Roth IRA Allocation

[OneDollarAtATime]

Hello. I am new here and just trying to get an opinion on a Roth IRA, I will be starting before year end and hoping to put in the full $5k for 2012. I am 28 and currently have $27k left on student loan debt that I have been paying down for the last few years. It started at about $70k in 2008 and I am hoping to have the rest paid down in the next 2- 2.5 years.
Currently for retirement I have $9k in a 403b at work and I am worried that I might be getting behind since I have been concentrating on paying more towards my student loan debt as opposed to saving for retirement.
I was planning on opening a roth ira with scottrade with the following allocations and was hoping for advice:
28% Vanguard Short term Bond ETF, BSV
21.5% Vanguard Total International Stock ETF, VXUS
50.5% Vanguard Dividend Appreciation Index Fund, VIG or Vanguard S&P 500 ETF, VOO

Just looking for whether this seems reasonable for my age? I understand that there seems to be a thought process about 100-28 years old= 72% of stock. So I was basing my allocations on that.

Any help or thoughts would be really helpful. I have tried asking a few friends and coworkers my age for their opinion. But everyone seems to have a 401k and no idea what is in it.

[kv968]

Welcome and congratulations on paying down a substantial amount of your student loans.

As far as your allocation, it'll really depend on your risk tolerance. The "age-100=% of stocks" approach isn't a bad rule of thumb to follow. Some even say use 110 to get a little more stock exposure. Again it all depends on your risk tolerance.

IMO, if you were willing to do so, I'd suggest thinking about having almost no (or a very little bit 5%) of bond exposure in your portfolio. Reason being, you've got a long way until retirement and bonds are most likely only going to down in the near future.

Unfortunately I'm finding the same thing where I work...a lot of people aren't really sure what they hold in their 401k's. What do you invest in with your 403b?

Another suggestion I'd have is to not open an IRA with Scottrade if you're planning on going the ETF route. Don't get me wrong, they're a great company and I have an account with them myself (although I just mostly use them for their trading tools and actually trade with another broker). However, they don't have a dividend reinvestment program so all of the dividends you receive from your investments will go to a sweep account where you'll have to reinvest them back yourself at $7/trade. Not very cost effective. Plus everytime you buy an ETF you'll be paying that same commission which could add up quite a bit if you plan on doing monthly or quarterly dollar cost averaging.

Instead, I'd recommend opening a brokerage account with Vanguard once you have the required $3000 minimum. You can trade their ETF's (the same ones you were talking about) which are quite good for NO commission and they reinvest the dividends automatically if you want so you don't have to worry about that. And if you want to buy some individual stocks they only charge $7 (same as Scottrade) for the first 25 transactions per year.

[BuckyBadger]

I like "age in bonds," even in this market. Statistically, you don't gain much by going even more into equities than you are right now, and you disproportionately increase your risk compared to any expected increase in return. There are a few quite brilliant people who recommend never having under 25% equities, and never having over 75% equities, so always keep your equities between 75% (when young) and 25% (when old) of your portfolio.

So at least for me, I like your asset allocation.

Mine is nearly identical - 30% bonds, 20% international, 50% US. All in index funds. (I'm 32, my husband is 33.)

I can't speak to the ETF nature of those investments, though. I don't hold ETFs.

[Petunia 100]

Welcome and congratulations on paying down a substantial amount of your student loans.

As far as your allocation, it'll really depend on your risk tolerance. The "age-100=% of stocks" approach isn't a bad rule of thumb to follow. Some even say use 110 to get a little more stock exposure. Again it all depends on your risk tolerance.

IMO, if you were willing to do so, I'd suggest thinking about having almost no (or a very little bit 5%) of bond exposure in your portfolio. Reason being, you've got a long way until retirement and bonds are most likely only going to down in the near future.

Unfortunately I'm finding the same thing where I work...a lot of people aren't really sure what they hold in their 401k's. What do you invest in with your 403b?

Another suggestion I'd have is to not open an IRA with Scottrade if you're planning on going the ETF route. Don't get me wrong, they're a great company and I have an account with them myself (although I just mostly use them for their trading tools and actually trade with another broker). However, they don't have a dividend reinvestment program so all of the dividends you receive from your investments will go to a sweep account where you'll have to reinvest them back yourself at $7/trade. Not very cost effective. Plus everytime you buy an ETF you'll be paying that same commission which could add up quite a bit if you plan on doing monthly or quarterly dollar cost averaging.

Instead, I'd recommend opening a brokerage account with Vanguard once you have the required $3000 minimum. You can trade their ETF's (the same ones you were talking about) which are quite good for NO commission and they reinvest the dividends automatically if you want so you don't have to worry about that. And if you want to buy some individual stocks they only charge $7 (same as Scottrade) for the first 25 transactions per year.

Are you sure about that? ETFs cannot be purchased in fractional shares.

[Petunia 100]

Hi OneDollar,

The "biggies" in investing are to make a reasonable asset allocation plan, keep costs as low as possible, and re-balance periodically. It looks as though you have that covered. (You do plan to re-balance on occasion, right?)

Your plan for your Roth seems reasonable. Personally, I would choose Total Stock Market (VTI) over S & P 500 or Dividend Appreciation. I would also choose Total Bond Market over Short Term Bond. But these are not the big decisions. And, you may have very good reasons for your choices.

Like Kv, I'm wondering how you have your 403b allocated.

[OneDollarAtATime]

My 403b is allocated as 17% bonds, 10% international stocks, 73% US stocks.
I chose this allocation when I first opened it a few years ago because it was one that was preset as a choice based on age.

I had made my choices on the ETFs above for the Roth after researching on the internet and most sites recommending vanguard ETFs.
I had not planned to DCA and I plan on putting in the $5k as a lump sum every year and making my purchase that way. So if I went with scottrade it would be about $28 for the year assuming I make 4 purchases/trades.
I had been really interested in the option of having dividends reinvested automatically as in a DRIP? But I couldn’t find information as to whom would do this free of cost for a roth ira and automatically. Does vanguard have this option for a roth ira?

[Petunia 100]

If you choose mutual funds instead of ETFs, then you can choose to automatically reinvest dividends.

If you want to own ETFs, as Kv mentioned, Vanguard will not charge you a commission to buy/sell Vanguard ETFs. So that is $0 per year compared to Scottrade's $28. It's not a great deal of money, but wouldn't you rather have that $28 annually in your account, growing for you?

I own ETFs in my traditional IRA, so I use dividends towards re-balancing. Over this past weekend, I noticed I had $156 and change in cash (inside my brokerage account). So, I calculated which holding was most underweight my desired allocation, and I bought 2 more shares of that holding. (Leaving $20ish in cash, not enough to buy another share.)

My 403b is allocated as 17% bonds, 10% international stocks, 73% US stocks.

Of your US stocks, do you have large, mid, and small caps?

Of your international stocks, do you have developed and emerging markets?

Is your bond fund broadly diversified or is it concentrated?

If so, then you are doing fine. (Personally, I would like more international. But again, you may have very good reasons for choosing 10%. And, it may turn out that you chose better than I did.)

[Gina23]

Petunia, he said that his 73% was in index funds. Although not guaranteed, it's probably safe to assume that they are a balanced mix between large cap, small cap, etc... at least I know mine are.

With that being said, being 28 and putting 5k away is great! Remember the max limit for 2013 is 5,500.

I always follow the same mix... I'm 33. I'm 80/20 (index funds) and 10% of the stock allocation is international.

I wouldn't be shy about learning heavily toward stocks at your age.

[Petunia 100]

Petunia, he said that his 73% was in index funds. Although not guaranteed, it's probably safe to assume that they are a balanced mix between large cap, small cap, etc... at least I know mine are.

You're right that it is possible, Gina. However, if his US stocks are 100% in an S & P 500 Index Fund, then he has no mid or small caps at all.

[kv968]

Are you sure about that? ETFs cannot be purchased in fractional shares.

You can't purchase in fractional shares but they'll reinvest dividends that way...

"When reinvesting dividends, Vanguard Brokerage Services combines the cash distributions from the accounts of all clients who have requested reinvestment in the same security, and then uses that combined total to purchase additional shares of the security in the open market. Vanguard Brokerage will attempt to purchase the reinvestment shares by entering a market order at the market opening on the payable date. The new shares are divided proportionately among the clients' accounts, in whole and fractional shares rounded to three decimal places. If the total purchase cannot be completed in one trade, clients will receive shares purchased at the weighted average price paid by Vanguard Brokerage Services."

[Petunia 100]

You can't purchase in fractional shares but they'll reinvest dividends that way...

"When reinvesting dividends, Vanguard Brokerage Services combines the cash distributions from the accounts of all clients who have requested reinvestment in the same security, and then uses that combined total to purchase additional shares of the security in the open market. Vanguard Brokerage will attempt to purchase the reinvestment shares by entering a market order at the market opening on the payable date. The new shares are divided proportionately among the clients' accounts, in whole and fractional shares rounded to three decimal places. If the total purchase cannot be completed in one trade, clients will receive shares purchased at the weighted average price paid by Vanguard Brokerage Services."

I did not know that. Thank you, Kv.

[kv968]

I had been really interested in the option of having dividends reinvested automatically as in a DRIP? But I couldn’t find information as to whom would do this free of cost for a roth ira and automatically. Does vanguard have this option for a roth ira?

Vanguard will reinvest dividends for free, Scottrade doesn't. They say that, "they're looking into it", but I heard the same thing 6-7 years ago when I first opened my account with them.

One other thing with Vanguard is that you'll have to sign up to have your statements and whatnot delivered electronically or they'll charge you an annual fee. To me it's no big deal but you might want paper delivery instead.

[OneDollarAtATime]

My stocks with my 403b are a mix of large, mid, small.
I think the reason I had originally hesitated with Vanguard was because when reading about it online it made it seem like I had to hold a minimum in a Star Fund?
I wasn’t sure if what I was reading applied to Roth IRAs. Or whether I would be able to change this minimum amount allocation to an ETF instead. Can someone explain Vanguard’s Star Fund or whether there is a minimum I have to hold into each different ETF I select for my roth?

I am definitely not opposed to receiving electronic statements.
Thanks so much for all the responses this has been really helpful.

[Petunia 100]

My stocks with my 403b are a mix of large, mid, small.
I think the reason I had originally hesitated with Vanguard was because when reading about it online it made it seem like I had to hold a minimum in a Star Fund?
I wasn’t sure if what I was reading applied to Roth IRAs. Or whether I would be able to change this minimum amount allocation to an ETF instead. Can someone explain Vanguard’s Star Fund or whether there is a minimum I have to hold into each different ETF I select for my roth?

I am definitely not opposed to receiving electronic statements.
Thanks so much for all the responses this has been really helpful.

Vanguard's minimum to invest in a mutual fund is generally 3k. However, there are a few mutual funds which can be opened with only 1k. Star is one of those mutual funds.

ETFs do not have any minimums, but to buy/sell ETFs you must have a brokerage account. The minimum to open a Vanguard brokerage account is 3k. You are not required to have any money at all in Star.

[kv968]

My stocks with my 403b are a mix of large, mid, small.
I think the reason I had originally hesitated with Vanguard was because when reading about it online it made it seem like I had to hold a minimum in a Star Fund?
I wasn’t sure if what I was reading applied to Roth IRAs. Or whether I would be able to change this minimum amount allocation to an ETF instead. Can someone explain Vanguard’s Star Fund or whether there is a minimum I have to hold into each different ETF I select for my roth?

I am definitely not opposed to receiving electronic statements.
Thanks so much for all the responses this has been really helpful.

If you want to invest in Vanguard FUNDS, the minimum for each fund is $3000 except for the STAR Fund (which is a balanced fund, currently 62% stocks, 25% bonds and 13% cash) or any of their target retirement funds (which may something for you to look at also). The minimum to invest in those funds is $1000.

To open an IRA brokerage account, you'll need a minimum of $3000. Once you have that open however there is no minimum you have to put in an ETF. As long as you have the money to buy the share, that's it. So say if you wanted to buy just one share of VIG at $60.11, as long as you have the money in the account, you can do it.

If you have just a regular account where you can buy just funds you won't be able to then allocate it to an ETF. You need a brokerage account in order to do that. However, if you have the brokerage account, you can invest in their funds also if you'd like.

So in other words, no you can't open an account using a fund with a $1000 minimum and then transfer it to an ETF if that's what you're asking.