Author Topic: I have been absorbing the information here and is it as simple as doing this?!?!  (Read 3916 times)

wantstoinvest

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Hi everyone,

This site and all the information I have been reading in general has been super helpful and eye opening. I have a question about process here and was wondering if it is really this simple to achieve financial security. The frugality is not an issue, my wife and I already have a simpler lifestyle, not reliant on cars, not buying stuff, no debts besides a mortgage (which we are paying extra on the principal each month). All that is well and good, but we are saving some money and besides a 401k, I did not know what to do with it. After reading the information here and on reddits fire subreddit, would doing the following be all I need to do?

1. Roll my 401k over to a Vanguard account that invests in ETFs (Is this the correct term)?
2. Put another initial investment in this fund, regardless of if I can rollover my money in Step 1.
3. Invest into that account monthly (we can do 25% of our monthly to start and adjust up when we see we can live off that)

Just do the above consistently a number of years? Is that really it? Will opening the Vanguard account be the only fund we would need (can the fund itself be used to invest in different vehicles)? Thanks for the help if any one responds.

Travis

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Just to clarify some terminology, a Vanguard account isn't the same thing as a fund. Vanguard is a company with dozens of funds to pick from.  You can pick an index fund that they offer and have that inside of your 401K or IRA (or both).  You could have multiple funds inside those vehicles. The experts recommend that you only need a couple to get the job done.

wantstoinvest

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Ah sorry, thanks for the clarification. To invest in Vanguards' investments, I would have to open an account with the, correct? And the account would either be a 401k or an IRA?

joonifloofeefloo

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I'm not in the States, so wait for a US-person to respond, but I buy Vanguard funds and my sense is this:

You don't need to open an account with Vanguard.
Wherever your investment account is, you can likely buy Vanguard's funds.

i.e.,

1. Look inside your 401(k) account. Click "buy". View the Vanguard funds available to buy with the money you have in that account.

2. With any money over and above that allowed in your 401(k), you can open an additional (nonregistered) account and do the same.

3. Every time you have money available, buy more. (Here you need to consider purchase fees, etc. If there's a fee of, say, $10 per buy, you don't want to buy with every $100 you gather. If it's free to buy, you might!)

wantstoinvest

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I also just did a little more checking and I see there are IRAs at Vanguard and just an investment account outside of that.

I would like to put away 2k a month so an IRA contribution would max out quick. I see that with an IRA and an individual account, I can invest in the ETFs and mutual funds offered. Does it make sense to open both accounts? I don't think I'll get the tax benefit from the Traditional and I may be priced out of a Roth.

Also I just saw the above post! Thanks for that info as well. If Vanguard funds are not available in my 401k, then would I have to open an account with Vanguard to have the option to invest in them?

wantstoinvest

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Ah sorry, thanks for the clarification. To invest in Vanguards' investments, I would have to open an account with the, correct? And the account would either be a 401k or an IRA?

If you don't already have access to Vanguard funds through work, then you would need to open a brokerage account with Vanguard.  It doesn't have to be a 401K account or an IRA account, but it certainly could be.  On this forum, most folks max out their tax-deferred/tax-advantaged investment accounts, ike a 401(k), before they invest in a normal joe-schmoe brokerage account.  For example, last year my wife and I maxed out her 403(b) and my 401(k) and her HSA account, and added very little if any to the balance of our brokerage accounts.   Unless you really want to keep the money liquid for cash-flow reasons, you usually try to max out the tax-advantaged accounts first.

Makes sense. And with following that strategy, have you seen the growth and the development that would enable you to live financially independent? Just curious to hear your experience :)

joonifloofeefloo

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wantstoinvest, I've seen ridiculous growth. I haven't tracked how much of that is actual market gains, but some is. Lots is matching contributions. Wherever it has come from, yes, it works. However, the MMM way does not anticipate fast growth (many of us have had that, but that's just because of what the market happens to have been doing the last few years). The focus is on long-term growth -think 20-40 years. You might see fabulous growth in the meantime, and even decide to cash out some along the way, but the MMM thing isn't about big, fast gains. At all. So, don't plan for that.

I highly recommend the book The Millionaire Teacher (Second Edition) by Andrew Hallam.
I haven't read this one, but many here also recommend Simple Path to Wealth.

wantstoinvest

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Completely understand and thanks for the info. I should have clarified that with our situation being more stable,  i just wanted to start investing instead of having our cash sit around. I want to begin with 2k a month so that would not even max our individual 401ks (which is fine!). If we simply invested that amount consistently and chose funds or investments with a small steady return, like an ETF or mutual fund, in 30 years I think we would be OK based on everything ive read? Is my understanding correct?

joonifloofeefloo

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If we simply invested that amount consistently and chose funds or investments with a small steady return, like an ETF or mutual fund, in 30 years I think we would be OK based on everything ive read? Is my understanding correct?

Basically, yes.

You would:

1. Choose 1-3 well-diversified funds. Each will include hundreds of businesses, in various sectors, in multiple countries.

2. Choose such an option offered at a very low fee.

3. Purchase more of that/those regularly, optimizing any matching contributions first.

4. Wait patiently while it increases over the decades.

5. Learn to live frugally in the meantime, so that by the time you wish to stop generating income through work, you will have fabulous practices in place for living well on a tiny portion of your investments.

kendallf

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Read this for some advice and explanation that should be relevant to your questions:

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

startbyservingothers

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I think this is obvious , but perhaps not from #3 in your list.  Most* IRA accounts are entirely separate from your work account.  They don't replace your work account, but are often times a better place to keep the funds.   You can only directly directly contribute $5500 per year to IRA's.  Basically many people would need to keep both the work and have an IRA that they routinely transfer funds to from the work account (401K etc.)

*Small employers that offer a "Simple IRA" might be an exception in some cases.

Essentially you would ask the following questions to your HR rep:

1.  Do they allow you to pick the 'provider' for your retirement account?
2.  Is it a 401K, 403b, etc?
3.  What type of investment choices does the account have? I.e. Can you invest directly in stocks or ETFs?
4.  Do they have offer Vanguard or similar low overhead funds?  (Schwab and Fidelity have similar funds.  Etrade, TDAmeritrade, Etc.  have funds that are 'good enough' to use temporarily if you need to use them.  Ubiquity has some acceptable options as well.)


Note:  few people complain (Or even understand these things at all!) if their work retirement isn't up to par.  While the crappy retirement at my old work wasn't enough on it's own for me to leave, it was certainly a contributing factor.
« Last Edit: February 10, 2018, 12:12:21 PM by startbyservingothers »

joonifloofeefloo

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Excellent list (and order) of questions, startbyservingothers!

aceyou

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Welcome.  You are doing well.  I'll just echo what others (you included) have basically said, because when getting started it's good to hear things a lot of ways to really get it. 

JL Collins is great at explaining investing...here's how he basically puts it...

A 401k or a Roth IRA are basically glasses that you can pour beer (your investments) into.  Anytime you buy beer and put it into the 401k glass, then you pay no tax on it now, but you pay it when you decided to drink the beer.  Anytime you pour beer into the Roth glass, you pay taxes before filling your glass, but there's no tax when you want to drink:) 

Once you have your beer mugs, you need to start putting something into them.  Vanguard sells many kinds of beers (index funds).  You get to pick which kind of beer you want to fill your mugs with.  The most popular beer on this site is VTSAX (sometimes called VTI).  When you buy this beer, you are buying a tiny piece of every publicly traded company in the United States (3,581 companies last I checked).  So, every two weeks, 50% of my paycheck gets sent to vanguard to buy more VTSAX beer.  I'm a teacher, so I pour half of my new beer into a Roth403B, and the other half into a 457 (like a 401K). 

People here like to buy our beer (investments) from vanguard and store our beer mugs (our tax designations) with vanguard because they are an outrageously good deal.  Their investments are all craft beer quality, and yet they charge less than Busch Lite.  To contrast, a typical investment firm sells you Bush Lite, but charges craft beer prices. 

That's the analogy that has helped me really understand what was going on. 

Financial.Velociraptor

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OP,

It really is shockingly simple.  I left the corporate grind on 5OCT2012 (I was 40) and haven't looked back.  You are getting good advice here.

Also, read the following sticky topics:

https://forum.mrmoneymustache.com/investor-alley/investment-order/
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

facepalm

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I would do the following:

Read "investment order" at the top of this sub forum.

Max out your tax advantaged accounts first. That would be your 401(k) and your traditional or Roth IRA.

Open a brokerage account. it does not have to be with Vanguard, but going with Vanguard allows you to invest in their mutual funds with no fee. You could also open a brokerage account with someone like Schwab, and buy ETFs instead of mutual funds. There is a thread here or on Bogleheads that discusses the merits of each firm.

Question: What investments are available in your 401(k)?


wantstoinvest

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My 401k offers these options to invest in

Fidelity Advisor Balanced M   FAIGX
Fidelity Advisor Dividend Growth M   FDGTX
Fidelity Advisor Equity Growth M   FAEGX
Fidelity Advisor Equity Income M   FEIRX
Fidelity Advisor Freedom 2005 M   FFTVX
Fidelity Advisor Freedom 2010 M   FCFTX
Fidelity Advisor Freedom 2015 M   FFVTX
Fidelity Advisor Freedom 2020 M   FDTFX
Fidelity Advisor Freedom 2025 M   FTTWX
Fidelity Advisor Freedom 2030 M   FTFEX
Fidelity Advisor Freedom 2035 M   FTTHX
Fidelity Advisor Freedom 2040 M   FTFFX
Fidelity Advisor Freedom 2045 M   FFFTX
Fidelity Advisor Freedom 2050 M   FFFQX
Fidelity Advisor Freedom 2055 M   FHFTX
Fidelity Advisor Freedom 2060 M   FDKTX
Fidelity Advisor Freedom Income M   FTAFX
Fidelity Advisor Government Income M   FVITX
Fidelity Advisor Growth Opportunities M   FAGOX
Fidelity Advisor Limited Term Bond M   FTBRX
Fidelity Advisor Mid Cap Ii M   FITIX
Fidelity Advisor New Insights M   FNITX
Fidelity Advisor Overseas M   FAERX
Fidelity Advisor Small Cap M   FSCTX
Fidelity Advisor Strategic Dividend & Income M   FTSDX
Fidelity Advisor Strategic Income M   FSIAX
Fidelity Advisor Total Bond M   FEPTX
Fidelity Government Money Market Dly Mny   FZBXX

Also, is there a point to have an IRA if I cannot deduct the taxes? I believe I am priced out of a Roth IRA so I am talking strictly traditional here.

markbike528CBX

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All the tickers from your post above that I've checked have expense ratio's of ~ 1.2% , which is eeek, WTF terrritory (for mustachians, normal for everyone else).

That said, putting money into a 401(k) is better than not.  It reduces your taxable income and gets you started investing.   If you get a company match, that's free money, that is then invested tax free.

Since you are just starting, the amounts won't be that bad, even at a high expense ratio.

wantstoinvest

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Yes, I was looking into the fees and one of my co-workers noticed they were high on Betterment. In this case, would it be wiser to simply invest up to my company's match and then create an account that invests in something with lower expenses (I believe VTI and some other Vanguard investments are highly touted around here)?

simonsez

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Also, is there a point to have an IRA if I cannot deduct the taxes? I believe I am priced out of a Roth IRA so I am talking strictly traditional here.
The Roth IRA income contribution limit is higher than the traditional.  For MFJ it goes up to 199k (phaseout starts at 189k) for Roth IRA in 2018.  If filing single, the Roth IRA limit is 135k.  For the traditional IRA, it's 121k and 73k, respectively for MFJ and single.

And yes, if your fees are high - invest in 401k up to match, then go to IRA/Roth IRA and fill that space up with low-cost broad index funds, and then come back and fill up rest of 401k (this is outlined in investment order post).

wantstoinvest

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Also, is there a point to have an IRA if I cannot deduct the taxes? I believe I am priced out of a Roth IRA so I am talking strictly traditional here.
The Roth IRA income contribution limit is higher than the traditional.  For MFJ it goes up to 199k (phaseout starts at 189k) for Roth IRA in 2018.  If filing single, the Roth IRA limit is 135k.  For the traditional IRA, it's 121k and 73k, respectively for MFJ and single.

And yes, if your fees are high - invest in 401k up to match, then go to IRA/Roth IRA and fill that space up with low-cost broad index funds, and then come back and fill up rest of 401k (this is outlined in investment order post).

Thank you. I see that the fees are still high on my 401k, but even with the high fees, its still worth maxing out? Is this just luck of the draw as far as fees goes? Has anyone ever successfully been abke to advocate their 401k supplier to add a different fund, namely one with a lower expense?

simonsez

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I see that the fees are still high on my 401k, but even with the high fees, its still worth maxing out?
Usually - you'd have to run some numbers based on your situation and we aren't 100% of what the future holds in terms of tax rates.  Keep in mind you get taxed on both ends of a taxable account (even if one is LTCG) but only on one end with a tax-deductible.  The arbitrage between the fees* is probably not the biggest issue compared to the different tax rates.

*-It definitely wouldn't hurt to ask your company about getting more competitive!  I have no experience/knowledge with this though.

Don't let really good be the enemy of perfect, though.  If you're contributing up the match, maxing your flavor of IRA, and then either maxing the 401k OR using a taxable account for the same amount, you're in great shape even if you pick the mathematically inferior option.

aceyou

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Quote
I see that the fees are still high on my 401k, but even with the high fees, its still worth maxing out?

Probably, for a couple reasons: you might not always be with that employer... (average tenure is 4.6 years, I just read) and when you leave you can roll that balance into an IRA with Vanguard that does not have crazy fees.  Also, if you are paying high marginal tax rates right now, it's probably better to stomach those high fees for a few years than to pay taxes right now.  I would still observe the guidelines set forth in the investment order posts.

Yes, still better to max it out for exactly this reason.  As soon as you leave your employer you can roll it all to vanguard and pay .04% fees the whole rest of the way...unless they lower their fees again. 

wantstoinvest

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That makes sense!!!!! Prefect reason. Thanks everyone, going to start this plan with my wife.

Fomerly known as something

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Also to answer your question, yes it is good to contribute to an IRA even if it is a traditional non-deductible.  Investing class 201 will tell you that you can convert your non-deductible to a ROTH IRA with no income limits, but Investing class 101 basically says, the money in even the traditional non-deductible will still grow tax deferred which is good in of itself.   

wantstoinvest

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You guys are great, this has been really helpful. My wife and I drew up a budget last night and we are starting today to invest aggressively. I am going to open us each a traditional IRA on Vanguard and I noticed that they really have insanely low expense ratios. Makes my 401k options seem pointless! But what are the best ones to choose from? I'm leaning toward VFIAX, VTSAX, and VIMAX. Are these good choices?

Also, how would I transform my tradtional IRA into a ROTH? Is there an article you can link me to on that?

BTDretire

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Just wanted to throw in a little more info.
 My wife and I have 7 Vanguard accounts grouped on one page.
We each have a SEP/IRA, Roth IRA and a Traditional IRA and
then the 7th account is a joint account with taxable money.
 You may also have another account through your companies
401k.

CorpRaider

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OP, you might want to start with one of the target date or life strategy funds for your vanguard account unless and until you have time/interest to read the JL Collins series and other resources mentioned above.  Vanguard also has a personal advisor service if you think you need it (I think it adds like .30 to your expense ratio though).

wantstoinvest

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Quick update, upped the 401k contributions and made the plunge into IRAs. Feels exciting! Thanks for the advice everyone.