High ER 401k vs Taxable Account

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B_F_Skinner_Box
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High ER 401k vs Taxable Account

Post by B_F_Skinner_Box » Sun Jul 14, 2019 1:44 pm

Bogleheads,
First of all, I am excited to have found you - I'm currently reading "The Bogleheads' Guide to Investing" after having read several others along the same line (Simple Path to Wealth, Random Walk Down Wall Street) - Thank you for your consideration of this question :)

I (32m, 45k/yr) work at a private high school as a teacher and my wife (32f, 80k/yr) owns a cashflow positive company for the past 10 years with around 15 employees, and has been increasing in gross revenue nearly every year. The goal is to retire around 50 with somewhere in the neighborhood of 3mm to allow for a 3%WR and life comfortably. I am planning to dump my entire paycheck into invesments starting this year.

We have a 300k house, and owe 150k on it. We have 45k in investments, 20k in 401k (through my work) and 20k in Roth IRA, no debt (other than mortgage).

We plan to fund the Roth IRA every year, and do the 100% matching up to 3% for the 401k. My question, however, has to do with what to do with the REST of the money, whether to fully fund the 401k or put it in a taxed investment account.

The problem with the 401k is an above average expense ratio, and mediocre selection. There are 15 mutual funds to choose from (listed below) through TIAA-Cref, only four of which are below 1% ER. The closest to entire market of the four is the “CREF Equity Index R1” Which claims to attempt to mirror the Russell 3000, which is good. However, the expense ratio is 0.47% - and I could invest in VTSAX in a taxed account at 0.04% - We *ARE* wanting to retire early, so there are benefits to the taxed account in the first place. However, my wife’s company will have a make-shift “pension” system when she wants to step back, we will still be receiving money, and leave the company on a sort of low-maintenance autopilot.
Unfortunately, there is no option that I can see to get a 401k account (or equivalent) from my wife’s end, since it’s too costly to make a proper 401k, and a SEP IRA would require contributing to all employees in the company equally.

I plan to work at the company until “retirement”, so potentially ~20 more years.

TL;DR Should I do the minimum in the 401k (with 0.47% expense ratio) to collect 100% match? (~$350/mo) or fully fund the 401k (~$1583/mo) . Either way the remaining money will be going into a taxed account, and the ROTH IRA will be capped reguardless.

Thank you for your thoughts 😊 Glad I found the Sensible Intelligent Investing community through reddit, Bogleheads and books.

- High School Teacher

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Re: High ER 401k vs Taxable Account

Post by mcraepat9 » Sun Jul 14, 2019 1:56 pm

B_F_Skinner_Box wrote:
Sun Jul 14, 2019 1:44 pm
Bogleheads,
First of all, I am excited to have found you - I'm currently reading "The Bogleheads' Guide to Investing" after having read several others along the same line (Simple Path to Wealth, Random Walk Down Wall Street) - Thank you for your consideration of this question :)

I (32m, 45k/yr) work at a private high school as a teacher and my wife (32f, 80k/yr) owns a cashflow positive company for the past 10 years with around 15 employees, and has been increasing in gross revenue nearly every year. The goal is to retire around 50 with somewhere in the neighborhood of 3mm to allow for a 3%WR and life comfortably. I am planning to dump my entire paycheck into invesments starting this year.

We have a 300k house, and owe 150k on it. We have 45k in investments, 20k in 401k (through my work) and 20k in Roth IRA, no debt (other than mortgage).

We plan to fund the Roth IRA every year, and do the 100% matching up to 3% for the 401k. My question, however, has to do with what to do with the REST of the money, whether to fully fund the 401k or put it in a taxed investment account.

The problem with the 401k is an above average expense ratio, and mediocre selection. There are 15 mutual funds to choose from (listed below) through TIAA-Cref, only four of which are below 1% ER. The closest to entire market of the four is the “CREF Equity Index R1” Which claims to attempt to mirror the Russell 3000, which is good. However, the expense ratio is 0.47% - and I could invest in VTSAX in a taxed account at 0.04% - We *ARE* wanting to retire early, so there are benefits to the taxed account in the first place. Generally speaking, it makes sense to consider taxable accounts ahead of 401k if the expense ratios are 2% or more. 0.47% isn't even close. Max the 401k. Make sure you know all the ways there are to get money out of a 401k before 59.5. You will also have many low income years to do Roth conversions that will lower your tax amount further. This is a no brainer.However, my wife’s company will have a make-shift “pension” system when she wants to step back, we will still be receiving money, and leave the company on a sort of low-maintenance autopilot.
Unfortunately, there is no option that I can see to get a 401k account (or equivalent) from my wife’s end, since it’s too costly to make a proper 401k, and a SEP IRA would require contributing to all employees in the company equally.

I plan to work at the company until “retirement”, so potentially ~20 more years.

TL;DR Should I do the minimum in the 401k (with 0.47% expense ratio) to collect 100% match? (~$350/mo) or fully fund the 401k (~$1583/mo) . Either way the remaining money will be going into a taxed account, and the ROTH IRA will be capped reguardless. Max 401k and it's not really a close call.

Thank you for your thoughts 😊 Glad I found the Sensible Intelligent Investing community through reddit, Bogleheads and books.

- High School Teacher
Amateur investors are not cool-headed logicians.

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grabiner
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Re: High ER 401k vs Taxable Account

Post by grabiner » Sun Jul 14, 2019 4:00 pm

Welcome to the forum!
B_F_Skinner_Box wrote:
Sun Jul 14, 2019 1:44 pm
The problem with the 401k is an above average expense ratio, and mediocre selection. There are 15 mutual funds to choose from (listed below) through TIAA-Cref, only four of which are below 1% ER. The closest to entire market of the four is the “CREF Equity Index R1” Which claims to attempt to mirror the Russell 3000, which is good. However, the expense ratio is 0.47% - and I could invest in VTSAX in a taxed account at 0.04%

I plan to work at the company until “retirement”, so potentially ~20 more years.
The combination of these two statements mean that you expect to lose 0.43% annually to higher expenses for 20 years, a net loss of 8.26% (not 8.6% because of compounding). Once you retire, you can roll the 401(k) over to an IRA and get rid of the higher expenses.

You will lose much more than that with a taxable account, paying tax on dividends every year, and tax on the capital gains when you sell the fund.

My rule of thumb is to multiply the number of years you will be in the plan by the expense ratio difference. If that exceeds twice your tax rate on qualified dividends (30% if you pay no state tax and are in a moderate tax bracket), consider taxable investing once you get the full match. Your 8.6% is not close.
Wiki David Grabiner

rascott
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Re: High ER 401k vs Taxable Account

Post by rascott » Sun Jul 14, 2019 4:23 pm

401k to the max you can....no question. .47 ER is not that awful in the bigger picture.

How "early" is your early retirement goal? You are only talking maybe 6 years or so before you can tap all accounts penalty free. And you can get all your Roth contributions at any time, no penalty.

jcerickson
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Re: High ER 401k vs Taxable Account

Post by jcerickson » Sun Jul 14, 2019 4:58 pm

B_F_Skinner_Box wrote:
Sun Jul 14, 2019 1:44 pm
Unfortunately, there is no option that I can see to get a 401k account (or equivalent) from my wife’s end, since it’s too costly to make a proper 401k, and a SEP IRA would require contributing to all employees in the company equally.
Have you looked into a SIMPLE IRA for your wife's company? You said it has about 15 employees, which is under the 100 employee max for a SIMPLE IRA. Where I work, the employer chooses the option to match 3% for all those who participate via their salary reduction contributions. The current annual maximum an employee can contribute is less than a 401k at $13K ($16K with catch up) but it is worth a look and is easy to maintain!

https://www.irs.gov/retirement-plans/ch ... e-ira-plan

foster918
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Re: High ER 401k vs Taxable Account

Post by foster918 » Sun Jul 14, 2019 5:12 pm

Perhaps your wife can consider a SIMPLE IRA for her workplace retirement plan. I believe those are pretty low cost. It would require either having an employer match of 3% or an automatic 2% to everyone on the plan though.

Edit: jcerickson beat me to it

jcerickson
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Re: High ER 401k vs Taxable Account

Post by jcerickson » Sun Jul 14, 2019 5:16 pm

foster918 wrote:
Sun Jul 14, 2019 5:12 pm
Perhaps your wife can consider a SIMPLE IRA for her workplace retirement plan. I believe those are pretty low cost. It would require either having an employer match of 3% or an automatic 2% to everyone on the plan though.

Edit: jcerickson beat me to it
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Re: High ER 401k vs Taxable Account

Post by pkcrafter » Sun Jul 14, 2019 5:56 pm

Welcome,
B_F_Skinner_Box wrote:
Sun Jul 14, 2019 1:44 pm
Bogleheads,
First of all, I am excited to have found you - I'm currently reading "The Bogleheads' Guide to Investing" after having read several others along the same line (Simple Path to Wealth, Random Walk Down Wall Street) - Thank you for your consideration of this question :)

I (32m, 45k/yr) work at a private high school as a teacher and my wife (32f, 80k/yr) owns a cashflow positive company for the past 10 years with around 15 employees, and has been increasing in gross revenue nearly every year.

Your wife owns a successful company. Does she have a small business retirement account established?

The goal is to retire around 50 with somewhere in the neighborhood of 3mm to allow for a 3%WR and life comfortably. I am planning to dump my entire paycheck into invesments starting this year.

We have a 300k house, and owe 150k on it.

What are the monthly payments and what is the interest rate on the loan?

We have 45k in investments, 20k in 401k (through my work) and 20k in Roth IRA, no debt (other than mortgage).

20k in a Roth IRA. Who owns the Roth IRA. Do each of you have one?

We plan to fund the Roth IRA every year, and do the 100% matching up to 3% for the 401k. My question, however, has to do with what to do with the REST of the money, whether to fully fund the 401k or put it in a taxed investment account.

The problem with the 401k is an above average expense ratio, and mediocre selection. There are 15 mutual funds to choose from (listed below) through TIAA-Cref, only four of which are below 1% ER. The closest to entire market of the four is the “CREF Equity Index R1” Which claims to attempt to mirror the Russell 3000, which is good. However, the expense ratio is 0.47%

This isn't terrible, but are you aware of the rules on withdrawals from TIAA CREF?

- and I could invest in VTSAX in a taxed account at 0.04% - We *ARE* wanting to retire early, so there are benefits to the taxed account in the first place.

Yes, you will no doubt need a taxable account to save the amount you are talking about.


However, my wife’s company will have a make-shift “pension” system when she wants to step back, we will still be receiving money, and leave the company on a sort of low-maintenance autopilot.

Please provide more information o the make-shift pension. Maybe wife can sell the company?


Unfortunately, there is no option that I can see to get a 401k account (or equivalent) from my wife’s end, since it’s too costly to make a proper 401k, and a SEP IRA would require contributing to all employees in the company equally.

I think there are some potential options.


https://investor.vanguard.com/small-bus ... comparison

https://www.employeefiduciary.com/

I plan to work at the company until “retirement”, so potentially ~20 more years.

TL;DR Should I do the minimum in the 401k (with 0.47% expense ratio) to collect 100% match? (~$350/mo) or fully fund the 401k (~$1583/mo) . Either way the remaining money will be going into a taxed account, and the ROTH IRA will be capped reguardless.

Probably max it, but be aware of withdrawal rules.

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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ruralavalon
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Re: High ER 401k vs Taxable Account

Post by ruralavalon » Sun Jul 14, 2019 6:17 pm

The closest to entire market of the four is the “CREF Equity Index R1” Which claims to attempt to mirror the Russell 3000, which is good. However, the expense ratio is 0.47%
That is definitely a good fund to use, the expense ratio is not so high as to rule it out. Contribute the employee maximum of $19k annually and use this fund.

What are the other TIAA-CREF funds which have expense ratios below 1%?
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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B_F_Skinner_Box
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Re: High ER 401k vs Taxable Account

Post by B_F_Skinner_Box » Sun Jul 14, 2019 7:50 pm

pkcrafter wrote:
Sun Jul 14, 2019 5:56 pm

Your wife owns a successful company. Does she have a small business retirement account established?

No - But it's been suggested to try a "simple IRA" a few times in this thread - I'm looking into it - the complication there is that only three of the 15 or so employees are salary, the rest are hourly, and don't work many hours - so it would be pretty close to the 5,000 threshold of inclusion for the plan. But it's definitely something to think about.

What are the monthly payments and what is the interest rate on the loan?

Monthly payments are a hair over 2,000 (including tax/insurance escrow) on a 15 year mortgage at 3.5% - I don't plan to pay off the mortgage earlier, even though I'd honestly like to, as I just can't justify ignoring the likelihood of larger returns in the market. Even if the market crashes, I'm willing to take the risk for greater returns over a guaranteed 3.5%

20k in a Roth IRA. Who owns the Roth IRA. Do each of you have one?

We do both have one, both with Vanguard. They will both be maxed every year going forward - not that it matters but it's closer to 26k, I just wrote it down wrong in the original post.

This isn't terrible, but are you aware of the rules on withdrawals from TIAA CREF?

They don't let you take loans from the amount, and you either have to be retirement age or quit the job before you can move it to another company.


Yes, you will no doubt need a taxable account to save the amount you are talking about.


Yes - But I've become more convinced that maxing the 401k will take priority over the taxable account... and possibly adding a simple IRA


Please provide more information o the make-shift pension. Maybe wife can sell the company?


I say "pension" loosely, but she 100% owns the company, and already has a manager, she could just delegate more responsibilities to the manager, or even hire more staff to handle the day-to-day and continue to draw salary, while still being involved to a lesser degree in "retirement" - Or sell the company, but I see an ongoing salary as more valuable financially.


I think there are some potential options.


Yes, I'm looking in to the "simple IRA"

Probably max it, but be aware of withdrawal rules.

Paul

Thank you Paul!
Last edited by B_F_Skinner_Box on Sun Jul 14, 2019 8:06 pm, edited 3 times in total.

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B_F_Skinner_Box
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Re: High ER 401k vs Taxable Account

Post by B_F_Skinner_Box » Sun Jul 14, 2019 7:55 pm

ruralavalon wrote:
Sun Jul 14, 2019 6:17 pm
The closest to entire market of the four is the “CREF Equity Index R1” Which claims to attempt to mirror the Russell 3000, which is good. However, the expense ratio is 0.47%
That is definitely a good fund to use, the expense ratio is not so high as to rule it out. Contribute the employee maximum of $19k annually and use this fund.

What are the other TIAA-CREF funds which have expense ratios below 1%?
The other funds listed by name and ER

CREF Equity Index R1 0.47%
CREF Global Equities R1 0.53%
CREF Growth R1 0.49%
CREF Stock R1 0.56%

The first is the Russell 3000 index, the second an international fund, the third a "growth stock fund" and the fourth looks to be a combination of foreign and domestic...

FWIW the remainder of the funds and their respective ERs are listed below (I was wrong, a couple of them are also under 1%... but still higher)

TIAA Access Equity Index Fund T4 0.80%
TIAA Access Growth & Income Fund T4 1.15%
TIAA Access International Equity Fund T4 1.23%
TIAA Access Large-Cap Growth Fund T4 1.16%
TIAA Access Large-Cap Value Fund T4 1.15%
TIAA Access Mid-Cap Growth Fund T4 1.22%
TIAA Access Mid-Cap Value Fund T4 1.17%
TIAA Access Quant Small-Cap Equity Fund T4 1.16%
TIAA Access Real Estate Securities Fund T4 1.26%
TIAA Access Small-Cap Blend Index Fund T4 0.81%
TIAA Access Social Choice Equity Fund T4 0.92%


Thank you Ruralavalon!
Last edited by B_F_Skinner_Box on Sun Jul 14, 2019 8:01 pm, edited 1 time in total.

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teen persuasion
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Re: High ER 401k vs Taxable Account

Post by teen persuasion » Sun Jul 14, 2019 8:01 pm

While researching SIMPLE plans (my employer finally started one for us), I found that the $5k in income to participate rule isn't mandatory. The paperwork from Schwab to create a SIMPLE plan for an employer gives the employer the option to waive the $5k minimum income and open the SIMPLE IRA up to all employees, if desired.

DarkHelmetII
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Re: High ER 401k vs Taxable Account

Post by DarkHelmetII » Sun Jul 14, 2019 8:09 pm

Another vote to proceed with 401k e.g. 0.47% isn't THAT bad. Not a big enough difference to forgo tax benefits and other protections that come from being in a retirement account.

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Re: High ER 401k vs Taxable Account

Post by grabiner » Sun Jul 14, 2019 8:16 pm

B_F_Skinner_Box wrote:
Sun Jul 14, 2019 7:55 pm
The other funds listed by name and ER

CREF Equity Index R1 0.47%
CREF Global Equities R1 0.53%
CREF Growth R1 0.49%
CREF Stock R1 0.56%
If the 401(k) is too large for your US stock allocation, adding Global Equities would be reasonable. I believe that fund is about 1/3 US stock and 2/3 foreign stock.

I don't see a bond fund at all, which is odd in a 401(k); are you listing only stock funds?
Wiki David Grabiner

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B_F_Skinner_Box
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Re: High ER 401k vs Taxable Account

Post by B_F_Skinner_Box » Sun Jul 14, 2019 8:36 pm

grabiner wrote:
Sun Jul 14, 2019 8:16 pm
B_F_Skinner_Box wrote:
Sun Jul 14, 2019 7:55 pm
The other funds listed by name and ER

CREF Equity Index R1 0.47%
CREF Global Equities R1 0.53%
CREF Growth R1 0.49%
CREF Stock R1 0.56%
If the 401(k) is too large for your US stock allocation, adding Global Equities would be reasonable. I believe that fund is about 1/3 US stock and 2/3 foreign stock.

I don't see a bond fund at all, which is odd in a 401(k); are you listing only stock funds?
correct I only listed the stock funds - there were also bond funds, money markets, and real estate which I did not list - I figure I'd just keep it simple on this 403b, but they (bond index funds) do exist at similar ER's (in the 0.5% range) - specifically "CREF Bond Market Account (R1) (QCBMRX)" at 0.53% ER

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Re: High ER 401k vs Taxable Account

Post by Jefferson » Sun Jul 14, 2019 8:39 pm

I’m curious as to how you plan on hitting $3MM in 18 years. You’ve got <$100K invested at 32. If you invest your entire paycheck for the next 18 years, maybe you’ll have $1MM? (I haven’t done the exact math.)

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B_F_Skinner_Box
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Re: High ER 401k vs Taxable Account

Post by B_F_Skinner_Box » Sun Jul 14, 2019 8:43 pm

Jefferson wrote:
Sun Jul 14, 2019 8:39 pm
I’m curious as to how you plan on hitting $3MM in 18 years. You’ve got <$100K invested at 32. If you invest your entire paycheck for the next 18 years, maybe you’ll have $1MM? (I haven’t done the exact math.)
Correct - that assumes growth on the wife's company side - which I think is reasonable, but you never know. You are absolutely correct that if all we did was invest my paycheck (that's pretty much at its maximum already, other than inflation raises) It would grow to at best 1.5MM give or take by 50. Maybe 3MM is unreasonable by 50 - it all depends on company growth. I plan to live pretty much the same regardless of income, and any additional money will go into investments. Which I know is the prevailing philosophy around here :)

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B_F_Skinner_Box
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Re: High ER 401k vs Taxable Account

Post by B_F_Skinner_Box » Sun Jul 14, 2019 8:50 pm

Also can I say thank you so much to everyone that's responded - it's unbelievably helpful (and unexpected as to the level of detail). I hope to be able to give back here as I cruise through these forums.

I really can't express how much these replies have helped me sort through these plans.

Thank you thank you thank you

sawhorse
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Re: High ER 401k vs Taxable Account

Post by sawhorse » Sun Jul 14, 2019 8:53 pm

Do you have TIAA Traditional, and if so, what version of it? Do you have TIAA Real Estate Account?

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B_F_Skinner_Box
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Re: High ER 401k vs Taxable Account

Post by B_F_Skinner_Box » Sun Jul 14, 2019 8:58 pm

sawhorse wrote:
Sun Jul 14, 2019 8:53 pm
Do you have TIAA Traditional, and if so, what version of it? Do you have TIAA Real Estate Account?
I do have TIAA Real Estate Account (QREARX) at 0.83% ER

I'm not sure what subset of TIAA I have - I've seen that TIAA has better funds than what are available to me, but I don't have access to those in my 401k (actually a 403b, but same thing) all of the index funds I have available have the "R1" after their name if that's a clue to the type of access I have? I have listed all 15 of the stock mutual funds I have access to - there are also target date funds, money market funds, bonds, and real estate funds which I have not listed. My assumption is that there are different "tiers" of accounts, and my school opted for the less expensive one administratively, passing off the costs to their employees? There are other funds through TIAA which have lower ER's, I just can't view them under my account.

CREF Equity Index R1 0.47%
CREF Global Equities R1 0.53%
CREF Growth R1 0.49%
CREF Stock R1 0.56%
TIAA Access Equity Index Fund T4 0.80%
TIAA Access Growth & Income Fund T4 1.15%
TIAA Access International Equity Fund T4 1.23%
TIAA Access Large-Cap Growth Fund T4 1.16%
TIAA Access Large-Cap Value Fund T4 1.15%
TIAA Access Mid-Cap Growth Fund T4 1.22%
TIAA Access Mid-Cap Value Fund T4 1.17%
TIAA Access Quant Small-Cap Equity Fund T4 1.16%
TIAA Access Real Estate Securities Fund T4 1.26%
TIAA Access Small-Cap Blend Index Fund T4 0.81%
TIAA Access Social Choice Equity Fund T4 0.92%

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Watty
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Re: High ER 401k vs Taxable Account

Post by Watty » Sun Jul 14, 2019 9:51 pm

The 401k wiki has a section that gives a formula to help decide if a mediocre 401K is worth contributing to.

https://www.bogleheads.org/wiki/401(k)# ... re_choices

Given that you would only have the higher expenses for 18 years until you are 50 and then the money could be invested for decades it would have to be REALLY bad to pass on the deductible 401k.

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Re: High ER 401k vs Taxable Account

Post by ruralavalon » Mon Jul 15, 2019 8:04 am

B_F_Skinner_Box wrote:
Sun Jul 14, 2019 8:36 pm
grabiner wrote:
Sun Jul 14, 2019 8:16 pm
B_F_Skinner_Box wrote:
Sun Jul 14, 2019 7:55 pm
The other funds listed by name and ER

CREF Equity Index R1 0.47%
CREF Global Equities R1 0.53%
CREF Growth R1 0.49%
CREF Stock R1 0.56%
If the 401(k) is too large for your US stock allocation, adding Global Equities would be reasonable. I believe that fund is about 1/3 US stock and 2/3 foreign stock.

I don't see a bond fund at all, which is odd in a 401(k); are you listing only stock funds?
correct I only listed the stock funds - there were also bond funds, money markets, and real estate which I did not list - I figure I'd just keep it simple on this 403b, but they (bond index funds) do exist at similar ER's (in the 0.5% range) - specifically "CREF Bond Market Account (R1) (QCBMRX)" at 0.53% ER
If interested in stocks of international companies, then instead of CREF Equity Index R1, you could use CREF Global Equities R1 which is about 55% stocks U.S. companies and 45% stocks of international companies. It tracks the well diversified MSCI ACWI index.

CREF Bond Market Account R1 is also a reasonable fund to use in your 401k plan. It tracks the very diversified Bloomberg Barclays U.S. Aggregate Bond Index.

This just reinforces the view that you should contribute the maximum $19k/yr to your 401k as a priority ahead of contributions to a taxable brokerage account.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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