Previously I discussed our asset allocation for retirement at the high level. This post is where the rubber meets the road. I’ll detail all the equities we own to achieve our goals. Like most things in life, planning asset allocation on paper is one thing, but implementing it is another story. The problem we have, like many families is that most of our retirement savings is in company sponsored retirement plans. In our case, most happens to be with my spouse. I’ll discuss some of the issues we’ve had, reasons why I picked specific funds, and how we were able to work around limitations. If you want to make a comment, or suggest improvements to the funds selected, you are more than welcome to do this.
The allocation is from September 30th, 2010. Some may notice the totals do not equal 100%. Equities under 0.5% are not mentioned because they are statistically insignificant, and in most cases are cash within the account.
|403b #1||Fidelity||26%||Cannot add additional funds|
|403b #2||MetLife||43%||Fund selection is limited|
|Roth IRA #1||Fidelity||8%|
|Roth IRA #2||Fidelity||2%|
|Rollover IRA #1||Fidelity||5%||Cannot add additional funds|
|Rollover IRA #2||Vanguard||16%||Cannot add additional funds|
We’ve decided not to convert our two rollover IRA accounts at this time. We might convert them over in another year where our tax burden is lower. Otherwise, from my estimates it’s not worth paying the taxes now. I’m also concerned about government deficits, and if the government would they somehow start taxing Roth IRAs.
We only recently created Roth IRA accounts, something I wish we did 10 years ago. With my tax efficient investing roadmap we now plan on maxing out our Roth IRAs every year.
403b #1 (Fidelity)
|Bonds||Government||Fidelity Intermediate Government Income||7.4%|
|Stocks||International||Fidelity Spartan International Index||6.3%|
|Stocks||Small Cap||Fidelity Small Cap Value||5.8%|
|Stocks||Emerging Markets||Fidelity China Region||1.4%|
|Stocks||Emerging Markets||Fidelity Latin America||1.2%|
My wife’s has two 403b plans. Both are through her current employer. The first one is through Fidelity (see Fidelity review), which is a great plan administrator. Their funds have low administration fees, and they offer a wide selection of funds. At some point during my wife’s employment they decided to change plan administrators, so no additional money can be added to this account. I contacted my wife’s HR department, and they explained to me we can’t perform an IRA rollover because she is an active employee.
403b #2 (Metlife)
|Stocks||Large Cap||Vanguard 500 Index Fund||16.0%|
|Stocks||Large Cap||Dodge & Cox Stock Fund||0.5%|
|Cash||Fixed Income||None (earns 3.5% until March 31st 2011)||7.9%|
|Stocks||International||Artio International Equity||5.7%|
|Bonds||Government||Vanguard Total Bond Market Index||10.0%|
|Stocks||Small Cap||Royce Opportunity||3.2%|
The MetLife account is where all new money from my wife’s salary goes, and unfortunately, it is the weakest retirement account in our portfolio. It’s something out of a spaghetti western:
- The Good – Their core funds are Vanguard index funds. S&P 500 (VINIX) and Total Bond Market (VBTIX) They also have a fixed rate fund that returns 3.5% until March of 2011.
- The Bad – Most of the the funds they offer are the brain-dead Vanguard target retirement funds.
- The Ugly – Actively managed integrated funds with no transparency.
The actively managed integrated funds merge two funds into one fund option available within the 403b. This means no stock symbol (unless you want to figure out how they are merged) and lacks transparency with fees. In addition, the funds they merged together are average at best. For example they offer a REIT fund that merges Cohen & Steers with Morgan Stanley’s Global REIT fund. Same applies to their international fund and growth fund. So for these parts of our asset allocation, we look towards our other accounts. We will then fill up this account last to meet our allocation with their poor choice in funds. The one positive thing I can say about MetLife is they offer is a decent (3.5% APY) fixed rate fund that will stay that way until March 31st, 2011. I’ve allocated some our money into this fund since there is no interest rate risk, or the other issues associated with bonds vs. bond funds. What you see is what you get. Even though it’s below my 4% rule to investing, I’m investing in it since it’s in a tax deferred account and would be approximately equal to 4%+ return in a taxable account.
Roth IRA #1 (Fidelity)
|Bonds||Inflation||iShares Barclays TIPS ETF||2.2%|
|Bonds||International||Oppenheimer Int Bond Class A||2.4%|
|Commodities||Gold||iShares COMEX Gold ETF||3.7%|
I have moved most of our portfolio to Fidelity. I did this because of a number of reasons.
- Originally many of these accounts were with E*TRADE. At the time I was concerned about their viability (2007-2008)
- Fidelity has low commission fees. In some cases as low as $7.95 per trade. Fidelity also offers a decent amount of commission free ETFs.
- Has a large selection of investment options available. CDs, bonds, mutual funds, and stocks, etc.
- Wanted one location in which I can better monitor our portfolio than having to go to multiple web sites.
- Offers a Fidelity Visa card with cash back that gets directly deposited into one of our investment accounts.
I picked the Oppenheimer Int Bond Class A for my international bond allocation. I have yet to find a decent ETF or mutual fund that allocates into international bonds. From my research this was so far the best I could find, and I dislike the 4.75% upfront fee and the annual 1.0% fee that comes with it.
Roth IRA #2 (Fidelity)
|Stocks||Value||Johnson & Johnson||1.1%|
As part of our allocation for value stocks, I decided to pick specific dividend aristocrat stocks. It will be a small portion of asset allocation, but the goal of these stocks is to offer a considerable amount of annual income. Since it will live within our Roth IRA accounts, it will grow tax free.
We currently have some dividend stocks in our taxable accounts, and we will slowly start transferring them to our retirement accounts. This is because the Bush tax cuts will end this year and will more than likely end the current 15% dividend tax rate.
Dividend aristocrats are constantly raising their dividend and haven’t missed (or lowered) a dividend payment in over 25 years. As the dividends increase, so does your annual income. By using this strategy it’s reported that Warren Buffett now earns over 25% APY with the Coca-Cola Company (KO) stock he bought in the 80’s and 90’s.
Rollover IRA #1 (Fidelity)
|Bonds||Corporate||iSharesBarclays 1-3 Year Bond||0.8%|
|Stocks||Emerging Markets||Vanguard Emerging Markets ETF||1.0%|
|Real Estate||Vanguard REIT Viper ETF||0.7%|
|Stocks||Small Cap||Vanguard Small Cap Index||2.3%|
Rollover IRA #2 (Vanguard)
|Commodities||Mining||Vanguard Precious Metals and Mining||3.9%|
|Stocks||International||Vanguard Pacific Stock Index||1.1%|
|Stocks||Emerging Markets||Vanguard Emerging Mkts Stock||4.3%|
|Stocks||International||Vanguard Total Intl Stock Index||1.4%|
|Stocks||Small Cap||Vanguard Small Cap Index||1.5%|
|Bonds||Corporate||Vanguard Short-Term Investment-Grade||1.1%|
|Real Estate||Vanguard REIT Index||2.3%|
I wanted to keep some money with Vanguard (see Vanguard review. They have some of the lowest cost and best index based funds around. If I had them within a Fidelity account, I would incur a fee with any transaction (ie buy or sell). In the future we may open additional Roth IRA accounts with Vanguard if I need to meet our asset allocation requirements with Vanguard funds.
I currently do not have any retirement plans within the company I own. Though in the future I may setup a SEP IRA account through Fidelity. At the moment I’ve been maxing out our Roth IRA accounts every year as a substitute. All other free cash goes into either our children’s 529 accounts or taxable investments.