Brand new to investing! Would like guidance...

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Brand new to investing! Would like guidance...

Postby bearpaws » Mon Jul 15, 2013 2:36 am

Hi everyone! I'm glad to have found this website with so many people willing to help! I'm completely new to investing and have been trying to learn the Boglehead way of investing, which I would love to follow. Needed a little guidance from here...

Emergency fund: 6 months

Debt:
Credit card - none
Student loans - $76,000 (10k @ 6.8%, 61k @ 2.5%, 5k @ 5%)
Car loans - $8,000 @ 0%
Mortgage - none (renting)

Tax Filing Status: Married filing jointly

Tax Rate: 33% Federal, 9% State

State of Residence: California

Age: 33

Desired Asset allocation: 65-70% stocks / 30-35% bonds

Desired International allocation: 20-25% of stocks - not sure??

Current retirement assets
His 401k at Fidelity
Target Date 2040 (name of the fund is just my employer's name) (0.02%) -- 87.5%

Asset allocation of my 401K plan.
Preferred stock 0.12%
Others 1.15%
Foreign stock 29.34%
Cash 6.07%
Domestic stock 51.21%
Domestic bond 10.57%
Foreign bond 1.54%

Available 401k funds
FID CUSTOM CONTRAFUND Portfolio Expense ratio 0.43%
Vanguard PRIMECAP Fund Admiral Shares (VPMAX) Expense ratio 0.36%
BlackRock US Market Equity Fund Expense ratio 0.01%
Fidelity® Custom Low-Priced Stock Portfolio Expense ratio 0.56%
RUSSELL SMALL CAP Expense ratio 0%
Capital Guardian International Equity Fund Unit Class S Expense ratio 0%
Templeton International Foreign Fund Expense ratio 0%
Russell Global Real Estate Securities Fund Expense ratio 0%
F.R. FIXED INCOME Expense ratio 0%
PIMCO High Yield Fund Institutional Class (PHIYX) Expense ratio 0.55%
Managed Income Portfolio II Class 3 Expense ratio 0.28%

His Roth IRA at Fidelity
Fidelity FUSEX (Fidelity Spartan 500 Index Fund Investor Class) (.1%) -- 12.5%

Her 401k
None offered through work

Her IRA
None

Contributions

New annual Contributions
$17500 his traditional 401k
$17500 (employer contribution to 401k)
$5500 his Roth IRA (backdoor)
$5500 her Roth IRA (backdoor)
In addition, trying to save for a house over the next year. After that, hoping to contribute an additional 25k/year of after tax dollars for investment.

After we're done saving for the house, I hope to repay the 10k in 6.8% and 5k in 5% student loan as soon as possible. I know it probably makes more sense to pay off the debt first, but we really want to get a bigger place soon...

Questions:

1. My work also offers a Roth 401k. So far I've put everything into a traditional 401K. Does it make sense for me to put some or all of it into a Roth 401k? I'm not sure what my tax bracket will be in retirement...how would I estimate it? I expect to be in this tax bracket for the rest of my career.

2. It seems like most of my holdings are in stock right now. Should I change my Roth IRA from FUSEX to something like FBIDX to increase my bond allocation? I think that will increase my bond allocation from 10% to 20%. Or should I diversify more through my 401k?

3. My wife is an independent contractor and her current income is minimal. However we would like to use any avenue to contribute for her retirement. Is there anything else besides a spousal IRA we can use?

4. Any other recommendations?

Thank you so much!
Last edited by bearpaws on Tue Jul 16, 2013 3:14 am, edited 1 time in total.
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Re: Brand new to investing! Would like guidance...

Postby NightOwl » Mon Jul 15, 2013 10:54 pm

Hi bearpaws,

I'm mostly bumping this post until the portfolio gurus get to it, but I can offer a few suggestions that might help them -- please make these as edits to your original post:

1. Calculate percentages as percentages of your entire portfolio, not within each account. I believe that makes you:

His 401k at (who is your provider?)
Target Date 2040 (0.02%) -- 87.5%

His Roth IRA at Fidelity
Fidelity FUSEX (Fidelity Spartan 500 Index Fund Investor Class) (.1%) -- 12.5%

2. Please list all available options in your 401k, along with their names (not just tickers) and expense ratios.

A few comments:
1. I think folks will generally recommend Fidelity's Total Stock Market Fund (FSTMX if investor class and FSTVX if advantage class) over the 500 Index Fund, though the two funds will have very similar performance.
2. Given that you want a minimum of 30% bonds, I think I would hold bonds in the 401k (if there's a good bond option there) and use the Roth space for something else. But as I said, the portfolio gurus will be along soon to give you better advice than I can give you.

NightOwl
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Re: Brand new to investing! Would like guidance...

Postby bearpaws » Tue Jul 16, 2013 3:15 am

Thanks for the comments nightowl! My post has been edited...
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Re: Brand new to investing! Would like guidance...

Postby Optimistic » Tue Jul 16, 2013 9:39 am

Welcome to the forum. You listed a few of the funds offered in your 401(k) with a 0% expense ratio. This is most likely incorrect. Can you please verify the expense ratios? Otherwise, my advice would be to pay off the student loans with interest rates of 5% and 6.8% prior to maxing out your 401(k)s and IRAs. These offer a high rate of risk-free return. It's not wise to invest in treasuries that pay 1.5% when you can get a much better return from simply paying off your student loan debt.
Last edited by Optimistic on Tue Jul 16, 2013 11:52 am, edited 1 time in total.
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Re: Brand new to investing! Would like guidance...

Postby bearpaws » Tue Jul 16, 2013 11:32 am

Thanks optimistic...here are my available funds copied and pasted directly from Fidelity and seems to indicate that some of them are 0%? Is it extremely unusual to be 0%? Are there other fees not indicated perhaps?

I will definitely work on paying off the high interest student loans first...




Name/Inception Date Asset Class Category Gross Expense Ratio Shareholder Fees

FID CUSTOM CONTRA
05/21/2013
Stock Investments Large Cap Growth 0.43% No additional fees apply.

VANG PRIMECAP ADM (VPMAX)
11/12/2001
Stock Investments Large Cap Growth 0.36% No additional fees apply.

BTC US EQUITY MKT
09/30/1994
Stock Investments Large Cap Blend 0.01% No additional fees apply.

FID CUSTOM LP STK
05/21/2013
Stock Investments Mid-Cap Blend 0.56% Short term trading fees of 1.5% for shares held less than 90 days.

RUSSELL SMALL CAP
01/01/1997
Stock Investments Small Cap Blend 0.00% No additional fees apply.

CAP GUARDIAN INTL EQ
08/13/1999
Stock Investments Foreign 0.00% No additional fees apply.

TMPL INTL FOREIGN FD
04/30/1990
Stock Investments Foreign 0.00% No additional fees apply.

RUSSELL GLOBAL REIT
07/01/2004
Stock Investments Other 0.00% No additional fees apply.
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Re: Brand new to investing! Would like guidance...

Postby Optimistic » Tue Jul 16, 2013 11:52 am

bearpaws wrote:Thanks optimistic...here are my available funds copied and pasted directly from Fidelity and seems to indicate that some of them are 0%? Is it extremely unusual to be 0%? Are there other fees not indicated perhaps?

It is extremely unusual and likely implausible that someone would charge you nothing to manage your investments. Vanguard is essentially a non-profit and still charge a small amount to cover the salaries of their employees, the cost of their buildings and technology, etc. The statement you copied states "No additional fees apply." So, something doesn't add up. I guess it's possible that your employer would be covering all costs for those particular funds, but I've never heard of an employer covering expense ratios. Instead, big employers sometimes get access to super low-cost funds (like Vanguard Signal shares) because they can put a lot of assets into them. But, even then you would see at least an expense ratio of 0.01%. Maybe someone else will point out something I'm missing.
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Re: Brand new to investing! Would like guidance...

Postby MindBogler » Tue Jul 16, 2013 12:58 pm

Do I read it correctly that your employer is matching your 401k contributions 1:1 up to 17.5k? Where do I sign up?! :happy

Regarding no fee funds, I have seen some deferred comp plans that have funds such as S&P500 Index for an ER of 0.00%. Then they have active funds surrounding that S&P500 for 1.5%. I'm assuming it balances out.
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Re: Brand new to investing! Would like guidance...

Postby bearpaws » Tue Jul 16, 2013 1:16 pm

yup :) it's not even really a match, they just contribute that amount to the 401k as part of the benefit package...
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Re: Brand new to investing! Would like guidance...

Postby Optimistic » Tue Jul 16, 2013 1:18 pm

MindBogler wrote:Do I read it correctly that your employer is matching your 401k contributions 1:1 up to 17.5k? Where do I sign up?!

Woah! I missed that. If that's true, only start paying off your loans after contributing to your 401k. You are receiving an immediate 100% return on you contribution when you employer matches. That is much better than the 6.8% return on paying off your loan!
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Re: Brand new to investing! Would like guidance...

Postby bearpaws » Tue Jul 16, 2013 1:25 pm

Optimistic wrote:
MindBogler wrote:Do I read it correctly that your employer is matching your 401k contributions 1:1 up to 17.5k? Where do I sign up?!

Woah! I missed that. If that's true, only start paying off your loans after contributing to your 401k. You are receiving an immediate 100% return on you contribution when you employer matches. That is much better than the 6.8% return on paying off your loan!


I actually get that amount contributed no matter what my contribution is...so I can definitely work on the 6.8% loan, cut down on my 401k contribution and not lose out.
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Re: Brand new to investing! Would like guidance...

Postby Pale Horse » Tue Jul 16, 2013 3:45 pm

Can I ask what Industry or line of work you're in, that your employer contributes $17.5k to your 401k?
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Re: Brand new to investing! Would like guidance...

Postby M_to_the_G » Tue Jul 16, 2013 9:25 pm

Err... the 0.00% ER funds and the $17,500 full match makes me think OP would benefit from having a discussion with relevant people in his company to clarify a few things as a very first step.
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Re: Brand new to investing! Would like guidance...

Postby bearpaws » Wed Jul 17, 2013 1:03 am

M_to_the_G wrote:Err... the 0.00% ER funds and the $17,500 full match makes me think OP would benefit from having a discussion with relevant people in his company to clarify a few things as a very first step.


I guess I'll check with my employer and confirm, but I'm pretty sure I'm reading it correctly from the Fidelity website with the funds available to me (I also copied and pasted it from Fidelity's website without editing it on my previous post). I'm also quite intrigued by the 0%...no such thing as a free lunch, right??

However I do definitely get the company's contribution no matter what I put in - that's part of the benefits package and have confirmed this with coworkers.
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Re: Brand new to investing! Would like guidance...

Postby M_to_the_G » Wed Jul 17, 2013 1:13 am

I wouldn't rely on the coworker for this information which affects your financial future. It is fairly easy to confirm for yourself. Here's how:

Sit down with the relevant people and confirm the ER for those funds. Get the literature from them and ask why there are funds available with zilch ER? There has to be an explanation. Maybe they are using weird (and inappropriate) rounding in their company literature (rounding 0.4% to 0%?). Either you misheard or the company is somehow subsidizing this for employees? If so, that's awesome... but confirm.

As for the $17,500 match, people have questioned that because probably none of us has ever heard of an organization that does that. I can see how it could make sense, depending on the organization. They could be doing such a thing in lieu of bonuses or to offset bonuses that don't track with what the industry is offering in your area, in which case, great! They are a fantastic company, and you are lucky to work there. Are you in tech? The best way to confirm this is to check your 401(k) account. Are you seeing ($17,500 divided by #-of-pay-periods) deposited into that account each pay period? If not, then you have misheard and should confirm what exactly they are giving you in your 401(k) each pay period.

Once you've confirmed those numbers, it will be easier to assess your situation.
Last edited by M_to_the_G on Wed Jul 17, 2013 1:27 am, edited 1 time in total.
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Re: Brand new to investing! Would like guidance...

Postby pingo » Wed Jul 17, 2013 1:18 am

Does your 401k allow after-tax contributions? Please check your Plan Document(s) to see if your 401k allows after-tax contributions as well as in-service withdrawals/distributions of only those after-tax contributions. Please note that after-tax contributions are not the same as Roth 401k contributions. They're contributions above and beyond Traditional/Roth 401k contributions limits and can also be an even larger means of creating Backdoor Roth contributions. Here are 4 links talking about after-tax contributions: here, here, here and here.

If your employer allows you to make regular in-service withdrawals of 401k after-tax contributions (again, these are not the same as Roth 401k contributions), you could have such contributions directly rolled over to your Roth account and they'd be tax-free and RMD-free forever. They do not affect your Roth IRA contribution limits and would also be preferred over saving in a taxable account.

If in-service withdrawals are not allowed, I wouldn't bother with 401k after-tax contributions.
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Re: Brand new to investing! Would like guidance...

Postby pkcrafter » Wed Jul 17, 2013 1:29 am

Mutual fund expense ratios are extracted from the funds on a regular basis by the fund company, so I don't know how you can avoid them. The 0 you are seeing may be additional administrative fees that are not passed on to you because your employer is paying them. As suggested, double-check.

Like everyone else who has commented, I've never seen a company that will add 17,500 to an employees 401k, and especially so if there is no employee contribution.

On review of your OP, we could be wrong.

Target Date 2040 (name of the fund is just my employer's name) (0.02%) -- 87.5%


Do you work for a mutual fund company? That might explain a lot.

Paul
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Re: Brand new to investing! Would like guidance...

Postby bearpaws » Wed Jul 17, 2013 2:31 am

Thank you for all the advice and input.

Regarding my employer's very generous contribution...and I do recognize it is extremely generous, however I am 100% sure they do contribute this much (half of it is already in my account for the year). My best guess of why they do it is that the base compensation at my work is a little bit less than the average salary in the area for similar work and this adds onto the base to make them more competitive with recruiting workers. There is a vesting period of this contribution over a couple years and I think they use that fact as an incentive to minimize people from leaving (they want their employees to work for them for the long run and I'm sure it's expensive to hire and train new people with fast turnover).

I do not work for a mutual fund company...I didn't want to put the target date retirement fund name because it identifies the company.
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Re: Brand new to investing! Would like guidance...

Postby pingo » Wed Jul 17, 2013 10:22 am

^Earlier you posted the "asset allocation of my 401k plan" which would have to be the asset allocation of the Target Date fund? Out of sheer curiosity, would posting the Target Date fund"s underlying fund names (and tickers if provided) reveal the company the company name? I suspect that no, it's a custom-made target fund assembled from options already in your plan, but I'd love to see how the underlying funds are allocated specifically and what funds those are.
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Re: Brand new to investing! Would like guidance...

Postby pkcrafter » Wed Jul 17, 2013 11:05 am

Thanks for the info on your TR fund, and I won't even ask about a TR fund named after your company if it's not a recognized fund name. It's unusual that you get a 100% match, and it's great, but the fund expense ratios still don't make much sense as they are beyond the control of your company plan, and none have a zero ER (expense ratio). Zero may just mean there is no additional fees tacked on.

Emergency fund: 6 months

Debt:
Credit card - none
Student loans - $76,000 (10k @ 6.8%, 61k @ 2.5%, 5k @ 5%)<--Pay off the 6.8% loan ASAP.
Car loans - $8,000 @ 0%
Mortgage - none (renting)

Tax Filing Status: Married filing jointly

Tax Rate: 33% Federal, 9% State

State of Residence: California

Age: 33

Desired Asset allocation: 65-70% stocks / 30-35% bonds

Desired International allocation: 20-25% of stocks - not sure??<--recommended range is 20-40% of equity.

Current retirement assets
His 401k at Fidelity
Target Date 2040 (name of the fund is just my employer's name) (0.02%) -- 87.5%

Please list the fund names in TR 2040 if you can (TR = target retirement or target date), so we can determine if this is the best choice. Don't choose TR funds by date; choose by asset allocation that meets your target. 2040 is too aggressive.


Asset allocation of my 401K plan.
Preferred stock 0.12%
Others 1.15%
Foreign stock 29.34%
Cash 6.07%
Domestic stock 51.21%
Domestic bond 10.57%
Foreign bond 1.54%

Available 401k funds
FID CUSTOM CONTRAFUND Portfolio Expense ratio 0.43%
Vanguard PRIMECAP Fund Admiral Shares (VPMAX) Expense ratio 0.36%
BlackRock US Market Equity Fund Expense ratio 0.01%
Fidelity® Custom Low-Priced Stock Portfolio Expense ratio 0.56%
RUSSELL SMALL CAP Expense ratio 0%
Capital Guardian International Equity Fund Unit Class S Expense ratio 0%
Templeton International Foreign Fund Expense ratio 0%
Russell Global Real Estate Securities Fund Expense ratio 0%
F.R. FIXED INCOME Expense ratio 0%
PIMCO High Yield Fund Institutional Class (PHIYX) Expense ratio 0.55%
Managed Income Portfolio II Class 3 Expense ratio 0.28%

His Roth IRA at Fidelity
Fidelity FUSEX (Fidelity Spartan 500 Index Fund Investor Class) (.1%) -- 12.5%

Her 401k
None offered through work

Her IRA
None

Contributions

New annual Contributions
$17500 his traditional 401k
$17500 (employer contribution to 401k)
$5500 his Roth IRA (backdoor)
$5500 her Roth IRA (backdoor)
In addition, trying to save for a house over the next year. After that, hoping to contribute an additional 25k/year of after tax dollars for investment.

After we're done saving for the house, I hope to repay the 10k in 6.8% and 5k in 5% student loan as soon as possible.

It makes a lot more sense to pay of the high interest loan.

Questions:

1. My work also offers a Roth 401k. So far I've put everything into a traditional 401K. Does it make sense for me to put some or all of it into a Roth 401k? I'm not sure what my tax bracket will be in retirement...how would I estimate it? I expect to be in this tax bracket for the rest of my career.

A Roth doesn't seem attractive in your tax bracket, but check on the possibility of adding more to your 401k after tax.

2. It seems like most of my holdings are in stock right now. Should I change my Roth IRA from FUSEX to something like FBIDX to increase my bond allocation? I think that will increase my bond allocation from 10% to 20%. Or should I diversify more through my 401k?

Right now you are over 90% stock and you want 65-70%. Move to a TR fund that is close to your target, don't choose by date. If the funds in the TR fund aren't good choices, you have some good individual funds you can use. Also, be sure to look at all retirement accounts as one portfolio to optimize it.

3. My wife is an independent contractor and her current income is minimal. However we would like to use any avenue to contribute for her retirement. Is there anything else besides a spousal IRA we can use?

She might be eligible for a solo 401k or one of the other plans designed for individuals.


4. Any other recommendations?



Thank you so much!
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Re: Brand new to investing! Would like guidance...

Postby bearpaws » Wed Jul 17, 2013 11:55 am

pingo wrote:^Earlier you posted the "asset allocation of my 401k plan" which would have to be the asset allocation of the Target Date fund? Out of sheer curiosity, would posting the Target Date fund"s underlying fund names (and tickers if provided) reveal the company the company name? I suspect that no, it's a custom-made target fund assembled from options already in your plan, but I'd love to see how the underlying funds are allocated specifically and what funds those are.


Equity Index Fund E 39.78%
BlackRock MSCI ACWI ex-U.S. IMI Index Fund E 25.11%
U.S. Debt Index Fund E 13.70%
Developed Real Estate Index Fund E 9.14%
Extended Equity Market Fund E 8.26%
BlackRock Dow Jones-UBS Commodity Index Daily Fund E 4.01%

% of Total Portfolio 100.00%

I don't see the tickers provided anywhere though.
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Re: Brand new to investing! Would like guidance...

Postby bearpaws » Wed Jul 17, 2013 12:09 pm

Thank you for everybody's responses! The 6.8% loan should definitely be one of my first priority. As far as after tax non-roth 401k contributions...my work does allow that, but I was trying to read more about it and a couple of websites mentioned it didn't make much sense since there are no tax benefits to this. Am I better off taking after-tax dollars and investing into a low expense fund?



pkcrafter wrote:Thanks for the info on your TR fund, and I won't even ask about a TR fund named after your company if it's not a recognized fund name. It's unusual that you get a 100% match, and it's great, but the fund expense ratios still don't make much sense as they are beyond the control of your company plan, and none have a zero ER (expense ratio). Zero may just mean there is no additional fees tacked on.

Emergency fund: 6 months

Debt:
Credit card - none
Student loans - $76,000 (10k @ 6.8%, 61k @ 2.5%, 5k @ 5%)<--Pay off the 6.8% loan ASAP.
Car loans - $8,000 @ 0%
Mortgage - none (renting)

Tax Filing Status: Married filing jointly

Tax Rate: 33% Federal, 9% State

State of Residence: California

Age: 33

Desired Asset allocation: 65-70% stocks / 30-35% bonds

Desired International allocation: 20-25% of stocks - not sure??<--recommended range is 20-40% of equity.

Current retirement assets
His 401k at Fidelity
Target Date 2040 (name of the fund is just my employer's name) (0.02%) -- 87.5%

Please list the fund names in TR 2040 if you can (TR = target retirement or target date), so we can determine if this is the best choice. Don't choose TR funds by date; choose by asset allocation that meets your target. 2040 is too aggressive.


Asset allocation of my 401K plan.
Preferred stock 0.12%
Others 1.15%
Foreign stock 29.34%
Cash 6.07%
Domestic stock 51.21%
Domestic bond 10.57%
Foreign bond 1.54%

Available 401k funds
FID CUSTOM CONTRAFUND Portfolio Expense ratio 0.43%
Vanguard PRIMECAP Fund Admiral Shares (VPMAX) Expense ratio 0.36%
BlackRock US Market Equity Fund Expense ratio 0.01%
Fidelity® Custom Low-Priced Stock Portfolio Expense ratio 0.56%
RUSSELL SMALL CAP Expense ratio 0%
Capital Guardian International Equity Fund Unit Class S Expense ratio 0%
Templeton International Foreign Fund Expense ratio 0%
Russell Global Real Estate Securities Fund Expense ratio 0%
F.R. FIXED INCOME Expense ratio 0%
PIMCO High Yield Fund Institutional Class (PHIYX) Expense ratio 0.55%
Managed Income Portfolio II Class 3 Expense ratio 0.28%

His Roth IRA at Fidelity
Fidelity FUSEX (Fidelity Spartan 500 Index Fund Investor Class) (.1%) -- 12.5%

Her 401k
None offered through work

Her IRA
None

Contributions

New annual Contributions
$17500 his traditional 401k
$17500 (employer contribution to 401k)
$5500 his Roth IRA (backdoor)
$5500 her Roth IRA (backdoor)
In addition, trying to save for a house over the next year. After that, hoping to contribute an additional 25k/year of after tax dollars for investment.

After we're done saving for the house, I hope to repay the 10k in 6.8% and 5k in 5% student loan as soon as possible.

It makes a lot more sense to pay of the high interest loan.

Questions:

1. My work also offers a Roth 401k. So far I've put everything into a traditional 401K. Does it make sense for me to put some or all of it into a Roth 401k? I'm not sure what my tax bracket will be in retirement...how would I estimate it? I expect to be in this tax bracket for the rest of my career.

A Roth doesn't seem attractive in your tax bracket, but check on the possibility of adding more to your 401k after tax.

2. It seems like most of my holdings are in stock right now. Should I change my Roth IRA from FUSEX to something like FBIDX to increase my bond allocation? I think that will increase my bond allocation from 10% to 20%. Or should I diversify more through my 401k?

Right now you are over 90% stock and you want 65-70%. Move to a TR fund that is close to your target, don't choose by date. If the funds in the TR fund aren't good choices, you have some good individual funds you can use. Also, be sure to look at all retirement accounts as one portfolio to optimize it.

3. My wife is an independent contractor and her current income is minimal. However we would like to use any avenue to contribute for her retirement. Is there anything else besides a spousal IRA we can use?

She might be eligible for a solo 401k or one of the other plans designed for individuals.


4. Any other recommendations?



Thank you so much!
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Re: Brand new to investing! Would like guidance...

Postby pingo » Thu Jul 18, 2013 8:28 pm

bearpaws wrote:As far as after tax non-roth 401k contributions...my work does allow that, but I was trying to read more about it and a couple of websites mentioned it didn't make much sense since there are no tax benefits to this. Am I better off taking after-tax dollars and investing into a low expense fund?


If your plan does not permit regular in-service withdrawals of the after-tax money, it's usually not worth saving the extra money in the 401k. Read the links I included carefully. The tax benefit comes if your employer allows regular in-service distributions/withdrawals of the after-tax savings because the after-tax portion can be rolled directly into your Roth IRA and have the properties of the Roth IRA forever after. It is a backdoor method to save potentially large amounts of money in your Roth IRA.

For example:
$17,500/yr Personal Deductible 401k Contribution
$17,500/yr Employer Contribution
$16,000/yr After-Tax Contribution (for rolling into Roth) <-- + $5,500 non-deduct IRA/Backdoor = $21,500/yr in Roth.
$51,000/yr Total Combined Limit for 401k Plan

Earnings are taxed when you move the money from the 401k to the Roth IRA, but if your plan allows you to move it quarterly/annually it is still tax efficient because earnings will be relatively low and then what you gain is decades of tax-free, RMD-free growth within the Roth from that point on.
Last edited by pingo on Thu Jul 18, 2013 9:52 pm, edited 3 times in total.
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Re: Brand new to investing! Would like guidance...

Postby pingo » Thu Jul 18, 2013 8:29 pm

bearpaws wrote:Equity Index Fund E 39.78%
BlackRock MSCI ACWI ex-U.S. IMI Index Fund E 25.11%
U.S. Debt Index Fund E 13.70%
Developed Real Estate Index Fund E 9.14%
Extended Equity Market Fund E 8.26%
BlackRock Dow Jones-UBS Commodity Index Daily Fund E 4.01%

% of Total Portfolio 100.00%

I don't see the tickers provided anywhere though.


Well, I was wrong about the Target Funds being "custom", i.e. assembled by the employer with funds from different investment firms, however...

...congratulations for still having a drool-worthy 401k.

I have seen these Target Funds here and there with minor variations in their titles. In one case I have seen the same Target Fund re-branded, although unbranded might be more accurate. They are among the lowest cost Target Funds I've ever seen, (around ER 0.12%), but I haven't seen them with costs as low as you've posted.

I guess your expense ratios aren't impossible, but I'd always keep an eye out for anything that might indicate otherwise. Also, you can always call up the plan and ask what other expenses the plan, or the funds, incur. I recall a plan from a different poster (with a different lineup of funds) where even the pre-assembled portfolio funds are as low as 0.0148%, which I suppose could be rounded to 0.0% or 0%, if one wanted. What is odd is that your expense ratios are inconsistent in how they round. Some are rounded to 0%, others are posted to a hundredth of a percent.

Costs aside, they're excellent Target Funds!

I would not hesitate to put 100% of your 401k in a Target Fund at least until you begin saving in a taxable investment account. When you open an IRA, say at at Vanguard, you can use a single Vanguard Target Retirement Fund and you're done. The number of ways to do worse are infinite; the number of ways to do better are few. Your employer Target Fund is every bit as good as Vanguard's Target Retirement Funds and you benefit from simplicity.

Your employer-sponsored Target Funds use some of the same index funds as the federal government's Thrift Savings Plan (TSP), which is why the costs are so low. One important difference is that your 401k Target Funds have a more desireable international component because it includes Canada and Emerging Markets whereas TSP's international fund does not. Your Target Fund glidepath is very straightforward as well. It's pretty much a straight line (perhaps with a slight arc) that reduces equities down to 38-40% by the target date, at which point the allocations remain fixed.

The only time I would consider splitting your assets is if/when you begin investing through a taxable account and/or your wife gets a 401k with only 1 or 2 acceptable funds, in which case we would help you set up her 401k with the acceptable option(s) and we'd use your 401k, the IRA's and the taxable account to complete the rest of the portfolio for both of you in a tax-efficient manner.

Stayed tuned for a few more details about your Target Funds...
Last edited by pingo on Sat Jul 27, 2013 4:33 pm, edited 9 times in total.
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Re: Brand new to investing! Would like guidance...

Postby pingo » Thu Jul 18, 2013 8:32 pm

Let's look at the Target Fund individual components:

Equity Index Fund E is an S&P 500 Index Fund.
Extended Equity Market Fund E tracks the remaining U.S. stock market (Md and Sm caps).
BlackRock MSCI ACWI ex-U.S. IMI Index Fund E is a "Total" International Index Fund w/Developed and Emerging Markets; perhaps no Int'l Sm Caps.
U.S. Debt Index Fund E is a Barclay's U.S. Aggregate Bond Index fund like Vanguard's "total" bond fund.

It may sound weird, but those particular 4 funds are a 3-fund portfolio. (See here and here concerning the 3-fund portfolio.)

I don't drink, but I'd be willing to bet you a virtual beer that if you look at the other 401k Target Funds, you'll see the introduction and gradual increase of TIPS through the inclusion of the following component:

US Treasury Inflation Protected Securities (TIPS) Fund E — By retirement, one probably wants to hold some Treasury Inflation Protected Securities (TIPS), which are inflation adjusted bonds that add a level of diversification for bond heavy retirement portfolios. TIPS count toward one's total bond allocation, regardless. Some people wait until later to add TIPS. Some never use them. Others slowly introduce them into a portfolio as time progresses, which is what your Target Funds do. I'm surprised you don't already see a >1% allocation to TIPs in the 2040 Target Fund, but your particular documentation may be lagging. Vanguard's Target Retirement Funds eventually build a cache of TIPS, too. If you're building a simple portfolio during the accumulation phase, TIPS aren't essential. If you invest in a Target Fund that holds some TIPS, there is no added complexity for you and there's nothing wrong with having them.

What about the other to components to your 401k Target Funds?

Developed Real Estate Index Fund E — Invests in Real Estate Investment Trusts (REITs). The equities in a 3-fund portfolio already include a small, neutral/marketweighted amount of REITs. If you're just starting out and building a portfolio from scratch, you can do without REITs, although this forum shows a few Lazy Portolios (here) that include them. REITs are stocks and they are volatile, but they don't necessarily go up and down at the same time as the broader market, so some people (or target funds) add more REITs in hopes that periods of lower correlation with the broader market will reduce risk, increase portfolio stability, and even increase returns through a "rebalancing bonus". The inclusion of REITs in your Target Funds should not deter you from using a Target Fund even if you would otherwise ignore them.

BlackRock Dow Jones-UBS Commodity Index Daily Fund E — In other words, commodities. This is a super volatile asset class that does not add or subtract any expected return to the portfolio (if I understand correctly), so it is otherwise non-essential. Some use commodities because they expect commodities to keep up with inflation (even if there is no additional "real" return) and because they don't necessarily move up and down at the same time as stocks. That means that despite their extreme volatility, they can lend stability to the portfolio as a whole. I'd never include them in a DIY portfolio, but the tiny amount used by your 401k Target Funds is fine. If your IRA(s) also hold Vanguard Target Retirement Funds, which do not include commodities, your total exposure to them would be reduced/diluted anyway. Again, I don't think they should deter you from using your employer's Target Funds, even if you would otherwise ignore them.
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