Seeking portfolio advice (w/ questions about 457b fund selection)

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Topic Author
vodkacab
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Joined: Fri Jan 14, 2022 5:46 pm

Seeking portfolio advice (w/ questions about 457b fund selection)

Post by vodkacab »

Hello from Vermont!
I’ve been lurking, and have read some of the recommended books, but still very much consider myself a newbie. I would definitely appreciate any portfolio advice. I have also posted some specific questions towards the bottom of my post. Thank you for your time!

Emergency funds: Yes, 6+ months

Debt: —Mortgage: $257K [30 years at 3%] Just purchased this house June 2021
—Federal Student Loan: $7K at 2.625%

Tax Filing Status: Married Filing Jointly

Tax Rate: 14.6% Federal, 1.9% State

State of Residence: Vermont

Age: I’m 36 and spouse is 40

Salary: Me: $60K
Spouse: $50K

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 40% international in stocks; 30% international in bonds

Portfolio: $502K

Taxable ($297K):
3.5% Vanguard Total Stock Market ETF (VTI) ER = 0.03% $17K
8.56% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER = 0.05% $43K
3.97% Vanguard Total International Bond Index Fund Admiral Shares (VTABX) ER = 0.11% $20K
25.47% Vanguard Total Stock Market ETF (VTI) ER = 0.03% $128K
17.63% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER = 0.11% $89K

Spouse’s Roth IRA at Vanguard ($73K):
2.75% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER = 0.05% $14K
0.4% Vanguard Total International Bond Index Fund Admiral Shares (VTABX) ER = 0.11% $2K
11.22% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER = 0.04% $56K
0.22% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER = 0.11% $1K

Spouse’s IRA at Vanguard ($13K):
0.71% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER = 0.05% $3.5K
1.02% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER = 0.04% $5K
0.86% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER = 0.11% $4.5K

Spouse’s 457b at Prudential ($22K):
0.89% Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX) ER = 0.035% $4.5K
0.24% Vanguard Value Index Fund Institutional Shares (VIVIX) ER = 0.04% $1K
1% Vanguard FTSE Social Index Fund Institutional Shares (VFTNX) ER = 0.12% $5K
0.53% Vanguard Institutional Index Fund Institutional Shares (VINIX) ER = 0.035% $2.5K
0.22% Vanguard Mid-Cap Index Fund Institutional Shares (VMCIX) ER = 0.04% $1K
0.13% T. Rowe Price Small-Cap Stock Fund I Class (OTIIX) ER = 0.75% Less than $1K
1.46% Vanguard Developed Markets Index Fund Institutional Shares (VTMNX) 0.05% $7K

My IRA at Vanguard ($19K):
2.54% Vanguard Total Bond Market ETF (BND) ER = 0.035% $13K
1.08% Vanguard Total International Bond ETF (BNDX) ER = 0.08% $5.5K
0.14% Vanguard Total Stock Market ETF (VTI) ER = 0.03% Less than $1K

My Roth IRA at Vanguard ($78K):
4.84% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER = 0.05% $24K
2.86% Vanguard Total International Bond Index Fund Admiral Shares (VTABX) ER = 0.11% $14K
7.79% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER = 0.11% $39K

State Defined Benefit Pension Plans:
$542 per month from another state (spouse’s pension)

Contributions:
$1,300/year to spouse’s 457B (no match)
$6,000/year to spouse’s Roth IRA
$6,000/year to my Roth IRA

Available Funds in spouse’s 457B (Managed through Prudential)
Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX) ER = 0.04%
Vanguard Value Index Fund Institutional Shares (VIVIX) ER = 0.04%
Vanguard Institutional Index Fund Institutional Shares (VINIX) ER = 0.04%
Vanguard Mid-Cap Index Fund Institutional Shares (VMCIX) ER = 0.04%
Vanguard Developed Markets Index Fund Institutional Shares (VTMNX) ER = 0.05%
Vanguard FTSE Social Index Fund Institutional Shares (VFTNX) ER = 0.12%
Vanguard U.S. Growth Fund Admiral Shares (VWUAX) ER = 0.28%
T. Rowe Price Retirement I 2010 Fund I Class ER = 0.34%
T. Rowe Price Retirement Balance I Fund I Class ER = 0.34%
T. Rowe Price Retirement I 2020 Fund I Class ER = 0.37%
State of Vermont Stable Value Fund ER = 0.41%
T. Rowe Price Retirement I 2030 Fund I Class ER = 0.41%
T. Rowe Price Retirement I 2040 Fund I Class ER = 0.43%
T. Rowe Price Retirement I 2050 Fund I Class ER = 0.45%
PIMCO Total Return ESG Fund Institutional Class ER = 0.53%
Dodge & Cox Balanced Fund ER = 0.53%
Calvert Bond Fund Class I ER = 0.56%
FPA New Income Fund ER = 0.57%
Dodge & Cox International Stock Fund ER = 0.63%
T. Rowe Price Small-Cap Stock Fund I Class ER = 0.75%
Pax Sustainable Allocation Fund Investor Class ER = 0.87%
Pax Global Environmental Markets Fund Institutional Class ER = 0.95%
Lazard Emerging Markets Equity Portfolio Institutional Shares ER = 1.11%



Questions:

1. Would it be okay to live off the money that is currently held in our taxable accounts and max out our 457b contributions with our earned money (in an effort to move our money from taxable accounts to tax-advantaged accounts)?

Are there any tax ramifications for doing so?

Would it be better to just keep the invested money where it is in the taxable accounts and put any extra money towards the 457b account moving forward? Prudential said that it charges 0.035% of the balance (of the 457b account) every quarter, so I’m not sure if putting more money in the 457b account would cost us more in the long run than just keeping the money in the taxable account with Vanguard.

2. Selections in the 457b are limited to the above funds. I tried to do an approximation of the total stock market using the Morningstar X-Ray tool, but I’m not sure if I’m getting enough Large Cap Growth. Here what the X-Ray tool had produced when I input my current fund selection:

Large Value: 18%
Large Blend: 30%
Large Growth: 25%
Mid Value: 7%
Mid Blend: 10%
Mid Growth: 6%
Small Value: 1%
Small Blend: 2%
Small Growth: 1%

Does this look okay? Is there an alternative combo of funds I should be doing instead? Can I lose OTIIX; the 0.75% ER seems steep.


The above are my 2 questions, but I’m happy to accept advice and feedback about anything else. Thank you again for your time!
Last edited by vodkacab on Sun Jan 16, 2022 10:59 am, edited 1 time in total.
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Duckie
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by Duckie »

vodkacab, welcome to the forum.
vodkacab wrote: Fri Jan 14, 2022 6:43 pm Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 40% international in stocks; 30% international in bonds
I would skip the international bonds completely.
Taxable ($297K):
3.5% Vanguard Total Stock Market ETF (VTI) ER = 0.03% $17K
8.56% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) ER = 0.05% $43K
3.97% Vanguard Total International Bond Index Fund Admiral Shares (VTABX) ER = 0.11% $20K
25.47% Vanguard Total Stock Market ETF (VTI) ER = 0.03% $128K
17.63% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER = 0.11% $89K
You have VTI listed twice, 3.5% and 25.47%. Why twice?
Turn OFF automatic dividend reinvestment. Don't funnel any more money toward the two bond funds.
Would it be okay to live off the money that is currently held in our taxable accounts and max out our 457b contributions with our earned money (in an effort to move our money from taxable accounts to tax-advantaged accounts)?
You could do that. Why is your taxable account so large? It's over half your portfolio.
Are there any tax ramifications for doing so?
Selling anything with a gain will create taxes. If you do this, consider starting with your two bond funds which probably have smaller gains (and don't belong in taxable anyway).
Would it be better to just keep the invested money where it is in the taxable accounts and put any extra money towards the 457b account moving forward?
What extra money? If you can afford to contribute without selling in taxable why aren't you?
Prudential said that it charges 0.035% of the balance (of the 457b account) every quarter, so I’m not sure if putting more money in the 457b account would cost us more in the long run than just keeping the money in the taxable account with Vanguard.
That's only 0.14%. Getting money into tax-sheltered is generally better than taxable as long as the tax-hit is minor.
Selections in the 457b are limited to the above funds. I tried to do an approximation of the total stock market using the Morningstar X-Ray tool, but I’m not sure if I’m getting enough Large Cap Growth.
<snip>Is there an alternative combo of funds I should be doing instead? Can I lose OTIIX; the 0.75% ER seems steep.
In the 457b the only funds I would use are:
  • Vanguard Institutional Index (VINIX) 0.04% -- Large caps, 80% of US stocks
  • Vanguard Developed Markets Index (VTMNX) 0.05% -- Developed markets, ~80% of international stocks
  • Vanguard Total Bond Market Index (VBTIX) 0.04% -- US bonds
I wouldn't bother with anything else in the account. In fact, I would have 100% VBTIX in this account.

I would also have both TIRAs 100% bonds, VBTLX and/or BND. I would drop international bonds in all accounts. The problem is that your Roth IRAs and taxable accounts are the vast majority of your assets and your 30% bonds have to go somewhere. Your pre-tax accounts (457b and both TIRAs) are only about 10%. That means the other 20% of your bonds will probably end up in your Roth IRAs. That's not optimal but will have to do.
Topic Author
vodkacab
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Joined: Fri Jan 14, 2022 5:46 pm

Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by vodkacab »

Thanks for the input!

I accidentally had VTI listed twice since I have 2 taxable accounts, and I wanted to present the info in one block. One taxable account holds 17K and the other account holds the rest. The reason my taxable account is so large is because of an unexpected windfall.

You also asked "What extra money? If you can afford to contribute without selling in taxable why aren't you?"
I was asking what to do with any money that my spouse and I saved at the end of every month (we max out our Roths already). I was planning to 1) start my own 457b, 2) set both of our 457b contributions to the yearly max, 3) siphon money from the taxable accounts to cover living expenses in the mean time. I guess by your comment, you're saying that it's better to leave the money in the taxable accounts alone?

I have Vanguard PAS, and they were the ones pushing for international bonds strangely enough.
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retiredjg
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by retiredjg »

vodkacab wrote: Fri Jan 14, 2022 6:43 pm Tax Rate: 14.6% Federal, 1.9% State
I'm wondering where you got this number. Usually when someone has a number that is not a tax bracket, they have given their effective tax rate. However, I think you might be in the 12% tax bracket so your effective tax rate would be less than 12%.

1. Would it be okay to live off the money that is currently held in our taxable accounts and max out our 457b contributions with our earned money (in an effort to move our money from taxable accounts to tax-advantaged accounts)?
If you are in the 12% bracket (which is yet to be seen) I would not do this because...deferring taxes at 12% is not particularly beneficial. I'm not saying you need to avoid putting money into tax-deferral, but you sure don't need to sell in taxable to put money in tax-deferral at 12%.

Are there any tax ramifications for doing so?
Probably. You might be able to sell some things in taxable without capital gains, but I'm not sure. It depends on how much of your total income is going into the pension and into health care premiums at work.

Would it be better to just keep the invested money where it is in the taxable accounts and put any extra money towards the 457b account moving forward?
My initial impression is to leave the money where it is.

2. Selections in the 457b are limited to the above funds. I tried to do an approximation of the total stock market using the Morningstar X-Ray tool, but I’m not sure if I’m getting enough Large Cap Growth. Here what the X-Ray tool had produced when I input my current fund selection:
There is no need for this many funds in this account. It is not necessary to approximate the total stock market...one fund (Vanguard Institutional Index Fund Institutional Shares (VINIX) ER = 0.04%) will do the trick. the 500 index and the total market track each other almost identically.
Topic Author
vodkacab
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by vodkacab »

I tried to calculate the federal and state rates off of a paystub, so maybe that wasn't the best approach.

Looking at the 2021 federal income tax brackets for married filing jointly, it looks like we'd be at 22%.
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retiredjg
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by retiredjg »

vodkacab wrote: Sat Jan 15, 2022 5:00 pm I tried to calculate the federal and state rates off of a paystub, so maybe that wasn't the best approach.

Looking at the 2021 federal income tax brackets for married filing jointly, it looks like we'd be at 22%.
Let's look a little closer.

The number you should use to determine your tax bracket is "taxable income" which is a lot less than "how much we made". "Taxable Income" is found on your tax-return...lately has been line 15. This number is after the pension and employer sponsored health care and the 457 and your deductions (standard or itemized) are taken out. I suspect you will come in under the 22% tax bracket, but you may be close.

If you have started preparing your 2021 taxes, you might be able to figure this number. If not, look at line 15 on your 2020 Form 1040 (assuming similar income) and compare to this link (be sure to pick the right year).

http://www.moneychimp.com/features/tax_brackets.htm

Let us know what you find out.
Topic Author
vodkacab
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by vodkacab »

I had to pull last year's info (different jobs but similar salaries). It looks like we were at 89,705 which had put us in 22% for 2020.
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retiredjg
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by retiredjg »

This makes the decision less clear in my mind. I consider the 22% bracket still to be a low bracket, but deferring taxes at 22% is definitely more beneficial than deferring at 12%.

The trouble is you have to pay tax on any gains you have in taxable in order to put more into the 457. Or put less into Roth IRA so you can put more into the 457.

What do you expect your future income to look like? Are you more likely to get ordinary raises and maybe an occasional promotion or more likely to have a significant increase in income as you move through your careers?
Topic Author
vodkacab
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by vodkacab »

retiredjg wrote: Sun Jan 16, 2022 9:53 am This makes the decision less clear in my mind. I consider the 22% bracket still to be a low bracket, but deferring taxes at 22% is definitely more beneficial than deferring at 12%.

The trouble is you have to pay tax on any gains you have in taxable in order to put more into the 457. Or put less into Roth IRA so you can put more into the 457.

What do you expect your future income to look like? Are you more likely to get ordinary raises and maybe an occasional promotion or more likely to have a significant increase in income as you move through your careers?
We get regular increases of about 2-3% each year until the 5 year mark, and then it goes to every other year. We're not very ambitious/trying to get promoted.

I looked back this morning at our current paystubs, and it looks like in practice, for federal taxes, we are being taxed 15.7% (of our federal taxable gross). I don't know if that makes a difference.

As for the capital gains tax issue, that only applies to the amount gained as the name suggests right? We originally put a windfall of $275K in the taxable account, and so far it has only grown about $5K, so I only have to worry about the gains tax on the $5K, correct?

Thank you for slogging through the tax issue with me; I really appreciate your time and help.
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retiredjg
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by retiredjg »

As you start to get deeper into financial decisions, you will find that marginal tax rate is "where it all happens". An overall or effective rate can be useful to know occasionally, but it is what happens "at the margin" - your next dollar earned or the next dollar taken out in retirement - that determines what decisions to make.

If you are in the 22% tax bracket, your marginal rate will generally be 22% (there are exceptions). If you earn another dollar, 22% of it will go to Uncle Sam. If in retirement and taking a dollar out of an IRA, it will be taxed at 22% if you are in the 22% bracket (again, there are exceptions).

If you defer taxes now (saving 22% on the dollar) and later can take the money out at only 15 cents on the dollar....you end up with more money. That is why deferring taxes at 22% is likely to be a good idea (because there is a good chance you will be in a rate lower than 22% in retirement). That is also why deferring taxes at 12% is not particularly helpful - because it is unlikely (not impossible) to be at a rate lower than that in retirement.

As for the capital gains tax issue, that only applies to the amount gained as the name suggests right? We originally put a windfall of $275K in the taxable account, and so far it has only grown about $5K, so I only have to worry about the gains tax on the $5K, correct?
That is correct. And if you sell bonds fro the taxable account, the gains on those shares are unlikely to be very much so there should. not be much tax. Then buy bonds in the 457 to keep your allocations right.


I would not sell so much in taxable that it takes you way down into the 12% bracket. But you certainly could sell enough to get near or just into the 12% bracket and that would avoid taxes at the 22% rate on a few thousand dollars.
rhubarbpie
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by rhubarbpie »

If you calculate the percentages of your desired AA, and extrapolate them out to your current 500K portfolio, you get:
42%, or 210K, wanted in US stock
28%, or 140K, wanted in intl stock
18%, or 90K, in US bond
9%, or 45K, in intl bond

The bonds are best held in the traditional IRAs and 457, but right now you've only got 55K of space in them where you need 135K, and you're only adding 1,300 a year. Maybe it makes sense to do traditional instead of Roth IRA contributions, maybe you could put more in the 457, maybe you could buy i-bonds to extend your tax-deferred space, and/or maybe there's a tax-exempt bond fund you could use in taxable. This seems to me to be your biggest issue.

If I were you I would radically simplify. Move the traditional IRAs to VBTLX/BND and/or VTABX/BNDX as needed, and make the 457 all VBTIX. Do traditional IRA contributions and put as much in the 457 as you can. As those bond percentages increase, sell the bonds in your Roth IRAs and move to all VTI and VTIAX. Turn off automatic dividend reinvestment in the taxable account, and sell everything except VTI and VTIAX as you can, depending on capital gains, and possibly use some of that for living expenses while you max out the 457.
MHA556
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by MHA556 »

Not gonna worry about the fund particulars.

But if you have any intentions at all of being retired before age 59 1/2, bump up that 457 contribution. No penalty for withdrawals after normal retirement age. That is a significant advantage over most other retirement savings plan types.
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vodkacab
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by vodkacab »

Thank you all so much for your time and assistance! It sounds like this will be my game plan moving forward:

1) Devote the space in both of our traditional IRAs to 100% bonds.
2) Set contributions to max both of our 457b accounts and buy 100% VBTIX in this space.
3) Sell off bonds in the taxable account—withdrawing just enough to stay in the top half of the 12% bracket
4) I will still need more space for our bonds as I make room in our 457b accounts, but I’ll keep them in the Roth accounts for now and move those out as bond space frees up in the 457b accounts.
5) The rest of the space in Roth and the taxable accounts will be devoted to stocks (with domestic stocks in our Roths and domestic + international stocks in the taxable accounts). We will continue maxing out our Roth IRAs as well.

I hope I got all of this right. Thank you all so much for your help; I had been putting off tackling this for months now, but I’m glad I’m starting the journey.
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retiredjg
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by retiredjg »

I think you are headed in the right direction, but may be going too far.

Will each of you have a pension or just one of you?
Topic Author
vodkacab
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by vodkacab »

retiredjg wrote: Mon Jan 17, 2022 6:54 am I think you are headed in the right direction, but may be going too far.

Will each of you have a pension or just one of you?
We both will.
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retiredjg
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by retiredjg »

Here's my thinking. With two pensions, you will not need much of a tax-deferred account because your pensions will cover much (if not all) of your living expenses. This argues for leaving more of the the money in the taxable account.

If I were in your shoes, I'd estimate income and perhaps contribute enough to get just into or not quite into the 12% bracket. If you do that, you will be deferring taxes at 22% (possibly helpful) and deferring little to none at 12% (which is probably not helpful at all).

So what I'm thinking is that you will not put enough in the two 457 accounts to fill them....just enough to bring your income down.

Comparing to your 2020 taxes...when your taxable income (line 15) was...well, the number disappeared. But I think it was only $5k to $6k over the top of the 12% bracket. So with similar numbers, you would only need maybe $6k more in the 457's (jointly) to get you into the lower bracket.

It appears you have left/plan to leave PAS. Except for the taxable account, you could have a simple portfolio just using the appropriate target fund in each account. Or you can split them up into individual funds, much in the manner you already described.
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retiredjg
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by retiredjg »

vodkacab wrote: Sat Jan 15, 2022 6:58 pm I had to pull last year's info (different jobs but similar salaries). It looks like we were at 89,705 which had put us in 22% for 2020.
It didn't disappear after all.

In 2020, the top of the 12% bracket was. $80,250 so putting $9,500 into the 457s would have pulled you into the 12% bracket. See if you can estimate the numbers for the future.

Income (salary and other) minus pension contributions, 457 contributions, and employer sponsored health insurance premiums, and your deductions (standard or itemized) should get you in the ball park.
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vodkacab
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Re: Seeking portfolio advice (w/ questions about 457b fund selection)

Post by vodkacab »

retiredjg wrote: Mon Jan 17, 2022 10:40 am
vodkacab wrote: Sat Jan 15, 2022 6:58 pm I had to pull last year's info (different jobs but similar salaries). It looks like we were at 89,705 which had put us in 22% for 2020.
Income (salary and other) minus pension contributions, 457 contributions, and employer sponsored health insurance premiums, and your deductions (standard or itemized) should get you in the ball park.
Thank you for this—

The pensions would cover slightly over half to two-thirds of our living expenses, depending on how long we work. We're aiming to retire a little early and have some of our investments fund the gap period until our pensions kick in around age 62, at which point it would be a combo.

My thought is to at least max out the 457b for the first year to create more of that needed bond space in my portfolio and then reassess for next year.
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