Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

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ldd4774
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Joined: Wed May 08, 2019 5:24 pm

Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by ldd4774 » Mon May 13, 2019 3:08 pm

Hi everyone, long time reader of the boards, finally decided to put together concise detail of our portfolio for review. I am glad I did this as it really gives me overview of larger picture. I have added a lot of information and quite a few questions. As I was compiling data, I realized how many details go into creating an overall plan moving forward so I hope you don't mind all the information and questions. I really appreciate all the input in advance. As you can tell from my investing, I have started to put the effort into following a quasi index investing Boglehead method but looking at all of my investments, I need to simplify our funds moving forward. I plan to consolidate to Vanguard 3 fund lazy portfolio moving forward. Appreciate all input! Thanks,


*Areas that will need attention in red font*

Age: He - 46, Her - 43

Tax Filing Status: (Single, Married Filing Jointly, Married Filing Separately, Head of Household, Qualifying Widow/Widower with Dependent Children)

Tax Rate: 24% Federal,5.1% State

State of Residence: MA

Annual Salary - Him - Lower six figures Full time; Her - high five figure salary - 36 hours a week
Current Retirement portfolio - mid six figures

Kids and College Plan - $0

2 kids twins aged 11. Both Grade 5, Both planning college in 2026. No 529 or college savings currently. Need help to start 529 vs Roth IRA. Massachusetts has $2000 deduction for married filing jointly for yearly contributions so will start $2000 bare minimum for each child with MA 529 plan. ? fund for MA 529 - FIdelity managed plan

Monthly Expenses - 6000/month

Mortgage - 2200 - see below for breakdown
Car payment - 450 - see below for breakdown
Equity loan - 450 - - see below for breakdown

Food -600
Gas - 90
YMCA - 100
Housecleaning - 260
Landscaper - 250
Cable/Phone - 150
Cell - 125
Electric/Gas/Utilities - 200
Dining Out - 250
Misc Expenses - 375

Kids Sports - 300
Kids Music - 200
Kids Summer Camps, Afterschool Programs - $400 (using Dependent FSA to maximize savings)

*Extra Savings/Month - Approximately $1000-1500 which we are currently making payments to lower home equity line of credit which is floating rate of 5% currently. Should we use this money for 529 vs building up emergency fund?

Emergency funds: Have two months expenses (approximately $6000). Need to increase - Using line of credit as backup currently. Paying extra money available to Home Equity Floating line of credit to pay off balance.


Debt:

Home Mortgage - 290K principal @ 3.25%, Ends 12/2042 - 23 more years.
Paying $2200 a month which includes escrow for Taxes ($7500/year) and Home Insurance ($1000) - included as part of monthly expense

Home Equity Loan Fixed Rate - 9,500 @ 3.99%, Paying $450/month for 4 more years (ends March 2023)- included as part of monthly expense
Home Equity Loan Floating Rate - $11,000 @ 5% (Floating Prime -½%) -

Fair Market Value of House approximately $590,000 per Zillow

Car Loan 3.5 years left approximately $450 a month, loan is approximately 18.000 @ 3% interest rate - included as part of monthly expense

Life Insurance - We both have 20 year term that expires 2024 - 5 years from Now

Him - 750,000 for $800 a year, and have life insurance policy at work for 210,000 for $500 yearly + 50,000 paid for by employer

Her - 500,000 for $300 a year and have life insurance policy at work for free at 80,000 plus 150,000 policy for $250 a year

Estate Planning - Estate, Will, Trust all completed

Retirement Savings


Desired Asset allocation: 75% stocks / 25% bonds - is this too much or too little? He is moderate risk, Her is min risk
Desired International allocation: 20% of stocks - is this too much or too little?

Current total portfolio - mid six figures
Anticipated Funds for retirement - Based on current retirement assets and max contributing both 401K with annual 7% return


Him - If Retire Age 55 - 918,000, Age 60 - 1.5 Million, Age 65 - 2.3 Million
Her - If Retire Age 55 - 982,000, Age 60 - 1.53 Million, Age 65 - 2.3 Million

Goal - 3 Million based on living off $120,000 a year for 25 years from age 60-85. Is this enough considering there will be no more kid expenses, mortgage paid off by 2042 (hopefully sooner!) and assuming no debt. This is NOT including any Social Security Benefits

Current retirement assets - Mid Six figures combined all accounts

His Traditional IRA at Vanguard -21% of Retirement Assets - Listed as % of Overall Portfolio, Mutual Fund Name and Expense Ratio

3% - Vanguard Target Retirement 2040/0.14%
2%- Vanguard Total Bond Market Index Admiral Shares/0.05%
2%- Vanguard Total International Stock Index Fund Admiral Shares/0.11%
13%- Vanguard Total Stock Market Index Fund Admiral Shares/0.04%
1% - Vanguard Health Care Investor Shares 0.38%

His Current 401k - Fidelity - 19% of Overall Retirement Assets, Company match 100% of first 3%, 50% of 4-5%

Large CAP
6% - FID 500 INDEX (FXAIX) (0.015%)
4% - FID CONTRAFUND K6 (FLCNX) (0.73%)
MID CAP
1% FID EXTD MKT IDX (FSMAX) (0.045%)
1% - MID CAP STOCK K (FKMCX) (0.51%)
SMALL CAP
1% - FID SM CAP ENH IDX (FCPEX) (0.64%)
1%- FID SM CAP GROWTH (FCPGX )(1.02%)
INTERNATIONAL
2% -FID INTL INDEX (FSPSX) (0.035%)
BOND -15%
1% - FID US BOND IDX (FXNAX) (0.025)%
1% -FID HIGH INCOME IDX (SPHIX) (0.7)%
1% -AMG G ENH CRBD ESG Z (MFDYX) (0.79%)


His Roth IRA at Fidelity - 1.5% of Overall Retirement Assets
1.5% Fidelity Select Health Care FSPHX (0.71)

His Rollover IRA at Fidelity/TIAA-CREF 19% - NEED TO MOVE TO VANGUARD OR ANOTHER SOURCE
13% - Old 401K, plan to move to Vanguard IRA - current in mix of stocks, bonds
6% - Old 403b At TIAA CREF, plan to move to Vanguard IRA - current in mix of stocks, bonds

HER CURRENT 401K - 13% of Overall Retirement Assets, company contributes 25% up to 6% - Transamerica

Large Cap - 2% - ISHARES S&P 500 INDEX K (WFSPX) (0.04)
MID CAP - 1%- ISHARES RUSSELL MID CAP INDEX Fund name (BRMKXl) (0.07)
SMALL CAP - 1%- ISHARES RUSSELL 2000 SMALL CAP INDEX A (MDSKX) (0.37)
TARGET DATE INVESTMENT CHOICE -10% - BLACKROCK LIFEPATH INDEX 2045 PORTFOLIO (LIHKX) (0.18 GROSS, 0.11 NET)

HER Rollover IRA at Vanguard - 21% of Overall Retirement Assets

13% - Vanguard Target Fund 2045 VTIVX
9% - Vanguard 500 Index Admiral Shares

HER Rollover IRA at Hartford - 3% - Will transfer to Vanguard LIKELY

HER Traditional IRA at Vanguard - 2.5%
2.5% - Vanguard Target Fund 2045 VTIVX

Total of All Accounts Together equal 100%.

Social Security Benefits

HIM - Retire 62 -$2030; 67 - $2945, 70 - $3673 a month, Disability - $2796/month if disabled right now
HER - Retire 62 -$1658; 67 - $2386, 70 - $2971 a month, Disability - $2253/month if disabled right now

FUTURE Contributions

New annual Contributions
$19,000 his 401k (Company match 100% of first 3%, 50% of 4-5%) - I have option for ROTH 401K also
$19,000 her 403b (company contributes 25% up to 6%)
$0 his Roth IRA, $0 her Roth IRA - Have not been making contributions to ROTH

Available funds - I would appreciate suggestions on asset allocation for this

HIS CURRENT 401K ALLOCATION MIX IS:

LARGE CAP - 55%
30% - FID 500 INDEX (FXAIX) (0.015%)
25% - FID CONTRAFUND K6 (FLCNX) (0.73%)

MID - 10%
5% FID EXTD MKT IDX (FSMAX) (0.045%)
5% - MID CAP STOCK K (FKMCX) (0.51%)

SMALL CAP - 10%
5% - FID SM CAP ENH IDX (FCPEX) (0.64%)
5%- FID SM CAP GROWTH (FCPGX )(1.02%)
TRP SM CAP VALUE I (PRVIX) (0.78%)

INTERNATIONAL -10%
FID INTL INDEX (FSPSX) (0.035%)

BOND -15%
5% - FID US BOND IDX (FXNAX) (0.025)%
5% -FID HIGH INCOME IDX (SPHIX) (0.7)%
5% -AMG G ENH CRBD ESG Z (MFDYX) (0.79%)

* I think I may change to all index funds to make it easier (LARGE, MID, SMALL, INTERNATIONAL, BOND INDEX ONLY) vs target fund?

**********
HIS FUNDS AVAILABLE TO CHOOSE FROM WITH MUTUAL FUND NAME/TICKER/EXPENSE RATIO

LARGE CAP
FID 500 INDEX (FXAIX) (0.015%)
FID CAP APPREC K (FCAKX) (0.045)
FID CONTRAFUND K6 (FLCNX) (0.73%)
FID GROWTH CO K (FGCKX) (0.76%)

MID CAP
FID EXTD MKT IDX (FSMAX) (0.045%)
VRTS C MDCP VL EQ R6 (SMVZX) (0.51%)
AMG GW&K SC CORE N (GWETX) (1.28%)

SMALL CAP
FID SM CAP ENH IDX (FCPEX) (0.64%)
FID SM CAP GROWTH (FCPGX )(1.02%)
TRP SM CAP VALUE I (PRVIX) (0.78%)

INTERNATIONAL
FID DIVERSFD INTL K6 (FKIDX) (0.69%)
FID INTL INDEX (FSPSX) (0.035%)
OAKMARK INTL INST (OANIX) (1.29%)
OPP DEVELOPING MKT A (ODMAX) (1.29%)

BOND
MIP CL 1 (0.74)%
AMG G ENH CRBD ESG Z (MFDYX) (0.79%)
FID US BOND IDX (FXNAX) (0.025)%
FID HIGH INCOME IDX (SPHIX) (0.7)%
FIMM GOVT MMKT (SPAXX) (0.42%)

ASSET ALLOCATION
TRP RETIREMENT 2040 (TRRDX) (0.72%)

HER CURRENT 401K ALLOCATION MIX IS - Company contributes 25% up to 6%

CURRENT ALLOCATION MIX IS:
Large Cap - 20% - ISHARES S&P 500 INDEX K (WFSPX) (0.04)
MID CAP - 10%- ISHARES RUSSELL MID CAP INDEX Fund name (BRMKXl) (0.07)
SMALL CAP - 10%- ISHARES RUSSELL 2000 SMALL CAP INDEX A (MDSKX) (0.37)
TARGET DATE INVESTMENT CHOICE -60% - BLACKROCK LIFEPATH INDEX 2045 PORTFOLIO (LIHKX) (0.18 GROSS, 0.11 NET)

* GOING FORWARD, MAY CHANGE TO 100% TARGET DATE INVESTMENT CHOICE

**********
HER FUNDS AVAILABLE TO CHOOSE FROM WITH MUTUAL FUND NAME/TICKER/EXPENSE RATIO
Large Cap
MFS Value R3 (MEIHX) (0.83%)
ISHARES S&P 500 INDEX K (WFSPX) (0.04)
TIAA-CREF LARGE CAP GROWTH INST (TILGX) (0.41)

MID CAP
WELLS FARGO SPECIAL MID CAP VALUE (WFIMIX) (0.83)
ISHARES RUSSELL MID CAP INDEX Fund name (BRMKXl) (0.07)
MASS MUTUAL SELECT MID CAP GROWTH R5 (MGRFX) (0.81)

SMALL CAP
WELLS FARGO SPECIAL SMALL CAP VALUE R6 (ESPRX) (0.88)
ISHARES RUSSELL 2000 SMALL CAP INDEX A (MDSKX) (0.37)
FEDERATED MDT SMALL CAP GROWTH INSTL (QISGX) (0.89)

INTERNATIONAL
HARTFORD INTL OPPORTUNITY (HAOYX) (0.76)
AMERICAN FUNDS NEW WORLD R4 (0.98) (RNWEX)

BONDS
TRANSAMERICA STABLE VALUE FOCUS OPTION (NA) (NA)
PGIM TOTAL RETURN BOND R (DTBRX) (1.01)

TARGET DATE INVESTMENT CHOICE - BLACKROCK LIFEPATH INDEX 2045 PORTFOLIO (LIHKX) (0.18 GROSS, 0.11 NET)

Questions:

1. Do we have enough life insurance. He will be tough to get more coverage as there are medical conditions which will raise premiums for new policy if he even qualifies due to Diabetes Type 2, High blood pressure, sleep apnea. Her - good health, should not be issue. Wondering with current savings, will this be enough to get by in case something happens to one of us. Should we also start thinking about long term care insurance?

2. Need to start saving for college for kids. We have been paying ourselves and focusing on maximize 401K first. Now need to focus on college savings. ?529 vs ROTH. Also, $2000 tax break for MA enrollment in 529 per child, so will maximum this first. But I prefer vanguard 529 in other states due to low expense ratios and familiar with Vanguard products. Can I have different 529 or just stick with MA?

3. Are we on track for retirement? I anticipate needing 120,000/yr for 25 years which equals goal of 3 million. This does not include social security. Are we putting too much in 401K now or need to boost it up with money in ROTH. Should we count on social security and add it to overall retirement goals

4. Need to adjust asset allocation. Too much overlap of funds. I think for HIM, 75% Stocks, 25% Bonds at current age 46. Should I increased bond allocation. I also need to increase international exposure. Is 20% International Stock enough/too much Plan to stick to Lazy Portfolio of 3 mutual funds, Total Stock, Total International Stock and Total Bond. Any other suggestions?

5. For wife’s assets, I am leaning on just switching everything to Target Funds 2045 to make things easier for her. She will not monitor assets, may be easier in case something happens to me.

6. Need advice on 401K plan choices going forward. For HIM, I was thinking of index funds only in large, mid, small, international and bond rather than target retirement fund. For HER - 100% - Target funds

7. Our taxes went up considerably this year due to new tax law and limits on state taxes, mortgage and tax deduction. 2017 I was able to deduct 38,000 in taxes. 2018 I was only able to deduct 23,000 and took the new standard deduction of 24,000. I have already maxed out wife’s 401K by extra $3000 and dropped my exemptions to 1 on federal withholding to better prepare for 2019. Any other tax breaks, suggestions for taxes moving forward?

8. Anticipated Large Expenses - Would like to renovate kitchen in next few years. Plan to pay lower home equity line of credit before renovating. Plan expenses $25-35,000. Will need new car for Her in 2-3 years. Anticipate cost $30,000. Plan for loans for both items above - see below.

9. Generally, we have $1000-2000 month extra a month after all expenses and maxing out 401K. We have been currently taking this extra money and focusing on paying off floating home equity which is at 5% currently. I was concerned with interest rates rising and thought this would be best use of extra money for last year. Now, that interest rates have stalled, where should we focus using this money?
- Continue to pay off home equity loan with floating interest rate?
- Building up emergency fund - currently only $6000. My backup is our home equity line if we get into trouble. I know not best way to achieve financial security!
- Contribute to 529
- Start Roth IRA for ourselves and pay ourselves first?
- Save for future kitchen/car expense
- Combination of all of the above and distribute money accordingly

Thanks for all of your help!
Last edited by ldd4774 on Tue May 14, 2019 12:16 pm, edited 2 times in total.

soccerrules
Posts: 820
Joined: Mon Nov 14, 2016 4:01 pm

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by soccerrules » Mon May 13, 2019 4:13 pm

I will comment on a few things that jumped out at me.
1) Life Insurance. I would look at a level premium term policy on both of you for 20 years. At least $1M on him and $750k-1M on her. Lock in the rates now. You can always drop the policy at any time (kids out of college, debt paid off) or reduce the dollar amount and keep for full term.
2) I would look at all of your assets as 1 bucket. Not his and hers. Look at them collectively, 1 AA
3) Save for car (no loan) Save for remodel (maybe equity line)
4) Be simple on investments. Reduce accounts when possible (combine the 2 HER IRA's, same for the HIS) -- if you have low cost 401K options check into rolling IRA's into each company plan. This opens up door for backdoor Roth.
5) Contribute $2K to 529 for each child to get tax break. You could add more. It might be also beneficial to add to Taxable account for his/her and use those funds if needed for college of EF. Are you sure both will go to college ?
6) I am older and anti-debt. If I were you I would be focused on knocking out the debt and then building up EF. If one of you lost your job $6K in EF and no taxable account seems a bit shaky for someone with $500K in 401k/IRAs. Just me.
7) Kids are expensive and you are just probably beginning to see that now. Everything costs more as they get to MS/HS. Braces X2, Car X2 ? (share), Sports/Music etc.

I am sure others will come along and give you great advice around your actual investment options
Don't let your outflow exceed your income or your upkeep will be your downfall.

delamer
Posts: 7711
Joined: Tue Feb 08, 2011 6:13 pm

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by delamer » Mon May 13, 2019 5:57 pm

Redo your estimate of your projected savings at retirement based on a real return, rather than using a 7% nominal return.

If you assume, for example, a 3.5% real return, then you can see what your income will be based on today’s dollars. That will make it easier to decide if the income will be adequate. As it is, who can say if $120,000 in 2033 dollars is enough?

There’s a big difference having $1500 excess versus $1000 per month. I’d put $500 into a 529 for each kid, and use any excess to pay down the HELOC.

Topic Author
ldd4774
Posts: 7
Joined: Wed May 08, 2019 5:24 pm

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by ldd4774 » Tue May 14, 2019 9:46 am

Thanks everyone so far for all the great advice. My plan is to reduce the amount of different accounts to make it easier to navigate moving forward. I appreciate the advice on increasing life insurance and plan to contribute to 529 to maximize tax credit. Would anyone recommend putting money in ROTH IRA for my wife and I after maximizing $2000 in 529 for MA tax credit. I was reading that ROTH IRA cannot be considered in financial loans and scholarships. We are below threshold and can contribute max $6000 per person each year for ROTH.

Also confused about what to expect/input for annual rate of return to forecast future savings. I was using 7% annual rate of return on my investments to calculate future growth. Is there a more realistic number I should use? Thanks

k3vb0t
Posts: 288
Joined: Mon Jun 02, 2014 4:42 pm

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by k3vb0t » Tue May 14, 2019 10:38 am

You say you've got 2 months expenses in emergency fund (approximately $6,000)... I see above where $6k is your monthly expenses. So you're saying then you've got $12k in the emergency fund?

Is it more like $1,000 per month extra cash or $1,500 on average? Or just average it to the middle, $1,250 per month or $15,000/year.

Is the $500 per month to the 11k @ 5% part of your current monthly expense total? (Doesn't look like it?) So when you say you've got $1,000 to $1,500 left over each month, $500 of whatever that amount is goes to this $11k?

What is the auto loan rate and balance?
Last edited by k3vb0t on Tue May 14, 2019 10:45 am, edited 2 times in total.

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goodenyou
Posts: 1638
Joined: Sun Jan 31, 2010 11:57 pm
Location: Skating to Where the Puck is Going to Be..or on the golf course

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by goodenyou » Tue May 14, 2019 10:41 am

ldd4774 wrote:
Tue May 14, 2019 9:46 am
Thanks everyone so far for all the great advice. My plan is to reduce the amount of different accounts to make it easier to navigate moving forward. I appreciate the advice on increasing life insurance and plan to contribute to 529 to maximize tax credit. Would anyone recommend putting money in ROTH IRA for my wife and I after maximizing $2000 in 529 for MA tax credit. I was reading that ROTH IRA cannot be considered in financial loans and scholarships. We are below threshold and can contribute max $6000 per person each year for ROTH.

Also confused about what to expect/input for annual rate of return to forecast future savings. I was using 7% annual rate of return on my investments to calculate future growth. Is there a more realistic number I should use? Thanks
I would concentrate on maximizing savings as a priority before concentrating on projecting returns. The most important behavior that you can do is to minimize spending where possible, extinguish debt where possible (highest interest rate first) and saving the most by priority (retirement then 529). I am a fan of constructing your asset allocation based on risk tolerance and philosophy (75%/25% stocks and bonds with 20% international is fine). Look to simplify ALL of BOTH of your's and wife's accounts into one portfolio. Determine how much is taxable and how much tax-privileged. Then, simplify (sell and buy) in the tax-privileged spaces first since it won't trigger any taxable events. When you construct your tax-privilege space, keep in mind the TOTAL portfolio asset allocation. Your positions should be the lowest cost funds that meet your desired asset allocation. I like simple low cost index funds. Then, you can work on your taxable space to see what the tax implications of selling would be to ultimately get to the "efficient frontier". This should be done over time and with the advice of a CPA, if needed.

As far as 529, you have less than 7 years to contribute. Most importantly, your need to deploy the money will be immediately following the 7 years. Not a lot of time, so your ability to take significant risk is contracted. If you reach for yield, you may get burned. So, I would put the maximum for the tax benefit in a 60/40 portfolio and add more as you have additional funds beyond your maximum retirement savings. Here's where cost cutting can help.

The most important thing you can do is cut spending and simplify your investing across the spectrum into low cost funds. The rest will have less effect on getting to the finish line.
"Ignorance more frequently begets confidence than does knowledge" | "The best years you have left are the ones you have right now"

k3vb0t
Posts: 288
Joined: Mon Jun 02, 2014 4:42 pm

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by k3vb0t » Tue May 14, 2019 11:20 am

k3vb0t wrote:
Tue May 14, 2019 10:38 am
You say you've got 2 months expenses in emergency fund (approximately $6,000)... I see above where $6k is your monthly expenses. So you're saying then you've got $12k in the emergency fund?

Is it more like $1,000 per month extra cash or $1,500 on average? Or just average it to the middle, $1,250 per month or $15,000/year.

Is the $500 per month to the 11k @ 5% part of your current monthly expense total? (Doesn't look like it?) So when you say you've got $1,000 to $1,500 left over each month, $500 of whatever that amount is goes to this $11k?

What is the auto loan rate and balance?
I'm similar to soccerrules in terms of not liking debt; you'll get different opinions around here but you're one layoff (or getting hit by a bus) from a bad time for you/your family. Boosting your 529 won't do you much good if you're hemorrhaging cash each month during some emergency.

Agree with goodenyou, you don't have a ton of time to save into 529. I'd look into getting the tax break each year, boosting the rest of my finances to more comfortable level, and consider cash flowing some/all college costs.

If I were in your shoes I'd prioritize:
1. Paying off the $11k @ 5% (since you're using this as emergency fund, makes more sense to pay it off than to put money into a savings account earning less than that)
2. While doing #1, each year, setting aside $2,000 to get the tax break in MA. I would do this in the last 2-3 months of the year based off of my extra cash flow (so you're paying down the 5% throughout the year until the end, then snagging the tax break).
3. Once I paid off the 11k @ 5%, my cash flow goes all to emergency fund (aside from $2k for the 529s) to get it to $36k (6 months @ 6k)

So this is a rough estimate of how soon you could pay off the 11k @ 5%, set a minimum amount aside for MA 529, and boost your emergency fund. It's rough because it doesn't include part of your payment to the $11k @ 5% being interest, but it should give you a decent estimate.

Image

So by the end of 2021 you could have almost 6 months of emergency funds, no more $11k @ 5%, and saved a minimum amount to the 529s to get the tax break. If you hit an non-unemployment emergency in between you've got options -- the floating line or temporarily stopping contributions to retirement accounts -- to get you through. Plus, as you pay off your loans that stretches how long an emergency fund would last as you lower your monthly expenses.

Other points:
0. You're currently having 'death by a thousand loan payments'. Or at least it looks that way with what you've provided.
1. How old is your wife's car? Is replacing in 2-3 years a need or a want? The last thing you need is another huge payment. It's unclear if the $450/month car payment is for 1 or 2 cars. I'd keep the ones I had for as long as humanly possible.
2. You've done a great job getting retirement assets in place -- which should have priority over college costs -- but your lack of emergency fund would keep me from sleeping at night.
3. Beating a dead horse, but you seem really focused on optimizing your AA/retirement accounts instead of all of the payments/lack of emergency fund.
4. Future cash flow: by April 2023 you should have extra cash flow of $1,250 (current estimated extra cash flow) + $450 home equity loan + $450 current car loan. That's $2,150/month or $25,800/year. Can take a big dent out of the college costs whether you put that into 529 or not. You'd have a lot more flexibility -- replacement car, doing the kitchen, whatever -- once you get your monthly payments taken care of.
5. If I'm reading correctly, you're currently spending $900/month on kids activities. Whether that can be reduced is up to you, but once they're in college that money can go straight to cash flow/college costs. So there's another $10,800/year.

Topic Author
ldd4774
Posts: 7
Joined: Wed May 08, 2019 5:24 pm

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by ldd4774 » Tue May 14, 2019 12:02 pm

Wow, that excel spreadsheet that k3vb0t provided is very insightful and much appreciated. I think I agree that our main priority is decreasing debt and saving. The asset allocation is less priority. The mortgage for 23 more years concerns me and I prefer to hold off new car and kitchen as long as possible. Managing our cash flow and having a secure future is priority over new kitchen and car.

Also, the extra $1000-1500 a month is AFTER paying $450 a month towards the fixed loan payment of 11,000 at 5% and paying $450 a month for car loan. We have one car loan @ $450 a month for 3 more years. The second car is paid off. So after all expenses and paying $450 a month to fixed loan, we have $1000-1500/month left over to put towards our floating loan.

My plan is that my salary covers all the expenses and my wife's salary would be the extra money we have towards savings, 529, reducing debt. We actually aim for 2000-2500 a month but certain months there is house repairs, unforeseen expenses so it averages $1000-1500/month which is where my estimate came from. I think I need to aim for a set amount each month so we have that consistent amount going towards

I know short time frame for kids education. I don't mind if our kids have student loan debt. Prefer it to be smaller if possible but I think getting our retirement and financial situation in order is more important. I feel our kids will both go to university so expect this to be a definite cost in future. I have not looked into it much but hoping that some of their loans will be deferred while in college so we can have an extra 4 years to save plus build enough income to help defray costs as they enter university in 7 years time.

This is initial financial plan so definitely appreciate advice and gives me some insight and focus of what to do next. I think building up emergency fund and reducing debt is definitely priority number one. I like how everyone states their personal preference of priorities. It gives me some ideas of where to start and where we need to manage/focus on.

k3vb0t
Posts: 288
Joined: Mon Jun 02, 2014 4:42 pm

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by k3vb0t » Tue May 14, 2019 12:23 pm

ldd4774 wrote:
Tue May 14, 2019 12:02 pm
Wow, that excel spreadsheet that k3vb0t provided is very insightful and much appreciated. I think I agree that our main priority is decreasing debt and saving. The asset allocation is less priority. The mortgage for 23 more years concerns me and I prefer to hold off new car and kitchen as long as possible. Managing our cash flow and having a secure future is priority over new kitchen and car.

Also, the extra $1000-1500 a month is AFTER paying $500 a month towards the fixed loan payment of 11,000 at 5% and paying $450 a month for car loan. We have one car loan @ $450 a month for 3 more years. The second car is paid off. So after all expenses and paying $500 a month to fixed loan, we have $1000-1500/month left over to put towards our floating loan.
Glad to help -- and that's even better news that it's $1-1.5k after paying the $500/month to the $11k. That just means you bump up the above plan by a few months since part of that $500 is principal on the loan AND when you pay it off, you've suddenly added $500 extra ($6k/year) that can go straight into your emergency fund.

Would look roughly like this:
Image

Again fast forwarding to when you pay off the 3.99% home equity loan and the car loan, you'd be sitting on $45.5k in emergency fund with monthly expenses of approximately $5,100 (your current $6k minus the car and home loan payments). That's right at 9 months of expenses saved up, a much healthier cushion. And from there you'd have so much cash flow that you could knock out the other priorities as you see fit -- paying cash for a new car, kitchen, adding to college savings, etc.

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ruralavalon
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Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by ruralavalon » Tue May 14, 2019 7:07 pm

Welcome to the forum :)

You have some excellent funds offered in your 401ks, you are fortunate.


Prioritizing investments.
ldd4774 wrote:
Mon May 13, 2019 3:08 pm
Extra Savings/Month - Approximately $1000-1500 which we are currently making payments to lower home equity line of credit which is floating rate of 5% currently. Should we use this money for 529 vs building up emergency fund?
. . . . .
New annual Contributions
$19,000 his 401k (Company match 100% of first 3%, 50% of 4-5%) - I have option for ROTH 401K also
$19,000 her 403b (company contributes 25% up to 6%)
$0 his Roth IRA, $0 her Roth IRA - Have not been making contributions to ROTH
. . . . .
Anticipated Large Expenses - Would like to renovate kitchen in next few years. Plan to pay lower home equity line of credit before renovating. Plan expenses $25-35,000. Will need new car for Her in 2-3 years. Anticipate cost $30,000. Plan for loans for both items above - see below.
. . . . .
9. Generally, we have $1000-2000 month extra a month after all expenses and maxing out 401K. We have been currently taking this extra money and focusing on paying off floating home equity which is at 5% currently. I was concerned with interest rates rising and thought this would be best use of extra money for last year. Now, that interest rates have stalled, where should we focus using this money?
- Continue to pay off home equity loan with floating interest rate?
- Building up emergency fund - currently only $6000. My backup is our home equity line if we get into trouble. I know not best way to achieve financial security!
- Contribute to 529
- Start Roth IRA for ourselves and pay ourselves first?
- Save for future kitchen/car expense
- Combination of all of the above and distribute money accordingly
Here is a general account funding priority that usually works well for many people (when there is no HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, SIMPLE IRA, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Pay off high interest debt (a guaranteed high return, the next best thing to free money);
3) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
4) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
5) Contribute to a taxable investing account.

"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments". You have some excellent funds offered in your 401ks, so make your contributions there.

I agree with both k3vbOt and goodenyou.
" . . . . . prioritize:
1. Paying off the $11k @ 5% (since you're using this as emergency fund, makes more sense to pay it off than to put money into a savings account earning less than that)
2. While doing #1, each year, setting aside $2,000 to get the tax break in MA. I would do this in the last 2-3 months of the year based off of my extra cash flow (so you're paying down the 5% throughout the year until the end, then snagging the tax break).
3. Once I paid off the 11k @ 5%, my cash flow goes all to emergency fund (aside from $2k for the 529s) to get it to $36k (6 months @ 6k)"

"[C]oncentrate on maximizing savings as a priority before concentrating on projecting returns. The most important behavior that you can do is to minimize spending where possible, extinguish debt where possible (highest interest rate first) and saving the most by priority (retirement then 529)." "The most important thing you can do is cut spending and simplify your investing across the spectrum into low cost funds. The rest will have less effect on getting to the finish line."

I suggest this priority --
1) pay off the floating rate home equity loan of $11k @ 5% fixed rate home equity loan @ 3.99% and car loan @ 3%, cut spending, defer kitchen renovation and any further home improvements, incur no more debt,
2) make maximum annual employee contributions of $19k to each 401k,
3) contribute $2k annually per child to the 529s to get the state tax benefit,
4) build up emergency fund, and
5) contribute $6k annually each to Roth IRAs.



Asset allocation.
ldd4774 wrote:
Mon May 13, 2019 3:08 pm
Desired Asset allocation: 75% stocks / 25% bonds - is this too much or too little? He is moderate risk, Her is min risk
Desired International allocation: 20% of stocks - is this too much or too little?
. . . . .
4. Need to adjust asset allocation. Too much overlap of funds. I think for HIM, 75% Stocks, 25% Bonds at current age 46. Should I increased bond allocation. I also need to increase international exposure. Is 20% International Stock enough/too much Plan to stick to Lazy Portfolio of 3 mutual funds, Total Stock, Total International Stock and Total Bond. Any other suggestions?
At ages 43 and 46 I suggest about 30% in bonds or other fixed income investments (like CDs, savings accounts, money market fund). This is expected to substantially reduce portfolio volatility (risk), with only a relatively modest decrease in portfolio return. Graph, "An Efficient Frontier: the power of diversification". Please see:
1) Wiki article Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk"; and
2) Wiki article, "Asset allocation";

In my opinion your desired 20% of stocks in international stocks is within the range of what is reasonable. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box, upper right, this page).

That works out to around 30% bonds, 15% international stocks., and 55% domestic stocks. Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.




Fund selection.
ldd4774 wrote:
Mon May 13, 2019 3:08 pm
For wife’s assets, I am leaning on just switching everything to Target Funds 2045 to make things easier for her. She will not monitor assets, may be easier in case something happens to me.

6. Need advice on 401K plan choices going forward. For HIM, I was thinking of index funds only in large, mid, small, international and bond rather than target retirement fund. For HER - 100% - Target funds
In selecting funds strive for a combination of broad diversification (to reduce risk) and low expense ratios (to increase your net gain). To simply and easily achieve those two goals I suggest choosing funds to simulate the very well diversified, low expense ratio "three-fund portfolio". Please see:
1) Wiki article "Three-fund portfolio";
2) Forum discussion, "The Three-Fund Portfolio".

It is often better coordinate investments across all accounts, in other words treat all accounts together as a single unified portfolio, rather than view each account separately. Select just one or two of the better funds (most diversified + lower expense ratio) in the work-based account (401k, 403b, 457, SIMPLE IRA, TSP etc.), where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited choices available in a taxable account or any IRAs.

This approach lets you avoid having to use sub-par, sub-optimal or high expense funds often found in work-based plans. Do not try to put all components of the asset allocation in every account. Wiki article, "Asset allocation in multiple accounts".

This approach also allows for better tax-efficiency if you later use a taxable account also. Wiki article, "Tax-efficient Fund Placement".

In my opinion in his 401k the better funds to consider using are:
1) FID 500 INDEX (FXAIX) (0.015%);
2) FID EXTD MKT IDX (FSMAX) (0.045%);
3) FID INTL INDEX (developed markets only) (FSPSX) (0.035%); and
4) FID US BOND IDX (FXNAX) (0.025)%.

In my opinion in her 401k the better funds to consider using are:
1) ISHARES S&P 500 INDEX K (WFSPX) (0.04); or
2) BLACKROCK LIFEPATH INDEX 2045 PORTFOLIO (LIHKX) (0.18 GROSS, 0.11 NET).
I don't see any diversified low expense international stock fund, or any diversified low expense bond fund offered in her 401k.

In my opinion in a plan that lacks a total stock market index fund, a S&P 500 index fund is good enough by itself for a domestic stock allocation. A S&P 500 index fund covers 81% of the U.S. stock market, investing in stocks of selected large-cap and mid-cap U.S. companies. In the 27 years since the creation of the first total stock market index fund the performance of the two types of funds has been almost identical. Morningstar, "growth of $10k" graph, VTSAX vs VFIAX. In the first 10 years the S&P 500 fund did better, in the last 10 years the total market fund did better, and over the 27 years the total market fund gave a little more return (0.11% per year), but at the cost of a little more volatility (risk): nisiprius post, in the forum discussion "Exchanging the S&P 500 for the TSM". So it seems that adding a little in mid/small cap stocks trying to mimic the holdings of a total stock market fund has historically made little difference in performance.

See also:
1) Allan Roth, CBS Moneywatch (02/03/2010), "John C. Bogle on the S&P 500 vs. the Total Stock Market"; and
2) Wall Street Physician (01/17/2019), "Should You Invest in the S&P 500 or the Total Stock Market?".

If you want to add the extended market fund, then an 81/19 mix of S&P 500 and extended market will approximate the content of a total stock market index fund. Wiki article, "Approximating total stock market". In my opinion this is not necessary, it is optional if you prefer to do this.

In general it's better to place bond funds in a traditional account. In general it's better to place stock funds, with their higher expected performance, in Roth accounts.

To make portfolio management and rebalancing easy it is often better to have at least one large tax-advantaged account which contains all three basic asset types (bonds, international stocks, and domestic stocks). Don’t try to put all components of the asset allocation in every account.


Example portfolio.
Here is an example portfolio that you could consider. This is a three-fund type portfolio, modified as necessary to accommodate the fund offerings in your 401ks. Current portfolio size = "mid six figures ". New annual contributions = about $38k + employer matches. The asset allocation is: 30% bonds; 15% international stocks; and 55% domestic stocks. The percentages given are percentages of the total portfolio, not of a given account.

Because diversified low expense funds are available in all accounts, there are probably dozens of ways to build a good portfolio.

The suggestion is to switch both the existing balances and the new contributions to the funds indicated. Sometimes I state 00% to indicate funds you might want to add in the future.

His Traditional IRA at Vanguard (21% of Retirement Assets)
08%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
05% Vanguard Total International Stock Index Fund Admiral Shares (both developed and emerging markets) (VTIAX) ER 0.11%
08%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%

His Current 401k - Fidelity includes transfer of Fidelity rollover IRA (38% of Overall Retirement Assets, adds $19k/year + Company match 100% of first 3%, 50% of 4-5%)
23%, FID 500 INDEX (FXAIX) (0.015%)
00%, FID EXTD MKT IDX (FSMAX) (0.045%) (optional)
05%, FID INTL INDEX (developed markets only) (FSPSX) (0.035%)
10%, FID US BOND IDX (FXNAX) (0.025%)

His Roth IRA at Fidelity (1.5% of Overall Retirement Assets)
1.5%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%

HER CURRENT 401K (13% of Overall Retirement Assets, adds $19k/year + company contributes 25% up to 6% )
13%, ISHARES S&P 500 INDEX K (WFSPX) (0.04)
(I don't see any diversified low expense international stock fund, or any diversified low expense bond fund offered in her 401k.)

HER Rollover IRA at Vanguard, includes transfer of Hartford IRA (24% of Overall Retirement Assets)
10%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04%
05%, Vanguard Total International Stock Index Fund Admiral Shares (both developed and emerging markets) (VTIAX) ER 0.11%
09%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%

HER Traditional IRA at Vanguard - 2.5%
2.5%, Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER 0.05%




Rebalancing.
Because the funds will grow at different and unpredictable rates, it may be necessary every few years to rebalance in order to maintain the desired asset allocation. Wiki article, "Rebalancing". You can easily adjust the asset allocation by exchanging between funds inside his 401k.




Projecting.
If you want to do some projections, then here are some calculators you could use to asses a range of results from various levels of contributions:
1) www.firecsalc.com; and
2) www.i-orp.com.

Making projections should be your last concern at this point.

. . . . .

I suggest that you read one or two books on general investing. Wiki article, "Books: recommendations and reviews". When I first stated managing my own investments, I found this tutorial very helpful in learning investing terminology/jargon and some of the investing basics. Morningstar, "Investing Classroom". Also take a look at the Boglehead’s wiki, the "getting started" link I give below.

If you have any questions just ask.

I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
ldd4774
Posts: 7
Joined: Wed May 08, 2019 5:24 pm

Re: Request Portfolio Assistance/Review for Mid 40's couple with 2 kids

Post by ldd4774 » Tue May 14, 2019 8:22 pm

Wow! Is all I can say ruralavalon!

You really went out of your way to explain things with great reference. Your post makes a lot of sense and has some great advice for me to research and follow. I am really at a loss of words of how great everyone on this forum is with taking their time to explain and advise people like myself everyday. I have learned a lot in a very short time.

Changing the portfolio and viewing my wife and my account as one account makes more sense in aligning our desired asset allocation. I also like how you prioritized where we should start focusing our efforts with respect to future savings and investing.

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