August 2020 First Year Attending Financial Plan

[livtex]

Hi All:

Was introduced to WCI in 2019, and this site (and the course) have been a life changer. I've spent the past year putting my financial plan together, while realizing my past mistakes (particularly re: investing). I would love everyone's honest and candid thoughts about my plan, particularly what on what I plan to do with retirement accounts. Thank you in advance!

Stage of Life: New attending, 1^st year in practice, mid 30s.

Social: Situation: Married, spouse is also a physician, currently at home to take care of our young child (during COVID), possible that she will go back to work part-time in future.

Annual income Just under 400k

Tax Bracket: 32% (32% Federal, 0% State)

State of Residence: Texas

Insurance Policies:
Term Life: 1 million 30 year term (until age 60)
Term Life: 1 million 20 year term (until age 55)
Additional 1 million Term Life through employer
Disability: ~10k/month thru Principal (total, extended partial, catastrophic, own occupation, etc) plus disability through work.
High Deductible Health Plan (HSA through employer)
Adequate auto, home, and flood insurance
Malpractice w/tail coverage policies through employer
Umbrella: 5 million

Debts:
-Home mortgage: $400k @3.125% 30 years (original mortgage $450k in 2015)
-No his or her student loans (paid off ~125k)
-No car loan. Goal is to buy any new car with cash.
-No credit card debt.

Plan to Invest
Remainder of 2020:
Max out 403b 19.5k, Employer Contribution 401 5k, Back Door Roths for both 13k, HSA 7k for total ~45k. Will contribute 500/month to child’s 529.

Emergency Fund Saving 3k/month, Car Replacement 500/month, Doctor House Saving 1500/month (will combine all three values (5k) into a high interest checking account). Our emergency fund will be around 30k by the end of this year. Our base expenditures (non-retirement related) is about 10k/month.

2021 and on:
Max Out 403b 19.5k, Employer Contribution 10k, Back Door Roths for both 13k, HSA 7k, Taxable Account 2k per month (48k) for total of ~98k. Will contribute 1k/month to child’s 529.
Emergency Fund Saving 1.5k/month, Doctor House 1.5k, Car Replacement 500 (will combine all three values 3.5k into the high interest account. Once we have enough emergency fund saved by the end of 2022, the money that would be put into the emergency fund from there on out is put towards down payment towards doctor house down payment). Emergency fund will be ~50k at end of 2021 and 66k by end of 2022, which is about 6 months of our base (non-retirement) spending per month. Starting in 2023, the money going towards emergency fund will be re-directed to our doctor house fund.

Current Portfolio (this is ugly: please excuse my haphazard choices with funds as this was pre-WCI days and I received bad recommendations and did not do research on my own. My plan is below the current portfolio):

Him:
Roth IRA: <8k USAA Intermediate-Term Bond Fund, Expense Ratio: 0.6% (corporate bonds are 50%
Roth IRA: ~10k Fidelity 60% Fidelity GNMA Fund, Expense Ratio 0.45% (70% pass through securities), 40% Cash (Core Position)
403b~50k Fidelity 80% Fidelity US Bond Index Fund, Expense Ratio 0.025% (40% US Treasury, 50% corporate), 20% Fidelity PIM Total Return Interest 0.7% (25% mortgage based, 25% government based)
403b ~20k TIAA 99% Vanguard Balanced Fund Institutional (60/40 mix)

401a: Company contribution of 4% starting in August 2020.

Her:
Roth IRA ~10k Fidelity 60% Fidelity GNMA Fund, Expense Ratio 0.45% (70% pass through securities), 40% Cash (Core Position)
403b from a prior employer ~80k 45% Fid Target Date 2040, Expense Ratio 0.09% (80% stock, 20% bond, 55% , 55%, PIM Total Return Interest 0.7% (25% mortgage based, 25% government based)
403b from a second prior employer ~2k Vanguard Target Date 2045 (90%/10%, 0.09% fees)
401a from a prior employer ~66k 65% Fid US Bond Index (50% US Treasury, 50% Corporate Bonds with 0.025%, expense, 35% Fid Target Date 2040 90 stock/10% bond mix)

The plan:
(Note: I have the option of contributing to a non-governmental 457 but am holding off as I only have the option of taking distributions over a 5 year period and I am a little wary of a non-governmental 457 right now.)

Major options for 401k, 403 (and 457 if I choose):
Target Date Funds (2045 has a 0.21% fee)
Fidelity 500 Index (0.015% fee)
Bond options are OK.
No REIT options.

Plan:
-Change all of our 403s and 401s with Fidelity to Fidelity 500 Index. (148 + 50 ~200k + 25k this year 401/403) ~225 at end of 2020
-Move USAA and Fidelity Roths to Vanguard. Place into Total Stock Market Fund for each person. Add back door roths to this amount. ~40k at end of 2020
-Move the TIAA Cref Fund to Fidelity and place into Fidelity US Bond Index Fund (~20k: Expense Ratio 0.025%)

265 at end of year in stocks, 20 in bond (93/7 mix) for 285k total. This is not ideal, but I am aiming to be 80/20 by end of 2021.

If I invest 100k in 2021, for a total portfolio of 385k, it get an 80/20 mix, I would invest around 50k in Vanguard Tax Exempt Bond Index Fund Admiral Shares (0.09%) in my taxable account. Would continue to invest my back door roths and workplace plans in their respective funds (vanguard total stock market funds, and fidelity 500 index)

This would give me around 320/80 by end of 2021, which is my goal is to get to this to a rough 80/20 mix by end of 2021, through this:

401/403s in Fidelity 500 Index: 250k
Back Door Roths in Total Stock Market Fund: 70k
Fidelity 403b in Fidelity US Bond Index: 22k
Vanguard Tax Exempt Bond Index Fund Admiral Shares in bond: 50k


HSA (not considering as part of my main retirement portfolio to calculate 80/20 percentage): Will do HDHP and max out annually (20% of the contribution to the IRS maximum from employer):
-Vanguard LifeStrategy Growth Fund (50% US Equity, 30% Int’l Equity, Fixed income 20%, Expense Ratio: 0.14% fund
-Will Consider Switch to Vanguard LifeStrategy Moderate Growth Fund (60% Equity, 40% Fixed Income) at age 45 and
-Vanguard LifeStrategy Conservative Growth Fund (40% Equity, 60% Fixed Income) at age 55.
-I will consider my HSA as separate from retirement accounts (so I understand my overall retirement portfolio may be a little more aggressive). Should I consider doing a Target Date fund instead?

-529: Will start investing 500 per month in August in Utah 529 (VG Total Stock Market Index Fund (99% US Equity, Expense Ratio: 0.02% fund and 0.18% admin fee), then 1000 per month in 2021. I’m going to take an aggressive approach to the 529 and will become significantly more conservative once goal is reached.

Questions (I know some of these may seem like simple questions, but after doing research I still need some clarity on some topics):

1. Does moving from one fund within vanguard to another one (such as in the HSA in 10 years) cost me for taxes? Let’s say I reach my goal in the 529 (400k). Can I move all of this money to a different, more conservative fund without it costing me taxes?
2. Can I roll a small 401k into another work 401k within Fidelity (wife had two separate prior employers)? Does that cost me money with Fidelity? Taxes?
3. When I am looking at fees, do I look at expense ratio gross or net AND management fees or is one part of the other?
4. Should I move USAA Roth and Fidelity Roths over to Vanguard?
5. Can I have two separate roths? IE, let’s say to rebalance in the future if my portfolio is too aggressive, do I tell Vanguard to invest the 6500 back door roth money from that specific year in a different fund (is this a separate roth that I have to open up or it’s just the same roth but now with both index fund and bonds in it)?
6. If I invest 50k in my taxable account every year and 13000 with backdoor roths, when my portfolio is large enough, will this 63k a year be enough to rebalance my portfolio to my risk (as I get more conservative over time)? I assume that I would have possibly to adjust how I invest the following year in my 401k as well, correct?
7. Can I change my allocation within my 401k without incurring taxes (ie, with my poor choice of funds that I started out, if I change what I have past invested into a different (now an index) fund, does this incur taxes?
8. Do I need to invest my entire 50k into a taxable account all at once (is that better for taxes) one time during the year? Or can invest 2k a month and still be tax efficient (like an automatic investment each month into the taxable account?)
9. Is it better to help me determine my target balance if I rebalance at the end/beginning of the year by investing all my taxable account and my roth all at once? Can I calculate in December/January what I need to put to maintain my mix in the upcoming year and invest to get to that number mix over the course of the year and still possibly maintain a rough estimate of my desired balance (by investing 2k/month in the taxable instead of 50k all at once)?
10. Should I consider my HSA / 520 as part of my retirement mix? Or no since its primary purpose is for health care and college, can I just leave this out of my calculations?
11. Once I get to end of 2021 and I am close to my 80/20 mix, what is the smartest way for me to maintain this mix over time (understanding that at 40 I will go 75/25, at 45 70/30, etc)? Ie, where should I aim to invest the majority of the money I need to put in bonds preferentially into my taxable account? Or my 401/403? Or my backdoor roth?)

Overall, I would like to maintain as simple of a portfolio as possible (with investing 2-3 index funds and 2-3 bond funds) and calculate a re-balance once a year.

Thank you everyone for your help.

[CordMcNally]

Just a few things off the top. You have the incorrect number for backdoor Roth contributions, it's currently $6k per person ($7k if over 50) so it's $12k for you and your spouse, not the $13k you've been mentioning. They haven't released the 2021 contribution limits so this may or may not go up next year.

Think of all of your accounts as one portfolio.

1. You can move money around whenever you want within a tax advantage account such as any pre-tax retirement accounts (i.e. 401k, 403b, etc.), Roths, HSAs, and 529s.

2. As long as the accepting 401k takes rollovers then there's no issue. It shouldn't cost you a thing.

3. Expense ratios includes operating expenses and management fees. If applicable, sales fee, brokerage fees, etc. will be extra.

4. Personal choice. Pretty much any major brokerage will have good low cost fund options. I would put the Roths all at one brokerage just for convenience.

5. You say 'two separate Roths' but I think what you mean is having different fund choices. You can buy whatever you want in your Roth. It doesn't all have to be in the same fund.

6. Maybe. You can always move money around in tax advantaged accounts if you're not able to reach your target AA with contributions.

7. See 1. Any movement in a tax advantaged account does not incur taxes.

8. Invest the money as you get it. or are able to. Time in (not timing) the market is most important.

9. Plan to rebalance once a year or plan to rebalance if your AA goes gets a certain percentage past your desired percentage.

10. HSA, yes. 529, probably not since you won't be the one using it.

11. It's preferable to put most bond funds in tax advantaged accounts.

[livtex]

Cord:
Thank you so much for the response.

I appreciate the correct on the backdoor Roth amounts. My oversight. Thank you!

Thank you also for all of the answers. They are very helpful. A couple of follow-up questions:

When I move all of the Roths from the other brokerages to combine it into one Roth at Vanguard, I won't incur taxes bc it is still a Roth correct (since the money really isn't going into my hands, just to a different firm), correct?

Am I making a mistake in placing 50k in the Vanguard Tax Exempt Bond Index Fund Admiral Shares (a tax efficient fund) to help me get to my 80/20 asset allocation at the end of 2021?

Or is this plan OK to get to end of 2021? And then aim to preferably put index funds/ETFs in the taxable accounts and aim to preferably put bonds in my yearly contributions to the 401/403 and backdoor Roths when I rebalance my AA yearly (or when I get outside of a certain percentage)?

Thank you again!

[Timparsons952]

Obviously you need to simplify.

But in long run isn’t the most impactful thing you could do for your financial future to have highly trained / highly intelligent physician spouse at least working part time while in his/her 30s-40s?

[livtex]

Tim:

That's the plan. We just moved, and are in the middle of a surge in our state. My wife does primary care, so the COVID risk increases exponentially, and we would likely have to put our kid in daycare, which is too much risk for us to take at this time. She will likely go back to work (probably part-time) once COVID passes, with the goal of having grandparents help take care of the kids on the days that she works.

[CordMcNally]

Tim:

That's the plan. We just moved, and are in the middle of a surge in our state. My wife does primary care, so the COVID risk increases exponentially, and we would likely have to put our kid in daycare, which is too much risk for us to take at this time. She will likely go back to work (probably part-time) once COVID passes, with the goal of having grandparents help take care of the kids on the days that she works.

We could get into a huge discussion about a physician not working part or full time. We could get in a big discussion about cutting down your expenses. Honestly, it doesn't matter in the grand scheme of things because you're in good shape and you've got a good plan. All you have to do is not muck it up. That's seriously it.

[livtex]

I appreciate all of the recommendations. Was thinking about recommendations re: bonds (placing them in tax advantaged accounts). I also noticed some errors to my numbers:

Original Plan to modify my investments was to:
-Change all of our 403s and 401s with Fidelity to Fidelity 500 Index. (148 + 50 ~200k + 25k this year 401/403) ~225 at end of 2020
-Move USAA and Fidelity Roths to Vanguard (totaling 28k). Place into Total Stock Market Fund for each person. Add back door roths (12k) to this amount. ~40k at end of 2020
-Move the TIAA Cref Fund to Fidelity (from my 403b) and place into Fidelity US Bond Index Fund (~20k: Expense Ratio 0.025%)

265 at end of year in stocks, 20 in bond (93/7 mix) for 285k total. I would then aim to be 80/20 by end of 2021.

If I invest 100k in 2021, for a total portfolio of 385k, it get an 80/20 mix, I would have to invest around 50k in Vanguard Tax Exempt Bond Index Fund Admiral Shares (0.09%) in my taxable account. Would continue to invest my back door roths and workplace plans in their respective funds (vanguard total stock market funds, and fidelity 500 index)

This would give me around 320/80 by end of 2021, which is my goal is to get to this to a rough 80/20 mix by end of 2021, through this:

401/403s in Fidelity 500 Index: 250k
Back Door Roths in Total Stock Market Fund: 70k
Fidelity 403b in Fidelity US Bond Index: 22k
Vanguard Tax Exempt Index Fund Admiral Shares in bond: 50k
Will do for HSA: Schwab 2040 Target Fund (is now a 80/20 mix, which matches our AA)- has 0.08% expense ratio


Given the recommendations above, I was thinking about doing this instead:
-Change my and my wife's 403b (132k) to Fidelity 500 Index. 2020 401a/403b contributions for him will be put in Fidelity 500 index (additional 25k). Total: 157k
-Her 401a from prior employer (66K) switch to Fidelity US Bond Index Fund.
-Move USAA and Fidelity Roths to Vanguard (totaling 28k). Place into Vanguard S&P 500 Index Fund for each person. Add back door roths (12k) to this amount. ~40k at end of 2020
-Move the TIAA Cref Fund to Fidelity (from my 403b) and place into Fidelity 500 Index. 20k.

-This would give us 177 in Fidelity 500 Index and 40k in Vanguard S&P Index Fund, totaling 217k
-We would have 66k in Fidelity US Bond Index.
-Overall a 77/23% mix.

This would allow me to:
-Start off my taxable investing with Vanguard Total Stock Market Index Fund with 50k next year (tax efficient fund with good outcomes).
-Continue to invest in our Vanguard Roths with Vanguard S&P 500 Index Fund with 12k back door next year
-Fund 403b 19k with Fidelity 500 Index.
-Fund 401a 11k with Fidelity US Bond Index Fund
-I could switch the last two if remaining in my AA necessitates it.

Note: HSA stays 2040 Target Fund (which will be similar in AA changes over duration of our retirement)

Would this second plan be better since I am preferentially putting the bonds in a tax advantaged account?

Thank you for your help.

[chocolatebear11]

I was wondering what the purpose of changing fidelity roth to Vanguard? (I'm new)

[jhwkr542]

I was wondering what the purpose of changing fidelity roth to Vanguard? (I'm new)

I assume simplicity of consolidating accounts in one place.

[chocolatebear11]

I assume simplicity of consolidating accounts in one place.

But it seems like the other accounts 403 and 401 will still be fidelity. Only one that is moving to vanguard is the Roth