23 Year Old About to Start Work

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matto
Posts: 140
Joined: Fri Jan 03, 2014 3:51 am

23 Year Old About to Start Work

Post by matto » Mon Jan 13, 2014 1:39 am

Investment Policy Statement
I am 23 years old, about to graduate and start work in March. I have learned a lot from the forum and wiki, but there is always more to learn and I would love advice on my finance plan. This will be the first year I am taking an active role in saving.

1. Until I reach a net worth of 500k, I will invest in 95%+ low cost index funds. After this point, I will re-evaluate whether to diversify into other investments such as property.
2. My portfolio will be 80%+ of the 4-fund portfolio (Domestic Stock, International Stock, Domestic Bonds, Domestic REITs). I will reserve the last 20% for tilts such as Domestic Small Value, International Emerging Markets, etc.
3. I will aim for a roughly 50/50 Domestic/International allotment

Target Percentages, Rebalanced annually through purchasing lagging parts (I intend to avoid any funds with expense ratios over 0.50%)
5% Vanguard Bond Index ETF (BND) (0.10)
10% Vanguard Corporate Intermediate Term ETF (VCIT) (0.12) [to raise the yield of the bond index and tilt away from treasuries]

40% Vanguard Total Stock Market ETF (VTI) (0.05)
5% iShares S&P SmallCap 600 Value. (IJS) (0.3) [5% SV and 5% MicroCap would be ideal, but not available to TDAmer]
5% Vanguard REIT ETF (VNQ) (0.10)

25% Vanguard All-World Ex-US ETF (VEU) (0.15)
5% Vanguard All-World Ex-US Small Value ETF (VSS) (0.20)
5% Vanguard Emerging Markets ETF (VWO) (0.18)

For now, I will plan on making my allocations progressively more conservative as my net worth increases. This means relatively increasing bond allotment. I intend to follow something similar to Rick Ferri's portfolio. I am capable of and willing to taking large amounts of rewardable risk since most of my income earning potential is ahead. I won't sell in a slump since most of my investments will be in tax advantaged accounts. I am also working in a startup so a significant amount of risk is taken in the form of stock options.

Finally, some meaningless targets:
Dec 2015, Age 25: Net Worth 100k. At this point, bonds will be 20% of my portfolio.
Dec 2020, Age 30: Net Worth 500k. At this point, bonds should be approximately 35% of my portfolio.
Dec 2025, Age 35: Net worth 1MM. At this point, bonds will be approximately 50% of my portfolio. Bonds won't increase past this point most likely.

Investment Plan
Emergency funds: A few months living expenses
Debt: 5k with 9 month grace period after graduation before interest accrues. Will pay this off in late 2014.
Tax Filing Status: Single
Salary: 110k
Tax Rate: 25% Federal, 9.3% State
State of Residence: CA
Age: 23
Desired Asset allocation: 80% stocks / 15% bonds by end of 2015
Desired International allocation: ~40% of stocks. I would also like a small tilt towards SV, International Emerging, and International SV.
Current Portfolio: 15k

Roth IRA at TD Ameritrade
4% Cash
16% Vanguard Total Stock ETF (VTI) (ER 0.05%)
11% Vanguard Corporate Intermediate ETF (VCIT) (ER 0.12%)
7% Vanguard REIT ETF (VNQ) (ER 0.10%)
3% Vanguard All-World Ex-US Stock Market ETF (VEU) (ER 0.15%)

Planning to divest from the following (chosen by parents):
24% Fidelity Latin America [Note: this is a non-diversified fund] (FLATX) (ER 1.03%) [Down 30% from purchase]
Stocks:
16% Huaneng Power [Individual Stock] (HNP) [Up 50% from purchase]
10% Ehouse China Holdings [Individual Stock] (EJ) [Up 10% from purchase]
6% Mechel OAO [Individual Stock] (MTL) [Down 90% from purchase]
3% Xinyuan Real Estate Co Ltd [Individual Stock] (XIN) [Down 50% from purchase]


Contributions Planned for 2014
$17.5k 401k (0 match :( ) [If my company has terrible choices such as > 1% ER, I may consider not investing in the 401k at all]
$5.5k Roth IRA
$5k taxable (this is planned to meet 100k goal for 2015)
$5k to kill my student debt

Available funds in 401(k)
Will update when I know in March!

Questions:
1. Should I just immediately dump the above red stocks mutual funds (in the next week or so)? The mutual fund has high ER and the individual stocks aren't of interest to me. I am just concerned about 'locking in the losses'/staying the course. Although in this case it is not 'my course' since I just took stewardship of the portfolio, and so I believe it is sunk cost fallacy.

2. I hope to have spendable investments for my 30s and would like to avoid only use stocks in my taxable account, since these might slump in value for 20 - 100 years. Are there alternatives for a taxable account to something like stock market index funds?

3. Do the tilt choices look sound? (Both the choice of tilt as well as the way I tried to achieve it with ETFs).

Thanks again to this great forum/wiki, it's really already taught me a lot as well as gotten me interested in personal finance.
Last edited by matto on Wed Jan 15, 2014 3:16 am, edited 4 times in total.

Johm221122
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Re: 23 Year Old About to Start Work

Post by Johm221122 » Mon Jan 13, 2014 8:41 pm

Long post, congratulations on investment plan and starting so early.
Question 2 look at ibonds
http://www.bogleheads.org/wiki/I_savings_bonds

As far as 500k "safe" investment(bonds) bonds are not always safe when you consider inflation

Your parents may have lost money in market downturns, but they should be at all time highs in portfolio value now (if they stayed the course)
Welcome to forum
John

matto
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Re: 23 Year Old About to Start Work

Post by matto » Tue Jan 14, 2014 3:11 am

Johm221122 wrote:Long post, congratulations on investment plan and starting so early.
Question 2 look at ibonds
http://www.bogleheads.org/wiki/I_savings_bonds

As far as 500k "safe" investment(bonds) bonds are not always safe when you consider inflation

Your parents may have lost money in market downturns, but they should be at all time highs in portfolio value now (if they stayed the course)
Welcome to forum
John
I've shortened my post to the most important points to make things easier :)

I've been meaning to look at ibonds for tax deferral and inflation protection. However, since I'm still pretty young, I'm not sure I'll be in a low tax bracket when I want to redeem them (< 53), but I will keep them in mind. They do seem like a safe emergency fund (compared to something like TIPs), and almost like an inflation hedged CD.

And my parents certainly benefitted from the recent rise in prices, but they were forced to liquidate in 2008 due to margin calls and so they are not near all time highs. I am very concerned that if the stock market slumps for the next 10 years, they will be in trouble. 100% stocks in an assortment of 10-20 stocks mostly outside the US. Seems dangerous.

Thanks for your reply!

Johm221122
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Re: 23 Year Old About to Start Work

Post by Johm221122 » Tue Jan 14, 2014 9:45 am

If I bonds will become tax headache, either municipal bond funds or cd's (still taxes yearly)

Margin is way too much risk, maybe show your parents this site

Yeah I would dump parents suggested funds asap (no tax pentaly, if Roth IRA)

Your tilts, more than I want but not bad.l'd use treasury bond instead of corporate
John

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DonCamillo
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Re: 23 Year Old About to Start Work

Post by DonCamillo » Tue Jan 14, 2014 9:08 pm

Do you have a reason for wanting a 50/50 Domestic/International split?

50% international seems excessive if you are a native-born, US citizen who plans to live, work and retire in the US. It may be a better idea to invest the majority of your money in the currency that you pay your bills in. Matching income with expenditures is why companies like Honda, Toyota and Mercedes build plants in the US.

Also, International investments often pay taxes that are not recoverable in US tax favored accounts.
Les vieillards aiment à donner de bons préceptes, pour se consoler de n'être plus en état de donner de mauvais exemples. | (François, duc de La Rochefoucauld, maxim 93)

MichaelM24
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Re: 23 Year Old About to Start Work

Post by MichaelM24 » Tue Jan 14, 2014 9:26 pm

Your savings goal is aggressive for you salary.

30k Taxes
20k Housing
25k Retirement
20k Taxable
15k Living

Possible, but not easy. Do you have an emergency fund? If not that first 20k in taxable goes into a checking account.
Last edited by MichaelM24 on Tue Jan 14, 2014 10:15 pm, edited 3 times in total.

MichaelM24
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Re: 23 Year Old About to Start Work

Post by MichaelM24 » Tue Jan 14, 2014 9:28 pm

Do you have a reason for wanting a 50/50 Domestic/International split?
Looks like it's within Vanguards recommended 20-50% recommendation.

matto
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Re: 23 Year Old About to Start Work

Post by matto » Wed Jan 15, 2014 1:35 am

Johm221122 wrote:If I bonds will become tax headache, either municipal bond funds or cd's (still taxes yearly)

Margin is way too much risk, maybe show your parents this site

Yeah I would dump parents suggested funds asap (no tax pentaly, if Roth IRA)

Your tilts, more than I want but not bad.l'd use treasury bond instead of corporate
John
I'll look into municipal bonds/cds for when I start contributing to taxable.

Yes, they know margin is a risk, but they like to gamble. I'm planning a visit in a couple weeks to see them, at which point I'm going to look at their portfolio and try to make recommendations. I have learned not to give unsolicited advice since it doesn't usually work, but I'll make an exception this time.

Thanks for the vote of confidence: I've dumped the mutual fund, and there are limit orders selling the individual stocks.

I realize it seems a bit tilted for a beginner, and simplicity is a beautiful thing. I'll try to think of ways to make it a bit less slice-and-dice.

matto
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Joined: Fri Jan 03, 2014 3:51 am

Re: 23 Year Old About to Start Work

Post by matto » Wed Jan 15, 2014 2:17 am

DonCamillo wrote:Do you have a reason for wanting a 50/50 Domestic/International split?

50% international seems excessive if you are a native-born, US citizen who plans to live, work and retire in the US. It may be a better idea to invest the majority of your money in the currency that you pay your bills in. Matching income with expenditures is why companies like Honda, Toyota and Mercedes build plants in the US.

Also, International investments often pay taxes that are not recoverable in US tax favored accounts.
Thanks for taking a look. And you're right, it is very international, but having money in a different currency will also be a hedge to some extent. Also, I am under the impression that emerging markets are some of the higher risk segments with higher potential rewards, and I am looking to take this risk. I've reworked the percentages to make it a 15% bonds, 50% domestic, 35% international split (so 60/40 domestic/international stocks). I will re-evaluate around 50k and 100k and move the exact percentages a small amount, so I would consider anywhere from 50/50 to 75/25 for domestic/international

I plan to have a taxable account by 2015, at which point I will consider keeping the international stocks there for foreign tax credit.

matto
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Re: 23 Year Old About to Start Work

Post by matto » Wed Jan 15, 2014 2:33 am

MichaelM24 wrote:Your savings goal is aggressive for you salary.

30k Taxes
20k Housing
25k Retirement
20k Taxable
15k Living

Possible, but not easy. Do you have an emergency fund? If not that first 20k in taxable goes into a checking account.
Nice catch. I had also forgotten about the 5k loan I have to pay back by december. The new plan is to invest 0k into taxable. I figure it is be better to set and surpass a good target than to fail at a much higher target. Even a just a maxed 401k + maxed roth ira is about 20% savings, which seems like a good number for now.

30k Taxes
15k Housing (Living in a very cheap apartment but planning to upgrade later in the year, currently ~700/month)
25k Retirement
5k Loan
15k emergency fund
20k Living

This seems very achievable, especially since I got really lucky and found a job which provides breakfast/lunch/dinner during the week.

I have about 5k in my bank account, and so I will add another 15k to it as an emergency fund. Once I have an emergency fund in place, is there any reason to keep it in the checking account or can I put it in ibonds/penfed (after keeping enough in the checking account so I don't have to worry about overdrafts on auto withdrawals)?

pingo
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Re: 23 Year Old About to Start Work

Post by pingo » Wed Jan 15, 2014 10:26 am

I'm glad you're thinking ahead and planning to save. The saving part is crucial.
matto wrote:Contributions Planned for 2014
$17.5k 401k (0 match :( ) [If my company has terrible choices such as > 1% ER, I may consider not investing in the 401k at all]
Let's wait until we have that update of available funds in whatever 401k you'll have. Even with high ERs (to a point), it may be better to invest in your 401k than to save outside of it. It will dictate limitations as to what you can and cannot do tilt-wise.
matte wrote:And you're right, it is very international, but having money in a different currency will also be a hedge to some extent. Also, I am under the impression that emerging markets are some of the higher risk segments with higher potential rewards, and I am looking to take this risk. I've reworked the percentages to make it a 15% bonds, 50% domestic, 35% international split (so 60/40 domestic/international stocks). I will re-evaluate around 50k and 100k and move the exact percentages a small amount, so I would consider anywhere from 50/50 to 75/25 for domestic/international
50/50 is "very international" for most, probably, but it is still reasonable and many on this forum hold as much (or more) internationally, although I personally do not. Larry Swedroe states that market weight, which is currently around 50%, is a starting point for discussing one's international allocation at his firm. At times, market weight has been as high as 64% of all stocks. Personally, I like international being 40% of stocks, as you have now chosen, but because of Mrs. Pingo's preferences, 31% of our stocks are international. That is still sufficient to benefit from the diversifying traits of international equities. It really is up to you.
matte wrote:I plan to have a taxable account by 2015, at which point I will consider keeping the international stocks there for foreign tax credit.
For extra retirement savings (and before you being investing in a regular taxable account), be sure to look at your 401k Plan Document and 401k website to find out whether or not either or both of you can get more of your after-tax savings into your Roth account via the backdoor via the 401k. Will your 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.)
Last edited by pingo on Wed Jan 15, 2014 11:34 pm, edited 1 time in total.

jasg
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Re: 23 Year Old About to Start Work

Post by jasg » Wed Jan 15, 2014 11:39 am

Congrats on starting so early and adopting a live below your means approach.

One mental trick that helped me was to use direct deposit to my taxable savings from each paycheck. As I got raises and bonuses, I had those routed to savings as well. Only monthly living expenses wet to checking.

I occasionally would give myself a raise by increasing the amount to checking, but I was not as generous as my employer.

Don't ignore Roth IRAs, even if you have to 'backdoor' contributions.

matto
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Re: 23 Year Old About to Start Work

Post by matto » Tue Jan 21, 2014 4:27 pm

pingo wrote: For extra retirement savings (and before you being investing in a regular taxable account), be sure to look at your 401k Plan Document and 401k website to find out whether or not either or both of you can get more of your after-tax savings into your Roth account via the backdoor via the 401k. Will your 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.)
Thanks, this is very helpful! I read all those other threads and now it makes sense. If my job allows it, I will definitely max out this option before I consider plain taxable. I really like roth, since 401k is very scary to me (what if I die before I'm 50? etc). At least with roth I can pull out principle for whatever reasons. As I mentioned, a large portion of my salary is in the form of stock options, and if I decide to leave and buy the options I'll need quite a bit of accessible cash to pay taxes and buy the options. The roth should allow this.

matto
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Re: 23 Year Old About to Start Work

Post by matto » Tue Jan 21, 2014 4:30 pm

jasg wrote:Congrats on starting so early and adopting a live below your means approach.

One mental trick that helped me was to use direct deposit to my taxable savings from each paycheck. As I got raises and bonuses, I had those routed to savings as well. Only monthly living expenses wet to checking.

I occasionally would give myself a raise by increasing the amount to checking, but I was not as generous as my employer.

Don't ignore Roth IRAs, even if you have to 'backdoor' contributions.
Definitely agree with the direct deposit savings. Since I'm single/no kids, I think I'll be able to direct deposit a significant amount of every paycheck into savings while not feeling squeezed for cash. Mental tricks are very useful.

I don't plan on forgetting about Roth :). Tax free earnings combined with the ability to take out principle is a very nice deal.

Laura
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Re: 23 Year Old About to Start Work

Post by Laura » Tue Jan 21, 2014 11:09 pm

Remember that even with high expenses and no match in a 401k the likelihood of you staying there for decades is slim. If you pass up the 401k space today then you can never get it back. I would almost certainly take advantage of this tax advantaged space so early in your earnings lifecycle.

Since you will have so many options you need to understand those and plan how to get out of them quickly. Your income will depend on this company and you don't want your retirement and financial future to be entirely dependent on the same thing. Remember Enron.

Laura
The views presented are my own and not necessarily those of the Department of State or the U.S. Government.

matto
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Re: 23 Year Old About to Start Work

Post by matto » Wed Jan 22, 2014 1:37 am

Laura wrote:Remember that even with high expenses and no match in a 401k the likelihood of you staying there for decades is slim. If you pass up the 401k space today then you can never get it back. I would almost certainly take advantage of this tax advantaged space so early in your earnings lifecycle.

Since you will have so many options you need to understand those and plan how to get out of them quickly. Your income will depend on this company and you don't want your retirement and financial future to be entirely dependent on the same thing. Remember Enron.

Laura
Yes... unless the expense ratios are pathetic (> 2%) I plan to max out the 401k.

And as soon as I am eligible to sell the options (company has to IPO and then there's usually a waiting period), I will get rid of them as fast as I can without too large a tax penalty. Although I obviously am a fan of my company, diversification is a good thing.

If I understand correctly, one thing that is scary is that from a tax point of view, it is better to buy options ASAP, since you have to pay income tax on the appreciated value (i.e. a $10 strike price for a $20 stock, I would have to pay income tax on $10 to exercise it).

Since cap gains taxes are significantly less than income, this would indicate it might be a good idea to 'cash in' the options before there is an IPO. Anyway, I have a year until any of the options vest, so I'll cross that road when I get to it.

mnvalue
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Re: 23 Year Old About to Start Work

Post by mnvalue » Wed Jan 22, 2014 1:49 am

matto wrote:what if I die before I'm 50?
Then it doesn't matter whether your money was in a 401k or Roth IRA. ;)

If you're worried about not being able to access your money for early retirement, there are some exceptions/techniques. Substantially Equal Periodic Payments, for example. I'm not well versed in them, since I'm also in my 20s.

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