A very simple situation but help is needed [How should I invest my 150k?]

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LivingFrugal
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Joined: Fri May 15, 2020 10:31 pm

A very simple situation but help is needed [How should I invest my 150k?]

Post by LivingFrugal » Fri May 15, 2020 11:40 pm

Hello all,

I'm a single male (never married, no kids) age 32 who lives in Connecticut. I have zero debt and I make about 50 to 60k gross income a year. I do not think I will ever get married and I"m not sure I'd like to ever own a home. I like the concept of being able to pick up my things and move anywhere at any time. However, If I ever did own a home I would try to have tenants to help pay the mortgage.

I have an emergency fund already in place and have about 150k (my life savings) I could invest in some manner.
The FIRE movement does appeal to me as my nature is frugal to begin with. I would consider retiring in another country that has a lower cost of living (such as South East Asia or Eastern Europe). I don't need much to live on and I'm in good health. However, I do worry about my health as a senior and being prepared for the associated costs.

I hesitate to write this forum post as I find investing complex and overwhelming. I'm not sure I will be able to answer the questions directed at me but hopefully I can do my best. I've been studying financial articles lately and educating myself but I feel I could spend a lifetime reading. I need to finally jump in and get in the game.

So I guess my question comes down to how should I invest my 150k?
Steps I'm considering:

1) I have a 401k at an old employer with 12k in a 100% cash/stable value account earning 0.98% interest. I'm thinking of transferring this to my new employers 401k with Fidelity. I'm in the AF TRGT DATE 2055 R6 (RFKTX) with Fidelity with ER 0.4%. I'm considering changing the RFKTX to FID 500 INDEX (FXAIX) as it's offered by my plan and has a 0.015% ER. I could then transfer the 12k into the FXAIX account as well.

2) Maxing out my 401k contribution all in FXAIX to get the 19,500 income tax deferral.

3) Opening a Roth or Traditional IRA (not sure which one?) and writing a check of 6k to it for 2019. Should I open one with Fidelity or Vanguard? I know Vanguard has funds with lower expense ratios but the customer service seems to be lacking. As a new investor I like that I can speak to Fidelity at any time of day and the service is excellent in my opinion. Any ideas on how I should invest the IRA money?

4) Putting the rest into a brokerage account. Again debating between Fido and Vanguard. I guess I will be investing for the next 30 years. I'm looking for passive investing (set it and forget it). This is appealing as it kind of takes some emotion out of it. I'm thinking 80% domestic stock (index fund) and 20% bonds. But perhaps I should just throw all my money in a target date fund. I'm considering going to an advisor but I don't think my situation is very complex.

Well any advice is appreciated. Sorry this was so long winded. I hope to update this as almost a form of a financial journal.

Jeff

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David Jay
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Re: A very simple situation but help is needed

Post by David Jay » Sat May 16, 2020 9:22 am

Welcome to the forum!

Let me deal with #3, hopefully others will comment on other items:

At your income level, I would definitely select a Roth. The money you put in (“contributions”) can be withdrawn without any tax consequences. This is important if you choose to stop working before age 59.5. You should do this every year that you have enough work income (you can’t contribute more than your work income in that year) to move a chunk of your life savings into Roth. All Roth growth is tax free if you follow the withdrawal rules (there are rules for the “growth” portion).

If you don’t know how to invest, I would strongly recommend the little pamphlet “If you can” by Bill Bernstein. Short but very solid. Link: https://www.etf.com/docs/IfYouCan.pdf

The Boglehead Wiki has lots of great information, the “Investing Startup Kit” would be great for you: https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

[edit] Fidelity or Vanguard is fine. Be aware that Fidelity has high expense and low expense funds, always look at the ER before investing if you choose Fidelity (example: Fidelity Freedom (date) Fund versus Fidelity Freedom Index (date) Fund).
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

bampf
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Re: A very simple situation but help is needed

Post by bampf » Sat May 16, 2020 9:31 am

Hi Jeff,

Welcome to the forum. Yes, this can seem complex and bewildering, but, one of the philosophical aspects of investing according to the boglehead way is to be humble in that no one knows much about the market and what it will do. Also, the complexity of yield and swaps and options and margins and p/e and and and is a full time job.

First:
1. Its really hard to beat the market consistently. Some people can do it for a time, but, they are either lucky or they have found a nugget of information that the rest of the market doesn't recognize (yet). I would suggest you not try and be that person.
2. Put your back in to figuring out an investment plan and write it down. It can be as simple as "I am going to max my tax advantage accounts every year, invest in low cost index funds, keep a portfolio balance of 80% stocks and 20% bonds/liquid cash and always buy into the market on Monday when I get paid." Write it down. Then do that.
3. The market will go up and down. Don't sweat it. Read Bob
4. Don't try to do too much. Don't try and be clever. Get rich slowly.
5. Read about the three fund portfolio. Actually read Getting started

Welcome! Great place to gain knowledge, humility and wealth.

terran
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Re: A very simple situation but help is needed

Post by terran » Sat May 16, 2020 9:42 am

Since your 401(k) is at Fidelity that's where I would open the IRA for the sake of simplicity. They actually have lower expense funds than Vanguard, but at that level it doesn't really matter either way (both are low enough).

I would counter the suggestion that you contribute to Roth IRA with the argument that based on your self professed frugality you'll likely be in a low tax bracket in retirement too. Depending on your exact income consider whether you can get under the limits for the Saver's Tax Credit by contributing some to a traditional IRA.

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David Jay
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Re: A very simple situation but help is needed

Post by David Jay » Sat May 16, 2020 9:42 am

bampf wrote:
Sat May 16, 2020 9:31 am
Actually read Getting started
Yeah, start here, it‘s the foundation. It actually links to the “Startup Kit” (my recommendation) part way through.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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David Jay
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Re: A very simple situation but help is needed

Post by David Jay » Sat May 16, 2020 9:47 am

terran wrote:
Sat May 16, 2020 9:42 am
I would counter the suggestion that you contribute to Roth IRA with the argument that based on your self professed frugality you'll likely be in a low tax bracket in retirement too.
The big problem with that suggestion is that Jeff can’t withdraw from the tIRA in early retirement without penalty (he says FIRE interests him). He is already maxing out his 401K so he is putting lots of money into tax-deferred savings.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

terran
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Re: A very simple situation but help is needed

Post by terran » Sat May 16, 2020 9:49 am

David Jay wrote:
Sat May 16, 2020 9:47 am
terran wrote:
Sat May 16, 2020 9:42 am
I would counter the suggestion that you contribute to Roth IRA with the argument that based on your self professed frugality you'll likely be in a low tax bracket in retirement too. Depending on your exact income consider whether you can get under the limits for the Saver's Tax Credit by contributing some to a traditional IRA.
The problem is that Jeff can’t withdraw from the tIRA in early retirement without penalty (he says FIRE interests him). He is already maxing out his 401K so he is putting lots of money into tax-deferred savings.
There are a number of options for withdrawing from a tax deferred account in early retirement (I'm planning to use the Roth conversion ladder): https://www.madfientist.com/how-to-acce ... nds-early/

dbr
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Re: A very simple situation but help is needed

Post by dbr » Sat May 16, 2020 9:49 am

Your asset allocation should be designed for all your long term investments as a whole and then things located in different types of accounts for best tax efficiency. An exception to that is that if you hold an emergency fund in cash or other short term fixed income assets in your taxable accounts, then your taxable account holdings might seem a little high in fixed income.* You might not hold any bonds in a taxable brokerage account otherwise.

*Some people just don't count the emergency fund in the asset allocation but I think a person should because it gives a clearer picture of what your holdings really are. If an emergency actually arises and you exhaust that fund then you also will redo your asset allocation plan.

livesoft
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Re: A very simple situation but help is needed

Post by livesoft » Sat May 16, 2020 9:59 am

I don't think a traditional IRA contribution would be tax deductible anyways, since the OP has access to a 401(k) which they are contributing to anyways. So the Roth IRA contribution as proposed is the way the go. That is, there is no actual choice to contribute to a traditional IRA anyways.

Also since the OP might want to retire early, the Roth is the better deal, isn't it? After all, contributions can be withdrawn without penalty, so 25 years of contributions could be withdrawn slowly over a few years during early retirement before age 59.5 if that's what was needed. It probably won't be needed though. Return of capital is tax-free and not reported on one's tax return, too.
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terran
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Re: A very simple situation but help is needed

Post by terran » Sat May 16, 2020 10:08 am

livesoft wrote:
Sat May 16, 2020 9:59 am
I don't think a traditional IRA contribution would be tax deductible anyways, since the OP has access to a 401(k) which they are contributing to anyways. So the Roth IRA contribution as proposed is the way the go. That is, there is no actual choice to contribute to a traditional IRA anyways.
With $60k income and a maxed 401(k) AGI is at most $40,500. A single filer with MAGI under $65k is eligible for a full IRA deduction when covered by a retirement plan at work.
livesoft wrote:
Sat May 16, 2020 9:59 am
Also since the OP might want to retire early, the Roth is the better deal, isn't it? After all, contributions can be withdrawn without penalty, so 25 years of contributions could be withdrawn slowly over a few years during early retirement before age 59.5 if that's what was needed. It probably won't be needed though. Return of capital is tax-free and not reported on one's tax return, too.
It depends. Early retirement tends to favor Roth because 1) it means you're planning to live on a small amount compared to current income or you wouldn't be able to retire early and 2) it gives you lots of time to Roth convert before other income streams (like social security come in to play. One thing about early retirement that can favor Roth is the possible need to ACA subsidies which is effectively another type of income tax, so Roth can help minimize income in retirement for that purpose.

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ruralavalon
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Re: A very simple situation but help is needed

Post by ruralavalon » Sat May 16, 2020 10:50 am

Welcome to the forum :).

It's great to see that you will make maximum annual contributions to both your 401k and an IRA. Establishing a high rate of contributions is half the battle, and you already plan to do that.

LivingFrugal wrote:
Fri May 15, 2020 11:40 pm
Hello all,

I'm a single male (never married, no kids) age 32 who lives in Connecticut. I have zero debt and I make about 50 to 60k gross income a year. I do not think I will ever get married and I"m not sure I'd like to ever own a home. I like the concept of being able to pick up my things and move anywhere at any time. However, If I ever did own a home I would try to have tenants to help pay the mortgage.

I have an emergency fund already in place and have about 150k (my life savings) I could invest in some manner.
The FIRE movement does appeal to me as my nature is frugal to begin with. I would consider retiring in another country that has a lower cost of living (such as South East Asia or Eastern Europe). I don't need much to live on and I'm in good health. However, I do worry about my health as a senior and being prepared for the associated costs.

I hesitate to write this forum post as I find investing complex and overwhelming. I'm not sure I will be able to answer the questions directed at me but hopefully I can do my best. I've been studying financial articles lately and educating myself but I feel I could spend a lifetime reading. I need to finally jump in and get in the game.

So I guess my question comes down to how should I invest my 150k?
Steps I'm considering:

1) I have a 401k at an old employer with 12k in a 100% cash/stable value account earning 0.98% interest. I'm thinking of transferring this to my new employers 401k with Fidelity. I'm in the AF TRGT DATE 2055 R6 (RFKTX) with Fidelity with ER 0.4%. I'm considering changing the RFKTX to FID 500 INDEX (FXAIX) as it's offered by my plan and has a 0.015% ER. I could then transfer the 12k into the FXAIX account as well.
With the very low expense ratio on the Fidelity index fund, the rollover of the old 401k into your current employer's 401k plan is a good idea.

How much is already in your 401k account with your current employer?


LivingFrugal wrote:
Fri May 15, 2020 11:40 pm
2) Maxing out my 401k contribution all in FXAIX to get the 19,500 income tax deferral.

It's is great to see that you will make the maximum annual employee contribution of $19.5k.

Fidelity 500 Index Fund (FXAIX) in your employer's 401k plan is an excellent choice for investing in U.S. stocks.

What bond funds are offered in your current employer's 401k plan? Please give fund names, tickers and expense ratios.

It would be better to also include your bond investment in your the 401k if possible. Bond funds are not very tax-efficient and ordinarily should be held in a tax-advantaged account, preferably a tax-deferred account like a traditional 401k account. Wiki article "Tax-efficient Fund Placement".


LivingFrugal wrote:
Fri May 15, 2020 11:40 pm
3) Opening a Roth or Traditional IRA (not sure which one?) and writing a check of 6k to it for 2019. Should I open one with Fidelity or Vanguard? I know Vanguard has funds with lower expense ratios but the customer service seems to be lacking. As a new investor I like that I can speak to Fidelity at any time of day and the service is excellent in my opinion. Any ideas on how I should invest the IRA money?
Either Vanguard of Fidelity would be fine. My own personal preference is Vanguard. My personal experience with Vanguard customer service has always been good.

If you want 24/7 customer service use Fidelity, especially since your current employer's 401k plan is with Fidelity. In my opinion it's useful and convenient to have all accounts at a single location.

Because you will make maximum annual contributions to your 401k, are single, earn about $50-60k gross, and are interested in early retirement I suggest using a Roth IRA.


LivingFrugal wrote:
Fri May 15, 2020 11:40 pm
4) Putting the rest into a brokerage account. Again debating between Fido and Vanguard. I guess I will be investing for the next 30 years. I'm looking for passive investing (set it and forget it). This is appealing as it kind of takes some emotion out of it. I'm thinking 80% domestic stock (index fund) and 20% bonds. But perhaps I should just throw all my money in a target date fund. I'm considering going to an advisor but I don't think my situation is very complex.
In my opinion it's useful and convenient to have all accounts at a single location, so use Fidelity.

In a taxable brokerage account use very tax-efficient stock index funds. Wiki article "Tax-efficient Fund Placement". Bond funds are not very tax-efficient.

At Fidelity for better tax-efficiency use exchange traded funds (ETFs) instead of regular Fidelity mutual funds. At Fidelity ETFs to consider using include:
1) Vanguard Total Stock Market ETF (VTI),
OR iShares Core S&P Total US Stock Market ETF (ITOT); and
2) Vanguard Total International Stock ETF (VXUS),
OR iShares Core MSCI Total International Stock ETF (IXUS).

At age 33 an asset allocation with 20% bonds is within the range of what is reasonable in my opinion, but as mentioned before bond funds are not very tax-efficient and ordinarily should be held in a tax-advantaged account like your 401k.

LivingFrugal wrote:
Fri May 15, 2020 11:40 pm
Well any advice is appreciated. Sorry this was so long winded. I hope to update this as almost a form of a financial journal.

Jeff
I agree with David Jay, Dr. Bernstein's short online book, "If You Can", is a good place to start your education. I suggest that you also read another one or two books on investing. Wiki article "Books: recommendations and reviews".

You can simply add new information to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps lot if all of your information is in one place.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
LivingFrugal
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Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by LivingFrugal » Sun May 17, 2020 10:28 pm

Thank you everyone for your helpful advice. Once I get more free time I will try to mull over each response in-depth which is what is deserved. My #1 priority right now is opening an IRA as the deadline for 2019 to contribute is fast approaching.

It seems a Roth would be better for me but I'm still not 100% sure on that. I honestly don't think my income will be much higher than it is now in 30 years. I think my income will be between 40-60k the rest of my life (just a guess). However, I do like that a Roth seems to be more flexible than a traditional. As stated, I don't plan to own a home but If an amazing real estate deal became available I like the option that I can draw on Roth contributions. I'm still thinking on which would be better for me (roth vs trad) at this time but will probably go with the Roth.

In general, I know it's easier to keep all investments with Fido but I'm not beholden to them. I know Vanguard is just as good so I have to see what makes the most sense. I'm trying to fill 3 buckets - my 401k, Roth/trad, and a brokerage account. I'm studying hard on how to do that (believe it's called asset allocation). For example, I've read for a Roth it may be best to just do a 100% index fund as growth could be good and obviously tax free growth is a great benefit.

I'm realizing I guess taxes play a huge role in all of this. Reading about taxes (tax loss harvesting, etc) and all this makes my head spin but I will soldier on. It doesn't seem taxes play a huge role for me at my income level (60k). I mean, I'm just trying to lower my income tax from 22% to 12% which I will accomplish if I can start maxing out a 401k.

On a side note, I looked more closely at my 401k options and although the FXAIX seems most appealing they do have a great bond fund in there as well. It's called FID US BOND IDX (FXNAX) with a ER of 0.025%. Perhaps I should put 80% in (FXAIX) and 20% in the FXNAX for diversification/protection. I tried to upload an image of all the funds with chrome but was unsuccessful.

In conclusion, I know I didn't add much update to this but I wanted to reply back within a reasonable time frame out of respect to the other posters. I will try to update as I go. I still stick to the premise that my situation is simple (although all this doesn't feel simple to me). 132k in the bank, 12k in my old 40lk, 6k in my new 401k with Fido. I hope to get things done incrementally.

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ruralavalon
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Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by ruralavalon » Mon May 18, 2020 10:42 am

LivingFrugal wrote:
Sun May 17, 2020 10:28 pm
Thank you everyone for your helpful advice. Once I get more free time I will try to mull over each response in-depth which is what is deserved. My #1 priority right now is opening an IRA as the deadline for 2019 to contribute is fast approaching.

It seems a Roth would be better for me but I'm still not 100% sure on that. I honestly don't think my income will be much higher than it is now in 30 years. I think my income will be between 40-60k the rest of my life (just a guess). However, I do like that a Roth seems to be more flexible than a traditional. As stated, I don't plan to own a home but If an amazing real estate deal became available I like the option that I can draw on Roth contributions. I'm still thinking on which would be better for me (roth vs trad) at this time but will probably go with the Roth.
You are right opening the IRA and making your contribution $6k for 2019 before the deadline is a priority. You can also go ahead and make your $6k IRA contribution for 2020.

If you want to be able to withdraw before she 59.5 then a Roth IRA is the right choice. Many people make traditional contributions to their 401k and use a Roth IRA.


LivingFrugal wrote:
Sun May 17, 2020 10:28 pm
In general, I know it's easier to keep all investments with Fido but I'm not beholden to them. I know Vanguard is just as good so I have to see what makes the most sense.

Either Vanguard of Fidelity will be fine. Since your employer's 401k plan is with Fidelity, and cannot be moved, I suggest Fidelity for the Roth IRA and taxable account.

LivingFrugal wrote:
Sun May 17, 2020 10:28 pm
I'm trying to fill 3 buckets - my 401k, Roth/trad, and a brokerage account. I'm studying hard on how to do that (believe it's called asset allocation). For example, I've read for a Roth it may be best to just do a 100% index fund as growth could be good and obviously tax free growth is a great benefit.

I'm realizing I guess taxes play a huge role in all of this. Reading about taxes (tax loss harvesting, etc) and all this makes my head spin but I will soldier on. It doesn't seem taxes play a huge role for me at my income level (60k). I mean, I'm just trying to lower my income tax from 22% to 12% which I will accomplish if I can start maxing out a 401k.

On a side note, I looked more closely at my 401k options and although the FXAIX seems most appealing they do have a great bond fund in there as well. It's called FID US BOND IDX (FXNAX) with a ER of 0.025%. Perhaps I should put 80% in (FXAIX) and 20% in the FXNAX for diversification/protection. I tried to upload an image of all the funds with chrome but was unsuccessful.

In conclusion, I know I didn't add much update to this but I wanted to reply back within a reasonable time frame out of respect to the other posters. I will try to update as I go. I still stick to the premise that my situation is simple (although all this doesn't feel simple to me). 132k in the bank, 12k in my old 40lk, 6k in my new 401k with Fido. I hope to get things done incrementally.
Fidelity US Bond Index Fund (FXNAX) ER 0.25% in the 401k is an excellent bond fund, very diversified with a very low expense ratio. I suggest that you make use of it in the 401k, along with Fidelity 500 Index Fund (FXAIX) ER 0.015%.

Are they any international stock funds offered in your employer's 401k plan? If so what are the fund names, tickers and expense ratios?


Tax-efficient fund placement.
You are right that a Roth IRA should preferably include only stock index funds, for better expected growth.

Bond funds are not very tax-efficient and ordinarily should be held in a tax-advantaged account, preferably a tax-deferred account like a traditional 401k account.

Generally a taxable brokerage account should use only very tax-efficient stock index funds.

Wiki article, "Tax-efficient fund placement".


Asset allocation.
One of your first decisions needs to be picking a desired asset allocation.

At age 33 I suggest about 20% 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";
2) Wiki article, "Asset allocation"; and
3) Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio".

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).

Morningstar (11/14/2019), "Revisiting the Case for International". "The case for diversifying internationally isn’t as strong as it used to be, especially if you’re looking for significant risk reduction or consistently better returns. From a portfolio perspective, we typically recommend a healthy international weighting--roughly 25% of total assets--for investors with longer time horizons."

That works out to about 20% bonds, 20% international stocks, and 60% 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.


Additional information needed.
If you will let us know what international stock funds are offered in your employer's 401k plan, and what asset allocation you might want to use, then we can suggest ideas on what funds to use in each of the three accounts.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
LivingFrugal
Posts: 4
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Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by LivingFrugal » Mon May 18, 2020 12:15 pm

Thanks for helping everyone. Below are all of the 401k options I have at work and the corresponding ER ratios. I'm thinking FXAIX (80%), FSGGX (10%), and FXNAX (10%) but I'm not definitive on that. Sorry I could not upload this in a more efficient way.

1) FID 500 INDEX (FXAIX)02/17/1988 Stock Investments Large Cap 0.015%

2) JPM US RSH ENH EQ R6 (JDEUX)01/03/1997 Stock Investments Large Cap 0.34%

3) FID EXTD MKT IDX (FSMAX)11/05/1997 Stock Investments Mid-Cap 0.036%

4) NB GENESIS R6 (NRGSX)09/27/1988 Stock Investments Small Cap 0.75%

5) DODGE & COX INTL STK (DODFX)05/01/2001 Stock Investments International 0.63%

6) FID GLB EX US IDX (FSGGX)09/08/2011 Stock Investments International 0.056%

7) AF TRGT DATE 2010 R6 (RFTTX)02/01/2007 Blended Investments* N/A 0.31%

8) AF TRGT DATE 2015 R6 (RFJTX)02/01/2007 Blended Investments* N/A 0.31%

9) AF TRGT DATE 2020 R6 (RRCTX)02/01/2007 Blended Investments* N/A 0.31%

10) AF TRGT DATE 2025 R6 (RFDTX)02/01/2007 Blended Investments* N/A 0.33%

11) AF TRGT DATE 2030 R6 (RFETX)02/01/2007 Blended Investments* N/A 0.35%

12) AF TRGT DATE 2035 R6 (RFFTX)02/01/2007 Blended Investments* N/A 0.37%

13) AF TRGT DATE 2040 R6 (RFGTX)02/01/2007 Blended Investments* N/A 0.38%

14) AF TRGT DATE 2045 R6 (RFHTX)02/01/2007 Blended Investments* N/A 0.38%

15) AF TRGT DATE 2050 R6 (RFITX)02/01/2007 Blended Investments* N/A 0.39%

16) AF TRGT DATE 2055 R6 (RFKTX)02/01/2010 Blended Investments* N/A 0.4%

17) AF TRGT DATE 2060 R6 (RFUTX)03/27/2015 Blended Investments* N/A 0.41%

18) PRU GUARANTEED INC Bond Investments Stable Value 0%

19) FID US BOND IDX (FXNAX)03/08/1990 Bond Investments Income 0.025%

20) METWEST TOT RTN BD P (MWTSX)03/31/1997 Bond Investments Income 0.37%

21) TMPL GLOBAL BOND R6 (FBNRX)09/18/1986 Bond Investments Income 0.64%

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ruralavalon
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Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by ruralavalon » Mon May 18, 2020 1:08 pm

Asset allocation.
LivingFrugal wrote:
Mon May 18, 2020 12:15 pm
Thanks for helping everyone. Below are all of the 401k options I have at work and the corresponding ER ratios. I'm thinking FXAIX (80%), FSGGX (10%), and FXNAX (10%) but I'm not definitive on that. Sorry I could not upload this in a more efficient way.


Fund selection and placement.
In selecting funds strive for a combination of both broad diversification (to reduce risk) and low expense ratios (to increase your net return). 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"; and
3) Taylor Larimore post, "Articles recommending the three-fund portfolio".

It is often better to coordinate investments among 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. It is not necessary to put all elements of the desired asset allocation in each account.

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.

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


For domestic stocks I suggest using a total stock market index fund where available. "In a 401(k) plan with limited choices one might very well opt for an S&P 500 index fund to serve as the domestic stock component of a three-fund portfolio." Wiki article, Three-fund portfolio, "Other considerations".

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 over 80% of the U.S. stock market investing in stocks of selected large-cap and mid-cap U.S. companies. In the 28 years since the creation of the first total stock market index fund the performance of the two types of funds has been almost identical. portfolio visualizer, 1993-2020. 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 index fund, then an 84/16 mix of the S&P 500 and extended market index funds will mimic the content of a total stock market index fund. Wiki "Approximating Total Stock Market" . In my opinion this is not necessary, it is optional if you prefer to do that.

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.I

You are right that a Roth IRA should preferably include only stock index funds, for better expected growth.

Bond funds are not very tax-efficient and ordinarily should be held in a tax-advantaged account, preferably a tax-deferred account like a traditional 401k account.

When investing in a taxable brokerage account stick with very tax-efficient stock index funds. Wiki article "Tax-efficient Fund Placement".

In a taxable brokerage account at Fidelity for better tax-efficiency use exchange traded funds (ETFs) instead of regular Fidelity mutual funds. At Fidelity examples of stock index ETFs to use include:
1) Vanguard Total Stock Market ETF (VTI) ER 0.03% or
iShares Core S&P Total US Stock Market ETF (ITOT) ER 0.03%; and
2) Vanguard Total International Stock ETF (VXUS) ER 0.08%, or
iShares Core MSCI Total Intl Stk ETF (IXUS) ER 0.09%.
These ETFs trade commission free at Fidelity.


Accounts.
LivingFrugal wrote:
Sun May 17, 2020 10:28 pm
132k in the bank, 12k in my old 40lk, 6k in my new 401k with Fido. I hope to get things done incrementally.
Of the $132k I suggest using $12k to make the 2019 and 2020 contributions to your new IRA.

Since you want to go incrementally, consider $60k now to a taxable brokerage account, and then adding the remaining $60k in stages (such as $10k per month on a pre-determined day every month for the next 6 months, or $5k per month for the next 12 months). Don't waste your time trying to guess when the best time to buy might be.

After that further $60k, about how much new money (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?

What is your tax bracket, both federal and state?



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 401k. Initial portfolio size = $90k. New annual contributions = about $????k. The asset allocation is: 10% bonds; 10% international stocks; and 80% domestic stocks.

The percentages given are percentages of the total portfolio, not of a given account. The suggestion is to switch both the existing balances and the new contributions to the funds indicated. All percentages and dollar amounts are rounded off, so may not add up exactly. Sometimes I state 00% to indicate funds you might want to add in the future.


Taxable account @ Fidelity (67% of total; $60k; adds $???? annually)
57%, $51k, Vanguard Total Stock Market ETF (VTI) ER 0.03%
10%, $9k, Vanguard Total International Stock ETF (VXUS) ER 0.08%

401k @ Fidelity, includes rollover of old 401k (20% of total; $18k; adds $19.5k annually)
10%, $9k, Fidelity® 500 Index Fund (>80% of U.S. stock market) (FXAIX) ER 0.015%
00%, $0k, Fidelity® Global ex US Index Fund (both developed and international markets, omits small-cap stocks) (FSGGX) ER 0.056%
10%, $9k, Fidelity® US Bond Index Fund (FXNAX) ER 0.25%

Roth IRA @ Fidelity (13% of total; $12k; adds $6k annually)
13%, $12k, Fidelity 500 Index Fund (>80% of U.S. stock market) (FXAIX) ER 0.015%


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 the 401k account.

Avoid exchanging between funds in the taxable account, which can create income tax liability.


Education.
A quick education for a beginning investor is Dr. Bernstein's free short on-line book, "If You Can". Also take a look at the Boglehead’s wiki, the "getting started" link I give below.

To go beyond the most basic I suggest that you also read one or two books on 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".

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
LivingFrugal
Posts: 4
Joined: Fri May 15, 2020 10:31 pm

Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by LivingFrugal » Thu May 21, 2020 10:37 pm

Ruralavalon, thank you very much for your thoughtful responses and feedback. It has been very helpful. This is a great community for a complete newbie 32 year old investor like myself.

So, a slight monkey wrench was thrown at me. I called FIdelity to increase my 401k contribution to 60% of my paycheck as I'm playing catchup to hit 1he 19.5k for the year. On the phone they tell me I have the option for a Roth 401k through work. I'm assuming it's the exact same investment choices but I will call to double check. I was in a slight rush at the time.

My original plan was 401k at work, Roth IRA, brokerage account. Should I alter it as the Roth 401k is available at work? Having the traditional 401k and the Roth IRA seemed like a good plan as it's a blend of the two and the traditional 401k lowers my taxable income. Just wondering people's opinion of this but I'm perfectly fine keeping it as my original plan just pondering.

Ruralavon, your idea to think of all the accounts as a single unified portfolio helped me a lot and makes sense. I was struggling with that. Your Example portfolio was also helpful to see an actual plan. Just curious, why not add the FSGGX now and if so how might it fit in percentage wise? I was trying to see how the VXUS and FSGGX were different.... It seems over the last 10-15 yrs international stocks haven't been as profitable as the US ones. I know it's recommended to have them as it diversifies a portfolio and opens up the opportunity for emerging markets. Humbly educating myself as I'm not against adding them.

On the 60k gross I will earn I can invest 48k of it. This is why I'm already living the fire movement but have been foolishly just saving it and not investing it where it can work for me.

Connecticut state income tax rates 2019-2020
Tax rate Single or married filing separately
5% $10,001–$50,000
5.5% $50,001–$100,000

I do have to pull out my tax return as the accountant has done this in previous years without my input. It's kinda been handled by parents but I plan to take a much more active role in this obviously. I usually get a refund which reading lately has shown me that might not be the proper way to do things. I checked my paychecks and for tax allowance it's listed as "1". I will research more into this as maybe I should change this.

I know I'm peppering the forum with lots of questions and require alot of hand holding but I'm learning alot as well. The education never ends :happy

terran
Posts: 1310
Joined: Sat Jan 10, 2015 10:50 pm

Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by terran » Fri May 22, 2020 7:32 am

LivingFrugal wrote:
Thu May 21, 2020 10:37 pm
...
My original plan was 401k at work, Roth IRA, brokerage account. Should I alter it as the Roth 401k is available at work? Having the traditional 401k and the Roth IRA seemed like a good plan as it's a blend of the two and the traditional 401k lowers my taxable income. Just wondering people's opinion of this but I'm perfectly fine keeping it as my original plan just pondering.
...
https://www.bogleheads.org/wiki/Traditional_versus_Roth would be worth a read. Here's another good read on the topic: https://www.madfientist.com/traditional ... -roth-ira/

User avatar
ruralavalon
Posts: 18241
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by ruralavalon » Fri May 22, 2020 9:25 am

LivingFrugal wrote:
Thu May 21, 2020 10:37 pm
Ruralavalon, thank you very much for your thoughtful responses and feedback. It has been very helpful. This is a great community for a complete newbie 32 year old investor like myself.

So, a slight monkey wrench was thrown at me. I called FIdelity to increase my 401k contribution to 60% of my paycheck as I'm playing catchup to hit 1he 19.5k for the year. On the phone they tell me I have the option for a Roth 401k through work. I'm assuming it's the exact same investment choices but I will call to double check. I was in a slight rush at the time.

My original plan was 401k at work, Roth IRA, brokerage account. Should I alter it as the Roth 401k is available at work? Having the traditional 401k and the Roth IRA seemed like a good plan as it's a blend of the two and the traditional 401k lowers my taxable income. Just wondering people's opinion of this but I'm perfectly fine keeping it as my original plan just pondering.
Will you receive a significant pension in addition to Social Security?

What is your profession or occupation?

What is your current federal tax bracket?

About what age do you expect that you might retire?

In your employer's 401k plan are you you permitted to invest in different funds in the Roth sub-account than in the traditional sub-account, or must your investments be the same in both?

LivingFrugal wrote:
Thu May 21, 2020 10:37 pm
Ruralavon, your idea to think of all the accounts as a single unified portfolio helped me a lot and makes sense. I was struggling with that. Your Example portfolio was also helpful to see an actual plan. Just curious, why not add the FSGGX now and if so how might it fit in percentage wise? I was trying to see how the VXUS and FSGGX were different.... It seems over the last 10-15 yrs international stocks haven't been as profitable as the US ones. I know it's recommended to have them as it diversifies a portfolio and opens up the opportunity for emerging markets. Humbly educating myself as I'm not against adding them.
A total international stock fund like Vanguard Total International Stock ETF (VXUS) ER 0.08%, or iShares Core MSCI Total Intl Stk ETF (IXUS) ER 0.09% includes both developed and emerging markets, investing in stocks of large-cap, mid-cap, and small-cap companies.

Fidelity® Global ex US Index Fund (FSGGX) ER 0.056% is less diversified, it omits stocks of small-cap companies. In my opinion that is not a very significant omission.

(You can use Morningstar's Instant X-Ray tool to see what a fund invests in.)

You are right that international stocks have not done well the last 10-15 years. That was not the reason for initially omitting Fidelity® Global ex US Index Fund (FSGGX) in the 401 account in my example.

In example I didn't include Fidelity® Global ex US Index Fund (FSGGX) in the 401k account initially only because the account is fairly small at this point, while the taxable brokerage account is large. In future years the 401k account will be a larger because it will be receiving large annual contributions, and in my opinion it would be wise to add Fidelity® Global ex US Index Fund (FSGGX) in the 401k account at some later date.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Rainmaker41
Posts: 525
Joined: Tue Apr 26, 2016 11:34 am

Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by Rainmaker41 » Fri May 22, 2020 11:58 am

On the question of pre-tax or Roth 401(k), I will point out that you probably will want to have some taxable income in retirement.

Assume for simplicity of illustration that tax laws do not change. You defer taxes at a federal marginal rate of, say, 12-22%. In retirement, your taxable distributions from the pre-tax 401(k) can fill up the standard deduction (0% bracket), 12% bracket, etc. If you only have Roth assets, the only taxable income would be Social Security, and even that maybe not much. So, you would have paid 22% tax to get the money after tax in order to contribute it to the Roth 401(k), but in retirement maybe all of your withdrawals combined don’t get you to that bracket even if they were all pre-tax.

I’m not explaining well, but my point is that you probably want some pretax to save taxes now as well as Roth to save taxes later for tax diversification and flexibility. A common approach is to fill up a pre-tax 401(k) and a Roth IRA.

User avatar
BL
Posts: 9409
Joined: Sun Mar 01, 2009 2:28 pm

Re: A very simple situation but help is needed [How should I invest my 150k?]

Post by BL » Fri May 22, 2020 2:06 pm

You have received a good portfolio suggestion above.

Simple is good.

All in 401k traditional and all 6k in Roth IRA is simple.

A simple 1-3 fund portfolio is fine if ERs are much less than 0.5%:

1. A one fund such as Target date (chosen by bond %) or Fidelity's four-in-one fund or target date INDEX fund, or:

2. S&P 500 (or total stock market) fund plus low-ER bond fund, or

3. S&P 500 plus bond fund plus international fund

Your plan can easily be changed for future contributions so don't worry too much right now, about whether it is perfect. "Good enough" is good enough. A few bonds/fixed income in other than 401k won't be perfect, but is probably good enough and offers some emotional "protection" when stocks crash.

Avoiding a balanced fund in taxable might be smart in case you wish to exchange for something else and would be taxed for the Capital Gains. Bonds usually don't have much capital gains but pay out taxable dividends regularly so not perfect for taxable account.

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