An anonymous listener, whom we call “Mary,” is curious about the auto-rebalancing feature offered by M1 Finance. Is it too good to be true?
J isn’t happy with the target date retirement fund she chose for her 401k. She has limited options and is wondering: should she move funds around? If so, is now a bad time, considering the market volatility?
Another anonymous listener, whom we call “Olivia,” is wondering how to choose the right mix of investments for a retirement portfolio. She also wants tips on rebalancing a portfolio. And when should she execute a Roth conversion?
Tami has $160,000 in a G fund in her TSP. Should she move this money to a Lifestyle fund to increase her earnings?
Andy and his wife contribute the maximum to their children’s 529 accounts, and they have three investment options to choose from. Should they continue with an aggressively managed portfolio, or choose something less risky?
My friend and former financial planner Joe Saul-Sehy and I answer these questions on today’s episode. Enjoy!
Anonymous “Mary” asks (at 1:36 minutes):
I’m curious about investing with M1 Finance. I researched this brokerage house and they have good features like auto rebalancing by buying fractional shares and things like that. I’m thinking of opening a Roth IRA with them. This should be easy to maintain since they have features of turning on auto rebalance. However, are there caveats with this approach? It sounds too good to be true.
Andy asks (at 9:33 minutes):
My wife and I have three children and we actively contribute to their college 529 accounts. We contribute at least the maximum amount that is tax-deductible in our state every year, or $4,000 per child per year. Our children will turn five, four, and two in one month.
There are three options when investing for our kids:
- A managed portfolio that adjusts risk as the child gets older based on their expected college enrollment date, similar to a target retirement date fund. A subset of the managed portfolios is an aggressively-managed portfolio with a higher amount of the investment in equities
- Static investment portfolios which don’t adjust as the child ages, and allows us to select what percentage of the investment would be aggressive vs. conservative – a mix of equity, principal-protected, and/or fixed-income funds
- A guaranteed investment return, which protects the capital and guarantees a one to three percent yearly return
All of our children have aggressively-managed portfolios, and they’re heavily invested in equities given their young ages. As you can imagine, their accounts have taken a hit with the market and like many Americans, I don’t know what the future holds.
My wife and I are going to make the maximum contribution to each child’s fund in the next few weeks. Should we continue with the aggressively-managed portfolio, or choose a less risky option? Their accounts are through Teachers Insurance and Annuity Association of America, College Retirement Equities Fund.
J asks (at 22:12 minutes):
I have a question about my investment options inside my 401k at work. Should I switch to index funds and is this pandemic a bad time for that change?
I’m in my 30s and for the past four years, my 401k contributions have gone to a 2050 Target Date Fund with John Hancock. The expense ratio is 0.79 percent, one of the cheapest options inside of my employer-sponsored plan.
There are two downsides I found: this fund is actively managed, not indexed, so it could underperform the market. The other downside is that it’s weirdly risk-averse. A Morningstar report says, “The overt focus on downside protection results in a conservative equity glide path that isn’t suitable for most retirement savers.” …Yikes??
I don’t plan to use this bucket of money until my 60s, even if I retire early, so I would rather be more growth-oriented. In fact, I’m aiming for an 85/15 asset allocation overall.
My husband and I are debt-free besides our mortgage, we have a 5-month emergency fund, a separate account for home repairs, we max out our 401ks and Roth IRAs every year. My employer doesn’t offer a match, but my 401k is worth using because of its tax advantages.
In my 401k, should I switch to a simple two or three-fund portfolio that I manage myself? Or is the Target Date fund good enough? My index fund choices are limited, but there are a few options like an S&P 500 index fund with a 0.64 percent expense ratio. How should I think about this decision?
If I make a change, is now a bad time? The market is so volatile — what should I consider? If it is time to make a move, should I move the entire $70,000 balance into the new funds all at once, take a staged approach, or should I direct new contributions there?
Anonymous Olivia asks (at 39:05 minutes):
I’m 45 years old and I’d like to retire in 10 years, at age 55. I started maxing out my 401k 20 years ago. A few years ago, I learned about the Roth 401k option, and started maxing that out. I want to understand the backdoor Roth conversion associated tax implications and whether it’s worth doing at this stage.
Here are the details: my 2019 income was $220,000 due to a $50,000 bonus that was paid out. I expect to be in a lower tax bracket next year because I don’t think I’ll receive a bonus. I’m hesitant to do anything that will increase my taxes, but if the value of my Traditional 401k is low, the backdoor Roth conversion might be worthwhile.
My 401k has a balance of $520,000 in a Vanguard retirement target fund, I have various Roth accounts totaling $60,000.
Half of my Roth accounts are in another target retirement fund of about $30,000 (the employer one), and I put some in VTSAX and VFIAX. I also have another $30,000 in a taxable brokerage account invested in VTI.
I’ve continued to max out my Roth 401k (I had an employer match, which was taken away because of the pandemic).
My questions are:
- When is a good time to do a backdoor Roth conversion?
- What do you think about these target retirement funds?
- What tips do you have for rebalancing my portfolio?
**Update: An awesome listener, Jeff, wrote in to tell us:
I believe Olivia mentioned she was 45 and wanted to retire in 10 years when she’d be 55. There’s a rule of 55 that allows retirees access to their 401k plans penalty-free as long as they leave their employer for any reason between 55 and 59.5. Perhaps you could mention that in a future episode so Olivia would be aware of it. This makes the Roth conversion ladder much less necessary for her.**
Tami asks (at 55:13 minutes):
I’m 56 years old, recently divorced, and a Registered Nurse in the VA Medical Center in Portland, Oregon. I’d like to retire at my full pension age of 62.
I’ll earn $2,000 per month from my pension and I’ll receive Social Security later on. My home is worth a little over $500,000 and I’ll own it outright in another year. I have $425,000 in my TSP account, $170,000 in a Vanguard account, and a six-month emergency fund account. I max out my TSP at $19,500 per year and contribute $6,500 in catch-up funds per year. I live frugally.
Years ago, when I started investing in my TSP, I only invested in the G fund. I converted to a Lifestyle fund later on, but I still have $160,000 sitting in the G fund. Should I move a chunk of that money to a Lifestyle fund in hopes of increasing future earnings?
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