27 YO newbie, looking for input.

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27 YO newbie, looking for input.

Postby WindGypsy » Fri Mar 15, 2013 2:17 am

Hi all. Ive been reading the forums for a couple days and figured I might gain more from posting my specifics than applying peices of advice to others.

Background- 27 YO, I work in the construction/engineering industry and relocate to wherever the current project is. This allows me to live with few expenses as vehicles, fuel, lodging, and meals are provided by my employer. I'm currently single and do not have any dependents.

Emergency funds: Six Months of expenses - Currently just sitting in a standard savings account with 0.1% interest, thinking about moving this elsewhere that might have higher yield.
Debt: None
Tax Filing: Single
Tax Rate: 28% Fed, 9.3% State (CA) Edited to represent tax brackets rather than effective rate
State of Residence: CA
Age: 27
Desired Asset allocation: Not 100% sure yet, thinking 70-75% stocks / 25-30% bonds..
Desired International allocation: 20%?

I'm just getting started. For simplicity I maxed out my Roth IRA for 2011 and 2012 with the Vangard 2045 TRF, I have the cash to max out my 2013 contributions now, but have been doing additional research before I pull the trigger.

My employer has a 100% match on 401k contributions up to 6% of of my salary. I currently have only $22k in the account, but plan to maximize it every year going forward now that all of my debt is paid off. I calculated my weekly contributions based on my salary so that I do not max it out early in the year thus paying for portions that could have been covered by employer contributions.

The company 401k program is run though Prudential. My current contributions with quarterly rebalance are the following ( Contribution %, Fund name/Expense Ratio):
5% Guaranteed income fund / 0.35
25% Core Bond Enhanced Index/PIM fund / 0.37
20% Dryden S&P 500 Index fund / 0.32
15% Columbia Mid-Cap Index A NTIAX (Blend) / 0.46
20% Columbia Small-Cap Index A NMSAX (Blend) / 0.47
15% Dodge and Cox International DODFX? (Value) / 0.64

There are numerous other choices but they all have have expense ratios of 0.99 and higher. I can list additional choice info if anyone would find that helpful..

What I'm really interested in is advice on additional investments beyond the Roth and 401k. I do not have a taxable account set up, but I have $10k to get started and would like to make monthly contributions of $1k.

Questions:
1. What areas of improvement are there for my Roth and 401k accounts allocations? I plan to max both accounts every year. Should I be concerned with having all of my Roth in the TRF that has 90/10 allocation, or just go heavier in Bonds in my 401k to balance?
2. I'm looking for suggestions on opening taxable accounts to make additional contributions beyond the roth and 401k.
3. What alternatives to my 0.1% savings account should I consider for keeping my emergency savings?

Thanks for any help in advance!
Last edited by WindGypsy on Wed Mar 20, 2013 12:43 am, edited 3 times in total.
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Re: 27 YO newbie, looking for input.

Postby Duckie » Fri Mar 15, 2013 8:23 pm

WindGypsy, at the age of 27 your stock/bond AA is extremely conservative. What is the reasoning behind that? Normally, I would reverse the ratios and make it 75% stocks, 25% bonds.

In your 401k you have 20% in large caps and 35% in mid/small caps. Large caps make up roughly 80% of the US stock market with mid/small caps making up the other 20%. You are seriously overweighting mid/small caps in your 401k. Are you sure that's what you want to do?

Your chosen funds in your 401k are decent and the expense ratios are reasonable.

Your questions:
1. What areas of improvement are there for my Roth and 401k accounts allocations? I plan to max both accounts every year. Should I be concerned with having all of my Roth in the TRF that has 90/10 allocation, or just go heavier in Bonds in my 401k to balance?
-- Since you hold separate funds in your 401k it would probably be easier for rebalancing purposes to have separate funds in your Roth IRA. You could put (VTSMX) Vanguard Total Stock Market Index Fund Investor Shares (0.18%) and (VGTSX) Vanguard Total International Stock Index Fund Investor Shares (0.22%) there. TISM is a much better international fund the Dodge and Cox. It would be better to put all your international allocation at Vanguard.

2. I'm looking for suggestions on opening taxable accounts to make additional contributions beyond the roth and 401k.
-- Before you do that make sure you have a short-term needs fund set up (new car, house down-payment, fancy vacation, etc). These monies should be in the same types of accounts as your emergency fund (listed below).

Then, taxable money for retirement purposes should be in tax-efficient stock funds like the previously mentioned Total Stock Market and Total International Stock funds. Having TISM in taxable allows you to take advantage of the
Foreign tax credit. You could also buy 
I Savings Bonds through Treasury Direct in taxable. I bonds are suitable for long-term and short-term.

3. What alternatives to my 0.1% savings account should I consider for keeping my emergency savings?
-- The purpose of an emergency fund is to have it, all of it, available when needed so the amount of earnings is not as important as the safety. This could be in a mix of savings accounts, CDs, money market accounts, I Savings Bonds, and possibly a short-term bond fund.

Just some possibilities.
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Re: 27 YO newbie, looking for input.

Postby Ryno » Sat Mar 16, 2013 10:07 pm

I believe you will find that even if you max your 401k very early in the year, your Employer contributions will continue until 6% of your salary is matched. Check with your Employer to confirm.
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Re: 27 YO newbie, looking for input.

Postby sometimesinvestor » Sat Mar 16, 2013 10:52 pm

For your savings account i bonds are plausible and I support them but you should also have access to an amount your funds with no penalty and for this purpse I think you area good candidate for an internet bank like Ally http://www.ally.com/?CP=ppc133160 , Discover https://www.discover.com/online-banking ... 17024359:s or ING http://www.ingdirect.com.au/index.htm . I think American expresss also offers a decent account http://personalsavings.americanexpress. ... gs-PS000HP .
I agree with those who think your asset allocation at 30-70 may be too conservative but if you might decide to save for a house or similar goal witha 5 year time horizon its ok or even bold for a taxable account with that proportion.
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Re: 27 YO newbie, looking for input.

Postby ruralavalon » Sun Mar 17, 2013 11:35 am

Welcome to the forum :) .

Its great that you have no debt. You are off to a great start with your saving and investing, its great that you are maxing your IRA and 401k, and you have some decent offerings in your 401k. I don't think that you need to list the higher expense choices in the 401k.


WindGypsy wrote:Age: 27
Desired Asset allocation: Not 100% sure yet, thinking 25-30% stocks / 70-75% Bonds..
Desired International allocation: 20%?

I'll start by suggesting that you re-think this, 75/25 stock/bonds would be more usual. Please see : Wiki article link: Asset Allocation ; and viewtopic.php?p=1217243#p1217243 . Given what you have in your accounts now, you may have meant 75 stock/25 bond anyway. The 20% of stocks in international seems reasonable.


WindGypsy wrote:Questions:
1. What areas of improvement are there for my Roth and 401k accounts allocations? I plan to max both accounts every year. Should I be concerned with having all of my Roth in the TRF that has 90/10 allocation, or just go heavier in Bonds in my 401k to balance?
2. I'm looking for suggestions on opening taxable accounts to make additional contributions beyond the roth and 401k.

2. The better more tax-efficient choices for taxable accounts are large cap or total market type stock index funds, like Vanguard Total International Stock Index Fund Investor Shares (VGTSX), and Vanguard Total Stock Market Index Fund Investor Shares (VTSMX). Wiki article link: Principles of Tax-Efficient Fund Placement .

1. Roth IRA. Since you will be using a taxable account and need to use tax-efficient funds there, I think you will find it easier to NOT use a target retirement fund in the Roth IRA. The prime benefit to a TR fund is its set-it-and-forget-it simplicity, you lose that benefit when you have to use it with regular index funds. Using a TR fund makes it harder to keep track of your asset allocation, and means you have to frequently rebalance the funds you keep in other accounts. 401k. Your 401k is your largest account, and will likely continue to be your largest account since it will be recieving the largest contributions. So I think it will be wise to continue to hold all of your basic asset types there, for ease of management and rebalancing going forward.

Here is portfolio idea along those lines to consider, using the funds you have picked out in the 401k, which should work well for you:

Taxable (23%; $10k; adds $12k/yr)
10%, Vanguard Total International Stock Index Fund Investor Shares (VGTSX), er = 0.22% , <= very tax efficient
18%, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX), er = 0.18%, <= very tax efficient

401k with Prudential (51%; $22k; adds $17.5k/yr plus match)
25% Core Bond Enhanced Index/PIM fund / 0.37
05% Dodge and Cox International DODFX? (Value) / 0.64, <= a nice managed int'l fund, moderate expense ratio
21% Dryden S&P 500 Index fund / 0.32
00% Columbia Mid-Cap Index A NTIAX (Blend) / 0.46
00% Columbia Small-Cap Index A NMSAX (Blend) / 0.47
(You could have all 21% domestic in the S&P 500 fund, or mix in the mid and small cap as you wish. Wiki article link: Approximating Total Stock Market .)

Roth IRA (26%; $11k; add $5.5k/yr)
26%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), er = 0.06%.

This gives you a simple 5 - 7 fund portfolio, which is tax-efficient, which is broadly diversified, with low expenses, which should be easy to manage and rebalance.


WindGypsy wrote:Questions:
. . . .
3. What alternatives to my 0.1% savings account should I consider for keeping my emergency savings?

3. There are currently no good alternatives, except perhaps a short term bond fund or short term CD. I don't think I-bonds are a good idea for you unless and until you need and develop a really large emergency fund. "I Bonds cannot be redeemed during the first year, and if you redeem them within the first five years after purchase, you lose the most recent three months' interest." Wiki article link: I Savings Bonds .


I hope that this helps.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: 27 YO newbie, looking for input.

Postby WindGypsy » Sun Mar 17, 2013 3:47 pm

Thanks for your input guys! :sharebeer

Maybe I was a little too tired when I made the initial post, I intended to have an AA of 75% stocks, 25% bonds not 75% bonds as the original post stated.

I have to absorb the info and I might have additional questions.
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Re: 27 YO newbie, looking for input.

Postby WindGypsy » Mon Mar 18, 2013 11:42 pm

Am I correct in assuming there are no fees for exchanging Roth IRA funds from my Target Retirement fund (VTIVX) for other Vanguard funds?
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Re: 27 YO newbie, looking for input.

Postby Brian2d » Tue Mar 19, 2013 12:07 am

WindGypsy- You are correct, no fees- but you can't go back into the fund you leave for 2 months (there are ways around this but you probably won't need to do it anyway).
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Re: 27 YO newbie, looking for input.

Postby ruralavalon » Tue Mar 19, 2013 9:07 am

WindGypsy wrote:Tax Rate: 28% Fed, 9.3% State (CA) Edited to represent tax brackets rather than effective rate

With a combined tax rate of 37.3% you will probably be better off making future IRA contributions to a traditional IRA rather than the Roth. In short, its probably best for you to take the tax break now. Please see : Wiki article link: Traditional versus Roth ; and http://thefinancebuff.com/case-against-roth-401k.html .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started
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Re: 27 YO newbie, looking for input.

Postby Default User BR » Tue Mar 19, 2013 1:09 pm

ruralavalon wrote:With a combined tax rate of 37.3% you will probably be better off making future IRA contributions to a traditional IRA rather than the Roth. In short, its probably best for you to take the tax break now.

How could that be? When covered by an employer plan, the total deductible phase-out for a single filer is [a MAGI of] $69,000 for 2013. The 28% bracket begins at $87,851 taxable income. There's no way that the OP can deduct that traditional IRA contribution.


Brian [edited with clarification]
Last edited by Default User BR on Tue Mar 19, 2013 3:53 pm, edited 1 time in total.
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Re: 27 YO newbie, looking for input.

Postby SVT » Tue Mar 19, 2013 1:29 pm

I agree. The OP has a company 401k and is in the marginal 28% bracket, which means there's no way he/she is eligible for a deductible IRA.

Roth IRA > non-deductible traditional IRA.
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Re: 27 YO newbie, looking for input.

Postby WindGypsy » Tue Mar 19, 2013 4:10 pm

I have to do a little more research, but I forgot to factor in my larger 401k withholdings in my taxable. By maxing my 401k this year, I'll likely be just below the $87,851 barrier for the 28% bracket but my earnings are not set in stone either.

Since we are talking about Roth's now, there is also a Roth 401k available through my company. I was worried about possibly losing the benefits of a Roth 401k if I leave my current employer and have to move the account. Should I be considering this?

I'm unsure what my future earnings will be. They are currently growing but its certainly possible I'll take a pay cut to live a more steady lifestyle in the future.
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