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!

Re-balancing my investments: 2015 Roth IRA contribution edition

I set my 2014 investment allocations back in December 2013 and then left them alone, which went great!

As of 01/02/2015, my investments portfolio was worth ~$164,400. I decided to re-balance my investments now with this Roth IRA contribution and then I’ll re-evaluate things once I start the new job. That will likely be calculating what my new 401(k) contributions should go into and then re-balancing my overall portfolio when I make my 2016 (!) Roth IRA contribution and set my 2016 401(k) contributions.

(Note: when I wrote this post last year, I estimated that my end of year balance would be $156,000. It is $8,400 higher than that! Crazy!)

First, what are the balances in my various accounts?

  • $38,900 Roth IRA (with $5,500 new contribution)
  • $8,400 Old tax-deferred CDs
  • $10,200 Series I Savings Bonds
  • $15,300 Taxable account
  • $97,100 Now-old 401(k)
  • $169,900 Total investments

What is my asset allocation?

% Category Amount
27% Fixed income $45,873
36.5% International stocks $62,013
36.5% US stocks $62,013

My allocation has gotten itself to the following with the markets and contributions in 2014 (a tiny bit out of whack):

  • 27% Fixed income
  • 34% International stocks
  • 39% US stocks

And if I just added my 2015 Roth IRA contribution to total US stocks, my allocation would get a tiny bit more out of whack:

  • 25.8% Fixed income
  • 32.8% International stocks
  • 41.4% US stocks

At which point, US stocks are 4.9 percentage points higher than they should be, which warrants re-balancing in my 401(k) account at the same time. Last year, since I’d just re-balanced in November 2013 to make my 2013 Roth IRA contribution, I didn’t do any when I made my 2014 Roth IRA contribution and instead re-balanced with my 401(k) contributions over the course of the year.

If we follow my ordering from my post on tax-efficient investment placement, what does that ideal portfolio look like?

Steps

  1. (not necessary – all in S&P 500 index fund) My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. CDs that are already in my Roth IRA
  4. The remaining portion of my fixed income allocation to the stable value fund in my 401(k).
  5. (not necessary) As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  6. (not necessary) If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  7. (not necessary) Any other fixed income went to a tax-exempt bond fund in taxable.
  8. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  9. Next, I added any of the remaining international allocation into my 401(k).
  10. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  11. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  12. The remaining Roth IRA funds went to Total Stock Market.
  13. (not necessary) The remaining taxable funds went to Total Stock Market.

Ideal portfolio

Account Fund Current Ideal Difference
401(k) Stable value $25,300 $27,300 +$2,000
Taxable Total international stock index (admiral shares!) $15,300 $15,300 (same)
401(k) Total international stock index $40,400 $46,700 +$6,300
401(k) S&P 500 index $31,400 $23,100 -$8,300
Roth IRA Extended Market index fund $7,100 $5,800 -$1,300
Roth IRA Total Stock Market index fund (admiral shares!) $26,300 $33,100 +$6,800

Note that these numbers are all rounded, so they may be slightly off if you try to make calculations with them, but they should still illustrate my example sufficiently.

My portfolio is pretty simple right now: one taxable account, one 401(k), and one Roth IRA, with one fund in taxable, two in the Roth IRA, and three in the 401(k). My re-balancing here is really just adding new money to the Total Stock Market index fund in my Roth IRA and then adding some money to fixed income and international stocks in my 401(k).

I performed a few transactions to accomplish this:

  1. Contribute $5,500 to the money market account in my Traditional IRA.
  2. Convert the $5,500 from my Traditional IRA into the total stock market index fund in my Roth IRA once the funds settle.
  3. In my Roth IRA, exchange $1,300 from the extended market index fund into the total stock market index fund.
  4. In my 401(k), exchange $8,300 from the S&P 500 index fund to $2,000 in the stable value fund and $6,300 in the international stock index fund.

D’oh! I did all of these transactions and then realized while writing this post that I needed to set it to only use my Traditional 401(k) portion to do the exchange, so it’s trying to do the re-allocation using all sources (also my Roth 401(k) and employer matching money), which I have conveniently set to only have one fund in those “accounts”. Oops! I called the plan administrator on Monday and they couldn’t do anything to fix the transaction. So my asset allocation is on track, but my accounts are a tiny bit more complicated than I like them to be. Oh well.

Re-balancing my investments: 2013 Roth IRA contribution edition

My investments have been mostly plodding along this year. Occasionally, I have adjusted how much of my 401(k) contribution went to what (S&P 500 index, total international index, and stable value fund) and then left it alone again. For example, my September and October contributions went about 50/50 to the stable value fund and the total international index because the US stock markets had been doing so well.

But now that it is time to make my 2013 Roth IRA contribution, I am going to re-balance by exchanging some funds around. Back in May, I wrote a post on Tax-Efficient Investment Placement Over Time, which I have referenced so many times that I should really bookmark it.

First, what are the balances in my various accounts?

  • $23,600 Roth IRA (with $5,500 new contribution)
  • $8,200 Old tax-deferred CDs
  • $10,100 Series I Savings Bonds
  • $15,700 Taxable account
  • $74,500 401(k)
  • $132,000 Total investments

What is my asset allocation?

% Category Amount
26% Fixed income $34,320
37% International stocks $48,840
37% US stocks $48,840

If we follow my ordering from my post on tax-efficient investment placement, what does that ideal portfolio look like?

Steps

  1. My employer match to the company stock
  2. Series I Savings Bonds that already exist in taxable
  3. CDs that are already in my Roth IRA
  4. The remaining portion of my fixed income allocation to the stable value fund in my 401(k).
  5. (not necessary) As much of my remaining fixed income allocation to Total Bond Market in my Roth IRA as possible
  6. (not necessary) If my tax-advantaged balances weren’t enough for all the fixed income necessary, added $10,000 in Series I Savings Bonds (possibly early for future-proofing)
  7. (not necessary) Any other fixed income went to a tax-exempt bond fund in taxable.
  8. As much of my international allocation in taxable as it allowed (in the first few years, my entire taxable balance; in later years, the entire international allocation)
  9. Next, I added any of the remaining international allocation into my 401(k).
  10. The remaining 401(k) funds went to the S&P 500 index fund. Call this amount X.
  11. (X/0.8)-X is how much I put into the Extended Market index fund in my Roth IRA (minimum of $3,000).
  12. The remaining Roth IRA funds went to Total Stock Market.
  13. (not necessary) The remaining taxable funds went to Total Stock Market.

Ideal portfolio

Account Fund Current Ideal Difference
401(k) Stable value $14,300 $16,000 +$1,700
Taxable Total international stock index (admiral shares!) $15,700 $15,700 (same)
401(k) Total international stock index $22,100 $33,200 +$11,100
401(k) S&P 500 index + employer stock $38,000 $25,300 -$12,700
Roth IRA Extended Market index fund $8,400 $6,300 -$2,100
Roth IRA Total international stock index $9,700 $0 -$9,700
Roth IRA Total Stock Market index fund (admiral shares -soon!) $5,500 $17,300 +$11,800

Note that these numbers are all rounded, so they may be slightly off if you try to make calculations with them, but they should still illustrate my example sufficiently.

The main thing here is that I’m moving my Roth IRA from being mostly Total International Stock Market index (TISM) with a bit of Extended Market index to being mostly Total Stock Market Index (TSM) with a smaller amount of Extended Market. I’m also going to exchange all of my company stock into the S&P 500 index fund to diversify better. (So many people don’t know you can do this!)

I’ll perform a few transactions to accomplish this:

  1. Contribute $5,500 to the money market account in my Traditional IRA. – done!
  2. Convert the $5,500 from my Traditional IRA into the total stock market index fund in my Roth IRA once the funds settle. – done!
  3. In my 401(k), exchange all of the company stock money to the S&P 500 index fund.
  4. Next in my 401(k), exchange ($11,100 – company stock money = $12,700) from the S&P 500 index fund to $1,700 in the stable value fund and $11,000 in the total international stock index fund.
  5. In my Roth IRA, exchange $2,000 from the extended market index fund and the entirety of the total international stock index fund into the total stock market index fund.

And that’ll be the last re-balance I make by exchanging until early 2015 when I make my Roth IRA contribution for 2015 – all other rebalancing will be done by adjusting which funds in my 401(k) get how much of my contribution each month.

Happy Friday, all!

Re-balancing with new funds, October edition

I’m trying to get into the habit of adjusting where my 401(k) money goes each month since my 401(k) company allows me to do this easily online. My options are:

  1. Vanguard Retirement Savings Trust (stable value)
  2. Vanguard 500 Index Fund Investor Shares
  3. Vanguard Total International Stock Index Fund Investor Shares

My employer match goes into something that I just count in my allocation to US Stocks.

My first priority is the ratio between fixed income investments and stocks, with the ratio between US and international stocks being second.

So far this year:

  • In July, since I had made such a huge addition to stocks by buying the Total International Admiral shares fund in my taxable account, I ended up putting 100% of my 401(k) contribution to the stable value fund. This put the split at 24%/31.5%/44.5% (Stable value/US Stocks/International stocks).
  • In August, there was a bit of a stock market gain, so I ended up putting 49% of my 401(k) contribution to the stable value fund and the rest to the S&P 500 fund. The split was now 24%/32.2%/43.8%, so a slight improvement over last month.
  • In September, I saw a lot of stock dividends post to my investment accounts, which threw off the distribution a bit. I re-did the calculation and determined that I should put 47% of my 401(k) contribution to the stable value fund and the rest to the S&P 500 fund, so I just left the contribution split from August since it was so close. The split was now 24%/32.7%/43.3%.
  • In October, my stocks went down a bit. I re-did the calculation again and it suggested I put only 28% of my 401(k) contribution into the stable value fund this month and the remaining 72% into the S&P 500 fund. I updated it this time around since that was quite a difference from August’s calculation. The split was now 24.3%/33.2%/42.5% (it looks like I updated my spreadsheet since I updated my 401(k) contribution allocation with Vanguard…), so we’re definitely trending towards the target of 24%/38%/38%.

I understand that this isn’t an exact science, but I generally try to do the calculation in the last few days of the month so that it’s as close to my contribution posting as possible.

You might also wonder why I’m adjusting with new money each month instead of flat out exchanging some shares of Total International for S&P 500 in my 401(k) since it’s so far off target. Well, my investment policy statement says to only re-balance with new money, ever. I implemented that policy so that I wouldn’t be tempted to try new strategies or different things by rearranging my money into different funds and it’s working quite well so far. Other than moving my employer match funds into the S&P 500 index fund, I haven’t exchanged any funds since December of 2011 and I think it’s much better this way. I need to protect myself from my fidgeting mind!

Asset Allocation: Re-balancing with new funds

Re-balancing is a confusing concept that I’m still becoming accustomed to. The idea of re-balancing one’s entire portfolio at some set time period seems too complicated to me when I’m adding more money each month to my portfolio and then, with bonuses, sometimes adding to it at random times as well.

So I’m trying to re-balance with the new funds I add each month. To do this, I do some math in my spreadsheet and then go into my 401(k) website and update the %s for the new money. I did this last month and again this month and so far, I feel better about this way of doing it.

For example, last month, since I had made such a huge addition to stocks by buying the total international Admiral shares fund in my taxable account, I ended up putting 100% of my 401(k) contribution to the stable value fund.

My first priority is the ratio between fixed income investments and stocks, with the ratio between US and international stocks being second.

Here’s how I do the math:

  1. I retrieve the $ value of each fund in each account and put it into my spreadsheet.
  2. I then pretend as if I’ve already added the money, by adding the employer match $ amount to that fund and my contribution to one of the funds randomly. I usually start by guessing the one that is going to be undervalued (fund G for guess).
  3. The spreadsheet tells me the current value in each category (Fixed Income, Stocks: US, Stocks: International), the current % for each, the target % for each, and the target $ amount for each, as well as how much the current $ value is off from the target $ value.
  4. I add exactly the $ amount that the fixed income category is off by to the stable value fund and then give the rest of my contribution to the S&P 500 index fund since that is the next category (US stocks) that is off.

So now my asset allocation is reset to 24% fixed income / 76% stocks. The US/international stock balance is still off-kilter somewhat, but I’m okay with that and accept that it will slowly grow back to 50/50.