Portfolio checkup / starting to invest in bond funds

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Topic Author
sarabayo
Posts: 349
Joined: Fri Jun 29, 2018 6:59 pm

Portfolio checkup / starting to invest in bond funds

Post by sarabayo » Wed Jan 15, 2020 1:46 am

Thought I'd ask for a portfolio checkup since it's been a while. Portfolio details are as follows:
Emergency fund: $30k, split into $5k in FDLXX for imimediate expenses and $25k in Simple Bank as a reserve
Debt: none
Tax Filing Status: Single
Tax Rate (marginal): low end of 32% federal, 9.3% state
State: CA
Age: 31
Desired asset allocation: 90/10
Desired international allocation: 40% (to mimic Vanguard's target retirement funds)

Current Retirement Assets (about $520k):

58.29% Taxable
  • 39.93% Vanguard Total Stock Market Index (VTSAX) (0.04%) at Merrill Edge
  • 18.35% 4-year twice-annually maturing CD ladder, avg yield 1.63%, at Fidelity
6.16% 403(b) (previous employer, at TIAA, 100% Roth):
  • 6.16% TIAA-CREF S&P 500 Index (TISPX) (0.05%)
26.72% 401(k) (current employer, at Fidelity, currently 30% traditional / 70% Roth):
  • 4.01% Vanguard 500 Index Trust (invests in VFFSX) (0.01%)
  • 0.88% Vanguard Extended Market Index Trust (invests in VSEMX) (0.04%)
  • 21.82% Vanguard Total International Stock Market Index Trust (invests in VTISX) (0.07%)
8.83% Roth IRA (at Vanguard):
  • 1.34% Vanguard Extended Market Index (VEXAX) (0.07%)
  • 7.48% Vanguard Total International Stock Market Index (VTIAX) (0.11%)
Current asset allocation is 81.65% stocks, 18.35% fixed income (CDs). Current international allocation within stocks is 35.89%.

Contributions:

New Annual Contributions (as of 2020):
  • $23k pre-tax to 401(k) (includes employer match)
  • $25.5k Roth to 401(k) via mega backdoor
  • $6k Roth to IRA via backdoor
  • $32.5k (very rough estimate) to taxable from vesting RSUs (only for the next couple years)
  • Anything else I can spare after annual expenses without eating into my emergency fund will also go to taxable. Last year this amounted to ~$27.5k (including reinvested dividends, though).
  • (Total = ~$114.5k)
Other available funds in retirement accounts (omitting uninteresting ones):

403(b):
  • TIAA-CREF International Equity Index (TCIEX) (0.06%)
  • TIAA-CREF Small-Cap Blend Index (TISBX) (0.06%)
  • Vanguard Short-Term Bond Index (VBITX) (0.05%)
  • Other stuff through a brokerage linking option
401(k):
  • Vanguard Total Bond Market Index Trust (invests in VTBSX) (0.03%)
  • Vanguard Target Retirement funds, 2015-2065 and Income (all 0.05%)
  • Galliard Stable Value Fund (0.31%)
  • Other stuff through a brokerage linking option
Question: I have my fixed income in a CD ladder because I wanted to avoid loss of principal (I was gifted ~$100k with the entreaty that I keep it in something "safe"). But now I think it would be simpler and more worry-free to use a bond fund. The equity side of my portfolio has grown large enough that now I'm confident I could replace any reasonable amount of lost value in the bond fund by rebalancing into it.

So my plan is to migrate my 4-year CD ladder into a bond fund over the next 3.5 years, converting each CD as it comes to maturity (one is maturing next week). Since my portfolio has a lower equity percentage than I would like (81.65% < 90%), I'll rebalance out of the bond fund biweekly if its value exceeds my ~$100k principal amount (at the same time that I buy VTSAX from my paycheck), and if its value drops I'll rebalance into it quarterly or even annually.

In terms of which bond fund to use, I'm trying to decide whether to use VBTLX (Vanguard Total Bond Market Index Fund) or to start out by buying some VTABX (Vanguard Total International Bond Index Fund). I've read that Vanguard recommends keeping ~30% of one's bonds in international bonds, and I'm guessing that my CDs are kind of analogous to US bonds, so then starting off by buying some VTABX would go towards moving my international bond percentage upward from 0%. Or is that the wrong way to think about it?

Question: And of course, does anyone have any other suggestions about my portfolio?

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alec
Posts: 3052
Joined: Fri Mar 02, 2007 2:15 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by alec » Wed Jan 15, 2020 6:23 am

A few suggestions:

1. At your high tax rates, I wouldn't hold any bonds in taxable. Probably use 401(k). Vanguard Total Bond Market Index Trust seems like a reasonable choice. Also, probably easier to rebalance if needed inside tax deferred accounts.

2. At only 10% bonds, I don't think you need int'l bonds.

3. Any reason you haven't rolled 403(b) into current 401(k)? Options seems a little cheaper.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

Topic Author
sarabayo
Posts: 349
Joined: Fri Jun 29, 2018 6:59 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by sarabayo » Wed Jan 15, 2020 5:43 pm

alec wrote:
Wed Jan 15, 2020 6:23 am
A few suggestions:

1. At your high tax rates, I wouldn't hold any bonds in taxable. Probably use 401(k). Vanguard Total Bond Market Index Trust seems like a reasonable choice. Also, probably easier to rebalance if needed inside tax deferred accounts.
I'm thinking I'll keep it in taxable for now, for a couple of reasons.

First, since the person who gifted me the ~$100k was concerned about preservation of principal, I think it would be hard to convince them that moving it into my retirement accounts is "safe". Normally it's easy (if you ignore the tax hit) to "swap" assets between 401(k) and taxable just by placing parallel exchange orders in both accounts, but taxable could get decimated in a market crash, forcing me to actually withdraw from the 401(k) and pay an early withdrawal penalty if I needed that money in an emergency. Personally I'm fine with that, but my benefactor may take some persuasion and I don't want to go against their wishes after they've been so generous to me :)
alec wrote:
Wed Jan 15, 2020 6:23 am
2. At only 10% bonds, I don't think you need int'l bonds.
I'm actually closer to 20% bonds right now; though my goal is 10%, I have this ~$100k I'm supposed to keep in "safe" investments, so I won't actually hit 10% until my portfolio hits $1 million, I guess. Do I need international bonds if I'm at 20% bonds?
alec wrote:
Wed Jan 15, 2020 6:23 am
3. Any reason you haven't rolled 403(b) into current 401(k)? Options seems a little cheaper.
It's a stupid reason -- I exceeded the defined contribution plan elective deferral limit in 2016 by a thousand-odd dollars and now I don't know what the right thing to do is. I see a lot of articles telling me how I needed to get my employer to back out the contributions by April of 2017 otherwise I'd be taxed twice on my contribution. Unfortunately I didn't notice the excess contribution until later, and it's rather hard to find any articles telling me what to do in that situation.

The impression I get is that I need to address the excess contribution as soon as I do any kind of distribution from the plan containing the excess, which would include any rollovers from that plan. I'm not even sure whether the excess contribution is supposed to be living in my 403(b) or in my 401(k), since I contributed to both of them in 2016 (it was the year I changed to my current job) -- which contribution was "the excess one"? So out of fear of doing the wrong thing, I've been avoiding doing any rollover from either the 403(b) or the 401(k). (The latter is moot since I'm still working at that employer.)

I'm hoping that I can just designate the excess contribution as belonging to the 403(b), which is 100% Roth. That would make things easier because then I wouldn't have to pay back taxes on any incorrectly deducted pre-tax contributions. But even then, I'm not sure what to actually do to resolve the situation.

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alec
Posts: 3052
Joined: Fri Mar 02, 2007 2:15 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by alec » Wed Jan 15, 2020 7:55 pm

sarabayo wrote:
Wed Jan 15, 2020 5:43 pm

I'm thinking I'll keep it in taxable for now, for a couple of reasons.

First, since the person who gifted me the ~$100k was concerned about preservation of principal, I think it would be hard to convince them that moving it into my retirement accounts is "safe". Normally it's easy (if you ignore the tax hit) to "swap" assets between 401(k) and taxable just by placing parallel exchange orders in both accounts, but taxable could get decimated in a market crash, forcing me to actually withdraw from the 401(k) and pay an early withdrawal penalty if I needed that money in an emergency. Personally I'm fine with that, but my benefactor may take some persuasion and I don't want to go against their wishes after they've been so generous to me :)
Can you at least use municipal bonds, like VCADX?

https://investor.vanguard.com/mutual-fu ... file/VCADX

I'm actually closer to 20% bonds right now; though my goal is 10%, I have this ~$100k I'm supposed to keep in "safe" investments, so I won't actually hit 10% until my portfolio hits $1 million, I guess. Do I need international bonds if I'm at 20% bonds?
I don't think they're really necessary at all. :D But probably not around 20% bonds. Vanguard's Life Strategy growth is about 20% bonds, and only 5% int'l bonds. You're choice.

https://investor.vanguard.com/mutual-fu ... olio/vasgx

It's a stupid reason -- I exceeded the defined contribution plan elective deferral limit in 2016 by a thousand-odd dollars and now I don't know what the right thing to do is. I see a lot of articles telling me how I needed to get my employer to back out the contributions by April of 2017 otherwise I'd be taxed twice on my contribution. Unfortunately I didn't notice the excess contribution until later, and it's rather hard to find any articles telling me what to do in that situation.

The impression I get is that I need to address the excess contribution as soon as I do any kind of distribution from the plan containing the excess, which would include any rollovers from that plan. I'm not even sure whether the excess contribution is supposed to be living in my 403(b) or in my 401(k), since I contributed to both of them in 2016 (it was the year I changed to my current job) -- which contribution was "the excess one"? So out of fear of doing the wrong thing, I've been avoiding doing any rollover from either the 403(b) or the 401(k). (The latter is moot since I'm still working at that employer.)

I'm hoping that I can just designate the excess contribution as belonging to the 403(b), which is 100% Roth. That would make things easier because then I wouldn't have to pay back taxes on any incorrectly deducted pre-tax contributions. But even then, I'm not sure what to actually do to resolve the situation.
:shock: I'll let someone more informed about this weight in.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

Jablean
Posts: 452
Joined: Sat Jun 02, 2018 2:38 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by Jablean » Wed Jan 15, 2020 11:00 pm

New Annual Contributions (as of 2020):
$23k pre-tax to 401(k) (includes employer match)
$25.5k Roth to 401(k) via mega backdoor
$6k Roth to IRA via backdoor
Are these backwards? or did you mean to write "from" instead of "to"? I haven't seen anyone trying to increase their IRA space instead of their Roth.

Topic Author
sarabayo
Posts: 349
Joined: Fri Jun 29, 2018 6:59 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by sarabayo » Wed Jan 15, 2020 11:11 pm

Jablean wrote:
Wed Jan 15, 2020 11:00 pm
New Annual Contributions (as of 2020):
$23k pre-tax to 401(k) (includes employer match)
$25.5k Roth to 401(k) via mega backdoor
$6k Roth to IRA via backdoor
Are these backwards? or did you mean to write "from" instead of "to"? I haven't seen anyone trying to increase their IRA space instead of their Roth.
I'm not sure I understand what you mean. All I'm saying is that I'm making Roth contributions into my retirement accounts in those two lines, as opposed to pre-tax contributions in the previous line. An IRA is a type of account, and Roth is a type of contribution, broadly speaking, isn't it? There are many different kinds of accounts which can accept Roth contributions if they are set up to do so, including 401(k), 403(b), and TSP. So I don't know what you mean by "IRA space instead of Roth".

Topic Author
sarabayo
Posts: 349
Joined: Fri Jun 29, 2018 6:59 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by sarabayo » Thu Jan 16, 2020 1:30 am

alec wrote:
Wed Jan 15, 2020 7:55 pm
Can you at least use municipal bonds, like VCADX?

https://investor.vanguard.com/mutual-fu ... file/VCADX
Hmm, not a bad idea. I see in Portfolio Visualizer that the drawdowns for VCADX are deeper than for VBTLX, but the after-tax returns must be better, if the pre-tax yields are so close to each other (VBTLX has TTM yield 2.72% while VCADX has 2.51%). VBTLX in 2018 had 32.76% of its income from the 41.84% of its holdings which were US government obligations. The 2019 numbers haven't been released yet, but today it has 62.3% of its holdings as US government obligations, so proportionally I can guesstimate that 48.78% its income comes from those holdings. That means under California tax law (IIUC), it's 48.78% deductible on my state taxes, bringing the total tax rate on VBTLX dividends (estimated) to 36.76% marginal, or 28.76% if I drop down into the 24% federal bracket (which I may, since I'm pretty close to the border).

So the after-tax yield of VBTLX for me would be either 1.72% or 1.92% if I were in the 32% or 24% federal tax brackets respectively. So if VCADX is totally tax-exempt in California, its yield of 2.51% is way better. I don't know how to do this calculation in terms of total return, but it certainly looks nice on paper. I'll have to start with VCAIX for a couple of years until enough of my CDs mature for me to get over the $50k initial investment threshold for VCADX, but thanks for the tip!

Jablean
Posts: 452
Joined: Sat Jun 02, 2018 2:38 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by Jablean » Thu Jan 16, 2020 5:31 am

sarabayo wrote:
Wed Jan 15, 2020 11:11 pm
Jablean wrote:
Wed Jan 15, 2020 11:00 pm
New Annual Contributions (as of 2020):
$23k pre-tax to 401(k) (includes employer match)
$25.5k Roth to 401(k) via mega backdoor
$6k Roth to IRA via backdoor
Are these backwards? or did you mean to write "from" instead of "to"? I haven't seen anyone trying to increase their IRA space instead of their Roth.
I'm not sure I understand what you mean. All I'm saying is that I'm making Roth contributions into my retirement accounts in those two lines, as opposed to pre-tax contributions in the previous line. An IRA is a type of account, and Roth is a type of contribution, broadly speaking, isn't it? There are many different kinds of accounts which can accept Roth contributions if they are set up to do so, including 401(k), 403(b), and TSP. So I don't know what you mean by "IRA space instead of Roth".
Usually people are trying to move their money into accounts that are treated like a Roth but as written you seem to be moving money from Roth first and then into traditional IRA/401k. Maybe your 401k accounts are 401k Roth accounts? but that wouldn't require backdooring.
A definition from NerdWallet - A backdoor Roth IRA is a way for people with high incomes to sidestep the Roth's income limits. Basically, a backdoor Roth IRA boils down to some fancy administrative work: You put money in a traditional IRA, convert the account to a Roth IRA, pay some taxes and you're done.

Topic Author
sarabayo
Posts: 349
Joined: Fri Jun 29, 2018 6:59 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by sarabayo » Thu Jan 16, 2020 12:28 pm

Jablean wrote:
Thu Jan 16, 2020 5:31 am
Usually people are trying to move their money into accounts that are treated like a Roth but as written you seem to be moving money from Roth first and then into traditional IRA/401k. Maybe your 401k accounts are 401k Roth accounts? but that wouldn't require backdooring.
A definition from NerdWallet - A backdoor Roth IRA is a way for people with high incomes to sidestep the Roth's income limits. Basically, a backdoor Roth IRA boils down to some fancy administrative work: You put money in a traditional IRA, convert the account to a Roth IRA, pay some taxes and you're done.
New Annual Contributions (as of 2020):
$23k pre-tax to 401(k) (includes employer match)
$25.5k Roth to 401(k) via mega backdoor
$6k Roth to IRA via backdoor
OK, let me just fully clarify what the above means. I contribute $23k to my 401(k) as traditional (pre-tax) contributions via elective deferrals from my paycheck. I contribute $25.5k to my 401(k) as after-tax contributions from my paycheck, and then do an in-plan Roth rollover to convert those into the Roth subaccount there (this is called the "mega backdoor" process). I contribute $6k to a traditional IRA and then convert it to Roth (this is called the "backdoor" process).

User avatar
alec
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Joined: Fri Mar 02, 2007 2:15 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by alec » Thu Jan 16, 2020 7:45 pm

sarabayo wrote:
Thu Jan 16, 2020 1:30 am
alec wrote:
Wed Jan 15, 2020 7:55 pm
Can you at least use municipal bonds, like VCADX?

https://investor.vanguard.com/mutual-fu ... file/VCADX
Hmm, not a bad idea. I see in Portfolio Visualizer that the drawdowns for VCADX are deeper than for VBTLX, but the after-tax returns must be better, if the pre-tax yields are so close to each other (VBTLX has TTM yield 2.72% while VCADX has 2.51%). VBTLX in 2018 had 32.76% of its income from the 41.84% of its holdings which were US government obligations. The 2019 numbers haven't been released yet, but today it has 62.3% of its holdings as US government obligations, so proportionally I can guesstimate that 48.78% its income comes from those holdings. That means under California tax law (IIUC), it's 48.78% deductible on my state taxes, bringing the total tax rate on VBTLX dividends (estimated) to 36.76% marginal, or 28.76% if I drop down into the 24% federal bracket (which I may, since I'm pretty close to the border).

So the after-tax yield of VBTLX for me would be either 1.72% or 1.92% if I were in the 32% or 24% federal tax brackets respectively. So if VCADX is totally tax-exempt in California, its yield of 2.51% is way better. I don't know how to do this calculation in terms of total return, but it certainly looks nice on paper. I'll have to start with VCAIX for a couple of years until enough of my CDs mature for me to get over the $50k initial investment threshold for VCADX, but thanks for the tip!
there are also Investor Class shares - https://investor.vanguard.com/mutual-fu ... file/vcaix
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

Topic Author
sarabayo
Posts: 349
Joined: Fri Jun 29, 2018 6:59 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by sarabayo » Thu Jan 16, 2020 7:46 pm

alec wrote:
Thu Jan 16, 2020 7:45 pm
sarabayo wrote:
Thu Jan 16, 2020 1:30 am
...

I'll have to start with VCAIX for a couple of years until enough of my CDs mature for me to get over the $50k initial investment threshold for VCADX, but thanks for the tip!
there are also Investor Class shares - https://investor.vanguard.com/mutual-fu ... file/vcaix
Yes, I found them (see above) :happy

User avatar
alec
Posts: 3052
Joined: Fri Mar 02, 2007 2:15 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by alec » Thu Jan 16, 2020 7:48 pm

sarabayo wrote:
Thu Jan 16, 2020 7:46 pm
alec wrote:
Thu Jan 16, 2020 7:45 pm
sarabayo wrote:
Thu Jan 16, 2020 1:30 am
...

I'll have to start with VCAIX for a couple of years until enough of my CDs mature for me to get over the $50k initial investment threshold for VCADX, but thanks for the tip!
there are also Investor Class shares - https://investor.vanguard.com/mutual-fu ... file/vcaix
Yes, I found them (see above) :happy
:oops:
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

Jablean
Posts: 452
Joined: Sat Jun 02, 2018 2:38 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by Jablean » Thu Jan 16, 2020 10:15 pm

sarabayo wrote:
Thu Jan 16, 2020 12:28 pm
Jablean wrote:
Thu Jan 16, 2020 5:31 am
Usually people are trying to move their money into accounts that are treated like a Roth but as written you seem to be moving money from Roth first and then into traditional IRA/401k. Maybe your 401k accounts are 401k Roth accounts? but that wouldn't require backdooring.
A definition from NerdWallet - A backdoor Roth IRA is a way for people with high incomes to sidestep the Roth's income limits. Basically, a backdoor Roth IRA boils down to some fancy administrative work: You put money in a traditional IRA, convert the account to a Roth IRA, pay some taxes and you're done.
New Annual Contributions (as of 2020):
$23k pre-tax to 401(k) (includes employer match)
$25.5k Roth to 401(k) via mega backdoor
$6k Roth to IRA via backdoor
OK, let me just fully clarify what the above means. I contribute $23k to my 401(k) as traditional (pre-tax) contributions via elective deferrals from my paycheck. I contribute $25.5k to my 401(k) as after-tax contributions from my paycheck, and then do an in-plan Roth rollover to convert those into the Roth subaccount there (this is called the "mega backdoor" process). I contribute $6k to a traditional IRA and then convert it to Roth (this is called the "backdoor" process).
Great then we are in agreement that your wording choice should change "to" and instead use "from"
New Annual Contributions (as of 2020):
$23k pre-tax to 401(k) (includes employer match)
$25.5k Roth from 401(k) via mega backdoor
$6k Roth from IRA via backdoor

Topic Author
sarabayo
Posts: 349
Joined: Fri Jun 29, 2018 6:59 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by sarabayo » Thu Jan 16, 2020 10:45 pm

Jablean wrote:
Thu Jan 16, 2020 10:15 pm
Great then we are in agreement that your wording choice should change "to" and instead use "from"
New Annual Contributions (as of 2020):
$23k pre-tax to 401(k) (includes employer match)
$25.5k Roth from 401(k) via mega backdoor
$6k Roth from IRA via backdoor
That doesn't make sense to me. The contribution is going to the 401(k) and to the IRA. The contribution is not coming from the 401(k) or from the IRA.

Topic Author
sarabayo
Posts: 349
Joined: Fri Jun 29, 2018 6:59 pm

Re: Portfolio checkup / starting to invest in bond funds

Post by sarabayo » Wed Jan 22, 2020 5:11 pm

sarabayo wrote:
Thu Jan 16, 2020 1:30 am
alec wrote:
Wed Jan 15, 2020 7:55 pm
Can you at least use municipal bonds, like VCADX?

https://investor.vanguard.com/mutual-fu ... file/VCADX
Hmm, not a bad idea. I see in Portfolio Visualizer that the drawdowns for VCADX are deeper than for VBTLX, but the after-tax returns must be better, if the pre-tax yields are so close to each other (VBTLX has TTM yield 2.72% while VCADX has 2.51%). VBTLX in 2018 had 32.76% of its income from the 41.84% of its holdings which were US government obligations. The 2019 numbers haven't been released yet, but today it has 62.3% of its holdings as US government obligations, so proportionally I can guesstimate that 48.78% its income comes from those holdings. That means under California tax law (IIUC), it's 48.78% deductible on my state taxes, bringing the total tax rate on VBTLX dividends (estimated) to 36.76% marginal, or 28.76% if I drop down into the 24% federal bracket (which I may, since I'm pretty close to the border).

So the after-tax yield of VBTLX for me would be either 1.72% or 1.92% if I were in the 32% or 24% federal tax brackets respectively. So if VCADX is totally tax-exempt in California, its yield of 2.51% is way better. I don't know how to do this calculation in terms of total return, but it certainly looks nice on paper. I'll have to start with VCAIX for a couple of years until enough of my CDs mature for me to get over the $50k initial investment threshold for VCADX, but thanks for the tip!
Looking a bit more into this I'm wondering if I should go for VCLAX (Vanguard California Long-Term Tax-Exempt Fund) instead of VCADX (Vanguard California Intermediate-Term Tax-Exempt Fund). Despite the names, the duration of VBTLX (6.26 years) is more comparable to VCLAX (6.09 years) than VCADX (only 4.76 years). If I understand correctly, duration is what I should think of as the "volatility" of a bond or bond fund -- right?

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