Hi all,
I'm a newcomer to this forum and I'm just starting to read about asset allocation. I would like your advice on how to allocate the assets for me and my wife. I apologize in advance for the length of the post and the number of the questions, but I'm pretty much lost in all the different options. And it's becoming more and more confusing as I read about these topics.
Here are our combined stats for me (35 years old) and my wife (30 years old):
Income: $300k/year
401k (pre-tax): $170k
personal investments (employer stock in taxable account): $85k
mortgage: 400k@4.375% (30-year fixed) and 50k HELOC (variable rate, currently at 4%) - we also have $400k equity in the house
We both recently started maxing out our 401k accounts (pre-tax: 18k from our salaries + 9k employer matching, post-tax: 20k that will be moved to ROTH using the backdoor). We have no IRA and very little money in cash. If we need additional funds, we take them back from the HELOC (up to 160k). Today all our remaining income is going towards the repayment of the HELOC.
Here are my questions:
1. What is the best approach for the 30-year fixed mortgage?
a. Leave as is
b. Refinance at 30-year fixed (new rate will be ~3.63%, after paying $10k). Monthly payment will go down from $2000 to $1750
c. Refinance at 20-year fixed (new rate will be 3.4%, after paying $10k). Monthly payment will increase to $2200
d. Refinance at 15-year fixed (new rate will be 2.75%, after paying $10k). Monthly payment will increase to $2650
In general, is it preferable to have a shorter-duration (assuming that we can make the monthly payments) or to keep the longer duration and use the money to invest in index funds (e.g. VTSAX)? Also, even if we refinance, should we put our left-over income against the principal (to repay the mortgage even faster) or invest in index funds? Is there any good calculator to understand these options better?
I do understand that "mortgage repayment" vs "stock market investing" is a personal preference, but I'm trying to understand what data do I need, in order to make the best decision for me.
2. I am a little concerned of the fact that the HELOC has a variable rate (it recently went up from 3.75% to 4%). Also, it seems that the FED will rise short-term interest rates, so our rate will increase as well. As a result, I was wondering if it would be better to sell my employee stock, in order to repay the HELOC or to just replace the stock with VTSAX.
3. After I left my previous employer, I have $10k in a Vanguard 401k. I have 2 questions regarding this money:
a. I had originally invested this amount in the Target Retirement 2045, which is flat for the last 4 years. Should I move this the Vanguard Institutional Index Fund (VIIIX), which tracks the S&P 500, has a lower fee (0.02% vs 0.07%) and has a much better performance? If not, then is there a better allocation, based on the options that are available to me (please see below)
b. Should I rollover my Vanguard 401k to a Vanguard IRA? If yes, then should I do traditional IRA or ROTH IRA? What are the pros and cons of each option (staying at 401k, rolling over to ROTH IRA, rolling over to a traditional IRA)? How many taxes will I need to pay if I rollover to a ROTH IRA (all the money in my 401k is pre-tax)?
Here are the funds (with their tickers) and their fees in my Vanguard 401k:
Target funds:
Target Retire 2010 Tr I 0.07%
Target Retire 2015 Tr I 0.07%
Target Retire 2020 Tr I 0.07%
Target Retire 2025 Tr I 0.07%
Target Retire 2030 Tr I 0.07%
Target Retire 2035 Tr I 0.07%
Target Retire 2040 Tr I 0.07%
Target Retire 2045 Tr I 0.07%
Target Retire 2050 Tr I 0.07%
Target Retire 2055 Tr I 0.07%
Target Retire 2060 Tr I 0.07%
Domestic Stock funds:
American Beacon Small Cp Val Inst AVFIX 0.82%
T. Rowe Price Instl Large Cap Growth TRLGX 0.56%
Vanguard Explorer Fund Admiral VEXRX 0.35%
Vanguard FTSE Social Index Inst VFTNX 0.15%
Vanguard Inst Index Fund Inst Plus VIIIX 0.02%
Vanguard Windsor II Fund Adm VWNAX 0.26%
International Stock funds:
AllianzGI NFJ International Value R6 ANAVX 0.90%
Vanguard Tot Intl Stock Ix Inst VTSNX 0.10%
Bond funds:
PIMCO Total Return Instl PTTRX 0.46%
Vanguard Total Bond Mkt Index Inst VBTIX 0.06%
Short-term:
WF Treasury Pl MMkt Inst PISXX 0.06%
4. Most of our 401k is in Fidelity. I have 2 questions:
a. I used to invest in the BTC LifePath 2040 L, thinking that it only has 0.09% fees (based on Fidelity's website). However, I linked this account to Betterment, which reported to me that this fund has 1.06% fees. Which one should I believe?
b. The Lifepath 2040 L fund has trailed the S&P500 for the last 5 years by a big margin, so I was thinking of switching to a different fund (more specifically the Vanguard S&P 500 Index fund, which is shown below). Should I do this? If so, what are your suggestions on what to choose? Here are my options:
Name Asset Class Category Gross Expense Ratio**
BTC LIFEPATH 2020 Blended Fund Investments* N/A 0.09%
BTC LIFEPATH 2030 Blended Fund Investments* N/A 0.09%
BTC LIFEPATH 2040 Blended Fund Investments* N/A 0.09%
BTC LIFEPATH 2050 Blended Fund Investments* N/A 0.09%
BTC LIFEPATH 2060 Blended Fund Investments* N/A 0.10%
BTC LIFEPATH RET Blended Fund Investments* N/A 0.09%
FID CONTRAFUND POOL Stock Investments Large Cap 0.43%
FID GROWTH CO POOL Stock Investments Large Cap 0.43%
VANG RUS 1000 GR TR Stock Investments Large Cap 0.02%
VANG RUS 1000 VAL TR Stock Investments Large Cap 0.02%
VANG S&P 500 IDX TR Stock Investments Large Cap 0.01%
ARTISAN MID CAP Stock Investments Mid-Cap 0.50%
DFA SM/MD CAP VAL Stock Investments Small Cap 0.26%
VANG RUS 2000 GR TR Stock Investments Small Cap 0.03%
RUSSELL INTL GROWTH Stock Investments International 0.57%
RUSSELL INTL VALUE Stock Investments International 0.57%
PIM ALL A ALL AUTH I (PAUIX) Blended Fund Investments* N/A 1.87%
PIM INFL RESP MA IS (PIRMX) Blended Fund Investments* N/A 1.10%
PIMCO TOTAL RETURN Bond Investments Income 0.27%
VANG ST BD IDX IS PL (VBIPX) Bond Investments Income 0.05%
FIMM MONEY MKT INST (FNSXX) Short Term Investments N/A 0.18%
5. So far I have not made any contributions to an IRA. After reading several or these posts, I understood that I could do two things (provided that I cannot contribute directly to a ROTH IRA due to income limits):
a. Putting 5.5k/year towards a traditional IRA and then doing a backdoor to a ROTH IRA. I am a little unclear, though, about the tax contributions. I've read that I need to pay some tax for the conversion from tIRA to ROTH IRA, but my understanding is that since I don't have any other IRA accounts, then this will be tax-free. Is this correct? What if I rollover my Vanguard 401k to an IRA (either ROTH or tIRA). Does that change anything?
b. I could put the 20k towards my post-tax Fidelity 401k (with my current employer) and then use the backdoor to move them to a ROTH IRA or a ROTH 401k. Which one is better?
c. How easy is it to move money between a Fidelity IRA and a Vanguard IRA (or any other 2 IRAs)? I would like to slowly transition my money towards Vanguard or even use Betterment.
6. I'm a little concerned that after maximizing 401k (pre-tax and ROTH) and IRA (traditional, ROTH) and, then my take-home income decreases a lot and there might not be enough to use from the time that I retire until I hit 59.5 years old (so that I can take money out of the 401k and the IRA). I see in all the websites that the important part is to maximize contributions to those accounts, but in the end I was wondering whether this means that I will need to work until I am 59.5 years old because otherwise my taxable investments will be low. Any thoughts on that?
7. I'm trying to calculate a good retirement target for me and my wife. I've read about the 4% rule (i.e. that my retirement savings should be 25x our withrawals). I was wondering, though, about inflation. For example, is it safe to assume that each of us will be ready to retire after we have $2.5M of today's money (i.e. we can each live with $100k of today's money)? From people, who are close to retirement and have given a good thought about this, what are your thoughts and your retirement targets? Also, what are your thoughts regarding our current status? Are we trending ok towards a $2.5M retirement target?