Early 30s Portfolio Review

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Topic Author
Havoner
Posts: 7
Joined: Mon Sep 14, 2020 8:44 pm

Early 30s Portfolio Review

Post by Havoner »

Income: $235,000-$260,000 depending on bonuses

Expenses:$100,000

Emergency funds: 1 year expenses

Debt: $54,000 Student Loan (Can pay off from emergency fund just sitting tight due to economic/work uncertainty)
$230,000 Mortgage @2.87%

Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal

State of Residence: KS

Age: 32 years/ 31 years

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: xx% of stocks

Current retirement assets
About $209,000

Taxable
Her ESSOP Stock
$2,000 (10% stock discount with a three month holding period allows a taxable 11% return over 3 months)

His Roth 401k
$40,000 Vanguard Total Stock Market Admiral (.04)
$5,000 Employer Stock

His Roth IRA at Vanguard
$40,000 Vanguard Total Bond Market Index ??

His IRA at Vanguard
$30,000 Vanguard Total Stock Market Index (.04)

His HSA at Vanguard
2,000 Vanguard Total Stock Market Index (.04)

Her 401k at Fidelity
$90,000 U.S. Large Company Stock Index Fund (0.10)
Contributions

New annual Contributions
$19,000 his Roth 401k ($5,360)
$19,000 her Roth 401k ($5,360)
$7,000 his HSA
$6,000 his IRA
$6,000 her IRA
$30,000 taxable (for retirement, not short term goals)

Available funds

Funds available in his 401(k) & HSA
Vanguard Mix

Funds available in her 401K
standard target date retirement accounts
Fidelity US Small/Mid Company Stock Index Fund(.045)
Fidelity LRG COMP STK INDEX (.01)
BOND INDEX (.02)
Multiple actively managed options


Questions:
1. My wife currently has access to a an ESSOP allowing a 10% discount for up to $32,000 should I focus on fully funding this and then pulling the money out every three months and moving it into our IRAs and other tax sheltered investments?

2. What is a good vehicle for the additional $30,000 per a year we are saving? We have thought about 529 accounts for our 2 young children but will still need some additional investments to put this into.

3. Should my wife take a $40,000 pay cut to have a job allowing her better work life balance and time with young children? Move from 2nd shift working 42 hours to 34 hours on 1st shift with no weekends.

Key Points

We are both high income professionals who enjoy our jobs and aren’t really focused on retiring early but my wife would like to work reduced hours and have more time with our young children.

I am a work horse and enjoy working longer hours and moving up the ladder. Would also be heavily interested in some active real estate investing at some point but have been very hesitant to jump into rentals in the current environment that is not landlord friendly.
User avatar
geerhardusvos
Posts: 1076
Joined: Wed Oct 23, 2019 10:20 pm
Location: heavenlies

Re: Early 30s Portfolio Review

Post by geerhardusvos »

Havoner wrote: Mon Sep 14, 2020 9:45 pm
Questions:
1. My wife currently has access to a an ESSOP allowing a 10% discount for up to $32,000 should I focus on fully funding this and then pulling the money out every three months and moving it into our IRAs and other tax sheltered investments?

2. What is a good vehicle for the additional $30,000 per a year we are saving? We have thought about 529 accounts for our 2 young children but will still need some additional investments to put this into.

3. Should my wife take a $40,000 pay cut to have a job allowing her better work life balance and time with young children? Move from 2nd shift working 42 hours to 34 hours on 1st shift with no weekends.

Key Points

We are both high income professionals who enjoy our jobs and aren’t really focused on retiring early but my wife would like to work reduced hours and have more time with our young children.

I am a work horse and enjoy working longer hours and moving up the ladder. Would also be heavily interested in some active real estate investing at some point but have been very hesitant to jump into rentals in the current environment that is not landlord friendly.
Welcome to the forum. Yes, your wife should reduce her hours to spend time with your children. 32 hours probably isn’t cutting down enough. My wife works 12 hours a week and its too much sometimes. Asset allocation looks good. Keep on investing! Spending $100K year in KS is a lot of money. You should look for opportunities to shave that down. That’s like spending $200,000 where I live. We spend $60k/year and we are similar in age and we do all the things we want to do. Guessing some of that might be childcare on your end. Having your wife or you raise your kids is ideal for many reasons. Pay off your student loans tomorrow. Use your taxable brokerage account for the other money you want to invest. Stick it in VTSAX. Google ESSOP options for more info on participation. Enjoy your family, don’t get too focused on work while the kids are young. Live a simple life, and invest the rest! Don’t overlook the wealth of information on the wiki.
VTSAX and chill
tashnewbie
Posts: 711
Joined: Thu Apr 23, 2020 12:44 pm

Re: Early 30s Portfolio Review

Post by tashnewbie »

Are both of you doing Roth 401k contributions, instead of traditional 401k? I'm assuming you have reasons for doing that and understand why. For someone in the 24% federal bracket, a lot of people would recommend traditional 401k, unless there are going to be specific circumstances that make your income in retirement put you in a higher bracket than you are now.

It's unclear if his "IRA" is pretax only or a combination of pre- and after-tax money. Would it make sense to transfer his pretax IRA into his 401k, assuming the IRA contains only pretax contributions and the 401k will accept an incoming transfer? Even if the IRA is a mix of pre- and after-tax money, it might make sense to see if his employer will accept a rollover of just the pretax amounts.

ETA: Maybe your designation of "his IRA" was a typo and it was meant to be "her Roth IRA." I see that you're contributing $6k per year into her Roth IRA, but I don't see the account listed.

It looks like your HHI straddles the point where you would need to use the backdoor method to contribute to Roth IRAs (I think the phase out range for MFJ is $196k to $206k MAGI), especially given that you're not doing traditional 401k contributions, which reduce your adjusted gross income (Roth contributions do not). If you earn on the higher end of your range in a given year, you'd definitely need to do backdoor conversions. If that's true, then any pretax IRAs would make that process more complicated, which is why it might be best for him to move that "IRA" into his 401k.

It's unclear whether the large cap stock index fund in her 401k has an expense ratio of .1 or .01. Either way, that's low cost.

May make sense to lean toward more stock in the Roth IRAs.
Topic Author
Havoner
Posts: 7
Joined: Mon Sep 14, 2020 8:44 pm

Re: Early 30s Portfolio Review

Post by Havoner »

Thanks for the advice guys just to explain the $100,000 expenses and why I am going Roth heavy right now it is because my two children cost about $25,000/year in childcare and my mortgage is on a 15 year rather than 30 year terms. Because of this my savings rate will probably be increasing significantly in the next 5-15 years. This being said since I am already maxed out on my tax advantaged retirement investments I will likely be putting back 20k-30k a year into taxable etfs and real estate. Since I actually enjoy work quite a bit while I want financial independence I really don't want to retire early this will likely result in some pretty large nest eggs and I plan on earning significantly more in my retirement and later years of employment.
tashnewbie
Posts: 711
Joined: Thu Apr 23, 2020 12:44 pm

Re: Early 30s Portfolio Review

Post by tashnewbie »

Havoner wrote: Tue Sep 22, 2020 10:25 am Thanks for the advice guys just to explain the $100,000 expenses and why I am going Roth heavy right now it is because my two children cost about $25,000/year in childcare and my mortgage is on a 15 year rather than 30 year terms. Because of this my savings rate will probably be increasing significantly in the next 5-15 years. This being said since I am already maxed out on my tax advantaged retirement investments I will likely be putting back 20k-30k a year into taxable etfs and real estate. Since I actually enjoy work quite a bit while I want financial independence I really don't want to retire early this will likely result in some pretty large nest eggs and I plan on earning significantly more in my retirement and later years of employment.
My earlier comment still stands w/r/t moving "His IRA" into his 401k (if it's allowed), which will make the backdoor conversion into Roth IRA easier for him.
cincyinvestor
Posts: 16
Joined: Sat Apr 28, 2012 2:08 pm

Re: Early 30s Portfolio Review

Post by cincyinvestor »

Looks pretty good!

Small thing, but only $2k in the HSA? I think that's typically the cash limit before investments can start to be made - is this just something brand new for you?

I'd think you want to max the HSA. Is there an HSA option for her as well?
Topic Author
Havoner
Posts: 7
Joined: Mon Sep 14, 2020 8:44 pm

Re: Early 30s Portfolio Review

Post by Havoner »

Yes just getting started in the HSA and I believe the 7k is the max with 3500 each but good call out It took me a year to catch on that that is really the best tax advantaged option to put stuff in.
User avatar
ruralavalon
Posts: 19236
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Early 30s Portfolio Review

Post by ruralavalon »

Contribution rate.
Income: $235,000-$260,000 depending on bonuses
. . . . .
New annual Contributions
$19,000 his Roth 401k ($5,360)
$19,000 her Roth 401k ($5,360)
$7,000 his HSA
$6,000 his IRA
$6,000 her IRA
$30,000 taxable (for retirement, not short term goals)
The maximum annual employee contribution to a 401k is $19.5k, so contributions could be increased a little.

Annual contributions of $87k plus $10.7k employer match is excellent (about 40% of income). When young the most important investing decision you can make is to establish a high rate of contributions. "Savings rate is the most important retirement savings decision, not only because of the math but because of the way it drives your financial mindset and habits. The basic raw stock/bond risk decision comes second. And the finer details--index or active, factors or total market, alts or no alts--are a distant third." Forum discussion on Jonathan Clements’ article "Show me the Money".




Asset allocation.
Age: 32 years/ 31 years

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: xx% of stocks
At age 31 and 32 I suggest about 20% in bonds or other fixed income investments (like CDs, savings accounts, money market fund). This is expected to substantially reduceportfolio 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";
3) Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio";and
4) White Coat Investor (9/23/2016), "In Defense of Bonds".
5) Ben Carlson (8/2/2020), "Why Would Anyone Own Bonds Right Now?"

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities", available as an archived pdf. 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). The diversification benefit has varied over time. (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.




Traditional vs Roth contributions.
Tax Filing Status: Married Filing Jointly
Tax Rate: 24% Federal

State of Residence: KS
I see that most of your tax-advantaged contributions (2 Roth 401ks and his Roth IRA) are Roth contributions. Will either or both of you be eligible for a substantial pension in addition to Social Security? Since you are in the 24% federal tax bracket traditional 401k contributions might be better.

For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

Because the tax code is progressive, when you withdraw from your 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension in addition to Social Security? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

Wiki article, "Traditional vs Roth".



Questions:
1. My wife currently has access to a an ESSOP allowing a 10% discount for up to $32,000 should I focus on fully funding this and then pulling the money out every three months and moving it into our IRAs and other tax sheltered investments?
I have no opinion.


2. What is a good vehicle for the additional $30,000 per a year we are saving? We have thought about 529 accounts for our 2 young children but will still need some additional investments to put this into.
Open a regular taxable account at a low cost provider like Vanguard of Fidelity, and invest in very tax-efficient stock index funds.

In a taxable account use very tax-efficient stock index funds. Wiki article "Tax-efficient fund placement".

At Vanguard I suggest using Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.04% or the ETF share class (VTI), and Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.11% or the ETF share class (VXUS). Stock index funds are also well suited to any type of account.

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.



3. Should my wife take a $40,000 pay cut to have a job allowing her better work life balance and time with young children? Move from 2nd shift working 42 hours to 34 hours on 1st shift with no weekends.
. . . . .
We are both high income professionals who enjoy our jobs and aren’t really focused on retiring early but my wife would like to work reduced hours and have more time with our young children.
That's reasonable on my opinion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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