Portfolio review -- early 40s

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Topic Author
dale77
Posts: 40
Joined: Mon Aug 05, 2019 11:05 pm

Portfolio review -- early 40s

Post by dale77 »

Emergency funds: $120k in a 5-year CD ladder (most 3-3.5%), $25k in savings (2.1%)

Debt: $210k/8 years remaining on mortgage at 2.5%

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 5% State

State of Residence: Illinois

Ages: 43/42

Desired Asset Allocation: 80% stocks / 20% bonds

Desired International allocation: 35% of stocks

Portfolio size: $1.3 million

Joint taxable account:
13% Vanguard Wellington Fund Admiral (VWENX) (0.17%)
8% Vanguard Long-Term Investment-Grade Fund Admiral (VWETX) (0.12%)
2% Vanguard Intermediate-Term Investment-Grade Fund Investor (VFICX) (0.20%)
2% in her employer's stock (unsold restricted stock)

Her 401(k):
36% State Street S&P 500 Index Class N (0.02%)

His Traditional IRA at Vanguard:
15% Vanguard FTSE All-World ex-US Index Fund Admiral (VFWAX) (0.11%)

Her Rollover IRA at Vanguard:
7% Vanguard FTSE All-World ex-US Index Fund Admiral (VFWAX) (0.11%)
7% Vanguard Extended Market Index Fund Admiral Shares (VEXAX) (0.07%)

Illinois Bright Start 529s for HS Freshman and 5th grader:
3% Vanguard 500 Index 529 (0.15%)
2% Vanguard Total Intl Stock Index 529 (0.20%)

Vanguard Coverdell ESAs for HS Freshman and 5th grader:
5% Vanguard Target Retirement 2025 Fund (VTTVX) (0.13%)

New annual contributions:
$19k her 401k + $8k employer match
$6k his IRA (unless AGI is too high)
$7k 529 college savings
~$15k taxable (dependent on freelance income)

Funds available in her 401(k):
Retirement Date
T Rowe Price Trust 2025 to 2060 (0.58%)

Bond
Loomis Core Plus Fixed Income (0.35%)
State Street US Bond Index Class C (0.05%)
PIMCO Foreign Bond Fund Institutional- PFORX (0.53%)

Large Cap
State Street S&P 500 Index Class N (0.02%)
JPM Analyst Large Cap Core (0.42%)

Mid Cap
State Street Russell SMID Index C (0.05%)
Rothchild Small/Mid Cap Core (0.85%)

International
Dodge & Cox Intl (DODFX) (0.64%)
DFA Emerging Markets Core Equity (DFCEX) (0.63%)
State Street Global All Cap Equity ex US Index C (0.18%)

Inflation Hedge
PIMCO Inflation Response Fund (PIRMX) (0.90%)

A few concerns:

I've never had a good notion of what's the ideal allocation for the 529/Coverdell money between stock/bonds. I've been on the aggressive side, which has worked so far for me...but that doesn't mean it's a good idea.

I feel I have too much in CDs/emergency funds, but it's still less than one year of income, so maybe I'm wrong with that.

I wouldn't put money in Wellington if I started investing today, but I'm not sure it's worth the tax hit right now to sell.

We're hoping to retire in 13-15 years -- I don't know if that means I should continue being fairly aggressive (to try to get as much by then) or to go a little more conservatively (as we semi-approach retirement).

Any thoughts on these concerns or anything else will be helpful — thanks in advance!
Last edited by dale77 on Tue Aug 06, 2019 2:17 pm, edited 2 times in total.
User avatar
Watty
Posts: 30138
Joined: Wed Oct 10, 2007 3:55 pm

Re: Portfolio review -- early 40s

Post by Watty »

dale77 wrote: Mon Aug 05, 2019 11:27 pm I feel I have too much in CDs/emergency funds, but it's still less than one year of income, so maybe I'm wrong with that.
I would agree that it is too large. You want to look at expenses not income and six months expenses would be plenty since you also have a large taxable account that you could dip into if you had an big emergency that required more than six months expenses.

With a several hundred thousand dollars in a taxable accounts a reasonable case could be made that just having a few months expenses in an emergency fund would be plenty.

Seperate from the emergency fund you might want to also have a fund to pay cash for your next car. If some of these CD's would likely be used for that then your emergency fund might not really be as large as it looks like.
dale77 wrote: Mon Aug 05, 2019 11:27 pm Joint taxable account:
13% Vanguard Wellington Fund Admiral (VWENX) (0.17%)
8% Vanguard Long-Term Investment-Grade Fund Admiral (VWETX) (0.12%)
2% Vanguard Intermediate-Term Investment-Grade Fund Investor (VFICX) (0.20%)
2% in her employer's stock (unsold restricted stock)
When possible it is best not to have bonds in a taxable account especially when you are in a high tax bracket. There is a wiki on this.

https://www.bogleheads.org/wiki/Tax-eff ... _placement
dale77 wrote: Mon Aug 05, 2019 11:27 pm Debt: $210k/8 years remaining on mortgage at 2.5%
I would look at using the money that is in the bond mutual funds in your taxable account to pay down your mortage.

Likewise if you decide to have a smaller emergency fund then as some of the high interest rate CDs mature you could use that cash to pay down your mortage too.

Once your mortage is paid off you could then invest your "mortage payment" each month.

Once the house is paid off then with no mortage payments your monthly expenses would be lower so less money would be needed to have six months expenses in a emergency fund.
Nissanzx1
Posts: 605
Joined: Wed Jul 18, 2018 11:13 pm

Re: Portfolio review -- early 40s

Post by Nissanzx1 »

Looking good! I’d say write about a $70,000 check today to mortgage lender and make a hard sacrifice to be mortgage debt free in 2 more years. Bootstrap it. You will have even more to plow into the markets. With the politics what they are and no mortgage payment, you will be able to buy lots of shares at great pricing in the next 2-3-4 years...
Lou354
Posts: 804
Joined: Sun Apr 03, 2016 10:51 pm

Re: Portfolio review -- early 40s

Post by Lou354 »

At your marginal tax rate, if you're going to hold bond funds in a taxable account maybe use tax-exempt bond funds.

If either of your 401k plans accepts incoming rollovers, you might consider doing that so you can make so-called backdoor Roth contributions without pro-rata rule complications.
megabad
Posts: 3638
Joined: Fri Jun 01, 2018 4:00 pm

Re: Portfolio review -- early 40s

Post by megabad »

dale77 wrote: Mon Aug 05, 2019 11:27 pm I've never had a good notion of what's the ideal allocation for the 529/Coverdell money between stock/bonds. I've been on the aggressive side, which has worked so far for me...but that doesn't mean it's a good idea.
I have actually subscribed to the age based models but I don't use them directly. I basically just take the allocations (from vanguards website) and mirror that with individual funds (as closely as I can). I start with the aggressive age based model when young and then I am moving toward the conservative model when they get older. Basically I want a much steeper/quicker glide path. I don't think this is necessarily the best, but it is what I do. That said, I am only planning on using money for college. If you use it younger, you would probably want a very different allocation.

I feel I have too much in CDs/emergency funds, but it's still less than one year of income, so maybe I'm wrong with that.
Personal decision. I wouldn't go any lower than 3 months expenses, but beyond that it just depends on job security/ one or two income earners / risk tolerance etc. I have fluctuated from basically zero all the way up to 12 months over the years personally.

I wouldn't put money in Wellington if I started investing today, but I'm not sure it's worth the tax hit right now to sell.
Can you squeeze it into the 15% LTCG bracket? Will you have a time in the future where you will be in a lower tax bracket? Remember those Wellington distributions are already gonna kill you tax wise even if you don't sell. Holding on to them is costing you money too.

We're hoping to retire in 13-15 years -- I don't know if that means I should continue being fairly aggressive (to try to get as much by then) or to go a little more conservatively (as we semi-approach retirement).
This is a personal decision that you and spouse will need to make together. That said, I suspect your answer today might be different than your answers 15 years from now. I think in this time frame your savings rate will matter much more than your exact allocation choice. In your case, you will need a very large portfolio in retirement assuming your expenses stay at current levels (looks like 200k or greater) so save as much as you can. I would expect you would need something like $7m nominal or $5m real (PV).

Any thoughts on these concerns or anything else will be helpful — thanks in advance!
You mentioned an IRA contribution which confused me. I assume you meant backdoor Roth IRA contribution through the IRA though.

For someone in the 37% bracket (without NIIT), those taxable bonds stick out like a sore thumb to me so I would work on those (as you touched on in your post). I know it doesn't seem like much but you are bringing in maybe $5k in distributions per year and then turning around and handing $2k right back in taxes. That just hurts me emotionally :happy
Topic Author
dale77
Posts: 40
Joined: Mon Aug 05, 2019 11:05 pm

Re: Portfolio review -- early 40s

Post by dale77 »

Watty wrote: Tue Aug 06, 2019 5:53 am With a several hundred thousand dollars in a taxable accounts a reasonable case could be made that just having a few months expenses in an emergency fund would be plenty.

Seperate from the emergency fund you might want to also have a fund to pay cash for your next car. If some of these CD's would likely be used for that then your emergency fund might not really be as large as it looks like.
The savings/CDs is halfway between an emergency fund and a fund for large purchases that we don't want to take a loan out for — our last three cars we've paid out of that fund, with another large purchase coming up about a year from now ($20k). But it's still probably overkill, even for that dual purpose.
Watty wrote: Tue Aug 06, 2019 5:53 am When possible it is best not to have bonds in a taxable account especially when you are in a high tax bracket. There is a wiki on this.

https://www.bogleheads.org/wiki/Tax-eff ... _placement
I hadn't thought that through, but the logic makes a lot of sense.
Watty wrote: Tue Aug 06, 2019 5:53 am
dale77 wrote: Mon Aug 05, 2019 11:27 pm Debt: $210k/8 years remaining on mortgage at 2.5%
I would look at using the money that is in the bond mutual funds in your taxable account to pay down your mortage.

Likewise if you decide to have a smaller emergency fund then as some of the high interest rate CDs mature you could use that cash to pay down your mortage too.
Nissanzx1 wrote: Tue Aug 06, 2019 6:39 am I’d say write about a $70,000 check today to mortgage lender and make a hard sacrifice to be mortgage debt free in 2 more years. Bootstrap it. You will have even more to plow into the markets.
My only thought regarding these comments is: Since my mortgage rate is so low, would it make more sense to the take the money I could put into extra mortgage payments and put it into stock index funds instead? Intuitively it would seem that I would financially end up better that way (assuming the market doesn't tank), but it's very possible I'm not thinking through all the ramifications thoroughly.
Topic Author
dale77
Posts: 40
Joined: Mon Aug 05, 2019 11:05 pm

Re: Portfolio review -- early 40s

Post by dale77 »

Lou354 wrote: Tue Aug 06, 2019 8:15 am If either of your 401k plans accepts incoming rollovers, you might consider doing that so you can make so-called backdoor Roth contributions without pro-rata rule complications.
I'll look into that — thanks.
megabad wrote: Tue Aug 06, 2019 12:34 pm
dale77 wrote: Mon Aug 05, 2019 11:27 pm I've never had a good notion of what's the ideal allocation for the 529/Coverdell money between stock/bonds. I've been on the aggressive side, which has worked so far for me...but that doesn't mean it's a good idea.
I have actually subscribed to the age based models but I don't use them directly. I basically just take the allocations (from vanguards website) and mirror that with individual funds (as closely as I can). I start with the aggressive age based model when young and then I am moving toward the conservative model when they get older. Basically I want a much steeper/quicker glide path. I don't think this is necessarily the best, but it is what I do. That said, I am only planning on using money for college. If you use it younger, you would probably want a very different allocation.
That seems like a good way to go.
megabad wrote: Tue Aug 06, 2019 12:34 pm
dale77 wrote: Mon Aug 05, 2019 11:27 pm I wouldn't put money in Wellington if I started investing today, but I'm not sure it's worth the tax hit right now to sell.
Can you squeeze it into the 15% LTCG bracket? Will you have a time in the future where you will be in a lower tax bracket? Remember those Wellington distributions are already gonna kill you tax wise even if you don't sell. Holding on to them is costing you money too.
We'll be in the 24% bracket at retirement (unsafely assuming the brackets haven't changed since then). We're safely in the 15% LTCG bracket.
megabad wrote: Tue Aug 06, 2019 12:34 pm
dale77 wrote: Mon Aug 05, 2019 11:27 pm We're hoping to retire in 13-15 years -- I don't know if that means I should continue being fairly aggressive (to try to get as much by then) or to go a little more conservatively (as we semi-approach retirement).
This is a personal decision that you and spouse will need to make together. That said, I suspect your answer today might be different than your answers 15 years from now. I think in this time frame your savings rate will matter much more than your exact allocation choice. In your case, you will need a very large portfolio in retirement assuming your expenses stay at current levels (looks like 200k or greater) so save as much as you can. I would expect you would need something like $7m nominal or $5m real (PV).
$200k is what we make combined right now, but once you subtract out our saving for retirement, our saving for college, our mortgage, our very high property taxes (we'll move elsewhere), etc., it's probably more like $140k without changing lifestyle. $4m is what I'm hoping for. We can always delay retirement as well — neither of us hates our jobs (although who knows in 15 years!).
megabad wrote: Tue Aug 06, 2019 12:34 pm
dale77 wrote: Mon Aug 05, 2019 11:27 pm You mentioned an IRA contribution which confused me. I assume you meant backdoor Roth IRA contribution through the IRA though.
Just a traditional IRA. I don't have a 401(k). Although the past two years I haven't been able to fund it fully because we're hitting the IRA income limits.

Thanks for everyone's help so far!
megabad
Posts: 3638
Joined: Fri Jun 01, 2018 4:00 pm

Re: Portfolio review -- early 40s

Post by megabad »

dale77 wrote: Tue Aug 06, 2019 1:16 pm $200k is what we make combined right now, but once you subtract out our saving for retirement, our saving for college, our mortgage, our very high property taxes (we'll move elsewhere), etc., it's probably more like $140k without changing lifestyle. $4m is what I'm hoping for. We can always delay retirement as well — neither of us hates our jobs (although who knows in 15 years!).
Gotcha. Sorry my numbers were rough, I thought you were in the 32% bracket. It is still always great to save as much as possible and retire early!

Just a traditional IRA. I don't have a 401(k). Although the past two years I haven't been able to fund it fully because we're hitting the IRA income limits.
Gotcha. Makes sense, as above thought you were in the 32% bracket which would put your income over the 193k limit.
Topic Author
dale77
Posts: 40
Joined: Mon Aug 05, 2019 11:05 pm

Re: Portfolio review -- early 40s

Post by dale77 »

Oops, mistake on my end: we're in the 24 percent bracket, not the 32. I misread the chart I got my bracket info from. (I hate to admit I don't know that info offhand.) I've edited my first post.
renue74
Posts: 1893
Joined: Tue Apr 07, 2015 7:24 pm

Re: Portfolio review -- early 40s

Post by renue74 »

I'm 45 and ratcheted down to 65/35 AA last year and keep a 5% band for any changes. It all depends on your plans. 13 years is not that far away.

Your target is $4M and you have $1.3M. You invest $48K/year into your retirement.

Compound that out over 13 years @ 4% real return per year and that gives you about $3M.

http://www.moneychimp.com/calculator/co ... ulator.htm

I would suggest not having a separate emergency fund, but just using that as part of your investments. As others have noted, anybody can pay a "real" emergency with a credit card and then pull from investments within a few days.

I have 2 kids....14 and 17. I have had them in age based 529 plans ever since they were born. I just looked at their AA and the 14 year old is in 80/20 stock/bond and the 17 year old is in 90/10 bond/stock AA. That AA was set up by the 529 plan folks. It feels safe to me as we are close to using it.

Here's a link to my 529 plan allocations: https://futurescholar.com/savings-plans ... rect-plan/

Overall, you are doing great! (Don't pay off your house. You have a great rate.)
DWNY
Posts: 23
Joined: Fri Apr 06, 2018 9:22 am

Re: Portfolio review -- early 40s

Post by DWNY »

You're well on the way. The bond funds and Wellington are not tax efficient in your taxable account so I wouldn't add to them. If you're reinvesting dividends and capital gains in your taxable account I recommend turning off reinvestment. Then you can decide where you want that money to go (index stock fund?).

I had Wellington for 25+ years and after reading Bogleheads and the post on viewtopic.php?t=242137 I realized how much Wellington costs per year. I took advantage of TLH in 2018 to sell my Wellington holdings. As others have said, consider the cost of holding Wellington vs. selling now with 15% LTCG rate.
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