Asset allocation and next steps?

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The Big Apple
Posts: 13
Joined: Mon Jul 30, 2018 9:28 pm

Asset allocation and next steps?

Post by The Big Apple » Tue Aug 07, 2018 10:04 pm

Hello!

I have been reading along for several months now, but recently registered and have been absorbing as much as I possibly can. With a new baby on the way, I wanted to get your feedback on my portfolio and overall next steps.

Emergency funds: 3-4 months
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Debt:
Car loan - $18,000 @ 1.9% - 4 years remaining on 5 year loan
Mortgage - $300,000 @ 3.25% - 14 years remaining on 15 year mortgage
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Taxes: Married-Joint
Federal Rate: 22% marginal (historically, much lower effective rate but still need to evaluate 2018)
State Rate: 6.5% marginal
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State of Residence: NY
Age: Early to mid-30s
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Current retirement assets - low to mid 6 figures
No taxable accounts
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Desired Asset allocation: 75-85% stocks / 15-25% bonds
Desired International allocation: 25-30% of stocks
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His 401k - 100% pre-tax funds (tradition or employer contributions)
--> Employer provides a match of approximately $5,000/year (50% of my contributions on up to 6% of my salary)
--> Plan uses quoted prices to determine the value of investments (Commingled Pools values are calculated daily, but are not quoted via ticker)
--> Plan charges $6.25/quarter for recordkeeping fees per participant, irrespective of amount invested in the plan or the investment options selected

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8.26%	PRJIX - T. Rowe Price New Horizons Fund I Class - 0.65%
8.24%	VHCAX - Vanguard Capital Opportunity Fund Admiral Shares - 0.37%
8.18%	FXAIX - Fidelity 500 Index Fund - Institutional Premium Class - 0.015%
8.08%	VSIIX - Vanguard Small-Cap Value Index Fund Institutional Shares - 0.06%
8.08%	***** - Fidelity Growth Company Commingled Pool Class 2 - 0.38%
7.84%	RERGX - American Funds EuroPacific Growth Fund Class R-6 - 0.49%
5.54%	FSRNX - Fidelity Real Estate Index Fund - Institutional Class - 0.07%
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His Roth IRA

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1.83%	VGWLX - Vanguard Global Wellington Fund Investor Shares - 0.45%
2.89%	VFICX - Vanguard Intermediate-Term Investment-Grade Fund Investor Shares - 0.2%
11.05%	VTIAX - Vanguard Total International Stock Index Fund Admiral Shares - 0.11%
19.60%	VTSAX - Vanguard Total Stock Market Index Fund Admiral Shares - 0.04%
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Her Roth IRA

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10.40%	VBIAX - Vanguard Balanced Index Fund Admiral Shares - 0.07%
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Annual contributions
$18,000 his 401k
$5,500 his Roth IRA
$5,500 her Roth IRA
(??) toward 529 Plan/taxable account [Question 1]

Overall savings rate (excluding any amounts toward 529/taxable accounts) is 15-20%.
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Funds available in 401(k)

Code: Select all

FBGKX - Fidelity Blue Chip Growth Fund - Class K - 0.59%
***** - Fidelity Growth Company Commingled Pool Class 2 - 0.38%
VHCAX - Vanguard Capital Opportunity Fund Admiral Shares - 0.37%
VPCCX - Vanguard PRIMECAP Core Fund Investor Shares - 0.46%
FXAIX - Fidelity 500 Index Fund - Institutional Premium Class - 0.015%
DODGX - Dodge & Cox Stock Fund - 0.52%
***** - Fidelity Low-Priced Stock Commingled Pool - 0.48%
PRJIX - T. Rowe Price New Horizons Fund I Class - 0.65%
VSIIX - Vanguard Small-Cap Value Index Fund Institutional Shares - 0.06%
RNPGX - American Funds New Perspective Fund Class R-6 - 0.45%
RERGX - American Funds EuroPacific Growth Fund Class R-6 - 0.49%
***** - Fidelity Diversified International Commingled Pool - 0.58%
VTSNX - Vanguard Total International Stock Index Fund Institutional Shares - 0.09%
FSRNX - Fidelity Real Estate Index Fund - Institutional Class - 0.07%
VIPIX - Vanguard Inflation-Protected Securities Fund Institutional Shares - 0.07%
PTTRX - PIMCO Total Return Fund Institutional Class - 0.46%
VBMPX - Vanguard Total Bond Market Index Fund Institutional Plus Shares - 0.03%
JHYUX - JPMorgan High Yield Fund Class R6 - 0.6%

Vanguard Target Retirement Trust Plus from 2015-2060, 5-year increments
Managed Income Portfolio II Class 3
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Comments:

1. 3 investment options in the 401(k) - are commingled pools without a ticker symbol. They follow and are managed in the same way as their namesake funds. The benefit is supposed to be lower expense ratios since the commingled pools do not incur certain expenses related to regulatory requirements.

2. Spouse does not have access to a 401(k), and I do not believe she is not eligible for a self-employed retirement plan.

3. I am vested in my employer's pension. Currently, expect a benefit of $12,000/yr at retirement (if I were to depart today and delay collection until full retirement age).

4. Not eligible for HSA. I do max out and participate in an FSA each year.

5. Have life insurance for both of us, rates are based on age and adjust every 5 years. I will be looking to convert these to 30-year level term.

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Questions:

1. With 401(k) and IRAs maxed out, should I (i) consider opening up a 529, (ii) invest in a taxable account, (iii) further paying down the mortgage/car? I expect to be able to put about $10,000 per year into one (or a combination) of these options.

2. If 529, any thoughts on the Aggressive Growth Portfolio option within the NY 529 Plan? NY allows a $10K deduction for 529 contributions, and the fee structure looks reasonable enough that it would not be beneficial for me to use an out-of-state plan.

3. Any thoughts on my existing investment options? Should I change any?

TwstdSista
Posts: 987
Joined: Thu Nov 16, 2017 4:03 am

Re: Asset allocation and next steps?

Post by TwstdSista » Wed Aug 08, 2018 3:16 am

A 529 account is a fantastic idea. I'd maximize the state tax deduction for that, how to invest it depends on the age of the kids. Take a look at target date retirement plans dated around the time your kid(s) would head off to college. Keep in mind that 100% stocks could take a 50% cut (or more) if we experience a market crash.

If you have extra funds available after funding a 529, then consider a taxable account . Converting to term life insurance is also a good idea.

A simpler portfolio suggestion (80/20 with 27.5% of equities in International):

401k:
34.22% FXAIX - Fidelity 500 Index Fund - Institutional Premium Class - 0.015%
20% VBMPX - Vanguard Total Bond Market Index Fund Institutional Plus Shares - 0.03%

His Roth:
13.37% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
22% Vanguard Total International Market Index Fund Admiral Shares (VTIAX) ER 0.11%

Her Roth:
10.40% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%

mega317
Posts: 2557
Joined: Tue Apr 19, 2016 10:55 am

Re: Asset allocation and next steps?

Post by mega317 » Wed Aug 08, 2018 3:42 am

You don't specifically mention kids. If you don't have any I definitely wouldn't do the 529, too much uncertainty. Even still I don't love them as much as many on this board. If you choose tax efficient funds the benefit isn't huge. $650 is nothing to sneeze at but it's not life changing. I would still probably take advantage of that. If I recall correctly the new York plan is a good one.

I wouldn't pay more towards either of those debts at this point -- I would value the 529 or taxable liquidity more. If you save in taxable you always have the option to pay off later.

ivk5
Posts: 479
Joined: Thu Sep 22, 2016 9:05 am

Re: Asset allocation and next steps?

Post by ivk5 » Wed Aug 08, 2018 6:22 am

mega317 wrote:
Wed Aug 08, 2018 3:42 am
You don't specifically mention kids.
Second sentence of OP mentions baby on the way.

I think it's worth contributing to the NY 529 up to the $10k NY tax deduction limit. I wouldn't recommend contributing beyond that- tax drag avoidance not worth enough to offset loss of liquidity/flexibility. For same reason, I wouldn't use another state's plan (NY's plan is one of the best anyway).

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Duckie
Posts: 6061
Joined: Thu Mar 08, 2007 2:55 pm

Re: Asset allocation and next steps?

Post by Duckie » Wed Aug 08, 2018 5:43 pm

The Big Apple wrote:His 401k - 100% pre-tax funds (tradition or employer contributions)
He's is some expensive funds and he has cheaper options.
His Roth IRA
<snip>
Her Roth IRA
In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. So put bonds in the pre-tax 401k and only stocks in the Roth IRAs.
Annual contributions
$18,000 his 401k
It's $18,500 for 2018 unless your employer limits your contributions.
Funds available in 401(k)
The best options are:
  • FXAIX - Fidelity 500 Index - 0.015% -- Large caps, 80% of US stocks
  • VSIIX - Vanguard Small-Cap Value Index - 0.06% -- Small caps, 14% of US stocks
  • VTSNX - Vanguard Total International Stock Index - 0.09% -- Complete international stocks
  • VBMPX - Vanguard Total Bond Market Index - 0.03% -- US bonds
With 401(k) and IRAs maxed out, should I (i) consider opening up a 529, (ii) invest in a taxable account, (iii) further paying down the mortgage/car? I expect to be able to put about $10,000 per year into one (or a combination) of these options.
Ordinarily I'd say a mix of all three, but....
If 529, any thoughts on the Aggressive Growth Portfolio option within the NY 529 Plan? NY allows a $10K deduction for 529 contributions, and the fee structure looks reasonable enough that it would not be beneficial for me to use an out-of-state plan.
With a $10K deduction, I'd be funneling most the $10K into the NY 529 Plan. I'd start with the Aggressive Growth Portfolio from the Stock portfolios section. By age six or so I'd switch to the Growth Portfolio from the Balanced portfolios section. By early-teens I'd switch again to the Moderate Growth Portfolio. By college age I'd switch again to the Conservative Growth Portfolio.
Any thoughts on my existing investment options? Should I change any?
Yes. You have a desired AA of 75-85% stocks with 15-25% bonds. For this example I'll go with 75% stocks and 25% bonds. You also want 25-30% of stocks in international. I'll go with 30%. That breaks down to 53% US stocks, 22% international stocks, and 25% bonds. You could have:

His 401k -- 54%
7% (FXAIX) Fidelity 500 Index Fund Institutional Premium Class (0.015%)
22% (VTSNX) Vanguard Total International Stock Index Fund Institutional Shares (0.09%)
25% (VBMPX) Vanguard Total Bond Market Index Fund Institutional Plus Shares (0.03%)

His Roth IRA -- 35%
35% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Her Roth IRA -- 11%
11% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Something to think about.

The Big Apple
Posts: 13
Joined: Mon Jul 30, 2018 9:28 pm

Re: Asset allocation and next steps?

Post by The Big Apple » Wed Aug 08, 2018 10:37 pm

TwstdSista wrote: A 529 account is a fantastic idea. I'd maximize the state tax deduction for that, how to invest it depends on the age of the kids. Take a look at target date retirement plans dated around the time your kid(s) would head off to college. Keep in mind that 100% stocks could take a 50% cut (or more) if we experience a market crash.
Thanks. Given that I have a long way to go, I think it makes sense to be very aggressive right now, but then slowly start to change the allocation as time goes on to be a bit more conservative.
TwstdSista wrote: If you have extra funds available after funding a 529, then consider a taxable account. Converting to term life insurance is also a good idea.
Any particular suggestions as to where I should look for term life insurance quotes? I can get coverage through an association (it's an individual plan) - 20-year term, $2,500,000 of coverage, for $180/month (including disability waiver of premium). To add A&D and Dependent Child Coverage, the rate goes to $230/month. The association has annual refunds that reduce the rate, on average to $160/month and $200/month, respectively, but the annual refunds are not guaranteed. They only have a 10 and 20 year term option.

Spouse, 20-year term, $1,000,000 of coverage is $50/month.

I have no idea if these rates are competitive, or if I should focus on 30-year vs. 20-year.
TwstdSista wrote:A simpler portfolio suggestion (80/20 with 27.5% of equities in International):
I like this simplification that this would bring (I am slowly trying to simplify as much as I can!). Like a lot of other people, I am carefully watching Fidelity's new Zero-Cost funds, but am not prepared to move yet. It seems that your suggestions are very similar to Duckie's.
Duckie wrote:In general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. So put bonds in the pre-tax 401k and only stocks in the Roth IRAs.
I have never thought of that this way and is something I definitely think I want to think through some more. My reasoning for pre- and post-tax contributions was due to the uncertainty of tax rates in retirement and would give me the flexibility to pull from one or the other when the time came to take withdrawals.
Duckie wrote:It's $18,500 for 2018 unless your employer limits your contributions.
Thanks for the correction. I do plan to max out starting this year and going forward. My employer finally has a "true-up" match policy in place. I used to have to do a lot of math to make sure the percentage I selected would allow me to contribute the maximum, but also ensured that a contribution was made each pay period. We used to not get a match if a contribution wasn't made in a pay period - so if you hit the maximum during the year, you lost out. This year, with the true-up, they will make us "whole" the following January for any missed match - so I didn't even notice that the limit has finally increased since I didn't have to do the math.

I appreciate everyone's input and definitely have some thinking to do and then actually take action.

TwstdSista
Posts: 987
Joined: Thu Nov 16, 2017 4:03 am

Re: Asset allocation and next steps?

Post by TwstdSista » Thu Aug 09, 2018 3:53 am

Re: life insurance. I have no idea what is competitive. The husband and I have $250k policies for 25 years from 15 years ago. Our premiums are $330 (for the 35 yo) and $250 (32 yo) annually.

Equities (stock funds) are preferred in Roths for the growth potential and tax free withdrawals in retirement. Tax efficient equities are preferred in a taxable account, since bond funds are generally not tax efficient. Bonds are preferred in pre-tax accounts to 'slow down' growth a little given that the withdrawals are taxed and you will be forced to take RMDs (required minimum distributions) at age 70 1/2. There are a lot of threads here (hang around, you'll see them!) about how to reduce taxes in retirement and how RMDs can increase tax brackets (especially if one spouse dies) and/or IRMMA premiums (medicare).

Duckie is one smart poster -- read those posts carefully. You'll learn a lot!

ETA: amended numbers
Last edited by TwstdSista on Thu Aug 09, 2018 2:18 pm, edited 1 time in total.

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Asset allocation and next steps?

Post by megabad » Thu Aug 09, 2018 12:11 pm

Some great suggestions by the posters above.

As to life insurance, your quote seems very high so maybe I am missing something. If you are preferred, I would expect 20 year term for him to be under $100 per month for $2.5 million. I would shop around.

The Big Apple
Posts: 13
Joined: Mon Jul 30, 2018 9:28 pm

Re: Asset allocation and next steps?

Post by The Big Apple » Thu Aug 09, 2018 12:19 pm

megabad wrote:
Thu Aug 09, 2018 12:11 pm
As to life insurance, your quote seems very high so maybe I am missing something. If you are preferred, I would expect 20 year term for him to be under $100 per month for $2.5 million. I would shop around.
From another thread on this board, I found a site "Term4Sale" which I ran quickly. It appears for a 20-year term, same facts, it would be just under $100/month for that amount of coverage. I can increase it to a 30-year term for the same price I am paying now.

Definitely more to research and think about!

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Asset allocation and next steps?

Post by megabad » Thu Aug 09, 2018 12:22 pm

The Big Apple wrote:
Thu Aug 09, 2018 12:19 pm
megabad wrote:
Thu Aug 09, 2018 12:11 pm
As to life insurance, your quote seems very high so maybe I am missing something. If you are preferred, I would expect 20 year term for him to be under $100 per month for $2.5 million. I would shop around.
From another thread on this board, I found a site "Term4Sale" which I ran quickly. It appears for a 20-year term, same facts, it would be just under $100/month for that amount of coverage. I can increase it to a 30-year term for the same price I am paying now.

Definitely more to research and think about!
Makes more sense, just be sure your health is in tip top shape because you will go thru an EOI process for $2.5 million for an individual policy.

The Big Apple
Posts: 13
Joined: Mon Jul 30, 2018 9:28 pm

Re: Asset allocation and next steps?

Post by The Big Apple » Thu Aug 09, 2018 12:26 pm

megabad wrote:
Thu Aug 09, 2018 12:22 pm
Makes more sense, just be sure your health is in tip top shape because you will go thru an EOI process for $2.5 million for an individual policy.
Yes, I don't see why I wouldn't qualify for that band of pricing, but regardless, I will make sure the new policy is completely underwritten and finalized before canceling any existing policy.

The Big Apple
Posts: 13
Joined: Mon Jul 30, 2018 9:28 pm

Re: Asset allocation and next steps?

Post by The Big Apple » Thu Aug 09, 2018 9:19 pm

So I have done some reading and I think I am ready to start moving dollars around to simplify my portfolio. However, any advice as to how I should transition? I will have new contributions sent to the new investment allocation, but should I rebalance the rest over a period of time? If so, what would a reasonable period of time be?

TwstdSista
Posts: 987
Joined: Thu Nov 16, 2017 4:03 am

Re: Asset allocation and next steps?

Post by TwstdSista » Fri Aug 10, 2018 4:56 am

I did my rebalance over a few months and regretted it. But I also didn't have a clear plan and ran into the 30 day rule a couple of times. Took up a lot of brain power.

The money is already invested in the stock market, so it's a lateral move. If you have a clear plan and know where you want to end up, then just get it done.

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