Natural savers but in the right places? Portfolio overview. Concise questions.

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jak3812
Posts: 3
Joined: Mon Aug 12, 2019 11:00 am

Natural savers but in the right places? Portfolio overview. Concise questions.

Post by jak3812 » Mon Aug 12, 2019 11:51 am

Natural savers. New(ish) to investing. Missing some of the basics as it pertains to our situation. Any help would be appreciated. Thanks!

Emergency funds: Yes. 6 months in MM.

Debt: None

Tax Filing Status: Married Filing Jointly

Tax Rate: 32% Federal, 0% State

State of Residence: Texas

Age: 52 (him), 45 (her)

Desired Asset allocation: Not sure

Portfolio size: 500K (as per assets below)

Total net worth: 1.1M (including assets below, home, cars, college, emergency fund)

Total annual contribution to accounts: 50K

Current retirement assets - Percentages are of total retirement portfolio.

Taxable
17% cash (available for investing, not including emergency funds) 
43% Betterment (Betterment allocation: 72% stocks, 28% bonds)
1% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)
1% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (.05%)
1% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (.11%)

His 403b at Fidelity
11% Fidelity Freedom 2040 (FFFFX) (.75%) 
Company match?  Yes.

His Roth IRA at Vanguard
3% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)  

His Rollover IRA at Vanguard
5% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%) 

Her SEP IRA at Vanguard
12% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%) 

Her Roth IRA at Vanguard
6% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%) 

———————————————

Questions:

1. Would you move funds from Betterment (it's not an IRA just General Investing) to Vanguard?

2. If we retire early, how do we take out 4% from our taxable accounts before retirement accounts? Do we just go to Transact > Sell Vanguard Funds > and choose $1667 ($5000/3) from each of the 3 funds?

3. Would you keep all college funds for oldest child in the MM since we’ll be using it over the next 3 years?

4. When saving, we understand extra cash should go first to our eligible tax advantaged accounts (403b, Rollover IRA, SEP IRA) then to taxable accounts (Vanguard Brokerage or Betterment General Investing). A few questions about that:
  • 4a. Is a backdoor Roth something we should do? We keep hearing about it but aren’t sure if it applies.

    4b. How do we know if we are contributing the max to the 403b? We do know employer monthly contribution is $150.00 and (his) monthly contribution is $518.34.

    4c. Can we contribute to the 403b, Rollover IRA and SEP IRA all at the same time?
5. It appears our 403b fund is one of the most expensive (.75%). Can we choose a cheaper one without consequences?

6. Anything else you would do differently?

———————————————

Other info that may or not be helpful:

Home value: 330k. No mortgage.

Annual expenses: ~60K

College: 160k saved. We have 4 kids. We’ve committed to provide $10,000 per child per year for college for a total of $40K each (thus the 160k). Our oldest is just beginning college, so the first 40k is in MM for immediate access. Then we have three 529s with 40k in each (we just recently opened those). We want our kids involved in the process of paying for college. We’re working together to reduce the cost and avoid loans by (a) taking dual credit / AP / CLEP in high school to graduate college in less than 4 years, (b) taking additional general ed courses at community college, (c) attending a state university (d) applying for scholarships (e) contributing money from their own jobs, etc. This plan has worked for Child #1 and we’re on track with Child #2. We’ll see if the trend continues.

HSA: None. We are part of a health sharing plan which has worked out well for us for many years.

Available funds for 403b:

FID FDM IDX 2005 INV (FJIFX)10/02/2009
0.12%
FID FDM IDX 2010 INV (FKIFX)10/02/2009
0.12%
FID FDM IDX 2015 INV (FLIFX)10/02/2009
0.12%
FID FDM IDX 2020 INV (FPIFX)10/02/2009
0.12%
FID FDM IDX 2025 INV (FQIFX)10/02/2009
0.12%
FID FDM IDX 2030 INV (FXIFX)10/02/2009
0.12%
FID FDM IDX 2035 INV (FIHFX)10/02/2009
0.12%
FID FDM IDX 2040 INV (FBIFX)10/02/2009
0.12%
FID FDM IDX 2045 INV (FIOFX)10/02/2009
0.12%
FID FDM IDX 2050 INV (FIPFX)10/02/2009
0.12%
FID FDM IDX 2055 INV (FDEWX)06/01/2011
0.12%
FID FDM IDX 2060 INV (FDKLX)08/05/2014
0.12%
FID FDM IDX INC INV (FIKFX)10/02/2009
0.12%
FID FREEDOM 2005 (FFFVX)11/06/2003
0.48%
FID FREEDOM 2010 (FFFCX)10/17/1996
0.52%
FID FREEDOM 2015 (FFVFX)11/06/2003
0.56%
FID FREEDOM 2020 (FFFDX)10/17/1996
0.60%
FID FREEDOM 2025 (FFTWX)11/06/2003
0.65%
FID FREEDOM 2030 (FFFEX)10/17/1996
0.69%
FID FREEDOM 2035 (FFTHX)11/06/2003
0.73%
FID FREEDOM 2040 (FFFFX)09/06/2000
0.75%
FID FREEDOM 2045 (FFFGX)06/01/2006
0.75%
FID FREEDOM 2050 (FFFHX)06/01/2006
0.75%
FID FREEDOM 2055 (FDEEX)06/01/2011
0.75%
FID FREEDOM 2060 (FDKVX)08/05/2014
0.75%
FID FREEDOM INCOME (FFFAX)10/17/1996
0.47%
FID FREEDOM INCOME (FFFAX)10/17/1996
0.47%
Last edited by jak3812 on Mon Aug 12, 2019 4:22 pm, edited 1 time in total.

Living Free
Posts: 341
Joined: Thu Jul 19, 2018 7:31 pm

Re: Natural savers but in the right places? Portfolio overview. Concise questions.

Post by Living Free » Mon Aug 12, 2019 12:57 pm

welcome to the forum jak3812!

Regarding question 5, yes I would change from the fidelity actively managed target date fund to the fidelity freedom index target date fund. It is considerably cheaper as you have noticed. I hold the fidelity freedom index fund in my HSA at fidelity.
To change you should re-direct future contributions to the freedom index fund and I'd also exchange the non index fund you already have for the index target date fund.

Topic Author
jak3812
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Re: Natural savers but in the right places? Portfolio overview. Concise questions.

Post by jak3812 » Mon Aug 12, 2019 1:04 pm

Thank you.
you should re-direct future contributions to the freedom index fund
Makes sense. Done.
I'd also exchange the non index fund you already have for the index target date fund.
Would this result in taxes due since it's selling then buying?
Last edited by jak3812 on Mon Aug 12, 2019 1:08 pm, edited 1 time in total.

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FiveK
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Re: Natural savers but in the right places? Portfolio overview. Concise questions.

Post by FiveK » Mon Aug 12, 2019 1:05 pm

jak3812, welcome to the forum.

1. Maybe. What fees are you paying now, and what would it cost in capital gain taxes to have the balance in your desired Vanguard funds?

2. Yes, it is that simple. You should have your cost basis set up for "specific lot identification" (or words to that effect) so you can minimize capital gains by selling the shares with the highest cost basis.

3. That's not unreasonable, assuming you are getting some decent return (2% or so) in the MM. You might also put the money in an interest-only 529 plan and save a few bucks on the tax-free interest there.

4a. If he can roll his existing pre-tax IRA money to his 403b, then his way is clear for the backdoor Roth process. Her SEP IRA will cause pro-rata issues - up to you to decide. See that wiki link for more.

4b. Because he is >50, his 403b maximum is $25K/yr. $518.34/mo is not the max. ;)

4c. Because the 403b is his and the SEP IRA is hers, they don't interfere with each other. See Can I Contribute to Both a SEP IRA and Traditional IRA? for more.

5. Yes, as far as taxes go. Changes within a 403b incur no taxes. Don't know if your 403b plan charges for sales or purchases.

6. See Investment Order for general suggestions.

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ruralavalon
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Re: Natural savers but in the right places? Portfolio overview. Concise questions.

Post by ruralavalon » Mon Aug 12, 2019 2:59 pm

Welcome to the forum :) .

It's good to see that you are debt free, natural savers, contributing to your tax-advantaged accounts, and primarily using low expense index funds.

Some additional information will be useful. You can simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.

1) What funds, stocks or other investments do you hold in the Betterment account? Please give fund or stock names, tickers, and expense ratios if any.

2) Does his 403b offer any funds besides the target date funds? Please give fund names, tickers and expense ratios.

3) Does his employer also offer a 457b plan? If so is his employer a government body or agency? Or is his employer a charity or non-profit?

4) About how much (in dollars) do you believe you might be able to contribute annually to investing (total, all accounts)?

5) What is her annual compensation?

6) Will his 403b plan accept a rollover of his rollover IRA?



jak3812 wrote:
Mon Aug 12, 2019 11:51 am
Age: 52 (him), 45 (her)

Desired Asset allocation: Not sure
At ages 52 and 45 I suggest about 40% 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".

I suggest around 20 - 30% of stocks in international stocks. 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 iut to about 40% bonds, 15% international stocks, and 45% 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.




Taxable
17% cash (available for investing, not including emergency funds) 
43% Betterment (Betterment allocation: 72% stocks, 28% bonds)
What funds, stocks or other investments do you hold in the Betterment account? Please give fund or stock names, tickers, and expense ratios if any.


1% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (.04%)
1% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (.05%)
1% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (.11%)
Bond funds are not very tax-efficient. In a taxable account I suggest using only very tax-efficient stock index funds. Wiki article "Tax-efficient fund placement".



His 403b at Fidelity
11% Fidelity Freedom 2040 (FFFFX) (.75%) 
Company match?  Yes.
I suggest switching to the lower expense index fund, FID FDM IDX 2040 INV (FBIFX) ER 0.12%.

Does his 403b offer any funds besides the target date funds? Please give fund names, tickers and expense ratios.

Does his employer also offer a 457b plan? If so is his employer a government body or agency? Or is his employer a charity or non-profit?

About how much (in dollars) do you believe you might be able to contribute annually to investing (total, all accounts)?


Questions:

1. Would you move funds from Betterment (it's not an IRA just General Investing) to Vanguard?
Yes, do an "in kind" transfer to avoid creating any unnecessary income tax liability.


3. Would you keep all college funds for oldest child in the MM since we’ll be using it over the next 3 years?
That would would be reasonable in my opinion.

4. When saving, we understand extra cash should go first to our eligible tax advantaged accounts (403b, Rollover IRA, SEP IRA) then to taxable accounts (Vanguard Brokerage or Betterment General Investing). A few questions about that:
  • 4a. Is a backdoor Roth something we should do? We keep hearing about it but aren’t sure if it applies.
He should do a backdoor Roth IRA, if he can rollover his rollover IRA into his 403b plan.

"A Backdoor Roth IRA is a technique for contributing to a Roth IRA when your income exceeds the contribution limit. There is no income limit on contributing to a nondeductible Traditional IRA, nor on converting a Traditional IRA to a Roth IRA" Wiki article, "Backdoor Roth IRA.".


4b. How do we know if we are contributing the max to the 403b? We do know employer monthly contribution is $150.00 and (his) monthly contribution is $518.34.
At age 52 the maximum annual employee contribution is $25k, so he could contribute $2,083.33 per month. The employer contribution does not count toward his maximum.

4c. Can we contribute to the 403b, Rollover IRA and SEP IRA all at the same time?[/list]
He can contribute $25k annually to his 403b.

She can also contribute to her SEP IRA. What is her annual compensation? Her contribution limit is up to 25% of compensation, but now with a maximum of $56,000. Boglehead's wiki, "SEP IRA".

5. It appears our 403b fund is one of the most expensive (.75%). Can we choose a cheaper one without consequences?
Yes.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
jak3812
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Joined: Mon Aug 12, 2019 11:00 am

Re: Natural savers but in the right places? Portfolio overview. Concise questions.

Post by jak3812 » Mon Aug 12, 2019 5:03 pm

Thank you @FiveK and @ruralavalon for the kind welcome and for the incredibly helpful information. You have no idea how much I appreciate your input.

I've been googling like crazy the last 2 months, trying to piece everything together. Obviously there are gaping holes in my understanding, but now I understand one reason I've gotten so confused along the way. I've been seeking out beginner info, but I think most beginner info is written with the assumption that beginners are average earners. I didn't comprehend all the twists that come with higher incomes (i.e. can't contribute to Roth IRAs, tax deductions go away on IRAs for us, etc.).

All that to say, your input has definitely filled in some holes. I appreciate your patience for my very, very basic questions. For example, my questions #2 and #4a, LOL. They are so much more clear now. My overthinking and was causing trouble. :)

@ruralavalon, I did edit my OP a bit to include some items per your suggestion, but thought I'd quickly summarize here while I have a minute.
1) What funds, stocks or other investments do you hold in the Betterment account? Please give fund or stock names, tickers, and expense ratios if any.
If I have the fortitude to parse this out, I may do so in the future. It is a huge mix of funds and EFTs and who-knows-what-else.

Suffice it to say, if I'm reading it right, the mix has an overall expense ratio of .10% BUT the Betterment service has an annual fee of.25% of our total balance. Now that we're actually paying attention, it seems to make sense to move over to Vanguard to avoid that fee. I'm just not sure if the tax loss harvesting makes it worth it. I need to explore this more...
2) Does his 403b offer any funds besides the target date funds? Please give fund names, tickers and expense ratios.
This I will have to look up further.
3) Does his employer also offer a 457b plan? If so is his employer a government body or agency? Or is his employer a charity or non-profit?
No. Non-profit.
4) About how much (in dollars) do you believe you might be able to contribute annually to investing (total, all accounts)?
50k
5) What is her annual compensation?
75k + owner draws totaling 60-70k
6) Will his 403b plan accept a rollover of his rollover IRA?
and
If he can roll his existing pre-tax IRA money to his 403b (from @FiveK)
While it's labeled a "rollover IRA" in Vanguard, it's actually an amalgamation of old employer accounts for various sources, plus some of our own contributions thrown in over the years. I can't imagine it would even qualify as rollover-able (??) into the 403b at this point. Also, we're anticipating he will no longer work for his current employer in a year or two.

---------

Using the information you both provided (and directed me to), I'm putting together my own "Investment Order" list that (I think) applies to our situation. Perhaps I will post that at some point to see if others might confirm my math/understanding.

Thank you again for all your help!

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FiveK
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Re: Natural savers but in the right places? Portfolio overview. Concise questions.

Post by FiveK » Mon Aug 12, 2019 5:22 pm

jak3812 wrote:
Mon Aug 12, 2019 5:03 pm
3) Does his employer also offer a 457b plan? If so is his employer a government body or agency? Or is his employer a charity or non-profit?
No. Non-profit.
See 457(b) - Bogleheads for what that means.
6) Will his 403b plan accept a rollover of his rollover IRA?
and
If he can roll his existing pre-tax IRA money to his 403b (from @FiveK)
While it's labeled a "rollover IRA" in Vanguard, it's actually an amalgamation of old employer accounts for various sources, plus some of our own contributions thrown in over the years. I can't imagine it would even qualify as rollover-able (??) into the 403b at this point. Also, we're anticipating he will no longer work for his current employer in a year or two.
All depends on how the 403b plan itself is written. Some will allow roll-ins from any pre-tax IRA. Only way to find out is to ask (and/or read the Summary Plan Description).
Using the information you both provided (and directed me to), I'm putting together my own "Investment Order" list that (I think) applies to our situation. Perhaps I will post that at some point to see if others might confirm my math/understanding.
Excellent plan!

Katietsu
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Re: Natural savers but in the right places? Portfolio overview. Concise questions.

Post by Katietsu » Mon Aug 12, 2019 5:49 pm

I am a bit confused about your income, including your ability to directly contribute to a Roth. The pieces I have read above seem to include:
$60 k expenses a year
$50 k savings a year - does this include retirement plan contributions?
$135 k or so for her income.

I did not see his income.

But a tax bracket of 32% would mean an income of over $345 k. And if you were maxing retirement that would mean you would be pushing 400k.

But a natural saver with an income of 400k and expenses of 60 k, would likely be planning on savings of more than 50 k a year.

You can contribute the maximum amount directly to a Roth well with an MAGI of $193,000 and a patial contribution with less than $203,000. Because the MAGI is calculated by subtracting things like your 403b contributions from your “real” income, your income might be $230 k, for instance, and you can still contribute to a Roth IRA directly.

So, I can you clarify some of these numbers? You might not need to do more than max out all workplace retirement plans and make direct Roth contributions to reach your savings goals.

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ruralavalon
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Re: Natural savers but in the right places? Portfolio overview. Concise questions.

Post by ruralavalon » Mon Aug 12, 2019 7:19 pm

jak3812 wrote:
Mon Aug 12, 2019 5:03 pm
@ruralavalon, I did edit my OP a bit to include some items per your suggestion, but thought I'd quickly summarize here while I have a minute.
ruralavalon wrote:]1) What funds, stocks or other investments do you hold in the Betterment account? Please give fund or stock names, tickers, and expense ratios if any.
If I have the fortitude to parse this out, I may do so in the future. It is a huge mix of funds and EFTs and who-knows-what-else.
The Betterment account is 43% of your portfolio. To make any progress in organizing your portfolio you have to deal with this. It is not something to put off.

If the Betterment account is a huge mess, then it's even more important to sort It out.



jak3812 wrote:
Mon Aug 12, 2019 5:03 pm
Suffice it to say, if I'm reading it right, the mix has an overall expense ratio of .10% BUT the Betterment service has an annual fee of.25% of our total balance. Now that we're actually paying attention, it seems to make sense to move over to Vanguard to avoid that fee. I'm just not sure if the tax loss harvesting makes it worth it. I need to explore this more...
It is not worth the 0.25% annual fee. You can do tax loss harvesting yourself for no cost.

Tax loss harvesting is really about tax deferral, and not outright tax savings. The benefit is fairly modest. "The bottom line, though, is simply this: tax loss harvesting (TLH) does have some economic benefit over time, although it’s driven not by the outright savings (typically measured by “tax alpha”), but instead by the economic value of tax deferral, which leads to modest but non-trivial economic benefits over time." Michael Kitces (12/03/2014), "Evaluating The Tax Deferral And Tax Bracket Arbitrage Benefits Of Tax Loss Harvesting".

Robo advisors like Betterment overestimate the benefit. "But those figures are vastly overstated and the reputed gains are based on flawed math, says one critic of the robo-advisers.

'Wealthfront’s calculation ignores two things: It ignores that these taxes are deferred and must be paid later, and that the maximum write-off for any one year is $3,000,' says Michael Edesess, mathematician and chief investment strategist at Compendium Finance, an investment adviser. 'Betterment’s number is better but still exaggerated.' ” Nerdwallet (04/16/2018), "How Bountiful Is Tax-Loss Harvesting? ".



jak3812 wrote:
Mon Aug 12, 2019 5:03 pm
ruralavalon wrote:2) Does his 403b offer any funds besides the target date funds? Please give fund names, tickers and expense ratios.
This I will have to look up further.

ruralavalon wrote:6) Will his 403b plan accept a rollover of his rollover IRA?
and
Fivek wrote:If he can roll his existing pre-tax IRA money to his 403b (from @FiveK)
While it's labeled a "rollover IRA" in Vanguard, it's actually an amalgamation of old employer accounts for various sources, plus some of our own contributions thrown in over the years. I can't imagine it would even qualify as rollover-able (??) into the 403b at this point. Also, we're anticipating he will no longer work for his current employer in a year or two.
The law permits a rollover of a traditional IRA into a 403b plan. See: 2019 IRS rollover chart

You need to check his 403b plan documents or ask HR to see if his 403b plan will accept a rollover. Some plans do, others do not. This will be important when it comes to his using the backdoor Roth IRA.

Please determine what other funds are offered in his 403b plan. It would be very unusual to have only target date funds offered. You need to have a plan for investing during the next year or two, even if he changes jobs then.


jak3812 wrote:
Mon Aug 12, 2019 5:03 pm
Using the information you both provided (and directed me to), I'm putting together my own "Investment Order" list that (I think) applies to our situation. Perhaps I will post that at some point to see if others might confirm my math/understanding.
Here is a general account funding priority that usually works well for many people (when there is no high interest debt or 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) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
3) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
4) 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".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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