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[S.Dedalus]

There are some very smart people in this thread, so I'm hoping I can get some advice...

I talked to HR yesterday about my company's 401(k) - it's through Fidelity, but there is no employer match. Not a penny. Is it even worth opening a 401(k) through work, or should I just open a Roth IRA with Vanguard and put as much into that as I can? Probably can't afford more than $1,000 a year at this point, which is about 4% of my yearly take-home pay.

American, 26, not married, and I currently support both myself and my boyfriend while he looks for work.

I don't know enough about the tax part of 401(k) vs. IRA to know what the best move is at this point.

Any advice is much appreciated!

 

[Husker86]

There are some very smart people in this thread, so I'm hoping I can get some advice...

I talked to HR yesterday about my company's 401(k) - it's through Fidelity, but there is no employer match. Not a penny. Is it even worth opening a 401(k) through work, or should I just open a Roth IRA with Vanguard and put as much into that as I can? Probably can't afford more than $1,000 a year at this point, which is about 4% of my yearly take-home pay.

American, 26, not married, and I currently support both myself and my boyfriend while he looks for work.

I don't know enough about the tax part of 401(k) vs. IRA to know what the best move is at this point.

Any advice is much appreciated!

If you for sure can't/aren't going to put in more than the IRA max ($5,500) for retirement then I would just go with a Roth and skip the 401k until they match, if ever.

IRAs are more flexible since you can invest in anything you want, and I personally like the tax benefits of a Roth over 401k/traditional.

Basically with a Roth you will be putting in after-tax money, but when you go to take out in retirement, you will pay no taxes at all. All those gains...tax free!

If you want to be able to deduct your contributions come tax time, then go with a traditional IRA. Same tax benefits as a 401k (though the limit is lower at $5,500, still higher than you will be putting in though).

To sum up, don't do 401k until you will be putting in more than $5,500 a year or they start matching.

 

[Mairu]

There are some very smart people in this thread, so I'm hoping I can get some advice...

I talked to HR yesterday about my company's 401(k) - it's through Fidelity, but there is no employer match. Not a penny. Is it even worth opening a 401(k) through work, or should I just open a Roth IRA with Vanguard and put as much into that as I can? Probably can't afford more than $1,000 a year at this point, which is about 4% of my yearly take-home pay.

American, 26, not married, and I currently support both myself and my boyfriend while he looks for work.

I don't know enough about the tax part of 401(k) vs. IRA to know what the best move is at this point.

Any advice is much appreciated!

If they don't do any matching and that's all you can afford to contribute I would go with the Roth IRA personally.

 

[Darren870]

Well a 401k is pretax money, while a Roth IRA, is post tax.

Unless you are straddling a tax bracket line the Roth likely makes more sense. Otherwise, with the 401k you could lower your tax bracket.

Any option is a good one if you don't have a retirement account though

 

[Husker86]

Well a 401k is pretax money, while a Roth IRA, is post tax.

Unless you are straddling a tax bracket line the Roth likely makes more sense. Otherwise, with the 401k you could lower your tax bracket.

Any option is a good one if you don't have a retirement account though

But in that case, just go with a traditional IRA and get the same tax deduction benefit. If he isn't going to hit the IRA cap, then a non-matched 401k doesn't make sense, unless I'm missing something.

 

[Kieli]

Never mind.

 

[Darren870]

But in that case, just go with a traditional IRA and get the same tax deduction benefit. If he isn't going to hit the IRA cap, then a non-matched 401k doesn't make sense, unless I'm missing something.

Yea, that's right. Wasn't thinking about it.

 

[S.Dedalus]

I don't think this current employer will ever match. I don't make a ton, and I'm nowhere near straddling a tax bracket line, so I think the Roth does make most sense.

I'm planning to move to another part of the country in a few years; hopefully I'll find a similar job with an employer who will match (and the cost of living will be slightly lower) so I can get a 401(k) going as well. But until then, I'll likely go with just a Roth with Vanguard. I like the idea of being taxed on it now and not later.

And I agree, anything is better than just having a savings account through the bank, which is all I currently have. Thankfully, no student loans or mortgage or any serious expenses at the moment. But the earlier I start, no matter how piddly the contribution, the better.

Thanks for your help, guys =)

 

[GhaleonEB]

I don't think this current employer will ever match. I don't make a ton, and I'm nowhere near straddling a tax bracket line, so I think the Roth does make most sense.

I'm planning to move to another part of the country in a few years; hopefully I'll find a similar job with an employer who will match (and the cost of living will be slightly lower) so I can get a 401(k) going as well. But until then, I'll likely go with just a Roth with Vanguard. I like the idea of being taxed on it now and not later.

And I agree, anything is better than just having a savings account through the bank, which is all I currently have. Thankfully, no student loans or mortgage or any serious expenses at the moment. But the earlier I start, no matter how piddly the contribution, the better.

Thanks for your help, guys =)

The first four years I had a Roth IRA, I only contributed $50 per month. Even that added up to a decent amount. Starting now is a good call.

 

[Randolph Freelander]

More dire news on the American retirement front:

36% of adults lack retirement savings -- 26% of them over 50
http://www.latimes.com/business/la-fi-retirement-savings-bankrate-20140818-story.html

More than a third of American adults have no retirement savings, including 14% of those 65 years of age or older, according to a new study released Monday.

The low savings rate for people at or approaching retirement age is alarming, said Greg McBride, chief financial analyst for Bankrate.com, which conducted the survey.

About a quarter -- 26% -- of those age 50 to 64 haven't started saving for retirement, the survey said; the figure was 33% of people who are 30- to 49-years-old.

...

The findings were not all bad, McBride said.

The survey showed that younger people are starting to save earlier than in past generations.

Twice as many adults who are 30- to 49-years-old started saving when they were in their twenties instead of waiting until their 30s., the survey said. Those 65 or older were just as likely to have waited until they were in their forties to start saving as to have started in their twenties, McBride said.

...

Still, 69% of those 18- to 29-years-old have no retirement savings, according to the survey.

 

[yogloo]

I just read the thread title how to incest for retirement.

 

[ScottSullivan]

Hey all, Lots of great advice in this thread. Thanks for taking the time to respond to us all.

Been investing in the Fidelity 401k with 3% employer match. 100% invested after 5 years, been with the company a little over a year and it's already boosted my total a good 20% it seems like

I'm only 27, should I go into my 401k and modify it to more risky investments, could I see enough growth potentially if I'm only adding in around 2k a year to the principle right now?

 

[Randolph Freelander]

Hey all, Lots of great advice in this thread. Thanks for taking the time to respond to us all.

Been investing in the Fidelity 401k with 3% employer match. 100% invested after 5 years, been with the company a little over a year and it's already boosted my total a good 20% it seems like

I'm only 27, should I go into my 401k and modify it to more risky investments, could I see enough growth potentially if I'm only adding in around 2k a year to the principle right now?

Define risky, or actually describe how your funds are allocated now. I'd say you should probably be heavily, heavily tilted towards stocks now (personally, I'd go all stock, but that's up to you), but I wouldn't go towards anything exotic. A good dose of an S&P 500 index fund, if it's available to you, will go a long way. A total market index fund would be even better.

As for your amount, you'll want to increase that as you can. $2000 per year, at 8% growth over 40 years, will get to just over $518K by the time you're 67, but keep in mind inflation. In today's dollars, that's worth about $234K (at 2% inflation per year). You'll want to save more than that, and the earlier you can start increasing your amount, the more it can grow, the less you'll need to scrimp in your later years.

 

[iamblades]

Define risky, or actually describe how your funds are allocated now. I'd say you should probably be heavily, heavily tilted towards stocks now (personally, I'd go all stock, but that's up to you), but I wouldn't go towards anything exotic. A good dose of an S&P 500 index fund, if it's available to you, will go a long way. A total market index fund would be even better.

As for your amount, you'll want to increase that as you can. $2000 per year, at 8% growth over 40 years, will get to just over $518K by the time you're 67, but keep in mind inflation. In today's dollars, that's worth about $234K (at 2% inflation per year). You'll want to save more than that, and the earlier you can start increasing your amount, the more it can grow, the less you'll need to scrimp in your later years.

^^ I view stocks as very low risk for anyone under 45 or so at the earliest.

Risky to me means derivatives and leveraged funds. Anything else, assuming proper diversification, is almost impossible to lose money on in the long term.

 

[YaGaMi]

If only there was a UKGAF version of this thread. Starting to put money aside for the future but would prefer to invest some of it rather than it just sitting in the bank.

 

[Piecake]

If only there was a UKGAF version of this thread. Starting to put money aside for the future but would prefer to invest some of it rather than it just sitting in the bank.

The investing principles are the same. Everyone, be they American, Canadian, English, etc should probably (i say everyone) invest in broad, diversified low cost index funds. The retirement vehicle specifics will differ from country to country, but the retirement investing strategy does not.

Let us know what kind of retirement vehicles you have, what those mean, what fund options you have, and someone here can probably help you out.

 

[iamblades]

If only there was a UKGAF version of this thread. Starting to put money aside for the future but would prefer to invest some of it rather than it just sitting in the bank.

The fundamentals are the same the world over.

Own parts of profitable businesses for the long term and you WILL make a lot of money. Profitable businesses are profitable no matter where you live. In some places buying stock may be problematic, but the UK has one of the most active international stock markets and laws relatively friendly toward direct foreign investment, so it should not be an issue for you at all.

Do not try to pick winners and losers, Do not try to time market swings. Do not react fearfully when the market dips, react greedily.

Read this for motivation and to put you in the right general mindset:

http://www.fool.com/ecap/the_motley...7410860008&waid=7284&wsource=esatabwdg0860008

 

[Neffarias_Bredd]

Someone I know was talking to a local asset management firm who advised that they basically set up a stop order to sell his portfolio out of the market if it were to drop by 15%. This would essentially lock in any losses and pull him out of the market when he should be buying in as much as he can, right? I'm not going crazy here???

 

[Piecake]

Someone I know was talking to a local asset management firm who advised that they basically set up a stop order to sell his portfolio out of the market if it were to drop by 15%. This would essentially lock in any losses and pull him out of the market when he should be buying in as much as he can, right? I'm not going crazy here???

That is really stupid if you are investing in index funds and for the long term. Small to super huge drops from now until, well, basically the time you retire really don't matter.

I don't know if it is stupid when you have stop orders on individual stocks for the short term though. I mean, it is beneficial to sell losers and get in on winners, but I believe it is basically impossible to pick losers and winners. One thing you do get out of selling losers is a nice tax credit that you can then put towards your earnings and cancel out your capital gains. So that's something.

So yea, I would tell him to not use that local asset management firm because that firm is likely fucking him in the ass with expensive fees. I would then tell him to ditch stock picking if he does it because that is simply a gamble and instead invest in index funds for the long term. He will (likely) be richer and happier.

 

[iamblades]

Someone I know was talking to a local asset management firm who advised that they basically set up a stop order to sell his portfolio out of the market if it were to drop by 15%. This would essentially lock in any losses and pull him out of the market when he should be buying in as much as he can, right? I'm not going crazy here???

You are correct, although 'locking in losses' is not really accurate. The issue is missing the future unpredictable gains:

Between 80% and 90% of the returns realized on stocks occur in less than 10% of trading days. So, if you're out of the market when stocks resume their march upward, your long-term returns may suffer significantly.

- A study by SEI Investments reviewed all the bear markets since World War II. According to the study, reported in The Wall Street Journal, stocks rose an average of 32.5% in the 12 months following the bear-market bottom. Yet, if you missed the bottom by just a week, that return fell to 24.3%. Waiting three months after the market turned cut your gain to less than 15%.

- From 1990 to 2005 a $10,000 investment would have grown to $51,354 had you just sat tight from beginning to end. However, if you had missed the best 10 days in that 15-year period, your returns would have dwindled to $31,994; if you had missed the best 30 days, you'd be looking at a mere $15,730.

- Nobel laureate William Sharpe found that market timers must be right an incredible 82% of the time just to match the returns realized by buy-and-hold investors. While longterm investors were sitting tight, the market timer was fretting over when was the best time to get in or out of the market and not necessarily earning greater rewards.

- Between 1986 and 2005, the S&P 500 compounded at an annual rate of return of 11.9% - even in the face of the market crash in 1987, two recessions, two wars, 9/11, the 2000's "tech-wreck," accounting scandals (i.e. Enron), and more. Due to market timing, the average investor's return during that time was only 3.9%.

- If an investor missed just 40 of the biggest up days in the market over the last 20 years (1987-2007), their return would have totaled 3.98% versus remaining fully invested and achieving an average annualized return of 11.82%.

- The market research firm DALBAR went one step further and looked at the returns of mutual fund investors over the 20-year period, 1986-2006, and reported the average market timer return was - 2%. During this same time period, the S&P 500 Index returned 12%.

Bottom line: Time is much more important than timing when it comes to long-term market success. I know it seems tempting to "get out of the market now and get back in when things are better." The problem is that you never know when things are better until it is too late, and stocks have already skyrocketed.

http://www.dowtheory.com/Why_you_should_stay_in_the_stock_market.asp

There is no justifiable reason to suggest a market timing strategy, and part of me considers it almost fraud on the part of financial managers to even suggest it given how they profit off of more active trading compared to a passive long term strategy. It is a pretty clear conflict of interest IMO.

This is not even mentioning potential missed dividend income, tax implications of sell offs, etc.

 

[Randolph Freelander]

Someone I know was talking to a local asset management firm who advised that they basically set up a stop order to sell his portfolio out of the market if it were to drop by 15%. This would essentially lock in any losses and pull him out of the market when he should be buying in as much as he can, right? I'm not going crazy here???

At that point, they're making a play that the correction will turn into a catastrophe. I think it's a bad play. Edit: For reasons stated above.^^

 

[Ace Harding]

Someone I know was talking to a local asset management firm who advised that they basically set up a stop order to sell his portfolio out of the market if it were to drop by 15%. This would essentially lock in any losses and pull him out of the market when he should be buying in as much as he can, right? I'm not going crazy here???

I don't get how people could ever do stuff like this. My first instinct if the market dropped 15-20% would be to step up buying stock, dollar cost averaging all the way down and back up again.

 

[Neffarias_Bredd]

By "locking in losses" I essentially meant that, even if the market dipped 50%, he would realize no losses until he actually sold the funds at a loss. He would of course miss the eventual rise in the market as well, although I'm sure the advisers told him they could time it right. Which is most likely bull shit.

Any yea, from the way he made it sound they would sell out of his whole portfolio, not individual stocks. Just seemed so stupid to me I was actually wondering if I missed anything.

 

[iamblades]

By "locking in losses" I essentially meant that, even if the market dipped 50%, he would realize no losses until he actually sold the funds at a loss. He would of course miss the eventual rise in the market as well, although I'm sure the advisers told him they could time it right. Which is most likely bull shit.

Any yea, from the way he made it sound they would sell out of his whole portfolio, not individual stocks. Just seemed so stupid to me I was actually wondering if I missed anything.

But assuming you buy it back at the same price you sold it at or less, you still haven't lost anything in theory. Some people do this to harvest a cap gains loss for tax purposes, though I wouldn't suggest this for core long term holdings due to the restrictions on rebuying the asset after selling it.

 

[Neffarias_Bredd]

But assuming you buy it back at the same price you sold it at or less, you still haven't lost anything in theory. Some people do this to harvest a cap gains loss for tax purposes, though I wouldn't suggest this for core long term holdings due to the restrictions on rebuying the asset after selling it.

Yea, I understand why you would want to sell at a loss for tax harvesting purposes. I'm more talking about people fleeing the market during an economic downturn. Maybe a poorly worded phrase

 

[Piecake]

By "locking in losses" I essentially meant that, even if the market dipped 50%, he would realize no losses until he actually sold the funds at a loss. He would of course miss the eventual rise in the market as well, although I'm sure the advisers told him they could time it right. Which is most likely bull shit.

Any yea, from the way he made it sound they would sell out of his whole portfolio, not individual stocks. Just seemed so stupid to me I was actually wondering if I missed anything.

I would show your friend either this thread or if he is going to dismiss this thread due to it being on a video game message board you just send him this link

http://www.vox.com/2014/7/31/5882885/retirement-planning-saving-how-much-do-i-need

I think timing the market is impossible and a great deal of actual data has proven that fact. I would imagine that your friend's brokers suffer from the illusion of expertise.

To find the answers, Kahneman calculated the correlations between the rankings of advisers in different years, comparing year one with year two, year one with year three, and so on through a comparison of year seven with year eight. This exercise generated 28 correlations, one for each year.

Kahneman was taken aback by what he discovered. “While I was prepared to find little year-to-year consistency,” he writes, “I was still surprised to find that the average of the 28 correlations was .01. In other words, zero. The stability that would indicate differences in skill was not to be found.”

Humans suck at predicting the future and anyone who says they can is either fooling themselves or trying to fool you.

Edit: On a side note, I updated the first post a bit and included links to the definition of jargon. I know a few people got overwhelmed by all of that stuff, so hopefully this helps. I am not sure how to make it any easier to understand. Any suggestions will be welcome

 

[iamblades]

I don't get how people could ever do stuff like this. My first instinct if the market dropped 15-20% would be to step up buying stock, dollar cost averaging all the way down and back up again.

It's because many people have a fundamental misunderstanding of what it means to own stock. People disconnect it completely in their minds from the real business activity it represents and just think of it as numbers on a page. Most people on the other hand would not panic and sell their house if everyday their neighbor came over and quoted them a price and then one day the price started dropping, because people have a more tangible sense of what it means to own a house. Whereas stocks are more intangible and ephemeral, so people don't develop the same intuitive sense of what the value of the thing is, so when the quote price decreases they panic because they lack a true understanding of why the thing is valuable so they can't foresee it ever increasing in value again, even though the history of the stock market shows that it certainly will.

Once you realize that by buying into the stock market you are buying pieces of profitable businesses, it becomes almost obvious that instead of selling off when the price drops you should be buying. A profitable business remains profitable no matter what the share price does, and in fact a lower share price just allows you to claim a larger share of the profits because you can buy more shares.

 

[giga]

Off topic, but maybe someone can advise. My FICO score is 755. I should be able to refinance my auto loan at a pretty low rate, right? Right now it's a 5.25% rate, and I'm looking for 1.6-1.7% when refinancing.

 

[Chumly]

Off topic, but maybe someone can advise. My FICO score is 755. I should be able to refinance my auto loan at a pretty low rate, right? Right now it's a 5.25% rate, and I'm looking for 1.6-1.7% when refinancing.

Yes absolutely. I don't know if you can get that low but I know credit unions around where I live were regularly doing 2.25-2.5% for good credit a while back.

 

[iamblades]

You are making dangerous assumptions with very little data. You do not know what he is invested in nor what he is paying. Be careful. Your anti-asset management firm bias is showing here.

Months later and you are still dishing out not jus poor advice but flat out false ones.

Market timing is a bad idea no matter what the asset class or how skilled the management is. It has been proven time and again that as a strategy is it no better than random chance, and often much worse. So it really doesn't matter what he is invested in or what he is paying, it would be bad advice if it were free.

Stop loss orders are useful for derivatives and highly leveraged positions where you can lose all of your initial capital and much more if you don't liquidate the position immediately when it starts to go bad, but that is not what people should be doing anyway, so it's pretty much irrelevant for a thread on retirement planning. You could make an argument for the usefulness of stop loss orders for people who are very near retirement, but even then I would suggest that the more standard approach of increasing bond allocations as you near retirement age is a much better way to insulate from a market crash immediately before retirement.

There is no scenario where it makes sense for someone to advise people to pull money out of the markets when they fall and come back when the market is stronger. It doesn't even seem logical when you consider the first rule of the stock market which is to 'buy low and sell high'.

A stop loss is a tool for traders, investors have no real need for it, because investors should be invested in companies they know will be profitable over the long term. Which is a much much easier question to answer than 'when will the share price increase?'.

 

[Deleted member 102481]

How/where do I invest in an index fund and how much do I put in? Like is 200 good?

 

[Husker86]

How/where do I invest in an index fund and how much do I put in? Like is 200 good?

Fidelity has some no-fee Exchange Traded funds. You won't be able to get into an Index Mutual Fund with $200, but ETFs are basically the same thing, just you have to buy full shares.

Check out funds like ITOT. I only know Fidelity, but they have great fees (if you do decide to buy individual stocks), along with many commission-free ETFs from iShares.

 

[iamblades]

A bond ladder ten years out is curre tly averaging 2.5-3%. If i know specifics of a cost basis of a particular stock, how much it has appreciated in the time I have bought it and can use a stop limit to target a 10% return on initial investment, for example, i am better off.

I appreciate you typing the information out as it is infor ative but I have been doing dtop losses, exercising options and executing other various strategies for 8 years now. I am fully aware of how, when, where, why.

Unfortunately, none of this is relevant to the case of unknown investor who we know nothing about. I do not adhere to your sentiment that strategies work across a pool of investors. This mindset is yet another variable why investors lose; be ause conventional approaches using traditional strategies is still common place no matter the circumstances. Specific circumstances call for different customized strategies. Not text book definitions.

A stop loss can be used as a contingency to target a net return. It is very possible that this friend's portfolio has already seen above market returns.

You are ignoring the missed gains after selling the stock. Even if your stop loss is set above the rate of return of bonds, you have to account for the fact that an investor who maintains a mixed allocation of stocks and bonds the whole time will receive higher returns on the stock portion of his portfolio than one who sells off on drops. Missing one good day a year can dramatically reduce the real return on stocks, missing a good week drops your real return to almost nothing in many years.

I am also not saying that everyone should follow the same investment strategy, obviously what you know and a comfortable with is where you should focus. What I am saying that market timing is not a viable strategy in any way. It has been proven statistically that it does not work at all. Basically what you are saying is that no one should be upset when a medical practitioner advises some bullshit like homeopathy because 'specific circumstances call for customized strategies' even though we know scientifically that it doesn't work and can't work. I'll continue to call a hack a hack and a quack a quack as long as they continue to give advice without any evidence for the effectiveness of their strategy.

Market timing in the age of HFT algo trading seems especially foolish IMO, but that's just my personal opinion, I haven't seen any studies on management performance specifically related to HFT.

As for the bolded, anecdotes are all well and good, but they do not prove anything. It has been shown repeatedly that there is absolutely no correlation from year to year as to which managers beat the market and which do not. So basically it's a coin flip as to whether you beat the market in any given year (actually a bit worse than that, last I read only 40% of managers beat the market in any given year).

I've also beat the market so far this year(by a decent margin), but I would never take my investment strategy (which is still a very passive strategy) and proclaim that everyone should do the same thing, because a data set of one doesn't prove anything.

 

[usea]

I just turned 31, and I haven't started investing for retirement yet. Right now I put all my extra money toward my student loans, which have an interest rate of 6 to 7%. I think I have around 12k left on them. Does that make sense, or should I just be making minimum payments on those and investing the rest?

Also, how much buffer money should I keep in my account? Like if I quit my job or something and I need to float for a month or two, it would be nice not to have to take money out of somewhere, right?

 

[Rubenov]

Keep tackling the debt. Market returns are about 7% anyway, and you're better off with less debt. Kill it quick tho.

 

[iamblades]

I just turned 31, and I haven't started investing for retirement yet. Right now I put all my extra money toward my student loans, which have an interest rate of 6 to 7%. I think I have around 12k left on them. Does that make sense, or should I just be making minimum payments on those and investing the rest?

Also, how much buffer money should I keep in my account? Like if I quit my job or something and I need to float for a month or two, it would be nice not to have to take money out of somewhere, right?

At 7% I'd pay it off asap.

6 months of expenses is a good rule of thumb. More or less depending on how comfortable you are with your employment and/or ability to find a new job and the degree to which you could reduce spending by cutting out discretionary items temporarily.

 

[Randolph Freelander]

I just turned 31, and I haven't started investing for retirement yet. Right now I put all my extra money toward my student loans, which have an interest rate of 6 to 7%. I think I have around 12k left on them. Does that make sense, or should I just be making minimum payments on those and investing the rest?

Also, how much buffer money should I keep in my account? Like if I quit my job or something and I need to float for a month or two, it would be nice not to have to take money out of somewhere, right?

Well, 6-7% is high enough interest that I would want to see it gone sooner rather than later. But before saying just continue paying that down, does your employer offer a 401K and a match? You will want to take advantage of that, because the match is free money and a guaranteed return on your investment.

So, if available, contribute to your 401K to the point that you get the maximum match from your employer. After that, yes, continue to work to eliminate the high interest debt and build up 3 months or more of savings. Then you'll want to revisit your retirement savings strategy, because at 31, your investment requirement is already higher than someone starting out at 23 or 24, and you don't want the hill to become even steeper.

I'm a few years older than you, and I didn't get serious about retirement until fairly recently (ie., older than you are now), but I know your profession (same as mine), so I think you should actually be able to recover some ground hopefully in the next few years. In fact, at 31 with a modest amount of remaining student loans, your situation is quite similar to my own at that age, though my interest rate was actually lower (upper 3s, not 6-7).

 

[usea]

Yeah, my employer does have a 401k with some match, although I forget the %.

 

[youngplaya21]

Hey everyone. I have a few questions regarding my 401k, and after reading the thread (or what I could understand anyway), I just wanted some input on my possible changes. Finally trying to invest in my future, so I just want to get it right this time, as I honestly just chose some stuff when I first set up my Vanguard account.

I'm 25 and have been at my current company for about a year now, and have been putting in 6% (with company matching 75% up to 6% I believe) for 6 months (before was 6 months at 1%). I don't have much in my 401k, just over $4k (pre-tax), but I wanted to make sure that I'll be good in the long run. Also, if it helps, I'm 40/35/25 stocks/bonds/short term reserves, and am paying in railroad retirement instead of social security, so I'll be getting 2-3 times what SS would be paying people when I retire.

I was wondering if I need to really do anything to maximize my earnings. I've seen some people mention switching to Roth IRA and investing more into stocks then bonds/short term reserves, along with some other things that honestly went over my head. Also, I have no idea on how much I should even be aiming to save up for, or if the $$$ I'll get back from the RR retirement would be enough to sustain a retired version of me. Any sort of tips would be greatly appreciated. And I'll be sure to reread this thread in the meantime to try to get a better understanding of the situation

 

[iamblades]

Iamblades,

I may have to miss the gains.

Stattements like these and the bolded are not anecdotes, but rather different scenarios that can paint different intentions behind the strategies being discussed per goals trying to be met. Hence my emphasis on understabding the situation better rather than plugging in assumptions and narrowing down our stances based on a limited set of assumptions.

They are by definition anecdotes, what you mean to say is that you did not intend to imply that these anecdotes were proof of effectiveness, which is fair enough I guess.

Give you another example, and I have seen this happen before. Again, anecdote, but a demonstration to see other angles on things instead of merely painting black and white scenarios . I had to explore whether a set allocation of stocks with stop loss orders were a better choice than a high yield bond ladder back when yields were higher before the crash.

What we do is determine the opportunity cost involved , given the investable assets + liquid assets , in a bond ladder vs stock position. If someone is lagging behind being able to sustain their livelihood and protecting it against diminishing ourchasing power , a yield of 4%, for example, may require them to commit more funds to a strategy than a possible higher return with a position bought at $10 that is now valued at $50, for example.

Except i cannot commit more funds to a bond ladder to make up the downfall in yield vs hightler returns. I have medical bills to pay, in home care for my mother, other variables in play. No matter my age at this moment , i have to commit to a target return and to do that, I have to use the necessary tools to do it.

If a stop loss helps me realize a 110% return on a set of stocks, then my money doesnt need to work that much harder in a bond strategy. I can use the excess money that would have to work in a bond strategy to commit to needs I need met now.

Of course a stop loss can only help you realize a 110% return on a set of stocks if they have already exceeded that return. It doesn't really help when the stock drops immediately after buying it or increases immediately after selling.

Again, there is no norm. I was using anecdotes as you out itto demonstrate this . Different goals changes the true nature of intended strategy no matter the tools you use.

Also, i am curious if this friend's portfolio is truly a stock/bond only strategy.

Lastly, i appreciate separating your own situation and success and removing it from the discussion. I think you and i are on opposite sides of same coin. I maintain that success beating the market should enhance the discussions around implementing strategies. If 40% are beating the market in a ten year horizon, why shouldnt the other 60% follow their lead? My first rule of investing? There is none. The norm has forever changed. A rhetorical question as I fear that feeds into a different discussion which I would love to share with you but can't at the moment.

The 60/40 split was on an annual basis not 10 year basis, and studies have shown there is no correlation from performance in one year to performance in subsequent years. My thing about the first rule of investment was kind of a joke, as that is just the most basic commonplace idea of how the stock market works, and it's not something I follow either, my first (and only) rule is to own profitable businesses over a long time.

Anyhoo, i generally adhere to this approach as stated above to reassess what we know. This is why in grand scheme of things, I hate index funds and with the projections we can see going forward in our sluggish economy, I refuse to take risk in the ass and just accept it because "long term reasons".

Cheers.

Index funds are useful because they narrow the amount of required knowledge from 'this particular business will make money over the long term' to 'on average the majority of businesses in this index will make money over the long term'. The anticipated future sluggishness of the economy doesn't really matter for index investing either unless you believe that the majority of businesses in the index are going to start operating at a loss.

I don't see the risk when investing in a profitable company for the long term. If a company makes 15% annual profits and has for years and you see no reason why it would stop being profitable in the future, I don't understand why you would sell it off just because that quoted market price drops.

You can look at a balance sheet and tell if a company is profitable or not, but there is no way to accurately predict the market valuation. Profitable companies will on average outperform less profitable ones, but even the strongest companies often have 20+ percent swings in valuation regularly. It doesn't change whether that stock is worth owning or not.

 

[GhaleonEB]

Fidelity has some no-fee Exchange Traded funds. You won't be able to get into an Index Mutual Fund with $200, but ETFs are basically the same thing, just you have to buy full shares.

Check out funds like ITOT. I only know Fidelity, but they have great fees (if you do decide to buy individual stocks), along with many commission-free ETFs from iShares.

With Fidelity, you can get into their index funds with $200, you just have to set up recurring monthly investments of $200. So long as you do that until you get over their minimum investment hurdle - which is about a year - you are fine. (This is what I did.)

 

[Husker86]

With Fidelity, you can get into their index funds with $200, you just have to set up recurring monthly investments of $200. So long as you do that until you get over their minimum investment hurdle - which is about a year - you are fine. (This is what I did.)

Oh wow, I didn't realize that. I waited until I had enough to get in.

Speaking of their auto-deposits...either I'm missing something or I can't easily do an automatic investment from my Fidelity checking into my Roth, and from there automatically into my mutual fund in my Roth.

Whenever I try to set up some auto-deposit to my Roth, it wants a bank account and won't let me choose my Fidelity checking account that's in the same portfolio.

edit: Do I have to set up a recurring automatic withdrawal from my Fidelity checking to my IRA and then a recurring automatic investment in my IRA (a day or two after the withdrawal)? I guess that would work.

 

[charlequin]

Off topic, but maybe someone can advise. My FICO score is 755. I should be able to refinance my auto loan at a pretty low rate, right? Right now it's a 5.25% rate, and I'm looking for 1.6-1.7% when refinancing.

With that FICO score you should definitely be able to get a < 2% rate.

 

[iamblades]

With that FICO score you should definitely be able to get a < 2% rate.

^^

Mine is just a bit above that, and I got a 1.49% rate from my credit union for my car.

Was a while ago though and rates are increasing.

 

[GhaleonEB]

Oh wow, I didn't realize that. I waited until I had enough to get in.

Speaking of their auto-deposits...either I'm missing something or I can't easily do an automatic investment from my Fidelity checking into my Roth, and from there automatically into my mutual fund in my Roth.

Whenever I try to set up some auto-deposit to my Roth, it wants a bank account and won't let me choose my Fidelity checking account that's in the same portfolio.

edit: Do I have to set up a recurring automatic withdrawal from my Fidelity checking to my IRA and then a recurring automatic investment in my IRA (a day or two after the withdrawal)? I guess that would work.

You can set them up to go through on the same day, and yes, that's what you have to do since you can only put cash into an IRA. Set up a cash transfer, and on the same day an investment in the IRA. So long as the transfer is pending, the investment purchase will go through, it just won't settle until the money transfers over.

 

[Piecake]

Hey everyone. I have a few questions regarding my 401k, and after reading the thread (or what I could understand anyway), I just wanted some input on my possible changes. Finally trying to invest in my future, so I just want to get it right this time, as I honestly just chose some stuff when I first set up my Vanguard account.

I'm 25 and have been at my current company for about a year now, and have been putting in 6% (with company matching 75% up to 6% I believe) for 6 months (before was 6 months at 1%). I don't have much in my 401k, just over $4k (pre-tax), but I wanted to make sure that I'll be good in the long run. Also, if it helps, I'm 40/35/25 stocks/bonds/short term reserves, and am paying in railroad retirement instead of social security, so I'll be getting 2-3 times what SS would be paying people when I retire.

I was wondering if I need to really do anything to maximize my earnings. I've seen some people mention switching to Roth IRA and investing more into stocks then bonds/short term reserves, along with some other things that honestly went over my head. Also, I have no idea on how much I should even be aiming to save up for, or if the $$$ I'll get back from the RR retirement would be enough to sustain a retired version of me. Any sort of tips would be greatly appreciated. And I'll be sure to reread this thread in the meantime to try to get a better understanding of the situation

Well, you should always do what you are comfortable with. If you are comfortable with more bonds than stocks then do that. However, the theory is that since you are investing for the long term it makes sense to invest heavily in stocks. On average stocks get a greater return than bonds because they are more volatile. That volatility does not really matter over a 30-40 year period, because who gives a shit if it drops like a rock 10 years from now if it is up quite a bit 30-40 years from now? Again, do what you are comfortable with because the biggest mistake you can make is not failing to get the maximum return, but panicking during a market crash 10 years from now and selling all of your retirement funds then getting back in when the market rebounds, Or worse, take out your funds because you think it is now too 'dangerous'

I would really see how much you need with your awesome pension. I mean, 2-3 times social security sounds pretty freakin sweet. I mean, lets just say thats 36k a year. That's a decent take on its own. But, lets say you want to ratchet that up to 50k a year, retire at 65 and die at 85. You would need 280k in retirement funds (todays money). You will easily surpass that by like 240kl (so total of 500k) if you invest like 6k every year for 30 years and get 6% interest. Take these numbers with an extreme grain of salt. They are not precise and things are more complicated, but it should give you a very rough idea if your pension is that kick ass.

You are making dangerous assumptions with very little data. You do not know what he is invested in nor what he is paying. Be careful. Your anti-asset management firm bias is showing here. His friend's advisor may also have a deeper understanding to his circumstances than we do.

I really don't look at it as a bias, but more of as reality since I have not seen any data that asset management actually adds value. On average, it subtracts it thanks to fees. I am sure there are some out there that occasionally add value, but I think that mostly is just luck. The book/author I quoted above, as well as behavioral economists like him have researched this topic pretty thoroughly and basically concluded that stock picking is luck because the world is far too complex and that humans have way too many biases and complexes to pick things objectively even if predicted the future wasn't already impossible. That regression analysis was simply one example.

I also think there is basically one way to invest for retirment for like 95% of the population (meaning the not absurdly wealthy - honestly don't know the super wealthy's investment situation). And that is index funds. There can obviously be differences in allocations and what not, but the basic strategy is the same. Tailor-made portfolios just seem like some bogus crap that financial advisors say to justify their fees. The only personal preference that an individual needs to answer is how much risk can they handle, and that is something that can only really be done by themselves. I honestly don't see why there needs to be any other difference, why it is necessary, and why it justifies the extra cost.

asset managers and financial advisers likely have a place for the super wealthy who need complicated strategies to hide their money or do other crazy shit, but for the average investor whose only purpose is to invest for retirement or save up for a down payment or college for the kids, well, I think they are doing themselves a disservice if they hire someone to do that for them because, like I said, there has been many studies showing that people can't pick stock winners and complicated strategies that really havent been shown to consistently beat index funds usually come with high fees.

I know you disagree with me, and that is fine, and I am sure there are others who also disagree with me. When I state these views, I try to make it pretty obvious that this is my opinion. I am not trying to pass myself off as an expert or that my opinion is FACT. My thinking is that most people will take an idea expressed as an opinion as something that needs to be further researched by themselves so that they can make up their own opinion. Personally, like I said, I think my opinion is backed up by a great deal of facts, but there you go.

 

[youngplaya21]

Well, you should always do what you are comfortable with. If you are comfortable with more bonds than stocks then do that. However, the theory is that since you are investing for the long term it makes sense to invest heavily in stocks. On average stocks get a greater return than bonds because they are more volatile. That volatility does not really matter over a 30-40 year period, because who gives a shit if it drops like a rock 10 years from now if it is up quite a bit 30-40 years from now? Again, do what you are comfortable with because the biggest mistake you can make is not failing to get the maximum return, but panicking during a market crash 10 years from now and selling all of your retirement funds then getting back in when the market rebounds, Or worse, take out your funds because you think it is now too 'dangerous'

Yeah that makes sense. I'll look into raising it a bit. I guess I'll try 50/30/20 first and move around from there. Thanks!
.

I would really see how much you need with your awesome pension. I mean, 2-3 times social security sounds pretty freakin sweet. I mean, lets just say thats 36k a year. That's a decent take on its own. But, lets say you want to ratchet that up to 50k a year, retire at 65 and die at 85. You would need 280k in retirement funds (todays money). You will easily surpass that by like 240kl (so total of 500k) if you invest like 6k every year for 30 years and get 6% interest. Take these numbers with an extreme grain of salt. They are not precise and things are more complicated, but it should give you a very rough idea if your pension is that kick ass.

Yeah, that's the reason a lot of people seem to like working here. We pay a bit more for it in our paycheck, though. Looking at some sheet I was given when I hired on, the average annuity being paid was over $2k/month, plus your spouse gets a check for half that amount (it's based on salary when you retire, and I'm a manager so I'd guess it'll be above the average). I've heard it all over the place, but I never put any thought into it, since it's 40 years away...

 

[Piecake]

Yeah that makes sense. I'll look into raising it a bit. I guess I'll try 50/30/20 first and move around from there. Thanks!
.

Yeah, that's the reason a lot of people seem to like working here. We pay a bit more for it in our paycheck, though. Looking at some sheet I was given when I hired on, the average annuity being paid was over $2k/month, plus your spouse gets a check for half that amount (it's based on salary when you retire, and I'm a manager so I'd guess it'll be above the average). I've heard it all over the place, but I never put any thought into it, since it's 40 years away...

Wait, it's an annuity and not a pension? How can an annuity replace social security? Honestly, I am not very familiar with annuities and basically mistrust them since I think they are an over-complicated mess filled with a bunch of fees and what not and whose return can change (sometimes) depending on the situation or the whim of the company.

This might be a situation where a financial adviser (I'm shocked as well) who has your own fiduciary interest (super important) and takes a flat fee (also super important) would be useful. You could tell him/her to look through that annuity and explain the positives/negatives what not and what you need to look out for.

 

[Lucky Forward]

Wait, it's an annuity and not a pension? How can an annuity replace social security?

I think youngplaya21 may be covered under the Railroad Retirement Program which is administered by the federal government.

An Overview of the Railroad Retirement Program

In the 1930s, amidst concern about the ability of existing pension programs to provide former railroad workers with adequate assistance in old age, Congress established a national Railroad Retirement system. This system is primarily administered by the Railroad Retirement Board (RRB), which is an independent federal agency charged with providing benefits to eligible employees of the railroad industry and their families. Today, the Railroad Retirement program is closely tied to the far better-known Social Security program, and although the Railroad Retirement program and Social Security share a number of common elements, key differences also exist between the two in areas such as funding and benefit structure.

The new Tier I benefit was designed to be equivalent to the annuity that would be offered by Social Security, while Tier II was structured to provide additional benefits comparable to private, multiemployer pension plans. In addition, the Tier I benefit was constructed in such a way that the annuity was reduced by any Social Security payments a beneficiary received, to prevent payment of dual benefits to railroad workers who also accrued sufficient time in jobs covered by Social Security.

The Tier I benefits that RRB provides for its beneficiaries are designed to take the place of Social Security...By design, Tier I retirement benefits are generally calculated to mimic comparable Social Security benefits, and employ the same benefit formula, based on the highest 35 years of indexed earnings.

I'm under the Civil Service Retirement System, so instead of Social Security, I get a pension which is referred to as an annuity.

 

[Piecake]

A lot of what you say isn't backed by facts but my pressumptions you plug in to justify your stance, something even you admitted to in a previous thread. You create your position, and assign data to back it. That's fine. But you cannot assert that all this is your opinion yet backed by fact in the same post and expect to be taken seriously. In fact, I highly advise anyone reading this to avoid your posts altogether.

All the answers you need to address any concerns you have are out there. Your limited assertions that tailor made strategies are not necessary, that basic prise of investing applies to all and that only the wealthy need answers are not merely miscontrued notions, they are lies. Thirty years ago, the "basic strategy" as you put it was to load up on CDs . That's not the case anymore obviously. The basic strategy adapta wiyh ever changing environments in our global markets and domestic economy. There is no norm. The challenges we face today cannot be address with silly "conservatove, moderate, aggressive" check boxes and coolie cutter asset allocation.

Well, was that basic strategy actually the best strategy to employ? If not, your whole premise doesnt really work. There is quite a bit of data to suggest that you are much better investing in low cost index funds than actively managed funds and investors, on average, do a lot better if they stay in the market than dip in and out of the market by trying to time the market and picking stocks. From all of the evidence that I've seen, investing in low cost index funds was the best choice 30-40 years ago as well.

Facts are evidence. It is good to have opinions that are backed up by evidence. I am not quite sure why this is controversial. Do I have all the evidence? No, of course not. But I think that that is basically impossible as well, so all we can do is go by what we have and try to find out more.

People go to financial planners to learn what strategies they have to take to tackle multiple financial priorities many of which cannot be resolved with mere stocks and bonds. They charge for their services, and not their asset management, to provide all their advice under a one fee umbrella or an hourly fee. They go to planners because you do not know the difference between an "annuity fund" and a bond fund. Because they need to understand how to take distributions and to target a rate of return by managing risk to address certain goals that they have to deal with . They deal with financial planners because a non biased professional can educate them on how much risk they need to take rather than address how much they are willing to take (investors dont know what risk even means!).

What priorities? What differences? You've said this multiple times, but I honestly can't think of a huge difference that would drastically change something for a reasonably knowledgeable investor. Beyond retirement and saving for your kids college what else really is in the realm of realistic possibility for the average American? Seriously, I would honestly like to see some specifics. About the only thing I can think of is investing for a house.

If someone does not know what the heck they are doing and does not want to try to figure it out for themselves, then yea, going to a financial planner who has your own fiduciary interest and changes a flat fee makes sense. It's too bad that those types of financial planners are the small minority of their profession.

You spout this garbage high fee nonsense and are hung up on fees rather than net returns. I get it. It's easier for you to take the path of least resistance. If a 73% return on a given year nets me more than an index fund, I am not cryig my eye balls out over an annual 0.50% (ooohhh so costly!) fee. If i track an index as I near retirement and hit a low market, i am fucked. Suggesting bond strategy to offset this is even more demeaning. Bond ladders mean more of my money may need to go to work when the funds are needed elsewhere. A financial planner can also help a person understand not just how much risk a person needs to take, but how much money they need to commit. Something I have never seen addressed on this thread (how much money do I invest? ).

So yeah, I give two shits about surveys that follow people who have no business being in the industry. They do not change how simple planning works. It is called financial planning, not investing. Financial planners make money because they are not hung on features of a product. But because many of them know how to put a good negatively correlated asset portfolio together to address and allocate certain dollars to address specific goals.

Education and health care costs continue to skyrocket. Inflation is a problem. The power of the dollar is a problem. Living longer is a problem. If you think these can be addressed with low cost index funds, have at it, best of luck to you.

The purpose of focusing on fees and following the market is because that is far easier to predict than actual returns. If people could consistently beat the market we wouldnt have data like only 1% of fund managers beat their index over a 10 year period or that example I provided above where Daniel Kahneman did a regressive analysis of the company's brokers over an extended period of time and found a correlation of basically 0. That pretty much debunks the claim that the reason why fund managers do so poorly is because too much money flows in and they have to invest in too many assets, and that is why they fail. I don't think stock pickers and an investment firm have that problem. How do you not conclude from that evidence, among a wealth of others, that beating the market just boils down to luck?

As for non-correlated assets, how do you predict them? Asset correlation varies. And it looks like it varies pretty substantially. I suppose if you do a study using historical data using a non-correlated asset portfolio it would do amazing, but well that is because you know what assets are correlated and what assets arent. It shouldn't be surprising, but I have very little faith that anyone can predict anything reliably (excluding bonds of course). I think the far more rational choice is to reduce fees and follow the market. If someone beats the market, and people definitely will, well, I think that that is luck.

As for how much you need to invest, well, I doubt financial planners are any more successful than a knowledgeable investor because that is something that is just too hard to predict. You can't predict the return of your investments, you can't predict how long you will live, you can't predict your expenses, so what the fuck are you supposed to do than save and invest a lot? A financial planner will somehow solve this predicament? Please...

Honestly, I am more than willing to include your perspective in the OP as well. I obviously think I am right, but I am not so egotistical to think that I can't be wrong and it is good for everyone to have as many sides of the story so that they can decide for themselves. If you point me to a post or two or three that I can link in the OP I will do that. I tried to do that already, but I am willing to do more.