Need help with 401k options and portfolio optimization!

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Topic Author
GatorGuy7
Posts: 22
Joined: Mon Aug 20, 2018 1:36 am

Need help with 401k options and portfolio optimization!

Post by GatorGuy7 » Sat Dec 29, 2018 12:25 am

Hello!

I’m looking for some help to make sure my portfolio is as optimal as it can be. I'm recently out of school and still learning this Boglehead stuff. I want to stick with a simple 3-fund portfolio with a 63/27/10 asset allocation. Also, my wife is now eligible to contribute to a 401k at work so we want to make sure to pick the right fund(s).

Emergency Funds: 6 months expenses
Debt: 40k student loans @5%
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal, 5.75% State
Income: His 250k, her 30k
State of Residence: North Carolina
Age: both 28
Desired Asset Allocation: 90% stocks / 10% bonds
Desired International Allocation: 30%

Current Assets ($35.7k):
His Roth IRA at Vanguard – $15.3k / 42.9%
15.7% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%) – $5.6k
18.5% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%) – $6.6k
8.7% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%) – $3.1k

Her Roth IRA at Vanguard – $9.5k / 26.6%
26.6% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%) – $9.5k

His HSA at BenefitWallet – $8.3k / 23.2%
14.2% Vanguard Total Stock Market Index Fund (VITSX) (0.04%) – $5.1k
6.2% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%) – $2.2k
2.8% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%) – $1k

Her HSA at BenefitWallet – $2.6k / 7.3%
4.5% Vanguard Total Stock Market Index Fund (VITSX) (0.04%) – $1.6k
2.0% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – $0.7k
0.8% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) – $0.3k

Her 401k options (1.35% annual management fee; 4% match):
Vanguard Mid Cap Index Adm (VIMAX) (0.06%)
Vanguard Inflation-Protected Secs Inv (VIPSX) (0.2%)
American Funds Fundamental Invs R5 (RFNFX) (0.35%)
American Funds AMCAP R5 (RAFFX) (0.41%)
Franklin Income Adv (FRIAX) (0.46%)
American Funds Europacific Growth R5 (RERFX) (0.54%)
Fidelity Low-Priced Stock (FLPSX) (0.68%)
DoubleLine Total Return Bond N (DLTNX) (0.73%)
Columbia Floating Rate R5 (RFRFX) (0.75%)
MFS International Value I (MINIX) (0.76%)
JHancock Disciplined Value R5 (JDVVX) (0.77%)
Oakmark Investor (OAKMX) (0.86%)
Loomis Sayless Bond Retail (LSBRX) (0.91%)
American Century Equity Income Inv (TWEIX) (0.93%)
Prudential Global Real Estate Z (PURZX) (0.97%)
Harbor Capital Appreciation Inv (HCAIX) (1.02%)
Buffalo Discovery (BUFTX) (1.03%)
Harbor International Investor (HIINX) (1.09%)
First Eagle Overseas A (SGOVX) (1.14%)
Oakmark Global Investor (OAKGX) (1.15%)
Parametric Emerging Markets Investor (EAEMX) (1.38%)
Third Avenue Real Estate Value Investor (TVRVX) (1.38%)
Litman Gregory Masters Alt Strats Inv (MASNX) (1.72%)


Next year contributions:
His backdoor Roth IRA $6,000
Her backdoor Roth IRA $6,000
Family HSA $7,000
Her 401k $19,000 ??
Pay off student loans
Start taxable account


Questions:
1. Since my wife and I are both W2 employees, and I don't have access to a 401k, is it a good idea to use up most of her yearly income in order to max out her 401k ($19,000 for 2019) to reduce our joint taxable income?

2. Regarding the 401k options, is it best to put 100% of the funds into Vanguard Mid Cap Index (VIMAX) (0.06%), and then balance our portfolio accordingly? This fund would be considered part of our 63% US stocks in our 63/27/10 AA, correct?

3. Is there anything we should change for our portfolio to make it most optimal? Can we condense any accounts?

Thank you in advance for your help!! I really appreciate it! :sharebeer
Last edited by GatorGuy7 on Sat Dec 29, 2018 3:10 am, edited 3 times in total.

02nz
Posts: 2202
Joined: Wed Feb 21, 2018 3:17 pm

Re: Need help with 401k options and portfolio optimization!

Post by 02nz » Sat Dec 29, 2018 1:21 am

The issue is that putting in 19K this year into the Vanguard mid-cap index in the 401k will mean about 25% of your entire portfolio will be in this one index fund (in addition to the mid-cap exposure you already have through Total Stock Market). According to the Wiki, the large-/mid-/small-cap mix to approximate TSM is 81/4/15 - just 4% midcaps! Midcaps have tracked the overall market very closely in the past 10 years or so, but you do run the risk that they could lag the market in the future (they could also outperform the market). One alternative is to invest in American Funds Fundamental Invs instead. It has a relatively low expense ratio and tracks pretty closely with the S&P 500. In the meantime maybe you can also advocate for more choices with the employer.

HEDGEFUNDIE
Posts: 3287
Joined: Sun Oct 22, 2017 2:06 pm

Re: Need help with 401k options and portfolio optimization!

Post by HEDGEFUNDIE » Sat Dec 29, 2018 1:41 am

Given your options, there is nothing wrong with going 100% midcaps. Over the past 20 years mid caps significantly outperformed Total Stock Market, while being 95% correlated with it.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

I would not pay a higher expense ratio to access large cap stocks that correlate strongly with much cheaper mid caps anyway.

Topic Author
GatorGuy7
Posts: 22
Joined: Mon Aug 20, 2018 1:36 am

Re: Need help with 401k options and portfolio optimization!

Post by GatorGuy7 » Sat Dec 29, 2018 8:21 am

02nz wrote:
Sat Dec 29, 2018 1:21 am
The issue is that putting in 19K this year into the Vanguard mid-cap index in the 401k will mean about 25% of your entire portfolio will be in this one index fund (in addition to the mid-cap exposure you already have through Total Stock Market). According to the Wiki, the large-/mid-/small-cap mix to approximate TSM is 81/4/15 - just 4% midcaps! Midcaps have tracked the overall market very closely in the past 10 years or so, but you do run the risk that they could lag the market in the future (they could also outperform the market). One alternative is to invest in American Funds Fundamental Invs instead. It has a relatively low expense ratio and tracks pretty closely with the S&P 500. In the meantime maybe you can also advocate for more choices with the employer.

Thank you for the information! I will consider that. Yea I can try to advocate for more fund choices, just not sure how successful that will be.

Topic Author
GatorGuy7
Posts: 22
Joined: Mon Aug 20, 2018 1:36 am

Re: Need help with 401k options and portfolio optimization!

Post by GatorGuy7 » Sat Dec 29, 2018 9:54 am

HEDGEFUNDIE wrote:
Sat Dec 29, 2018 1:41 am
Given your options, there is nothing wrong with going 100% midcaps. Over the past 20 years mid caps significantly outperformed Total Stock Market, while being 95% correlated with it.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

I would not pay a higher expense ratio to access large cap stocks that correlate strongly with much cheaper mid caps anyway.
Good to know, thanks! Yea the 401k fund options aren’t great at all....and high management fee too. But I still feel like it’s best to max it out regardless, correct? To get taxable income down

HEDGEFUNDIE
Posts: 3287
Joined: Sun Oct 22, 2017 2:06 pm

Re: Need help with 401k options and portfolio optimization!

Post by HEDGEFUNDIE » Sat Dec 29, 2018 11:14 am

GatorGuy7 wrote:
Sat Dec 29, 2018 9:54 am
HEDGEFUNDIE wrote:
Sat Dec 29, 2018 1:41 am
Given your options, there is nothing wrong with going 100% midcaps. Over the past 20 years mid caps significantly outperformed Total Stock Market, while being 95% correlated with it.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

I would not pay a higher expense ratio to access large cap stocks that correlate strongly with much cheaper mid caps anyway.
Good to know, thanks! Yea the 401k fund options aren’t great at all....and high management fee too. But I still feel like it’s best to max it out regardless, correct? To get taxable income down
Yes you should be maxing it out. Does your plan offer an after-tax option that would enable you to do a Mega Backdoor Roth?

Topic Author
GatorGuy7
Posts: 22
Joined: Mon Aug 20, 2018 1:36 am

Re: Need help with 401k options and portfolio optimization!

Post by GatorGuy7 » Sat Dec 29, 2018 4:05 pm

HEDGEFUNDIE wrote:
Sat Dec 29, 2018 11:14 am
GatorGuy7 wrote:
Sat Dec 29, 2018 9:54 am
HEDGEFUNDIE wrote:
Sat Dec 29, 2018 1:41 am
Given your options, there is nothing wrong with going 100% midcaps. Over the past 20 years mid caps significantly outperformed Total Stock Market, while being 95% correlated with it.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

I would not pay a higher expense ratio to access large cap stocks that correlate strongly with much cheaper mid caps anyway.
Good to know, thanks! Yea the 401k fund options aren’t great at all....and high management fee too. But I still feel like it’s best to max it out regardless, correct? To get taxable income down
Yes you should be maxing it out. Does your plan offer an after-tax option that would enable you to do a Mega Backdoor Roth?
Didn’t think about that. The plan does offer after-tax Roth contributions. I’m not too familiar with how a mega backdoor Roth works but I was under the impression the 401k has to offer after-tax non-Roth contributions. Regardless, I thought that since we are close to our maximum income potential right now, a traditional pre-tax 401k would be best? But I could be wrong?

HEDGEFUNDIE
Posts: 3287
Joined: Sun Oct 22, 2017 2:06 pm

Re: Need help with 401k options and portfolio optimization!

Post by HEDGEFUNDIE » Sat Dec 29, 2018 4:43 pm

GatorGuy7 wrote:
Sat Dec 29, 2018 4:05 pm
HEDGEFUNDIE wrote:
Sat Dec 29, 2018 11:14 am
GatorGuy7 wrote:
Sat Dec 29, 2018 9:54 am
HEDGEFUNDIE wrote:
Sat Dec 29, 2018 1:41 am
Given your options, there is nothing wrong with going 100% midcaps. Over the past 20 years mid caps significantly outperformed Total Stock Market, while being 95% correlated with it.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

I would not pay a higher expense ratio to access large cap stocks that correlate strongly with much cheaper mid caps anyway.
Good to know, thanks! Yea the 401k fund options aren’t great at all....and high management fee too. But I still feel like it’s best to max it out regardless, correct? To get taxable income down
Yes you should be maxing it out. Does your plan offer an after-tax option that would enable you to do a Mega Backdoor Roth?
Didn’t think about that. The plan does offer after-tax Roth contributions. I’m not too familiar with how a mega backdoor Roth works but I was under the impression the 401k has to offer after-tax non-Roth contributions. Regardless, I thought that since we are close to our maximum income potential right now, a traditional pre-tax 401k would be best? But I could be wrong?
You are correct, if your plan does not offer after-tax non-Roth then you can’t do the Mega Backdoor. You would want to max out pre-tax first, but then the Mega Backdoor would let you save even more in tax advantaged space.

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Duckie
Posts: 6763
Joined: Thu Mar 08, 2007 2:55 pm

Re: Need help with 401k options and portfolio optimization!

Post by Duckie » Sat Dec 29, 2018 6:00 pm

GatorGuy7 wrote:Debt: 40k student loans @5%
<snip>
Income: His 250k, her 30k
Kill the student loans.
Her 401k options (1.35% annual management fee; 4% match)
Ack! Those fees are bad. The least worst are:
  • Vanguard Mid Cap Index Adm (VIMAX) (0.06%)
    Vanguard Inflation-Protected Secs Inv (VIPSX) (0.20%)
    American Funds Fundamental Invs R5 (RFNFX) (0.35%)
Since my wife and I are both W2 employees, and I don't have access to a 401k, is it a good idea to use up most of her yearly income in order to max out her 401k ($19,000 for 2019) to reduce our joint taxable income?
Yes. The costs are high but the match negates that.
Regarding the 401k options, is it best to put 100% of the funds into Vanguard Mid Cap Index (VIMAX) (0.06%), and then balance our portfolio accordingly?
I would be inclined to use her 401k for bonds first, then mid-caps (at least for a while, eventually that mid-cap overweight will become too much).
This fund would be considered part of our 63% US stocks in our 63/27/10 AA, correct?
VIMAX would be part of the US stock AA, correct.
Is there anything we should change for our portfolio to make it most optimal? Can we condense any accounts?
You could simplify by using fewer funds in your accounts. For example, the following hypothetical portfolio has an AA of 63/27/10. At the end of 2019 you could have:

Her 401k -- $19K -- 26%
16% (VIMAX) Vanguard Mid-Cap Index Fund Admiral Shares (0.06% + 1.35% = 1.41%)
10% (VIPSX) Vanguard Inflation-Protected Securities Fund Investor Shares (0.20% + 1.35% = 1.55%)

His Roth IRA at Vanguard -- $21K -- 28%
23% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
5% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Roth IRA at Vanguard -- $16K -- 22%
22% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

His HSA at BenefitWallet -- $12K -- 16%
16% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Her HSA at BenefitWallet -- $6K -- 8%
8% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

I don't know much about HSAs but I believe you can have just one for your family. That may or may not be suitable for your situation but would slightly simplify things.

Something to think about.

Topic Author
GatorGuy7
Posts: 22
Joined: Mon Aug 20, 2018 1:36 am

Re: Need help with 401k options and portfolio optimization!

Post by GatorGuy7 » Sat Jan 12, 2019 12:32 pm

Duckie wrote:
Sat Dec 29, 2018 6:00 pm
Kill the student loans.
Yep that's our #1 goal this year!
Her 401k options (1.35% annual management fee; 4% match)
Ack! Those fees are bad. The least worst are:
i know they are :oops:
I would be inclined to use her 401k for bonds first, then mid-caps (at least for a while, eventually that mid-cap overweight will become too much).
makes sense
You could simplify by using fewer funds in your accounts. For example, the following hypothetical portfolio has an AA of 63/27/10. At the end of 2019 you could have:
Her 401k -- $19K -- 26%
16% (VIMAX) Vanguard Mid-Cap Index Fund Admiral Shares (0.06% + 1.35% = 1.41%)
10% (VIPSX) Vanguard Inflation-Protected Securities Fund Investor Shares (0.20% + 1.35% = 1.55%)

His Roth IRA at Vanguard -- $21K -- 28%
23% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)
5% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

Her Roth IRA at Vanguard -- $16K -- 22%
22% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.11%)

His HSA at BenefitWallet -- $12K -- 16%
16% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

Her HSA at BenefitWallet -- $6K -- 8%
8% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.04%)

I don't know much about HSAs but I believe you can have just one for your family. That may or may not be suitable for your situation but would slightly simplify things.

Something to think about.

Thanks for taking the time to provide that breakdown! i really appreciate it!

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