Author Topic: Need advice on my investments  (Read 5029 times)

Here2Live

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Need advice on my investments
« on: July 25, 2013, 10:15:25 PM »
Hello everyone: New here and like everyone else who's come before me here, I find this site to be truly inspiring...have not ridden a bike in years, and have already been online searching for one...btw, if someone has some good suggestions, please chime in.

Here goes--I have been trying to understand MR. Mustache's method of investing, and as I understand it, he withdraws 4% from his investment.  This made me wonder...he couldn't have withdrawn this 4% from his 401K so it had to be mutual funds.  My question is, should I continue to invest 16% of my income into my 401K (with Fidelity) or should I break this up to include a Mutual Fund--where I would be able to withdraw income just as the MMM dude is doing? 

FWIW: I have $150K in 401K and about $20k in savings.  If there is more information needed, please let me know.

Thanks in advance!

GreenGuava

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Re: Need advice on my investments
« Reply #1 on: July 26, 2013, 02:27:47 AM »
Welcome to the forum;  let me see how I can help you with a few things.

Here goes--I have been trying to understand MR. Mustache's method of investing, and as I understand it, he withdraws 4% from his investment. 

I don't think he withdraws anywhere near a full 4%.  The purpose of mentioning that number is that 4% has generally been - and is believed to be, going forward - a sustainable withdrawal rate from a reasonable, balanced portfolio.  That is, it is expected that if you have 25x your expected annual expenses in appropriate investments, you'll be able to withdraw enough to live off of, indefinitely.  That is, you are no longer dependent on a paycheck for your living expenses.

(obviously, your "expenses" here have to account for taxes in some form or another, unless everything is in a Roth IRA and accessible within that;  this is a slightly simplified version, but sufficient for planning, at least at the moment)

The 4% rule isn't his, by the way.  It comes from studies long before him about how long a portfolio can sustain someone, among other things.  The important takeaway, though, is that if you have a reasonably allocated portfolio, you can withdraw 4%/year indefinitely in most circumstances (the one worry that kills the 4% - sometimes, not even always - is runaway inflation, something I don't think we have to worry about in the U.S.).

This made me wonder...he couldn't have withdrawn this 4% from his 401K so it had to be mutual funds. 

I think you're misunderstanding what these are.

A 401(k) is an investment account - just like an IRA is, or a 403(b), or a standard brokerage account.  A 401(k) has its own set of tax rules (it's actually called a 401(k) because that's the section of the tax code it comes from) and restrictions.

A mutual fund is a type of investment.  You can (and almost certainly do) have mutual funds in your 401(k).  I did, back when I had them.  I still do in my IRAs and taxable investment account.  There are many varieties of mutual funds.  As a general statement, once you know which assets you wish to hold, a low-cost, low-turnover mutual fund is a great way to buy these.  The index variety are particularly popular, and, I believe, with good reason.  They are my preferred method of investment. 

It's also worth noting:  while MMM has clearly done quite well for himself, I don't think he started off investing with the goal of early retirement (not sure if that's your goal or not from your post).  He lived (and continues to live) a lifestyle with little waste (biking instead of driving when he can, cooking instead of eating out every day, not having every cable channel on a huge TV, etc);  this, coupled with a high income, caused him to have a high savings rate - which, naturally, he invested in a variety of ways.  One day, he realized his passive income was higher than his annual expenses - he literally didn't need the paycheck anymore, and eventually decided to do other things with his life that he found more meaningful and fulfilling (some of which bring in money, which doesn't hurt;  some of which don't).

Incidentally, this side income is one reason he doesn't withdraw the full 4% each year.  Another is that his investments have grown to such a point that 4% is far more than his annual expenses.

My question is, should I continue to invest 16% of my income into my 401K (with Fidelity) or should I break this up to include a Mutual Fund--where I would be able to withdraw income just as the MMM dude is doing?

I have no idea what your 16% figure is.  I have friends who can't invest 16% of their paycheck in a 401(k) due to limits in the tax code.   In general, I think you should contribute to your 401(k) as much as possible, at least until you have "enough" in there (see below for link with explanation of that). 

If your goal is to retire after or in the year in which you will turn 59.5, you can keep contributing to your 401(k) well after you have enough.  Otherwise, you have to start some planning.

Should you use the mutual funds in your 401(k)?  Probably;  I've yet to hear of better options within a 401(k).  I've certainly heard of worse.

In general, your investments for retirement are generally advised to be as follows:

* Contribute enough to your 401(k) to get the company's match.  There are very few situations where you don't want to do this.

* Pay off any toxic debt, such as credit cards.  Reasonable people disagree here as to whether or not low-effective-interest debt (such as many mortgages and some student loans) should be repaid before continuing. 

* After you have contributed enough to get the match, you probably want to max out a Roth IRA.  You wouldn't do this if you weren't eligible (and also couldn't do a backdoor Roth), or if your 401(k) options were better than what you could get in an IRA (rare), or if your income is sufficiently low that you still qualify for a traditional IRA, and the tax deduction from this is worth it for you.  In 2013, you can contribute the maximum of $5500 or your earned income for the year to an IRA;  this is across both IRA types (does not include rollovers) and investment companies (you can't put $5500 in one at Fidelity and another $5500 in at Vanguard). 
If you earn more than $112,000 (I don't think you do, if you are contributing 16% of your paycheck to your 401(k)), you can't contribute the full amount to a Roth IRA this year.  If you're over 50, you can add another $1000 to what you can contribute.

* After you have done this, increase 401(k) contributions until you hit the maximum;  if you're under 50, this is $17,500 for 2013;  I think it's $5500 higher for 50+.  Once you have enough in your 401(k), consider reducing this step (depending on income and desired retirement age).

* After that, consider taxable investments.  Be aware of tax-efficient investing, and be sufficiently informed to decide if your taxable portfolio is to be treated as part of your overall portfolio, or if you treat them differently.  Reasonable people disagree on what is right here, regardless of desired retirement age.


FWIW: I have $150K in 401K and about $20k in savings.  If there is more information needed, please let me know.

* How old are you? 

* What do you expect your expenses to be like in retirement? 

* Do you have any other retirement savings (e.g., old 401(k)s, an IRA or two, taxable investments)? 

* Are you saving for anything else (next car, a house, other long-term savings goal)?

* What is the money in your 401(k) invested in (which funds;  name, ticker, and expense ratio)? 

* Which other choices are available to you in the 401(k)?

pom

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Re: Need advice on my investments
« Reply #2 on: July 26, 2013, 07:37:51 AM »
Great respons from GreenGuava,

I will chive in a little to say that most of us that have accumulated significant savings at a relatively young age have a mix of 401(k), IRA and taxable account saving. Many of us also have rental properties.

That is simply because if you achieve 40%-70% saving rate, you will run out of space in your 401(k) so you will be forced to invest in a taxable account.

You don't have to withdraw 4% accross the board, assuming that half your money is in a taxable account then you can withdraw 8% from the taxable account and nothing from the 401(k) until you hit 59 1/2. There are some capital gain issues that goes with that but nothing major.

Eric

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Re: Need advice on my investments
« Reply #3 on: July 26, 2013, 11:15:01 AM »
I'd continue contributing as much as possible to your 401k, even if you plan to retire early.  There are ways to access that money before age 59.5 without paying the early withdrawal penalty.

Have you read this post yet?

http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Here2Live

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Re: Need advice on my investments
« Reply #4 on: July 26, 2013, 02:24:33 PM »
Thanks all for your feedback.  I've spent a good amount of time reading through these comments, as well as reading the link that Eric has provided.  Thank you.

Bottom line, I am contributing $16,900 into 401K right now. I have read that the max is set at $16,500 (I am 38 and expect to retire no sooner than 60).  It appears anything over the max must be added to the Roth IRA.  Is this the same type of account that enables MMM to withdraw money to cover his living expenses? Or does this really not matter for my situation? 

Correct me if I am wrong, should my investments look like this:

1--$16,500 into 401K
2--$5,000 into Roth IRA
3--remaining put into a Money Market account.

This sound right?  Also, no credit card debt...just one mortgage and one car payment.

Thanks again. 

matchewed

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Re: Need advice on my investments
« Reply #5 on: July 26, 2013, 02:26:20 PM »
Max for 401k's and Roth IRAs were updated for 2013. 17.5k for 401k's and 5.5k for Roth IRAs.

GreenGuava

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Re: Need advice on my investments
« Reply #6 on: July 26, 2013, 03:33:38 PM »
Bottom line, I am contributing $16,900 into 401K right now. I have read that the max is set at $16,500 (I am 38 and expect to retire no sooner than 60).  It appears anything over the max must be added to the Roth IRA.  Is this the same type of account that enables MMM to withdraw money to cover his living expenses? Or does this really not matter for my situation? 

The max varies year to year, based on a number of factors.  For 2013, and people under 50, it's $17,500 for the 401(k) and $5500 for the IRA (Roth or otherwise;  I suggest Roth in your case).

Don't worry about where MMM is withdrawing his money - he has many streams of income.  Putting plenty into the 401(k), Roth IRA, and taxable investment accounts will ensure that you'll have the streams when the time comes. 

In fact, since you'll be retiring "no sooner than 60," you literally don't have to worry:  all of this is accessible then, and quite easily.  Please trust me on this for now;  the 401(k) effectively will become a mini-company that pays you to be you (almost literally, you will pay yourself an income out of it).  The Roth IRA becomes supplemental money - you'll pay yourself an income to keep yourself in a low tax bracket and use the Roth IRA and taxable money for the rest.


Correct me if I am wrong, should my investments look like this:

1--$16,500 into 401K
2--$5,000 into Roth IRA
3--remaining put into a Money Market account.

This sound right?  Also, no credit card debt...just one mortgage and one car payment.

Thanks again.

1 & 2, adjusted for the numbers above are good.

3 is not quite.  Don't go money market - those return almost zilch - at least not long-term.

What's your mortgage's interest rate?  How much is left on the car note, and at what percent interest?  If either of these is high interest, you might want to pay them down before doing step 3.  If they're low interest, then move ahead to the amended step 3.  Note that paying off your car might result in lower insurance premiums, depending on what is required by your loan.

As for 3, money market is fine as a staging area - that is, you open an account at Vanguard (or wherever you decide) and fund the money market.  We'll move money from there into more appropriate investments as the time comes.

I'm happy to help you with more specifics, but let's look at appropriate investments. 

* Do you have any other retirement savings (e.g., old 401(k)s, an IRA or two, taxable investments) beyond the Roth IRA you're going to create and the existing 401(k)?

* What is the money in your 401(k) invested in (which funds;  name, ticker, and expense ratio)?  I ask because a few days ago, you didn't know the difference between the account and the underlying funds, and I want to do what I can to ensure you're in an appropriate investment situation.

* Which other choices are available to you in the 401(k) (funds' names, ticker symbols, and expense ratios)?

Here2Live

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Re: Need advice on my investments
« Reply #7 on: July 26, 2013, 05:21:42 PM »
Thanks GreenGuava--I don't have any other retirement accounts other than the one mentioned.  Below are the choices I can choose from, and I've indicated which ones I currently own....apologies for the cut and paste method...hope you can read this


LIFECYCLE FUNDS
                                                                                                              Gross Exp.  Shareholder Fees
VANGUARD TARGET 2010 06/22/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2015 06/28/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2020 06/22/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2025 06/28/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2030 06/28/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2035 06/28/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2040 06/28/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2045 06/28/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2050 06/28/2007    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2055 10/05/2010    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET 2060 01/19/2012    Blended Fund Investments*    0.08%    No additional fees apply.
VANGUARD TARGET INC 06/22/2007    Blended Fund Investments*    0.08%    No additional fees apply.

INDEX FUND (PASSIVELY MANAGED)

VANG EXT MKT IDX ISP (VEMPX) 01/14/2011    Stock Investments            0.10%    No additional fees apply.
Investments I currently own VANG INST INDEX PLUS (VIIIX) 07/07/1997    Stock Investments    0.02%    No additional fees apply.
VANG TOT INTL STK IS (VTSNX) 11/29/2010      Stock Investments    0.12%    No additional fees apply.
VANG TOT BD MK IS PL (VBMPX) 02/05/2010       Bond Investments    0.05%    No additional fees apply.

CORE OPTIONS

ARTISAN INTL INST (APHIX) 06/30/1997    Stock Investments                   0.98%    Short term trading fees of 2% for shares held less than 90 days.
ARTISAN SMCP VAL IS (APHVX) 02/01/2012    Stock Investments          1.01%    No additional fees apply.
DODGE & COX INTL STK (DODFX) 05/01/2001    Stock Investments         0.64%    No additional fees apply.
DODGE & COX STOCK (DODGX) 01/04/1965    Stock Investments         0.52%    No additional fees apply.
FID CONTRAFUND K (FCNKX) 05/17/1967    Stock Investments         0.63%    No additional fees apply.
FID GROWTH CO K (FGCKX) 01/17/1983    Stock Investments                 0.77%    No additional fees apply.
Investments I currently own FID LOW PRICED STK K (FLPKX) 12/27/1989    Stock Investments    0.76%    Short term trading fees of 1.5% for shares held less than 90 days.
FID WORLDWIDE (FWWFX) 05/30/1990    Stock Investments                 1.11%    Short term trading fees of 1% for shares held less than 30 days.
Investments I currently own LZRD EMRG MKTS EQ IS (LZEMX) 07/15/1994    Stock Investments    1.10%    Short term trading fees of 1% for shares held less than 30 days.

PERKINS MID CAP VAL 07/06/2012    Stock Investments                         0.56%    No additional fees apply.
Investments I currently own WM BLAIR SMID CAP GR 04/08/2013    Stock Investments    0.75%    No additional fees apply.
FID BALANCED K (FBAKX) 11/06/1986    Blended Fund Investments*    0.48%    No additional fees apply.
PIM INFL RESP MA IS (PIRMX) 08/31/2011    Blended Fund Investments*    1.04%    No additional fees apply.
GALLIARD STABLE VAL 06/22/2010    Bond Investments                         0.31%    No additional fees apply.
PIM TOTAL RT INST (PTTRX) 05/11/1987    Bond Investments                 0.46%    No additional fees apply.
« Last Edit: July 26, 2013, 05:23:44 PM by Here2Live »

GreenGuava

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Re: Need advice on my investments
« Reply #8 on: July 26, 2013, 06:38:19 PM »
Please be sure to send a "thank you" note to whoever put together your 401(k) - it's truly fantastic.  This is literally the best 401(k) I've ever seen - they have options in there that aren't available to you outside of it.  Those four index funds available to you - those are the ones I've been hoping for in every 401(k) since I learned about their existence.

Unfortunately, there are also some bad choices in there - but you can avoid those.   You're in some now, so you'll have to hold to avoid the redemption fees, but we can redirect your contributions and then re-balance the entire thing over the next 90 days (to avoid any of the short-term trading fees).

I'm suggesting different ones because you have a number of high-expense ratio funds available to you;  these tend, especially over longer periods, to under-perform simple index funds (in fact, if you compare them to appropriate indices, you'll see that these are already under-performing).  As a general rule, within any asset class, a lower expense ratio is the best predictor of future returns.

My suggestion:  redirect your future contributions as follows:

28% : VBMPX - this is the "age - 10 as a percent in bonds".  You've been fine with 100% stocks so far, without panicking, but it's important to reduce volatility in your portfolio.   Feel free to adjust this up or down based on risk tolerance, but I would avoid staying at 100% stocks;  in fact, I'd avoid being under 20% bonds at any point:  you end up taking far more risks than is necessary and aren't compensated for the additional risk.

22% : VTSNX - this is going to be approximately 30% of your stock investment;  it is basically an index of all the world's established stock markets outside the U.S.

This leaves 50% of your portfolio for domestic stocks.  Normally, it'd be better to have a total stock market index, but we can emulate that with two options available to you: the S&P 500 index and the extended market index (which is literally the total U.S. market, minus the S&P 500).

40%: VIIIX - that's the S&P 500

10%: VEMPX - that's a large fraction of the rest of the U.S. economy.

Alternately, put everything into Vanguard Target 2030 or 2035 (whichever you think is closer to when you think you'll retire).  The ones you have available to you are sufficiently discounted that they're using the institutional index funds you have.

I'd move what you could out of the WM BLAIR fund when you get a moment;  when it's been 30 days since anything was last added to LZEMX, move that out too (VTSNX is going to serve that role in your portfolio);  when it's been 90 days since anything was added to FLPKX, do the same.

-----

Normally, I suggest using a Roth IRA to make up for deficiencies in a 401(k);  that's not a problem for you.  Instead, I'll suggest either the Vanguard Target date fund that most resembles when you think you'll retire, or alternately, VTSMX, the total stock market index.  With your 401(k) where it is for balance, and where it's going, the Roth isn't a major component of your portfolio yet.  Contribute, leave it alone, and check back in January when it's time to contribute for 2014.

-----

Long story short: You've done a great job at the first accumulation phase and you have a great 401(k) available to you.  When your car is paid off, or if the loan is at a low rate, we can easily expand your portfolio to the taxable realm.  Before you know it, you'll have some easy passive income coming in - and, realistically, you'll either have a kick-ass retirement at 60 or a good-but-slightly-less-spendy one before that, depending on what you choose to do in a decade or so.

If you're super eager to expand to the taxable realm, the first fund should be VGTSX - it's a $3000 minimum at Vanguard.  If you find yourself contributing significantly to it, you'll want to re-adjust your 401(k) so that you don't have too much total international - if it reaches 35% of your total portfolio, re-allocate the funds in your 401(k) so the total is less (do so in the 401(k) because there are no tax consequences to buying and selling within it).  Unless your expenses are super low, though, it's unlikely this is going to be a concern within the next year.

Here2Live

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Re: Need advice on my investments
« Reply #9 on: July 27, 2013, 05:54:57 AM »
Well, I knew the benefits I received from my employer were good, just didn't realize that it spilled over to my choices in the 401K plan.

Thank you so very much, GreenGuava. I appreciate you taking the time to analyze my current investments and providing a detailed guide as to what steps I should take going forward.  This means a lot to me.  I've been sort of on auto pilot these last several years in terms of deciding which investments to allocate my money, so I haven't done much else except to continue to pump money into them, all evenly divided.

I believe I can and will make your suggested changes without a doubt, and will continue to max out up to $17,500, in the 401K which is doable for me.

I suppose it would also make sense that in addition to the above, any additional income I might receive (bonuses), I can throw that at paying off the car loan. Works for me!

Again, thank you, thank you, thank you!!     

GreenGuava

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Re: Need advice on my investments
« Reply #10 on: July 27, 2013, 10:18:04 AM »
Again, thank you, thank you, thank you!!   

Very happy to have helped.  Best of luck going forward.