Support NeoGAF

[ferr]

up until april 15th of next year you can make your contributions for this year.

You can still make your contribution for last year for another month as well, so you could put that $3k in on last years, then do another full $5.5k later in the year if you have the cash.

Would you need to re-do your taxes if you put after-tax money into an ira before april 15th of this year? If you already did them.

 

[RumblingRosco]

Would you need to re-do your taxes if you put after-tax money into an ira before april 15th of this year? If you already did them.

I think not, since it is after tax money and therefore nothing changes. I am certainly no tax expert though, but I cannot see how anything would differ.

 

[ferr]

I think not, since it is after tax money and therefore nothing changes. I am certainly no tax expert though, but I cannot see how anything would differ.

Yeah I guess. It looks like the only impact would be if you wanted to make deductible contributions.. https://turbotax.intuit.com/tax-too...-IRA-Contributions-Information-/INF20121.html -- that also says you wouldn't even need to return the form on april 15th since the form has up until May 31 to be sent to you which is interesting.

 

[Piecake]

It's all considered one bucket, and I'm pretty sure there's no distinction between roth and traditional with the IRA bucket when distributing. Not exactly sure, can't find the material I saw earlier.

You can get an accurate distribution if you maintain everything correctly, I think I overlooked that you can do this to get the exact amount of post-tax money accounted for so you don't get taxed twice. http://www.investopedia.com/articles/retirement/05/aftertaxassets.asp example in there. It's just a matter of actually getting this all recorded correctly and taking care of things when it comes time for distribution.. in that case maybe I should put some after-tax money in there, maybe next tax year. Can anyone clarify this, though?

I am honestly confused what your issue/question with IRAs is. Do you mind explaining it further?

Are you talking about including after tax money into a traditional IRA? If so, you receive your tax deduction when you do your taxes. That 5,500 you contributed for your trad IRA is deductable from your taxable income. You just have to do it manually.

Roths work differently. You don't get a deduction. You simply get tax free money when you take out distributions at retirement.

 

[ferr]

I am honestly confused what your issue/question with IRAs is. Do you mind explaining it further?

Are you talking about including after tax money into a traditional IRA? If so, you receive your tax deduction when you do your taxes. That 5,500 you contributed for your trad IRA is deductable from your taxable income. You just have to do it manually.

Roths work differently. You don't get a deduction. You simply get tax free money when you take out distributions at retirement.

Well what I'm unsure about is the distribution part when pre-tax and after-tax are in your IRAs, whether they're in different IRA accounts or types of IRA accounts. From what I have read it seems like all of your IRAs, traditional or roth or whatever, are considered one bucket that you distribute from. And you need to maintain a record of the exact amount of how much after-tax money has been contributed so that % of your distribution is tax free.

There's a formula for that apparently, [after tax basis] / [total ira value] * [distribution amount] = amount not subject to tax. so if you have $20,000 after tax in an ira 'bucket' that is valued at $200,000, you would only have to pay tax on 90% of the distribution since 20,000 / 200,000 * 200,000 = 20000 aka the total amount that is tax free.

I'm not sure how that formula continues to work if you are still making contributions after beginning distributions.. or if that's even a thing. I think 'ruined' is the wrong word and I meant that it impacts after-tax, not pre-tax. More like creates complications than 'ruins'.

 

[GhaleonEB]

Well what I'm unsure about is the distribution part when pre-tax and after-tax are in your IRAs, whether they're in different IRA accounts or types of IRA accounts. From what I have read it seems like all of your IRAs, traditional or roth or whatever, are considered one bucket that you distribute from. And you need to maintain a record of the exact amount of how much after-tax money has been contributed so that % of your distribution is tax free.

There's a formula for that apparently, [after tax basis] / [total ira value] * [distribution amount] = amount not subject to tax. so if you have $20,000 after tax in an ira 'bucket' that is valued at $200,000, you would only have to pay tax on 90% of the distribution since 20,000 / 200,000 * 200,000 = 20000 aka the total amount that is tax free.

I'm not sure how that formula continues to work if you are still making contributions after beginning distributions.. or if that's even a thing. I think 'ruined' is the wrong word and I meant that it impacts after-tax, not pre-tax. More like creates complications than 'ruins'.

I think that over complicates things a bit.

In a Roth IRA, you don't pay any taxes for withdraws in retirement, on principal or growth.

In a traditional IRA, you pay taxes on your withdrawals as if they were normal income, on the full amount (principal and growth).

That's it, unless there is some aspect of your question I'm missing.

 

[ferr]

I think that over complicates things a bit.

In a Roth IRA, you don't pay any taxes for withdraws in retirement, on principal or growth.

In a traditional IRA, you pay taxes on your withdrawals as if they were normal income, on the full amount (principal and growth).

That's it, unless there is some aspect of your question I'm missing.

Thanks- that actually answers some follow up questions I had related to whether it'd be taxed at normal income or not.

Kind of curious, how does a distribution work once you're at the appropriate age? Is it as simple as going to your brokerage account site like fidelity, selling some stocks from your ira, and transferring that money to your bank account? And that tax year you just put that down as additional income if it was pre-tax money?

edit: On second pass, the missing aspect would be in your statement regarding traditional ira. If you contribute after-tax money into a traditional ira that already has pre-tax money in it.. that's when you'd need to use that formula?

 

[Piecake]

Thanks- that actually answers some follow up questions I had related to whether it'd be taxed at normal income or not.

Kind of curious, how does a distribution work once you're at the appropriate age? Is it as simple as going to your brokerage account site like fidelity, selling some stocks from your ira, and transferring that money to your bank account? And that tax year you just put that down as additional income if it was pre-tax money?

edit: On second pass, the missing aspect would be in your statement regarding traditional ira. If you contribute after-tax money into a traditional ira that already has pre-tax money in it.. that's when you'd need to use that formula?

Sell shares and put shares into your bank account. If those shares were in a Roth IRA you dont have to worry about it (maybe you mention it on your tax form, i dont know, but it doesnt impact anything.

Sell shares and put shares into your bank account. If those shares were in a traditional IRA you declare all of that distribution on your tax form and then that is taxed at your whatever income tax rate you are at.

You don't use a formula or anything. I think you got confused somewhere because all distributions from a traditional IRA after 59 1/2 are simply taxed at your income tax rate. thats it.

The link you posted just makes it a lot more complicated than it should by telling you what to do with non-deductible traditional IRA contributions and the like. Thats only relevant for a minority of people and not the general rule. For the vast majority of people, all of your traditional IRA money will be tax deductible so you won't have to worry about it. And frankly, if you have a bunch of IRAs with non-deductible, deductible, rollover, whatever, you should probably just go to a tax professional when you retire and start taking out distributions because that shit sounds complicated.

 

[ferr]

The link you posted just makes it a lot more complicated than it should by telling you what to do with non-deductible traditional IRA contributions and the like. Thats only relevant for a minority of people and not the general rule. For the vast majority of people, all of your traditional IRA money will be tax deductible so you won't have to worry about it. And frankly, if you have a bunch of IRAs with non-deductible, deductible, rollover, whatever, you should probably just go to a tax professional when you retire and start taking out distributions because that shit sounds complicated.

I'm in that minority, so that's why I'm looking at overly complicated formulas like that. I'm not able to deduct trad contributions and I can't contribute to a roth.. I believe I can partially contribute for now, but not too much longer. Although I guess I could put it into a traditional ira, then convert that to a Roth ira, which might simplify distributions.

 

[Piecake]

I'm in that minority, so that's why I'm looking at overly complicated formulas like that. I'm not able to deduct trad contributions and I can't contribute to a roth.. I believe I can partially contribute for now, but not too much longer. Although I guess I could put it into a traditional ira, then convert that to a Roth ira, which might simplify distributions.

Yea, I would probably do that. If you are not getting the full benefit of a traditional IRA, you might as well do a back-door Roth. The only other option I can see is open up a separate T-IRA for your non-deductible contributions and fill out that form so you can easily distinguish between all of your retirement accounts. Still, that seems more complicated than simply doing a back-door Roth.

 

[ferr]

Yea, I would probably do that. If you are not getting the full benefit of a traditional IRA, you might as well do a back-door Roth. The only other option I can see is open up a separate T-IRA for your non-deductible contributions and fill out that form so you can easily distinguish between all of your retirement accounts. Still, that seems more complicated than simply doing a back-door Roth.

According to the roth ira wiki entry,

One major caveat to the entire "backdoor" Roth IRA contribution process, however, is that it only works for people who do not have any pre-tax contributed money in IRA accounts at the time of the "backdoor" conversion to Roth; conversions made when other IRA money exists are subject to pro-rata calculations and may lead to tax liabilities on the part of the converter

yikes, maybe not.

for trad ira, regarding contributing post-tax money,

Distributions are taxed as ordinary income (except any non-deducted principal).

I think this is where the formula comes in to play, which would mean growth is taxed (as ordinary income?), but the post-tax principal would not be.

This makes me wonder if just putting money into a regular stock account would be more beneficial since growth could be taxed at long term capital gain rate. also there would be no contribution limit.

 

[Piecake]

According to the roth ira wiki entry,



yikes, maybe not.

for trad ira, regarding contributing post-tax money,

I think this is where the formula comes in to play, which would mean growth is taxed (as ordinary income?), but the post-tax principal would not be.

This makes me wonder if just putting money into a regular stock account would be more beneficial since growth could be taxed at long term capital gain rate. also there would be no contribution limit.

You might want to call up Vanguard or whoever about a roll-over Roth, explain your situation, and see if it makes sense for you.

http://www.bogleheads.org/wiki/Non-deductible_traditional_IRA

http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

This might be helpful

 

[simplayer]

http://www.businessinsider.com/nobel-prize-robert-shiller-housing-not-great-investment-2013-10

You should read this. I think its pretty convincing that you should consider housing as a lifestyle choice and not an investment.

Hm, ya, it does seem a lot less costly in the long run.

I did some back of the envelope calculations, and renting seems cheaper even account for an extra 30 years of renting beyond when the mortgage is paid off. It's amazing how much property tax and repairs cost (almost the same as the mortgage over the ~60 years of ownership).

It becomes even more depressing looking at the opportunity cost of a downpayment. While the downpayment could save me ~245K, I'd be giving up a lost ~1M over the lifetime of the mortgage. Ugh...

It's a little hard to be fair with what an equivalently priced house is to my apartment, but even so...

 

[HammerOfThor]

So I'm getting ready to open an account and make a max Roth IRA deposit to count as last year, but before I go in, do I need to worry about fees and stuff now? Thats the one thing I don't quite grasp.

 

[Piecake]

So I'm getting ready to open an account and make a max Roth IRA deposit to count as last year, but before I go in, do I need to worry about fees and stuff now? Thats the one thing I don't quite grasp.

If its a vanguard account and you sign up for paperless billing/statements, etc then there are no account maintenance fees. The only other fees that you would pay in a Roth IRA are fees attached to the funds that you invest in. If you are going to invest in the two funds I have mentioned in this thread, Total US Stock and Total International Stock then the expense ratio, the fund fee, is VERY cheap. If you are investing in a different one, just bear in mind that an expense ratio less than .2% is very good while one that is above .5% kinda sucks. You won't directly pay this fee either. It will simply be taken out of the fund. Meaning that if you have a 100 bucks in a fund with an expense ratio of 1% you will have 99 bucks at the end of the year if your fund doesnt lose or make anything.

I don't know about account maintenance fees at other brokerages besides Vanguard so you might have to do some googling to find out the answer there.

 

[iamblades]

If its a vanguard account and you sign up for paperless billing/statements, etc then there are no account maintenance fees. The only other fees that you would pay in a Roth IRA are fees attached to the funds that you invest in. If you are going to invest in the two funds I have mentioned in this thread, Total US Stock and Total International Stock then the expense ratio, the fund fee, is VERY cheap. If you are investing in a different one, just bear in mind that an expense ratio less than .2% is very good while one that is above .5% kinda sucks.

I don't know about account maintenance fees at other brokerages besides Vanguard so you might have to do some googling to find out the answer there.

Fidelity also has no account maintenance fees.

Most online brokerages should be the same. I don't see how they would be able to justify a fee for just having an account with them given the competition.

 

[RumblingRosco]

You won't directly pay this fee either. It will simply be taken out of the fund. Meaning that if you have a 100 bucks in a fund with an expense ratio of 1% you will have 99 bucks at the end of the year if your fund doesnt lose or make anything.

I should know this, but, if a fund has an expense ratio of 1% and the 10-year historical yield of the fund is 5% annually, does that 5% account for the 1% loss due to the expense ratio?

I've been sticking with the lowest fee index funds I can find especially going forward so I guess the answer to this won't change how I invest, but I still think it is important to understand what is happening to my money.

 

[this_guy]

I should know this, but, if a fund has an expense ratio of 1% and the 10-year historical yield of the fund is 5% annually, does that 5% account for the 1% loss due to the expense ratio?

I've been sticking with the lowest fee index funds I can find especially going forward so I guess the answer to this won't change how I invest, but I still think it is important to understand what is happening to my money.

Usually that yield does account for the expense ratio. You'll typically see a chart or something that shows had you invested $10k ten years ago this is what your current value would be.

 

[Piecake]

I should know this, but, if a fund has an expense ratio of 1% and the 10-year historical yield of the fund is 5% annually, does that 5% account for the 1% loss due to the expense ratio?

I've been sticking with the lowest fee index funds I can find especially going forward so I guess the answer to this won't change how I invest, but I still think it is important to understand what is happening to my money.

I don't know for sure, but googling it, it looks like TRowe price and Franklin Templeton does not include expense ratios into their historical yield. I would imagine that other companies would follow suit because it would give an unfair advance to the two above companies if their returns 'looked' better.

 

[giga]

Some good stuff here: https://www.jpmorganfunds.com/cm/Sa...RL=gtrbrowseslides&pagename=jpmfVanityWrapper

 

[hitsugi]

Some good stuff here: https://www.jpmorganfunds.com/cm/Sa...RL=gtrbrowseslides&pagename=jpmfVanityWrapper

All this is does is make people who just started investing at 30 (me) feel horrible.

...then again, I have a pension plan if it still exists when I'm in my 60s.

 

[B.K.]

I just got my tax return check today and cashed it. I've got $1300. I'd like to invest it. I don't want to end up like my parents, if I live to be their age. They're almost 60 and only have about $20,000 in cash put away. I tried reading the op, but I'm too stupid to understand it. Does anyone have any links that dumb it down even more and make investing easier to understand?

 

[giga]

I just got my tax return check today and cashed it. I've got $1300. I'd like to invest it. I don't want to end up like my parents, if I live to be their age. They're almost 60 and only have about $20,000 in cash put away. I tried reading the op, but I'm too stupid to understand it. Does anyone have any links that dumb it down even more and make investing easier to understand?

Go through all of this, including the videos: http://www.bogleheads.org/wiki/Main_Page

This is good too: http://www.reddit.com/r/personalfinance/wiki/faq

With $1300, you'll probably be putting that into a Vanguard target retirement fund since it only has a $1000 minimum.

 

[Nelo Ice]

So I opened a Schwaab Roth IRA still need to activate it and the moneylink just haven't gotten around to calling when they're open or when there isn't a ridiculously long wait. I also have no idea what I'm doing. Anyway I think I can only contribute $50 or maybe more a month since I'm not working full time. Also damn still not figuring out a career and finishing college. Anyway is that enough or what else can I do? Technically I could contribute more from my savings but since so much of the money is wasted especially with all the little things that add up and my sister completely ignores any of my pleas and ideas to save $$ stuff that we could save, I'm not sure if I'll be able to, though it's under my name. Anyway kinda ranting on that since I've tried budgeting and trying to save but it usually fails since I still end up spending extra on stupid shit. I'm usually looked at like I'm crazy for doing extensive research on things and for forward thinking lol. With that said I'm going to start creating a budget and putting YNAB and mint to use along with putting $$ saving tips to good to use since I will likely be spending more than I should later this year.

 

[Piecake]

So I opened a Schwaab Roth IRA still need to activate it and the moneylink just haven't gotten around to calling when they're open or when there isn't a ridiculously long wait. I also have no idea what I'm doing. Anyway I think I can only contribute $50 or maybe more a month since I'm not working full time. Also damn still not figuring out a career and finishing college. Anyway is that enough or what else can I do? Technically I could contribute more from my savings but since so much of the money is wasted especially with all the little things that add up and my sister completely ignores any of my pleas and ideas to save $$ stuff that we could save, I'm not sure if I'll be able to, though it's under my name. Anyway kinda ranting on that since I've tried budgeting and trying to save but it usually fails since I still end up spending extra on stupid shit. I'm usually looked at like I'm crazy for doing extensive research on things and for forward thinking lol. With that said I'm going to start creating a budget and putting YNAB and mint to use along with putting $$ saving tips to good to use since I will likely be spending more than I should later this year.

Yea, if you are still in college and do not have a career I would focus on budgeting. The rule of thumb is also to get a 3-6 months worth of expenses in your saving account before you start investing. The rationale for this is if you hit an unexpected expense, like car repair, or lose your job, you will have something to fall back on and not resort to selling stock (which could mean a loss).

 

[The Fronde]

Love this thread - thanks especially to Piecake.

Going to set up a Roth IRA and invest in the S&P 500.

I'm 28. Will thread bump when I'm 59 and a half!

(Wish I did this after the stock market crash in 2008. Also wish I was into stocks back then - there's NO WAY I wouldn't have bet big on Google and Apple back then. I'll never get how people did NOT see them dominating??)

 

[RumblingRosco]

Love this thread - thanks especially to Piecake.

Going to set up a Roth IRA and invest in the S&P 500.

I'm 28. Will thread bump when I'm 59 and a half!

(Wish I did this after the stock market crash in 2008. Also wish I was into stocks back then - there's NO WAY I wouldn't have bet big on Google and Apple back then. I'll never get how people did NOT see them dominating??)

In 2008, Apple was an iPod and Mac company with a dash of iPhone and Google was more or less just a marketing company disguised as a search engine/web company In 2008, no one really knew just how big smart phones would be let alone tablets. Hell, desktop PCs were still outselling laptops until around 2006-2007 I believe. It's very easy to look back and say "well, yeah, of course they'd become huge!" but you're not seeing all the other companies that failed along the way (HP, Dell, Microsoft to some extent, tons of smaller companies, etc).

Still - it's good you're investing now. There's no time like the present to start buying into index funds.

 

[giga]

Love this thread - thanks especially to Piecake.

Going to set up a Roth IRA and invest in the S&P 500.

I'm 28. Will thread bump when I'm 59 and a half!

(Wish I did this after the stock market crash in 2008. Also wish I was into stocks back then - there's NO WAY I wouldn't have bet big on Google and Apple back then. I'll never get how people did NOT see them dominating??)

Any reason you're only doing large caps (S&P 500) instead of a diverse small, mid, and large cap mix with a total stock index?

 

[Cyan]

(Wish I did this after the stock market crash in 2008. Also wish I was into stocks back then - there's NO WAY I wouldn't have bet big on Google and Apple back then. I'll never get how people did NOT see them dominating??)

You know the saying "hindsight is 20/20"? Because if you didn't know that saying, you should have.

 

[Y2Kev]

Moreover, holding a 80/20 allocation - meaning that you will be buying stock on a market crash - will, generally, get you less of a return that a 100% stock portfolio because that 20% bond was and is a drag on your theoretical return.

No, I'm not suggesting it won't reduce your overall return in any given year. It obviously will. But it won't materially reduce your return and over the long haul it will reduce the number of years you take a loss on your portfolio as well as blunt losses in years you do take a loss.

Please see this research:
https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

.6% incremental return is not worth the risk.

 

[Earthstrike]

I'm 25, and this thread is motivating me to start.

Just a question though. Let's say I start an account now and plan to do the standard x dollars a year for 40 years. When I am say 30, if I have a higher paying job/more income, can I create another account and let it mature for when I'm 70? Or is retirement a fixed legal definition and you kind of have to do everything at once?

 

[iamblades]

I'm 25, and this thread is motivating me to start.

Just a question though. Let's say I start an account now and plan to do the standard x dollars a year for 40 years. When I am say 30, if I have a higher paying job/more income, can I create another account and let it mature for when I'm 70? Or is retirement a fixed legal definition and you kind of have to do everything at once?

You can create invest as much annual as you want/can afford.

You only get the tax deferral/exemption up to a certain amount of contributions per year though.

Generally the most you would need is 3 accounts. Either a roth or a traditional IRA for the tax benefit, a 401k if your employer does matching funds, and then a normal brokerage account for any money after you make the annual contribution limit to the IRA and max out your 401k matching.

 

[Piecake]

No, I'm not suggesting it won't reduce your overall return in any given year. It obviously will. But it won't materially reduce your return and over the long haul it will reduce the number of years you take a loss on your portfolio as well as blunt losses in years you do take a loss.

Please see this research:
https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

.6% incremental return is not worth the risk.

Oh, I agree that the purpose of bonds is to blunt loses. I just don't see the point of blunting loses and reducing gains when I still have 35 years left until retirement. I mean, what do I care if my portfolio absolutely tanks 10 years from now due to a huge market crash? I still have 25 years left to retirement. Thats plenty of time for the market to bounce back. Therefore, I think it makes sense to invest for the most growth possible.

I think time is all the hedge you need until time stops being such an excellent hedge. That is when I plan to start heavily investing in bonds.

I'm 25, and this thread is motivating me to start.

Just a question though. Let's say I start an account now and plan to do the standard x dollars a year for 40 years. When I am say 30, if I have a higher paying job/more income, can I create another account and let it mature for when I'm 70? Or is retirement a fixed legal definition and you kind of have to do everything at once?

You don't have to cash out your retirement accounts all at once. You can draw on it whenever (after 60) for however much you need (maybe there are restrictions I don't know about). I think it would be kinda pointless to set up another Roth IRA account if you already have one, for example.

 

[Mairu]

What are some suggestions as far as investing once you've already got 5500 in the Roth IRA for the year and are already contributing the most your company will match in a 401k? Should I just increase the contribution amount to my 401k or open some sort of non-retirement investment account? I'm at the point where I have at least six months expenses in an online savings account.

 

[Cyan]

What are some suggestions as far as investing once you've already got 5500 in the Roth IRA for the year and are already contributing the most your company will match in a 401k? Should I just increase the contribution amount to my 401k or open some sort of non-retirement investment account? I'm at the point where I have at least six months expenses in an online savings account.

Depends on what your goals are. Still want more retirement savings (and/or tax deductions)? Max out the 401k. Want to save for some future thing in particular, where you'd need the money out prior to retirement? You probably want a regular investment account.

 

[Piecake]

What are some suggestions as far as investing once you've already got 5500 in the Roth IRA for the year and are already contributing the most your company will match in a 401k? Should I just increase the contribution amount to my 401k or open some sort of non-retirement investment account? I'm at the point where I have at least six months expenses in an online savings account.

That really depends on your situation. Do you feel you need to invest more for retirement? If so, max out your 401k. If you dont, which is possible if you started investing for retirement early enough, then a taxable account might be worthwhile to save up for big expenses like a better house, new car, vacation, whatever.

A 529 plan is also an option if you have kids or are going to have kids and want to save for their college.

 

[giga]

I only have one remaining student loan with a $1229 balance and a 3.15% interest rate. Pay it off or continue the $50 minimum monthly payments? I know paying it off would feel really good psychologically, but I'm not sure if it's worth it over putting that money to this year's Roth IRA.

 

[RumblingRosco]

I only have one remaining student loan with a $1229 balance and a 3.15% interest rate. Pay it off or continue the $50 minimum monthly payments? I know paying it off would feel really good psychologically, but I'm not sure if it's worth it over putting that money to this year's Roth IRA.

It likely makes more financial sense to invest into a total stock market mutual fund or ETF, but honestly... I would just pay off that debt. The psychological benefit would be more worth it to me than the small amount you'd earn by investing once that 3.15% is taken into account.

 

[Cyan]

Oh, I agree that the purpose of bonds is to blunt loses. I just don't see the point of blunting loses and reducing gains when I still have 35 years left until retirement. I mean, what do I care if my portfolio absolutely tanks 10 years from now due to a huge market crash? I still have 25 years left to retirement. Thats plenty of time for the market to bounce back. Therefore, I think it makes sense to invest for the most growth possible.

I think time is all the hedge you need until time stops being such an excellent hedge. That is when I plan to start heavily investing in bonds.

Well... does your ability to take on risk suddenly fall off a cliff at 10 years before retirement? Or does it slowly increase over time as your time horizon decreases, as you approach the time that you'll actually need the money?

Or, here's another way of looking at it. The reason you want to switch to a bond mix (let's call it 60/40) ten years before retirement is to blunt the risk of a massive loss right before retirement, when you'll need the money. But what if that massive loss happens right before your planned switch to the 60/40 bond mix? Your ability to make up the loss will be severely curtailed by the switch in asset allocation, with all those bonds in your portfolio. Of course, this isn't as disastrous as a massive loss just before retirement. But it's still really bad. So maybe you should hedge that by switching to, say, a 70/30 bond mix a few years before your planned 60/40 switch. But wait! What if a market crash happens right before your planned 70/30 switch? Well, again, not nearly as bad as the crash before retirement or the crash before the 60/40 switch, but still kind of bad. Maybe you should hedge it by switching to 80/20 a few years before the 70/30 switch. You see where this is going. Suddenly we've arrived at the standard, mainstream notion of slowly increasing your allocation to bonds as you get closer to retirement.

Now, it's important to be aware of the costs as well as the benefits. By slowly allocating to bonds, you are also slowly reducing the expected return of your portfolio. But what that buys you is a slow decrease in variance over time. An increased ability to withstand downturns, that goes up in tandem with your vulnerability to downturns.

Pie, I'm not going to tell you that you personally have to allocate to bonds. You're clearly comfortable with a high level of risk. But this is the argument for it: over time, your ability to withstand risk goes down. It's prudent to lower your risk as your ability to withstand it decreases.

And I'm very uncomfortable with advising people in this thread to not invest in bonds at all. Sure, that's a thing you can do if you can deal with the risks due to a high income or not caring or maybe needing to take higher risks in order to get your portfolio to where you want it... but it's not for everyone. Most people will find that a stock/bond portfolio, with the allocation to bonds increasing over time, works better for them as far as risk/return go.

 

[Piecake]

Well... does your ability to take on risk suddenly fall off a cliff at 10 years before retirement? Or does it slowly increase over time as your time horizon decreases, as you approach the time that you'll actually need the money?

Or, here's another way of looking at it. The reason you want to switch to a bond mix (let's call it 60/40) ten years before retirement is to blunt the risk of a massive loss right before retirement, when you'll need the money. But what if that massive loss happens right before your planned switch to the 60/40 bond mix? Your ability to make up the loss will be severely curtailed by the switch in asset allocation, with all those bonds in your portfolio. Of course, this isn't as disastrous as a massive loss just before retirement. But it's still really bad. So maybe you should hedge that by switching to, say, a 70/30 bond mix a few years before your planned 60/40 switch. But wait! What if a market crash happens right before your planned 70/30 switch? Well, again, not nearly as bad as the crash before retirement or the crash before the 60/40 switch, but still kind of bad. Maybe you should hedge it by switching to 80/20 a few years before the 70/30 switch. You see where this is going. Suddenly we've arrived at the standard, mainstream notion of slowly increasing your allocation to bonds as you get closer to retirement.

Now, it's important to be aware of the costs as well as the benefits. By slowly allocating to bonds, you are also slowly reducing the expected return of your portfolio. But what that buys you is a slow decrease in variance over time. An increased ability to withstand downturns, that goes up in tandem with your vulnerability to downturns.

Pie, I'm not going to tell you that you personally have to allocate to bonds. You're clearly comfortable with a high level of risk. But this is the argument for it: over time, your ability to withstand risk goes down. It's prudent to lower your risk as your ability to withstand it decreases.

And I'm very uncomfortable with advising people in this thread to not invest in bonds at all. Sure, that's a thing you can do if you can deal with the risks due to a high income or not caring or maybe needing to take higher risks in order to get your portfolio to where you want it... but it's not for everyone. Most people will find that a stock/bond portfolio, with the allocation to bonds increasing over time, works better for them as far as risk/return go.

I think the key point here is that the 10 or so years is not a definite set date. If the market is in a terrible position, I am going to wait. If its doing fine, I'll go into bonds. 10 years is simply the time period when I will start to look to moving towards bonds. This obviously involves a little market timing, but I think its a bit different than 'regular' market timing because I'd simply be waiting on a bull market to come around. That should definitely happen during that time period unless we get another great depression going on. So I guess if a 15 year great depression happens I am kinda fucked, but that is about the only scenario I can see screwing me over.

Now, while I have continuously said that people should do what they are comfortable with I can see how my 100% stock strategy might have influenced some people to go that route. Personally, I think thats a good thing if they can handle the risk, but could be a bad thing if they can't. Of course, if a downturn happens and they panic and sell, I don't think them having an 80/20 allocation instead of a 100/0 allocation is going to stop that. They are selling because the market tanked and are afraid, not because they would have fictitiously lost a little less money if they went the 80/20 route.

I think the purpose of bonds is to have those available to sell to cover expenses during a market crash when you are in retirement. As long as you get bonds and reduce risk before retirement I think its fine. Moreover, the more you gain now, the more conservative your investment can be in retirement. I think that is quite useful because you can more easily make up for a mistake in your youth than you make up for a wicked, long market crash in retirement.

I'd also disagree with the sentiment that your tolerance for risk goes down as you age. While that might be true for some or many, I don't see that happening to myself. I certainly will take on less risk by investing in more bonds when I am 55+, but that is just because its very prudent to do so. Its not because I will be less risk averse. I think its prudent now to invest in 100% stocks, so thats what I do.

 

[giga]

It likely makes more financial sense to invest into a total stock market mutual fund or ETF, but honestly... I would just pay off that debt. The psychological benefit would be more worth it to me than the small amount you'd earn by investing once that 3.15% is taken into account.

Yeah I think I feel the same way. I hate debt.

I still have to max out 2013's Roth IRA before the 15th, so once I do that, I'll concentrate on paying off that loan. Thanks!

 

[clav]

Is this week dividend day?

Well... does your ability to take on risk suddenly fall off a cliff at 10 years before retirement? Or does it slowly increase over time as your time horizon decreases, as you approach the time that you'll actually need the money?

Or, here's another way of looking at it. The reason you want to switch to a bond mix (let's call it 60/40) ten years before retirement is to blunt the risk of a massive loss right before retirement, when you'll need the money. But what if that massive loss happens right before your planned switch to the 60/40 bond mix? Your ability to make up the loss will be severely curtailed by the switch in asset allocation, with all those bonds in your portfolio. Of course, this isn't as disastrous as a massive loss just before retirement. But it's still really bad. So maybe you should hedge that by switching to, say, a 70/30 bond mix a few years before your planned 60/40 switch. But wait! What if a market crash happens right before your planned 70/30 switch? Well, again, not nearly as bad as the crash before retirement or the crash before the 60/40 switch, but still kind of bad. Maybe you should hedge it by switching to 80/20 a few years before the 70/30 switch. You see where this is going. Suddenly we've arrived at the standard, mainstream notion of slowly increasing your allocation to bonds as you get closer to retirement.

Now, it's important to be aware of the costs as well as the benefits. By slowly allocating to bonds, you are also slowly reducing the expected return of your portfolio. But what that buys you is a slow decrease in variance over time. An increased ability to withstand downturns, that goes up in tandem with your vulnerability to downturns.

Pie, I'm not going to tell you that you personally have to allocate to bonds. You're clearly comfortable with a high level of risk. But this is the argument for it: over time, your ability to withstand risk goes down. It's prudent to lower your risk as your ability to withstand it decreases.

And I'm very uncomfortable with advising people in this thread to not invest in bonds at all. Sure, that's a thing you can do if you can deal with the risks due to a high income or not caring or maybe needing to take higher risks in order to get your portfolio to where you want it... but it's not for everyone. Most people will find that a stock/bond portfolio, with the allocation to bonds increasing over time, works better for them as far as risk/return go.

I agree with Cyan.

Someone here earlier melted down and sold everything for some odd reason in February when the stock market dipped a bit.

Since this thread is still in its infant stages, we haven't really seen a bear market.

 

[GhaleonEB]

Well... does your ability to take on risk suddenly fall off a cliff at 10 years before retirement? Or does it slowly increase over time as your time horizon decreases, as you approach the time that you'll actually need the money?

Or, here's another way of looking at it. The reason you want to switch to a bond mix (let's call it 60/40) ten years before retirement is to blunt the risk of a massive loss right before retirement, when you'll need the money. But what if that massive loss happens right before your planned switch to the 60/40 bond mix? Your ability to make up the loss will be severely curtailed by the switch in asset allocation, with all those bonds in your portfolio. Of course, this isn't as disastrous as a massive loss just before retirement. But it's still really bad. So maybe you should hedge that by switching to, say, a 70/30 bond mix a few years before your planned 60/40 switch. But wait! What if a market crash happens right before your planned 70/30 switch? Well, again, not nearly as bad as the crash before retirement or the crash before the 60/40 switch, but still kind of bad. Maybe you should hedge it by switching to 80/20 a few years before the 70/30 switch. You see where this is going. Suddenly we've arrived at the standard, mainstream notion of slowly increasing your allocation to bonds as you get closer to retirement.

Now, it's important to be aware of the costs as well as the benefits. By slowly allocating to bonds, you are also slowly reducing the expected return of your portfolio. But what that buys you is a slow decrease in variance over time. An increased ability to withstand downturns, that goes up in tandem with your vulnerability to downturns.

Pie, I'm not going to tell you that you personally have to allocate to bonds. You're clearly comfortable with a high level of risk. But this is the argument for it: over time, your ability to withstand risk goes down. It's prudent to lower your risk as your ability to withstand it decreases.

I think the key to making the strategy work - or potentially work, given the increased risk - is to re-balance toward bonds gradually as retirement approaches. If you are in 100% stock, the more prudent approach would be to transition to bonds gradually as retirement approaches. If you're targeting a 30/70 bond/stock mix come retirement, you'd start with a re-balance to 3-97 ten years out, and then 6/94 the next, and so on. This will blunt the risk of making the transition in a downturn by completing it over a long period of time. This is just an example, the starting and end points can be adjusted, but the goal is a gradual rather than sudden transition, so as to not expose yourself to the market timing risk inherent with a large re-balance.

This actually is the "standard, mainstream notion of slowly increasing your allocation to bonds as you get closer to retirement", only starting with a lower baseline (zero) of bonds, rather than say, 10% or 20%. It's higher risk but the transition to a sensible retirement allocation can be handled the same way. (It's also my current plan, as I'm sitting on 100% stock in retirement.)

 

[rkn]

Starting a new job with some sort of company match 401k plan finally. It's a 100% match for 3% and 50% match for the next 2%? I have no idea what this means. Just to use rounded off figures what should I be doing if I am making say 100k? Also a bit of a late starter, early 30s, had a 401k in the past but pulled out during a rough patch. So starting from zero.

 

[RumblingRosco]

Starting a new job with some sort of company match 401k plan finally. It's a 100% match for 3% and 50% match for the next 2%? I have no idea what this means. Just to use rounded off figures what should I be doing if I am making say 100k? Also a bit of a late starter, early 30s, had a 401k in the past but pulled out during a rough patch. So starting from zero.

The 100% match for the first 3% means your employee will add $1 for every $1 you put into your 401k, up to 3% of your salary. The 50% match means they'll put $0.50 in for every $1 you put in up to the next 2% of your salary. So, if you make $100,000 a year and put in 3% ($3,000) your employer will automatically add an extra $3,000 into your 401k. If you put in an extra 2% ($2,000) after already putting in that first 3%, they'll match it up to 50%, so they'll put in an extra $1,000. At the bare minimum, you should contribute 5% (or, in my example, $5,000) per year to your 401k because you'll essentially make an 80% return on your investment just because your employer is matching your initial investment.

Was your pulling out previously due to a personal rough patch (such as you were dead broke and needed the money) or did you pull out because the stock market was tanking (such as in 2008-2009)? Not trying to pry into your personal life, but if it was because of the stock market, then there are some valuable lessons you should learn before going forward with your retirement planning, imo.

 

[simplayer]

Starting a new job with some sort of company match 401k plan finally. It's a 100% match for 3% and 50% match for the next 2%? I have no idea what this means. Just to use rounded off figures what should I be doing if I am making say 100k? Also a bit of a late starter, early 30s, had a 401k in the past but pulled out during a rough patch. So starting from zero.

If you invest 3% of your 100k, you would put in 3k and your company would put in 3k. Of you put in 4%, you would put in 4k and your company 3.5k. If you put in 5% you would put in 5k and the company 4k. Anything past 5% the company will only put in 4k

 

[iamblades]

I think the key to making the strategy work - or potentially work, given the increased risk - is to re-balance toward bonds gradually as retirement approaches. If you are in 100% stock, the more prudent approach would be to transition to bonds gradually as retirement approaches. If you're targeting a 30/70 bond/stock mix come retirement, you'd start with a re-balance to 3-97 ten years out, and then 6/94 the next, and so on. This will blunt the risk of making the transition in a downturn by completing it over a long period of time. This is just an example, the starting and end points can be adjusted, but the goal is a gradual rather than sudden transition, so as to not expose yourself to the market timing risk inherent with a large re-balance.

This actually is the "standard, mainstream notion of slowly increasing your allocation to bonds as you get closer to retirement", only starting with a lower baseline (zero) of bonds, rather than say, 10% or 20%. It's higher risk but the transition to a sensible retirement allocation can be handled the same way. (It's also my current plan, as I'm sitting on 100% stock in retirement.)

IMO the whole idea of drawing down your investments at retirement age is the wrong way to go about it. I also think the stocks vs bonds allocation idea is overly simplistic. Income vs. Growth is a better measurement. I absolutely am a believer in mixing in more income producing investments as you near retirement age. Not government bonds though. Government bonds at the moment are a historically shitty investment.

The issue with timing for the retirement age is not that the market might hit a down period around when you hit retirement age, the issue is that there is almost never a good time to sell a productive asset. If something is earning 9% per year, you are almost never going to get as much from selling it as you would holding it.

The goal for retirement planning should not be to sell off your investments piecemeal to pay for your retirement. The goal should be to make enough in dividends that you are never forced to sell anything and can actually continue to reinvest during retirement. This may not be an option for those who are already nearing retirement, but for those starting out in their 20s or even 30s, it absolutely should be the goal they are targeting. Plan for retirement as if you are going to live forever.

 

[Cyan]

The issue with timing for the retirement age is not that the market might hit a down period around when you hit retirement age

That's exactly the issue. The market might hit a down period, and you are stuck with a low asset base right when you need to start selling and can't afford much risk to build it back up.

The goal for retirement planning should not be to sell off your investments piecemeal to pay for your retirement. The goal should be to make enough in dividends that you are never forced to sell anything and can actually continue to reinvest during retirement.

In a non-taxable account like an IRA or 401k, there is zero difference between selling assets and receiving dividends. They are functionally identical. Income vs growth investment is a distinction that doesn't matter at all for tax-exempt retirement accounts.

I'd also disagree with the sentiment that your tolerance for risk goes down as you age. While that might be true for some or many, I don't see that happening to myself. I certainly will take on less risk by investing in more bonds when I am 55+, but that is just because its very prudent to do so. Its not because I will be less risk averse. I think its prudent now to invest in 100% stocks, so thats what I do.

I'm using "risk tolerance" sort of interchangeably with "ability to withstand risk." Risk tolerance includes a number of factors: time horizon, asset base, future expected income, and of course personal risk aversion. Personal risk aversion may or may not change as you age, but time horizon decreases and future income does too. This is what I'm talking about when I say risk tolerance goes down over time.

I think the key to making the strategy work - or potentially work, given the increased risk - is to re-balance toward bonds gradually as retirement approaches.

Yes, this was the point of that paragraph.

This actually is the "standard, mainstream notion of slowly increasing your allocation to bonds as you get closer to retirement", only starting with a lower baseline (zero) of bonds, rather than say, 10% or 20%. It's higher risk but the transition to a sensible retirement allocation can be handled the same way. (It's also my current plan, as I'm sitting on 100% stock in retirement.)

It's not only about transitioning to a sensible retirement allocation. It's also about transitioning to a sensible allocation for ten years out from retirement (0% bonds at that time horizon is not what I would consider sensible), for fifteen years out from retirement, etc etc going backwards. I think it's fine to have a faster ramp-up that starts later than what most people do, if you have the income, asset base, and lack of risk aversion to handle it. Just be aware of how aggressive it is!

 

[GhaleonEB]

Yes, this was the point of that paragraph.

Perhaps I misunderstood. I thought you were talking about switching from Piecake's 100% stock allocation to a 30/70 or 40/60 bond/stock mix at a given point in time (10 years out from retirement), rather than gradually. Or rather, arguing why such an approach is problematic. That wasn't what I thought Piecake's strategy was, but then perhaps I misread that as well. I might be on a roll!

It's not only about transitioning to a sensible retirement allocation. It's also about transitioning to a sensible allocation for ten years out from retirement (0% bonds at that time horizon is not what I would consider sensible), for fifteen years out from retirement, etc etc going backwards. I think it's fine to have a faster ramp-up that starts later than what most people do, if you have the income, asset base, and lack of risk aversion to handle it. Just be aware of how aggressive it is!

Right, I was noting how aggressive it is. I personally see a moderate bond allocation 20 years from retirement as wasted growth potential, but then I have a high risk tolarance and am not going flinch due to market gyrations. Those who desire a more stable retirement portfolio that far out should hold bonds. (Which is probably most people, especially those entering this thread looking for advice.)

 

[rkn]

The 100% match for the first 3% means your employee will add $1 for every $1 you put into your 401k, up to 3% of your salary. The 50% match means they'll put $0.50 in for every $1 you put in up to the next 2% of your salary. So, if you make $100,000 a year and put in 3% ($3,000) your employer will automatically add an extra $3,000 into your 401k. If you put in an extra 2% ($2,000) after already putting in that first 3%, they'll match it up to 50%, so they'll put in an extra $1,000. At the bare minimum, you should contribute 5% (or, in my example, $5,000) per year to your 401k because you'll essentially make an 80% return on your investment just because your employer is matching your initial investment.

Was your pulling out previously due to a personal rough patch (such as you were dead broke and needed the money) or did you pull out because the stock market was tanking (such as in 2008-2009)? Not trying to pry into your personal life, but if it was because of the stock market, then there are some valuable lessons you should learn before going forward with your retirement planning, imo.

Was prior to that, and it wasn't a huge amount, but yeah, was a pull it out at that moment or out on the street situation, thankfully the last few years have been a complete 180, but I still haven't ventured into anything except saving for a house. This seems like a reason to start.

If you invest 3% of your 100k, you would put in 3k and your company would put in 3k. Of you put in 4%, you would put in 4k and your company 3.5k. If you put in 5% you would put in 5k and the company 4k. Anything past 5% the company will only put in 4k

Thanks both for the simple explanation, I know I'm definitely behind the curve on just the basics, just don't want to leave anything on the table.