Looking to Rebalance Traditional 401(k) and Change Future Contributions

[Grindin' Away]

Basically, I would like ideas for my 401(k) allocations and future contributions...

Current Holdings – Total $57,678.07
2040 LifeTime Fund  - $12,831.17   exp ratio 0.78%    (22.24% of port)
2050 LifeTime Fund  - $33,786.21   exp ratio 0.78%    (58.57% of port)
Int’l Emg Mkt Sep     - $2,178.61   exp ratio 0.69%    (3.77% of port)
Company Stock        - $8,882.08   no expense    (15.39% of port)

Current Strategy:
-75% of all contributions go into the 2 balanced allocation LifeTime Funds
-25% of all contributions go into the Int’l Emg Mkt and Company Stock
-Whenever the Emg Mkt or Company Stock can lock in solid returns, I move about 75% of what’s in there into the balanced allocation LifeTime Funds, and continue the future contributions as above
-Money is never moved out of the balanced allocation LifeTime Funds


Younger me was arrogant for thinking I could beat the market average in the long term.  I got real lucky the last 2 years, and see the errors in my strategy now.  I am just about done reading John Bogel’s Little Book of Common Sense Investing, and it is supporting my thought that I’m an idiot.

I’m ready for a new allocation/future strategy in my 401(k) with simple, low expense choices.  No more trying to beat the market average.  But I’m reluctant to put too much in just a S&P 500 index fund.

I would like to hear some fellow mustachian opinions for someone in the following situation:




-31 years old, married
-I put in 8%, company puts in 6% every other week
-The company I work for is a large Fortune 500 Financial Company
Let me know if more information would be helpful


Possible Investment Options are:

Short Term Fixed Income
Select Savings Stable Value   -   .37% exp

Fixed Income
Inflation Protection Sep      -   .45% exp
Gov’t & High Qual Bond Sep   -   .45% exp
Bond and Mortgage Sep      -   .30% exp
U.S Property Sep                     -   .85% exp

Balanced/Asset Allocation
Lifetime Strategic Income Sep   -   .63% exp
LifeTime 2010 Sep      -   .67% exp
LifeTime 2020 Sep      -   .71% exp
LifeTime 2030 Sep      -   .75% exp
LifeTime 2040 Sep      -   .78% exp
LifeTime 2050 Sep      -   .78% exp
LifeTime 2060 Sep      -   .92% exp

Large U.S. Equity
LargeCap Growth Sep      -   .35% exp
Equity Income Sep      -   .52% exp
LargeCap S&P 500 Sep      -   .06% exp
LargeCap Value Sep      -   .45% exp

Small/Mid U.S. Equity
SmallCap Growth I Sep      -   1.09% exp
SmallCap Vaklue II Sep      -   1.12% exp
MidCap Sep                      -   .45% exp
SmallCap S&P 600 Sep      -   .06% exp
MidCap Growth III Sep      -   .97% exp

International Equity
Diversified Int’l Sep      -   .69% exp
Int’l Emg Mkt Sep      -   .69% exp

Company Stock
ESOP Company Stock      -   0% exp



The problem is that I like the diversification of the balanced allocation, but then take on more risk to compensate for the expenses, which is dumb.  Can someone please suggest a good low expense portfolio balance that is still decently diversified?

[Cheddar Stacker]

I’m ready for a new allocation/future strategy in my 401(k) with simple, low expense choices.  No more trying to beat the market average.  But I’m reluctant to put too much in just a S&P 500 index fund.

I think the S&P will be your best place to put the lion's share of the funds. I think it's worth noting the expense ratios you were paying are higher than all the other expense ratios in your plan, except small cap which are almost always higher. First thing would be to eliminate the Lifetime funds since you have better options.

Questions:
1) How long until you plan to need any of this money? When do you envision retiring?
2) Are you currently maxing out your contributions at $17,500? If not, that should be your first step unless you like taking the slow road. Read this if you haven't already: http://www.madfientist.com/retire-even-earlier/

Without knowing your timeline and knowing nothing about your company, and simply using your age as my guide, I would recommend the following:
Large U.S. Equity
LargeCap S&P 500 Sep      -   .06% exp   - 50%
Small/Mid U.S. Equity
MidCap Sep                      -   .45% exp - 15%
SmallCap S&P 600 Sep      -   .06% exp - 15%
International Equity
Diversified Int’l Sep      -   .69% exp - 5%
Int’l Emg Mkt Sep      -   .69% exp - 5%
Company Stock
ESOP Company Stock      -   0% exp - 10%

You mentioned you wanted diversification. The only thing that's not diversified in this recommendation is your ESOP. Since you know the company well and it has no expense, I think you should invest some funds there, but limit your exposure to 10%. Outside of that, this would give you large, mid, small, and international stocks. Each one of these funds is invested in hundreds of companies, so there's your diversification.

I would not put anything in bonds unless you are extremely risk averse. As long as you know going in you will lose value at times, and you need to hold onto the stock funds, you will be fine. Once you are a few years away from actually needing the money, buy some bonds to smooth out the ride.

Last note - I'm aggressive when it comes to investing, and there are many smarter investors on this forum than me, so take it all with a grain of salt.

[gimp]

Expense ratio is quite high! I'd reallocate to index funds - total market, or big cap and small/med cap. You can cut that expense ratio down to under ten basis points.

[GregO]

Large U.S. Equity
LargeCap S&P 500 Sep      -   .06% exp   - 50%
Small/Mid U.S. Equity
MidCap Sep                      -   .45% exp - 15%
SmallCap S&P 600 Sep      -   .06% exp - 15%
International Equity
Diversified Int’l Sep      -   .69% exp - 5%
Int’l Emg Mkt Sep      -   .69% exp - 5%
Company Stock
ESOP Company Stock      -   0% exp - 10%

Last note - I'm aggressive when it comes to investing, and there are many smarter investors on this forum than me, so take it all with a grain of salt.

+1 to CS's good allocation.  If it was me I'd probably allocate a little more to the international funds, maybe 7.5% or 10% to each of them and probably either lower the company stock or the S&P 500.  But that's really nitpicking, CS put together a very solid portfolio.

[Grindin' Away]

Thanks for the great feedback.

CS, your weight exp comes out to .1755% compared to my current .6563%.  Assuming both our strategies have the  same returns, that will save me $277.32 a year with my current balance.

When I mentioned diversification, I was referring to not having 100% in the S&P 500 & 600.  Your recommendation is very diversified, and low expense.  What are your thoughts on Fixed Income?  I know it used to be a cornerstone for conservative investing, but times have changed.  The LifeTime funds usually hold a percentage of Fixed Income depending on the retirement date.  Are most DIY 401(k)ers sticking to only Equities now?

I'm going to take both recommendations into consideration, and come up with something a lot better than what I have now.


CS, to answer your questions:

1.)  Right now, I'm projected to work until I'm around 45-50, but constantly trying to lower that number.  As I get closer to retirement, I'll have to see if it makes sense to start the whole Roth conversion pipeline to touch the money before I'm 59.5.

2.)  Unfortunately, I'm not maxing it out right now like a lot of you badass mustachians.  We are currently working on destroying my wife's student loans, and we're projected to have our 3.5% mortgage be our only debt in about 4-5 years.  Once that happens, I'll start maxing the 401(k).  For now, I only contribute 8% to get the max company match of 75% up to 8%.  The rest is going towards debt paydown.

Thanks again

[Cheddar Stacker]

You might want to read this thread:
http://forum.mrmoneymustache.com/investor-alley/never-reallocating-from-100-equity-with-age/msg315207/?topicseen#new

and the other one I referenced within that thread.

Fixed Income - Holding bonds is not a terrible idea, it just depends on your risk tolerance. If you have REIT's available to you, I would put some there rather than bonds if you're looking for more diversification/safety. If losing 25% of your portfolio value will send you into a panic sell mode, maybe you should have some bonds. If you are sophisticated enough to realize the value is irrelevant until you are near/in retirement, you will see that 25% drop as a great buying opportunity and do everything you can to put in more immediately.

Your answer to number 2 directly affects your answer to number 1. Destroying student loans can be a good thing, but there is an opportunity cost. What are the interest rates on the student loans?

If they are low and fixed, many here (including me) would argue your money would be better utilized in the 401K. It gives you an immediate tax break, plus equities (stocks) have a high historical rate of return that tends to beat most low fixed income debts.

Many people here would also argue the opposite - that getting rid of the student loans reduces your required monthly cash outflow, and provides more peace of mind. I agree with the cash flow part if that's an issue, but I don't buy the peace of mind argument. I liken it to a car warranty, or car insurance for that matter. Yes, paying those gives you peace of mind, but it can be an illusion and you would likely be better off not paying them and taking your chances with the car repair bill/accident. Wouldn't an extra $35K in your 401K while still carrying $25K in loans give you some peace of mind as well?

If you didn't read (or fully comprehend) the madfientist article I would circle back to that as well. The power of tax deferral (avoidance) could turn your 45-50 target into a 40-44 target.

[Grindin' Away]

Thanks for the resources CS.

I've started following the Mad FIentist as well.  The math behind all of this is fascinating to me, and I'm working on calculating all of the scenarios, and deciding what makes the most sense.

In terms of Student Loans:
$4,000 at 8.4% fixed  (will be paid off in the next 6 months)
$13,000 at 6.8% fixed
$19,000 at 4.75% fixed
$8,500 at 4.18% var

With all of that said, I'm thinking I should get all of the 8.4% and 6.8% fixed knocked out, and then start maxing the 401(k).  I definitely see the math advantages of doing that, and setting aside the emotional want to just get rid of the damn SLs.  We have a decent financial situation otherwise, and are heading in the right direction, so the math route makes sense.

[Cheddar Stacker]

You're welcome.

With all of that said, I'm thinking I should get all of the 8.4% and 6.8% fixed knocked out, and then start maxing the 401(k).  I definitely see the math advantages of doing that, and setting aside the emotional want to just get rid of the damn SLs.  We have a decent financial situation otherwise, and are heading in the right direction, so the math route makes sense.

Agreed, but check the fine print on the 4.18% variable to make sure it won't be a crazy rate when they go up.

I have 23K in SL debt 14 years after graduating. The interest rate is fixed at 4%. I made a few extra payments early on to reduce principal, but I don't ever plan to make another extra payment again. I almost paid it off 2-3 years ago before finding MMM, but I ran some numbers and instead maxed out my 401K and bought some rental real estate.

Madfientist is great. Make sure you also check out gocurrycracker.com. It's more travel focused with an FI undertone since the travels are a direct result of frugality, tax planning, and financial independence.