29 with newly available 401k, help with fund selection

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Topic Author
Cruz
Posts: 132
Joined: Sun Mar 30, 2014 7:16 pm

29 with newly available 401k, help with fund selection

Post by Cruz » Sun Jun 02, 2019 2:56 pm

Age: 29
Debt: None
Tax Filing Status: Single
Tax rate: 22%, could be lower depending on how much I contribute to 401k and lower taxable income
Emergency Fund: 6mo in Capital One MM @ 2.00%
State: MA

Current situation: I recently changed jobs and have a 401k available to me through Fidelity. My average salary is ~$65k and will receive an employer 4% match on my 401k. I am not sure what I percentage of my salary plan to contribute to my 401k but it will at least be 4% to receive the match. I contribute the max to my Roth IRA every year.

The fund options are below in the two pictures. I was planning on choosing the traditional option for my 401k and investing it in 100% bonds and changing the corresponding percentage of my bond holdings in my Roth IRA to stock funds. I was looking primarily at the Vanguard funds in my 401k as options, but open to any fund suggestions. Any other comments on my overall situation/asset allocation/fund selection are welcome. Thanks

Update: While reading the plan disclosure document I found out about two plan administrative fees:
Recordkeeping Fee: The annual Plan level fee is 0.37% of the Plan's assets. This amount will be deducted from participant accounts proportionally based upon account balance. Fidelity’s cost for the administrative work on the plan, offering and maintenance of the online platform, oversight of all assets, etc.
Advisor/Consultant Fee: .25% of account balance per year deducted quarterly. Third-Party group, hired by employer to oversee the 401k, fee for their monitoring and investment analytics services, access to their consultant services for all employees, investment guidance, or assistance with anything else related to the plan, etc)

In my correspondence with the third-party group I did find out that some low-cost bond funds may come available soon which would be nice as there are none now.

Current portfolio (with Vanguard):
Roth IRA:
Vanguard Intermediate-Term Bond Index Fund Admiral Shares (VBILX) – (21% of total portfolio)
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (23% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (5% of total portfolio)

Taxable:
Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) – (37% of total portfolio)
Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) – (10% of total portfolio)

My asset allocation is currently 80/20
Giant Cap: 45.03%
Large Cap: 28.91%
Mid Cap: 17.23%
Small Cap: 5.29%
Micro Cap: 0.51%
International/Emerging Markets: 15.25%
Bonds: 20%


Image
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Last edited by Cruz on Sat Jun 15, 2019 8:58 pm, edited 4 times in total.

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Watty
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Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by Watty » Sun Jun 02, 2019 4:21 pm

In the new 401k I would just use the Vanguard 2055 target date fund if that is when you are likely to retire. It has one of the lowest ERs in the funds you listed.

For the rest of the retirement money I would just have it mimic the same asset allocation as the 2055 fund using a three or four fund portfolio.

https://www.bogleheads.org/wiki/Three-fund_portfolio

RTQ248
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Joined: Sun Jun 02, 2019 4:17 pm

Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by RTQ248 » Sun Jun 02, 2019 4:29 pm

I am new to investing and in my 20s. I have a Vanguard Roth IRA. I was thinking of doing a 3 fund portfolio and thinking of purchasing the Admiral Shares Option. However, right now I do not have the minimum for each fund that I want to purchase.

Would it be better to buy a Target Date fund for the time being and then switch to the 3 funds once I have enough money? Or would it be better to buy the Exchange Traded Funds option of the funds that I want?

catlady
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Joined: Sat Mar 26, 2016 8:31 pm

Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by catlady » Sun Jun 02, 2019 4:55 pm

I would do the following
- Stop investing in taxable and put that % of your savings towards your 401k (it's not clear if you were investing in taxable previously because you didn't have access to a 401k)
- Remove the bonds from your Roth IRA as you mentioned
- Use the Vanguard 2055 target date fund for your 401k as Watty suggested
- Consider contributing less to your Roth IRA and put it into your 401k instead. Because of how the progressive tax system works, the money that you are currently paying 22% taxes on will likely be able to be withdrawn at a lower % in the future.
Last edited by catlady on Sun Jun 02, 2019 4:57 pm, edited 2 times in total.

catlady
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Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by catlady » Sun Jun 02, 2019 4:56 pm

RTQ248 wrote:
Sun Jun 02, 2019 4:29 pm
I am new to investing and in my 20s. I have a Vanguard Roth IRA. I was thinking of doing a 3 fund portfolio and thinking of purchasing the Admiral Shares Option. However, right now I do not have the minimum for each fund that I want to purchase.

Would it be better to buy a Target Date fund for the time being and then switch to the 3 funds once I have enough money? Or would it be better to buy the Exchange Traded Funds option of the funds that I want?
I would buy one at a time starting with total stock market.

RTQ248
Posts: 5
Joined: Sun Jun 02, 2019 4:17 pm

Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by RTQ248 » Sun Jun 02, 2019 5:07 pm

So here's some more information about me.
1) I'm a resident physician, so I'm in my low income earning years right now which is why I opted for the Roth
2) I have a 457b available to me through the hospital I work at and have also been maxing that out as well. That is through Fidelity and I'm more limited to what I have to choose from for that.

So I have been maxing out my Roth and I currently have the Target Date Retirement Fund. However, would I be better off going to the ETFs? I want to get Admiral Shares but only have the minimum investment for 2 of the 3 funds that I want to purchase.

Topic Author
Cruz
Posts: 132
Joined: Sun Mar 30, 2014 7:16 pm

Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by Cruz » Sun Jun 02, 2019 5:12 pm

Watty wrote:
Sun Jun 02, 2019 4:21 pm
In the new 401k I would just use the Vanguard 2055 target date fund if that is when you are likely to retire. It has one of the lowest ERs in the funds you listed.

For the rest of the retirement money I would just have it mimic the same asset allocation as the 2055 fund using a three or four fund portfolio.

https://www.bogleheads.org/wiki/Three-fund_portfolio
why do you suggest the 2055 fund? I understand that it is the target date fund for when I am likely to retire, but wouldn't it make sense to chose one of the target date funds (i.e. 2015 or 2020) with a higher proportion of bond funds to make up for the bond funds that I remove from my Roth IRA?

Topic Author
Cruz
Posts: 132
Joined: Sun Mar 30, 2014 7:16 pm

Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by Cruz » Sun Jun 02, 2019 5:13 pm

RTQ248 wrote:
Sun Jun 02, 2019 5:07 pm
So here's some more information about me.
1) I'm a resident physician, so I'm in my low income earning years right now which is why I opted for the Roth
2) I have a 457b available to me through the hospital I work at and have also been maxing that out as well. That is through Fidelity and I'm more limited to what I have to choose from for that.

So I have been maxing out my Roth and I currently have the Target Date Retirement Fund. However, would I be better off going to the ETFs? I want to get Admiral Shares but only have the minimum investment for 2 of the 3 funds that I want to purchase.
I would suggest starting your own thread, you will likely get better answers for your situation.

catlady
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Joined: Sat Mar 26, 2016 8:31 pm

Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by catlady » Sun Jun 02, 2019 5:14 pm

RTQ248 wrote:
Sun Jun 02, 2019 5:07 pm
So here's some more information about me.
1) I'm a resident physician, so I'm in my low income earning years right now which is why I opted for the Roth
2) I have a 457b available to me through the hospital I work at and have also been maxing that out as well. That is through Fidelity and I'm more limited to what I have to choose from for that.

So I have been maxing out my Roth and I currently have the Target Date Retirement Fund. However, would I be better off going to the ETFs? I want to get Admiral Shares but only have the minimum investment for 2 of the 3 funds that I want to purchase.
Honestly, your future contributions will likely eclipse your current investments so you can't really go wrong with any of the listed options.

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Watty
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Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by Watty » Sun Jun 02, 2019 5:16 pm

RTQ248 wrote:
Sun Jun 02, 2019 4:29 pm
I am new to investing and in my 20s. I have a Vanguard Roth IRA. I was thinking of doing a 3 fund portfolio and thinking of purchasing the Admiral Shares Option. However, right now I do not have the minimum for each fund that I want to purchase.

Would it be better to buy a Target Date fund for the time being and then switch to the 3 funds once I have enough money? Or would it be better to buy the Exchange Traded Funds option of the funds that I want?
It would be good to start a new thread with more of your information in this suggested format.

viewtopic.php?f=1&t=6212

Part of the reasonto use a new thread is that it gets confusing when you ask a question like this in someone else's thread since it is not always clear if a response was intended towards you or the original poster(OP)

This is not a big deal so don't worry about it.

Anyway I would just use a target date fund to start with since any difference in the expense ratios is pretty small when you look at it in dollar terms. For example if you have $20,000 in a Roth then a difference in the expense ratio of 0.05% is $10 a year. The advantage of a target date fund automatically rebalancing daily is likely worth more than that.

Topic Author
Cruz
Posts: 132
Joined: Sun Mar 30, 2014 7:16 pm

Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by Cruz » Sun Jun 02, 2019 5:22 pm

Watty wrote:
Sun Jun 02, 2019 5:16 pm
RTQ248 wrote:
Sun Jun 02, 2019 4:29 pm
I am new to investing and in my 20s. I have a Vanguard Roth IRA. I was thinking of doing a 3 fund portfolio and thinking of purchasing the Admiral Shares Option. However, right now I do not have the minimum for each fund that I want to purchase.

Would it be better to buy a Target Date fund for the time being and then switch to the 3 funds once I have enough money? Or would it be better to buy the Exchange Traded Funds option of the funds that I want?
It would be good to start a new thread with more of your information in this suggested format.

viewtopic.php?f=1&t=6212

Part of the reasonto use a new thread is that it gets confusing when you ask a question like this in someone else's thread since it is not always clear if a response was intended towards you or the original poster(OP)

This is not a big deal so don't worry about it.

Anyway I would just use a target date fund to start with since any difference in the expense ratios is pretty small when you look at it in dollar terms. For example if you have $20,000 in a Roth then a difference in the expense ratio of 0.05% is $10 a year. The advantage of a target date fund automatically rebalancing daily is likely worth more than that.
I understand the benefit of target date funds but are you suggesting that I move my entire Roth IRA into a target date fund as well as my 401k? My question was in relation to you suggestion of the 2055 target date fund, as I thought holding your bond funds in your 401k was more advantageous tax-wise.

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Watty
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Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by Watty » Sun Jun 02, 2019 6:23 pm

Cruz wrote:
Sun Jun 02, 2019 5:22 pm
Watty wrote:
Sun Jun 02, 2019 5:16 pm
RTQ248 wrote:
Sun Jun 02, 2019 4:29 pm
I am new to investing and in my 20s. I have a Vanguard Roth IRA. I was thinking of doing a 3 fund portfolio and thinking of purchasing the Admiral Shares Option. However, right now I do not have the minimum for each fund that I want to purchase.

Would it be better to buy a Target Date fund for the time being and then switch to the 3 funds once I have enough money? Or would it be better to buy the Exchange Traded Funds option of the funds that I want?
It would be good to start a new thread with more of your information in this suggested format.

viewtopic.php?f=1&t=6212

Part of the reasonto use a new thread is that it gets confusing when you ask a question like this in someone else's thread since it is not always clear if a response was intended towards you or the original poster(OP)

This is not a big deal so don't worry about it.

Anyway I would just use a target date fund to start with since any difference in the expense ratios is pretty small when you look at it in dollar terms. For example if you have $20,000 in a Roth then a difference in the expense ratio of 0.05% is $10 a year. The advantage of a target date fund automatically rebalancing daily is likely worth more than that.
I understand the benefit of target date funds but are you suggesting that I move my entire Roth IRA into a target date fund as well as my 401k? My question was in relation to you suggestion of the 2055 target date fund, as I thought holding your bond funds in your 401k was more advantageous tax-wise.
That comment was directed to the user RTQ248 which is why I suggested that they should start a new thread with their question.

nix4me
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Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by nix4me » Sun Jun 02, 2019 6:27 pm

100% s&p 500. Bonds are terrible for a young person in accumulation phase.

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Watty
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Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by Watty » Sun Jun 02, 2019 6:36 pm

Cruz wrote:
Sun Jun 02, 2019 5:12 pm
Watty wrote:
Sun Jun 02, 2019 4:21 pm
In the new 401k I would just use the Vanguard 2055 target date fund if that is when you are likely to retire. It has one of the lowest ERs in the funds you listed.

For the rest of the retirement money I would just have it mimic the same asset allocation as the 2055 fund using a three or four fund portfolio.

https://www.bogleheads.org/wiki/Three-fund_portfolio
why do you suggest the 2055 fund? I understand that it is the target date fund for when I am likely to retire, but wouldn't it make sense to chose one of the target date funds (i.e. 2015 or 2020) with a higher proportion of bond funds to make up for the bond funds that I remove from my Roth IRA?
I suggested using the 2055 fund in the 401k since it would be simpler and you would not need to worry about your asset allocation being changed by your new contributions.

Your existing Roth and Taxable account you could then just manage as sort of a separate portfolio and maybe rebalance it one a year.

If you had better index funds in your new 401k you could just manage it as one large combined portfolio but the problem is that most of the other funds have an expense ratio above 0.5% and you don't have a good total stock market index fund or a low cost international index fund or bond fund so you can save some money by using the lower cost target date 2055 fund.

Topic Author
Cruz
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Joined: Sun Mar 30, 2014 7:16 pm

Re: 29 with newly available 401k and AA check-up...question on fund selection

Post by Cruz » Mon Jun 03, 2019 9:37 am

Watty wrote:
Sun Jun 02, 2019 6:36 pm
Cruz wrote:
Sun Jun 02, 2019 5:12 pm
Watty wrote:
Sun Jun 02, 2019 4:21 pm
In the new 401k I would just use the Vanguard 2055 target date fund if that is when you are likely to retire. It has one of the lowest ERs in the funds you listed.

For the rest of the retirement money I would just have it mimic the same asset allocation as the 2055 fund using a three or four fund portfolio.

https://www.bogleheads.org/wiki/Three-fund_portfolio
why do you suggest the 2055 fund? I understand that it is the target date fund for when I am likely to retire, but wouldn't it make sense to chose one of the target date funds (i.e. 2015 or 2020) with a higher proportion of bond funds to make up for the bond funds that I remove from my Roth IRA?
I suggested using the 2055 fund in the 401k since it would be simpler and you would not need to worry about your asset allocation being changed by your new contributions.

Your existing Roth and Taxable account you could then just manage as sort of a separate portfolio and maybe rebalance it one a year.

If you had better index funds in your new 401k you could just manage it as one large combined portfolio but the problem is that most of the other funds have an expense ratio above 0.5% and you don't have a good total stock market index fund or a low cost international index fund or bond fund so you can save some money by using the lower cost target date 2055 fund.
Because the 2055 fund most closely matches my current AA? There really isn't a good bond option unless I used one the 2015 or 2020 target date funds.

Topic Author
Cruz
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Re: 29 with newly available 401k, help with fund selection

Post by Cruz » Mon Jun 03, 2019 9:31 pm

Does choosing the traditional option make the most sense for my 401k in the first place? If I can contribute close to the max I MAY be able to get into the 12% bracket.

Topic Author
Cruz
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Re: 29 with newly available 401k, help with fund selection

Post by Cruz » Thu Jun 06, 2019 7:37 am

morning bump. Hoping to get a few more responses on my situation of fund selection in my 401k and traditional vs Roth. I was thinking about choosing a target date fund with a higher bond percentage and move bonds out of my Roth IRA or could just go with a target date fit my current AA. As far as Roth vs traditional, I was leaning towards investing in traditional and use the tax savings to contribute to my Roth IRA but welcome to other thoughts.

lakpr
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Re: 29 with newly available 401k, help with fund selection

Post by lakpr » Thu Jun 06, 2019 10:02 am

With a $65k salary, I think you should be doing a 50:50 between Roth 401k and traditional 401k. Here is how I arrived at that conclusion.

Top of 12% bracket for a single = $39875, say $40k in round numbers

Initial salary = $65k
- $3k for medical insurance premiums (finger in the air estimate)
- $12.3k standard deduction for a single
=============
$ 49.7k taxable income

You need to defer $10k in traditional 401k to get into the 12% tax bracket. Once there, the remaining $9k should be invested in a Roth 401k. No point in deferring taxes once you are already in the lowest tax bracket(s), in general.

Topic Author
Cruz
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Re: 29 with newly available 401k, help with fund selection

Post by Cruz » Tue Jun 11, 2019 2:04 pm

lakpr wrote:
Thu Jun 06, 2019 10:02 am
With a $65k salary, I think you should be doing a 50:50 between Roth 401k and traditional 401k. Here is how I arrived at that conclusion.

Top of 12% bracket for a single = $39875, say $40k in round numbers

Initial salary = $65k
- $3k for medical insurance premiums (finger in the air estimate)
- $12.3k standard deduction for a single
=============
$ 49.7k taxable income

You need to defer $10k in traditional 401k to get into the 12% tax bracket. Once there, the remaining $9k should be invested in a Roth 401k. No point in deferring taxes once you are already in the lowest tax bracket(s), in general.
Thanks lakpr, that seems like a wise way of looking at my contributions.

I was looking through my Plan Disclosure document and noticed a section on fees and was wondering if these are standard with a 401k?? (I did not notice them with my previous employer, but may have not read the fine print):
"Type of Plan Administrative Fee:
Recordkeeping Fee: The annual Plan level fee is 0.37% of the Plan's assets. This amount will be deducted from participant accounts proportionally based upon account balance. For example, if your account balance is $10,000.00 you will have an estimated fee between $32.00 and $43.00 per year deducted quarterly.
Advisor/Consultant Fee: .25% of account balance per year deducted quarterly"

lakpr
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Re: 29 with newly available 401k, help with fund selection

Post by lakpr » Tue Jun 11, 2019 3:13 pm

Gosh, that is new information and bad news! You have just listed 0.62% as fees for your 401k plan, not including the plan funds’ own expense ratios. With this new information, there is no way I would contribute to a Roth 401k within the plan. I would still hold my nose and contribute the $10k per year to get me down to the 12% bracket, but no more. With the pre-tax 401k, your feed also is discounted by your marginal rate. That $43 per quarter you are paying, becomes only $34 per quarter.

There is a break even thumb rule I use, when confronted by the high expense 401k plans like yours. I divide the marginal tax rate (22% in your case) with the expense ratio you would incur including all admin fees (0.62% + 0.13% average, say = 0.75%) = 29 years. If you are planning to stay at this company for less than 29 years, it still makes sense for you to contribute to the plan on a pretax basis.

The money that you will have contributed to Roth 401k, I suggest you invest in a taxable account. There is a slight tax drag compared to Roth option, but better than paying 0.75% fee. In fact, if you stick to Vanguard funds like Total Stock Market Index or S&P 500 Index funds, your tax drag is really very minimal.

As your salary increases, though, try to also increase your contribution to the 401k plan to keep dropping yourself to the 12% bracket.

Topic Author
Cruz
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Joined: Sun Mar 30, 2014 7:16 pm

Re: 29 with newly available 401k, help with fund selection

Post by Cruz » Thu Jun 13, 2019 4:14 pm

lakpr wrote:
Tue Jun 11, 2019 3:13 pm
Gosh, that is new information and bad news! You have just listed 0.62% as fees for your 401k plan, not including the plan funds’ own expense ratios. With this new information, there is no way I would contribute to a Roth 401k within the plan. I would still hold my nose and contribute the $10k per year to get me down to the 12% bracket, but no more. With the pre-tax 401k, your feed also is discounted by your marginal rate. That $43 per quarter you are paying, becomes only $34 per quarter.

There is a break even thumb rule I use, when confronted by the high expense 401k plans like yours. I divide the marginal tax rate (22% in your case) with the expense ratio you would incur including all admin fees (0.62% + 0.13% average, say = 0.75%) = 29 years. If you are planning to stay at this company for less than 29 years, it still makes sense for you to contribute to the plan on a pretax basis.

The money that you will have contributed to Roth 401k, I suggest you invest in a taxable account. There is a slight tax drag compared to Roth option, but better than paying 0.75% fee. In fact, if you stick to Vanguard funds like Total Stock Market Index or S&P 500 Index funds, your tax drag is really very minimal.

As your salary increases, though, try to also increase your contribution to the 401k plan to keep dropping yourself to the 12% bracket.
I do not plan on staying with this company for 29 years, it will most likely be max 1-2 more years so pre-tax seems to make sense according to your rule.

Yes, the newly discovered fees aren't great - basically just reduces my employer match from 4% to 3.25%. I was able to get some info about the fee's which makes me a bit more annoyed about them.
- Recordkeeping fee: Fidelity’s cost for the administrative work on the plan, offering and maintenance of the online platform, oversight of all assets, etc.
- Advisor fee: Third-Party group, hired by employer to oversee the 401k, fee for their monitoring and investment analytics services, access to their consultant services for all employees, investment guidance, or assistance with anything else related to the plan, etc)

In my correspondence with the third-party group I did find out that some low-cost bond funds may come available soon which would be nice as there are none now. Would the Boglehead community suggest I invest in a stock fund (Vanguard S&P 500 or Mid-Cap) for now or a target retirement fund until a low cost bond option becomes available?

Topic Author
Cruz
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Re: 29 with newly available 401k, help with fund selection

Post by Cruz » Fri Jun 14, 2019 10:17 pm

Exchanged emails today with the president of the company I am paid by and it seems they shockingly know very little about 401Ks and think they, along with HSAs are scams...luckily all this company does is pay me and I don't actually interact with them. Moral of the story it seems there is nothing to be done about the fees unfortunately.

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ruralavalon
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Re: 29 with newly available 401k, help with fund selection

Post by ruralavalon » Sat Jun 15, 2019 11:09 am

Please simply add any new information to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is In one place.


Asset allocation.
Cruz wrote:
Sun Jun 02, 2019 2:56 pm
Age: 29
. . . . .
My asset allocation is currently 80/20
Giant Cap: 45.03%
Large Cap: 28.91%
Mid Cap: 17.23%
Small Cap: 5.29%
Micro Cap: 0.51%
International/Emerging Markets: 15.25%
Bonds: 20%
In my opinion a fixed income allocation of 20% is within the range of what is reasonable for age 29.

In my opinion your approximate 20% of stocks in international stocks is also within the range of what is reasonable.

Cruz wrote:
Sun Jun 02, 2019 5:12 pm
why do you suggest the 2055 fund? I understand that it is the target date fund for when I am likely to retire, but wouldn't it make sense to chose one of the target date funds (i.e. 2015 or 2020) with a higher proportion of bond funds to make up for the bond funds that I remove from my Roth IRA?
Yes it makes sense to use a target date fund which is close to your desired asset allocation.



Funds to consider in the 401k plan.
If you decide you don't wish to use a target date fund, then the better funds to consider using in your 401k include:
1) Vanguard 500 Index Fund Admiral Shares (VFIAX) ER 0.04%;
2) American Funds EuroPacific Growth R6 (both developed and emerging markets) (RERGX) ER 0.49%; and
3) Vanguard GNMA Admiral Shares (short-term, investment-grade Mortgage Backed Securities) (VFIJX) ER 0.11% (This can be used for part of your fixed income allocation.).


401k Contributions,
Cruz wrote:
Thu Jun 13, 2019 4:14 pm
I do not plan on staying with this company for 29 years, it will most likely be max 1-2 more years . . .
I suggest contributing as much as practical to your 401k (the annual maximum employee contribution allowed is $19k) in spite of those shocking added fees.

Contribute at least enough to get the full employer match. But don't limit yourself to that if you are able to contribute more.

Once you leave this employer you can rollover to an IRA at a low cost provider like Vanguard, or into a new employer's plan, so that you won't be stuck with those extra fees very long.


Roth versus traditional.
For most people traditional 401k contributions will likely be better. I believe that traditional contributions will likely be better for you ("average salary is ~$65k"), unless you will be eligible for a significant pension in addition to Social Security.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional 401k contributions will probably be better. In addition when you withdraw from your 401k in retirement, your income is not all taxed at your marginal tax rate specified for your tax bracket. 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)."

"Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. 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.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
Cruz
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Re: 29 with newly available 401k, help with fund selection

Post by Cruz » Sat Jun 15, 2019 8:53 pm

ruralavalon wrote:
Sat Jun 15, 2019 11:09 am
Please simply add any new information to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is In one place.


Asset allocation.
Cruz wrote:
Sun Jun 02, 2019 2:56 pm
Age: 29
. . . . .
My asset allocation is currently 80/20
Giant Cap: 45.03%
Large Cap: 28.91%
Mid Cap: 17.23%
Small Cap: 5.29%
Micro Cap: 0.51%
International/Emerging Markets: 15.25%
Bonds: 20%
In my opinion a fixed income allocation of 20% is within the range of what is reasonable for age 29.

In my opinion your approximate 20% of stocks in international stocks is also within the range of what is reasonable.

Cruz wrote:
Sun Jun 02, 2019 5:12 pm
why do you suggest the 2055 fund? I understand that it is the target date fund for when I am likely to retire, but wouldn't it make sense to chose one of the target date funds (i.e. 2015 or 2020) with a higher proportion of bond funds to make up for the bond funds that I remove from my Roth IRA?
Yes it makes sense to use a target date fund which is close to your desired asset allocation.



Funds to consider in the 401k plan.
If you decide you don't wish to use a target date fund, then the better funds to consider using in your 401k include:
1) Vanguard 500 Index Fund Admiral Shares (VFIAX) ER 0.04%;
2) American Funds EuroPacific Growth R6 (both developed and emerging markets) (RERGX) ER 0.49%; and
3) Vanguard GNMA Admiral Shares (short-term, investment-grade Mortgage Backed Securities) (VFIJX) ER 0.11% (This can be used for part of your fixed income allocation.).


401k Contributions,
Cruz wrote:
Thu Jun 13, 2019 4:14 pm
I do not plan on staying with this company for 29 years, it will most likely be max 1-2 more years . . .
I suggest contributing as much as practical to your 401k (the annual maximum employee contribution allowed is $19k) in spite of those shocking added fees.

Contribute at least enough to get the full employer match. But don't limit yourself to that if you are able to contribute more.

Once you leave this employer you can rollover to an IRA at a low cost provider like Vanguard, or into a new employer's plan, so that you won't be stuck with those extra fees very long.


Roth versus traditional.
For most people traditional 401k contributions will likely be better. I believe that traditional contributions will likely be better for you ("average salary is ~$65k"), unless you will be eligible for a significant pension in addition to Social Security.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional 401k contributions will probably be better. In addition when you withdraw from your 401k in retirement, your income is not all taxed at your marginal tax rate specified for your tax bracket. 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)."

"Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. 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.

Wiki article, "Traditional vs Roth".
"Tax considerations:
* If your current marginal tax rate is 15% or less, prefer a Roth.
* If you expect to have higher marginal rates than your current marginal rate for most of your career, prefer a Roth.
* If you will have a traditional account or a pension large enough to meet your expected retirement expenses (and you expect to take that pension shortly after retiring), prefer a Roth.
* Otherwise, prefer a traditional account."
Thanks for your insight, I always appreciate reading your posts!

No foreseeable pension, so Traditional seems like the best contribution option.

I did talk to the third-party advisor/consulting service and they said that it is likely more bond funds will be added to the 401k in the near future. Given that news, would you recommend investing in a Target Date fund for now and then moving my balance into one of the newly offered bond funds (assuming they have good ERs) and swapping some of the bond funds in my Roth IRA for stock funds?

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ruralavalon
Posts: 15727
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: 29 with newly available 401k, help with fund selection

Post by ruralavalon » Sun Jun 16, 2019 10:04 am

Cruz wrote:
Sat Jun 15, 2019 8:53 pm
Thanks for your insight, I always appreciate reading your posts!

No foreseeable pension, so Traditional seems like the best contribution option.

I did talk to the third-party advisor/consulting service and they said that it is likely more bond funds will be added to the 401k in the near future. Given that news, would you recommend investing in a Target Date fund for now and then moving my balance into one of the newly offered bond funds (assuming they have good ERs) and swapping some of the bond funds in my Roth IRA for stock funds?
You could do thst.

Or you could use some Vanguard GNMA Admiral Shares (short-term, investment-grade Mortgage Backed Securities) (VFIJX) ER 0.11% for part of your fixed income allocation until you see what is added.

It probably makes little difference since this is temporary.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
Cruz
Posts: 132
Joined: Sun Mar 30, 2014 7:16 pm

Re: 29 with newly available 401k, help with fund selection

Post by Cruz » Sun Jun 16, 2019 2:15 pm

ruralavalon wrote:
Sun Jun 16, 2019 10:04 am
Cruz wrote:
Sat Jun 15, 2019 8:53 pm
Thanks for your insight, I always appreciate reading your posts!

No foreseeable pension, so Traditional seems like the best contribution option.

I did talk to the third-party advisor/consulting service and they said that it is likely more bond funds will be added to the 401k in the near future. Given that news, would you recommend investing in a Target Date fund for now and then moving my balance into one of the newly offered bond funds (assuming they have good ERs) and swapping some of the bond funds in my Roth IRA for stock funds?
You could do thst.

Or you could use some Vanguard GNMA Admiral Shares (short-term, investment-grade Mortgage Backed Securities) (VFIJX) ER 0.11% for part of your fixed income allocation until you see what is added.

It probably makes little difference since this is temporary.

Thanks, you're right that it probably will not matter. I will invest in the target date fund and reevaluate if new funds become available in my 401k.

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jakehefty17
Posts: 113
Joined: Fri May 11, 2018 6:48 pm
Location: New York

Re: 29 with newly available 401k, help with fund selection

Post by jakehefty17 » Mon Jun 17, 2019 2:32 pm

Hello,

The recordkeeping and advisor/consultant fee are a bummer. Fees like that erode a lot of earning potential.

I'd suggest that you use a target date fund that best reflects the allocation you're looking for. Seems you have a decent idea what you're doing regarding holding assets across multiple accounts, you're right that pre-tax is a good place for your bond allocation.

Contribute at least enough for the match for the 401k, max out your Roth IRA. If you have an HSA health plan I'd max that out before the 401k.

If you're planning on leaving the company before long it will still be worthwhile to prioritize contributions to 401k over taxable contributions. If/when you rollover the account, you'll escape those fees. Hopefully your next employer has lower fees for their retirement benefits.
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

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