Author Topic: Help with AA in multiple accounts  (Read 2546 times)

Sebastian

  • Stubble
  • **
  • Posts: 209
  • Age: 32
Help with AA in multiple accounts
« on: May 22, 2013, 12:39:31 PM »
I am looking to set up my 401K at my place of employment and I need some advice on how to make sure my AA is optimized for me.

I'm 26 years old right now and I just recently set up a Target Retirement Roth IRA fund with Vanguard. I put my money into the 2060 fund which is split like this...

90% Stocks (70% US / 20% Int'l)
10% Bonds

Ok so that makes sense because I'd rather be more aggressive right now because I'm so young and I plan on living for a long time! :)

Now I want to set up my 401K. It's with Charles Schwab and the S&P 500 Index fund looks like the best option I have. The only thing I don't get is if this will mess up my AA??

I looked at the bond options that Schwab offers and the expense ratio is pretty damn high. Really all the expenses in all the other funds they have seems high.

So to wrap this up... will it be OK for me to go 100% into the S&P 500 at this point, or would it behoove me to split it up a bit and spread that AA out a bit more?

Also - I probably should have started with this - how do I figure out what my AA is across several accounts. Currently I'm at 90/10 with stocks and bonds. If I go 100% into stocks with my 401K will that make my overall AA unbalanced? Like 95/5?

Any help/advice would be appreciated!

icefr

  • Bristles
  • ***
  • Posts: 325
Re: Help with AA in multiple accounts
« Reply #1 on: May 22, 2013, 12:59:09 PM »
Could you list the other funds that your 401(k) has? Just so we can see how high the expense ratios are.

How much do you have in your Roth IRA? $5,500? $10,500?

An easy way to figure out your AA across multiple accounts is with a spreadsheet. Try this Google doc from longtermreturns.com: http://www.longtermreturns.com/2013/04/investment-tracking-spreadsheet.html

When you have small amounts, splitting it up isn't worth the time and thought processing all that much. So if you have $0 in your 401(k) and $5,500 in your Roth IRA right now, I'd just pick the cheapest fund in the 401(k) and leave it alone until you have > $50,000 total to work with. (That advice totally goes against my natural train of thought too...)

Sebastian

  • Stubble
  • **
  • Posts: 209
  • Age: 32
Re: Help with AA in multiple accounts
« Reply #2 on: May 22, 2013, 01:34:51 PM »
Could you list the other funds that your 401(k) has? Just so we can see how high the expense ratios are.

How much do you have in your Roth IRA? $5,500? $10,500?

An easy way to figure out your AA across multiple accounts is with a spreadsheet. Try this Google doc from longtermreturns.com: http://www.longtermreturns.com/2013/04/investment-tracking-spreadsheet.html

When you have small amounts, splitting it up isn't worth the time and thought processing all that much. So if you have $0 in your 401(k) and $5,500 in your Roth IRA right now, I'd just pick the cheapest fund in the 401(k) and leave it alone until you have > $50,000 total to work with. (That advice totally goes against my natural train of thought too...)

Sure thing! I can copy some pictures of the options I have. I only have a few grand in the Roth right now. I'm using the ole DCA to spread the 5500 over this year. So based on what you are saying I should just dump it all in the index fund?

P.S. - the fees for this index fund seem pretty low right? .1 for the gross expense ration then .9 for the nex expense ratio. Does that mean the overall expense ratio is .19?


icefr

  • Bristles
  • ***
  • Posts: 325
Re: Help with AA in multiple accounts
« Reply #3 on: May 23, 2013, 11:10:55 AM »
Hey, I'm sorry for the delay in responding. I've been doing some thinking.

1) I think that putting 100% of your 401(k) into the S&P 500 index fund is probably the best move. It looks like its expense ratio is 0.09%, which is pretty good.
2) If you stick with the 2060 target retirement date fund and then put 100% of your 401(k) into the S&P 500 index fund, yes you're going to be unbalanced from your 90/10 target asset allocation. That's why target retirement date funds are meant to be the only thing used - it makes the balancing a bit more complicated if you mix them with something else.
So 3) I would actually recommend that you pick a different fund in your Roth IRA for now.

Let's look at some math.

So if you want your AA to be 90/10, then you generally either want to:
a) Pick a target retirement date fund or LifeStrategy fund that has that AA in each of your accounts. So in your 401(k), you pick a target date fund AND in your Roth IRA.
b) You set up your portfolio so that you take advantage of the best funds available in each account and make the math work to hit your target allocation.

Let's say that at some future date, you have $20,000 in your Roth IRA and $20,000 in your 401(k). This means that 50% of your portfolio is in your Roth IRA and 50% in your 401(k). The only good fund in your 401(k) is still the S&P 500 index fund, so you'd set up your portfolio like this: (%s are of the whole portfolio)

50% 401(k) S&P 500 index fund [$20,000]
12.5% Roth IRA Extended Market index fund [$5,000]
10% Roth IRA Total Bond Market index fund [$4,000]
27.5% Roth IRA Total International Stock Market index fund [$11,000]

This portfolio completely replicates Vanguard's 2060 target retirement date fund, uses the best fund in your 401(k) and is reasonably simple (though not quite as simple as the target date fund). Notice though that I only put $5,000 into the Extended Market index fund and $4,000 into the Total Bond market index fund? Those funds have $3,000 minimums, so until your portfolio gets to be about $40,000 it's going to be hard to split it up.

So, the best thing to do for now is to pick a fund of funds for your Roth IRA so that the math works out to hit your target asset allocation.

If you use your current 2060 fund and you have say $5,000 in it and $5,000 in your 401(k) at the end of this year, things would look like this:
50% 401(k) S&P 500 index fund [$5,000]
50% Roth IRA Target Retirement 2060 fund [$5,000] which is 90% stocks, 10% bonds

which breaks down to:
50% 401(k) S&P 500 index fund [$5,000]
45% Roth IRA Stocks in 2060 fund [$4,500]
5% Roth IRA Bonds in 2060 fund [$500]

So if your portfolio is 50/50 401(k)/Roth IRA you want X% in stocks in your target date fund where 0.5 + 0.5x = 0.9. If we solve for x, we get x=80%, which would put you at the 2030 target retirement date fund or if you have over $3,000, you could use the LifeStrategy Growth fund, which are like the target retirement date funds in that they rebalance, but they never change their asset allocation.

So the general formula to figure out how much you want in stocks in your target date fund is:
x + yz = 0.9
where x = the percentage of your portfolio in your 401(k), y = the percentage of your portfolio in your Roth IRA, z = what we're solving for, and 0.9 is the target percentage of stocks you want.

With how little you sound like you have in investments right now, I'd probably exchange from the 2060 fund to the LifeStrategy Growth fund (80/20) and leave things alone for a bit.

I hope that made sense!

Zaga

  • Handlebar Stache
  • *****
  • Posts: 2180
  • Age: 39
  • Location: North of Pittsburgh, PA
    • A Wall of Hats
Re: Help with AA in multiple accounts
« Reply #4 on: May 23, 2013, 11:13:34 AM »
I can't read those, they are pixelated.

Anyways, I agree with icefr about sticking with the target retirement fund you already have in your Roth and the S&P fund in your 401-K until you have a larger invested total.  You're just fine.

We stuck with various target date and balanced funds in all 5 of our accounts until the total invested was over $100K.  It just didn't make any sense to worry about an exact asset allocation on such a small amount of money.