Young, Ambitious and Relatively Clueless

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singern
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Young, Ambitious and Relatively Clueless

Post by singern »

Hello Everyone,

This is my first of hopefully many posts. I first want to express my gratitude that this forum exists. It is inspiting and heartening to see a group devoted to sound investment stratagies and personal accountability.

I want to begin building a strong financial future. I have a great job just out of college and limited debt.I am ambitious, but am feeling paralyzed by over analysis and general noise from friends, collegues and the media. I have read the boggleheads guide and am hoping to find a group that can give advice on building a bright financial future without an undercurrent of jealousy or competition.

Currently my plan is Such (please take the time to comment whether positivly or negativly):

open an account with Vanguard 500. My company will only match retirement contributions after 2 years (I am on a two year contract and am considering law school after that) so It may be more benifical to just open my own IRA rather than their company 401k.

I am looking to fund 15k or more into this fund this year. I am in my early 20's and I feel I should be reasonably aggressive in my investment stratagies.

I want to pay down my limited student loan debt (the interest will neverexceed 4%) at my current monthly payments. I am thinking that the compound interest of investing now will more than compensate for the length of my loan repayment.

I am considering investing in mutual funds without the pretext of a retitement account. If there is ever a business or venture I believe in I cna invest without the steep penalties of withdrawing from a retirement account. I would appreciate any comments on this because I have gotten mixed feedback from friends and collegues on this issue.

Thanks for reading! If you have any wisdom, theories or personal experiences to share I would be very appreciative to hear them!
I haven't "needed the money" since I took Archie's milk money in the third grade.... but I like it - The Departed, 2006.
Sciray
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Re: Young, Ambitious and Relatively Clueless

Post by Sciray »

Sounds like you're off to a great start already! The Boglehead's Invesetment Guide is a great start.

Good investment is simple and easy to understand. Never invest in something you don't understand. Ignore your friends and especially the media. The media makes money off of entertaining you (or scaring you), not making you rich. While your friends have your best interest in mind, only you know your personal situation, comfort level, risk tolerance and financial goals.

The Vanguard 500 Index (VFINX) is a great investment for an aggressive portfolio. Ignore the 401K if they don't match. If you have money left over, you can circle back around and invest, but if you're looking to leave in 2 years, you'll have to roll that 401K over into an IRA anyway. IRA contributions are capped at $5,500 annually for single people, so again, if you max that out, you can contribute to your 401K and roll that over later (a very simple process).

4% is not a lot of interest to pay, but it's a payment you'll have to make regardless. I personally don't like to have monthly liabilities so beyond the fact you can likely make more than 4% on an investment, there's a great psychological relief to being debt free. Get rid of these in 3-5 years (or less) if you can. Then take all that money you'd spend on monthly payments and concentrate on where to allocate it each month. Trust me, that's a lot more fun than writing a check (or EFT).

If you remember from the book, Index Funds are great funds to hold in taxable accounts. They are tax efficient and have low fees. Again, ignore your friends, especially the poor, in debt ones. If your goals dictate saving money outside a retirement fund, do it! But do it tax efficiently. You might find watching that balance rise is more fun and less stress than investing in an individual company or stock.

Final advice: save early, save often and revisit your investment goals to stay on track.
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ruralavalon
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Re: Young, Ambitious and Relatively Clueless

Post by ruralavalon »

Welcome to the forum :) .

It's always great to see someone starting young.

Excellent choice for your reading material.

The 401k might be a good idea, even without a match, if the fund choices are good and the expenses low. What are the 3 or 4 lowest expense ratio funds offered there? Any index funds?

If not a Roth IRA at Vanguard might be the best choice. Are you eligible for a Roth IRA? What is your marginal tax bracket? Don't just skip all tax-protected investing even if you want the flexibility to use the money for non-retirement purposes, "[p]rincipal contributions (but not earnings) can be withdrawn at any time without penalty (subject to some minimal conditions)." wiki, "Roth IRA".

To invest $15k a year, you need some account in addition to an IRA. The limit for an IRA is $5.5k/yr.

How much student loan debt do you have? What is the interest rate?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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singern
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Re: Young, Ambitious and Relatively Clueless

Post by singern »

Sciray wrote:Sounds like you're off to a great start already! The Boglehead's Invesetment Guide is a great start.

Good investment is simple and easy to understand. Never invest in something you don't understand. Ignore your friends and especially the media. The media makes money off of entertaining you (or scaring you), not making you rich. While your friends have your best interest in mind, only you know your personal situation, comfort level, risk tolerance and financial goals.

The Vanguard 500 Index (VFINX) is a great investment for an aggressive portfolio. Ignore the 401K if they don't match. If you have money left over, you can circle back around and invest, but if you're looking to leave in 2 years, you'll have to roll that 401K over into an IRA anyway. IRA contributions are capped at $5,500 annually for single people, so again, if you max that out, you can contribute to your 401K and roll that over later (a very simple process).

4% is not a lot of interest to pay, but it's a payment you'll have to make regardless. I personally don't like to have monthly liabilities so beyond the fact you can likely make more than 4% spend on monthly payments and concentrate on where to allocate it each month. Trust me, that's a lot more fun than writing a check (or EFT).on an investment, there's a great psychological relief to being debt free. Get rid of these in 3-5 years (or less) if you can. Then take all that money you'd

If you remember from the book, Index Funds are great funds to hold in taxable accounts. They are tax efficient and have low fees. Again, ignore your friends, especially the poor, in debt ones. If your goals dictate saving money outside a retirement fund, do it! But do it tax efficiently. You might find watching that balance rise is more fun and less stress than investing in an individual company or stock.

Final advice: save early, save often and revisit your investment goals to stay on track.
Thanks! very happy to be here!

I certainly agree that the media and financial professionals are out to make themselves :dollar at my expense (Can't blame them for that but I certainly will not be suckered into the shenanagians). I am thinking I will set up the IRA now so I will not have to roll anything over. I have a additional question though, what is the significant difference, if any between a IRA and a taxed account (as in just putting x amount of money into index funds). Note I am not askign the difference between a traditional and Roth IRA, but the drawbacks of putting that money directly into mutual/ index funds.

I am also switching my fidelity account to a vanguard account and dropping the ameriprise advisor I have been set up with (not that hes not a nice guy). I want to accomplish this myself (not to mention I will save a bundle doing so).

Do you think it might be wise to erase my debt (12k) before I begin investing. I assume that is what Mr. Boggle would say but I am very egar to begin investing in mutual and index funds. Could I perhaps (to use an awful phrase) "split the baby" and contribute to both simultaniously.

Thanks for beign so welcoming! I really appreciate it!
I haven't "needed the money" since I took Archie's milk money in the third grade.... but I like it - The Departed, 2006.
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singern
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Re: Young, Ambitious and Relatively Clueless

Post by singern »

ruralavalon wrote:Welcome to the forum :) .

It's always great to see someone starting young.

Excellent choice for your reading material.

The 401k might be a good idea, even without a match, if the fund choices are good and the expenses low. What are the 3 or 4 lowest expense ratio funds offered there? Any index funds?

If not a Roth IRA at Vanguard might be the best choice. Are you eligible for a Roth IRA? What is your marginal tax bracket? Don't just skip all tax-protected investing even if you want the flexibility to use the money for non-retirement purposes, "[p]rincipal contributions (but not earnings) can be withdrawn at any time without penalty (subject to some minimal conditions)." wiki, "Roth IRA".

To invest $15k a year, you need some account in addition to an IRA. The limit for an IRA is $5.5k/yr.

How much student loan debt do you have? What is the interest rate?

Thank you for your response!

I honestly have been trying to get started for some time but until I found Boggleheads Guide, Investing was sort of a mystifying and intimidating prospect. I think that is an issue for a lot of people my age but thats a discussion for another time.

The 401k is through fidelity. Currently I am contributing 3% (will up it to 15 once I make a decision about the loan repayment). I am enrolled in the Freedom K 2055 fund, its a lifecycle fund that beigns aggressive and becomes more conservative over time. There is no management fee and the total operating expenses amount to .66% anually (seems fairly reasonable to me, please say if you disagree). The fund focuses on
Investing in a combination of underlying Fidelity domestic equity funds, international equity funds, bond funds, and short-term funds. Allocating assets among underlying Fidelity funds according to an asset allocation strategy that becomes increasingly conservative until it reaches approximately 17% in domestic equity funds, 7% in international equity funds, 46% in bond funds, and 30% in short-term funds. The perfomance in the past two years has been 15.39% and 22.7% respectively.

I cannot rollover my plan until I leave my employer. I can set up an additional IRA. In my company sponsored 401k I can contribute 17,500 ont he year and as you mentioned, 5,500 in an IRA. I am very much looking to move my account to Vanguard (or open an additional one) but I am unsure that is the right move at this time.

My job is salaried plus overtime so I cannot say exactly what my marginal tax bracket will be. According to coworkers I can expect to be between 27-33% after expenses this year and next.

I have 12 k in school loans, the interest rate cannot exceed 4%. I am considering paying all the debt down first (in this year) and than redoubling my efforts. Then again perhaps investign while paying down loans would be the best move.

Thanks again for responding, your insight is very much appreciated!
I haven't "needed the money" since I took Archie's milk money in the third grade.... but I like it - The Departed, 2006.
nordsteve
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Re: Young, Ambitious and Relatively Clueless

Post by nordsteve »

You can save a significant amount of costs by constructing a three-fund portfolio with the same ratio of domestic equity/international equity/bond funds. The linked article has an example for Fidelity that would have an ER of probably .11%, based on matching the ratio of the fund you've selected.
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singern
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Re: Young, Ambitious and Relatively Clueless

Post by singern »

stevep001 wrote:You can save a significant amount of costs by constructing a three-fund portfolio with the same ratio of domestic equity/international equity/bond funds. The linked article has an example for Fidelity that would have an ER of probably .11%, based on matching the ratio of the fund you've selected.

Thank you for your comment! I am certainly interested in lowering any costs. When you say based on matching the ratio of the fund are you reffering to the employers match because I only get that after two years (which is when I will leave my current company).
I haven't "needed the money" since I took Archie's milk money in the third grade.... but I like it - The Departed, 2006.
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ruralavalon
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Re: Young, Ambitious and Relatively Clueless

Post by ruralavalon »

singern wrote:The 401k is through fidelity. Currently I am contributing 3% (will up it to 15 once I make a decision about the loan repayment). I am enrolled in the Freedom K 2055 fund, its a lifecycle fund that beigns aggressive and becomes more conservative over time. There is no management fee and the total operating expenses amount to .66% anually (seems fairly reasonable to me, please say if you disagree).
Thje expense ratio of 0.66% is high in my opinion.

Are there any Fidelity Spartan index funds offered in the 401k, and if so which ones with what expense ratios? Also, is there a BrokerageLink offered in the 401k that lets you buy Fidelity funds not otherwise offered?

EDIT to add: If Fidelity Spartan index funds are available through your 401k, or thru a BrokerageLink in the 401k,then you will be able to construct a nice simple very low expense portfolio there even if there is no match.
Last edited by ruralavalon on Wed Aug 27, 2014 3:17 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Meg77
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Re: Young, Ambitious and Relatively Clueless

Post by Meg77 »

To answer your later question, the downside of investing in a taxable account is that you will have to pay taxes every year based on the capital gains distributions and dividends/interest thrown off by that fund. When you rebalance or trade funds/stocks, you'll also owe capital gains on those transactions. That can add up to quite a lot over time as your portfolio grows. The primary advantage of retirement accounts is being able to avoid paying taxes on those annual investment earnings every year.

Also 0.66% is a pretty high fee, though not atypical for a 401k fund. Often 401ks have ONE index fund (usually an S&P 500 fund) that is the cheapest fund they offer. Mine is a small/midcap index and I put 100% of my contributions in there and diversify with my Roth investments. If your 401k doesn't have any cheap funds and they don't match then I'm leaning toward saying you should just knock out your debt to minimize your fixed expenses. Also I know this reeks of market timing, but I wouldn't be as eager as usual to pour everything into the stock market with it setting new record highs every week.

Here's what I would do if I were you (this is also pretty much what I did 8 years ago when I was in your exact shoes).

Step One - Max out a Roth IRA for 2014. This is a no-brainer. And if you must, you can use it as a dual emergency fund or savings account for starting a business because you can always take contributions out tax and penalty free. Go to vanguard, buy the S&P 500 fund, and then next year max it out for 2015 as soon as you can. Once you have $10K you can convert to the admiral shares of the fund (VG will do this automatically) which are even cheaper.

Step Two - Keep $5K in cash. It's good to have an emergency reserve so that you aren't tempted to raid retirement accounts, but it'll also give you flexibility and peace of mind.

Step Three - Contribute whatever it takes to get you to 12% of your gross income (including the Roth contribution). That's a minimum goal you should be targeting to save for retirement. 15% is better, but if you're young and have other goals I think 12% is a fine start. The automatic payroll deduction really is a great way to save without even realizing you're doing it; plus having that separate "bucket" that you mentally know you can't touch eliminates the ability or mental energy you might otherwise spend playing with that money. The tax deduction takes the edge off the savings.

Step Four - Save for other goals and/or pay off student loans.

I know you think you'll be tempted by various opportunities and business ventures going forward, but that's a different goal. You need to save for that in addition to your retirement contributions; not instead of them. No raiding retirement accounts to buy a house, an engagement ring, a share of your buddy's cool new start up, or any other non life-threatening emergency. I promise you won't regret getting into this habit. Whatever else you do in life, whatever ventures fail or take off, if you steadily contribute to retirement accounts and invest in low cost index funds, you will end up with millions and millions of dollars in retirement savings and always sleep soundly knowing that portion of your financial life is exactly on track. It's a very powerful feeling and will enable you to take risks with other investments or jobs.

Good luck! You're obviously off to a great start. :beer
"An investment in knowledge pays the best interest." - Benjamin Franklin
nordsteve
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Re: Young, Ambitious and Relatively Clueless

Post by nordsteve »

singern wrote:
stevep001 wrote:You can save a significant amount of costs by constructing a three-fund portfolio with the same ratio of domestic equity/international equity/bond funds. The linked article has an example for Fidelity that would have an ER of probably .11%, based on matching the ratio of the fund you've selected.

Thank you for your comment! I am certainly interested in lowering any costs. When you say based on matching the ratio of the fund are you reffering to the employers match because I only get that after two years (which is when I will leave my current company).
I'm talking about the expense ratio of the Freedom 2050 fund. Given your age, that fund will currently have a more aggressive set of investments. The idea here is to create a three fund portfolio to approximately replicate that fund's performance, with lower expenses.

If you have access to the right cheap funds in the 401k you can do it all there.

Otherwise, you can save in another tax advantaged account, using the inexpensive funds available in the 401k and buying the other funds of the 3 fund portfolio in an account at Vanguard.

You could even choose to be 100% in the S&P 500 fund in your 401k for a couple years (assuming it's an inexpensive fund), until you change jobs and have more flexibility with rollover money in an IRA. That's not all that much more volatile than the Freedom 2050 fund will be.
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singern
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Re: Young, Ambitious and Relatively Clueless

Post by singern »

Thje expense ratio of 0.66% is high in my opinion.

Are there any Fidelity Spartan index funds offered in the 401k, and if so which ones with what expense ratios? Also, is there a BrokerageLink offered in the 401k that lets you buy Fidelity funds not otherwise offered?

EDIT to add: If Fidelity Spartan index funds are available through your 401k, or thru a BrokerageLink in the 401k,then you will be able to construct a nice simple very low expense portfolio there even if there is no match.[/quote]

Thanks for pointing that out. Fidelity does offer a few different Spartan Index funds which are .10 - .20% annual expenses. There is a Brokerage link offered aswell but the fidelity advisor cautioned me against it saying it was an option for experienced investors only. I am looking to invest 15% of my earnings annually split in three parts, US total stock market index fund, Intl total stock market index fund, US total bond market index fund. Within a pre tax 401K and a separate Roth IRA. Though the sheer stability of it all is a little off putting for my risk averse self.
I haven't "needed the money" since I took Archie's milk money in the third grade.... but I like it - The Departed, 2006.
investor1
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Re: Young, Ambitious and Relatively Clueless

Post by investor1 »

On tax advantaged space
As others have mentioned, you can't put more than $5.5k into an IRA this year. In order to put $15k into tax advantaged space, you'll have to put at least part of it into your 401k.

You didn't mention your income.

If you contribute to a workplace retirement plan (401k), there is a phaseout that might prevent you from being able to deduct contributions to a traditional IRA. The phaseout begins with an MAGI of $60k and ends at an MAGI of $70k. If you are in that range, you can only get a partial deduction. If you are beyond $70k, you can't deduct of your IRA contributions. This is why it is common for people who have a 401k to also open a Roth IRA.

There are different limits for contributing to a Roth IRA. If your MAGI is between $114k-$129k, you are in the phaseout. Beyond that, you can't contribute directly to a Roth IRA. People beyond that range sometimes go with the Backdoor Roth method to utilize IRA space.

Keep in mind these limits all get adjusted from time to time to adjust for inflation just as the contribution limits do.

If you have a good 401k and don't plan on contributing more than the contribution limit ($17.5k), I don't see an advantage of opening an IRA. Fewer accounts sounds simplier to me.

On existing debt
Your debt has a rate of 4%. Typically, stocks return more than that, but nobody can predict the future. Paying off your debt gives you a guarunteed 4% return and simplifies your life. If you can afford to put $15k into retirement funds, you can afford to pay off a $12k debt quickly. I'd take the modest return in exchange for simplifying my life.

Make sure you have an emergency fund before paying off debt or investing.

You are on the right track with the three fund portfolio with Spartan funds and/or Vanguard's.
TRC
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Re: Young, Ambitious and Relatively Clueless

Post by TRC »

Even though your company doesn't match, fund your 401K first. It will reduce your taxable income and provide you with tax free growth. Then if you have money left over fund a Roth IRA. Once you've maxed out your 401K and Roth IRA, then move onto a Taxable Account with Vanguard, Fidelity or Schwab.

Before you invest, you need to decide on an asset allcoation strategy (% of US Stocks, % of International Stocks and % of bonds). A good rule of thumb is to hold your age in bonds, the difference in stocks and rebalance annually as you age. Post the available funds in your 401K plan and you'll get some good advice on the funds to select that you have available. Generally speaking, you'll want to select index funds to capture the market return. The S&P 500 is a good fund, but you'd be better off selecting a US Total Stock Market index fund to cast a wider net.

Welcome! This is the best place for sound, no nonsense investment advice.
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ruralavalon
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Re: Young, Ambitious and Relatively Clueless

Post by ruralavalon »

singern wrote:Fidelity does offer a few different Spartan Index funds which are .10 - .20% annual expenses. There is a Brokerage link offered aswell but the fidelity advisor cautioned me against it saying it was an option for experienced investors only. I am looking to invest 15% of my earnings annually split in three parts, US total stock market index fund, Intl total stock market index fund, US total bond market index fund. Within a pre tax 401K and a separate Roth IRA. Though the sheer stability of it all is a little off putting for my risk averse self.
Which Fidelity Spartan funds (fund names, tickers & expense ratios) are offered in your 401k?

Don't be put off, its not very difficult.

Using three funds of those types is very sensible, please see: wiki, "Three-fund portfolio".

How much in dollars will that 15% be? Will that max out your 401k at $17.5k/yr? Will that max out your IRA at $5.5k/yr?

singern wrote: I am in my early 20's and I feel I should be reasonably aggressive in my investment stratagies.
What is your desired asset allocation (stock/bond mix & domestic/international mix?) Please see: wiki, on risk; and 2013 int'l poll & forum discussion (int'l = median 30% of total stocks).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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