Seeking Help: 23 y/o with no debt, money to invest, and too many options

[TheHappyGoomba]

Hello!

Okay, so I have been doing a lot of retirement planning / investing reading everywhere in all kinds of forums, Youtube videos, podcasts and blogs (including JL Collins's Stocks Series) these past two weeks and I've been heavily considering beginning my journey toward investing in my retirement.

According to the two weeks' worth of research I have made, trying to understand the market and the different types of opportunities available, here are the finer details of what I am most set about on asking for guidance:

Broker: Vanguard
Type of Account: Roth IRA

Type of Investment Fund(s):
     Vanguard Target Retirement Fund 2060
     Vanguard VTSMX
     Vanguard VTSAX (Total Stock Market)

I know Roth IRAs have the $5,500 contribution limit per year and so I was wondering what would be the best types of funds to put into my Roth IRA if I am gearing it specifically for that tax-free retirement benefit? Should I put the Vanguard Target Retirement Fund 2060 in there, and buy VTSAX or VTSMX outside of my Roth or should it be the other way around, putting the VTSAX/VTSMX in my Roth?

I plan on being in this for the long-haul (30-40 yrs), but I am just unsure of myself because this would really be my first time investing. I'd love any and all insight on what would be best to maximize the gains I'd make, and take advantage of a Roth IRA's inherent tax-free incentives.

Here is my financial situation/background:

1) Currently have a total of 7k to invest, but I only have Earned Income of 2,500 from 2017 (I know that this would definitely be the limit on my Roth Contributions)
2) I am 23 years old, newly graduated from college making an estimated 20-30k by the end of 2018 (assuming I stay where I currently work now).
3) I still live with my parents, and have no debt - aside from a $300 per month payment on my car.

... pls help me.

[PizzaSteve]

My personal opinion is that any of those instements will do fine, likely generating comparable returns.

At your age I like 100% stock, so the VTSAX or VTSMX seem fine.

[Gone Fishing]

You will likely want to shift to traditional pre-tax accounts as your earnings rise over the next few years. 

Read the Traditional vs Roth link in my signature below and the following two links which have example tax returns using the outlined strategy.

If you don't already, learn to do your own taxes.  Run them several different ways to see how changes affect the outcome.

[TheHappyGoomba]

My personal opinion is that any of those instements will do fine, likely generating comparable returns.

At your age I like 100% stock, so the VTSAX or VTSMX seem fine.

Thanks for the reply! Upon just comparing the projected 10-year returns between TRFs and VTSMX/VTSAX, I'm beginning to lean more toward VTSMX. Would you recommend having this fund in my Roth IRA?

[TheHappyGoomba]

You will likely want to shift to traditional pre-tax accounts as your earnings rise over the next few years. 

Read the Traditional vs Roth link in my signature below and the following two links which have example tax returns using the outlined strategy.

If you don't already, learn to do your own taxes.  Run them several different ways to see how changes affect the outcome.

Hello,

Thank you for your insight. I do see myself eventually dipping into traditional pre-tax accounts (probably from my employer once I get a job with the state), but for now, I am thinking that investing in a Roth while my income is low could be a great start to investing in tax-free money for retirement 40 years down the line.

So for now, I'm focused on opening, and contributing to a Roth. I'm just wondering if it's worth it to invest in a target retirement fund for it, or if I should take the Total Stock Market Fund (VTSAX or VTSMX) head on.

[rubybeth]

So for now, I'm focused on opening, and contributing to a Roth. I'm just wondering if it's worth it to invest in a target retirement fund for it, or if I should take the Total Stock Market Fund (VTSAX or VTSMX) head on.

Likely, a target fund is not worth it at this point. Mustachians are typically more aggressive than the average investor, so these types of funds that dial down the risk as you approach "retirement age" are not really a good tactic. You could certainly consider it later, but at 23 with no debt, nahhhh.

And just a note, VTSMX and VTSAX are the same fund--VTSMX has a minimum invest amount of $3,000. Then, when you get up to $10,000, it will automatically convert your VTSMX shares (investor class) to VTSAX shares (admiral class).

[Drew0311]

If you really want to take wealth generation to the next level follow these steps:

1) Ditch the $300 car payment (buy a used Prius for $3-4k)
2) Save to buy a multi-family home for your primary residence. Try to purchase within a few miles of where you work. This will provide a tax shelter and an additional income stream.
3) Max out retirement accounts
4) Save at least 20% after tax.

Do this and retire in 10 years

[Rob_bob]

There really is no "wrong" fund to put in the Roth, it depends on your investment objectives.  Any earnings whether capital gains or dividend/interest income grows tax free.  And you are not limited to just one or two funds either.

Many people like to mix a target date fund with other funds, I did it myself once.  But really when you do that you are saying you don't agree with the asset allocation or long term adjustment to the portfolio the manager makes over time. I think, for what it's worth is that you should be all in or all out of a target date fund.  You can make your own target date fund and tweek it like you want over the years.

[Dee18]

Compare the fees on the funds.  I dropped my target date fund when I realized the fee was higher.

[TheHappyGoomba]

So for now, I'm focused on opening, and contributing to a Roth. I'm just wondering if it's worth it to invest in a target retirement fund for it, or if I should take the Total Stock Market Fund (VTSAX or VTSMX) head on.

Likely, a target fund is not worth it at this point. Mustachians are typically more aggressive than the average investor, so these types of funds that dial down the risk as you approach "retirement age" are not really a good tactic. You could certainly consider it later, but at 23 with no debt, nahhhh.

And just a note, VTSMX and VTSAX are the same fund--VTSMX has a minimum invest amount of $3,000. Then, when you get up to $10,000, it will automatically convert your VTSMX shares (investor class) to VTSAX shares (admiral class).

Yeah, upon revisiting JL Collins' Stock Series and also looking at Vanguard's 2065 Target Retirement Fund portfolio, I am becoming increasingly unsure with purchasing the fund, since it invests 36% in the Total International Stock Fund - which, in Collins's view, would better be used in to go, "all-in" on the Total Stock Market Index, especially since I am still in the early part of my 20s.

Would it be a good idea to open a Roth IRA, and just go all-in on VTSMX, which would eventually convert into VTSAX?

Just to further clarify, this would mean that it would take me approx. 2 years of maximum contributions before I can convert to VTSAX, right? (since Roth IRAs have the 5,500k limit/annual), BUT it would also mean that any earnings/gains I attain from VTSMX/VTSAX in my Roth over the next... 30-40 years would be completely tax free? 

[TheHappyGoomba]

If you really want to take wealth generation to the next level follow these steps:

1) Ditch the $300 car payment (buy a used Prius for $3-4k)
2) Save to buy a multi-family home for your primary residence. Try to purchase within a few miles of where you work. This will provide a tax shelter and an additional income stream.
3) Max out retirement accounts
4) Save at least 20% after tax.

Do this and retire in 10 years

Man. You know, I was heavily considering just jumping ship and buying some certified pre-owned vehicle, or other reliable brand-used cars in the final stages of buying this, but my parents insisted, and so now here we are. haha. It's a 2017 Honda Civic Si and at this point, I think I'd be hard pressed to part with it.

I love this advice though, and I will definitely keep this in mind for the coming years, once I get the ball rolling on my retirement savings, I feel more comfortable with investing in a house with an improved (and more stable) income stream. Thanks!!

[TheHappyGoomba]

Compare the fees on the funds.  I dropped my target date fund when I realized the fee was higher.

Did you have it through Vanguard? What are you currently investing in?

[letired]

Just to further clarify, this would mean that it would take me approx. 2 years of maximum contributions before I can convert to VTSAX, right? (since Roth IRAs have the 5,500k limit/annual), BUT it would also mean that any earnings/gains I attain from VTSMX/VTSAX in my Roth over the next... 30-40 years would be completely tax free?

Thats how I started mine! I've never had 10k I can just dump in, so I save up the initial investment for the Investor class, then make regular contributions until I hit the 10k for the Admiral class. Then I continue making regular contributions :)

The other great thing about investing inside your RothIRA (or any tax-advantaged account) is that you can change your mind in the future without paying taxes on any realized gains. If you decide that you want to switch to a different fund, you can do so inside an IRA without any tax penalties.

[TheHappyGoomba]

There really is no "wrong" fund to put in the Roth, it depends on your investment objectives.  Any earnings whether capital gains or dividend/interest income grows tax free.  And you are not limited to just one or two funds either.

Many people like to mix a target date fund with other funds, I did it myself once.  But really when you do that you are saying you don't agree with the asset allocation or long term adjustment to the portfolio the manager makes over time. I think, for what it's worth is that you should be all in or all out of a target date fund.  You can make your own target date fund and tweek it like you want over the years.

See, that's exactly what I was *initially* planning on doing; mixing a TDF with other funds in order to keep myself "diversified" and flexible in the market. My idea was that my TDF would be the long-term/retirement safety net I would have in place for when I finally get out of the workforce, while on the other side, I would invest in Vanguard's VTSMX/VTSAX fund aggressively in order to reap the benefits of the tremendous growth of those stock indexes over 20-30 years.

But that does not take into account what to do / what to put in my Roth - I like the idea of earnings growing tax-free like you said, so now I'm more curious as to what you think would be best for a Roth IRA, with its annual contribution max of $5,500. Should I put a TDF in my Roth and fund it annually that way, or should I put VTSMX/VTSAX funds in my Roth to maximize the growth potential of $5,500 max contributions per year?

[TheHappyGoomba]

The other great thing about investing inside your RothIRA (or any tax-advantaged account) is that you can change your mind in the future without paying taxes on any realized gains. If you decide that you want to switch to a different fund, you can do so inside an IRA without any tax penalties.

Oh man, I did not even consider the possibility of switching different funds in a Roth IRA. Good to know they wouldn't have tax penalties, and that as a result, the investment logistics of it all are flexible. Thank you for the tip!

So I am basically about to embark on the same path you were on, when you first started investing in VTSMX which eventually turned into VTSAX. What are your thoughts into making that investment (and continually being in it), now that you're currently up and above 10k in the fund, and are in the Admiral class of shares? Have you considered TRFs at all / was that ever an option for you?

[letired]

The other great thing about investing inside your RothIRA (or any tax-advantaged account) is that you can change your mind in the future without paying taxes on any realized gains. If you decide that you want to switch to a different fund, you can do so inside an IRA without any tax penalties.

Oh man, I did not even consider the possibility of switching different funds in a Roth IRA. Good to know they wouldn't have tax penalties, and that as a result, the investment logistics of it all are flexible. Thank you for the tip!

So I am basically about to embark on the same path you were on, when you first started investing in VTSMX which eventually turned into VTSAX. What are your thoughts into making that investment (and continually being in it), now that you're currently up and above 10k in the fund, and are in the Admiral class of shares? Have you considered TRFs at all / was that ever an option for you?

I'm pretty happy managing my investments/asset allocation myself and anytime I have a target fund as an option, the expense ratio is usually higher than if I buy funds individually. I don't consider it a lot of work. I did sit down and do some math at the beginning of this year to make sure I was making purchases in the appropriate ratios across the three investment accounts I'm currently contributing to (401k, IRA, taxable), but that's the first time I've really had to do that, and that's really just because I haven't/don't want to consolidate all my accounts. I'm also maintaining a more aggressive allocation to make up for some low-saving years while I was in grad school and I anticipate maintaining a relatively constant asset allocation in retirement. I'm not well-educated about how target date funds shift allocation over time.