35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

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Topic Author
cormacthecelt
Posts: 4
Joined: Tue May 07, 2019 4:25 pm

35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by cormacthecelt » Wed May 08, 2019 3:56 pm

Hello Bogleheads, thanks for taking the time to read this and contribute, it will be a great help to our family to get investment & planning advice from this community.

Emergency funds: Yes, for 6 Months expenses

Debt: My wife has a refinanced student loan of $50k with an interest of 4.29% that she is currently paying down from her self-employed income (Target is 4-5 year paydown). My income/wages are being used to save/invest. This seems to work best for us right now.

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 0% State

State of Residence: Florida

Age: 35, 33 years’ old

Kids and College Plan: Ages are 6 & 1 years old. We opened 529 plans for them ($3k each) however have now decided to incorporate the savings for them into our own portfolio rather than having it broken out.

Desired Asset allocation: 70% stocks / 25% bonds / 5% Alternatives
Desired International allocation: 25% of stocks

Additional relevant info:
• I’m originally from Ireland and moved to the US ~4 years ago. I am now a permanent resident, I met my wife here (she is a citizen) and we got married last year. I hold ~50K euro investments back in Ireland and want to hold them for future expenses back there (taking care of parents, etc)
• I transferred the majority of my savings to the US when I moved here, to a taxable account in Betterment and began building. I have recently transferred all my taxable accounts to Vanguard.
• I have only begun building my non-taxable since moving to the US – therefore they are relatively low; I am maxing them all out each year.
• For the Roth IRAs, they are back door conversions from a traditional IRA, post-tax-funded

Current Portfolio: ~$600k

Taxable 81.12%

AGG iShares Core U.S. Aggregate Bond ETF 0.13%
BND Vanguard Total International Bond Index Fund ETF Shares 4.35%
EMB iShares J.P. Morgan USD Emerging Markets Bond ETF 0.35%
IEMG iShares Core MSCI Emerging Markets ETF 0.49%
IVE iShares S&P 500 Value ETF 0.20%
LQD iShares iBoxx $ Investment Grade Corporate Bond ETF 0.23%
MUB iShares National Muni Bond ETF 1.80%
NAESX Vanguard Small Capitalization Index Fund Investor Shares 0.56%
SCHF Schwab International Equity ETF™ 0.47%
SCHV Schwab U.S. Large-Cap Value ETF™ 0.67%
SPAB SPDR® Portfolio Aggregate Bond ETF 0.32%
SPTM SPDR® Portfolio Total Stock Market ETF 1.00%
TFI SPDR® Nuveen Bloomberg Barclays Municipal Bond ETF 6.59%
VBR Vanguard Small-Cap Value Index Fund ETF Shares 2.83%
VCIT Vanguard Intermediate-Term Corporate Bond Index Fund ETF Shares 0.34%
VEA Vanguard FTSE Developed Markets Index Fund ETF Shares 12.77%
VFWAX Vanguard FTSE All-World ex-US Index Fund Admiral Shares 2.23%
VGSLX Vanguard REIT Index Fund Admiral Shares 4.11%
VOE Vanguard Mid-Cap Value Index Fund ETF Shares 3.34%
VTI Vanguard Total Stock Market Index Fund ETF Shares 18.95%
VTIAX Vanguard Total International Stock Index Fund Admiral Shares 1.71%
VTIP Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares 1.73%
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares 7.66%
VTV Vanguard Value Index Fund ETF Shares 4.17%
VWO Vanguard FTSE Emerging Markets Index Fund ETF Shares 2.70%
VWOB Vanguard Emerging Markets Government Bond Index Fund ETF Shares 1.43%


My Roth IRA 4.49%
AGG iShares Core U.S. Aggregate Bond ETF 0.02%
VTV Vanguard Value Index Fund ETF Shares 0.03%
VTI Vanguard Total Stock Market Index Fund ETF Shares 0.05%
VOE Vanguard Mid-Cap Value Index Fund ETF Shares 0.03%
BNDX Vanguard Total International Bond Index Fund ETF Shares 0.08%
VTIP Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares 0.02%
VBR Vanguard Small-Cap Value Index Fund ETF Shares 0.02%
VEA Vanguard FTSE Developed Markets Index Fund ETF Shares 0.33%
VWO Vanguard FTSE Emerging Markets Index Fund ETF Shares 3.88%
EMB iShares J.P. Morgan USD Emerging Markets Bond ETF 0.02%

Her Roth IRA 1.09%
VTSAX Vanguard Total Stock Market Index Fund Admiral Shares 1.09%

Kids 529 Plans 1.06%
529 Vanguard Aggressive Age-Based Option: Vanguard 90% Stock/10% Bond Portfolio 1.06%

Tax Deferred – My 401K – 10.97%
VFFVX VANGUARD TARGET 2055 FUND 9.51%
NEE NEXTERA ENERGY ESOP 1.46%

My HSA trade a/c – 1.27%
SPAB SPDR Portfolio Aggregate Bond ETF 0.44%
SPTM SPDR Portfolio Total Stock Market ETF 0.83%


New annual contributions
$18,000 for my 401k (capped)
50% Employer Match with ESOP into 401K
~$100K for long term retirement investments

Available funds in my 401K
American Funds EuroPacific Growth Fund® Class R-6 (RERGX) 0.49%
Aristotle Small Cap Equity Collective Trust - Class B 0.69%
BlackRock MSCI ACWI ex-U.S. IMI Index Fund M 0.11%
Cohen & Steers U.S. Realty Fund - Class B 0.55%
Eaton Vance Floating-Rate & High Income Fund R6 Class (ESFHX) 0.72%
Equity Index Fund M 0.02%
Fidelity® Low-Priced Stock Commingled Pool 0.48%
Fisher Investments Emerging Markets Equity Collective Trust 0.95%
JPMorgan Equity Income Fund Class R6 (OIEJX) 0.50%
Large Cap Growth Fund managed by T. Rowe Price 0.36%
Loomis Sayles Core Plus Fixed Income Trust Class D 0.25%
Managed Income Fund 0.28%
NextEra Energy Stock Fund 0.00%
PIMCO Diversified Real Asset Trust 0.41%
Russell 2000® Index Fund M 0.06%
Russell 3000® Index Fund M 0.03%
Small-Mid Cap Growth by Jackson Square Partners 0.73%
U.S. Debt Index Fund W 0.04%
Vanguard Federal Money Market Fund Investor Shares (VMFXX) 0.11%
Vanguard PRIMECAP Core Fund Investor Shares (VPCCX) 0.46%
Vanguard Target Retirement 2015 Trust I 0.07%
Vanguard Target Retirement 2020 Trust I 0.07%
Vanguard Target Retirement 2025 Trust I 0.07%
Vanguard Target Retirement 2030 Trust I 0.07%
Vanguard Target Retirement 2035 Trust I 0.07%
Vanguard Target Retirement 2040 Trust I 0.07%
Vanguard Target Retirement 2045 Trust I 0.07%
Vanguard Target Retirement 2050 Trust I 0.07%
Vanguard Target Retirement 2055 Trust I 0.07%
Vanguard Target Retirement 2060 Trust I 0.07%
Vanguard Target Retirement 2065 Trust I 0.07%
Vanguard Target Retirement Income Trust I 0.07%

We would really appreciate getting some advice on the following:

Goals:
1. The best way to simplify the portfolio. Using asset allocation across multiple accounts.
2. Long term financial saving for retirement and achieving financial independence within our 40s. The plan is to keep working or creating income, however, have more flexibility and time with family, travel. We plan to keep our expenses low and our lifestyle moderate.
3. Diversify our portfolio enough to cover us for downside risk in the markets. We have high-risk tolerance, however, think buying a property in the near future may be a good investment.

We need advice and guidance on:
1. Please review our portfolio and asset allocation and advise what changes we should make based upon the above-mentioned goals.

2. Guidance on how to invest tax-efficiently between taxable and tax-deferred accounts would be appreciated? Any suggestion for optimized tax savings?

3. When we do want to invest in a house what is the best approach, to use cash to make a large down payment or take advantage of the still relatively low-interest rates?

4. In partially covering ourselves from a potential market downturn, should we leave some cash on the sidelines to invest once the market is down? Or would that be a good time to convert the investments we have in bonds into stock? (Basically a risk minimization plan)

5. Is there a big advantage to us paying my wife’s student loan down immediately, rather than waiting 4-5 years? From my viewpoint it may not be the best economical decision, however, it helps keep her focused and seems to work so I think sticking with the current setup is ok.

Thanks for reading our post and we appreciate all your suggestions. If any additional information would be helpful, please let me know in the comments and I will provide it. :sharebeer

noraz123
Posts: 233
Joined: Tue Jun 10, 2014 1:23 am
Location: SF Bay Area

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by noraz123 » Wed May 08, 2019 8:48 pm

cormacthecelt wrote:
Wed May 08, 2019 3:56 pm
Hello Bogleheads, thanks for taking the time to read this and contribute, it will be a great help to our family to get investment & planning advice from this community.

1. Please review our portfolio and asset allocation and advise what changes we should make based upon the above-mentioned goals.
IMHO, you own too many funds. Being at Vanguard, I'd recommend a very simple portfolio with the following allocation based the numbers you gave:
  • Vanguard Total Market = 52.5%
  • Vanguard Total Bond = 25%
  • Vanguard Total International = 17.5%
  • Whatever you need for "alternatives". I recommend Vanguard REIT Index fund = 5%
To whatever extent possible, I'd keep to the three/four funds above. If you do not have access to these specific funds, (e.g., your 401K), use similar, low cost funds.

2. Guidance on how to invest tax-efficiently between taxable and tax-deferred accounts would be appreciated? Any suggestion for optimized tax savings?
From the Bogleheads wiki, "In general, the international fund should go into a taxable account, the bond fund should go into a tax-advantaged account, and the domestic equity fund should fill in the remaining space."

My advice, with percentages based on total portfolio value across all accounts:

Roth - Simplify!
No tax consequences. Assuming a REIT will meet your “alternatives” needs, sell everything, put everything in Vanguard REIT Index fund. This is close enough to 5% of your portfolio.

401K
Sell everything (no tax consequences). Buy U.S. Debt Index Fund. This will give you 11% bonds.

Taxable - simplify to whatever extent possible. If any positions have losses, sell them! If any of the positions have small gains, consider selling them. Otherwise, you may want to keep them to defer any taxes, and going forward buy Total International, Total Bond, and Total Market.
17.5% allocated to Total International
14% Bonds - Total Bond Fund
Total Market to fill the rest.

As your Roth grows and is more than 5% of your portfolio, add Total Stock Market.
3. When we do want to invest in a house what is the best approach, to use cash to make a large down payment or take advantage of the still relatively low-interest rates?
This is a personal question re:risk. I cannot predict where interest rates go, neither can you. Use down payment that you are comfortable with, not based on where you think interest rates are going.
4. In partially covering ourselves from a potential market downturn, should we leave some cash on the sidelines to invest once the market is down? Or would that be a good time to convert the investments we have in bonds into stock? (Basically a risk minimization plan)
You don’t know when the market will go down. And having cash on the sideline will miss out on when the market is going up. Stick to your asset allocation, and if/when the market goes down, rebalance out of bonds into stocks.
5. Is there a big advantage to us paying my wife’s student loan down immediately, rather than waiting 4-5 years? From my viewpoint it may not be the best economical decision, however, it helps keep her focused and seems to work so I think sticking with the current setup is ok.
This a personal decision, based on your risk profile. Do you get a tax deduction on the interest? If no, I’d pay this off first, as it is a 4.59% risk free rate of return.

Topic Author
cormacthecelt
Posts: 4
Joined: Tue May 07, 2019 4:25 pm

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by cormacthecelt » Thu May 09, 2019 8:10 am

Thanks for the response noraz123. It was very clear to follow and is much appreciated.
noraz123 wrote:
Wed May 08, 2019 8:48 pm
IMHO, you own too many funds.
I agree I have too many funds, this is mainly a result of having my taxable account in Betterment previously. Now that they are all held in Vanguard I can start to simplify them. I wanted to check in with the experts on this forum and get a few opinions before I did anything though.

ivk5
Posts: 671
Joined: Thu Sep 22, 2016 9:05 am

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by ivk5 » Thu May 09, 2019 8:27 am

Not one of your questions but just to flag in case you are not aware - your investments in Ireland bring an added compliance burden now that you are a US tax resident. Make sure you are aware of reporting requirements for non-US assets (FBAR/FinCEN), and PFIC requirements if you hold any non-US funds/ETFs.

If you may leave US in the future (and you do not naturalize) you may want to consider the complexities of becoming an NRA married to a US citizen (gift tax, spouse’s continuing US reporting requirement, etc).

Edited to add: forget alternatives. 5% allocation won’t move the needle, and larger allocation is just increasing uncompensated risk.

Topic Author
cormacthecelt
Posts: 4
Joined: Tue May 07, 2019 4:25 pm

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by cormacthecelt » Thu May 09, 2019 10:03 am

ivk5 wrote:
Thu May 09, 2019 8:27 am
If you may leave US in the future (and you do not naturalize) you may want to consider the complexities of becoming an NRA married to a US citizen (gift tax, spouse’s continuing US reporting requirement, etc).
Thanks for bringing this up ivk5. We are thinking about moving to Ireland at some point in the future, it may only be for a short period of time though. I will have to research it some more.

noraz123
Posts: 233
Joined: Tue Jun 10, 2014 1:23 am
Location: SF Bay Area

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by noraz123 » Thu May 09, 2019 11:08 am

cormacthecelt wrote:
Wed May 08, 2019 3:56 pm

Taxable 81.12%
...
VGSLX Vanguard REIT Index Fund Admiral Shares 4.11%
...
I missed that you already owned REIT in your taxable. If the gains are low (or even better if you have a loss), sell it and buy back in your Roth.

Else, leave it in taxable and buy total stock market in your Roth. As your portfolio grows and you need to add more, add it in your Roth IRA.

or as ivk5 said,
ivk5 wrote:
Thu May 09, 2019 8:27 am
...forget alternatives. 5% allocation won’t move the needle, and larger allocation is just increasing uncompensated risk.
I personally agree with this, as I don't directly own any REITs or other alternatives unless they are already part of my domestic or international index funds. But some Bogleheads are advocates of greater diversity, and 5% in REIT or other alternatives is certainly "Boglehead-ish".

doon
Posts: 113
Joined: Tue May 27, 2014 9:25 am

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by doon » Thu May 09, 2019 11:32 am

cormacthecelt wrote:
Wed May 08, 2019 3:56 pm

New annual contributions
$18,000 for my 401k (capped)
50% Employer Match with ESOP into 401K
~$100K for long term retirement investments
You are making close to $100k contribution towards retirement. What portion of that is in tax deferred? Only your 401k? Have you considered solo 401k or something similar for your wife? You mention that she is self employed. You can sock away close to $54K in a solo 401k account every year. Not sure what your income is but you can also look into backdoor roth for both of you.
"Goal - Win the game before the need to retire"

malabargold
Posts: 556
Joined: Fri Aug 08, 2014 8:16 am

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by malabargold » Thu May 09, 2019 1:55 pm

None of us has a crystal ball better than yours.

Just simplify your holdings.

The large ETF’s will likely revert to the mean as
conditions wax and wane, and decades
from now the difference in performance
likely will not be great, and at least you won’t get
stuck betting a bundle on the horse bringing up the rear.

noraz123
Posts: 233
Joined: Tue Jun 10, 2014 1:23 am
Location: SF Bay Area

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by noraz123 » Thu May 09, 2019 2:15 pm

doon wrote:
Thu May 09, 2019 11:32 am
You can sock away close to $54K in a solo 401k account every year. Not sure what your income is but you can also look into backdoor roth for both of you.
Excellent point by doon! If you are investing $100K year, get as much of it into tax sheltered accounts as possible (IRA, Roth IRA, 401K, 529, etc.)
The OP is already funding Roth IRA via backdoor. Adding a solo 401K, which is available to self-employed folks, such as your wife, would shelter even more.

As mentioned by doon, can put away another $54K/year, providing your wife makes $54K/year or more. If your wife makes $40K/year, she would only be able to put in$40K. Vanguard offers solo 401Ks. See here: https://investor.vanguard.com/small-bus ... -solo-401k.

Also - health savings accounts can be another great vehicle for tax-sheltered savings provided you have a high deductible health plan (HDHP). You could sock away another $7K/year if you have a HDHP.

Also note, the 401K limit is now $19K.

So, you could do the following:
$54K in solo 401K (if your wife makes at least $54K)
$19K in your 401K
$12K ($6K x 2) for backdoor Roth IRA contributions
$7K HSA account (if applicable)
---------------------
$92K in tax sheltered accounts --> 92% of your yearly savings in tax sheltered accounts! That's awesome.

One more thing to look into is the "mega backdoor roth IRA" contribution. If your 401K allows for after-tax contributions (not Roth 401K, but after tax contributions -- they are different) *and* in-service withdrawals, you can save another $35K in your Roth IRA (you could do $19K in your 401K and $54-19k = $35K in a mega backdoor Roth IRA contribution). Details here: https://www.madfientist.com/after-tax-contributions/

Topic Author
cormacthecelt
Posts: 4
Joined: Tue May 07, 2019 4:25 pm

Re: 35 and 33 years old, 2 kids: Please advise on Asset Allocation/Tax Efficiency/Risk Minimization/Loan Repayment

Post by cormacthecelt » Wed May 15, 2019 2:52 pm

doon wrote:
Thu May 09, 2019 11:32 am
You are making close to $100k contribution towards retirement. What portion of that is in tax deferred? Only your 401k? Have you considered solo 401k or something similar for your wife? You mention that she is self employed. You can sock away close to $54K in a solo 401k account every year. Not sure what your income is but you can also look into backdoor roth for both of you.
Thanks for the response doon & noraz123. My wife has an annual income of ~$40-50k, I was going to use a SEP IRA, however, it seems like a solo 401K is more efficient. I'll also look into the mega backdoor Roth ira to see if it's workable for me.

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