401k rebalancing

[southpaw328]

Hey, I'm 27 years old, and I have a 401k through my company. I contribute 7% which is 1% more then I need to get the full match. Company matches up to 3% for <2 years of employment and increases 1% per year up to 6%. I do 7, they do 3. I look forward to this fall when they'll go up another 1%. I'm not sure why I do 7% instead of 6%, but I just figured more is better.

Anyway, I am pretty new to Mustachianism and investing. I just finished reading Bogle's Little Book of Common Sense Investing and realized that I could get started with Vanguard in some form just by rebalancing my 401k.

I have 100% allocation in this LifePath Index which was the fund that I was automatically put into,

LifePath Index 2055 Account A
LifePath Funds   
0.06% Gross Expense Ratio

I have 5 Vanguard Indexes available to me:
   
Vanguard Extended Market Index Trust
Mid Cap Funds      
0.05%
   
Vanguard Institutional 500 Index Trust
Large Cap Funds   
0.01%
   
Vanguard Total Bond Market Index Trust
Bond Funds   
0.03%

Vanguard Total Intl Stock Idx InstlPls
International Funds      
0.07%
   
Vanguard Windsor II Fund - Admiral
Large Cap Funds   
0.25%

I was thinking I would rebalance to 85% Vanguard Institutional 500 Index Trust & 15% Vanguard Total Bond Market Index Trust

What do you guys think about those indexes and allocations? Any and all input is very much appreciated. Thank you!

[Semag]

Hey Southpaw-

I'd say you can look at the lifepath index2055 to see what it is made up of and see if you can beat the expense ratio with the options afforded to you.

Looks like it is:

50% blackrock russell 1000 (close to your vanguard 500 fund)
30% Total International
16% Developed Real Estate.

-----

I believe if you want the same thing you could do 55% total 500, 30 % international (with the .07 ratio) and 15% of your total bond fund and it would be equivalent but with a lower expense ratio - so your return would be just slightly better.

[southpaw328]

Thanks Semag, sounds like the ratios I'll likely do.

To figure my total expense ratio, do I just get the average of the 3 or do I need to weight the percentages as they are in my portfolio?

[Semag]

you would need to weight them.

Think of it this way.

$55 of stock 1, and the fee was $0.55 - 1% ratio
$30 of stock 2, fee is $2.10 - 7% ratio
$15 of stock 3, fee is $0.45 - 3% ratio.

Average of the ratios is 11% /3 = 3.7%

BUT, total expenses would be  $0.55 + $2.10 + $0.45 = $3.10 / $100 (Total investment) = 3.1%

Make sense?

[MustacheAndaHalf]

I'm rather stunned at the low expense ratios in your plan - your company is probably large enough to muscle Vanguard into lower expenses.  It's impressive to see a 0.01% expense ratio outside of the government's retirement plans.

Because of that, I'd say pick whatever you like.  A target date fund costing 0.06% is impressive, and each $10,000 only costs you $6/year.  For that price you get the features of a target date fund like automatic rebalancing, and slowly increasing the bond percentage as you approach retirement.

Note target date funds allocate about 10% to bonds.  It's a good habit to have - that you don't go 100% stocks right up to your retirement date.  I suspect most people never rebalance, and if they hit a market correction shortly before they retire... well, the lack of bonds might mean they have to work a bit longer than expected.  Until the market recovers, really.  So the reason for bonds is a good habit that becomes much more important the closer you get to retirement.

But don't trust me on the 10% bonds - trust the largest retirement funds - each of them allocates 10% bonds.  Take a look at Vanguard, Fidelity or Schwab's "target date" or "retirement" funds.

[farfromfire]

0.01% is a very low expense ratio.

I haven't done the math, but if I were you I'd be tempted to go 100% Vanguard Institutional 500 Index Trust, and rebalance by buying a bond fund in an ira account.

[SeattleCPA]

I'm rather stunned at the low expense ratios in your plan - your company is probably large enough to muscle Vanguard into lower expenses.  It's impressive to see a 0.01% expense ratio outside of the government's retirement plans.

Because of that, I'd say pick whatever you like.  A target date fund costing 0.06% is impressive, and each $10,000 only costs you $6/year.  For that price you get the features of a target date fund like automatic rebalancing, and slowly increasing the bond percentage as you approach retirement.

Note target date funds allocate about 10% to bonds.  It's a good habit to have - that you don't go 100% stocks right up to your retirement date.  I suspect most people never rebalance, and if they hit a market correction shortly before they retire... well, the lack of bonds might mean they have to work a bit longer than expected.  Until the market recovers, really.  So the reason for bonds is a good habit that becomes much more important the closer you get to retirement.

But don't trust me on the 10% bonds - trust the largest retirement funds - each of them allocates 10% bonds.  Take a look at Vanguard, Fidelity or Schwab's "target date" or "retirement" funds.

+1

[southpaw328]

I'm rather stunned at the low expense ratios in your plan - your company is probably large enough to muscle Vanguard into lower expenses.  It's impressive to see a 0.01% expense ratio outside of the government's retirement plans.

Because of that, I'd say pick whatever you like.  A target date fund costing 0.06% is impressive, and each $10,000 only costs you $6/year.  For that price you get the features of a target date fund like automatic rebalancing, and slowly increasing the bond percentage as you approach retirement.

Note target date funds allocate about 10% to bonds.  It's a good habit to have - that you don't go 100% stocks right up to your retirement date.  I suspect most people never rebalance, and if they hit a market correction shortly before they retire... well, the lack of bonds might mean they have to work a bit longer than expected.  Until the market recovers, really.  So the reason for bonds is a good habit that becomes much more important the closer you get to retirement.

But don't trust me on the 10% bonds - trust the largest retirement funds - each of them allocates 10% bonds.  Take a look at Vanguard, Fidelity or Schwab's "target date" or "retirement" funds.

Hey MustacheAndaHalf, thanks for your input - appreciate your response.

So, I could keep the target date fund, pay a little bit more for it, and it will rebalance for me. Or I could rebalance to 90% Vanguard 500 Index Trust & 10% Vanguard Total Bond Mkt, have lower fees, but I would have to do my own re-balancing and as I get older move more to bonds, correct?

0.01% is a very low expense ratio.

I haven't done the math, but if I were you I'd be tempted to go 100% Vanguard Institutional 500 Index Trust, and rebalance by buying a bond fund in an ira account.

hey farfromfire, thanks for your input!

That's interesting too. Take full advantage of the tiny ER. And I have been thinking about opening a Roth IRA anyway. I'd have to look at what the expense ratio is on bonds at Vanguard when doing it on my own - it sounds like my 401k ratios are so low because of my employer.

[ooeei]

With those expense ratios and fund options I'd be putting my $ in there before an IRA, unless you have some other reason specifically for wanting an IRA.  If possible, max out the 401k.

[southpaw328]

With those expense ratios and fund options I'd be putting my $ in there before an IRA, unless you have some other reason specifically for wanting an IRA.  If possible, max out the 401k.

to clarify, by "max out the 401k," do you mean to literally put as much as I can beyond the match or up to the match? I assume the former but just want to be sure.

[farfromfire]

I have 0 experience with this - but is a mega backdoor Roth applicable here? Because then "max out" is way beyond the match.

[Semag]

Southpaw - I think when he says "max out" your 401k, he means increase your contributions until you hit the 18,000 per year max.  If you can't do that on your current salary, then keep increasing when you can until you get there.

[southpaw328]

Southpaw - I think when he says "max out" your 401k, he means increase your contributions until you hit the 18,000 per year max.  If you can't do that on your current salary, then keep increasing when you can until you get there.

Thought so. However, I think the "order of investing" thread suggests you go 401k up to the match and max out the HSA then back to maxing 401k. I emailed my HR to ask how I can view the HSA investment options to figure if I should contribute to the HSA at all.

I decided to reallocate my 401k funds to 90% 500 Index Trust & 10% Total Bonds Index. I still have more research to do on the 3-fund portfolio so I might add in 20% Int'l and bump Bonds up to 15% at a later date.

I do wonder if I should even bother opening a Traditional IRA given my 401k options might come at even lower ER then opening my own at Vanguard. However, probably be a good idea to open one for my wife, who has a 403b and no Vanguard options and no HSA options.

Thanks for everyone's input.

[Greenpez]

Thought so. However, I think the "order of investing" thread suggests you go 401k up to the match and max out the HSA then back to maxing 401k. I emailed my HR to ask how I can view the HSA investment options to figure if I should contribute to the HSA at all.

I decided to reallocate my 401k funds to 90% 500 Index Trust & 10% Total Bonds Index. I still have more research to do on the 3-fund portfolio so I might add in 20% Int'l and bump Bonds up to 15% at a later date.

I do wonder if I should even bother opening a Traditional IRA given my 401k options might come at even lower ER then opening my own at Vanguard. However, probably be a good idea to open one for my wife, who has a 403b and no Vanguard options and no HSA options.

Thanks for everyone's input.

 The order of investing assumes that your 401k will have higher fees and lesser options. In your case, you have good options with low fees, so it's fine to max your 401k then look at IRA options. I do wish my 130k employee company had options near as good as yours :p

[MustacheAndaHalf]

...
Because of that, I'd say pick whatever you like.  A target date fund costing 0.06% is impressive, and each $10,000 only costs you $6/year.  For that price you get the features of a target date fund like automatic rebalancing, and slowly increasing the bond percentage as you approach retirement.

Note target date funds allocate about 10% to bonds.
...

So, I could keep the target date fund, pay a little bit more for it, and it will rebalance for me. Or I could rebalance to 90% Vanguard 500 Index Trust & 10% Vanguard Total Bond Mkt, have lower fees, but I would have to do my own re-balancing and as I get older move more to bonds, correct?

Better would be squeezing in some international: maybe 18% if you're reluctant (18/90 = 20% of your stock allocation).  I know the expense ratio looks higher (0.07%), but it's purchasing stocks from countries around the world.  And historically, international sometimes beats U.S. and sometimes U.S. pulls ahead.

Note the 10% bonds slowly changes over time.  If you do your own allocation, you might want to keep an eye on a target date fund, and imitate it's bond allocation.  So when it allocates 15% or 20%, you do the same.

It's good to save on expense ratios, but below 0.10% beware you don't make strategic decisions just based on saving a few dollars (literally a few dollars).  But after one year of a maximum allocation ($18,000) you might expect the account to grow by more than $1000 in the average year.  The expense ratios at $2.16/yr or $10.80/yr aren't likely to impact returns.  I mention this also because you shouldn't exclude international just to avoid an expense ratio of 0.07%.  That level of expense is very low - it's cheap diversification.

I'd also say that at some future time if you leave this company, I'd suggest keeping your 401(k) plan intact - don't roll it over.  It's my first time giving that advice, but I don't think you will find better options for that cheap anywhere else.  You also get some level of bankruptcy protection, and certain maneuvers with Roth Conversions are probably easier.

[southpaw328]

...
Because of that, I'd say pick whatever you like.  A target date fund costing 0.06% is impressive, and each $10,000 only costs you $6/year.  For that price you get the features of a target date fund like automatic rebalancing, and slowly increasing the bond percentage as you approach retirement.

Note target date funds allocate about 10% to bonds.
...

So, I could keep the target date fund, pay a little bit more for it, and it will rebalance for me. Or I could rebalance to 90% Vanguard 500 Index Trust & 10% Vanguard Total Bond Mkt, have lower fees, but I would have to do my own re-balancing and as I get older move more to bonds, correct?

Better would be squeezing in some international: maybe 18% if you're reluctant (18/90 = 20% of your stock allocation).  I know the expense ratio looks higher (0.07%), but it's purchasing stocks from countries around the world.  And historically, international sometimes beats U.S. and sometimes U.S. pulls ahead.

Note the 10% bonds slowly changes over time.  If you do your own allocation, you might want to keep an eye on a target date fund, and imitate it's bond allocation.  So when it allocates 15% or 20%, you do the same.

It's good to save on expense ratios, but below 0.10% beware you don't make strategic decisions just based on saving a few dollars (literally a few dollars).  But after one year of a maximum allocation ($18,000) you might expect the account to grow by more than $1000 in the average year.  The expense ratios at $2.16/yr or $10.80/yr aren't likely to impact returns.  I mention this also because you shouldn't exclude international just to avoid an expense ratio of 0.07%.  That level of expense is very low - it's cheap diversification.

I'd also say that at some future time if you leave this company, I'd suggest keeping your 401(k) plan intact - don't roll it over.  It's my first time giving that advice, but I don't think you will find better options for that cheap anywhere else.  You also get some level of bankruptcy protection, and certain maneuvers with Roth Conversions are probably easier.

Hey, I really appreciate the input. I have been reading The Four Pillars of Investing and then saw your response... combining some of things I've learned here and there, I did actually re-allocate to 80/20 stocks/bonds:
62% Vanguard Institutional 500 Index Trust
19% Vanguard Total Bond Market Index Trust
19% Vanguard Total Intl Stock Idx InstlPls

though, now that I think about it, I really need to put all my assets in front of me and see what the overall allocation is to see if this allocation of my 401k is proper based on what I want to do.

Thanks for the help everyone,