Starting from nothing

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uncertainty
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Starting from nothing

Post by uncertainty » Sun Dec 16, 2012 3:42 pm

Hey everyone, this is my first attempt at actually planning for retirement. I graduated a few years ago with roughly $55,000 in student loans and got a job shortly after. I sold my car, bought a bicycle, moved into an apartment with a couple roommates and have been working to reduce my debt since. I'm roughly halfway done and, having avoided my employers 401k match up til now, decided it was probably time to stop leaving money on the table. I have no real assets and no consumer debt and I don't plan on buying a home or vehicle anytime soon, so my expenses will remain low for the foreseeable future. I've been independent since 18 and have stable employment. My parents are my emergency fund at this point, though I have yet to ask or receive any money from them since graduation.

Emergency funds: One week
Debt: $18,000 5.74% private student loans
$12,000 ~4.5% federal student loans
Tax Filing Status: Single
Tax Rate: 15% Federal, 8.5% State (ME)
Age: 25
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 30% of stocks
Current portfolio: Zero

Current Income: $32,000
New annual contributions: 5% of income (100% company match up to 5%)
I also plan to save $2,000 to $3,000 for an emergency fund and will continue paying down debt aggressively afterwards.

401k options are grim from what I can tell. I've read the wiki and have been reading this forum for almost a year now, but this is all completely foreign to me so I'm open to any suggestion. I'm leaning towards a simple plan, though I actively study finance in my spare time so if slicing my contributions further makes sense I'm happy to pursue that as well. I'm shooting for low ER which has proven to be difficult. I've added some small cap growth to try to approach the total market since there was no obvious option for that in this plan. The increased risk and possible return doesn't hurt either; I'm not particularly risk adverse.

Here's my initial stab at it:

46% 500 Index Fund (JHVIT) (0.53)
24% EuroPacific Growth Fund (RERFX) (1.0)
10% Small Cap Growth Index (VISGX) (0.74)
20% Short-Term Federal (VSGBX) (0.7)

This is all offered through John Hancock Retirement Services. They also have 5 actively managed funds for various levels of risk, but I prefer the DIY approach. Here's the full list:

Aggressive Growth
Small Cap Growth Index (VISGX) (0.74)
DFA U.S. Small Cap Fund (DFSTX) (.87)
DFA US Targeted Value Fund (DFFVX) (.88)
Mid Cap Stock Fund (JIMSX) (.93)
International Value Fund (JIVIX) (.97)
Franklin Small-Mid Growth (FRSGX) (.99)
EuroPacific Growth Fund (RERFX) (1.0)
International Growth Fund (AIEVX) (1.13)
American Century Heritage (TWHIX) (1.16)
T. Rowe Price Sci & Tech (PASTX) (1.17)
Legg Mason ClearBr Agg Growth (SAGYX) (1.24)
Oppenheimer Developing Mkt (ODVYX) (1.25)
Inv Small Cap Growth (GTSAX) (1.27)
Fidelity Adv Leveraged Co Stk (FLXTX) (1.35)

Growth
Fundamental All Cap Core Fund (JEQAX) (0.76)
Capital Appreciation Fund (JICPX) (0.78)
Value Fund (JEVLX) (0.83)
Blue Chip Growth Fund (JIBCX) (0.86)
John Hancock Disciplined Value (JDVVX) (0.87)
Templeton World (TEMWX) (1.07)
Domini Social Equity (DIEQX) (1.25)

Growth & Income
500 Index Fund (JHVIT)* (0.53)
Fundamental Large Cap Value (JHVIT)* (0.78)
American Balanced Fund (RLBFX) (0.8)
Davis New York Venture (NYVTX) (0.92)
T. Rowe Price Equity Inc (PAFDX) (1.02)
Mutual Beacon (BEGRX) (1.09)
Mutual Global Discovery (MDISX) (1.26)

Income
Short-Term Federal (VSGBX) (0.7)
High Yield Fund (JIHDX) (0.76)
PIMCO Total Return (PTRAX) (0.96)
T. Rowe Price Spectrum Inc (RPSIX) (1.04)

*This is all I could find from the site, it didn't specify further. The 500 index says "Investing solely in JHVIT - 500 Index Trust B (Class 1) Sub-advised by John Hancock Asset Management" and the Fundamental Large Cap Value says "Investing solely in JHVIT - Fundamental Large Cap Value Trust (Class 1) Sub-advised by John Hancock Asset Management" I can get more details on this if needed.

Questions:

1. Are the allocations decent? Any obvious improvements?
2. Should I go for intermediate term bonds instead of short term, despite the higher ER?
3. I've added some small cap growth to try to approach the total US market since I didn't see an obvious option for that in this plan. Is 10% enough? Did I even accomplish what was intended?
4. Should I scrap this entirely and do something else?

If I missed anything please let me know!
Last edited by uncertainty on Tue May 19, 2015 5:09 pm, edited 1 time in total.

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prudent
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Re: Starting from nothing

Post by prudent » Sun Dec 16, 2012 6:01 pm

First off, I think you are doing a terrific job getting out of debt and developing a focus on long-term investing. At age 25 to have paid down student loans by $30K after graduation is great. I won't quibble with your planned allocation other than to say I see no benefit to using VSGBX in your 401k. Short-term bonds just aren't paying anything now. I would choose PTRAX over that one but it's a strictly personal preference of mine - others probably will see it differently.

Emergency funds are important but if you have parental backup if needed, and if you can still build your emergency fund then be aggressive on the remaining debt while contributing 5% to the 401k, I say start now to get the 100% match.

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DiscoBunny1979
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Re: Starting from nothing

Post by DiscoBunny1979 » Sun Dec 16, 2012 6:27 pm

Maybe the OP or someone can answer a question. In the 1990s I made a salary of about $35,000 a year without having a college degree - hence no college debt. How does someone with $65,000 in original college debt end up making $32,000 in today's dollars? What kind of career path is that?

To answer the OP, I think that the most important thing is savings rate, contributing on a regular basis, and having something like a 60/40 split so that staying the course over the long-run is comfortable. Single out the lowest cost funds - like the 500 Index and Pimco Total Return and call it a day. To slice and dice without a larger nest egg to me seems a little premature, but that's just me.

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celia
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Re: Starting from nothing

Post by celia » Sun Dec 16, 2012 6:37 pm

Have you ever considered that the factor that will have the biggest impact on your future net worth is the amount you save each year, rather than what it is invested in? Don't worry what you invest in for now until you have at least $10,000 saved. Remember that owning multiple funds means you have to have the minimum to get into EACH fund. So for now go with a balanced fund or a Target Retirement fund that gradually shifts from mostly stocks to mostly bonds as you get closer to the Year of Retirement (that is part of the fund name). For example, today's 25-year-old will probably retire in about 40 years, 2052. Since these funds are named using multiple of 5, how about putting all your money in a Target Retirement 2050 or Target Retirement 2055 fund until you have enough to split it among multiple funds.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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celia
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Re: Starting from nothing

Post by celia » Sun Dec 16, 2012 6:43 pm

DiscoBunny1979 wrote:Maybe the OP or someone can answer a question. In the 1990s I made a salary of about $35,000 a year without having a college degree - hence no college debt. How does someone with $65,000 in original college debt end up making $32,000 in today's dollars? What kind of career path is that?
Disco, Don't forget that jobs are harder to come by these days. Some people are just lucky to have a job, any job. But a low paying job now doesn't mean (s)he will always stay at that level. He/she may have many more opportunities ahead compared to what a HS grad will have. Right now, it may just be important to get the experience to go with that education. And the pay-off of the debt so far, in this case, is impressive.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Calm Man
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Re: Starting from nothing

Post by Calm Man » Sun Dec 16, 2012 7:43 pm

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Last edited by Calm Man on Sun Dec 16, 2012 8:59 pm, edited 1 time in total.

retiredjg
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Re: Starting from nothing

Post by retiredjg » Sun Dec 16, 2012 7:44 pm

Welcome to the forum!
Emergency funds: One week
:shock: :shock: :shock:

I'm glad to see you plan to start an emergency fund. That is what will keep you from acquiring more debt (even to the bank of Mom and Dad) when things happen. You have been fortunate (and probably lucky) so far, but that is not always something you can depend on.

What you may not have thought of...you can hold your emergency fund in a Roth IRA. This is because the contributions (not the earnings) to a Roth IRA are available any time for any reason with no tax and no penalty. You would still invest it like an emergency fund - money market or whatever. This money would "hold" your space since Roth IRA space is no longer available once the contribution period is over. Eventually, you would save money outside the Roth IRA and then exchange the money in the Roth IRA to something more appropriate for retirement investing.

Since it might take you 3 days to get the money (unless you open that Roth IRA at your local bank or credit union), I'd still keep a little buffer in your savings account.

You are doing an excellent job at paying down debt and planning for saving money.

Here's my initial stab at it:

46% 500 Index Fund (JHVIT) (0.53)
24% EuroPacific Growth Fund (RERFX) (1.0)
10% Small Cap Growth Index (VISGX) (0.74)
20% Short-Term Federal (VSGBX) (0.7)
This is probably as good as you can do with what is offered. However, I too might choose the PIMCO fund over the short term federal (even though it costs more).

On the other hand, it really does not matter right now what you invest in. Your annual contributions will grow your nest egg more than the return on any investment. So you could just as easily use only the 500 index and a bond fund and call it good enough.

3. I've added some small cap growth to try to approach the total US market since I didn't see an obvious option for that in this plan. Is 10% enough? Did I even accomplish what was intended?
10% is pretty close - yes it does what you intended.

Hard to imagine a bicycle in Maine in the winter....

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BL
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Re: Starting from nothing

Post by BL » Sun Dec 16, 2012 7:59 pm

Perhaps you could just start with the cheaper S&P 500 index fund in 401k and then do a short term bond fund at Vanguard in a Roth IRA as an emergency fund; then later add an extended market fund to complete your S&P, and Total International for the 3-fund completion.

uncertainty
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Re: Starting from nothing

Post by uncertainty » Sun Dec 16, 2012 9:04 pm

Thanks for all the replies, all the opinions expressed have been helpful.
retiredjg wrote:What you may not have thought of...you can hold your emergency fund in a Roth IRA. This is because the contributions (not the earnings) to a Roth IRA are available any time for any reason with no tax and no penalty. You would still invest it like an emergency fund - money market or whatever. This money would "hold" your space since Roth IRA space is no longer available once the contribution period is over. Eventually, you would save money outside the Roth IRA and then exchange the money in the Roth IRA to something more appropriate for retirement investing.
I hadn't! Are the contributions from prior years still available tax/penalty free or can you only withdraw current contributions? I have an arsenal of credit cards available for short term emergencies; waiting a few days to withdraw from the Roth wouldn't be a problem.
BL wrote:Perhaps you could just start with the cheaper S&P 500 index fund in 401k and then do a short term bond fund at Vanguard in a Roth IRA as an emergency fund; then later add an extended market fund to complete your S&P, and Total International for the 3-fund completion.
I like this idea, especially since the earlier posters reminded me that returns on my investments will be quite small for some time. Would short term bond funds at Vanguard be the best place to put my Roth "emergency fund" contributions? Can it be withdrawn as easily as a money market account?

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celia
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Re: Starting from nothing

Post by celia » Sun Dec 16, 2012 9:16 pm

uncertainty wrote:I have an arsenal of credit cards available for short term emergencies; waiting a few days to withdraw from the Roth wouldn't be a problem.
Just a reminder that using credit cards is the WORST way to pay for something in an emergency unless you can pay the bill off at the end of the billing cycle.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

retiredjg
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Re: Starting from nothing

Post by retiredjg » Sun Dec 16, 2012 9:51 pm

uncertainty wrote:I hadn't! Are the contributions from prior years still available tax/penalty free or can you only withdraw current contributions?
All of the contributions are available, not just the current year. Just be sure to leave the earnings. So if you have contributed 10k, you can take $10k. If you take any of the earnings, there will be tax and a penalty due on that part.

BL wrote:Would short term bond funds at Vanguard be the best place to put my Roth "emergency fund" contributions? Can it be withdrawn as easily as a money market account?
You could get the money from bond funds as fast as from money market. But even short term bonds can lose some value. I would not put my entire emergency fund in short term bonds, but maybe some of it. Since you'll have a $3k minimum, I guess you'll have to choose one or the other.

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Watty
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Re: Starting from nothing

Post by Watty » Sun Dec 16, 2012 10:01 pm

celia wrote:
DiscoBunny1979 wrote:Maybe the OP or someone can answer a question. In the 1990s I made a salary of about $35,000 a year without having a college degree - hence no college debt. How does someone with $65,000 in original college debt end up making $32,000 in today's dollars? What kind of career path is that?
Disco, Don't forget that jobs are harder to come by these days. Some people are just lucky to have a job, any job. But a low paying job now doesn't mean (s)he will always stay at that level. He/she may have many more opportunities ahead compared to what a HS grad will have. Right now, it may just be important to get the experience to go with that education. And the pay-off of the debt so far, in this case, is impressive.

One thing that was not mentioned was what the OP's expenses were and if he or she lived in a high or low cost of living area.

Here in Atlanta where expenses are moderate that is a pretty decent salary for recent graduate that wasn't in something like engineering, computers or a medical field. This is especially true if the job comes with some benefits. My son who is a year or two younger recently graduated from college, he is in computers but a lot of his friends that graduated with less marketable degrees would love to have a job that paid that.

Back to the questions;

Getting the employer match should come ahead of paying down the loans early. Your combined tax bracket is almost 25% so if you put $1,000 in the 401K you will get almost $250 in taxes back and a $1,000 match. this means that for $750 out of pocket you can get $2,000 in the 401K.

That match is actually a great match and the plan has enough Ok choices that combined that is likely one of the better 401K's plans that anyone on this board has. With that match I would gladly trade you mine.

John Bogle is at best lukewarm about buying international funds. As I recall his reasoning is that around a third of the S&P 500's earning come from international operations so having an international fund does not add much, and they typically have higher expenses and complications. Since the international fund is a growth fund and not just a total international market index fund it likely has a number of other trading costs that are not included in the expense ratio. I think you would do just fine to omit the international fund.

Between the low interest rates and the high expense ratio the bond fund likely have a negative nominal(before inflation) yield and if you adjust for inflation then it is even worse. The dividend yield on the S&P 500 fund is likely higher than the bond yield. Given that you have around 40 years until retirement I would also skip the bond fund for now and reevaluate it in a few years.
The S&P 500 fund combined with a small position(10 to 20%) in the small cap growth fund would be a good way to start.

You had a footnote about all the gobbledygook they listed on what the S&P 500 fund actually is. This is pretty typical, what you want to check is how closely it has tracked the S&P 500 Index fund for 1, 5, and 10 years, this should be in the plan paperwork. It should be just about half a percent behind because that is what the expense ratio is. If that does not roughly match then you can see that they are taking more money out somehow and you will need to decide what to do then. Most likely it will be close.

MathWizard
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Re: Starting from nothing

Post by MathWizard » Mon Dec 17, 2012 11:07 am

Possible tax credit:
---
I'm a big believer in a ROTH, and using it as an emergency fund. However this year, it looks like you
have an opportunity for a 10% federal tax credit on IRA contributions.

At 32K income (and I assume single) and already having 5% go to the 401K, your AGI should be close to
saver's credit territory.

If you use a traditional IRA, you could drop your AGI by the amount you out into a TIRA (not a ROTH though).
Then you can use IRS form 8880 to figure the savings credit. It looks like as a single, if you put enough into a
TIRA to get under an AGI of $28,250, then the amount you contribute to either both the TIRA and ROTH should
give you a 10% tax credit. You would have until filing time next year to make the contribution, so do your taxes
without the IRA, then try examples with various TIRA and ROTH contributions. (I use TurboTax, then I can
easily run different scenarios easily.)

I have not ever been close to taking the saver's credit, so I may be wrong about being able to get a
tax credit from the ROTH, it may be limited to the TIRA amount, so make sure you check on this.

Advice on 401K funds.
---
The ER's seem quite high to me. I woud suggest using only the lowest ER index fund
500 Index Fund (JHVIT)* (0.53)
and get low ER equivalents for the others in your TIRA and ROTH.
You jsut want you AA to be diversified over all your investments, it does not
have to be diversified in your 401K as long as your other investments bring in
into balance.





See:
http://www.irs.gov/pub/irs-pdf/f8880.pdf

retiredjg
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Re: Starting from nothing

Post by retiredjg » Mon Dec 17, 2012 11:58 am

I know little about the Saver's Credit and think the original poster should definitely look into it. It's an opportunity overlooked by many who are eligible (or so says an article I saw last week).

In this case, however, I'm not sure that traditional IRA will work because that is money that is designated as an emergency fund. Roth IRA is only an alternate container for it (as opposed to leaving the money in a taxable account). The money has to be liquid and available. tIRA money is available for some emergencies, but not all.

Perhaps the Saver's Credit might be available anyway though. It is worth researching.

STC
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Re: Starting from nothing

Post by STC » Mon Dec 17, 2012 12:50 pm

It's good that you are thinking of a investment plan. The two things I would do in your situation:

1: write out a complete investment policy statement
2: look for opportunities to increase your income.

Default User BR
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Re: Starting from nothing

Post by Default User BR » Mon Dec 17, 2012 4:19 pm

celia wrote:Just a reminder that using credit cards is the WORST way to pay for something in an emergency unless you can pay the bill off at the end of the billing cycle.
Better than payday loans.


Brian

uncertainty
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Re: Starting from nothing

Post by uncertainty » Mon Dec 17, 2012 6:36 pm

So many good ideas, I'll quote a few I want to respond to but thanks to everyone who's contributed!
Watty wrote:The S&P 500 fund combined with a small position(10 to 20%) in the small cap growth fund would be a good way to start.
This is what I'm leaning towards at this point, with a Roth at Vanguard for my emergency fund. Thanks for simplifying things!
MathWizard wrote:Possible tax credit:
---
I'm a big believer in a ROTH, and using it as an emergency fund. However this year, it looks like you
have an opportunity for a 10% federal tax credit on IRA contributions.
This is very interesting, though I'm not 100% I can get my AGI low enough to accomplish this. I haven't contributed anything to the 401k yet so I can't deduct that portion, and I just checked my most recent pay stub and it looks like my final check will put me at $34,500 thanks to overtime and a small bonus. I'll play around with TurboTax in a few weeks to see what I can manage. Thanks for the suggestion! I would never have discovered this myself.
MathWizard wrote: ---
The ER's seem quite high to me. I woud suggest using only the lowest ER index fund
500 Index Fund (JHVIT)* (0.53)
and get low ER equivalents for the others in your TIRA and ROTH.
You jsut want you AA to be diversified over all your investments, it does not
have to be diversified in your 401K as long as your other investments bring in
into balance.
What do you think about Watty's suggestion? 10-20% in small cap would be an easy addition and the ER isn't MUCH higher.
STC wrote:It's good that you are thinking of a investment plan. The two things I would do in your situation:

1: write out a complete investment policy statement
2: look for opportunities to increase your income.
1. The OP was my first attempt at this and I intend to continue honing my goals into a policy statement as my 401k builds some momentum. Good idea!
2. This, as many have pointed out, remains a sticking point for my retirement goals. Maine isn't known for our booming industry and worse, I work for a local credit union without any real opportunity for advancement. The job is stable and I have artistic endeavors outside of the 9-5 that requires some flexibility which my job allows. I have an expensive degree in Business but my focus has, post-graduation, been entirely on my hobbies. To be critical of myself, I may be intelligent but I'm not always smart. :oops: I'm working on this though, finally, so with any luck I can figure something better out.

retiredjg
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Re: Starting from nothing

Post by retiredjg » Mon Dec 17, 2012 6:57 pm

I'll argue in the other corner.

You are 25 years old and making sound financial progress. You don't make a lot of money, but you are not wanting for anything are you?

Enjoy these years, especially your passion, whatever it is. Life has a way of offering opportunities that you have no way of predicting and these opportunities often involve your passion. You might even get to combine your passion with your degree. Hmmm.

Don't abandon what you love and don't abandon the job that lets you do what you love. Stay out of your own way and just let these things take care of themselves.:wink:

uncertainty
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Re: Starting from nothing

Post by uncertainty » Thu Mar 07, 2013 10:40 am

Quick update:

I've been saving since my first post and I've been able to save roughly 6 months of expenses for an emergency fund. I was planning on moving it into a Roth savings account through Ally for my 2012 contribution, but is there really a point? After meeting the 2012 limit it's very unlikely I'll be able to put anything into a Roth for at least another 3 years since any available cash will be used to pay off my student loans which will likely be around for another 4-5 years. Does it even make sense to sock $5,000 away into a Roth that will be earning less than 1% interest for a few years?

ResNullius
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Re: Starting from nothing

Post by ResNullius » Thu Mar 07, 2013 1:00 pm

At your age, I would go 100% in the SP500 fund. It has the lowest costs, and it will do just fine when compared to all the other funds. Invest enough to get the match, then pay off your debt. As you mentioned, if you and your parents are willing, take advantage of them for your emergency fund, other than to have a couple thousand in cash handy. Just my two cents.

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HardKnocker
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Re: Starting from nothing

Post by HardKnocker » Thu Mar 07, 2013 3:40 pm

Too bad that 401k is with John Hancock. They stink.

Contribute to the 401k up to the match and not more. Establish the emergency fund. Payoff the loans.

I agree with a one fund approach for now of the S&P500 index. You don't need any of those other funds. Don't concern yourself with diversification at this stage of the game.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett

retiredjg
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Re: Starting from nothing

Post by retiredjg » Thu Mar 07, 2013 4:29 pm

uncertainty wrote: Does it even make sense to sock $5,000 away into a Roth that will be earning less than 1% interest for a few years?
It does make sense. This preserves your Roth space. If you don't use it, the opportunity for that space goes away forever. If you use it, you get to keep that space and you can use it later for retirement investing rather than as a temporary container for your emergency funds.

If you think of that money as emergency fund, invest it safely - money market, high yield savings, CDs, etc. If you think of that money as retirement money, use something more aggressive such as stocks.

crowd79
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Re: Starting from nothing

Post by crowd79 » Thu Mar 07, 2013 4:57 pm

I would contribute just enough to get an employer match on 401k contributions and devote the rest to paying off your high interest student loan debt. You're only 25, you've got years ahead of you to save after paying off the debt.

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Taylor Larimore
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On the road to investment success!

Post by Taylor Larimore » Thu Mar 07, 2013 5:08 pm

Here's my initial stab at it:

46% 500 Index Fund (JHVIT) (0.53)
24% EuroPacific Growth Fund (RERFX) (1.0)
10% Small Cap Growth Index (VISGX) (0.74)
20% Short-Term Federal (VSGBX) (0.7)
Uncertainty:

Welcome to the Bogleheads Forum!

In my opinion, your "initial stab" is excellent. You might do a little better but you could also do a lot worse. No one knows.

Get the match. That's a no-brainer. If you can contribute more, open a Vanguard Roth for emergency funds and retirement. After that, pay down the private 5.74% student loan.

Open a Vanguard IRA

You are on the road to investment success!

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

trudy
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Re: Starting from nothing

Post by trudy » Fri Mar 08, 2013 2:52 pm

uncertainty wrote: Does it even make sense to sock $5,000 away into a Roth that will be earning less than 1% interest for a few years?
Maybe I missed something reading quickly through the other posts, but why less than 1%? If you open a $5000 Roth CD at a credit union, you can get 1.86% on a five year CD (highest rate at the credit unions I just looked at), and you can always take the cash out of the CD early and put it in another investment in the Roth with a six month interest penalty which will be minimal at that interest rate.

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