25 Years Old - New Job - 401k Advice

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TheQuahs
Posts: 2
Joined: Thu Jun 20, 2013 11:59 am

25 Years Old - New Job - 401k Advice

Post by TheQuahs » Thu Jul 11, 2013 12:03 pm

Hello, I've been lurking and reading around the forums/wiki for awhile and thought it would be a good time to start getting my retirement plans figured out. I recently started a new job and am eligible to start my 401k through them, but was hoping to get some help on how I should proceed with choosing my investments. I haven't started contributing, so the "New Annual Contributions" is what I'm planning on doing in the next couple weeks.

Emergency Funds: 12 Months ($30,000)
Debt:
- Student Loan - $12,500 @ 5%
- Car - $5,300 @ 3%
- Mortgage - $200,000 @ 3.5% (40% Equity)
Tax Filing Status: Single
Tax Rate: 15% Federal, 0% State (w/ deductions)
State of Residence: WA
Age: 25
Desired Asset Allocation: 85% Stocks /15% Bonds (??)
Desired International Allocation: 15% (??)

Contributions:

New annual contributions
$12,500 of pre-tax income in my 401k
$2,300 (automatic 3% by employer)

Available Funds:

Funds available in 401(k)
T. Rowe Price Retirement Income Adv (PARIX) - 0.82%
T. Rowe Price Retirement 2015 Adv (PARHX) - 0.91%
T. Rowe Price Retirement 2020 Adv (PARBX) - 0.95%
T. Rowe Price Retirement 2030 Adv (PARCX) - 1.00%
T. Rowe Price Retirement 2040 Adv (PARDX) - 1.03%
T. Rowe Price Retirement 2050 Adv (PARFX) - 1.03%
American Funds EuroPacific Gr R5 (RERFX) - 0.55%
Janus Overseas Fund T (JAOSX) - 0.76%
Oppenheimer Developing Markets Y (ODVYX) - 1.03%
Eagle Small Cap Growth R5 (HSRSX) - 0.80%
Heartland Value Plus Inst (HNVIX) - 0.93%
Nuveen Small Cap Index (ASETX) - 1.05%
Nuveen Mid Cap Index (FIMEX) - 0.57%
Perkins Mid Cap Value Fund (JMCVX) - 0.84%
Prudential Jennison Mid Cap Growth (PEGZX) - 0.76%
American Funds Fundamental Investors R5 (RFNFX) - 0.36%
American Funds Growth Fund of Amer R5 (RGAFX) - 0.39%
Columbia Dividend Income (GSFTX) - 0.83%
Nuveen Equity Index (FEIIX) - 0.44%
Oakmark Equity & Income (OAKBX) - 0.78%
BlackRock High Yield Bond Svc (BHYSX) - 0.97%
Great-West Bond Index Fund (MXBIX) - 0.50%
PIMCO GNMA Fund (PAGNX) - 0.90%
PIMCO Total Return Admin (PTRAX) - 0.71%

Questions:

1. From reading the forum and wiki’s, I’m leaning toward the conclusion that my 401k does not have the greatest options. Since the employer 3% is automatic, do any of the options above make it worthwhile to put my whole contribution in the 401k?
2. If I don't put it all in the 401k, what should I do with the rest of my contribution? Roth IRA?
3. I have roughly $3,000 in a 401k from my last job. I don't remember the funds off hand, but I do know it had a higher ER. Should I roll this over into my current 401k?
4. Instead of maxing out a 401k/Roth IRA, should I focus on paying off my student loans?

I really appreciate any help and if there is any info missing, I will get it updated as quickly as I can. Thanks!
Last edited by TheQuahs on Thu Jul 11, 2013 2:39 pm, edited 1 time in total.

Mandrale
Posts: 164
Joined: Mon Jun 11, 2012 2:55 pm

Re: 25 Years Old - New Job - 401k Advice

Post by Mandrale » Thu Jul 11, 2013 12:40 pm

Seems to me that your 401 plan does have higher expense ratios than most. Being in a similar situation as you, my main goal was to pay down my student debt regardless of the interest rate... Just a peace of mind idea for myself. What is usually recommended is 401k up to the match, max out Roth/Trad IRA -- beyond that it comes down to pay down debt or keep investing for the future, which is a personal preference in my opinion.

**Edit: Why not take some of that emergency fund and pay down some student loan debt? Is there a reason you have $30k sitting there?

ieee488
Posts: 1989
Joined: Thu Dec 10, 2009 8:57 am

Re: 25 Years Old - New Job - 401k Advice

Post by ieee488 » Thu Jul 11, 2013 1:16 pm

The expense ratios aren't that outrageous at all.

Nuveen Equity Index (IFELIX) - 0.44%
Nuveen Mid Cap Index (IFIMEX) - 0.57%
are the two I would use for stocks

I agree with the advice to take some of the emergency fund and pay off the student loans.
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TheQuahs
Posts: 2
Joined: Thu Jun 20, 2013 11:59 am

Re: 25 Years Old - New Job - 401k Advice

Post by TheQuahs » Thu Jul 11, 2013 2:38 pm

Thanks for the response! I have the $30,000 in there because I've been doing a lot of home improvements over the last couple years to raise the LTV on my house to get out of MIP. Now that I've refinanced the improvements have slowed down, so I will probably take the advice and start to pay down the student loans.

For the IRA, would you suggest a Roth or traditional?
Should I put in the $5,500 max right away or contribute monthly?
Also, any advice on a good Vanguard IRA option? I'm thinking that since my 401k doesn't have good bond/international options, I may try to make up for those in the Vanguard IRA. But I'm also not opposed to just doing a Target Fund to keep it simple.

Mandrale
Posts: 164
Joined: Mon Jun 11, 2012 2:55 pm

Re: 25 Years Old - New Job - 401k Advice

Post by Mandrale » Thu Jul 11, 2013 2:49 pm

TheQuahs wrote:Thanks for the response! I have the $30,000 in there because I've been doing a lot of home improvements over the last couple years to raise the LTV on my house to get out of MIP. Now that I've refinanced the improvements have slowed down, so I will probably take the advice and start to pay down the student loans.

For the IRA, would you suggest a Roth or traditional?
Should I put in the $5,500 max right away or contribute monthly?
Also, any advice on a good Vanguard IRA option? I'm thinking that since my 401k doesn't have good bond/international options, I may try to make up for those in the Vanguard IRA. But I'm also not opposed to just doing a Target Fund to keep it simple.
The Roth/Traditional debate always comes up -- I personally decided to choose the Roth IRA, reason being that I already have my 401(k), so to sort of "even it out" tax-wise, I went with the Roth. On top of that, it's nice knowing that in the future (hopefull) any money that I would need from it (if any) would come out tax free.

As far as how to put the $5,500 in, that's all preference. For the last 3 years I had always just done a 1-time lump sum of $5,000. This year, however, I am contributing $460/mo. for more of a Dollar Cost Average (DCA) approach. It's really just preference on what you would like to do most.

For a good IRA option, it really depends how active you want to manage your portfolio. For me, in my Roth IRA, I just chose the Target Retirement 2040 fund for simplicity, which is a little bit early for my age, but I feel like I will be able to retire early at the rate I'm going, so I don't mind it being a little bit more conservative. However, for my 401(k), I had to more slice-and-dice due to fund options, so that becomes a bit more complicated. I would personally choose a set-it-and-forget-it mentality so you don't have to constantly worry about rebalancing. Worth the tiny bit higher ER in my opinion. Being that you're 25, you would think that you have ~40 years of working left, so maybe a Retirement 2045 or 2050 would be a good option.

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ruralavalon
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Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: 25 Years Old - New Job - 401k Advice

Post by ruralavalon » Thu Jul 11, 2013 5:03 pm

Welcome to the forum :) .

Glad you're starting early on your saving and investing.
TheQuahs wrote:Age: 25
Desired Asset Allocation: 85% Stocks /15% Bonds (??)
Desired International Allocation: 15% (??)

Your desired asset allocation is not far from what I would suggest. I would suggest a minimum of 20 - 25 % in bonds, please see -- Wiki article link: Asset Allocation ; and 2011 Regression, % Stocks vs Age . I would suggest a minimum of 20% of stocks in international, "[a]llocating 20% of an equity portfolio to non-U.S. stocks would have captured . . . about 84% of the maximum possible benefit", please see -- Considerations for investing in non-U.S. equities, p. 6 .

TheQuahs wrote:1. From reading the forum and wiki’s, I’m leaning toward the conclusion that my 401k does not have the greatest options. Since the employer 3% is automatic, do any of the options above make it worthwhile to put my whole contribution in the 401k?
2. If I don't put it all in the 401k, what should I do with the rest of my contribution? Roth IRA?
3. I have roughly $3,000 in a 401k from my last job. I don't remember the funds off hand, but I do know it had a higher ER. Should I roll this over into my current 401k?
4. Instead of maxing out a 401k/Roth IRA, should I focus on paying off my student loans?
The 401k contains some nice moderate cost funds, even though not low cost by Boglehead standards. The overall quality of the funds offered is good, in my opinion. In my opinion, the quality of the options makes it worthwhile to put most of your personal contributions into the 401k. I would suggest rolling over your old 401k into this one, to lower costs and to preserve your future option to use a backdoor Roth IRA if your earnings ever get too high to qualify for regular Roth IRA contributions and you still want to do Roth investing. Wiki article link: Backdoor Roth IRA . I would suggest opening an IRA, and contributing the max of $5.5k/yr.

When you don't have a "match" in a 401k, the general investing priority for most people and situations is:
1. Pay off high interest debt;
2. Roth IRA or deductible Traditional IRA up to maximum contribution limit, depending on personal circumstances and eligibility;
3. Company plan up to maximum contribution limit
4. Taxable Investing.
Wiki article link: Prioritizing investments ; and Wiki article link: Paying down loans versus investing . Your student loan burden is relatively small, and at a 05% interest rate its certainly worth considering diverting some of your investing money to more rapid pay off of that loan, but its kind of a "toss-up" at that rate in my opinion. So in your case, where the employer contribution is automatic no matter what you do -- max the IRA, then as much as you can in the 401k up to the max of $17.5k/yr, and divert some money to accelerated payoff of the student loan if you wish.

There is a lot of debate on the Roth vs Traditional IRA issue, I tend to feel that most people are better off with a traditional deductible IRA. Please see -- "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k), " TFB post, The Case Against Roth 401(k) ; and Wiki article link, discussing many factors to consider one of which is "f you are in the 15% tax bracket, prefer a Roth", Traditional versus Roth .


Here is an portfolio idea to consider, using the asset allocation I suggested with a simple 3 fund format ( Wiki article link: Three-fund portfolio ; and Forum Discussion, The Three Fund Portfolio ), that is well diversified and at moderate cost, and which will become lower in cost over the years as you contribute to an IRA.

401k ($3k from rollover of old 401k; adds $7.5k/yr; employer contribution $2.3k/yr; total $9.8k/yr = 64% of new contributions)
20%, Great-West Bond Index Fund (MXBIX), er = 0.50% <= intermediate term bond index fund, performs similarly to Barclays US Agg Bond , MXIBX, on Morningstar .
15%, American Funds EuroPacific Gr R5 (RERFX), er = 0.55% <= a good actively managed international fund, covers large companies in both developed and emerging markets, RERFX, on Morningstar .
65%, Nuveen Equity Index (FEIIX), er = 0.44% <= an S&P 500 index fund, reduce this as VTSMX grows in the IRA, so that total of VTSMX and FEIIX equals your intended domestic stock allocation

IRA @ Vanguard ($00; adds $5.5k/yr = 36% of new contributions)
00%, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX), er = 0.17%, <= more diversified than S&P 500, an even lower rexpense ratio of 0.05% when you get to Admiral Class Shares within about 2 years, the best opportunity to substantially lower your overall expense ratio by how you choose in the IRA .

Finally, I suggest you do some reading, one or two books from the General Investing section of this rreading list -- Investing Books . This will help you understand the reasons for the suggestions, and help you manage the portfolio in future years.

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

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