Advice on Retirement Investments: IRA? High-Expense Govt 457b?

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pasorobles
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Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by pasorobles » Thu Oct 12, 2017 6:58 pm

I'm 47 and a public employee, make $62k and contribute 7% to a defined benefit pension fund. Three years ago I started a Roth IRA, currently about $19500, and I plan to continue maxing it out every year I'm employed (although see questions below). It's invested in a Vanguard Target Retirement 2035 Fund at a 0.15% expense ratio. I have paid into social security and am currently vested 12 years in another public pension fund which estimates a payout of $1200/mo if I retire at age 65.

I have no debt, including no mortgage, and no plans to buy a home at this time. Single, no dependents, $10k in savings account emergency fund and $7 I can invest in a taxable plan.

My employer offers government 457b plans through Nationwide and ICMA, and the expense ratios for the funds look really high. The lowest index fund offered was about 0.97%, a target date fund similar to my Vanguard plan 1.4-1.5%, and the highest ranged about 1.8%. There's also some "fixed account" annuity-type option with Nationwide claiming a minimum yield which is currently 3.5% with no management expense, but I don't really understand the details. I have about $400 per month I can put into investments or retirement, not including the $460/mo currently fully funding the Roth.

Questions:
1. Should I keep funding the Roth or consider a traditional IRA? It's likely I'll be at the same income tax bracket upon retirement (25%), possibly lower but certainly not higher.
2. Should I divert all available retirement funds into the 457b plan instead of any IRA? I may not be with this employer more than another year or two so I wonder if I should maximize access to a government 457b while I have it. Future life plans may mean lower income in the $50k area, so want to maximize my benefits & income while I have it.
3. How should I invest the extra $7k? What's the wisest use of traditional taxable investments? I have a moderate risk tolerance but don't want to be so risk-shy I avoid a good opportunity. Also, I want simplicity, hence the current choice of a Vanguard retirement fund.

Thanks for the input!

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David Jay
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Re: Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by David Jay » Thu Oct 12, 2017 8:28 pm

Welcome to Bogleheads. You may want to visit the Wiki for an overview of BH thinking on the "Starter Kit" page here: https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

1. Because of the high costs of the 457 offerings, I would fund the Roth first and put the remainder of your retirement investment dollars in the 457.

2. Because of the high cost of the 457 offerings, I would not choose that investment over other, low cost tax-advantaged investment accounts.

3. I would put the money into the 457 rather than invest in taxable. I would always use tax advantaged space before investing in taxable, even with a .97 ER. Put the money in the 457 by increasing your withholding by $500 a month and take $500 a month out of the $7000 for living expenses. It will all be invested in 14 months.

In summary: Roth first, 457 second, taxable only if you have reached the contribution limit of all tax-advantaged accounts.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

pasorobles
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Re: Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by pasorobles » Thu Oct 12, 2017 9:54 pm

Thanks. Would it be smarter to open a standard IRA and fund it instead of the Roth? (The logic being that my federal tax bracket might be lower when I retire, so I should take advantage of a tax savings now?) I honestly think I'm likely to remain in the 25% bracket (assuming brackets remain as they are). Or maybe I should split the difference--have in the Roth and half in a standard IRA?

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David Jay
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Re: Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by David Jay » Thu Oct 12, 2017 10:38 pm

pasorobles wrote:
Thu Oct 12, 2017 9:54 pm
Thanks. Would it be smarter to open a standard IRA and fund it instead of the Roth? (The logic being that my federal tax bracket might be lower when I retire, so I should take advantage of a tax savings now?) I honestly think I'm likely to remain in the 25% bracket (assuming brackets remain as they are). Or maybe I should split the difference--have in the Roth and half in a standard IRA?
I see far more discussions here wishing they had less in traditional IRA and more in Roth because of having to take large RMDs.

In fact, I don't remember any retiree wishing in hindsight that they had put less in their Roth. After age 59.5 you can take as much as you want out of a Roth with no tax consequences, that gives you a lot of withdrawal options.

Do a search on "Roth Conversion", you will get hundreds of hits. They are all talking about strategies for converting traditional IRA assets to Roth accounts.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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sergeant
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Re: Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by sergeant » Thu Oct 12, 2017 11:54 pm

Check the expenses in the ICMA index funds again. I have my DC plan with them and the ER's on my index funds are .15 domestic, and .20 international.
Lincoln 3 EOW!

pasorobles
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Re: AdviceVT Vantag on Retirement Investments: IRA? High-Expense Govt 457b?

Post by pasorobles » Fri Oct 13, 2017 6:39 am

sergeant wrote:
Thu Oct 12, 2017 11:54 pm
Check the expenses in the ICMA index funds again. I have my DC plan with them and the ER's on my index funds are .15 domestic, and .20 international.
I double-checked the fees. A VT Vantagepoint Milestone 2035 fund, roughly equivalent to my Vanguard target-date fund, has a Gross and Net Expense Ratio of 1.43% (see link below). My Vanguard fund is only 0.15%. Or am I misinterpreting this?

https://imgur.com/Dhx1hLK
Last edited by pasorobles on Fri Oct 13, 2017 7:14 am, edited 2 times in total.

pasorobles
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Re: Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by pasorobles » Fri Oct 13, 2017 7:08 am

David Jay wrote:
Thu Oct 12, 2017 10:38 pm
I see far more discussions here wishing they had less in traditional IRA and more in Roth because of having to take large RMDs.
Thanks. I'll keep funding the Roth.

CnC
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Re: Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by CnC » Fri Oct 13, 2017 8:34 am

David Jay wrote:
Thu Oct 12, 2017 8:28 pm
Welcome to Bogleheads. You may want to visit the Wiki for an overview of BH thinking on the "Starter Kit" page here: https://www.bogleheads.org/wiki/Boglehe ... art-up_kit

1. Because of the high costs of the 457 offerings, I would fund the Roth first and put the remainder of your retirement investment dollars in the 457.

2. Because of the high cost of the 457 offerings, I would not choose that investment over other, low cost tax-advantaged investment accounts.

3. I would put the money into the 457 rather than invest in taxable. I would always use tax advantaged space before investing in taxable, even with a .97 ER. Put the money in the 457 by increasing your withholding by $500 a month and take $500 a month out of the $7000 for living expenses. It will all be invested in 14 months.

In summary: Roth first, 457 second, taxable only if you have reached the contribution limit of all tax-advantaged accounts.

This is my exact situation.

A decent bond fund a sp 500 index a international index all have .95-1.01 expenses ratios it kills me but i fund it along with my Roth. I have to keep putting the max in my 457 plan because it keeps me safely in the Roth IRA contribution limits.


But even with stupidly high ER a 457 plan has one big advantage over 401k plans.

If you retire or are forced to leave prior to 60 you can still withdraw from the 457 plan without penalties.

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sergeant
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Re: AdviceVT Vantag on Retirement Investments: IRA? High-Expense Govt 457b?

Post by sergeant » Fri Oct 13, 2017 9:58 am

pasorobles wrote:
Fri Oct 13, 2017 6:39 am
sergeant wrote:
Thu Oct 12, 2017 11:54 pm
Check the expenses in the ICMA index funds again. I have my DC plan with them and the ER's on my index funds are .15 domestic, and .20 international.
I double-checked the fees. A VT Vantagepoint Milestone 2035 fund, roughly equivalent to my Vanguard target-date fund, has a Gross and Net Expense Ratio of 1.43% (see link below). My Vanguard fund is only 0.15%. Or am I misinterpreting this?

https://imgur.com/Dhx1hLK
Wow! Those are high. I checked mine again and my plan is actually .20 for the S&P 500, .20 Mid/Small Cap, and .29 for International. My employer has been with ICMA for 35 years and may have more assets under management than your agency. The more assets under management the lower the ER's.

In your shoes I would still put the 7k a year into the 457b vehicle. You will be leaving in a few years and can transfer the funds to Vanguard if the ER bothers you. You wont have that much money in the DC account so really wont be paying much in fees. The tax benefit outweighs the high ER's.
Lincoln 3 EOW!

CnC
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Re: AdviceVT Vantag on Retirement Investments: IRA? High-Expense Govt 457b?

Post by CnC » Fri Oct 13, 2017 12:51 pm

pasorobles wrote:
Fri Oct 13, 2017 6:39 am
sergeant wrote:
Thu Oct 12, 2017 11:54 pm
Check the expenses in the ICMA index funds again. I have my DC plan with them and the ER's on my index funds are .15 domestic, and .20 international.
I double-checked the fees. A VT Vantagepoint Milestone 2035 fund, roughly equivalent to my Vanguard target-date fund, has a Gross and Net Expense Ratio of 1.43% (see link below). My Vanguard fund is only 0.15%. Or am I misinterpreting this?

https://imgur.com/Dhx1hLK
Haha do we work for the same employer? That looks exactly like my icma booklet and those costs appear the same as mine. :( They are not fun.


If you really want to get frustrated look at what the funds expense ratios should be.

Sp500 index they offer for .19 er
http://www.icmarc.org/prebuilt/static/f ... 79800.html

2035 target date they offer at .84 er
http://www.icmarc.org/prebuilt/static/f ... 29900.html

Icma is extreamly shady and if you have an I'll educated HR staff they will jack up the expense ratios as much as possible.

pasorobles
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Re: AdviceVT Vantag on Retirement Investments: IRA? High-Expense Govt 457b?

Post by pasorobles » Sat Oct 14, 2017 8:28 pm

CnC wrote:
Fri Oct 13, 2017 12:51 pm
Haha do we work for the same employer? That looks exactly like my icma booklet and those costs appear the same as mine. :( They are not fun.

If you really want to get frustrated look at what the funds expense ratios should be.

Sp500 index they offer for .19 er
http://www.icmarc.org/prebuilt/static/f ... 79800.html

2035 target date they offer at .84 er
http://www.icmarc.org/prebuilt/static/f ... 29900.html

Icma is extreamly shady and if you have an I'll educated HR staff they will jack up the expense ratios as much as possible.
Yeah I'm really unhappy with the high fee options we have. I did check out options through Nationwide (our other 457B provider), and found a Target Date fund with a slightly lower expense ratios in the 1.10-1.20 range. I think I'll go with this one. The options for creating your own funds were in the 1.5+ range.

However, given the tax advantages and portability I'll definitely use it once I max out the Roth. It's better than nothing.

tibbitts
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Re: Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by tibbitts » Sat Oct 14, 2017 10:27 pm

I haven't read the entire thread but if you have a 3.5% fixed account in a 457 and zero expenses, wow, I'd jump at that. Nobody understands fixed accounts, you just have to get over that. I had a fixed account in similar situation for years and it turned out to be an amazing deal because there was a guarantee period for a 6% minimum rate. Today 3.5% would be the equivalent. I'd just make sure there is an exit strategy available if the rate can change.

crumbone
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Re: Advice on Retirement Investments: IRA? High-Expense Govt 457b?

Post by crumbone » Sat Oct 14, 2017 11:22 pm

pasorobles wrote:
Thu Oct 12, 2017 6:58 pm
I'm 47 and a public employee, make $62k and contribute 7% to a defined benefit pension fund. Three years ago I started a Roth IRA, currently about $19500, and I plan to continue maxing it out every year I'm employed (although see questions below). It's invested in a Vanguard Target Retirement 2035 Fund at a 0.15% expense ratio. I have paid into social security and am currently vested 12 years in another public pension fund which estimates a payout of $1200/mo if I retire at age 65.

I have no debt, including no mortgage, and no plans to buy a home at this time. Single, no dependents, $10k in savings account emergency fund and $7 I can invest in a taxable plan.

My employer offers government 457b plans through Nationwide and ICMA, and the expense ratios for the funds look really high. The lowest index fund offered was about 0.97%, a target date fund similar to my Vanguard plan 1.4-1.5%, and the highest ranged about 1.8%. There's also some "fixed account" annuity-type option with Nationwide claiming a minimum yield which is currently 3.5% with no management expense, but I don't really understand the details. I have about $400 per month I can put into investments or retirement, not including the $460/mo currently fully funding the Roth.

Questions:
1. Should I keep funding the Roth or consider a traditional IRA? It's likely I'll be at the same income tax bracket upon retirement (25%), possibly lower but certainly not higher.
2. Should I divert all available retirement funds into the 457b plan instead of any IRA? I may not be with this employer more than another year or two so I wonder if I should maximize access to a government 457b while I have it. Future life plans may mean lower income in the $50k area, so want to maximize my benefits & income while I have it.
3. How should I invest the extra $7k? What's the wisest use of traditional taxable investments? I have a moderate risk tolerance but don't want to be so risk-shy I avoid a good opportunity. Also, I want simplicity, hence the current choice of a Vanguard retirement fund.

Thanks for the input!
The 3.5% thing sounds like a stable value fund; these are generally a reasonable place to put some of your fixed income allocation (provided the terms are reasonable
and it is offered by a creditworthy company.) Carefully review its terms and assess the company. If it looks kosher, you could use your 457 for your fixed income allocation (or part of it if you'd prefer to spread your risk) in the stable value fund and put whatever is left over in the cheapest, closest to total-market equity fund. Equities would then go in the Roth.

If you have a pension, that is potentially important as it can be counted as part of a fixed income allocation.

I'd stick with the Roth over a TIRA (not a CPA, not official tax advice, etc. etc.)

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