Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

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Topic Author
daheld
Posts: 1007
Joined: Wed Sep 13, 2017 8:14 am
Location: Midwest US

Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

Post by daheld »

Hi all. I posted a few months ago about my wife and I considering dropping Vanguard PAS and self-managing our retirement portfolio. We've dropped PAS and I have come up with a plan, and I'd like to just have a sanity check with what we're doing here. There are a few things we've decided that we're going to stick with: mainly, we're going to be using Vanguard Target Retirement funds in our Roths and in a Rollover IRA (all at Vanguard). We have about $25k saved in a 529 for son's college expenses. Will not save in 529 aggressively, but will target covering ~50% of expected college costs via 529, cash flow the rest. Details below:

Emergency funds: ~10-12 months split between PNC savings and Vanguard Money Market fund.
Debt: Mortgage $177k, 20 year fixed rate 3.25%. Refi'd in May 2020. Paying about $150/month extra and mortgage will be paid off in about 2037. Home purchased 2018 for $294,000. Do not plan on moving.
Tax Filing Status: MFJ
Tax Rate: 22% Federal, 6% State
State of Residence: MO
Age: 36 and 34. One child, 2 years old. Do not plan for more.
Income: $165,000, MCOL Midwestern city
Desired Asset allocation: 80% stocks / 20% bonds
Current yearly expenses: ~60,000/year

Retirement Portfolio Worth:
Retirement: ~$775,000 (includes $165k in taxable brokerage but do not intend to touch this til son starts college)

Current retirement assets
His TSP (20% of retirement portfolio):
36% C Fund, 11% S Fund, 25% I Fund, 28% F Fund
5% company match

Her 401k (36% of retirement portfolio):
3 index fund (50% S&P500, 25% Intl stock, 25% bond index fund)
6% company match

His Roth IRA at Vanguard (8% of retirement portfolio):
Vanguard Target Retirement 2040 (VFORX)

Her Roth IRA at Vanguard (11% of retirement portfolio):
Vanguard Target Retirement 2040 (VFORX)

His Rollover IRA at Vanguard (4% of retirement portfolio):
Vanguard Target Retirement 2040 (VFORX)

Taxable (21% of retirement portfolio):
72% VTSAX
28% VTIAX

Annual Contributions
$19,500 his TSP + 5% match
$19,500 her 401k + 6% match
$6,000 his Roth IRA
$6,000 her Roth IRA
$1,200 taxable
Total with matches: ~$63,000 per year (including employer matching)

Questions:

1. Our overall retirement asset allocation before making these changes was about 86/14. We'll be right around 81/19 after implementing the above portfolio. Is targeting 80/20 acceptable/in line with our ages and where we're at? I just kind of struggle with settling on an appropriate AA, particularly because I will have a pension as a federal retiree. I intend to stay in the federal service (while being fully aware of best laid plans...).

2. In light of the above portfolio, what is the best way to rebalance? I really want to keep it simple with the Target Date Funds in our Roths, so this basically just leaves the TSP/401k, as I shouldn't buy bonds in taxable, correct? Just check in on AA yearly and adjust 401k/TSP as necessary?

3. Anyone familiar with TSP, please comment on my TSP allocations. I have used L funds previously but recently reallocated into individual TSP funds to allow some more flexibility, particularly with rebalancing (i.e. question 2).

4. We plan to retire at 55 and 59, so in 19 and 25 years. How do we look, and what kind of timeline or glide path should I be thinking of in terms of making our overall retirement assets more conservative?

Thanks to all for any help.
Last edited by daheld on Mon Jan 11, 2021 1:52 pm, edited 1 time in total.
HomeStretch
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Joined: Thu Dec 27, 2018 3:06 pm

Re: Portfolio Review: Recent Changes/Sanity Check

Post by HomeStretch »

A 80/20 (equity/fixed income) asset allocation (AA) is reasonable in my opinion.

As you get closer to vesting in your pension, re-evaluate your portfolio AA but, more importantly, what % of your portfolio is in tax-deferred accounts. If you forecast that your retirement income (pension/SS/RMDs) will result in a higher marginal tax rate in retirement, you may want to shift from tax-deferred contributions to Roth/Taxable contributions to reduce future RMDs.

Consider holding all equity in your Roth IRAs (for example, VFIAX S&P 500) offset by higher bonds in your tax-deferred accounts to maintain your 80/20 AA. It will help slow the growth in your tax-deferred accounts plus give your Roth accounts higher expected tax-free growth.

Your plan to pay off your mortgage in 16 years makes sense as it will free up cash when your child enters college around the same time. Your mortgage rate is 3.25%. Rates have come down further. Have you looked into 15-year fixed no-cost refi rates? If you could get a rate in the 2.x% range, you might pay about the same monthly amount to payoff your mortgage in 15 years. Check recent posts in the BH mega refi thread for lenders/rates.
Topic Author
daheld
Posts: 1007
Joined: Wed Sep 13, 2017 8:14 am
Location: Midwest US

Re: Portfolio Review: Recent Changes/Sanity Check

Post by daheld »

HomeStretch wrote: Mon Jan 11, 2021 12:07 pm A 80/20 (equity/fixed income) asset allocation (AA) is reasonable in my opinion.

As you get closer to vesting in your pension, re-evaluate your portfolio AA but, more importantly, what % of your portfolio is in tax-deferred accounts. If you forecast that your retirement income (pension/SS/RMDs) will result in a higher marginal tax rate in retirement, you may want to shift from tax-deferred contributions to Roth/Taxable contributions to reduce future RMDs.

Consider holding all equity in your Roth IRAs (for example, VFIAX S&P 500) offset by higher bonds in your tax-deferred accounts to maintain your 80/20 AA. It will help slow the growth in your tax-deferred accounts plus give your Roth accounts higher expected tax-free growth.

Your plan to pay off your mortgage in 16 years makes sense as it will free up cash when your child enters college around the same time. Your mortgage rate is 3.25%. Rates have come down further. Have you looked into 15-year fixed no-cost refi rates? If you could get a rate in the 2.x% range, you might pay about the same monthly amount to payoff your mortgage in 15 years. Check recent posts in the BH mega refi thread for lenders/rates.
Thanks for your input. Currently all contributions to 401k and TSP are traditional, but I anticipate this will change at some point. I really would like to keep it simple with the Target Date funds in Roths and Rollover, but your point about higher returns in those accounts is well taken. I will think it over. And yes, we have paid the mortgage really aggressively, but we'd like to retire relatively young (ages 55 and 59), and the idea of having it completely paid off before this, and before our son is college aged, is really attractive to us.
Topic Author
daheld
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Joined: Wed Sep 13, 2017 8:14 am
Location: Midwest US

Re: Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

Post by daheld »

Bump. Input is welcome. Thanks.
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alec
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Joined: Fri Mar 02, 2007 2:15 pm

Re: Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

Post by alec »

Yeah, I suppose using the Roth IRAs for equities and pre-tax 401(k)'s for bonds likely makes sense. I imagine rebalancing would only take about 10 minutes a year buying/selling bonds/stocks in the TSP/401(k).

Other than that, it all looks pretty good.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair
Topic Author
daheld
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Joined: Wed Sep 13, 2017 8:14 am
Location: Midwest US

Re: Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

Post by daheld »

alec wrote: Mon Jan 11, 2021 9:14 pm Yeah, I suppose using the Roth IRAs for equities and pre-tax 401(k)'s for bonds likely makes sense. I imagine rebalancing would only take about 10 minutes a year buying/selling bonds/stocks in the TSP/401(k).

Other than that, it all looks pretty good.
Thanks. If other folks have perspective on the portfolio and my questions, I appreciate input.
Fishing50
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Joined: Tue Sep 27, 2016 1:18 am

Re: Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

Post by Fishing50 »

Not much to comment on, you are doing well.

I don't think you need a large emergency fund with high saving rate, substantial taxable assets, and darn near guaranteed income of a govt job. You could get that money invested. Big ERN explains better than I: https://earlyretirementnow.com/2016/05/ ... ency-fund/


80/20 is an appropriate asset allocation. We moved to 70/30 from 100 equities 6yrs ago, but we're on a rising equity glidepath now that an unexpected promotion increased our pension.

I too recommend all equities in Roth IRAs and taxable, so the only bond holdings would be in TSP and 401k. An annual rebalance would be simple. G fund is our only bond holding along with DW target date funds. At your age a mix of G and F Funds would be appropriate.

With dividends from taxable holdings and a pension, you'll probably have the possibility to retire at 55 and 59. As you get closer you can determine the overall portfolio withdrawal rate during early retirement. I think a higher withdrawal rate during the years preceding social security (probably best for lower earning spouse to take at 62) is acceptable risk with guaranteed pension income.

Roth TSP might be the right option until tax rates increase in 2026. https://thefinancebuff.com/most-tsp-par ... h-tsp.html
2yrs from military pension. 80 equites / 20 bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. | Gone Fishing At 52yrs old!
Topic Author
daheld
Posts: 1007
Joined: Wed Sep 13, 2017 8:14 am
Location: Midwest US

Re: Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

Post by daheld »

Fishing50 wrote: Wed Jan 13, 2021 11:19 am Not much to comment on, you are doing well.

I don't think you need a large emergency fund with high saving rate, substantial taxable assets, and darn near guaranteed income of a govt job. You could get that money invested. Big ERN explains better than I: https://earlyretirementnow.com/2016/05/ ... ency-fund/


80/20 is an appropriate asset allocation. We moved to 70/30 from 100 equities 6yrs ago, but we're on a rising equity glidepath now that an unexpected promotion increased our pension.

I too recommend all equities in Roth IRAs and taxable, so the only bond holdings would be in TSP and 401k. An annual rebalance would be simple. G fund is our only bond holding along with DW target date funds. At your age a mix of G and F Funds would be appropriate.

With dividends from taxable holdings and a pension, you'll probably have the possibility to retire at 55 and 59. As you get closer you can determine the overall portfolio withdrawal rate during early retirement. I think a higher withdrawal rate during the years preceding social security (probably best for lower earning spouse to take at 62) is acceptable risk with guaranteed pension income.

Roth TSP might be the right option until tax rates increase in 2026. https://thefinancebuff.com/most-tsp-par ... h-tsp.html
Thanks for this. I will make the change to equities in Roths and taxable when we rebalance. I went with the F fund for all my bond holding in TSP. I figured that the overall risk is low, and didn't necessitate going with the ultra-low risk of the G fund. I was previously in L2050, and my new TSP allocation essentially mimcs L2040 but without the G fund.

I don't disagree about the emergency fund. My wife is somewhat more cautious than I, and keeping the larger E fund is a compromise I'm willing to make.
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KneePartsPro
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Joined: Tue Dec 29, 2020 11:52 am

Re: Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

Post by KneePartsPro »

daheld wrote: Mon Jan 11, 2021 11:32 am
Questions:

1. Our overall retirement asset allocation before making these changes was about 86/14. We'll be right around 81/19 after implementing the above portfolio. Is targeting 80/20 acceptable/in line with our ages and where we're at? I just kind of struggle with settling on an appropriate AA, particularly because I will have a pension as a federal retiree. I intend to stay in the federal service (while being fully aware of best laid plans...).

2. In light of the above portfolio, what is the best way to rebalance? I really want to keep it simple with the Target Date Funds in our Roths, so this basically just leaves the TSP/401k, as I shouldn't buy bonds in taxable, correct? Just check in on AA yearly and adjust 401k/TSP as necessary?

3. Anyone familiar with TSP, please comment on my TSP allocations. I have used L funds previously but recently reallocated into individual TSP funds to allow some more flexibility, particularly with rebalancing (i.e. question 2).

4. We plan to retire at 55 and 59, so in 19 and 25 years. How do we look, and what kind of timeline or glide path should I be thinking of in terms of making our overall retirement assets more conservative?

Thanks to all for any help.
1) There is nothing unreasonable about 80/20.

2) Bonds in/not in taxable is not clear cut. Some say hold bonds in taxable and use as emergency fund. Others argue to hold bonds in tax-deferred for efficiency. Neither is wrong. Take home message is to balance entire portfolio according to your allocation regardless of where you hold bonds.

3) I am not familiar with TSP, L funds.

4) Generally speaking, I think you're headed in the right direction. Keep saving and investing. Manage your expenses. Hope for average returns. Stay the course.

Good luck!
I can tell you almost anything about artificial knees used in knee replacement, and almost nothing about investing.
Topic Author
daheld
Posts: 1007
Joined: Wed Sep 13, 2017 8:14 am
Location: Midwest US

Re: Portfolio Review: Recent Changes/New to Self Managing/Sanity Check

Post by daheld »

KneePartsPro wrote: Wed Jan 13, 2021 1:14 pm
daheld wrote: Mon Jan 11, 2021 11:32 am
Questions:

1. Our overall retirement asset allocation before making these changes was about 86/14. We'll be right around 81/19 after implementing the above portfolio. Is targeting 80/20 acceptable/in line with our ages and where we're at? I just kind of struggle with settling on an appropriate AA, particularly because I will have a pension as a federal retiree. I intend to stay in the federal service (while being fully aware of best laid plans...).

2. In light of the above portfolio, what is the best way to rebalance? I really want to keep it simple with the Target Date Funds in our Roths, so this basically just leaves the TSP/401k, as I shouldn't buy bonds in taxable, correct? Just check in on AA yearly and adjust 401k/TSP as necessary?

3. Anyone familiar with TSP, please comment on my TSP allocations. I have used L funds previously but recently reallocated into individual TSP funds to allow some more flexibility, particularly with rebalancing (i.e. question 2).

4. We plan to retire at 55 and 59, so in 19 and 25 years. How do we look, and what kind of timeline or glide path should I be thinking of in terms of making our overall retirement assets more conservative?

Thanks to all for any help.
1) There is nothing unreasonable about 80/20.

2) Bonds in/not in taxable is not clear cut. Some say hold bonds in taxable and use as emergency fund. Others argue to hold bonds in tax-deferred for efficiency. Neither is wrong. Take home message is to balance entire portfolio according to your allocation regardless of where you hold bonds.

3) I am not familiar with TSP, L funds.

4) Generally speaking, I think you're headed in the right direction. Keep saving and investing. Manage your expenses. Hope for average returns. Stay the course.

Good luck!
Thanks. Appreciate your input. TSP L funds are just target date retirement funds.
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