Brand new member enrolling in 401K for first time

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716God
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Brand new member enrolling in 401K for first time

Post by 716God »

Hello all,

I am starting a new job in medical device sales next week, and this will be my first time enrolling in a 401k plan. My company does not yet offer a match ( :x ) but I am still interested in enrolling for tax purposes. The plan is through American Funds, which I have no experience working with. Here are some of my personal stats if that helps:

29 years old
$58k base salary plus commissions, side income earning ~$10k/year
Living with mom (not paying rent)
~$6k student loan debt ($3k @ 6.8% fixed, ~$3k @ 2.6% variable) - I've paid off over $20k in the past 8 months
Car lease through Hyundai - $315.85/month through March '19

My company is offering before-tax contributions and/or after-tax Roth contributions of up to 10% of each paycheck. There are 16 different individual funds ranging from growth funds to bond funds. There are also several different target-date funds ranging from target date 2010-2055. I've done a fair amount research in the past several months, and from what I understand a Roth seems like the best bet due to the fact that the money grows post-tax. I was originally interested in opening a Roth Ira with Vanguard and putting all of my funds in a Target Date 2055 fund (VFFVX) so that I can just set it and forget it.

I'm not sure how the American Funds Target Date funds stack up to the Vanguard funds, so I'll have to research that. I only have a week or two to enroll in the plan and don't have much time to research all of the different variables within each individual American Funds fund available. Should I just put the max contribution to the Roth in the Target Date 2055 fund? Any advice would be GREATLY appreciate. Thanks! :sharebeer

Edit:

The Target Date 2055 Fund (AAMTX) that I'm considering has an Exp Ratio of 0.78%

Here are the 16 individual funds available, with expense ratios:

American Funds AMCAP (AMCPX) - 0.67%
American Funds EuroPacific Growth Fund® Class A (AEPGX) - 0.83%
American Funds The Growth Fund of America (AGTHX) - 0.65%
American Funds New World Fund (NEWFX) - 1.04%
American Funds SMALLCAP World Fund (SMCWX) - 1.07%
American Funds American Mutual Fund (AMRMX) - 0.58%
American Funds Capital World Growth and Income Fund (CWGIX) - 0.77%
American Funds Fundamental Invs (ANCFX) - 0.60%
American Funds Capital Income Bldr (CAIBX) - 0.65%
American Funds The Income Fund of America (AMECX) - 0.56%
American Funds American Balanced Fund (ABALX) - 0.58%
American High-Income Trust (AHITX) - 0.67%
American Funds The Bond Fund of America (ABNDX) - 0.60%
American Funds Capital World Bond Fund (CWBFX) - 0.93%
American Funds Short-Term Bond Fund of America (ASBAX) - 0.60%
American Funds Money Market Fund (AFAXX) - 0.38%

To contrast, The Vanguard Target Date 2055 Fund (VFFVX) has an Exp Ratio of 0.16%. Would it be advisable to skip out on my company's 401k plan and instead open a Roth with Vanguard and contribute the max to VFFVX? From there, notify my employer that I'd like to contribute the max (10%/check) to one of their individual funds? They told me that I need to enroll in the 401k plan within my first 14 days of employment so I don't want to skip out on the 401k (even with no match) and regret it months/years down the line.
Last edited by 716God on Thu Nov 03, 2016 6:51 am, edited 2 times in total.
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alec
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Re: Brand new member enrolling in 401K for first time

Post by alec »

If you post the funds available to you in your new 401k, you'll people's thoughts on them.

You should be able to just compare the expense ratios of the funds in your 401(k) to the Vanguard target retirement fund. And then go with the cheapest one, which is most likely the Vanguard target retirement fun in your Roth IRA.
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BL
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Re: Brand new member enrolling in 401K for first time

Post by BL »

If you plan on a Roth anyway, the Roth IRA would be cheaper than 401k (check ERs, are there any other charges?, are the loads waived or do you have to pay loads of any kind?) (ER- Expense Ratio). Vanguard Target date funds are a good choice. Be sure to select on-line statements to avoid low-acount fee.

What are the ERs of the Target date funds in your 401k?
Are there any S&P500 or institutional funds, bond funds with low-ERs.

If you use traditional you could save 25% + your state tax rate on what you contribute. Perhaps you could use the tax savings to pay off that 6.8% loan.

Here is a nice booklet of great info for new investors:
https://www.etf.com/docs/IfYouCan.pdf
sawhorse
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Re: Brand new member enrolling in 401K for first time

Post by sawhorse »

Could you post all the fund options along with expense ratios and additional fees if any?

No reason to not pay off that 6.8% loan. What's the reason behind your decision to lease the car instead of buying one?

By the way, it's not at all unusual for employers to not offer a match. Many of them aren't offering 401ks or are restricting participation.
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ruralavalon
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Re: Brand new member enrolling in 401K for first time

Post by ruralavalon »

Welcome to the forum :) .

Congratulations on paying of $20k in debt in the past 8 months. That's excellent.

What is your marginal tax rate, both federal and state. Will you be eligible for a significant pension. Those facts will important for the Roth versus traditional decision.

Will you please list the funds offered in the 401k (fund names, tickers and expense ratios)? Sometimes American Funds are a reasonable buy, but a lot depends on the expenses. All that is important in deciding how much to use a 401k that has no employer match.

About how much do you believe that you might be able to contribute to investing annually (total all accounts, in dollars)?

Please simply add this to your original post using the edit button, so that all of your information is in one place.
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pkcrafter
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Re: Brand new member enrolling in 401K for first time

Post by pkcrafter »

My company is offering before-tax contributions and/or after-tax Roth contributions of up to 10% of each paycheck.


Not sure what you mean here. Is your company matching 10%, or are they limiting your contributions to 10%? If your company is matching 10%, Wow.

401k limit is 18k/year. If you use an individual Roth, you are limited to $5500/year. American target funds look pretty good, so as long as you have reasonable expense ratios, you're good.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

alec wrote:If you post the funds available to you in your new 401k, you'll people's thoughts on them.

You should be able to just compare the expense ratios of the funds in your 401(k) to the Vanguard target retirement fund. And then go with the cheapest one, which is most likely the Vanguard target retirement fun in your Roth IRA.
The Target Date 2055 Fund (AAMTX) that I'm considering has an Exp Ratio of 0.78%

Here are the 16 individual funds available, with expense ratios:

American Funds AMCAP (AMCPX) - 0.67%
American Funds EuroPacific Growth Fund® Class A (AEPGX) - 0.83%
American Funds The Growth Fund of America (AGTHX) - 0.65%
American Funds New World Fund (NEWFX) - 1.04%
American Funds SMALLCAP World Fund (SMCWX) - 1.07%
American Funds American Mutual Fund (AMRMX) - 0.58%
American Funds Capital World Growth and Income Fund (CWGIX) - 0.77%
American Funds Fundamental Invs (ANCFX) - 0.60%
American Funds Capital Income Bldr (CAIBX) - 0.65%
American Funds The Income Fund of America (AMECX) - 0.56%
American Funds American Balanced Fund (ABALX) - 0.58%
American High-Income Trust (AHITX) - 0.67%
American Funds The Bond Fund of America (ABNDX) - 0.60%
American Funds Capital World Bond Fund (CWBFX) - 0.93%
American Funds Short-Term Bond Fund of America (ASBAX) - 0.60%
American Funds Money Market Fund (AFAXX) - 0.38%
Topic Author
716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

sawhorse wrote:No reason to not pay off that 6.8% loan. What's the reason behind your decision to lease the car instead of buying one?
I had been driving a 2009 model which I had paid off years ago, however I was on a crappy insurance policy through Progressive and got into a fender bender back in March. My insurance told me that since I was deemed at fault, that they wouldn't be covering any of the damages, and I was quoted for $3.5k in repairs. The car was already coming up on 100k miles, and needed various repairs including new brake pads, transmission, etc. and I decided that I would go on a lease because it was the cheaper option and at the time I had a very short commute to and from work. My goal is to buy it off before the lease is over.
pkcrafter wrote:
My company is offering before-tax contributions and/or after-tax Roth contributions of up to 10% of each paycheck.


Not sure what you mean here. Is your company matching 10%, or are they limiting your contributions to 10%? If your company is matching 10%, Wow.

401k limit is 18k/year. If you use an individual Roth, you are limited to $5500/year. American target funds look pretty good, so as long as you have reasonable expense ratios, you're good.

Paul
What I meant is that my company allows me to contribue up to 10% of each paycheck into either a traditional 401k or a Roth 401k. They do not currently offer a match, but I've been told that it is likely coming in the next calendar year since the company just recently went public.
sawhorse
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Re: Brand new member enrolling in 401K for first time

Post by sawhorse »

716God wrote:
sawhorse wrote:No reason to not pay off that 6.8% loan. What's the reason behind your decision to lease the car instead of buying one?
I had been driving a 2009 model which I had paid off years ago, however I was on a crappy insurance policy through Progressive and got into a fender bender back in March. My insurance told me that since I was deemed at fault, that they wouldn't be covering any of the damages, and I was quoted for $3.5k in repairs. The car was already coming up on 100k miles, and needed various repairs including new brake pads, transmission, etc. and I decided that I would go on a lease because it was the cheaper option and at the time I had a very short commute to and from work. My goal is to buy it off before the lease is over.
What are the vehicle arrangements with your company - company car, own car with reimbursement, etc? (ignore this question if you're not going to be an office to office salesman)

100k miles isn't very much for a car these days. What was the model? How much did you get for your wrecked car?
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ruralavalon
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Re: Brand new member enrolling in 401K for first time

Post by ruralavalon »

Since there is no employer match in your 401k, and with fairly high expense ratios on the American Funds, in my opinion your first investing priority should probably be an IRA at a low cost provider such as Vanguard. You can contribute up to $5.5k per year.

If you are in the 25% tax bracket, then a traditional deductible IRA rather than a Roth IRA may be better.

If you have additional money available beyond the $5.5k/yr for the IRA then I suggest putting that into paying off more of your $3k 6.8% student loan.

After the $3k 6.8% student debt is paid off, then any extra money beyond the $5.5k/yr to the IRA should be contributed to your 401k. In your 401k I suggest using American Funds American Balanced Fund (ABALX) ER 0.58%.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Danzangdc
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Re: Brand new member enrolling in 401K for first time

Post by Danzangdc »

At those ERs, you should invest first in an IRA (Roth or regular) up to $5,500/yr at Vanguard or similar in a low-cost index fund. If you can save more than that - and it seems you can given your loan pay downs - then put into your 401k whatever more you can bear (Roth or regular). I would pay off that 6.8% loan first though.

Investing in a traditional IRA/401k usually comes out better than a Roth, unless you expect your tax bracket to be significantly higher in retirement, in which case it might be better to do Roth and take your tax hits now.
Topic Author
716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

sawhorse wrote:
716God wrote:
sawhorse wrote:No reason to not pay off that 6.8% loan. What's the reason behind your decision to lease the car instead of buying one?
I had been driving a 2009 model which I had paid off years ago, however I was on a crappy insurance policy through Progressive and got into a fender bender back in March. My insurance told me that since I was deemed at fault, that they wouldn't be covering any of the damages, and I was quoted for $3.5k in repairs. The car was already coming up on 100k miles, and needed various repairs including new brake pads, transmission, etc. and I decided that I would go on a lease because it was the cheaper option and at the time I had a very short commute to and from work. My goal is to buy it off before the lease is over.
What are the vehicle arrangements with your company - company car, own car with reimbursement, etc? (ignore this question if you're not going to be an office to office salesman)

100k miles isn't very much for a car these days. What was the model? How much did you get for your wrecked car?
After 3-6 months in my current role, I'm eligible for a company car. This would be a huge coup, because I'm currently commuting ~60-70 miles/day as an Associate. We also get a $550/month car allowance. We also fill out a bi-weekly expense report and are reimbursed for any work expenses (gas, food, etc.) My old car was falling apart, I had put it through Hell in my early 20's. It was a 2009 Hyundai Elantra. I'm currently leasing a '17 Elantra for $315.85/month, lease ending in March '19. I was only able to trade in my old car for $600 with the existing damage. I was either going to pay for the damages to my old car ($3.5k - (which would be equivalent to 11 months at my current car's lease rate) ) plus new transmission, brake pads, battery, etc. which would be another $500-1000, or pay nothing up front for a new lease at $315.85/month. I was in a tough spot so I went with the lease.
ruralavalon wrote:Since there is no employer match in your 401k, and with fairly high expense ratios on the American Funds, in my opinion your first investing priority should probably be an IRA at a low cost provider such as Vanguard. You can contribute up to $5.5k per year.

If you are in the 25% tax bracket, then a traditional deductible IRA rather than a Roth IRA may be better.

If you have additional money available beyond the $5.5k/yr for the IRA then I suggest putting that into paying off more of your $3k 6.8% student loan.

After the $3k 6.8% student debt is paid off, then any extra money beyond the $5.5k/yr to the IRA should be contributed to your 401k. In your 401k I suggest using American Funds American Balanced Fund (ABALX) ER 0.58%.
Thanks for the advice. So while filling out my enrollment paperwork this week, would you suggest that I hold off on the 401k plan? They told me that I need to enroll in the company's benefits package within my first 14 days of employment (my first day is this Monday 11/7). Or should I just contribute a small percentage per check to ABALX, and open a Vanguard Roth IRA in the meantime, once I contribute the max ($5.5k) to that account, contact my employer and tell them I want to contribute a higher percentage to my 401k? Am I understanding correctly?
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runner9
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Re: Brand new member enrolling in 401K for first time

Post by runner9 »

Personally, I would in this order:

Full fund a Roth IRA for 2016
Pay off student loans
Get out of car lease
Then fund Roth for 2017
Only then think about the 401k with high fees
traveltoomuch
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Re: Brand new member enrolling in 401K for first time

Post by traveltoomuch »

716God wrote: Thanks for the advice. So while filling out my enrollment paperwork this week, would you suggest that I hold off on the 401k plan? They told me that I need to enroll in the company's benefits package within my first 14 days of employment...
The enrollment deadline is for benefits like health cover, probably not for the 401k.

You've been saving 20k over 8 months (=2.5/month or 30k annualized) in the form of student loan payment. That's spectacular. If you can keep that up, you could max out your RothIRA ($5500), a normal 401k ($18000), and pay off the remaining student loans, all in twelve months. Except that your employer has a 10% limit on 401k contributions. That's unfortunate. I'd look into that more. Perhaps even see if they'll allow 10% into Roth401k AND 10% into tax-deferred 401k. Of see if they'll raise the limit.

Because of that 10% limit, I'd just start maxing the savings plans now:
1) sign up for the full 10% into the 401k. If you're in a state with income tax and you're likely in a 25% federal bracket, I'd go for tax-deferred. In a state with no income tax, I'd go for Roth. Others will argue that you should do Roth (first) in all cases since that saves more value. Either is fine.
2) max out your RothIRA for 2016
3) pay the student loan off

Normally paying off the student loan is priority #1, but I think it's okay to let that take a few extra months in the interest of taking advantage of these savings plans that have annual contribution limits.

If you keep up this same savings rate, you'll have money to invest in taxable accounts very soon. Check back here for more advice.
Last edited by traveltoomuch on Thu Nov 03, 2016 10:26 am, edited 1 time in total.
traveltoomuch
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Re: Brand new member enrolling in 401K for first time

Post by traveltoomuch »

runner9 wrote: Get out of car lease
While getting into the car lease was probably not the best decision, getting out of it early might be even worse. (Think "sunk cost".)

716God: there's a bias on this forum towards spending less (or spending wisely) and saving more. We would probably have suggested buying a used car, for instance. But that's neither here nor there at the moment. Feel free to ask questions about spending as you go along. We're full of advice. :D
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BL
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Re: Brand new member enrolling in 401K for first time

Post by BL »

You do have until next April 15, 2017, to get this year's Roth IRA contributed, if that helps. Be sure to indicate it is for 2016.

What will you do with the rental when you get the company car, or can you delay that and get the reimbursement instead?
Topic Author
716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

runner9 wrote:Personally, I would in this order:

Full fund a Roth IRA for 2016
Pay off student loans
Get out of car lease
Then fund Roth for 2017
Only then think about the 401k with high fees
What I failed to communicate in the OP is that I only have $2.5k in my emergency fund. Paying off my student loan debt has been my #1 priority this year since I had been so negligent about paying it off in my 20's and was constantly going into forbearance instead of making the minimum payment. Hence, about $6k of the $26k that I had in student loan debt earlier this year was interest. Looking at my net worth on Personal Capital was demoralizing to say the least, and I decided that I needed to prioritize getting out of debt and freeing up my monthly cash flow. I am also interested in getting my own apartment ASAP, as I've been living with my mom for the past year and I really miss having my own space for the purpose of maintaining some semblance of a social life.
traveltoomuch wrote:
716God wrote: Thanks for the advice. So while filling out my enrollment paperwork this week, would you suggest that I hold off on the 401k plan? They told me that I need to enroll in the company's benefits package within my first 14 days of employment...
The enrollment deadline is for benefits like health cover, probably not for the 401k.

You've been saving 20k over 8 months (=2.5/month or 30k annualized) in the form of student loan payment. That's spectacular. If you can keep that up, you could max out your RothIRA ($5500), a normal 401k ($18000), and pay off the remaining student loans, all in twelve months. Except that your employer has a 10% limit on 401k contributions. Boo. I'd look into that more. Perhaps even see if they'll allow 10% into Roth401k AND 10% into tax-deferred 401k. Of see if they'll raise the limit.

Because of that 10% limit, I'd just start maxing the savings plans now:
1) sign up for the full 10% into the 401k. If you're in a state with income tax and you're likely in a 25% federal bracket, I'd go for tax-deferred. In a state with no income tax, I'd go for Roth. Others will argue that you should do Roth (first) in all cases since that saves more value. Either is fine.
2) max out your RothIRA for 2016
3) pay the student loan off

Normally paying off the student loan is priority #1, but I think it's okay to let that take a few extra months in the interest of taking advantage of these savings plans that have annual contribution limits.

If you keep up this same savings rate, you'll have money to invest in taxable accounts very soon. Check back here for more advice.
Given that I have so little in my emergency fund, and there's less than 2 months remaining in the 2016 calendar year, do you think it would be more prudent to focus on killing off the remaining 6.8% interest loan debt and replenishing my emergency fund, then go full bore into maxing out my Roth 2017 once the new year starts? I live in Maryland FWIW. I just want to make sure that I have more cash on-hand in the event of Murphy's Law. I should be getting a fair amount on my tax return this year, since I'll be getting a 1098-E from Navient for $2.5k in interest as well as a few hundred dollars from my 1098-T for paying out of pocket for the classes that I took in the Spring at my local community college.
traveltoomuch
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Re: Brand new member enrolling in 401K for first time

Post by traveltoomuch »

716God wrote: Given that I have so little in my emergency fund, and there's less than 2 months remaining in the 2016 calendar year, do you think it would be more prudent to focus on killing off the remaining 6.8% interest loan debt and replenishing my emergency fund, then go full bore into maxing out my Roth 2017 once the new year starts? I live in Maryland FWIW. I just want to make sure that I have more cash on-hand in the event of Murphy's Law.
Short answer: no.

Remember that RothIRA contributions can be taken out penalty-free at any time - it's only earnings that have an early-withdrawal penalty. I would focus on maximizing the RothIRA in 2016. If you need the money for emergency purposes, pull it back out. If you think there's a fair likelihood of needing it, still put it into the RothIRA but hold it in a money market fund rather than investing in stocks.

See: https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

Since you can make (the rest of) your 2016 RothIRA contribution in early 2017, I'd go ahead and put 10% into the 401k starting now. Given your marginal tax rate, I'd use the tax-deferred 401k option. Prioritize the 2016 RothIRA contribution, since the window to do that goes away in a few months. Then pay then loan. Then put money towards the 2017 RothIRA contribution.

As for wanting to move into your own apartment: I suggest you start with a budget. Living with mom is doing your own finances a world of good. Consider sharing an apartment, if only for the cost savings. If you decide to move out, pay close attention to lease terms, especially clauses re: ending the lease and moving out early.
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Re: Brand new member enrolling in 401K for first time

Post by lazydavid »

traveltoomuch wrote:The enrollment deadline is for benefits like health cover, probably not for the 401k.
This. I've never seen a 401k program that can only be joined during open enrollment. Ours you can begin, stop, or change contributions at any time, and the changes take effect in 2-3 days. There's about a two-week delay for new hires to be able to start contributing, but that's just the logistics of getting the account created, not any sort of policy. Any employee who's been with us for more than a couple weeks could make their withholding election today or tomorrow, and see it on next week's check.
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716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

traveltoomuch wrote:
716God wrote: Given that I have so little in my emergency fund, and there's less than 2 months remaining in the 2016 calendar year, do you think it would be more prudent to focus on killing off the remaining 6.8% interest loan debt and replenishing my emergency fund, then go full bore into maxing out my Roth 2017 once the new year starts? I live in Maryland FWIW. I just want to make sure that I have more cash on-hand in the event of Murphy's Law.
Short answer: no.

Remember that RothIRA contributions can be taken out penalty-free at any time - it's only earnings that have an early-withdrawal penalty. I would focus on maximizing the RothIRA in 2016. If you need the money for emergency purposes, pull it back out. If you think there's a fair likelihood of needing it, still put it into the RothIRA but hold it in a money market fund rather than investing in stocks.

See: https://www.bogleheads.org/wiki/Roth_IR ... gency_fund

Since you can make (the rest of) your 2016 RothIRA contribution in early 2017, I'd go ahead and put 10% into the 401k starting now. Given your marginal tax rate, I'd use the tax-deferred 401k option. Prioritize the 2016 RothIRA contribution, since the window to do that goes away in a few months. Then pay then loan. Then put money towards the 2017 RothIRA contribution.

As for wanting to move into your own apartment: I suggest you start with a budget. Living with mom is doing your own finances a world of good. Consider sharing an apartment, if only for the cost savings. If you decide to move out, pay close attention to lease terms, especially clauses re: ending the lease and moving out early.
Ok thanks for the feedback. Just to make sure I completely understand, when you say put the 10% match towards my 'tax deferred 401k option' you mean the 'before-tax' traditional 401K option and not the 'after-tax Roth' option?

Based off of the funds available that I listed in the OP, would you suggest putting 100% of my contributions to ABALX as opposed to the American Funds target date fund, due to the lower expense ratio, as another poster suggested? Because, to contrast, the expense ratio for The Vanguard 2055 fund (VFFVX) is only 0.16%, so if I opt to open a Roth IRA with Vanguard for for my target date fund as opposed to the American Funds fund available to me in my 401k (0.78%) that seems like a better investment.
traveltoomuch
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Re: Brand new member enrolling in 401K for first time

Post by traveltoomuch »

Yes, use the "before tax" option. (As above, this is arguable, and either option is OK. But this is the one I suggest.)

I suggest you use the target date fund, but don't let indecision stop you. I'd much prefer you use the "wrong" one than see indecision stop you from using either of them. (Reason: the target date fund's asset allocation is probably more appropriate for someone your age than the 60/40 balanced fund.)

Do not worry about the expense ratio for now. (Yes, I know it's heresy around here...) You don't have the best 401k options (with regard to expenses), but you do have decent ones. And in that situation, it's far more important to get money into tax-advantaged accounts than to worry about getting the absolute best expense ratio. You're in a situation where you can reasonably max out both the 401k (at 10%) and the RothIRA. Do that. (If you were only going to save $5k/year, I might say something different, but your current savings rate supports maxing both.)
Last edited by traveltoomuch on Thu Nov 03, 2016 11:48 am, edited 1 time in total.
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ruralavalon
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Re: Brand new member enrolling in 401K for first time

Post by ruralavalon »

716God wrote:Ok thanks for the feedback. Just to make sure I completely understand, when you say put the 10% match towards my 'tax deferred 401k option' you mean the 'before-tax' traditional 401K option and not the 'after-tax Roth' option?
I suggest traditional deductible 401k contributions.
716God wrote:Based off of the funds available that I listed in the OP, would you suggest putting 100% of my contributions to ABALX as opposed to the American Funds target date fund, due to the lower expense ratio, as another poster suggested? Because, to contrast, the expense ratio for The Vanguard 2055 fund (VFFVX) is only 0.16%, so if I opt to open a Roth IRA with Vanguard for for my target date fund as opposed to the American Funds fund available to me in my 401k (0.78%) that seems like a better investment.
I suggested American Funds American Balanced Fund (ABALX) ER 0.58% not only because of the lower expense ratio, but also because of the very high credit quality of its bond allocation, and the fairly small international stock allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

traveltoomuch wrote:Yes, use the "before tax" option. (As above, this is arguable, and either option is OK. But this is the one I suggest.)

I suggest you use the target date fund, but don't let indecision stop you. I'd much prefer you use the "wrong" one than see indecision stop you from using either of them. (Reason: the target date fund's asset allocation is probably more appropriate for someone your age than the 60/40 balanced fund.)

Do not worry about the expense ratio for now. (Yes, I know it's heresy around here...) You don't have the best 401k options (with regard to expenses), but you do have decent ones. And in that situation, it's far more important to get money into tax-advantaged accounts than to worry about getting the absolute best expense ratio. You're in a situation where you can reasonably max out both the 401k (at 10%) and the RothIRA. Do that. (If you were only going to save $5k/year, I might say something different, but your current savings rate supports maxing both.)
That's great advice; thank you for being so detailed in your response.
traveltoomuch
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Re: Brand new member enrolling in 401K for first time

Post by traveltoomuch »

You're most welcome.

Let me try to put a different perspective on this. You'll be making ~$5650/month (gross, based on $58k+10k) + commissions. Your taxes should be about $850/mo (10k/year) federal + $250/mo (3k/yr) state + tax on commissions. Leaving some $4500/mo. as take-home (before benefits deductions).

You've described being able to pay $2500/month toward student loans. We don't know if that's on this salary or something lower, but presumably you should be able to keep saving this much or more.

Maxing the Roth will take $458/mo.

If you can only save 10% in the 401k, that's 483/mo. (10% of 58k / 12). But if you use the tax-deferred option your federal+state taxes go down ~$145/mo, so your monthly take-home will only drop by $350 or so. So we're talking about tax-deferred accounts only being able to absorb $800 or so of the $2500/mo that you have been saving. If you use Roth401k, it's $940/mo. You'll still have $1560-1700 to apply to the remaining student loans, paying off the car, or taxable savings. Maybe more, if your salary has just gone up and/or you get some commissions.

Choosing between RothIRA and 401k is not an "either-or" game for you. You should be able to put 10% into the 401k, max the RothIRA in both 2016 and 2017, and pay off the student loans, all in the course of a few months. Assuming you don't change your spending patterns. :D

(All rough numbers, and probably inaccurate in the detail, but the big picture still holds...)
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716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

ruralavalon wrote:
716God wrote:Ok thanks for the feedback. Just to make sure I completely understand, when you say put the 10% match towards my 'tax deferred 401k option' you mean the 'before-tax' traditional 401K option and not the 'after-tax Roth' option?
I suggest traditional deductible 401k contributions.
716God wrote:Based off of the funds available that I listed in the OP, would you suggest putting 100% of my contributions to ABALX as opposed to the American Funds target date fund, due to the lower expense ratio, as another poster suggested? Because, to contrast, the expense ratio for The Vanguard 2055 fund (VFFVX) is only 0.16%, so if I opt to open a Roth IRA with Vanguard for for my target date fund as opposed to the American Funds fund available to me in my 401k (0.78%) that seems like a better investment.
I suggested American Funds American Balanced Fund (ABALX) ER 0.58% not only because of the lower expense ratio, but also because of the very high credit quality of its bond allocation, and the fairly small international stock allocation.
Thanks for clarifying. Do you think at my age (29) that I should 100% into ABALX, or add it one of the growth funds due to the fact that ABALX contains significant bond holdings? I ask because from everything I've read it makes sense to invest heavily in stocks in your 20's and 30's, and increase your bond allocation as you get closer to retirement.
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ruralavalon
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Re: Brand new member enrolling in 401K for first time

Post by ruralavalon »

716God wrote:
ruralavalon wrote:
716God wrote:Ok thanks for the feedback. Just to make sure I completely understand, when you say put the 10% match towards my 'tax deferred 401k option' you mean the 'before-tax' traditional 401K option and not the 'after-tax Roth' option?
I suggest traditional deductible 401k contributions.
716God wrote:Based off of the funds available that I listed in the OP, would you suggest putting 100% of my contributions to ABALX as opposed to the American Funds target date fund, due to the lower expense ratio, as another poster suggested? Because, to contrast, the expense ratio for The Vanguard 2055 fund (VFFVX) is only 0.16%, so if I opt to open a Roth IRA with Vanguard for for my target date fund as opposed to the American Funds fund available to me in my 401k (0.78%) that seems like a better investment.
I suggested American Funds American Balanced Fund (ABALX) ER 0.58% not only because of the lower expense ratio, but also because of the very high credit quality of its bond allocation, and the fairly small international stock allocation.
Thanks for clarifying. Do you think at my age (29) that I should 100% into ABALX, or add it one of the growth funds due to the fact that ABALX contains significant bond holdings? I ask because from everything I've read it makes sense to invest heavily in stocks in your 20's and 30's, and increase your bond allocation as you get closer to retirement.
At age 29 I suggest around 20-25% of portfolio in bonds. This is expected to substantially reduce volatility (risk), with only a relatively slight decrease in return. Graph, "An Efficient Frontier: the power of diversification". Please see also William Bernstein, "The Rebalancing Bonus".

Please see the wiki articles "Risk tolerance", "Asset allocation", and Bogleheads® investment philosophy, "Never bear too much or too little risk".

Edited to ad the above links.

Consider all accounts together as a single unified portfolio, rather than look at each account individually.

With your 401k contributions at 10% of salary, it looks like you will be contributing about equal amounts to the 401k and the IRA. Therefore if you use American Funds American Balanced Fund (ABALX) with 40% bonds in the 401k and Vanguard Target Retirement 2055 (VFFVX) with 10% bonds in the IRA, then you wind up with about 25% bonds overall, which is a reasonable bond allocation in my opinion.
Last edited by ruralavalon on Thu Nov 03, 2016 1:46 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Angst
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Re: Brand new member enrolling in 401K for first time

Post by Angst »

716God wrote:Thanks for clarifying. Do you think at my age (29) that I should 100% into ABALX, or add it one of the growth funds due to the fact that ABALX contains significant bond holdings? I ask because from everything I've read it makes sense to invest heavily in stocks in your 20's and 30's, and increase your bond allocation as you get closer to retirement.
Yikes! Well, as far as bonds are concerned... you could compensate by holding a high % of equity in your personal Roth IRA as well as in taxable savings, but until you understand why virtually no one at this website would ever recommend that someone invest in a fund having "Growth" in its title, don't go picking any funds yourself! All of the ones already mentioned here by others posting above will be fine. :) Seriously, first things first - you've gotten some great suggestions already for getting started. Do note the links at the main Bogleheads webpage and when you have time, start reading. Explore the website, pick one of the the recommended books, use the Wiki pages... Lot's of Boglehead links can be found here: https://www.bogleheads.org/SitesOfInterest.php And always come back to this: as has been cited here many times before, more or less, "the enemy of a good plan is the pursuit of the perfect plan".
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716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

I just received confirmation from HR that the max contribution I can make is 10% PER CHECK, and not 10% monthly. So instead of contributing 10% of my monthly wages to my 401k, it'll be 20% (or in December 30%) of my net income. I think I'm going to contribute the max into a traditional 401k and am weighing my options between the American Balanced Fund (ABALX) and American Funds Target Date 2055 Fund (AAMTX). They also waive the load fee, for what that's worth. Thanks again for all of the great feedback. :beer
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Re: Brand new member enrolling in 401K for first time

Post by sawhorse »

traveltoomuch wrote:Yes, use the "before tax" option. (As above, this is arguable, and either option is OK. But this is the one I suggest.)
ruralavalon wrote: I suggest traditional deductible 401k contributions.
Would this still make sense in a state like Pennsylvania which taxes traditional 401k contributions? They have a flat tax of 3.07%.

The 10% limit is unusual. It means that only employees that make $180,000 can max out their 401k :shock: I didn't even know that's legal. And I can't see the advantage for the company because usually plan providers give a discount to employers whose employees collectively have a lot of money in the program.
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Re: Brand new member enrolling in 401K for first time

Post by traveltoomuch »

sawhorse wrote: Would this still make sense in a state like Pennsylvania which taxes traditional 401k contributions? They have a flat tax of 3.07%.
As usual, it depends on where you think you might live later in life, what you think your later tax rates will be, and what you think your in-retirement tax rate might be. If you imagine staying in PA and, like many, having a lower tax rate in retirement, then yes, use tax-deferred. If you think you might move to California or have even higher taxes, maybe use Roth.

There's much to be said for diversification of the tax buckets, too - have some tax-deferred and some Roth.
traveltoomuch
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Re: Brand new member enrolling in 401K for first time

Post by traveltoomuch »

716God wrote:I just received confirmation from HR that the max contribution I can make is 10% PER CHECK, and not 10% monthly. So instead of contributing 10% of my monthly wages to my 401k, it'll be 20% (or in December 30%) of my net income.
You might be misunderstanding. They probably mean 10% of each check's total gross compensation. They probably don't mean 10% of your monthly compensation on each bi-weekly (or whatever) check. And they probably mean 10% of gross, not 10% of net.
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ruralavalon
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Re: Brand new member enrolling in 401K for first time

Post by ruralavalon »

sawhorse wrote:
traveltoomuch wrote:Yes, use the "before tax" option. (As above, this is arguable, and either option is OK. But this is the one I suggest.)
ruralavalon wrote: I suggest traditional deductible 401k contributions.
Would this still make sense in a state like Pennsylvania which taxes traditional 401k contributions? They have a flat tax of 3.07%.
Yes I think that traditional 401k contributions are probably better even in a State which gives no deduction for 401k contributions, the federal tax bracket of 25% is more significant than the State flat rate of 3.01%. Because of the graduated federal rates, for most people traditional 401k contributions will probably be better. TFB blog post, "The case against Roth 401k". "I think for most people the majority, if not 100%, of the contribution should go to a Traditional 401(k)."

A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

pkcrafter wrote:
My company is offering before-tax contributions and/or after-tax Roth contributions of up to 10% of each paycheck.


Not sure what you mean here. Is your company matching 10%, or are they limiting your contributions to 10%? If your company is matching 10%, Wow.

401k limit is 18k/year. If you use an individual Roth, you are limited to $5500/year. American target funds look pretty good, so as long as you have reasonable expense ratios, you're good.

Paul
Would you say that the 0.78% expense ratio for the Target Date 2055 fund is good for my 401k, or attempt to go with some sort of three-fund portfolio and use my Vanguard Roth IRA for their Target 2055 fund, which has an expense ratio of 0.16%? I supposed I could do both Target date funds as well.
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BL
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Re: Brand new member enrolling in 401K for first time

Post by BL »

Not so bad, but I think rural avalon's balanced fund is even better.

You could even do ANCFX if you were willing to change your IRA target fund to have much higher bonds, as ANCFX is mostly US stocks, possibly like S&P 500.

Costs (ERs) matter!
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Re: Brand new member enrolling in 401K for first time

Post by LadyGeek »

716God wrote:I just received confirmation from HR that the max contribution I can make is 10% PER CHECK, and not 10% monthly. So instead of contributing 10% of my monthly wages to my 401k, it'll be 20% (or in December 30%) of my net income. I think I'm going to contribute the max into a traditional 401k and am weighing my options between the American Balanced Fund (ABALX) and American Funds Target Date 2055 Fund (AAMTX). They also waive the load fee, for what that's worth. Thanks again for all of the great feedback. :beer
As noted earlier by traveltoomuch, you may be misunderstanding HR. The deduction is from from your gross pay, not what you take home.

Let's look at the math. Say you're salary is $1,000 / week, which is 4 paychecks / month ($4,000). (Not what you take home, this is your gross salary.)

10% per check is $100 /week. That's $400/month. which is still 10% of $4,000/month.

No matter how you slice it, 10% of your paycheck is still 10%.

HR is not responsible for managing your 401(k), that's you're responsibility. As noted earlier, the maximum you can contribute is $18k. The IRS calls this an "elective deferral", which is $18k for 2016 and 2017. See: COLA Increases for Dollar Limitations on Benefits and Contributions
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Re: Brand new member enrolling in 401K for first time

Post by pkcrafter »

716God wrote:
Would you say that the 0.78% expense ratio for the Target Date 2055 fund is good for my 401k, or attempt to go with some sort of three-fund portfolio and use my Vanguard Roth IRA for their Target 2055 fund, which has an expense ratio of 0.16%? I supposed I could do both Target date funds as well.
I think the TR fund is acceptable. American funds do have higher expense ratios, but their performance has been acceptable considering the expense ratio. There are far worse employee plans.

What you need to do is decide on an overall asset allocation (all funds, all accounts), and then work from there. If you had TR funds and/or balanced funds in all accounts, you're OK, and you would not have to worry about rebalancing for a long time. But if you hold individual funds with a TR fund, you will often have problems rebalancing to your target AA.

AAMTX is at least 82% stock, but could be higher at times depending on what they do with the cash that's in the fund. The balanced fund is 60/40, so they are quite different. Both acceptable for investment, but you have to set your risk level and then pick funds to match. Don't choose TR funds by the date, choose by allocation that is close to your target.

If you can invest 10% of your pay, you are doing well. Fund an IRA or Roth first, then fund the 401k with with what's left. If you can max both, all the better. The more you can invest at a younger age, the more compounding you will have over time.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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716God
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Re: Brand new member enrolling in 401K for first time

Post by 716God »

pkcrafter wrote:716God wrote:
Would you say that the 0.78% expense ratio for the Target Date 2055 fund is good for my 401k, or attempt to go with some sort of three-fund portfolio and use my Vanguard Roth IRA for their Target 2055 fund, which has an expense ratio of 0.16%? I supposed I could do both Target date funds as well.
I think the TR fund is acceptable. American funds do have higher expense ratios, but their performance has been acceptable considering the expense ratio. There are far worse employee plans.

What you need to do is decide on an overall asset allocation (all funds, all accounts), and then work from there. If you had TR funds and/or balanced funds in all accounts, you're OK, and you would not have to worry about rebalancing for a long time. But if you hold individual funds with a TR fund, you will often have problems rebalancing to your target AA.

AAMTX is at least 82% stock, but could be higher at times depending on what they do with the cash that's in the fund. The balanced fund is 60/40, so they are quite different. Both acceptable for investment, but you have to set your risk level and then pick funds to match. Don't choose TR funds by the date, choose by allocation that is close to your target.

If you can invest 10% of your pay, you are doing well. Fund an IRA or Roth first, then fund the 401k with with what's left. If you can max both, all the better. The more you can invest at a younger age, the more compounding you will have over time.

Paul
Thanks, my plan is to put the max contribution towards the AF Target Date 2055 fund in my traditional 401k, pay off the remaining $3k on my 6.8% loan by December, immediately begin funneling any and all discretionary income into a Vanguard Roth Ira (VFFVX) while also putting money into my Capital One savings acct for an Emergency fund and to stack toward paying off my car before the lease is up.

A year from now, my financial goal will be to have made the max contribution to my Roth IRA for both 2016 & 2017, be close to paying off my leased vehicle, still be contributing the max to my 401k, have my company car so that I'm not putting miles on my own vehicle, and enough money saved up to have a decent cushion once I get my own apartment in Northern VA. Of course with either no student loan debt or just a few thousand at that 2.65% variable interest rate. If I'm there next November, I'm happy as a clam.
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