Author Topic: Prioritizing Asset Allocation  (Read 2446 times)

hadabeardonce

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Prioritizing Asset Allocation
« on: May 31, 2016, 05:09:53 PM »
Is there a standard way to approach spreading your income across accounts, investments, long term debts(mortgage), etc.?

Right now this is how I'm running things:
Step #1) Short term debt(credit cards) are always paid off
Step #2) Always have ~24k liquid cash in checking/savings
Step #3) Max out retirement accounts 403b(his)/401k(hers) (I could even start a 457)
Step #4) Accelerated mortgage payments (4.125% - 30Y fixed [Orig. 07/12])
Step #5) Taxable Vanguard investment account

The problem I'm having is that I really don't see getting beyond step #3, so I'll never be making accelerated mortgage payments or starting an investment account. Is focusing on funding retirement accounts the right way to go or should I diversify where my money is going?

PhysicianOnFIRE

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Re: Prioritizing Asset Allocation
« Reply #1 on: May 31, 2016, 05:33:36 PM »
THe 5 Steps look like a good start, but Step 4 should be Roth IRA / backdoor Roth if you ever get to Step 4.

The answer depends on your goals. A 457(b) can easily be accessed without penalty in an early retirement. The 401(k) and 403(b) could also be tapped, but it's not as straightforward. You would have to convert to IRA, then set up SEPP (periodic payments).

I would not choose to make accelerated mortgage payments or start a taxable account over making tax-deferred investments.

Best,
PoF

Retire-Canada

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Re: Prioritizing Asset Allocation
« Reply #2 on: May 31, 2016, 07:42:50 PM »
I would not choose to make accelerated mortgage payments or start a taxable account over making tax-deferred investments.

^^^ agreed.

If you get to the point where you can max out all your tax advantaged accounts and want to save more it's time to go back analyze your spending and/or your potential income options agains to see if there is a way to save more.

If there is I would put money in taxable accounts. I see no point in paying off a mortgage faster in these low interest rate times.

MustacheAndaHalf

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Re: Prioritizing Asset Allocation
« Reply #3 on: May 31, 2016, 08:24:13 PM »
I'd prioritize "contribute up to the company match" as #1.  That means checking the amount your company will match, and ensuring you get every dollar of company match first.  Typically matching is an immediate +25% or +50% to your account.  A credit card's interest rate will be somewhere in the range of 1-2% per month.  While damaging, it doesn't approach the gains from a company match.

Student loan debt also figures in that mix, but it varies.  If you have a job where all student loans are forgiven after 10 years, it makes sense to see how that plays out.  But for most cases, student debt follows you forever, and should be the top priority after credit card debt.

bearkat

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Re: Prioritizing Asset Allocation
« Reply #4 on: May 31, 2016, 08:49:42 PM »
I agree to add IRA's to the mix. Also, just because you can't invest in a taxable account now (when I presume you're just starting out based on the nature of your post), doesn't mean you won't be able to invest that way throughout your 7-15 year FIRE journey. Optimizations of spending (and income) tend to help you out.

Good luck!

Radagast

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Re: Prioritizing Asset Allocation
« Reply #5 on: May 31, 2016, 09:41:24 PM »
There is a handy spreadsheet in the "Ask a Mustachian" subforum, "How to Write a Case Study" sticky, at this location:
https://drive.google.com/file/d/0Bxe0EgraZFRBT2pGYjBEbG1qYlk/edit

According to this source the order of priority should be:
0. Establish an emergency fund to your satisfaction         
1. Contribute to 401k up to any company match         
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.      (3%! my edit)   
3. Max HSA          
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level         
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)         
6. Fund mega backdoor Roth if applicable         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.      (1%! my edit)   
8. Invest in a taxable account with any extra.         


hadabeardonce

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Re: Prioritizing Asset Allocation
« Reply #6 on: June 01, 2016, 12:51:05 PM »
Good info and thank you for the replies.

We don't have any student loans or car payments. My wife is finishing up a bachelor's degree program. I think we have 8k in upcoming payments left and we're done with it at the end of the year.

We just recently moved away from Edward Jones and the financial vampire there got the idea in our minds that we should have the bulk of our savings in a taxable investment account. I'm still trying to cleanse my mind of it. Initially I went in with the idea of maxing retirement accounts, but the advisor felt it was a bad idea to lock so much money away for retirement.

I'm 33 and my wife is 32. Currently we have:
Code: [Select]
$ 3,305 Fidelity 401k w/3% match (contributing 50% salary - increased recently)
$25,695 Vanguard 403b w/o match (contributing $1400/mo - increased recently)
$ 4,788 Vanguard IRA
$57,266 CalPERS (Pension Plan - contributing ~$525/mo [8 years of service])

---

0. Establish an emergency fund to your satisfaction (done)         
1. Contribute to 401k up to any company match (done) - wife gets a 3% match         
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield. (3%! my edit) (done)   
3. Max HSA (reading about it)           
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level (reading about it)- joint income puts us in the 25% or 28% bracket. Our Modified AGI was like 123k and that's with only one of us working full time.         
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5) (working on it) - Next year will probably be the first year we max her 401(k) and my 403(b)           
6. Fund mega backdoor Roth if applicable (reading about it) - If we're still in the 25% tax bracket, does this make sense? I also have the option to start a 457(b), but the fees are higher and funds are more limited.           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. (1%! my edit) (Looking into 3,4,5,&6 will keep me busy for a while)   
8. Invest in a taxable account with any extra. 

---

Next year may be the first year that neither of us are in school and both of us have full time jobs, so we're still adjusting financially to those changes. We're trying to stay on top of things like saving and leveraging tax deferred accounts. At some point I'll gather information to start a new case study thread. I can't say we have a real plan other than trying to max our retirement accounts.

Thanks again for all the information you've provided

---

Reading up more on HSAs, I don't think I qualify. I'm covered through Kaiser (HMO) via my employer and they only deduct $204/mo.
« Last Edit: June 01, 2016, 05:27:39 PM by hadabeardonce »

hadabeardonce

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Re: Prioritizing Asset Allocation
« Reply #7 on: August 28, 2017, 02:12:19 PM »
***Update***

As of Today we have:
Code: [Select]
$39,323 Fidelity 401k w/1.5% match up to 3% salary (Max Contribution @ $1,500/mo)
$ 2,583 Fidelity 401k (It's some kind of bonus that is granted to my wife for working a # of hrs/yr)
$59,019 Vanguard 403b w/o match (Max Contribution @ $1,500/mo)
$ 9,948 CalSTRS Pension2 457 w/o match (Max Contribution @ $1,500/mo)
$ 5,718 Vanguard Traditional IRA (No contributions)
$70,437 CalPERS (Pension Plan - contributing $539/mo [9 years of service])

---

I did post a case study topic here: https://forum.mrmoneymustache.com/case-studies/case-study-confessional-cry-for-help/

What's changed? We're both working full time and contributing the max to all of our available tax deferred accounts, including the 457 account I set up earlier this year.

Since our AGI is less than $186k we should be able to contribute to a Roth IRA, right? I'm going to call up Vanguard later today to see if they'll give me any advice on the topic and set one up. That feels like the last piece of our investment account puzzle.

I called up Vanguard and a rep confirmed that I was eligible to open a Roth IRA even though I'm contributing the max to my 403b & 457. I should have asked if my wife can also open her own Roth IRA and contribute $5,500... it looks like she should be able to.

Opening the account was extremely straightforward online. I didn't really need to speak with anybody since I'm already investing with Vanguard. I should have done it sooner.

The investment side of my retirement picture is looking pretty well filled in. It feels good to have all the accounts setup and see them in action.

NoraLenderbee

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