Portfolio Review 37yo Post Divorce

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Topic Author
DiggingOut
Posts: 4
Joined: Thu Jan 12, 2017 8:14 am

Portfolio Review 37yo Post Divorce

Post by DiggingOut » Fri Jun 14, 2019 2:58 pm

Long time reader, finally getting up the courage (and organization) to post, suggestions greatly appreciated. Thanks for reading!


Emergency Funds – 4 months
Debt:
-$50k of professional school debt on a standard repayment plan being paid by my employer through a public service debt repayment program.
-$3,800 of other grad school debt at 8% I had neglected this because it was a small balance, tripling up my payments now and will make a lump sum payment to pay it off within a year.
-Mortgage $175k at 4.5%, modest condo, just bought it 6 months ago, 10% down, worth about $210k
Tax status: single, federal 22%, North Carolina 5.25%
37 years old
Desired Asset Allocation: 85% stocks 15% bonds
Desire International Allocation 20% of stocks (rather than current 20% of portfolio)

Total Portfolio ~$165k
(percentages are of total portfolio)

Taxable – none

Roth IRA ~$105K
Fidelity Total Market Index Fund (KSKAX er: .015%) 26%
Fidelity International Index Fund (FSPSX er: .035%) 19%
Fidelity UD Bond Index Fund (FXNAX er: .025%) 17%
Cash 1%

Traditional 401k ~$57k
(available 401k investment options below)
Vanguard 500 Index Admiral (VFIAX er: .04%) 27%
Vanguard Equity Income Fund (VEIRX er: .18%) 7%

Roth 401k ~$4k
Vanguard 500 Index Admiral (VFIAX er: .04%) 2%
Vanguard Equity Income Fund (VEIRX er: .18%) .5%

New Contributions: $9k/year 15.5% of gross salary
$6k/yr Roth IRA
$1800/yr Roth 401k
$1200/yr Trad. 401k
Employer Contributions: completely unpredictable, often none, last year 5%, not a match, just a straight contribution

Questions:

1. Generally, How am I doing? I hope to retire by 67 with at least 1.5. I’m less than a year removed from an unexpected divorce that cut my household income by 2/3, but I am finally starting to feel like I’ve got my financial house in order.

2. I work for a nonprofit for well below market rate, but I enjoy what I do, have great work/life balance and fantastic benefits. If I need to be saving significantly more I probably need to increase my income as I run a pretty tight ship right now. Do I need to be saving more?

3. I recently started contributing to the Roth 401k, I just like having the taxes already paid and the tax-free growth, with my low tax bracket I think it makes sense, thoughts?

4. Any suggestions



401k Investment Options:

American Funds American Balanced Fund (R6) (.28%)
American Funds US Govt. Securities Fund (R6) (.27%)
DFA Intl. Sustainability Core 1 Portfolio (.34%)
DFA Emerging Markets Social Core Portfolio (.53%)
Dodge & Cox Income Fund (.43%)
Federated MDT Small Cap Growth Fund (R6) (1.07%)
Fidelity Small Cap Index Fund (.03%)
Fidelity Mid Cap Index Fund (.03%)
Hartford MidCap Fund (R6) (.75%)
Ivy International Core Equity Fund (N)(.79%)
Lord Abbett High Yield Fund (R6) (.60%)
MFS Mid Cap Value Fund (R6) (.69%)
T. Rowe Price Blue Chip Growth Fund (I)(.57%)
Morley Capital Stable Value Fund (25)(.50%)
T. Rowe Price Retirement I 2010 Fund (I)(.46%)
T. Rowe Price Retirement I 2015 Fund (I)(.46%)
T. Rowe Price Retirement I 2020 Fund (I)(.48%)
T. Rowe Price Retirement I 2025 Fund (I)(.51%)
T. Rowe Price Retirement I 2030 Fund (I)(.54%)
T. Rowe Price Retirement I 2035 Fund (I)(.58%)
T. Rowe Price Retirement I 2040 Fund (I)(.59%)
T. Rowe Price Retirement I 2060 Fund (I)(.91%)
T. Rowe Price Retirement I 2055 Fund (I)(.65%)
T. Rowe Price Retirement I 2050 Fund (I)(.61%)
T. Rowe Price Retirement I 2045 Fund (I)(.61%)
Vanguard FTSE Social Index Fund (Adm)(.14%)
Vanguard Equity Income Fund (Adm)(.18%)
Vanguard 500 Index Fund (Adm) (.04%)

02nz
Posts: 1521
Joined: Wed Feb 21, 2018 3:17 pm

Re: Portfolio Review 37yo Post Divorce

Post by 02nz » Fri Jun 14, 2019 3:31 pm

According to Fidelity (https://www.fidelity.com/viewpoints/ret ... -to-retire), you should have about 3x your annual salary saved by the time you're 40. You look to be on track for that, and contributing 15% or so should keep you on track or get you ahead a bit.

The "tax-free growth" that you cite as an advantage for Roth 401k is not any different with a traditional 401k; both grow tax-advantaged. The key is whether you pay taxes on the front or back end, and which rate ends up being lower. Generally it makes sense to hedge bets a bit; at 12% and below paying now makes sense, at 22% and above, I'd defer. You have a lot more in Roth than in traditional, so I'd tilt contributions more toward traditional for some time.

A small portion of your income (maybe around $5-7K, but that's a very rough guess) falls into the 22% federal income tax bracket. You should figure out the exact math and put at least that much in traditional 401k contributions. Below that, at 12% federal, I agree Roth 401k makes sense.

I'd also shop around for a refinance. Mortgage rates have come down in the past several months and you should be able to do better than 4.5%.
Last edited by 02nz on Fri Jun 14, 2019 3:33 pm, edited 1 time in total.

megabad
Posts: 1768
Joined: Fri Jun 01, 2018 4:00 pm

Re: Portfolio Review 37yo Post Divorce

Post by megabad » Fri Jun 14, 2019 3:33 pm

DiggingOut wrote:
Fri Jun 14, 2019 2:58 pm
1. Generally, How am I doing? I hope to retire by 67 with at least 1.5. I’m less than a year removed from an unexpected divorce that cut my household income by 2/3, but I am finally starting to feel like I’ve got my financial house in order.
Generally I think you are doing fine. Assuming your savings rate stays constant, I would guess maybe $1-1.5 million at age 67. Random guess, predicting the future is hard. $1.5 million is on the very optimistic side of what I would predict (in my opinion). It is hard to tell since I don't know your employer contribution and it seems like this could make a sizable difference. If $1.5 million is a floor, I would increase savings rate a little or count on working a few more years just to be safe.

2. I work for a nonprofit for well below market rate, but I enjoy what I do, have great work/life balance and fantastic benefits. If I need to be saving significantly more I probably need to increase my income as I run a pretty tight ship right now. Do I need to be saving more?
Tied to my answer above. I think if market returns are rosy for the next 30 years and/or you get good employer contributions, you will be fine. Make sure you are accounting for social security in retirement (ie. you might need less than you think). I tend to predict pessimistically and I would shoot for about double your savings rate in order to be sure to have $1.5 million. But honestly, most would not predict that conservatively. If you are a little short in your 60s, you can likely work a few more years since I assume non-profits are not quite as cutthroat so I wouldn't be that worried as long as you can keep up your savings rate % at the current level or higher. Just my personal opinion.

3. I recently started contributing to the Roth 401k, I just like having the taxes already paid and the tax-free growth, with my low tax bracket I think it makes sense, thoughts?
At your current savings rate, I probably lean toward going all traditional unless you have unusual circumstances (ie. rapidly increasing income next year due to divorce settlement).

4. Any suggestions
Just a question, but what is your intent by investing in Vanguard Equity Income fund? The ER is a little higher than some of your other offerings and it is actively managed. It is not a huge holding, but I would just make sure this fits your investment plan. I actually prefer holding the Fidelity Small/Mid Cap Funds in your 401k. I would then balance this out with a large cap equity holding in your other accounts. But this is just trying to eek out very drop of expense.

cherijoh
Posts: 5742
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Portfolio Review 37yo Post Divorce

Post by cherijoh » Fri Jun 14, 2019 4:53 pm

DiggingOut wrote:
Fri Jun 14, 2019 2:58 pm
Long time reader, finally getting up the courage (and organization) to post, suggestions greatly appreciated. Thanks for reading!


Emergency Funds – 4 months
Debt:
-$50k of professional school debt on a standard repayment plan being paid by my employer through a public service debt repayment program.
-$3,800 of other grad school debt at 8% I had neglected this because it was a small balance, tripling up my payments now and will make a lump sum payment to pay it off within a year.
-Mortgage $175k at 4.5%, modest condo, just bought it 6 months ago, 10% down, worth about $210k
Tax status: single, federal 22%, North Carolina 5.25%
37 years old
Desired Asset Allocation: 85% stocks 15% bonds
Desire International Allocation 20% of stocks (rather than current 20% of portfolio)

Total Portfolio ~$165k
(percentages are of total portfolio)

Taxable – none

Roth IRA ~$105K
Fidelity Total Market Index Fund (KSKAX er: .015%) 26% --
Fidelity International Index Fund (FSPSX er: .035%) 19%
Fidelity UD Bond Index Fund (FXNAX er: .025%) 17% <-- IMO Bonds should be in Traditional not Roth where they slow down tax-free growth relative to 100% stock AA; Your Bond option in 401k isn't great but isn't terrible either
Cash 1%

Traditional 401k ~$57k <-- Do you have to invest traditional and Roth in the same funds/proportions for new money? Can you reallocate them separately? I'd reallocate all bonds to traditional 401k and leave Roths for stocks
(available 401k investment options below)
Vanguard 500 Index Admiral (VFIAX er: .04%) 27% <-- see this wiki article on how to create a TSM equivalent
Vanguard Equity Income Fund (VEIRX er: .18%) 7% <-- I would dump

Roth 401k ~$4k <-- See suggestions above
Vanguard 500 Index Admiral (VFIAX er: .04%) 2%
Vanguard Equity Income Fund (VEIRX er: .18%) .5%

New Contributions: $9k/year 15.5% of gross salary <-- Most likely adequate to retire at 65 when you become Medicare eligible;
$6k/yr Roth IRA
$1800/yr Roth 401k
$1200/yr Trad. 401k
Employer Contributions: completely unpredictable, often none, last year 5%, not a match, just a straight contribution <-- Don't look a gift horse in the mouth :happy

Questions:

1. Generally, How am I doing? I hope to retire by 67 with at least 1.5. <-- Did you mean $1.5M? I'm not sure you need that much assuming you are SS eligible.

I’m less than a year removed from an unexpected divorce that cut my household income by 2/3, but I am finally starting to feel like I’ve got my financial house in order. <-- How long were you married? If you were married at least 10 years, you may be able to collect SS at 62 (or later) based on your ex-spouse's earnings record if you are not married at that time.

2. I work for a nonprofit for well below market rate, but I enjoy what I do, have great work/life balance and fantastic benefits. If I need to be saving significantly more I probably need to increase my income as I run a pretty tight ship right now. Do I need to be saving more? <-- Not to retire at 67 IMO; probably if you want to retire much earlier than that

3. I recently started contributing to the Roth 401k, I just like having the taxes already paid and the tax-free growth, with my low tax bracket I think it makes sense, thoughts? <-- I'd make sure to save enough in Traditional to get down to the 12% marginal tax bracket, before doing Roth but this doesn't need to be sequential in the year. In January, I'd start contributing to both Roth and Traditional in a proportion that would put your taxable income near the top of the 12% bracket.

4. Any suggestions



401k Investment Options:

American Funds American Balanced Fund (R6) (.28%)
American Funds US Govt. Securities Fund (R6) (.27%)
DFA Intl. Sustainability Core 1 Portfolio (.34%)
DFA Emerging Markets Social Core Portfolio (.53%)
Dodge & Cox Income Fund (.43%)
Federated MDT Small Cap Growth Fund (R6) (1.07%)
Fidelity Small Cap Index Fund (.03%)
Fidelity Mid Cap Index Fund (.03%)
Hartford MidCap Fund (R6) (.75%)
Ivy International Core Equity Fund (N)(.79%)
Lord Abbett High Yield Fund (R6) (.60%)
MFS Mid Cap Value Fund (R6) (.69%)
T. Rowe Price Blue Chip Growth Fund (I)(.57%)
Morley Capital Stable Value Fund (25)(.50%)
T. Rowe Price Retirement I 2010 Fund (I)(.46%)
T. Rowe Price Retirement I 2015 Fund (I)(.46%)
T. Rowe Price Retirement I 2020 Fund (I)(.48%)
T. Rowe Price Retirement I 2025 Fund (I)(.51%)
T. Rowe Price Retirement I 2030 Fund (I)(.54%)
T. Rowe Price Retirement I 2035 Fund (I)(.58%)
T. Rowe Price Retirement I 2040 Fund (I)(.59%)
T. Rowe Price Retirement I 2060 Fund (I)(.91%)
T. Rowe Price Retirement I 2055 Fund (I)(.65%)
T. Rowe Price Retirement I 2050 Fund (I)(.61%)
T. Rowe Price Retirement I 2045 Fund (I)(.61%)
Vanguard FTSE Social Index Fund (Adm)(.14%)
Vanguard Equity Income Fund (Adm)(.18%)
Vanguard 500 Index Fund (Adm) (.04%)

lakpr
Posts: 1607
Joined: Fri Mar 18, 2011 9:59 am

Re: Portfolio Review 37yo Post Divorce

Post by lakpr » Fri Jun 14, 2019 5:46 pm

I think Roth 401k and Roth IRA are wrong options to make at this stage. With $6k in Roth IRA, and $1.8 k in Roth 401k, you are contributing $7800 per year to Roth accounts. At 22% tax bracket, that is $10,000 exactly in pretax contributions, if you choose to do so. Add the $1200 per year you are contributing to traditional 401k, you can contribute $11,200 to traditional 401k now and you will see zero reduction in your take home pay.

The net effect is that you have quietly increased your retirement contributions from 15.5% of your gross income to 20% of gross income, with zero loss in your take home pay.

Since you are 37, I assume you will have 30 more years of contributions. Let them be the same $11.2k contributions per year, assume a 4% real return (that is, over and above inflation rate) you will end up with $813k. In today’s dollars, remember I assumed growth rate above inflation.
(Starting balance $57k in your traditional 401k is included in the calculation)

At retirement, that will give you $20k per year assuming a 4% safe withdrawal rate. $20k per year, even if it is completely taxable — let us assume you will receive social security equal to your standard deduction — puts you just barely into 12% bracket.

In other words, contribute to traditional 401k annually, escape 22% tax rate, pay 12% tax rate when you withdraw.

Even if tax rates raise to 15%, you still win.

Unless your annual income pretty much doubles, I would say contributing to Roth IRA or a Roth 401k is a losing proposition for you.

User avatar
Duckie
Posts: 6613
Joined: Thu Mar 08, 2007 2:55 pm

Re: Portfolio Review 37yo Post Divorce

Post by Duckie » Fri Jun 14, 2019 6:00 pm

DiggingOut wrote:37 years old
Desired Asset Allocation: 85% stocks 15% bonds
15% is low for age 37. I'd be at least 25%.
Desire International Allocation 20% of stocks (rather than current 20% of portfolio)
20% of 85% is 17%. Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the Vanguard paper link and the discussion. I usually split the difference and recommend 30% of stocks. 17% is a little low, but reasonable.
Roth IRA ~$105K
Fidelity Total Market Index Fund (KSKAX er: .015%) 26%
Fidelity International Index Fund (FSPSX er: .035%) 19%
Fidelity UD Bond Index Fund (FXNAX er: .025%) 17%
Cash 1%
First, FSPSX is only developed markets, roughly 75% of international stocks. FTIHX would be a more complete option.

Second, in general it's better to put assets with higher expected growth (stocks) in Roth accounts and assets with lower expected growth (bonds) in pre-tax accounts. That's because you've already paid the taxes in the Roth accounts so future growth is tax-free. So sell the bonds in the Roth IRA and put them in your 401k, preferably all in the pre-tax traditional 401k if possible.
I work for a nonprofit for well below market rate, but I enjoy what I do, have great work/life balance and fantastic benefits. If I need to be saving significantly more I probably need to increase my income as I run a pretty tight ship right now. Do I need to be saving more?
Try to contribute 20%. You might not succeed at first, but try. Once you've paid off that $3800 debt you can increase your 401k contributions.
I recently started contributing to the Roth 401k, I just like having the taxes already paid and the tax-free growth, with my low tax bracket I think it makes sense, thoughts?
For most people, contributing pre-tax instead of Roth is the better choice. And unless you expect a pension I would make all 401k contributions pre-tax. If you do, you will be able to contribute more which will help your taxes (and also your future retirement).
401k Investment Options:
The best options are:
  • Vanguard 500 Index (.04%) -- Large caps, 80% of US stocks
  • Fidelity Mid Cap Index (.03%) -- Mid caps, 6% of US stocks
  • Fidelity Small Cap Index (.03%) -- Small caps, 14% of US stocks
  • American Funds US Govt. Securities (.27%) -- Government bonds
Put your international in the Roth IRA.
________________________

The following retirement portfolio example has an AA of 85% stocks, 15% bonds, with 20% of stocks in international. That breaks down to 68% US stocks, 17% international stocks, and 15% bonds. Right now you could have:

Traditional 401k -- $57K -- 34%
15% (VFIAX) Vanguard 500 Index Fund Admiral Shares (0.04%)
4% (FSSNX) Fidelity Small Cap Index Fund (0.03%)
15% (RGVGX) American Funds U.S. Government Securities Fund Class R-6 (0.27%)

Roth 401k -- $4K -- 3%
3% (VFIAX) Vanguard 500 Index Fund Admiral Shares (0.04%)

Roth IRA at Fidelity -- $105K -- 63%
46% (FSKAX) Fidelity Total Market Index Fund (0.015%)
17% (FTIHX) Fidelity Total International Index Fund (0.06%)

Something to think about.

Topic Author
DiggingOut
Posts: 4
Joined: Thu Jan 12, 2017 8:14 am

Re: Portfolio Review 37yo Post Divorce

Post by DiggingOut » Sat Jun 15, 2019 9:22 am

Since everyone seems to be saying the same thing about the Roth contributions it seems I have a misunderstanding of the tax effects and I seem to be overvaluing the fact that the growth is never taxed. One consideration is that at some point I will probably have to change jobs which would significantly increase my income and probably triple my savings. I also think that taxes are likely to rise in the future and I like the tax diversification so my adjustment to my plan will be to continue to max out my Roth IRA, but make all 401k contributions traditional going forward. I will also increase my 401k contributions now, and later this year with my scheduled raise (aiming for 50% of the raise). Paying off the 3800 will also clear some space to increase contributions.

I've been pretty good about gradually increasing my savings rate so I just need to keep trying to do that and hopefully, I will be ok.

1.5M may be more than I need based on my current standard of living but I would hopefully like to increase my standard of living somewhat in retirement and be able to travel. I am social security eligible and that is a part of my plan I undervalue. Employer retirement contributions would also be a nice bonus. Also aiming high leaves open the possibility of retiring earlier if I can save more.

I've been playing catchup for a while and so I have been aggressive with my asset allocation but if I'm 25 years or more from retirement I don't know why I need 25-35% in bonds. Other than helping me sleep at night what is the point? It isn't like I've accumulated that much that I need to protect. I am comfortable with the fact that I am taking somewhat more risk than conventional wisdom suggests. The bigger concern for me is trying to figure out how/when to reduce equity exposure as I get older. By 50 I'd like to be 35% in bond and by 60 50% in bonds unless my circumstances change significantly. Do those targets also seem too aggressive? Age - 10 in bonds seems more in line with conventional wisdom.

Duckie thank you very much for the thoughtful portfolio suggestions, those make a lot of sense to me, especially the international allocation and the bonds in the traditional 401k.

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M_to_the_G
Posts: 546
Joined: Mon Jan 21, 2013 9:57 am

Re: Portfolio Review 37yo Post Divorce

Post by M_to_the_G » Sat Jun 15, 2019 12:11 pm

Listen to that duck! I did six years ago, and it has worked out very well for me.
"It’s basically the plot of 'Charlie and the Chocolate Factory.' If you stick around, doing nothing, while everyone around you ****s up, you’re going to win big." - John Oliver

Topic Author
DiggingOut
Posts: 4
Joined: Thu Jan 12, 2017 8:14 am

Re: Portfolio Review 37yo Post Divorce

Post by DiggingOut » Sat Jun 15, 2019 6:50 pm

After thinking on this today I have doubled my 401 contributions, all to the traditional (and stopped contributing to the Roth 401k) so now I am maxing out my Roth IRA ($6k) and sending another $6k to my Traditional 401k. Also, I upped my debt repayment even more so the 3800 will definitely be paid off this year.

So now my retirement savings rate is over 20% without any employer contribution (fingers crossed for next year 5% like this year).

This has been a really helpful exercise. Next I will need to change my asset allocations, but one thing at a time

Thanks to those that have responded. :sharebeer

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