The bond index isn't managed.
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How to Invest for Retirement
- Thread starter Piecake
- Start date
The bond index isn't managed.
Darren870
Member
EG: Enron
While I diversify in company stock in my non retirement accounts, I try not to hold any in the company I work for. Unless of course its given to me or I can purchase it at a discount.
Randolph Freelander
Member
Yeah, thanks, I missed that one.
Unfortunately the expense ratio for the target date funds is too high, IMO. If I were you, I would just put it 100% in the Northern Trust S&P 500.
GodParticle
Member
Maybe I should just go 100% with the S&P for a bit and see how that goes. Would that be reasonable until I can learn more? Also, what do I do with all that coke stock? Do I put 100% in the sell field and where does it go after I sell it? Thanks for all the help. This is way over my head and a lot of money(to me) to deal with
Right, that may be my choice
Randolph Freelander
Member
On this page, it looks like you would put 100% in the "amount to sell" field(s) for the fund(s)to liquidate, and then 100% in the "amount to buy" field for the fund to get into. Validation controls on that page will likely not allow you to submit until your inputs are valid.
GodParticle
Member
That makes sense. Since they match in stock, I guess I would have to come back periodically and move it that way
Even though that expense ratio is somewhat high, would it hurt to put half in the target and half in the S&P?
Just to be sure, what is the expense ratio of the Northern Trust SP 500?
GodParticle
Member
I'll have to look up tomorrow. Maybe I'll look them all up and post a list
Randolph Freelander
Member
I wouldn't. I'm curious about the "NT Collective All Coutnry World Ex-US..." fund in your blend. Also look at the "NT Collective Aggregate Bond Index" fund. If you're interested in a strategy that might be target-date oriented, and if these funds are low expense, you could maintain a lower cost portfolio using funds other than the actual target date funds.
First thing to consider, though, is Warren Buffett's advice, if only because it's not terrible. You could do worse than going 90/10 S&P 500/Bonds.
http://www.marketwatch.com/story/wa...ron-james-stick-with-an-index-fund-2015-03-02
http://www.fool.com/investing/general/2016/01/06/warren-buffetts-15-minute-retirement-plan.aspx
On the other hand, a target date fund would typically include international equities, not to mention some domestic small and mid-caps. I don't think you have a good selection for those last categories, but if you have good international and bond selections, you could allocate your funds something like ~60% S&P 500, 30% international, and 10% bonds, and every year or two drive up your bond holdings by a point or two. You would gradually increase the weighting of bonds in your portfolio, just as a target date fund would.
*Starting percentages based roughly on the Vanguard 2050 fund, though they're higher on international than me.
https://personal.vanguard.com/us/funds/snapshot?FundId=0699&FundIntExt=INT#tab=2
You could find a different Vanguard target fund for different starting points if 2050 isn't as close to your anticipated year of retirement as some other year (divisible by 5).
You're only 29? I didn't even start in my field until 31. What do you do during the day volunteer? Part time work? Skill training? You should have something you can fill that gap with.
You have plenty of time still to save for retirement.
vinnygambini
Why are strippers at the U.N. bad when they're great at strip clubs???
Sorry, I should have read the conversation more clearly as I thought Randolph was advocating of holding no company stock (one from an employer or not). I have many holdings in different companies and that's usually how I trade instead of investing in the Vanguards etc.
That's how I've been managing my portfolio since I've started
I wouldn't advise holding individual company stocks either. The risk level is too high for one's retirement savings, IMO, and unless you are some kind of genius the expected returns are not going to increase commensurately with the risk. It's also going to be more psychologically demanding for most people since you need to do research on the companies and the stocks are going to be a lot more volatile than an index, causing issues with loss aversion.
Randolph Freelander
Member
Preference would be to roll them over into an IRA so that you could have a wider variety of funds to choose from, hopefully low cost. We talk a lot about Vanguard or Fidelity in this thread, and each has a great selection of low expense index funds, although Vanguard has better target date funds (on the expense side).
Personally, I rolled a prior 401K into my current employer's plan because, unlike many employer plans, it actually had some great index funds with expenses even lower than Vanguard/Fidelity (the benefit of working for a large bank, I guess) and, like you, I favored the convenience of less accounts to manage at that point in time.
So I would say go with the place that gives you the better options, which is normally going to be an independent IRA. And even when the employer plan is actually competitive, you always run the risk that the employer might elect to change fund offerings, which could then put you at a disadvantage.
GodParticle
Member
Here are the different costs associated with each. Looking at the charts for them, none of them are remotely close to as good as the basic stock does. It has a 10.5% gain over 10 years. Or am I reading into it wrong?
GLOBAL/INTERNATIONAL
LAZARD COLLECTIVE TRUST EMERGING MARKETS PORTFOLIO CLASS C .91%
MFS INSTITUTIONAL INTERNATIONAL EQUITY FUND .71%
NT COLLECTIVE ALL COUNTRY WORLD EX-US IMI NL TIER 3 .10%
MID-CAP DOMESTIC EQUITY
US SMALL MID CAP ACTIVE EQUITY FUND .87%
LARGE/MULTICAP DOMESTIC EQUITY
NORTHERN TRUST S&P 500 INDEX DC NL TIER 3 .02%
US LARGE CAP ACTIVE EQUITY FUND .60%
INCOME/BOND
NT COLLECTIVE AGGREGATE BOND INDEX DC NON LENDING TIER 3 .03%
US CORE PLUS ACTIVE FIXED INCOME .51%
CAPITAL PRESERVATION
STABLE VALUE FUND .36%
You should really only concern yourself with these three funds. The SP 500 is absolutely necessary. As for the international fund and the bond fund, you need to decide whether or not that makes sense to you.
For example, I don't own any bonds, but international does take up a significant share of my portfolio. I know Randolph also doesnt own any bonds, but he also either doesnt own any international or just a small amount. You can look through the OP to see my thoughts on bonds. The argument for little to no international is that American companies are international companies and already have international exposure.
Don't look at past experience of a fund. That really doesnt matter at all. What is important is if it is an index fund, how cheap it is, and how diverse the fund is. You want to follow the ups and downs of the market as closely as possible. What that means is that you are not trying to beat the market. You are just simply along for the ride, and it is a very profitable ride with little comparative risk over the long term.
https://www.daveramsey.com/blog/investment-calculator/#/entry_form
To calculate the costs of the expense ratio, just input numbers into that link. Go with a 7% return, but subtract the expense ratio. so if it is a .02 expense ratio you would stick in 6.98. Make sure to do 65 - age for the years, because time is essential to see the huge impact of costs.
Randolph Freelander
Member
International has been underperforming the past several years (we like to blame austerity in Europe, but other factors could be at play), International isn't always going to be sluggish, there will be some points in time when it flourishes while domestic stocks lag. Bonds are going to be more even in good times and bad, and that's a stabilizing factor that many want in their portfolios and is a staple of target date funds. Like Piecake said, you don't want to focus too much on the rates of return as you do just having a well-diversified, market-based blend.
You have 3 good funds (from all we can tell). If you want to do a target-style approach, see my previous post. You can also look more closely to the blend that Vanguard maintains in its target date funds (again, look to the one that is closest to your anticipated year of retirement), and you can check those from time to time to adjust your own allocations. You could literally just do this once per year, you don't have to be constantly on top of it.
If you want to do something more equity based (utilizing the S&P 500 fund near exclusively), you can do that, too. And as you learn more and become more comfortable with retirement investing, you can always elect to change your strategy, nothing here is locked in. Just don't be reactionary with the near-term movement of the market. You're in this for the long haul, you don't really need to concern yourself with a market that is down for the month, year, or even longer periods. Economies recover, and the market recovers with it. Don't sweat when it slumps.
GodParticle
Member
Very helpful. It's slowly starting to make sense
You're right, I was focused on the rates when looking at things. I think I will go with what you suggested previously. Look good?
60% - NORTHERN TRUST S&P 500 INDEX DC NL TIER 3 .02%
30% - NT COLLECTIVE ALL COUNTRY WORLD EX-US IMI NL TIER 3 .10%
10% - NT COLLECTIVE AGGREGATE BOND INDEX DC NON LENDING TIER 3 .03%
One last thing is an Roth IRA(or just IRA? - which is better?). I can just do that at my bank, yes? If so, any catches I should look out for?
Randolph Freelander
Member
Looks fine to me, given your desire to follow a target date approach. It's close enough to Vanguard's allocation, a bit tilted more to domestic than what they do. Just remember to check in on it every year or so and make adjustments to the percentages, as needed. And when you transfer funds out of your employer match, you can use that to also keep the percentages roughly in line until your next adjustment.
As for IRAs... we generally recommend Roth over traditional, because the near-term tax advantages on the traditional phase out so quickly and the long-term benefit of tax-free growth in the Roth is so advantageous. If you're in a position where you can think about an IRA in addition to your 401K investing, a Roth is probably right for you. Of course, do some research on google on Roth vs. Traditional IRAs to see how it might really impact your situation.
Where to open it? Your bank might not be the best place. Brokerage houses connected to banks might not have the best selection of funds that you can buy into without loads or fees. While you can buy into any mutual fund or ETF, it would be nice to avoid any upfront costs while doing so. Many of us in this thread either go with Vanguard or Fidelity (I use the latter). You can easily set those up to transfer funds to and from your bank, so the convenience factor of the bank is lessened. And both of those companies offer great, low-expense, no load/transaction fee mutual funds and commission-free ETFs that we would be happy to help you select. Though if you would like to also utilize a target-date approach in your IRA, Vanguard is probably the best place to go. As good as Fidelity is with their broad-market index funds, their target date funds are managed, which bring higher expenses.
The 'adjustments as needed' are ideally just rebalancing it to the 60/30/10 allocation you have decided on. You will want to be careful about doing stuff like changing your international allocation because you feel more / less anxious about International economies vs the US. Look no further than people who dropped International after the Brexit getting punished this week as an example.
You may want to change the allocation over time (for example adding more bonds as you get older); the best way is to write down your plan for the next ten years in advance, then stick to it, only revising in response to big changes in your financial situation (getting a promotion, starting a family, etc.). The important part is to take your gut emotions out of the process, because usually they will result in decisions that lead to lower returns.
BannedEpisode
Member
Value of homes in my area are increasing at a very fast rate and renting is horribly cost inefficient.
I'm 26 years old, stabily employed, have a decent but not crippling amount of student debt, a really decent 401k, and a small pension plan. Oh and I have very decent credit.
I have about 20k in my 401k by contributing up to my company match over 2.5 years.
My question is: Is it ever a reasonable idea to take a loan against my 401k in order to help pay for a down payment for a home? I know it's generally advised against. With that said, I get the feeling that I will be missing out/priced out in the time it will take me save up a reasonable down payment in the next two/three years.
Just looking for opinions. Not in any way sold or set on the idea.
I'm 26 years old, stabily employed, have a decent but not crippling amount of student debt, a really decent 401k, and a small pension plan. Oh and I have very decent credit.
I have about 20k in my 401k by contributing up to my company match over 2.5 years.
My question is: Is it ever a reasonable idea to take a loan against my 401k in order to help pay for a down payment for a home? I know it's generally advised against. With that said, I get the feeling that I will be missing out/priced out in the time it will take me save up a reasonable down payment in the next two/three years.
Just looking for opinions. Not in any way sold or set on the idea.
Simply put, no. I'm sure some of the others in the thread that are mathematicians can show you some more direct numbers but no. You would lose out on market gains and there is no promise you will end up really paying it off (EX: You leave the job for a better prospect but you still owe on the account. Now the amount left over becomes a tax burden and you are further behind on your retirement goal).
I'm empathetic on the housing situation but don't rush into it. I would take the time to save for a down payment. There is always the possibility you may end up leaving the area in a few years for a better job anyway so having that flexibility (And savings!) can be a nice thing. That's my opinion though.
If it was me, I would continue with the following order of importance:
1) Retirement savings
2) Make sure you have at least 3-6 months of emergency savings in the bank
3) Create a solid plan to reduce/eliminate student loan in 5 years (if possible)
4) Then actually save for a down payment for an eventual home.
True financial security/freedom>>>>Perceived financial security via home ownership.
BannedEpisode
Member
Thanks. I just needed someone to say it directly.
GodParticle
Member
Ok, I'll go with that. I've got plenty to put into an IRA, so I'll try to max it out. Thanks again for all the detailed help =D
I'll keep that in mind. I can imagine people freaking out after all the brexit stuff going on
PantherLotus
Professional Schmuck
Question for y'all, but first some BG:
Student Loan 1 (mine): $18.5K -- payment = $190
Student Loan 2 (hers): $13K -- payment = $140
CC1 (0% for another year): $1600
CC2 (0% for another year): $5600
Ok, assuming I'm just trying to debt snowball and pay off these cards first before putting those payments onto our student loans and crushing those ... what do you think about getting a deferment on our student loans (interest will still accrue) to pay off CCs faster before turning around and putting all of those payments into the smaller student loan?
Student Loan 1 (mine): $18.5K -- payment = $190
Student Loan 2 (hers): $13K -- payment = $140
CC1 (0% for another year): $1600
CC2 (0% for another year): $5600
Ok, assuming I'm just trying to debt snowball and pay off these cards first before putting those payments onto our student loans and crushing those ... what do you think about getting a deferment on our student loans (interest will still accrue) to pay off CCs faster before turning around and putting all of those payments into the smaller student loan?
Presumably the APR on your credit card debt (once you get out of the 0% period) is going to be much higher than that of your student loans, so getting a deferral and paying off the cards faster makes sense. There is a tax deduction for student loan interest payments, but that is less of a factor.
The real question is whether you have the discipline to actually spend as much each month paying down the CC debt as you would have making combined payments on the CC and loans. A lot of people don't, and need that bill at the end of the month to compel them to stick to a tighter budget. If you get the deferral and a chunk of the money that would have gone to the loan payments ends up going to discretionary spending instead, you will be worse off than if you hadn't gotten the deferral.
Randolph Freelander
Member
To what tokkun has said, I would add what is your current rate of paydown on the credit cards? Are you going to end up incurring more extra interest on your student loans than you would seek to avoid on your cards?
To put some sample math to it, let's say your interest rate on your loans is 5%, compounding monthly. If you let those things sit for a year with no payments, you're accruing $1611 in interest (that itself will continue to accrue interest going forward along with your original balance). This is extra that you are adding to your burden, as now your combined student loan debt would be over $33K instead of $31.5K.
Would you be avoiding more or less than that with your credit cards? If more, then I guess focus on the cards. But if that 0% goes another year and you would otherwise pay off the cards before you ever saw $1611* in interest even while paying down your loans, then that's what you do.
Make a budget. Plot this out both ways. Whichever way comes out ahead, go that direction.
(*It's actually more than that, because you'll continue accruing extra interest for the life of your loans, and you should factor that into any calculation. I'll leave that for you to do, since I don't know your actual interest rate or the number of years you have left.)
chaosblade
Unconfirmed Member
It's worth factoring in that the "0%" for the credit cards is probably not actually 0%. I've never seen a credit card that actually offered something fully and truly interest free. Instead, I've always seen it where the interest is calculated but it's not applied to your account unless you don't finish paying off the principle before the interest free period is over.
Maybe your situation is different, but you should be sure of that because you really don't want to get hit by a truckload of interest next year.
Maybe your situation is different, but you should be sure of that because you really don't want to get hit by a truckload of interest next year.
MidgarBlowedUp
Member
Can someone explain how the 401k tax savings works?
I know that what I put in pretax is only pretax to an extent correct? Do I still pay taxes for Medicare or state taxes? Am I able to lower my AGI when I do my taxes to get more back at the end of the year? And if putting back 401k does lower my AGI does that effect the amount of social security I get when I retire or is that still taken out before the money goes into 401k?
I ask all this because I'm just wondering if I can put in enough to lower my AGI which would lower my end of year taxes. I'll get more back at the end of the year.
Also, I read that the Roth IRA is the way to go after you max out your 401k. But couldn't you just get the tax advantage of a Traditional then roll it over later?
And I thought IRAs were just set bank rates I had no idea you could invest that money. You still can only contribute $5,500 thought right?
I know that what I put in pretax is only pretax to an extent correct? Do I still pay taxes for Medicare or state taxes? Am I able to lower my AGI when I do my taxes to get more back at the end of the year? And if putting back 401k does lower my AGI does that effect the amount of social security I get when I retire or is that still taken out before the money goes into 401k?
I ask all this because I'm just wondering if I can put in enough to lower my AGI which would lower my end of year taxes. I'll get more back at the end of the year.
Also, I read that the Roth IRA is the way to go after you max out your 401k. But couldn't you just get the tax advantage of a Traditional then roll it over later?
And I thought IRAs were just set bank rates I had no idea you could invest that money. You still can only contribute $5,500 thought right?
Anyone look into those peer to peer lending services? loanclub.com reports a history of 5-8% returns (they will take 1% of that though). Have to commit to 36 or 60 month terms, but, seems like it would be a relatively safe long term investment option in lieu of bonds, CD's treasury notes, etc...
Am I missing something like the 5-8 percent return is over the life of the loan and therefore pretty shitty?
Am I missing something like the 5-8 percent return is over the life of the loan and therefore pretty shitty?
What you're missing is that it's not "relatively safe." You're not going to get a lot of swings in value as you would with market investing, but you'll get straight up defaults where loans will have to be written off to zero. Hopefully that 5-8% is inclusive of defaults, but even so that's lower than the return you'd expect from a market index.
chaosblade
Unconfirmed Member
Will let someone else get the details of the first part since I'm not exactly sure.
For Roth vs Traditional it depends on what you make now and anticipate making later. You are basically paying your maximum tax rate on the money going into the Roth. If your tax rate is on the lower end that's not really a bad thing, while if it's on the higher end you might be able to pay less taxes later by deferring with traditional.
Converting would only be beneficial if you know your top tax rate is going to get higher. You have to pay taxes on the money if you convert it, and that's lumped on top of your current income so it's still at your highest tax rate.
Banks offer IRAs but they are usually just savings account type things with lowish interest rates.
$5500 a year is the maximum for an IRA, but 401Ks have their own $18000 per year limit.
Darren870
Member
Roth IRAs are the way to go after you hit your employers match. Then you max out your Roth IRA.
It goes:
1. Put enough into your 401k to hit your employers full match (eg if they match up to 3% then put in 3%.
2. Max our your Roth IRA ($5,500)
3. Max out the rest of your 401k ($18,000)
Its not worth getting too focused on the tax stuff. In short (and roughly) if you can contribute $18,000 per year then you take that off your gross income. But for it to be beneficial you will have to be on the border tax rate.
So for example (as a single filer) the tax rate is:
10% $0 $9,275
15% $9,276 $37,650
25% $37,651 $91,150
28% $91,151 $190,150
If you are on $100k a year then minus $18k puts you at $82k a year taxable income.
So that $82k would be taxed at:
10% $0 $9,275
15% $9,276 $37,650
25% $37,651 $91,150
So that means if you had extra income this year up to $10k would only be taxed at 25% instead of 28%. In short you save about $240 ($8000 *3% by lowering your tax bracket)
It really only matters if you are the edge of a tax bracket. But people get so worked up in this that I don't think they realize how tax brackets actually work. Some people thing that if you get a raise that puts you into the next tax bracket all your income is taxed at that new %....
As for the other questions I am not 100% . In theory the money isn't part of your AGI so you shouldn't be paying state tax or any other taxes on it.
Considering what happened recently with their executives I'd stay away from Lending Club... :O
It works like this:
1. Payroll taxes are applied to your gross salary. This always happens before any 401k election happens, so 401k contributions never affect the amount you pay into SS / Medicare or your future benefits. This money is considered part of your AGI.*
2. Of the remaining money you have after payroll taxes are deducted, you can opt to contribute to a 401k. If you contribute to a Traditional 401k (i.e. not a Roth 401k), that money is deducted from your taxable income for federal income tax and for most (but not all) state and local income taxes.
*If you ever want to write a challenging problem for a math test, try to calculate what happens when an employee with a standard tax withholding wants to contribute the maximum amount of their paycheck to a traditional 401k. First you have to set aside money to pay the payroll taxes. However that money you set aside is now subject to federal & state income taxes, so you have to set aside more money for income tax withholding. However that additional money is also subject to income tax, so you set aside even more money. This process repeats until the increase in income tax becomes < 1 cent, at which point you can stop setting aside money.
PflargBlarg
Member
Uh no. Unless I'm misunderstanding you, this is incorrect.
It doesn't really have anything to do with tax brackets and it certainly doesn't "only matter" if you're on the edge of a tax bracket.
A 401k (like a Canadian RRSP) is pre-tax. Anything you contribute no longer counts as income and you don't get taxed on it. If you contribute 18000, your 'savings' are the entire amount of what would have been taxed on that 18000.
The savings are really more difficult to calculate than that because that 18000 now grows tax-free until you withdraw it. So the simplest way of saying what the savings are is the difference in your tax rate when you contributed the 18000 and when you eventually withdraw 18000.
In short, it's certainly always beneficial to use a tax-sheltered account if possible.
Actually, with credit cards, 0% is almost always truly 0%. It's store cards that do "deferred interest". In those cases, I don't think they call it 0% (I don't even know if they can), rather they say "No interest for xxx months" or "Deferred interest".
Darren870
Member
Yea, I think you are misunderstanding me. Thats not really what I am talking about. I know the $18,000 is tax free and should be contributed to if you want to save the max amount for retirement.
However, people also use it as a way to lower their tax brackets. Eg if they are close to a tax bracket line will contribute to their 401k to bring down there TGI and could potentially put them into a lower tax bracket. Thats more what his question was. I don't see the point in this as it the money you "save" is minuscule. This shouldn't be the reason you are putting more into your 401k.
Thats what I am saying...
chaosblade
Unconfirmed Member
I guess that's an important distinction, other than my one reward card I use the only ones I've ever paid any attention to are store cards when buying largish purchases and paying them off during the interest free period.
Which is probably a net negative for my credit score, having store card lines of credit languishing with no activity, but maybe it's evened out by having a higher total available credit. But that's something for a different topic.
Darren870
Member
I mean wasn't that the question I was responding too? He is talking about lowering his AGI and getting more tax back:
I had a big post typed up about p2p lending and investing into it, but, then I realized this was about investing for RETIREMENT. And I would NOT recommend such a service for investing retirement income.
For money you have sitting around in a savings account which you won't need to touch for a while, it's a pretty great deal. Otherwise, nah. And if you have such money, use it to max out total market 401k's and IRA's first.
For money you have sitting around in a savings account which you won't need to touch for a while, it's a pretty great deal. Otherwise, nah. And if you have such money, use it to max out total market 401k's and IRA's first.
Well, getting more back is a weird way of looking at it because that all depends on your withholdings and is mostly meaningless. But lowering your AGI and paying less taxes is definitely one of the main draws of 401k contributions.
SaviourMK2
Member
I typically sit around and do survey and online stuff for money or filling in job applications (although I'm taking a break until August to go see my girlfriend for a week or two at the end of July), anything else i'm usually moving people's furniture or something for a couple bucks or something to eat.
I'm all about earning money, the only time i get to relax is when i'm running perk/checkpoints on my cellphones and sleep or play a game.
Darren870
Member
Fair enough.
I guess my point was that you shouldn't look at a 401k as a way to lower your TGI and change tax brackets. You should look at it as a retirement vehicle that also lowers your TGI.
Ive had people tell me they put more into their 401k so that all total income gets taxed at 25% instead of 28%.... That's not how it works...
Therein lies a virtue of the Roth IRA / 401k - it's much easier to understand / explain.
Just like normal after-tax money, except all the growth is tax free. That's it. No need to try to guess what tax rates will be like in 2050. No required minimum distributions. No penalties if you retire early and want to start withdrawing. No need to adjust your tax withholdings.
Just like normal after-tax money, except all the growth is tax free. That's it. No need to try to guess what tax rates will be like in 2050. No required minimum distributions. No penalties if you retire early and want to start withdrawing. No need to adjust your tax withholdings.
demosthenes
Member
DOW finally over 18k after flirting with it since it first crossed it in May of 15.
S&P to an all time high as well.
S&P to an all time high as well.
PflargBlarg
Member
Yep, I see what you were pointing out now. I'm just not sure if that's what he was actually asking, but it's still a good point to bring up regardless.
It does remind me of that legendary thread where somebody was insisting that it did actually work like that and that they were sure because their dad was a financial genius or something. It honestly went on for hundreds of posts.