AA: How would you deploy $500K?

[SimpleLifer]

I'm wondering if anyone has advise on this. 

I'm looking to retire in less than 5 years.  At that time, or before then, I intend to sell my home and downsize.  I'm currently refinancing my home, and expect to close in the next 14 days.  It's a cash-out refi...I'm taking $500K equity out of my home, and will invest.  Some of you helped talk me through those decisions (thank you for that, it was very helpful!). 

When the time comes to move, I don't intend to touch these funds (in fact, I estimate that I'll get another big chunk when I downsize).

Now I'm thinking about what to do with that $500K. I tend to invest and forget, so I'd like to think I can tolerate some volatility for a few years...especially since I'm still contributing and accumulating. 

My Assets:

tax-deferred (401K, traditional IRA, HSA - I don't qualify for Roth IRA):
$364K VTSAX
$31K VTSNX
$32K VIEIX
$33K VINIX

taxable:
$245K VTSAX
$275K  mix of mostly S&P500 funds (Most of the S&P500 funds that I'm invested in are long-term (10+ years), and would create a massive tax event for me to sell)

One option is to put all $500K in VTSAX.  Another option I'm considering is moving towards a 3-fund portfolio, and using my tax-deferred accounts to invest in bonds, and use the taxable account for US and Int Stock, to be more diversified.  Something like this:

tax-deferred:
$390K VBTLX
$50K VTABX
$20K VTSAX

taxable:
$380K VTSAX
$275K  mix of mostly low-fee S&P500 funds (Most of the S&P500 funds that I'm invested in are long-term (10+ years), and would create a massive tax event for me to sell)
$363K VTIAX

I'm mid-40's...if that matters. 

What would you do?

*edited to fix typo

[MustacheAndaHalf]

Can you split your tax-deferred accounts into "Traditional" vs "Roth"?

Roth accounts never get taxed again.  Since stock growth far outpaces bond growth over the long term, I favor more bonds in a Roth account.  Traditional IRA/401(k) accounts get taxed on withdrawal - so the less it grows, the less you pay in taxes.  In addition, both bonds and Traditional IRAs use ordinary income tax rates, so there's no penalty.  Equities held over 1 year use a lower long-term capital gains rate, and if those equities are in a Traditional IRA they are taxed at ordinary income tax rates.  So I favor bonds in a Traditional IRA.

(Note that all your assets in taxable have already been taxed - the Traditional IRA is still better than taxable).

So do you have all Traditional, all Roth, or a mixture of the two?

[Radagast]

I can't give definitive advice. A couple observations:

Why do you always double up on S&P500 funds and Total US Stock funds? Those are about 80% identical, and the other 20% behaves 90% the same.
VINIX looks pretty good if the account has no extra fees, might be worth keeping that around.

At least 50% stocks
Not more than 50% total in US stocks
10-40% bonds, consider being in the higher end of that range as you approach retirement and depending on factors such as other fixed income (SS), whether you are doing a fixed allocation or reverse glide path, subjective feels, and others
Meaningful allocation to international stocks, about 25% of total is ideal, or 20-50% of stock allocation.
A real asset is nice, home equity might count for you
Those allocations do not necessarily exclude or include finer slices

[SimpleLifer]

Can you split your tax-deferred accounts into "Traditional" vs "Roth"?

Roth accounts never get taxed again.  Since stock growth far outpaces bond growth over the long term, I favor more bonds in a Roth account.  Traditional IRA/401(k) accounts get taxed on withdrawal - so the less it grows, the less you pay in taxes.  In addition, both bonds and Traditional IRAs use ordinary income tax rates, so there's no penalty.  Equities held over 1 year use a lower long-term capital gains rate, and if those equities are in a Traditional IRA they are taxed at ordinary income tax rates.  So I favor bonds in a Traditional IRA.

(Note that all your assets in taxable have already been taxed - the Traditional IRA is still better than taxable).

So do you have all Traditional, all Roth, or a mixture of the two?

I forgot to specify that...I have a combo of 401k, traditional IRA, and HSA.  I don't qualify for a Roth.  When retirement time comes, I plan to get on the 5-year conversion ladder plan, as described by some bloggers, including Go Curry.

[SimpleLifer]

I can't give definitive advice. A couple observations:

Why do you always double up on S&P500 funds and Total US Stock funds? Those are about 80% identical, and the other 20% behaves 90% the same.
VINIX looks pretty good if the account has no extra fees, might be worth keeping that around.

At least 50% stocks
Not more than 50% total in US stocks
10-40% bonds, consider being in the higher end of that range as you approach retirement and depending on factors such as other fixed income (SS), whether you are doing a fixed allocation or reverse glide path, subjective feels, and others
Meaningful allocation to international stocks, about 25% of total is ideal, or 20-50% of stock allocation.
A real asset is nice, home equity might count for you
Those allocations do not necessarily exclude or include finer slices

Most of the S&P500 funds that I'm invested in are long-term (10+ years), and would create a massive tax event for me to sell.  For the last few years, I've focused on selling the higher-fee funds, and keeping the ones with lower fees.  I agree, that they perform almost exactly the same.

Yea, even after the cash-out refi, I estimate I'll still have ~$700K in home equity...but who knows what that real number is until I sell...that being said, it's thinking about all this extra home equity that makes me wonder if I should be treating the home equity more like a bond investment, and even count it as part of my bond investments just for portfolio balancing purposes.  I live in a HCOL but very solid community of young career-professional family-types where home prices have been stable for a very long time, and I don't expect that to change.

[PDXTabs]

Personally, I would just be 100% VT.

[SimpleLifer]

Personally, I would just be 100% VT.

management fee on that is .09% tho.

[MustacheAndaHalf]

Besides slightly lower costs, with a combination of VTI (U.S.) and VXUS (international) you can set your percentages and rebalance as needed.  With a single ETF / fund, you can't.

If your retirement accounts are all pre-tax, it might make sense to put your bond allocation in there.  Bonds get taxed at the same rate (ordinary income tax) either way, plus the account grows slower so you have a lower amount to pay taxes on.  With equities in taxable, any growth is taxed at lower rates.  Dividends also get a tax advantage which is lost when they are in a pre-tax account (since any withdrawal is taxed at ordinary income tax rates).  So bonds are usually best kept in a pre-tax retirement account.

If you don't qualify for Roth, there's another approach available: it might mean your income tax is high enough that tax-exempt bonds make sense.  Those go in taxable, since their income is tax exempt.

[PDXTabs]

Besides slightly lower costs, with a combination of VTI (U.S.) and VXUS (international) you can set your percentages and rebalance as needed.  With a single ETF / fund, you can't.

True, VTI+VXUS would also work and have a slightly lower expense ratio.

The cheapest fund in my 401k is 1.80% so I'm usually too happy about 0.09% to worry.