Late-start Fidelity 401(k)

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SantaClaraSurfer
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Late-start Fidelity 401(k)

Post by SantaClaraSurfer » Tue Mar 12, 2019 3:13 pm

Quick background: my wife and I both recently took higher-paying jobs, paid off debt (just in time for children's college years), and our savings/investing takes the form of her 401(k) (100% Vanguard Target Date), my catch-up 401(k) with Fidelity (see below) and our Schwab Brokerage account which houses our Emergency Funds, Goal Savings, College Savings, and all our additional savings and investments.

I just started maxing out my 401(k) using the age 50 catch up (no match from employer) so I have $20k now and will (income permitting) add $25K annually through my SSI qualification in 17 years. My goal for this account is simplicity, self-sufficiency and a decent amount of set it and forget it. Maybe an annual rebalance and glide path into more bonds as I get older and that's it.

Here's what I've chosen:

FSKAX (Fidelity Total Market), ER .015%: 44% allocation
FSPSX (Fidelity Int'l Blend), ER .045%: 12% allocation
FXNAX (Fidelity US Bond Index), ER .025%: 12% allocation
TRRJX (T Rowe Price 2035 Target Date), ER .7%: 32% allocation

By my math this gets me 23% International, 18.5% Bonds (with TRRJX glide increasing), and an overall ER of .239%.

My rationale for including the T Rowe Price Target date was add some diversity/quality in Bond and International that is just not available via the funds offered in my plan. I am willing to pay the ER to attain this goal and have read good things about T Rowe Price with the ER being the only reservation ever expressed. The next best options (w ERs) available in my fund are RWIGX (.44%) /RNWGX (.62%) for Int'l, PGTQX (.58%) /PTRQX (.41%) for Bonds, all of which have fees high enough that I would not want to substitute for the Fidelity options and I'm honestly not sure that they are better/more reliable than a T Rowe Price Target Fund. There's also FXAIX and TRBCX as options for US, but I think the US Total Market Fund (FSKAX) keeps it very simple and super low ER.

We are currently adding an additional $40K per year to the Savings/Investment component of the Schwab taxable account (wholly separate from college savings) at a 40/60 ratio of Savings (Bonds etc.) to Investments (ETFs). We see that account slightly differently than the two 401(k)s as it's not exclusively retirement. We may pull money out of it for a housing down payment someday, for example. (We currently rent.) We have the Schwab account mostly following the general Boglehead Schwab ETF advice (SCHB, SCHE, SCHF, SLYV, SCHZ), and I've opened a Treasury Direct account for purchasing I Bonds, as well, so I do not feel like I am too far off the mark with the taxable account plan and attaining decent broad diversification across all the accounts.

My main question is what do more experienced retirement investors think of the Fidelity 401(k) allocation I've chosen? Do you have any advice, problems to flag? Please understand that my goal for my 401(k) account is to have it be a self-sufficient (wrt to diversification), retirement account. My wife's 401(k) is better funded than mine and she is younger than me and will likely be working when I hit the semi-retired zone. I was tempted, because of this, to add more risk with my 401(k), especially given my late start, but I've come to the conclusion that it should be as boring as possible. Heck, I'd even be willing to put the whole thing into TRRJX 2035 since that pretty much matches my attitude about the purpose of the account.

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GoldStar
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Re: Late-start Fidelity 401(k)

Post by GoldStar » Tue Mar 12, 2019 3:40 pm

I wouldn't do the TRRJX fund myself - I'm an 100% index fund guy though. I don't believe in actively managed funds (any longer) as I know there are few that consistently beat their indexes over the years. I would stick with just a mix of the three Fidelity Index funds you have listed.

I would be curious to know how you think that the T-Rowe fund is more diversified and quality than the total-market funds and how you think that mix of large actively managed T-Rowe-Price funds (that is within TRRJX) is going to beat the market by at least 0.7% every year. If you aren't convinced it will beat the market consistently by 0.7% every year - then you should stick with the other three. You also don't know how they will change the mix-up over the years - I believe they are free to move in whatever large funds they want investors to hold.

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GoldStar
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Re: Late-start Fidelity 401(k)

Post by GoldStar » Tue Mar 12, 2019 3:46 pm

As an example to my statement above - the current top holding of TRRJX is "T. Rowe Price Growth Stock (PRGFX)"
If you compare this fund to a similar passive Index fund (like Vanguard's Growth Index Fund) it is lagging by several percentage points each year.
Why pay more for weaker performance? I would do similar comparisons on every fund in its current make-up.
You can get really great diversification with the three fidelity funds you list - TRRJX is likely to just drag down your returns.

megabad
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Re: Late-start Fidelity 401(k)

Post by megabad » Tue Mar 12, 2019 4:18 pm

SantaClaraSurfer wrote:
Tue Mar 12, 2019 3:13 pm
My main question is what do more experienced retirement investors think of the Fidelity 401(k) allocation I've chosen? Do you have any advice, problems to flag? Please understand that my goal for my 401(k) account is to have it be a self-sufficient (wrt to diversification), retirement account. My wife's 401(k) is better funded than mine and she is younger than me and will likely be working when I hit the semi-retired zone. I was tempted, because of this, to add more risk with my 401(k), especially given my late start, but I've come to the conclusion that it should be as boring as possible. Heck, I'd even be willing to put the whole thing into TRRJX 2035 since that pretty much matches my attitude about the purpose of the account.
You have very limited exposure to emerging international markets if that matters to you (Fidelity Int is only developed). The amount of risk you take should not be different than your wife because you are both planning for the exact same situation. This doesn't mean that you would necessarily have the exact same funds/allocation in each 401k since you would want to hold funds where it is more cost and tax efficient to do so (for the both of you together). Also, as other posters have indicated, I don't see a need for the T Rowe Price fund.

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SantaClaraSurfer
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Re: Late-start Fidelity 401(k)

Post by SantaClaraSurfer » Tue Mar 12, 2019 5:03 pm

megabad wrote:
Tue Mar 12, 2019 4:18 pm
You have very limited exposure to emerging international markets if that matters to you (Fidelity Int is only developed). The amount of risk you take should not be different than your wife because you are both planning for the exact same situation. This doesn't mean that you would necessarily have the exact same funds/allocation in each 401k since you would want to hold funds where it is more cost and tax efficient to do so (for the both of you together). Also, as other posters have indicated, I don't see a need for the T Rowe Price fund.
She is 100% in VTIVX which is a Target Date Fund with an ER of 0.06%.

If I had that option, I would simply do the same, but with a different date to reflect my age.

The first goal is to maintain and sustain the contribution level.
The second goal is to keep it simple and "stay the course-able" come what may.

For my wife, VTIVX fits that. For me, adding the TRRJX helps me embrace the Fidelity options.

As it stands, I think both FSPSX or FXNAX do have some holes/concerns. You mention emerging international, which I agree with, but a corollary of that is how focused FSPSX is on Japan (25%)...which wouldn't be my preference, and certainly would make me think twice about expanding FSPSX in the allocation (3% Japan is okay by me, 6% or 9% of my 401(k) would not be.) FXNAX may serve the role of a bond fund well, but 9 of the top 10 holdings are Ginnie Mae, Fannie Mae or Freddie Mac, which is pretty specific.

What I like about adding the T Rowe Price Fund is that I tick off multiple boxes inside of my 401(k) including adding improved Bond and International diversity while keeping my overall ER to 0.239%. I can live with that at this point. Of course, I will also keep reading and learning, thanks!

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SantaClaraSurfer
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Re: Late-start Fidelity 401(k)

Post by SantaClaraSurfer » Tue Mar 12, 2019 5:14 pm

GoldStar wrote:
Tue Mar 12, 2019 3:46 pm
TRRJX is likely to just drag down your returns.
1. Thank you for both of your replies, very appreciated.

2. I guess I just don't conceptualize my 401(k) goal that way. Part of it is preservation, part of it is growth, and part of it is coming up with a strategy that I can follow, contribute to, and see through into retirement years.

For me, there's already an artificial barrier in the funds that are available via my employer's program, which may change multiple times, as it has already. Personally, I feel like concluding that there's sufficient diversity in the low cost index funds offered is not accurate. So I either "pay" by accepting some additional fees to get something closer to the diversification I want in a single account, or I pay by accepting the limitations of FXNAX or FSPSX, which I see mostly in terms of greater downside risk (see my other comment above), not in terms of dragging down returns.

Thank you again! Much to think about!

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GoldStar
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Re: Late-start Fidelity 401(k)

Post by GoldStar » Tue Mar 12, 2019 6:34 pm

SantaClaraSurfer wrote:
Tue Mar 12, 2019 5:14 pm
GoldStar wrote:
Tue Mar 12, 2019 3:46 pm
TRRJX is likely to just drag down your returns.
1. Thank you for both of your replies, very appreciated.

2. I guess I just don't conceptualize my 401(k) goal that way. Part of it is preservation, part of it is growth, and part of it is coming up with a strategy that I can follow, contribute to, and see through into retirement years.

For me, there's already an artificial barrier in the funds that are available via my employer's program, which may change multiple times, as it has already. Personally, I feel like concluding that there's sufficient diversity in the low cost index funds offered is not accurate. So I either "pay" by accepting some additional fees to get something closer to the diversification I want in a single account, or I pay by accepting the limitations of FXNAX or FSPSX, which I see mostly in terms of greater downside risk (see my other comment above), not in terms of dragging down returns.

Thank you again! Much to think about!

I guess I don't see how investing in the entire market isn't diverse but you could certainly do worse.

Also - not sure how the actively managed trowe funds help with downside risk - some of those underlying managednfunds have fallen harder and taken longer to return during downsides as compared with the market as a whole.

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Wiggums
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Re: Late-start Fidelity 401(k)

Post by Wiggums » Tue Mar 12, 2019 7:39 pm

GoldStar wrote:
Tue Mar 12, 2019 3:40 pm
I wouldn't do the TRRJX fund myself - I'm an 100% index fund guy though. I don't believe in actively managed funds (any longer) as I know there are few that consistently beat their indexes over the years. I would stick with just a mix of the three Fidelity Index funds you have listed.

I would be curious to know how you think that the T-Rowe fund is more diversified and quality than the total-market funds and how you think that mix of large actively managed T-Rowe-Price funds (that is within TRRJX) is going to beat the market by at least 0.7% every year. If you aren't convinced it will beat the market consistently by 0.7% every year - then you should stick with the other three. You also don't know how they will change the mix-up over the years - I believe they are free to move in whatever large funds they want investors to hold.
I would get rid of the target date fund as well.

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SantaClaraSurfer
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Re: Late-start Fidelity 401(k)

Post by SantaClaraSurfer » Tue Mar 12, 2019 8:51 pm

GoldStar wrote:
Tue Mar 12, 2019 6:34 pm
I guess I don't see how investing in the entire market isn't diverse but you could certainly do worse. (1.)

Also - not sure how the actively managed trowe funds help with downside risk (2.) - some of those underlying managednfunds have fallen harder and taken longer to return during downsides as compared with the market as a whole.
1. Which is why I put 44% into FSKAX!! (And would also note that I am putting 68% of my 401(k) in low cost Fidelity Index Funds.)

2. However, to cite one example, due to its focus FSPSX has 25% of its total investments in Japan. If I scaled FSPSX to use as a 36% Int'l allocation that would put 9% of my total 401(k) in Japanese stocks. I would call that a possible downside risk that there's no reason a US investor should take. Wouldn't that be sacrificing diversification on the altar of available low cost index funds? The same can be said for the selection of Bonds available in FXNAX. There's some risk in the focus even though the ER is sound and it's basically a very good index fund.

I am not saying that TRRJX is ideal, or even that my allocation should be accepted as orthodox, however, by fitting TRRJX at 32% of my 401(k) I get an International exposure that ticks multiple categories (Large Cap, Value, Emerging, Int'l Bonds, Int'l Emerging Bonds) that I would rather have IN my 401(k) mix than leave out, even if some of the underlying funds that get me that exposure aren't ones that I would have chosen independently. The same could be said about exposure to some of the asset classes (Real Estate) or the minor anti-inflation strategies included with TRRJX.

At the end of the day, every investor selecting from limited 401(k) funds from an employer will have some kind of calculations similar to the one's I've made. I don't think that's radical. Most everyone in this situation is trying to fit some square pegs into round holes. I'm happy to come out at $23.90 in expenses per $10,000 invested. In recent memory, many have fared much worse!!

In my case, I want to keep my 401(k) somewhat diverse all by itself and include a slightly different allocation (making sure I hit the certain bond and international components) than I might otherwise have selected. I am doing this in part because I don't see the Schwab taxable account as exclusively a retirement account and want to be able to liquidate some large part of it if we choose to purchase housing instead of renting. In which case, having built my 401(k) to be able to stand alone may well come in handy, even though I've started very, very late!!

Thank you for getting me to think about all of this! Not saying I'm right, just trying to tack the right course.

miket29
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Re: Late-start Fidelity 401(k)

Post by miket29 » Tue Mar 12, 2019 9:18 pm

SantaClaraSurfer wrote:
Tue Mar 12, 2019 3:13 pm
We are currently adding an additional $40K per year to the Savings/Investment component of the Schwab taxable account (wholly separate from college savings) at a 40/60 ratio of Savings (Bonds etc.) to Investments (ETFs). We see that account slightly differently than the two 401(k)s as it's not exclusively retirement.
Check to see if your plan allows after-tax contributions and in-plan conversions to Roth. This is becoming more common. My employer has it with our Fidelity 401K, yours may too. So instead of contributing this money to your taxable fund you'd put some of the exact same dollars into the 401K as after-tax and then convert them to Roth a few times a year; in this way the money will never be taxed again. You would want to hold high-growth potential funds in such a Roth, not bonds.

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SantaClaraSurfer
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Re: Late-start Fidelity 401(k)

Post by SantaClaraSurfer » Tue Mar 12, 2019 10:25 pm

miket29 wrote:
Tue Mar 12, 2019 9:18 pm
My employer has it with our Fidelity 401K, yours may too. So instead of contributing this money to your taxable fund you'd put some of the exact same dollars into the 401K as after-tax and then convert them to Roth a few times a year; in this way the money will never be taxed again. You would want to hold high-growth potential funds in such a Roth, not bonds.
My wife's employer has a free, online consulting service to help with in-plan Roth conversion and other topics, we will ask! I know my employer offers an after-tax 401(k) option, but I assumed our (new) joint income total would likely remove us from most of those options entirely, hence the taxable account. Thanks for replying and for the suggestion!

miket29
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Re: Late-start Fidelity 401(k)

Post by miket29 » Tue Mar 12, 2019 11:02 pm

If this works for you you're golden! My only regret is this wasn't around when I was 15 years younger and farther from retirement.

Look up mega backdoor Roth on this site and others to get an overview of how it would work and prepare some questions to ask the advisor.

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GoldStar
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Re: Late-start Fidelity 401(k)

Post by GoldStar » Wed Mar 13, 2019 8:18 am

I am assuming you do realize you can easily move between funds inside this 401k later without any taxable event occurring. You mention that you want this 401k to be a self-standing diversified holding while you manage another 401k account and a taxable account separately. If you look at all of these as a single portfolio you can optimize your choices across all of them (e.g. - you could put ALL your 401k into the Total-Market fund; and pick international elsewhere). If you later cash out a large portion of your Schwab taxable for a home purchase - at that time - you can choose to rebalance by moving money inside the 401ks. Looking at my portfolio as a whole is what made the biggest difference for me in optimizing my portfolio as well as simplifying it. Just something else to think about (if you haven't already).

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Re: Late-start Fidelity 401(k)

Post by chevca » Wed Mar 13, 2019 8:39 am

GoldStar wrote:
Wed Mar 13, 2019 8:18 am
I am assuming you do realize you can easily move between funds inside this 401k later without any taxable event occurring. You mention that you want this 401k to be a self-standing diversified holding while you manage another 401k account and a taxable account separately. If you look at all of these as a single portfolio you can optimize your choices across all of them (e.g. - you could put ALL your 401k into the Total-Market fund; and pick international elsewhere). If you later cash out a large portion of your Schwab taxable for a home purchase - at that time - you can choose to rebalance by moving money inside the 401ks. Looking at my portfolio as a whole is what made the biggest difference for me in optimizing my portfolio as well as simplifying it. Just something else to think about (if you haven't already).
This ^^

It seems you're making things overly complicated, OP.

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SantaClaraSurfer
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Re: Late-start Fidelity 401(k)

Post by SantaClaraSurfer » Wed Mar 13, 2019 2:17 pm

GoldStar wrote:
Wed Mar 13, 2019 8:18 am
(e.g. - you could put ALL your 401k into the Total-Market fund; and pick international elsewhere). If you later cash out a large portion of your Schwab taxable for a home purchase - at that time - you can choose to rebalance by moving money inside the 401ks.
1. I am aggressively learning and appreciative of the multiple opportunities for me to learn on the forum in general and in this thread.

2. My current Fidelity 401(k) pie chart is super simple and I understand how easy it is to rebalance since I have been doing just that.

3. However, I do disagree with the above suggestion.

Let's say that the horizon for pulling money out of the Schwab Taxable account for a down payment is 10 years. Let's say that in year 9 we have a US Market event similar to 2008-9 and US Total Market equities lose MORE than their gains of the intervening 9 years.

Scenario A: I follow your advice. In nine years my 401(k) has been 100% invested in a US Total Market Fund. I haven't rebalanced any of these gains. I've reinvested the dividends, made my monthly contribution, and that's it. In Year 9, I lose, more or less, the entirety of those gains in a 2008/9 scenario.

Regardless of how the Taxable account has fared (remember it is carrying an extra weight to International), I now am going to have a conversation with my wife about whether we can still afford to take 30-50% of our taxable account and use it for a mortgage down payment given that we are significantly off course with my 401(k). Does it even make sense to buy housing in this scenario? And even if it does make sense, how persuasive am I going to sound given how I managed my 401(k)? My wife could (and should) ask why I invested my 401(k) 100% in a Total US Market fund. My answer would be a very interesting real world portfolio challenge.

Scenario B: For the next nine years US Total Markets make steady gains. Every year I reinvest my dividends and rebalance my total gains inside my 401(k), which in this scenario, has meant rebalancing into the Bond portion of my 401(k). I do this manually with my Fidelity funds, and passively via the allocation adjustments in the Target Date Fund portion of my 401(k). Additionally, the bond allocation portion of my portfolio grows from 18% to closer to 30% as I near my retirement date. In the taxable account, since I've treated the portion of the account that might be used for a down payment as it's own thing (ie. not relied on it for diversification across accounts), I've been able to steadily move the housing funds into safer investments as we approach the possible housing purchase date.

When the Year 9 market event hits, the equities portion of my 401(k) takes a significant hit. Realistically, our taxable account takes a hit, too. But my 401(k)'s diversification, and the fact that I've steadily rebalanced stock gains into bonds, means that I am still on course to my 17 year goal. On a family conversation level, the market event is simple and undestandable: our rebalancing now goes towards stocks and not bonds. Our conversation about retirement and the possible housing purchase are on track. What's happened isn't ideal, but we structured our strategy to account for this outcome and we are best positioned to make an appropriate decision about housing and retirement.

Conclusion: The whole attractiveness of the Boglehead approach is the ability to stay the course and to achieve acceptable outcomes over the long term even given adverse market events.

For the life of me, I cannot fathom recommending putting my entire 401(k) into a single US Total Market index fund. (I wonder how much that advice is influenced by the fact that index funds are currently experiencing a decade in which that advice would retroactively look amazing.)

As I've emphasized, my philosophy centers on a sustainable, understandable strategy. First and foremost, we need to keep earning, saving and putting money in. Second, we need to have a formula that allows us to stay the course. That formula should be smart, simple and understandable even in an adverse environment. That is what has drawn me to the Boglehead approach.

Finally, I am cognizant of the fact that our happiness with our long term financial outcomes will be impacted not just by basis points and expense ratios, but also whether our retirement planning is perceived as fair.

We cannot control the context of market events, but that context can directly impact our happiness in ways much more significant than whether we beat or underperformed the market by .7%. For example, as someone who will likely retire (or at least semi-retire) prior to my wife, I very much want her decision on when to retire to be based on her own happiness and how it fits our financial goals proactively, not in reaction to a market event.

Thank you again for challenging me, and forcing me to enunciate my positions.

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GoldStar
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Re: Late-start Fidelity 401(k)

Post by GoldStar » Wed Mar 13, 2019 2:36 pm

SantaClaraSurfer wrote:
Wed Mar 13, 2019 2:17 pm

For the life of me, I cannot fathom recommending putting my entire 401(k) into a single US Total Market index fund. (I wonder how much that advice is influenced by the fact that index funds are currently experiencing a decade in which that advice would retroactively look amazing.)
I was merely using this as an example (Can't make real specific suggestions since you didn't provide info on your wife's 401k and your taxable and anything else you might have). For example - if your spouse has better bond fund choices than you in her 401K you could put all (or most) your 401K money in Total-US-Stock-Market; she could put all her 401K in Bond; and you could put all (most) taxable in International. This might give you the exact Asset-Allocation you are looking for in better fund choices than you would have trying to have 3 micro-Asset-Allocations.
I also wasn't suggesting (or didn't mean to) that you never re-balance. For example - if you did as I stated below and found that you were too heavily weighted in US-Stock after 1 year then you could start putting Bonds in your 401K as well as your spouses. I specifically pointed out you could buy/swap into other funds easily in your 401k over the years as your circumstances and AA goes off kilter. There is no Taxable event - very easy to move stuff around inside 401K as needed.
If you think it through you will hopefully see the advantages of managing your Asset Allocation across all your accounts rather than trying to manage separate AAs in each Account separately.

Regarding home downpayment - my personal opinion is if you plan on buying in the next few years the money shouldn't be in Stocks nor Bonds - just plunk it into high-yield savings or MM at 2.25% - 2.5%. (Don't wait until 1-year prior to purchase hoping the market will be at a high)
Last edited by GoldStar on Wed Mar 13, 2019 3:00 pm, edited 2 times in total.

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GoldStar
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Re: Late-start Fidelity 401(k)

Post by GoldStar » Wed Mar 13, 2019 2:40 pm

^^ You should read this page if you haven't done so yet:

https://www.bogleheads.org/wiki/Asset_a ... e_accounts

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SantaClaraSurfer
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Re: Late-start Fidelity 401(k)

Post by SantaClaraSurfer » Wed Mar 13, 2019 4:18 pm

GoldStar wrote:
Wed Mar 13, 2019 2:36 pm
Regarding home downpayment - my personal opinion is if you plan on buying in the next few years the money shouldn't be in Stocks nor Bonds - just plunk it into high-yield savings or MM at 2.25% - 2.5%. (Don't wait until 1-year prior to purchase hoping the market will be at a high)
I agree, and frankly don't see much reason to own at all with the current market where we live! Multiple things would have to change for this to make sense.

I appreciate all the advice and good-natured responses. Thank you for your patience. Regards.

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