Vanguard Roth IRA advice

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Topic Author
treebeard_
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Joined: Sun Feb 10, 2019 1:11 pm

Vanguard Roth IRA advice

Post by treebeard_ » Sun Feb 10, 2019 1:24 pm

Hey Bogleheads,

Just started my career last year and wanted your advice on retirement savings / investing plans. I'm currently 22, single, and putting the maximum $19,000 a year into my 401k (BTC Lifepath 2060 L target retirement date fund), ER: 0.09%.

I just opened a Roth IRA at Vanguard, and I'm debating between a Vanguard target retirement 2065/60 fund (VLXVX) ER: 0.15% and the 3 fund portfolio (VTSAX/VTIAX and maybe total bonds). I plan to contribute automatically every month so I would like to stay away from ETFs. Also, I see that I can contribute to 2018 IRA, is it best to max that out before 2019? Looking to see what most people recommend here.

I think I would be fine rebalancing each year or when things get out of whack, but am mainly curious about the mix of stocks/bonds as well as US/International, or if the target date's rebalancing is better. My 401k is ~56% US stocks, 39% foreign stocks, 4% cash, and 1% bonds at the current moment.

Thanks 😊,
treebeard_

Edit: I'd also like to add that I have paid off my debts, and have 6 months emergency funds in a savings account, so any advice on what to do with excess funds aside from 401k/Roth would also be appreciated (probably won't have extra to invest in a taxable acct this year, but definitely next). Thanks!

retiredjg
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Re: Vanguard Roth IRA advice

Post by retiredjg » Sun Feb 10, 2019 1:51 pm

Financially, it won't matter much if you use a target fund or a 3 or 4 funder in your Roth IRA. Either is a good idea. If you want to practice managing the money yourself, use the individual funds. It's not hard and the experience will be useful in the future.

Yes, go ahead and make your 2018 contribution to Roth IRA as you can (but prior to tax day). Then start on your 2019 contribution.
My 401k is ~56% US stocks, 39% foreign stocks, 4% cash, and 1% bonds at the current moment.
:shock: That is a very aggressive target fund. Many start at 10% in bonds/cash and many people consider that too aggressive as well.

I would suggest you use something like 80% stocks (split however you like) and 20% bonds in the Roth IRA. This will give you the opportunity to see how each asset allocation (stock to bond ratio) acts and feels in an extended market downturn.

As for extra money, start a savings account for your next car or a house downpayment or a wedding or honeymoon or move or appartment deposit or whatever. At this point, it does not matter much if that money is in ordinary savings or invested in stocks. At some point, a goal for the money will appear and you will already have started and maybe finished saving for it.

You are way ahead of most folks and doing a good job!

02nz
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Re: Vanguard Roth IRA advice

Post by 02nz » Sun Feb 10, 2019 1:59 pm

You should always use all tax-advantaged space, so yes, first contribute 5500 to the Roth IRA for 2018, and then 6000 for 2019. If you don't have enough money on hand to do the latter, you have until April 15, 2020.

I agree that the lifepath fund is rather aggressive. You can certainly use a VG target retirement fund in the Roth IRA as well, but if you have a decent bond fund in the 401k, maybe use that for 10% or so of your overall portfolio, and put the rest in stock index funds, allocating as you see fit between U.S. and international (I'd recommend anywhere making int'l stocks 20-45% of your overall stock allocation; 45% is about global market cap weighting). Generally you want the investments with highest returns to go into the Roth IRA, so putting all the bonds into the 401k makes most sense. But at this stage, how much you put in matters more than these (relatively small) optimizations, so keep up the great work in saving!

bluquark
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Re: Vanguard Roth IRA advice

Post by bluquark » Sun Feb 10, 2019 2:05 pm

At 22, having a very high stock allocation is exactly right in my opinion. As Bernstein has said, the true risk for young investors of stocks is remarkably low, because it only manifests over <30 year timeframes. (Bernstein also says the risk of stocks is “toxic” for near-retirees, but you are a long way from having to make that mindset shift.) In your Roth, I suggest Vanguard’s new fund Total World Index VTWAX,for a lower ER and to keep all your bonds in the traditional 401k.

Topic Author
treebeard_
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Joined: Sun Feb 10, 2019 1:11 pm

Re: Vanguard Roth IRA advice

Post by treebeard_ » Sun Feb 10, 2019 2:27 pm

retiredjg wrote:
Sun Feb 10, 2019 1:51 pm

I would suggest you use something like 80% stocks (split however you like) and 20% bonds in the Roth IRA. This will give you the opportunity to see how each asset allocation (stock to bond ratio) acts and feels in an extended market downturn.
Great, thank you! I'll take this advice. It will give me a better feel for how both mixes perform. Do you think something like the 80/20 LifeStrategy fund would be good, or as the other posters suggested, a bond fund (0.04 ER) in the 401k and a more stock-heavy mix in the IRA? Guessing in the long run it won't matter too much, so I will probably go with what's simplest until ~100k where I can re-evaluate.
retiredjg wrote:
Sun Feb 10, 2019 1:51 pm
As for extra money, start a savings account for your next car or a house downpayment or a wedding or honeymoon or move or appartment deposit or whatever.
Opened a MM account for this last month!

Topic Author
treebeard_
Posts: 12
Joined: Sun Feb 10, 2019 1:11 pm

Re: Vanguard Roth IRA advice

Post by treebeard_ » Sun Feb 10, 2019 2:31 pm

bluquark wrote:
Sun Feb 10, 2019 2:05 pm
At 22, having a very high stock allocation is exactly right in my opinion. As Bernstein has said, the true risk for young investors of stocks is remarkably low, because it only manifests over <30 year timeframes. (Bernstein also says the risk of stocks is “toxic” for near-retirees, but you are a long way from having to make that mindset shift.) In your Roth, I suggest Vanguard’s new fund Total World Index VTWAX,for a lower ER and to keep all your bonds in the traditional 401k.
Interesting, I'll check out the new funds. Didn't realize they announced some. And I have a fairly high risk tolerance, and I'm not looking to touch this money for 30+ years, so I will be going with a higher stock allocation. Also, it's a Roth 401k, not sure if that makes a difference. Thank you for the advice!

Topic Author
treebeard_
Posts: 12
Joined: Sun Feb 10, 2019 1:11 pm

Re: Vanguard Roth IRA advice

Post by treebeard_ » Sun Feb 10, 2019 2:42 pm

02nz wrote:
Sun Feb 10, 2019 1:59 pm
You can certainly use a VG target retirement fund in the Roth IRA as well, but if you have a decent bond fund in the 401k, maybe use that for 10% or so of your overall portfolio, and put the rest in stock index funds, allocating as you see fit between U.S. and international (I'd recommend anywhere making int'l stocks 20-45% of your overall stock allocation; 45% is about global market cap weighting). Generally you want the investments with highest returns to go into the Roth IRA, so putting all the bonds into the 401k makes most sense. But at this stage, how much you put in matters more than these (relatively small) optimizations, so keep up the great work in saving!
Thanks! At this point I'm more curious to see how people with larger allocations manage their holdings, I know that the small tweaks won't mean much in the long run. Maybe I could add BTC US Debt Index M to my 401k (ER 0.04) for 10% bonds, and VTSAX in the IRA to bring my US/intl ratio to 75/25?

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

Re: Vanguard Roth IRA advice

Post by 02nz » Sun Feb 10, 2019 2:51 pm

treebeard_ wrote:
Sun Feb 10, 2019 2:42 pm
02nz wrote:
Sun Feb 10, 2019 1:59 pm
You can certainly use a VG target retirement fund in the Roth IRA as well, but if you have a decent bond fund in the 401k, maybe use that for 10% or so of your overall portfolio, and put the rest in stock index funds, allocating as you see fit between U.S. and international (I'd recommend anywhere making int'l stocks 20-45% of your overall stock allocation; 45% is about global market cap weighting). Generally you want the investments with highest returns to go into the Roth IRA, so putting all the bonds into the 401k makes most sense. But at this stage, how much you put in matters more than these (relatively small) optimizations, so keep up the great work in saving!
Thanks! At this point I'm more curious to see how people with larger allocations manage their holdings, I know that the small tweaks won't mean much in the long run. Maybe I could add BTC US Debt Index M to my 401k (ER 0.04) for 10% bonds, and VTSAX in the IRA to bring my US/intl ratio to 75/25?
That sounds sensible to me.

Topic Author
treebeard_
Posts: 12
Joined: Sun Feb 10, 2019 1:11 pm

Re: Vanguard Roth IRA advice

Post by treebeard_ » Sun Feb 10, 2019 2:56 pm

retiredjg wrote:
Sun Feb 10, 2019 1:51 pm
Yes, go ahead and make your 2018 contribution to Roth IRA as you can (but prior to tax day). Then start on your 2019 contribution.
If I already filed my 2018 tax return, should I contribute to the 2018 IRA?

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

Re: Vanguard Roth IRA advice

Post by 02nz » Sun Feb 10, 2019 3:03 pm

treebeard_ wrote:
Sun Feb 10, 2019 2:56 pm
retiredjg wrote:
Sun Feb 10, 2019 1:51 pm
Yes, go ahead and make your 2018 contribution to Roth IRA as you can (but prior to tax day). Then start on your 2019 contribution.
If I already filed my 2018 tax return, should I contribute to the 2018 IRA?
Yes you should contribute. You don't get a tax deduction for the Roth IRA, so it doesn't change your tax return (as long as you made enough to contribute and aren't over the income limit). Vanguard will report the amount you contribute to the IRS.

retiredjg
Posts: 38211
Joined: Thu Jan 10, 2008 12:56 pm

Re: Vanguard Roth IRA advice

Post by retiredjg » Sun Feb 10, 2019 3:13 pm

treebeard_ wrote:
Sun Feb 10, 2019 2:56 pm
If I already filed my 2018 tax return, should I contribute to the 2018 IRA?
Yes, and while you are at it, start recording how every penny gets into Roth IRA by year. Don't worry about earnings, just what you put in. Right now that will only be direct contributions. Later, it may include other things like conversions and rollovers, etc.

Just keep a spreadsheet or even a handwritten record (or both). Keep with it the documentation you get for that contribution. For example, you'll get a form 5498 in about May for your 2018 contribution.

If you take any money out of Roth IRA before age 59.5, you will need this information and it can be difficult to construct this record later. Best to just start keeping it from the start.

Topic Author
treebeard_
Posts: 12
Joined: Sun Feb 10, 2019 1:11 pm

Re: Vanguard Roth IRA advice

Post by treebeard_ » Sun Feb 10, 2019 3:17 pm

retiredjg wrote:
Sun Feb 10, 2019 3:13 pm
treebeard_ wrote:
Sun Feb 10, 2019 2:56 pm
If I already filed my 2018 tax return, should I contribute to the 2018 IRA?
Yes, and while you are at it, start recording how every penny gets into Roth IRA by year. Don't worry about earnings, just what you put in. Right now that will only be direct contributions. Later, it may include other things like conversions and rollovers, etc.

Just keep a spreadsheet or even a handwritten record (or both). Keep with it the documentation you get for that contribution. For example, you'll get a form 5498 in about May for your 2018 contribution.

If you take any money out of Roth IRA before age 59.5, you will need this information and it can be difficult to construct this record later. Best to just start keeping it from the start.
Thanks! I will start a spreadsheet

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Vulcan
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Re: Vanguard Roth IRA advice

Post by Vulcan » Sun Feb 10, 2019 3:45 pm

treebeard_ wrote:
Sun Feb 10, 2019 2:31 pm
bluquark wrote:
Sun Feb 10, 2019 2:05 pm
At 22, having a very high stock allocation is exactly right in my opinion. As Bernstein has said, the true risk for young investors of stocks is remarkably low, because it only manifests over <30 year timeframes. (Bernstein also says the risk of stocks is “toxic” for near-retirees, but you are a long way from having to make that mindset shift.) In your Roth, I suggest Vanguard’s new fund Total World Index VTWAX,for a lower ER and to keep all your bonds in the traditional 401k.
Interesting, I'll check out the new funds. Didn't realize they announced some. And I have a fairly high risk tolerance, and I'm not looking to touch this money for 30+ years, so I will be going with a higher stock allocation. Also, it's a Roth 401k, not sure if that makes a difference. Thank you for the advice!
VTWAX should now be considered a default stock fund recommendation.

Unless one plans to tilt away from global market cap (which should not be taken lightly), or engage in TLH (which isn't an option for IRAs), there is no benefit in holding VTSAX/VTIAX separately. Well, unless one insists on optimizing out the last 0.03% of ER at the risk of introducing a tracking error.
If you torture the data long enough, it will confess to anything. ~Ronald Coase

mcraepat9
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Re: Vanguard Roth IRA advice

Post by mcraepat9 » Mon Feb 11, 2019 1:56 am

treebeard_ wrote:
Sun Feb 10, 2019 2:31 pm
Also, it's a Roth 401k, not sure if that makes a difference. Thank you for the advice!
Why are you using a Roth 401k rather than traditional? What is your current marginal fed and state tax brackets? Are you anticipating a large pension in retirement?

Roth 401k is better than traditional for a very small subset of Americans - probably less than 5%
Amateur investors are not cool-headed logicians.

Cruz
Posts: 140
Joined: Sun Mar 30, 2014 7:16 pm

Re: Vanguard Roth IRA advice

Post by Cruz » Mon Feb 11, 2019 2:28 am

retiredjg wrote:
Sun Feb 10, 2019 3:13 pm
treebeard_ wrote:
Sun Feb 10, 2019 2:56 pm
If I already filed my 2018 tax return, should I contribute to the 2018 IRA?
Yes, and while you are at it, start recording how every penny gets into Roth IRA by year. Don't worry about earnings, just what you put in. Right now that will only be direct contributions. Later, it may include other things like conversions and rollovers, etc.

Just keep a spreadsheet or even a handwritten record (or both). Keep with it the documentation you get for that contribution. For example, you'll get a form 5498 in about May for your 2018 contribution.

If you take any money out of Roth IRA before age 59.5, you will need this information and it can be difficult to construct this record later. Best to just start keeping it from the start.
What do you mean "what you put in it?" Are saying the dollar amount that you contributed, rather than where the money was from?

Thecallofduty
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Joined: Sat Jan 19, 2019 10:59 am

Re: Vanguard Roth IRA advice

Post by Thecallofduty » Mon Feb 11, 2019 2:58 am

You are 22 years old and have quite a long time frame from retiring. I personally would NOT be at 20% bonds. I would be at 10% max. This is assumig you plan on retiring in 25/30 years.

But that is a trivial matter as the amount of money you save at your age is what matters most.

I personally do about 25% international.

My account would have a 100% total stock in roth ira and the 401k split amongst total stock/international/bonds as per my asset allocation.
-thecallofduty

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Vanguard Roth IRA advice

Post by retiredjg » Mon Feb 11, 2019 9:51 am

Cruz wrote:
Mon Feb 11, 2019 2:28 am
What do you mean "what you put in it?" Are saying the dollar amount that you contributed, rather than where the money was from?
Yes. The dollar amount.

Well....both I guess.

For direct contributions, it does not matter where the money came from. But it does matter for a Roth conversion or a rollover from 401k type plans because sometimes that money will come with a 5 tax year clock attached to it.

DB2
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Re: Vanguard Roth IRA advice

Post by DB2 » Mon Feb 11, 2019 11:17 am

At 22 (awesome you are investing so young) it's hard to argue against being in VTWAX at 100%. I agree with the other poster: 10% in bonds in the most I would do right now.

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