Seeking Advice on My Portfolio

[cubbyfruitbat]

Hi, my wife & I have been mindlessly investing for a couple decades now and have recently “seen the light” (thanks to Bogleheads) to proactively take charge of our money. We’re now saving & investing half of our income and would love to retire early. Hoping to get this group’s advice to make sure we’re on the right path.

Emergency funds: We have 6 months of living expenses in HYSA (4.25%)

Debt: 190k mortgage with 3.25% interest rate (19 years remaining); no other debt

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 8.75% State

State of Residence: OR

Age: 43/41

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20% of stocks

Total Portfolio: $910,000

Current retirement assets

His 401k
Currently invested in an aggressive “retireview” model for a retirement in 20+ years.
Company provides 6% match

His Roth IRA
Currently invested in lots of stocks by a financial advisor at Raymond James; want to transition to Vanguard to manage the funds myself.

His Rollover IRA
Currently invested in lots of stocks by a financial advisor at Raymond James; want to transition to Vanguard to manage the funds myself.

Her 401k
45% Vanguard 500 Index Admiral (VFIAX) (.04%)
21% Vanguard Total Intl Stock Index Admiral (VTIAX) (.12%)
14.5% Vanguard Small Cap Index Admiral (VSMAX) (.05%)
13.5% Vanguard Mid Cap Index Fund – Admiral (VIMAX) (.05%)
6% Principal Real Estate Securities Fd R-6 (PFRSX) (.81%)
Company provides 3% match

Her Roth IRA
Currently invested in lots of stocks by a financial advisor at Raymond James; want to transition to Vanguard to manage the funds myself.

Contributions

New annual Contributions
$23000 his 401k (+$7860 match)
$23000 her 401k (+$3450 match)

Available funds

Funds available in his 401k
PGIM Global Total Return R6 Fund (PGTQX) (.54%)
Baird Aggregate Bond Institutional Fund (BAGIX) (.3%)
Nuveen Core Impact Bond R6 Fund (TSBIX) (.36%)
Fidelity Short-Term Treasury Bond Index Fund (FUMBX) (.03%)
Nuveen Large-Cap Value Index R6 Fund (TILVX) (.05%)
Schwab S&P 500 Index Fund (SWPPX) (.02%)
Vanguard FTSE Social Index Admiral Fund (VFTAX) (.14%)
Nuveen Large-Cap Growth Index R6 Fund (TILIX) (.05%)
Allspring Special Mid Cap Value R6 Fund (WFPRX) (.7%)
Vanguard Mid-Cap Value Index Admiral Fund (VMVAX) (.07%)
MidCap S&P 400 Index Separate Account (PMFSX) (.05%)
Vanguard Mid-Cap Growth Index Admiral Fund (VMGMX) (.07%)
Vanguard Small Cap Value Index Admiral Fund (VSIAX) (.07%)
Fidelity Small Cap Index Fund (FSSNX) (.03%)
Vanguard Small Cap Growth Index Admiral Fund (VSGAX) (.07%)
Fidelity Emerging Markets Index Fund (FPADX) (.08%)
iShares MSCI Total International Index K Fund (BDOKX) (.1%)
Great Gray EuroPacific Growth Trust Class R1 (GEPABX) (.41%)
BlackRock Sustained Balanced K Fund (MKCPX) (.49%)
Fidelity Mid Cap Index Fund (FSMDX) (.03%)
Fidelity International Index Fund (FSPSX) (.04%)

Funds available in her 401k
American Funds EuroPacific Gr R6 (RERGX) (.47%)
Dodge & Cox International Stock X (DOXFX) (.52%)
Vanguard Total Intl Stock Index Admiral (VTIAX) (.12%)
Principal Real Estate Securities Fd R-6 (PFRSX (.81%)
Franklin Small Cap Value R6 (FRCSX) (.6%)
Vanguard Small Cap Growth Index Admiral (.07%)
Vanguard Small Cap Index Adm (VSMAX) (.05%)
JPMorgan Mid Cap Growth R6 (JMGMX) (.7%)
Vanguard Mid Cap Index Fund – Admiral (VIMAX) (.05%)
Vanguard Mid-Cap Value Index Admiral (VMVAX) (.07%)
JPMorgan Equity Income R6 (OIEJX) (.45%)
JPMorgan Large Cap Growth R6 (JLGMX) (.44%)
Vanguard 500 Index Admiral (VFIAX) (.04%)
Fidelity Total Bond K6 (FTKFX) (.3%)
Vanguard Total Bond Market Index Admiral (VBTLX) (.05%)

Questions:
1. We want to retire as early as possible (FIRE!) and have ramped up our savings rate to 50%. We’re going to end our relationship with our financial advisor and move our retirement investments from Raymond James to Vanguard. We’re interested in a simple portfolio, like the Bogleheads 3-fund portfolio, to keep things easy and mostly on autopilot. Are there any rules of thumb for how we spread out investments across our retirement accounts, as long as they ultimately hit our desired 70-30 AA? I’m especially confused on the best approach with the 401k’s since they don’t offer the “3 funds," as well as whether it matters investing in the same stock/bond index funds across accounts or if we should try to consolidate those investments into only one of the accounts if it pencils out.

2. One of the big things we’re missing (to achieve FIRE) is a non-retirement account, which we plan to start funding a year from now. Does a basic taxable account at Vanguard make the most sense? And once we open that account, how should we adjust our entire portfolio’s investments? After reading a couple Bogleheads books, it sounds like the big rule of thumb is to keep bond funds in the tax-advantaged accounts.

[lakpr]

@cubbyfruitbat,

Welcome to the forum.

You are carrying $190k mortgage at 3.25% rate, implies that your annual interest expense on the mortgage is $6,175. Add to it the max SALT deduction of $10,000, your itemized deductions are $16,175. Meanwhile the standard deduction for a MFJ couple is $29,200. Therefore you are very likely taking standard deduction on your tax returns, unless you are also donating gobs of money (more than $13k this year) to charity.

If you ARE donating that much to charities this year, read no further, accept my heartfelt admiration.

But if you aren't, the interest that you are paying on the mortgage is effectively an after-tax interest. To earn 3.25% after-tax on your investments, you must earn at least 3.25% / (1 - 24% - 8.75%) = 4.5%.

By investing in bonds while also carrying your mortgage debt (which is a negative bond; your mortgage lender is certainly treating your mortgage as a bond in their books), you are in essence borrowing at 4.5%, but turning around and lending it at 4.26% (which is the latest SEC yield on the Total Bond Fund).

Unless you are hurting for liquidity, and your post certainly does not suggest you are, why do you want to lose 0.25% per year?

Decide what you want to contribute every year towards your retirement assets. Then take 30% of that money, and paydown the mortgage instead. You are achieving the exact 70:30 stocks-to-bonds asset allocation, even though the rest of the investments are actually showing 100% equities.
================

The second suggestion I have is to have a conversation with your spouse, and agree between you whether you want to treat your combined portfolio as a single portfolio, OR you will each have individual portfolios and both will have a 70:30 exposure.

The reason I say this is because Her 401(k) has the lowest expense bond fund at 0.05%, whereas His 401(k) fund's choices are not so appealing with regard to bond funds. *IF* both 401(k)s are to be treated as parts of the single portfolio, this demands that -- eventually, when the mortgage is gone if you take my suggestion -- more bonds be placed in Her 401(k) account instead of His 401(k) account.

This is in effect, "stuffing more dogs" in Her 401(k) account than His 401(k) account, if you do want to make an efficient portfolio with the least overall expenses.

Absolutely make sure that both spouses are onboard with the plan.

===========================
In His 401(k) plan, I suggest (both now and eventually):
- Schwab S&P 500 Index Fund (SWPPX) (.02%)
- Fidelity International Index Fund (FSPSX) (.04%) [note that this is the least expensive international equities fund across both plans]

In Her 401(k) plan, I suggest:
- Vanguard 500 Index Admiral (VFIAX) (.04%)
- Vanguard Total Bond Market Index Admiral (VBTLX) (.05%) [ eventually ]

[cubbyfruitbat]

@lakpr,

Thank you so much for your quick and thoughtful response! I've read it about 10 times and it's given me some great new ideas I hadn't thought of. Right off the bat, I have some follow-up questions relating to your recommendations and would really appreciate more guidance to help me understand the "why" behind how this works. Thanks in advance!

1. You mention that Her 401(k) has the lowest expense bond fund at 0.05% (Vanguard Total Bond Market Index Admiral – VBTLX). Yet His 401(k) has a bond fund at 0.03% (Fidelity Short-Term Treasury Bond Index Fund – FUMBX). Help me understand why you are choosing VBTLX over FUMBX – why does the higher expense bond index fund win out?

2. Why do you favor putting bond funds in a 401(k) rather than any of the IRAs – does it make a difference?

3. Under your recommended scenario, help me understand the best way to invest in our two Roth IRAs and one tIRA that will be moved to Vanguard. For example, would it make a difference whether we invest in Vanguard Total International Stock Index Fund (VTIAX) in one of those accounts vs spread the VTIAX investments across all three of the accounts, as long as 20% of our total stock investments are international?

4. You point out that His 401(k) plan has Fidelity International Index Fund (FSPSX) with an expense ratio of .04%. As I consider VTIAX for our IRAs (see previous question), which has an expense ratio of .12%, would it actually make more sense to exclusively use FSPSX as the international fund that comprises our portfolio since the expense ratio is lower?

5. Is a taxable brokerage account, like at Vanguard, the best non-retirement account to contribute assets to if we want to make investments that can be accessed prior to age 59 1/2? And is the general rule of thumb to limit investments in taxable accounts to stocks rather than bonds? I'm thinking ahead to how I would need to readjust our investments if I open an account like this in a year or so.

[lakpr]

@cubbyfruitbat,

1) FUMBX is, as the name implies, a "short-term" bond fund. It invests only in bonds that have a maturity date not more than 4 to 5 years into the future, and the weighted average duration of all bonds in that fund is just about 3 years (Link).

Whereas the VBTLX available in Her 401(k), and all other bond funds in His 401(k) are more of "core" bond type, encompassing bonds of all maturity dates from short to intermediate to long.

2) I do not favor putting bonds in Roth IRAs. The whole deal with Roth is that, in exchange for upfront taxes, all future growth is tax free. Why would you want to choke off that growth by keeping slow-growth investments such as bonds in them?

Yes you can keep the bonds in Traditional IRAs. But with you being in the 24% tax bracket, you will not be able to contribute any more to the traditional IRAs. Furthermore, by keeping a hefty traditional IRA, you are locking yourself out of the Backdoor Roth IRA maneuver. [Please do click that link and read further]

The ABSOLUTE PRE-REQUISITE of the Backdoor Roth maneuver is that you should NOT have a Traditional IRA (or a Rollover IRA or a SIMPLE IRA etc.) at any brokerage. You can meet this pre-requisite by rolling over His Rollover IRA to His 401(k) plan (please check with the HR and/or your plan administrator, I bet they would allow it).

Once you "get rid of" the Rollover IRA thus, you simply make a $7k contribution to a Traditional IRA, and then immediately turn around and convert that to Roth IRA. Since the contribution to the Traditional IRA is on a post-tax basis (you are way above the limits to be able to deduct the tIRA contribution, being in 24% bracket), only the growth between the time you contribute to tIRA, and the time you convert that to Roth-IRA, will be taxable on your tax returns. Keep that time as short as possible.

Since I do not see a Her Traditional IRA or Her Rollover IRA in the original post, your wife can do this tomorrow.

3) I would earnestly recommend Fidelity or Schwab as the destination for your Roth IRAs and taxable accounts rather than Vanguard. Recent posts on this forum are indicating a lot of customer service issues with Vanguard ... and I say this as an existing Vanguard customer. One recent post (look for author "Random Poster") said that he (actually his mother-in-law) invested in a Vanguard brokerage account, but unable to withdraw a monthly amount from that account apparently because Vanguard places an unexpected hold on any funds received within the first year into the account. Hotel California theme, you can checkin anytime you want, but cannot ever leave ...

4) Yes, I would recommend all intended allocation to international equities across the portfolio, be invested in FSPSX in His 401(k). If you do open a Fidelity brokerage account you can invest in this in a taxable account yourself and get the same exact ER of 0.04% (than the VTIAX at 0.12%).

In a taxable account, you will be able to capture the international tax credit, which you cannot with the international equities being in His 401(k). But at the same time, international equities tend to distribute a lot more non-qualified dividends (more than twice as much as an S&P 500 fund), so you pay ordinary income taxes on those n-q dividends. Generally these two come out to be a wash, and if there is no real benefit or the benefit is just pennies, why not sidestep the tax-return angst altogether and house the international equities in a 401(k)?

The other possible home for the international equities is Roth IRA, but here is where your general outlook on the performance of international equities comes in. I expect the international equities performance to lag that of S&P 500 within my lifetime. Similar argument as in (1), except to a lesser extent ...

If instead, you are bullish on international equities (arguments such as they are more fairly valued than US stocks, lower P/E ratios than the S&P 500 index etc.) ... place the international equities within the Roth IRA and capture that expected outperformance tax free.

5) I think I partially answered this question in (3). Choose Fidelity or Schwab instead. As a general rule, anything that is NOT emergency funds or required for near-term daily expenses should be placed in stocks, as the tax rates on stocks are more favorable. The capital gains tax rates on stocks is only 15% + 3.8% NIIT = 18.8% for you (I am in the same 24% tax bracket, I am in NJ and my state tax rate is 6.64%) instead of 24%; you will be able to do tax loss harvesting if the stocks happen to decline.

To summarize, my general theme is:
- Only US stocks in Roth IRAs and Taxable Brokerage
- House all bonds and international equities in tax-deferred accounts like 401(k)/403(b)
- Choose the lowest expense fund(s) for the respective asset classes; thus FSPSX for international equities and VBTLX for bonds in your specific case
- Make sure you do NOT invest in the same exact mutual fund / ETFs between the Roth IRA and taxable account; this last recommendation comes from being able to avoid unintended wash sales.

Feel free to post back with additional questions if any.

[dbr]

Note another possible advantage of Fidelity or Schwab would be a local office if that applies where you live. I only went to my local Fidelity office once in 30 years, but when I did it saved a huge mess trying to get my signature on some papers. They were professional and helpful.

A downside is that Fidelity can try to upsell you to expensive advisory services and funds, but they never did that with me.

[lakpr]

A downside is that Fidelity can try to upsell you to expensive advisory services and funds, but they never did that with me.

Vanguard has been bothering me lately with trying to upsell their advisory services for 0.3% fee. Not much of a gain there to prefer Vanguard over Fidelity.

[bonesly]

I generally concur with most everything @lakpr said, so consider this commentary amplification.

1. We want to retire as early as possible (FIRE!) and have ramped up our savings rate to 50%. We’re going to end our relationship with our financial advisor and move our retirement investments from Raymond James to Vanguard. We’re interested in a simple portfolio, like the Bogleheads 3-fund portfolio, to keep things easy and mostly on autopilot. Are there any rules of thumb for how we spread out investments across our retirement accounts, as long as they ultimately hit our desired 70-30 AA? I’m especially confused on the best approach with the 401k’s since they don’t offer the “3 funds," as well as whether it matters investing in the same stock/bond index funds across accounts or if we should try to consolidate those investments into only one of the accounts if it pencils out.

There are two approaches: Mirroring (you each hold a separate portfolio that is 70/30) or Unified (you use all accounts as a single portfolio, which as @lakpr pointed out tends to be easier to execute Tax-Efficient Fund Placement and is likely to be simpler in terms of lower total holdings count, so less investments to track for rebalancing). As an example, let's just assume you each have $100K in your Roth IRAs, His 401k = $400K, and her 401k = $300K... this is how mirroring and unified might look. The Mirrored setup requires both of you hold int'l and bonds, but the unified setup has only the largest 401k hold those two so all other accounts just hold S&P-500, which reduces the holdings count from 8 to 6. That might not seem like much but it is simpler; still you have to do what works for both of you. I've suggested S&P-500 in all these accounts since 401k offerings rarely include a Total US Stock Market Index (TSM); you'll want TSM in your Taxable account and S&P-500 in all your tax-advantaged accounts, which will avoid Wash Sales.



A template sheet to do this kind of planning/rebalancing yourself is linked below.
Asset Allocation Sheet
AA Current and Proposed

2. One of the big things we’re missing (to achieve FIRE) is a non-retirement account, which we plan to start funding a year from now. Does a basic taxable account at Vanguard make the most sense? And once we open that account, how should we adjust our entire portfolio’s investments? After reading a couple Bogleheads books, it sounds like the big rule of thumb is to keep bond funds in the tax-advantaged accounts.

I prefer Vanguard (and am a customer of Van & Schwab), but Fidelity and Schwab likely have superior customer service if you need help from the brokerage. You can buy Vanguard ETFs at any brokerage, so as long as you're comfortable using ETFs rather than mutual funds, you're not locking yourself out of stock & bond fund choices by choosing Fidelity or Schwab over Vanguard (MMFs are unique to each brokerage). I don't like that Schwab's settlement fund pays ZERO interest, but if you setup automatic reinvestment of distributions into the funds that are paying those distributions, it shouldn't be a problem. Fidelity's money market rates are the lowest among those three (you can do better @Fido if you have a LOT of cash on hand that you don't plan to invest, but generally Vanguard has the best MMFs and I think Fido has the best customer service). Local offices don't matter to me, but that might be a decision factor for you: Vanguard has none; Schwab & Fido do (although Schwab offices can be franchises as reported by other posters).

Once you open a Taxable account somewhere, consider keeping your emergency fund (separate from your retirement portfolio) in the brokerage's highest yielding MMF that's available to you with the dollar amount of your EF. For retirement investing, as @lakpr said, you'd prefer to be all in stocks for Taxable and Roth accounts, and hold stocks & all your bonds in your Tax-Deferred (i.e., Trad 401k) accounts. That's the synopsis of the tax-efficient fund placement Wiki topic linked earlier. To avoid wash sales if you're holding S&P-500 in tax-advantaged accounts, you'll probably want a TSM index fund in the Taxable account (VTI is the TSM ETF from Vanguard that you can buy at any brokerage).

MMFs at Vanguard, Schwab, and Fidelity
Vanguard MMFs
5.30% Vanguard Cash Reserves Federal Money Market Fund (VMRXX, ER=0.10%, $3K min)
5.29% Vanguard Treasury Money Market Fund (VUSXX, ER=0.09%, $3K min)

Schwab MMFs
5.13% Schwab Value Advantage Money Fund® (SWVXX, ER=0.34%, $0 min)
5.01% Schwab Government Money Fund (SNVXX, ER=0.34%, $0 min)

Fidelity MMFs
5.04% Fidelity® Money Market Fund (SPRXX, ER=0.42%, $0 min)
4.97% Fidelity® Government Money Market Fund (SPAXX, ER=0.42%, $0 min)

You can find better rates at Schwab & Fido if you have over $100K to invest in a MMF.

----------
You didn't specifically ask about this but have you planned out your early retirement (FIRE) with a Monte Carlo analysis of how much you need to save and for how long to reach your goals with your desired asset allocation (70/30)? This is usually a fuzzy prediction with a range of possible outcomes ordered by likelihood; you pick a likelihood for a bad sequence of returns (less than 50th percentile) that you can live with.

I like Portfolio Visualizer's Monte Carlo and Financial Goals models, so if you haven't done this kind of assessment, it's likely worth learning about and doing. If you need help, let us know.

[cubbyfruitbat]

Thank you! This is so helpful. Here’s my plan for next steps (in priority order) based on everyone’s advice:

• Roll His Rollover IRA into His 401k (assuming this is allowed by Administrator)
• I’ve revised our asset allocation to 80/20 and will adjust investments in portfolio to reflect what is shown on the spreadsheet below. My spouse and I will treat our combined portfolio as a single portfolio. Per advice from @lakpr, will put a total of $75k annually toward retirement assets, with $15k of that (20%) going to extra mortgage payments and the remaining $60k in stocks in 401ks & backdoor Roths.
• Do backdoor Roth IRAs for both Him and Her ($7k each) this year and annually
• Invest $23k into both His 401k and Her 401k annually
• In later 2025, begin making contributions into a taxable account, at which point will reassess portfolio allocations.



Questions:

1. Do the above contributions and their order make sense? Is anything missing that should be considered?
2. As I consider where to put the IRAs and future taxable accounts, should the expense ratio of the three index funds be a deciding factor if those are the major funds we plan to invest in? For instance, I’m seeing that Fidelity has a lower ER than Vanguard and Schwab on their total stock market index fund, Fidelity’s international index fund is equal to Schwab and lower than Vanguard, and Fidelity’s bond index fund is highest between the three (but our bond investments will be in Her 401k).
3. His 401k will never have enough money in it for 20% of the overall portfolio’s assets to be in an international index fund (even after rolling His Rollover IRA into it). Therefore, I will make additional investments in VTIAX through Her 401k. Is this the right move, as opposed to making additional international investments through one of the Roth IRAs or the future taxable account?
4. How do I rebalance the portfolio down the road if the bond allocation is actually in extra mortgage payments? On the asset allocation sheet that @bonesly provided, should I somehow add a line for extra mortgage payments? For the time being on that sheet, I’ve made my target 80% US Stocks, 20% Int’l Stocks, and 0% Bonds. Or under this approach, am I only rebalancing between US and International Stocks?
5. How do I set up dividends to automatically reinvest?
6. @bonesly – to your comment about avoiding wash sales, once I have a taxable account are you saying that I’ll want to use TSM in it and use ONLY S&P-500 in the tax advantaged accounts? While I understand that TSM isn’t an option in our 401ks, would we still want to avoid having it in our Roth IRAs even though it is an option?
7. We’ve been making small monthly contributions toward 529 accounts for both of my kids (ages 10 & 8) since they were born. What is recommended for an asset allocation in accounts like these?
8. @bonesly – per your comments, can I expect the MMFs to do slightly better than a HYSA, even with the small fee? Is that why you’re recommending I move my emergency fund to it?

[lakpr]

Quick reply on question no. 6: yes, exactly.

(Will edit this post as I read through the latest post from @cubby).

First edit: as I read through the table, I see that you are proposing to invest in Total Stock Market in both Roth IRAs. I suggest S&P 500 index funds instead, and my rationale for this is that same reasoning as in Qn 6: wash sales rules. You want to sidestep them altogether, so you should not invest in TSM in both Roth IRA and taxable. The 401(k) and Roth can have the same funds, the taxable account alone cannot have any overlap with either. Since there is (usually) no TSM offered in 401(k) plans and only the S&P 500 funds are, easiest path is to choose S&P 500 also in Roth IRAs and TSM in taxable instead.

Second edit (Question 3): Yes, housing part of the international equities in VTIAX for now in Her 401(k) is fine. Eventually His 401(k) balance will grow enough to accommodate entire international equities allocation within FSPSX in His 401(k).

Third edit (Question 7): I would NOT start a taxable account until the kids 529 plans are fully funded. For someone in a 24% bracket, it is almost a written guarantee that your kids will not qualify for any need based aid. You will pay full freight. Full freight, even at state public universities, is running around $30k per year.

So you have a rather stiff target in front of you: $240k in 529 plans for both your kids. In today's money. And hope that the growth within the 529 plan will keep pace with tuition inflation.

$240k to be achieved in 96 months = $2500 per month to be set aside for 529 plans ($1250 each).

I would keep the asset allocation within the 529 plan to be 60:40 for now. Move closer to 40:60 when the respective kid reaches age 18, and hold steady at that allocation throughout the 4 years of college.

(I am a parent of twins who entered college this year, and the $30k figure is the expected contribution towards tuition and room and board and books, at Rutgers, state University of New Jersey, where I live).

Fourth edit (Question 4): the only rebalancing would be between US stocks and International stocks, until the mortgage is gone. Then (20% of) any future contributions -- which will presumably be higher since there will be no mortgage nut to be met every month -- will go towards bond funds, preferably within the 401(k) plan.

(Final edit to say I don't have anything further to add)

[bonesly]

I’ve revised our asset allocation to 80/20 and will adjust investments in portfolio to reflect what is shown on the spreadsheet below.

The spreadsheet you provided is 100/0 (with an 80% US stock and 20% Int'l stock split, but 0% bonds). Going from 30% bonds to 0% bonds seems like a pretty severe jump in portfolio volatility. I think you're using @lakpr's suggestion that your mortgage is like a negative bond, but to you it's a debt, not an asset and that asset allocation rebalancing sheet is about your investment assets. I would reduce that debt by prepaying the mortgage like you're planning, but I would not include it as a negative bond that is changing your asset allocation from 70/30 to 100/0. My suggestion is to treat your portfolio current allocation and proposed rebalance based on the dollar balances of your retirement accounts as shown on your statements. The comment about a negative bond is more motivational, in my view, to justify pre-paying the mortgage but is independent of your actual allocation among retirement accounts.

1. Do the above contributions and their order make sense? Is anything missing that should be considered?

What you're proposing generally seems fine, but you are suggesting S&P-500 in the 401k and TSM in the Roth IRA and that will likely cause wash sales when you get around to investing in Taxable. I previously said: "you'll want TSM in your Taxable account and S&P-500 in all your tax-advantaged accounts, which will avoid Wash Sales.".

2. As I consider where to put the IRAs and future taxable accounts, should the expense ratio of the three index funds be a deciding factor if those are the major funds we plan to invest in? For instance, I’m seeing that Fidelity has a lower ER than Vanguard and Schwab on their total stock market index fund, Fidelity’s international index fund is equal to Schwab and lower than Vanguard, and Fidelity’s bond index fund is highest between the three (but our bond investments will be in Her 401k).

It's not so much a factor for which funds to put in which accounts, but it is a factor in choosing the lowest-cost index that accurately tracks the index of interest. If you need an S&P-500 fund, then pick the one with the lowest ER that's available in that account. Same with Total Int'l Stock Index and Total US Bond Index. The limitation here is usually what's available in the 401k, since you can pretty much buy ETFs from any provider in the IRA accounts if they're cheaper than your brokerage's mutual funds & ETFs.

3. His 401k will never have enough money in it for 20% of the overall portfolio’s assets to be in an international index fund (even after rolling His Rollover IRA into it). Therefore, I will make additional investments in VTIAX through Her 401k. Is this the right move, as opposed to making additional international investments through one of the Roth IRAs or the future taxable account?

Yes... as you run out of space in one account to hold a particular asset class, you start allocating that class to a different account. Priority is keeping all bonds in a Tax-Deferred (Trad 401k) account, if possible (it's not always possible and municipal bonds in Taxable are an alternative if your 401k accounts are 100% filled with bonds and you still need more).

4. How do I rebalance the portfolio down the road if the bond allocation is actually in extra mortgage payments? On the asset allocation sheet that @bonesly provided, should I somehow add a line for extra mortgage payments? For the time being on that sheet, I’ve made my target 80% US Stocks, 20% Int’l Stocks, and 0% Bonds. Or under this approach, am I only rebalancing between US and International Stocks?

I'm suggesting that the "negative bond" is a motivational viewpoint and not a literal negative balance in the allocation spreadsheet. Subsequently, I'd suggest only counting the positive dollars in each retirement account's fund holdings and rebalancing to your target on the actual balances you have in retirement accounts (not counting the mortgage balance which is a debt, not an investment asset).

5. How do I set up dividends to automatically reinvest?

There should be some option on your brokerage's website. Use their search function. If you can't find it tell us which brokerage you're dealing with and someone that has accounts there can likely walk you through it, or just call the brokerage and ask for help (expect a long wait-time if you call Vanguard, but if Van is where you have a question I can look that up for you).

6. @bonesly – to your comment about avoiding wash sales, once I have a taxable account are you saying that I’ll want to use TSM in it and use ONLY S&P-500 in the tax advantaged accounts? While I understand that TSM isn’t an option in our 401ks, would we still want to avoid having it in our Roth IRAs even though it is an option?

Yes, your Roth's should be S&P-500 if you're planning to eventually hold TSM in Taxable... Here's an example of good and bad setups; good = avoids wash sales; bad = exposed to wash sales.

7. We’ve been making small monthly contributions toward 529 accounts for both of my kids (ages 10 & 8) since they were born. What is recommended for an asset allocation in accounts like these?

Typically think like a TDF that's matched to the year your child starts college, with the date adjusted up or down based on your risk-tolerance. By the time a child starts college, or by their second year, you probably want to shift out of the TDF and into a MMF. If it's one 529 account for both kids, then that shift to a MMF would be when the youngest starts college.

8. @bonesly – per your comments, can I expect the MMFs to do slightly better than a HYSA, even with the small fee? Is that why you’re recommending I move my emergency fund to it?

Your HYSA is 4.25%. All those MMF yields that were listed are after the expense ratio is applied, so all of them will pay more than your HYSA. The ER mostly explains why Vanguard's MMFs have higher net yields than Fidelity's (Fidelity's have the highest ER so lowest net yield).

[lakpr]

I disagree that paying down the mortgage vs. holding bond funds is "motivational". It is pure / hard / cold mathematical fact that the mortgage is a negative bond (as I remarked up thread, the mortgage lender certainly views your mortgage as a positive bond, then groups your mortgage with a zillion others, creates a mortgage-backed-security, and then sells slices of the MBS off to investors; and that, by definition, is a negative bond in your own books).

Paying down the mortgage (by $15k as the OP proposes, 20% of $75k annually) is exact equivalent of taking the same amount of money and investing it in a CD that guarantees the 3.25% after-tax / 4.5% before tax. Stripped down to its essence, it is the equivalent of finding and investing in a 4.5% 19-year CD. Investing in a bond fund is a hail-mary; the indications are that you will get 4.26% for the next year, but no guarantee at all that at the end of 19 years you will get an overall return of 4.5% over the 19 years. In fact, indications are that that yield will be whittled down further ...

[bonesly]

and that, by definition, is a negative bond in your own books

They way most businesses tally their books is assets and liabilities with a net-outstanding balance as the difference of the two. The negative bond is a liability, not an asset. The asset allocation sheet is about assets, not liabilities.

We can agree to disagree if you actually are suggesting that debts (or specifically just mortgage debt) should be included as a negative asset reducing the total percentage of bonds one holds in their portfolio when calculating "current" AA and making "proposed" adjustments if current is off target by ±5%.

[dbr]

and that, by definition, is a negative bond in your own books

They way most businesses tally their books is assets and liabilities with a net-outstanding balance as the difference of the two. The negative bond is a liability, not an asset. The asset allocation sheet is about assets, not liabilities.

We can agree to disagree if you actually are suggesting that debts (or specifically just mortgage debt) should be included as a negative asset reducing the total percentage of bonds one holds in their portfolio when calculating "current" AA and making "proposed" adjustments if current is off target by ±5%.

Speaking for myself in this conversation:

I think this is another of those convoluted "what is this thing called" discussions. I like to keep things simple and I don't think "negative bond" is a thing.

But the context here is how do individual investors arrive at their asset allocation. I am not comfortable calling a debt an asset with a negative value, much less insisting that debt is specifically a bond asset.

Probably in the case of a mortgage when I had one the interest was an expense and the payment against principal caused the net equity to increase in the sense of net equity = gross equity - liability and the liability is decreased as payments are made. But real estate equity was never an investment asset for us in the sense of managing the asset allocation of a portfolio of stocks and fixed income.

[lakpr]

and that, by definition, is a negative bond in your own books

They way most businesses tally their books is assets and liabilities with a net-outstanding balance as the difference of the two. The negative bond is a liability, not an asset. The asset allocation sheet is about assets, not liabilities.

We can agree to disagree if you actually are suggesting that debts (or specifically just mortgage debt) should be included as a negative asset reducing the total percentage of bonds one holds in their portfolio when calculating "current" AA and making "proposed" adjustments if current is off target by ±5%.

Yes, I am suggesting (actually of the firm opinion) that one's "bonds" assets should be reduced by the "liabilities" of outstanding mortgage debt. As you suggested, we can agree to disagree and leave it there.

[cubbyfruitbat]

Thanks everyone. I've been busy reading books the last couple weeks and am ready to forge ahead. Here are some final updates and a few questions.

I confirmed with 401k Administrator that it's possible to roll His Rollover IRA into His 401k. Will initiate this in the morning.

Sticking with the 80/20 AA but have decided to include bonds in this mix. Updated the portfolio chart below. I’ve put placeholders showing $0 in His 401k and the Joint Taxable Account for when we start making investments there next year. Plan is to tackle both a taxable account and the 529 accounts at the same time. We’d also love to pay down the mortgage earlier, but these two accounts seem like more important priorities.

I’ve decided to open up an account with Fidelity to move all the investments to.

Questions:
1. Does the updated portfolio chart look good or are there any tweaks needed?
2. When I do the backdoor Roths, will the funds be added to His & Her existing Roth IRAs (soon to be at Fidelity)?
3. I plan to move my HYSA funds to a Fidelity money market fund. Does the MMF exist standalone or does it exist in a specific account that I hold at Fidelity?

[lakpr]

Except that I disagree you should start a taxable account at all until your mortgage is gone entirely ... (I think I made my arguments very clear earlier), this updated portfolio does look good.

Answer to question 2,: yes, once you convert a Traditional IRA contribution (which will be non deductible in your case, for both spouses), those funds get added to your existing Roth IRAs.

[bonesly]

1. Does the updated portfolio chart look good or are there any tweaks needed?

Looks good to me! Low-cost well-diversified index funds that meet your allocation to US stock, Int'l stock, and US bonds. Great job! No tweaks needed.

I do share @lakpr's idea to retire the mortgage early (I planned my pre-payments to be paid off at my retirement date), but at 3.25% it's on the cusp of being a lower priority than contributing to a Taxable account for retirement per the Wiki topic on Prioritizing Investments (which suggests that 3% is "low-rate, bottom priority"). The Wiki is a generic guide and should be tailored to what suits you and your partner, so if you both think contributing to Taxable vs pre-paying the mortgage is the best for your family, then that's the thing to do!.

2. When I do the backdoor Roths, will the funds be added to His & Her existing Roth IRAs (soon to be at Fidelity)?

You can direct the conversion into the existing Roth accounts, but that may reset the 5-year clock on that account. That clock doesn't matter once you reach age 59.5 and you can withdraw contributions after 1-year without penalty (if you really, really needed them), so as long as Fidelity doesn't have a restriction due to the 5-year clock thing, then it's simpler to have fewer Roth IRA accounts and I'd convert the Trad IRA backdoor contribution to your existing Roth IRA.

Fidelity's explanation of The Five Year Rule

The Internal Revenue Service (IRS) requires a waiting period of 5 years before withdrawing balances converted from a traditional IRA to a Roth IRA, or you may pay a 10% early withdrawal penalty on the conversion amount in addition to the income taxes you pay in the tax year of your conversion. (There is an exception to the penalty for withdrawals if you are age 59½ or older.)

But the clock starts on January 1 of the year you do the conversion—no matter when during the year it happened. So if you converted in December, the aging requirement might, in practice, be only a bit more than 4 years.

Important to know: The 5-year rule is counted separately for each conversion. The same rules apply to so-called backdoor Roth IRA conversions.

3. I plan to move my HYSA funds to a Fidelity money market fund. Does the MMF exist standalone or does it exist in a specific account that I hold at Fidelity?

The MMF is a "holding" that can be held within any account. You could hold a MMF in any of your Fidelity accounts (HSA, Roth IRA, 401k, 529, Taxable). So it's not standalone in that it has to be inside your Taxable account (since it was in a Taxable HYSA bank account).

Is this money you plan to keep in cash or invest in stocks in Taxable. If you intend to continue to hold cash that's typically not ideal tax-placement. Remember that Tax-Efficient Fund Placement suggests 100% stocks in Taxable and Roth and all your bond/cash needs in Tax-Deferred, which may also employ the concept of Placing Taxable Bond/Cash Needs in a Tax-Advantaged Account. However, tax-efficient placement optimization is not always possible (and sometimes is too much bother if the return on effort is too small, which is a personal threshold to do or skip).

[lakpr]

I do share @lakpr's idea to retire the mortgage early (I planned my pre-payments to be paid off at my retirement date), but at 3.25% it's on the cusp of being a lower priority than contributing to a Taxable account for retirement per the Wiki topic on Prioritizing Investments (which suggests that 3% is "low-rate, bottom priority"). The Wiki is a generic guide and should be tailored to what suits you and your partner, so if you both think contributing to Taxable vs pre-paying the mortgage is the best for your family, then that's the thing to do!.

Just wanted to point out that the SEC yield on total bond fund as of today, is 4.02%, and as in the first response to this thread, the mortgage is 4.5% in pretax terms.

By continuing to hold VBTLX while carrying the mortgage, the OP and spouse are losing 0.5% of the principal amount, or about $950 per year on $190k principal.

I absolutely agree with your last sentence though. If the OP and spouse determine that taxable is preferable to prepaying the mortgage, then that's the thing to do. Just keep at the back of their minds that the imputed cost of that alternative is approximately $80 per month.

[cubbyfruitbat]

Thanks all - appreciate your latest feedback.

The common thread for all of these questions is what is guiding our investment decisions, and for us, it's #1: wanting to retire early, ideally in 11 years at age 54, and #2 paying for our 2 kids to go to college in 8 & 10 years from now. Based on those goals, our investment priorities include: 1) annual maxing of His & Her 401ks and Her HSA, 2) a joint taxable account to pay for the first 5 years of retirement before age 59.5, 3) fully funding the two 529 accounts, 4) annual maxing of His & Her backdoor Roths, and 5) making additional payments on our mortgage so it's paid off 11 years from now at retirement.

Questions:

1. Based on our goals above, is there anything in our investment priorities that we should reconsider or are there other things to seriously consider?

2. I'm still not fully understanding the argument for prepaying on a mortgage as a substitute for investing in bonds, and I see there's not general agreement on the best approach. I'm erring on the side of doing both, essentially, unless there's a strong reason to repurpose the bond funds elsewhere without increasing risk to our portfolio.

2. @lakpr, your previous comments about the 529 accounts were helpful in that I don't anticipate getting need-based college aid. That said, I'm seeing a drastic difference in cost between 4 years of in-state public college and 4 years of out-of-state or private college. Given that, I'm thinking of saving $150k/child, which seems to be near the upper end of an in-state public college, but still a lot less than an out-of-state public or a private college (with no merit aid). I welcome any thoughts on whether we should consider saving a different amount.

2. @bonesly, you mentioned the possible reset on the 5-year clock on our Roths if we do the backdoor conversion. Would this, therefore, impact whether we're able to do a Roth IRA conversion ladder? And on that point, is there a way that we could do the Roth IRA conversion ladder for our first 5 years of retirement, or could that only be initiated from our 401ks 5 years after we've already retired?

3. @bonesly, to your question about MMF, the purpose of the money is 1) a 6-month emergency fund and 2) short-term savings that we intend to spend in the next year on various house projects & trips. Given that, what is your suggestion on where we put it?

Thanks!

[dogagility]

1. Based on our goals above, is there anything in our investment priorities that we should reconsider or are there other things to seriously consider?

I don't think so.

Use TPAW to model the track to your goal. https://tpawplanner.com/

I'm thinking of saving $150k/child, which seems to be near the upper end of an in-state public college, but still a lot less than an out-of-state public or a private college (with no merit aid). I welcome any thoughts on whether we should consider saving a different amount.

This is a common savings goal.

[lakpr]

2. I'm still not fully understanding the argument for prepaying on a mortgage as a substitute for investing in bonds, and I see there's not general agreement on the best approach. I'm erring on the side of doing both, essentially, unless there's a strong reason to repurpose the bond funds elsewhere without increasing risk to our portfolio.

Just remember 2022. Investments in VBTLX got hammered by 17%. I lost $82k between 2021 and 2022, and 3.5 years later I am still in the red.
If within the intervening 11 years between now and retirement, a similar episode happens, would you be able to absorb the loss? More importantly, would you be willing to WAIT 7+ years for that principal to be back to what it was? And also that's theoretical, not a GIVEN ... if yet another interest rate hike happens while you are in waiting mode, are you prepared to wait YET ANOTHER 7 years?

By contrast, if you pay down the mortgage by what you would be investing in VBTLX (or any bond fund, really), the principal pay down remains constant, and it is equivalent to buying a *CD*, whose principal does NOT vary. The interest continues to be "paid" for the remainder of your mortgage duration (but slightly less, such as -- if you prepay the mortgage exactly by the equivalent of 1 month payment towards principal, the mortgage term reduces from 11 years to 10y+11 months ... etc. The act of prepayment itself shortens the remaining duration on the mortgage; so you are buying a 10y+11 month CD not exactly a 11-year CD).

After my shellshocked year of 2022, I am very much biased at seeking and investing where there are GUARANTEED returns of some kind but does NOT put the principal at stake. I-bonds; CDs, multi-year guaranteed annuities (not suitable for someone younger than 59.5 though), TIPS, T-bills, EE bonds, etc.

If you must put your principal at stake in anticipation of returns, why not do that with the equities side instead? Why settle for meager returns of the bonds?

An interesting tidbit. For any asset allocation with stocks:bonds where bonds is less than 50%, it has the exact same returns (over the past 30+ years) with stocks percentage increased by 10% and the bonds replaced with cash (US treasury bills is the benchmark, but really any investment where the principal is guaranteed will do).

By that I mean, 70% stock + 30% bonds == 80% stocks + 20% cash; 60% stock + 40% bonds == 70% stocks + 30% cash, etc. This seems to breakdown a bit if the bond percentage desired is greater than 50% though.

If you are ending up with the same exact return investing in bonds, why not choose the second alternative of increasing equities slightly and then have a rock-solid bottom for your "FIXED INCOME" portion? FIXED *AND* INCOME, not just income but principal not fixed!

(There is ONE exception, during the GFC the stocks + cash did underperform slightly; in 2008. That was the only year this underperformance occurred)

I preach this almost ever other post for the past three years, I am batting zero so far (no converts at all to my side), but that's ok. You do you!

2. @lakpr, your previous comments about the 529 accounts were helpful in that I don't anticipate getting need-based college aid. That said, I'm seeing a drastic difference in cost between 4 years of in-state public college and 4 years of out-of-state or private college. Given that, I'm thinking of saving $150k/child, which seems to be near the upper end of an in-state public college, but still a lot less than an out-of-state public or a private college (with no merit aid). I welcome any thoughts on whether we should consider saving a different amount.

I would increase that amount to perhaps $160k. $35k can be rolled into a Roth IRA for the child eventually, per SECURE Act 2.0. The only requirement is that the funds must have been aged at least 15 years for this rollover to happen. To take advantage of this provision, I'd open a different-state 529 plan, drop $35k there, and forget about it for 15 years. The main 529 plan, I'd contribute until it reaches $120k to $125k in TODAY's money per child.
[And the reason I suggest a different-state 529 plan is because states tend to clawback tax benefits if funds are not used for higher education. By definition, there is no tax benefit by investing in a different state's plan -- UNLESS you are in Ohio which is an outlier, Ohio provides state tax benefit regardless of which state's 529 plan you choose to invest in]

That extra $35k might buy you an additional semester in a private college, if needed. Of course, you also must be prepared to cashflow the rest of the tuition.

[cubbyfruitbat]

I would increase that amount to perhaps $160k. $35k can be rolled into a Roth IRA for the child eventually, per SECURE Act 2.0. The only requirement is that the funds must have been aged at least 15 years for this rollover to happen. To take advantage of this provision, I'd open a different-state 529 plan, drop $35k there, and forget about it for 15 years. The main 529 plan, I'd contribute until it reaches $120k to $125k in TODAY's money per child.
[And the reason I suggest a different-state 529 plan is because states tend to clawback tax benefits if funds are not used for higher education. By definition, there is no tax benefit by investing in a different state's plan -- UNLESS you are in Ohio which is an outlier, Ohio provides state tax benefit regardless of which state's 529 plan you choose to invest in]

That extra $35k might buy you an additional semester in a private college, if needed. Of course, you also must be prepared to cashflow the rest of the tuition.

This is great to know and I will definitely follow your recommendation. Do you have suggestions for a particular state 529 plan to select? Other than looking at low fees and performance, does anything else really matter? Like, if there's a possibility that our kids may go to a college in Virginia and there's a possibility we may move there some day, would it make sense to select a Virginia 529?

[lakpr]

This is great to know and I will definitely follow your recommendation. Do you have suggestions for a particular state 529 plan to select? Other than looking at low fees and performance, does anything else really matter? Like, if there's a possibility that our kids may go to a college in Virginia and there's a possibility we may move there some day, would it make sense to select a Virginia 529?

Currently the California Scholarshare plan, administered by TIAA, has the absolute-lowest costs of any 529 plan in the nation. It offers an equity index option (equivalent to S&P 500 Index) at an expense ratio of 0.06%, to offer an example. It also does have the other two ingredients of a 3-fund portfolio (international equities and bonds) if you are so inclined, at comparable ERs.

Virginia 529 plan is also quite reasonable, but I do believe the ERs are around 0.15% (going by my memory here, so don't hold me to this exact figure). Virginia 529 does have a quirky rule that it provides state tax benefits for EVERY account you open with them, up to $4k per account. So you can do something like this:
Parent 1 Owner --> Kid 1 beneficiary --> Equity option ($4k)
Parent 1 Owner --> Kid 1 beneficiary --> Money Market option ($4k)
Parent 2 Owner --> Kid 1 beneficiary --> Equity option ($4k)
Parent 2 Owner --> Kid 1 beneficiary --> Money Market option ($4k)
Parent 1 Owner --> Kid 2 beneficiary --> Equity option ($4k)
Parent 1 Owner --> Kid 2 beneficiary --> Money Market option ($4k)
Parent 2 Owner --> Kid 2 beneficiary --> Equity option ($4k)
Parent 2 Owner --> Kid 2 beneficiary --> Money Market option ($4k)
etc. for a total of $32k per year that would be excluded from VA taxable income.

If you are FOR SURE relocating to Virginia in the near future, AND BEFORE either kid reaches college age, it is better to slow-walk the 529 contributions (may be just use $35k for future Roth IRA in California plan) and then contribute aggressively using the scheme above when you do relocate there. Of course, I am assuming that the VA lawmakers don't kill it in the mean time.

[HermieHollerith]

VTI is worth a glance:

https://www.fool.ca/2024/09/25/is-vangu ... e-maker-3/

[Alex GR]

@cubbyfruitbat,
Very interesting thread for me as I have many of the same questions. However what I didn't catch is how you went from an allocation of 80/20 to 100/0? Reason I ask is although I am 5 years older than you, my allocation is currently 59/41 and increasing fixed income by 1 every year (according to IPS I'll stop at 50/50). So my equity allocation is much lower than yours and even then I react very negatively to large drops in value. For example, Dec 2018 correction or the COVID crash in 2020, when I log into the account and see a drop of like $20k in one day I can't help but think about the times when I had to fight traffic, spend nearly all my life at work, and go through enormous work-related stress for 6 months to make that 20k
That is obviously the wrong way of looking at it (the past is the past) but my point is how are you going to feel if "2008 hits again" (a similar event in terms of price correction), and you basically see that you have 1/2 the money? Say you had 1M and now you have 500k. My concern is that with the recent run-up in stock prices we're forgetting that it can go in the other direction.

P.S. As far as your question "How do I set up dividends to automatically reinvest?", this is very easy, depending on the broker they have a menu item called "DRIP" where you can configure it for each fund OR it could be right there in "Positions" as "reinvest Y/N" for each position.

[bonesly]

Thanks all - appreciate your latest feedback.
2. @bonesly, you mentioned the possible reset on the 5-year clock on our Roths if we do the backdoor conversion. Would this, therefore, impact whether we're able to do a Roth IRA conversion ladder? And on that point, is there a way that we could do the Roth IRA conversion ladder for our first 5 years of retirement, or could that only be initiated from our 401ks 5 years after we've already retired?

I don't think this will be a problem. If you're 43 now and retire in 11 years at age 54, then you can't withdraw earnings from the Roth IRA penalty-free until age 59.5 (which is a 5.5 year wait). If you have saved/earned enough in your Taxable account to get you through that 5.5y bridge, then all the 5-year clocks go away at age 59.5... there will be no early withdrawal penalties once you reach that age, even if you made your last conversion at age 58.5.

3. @bonesly, to your question about MMF, the purpose of the money is 1) a 6-month emergency fund and 2) short-term savings that we intend to spend in the next year on various house projects & trips. Given that, what is your suggestion on where we put it?

An EF should always be held in a MMF (either in Taxable or a as stocks while the cash is held in a Tax-Deferred Trad 401k/IRA account). Short-term savings should also be held in a MMF if "short-term" means <5y. If it's actually mid-term (e.g., 5-10y) then you could consider something slightly more aggressive like a 50/50 or 60/40 balanced fund (again ideally held as 100% stocks in Taxable and then the actual balanced fund held in Tax-Deferred). My new car fund and home repair/upgrade fund is in a 60/40 fund (VBIAX), but it's not particularly tax-efficient as I'm holding it in Taxable (can't be bothered to optimize that particular pot of money's account location).

[ruralavalon]

What percentage of the total portfolio is currently in each account?

Hi, my wife & I have been mindlessly investing for a couple decades now and have recently “seen the light” (thanks to Bogleheads) to proactively take charge of our money. We’re now saving & investing half of our income and would love to retire early. Hoping to get this group’s advice to make sure we’re on the right path.

Emergency funds: We have 6 months of living expenses in HYSA (4.25%)

Debt: 190k mortgage with 3.25% interest rate (19 years remaining); no other debt

Tax Filing Status: Married Filing Jointly

Tax Rate: 24% Federal, 8.75% State

State of Residence: OR

Age: 43/41

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 20% of stocks

In my opinion your desired asset allocation is within the range of what is reasonable.

Total Portfolio: $910,000

Current retirement assets

His 401k
Currently invested in an aggressive “retireview” model for a retirement in 20+ years.
Company provides 6% match

His Roth IRA
Currently invested in lots of stocks by a financial advisor at Raymond James; want to transition to Vanguard to manage the funds myself.

His Rollover IRA
Currently invested in lots of stocks by a financial advisor at Raymond James; want to transition to Vanguard to manage the funds myself.

. . . . .

Her Roth IRA
Currently invested in lots of stocks by a financial advisor at Raymond James; want to transition to Vanguard to manage the funds myself.

In my opinion it's a good idea to rollover the IRAs into IRAs at Vanguard.

You should roll his traditional IRA into his 401k account.

Contributions

New annual Contributions
$23000 his 401k (+$7860 match)
$23000 her 401k (+$3450 match)

Available funds

Funds available in his 401k

In my opinion the better funds to use in his 401k are:
1) Schwab S&P 500 Index Fund (SWPPX) (.02%);
2) iShares MSCI Total International Index K Fund (BDOKX) (.1%); and
3) Baird Aggregate Bond Institutional Fund (BAGIX) (.3%)

Funds available in her 401k

In my opinion the better funds to use in her 401k are:
1)Vanguard 500 Index Admiral (VFIAX) (.04%);
2) Vanguard Total Intl Stock Index Admiral (VTIAX) (.12%); and
3) Vanguard Total Bond Market Index Admiral (VBTLX) (.05%).

A S&P 500 index fund covers 80% of the U.zS. stock market investing in stocks of selected large-cap and mid-cap U.S. companies. In the 30+ years since the creation of the first total stock market index fund the two types of funds have had almost identical performance.

Some years one fund type was a little bit ahead, other years the other fund type was a little bit ahead. I would not bother adding another U.S. stock fund trying to better mimic a total stock market index fund.

Questions:
1. We want to retire as early as possible (FIRE!) and have ramped up our savings rate to 50%. We’re going to end our relationship with our financial advisor and move our retirement investments from Raymond James to Vanguard. We’re interested in a simple portfolio, like the Bogleheads 3-fund portfolio, to keep things easy and mostly on autopilot. Are there any rules of thumb for how we spread out investments across our retirement accounts, as long as they ultimately hit our desired 70-30 AA? I’m especially confused on the best approach with the 401k’s since they don’t offer the “3 funds," as well as whether it matters investing in the same stock/bond index funds across accounts or if we should try to consolidate those investments into only one of the accounts if it pencils out.

If you really want a good real estate fund, then you could use Vanguard Real Estate Index Admiral (VGSLX) in a Roth IRA.

What percentage of the total portfolio is currently in each account?

2. One of the big things we’re missing (to achieve FIRE) is a non-retirement account, which we plan to start funding a year from now. Does a basic taxable account at Vanguard make the most sense? And once we open that account, how should we adjust our entire portfolio’s investments? After reading a couple Bogleheads books, it sounds like the big rule of thumb is to keep bond funds in the tax-advantaged accounts.

Yes.

In a taxable account stick with very tax-efficient stock index funds.

You would adjust to your desired asset allocation by exchanging between funds inside one of the. 401ks.

[cubbyfruitbat]

I still am not grasping how MMFs work – please help me understand the basics in terms of what they are, how they differ from stocks/bonds, how they relate to taxes, and if I should factor them into my asset allocation. I also don’t understand the difference between MMFs and “cash” within my accounts. @bonesly, you recommend keeping my EF and other short-term savings in the highest yielding MMF within my taxable account. So now that I’m at Fidelity, it looks like that would be either SPRXX or SPAXX – is one better than the other? Finally, I don’t plan on investing in my taxable account until later next year, but should I open it now and put funds in an MMF within it?

I don't think this will be a problem. If you're 43 now and retire in 11 years at age 54, then you can't withdraw earnings from the Roth IRA penalty-free until age 59.5 (which is a 5.5 year wait). If you have saved/earned enough in your Taxable account to get you through that 5.5y bridge, then all the 5-year clocks go away at age 59.5... there will be no early withdrawal penalties once you reach that age, even if you made your last conversion at age 58.5.

@bonesly – if it’s a choice between saving enough in a taxable account for those first 5 years of retirement (before age 59.5) or being able to get funds via a Roth IRA conversion ladder (and therefore not doing the backdoor Roth that resets the clock), is one option better than the other? I’m thinking the way to evaluate that is to look at how much I could put into the Roths over the 11 years ($7,000 x 11 = $77k for each of us), which wouldn’t be enough to cover 5 years of retirement. Therefore, we should prioritize the taxable investing and put anything remaining in the Backdoor Roth?

Also, how is a Backdoor Roth IRA actually done? Would I call Fidelity for help with funding a traditional IRA by end of year and then help convert that over to the existing Roths? I assume it may take days so we should get this underway well before Dec. 31…

@cubbyfruitbat,
Very interesting thread for me as I have many of the same questions. However what I didn't catch is how you went from an allocation of 80/20 to 100/0? Reason I ask is although I am 5 years older than you, my allocation is currently 59/41 and increasing fixed income by 1 every year (according to IPS I'll stop at 50/50). So my equity allocation is much lower than yours and even then I react very negatively to large drops in value. For example, Dec 2018 correction or the COVID crash in 2020, when I log into the account and see a drop of like $20k in one day I can't help but think about the times when I had to fight traffic, spend nearly all my life at work, and go through enormous work-related stress for 6 months to make that 20k
That is obviously the wrong way of looking at it (the past is the past) but my point is how are you going to feel if "2008 hits again" (a similar event in terms of price correction), and you basically see that you have 1/2 the money? Say you had 1M and now you have 500k. My concern is that with the recent run-up in stock prices we're forgetting that it can go in the other direction.

@Alex GR – note in the middle of this thread that I had a change of heart and adjusted my AA to 80/20. I tend to be more aggressive in my investing and don’t watch my money on a daily basis, so I’m going to trust the approach and gradually make the allocation more conservative. When the market has had big shifts in the past, I haven’t sweated it and just stay the course.

Currently the California Scholarshare plan, administered by TIAA, has the absolute-lowest costs of any 529 plan in the nation. It offers an equity index option (equivalent to S&P 500 Index) at an expense ratio of 0.06%, to offer an example. It also does have the other two ingredients of a 3-fund portfolio (international equities and bonds) if you are so inclined, at comparable ERs.

@lakpr – I’ve set both kids up with CA 529 accounts – thanks for the tip!

[lakpr]

Currently the California Scholarshare plan, administered by TIAA, has the absolute-lowest costs of any 529 plan in the nation. It offers an equity index option (equivalent to S&P 500 Index) at an expense ratio of 0.06%, to offer an example. It also does have the other two ingredients of a 3-fund portfolio (international equities and bonds) if you are so inclined, at comparable ERs.

@lakpr – I’ve set both kids up with CA 529 accounts – thanks for the tip!

Good!

Just a mild caution though, I think I read (perhaps on these forums, or perhaps reddit) that California tends to tax withdrawals from the Scholarshare plan if not used for higher education expenses. CA does not also follow the Federal rules about using the money in 529 plans for K-12 tuition fees, and neither does it allow for rollover to Roth IRA (yet). It views both such withdrawals as non-qualified and assesses a 2.5% penalty on the earnings at the time of withdrawal.

So, YES CA Scholarshare is quite a good plan, but do make use of the money in that plan only for college expenses. Perhaps look at Illinois BrightStart (another plan also administered by TIAA and near rock-bottom expenses) if you intend to use a plan as a repository for $35k eventual rollover to Roth IRA.

[cubbyfruitbat]

@lakpr – I’ve set both kids up with CA 529 accounts – thanks for the tip!

Good!

Just a mild caution though, I think I read (perhaps on these forums, or perhaps reddit) that California tends to tax withdrawals from the Scholarshare plan if not used for higher education expenses. CA does not also follow the Federal rules about using the money in 529 plans for K-12 tuition fees, and neither does it allow for rollover to Roth IRA (yet). It views both such withdrawals as non-qualified and assesses a 2.5% penalty on the earnings at the time of withdrawal.

So, YES CA Scholarshare is quite a good plan, but do make use of the money in that plan only for college expenses. Perhaps look at Illinois BrightStart (another plan also administered by TIAA and near rock-bottom expenses) if you intend to use a plan as a repository for $35k eventual rollover to Roth IRA.

Hmmmm....I opened the CA 529s at your suggestion as the place to sock away $35k to eventually roll over into Roth IRAs. Should I reconsider?

[bonesly]

I still am not grasping how MMFs work – please help me understand the basics in terms of what they are, how they differ from stocks/bonds, how they relate to taxes, and if I should factor them into my asset allocation. I also don’t understand the difference between MMFs and “cash” within my accounts. @bonesly, you recommend keeping my EF and other short-term savings in the highest yielding MMF within my taxable account. So now that I’m at Fidelity, it looks like that would be either SPRXX or SPAXX – is one better than the other? Finally, I don’t plan on investing in my taxable account until later next year, but should I open it now and put funds in an MMF within it?

Stocks - you have a (tiny sliver) of ownership in a company. If a stock fails you get paid last and probably pennies on the dollar if anything.
Bonds - you loan money to the government or to a corporation for an intermediate term (3-10 years). If the company fails you get paid before stockholders (might still be pennies on the dollar, but likely more). If the gov't fails we all have bigger problems (so it's considered an ultra low-risk investment).
Cash - you loan money to the government or a corporation for a short term (3 months to 3 years). Cash instruments include savings accounts, high-yield savings accounts, certificates of deposit (CDs), money market funds (MMFs), and maybe some others like that. MMFs typically invest in T-Bills (3 months up to a year is common) and/or commercial paper (very short-term loans between banks and short-term loans to corporations). MMFs are not covered by Federal Deposit Insurance Company (FDIC) like bank accounts, HYSA, and CDs, but they maintain a stable NAV of $1.00/share so they don't lose money. The only MMF that I know of that's failed in recent history was Lehman Brothers during the 2008 Financial Crisis and the Fed swooped in to ensure that no investors lost money. They're pretty safe and typically pay more than HYSA/CDs, but you have to compare rates after fees as that's not always the case.

Cash is the lowest risk, lowest reward. Stocks are the highest risk/reward. Bonds are in the middle. Historically that risk (±std. dev.) and reward (average return) from the NYU Data Set 1928-2017 was this:
Stocks: 11.5% ± 19.5%
10y T-Notes: 5.2% ± 7.7%
3mo T-Bills: 3.4% ± 3.0%

MMFs at Vanguard, Schwab, and Fidelity
Vanguard MMFs
4.83% Vanguard Federal Money Market Fund (VMFXX, ER=0.11%, $3K min)
4.90% Vanguard Treasury Money Market Fund (VUSXX, ER=0.09%, $3K min)

Schwab MMFs
4.72% Schwab Value Advantage Money Fund® (SWVXX, ER=0.34%, $0 min)
4.57% Schwab Government Money Fund (SNVXX, ER=0.34%, $0 min)

Fidelity MMFs
4.55% Fidelity® Money Market Fund (SPRXX, ER=0.42%, $0 min)
4.56% Fidelity® Government Money Market Fund (SPAXX, ER=0.42%, $0 min)

You might find better rates at Schwab & Fido if you have over $100K to invest in a MMF.

I don't think this will be a problem. If you're 43 now and retire in 11 years at age 54, then you can't withdraw earnings from the Roth IRA penalty-free until age 59.5 (which is a 5.5 year wait). If you have saved/earned enough in your Taxable account to get you through that 5.5y bridge, then all the 5-year clocks go away at age 59.5... there will be no early withdrawal penalties once you reach that age, even if you made your last conversion at age 58.5.

@bonesly – if it’s a choice between saving enough in a taxable account for those first 5 years of retirement (before age 59.5) or being able to get funds via a Roth IRA conversion ladder (and therefore not doing the backdoor Roth that resets the clock), is one option better than the other? I’m thinking the way to evaluate that is to look at how much I could put into the Roths over the 11 years ($7,000 x 11 = $77k for each of us), which wouldn’t be enough to cover 5 years of retirement. Therefore, we should prioritize the taxable investing and put anything remaining in the Backdoor Roth?

Also, how is a Backdoor Roth IRA actually done? Would I call Fidelity for help with funding a traditional IRA by end of year and then help convert that over to the existing Roths? I assume it may take days so we should get this underway well before Dec. 31…

A Backdoor Roth is described in the linked Wiki topic and involves a contribution to a non-deductible Trad IRA and then an immediate conversion from Trad IRA to Roth IRA. You will not be able to withdraw earnings from a Roth of any kind before age 59.5. Each conversion, including direct conversion of pre-existing Trad IRA balances or Backdoor conversion your zero-balance Trad IRA used to execute Backdoor Roth contributions, is going to trigger that 5-year clock reset. Read the Fidelity Explanation of the 5-Year Rule again to be sure it's clear to you (i.e., direct conversion and backdoor conversion both trigger the 5-year clock reset). That's why I'm saying you need to a Taxable investment balance that's large enough to support your expenses for 5.5 years until you can tap all the retirement accounts without penalty. You can withdraw your contributions (not the earnings) from a Roth at any time, but you cited that wouldn't be enough ($77K in contributions... If you have existing Roth IRAs, what year did you first contribute to one? As long as you make your first contributions at least 5 years before you turn age 59.5, then all the clocks go away at that age but the a Roth (for each of you), must have been open at least 5 years).

Fidelity customers service is supposedly pretty good (I have no experience with them), so I would certainly call Fido and ask them for help with what you want to do. They may say this is not "technical support" and is "advisory support," and may try to hook you up with an advisor that will likely answer your questions, but may also want to manage your assets (their fees are much lower than Edward Jones, Raymond James, or Goldman Sachs, but it's still an AUM so preferably avoided). Doesn't hurt to ask though if you want professional input.

I agree with "prioritize Taxable investing and put anything remaining in the Backdoor Roth." Do review that Roth Backdoor topic about pro rata rules, because Backdoor Roth is easy if you have ZERO dollars in Trad IRAs (401k, 403b, etc. are ok, but Trad IRAs trigger pro rata).

[lakpr]

Hmmmm....I opened the CA 529s at your suggestion as the place to sock away $35k to eventually roll over into Roth IRAs. Should I reconsider?

Well, not necessarily. The only requirement for eventual rollover to the Roth IRA is that the plan should be open for 15 years or older. You do require a 529 plan to fund your kids' education, you can view the CA Scholarshare plan as part of it, you can also use the Oregon plan (I just read that if you contribute $7200 to it, you get $360 state tax credit, and this is annually).

1) Contribute just enough to capture the max state tax credit to the OR plan
2) Contribute $35k over one or two years to the Illinois Brightstart plan (just a suggestion here but other states also would work)
3) Contribute the rest to the CA Scholarshare plan.

1) will capture max state tax credit
2) will be intended for eventual rollover to Roth IRA
3) will provide you the maximum growth due to lowest expenses.

I do something similar. NJ offers a $3,600 scholarship if the NJ resident's kids attend in-state school, *IF* you contribute at least $4k and leave it in the plan for 12 years. So when my kids were 6 years old, I contributed $4k each and just plain forgot about it. All my actual intended college fund contributions went into the NY SAVES plan, which was cheaper than the NJ-BEST plan.

Nothing prevents you from owning more than one state's 529 plan.

[InSearchOfZen]

...
Just a mild caution though, I think I read (perhaps on these forums, or perhaps reddit) that California tends to tax withdrawals from the Scholarshare plan if not used for higher education expenses. CA does not also follow the Federal rules about using the money in 529 plans for K-12 tuition fees, and neither does it allow for rollover to Roth IRA (yet). It views both such withdrawals as non-qualified and assesses a 2.5% penalty on the earnings at the time of withdrawal.
...

You spooked me for a moment! But I think that penalty is only the case for Californians.

I found this thread researching 529 plans for my toddler and am debating between California ScholarShare (0.06–0.08%) for the lower fees, or to go with Fidelity (with 0.10–0.15% fees) to make it easier to keep track of alongside my IRA/401k. (Unfortunately, seems like many 529s don't allow a quicken export - unclear if either of these do - so my "tracking benefit" may mostly be a puff of smoke.)

From the California ScholarShare page FAQ for "Can I rollover unused funds to a Roth IRA for the beneficiary?", quoted below for easy reference:

Can I rollover unused funds to a Roth IRA for the beneficiary?

Account owners may roll money from a 529 account to a Roth IRA for the benefit of the 529 plan account beneficiary without incurring federal income tax or penalties (state tax treatment varies), subject to the following conditions:

• The 529 plan account must be open for 15 or more years, ending with the date of the rollover;

• Contributions and associated earnings that you transfer to the Roth IRA must be in the 529 plan account for more than five (5) years, ending with the date of the rollover;

• The Internal Revenue Code permits a lifetime maximum amount of $35,000 per designated beneficiary to be rolled over from 529 plan accounts to Roth IRAs;

• 529 plan assets can only be rolled over into a Roth IRA maintained for the benefit of the designated beneficiary on the 529 plan account;

• 529 plan assets must be sent directly to the Roth IRA;

• Roth IRA income limitations are waived for 529 plan rollovers to Roth IRAs; and

• The Roth IRA contribution is subject to the Roth IRA contribution limit for the taxable year applicable to the designated beneficiary for all individual retirement plans maintained for the benefit of the designated beneficiary.

State tax treatment of a rollover from a 529 plan into a Roth IRA is determined by the state where you file state income tax. Account owners and beneficiaries should consult with a qualified tax professional before rolling over funds from their 529 plan to contribute to a Roth IRA. You are responsible for determining the eligibility of a 529 plan to Roth IRA rollover including tracking and documenting the length of time the 529 plan account has been open and the amount of assets in your 529 plan account eligible to be rolled into a Roth IRA.

link: https://www.scholarshare529.com/resourc ... ficiary%3F

This makes it sound like the special tax issue with ScholarShare is only if you file in California.

Fidelity phrases it slightly differently, with emphasis on contributions only, "Additionally, the transfer amount must come from contributions made to the 529 account at least 5 years prior to the transfer date."
link: https://www.fidelity.com/learning-cente ... er-to-roth

This 5-year rule has me wondering. If you're planning to have enough extra to fund a kid's Roth IRA rollover, having a second 529 that you cap off at the lifetime rollover limit sounds like a reasonable hedge, lakpr. But I always prefer fewer accounts when possible.
The question then is: Can you "choose" which of your historical contributions you're rolling over, like FIFO, and/or keep a paper trail to show that 5+yr old contributions of at least $35k exist?


The full SECURE 2.0 act text eludes me, but I did find a snippet that supports this –
From https://assets.comptroller.texas.gov/tg ... %20Act.pdf :

"[Roth IRA distribution] does not exceed the aggregate amount contributed to the program
(and earnings attributable thereto) before the 5-year period ending
on the date of the distribution"

So perhaps you are okay with a single account so long as you document earnings & contributions from 5+ years ago that equal the $35k, (at least from a roth rollover perspective.)