24, starting new job - advice please!

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Markr867
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Joined: Sat Mar 29, 2014 6:12 am

24, starting new job - advice please!

Post by Markr867 » Sat Mar 29, 2014 7:10 am

Hello! Long time forum lurker, first time poster. I know I don't have the money most of you here do, but I just started a new job with a higher salary (more on that later) and I want to make the most of it.

Emergency funds: $9,500 right now. (This represents about 5 months of expenses. My goal is to have this at $12,000 by the end of the year. I also keep over one month of expenses in my checking account.)
Debt: $18,000 in student loans at 0%. (My parents paid them off and I'm paying them back.)
Tax Filing Status: Single
Tax Rate: 25% Federal, 5.75% State
State of Residence: Virginia
Age: 24
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: Unsure

Current retirement assets

401k - $9,400
100% SSgA S&P 500 Index Fund – Class A (SVSPX?) (0.01% ER)

Roth IRA at Vanguard - $7,300
100% Vanguard Target Retirement 2055 Fund (VFFVX) (0.18% ER)

Total: $16,700

Contributions

New annual Contributions
$3,900 annually into 401k (This is 6% of my salary - the max to get the company match. My employer will match dollar for dollar up to 6%, but I do not get it until the end of the year)
$5,500 annually into Roth IRA

Total: $9,400 annually (with another $3,900 from my employer)

Available funds

Funds available in 401(k)
**One note: The employer fund website does not list tickers for any of these funds. I'm assuming they are the same tickers that can be found on Morningstar, just with lower expense ratios? (Example: SSgA S&P 500 Index Fund on Morningstar has an ER of 0.17%. My fund offers it with an ER of 0.01%.)

I don't mind saying my employer if that helps anyone determine exactly what these funds are. I'm employed by Booz Allen Hamilton.

Stable Value Fund (Cannot find ER)
Bond Fund (Cannot find ER)
SSgA S&P 500 Index Fund – Class A (0.01% ER)
US Structured Research Strategy (0.00% ER)
Russell 1000 Value Index Fund (0.02% ER)
Russell 1000 Growth Index Fund (0.02% ER)
SSgA Russell Small Cap Index Fund - Class A (0.02% ER)
EuroPacific Growth Fund (0.55% ER)
EAFE Stock Index Fund (0.04% ER)
LifePath Retirement Income (0.02% ER)
LifePath 2015 (0.02% ER)
LifePath 2020 (0.02% ER)
LifePath 2025 (0.02% ER)
LifePath 2030 (0.02% ER)
LifePath 2035 (0.02% ER)
LifePath 2040 (0.02% ER)
LifePath 2045 (0.02% ER)
LifePath 2050 (0.02% ER)
LifePath 2055 (0.02% ER)
SSgA Real Asset Fund (0.05% ER)

As mentioned previously, I just started a new job this month. My salary went up by over 50% from my previous job, to $65,000. I haven't even received my first paycheck from this job yet, so I would like to position myself well to take advantage of a pretty decent income for my age. I am single with no kids, so I want to start building up my financial future.

Questions:
1. Is my asset allocation too risky? Not risky enough? I can stomach risk - I understand that the most important number in my retirement account right now isn't the dollar value, it is the number of shares. If the market plummets tomorrow, I will be fine knowing I'm buying shares on sale.
2. Am I taking advantage of the best funds in my 401k? The expenses ratios are VERY low, which is nice, I just want to make sure I'm not making mistakes now.
3. Where is the best place/what are the best funds for money that is not for retirement, but not for use in the next couple of years? It is not listed above, but I currently have $4,300 invested at Vanguard in a taxable account for short/medium-term goals. It is invested in the Vanguard Target Retirement 2025 Fund (VTTVX, 0.17% ER). I really don't know what I want to do with this money. I live in the DC area, so I do not need a car, but would like one in the future. I don't know when I want a house, but eventually I want to buy. I'm going to add $300 each month into this account, and my goal is to have it grow for future use. It was in a Capital One 360 account, but I hated seeing it earn so little when I don't need the money immediately.
4. Overall, how am I doing? Is there anything I should change or improve?

Thank you in advance for any advice!

placeholder
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Joined: Tue Aug 06, 2013 12:43 pm

Re: 24, starting new job - advice please!

Post by placeholder » Sat Mar 29, 2014 2:41 pm

At your tax rate and with the excellent choices available I would not contribute to Roth IRA until you max the 401k.

bondsr4me
Posts: 919
Joined: Fri Oct 18, 2013 7:08 am

Re: 24, starting new job - advice please!

Post by bondsr4me » Sat Mar 29, 2014 2:49 pm

I am really gonna go out on a limb here, and suggest you buy 100 shares of BRK.B and NEVER sell it.
This is in addition to a good BH portfolio that is suitable for YOU.
Don

dharrythomas
Posts: 886
Joined: Tue Jun 19, 2007 4:46 pm

Re: 24, starting new job - advice please!

Post by dharrythomas » Sat Mar 29, 2014 3:32 pm

I think you're fine except that your asset location is more like 96/4 than 90/10. You are also overweight large US growth stocks. You're making a good start. Continue to learn and and you have plenty of time to make necessary adjustments.

Good luck.

Harry

Markr867
Posts: 50
Joined: Sat Mar 29, 2014 6:12 am

Re: 24, starting new job - advice please!

Post by Markr867 » Sat Mar 29, 2014 5:40 pm

Thank you for all of the responses so far.
placeholder wrote:At your tax rate and with the excellent choices available I would not contribute to Roth IRA until you max the 401k.
This one in particular surprised me because it was something I had never even considered. Basically everything I've read online has advocated the Roth IRA for young investors.

I want to make sure I'm understanding the tax deductions correctly.

If I were to put my Roth IRA contributions ($450/month) into my 401k, it would lower my taxable income by $450, correct? Since I am in the 25% bracket, every $1 I put in, I would only be costing me 75 cents, essentially. So my paycheck would be lower by only $337.50, leaving me with $112.50 more in take home pay each month than if I was contributing to the Roth IRA?

If that is true, that might not be a bad idea. I could then contribute that $112.50 into a Roth IRA. I am not sure I want to 100% give up the Roth contributions. I like the idea of having both a 401k and a Roth IRA. A lot can happen in 40 years with tax rates, and I'd like to have money in each.

Nukeboilermaker
Posts: 294
Joined: Mon Apr 11, 2011 9:49 am

Re: 24, starting new job - advice please!

Post by Nukeboilermaker » Sat Mar 29, 2014 6:16 pm

Markr867 wrote:Thank you for all of the responses so far.
placeholder wrote:At your tax rate and with the excellent choices available I would not contribute to Roth IRA until you max the 401k.
This one in particular surprised me because it was something I had never even considered. Basically everything I've read online has advocated the Roth IRA for young investors.

I want to make sure I'm understanding the tax deductions correctly.

If I were to put my Roth IRA contributions ($450/month) into my 401k, it would lower my taxable income by $450, correct? Since I am in the 25% bracket, every $1 I put in, I would only be costing me 75 cents, essentially. So my paycheck would be lower by only $337.50, leaving me with $112.50 more in take home pay each month than if I was contributing to the Roth IRA?

If that is true, that might not be a bad idea. I could then contribute that $112.50 into a Roth IRA. I am not sure I want to 100% give up the Roth contributions. I like the idea of having both a 401k and a Roth IRA. A lot can happen in 40 years with tax rates, and I'd like to have money in each.
That above sounds about right, plus state tax reduction. However, at your age having a Roth IRA can be a BACKUP emergency fund. Info that may be useful is how much do you want to save each year? If you can save 20k vs 10k would change my suggested strategy. For example if you have 15k efund, at the end of each year I would use 5.5k to fund the Roth. If you need it for an efund then remove that contribution (not the gains). If you don't need it then you just took advantage of very valuable and limited tax advantage space.

edit: do you plan to get married soon which will lower your tax bracket? What does your career/income potential look like?
Edit 2: what is your desired student loan repayment plan? If this is a high priority then 401k up to match could be decent. Also are you going to roll the existing 401k into your new 401k or an IRA?

Markr867
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Joined: Sat Mar 29, 2014 6:12 am

Re: 24, starting new job - advice please!

Post by Markr867 » Sat Mar 29, 2014 6:51 pm

Nukeboilermaker wrote:
Markr867 wrote:Thank you for all of the responses so far.
placeholder wrote:At your tax rate and with the excellent choices available I would not contribute to Roth IRA until you max the 401k.
This one in particular surprised me because it was something I had never even considered. Basically everything I've read online has advocated the Roth IRA for young investors.

I want to make sure I'm understanding the tax deductions correctly.

If I were to put my Roth IRA contributions ($450/month) into my 401k, it would lower my taxable income by $450, correct? Since I am in the 25% bracket, every $1 I put in, I would only be costing me 75 cents, essentially. So my paycheck would be lower by only $337.50, leaving me with $112.50 more in take home pay each month than if I was contributing to the Roth IRA?

If that is true, that might not be a bad idea. I could then contribute that $112.50 into a Roth IRA. I am not sure I want to 100% give up the Roth contributions. I like the idea of having both a 401k and a Roth IRA. A lot can happen in 40 years with tax rates, and I'd like to have money in each.
That above sounds about right, plus state tax reduction. However, at your age having a Roth IRA can be a BACKUP emergency fund. Info that may be useful is how much do you want to save each year? If you can save 20k vs 10k would change my suggested strategy. For example if you have 15k efund, at the end of each year I would use 5.5k to fund the Roth. If you need it for an efund then remove that contribution (not the gains). If you don't need it then you just took advantage of very valuable and limited tax advantage space.

edit: do you plan to get married soon which will lower your tax bracket? What does your career/income potential look like?
Edit 2: what is your desired student loan repayment plan? If this is a high priority then 401k up to match could be decent. Also are you going to roll the existing 401k into your new 401k or an IRA?
Here's a breakdown of my savings each month (or at least what I had planned before I started this thread):

$450/month into Roth IRA
$325/month into 401k (6% for the full match)
$300/month into my taxable account for short-term goals (explained above... not sure what to do with this money)

So that all comes out to $13,000 per year. I'm also saving $200/month into a travel fund, but I don't count that in my overall savings amount though since it will be spent down each year.

I have no plans to get married in the near future, and my career potential seems bright. I'm a financial analyst, and the career path at Booz Allen seems promising. Lots of room for growth and I can move to different contracts to keep climbing the ladder. I'm happy with how my career is unfolding thus far.

As for the student loan payment.. I'm currently giving my parents $350/month. They don't even want me to give them this much, but I'd prefer to pay them back sooner rather than later. I'm tempted to just throw everything I can at them each month, but they wouldn't like that and I know that's not the smartest thing to do when I'm paying them back at 0%.

I actually just mailed in the paperwork today for my old 401k to be rolled over to my new 401k. Hopefully that process is complete sometime in the coming week.

mnvalue
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Joined: Sun May 05, 2013 2:22 pm

Re: 24, starting new job - advice please!

Post by mnvalue » Sat Mar 29, 2014 7:26 pm

Assuming you don't itemize deductions, your tax rate is 30.75%. So your $450/month Roth IRA contribution is equivalent to $450/(1-.3075) = $649.82 pre-tax. So I recommend the following:
1) Switch your 401k to an appropriate target fund for simplicity's sake.
2) Raise your 401k contributions by an additional $650/month. For now, stop contributing to the Roth IRA for retirement purposes.
3) Max out the Roth IRA for 2013 (before April 15th!), using money from your emergency fund as necessary. For any emergency fund money that you put into the Roth IRA, invest it in a short-term bond fund (VBISX until you reach $10k, then the Admiral Shares equivalent VBIRX).
4) Max out the Roth IRA for 2014, first using your $300/month that you were going to put into a taxable account. Then, move money from your emergency fund as necessary to get to the contribution limit (about $150/month). Again, keep the emergency fund portion in a short-term bond fund. The taxable can be invested however you feel appropriate for whatever you're going to do with that.

At this point, you're contributing the exact same amount for retirement. You've just switched from a Roth IRA to your 401k. Your after-tax discretionary income is unaffected. Well, other than the 18 cents difference from $649.82 to $650. ;) Your emergency fund is also exactly the same size, $9,500, but now some of it is in a Roth IRA in a short-term bond fund. This allows you to expand your tax-advantaged space, which may be helpful later.

Maybe your Roth IRA has three funds in it: A) a Target Retirement fund for retirement, B) a short-term bond fund for your emergency fund, and C) a LifeStrategy fund of an appropriate asset allocation for your "goals" money that was going to go to taxable. The separate funds will keep it easy to keep the money separate in your mind.

This all works because you can withdraw contributions from a Roth IRA at any time. It's true that you can't get to the earnings (with some exceptions after 5 years), but that's not likely to be a big deal. Here's why: A) The emergency fund money in your Roth IRA is not going to grow much, because you have to invest it very safely. B) For the other money, you can always "withdraw" earnings by simply reducing future contributions you were already planning to make. Sure it takes a little bit, but it accomplishes the same thing in the end.

Even better, if at the time you want to spend some money, you still have some emergency fund in the savings account, you can "withdraw" by spending that, and exchanging some money from the "goals" mutual fund for the "emergency fund" mutual fund in the Roth IRA. This avoids making an actual Roth IRA withdrawal at all (or making a smaller one).

If you have more money to save for retirement (for example, if you paid less on your student loans), then put it into the 401k until you hit the 401k max. If that happens, you can adjust the Roth IRA plan.

Nukeboilermaker
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Joined: Mon Apr 11, 2011 9:49 am

Re: 24, starting new job - advice please!

Post by Nukeboilermaker » Sat Mar 29, 2014 7:58 pm

Personally I would not invest in taxable account until I am maxing out tax advantage investments (an employee stock purchase plan could be an exception). Paying your parents back is good and it sounds like you naturally found a comfortable payback rate for both parties. I didn't see anything in your posts about the taxable account or it's potential purpose (though in your response you said you didn't know). There are a few ways of going about this, you could suck it up and save 22.5k per year and max out both the Roth IRA and 401k and utilize pay raises and bonuses to further general savings. My suggestion for what you described is to simply divert the pretax equivalent that you are placing in your taxable account into your 401k and continue with the Roth. If you are seriously planning a home purchase within 5 years the plan may be adjusted to less 401k and more general savings.

P.S. To add more flexibility, you could save the Roth IRA money and just lump sum at he end of each year. Like I said before use efund which means on average you have more cash on hand. This "trick" will make it easier to up your 401k contribution (this is how I do it).

cherijoh
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Re: 24, starting new job - advice please!

Post by cherijoh » Sat Mar 29, 2014 7:59 pm

Markr867 wrote:Thank you for all of the responses so far.
placeholder wrote:At your tax rate and with the excellent choices available I would not contribute to Roth IRA until you max the 401k.
This one in particular surprised me because it was something I had never even considered. Basically everything I've read online has advocated the Roth IRA for young investors.
I think the main reasons Roth IRAs are suggested for young investors (besides their long time horizons) are:
1) Young investors are often in 15% marginal tax bracket - so 401K beyond the match doesn't make sense since they could easily pay higher taxes on withdrawal
2) Many 401K plans have really high ERs or poor representation of asset classes, so it is critical to build up tax advantaged space outside the 401k
3) Young investors have very limited emergency funds - Roth can serve as both emergency fund early in career and retirement fund later in life

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tainted-meat
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Re: 24, starting new job - advice please!

Post by tainted-meat » Sat Mar 29, 2014 8:06 pm

Consider maxing out the 401k, then maxing out a Traditional IRA instead of a Roth IRA.

Nukeboilermaker
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Re: 24, starting new job - advice please!

Post by Nukeboilermaker » Sat Mar 29, 2014 8:13 pm

tainted-meat wrote:Consider maxing out the 401k, then maxing out a Traditional IRA instead of a Roth IRA.
I recommended he stick with the Roth as diversification between Roth and traditional retirement accounts, but also because he might be more comfortable saving more (in his 401k) knowing he could fall back on his Roth contributions in dire straights. The benefit of doing a traditional IRA would be the increased tax return.

Markr867
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Re: 24, starting new job - advice please!

Post by Markr867 » Sat Mar 29, 2014 8:38 pm

mnvalue wrote:Assuming you don't itemize deductions, your tax rate is 30.75%. So your $450/month Roth IRA contribution is equivalent to $450/(1-.3075) = $649.82 pre-tax. So I recommend the following:
1) Switch your 401k to an appropriate target fund for simplicity's sake.
2) Raise your 401k contributions by an additional $650/month. For now, stop contributing to the Roth IRA for retirement purposes.
3) Max out the Roth IRA for 2013 (before April 15th!), using money from your emergency fund as necessary. For any emergency fund money that you put into the Roth IRA, invest it in a short-term bond fund (VBISX until you reach $10k, then the Admiral Shares equivalent VBIRX).
4) Max out the Roth IRA for 2014, first using your $300/month that you were going to put into a taxable account. Then, move money from your emergency fund as necessary to get to the contribution limit (about $150/month). Again, keep the emergency fund portion in a short-term bond fund. The taxable can be invested however you feel appropriate for whatever you're going to do with that.

At this point, you're contributing the exact same amount for retirement. You've just switched from a Roth IRA to your 401k. Your after-tax discretionary income is unaffected. Well, other than the 18 cents difference from $649.82 to $650. ;) Your emergency fund is also exactly the same size, $9,500, but now some of it is in a Roth IRA in a short-term bond fund. This allows you to expand your tax-advantaged space, which may be helpful later.

Maybe your Roth IRA has three funds in it: A) a Target Retirement fund for retirement, B) a short-term bond fund for your emergency fund, and C) a LifeStrategy fund of an appropriate asset allocation for your "goals" money that was going to go to taxable. The separate funds will keep it easy to keep the money separate in your mind.

This all works because you can withdraw contributions from a Roth IRA at any time. It's true that you can't get to the earnings (with some exceptions after 5 years), but that's not likely to be a big deal. Here's why: A) The emergency fund money in your Roth IRA is not going to grow much, because you have to invest it very safely. B) For the other money, you can always "withdraw" earnings by simply reducing future contributions you were already planning to make. Sure it takes a little bit, but it accomplishes the same thing in the end.

Even better, if at the time you want to spend some money, you still have some emergency fund in the savings account, you can "withdraw" by spending that, and exchanging some money from the "goals" mutual fund for the "emergency fund" mutual fund in the Roth IRA. This avoids making an actual Roth IRA withdrawal at all (or making a smaller one).

If you have more money to save for retirement (for example, if you paid less on your student loans), then put it into the 401k until you hit the 401k max. If that happens, you can adjust the Roth IRA plan.
WOW. This is EXACTLY what I was looking for. I would have never thought that contributing to a 401k over a Roth IRA would make so much sense.

One question though. The $450/month I was going to contribute to my Roth IRA comes out to be $650 pre-tax. So my total 401k contribution each month will be $975, correct? Since I was planning on doing $325 each month into the 401k already.

So here's what I think I'm going to do:

1) Increase 401k contributions to $975 and use that for all future retirement contributions until I can eventually max it out.
2) Keep the $7,300 I have in my Roth IRA now dedicated for Retirement. I will keep it invested in the Target Date 2055 Fund.
3) Move $3,190 from my emergency fund savings account into my Roth IRA for 2013. (That is how much I can invest into my Roth still for 2013) This will be invested in a short-term bond fund to stay stable.
4) I have $5,050 left in my Roth space for 2014. I will move the $4,300 from my taxable account into this account and invest in something suited for use in the next couple of years.
5) That leaves me with $750 in Roth space for 2014. I will contribute the $300/month I was going to put in my taxable account and invest it into the fund I choose for step 4.

I guess my last question would be where to invest the money once I hit the Roth IRA limit? If I only have $750 of space left and I'm investing $300 each month starting in April, I'll hit the limit in June. Where should that $300/month go when the Roth is not an option? I don't want to increase my 401k contributions even more, as this is money I will need way before retirement.

THANK YOU for everyone's help so far. This has been very helpful.

Nukeboilermaker
Posts: 294
Joined: Mon Apr 11, 2011 9:49 am

Re: 24, starting new job - advice please!

Post by Nukeboilermaker » Sat Mar 29, 2014 10:05 pm

Sounds good^, that pretty much incorporates exactly what I suggested. Anything else should go to pad up your savings/efund for the next big purchases such as a home or vehicle/ whatever your life happens to need. Maybe in the future your parents might run on a hard time and that nest egg might take out a huge chunk of your debt and help hem out all in one shot. For example I have 40k in cash right now earning about ~$10/mo in interest in my bank account (sounds crappy right?) I don't need nearly that much for my efund, but a chunk of that is there for either a major home maintenance if I stay in my current home or a down payment on a new home (trading up). Or possibly a new family vehicle since we now have a kid. I personally don't want to deal with selling taxable stocks or investments if I don't have too (especially with a sub 5 year timeframe you seem to be describing). If you save a solid amount for retirement(which your plan would qualify) and save for life(increasing your savings nest egg), you will only have more fun and enjoy things better. I would highly encourage an annual increase of at least 1% to your 401k. If your single and making >80k/yr I would recommend trying to max out that 401k too at that point.

Cheers,
Nuke

Edit: P.S. You don't have to sell that taxable account to fund a Roth, it's simply one option. I have Disney, IBM, and Employee stock purchase shares that I'm likely going to liquidate when we trade up in homes. I would take money from an efund to take advantage of a Roth, not liquidate taxable investments. If you can save enough to fund he Roth without selling that then I would because you just effectively raised your savings rate (when you are not yet use to he new larger income). I would also place your more aggressive funds in Roth, not bonds use your 401k for that. Trust me you won't miss it! Remember a vast majority of all this is behavioral, and you seem to have good savings muscles.
Last edited by Nukeboilermaker on Sat Mar 29, 2014 10:22 pm, edited 1 time in total.

mnvalue
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Re: 24, starting new job - advice please!

Post by mnvalue » Sat Mar 29, 2014 10:17 pm

A few thoughts for what to do when you run out of Roth IRA space:
1) There is no single correct answer. Ultimately you need to find something you're comfortable with.
2) If you don't have a specific goal in mind for the taxable monies, as counter-intuitive as it may seem, my thought is that you should skip saving more for short-term goals and max out the 401k first. Here's why: It's obvious that you're going to have a high savings rate. You might as well take advantage of the 401k space while you can. Once you have a specific goal in mind, you can always drop the 401k rate to just the match, to accelerate making up the "goal" space that you lost to the 401k now. The value of compounding means that even a couple extra early years in the 401k makes a truly massive difference. There are lots of examples; a common one is something like saving $X/year from age 25 to age 35 is worth more than saving $X/year from age 35 to age 65: http://www.vanguard.com/compounding
3) When you are forced with a choice of what goes in the Roth IRA and what goes in taxable, I would prefer to see you put your "goals" money in the Roth and keep the emergency fund in taxable. Again, this is counter-intuitive, but I'm assuming that you'll be able to firm up your predictions for the goals far enough out that you can meet them with contributions and shuffling things around. So I want to see you put higher-growth pots of money ("goals" instead of "emergency fund') in the Roth, to maximize the benefit of tax-free compounding and the yearly contribution limits.
4) If you disagree with my thoughts in #2 and #3 (and a reasonable person could), I still suggest you keep maxing the Roth IRA using the emergency fund. Since you have money in checking, money in savings, money in taxable (since in this scenario, we're assuming you do), flexibility in the student loan repayments, and excess current income (for any scenario other than job loss), it's unlikely that you will actually incur an emergency large enough to require a Roth IRA withdrawal.

For your "goals" asset allocation, I recommend you start with the Vanguard risk assessment questionnaire: https://personal.vanguard.com/us/FundsInvQuestionnaire Just remember to answer the questions thinking about only your short-term goals, not your retirement planning. And if it comes back too aggressive, ratchet it down further. And again, I recommend a LifeStrategy fund for set-it-and-forget-it.

Nukeboilermaker
Posts: 294
Joined: Mon Apr 11, 2011 9:49 am

Re: 24, starting new job - advice please!

Post by Nukeboilermaker » Sat Mar 29, 2014 10:33 pm

mnvalue wrote:A few thoughts for what to do when you run out of Roth IRA space:
1) There is no single correct answer. Ultimately you need to find something you're comfortable with.
2) If you don't have a specific goal in mind for the taxable monies, as counter-intuitive as it may seem, my thought is that you should skip saving more for short-term goals and max out the 401k first. Here's why: It's obvious that you're going to have a high savings rate. You might as well take advantage of the 401k space while you can. Once you have a specific goal in mind, you can always drop the 401k rate to just the match, to accelerate making up the "goal" space that you lost to the 401k now. The value of compounding means that even a couple extra early years in the 401k makes a truly massive difference. There are lots of examples; a common one is something like saving $X/year from age 25 to age 35 is worth more than saving $X/year from age 35 to age 65: http://www.vanguard.com/compounding
3) When you are forced with a choice of what goes in the Roth IRA and what goes in taxable, I would prefer to see you put your "goals" money in the Roth and keep the emergency fund in taxable. Again, this is counter-intuitive, but I'm assuming that you'll be able to firm up your predictions for the goals far enough out that you can meet them with contributions and shuffling things around. So I want to see you put higher-growth pots of money ("goals" instead of "emergency fund') in the Roth, to maximize the benefit of tax-free compounding and the yearly contribution limits.
4) If you disagree with my thoughts in #2 and #3 (and a reasonable person could), I still suggest you keep maxing the Roth IRA using the emergency fund. Since you have money in checking, money in savings, money in taxable (since in this scenario, we're assuming you do), flexibility in the student loan repayments, and excess current income (for any scenario other than job loss), it's unlikely that you will actually incur an emergency large enough to require a Roth IRA withdrawal.

For your "goals" asset allocation, I recommend you start with the Vanguard risk assessment questionnaire: https://personal.vanguard.com/us/FundsInvQuestionnaire Just remember to answer the questions thinking about only your short-term goals, not your retirement planning. And if it comes back too aggressive, ratchet it down further. And again, I recommend a LifeStrategy fund for set-it-and-forget-it.
I suggested sucking it up and maxing out the 401k earlier, I get the impression he has some goals (including travel) and wants some liquid flexibility and just hasn't elaborated on them here.

Something I want to elaborate on since we are using the term of efund for a Roth IRA is the order in which an emergency would have to drain you.
1) regular spending account buffer
2) efund
3) taxable accounts
4) original Roth contributions

As you can see the Roth is a true last resort, but at least an option that won't require penalties, loans, etc. I personally value the roth's tax advantage growth and withdrawal to be a critical component in helping an individual shape what tax bracket they will be in during retirement, if you use goal money in this space you are planing to raid this precious limited space, so I have to disagree with mnvalue about that. Put money you know you want to spend in taxable if greater than 5 years out and plain savings if less than 5 years out. But I would still go back to sucking it up and maxing out both 401k and Roth IRA (FYI, I'm a glutton for punishment) Edit: it would be just under 25k gross income to max out both spaces.

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

Re: 24, starting new job - advice please!

Post by pingo » Sat Mar 29, 2014 10:41 pm

Concerning fund selection, let me strongly suggest that you put 100% of your 401k money into one of the BlackRock/BTC LifePath Index Funds. One is all you need. By using a single LifePath fund in the 401k you are set. I have to suppose that they are the "index" iterations of their LifePath series because of the unheard of expense ratio of 0.02%. (Holy --!) 100% of your retirement investments in the Roth IRA can go into the Vanguard LifeStrategy Growth Fund (VASGX) which is 80% stocks / 20% bonds (the most aggressive allocation I'd probably recommend) or an appropriately allocated Vanguard Target Retirement Fund. LS and TR funds are identical, with the exception being that a VG TR fund will reach a point where is begins to de-risk by adding more bonds. The fund series' still apply even if you're determined to hold 90% stocks as posted earlier.

Going back to the LifePath funds. Here's a previous post of mine where I explain how they're put together and why:

Here's a direct link to my post explaining BTC/BlackRock LifePath Index Funds

All the best!

:beer
Last edited by pingo on Sun Mar 30, 2014 1:29 am, edited 1 time in total.

mnvalue
Posts: 1086
Joined: Sun May 05, 2013 2:22 pm

Re: 24, starting new job - advice please!

Post by mnvalue » Sat Mar 29, 2014 11:49 pm

Nukeboilermaker wrote:I get the impression he has some goals (including travel) and wants some liquid flexibility and just hasn't elaborated on them here.
To be clear, I'm not counting the travel fund, as that gets emptied each year, as the OP noted. In re-reading, I see that "not sure what to do with this money" is probably more "I don't know how to invest this." than "I'm not sure what I'm going to spend this money on." I was assuming the latter, as the OP is still living at home, has no plans to get married soon, etc. But maybe there's a specific plan for a car or house downpayment or whatever and it just hasn't been expressed here.

Markr867
Posts: 50
Joined: Sat Mar 29, 2014 6:12 am

Re: 24, starting new job - advice please!

Post by Markr867 » Sun Mar 30, 2014 9:31 am

There are definitely a lot more options to consider that I wouldn't have even thought of, but I like the fact that no choice is really the "wrong" one.

I went ahead and submitted the order to move the $4,300 in my taxable Vanguard account to my Roth IRA. It didn't make sense to me to be using a taxable account when I wasn't yet using of all of the tax-advantaged space available. This has maxed out 2013 and part of 2014. I put it in a LifeStrategy fund, but I'm unsure how I want to allocate that right now. At least it is in the Roth and I can make the decision later when I know exactly what I want to do.

One thing I thought of this morning is my liquid savings..

Here's where my liquid savings stand right now (all currently in Capital One 360):

$9,500 - Emergency Fund
$1,800 - Travel Fund
$1,000 - Checking (will be over $4k tomorrow when I get my first paycheck at the new job :D )

I don't count the travel fund as money available to me since it will be used, and the checking account is just a holding place for money going to other places (aka the paycheck I get tomorrow will be used for all of April's expenses). That leaves me with $9.5k in truly liquid money, and that is emergency money.

I don't have a car right now due to living in an area with great public transportation, but within five years I think I'll go crazy if I don't have a car. I would like to pay mostly cash. In addition, a house is something I want in the future, I just have no idea when that will happen. Rent is outrageous in DC, but I don't want to tie myself down just yet incase life takes me elsewhere in the future. (mnvalue.. I noticed you thought I lived at home. I wish. My rent is over $1,100 a month.)

SO. My thoughts are maybe to adjust my plan just for this year only.

1) Keep my 401k contributions at 6% to get the match.
2) Consider that $4,300 I put into my Roth as my retirement contribution for 2014 in one lump sum.
3) Focus for the rest of 2014 on building up liquid savings in a normal savings account. Since I already contributed to my Roth, I can save the $450/month I was going to put in there plus the $300/month that was going to go to the taxable account (which is now closed). I also expect to have money left at the end of each month once I get used to these new paychecks. My lifestyle is not extravagant. At all.
4) Throw any unexpected money at the Roth to finish maxing it out for 2014 (birthday money, Christmas money, etc)

That way, I'll have a nice sum of liquid savings at the end of 2014 that isn't considered emergency money. Then I can start on January 1 with the plan I listed above (high 401k contributions, etc). I think I'll just feel more comfortable knowing that I have some liquid savings on hand without having to go into my Roth for them.

mnvalue
Posts: 1086
Joined: Sun May 05, 2013 2:22 pm

Re: 24, starting new job - advice please!

Post by mnvalue » Sun Mar 30, 2014 1:15 pm

Markr867 wrote:I went ahead and submitted the order to move the $4,300 in my taxable Vanguard account to my Roth IRA. ... This has maxed out 2013 and part of 2014.
This worries me! Did you put in one contribution or two (i.e. two transfers)? If one, did you mark it for 2013 or 2014? My guess is that if you did one contribution, you just contributed $4,300 for 2014 and $0 for 2013. If that's the case, you can fix it by making another contribution for 2013 (and possibly withdrawing some of 2014, but I wouldn't, since you have the cash right now, and you're planning on maxing for 2014 anyway). You have to report contributions to the custodian properly.
Markr867 wrote:mnvalue.. I noticed you thought I lived at home. I wish. My rent is over $1,100 a month.
I must have gotten you confused with another thread I was replying to. Sorry. :oops: I re-read my posts and I don't think it changes my advice.

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