What does a retirement account look like for a young person who is risk tolerant?

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Topic Author
pepelepuanteur
Posts: 6
Joined: Mon May 14, 2018 11:44 am

What does a retirement account look like for a young person who is risk tolerant?

Post by pepelepuanteur » Tue May 14, 2019 1:51 pm

I have about $2500 in my brokerage (Schwab) account right now that I am unsure what to do with. About $1600 is tied up in my company stock but I would like to sell and diversify. Long term, I would like the account to serve as a slightly more risky retirement account than my 401K. I plan to fund it at a rate of about $12,000 per year with money from my company bonuses.

Some background info about me:

Age: 30
Income: 165K + ~25% cash bonus + 35K in company stock
401k balance: 80K in a 4 fund portfolio 88/12 stocks/bonds (balance is low due to lost earning years in grad school, coming from a poor family, and the fact that I have aggressively paid down my student loans)
Cash savings: 35K (15 of this is earmarked for a car)
Student loans: ~30k (should be paid off in 1 yr)

DonIce
Posts: 598
Joined: Thu Feb 21, 2019 6:44 pm

Re: What does a retirement account look like for a young person who is risk tolerant?

Post by DonIce » Tue May 14, 2019 2:01 pm

Just go 100% equities in your brokerage account if you want to be "more risky" than 88/12, with a split between US (VTI) and international (VXUS) to suit your preference. Personally I'd go 50/50 (some others here would argue for more US and less international).

Also, personally I wouldn't keep 35k of cash savings if your job is stable while you have loans and your investment portfolio is small. Keeping an emergency fund worth 3-6 months expenses is good general advice but in my opinion not ideal for someone just starting out. What's the interest rate on your student loan? Pay off the entire student loan if it's more than 4% interest with a lump sum from your cash savings. 4% or more risk free return is almost always the best way to invest money in my opinion.

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ruralavalon
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Location: Illinois

Re: What does a retirement account look like for a young person who is risk tolerant?

Post by ruralavalon » Tue May 14, 2019 2:35 pm

In your taxable brokerage account I suggest 100% in stocks, investing in very tax-efficient stock index funds.

pepelepuanteur wrote:
Tue May 14, 2019 1:51 pm
I have about $2500 in my brokerage (Schwab) account right now that I am unsure what to do with. About $1600 is tied up in my company stock but I would like to sell and diversify. Long term, I would like the account to serve as a slightly more risky retirement account than my 401K. I plan to fund it at a rate of about $12,000 per year with money from my company bonuses.

Some background info about me:

Age: 30
Income: 165K + ~25% cash bonus + 35K in company stock
401k balance: 80K in a 4 fund portfolio 88/12 stocks/bonds (balance is low due to lost earning years in grad school, coming from a poor family, and the fact that I have aggressively paid down my student loans)
Cash savings: 35K (15 of this is earmarked for a car)
Student loans: ~30k (should be paid off in 1 yr)
Prioritizing investments.
I think it is wise to aggressively pay off your student debt. A 401k balance of $80k at age 30 is good, and does not require any explanation.

If your 401k offers any decent funds then making maximum annual contributions to your 401k would be a priority ahead of investing in a taxable account. WIki article, "Prioritizing Investments".



Asset allocation.
At age 30 I suggest about 20% in bonds or other fixed income investments (like CDs, savings accounts, money market fund). This is expected to substantially reduce portfolio volatility (risk), with only a relatively modest decrease in portfolio return. Graph, "An Efficient Frontier: the power of diversification". Please see:
1) Wiki article Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk"; and
2) Wiki article, "Asset allocation";

I suggest around 20 - 30% of stocks in international stocks. Vanguard paper (March 2012), "Considerations for investing in non-U.S. equities". Historically, allocating 20% of an equity portfolio to non-U.S. stocks would have captured about 84% of the maximum possible diversification benefit, and allocating 30% of an equity portfolio to non-U.S. stocks would have captured about 99% of the maximum possible diversification benefit (p. 6). (You can find lots of debate here on international allocation, opinions ranging all the way from 00% to 50% of stocks in international stocks. If you want more viewpoints on international stocks please try the Google search box, upper right, this page).

Asset allocation is a very personal decision. You must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.


Coordinating investments among all accounts.
It is often better coordinate investments across all accounts, in other words treat all accounts together as a single unified portfolio, rather than view each account separately. Select just one or two of the better funds (most diversified + lower expense ratio) in the work-based account (401k, 403b, 457, SIMPLE IRA, TSP etc.), where the choices offered are limited. Then complete the rest of the asset allocation using the nearly unlimited choices available in a taxable account or any IRAs.

This approach lets you avoid having to use sub-par, sub-optimal or high expense funds often found in work-based plans. Do not try to put all components of the asset allocation in every account. Wiki article, "Asset allocation in multiple accounts".

This approach also allows for better tax-efficiency if you use taxable account too. Wiki article, "Tax-efficient Fund Placement". Bonds are not very tax-efficient and ordinarily should not be in a taxable account, should be in a tax-advantaged account preferably in a tax-deferred account like a 401k. Use very tax-efficient stock index funds in a taxable account. Stock index funds are also suitable for any type of account.


Your taxable account.
In your taxable brokerage account at Schwab I suggest 100% in stocks, investing in very tax-efficient stock index funds. Wiki article "Tax-efficient fund placement". Examples of tax-efficient stock index funds include Schwab Total Stock Market Index Fund (SWSTX) and Schwab International Index Fund (developed markets only) (SWISX).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
pepelepuanteur
Posts: 6
Joined: Mon May 14, 2018 11:44 am

Re: What does a retirement account look like for a young person who is risk tolerant?

Post by pepelepuanteur » Tue May 14, 2019 3:05 pm

This is incredibly helpful. I love the tip about not needing to have all classes in every account. Thank you! I will read through all of your references before deciding what to do.

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Mullins
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Joined: Wed May 08, 2019 4:38 pm

Re: What does a retirement account look like for a young person who is risk tolerant?

Post by Mullins » Wed May 15, 2019 11:04 am

pepelepuanteur wrote:
Tue May 14, 2019 1:51 pm
I have about $2500 in my brokerage (Schwab) account right now that I am unsure what to do with. About $1600 is tied up in my company stock but I would like to sell and diversify. Long term, I would like the account to serve as a slightly more risky retirement account than my 401K.
I think the higher risk is in if you don't follow through on your plan to divest yourself of the company stock...

I know you're probably thinking higher potential risk in return for higher potential reward though I don't see a decades away retirement account invested in 100% stocks (which is what I'd recommend) as all that risky per se, because it's such a long term and one where you can recoup or offset losses while you're working and so it will mean more volatility (as opposed to pure risk) at times but I'd say go with the S&P 500 index.

I've been there. When I was around 30 I opened an IRA using Vanguard's 500 index fund and it's been a few decades since and I still have it growing.

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