Portfolio advice, please :)

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Topic Author
OrangeMan234
Posts: 4
Joined: Sun Dec 05, 2021 1:12 pm

Portfolio advice, please :)

Post by OrangeMan234 »

Hey all, would love your help reviewing our portfolio!

Our goal is to retire in our early 60s with $4M. Our incomes have risen significantly in the last couple of years and we're just now able to start maxing out our annual retirement contributions. The ratio of our portfolio value to income is therefore lower than we'd like, and we're hoping to catch up. We're generally pretty risk tolerant, and I expect/hope we'll be able to increase contributions in the next few years by $25-50k from a combination of continued income growth and expense reduction. I'd love any advice on how to invest that in order to reach our goal. Also generally interested in consolidation and simplification.

~~~~~~

Combined annual gross income: $325,000
Annual spending: $185,000 (HCOL area)
Emergency funds: $48,000

Debt
Credit card: $15,000 (paid off in full each month)
Car loan (<1 year remaining): $5,000 @1.9%
Mortgage (29 years remaining): $815,000 @3.0%

Tax Filing Status: MFJ
Tax Rate: 24% Federal, 6% State. Likely to get to 32% federal in 2022.

Ages: both early forties
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 10% of stocks (I guess?)

Total portfolio excluding his pension and 529s: $594,000
Net Worth: $965,000

~~~~~~

Current retirement assets

Taxable via RobinHood
$66,000 (11.1%) — Vanguard ESG US Stock ETF — ESGV (0.12% ER)
$39,000 (6.6%) — iShares US Technology ETF — IYX (0.41% ER)
$38,000 (6.4%) — Assorted growth stocks and ETFs
$37,000 (6.2%) — Assorted crypto

Her 403b via Prudential
$104,000 (17.5%) — American Funds 2045 Target Date Retirement Fund® Class R-6 — RFHTX (0.39% ER) — 12% employer match

Her 401k via Fidelity
$221000 (37.2%) — Fidelity Freedom® 2045 Fund — FJTKX (0.5% ER)

His 401k via Vanguard
$68,000 (11.4%) — Vanguard Institutional Target Retirement 2045 Fund — VITLX (0.09% ER) — 1% employer match

His IRA at Wealthfront
$6,000 (1.0%) — Wealthfront Risk Parity Fund Class W — WFRPX (0.25% ER)

His & Her IRAs
$15,000 (2.5%) — Assorted smaller 401ks and IRAs that should be consolidated, mostly in target date funds

His pension $53,000 (not included in portfolio value)

529s (not included in portfolio value)
Child 1 (age 10) $49,000
Child 2 (age 6) $33,000

~~~~~~

New annual Contributions
His 401k: $20,500 + $2,000 employer match
Her 403b: $20,500 + $14,000 employer contribution
Taxable: $5,000
Child 1 529: $9,600
Child 2 529: $6,000
His pension: $6,500 (100% paid by employer)

Available funds
Her 403b has about 20 funds to choose from, including a self-directed brokerage account for $100/yr.
Her 401k has about 45 funds to choose from.
His 401k has about 25 funds to choose from, mostly Vanguard

~~~~~~

The plan + questions:
1. Our plan is to (a) prioritize setting up backdoor Roth IRAs this year, perhaps for the last time it's an option, and then (b) going forward, if we are able to save an additional $25-$50k in contributions per year as I expect, we will put that into ESGV (Vanguard's ESG total US ETF) in a taxable account. Any comments welcome! (Except on the merits of ESG funds relative to conventional alternatives — we understand the tradeoffs).
2. I will likely stick with the Vanguard target retirement fund in my 401k because the fees are low and I don't want to actively manage these funds. But her 403b target date fund has a higher expense ratio of 0.39%, so I'm wondering if I should move from the target fund in her 403b toward the VITLX (0.09% ER) target fund in the self-directed brokerage option.
3. For the sake of simplicity, we're planning to consolidate by rolling over her 401k into her Prudential 403b, her smaller IRAs into her Prudential 403b, and his smaller IRAs (including Wealthfront) into his 401k.
4. Are we funding 529s appropriately today? It's important to us to be able to fund the vast majority of college education at a top tier school if our kids are fortunate enough to get in to one, and we'd be willing to work another 1-3 years in order to do that. However, we want to avoid (a) over-investing in our kid's education relative to our retirement accounts, (b) throwing money away if they go to lower cost schools, and/or (c) taking ourselves out of consideration for financial aid (though perhaps that's not an option regardless). Note that we also expect to get ~$100k per child from grandparents.
5. Not really a question, but from observing other threads, I expect to hear that technology stocks and crypto are overweighted in my portfolio. I'd respond that they started as a much smaller part of the portfolio and simply grew much faster than the rest. Perhaps I should rebalance, but as I said, we understand the risks, and we're comfortable with higher risk in exchange for a higher return over the long run.

Other general thoughts and advice very welcome — thanks in advance!!
tashnewbie
Posts: 4283
Joined: Thu Apr 23, 2020 12:44 pm

Re: Portfolio advice, please :)

Post by tashnewbie »

You seem to know the potential pitfalls of your approach and portfolio. I won’t say anything about them.

I agree it makes sense to consolidate the accounts as you’ve said.

I would definitely try to use a cheaper option in her 403b. You didn’t list any of the funds available. It might be easy to construct a simple 3-fund portfolio from the funds available. If you want to use a target date fund, it’s much cheaper to use the brokerage link: assuming the account would have $340k after the consolidation, you’d pay an extra ~$900/year for the 0.39% TDF ([$340k x 0.003] - 100).

If you want to do the full backdoor Roth this year which includes the second step of a Roth conversion, you should move the pretax balances in the IRAs into his and her respective workplace plans. Otherwise you’d have to deal with prorated taxes on the backdoor conversion amounts. You have until December 31 to clear the pretax balances from the IRAs (by moving into workplace plans or doing conversions and paying associated tax), to avoid the pro rata rule. Time is of the essence if you want to do this.
chassis
Posts: 2183
Joined: Tue Mar 24, 2020 4:28 pm

Re: Portfolio advice, please :)

Post by chassis »

$4m in your 60s from your current net worth is very doable, even more so with strong new contributions to investment accounts.

I would not hold bonds at your age, or any age for that matter. They don't return. Things have changed since the 70s and 80s when bonds were reasonable instruments. Investment advice from the mainstream retirement planning outlets regarding portfolio allocations has not kept up and is woefully slow to evolve.

Consider "international" as choosing US equities (stocks) with global currency and market exposure. Many household names come to mind. I argue it's better to buy a US equity with foreign exposure than it is to buy a foreign company, because you invest in Team USA in the most secure equities market in the world, and tap into international economic phenomena.
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ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: Portfolio advice, please :)

Post by ruralavalon »

Welcome to the forum :) .

OrangeMan234 wrote: Sun Dec 05, 2021 2:11 pmNew annual Contributions
His 401k: $20,500 + $2,000 employer match
Her 403b: $20,500 + $14,000 employer contribution
Taxable: $5,000
Child 1 529: $9,600
Child 2 529: $6,000
His pension: $6,500 (100% paid by employer)
Establishing a high savings rate is the most important investing decision you can make. You already make the maximum annual contributions to the employer plans.

Consider making contributions to two Backdoor Roth IRAs, one for each of you, and increasing contributions to the taxable brokerage account.


Bogleheads wiki wrote:If you cannot contribute to a Roth IRA because your income exceeds the income eligibility limit, you can still choose to contribute indirectly through a two step process known informally as the backdoor Roth.

. . . . . .

1. Make a nondeductible (i.e. taxed and not deducted) contribution to a traditional IRA.
2. Then convert the traditional IRA to a Roth IRA.

The net effect of performing these two steps is equivalent to contributing to a Roth IRA. Since there are no income limits for either of these steps, you can use this backdoor Roth technique to effectively contribute to a Roth IRA regardless of how high your income is.

OrangeMan234 wrote: Sun Dec 05, 2021 2:11 pmAges: both early forties
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 10% of stocks (I guess?)
I suggest around 20% in fixed income (which can be bond funds, federally insured CDs or savings accounts, a Stable Value Fund or Guaranteed Income Fund in the employer plans, or I savings bonds). "Series I Savings Bonds (often called I Bonds) are government savings bonds issued by the U.S. Treasury that offer inflation protection. . I Bonds offer tax-deferral for up to 30 years and are free from state and local taxation."

"The initial interest rate on new Series I savings bonds is 7.12 percent. You can buy I bonds at that rate through April 2022." Treasury Direct



I suggest around 20-30% of stocks in international stocks, so around 20% of portfolio in inter stocks.

OrangeMan234 wrote: Sun Dec 05, 2021 2:11 pm2. I will likely stick with the Vanguard target retirement fund in my 401k because the fees are low and I don't want to actively manage these funds. But her 403b target date fund has a higher expense ratio of 0.39%, so I'm wondering if I should move from the target fund in her 403b toward the VITLX (0.09% ER) target fund in the self-directed brokerage option.
For her 403b account both American Funds target detectives in the basic plan and Vanguard target date funds in the Self Directed Brokerage account are highly rated.

Morningstar (3/18/2021), "The Best Target-Date Funds for 2021 and Beyond".


OrangeMan234 wrote: Sun Dec 05, 2021 2:11 pmAsking3. For the sake of simplicity, we're planning to consolidate by rolling over her 401k into her Prudential 403b, her smaller IRAs into her Prudential 403b, and his smaller IRAs (including Wealthfront) into his 401k
In my opinion simplifying by consolidating accounts is a good idea.

OrangeMan234 wrote: Sun Dec 05, 2021 2:11 pm4. Are we funding 529s appropriately today? It's important to us to be able to fund the vast majority of college education at a top tier school if our kids are fortunate enough to get in to one, and we'd be willing to work another 1-3 years in order to do that. However, we want to avoid (a) over-investing in our kid's education relative to our retirement accounts, (b) throwing money away if they go to lower cost schools, and/or (c) taking ourselves out of consideration for financial aid (though perhaps that's not an option regardless). Note that we also expect to get ~$100k per child from grandparents.
In have no opinion. Tax advantages for 529s didn't exist until 1996, and there was no tax advantage when we were covering college expenses for our children.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Topic Author
OrangeMan234
Posts: 4
Joined: Sun Dec 05, 2021 1:12 pm

Re: Portfolio advice, please :)

Post by OrangeMan234 »

I would definitely try to use a cheaper option in her 403b. You didn’t list any of the funds available. It might be easy to construct a simple 3-fund portfolio from the funds available. If you want to use a target date fund, it’s much cheaper to use the brokerage link: assuming the account would have $340k after the consolidation, you’d pay an extra ~$900/year for the 0.39% TDF ([$340k x 0.003] - 100).
tashnewbie, I would be able to assemble a 3 fund portfolio using various Fidelity funds available in her 403b. But I'd pay $100/year to use a low-ER target date fund instead of having to adjust the allocations.
I would not hold bonds at your age, or any age for that matter. They don't return. Things have changed since the 70s and 80s when bonds were reasonable instruments. Investment advice from the mainstream retirement planning outlets regarding portfolio allocations has not kept up and is woefully slow to evolve.
chassis, you are suggesting the opposite not only of "mainstream retirement planning outlets" but of John Bogle and the Bogleheads wiki, no? https://www.bogleheads.org/wiki/Asset_allocation. I'm quite risk tolerant but figured 10% was the bare minimum...?
If you want to do the full backdoor Roth this year which includes the second step of a Roth conversion, you should move the pretax balances in the IRAs into his and her respective workplace plans. Otherwise you’d have to deal with prorated taxes on the backdoor conversion amounts. You have until December 31 to clear the pretax balances from the IRAs (by moving into workplace plans or doing conversions and paying associated tax), to avoid the pro rata rule. Time is of the essence if you want to do this.
Thanks for the advice on backdoor roths, tashnewbie and ruralavalon. I still don't quite get the prorata rule but I figure if I read the wiki on it a few more times it'll click... Anyway I will hustle to set these up while the year.

Still very curious to hear any further thoughts on the appropriate 529 contributions...
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