2013 Investing Plan

1) Contributions

The first step to setting out my investing plan for the year is to calculate how much I plan to contribute to my investments, which requires choosing investment vehicles.

Investment Vehicles

  1. I am going to max out my Traditional 401(k) since it saves me a good amount on income taxes. $17,500 in pre-tax income instead of post-tax saves $4,900 in the 28% federal income tax bracket, which is not a small amount.
  2. Maxing out my 401(k) is more than enough to get the maximum match from my employer.
  3. I could also contribute part of the IRA contribution limit ($5,000) to a Roth IRA for 2012. I won’t know for sure how much I will be able to contribute until I do a full run of my income taxes with all the tax forms.
  4. I could also contribute the remainder of the 2012 IRA contribution limit to a non-deductible Traditional IRA and the full 2013 contribution limit ($5,500) to a non-deductible Traditional IRA.
  5. I could buy up to $10,000 in i-bonds through Treasury Direct.
  6. I could buy index funds in my regular, taxable investing account at Vanguard.

I’ve decided to go with #1, #2, and #3 for this year. Any remaining savings for the year will go towards the mortgage principal. I will re-evaluate this plan again for 2014.

Why do I not want to use the non-deductible Traditional IRA? Its gains are taxed as ordinary income rather than capital gains like they would be in a taxable account. It could make sense to defer taxes on fixed income investments, but for now, I have plenty of tax-advantaged room to cover than between my 401(k) and my Roth IRA and I could always buy i-bonds in taxable to gain some more fixed income room. Buying total stock index funds in taxable is pretty tax efficient, so I would rather do that over opening and maintaining a Traditional IRA with non-deductible contributions. It could make sense to use the non-deductible Traditional IRA if I was to convert its funds to my Roth IRA within a year or two. At some point, I could end up working somewhere with high fees in the 401(k) plan and wanting to roll over my current 401(k) to a Rollover IRA instead of into the new plan, which would leave me with both non-deductible and deductible Traditional IRA contributions. So for now, I’m going to keep things simple and not make non-deductible contributions. As above, I will re-evaluate this plan for 2014 and may retroactively make a non-deductible Traditional IRA contribution for the 2013 tax year.

Why do I not want to buy i-bonds? I don’t have a need for that much fixed income room yet. My current fixed income allocation is ~1/4 of my investment portfolio. I like their tax-deferred nature, but the current composite rate is 1.76%, which is still less than my mortgage.

Why do I not want to add more funds to my taxable account? I would rather pay down the mortgage than invest in a non-tax-advantaged account this year. I will, of course, re-visit this decision again next year.

Monthly 401(k) Contributions

I have a simple little spreadsheet that takes the following formula to tell me how much to set my monthly contributions at:

  • H3 = annual base pay (gross)
  • J2 = Yearly max to the 401(k) – $17,000 for 2012
  • I2 = ROUNDUP(J2/H3,2) = the % that I should contribute monthly from my paycheck to max out the 401(k) over the course of the year, e.g. if it is XX.3%, I will set it to XX+1%.

I updated my 401(k) contribution % back in December, so it is already set for the year!

Roth IRA Contribution

I set aside my estimated Roth IRA contribution with my January RSU vest. It is in a savings account and once I’m sure of the final amount, I will ACH it off to my Roth IRA at Vanguard. I will pull any extra funds necessary to max out my Roth IRA from my general savings account.

2) Asset Allocation

Now for the fun part: figuring out which index funds should get all of this money. To do that, I calculate what my portfolio will look like at the end of 2013 if the market makes no changes and what the “ideal” portfolio would be.

As of writing this post, my investments portfolio is worth ~$77,400. I estimate adding $20,700 to the portfolio this year, including my 401(k) contributions, my employer match, and my Roth IRA contribution, putting an estimated end of year balance at $98,100.

My target asset allocation at the end of 2013 will be:

  • 31% S&P 500 Index
  • 7% Extended Market Index
  • 37% International Stocks
  • 25% Fixed Income

Based on this, let’s calculate my ideal portfolio at the end of 2013 and compare it to where my portfolio is now:

Current Ideal EOY Difference
S&P 500 $23,500 $30,411 $6,911
Extended Market $3,500 $6,867 $3,367
International Stocks $32,000 $36,297 $4,297
Fixed Income $18,400 $24,525 $6,125
total $77,400 $98,100 $20,700

I keep the Extended Market index fund in my Roth IRA. The amount that needs to go into it by the end of the year is more than my contribution amount. I also have Total International Stock Index fund in my Roth IRA, so I will re-balance by putting 100% of my Roth IRA contribution into the Extended Market Index fund and by exchanging the difference from the Total International Stock index fund into the Extended Market Index fund. That will even things out and then I won’t look at the Roth IRA again until January/February 2014.

The remaining amounts will go into my 401(k). I subtracted my employer match off of the targeted amount for the S&P 500 index fund since it goes into something I count as that for my asset allocation calculations and then came up with the following split for my 401(k) contributions:

  • 27% Vanguard 500 Index fund
  • 38% Vanguard Total International Stock Index Fund
  • 35% Vanguard Retirement Savings Trust

Since this is all the contributions I plan on making for 2013, I should just be able to set and forget this for the rest of the year. I’ll check in on what things look like perhaps in early to mid July, but it looks like this year will be pretty simple for investment contributions!

Readers, have you set your 2013 investment plan? How does it look?

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33 thoughts on “2013 Investing Plan

  1. My investment allocation is similar to yours with less fixed income. My biggest issue this year is when to buy. I dollar cost average all my funds, but I need to drop at least $3,000 at one time to get into a new vanguard fund, but the stock market seems to be reaching new heights. Do you ever worry about when you put your money in?

    • I honestly don’t even think about when to deploy new funds when it’s investing for retirement because I don’t plan to withdraw for 30-40 years, so it has plenty of time for the stock market to reach even higher new heights.

  2. Sounds like you are all set. I haven’t done i bonds in a long time. Tough to find them attractive with rates so low!

    Our plan is not so different from last year in terms of maxing out 401ks, contributing to 529 plans and also to a taxable account with index funds. I do want to take a look at our asset allocation this year but for how I am using our old one. The one big differences is that we have a house so bonuses will go towards paying down our mortgage rather than a down payment fund.

    Is your extended market fund an emerging market fund or something else?

      • No, but I can’t complain as it’s a good problem to have.

        Thanks for the link, I’ll check it out. So I guess that’s the biggest difference in out asset allocation, I use a dedicated EM fund. I think there’s a little bit in the international fund (but I’d have to double check).

        • Agreed, looks like I’m there now too.

          The total international stock index fund looks like it is about 24% emerging markets. It seems simpler to me to just use the one fund.

  3. That’s a great plan that you have. I’m shying away from fixed income at this time as well and just have a small allocation towards it in my 401k and rollover. Determining your investment plan is always a fluid process. Life and the economy continue to change by the second and what used to be a great plan might no longer work for you. But it’s great that you have other ideas already compared to most people that would just wing it and most likely hurt their investments in the long run.

    • I’m actually somewhat risk averse, so having even a 75% stock allocation is quite high for me. It seems to be going okay so far and I think I’ll be okay in a downturn, but we can only see.

      Agreed that determining your investment plan is always a fluid process. It’s better to start out with a plan and change it though than to start out with no plan! It forms a good starting point. And since this year is pretty simple with the Roth IRA contribution in February-ish and just my 401(k) contributions other than that, I may just leave it alone for the rest of the year.

  4. Looks like a great plan going forward Leigh. I’m in the same boat that I need to figure out if I’m able to contribute to a Roth for 2012 (may be so small it’s not even worth it). I’ve contributed to my Roth since I was 18, but this year I’m just going to max out my Traditional 401k, as the up-front tax benefits are great now that I’m in a higher tax bracket.

    I have a similar stock allocation as you, but much less fixed income exposure as I’m quite risk seeking. Not sure if you’ve looked at your fixed income breakdown, but personally I’d be quite worried about having long-term bond exposure, especially in low-yielding securities like US Treasuries. Maybe it’s worth going into funds with a lower duration that will not be affected as much in a rising interest rate environment. Although I don’t think rates will rise as drastically as others (why would the gov’t want to pay higher rates if they can keep printing??), they’re bound to move at least somewhat higher in the future.

    Last point, I like your heavy exposure to international stocks, which is similar to my allocation in my retirement accounts. However, I prefer to have a lot less Developed International exposure with highly indebted countries like Japan, U.K., and many Western European countries, and would rather take more risk in Emerging Market countries where I see much higher growth rates, especially when you look at population pyramids. I look forward to hearing about a great 2013!

    • To me, it’s worth it no matter how small the amount is because I’ve only contributed to my Roth IRA for two years (2010 and 2011), post-college. So I’d like to get a bit more in there as long as I can. Isn’t watching the 401(k) grow fun though with how much you add to it monthly when you’re maxing it out? :) I love watching that graph!

      My fixed income is currently about about 45% CDs and the rest in the stable value fund in my 401(k) – Vanguard Retirement Savings Trust. If I needed fixed income room outside of my 401(k), I would probably go with i-bonds in my taxable account and then something like Vanguard’s Intermediate-Term Bond Index Fund in tax-advantaged accounts or Total Bond Market Index Fund if it’s a 401(k).

      I’m a big believer that the US isn’t the center of the world. I can’t quite bring myself to hold 60% of my stock allocation in international stocks due to currency risk, but 50% still seems quite abnormal! You’re one of the first people I’ve met who doesn’t want very little international stock exposure!

      Thanks for dropping by and I hope your 2013 goes well!

    • Just saw that you had your fixed income exposure as the Vanguard Retirement Savings Trust. Definitely a great call in my opinion for Fixed Income exposure. A low cost fund with a duration of only 2.7 years should do well when the market tanks, and will hold up MUCH better than many other fixed income funds in a rising interest rate environment.

      • Agreed – one of the reasons I picked it was that it lost no value during the 2008-2009 downturn :) What are you using for your fixed income?

        • Like I said, I’m very risk-seeking so my small fixed income allocation is mostly emerging market debt along with a small domestic high yield bond fund.

          As someone who agrees that the US isn’t the center of the investing world, do you mind if I ask why you don’t have an emerging market fund as well? I know the Vanguard Intl Stock Index has nearly a 24% allocation to emerging markets, but I prefer to have a separate Vanguard fund as well to capitalize on the high growth rates, strong demographics and the currency exposure.

        • Interesting! Thanks for sharing. I don’t believe that the US is the center of the world, but I also want to keep things simple, so I would rather just stick with the total international instead of slicing and dicing between developed and emerging markets. Also, my 401(k) doesn’t have any of those funds and it is a very large portion of my portfolio (> 50%) right now. Where do you keep your emerging markets allocation? Your Roth IRA?

  5. Yes in my Roth I use VWO for Emerging Markets. I don’t have a great low-cost fund in my 401k right now, so my Roth is highly skewed with International stocks and 401k has more domestic.

    P.S. I’ve been following your net worth updates for quite some time. I have a slightly higher amount right now, but you’re doing such a great job saving that you’re going to surpass me very soon! Manhattan rent is not wealth-building friendly!!

    • Maybe you should move out of Manhattan at some point! Buying the condo is definitely increasing my net worth faster than rent was, for now. I’m paying less monthly and one third of my housing costs is building equity!

      Sounds like you have a pretty soon plan as well. I’m slightly jealous of what I’m assuming your Roth IRA balance is!

  6. How long do you want to work? Is early retirement one of your goals?

    When I began working in my early 20s, I maximized all of my tax-advantaged accounts (401k, IRA, etc). I did a great job saving and was feeling great about my future. However after working for about a decade I realized I wanted out of the rat race as quickly as possible. And although I had a decent amount of savings, all of it was earmarked for my “golden years”. The downside to 401k and IRA savings is that you can’t touch them for the most part (Roth contributions and special situations excepted) without being subject to penalties and taxes.

    If I could go and do it over again, I’d do the following:
    1. Max Roth every year
    2. Contribute to 401k only as much as the employer will match
    3. Use remaining free cash flow to pay off mortgage ASAP
    4. After mortgage is gone, use remaining free cash flow to invest in a taxable account to bridge the gap between early retirement and 59.5 years of age

    • I’m not sure how long I want to work at the moment. I’m not sure what I would do if I retired early. At the moment, I just have so much excess income that I could very well end up with the option to retire early if I keep saving at my current dollar rate per year.

      My plan at the moment is to use the 401(k) and Roth IRA money for age 60+ and my taxable account until then, ages ~30-60. That gives me two separate ~30 year time spans to plan for and I can assume for a 4% withdrawal rate on each bucket. I estimate that I only need to contribute to the 401(k) for another 3-5 years and then I have a sufficient amount for age 60+, at which point, I would consider dropping down to only the amount to get the maximum match. I will contribute to the Roth IRA the maximum possible through the front door for all years.

      I am using all remaining free cash flow to pay off the mortgage ASAP. After it is gone, then I will use the remaining free cash flow to invest in a taxable account to cover ages 30-60. I estimate that the mortgage should be gone somewhere between the end of 2016 and the end of 2017 and then I should be able to plow ~$3k/month plus the net of my RSU vests into my taxable account. It should still take a few years to accumulate enough assets to be able to live off of 4% of the principal, but I’m sure that it will be here sooner than I think it will.

    • For me, contributing to the Roth IRA via the backdoor poses some strange complications and for now, I would prefer the simplicity of paying down the mortgage or investing in index funds in a taxable account. I may change my mind in another year or two, but this is the approach I’m taking for now.

  7. Leigh,

    Sounds like you have a really solid plan in place! Having excess income is a wonderful problem to have, wouldn’t you say?

    I’m a real big fan of Vanguard funds. In fact, all my retirement accounts are administered through Vanguard. You simply can’t beat the expense ratios and choice offerings.If I didn’t maintain a taxable dividend portfolio, I would probably just buy more Vanguard funds. I like your asset allocation as well. I have a mix of large cap US, international, and some bonds. I’m going to buy some REITs in the future.

    I like your idea of having two separate 30-year portfolios. I thought of doing the same thing as well, but I’m starting to wonder how much longer I can keep working. I may have to start looking at SEPP for my retirement plans…

    Take care!

    • Having excess income is definitely a wonderful problem to have! I’m starting to wish I wasn’t working and had enough assets to live off of though… Patience, I suppose.

      I love Vanguard index funds. They’re so cheap and it feels like it takes a bit of the gambling away from investing, which makes it far more attractive to me since I’m pretty risk averse. Which of Vanguard’s bond funds do you use? Why are you going to buy some REITs when you have multiple rental properties and it’s already in the Total Stock Market index fund?

      • I have one of the target retirement funds in my 401k, which buys a % of the total bond (VBMFX).

        I want to buy some REITs to gain some exposure to commercial/industrial/healthcare segments. The rental properties take care of the residential side of things ;)

  8. Looks like a great plan. The only two reasons I do not max. my 401k are
    1) I cannot afford it
    2) The investments available in our plan suck

    So I rather use ROTH and taxable account.

    • The investments sucking is definitely a good reason to use your Roth IRA and a taxable account instead since you can invest reasonably tax efficiently in those vehicles on your own. I max mine out partially because I have awesome index funds available to me.

  9. I did set up my plan and a goal for 2013 (please, go check it out onto my blog) and so far exceeding my goals. If this will progress at the same pace throughout the entire year, 2013 will be a very successful year for me. But it is too early to judge.

    I also decided avoid mutual funds completely except my 401k where I have no choice.

  10. Re: “asset allocation” — it really is the fun part. I’m going to be honest — I saw “401k… IRA” and I just drifted down the page until I hit “Asset Allocation” lol. You’ve got a really simple but clearly effective mix of US, Int’l, and fixed income. I recommend some extra REIT exposure given where the US is but, then again, I’m always yammering on about that. Good work.

    • The expense ratios on all of those things are pretty good too! Yup, you definitely love your REIT. I just don’t have the asset location for it, fortunately ;)

      Once the mortgage is paid off, I’ll be able to invest enough money that my tax-advantaged contribution room isn’t enough for fixed income, so I’ll just get to stockpile Vanguard’s Total International Stock Index Fund Admiral Shares and Total Stock Market Index Fund Admiral Shares in taxable :D :D I couldn’t imagine doing this with a more complicated asset allocation…

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