24 Year Old Needs Help w/ Retirement Planning

[dag06001]

Emergency funds: Three to six months of expenses
Debt: Credit Card Debt-$2k @ 0% interest, all else paid off every month.
Tax Filing Status: Single
Tax Rate: 15% Federal, 5% State
State of Residence: Connecticut
Age: 24
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 20% of stocks
Income: $40k-$50k
Risk Tolerance: Prefer risk.


Roth IRA Vanguard: Total: $3800
30% VWO Expense Ratio .2
11% VNQ Expense Ratio .1
30% VXUS Expense Ratio .05
29% VTV Expense Ratio .1

401k Fidelity-4% company match for 6% contribution- Total: $1,800
60% Vang Inst Index Plus -VIIX Expense Ratio .02
20% Vang Md CP IDX IS PL -VMPSX Expense Ratio .06
20% Vang Sm CP IDX IS PL -VSCPX Expense Ratio .12

Taxable: Total: $2,700
United Health Group (UNH) 50.359 shares
Cash: $21.40
Next contribution: $1,108.64 estimated 24 shares @ $46.09/share 1/1/2013. (not included in total above).

Contributions
6% to 401k (also specify any employer matching contributions)
$250 bi-weekly his Roth IRA
5% taxable-UNH Stock Purchase Program (They take 15% off lowest 6 month stock price and purchase at that price).

Available funds

Funds available in 401(k)

Blended Fund Investments & Expense Ratios:
PIMCO All Asset Fund Institutional Class PAAIX .965
WF DJ TARGET 2010N .3
WF DJ TARGET 2015N .3
WF DJ TARGET 2020N .3
WF DJ TARGET 2025N .3
WF DJ TARGET 2030N .3
WF DJ TARGET 2035N .3
WF DJ TARGET 2040N .3
WF DJ TARGET 2050N .3
WF DJ TARGET TODAY N .3

Bond Investments & Expense Ratios:
DODGE & COX INCOME Fund .1604
NT DAILY TIPS INDEX .06
SSGA US BOND INDEX Non-Lending Series C .062
UHG STABLE VALUE FD .155

Stock Investments & Expense Ratios:
Aberdeen Emerging Markets Fund Institutional Class ABEMX 1.03
American Funds EuroPacific Growth Fund C RERGX .5
EB DIVERSIFIED STOCK .5
Pyramis Small Company Fund .86
SSgA Global Equity ex U.S. Index Non-Lend Series Fund Class C .17
Vang Inst Index Plus -VIIX Expense Ratio .02
Vang Mid Cap IDX IS PL -VMPSX Expense Ratio .06
Vang Small Cap IDX IS PL -VSCPX Expense Ratio .12
Wellington Mid Cap Opportunities Portfolio .53


Questions:
1.) What do you think of my asset allocation, what can be changed? Any recommendations?

[Bob's not my name]

Tax Rate: 25% Federal, 5% State
Income: $40k-$50k

Do you have another source of income? I don't think you can be in the 25% bracket with $50,000 of gross income. If you are in the 25% bracket, I recommend you contribute a little more to your 401k to get into the 15% bracket.

$50,000 gross income
- $2,000 pre-tax health, dental, and disability insurance premiums withheld from your pay (guess)
- $3,000 401k contributions
------------
$45,000 AGI
- $3,800 personal exemption
- $5,950 standard deduction
-------------
$35,350 taxable income --> precisely the 25% bracket threshold

Max out the ESPP and sell the stock right away each period. Here's a good article: http://thefinancebuff.com/employee-stoc ... pp-is.html

[dag06001]

Oh, I was totally looking at the wrong part of my paycheck. It looks like i'll fall in the 15% tax bracket after all.

I really wish I read that article about the SPP when I received my shares in July. Should I cash out now before the year ends? Or wait until next year?

[Bob's not my name]

Unless there is a loss on the shares, sell them now. If there is a loss, your next purchase (Jan 2?) would create a wash sale.

However, if you did not contribute enough to your 401k this year to get into the 15% bracket, wait until Jan 2 to sell, and then contribute more to your 401k in 2013 so that you are in the 15% bracket (including the income from the stock sale and the next one in July). That is, waiting a few days to sell could save you 10% tax on the sale.

We're not talking about a lot of money anyway, right? Unless the stock went up a lot, your profit is 15/85 * 10%? * $50,000/2 = $440, so the 10% tax difference would be less than $50.

[Watty]

See this link on how to set up a three fund portfolio using the lowest cost index funds.

http://www.bogleheads.org/wiki/Three-fund_portfolio

Your desired asset allocation looks fine to me so just use those three funds to get that asset allocation.

The $2K in credit card debt bothers me even though it is at 0% because paying it off would wipe out a large part of your emergency fund. I would either beef up the emergency fund or pay off the credit card debt.

Any recommendations?

Sometimes the best investment is investing in yourself to help out your career. Plan on spending some money and time each year on career related books and classes.

You didn't mention having a car or a car loan. Unless you live in an area where a car is not needed then it would be good to start up a separate car fund so that you will have money available when a replacement car is needed. It would be good to have a goal of being able to pay cash for your future cars(new or used) by the time you are in your early 30's. Once you have a paid off car you can save your monthly "car payment" for you next car so it becomes pretty easy to always pay cash for a car once you have your first paid off car.

One thing that worked for me when I was your age was to commit to saving half of any future pay increases. Even with moderate pay raises you will be saving a large percentage of your pay by the time you are in your 30's and you will never miss the money.

The retirement savings and planning are great and necessary but it is also good to be methodical about planning for some larger optional expenses like traveling or whatever your particular interest is. You are young, single, don't have kids, and are likely in pretty good health so now is a great time to do thinks like take a budget trip to Europe. You may find out that if you don't do some things like that now that you never will do them or that you will have to wait until you retire to do it. This does not have to be real expensive, there are places like the less well known Greek Islands or Costa Rica where you can get a very adequate hotel for $60 a night in the shoulder season. With airfare it will not be exactly cheap but it is very doable on a budget.

One thing that I would suggest is that you open a separate "fun" account and have maybe $25 from every paycheck deposited into that account. You will find that every couple of years you will have enough for something like a big trip.

If you can also keep your fixed expenses, like rent, utilities, car payments, etc reasonable then when you have some paid vacation time that you can pay part of your vacation expenses out of your vacation pay instead of having the vacation pay all pre-commited to things like rent.

[dag06001]

Hey,

I do own a vehicle. Its a 2010 Kia Forte, paid off in cash. The credit card of 2k is not paid off since there is no interest, I just set it to autopay a few hundred dollars every month so that it will be paid off 1 month prior to when the full amount is due. Right now after all my expenses I usually net $1k to $2k in savings. I moved back home to save some cash. I actually just got back from a 10 day vacation to South Africa, it was amazing.

On the topic of separate account, I set an amount of $200 per month to get direct deposited to my credit union. I don't typically touch the money in this account but when I do its usually for haircuts, casino or anything else that requires cash. Eventually I'll use the leftover cash in this account as a down payment for a house.

[dag06001]

Unless there is a loss on the shares, sell them now. If there is a loss, your next purchase (Jan 2?) would create a wash sale.

However, if you did not contribute enough to your 401k this year to get into the 15% bracket, wait until Jan 2 to sell, and then contribute more to your 401k in 2013 so that you are in the 15% bracket (including the income from the stock sale and the next one in July). That is, waiting a few days to sell could save you 10% tax on the sale.

We're not talking about a lot of money anyway, right? Unless the stock went up a lot, your profit is 15/85 * 10%? * $50,000/2 = $440, so the 10% tax difference would be less than $50.

-Yeah you are right, i've made about $500 on the stock so far, if I sold it when I got it I would be at about $700. I should have no problem being in that 15% bracket, would it make more sense to take this money out and transfer it to my Vanguard Roth? Or just stick with Fidelity and put it in one of my index funds?

[covertfantom]

You're going to want to sell all of your UNH shares as it becomes available to you every 6 months - take that 15% return, pay extra taxes on it, and run. You want to be as diversified as possible... and being employed by UHG already overweights you with the company. You will want to take full advantage of the 401k match and contribute at least 6% of your salary to your 401k.

You want your 401k allocations to match your desired asset allocation. You also want your allocations for U.S. markets to match the Vanguard Total Stock Market ( http://www.bogleheads.org/wiki/Approxim ... ock_Market ). The following percentages slightly overweight the small cap index, but it's a strategy many posters here swear by.

Based on your asset location desires:
10% SSGA US BOND INDEX Non-Lending Series C .062
18% SSgA Global Equity ex U.S. Index Non-Lend Series Fund Class C .17
58% Vang Inst Index Plus -VIIX Expense Ratio .02
4% Vang Md CP IDX IS PL -VMPSX Expense Ratio .06
10% Vang Sm CP IDX IS PL -VSCPX Expense Ratio .12

You neglected to mention the HSA plan that the company offers with your health plan. You should prioritize your retirement funding as such: 6% to 401k, max out your HSA's $3,000 / year limit (once you hit the $2,000 barrier, start investing it into the Vanguard 500 fund), and then put whatever is left over into your Roth IRA. The reason you want to do this is that it the money going in to the HSA is pretax, but you can pull from it very easily to fund your health care needs today. The Roth IRA is after tax money that will grow, but will never grow quite as fast as pre-tax money.

[dag06001]

I actually have Next Gen, so I don't qualify for the HSA. Is there still a way to open one up even though I don't have the CDHP?

[covertfantom]

Sorry - I forgot about that plan. HSAs are only available with high deductible plans (all of the other plans that are offered.) If you're healthy and don't use your health plan much, the contribution the company makes to the HSA with the super saver plan effectively has the company paying you to have a health plan. All you need to do is jump through the hoops to get the extra health plan discounts by getting signed off as being healthy. You have to be able/ready to pay the higher deductibles (they max out at some number... like $5k? for a year), so if that's unacceptable, or you're dependent on some 'fringe' benefit that the next-gen plan offers, it may not really be an option for you - just food for thought for the next enrollment cycle next year.

[dag06001]

Yeah, I take some medication that has a $15 copay otherwise Id have to bear the whole cost $150-$200 for a month supply until I reached my deductible. Otherwise i'd switch plans because i'm healthy and rarely get sick.