23 year old maxing out tax advantaged accounts...now what?

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Workaholic
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23 year old maxing out tax advantaged accounts...now what?

Post by Workaholic » Tue Oct 29, 2013 2:32 pm

I posted once before on this site and it was very helpful as a starting point. I've been slowly trying to figure out what I should do with my money and how to best go about saving for my future.

Age: 23 single male no kids
Salary: Appx. $50K/ year with a likely increase in 2014 to $55K.
Emergency Funds: Yes- 3 months of expenses
Debt: $26,000 car loan at $450/ month at 0%/ 60 months. Student loans of $25,000 at 3.2%/ year. No credit card debt.
State of residence: Iowa
Tax bracket: 15% federal, 7% state.
Tax filing status: Single
Desired Asset Allocation- 100% equities
No current international allocation

Current retirement assets:

Taxable Accounts:

Vanguard Taxable Account:
$10K in VSIAX (Small Cap Value Index- Admiral)
$10K in VMVAX (Mid Cap Value Index- Admiral)
$4K in VGHCX (Health Care Fund- Investor)

Scottrade Brokerage Account:
$6K in various individual stocks...sort of my "play" money.

Edward Jones
$2500 in AMCPX (American Funds AMCAP Fund Class A)
$3500 in ANEFX (American Funds New Economy Fund Class A)

My 401K at New York Life, employer match of 4% when I contribute 8%. Currently I'm maxing my 401K out with a 35% annual contribution rate. My funds:

SCETX (Ridgeworth Small Cap Value Equity Fund I Shares) 50% of contribution
VINIX (Vanguard Institutional index Fund) 10% of contribution
ARTMX (Artisan Mid Cap Fund) 20% of contribution
PRNHX (T. Rowe Price New Horizons Fund) 20% of contribution

Other funds available in 401K plan:

PRFDX (T. Rowe Price Income Equity Fund)
SEEGX (JP Morgan Large Cap Growth Select)
GCMAX (Goldman Sachs Mid Cap Value Fund Class A)
REREX (American Funds- EuroPacific Growth Fund Class R4)
PRIDX (T. Rowe Price International Discovery Fund )
DEBTD (Blackrock US Debt Index Fund)

Plus a slew of target retirement funds that are of no interest to me at my age.

ROTH IRA

$6K in VTSMX (Vanguard Total Stock Market Index). Started it this year, fully funded and will be fully funded each year afterwards.

I'm trying to figure out my financial plan for 2014 and would like some advice as what I should do now.

With my contribution rate to my 401K, I will max it out around Nov/Dec of next year. I will also max out my ROTH IRA at the beginning of next year. So these two would amount to $23,000.

After maxing out my tax advantaged accounts, my plan is to contribute an additional $500 per month into one of my Vanguard index funds in a taxable account...sound logical? I could use it to pay down my student loan debt or my car loan but with interest rates being 0% on one and only 3.2% of the other, it seems like a much better idea to invest that excess cash for the potential of long term (30+ year) gains.

I have also ordered the Bogleheads Guide to Investing in hopes of furthering my financial knowledge.

What should I be concentrating on at my age to prepare myself for an early retirement (hopefully)?

I'm currently in 100% equities because having bonds at my age doesn't seem to be necessary. I understand how bonds can be used to stabilize a portfolio but when I have 30+ years to recoup losses, I should be going towards maximizing my portfolio versus stabilizing it correct?

Anything else I'm missing? Any advice on things I could/should change?

Thank you in advance!!

I hope to be a participating member of this community in the future.
Chris

Busting Myths
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Busting Myths » Tue Oct 29, 2013 2:44 pm

Workaholic wrote: What should I be concentrating on at my age to prepare myself for an early retirement (hopefully)?
Chris
I would say to invest in yourself (professional development / additional education). You are putting a lot of money away which is great but you do not want to put everything into the market (eggs all in one basket). Your Rate of Return will be much higher than the market return if you develop your skill set and gain valuable work experience.

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Nosferatu
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Nosferatu » Tue Oct 29, 2013 2:48 pm

You have a negative net worth. Pay off the debt.

bta15
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by bta15 » Tue Oct 29, 2013 2:49 pm

It sounds like you are doing a phenomenal job saving at a high rate.

I would probably move all 401k holding to VINIX because the ER is so low.

Then use move all other holdings (except RIRA) to Vanguard taxable and use that to hold your international equities (and small cap tilt).

I would also second the other poster that it might be good to spend money on yourself. Maybe that is just paying off debt. Having a year's salary over your head in debt could weigh heavy, I personally would knock out the school loan with extra money (even though interest rate is low).

Workaholic
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Workaholic » Tue Oct 29, 2013 3:07 pm

Busting Myths wrote:
Workaholic wrote: What should I be concentrating on at my age to prepare myself for an early retirement (hopefully)?
Chris
I would say to invest in yourself (professional development / additional education). You are putting a lot of money away which is great but you do not want to put everything into the market (eggs all in one basket). Your Rate of Return will be much higher than the market return if you develop your skill set and gain valuable work experience.
I'm currently working on that. There are quite a few opportunities for advancement in my company and I've already jumped up a pay grade since starting in August.
Nosferatu wrote:You have a negative net worth. Pay off the debt.
Not really the answer I need. Yes I know I have debt but most kids my age DO have debt. Frankly since the interest rate on my new car is 0% and my student loans are only 3.2%, doesn't it make more sense to continue paying the minimum amount on both because according to the time value of money, every dollar I pay now is worth more than a dollar I'll be paying in 4 years down the road. I currently pay about $450/ month on my car loan and $420/ month on my student loan. I'd much rather invest that extra $500 to get the compound interest that will accumulate over the next 30+ year versus the short-term view of being debt-free in less time.
bta15 wrote:It sounds like you are doing a phenomenal job saving at a high rate.

I would probably move all 401k holding to VINIX because the ER is so low.

Then use move all other holdings (except RIRA) to Vanguard taxable and use that to hold your international equities (and small cap tilt).

I would also second the other poster that it might be good to spend money on yourself. Maybe that is just paying off debt. Having a year's salary over your head in debt could weigh heavy, I personally would knock out the school loan with extra money (even though interest rate is low).
I thought about moving everything to VINIX but currently VINIX is lagging behind in performance of the other three funds in my 401K. If everything were equal, I'd gladly move it all but I hate to give up some performance for a lower ER.

I'm leery of international equities...isn't the old saying true that when the US sneezes, the rest of the world catches a cold?

I feel like I'm a compulsive saver...it's just who I am. The ONE big purchase I made was I bought a brand new 2014 Ford Fusion loaded with all the tech goodies as a graduation present to myself for landing a good job, finishing college, etc. I know a new car is never a good financial decision but it's a treat to myself and you can't quantify that.

Busting Myths
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Busting Myths » Tue Oct 29, 2013 3:18 pm

Workaholic wrote:
Nosferatu wrote:You have a negative net worth. Pay off the debt.
Not really the answer I need. Yes I know I have debt but most kids my age DO have debt. Frankly since the interest rate on my new car is 0% and my student loans are only 3.2%, doesn't it make more sense to continue paying the minimum amount on both because according to the time value of money, every dollar I pay now is worth more than a dollar I'll be paying in 4 years down the road. I currently pay about $450/ month on my car loan and $420/ month on my student loan. I'd much rather invest that extra $500 to get the compound interest that will accumulate over the next 30+ year versus the short-term view of being debt-free in less time.


I feel like I'm a compulsive saver...it's just who I am. The ONE big purchase I made was I bought a brand new 2014 Ford Fusion loaded with all the tech goodies as a graduation present to myself for landing a good job, finishing college, etc. I know a new car is never a good financial decision but it's a treat to myself and you can't quantify that.
To each his own but buying a car half your salary with only 3 months living expenses is really stretching yourself. Remember that leverage goes both ways....if the economy tanks again how stable is your job?

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4nursebee
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by 4nursebee » Tue Oct 29, 2013 3:48 pm

Change the "play money" account to being your Roth. If you want to play with stocks you can grow them without paying any taxes on them now. Use the play money account to get out of debt or add to reserves.

if you don't turn out profitable, don't throw good money after bad.

My guess is that the opportunity cost of losing via market gambling at such a young age is great as you could miss out on safe coumpound growth over many years.

Did I see your play account is at ST? Ignore the bozos on their forum, they have no clue.
4nursebee

BW1985
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by BW1985 » Tue Oct 29, 2013 3:58 pm

Workaholic wrote: I know a new car is never a good financial decision but it's a treat to myself and you can't quantify that.
I wouldn't say never. If you can pay for a new car in cash and still have fully funded EF's & Retirement accts then I see no issue with new cars. If you can get a family, or friends, discount then all the better. 0% financing without the money upfront is OK too in my opinion, as long as your job is relatively secure and you have an EF.

The new Fusion is a nice car though, good choice. I bought a '13 Escape at the beginning of the year and love it.
Last edited by BW1985 on Tue Oct 29, 2013 4:02 pm, edited 1 time in total.
"Squirrels figured out how to save eons ago. They buried acorns. Some, they dug up, for food. Others, they let to sprout, in new oak trees. We could learn from squirrels." -john94549

DGE
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by DGE » Tue Oct 29, 2013 3:59 pm

Busting Myths wrote:
Workaholic wrote:
Nosferatu wrote:You have a negative net worth. Pay off the debt.
Not really the answer I need. Yes I know I have debt but most kids my age DO have debt. Frankly since the interest rate on my new car is 0% and my student loans are only 3.2%, doesn't it make more sense to continue paying the minimum amount on both because according to the time value of money, every dollar I pay now is worth more than a dollar I'll be paying in 4 years down the road. I currently pay about $450/ month on my car loan and $420/ month on my student loan. I'd much rather invest that extra $500 to get the compound interest that will accumulate over the next 30+ year versus the short-term view of being debt-free in less time.


I feel like I'm a compulsive saver...it's just who I am. The ONE big purchase I made was I bought a brand new 2014 Ford Fusion loaded with all the tech goodies as a graduation present to myself for landing a good job, finishing college, etc. I know a new car is never a good financial decision but it's a treat to myself and you can't quantify that.
To each his own but buying a car half your salary with only 3 months living expenses is really stretching yourself. Remember that leverage goes both ways....if the economy tanks again how stable is your job?
A 3-month emergency fund at 23 while living a home is not a bad thing. There is no need to have a 6-9 month emergency fund at your age, when you're living at home and your only expenses are food, play money, car payment and student loans. As you get older and you have more responsibilities (mortgage, family, etc.), then a 6-9 month emergency fund makes sense. Plus you have the money in your brokerage account to pull from if things REALLY hit the fan.

I think you're doing just fine in your current situation. In fact, I think you're doing great. However, you shouldn't be completely opposed to the idea of some sort of fixed income/bond allocation in your investments (even if it's just 10% for now). Also, there is nothing wrong with being a compulsive saver. You said it yourself, you're rewarding yourself by having a nice car. There is NOTHING wrong with that - don't let anybody on this board tell you there is.

You're saving a significant amount of your income. The only thing I would be weary about is that tying up such a significant amount of your income in investments will make it very difficult for you to save up enough money to make a down payment on a house in a few years.

Stan Dup
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Stan Dup » Tue Oct 29, 2013 4:05 pm

Max your emergency fund to 12 months of expenses. You could also use the excess there to save for your first house.

Your argument about the time value of money is a good one. But you are already maxing out on savings. If you put new money in a taxable account then you have to add the texes to the cost of that loan. That 3.2% is now higher and you have to earn more to make up for it. After you are finished with the emergency fund get rid of that loan.

(BTW: thanks for buying that car)
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti

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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by MoonOrb » Tue Oct 29, 2013 4:11 pm

Workaholic wrote:I thought about moving everything to VINIX but currently VINIX is lagging behind in performance of the other three funds in my 401K. If everything were equal, I'd gladly move it all but I hate to give up some performance for a lower ER.

I'm leery of international equities...isn't the old saying true that when the US sneezes, the rest of the world catches a cold?

I feel like I'm a compulsive saver...it's just who I am. The ONE big purchase I made was I bought a brand new 2014 Ford Fusion loaded with all the tech goodies as a graduation present to myself for landing a good job, finishing college, etc. I know a new car is never a good financial decision but it's a treat to myself and you can't quantify that.
I'd consider challenging three assumptions it looks like you're making here:

(1) Bonds are unnecessary
(2) The most-recently better performing fund is the best fund, regardless of ER
(3) International funds are unnecessary

(1) I hear what you're saying about bonds, but I've tried to think about it this way: at some future point I will want bonds in my portfolio, right? But it's not like I can choose the optimal time to go all in with the amount of bonds I'll want at, say, age 50. When I get to age 50, maybe it will be like 2002 or 2009 and equities will have plummeted. This would be pretty okay if I already had some bonds--I'd just rebalance. But if I didn't have any, I'd...what? Sell a bunch of my equities that are now off 30%(or whatever)? It seems to me the best way to ensure that I have the right amount of bonds in my portfolio at the time that I need them is to accumulate them gradually: start with some amount, then increase that proportion to put myself on a path to being where I want to be over time. So if I were 23 and I knew at age 55 I wanted to be 60/40, I'd consider starting out with something in the 15%-20% range and then, every year when rebalancing, increase my bond % to stay on the path.

(2) For this I'd just say do some more reading. It's a pretty central Boglehead tenet that, over time, ER's cannibalize your returns. Smarter people than me have written really compelling entire chapters about this, but the quick and dirty version is that the funds that seem to be performing well now are likely to revert to the mean, and when they do so, the extra bite that the ER takes will really deplete performance over the long haul. Because these funds reduce their gains by the amount of the ER, they have to outperform lower cost funds by that difference just to be equal. The likelihood of consistent outperformance is so low that the winning strategy is to choose the lowest possible ER, all else being equal (and when I mean all else being equal, I mean when you are comparing a large cap fund to a large cap fund, or a total international fund to a total international fund, etc). The idea that you can somehow choose a fund that, over the long term, will outperform its peers is an idea that Boglehead-ism more or less wholly rejects. This isn't a cult and you're free to do what you please, but the perspective shared on these boards is largely going to see things from this perpspective.

(3) Regarding international funds, it's true that there's a correlation between US equities and international equities, but the correlation isn't perfect. There are lots of years when international equity funds have performed differently than US equity funds. It's this imperfect correlation that makes it so important to hold both. In years that US equities are soaring and internationals are down, you'll rebalance into the internationals, and vice-versa. In any event, over the long term you can expect both to rise.

At the end of the day, you are doing so many critical things well that if you keep doing those things you will have a secure financial future. A high savings rate, living below your means, maximizing tax-advantaged investing, and diversifying by investing in mutual funds go a long, long way toward achieving your goals. But we believe around here that you can do even better.

Also, you're right about the amount of debt you have. It's fine. Don't pay it off. Why would you pay off a zero-interest loan, anyway? The other interest rate is also very low, as you mentioned. If you *want* to pay off the loans because it makes you feel nice, then that's a fine decision too. But I don't think it's the optimal decision.
Last edited by MoonOrb on Tue Oct 29, 2013 7:05 pm, edited 2 times in total.

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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by niceguy7376 » Tue Oct 29, 2013 4:25 pm

As for my recommendations:
For this year, With upto 70% of your salary contributed to 401K and a IRA contribution, I assume you wont have much left. Pay the minimum on the loans.
Starting from next year, spread your 401k contributions across the whole year and beef up your emergency funds to a bit more to act as safegaurd in worst case of economy going south / job loss to pay for the loans.

What type of Account is your EdJones? Did you pay any loads on those when you bought? Can you combine that with your VG taxable account?
Could you list the ERs for your funds in your 401K?
Scottrade does $7 and I assume it is the same at VG I suppose. Maybe you need 50K in total assets to get that rate.
Where is your ROTH located? If you can get both ROTH and Scottrade to VG, you are looking at $36K right now.
I prefer to have all the accounts at one place.

As for the options, if you dont want to do Bonds or Int Stock, then you can buy VINIX.
If you are not interested in Intl, then why are you investing in PRNHX (New Horizons Fund)?
You are currently highly invested in Small Cap.

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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by alexfrey » Tue Oct 29, 2013 6:19 pm

I'd echo what others have said about your small-cap tilt being aggressively large. It is true that (historically at least) small companies have generated somewhat higher returns over time, but there are long stretches where the reverse is also true (like the 90s). Google "fama and french size factor" for more.

This also explains why the Vanguard index fund is the underperformer of the group recently. Small caps have been on a run, so your small-cap funds are going to be outperforming your larger-cap ones, regardless of ERs. But that can reverse quickly in the future. I can't find a link at the moment, but in valuation terms small-caps are also now trading at a multi-year high premium to larger-caps.

I would shift out of some of those small-cap funds into a broad international fund like VGTSX. There is reason to think European stocks in particular will not be correlated entirely with US stocks in the future, given the unique issues facing that continent... And they are also much cheaper on long-term measures.

Workaholic
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Workaholic » Tue Oct 29, 2013 7:05 pm

Ill address each reply more thoroughly tomorrow but I do want to say I appreciate everyone taking the time to reply and help someone young realize what they need to do to secure a financially independent future. I will get all the expense ratios for the 401k ERs tomorrow as well.

Before I receive the Bogleheads Guide to Investing, I wanted to get a grasp on where I need to be.

To answer a few questions:

My ROTH IRA is at Vanguard.
My Edward Jones Account was part of an inheritance I received many years ago and I just haven't transferred the assets to Vanguard yet.
My 401k will not be maxed out for 2013 as I wasn't able to start contributing until September and I had a few other bills to take care of. Starting 2014, it will be maxed out yearly.

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Watty
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Watty » Tue Oct 29, 2013 7:13 pm

23 year old maxing out tax advantaged accounts...now what?
Build up a 6 month emergency fund. This is not just for bad things, often having an ample emergency fund will allow you to take advantage of unexpected good opportunities.

Pay off the student loan. Paying it off isn't an option, only a question of when.

Save up to be able to payoff the car whenever you want, then start saving up to pay cash for your next car.

Start saving up a down payment to buy a house some day. There is no hurry and there are lots of good reasons not to buy one now but you may want to buy one when you are in your 30's so if you start saving up a modest amount now then you will be all set then.

TurtleHerder
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by TurtleHerder » Tue Oct 29, 2013 8:28 pm

Workaholic wrote:
Frankly since the interest rate on my new car is 0%...
This is never the whole story.

Your lienholder requires you to carry collison and comprehensive coverage, correct? How much less would your insurance cost you if you were able to drop collision and comprehensive and go with liability coverage only*? Most likely quite a bit. Now imagine if that extra insurance premium was instead interest going to the bank and back out an effective interest rate (after all, it shouldn't matter to you whether you're paying a bank or an insurance company, that money is gone either way). That is what that 0% loan is really costing you.

The numbers for a $26k, 0% loan are below:

Code: Select all

Additional Insurance          Effective Rate
($, monthly)                      (%, yearly)
10                                     0.94
20                                     1.86
30                                     2.77
40                                     3.67
50                                     4.55
75                                     6.71
100                                    8.81
150                                   12.83
I have no idea what your particular insurance situation might be because there are way too many variables. But if you're paying less that 50/month for collision/comprehensive at your age I'd be flabbergasted. I wouldn't be surprised if that number were closer to 100. That means it's way more likely you're effectively paying somewhere in the neighborhood of 4-8% for that car loan. IMO that makes it a no-brainer to pay down the car loan ASAP so you can drop the expensive insurance coverage. Of course purely from the numbers would be even better to just sell the thing and buy something more sensible, but if you feel you're getting enough value out of driving a nicer car to justify the extra expense I can't really argue.


* - "But don't I need collision and comprehensive anyway?" No, absolutely not. If you can't afford to replace your vehicle out of savings or cash flow, you can't afford that vehicle, period.

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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by LadyGeek » Tue Oct 29, 2013 8:57 pm

Welcome! Consider that if the car was totalled, the OP would have to pay-off the balance of the loan and then buy a new car. I'd say to keep the insurance coverage as-is for peace of mind. The student loans are higher priority.
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by TurtleHerder » Tue Oct 29, 2013 9:28 pm

LadyGeek wrote:Welcome! Consider that if the car was totalled, the OP would have to pay-off the balance of the loan and then buy a new car. I'd say to keep the insurance coverage as-is for peace of mind. The student loans are higher priority.
Thanks! Long time lurker, first time poster, etc...

I would agree that he should carry the insurance as long as he has the loan. As long has he has that loan he doesn't even have the option of downgrading his insurance. It's almost certainly a requirement written right into the loan documents.

That's my whole point. People like to think they're being clever playing arbitrage games with their low interest auto loans but they're ignoring the fact that even at 0% interest there are significant strings attached to financing that you do not have to deal with paying cash. I would still maintain that he needs to be driving a fully-paid-for vehicle sooner than later. If he can't stomach the thought of downgrading the insurance as soon as the car is paid for, then it is simply too much car for him and the smart move would be to sell it ASAP and pay cash for something cheaper.

And of course we're all sort of sidestepping the fact that taking on a $26k liability when you already have a sub-zero net worth is the real elephant in the room anyway. Although I financed a brand new car myself in my younger and dumber days (at 7% mind you :oops: ) so I can't be too hard on him for that. But you can bet the first thing I did when I had the lien release in hand was call the insurance company and go liability only.

Workaholic
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Workaholic » Tue Oct 29, 2013 9:32 pm

TurtleHerder wrote:
Workaholic wrote:
Frankly since the interest rate on my new car is 0%...
This is never the whole story.

Your lienholder requires you to carry collison and comprehensive coverage, correct? How much less would your insurance cost you if you were able to drop collision and comprehensive and go with liability coverage only*? Most likely quite a bit. Now imagine if that extra insurance premium was instead interest going to the bank and back out an effective interest rate (after all, it shouldn't matter to you whether you're paying a bank or an insurance company, that money is gone either way). That is what that 0% loan is really costing you.

The numbers for a $26k, 0% loan are below:

Code: Select all

Additional Insurance          Effective Rate
($, monthly)                      (%, yearly)
10                                     0.94
20                                     1.86
30                                     2.77
40                                     3.67
50                                     4.55
75                                     6.71
100                                    8.81
150                                   12.83
I have no idea what your particular insurance situation might be because there are way too many variables. But if you're paying less that 50/month for collision/comprehensive at your age I'd be flabbergasted. I wouldn't be surprised if that number were closer to 100. That means it's way more likely you're effectively paying somewhere in the neighborhood of 4-8% for that car loan. IMO that makes it a no-brainer to pay down the car loan ASAP so you can drop the expensive insurance coverage. Of course purely from the numbers would be even better to just sell the thing and buy something more sensible, but if you feel you're getting enough value out of driving a nicer car to justify the extra expense I can't really argue.


* - "But don't I need collision and comprehensive anyway?" No, absolutely not. If you can't afford to replace your vehicle out of savings or cash flow, you can't afford that vehicle, period.
I wouldn't ever go without comprehensive insurance anyway. It's about $35 more each month over just liability and for $400/ year, it's well worth the peace of mind.

Who can really afford to simply REPLACE a new vehicle out of cash flow? I think statements like that make me a bit defensive because a car is such a large purchase that very few can simply replace it at the drop of a hat.

I think my Fusion IS a sensible vehicle as it's rated well, safety is top notch, and I average 30 mpg. What's not sensible about a midsized sedan?

Workaholic
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Workaholic » Tue Oct 29, 2013 9:39 pm

TurtleHerder wrote:
LadyGeek wrote:Welcome! Consider that if the car was totalled, the OP would have to pay-off the balance of the loan and then buy a new car. I'd say to keep the insurance coverage as-is for peace of mind. The student loans are higher priority.
Thanks! Long time lurker, first time poster, etc...

I would agree that he should carry the insurance as long as he has the loan. As long has he has that loan he doesn't even have the option of downgrading his insurance. It's almost certainly a requirement written right into the loan documents.

That's my whole point. People like to think they're being clever playing arbitrage games with their low interest auto loans but they're ignoring the fact that even at 0% interest there are significant strings attached to financing that you do not have to deal with paying cash. I would still maintain that he needs to be driving a fully-paid-for vehicle sooner than later. If he can't stomach the thought of downgrading the insurance as soon as the car is paid for, then it is simply too much car for him and the smart move would be to sell it ASAP and pay cash for something cheaper.

And of course we're all sort of sidestepping the fact that taking on a $26k liability when you already have a sub-zero net worth is the real elephant in the room anyway. Although I financed a brand new car myself in my younger and dumber days (at 7% mind you :oops: ) so I can't be too hard on him for that. But you can bet the first thing I did when I had the lien release in hand was call the insurance company and go liability only.
Sub zero net worth? I thought I was doing quite well for my age. It's not like I have piles of credit card debt, gambling debt, or an upside down mortgage payment. I have student loans that allowed me to get the job I have and a car that I can keep for a while. If I can afford to pay both these payments plus maxing out my tax deferred accounts and contribute to a taxable fund, how am I doing poorly?

You live in a completely different world than me and I don't appreciate the condescending tone. I'm trying to get reasonable advice to help me build a comfortable best egg, not to have someone tell me I'm doing everything wrong and that they're better than me because they can buy a new car with cash and have no debts. Sorry I'm 23, can't do everything on my income.

mlipps
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by mlipps » Tue Oct 29, 2013 9:46 pm

Workaholic wrote:
TurtleHerder wrote:
Workaholic wrote:
Frankly since the interest rate on my new car is 0%...
This is never the whole story.

Your lienholder requires you to carry collison and comprehensive coverage, correct? How much less would your insurance cost you if you were able to drop collision and comprehensive and go with liability coverage only*? Most likely quite a bit. Now imagine if that extra insurance premium was instead interest going to the bank and back out an effective interest rate (after all, it shouldn't matter to you whether you're paying a bank or an insurance company, that money is gone either way). That is what that 0% loan is really costing you.

The numbers for a $26k, 0% loan are below:

Code: Select all

Additional Insurance          Effective Rate
($, monthly)                      (%, yearly)
10                                     0.94
20                                     1.86
30                                     2.77
40                                     3.67
50                                     4.55
75                                     6.71
100                                    8.81
150                                   12.83
I have no idea what your particular insurance situation might be because there are way too many variables. But if you're paying less that 50/month for collision/comprehensive at your age I'd be flabbergasted. I wouldn't be surprised if that number were closer to 100. That means it's way more likely you're effectively paying somewhere in the neighborhood of 4-8% for that car loan. IMO that makes it a no-brainer to pay down the car loan ASAP so you can drop the expensive insurance coverage. Of course purely from the numbers would be even better to just sell the thing and buy something more sensible, but if you feel you're getting enough value out of driving a nicer car to justify the extra expense I can't really argue.


* - "But don't I need collision and comprehensive anyway?" No, absolutely not. If you can't afford to replace your vehicle out of savings or cash flow, you can't afford that vehicle, period.
I wouldn't ever go without comprehensive insurance anyway. It's about $35 more each month over just liability and for $400/ year, it's well worth the peace of mind.

Who can really afford to simply REPLACE a new vehicle out of cash flow? I think statements like that make me a bit defensive because a car is such a large purchase that very few can simply replace it at the drop of a hat.

I think my Fusion IS a sensible vehicle as it's rated well, safety is top notch, and I average 30 mpg. What's not sensible about a midsized sedan?
The price. You could have gotten all those features in a 5 year old Toyota Corolla for $8k.

MoonOrb
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by MoonOrb » Tue Oct 29, 2013 9:48 pm

Oh for pete's sakes. His savings rate is through the roof. He's living way beneath his means. He's killing it here. If he wants to drive a new car instead of an old Corolla, he can drive a new car. Let's not miss the forest for the trees.

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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by LadyGeek » Tue Oct 29, 2013 9:53 pm

Back on topic, are you comfortable with 100% equities? We normally recommend 80 / 20 (stocks / bonds), as there's not much difference in performance and it lets you sleep better at night.

If you are going to 100% equities because the interest rates are low right now, I suggest looking a little more long term and reconsider your decision.

(Let's consider the car discussion closed.)
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

BerkeleyChris
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by BerkeleyChris » Tue Oct 29, 2013 9:56 pm

I think you are doing really great. In my opinion, the best thing you can do right now is make financial choices that increase your comfort/ability to take smart, calculated career risks. That might mean building up some more savings so you can move out and take a job in a different geographical location and/or paying down debt so you have less monthly obligations to worry about. Without knowing your profession, I am guessing that you are at a point in your life where you are on a steep learning curve, and, if so, you are likely going to have to move around a few times in the next decade to get your salary to reflect what you are worth. A low overhead and financial reserves will help you be comfortable in making those kind of choices.

-Chris

TurtleHerder
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by TurtleHerder » Tue Oct 29, 2013 10:10 pm

Nobody's being condescending. You asked for advice and you're getting it.

Of course you're doing great. You're pretty much winning the game by your savings rate alone. But as of right now, you are in debt. Your liabilites outweigh your assets. Buying a brand new car when you're already in debt is not the optimal move. Sorry if that's not what you want to hear, but it is simply a fact. Will it ruin you? Of course not. We've already established that you're ahead of the game. You are on the path to get out of debt. That's obviously a good path to be on. That path is just a bit longer than it would be if you drove something cheaper for the time being.

As far as who can pay cash for a car... I'm going to guess most of the people who have posted on this thread. Keep saving, advancing in your career and investing and YOU will be that guy before too long.

lostInFinance
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by lostInFinance » Tue Oct 29, 2013 11:06 pm

I lean toward putting more money toward liquid savings. 1) If you ever got laid off, that three month emergency fund could be exhausted before you found another job, especially if you had to get health insurance on the private market. 2) You should be saving for a 20% house down payment and 3) if you get married in the next 2-4 years, a wedding+honeymoon+engagement rings can be quite expensive.

Workaholic
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Workaholic » Wed Oct 30, 2013 4:25 am

Here's a list of the available 401K options with their ER:

SCETX (Ridgeworth Small Cap Value Equity Fund I Shares) 50% of contribution (1.24% ER)
VINIX (Vanguard Institutional index Fund) 10% of contribution (0.04% ER)
ARTMX (Artisan Mid Cap Fund) 20% of contribution (1.33% ER)
PRNHX (T. Rowe Price New Horizons Fund) 20% of contribution (0.80% ER)

Other funds available in 401K plan:

PRFDX (T. Rowe Price Income Equity Fund) (0.68% ER)
SEEGX (JP Morgan Large Cap Growth Select) (0.91% ER)
GCMAX (Goldman Sachs Mid Cap Value Fund Class A) (1.15% ER)
REREX (American Funds- EuroPacific Growth Fund Class R4) (0.85% ER)
PRIDX (T. Rowe Price International Discovery Fund ) (1.23% ER)
DEBTD (Blackrock US Debt Index Fund)

I guess I never really paid too close of attention to the ER's of the funds in my 401K, chalk it up to a newbie mistake. But even with the higher ER, wouldn't a Small Cap or Mid Cap fund be likely to outperform VINIX over 30+ years to make up for the 1% ER?
MoonOrb wrote:
Workaholic wrote:I thought about moving everything to VINIX but currently VINIX is lagging behind in performance of the other three funds in my 401K. If everything were equal, I'd gladly move it all but I hate to give up some performance for a lower ER.

I'm leery of international equities...isn't the old saying true that when the US sneezes, the rest of the world catches a cold?

I feel like I'm a compulsive saver...it's just who I am. The ONE big purchase I made was I bought a brand new 2014 Ford Fusion loaded with all the tech goodies as a graduation present to myself for landing a good job, finishing college, etc. I know a new car is never a good financial decision but it's a treat to myself and you can't quantify that.
I'd consider challenging three assumptions it looks like you're making here:

(1) Bonds are unnecessary
(2) The most-recently better performing fund is the best fund, regardless of ER
(3) International funds are unnecessary

(1) I hear what you're saying about bonds, but I've tried to think about it this way: at some future point I will want bonds in my portfolio, right? But it's not like I can choose the optimal time to go all in with the amount of bonds I'll want at, say, age 50. When I get to age 50, maybe it will be like 2002 or 2009 and equities will have plummeted. This would be pretty okay if I already had some bonds--I'd just rebalance. But if I didn't have any, I'd...what? Sell a bunch of my equities that are now off 30%(or whatever)? It seems to me the best way to ensure that I have the right amount of bonds in my portfolio at the time that I need them is to accumulate them gradually: start with some amount, then increase that proportion to put myself on a path to being where I want to be over time. So if I were 23 and I knew at age 55 I wanted to be 60/40, I'd consider starting out with something in the 15%-20% range and then, every year when rebalancing, increase my bond % to stay on the path.

(2) For this I'd just say do some more reading. It's a pretty central Boglehead tenet that, over time, ER's cannibalize your returns. Smarter people than me have written really compelling entire chapters about this, but the quick and dirty version is that the funds that seem to be performing well now are likely to revert to the mean, and when they do so, the extra bite that the ER takes will really deplete performance over the long haul. Because these funds reduce their gains by the amount of the ER, they have to outperform lower cost funds by that difference just to be equal. The likelihood of consistent outperformance is so low that the winning strategy is to choose the lowest possible ER, all else being equal (and when I mean all else being equal, I mean when you are comparing a large cap fund to a large cap fund, or a total international fund to a total international fund, etc). The idea that you can somehow choose a fund that, over the long term, will outperform its peers is an idea that Boglehead-ism more or less wholly rejects. This isn't a cult and you're free to do what you please, but the perspective shared on these boards is largely going to see things from this perpspective.

(3) Regarding international funds, it's true that there's a correlation between US equities and international equities, but the correlation isn't perfect. There are lots of years when international equity funds have performed differently than US equity funds. It's this imperfect correlation that makes it so important to hold both. In years that US equities are soaring and internationals are down, you'll rebalance into the internationals, and vice-versa. In any event, over the long term you can expect both to rise.

At the end of the day, you are doing so many critical things well that if you keep doing those things you will have a secure financial future. A high savings rate, living below your means, maximizing tax-advantaged investing, and diversifying by investing in mutual funds go a long, long way toward achieving your goals. But we believe around here that you can do even better.

Also, you're right about the amount of debt you have. It's fine. Don't pay it off. Why would you pay off a zero-interest loan, anyway? The other interest rate is also very low, as you mentioned. If you *want* to pay off the loans because it makes you feel nice, then that's a fine decision too. But I don't think it's the optimal decision.
My rationale for NOT holding bonds in my portfolio is that I have 30-40 years to let my money ride the market. I realize bonds can stabilize a portfolio but at my age, is it really necessary to give up potential growth? My other issue is the bond market right now is not very appealing and with the Fed playing with interest rates, I don't see any value in tying up my capital in bonds. Yes, maybe in 10-20 years I'll add bonds to stabilize a (hopefully) substantial portfolio but at this time, I don't see a compelling reason to hold them.

I do understand what you're saying about international equities and until I re-read my first post, I forgot about the New Horizons fund in my 401K. I guess that's about as internationally exposed as I am at this point. I could see myself purchasing some of the Total International or maybe a more focused international fund investing heavily in Europe or China.

I guess the whole point of my thread is to get me pointed in the right direction to accumulate wealth as I grow in both my career and salary. I want to have a clearly defined and focused path to follow versus how I'm sort of all over the place with my investing.

Thank you for all the replies so far, I appreciate them!

lrak
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by lrak » Wed Oct 30, 2013 5:22 am

Here's my advice.

IF you have a Roth 401k available I'd switch to investing in that now. IMO it makes sense to have 25-50% of your final retirement accounts in Roth for tax/income flexibility reasons. Your income will likely go up over time pushing you into higher tax brackets. If your income grows and you have kids, using a traditional 401k later may reduce your AGI enough to use a front door Roth IRA, deductable IRA, or get the full child tax credit so you could potentially save more than your marginal tax rate on the contribution later. So I'd contribute as much as you can to a Roth now. I wish I had a Roth 401k option was I was in my 20s.

If you don't have a Roth 401k option, pay down the student loan as fast as you can. It is a 100% safe investment with a guaranteed 3.2% return. You won't find CDs paying close to that these days. A nine month emergency fund could be $4k smaller without that monthly payment. A mortgage payment will be a lot less stressful in the future without that $420/mo student loan drain.

Even if you pay off the loan, I'd keep comprehensive coverage on cars till they are worth $3-5k. I don't want to deal with another insurance company trying to get out of paying after their insured hits me. I don't want to have to sell stocks to buy a car when hit by an uninsured person. I don't want to have to sue an autobody shop if they fix my car wrong after a crash. Insurance takes care of all of that for me. Liability only coverage on a new car doesn't make sense to me.

Carl53
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Carl53 » Wed Oct 30, 2013 5:53 am

My two cents.

Use taxcaster or other tax software to ascertain where you are dropping into the 15% bracket. Then reduce the pretax 401k contributions by enough so that you can just get below the 25% bracket. Long term you likely will never be below the 15% bracket, but possibly higher in retirement so that saving 15% today could cost you more then. Move the reduced 401k contributions to a Roth 401k if possible. If you want to be the most precise in using up all of your bracket, reduce the 401k contributions an extra thousand or two. Reduce your early Roth IRA by a like amount. Before you file your taxes, use your tax program to determine how much of the last few thousand you would add to your Roth and how much to a TIRA.

I suspect that you will get a credit for the Student Loan on your taxes for the next few years. Run your tax program to see how much you would save to see if you want to pay it off.

I cannot recommend staying with EJ for your taxable investments. You seem astute enough to be doing the investing on your own. So move those investments to Vanguard or Fidelity.

I second those that would encourage you to boost your emergency fund. Furthermore, I suggest that you start paying yourself the equivalent of an extra car payment to the fund. That way down the road when you want to buy your next car you can pay cash. Also building up cash will position you to avoid PMI when you decide to purchase a home.

VINIX looks like the clear winner.

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Riceman
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Riceman » Wed Oct 30, 2013 6:56 am

Creating an investment policy statement is a good way to put everything together after you've finished your financial reading, come up with your strategy, and made broad goals. It's supposed to be helpful in a bear market to prevent one from losing his head, so if you're 100% equities, that might make it even more helpful for you. There's more info on creating an IPS in the wiki, as well as some samples, but I'll share mine as I'm closer to your end in age (30) and asset allocation (100% equities, with tilts, but also with an early pension from the federal government).

Investment Policy Statement


Investment Philosophy: "Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

Time Horizon:
33 Permanent employee status at current position
48 Retirement; purchase house and/or start business
50 Pension begins

Asset Allocation: Equity holding should be diversified across small and large, international and domestic (50-50), and REITs. Fixed-income assets should be diversified across the TSP G Fund, TIPs, and total bond market.

Until age 38, portfolio should be 100% equities with tilts to small, value, and emerging markets. From age 38, portfolio should be (20 + N)% fixed-income, where N= (age – 38).

Evaluate against benchmark, S&P 500, at 33, and every 5 years thereafter.

Funds & Accounts: Use only low-cost index funds or ETFs. Shelter tax-inefficient funds in tax-advantaged accounts to reduce tax drag.*
*Fixed-income assets should initially be held in taxable accounts to allow flexibility for purchasing a house and/or starting a business.

Detailed Current Allocation: [45% U.S., Domestic]
20% Small Value, U.S.
15% Large Cap, U.S.
10% Small Cap, U.S.

[45% International]
25% Emerging Market
10% International, Total
10% International, Small Cap

10% REIT

Other considerations:

-No market timing.
-Update Assets and Liabilities quarterly.
-Rebalance yearly during Q4.
-Alternate harvesting gains/losses in 15% bracket.
-Contribute maximum to IRAs during Q1.
-Purchase taxable funds when excess cash (total cash minus necessary cash flow) exceeds $3,000.00.
-Automatic contributions to TSP, no adjustments until Q4 rebalancing.
-Simplify. No unscheduled portfolio checks. No market timing.

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neurosphere
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by neurosphere » Wed Oct 30, 2013 7:07 am

Workaholic wrote: I thought about moving everything to VINIX but currently VINIX is lagging behind in performance of the other three funds in my 401K. If everything were equal, I'd gladly move it all but I hate to give up some performance for a lower ER.
I know this has been mentioned already by some, but don't want it to get lost among the other recommendations. Workaholic, you need to spend some time learning why your statements above make no sense.

You would be equally right had you said "[Fund X] is currently lagging the other three funds, which is why I choose it, because that means it will beat those other funds in the future".

You are young, and have a lot of time to learn about investing. You are doing great for now. But make sure you take some time to investigate the fallacy of your assumption as quoted above before too much time passes.

NS
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

investor1
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by investor1 » Wed Oct 30, 2013 7:26 am

Do you have cash savings beyond the 3 month EF? What happens if your car breaks down? Do you have money to pay for it? What happens when the 0% interest goes away? Do you have money to pay it off? I think you should increase your cash holdings. You should be in a position to pay off the car when the interest rate rises. You should also be in a position to pay for your next car without going into debt. There's nothing wrong with a treat once in a while, but you already stated you understand why going into debt for a car is a bad idea. Make sure you have the money to treat yourself.

Are you saving for a house? I assume you'll buy one eventually. It takes a while to save for one.

Beyond that, use a taxable account, I-bonds, TIPS, consider an HSA, and get out of debt.

khalestorm
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by khalestorm » Wed Oct 30, 2013 9:08 am

Good job OP. Lots of good quality varying advice in this thread, which is really just icing on the cake for you. You already have a solid foundation. My 2 cents is build a 12 month emergency fund, then pay off all student loan debt, then the car (unless the interest rate on the loan increases in the coming years). After that, save for a downpayment on a home and put the left over in a taxable. Oh yea, don't forget to have fun along the way. Take an international trip :)

SHB
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by SHB » Wed Oct 30, 2013 9:46 am

I'm sure this was already mentioned but there has been a lot of text. I'm just curious, do you live at home?

Just rough numbers but this is what I'm seeing

50,000-17,500=32,500 (401k)
32,500-800=31,700 (student loans interest only)
31,700*.76=24,100 (taxes)
24,100-5,500=18,600 (roth IRA)
18,600-5,400=13,200 (car)

That leaves roughly 13,200 for shelter, food, clothing for an entire year. The reason I bring this up is (and forgive me if I'm wrong) at 50K per year at 23 this looks to be your first job out of college, maybe the parental gravy train is still coming, maybe it just stopped, either way I think you may be saving in such a way that you are forgetting about the basic necessities to get by, especially in accounts where the money goes in and cannot be redeployed. If you are just starting out on your own or if the parental support suddenly stops you may be in for a suprise.

Anyways, it just seems like a very little amount to live off, even if it is in Iowa.

dublin
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by dublin » Wed Oct 30, 2013 10:22 am

Just wanted to pipe in with my two cents of support - you're doing exceptionally well, and don't worry too much about the seemingly outlandish recommendations to have no debt as of tomorrow, cash to buy a new car whenever you please, a 10-year emergency fund, etc - you're doing great, and if you keep doing what you're doing and learning along the way by reading this forum and a good book or two, you'll be just fine. I'm in my 20s and have been focusing on Boglehead-ism for quite a while now, and guess what, I still have car debt at 0%, student loans with low rates, and a much smaller emergency fund than people in this thread are recommending (unless you include my Roth IRA contributions). Life happens, everyone does things a bit differently, and as long as you make good decisions for your own circumstances, you'll get where you want to go.

Savvy
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Savvy » Wed Oct 30, 2013 11:43 am

SHB wrote:I'm sure this was already mentioned but there has been a lot of text. I'm just curious, do you live at home?

Just rough numbers but this is what I'm seeing

50,000-17,500=32,500 (401k)
32,500-800=31,700 (student loans interest only)
31,700*.76=24,100 (taxes)
24,100-5,500=18,600 (roth IRA)
18,600-5,400=13,200 (car)

That leaves roughly 13,200 for shelter, food, clothing for an entire year. The reason I bring this up is (and forgive me if I'm wrong) at 50K per year at 23 this looks to be your first job out of college, maybe the parental gravy train is still coming, maybe it just stopped, either way I think you may be saving in such a way that you are forgetting about the basic necessities to get by, especially in accounts where the money goes in and cannot be redeployed. If you are just starting out on your own or if the parental support suddenly stops you may be in for a suprise.

Anyways, it just seems like a very little amount to live off, even if it is in Iowa.
Health insurance?

Luke Duke
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Location: Texas

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Luke Duke » Wed Oct 30, 2013 1:25 pm

Image

Even the most aggressive target date fund has a bond allocation.

SHB
Posts: 112
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by SHB » Wed Oct 30, 2013 1:40 pm

Savvy wrote:
SHB wrote:I'm sure this was already mentioned but there has been a lot of text. I'm just curious, do you live at home?

Just rough numbers but this is what I'm seeing

50,000-17,500=32,500 (401k)
32,500-800=31,700 (student loans interest only)
31,700*.76=24,100 (taxes)
24,100-5,500=18,600 (roth IRA)
18,600-5,400=13,200 (car)

That leaves roughly 13,200 for shelter, food, clothing for an entire year. The reason I bring this up is (and forgive me if I'm wrong) at 50K per year at 23 this looks to be your first job out of college, maybe the parental gravy train is still coming, maybe it just stopped, either way I think you may be saving in such a way that you are forgetting about the basic necessities to get by, especially in accounts where the money goes in and cannot be redeployed. If you are just starting out on your own or if the parental support suddenly stops you may be in for a suprise.

Anyways, it just seems like a very little amount to live off, even if it is in Iowa.
Health insurance?
Indeed,
Internet, fule for car, cell phone, laundry, to add to the list

Workaholic
Posts: 53
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Workaholic » Wed Oct 30, 2013 3:46 pm

SHB wrote:I'm sure this was already mentioned but there has been a lot of text. I'm just curious, do you live at home?

Just rough numbers but this is what I'm seeing

50,000-17,500=32,500 (401k)
32,500-800=31,700 (student loans interest only)
31,700*.76=24,100 (taxes)
24,100-5,500=18,600 (roth IRA)
18,600-5,400=13,200 (car)

That leaves roughly 13,200 for shelter, food, clothing for an entire year. The reason I bring this up is (and forgive me if I'm wrong) at 50K per year at 23 this looks to be your first job out of college, maybe the parental gravy train is still coming, maybe it just stopped, either way I think you may be saving in such a way that you are forgetting about the basic necessities to get by, especially in accounts where the money goes in and cannot be redeployed. If you are just starting out on your own or if the parental support suddenly stops you may be in for a suprise.

Anyways, it just seems like a very little amount to live off, even if it is in Iowa.
After taxes, health insurance, and my 401k deduction, my weekly paycheck is about $440. So about $1800 month of which $440 goes toward my car payment, $410 goes toward my school loans leaving me with about $950 to live on for the month for other bills. After paying for fuel, food, car insurance, I have about $500 left over each month as excess income.

I have cash reserves of about $3000 NOT in my emergency fund and ill couple that amount with my tax returns this year to fully fund my ROTH.

No ROTH 401k option at my work unfortunately.

I like the idea of an investment policy statement.

pingo
Posts: 2594
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by pingo » Wed Oct 30, 2013 5:28 pm

I was hoping to get a better understanding of your 401k options by looking at your earlier thread, but I see that it is less complete than this one. Thank you for being more thorough here.

Past performance does not guaranty future results. Most 401k plans choose their lineup based on the prior 10 year performance, but the best performers of the last 10 years this year are not necessarily going to be make the list of best 10-year performers next year, and they definitely won't be the same best 10-year performers in ten years. Fund outperformance is random in nature, but not persistent. It's why we say outperformance is period dependent and it's why an S&P 500 fund like VINIX has beat the combined returns of all other U.S. Large Blend funds over longer periods despite the fact that you may not perceive anything special when you look at it. For example, charting VINIX for the maximum possible period shows that it took 7 years for VINIX to barely begin to part ways and "outperform" the remaining market of LB funds:

Image

And if you had started investing only 10 years ago, it still would have taken even longer for VINIX to begin to distinguish itself from the rest of the marketplace of funds.

Image

Differing points of departure, same relative lack of spectacularity for a significant period of time. The benefits of indexing may not be perceptible in a year or even a decade, but over decades, well, look at the first chart again. 10 years from now, VINIX will still look less than spectacular when compared to whatever future top performers make the list, and it would also take a similarly long period of time for new investors to begin to see it part ways to their benefit.

If you'd like to read some interesting discussions that are related, albeit not concerning your plans funds, here's are a couple links:

These funds have beaten the Vgd Idxs over 10 yrs
Indexes Beat Active Funds Again in S&P Study

More comments:

It would be nice the see the expense ratios and any available tickers for the 401k funds.

Also, please solve the following equation: $3500 + 50% = ? (I usually can't add $ + %, but for some reason you list dollar amounts for every account and then only refer to percents in the 401k. Please explain.)

Also, do you have the 401k holdings in the same exact amounts as the 401k contributions? (You only indicate 401k contribution percentages, not how you have allocated your holdings. Please clarify.)
Workaholic wrote:Desired Asset Allocation- 100% equities
Workaholic wrote:I have 30+ years to recoup losses, I should be going towards maximizing my portfolio
Workaholic wrote:I'm leery of international equities...isn't the old saying true that when the US sneezes, the rest of the world catches a cold?
Why don't international equities have 30 years to recoup, too? If there's a cold going around, and the U.S. catches it and spreads it around, why does that make international bad and the U.S. gets a pass? Risk and reward are inseparable.

I like the suggestions to build more emergency savings and to work getting rid of interest-charging debt, although it's nice that the rates are so low.

For extra retirement savings, be sure to look at your 401k Plan Document and the 401k website to find out whether or not you can make Backdoor Roth contributions via your 401k. Does the 401k allow after-tax contributions plus the ability to regularly take distributions/withdrawals of (only) the after-tax contributions? I am not referring to Roth 401k contributions (which are also after-tax), rather a separate way to save after-tax money inside the 401k in addition to the Traditional/Roth 401k contribution limit of $17,500/year. (If you don't find the option, call and ask, but it's best to find it in writing, in case CS misses it.) Here are 4 links talking about 401k after-tax contributions: here, here, here and here.

If your 401k allows regular in-service withdrawals/distributions of elective after-tax contributions to your employer plan, you can have them directly rolled over to a Roth account where they will be tax-free forever. They do not affect Roth IRA contribution limits. (If in-service withdrawals of the after-tax money are not allowed on a regular basis, then it is not a desirable option, but please let us know if this is the case, regardless.)

MoonOrb
Posts: 959
Joined: Thu Jan 24, 2013 6:58 pm

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by MoonOrb » Wed Oct 30, 2013 5:40 pm

I think you're doing well, and I'd like to add that there are certain things that a lot of us pretty much take for gospel around here that you haven't embraced yet. I'm not saying there is some sort of Boglehead Purity Test that you need to pass, but it's effectively taken for granted around here that:

-index funds are preferred to non-index funds
-we don't time the market or chase performance
-low expense ratios beat high expense ratios all else being equal
-it's critical to allocate among assets that aren't highly correlated (ie, hold domestic equities, bonds, and international equities)
-we aim to come close to holding the "whole market" not just particular sectors (ie, we wouldn't invest in say, a China fund)

This is, to me, all sort of "Investing 201" stuff. You're already crushing Investing 101, where you learn to buy and hold, invest in mutual funds instead of individual stocks, max out tax advantaged accounts, and live beneath your means. But bear in mind that the vast majority of responses you're going to get around here are from folks who've all ingested this "201" stuff.

I think your next step, before you do anything else, is homework. And you say you're going to do this--so great. Because you have two choices here--you can keep going the way you are going, and if you do, you'll do better than most investors. Or, you can examine some of the things you're hearing in this thread and consider making some changes. My best guess is that you will eventually come around to the Boglehead point of view, at least mostly. And if you're like all of us, you'll wish you had done it sooner.

To sort of address some of the things you brought up:

I guess I never really paid too close of attention to the ER's of the funds in my 401K, chalk it up to a newbie mistake. But even with the higher ER, wouldn't a Small Cap or Mid Cap fund be likely to outperform VINIX over 30+ years to make up for the 1% ER?

A small cap or mid cap fund may indeed outperform a total stock market fund over 40 years. So if you were thinking of choosing a small cap index fund with a low ER, then we would just talk about your asset allocation, tolerance for risk, and how reasonable to expect it is that you won't sell a bunch of stuff off when your highly volatile small cap funds decline in double digit percents for a few years in a row, which they inevitably will over the 40 years you plan to hold them. But you're not considering a small cap index fund--you're considering an active fund, with its higher costs that will eat at its return. So if you are going to invest in a small cap fund, at least make it a small cap index fund. Read the books I recommended, the wiki, the Bogleheads guide, etc. for more information on why this is the case.

In any event, if your goal is to have a portfolio tilted toward small caps, then purchase those small cap funds in your Roth or taxable accounts and use your 401k to load up on VINIX with its miniscule ER.

Now, I still maintain that you shouldn't just dump everything in your small cap fund and say "Well in 40 years it will be worth a lot so I can just call it a day" since how are you going to know, in 40 years, whether the small cap fund is going to be up 20% that year or down 20% that year? If it's down 20%, is that really the year you're going to do what you claim you're going to do and buy a bunch of bonds? I think you're setting yourself up for unnecessary risk this way, and for that reason I maintain the best plan is to get in the entire market now and gradually adjust your proportions as you age. Otherwise you'll be perpetually guessing when the best time is to get out of the AA you hold and into a more conservative one.

tl;dr: you're doing great, but read the Bogleheads guide, study the wiki, pick up one of Jack Bogle's books and you'll be happy with yourself if you approach them with an open mind.

pingo
Posts: 2594
Joined: Sat Sep 19, 2009 8:24 pm

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by pingo » Wed Oct 30, 2013 6:05 pm

^ Great post. I'm glad you jumped in to make those clarifications.

My brain is acting a bit randomly right now, but I'll still add the following, in case it makes any sense:

In a choice between a low cost fund like VINIX and an expensive, say 1% ER Small Cap fund, most Bogleheads would pick VINIX because the 1% ER is likely to eat any outperformance that may or may not actually happen for the duration of your investments, but it will definitely be riskier.

In a choice between a low cost Small Cap Index Fund and and and expensive Small Cap fund, most Bogleheads, again, would go with the index fund.

kdub2008
Posts: 22
Joined: Wed Jul 10, 2013 9:05 pm

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by kdub2008 » Wed Oct 30, 2013 7:14 pm

Nosferatu wrote:You have a negative net worth. Pay off the debt.
+100

I'm also your age and make just a sliver more than you in income. In the past 12 months I've paid off $25,000 of student debt. Why? Because your income is your greatest wealth building tool. The way you blew off the suggestion to pay off debt is immature especially when you compare your opinion to a number of the richest people in the world. I'll have my debt paid off in 10 months and from that point on for the rest of my life, every dime will go into my pocket and nobody else's.

Proverbs 22:7 "The rich rules over the poor, And the borrower becomes the lender's slave"

madbrain
Posts: 5027
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by madbrain » Wed Oct 30, 2013 7:34 pm

Workaholic wrote: $6K in various individual stocks...sort of my "play" money.
Liquidate those when you get a chance and consolidate to index funds. It's not worth your time with a small portfolio to own individual stocks.
Edward Jones
$2500 in AMCPX (American Funds AMCAP Fund Class A)
$3500 in ANEFX (American Funds New Economy Fund Class A)
The ERs are too high on those 2 funds. Liquidate and convert to index funds.
My 401K at New York Life, employer match of 4% when I contribute 8%. Currently I'm maxing my 401K out with a 35% annual contribution rate. My funds:

SCETX (Ridgeworth Small Cap Value Equity Fund I Shares) 50% of contribution
VINIX (Vanguard Institutional index Fund) 10% of contribution
ARTMX (Artisan Mid Cap Fund) 20% of contribution
PRNHX (T. Rowe Price New Horizons Fund) 20% of contribution
The ER on SCETX and ARTMX are way too high. PRNHX is high too.
Other funds available in 401K plan:

PRFDX (T. Rowe Price Income Equity Fund)
SEEGX (JP Morgan Large Cap Growth Select)
GCMAX (Goldman Sachs Mid Cap Value Fund Class A)
REREX (American Funds- EuroPacific Growth Fund Class R4)
PRIDX (T. Rowe Price International Discovery Fund )
DEBTD (Blackrock US Debt Index Fund)
All the fund have high ERs , except for DEBTD - I couldn't find the ER on that one.
It should be under 0.30% for a bond fund. If not, change your 401k election to put 100% in VINIX.

Since you are in a low tax bracket, it is questionable whether investing the max in the pretax 401k is the best choice for you.
You said there was no Roth 401k option, unfortunately.
You may want to dial down the 401k pre-tax contribution a little bit, and invest more in taxable instead.
You need more emergency funds as well. You can harvest losses in taxable also which you can't do in a 401k.
If your 401k bond option is too expensive, maybe contribute to a muni bond fund for your state in your taxable account.
Plus a slew of target retirement funds that are of no interest to me at my age.
You mean there isn't one that's 40 years out ?
After maxing out my tax advantaged accounts, my plan is to contribute an additional $500 per month into one of my Vanguard index funds in a taxable account...sound logical? I could use it to pay down my student loan debt or my car loan but with interest rates being 0% on one and only 3.2% of the other, it seems like a much better idea to invest that excess cash for the potential of long term (30+ year) gains.
Pay the debt . The order is up to you but there are 2 main strategies - either pay the loan with the highest interest first, or the loan with the lowest balance. The first one minimizes interest, the second method optimizes cash flow.
I'm currently in 100% equities because having bonds at my age doesn't seem to be necessary. I understand how bonds can be used to stabilize a portfolio but when I have 30+ years to recoup losses, I should be going towards maximizing my portfolio versus stabilizing it correct?
You may want to look at the data I posted in
http://www.bogleheads.org/forum/viewtop ... 7#p1840747
about my last 17 years of 401k and how being 100% equities would have done for most of that period.
Surprise - 100% bonds did better than 100% equities for the period 1996 - 2012 with my levels of contributions.
Bonds are not just about stabilizing the portfolio, but also making up for underperformance of stocks.
That said, I still wouldn't go too heavy on bonds, but don't avoid them completely either. Age in bonds is a good method.

User avatar
Riceman
Posts: 213
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Riceman » Thu Oct 31, 2013 3:07 am

kdub2008 wrote:
Nosferatu wrote:You have a negative net worth. Pay off the debt.
+100

I'm also your age and make just a sliver more than you in income. In the past 12 months I've paid off $25,000 of student debt. Why? Because your income is your greatest wealth building tool. The way you blew off the suggestion to pay off debt is immature especially when you compare your opinion to a number of the richest people in the world. I'll have my debt paid off in 10 months and from that point on for the rest of my life, every dime will go into my pocket and nobody else's.

Proverbs 22:7 "The rich rules over the poor, And the borrower becomes the lender's slave"
Disagree. Especially with the judgmental "immature" statement. If the OP hadn't stated his age, would you have said that?

OP has solid mathematical and historical reasons not to pay off very low interest debt. The anti-debt prophets of the financial world often base their arguments on the emotional and/or religious appeal of being debt-free, but the OP seems to have no such concerns..

Workaholic
Posts: 53
Joined: Thu Jul 18, 2013 6:55 am

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by Workaholic » Thu Oct 31, 2013 3:59 am

pingo wrote:^ Great post. I'm glad you jumped in to make those clarifications.

My brain is acting a bit randomly right now, but I'll still add the following, in case it makes any sense:

In a choice between a low cost fund like VINIX and an expensive, say 1% ER Small Cap fund, most Bogleheads would pick VINIX because the 1% ER is likely to eat any outperformance that may or may not actually happen for the duration of your investments, but it will definitely be riskier.

In a choice between a low cost Small Cap Index Fund and and and expensive Small Cap fund, most Bogleheads, again, would go with the index fund.
I see where you're coming from and I agree, I will re-evaluate my 401K today or tomorrow and change my future investments accordingly. I do like to tilt small caps because I believe, in the long term, small caps have the greatest growth potential and therefore I will likely consolidate my 401K from four funds to two- the two being 50% VINIX and 50% being PRNHX with an expense ratio of 0.80%. While VINIX may still hold the ER edge, I believe PRNHX (T. Rowe Price small cap) will be able to outperform VINIX even taking into account the 0.74% higher ER. If my theory is wrong, I can always reevaulate my decision.
madbrain wrote:
Workaholic wrote: $6K in various individual stocks...sort of my "play" money.
Liquidate those when you get a chance and consolidate to index funds. It's not worth your time with a small portfolio to own individual stocks.
Edward Jones
$2500 in AMCPX (American Funds AMCAP Fund Class A)
$3500 in ANEFX (American Funds New Economy Fund Class A)
The ERs are too high on those 2 funds. Liquidate and convert to index funds.
My 401K at New York Life, employer match of 4% when I contribute 8%. Currently I'm maxing my 401K out with a 35% annual contribution rate. My funds:

SCETX (Ridgeworth Small Cap Value Equity Fund I Shares) 50% of contribution
VINIX (Vanguard Institutional index Fund) 10% of contribution
ARTMX (Artisan Mid Cap Fund) 20% of contribution
PRNHX (T. Rowe Price New Horizons Fund) 20% of contribution
The ER on SCETX and ARTMX are way too high. PRNHX is high too.
Other funds available in 401K plan:

PRFDX (T. Rowe Price Income Equity Fund)
SEEGX (JP Morgan Large Cap Growth Select)
GCMAX (Goldman Sachs Mid Cap Value Fund Class A)
REREX (American Funds- EuroPacific Growth Fund Class R4)
PRIDX (T. Rowe Price International Discovery Fund )
DEBTD (Blackrock US Debt Index Fund)
All the fund have high ERs , except for DEBTD - I couldn't find the ER on that one.
It should be under 0.30% for a bond fund. If not, change your 401k election to put 100% in VINIX.

Since you are in a low tax bracket, it is questionable whether investing the max in the pretax 401k is the best choice for you.
You said there was no Roth 401k option, unfortunately.
You may want to dial down the 401k pre-tax contribution a little bit, and invest more in taxable instead.
You need more emergency funds as well. You can harvest losses in taxable also which you can't do in a 401k.
If your 401k bond option is too expensive, maybe contribute to a muni bond fund for your state in your taxable account.
Plus a slew of target retirement funds that are of no interest to me at my age.
You mean there isn't one that's 40 years out ?
After maxing out my tax advantaged accounts, my plan is to contribute an additional $500 per month into one of my Vanguard index funds in a taxable account...sound logical? I could use it to pay down my student loan debt or my car loan but with interest rates being 0% on one and only 3.2% of the other, it seems like a much better idea to invest that excess cash for the potential of long term (30+ year) gains.
Pay the debt . The order is up to you but there are 2 main strategies - either pay the loan with the highest interest first, or the loan with the lowest balance. The first one minimizes interest, the second method optimizes cash flow.
I'm currently in 100% equities because having bonds at my age doesn't seem to be necessary. I understand how bonds can be used to stabilize a portfolio but when I have 30+ years to recoup losses, I should be going towards maximizing my portfolio versus stabilizing it correct?
You may want to look at the data I posted in
http://www.bogleheads.org/forum/viewtop ... 7#p1840747
about my last 17 years of 401k and how being 100% equities would have done for most of that period.
Surprise - 100% bonds did better than 100% equities for the period 1996 - 2012 with my levels of contributions.
Bonds are not just about stabilizing the portfolio, but also making up for underperformance of stocks.
That said, I still wouldn't go too heavy on bonds, but don't avoid them completely either. Age in bonds is a good method.
I maintain the Scottrade account because I enjoy having individual stock holdings. I may liquidate the fund but I will likely use Vanguard's brokerage to own a few individual stock offerings. The bulk of my assets will still be in mutual funds though.

I'm mainly maxing out my 401K because of the tax advantage of keeping me in the 15% bracket versus having to bump up to the 25% bracket for part of my income. I don't see any advantage to contributing money to a taxable account when that money can be easily contributed to a tax-advantaged account. I think you're the first person on this board to recommend NOT maxing out a tax-advantaged account before contributing to taxable. I'm just curious as to why.
Riceman wrote:
kdub2008 wrote:
Nosferatu wrote:You have a negative net worth. Pay off the debt.
+100

I'm also your age and make just a sliver more than you in income. In the past 12 months I've paid off $25,000 of student debt. Why? Because your income is your greatest wealth building tool. The way you blew off the suggestion to pay off debt is immature especially when you compare your opinion to a number of the richest people in the world. I'll have my debt paid off in 10 months and from that point on for the rest of my life, every dime will go into my pocket and nobody else's.

Proverbs 22:7 "The rich rules over the poor, And the borrower becomes the lender's slave"
Disagree. Especially with the judgmental "immature" statement. If the OP hadn't stated his age, would you have said that?

OP has solid mathematical and historical reasons not to pay off very low interest debt. The anti-debt prophets of the financial world often base their arguments on the emotional and/or religious appeal of being debt-free, but the OP seems to have no such concerns..
I'm of the same school of thought as Riceman. If I had credit debt accruing 19% interest, it would be a no-brainer to pay it off ASAP. But with a 0% interest/ 60 month auto loan, my money is better spent being invested. The potential return on an extra $500/ month in 30 years is much greater than the return of paying off a loan that is accruing no interest. In fact....wouldn't I actually be "losing" money if I paid the loan off right now versus just waiting the full 60 months because of inflation making the dollar worth *less* each passing year? As for the school loan, I can see the argument for paying off that loan because it IS accruing (albeit minimal) interest but I *feel* better investing the money knowing that, if need be, I CAN pay the loan off.
MoonOrb wrote:I think you're doing well, and I'd like to add that there are certain things that a lot of us pretty much take for gospel around here that you haven't embraced yet. I'm not saying there is some sort of Boglehead Purity Test that you need to pass, but it's effectively taken for granted around here that:

-index funds are preferred to non-index funds
-we don't time the market or chase performance
-low expense ratios beat high expense ratios all else being equal
-it's critical to allocate among assets that aren't highly correlated (ie, hold domestic equities, bonds, and international equities)
-we aim to come close to holding the "whole market" not just particular sectors (ie, we wouldn't invest in say, a China fund)

This is, to me, all sort of "Investing 201" stuff. You're already crushing Investing 101, where you learn to buy and hold, invest in mutual funds instead of individual stocks, max out tax advantaged accounts, and live beneath your means. But bear in mind that the vast majority of responses you're going to get around here are from folks who've all ingested this "201" stuff.

I think your next step, before you do anything else, is homework. And you say you're going to do this--so great. Because you have two choices here--you can keep going the way you are going, and if you do, you'll do better than most investors. Or, you can examine some of the things you're hearing in this thread and consider making some changes. My best guess is that you will eventually come around to the Boglehead point of view, at least mostly. And if you're like all of us, you'll wish you had done it sooner.

To sort of address some of the things you brought up:

I guess I never really paid too close of attention to the ER's of the funds in my 401K, chalk it up to a newbie mistake. But even with the higher ER, wouldn't a Small Cap or Mid Cap fund be likely to outperform VINIX over 30+ years to make up for the 1% ER?

A small cap or mid cap fund may indeed outperform a total stock market fund over 40 years. So if you were thinking of choosing a small cap index fund with a low ER, then we would just talk about your asset allocation, tolerance for risk, and how reasonable to expect it is that you won't sell a bunch of stuff off when your highly volatile small cap funds decline in double digit percents for a few years in a row, which they inevitably will over the 40 years you plan to hold them. But you're not considering a small cap index fund--you're considering an active fund, with its higher costs that will eat at its return. So if you are going to invest in a small cap fund, at least make it a small cap index fund. Read the books I recommended, the wiki, the Bogleheads guide, etc. for more information on why this is the case.

In any event, if your goal is to have a portfolio tilted toward small caps, then purchase those small cap funds in your Roth or taxable accounts and use your 401k to load up on VINIX with its miniscule ER.

Now, I still maintain that you shouldn't just dump everything in your small cap fund and say "Well in 40 years it will be worth a lot so I can just call it a day" since how are you going to know, in 40 years, whether the small cap fund is going to be up 20% that year or down 20% that year? If it's down 20%, is that really the year you're going to do what you claim you're going to do and buy a bunch of bonds? I think you're setting yourself up for unnecessary risk this way, and for that reason I maintain the best plan is to get in the entire market now and gradually adjust your proportions as you age. Otherwise you'll be perpetually guessing when the best time is to get out of the AA you hold and into a more conservative one.

tl;dr: you're doing great, but read the Bogleheads guide, study the wiki, pick up one of Jack Bogle's books and you'll be happy with yourself if you approach them with an open mind.
I appreciate the very detailed response.

I think Bogleheads, from my research on this forum, seem to differ a bit on some tenets of "Bogle-ism". One being market timing as I've read varying statements that many self-proclaimed Bogleheads hold cash reserves for the sole reason of BUYING when the market is in a correction. Is this not true?

Another statement where I see variance is in Bogleheads simply holding the whole market versus individual pieces of the market. There is quite a bit of discussion of Bogleheads who have a portfolio that is weighted in a particular direction (i.e. small cap value) or some Bogleheads who believe Mid-Caps are a good place to hold substantial capital. Even some Bogleheads weigh toward sector-specific funds such as the healthcare fund or Emerging Markets. Doesn't this go against Bogle-ism or not? I'm just curious, no harm intended by my question.

You are right, I think I've passed Investing 101 with flying colors but Investing 202 is much more nuanced with some ideas and theories that I have yet to fully grasp. I intended to get there at some point though.

madbrain
Posts: 5027
Joined: Thu Jun 09, 2011 5:06 pm
Location: San Jose, California

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by madbrain » Thu Oct 31, 2013 4:38 am

Workaholic wrote: I maintain the Scottrade account because I enjoy having individual stock holdings. I may liquidate the fund but I will likely use Vanguard's brokerage to own a few individual stock offerings. The bulk of my assets will still be in mutual funds though.
You should compute the ER of what those stock holding is. Include all account fees if any, and the commissions. I don't think Vanguard's brokerage is a good one.
If you really must own individual stocks, Scottrade is likely better. But anyway, most people on this board will tell you you aren't likely to outperform the market over the long term. It will however consume more of your time to research your individual issues.
I'm mainly maxing out my 401K because of the tax advantage of keeping me in the 15% bracket versus having to bump up to the 25% bracket for part of my income. I don't see any advantage to contributing money to a taxable account when that money can be easily contributed to a tax-advantaged account. I think you're the first person on this board to recommend NOT maxing out a tax-advantaged account before contributing to taxable. I'm just curious as to why.
OK, I didn't realize the 401k contribution is what dropped you into the 15% tax bracket. If you were in the 15% bracket already, and then contributed to the 401k, it wouldn't make sense, because you are likely to be in a higher tax bracket in retirement. That was the first reason for my statement.

Perhaps you could drop your 401k contribution just to the amount that your taxable income will exceed the 25% tax bracket threshold. But it may be difficult to achieve, as sometimes income will fluctuate as a result of bonuses/raises, termination, of non-wage income and deductions.

Staying in the 15% income tax bracket has the benefit that any qualified dividends you receive in your taxable account are free of federal tax.
But since your taxable portfolio is so small at the moment, this isn't a huge benefit. And by the time your taxable portfolio grows enough for it to matter, the benefit will likely go away as your income is likely to rise.

The second reason is the high ER funds in your 401k plan, which will work against you, and the tax benefit will likely not offset the underperformance you are likely to receive in the plan, except for the VINIX fund with its 0.04% ER (I have the very similar VIIIX fund which has 0.02% ER in my plan).

The last reason is that you lack a sufficient emergency fund, IMO. 3 months is not really sufficient. In an emergency, you won't want to raid your 401k, due to the severe penalties involved. Depending on the emergency, you may not be able to anyway, if you are still with the company. Loans are possible but not with all companies, and in limited amounts.

If you have, say, an investment in muni bonds in your taxable account, which don't have huge price swings, you may consider using them as part of your emergency fund.

MoonOrb
Posts: 959
Joined: Thu Jan 24, 2013 6:58 pm

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by MoonOrb » Thu Oct 31, 2013 3:14 pm

Workaholic wrote: I think Bogleheads, from my research on this forum, seem to differ a bit on some tenets of "Bogle-ism". One being market timing as I've read varying statements that many self-proclaimed Bogleheads hold cash reserves for the sole reason of BUYING when the market is in a correction. Is this not true?

Another statement where I see variance is in Bogleheads simply holding the whole market versus individual pieces of the market. There is quite a bit of discussion of Bogleheads who have a portfolio that is weighted in a particular direction (i.e. small cap value) or some Bogleheads who believe Mid-Caps are a good place to hold substantial capital. Even some Bogleheads weigh toward sector-specific funds such as the healthcare fund or Emerging Markets. Doesn't this go against Bogle-ism or not? I'm just curious, no harm intended by my question.

You are right, I think I've passed Investing 101 with flying colors but Investing 202 is much more nuanced with some ideas and theories that I have yet to fully grasp. I intended to get there at some point though.
Right, I'm not saying there is some universal Boglehead-ist way to do every single thing in our investing lives. There is variance. The reason I mention Boglehead-ism in the first instance is to provide context for the perspective you're likely to encounter here. You're soliciting advice from a group of people who largely believe the types of statements I made. I say "largely" because there are many here who may hold different views, or who may say they believe one thing and act another way. I get that. What I am saying is that the positions you're advancing are contrary to what can broadly be considered Boglehead principles, and this should give you pause, both because you're asking a bunch of Bogleheads for advice and because, hey, maybe there's some truth to be found in here. Yes--when people opt not to invest money and just leave it sitting around hoping to dump it all in the market when the market is down--I agree that is market timing. I don't do it and I wouldn't recommend it. Similarly, if there are people here who include sector specific funds among their investments, I wouldn't recommend that, either and I don't do that.

In any event, it doesn't really get to the issues I'm trying to address, and to say "You say Bogleheads generally do X but in fact some Bogleheads to Y, so I think I'm going to do Z" isn't particularly useful. I realize I may be beating a dead horse here. Sorry. I'd just ask that you approach these issues with an open and flexible mind and make decisions after you have read more widely on the topics rather than digging in and defending your position now.

For instance, you say: I believe PRNHX (T. Rowe Price small cap) will be able to outperform VINIX even taking into account the 0.74% higher ER. If my theory is wrong, I can always reevaulate my decision.

The problem is that you won't know for a few decades, really, whether you're right about this. That's when you're going to reevaluate your decision? In the short term, what you can expect is for PRNHX to be more volatile than VINIX, so in any one year it's not going to be remarkable for it to outperform or underperform VINIX, and even over the course of many years it shouldn't be remarkable for PRNHX to underperform VINIX. Are you going to dump it then?

pingo
Posts: 2594
Joined: Sat Sep 19, 2009 8:24 pm

Re: 23 year old maxing out tax advantaged accounts...now wha

Post by pingo » Thu Oct 31, 2013 5:43 pm

Workaholic wrote:I see where you're coming from and I agree, I will re-evaluate my 401K today or tomorrow and change my future investments accordingly. I do like to tilt small caps because I believe, in the long term, small caps have the greatest growth potential and therefore I will likely consolidate my 401K from four funds to two- the two being 50% VINIX and 50% being PRNHX with an expense ratio of 0.80%. While VINIX may still hold the ER edge, I believe PRNHX (T. Rowe Price small cap) will be able to outperform VINIX even taking into account the 0.74% higher ER. If my theory is wrong, I can always reevaulate my decision.
Seriously, you have most of the most important stuff down. And I cannot tell you how excited I am for your future if you continue to be disciplined.

Keep in mind that the choice isn't necessarily between VINIX and PRNHX. It may be about where you hold your small caps, in which case your choice is more like "to PRNHX or not to PRNHX?"

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Judging by it's stock style diversification, PRNHX appears to be an extremely "growthy" small growth stock fund that has done very well within the realm equities that are often called "the black hole of investing". That said, growth has been in favor of late (which may explain PRNHX looking like it's catching up towards the end of the graph). If I were a past performance kind of a guy, and if I were judging be the above chart rather than a ten-year chart, I'd probably end up pick one of the other winning asset classes through a fund that not only has lower costs, but also isn't subject to manager risk and has a much larger number of holdings for more diversification...in other words I'd feel better with an index fund.

You also have other things to consider. In the Edward Jones account, your Edward Jones "helper" only put 94.25% of your money in those funds. S/he slipped 5.75% into his/her own pocket. I doubt that the returns you think you've had with those funds are the actual returns you've had when considering the initial loss. If you chart those funds, those charts will not show the 5.75% loss because they only chart the growth of money inside the fund. Also, they are less tax-efficient. I'm eye-balling the tax-adjusted returns of those funds at Morningstar.com. It appears that any perceived outperformance of those funds disappears after-taxes when compared to an S&P 500 Fund like VFINX, and the Vanguard Total Stock Market Index Fund (VTSMX), which we tend to prefer for U.S. stocks in a taxable account, did even better.

I think you need to create enough headroom in the 15% tax bracket to allow you to sell those funds and pay 0% capital gains taxes, or tax loss harvest them if there are losses. (Check with an accountant.)

I'm still hoping to have a couple questions answered (unless I missed the responses somewhere):
pingo wrote:Also, please solve the following equation: $3500 + 50% = ? (I usually can't add $ + %, but for some reason you list dollar amounts for every account and then only refer to percents in the 401k. Please explain.)

Also, do you have the 401k holdings in the same exact amounts as the 401k contributions? (You only indicate 401k contribution percentages, not how you have allocated your holdings. Please clarify.)

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Why don't international equities have 30 years to recoup, too? If there's a cold going around, and the U.S. catches it and spreads it around, why does that make international bad and the U.S. gets a pass? Risk and reward are inseparable.
And did you look into whether or not you can make after-tax contributions to your 401k and regularly withdraw/distribute/roll those savings into your Roth IRA?

pingo
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Re: 23 year old maxing out tax advantaged accounts...now wha

Post by pingo » Thu Oct 31, 2013 8:14 pm

I would also encourage you to watch the following video (which Taylor Larimore recently posted) of a Morningstar.com interview of Rick Ferri concerning his research comparing active versus passive portfolios:

Ferri: Why Passive Portfolios Are Better Than Active

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