Poof goes the rollover (and my 2015 investment plan and updates to my Investment Policy Statement)

I realized in hindsight that this could have been three separate posts, but I’m going to leave it as is.

Rolling over a 401(k) is a slow process stuck in the archaic ages. At the beginning of April, I initiated the termination from my old employer’s plan. The next day, I had my Roth 401(k) money invested in my Roth IRA. Three business days later, I had in my hands a check for the tens of thousands of dollars that I had in my pre-tax 401(k). I filled out the rollover paperwork that I had acquired from the new 401(k) plan a few weeks prior and mailed off the check the next day, with the morning mail pickup. Within 10 business days of the original request, the funds were in my new 401(k) and I could breathe clearly again.

It was pretty scary seeing the ~$100k in my 401(k) disappear the evening after I started the process and the vast majority of it still not in a bank account. It definitely made me question my attachment to the Backdoor Roth IRA and make me wonder if I was making the right decision not rolling my old 401(k) into a Rollover IRA. Once the funds had arrived in the new 401(k) though, I was definitely in agreement that this was the best and simplest decision, to keep all of my 401(k) money in one spot.

My asset allocation was quite a bit out of whack during this time – basically all of my fixed income was in my 401(k) that disappeared. For reference, today, 2/3 of my fixed income is in my 401(k). Since my 401(k) is a bit over half of my investments, that wasn’t the end of the world. My allocation looked something like 23% fixed income (not bad), 57% US stocks (way too much), and 20% international stocks (way too little).

Overall though, the rollover went reasonably smoothly and so far, I’m glad I did it instead of trying to manage two 401(k)s.

My 2015 investment plan

Since there was a large chunk of money to be invested, this was a great time to re-balance and set up my 2015 investment plan!

I’m working with a target asset allocation of 28% fixed income (age in bonds + 1 percentage point for having > $100,000 in investments) and then the stocks split 50/50 to US and international.

Category EOY Value Current Missing
Total $218.4k $87.4k $131.0k
Fixed income $61.2k $18.6k $42.5k
US stocks $78.6k $52.1k $26.6k
International stocks $78.6k $16.8k $61.9k

The missing chunk represents the rollover, my mid-April through end of year pre-tax and after-tax 401(k) contributions, and expected 401(k) employer match contributions. This year is going to be reasonably easy to re-balance with contributions and not needing to exchange anything.

At the moment, my Roth IRA holds US stocks, so I just sent my Roth 401(k) to the Total Stock Market index fund there. I used to hold shares of an Extended Market index fund in my Roth IRA as well to balance out the large portion of my 401(k) that was in a S&P 500 index fund, but I now have access to a Total Stock Market index fund in my 401(k) and don’t need to worry about that anymore, so I exchanged all of the Extended Market index fund into the Total Stock Market index fund.

Since my Roth IRA holds mostly US stocks and that’s where my after-tax 401(k) contributions will go, I plan to put my after-tax 401(k) contributions into a US stock market index fund in my 401(k) until I move the money over to my Roth IRA since it’ll take several months to max it out.

That means my 2015 contributions will be allocated as follows:

Account Category $
After-tax 401(k) US stocks $Xk
Pre-tax 401(k) US stocks $26.6k – $Xk
International stocks $61.9k
Fixed income $42.5k

I calculated the percentages for each of the pre-tax 401(k) contribution categories overall for the year and then applied those to the amount that was being contributed this week (the rollover and the mid-April paycheck deductions and employer match).

That means that the only manual thing left to do for my investments this year is to move my after-tax 401(k) to my Roth IRA in the fall. I’m a little overweight in fixed income at the moment (30% of my investments) since a big stock contribution will come later in the year, but that’s perfectly fine.

I’m so happy to have finally finished this! Usually I do this work in December/January and it’s now late April…

Updates to my Investment Policy Statement

With the new job and 401(k), I decided it was time to check up on my Investment Policy Statement, which hadn’t really been updated since early 2012.

My long-term goal has always been to be able to retire at 50 with a paid-off home and enough in investments to cover estimated living expenses at a 3% withdrawal rate. I also added a medium-term goal of having the mortgage paid off by my 30th birthday and enough in investments to cover my then-current expenses at a 4% withdrawal rate. This sounds like a Big Hairy Goal, but I’m actually on track to meet it.

I changed my IPS to reflect my plan to lump sum my 401(k) contributions since it no longer affects my employer match. I also added some notes on my feelings about rollovers.

I’ve been contemplating asset allocation a lot over the last six months or so. I’ve been using the following model for the last several years:

The percentage of the investments in stocks is 100 minus (at the time of re-balancing):

  • My age
  • The multiples of $100,000 in investment assets that I have

I added an additional note of: “This formula will continue until I reach 30% in fixed income and 70% in stocks and then it will stay there until I choose to re-evaluate it.”

Why? I’ve realized that with the possibility of early retirement, I’ll need more money in stocks than I’ve previously considered. If I end up working past when a 3% WR on my investments is achieved, then I’ll re-evaluate my asset allocation formula.

“I want the US stocks to replicate the entire US stock market.

I don’t want to stake everything on the US stock market. Market weighting sounds good, so my ideal split would be 50/50 on US/International Stocks.”

My plan for now is to keep my Roth IRA 100% stocks, all of the fixed income in my 401(k), and all stocks in my taxable investment account.

There was an interesting section at the bottom of my IPS showing short-term goals, including estimated net worth for 2010 through 2014. I surpassed all of those numbers, some by a long shot! Some of my goals for the next 5 years include getting my savings rate above 80%, paying off the mortgage, reaching a $1M net worth by the end of 2018, and reaching a $1.5 M net worth by the end of 2020. It seems pretty crazy to imagine my net worth going from the mid $500k range today to $1.5M in 5.5 years, considering that it took the last 5 years to build it up to $500k, but that’s what my spreadsheet shows! The next five years are going to be some incredible wealth building years and I thank all of you readers for following along on this wonderful ride!

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4 thoughts on “Poof goes the rollover (and my 2015 investment plan and updates to my Investment Policy Statement)

  1. I’ve had to do some rollovers in the past, but I haven’t had them send the check to me just because I was worried that it was just another step that could get messed up. So whenever I’ve done rollovers it’s from the old custodian directly to the next.

    I was wondering your reasoning on the 50/50 split for US:International stock allocation. Since many of the corporations in a total stock market index fund are multinational, I feel that I get a lot of diversification via their operations in other countries. Thanks.

    • My new employer’s 401(k) plan required me to have the check sent to me and then for me to forward it on to them with some instructions. I made sure to have the check addressed to them though, not to me directly. That definitely made me debate rolling it over to them.

  2. It looks like you are dividing your allocation between 3 accounts (401k, Roth IRA and taxable). I initially did my allocation that way. It was doable but a little tricky to do 3. I reduced it to 1) 401K and 2) Taxable and Roth IRA. The Roth IRA gets money two times a year (backdoor and mega backdoor) and the taxable every paycheck. Basically there is one index fund that I keep in both my Roth IRA and in Taxable. I contribute each paycheck to the index fund in my taxable and set up an automatic exchange FROM that index fund in my Roth to all other funds in my Roth. I effectively contribute the right percentages to each fund despite some funds only being in Roth IRA and some only being in taxable. I rebalance with the Roth IRA contributions/conversions and tweak my taxable contributions around that period for balancing.

    I think this is a good bang for your buck approach as is completely automatable most of they year and not too hard to do. Extra wrinkle is the right way to pause things if there is ever a big tax loss harvesting opportunity to avoid wash sale. Possible, but trickier to do if you throw 401K into the mix, and I found it not worth it (and have a complete allocation within my 401k independently). I don’t think it is possible to maintain stable percentages long term without either a) having everything in each account (which is not my preferred though tax efficient placement logic of bonds going first in tax advantaged is arguable) or b) having overlap of a fund in each account so automated or manual periodic exchanges can maintain the percentages.

    Separately, I think your bond allocation is probably too high, but that obviously depends on your risk profile, and doesn’t make an enormous difference in any case, so the positive habit value of sticking to your plan might outweigh value in switching it.

    • Thanks for sharing how you do this! Any plan with minimal manual intervention is a good one in my opinion since I used to have a tendency to fidget with my investments a lot…

      I also am starting to think my bond allocation is too high, but I don’t want to adjust it too quickly considering that it was set up this way because I had a very low tolerance to risk – that’s why I’ve decided to stick to the plan until I get to 30% fixed income and see how I feel there. I think my risk tolerance is shifting a bit, but I want to make it through my first bear market before I adjust my allocation. I read an article recently saying that you don’t know what your true risk tolerance is until you make it through a bear market without selling anything and that seems reasonably likely to me.

      It definitely seems that it’ll get tricky to keep the allocation divided across the three accounts once I start contributing more regularly to my taxable account. Since I’m not doing that at the moment, this doesn’t seem so bad. My 401(k) thankfully has a different fund family entirely than my taxable account, so I’m not worried about any tax loss harvesting issues there.

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