23 yr male / full-time / looking to max-out 401(k) + more

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fiend0011
Posts: 3
Joined: Tue Jun 28, 2011 10:43 pm

23 yr male / full-time / looking to max-out 401(k) + more

Post by fiend0011 »

Hello,

This may be a long post so I apologize for the length, I just want to be detailed and give the recommended info.

Basics
Age - 23 years old
Sex - Male
Job - Full-time (started last week)
Income - $75,600
Debts - 20k on car @ 5% for 5 yrs (looking to have it done in under 2), no other debts (and let's keep it that way!)
Filing Status - Single
Tax Rate Fed - 25%
Tax Rate State - AZ (not sure on rate, sorry)

I just started full-time last week with a good paying job with no student loans. I have a car to pay off but I can do that quickly. I am looking to set myself up for a comfortable retirement by saving wisely. I can afford to max out my 401(k) plus a bit more. My company does not do 401(k) matching but pays out according to profits, so I am no counting on their contributions (it'll just be considered extra retirement money - this way I don't count on it).

My retirement plans are not set in stone yet, but here is what I was thinking:

* Max-out annual 401(k) contributions (21% income)
* Temporarily divert additional IRA contributions to accelerate car payoff
* Establish 6-month emergency fund ($12k or so)

Now I need to figure out what to do with my 401(k) contributions. Below is a list of everything available to me:

Code: Select all

CORE ASSET CLASS FUNDS
	Stock Investments
		Large Blend
			LARGE CAP US STOCK

		Small Blend
			SMALL CAP US STOCK

		Foreign
			INTERNATIONAL STOCK

	Bond Investments
		Stable Value
			STABLE VALUE FUND

		International
			GLOBAL BOND FUND

ADDITIONAL INVESTMENT OPTIONS
	Stock Investments
		Company Stock
			COMPANY STOCK FUND

		Large Growth
			AF GROWTH OF AMER R5
			MGRS/C CAP APPR INST
			BRANDYWINE BLUE FUND
			FID CONTRAFUND
			FID GROWTH COMPANY
			SSGA NASDAQ 100
			TRP GROWTH STOCK
			VANG GRTH INDEX INST

		Large Blend
			CALVERT EQUITY I
			DODGE & COX STOCK
			LONGLEAF PARTNERS
			VANG INST INDEX PLUS
			VANG WINDSOR ADM

		Large Value
			AM CENT EQ INC INST
			BTC RUSSELL 1000 VAL
			LM CM VALUE I

		Mid-Cap Growth
			MGRS/C MID CAP INST
			FID MID CAP STOCK

		Mid-Cap Blend
			FID LOW PRICED STK
			LM CM SPC INV I
			TCW VALUE OPPS I
			VANG MIDCAP IDX INST
			VANG STRATEGIC EQ

		Small Growth
			VANG SM GR IDX INST

		Small Blend
			AM CENT SM COMP INST
			GS SM CAP VALUE INST
			ROYCE PA MUTUAL INV

		Small Value
			AM CENT SM CAP VAL I
			GS MIDCAP VALUE INST
			VANG SM VAL IDX INST

		World
			BLKRK GLB SM CAP I
			TEMPLETON GROWTH ADV

		Foreign
			AF EUROPAC GROWTH R5
			DELAWARE PT INTL EQ
			MSIF INTL SM CAP I
			VANGUARD INTL VALUE

		Specialty
			AM CENT REAL EST IS
			GAMCO GOLD AAA

		Diversfd Emerging Mkts
			SSGA ACTIVE EMRG MKT
			GMO EMRG COUNTRIES 3
			LAZARD EMERG MKTS EQ
			IVK VALUE OPPS INST
			IVK COMSTOCK Y

	Blended Fund Investments*
		Mid-Cap Growth
			MERGER FUND

		Large Blend
			BLKRK GLOBAL ALLOC I

		Large Value
			FID PURITAN

		Convertibles
			VANG CONVERTIBLE SEC
			FRANKLIN INCOME ADV

	Bond Investments
		Long Government
			PIM LT US GOVT INST

		Intermed Government
			VANG INFL PROT INST
			VANG INTM TREAS ADM

		Long-Term
			VANG LT BOND IDX INV

		Intermediate-Term
			CALVERT BOND I
			PIM TOTAL RT INST

		High-Yield
			FID CAPITAL & INCOME
			PIM HIGH YIELD INST

		Multisector
			LOOMIS BOND INST

		International
			WFA INTL BOND IS

		Emerging Markets
			PIM EM MKTS BD INST

		Short Term Investments
			INV GOVT & AGCY PRT
Honestly, I have no idea where to go with that list. I've heard good things about Vanguard and lower management fees & expense ratios, bonds are a bit safer vs. stocks, etc. However, I'm still at a loss - how should I split my 401(k) contributions according to the above options? My biggest goal is to invest wisely so that I can retire comfortably. I'm young, I have time to make mistakes, but I don't think I should make stupid decisions. I think I have a great opportunity here to set a solid future for myself, I don't want to blow it.

I'm going through the start-up kit now but was wondering what would be recommended? If there's more info I could provide, please let me know!

Thank you very much :-)
AerialP
Posts: 234
Joined: Thu Apr 12, 2007 12:34 pm
Location: Central Kentucky

Post by AerialP »

Were I you, being me, at 25 with that income, opportunity, and menu of selections......

I'd max the 401k for certain. 21%, or whatever you said, of your income. Don't count on employer contribution, like you said, but if profit sharing happens, it's icing on the dessert of the "free lunch" that is the 401k.
For the next few years, as you read up on Bogleheads and learn more, put perhaps 70% in the Vanguard Windsor Balanced (Admiral) Mutual Fund.
The remaining 30% on the "Multisector" Loomis Sayles Bond Fund (Institutional) for tax-advantaged foreign bond exposure in your diversification.

If at all possible, invest outside of this, too, taxable, in mostly a mix of a money market account at your local credit union and a small holding in a muni-bond fund particular to your state of residence, both combined for your emergency fund, and most of the remainder in Vanguard broad-based equity index fund or two, like Total Stock Market and/or FTSE World Ex-US.

If an HSA with the associated High Deductible Health Plan is an option in your employer's benefits, go for that, too, maxing out the withholding (and, hopefully, the match) and take advantage of it for regular check-ups under it: overall, dermatological, vision, dental, etc.

I'd ponder hard on the automobile situation. Consider whether transmogrifying your current auto-loan situation into a cheap reliable lightly-used knock-around pick-up or hatchback would work for you, supplemented with a mid-grade bicycle...dependent on your living situation and commute.

Good luck, brother!
kerplunk
Posts: 809
Joined: Sun Apr 17, 2011 9:58 pm

Post by kerplunk »

Disclaimer: Only you can choose your own asset allocation and how risky you want to get with your investments. This is just one option.

I agree with what AerialP said. Emergency fund, auto situation, and whatnot. Now the fun stuff:

I am 25 years old. At this age, I feel like if there was ever a time to be risky or aggressive with my investments, it would be now. I don't know if you feel the same way, but if I were in your shoes I would lean toward an asset allocation along these lines:

20% US Large-Cap Blend
20% US Small-Cap Value
20% International Large-Cap Value
20% International Small-Cap Blend
20% Bonds

Ideally using all Vanguard funds. You can get to a lot of this within your 401k. For example:

20% US Large-Cap Blend - VANG INST INDEX PLUS
20% US Small-Cap Value - VANG SM VAL IDX INST
20% International Large-Cap Value - VANGUARD INTL VALUE
20% International Small-Cap Blend - Ideally you would use "VSS" as an ETF here, possibly in your Roth IRA or taxable account
20% Bonds - Maybe something like: VANG INTM TREAS ADM

This format is talked about in this thread if you are interested.

No matter what you do, please look at the Bogleheads Wikipedia and learn about the Boglehead way. Whether or not you choose to adopt those practices, you will learn a lot and it's very beneficial. It's DEFINITELY worth it, I promise.
Bob's not my name
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Joined: Sun Nov 15, 2009 9:24 am

Post by Bob's not my name »

AerialP wrote:put perhaps 70% in the Vanguard Windsor Balanced (Admiral) Mutual Fund
Use the index choices instead.
AerialP wrote:The remaining 30% on the "Multisector" Loomis Sayles Bond Fund (Institutional) for tax-advantaged foreign bond exposure in your diversification.
Don't do this. Read: http://www.bogleheads.org/forum/viewtopic.php?t=69087
AerialP wrote:muni-bond fund particular to your state of residence
Don't do this. Use a lower cost Vanguard national muni fund instead, one of the shorter duration ones, if the tax-adjusted yield makes sense vs. taxable instruments. Even Vanguard's state-specific funds (and there isn't an Arizona one) don't compare favorably to its national funds. Also, you can have part of your emergency fund in a Roth IRA, because contributions can be withdrawn in an emergency.

Didn't try Googling your Arizona tax rate? It's probably 4.24%.
pkcrafter
Posts: 14681
Joined: Sun Mar 04, 2007 12:19 pm
Location: CA
Contact:

Post by pkcrafter »

fiend0011,

It's great you are getting started at a young age. You will get some recommendations, but it's most important that you do the homework so you can fully understand the reasons behind the recommendations. The start-up kit is an excellent place to begin. As a general recommendation I'd suggest you limit stock allocation to 75-80%. Since you aren't getting a match, you should contribute 5k to a Roth and the remainder of what you can afford to the 401k. The Roth will be lower cost. Consider both accounts as integrated parts of the whole portfolio.

You will find some first-book recommendations in the start up kit, but in the mean time, this online primer can help you get oriented.

http://investingroadmap.wordpress.com/


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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FNK
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Post by FNK »

A couple add-on suggestions:

Consider paying off the car debt before maxing out retirement investments. The reason is that you're guaranteed to pay 5% on the debt, but not guaranteed to make anything on stocks. If it were 3%, it would be a different story.

Do make a 20% position in bonds. Probably the experts will shoot me down on this one, but consider placing it in Vanguard Long-Term because you're not going to need it for a long time and might as well take the extra interest.

Check what the expense ratios on the funds are and throw away everything above 0.5%. That will trim the list well.
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Watty
Posts: 21863
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Post by Watty »

Income - $75,600

If you didn’t have much income earlier in the year this year the your tax situation will be different this year with half the income, about $38,000, so your tax rates will be lower this year so you should make sure that you contribute enough to the 401K to get down to the 15% tax bracket, then max out a Roth before putting more into the 401K. There will be minor differences but you can uses last year’s tax software, like Turbo Tax, or one of the free online tax web sites to calculate your tax situation which may be much different than you would intuitively think. This will also calculate he state taxes which can change your situation a lot. Once you have a dummy tax return set up you play with the numbers so try out different scenarios.

Next year it is unlikely that you will be able to get down to the 15% tax bracket so I would use the 401K and deductable IRA for a few years until you have a significant nest egg built up. Single people hit the higher tax brackets pretty quickly. If you are likely to get married some day and have a spouse and a couple of kids along with a mortgage deduction, then you will likely be in a lower tax bracket then and that might be a better time to make Roth contributions.

Saving boatloads of retirement money is great and important but people often run into other financial problems that can side track their plans so it is at least equally important to get a rock solid financial situation outside of your retirement savings;

I would suggest;

1) Once the car is paid off, then keep making the car payment to separate account to save up to pay cash for your next car.

2) Quickly save up an emergency fund of three months expenses and plan to have a year’s expenses in your emergency fund by the time you are 30. This isn’t just for bad things. Being financially secure can let you take advantage of special opportunities like going to work for a promising startup company that is financially shaky. Some people call this their “go to hell” money since with a year’s expenses in the bank they can tell their boss or whoever to “go to hell” if they get in a bad situation.

This is something you will money need to do once in your life if you replenish the money if you ever user it. This is for real emergencies only, once your are established things like expensive car repairs are not really emergencies since you know they will happen, just not when. Do not depend on your emergency fund for these so you will eventually also need a separate fund for routine unscheduled normal expenses.

3) Start saving up to buy a house. There is no need to hurry to do this at your age but by the time you are in your thirties having a full 20% down payment will save you a lot if you do buy a house then.

4) Commit to saving half of any future raises. This worked well for me and you will never miss the money.

5) You are young, single, and have a good income. Don’t get so focused on saving quickly that you miss opportunities that will be harder to do when you are older and have more commitments. Putting 5%, or whatever number works for you, into a separate account for “fun” money to be used for things like travel is very reasonable.

6) Having separate accounts for different purposes is a good way to go. Having these funds automatically deposited from your paycheck into the separate account is a great way to make sure that this actually happens and is painless. My employer allows automatic payroll deposits in up to four accounts and I have three automatic deposits (in addition to 401k money) automatically done to different accounts and this works well for me.

7) If you don’t already have it the get the Bogelheads Investing Guide;
http://www.amazon.com/s/?search-alias=a ... Bogleheads
Last edited by Watty on Wed Jun 29, 2011 1:56 pm, edited 1 time in total.
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Watty
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Post by Watty »

Do make a 20% position in bonds. Probably the experts will shoot me down on this one, but consider placing it in Vanguard Long-Term because you're not going to need it for a long time and might as well take the extra interest.
I am not an expert but I agree with this although your exact number may vary. Many young investors go with something like 100% stocks thinking they have a higher long term expected return and that putting anything thing in low yielding bonds is just dead money. (especially with the current interest low rates)

What they miss is that the purpose of the bonds isn’t to just dampen the return, but it is to provide a reservoir of money that will automatically “buy low and sell high” as the market swings when the portfolio is periodically rebalanced. For example if you set up a portfolio today that is 80% stocks and 20% bonds, then a year from now stocks are either up or down 30%, when you rebalance next year back to 80/20 you will automatically “buy low and sell high”. In theory the rebalancing when assets are high or low will more than offset the lower expected return of bonds and your portfolio will be MUCH less volatile. Adding more asset classes like international stocks will help out this rebalancing affect too.

The current low interest rates do make longer bonds more risky now since they will be clobbered when interest rates rise which is why I have chosen to keep my bonds shorter term.

Greg
mikep
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Joined: Wed Apr 22, 2009 9:27 pm

Post by mikep »

kerplunk wrote: 20% US Large-Cap Blend
20% US Small-Cap Value
20% International Large-Cap Value
20% International Small-Cap Blend
20% Bonds

Ideally using all Vanguard funds. You can get to a lot of this within your 401k. For example:

20% US Large-Cap Blend - VANG INST INDEX PLUS
20% US Small-Cap Value - VANG SM VAL IDX INST
20% International Large-Cap Value - VANGUARD INTL VALUE
20% International Small-Cap Blend - Ideally you would use "VSS" as an ETF here, possibly in your Roth IRA or taxable account
20% Bonds - Maybe something like: VANG INTM TREAS ADM
I have very similar 401(k) funds and this is what I do. Consider putting half the bonds in the TIPS fund also, it is institutional version with only 0.07% expenses. Those are very low expense funds.. for example the INST INDEX PLUS only costs 0.02% per year! Stick to the Vanguard funds, especially the ones with INST in the name, as those are cheaper than what you can get directly from Vanguard.

To complement the 401(k) I use my IRA at Vanguard for REIT's , international large and small index and use the int'l value fund for the part of international needed in the 401k due to limited 401k options.
Watty wrote: If you didn’t have much income earlier in the year this year the your tax situation will be different this year with have the income, about $38,000, so your tax rates will be lower this year so you should make sure that you contribute enough to the 401K to get down to the 15% tax bracket, then max out a Roth before putting more into the 401K. There will be minor differences but you can uses last year’s tax software, like Turbo Tax, or one of the free online tax web sites to calculate your tax situation which may be much different than you would intuitively think. This will also calculate he state taxes which can change your situation a lot. Once you have a dummy tax return set up you play with the numbers so try out different scenarios.
A roth 401(k) will also work to contribute in a low tax bracket, if you find you don't have enough 25% bracket space, and at $38K income my guess is you won't.
YDNAL
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Location: Biscayne Bay

Re: 23 yr male / full-time / looking to max-out 401(k) + mor

Post by YDNAL »

kerplunk wrote:Ideally using all Vanguard funds. You can get to a lot of this within your 401k. For example:

20% US Large-Cap Blend - VANG INST INDEX PLUS
20% US Small-Cap Value - VANG SM VAL IDX INST
20% International Large-Cap Value - VANGUARD INTL VALUE
20% International Small-Cap Blend - Ideally you would use "VSS" as an ETF here, possibly in your Roth IRA or taxable account
20% Bonds - Maybe something like: VANG INTM TREAS ADM

This format is talked about in this thread if you are interested.
fiend0011, welcome!

Impressive suggestion from kerplunk!
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
golfallday
Posts: 118
Joined: Sat Feb 14, 2009 3:43 am
Location: College Point, NY

Post by golfallday »

At your young age, after maxing 401(k), fund as much as you can in Roth IRA . Tax free growth and no mandatory withdrawls is really passing up free money at your age. Just stay current with your car loan.

Good luck, and welcome to the forum!
Topic Author
fiend0011
Posts: 3
Joined: Tue Jun 28, 2011 10:43 pm

Post by fiend0011 »

First off,

Thank you! This info helps beyond belief and really gives me a starting point. I'll try to address what points I can. First, about the car.
FNK wrote:Consider paying off the car debt before maxing out retirement investments. The reason is that you're guaranteed to pay 5% on the debt, but not guaranteed to make anything on stocks. If it were 3%, it would be a different story.
I'm definitely keeping it (it's a Honda, I expect it to last a long time) and it should be paid off within 14 months. After it's paid off, the standard car payment will be put into a separate account which will be for maintenance and a future vehicle purchase (many years from now). My 'accelerated' car payments (which just go into a savings account for now) are my future Roth IRA contributions (once the car is paid off, I'll be putting that extra amount into a Roth ... also serves as a motivator to pay it off sooner). I figured divert Roth IRA and maxed 401(k) (rather than the opposite) because the limit is so much higher. Either way, once the car is paid for, I'll be maxing both.

As far as stocks/bonds, I refuse to go 100/0 ... I'm young, not invincible. I figured putting the bonds into something long term and had my eye on VANG INTM TREAS ADM even before kerplunk had mentioned it. I'll probably split 80/20 or 75/25, but no more than 80% in stocks.
Watty wrote:3) Start saving up to buy a house. There is no need to hurry to do this at your age but by the time you are in your thirties having a full 20% down payment will save you a lot if you do buy a house then.

6) Having separate accounts for different purposes is a good way to go. Having these funds automatically deposited from your paycheck into the separate account is a great way to make sure that this actually happens and is painless. My employer allows automatic payroll deposits in up to four accounts and I have three automatic deposits (in addition to 401k money) automatically done to different accounts and this works well for me.

7) If you don’t already have it the get the Bogelheads Investing Guide
7) Already on it's way!

6) Absolutely 100% yes. I'm very detailed oriented so I hate seeing a lump sum in an account and then having to figure out how it's divided so I'm looking to open some accounts for separate causes (general savings / future car payments / emergency fund / my spending money / 'future' fund). The 'future' fund ties into your point #3:

3) That 'future' fund (which will probably be 2 accounts actually) will be for a house down payment (hopefully a long time from now) and also an educational fund in case I have any kids (also, hopefully a long time from now ;-)).
kerplunk wrote: Ideally using all Vanguard funds. You can get to a lot of this within your 401k. For example:

20% US Large-Cap Blend - VANG INST INDEX PLUS
20% US Small-Cap Value - VANG SM VAL IDX INST
20% International Large-Cap Value - VANGUARD INTL VALUE
20% International Small-Cap Blend - Ideally you would use "VSS" as an ETF here, possibly in your Roth IRA or taxable account
20% Bonds - Maybe something like: VANG INTM TREAS ADM
Knowing very little about all this stuff, that looks good to me ... gets an 80/20 split, mainly Vanguard, and not all my contributions are in 1 area.

Again, thank you to everyone, this info has helped immensely!
wilked
Posts: 1896
Joined: Thu Mar 24, 2011 1:50 pm

Post by wilked »

Basics
Age - 23 years old
Sex - Male
Job - Full-time (started last week)
Income - $75,600
Debts - 20k on car @ 5% for 5 yrs (looking to have it done in under 2), no other debts (and let's keep it that way!)
Filing Status - Single
Tax Rate Fed - 25%
Tax Rate State - AZ (not sure on rate, sorry)

I just started full-time last week with a good paying job with no student loans. I have a car to pay off but I can do that quickly. I am looking to set myself up for a comfortable retirement by saving wisely. I can afford to max out my 401(k) plus a bit more.

-------------
You might want to put a spreadsheet together, as I think that will help you see what is possible.

$20K @ 5% paid off in 2 years. Let's use a round number of $1000 a month to achieve your goal (in my head I think somewhere around $900 should get it paid off, but I'll round up).

So $75600 (salary) - $16500(401k max) = 59100
I am going to use 25% as a number for taxes, SS, health/dental, etc.
$59100 * 0.75 = 44325 = $3700 / month take home.
Less $1000 for the car payment, you have $2700 / month take home.
Of course only you know your car insurance, phone, rent, cable, elect, gas, water, food, fun, etc. I figure those could be anywhere from $750 to $2000 depending. Using an estimation I would guess you have $1000 in your pocket at the end of each month.

Most here would agree that you should max Roth before maxing (or at least in addition) your 401K. If you want to be aggressive and do both that will take your monthly pocket change down to ~$600.
campy2010
Posts: 1035
Joined: Sun Nov 28, 2010 5:01 pm

Post by campy2010 »

Lots of good investment advice here.

My only additional comment is that you could save yourself some money by refinancing your car loan. Penfed has a 2.49% loan and I have seen others at 1.99% recently.
Topic Author
fiend0011
Posts: 3
Joined: Tue Jun 28, 2011 10:43 pm

Post by fiend0011 »

wilked wrote:Basics
Age - 23 years old
Sex - Male
Job - Full-time (started last week)
Income - $75,600
Debts - 20k on car @ 5% for 5 yrs (looking to have it done in under 2), no other debts (and let's keep it that way!)
Filing Status - Single
Tax Rate Fed - 25%
Tax Rate State - AZ (not sure on rate, sorry)

I just started full-time last week with a good paying job with no student loans. I have a car to pay off but I can do that quickly. I am looking to set myself up for a comfortable retirement by saving wisely. I can afford to max out my 401(k) plus a bit more.

-------------
You might want to put a spreadsheet together, as I think that will help you see what is possible.

$20K @ 5% paid off in 2 years. Let's use a round number of $1000 a month to achieve your goal (in my head I think somewhere around $900 should get it paid off, but I'll round up).

So $75600 (salary) - $16500(401k max) = 59100
I am going to use 25% as a number for taxes, SS, health/dental, etc.
$59100 * 0.75 = 44325 = $3700 / month take home.
Less $1000 for the car payment, you have $2700 / month take home.
Of course only you know your car insurance, phone, rent, cable, elect, gas, water, food, fun, etc. I figure those could be anywhere from $750 to $2000 depending. Using an estimation I would guess you have $1000 in your pocket at the end of each month.

Most here would agree that you should max Roth before maxing (or at least in addition) your 401K. If you want to be aggressive and do both that will take your monthly pocket change down to ~$600.
Correct, my monthly pocket change is on the lower end (my budget shows $800-1000 after all expenses ... living with a roommate helps). I'm used to living like a student so I figure as long as I don't start making weekly trips to Vegas and live within my means, this will be more than enough.

I ended up going 70/30 ... playing it a bit safer but I've done well in life playing it safe so why change what isn't broken? I'll probably start playing the stock game and be a bit riskier there with money that has no relation to retirement, that way whatever I lose has no effect on my retirement (just a lesson) and anything I gain can be a bonus.
Redgts
Posts: 6
Joined: Wed Jun 29, 2011 4:11 pm

Post by Redgts »

You NEVER, NEVER, NEVER want to max out any gov sponsored retirement plan ...EVER ! Why you ask taxes taxes and more taxes. 401k's IRA's are good things dont get me wrong but only if funded correctly. The #1 rule to go by with 401k is only contribute what your company matches...thats it. Thats free money and we never turn down free money. Someone in there early 20's like yourself (im 29) could do much better than gov sponsered plans to help ourselfs in retirement years. Have you explored Indexed Univeral Life ? Roth IRA's? just to name a couple to start.

Money goes into 401k pre-tax, and is taxed when it comes out as distribution once we retire. The issue there is that taxes are most certainly going to go up in the next 30-40 years. Death and taxes are the only certain things in the world. So you will pay more tax on your retirement money later than you would now, and guess what you have less deductions at that age too, house is usually paid off, kids are grown etc, so you in a higher bracket and paying higher rates than right now. It makes sense to pay the taxes on retirement dollars now, and enjoy them later tax free. Hope this blabber helps some,

-Chris
kirent
Posts: 529
Joined: Tue Sep 28, 2010 1:06 am

Post by kirent »

Redgts wrote:You NEVER, NEVER, NEVER want to max out any gov sponsored retirement plan ...EVER ! Why you ask taxes taxes and more taxes. 401k's IRA's are good things dont get me wrong but only if funded correctly. The #1 rule to go by with 401k is only contribute what your company matches...thats it. Thats free money and we never turn down free money. Someone in there early 20's like yourself (im 29) could do much better than gov sponsered plans to help ourselfs in retirement years. Have you explored Indexed Univeral Life ? Roth IRA's? just to name a couple to start.

Money goes into 401k pre-tax, and is taxed when it comes out as distribution once we retire. The issue there is that taxes are most certainly going to go up in the next 30-40 years. Death and taxes are the only certain things in the world. So you will pay more tax on your retirement money later than you would now, and guess what you have less deductions at that age too, house is usually paid off, kids are grown etc, so you in a higher bracket and paying higher rates than right now. It makes sense to pay the taxes on retirement dollars now, and enjoy them later tax free. Hope this blabber helps some,

-Chris
Is this spam or a real person? :roll:
Disclaimer: I am not a financial or legal expert and all information I provide is given for entertainment purposes only, at your own risk and with no guarantees of accuracy.
Redgts
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Post by Redgts »

sorry for triple post, dont know why it did that, but I am Real person
mikep
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Post by mikep »

Redgts wrote:You NEVER, NEVER, NEVER want to max out any gov sponsored retirement plan ...EVER ! Why you ask taxes taxes and more taxes. 401k's IRA's are good things dont get me wrong but only if funded correctly. The #1 rule to go by with 401k is only contribute what your company matches...thats it. Thats free money and we never turn down free money. Someone in there early 20's like yourself (im 29) could do much better than gov sponsered plans to help ourselfs in retirement years. Have you explored Indexed Univeral Life ? Roth IRA's? just to name a couple to start.

Money goes into 401k pre-tax, and is taxed when it comes out as distribution once we retire. The issue there is that taxes are most certainly going to go up in the next 30-40 years. Death and taxes are the only certain things in the world. So you will pay more tax on your retirement money later than you would now, and guess what you have less deductions at that age too, house is usually paid off, kids are grown etc, so you in a higher bracket and paying higher rates than right now. It makes sense to pay the taxes on retirement dollars now, and enjoy them later tax free. Hope this blabber helps some,

-Chris
Indexed Univeral life.. no thanks

RE: even if taxes go up in future, what is paid then is the average rate spread across low brackets. What is saved today is at the full fed+ state marginal rate which for the OP is 25% + the state rate.
luckyduck288
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Post by luckyduck288 »

Redgts wrote:You NEVER, NEVER, NEVER want to max out any gov sponsored retirement plan ...EVER ! Why you ask taxes taxes and more taxes. 401k's IRA's are good things dont get me wrong but only if funded correctly. The #1 rule to go by with 401k is only contribute what your company matches...thats it. Thats free money and we never turn down free money. Someone in there early 20's like yourself (im 29) could do much better than gov sponsered plans to help ourselfs in retirement years. Have you explored Indexed Univeral Life ? Roth IRA's? just to name a couple to start.

Money goes into 401k pre-tax, and is taxed when it comes out as distribution once we retire. The issue there is that taxes are most certainly going to go up in the next 30-40 years. Death and taxes are the only certain things in the world. So you will pay more tax on your retirement money later than you would now, and guess what you have less deductions at that age too, house is usually paid off, kids are grown etc, so you in a higher bracket and paying higher rates than right now. It makes sense to pay the taxes on retirement dollars now, and enjoy them later tax free. Hope this blabber helps some,

-Chris
I don't get this advice. Isn't a Roth IRA a "government sponsored" retirement plan just the same as a 401(k) or TIRA? There is nothing wrong with maxing out all of your tax-advantaged space (401(k), Roth, etc.). It's certainly a better retirement foundation than many alternatives for most of us. It might make sense to fund both a 401(k) and a Roth for tax-rate diversification in retirement since none of us know what tax rates will be 40 years from now.

Life insurance? No thanks with the fees. Unless you are incredibly rich I doubt life insurance is of much importance for funding your retirement at this point.
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Watty
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Post by Watty »

Redgts wrote:You NEVER, NEVER, NEVER want to max out any gov sponsored retirement plan ...EVER ! Why you ask taxes taxes and more taxes. 401k's IRA's are good things dont get me wrong but only if funded correctly. The #1 rule to go by with 401k is only contribute what your company matches...thats it. Thats free money and we never turn down free money. Someone in there early 20's like yourself (im 29) could do much better than gov sponsered plans to help ourselfs in retirement years. Have you explored Indexed Univeral Life ? Roth IRA's? just to name a couple to start.

Money goes into 401k pre-tax, and is taxed when it comes out as distribution once we retire. The issue there is that taxes are most certainly going to go up in the next 30-40 years. Death and taxes are the only certain things in the world. So you will pay more tax on your retirement money later than you would now, and guess what you have less deductions at that age too, house is usually paid off, kids are grown etc, so you in a higher bracket and paying higher rates than right now. It makes sense to pay the taxes on retirement dollars now, and enjoy them later tax free. Hope this blabber helps some,

-Chris
-1

Life insurance as an investment for a single guy? Sigh…… Not only it is a bad investment but he doesn’t need the life insurance.

The best you can guess is that the tax structure in retirement will be at least vaguely similar to the way that it looks now. In this case you will be in a very low tax bracket for the first $30-50K of income so you really want at least that much taxable income.

In addition if you in the 25 combined tax bracket then by making deductable contributions you can get $133 in a 401k compared to just $100 in a taxable account or Roth. When building up your core “I’m not going to eat dog food!” getting the extra larger amount in the 401K helps protect you in case there are career setbacks or health problems and you end up having a lot less assets when you retire than you would plan on. I am not retired yet but I have seen LOTS of people not doing as well financial as they hoped because of setbacks beyod their control.


Greg
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Post by retiredjg »

fiend, welcome to the forum! I'm going to suggest something very different. It's not my idea - it's been tossed around here for maybe a year, but not discussed too much. The author may or may not be Jim Otar in his publication Unveiling the Retirement Myth. Apparently it is included in his book, but I don't know if it is his idea or not.

The idea, as I understand it, is to start out at about 50% stocks and 50% bonds and as you gain experience, increase your percentage of stocks to the level that you have learned through experience is appropriate for you. Yes, flies in the face of conventional wisdom, but here's why it could be a very good idea.

When you are starting out, it simply does not matter much what you invest in - 100% stocks, 50% stocks, 0% stocks, does not matter. Hard to believe, isn't it?

Let's say you can invest $5k a year and you put it all in stocks. Let's say you have a good year and your investment increases to $5500. In year two, you add another $5k and at that point you have $10,500.

Let's say your twin does the same thing, but invests his/her $5k in money market funds. At the end of the year, he/she has $5050 and adding in next years money has $10,050.

Now there is a difference in $10,500 and $10,050, but that's not what you should look at. What actually contributed most to the increased value of the investments? Was it the additional money? Or the choice of stocks vs money market? Well, the additional money almost doubled the value of the investments and the fund itself added a little. So what is more important - adding more money or investing in the "right" fund?

But, you say you want that extra $450! Well, that's only if the market goes up. What happens when the market goes down? You will likely have less money than you invested in the first place and your twin will have the same that he/she invested or maybe a little more. Hmm, which is the "right" investment now?

So, when you are starting, it just does not matter if you are all stocks, all bonds, all cash, etc. because you can't predict if the market is going to be kind or not. So why not invest half and half for several years and see how markets work and what happens to your actual money when the markets do their thing. Then, when you have some actual personal knowledge under your belt, invest in what you now know through own experience is likely to be your "correct" stock to bond ratio.

The other option is to just guess (most people guess at too high a percentage of stock) and go through a market crash and possibly sell at the bottom because you were in over your head and just couldn't take it any more.

Anyway, some people would like to see this idea get more discussion and this seemed like a good thread to bring it up. I don't particularly think you need this advice as you are already considering a properly diversified portfolio. But seemed like a good time anyway. :wink:
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Post by retiredjg »

Redgts, welcome to the forum!
Redgts wrote:You NEVER, NEVER, NEVER want to max out any gov sponsored retirement plan ...EVER !....
Whoever taught you this was trying to sell you something. Or, perhaps, teaching you to sell something. And some of your arguments sound reasonable because they do contain some particle of truth. Unfortunately, much of what you have used as "proof" is not completely thought out yet and not supported by facts in my opinion.

Why don't you hang around here for awhile and see if the other side of the argument doesn't start to make some sense to you?
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Re: 23 yr male / full-time / looking to max-out 401(k) + mor

Post by YDNAL »

Redgts wrote:You NEVER, NEVER, NEVER want to max out any gov sponsored retirement plan ...EVER !

Have you explored Indexed Univeral Life ?
You have to be joking!
Redgts wrote:Money goes into 401k pre-tax, and is taxed when it comes out as distribution once we retire. The issue there is that taxes are most certainly going to go up in the next 30-40 years. Death and taxes are the only certain things in the world. So you will pay more tax on your retirement money later than you would now, and guess what you have less deductions at that age too, house is usually paid off, kids are grown etc, so you in a higher bracket and paying higher rates than right now. It makes sense to pay the taxes on retirement dollars now, and enjoy them later tax free. Hope this blabber helps some,

-Chris
Yes, money that comes out is taxed at 0%, then 10%, then 15%, then..... The average for a retiree is likely MUCH lower than OP will pay today in the 25%++ tax bracket.
fiend0011 (OP) wrote:Filing Status - Single
Tax Rate Fed - 25%
Tax Rate State - AZ (not sure on rate, sorry)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Lente
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Post by Lente »

Watty wrote:
Income - $75,600

If you didn’t have much income earlier in the year this year the your tax situation will be different this year with half the income, about $38,000, so your tax rates will be lower this year so you should make sure that you contribute enough to the 401K to get down to the 15% tax bracket, then max out a Roth before putting more into the 401K. There will be minor differences but you can uses last year’s tax software, like Turbo Tax, or one of the free online tax web sites to calculate your tax situation which may be much different than you would intuitively think. This will also calculate he state taxes which can change your situation a lot. Once you have a dummy tax return set up you play with the numbers so try out different scenarios.
I've never understood this...why should one care if they are in the 15% tax bracket? I mean, I get the taxes are lower on that incremental income, but it's a marginal benefit (pun intended) at best. It seems like the reasons for choosing a roth (lower taxes now, higher taxes later) hold true whether you are just at the 15% bracket, or just into the 25% bracket. I guess my point is, lower taxes are good, I get that; but is there some larger benefit I'm missing?
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Post by market timer »

Lente wrote:I've never understood this...why should one care if they are in the 15% tax bracket? I mean, I get the taxes are lower on that incremental income, but it's a marginal benefit (pun intended) at best. It seems like the reasons for choosing a roth (lower taxes now, higher taxes later) hold true whether you are just at the 15% bracket, or just into the 25% bracket. I guess my point is, lower taxes are good, I get that; but is there some larger benefit I'm missing?
Marginal cost of putting $1 into a Roth: $1
Marginal cost of putting $1 into a 401K: $1*(1-t)

Where t is the marginal income tax rate (state, city, and Federal).

Marginal benefit of putting $1 into a Roth: V_r
Marginal benefit of putting $1 into a 401K: V_4

The investor should maximize surplus by deciding which of the following is greater: (V_r - 1) or (V_4 - 1 + t). Clearly, the answer depends on t.
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Post by Lente »

market timer wrote:
Lente wrote:I've never understood this...why should one care if they are in the 15% tax bracket? I mean, I get the taxes are lower on that incremental income, but it's a marginal benefit (pun intended) at best. It seems like the reasons for choosing a roth (lower taxes now, higher taxes later) hold true whether you are just at the 15% bracket, or just into the 25% bracket. I guess my point is, lower taxes are good, I get that; but is there some larger benefit I'm missing?
Marginal cost of putting $1 into a Roth: $1
Marginal cost of putting $1 into a 401K: $1*(1-t)

Where t is the marginal income tax rate (state, city, and Federal).

Marginal benefit of putting $1 into a Roth: V_r
Marginal benefit of putting $1 into a 401K: V_4

The investor should maximize surplus by deciding which of the following is greater: (V_r - 1) or (V_4 - 1 + t). Clearly, the answer depends on t.
V_r?
V_4?
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Post by market timer »

Lente wrote:V_r?
V_4?
These depend on time to retirement, asset allocation, future expected savings, future expected tax rates, etc. Point is, they should not depend on whether one is just above or below the 25% tax bracket today.

I estimate V_r = 1.20 and V_4 = 1 for making my own investment decisions, based on a simple Excel model.

More info in this paper: http://papers.ssrn.com/sol3/papers.cfm? ... id=1141963
Last edited by market timer on Wed Jun 29, 2011 11:44 pm, edited 1 time in total.
Lente
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Post by Lente »

Is this a standard nomenclature found somewhere in literature or the boglehead wiki, or something you have created yourself?
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Post by market timer »

Lente wrote:Is this a standard nomenclature found somewhere in literature or the boglehead wiki, or something you have created yourself?
The nomenclature is my own, but the concept is not. See the Poterba paper for more info.
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Post by Redgts »

to all defending gov plans like there the greastest in the world, most people with 401ks have lost money, especially since 2008, they dont know alternatives exist. Also the money is not liquid. And in the future your income tax bracket will be HIGHER, you cannot argue that. With baby boomers set to retire and the social security benefits turned on, social security will be gone by 2030 or earlier, which mean will all will be paying more income tax to offset this. TAx rates will double, triple, maybe even more. 401k was never designed to be a retirement plan, now its only thing most people have. Pension plan days are gone. Lets not forget about inflation too!! Prices double every 18-20 years. Younger people dont buy life insurance for the traditional sense, but as a supplement to retirement. These policies out today build cash value in a cash account tied to the s&p, that you can access tax free $$ at retirement age each year for the rest of your life. Im just saying you should look into alternatives. Maybe search out a tax free retirement specialist in your area.
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Post by Bob's not my name »

Grab the guns and beans, Leroy. Let's head to the hills.
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Post by Johm221122 »

Most people have not lost money in 401's and most people don't buy life insurance for retirement
Redgts
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Post by Redgts »

Johm221122 wrote:Most people have not lost money in 401's and most people don't buy life insurance for retirement
you typed this with a serious face and not laughing?

I work in the financial industry friend, you are grossly misinformed
Johm221122
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Post by Johm221122 »

I have a 401 and your way off base
Redgts
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Post by Redgts »

Redgts wrote:
Johm221122 wrote:Most people have not lost money in 401's and most people don't buy life insurance for retirement
you typed this with a serious face and not laughing?

I work in the financial industry friend, you are grossly misinformed
Since the housing and financial markets began to collapse in 2007-2009, about 39% of all Americans have had their homes foreclosed on, lost their jobs, gotten underwater on a mortgage or fallen more than two months behind on their mortgage payments, but im sure there retirement account are doing ...just fine. Get real
Johm221122
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Post by Johm221122 »

39% is most and not all the would have lost money in 401
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Re: 23 yr male / full-time / looking to max-out 401(k) + mor

Post by YDNAL »

Redgts wrote:to all defending gov plans like there the greastest in the world, most people with 401ks have lost money, especially since 2008, they dont know alternatives exist. Also the money is not liquid. And in the future your income tax bracket will be HIGHER, you cannot argue that.
Redgts wrote:you typed this with a serious face and not laughing?

I work in the financial industry friend, you are grossly misinformed
GTS,

There is nothing wrong with life insurance (term) to protect loved ones. There's plenty WRONG with Indexed Univeral Life (or any other such product) as an investment.
Redgts wrote:Someone in there early 20's like yourself (im 29) could do much better than gov sponsered plans to help ourselfs in retirement years. Have you explored Indexed Univeral Life ?
If you didn't read my previous post, REGARDLESS of what happens to tax rates - which is an unknown to you and everyone else - retirees pay 0% for a chunck of their withdrawal, then 10%, then 15%, then....
Previously, YDNAL wrote:Yes, money that comes out is taxed at 0%, then 10%, then 15%, then..... The average for a retiree is likely MUCH lower than OP will pay today in the 25%++ tax bracket.
fiend0011 (OP) wrote:Filing Status - Single
Tax Rate Fed - 25%
Tax Rate State - AZ (not sure on rate, sorry)
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Redgts
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Post by Redgts »

Johm221122 wrote:39% is most and not all the would have lost money in 401
Do you wear a helmet to school growing up? just curious
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Watty
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Post by Watty »

Lente wrote:
Watty wrote:
Income - $75,600

If you didn’t have much income earlier in the year this year the your tax situation will be different this year with half the income, about $38,000, so your tax rates will be lower this year so you should make sure that you contribute enough to the 401K to get down to the 15% tax bracket, then max out a Roth before putting more into the 401K. There will be minor differences but you can uses last year’s tax software, like Turbo Tax, or one of the free online tax web sites to calculate your tax situation which may be much different than you would intuitively think. This will also calculate he state taxes which can change your situation a lot. Once you have a dummy tax return set up you play with the numbers so try out different scenarios.
I've never understood this...why should one care if they are in the 15% tax bracket? I mean, I get the taxes are lower on that incremental income, but it's a marginal benefit (pun intended) at best. It seems like the reasons for choosing a roth (lower taxes now, higher taxes later) hold true whether you are just at the 15% bracket, or just into the 25% bracket. I guess my point is, lower taxes are good, I get that; but is there some larger benefit I'm missing?

Yes there are other benefits of having some retirement money in a Roth instead of just a 401K or IRA

The main ones are;

1) Diversification of tax investments types in retirement. Some years in retirement you may have higher than normal expenses that might put you into a significantly higher tax bracket. For example if you are retired and want to buy a new car (or boat, RV, etc) then withdrawing that much money from a 401K in one year could put you in a pretty high tax bracket.

Likewise, at certain levels of taxable income more of your social security becomes taxable which can result in a pretty high marginal tax rate. Money coming from a Roth is not counted for this so you can juggle which accounts to use each year to minimize the taxation of your social security. When I get close to retirement I will be looking at this very closely and may do some Roth conversions before I start social security if this will be a problem for me.

http://www.bogleheads.org/wiki/Taxation ... y_benefits

2) More flexibility. The Roth contributions can be withdrawn at any time so if you get in a bind then they money would be accessible without paying a penalty or taxes. Some people even keep part of their emergency fund in a Roth.
Lente
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Post by Lente »

Watty wrote:
Lente wrote:
Watty wrote:
Income - $75,600

If you didn’t have much income earlier in the year this year the your tax situation will be different this year with half the income, about $38,000, so your tax rates will be lower this year so you should make sure that you contribute enough to the 401K to get down to the 15% tax bracket, then max out a Roth before putting more into the 401K. There will be minor differences but you can uses last year’s tax software, like Turbo Tax, or one of the free online tax web sites to calculate your tax situation which may be much different than you would intuitively think. This will also calculate he state taxes which can change your situation a lot. Once you have a dummy tax return set up you play with the numbers so try out different scenarios.
I've never understood this...why should one care if they are in the 15% tax bracket? I mean, I get the taxes are lower on that incremental income, but it's a marginal benefit (pun intended) at best. It seems like the reasons for choosing a roth (lower taxes now, higher taxes later) hold true whether you are just at the 15% bracket, or just into the 25% bracket. I guess my point is, lower taxes are good, I get that; but is there some larger benefit I'm missing?

Yes there are other benefits of having some retirement money in a Roth instead of just a 401K or IRA

The main ones are;

1) Diversification of tax investments types in retirement. Some years in retirement you may have higher than normal expenses that might put you into a significantly higher tax bracket. For example if you are retired and want to buy a new car (or boat, RV, etc) then withdrawing that much money from a 401K in one year could put you in a pretty high tax bracket.

Likewise, at certain levels of taxable income more of your social security becomes taxable which can result in a pretty high marginal tax rate. Money coming from a Roth is not counted for this so you can juggle which accounts to use each year to minimize the taxation of your social security. When I get close to retirement I will be looking at this very closely and may do some Roth conversions before I start social security if this will be a problem for me.

http://www.bogleheads.org/wiki/Taxation ... y_benefits

2) More flexibility. The Roth contributions can be withdrawn at any time so if you get in a bind then they money would be accessible without paying a penalty or taxes. Some people even keep part of their emergency fund in a Roth.
Just to clarify - my question is not whether there is benefit to using a Roth IRA or 401k, there are reasons for that...my question is why people are so concerned with getting under the magic 15% marginal bracket. The roth limits are much higher than that, so it's not the ability to contribute that's in question.
Lente
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Post by Lente »

market timer wrote:
Lente wrote:V_r?
V_4?
These depend on time to retirement, asset allocation, future expected savings, future expected tax rates, etc. Point is, they should not depend on whether one is just above or below the 25% tax bracket today.

I estimate V_r = 1.20 and V_4 = 1 for making my own investment decisions, based on a simple Excel model.

More info in this paper: http://papers.ssrn.com/sol3/papers.cfm? ... id=1141963
Thanks for the link. I found Mr. Poterba's page on the MIT site, but didn't see that paper referenced...I will read.
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