Forum Mailbag: Three-Fund Portfolio Allocation, Vanguard Recession Warning, Expensive In-State 529 Plans, And More!

There is so much great information on personal finance forums. I participate on several message boards, including the Bogleheads and White Coat Investor forums. Here are some of the discussions happening around the internet.

1. Reader Question: Three-Fund Portfolio Allocation

Question: A reader e-mailed me this question through the contact form on the blog:

“I have just recently been introduced to your website by a friend of mine. Where have I been??? I have spent countless hours reading your posts and can’t thank you enough. I recently read your article about building a Vanguard portfolio.

What would you recommend the % breakdown in terms of allocations for the 3, 4, and 5 index fund portfolios? I am 36 years old.”

WSP’s Take: The percentages to allocate your 3, 4, or 5 index funds is highly personal, but a good starting point is to look at the asset allocation of the corresponding Vanguard target retirement fund. You are 36, so your target retirement date might be in 2045, when you are 63.

• 54% Total Stock Market
• 36% Total International Stock Market
• 7% U.S. Bond
• 3% International Bond

• 54% Total Stock Market
• 36% Total International Stock Market
• 10% U.S. Bond

2. White Coat Investor: Invest in High-Expense In-State 529 For Tax Deduction?

Question: Albinaire recently moved to North Dakota for his first job. He has a three-year-old daughter who he would like to begin contributing to a 529 fund for. Unfortunately, North Dakota’s plan has very high management fees (approximately 0.85%) compared to other states such as Nevada (roughly 0.15% in fees). However, North Dakota does offer a tax deduction on the first $10,000 in contributions, and the state income tax rate is 2.9%. He was wondering whether he should invest in a North Dakota 529 plan or an out-of-state plan.

WSP’s Take: As you know, you are not obligated to invest in your state’s 529, but some 529s offer tax benefits (usually a deduction on contributions) to their residents. However, these benefits may be offset by increased fees, a predicament that Albinaire is facing in North Dakota.

A $10,000 contribution to a North Dakota 529 would confer an immediate 2.9% ($290) tax benefit, but this benefit would be offset he would then have to pay an additional 0.70% in management fees every year until the money is withdrawn. Because his child is only 3, he will be holding the money in the 529 for at least 15 years. Paying an additional 0.70% in fees for 15 years will likely overwhelm the upfront 2.9% tax deduction. I would invest in a low-cost, out-of-state 529 plan.

3. Bogleheads: Vanguard Warns of Recession

Question: MFInvestor wants to discuss the recent New York Times article that highlights Vanguard’s increasing pessimism regarding the U.S. economy and stock market. Vanguard currently projects that the probability of a recession by 2020 as between 30% and 40%.

WSP’s Take: Most investors in the Bogleheads community would generally shake off calls of an impending recession. But when it comes from the research staff at Vanguard themselves, they take notice.

Unfortunately, this type of prognostication isn’t actionable for index investors. Index fund investors shouldn’t change their asset allocation even if there is an increased risk of recession in the future. Repositioning their portfolios to hold more cash or increase their exposure to bonds in response to recession fears is no different than trying to pick stocks or market timing.

If Jack Bogle’s most important mantra is to “stay the course,” then Bogleheads should do so not just during a recession, but also before it.

4. Physicians on FIRE Facebook Group: Benefits of HSA For Healthy Individuals

Question: A reader on the Physicians on FIRE Facebook group wants to know if it makes sense to contribute to an HSA when they are very healthy. She has a great family history, with her great-grandmother living to 102 and her mother doing great at age 77. She is worried that if she contributes to an HSA, she may lose the money if she never gets sick enough to spend all of the money on healthcare.

WSP’s Take: This is a common misconception regarding Health Savings Accounts (HSA). While money from an HSA can be withdrawn tax-free if used for eligible healthcare expenses, it can be withdrawn and taxed as ordinary income after the age of 65 without penalty.

These are the general rules for HSA withdrawals:

1. Withdrawals for eligible healthcare expenses: tax-free
2. Withdrawals for non-healthcare expenses after the age of 65: taxed as ordinary income
3. Withdrawals for non-healthcare expenses before the age of 65: taxed as ordinary income, with a 10% penalty.

So HSAs become similar to 401(k)s after the age of 65, with two beneficial exceptions:

1. You can withdraw money tax-free for eligible healthcare expenses
2. There are no required minimum distributions in HSAs

For this reason, it might be preferred to contribute to an HSA prior to a 401(k), if the 401(k) does not offer matching contributions. This reader seems to be able to max out both, which is even better.

Wall Street Shares: 5 Articles To Read This Week

1. Dads Making Cents: Storm Brewing In Crowdfunded Real Estate? — Dr. Linus highlights some of the reasons to be cautious before jumping headfirst into crowdfunded real estate.
2. White Coat Investor: Don’t Obsess About Expense Ratios — WCI argues forcefully for sticking with Vanguard in light of Fidelity’s recent introduction of two zero-expense ratio mutual funds.
3. Passive Income MD: The Abundance Mindset vs Scarcity Mindset for Physicians — Physicians are trained to have a scarcity mindset, but PIMD argues that an abundance mindset will make you happier.
4. The Physician Philosopher: 5 Attributes that Make You An Easy Financial Target — Physicians are often considered prone to financial mistakes, but this blog and others are hoping to change that.
5. Smart Money MD: Doctors need to transform their careers into hobbies — As Mark Twain once said, “Find a job you enjoy doing, and you will never have to work a day in your life.”

What do you think? Do you agree or disagree with any of my responses? What’s your take on the topics in this week’s forum mailbag?