Portfolio checkup, simplifying some stuff, a few questions

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Morik
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Joined: Tue Nov 25, 2014 12:26 pm

Portfolio checkup, simplifying some stuff, a few questions

Post by Morik » Tue Oct 08, 2019 5:38 pm

Hi Bogleheads,

I haven't been active on the forum for a while, but am still chugging along.

When I first went to passive investing, it was with a 3-fund portfolio (I think... could be misremembering). Over time I nerded a bit and tried some slicing/factor tilts. I also sent some money to lending club (roughly 0 nominal return, I'm almost back out of it).
As time went on I went back to a simpler portfolio.
Up to now, I have been separately tracking my pre-tax vs post-tax tax-advantaged assets, with a guessed-at avg withdrawal tax rate applied to the pre-tax holdings. After some more thought, I've decided to stop doing this as it adds complication to my life (updating my current holdings and rebalancing are both harder doing this, though not significantly so, but enough to be annoying).

Age: 37
Spouse: 36

Emergency fund:
Tier 2: $60k (well, a bit more now with the interest) in ibonds, which is ~5 months expenses. I think I will add another $20k to this this year, maxing out our purchases for the year.

Tier 1: Currently ~$120k in cash, held in ally savings right now. I am going to move it to a 2.4% APY bank. I don't like to drop liquid cash below
3 months expenses, but this is more like 10 months right now. $20k of it will go to ibonds. I haven't decided what to do with the rest yet--our taxable investment account was drawn down to 0 when we bought our current house a couple years ago. (So no taxable investments right now.) We've been spending a lot on home improvements (and are spending more, as shown below). Our liquid cash position is starting to build back up though, so I should probably start thinking about financial goals and figure out whether to put it towards retirement, or if there are any shorter term goals that I should allocate it differently (more conservatively) for.

Other cash: ~$120k, earmarked for some home improvements taking place over the next 6 months or so. (Also held in an Ally savings account, I also plan to move this to a 2.4% account instead of the 1.9% Ally has)

Debt: $565k mortgage (3.875%, matures 2033). ($5.5k monthly, including escrowed taxes/insurance.)

Current retirement portfolio:
Total assets: ~$1.1m

Current annual contributions (and continuing to max all of these vehicles each year):
- $28k -> Traditional 401k (includes employer match)
- $27.5k -> Roth 401k (conversion via aftertax 401k)
- ~$23k -> 403b (includes employer match)
- $12k -> Roth IRA (via backdoor conversion for me + spouse)
- $7k -> HSA (includes $2k from employer). (We aren't drawing this down for medical expenses now, will let it grow & use for medical later in life.)

Current holdings:

Roth IRA 1: $117k VTSAX
Roth IRA 2: $76k VTSAX

401k:
- $140k Vanguard Institutional 500 Index Trust
- $281k Vanguard Developed Markets Index Fund Institutional Plus Shares
- $70k Vanguard Emerging Markets Index Fund Institutional Plus Shares
- $86k Vanguard Institutional Total Bond Market Index Trust
- $45k Vanguard Real Estate Index Fund Institutional Shares

403b:
TDA contract: $62k TIAA Real Estate
RA Contract: $31k TIAA Real Estate
RC Contract:
- $12k TIAA Traditional (TPAing into small cap blend)
- $52k TIAA-CREF Small-Cap Blend Index Fund - Institutional Class
IA (TPA account): $63k TIAA Traditional (going to TREA in the RA contract)

HSA: $42k Vanguard Institutional 500 Index Trust

Lending club Roth IRA: $26k (drawing this down as the loans finish up, it will be a few more years before it is completely gone though).

Allocations:

39.75% US stock (Total US stock market in our Roth IRAs, S&P 500 in our HSA & my 401k (total market not available, extended market is available but I skip for simplicity), and TIAA cref small cap blend index fund (best available choice in 403b), which happens to balance out the S&P 500 almost perfectly to make total market allocation.)

32.5% International (55/45 US/Intl split, per market cap). (Vanguard Emerging Markets Index Fund Institutional Plus Shares + Vanguard Developed Markets Index Fund Institutional Plus Shares in an 80/20 ratio... I didn't set it up, my 401k recently switched from offering the total international fund, to splitting it to these two in an automated transaction. I can maintain the 80/20 going forward... though maybe for simplicity I should just swap it all to developed...)

12.75% real estate (2/3rds is TIAA Real Estate, 1/3 is Vanguard Real Estate Index Fund Institutional Shares)

15% Fixed income (combo of TIAA traditional, which we are in the process of getting out of over 10 years (started this year), and Vanguard Institutional Total Bond Market Index Trust)

(And a little left over in lending club in a roth IRA, which will be back at Vanguard once my current loans run their course in a few years.)

I decided to get out of TIAA traditional because I don't like illiquidity--if stocks crash hard, I want to be able to rebalance. I can get fixed income from other, more liquid investments. (I would probably still be at 10% fixed income if it weren't for TRAD; I upped my allocation so that I would actually have something to rebalance out of if stocks crash, instead of having no liquid fixed income assets to rebalance out of. It is probably time to start increasing the bond portion of my portfolio anyway though, so I won't go back down below 15, and may go up to 20 in a few years.)


Holdings by account:

Roth IRA 1:
- $118k


Questions:
1) After this year, is continuing to invest in ibonds (to use as part of my retirement bond allocation) reasonable? I am leaning in that direction.

2) Regarding the HSA, should I swap it over to bonds? (Swapping equivalent 401k bonds into equities.)
I ask because it occurs to me that in an emergency, if I need to access retirement funds, HSA is probably the best first bet (at least, up to the amount of out-of-pocket post-deductible medical expenses incurred while on the corresponding high deductible health plan) because it is withdrawn tax-free. (After reimbursing all such expenses incurred to date, next would be Roth IRA contributions & anything I can get out of the Roth 401k from previously converted after-tax 401k funds.)
So in a pinch, it would be better to have that HSA account in a safer investment, right?
(I do like having higher growth things in the not-to-be-taxed-again accounts, though the HSA is only not taxed again for medical expenses...)


3) Real estate--I'm just not sure I should be staying in it. I am not against it, per se, but I really only got in it in the first place due to the availability of TREA, and the fact that the 403b account options are limited...

There are several contracts. Here are the options for each.

TDA: ~$60k, no further contributions coming in on this contract. Options are:
(Name, expense ratio)
CREF Equity Index R1 (Variable Annuities) 0.47%
CREF Global Equities R1 (Variable Annuities) 0.53%
CREF Growth R1 (Variable Annuities) 0.49%
CREF Stock R1 (Variable Annuities) 0.56%

CREF Bond Market R1 (Variable Annuities) 0.53%
CREF Inflation-Linked Bond R1 (Variable Annuities) 0.48%

TIAA Traditional

CREF Money Market R1 (Variable Annuities) 0.48%

CREF Social Choice R1 (Variable Annuities) 0.5%

TIAA Real Estate 0.83%


I have this TDA account in TIAA Real Estate, and don't really see any other attractive options other than TIAA Traditional (which, in this account, has the lower interest rate but can lump sum withdraw without going through a 10 year payout annuity).

RA: ~30k, I think another ~60k will be coming in via one of the transfer payout annuities moving us out of TIAA traditional.

Same options as above, but the TRAD in this account does not allow lump sum withdrawal.

RC: ~65k, further 403b contributions come into this contract.

American Funds Growth Fund of America - R6 (Mutual Funds) 0.33%
Calvert U.S. Large Cap Core Responsible Index A (Mutual Funds) 0.62%
DFA Emerging Markets Core Equity Portfolio Institutional (Mutual Funds) 0.52%
DFA International Core Equity Portfolio Institutional (Mutual Funds) 0.30%
DFA International Small Company I (Mutual Funds) 0.53%
DFA US Core Equity 2 Portfolio Institutional (Mutual Funds) 0.22%
DFA US Large Cap Value Portfolio Institutional (Mutual Funds) 0.37%
DFA US Small Cap Portfolio Institutional Class Shares (Mutual Funds) 0.37%
MFS Growth Fund Class R6 (Mutual Funds) 0.58%
PGIM Jennison Natural Resources Z (Mutual Funds) 0.87%
TIAA-CREF Small-Cap Blend Index Fund - Institutional Class (Mutual Funds) 0.06%
TIAA-CREF Social Choice Equity Fund - Institutional Class (Mutual Funds) 0.17%
Vanguard Mid-Cap Index Fund Admiral (Mutual Funds) 0.05%
Vanguard Real Estate Index Fund Admiral (Mutual Funds) 0.12%

DoubleLine Total Return Bond Fund Class I (Mutual Funds) 0.48%
Loomis Sayles Bond Fund Institutional Class Shares (Mutual Funds) 0.66%
PGIM Short-Term Corporate Bond R6 (Mutual Funds) 0.42%
TIAA-CREF High-Yield Fund - Institutional Class (Mutual Funds) 0.36%
TIAA-CREF Inflation-Linked Bond Fund - Institutional Class (Mutual Funds) 0.26%
Vanguard Short-Term Treasury Fund Investor (Mutual Funds) 0.20%

TIAA Traditional (Fixed Annuities)

BlackRock Global Allocation Fund Investor A Class Shares (Mutual Funds) 1.15%
TIAA-CREF Lifecycle 2015 Fund - Institutional Class (Mutual Funds) 0.50%
TIAA-CREF Lifecycle 2020 Fund - Institutional Class (Mutual Funds) 0.51%
TIAA-CREF Lifecycle 2025 Fund - Institutional Class (Mutual Funds) 0.52%
TIAA-CREF Lifecycle 2030 Fund - Institutional Class (Mutual Funds) 0.53%
TIAA-CREF Lifecycle 2035 Fund - Institutional Class (Mutual Funds) 0.54%
TIAA-CREF Lifecycle 2040 Fund - Institutional Class (Mutual Funds) 0.55%
TIAA-CREF Lifecycle 2045 Fund - Institutional Class (Mutual Funds) 0.56%
TIAA-CREF Lifecycle 2050 Fund - Institutional Class (Mutual Funds) 0.57%
TIAA-CREF Lifecycle 2055 Fund - Institutional Class (Mutual Funds) 0.59%
TIAA-CREF Lifecycle 2060 Fund - Institutional Class (Mutual Funds) 0.71%
TIAA-CREF Lifecycle Retirement Income Fund - Instl Class (Mutual Funds) 0.53%

The issues with keeping TREA are:
1) That I'm not sure how to count TREA in my asset allocation. It is certainly less volatile than, say, vanguard's REIT index. But it can crash pretty decently, so it isn't really a low risk fixed income fund either.
2) I don't really think I need to be in REITs, but had talked myself into them to go along with the TREA and have something to rebalance against. E.g., in my high risk allocation, do 85% stock, 15% real estate. Use Vanguard's REIT to fill in the rest of the 15% I can't get via TREA, and rebalance off of that.

One option is to just keep those first two contracts fully in TREA... perhaps counting 50% of it towards my US total market allocation, and 50% of it towards my fixed income allocation. (I'm really not sure the best way to account for it in my AA.)
The other option would be to say screw it, and just go over to the 0.47% ER equity index. (Or do TIAA traditional in the contract that has the liquid version of it, and the equity index in the other contract.)


Thanks in advance for any comments/advice/etc.
Last edited by Morik on Wed Oct 09, 2019 7:23 pm, edited 1 time in total.

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Tyler Aspect
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Re: Portfolio checkup, simplifying some stuff, a few questions

Post by Tyler Aspect » Tue Oct 08, 2019 11:45 pm

Real-estate is sector stock; it is a quite narrowly defined sector at that.

Image

Perhaps the best option at TIAA is to pick the equity index. At least it has the highest return potential to overcome its 0.5% cost. Reserve bond allocation to your 401k account.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Topic Author
Morik
Posts: 731
Joined: Tue Nov 25, 2014 12:26 pm

Re: Portfolio checkup, simplifying some stuff, a few questions

Post by Morik » Wed Oct 09, 2019 6:06 pm

I have given it some more thought, and will be replacing the real estate, dropping explicit allocation to it. (Leaving whatever real estate is held as part of the total stock market index.)

In the contract that can't hold the liquid form of TRAD, I will go for the equity index. But for the other contract, I'm not sure whether to go with the equity index, or to go with TRAD. It likely isn't going to be a big difference either way (the money in that contract is < 10% of the portfolio, and that contract isn't getting any new contributions).

Generally I would decide by analyzing which costs the least.
I can hold S&P 500 for 0.012% ER, and bonds for 0.025% ER.
So if TRAD were a mutual fund or variable annuity with a 0.3% ER, say, then I'd compare:
0.3% - 0.025% = 0.275% cost delta for fixed income/low risk.
And with the cref index at 0.47% ER,
0.47% - 0.012% = 0.458% cost delta for stocks.

Result: Holding the stock index in the 403b results in a higher overall portfolio ER, so better to hold the fixed income asset there.

However, TRAD doesn't have an explicit expense ratio. But I don't know that counting this as a 0% ER is really correct either.

This particular contract's flavor of TRAD:
- Has full liquidity
- Has a 3% minimum guaranteed rate during accumulation, 2.5% during payout
- Current contributions are getting 3%. It was 3.25% til 3/31/19.


After writing all this out, I think I am going to go with TRAD in that contract.


So to summarize, I plan the following changes:
- In my high risk allocation (currently 85% of portfolio), remove the 15% allocation to real estate. My high risk allocation will now just contain 55% US total stock market, and 45% international total stock market.
- In the 403b RA contract (with illiquid TRAD), I'll do the CREF equity index.
- In the 403b TDA contract (with liquid TRAD), I'll do TRAD.



Remaining questions:
1) I know I will eventually be saving for retirement outside of my tax advantaged accounts. Is it reasonable to use IBonds as part of my low risk allocation? (Or is it better to skip those and just hold stock index funds in my taxable accounts, leaving the low risk allocation fully in my tax advantaged accounts?)

1a) If yes to using ibonds for that, maybe I should continue buying the max each year... and then if I have too much, I can sell the older ones penalty free once they are 5 years old (with the low fixed rates of 0% or 0.1%). Thoughts?

2) Should my HSA be swapped over to bonds? I am leaning towards this, as it would be one of the least costly sources to draw from, if I needed to draw money out of tax-advantaged accounts. Having stocks in it means it may have taken a significant hit right as I need it, e.g. if the economy crashes and I lose my job.
I usually prefer putting the highest growth assets in post-tax accounts... but it is not that big a deal. I have a lot of equities in roth accounts already.

HomeStretch
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Re: Portfolio checkup, simplifying some stuff, a few questions

Post by HomeStretch » Wed Oct 09, 2019 6:27 pm

Consider buying I-Bonds with a 0.5% fixed rate by the end of October if you think the new 6-month fixed rate effective November 1 will be lower.

I like the HSA invested in 100% equities for highest expected tax-free growth. With an adequate emergency fund it’s unlikely you will need to prematurely withdraw HSA funds before retirement.

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Tyler Aspect
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Re: Portfolio checkup, simplifying some stuff, a few questions

Post by Tyler Aspect » Sun Oct 13, 2019 1:40 am

Morik wrote:
Wed Oct 09, 2019 6:06 pm
Remaining questions:
1) I know I will eventually be saving for retirement outside of my tax advantaged accounts. Is it reasonable to use IBonds as part of my low risk allocation? (Or is it better to skip those and just hold stock index funds in my taxable accounts, leaving the low risk allocation fully in my tax advantaged accounts?)

1a) If yes to using ibonds for that, maybe I should continue buying the max each year... and then if I have too much, I can sell the older ones penalty free once they are 5 years old (with the low fixed rates of 0% or 0.1%). Thoughts?

2) Should my HSA be swapped over to bonds? I am leaning towards this, as it would be one of the least costly sources to draw from, if I needed to draw money out of tax-advantaged accounts. Having stocks in it means it may have taken a significant hit right as I need it, e.g. if the economy crashes and I lose my job.
I usually prefer putting the highest growth assets in post-tax accounts... but it is not that big a deal. I have a lot of equities in roth accounts already.
You could buy some IBonds, but the majority of your taxable holdings should be stock index funds. Keep bumping up 401k bond percentage when the size of your taxable account grows. Your salary should grow in step to inflation, so that you should not need that much CPI indexed bonds at this time.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Topic Author
Morik
Posts: 731
Joined: Tue Nov 25, 2014 12:26 pm

Re: Portfolio checkup, simplifying some stuff, a few questions

Post by Morik » Wed Oct 23, 2019 10:55 am

My thought on the ibonds was something like:
- The yield, while lower than total bond market, is relatively close. (Right now, 1.9% for ibonds, vs 2.24% (SEC yield) for BND.)
- It accumulates federal tax-deferred, and is state tax free.
- There are purchase limits; so if I want more of this in the future for whatever reason, the only way would be to build up a position over time.
- I can swap things around later. E.g., if I am saving cash towards some shorter-term goal in the future (vs saving for retirement), I can put that cash into stocks (towards retirement) and shift the same value in ibonds over to the shorter term goal. (Or whatever combination--e.g., if I want to save for something in 10 years from now, and wanted a 50/50 equities/bonds allocation, half the cash could go to stocks 'for that goal', and half could go to stocks 'for retirement', and I would count that 1/2 value in ibonds against my short term goal. So retirement savings gets more stock and fewer bonds in taxable, and I'd exchange some stocks to bonds in tax-advantaged accounts to maintain retirement bond allocation.
- If I don't end up with any shorter term goals to save for, the ibonds would just continue to be part of my retirement portfolio.

It seems like the downside is that this costs me (vs holding just equities in taxable, and all bonds in tax-advantaged): BND yield - ibond yield - tax drag of equities in taxable + foreign tax credits I am forgoing.
E.g., if the yield gap is 0.34%, and tax drag of holding equities instead of ibonds is, say, 0.05% (I have no idea what the actual tax drag would be), and being able to claim foreign tax credits was, say, 0.1% (again no idea what reasonable #s are here), then the cost to me for doing this would be losing 0.39% vs the equity-only in taxable strategy, annually.
The upside is the increased flexibility due to having access to a larger pool of ibonds.

I will look into what typical tax drag costs. I should also consider the benefits of holding international stock in taxable--my understanding is that holding international in taxable will allow recouping some of the foreign taxes paid.

But it sounds like I'd probably be better off just doing international equities in my taxable account.

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