Earlier this week, I posted my personal asset allocation, which I post again below for your review:
75% Stock
50% US Stock
Total US Stock Market 17.5%
Extended Market 10%
Microcaps 5%
Large Value 5%
Small Value 5%
REITs 7.5%
25% International Stock
Developed Markets 15%
Small International 5%
Emerging Markets 5%
25% Bonds
Nominal Bonds (G Fund) 12.5%
TIPS 12.5%
I currently have 5 different investing accounts, all with different expenses and different options available, as well as differing tax treatment. Those 5 accounts don't count ESAs and 529s for each of my kids, nor the 4 accounts I've used in the past that don't currently have anything them, including a SEP-IRA, two traditional IRAs I use each year to do Backdoor Roth IRA contributions, and a taxable account. With multiple investing accounts, it can be a bit of a puzzle how to best implement your asset allocation within those accounts. Hopefully seeing a real life example will make it a little more clear.
My Current 401K (18%)
Schwab Total Stock Market Index Fund 18%
My Old 401K (TSP) (29%)
G Fund 12%
S Fund 10%
I Fund 7%
My Roth IRA at Vanguard (31%)
Vanguard Total Stock Market Fund 4%
Vanguard Total International Stock Market Fund 8%
Vanguard TIPS Fund 1%
Vanguard REIT Index Fund 8%
Vanguard Emerging Markets Index Fund 5%
Vanguard International Small Index Fund 5%
My Roth IRA at Bridgeway (4%)
Bridgeway Ultra-small Market Fund 4%
Spousal Roth IRA at Vanguard (18%)
Vanguard TIPS Fund 7%
Vanguard Value Index Fund 5%
Vanguard Small Value Index Fund 6%
Every year it looks a little different because different amounts get added to different accounts, and investments perform differently. Only $5K total can go into my Roth IRAs, and only $5K total can go into my spouse's Roth IRA. I can't put any money into my old 401K. And I can put up to $50K into my current 401K. It's easy to see that it won't be long before I will need to move asset classes from my Roth IRAs to my current 401K. Since the only low-cost fund in my current 401K is the Schwab TSM fund, I'll have to start using the brokerage option there soon and buy ETFs to maintain my desired asset allocation. The TSP will gradually move from G, S, and I to just G and S, then eventually will likely be all G. The separate Roth IRA at Bridgeway makes rebalancing that fund a pain. It requires that I either do part of my backdoor Roth IRA at Bridgeway, or that I do a rollover periodically from Vanguard. I'll likely move that asset class to my 401K eventually for simplicity (assuming I keep it.)
One principle of allocating investments into accounts that many people don't recognize is that for easy rebalancing, each account needs to share one asset class with another account. You'll notice that each of my accounts does that, with the exception of the Bridgeway Roth IRA. But for simplicity and to get access to lower cost admiral funds, you don't want too many funds in each account.
One thing I've been pretty happy with (and worked very hard to attain) is to have a relatively large Roth portion of our retirement accounts at this stage in my career. Over half of our retirement assets will never be taxed again. We achieved that by maxing out our Roths each year in residency (I confess we didn't quite make it one year), making Roth IRA contributions either directly or via a backdoor Roth each year, and a couple of Roth conversions at relatively low tax rates. Even though the majority of future contributions will be tax-deferred, we should still have a Roth component of significant size at retirement, allowing for tax diversification in the withdrawal phase.
One other thing I'm proud above about this implementation is that I've been able to keep the expenses quite low. The average expense ratio for this portfolio is 0.16%, dirt cheap by any standard, despite having several relatively expensive asset classes- microcaps, emerging markets, and international small.
I hope you find this example helpful as you implement your own asset allocation.
One question- how are you able to put up to $50K in your 401K? I am probably ignorant, but what about the $17K cap on 401K’s – how do you make this happen?
Are you able to keep your money in the TSP forever? For some reason when I opened my TSP account I had the impression that you got kicked out when you leave the service. I guess I could look this up on the TSP website…
Jeff-
You need a profit sharing plan/401K that allows you to “self-match.” If the plan is written correctly, highly compensated employees can put in $50K up to the IRS limit for employee ($17K) + employer contributions.
Jared- No, you can’t keep it in there forever. You have to start taking it out in retirement. But you can certainly keep it in there after separation. And yeah, it’s on the TSP website:
Account Withdrawal Deadline
If you decide to leave your money in the TSP, be aware that you will be required to start withdrawing your money by April 1 of the year following either:
The year you turn age 70½, if you are separated from Federal employment or the uniformed services, or
The year you separate from Federal service, if you have already reached age 70½.
As a helpful reminder, the TSP will notify you before your required withdrawal date and mail you important tax information about your TSP withdrawal, as well as information about the IRS required minimum distributions.
If you do not begin withdrawing your account by the required deadline, your account balance will be forfeited to the TSP. You can reclaim it; however, you will not receive earnings on it from the time it was forfeited.
https://www.tsp.gov/planparticipation/withdrawals/accountOptions.shtml
WCI,
There are some downsides to a self-match/profit sharing 401K with the 50K limit that you describe:
1. No free company match money
Since it your own money that is going into the 401K as opposed to a standard 17k limit 401k where the employer matches say 4-5% of salary upto 245K.
2. Vesting Schedule for your own contributions of 50K
In a normal 17k limit 401k, your own contributions to a 401k do not have a vesting schedule, only the company match free money has a vesting schedule, you likely have vesting schedule for your “self-match” money….even though it is your contributions. My experience has been that those contributions were also mandatory.
Please inform us if the above points are applicable to you
Yes I am also highly interest in this self match profit sharing 401k. My goigle searches are not yielding much, so I do not have enough information to bring it up with my partners. We use employee fiduciary, so my next step is to call them I guess, but in my experience with them as a low cost provider you need to know what you are wanting specifically, because they do not do handholding.
I’m not sure I understand the above questions on self match. In essence since he is an employee and employer, he is just increased his deductions/tax deferral. You hope when you take the money out that it’s taxed at a lower rate. Given many of the costs of his plan are fixed, the only reasons not to do it are you need the money before retirement or the costs of matching all eligible employees make it costly.
Rex, yes my question is along those lines. Our current safe harbor, 3% non elective matching 401k with optional profit sharing is limited in ability to maximize owners profit sharing contributions. We are an s corp with 8 owners and 9 employees. Because of our age distributions of different group we are unable to max out owners 401k profit sharing distributions because of high amounts having to go to employees via non discrimination rules. This self matching is not something i can find any info on to bring up with EF or TPA
It’s the same thing just in his case all eligible employees are other docs so each is okay with the business putting up those costs. In your case, unless you want to use it as a carrot to retain people, it might not be worth it.
Yes, it’s all my money. Yes, it’s all vested immediately. Yes, nearly the entire company is docs, but mostly partners, which I am not yet. I think the non highly compensated employees (non-docs) DO get a match from the company, which the docs do not.
I’ll do some research and dedicate a post to this. Until then, perhaps this link will help:
http://www.dol.gov/ebsa/publications/profitsharing.html
Hi WCI, I have a question for you. Why do you still contribute to the Roth IRA? I don’t think it makes sense for someone at your income level, with that significant of a Roth IRA already, to pay taxes at the absolute highest rate possible. Thanks 🙂
I imagine bc he was going to invest after tax anyway. Also there is an assumption that bc of lower income in retirement you will pay less taxes. Maybe 50 is lowest rate in future.
Rex is right. For the backdoor Roths I’m not choosing between a traditional tax-deferred IRA and a Roth IRA. I’m choosing between a non-deductible IRA and a Roth IRA. A Roth is far better than a non-deductible IRA because the earnings will never be taxed again. So if I have to pay the taxes on the contribution anyway, I might as well get it into the Roth. That’s the wonderful thing about a backdoor Roth IRA. .
Doc, have you or your partnership considered the option of Roth 401k? With Roth 401k, you can contribute your post tax money and the earnings are tax free (similar to Roth Ira). Annual limit is 50k for employee pretax a d post tax dollars combined. Withdrawal rules are similar to that of regular 401k.
My group gives us the option of contributing to a 401k vs. a Roth 401k. So far I’ve just been sticking with the 401k since my tax bracket is high now, and I’ll likely be in a lower tax bracket when I retire. Some might argue however that taxes are at an all time low right now, and when people my age retire (I’m 35), even folks with lower incomes will be taxed at a higher rate than the highest current marginal tax rate. I’m not sure I’m convinced though…
Sure. It’s got a Roth 401K. But I’m not going to pass up a 33% (soon to be 38%) tax break now to fund it, especially when I can do $10K into backdoor Roth IRAs each year.
Attendings in their peak earnings years should, as a general rule, use tax-deferred savings vehicles whenever possible. The Finance Buff did a great post on this: http://thefinancebuff.com/case-against-roth-401k.html
Would you mind sharing what company administers your profit sharing 401K. My wife recently purchased a dental practice and I have been reading a lot about retirement plans for small businesses lately. This seems like it makes the most sense for her/our situation so I am curious to know what company holds your 401K and whether, generally speaking, you and your colleagues are happy with it. Thanks.
I sent you an email.
WCI,
My earlier post regarding the downsides holds true if the physician is a regular employee ( say employed by a muti-specialty group or hospital). I am in this situation.
I would much rather get the free company match ( for me 10K) than have the ability to put 33K of my OWN pre-tax money into the 401K.
The plan you describe is obviously perfect if the physician is the owner of the group, thereby you are able to limit the company match for your regular employees and at the same time defer a higher amount of your earnings/”self-match”. The company match free money I describe is obviously from the earnings/profits of the owners.
As far as the vesting schedule is concerned…….if you dont have a vesting schedule for your self-match contribution…..you likely dont have vesting schedule for your regular employees.
As a ER doc, your group likely does not have a large number of regular employees…..but for other specialties……..a vesting schedule may be desirable to prevent employee turnover…..but if there is a vesting schedule for regular employees……there has to be vesting schedule for owner self-match contributions for the owners
I agree. The most important point you made is that for the owners, the “free company match” is the same as the “self-match.” Any employee should keep in mind that their “match” is just part of their salary. Without it they could command a higher salary. It’s just like their benefits. To an employer, just like to the seller of a house, it’s all the same money.
although we talk about the employer matching as free money, in reality the employer would/could likely pay you a higher salary if there wasnt any match available. Still everyone should try to take them up on the offer.
This ignores the favorable tax treatment, economies of scale, required IRS testing, vesting schedule which is designed to reduce turnover, etc, in why many employers offer healthcare or retirement benefits. Everything else being equal, you could just ask for more money in your paycheck…but everything else is not equal.
i was curious, how long ago were you contributing to a TSP? I am trying to figure out if a Roth IRA is currently better than using the Army’s TSP if I am putting approximately $5000 per year into retirement as a medicine resident. It seems like other people on military forums thought using a Roth was a better way to go.
I last contributed in 2010. As a medicine resident, I would choose a Roth IRA over the traditional TSP, but would consider the Roth TSP before a Roth IRA as expenses are lower. Ideal would be to put $5K into your Roth IRA and $17K into your Roth TSP, but that’s pretty tough to save that much as a resident, even with the higher military salary.
Yea while the tsp is great, in that situation go Roth IRA.
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for someone new to the investment scene, what do u think about just choosing target date retirement funds for all of my investments? pros/cons?
It’s fine as long as all your investments are in tax-protected accounts and that the target date retirement fund is available in all those accounts and that you choose the fund by the asset allocation, not the date on it.
If you had the option to put all your investments into something like the Vanguard LifeStrategy Growth Fund (in a tax advantaged account) which costs 0.17%, compared to your above described portfolio with almost the same total expenses, would you do so? I’m still an investing novice, but you’ve written a fair amount about “tilt” and it seems like that would be the one thing it might be missing out on when it comes to asset allocation.
Also, for the brand new investor with decades of investing ahead of him (who vows not to sell when values eventually drop by 50%), do you think it would be reasonable to start out for at least a few years of nothing but something like Vanguard Total Stock Market which boasts a cost of 0.05% before beginning to add some bonds and international stock ETFs after a few years?
While I don’t know what options I will have, I’m considering using one of these two strategies to implement my portfolio this July. Although I continue to educate myself on investing so I havent made any decisions yet.
Sure, Total Stock Market Index Fund is a wonderful first investment. I have owned it for years and it was my first Vanguard fund. I still have a sizable portion of my portfolio in it. In the beginning, how much you save matters far more than what you invest it in anyway, so no need for a complicated portfolio.
However, I’m willing to deal with a more complex portfolio in the hopes of eking out an extra 1-3% return per year over a simple solution like the VG LS Growth fund. Will my portfolio outperform over my investment horizon? Perhaps, perhaps not. But I’m willing to bet my life savings on it. And if I’m wrong, I likely won’t be wrong enough that it will keep me from reaching my financial goals.