Personal Investments • 11 years from retirement, Traditional vs. Roth, second home, tax efficiency, and more!

Hi! This is my first post on the forum, and it's errr... a little daunting! I've tried to do my homework and provide lots of information, but hope I haven't overdone it, or expect too much with the questions I'm asking. You guys can let me know.

We're about 11 years away from our desired (early) retirement date, and I'm hoping to get some feedback on where we should direct future contributions (Traditional vs. Roth), possibly purchasing a second home, and suggestions for our portfolio, asset allocation and location from a tax efficiency point of view. Thanks in advance!

Emergency funds

• 6+ months of expenses in HYSA.

Debt

• Primary residence mortgage: $165,000, 2.250%, pay off 2035
• Rental property mortgage: $63,000, 3.375%, pay off 2031
• Student loans: $45,000, 2.750%, pay off 2027 (mostly through forgiveness as healthcare worker)

Tax Filing Status

• Married Filing Jointly (MFJ)
• 1 dependent (7 years old)

Tax Rate

• 24% Federal
• 3% State (PA)

State of Residence

• PA

Age

• Him: 48
• Her: 42
• Dependent: 7

Desired Asset allocation

• 80% stocks / 20% bonds
• Desired International allocation: 25% of stocks

Total portfolio

• ~$1.2M

Current retirement assets

His & Her Taxable Brokerage Account at Vanguard

• $11K
• 0.7% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.040%)
• 0.2% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.120%)

Notes:

• We just opened this account a couple of months or so ago.

His 401k at Vanguard (79% Traditional/21% Roth)

• $702K
• 29.8% Vanguard Institutional Index Fund Institutional Shares (VINIX) (0.035%)
• 4.8% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX) (0.040%)
• 11.9% Vanguard Developed Markets Index Fund Institutional Shares (VTMNX) (0.060%)
• 13.1% Vanguard Total Bond Market Index Fund Institutional Shares (VBTIX) (0.035%)
• 6.0% company match

Notes:

• No total stock market fund available, hence approximating w/ VINIX and VSCIX.

His Roth IRA at Vanguard

• $31K
• 2.1% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.040%)
• 0.5% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.120%)

His HSA at Wex

• $60K
• 3.2% Vanguard 500 Index Fund Admiral Shares (VFIAX) (0.040%)
• 0.8% Vanguard Small-Cap Index Fund Institutional Shares (VSCIX) (0.040%)
• 1.0% Vanguard Total International Stock Index Fund Institutional Shares (VTSNX) (0.090%)

Notes:

• No total stock market fund available, hence approximating w/ VINIX and VSCIX.
• We don't withdraw from our HSA. We save receipts, and use this as an investment for retirement.

Her 457b at Empower (47% Traditional/53% Roth)

• $356K
• 16.7% U.S. Large Company Stock Index Fund (n/a) (0.010%)
• 5.8% Global Non-U.S. Stock Index Fund (n/a) (0.035%)
• 6.3% U.S. Bond Index Fund (n/a) (0.013%)
• 0% company match

Her 401a at Empower (Traditional/pre-tax)

• $5K
• 0.4% U.S. Bond Index Fund (n/a) (0.013%)
• 2.25% company match

Her Roth IRA at Vanguard

• $31K
• 2.1% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.040%)
• 0.5% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.120%)

Notes:

• The percentage total of all funds listed above is 100% (slightly off due to a small rounding error).

529 for dependent

• $41K

Notes:

• We plan to fund ~50% of 4 years of college through the 529 for our one dependent.
• Remainder will come (hopefully) from grants/scholarships, and dependent's own earnings, or student loans as a last resort.

Current overall allocation based on tax status

• Tax deferred: 61%
• Tax free (Roth + HSA): 38%
• Taxable: 1%

New annual contributions

• $23.5K his 401k (+$9.3K employer matching contributions) - 100% Roth (employer match goes to Traditional)
• $7.3K his HSA (+$1.2K employer matching contributions)
• $7.0K his Backdoor Roth IRA
• $23.5K her 457b - 50% Traditional, 50% Roth
• $3.5K (+$2.4K employer matching contribution)
• $5.4K her pension
• $7.0K her Backdoor Roth IRA
• $12.7K taxable
• $5.1K 529 for dependent

Notes:

• Once DWs student loans and the mortgage on our rental property are paid off, those payments will become contributions to our taxable brokerage account. Primary residence mortgage will be paid off just before we hope to retire.
• We plan to do "catch up" contributions to 401k, Roth IRA, HSA, etc. when age eligible.
• Our 401k and 457 both allow contributions to be applied to Traditional and Roth in a ratio of our choosing, but contributions are just split in the ratio we specify. Neither plan allows for different funds in Traditional vs. Roth, and therefore we can't direct contributions optimally from a tax efficiency point of view, which is unfortunate.
• No MBR options available.

His pension

• From an old job out of school that I long since left.
• Estimated benefit of ~$230/month at age 67.
• Includes COLA.
• 50% survivor benefit.

Her pension

• From new government job started 1 year ago. Assuming DW stays there until retirement age of 53.
• Estimated benefit of ~$560/month at desired retirement age of 53 (would increase if DW works longer or we defer claiming).
• No COLA.
• We're unsure if this includes a survivor benefit (and it's proving difficult to find out).

Property assets and rental income

• Primary residence: ~$550K (70% equity)
• Rental property: ~$300K (79% equity) produces $2.2K/month rental income

Desired retirement date/age

• January 2036
• Him: 59.5
• Her: 53
• Dependent: 18 (off to college just as we retire - not sure that's ideal!)

Social Security monthly benefit

• His (age 62/67/70): $2.5K/$3.7K/$4.7K
• Hers (age 62/67/70): $2.3K/$3.3K/$4.1K

Notes:

• Estimates are from SSA website. If we retire early, estimates may be lower, especially for DW who is 7 years younger than me and had gaps in employment, so less earning history.
• Current thought is that we will try to defer taking SS until age 70, but open to alternatives if it makes financial sense.

Estimated retirement expenses (today's dollars)

• ~10k/month for "normal" expenses (these would go up if we purchase a second home - see question below).
• Doesn't include one-off items like a new roof, large travel expense, etc.

Questions

1. Traditional vs. Roth
   We're in the 24% marginal tax bracket with a decent amount of headroom. My 401k contributions are currently 100% Roth. DW's 457b contributions are 50% Traditional, 50% Roth. See above for current invested funds Traditional/Roth ratio.
   
   I definitely favored the "better the devil you know" philosophy of Roth, but now feel like that's perhaps not the best financial decision for us after all. If we retire early and defer SS, we could withdraw from my pre-tax 401k and do Roth conversions when we're hopefully in a lower tax bracket. Taxes due could be funded from our Taxable Brokerage account. Speaking of... if I switch from Roth to Traditional, then I'd contribute the difference in take home pay to our brokerage account to grow that. This would "burn down" the Traditional balance while in a lower tax bracket and minimize future RMDs. So what's the best strategy: fund my 401k as Traditional, Roth, or some combination? Same question for DWs 457b?
   
   Since we're max'ing out contributions to all tax-advantaged accounts (401k, 457b, HSA, Backdoor Roth, etc.), is it better to fund a Roth 401k account rather than Traditional, and putting the difference into a brokerage account with after-tax dollars, which would be subject to LTCG? The Roth sounds more tax efficient, but I keep reading that having a taxable account is great because it adds "flexibility".
   
   In case it helps, based on some projections I've made, here's roughly how our portfolio might look at our desired retirement date if I continue to invest 100% Roth vs. 100% Traditional. Figures are in today's dollars. In both cases, I've lumped the HSA in with the Roth, as it's essentially tax free the way we plan to use it.
   
   100% Roth 401k scenario:
   • $2.9M
   • Tax deferred: 46%
   • Tax free (Roth + HSA): 47%
   • Taxable: 7%
   100% Traditional 401k scenario:
   • $2.9M
   • Tax deferred: 57%
   • Tax free (Roth + HSA): 34%
   • Taxable: 9%
2. Withdrawal order
   I'm assuming we'd withdraw from my 401k before DWs 457b in early retirement given that she's 7 years younger than me, and won't turn 59.5 until a few years into retirement. Does this make sense, i.e., mostly tapping my pre-tax 401k first, with some of the brokerage account, and letting the Roth 401k, Roth IRA and HSA sit for as long as possible?
3. Second home
   We'd love to purchase a modest second home ($400K say, in today's dollars) somewhere warm down south in our early retirement years, if we can afford it. We'd spend about half the year there. This would obviously significantly change how much money we'd need to withdraw early in retirement. We could purchase the house outright, but think we'd get hammered on taxes that year if withdrawn from my pre-tax 401k. I don't like the idea of having a mortgage in retirement, but can see how it might make sense to pay the house off over a few years (5 or less say) to avoid moving into a higher tax bracket. Our ongoing expenses would obviously go up a lot too (double property taxes, insurance, utilities, maintenance, etc.).
   
   How might purchasing a second home impact the choice of our future Traditional vs. Roth contributions?
4. Asset allocation
   Our asset allocation is currently 80/20. Given we're (potentially) 11 years away from our desired retirement date, does this sound reasonable, or too aggressive? I think we're reasonably aggressive (but not reckless) with our investing, but that mindset will likely shift a little as we approach retirement. Would some kind of glide path make sense? If so, what would you suggest?
5. Asset location and tax efficiency
   As mentioned above, our 401k and 457b plans don't allow for directing contributions to certain funds in Traditional vs. Roth - contributions are just prorated based on the percentage we specify. This makes efficient tax placement harder. We could decide, for example, to make my future 401k contributions 100% Traditional, and have a higher allocation of bonds in that account, and DWs future 457b contributions 100% Roth, thinking we'd withdraw on that later. Any thoughts on how we currently have things located, or suggestions for improvement?
6. Professional advice
   With all these questions, as we reach 10 years from our desired retirement date next year, I'm considering paying the money to hire a CFP to help us make a plan. This would be a one-off thing, certainly not am AUM agreement or anything like that. I'd then consider reaching out to a CFP again 2-3 years before retirement for a re-evaluation. Do you think this is necessary, or beneficial, or money wasted?

Thank you!
Sorry for the information overload and for asking so many questions! Thanks in advance for any help, guidance, or shared experiences.

Statistics: Posted by bogle-header — Sat Jan 25, 2025 5:21 pm — Replies 0 — Views 73

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