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[Cloudy]

Index funds and APPL have worked great for me.

Another piece of advice is to not go all-in on traditional IRAs and 401ks (only enough for the company match). Put aside some money in a Roth as well. You can withdraw with no penalty in case of an emergency and not to be morbid, who says you're going to live till 59 1/2 anyways?

 

[Piecake]

Nah, let's update OP when we get to meet face to face one day after touring either of our respective cities and find out that despite our difference in investment philosophies, we very much adore other aspects of one another.

Hah, works for me.

 

[Easy_G]

General question here.

I'm currently on a Roth 401(k) through work. My company matches 4.5%, which is the amount I've been contributing for about 6 years now. It's currently going into a Fidelity blended fund that is tailored for retirement in 50 years. It underperforms compared to the S&P 500 (over 5 years this fund had a return of 12.5% whereas the S&P 500 had 16.8%, according to Fidelity).

Is there anything I should change?

 

[meow]

I'm so confused. I really need/want to get an understanding of investing and I've read through a bunch of stuff about investment in general, including a whole bunch of pages here. Have just about one more year of school so I think it's time to learn this stuff so I know what to do when I actually have some disposable income.

I've been contributing small amounts into a Fidelity Roth IRA for a little while that my mom help me set up, and when I worked for a couple of years between undergrad and going to grad school, I also had a 401(k) with my employer, also at Fidelity. I can see them both when I log into my account and I know they aren't invested in the correct places. The Roth is split between cash reserves and Asset Manager 20%, the 401(k) is in the Freedom 2050 fund.

My problem: I have no idea what any of this means. Can anyone give me some pointers or point to where I can look to figure out my own account and which funds I should be invested in? Should I just call Fidelity and ask them for help? I know people have talked about certain Fidelity funds in this thread but I've browsed so many pages I have no clue anymore where it's been mentioned.

 

[RumblingRosco]

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[Easy_G]

Whether you should change or not depends on a few factors:

1) What are you goals? How much risk are you willing to take? I assume you're in your early-to-mid 20s, which means you're probably willing to be a bit more risky with your investments in the short-term at the benefit of long-term gain.
2) What options do you have for investing through your 401k? Is there a list of funds somewhere that you can see your choices?
3) What is the expense ratio of your current fund (the Fidelity blended fund, that is)? If it is under-performing compared to the S&P500 and also has high fees, then it seems like better options may exist.

1) I'm in my late twenties and since this is purely for retirement I'm comfortable with a good amount of risk.

2) I have 29 finds to choose from. Most are fidelity funds with target end dates, but there are some outside funds as well. Such as "invesco growth and income class y", "spartan 500" and "dreyfus/the Boston company small cap class 1".

3) My current find has an expense ratio of 65%.


What's unique about the target date funds? Just that they'll rebalance over the years to reduce risk as it gets closer to the end date?

 

[RumblingRosco]

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[darkazcura]

Soooo my company offers a traditional 401k and a Roth 401k. As far as I can tell, the investment options are the same..I've been putting 10% into my 401k (no match until next March ), but I realized I might not be doing the best thing since a lot of people suggest you should have a Roth IRA on the side (because of the way the money is taxed). What would you guys do in this case?

 

[Easy_G]

Just to clarify, your current fund's expense ratio is 0.65% right, not 65%?

And yeah, target-retirement funds just gradually reduce their risk. They start mostly stocks (probably 90% or more) and I think they often just match an index such as the S&P 500, but then every year or five years they'll adjust. By the time you reach retirement, they'll be mostly bonds with some cash reserves and some stocks, although the ratios will depend on the company behind the fund (Fidelity may have different allocations than Vanguard, for example).

I like target-retirement funds for people that really want zero involvement or management of their retirement funds, although I think the downside is that the expense ratio is always higher than a basic S&P-matching index fund. If that increased expense ratio is acceptable to you though, you can certainly go the target-retirement fund route and more or less never have to worry again about adjusting your retirement plans, pending no major changes in your career/etc. I'd still check in on the fund at least once a year to make sure nothing crazy has changed though.

Yeah,.65%. I swear I double checked the decimal was there!

Thanks for the tips. I guess I'm not sure how to decide if I'm okay with the increased expense ratio. The SEC has a calculator which shows a significant change in value for a reduction in expense ratios.

 

[Randolph Freelander]

Soooo my company offers a traditional 401k and a Roth 401k. As far as I can tell, the investment options are the same..I've been putting 10% into my 401k (no match until next March ), but I realized I might not be doing the best thing since a lot of people suggest you should have a Roth IRA on the side (because of the way the money is taxed). What would you guys do in this case?

What's your top marginal tax rate right now? If it's on the high side (25+ %), you'll probably want to avoid (some of) that by using pre-tax contributions. If it's on the low side (10-15%), a Roth would be beneficial to avoid higher marginal rates in the future. You could also consider a blend, if your employer plan supports it, where you contribute some funds pre-tax and other funds after and get some tax diversification in your portfolio.

Basically, the more money you earn now, the more beneficial a pre-tax contribution can be for avoiding the highest marginal rates. If you're a low earner, then a post-tax contribution becomes better. It's really up to you, your earnings, and your expectations of your income and tax rates in the future.

 

[Randolph Freelander]

Yeah,.65%. I swear I double checked the decimal was there!

Thanks for the tips. I guess I'm not sure how to decide if I'm okay with the increased expense ratio. The SEC has a calculator which shows a significant change in value for a reduction in expense ratios.

That's up to you, but if it were me, I'd go with a heavy dose of the Spartan 500 fund that you have available and see if there were other index funds also available (international, small and mid-caps) to get some diversification. If your fund selections are good, you can reasonably approximate the strategy the target date funds use but at a fraction of the cost. Given your age, I'd honestly worry about that later, you have time to learn those things, but for now you want to ensure you're not being eaten by fees. Just my opinion, of course, choose your own path.

 

[darkazcura]

What's your top marginal tax rate right now? If it's on the high side (25+ %), you'll probably want to avoid (some of) that by using pre-tax contributions. If it's on the low side (10-15%), a Roth would be beneficial to avoid higher marginal rates in the future. You could also consider a blend, if your employer plan supports it, where you contribute some funds pre-tax and other funds after and get some tax diversification in your portfolio.

Basically, the more money you earn now, the more beneficial a pre-tax contribution can be for avoiding the highest marginal rates. If you're a low earner, then a post-tax contribution becomes better. It's really up to you, your earnings, and your expectations of your income and tax rates in the future.

hmm okay thanks! I'm in the 25% bracket so I suppose I should lean towards pre-tax contributions. I do want some diversification in there, though, so I'll probably shift 2 or 3% to the Roth 401k and 7 or 8 to the 401k. Thanks again.

 

[Piecake]

hmm okay thanks! I'm in the 25% bracket so I suppose I should lean towards pre-tax contributions. I do want some diversification in there, though, so I'll probably shift 2 or 3% to the Roth 401k and 7 or 8 to the 401k. Thanks again.

I think it makes a good deal of sense to have tax diversification as well. We don't know what the tax rate will be in 40 years. A Roth is a nice hedge against that uncertainty. Of course, if I was forced to bet, I would probably put my money on your tax rate being lower when you retire.

 

[Link]

Ok, so I'm finally taking the plunge and setting up a Roth IRA, and possibly also put some money into Index Funds, through Vanguard. However, there are so many options, I don't really know what's best for myself. I don't want to be too risky, but I don't want to be too conservative, either. Any of you gents care to offer some insight?

 

[KingGondo]

Ok, so I'm finally taking the plunge and setting up a Roth IRA, and possibly also put some money into Index Funds, through Vanguard. However, there are so many options, I don't really know what's best for myself. I don't want to be too risky, but I don't want to be too conservative, either. Any of you gents care to offer some insight?

I started out with my initial $3k in VBMFX, but it's very conservative and I eventually shifted almost everything over to VTSMX.

I now have about an 80/20 split between VTSMX/VBMFX which is what Vanguard recommends for someone my age.

 

[GhaleonEB]

Ok, so I'm finally taking the plunge and setting up a Roth IRA, and possibly also put some money into Index Funds, through Vanguard. However, there are so many options, I don't really know what's best for myself. I don't want to be too risky, but I don't want to be too conservative, either. Any of you gents care to offer some insight?

You have some options depending on how hands on you want to be with balancing your portfolio yourself.

You can balance between stocks and bonds; US and international; and total market vs. market or class segments.

For example, Vanguard offers a global stock index fund that tracks both the US and international stock indexes. It's about 50% US and 50% international. That gets you the broadest possible stock diversification from a single fund, and is an all in one approach to stock index investing. Or, you can buy a US total market index and an international index and pick the ratio between them yourself.

If you want to go deeper (*inception horn*) you can manage things like big cap vs. small cap stocks, or track specific industries. Some folks here put more emphasis on smaller companies, for example, which you can do with a small cap index. You could also get a broad market index fund and put some into a sector fund if you want to emphasize that sector in your portfolio.

Personally, I like to hold a small number of funds that cover broad indexes and balance between them. I only have a total US market index and an international (ex-US) stock index, and just balance between those two. (No bonds, but that may or may not be something you are comfortable with.) You can do the same balancing with bonds as well, of course (international vs. US, etc.). So the answer depends partly on how hands on you want to be with balancing your portfolio.

 

[Randolph Freelander]

The S&P closed above 2000 for the first time today (2000.02).

Good news:

-S&P is up 27.8% since the pre-recession peak (closed at 1565.15 on Oct 9, 2007)
-S&P is up 195.6% since the bottom (closed at 676.53 on Mar 9, 2009)
-S&P is up 20.2% 1 year
-S&P is up 8.2% YTD

Bad news:

-Party's over, oops, out of time.

 

[GhaleonEB]

The S&P closed above 2000 for the first time today (2000.02).

Good news:

-S&P is up 27.8% since the pre-recession peak (closed at 1565.15 on Oct 9, 2007)
-S&P is up 195.6% since the bottom (closed at 676.53 on Mar 9, 2009)
-S&P is up 20.2% 1 year
-S&P is up 8.2% YTD

Bad news:

-Party's over, oops, out of time.

I read this article yesterday, which argues that stocks are now over valued by several historical metrics, (P to E ratios, etc.). The headline was (intentionally) sensationalist, but I found the data pretty convincing in general, some quibbles aside.

Are there any good counter arguments? Given the data you posted and what I've seen in historical terms, I'm gearing up for pretty low returns for the next decade, on average, as we revert to the mean (eventually). Not sure if that will be in the form of a crash, a series of smaller corrections or just choppy, slow growth. But as you said, the party's over, it's just a question of when the lights go out.

(Not that I'm changing my investment strategy.)

 

[John Dunbar]

that just means you got to cash out and put all your money in high risk asian stocks wooooooooooooo this party lasts forever wooooooooooooo

 

[Piecake]

that just means you got to cash out and put all your money in high risk asian stocks wooooooooooooo this party lasts forever wooooooooooooo

Africa is where it's at. At least that is what a Bloomberg article told me a few weeks ago.

 

[Javaman]

Soooo my company offers a traditional 401k and a Roth 401k. As far as I can tell, the investment options are the same..I've been putting 10% into my 401k (no match until next March ), but I realized I might not be doing the best thing since a lot of people suggest you should have a Roth IRA on the side (because of the way the money is taxed). What would you guys do in this case?

An easy way to look at it is that you'll want your money in a Roth is you think taxes or your income will be higher after retirement than it is now. There's other benefits to Roths too such as easier access to your money.
I'm on my phone now so I can't go into too much detail though. Big thumbs up to you Soka. That post of yours was awesomesauce.

 

[Anno]

Anyone have any experience with Acorns? Seems like a really neat idea; you either contribute funds or, more what is interesting to me, it just rounds up your purchases on debit/credit cards and transfers the funds into an account they manage and you select from a few risk variables. Investments seem to be through a small selection of pretty well known ETFs.

I already have a 401k and Roth IRA, but this seems like a neat little way to force myself to save all those little extra bits without really thinking about it.

 

[Randolph Freelander]

I read this article yesterday, which argues that stocks are now over valued by several historical metrics, (P to E ratios, etc.). The headline was (intentionally) sensationalist, but I found the data pretty convincing in general, some quibbles aside.

Are there any good counter arguments? Given the data you posted and what I've seen in historical terms, I'm gearing up for pretty low returns for the next decade, on average, as we revert to the mean (eventually). Not sure if that will be in the form of a crash, a series of smaller corrections or just choppy, slow growth. But as you said, the party's over, it's just a question of when the lights go out.

(Not that I'm changing my investment strategy.)

Yeah, I don't know what to make of that article. In a vacuum, I'm sure he makes some interesting points, though I'm also sure that an enthused and educated market bull could make some just as interesting counterpoints. The author points to the turn of the century, doesn't really talk about 2007-2009 too much, but it's useful to keep in mind what else was going on in the economy those years.

Around the turn of the century, we had a dot-com asset bubble bursting, and we also had the government running budget surpluses, which (if you consider MMT viewpoints) is a very bad thing. You could say the S&P was significantly overvalued at this time, as well (more on that later). Additionally, we had the election turmoil of Florida. The economy went into recession ~March 2001, if I recall my dates correctly, and then we had the terrorist attacks in September, leading to a war in Afghanistan and the run up to a war in Iraq. The economy fluttered, and stock prices sagged and more or less corrected.

In 2007, we had the housing bubble begin to collapse. We had total upheaval starting in 2008 in the financial sector, and the S&P crashed and essentially over-corrected.

The article goes to great lengths to take away the notion that "this time will be different." So, at great risk, I ask, could this time be different? In 2014, do we have a similar economic condition? Do we have a bubble that needs to burst? Perhaps. I mean, what do I know? But on the other hand, you might consider that (assuming the P/E ratio is, in fact, historically high) perhaps the reason the ratio is high is because earnings are being suppressed. Despite high corporate profits, employment hasn't fully recovered, particularly when you consider underemployment. Income inequality has grown. The government has cut growth in spending in some areas, cut spending outright in others, at a time when the economy needs stimulus. Perhaps it's not that the price is too high, it's that earnings are too low! Get this economy going and see where we stand. Perhaps the market will still be overvalued at that point, but it could still be significantly higher than today either way. Maybe it still corrects, but to what point?

I found it interesting to zoom out and look at the S&P graph.

You can see a decided shift in the curve starting at the beginning of 1995. So I chose the end of 1994 and took the S&P closing price of 459.27 and plugged into Excel and projected it forward at different rates of return for straight line growth.

Year	  8%		  9%		  10%		  11%		  12%	
Dec-94** 459.27 	 459.27 	 459.27 	 459.27 	 459.27 	Actual**
Dec-95	 496.01 	 500.60 	 505.20 	 509.79 	 514.38 	Projected
Dec-96	 535.69 	 545.66 	 555.72 	 565.87 	 576.11 	Projected
Dec-97	 578.55 	 594.77 	 611.29 	 628.11 	 645.24 	Projected
Dec-98	 624.83 	 648.30 	 672.42 	 697.20 	 722.67 	Projected
Dec-99	 674.82 	 706.64 	 739.66 	 773.90 	 809.39 	Projected
Dec-00	 728.80 	 770.24 	 813.62 	 859.03 	 906.52 	Projected
Dec-01	 787.11 	 839.56 	 894.99 	 953.52 	 1,015.30 	Projected
Dec-02	 850.08 	 915.12 	 984.49 	 1,058.41 	 1,137.14 	Projected
Dec-03	 918.08 	 997.49 	 1,082.93 	 1,174.83 	 1,273.59 	Projected
Dec-04	 991.53 	 1,087.26 	 1,191.23 	 1,304.06 	 1,426.42 	Projected
Dec-05	 1,070.85 	 1,185.11 	 1,310.35 	 1,447.51 	 1,597.59 	Projected
Dec-06	 1,156.52 	 1,291.77 	 1,441.39 	 1,606.73 	 1,789.30 	Projected
Dec-07	 1,249.04 	 1,408.03 	 1,585.52 	 1,783.47 	 2,004.02 	Projected
Dec-08	 1,348.96 	 1,534.75 	 1,744.08 	 1,979.66 	 2,244.50 	Projected
Dec-09	 1,456.88 	 1,672.88 	 1,918.48 	 2,197.42 	 2,513.84 	Projected
Dec-10	 1,573.43 	 1,823.44 	 2,110.33 	 2,439.13 	 2,815.51 	Projected
Dec-11	 1,699.31 	 1,987.55 	 2,321.37 	 2,707.44 	 3,153.37 	Projected
Dec-12	 1,835.25 	 2,166.43 	 2,553.50 	 3,005.26 	 3,531.77 	Projected
Dec-13	 1,982.07 	 2,361.41 	 2,808.85 	 3,335.84 	 3,955.58 	Projected
Dec-14	 2,140.64 	 2,573.94 	 3,089.74 	 3,702.78 	 4,430.25 	Projected
Dec-15	 2,311.89 	 2,805.59 	 3,398.71 	 4,110.08 	 4,961.88 	Projected
Dec-16	 2,496.84 	 3,058.10 	 3,738.58 	 4,562.19 	 5,557.31 	Projected
Dec-17	 2,696.59 	 3,333.32 	 4,112.44 	 5,064.03 	 6,224.19 	Projected

You can pick any rate of return you like and see that in 1999, 2000, we are significantly above any "projected" value, and the economy happened to sputter and helped produce a correction to historical norms. In 2007, we were again ahead of the curve (at 8 or 9%), and the economy once again happened to sputter and produce an (over)-correction. Take a look at 2014 at 8%. Where are we now? Seems like we're kind of on pace, doesn't it? At higher rates of return, we're behind! What would happen if we enacted economic policies that unleashed some robust growth? I wonder.

At any rate, I have no idea what's going to happen. I'm not an economist, a finance guru, a market analyst, strategist, or anything of the sort. I'm just an idiot programmer with enough business background to be (accidentally) dangerous and not much more. Either way, up or down, I'm going to keep dumping money into the market, because what goes down must surely go right back up (or we'll all pretty much hosed), so there will be profits to be had, rain or shine.

 

[Piecake]

Anyone have any experience with Acorns? Seems like a really neat idea; you either contribute funds or, more what is interesting to me, it just rounds up your purchases on debit/credit cards and transfers the funds into an account they manage and you select from a few risk variables. Investments seem to be through a small selection of pretty well known ETFs.

I already have a 401k and Roth IRA, but this seems like a neat little way to force myself to save all those little extra bits without really thinking about it.

That is a neat idea. I honestly don't buy enough things for this to be really useful to me, but if vanguard came out with something like this I would probably sign up for it since my money is with them and I wouldnt have to do anythign extra.

 

[lastflowers]

At any rate, I have no idea what's going to happen. . I'm not an economist, a finance guru, a market analyst, strategist, or anything of the sort. I'm just an idiot programmer with enough business background to be (accidentally) dangerous and not much more. Either way, up or down, I'm going to keep dumping money into the market, because what goes down must surely go right back up (or we'll all pretty much hosed), so there will be profits to be had, rain or shine.

Same, brother. I'm way ahead of where I projected I would be at. At age 24 I've got more saved than my parents did when they were 5 years older than me. And with my car/school debts paid off along with bonus/pay raises, I'm only going to be saving at a higher clip. Put money as cash into the account, maybe some bonds here or there, wait for a correction, dump a bunch in. Rinse, repeat.

It helps quite a bit that I started investing in 2010-2012 and was in college during the financial crisis.

 

[meow]

post

Woah, thanks so much! I'm definitely going to take a closer look at those detail pages. I'm only 26 so I'm going to get out of the cash reserves and 20% asset manager ASAP. This leads to my next question: as others mentioned, the market did really well today and my portfolio is up $1k from just two or three days ago. My mom said I should sell everything now since I want to convert it all to index funds anyway. She said it doesn't matter since if I wait and stuff does go up again, it'll just make the index funds I'm trying to get into go up too. Is that correct?

I know I want to sell the 20% asset manager, but should I also change the the 401(k) money out of the Freedom 2050/2055? Now that I know how to look up the details, I can see that the returns aren't as good as the Spartan 500 Fund.

Also, my mom sent me what her distribution looks like, and while I know I probably don't need to invest in bonds at this point, I'm wondering if I should be putting some money into mid and small cap funds?

 

[Piecake]

Woah, thanks so much! I'm definitely going to take a closer look at those detail pages. I'm only 26 so I'm going to get out of the cash reserves and 20% asset manager ASAP. This leads to my next question: as others mentioned, the market did really well today and my portfolio is up $1k from just two or three days ago. My mom said I should sell everything now since I want to convert it all to index funds anyway. She said it doesn't matter since if I wait and stuff does go up again, it'll just make the index funds I'm trying to get into go up too. Is that correct?

I know I want to sell the 20% asset manager, but should I also change the the 401(k) money out of the Freedom 2050/2055? Now that I know how to look up the details, I can see that the returns aren't as good as the Spartan 500 Fund.

Also, my mom sent me what her distribution looks like, and while I know I probably don't need to invest in bonds at this point, I'm wondering if I should be putting some money into mid and small cap funds?

Your mom is trying to predict the market. I think predicting the market is basically impossible. Your funds could go up higher than the index or your funds could go up slower than the index. Who knows? It is best not to think about those things too deeply because you will simply just regret doing it if you guess wrong. Create a plan and stick with it.

As for the 401k, I would look into a interest rate calculator

http://www.daveramsey.com/article/investing-calculator/lifeandmoney_investing/#/entry_form

Your index fund was like .65% or something, right? Well, if you do it on your own it will probably be .15%.

If you copy that target date fund exactly, I have you losing 100k to fees in 35 years if that fund gets you 7% annually, you start with a principal of 5k and contribute 500 a month.

As for mid-cap/small cap I think its a good idea since I simply like to mirror the total world market as much as possible for greater diversification and to make sure that I am not weighting a specific sector or nation too much. Basically, so that I am not placing bets on a sector of the economy because I think all bets are luck. Right now without mid and small cap you are placing a bet on the 500 largest companies. That is not a bad bet at all because the 500 biggest American companies are going to be the biggest drivers of the american economy by far. Basically, you would be fine with just the SP 500 if you want to simplify things, but it might be 'better' with trying to capture the whole market. That also might be my biases of wanting to track the total market speaking though.

 

[meow]

Your mom is trying to predict the market. I think predicting the market is basically impossible. Your funds could go up higher than the index or your funds could go up slower than the index. Who knows? It is best not to think about those things too deeply because you will simply just regret doing it if you guess wrong. Create a plan and stick with it.

As for the 401k, I would look into a interest rate calculator

http://www.daveramsey.com/article/investing-calculator/lifeandmoney_investing/#/entry_form

Your index fund was like .65% or something, right? Well, if you do it on your own it will probably be .15%.

If you copy that target date fund exactly, I have you losing 100k to fees in 35 years if that fund gets you 7% annually, you start with a principal of 5k and contribute 500 a month.

As for mid-cap/small cap I think its a good idea since I simply like to mirror the total world market as much as possible for greater diversification and to make sure that I am not weighting a specific sector or nation too much. Basically, so that I am not placing bets on a sector of the economy because I think all bets are luck. Right now without mid and small cap you are placing a bet on the 500 largest companies. That is not a bad bet at all because the 500 biggest American companies are going to be the biggest drivers of the american economy by far. Basically, you would be fine with just the SP 500 if you want to simplify things, but it might be 'better' with trying to capture the whole market. That also might be my biases of wanting to track the total market speaking though.

I see. Thank you for the reply, I'm starting to understand more. The 401(k) was from a previous employer, no contributions have been made to it since I stopped working there. almost 3 years ago. My next employer also doesn't do any 401(k) matching so I assume anything I do once I'm done with school and working again would be separate from that completely, I'm just trying to figure out what to do with the money already in there.

I'll also look into some of the mid and small cap funds. Will probably end up doing most in the large cap (maybe 60-75%? I'm picking pretty arbitrarily tbh) and the rest split.

 

[Darren870]

I see. Thank you for the reply, I'm starting to understand more. The 401(k) was from a previous employer, no contributions have been made to it since I stopped working there. almost 3 years ago. My next employer also doesn't do any 401(k) matching so I assume anything I do once I'm done with school and working again would be separate from that completely, I'm just trying to figure out what to do with the money already in there.

I'll also look into some of the mid and small cap funds. Will probably end up doing most in the large cap (maybe 60-75%? I'm picking pretty arbitrarily tbh) and the rest split.

If you are no longer contributing into the 401k you should roll it into an IRA with Vanguard or Fidelity.

This will avoid fees and give you more investments options. There is no reason to keep a 401k when you are no longer at the company it was originally opened with.

 

[lunchtoast]

Made a thread about acorns

http://www.neogaf.com/forum/showthread.php?t=885518

 

[Piecake]

Made a thread about acorns

http://www.neogaf.com/forum/showthread.php?t=885518

Hrmm, didnt realize that the fees were that high. I mean, they arent absurd, but taking on an .25-.5 expense ratio on top of the expense ratio you are already paying to your fund/etf is a bit much. I am sure it is good for people who struggle saving since it takes it out of their hands, but for people who are good at savings it does not seem like a good option.

 

[ScottSullivan]

Hey all, wanted to ask for some advice

I'm generally decent with my money, but getting married a couple of years ago, I incurred some unexpected debts I'm still paying off, (2k ring, 3k left still to pay in credit cards for wedding expenses and honeymoon)

I've only been working at a "corporate" job for about 18 months now, and my 401k is roughly that 5k I have in debt.

Would it be smart to withdraw that, pay off this short term debt so I'm not wasting money on interest fees anymore, and then start over for retirement savings? Or are the taxes and fees going to outweigh the benefit.

 

[Herpes Reasons]

An easy way to look at it is that you'll want your money in a Roth is you think taxes or your income will be higher after retirement than it is now. There's other benefits to Roths too such as easier access to your money.
I'm on my phone now so I can't go into too much detail though. Big thumbs up to you Soka. That post of yours was awesomesauce.

The problem with putting too much of your money in deferred accounts is that unless you're in your late 50s/early 60s, nobody has any idea of what taxes will be when they retire (assuming they're like most and retire at 65 or so). Folks who put max out their 401k, or even put in $1 more than what their match is are doing it wrong.

Need to make sure that folks pay attention to all three types of tax buckets. In my business (I'm in financial advising), it's amazing how many professionals don't understand this. They'll set up IRAs, max out their 401k and feel they're planning for retirement when they're not. They're basically guessing their way until the finish line.

 

[RumblingRosco]

-

 

[Randolph Freelander]

Would it be smart to withdraw that, pay off this short term debt so I'm not wasting money on interest fees anymore, and then start over for retirement savings? Or are the taxes and fees going to outweigh the benefit.

That's not what I would recommend. There are exceptions, but generally, if you withdraw the money, you're looking at being taxed on it and paying an additional 10% penalty, so no, it would not be smart to do that.

What you want to think about is your money going forward, how best to allocate it. The higher the interest on the debt, the more you will want to prioritize paying it down. But also consider your employer match, as that's free money that would far exceed the interest you're paying on the same dollar amounts.

Let's assume your interest rate is 8 or 9% or higher on your credit card. If I'm you (and I'm not), I'll invest the amount required to get the full employer match on my 401K, then direct excess funds towards the credit card until it is gone. Apply the same logic to your other high interest debt. If I'm you (and again...), I'm not worried about the debt sitting at 4% or lower, slightly aggravated by the debt at 5-6%, and annoyed greatly at debt sitting at or above 7%. But get your employer match first! That's (typically) 60-100% of contributions up to a given amount, and that far exceeds any interest you'll pay.

 

[lastflowers]

The problem with putting too much of your money in deferred accounts is that unless you're in your late 50s/early 60s, nobody has any idea of what taxes will be when they retire (assuming they're like most and retire at 65 or so). Folks who put max out their 401k, or even put in $1 more than what their match is are doing it wrong.

Need to make sure that folks pay attention to all three types of tax buckets. In my business (I'm in financial advising), it's amazing how many professionals don't understand this. They'll set up IRAs, max out their 401k and feel they're planning for retirement when they're not. They're basically guessing their way until the finish line.

Could you explain your post a bit more?

I do a 60/40 election split on Pre-Tax/Roth in my 401k. As well I've opened up a traditional IRA, along with a rollover IRA from a previous employer (who gives 401k to interns....the benefits of small company internships!).

I max out my 401k each year along with the extra 5.5k for IRA. Is there something different I should be doing? I'm also putting in my old car payment (I paid it off) into an individual stock account along with 60% of bonuses so that I can more fine-tune pick investments. I have no more school debts/auto debts/any other debts.


It's worked out for me thus far, but impossible to gauge as even my internship 401k occured right after the 2008 crash. So while my investments have 'skyrocketed', its incredibly hard for me to accurately gauge how well I've been doing or whether my strategy (mostly vanguard indexs/mutual funds in 401k) is alright. I'm heavily invested in MSFT due to work benefits, and am slowly selling off my stock there (to lock in 20-35% gains) since I don't want to be heavily invested in retirement and employment by the same company.

 

[GhaleonEB]

I max out my 401k each year along with the extra 5.5k for IRA. Is there something different I should be doing? I'm also putting in my old car payment (I paid it off) into an individual stock account along with 60% of bonuses so that I can more fine-tune pick investments. I have no more school debts/auto debts/any other debts.

A good general rule for retirement savings, which I think he was alluding to, is:

1) Contribute to your 401(k) up to your employer match
2) Max your IRA contributions for the year
3) Then contribute what additional you can to your 401(k)

Generally IRA's will allow you greater investment options and at lower costs (if you go with companies like Vanguard or Fidelity) than most employer 401(k) plans. But the employer match will offset high fees in a 401(k) to the point where it's worth taking full advantage of the match your first priority. Since you are already maxing out both your 401(k) and IRA, there's not really any more that you can do.

 

[scurker]

I know this is a retirement thread, but this is somewhat investing related. My wife and I had a child this past month and we've been looking at savings options for him. We max out our IRAs every year - so making extra contributions there isn't really a solution. I've taken a look at the 529 plan offered here in Alabama, but I kind of hate that they're restricted to higher education only as we'd like to offer him the flexibility to do what he wants if he decides to not go to college.

I did come across UTMA accounts but unfortunately they're not tax advantaged, but that's the best option I have found. Are there any other alternatives out there?

 

[Piecake]

I know this is a retirement thread, but this is somewhat investing related. My wife and I had a child this past month and we've been looking at savings options for him. We max out our IRAs every year - so making extra contributions there isn't really a solution. I've taken a look at the 529 plan offered here in Alabama, but I kind of hate that they're restricted to higher education only as we'd like to offer him the flexibility to do what he wants if he decides to not go to college.

I did come across UTMA accounts but unfortunately they're not tax advantaged, but that's the best option I have found. Are there any other alternatives out there?

Here you go

http://www.investopedia.com/university/retirementplans/esa/

If you go with a 529 instead, you can also choose one from a different state if it is more advantageous for you.

 

[GhaleonEB]

I know this is a retirement thread, but this is somewhat investing related. My wife and I had a child this past month and we've been looking at savings options for him. We max out our IRAs every year - so making extra contributions there isn't really a solution. I've taken a look at the 529 plan offered here in Alabama, but I kind of hate that they're restricted to higher education only as we'd like to offer him the flexibility to do what he wants if he decides to not go to college.

I did come across UTMA accounts but unfortunately they're not tax advantaged, but that's the best option I have found. Are there any other alternatives out there?

I went through this exact same debate over the past few years. We have been saving college money for our kids since they were babies, but it was just in some regular mutual funds, no tax protected accounts or anything.

I didn't like the UTMA as they would take full possession of the funds at a certain age, when I wanted to make sure the kids didn't get the money until they were semi-responsible. And of course the 529 limits things to higher education expenses.

In the end we split the money about 25/75 between a regular savings account and a 529. That way they have a chunk of money that will be theirs and flexible, but we get the tax benefits of the 529 (both for deductions now, and on withdrawal later).

I don't think there is any one solution, and I don't have super awesome advice here (others may), but I thought I'd at least pass on what we did after a similar debate.

 

[Halvie]

Suggestions for a companion fund to go in a taxable account with VTSAX? Was looking at a couple of their other admiral index funds.

 

[RumblingRosco]

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[anonymous_abc]

Congrats Soka.

 

[Piecake]

I like VBIAX if you want to consider adding on some bonds into your funds. I have some investments into VTSAX and VBIAX. VEMAX also makes up some of my portfolio, though I'm not sure it's a great choice as I've been basically flat on it for 3-4 years.

---

So, I just got married on Saturday. My fiancee has already been contributing to a retirement account through her employer (a not-for profit; I believe she has a 403b but I could be wrong on this) which she invests up to their matching into Vanguard funds (currently one of the Target-Retirement funds). She also invests some more on the side directly into Vanguard through a Roth IRA. I am a graduate student that receives a non-taxable fellowship, so I just invest through a non-tax-advantaged account at Vanguard. I occasionally have some taxable income each year, which I invest entirely into my Roth IRA that I started when I was 16 and got my first job.

To get to my question: Does anyone have advice for us in regards to how we could gain some financial advantages now that we're married? Pros/cons to opening joint accounts? Filing taxes as single or as a couple? Any general tips or resources to look into would be appreciated. We are both very money/retirement-conscious and we've discussed our finances quite a bit already, but we're looking for some outside opinions.

Not married so I really can't help you out all that much, but I advised my brother and his wife to file separately due to student loans. They saved a ton of money that way. You can't do a Roth if you do that, but for them it was totally worth it.

 

[Oni Jazar]

When you invest in Index Funds what brokerage do you use to invest? Should it be something like Scottrade? Edit: Nevermind I didn't know Index funds are mutual funds.

 

[Tyreny]

I went through this exact same debate over the past few years. We have been saving college money for our kids since they were babies, but it was just in some regular mutual funds, no tax protected accounts or anything.

I didn't like the UTMA as they would take full possession of the funds at a certain age, when I wanted to make sure the kids didn't get the money until they were semi-responsible. And of course the 529 limits things to higher education expenses.

In the end we split the money about 25/75 between a regular savings account and a 529. That way they have a chunk of money that will be theirs and flexible, but we get the tax benefits of the 529 (both for deductions now, and on withdrawal later).

I don't think there is any one solution, and I don't have super awesome advice here (others may), but I thought I'd at least pass on what we did after a similar debate.

Struggled with the same issue with the birth of my first child. We are only a year in but for now we have decided to save for college by adding to our own retirement accounts. The strategy, which we can adjust as time goes on, operates on the fact that we can borrow for college but we can't borrow for retirement. The worst case scenario is that our child ends up borrowing a ton of money for college and we kick in money as it frees up in retirement accounts. More realistically we borrow via home equity or use some other debt to bridge the gap between child entering college and us turning 59 1/2.

None of the education specific savings accounts are very attractive that I have seen. It seems like a Roth is the best way (tax advantage on withdrawal, funds not locked into higher education and investments are self directed) but we do not qualify for Roth contributions anymore.

Would love to hear more discussion on this topic. I see it as directly related to retirement savings in many ways.

 

[manngc]

None of the education specific savings accounts are very attractive that I have seen. It seems like a Roth is the best way (tax advantage on withdrawal, funds not locked into higher education and investments are self directed) but we are do not qualify for Roth contributions anymore.

Would love to hear more discussion on this topic. I see it as directly related to retirement savings in many ways.

You said you don't qualify for Roth contributions anymore. I'm assuming that's related to the income limit for Roth contributions. I was informed that the income contribution limits have a loop hole in which any income can make the $5500 per year deposit. All you have to do is create a traditional IRA, then instantly roll it over to a ROTH IRA. Apparently the restriction on this expired in 2010 and has yet to be closed...I didn't know this until a couple of weeks ago.

 

[Tyreny]

You said you don't qualify for Roth contributions anymore. I'm assuming that's related to the income limit for Roth contributions. I was informed that the income contribution limits have a loop hole in which any income can make the $5500 per year deposit. All you have to do is create a traditional IRA, then instantly roll it over to a ROTH IRA. Apparently the restriction on this expired in 2010 and has yet to be closed...I didn't know this until a couple of weeks ago.

Just looked that up and it sounds really easy too. Sent a note to my tax guy to see about some details. Thanks for the heads up.

If this holds up over time my college savings plan will be to fund a roth balance as much as I can every year and invest in an S&P index (I use SPY currently). Home equity being the backup plan with tax advantaged interest deductions.

 

[Renzoku]

Sorry if this question is too simplistic:

Is it worth investing in indexes and/or 401k/IRAs if you've still got outstanding debt?

I've got about $40,000 of student loans left to pay off, at rates from about 4%-6.75% for the highest one.

Is it more to get rid of those or should I pay those off while also investing maximums in IRA/40k/Indexes.

I ask because if I'm expecting x% gains on those, I assume the debts will eat away at those gains anyway.

Thanks for any responses, I'll keep reading this thread now that I've found it for more info!

 

[Randolph Freelander]

Sorry if this question is too simplistic:

Is it worth investing in indexes and/or 401k/IRAs if you've still got outstanding debt?

I've got about $40,000 of student loans left to pay off, at rates from about 4%-6.75% for the highest one.

Is it more to get rid of those or should I pay those off while also investing maximums in IRA/40k/Indexes.

I ask because if I'm expecting x% gains on those, I assume the debts will eat away at those gains anyway.

Thanks for any responses, I'll keep reading this thread now that I've found it for more info!

Yes, it's worth it, if only for the potential employer match on your 401K. That is a rate of return that far exceeds any interest you might pay (dollar for dollar), so at the very least, contribute enough to get the maximum employer match possible (if you can). It's even more worth it when you consider the tax savings if you contribute pre-tax to a 401K or IRA. The United States also has rather inflexible yearly contribution limits, so it's not like you can prioritize debt one year and catch up on tax advantaged retirement accounts later.

Your debt, even the debt at 6.75%, costs less to service, dollar for dollar, than the employer match and tax savings you would expect to receive on your retirement contributions, so do not skimp on that. If you factor in (non-guaranteed) historical 8-10% rates of return in the market, the debt becomes a lower priority still.

Just to provide some simple numbers to aid in my thought process, let's assume you have $5000 in debt at 7%. Let's say your employer matches 60% of your own contributions, up to a maximum match of $3000 (makes the math simple, you have to contribute $5000 to get their maximum, but some employers will match differently and with no caps). Let's hold your top marginal tax rate at 15%, which is low on the tax scale. Additionally, let's hold the market rate of return at 9%. Finally, let's say you have $5000 you can either contribute to your 401K or pay down your debt. What do the numbers suggest?

Well, if you leave $5000 at 7% interest, and ignoring your own payments, it will accumulate $350 in interest in a year.

If you contribute the $5000 to your 401K, your employer is going to kick in $3000. The market is going to produce $225* on your investment and $135* on your employer match this year (*I'm taking 9% of $5000 and $3000, respectively, and dividing it by 2, since I'll stipulate that your contributes take place over the course of the entire year, not all up front. If all up front, it would be $450 and $270 in earnings.) Your tax savings (if contributing pre-tax) will be $750 for this year, and it would be more if you were actually in a higher tax bracket.

Add it up. On one hand, you have $350 in interest. On the other, you have $4110 in matches, earnings, and tax savings. Which would you rather do? Pay off the debt, or invest in your 401K? Take away everything but the tax savings (which assumes no employer match and a flat year in the market) and it still favors the 401K when you contribute pre-tax.

All that said, do what feels comfortable to you.