Thoughts/criticism on my investing strategy and AA

[dvalley]

I'll start with a quick summary:

Age: 38, single, tall, handsome...oh nevermind

Goals and assumptions:
- Retire by: 50 (year 2025) with a possible part-time gig at Starbucks if needed. I figure at the 4% withdrawl rate I need a minimum of $1M, perhaps $1.5-2M. If my house is paid off I should be able to live off of 40-50k/yr.
- Put my kid through college (10 years to go). I figure I'd need $90k min?
- If possible, leave something behind for the loved ones (kid, gf)

Current status:
401k: $85k (Target Retirement Fund 2025)
IRA: $105k (currently cash)
Roth: $11k (currently cash)
Brokerage: $30k (12k cash, rest includes: AEP, BRK/B, KO, O, PAYX, PG)
Cash/savings: $20k (emergency fund)
House: $310k left on mortgage, about $100k equity.
Kid's college fund: $6k (VTI at Sharebuilder)

Current savings, going as far as I can stretch my savings:
$17k/yr into 401k
$300/mo into brokerage
$300/mo into college fund
$300/mo addl towards mortgage

The big question I'm trying to answer is how to invest the money above where it says "currently cash" including the future proceeds to them. Here's what I was thinking:
1. Equally divide the IRA+Roth money to buy these 10 dividend stocks (with div reinvestment): ABT, CVX, D, JNJ, MO, PEP, PG, PM, WMT, XOM
2. In my brokerage account buy VTI and VEU/VFWIX with div reinvestment?
3. Should I consider adding bonds or CDs or Munis? which ones?
4. What about the popular Wellengton and Wellesley funds? do I need them? why, where and how much?

I think I've provided as much info without reading like a boring book but if I missed anything please let me know. I'm looking for ideas and criticism on both my strategies as well as my assumptions. I realize that I may have to extend my working years to reach the ambitious goals...it is what it is.

 

[someguy]

It seems you're being really optimistic in all your assumptions/ranges. I'm assuming the $1mm and $40-50K/year are in today's dollars?

Is your mortgage 15 years? If so, then your assumption to have it paid off in 12 years seems reasonable. If it's a 30-year, that seems a lot less likely with only $3,600/yr extra principal.

The biggest flag I see is your savings rate versus timeline. I needed an 8% real rate of return to get over $1mm by 2025. And $1mm gives you at the bottom end of your expense range at a fairly aggressive SWR.

 

[dvalley]

Thanks for the feedback and you're absolutely right, it's optimistic and aggressive. I also know that I will likely end up working a few more years to reach the goal unless the part-time income fills that gap. I'm not dead-set on retiring in 2025.

The mortgage is 30years and will be paid off in 22yrs, about 7 years after my target retirement date but may be I will downsize by then. I don't really know at this point.

What I REALLY need is a sanity check on how I plan to invest the current and future cash. What would you do in this situation?

 

[someguy]

You are definitely too cash heavy since you haven't mentioned any upcoming cash needs. You'll get a million and one answers on where to put it, though. *I* would leave the emergency fund in cash or perhaps laddered CDs. As for the rest, I like the simple three fund model which is usually one domestic and one international stock index, plus a bond fund. For me, I'd rather put extra time into my business or expenses (i.e., finding more funds to invest) than chasing what I perceive to be a marginal increase in return. But again, opinions vary. The one thing you don't want to do is for no reason stay in cash and let inflation ravage it.

Thanks for the feedback and you're absolutely right, it's optimistic and aggressive. I also know that I will likely end up working a few more years to reach the goal unless the part-time income fills that gap. I'm not dead-set on retiring in 2025.

The mortgage is 30years and will be paid off in 22yrs, about 7 years after my target retirement date but may be I will downsize by then. I don't really know at this point.

What I REALLY need is a sanity check on how I plan to invest the current and future cash. What would you do in this situation?

 

[nash031]

One piece of info that would be helpful is your mortgage interest rate. I think too many people get in a tizzy about paying off their mortgages quickly, and can end up losing money by paying down low interest debt before saving. In any event, at age 38, are you dead-set positive that's where you're going to live forever? I'm 36, and I think there's about a 10% chance I'll live in my current home forever, hence I'm in no rush to pay down my 3.25% APR loan.

Next, I would take a look at your 401(k). You said it's in a 2025 Target fund. Unless I'm missing something, you're not going to withdraw from that account until probably 2035 (unless you want to pay the penalties for early withdrawl). My *guess*, without looking at that specific fund, is that it's going to be more conservative than you want, since you seem to be a pretty heavy equity investor.

I agree with others that you're pretty cash heavy. I don't see a need for CDs or munis. You've already got some bonds in your 2025 fund and $20K is probably fine for your emergency fund... I wouldn't see a need to have any more "cash-like" investments outside of that.

Honestly, I think you should set an AA and look at your aggregate investment picture, including the AA in your 2025 fund, then decide if you're happy with your situation. Only you can answer that, but based on your goal, where you're at and your savings rate, you would need to be pretty aggressive with your AA.

Agree with others' sentiment that your savings rate looks a little bit low to meet your goal. Looking at what you really need to do with your mortgage can help that if you determine you can shift that pre-payment into savings. You won't have penalty-free access to IRAs and 401ks at age 50, so you need that taxable account (or a pension...) to bridge the gap.

Final word of caution: your taxable account looks to me like it's going to start creating some dividend income from those stocks soon. You're going to have to pay taxes on that income. I wouldn't put any bonds or other interest/income generating stuff in that taxable account... just index it with VTSAX or VFAIX (or VTI) or one of the others you mentioned. Keeping index funds in your taxable account is very tax- and expense-savvy, and I think is the best way for you to go. You've got enough to get into Admiral's shares at Vanguard and pay 0.05% ER for great index returns.

 

[nun]

You have too much cash. I'd ditch the DRIP plan and just implement a lazy portfolio across all your accounts, maybe 70/30 stocks/bonds. You can do that with any mix of inexpensive index funds. If you want a bit of active management and a bit of a bias to dividends and corporate bonds add some Wellesley or Wellington. Sit back and drink a cocktail.

 

[pb4uski]

Put your situation through Quicken Lifetime Planner.

 

[Mulligan]

One piece of info that would be helpful is your mortgage interest rate. I think too many people get in a tizzy about paying off their mortgages quickly, and can end up losing money by paying down low interest debt before saving. In any event, at age 38, are you dead-set positive that's where you're going to live forever? I'm 36, and I think there's about a 10% chance I'll live in my current home forever, hence I'm in no rush to pay down my 3.25% APR loan.

Next, I would take a look at your 401(k). You said it's in a 2025 Target fund. Unless I'm missing something, you're not going to withdraw from that account until probably 2035 (unless you want to pay the penalties for early withdrawl). My *guess*, without looking at that specific fund, is that it's going to be more conservative than you want, since you seem to be a pretty heavy equity investor.

I agree with others that you're pretty cash heavy. I don't see a need for CDs or munis. You've already got some bonds in your 2025 fund and $20K is probably fine for your emergency fund... I wouldn't see a need to have any more "cash-like" investments outside of that.

Honestly, I think you should set an AA and look at your aggregate investment picture, including the AA in your 2025 fund, then decide if you're happy with your situation. Only you can answer that, but based on your goal, where you're at and your savings rate, you would need to be pretty aggressive with your AA.

Agree with others' sentiment that your savings rate looks a little bit low to meet your goal. Looking at what you really need to do with your mortgage can help that if you determine you can shift that pre-payment into savings. You won't have penalty-free access to IRAs and 401ks at age 50, so you need that taxable account (or a pension...) to bridge the gap.

Final word of caution: your taxable account looks to me like it's going to start creating some dividend income from those stocks soon. You're going to have to pay taxes on that income. I wouldn't put any bonds or other interest/income generating stuff in that taxable account... just index it with VTSAX or VFAIX (or VTI) or one of the others you mentioned. Keeping index funds in your taxable account is very tax- and expense-savvy, and I think is the best way for you to go. You've got enough to get into Admiral's shares at Vanguard and pay 0.05% ER for great index returns.

I have went to the "dark side" myself, refinancing out to 30 years at 3.75%. Being single my threshold for itemizing is easier than a married couple with a mortgage and I want to preserve that as long as possible. I am also wanting this deduction to coincide with the possibility of having any healthcare expenses over the 10% threshold to cobble together with mortgage deduction to get a decent refund if ever necessary as I will always be carrying a high deductible until Medicare way down the road. I also assume my rate of return on money I am presently investing in will return a higher margin than the mortgage rate over the next few decades.

 

[Midpack]

Having us make suggestions probably won't be as helpful as you think. Sound investing is methodology AND discipline (many people miss the latter, it's crucial). If you don't take the time to understand how to put together a portfolio that fits your needs & risk tolerance, odds are when the market corrects you'll panic and sell off stock (funds) if not other assets. That's the beginning of a long run portfolio failure. None of us wish that on you or anyone else...

And the type of portfolios recommended below are all pretty basic, not "rocket science."

Best authors IMO: William Bernstein, Larry Swedroe, Rick Ferri, and John Bogle among others. Here are specific suggestions from the Boglehead site.

[Good middle of the road choice] The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between - by William ("Bill") Bernstein. You cannot go wrong with Bill Bernstein's books, this is my #1 choice for anyone interested in going beyond the most basic investment primer. My previous favorite all-in-one investing book, [More substantial, my personal fav] The Four Pillars of Investing, is an earlier work by Dr. Bernstein that covers much the same ground, but is a bit longer and more technically oriented. Note the link is to the latest version, with a 2010 postscript that brings the book up to date. For reviews and content, see the original version.
[A classic] Common Sense on Mutual Funds: 10th Anniversary Edition - by John "Jack" Bogle - very readable classic updated to cover the events of the '00s
["Investing for Dummies" - a good place to start, and all most investors will ever need/want] The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life - by Bill Schultheis. Too light on content for my tastes, but a short and fun read and perhaps the best choice for introducing investing concepts to those who need to know them, but are unwilling to take on something more comprehensive. Our members give out a lot of these as gifts.
[More of a collection of topics than a typical book, but great stuff] The Bogleheads' Guide to Investing - by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf

 

[dvalley]

Thanks so much for the ideas and suggestions guys I really appreciate it.

My mortgage rate is 3.75%. I figured even if I end up selling the house I can't lose by paying it down just a bit faster. It becomes part of my equity and it would help me shave almost 6-7yrs and a whole bunch of interest over the term of the mortgage. However, I do realize that if I could make 6% on my money elsewhere then I should probably do that.

So what you guys are suggesting changing, if I understand correctly, is this:

1. Consider redirecting the additional mortgage payments towards the taxable accounts (college and retirement)
2. Sell off the dividend stuff from the taxable account and just go to VTI/VXUS/BND (70/20/10).
3. Move the target retirement fund 2025 VTHRX (actually I just looked and it's 2030) to 2035. I actually turn 55 in 2030 so I think that's OK.

One question that remains is should I put the cash in IRA/ROTH($105k/11k) into the 10 dividend creating equities I listed earlier? It would be nice to have dividend appreciation along with the overall market appreciation for the next 20yrs or so?

 

[dvalley]

@midpack, thanks for the suggestions too, we must have been typing at the same time. I totally agree with the proverbial 'giving the fish vs. teaching how to fish' mentaily.

I've actually been following boggleheads and several other forums etc since 2001. Not to delve into the past too much but I lost about 65% of my assets to the divorce. I really didn't even feel like saving anymore after that. For a while I felt that I built a nest one twig at a time only to see it vanish in a snap but such is life. Onwards and upwards as they say

I'm just wanting to verify, from those better informed and financial savvy than myself, if my strategy makes any sense whatsoever.

 

[haha]

Not to delve into the past too much but I lost about 65% of my assets to the divorce. I really didn't even feel like saving anymore after that. For a while I felt that I built a nest one twig at a time only to see it vanish in a snap but such is life. Onwards and upwards as they say

As long as this divorce inoculated you against ever marrying again, you are ahead. At this point, carry adequate insurance and be careful and you money will stay yours.

A lot of guys are serial marryers, and also serial losers. OTOH, some guys remarry and are happy for ever after. It all depends are your way of balancing hope against odds. Personally, I'm in the one marriage either lasts for life, or inoculates me for life against ever getting sick in this way again.

Ha

 

[dvalley]

Hahaha...

I was always in it for life myself but as I found out it's not enough for just one person to feel that way Marriage is no longer in my my vocabulary...unless I find a successful FI woman in which case you can't let just one bad experience make you jaded for life- did you really think I joined this forum for financial advice??

 

[Mulligan]

@midpack, thanks for the suggestions too, we must have been typing at the same time. I totally agree with the proverbial 'giving the fish vs. teaching how to fish' mentaily.

I've actually been following boggleheads and several other forums etc since 2001. Not to delve into the past too much but I lost about 65% of my assets to the divorce. I really didn't even feel like saving anymore after that. For a while I felt that I built a nest one twig at a time only to see it vanish in a snap but such is life. Onwards and upwards as they say

I'm just wanting to verify, from those better informed and financial savvy than myself, if my strategy makes any sense whatsoever.

Hey DValley, if you have been on the Boglehead forum for several years now, then you you truly already know what to do! I am not a go to person on investing as I live off a pension and am very conservative with most of my other money. Though I do have a thought to pass on... Are you planning on funding your Roth every year? If you are and determine you want Bonds or CDs in your portfolio that is a place where many people here park that money for tax reasons. I kick myself in the butt everyday for not fully funding those like I should have every year I had the chance, YMMV. Mid pack is correct about becoming knowledgable with some readings. If nothing else it empowers you to understand what you are doing and staying the course.

 

[Mulligan]

As long as this divorce inoculated you against ever marrying again, you are ahead. At this point, carry adequate insurance and be careful and you money will stay yours.

A lot of guys are serial marryers, and also serial losers. OTOH, some guys remarry and are happy for ever after. It all depends are your way of balancing hope against odds. Personally, I'm in the one marriage either lasts for life, or inoculates me for life against ever getting sick in this way again.

Ha

What about this other scenario, HA. Only marry again if SHE has more to lose from a second divorce than you do?

 

[HFWR]

Hahaha...

I was always in it for life myself but as I found out it's not enough for just one person to feel that way Marriage is no longer in my my vocabulary...unless I find a successful FI woman in which case you can't let just one bad experience make you jaded for life

As I often say, "If you're not cynical, you're just not paying attention..."

 

[dvalley]

Hi Mulligan, thanks for your post and it's helpful whether you realize it or not While I've been saving and investing for a while it was mostly just through the basic know-how, like the boggleheads 2 or 3 fund lazy/coffee portfolios. I find that folks on this forum are quite in their own league compared to many other forums in terms of what they've accomplished and how. My knowledge of the basics pales in comparison to many here and I'm not ashamed to admit it because it's a fact.

I do have a high enough salary and not enough deductions that I can't contribute to ROTH. What I have from before is all I have in there.

 

[Mulligan]

Hi Mulligan, thanks for your post and it's helpful whether you realize it or not While I've been saving and investing for a while it was mostly just through the basic know-how, like the boggleheads 2 or 3 fund lazy/coffee portfolios. I find that folks on this forum are quite in their own league compared to many other forums in terms of what they've accomplished and how. My knowledge of the basics pales in comparison to many here and I'm not ashamed to admit it because it's a fact.

I do have a high enough salary and not enough deductions that I can't contribute to ROTH. What I have from before is all I have in there.

There are some very smart people on here and hopefully they will chime in for you, DV. Just hang in there. My dad got totally wiped out with a divorce from my mother at 43. Thirty years later he is sitting on a million plus, never made more than 50k a year in his life. Still won't spend a nickel of it. He had no formal education and did well. You will do fine. Good luck!

 

[haha]

What about this other scenario, HA. Only marry again if SHE has more to lose from a second divorce than you do?

That might be good- but to find a pretty, rich woman takes more effort than I would want to make. Also, women with enough money to matter are very careful. I knew a totally good looking and appealing gal who had inherited $2 mm. She was blithely blowing through it. I had no interest in marrying her or anyone else, and the last thing I want is someone else's money. I casually tried to turn her on to Bogle and simple investing allocation, etc, and she clammed up like I was trying to start a threesome on the first date. In fact, that would likely have bothered her far less.

Interesting thing is that she is totally, absolutely broke today, except for her house which she doesn't even generate enough wages to keep in good repair. She is still totally cute, but I consider her in the same class as a carrier of some deadly disease.

Ha

 

[Mulligan]

That might be good- but to find a pretty, rich woman takes more effort than I would want to make. Also, women with enough money to matter are very careful. I knew a totally good looking and appealing gal who had inherited $2 mm. She was blithely blowing through it. I had no interest in marrying her or anyone else, and the last thing I want is someone else's money. I casually tried to turn her on to Bogle and simple investing allocation, etc, and she clammed up like I was trying to start a threesome on the first date. In fact, that would likely have bothered her far less.

Interesting thing is that she is totally, absolutely broke today, except for her house which she doesn't even generate enough wages to keep in good repair. She is still totally cute, but I consider her in the same class as a carrier of some deadly disease.

Ha

Oh how I love your posts, HA. When you are bringing your "A" game, you can't be topped!

 

[LakeTravis]

Oh how I love your posts, HA. When you are bringing your "A" game, you can't be topped!

+1

 

[jclarksnakes]

That might be good- but to find a pretty, rich woman takes more effort than I would want to make. Also, women with enough money to matter are very careful. I knew a totally good looking and appealing gal who had inherited $2 mm. She was blithely blowing through it. I had no interest in marrying her or anyone else, and the last thing I want is someone else's money. I casually tried to turn her on to Bogle and simple investing allocation, etc, and she clammed up like I was trying to start a threesome on the first date. In fact, that would likely have bothered her far less.

Interesting thing is that she is totally, absolutely broke today, except for her house which she doesn't even generate enough wages to keep in good repair. She is still totally cute, but I consider her in the same class as a carrier of some deadly disease.

Ha

That post may be worthy of filling up an entire page in my "wisdom of the ages" notebook.

 

[sheehs1]

That might be good- but to find a pretty, rich woman takes more effort than I would want to make. Also, women with enough money to matter are very careful. I knew a totally good looking and appealing gal who had inherited $2 mm. She was blithely blowing through it. I had no interest in marrying her or anyone else, and the last thing I want is someone else's money. I casually tried to turn her on to Bogle and simple investing allocation, etc, and she clammed up like I was trying to start a threesome on the first date. In fact, that would likely have bothered her far less.

Interesting thing is that she is totally, absolutely broke today, except for her house which she doesn't even generate enough wages to keep in good repair. She is still totally cute, but I consider her in the same class as a carrier of some deadly disease.

Ha

O.K. I have to admit. I laughed most of the way thru this.
Good post Ha!

 

[MooreBonds]

That might be good- but to find a pretty, rich woman takes more effort than I would want to make. Also, women with enough money to matter are very careful. I knew a totally good looking and appealing gal who had inherited $2 mm. She was blithely blowing through it. I had no interest in marrying her or anyone else, and the last thing I want is someone else's money. I casually tried to turn her on to Bogle and simple investing allocation, etc, and she clammed up like I was trying to start a threesome on the first date. In fact, that would likely have bothered her far less.

Interesting thing is that she is totally, absolutely broke today, except for her house which she doesn't even generate enough wages to keep in good repair. She is still totally cute, but I consider her in the same class as a carrier of some deadly disease.

Ha

I agree that when Ha is in "the zone", it's much more of a work of art than any Picasso or other famous painter.

I also agree with nearly everything in the above - the only point I differ is (as someone who hasn't walked down the aisle yet) that I still have the hope that there is "the one" out there. I'm not necessarily looking for a sugar momma, but just one that can enjoy a modest lifestyle with some splurging.

While it's understandable that everyone starts at different points in life and we all take different journeys, and I'm not demanding a 6 figure positive net worth (but surely would like to see that by the time they're in their mid 30s) it can be very frustrating when women in their 30s still have a negative net worth (and not because they had to finance education through a PhD in a financially rewarding profession). Note: I realize many men also fit the bill, but as my post is a reflection on my frustration, I merely let it referring to the fairer sex.

 

[dvalley]

Wow I derailed my own thread, awesome!

To get this back on-topic, this is what my current game-plan looks like.

1. Consider redirecting the additional mortgage payments towards the taxable accounts (college and retirement)
2. Sell off the dividend stuff from the taxable account and just go to VTI/VXUS/BND (70/20/10).
3. Move the target retirement fund 2025 VTHRX (actually I just looked and it's 2030) to 2035. I actually turn 55 in 2030 so I think that's OK.

One question that remains is should I put the cash in IRA/ROTH($105k/11k) into the 10 dividend creating equities I listed earlier? It would be nice to have dividend appreciation along with the overall market appreciation for the next 20yrs or so?

Any suggestions or objections before I put things in motion? The market is so artifically inflated right now though, I'm considering waiting until the DJIA goes back to 14k. I know, timing the market is bad but ignoring basic logic is...not