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  • Portfolio review and advice

    My post is very lengthy, so I want to apologize for that first.

    As my username implies, I am a late beginner and just recently start thinking about investment. I just started my attending job within the past year, but the challenge is I am already 40 and only have $15k in a previous 403b, and have no other savings or investments. My wife stays home taking care of our two small children, 3 and 6. Job wise I am salaried at around $400k/year (just started), and my practice provides both 403b/401k and 457b (organizational). The company matches about 2% of my salary if I contribute 4% or more (says IRS max salary rule applies, I don’t quite understand how); in addition, the company provides employer-sponsored pension plan at a pension factor of 1.5%, to which I myself don’t need to contribute any. I am hoping to work for this practice for many years and retire there between 65-70. I have fair confidence of my job stability.

    Given the good pension plan, as long as the practice keeps running well and I can keep my job, I shouldn’t need to worry too much about future. But no one knows what is going to happen in the next 20-30 years, and the safest thing is to accumulate my own wealth besides the pension plan. On the other hand, because of the pension plan I figure I should have better risk tolerance and take a little more risk in investing. So here is my immature plan after reading the WCI book and some Bogleheads posts for a couple of months. Any suggestions will be greatly appreciated, please be harsh.

    Planned Portfolio AA:

    1. 401k: long term growth over 20 years, aggressive 100% equity ($18000+$6000 match=$24,000/year):
    Vanguard Total Stock Market Index or equivalent (VTSAX or VTI in ETF): 50%
    Vanguard Small-Cap Value Index or equivalent (VSIAX or VBR in ETF): 25%
    Vanguard FTSE All-World Ex-US Index or equivalent (VFWAX or VEU in ETF): 20%
    Vanguard Emerging Markets Stock Index or equivalent (VEMAX or VWO in ETF): 5%

    2. 457b: long term growth over 20 years, aggressive 100% equity, ($18,000/year):
    same as 401k

    3. HSA: long term growth over 20 years, aggressive 100% equity, ($6,750/year):
    Same as 401k

    4. Roth IRA: Traditional IRAs, one for me and one for my wife (spousal IRA), max out with backdoor conversion into Roth ($11,000/year), long term growth over 20 years, back-up for liquidity, moderate 75% equity and 25% bonds:
    Vanguard Total Stock Market Index or equivalent (VTSAX or VTI in ETF): 40%
    Vanguard Small-Cap Value Index or equivalent (VSIAX or VBR in ETF): 15%
    Vanguard FTSE All-World Ex-US Index or equivalent (VFWAX or VEU in ETF): 15%
    Vanguard Emerging Markets Stock Index or equivalent (VEMAX or VWO in ETF): 5%
    Vanguard Total Bond Market Index Fund Investor shares or equivalent (VBMFX): 25%

    5. 529: 13-year plan, planning to use Vanguard 529 aggressive growth ($12,000/year/kid, so $24,000 total/year), which starts out from 100% equity with gradual transition into mostly bonds.

    6. Taxable account ($20,000/year): 70% equity (similar to Roth IRA equity allocation without Emerging Markets Stock Index) /30% tax-exempt bonds (Vanguard Intermediate-Term Tax-Exempt Fund Investor Shares VWITX or Fidelity Intermediate Municipal Income Fund, FLTMX)

    7. Emergency fund tier 2: high APY (slightly over 1%) saving online bank ($10,000/year)

    8. Emergency fund tier 1: checking account, no interest ($10,000/year)

    9. Additional: real estate crowdfunding (no specific plan or experience yet, $10,000/year)

    I am carrying a 15-year house loan, just started. I need to pay about $5,500 every month to cover P&I, property tax, home insurance and HOA. So I need about $11,000-$12,000/month for routine including house expenses. This makes our emergency funds look a bit thin, but I am thinking the job safety can give me some reassurance. In addition, I am hoping the money from planned taxable account and crowdfund investment can be the backup, while Roth IRA money and 529 plan can be used if we are truly in financial trouble.

    Please let me know if there is any major defect with above plan, thank you all so much for your suggestions in advance!

  • #2
    Bump up the emergency fund, make sure you have good quality own occupation disability insurance, and get $2-4M in term life insurance. Perhaps three $1M policies for ten, twenty, and thirty years.

    Is med school all paid off?

    Other than that, it looks like you have a solid plan.

    P.S. Are you in a high cost of living area, or just a bigger house in a lower cost of living area? Does your wife plan to re-enter the workforce when the youngest starts school?

    Comment


    • #3




      Bump up the emergency fund, make sure you have good quality own occupation disability insurance, and get $2-4M in term life insurance. Perhaps three $1M policies for ten, twenty, and thirty years.

      Is med school all paid off?

      Other than that, it looks like you have a solid plan.

      P.S. Are you in a high cost of living area, or just a bigger house in a lower cost of living area? Does your wife plan to re-enter the workforce when the youngest starts school?
      Click to expand...


      Thanks so much for the advice! I haven't thought through the life insurance/occupation disability insurance plan yet, will definitely buy good plans. The employer offers some nice plans, but I will supplement with my own. I went to a state college and graduated from a MD-PhD program, and my parents helped me quite a bit financially, so there is no student loan problem for me. As for the emergency fund, will see if we can save some more from our routine monthly cost, still need to figure out.

      I live in Midwest area, and the cost of living is roughly at national average. The state income tax is a little high (9%) though. My wife is thinking of returning to work after a couple of years, but she is in basic researcher and the salary won't be high ($50,000/year range).

      Comment


      • #4
        No debt - age 40.  aside for Mortgage?  That's solid.

        You can also anticipate catchup contributions in 10 years to start and probably topped off the 529 by then; so move that funding over at that point.

        Ditto on the Life Term insurance and Own occ DI.  Make sure you have enough Term life to cover mortgage, education and daily funds.  20yr at least with the little ones.

         

        Comment


        • #5




          No debt – age 40.  aside for Mortgage?  That’s solid.

          You can also anticipate catchup contributions in 10 years to start and probably topped off the 529 by then; so move that funding over at that point.

          Ditto on the Life Term insurance and Own occ DI.  Make sure you have enough Term life to cover mortgage, education and daily funds.  20yr at least with the little ones.

           
          Click to expand...


          Awesome! I will do some more homework on the insurance plans.

          Comment


          • #6
            It would be helpful to know your target asset allocation and then to see what this will look like after breaking this down into equity (further broken down into large/mid/small caps) and bonds - essentially abbreviate the above mutual funds.  Your overall mutual fund plan looks good - just be mindful of the fact that you're pretty heavy on Small Cap stocks.  You're 40 and realize you may have to wait a LONG time to see any added growth from value stocks.  Just be aware, not advising against.  Otherwise, I agree re: emergency fund.  You have a lot going out every month and to only have ~2 months or less in an emergency fund is probably not advised although not entirely reckless since you have other sources that you can draw from (although probably shouldn't).  When you say $10,000/yr do you mean you're going to be contributing $10,000 a year to each of those tiers or just expect that to be the balance?  I don't see much point in putting something into standard checking.  You can get 1.45% APY with Everbank's 1 year CD and 1.05% with Ally Bank's online savings.  If you need check-writing abilities there are online checking accounts close to 1% or money market accounts which allow for check writing (in a more limited fashion).  You'll see a nice bump up should your wife go back to work which will be nice for additional 529 money and/or your retirement.  BTW, having a 457, 401k and a pension is solid.  Nice salary too.

            Comment


            • #7
              The plan looks solid.  I agree on the insurance and er fund comments.  Congrats on the job and your financial organization.

              Comment


              • #8
                Adding up all your savings I get to about a 30% savings rate.  I would encourage you to push that higher for the next few years, perhaps more into taxable for flexibility.  If you more slowly grow into your attending income over say the next 5 years and increase your savings, you will give yourself a big boost at this early stage of your career.  Your plan seems solid though.

                Comment


                • #9
                  One other minor suggestion -- if you have room for taxable, and you live in a high income tax state, consider Munis.  Perhaps (very slowly) replacing part of your emergency fund with a laddered bond portfolio and hold them to maturity.  If you buy them at 5K intervals, you can get them commission free with no ER, and if you hold them to maturity then no price fluctuation (only interest risk and very, very small (if you are careful) default risk).

                  Comment


                  • #10




                    One other minor suggestion — if you have room for taxable, and you live in a high income tax state, consider Munis.  Perhaps (very slowly) replacing part of your emergency fund with a laddered bond portfolio and hold them to maturity.  If you buy them at 5K intervals, you can get them commission free with no ER, and if you hold them to maturity then no price fluctuation (only interest risk and very, very small (if you are careful) default risk).
                    Click to expand...


                    Do you mean no interest rate risk, but only re-investment risk (if rates are on the decline...which they don't appear to be)?  Curious about this ladder approach and buying bonds directly rather than bond funds.  Requires that you do the re-investment of the interest payments on your own, right?  Seems like this would be painful.

                    Comment


                    • #11
                      Laddering takes out the middle man and fees. It's relatively easy to do in Cali for bond purchasing.   So if you're a regular at bonds, direct has some savings benefits.

                       

                      Comment


                      • #12


                        Adding up all your savings I get to about a 30% savings rate.  I would encourage you to push that higher for the next few years, perhaps more into taxable for flexibility.  If you more slowly grow into your attending income over say the next 5 years and increase your savings, you will give yourself a big boost at this early stage of your career.  Your plan seems solid though.
                        Click to expand...


                        Agreed.  My first thought was increase your EF some, then that you should probably save more in taxable per year.

                        Comment


                        • #13
                          Very well thought plan. Not plan is perfect, but yours is pretty dang good! Best of luck.  

                          Comment


                          • #14
                            Sorry for my delayed response, just got off my busy call day  

                            Thank you all for the great suggestions and encouragement! As for ENT Doc's question regarding my emergency funds, my plan is to save for Emergency funds every year, so the listed $20,000 is only from year 1. If nothing emergent happens they will become $40,000 in year 2, and hopefully the funds will increase to $80,000 in year 4, and I will keep them at this level. I have to admit the planned monthly routine expenses are high, but it is not easy to convince my wife we can do just well with less money   . But I am hopeful my wife will be on board with me in the near future. If we can save more from routine expenses, these numbers will look better I hope. This is a little risky in the first 4 years, but I think this risk is tolerable. If my wife returns to work, we will have more in emergency funds. I will make sure she maximizes her 401k if there is one for her. Also we can surely put more in taxable accounts.

                            I am so glad there are so many inspiring ideas here for the emergency funds, which I had no idea about! Laddering bonds sounds interesting, will try to learn some details. I know it is silly to keep big chunk of money in regular checking account.

                            I put everything together except 529 and emergency funds, which totals $89,750/year. Equity/bonds allocation is about 90/10. Also there is a planned $10,000 crowdfunding, more like a play money that my wife will be in charge. The equity distribution is tilt toward small-cap value based on an experienced friend's suggestion, I myself actually don't have a very clear mind about it. May give it a test drive.

                            The nice thing is that I still have a little room for salary increase in the next few years, so will try to add more in taxable accounts, and maybe add even more by limiting our routine expenses (at the condition of approval by my wife).

                            I also consulted someone with financial expertise, but they were concerned the set-up was too aggressive and suggested a 70/30 allocation based on my age. So I guess I will need to think through about it. Let me know if you have any more suggestions, appreciated!

                            Comment


                            • #15
                              I would put bonds in tax-deferred instead of Roth. User the tax-free status for higher-earning holdings.

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