Low-Income Investing

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Topic Author
FannyBrawne
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Low-Income Investing

Post by FannyBrawne »

I'm new to this board, and feel lucky to have found it. It's refreshing to read good advice and helpful insight without all the competitive bickering on most other sites. I've been reading some of John Bogle's books, and I feel that they've given me a good, basic footing for investing in index funds.
My situation: I'm in my early 30s, newly divorced with three small children. I live in a high-cost-of-living mid-Atlantic state.
My income is $37,500 salary and $1,650 child support. Total $39,150 yearly income.
I have a fairly safe state government job that provides great health insurance, a free $50,000 life insurance policy, and a pension (assuming I stay a minimum of 5 years). My job doesn't offer a 401k, however.
I'm stretched pretty thin. Example: my childcare costs are 25% of my income. I am very careful with my spending, and am debt-free. My car is old but runs great. My only luxury is getting my hair highlighted every 6 weeks, and buying nice clothes occasionally. I work in an office with a lot of lawyers, and I think it's important for me (socially and career-wise) to look like I belong. The last thing I want is to look poor.
I have run the numbers and will be able to invest $250 per month. I also plan to invest my entire tax refund. I got nearly $4,000 back (state and federal) for 2012, and expect at least as much for 2013.
I have a nest-egg of $20,000 cash. I plan to contribute the max to a Roth IRA, then the remainder to a taxable account. I will keep six months' living expenses.
My kids will have the majority of their college tuition paid for through their father's VA benefits, so I am choosing to focus on my security/retirement rather than their education expenses.
I was feeling really confident about my future, and the fact that I have $20,000 to invest. Then, the more I started reading posts from other people on this site - people who have high incomes, and who are uncertain what to do with their 6-figure portfolios, I have to admit my confidence has been shaken. There's a part of me that wonders how I'll ever save and invest enough own a home one day, or God forbid retire.
Has anyone been successful, and built a good, secure life for him/herself, and kids, on a modest income with high expenses? I'm not giving up, I'm just feeling a little beaten down.
So, I guess this question is more about morale vs. specific asset allocation, though I'd appreciate any insight into either. I'm just tired of worrying, and I want to give my kids (and me) a decent life.
Thanks.
MnD
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Re: Low-Income Investing

Post by MnD »

Do you pay into and qualify for Social Security in addition to the state pension, or are you exempt?
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Topic Author
FannyBrawne
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Re: Low-Income Investing

Post by FannyBrawne »

MnD wrote:Do you pay into and qualify for Social Security in addition to the state pension, or are you exempt?
I do pay SS taxes as a paycheck deduction. 2012 was the first year I collected a taxable salary, so I don't expect to receive much SS when I do retire (assuming it's still there, of course).
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Sbashore
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Re: Low-Income Investing

Post by Sbashore »

I think you should congratulate yourself for thinking along the lines you are. I remember when I was in my early thirties, just got laid off from a not so great job and was selling real estate, not making much. Today I'm comfortably retired. So take heart, you have to start sometime. One advantage you have is this board. If I had the benefit of all this collective wisdom 35 years ago, I'd be in considerably better shape. Not that I'm complaining. :happy
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red5
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Re: Low-Income Investing

Post by red5 »

I am in a similar boat, same age, less income but no child care expenses either (one of us stays home). It seems like you are doing fine. My family has always used our tax refund (mostly refundable credits) and use it exclusively for retirement investing. Sometimes when we have some spare cash at the end of the month we use it for more IRA investing.

Perhaps you can track your spending for a couple of months and see if you can free up some money. We've done that and live a pretty frugal lifestyle.

Also, beware about comparing yourself with other posters here, or anyone else for that matter. Concentrate on your goals and what you can do to improve your situation. Also, there are many people here who have similar situations and account values to you and I, so don't stress out. Certainly you are already doing better than many many Americans. Don't lose hope and keep your morale up. $20,000 invested and $250 per month invested will add up over the next 35 years or so.
ddunca1944
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Re: Low-Income Investing

Post by ddunca1944 »

Sbashore wrote:I think you should congratulate yourself for thinking along the lines you are. I remember when I was in my early thirties, just got laid off from a not so great job and was selling real estate, not making much. Today I'm comfortably retired. So take heart, you have to start sometime. One advantage you have is this board. If I had the benefit of all this collective wisdom 35 years ago, I'd be in considerably better shape. Not that I'm complaining. :happy
+1
At 35 I was a recent divorcee with 2 teenagers to raise and no child support... I did have a pretty decent job with a pension and401K. I took advantage of both, contributing the max allowed to the 401k. I am now (age 68) and very comfortably retired.

Second the post about not comparing yourself to other posters. All of us have different backgrounds and incomes. We do have some things in common (a desire to lbym and invest sensibly).

You have some 30 or so years - starting now with $20K is great.
Novine
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Re: Low-Income Investing

Post by Novine »

What kind of emergency fund do you have? If your car was to break down tomorrow, what would you do? I'm not asking these to dissuade you from investing some of your nest egg for your retirement but if you don't have a significant financial cushion for those kinds of events, you may not want to invest that entire amount for retirement. You noted that your workplace doesn't offer a 401k - those are for private sector employers. Public employers typically offer a 457 or 403b plan - are either of those available to you?
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steadyeddy
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Re: Low-Income Investing

Post by steadyeddy »

If you continue to pay into social security until your full retirement age, then social security will likely provide most of the money you need at retirement. In the meantime, set aside as much money as you are able each month to bolster that retirement income. As your income grows over time, you'll have more money to save and more need to save in order to replace that income later (assuming you have a non-zero amount of lifestyle creep).

In a nutshell, you're not in terrible shape starting off, and your trajectory is great. Slow and steady will win you this race.
leo383
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Re: Low-Income Investing

Post by leo383 »

I think just sitting down and putting your numbers together puts you wayyy ahead of the great majority of the population.

$250/month is a fine start. Don't give up.
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BrandonBogle
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Re: Low-Income Investing

Post by BrandonBogle »

Also, do you do your own taxes? You may want to play with last years copy of TurboTax or similar tax software to see if you will qualify for the Savers credit. If the numbers work right, by doing retirement contributions, you can get a near-equivalent amount back (depending on your tax circumstances). In some cases, it may be totally worthwhile to pay to the max each year in your retirement fund and then get a good portion of what you paid in back on your taxes.

Another thread with some info about it: http://www.bogleheads.org/forum/viewtop ... 0&t=107032
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DiscoBunny1979
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Re: Low-Income Investing

Post by DiscoBunny1979 »

FannyBrawne wrote: There's a part of me that wonders how I'll ever save and invest enough own a home one day, or God forbid retire.
-----------

In my opinion, you're putting a lot of pressure on yourself. While the American Dream might be to own a home, you have to create your own American dream of what you really want. Not everyone is cut out to be a home owner and even if you do one day buy that home of your 'dreams' you might find it to be more work and cost than enjoyable. I'd buy a house because it meets my hobby and lifestyle requirements, not just because I want to be a home owner.

That aside, one can invest over time and save a good amount. While $250 a month is not earth shattering, it's not bad either. That's because compounding over time would work in your favor. For instance if you only contributed $250 a month for 1 year and stopped, That $3,000 over time given the rule of 72 whereas money doubles every 10 years at 7% annualized return will go from $3,000 to $6,000 to $12,000 to $24,000 in 30 years. Just planting a seed is what you need. You just need to plant seeds over the years. That's the problem - many can't imagine the compounding over time and stick with it. All they can see is the here and now.
Topic Author
FannyBrawne
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Re: Low-Income Investing

Post by FannyBrawne »

Novine wrote:What kind of emergency fund do you have? If your car was to break down tomorrow, what would you do? I'm not asking these to dissuade you from investing some of your nest egg for your retirement but if you don't have a significant financial cushion for those kinds of events, you may not want to invest that entire amount for retirement. You noted that your workplace doesn't offer a 401k - those are for private sector employers. Public employers typically offer a 457 or 403b plan - are either of those available to you?
I will ask the office manager about the 457 plan. I am fairly new to this job, and am still learning about its benefits.
Thanks.
MnD
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Re: Low-Income Investing

Post by MnD »

FannyBrawne wrote:
MnD wrote:Do you pay into and qualify for Social Security in addition to the state pension, or are you exempt?
I do pay SS taxes as a paycheck deduction. 2012 was the first year I collected a taxable salary, so I don't expect to receive much SS when I do retire (assuming it's still there, of course).
In that case I think you plan is a wonderful one and you should be in great shape. Social security replaces a much larger percentage of your income than it would for higher income workers. Despite the years of no income you'll find that once you start paying in for a number of years, your estimated benefits on your on-line social security statement of benefits will grow dramatically. The formula is very favorable to lower incomes once you get your 40 quarters in.

So you have that, _and_ a fairly secure job, _and_ a state pension _and_ a nice growing individual retirement account by maxing out your Roth IRA and some additional being added to taxable and emergency fund. You'll probably qualify for the savers tax credit so the government will be effectively contributing to your investments in addition to your contributions.

The large child care expense should tail off as the kids age. With three kids and your income and VA higher ed benefits, i agree with your assessment to not try and save for college. The VA benefit will help and if it doesn't handle everything they should also qualify for very substantial need-based financial aid. If you happen to be in a financial position to help when they hit college age - great, but I wouldn't cut back on your other plans to save and be living in the present.

Human capital
Are you in a job series that has the promotion potential to be the best paying in your office that doesn't require a law degree? What I mean is, if the best paying non-lawyer job in your office is legal assistant, are you one of those? if so, good. If not, take a look at what education, training or experience it would take to get into that series. It doesn't hurt to periodically mention to your higher-ups in the office about how much you like your job and are always looking for ways to advance in the office. You can have a lot of negative energy types in some government offices, so being positive and be actively seeking advancement can be a breath of fresh air.

Personally I think for your income, you are hitting the ball out of the park.
Be sure to enjoy life and the kids - they will not be kids forever. While extravagant vacations are probably not in the cards, try to do something every summer - camping, beach motel, maybe split a vacation rental with another friend with kids at a destination your can drive to. The vacation rentals can be much cheaper than resorts and hotels, especially when costs are split with another family and a bunch of kids and you can shop/cook instead of going out for every meal. And avoiding four airplane tickets is nice on costs if you have a drive-to destination.

This place can discourage anyone with the "Can I retire on $4 million?" and "Need to boost my savings rate above 50%". Just ignore that and realize your plan and situation is probably in the top few percent among folks with your income and family situation. Good luck!
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fisher_man89
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Re: Low-Income Investing

Post by fisher_man89 »

Assuming a high income is an unfortunate prejudice of this board.
The assumption that if one is not maxing out their 401k, he is doing a bad job, is based on that assumption.
But the basic investing advice is still applicable to your situation.

It looks like you are doing really well, actually.
My calculation is that you can save 7.6% of your income ($250/month).
While Social Security can be ignored for high earners, it will be substantial for you.
Calculate it based on your salary. It could easily be 40-50% of your current salary (based on your current salary I got 17,500/year in retirement)
The benefit formula favors lower income earners:
a) 90 percent of the first $791 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $791 and through $4,768, plus
(c) 15 percent of his/her average indexed monthly earnings over $4,768.
http://www.ssa.gov/OACT/cola/piaformula.html

With a pension you could have enough for retirement right there, based on needing 70-80% of your current spending.
A 401k would not be a big benefit for you, since you don't have a ton to invest.
I would research the pension and see how good it is.
Would more income without a pension at different job be better?

I would suggest for peace of mind, keeping a large emergency fund around (perhaps 6-10 months of expenses).
If you are not paying much in taxes (with your kids likely), a Roth IRA is a great deal (but not for high earners).
But if you are paying some taxes a traditional IRA would be deductible and lower your taxable income (that is true of few on this board, so it's not mentioned much).
It would have the same effect as a 401k, just with a $5,500 limit.
Plus there is a savers credit for lower incomes and it might get you more of the child tax credit.

I understand wanting to fit it, but I would change your goal to look professional and neat, not to look the opposite of poor (which is rich).
Having more money invested is better than not looking poor.

If you save in the neighborhood of 5-10% for retirement, assuming a pension, you are doing very well.
You will not always have childcare expenses or children at home.
There will be time to save a higher percentage later, but investing consistently now is a great habit.

Cultivating an atmosphere for your family not based on spending or costly activities will be key.
I'm sure you know this already, that kids don't need new stuffor costly activities, though, many parents do it out of guilt.
To save anything, you will not be able to be normal and do what everyone else does for their kids.
But it will be good for them, as wrote in this post http://www.bogleheads.org/forum/viewtop ... 1#p1747473

Prioritze your goals and be realistic.
You can do everything you want (retire, buy house, raise family) on your income---just not all right now.
Everything has is time.
Saving for a house is doable, but I wouldn't jump into getting one.
Houses bring a lot of expenses and repair headaches you might not be ready for yet.

Doing what is best for your family is key, not comparing yourself to others in likely very different situations (even on this board).
And thankfully there is much more to life than money.
I actually think you right on track, since investing wisely is more a matter of self-control and planning carefully, rather than assets and income.
fisher_man89
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Re: Low-Income Investing

Post by fisher_man89 »

FannyBrawne wrote:
MnD wrote:Do you pay into and qualify for Social Security in addition to the state pension, or are you exempt?
I do pay SS taxes as a paycheck deduction. 2012 was the first year I collected a taxable salary, so I don't expect to receive much SS when I do retire (assuming it's still there, of course).
Only the highest 35 years of income count for social security, no matter at your age.
Filling most of those zeros on your record with income would put you at retirement age.
I think SS should figure heavily into your retirement planning.

(Those divorced, married for greater than 10 years, can draw on their spouses' record.)
Topic Author
FannyBrawne
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Re: Low-Income Investing

Post by FannyBrawne »

fisher_man89 wrote:
FannyBrawne wrote:
MnD wrote:Do you pay into and qualify for Social Security in addition to the state pension, or are you exempt?
I do pay SS taxes as a paycheck deduction. 2012 was the first year I collected a taxable salary, so I don't expect to receive much SS when I do retire (assuming it's still there, of course).
Only the highest 35 years of income count for social security, no matter at your age.
Filling most of those zeros on your record with income would put you at retirement age.
I think SS should figure heavily into your retirement planning.

All of that SS info is so helpful. Thank you! I have to admit that I wasn't aware of most of what you wrote about. What a good resource! Thanks again.

(Those divorced, married for greater than 10 years, can draw on their spouses' record.)
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M_to_the_G
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Re: Low-Income Investing

Post by M_to_the_G »

Congrats on wanting to get started on a path of retirement planning. I would start with the emergency fund, which you can do immediately if you take from the $20,000 "nest egg" and put it somewhere liquid and safe like a money market savings account. I imagine (as others have speculated above) that your state agency does offer some sort of tax-advantaged plan. As you plan to invest a fairly low amount ($3,000/yr), I would put it all in that account. If the max is $17,500, then that will more than encompass all of your retirement investing, including your annual tax refund. No need to think about a Roth or taxable account.

Next step is to list the choices your agency offers for your retirement plan, tickers, and expense ratios after you find out from your office manager what is offered.
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BL
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Re: Low-Income Investing

Post by BL »

Congratulations on doing so well! You are admired, nothing to feel ashamed about.

You have received good advice here. Be sure you keep a good emergency fund available and maybe to cover the eventual cost of a new used car.

Since you mentioned dressing well, this can be done on a budget. Check out thrift, consignment, and other low-cost avenues in good neighborhoods for good quality, last-year's clothing and accessories and you will be well dressed as well as smart. Granted, a few of those places may not be low-cost, so you need to watch for that. If you acquire classic clothing that doesn't stand out (think men's suits) you don't need many, and you can accessorize to look smart.

Only you can decide if staying where you are is the best move. I would definitely want to line up a job before moving elsewhere for lower cost of living. There are many advantages to having family in the area and you don't say if that is the case.

I agree that it would be a good idea to play with a free tax program online to see what happens if you save in 457 or tIRA which lower current taxes versus Roth IRA where the tax has been paid already on your money. You are probably Head of Household. Also, there may be a 10-50% credit on retirement savings up to $2000 if you qualify. That is like a 10-50% company match! Child tax credits depend on divorce arrangements with ex-spouse. Child care credits (done on tax return) versus payroll Dependent care FLEX cafeteria plan (which lowers taxes but also contributions to Social Security) or a combination of the two can return 20-35% of allowable cost, IIRC. Flex can also be used to prepay known medical costs but again it also reduces SS payments and average pay for retirement purposes so it might depend on how much it saves you now in taxes vs. how much it costs you in reduced future SS. Earned Income credit may also apply.
donall
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Re: Low-Income Investing

Post by donall »

Fanny:
You are way ahead of the curve and will do fine. Just a couple of things to look at:
- Are you filing as head of household?
- Does your 403b or 457 have matching funds from your employer? If not then contribute to a Roth IRA and use Savers credit to decrease taxes owed.
- Have you been married 10 years or more and did your former husband contribute or is contributing to Social Security and Medicare? If yes, you will be eligible for Medicare and 1/2 or former husband's SS.
- I kinda doubt that you were married 20 years or more, but if you were you would be eligible for military benefits, including Tricare http://www.irs.gov/publications/p17/ch0 ... 1000170792 It looks like you can still be designated a Survivor Benefit Plan beneficiary if you take the proper steps.
- Can you use pretax money for childcare and medical expenses?
- Are you taking advantage of childcare tax credit? Since you can't use both, the credit will usually save more.

If you have time, keep reading this site, as there is some great advice here.
Topic Author
FannyBrawne
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Re: Low-Income Investing

Post by FannyBrawne »

donall wrote:Fanny:
Unfortunately, there's neither a 403b nor a 457 (I just checked) at my job. I do file as head of household. We were married for 9 years, so I just missed the 10 year mark! (I knew about the 10-year marriage minimum, but couldn't bear to wait a year).While I'm not eligible for Tricare benefits, the kids are. The education benefits for them are huge!
Thanks for your time in responding.

You are way ahead of the curve and will do fine. Just a couple of things to look at:
- Are you filing as head of household?
- Does your 403b or 457 have matching funds from your employer? If not then contribute to a Roth IRA and use Savers credit to decrease taxes owed.


- Have you been married 10 years or more and did your former husband contribute or is contributing to Social Security and Medicare? If yes, you will be eligible for Medicare and 1/2 or former husband's SS.
- I kinda doubt that you were married 20 years or more, but if you were you would be eligible for military benefits, including Tricare http://www.irs.gov/publications/p17/ch0 ... 1000170792 It looks like you can still be designated a Survivor Benefit Plan beneficiary if you take the proper steps.
- Can you use pretax money for childcare and medical expenses?
- Are you taking advantage of childcare tax credit? Since you can't use both, the credit will usually save more.

If you have time, keep reading this site, as there is some great advice here.
Calm Man
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Re: Low-Income Investing

Post by Calm Man »

OP, am I reading it correctly that your 1650 of child support is annually? Less than 150 per month for 3 children? If so, how can the father possibly pay for the children's college? Also, do not read further !!!!

[OT comments removed by admin LadyGeek]
Topic Author
FannyBrawne
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Re: Low-Income Investing

Post by FannyBrawne »

Calm Man wrote:OP, am I reading it correctly that your 1650 of child support is annually? Less than 150 per month for 3 children? If so, how can the father possibly pay for the children's college? Also, do not read further !!!!

[OT comments removed by admin LadyGeek]
Yes, it's $138 per month. My ex-husband has the children about 40% of the time (I'm the 60%), and his main source of income is VA disability, which doesn't amount to much more than my total salary. So, both of those factors go into explaining the court's coming up with the $138 figure. If he starts working I can ask the court to re-examine child support.
And yes, I stayed at home with the kids during my 20s, while he worked. I assumed he would take care of us, and that I was making a smart choice. Slowly, reality sunk in, and I realized that neither of things were true. So yes - I missed out on over ten years of career growth. It's really frustrating if I let myself think about it, but it doesn't get me anywhere, so I try to focus on the positive.
Topic Author
FannyBrawne
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Re: Low-Income Investing

Post by FannyBrawne »

The college tuition comes from the fact that my kids are eligible for Dependents and Survivors Benefits due to his disability.
MnD
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Re: Low-Income Investing

Post by MnD »

Calm Man - Your assessment is way off base.

OP is in her early 30's with Social Security participation, a defined benefit pension plan, a significant cash nest egg and solid plans for additional savings via Roth IRA or other means. It's likely she qualifies for the savers tax credit. College benefits are through the VA, not directly from the ex-spouse. And if that isn't enough, it's likely the children will qualify for extensive need-aid for college.

Sounds like she could easily retire in her early 60's with 30 years of SS and pension plan participation with a very comfortable retirement income plus a considerable investment account if she follows through on her proposed plan. And someone in their early 30's has many many years of opportunity for career advancement which would translate almost immediately into much higher DB pension benefits, which are often based off high-3 salary. It doesn't matter that 30 years ago their "years" were at a relatively low salary level. All that generally matters is _number_ of years in and final high-3, high-5 or whatever salary. Re-marriage is another potential financial upside, someone divorced in their early 30's has around a 65% chance of remarriage within 10 years.
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FannyBrawne
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Re: Low-Income Investing

Post by FannyBrawne »

Thanks for your vote of confidence :D
ieee488
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Re: Low-Income Investing

Post by ieee488 »

MnD wrote:Calm Man - Your assessment is way off base.

OP is in her early 30's with Social Security participation, a defined benefit pension plan, a significant cash nest egg and solid plans for additional savings via Roth IRA or other means. It's likely she qualifies for the savers tax credit. College benefits are through the VA, not directly from the ex-spouse. And if that isn't enough, it's likely the children will qualify for extensive need-aid for college.

Sounds like she could easily retire in her early 60's with 30 years of SS and pension plan participation with a very comfortable retirement income plus a considerable investment account if she follows through on her proposed plan. And someone in their early 30's has many many years of opportunity for career advancement which would translate almost immediately into much higher DB pension benefits, which are often based off high-3 salary. It doesn't matter that 30 years ago their "years" were at a relatively low salary level. All that generally matters is _number_ of years in and final high-3, high-5 or whatever salary. Re-marriage is another potential financial upside, someone divorced in their early 30's has around a 65% chance of remarriage within 10 years.
If she is in her early 30s, and Social Security looks at the highest 35 years of earnings, wouldn't that mean she'd have to be in her late 60s not early 60s?

What she has going for her is her Bogleheads mindset. What is lost is 10 years of compounding interest.
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Chan_va
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Re: Low-Income Investing

Post by Chan_va »

OP,

Nothing to add to the excellent suggestions on this thread, but another vote of confidence. You are way ahead of your peers. Most of us did not get serious about saving till we were in our 30's, so don't worry about having lost time.

A lower income earner saving 7% of their salary is so much more impressive than a high earner saving 40%. I grew up poor, so I can understand your wanting to fit in with your peers. It's natural - even motivating. Just don't let it carry you away.
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BrandonBogle
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Re: Low-Income Investing

Post by BrandonBogle »

ieee488 wrote:If she is in her early 30s, and Social Security looks at the highest 35 years of earnings, wouldn't that mean she'd have to be in her late 60s not early 60s?

What she has going for her is her Bogleheads mindset. What is lost is 10 years of compounding interest.
While she would get the most from SS working till all 35 years have values other than $0 in them, nobody ever said she has to. The minimum number of credits the Op needs is only 40 credits (10 years @ 4/year) to qualify for SS.
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Sbashore
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Re: Low-Income Investing

Post by Sbashore »

MnD wrote:Calm Man - Your assessment is way off base.

OP is in her early 30's with Social Security participation, a defined benefit pension plan, a significant cash nest egg and solid plans for additional savings via Roth IRA or other means. It's likely she qualifies for the savers tax credit. College benefits are through the VA, not directly from the ex-spouse. And if that isn't enough, it's likely the children will qualify for extensive need-aid for college.

Sounds like she could easily retire in her early 60's with 30 years of SS and pension plan participation with a very comfortable retirement income plus a considerable investment account if she follows through on her proposed plan. And someone in their early 30's has many many years of opportunity for career advancement which would translate almost immediately into much higher DB pension benefits, which are often based off high-3 salary. It doesn't matter that 30 years ago their "years" were at a relatively low salary level. All that generally matters is _number_ of years in and final high-3, high-5 or whatever salary. Re-marriage is another potential financial upside, someone divorced in their early 30's has around a 65% chance of remarriage within 10 years.
+1. I think she has plenty of time. It will take work, discipline and perseverance but it is by no means impossible. All you have to do is stay focused and don't make any big mistakes.
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neurosphere
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Re: Low-Income Investing

Post by neurosphere »

FannyBrawne wrote: And yes, I stayed at home with the kids during my 20s, while he worked. I assumed he would take care of us, and that I was making a smart choice. Slowly, reality sunk in, and I realized that neither of things were true. So yes - I missed out on over ten years of career growth. It's really frustrating if I let myself think about it, but it doesn't get me anywhere, so I try to focus on the positive.
Yes, focus on the positive. You got to spend that time with your kids. Or, wait. I don't have kids...so perhaps spending that time with them is a negative? :D Kidding of course.

And it sounds like you STILL have the chance to end up way above the majority of Americans, financially speaking, with prudent spending and reasoned investing. Maybe in the long run it will be a win-win. :happy
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: Low-Income Investing

Post by Calm Man »

FannyBrawne wrote:
Calm Man wrote:OP, am I reading it correctly that your 1650 of child support is annually? Less than 150 per month for 3 children? If so, how can the father possibly pay for the children's college? Also, do not read further !!!!

[OT comments removed by admin LadyGeek]
You are a wise woman. You made a mistake, you acknowledge it and are trying to move on. I shouldn't have assume that you had the kids all the time, so given that he does half the time, the child support may be quite reasonable. Just avoid making the same mistake again now matter how handsome or charming the next guy is !!!! Good luck.

Yes, it's $138 per month. My ex-husband has the children about 40% of the time (I'm the 60%), and his main source of income is VA disability, which doesn't amount to much more than my total salary. So, both of those factors go into explaining the court's coming up with the $138 figure. If he starts working I can ask the court to re-examine child support.
And yes, I stayed at home with the kids during my 20s, while he worked. I assumed he would take care of us, and that I was making a smart choice. Slowly, reality sunk in, and I realized that neither of things were true. So yes - I missed out on over ten years of career growth. It's really frustrating if I let myself think about it, but it doesn't get me anywhere, so I try to focus on the positive.
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Re: Low-Income Investing

Post by MnD »

ieee488 wrote:
MnD wrote: If she is in her early 30s, and Social Security looks at the highest 35 years of earnings, wouldn't that mean she'd have to be in her late 60s not early 60s?
No. The benefit formula will take the highest 35 years for AIME calculation, but less than 35 years aren't the end of the world and having 35 isn't a requirement for benefits. She may also have part-time employment from her teens for some of those missing years. The benefit formula is very favorable to those with lower incomes and limited employment as long as they have 40 quarters (10 years) of employment history due to the bend points in the benefit formula and minimum benefit guarantees. Above a certain level, many years and higher income earn you very little additional in SS benefits.

And the OP didn't indicate she wanted to retire prior to her full SS retirement age of 67, I was just speculating that she probably could, given 30 years paid into a DB state pension plan if she stays with the state, SS eligibility and concrete plans for additional savings. Her concern seems to be that after reading threads here that she may never be able to reach any level of financial security or retire. That's understandable given the many threads here of "Two doctor household with only $2 million at age 32 - how can we boost savings?" :mrgreen:
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Re: Low-Income Investing

Post by ruralavalon »

FannyBrawne wrote: . . .I've been reading some of John Bogle's books, and I feel that they've given me a good, basic footing for investing in index funds. . . .
. . . . .
I was feeling really confident about my future, and the fact that I have $20,000 to invest. Then, the more I started reading posts from other people on this site - people who have high incomes, and who are uncertain what to do with their 6-figure portfolios, I have to admit my confidence has been shaken. . . . . .
. . . . . I'm just feeling a little beaten down.
There are plenty of reasons for you to feel confident. You picked a good author to start your investing education. You have found a good resource in this forum.

I recall several posters who were carpenters, operating engineers, electrcians, nurses, secretaries, paralegals and other occupations not on anyone's list of high income jobs. And nearly everyone with a six figure portfolio started with a zero portfolio, I did even with my higher income job.

And you have $20k to kickstart your portfolio, with $20k saved you are about average for any age, and ahead for your age. 57% of households of all ages have under $25k saved in for retirement as of 2013. (p. 3, Fig. 4, EBRI, "2013 Retirement Confidence Survey, Fact Sheet #3") . 60% of workers under 35 have less than $10k saved for retirement as of 2013. (p. 2 , Fig. #3, "EBRI, 2013 Retirement Confidence Survey, Fact Sheet #4") .
FannyBrawne wrote:My situation: I'm in my early 30s,
Certainly not a late start.
FannyBrawne wrote:My income is $37,500 salary and $1,650 child support. Total $39,150 yearly income.
. . . . .
I have run the numbers and will be able to invest $250 per month. I also plan to invest my entire tax refund. I got nearly $4,000 back (state and federal) for 2012, and expect at least as much for 2013.
Median income of households in this country is around $50k per year, so you are pretty close to average income.

Thats $3k in additional savings per year, plus the tax refund of $4k, more than enough to fully fund your IRA and do more investing beyond that. And a pretty good savings rate of 18% of your total income, better than most people. A good savings rate is the most important factor (under your control) in investment portfolio growth. Forum Discussion, "The savings Rate" .
FannyBrawne wrote:I have a fairly safe state government job that provides great health insurance, a free $50,000 life insurance policy, and a pension (assuming I stay a minimum of 5 years). My job doesn't offer a 401k, however.
Does your state job offer some other savings or retirement vehicle, like a 403b, 457b, 401a or anything else?

You will be eligible for social security, SS will continue in some form, and it will provide a substantial part of what you need in retirement.

Anyway, you are far ahead of private sector employees with your stable job, good employer provided health insurance, and a pension.
FannyBrawne wrote:I am very careful with my spending, and am debt-free
Two more reasons to expect a good outcome for you.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: Low-Income Investing

Post by Caduceus »

Welcome! I think you're in good shape and just need to plan and save (as you are doing). It can be tough on this forum, where people try to keep up with the Bogleheads instead of the Joneses, and everyone feels like they are a little behind in comparison to everyone else.

It's so great to see someone taking control of their life and forging ahead. I remember reading about Charlie Munger who in his early 30s was divorced, broke, and had just suffered a devastating lost of his son to leukemia, and then moved on from that to re-building his financial life throughout his 30s. One of the things Munger has emphasized in his speeches is moving on emotionally from the past and I respect that advice.
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Re: Low-Income Investing

Post by donall »

You go girl.
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Re: Low-Income Investing

Post by stan1 »

Also, look into educational benefits offered by your employer. A no-cost-to-you degree would position you for future advancement -- but the most important attribute on the job is a positive, can do attitude and problem solving skills that yield results. I can tell you have a positive attitude and have a good head on your shoulders -- you'll do fine!
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Re: Low-Income Investing

Post by mlipps »

I just want to chime in that you're doing great. My parents make around $45,000/year and have managed to contribute only about $150/month to their retirement over the years, starting in about 1990. My dad is about 5 years from retiring and has $120k in his 401k. It's not a million, but it will be a big help to them when they retire. They can either take a few thousand a year at a SWR or leave it to serve as an emergency fund over the years. My mom thinks they'll be able to cover their expenses primarily from SS, and I expect the same will be true for you. I love this forum very much, but some people are a bit out of touch with the reality of being middle class in America. Don't let that get you down, as there is far more good to be learned here than bad. Best wishes to you.
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Inspiring!

Post by Taylor Larimore »

So, I guess this question is more about morale vs. specific asset allocation, though I'd appreciate any insight into either. I'm just tired of worrying, and I want to give my kids (and me) a decent life.
This is one of the most helpful and inspiring forum conversations I have read!

Congratulations to FannyBrawne and those who are responding to her plea.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Low-Income Investing

Post by ruralavalon »

FannyBrawne wrote:So, I guess this question is more about morale vs. specific asset allocation, though I'd appreciate any insight into either. I'm just tired of worrying, and I want to give my kids (and me) a decent life
OK. Lets start on making a plan?

A few additional pieces of information are needed.

Do you have some other savings or retirement vehicle at work, like a 403b, 457b, 401a or anything else? If so, what investments are available to buy in it?

How much of that $20k is available to invest, after subtracting out that emergency fund of 6 months of living expenses?

Have you looked at what you would like for an asset allocation, that is: stock/bond mix; and domestic/internation mix? Here are things to read on that:
Bogleheads® investment philosophy, "Never bear too much or too little risk" ;
Wiki article link: Asset Allocation ; and
Wiki article link: Domestic/International .
Don't be afraid of this, you will get suggestions. But it helps if you try to make at least a tentative decision first, and give us an idea of how risky/not risky you might want to be.

What is your marginal tax rate? Not certain about that, look at your last year's tax return or here moneychimp, "Federal tax brackets" .

You can add this information to your original post here using the "edit" button, or start another thread with this info and the info you already provided combined. Either way, try to include everyting in one post in this format, Asking Portfolio Questions . It helps a lot to have all of your informtion in one place.
Last edited by ruralavalon on Wed Jul 31, 2013 8:34 pm, edited 1 time in total.
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Re: Low-Income Investing

Post by mlipps »

Her effective tax rate is likely 0 after the Savers Credit & EITC. Roth is a perfect choice & $250/month won't put her over the limits after this year. I'd be inclined to put in $5500 for 2013 (assuming you'll have a safe level of emergency fund after doing so), then put the $250/month aside for 2014 contributions and just keep it really easy for yourself in doing so.
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Re: Low-Income Investing

Post by ruralavalon »

mlipps wrote:Her effective tax rate is likely 0 after the Savers Credit & EITC. Roth is a perfect choice & $250/month won't put her over the limits after this year. I'd be inclined to put in $5500 for 2013 (assuming you'll have a safe level of emergency fund after doing so), then put the $250/month aside for 2014 contributions and just keep it really easy for yourself in doing so.
Probably all true, but lets not assume especially about whats available to invest after subtracting out the emergency fund.

And still need to know about asset allocation and thus what to suggest for investing in for the Roth IRA, what to do with anything more than the Roth IRA (she is saving $7k per year; and that $20k she has now may, after subtracting the emergency fund money, be enough to fund more than the Roth now), and whether there is some employer-based plan of any kind, etc.
Last edited by ruralavalon on Thu Aug 01, 2013 2:00 pm, edited 2 times in total.
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Re: Low-Income Investing

Post by Novine »

OP stated in one of the earlier responses that she checked and she doesn't have access to a 457 or similar plan.
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Re: Low-Income Investing

Post by ruralavalon »

Novine wrote:OP stated in one of the earlier responses that she checked and she doesn't have access to a 457 or similar plan.
That was more than a little confusing, but I see it now:
link # 1, Novine post, asking question ;
link # 2, FB post, "I will ask the office manager about the 457 plan" ;
link # 3, donall post, asking question again; and
link # 4, FB post, answer appears in a "quote" from donall, but seems to be from FB .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Re: Low-Income Investing

Post by BL »

mlipps wrote:Her effective tax rate is likely 0 after the Savers Credit & EITC. Roth is a perfect choice & $250/month won't put her over the limits after this year. I'd be inclined to put in $5500 for 2013 (assuming you'll have a safe level of emergency fund after doing so), then put the $250/month aside for 2014 contributions and just keep it really easy for yourself in doing so.
The EIC table shows a maximum refundable credit of $5,891(for 2012) for HOH with 3 children which decreases at the upper and lower end of the income range in the table. That might make it worthwhile in the future to use a tIRA instead of a Roth IRA if it brings your AGI below the cut-off number of about $45k limit for 2012.

Edt: Anything you can do to reduce your w-2 earned income will increase your EIC if you qualify for it. It may be too late to change this year, but check into cafeteria plans for child care and/or known health expenses, and check again for retirement plans, as these can count up with EIC. Find out what is available and be prepared to use what helps you. It would really be useful to use a tax program (this year's one would come close) to find out what might work.
Last edited by BL on Wed Jul 31, 2013 11:57 pm, edited 1 time in total.
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Re: Low-Income Investing

Post by grabiner »

mlipps wrote:Her effective tax rate is likely 0 after the Savers Credit & EITC.
Filing as head of household, she would need to get her AGI under $28,125 to get more than a 10% Saver's Credit, so it's only $200 on a contribution of $2000 or more.

And she is in the phase-out range for the Earned Income Credit (which is refundable), but contributing to an IRA doesn't help here, so I agree that the Roth is a better choice. (If her employer offers a 403(b) or 457, contributions to that would reduce her earned income, which would give a very large tax savings because of the phase-out.)
Roth is a perfect choice & $250/month won't put her over the limits after this year. I'd be inclined to put in $5500 for 2013 (assuming you'll have a safe level of emergency fund after doing so), then put the $250/month aside for 2014 contributions and just keep it really easy for yourself in doing so.
Agreed.
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FannyBrawne
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Re: Low-Income Investing

Post by FannyBrawne »

Caduceus wrote:I remember reading about Charlie Munger who in his early 30s was divorced, broke, and had just suffered a devastating lost of his son to leukemia, and then moved on from that to re-building his financial life throughout his 30s. One of the things Munger has emphasized in his speeches is moving on emotionally from the past and I respect that advice.
That's inspiring - I'm going to look into finding out more about his story. Thanks!

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Re: Low-Income Investing

Post by FannyBrawne »

Ruralavalon: to answer your questions:

I used the formula to find my marginal tax rate and it looks like I'm at 15%. (I have to admit I don't know what to expect, tax-wise). For example, last year, my total income was $7,000 and I got a tax refund of nearly $4,000 after maximizing credits.
I don't have access to any 401k type plans through work.
Assuming I set aside $6,000 of my nest egg for emergencies, I'd have $14,000 left to invest. I don't mind allocating it towards longer-term, higher-risk investments. International stock indexes, or a blend of small/mid/large US stocks. I don't know how many total funds I'd want to invest in. I'm assuming I'd use one for the Roth IRA, then another in a taxable account?
I do have access to a HSA plan for childcare expenses. I had assumed I could use either the HSA, or childcare tax credit, but not both. I thought since my income was fairly low to begin with, I wouldn't gain much by lowering it using an HSA.

Thanks!
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Re: Low-Income Investing

Post by FannyBrawne »

And I have to say: to everyone taking the time to share their thoughts, it's sincerely appreciated. I don't have anyone (in the virtual world) that I can ask these questions of. A million thanks.
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Re: Low-Income Investing

Post by BrandonBogle »

FannyBrawne wrote:And I have to say: to everyone taking the time to share their thoughts, it's sincerely appreciated. I don't have anyone (in the virtual world) that I can ask these questions of. A million thanks.
We all have to start somewhere and we are a community that in some ways, are easier to talk to since you don't have to see us eye to eye.

Personally, I grew up in a house that went through bankruptcy, both parents losing heir jobs, going on welfare and food stamps, and having friends and teachers donate meals or else we didn't eat dinner (the six months before food stamps). I still think I was fortunate and we didn't hit rock bottom, but if my parents could rise above that to be ok in retirement now, and I worked my tail off so I'm looking forward to early retirement in 20 years, then it definitely can be done.

You are already ahead of the pack having saved up some for a rainy day and thinking out some really good options before ever even starting this thread. Great job!
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Re: Low-Income Investing

Post by ruralavalon »

grabiner wrote: And she is in the phase-out range for the Earned Income Credit (which is refundable), but contributing to an IRA doesn't help here, so I agree that the Roth is a better choice. (If her employer offers a 403(b) or 457, contributions to that would reduce her earned income, which would give a very large tax savings because of the phase-out.)
Roth is a perfect choice & $250/month won't put her over the limits after this year. I'd be inclined to put in $5,500 for 2013 (assuming you'll have a safe level of emergency fund after doing so), then put the $250/month aside for 2014 contributions and just keep it really easy for yourself in doing so.
Agreed.
Fanny Brawne wrote:I'm in my early 30s . . .
. . . . .
I have run the numbers and will be able to invest $250 per month. I also plan to invest my entire tax refund. I got nearly $4,000 back (state and federal) for 2012, and expect at least as much for 2013.
. . . . .
I used the formula to find my marginal tax rate and it looks like I'm at 15%. (I have to admit I don't know what to expect, tax-wise). For example, last year, my total income was $7,000 and I got a tax refund of nearly $4,000 after maximizing credits.
I don't have access to any 401k type plans through work.
Assuming I set aside $6,000 of my nest egg for emergencies, I'd have $14,000 left to invest. I don't mind allocating it towards longer-term, higher-risk investments. International stock indexes, or a blend of small/mid/large US stocks. I don't know how many total funds I'd want to invest in. I'm assuming I'd use one for the Roth IRA, then another in a taxable account?
I do have access to a HSA plan for childcare expenses. I had assumed I could use either the HSA, or childcare tax credit, but not both. I thought since my income was fairly low to begin with, I wouldn't gain much by lowering it using an HSA.
You are saving at the rate of $250/month = $3,000 per year plus whatever your tax refund may be in a particular year. It doesn't sound like the tax refund will remain the same in future years, but I can't really tell. That savings rate of $250 per month gives you $1,250 more for the rest of this year, and you have $14,000 available to invest now, not counting your emergency money. No debt. No employer plan. A Roth IRA is the ideal place to start, you can contribute up to $5,500 per year to a Roth IRA.

Here is an idea to think about. Asset allocation: 70/30 stocks/bonds, please see: bogleheads philosophy, "Never bear too much or too little risk" , with 30% of stocks in international, please see: 2013 poll results wth discussion, "What is your equity allocation to international?" . That breaks down overall to: 30% bonds; about 20% international stocks; and about 50% domestic stocks.

This is a suggestion, make your own decision. You are the one who has to be able sleep at night with the allocation chosen and the risk that comes with it.

Keep it simple to start. Open a Roth IRA at Vanguard now. Contribute $5,500 when you open it, all at once. Continue to save your $250/month. Put the extra $8,500 from your savings into short term CDs at your federally insured bank or savings and loan, just to have someplace interest-bearning to hold it until the start of 2014, when you put another $5,500 to the Roth IRA all at once. Then also open a regular taxable account at Vanguard, contribute to it the rest of your $14,000 (about $3000) plus the additional $1,250 saved by then (total of about $4,250) into the taxable account).

So start this way now:

Roth IRA @ Vanguard (100% of portfolio; $5,500)
100%, Vanguard Target Retirement 2025 Fund (VTTVX), er = 0.17%
(This fund gives you an allocation of 70/30 stocks/bonds, with 30% of stocks in international)
(You can't divide this up its 3 individual core funds at this time. There is a required initial minimum investment of $3,000 per fund per account.)


Then in January 2014 change to this, all percentages in both accounts, and all dollar amounts in the Roth IRA are all approximate, since we don't know how much your investments will change between now and then, everyting is rounded off:

Taxable account @ Vanguard (about 28% of total portfolio; about $4,250; may or may not have more contributions in future years?)
28%, $4,270,Vanguard Total Stock Market Index Fund Investor Shares (VTSMX), er = 0.17%

Roth IRA @ Vanguard (about 72% of total portfolio; about $11,000; adds $3,000 or more per year hereafter?)
30%, $3,050, Vanguard Total Bond Market Index Fund Investor Shares (VBMFX, er = 0.20%
20%, $3,050, Vanguard Total International Stock Index Fund Investor Shares (VGTSX), er = 0.22%
22%, $3,350, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX), er = 0.17%
(Starting in a year or two more, you begin to get Admiral class shares which require a blance of $10,000 per fund per account, which give you even lower expense ratios.) .

Then your general priotity (since you have no employer-based plan, and no debt) for investing, that works well for many people much of the time, would be: (1) continue to avoid consumer debt; (2) max out the Roth IRA each year; and then (3) anything more into the taxable account. Wiki article link: Prioritizing investments .

This should quickly give you a very diversified portfolio (to reduce your risk), which also has very low investing expenses (to increase your net gain).

Rebalance every year or so to adhere to whatever asset allocation you choose. Wiki article link: Rebalancing .

If you have any questions about any suggestion, or the reasons for them, feel free to ask.


Make sure you do some reading, to learn a little more, like: Wiki article link: Bogleheads® investment philosophy ; Wiki article link: Getting Started ; Wiki article link: Three-fund portfolio ; and Forum Discussion, "The Three Fund Portfolio" .

I hope that this helps.

EDITS: for grammar, punctuation, spelling, to correct arithimetic, and add references to rebalancing and investing priorities.
Last edited by ruralavalon on Thu Aug 01, 2013 2:26 pm, edited 10 times in total.
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