Best place for short/ medium to potentially long-term savings

[sser]

Hello, all -

I originally attempted to post this as a comment reply in the "The Betterment Experiment - Results" blog post, but it didn't stick. Hopefully it is more appropriate here.

'The Betterment Experiment - Results' post: http://www.mrmoneymustache.com/betterment-vs-vanguard/

The post had an excellent discussions, and I learned quite a bit just by reading though this post and the corresponding comments. It’s exciting, though also a lot to take in. Hopefully I’ll build up enough understanding at some point to really invest well (and live more frugally).

Initial Question: What is the best place for funds that could be called upon at an unknown time (ex: potential future down payment on a house, an emergency, etc)?

Background:
As a US government worker at 29 years old, I have been contributing 6% to my TSP and work will match 4% (plus a mandatory 0.8% from me and 1% from work). My TSP is mostly in their 2040 and 2050 target date funds, which seem to be doing alright. I also max out my Roth IRA, most of which is invested in Vanguard’s 2045 and 2050 target date funds. Happily, I am currently debt-free.

At this point, I have 35k to 45k that I want to move out of my savings account and into index funds (leaving leave me with 10k to 20k in the savings account). In addition, I plan to contribute my monthly target savings amount to the index funds going forward. However, what I want to transfer includes part of my emergency fund and money that could be used for a large purchase. Since I live in the DC area, I do not have a car and I rent (which is high, but building up a good down payment for even a small condo here is tough, and I do not know how long I will be in the area). This money could go toward buying a home or ‘ideally’ paying cash for a decent used car at some point in the near or distant future, depending. I currently do not have plans for a car or to buy a home, but that could change within the next few years if circumstances shift. 

In the blog comments, Dodge’s suggested allocation for Vanguard funds sounds right (56% US stock, 24% international, 20% bond), and it looks like 42k or more would let me get into a few of the Admiral Share levels. However, I know that changes in the market or a withdrawal could bump me back down to the Investor Share level (though Vanguard will automatically move you to Admiral each quarter if you qualify).

SPECIFIC KEY QUESTIONS:
Should I put the money into Vanguard using something like Dodge’s asset allocation and just not worry about getting bumped between Admiral and Investor Share levels (due to market changes or withdrawals, etc)?
Or should I consider using WiseBanyan or Betterment instead until I have built up enough funds to put in something like VTSAX, VTIAX, and/or VBTLX more permanently?

Sorry that this was a bit long! I wanted to make sure that I was communicating my currently financial position and concerns accurately.

Thank you!

[lise]

Money that I may need sooner rater than later for a large purchase ($50k) is in a bond fund with Vanguard.  I would hate to need that money the day after a market "correction".   
This may be an overly cautious approach, but until I found MMM that money was sitting in an online savings account where other posters convinced me I had too much in cash.

[Dodge]

1.  Should I put the money into Vanguard using something like Dodge’s asset allocation and just not worry about getting bumped between Admiral and Investor Share levels (due to market changes or withdrawals, etc)?

Personally, I wouldn't worry about getting bumped into Investor Share levels.  I read somewhere that this will only happen as a result of withdrawals, and not market movements, but that might be wrong.  You'd like to move 35-45k, so I'll do the math for 40k

1.  Easy Option:

     Put the money in a Vanguard LifeStrategy fund, and never worry about it again.  If this is for a short-term horizon, you can go with a less risky fund, this is a personal choice based on your circumstances.

2.  A little more efficient long-term option than #1, for a little more work than #1:

     Go with a 3 fund portfolio now, and choose investor shares if you need to.  A 40k account at 56/24/20 US/International/Bonds is $22,400/$9,600/$8,000.  If you go this route, you're pretty close to hitting the 10k minimum for each fund.  If you're saving a good portion of your income, it might only take a few months to get there.

3.  A little more efficient option than #2 over the short term (equal over the long term), for a little more work than #2:

     Go with a 3 fund portfolio now, and choose ETFs instead of funds.  The ETFs don't have a minimum (as long as you can buy 1 unit), and the fees are equal to Admiral funds.  So your portfolio will be VTI/VXUS/BND instead of VTSAX/VTIAX/VBTLX.  Be sure to check the following links for an explanation of ETFs vs funds:

https://investor.vanguard.com/etf/etf-vs-mutual-fund

ETFs aren't as convenient as funds, and I don't think the small temporary gain in fees you'll get is worth it, but it's something to consider.

2.  Or should I consider using WiseBanyan or Betterment instead until I have built up enough funds to put in something like VTSAX, VTIAX, and/or VBTLX more permanently?

The problem with this route, is you'll pay potentially large capital gains taxes when switching out of WiseBanyan/Betterment, unless you plan on manually managing their 10-20 fund portfolio for the rest of your days.  Not very efficient, and based on the math above, you're already very close to getting VTSAX/VTIAX/VBTLX anyway.


Disclaimer, I choose 56/24/20, because that's what Vanguard choose for their Lifestrategy fund.  They have since announced they are moving to 48/32/20.  I suspect they'll be 40/40/20 in a few years, but it's all close enough that it doesn't really matter.

[forummm]

You ought to think about putting more into your TSP. If your state and federal taxes are 30% of your income (for example), then your paycheck only goes down $700 for every $1000 you put into your TSP. The TSP funds are very good funds with incredibly low expense ratios. If you decide to make a home purchase you can borrow from your TSP and pay it back over up to 15 years. For non-housing purchases, the payback period is 5 years.

With a government job and (presumably since you want to buy a house) good credit, do you really need even $10k in a savings account? I haven't kept more than $5k (generally more like $3k) in total in our checking and savings accounts. After maxing out retirement accounts, the rest goes to index funds.

[sser]

Thank you all for the responses!

Dodge, thanks for laying out some options and a little background on the Vanguard allocation. Taking lise's reminder for caution given the intent of this money, I played around with Vanguard's fund recommender tool a bit to look at suggested allocation levels in different scenarios. I am leaning towards transferring the funds into Vanguard Total Stock Market Index, Vanguard Total International Stock Index, and Vanguard Total Bond Market Index with a more conservative ratio. Maybe 25/20/55 to start (for few Admiral shares) and then will add more to the bonds over time so that its more like 20/15/65. Could also consider adding Vanguard Total International Stock Index to the mix.


forummm, at a minimum, you've got me thinking about upping my TSP contribution a bit! Though I am a little hesitant to put that much (by maxing contributions) into one type of account since it seems to have less flexibility. Also think I would want to keep potential down payment funds, etc separate from the account for accessibility. After looking into it a little more:

Pros to contributing largely to the TSP:
- Contributions can only be made while a government employee (though it sounds like we can contribute portions of other 401ks in some way)
- Decent fund performance and low fees
- Ability to redistribute assets between funds easily
- Personal loan (payback in 1 to 5 years), low fees / rates
- Home loan (payback in 1 to 15 years), low fees / rates
- Loan payments and the interest go back into your TSP to grow as you make them
- Takes greater advantage of tax-deferrals (assuming you are able to keep withdraws lower in retirement, and that income taxes are not ridiculous in 30 to 50 years)
- The Roth Pipeline method can be implemented to convert the TSP/ 401k to a traditional IRA, then to a Roth IRA in chunks (which can be accessed penalty free after 5 years)
- Can make a one-time withdrawal (after age 59.5 or for financial hardship)

Cons to contributing largely to TSP:
[Particularly important since I do not know how long I will remain a government employee]
- Once separated from the government, loans can no longer be taken out
- Only one personal loan at a time (with additional time and fund limitations after the amount is payed back)
- If you separate from the government while a TSP loan is out, it will be due within 90 days (or it is a taxable distribution with potential penalties and permanently impacts growth of the account)
- Loans not tax-deductible
- It's only a one-time withdrawal (I would likely want to take from the TSP one before age 59.5 if I had to, and absolutely want to avoid the financial hardship situation)


I also get a little paranoid that the government will end up change rules that some methods (like the Roth Pipeline) depend on - not sure how likely that is, however. Overall, think I will try and spread things out a little so that I have more options in the future.

[forummm]

The TSP is a really good savings vehicle for many reasons. The funds are among the best funds you can possibly have. When you separate you can leave it there, or roll it over to wherever you want (like a Vanguard IRA). I understand if you want to keep money in taxable accounts for a major purchase. But the tax-advantaged accounts are really powerful wealth building tools. And the TSP is one of the best.