need help with shifting toward index funds/reallocation

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texasgal234
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Joined: Sun Feb 05, 2012 11:27 am

need help with shifting toward index funds/reallocation

Post by texasgal234 » Mon Apr 16, 2012 12:02 pm

I just recently read several excellent books including the Boglehead’s Guide to Investing and several of Larry Swedroe’s excellent books and would like to use more index funds for most of the bond funds, int’l funds, and some of the stock funds that should be replaced. I will be moving our 401Ks to Vanguard and would like to use these accounts for our bond funds and REITs, if used.


Emergency funds = 10-12 months of expenses
Debt – none (mortgage pd off). Will sell home in 5 yrs and downsize and hopefully pay off new mortgage right away.
Tax Filing Status: married filing jointly
Tax Rate: 28% Federal, 0% state (TX)

Age: 51 (spouse 50)

Desired Asset allocation: ~ 55/45 or 50/50
Int’l allocation: 15-20% (open to recommendations)

Current asset allocation: US stocks 43%, int’l 7%; bonds 32%, cash 18%

Current portfolio is in the lowish 7 figures.

Risk level – still in accumulation phase for next 4 yrs then will try to semi-retire (no pensions) so leaning more conservative now. Child enters college in 2015. Will have 25-50% funded (529 and ESAs) depending on public vs private and scholarship availability.

Taxable
8% cash (needs to be invested)
3.1% American Century Infl. Adj Bond ( ACITX) (0.48%)**
2.0% Vanguard Intermed Tax Exempt (VXITX) (0.2%)
1.3% Dodge & Cox Int’l (DODFX) (0.65%) – could sell with a loss
3.4% Dodge & Cox Stock (DODGX) (0.52%) – could sell with a loss
5.6% FAM Value (FAMVX) (1.24%) - long held profitable fund
3.0% Janus Fund (JANSX) (0.90%) – profitable but willing to sell
7.7% Mairs & Power Growth (MPGFX) (0.71%) – long held profitable fund
6.0% Meridian Growth (MPGFX) (0.81%) – long held profitable fund
4.8% T Rowe Price Equity Income (PRFDX) (0.69%) – could sell at a loss
0.7% USAA S&P 500 (USSPX) (0.25%) – will sell; break even
2.4% Scout Int’l (UMBWX) (0.94%) – purchased 12/12
2.6% T Rowe Price Growth (PRGFX) (0.70%) – long held profitable fund

Her Roth IRA
2.3% - Meridian Growth (MERDX) (0.81%)
1.6% - Mairs & Power Growth (MPGFX) (0.71%)

Her trad’l IRA (non-deductible; would like to backdoor to Roth if possible)
3.7% – USAA Income (USAIX) (0.43%) – would like a Vanguard bond index fund

His Roth IRA
2.4% - Meridian Growth (MERDX) (0.81%)
1.5% - Mairs & Power Growth (MPGFX) (0.71%)

His trad’l IRA (non-deductible; would like to backdoor to Roth if possible)
3.5% - Dodge & Cox Income (DODIX) (0.43%) – pretty good fund; not sure spouse would like to change

Her self-employed 401k (at Fidelity – want to move it to Vanguard) - pre-tax contributions
0.5% Jensen Quality Growth (JENSX) (0.92%)
2.5% Royce Special Equity (RYSEX) (1.16%)
0.8% T Rowe Price Emerging Mkts (PRMSX) (1.26%)
2.5% Yacktman Focused (YAFFX) (1.25%)
2.7% Fidelity Inflation Protected Bond (FINPX) (0.45%)
1.8% Janus High Yield Bond (JSHYX) (0.89%)
2.9% Spartan US Bond Index (FBIDX) (0.22%)
2.2% TCW Total Return Bond (TGLMX) (0.44%)
3.2% CASH (needs to be invested)

His self-employed 401K (at Fidelity – want to move to Vanguard) - pre-tax contributions
0.6% Dodge & Cox Stock (DODGX) (0.52%)
0.8% T Rowe Price Emerging Mkts (PRMSX) (1.26%)
1.8% Dodge & Cox Income (DODIX) (0.43%)
2.5% Fidelity Inflation Protected Bond (FINPX) (0.45%)
1.7% Janus High Yield Bond (JSHYX) (0.89%)
2.6% Spartan US Bond Index (FBIDX) (0.22%)
5.3% CASH (needs to be invested)

New annual Contributions:
$20,000 her 401k for 2012 – 2016
$16,000 his 401K for 2012-2016
$6,000 her non-deductible IRA for 2012 and beyond (want to move to backdoor Roth)
$6,000 his non-deductible IRA for 2012 and beyond (want to move to backdoor Roth)
$35,000 taxable for 2013-2016

Questions:

1. For bond funds, I’m not sure how to choose and allocate among VBTLX, VFIDX, VBILX, VAIPX, and VWITX (if needed in taxable acct)
2. Taxable acct: Would like to sell taxable bond fund(**) and keep all taxable bonds in tax-deferred accts. Within taxable, would like to invest in VTSMX but am open to recommendations for other good Vanguard funds
3. Within int’l funds, not sure how to choose and allocate between VGTSX vs VTWSX vs other options

Thanks. I would appreciate any suggestions.

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bertilak
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Re: need help with shifting toward index funds/reallocation

Post by bertilak » Mon Apr 16, 2012 2:07 pm

Without giving a precise answer, I would suggest you think it through as follows. Pretty much ignore that huge pile of funds you already have, at least until the end of this thought process.
  1. Determine your stock/bond split. Looks like you are close to this.
  2. For bonds, determine your nominal/TIPs split. Recommendations for this are all over the map. You could almost pick randomly and find as many people to agree with you as disagree. I went 2 for 1, nominal/TIPS.
  3. For stocks, determine your US/International split. I went 70/30, US/International. I weighted heavier to US since when I spend the money it will be in US dollars so want to lessen risk of foreign currency. There is a range of opinions on this.
  4. Once the above is determined, identify appropriate low-cost funds to cover those investments. Vanguard funds are almost always the right answer. Don't get fancy with lots of different stock or bond funds. Go for Total Stock Market (US and International), Total Bond Market (US) and TIPs. If you like REITs, reallocate some of the US stock money to REITs but keep the percentage low. Remember TSM and TISM already include some REITs.
  5. Use the available money in each of your accounts (Tax-advantaged, Taxable, His, Hers) to purchase funds so they add up to the proportions you have decided upon. Think of all the accounts as a single portfolio. Sell off what you don't want and buy what you do want. Fill up the taxable accounts with stock funds first (but not REITs).
Reinvest all dividends.

Oh yes, cash at 18% seems way high. Total Bond Market is fairly stable, almost certainly it will earn more than cash/MM, even over the short term, and can it can be easily accessed for emergencies. I allocate zero % to cash in my IRA. (In an account I manage for a relative who needs to pay expenses out of cash I allocate about 2-3 months expenses to cash. SS and Pension direct deposit into the account and those plus dividends closely match expenses. But none of this should apply to you.)

One other consideration. It *might* be worth your while to delay sales of short-term cap gains in taxable accounts. Earmark that money for its final destination but sit on it until it turns into long-term CGs. If yu can match losses to gains that may make it OK to sell anyway.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

Topic Author
texasgal234
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Joined: Sun Feb 05, 2012 11:27 am

Re: need help with shifting toward index funds/reallocation

Post by texasgal234 » Mon Apr 16, 2012 10:13 pm

Thanks so much for taking the time to reply. I appreciate your advice.

I definitely need to simplify and pare down the number of funds that we've accumulated over the years. Cash % is definitely too high. Unfortunately we froze after losing a large sum that we were advised to invest in the market in mid 2008, rather than pay off our mortgage at the time. I know we lost out during the subsequent upswing and, the longer I waited to invest our 401k contributions, while trying to find a better advisor, the more my spouse has been worried about another downturn. I need to just trust my own judgement and just get back in and invest our cash.

Thanks again for your help.

retiredjg
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Re: need help with shifting toward index funds/reallocation

Post by retiredjg » Tue Apr 17, 2012 12:05 pm

texasgal234 wrote:Int’l allocation: 15-20% (open to recommendations)
Vanguard recommends between 20% and 40% of stocks, up to market weight (roughly 57%) for those who want market weight.

Taxable
8% cash (needs to be invested)
3.1% American Century Infl. Adj Bond ( ACITX) (0.48%)**
2.0% Vanguard Intermed Tax Exempt (VXITX) (0.2%)
1.3% Dodge & Cox Int’l (DODFX) (0.65%) – could sell with a loss
3.4% Dodge & Cox Stock (DODGX) (0.52%) – could sell with a loss
5.6% FAM Value (FAMVX) (1.24%) - long held profitable fund
3.0% Janus Fund (JANSX) (0.90%) – profitable but willing to sell
7.7% Mairs & Power Growth (MPGFX) (0.71%) – long held profitable fund
6.0% Meridian Growth (MPGFX) (0.81%) – long held profitable fund
4.8% T Rowe Price Equity Income (PRFDX) (0.69%) – could sell at a loss
0.7% USAA S&P 500 (USSPX) (0.25%) – will sell; break even
2.4% Scout Int’l (UMBWX) (0.94%) – purchased 12/12
2.6% T Rowe Price Growth (PRGFX) (0.70%) – long held profitable fund
In a higher tax bracket such as 28%, it is important to achieve as much tax-efficiency as you can to avoid paying extra tax. Unfortunately, that horse is already out of the barn since your taxable account is filled with actively managed funds and also contains bonds.

The other thing about your choice of funds is that almost all have a higher expense ratio than necessary.

One last issue is the number if tiny slices you have. Anything less than about 5% of portfolio is just clutter.

How much you can (and are willing to) fix these three things depends on what you can sell without triggering an unreasonable amount of tax. Obviously, it also depends on what you are willing to sell. Balancing out gains against losses (so there is no tax to pay), what would you be left with?

Here's sort of an ideal portfolio that could be a goal.

Taxable 50.6%
35.6% Total Stock Market
15% Total International

Her Roth IRA 3.9% + 3.7% = 7.6%
7.6% Inflation Protected Bonds

His Roth IRA 3.9% + 3.5% = 7.4%
7.4% Inflation Protected Bonds

Her self-employed 401k 19.1%
19.1% Spartan US Bond Index (FBIDX) (0.22%)

His self-employed 401K 15.3%
15.3% Spartan US Bond Index (FBIDX) (0.22%)

This is a 50/50 portfolio that has everything you actually need. Other things could be added to suit your tastes. Both of the funds in the taxable account are tax-efficient.

I realize this is not what you want because you want to keep some of the actively managed funds and also because you probably cannot do a wholesale liquidation of the taxable account without some taxes being triggered. However, this is where I think you should be heading - achieve the closest you can without a blood-bath of taxes.

I did not move the 401ks to Vanguard because Fidelity is perfectly fine if you use Spartan Funds. Their inflation protected bond fund is reasonably priced as well. You could buy the same things at Vanguard if you decide to move.


New annual Contributions:
$20,000 her 401k for 2012 – 2016
$16,000 his 401K for 2012-2016
$6,000 her non-deductible IRA for 2012 and beyond (want to move to backdoor Roth)
$6,000 his non-deductible IRA for 2012 and beyond (want to move to backdoor Roth)
$35,000 taxable for 2013-2016
Is there some reason that His 401k is only receiving $16k instead of $17k?

I see no reason not to convert the traditional IRAs to Roth IRA. You will pay tax (at 28%) on the earnings. This will allow each of you to back door Roth contributions in the future.

Remember NOT to back door any Roth contributions in the year you move your 401ks to IRAs (if you move the 401ks to IRAs) since any money in IRA at the end of the year will have to be included in the calculations. For the last year you work, go ahead and do a back door Roth (if the option still exists) and then wait until January of the following year to move any 401k money to IRA.

retiredjg
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Re: need help with shifting toward index funds/reallocation

Post by retiredjg » Tue Apr 17, 2012 12:32 pm

I took a quick look at these things. I think I would prioritize selling the gains (offset by losses from selling the other stuff) in this order:


Worst offenders:
5.6% FAM Value (FAMVX) (1.24%) - long held profitable fund <--excessive expenses
6.0% Meridian Growth (MERDX) (0.81%) – long held profitable fund <--least tax efficient (according to Morningstar )

Middle offenders:
3.0% Janus Fund (JANSX) (0.90%) – profitable but willing to sell
2.4% Scout Int’l (UMBWX) (0.94%) – purchased 12/12

Least offenders:
7.7% Mairs & Power Growth (MPGFX) (0.71%) – long held profitable fund
2.6% T Rowe Price Growth (PRGFX) (0.70%) – long held profitable fund

This would be my order, but that does not necessarily make it right.

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Duckie
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Re: need help with shifting toward index funds/reallocation

Post by Duckie » Tue Apr 17, 2012 7:48 pm

Check with your 401k plan documents. You each may be able to contribute an extra $5.5K for a catchup on top of the $17K. Then there would be more going into tax-sheltered and less into taxable.

retiredjg
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Re: need help with shifting toward index funds/reallocation

Post by retiredjg » Tue Apr 17, 2012 8:36 pm

Duckie wrote:Check with your 401k plan documents. You each may be able to contribute an extra $5.5K for a catchup on top of the $17K. Then there would be more going into tax-sheltered and less into taxable.
Duh! :oops: That's the great thing about this forum. There's usually one person who catches what others have missed.... Good catch Duckie!

Topic Author
texasgal234
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Joined: Sun Feb 05, 2012 11:27 am

Re: need help with shifting toward index funds/reallocation

Post by texasgal234 » Tue Apr 17, 2012 10:14 pm

Here's sort of an ideal portfolio that could be a goal.

Taxable 50.6%
35.6% Total Stock Market
15% Total International

Her Roth IRA 3.9% + 3.7% = 7.6%
7.6% Inflation Protected Bonds

His Roth IRA 3.9% + 3.5% = 7.4%
7.4% Inflation Protected Bonds

Her self-employed 401k 19.1%
19.1% Spartan US Bond Index (FBIDX) (0.22%)

His self-employed 401K 15.3%
15.3% Spartan US Bond Index (FBIDX) (0.22%)

This is a 50/50 portfolio that has everything you actually need.
[/quote]

This does look so much simpler and streamlined. It may take me a while to replace the funds in the taxable acct as I balance the gains with losses, esp. since the cap gains rate is going up this year, isn't it?

I always thought that I was choosing funds with fairly low expense ratios. It's also been difficult to give up funds that are consistently rated well by Morningstar, though I've noticed that their analyst reports don't tend to change much for the larger fund families.

Topic Author
texasgal234
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Re: need help with shifting toward index funds/reallocation

Post by texasgal234 » Tue Apr 17, 2012 10:16 pm

I'm not quite sure that I'm doing the "quotes' reply correctly (newbie to forum).

I do need to confirm that we can do the catch up contribution to the 401k's but not sure if the deadline was today or "with extensions" which we always file.

retiredjg
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Re: need help with shifting toward index funds/reallocation

Post by retiredjg » Tue Apr 17, 2012 10:57 pm

You can't do 401k contributions now for last year. However, based on your age, you can each do $17k + $5.5k catch up for 2012 and in the future.

Edit: apparently this information is incorrect. See discussion below.
Last edited by retiredjg on Sun Apr 22, 2012 8:14 am, edited 1 time in total.

retiredjg
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Re: need help with shifting toward index funds/reallocation

Post by retiredjg » Tue Apr 17, 2012 10:59 pm

You can use the quote button, but as you edit, you need to be sure there is a [ quote ] at the beginning of what you want to quote and a [/quote] at the end of what you want to quote. (But don't have any spaces in there like I had to do to make it work).
Last edited by retiredjg on Tue Apr 17, 2012 11:06 pm, edited 1 time in total.

retiredjg
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Re: need help with shifting toward index funds/reallocation

Post by retiredjg » Tue Apr 17, 2012 11:03 pm

texasgal234 wrote: It may take me a while to replace the funds in the taxable acct as I balance the gains with losses, esp. since the cap gains rate is going up this year, isn't it?
Yes. Starting in January, the long term capital gain rate goes from 15% to 20% (unless laws change before then).
I always thought that I was choosing funds with fairly low expense ratios.
Most of the expense ratios are lower than the average. But not as low as index funds.

Default User BR
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Re: need help with shifting toward index funds/reallocation

Post by Default User BR » Wed Apr 18, 2012 12:39 am

texasgal234 wrote:I'm not quite sure that I'm doing the "quotes' reply correctly (newbie to forum).
No, but Retiredjg has given you guidance. You can also fix any problems with EDIT. Any time you are using quoting, click Preview first to see how your post will look.


Brian

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Duckie
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Re: need help with shifting toward index funds/reallocation

Post by Duckie » Sat Apr 21, 2012 2:31 pm

texasgal234, you wrote you would like to do backdoor Roths and that you want to move your Self-Employed 401ks to Vanguard. If you want to do the backdoor Roths then you need to either convert both TIRAs to Roths or roll them into your SE 401ks.

Be advised, Fidelity allows incoming rollovers from IRAs to SE 401ks. Vanguard does not. So if you choose to roll over the IRAs and move to Vanguard, make sure you do the rollover first.

Muchtolearn
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Re: need help with shifting toward index funds/reallocation

Post by Muchtolearn » Sat Apr 21, 2012 3:36 pm

retiredjg wrote:You can't do 401k contributions now for last year. However, based on your age, you can each do $17k + $5.5k catch up for 2012 and in the future.
A rare error. One can fund a self-employed 401K as late as the last date of an extension in October 2012 for 2011.

retiredjg
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Re: need help with shifting toward index funds/reallocation

Post by retiredjg » Sat Apr 21, 2012 4:14 pm

Muchtolearn wrote:
retiredjg wrote:You can't do 401k contributions now for last year. However, based on your age, you can each do $17k + $5.5k catch up for 2012 and in the future.
A rare error. One can fund a self-employed 401K as late as the last date of an extension in October 2012 for 2011.
Hmmm....I've recently learned that is true for SEP-IRA. You might be right, but I didn't find anything that says that can apply to a Solo 401k as well. However, I didn't do a very exhaustive search. :)

Default User BR
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Re: need help with shifting toward index funds/reallocation

Post by Default User BR » Sun Apr 22, 2012 12:13 am

retiredjg wrote:
Muchtolearn wrote:A rare error. One can fund a self-employed 401K as late as the last date of an extension in October 2012 for 2011.
Hmmm....I've recently learned that is true for SEP-IRA. You might be right, but I didn't find anything that says that can apply to a Solo 401k as well. However, I didn't do a very exhaustive search. :)
http://www.irs.gov/publications/p560/ch ... nk10008975


Brian

retiredjg
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Re: need help with shifting toward index funds/reallocation

Post by retiredjg » Sun Apr 22, 2012 8:11 am

Default User BR wrote:
retiredjg wrote:
Muchtolearn wrote:A rare error. One can fund a self-employed 401K as late as the last date of an extension in October 2012 for 2011.
Hmmm....I've recently learned that is true for SEP-IRA. You might be right, but I didn't find anything that says that can apply to a Solo 401k as well. However, I didn't do a very exhaustive search. :)
http://www.irs.gov/publications/p560/ch ... nk10008975
Brian
Thanks Brian. That link is a wealth of information! I've bookmarked it for more thorough perusal with coffee. :happy

So, if I understood it correctly, the employer (but not the employee?) CAN make 401k contributions after the end of the year for the previous year. It causes me to wonder if this is also possible in a plain 401k (not a solo-401k). When this has been discussed previously, it seems the answer was always "no". I wonder if that is incorrect.

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