Youngin' looking for help.

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helpmebby
Posts: 4
Joined: Wed Nov 22, 2017 3:10 pm

Youngin' looking for help.

Post by helpmebby » Wed Nov 22, 2017 3:25 pm

Hello! The time has come for me to actually start thinking about investing.

General Stats:
-Age: 25
-Salary: ~145k/yr
-All in Take home salary (i.e base + ~bonus + ~stock grants): ~200k/yr
-Assets: I own my parents house outright, which is worth~200k.
-Savings(i.e 6/mo of living expenses in cash): ~27k
-401k: currently I put 7% in (my employer matches up to this amount). This translates ~10k / yr. The account is w/ fidelity, and contains vanguard 2055 and vanguard 2060. its sitting at about 30k right now.
-Whats left: about 40k in cash.


I'd like to start doing more with this 40k, and that is where I turn to all you fine people. What should I do?

Some more directed questions:
1. Should I open an (roth) IRA and should I max it? What to do here?
2. Should I max my 401k?
3. Even if i do both of these I should still be able to stash a good deal of cash so what to do w/ that? My initial thoughts were to invest like 50% in an index fund, 40% in some stable stocks, and continue to save 10% in cash. Is this a good plan? Is this a bad plan?

Some caveats (i.e what may change in my life):
1. May leave job soon (a year or two, maybe not though) to go to school to do something else. If this is the case, what should I be aware of in my savings plan / investment?

Let me know if you need more info! Also, I am dumb, and new to all of this, so I apologize if anything here is 1. Rude, or 2. Ignorant.

Thanks!

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Duckie
Posts: 5119
Joined: Thu Mar 08, 2007 2:55 pm

Re: Youngin' looking for help.

Post by Duckie » Wed Nov 22, 2017 4:58 pm

helpmebby, welcome to the forum.
helpmebby wrote:Should I open an (roth) IRA and should I max it?
At your income you can't contribute to a Roth IRA directly but you can using the Backdoor Roth IRA method. Yes, max it.
Should I max my 401k?
Yes.
Even if i do both of these I should still be able to stash a good deal of cash so what to do w/ that? My initial thoughts were to invest like 50% in an index fund, 40% in some stable stocks, and continue to save 10% in cash. Is this a good plan? Is this a bad plan?
<snip>
May leave job soon (a year or two, maybe not though) to go to school to do something else. If this is the case, what should I be aware of in my savings plan / investment?
Your taxable assets will have three purposes:
  1. Adding to your emergency fund. If you're planning to quit your job you'll need a lot more saved up. This will be in a mix of savings accounts, CDs, and money market accounts. This is not part of your retirement portfolio.
  2. Saving for school or "something else". Exactly what "else" do you have in mind? This is a short-term-needs fund for future planned expenses. This will be in the above three accounts and possibly a short-term bond fund. This is not part of your retirement portfolio.
  3. Investing for retirement. The best options here are a total US stock market index fund and a total international stock market index fund. Once you start adding to this account you'll need to reconsider what you choose in your 401k. This is part of your retirement portfolio along with your 401k and Roth IRA.
Do you have a desired Asset allocation for your retirement portfolio? At age 25 I recommend 80% stocks, 20% bonds, with 30% of stocks in international. That breaks down to 56% US stocks, 24% international stocks, and 20% bonds spread across all assets earmarked for retirement. How does that sound?

runner23
Posts: 19
Joined: Sat Oct 17, 2015 8:45 am

Re: Youngin' looking for help.

Post by runner23 » Wed Nov 22, 2017 5:04 pm

helpmebby wrote:
Wed Nov 22, 2017 3:25 pm
-Assets: I own my parents house outright, which is worth~200k.
So you own a home. Do you live in that home or charge your parents rent?

helpmebby
Posts: 4
Joined: Wed Nov 22, 2017 3:10 pm

Re: Youngin' looking for help.

Post by helpmebby » Wed Nov 22, 2017 5:26 pm

runner23 wrote:
Wed Nov 22, 2017 5:04 pm

So you own a home. Do you live in that home or charge your parents rent?
I do not live there, nor would I dream of charging my folks rent :)

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BL
Posts: 7365
Joined: Sun Mar 01, 2009 2:28 pm

Re: Youngin' looking for help.

Post by BL » Wed Nov 22, 2017 5:34 pm

1. yes, backdoor Roth; see Wiki
2. yes
3. Duckie has good answer for taxable investing and AA. Read about investing here for a start:
https://www.etf.com/docs/IfYouCan.pdf

probably sell stock as soon as possible, at least within 1 year. Don't keep over 5% of portfolio in single stocks if you feel you must keep some. Check on tax laws regarding sales.

helpmebby
Posts: 4
Joined: Wed Nov 22, 2017 3:10 pm

Re: Youngin' looking for help.

Post by helpmebby » Wed Nov 22, 2017 5:46 pm

Duckie wrote:
Wed Nov 22, 2017 4:58 pm
helpmebby, welcome to the forum.
helpmebby wrote:Should I open an (roth) IRA and should I max it?
At your income you can't contribute to a Roth IRA directly but you can using the Backdoor Roth IRA method. Yes, max it.
Should I max my 401k?
Yes.
Even if i do both of these I should still be able to stash a good deal of cash so what to do w/ that? My initial thoughts were to invest like 50% in an index fund, 40% in some stable stocks, and continue to save 10% in cash. Is this a good plan? Is this a bad plan?
<snip>
May leave job soon (a year or two, maybe not though) to go to school to do something else. If this is the case, what should I be aware of in my savings plan / investment?
Your taxable assets will have three purposes:
  1. Adding to your emergency fund. If you're planning to quit your job you'll need a lot more saved up. This will be in a mix of savings accounts, CDs, and money market accounts. This is not part of your retirement portfolio.
  2. Saving for school or "something else". Exactly what "else" do you have in mind? This is a short-term-needs fund for future planned expenses. This will be in the above three accounts and possibly a short-term bond fund. This is not part of your retirement portfolio.
  3. Investing for retirement. The best options here are a total US stock market index fund and a total international stock market index fund. Once you start adding to this account you'll need to reconsider what you choose in your 401k. This is part of your retirement portfolio along with your 401k and Roth IRA.
Do you have a desired Asset allocation for your retirement portfolio? At age 25 I recommend 80% stocks, 20% bonds, with 30% of stocks in international. That breaks down to 56% US stocks, 24% international stocks, and 20% bonds spread across all assets earmarked for retirement. How does that sound?
First, thank you for the detailed reply. Now, some follow ups (may have a few more once I read up on the asset allocation link):

1. If I left my job, it would be to go to school. After school, I may take a job with lower earnings. Not sure how this would affect your advice if at all. Where I could foreseeable get loans or get a scholarship. Either way, I will indeed need money to live during that period. Do you have any general advice here for funding that? I.E should I go out of pocket (if possible), or take the loan? Would the correct answer be to look at the interest rate I'm getting and seeing if my portfolio would outpace that rate?

2. Why international? and why that bond/stock split? Honestly just curious here, and maybe the portfolio link will help me address these questions. Are these splits just hedges more or less? I.E if US market goes down, maybe INTL is going up or is flat? Do you have any material I could read here if I was interested in learning more.

3. I should have clarified a my original post a bit more. But, seeing as this forum is this forum, Im assuming taking a long (but not necessarily retirement long) position in some stable stock (coca-cola for instance) is frowned upon? Curious why this is? Surely diversification creates a more robust portfolio. However, if I believe in some well established companies at my age, why not take a shot and try and slightly outpace my index fund? Again hopefully this makes sense..

Thanks again, and I'll read that link after I finish this. Apologies for any redundancy thats answer there.

Juice3
Posts: 19
Joined: Sun Nov 05, 2017 7:40 am

Re: Youngin' looking for help.

Post by Juice3 » Wed Nov 22, 2017 5:46 pm

helpmebby wrote:
Wed Nov 22, 2017 3:25 pm
I'd like to start doing more with this 40k, and that is where I turn to all you fine people. What should I do?
Congratulations on a awesome first job. May I ask what field you are in that pays 200K / yr for newish grads?

Information you did not provide (information I did not have at 25 yo :) is what your plan for using the money in question is. The when you plan to use the money and for what is a big factor in creating a good plan. Plan to use it in the short term, say 4y or less, then invest it conservatively. Have a longer time horizon, then more aggressive.

Saving the money for retirement in 30 or 40 years and are aggressive, you can a 90/10 AA. Research Asset Allocation on this site and you will have plenty of reading. The time horizon question will also answer if you want the money in a retirement account which limits access before retirement or a brokerage account which does not limit access but is less tax efficient.

Since your employer seems to have a pretty good 401K and you seem to plan on saving, you might want to check if the plan allows after tax 401K contributions. These can be rolled into a Roth IRA if the plan allows in service distributions. Research a technique called mega back door Roth and you will find the details.

Roths have a huge advantage for young savers because the gMan does not get his hand in your pocket for inflation. Over 30 years at 2% inflation, savings will grow about 81% and government will want 15% LTGC Tax + SALT.

Most here are fans of low cost, straight forward investing. Research 3 fund portfolios.

Juice3
Posts: 19
Joined: Sun Nov 05, 2017 7:40 am

Re: Youngin' looking for help.

Post by Juice3 » Wed Nov 22, 2017 5:53 pm

helpmebby wrote:
Wed Nov 22, 2017 5:46 pm

3. I should have clarified a my original post a bit more. But, seeing as this forum is this forum, Im assuming taking a long (but not necessarily retirement long) position in some stable stock (coca-cola for instance) is frowned upon? Curious why this is? Surely diversification creates a more robust portfolio. However, if I believe in some well established companies at my age, why not take a shot and try and slightly outpace my index fund? Again hopefully this makes sense..
Individual stock are frowned upon because they are not diversified.

Let's try and an example: Assume you buy 50K of Coke stock today and hold it for 30 years. It is worth 500K assuming 8% /yr growth. You have a 450K *.15% (at least) tax liability and are still working and do not want to sell.

In year 30 some smart DR write a journal article blaming sugar for reduced life expectancy. Guess what happens to your Coke stock? Right, back down to 50K.

It is okay to invest in individual stocks but you need to have an exit plan and keep track of what is going on in the market. It is usually recommended to only invest 'play' money meaning if something bad happens to that company your not materially hurt.

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Sandtrap
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Location: Hawaii😀 Northern AZ.😳

Re: Youngin' looking for help.

Post by Sandtrap » Wed Nov 22, 2017 6:17 pm


helpmebby
Posts: 4
Joined: Wed Nov 22, 2017 3:10 pm

Re: Youngin' looking for help.

Post by helpmebby » Wed Nov 22, 2017 6:28 pm

Juice3 wrote:
Wed Nov 22, 2017 5:46 pm
helpmebby wrote:
Wed Nov 22, 2017 3:25 pm
I'd like to start doing more with this 40k, and that is where I turn to all you fine people. What should I do?
Congratulations on a awesome first job. May I ask what field you are in that pays 200K / yr for newish grads?

Information you did not provide (information I did not have at 25 yo :) is what your plan for using the money in question is. The when you plan to use the money and for what is a big factor in creating a good plan. Plan to use it in the short term, say 4y or less, then invest it conservatively. Have a longer time horizon, then more aggressive.

Saving the money for retirement in 30 or 40 years and are aggressive, you can a 90/10 AA. Research Asset Allocation on this site and you will have plenty of reading. The time horizon question will also answer if you want the money in a retirement account which limits access before retirement or a brokerage account which does not limit access but is less tax efficient.

Since your employer seems to have a pretty good 401K and you seem to plan on saving, you might want to check if the plan allows after tax 401K contributions. These can be rolled into a Roth IRA if the plan allows in service distributions. Research a technique called mega back door Roth and you will find the details.

Roths have a huge advantage for young savers because the gMan does not get his hand in your pocket for inflation. Over 30 years at 2% inflation, savings will grow about 81% and government will want 15% LTGC Tax + SALT.

Most here are fans of low cost, straight forward investing. Research 3 fund portfolios.
Thank you for this reply. Seems like I have a lot of reading to do based on the other replies. I will go and do that. To answer your question, I do machine learning for a tech company that does quite a bit of machine learning. I feel very blessed to have gotten this job. I'd recommend the field to anyone who doesn't mind staring at a screen all day, is relatively good at math, and can program well. Happy Thanksgiving to all who celebrate!

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badbreath
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Re: Youngin' looking for help.

Post by badbreath » Wed Nov 22, 2017 6:37 pm

OP
Did you read https://www.etf.com/docs/IfYouCan.pdf If you did you would not be asking about a single stock.

Watch the Boglehead videos, link in the upper left.

Read http://jlcollinsnh.com/stock-series/

keep learning
“While money can’t buy happiness, it certainly lets you choose your own form of misery.” Groucho Marx

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Duckie
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Joined: Thu Mar 08, 2007 2:55 pm

Re: Youngin' looking for help.

Post by Duckie » Thu Nov 23, 2017 5:37 pm

helpmebby wrote:If I left my job, it would be to go to school. After school, I may take a job with lower earnings. Not sure how this would affect your advice if at all. Where I could foreseeable get loans or get a scholarship. Either way, I will indeed need money to live during that period. Do you have any general advice here for funding that? I.E should I go out of pocket (if possible), or take the loan? Would the correct answer be to look at the interest rate I'm getting and seeing if my portfolio would outpace that rate?
This doesn't affect my advice concerning where to put your savings. As for paying out-of-pocket or taking a loan, unless the cost is very low you will probably have to take a loan. Right now you have $40K available. How much do you expect school to cost you (tuition, fees, books, living expenses)?
Why international? and why that bond/stock split? Honestly just curious here, and maybe the portfolio link will help me address these questions. Are these splits just hedges more or less? I.E if US market goes down, maybe INTL is going up or is flat? Do you have any material I could read here if I was interested in learning more.
The US is about half the world stock market so international provides diversification with the other half. Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the Vanguard paper link and the discussion. I usually split the difference and recommend 30% of stocks.

As for my recommendation of 20% bonds, I think most people should have at least 20% bonds in their long-term assets. Bonds provide diversification (that word again), cushioning the fall when stocks crash, and having dry powder (money for rebalancing). Here are four short videos about bonds to watch (or read the transcripts).
Im assuming taking a long (but not necessarily retirement long) position in some stable stock (coca-cola for instance) is frowned upon? Curious why this is? Surely diversification creates a more robust portfolio. However, if I believe in some well established companies at my age, why not take a shot and try and slightly outpace my index fund?
Once you've got the basics set up then buying some individual stocks in an attempt to beat the market is not the worst thing, but you don't do it until you have the main things done. The main things (not in order) are:
  • Emergency fund
  • Short-term-needs fund for future planned expenses
  • Maxing employer plan
  • Maxing IRA
  • Maxing HSA if available
  • Paying off high-interest-rate debt
  • Using low-cost total-market index funds whenever possible
Think of individual stocks as dessert. You need to finish your meat, potatoes, and vegetables first.

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