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Cranberry44

New Teacher (starting in 2 weeks): 403b advice?

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Hi all,

First, thanks for the site -- I've enjoyed reading it and listened to one of the 403bwise podcasts yesterday and enjoyed it!

I'm 31 and will be starting my first year as a teacher at a private high school in a VHOL area. I'll be starting in two weeks, and will have no pension. I'm coming from another job that did not offer a retirement account (I have a Roth IRA that I've maxed out of 2020 and 2019); this is my first employer sponsored account. This school offers Roth and Traditional 403b through TIAA, and I plan to max out the contributions whenever I can. The school matches up to 1% of the employee's salary for the first three years, and then increases the percentage by one each year thereafter until a max of 8% match. Here are the options provided, with name, ticker, and expense ratio:

  • TIAA Traditional Annuity - Retirement Choice: (TC1IO# )
  • AllianzGI Mid Cap Value Fund Institutional Class (PRNIX) 0.64%
  • American Funds New Perspective R6 (RNPGX) 0.42%
  • BlackRock Total Return Fund K (MPHQX) 0.44% 
  • CREF Social Choice Account (R2) (QCSCPX) 0.32%
  • CREF Stock Account (R2) (QCSTPX) 0.39%
  • Federated MDT Small Cap Core Fund Class R (QLSCX) 0.96%
  • JPMorgan Large Cap Value Fund Class R6 (JLVMX) 0.52%
  • MassMutual Select Mid Cap Growth Equity II Fund Class I (MEFZX) 0.71%
  • T. Rowe Price Blue Chip Growth Fund Class I (TBCIX) 0.56%
  • TIAA Stable Value - [[Company Name Redacted]] C RETIREMENT PLAN
  • TIAA-CREF Lifecycle Index 2045 Fund (Institutional) (TLXIX) 0.19%
  • TIAA-CREF Lifecycle Index 2050 Fund (Institutional) (TLLIX) 0.19%
  • TIAA-CREF Lifecycle Index 2055 Fund (Institutional) (TTIIX) 0.22%
  • TIAA-CREF Lifecycle Index 2060 Fund (Institutional) (TVIIX) 0.33%
  • ((**There are also earlier Lifecycle funds, starting in 2010, if that matters**))
  • TIAA-CREF Lifecycle Index Retirement Income Fund (Institutional) (TRILX) 0.28%
  • Vanguard 500 Index Fund Admiral (VFIAX) 0.04%
  • Vanguard Developed Markets Index Fund Admiral (VTMGX) 0.07%
  • Vanguard Intermediate-Term Bond Index Fund Admiral (VBILX) 0.07%
  • Vanguard Mid-Cap Index Fund Admiral (VIMAX) 0.05%
  • Vanguard Real Estate Index Fund Admiral (VGSLX 0.12%
  • Vanguard Small-Cap Index Fund Admiral: (VSMAX) 0.05%

I signed up for 90% to VFIAX (Vanguard 500) and 10% to VBILX (Vanguard Intermediate Bond). Any advice I should be aware of as this will be my first account of this type?

Thanks!

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Cranberry 44

You have some decent choices and you seemed to make a good choice with your selections but they are narrow in scope.

I think you would be wise to allocate a portion -atleast 20% to Vanguard Developed Markets(international) Index and at least 10% to the Vanguard Small Cap Index. Something like this might work but keep in mind there is no exact formula for success although sticking to index funds is smart. Diversifying across all assets classes is always a good idea.

60% VFAIX

20% VTMGX

10%  VBILX

10% VSMAX

I hope I have helped and I wish you my best in your teaching career. I think you will do very well with this allocation long term.

Tony

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Welcome aboard, Cranberry.  You are definitely on the right track, and if you start contributing as much as you can manage consistently, you'll have a great nestegg to get you through retirement.  

I think what you're doing is fine, no change is required.  But FWIW, a couple of thoughts:

1. Assuming that you are not planning to retire for 25 years or more, I wonder why you want bonds.  Those are usually there to buffer volatility and to provide a stable source of income when you are drawing down the account in retirement.  Traditionally, the amount of bonds is something to increase as your focus shifts from building wealth to preserving it.  At your age, I think there's a good argument for 100% equity, which has the best expected return over multi-decade periods.

2. I agree with Tony that diversification into international equities make sense.  But some very successful figures, notably John Bogle and Warren Buffett, think an all-US portfolio is fine, so I can't blame you if you line up with them. 

3.  It would be good to understand what sort of fees that TIAA is charging you, beyond the fund expense ratio that goes to Vanguard.  There are almost always some charges related to the bookkeeping requirements of "qualified" retirement accounts.  You probably won't have any control over this, but it would be useful to know when comparing among options in the future.

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Thank you so much, tony and whyme!

Bonds: I was allocating 10% to bonds since I'm largely trying to stick to the "three-fund portfolio" I've been reading about on bogleheads. I'm still undecided, but I may indeed forgo all bonds. I've read that bonds are good for rebalancing in down-turns, so I figured I was giving myself a little bit of wiggle room to sell bonds when they're high and to buy more equities when they're low. I've never had a 403b, so I'm now sure how hard/easy it is to make trades within these kinds of accounts.

International: I currently hold a bit of VT (Vanguards Total World ETF) and a very small amount of VXUS (Vanguard ex-us ETF) in a taxable account -- so I'll likely keep my international exposure there. (I should have mentioned this in my post, sorry!)

Small Cap/VSMAX: I hadn't really looked into this fund, but it has had a great track record, so I think I'll change my allocation to "tilt" to small cap, but will do a bit more research. Comparing VSMAX with VFAIX on Portfolio Visualizer was an eye opener!

TIAA: Yes, but unfortunately you are correct, TIAA is the only option I have through this school, so not much I can do about it. I will still seek out more information on their fees though, thanks for the suggestion!

I created three portfolios on portfolio visualizer:


Portfolio 1) tony's suggestion above: 60% VFAIX; 20% VTMGX; 10%  VBILX; 10% VSMAX

Portfolio 2) my original plan of 90% VFAIX; 10% VBILX

Portfolio 3) and a 50/50 VFAIX/VSMAX

And was surprised to see the results (link to portfolio visualizer)! I'll definitely change my plan to something closer to tony's suggestion, or even a bit more like portfolio 3. Thoughts, or am I risking too much by basing this decision on past performance?


 

Screen Shot 2020-08-01 at 3.53.40 PM.png

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I think you would be wise to keep some small cap allocation because the 500 index is larger cap funds.  As far as  international goes, I'm not crazy about them and only hold about 20% in my portfolio and they haven't done all that well in the last several years but today's Vanguard ,post John Bogle recommends 30% allocation. The 500 index includes American multi national companies so you are getting some international exposure there. Plus you say you already own some internationals else where.

I agree with Whyme  about bonds especially if you plan to stay in education and collect a pension/social security. That could count as your bond allocation.. Ultimately you will do fine if you stick with the Vanguard funds.. Let us know how you decide to proceed. Portfolio 3 keep in mind is very aggressive. In down markets that 50% small cap might retreat significantly. If you will be able  handle that than it's  all good. If losing 40% or more of your portfolio bothers you than I still think portfolio one might be better.  You can always lower your small cap exposure when you get closer to retirement.

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3 hours ago, Cranberry44 said:

I've read that bonds are good for rebalancing in down-turns, so I figured I was giving myself a little bit of wiggle room to sell bonds when they're high and to buy more equities when they're low.

Look, I love the bogleheads and I essentially have a two fund portfolio (domestic and international stock), but this is myth the bogleheads push.

Do you get a perk from selling bonds during a crash to buy some stocks? Sure.

Is it enough to compensate you for the underperformance of those bonds during the bull market leading up to the crash? No.

Bonds will reduce your expected returns. They’re there to reduce volatility so you can sleep at night and so you don’t do something foolish like selling all your stocks at the bottom of a crash and buy back in after the recovery.

If bonds had similar returns to stocks, but went up when stocks went down and vice versa, then you’d get that “rebalance bonus” that actually generates wealth. Unfortunately bonds don’t have enough upside to make this proposition worthwhile.

Play with one of the portfolio visualizer sites to prove it to yourself. Set up a 20 year window and compare a 100% portfolio against a portfolio with bonds across any number of time frames and you’ll see what I mean.

3 hours ago, Cranberry44 said:

I think I'll change my allocation to "tilt" to small cap

The bogleheads love to tilt, which is ironic because it runs against the ethos of not making bets on sectors of the market.

Bogle spoke out against this. I agree with Bogle. However, if you’re going to do it, then pick a percentage to tilt and live with it for life. If you change that percentage over time then I fully expect you to underperform.

3 hours ago, Cranberry44 said:

And was surprised to see the results (link to portfolio visualizer)! I'll definitely change my plan to something closer to tony's suggestion

I’m not trying to talk you out of To y’s suggestion. I am however telling you that you’re making a big mistake in your decision making process.

Past performance doesn’t indicate future performance. That isn’t a disclaimer to cover some low probability event, it’s a reality.

You should never invest in a portfolio because of past returns. If you want to do that then I can recommend an objectively awful portfolio that blew Tony’s out of the water for a specific time period.

You should invest in a portfolio because it has rock bottom costs, is fully diversified, meets your desired risk profile, and you agree with philosophical. 

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I kept my "bond" money in the TIAA Traditional Annunity which doesn't work like most annunities (depending on ther contract your district has with TIAA).  It paid a guaranteed 3% for all the years I was with it--never more, never less.  In this market, that seems pretty good.  I don't recall fees but I think they were minimal.

The best thing is that you're starting right away.  That will pay off in the future.  Looking back, I put too much into my 403b7/457 and wish I'd put more into my Roth.  That's good news, though--it means I saved really well but looking ahead my RMD's will be steeper than I expected and I'm having to convert some savings to Roth. 

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7 hours ago, bzribee said:

I put too much into my 403b7/457 and wish I'd put more into my Roth

403b and 457b accounts are often available as either Roth or Traditional. 403b and 457b plans are not inherently in conflict with or the opposite of a “Roth.” In fact, there is no such thing as just a “Roth”.

A tax advantaged account (401k, 403b, 457b, IRA, etc) can be either a Roth or a Traditional. 

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Ed

Are  you missing something or am I ?  The S&P 500  he has available is not the Total Stock Market Index so a 10% allocation in small caps does help make his portfolio a little more diversified. I was not encourage him to tilt. I was encouraging  him to try and be fully diversified considering the funds he has access to. I never recommended he go 50% small cap.

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2 hours ago, tony said:

Are  you missing something or am I ?

I'm not sure, I was just going by the OP's words:

16 hours ago, Cranberry44 said:

I'll change my allocation to "tilt" to small cap

 

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17 hours ago, Cranberry44 said:

I've never had a 403b, so I'm now sure how hard/easy it is to make trades within these kinds of accounts.

It's quite easy to make changes and there are no tax consequences.  So if you want to rebalance or adjust your portfolio, you can do it.  But trading to catch opportunities in the market is not advisable...  academic research shows that trading and timing the market fails in comparison with ongoing regular contributions to a low-cost diversified buy-and-hold portfolio.  Of course you will find many people touting market-beating investments or strategies: mostly, these are salespeople who benefit when others follow their advice. 

A simple unswerving commitment to any of the portfolios you are considering will likely surpass the results of the large majority of investors, including professional investment managers (counter-intuitive as that sounds, it's true).  Your problem is not to find the very best portfolio--that's unknowable, since nobody knows the future.  Settle on a sound portfolio (your current options are all in that category) and turn away from the many traps, fees and distractions with which the good people of the financial services industry manipulate human nature to their own monetary benefit (that will require some willpower).  Keep your contributions high and costs low: you'll reach your goals in time.  

If you are interested in the research I refer to above, I recommend "A Random Walk Down Wall Street" by Burton Malkiel.  Even online interviews with Malkiel (or John Bogle or Charles Ellis) would throw light on the situation.  Maybe this is old news to you, since you've looked at Bogleheads' arguments for the three fund portfolio.  There are small disagreements between all of these sources, but those are always around the margins: overwhelmingly they share the same message.

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