Portfolio Review: new house, big windfall

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Topic Author
boombaz
Posts: 41
Joined: Sat Dec 28, 2013 12:13 am

Portfolio Review: new house, big windfall

Post by boombaz »

Hello Bogleheads. My spouse and I have recently gone through some big changes in our financial lives. We received a big windfall and bought our first house. This has caused some disruption in what was previously a well-manicured 3-fund portfolio.

We'd appreciate your help sorting through the mess and getting back on track.

Emergency funds: Yes, part of taxable fixed income allocation.

Debt: Mortgage (30-year fixed, 6.25%, 30 years remaining, $1.5M principle remaining, $600k equity)

Tax Filing Status: Married Filing Jointly

Tax Rate: 37% Federal, 0% State

State of Residence: WA

Age: Me 34, Spouse 32

Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 30% of stocks

Approximate size of your total portfolio: $3.1M

Current retirement assets

My 401k at Fidelity

6% Fidelity Total Market Index Fund (FSKAX) (0.01%)
3% Fidelity U.S. Bond Index Fund (FXNAX) (0.03%)

Company match? No
Mega Backdoor Roth IRA available

My Roth IRA at Schwab

4% Vanguard Total Stock Market Index Fund ETF (VTI) (0.01%)
2% Fidelity Total Market Index Fund (FSKAX) (0.01%)
0% Schwab Total Stock Market Index Fund (SWTSX) (0.03%)

Spouse's Roth IRA at Schwab

4% Schwab Total Stock Market Index Fund (SWTSX) (0.03%)

My Taxable at Schwab

6% Vanguard Total Stock Market Index Fund ETF (VTI) (0.01%)
3% Vanguard Total International Stock Index Fund ETF (VXUS) (0.07%)

Joint Taxable at Schwab

72% Cash

Contributions

New annual contributions

$66,000 my 401k (no employer match, max out pre-tax amount, max remaining total contribution limit with after-tax)
$6,500 my Roth IRA (via backdoor)
$6,500 spouse's Roth IRA (via backdoor)
whatever remains after expenses to mortgage/taxable

Available funds

Funds available in my 401(k)

COL DIVIDEND INC I3 (CDDYX) (0.55%)
FID 500 INDEX (FXAIX) (0.015%)
FID LG CAP GR IDX (FSPGX) (0.035%)
FID TOTAL MKT IDX (FSKAX) (0.015%)
BLKRK MD CP GR EQ K (BMGKX) (0.7%)
FID MID CAP IDX (FSMDX) (0.025%)
MFS MID CAP VALUE R6 (MVCKX) (0.63%)
AM CENT SMCAP VAL R6 (ASVDX) (0.74%)
FID SM CAP IDX (FSSNX) (0.025%)
AF NEW WORLD R6 (RNWGX) (0.57%)
FID EMRG MKTS IDX (FPADX) (0.075%)
FID INTL INDEX (FSPSX) (0.035%)
JPM INTL EQUITY R6 (JNEMX) (0.61%)
C&S INST REALTY SHS (CSRIX) (0.76%)
LD ABT DEV GRTH R6 (LADVX) (0.59%)
FID FDM IDX 2005 IPR (FFGFX) (0.08%)
FID FDM IDX 2010 IPR (FFWTX) (0.08%)
FID FDM IDX 2015 IPR (FIWFX) (0.08%)
FID FDM IDX 2020 IPR (FIWTX) (0.08%)
FID FDM IDX 2025 IPR (FFEDX) (0.08%)
FID FDM IDX 2030 IPR (FFEGX) (0.08%)
FID FDM IDX 2035 IPR (FFEZX) (0.08%)
FID FDM IDX 2040 IPR (FFIZX) (0.08%)
FID FDM IDX 2045 IPR (FFOLX) (0.08%)
FID FDM IDX 2050 IPR (FFOPX) (0.08%)
FID FDM IDX 2055 IPR (FFLDX) (0.08%)
FID FDM IDX 2060 IPR (FFLEX) (0.08%)
FID FDM IDX 2065 IPR (FFIKX) (0.08%)
FID FDM IDX INC IPR (FFGZX) (0.08%)
AF INFL LINKED BD R6 (RILFX) (0.29%)
DFA INVT GRD PORT IS (DFAPX) (0.19%)
FID US BOND IDX (FXNAX) (0.025%)
PGIM HIGH YIELD R6 (PHYQX) (0.38%)
FID GOVT MMKT K6 (FNBXX) (0.27%)

Proposed portfolio

Before the disruption of liquidating funds for the house down payment and the windfall, we had a 3-fund portfolio of mostly VTI, VXUS, and VMFXX (Vanguard Federal Money Market).

My proposal for how to clean this up is:

My 401k at Fidelity

9% Fidelity U.S. Bond Index Fund (FXNAX) (0.03%)

Company match? No
Mega Backdoor Roth IRA available

My Roth IRA at Schwab

6% Schwab Total Stock Market Index Fund (SWTSX) (0.03%)

NOTE: Choosing the Schwab Total Stock Market fund here to avoid wash sales in taxable.

Spouse's Roth IRA at Schwab

4% Schwab Total Stock Market Index Fund (SWTSX) (0.03%)

My Taxable at Schwab

6% Vanguard Total Stock Market Index Fund ETF (VTI) (0.01%)
3% Vanguard Total International Stock Index Fund ETF (VXUS) (0.07%)

NOTE: leaving this untouched as there are large capital gains here.

Joint Taxable at Schwab

33% Vanguard Total Stock Market Index Fund ETF (VTI) (0.01%)
18% Vanguard Total International Stock Index Fund ETF (VXUS) (0.07%)
21% Schwab U.S. Treasury Money Fund – Ultra Shares (SUTXX) (0.19%)
0% Schwab Municipal Money Fund - Ultra Shares (SWOXX) (0.19%)
0% Schwab Value Advantage Money Fund – Ultra Shares (SNAXX) (0.19%)

NOTE: Planning to use the large cash balance we have to hit the $1M minimum on the 3 major classes of money market fund to get access to the ultra shares.

Questions
  1. Does my proposed portfolio and asset allocation look reasonable?
  2. We currently have sufficient assets in cash to pay off the mortgage. At a 6.25% rate, should we do this?
  3. Our tax advantaged space is not sufficient to hold our entire bond allocation. Should my 401k be 100% bonds or 0% bonds? I think tax-equivalent yields if holding fixed income in taxable, future RMDs, and the ability to do Roth conversions between early retirement and full retirement age are major considerations here, but I don't have enough background to know how to evaluate this choice.
  4. My family currently has health/vision/dental insurance (through my employer), disability insurance (a small policy through my employer), car insurance with $1M in liability coverage, homeowners insurance with $300k in liability coverage, an umbrella policy with $5M in liability coverage, earthquake insurance on our home. Are we missing anything here?
  5. My family is lacking in the estate planning department. All retirement accounts have beneficiaries assigned. Other than putting a will in place, is there anything else I should be considering for estate planning? Will I want to store these assets in a revocable trust?
HomeStretch
Posts: 11419
Joined: Thu Dec 27, 2018 2:06 pm

Re: Portfolio Review: new house, big windfall

Post by HomeStretch »

1. Yes. Consider transferring your Taxable holdings in-kind to the joint Taxable account to simplify.

2. Paying down a mortgage is a personal choice. Given your high mortgage rate and your large portfolio, I personally would be paying down the mortgage in lieu of contributing more to the Taxable account.

3. Does your 401k allow you to have different investment allocations in your Traditional and Roth 401k accounts or must they be invested identically?

4. I don’t see life insurance for you and your spouse listed. Consider level-premium term life through a broker. Selectquote.com is an online broker (there are others too) that I have used and liked. You may also want to review the adequacy of your small disability policy and whether your spouse needs coverage. Consider a non-employer policy for portability.

5. Consult with an experienced estate and trust attorney in your state asap for estate planning including Wills, Trust(s)?, durable power-of-attorneys and healthcare reps/advance directives. Review the beneficiary designations for accounts/insurance policies with the attorney. Get POA access set up for all individual accounts at your financial institutions so a spouse can manage them in the event the account owner is incapacitated.

Search the forum for recent threads about RLTs which will give reasons for having a RLT (or not) and the pros/cons. One factor is whether or not your state probate process is difficult. Another factor is your age (younger persons are less likely to need a RLT). If you have minor beneficiaries, your Wills will need a Testamentary Trust(s) as minors cannot inherit outright. Discuss with your estate attorney.
Outer Marker
Posts: 4382
Joined: Sun Mar 08, 2009 8:01 am

Re: Portfolio Review: new house, big windfall

Post by Outer Marker »

I would make paying down that huge 6.25% mortgage your number one priority. 6.25% is greater than Vanguard's 10 year market forecast for U.S. equities of 4.1 to 6.1%. Max out your tax advantaged accounts but apply everything else to the mortgage. Try to get it down to the $750K deductablity limit as soon as possible.
Mike Scott
Posts: 3579
Joined: Fri Jul 19, 2013 2:45 pm

Re: Portfolio Review: new house, big windfall

Post by Mike Scott »

I would give serious consideration to paying the mortgage in full using the cash and then put the "mortgage payments" back into investments asap.
desiderium
Posts: 1264
Joined: Sat Jan 04, 2014 10:08 am

Re: Portfolio Review: new house, big windfall

Post by desiderium »

I would suggest tackling the mortgage given the "guaranteed return". From your tax bracket, I gather that you may be able to accelerate payments, so you could consider paying part with a lump sum and using excess income to finish the job.

Get an attorney experienced in estates who is about your age. You will want to revisit your estate plan periodically as laws and your goals change, and your wealth grows. The reasons often cited for using trusts are less compelling in Washington, and there is a state estate tax with a fairly low threshold. Do it soon, as it will likely affect the types of taxable accounts you hold and how you title the beneficiaries.

Good luck!
Topic Author
boombaz
Posts: 41
Joined: Sat Dec 28, 2013 12:13 am

Re: Portfolio Review: new house, big windfall

Post by boombaz »

Thanks for the info here, HomeStretch. Responses to your followups inline:
HomeStretch wrote: Sat May 27, 2023 1:39 am 3. Does your 401k allow you to have different investment allocations in your Traditional and Roth 401k accounts or must they be invested identically?
My 401k does not permit Traditional and Roth money to be invested separately. However, my 401k only holds Traditional (pre-tax) funds. The after-tax contributions are rolled out via in-service withdrawals to a Roth IRA rather than converted to Roth 401k.
HomeStretch wrote: Sat May 27, 2023 1:39 am 4. I don’t see life insurance for you and your spouse listed. Consider level-premium term life through a broker. Selectquote.com is an online broker (there are others too) that I have used and liked. You may also want to review the adequacy of your small disability policy and whether your spouse needs coverage. Consider a non-employer policy for portability.
Term life insurance for me and my spouse is on the list. Thanks for the tip about the disability policy. We will review this.
HomeStretch wrote: Sat May 27, 2023 1:39 am 5. Consult with an experienced estate and trust attorney in your state asap for estate planning including Wills, Trust(s)?, durable power-of-attorneys and healthcare reps/advance directives. Review the beneficiary designations for accounts/insurance policies with the attorney. Get POA access set up for all individual accounts at your financial institutions so a spouse can manage them in the event the account owner is incapacitated.

Search the forum for recent threads about RLTs which will give reasons for having a RLT (or not) and the pros/cons. One factor is whether or not your state probate process is difficult. Another factor is your age (younger persons are less likely to need a RLT). If you have minor beneficiaries, your Wills will need a Testamentary Trust(s) as minors cannot inherit outright. Discuss with your estate attorney.
Thank you, this gives me the words for the things I need to be researching. We will be looking for an estate attorney.
HomeStretch
Posts: 11419
Joined: Thu Dec 27, 2018 2:06 pm

Re: Portfolio Review: new house, big windfall

Post by HomeStretch »

boombaz wrote: Sat May 27, 2023 8:59 am
HomeStretch wrote: Sat May 27, 2023 1:39 am 3. Does your 401k allow you to have different investment allocations in your Traditional and Roth 401k accounts or must they be invested identically?
My 401k does not permit Traditional and Roth money to be invested separately. However, my 401k only holds Traditional (pre-tax) funds. The after-tax contributions are rolled out via in-service withdrawals to a Roth IRA rather than converted to Roth 401k.
Given your high marginal tax rate, it likely is most tax efficient to hold 100% bonds in your Traditional 401k and hold the remainder of your desired bond allocation in your Taxable account. Set your 401k contributions to purchase 100% bond fund. Given the size of your Taxable account, the majority of your bond holdings will likely be in your Taxable account for the foreseeable future.
Outer Marker
Posts: 4382
Joined: Sun Mar 08, 2009 8:01 am

Re: Portfolio Review: new house, big windfall

Post by Outer Marker »

HomeStretch wrote: Sat May 27, 2023 9:13 am
boombaz wrote: Sat May 27, 2023 8:59 am
HomeStretch wrote: Sat May 27, 2023 1:39 am 3. Does your 401k allow you to have different investment allocations in your Traditional and Roth 401k accounts or must they be invested identically?
My 401k does not permit Traditional and Roth money to be invested separately. However, my 401k only holds Traditional (pre-tax) funds. The after-tax contributions are rolled out via in-service withdrawals to a Roth IRA rather than converted to Roth 401k.
Given your high marginal tax rate, it likely is most tax efficient to hold 100% bonds in your Traditional 401k and hold the remainder of your desired bond allocation in your Taxable account. Set your 401k contributions to purchase 100% bond fund. Given the size of your Taxable account, the majority of your bond holdings will likely be in your Taxable account for the foreseeable future.
I would not hold any bonds while holding a 6.25% mortgage. It makes no sense to lend at 4% to bond issuers while borrowing at 6.25% on the mortgage.
User avatar
Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Portfolio Review: new house, big windfall

Post by Watty »

boombaz wrote: Fri May 26, 2023 7:30 pm Debt: Mortgage (30-year fixed, 6.25%, 30 years remaining, $1.5M principle remaining, $600k equity)
.....
Approximate size of your total portfolio: $3.1M

....
Joint Taxable at Schwab

72% Cash
......
We currently have sufficient assets in cash to pay off the mortgage. At a 6.25% rate, should we do this?
You have over $2 million in cash. At 6.25% paying off the mortgage would be a easy choice for me. You can then invest your freed up mortgage payment each month.

With a $1.5 million dollar mortgage you are paying almost $100K in interest a year.

It is easy to overthink the "Should I pay off the mortgage?" question. I like to turn the question around and ask, "I have a paid off house, should I take out a $1.5 million dollar mortgage at 6.25% just to invest the money?" When asked that way few people would choose to take on a new mortgage but that is just about the same question.

Investing the money and earning a higher return than the mortgage rate is also a harder than it sounds because you have a large sequence of returns risk. Here is a simplistic example of that which I have posted before but I wrote it up when interest rates were much lower. You may want to play with your actual numbers looking at it this way.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://investor.vanguard.com/investing ... allocation

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
runner540
Posts: 1763
Joined: Sun Feb 26, 2017 4:43 pm

Re: Portfolio Review: new house, big windfall

Post by runner540 »

You don’t say the source of the windfall. If it’s an inheritance, you and spouse need to both understand the consequences of “commingling” that money with your other assets, should you later split up. Learn about this before taking action, and the spouse that actually inherited, should think critically about it. If they want to keep it in a separate account, they should.
Topic Author
boombaz
Posts: 41
Joined: Sat Dec 28, 2013 12:13 am

Re: Portfolio Review: new house, big windfall

Post by boombaz »

runner540 wrote: Sat May 27, 2023 1:30 pm You don’t say the source of the windfall. If it’s an inheritance, you and spouse need to both understand the consequences of “commingling” that money with your other assets, should you later split up. Learn about this before taking action, and the spouse that actually inherited, should think critically about it. If they want to keep it in a separate account, they should.
Thanks runner. The windfall is not an inheritance.
queenofthemadhouse
Posts: 307
Joined: Fri Jun 04, 2021 5:26 pm

Re: Portfolio Review: new house, big windfall

Post by queenofthemadhouse »

I'd pay the mortgage down to $750K in a heartbeat, and probably pay it all off, but if you are afraid you'd regret that decision, you could go in phases.
Topic Author
boombaz
Posts: 41
Joined: Sat Dec 28, 2013 12:13 am

Re: Portfolio Review: new house, big windfall

Post by boombaz »

queenofthemadhouse wrote: Sat May 27, 2023 7:08 pm I'd pay the mortgage down to $750K in a heartbeat …
What is the significance of the $750k threshold?
pizzy
Posts: 4339
Joined: Tue Jun 02, 2020 6:59 pm

Re: Portfolio Review: new house, big windfall

Post by pizzy »

boombaz wrote: Sat May 27, 2023 9:04 pm
queenofthemadhouse wrote: Sat May 27, 2023 7:08 pm I'd pay the mortgage down to $750K in a heartbeat …
What is the significance of the $750k threshold?
You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness.

https://www.irs.gov/publications/p936
Vanguard/Fidelity | 76% US Stock | 16% Int'l Stock | 8% Cash
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