Bogleheads :: View topic - Our Investment/Savings Plan - Any ...

View previous topic :: View next topic ? Author Message randomwalk

Joined: 16 Sep 2011
Posts: 18


PostPosted: Fri Sep 16, 2011 10:39 am?? ?Post subject: Our Investment/Savings Plan - Any Thoughts Appreciated. Reply with quote

Good morning. I've done my share of lurking and have, over the past several years, read several of the books most highly recommended on this board (Bernstein, Bogle, Swedroe, both of the Bogleheads guides). I'm putting the finishing touches on our investment portfolio and savings plan and was hoping to get some thoughts.

Here's our info:

Emergency funds
: $10k now, will build to $50k over next two years. Held in high-yield savings account.

Debt
:
No credit card debt.
~$90k ($45k for each of us) in federal law school loans consolidated at 0.625% for 30 years.
First mortgage: ~400k 30-year fixed rate at 4.875%.
Second mortgage: ~60k 15-year fixed rate with balloon (amortized on 30-year schedule) at 8%.

Tax Filing Status
: Married filing Jointly

Tax Rate
: 33% Federal 6% State, Georgia

Age
: 31, spouse is 34

Portfolio:

We've each got a ROTH IRA at Vanguard, though our present income negates the ability to make additional contributions.

Spouse's 401(k) is at Vanguard with access to investors shares of virtually all Vanguard funds. My 401(k) is not at Vanguard but has access to institutional shares of Vanguard's Total Bond, Total Stock Market, and Total International funds (as well as Vanguard Institutional Index Fund). We are both maxing out our 401(k) contributions and plan to continue to do so. Our total portfolio is in the 6 figures.

Desired Asset allocation: 75/25

Int'l allocation: 33% of stocks

TIPS allocation: 50% of bonds

Current Allocation Across Accounts:

Vanguard Total Stock Market Index Fund - 50%
Vanguard Total Int'l Stock Index Fund - 25%
Vanguard Total Bond Market Index Fund - 12.5%
Vanguard Inflation-Protected Securities Fund - 12.5%

Future Plans:

At present we do not have taxable investment accounts. Once our emergency fund is in place we will begin funding a brokerage account at Vanguard. Plan is to fund the taxable account entirely in Vanguard Total Stock Market, at the same time reallocating contributions in the 401(k)s to preserve the overall allocation above.

Also planning to pay down the 8% second mortgage over the next 2-3 years rather than spreading it out over 15, or (heaven forbid) making the minimum payments and getting hit with the balloon payment. We plan to stay in this house long term.

No plans to prepay the student loans consolidated at 0.625%.

Questions:

1. Reasons not to pay down the second mortgage that quickly?
2. Any glaring deficiencies?
3. Any ways to improve?

We appreciate your thoughts.

Back to top
View user's profile Send private message ?'); //-->
og15F1

Joined: 08 Dec 2010
Posts: 146


Back to top
View user's profile Send private message ?'); //-->
ObliviousInvestor

Joined: 17 Mar 2009
Posts: 877


PostPosted: Fri Sep 16, 2011 10:54 am?? ?Post subject: Reply with quote

Welcome! Smile

Your allocation seems quite reasonable to me.

Personally, unless there's a matching contribution to be had, I'd pay off that second mortgage before contributing anything to either 401(k). If there

is
a match available, I'd get that, then go back to paying off the mortgage.

After that's paid off, I'd max out each 401(k), but I'd probably put all additional funds toward the first mortgage before doing any taxable saving.

Also, you may want to consider the "backdoor Roth" after maxing out the 401(k)s.
http://thefinancebuff.com/the-....ow-to.html
_________________
Mike Piper, author/blogger

Back to top randomwalk

Joined: 16 Sep 2011
Posts: 18


PostPosted: Fri Sep 16, 2011 11:02 am?? ?Post subject: Reply with quote

ObliviousInvestor wrote:
After that's paid off, I'd max out each 401(k), but I'd probably put all additional funds toward the first mortgage before doing any taxable saving.

Thanks for bringing this up. This is probably the issue I'm struggling with the most, yet I forgot to mention it!

My current plan was to split the excess savings 50/50 between pre-paying the first mortgage and the taxable savings. That would put us on target to have the first mortgage paid off around 2028 or so. Pre-paying the first mortgage doesn't get us the full 4.875%, since we itemize and are in a pretty high tax bracket.

Back to top
View user's profile Send private message ?'); //-->
ObliviousInvestor

Joined: 17 Mar 2009
Posts: 877


PostPosted: Fri Sep 16, 2011 11:26 am?? ?Post subject: Reply with quote

randomwalk wrote:
Pre-paying the first mortgage doesn't get us the full 4.875%, since we itemize and are in a pretty high tax bracket.

Indeed. If we assume it's entirely deductible, that leaves an after-tax return of ~2.97%.

Taking a look at the current SEC yields on most Vanguard bond funds: https://personal.vanguard.com/....torder=asc

...shows that a risk-free 3% return doesn't appear to be available on even a before-tax basis. In other words, I'd personally be reluctant to borrow money (or decline to pay back borrowed money) at an after-tax rate of ~3% in order to own bond funds that are unlikely to return 3%.

All of that said,
1) plenty of smart, well-informed bogleheads will probably disagree with me, and
2) even if you agree with me, it's worth revisiting the decision if/when bond yields rise.
_________________
Mike Piper, author/blogger

Back to top randomwalk

Joined: 16 Sep 2011
Posts: 18


PostPosted: Fri Sep 16, 2011 11:40 am?? ?Post subject: Reply with quote

ObliviousInvestor wrote:
In other words, I'd personally be reluctant to borrow money (or decline to pay back borrowed money) at an after-tax rate of ~3% in order to own bond funds that are unlikely to return 3%.

Interesting. This would complicate the overall asset allocation, would it not? If I'm essentially putting the extra savings into a bond-like ~3% repayment for X years, how should I take that into account in my overall asset allocation?

In other words, if instead of investing the extra savings in a taxable account as part of my overall 75/25 asset allocation, I only put it into mortgage repayment, it seems like I have made my portfolio more conservative. That's X dollars per month that are only going into a bond-like repayment instead of a 75/25 split.

That makes me think I should then adjust my 401(k) contributions to be weighted more to equities. But if I do that, then once the mortgage is paid off it seems I will be left with a portfolio that is over-weighted toward equities, since the paid-off house is not part of the fixed-income asset allocation.

Does any of that make sense?

Back to top
View user's profile Send private message ?'); //-->
retiredjg

Joined: 10 Jan 2008
Posts: 9539


PostPosted: Fri Sep 16, 2011 11:52 am?? ?Post subject: Reply with quote

Welcome to the forum! In general, I think your plan is very good.

Some comments for your consideration.

I think the 8% loan should be very

high on your list. I'd do this before any taxable investing. I might do it before maxing out both of the 401ks (maybe do half of max and rest to 8% loan).
Quote:
We've each got a ROTH IRA at Vanguard, though our present income negates the ability to make additional contributions.

Since you appear to have no traditional IRA accounts, you should definitely consider back door Roth before taxable investing.

"Brokerage account" at Vanguard means something different than other companies. Vanguard is actually split into the mutual fund side (selling only VG mutual funds) and Vanguard Brokerage Service (which sells everything else - VG ETFs, stocks, mutual funds and ETFs from other companies). Unless you want Vanguard ETFs, you have no need for a "brokerage account". Just open an "individual account" and keep using Vanguard mutual funds.

Total Stock Market is a good choice for your taxable account. Total International may be a better choice since it is eligible for the foreign tax credit (which you can't use in the 401ks). I would have both TSM and TISM myself for more flexibility. Wiki article link: Foreign tax credit
_________________
Link to Asking Portfolio Questions

Back to top
View user's profile Send private message ?'); //-->
retiredjg

Joined: 10 Jan 2008
Posts: 9539


Back to top
View user's profile Send private message ?'); //-->
randomwalk

Joined: 16 Sep 2011
Posts: 18


PostPosted: Fri Sep 16, 2011 12:14 pm?? ?Post subject: Reply with quote

retiredjg wrote:
Since you appear to have no traditional IRA accounts, you should definitely consider back door Roth before taxable investing.

Thanks both to you and ObliviousInvestor

for this information. You are correct that we have no traditional IRA accounts, so I will amend our IPS to plan for back-door Roth contributions ahead of taxable investing.
retiredjg wrote:
Sounds like you may be subject to the AMT and that does change some decisions on what is best tax wise.

Unfortunately (?) you are correct, we are subject to the AMT. When we do our taxes this coming year I will look closely at how much of our mortgage interest is effectively non-deductible and adjust our plans to accelerate payments accordingly.

I appreciate your comments.

Back to top
View user's profile Send private message ?'); //-->
ObliviousInvestor

Joined: 17 Mar 2009
Posts: 877


Back to top ofcmetz

Joined: 08 Feb 2011
Posts: 446
Location: Louisiana


PostPosted: Fri Sep 16, 2011 1:36 pm?? ?Post subject: Reply with quote

Welcome to Bogleheads Random Walker.

First, I'd like to say you appear to have your finances in order. You're plan seems good, but since you asked I'll give my two cents.

You've gotten good advice so far including investigating if or how the AMT would affect you. Assuming it wouldn't I would:

1. Continue to build my cash emergency fund. (as this gets bigger, I might do backdoor ROTH contributions and count them towards this part).

2. 401K payments up to match

3. Kill the 8% second mortgage.

4. Max out 401K's

5. Pay off my mortgage prior to after tax investing.

You can compromise with your self on #5 and do a 50/50 between taxable investing and mortgage payments.
_________________
Current portfolio 77% donuts/ 23% coffee and rebalanced after every meal. Breaking News: donut prices falling sharply.

Back to top
View user's profile Send private message ?'); //-->
randomwalk

Joined: 16 Sep 2011
Posts: 18


PostPosted: Fri Sep 16, 2011 2:03 pm?? ?Post subject: Reply with quote

ofcmetz wrote:
5. Pay off my mortgage prior to after tax investing.

First of all, thank you for your comments.

As for paying off the first mortgage, I've been thinking about this all day. I have some concerns about liquidity. If I devote all of our extra savings to paying down the mortgage, it seems that I am taking on liquidity risk by putting so much of our net worth into our home so quickly.

Granted, we'll have the $50k emergency fund, and our household income is pretty evenly split between the two of us, so the loss of one job would not be ruinous. That said, I'm not sure I'm comfortable in a situation where any money beyond the $50k either has to come out of a retirement account or home equity (particularly since HELOC availability is spotty when needed most).

Maybe that's a long-winded way of deciding that the 50/50 compromise is best for me, even if it not necessarily return-maximizing.

Back to top
View user's profile Send private message ?'); //-->
ofcmetz

Joined: 08 Feb 2011
Posts: 446
Location: Louisiana


Back to top
View user's profile Send private message ?'); //-->
bdpb

Joined: 06 Jun 2007
Posts: 609


PostPosted: Fri Sep 16, 2011 9:49 pm?? ?Post subject: Reply with quote

I would mildly disagree with the experts about paying the 2nd mortgage
before maxing out your 401k. At these tax rates I would use as much tax
deductible saving as possible. You will have plenty of taxable savings in
a short time and will be glad you have tax advantaged accounts.

I agree the 2nd mortgage rate is very high, but at this income level you
should probably be saving 50k to 60k per year. That means 33k to the
tax deductible 401k and the other 30k to the 2nd mortgage. It will be
paid off in two years.

If you pass up the tax deductible account you are effectively trading this
for a taxable account a couple years down the road. That taxable account
will probably cost you at least 30bp per year and probably much more
than that for 50 years.

After the 2nd is paid, then back door Roth.

Then determine if you can make after-tax contributions to your 401k and
are allowed to roll them to a Roth IRA. Then do that up to 49k per year
per person.

Then taxable savings.

Back to top
View user's profile Send private message ?'); //-->
BolderBoy

Joined: 07 Apr 2010
Posts: 7


PostPosted: Fri Sep 16, 2011 10:37 pm?? ?Post subject: Reply with quote

Welcome (from a lurker) -

I was faced with the how-to-approach-this a number of years back. One thought to keep in mind is that once a contribution year for your 401k contributions is gone... It is gone forever.

Personally, I'd max out the 401k contribs (and any other retirement accounts), then tackle the debt (highest interest first), then get with the taxable account investing.

Just MHO, having done it and am now debt free, almost work-free and 61 y/o.

B

Back to top
View user's profile Send private message ?'); //-->
Dandy

Joined: 25 Apr 2010
Posts: 407


PostPosted: Sat Sep 17, 2011 9:21 am?? ?Post subject: Reply with quote

I like your proposed allocation - simple and well diversified. A bit too aggressive for me.

I also like your idea to split the excess income after paying off the second mortgage between paying down the 1st mortgage and after tax investing. Naturally, you would want to put the after tax investing in tax effecient investments e.g. equities

I would pay down the 8% second mortgage as quick as possible as long as it does not disrupt building your emergency fund.

Back to top
View user's profile Send private message ?'); //-->

Source: http://www.bogleheads.org/forum/viewtopic.php?t=82521&start=0&mrr=1316265691

philadelphia phillies cher verizon wireless alyssa milano tcf schwarzenegger strike