Advice for Vanguard Portfolio

[Alex]

Hey everyone! After ten years with the same company, I am changing jobs! So, in the next 30 days I have the opportunity to roll over my (high cost) 401K into an IRA at Vanguard!!! All of my taxable investments have been with Vanguard since 1990 (when I wisely bought the 500 index) so I am reluctant to tinker too much with the taxable side due to tax considerations. But I will have some flexibility on the tax deferred side once the rollover to Vanguard is complete. I have winnowed the number of funds I need to own, down to 7 or 8 from the 16 that I currently own. (yes, I am finally ready to part with the Health care fund and my favorite pet fund 'global equity'..lol)

PS- In the future 90% of my investments will be going to the taxable side. Because the new job doesn't have a 401k plan (instead they'll be nearly doubling my pay!), I will be adding CA IT Muni bonds to the taxable account or (I- bonds depending on the rate) as needed to maintain proper bond allocation. I will continue to add the maximum to my and my wifes IRA's (both are non deductible). The idea is to convert these non-deductible IRA's to Roths in 2010.

I am 44 years old and have an overall AA plan of 60% (stock) / 30% (bond) / 10% (cash). I also want to have close to 65% USA and 35% International for my equity portion. Here is what I am proposing:

OPTION 1

Tax Deferred accts: 40% of assets

20% total bond index (VBMFX)
10% TIPS fund (VIPSX)
10% Mid cap index (VIMSX)

Taxable accts: 60% of assets

22% FTSE ex-USA (VFWIX)
20% 500 Index (VFINX)
8% Tax managed small cap (VTMSX)
10% CA tax free Money Market (VCTXX)

OPTION 2:

Tax Deferred accts: 40% of assets

10% ST bond index (VBISX)
10% IT bond Index (VBIIX)
10% TIPS fund (VIPSX)
5% Mid cap index (VIMSX)
5% REIT index (VGSIX)

Taxable accts: 60% of assets

22% FTSE ex-USA (VFWIX)
20% 500 Index (VFINX)
8% Tax managed small cap (VTMSX)
10% CA tax free Money Market (VCTXX)


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So, the big question is - Which option would you go with? How would you change things around? Any suggestions for improvement? Any advice would be greatly appreciated. Thank you all in advance for your help!!!

 

[LOL!]

Wow, your clone is asking the same thing on the diehards forum. I suggest you just follow the advice that your clone gets.

 

[Alex]

Wow, your clone is asking the same thing on the diehards forum. I suggest you just follow the advice that your clone gets.

Obviously, I hold the members of both forums in high esteem.

 

[yakers]

Obviously, I hold the members of both forums in high esteem.

I do too, I love this place but you can't beat the diehards board for advice about Vanguard asset allocations.

I love my Target Retirement fund, no advice for others.

 

[Ed_The_Gypsy]

What are you doing with all the bond funds and CA tax-free mm fund at the age of 44? 60/40 damps the volatility but significantly reduces return. I figure that if I can wait ten years for recovery from a dip (historical maximum), I should be 100% in equities. Five to seven years for 50/50 US/international (my present allocation).

Pedal to the metal, kid.

Me, I would keep the heath care fund instead. Plus the energy index fund. Two things for which demand is sure to rise.

How about converting your taxable accounts to Roths? No new taxes at all, compared to converting tax-protected accounts to Roths. Two hitches: can't take advantage of losses and can't touch for 5 years. Advantage: tax-free forever.

You are thinking like an old man. (That's MY job, not yours.)

 

[JohnEyles]

How about converting your taxable accounts to Roths?

Uh, can you do that (other than at $4000-5000 per year) ?!?

 

[Ed_The_Gypsy]

Uh, can you do that (other than at $4000-5000 per year) ?!?

Dunno. Can he convert more from his tax-protected accounts? If he converts from his tax-protected accounts, he will be paying at the highest marginal rate. Remember, his salary has just doubled.

 

[Webzter]

What are you doing with all the bond funds and CA tax-free mm fund at the age of 44? 60/40 damps the volatility but significantly reduces return. I figure that if I can wait ten years for recovery from a dip (historical maximum), I should be 100% in equities. Five to seven years for 50/50 US/international (my present allocation).

Swedroe (it was him I think) says own your age in bonds. Remember, it's all about time horizon too. I'm retiring in 13 years at age 42. I don't think I can stomach the volatility of a 50% drop (potential worst-case exposure with 100% stock) the year before I planned to retire. Different strokes.

 

[Alex]

What are you doing with all the bond funds and CA tax-free mm fund at the age of 44? 60/40 damps the volatility but significantly reduces return. I figure that if I can wait ten years for recovery from a dip (historical maximum), I should be 100% in equities. Five to seven years for 50/50 US/international (my present allocation).

Pedal to the metal, kid.

Me, I would keep the heath care fund instead. Plus the energy index fund. Two things for which demand is sure to rise.

How about converting your taxable accounts to Roths? No new taxes at all, compared to converting tax-protected accounts to Roths. Two hitches: can't take advantage of losses and can't touch for 5 years. Advantage: tax-free forever.

You are thinking like an old man. (That's MY job, not yours.)

The reason I am 60/40 is that I am getting close to retirement. Within 5 years I will be pulling the plug permanently and living off of my investments. Also, my NEED to take risk has also decreased as my nest egg has grown. At the same time, my tolerance for risk has dropped as well. When I was younger and had far less assets, my tolerance was much higher (I was 100% equities up until 4 years ago) now as I pass the 7 figure mark, the idea of losing 40 or 50% of my assets in a downturn is, well, unacceptable and scary! At 60/40 my maximum loss should be limited to 20-25%. Thats still a lot of lettuce to lose, but much closer to my comfort zone. I don't want a bear market to derail my FIRE plans!

Regarding the Roth conversion idea - I agree with you and I plan on converting our two non-deductible IRA's (held in separate IRA's) to Roth's in 2010. I'll only have to pay taxes on the gain and not on the principle so it shouldn't be too painful in the tax dept. I am rolling over the 401K into a separate SEP-IRA and when my income decreases at retirement I'll look at converting more to Roth then.

 

[FinanceDude]

Why not call Vanguard and ask their expertise??

 

[Alex]

Why not call Vanguard and ask their expertise??

FD, I've already done that. Vanguard has a pretty standard plan that they recommend for most people. It's not a bad way to go, but I am more interested in getting feedback from some of the folks here.

 

[ats5g]

Swedroe (it was him I think) says own your age in bonds. Remember, it's all about time horizon too. I'm retiring in 13 years at age 42. I don't think I can stomach the volatility of a 50% drop (potential worst-case exposure with 100% stock) the year before I planned to retire. Different strokes.

fyi - that was Bogle who said "your age in bonds."

Swedroe is all about (1) your need to take risk, (2) your willingness to take risk, and (3) your ability to take risk:

(1) how much return do you need;
(2) how [-]big of a panzy are you[/-] risk tolerant are you; and
(3) how safe/stable is your job/earnings, and how does it react to shocks to your portfolio. For example, a tenured prof has a huge ability to take risk, while a stockbroker probably doesn't.

Why the 10% in muni MM in taxable account?

- Alec

 

[Alex]

Why the 10% in muni MM in taxable account?

- Alec

I am keeping the cash in a muni fund because I am in the highest marginal tax rate. The cash is purely defensive. If the stock market continues to decline I will use it to slowly add to my equity positions which are all held in my taxable account. So keeping the cash in my tax deferred accounts wouldn't do me much good.