Which Vanguard funds to invest $400k in?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

Hello all,
I once asked a question here and got helpful replies, but have not checked back here much since. I'm very much a "set it and forget about it" type when it comes to money management, but I feel that I'm at a point now where I need to make some changes. Here are my stats:

- Spouse and I in our mid-40s with two kids, 10 and 12 years old
- I work for the federal government, spouse works for a non-profit
- We live in northern Virginia just outside Washington, DC
- HHI is around $260k, jobs are pretty stable
- We expect to stay in this area until our youngest is out of high school

Assets:
Retirement:
- Mine: $843k in TSP, (70% C, 30% S), max annually
- Spouse: $785k in TIAA-CREF (target date 2040 fund), max annually
- We both have Roth IRAs in Vanguard target retirement 2045 ($124k each), no longer contributing as over the income level

Other:
- Vanguard Life Strategy Growth, $110k
- Vanguard target enrollment age 529s, $175k
- Vanguard brokerage account, $50k (ready to invest, but in what?)
- Cash, $400k (yes, way too much, that is what I want to ask about)
- Home equity, $250k

Debt:
- Mortgage, $650k, re-financed last year at 2.625%

Goals:
- I am eligible to retire in 5 years at age 50 (with pension about $4k/month and health care), but not sure whether I will continue, switch to private sector, or fully retire and maybe get a hobby job.
- Spouse would also like to retire on the early side.
- One child is in private school ($40k/year) for at least the next four years.
- Would like to be able to pay for public college for each child.
- Once kids are gone, we could see ourselves staying in the area or moving somewhere else but probably not somewhere with a much cheaper COL, as we like to be in the city. We hope to maintain our standard of living and travel a bit, but nothing too fancy.

My question is where to invest and how much? I would like to keep around 50k in cash for an emergency fund, plus whatever we can't cash flow for the private school tuition (though I think we will be able to cover it from our monthly income). That leaves $350k in cash plus $50k that is sitting in Vanguard ready to be invested.

We don't have super clear goals aside from both of us being able to retire around 55-56 when kids are out of college. At that point, we would like to be able to either continue working if we enjoy it or stop altogether and live off my pension and our investments. Down the road of course I am worried about end-of-life and not burdening our kids, but that seems so far off and hard to plan for now, aside from looking into LTC insurance in the next few years.

Given that we don't anticipate needing this money for at least 10 years, what should we do with it? Since my TSP retirement is all in C and S, should I go for a more conservative Vanguard portfolio, or is that already balanced out by my pension?

As stated up front, we don't really monitor these things closely, so something as low-maintenance as possible would be great.

Thanks!
User avatar
RickBoglehead
Posts: 7877
Joined: Wed Feb 14, 2018 8:10 am
Location: In a house

Re: Which Vanguard funds to invest $400k in?

Post by RickBoglehead »

When you posted in 2013, you were asked if you had an IPS. 8 years later - do you? What have you been doing in 8 years with your investments, that now you're asking where to put $400k?

You want to have a set and forget it investment portfolio, so you need to put in the work to figure out what should be where. Have you read the information in the Wiki about the 3-fund portfolio? Have you read The Boglehead's Guide to Investing?
Avid user of forums on variety of interests-financial, home brewing, F-150, EV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
Mike Scott
Posts: 3579
Joined: Fri Jul 19, 2013 2:45 pm

Re: Which Vanguard funds to invest $400k in?

Post by Mike Scott »

If you really are paying no more attention than this, you are probably a good candidate for a balanced fund of some sort even though it is not as tax efficent as a three fund portfolio balanced across accounts. You could pick a single Target Date Fund or a Life Strategy Fund at Vanguard that suits your risk tolerance and go back to ignoring it.
nix4me
Posts: 1059
Joined: Sat Oct 13, 2018 9:32 am

Re: Which Vanguard funds to invest $400k in?

Post by nix4me »

VTI would be my choice.
Ed 2
Posts: 2692
Joined: Sat May 15, 2010 9:34 am

Re: Which Vanguard funds to invest $400k in?

Post by Ed 2 »

Most of our community claims that “ we are not market timers “. But I disagree. Usually I notice during market good performance posts like yours with standard questions like “ do I have too much cash?” or “ should I sell my investments?” , we call it “ rebalancing “ lol. If you ask me , if I had 400K in cash right now I would leave some like couple of months to pay my bills and the rest into VTI. I don’t care market up or down. If you have stable job and even pension guarantee in 5 years ( which is rear for the most of us mortals) I would not hesitate knowing that I am in my middle 40’s have 25 years of accumulation.
Last edited by Ed 2 on Sun Aug 01, 2021 12:13 pm, edited 1 time in total.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

RickBoglehead wrote: Sun Aug 01, 2021 11:49 am When you posted in 2013, you were asked if you had an IPS. 8 years later - do you? What have you been doing in 8 years with your investments, that now you're asking where to put $400k?

You want to have a set and forget it investment portfolio, so you need to put in the work to figure out what should be where. Have you read the information in the Wiki about the 3-fund portfolio? Have you read The Boglehead's Guide to Investing?
Yes, after 2013 we were working with a financial advisor and did get a strategy and some recommendations. As a result of this advice, I changed my TSP from a target date fund to all C and S (which was a good move, as it has grown a lot more). We also invested in the 529s, paid off student loans, paid $200k down payment on house, and bought the life strategy fund. Now I have read about the three-fund portfolio, but my impression was that one would use that strategy for their entire portfolio, so I am unsure how to factor that in with the the bulk of our retirement investments already set up how they are, as well as the pension starting at 50. So I am looking for ideas of what "gaps" I should be looking to fill in our portfolio using this money.

I am also looking into other options such as buying another property, but doesn't seem to be a good time for that.
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

Ed 2 wrote: Sun Aug 01, 2021 12:07 pm Most of our community claims that “ we are not market timers “. But I disagree. Usually I notice during market good performance posts like yours with standard questions like “ do I have too much cash?” or “ should I sell my investments?” , we call it “ rebalancing “ lol. If you ask me , if I had 400K in cash right now I would leave some like couple of months to pay my bills and the rest into VTI. I don’t care market up or down. If you have stable job and even pension guarantee in 5 years ( which is rear for the most of us mortals) I would not hesitate knowing that I am in my middle 40’s have 25 years of accumulation.
Thank you!
Ed 2
Posts: 2692
Joined: Sat May 15, 2010 9:34 am

Re: Which Vanguard funds to invest $400k in?

Post by Ed 2 »

Daisy2178 wrote: Sun Aug 01, 2021 12:18 pm
Ed 2 wrote: Sun Aug 01, 2021 12:07 pm Most of our community claims that “ we are not market timers “. But I disagree. Usually I notice during market good performance posts like yours with standard questions like “ do I have too much cash?” or “ should I sell my investments?” , we call it “ rebalancing “ lol. If you ask me , if I had 400K in cash right now I would leave some like couple of months to pay my bills and the rest into VTI. I don’t care market up or down. If you have stable job and even pension guarantee in 5 years ( which is rear for the most of us mortals) I would not hesitate knowing that I am in my middle 40’s have 25 years of accumulation.
Thank you!
In addition, what would you say if I told you that DOW in 20 years with 5% conservative return would be around 100k? Keep it in perspective. Good luck. You are in very good financial position in my opinion.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
orklc
Posts: 81
Joined: Sun Mar 24, 2013 10:35 am

Re: Which Vanguard funds to invest $400k in?

Post by orklc »

I didn't see any traditional IRA mentioned, or any other existing account that would make a backdoor Roth IRA difficult to use.

Also did not see an HSA mentioned. Are you eligible for one?

These two steps can't take a large fraction of your current cash, but are still definitely worth doing.
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

orklc wrote: Sun Aug 01, 2021 12:29 pm I didn't see any traditional IRA mentioned, or any other existing account that would make a backdoor Roth IRA difficult to use.

Also did not see an HSA mentioned. Are you eligible for one?

These two steps can't take a large fraction of your current cash, but are still definitely worth doing.
We don't have a traditional IRA, but I'm not sure about the backdoor Roth IRA. I seem to remember researching it before and it was not feasible, but I can't remember exactly why, so perhaps I should look into it again.

As for HSA, we have a flexible health spending account through my job. I put $1500 in per year and we usually spend just about that much.
orklc
Posts: 81
Joined: Sun Mar 24, 2013 10:35 am

Re: Which Vanguard funds to invest $400k in?

Post by orklc »

Daisy2178 wrote: Sun Aug 01, 2021 12:48 pm
orklc wrote: Sun Aug 01, 2021 12:29 pm I didn't see any traditional IRA mentioned, or any other existing account that would make a backdoor Roth IRA difficult to use.

Also did not see an HSA mentioned. Are you eligible for one?

These two steps can't take a large fraction of your current cash, but are still definitely worth doing.
We don't have a traditional IRA, but I'm not sure about the backdoor Roth IRA. I seem to remember researching it before and it was not feasible, but I can't remember exactly why, so perhaps I should look into it again.

As for HSA, we have a flexible health spending account through my job. I put $1500 in per year and we usually spend just about that much.
https://www.bogleheads.org/wiki/Backdoor_Roth has descriptions of how a backdoor roth IRA works.

A flex spending account and an HSA are different things. Though if you contribute to a flex spending account then you cannot also contribute to an HSA. If you would otherwise be eligible for both, and since you have cash to use for current expenses, then a HSA may be a better choice: https://www.bogleheads.org/wiki/Health_savings_account
User avatar
RickBoglehead
Posts: 7877
Joined: Wed Feb 14, 2018 8:10 am
Location: In a house

Re: Which Vanguard funds to invest $400k in?

Post by RickBoglehead »

Daisy2178 wrote: Sun Aug 01, 2021 12:48 pm

As for HSA, we have a flexible health spending account through my job. I put $1500 in per year and we usually spend just about that much.
A flexible spending account is not an HSA, nor does it provide the continued tax-free growth that an HSA could. Do you participate in a health plan that allows you to fund an HSA?
Avid user of forums on variety of interests-financial, home brewing, F-150, EV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Which Vanguard funds to invest $400k in?

Post by delamer »

How are you planning to pay for the kids’ college?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

RickBoglehead wrote: Sun Aug 01, 2021 12:55 pm
Daisy2178 wrote: Sun Aug 01, 2021 12:48 pm

As for HSA, we have a flexible health spending account through my job. I put $1500 in per year and we usually spend just about that much.
A flexible spending account is not an HSA, nor does it provide the continued tax-free growth that an HSA could. Do you participate in a health plan that allows you to fund an HSA?
Thanks for the info about HSA. After reading it, I don't think either one of us has access. We use my federal health insurance and there is only a small deductible.
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

delamer wrote: Sun Aug 01, 2021 12:56 pm How are you planning to pay for the kids’ college?
We continue to contribute to the 529 plans, and also plan to cash flow some of it while they are attending (anticipating they will go in-state, currently $30-40k per year). Also my spouse works for a university and they could attend tuition free if they choose to go there (private). If they want to attend a different private/out-of-state public and do not get any aid/scholarships, we would look into other options, perhaps using some of this money I am planning to invest now.
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Which Vanguard funds to invest $400k in?

Post by aristotelian »

My approach would be pay off mortgage, invest remainder in VTI, rebalance retirement accounts as necessary to hit desired allocation.
User avatar
MahoningValley
Posts: 189
Joined: Sat Dec 01, 2007 11:38 am
Location: South Florida

Re: Which Vanguard funds to invest $400k in?

Post by MahoningValley »

I don't think I could be much help to you, but you might want to consider some inflation hedges. Maybe a TIPS fund directed into your TSP or the 401k and replacing the equity portions of those accounts into the taxable accounts? Just a thought.
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

aristotelian wrote: Sun Aug 01, 2021 1:54 pm My approach would be pay off mortgage, invest remainder in VTI, rebalance retirement accounts as necessary to hit desired allocation.
Thanks, I have thought about paying down the mortgage but don't know if it makes sense when I am not sure how long we will stay in this house. We will at least be there another 10 years, but may move after that (would still have 15 years or so of mortgage).
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

MahoningValley wrote: Sun Aug 01, 2021 1:56 pm I don't think I could be much help to you, but you might want to consider some inflation hedges. Maybe a TIPS fund directed into your TSP or the 401k and replacing the equity portions of those accounts into the taxable accounts? Just a thought.
Thank you for the suggestion, I will look into TIPS since I am not familiar with that. I do want to hedge against inflation - that is my main reason for moving to invest this money now rather than keeping it in cash. Otherwise I think at my core I'm a "keep it under the mattress" type but I know that doesn't make sense!
User avatar
RickBoglehead
Posts: 7877
Joined: Wed Feb 14, 2018 8:10 am
Location: In a house

Re: Which Vanguard funds to invest $400k in?

Post by RickBoglehead »

Daisy2178 wrote: Sun Aug 01, 2021 3:47 pm
aristotelian wrote: Sun Aug 01, 2021 1:54 pm My approach would be pay off mortgage, invest remainder in VTI, rebalance retirement accounts as necessary to hit desired allocation.
Thanks, I have thought about paying down the mortgage but don't know if it makes sense when I am not sure how long we will stay in this house. We will at least be there another 10 years, but may move after that (would still have 15 years or so of mortgage).
2.625% should not be paid off.
Avid user of forums on variety of interests-financial, home brewing, F-150, EV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: Which Vanguard funds to invest $400k in?

Post by aristotelian »

Daisy2178 wrote: Sun Aug 01, 2021 3:47 pm
aristotelian wrote: Sun Aug 01, 2021 1:54 pm My approach would be pay off mortgage, invest remainder in VTI, rebalance retirement accounts as necessary to hit desired allocation.
Thanks, I have thought about paying down the mortgage but don't know if it makes sense when I am not sure how long we will stay in this house. We will at least be there another 10 years, but may move after that (would still have 15 years or so of mortgage).
Why would that matter? Unless you wouldn't have enough liquidity for a down payment when moving? Otherwise it's really a question of whether you have need and willingness to borrow money to invest.
User avatar
MahoningValley
Posts: 189
Joined: Sat Dec 01, 2007 11:38 am
Location: South Florida

Re: Which Vanguard funds to invest $400k in?

Post by MahoningValley »

Daisy2178 wrote: Sun Aug 01, 2021 11:42 am
- We both have Roth IRAs in Vanguard target retirement 2045 ($124k each), no longer contributing as over the income level


You have a quarter of a million dollars in tax-free space available to you at Vanguard? What do you think you should do with that? I would suggest it be 100% in VAIPX.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: Which Vanguard funds to invest $400k in?

Post by lakpr »

MahoningValley wrote: Sun Aug 01, 2021 8:10 pm
Daisy2178 wrote: Sun Aug 01, 2021 11:42 am
- We both have Roth IRAs in Vanguard target retirement 2045 ($124k each), no longer contributing as over the income level


You have a quarter of a million dollars in tax-free space available to you at Vanguard? What do you think you should do with that? I would suggest it be 100% in VAIPX.
Disagree vehemently with this particular suggestion. Money in Roth IRA should be invested for maximum growth. Ideally into a total stock market fund/etf, and/or total international stock market fund/etf. Not consigned to a fund that barely keeps up with inflation.

To the OP (@Daisy2178):

Target 2045 fund is currently at 90:10, so not that far away from my ideal allocation above, but the glide path begins soon in 2026. I would recommend getting out of Target 2045 fund in Roth IRA before 2026 and invest in VTSAX or FSKAX or SWTSX (total market funds from Vanguard, Fidelity and Schwab respectively) depending on where your Roth IRAs are. It appears that those are at Vanguard, so choose VTSAX.

Shifting $250k from Target 2045 fund to VTSAX and/or VTIAX in the Roth accounts is equivalent to moving 10% away from bonds = $25k. To get back to the same overall bond allocation, I suggest you shift $25k in His TSP, from C fund to G fund. I would have recommended the F fund, but the yield on F fund (approx 1.3%) is currently lower than that of G fund (approx 1.5%). Double check those figures, though, please, from your plan. You should be looking at SEC yield of these funds (which is forward looking, that is, expected yield over the next 1 year), not the 1 year return (which is looking at the past).

Coming to the question of taxable account investing: let me ask you first. If a bank were to offer you a CD of 2.625%, guaranteed for 15 years, with the caveat that you can invest a maximum of $400k, with an early withdrawal penalty of 5% of principal amount invested (so a $20k penalty if you were to invest the full $400k), whether earned or unearned, would you invest in that CD?

Keep in mind that the super best CD offers available for 5 years duration are 1% now.

If you say YES, then the choice is clear. Pay down the mortgage.

[ The $20k penalty I inserted in the hypothetical clause above is my approximate estimate of the difference in HELOC rates to mortgage rates, multiplied by half the $400k balance. HELOC rates are at 4% now, an increase of 1.325% over your mortgage rate, and I assumed a crunch in liquidity that requires you to borrow half of that $400k again at the higher rate for a period of 5 years at least. 5 years * 1.325% * $200k = $13,250. Rounded quite a bit up to $20k, since this is an estimate, your interest rate or the duration of liquidity crunch or the principal you need to borrow may be higher ]

Likely the answer is NO. 15 years is a long time to be locking up $400k, which makes stock markets a more attractive alternative. In this case, invest it all in a stock market fund. Just make sure that whatever funds you would invest in taxable account would have zero overlap with the funds you have in Roth IRA, as that could expose you inadvertently to wash sales rules. Which means, if you are invested in VTSAX in Roth IRA as I recommended above, don't buy VTSAX in taxable. Instead, buy S&P 500 index + Extended Market index in a 4:1 ratio, or Large Cap Index + Small Cap index in a 6:1 ratio, which are shown historically to approximate the returns of total stock market index. You could do this the other way too, with these combinations in the Roth IRA and VTSAX in taxable accounts.

If your answer to the CD investing question is MAYBE, then split your investment 50:50. Half to stock investments in taxable account, half to mortgage principal pay down. If you choose this option, don't forget to ask the lender to "recast" the mortgage, which would reduce your monthly payment and keeps the same end date as original mortgage. This improves your liquidity which may just be enough to avoid that hypothetical "liquidity crunch" event or that early withdrawal penalty.

Edited to add one last bit of advice: consider parking about $100k of that $400k money at Merrill Edge, and qualify for Platinum Honors rewards on Bank of America credit cards. You can get effective cash back of 5.25% if you carefully analyze your spending and determine your top 3 spending categories and choose them as your preferred rewards categories (likely groceries and online spending), and 2.25% on all other spending. You can buy Vanguard ETFs at no charge at Merrill Edge.
User avatar
MahoningValley
Posts: 189
Joined: Sat Dec 01, 2007 11:38 am
Location: South Florida

Re: Which Vanguard funds to invest $400k in?

Post by MahoningValley »

lakpr wrote: Mon Aug 02, 2021 3:51 am
Disagree vehemently with this particular suggestion. Money in Roth IRA should be invested for maximum growth. Ideally into a total stock market fund/etf, and/or total international stock market fund/etf. Not consigned to a fund that barely keeps up with inflation.
Granted, this position has been aggressively litigated here on Bogleheads. However I do not feel that it has been adjudicated. There are two camps out there.

My point is that these are extraordinary times, why can't your tax free account be a safe harbor, at least for the next couple of years?

Full disclosure, I have Value MF and REIT MF in my Roth along with bonds.
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

lakpr wrote: Mon Aug 02, 2021 3:51 am
MahoningValley wrote: Sun Aug 01, 2021 8:10 pm
Daisy2178 wrote: Sun Aug 01, 2021 11:42 am
- We both have Roth IRAs in Vanguard target retirement 2045 ($124k each), no longer contributing as over the income level


You have a quarter of a million dollars in tax-free space available to you at Vanguard? What do you think you should do with that? I would suggest it be 100% in VAIPX.
Disagree vehemently with this particular suggestion. Money in Roth IRA should be invested for maximum growth. Ideally into a total stock market fund/etf, and/or total international stock market fund/etf. Not consigned to a fund that barely keeps up with inflation.

To the OP (@Daisy2178):

Target 2045 fund is currently at 90:10, so not that far away from my ideal allocation above, but the glide path begins soon in 2026. I would recommend getting out of Target 2045 fund in Roth IRA before 2026 and invest in VTSAX or FSKAX or SWTSX (total market funds from Vanguard, Fidelity and Schwab respectively) depending on where your Roth IRAs are. It appears that those are at Vanguard, so choose VTSAX.

Shifting $250k from Target 2045 fund to VTSAX and/or VTIAX in the Roth accounts is equivalent to moving 10% away from bonds = $25k. To get back to the same overall bond allocation, I suggest you shift $25k in His TSP, from C fund to G fund. I would have recommended the F fund, but the yield on F fund (approx 1.3%) is currently lower than that of G fund (approx 1.5%). Double check those figures, though, please, from your plan. You should be looking at SEC yield of these funds (which is forward looking, that is, expected yield over the next 1 year), not the 1 year return (which is looking at the past).

Coming to the question of taxable account investing: let me ask you first. If a bank were to offer you a CD of 2.625%, guaranteed for 15 years, with the caveat that you can invest a maximum of $400k, with an early withdrawal penalty of 5% of principal amount invested (so a $20k penalty if you were to invest the full $400k), whether earned or unearned, would you invest in that CD?

Keep in mind that the super best CD offers available for 5 years duration are 1% now.

If you say YES, then the choice is clear. Pay down the mortgage.

[ The $20k penalty I inserted in the hypothetical clause above is my approximate estimate of the difference in HELOC rates to mortgage rates, multiplied by half the $400k balance. HELOC rates are at 4% now, an increase of 1.325% over your mortgage rate, and I assumed a crunch in liquidity that requires you to borrow half of that $400k again at the higher rate for a period of 5 years at least. 5 years * 1.325% * $200k = $13,250. Rounded quite a bit up to $20k, since this is an estimate, your interest rate or the duration of liquidity crunch or the principal you need to borrow may be higher ]

Likely the answer is NO. 15 years is a long time to be locking up $400k, which makes stock markets a more attractive alternative. In this case, invest it all in a stock market fund. Just make sure that whatever funds you would invest in taxable account would have zero overlap with the funds you have in Roth IRA, as that could expose you inadvertently to wash sales rules. Which means, if you are invested in VTSAX in Roth IRA as I recommended above, don't buy VTSAX in taxable. Instead, buy S&P 500 index + Extended Market index in a 4:1 ratio, or Large Cap Index + Small Cap index in a 6:1 ratio, which are shown historically to approximate the returns of total stock market index. You could do this the other way too, with these combinations in the Roth IRA and VTSAX in taxable accounts.

If your answer to the CD investing question is MAYBE, then split your investment 50:50. Half to stock investments in taxable account, half to mortgage principal pay down. If you choose this option, don't forget to ask the lender to "recast" the mortgage, which would reduce your monthly payment and keeps the same end date as original mortgage. This improves your liquidity which may just be enough to avoid that hypothetical "liquidity crunch" event or that early withdrawal penalty.

Edited to add one last bit of advice: consider parking about $100k of that $400k money at Merrill Edge, and qualify for Platinum Honors rewards on Bank of America credit cards. You can get effective cash back of 5.25% if you carefully analyze your spending and determine your top 3 spending categories and choose them as your preferred rewards categories (likely groceries and online spending), and 2.25% on all other spending. You can buy Vanguard ETFs at no charge at Merrill Edge.
Thank you so much, this is very helpful! If I am understanding correctly, the rationale for switching the Roth to VTSAX and then moving part of TSP to G is that the Roth will then grow more tax-free, or is there also another reason?

I don't think I really want to pay down the mortgage. As you said, I don't want to have all my money locked up in my house. I might feel differently if I knew for sure I was staying in the house forever and wanted to pay it off as soon as possible for peace of mind.

I will have to look up the bit about wash sales rules, as I have not heard of that before. Could I switch the Roth to VTSAX and then buy VTI with some/all of the $400k or does that break the rules?

Thanks for the tip about Merrill Edge - will check it out!
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

MahoningValley wrote: Mon Aug 02, 2021 8:04 am
lakpr wrote: Mon Aug 02, 2021 3:51 am
Disagree vehemently with this particular suggestion. Money in Roth IRA should be invested for maximum growth. Ideally into a total stock market fund/etf, and/or total international stock market fund/etf. Not consigned to a fund that barely keeps up with inflation.
Granted, this position has been aggressively litigated here on Bogleheads. However I do not feel that it has been adjudicated. There are two camps out there.

My point is that these are extraordinary times, why can't your tax free account be a safe harbor, at least for the next couple of years?

Full disclosure, I have Value MF and REIT MF in my Roth along with bonds.
Would it make more sense to put the taxable money in the safer fund, so the non-taxable Roth can grow more?
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: Which Vanguard funds to invest $400k in?

Post by lakpr »

Daisy2178 wrote: Mon Aug 02, 2021 11:44 am Thank you so much, this is very helpful! If I am understanding correctly, the rationale for switching the Roth to VTSAX and then moving part of TSP to G is that the Roth will then grow more tax-free, or is there also another reason?

I don't think I really want to pay down the mortgage. As you said, I don't want to have all my money locked up in my house. I might feel differently if I knew for sure I was staying in the house forever and wanted to pay it off as soon as possible for peace of mind.

I will have to look up the bit about wash sales rules, as I have not heard of that before. Could I switch the Roth to VTSAX and then buy VTI with some/all of the $400k or does that break the rules?

Thanks for the tip about Merrill Edge - will check it out!
1. Yes. Since the growth in Roth is tax-free, you want to maximize that growth so you can have more tax-free wealth. Hence Roth IRA / Roth 401k should contain only stock investments, or realistically any particular asset class that you have high conviction that will provide you the maximum growth. Some people believe in "small-cap value"; some in "tech stocks"; some in "large cap growth"; some in "emerging markets". Whatever. If you reasonably believe that the particular investment gives you outsized returns, it belongs in the Roth to the extent possible. By any stretch of imagination, though, bonds are not that asset class.

2. No worries about not paying down that mortgage. Just realize that by not paying down the mortgage and choosing to invest in the market, you are essentially borrowing at 2.625% from the mortgage lender and investing it in the market. You need to make at least that much to break even. I was only trying to provide you alternatives and their impacts.

3. No, VTSAX and VTI are two different share classes of the same underlying fund. You would still be subject to wash sales rules. You may want to check this post by forum member Duckie about which funds are tax-loss-harvesting partners with each other:
viewtopic.php?p=6010852#p6010852

I want to add here that: wash sales are not illegal! It is just that you cannot deduct the loss in taxable account on your tax returns, if wash-sales occur and to the extent that wash-sales occurred. Consider a scenario: you sold 1000 shares of VTI in your taxable, and your loss had been $6 per share, for a total loss of $6000. Unknown to you, your Roth IRA purchased about 4 shares of VTI within the past 30 days, through dividend reinvestment. So the loss on your tax return is not 1000 * $6 = $6000, but (1000 - 4) * $6 = $5976. You cannot claim that $24 loss, it is lost forever. The impact on your tax return is $24 * your marginal tax rate; say it is 24%, that is a grand total of $4.76.

This is a very simplified example, but this is essentially the gist. If you organized your investments in a disciplined fashion from the beginning that you have zero overlap between taxable and Roth IRA, you could have claimed the entire $6000 loss.
User avatar
MahoningValley
Posts: 189
Joined: Sat Dec 01, 2007 11:38 am
Location: South Florida

Re: Which Vanguard funds to invest $400k in?

Post by MahoningValley »

Daisy2178 wrote: Mon Aug 02, 2021 11:58 am
Would it make more sense to put the taxable money in the safer fund, so the non-taxable Roth can grow more?

👍
Topic Author
Daisy2178
Posts: 18
Joined: Fri Jul 26, 2013 4:01 pm

Re: Which Vanguard funds to invest $400k in?

Post by Daisy2178 »

lakpr wrote: Mon Aug 02, 2021 12:33 pm
Daisy2178 wrote: Mon Aug 02, 2021 11:44 am Thank you so much, this is very helpful! If I am understanding correctly, the rationale for switching the Roth to VTSAX and then moving part of TSP to G is that the Roth will then grow more tax-free, or is there also another reason?

I don't think I really want to pay down the mortgage. As you said, I don't want to have all my money locked up in my house. I might feel differently if I knew for sure I was staying in the house forever and wanted to pay it off as soon as possible for peace of mind.

I will have to look up the bit about wash sales rules, as I have not heard of that before. Could I switch the Roth to VTSAX and then buy VTI with some/all of the $400k or does that break the rules?

Thanks for the tip about Merrill Edge - will check it out!
1. Yes. Since the growth in Roth is tax-free, you want to maximize that growth so you can have more tax-free wealth. Hence Roth IRA / Roth 401k should contain only stock investments, or realistically any particular asset class that you have high conviction that will provide you the maximum growth. Some people believe in "small-cap value"; some in "tech stocks"; some in "large cap growth"; some in "emerging markets". Whatever. If you reasonably believe that the particular investment gives you outsized returns, it belongs in the Roth to the extent possible. By any stretch of imagination, though, bonds are not that asset class.

2. No worries about not paying down that mortgage. Just realize that by not paying down the mortgage and choosing to invest in the market, you are essentially borrowing at 2.625% from the mortgage lender and investing it in the market. You need to make at least that much to break even. I was only trying to provide you alternatives and their impacts.

3. No, VTSAX and VTI are two different share classes of the same underlying fund. You would still be subject to wash sales rules. You may want to check this post by forum member Duckie about which funds are tax-loss-harvesting partners with each other:
viewtopic.php?p=6010852#p6010852

I want to add here that: wash sales are not illegal! It is just that you cannot deduct the loss in taxable account on your tax returns, if wash-sales occur and to the extent that wash-sales occurred. Consider a scenario: you sold 1000 shares of VTI in your taxable, and your loss had been $6 per share, for a total loss of $6000. Unknown to you, your Roth IRA purchased about 4 shares of VTI within the past 30 days, through dividend reinvestment. So the loss on your tax return is not 1000 * $6 = $6000, but (1000 - 4) * $6 = $5976. You cannot claim that $24 loss, it is lost forever. The impact on your tax return is $24 * your marginal tax rate; say it is 24%, that is a grand total of $4.76.

This is a very simplified example, but this is essentially the gist. If you organized your investments in a disciplined fashion from the beginning that you have zero overlap between taxable and Roth IRA, you could have claimed the entire $6000 loss.
Thanks, this is a great explanation! I appreciate the advice.
Post Reply