Investment / 401k / Roth IRA personal investment advice

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Topic Author
silverback
Posts: 8
Joined: Tue Jan 05, 2010 10:41 pm

Investment / 401k / Roth IRA personal investment advice

Post by silverback » Tue Jan 05, 2010 11:33 pm

I've been a long time lurker of this forum and fatwallet finance and am tired of waiting, preparing, planning to act. I've made a resolution to start investing for retirement this year instead of just leaving my money in my online savings account.

Some background:

Books Read:
=========
The Millionaire Next Door (with a written outline of important notes)
The Boglehead's Guide to Investing
Forbes Magazine for the last 3 years

BIO:
=========
Age: 28
Gender: Male
Status: Married filed Joint
Pretax Income (just me): $60,000
Current Investments: NONE

Debts:
Subsidized Consolidated Loan: $8,762.19 Fixed Rate: 2.250%

Assets:
Checking (earning 0.0%): ~$1,000 at any given time
Savings (earning 0.5% APY): $30,000

=========

I can currently save (invest) after expenses ~$2,000 per month. Based on what I've read, I'd like to first max out a Roth IRA for 2009, then for 2010 and then start allocating funds to my company's 401K. They will match 50% up to 1.5% of my contribution. So to get the max match, I'll need to contribute a minimum of 3%. I'll ramp this up once my Roth is maxed out. Does this sound like a good strategy? Here's the catch, my wife and I are planning to purchase a house in July and I'll need ~35-40k liquid for a down payment at that time.

As for a Roth IRA, I'm open for suggestions. I'm leaning towards going with Vanguard and their the Target Retirement 2025 Fund. As for the 401K, this is my current allocation @ 3% contribution:

SSgA Stable Value Fund 10%
Janus Forty Fund - Class S 50%
T. Rowe Price Mid-Cap Value Fund - R Class 20%
Allianz NFJ Small-Cap Value Fund - Class A 20%

Here are the fund available:
Fund 1mo lifetime expense ratio Ticker
SSgA Government Money Market Fund 0.00 4.10 0.75
SSgA Stable Value Fund 0.13 4.52 0.85
DWS Core Fixed Income Fund - Class A 1.15 2.36 0.80 SFXAX
The George Putnam Fund of Boston - Class M 3.23 5.21 1.70 PGEMX
Fidelity® Advisor Equity Income Fund - Class T 5.12 7.95 1.21 FEIRX
American Century Income & Growth Fund - Class A 5.26 2.38 0.95 AMADX
SSgA S&P® 500 Index Fund 5.94 10.53 0.70
SSgA Large Cap Core Equity Fund 4.94 10.66 1.30
Janus Forty Fund - Class S 4.09 10.18 1.15 JARTX
T. Rowe Price Mid-Cap Value Fund - R Class 5.07 10.93 1.29 RRMVX
RS Value Fund - Class A 5.78 5.91 1.41 RSVAX
DWS Mid Cap Growth Fund - Class A 4.19 0.66 1.37 SMCAX
SSgA MSCI EAFE Index Strategy Fund 2.95 3.93 0.95
Templeton Growth Fund, Inc. - Class R 4.01 3.62 1.28 TEGRX
Allianz NFJ Small-Cap Value Fund - Class A 4.14 9.41 1.24 PCVAX
SSgA Russell® 2000 Index Strategy Fund 3.05 6.82 0.95
Alger SmallCap Growth Institutional Fund - Class I 3.62 7.81 1.27 ALSRX
AllianceBernstein Global Thematic Growth Fund - Class A 5.43 12.42 1.70 ALTFX

I appreciate any input or insight you guys have to offer, both for short term and long term planning.

Regards,
Silverback

JeremiahS
Posts: 186
Joined: Tue Apr 29, 2008 11:19 am

Re: Investment / 401k / Roth IRA personal investment advice

Post by JeremiahS » Wed Jan 06, 2010 9:26 am

silverback wrote: Based on what I've read, I'd like to first max out a Roth IRA for 2009, then for 2010 and then start allocating funds to my company's 401K. They will match 50% up to 1.5% of my contribution. So to get the max match, I'll need to contribute a minimum of 3%. I'll ramp this up once my Roth is maxed out. Does this sound like a good strategy? Here's the catch, my wife and I are planning to purchase a house in July and I'll need ~35-40k liquid for a down payment at that time.
Yes and No. Here are a few things to consider:

First the 401k match form your company is free money. Never leave free money on the table. While tax free ROTH withdrawal is one of the best things you could be doing, free money is better. The most often recommended contribution order is the following:
1. 401k up to the company match
2. ROTH IRA up to max (currently $5,000 per person)
3. 401k up to the max (currently $16,500 per person)
4. Taxable investing

Remember that you can open up a ROTH IRA account for both you and your wife, so for #2 you can have $10,000 in ROTH sheltered assets.

Second. In 6 months you are planning on buying a house. You state that you currently have $30,000 and will have saved an additional $12,000 ($2,000/month @ 6 months) by this time. This would give you $42,000 for a down payment. If you’re planning on using your savings for a down payment it is not a good idea to be investing that money right now. Money that is needed to meet a short term expense (and 6 months is very short term in the world of investments) should not be put into a long term account like a Roth IRA. My advice is if your heart is set on buying a house then contribute 3% to your 401k and hold off on contributing to a ROTH IRA until after you have made your home purchase.

Third. By July you will have $42,000 in savings and $1,000 in a checking account. You are planning on spending potentially $40,000 on a down payment for a house. This would leave you with a new mortgage and only $3,000 in liquid assets. It is always a good idea to have a substantial emergency fund. 3 months worth of spending money at a minimum. 6 months to a year’s worth in most cases. I believe that depleting your emergency reserves to finance the down payment on a house is a bad idea.

I’ll leave any discussion of asset allocation to people wiser in that area than I.

letsgobobby
Posts: 12074
Joined: Fri Sep 18, 2009 1:10 am

Post by letsgobobby » Thu Jan 07, 2010 3:16 am

Your fund choices are pure ass. Sorry about that. I hate when companies do that to their workers. Looks like even your stable value fund is getting ~1.57% per year - lousy.

SSgA S&P® 500 Index Fund 5.94 10.53 0.70 - this may be the best of the lot. Though its ER is an astounding 7 times that of Fidelity's 500 index, their comparable returns over 5 years are almost identical. Anyway, it's not a bad place to put the free money JeremiahS described.

What I might do is put all 401k money into the above 500 index fund, and using your Roth and taxable savings for a combination of bonds and global stocks, both using inexpensive Vanguard index funds for example.

In year 1 you'll be saving for an emergency fund and a down payment on a house. I'd only save enough in your 401k to get the max company match. You have $30k now; in 12 months you'll have $42k for the house and another $12k in emergency funds. I'd squeeze the EF down to $10k and put the $2k in your 401k to get your company match. That's it for year 1. You definitely don't go into new house ownership cash poor - that's a set up for problems. Houses need maintenance and repairs, and you've gotta have a few thousand laying around for the unexpected.

Year 2 you can start hitting the savings hard. $24k/yr allows you to max your 401k and your Roth, and save a few thousand in a taxable account, too. Well, maybe even more if you mean you can afford $2k per month after taxes, since the 401k money is before tax.

You'd set up the 401k to be largely the SSga 500 index fund ($16,500/yr), the Roth to be a Vanguard total bond fund ($5k) and the last few thousand per year in a taxable account in a Vanguard world stock index (either an ETF like VEU or the comparable index fund). Under this scenario, assuming you're saving $3500/yr taxable, your allocation is:

66% US stocks
14% world stocks
20% total bonds

80/20 stocks/bonds for a 28 year old is a bit aggressive but not ridiculously so. It has the advantage of being super easy to administer, and takes advantage of an otherwise bad 401k. If you really didn't want to be that aggressive you could have some of your 401k in the stable value fund, but that's not a good long term winning strategy.

Happy new year.

obsessedanalytic
Posts: 3
Joined: Wed Jan 13, 2010 3:17 pm
Contact:

Roth IRA Advice

Post by obsessedanalytic » Wed Jan 13, 2010 9:41 pm

First of all, it's great to see that you are ready to focus on retirement. You were headed in the right direction by saving money and not spending it all away, but focusing on retirement is a wise long-term decision.

After reading your post, I'd advise you to consider a few things in addition to retirement. Since you listed the amount of money you keep in checking, make sure the $1K is enough to get you between 1-2 paychecks. You don't need to be wasting time transferring money from savings to checking every time the checking account gets low.

Next, $30K in Savings for a married couple is awesome! Your savings should include any Emergency Fund, Long Term Savings (e.g. House), and Short Term Savings money you need. Right now you either have almost enough for your desired house down payment but with nothing left for an Emergency Fund or enough for a full Emergency Fund but not for the House. I highly recommend postponing your House purchase by about 6-12 additional months so that you have more savings built up. This may sound conservative, but there is no need to take such a big risk when it will only impact you for a year.

Now to the retirement. Since, your Savings is completely focused on the House and Emergency Fund, don't just throw that into Retirement. Instead start the IRA from scratch. Your number one goal has to be the company match since it would take years for your stock to grow by 50% on average. Next, consider how much money you have in your budget towards a Roth IRA. Don't add any more to the 401K until you fill the IRA for you and your wife. Ideally, your budget will allow enough room to fill both IRA's but if not that's fine for now - you don't want to sacrifice something like an Emergency Fund just to max out the IRA.

Like letsgobobby said, the SSgA fund works fine for the 401K. The great thing is that you will likely have much more money in the IRA (up to $10K per year) than the 401K ($2.7K per year) so even if the fund choices aren't great in the 401K they are unlimited in the IRA. If you are ready for an IRA I recommend a T. Rowe Price or Vanguard Target Retirement Fund. Based on your age, a 2050 Fund makes since. These funds are great because you don't have to rebalance every year, the funds invest in a little of everything so no need to buy a lot of different funds, and TRP and Vanguard are known for good service and extremely low fees.

Make sure you set up an automatic monthly deduction for your IRA(s). This is called Dollar Cost Averaging and will help smooth out good and bad times so that in the end you make out well.

Good luck, and PM if you have any specific questions.

JessicaTy
Posts: 19
Joined: Thu Apr 16, 2009 11:21 pm

Re: Investment / 401k / Roth IRA personal investment advice

Post by JessicaTy » Thu Jan 14, 2010 11:18 pm

maybe this can help:

http://www.rothirarules.net/roth-ira-investments.htm
silverback wrote:I've been a long time lurker of this forum and fatwallet finance and am tired of waiting, preparing, planning to act. I've made a resolution to start investing for retirement this year instead of just leaving my money in my online savings account.

Some background:

Books Read:
=========
The Millionaire Next Door (with a written outline of important notes)
The Boglehead's Guide to Investing
Forbes Magazine for the last 3 years

BIO:
=========
Age: 28
Gender: Male
Status: Married filed Joint
Pretax Income (just me): $60,000
Current Investments: NONE

Debts:
Subsidized Consolidated Loan: $8,762.19 Fixed Rate: 2.250%

Assets:
Checking (earning 0.0%): ~$1,000 at any given time
Savings (earning 0.5% APY): $30,000

=========

I can currently save (invest) after expenses ~$2,000 per month. Based on what I've read, I'd like to first max out a Roth IRA for 2009, then for 2010 and then start allocating funds to my company's 401K. They will match 50% up to 1.5% of my contribution. So to get the max match, I'll need to contribute a minimum of 3%. I'll ramp this up once my Roth is maxed out. Does this sound like a good strategy? Here's the catch, my wife and I are planning to purchase a house in July and I'll need ~35-40k liquid for a down payment at that time.

As for a Roth IRA, I'm open for suggestions. I'm leaning towards going with Vanguard and their the Target Retirement 2025 Fund. As for the 401K, this is my current allocation @ 3% contribution:

SSgA Stable Value Fund 10%
Janus Forty Fund - Class S 50%
T. Rowe Price Mid-Cap Value Fund - R Class 20%
Allianz NFJ Small-Cap Value Fund - Class A 20%

Here are the fund available:
Fund 1mo lifetime expense ratio Ticker
SSgA Government Money Market Fund 0.00 4.10 0.75
SSgA Stable Value Fund 0.13 4.52 0.85
DWS Core Fixed Income Fund - Class A 1.15 2.36 0.80 SFXAX
The George Putnam Fund of Boston - Class M 3.23 5.21 1.70 PGEMX
Fidelity® Advisor Equity Income Fund - Class T 5.12 7.95 1.21 FEIRX
American Century Income & Growth Fund - Class A 5.26 2.38 0.95 AMADX
SSgA S&P® 500 Index Fund 5.94 10.53 0.70
SSgA Large Cap Core Equity Fund 4.94 10.66 1.30
Janus Forty Fund - Class S 4.09 10.18 1.15 JARTX
T. Rowe Price Mid-Cap Value Fund - R Class 5.07 10.93 1.29 RRMVX
RS Value Fund - Class A 5.78 5.91 1.41 RSVAX
DWS Mid Cap Growth Fund - Class A 4.19 0.66 1.37 SMCAX
SSgA MSCI EAFE Index Strategy Fund 2.95 3.93 0.95
Templeton Growth Fund, Inc. - Class R 4.01 3.62 1.28 TEGRX
Allianz NFJ Small-Cap Value Fund - Class A 4.14 9.41 1.24 PCVAX
SSgA Russell® 2000 Index Strategy Fund 3.05 6.82 0.95
Alger SmallCap Growth Institutional Fund - Class I 3.62 7.81 1.27 ALSRX
AllianceBernstein Global Thematic Growth Fund - Class A 5.43 12.42 1.70 ALTFX

I appreciate any input or insight you guys have to offer, both for short term and long term planning.

Regards,
Silverback

Topic Author
silverback
Posts: 8
Joined: Tue Jan 05, 2010 10:41 pm

Post by silverback » Thu Oct 21, 2010 1:32 am

Thanks all above for your advice. I took it all in, acted and wanted to post an update.

First, I ended up opening a Vanguard Roth IRA. I've maxed out for both 2009 (5k) and 2010 (5k) with 100% VTTVX (Target Retirement 2025). I've also been promoted since my original post and am now earning ~100k. As such I'll have my 2010 401k maxed out (16.5k) by the end of the year. Currently my contributions are 25% SSgA Stable Value Fund / 75% SSgA S&P 500 Index Fund. Savings are now at 62k @ 1.35%.

As you can see my current AA is ~75/25 which I've very comfortable with. My next thought is that I convert my Roth IRA TR2025 to Total Bond Index Admiral Shares to save on ER. Then convert my 401k to SSgA S&P 500 to keep my AA. I'm aiming for April of 2011 to have 15k 100% Total Bond Index Admiral in Roth IRA, and 33k 100% SSgA S&P500. After that, I'd like to start building a taxable account with Total Intl Stock Index to get more international/emerging market exposure. In a way, I'll be mimicking the TR2025 fund with its upcoming allocations. All said and done, starting April 2011, I'll have 5k/month to save and/or invest.

Thoughts?

We're also now looking to next year (Julyish) to purchase a home.

Submariner1980
Posts: 84
Joined: Thu Feb 18, 2010 2:36 pm

Post by Submariner1980 » Thu Oct 21, 2010 8:10 am

silverback wrote: I've also been promoted since my original post and am now earning ~100k.
Wow. You got a promotion from about $60k to about $100k? Congratulations! Would you mind sharing a little about how that went down? What field/profession are you in?

Good job on the savings and sorting out and sticking to a plan.

Topic Author
silverback
Posts: 8
Joined: Tue Jan 05, 2010 10:41 pm

Post by silverback » Thu Oct 21, 2010 9:23 am

Thanks!

I'm an Application Developer.

I actually created some internal tools for my company that automated a lot of paperwork/filing on my own time and got recognized for it in the end.

fcirullo
Posts: 737
Joined: Fri Apr 30, 2010 9:02 am
Location: San Diego, California
Contact:

Post by fcirullo » Thu Oct 21, 2010 10:17 am

silverback wrote:Thanks all above for your advice. I took it all in, acted and wanted to post an update.
I see that people on this thread have given you great advice, and today you gave them an update. Good for you and good for them. Don't you love it when people treat you right?

By the way, I noticed that your original post was on Jan 06, 2010. Today is October 21, 2010. You've learned alot. Well done!
Frank R. Cirullo | | "It isn't what we don't know that gives us trouble, it's what we know that ain't so." -- | Will Rogers

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