Leaving broker, need advice- Update

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Topic Author
lssugoalie
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Joined: Wed Jan 18, 2012 3:44 pm

Leaving broker, need advice- Update

Post by lssugoalie »

Hi everyone. I have finally convinced the hubby to leave Edward Jones for Vanguard. I have spent the last couple of weeks reading everything I can find online, but we have a big age difference and don't know what to do. Here's the background:

Husband has only income of approx. $110k, He got this job about 6 years ago and we just started contributing heavily 3 years ago. He works for the gov't and his job is very secure. He is eligible for retirement at age 57 and we are shooting for his age 60. We have no kids and have no plans for any. We live way under our means and are using the extra to pay off mortgage (bought house for $160k in 2006, now worth about $110k)

Emergency funds = we have at least 3 months

Debt: Our only debts are 121k on a 15 year mortgage at 4%, just refied this summer and 21k of student loans at 4.125%
We are putting extra on the mortgage each month to have it paid in 3.5 years.

Tax Filing Status: Married filing Jointly

Tax Rate: Last year we had a marginal tax rate of 15%, but a big raise and fewer deductions will probably put us at 25% this year

Age: me 28, hubby 39

Current portfolio
Taxable -none

His Roth IRA at Edward Jones, soon to be Vanguard
about $22k

Her Roth IRA
about $15k

His TSP
30% C fund
65% S fund
5% I fund
total TSP= $61k

Company Match? Gov't matches 5% of salary

New annual Contributions
his TSP (including matching contributions) about $22k (17k contributions, 5k match)
his Roth IRA $5k
her Roth IRA $5k


Questions:
1. We want to switch our Roth IRAs from Edward Jones to Vanguard, but I'm not sure what funds to buy. Do we go with all ETFs or a mix of mutual funds and ETFs? I feel like I can be more aggressive since my IRA will be available so much later than his. I've been researching a lot and I was thinking this, but I don't know what percentage should go in each from the transfer and our monthly contributions:
Him- ETFs: Corporate long term bon (VCLT), SP500 (VOO), and High dividend yield (VYM)
mutual fund: Admiral Shares (VBIAX)
Her-ETFs: Mega Cap 300 (MGK), small cap growth (VBK), midcap growth (VOT)
mutual funds: Life strategy growth (VASGX), Vanguard 500 index (VFIAX)

2. My second question is, are we on the right track? He wants to buy a second home, that's why we're paying this one off asap. I worry that we'll be trading one mortgage payment for another. We aren't saving anything for retirement outside the TSP and the 2 Roths. Our bills are about $4k/month including retirement contributions and our income is about $5400. When the mortgage is paid our bills will be $3k/month. We plan to save that money for a couple of years so we have a large down payment and a small mortage if we get a vacation house. I wonder if we are going to need all or part of that $2400 surplus in retirement? His pension will be about $3500/month plus social security, TSP and Roth IRA.

Thanks in advance for any advice.


UPDATE:
I called and talked to a representative for over an hour and he was very helpful and patient. All my forms are in the mail and I'm on my way to saying good-bye to Edward Jones!
Last edited by lssugoalie on Thu Jan 26, 2012 2:29 pm, edited 1 time in total.
Muchtolearn
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Re: Leaving broker, need advice

Post by Muchtolearn »

Congratulations on a good start. I don't see anything about your income as between the two of you I would think you should have more net positive cash flow.
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Cloud
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Re: Leaving broker, need advice

Post by Cloud »

Question #1: You really need a written IPS "Investment Policy Statement" before you can answer what funds you should purchase at Vanguard and they should be considered part of your total investments and not looked at in isolation. I would lean towards mutual funds then mix with ETF's if needed. The ROTH balances are still small enough I'd try to limit yourselves to one fund each to take advantage of lower costs. For a minimum investment of $10,000 you can get into the Vanguard Admiral class shares at a much lower exp ratio.

Question #2: On the right track, YES... 17K TSP plus 10K combined ROTH's is definitely the right track, at least for the last 3 years. But to be honest, your husbands total savings are on the low side for his age IMO but it looks like your on the right track now! Just don't over spend in the housing area, it sounds like you're not in agreement about the second home. In any case plan to have the home/s paid off by retirement.
Topic Author
lssugoalie
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Re: Leaving broker, need advice

Post by lssugoalie »

Thanks for the quick responses. His is the only income at about 110k/year. All of the extra income is going towards the mortgage, which will be gone in 3.5 years. I will definitely be looking more at the mutual funds. We are still pretty aggressive in the TSP with 30% large cap, 65% small cap, and 5% international. Our other 2 choices are government bonds or a lifecycle fund, which seems a little too conservative for us since we are "playing catch-up"
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tyrion
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Re: Leaving broker, need advice

Post by tyrion »

Not to be mean or pick a fight here, but....

He is the only earner. You don't have kids and don't plan to. Do you plan to work in the future?
retiredjg
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Re: Leaving broker, need advice

Post by retiredjg »

lssugoalie, welcome to the forum!
lssugoalie wrote:I have spent the last couple of weeks reading everything I can find online, but we have a big age difference and don't know what to do.
I do not believe this age difference is going to be an important issue in this case. If he dies first, you will still received survivors benefits on his pension and on his SS. As well as having money in the TSP. Don't worry about age difference at this point.
Debt: Our only debts are 121k on a 15 year mortgage at 4%, just refied this summer and 21k of student loans at 4.125%
We are putting extra on the mortgage each month to have it paid in 3.5 years.
Is the student loan deductible? Are you also paying it off at an accelerated rate?
1. We want to switch our Roth IRAs from Edward Jones to Vanguard, but I'm not sure what funds to buy. Do we go with all ETFs or a mix of mutual funds and ETFs?
You can use either mutual funds or ETFs - it's just personal preference. The cost will be the same for most.
I feel like I can be more aggressive since my IRA will be available so much later than his.

You are looking at this wrong.
  • -First, your Roth IRA will not be available later than his. Your contributions (not earnings) to Roth IRA are available any time for any reason with no penalty.

    -Second, the portfolio consists of all the accounts together - His TSP, His Roth IRA, and Her Roth IRA. It does not make any difference which is more aggressive and which is less aggressive - the portfolio is the same. Even if it did matter, since you can move things around any time you want, it would not matter.
Him- ETFs: Corporate long term bon (VCLT), SP500 (VOO), and High dividend yield (VYM)
mutual fund: Admiral Shares (VBIAX)
Her-ETFs: Mega Cap 300 (MGK), small cap growth (VBK), midcap growth (VOT)
mutual funds: Life strategy growth (VASGX), Vanguard 500 index (VFIAX)
This is way too complicated and many of the choices are not optimal. We'll come back to this.
He wants to buy a second home, that's why we're paying this one off asap. I worry that we'll be trading one mortgage payment for another. We aren't saving anything for retirement outside the TSP and the 2 Roths.
It appears your husband intends to stay with the government till retirement. If so, he will have a pension and SS. Since you can live on so much less than his current salary, I suspect you will be able to live on just the pension and SS and need little if any of the money saved in the TSP and the Roth IRAs. In my opinion, $17k into TSP and $10k into Roth IRA is probably enough savings.

There are two ways to approach investing in your situation. You can use a target retirement type of fund in each account. This would certainly be the easiest thing to do because all you have to do is add money. The other option is to hold individual funds. This results in essentially the same portfolio, but you do the work of keeping things balanced.

Here are two examples, each with 70% stock and 30% bonds. I picked this number out of a range of numbers that are appropriate at your ages. You need to decide your own stock to bond ratio. This should be your first decision. Picking funds should be your last decision.

Option 1


His Roth IRA 22.5% ($22k)
22.5% Vanguard Target Retirement 2025

Her Roth IRA 15.3% ($15k)
15.3% Vanguard Target Retirement 2025

His TSP 62.2% ($61k)
62.2% Lifecycle 2030

Total = $98k

Option 1 is about 70% stock, 30% bonds with about 30% of stock (21% of portfolio) in international. Vanguard and the TSP will keep this balanced and move your portfolio to higher bond percentages as you age. The only shortcoming is that this portfolio contains less emerging markets and international small caps than Option 2.

Option 2

His Roth IRA 22.5% ($22k)
16.5% Vanguard Total Stock Market
6% Vanguard Total International

Her Roth IRA 15.3% ($15k)
15.3% Vanguard Total International

His TSP 62.2% ($61k)
24% C Fund (500 Index)
8.2% S Fund (mid cap and small cap)
20% F Fund (total bond market)
10% G Fund

Total = $98k

New annual Contributions for Option 2 (total = $32k)
his TSP $22k 9.6k to Bonds (F fund and G Fund), 9.3k to C Fund, 3.1k to S Fund
his Roth IRA $5k - $1.7k to International, 3.3k to total stock market
her Roth IRA $5k - All to international

Option 2 is also 70% stocks and 30% bonds with 30% of stocks (21% of portfolio) in international. With the exception of having less emerging markets and international small caps as mentioned earlier, it is essentially identical to option 1. Just more trouble.
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Throwin' Darts
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Location: The Lone Star State

Re: Leaving broker, need advice

Post by Throwin' Darts »

Welcome to the forum.

With a single income earner in the household having only 3 months of emergency funds is a little thin. I would focus on building that up instead of using extra cash to pay down the mortgage right now. If you get in a bind, it will be tough, if not impossible, to tap that equity.

Once you build up the emergency funds, then you may need to take a look at paying down the student loan debt over the mortgage debt. Is the student loan interest tax deductible?

If you absolutely are planning to buy a second home, then I'd make a projection on where I thought interest rates would be at the time I purchase. You are throwing all your extra cash at an extremely cheap rate wise mortgage in an interest rate environment that only has one direction to go in the future. If you expect rates to be higher at the time of purchase (don't forget to consider not only the projected interest rate environment but also the higher rate that a second home mortgage will generally carry anyway) then I would focus on building up a sizeable down payment over paying down locked in really cheap mortgage debt today.

How are you contributing to a Roth when you have no earned income? Since you have no plans for kids, are you planning to enter the workforce?
Chuck Norris can divide by zero
Topic Author
lssugoalie
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Joined: Wed Jan 18, 2012 3:44 pm

Re: Leaving broker, need advice

Post by lssugoalie »

retiredjg: Thank you for taking the time to respond.
The student loan interest is deductible and since the payment and interest is such a small amount we figured we'd free up the mortgage payment then get rid of the student loan immediately after.
Also, thanks for including the TSP in your answer, With so few choices it's hard to decide. Our goal with the second house is a retirement house, when he reitres, we will move into it full time and sell our primary house. I like the idea of all the lifecycles. One question, should I be in a different lifecycle since we don't plan to touch my Roth until after I'm at least 60 and possibly not until he dies?
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Midpack
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Re: Leaving broker, need advice

Post by Midpack »

Having seen your posts on another site, I am not clear if you're looking "for a fish" or you want to "learn how to fish." You seem to be on the fence, and that's not unusual, but which side are you aiming for? The best approach is keep it simple with balanced funds if you aren't interested in learning how to DIY, nothing wrong with that. DIY doesn't have to be a lot of work, but there are some essential fundamentals you'll want to learn and manage - most people in the overall just don't want to. And they often make costly mistakes by acting on bad info without any knowledge base.
You only live once...
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HomerJ
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Re: Leaving broker, need advice

Post by HomerJ »

tyrion wrote:Not to be mean or pick a fight here, but....

He is the only earner. You don't have kids and don't plan to. Do you plan to work in the future?
I'm curious about this too...
Topic Author
lssugoalie
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Joined: Wed Jan 18, 2012 3:44 pm

Re: Leaving broker, need advice

Post by lssugoalie »

Midpack wrote:Having seen your posts on another site, I am not clear if you're looking "for a fish" or you want to "learn how to fish." You seem to be on the fence, and that's not unusual, but which side are you aiming for? The best approach is keep it simple with balanced funds if you aren't interested in learning how to DIY, nothing wrong with that. DIY doesn't have to be a lot of work, but there are some essential fundamentals you'll want to learn and manage - most people in the overall just don't want to. And they often make costly mistakes by acting on bad info without any knowledge base.

I think I have a pretty good grasp of retirement planning, but the idea of "investing" is scary. I've read a lot of books from the library, but they all seem to say different things, I like coming on here and seeing more real world advice. The hubby has decided to be hands off so I feel like it's all on me. I plan to go balanced/target funds to be more safe.

When we moved to this area there is very little work available, after a couple of years of looking for a job, I kind of gave up, then ended up providing care to an elderly family member a lot of the time. This is more important to us than a second income. When this ends I will hopefully get back into the workforce.
retiredjg
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Re: Leaving broker, need advice

Post by retiredjg »

lssugoalie wrote:Also, thanks for including the TSP in your answer
The TSP has to be included in any answer - it is the largest portion of your retirement portfolio.
With so few choices it's hard to decide.
Newer investors often see the TSP choices as "limited". However, the TSP contains everything you need in just 5 funds and the expenses are rock bottom low - nothing lower on the planet. Ok, that first part is not entirely true - emerging markets is missing and I think emerging markets is an important class of funds to own, but you can certainly survive without it.
One question, should I be in a different lifecycle since we don't plan to touch my Roth until after I'm at least 60 and possibly not until he dies?
No. You are still missing an important concept - you need to look at all the accounts as one portfolio. If you hold a different target type fund in your Roth IRA, that changes the whole portfolio, not just your Roth IRA.

Imagine you have 100 blue marbles, 100 red marbles and 100 white marbles. Does it change anything if you put all the blue marbles in His Roth IRA as opposed to Her Roth IRA? No, you still have 100 blue marbles and the blue marbles still represent 1/3rd of your marbles. The blue marbles can be in any account. They can be spread out equally or unequally in all the accounts. No matter where you put the blue marbles, you will still have 100 blue marbles and they will still be 1/3rd of your marbles. Does this make sense?
Topic Author
lssugoalie
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Re: Leaving broker, need advice

Post by lssugoalie »

wow, the marbles made it so clear, I kept thinking separate. Thanks.
retiredjg
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Re: Leaving broker, need advice

Post by retiredjg »

lssugoalie wrote:I think I have a pretty good grasp of retirement planning, but the idea of "investing" is scary. I've read a lot of books from the library, but they all seem to say different things....

Yes they do and nobody knows what is best although many claim to.

That is why many people here just choose to invest in everything and be done with it. Sometimes, X will do well, sometimes Y, sometimes Z. Since nobody can predict which will be which, the only logical solution is to just hold everything.

I think this these two links may be helpful to you.

Wiki article link: Bogleheads® investment philosophy

Wiki article link: Books: Recommendations and Reviews
retiredjg
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Re: Leaving broker, need advice

Post by retiredjg »

lssugoalie wrote:wow, the marbles made it so clear, I kept thinking separate. Thanks.
:D Good! Keep it in mind as this will completely change how you manage things.
retiredjg
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Re: Leaving broker, need advice

Post by retiredjg »

I think whether you return to work is irrelevant. Your joint income is plenty big enough. You are living below your means. You are saving a lot of money. You will have income in retirement. Sure, more money would be fine, but if you keep up the good habits, you don't really have more money in my opinion.
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HomerJ
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Re: Leaving broker, need advice

Post by HomerJ »

retiredjg wrote:I think whether you return to work is irrelevant.
Heh, it might be relevant to her husband when he's 57 and thinking "Man, I could retire TODAY, if my wife had worked at some point over the last 20 years...."

Not slamming the OP.. She has a very good reason not to work right now...
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lssugoalie
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Re: Leaving broker, need advice

Post by lssugoalie »

rrosenkoetter wrote:
retiredjg wrote:I think whether you return to work is irrelevant.
Heh, it might be relevant to her husband when he's 57 and thinking "Man, I could retire TODAY, if my wife had worked at some point over the last 20 years...."

Not slamming the OP.. She has a very good reason not to work right now...

Ha, I keep thinking the same thing, like is he going to wake up one day and hate me, but family is very important to us. Luckily he has a great, secure job that allows me to do this. We also keep a tight cash budget that lets me do this as well. We're pretty low maintenance people who don't feel the need to keep up with others.
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