Support NeoGAF

[HammerOfThor]

Your best long term option is a 401k and a Roth IRA. Thats really all you need. If you want to contribute more after you fully funded your roth IRA, simply fund more to your 401k. And yea, its 5,500 limit per person per year. I am assuming that the reason why there is a limit is that the government doesnt want a bunch more money holed away in tax advantaged retirement accounts.

Just so you know, dividends are taxed at a much higher rate than the capital gains you get for selling stock. Now, that won't matter if its in a tax advantaged account, but it sounds like you are interested in a taxable account. You should do quite a bit of research on the stock you want to buy and just not go to a well known company with a high dividend. Buying individual stocks is risky so you need to know what you are getting into before purchasing. Even then there are still a bunch of random variables and risks.

As for mid-term options you are going to have to go with a regular taxable account if you want to invest that money. This is a lot more tricky to answer because it depends on how much money you have, how much money you need, and how flexible you can be. If you have a lot of money, need little, and can't be time flexible then you'll probably want to invest more in bonds. The opposite, invest more in stocks. I still think index funds are the best way to go about this.

Thanks for the pointers!

 

[Jado]

Question:

I have Vanguard through my employer. Salary Deferral and Roth Salary Deferral, which I take to mean 401K and Roth 401K. No matching contribution and I put the same amount into each one, auto-deducted from my paycheck. Both with the same index fund that tracks the S&P 500 and has ridiculously low fees: VINIX

I had a T. Rowe Price Roth IRA for several years before my current employment. Realized the fees were much lower through Vanguard and transferred over the account. This was months ago. I decided to try a broader index fund that follows the entire stock market: VTSMX. Not through my employer, so I don't have access to funds with really low fees, but this is still quite decent. edit: will switch to the Admiral Shares version with lower fees when I reach the required minimum investment.

So, how should I allocate my contributions? Any point in maximizing or even contributing much to the Roth IRA when my 401K and Roth 401K have much lower fees (.04% vs .17%) ? I currently put away enough into the 401K accounts to maximize a Roth IRA if I diverted the funds. Does that make sense or does it have no importance? I've looked this up in the past but can't get a clear answer on my situation.

Unless anyone sees something horribly wrong and objects, I'm also fine with my two fund selections (aggressive allocation into purely stocks). From browsing, the Boglehead folks recommend the investment newbie or lay person hold a couple of these index funds, saying they beat almost everything else in the long-term.

 

[Ramma2]

At what age should a person stop buying bonds, if there is one? Right up until retirement? I guess if I live till 95 that makes sense, but I figured 75 was a nice obtainable number.

 

[alstein]

Obama is supposedly announcing something tonight for folks who have money to put towards retirement but no plan.

Will be interesting to see what he proposes.

 

[tarby]

I don't qualify for a Roth IRA and I already have a 401k. Is it worthwhile to have a traditional IRA also?

 

[Polishin8r]

CD laddering is not a sound strategy for any reason in these environments. Absolutely not. Inflation is 2.50%. Why do you want to average a 0.75% return on a low duration CD ladder? If this is money for an emergency fund, keep it liquid. Interest rates are only going to go up; do not commit your hard earned dollars to a net negative return strategy (0.75-2.50= -1.75%)

So even for emergency found, you suggest I should invest in liquid founds like bonds?

 

[Piecake]

Question:

I have Vanguard through my employer. Salary Deferral and Roth Salary Deferral, which I take to mean 401K and Roth 401K. No matching contribution and I put the same amount into each one, auto-deducted from my paycheck. Both with the same index fund that tracks the S&P 500 and has ridiculously low fees: VINIX

I had a T. Rowe Price Roth IRA for several years before my current employment. Realized the fees were much lower through Vanguard and transferred over the account. This was months ago. I decided to try a broader index fund that follows the entire stock market: VTSMX. Not through my employer, so I don't have access to funds with really low fees, but this is still quite decent. edit: will switch to the Admiral Shares version with lower fees when I reach the required minimum investment.

So, how should I allocate my contributions? Any point in maximizing or even contributing much to the Roth IRA when my 401K and Roth 401K have much lower fees (.04% vs .17%) ? I currently put away enough into the 401K accounts to maximize a Roth IRA if I diverted the funds. Does that make sense or does it have no importance? I've looked this up in the past but can't get a clear answer on my situation.

Unless anyone sees something horribly wrong and objects, I'm also fine with my two fund selections (aggressive allocation into purely stocks). From browsing, the Boglehead folks recommend the investment newbie or lay person hold a couple of these index funds, saying they beat almost everything else in the long-term.

Yes, 401ks can have account maintenance fees tied to them, and that could definitely put you above a .17% expense ratio. IRAs do not have those. I would go through your 401k report and see what the expenses are, and even then I don't think they are legally required to disclose all of them (could be wrong)

http://www.dol.gov/ebsa/publications/401k_employee.html

It also might be a good idea to have some tax diversification. Roths are taxed now and tax free on distributions. Might be worthwhile to have as a hedge against an increase in the income tax rate.

At what age should a person stop buying bonds, if there is one? Right up until retirement? I guess if I live till 95 that makes sense, but I figured 75 was a nice obtainable number.

This is fairly difficult question, and besides the whole sell bonds during a market crash so you don't have to sell stocks there doesnt seem to be a lot of good advice. I would probably keep up with your asset allocation. If you like a 30/70 50/50, age in bonds or whatever then you should probably stick with it. That gets tricky because if you are selling bonds for income and that screws up your asset allocation, it doesnt seem like a good idea to sell stocks to buy bonds. So case by case basis since a market crash might put your asset allocation out of wack to the point where selling those bonds for income puts you back into the right spot.

It really depends on if you have enough money for retirement. If you do, then I really don't see why you would need to have moderate or aggressive plan. If you don't, well, you probably are going to need to be more risky and invest in more stocks.

I don't qualify for a Roth IRA and I already have a 401k. Is it worthwhile to have a traditional IRA also?

Yup, for the reasons I listed above in the first response. Your 401k could have fees. If it does it makes sense to try to avoid those by investing in a traditional IRA after you fund your 401 employer match.

Plus, you could do a back door Roth to switch from a traditional ira to a roth ira (anyone can do this, not matter how much they make). You need to see if that actually makes sense for you before you do that because there are obviously tax implications.

 

[Jado]

Yes, 401ks can have account maintenance fees tied to them, and that could definitely put you above a .17% expense ratio. IRAs do not have those. I would go through your 401k report and see what the expenses are, and even then I don't think they are legally required to disclose all of them (could be wrong)

http://www.dol.gov/ebsa/publications/401k_employee.html

It also might be a good idea to have some tax diversification. Roths are taxed now and tax free on distributions. Might be worthwhile to have as a hedge against an increase in the income tax rate.

Very helpful! Thanks for the advice.

 

[Polishin8r]

A bond is a loan you extend to a corporation or local municipality that is in need of cash. In return, they promise you to return your principal (what you lent them) plus interest at an agreed upon date in future.

Bonds are not liquid and you can lose principal. As interest rates rise, it comes at the cost of the price of your bonds. The reason is because as rates rise, more income paying instruments, such as bonds, pay higher rates and your bond, the lower paying rate, is less valued by the markets meaning you have to sell at a discount. Generally, with a bond, you commit to a maturity date.

Example:

You buy a bond at $1,000 that pays lets say 1%.
Interest rates in market rise.
Bonds, at same maturity, now pay 1.20% if you buy one for $1,000. No one wants to buy your first bond because for the same price, they can get 1.20% instead of your 1%. So now you may have to sell at $990.

But to answer your question, avoid Bonds and CDs for now. Just have it liquid. Liquid means at any time, you have access to your funds such as a cash equivalent money market or savings/checking account. To liquidate a bond, you have to sell it on secondary market and you may not get your principal back. To liquidate a CD, you have to terminate the CD and pay a penalty.

but the penalty to terminate the CD is typically potential % you would have earned ( you close 3 months early you loose a little more than that), so if my money is just sitting there it may as well make some money? ( since I make more than by just keeping in a savings account)

 

[PantherLotus]

Great thread. Questions:

I have a home with a low interest rate (2.75%) and we pay a touch over the mortgage every month and we're on pace to pay it off in 20 years. Our cars are paid off and should last another 5-10 years each. My wife has a 403B (similar to 401K but for public employees), and I have a 401K (my employer doesn't match, yet). I have some stock options but consider those basically worthless until we go public. We both have student loans in the $30k combined range (and we each consolidated some time ago).

And we have about 4 months of income in savings, but would like around 6 months of income to remain liquid for emergencies. I know the number of months is debatable, but my wife is comfortable with that latter. We make o-k money combined, but clearly we have a lot of moving parts.

I'm 34.

After reading this thread, I think I need to direct basically every cent of this year's raise toward some mix of the following:
-- building our cash savings (in a worthless MM account, I'll note)
-- a Vanguard or Fidelity no-fee index fund or a Roth IRA
-- a college fund for my kids

I guess the issue is my raise and our current income isn't enough to hit any Roth max (5.5k?) and I don't think I should commit more to the house or the student loans because they're either low interest or no interest. So:

1. How should I prioritize savings vs. IRA vs. college funds? I recognize I'm asking for opinions and that it's a family decision, just looking for insight or ideas here.

2. Can pie or someone else explain the difference between a mutual fund, an index fund, and a Roth IRA? It seems like they're used pretty interchangeably throughout the thread but I don't know enough nuance to differentiate between them. I know the Roth IRA is the one where you can save on taxes either now or later. If they're not the exact same, which do you (all) recommend to use to start building my non-401K portfolio?

3. I think I could do that $3K entry index fund mentioned earlier, but I don't really understand the particulars. For example: someone mentioned having $100 minimum purchases (is that the right word?), but is that monthly? Can you get it automatically withdrawn? Is a monthly purchase/deposit required? Are there some minimum number of years you're committing to? Further, is there an early-exit fee like there is with a 401k? Can you really just sell at any time?

4. I've seen a lot of discussion about stocks vs. bonds mix. Does everyone basically agree that it should start rather high in favor of stocks at a young age (70-80/30-20?) and then reversed when you get about 10-15 years out from retirement? How do you make that change when it comes time? I've seen the option with my 401K, but is that also an option with an index fund or mutual fund or Roth IRA or whatever?

5. This probably sounds ridiculously stupid, but do bonds not lose value in a crash? Or do they just lose less value in a crash? Let's say I followed OP's 90/10 plan (which I know is highly aggressive) until I was 15 years exactly from retirement. If I switch my holdings to a 10/90 mix on the exact day and the market crashes the next day, have I saved my ass? I guess I'm just looking for worst case/best case scenarios so I can understand (and explain it to my wife) better.

6. Does anyone know anything about college funds? Why not just get one of the above and use that?

I know this a lot of questions all in one post so I'll stop there. I love how helpful everyone has been so far and I clearly don't know shit but I don't have a choice -- I have to get serious, NOW. Feel free if you want to break up your responses in multiple posts.

 

[demosthenes]

Vanguard funds have super low expense ratios. Something like .2%

Oh I know that I was just trying to bring up for people that might have accounts somewhere else if you wanted to buy say: Vanguard. The only fee you pay after a possible initial transaction fee would be the normal expense ratio. There isn't a huge difference in owning a Vanguard fund at Vanguard vs owning it at etrade, etc. You'll pay a transaction fee at the other brokerage fund but that's it.

 

[Smiley90]

Oh I know that I was just trying to bring up for people that might have accounts somewhere else if you wanted to buy say: Vanguard. The only fee you pay after a possible initial transaction fee would be the normal expense ratio. There isn't a huge difference in owning a Vanguard fund at Vanguard vs owning it at etrade, etc. You'll pay a transaction fee at the other brokerage fund but that's it.

There are some online brokers with no ETF transaction fees, too. Then it's just like owning a Vanguard account. Only better, since you get ALL ETF's transaction fee free.

E.g. questrade woooo.

 

[demosthenes]

Great thread. Questions:

I have a home with a low interest rate (2.75%) and we pay a touch over the mortgage every month and we're on pace to pay it off in 20 years. Our cars are paid off and should last another 5-10 years each. My wife has a 403B (similar to 401K but for public employees), and I have a 401K (my employer doesn't match, yet). I have some stock options but consider those basically worthless until we go public. We both have student loans in the $30k combined range (and we each consolidated some time ago).

And we have about 4 months of income in savings, but would like around 6 months of income to remain liquid for emergencies. I know the number of months is debatable, but my wife is comfortable with that latter. We make o-k money combined, but clearly we have a lot of moving parts.

I'm 34.

After reading this thread, I think I need to direct basically every cent of this year's raise toward some mix of the following:
-- building our cash savings (in a worthless MM account, I'll note)
-- a Vanguard or Fidelity no-fee index fund or a Roth IRA
-- a college fund for my kids

I guess the issue is my raise and our current income isn't enough to hit any Roth max (5.5k?) and I don't think I should commit more to the house or the student loans because they're either low interest or no interest. So:

1. How should I prioritize savings vs. IRA vs. college funds? I recognize I'm asking for opinions and that it's a family decision, just looking for insight or ideas here.

I would try to reach my max roth ira each year. For 2013 that is 5,500. Do you have children yet? You have 4 months of savings, you're almost to 6 months so I don't klnow if there is much more to be said there. I would however have extra investments outside of your IRA and 401k.

2. Can pie or someone else explain the difference between a mutual fund, an index fund, and a Roth IRA? It seems like they're used pretty interchangeably throughout the thread but I don't know enough nuance to differentiate between them. I know the Roth IRA is the one where you can save on taxes either now or later. If they're not the exact same, which do you (all) recommend to use to start building my non-401K portfolio?

Mutual fund is a collection of investments that you invest in to be automatically diversified. An index fund is essentially a mutual fund. It's a diversification that is made to mirror a specific index. Roth IRA is a retirement vehicle where you can invest a certain amount of money per year. Inside it you can invest in mutual funds, index funds, etfs, etc.

3. I think I could do that $3K entry index fund mentioned earlier, but I don't really understand the particulars. For example: someone mentioned having $100 minimum purchases (is that the right word?), but is that monthly? Can you get it automatically withdrawn? Is a monthly purchase/deposit required? Are there some minimum number of years you're committing to? Further, is there an early-exit fee like there is with a 401k? Can you really just sell at any time?

It depends what you're investing in really, you just asked a really really loaded question. General rule: IRAs have a penalty for withdrawing early, there are some exceptions. If you invest in a specific fund, it probably has a minimum buy in of say $3,000. Additional purchases would have a minimum of what you saw, say $100.

4. I've seen a lot of discussion about stocks vs. bonds mix. Does everyone basically agree that it should start rather high in favor of stocks at a young age (70-80/30-20?) and then reversed when you get about 10-15 years out from retirement? How do you make that change when it comes time? I've seen the option with my 401K, but is that also an option with an index fund or mutual fund or Roth IRA or whatever?

I'm 27 and don't have any bonds right now. I have a IRA, 401k and some of my own investments. You make that change like you said down the line when you want the least amount of volatility.

5. This probably sounds ridiculously stupid, but do bonds not lose value in a crash? Or do they just lose less value in a crash? Let's say I followed OP's 90/10 plan (which I know is highly aggressive) until I was 15 years exactly from retirement. If I switch my holdings to a 10/90 mix on the exact day and the market crashes the next day, have I saved my ass? I guess I'm just looking for worst case/best case scenarios so I can understand (and explain it to my wife) better.

I can't speak specifically, but yes you for the most part saved your ass, you're not immune but you saved a lot of money

6. Does anyone know anything about college funds? Why not just get one of the above and use that?

New York State has 529 college plans. I assume your state has a similar plan. Invest in those.

I know this a lot of questions all in one post so I'll stop there. I love how helpful everyone has been so far and I clearly don't know shit but I don't have a choice -- I have to get serious, NOW. Feel free if you want to break up your responses in multiple posts.

See the bold.

 

[Learn2read]

If there's any Canadians reading this thread, basically get this book (only $4.99 kindle) which lays out step by step the same indexing philosophy. Or just go through the blog canadiancouchpotato.com/, he posts the same recommended portfolios there. "Couch potato" in the name means what it says, pick a few funds, set it and and forget it.

 

[Piecake]

Except its not true.

Firstly, IRAs DO have annual maintenance fees. This is because every year, a Broker-dealer, discount or not, has to pay between $30-$4000 in custodian fees a month. How they pass that on to you is up to the broker-dealer. A typical B/D charges their customer $50 a year on average. This can be waived if you a) meet the eligibility (typically balance minimums) or b) opt for the waiver! I say opt because you have a choice! You have a choice because you may qualify up to 2% of your gross income as a deduction on your IRA maintenance fees using form 1040.

Now, the reason why you compliment your 401K with a Trad IRA, any IRA really.

In your 401K, you are merely participating in a plan sponsored by a financial institution your employer hired to give you the means to make a contribution. There are incentives for them to do this. Bottom line: These 401K plans have a price and your employer has a budget. SO: the plan and all the funds available for you to pick and choose from all have to fall within the parameters of your employers budget by watching the expense ratio of the funds in the plan. Remember, you participate in these. You do not own them. So, if the cost of a fund rises, the 401K plan administrator can take said fund out any anytime with or without your consent. Why? Its not your plan. Its your employers.

You opt for an IRA because you get full ownership on what you can or want to invest in. You own said investment and you have better transparency. A lot of investors use their 401K to put together their core portfolio and use their IRA to invest in alternative strategies that compliment your portfolio and help you manage risk. Some use it as a means to sock another $5500-$6500 away a year.

But there are costs for the account, in of itself, and for the investments you invest in inside said accounts.

There are no account maintenance fees for vanguard and Roth IRA accounts so long as you sign up for electronic mailing. I am sure there are a few others that do this, and I probably should have been more specific, but there you go. They likely roll the expense of their IRAs and the cost of maintenance into the expense ratio.

 

[Box of Kittens]

Ctrl-F "index fund"

Yep. Solid.

 

[Cow Mengde]

Oh, was looking for this thread. Thanks for the info. I'm looking into Roth IRA right now.

 

[demosthenes]

Oh, was looking for this thread. Thanks for the info. I'm looking into Roth IRA right now.

You have until April 15 to get in your 2013 portion.

 

[Cow Mengde]

Yeah I know. Planning on buying some before tax time is over.

 

[Piecake]

Correct, Pie. I clarified because you're a Vanguard wholesaler and wanted to pull the lens back a little. Also why I did a backseat mod to my post.

Oh, I am glad you clarified because what I said was unintentionally misleading. I just wanted to point out the places that i know where you can find IRAs that are free from any sort of annual fee or an additionally attached on expense ratio. And no need to be snide Vanguard is simply what I know and am familiar with, and don't really see why there is a reason to use another company if you are going the index fund route. Fidelity and others like it, if they offer the same service would be just as good. I'd still recommend Vanguard though since I like the business model.

...

Well, before you dive deep into investing the usual rule of thumb is to first pay down all of your debt before you do that. Its a bit more complicated than that because I personally think its a bit foolish to forgo investing in the stock market for retirement to quickly pay down a 2.75% interest mortgage more quickly, but if your interest is higher than that? that gets tricky.

Debt interest also enjoys the magic of compound interest, so if your student loans have an interest rate of 4-5% paying off those is basically 4-5% return on your student loans. I think I worded that sentence rather poorly, but hopefully you get what I mean. So yea, if the interest on your debt ifs 4%+ I would definitely pay that off first because there is no guarantee what you will get in the stock market. You will know what return you will get by paying down debt. 3% is iffy. Not sure what I would do in that situation. And I am sure there are plenty of people out there who think that debt should be paid down first.

 

[iamblades]

There are some online brokers with no ETF transaction fees, too. Then it's just like owning a Vanguard account. Only better, since you get ALL ETF's transaction fee free.

E.g. questrade woooo.

No ETF transaction fees at all? Sounds sweet.

Although really, transaction costs don't affect me much at all and they shouldn't if you are doing the whole 'investing for retirement properly. Buy and hold for the long term.

Who it does really help is people just starting out investing. Normally it is hard to get a good portfolio balance if you only have a few thousand to invest to begin, because if you bought everything you want to buy, transaction costs would eat up a significant chunk of your capital. No excuse for not having a diverse portfolio when transactions are free.

I also feel like commenting on cap gains growth vs income(or 'value') investing a little bit since people have been debating whether to buy bonds or not. IMO, do it, and not government bonds or even investment grade corporate bonds, I'm talking junk bonds.

People think way too much of bonds as a 'safe' option vs stocks, so they think of it as something only people close to retirement should buy, but there are plenty of riskier bond/income investing plays with rewards to match. What high yield bond funds, REITs, MLPs, and just plain dividend paying stocks are is predictable, not safe.

New investors especially should own some for of income equity, so that no matter how bad the market gets, you still have dividend day to look forward to. General stocks should make up the bulk of most people's investments of course, but there is something reassuring about regular dividends.

 

[Learn2read]

Transaction costs matter if you're periodically rebalancing your portfolio

 

[Piecake]

No ETF transaction fees at all? Sounds sweet.

Although really, transaction costs don't affect me much at all and they shouldn't if you are doing the whole 'investing for retirement properly. Buy and hold for the long term.

Who it does really help is people just starting out investing. Normally it is hard to get a good portfolio balance if you only have a few thousand to invest to begin, because if you bought everything you want to buy, transaction costs would eat up a significant chunk of your capital. No excuse for not having a diverse portfolio when transactions are free.

I think transaction costs are not insignificant if you dollar-cost average monthly. 50-100 bucks saved a year isn't probably a huge deal in the long term, but if I can avoid that cost I definitely am going to do it.

Transaction costs matter if you're periodically rebalancing your portfolio

That too

 

[Red]

Have there been any book recommendations besides Four Pillars? Would like something comprehensive.

Good thread.

 

[Smiley90]

I'm holding back on about 2/3 of my funds to invest after the market crashes.... Thinking about putting it in short-term bonds til then... Decent idea? I just wanna minimize the effects of a market crash since i'm starting out fairly late in this boom.

 

[Piecake]

I'm holding back on about 2/3 of my funds to invest after the market crashes.... Thinking about putting it in short-term bonds til then... Decent idea? I just wanna minimize the effects of a market crash since i'm starting out fairly late in this boom.

I think market timing is a bad idea in general. Thats the easiest way to lose money or miss out on returns. There will obviously be another market slump, but you have no idea when it is going to happen or how bad it will be. Moreover, there is not a good way to predict the bottom. You could miss out on the market slump by simply thinking its going to go lower. The market could take off then slump, but the bottom could be higher than it is now. If thats the case, you would have been better off investing it all in the market right now even if you perfectly timed the bottom.

If you are invested for the super long term, the next market crash shouldnt matter. Only worry about the one that happens when you are about to retire.

 

[Learn2read]

I'm holding back on about 2/3 of my funds to invest after the market crashes.... Thinking about putting it in short-term bonds til then... Decent idea? I just wanna minimize the effects of a market crash since i'm starting out fairly late in this boom.

Alot of people were predicting a crash last Dec. and the market's been up 30% last year...

 

[demosthenes]

I'm holding back on about 2/3 of my funds to invest after the market crashes.... Thinking about putting it in short-term bonds til then... Decent idea? I just wanna minimize the effects of a market crash since i'm starting out fairly late in this boom.

If you're going to go for retirement you're going to experience another 6-8 crashes if you're under 30. It doesn't really matter.

edit: Like Pie said, the only crash that matters is the one when you're about to retire.

 

[muu]

If I recall there was a study on this, and reading the market was no better than consistent periodic investment.

 

[Smiley90]

It's not like I'm gonna pretend I can predict the market. I'm only talking about the very initial investment. Wouldn't it be better to start investing when the market is low, vs high?

If the next crash happens late and/or doesn't go lower than what the market is at right now, then yeah, investing right now would be a smarter choice. But will it? Who knows... mhmmmm

 

[tarby]

Plus, you could do a back door Roth to switch from a traditional ira to a roth ira (anyone can do this, not matter how much they make). You need to see if that actually makes sense for you before you do that because there are obviously tax implications.

Thanks, I'll talk to my tax guy and see if this is something I should look into.

 

[arglebargle]

overall pretty good general advice.

This is not the purpose of the stock market, for one. Companies receive ZERO capital from the stock market, outside of IPOs which 99.999999% of investors don't participate in.

that is actually the purpose of the stock market. the IPO tends to get the most coverage, but after a company has listed it tends to buy back and issue shares quite frequently. this is how the market price of stock impacts the capital available to companies. each time the company comes to market, whether it be at the IPO or in a secondary offering, the price of the stock determines how much cash the company gets to invest in its projects.

This is also false. much of the market is controlled by large institutional investors and retirement funds, which do not engage in speculative investment at ALL- they're actually quite conservative.

this could be a confusion between ownership and trading. trading volume and total orders are dominated by high frequency traders. ownership is dominated by large asset holders, as you note.

as for the question about the risk of all investors indexing, it would literally have to be ALL investors before it was a problem. as long as there are one or two active investors bidding on stocks they will set the prices. at its extreme, liquidity could actually be an issue since if everyone was indexing no one would buy or sell from each other (and the stock market would cease to be an efficient allocator of capital). we are just so far from that being reality (and there is something self correcting to it: if everyone indexed the opportunity for profits from active trading would be greater) that it isnt worth considering.

It's not really 20%, its how much percentage of my last 12 month income I want to put into company stock. Employee stock older than 1 year can be sold without penalty.

i would do it if you can afford the volatility. i wouldnt make it my only investment or rely on it as my only source of savings. my wife has a similar program at work and i recommended she take advantage of the program with a modest amount and sell as soon as the lock up expires. over the long term it should be free money.

Outside of the initial purchase though you're not going to be losing extra money every year though correct?

you will pay a very small fee each year. vanguard is the best option you have in this regard as other providers will change higher fees each year.

vanguard has made this entire industry so much more consumer friendly. fees across the industry have come down as vanguard continues to take share from other fund providers. fidelity has several non-terrible products as well.

 

[HammerOfThor]

I was just treading up on Roth IRA requirements.

If your married and total income is over 181k, you can't contribute to one? I'm not in that situation now but if I where, what would my options be?

 

[HammerOfThor]

As far as tax free distributions go? A variable Universal life insurance policy. Need to speak with a life insurance agent or, better yet, a financial advisor to learn more.

As far as IRAs go? Just a traditional (or SEP, SIMPLE if you're a business owner).

Great, thanks. So the biggest difference between those is that I need to pay taxes when I take out and I can't withdrawal anything at all without a penalty?

Also, when did the retirement age become 70?? I thought it was 65 :/

 

[GhaleonEB]

Great thread. Questions:

I have a home with a low interest rate (2.75%) and we pay a touch over the mortgage every month and we're on pace to pay it off in 20 years. Our cars are paid off and should last another 5-10 years each. My wife has a 403B (similar to 401K but for public employees), and I have a 401K (my employer doesn't match, yet). I have some stock options but consider those basically worthless until we go public. We both have student loans in the $30k combined range (and we each consolidated some time ago).

The interest rate on your home loan is low enough that you should probably redirect that extra you are paying on it toward your student loans, assuming they have a higher interest rate. Then, assuming you have a bias toward getting out of debt, resume paying the home down once they are gone.

And we have about 4 months of income in savings, but would like around 6 months of income to remain liquid for emergencies. I know the number of months is debatable, but my wife is comfortable with that latter. We make o-k money combined, but clearly we have a lot of moving parts.

I'm 34.

After reading this thread, I think I need to direct basically every cent of this year's raise toward some mix of the following:
-- building our cash savings (in a worthless MM account, I'll note)
-- a Vanguard or Fidelity no-fee index fund or a Roth IRA
-- a college fund for my kids

I guess the issue is my raise and our current income isn't enough to hit any Roth max (5.5k?) and I don't think I should commit more to the house or the student loans because they're either low interest or no interest. So:

They way my wife and I structured our savings is thus:

Cash: ~6 months pay.
Savings funds: Mutual funds, with around $20k currently, set aside for things like car purchases and potential high-cost emergencies.
College: See below.
Retirement: Roth IRAs, Roth 401(k), employer retirement funds.

It's something I've heard called a "bucket" strategy. My suggestion is to split up your savings into each of the buckets you want to have. Put more into your high priority areas, less into lower priorities. (Retirement should be your highest priority). As you reach your goal in places like cash and savings funds, direct what you had been saving to the next priority up.

1. How should I prioritize savings vs. IRA vs. college funds? I recognize I'm asking for opinions and that it's a family decision, just looking for insight or ideas here.

They way my wife and I did it was simple: we started each college fund with $1000 and have added $50 per month, every month, since then, for each child. With bonuses and such we put a bit more into them, but the real savings focus for us is retirement.

Think of it this way. If the kids don't have enough college money, they take out loans. If you don't have enough retirement funds, you can't retire, or have a less great retirement than you want. That line of thinking led to us putting as much as we can into retirement.

2. Can pie or someone else explain the difference between a mutual fund, an index fund, and a Roth IRA? It seems like they're used pretty interchangeably throughout the thread but I don't know enough nuance to differentiate between them. I know the Roth IRA is the one where you can save on taxes either now or later. If they're not the exact same, which do you (all) recommend to use to start building my non-401K portfolio?

A mutual fund is a collection of stocks and/or bonds, bundled together. An index fund is a type of mutual fund that tracks a certain index, such as say, the S&P500. They are passively managed, meaning only small adjustments are made to reflect changes in the index they track. As such they give you the benefit of the gains of that index, and no more or no less. They also tend to have the lowest costs as a result.

Regular IRA or 401(k): pay no taxes now on what you put in now, pay taxes when you withdraw.

Roth IRA or 401(k): get no tax deduction for what you put in, but don't pay any taxes when you withdraw. It grows tax-free.

I suggest using nothing but index funds.

Here is a set of good retirement tools from Fidelity. Click the Roth vs. Traditional calculator to see which it makes the most sense for you to focus on. (It'll be the Roth.)

https://www.fidelity.com/calculators-tools/retirement/overview

3. I think I could do that $3K entry index fund mentioned earlier, but I don't really understand the particulars. For example: someone mentioned having $100 minimum purchases (is that the right word?), but is that monthly? Can you get it automatically withdrawn? Is a monthly purchase/deposit required? Are there some minimum number of years you're committing to? Further, is there an early-exit fee like there is with a 401k? Can you really just sell at any time?

4. I've seen a lot of discussion about stocks vs. bonds mix. Does everyone basically agree that it should start rather high in favor of stocks at a young age (70-80/30-20?) and then reversed when you get about 10-15 years out from retirement? How do you make that change when it comes time? I've seen the option with my 401K, but is that also an option with an index fund or mutual fund or Roth IRA or whatever?

I'm a wee more aggressive on this than most. I only hold a bond fund in our savings funds, which are used for medium to large purchases, to dampen market swings on those funds. In our retirement and college funds, I hold none. I'll add bonds to college funds when the kids get into high school. But yes, you have the right approach IMO. Personally I'd never hold more than 20% or so in bonds.

5. This probably sounds ridiculously stupid, but do bonds not lose value in a crash? Or do they just lose less value in a crash? Let's say I followed OP's 90/10 plan (which I know is highly aggressive) until I was 15 years exactly from retirement. If I switch my holdings to a 10/90 mix on the exact day and the market crashes the next day, have I saved my ass? I guess I'm just looking for worst case/best case scenarios so I can understand (and explain it to my wife) better.

I'll let others speak to this as I' m not as experienced with bonds. I could answer but might get details wrong.

6. Does anyone know anything about college funds? Why not just get one of the above and use that?

My college funds are in a 529 plan. Each child has two index funds, one US and one international. I advocate using index funds in the 529 plan if you have the option.

 

[clav]

building our cash savings (in a worthless MM account, I'll note).

Have you considered opening an online savings account through American Express or Barclays?

 

[GhaleonEB]

Have you considered opening an online savings account through American Express or Barclays?

Whoops, that was actually PantherLotus. I accidentally skipped a block quote. I fixed it and added my response.

 

[PantherLotus]

The interest rate on your home loan is low enough that you should probably redirect that extra you are paying on it toward your student loans, assuming they have a higher interest rate. Then, assuming you have a bias toward getting out of debt, resume paying the home down once they are gone.

Step 1: find out what the interest rate on our student loans is!

They way my wife and I structured our savings is thus:

Cash: ~6 months pay.
Savings funds: Mutual funds, with around $20k currently, set aside for things like car purchases and potential high-cost emergencies.
College: See below.
Retirement: Roth IRAs, Roth 401(k), employer retirement funds.

It's something I've heard called a "bucket" strategy. My suggestion is to split up your savings into each of the buckets you want to have. Put more into your high priority areas, less into lower priorities. (Retirement should be your highest priority). As you reach your goal in places like cash and savings funds, direct what you had been saving to the next priority up.

We're basically following the bucket strategy as well (I called it the wine glass pyramid strategy though). Our problem is that we've only been filling one bucket at a time -- putting everything we can into savings so we have a safety net. It's probably time to change that just a bit, but granted, we both came of professional age at the height of the collapse. Needless to say we're skittish.

They way my wife and I did it was simple: we started each college fund with $1000 and have added $50 per month, every month, since then, for each child. With bonuses and such we put a bit more into them, but the real savings focus for us is retirement.

Think of it this way. If the kids don't have enough college money, they take out loans. If you don't have enough retirement funds, you can't retire, or have a less great retirement than you want. That line of thinking led to us putting as much as we can into retirement.

This is good logic, and as parents with student loans, our strategy as well. Treat it like a bill. I was going to ask what you meant by "college fund" but you answer it below.

A mutual fund is a collection of stocks and/or bonds, bundled together. An index fund is a type of mutual fund that tracks a certain index, such as say, the S&P500. They are passively managed, meaning only small adjustments are made to reflect changes in the index they track. As such they give you the benefit of the gains of that index, and no more or no less. They also tend to have the lowest costs as a result.

Regular IRA or 401(k): pay no taxes now on what you put in now, pay taxes when you withdraw.

Roth IRA or 401(k): get no tax deduction for what you put in, but don't pay any taxes when you withdraw. It grows tax-free.

I suggest using nothing but index funds.

Here is a set of good retirement tools from Fidelity. Click the Roth vs. Traditional calculator to see which it makes the most sense for you to focus on. (It'll be the Roth.)

https://www.fidelity.com/calculators-tools/retirement/overview

This is extremely helpful. Can you address whether a payment to an index fund is required monthly? Are there penalties for cashing out an IRA (roth or otherwise)? What's the downside of an index fund? Surely there is one...?

I'm a wee more aggressive on this than most. I only hold a bond fund in our savings funds, which are used for medium to large purchases, to dampen market swings on those funds. In our retirement and college funds, I hold none. I'll add bonds to college funds when the kids get into high school. But yes, you have the right approach IMO. Personally I'd never hold more than 20% or so in bonds.

Wait a sec -- you're choosing a mix of index and bonds for each type of fund (retirement, savings, and college)? I think this is starting to make sense but any further clarity you can provide will help.

Also, you're using bond fund for savings? How do you square that with it not being FDIC insured? Are they really that safe? Is that as liquid as one needs? Ours is in MM account at our local bank making micropennies on the thousands.

I'll let others speak to this as I' m not as experienced with bonds. I could answer but might get details wrong.

Found this link pretty helpful for that answer: http://www.moneycrashers.com/investing-in-bonds-versus-stock-investing/ <-- not sure if a quality source, but it goes along with what others are saying.

My college funds are in a 529 plan. Each child has two index funds, one US and one international. I advocate using index funds in the 529 plan if you have the option.

Ok, this is at the top of my list to check out.

###

Next steps:
1. Determine interest rate difference between house and student loans to see if I should move the extra dollars to the SL. I'm guessing that won't fly with the wife since we're talking negligible ($50?) dollars extra per month.

2. Find how much extra we have per month for Retirement + Savings + College. Thinking something like a 65-25-10 split for now. Needing further clarity and will research on how one splits index funds with bonds in their retirement portfolio, whether bonds-as-savings is a good idea, and what my options are with college funds.
_______

Anyway, thank you so much man. Great answers that are leading me to research a bit on my own while also creating new questions. My wife and I (and kids) have a tough road ahead (we're the highest-educated and best-paid-at-this-age in our family) and we're still overcoming the costs of our family history (poverty + poor decisions) but I know we can do it. Hell yes!

 

[Piecake]

This is extremely helpful. Can you address whether a payment to an index fund is required monthly? Are there penalties for cashing out an IRA (roth or otherwise)? What's the downside of an index fund? Surely there is one...?

You are not forced to make contributions to an index fund. You can purchase it once and then forget about it for the rest of your life. For traditional IRAs there is a 10% penalty (on top of the income tax cut) for taking it out before 59 1/2. For a Roth IRA you can take out the principal, but not the earnings before 59 1/2, but there are some restricitons. find more here http://www.bogleheads.org/wiki/Roth_IRA

The downside of the index fund is that you will never beat the market. You follow it. Personally, I am fine with that, but if the market goes poop for the next 40 years then you made a bad bet. Of course, if that happens then you'd have to get very very lucky picking the few stocks that actually did well to come out ahead.


Wait a sec -- you're choosing a mix of index and bonds for each type of fund (retirement, savings, and college)? I think this is starting to make sense but any further clarity you can provide will help.

The reason why he is choosing bonds for his college fund when his kids hit high school and his intermediate purchases, etc is because bonds are a lot more stable than stocks. Basically, that means that he is 'protected' if the market crashes when his kids are in high school or when he wants to purchase that fancy yacht. I don't think bonds make any sense at all for long term investments (many disagree with me), but start to make sense when those long-term investments become short-term investments.


Ok, this is at the top of my list to check out.

###

Next steps:
1. Determine interest rate difference between house and student loans to see if I should move the extra dollars to the SL. I'm guessing that won't fly with the wife since we're talking negligible ($50?) dollars extra per month.

2. Find how much extra we have per month for Retirement + Savings + College. Thinking something like a 65-25-10 split for now. Needing further clarity and will research on how one splits index funds with bonds in their retirement portfolio, whether bonds-as-savings is a good idea, and what my options are with college funds.
_______

Anyway, thank you so much man. Great answers that are leading me to research a bit on my own while also creating new questions. My wife and I (and kids) have a tough road ahead (we're the highest-educated and best-paid-at-this-age in our family) and we're still overcoming the costs of our family history (poverty + poor decisions) but I know we can do it. Hell yes!

see bold

 

[Flo_Evans]

Any info on the new Obama myIRA? Seems like its just bonds?

Personally I think they should of upped SS payments/taxes as this will probably just be another confusing option that people ignore.

 

[iamblades]

Step 1: find out what the interest rate on our student loans is!



We're basically following the bucket strategy as well (I called it the wine glass pyramid strategy though). Our problem is that we've only been filling one bucket at a time -- putting everything we can into savings so we have a safety net. It's probably time to change that just a bit, but granted, we both came of professional age at the height of the collapse. Needless to say we're skittish.



This is good logic, and as parents with student loans, our strategy as well. Treat it like a bill. I was going to ask what you meant by "college fund" but you answer it below.



This is extremely helpful. Can you address whether a payment to an index fund is required monthly? Are there penalties for cashing out an IRA (roth or otherwise)? What's the downside of an index fund? Surely there is one...?



Wait a sec -- you're choosing a mix of index and bonds for each type of fund (retirement, savings, and college)? I think this is starting to make sense but any further clarity you can provide will help.

Also, you're using bond fund for savings? How do you square that with it not being FDIC insured? Are they really that safe? Is that as liquid as one needs? Ours is in MM account at our local bank making micropennies on the thousands.



Found this link pretty helpful for that answer: http://www.moneycrashers.com/investing-in-bonds-versus-stock-investing/ <-- not sure if a quality source, but it goes along with what others are saying.




Ok, this is at the top of my list to check out.

###

Next steps:
1. Determine interest rate difference between house and student loans to see if I should move the extra dollars to the SL. I'm guessing that won't fly with the wife since we're talking negligible ($50?) dollars extra per month.

2. Find how much extra we have per month for Retirement + Savings + College. Thinking something like a 65-25-10 split for now. Needing further clarity and will research on how one splits index funds with bonds in their retirement portfolio, whether bonds-as-savings is a good idea, and what my options are with college funds.
_______

Anyway, thank you so much man. Great answers that are leading me to research a bit on my own while also creating new questions. My wife and I (and kids) have a tough road ahead (we're the highest-educated and best-paid-at-this-age in our family) and we're still overcoming the costs of our family history (poverty + poor decisions) but I know we can do it. Hell yes!

There are bond index funds as well, index funds are just a pre-diversified investment, it doesn't have to mean stocks. As for the mix, the reason to favors stocks over bonds if retirement is further away is not as much to do with the riskiness of stocks vs bonds, it has to do with the lower tax rate for capital gains. Bond yield is taxed as income, stock price appreciation is cap gains. I'm not a fan of this as a policy thing, as I think it leads to bad corporate governance because it puts too much pressure on executives to increase share price instead of building a solid profitable business model, but for an investor it should be taken into account when planning your portfolio balance.

As I posted earlier, I'm in favor of getting some form of income equity in your portfolio to start, even if only 20% of the total portfolio. Part of it is probably irrational on my part because of the way I feel about the cap gains tax effect, but mostly it's just because it feels damn good to get regular dividends. Even if you automatically reinvest your dividends it still feels more like real cash to me than stock price increase do. It feels good seeing your money make more real money, especially once your principal gets high enough that you can look at the dividend payment and say 'that's a car payment right there' or 'that's a new TV'. Income equity doesn't have to be bonds though, you can just buy a dividend skewed stock index fund for some of the effect. Preferred stock index funds are another step, then REITs and such, and bonds. As for why bonds, the main reason is that bond holders get paid first in the event of a default, then preferred stock, then lastly common stock holders. If a company defaults stockholders will likely get nothing, while bond holders will retain some of their principal.

As for bonds in a savings account, that is where it is important to note the vast range of bonds, from federal savings bonds to treasuries to municipal bonds to corporate bonds to high yield corporate bonds(junk bonds) and distressed securities in ascending order or riskiness. An I series savings bond or a TIPS bond is basically the most secure form of savings there is, even without being FDIC insured. I would not buy a regular EE series savings bonds currently, the yields are basically 0, so you lose money to inflation. The inflation protected varieties are good though. If you buy TIPS bonds you can buy and sell them like stocks (which means their price has more volatility like a stock), while if you buy I series savings bonds you pay a penalty like you would with a CD if you sell them before 5 years. Treasuries are also safe enough to be considered as savings mostly, and they yield a bit more than savings bonds.

 

[Cyan]

Can you address whether a payment to an index fund is required monthly?

If you're asking this because of people talking about fees/expenses, those aren't something you pay separately, they come out of the fund itself. It's invisible on your end, you just get a slightly lower return than you otherwise would.

 

[Piecake]

Any info on the new Obama myIRA? Seems like its just bonds?

Personally I think they should of upped SS payments/taxes as this will probably just be another confusing option that people ignore.

That would have been politically impossible. It seems that Obama will be able to do myRA by executive order. And yea, its just bonds. Once it gets to 15k it will roll over into an IRA account

 

[GhaleonEB]

Just wanted to add, I'll reply to ya in a few hours, PantherLotus, I'm about to leave work. I have a few links in mind that should help you and can explain my own strategy better.

 

[Easystride]

Any info on the new Obama myIRA? Seems like its just bonds?

Personally I think they should of upped SS payments/taxes as this will probably just be another confusing option that people ignore.

I am wondering if the yearly limit on the myRA will be separate than that of the Roth IRA, and when you roll it over to your Roth after $15,000 in a myRA, it isn't included in your Roth IRA contribution amount for that year?

If that is the case, that is about the only value I see in it. If I could get an additional $5,500 a year into my Vanguard Roth IRA for 3 years, I would be interested.

 

[Smiley90]

What's your guys' opinion on high-yield dividend stocks/dividend ETF's vs regular stocks/regular ETF's? Only use them if you need the income, or should be an essential part of a portfolio?

 

[Flo_Evans]

I am wondering if the yearly limit on the myRA will be separate than that of the Roth IRA, and when you roll it over to your Roth after $15,000 in a myRA, it isn't included in your Roth IRA contribution amount for that year?

If that is the case, that is about the only value I see in it. If I could get an additional $5,500 a year into my Vanguard Roth IRA for 3 years, I would be interested.

Hmm idk.

Personally I am at near max in my simple IRA ($12k/year) so I am not quite sure how that effects the Roth. I am pretty damn close to the income limit to get a Roth (probably over this year if I am lucky) so my thinking is to take the tax cut now instead of later. Probably need to talk to a real financial planner to see what the best option is if I want to save more in tax advantaged accounts.

Really want to knock out some debts before I save anymore though, feels like I am dumping cash into buckets with a bunch of leaky holes.

 

[yggdrasill]

What do you people think about this https://personal.vanguard.com/us/funds/snapshot?FundId=0306&FundIntExt=INT#tab=2? That's one of the options for my vanguard account through my employer. I would probably pick that fund and put 0% for bonds till much later in my life. The fees are .18%, whereas investing in both Vanguard Total Stock Market Index Fund Investor Share and Vanguard Total International Stock Index Fund Investor Shares would yield higher fees. So it would be in my best interest to invest in the 2045 Fund?

 

[Piecake]

What do you people think about this https://personal.vanguard.com/us/funds/snapshot?FundId=0306&FundIntExt=INT#tab=2? That's one of the options for my vanguard account through my employer. I would probably pick that fund and put 0% for bonds till much later in my life. The fees are .18%, whereas investing in both Vanguard Total Stock Market Index Fund Investor Share and Vanguard Total International Stock Index Fund Investor Shares would yield higher fees. So it would be in my best interest to invest in the 2045 Fund?

Well, you can't pick and choose the percentage of bonds you want for target date funds. Youre stuck with what they give you. So if you are fine with that, then yea, go for it. If you don't like that asset allocation then you are going to have to create your own with individual funds.

 

[mech IFR]

Who the fuck needs an investment banker when you got piecake. Thanks for the thread dude.

I definitely wouldnt do that because those dudes usually will charge you 1 to 2% fees to manage your account. Thats bad news if they are recommending actively managed funds as well. 3-4% fees would probably cost you 600-700k in fees. Pretty ridiculous

....I'll go to an investment banker when I have a million bucks to spare. Of course they want to help you maximize your return, but they also want to make money. Here there is no such agenda and for that I am happy.

I don't think investment banker means what you think it means.

Investment bankers are primarily engaged by companies (both public and private) to provide M&A advisory and capital structure recommendations. Said another way, IBers help companies buy/sell one another and advise on ways to finance projects (usually via debt or equity).

Someone who gives personal financial advice is just that, a financial adviser. Someone who you give money to invest is likely an asset manager. The person actually making the equity trades in the market is a stock broker, though human brokers are nearly extinct given the modern electronic exchange systems.

None of these jobs is better than the other. I'm just pointing out that they have very different skill sets that are applied to very different job descriptions.