Help me sup up our IRA's Advice from pro's appreciated mahalo

[kgtest]

I just opened Traditional Roth IRAs for my wife and for myself, and I maxed it out. I have $11000.00 that I need to allocate somewhere in Fidelity.

NOW, that I have your attention a little back-story.


So a few of you may have seen me randomly post here and there on this forum in a "testing the water" fashion as I am sure quite a few do. I introduced myself formally but will attempt to introduce myself further in an attempt to get some real financial advice from real people. I will call you all my "FA"s or Forum advisers, as I feel it is important to gain insight from many folks.

I stumbled upon this forum out of pure boredom and career suicide. Basically I was in my cubicle one day and rather than simply ask myself the question "How the he** do I retire early?" and rather than just asking myself the question I actuallay decided I would get serious about the answers to my question. This lead me to my sister, my dad, my wife, this forum, bogleheads, google finance, yahoo finance, my bank, fidelity, my employer and some dude and his assistant at Edward J.

After gathering my knowledge I have come out with a budget, and what I feel is a good savings and investment plan. I am going to get into the real nitty gritty with you all as if you were my financial planners because I feel the more you know, the better feedback you all will give me and the greater chance I have of reaching FI sooner.

I am 32, the wife is 31 and I have been passively investing for a total of 7years now with no clue. I have my budget adjusted so that I have literally no money to spare, which may or may not be a good thing but I feel I am heavy on cash for our age and so this is why I chose to do that. We are aiming to retire in 20-25years if possible putting a target date at 2023-2028.

Also, I have experienced an Income gain of 19.37% /yr for past 6yrs and I expect this trend to continue for a little while as I have room to grow 7years into my professional career. I am dissapointed that I haven't saved as much as I have yet in my life and feel I could have started 7 years sooner at 18, but I have seriously lived life. I have had success in real estate and that is the only reason I have the cash on hand that I do today. My dad and sister own 11 investment properties between themselves and something tells me I might inherit some of these someday....I've already been drug into a lot of it as it is and I unfortunately know more than I care to about residential real estate investments and landlording but I do know how to win at that game.


Okay, on to some real numbers, the nitty gritty and a gasp for improvement suggestions...

We have combined gross income of ~ $90k/year, zero debt. For the sake of numbers and analysis I do not include my wifes $10k/year salary into my final numbers but I really think I might begin doing this since I just opened her own Traditional IRA. So basically I am reporting with an annual gross income of $80k/yr. Of this, I am am currently saving 10% of this into a 401k with 2.5% company match. I am then contributing the max to my Traditional IRA with a one time payment of $5500.00. My DH is contributing the max to her IRA at $5,500.00 and has an unknown IRA I with schwb that I am trying to still access and analyze.

Also, DH has the option to open a 403(b) through her employer however they do not match...but she only nets 11k/year in income and she "in her mind" feels it is not worth it to contribute because of that which is assisnine I know... I am working on changing this mentality, believe me and hope that she can contribute SOMETHING to this 403(b) especially considering I do not include her salary in these numbers. I am open to alternatives or persuasion tactics for her stubbornness without trying to explain tax deferred vehicles to her.

We now have $55k cash on hand after I moved the $11,000 into the IRA's tonight.

This brings me to the crossroad of WHERE DO I INVEST?

Below are our current, recently rebalanced to high growth stock, 401K allocations:

FIDELITY 401(k) -
Current
Balance (%) Investment Current Balance ($)
25.06% PRU/J MID CAP GR Z PE StockEqity GZX $3,423.21
25.04% FID LOW PRICED STK StockMidVal FLPSX $3,421.56
25.00% TRP SMALL-CAP VALUE Stock PRSVX $3,415.70
24.90% OAKMARK INTL Blend Stock OAKIX $3,401.41
ADP 401(k) -
100.00 ClearBridge SmCap Growth StockEquity MUTF:SASMX $1,320.00
100% TOTAL $14,981.88

With the above knowledge I am hoping to get some insight into what I should do with these $11,000 in newly available IRA funding. I hear a lot about INDEX and Dividend funds and I would prefer high growth at this point in my portfolio.

After putting all of this finance and investment stuff together I now realize me and my wife have a net worth of $81k whoohoo! Honestly I am a bit shocked but excited because I realize there will be tons of room for improvement considering less than a week ago our 401k was sitting at 50% bonds!

If you want to get into out budget just know that we spend $36,000 of 60,000 after tax dollars on housing and transportation...there is no way to cut these costs for me for the next 18months unfortunately and I realize that is really high at 60% of our net but we chose to live where we do knowing it was temorary with plans to decrease our cost of living and increase our savings rate when this contract is up.

I set out to improve my investment / tax /saving knowledge in 2013 and I am open to honest feedback and advice from the pro's here. I know a few of you are quite respected with great qualifications so I am willing to be honest with this stuff.
=]

 

[panacea]

How about some s&P 500? looks like you have lots of small/mid but you're light in large cap US. FUSEX!

 

[Animorph]

I just opened Traditional Roth IRAs for my wife and for myself, and I maxed it out. I have $11000.00 that I need to allocate somewhere in Fidelity.

Just to be clear, those were traditional IRA's, not Roth IRA's, right?

My first thought is that you may still be in the 15% tax bracket, and in that case I'd favor contributions to a Roth IRA. You could still Roth convert the tIRA's, I think.

Looks like you're headed to a heavy stock allocation with diversification. Now is not a bad time to add some emerging markets, and then some foreign small cap. And really, large caps would be OK too.

 

[haha]

I just opened Traditional Roth IRAs for my wife and for myself, and I maxed it out.

No such thing exists. There is Traditional IRA, and a Roth IRA. They are different, get familiar with the differences.

Ha

 

[kgtest]

Just to be clear, those were traditional IRA's, not Roth IRA's, right?

My first thought is that you may still be in the 15% tax bracket, and in that case I'd favor contributions to a Roth IRA. You could still Roth convert the tIRA's, I think.

Looks like you're headed to a heavy stock allocation with diversification. Now is not a bad time to add some emerging markets, and then some foreign small cap. And really, large caps would be OK too.

Yes these are traditional. I wonder if I can do the Roth...its prob too late. Well I opened a traditional for myself and I am still waiting for DH to get me her Roth info so I have yet to contribute for her and have only opened the one traditional in my name.

 

[kgtest]

I have been trying to get familiar...made a typo sorry. The reason I chose to max traditional was for tax reasons. I sold a house and we got married and have paid a lot of taxes already thi year.

 

[Animorph]

I have been trying to get familiar...made a typo sorry. The reason I chose to max traditional was for tax reasons. I sold a house and we got married and have paid a lot of taxes already thi year.

If you are in the 25% tax bracket (or higher) for this year then stick with the traditional IRA and its deduction.

If not, you should be able to convert the tIRA into a Roth IRA before the end of the year. If it's sitting in cash it won't cost any more than contributing to a Roth originally would have. On the other hand it's probably not going to make or break you.

 

[kgtest]

If you are in the 25% tax bracket (or higher) for this year then stick with the traditional IRA and its deduction.

If not, you should be able to convert the tIRA into a Roth IRA before the end of the year. If it's sitting in cash it won't cost any more than contributing to a Roth originally would have. On the other hand it's probably not going to make or break you.

Based on all of the online tax bracket estimation calculators I am confident this years option should be the Traditional IRA as we will sit in a 25% tax bracket. Next year, if and when our tax bracket gets lowered we will contribute to Roth. That will most-likely depend on how much my wife works this year.

 

[kgtest]

After analyzing some more I am confident with out combined income, and the capital gains from the home sale we will be sitting above 25% so this year it will be tIRA for both of us. After doing my actual taxes if I find I was wrong I will just convert to the Roth.

Now I am back to my original problem of trying to find a good high growth fund that allows for diversification.

 

[Animorph]

You can only Roth convert within the calendar year, though you can recharacterize a Roth conversion well into the next year.

FUSEX is fine for large cap.
I'd go with IEMG commission free for EM exposure.

 

[kgtest]

You can only Roth convert within the calendar year, though you can recharacterize a Roth conversion well into the next year.

FUSEX is fine for large cap.
I'd go with IEMG commission free for EM exposure.

Thanks for the tips! You have been more than kind!

 

[LOL!]

Until your portfolio gets larger, I think your portfolio should be invested in a single low-expense-ratio, passively-managed index fund of other index funds. Fidelity has a such a fund and it is called FFNOX. It's got US stocks, foreign stocks, US bonds and is totally and completely diversified.

As for what's available in your Fidelity 401(k), I don't think you said what was available, but I would not use any of the stock funds you listed if there were some low-expense-ratio passively managed index funds available.

 

[RobLJ]

Until your portfolio gets larger, I think your portfolio should be invested in a single low-expense-ratio, passively-managed index fund of other index funds. Fidelity has a such a fund and it is called FFNOX. It's got US stocks, foreign stocks, US bonds and is totally and completely diversified.

As for what's available in your Fidelity 401(k), I don't think you said what was available, but I would not use any of the stock funds you listed if there were some low-expense-ratio passively managed index funds available.

You make a good point.
My core funds when I was his age happened to be Fidelity Contra, then added Fidelity Low-Priced a few years later. I would add a large allocation to a 500 index or preferably a Total Market index, if available and consider keeping a plus allocation in Low-Priced (if you like small/midcap), but his future returns may differ from mine.
Low-Priced has added the largest gains in my entire portfolio over 15 years, despite major rebalancings (which included 2006-7), so I'm prejudiced. It's success could be random luck, of course and Tillotson has hired subadvisors. As an active fund, LP has been a good one, but I wouldn't put most of my money in it. It's now 8% of my allocation although it was a lot more back in '06 before I rebalanced. (I looked--it's contributed 18% of my total portfolio returns, with 8% of current allocation). It trailed the S&P only in '07 over the last 10 years, although the 3 year returns are close, as you would expect.
http://performance.morningstar.com/fund/performance-return.action?t=FLPSX&region=USA&culture=en-US

 

[clifp]

KG great intro financial post. Maui no ko oi.

If you are looking for growth rocket funds, I think you have done a very good job already. Two Morningstar 5 star funds and 3 4 stars one, and none of them have crazy expenses high expense ~1%. The two areas where active management has a better chance of out performing indexes are in small caps and international/emerging funds.

It looks like you are in the 25% bracket or if not very close so I think that sticking with a traditional IRA is fine rather than do a ROTH.

I'll echo everybody else your portfolio has plenty of sizzle already you really don't need more. So I would invest in a old fashion S&P 500 index fund with the new money and add some steak. You'll got plenty of action with 100% stock portfolio heavily invested in small caps. After you go through your first bear market with some real skin in the game, and you want to jettison the boring S&P in favor of the action growth fine. But until you gone through your first bear market, when the small caps drop 30% in 6 months you'll be happy to have an S&P which only goes down 15%

If you want to add some sizzle the one area which may (emphasis MAY) be a profitable is adding an emerging market fund, only after the S&P 500. Relatively speaking emerging market stocks are cheap compared to US right now.

 

[kgtest]

KG great intro financial post. Maui no ko oi.

If you are looking for growth rocket funds, I think you have done a very good job already. Two Morningstar 5 star funds and 3 4 stars one, and none of them have crazy expenses high expense ~1%. The two areas where active management has a better chance of out performing indexes are in small caps and international/emerging funds.

It looks like you are in the 25% bracket or if not very close so I think that sticking with a traditional IRA is fine rather than do a ROTH.

I'll echo everybody else your portfolio has plenty of sizzle already you really don't need more. So I would invest in a old fashion S&P 500 index fund with the new money and add some steak. You'll got plenty of action with 100% stock portfolio heavily invested in small caps. After you go through your first bear market with some real skin in the game, and you want to jettison the boring S&P in favor of the action growth fine. But until you gone through your first bear market, when the small caps drop 30% in 6 months you'll be happy to have an S&P which only goes down 15%

If you want to add some sizzle the one area which may (emphasis MAY) be a profitable is adding an emerging market fund, only after the S&P 500. Relatively speaking emerging market stocks are cheap compared to US right now.

Very sound advice. I have been narrowed down to whether or not I choose to allocate remaining funds into Emerging Markets or an Index and I am very thankful and appreciative of everyone's input. I decided to dive into S&P.

For my account Traditional I went 50/50
MUTF:NAESX
FUSEX

and for the DH we decided to use Schwab as she already has a Roth through them and went 100% SCHA.