Fairly new here and looking for some advice on creating a 3-fund portfolio. I have been investing in my 457 plan at work, using Roth funds 100% into VFIAX. My employer matches 10% of what I contribute every paycheck. I am looking into how to invest another ~50k of cash into retirement funds over the next two to three years.
I realize the expense ratios are well above what they would be if invested with Vanguard. However, wouldn’t the 10% employer match make up for that? Are there any other factors that come into play here? I also like that the 457 plan allows for early withdrawal after retirement. Any guidance would be much appreciated. I plan on beginning to start the new investments the first week of May. Thanks in advance.
- total cash amount we are receiving will be ~$150k, but $100k of it will be allocated to home repairs, emergency fund, 529 plans, etc, leaving $50k to put towards retirement.
- there is probably a lot of other info I missed but will add if needed.
Last edited by tbini87 on Tue Apr 16, 2019 12:10 pm, edited 2 times in total.
Bond funds should belong in tax deferred accounts (traditional 401k, 403b, 457 plans etc.), not in Roth accounts. Agreed that the bond funds in your plan are decent, you want to get the match, and I suggest as well get the tax break in the contribution now.
I only contribute to Roth in my 457, and the 10% the employer matches goes into a traditional. I’m not sure that I can contribute to both transitional and Roth, but if I can then it sounds like I should do equities in the Roth and the bond fund in traditional?
The idea is that your Roth accounts have tax free growth, so you should place only equities there since they have the highest expected return. Placing bond funds in a tax deferred plan constrains that growth, the eventual tax you would have to pay to the tax man will be minimized.
Thanks for the link. From what I am gathering it appears that bonds should be in tax-advantaged, as opposed to in a taxable account. I don’t plan on any taxable accounts any time soon because I will not be investing past the maximums for my 457 plan plus the $12k of space available in Roth IRAs if needed. I didn’t see any specific mention of placing bonds in traditional and stocks in Roth, but I will keep looking.
It's simply where do you want the assets with the highest expected return to reside? Consider $10k in bonds that will be invested this year and allowed to grow. After 30 years, taxes will be due on whatever portion of those bonds are in tax-deferred. The amount in tax-free Roth acocunts will grow with no taxes due.
If that $10k in bonds grows over 30 years at 1.0% real return, it will increase by $3,478. An equal amount of US Stocks returning 5% real would grow by $33,219.
If the $10k in the tax-deferred account is all bonds, then the tax due will be on $13,478. If the $10k in tax-deferred is 50/50 bonds and stocks then the tax due will be on $28,348. If the $10k in tax-defrred is all US stocks then taxes will be due on $43,219.
We may be getting a little off topic regarding Roth and traditional I guess. Maybe that is an important part of the equation. However, initially I was assuming all my accounts would be Roth, and with that being said... would it make more sense to keep all the investments in the 457 to get the 10% employer match despite the fund options not being as good, or would it make sense to put the international and bond funds into a Roth IRA at vanguard to get better funds with lower expense ratios but miss out on the 10% employer match. That was my main question. Ultimately 25 years from now I hope to be ready to retire with a solid pension and would be using the 457 and IRA funds to supplement the pension in retirement. And my AA would prob be more like 80/20 in the future, right now I’m 100% VFIAX because that is by far the best fund available in my 457 plan.
If you account for the taxes paid on the portion contributed to the Roth account, you'll find this is not a reason to prefer Roth, all else equal. In other words, you can't say put $X in a Roth vs. $X in tax-deferred, because your actual Roth contribution will be reduced by taxes paid up front.
Question from an observer: why do you want a 3-fund portfolio in your 457? Is the idea to treat the pile of money separately because it's a separate account you can tap before you turn 59.5?
I could have been a little clearer in my analysis, which assumes $10k in tax-deferred and $10k in Roth. It isn't meant to address "Should I save my next $10k in Roth or traditional?"
It is meant to address "Should I have my $10k in bonds in Roth or traditional, when I have both type of accounts?"
I don’t need to have all 3 funds in the 457, I don’t care how I get the total 3 fund portfolio per se. I was actually planning on only holding VFIAX in 457 and the other two funds in Roth IRAs. I’m actually asking what you are asking... is 457 the best place to hold all 3 funds. My argument for holding all 3 funds in 457 is that I’m getting a 10% employer match out the gate AND I can access the funds earlier than 59.5 which could be important if I choose to retire in the 52-55 age range.
Do you feel like there are advantages to not hold all 3 funds in the 457?
That also is an interesting question in that it does not matter after tax-adjusting the asset allocation, since the dollar in the Roth is (usually) worth more than the dollar in tax-deferred regardless of what it's invested in. So if you plan to pay taxes on tax-deferred distributions, you would not say, "Should I put $10,000 in bonds in Roth or Traditional," but rather, "Should I put $8,000 in bonds in Roth with the $2,000 invested in something else in the Roth account, or $10,000 in bonds in Traditional?" Exactly how you frame the question depends on what you're trying to accomplish. If you don't tax-adjust, by comparing different scenarios, you're really comparing different after-tax asset allocations.
Maybe I need to also clarify that I do not have any other investment accounts besides the 457. We will have approximately $100k to put into VMMXX which will be used over the next 3 years and any leftover will be left there as an emergency fund. But maxing out my 457 every year will be the max I will be investing for the foreseeable future.
Some additional information and some clarification will probably be helpful. I have asked a few questions below. Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.
Fairly new here and looking for some advice on creating a 3-fund portfolio. I have been investing in my 457 plan at work, using Roth funds 100% into VFIAX. My employer matches 10% of what I contribute every paycheck. I am looking into how to invest another ~50k of cash into retirement funds over the next two years.
The two Vantagepoint index funds have low expense ratios, they are certainly low enough to use the funds even though not as low as comparable Vanguard index funds.
Is your employer a government body or government agency or public school district, or is your employer a charity or non-profit?
There is a difference between a governmental 457 and a non-governmental 457; your assets in a governmental plan are protected from your employer's creditors, a non-governmental plan does not protect your assets from your employer's creditors. Wiki article, "457(b)".
Does your employer also offer a 401k plan or 403b plan? If so you could contribute the annual limit to the 457, and also contribute the annual limit to the other plan.
"You have a separate deferral limit if you’re also eligible to participate in a 457(b) plan. See 457(b) Plan Contribution Limits. It is not combined with your deferrals made to a 403(b) or other plans." IRS, "How Much Salary Can You Defer if You’re Eligible for More than One Retirement Plan?".
It depends on the provisions of your employer's plan. When an employer offers a Roth 457(b) provision, an employee can designate all or a portion of their 457(b) as an after-tax Roth contribution, but total contributions cannot exceed the year's contribution limit. Wiki article, "457(b)".
I don't think it's likely that you are allowed to say which fund goes in which sub-account. It's likely that each fund you pick is held in both sub-accounts, at least that is what we see in other plans.
How much is currently in the traditional sub-account, and how much is in the Roth sub-account?
Check the plan provisions, or call HR, or do both. Do you get to designate different funds for the different sub-accounts?
If so then Roth contributions are likely the better choice. Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.
Can you tell us the ticker symbol for Vantagepoint Core Bond Index Fund R5 ER 0.19% as offered in the 457 plan?
3) Vantagepoint Core Bond Index Fund R5 (Bloomberg Barclays US Agg bond index, a total bond market index fund) (?????) ER 0.19%.
All three index funds have low expense ratios, the expense ratios of the two Vantagepoint index funds are certainly low enough to use the funds even though not as low as comparable Vanguard index funds.
When under age 50 the maximum annual contribution is $19k, times 3 = $57k. Or double that if another plan is offered by your employer.
Is the $100k a lump sum you have available now, or what you believe you can save from earnings over the next few years?
How much do you want for an emergency fund? How much would be necessary to cover 3-6 months of basic living expenses?
What is your tax bracket, both federal and state? What is your tax filing status? Are you eligible to contribute to a Roth IRA?
I haven't given it much thought yet as I'm not yet eligible for my employer's 457 (private school). But if the plan is to retire pre-59.5, then I think there's some value in figuring out a way to have some number of years' expenses in there... and I'd probably lean a bit heavier into bonds in 457, depending on taxable account situation when approaching retirement. But that isn't a very thought out position yet.
I tried to answer most of that in my edit of the OP. I could not find the ticker anywhere for the bond fund, is there a way to share a screenshot? I do not have access to any other retirement accounts via my employer. I believe the matching contribution from employer goes into same funds that I choose for my contribution, but the employer match goes into a traditional account instead of my Roth account.
We will already have an emergency fund established with 3 months expenses (15k), and anything left over will just be additional buffer in VMMXX. Ultimately, your answer saying that the expense ratios are low enough on the available funds to use instead of the Vanguard funds is what I was looking for. With the 10% match that seemed to make the most sense to me. If sometime down the road I am ready to max our Roth IRAs as well I will just use VFIAX in 457 plan and do VTIAX and VBTLX in the IRAs.
It's good to see that this is governmental 457 plan. This removes any doubt about the desirability of making maximum contributions to the 457 plan.
Since you are eligible for a pension in addition to Social Security, Roth contributions to your 457 plan are probably better.
I don't know how to do a screen shot. On the fact sheet for "Vantagepoint Core Bond Index Fund R5", how has the fund's performance compared to the index? The difference should be approximately the amount of the expense ratio.
The expense ratios of the two Vantagepoint index funds are certainly low enough to use the funds even though not as low as comparable Vanguard index funds.
The core bond index tracks the Bloomberg Barclays index very closely, 2.95% compared to 2.94% for the last quarter, and 3.52% compared to 3.77% for the past 10 years, which seems similar once the Expense ratio is factored in.
Based on that I will create the 3 fund portfolio in the Roth 457 to get the employer match, and maybe down the road will be able to even more investing via Roths with Vanguard directly. Thanks for the help!