Help select best 401k bond fund

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Topic Author
Bluemnatra
Posts: 492
Joined: Fri Jun 11, 2021 3:37 pm

Help select best 401k bond fund

Post by Bluemnatra »

Hi all, long time reader of the forum and I’ve been reading John Bogle’s The Little Book of Common Sense Investing and recently JL Collins. A little late in the game, but trying to make up ground and looking for some guidance.


Emergency funds: $50,000

Debt: Mortgage: $489,000 @ 2.75%


Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 9.3% State

State of Residence: California

Age: 37

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 0% of stocks

Total Retirement Portfolio: $80,000

Current retirement assets

Taxable
$20,000.00

His 401k
$33k S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%)
$3,5k Total Bond Mark Fund (JTBMX) (ER 0.31%)

Plus 1.00% for admin and record keeping on top of the fund ER.

Company plan is a safe harbor with 3% Salary Match and with Profit Sharing, last year employer contribution totaled $6k.

His Roth IRA at Fidelity
$14k 100% Fidelity Zero Total Stock Market Index Fund (FZROX) (ER 0.00%)


His Rollover IRA at Fidelity
$10k Fidelity 500 Index Fund (FXAIX) (0.015%)
$1k Fidelity US Bond Index Fund (FXNAX) (0.025%)
_______________________________________________________________

Contributions:

Current annual Contributions
$19,500 his 401k ($6k company contribution)
$6,000 his Roth IRA
$6,000 her Roth
$3,000.00 taxable (for retirement, not short term goals)

Questions:
1. I have a lump sum of approximately $90,000 that will be coming to me and I’m not sure the best way to deploy the funds. Should I pay off all debt then maximize retirement accounts? Should I pay off the Solar loan and invest the rest in my taxable brokerage account, max out retirement and throw extra remaining funds towards the car payments?
Last edited by Bluemnatra on Sat Jul 24, 2021 7:37 am, edited 3 times in total.
"The greatest enemy of a good plan is the dream of a perfect plan"
Grt2bOutdoors
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Location: New York

Re: Investment planning and best way to deploy lump sum

Post by Grt2bOutdoors »

Payoff the solar loan and the vehicle loan when you get the lump sum. You can not beat those rates of return in the fixed income markets.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
RyeBourbon
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Re: Investment planning and best way to deploy lump sum

Post by RyeBourbon »

Use the lump sum to pay of your loans, which will free up $2800/month cash flow. That's almost $34k per year. Use that to max out your 401k each year. Bank some to pay for the next car. Invest the rest in a taxable account. Or investigate a refi on the mortgage to a lower rate and possibly a shorter term to use some of that extra cash flow.
Retired June 2023. AA = 55/35/10
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retired@50
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Re: Investment planning and best way to deploy lump sum

Post by retired@50 »

Welcome to the forum. :happy

I agree with the poster(s) above.

Pay off the solar and automobile debts, then try to max out the 401k & Roth IRA each year.

If you still have money to save after that, consider reading the wiki page on investment priority.

Link: https://www.bogleheads.org/wiki/Priorit ... nvestments

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
tashnewbie
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Re: Investment planning and best way to deploy lump sum

Post by tashnewbie »

retired@50 wrote: Sat Jun 12, 2021 10:58 am Welcome to the forum. :happy

I agree with the poster(s) above.

Pay off the solar and automobile debts, then try to max out the 401k & Roth IRA each year.

If you still have money to save after that, consider reading the wiki page on investment priority.

Link: https://www.bogleheads.org/wiki/Priorit ... nvestments

Regards,
+1.

I didn’t see that you have a Roth IRA for your spouse. Definitely max that each year if you can (if you can’t, I’d suggest evenly splitting what you can contribute between the 2 Roth IRAs).

I’d pay off all non-mortgage debt, then I’d max Roth IRAs for both spouses for 2021, if you haven’t already.
Topic Author
Bluemnatra
Posts: 492
Joined: Fri Jun 11, 2021 3:37 pm

401k investment selection help

Post by Bluemnatra »

[Thread merged into here --admin LadyGeek]

Emergency funds: $40,000

Debt: Solar Loan: $10,880 @ 6.49% $219/month
Van: $24,000 @ 4.29% 40 months remaining. $566/month
Car: $32,000 @ 4.74% 40 months remaining $677/month
Mortgage: $489,000 @ 3.19% $3,000/month

As far as debt I’ve been paying an extra $1,400/month on the solar loan. However, these debts should be paid in the next month in full.

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 9.3% State

State of Residence: California

Age: 37

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 0% of stocks

Total Retirement Portfolio: $48,000

Current retirement assets

Taxable
$200.00

His 401k
$22k S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%)
$3k Total Bond Mark Fund (JTBMX) (ER 0.31%)

Plus 1.00% for admin and record keeping on top of the fund ER.

Company plan is a safe harbor with 3% Salary Match and with Profit Sharing, last year employer contribution totaled $6k.

His Roth IRA at Fidelity
$12k 100% Fidelity Zero Total Stock Market Index Fund (FZROX) (ER 0.00%)


His Rollover IRA at Fidelity
$10k Fidelity 500 Index Fund (FXAIX) (0.015%)
$1k Fidelity US Bond Index Fund (FXNAX) (0.025%)
_______________________________________________________________

Contributions:

Current annual Contributions
$19,500 his 401k ($6k company contribution)
$6,000 his Roth IRA
$0.00 taxable (for retirement, not short term goals)

Questions:
1. I will be receiving a lump sum this month and will be paying off my debts and maxing out my retirement plans. I’m currently 90/10 US stocks and total bond market in my workplace 401k. My question is should I consider changing my contributions to a target date fund? I’m not to keen on international and was planning on holding US stocks only, however, I keep wobbling back and forth on whether a target date fund is the best option. I tend to like to control things and I feel with a target date fund I won’t have any control. Any opinions if I should change course or stick with my current 401k allocation as is? Or I’ve though of holding my S&P 500 index fund and for my bond allocation use the target date fund.

WORK PLACE OPTION:

American Funds 2050 Target Date Retirement Fund (Class R6) (RFITX) (ER 0.39%)

Other Bond fund options are:

DFA Inflation-Protected Securities Portfolio (Institutional Class) (DIPSX) (ER 0.11%)
PGIM Total Return Bond Fund (Class Z) (PDBZX) (ER 0.49%)
Federated Hermes Institutional High Yield Bond Fund (Institutional Class) (FIHBX) (ER 0.50%)
"The greatest enemy of a good plan is the dream of a perfect plan"
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LadyGeek
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Re: Investment planning and best way to deploy lump sum

Post by LadyGeek »

Bluemnatra - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post and provided a link to the original thread.)
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exodusNH
Posts: 10346
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Re: 401k investment selection help

Post by exodusNH »

Bluemnatra wrote: Sun Jun 20, 2021 10:00 am Emergency funds: $40,000

Debt: Solar Loan: $10,880 @ 6.49% $219/month
Van: $24,000 @ 4.29% 40 months remaining. $566/month
Car: $32,000 @ 4.74% 40 months remaining $677/month
Mortgage: $489,000 @ 3.19% $3,000/month

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 9.3% State

His 401k
$22k S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%)
$3k Total Bond Mark Fund (JTBMX) (ER 0.31%)

Plus 1.00% for admin and record keeping on top of the fund ER.

Company plan is a safe harbor with 3% Salary Match and with Profit Sharing, last year employer contribution totaled $6k.

His Roth IRA at Fidelity
$12k 100% Fidelity Zero Total Stock Market Index Fund (FZROX) (ER 0.00%)

His Rollover IRA at Fidelity
$10k Fidelity 500 Index Fund (FXAIX) (0.015%)
$1k Fidelity US Bond Index Fund (FXNAX) (0.025%)
_______________________________________________________________

Contributions:

Current annual Contributions
$19,500 his 401k ($6k company contribution)

$6,000 his Roth IRA
Not sure where you fall in the "direct contribution to Roth IRA" vs needing to do a "backdoor Roth", but you might need to take a tax hit on the rollover IRA. You might also consider rolling that external IRA into your 401K.
Bluemnatra wrote: Sun Jun 20, 2021 10:00 am Questions:
1. I will be receiving a lump sum this month and will be paying off my debts and maxing out my retirement plans. I’m currently 90/10 US stocks and total bond market in my workplace 401k. My question is should I consider changing my contributions to a target date fund? I’m not to keen on international and was planning on holding US stocks only, however, I keep wobbling back and forth on whether a target date fund is the best option. I tend to like to control things and I feel with a target date fund I won’t have any control. Any opinions if I should change course or stick with my current 401k allocation as is? Or I’ve though of holding my S&P 500 index fund and for my bond allocation use the target date fund.

WORK PLACE OPTION:

American Funds 2050 Target Date Retirement Fund (Class R6) (RFITX) (ER 0.39%)

Other Bond fund options are:

DFA Inflation-Protected Securities Portfolio (Institutional Class) (DIPSX) (ER 0.11%)
PGIM Total Return Bond Fund (Class Z) (PDBZX) (ER 0.49%)
Federated Hermes Institutional High Yield Bond Fund (Institutional Class) (FIHBX) (ER 0.50%)
Great idea on clearing out those loans. Since those are mostly paid with after-tax dollars, they're really quite expensive.

It's usually helpful to list all of the options in your 401K. The American Funds target funds are fine. If you don't want international, you obviously can't use them.

The biggest benefit of TDFs is that they take all your emotions out of the process. They automatically rebalance between stocks and bonds as well as increasing bond exposure as you get closer to the date. In that respect, they can perform better because they take human error out of the equation.

FYI: "High Yield Bond Fund" = junk bonds. You shouldn't even consider them to be part of your bond portfolio.
Topic Author
Bluemnatra
Posts: 492
Joined: Fri Jun 11, 2021 3:37 pm

Re: Investment planning and best way to deploy lump sum

Post by Bluemnatra »

Thanks. What would be the benefit be of rolling my external IRA to my 401k? The fees are so much higher for my employer plan
"The greatest enemy of a good plan is the dream of a perfect plan"
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retired@50
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Re: Investment planning and best way to deploy lump sum

Post by retired@50 »

Bluemnatra wrote: Sun Jun 20, 2021 10:46 pm Thanks. What would be the benefit be of rolling my external IRA to my 401k? The fees are so much higher for my employer plan
External IRAs can make the backdoor Roth IRA strategy subject to the pro rata rule.

This may or may not apply to you, depending on your income. See link for details.

Link: https://www.bogleheads.org/wiki/Backdoor_Roth

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
Bluemnatra
Posts: 492
Joined: Fri Jun 11, 2021 3:37 pm

Re: Investment planning and best way to deploy lump sum

Post by Bluemnatra »

I'm trying to figure out where to keep my bond allocation of my desired AA for bonds is 10%. My 401k IMO has pretty bad options. The Total Bond Market Fund (JTBMX) (ER 0.31%) https://markets.ft.com/data/funds/tears ... gs?s=JTBMX I'm currently invested in has really bad performance the more I look into it, which is hard because it is collective investment trust. The only other acceptable option I see is the PGIM Bond Fund (PDBZX) https://markets.ft.com/data/funds/tears ... ry?s=PDBZX although it seems to take greater risk thus making it more volatile. Do I just accept the fact I have a lousy 401k bond fund option and ride it out with my desired AA using the bond fund I'm already invested?

Plus 1.00% for admin and record keeping on top of the fund ER.
WORK PLACE OPTION:

American Funds 2050 Target Date Retirement Fund (Class R6) (RFITX) (ER 0.39%)

Other Bond fund options are:

DFA Inflation-Protected Securities Portfolio (Institutional Class) (DIPSX) (ER 0.11%)
PGIM Total Return Bond Fund (Class Z) (PDBZX) (ER 0.49%)
Federated Hermes Institutional High Yield Bond Fund (Institutional Class) (FIHBX) (ER 0.50%)
"The greatest enemy of a good plan is the dream of a perfect plan"
Topic Author
Bluemnatra
Posts: 492
Joined: Fri Jun 11, 2021 3:37 pm

Help select best 401k bond fund

Post by Bluemnatra »

Bluemnatra wrote: Sat Jun 12, 2021 9:53 am Hi all, long time reader of the forum and I’ve been reading John Bogle’s The Little Book of Common Sense Investing and recently JL Collins. A little late in the game, but trying to make up ground and looking for some guidance.


Emergency funds: $50,000

Debt: Mortgage: $489,000 @ 2.75%


Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 9.3% State

State of Residence: California

Age: 37

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 0% of stocks

Total Retirement Portfolio: $80,000

Current retirement assets

Taxable
$20,000.00

His 401k
$33k S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%)
$3,5k Total Bond Mark Fund (JTBMX) (ER 0.31%)

Plus 1.00% for admin and record keeping on top of the fund ER.

Company plan is a safe harbor with 3% Salary Match and with Profit Sharing, last year employer contribution totaled $6k.

His Roth IRA at Fidelity
$14k 100% Fidelity Zero Total Stock Market Index Fund (FZROX) (ER 0.00%)


His Rollover IRA at Fidelity
$10k Fidelity 500 Index Fund (FXAIX) (0.015%)
$1k Fidelity US Bond Index Fund (FXNAX) (0.025%)
_______________________________________________________________

Contributions:

Current annual Contributions
$19,500 his 401k ($6k company contribution)
$6,000 his Roth IRA
$6,000 her Roth
$3,000.00 taxable (for retirement, not short term goals)

Questions:
1. I have a lump sum of approximately $90,000 that will be coming to me and I’m not sure the best way to deploy the funds. Should I pay off all debt then maximize retirement accounts? Should I pay off the Solar loan and invest the rest in my taxable brokerage account, max out retirement and throw extra remaining funds towards the car payments?
"The greatest enemy of a good plan is the dream of a perfect plan"
Grt2bOutdoors
Posts: 25625
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Investment planning and best way to deploy lump sum

Post by Grt2bOutdoors »

Bluemnatra wrote: Fri Jul 23, 2021 11:32 pm I'm trying to figure out where to keep my bond allocation of my desired AA for bonds is 10%. My 401k IMO has pretty bad options. The Total Bond Market Fund (JTBMX) (ER 0.31%) https://markets.ft.com/data/funds/tears ... gs?s=JTBMX I'm currently invested in has really bad performance the more I look into it, which is hard because it is collective investment trust. The only other acceptable option I see is the PGIM Bond Fund (PDBZX) https://markets.ft.com/data/funds/tears ... ry?s=PDBZX although it seems to take greater risk thus making it more volatile. Do I just accept the fact I have a lousy 401k bond fund option and ride it out with my desired AA using the bond fund I'm already invested?

Plus 1.00% for admin and record keeping on top of the fund ER.
WORK PLACE OPTION:

American Funds 2050 Target Date Retirement Fund (Class R6) (RFITX) (ER 0.39%)

Other Bond fund options are:

DFA Inflation-Protected Securities Portfolio (Institutional Class) (DIPSX) (ER 0.11%)
PGIM Total Return Bond Fund (Class Z) (PDBZX) (ER 0.49%)
Federated Hermes Institutional High Yield Bond Fund (Institutional Class) (FIHBX) (ER 0.50%)
Here’s a suggestion for you - can you save $8k outside of your 401k plan? If yes, put the $8k in I bonds if you don’t already own them and earn at least 3 percent in year 1 after the 3 month penalty (assumes you don’t hold the full 5 years to avoid it). Or, open an Roth IRA and invest it in the Total Bond Market Index. Money is fungible (you will still be 90/10). If markets really tumble, you can sell some of the bonds and buy equities in the Roth IRA with no tax consequences. Then invest that $8k in the plan in the lowest cost equity investment as your allocation is now.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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ruralavalon
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Location: Illinois

Re: 401k investment selection help

Post by ruralavalon »

Bluemnatra wrote: Sun Jun 20, 2021 10:00 am [Thread merged into here --admin LadyGeek]

Emergency funds: $40,000

Debt: Solar Loan: $10,880 @ 6.49% $219/month
Van: $24,000 @ 4.29% 40 months remaining. $566/month
Car: $32,000 @ 4.74% 40 months remaining $677/month
Mortgage: $489,000 @ 3.19% $3,000/month

As far as debt I’ve been paying an extra $1,400/month on the solar loan. However, these debts should be paid in the next month in full.

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 9.3% State

State of Residence: California

Age: 37

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 0% of stocks

Total Retirement Portfolio: $48,000

Current retirement assets

Taxable
$200.00

His 401k
$22k S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%)
$3k Total Bond Mark Fund (JTBMX) (ER 0.31%)

Plus 1.00% for admin and record keeping on top of the fund ER.

Company plan is a safe harbor with 3% Salary Match and with Profit Sharing, last year employer contribution totaled $6k.

His Roth IRA at Fidelity
$12k 100% Fidelity Zero Total Stock Market Index Fund (FZROX) (ER 0.00%)


His Rollover IRA at Fidelity
$10k Fidelity 500 Index Fund (FXAIX) (0.015%)
$1k Fidelity US Bond Index Fund (FXNAX) (0.025%)
_______________________________________________________________

Contributions:

Current annual Contributions
$19,500 his 401k ($6k company contribution)
$6,000 his Roth IRA
$0.00 taxable (for retirement, not short term goals)

Questions:
1. I will be receiving a lump sum this month and will be paying off my debts and maxing out my retirement plans. I’m currently 90/10 US stocks and total bond market in my workplace 401k. My question is should I consider changing my contributions to a target date fund? I’m not to keen on international and was planning on holding US stocks only, however, I keep wobbling back and forth on whether a target date fund is the best option. I tend to like to control things and I feel with a target date fund I won’t have any control. Any opinions if I should change course or stick with my current 401k allocation as is? Or I’ve though of holding my S&P 500 index fund and for my bond allocation use the target date fund.

WORK PLACE OPTION:

American Funds 2050 Target Date Retirement Fund (Class R6) (RFITX) (ER 0.39%)

Other Bond fund options are:

DFA Inflation-Protected Securities Portfolio (Institutional Class) (DIPSX) (ER 0.11%)
PGIM Total Return Bond Fund (Class Z) (PDBZX) (ER 0.49%)
Federated Hermes Institutional High Yield Bond Fund (Institutional Class) (FIHBX) (ER 0.50%)
Use the lump sum to entirely pay off the Solar Loan $10,880 @ 6.49%, the Van loan $24,000 @ 4.29%, and the Car loan $32,000 @ 4.74%.

Also use the lump sum to buy up to $10k each in I savings bonds.

Invest the rest of the lump sum in a taxable brokerage account at a low cost fund provider like Vanguard, Fidelity or Schwab using very tax-efficient stock index funds such as a total stock market index fund or total stock market index exchange traded fund (ETF). If at Fidelity use an ETF for better tax-efficiency, do not use a Fidelity ZERO fund in a taxable brokerage account..

Shift your bond allocation from the 401k to his Rollover IRA at Fidelity, using Fidelity US Bond Index Fund (FXNAX) (0.025%). Also buy up to $10k each annually in I savings bonds.

In the 401k just use S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%).
Last edited by ruralavalon on Sat Jul 24, 2021 9:39 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
Bluemnatra
Posts: 492
Joined: Fri Jun 11, 2021 3:37 pm

Re: 401k investment selection help

Post by Bluemnatra »

ruralavalon wrote: Sat Jul 24, 2021 9:23 am
Bluemnatra wrote: Sun Jun 20, 2021 10:00 am [Thread merged into here --admin LadyGeek]

Emergency funds: $40,000

Debt: Solar Loan: $10,880 @ 6.49% $219/month
Van: $24,000 @ 4.29% 40 months remaining. $566/month
Car: $32,000 @ 4.74% 40 months remaining $677/month
Mortgage: $489,000 @ 3.19% $3,000/month

As far as debt I’ve been paying an extra $1,400/month on the solar loan. However, these debts should be paid in the next month in full.

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 9.3% State

State of Residence: California

Age: 37

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 0% of stocks

Total Retirement Portfolio: $48,000

Current retirement assets

Taxable
$200.00

His 401k
$22k S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%)
$3k Total Bond Mark Fund (JTBMX) (ER 0.31%)

Plus 1.00% for admin and record keeping on top of the fund ER.

Company plan is a safe harbor with 3% Salary Match and with Profit Sharing, last year employer contribution totaled $6k.

His Roth IRA at Fidelity
$12k 100% Fidelity Zero Total Stock Market Index Fund (FZROX) (ER 0.00%)


His Rollover IRA at Fidelity
$10k Fidelity 500 Index Fund (FXAIX) (0.015%)
$1k Fidelity US Bond Index Fund (FXNAX) (0.025%)
_______________________________________________________________

Contributions:

Current annual Contributions
$19,500 his 401k ($6k company contribution)
$6,000 his Roth IRA
$0.00 taxable (for retirement, not short term goals)

Questions:
1. I will be receiving a lump sum this month and will be paying off my debts and maxing out my retirement plans. I’m currently 90/10 US stocks and total bond market in my workplace 401k. My question is should I consider changing my contributions to a target date fund? I’m not to keen on international and was planning on holding US stocks only, however, I keep wobbling back and forth on whether a target date fund is the best option. I tend to like to control things and I feel with a target date fund I won’t have any control. Any opinions if I should change course or stick with my current 401k allocation as is? Or I’ve though of holding my S&P 500 index fund and for my bond allocation use the target date fund.

WORK PLACE OPTION:

American Funds 2050 Target Date Retirement Fund (Class R6) (RFITX) (ER 0.39%)

Other Bond fund options are:

DFA Inflation-Protected Securities Portfolio (Institutional Class) (DIPSX) (ER 0.11%)
PGIM Total Return Bond Fund (Class Z) (PDBZX) (ER 0.49%)
Federated Hermes Institutional High Yield Bond Fund (Institutional Class) (FIHBX) (ER 0.50%)
Use the lump sum to entirely pay off the Solar Loan $10,880 @ 6.49%, the Van loan $24,000 @ 4.29%, and the Car loan $32,000 @ 4.74%.

Also use the lump sum to buy up to $10k each in I savings bonds.

Invest the rest of the lump sum in a taxable brokerage account at a low cost fund provider like Vanguard, Fidelity or Schwab using very tax-efficient stock index funds such as a total stock market index fund or total stock market index exchange traded fund (ETF).

Shift your bond allocation from the 401k to his Rollover IRA at Fidelity, using Fidelity US Bond Index Fund (FXNAX) (0.025%). Also buy up to $10k each annually in I savings bonds.

In the 401k just use S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%).
If I go with this plan what do I do when my rollover IRA no longer holds enough bonds to keep me in my desired AA? Add bond to Roth, taxable, or 401k?

I did payoff all loans except for the mortgage, so my monthly cash flow is now going towards investments.

***I didn't read your I bonds comment, that would be the recommendation then. Thank you
"The greatest enemy of a good plan is the dream of a perfect plan"
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ruralavalon
Posts: 26351
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Location: Illinois

Re: 401k investment selection help

Post by ruralavalon »

Bluemnatra wrote: Sat Jul 24, 2021 9:39 am
ruralavalon wrote: Sat Jul 24, 2021 9:23 am
Bluemnatra wrote: Sun Jun 20, 2021 10:00 am [Thread merged into here --admin LadyGeek]

Emergency funds: $40,000

Debt: Solar Loan: $10,880 @ 6.49% $219/month
Van: $24,000 @ 4.29% 40 months remaining. $566/month
Car: $32,000 @ 4.74% 40 months remaining $677/month
Mortgage: $489,000 @ 3.19% $3,000/month

As far as debt I’ve been paying an extra $1,400/month on the solar loan. However, these debts should be paid in the next month in full.

Tax Filing Status: Married Filing Jointly

Tax Rate: 22% Federal, 9.3% State

State of Residence: California

Age: 37

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 0% of stocks

Total Retirement Portfolio: $48,000

Current retirement assets

Taxable
$200.00

His 401k
$22k S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%)
$3k Total Bond Mark Fund (JTBMX) (ER 0.31%)

Plus 1.00% for admin and record keeping on top of the fund ER.

Company plan is a safe harbor with 3% Salary Match and with Profit Sharing, last year employer contribution totaled $6k.

His Roth IRA at Fidelity
$12k 100% Fidelity Zero Total Stock Market Index Fund (FZROX) (ER 0.00%)


His Rollover IRA at Fidelity
$10k Fidelity 500 Index Fund (FXAIX) (0.015%)
$1k Fidelity US Bond Index Fund (FXNAX) (0.025%)
_______________________________________________________________

Contributions:

Current annual Contributions
$19,500 his 401k ($6k company contribution)
$6,000 his Roth IRA
$0.00 taxable (for retirement, not short term goals)

Questions:
1. I will be receiving a lump sum this month and will be paying off my debts and maxing out my retirement plans. I’m currently 90/10 US stocks and total bond market in my workplace 401k. My question is should I consider changing my contributions to a target date fund? I’m not to keen on international and was planning on holding US stocks only, however, I keep wobbling back and forth on whether a target date fund is the best option. I tend to like to control things and I feel with a target date fund I won’t have any control. Any opinions if I should change course or stick with my current 401k allocation as is? Or I’ve though of holding my S&P 500 index fund and for my bond allocation use the target date fund.

WORK PLACE OPTION:

American Funds 2050 Target Date Retirement Fund (Class R6) (RFITX) (ER 0.39%)

Other Bond fund options are:

DFA Inflation-Protected Securities Portfolio (Institutional Class) (DIPSX) (ER 0.11%)
PGIM Total Return Bond Fund (Class Z) (PDBZX) (ER 0.49%)
Federated Hermes Institutional High Yield Bond Fund (Institutional Class) (FIHBX) (ER 0.50%)
Use the lump sum to entirely pay off the Solar Loan $10,880 @ 6.49%, the Van loan $24,000 @ 4.29%, and the Car loan $32,000 @ 4.74%.

Also use the lump sum to buy up to $10k each in I savings bonds.

Invest the rest of the lump sum in a taxable brokerage account at a low cost fund provider like Vanguard, Fidelity or Schwab using very tax-efficient stock index funds such as a total stock market index fund or total stock market index exchange traded fund (ETF).

Shift your bond allocation from the 401k to his Rollover IRA at Fidelity, using Fidelity US Bond Index Fund (FXNAX) (0.025%). Also buy up to $10k each annually in I savings bonds.

In the 401k just use S&P 500 index fund through John Hancock (JFIVX) (ER 0.3%).
If I go with this plan what do I do when my rollover IRA no longer holds enough bonds to keep me in my desired AA? Add bond to Roth, taxable, or 401k?

I did payoff all loans except for the mortgage, so my monthly cash flow is now going towards investments.

***I didn't read your I bonds comment, that would be the recommendation then. Thank you
Keep buying up to $10k each annually in I savings bonds, if the rates are still good.

Then shift to a good credit quality bond fund with a low expense ratio in his Roth IRA. This can be Fidelity US Bond Index Fund (FXNAX) ER 0.025%. You can add a Roth IRA for her as well.

If your tax bracket becomes higher then consider a tax-exempt bond fund like Fidelity Municipal Bond Index Fund (FMBIX) ER 0.07% in your taxable account.
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lakpr
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Re: Help select best 401k bond fund

Post by lakpr »

I differ from @ruralavalon, about investing in bonds in Roth IRA. The deal with Roth is that, in exchange for upfront taxes, all future growth is tax free. Why do you want choke off that growth by investing in bonds in the Roth?

Yes, purchase the I bonds in taxable to increase your bonds space. If you still have money left to be invested in bonds, and you ran out of space in your 401k / Traditional IRA / Rollover IRA, I suggest paying down the mortgage and view the increased equity as your bond allocation. Getting a 2.75% yield is EXCELLENT in today's low rate environment.

The usual argument against paying down (but not paying off) the mortgage is liquidity. But if you are having money left to invest in taxable account and you are looking to increase the bond allocation in your portfolio, you are definitely not hurting for liquidity. Even if you are, it would be easy to refinance or take out a home equity loan. It could be at a higher interest rate in the future than the current 2.75% mortgage rate possibly, but you also would have escaped paying that 2.75% interest rate for an extended period of time until that "liquidity-crunch" event hit you. It may still end up cheaper
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Bluemnatra
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Re: Help select best 401k bond fund

Post by Bluemnatra »

lakpr wrote: Sat Jul 24, 2021 5:24 pm I differ from @ruralavalon, about investing in bonds in Roth IRA. The deal with Roth is that, in exchange for upfront taxes, all future growth is tax free. Why do you want choke off that growth by investing in bonds in the Roth?

Yes, purchase the I bonds in taxable to increase your bonds space. If you still have money left to be invested in bonds, and you ran out of space in your 401k / Traditional IRA / Rollover IRA, I suggest paying down the mortgage and view the increased equity as your bond allocation. Getting a 2.75% yield is EXCELLENT in today's low rate environment.

The usual argument against paying down (but not paying off) the mortgage is liquidity. But if you are having money left to invest in taxable account and you are looking to increase the bond allocation in your portfolio, you are definitely not hurting for liquidity. Even if you are, it would be easy to refinance or take out a home equity loan. It could be at a higher interest rate in the future than the current 2.75% mortgage rate possibly, but you also would have escaped paying that 2.75% interest rate for an extended period of time until that "liquidity-crunch" event hit you. It may still end up cheaper
Thank you. I wasn't very liquid until recently. I sold a business and paid off all non-mortgage debt ($66,000). I had $42,000 left remaining. I invested $20,000 in my taxable brokerage in a total stock market index fund. I'm saving the $22,000 in Ally and I'm trying to decide whether to keep it there to cover the cost of replacing our A/C and new roof, not sure when those two big expenses will hit, but they're at the end of their life span. My Ally has around $52,000. I've since started fully funding my 401k to the max and Roth accounts for me and my wife. This has thrown my AA out of balance and my workplace 401k is pretty bad in terms of fees and options.

I suppose I could choose a TDF in my 401k with a high percentage of bonds? International is just not a part of my AA, which is one of the reasons I've avoided them. All target date funds in my plan are American Funds Class R6. Morningstar seems to think highly of them.

American Funds 2010 Trgt Date Retire R6 (RFTTX)(0.3%ER)
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lakpr
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Re: Help select best 401k bond fund

Post by lakpr »

With that $22k remaining, I think a better option would be to buy the I bonds, $10k each for you and your spouse. You can prepay the remainder $2k to IRS, and get that back as I bonds as part of your tax return (either this year, if you have not yet filed taxes for 2020 yet; or next year if you did file 2020 taxes already).

This alternative is better than Ally (no state tax drag, and far higher yield), and better than the target date fund in your 401k (no 0.3% fee drag).

As long as you can hold off until next July for replacing that roof or A/C (or at least be able to take a quick loan and repay it after July next year), even with the 3-month interest penalty, the I bonds are a better deal than sticking it in Ally.
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Bluemnatra
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Re: Help select best 401k bond fund

Post by Bluemnatra »

lakpr wrote: Sat Jul 24, 2021 9:16 pm With that $22k remaining, I think a better option would be to buy the I bonds, $10k each for you and your spouse. You can prepay the remainder $2k to IRS, and get that back as I bonds as part of your tax return (either this year, if you have not yet filed taxes for 2020 yet; or next year if you did file 2020 taxes already).

This alternative is better than Ally (no state tax drag, and far higher yield), and better than the target date fund in your 401k (no 0.3% fee drag).

As long as you can hold off until next July for replacing that roof or A/C (or at least be able to take a quick loan and repay it after July next year), even with the 3-month interest penalty, the I bonds are a better deal than sticking it in Ally.
Thank you, I am going to look into I bonds, so it seems the I bonds can serve also as an emergency fund? Are they very liquid if I needed them to buy a new A/C system within 1-3 years?

In doing some research I read that I bonds are similar to TIPS. I do have a good TIPS fund in my 401k with a relatively low ER (DIPSX). Should I consider using this for my bond allocation as well?
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lakpr
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Re: Help select best 401k bond fund

Post by lakpr »

Bluemnatra wrote: Sun Jul 25, 2021 10:41 am Thank you, I am going to look into I bonds, so it seems the I bonds can serve also as an emergency fund? Are they very liquid if I needed them to buy a new A/C system within 1-3 years?
Yes, I bonds are perfect for emergency funds. The only caveat here is that, come what may, you CANNOT redeem the I bonds until one year after purchase date. Actually it counts only calendar months, not the actual dates, so the redemption lock out period can be as little as 11 months and 1 day (purchase on July 31, 2021 and redeem August 1, 2022 for example). So after your FIRST purchase, you need to have enough liquidity to carry you for 1 year, or at least have access to funds such as credit cards etc. that you can rely on to tide you over until the redemption date.
Bluemnatra wrote: Sun Jul 25, 2021 10:41 am In doing some research I read that I bonds are similar to TIPS. I do have a good TIPS fund in my 401k with a relatively low ER (DIPSX). Should I consider using this for my bond allocation as well?
Well, not quite. TIPS are in the negative yield territory now. The concept is the same, to protect against inflation. But I bonds are non-transferable, whereas TIPS are. By that, I mean, one cannot sell the I bonds to an unknown stranger. The obligor on the I bonds is Uncle Sam, so you buy from Uncle Sam and redeem with Uncle Sam. TIPS are not like that. You can buy TIPS at auction from Uncle Sam, then sell them in secondary market to another buyer, face unseen, through brokerage firms.

Because the market sets the rates for TIPS, and those rates are currently yielding negative. A $100 inflation-protected face value of TIPS can only be bought in the secondary market at $102.50, for example, in today's money. Right off the bat you lose one year's, or more, worth of inflation protection yield. You do not, with I bonds; you lose only the last 3 months worth of interest if you redeem earlier than 5 years. Your loss therefore is limited to only 3 months, not an entire year (and possibly more).
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Bluemnatra
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Re: Help select best 401k bond fund

Post by Bluemnatra »

lakpr wrote: Sun Jul 25, 2021 11:04 am
Bluemnatra wrote: Sun Jul 25, 2021 10:41 am Thank you, I am going to look into I bonds, so it seems the I bonds can serve also as an emergency fund? Are they very liquid if I needed them to buy a new A/C system within 1-3 years?
Yes, I bonds are perfect for emergency funds. The only caveat here is that, come what may, you CANNOT redeem the I bonds until one year after purchase date. Actually it counts only calendar months, not the actual dates, so the redemption lock out period can be as little as 11 months and 1 day (purchase on July 31, 2021 and redeem August 1, 2022 for example). So after your FIRST purchase, you need to have enough liquidity to carry you for 1 year, or at least have access to funds such as credit cards etc. that you can rely on to tide you over until the redemption date.
Bluemnatra wrote: Sun Jul 25, 2021 10:41 am In doing some research I read that I bonds are similar to TIPS. I do have a good TIPS fund in my 401k with a relatively low ER (DIPSX). Should I consider using this for my bond allocation as well?
Well, not quite. TIPS are in the negative yield territory now. The concept is the same, to protect against inflation. But I bonds are non-transferable, whereas TIPS are. By that, I mean, one cannot sell the I bonds to an unknown stranger. The obligor on the I bonds is Uncle Sam, so you buy from Uncle Sam and redeem with Uncle Sam. TIPS are not like that. You can buy TIPS at auction from Uncle Sam, then sell them in secondary market to another buyer, face unseen, through brokerage firms.

Because the market sets the rates for TIPS, and those rates are currently yielding negative. A $100 inflation-protected face value of TIPS can only be bought in the secondary market at $102.50, for example, in today's money. Right off the bat you lose one year's, or more, worth of inflation protection yield. You do not, with I bonds; you lose only the last 3 months worth of interest if you redeem earlier than 5 years. Your loss therefore is limited to only 3 months, not an entire year (and possibly more).
Very good information and thanks for taking the time to respond. I am expecting a tax refund for 2020, I haven't filed yet. My Federal refund amount is in the neighborhood of $8,000. Since I file MFJ can I request any amount of that $8,000 be refunded in the form of an I bond? Additionally my 401k does offer a stable value fund with John Hancock it's 1 yr return is 2.04%. The expense ratio is .43%, but in the prospectus it says "Net Crediting Rate to Participants: 2%", does this mean that they're guaranteeing a 2% return to me net of fees? Is a stable value fund a viable option?

I've struggled with whether or not to include my emergency fund in my AA. If I do convert some of my emergency fund to I bonds I'm leaning towards including in my AA. From what I've read on here that's more of a personal decision?
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lakpr
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Re: Help select best 401k bond fund

Post by lakpr »

Bluemnatra wrote: Sun Jul 25, 2021 11:31 am Very good information and thanks for taking the time to respond. I am expecting a tax refund for 2020, I haven't filed yet. My Federal refund amount is in the neighborhood of $8,000. Since I file MFJ can I request any amount of that $8,000 be refunded in the form of an I bond? Additionally my 401k does offer a stable value fund with John Hancock it's 1 yr return is 2.04%. The expense ratio is .43%, but in the prospectus it says "Net Crediting Rate to Participants: 2%", does this mean that they're guaranteeing a 2% return to me net of fees? Is a stable value fund a viable option?

I've struggled with whether or not to include my emergency fund in my AA. If I do convert some of my emergency fund to I bonds I'm leaning towards including in my AA. From what I've read on here that's more of a personal decision?
That's very good. The maximum amount you can ask for, via tax refunds, is only $5000 per MFJ return. It is good that you do have $8k estimated federal tax refund, you can ask for $5k of that to be sent to you as paper I bonds.

Not sure which tax software you use, I use TaxAct, and it did have a question on whether I wanted the refund as I-bonds. In the past I ignored that question electing to receive the money as direct deposit (last year the rates on I bonds were 1.9% and intermediate term bond funds were also yielding 1.8%); but this year the equation flipped completely upside down.

I believe you get a packet of I bonds in various denominations, not just a single bond with $5k face value. Then you will have to send them back to Treasury Direct and ask them to be transferred to electronic bonds linked to your Treasury Direct account.

[ I am in the same boat as you, I haven't filed taxes for 2020 yet, expecting a refund of about $6k, and want to ask $5k in I bonds, and this is my first year. So I cannot give you more details from personal experience, only what I gathered from this excellent forum myself ]

To your last question: yes it is a personal decision. I lean on the side of NOT including them in the AA, since by definition emergency funds are not available for investment, they are meant to be there to be used in catastrophic scenarios.
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Re: Help select best 401k bond fund

Post by ruralavalon »

I would prefer I bonds via Treasury Direct over the TIPS fund in your 401k account.



Bluemnatra wrote: Sun Jul 25, 2021 11:31 amAdditionally my 401k does offer a stable value fund with John Hancock it's 1 yr return is 2.04%. The expense ratio is .43%, but in the prospectus it says "Net Crediting Rate to Participants: 2%", does this mean that they're guaranteeing a 2% return to me net of fees? Is a stable value fund a viable option?
The Stable Value Fund in your employer's 401k plan paying 2.04% last year is a reasonable choice for a fixed income investment in my opinion.

The 2.04% rate is return net of fees.

Is there a guaranteed rate?
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Bluemnatra
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Re: Help select best 401k bond fund

Post by Bluemnatra »

See attached. It says it is guaranteed by third parties, but I don't see a listed guaranteed rate.

Image

Image

So if I bonds are going to be considered part of my emergency fund, I still need to find a viable fixed income fund that is a counter weight to my equities. It's either the Total Bond Market Fund, DFA Inflation Protected Securities (DIPSX) which is weighted heavily towards intermediate, or the stable value fund.
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Re: Help select best 401k bond fund

Post by lakpr »

Since the current yield of Stable Value Fund is higher than Total Bond Market index, for now I would prefer SVF until such time as when the TBM yield catches up to SVF. Which looks to be at least an year away.
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Re: Help select best 401k bond fund

Post by welderwannabe »

Pay off the vehicles as suggested above. I would suggest less in vehicles going forward. You have a lot of money tied up in them, and they are depreciating. Its probably close to half your annual income just in vehicles. You've got them now and already taken the depreciation hit, but when you decide to replace them go used.
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Re: Help select best 401k bond fund

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welderwannabe wrote: Sun Jul 25, 2021 7:18 pm Pay off the vehicles as suggested above. I would suggest less in vehicles going forward. You have a lot of money tied up in them, and they are depreciating. Its probably close to half your annual income just in vehicles. You've got them now and already taken the depreciation hit, but when you decide to replace them go used.
Yes indeed. It’s been a learning curve. They’re paid off now. I’m driving mine into the ground!! On the plus side one is electric and I have enough in solar to have no cost for gas/electricity. I drive around 18,000 miles a year. I got started a little later in life, but I’m just trying to do the best I can moving forward. High savings rate and avoiding debt. Now that I’ve had a sudden influx of cash my AA has become more of a problem than it was previously. Luckily my wife is very frugal and helped us pay off all non-mortgage debt.
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Re: Help select best 401k bond fund

Post by ruralavalon »

Bluemnatra wrote: Sun Jul 25, 2021 5:38 pm See attached. It says it is guaranteed by third parties, but I don't see a listed guaranteed rate.

Image

Image

So if I bonds are going to be considered part of my emergency fund, I still need to find a viable fixed income fund that is a counter weight to my equities. It's either the Total Bond Market Fund, DFA Inflation Protected Securities (DIPSX) which is weighted heavily towards intermediate, or the stable value fund.
As of 3/31/2021 the net crediting rate is 2.00%, so I suggest using the Stable Value for fixed income investing in the 401k plan.
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