pre-tax anyway. Is that last sentence faulty logic?


His Roth at Vanguard
100% Target Retirement 2020

Matching: I put in 4.5% and they put in 7.9%.

Funds Available in his 401(a) and 457(b) (VT=Vantage Trust)

Stable Value/Money Market Funds Ticker ER
VT PLUS FUND
VT Cash Management Fund VAMXX

Bond Funds
VT Core Bond Index Fund, Class I VPCIX 0.42
VT PIMCO Total Return Class Administrative PTRAX 0.71
VT Inflation Protected Securities Fund VPTSX 0.67
VT PIMCO High Yield Fund, Administrative PHYAX 0.80

Balanced/Asset Allocation Funds
VT Milestone Retirement Income Fund VPRRX 1.00
VT Milestone 2010 Fund VPRQX 1.02
2015 Fund VPRPX 0.96
2020 Fund VPROX 0.96
2025 Fund VPRNX 0.97
2030 Fund VPRMX 1.00
2035 Fund VPRLX 1.03
2040 Fund VPRKX 1.02
VT Model Portfolio Savings Oriented Fund VPSOX 0.91
VT MP Conservative Fund VPCGX 0.94
VT MP Traditional Growth Fund VPTGX 0.96
VT MP Long Term Growth Fund VPLGX 0.98
VT MP All-Equity Growth Fund VPAGX 1.07
VT Asset Allocation Fund VPAAX ???
VT Fidelity Puritan Fund FPURX 0.61

U.S. Stock Funds
VT Equity Income Fund VPEIX 0.88
VT American Century Value Fund, Investor TWVLX 1.00
VT Lord Abbett Large Company Value, Class A LAFFX 0.85*5.25
VT Hotchkis and Wiley Lrg Cap Value, Class I HWLIX 1.05
VT 500 Stock Index Fund, Class I VPFIX 0.44
VT Growth and Income Fund VPGIX 0.81
VT Broad Market Index Fund, Class I VPMIX 0.43
VT BlackRock LrgCap Core Retirement, Class K MKLRX 0.67
VT Legg Mason Value Trust, Class FI LMVFX 1.12
VT Growth Fund VPGRX 0.84
VT Calvert Social Investment Fund Equity
Portfolio, Class A CSIEX 1.22*4.75
VT Fidelity Contrafund FCNTX 1.01
VT T. Rowe Price Growth Stock Fund
Class Advisor TRSAX 0.92
VT Maggellan Fund FMAGX 0.74
VT Select Value Fund VPSVX 1.04
VT Columbia Mid Cap Value Fund, Class Z NAMAX 0.92
VT Mid/Small Company Index, Class I VPSIX 0.48
VT Royce Premier Fund, Class Service RPFFX 1.43
VT Aggressive Opportunities Fund VPAOX 0.98
VT Harbor Mid Cap Growth
Class Administrative HRMGX 1.12
VT Rainer Small/Mid Cap Equity Fund RIMSX 1.21
VT Discovery Fund VPDSX 0.99
VT T. Rowe Price Sml Cap Value, Advisor PASVX 1.06
VT T. Rowe Price Sml Cap, Class Advisor PASSX 1.14
VT Royce Value Plus Fund, Class Service RYVPX 1.45
VT American Century Real Estate, Investor REACX 1.16

International Stock Fund
VT Third Avenue Value Fund TAVFX 1.15
VT International Fund VPINX 1.05
VT Overseas Equity Index Fund VPOIX 0.59
VT Fidelity Diversified International Fund FDIVX 0.96


**5.75 load
* 4.25 load

Questions:
1. Can I hold the Vanguard 2020 TR in my IRAs and make a similarly allocated portfolio in my work account, then next year when I have a total of about $15-18,000 revamp to make a comprehensive portfolio that covers all accounts?

2. Currently I have about $600 in my old job’s 403(b) that I am going to roll-over. Roll over to self directed or to my new job?

3. Pay off the car or invest or both?

Thanks everyone!

--Brian and Heather

Regarding the vehicle loan so it doesn't get asked or suggested again and again:

My wife had 3 children prior to our marriage. About a year before we married her car died and she bought a 04 GMC Envoy with about a 95% loan. We married a year later. We quickly got pregnant. Of course, having only paid on her loan for a year and a half, the value of the vehicle dropped faster than the loan balance. With four kids and a wife that adamantly will not drive a minivan (not that I blame her), our vehicle options were somewhat limited. Had we not gotten pregnant we would have driven the Envoy until it died, however that's not how life worked. Incredibly smart financial decision--not really. However, we are paying it off early and my truck is already paid for. It's the only debt we have at all. Buy a vehicle on a 5 year payment was more towards necessity than option as we didn't have a lot of money when we got pregnant. This is just going to have to be one of those cost of doing business moments. It's not a pattern of behavior. My name has never been on a vehicle loan before.

Posted: Thu Feb 24, 2011 6:30 pm
by medicevans
Ok, someone help me format that better. It looks ok in the posting box, but when it's posted, it gets all screwed up. HELP?!

Posted: Thu Feb 24, 2011 6:44 pm
by Hector
Trading that car for a cheap one would be my priority over AA

Posted: Thu Feb 24, 2011 7:04 pm
by medicevans
Thanks Hector.

Initial post edited to include reply.

Posted: Fri Feb 25, 2011 10:28 am
by Default User BR
medicevans wrote:Ok, someone help me format that better. It looks ok in the posting box, but when it's posted, it gets all screwed up. HELP?!
It looks basically ok to me. A good idea is to use the Preview button first before posting. That gives you a chance to spot any glaring format problems.



Brian

Posted: Fri Feb 25, 2011 11:57 pm
by medicevans
I have to admit, I feel a little disappointed. 29 hours and 244 views and two people have commented? I guess I don't know what to say.

Posted: Sat Feb 26, 2011 12:29 am
by grberry
Ok, it feels to me like you have an asset allocation you want to eventually reach. Your starting portfolio is fairly small, so you'll either have next to nothing in a given fund or have to use fewer pieces at first and reallocate in a few years when you have more in the pot.

The good news is that you'll grow the portfolio about 25% from this year's contributions to the employer plan, and another 40% next year from next year's contributions. With this much contribution growth going on, my strong recommendation is to make sure your employer retirement plan matches the target portfolio. Otherwise the contributions alone will take you far off target in the next few months.

Since one of the plan vehicles is a 457(b), I believe you are now a government employee. Is there a pension in the picture? (And, if there is, do you believe it will still be there when you are retired?) If so, this needs consideration but may not change your target allocation.

As I look at the options for the plans, I see that Vantage Trust is the firm holding the funds. For a lot of the options, if you delete the VT prefixes and look up the funds elsewhere, you'll find what the fund really is. It also looks like Vantage Trust has gotten the plan access to institutional versions of many of these funds - they are generally lower expense and thus better than the retail versions, but have the same pattern of holdings. This is good.

On the bond funds, avoid PIMCO High Yield - that is a junk bond fund. I expect either of the other three would be fine as your only core bond fund. But you want two, one for TIPS which here would have to be "VT Inflation Protected Securities Fund VPTSX 0.67" and one for an intermediate or total bond fund which either of the other two could be.

The only REIT fund I spot is "VT American Century Real Estate, Investor REACX 1.16". That makes choosing a REIT fund simple - either use this or eliminate the REIT allocation inside the employer plan and go heavy on REITs outside the employer plan.

I don't know any of those international stock funds, but one has a much better expense ratio than the others. I'd look into that one - check Morningstar, check the prospectus. Is it strongly biased (large cap only, some geographies only) or otherwise weird? If not, use it. If it is, look at the others and then maybe use it.

On the US stock funds, I would avoid the two funds with a load. (Why isn't the load waived? It ought to be. Rhetorical question because you won't have the answer.) Beyond that I am not as sure what to say. You might do well starting with "VT Broad Market Index Fund, Class I VPMIX 0.43 ", "VT 500 Stock Index Fund, Class I VPFIX 0.44", and/or "VT Mid/Small Company Index, Class I VPSIX 0.48 " then maybe adding one or two more to tilt these to your target allocation. Morningstar's Instant X-Ray feature can help you look at this. It does look like you will add significant expense ratio to get the tilt, as everything else has a much higher expense ratio.

Posted: Sat Feb 26, 2011 1:08 am
by retcaveman
I am not familiar with most of your fund options, so I can only make a couple of general comments:

- You can look up all of these funds for free at the morningstar website. It will tell you the load, expense ratio, fund composition, risk, etc.

- I would pay attention to expense ratios and loads. Basically I will not invest in any load fund ie one that charges a sales fee. I also avoid anything with a high expense ratio.

- I'd keep it real simple...just a few basic, low cost funds. You don't need to get real fancy.

- Meanwhile, I would do some reading to get a better handle on investing and fine tune after you build up your balances and gain more insight. (Even then, no need to have numerous funds IMHO)

- My answer to your first question is yes. You should do your AA on all your accounts.

- Question #2, if you are not happy with the options you have in your employers 401k roll it over to an IRA. To keep things simple, I suggest a direct custodian to custodian rollover. You can also roll it into an existing IRA (note taxes if rolling to the Roth). But if you do that you will lose the option of rolling it into an employer plan in the future. If you roll it to a separate IRA, you will preserve the right to roll it in the future (don't commingle the funds). With so little money ($600) in question, I wouldn't worry about keeping it separate.

- Question 3; the car. If you like the car and are managing the loan ok, keep it. If you are going to keep it, you will want to evaluate if you think your money will get you more by investing it vs paying off the loan. If you are contributing to your 401k and IRA's, I guess I would next focus on making the loan go away.

BTW, I appreciate the way you say, "we got pregnant." I also like the way you seem to accept responsibility for the decisions/actions you have taken.

Best wishes.

Posted: Sat Feb 26, 2011 9:08 am
by JBmadera
first off, congrats on the new job and good for you getting started early on being proactive with your financial future.

I would start with a lot of reading, tons of great links on this site. Perhaps start with this one: http://www.bogleheads.org/wiki/Lazy_Portfolios

good luck!

Posted: Sat Feb 26, 2011 10:10 am
by bdpb
IL state income tax is 5%.

Do you get a company match?

If no company match I would contribute up to 10k (5k you and 5k wife)
to tax deductible IRA instead of the 401 or 457. Your fund options will be
much better in the IRAs than the 401 or 457.

If there is a company match then contribute only enough to get the match
and the rest to tax deductible IRA.

You don't have enough saved to mess with a portfolio that has 8 different
funds. I would stick with simple TR funds and maybe one or two others if
you want to overweight something. In a year or two would be about the
time to break up your TR funds.

Your international allocation in your AA is too low. Should be around 30%
of stocks (plus or minus).

Since you are in the state of IL, do not contribute to a Roth directly. If
you want to put money in a Roth, you should contribute to tax deductible
IRAs and then convert to Roths. IL does not tax IRA contributions or
withdrawals/conversions.

In the 15% tax bracket (effectively no state tax), I would definitely try
to convert IRAs to Roths. Five years down the road, the converted Roth
money can act a secondary emergency fund (since Roth contributions
and conversions can be withdrawn tax free).

I would roll the old 401k to Vanguard IRAs. For any money already in
the new 401/457 put into the low cost bond fund. In the IRA choose
a higher stock allocation TR fund and average it with the bond fund
in the 401/457 to meet your chosen AA.

Posted: Sat Feb 26, 2011 6:14 pm
by medicevans
I edited the initial post to include my company match.

Grberry: You are correct, I am a medic at a city owned ambulance service. I have access to the Illinois Municipal Retirement Fund, but I have chosen to invest in the 401(a) due to several reasons. I don't plan on retiring from where I work now, the vesting period is incredibly long, and Illinois' financial situation scares me a little.

Retcaveman: I swear I wasn't there when my son was conceived. However, my wife also swears she wasn't there, so I guess I have to go with the "I was asleep" line.

JBmadera: I read voraciously. Over the last year and a half I have read around 15 books from the likes of Ferri, Swedroe, Gibson, Larimore et al., Grahm, Bernstein, Schultheis, and then some. Honestly, just now have a job where I don't have to live hand to mouth.

Bdpb: Thanks for setting me straight on the state income tax. I don't know where I got 6% from. I edited my initial post to include my company match. If I put 4.5% in, they put in 7.9%. Of course, I want to maximize my savings. We will be able to put in 4.5% in without even straining. I didn't realize that IL didn't tax Roth conversions. I have my IRAs split evenly between Roth and Trad. When I do a conversion, I assume I pay taxes on the converted balance at the end of the year, right? I might have to do this. However, if I convert $6500 into Roth, can I still put $5000 in for FY2011?