Author Topic: Help with savings strategy  (Read 2717 times)

teamShaleen

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Help with savings strategy
« on: May 02, 2018, 05:52:06 PM »
My apologies if this exact scenario has been covered, but the forum is so deep I wasn't sure where to find it.

The short version: I currently have a vanguard LifeStrategy Conservative Growth Fund of which I've been contributing nothing since I purchased it in Oct 16', a 401k of which I contribute 12% of my employment earnings (10% roth, 2% standard, employer matches 8%), and a regular savings account through my bank which I've been trying to put all of my savings for the past 6-8 months (Avg between $800-1200 per month).  My plan for the regular savings was to try and build up the 3 month buffer of living expenses but I keep having setbacks getting to what I've determined is the magic number.

My goals are the same as many who frequent this forum: retiring early, owning a home/property outright, travel, etc.

My question is this: Would I be better served by lowering my 401 contribution to 8% (or some other amount), by not contributing to my regular savings account, and instead taking that money and investing it into a not yet purchased ($3k initial investment) Vanguard total market index fund?  This is the very fund that MMM preaches about in his posts about the stock market.

I greatly appreciate any insight or advice shared.

MDM

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Re: Help with savings strategy
« Reply #1 on: May 02, 2018, 06:11:22 PM »
teamShaleen, welcome to the forum.

In short, "probably not".

See Investment Order for a longer version.

teamShaleen

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Re: Help with savings strategy
« Reply #2 on: May 02, 2018, 06:59:54 PM »
Thanks for the welcome, and the redirect to the Investment Order post.  I'm a little confused right now, but will continue to dig into that info.

Thanks again.

Aggie1999

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Re: Help with savings strategy
« Reply #3 on: May 02, 2018, 07:04:11 PM »
Note that you don't have to wait until you have the $3k to invest at Vanguard in Vanguard funds. You can always but their ETF shares. Only downside is you have to buy whole shares. Upside is you get the same lower expense ratio as their admiral mutual funds.

MDM

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Re: Help with savings strategy
« Reply #4 on: May 02, 2018, 07:07:28 PM »
I'm a little confused right now, but will continue to dig into that info.
After you have read it, just ask about anything that is unclear.  There is a very good chance someone will help.

teamShaleen

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Re: Help with savings strategy
« Reply #5 on: May 03, 2018, 06:43:30 AM »
I've read over the investment order a few times and worked in calculations for my specific scenario.  I'm happy to report that I'm well on my way into this already.  The question I have that jumps out at me is where does the full market index fund come in?  Maybe it doesn't?  Maybe the IRA or some other mechanism takes its place?

Thanks for the tip about the ETF shares.
Note that you don't have to wait until you have the $3k to invest at Vanguard in Vanguard funds. You can always but their ETF shares. Only downside is you have to buy whole shares. Upside is you get the same lower expense ratio as their admiral mutual funds.

Murse

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Re: Help with savings strategy
« Reply #6 on: May 03, 2018, 07:01:04 AM »
I've read over the investment order a few times and worked in calculations for my specific scenario.  I'm happy to report that I'm well on my way into this already.  The question I have that jumps out at me is where does the full market index fund come in?  Maybe it doesn't?  Maybe the IRA or some other mechanism takes its place?

Thanks for the tip about the ETF shares.
Note that you don't have to wait until you have the $3k to invest at Vanguard in Vanguard funds. You can always but their ETF shares. Only downside is you have to buy whole shares. Upside is you get the same lower expense ratio as their admiral mutual funds.

We need to clarify what you are asking.

Are you asking an asset allocation question? (What percentage international stocks vs US stocks vs bonds?)

Or a bucket question? (401k vs IRA vs taxable brokerage vs HSA ect...)

I personally use the full market index (or a substitute like the s&p 500) in my wife’s 401k, my 457, both of our Roth IRA’s, and our taxable brokerage.

As far as asset allocation I try to use 30% international and 70% domestic. No bonds, no single stocks (excluding one share of brk.b for a gieco discount.)


Since it has yet to be posted, I recommend reading this stock series by JLcollins: http://jlcollinsnh.com/stock-series/
« Last Edit: May 03, 2018, 07:14:51 AM by Murse »

MDM

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Re: Help with savings strategy
« Reply #7 on: May 03, 2018, 10:29:34 AM »
I've read over the investment order a few times and worked in calculations for my specific scenario.  I'm happy to report that I'm well on my way into this already.  The question I have that jumps out at me is where does the full market index fund come in?  Maybe it doesn't?  Maybe the IRA or some other mechanism takes its place?

Thanks for the tip about the ETF shares.
Note that you don't have to wait until you have the $3k to invest at Vanguard in Vanguard funds. You can always but their ETF shares. Only downside is you have to buy whole shares. Upside is you get the same lower expense ratio as their admiral mutual funds.
Are you asking an asset allocation question? (What percentage international stocks vs US stocks vs bonds?)

Or a bucket question? (401k vs IRA vs taxable brokerage vs HSA ect...)
+1

For a picture version of this, see the 'Basic Terms' tab of the case study spreadsheet.

NoStacheOhio

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Re: Help with savings strategy
« Reply #8 on: May 03, 2018, 10:34:21 AM »
I've read over the investment order a few times and worked in calculations for my specific scenario.  I'm happy to report that I'm well on my way into this already.  The question I have that jumps out at me is where does the full market index fund come in?  Maybe it doesn't?  Maybe the IRA or some other mechanism takes its place?

Thanks for the tip about the ETF shares.
Note that you don't have to wait until you have the $3k to invest at Vanguard in Vanguard funds. You can always but their ETF shares. Only downside is you have to buy whole shares. Upside is you get the same lower expense ratio as their admiral mutual funds.

Mutual Funds (and ETFs) are the actual thing you're purchasing. They can live in a wide variety of account types (401k, IRA, taxable, etc.).

Also, are you sure Roth is the best way to go for your 401k (it usually isn't)? What does your overall income and tax picture look like?

teamShaleen

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Re: Help with savings strategy
« Reply #9 on: May 03, 2018, 07:23:41 PM »
Again, thanks very much to those taking the time here, as it's probably become pretty obvious that I'm quite new at this and also a little naive.

I think I'm trying to whittle this down to the very basics, what the types of investments are, how to get them, etc.

Is it true that the savings vehicle is the 401k or the IRA, etc while the total stock index is the specific investment?  Maybe there's a better way to ask that, but I think this has been part of my hangup.  I get confused because I search on vanguard's website and I see both an option to purchase the total stock index and to also start an IRA.

And with regards to the traditional vs roth 401k, I had been taught (and am likely wrong) that due to my age (34) and potential earnings in the future being more than what they are now that it makes more sense to pay taxes now vs later?  Does that not jive?

MDM

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Re: Help with savings strategy
« Reply #10 on: May 03, 2018, 08:10:21 PM »
Is it true that the savings vehicle is the 401k or the IRA, etc while the total stock index is the specific investment?  Maybe there's a better way to ask that, but I think this has been part of my hangup.  I get confused because I search on vanguard's website and I see both an option to purchase the total stock index and to also start an IRA.
The total stock index would be one of the "Investment Options within the account" as described in the 'Basic Terms' picture mentioned previously.

Quote
And with regards to the traditional vs roth 401k, I had been taught (and am likely wrong) that due to my age (34) and potential earnings in the future being more than what they are now that it makes more sense to pay taxes now vs later?  Does that not jive?
Sometimes one sees advice to use Roth if income will be higher "at retirement" than it is now.  Unfortunately, "at" retirement is ambiguous and often misinterpreted.

See Traditional versus Roth - Bogleheads for details, but in short traditional is better for most people.

If your tax rate will be higher after retirement than it is now, then using Roth now is better.

NoStacheOhio

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Re: Help with savings strategy
« Reply #11 on: May 04, 2018, 06:16:06 AM »
Is it true that the savings vehicle is the 401k or the IRA, etc while the total stock index is the specific investment?  Maybe there's a better way to ask that, but I think this has been part of my hangup.

Basically, yes. 401k and IRA are account types, like checking or savings. They have tax advantages for the money you put in them.

Within those accounts, you can essentially do anything (almost anything) you want. Most employer-sponsored retirement plans (usually 401k) have a limited menu of investment choices. Many plans offer inexpensive passive (aka index) funds alongside active funds. You want the index funds. Some employer plans also offer a self-directed option where you can buy anything you like, Fidelity calls it BrokerageLink, Schwab has a similar option, but I forget the name. Always read the fee disclosures for your plan. You want to pay the lowest amount of money possible in fees. Even if your employer plan isn't great, it's usually in your best interest to contribute because A. employer matching is free money and B. it's the biggest tax-advantaged bucket available to most people, you can always roll the plan into a low cost IRA when you separate from the employer.

IRAs are super flexible, but have lower contribution limits and not everyone is eligible to deduct contributions (but contributing to a 401k can bring your taxable income down to be eligible if you're near the cutoff). You can basically buy anything that's publicly-traded within an IRA. Again, go for low cost index funds. Preferably ones you can buy with no transaction fees (i.e. Vanguard funds held at Vanguard).

Also, read this: http://jlcollinsnh.com/stock-series/

teamShaleen

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Re: Help with savings strategy
« Reply #12 on: May 04, 2018, 08:40:42 AM »
Thanks folks.  That certainly helps clear some things up.  I'm currently working through the stock-series posts by jlcollins to gain more insight.

Sounds like I have some details to iron out with my 401k among other things.

erutio

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Re: Help with savings strategy
« Reply #13 on: May 04, 2018, 08:51:25 AM »
whats funds are you currently investing in within you 401k? 

teamShaleen

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Re: Help with savings strategy
« Reply #14 on: May 04, 2018, 09:15:24 AM »
whats funds are you currently investing in within you 401k?

My employers plan is through Fidelity.  I currently have the following investment: https://www3.troweprice.com/fb2/fbkweb/snapshot.do?ticker=TRRNX

This is the result of me not understanding enough about savings when I got help from an HR person setting this up 10 years ago...  I'm trying to find an available total market index option that I could move over to.

NoStacheOhio

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Re: Help with savings strategy
« Reply #15 on: May 04, 2018, 10:47:52 AM »
whats funds are you currently investing in within you 401k?

My employers plan is through Fidelity.  I currently have the following investment: https://www3.troweprice.com/fb2/fbkweb/snapshot.do?ticker=TRRNX

This is the result of me not understanding enough about savings when I got help from an HR person setting this up 10 years ago...  I'm trying to find an available total market index option that I could move over to.

It's not atrocious, but if you post your fund choices, we can probably steer you in a better direction.

teamShaleen

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Re: Help with savings strategy
« Reply #16 on: May 04, 2018, 10:54:42 AM »
It's not atrocious, but if you post your fund choices, we can probably steer you in a better direction.

I've linked 2 screenshots of what appears to be my available options.

https://ibb.co/hT2ER7
https://ibb.co/ds79tn
« Last Edit: May 04, 2018, 10:58:20 AM by teamShaleen »

Raenia

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Re: Help with savings strategy
« Reply #17 on: May 04, 2018, 11:11:06 AM »
It's not atrocious, but if you post your fund choices, we can probably steer you in a better direction.

I've linked 2 screenshots of what appears to be my available options.

https://ibb.co/hT2ER7
https://ibb.co/ds79tn

Of those options, I'd say the Fidelity 500 Index Fund is your best choice.  It has the lowest expense ratio, and 500 index is a good substitution if total market is unavailable.  Once you've had time to read and digest more information on asset allocations, you can decide if you want to expand your selections.

NoStacheOhio

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Re: Help with savings strategy
« Reply #18 on: May 04, 2018, 11:42:30 AM »
Of those options, I'd say the Fidelity 500 Index Fund is your best choice.

This, or mix the three basic index funds (500/midcap/smallcap; 80%/10%/10%)

teamShaleen

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Re: Help with savings strategy
« Reply #19 on: May 04, 2018, 11:50:19 AM »
Thank you for taking the time to look and for the suggestions!  I will likely be moving over to either one or the mix shortly (once I figure out how, ha).

If I may circle back to the traditional vs Roth debate with regards to this 401k (I've been reading the Boglehead posting) I'm still not quite sure what makes the most sense for my scenario.  To recap, I currently contribute 10% into a roth and 2% into traditional. 

My employers specific matching ->"Your employer matches up to 8% of your eligible compensation. When you contribute to your plan, your employer matches 30% of the first 8% of your pay. Your employer match applies to the following contribution elections:PRE-TAX, ROTH"

I'm 34 and if I can commit to a smarter spending/saving plan I hope to not be working full time in my 60s.  Hopefully much sooner.  If I'm reading the Trad vs Roth article correctly, keeping an emphasis on the roth now may be a smart move and as I get closer to my retirement from full time employment start to swing the bulk over to traditional instead.    Or have I missed something?

MDM

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Re: Help with savings strategy
« Reply #20 on: May 04, 2018, 12:04:06 PM »
I'm 34 and if I can commit to a smarter spending/saving plan I hope to not be working full time in my 60s.  Hopefully much sooner.  If I'm reading the Trad vs Roth article correctly, keeping an emphasis on the roth now may be a smart move and as I get closer to my retirement from full time employment start to swing the bulk over to traditional instead.    Or have I missed something?
Need two numbers:
1) Marginal tax saving rate you would get from a traditional contribution this year.
2) Marginal tax rate expected (a back of the envelope calculation should suffice) for withdrawals based on a traditional contribution this year.

What do you get for those numbers?

NoStacheOhio

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Re: Help with savings strategy
« Reply #21 on: May 04, 2018, 12:10:10 PM »
I'm 34 and if I can commit to a smarter spending/saving plan I hope to not be working full time in my 60s.  Hopefully much sooner.  If I'm reading the Trad vs Roth article correctly, keeping an emphasis on the roth now may be a smart move and as I get closer to my retirement from full time employment start to swing the bulk over to traditional instead.    Or have I missed something?

I can't really think of a reason age would matter on this choice. It's all down to your tax rates. If you're low income (i.e. you don't pay tax), then absolutely, Roth away until you're blue in the face. If you have tax liability, it's usually better to deduct contributions.

teamShaleen

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Re: Help with savings strategy
« Reply #22 on: May 04, 2018, 12:24:12 PM »
Need two numbers:
1) Marginal tax saving rate you would get from a traditional contribution this year.
2) Marginal tax rate expected (a back of the envelope calculation should suffice) for withdrawals based on a traditional contribution this year.

What do you get for those numbers?

I'm not positive how to get these numbers, but I can tell you that I currently fall into the 22% Marginal Tax rate based on my current earnings.


NoStacheOhio

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Re: Help with savings strategy
« Reply #23 on: May 04, 2018, 01:02:20 PM »
How much do you spend in a year? How much would you pay in taxes if you were retired right now, living off of tax-deferred withdrawals?

MDM

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Re: Help with savings strategy
« Reply #24 on: May 04, 2018, 01:15:28 PM »
Need two numbers:
1) Marginal tax saving rate you would get from a traditional contribution this year.
2) Marginal tax rate expected (a back of the envelope calculation should suffice) for withdrawals based on a traditional contribution this year.

What do you get for those numbers?

I'm not positive how to get these numbers, but I can tell you that I currently fall into the 22% Marginal Tax rate based on my current earnings.
The new tax code has fewer "moving parts" for someone in your current situation, so the federal marginal saving rate is probably the same as your federal bracket, 22%.  If you pay a progressive state income tax, you would add your state bracket to that.  If you put your situation into the case study spreadsheet (CSS) in Excel, you should see the marginal rate on the chart near cell F81.  It will be negative because it is a saving rate

Estimating the marginal rate on withdrawals takes a little more work, but not too much and it's probably worthwhile for you to go through the exercise.  From the Investment Order sticky:
Quote
Estimating withdrawal tax rates is not an exact science, but here is one approach:
1) Include any guaranteed pension amount that you can't defer in return for higher payments when you do start
2) Take current traditional balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 4% of that value as an annual withdrawal.
3) Take current taxable balance and predict value at retirement (e.g., with Excel's FV function) using a conservative real return, maybe 3% or so.  Take 2% of that value as qualified dividends.
4a) Decide whether SS income should be considered, or whether you will be able to do enough traditional->Roth conversions before taking SS.
4b) Include SS income projections (using today's dollars) if needed from step 4a.
5) Calculate marginal rate using today's tax law on the numbers from step 1-4.
6) Make your traditional vs. Roth decision for this year's contribution
7) Repeat steps 1-6 every year until retirement

The steps above may look complicated at first, but you don't need great precision.  The answer will either be "obvious" or "difficult to choose".  If the latter, it likely won't make much difference which you pick anyway.

Note the possibility of self-defeating predictions:
a) predict high taxable retirement income > contribute to Roth > get low taxable retirement income
b) predict low taxable retirement income > contribute to traditional > get high taxable retirement income

Also, if you pick traditional and that ends up being wrong it will be because you have "too much money" - not the worst problem.
If you pick Roth and that ends up being wrong it will be because you have "too little money" - that can be a real problem.
Thus using traditional is a "safer" choice.

To help with the math, see rows 196-207 on the 'Misc. calcs' tab in the CSS.  Then take numbers from that and enter them in the designated cells on the Calculations tab.  Change Calculations!G106 to "D31", hit the nearby "Update chart" button, adjust cell P82 as needed to reach the expected traditional withdrawal amount on the x-axis, and read the marginal rate from the chart.

Again, this may be daunting at first glance but if you have even a little Excel familiarity it will be simple in hindsight. :)

Ask questions as needed.