Portfolio checkup

[warreng]

Dear WCI community, I am hoping to get a portfolio and financial trajectory checkup. Thank you in advance!! (for anyone perusing Bogleheads, sorry for the 'duplicate' post).

Emergency funds: ~12 months living expenses (please see question #2 below)

Debt:
$169k med school debt consolidated at 1.870% (I know that by the numbers I should be in no hurry to pay this off, however I determined I don’t want to carry it into retirement with me so I decided to treat it like a 15 year loan, along with our mortgage, so I am making increased payments to have it paid off in 2030, at the same time that our mortgage will be paid off).

$288k mortgage at 2.875% (purchased with 20% down, 15 yr loan, to be paid off in 2030). We will be in this house for the next 15 years or so, barring an unforeseen event.

No additional debt.

Tax Filing Status: Married filing jointly. +kids.
Tax Rate: 33% Federal, 5.75% State
State of Residence: NC
Age: 37
Desired Asset allocation: 80% stocks / 20% bonds, CDs
Desired International allocation: 10% of stocks

Current retirement assets (current portfolio mid six-figures)

Taxable
20% Vanguard Total Stock Market Admiral Shares (VTSAX) (0.05)

4% Vanguard Total International Stock Admiral Shares (VTIAX) (0.11)
His Roth IRA at Vanguard
15% Vanguard Total Stock Market Admiral Shares (VTSAX) (0.05)
4% Vanguard Total Bond Market Admiral Shares (VBTLX) (0.06)

Her Roth IRA at Vanguard
11% Vanguard Small Cap Value Admiral Shares (VSIAX) (0.08)
4% Vanguard Total International Admiral Shares (VTIAX) (0.11)

His HSA (using as ‘stealth’ IRA)
8% Vanguard Total Stock Market Investor Shares (VTSMX) (0.17)

His 401k

32% Vanguard 500 Index Admiral Shares (VFIAX) (0.05)

2% Vanguard Total International Stock Admiral Shares (VTIAX) (0.14)

Contributions

Annual Contributions

$5,500 his Roth IRA (backdoor)
$5,500 her Roth IRA (backdoor)
$6,650 his HSA
$18,000 his 401k (+ 4% company match and year end profit sharing to max)
$36,000 his taxable Vanguard account

$36,000 cash/CDs

Beginning in July I anticipate an additional ~8k/month (after tax) available for savings which I plan to put into the taxable accounts above (please see question #3).
Misc

I have the usual homeowners, life, auto, own occupation disability, and umbrella ($3M) insurance.
Questions:
1. Does my portfolio plan/financial trajectory seem reasonable? Any recommendations or criticisms?

2. Since buying our home I have been building our cash reserves back up. Our cash (in an online savings account at 0.95%) is ~12 months living expenses. I am planning on putting the excess into an Ally 5 yr CD (2.25%). Any other recommendations? I know one recommendation would be to invest the difference but I am comfortable with a little extra in cash/CDs, and going forward the bulk of all excess funds (see question 3) will be put into the market.

3. In July I anticipate a significant increase in my after tax funds available for savings/investment, as outlined above. I plan to put these excess funds into my taxable accounts (and 529s). Other than paying down loans (which I don’t think I’ll be doing at this point), any other recommendations for the additional funds that will be available in July?

Thank you. This is a fantastic community. Between Bogleheads and WCI I have learned some great stuff.

[hightower]

Seems excellent to me.  Your mortgage and student loans have insanely good interest rates.  Not sure how you managed that!?  Anyway, you're saving a solid amount and going to be debt free in the next 12 years.  Your asset allocation is great, nice and simple.  I can't think of anything to criticize.  Keep it up!

[Hatton]

I agree with Hightower

[warreng]

hightower wrote:

Seems excellent to me.  Your mortgage and student loans have insanely good interest rates.  Not sure how you managed that!?  Anyway, you’re saving a solid amount and going to be debt free in the next 12 years.  Your asset allocation is great, nice and simple.  I can’t think of anything to criticize.  Keep it up!

Click to expand...

Thank you for the feedback. Just hit interest rates at the right time -- better lucky than good!

[jfoxcpacfp]

You get a thump on the back - good work. I'm not even going to criticize your relatively measly 4% bond allocation  .

Any further advice/recommendations would depend upon your short- and long-term goals and planned transitions. For example, you have (young?) children and I didn't see college savings anywhere. Retirement goals? Plans to go to part-time by a certain age? Change jobs in the future? A financial plan or financial checkup will give you clarity on the opportunity to accomplish these and other goals on your own timeline.

[warreng]

jfoxcpacfp wrote:

You get a thump on the back – good work. I’m not even going to criticize your relatively measly 4% bond allocation  .

Any further advice/recommendations would depend upon your short- and long-term goals and planned transitions. For example, you have (young?) children and I didn’t see college savings anywhere. Retirement goals? Plans to go to part-time by a certain age? Change jobs in the future? A financial plan or financial checkup will give you clarity on the opportunity to accomplish these and other goals on your own timeline.

Click to expand...

Thank you for the reply, and for your very appropriate 'non-criticism criticism'    of my bond allocation. Based on a recommendation I received over at Bogleheads I think I will open up a Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX) in my taxable accounts and start to use that as my bond workhorse going forward to get more in line with my 80/20 AA. I have a good amount of cash on the sidelines (extra in my emergency fund beyond 6 months living expenses) that I can use to start it and then will have VWIUX, VTSAX, and VTIAX in my taxable going forward where I can allocate the extra after-tax funds I will start receiving in July (in addition to what I am already contributing to my taxable accounts). Does that seem reasonable?

Regarding your questions, my short-term goals are to save, save, save -- I want to hit the 2 comma club by the time I'm 40 in 2 years and a few months (assets, not net worth since I'll still have my loans). I am on a 20 year timeline for retirement, although if I could manage to start ramping down in 15 years (my early to mid 50s) that would be great. I like golf and fishing more than work. Our youngest child will be heading to college in 15 years so that's why I think 20 years is more realistic (to ensure the kids have 'launched' before the income stream slows down). I am working on college plans for them -- I don't include that in my portfolio info. I am very happy in my current job and hope that this will be the job I retire in. I welcome any additional insights or thoughts you might have! Thank you.

[jfoxcpacfp]

warreng wrote:

Does that seem reasonable?

Click to expand...

Age 37, 20% bonds does not sound reasonable to me unless there is a specific need for them at your age. Since I don't know your income or planned lifestyle at retirement, I can't comment on the reasonableness of your retirement glide path, but it appears that you are well organized and have thought things through well. Be sure to invest in your marriage

[warreng]

jfoxcpacfp wrote:

warreng wrote:

Does that seem reasonable? 

Click to expand…

Age 37, 20% bonds does not sound reasonable to me unless there is a specific need for them at your age. Since I don’t know your income or planned lifestyle at retirement, I can’t comment on the reasonableness of your retirement glide path, but it appears that you are well organized and have thought things through well. Be sure to invest in your marriage

Click to expand...

Do you mean that 20% bonds sounds too high for my age?

I agree on the 'invest in marriage' advice -- working on that too!

[jfoxcpacfp]

warreng wrote:

Do you mean that 20% bonds sounds too high for my age?

Click to expand...

Yes. I think you may have taken my "non-criticism criticism" the wrong way. I'm just not a fan of bonds unless they have a specific purpose in your plan.

Bonds: What Are They Good For? Part 1

Part 2

[warreng]

jfoxcpacfp wrote:

warreng wrote:

Do you mean that 20% bonds sounds too high for my age? 

Click to expand…

Yes. I think you may have taken my “non-criticism criticism” the wrong way. I’m just not a fan of bonds unless they have a specific purpose in your plan.

Bonds: What Are They Good For? Part 1

Part 2

Click to expand...

Ahh, got it. Thank you for your help!

[The Wall Street Doctor]

Looks like a pretty reasonable portfolio, good job! Some criticism (mostly about tax, tax and tax  )

 

• Put your international stocks in your taxable account as much as possible. In your tax-exempt accounts, you'll get hit by the dividend income tax withhold by the foreign governments. Most developed countries have this, except a few, like UK, Hong Kong and Singapore. If they are in your taxable account, this loss can be used as credit towards your US tax due, so largely speaking you would break even. For this reason, you should do US + International instead of Broad Stock + International. Although you can achieve the same allocation and the same low fee, the former is more tax efficient when you put ALL your international portion in your taxable account.

 

• Agree with jfoxcpacfp that you don't need 20% bond at the age of 37 - the bond fund you now have, VBTLX contains all investment grade bonds (70% US government, 30% high quality corporate bonds), which is too conservative for your age. If you really want some bonds, I'd recommend two potential changes:
  
  
  
  1. If you want some diversifier without sacrificing too much long term return, buy some High Yield bond funds instead of investment grade and government bonds. Do this in your tax-exempt accounts, as bond yield is tax as regular income.
  
  
  2. If you really want the low risk bonds, buy Muni bonds instead of treasury. Do this in your taxable account. Your marginal tax rate is high enough to take advantage of the tax benefit. For example, you can buy Vanguard Long-Term Tax-Exempt Fund Admiral Shares.
  
  
  
  

 

• Are you saying you are putting 36,000 into CDs or pure cash? Personally I think it's too much. I assume you are doing this for liquidity purpose.
  
  
  
  1. CD is not real liquidity. You also have to pay regular income tax on the already very low yield of a CD. I'd replace CD with at least Muni bonds (not really, I would actually replace them with stocks).
  
  
  2. Liquidity should be managed in levels. I personally would feel secure with just 5~10K immediate cash. Then if you could sell some of your liquid investment and get the cash in 1~2 days when emergency happens, I wouldn't worry liquidity too much.
  
  
  
  

 

• At the rate of your loans, I wouldn't pay a penny over the minimum requirement. That being said, is your student loan interest tax deductible? If yes, why don't you make all the payments you want to make towards your mortgage first? Seems a simple arbitrage to me, 2.875% > 1.87%. Is it just psychological? If this is 1.87% and tax deductible, I'd take this loan into my grave, grave I say! Plus, paying off student loan, you are losing this liquidity forever; while paying off more off your mortgage, increases the potential capacity for home loan when you in dire need of liquidity. Btw, if you have already built up some equity in your house, open a home equity line of credit. You don't have to use it, but it's another layer of protection for emergency. Then you wouldn't need this much in cash and CDs.

 

• This last advice is more controversial. If you are seeking risk mitigation, I'd buy some precious metals instead of bonds. Yes, yes, stocks have the highest return historically, and yes, yes, bonds yields stable income. But you never know, what if the human economy has peaked in 2007 or 2017 and now switching to permanent low growth regime? Or what if the economical cycle gets awfully long? Look at Japan. One thing I'm confident of - All the central banks will print more money than they should whenever there is pain, so all paper money will depreciate faster than they should. It's just human nature to abuse the power in possession. Look at how we indulge even ourselves, you think the chairmen and chairwomen of the central banks care about the long term well-being of the economy that much to act disciplined, when their careers are on the line? So I'd put a small portion in precious metal in the tax-exempt account. The gain on precious metals are taxed at a minimum of 28% even if it is long term gain.

[DMFA]

There is p much no way his student loan interest is tax-deductible. How could he save that much and be below the income cap ($80,000 single, $160,000 married)? Even then, one can only take a max $2,500 deduction.

Math would dictate that your money would probably be better placed in equities in a taxable brokerage account than to eliminate a simple amortizing 1.87% (prob less than inflation) debt. Same with a mortgage that is right around the same rate (1.93% after deduction) and with its own built-in hedges against inflation and liability. It's basically leverage. However, if there are other reasons you need to eliminate debts, the student debt would be the one to knock out first.

You should generally have every dollar working for you as much as possible. Idk if holding a whole year's worth of straight cash is the best way forward. You may want to let a HELOC be a large cushion, a few months' worth of cash in savings, and the remainder of "emergency" cash in muni bonds. Dealer's choice.

[JeffreyBrown]

I agree with Hightower