New investor advice for allocation across multiple accounts

[Tim89]

Hello everyone,

Emergency funds: One year of living expenses
Debt: Mortgage only
Tax Filing Status: Married Filing Jointly
Tax Rate: 15% Federal, 4% State
State of Residence: RI
Age:30
Retirement age goal:40-45
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30% of stocks
Portfolio size:10K initial investment
Portfolio growth potential: 20-25K/year of extra income can be contributed (not counting my work 401K contributions)

Current retirement assets:

Taxable
Not applicable

His 401k
VFIFX 0.08% VFIFX
Company match? 6%

His Roth IRA at Vanguard
Not applicable

His Rollover IRA at Schwab
Not applicable

Her 403b
Not applicable

Her SIMPLE IRA at Fidelity
Not applicable

Her Traditional IRA at Vanguard
Not applicable

Contributions:

New annual Contributions
$6500 his 401k (6% match included)

Available funds:

Funds available in his 401(k)
(VFIFX) (0.08%) 10K

Funds available in her 403(b)
Not applicable

Questions:
1. After researching it seems I want to contribute $5500/year into my ROTH IRA that I opened with vanguard as this will give us a $550 credit per year since our income is low enough and we qualify for the retirement saver's credit at 10%. Is there anything I am missing on this? I make too much for the EIC as well, even if I did want to contribute the max amount to my 401k per year to lower my AGI.

2. My main holdup is allocation. I'm pretty set on a 80/20 (stocks/bonds) allocation even though vanguard recommends 70/30 but my dilemma is the multiple accounts and minimum buy in;s of the funds. I am going to start with 10K and was going to distribute the full $5500 into the roth IRA before the April 17th cutoff so we can get the $550 credit next year. I will also be continuously be contributing about $6500/year into my work 401K (including full 6% match, target retirement 2050 fund). That will leave $4500 which will get me into investor shares of one fund. I'm thinking of starting with the following funds:

$5500 into investor shares of Total Bond Mkt Index Inv (Roth IRA)
$4500 into investor shares of Total Stock Mkt Idx Inv (taxable account)

Is the above a good starting point if I plan to add Total Intl Stock Ix Inv in a few months?

3. My goal is to mimic the 80/20 3 fund portfolio with 64% in Total Stock Mkt Idx Inv, 16% in Total Intl Stock Ix Inv and 20% in Total Bond Mkt Index Inv. My other goal is to reach admiral shares for all 3 funds as soon as possible, which should not be hard since I am stashing about 20-25K/year. Will this be a difficult scenario to manage going forward as far as % allocations go to the 3 different funds and specifically the total, international and bond funds?

4. Should I just stick with the Total Bond Mkt Index Inv in the Roth IRA and Total Stock Mkt Idx Inv in my taxable to simplify things?

5. Should I allocate all spillover from my ROTH IRA into my taxable account going forward since I am limited to $5500/year in the ROTH (around 15-20K per year)?

6. Of course this will eventually be a much higher % in stocks vs bonds, which Is fine because I am looking to eventually get to 80/20. What should I do when I can no longer keep my 80/20 goal? Put a bond fund in a traditional IRA? I have researched for weeks now but am still hesitant to proceed without ironing out a solid strategy now that I can maintain for the rest of my life and I am committed to getting it right the first time.


Thank You

[Scandium]

Why are you setting up a taxable instead of a) a Roth for your wife? or b) more into your 401k?
20% bonds is a lot at 30 IMO, but that's up to you. It will indeed be hard to balance that with only bonds in Roth. Quickly you'll need more than you're able to put in there.
There is very little reason to fret about getting admiral shares ASAP. The fee is so low anyway I would put it in the funds in the target ratios and you'll get to admiral soon. Autodeposits are easier, and won't having to worry about monitoring and rebalancing. How much of a difference will it really make, $10? 

[Tim89]

Why are you setting up a taxable instead of a) a Roth for your wife? or b) more into your 401k?
20% bonds is a lot at 30 IMO, but that's up to you. It will indeed be hard to balance that with only bonds in Roth. Quickly you'll need more than you're able to put in there.
There is very little reason to fret about getting admiral shares ASAP. The fee is so low anyway I would put it in the funds in the target ratios and you'll get to admiral soon. Autodeposits are easier, and won't having to worry about monitoring and rebalancing. How much of a difference will it really make, $10?

I plan to retire in 10-15 years so I don't want too much money held up if I can help it. Would a 90/10 split be more appropriate for my age? I never even considered setting up another Roth IRA for my wife, thats a great idea but since we are filing jointly, we would still be limited to a 10% credit every year up to $5500? I won't stress over admiral shares than either. I will be setting up auto deposits allocated appropriately to the accounts/funds as well but won't I still have to rebalance at least annually?

[Scandium]

Why are you setting up a taxable instead of a) a Roth for your wife? or b) more into your 401k?
20% bonds is a lot at 30 IMO, but that's up to you. It will indeed be hard to balance that with only bonds in Roth. Quickly you'll need more than you're able to put in there.
There is very little reason to fret about getting admiral shares ASAP. The fee is so low anyway I would put it in the funds in the target ratios and you'll get to admiral soon. Autodeposits are easier, and won't having to worry about monitoring and rebalancing. How much of a difference will it really make, $10?

I plan to retire in 10-15 years so I don't want too much money held up if I can help it. Would a 90/10 split be more appropriate for my age? I never even considered setting up another Roth IRA for my wife, thats a great idea but since we are filing jointly, we would still be limited to a 10% credit every year up to $5500? I won't stress over admiral shares than either. I will be setting up auto deposits allocated appropriately to the accounts/funds as well but won't I still have to rebalance at least annually?

Stock/bond split is a personal decision, so don't take my opinion as gospel. There are endless discussions on it. Only you can decide. As long as you stick with it, any bond ratio from 0-40% is fine.

I'm not eligible for it so I don't know how the saves credit works unfortunately.

Yes advice is usually to rebalance annually. I meant if you're aiming for minimum balances you'll be wildly out of balance alot and might have to do it more often. Not a huge issue, but I'm not sure worth it to save a few bucks. Unless you like to fiddle with your account I guess. Though that's not a good habit..

[Tim89]

Stock/bond split is a personal decision, so don't take my opinion as gospel. There are endless discussions on it. Only you can decide. As long as you stick with it, any bond ratio from 0-40% is fine.

Vanguard recommends 70/30 but I feel 80/20 would serve me better, maybe even 90/10.

I'm not eligible for it so I don't know how the saves credit works unfortunately.

It seems we would only qualify for the $550/year, not to shabby anyways and FREE money.

Yes advice is usually to rebalance annually. I meant if you're aiming for minimum balances you'll be wildly out of balance alot and might have to do it more often. Not a huge issue, but I'm not sure worth it to save a few bucks. Unless you like to fiddle with your account I guess. Though that's not a good habit..

I am totally fine with the sub-allocations being off. The more important thing for me is the primary allocation of stocks/bonds. In your opinion, are target retirements funds in each separate account a good idea? Would life strategy be better in anyway? Would it benefit me in any way to go with ETF's vs MF's?

[Tim89]

So to begin I would want to buy into Total Stock for my taxable account (3K), open a Roth IRA for my wife and place the Total Bond fund in each Roth? To begin it seems I would be bond heavy (21.43/78.57% Stocks-Bonds) but going forward all excess would go into the Total Stock in taxable so the allocations would get better over time it seems and tilt closer to stocks. I would have auto deposits set up to taxable for roughly 1K/month going forward. With this strategy I will need 14K to start which is not a problem. Is this a good starting point? I would eventually add in Total International Stock into my taxable account later on to diversify better as well. I would assume in about a year my allocations would be pretty close to my goals.

[Tim89]

I have another potential strategy, please comment.

$5500 to Vanguard Target Retirement 2050 Fund (VFIFX) My Roth IRA
$5500 to Vanguard Total Bond Market Index Fund Investor Shares (VBMFX) Her Roth IRA
$3000 to Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

This would be my starting point not counting my work 401K which is 90/10. This roughly gives me a 70/30 allocation to start with across all accounts. I would be putting about 1K/month in the Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) so the allocation would eventually lean more towards stocks, which is what I want. I would also add in the Vanguard Total International Stock Index Fund Investor Shares (VGTSX) at some point and time (any recommendation on when)? Would this be a pain to manage going forward? Essentially I would max out both Roth IRA's once a year and all other funds go into my taxable (all while the Vanguard Target Retirement 2050 Fund (VFIFX) grows with my work 401K account). Am I missing anything with this strategy? As far as rebalancing, do you think this would be a difficult strategy to keep in check? Sorry to post so much I just want to get this set in stone. I am also developing an investement policy statement so I can have this all clarified.

[Cornel_Westside]

You have several statements in your post that contradict very standard advice. Advice that is so standard that you need very good reasons to go away from it. See standard investment order here: (https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/).

You want to put money into taxable accounts even though you have money to put into your 401k or Roth IRA first. That is wasting money on taxes. You can use a Roth conversion ladder to access your 401k money in retirement. You'll need 5 years of expenses to survive in the meantime, but you have 10-15 years (your plan) to get 5 years expenses into your Roth IRA (withdrawable basis with no penalty). If you can set up in-person distributions from your 401k to an IRA you can do the Roth ladder earlier.

If you are concerned that you will not be able to get to 5 years expenses on just the contributions to your Roth IRA over the next 10-15 years, then you should consider putting money into taxable accounts. But this should be done in the years just before retirement, as you will be taxed more on the earnings. You should do the math now on how much money you'll need for those first 5 years of expenses, compare that to both or your Roth IRA contributions for the duration of the investment period (10-15 years) and make up the difference in taxable accounts. 2 people with Roth IRAs for 10 years can fund 22k a year for 5 years (110k) without inflation. How much more will you need? That amount is what you should plan to put into taxable accounts as late as possible before retirement. If it's 50k more, you maybe should start 3 years before retirement (saving 20-25k a year as you said). If it's 100k more, it may be 5 years. Up until then, all your leftover savings money should be put in your 401k with match, then Roth IRA (because of your tax credits), and then 401k up to the limit, and only then should you consider taxable accounts.

You want to put money into your Roth IRA into bonds. Roth IRAs shield your growth from taxes. You want your highest yield investments in your Roth IRA. That means you should be buying index funds in your Roth IRA.

I think you need to do more research on the Roth Conversion ladder and on the tax benefits of putting extra money in your 401k as opposed to taxable accounts. You need 5 years of expenses accessible at the start of FIRE - if that can be all from Roth IRA contributions, you will be able to shield the maximum amount of money from Uncle Sam as possible and retire with more money.

[Tim89]

You have several statements in your post that contradict very standard advice. Advice that is so standard that you need very good reasons to go away from it. See standard investment order here: (https://forum.mrmoneymustache.com/investor-alley/investment-order-65299/).

You want to put money into taxable accounts even though you have money to put into your 401k or Roth IRA first. That is wasting money on taxes. You can use a Roth conversion ladder to access your 401k money in retirement. You'll need 5 years of expenses to survive in the meantime, but you have 10-15 years (your plan) to get 5 years expenses into your Roth IRA (withdrawable basis with no penalty). If you can set up in-person distributions from your 401k to an IRA you can do the Roth ladder earlier.

If you are concerned that you will not be able to get to 5 years expenses on just the contributions to your Roth IRA over the next 10-15 years, then you should consider putting money into taxable accounts. But this should be done in the years just before retirement, as you will be taxed more on the earnings. You should do the math now on how much money you'll need for those first 5 years of expenses, compare that to both or your Roth IRA contributions for the duration of the investment period (10-15 years) and make up the difference in taxable accounts. 2 people with Roth IRAs for 10 years can fund 22k a year for 5 years (110k) without inflation. How much more will you need? That amount is what you should plan to put into taxable accounts as late as possible before retirement. If it's 50k more, you maybe should start 3 years before retirement (saving 20-25k a year as you said). If it's 100k more, it may be 5 years. Up until then, all your leftover savings money should be put in your 401k with match, then Roth IRA (because of your tax credits), and then 401k up to the limit, and only then should you consider taxable accounts.

You want to put money into your Roth IRA into bonds. Roth IRAs shield your growth from taxes. You want your highest yield investments in your Roth IRA. That means you should be buying index funds in your Roth IRA.

I think you need to do more research on the Roth Conversion ladder and on the tax benefits of putting extra money in your 401k as opposed to taxable accounts. You need 5 years of expenses accessible at the start of FIRE - if that can be all from Roth IRA contributions, you will be able to shield the maximum amount of money from Uncle Sam as possible and retire with more money.

Thank you for the insight. So my money should go to the following in order of priority:

1. Roth IRA (Mine and my wife's at 11K/year)
2. Work 401K (on top of 6% match I would need to contribute an additional 11K to hit the limit)
3. Taxable account (Anything left over would go to taxable, possibly around 2-3K/year)

Is this accurate?

We would be at 5 years expenses in 10 years just contributing to our Roth IRA's. I will research into the Roth Conversion ladder as well.

[Radagast]

Now yer gettin it :). If you will save enough in taxable to get you through the first 5 years of Roth conversions, it is also probably better to do traditional IRA's. Apart from having lower expected taxes overall, IRA's reduce your AGI, which may increase your saver's credit. If you have the money available you can max out IRA's (or Roth IRA's) for both 2016 and 2017 right now, making each of those accounts eligible for admiral shares.

You ask lots of questions about stocks / bonds / asset allocation etc. but the reality is it does not matter that much at this stage. As Scandium says, any bond allocation from 0%-40% will probably be OK right now, change that to 10%-40% by the time you retire. I would not use a target date fund if I was planning to rebalance, as it would be more complicated. Personally I would probably invest in just the stock funds until they qualified for admiral shares in each account, and then start working on the bonds. Stocks have higher expected returns. Bonds are more tax efficient in IRA's, but also not especially useful except for a small amount for rebalancing. I tend to view bonds as more of a deep emergency fund, and might suggest investing in bonds or tax exempt bonds in a taxable account for that part of the allocation. Having your bonds in taxable also allows you to spend them first when you FIRE, which may reduce the risk of a bad sequence of returns as well.

[Paul der Krake]

401(k) are covered under ERISA creditor protection laws, IRAs are not. There are some discrepancies in the protections afforded to your IRA that's dependent on state law, but in general 401(k)s are more protected.

Assuming you have a good 401(k) plan, you should max it out first, then your IRA and other tax-advantaged accounts if any, then spill over to your taxable account.

Having so much money that you run out of tax-advantaged space is a good problem to have.

[MustacheAndaHalf]

One way to diversify is with Exchange Traded Funds (ETFs) at Vanguard.  For example, instead of the Total Stock Market mutual fund (VTSMX) you buy Total Stock Market ETF (VTI).  You can buy VTI in single share allocations, currently ~$120/share.

Then you can also buy (Vanguard) Total Bond Index ETF (BND) and Total International (VXUS).  For example with $5,500 and 20% bonds with 1/3rd international:
14 shares BND (20%)
24 shares VTI (52%)
30 shares VXUS (27%)

That let's you diversify with only $5,500 instead of picking one mutual fund for everything.  An additional benefit is lower expense ratios than the investor class shares (the $3,000 minimum funds).  Vanguard's ETFs are very popular and frequently traded, so the gap between buyers and sellers is typically $0.01 and not an issue.

Have you plotted out how you would retire in 10 years?  The only numbers I spotted were $20k/year for 10 years, or $200k plus growth.  That will not provide much of a retirement in 10 years.  I deliberately picked the lowest contribution and the earliest retirement date because I'm worried you're including numbers that might not work.

Retiring at age 40-45 could mean a 50 year retirement, which means you'll need to withdraw less than 4%/year.  Let's say it's 3.33% so you can use "33x expenses".  Now if you're spending $30k/year now, that would suggest: $30k x 33 = $1 million in assets to retire on $30k/year of spending.  While your circumstances are almost certainly different, it gives you an idea of the kind of things you need to consider when saving up for retirement.  You should aim to retire on a certain level of assets, and if you haven't calculated that it doesn't make sense to pick a specific retirement year just yet.

[Tim89]

One way to diversify is with Exchange Traded Funds (ETFs) at Vanguard.  For example, instead of the Total Stock Market mutual fund (VTSMX) you buy Total Stock Market ETF (VTI).  You can buy VTI in single share allocations, currently ~$120/share.

Then you can also buy (Vanguard) Total Bond Index ETF (BND) and Total International (VXUS).  For example with $5,500 and 20% bonds with 1/3rd international:
14 shares BND (20%)
24 shares VTI (52%)
30 shares VXUS (27%)

That let's you diversify with only $5,500 instead of picking one mutual fund for everything.  An additional benefit is lower expense ratios than the investor class shares (the $3,000 minimum funds).  Vanguard's ETFs are very popular and frequently traded, so the gap between buyers and sellers is typically $0.01 and not an issue.

Have you plotted out how you would retire in 10 years?  The only numbers I spotted were $20k/year for 10 years, or $200k plus growth.  That will not provide much of a retirement in 10 years.  I deliberately picked the lowest contribution and the earliest retirement date because I'm worried you're including numbers that might not work.

Retiring at age 40-45 could mean a 50 year retirement, which means you'll need to withdraw less than 4%/year.  Let's say it's 3.33% so you can use "33x expenses".  Now if you're spending $30k/year now, that would suggest: $30k x 33 = $1 million in assets to retire on $30k/year of spending.  While your circumstances are almost certainly different, it gives you an idea of the kind of things you need to consider when saving up for retirement.  You should aim to retire on a certain level of assets, and if you haven't calculated that it doesn't make sense to pick a specific retirement year just yet.

I was considering ETF's but read in many places they are more "difficult" to manage. I also did like the idea of auto deposits to prevent the funds from going anywhere else. Please see my below statement and let me know if you see any flaws in the strategy:

"I assume my priority for contributions should be as follows:

1. Roth IRA (Mine and my wife's at 11K/year, maybe 22K? SEE BELOW)
2. Work 401K (on top of 6% match I would need to contribute an additional 11K to hit the limit)
3. Taxable account (Anything left over would go to taxable, possibly around 2-3K/year)

I also have a few follow up questions to the above priorities. Before April 17th of this year, could I potentially contribute $5500 to each Roth IRA for 2016 then until April of next year contribute another $5500 to each? This would bring contributions to 11K for 2016 (since we just opened the Roth IRA's and have never contributed anything). For the rest of the year up until April of next year my goal would be to contribute an additional $5500 to each, bringing totals to 22K by this time next year between both Roth IRA's. Is this optimal? I would use a Vanguard Target Retirement 2050 Fund (VFIFX) in each Roth IRA as well, while maintaining the same fund in my work 401K. If I have any extra between now and April 2018, I would contribute to a taxable account. How does this sound? Am I getting closer to the correct line of thinking about all of this?"


Thank you for your insight, as I learn more I feel I am getting closer to a solid plan. I wont overly focus on the 10 year retirement aspect just yet but according to rough calculations, we would need around 600K if I take our expenses of 20K/year currently and multiply by 33. Our cost of living should go down dramatically soon though as within the next few years we are purchasing a buy & hold duplex and will rent out one side. I believe building the foundation first is more important since we have barely anything invested and most of our money is in our online savings account only earning 1%.

[Cornel_Westside]

I don't want to argue too much with another poster, but estimating a 50 year retirement when retiring at 40 is kind of pushing it. Expenses often go way down at the ages of 60-75 (and then often go up with end of life medical expenses, but this is highly variable. Also, the 4% rule works for a 30 year retirement and the median case results in you more than doubling your money over the lifetime of your retirement. I would not be so conservative as to go to a 3.33% withdrawal rate for fear of retiring too early. I think 3.8% is extremely safe and 4% is fine.

As for your questions about putting your money into your Roth IRA now for 2016 - absolutely do it. You never get the chance to put more money into your Roth IRA once it's over. I would say, however, that you shouldn't put it in a target date fund because the fees are higher than simply putting it into a total market index and a total bond index. You can do rebalancing yourself if you want - rebalancing is dead easy.

Your overall priority for the rest of the fiscal year should be as follows:

0. 2016 Roth IRA (do it now)
1. 401k up the match
2. Max HSA (if your work has it)
3. Roth/Traditional IRA (depending on taxes/credits - it doesn't matter too much_
4. Max 401k
5. Max Mega Backdoor Roth (if your work has after-tax 401k contributions and in-service 401k distributions)
6. Taxable Accounts

And again, you may need to put money into taxable accounts if you need some extra easily available money for the first few years of retirement.

As for your overall retirement date, I can't say. You would need to do the math with your rental property and planned expenses to know how much you'd need to retire. The key is that you are setting yourself up now to retire as soon as possible. If that turns out to be 15 years, it's 15 years. You'll still have saved a lot of time compared to how you'd have done if you didn't put in the work now.

[Tim89]

I don't want to argue too much with another poster, but estimating a 50 year retirement when retiring at 40 is kind of pushing it. Expenses often go way down at the ages of 60-75 (and then often go up with end of life medical expenses, but this is highly variable. Also, the 4% rule works for a 30 year retirement and the median case results in you more than doubling your money over the lifetime of your retirement. I would not be so conservative as to go to a 3.33% withdrawal rate for fear of retiring too early. I think 3.8% is extremely safe and 4% is fine.

Absolutely, especially depending on our real estate venture. Readjusting for your calculations I am looking at around 800K to retire, which could be much less since 11K of that per year is housing expenses (we literally have no bills except for our house). I am going to try my best with our duplex to eliminate our housing costs. For now though, 800K seems like an ideal number then I can adjust once we move.

As for your questions about putting your money into your Roth IRA now for 2016 - absolutely do it. You never get the chance to put more money into your Roth IRA once it's over. I would say, however, that you shouldn't put it in a target date fund because the fees are higher than simply putting it into a total market index and a total bond index. You can do rebalancing yourself if you want - rebalancing is dead easy.

Your overall priority for the rest of the fiscal year should be as follows:

0. 2016 Roth IRA (do it now) I can put 11K towards this immediately for me and my wife.
1. 401k up the match Doing this already
2. Max HSA (if your work has it) They do, I will research into this further
3. Roth/Traditional IRA (depending on taxes/credits - it doesn't matter too much_I will already be at max contributions for this for 2016/2017
4. Max 401k Any other options besides the TR 2050 fund that you would consider?
5. Max Mega Backdoor Roth (if your work has after-tax 401k contributions and in-service 401k distributions) I will have to research into this.
6. Taxable Accounts I would have maybe 2-3K per year to put towards a taxable but not for a while since I would be full up Roth IRA's first.

After discovering I could contribute for last years Roth IRA's I am absolutely going to do it, just waiting on vanguard since they have a 7 day transfer wait for funds (really cutting it close!) Opening a ROTH for my wife will basically give us the ability to dump 22K into Roth accounts over the next year(11K immediately, then another 11K slowly over time until April 2018). The question at this point is what funds to buy for both these roth accounts. So in your opinion, one Roth Ira should have    
Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) and the other should have Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)? My work 401K is locked into target retirement funds only (Currently 2050 fund) but at least its with vanguard as well. It seems to begin I would be bond heavy and since I would be putting equal amounts but I'm sure that would change based on the higher return of stocks in general? Either way I would have my foot in the door which is what is most important to me at this point since time is on my side. Would you consider putting Total Stock Market in a taxable account and putting Total International Stock in the Roth instead? Are there any downsides to this and wouldn't this provide a bit more diversification? 

And again, you may need to put money into taxable accounts if you need some extra easily available money for the first few years of retirement.

As for your overall retirement date, I can't say. You would need to do the math with your rental property and planned expenses to know how much you'd need to retire. The key is that you are setting yourself up now to retire as soon as possible. If that turns out to be 15 years, it's 15 years. You'll still have saved a lot of time compared to how you'd have done if you didn't put in the work now.

I absolutely agree, I just want to get my foot in the door since I am only 30. Things can always be adjusted over time.

[Cornel_Westside]

Ok first, do not do equal amounts of Total Market Index and Total Bond Index. You can buy the amounts you want depending on your intended asset allocation. I believe Vanguard 2050 has something like 90/10 stock/bond split. If you like that, do it. If you want to be more conservative, you can go down all the way to 70/30 or even 60/40. This is a personal decision based on your risk tolerance and rebalancing strategy. So when you buy your funds in your Roth IRA, buy stocks and bonds in proportion to your strategy. You can also put money into a Total International Index fund as well for international diversification.

Technically there is a foreign stock tax credit that can mean it makes sense to buy international stocks in a taxable account. It doesn't matter that much though - sticking to your planned asset allocation will never be stupid. Really, the key is that since you have tax free earnings in your Roth IRA that you should have your highest yield (and therefore highest risk) investments there. That means in general you want stocks there. If you have a planned bond allocation, putting the remainder in a taxable account so that you can put more money into stocks in your Roth IRA makes sense because the yields will be lower on bonds and therefore you aren't taxed as much.

So basically, assuming you are investing 25k a year and you want 80/20 stocks/bonds split, you'd do this:

20k stocks - let's assume 70/30 domestic/international split
5k bonds

11k in Roth IRAs - all stocks
6% 401k match - stocks/bonds depending on allocation
6750 in HSA - stocks/bonds depending on allocation (this is the family maximum)
Max 401k - stocks/bonds depending on how much is left - this + match has 18000 max
Whatever is left in taxable.

You will therefore not need to have money in taxable accounts. You don't quite invest enough money. If you have more than $44688 to invest (80% of that is 35750 - the tax advantaged limit assuming just 401k + Family HSA + Roth IRA for two are all maxed), then to keep an 80/20 allocation you'd need to buy stocks and bonds in your taxable accounts. Since you don't have that much to invest, you don't have the need to buy stocks in taxable accounts.

[Tim89]

Ok first, do not do equal amounts of Total Market Index and Total Bond Index. You can buy the amounts you want depending on your intended asset allocation. I believe Vanguard 2050 has something like 90/10 stock/bond split. If you like that, do it. If you want to be more conservative, you can go down all the way to 70/30 or even 60/40. This is a personal decision based on your risk tolerance and rebalancing strategy. So when you buy your funds in your Roth IRA, buy stocks and bonds in proportion to your strategy. You can also put money into a Total International Index fund as well for international diversification.

Let me break down exactly what I plan to start with based on what you said:
11K = Total starting funds
$5500 to his Roth IRA for 2016 (Vanguard 2050 fund with 90/10) I can always switch this at anytime to another mutual fund with no penalty or tax etc correct? I am assuming the answer will be the same for her Roth IRA as well.
$5500 to her Roth IRA for 2016 (Vanguard 2050 fund with 90/10)

^This is the simple baseline I was going to initially start with, just to limit confusion and get started. Should I simply use Vanguard Total Stock Market Index Fund in both Roth IRA's instead of the 2050 fund? Sticking with the funds will have a much higher ER but will give a bit more bonds to the overall AA. Going forward I would allocate another 11K to both between now and April 2018. I am already doing the employer match in full so that priority is met. I am hesitant to increase my employer match past 6% (they are matching 100%) since I plan to retire early, although I do understand the roth conversion ladder now much better so may change my mind (I know its 100% recommended). I will look into the HSA option but I only have two times a year I can change my health plan and I am not in a HDHP currently to get access to the HSA, I think in June I could change it though and will at that time (for me only). So let's assume i go with vanguard 2050 funds in his/her Roth IRA's at $5500 each to start within the next week. I then put Total International Stock in my taxable account at the 3K minimum buy in. Then, set up auto deposits to both Roth IRA until they are at a 11K contribution limit (maybe 6 months)? At this point I would have already gotten my HSA opened (should I just skip opening a taxable and wait to put Total international Stock in the HSA instead for maximum tax efficiency?). I then would be simultaneously contributing to both Roth IRA's (up until 11K limit for each) AND the HSA until its limit (seems to be $3450 since my wife and child will stay on conventional health plans and I will be the only one with the HDHP). This should put me into next year when I could re-evaluate everything and proceed, probably increase my employer 401K at this point. What do you think of this strategy? I'm trying to develop a good roadmap and write up an investement policy statement to include all of this.

Technically there is a foreign stock tax credit that can mean it makes sense to buy international stocks in a taxable account. It doesn't matter that much though - sticking to your planned asset allocation will never be stupid. Really, the key is that since you have tax free earnings in your Roth IRA that you should have your highest yield (and therefore highest risk) investments there. That means in general you want stocks there. If you have a planned bond allocation, putting the remainder in a taxable account so that you can put more money into stocks in your Roth IRA makes sense because the yields will be lower on bonds and therefore you aren't taxed as much.

So basically, assuming you are investing 25k a year and you want 80/20 stocks/bonds split, you'd do this:

20k stocks - let's assume 70/30 domestic/international split
5k bonds

11k in Roth IRAs - all stocks
6% 401k match - stocks/bonds depending on allocation
6750 in HSA - stocks/bonds depending on allocation (this is the family maximum)
Max 401k - stocks/bonds depending on how much is left - this + match has 18000 max
Whatever is left in taxable.

You will therefore not need to have money in taxable accounts. You don't quite invest enough money. If you have more than $44688 to invest (80% of that is 35750 - the tax advantaged limit assuming just 401k + Family HSA + Roth IRA for two are all maxed), then to keep an 80/20 allocation you'd need to buy stocks and bonds in your taxable accounts. Since you don't have that much to invest, you don't have the need to buy stocks in taxable accounts.

[Tim89]

Bump

[Scandium]

Yes in all tax-sheltered accounts you can change your allocations without any tax issues. It's really only in taxable where you need to set out a plan and stick to it, as switching funds around 10 years from now could cost a fortune.

Your plan sounds good. These are all minor tweaks, and many just personal preference; stock/bond ratio, target date/multiple funds, ETF/MF, etc. I'm lazy so like simplicity, especially once you have 4-5 different accounts to manage. Even if it's perhaps not the most optimal. So I would have no issue with target date funds in at least some accounts. Don't overthink it, just put as much as possible into tax-sheltered accounts in a reasonable allocation and you'll be fine.

[Tim89]

Yes in all tax-sheltered accounts you can change your allocations without any tax issues. It's really only in taxable where you need to set out a plan and stick to it, as switching funds around 10 years from now could cost a fortune.

This was my concern initially but with my plan, I don't think I would even have the money to start contributing to a taxable account for a while so that makes things simpler. My mindset was if I go vanguard 2050 funds across all accounts, it would collectively be a 90/10 allocation which is exactly what I want. BUT the ER will be almost double compared to going with MF's and converting to admiral shares in 1-2 years for all accounts (except 401K). I can always switch it in 6-12 months without paying much extra in the long run. The problem is the 3K minimum buy-in's for the MF's and trying to diversify at the same time with an 11K starting amount. At least with the target funds I will be at my AA from the get go. When I have more money later and begin to add funds to other accounts, I can convert to MF's to lower the overall ER. Does that sounds reasonable?

Your plan sounds good. These are all minor tweaks, and many just personal preference; stock/bond ratio, target date/multiple funds, ETF/MF, etc. I'm lazy so like simplicity, especially once you have 4-5 different accounts to manage. Even if it's perhaps not the most optimal. So I would have no issue with target date funds in at least some accounts. Don't overthink it, just put as much as possible into tax-sheltered accounts in a reasonable allocation and you'll be fine.

I absolutely agree, I was overthinking it. I was looking 30 years ahead when I should of been looking 5-10.

[Tim89]

I decided 90/10 was a good AA to start with across all accounts. For now, His/Her Roth Ira will have the Vanguard 2050 fund as well as my work 401K, giving me 90/10 across all accounts +/- 1%. I have maxed out both of our Roth's for 2016 and will begin working on 2017 next. I feel this is a comfortable way for me to start and can easily be adjusted going forward.