34 years old and need advice

[Risky23]

Hello all. I have been lurking for a while and am ready to join the forums. Some of the topics are pretty though provoking - both with regards to money and otherwise. I need some advice with regards to my personal situation. I am 34 and belive that it may be possible for me to retire in about 15 years. I took the advice of others on these boards and read both the Millionaire Next Door and the Four Pillars of Investing. My goals with respect to my investing is to be an index investor and get market returns of 8% or 9% per year. (assuming of course that is how the market performs in an average year). I am going to shortly move my investments to Vanguard and need help in selecting the right funds and right percentages. With my risk tolerance I was given the following asset allocation by an on-line calculator:

Large Cap 40%
Small Cap 20%
Foreign Stocks 20%
Bonds 20%

To invest, I have the following:

SEP of about $20,000
IRA of about $150,000
After Tax Account of $100,000
Cash on hand of $70,000

Moving forward my money will go into my SEP and my After tax account. I'm not sure if there is anything I can do about taxes in my After tax account investing. From my understanding with mutual funds I don't think I can chose anything that would be tax efficient with these investments. Anyone have any advice as to which funds I should chose and which percentages I should go with? I feel overwhelmed looking at their site and have not been able to locate any older threads here that fit my personal situation.

Thank you again for your time and I look forward to joining the community!

 

[travelover]

Welcome Risky. if you haven't spent some time at the Bogleheads forum, I'd recommend it. They also have good archives worth reading. I'd recommend their new book, as well - a good read for $10.

Guide to the Vanguard Diehards Forums

I use index funds in my taxable account because with low turnover, there is a minimal capital gain. Bonds are in my 401(k) . I think your allocation looks pretty straight forward.

 

[simple girl]

Hi Risky,

We use Vanguard Total Stock Market Index in our taxable account. Pretty efficient in terms of taxes. It holds lg, mid, and small caps (mostly large) but is efficient since it doesn't have to sell small caps when they became mid, etc.

I personally would add what % you want to hold in cash to your allocation (i.e. emergency funds).

There is a nice thread here by LOL called asset allocation tutorial. Do a search and it will come up.

Do you want a simple approach or more detailed? If you like more detailed, you'll want to decide if you want to take a value slant to your funds, want to own any REITS, if you want to hold any emerging markets or not in your international, or want any commodities, etc. Lots of people with lots of different styles here. Your style will help you decide which funds.

 

[ats5g]

Risky,

You've done the hard part, choosing an asset allocation. The fund question is actually the easy part. If you want to include that $70,000 in your portfolio, and you want to invest it, then it looks like you've got roughly:

SEP IRA        6%
IRA           44%
taxable       29%
cash taxable  21%

If not then it's

SEP IRA        7%
IRA           56%
taxable       37%

First, I'm going to assume that the $70,000 is not for immediate investing into your portfolio [i.e. it's some sort of emergency fund].

You could simply to something like:

Taxable - all 37% [i.e. $100,000] in Vanguard's Large-Cap Index Fund Admiral Shares [note cheaper admiral shares]

IRA
20% [i.e. $54,000] in Vanguard Total International Stock Index Fund
20% [i.e. $54,000] in Vanguard Small-Cap Index Fund
16% [i.e. $42,000] in Vanguard Total Bond Market Index Fund

SEP IRA
7% [i.e. $20,000] in Vanguard Total Bond Market Index Fund

Notes: I suggested the Vanguard Large-Cap Index Fund in taxable b/c it has zero overlap with the small cap index fund. See MSCI's US equity indices for more info on the Prime Market Index 750 [which the Large-Cap Index Fund tracks] and the Small Cap Index 1750 [which the Small-Cap Index Fund tracks]. Added together [750 + 1750], these two funds make up MSCI's Investable US market. Also, I'd expect that the Large-Cap Index Fund would be similarly as tax efficient as Vanguard's total stock market index fund.

What you put where in the tax deferred [either IRA or SEP IRA] isn't really all that important since you can at some later date sell/buy funds in the IRA/SEP IRA without tax consequences. For example, since you're only adding to the taxable and SEP IRA, you may find it easier to keep some other fund mentioned above in the SEP other than the total bond index.

But this is the basic thinking behind what goes where.

Edited to add: Opps, I also assumed that you had the SEP and IRA at Vanguard already. If not, then your choices in the SEP may skew what funds you choose. Also, if the IRA is pre-tax money, then you could consider rolling it into the SEP for less accounts, etc.

- Alec

 

[Risky23]

Fund choices

Thank you everyone for your replies.

Travelover and Simple Girl,

I all ready have an emergency fund put away and would like to invest the $70,000. I like your suggestions concerning the taxable account and would like to keep the allocation as simple as possible.

Alec,

The $70,000 in cash is to invest. I will probably be able to put about $20,000 into my SEP and the other $50,000 will be after tax. This would break down to:

$150,000 IRA (44%)
$150,000 Taxable (44%)
$40,000 SEP (12%)

I'm assuming that if I transfer my current investments to Vanguard that I can then subsequently add the $20,000 to the SEP. I'm assuming I do not have to start a seperate SEP account after I transfer. My allocation would then look like:

Taxable $150,000 (44%) VLCAX Vanguard Large Cap Index Admiral
IRA $61,000 (18%) VGTSX Vanguard Total Intern. Stock Market Index
IRA $61,000 (18%) NAESX Vanguard Small Cap Index
IRA $28,000 (8%) VBMFX Vanguard Bond Market Index
SEP $40,000 (11%) VBMFX Vanguard Bond Market Index

You provided this recommendation assuming that the $70,000 in cash was not for immediate investing. However, I would like to invest it now as well. Do you see anything wrong with this choice of funds? Do you think it is diversified enough with just 4 funds? Thank you for your advice!

Risky23

 

[travelover]

.............. Do you see anything wrong with this choice of funds? Do you think it is diversified enough with just 4 funds? Thank you for your advice!

Risky23

Looks reasonable to me. If you want a second opinion, shop it at the Bogleheads forum.

 

[ats5g]

Thank you everyone for your replies.

Travelover and Simple Girl,

I all ready have an emergency fund put away and would like to invest the $70,000. I like your suggestions concerning the taxable account and would like to keep the allocation as simple as possible.

Alec,

The $70,000 in cash is to invest. I will probably be able to put about $20,000 into my SEP and the other $50,000 will be after tax. This would break down to:

$150,000 IRA (44%)
$150,000 Taxable (44%)
$40,000 SEP (12%)

I'm assuming that if I transfer my current investments to Vanguard that I can then subsequently add the $20,000 to the SEP. I'm assuming I do not have to start a seperate SEP account after I transfer. My allocation would then look like:

Taxable $150,000 (44%) VLCAX Vanguard Large Cap Index Admiral
IRA $61,000 (18%) VGTSX Vanguard Total Intern. Stock Market Index
IRA $61,000 (18%) NAESX Vanguard Small Cap Index
IRA $28,000 (8%) VBMFX Vanguard Bond Market Index
SEP $40,000 (11%) VBMFX Vanguard Bond Market Index

You provided this recommendation assuming that the $70,000 in cash was not for immediate investing. However, I would like to invest it now as well. Do you see anything wrong with this choice of funds? Do you think it is diversified enough with just 4 funds? Thank you for your advice!

Risky23

Risky,

The number of funds is immaterial when looking at diversification. You've got to look under the hood for the what the funds hold. For example, if you hold 20 funds that only invest in US large caps, you wouldn't be as diversified as if you held three stock funds that each separately invest in US large, US small, and Int'l stocks [which would collectively own about 2,500 US stocks and 2,100 foreign stocks], or even 1 fund that invests in every stock market/country in the world. On the bond side, VBMFX holds over 3,000 bonds, covering corporate bonds, mortgage bonds, and gov't/Treasury bonds. That's pretty diversified.

You previously said that you'd only be adding to the SEP and taxable account. A potential problem with holding only VLCAX in the taxable account is that you may start to find that the US large caps become well more than 40% of your portfolio, which wouldn't jive with your AA. What some people have done is to hold both tax efficient US large [VLCAX] and tax efficient International [through either Vanguard's Tax Managed Int'l or Vanguard's All World Ex-US index fund (VFWIX)]. The All-World Index fund is a tax efficient clone of the Total International fund that you would hold in your IRAs.

This just makes rebalancing a whole lot easier because you can do it in your IRAs, and not in your taxable account, which eliminates having to realize capital gains. For example, if US small caps are doing worse than Int'l stocks, you can sell the int'l stocks in the IRA and buy US small caps in the IRA without any tax consequences. You can also rebalance through new contributions to to the taxable account. For example, if US large is doing worse (or better) than int'l, you could add more (or less) to US large than int'l.

So, you could something like:

Taxable:
$136,000 (40%) VLCAX
$14,000 (4%) VFWIX

IRA
$54,800 (16%) VGTSX
$68,000 (20%) NAESX
$27,200 (8%) VBMFX

SEP:
$40,000 (12%) VBMFX

And if you decide sometime in the future that "Hey I want more small caps, or REITS, or US small value instead of US small blend," it's pretty easy to switch funds in the IRAs without tax consequences.

Alternatively, if you just wanted to use the Total Market funds [i.e. no tilt towards US small, which the above has a slight tilt towards] you could do:

Taxable:
$150,000 (44%) VTSAX [admiral TSM fund]

IRA
$68,000 (20%) VGTSX
$54,800 (16%) VTSAX
$27,200 (8%) VBMFX

SEP:
$40,000 (12%) VBMFX

- Alec