Author Topic: 401k questions - Am I doing the best thing for me?  (Read 2119 times)

taking fire

  • 5 O'Clock Shadow
  • *
  • Posts: 54
  • Age: 34
  • Location: AL
401k questions - Am I doing the best thing for me?
« on: November 16, 2015, 11:09:07 AM »
I have a 401k through my employer and I contribute 4%, because that is the company match. It was originally through Merrill Lynch, and just recently changed to Fidelity about two years ago. I am 31, and I have been in it for about 8- 9 years. There were a few years where I bumped it down to only 1%, because I needed the extra money in my paycheck. Stupid, I know, but water under the bridge. Back up to 4% and has been for the last 4 years or so. I've got around $35k in it at its highest.

I am fully vested. I am not sure what that means, but I am that. With my employer, it takes 7 years to get that. Can anybody explain this?

I have my contributions going 100% into vangaurd target retirement 2050, stock symbol VFIFX. It does pretty good I guess, but I have no idea if this is the best it could be or if it is a bad choice, etc. I can remember when it was with Merrill Lynch, my contributions were split three ways or so into several different kinds of accounts.

Looking at all of this MMM stuff has gotten me thinking, maybe I should be taking more risk and putting my money into higher risk account to gain more money now. I guess i do have the option to change it whenever I want. Is there an option that would be better earning through Fidelity?

Like I said, I don't know much about it, but it hurts to watch is rise and fall. It has been as high as $35k and as low as $28k in the past year alone.

Also, I have some debt to pay off, and when that gets paid off I will raise My contribution. I guess maybe I should not worry that my employer only matches 4%, and just continue to raise my contribution. I guess part of me feels like since they only match 4%, that's what I should do.

Also, I hear a lot of talk about IRAs and such. Just wondering if 401k is my only option or if one of these personal accounts would benefit me and how.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2223
  • Location: EastCoast
Re: 401k questions - Am I doing the best thing for me?
« Reply #1 on: November 16, 2015, 11:22:55 AM »
That is a great low cost fund. VFIFX has just 10% bonds. I'd say that's perfectly fine for you at this point, it would be hard to do a whole lot better with additional complexity. I'd suggest you stay in that until you learn more. Recommended would be to put as much as you can into this, up to $18,000 per year. Just to keep it simple. Only after that would I worry about other accounts. IRA or Roth are options for additional saving, I'm sure some will explain, or you can google it.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4980
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: 401k questions - Am I doing the best thing for me?
« Reply #2 on: November 16, 2015, 11:40:17 AM »
I am fully vested. I am not sure what that means, but I am that. With my employer, it takes 7 years to get that. Can anybody explain this?

"Fully vested" just means that you could leave the company tomorrow and keep all of the money. You are always 100% vested in the money you personally put in; the company can set its own vesting schedule for any matching funds it puts in. For the matching funds, if you left the company before you were fully vested, you would see some or all of the matching money disappear from your account.

Quote
I have my contributions going 100% into vangaurd target retirement 2050, stock symbol VFIFX. It does pretty good I guess, but I have no idea if this is the best it could be or if it is a bad choice, etc. I can remember when it was with Merrill Lynch, my contributions were split three ways or so into several different kinds of accounts.

VFIFX is a fine choice. It has a combination of stocks and bonds, mostly stocks. I recommend you read some more about investing before you think about changing this.

Quote
Like I said, I don't know much about it, but it hurts to watch is rise and fall. It has been as high as $35k and as low as $28k in the past year alone.

This statement makes me think that increasing the risk level might not be a good idea for you at this time. Increased risk generally increases the long-term growth, but it also increases the ups and downs. If you think it's even remotely possible that you might cash out at a low point because you are worried it will go even lower, a riskier investment is not for you.

Quote
Also, I have some debt to pay off, and when that gets paid off I will raise My contribution. I guess maybe I should not worry that my employer only matches 4%, and just continue to raise my contribution. I guess part of me feels like since they only match 4%, that's what I should do.

You should absolutely contribute as much as it takes to get the maximum match from your employer, even when you have some debt. Increase this contribution once you get your debt paid off. Tax-deferred saving is your friend.

Quote
Also, I hear a lot of talk about IRAs and such. Just wondering if 401k is my only option or if one of these personal accounts would benefit me and how.

You can contribute to an IRA and a 401(k) in the same year. I would say you shouldn't open an IRA until you're able to max out your 401(k). With decent funds like VFIFX in your 401(k) there's no reason to add the complexity of a second account as long as you still aren't using up the contribution space in the first one.

mandy_2002

  • Bristles
  • ***
  • Posts: 292
Re: 401k questions - Am I doing the best thing for me?
« Reply #3 on: November 16, 2015, 11:49:10 AM »
Vesting for a 401k applies to the employer match.  If you leave the company without being vested, they take the match back.  These are sometimes on a vesting schedule (like 5 years at 20% per year), but some do have a cliff vesting, where if you leave a day before vesting, you get zero match. 

IRA's are great, but because the 401k investment also removes payroll taxes, they are a priority (and after getting the employer match, if you have a High Deductible Health Plan, maxing an HSA is the next priority). 

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4980
  • Age: 34
  • Location: Seattle, WA
    • My blog
Re: 401k questions - Am I doing the best thing for me?
« Reply #4 on: November 16, 2015, 11:59:00 AM »
...but because the 401k investment also removes payroll taxes...

This is false. Payroll taxes apply to amounts contributed to a 401(k). HSA contributions out of your paycheck generally are exempt from payroll taxes though.

taking fire

  • 5 O'Clock Shadow
  • *
  • Posts: 54
  • Age: 34
  • Location: AL
Re: 401k questions - Am I doing the best thing for me?
« Reply #5 on: November 16, 2015, 01:45:01 PM »
Ok, Well I guess it is good and I will just keep it the way that it is for now. Like stated, I will contribute more once everything is paid off but my mortgage. I will stay away from an IRA at the moment, since the 401k seems to bee good.

Doesn't the money I put towards 401k drop my annual income, this putting me in a lower tax bracket in some cases?

I guess the next topic I'll start is about health savings accounts, unless you all want to answer that question here. I still have health insurance through my employer, and it is a bcbs PPO plan. I guess, fortunately, we have not moved towards one of the ACA plans. Unfortunately, it costs me $130 a week for family coverage. Our copays were $40, but most everything was covered at 100%. We just got our insurance packets for next year. Copays went down to $20, but most everything is now only covered at 80%. This worries me. A small $1k procedure would only end up costing me $200, but a $100k procedure could cost me $20k.

Why is there so much talk here about health savings accounts, and what is the difference between them and regular health insurance?


taking fire

  • 5 O'Clock Shadow
  • *
  • Posts: 54
  • Age: 34
  • Location: AL
Re: 401k questions - Am I doing the best thing for me?
« Reply #6 on: November 16, 2015, 01:58:31 PM »
Also, another question.

Let's say I didn't have any debt and went crazy at saving in 401k, and saved up to 25 times my annual income in about ten years, and wanted to retire. That makes me 41. Wouldn't I take the tax hit for pulling it out early, vs waiting until whatever it is - age 59.5? If so, I have heard that it is something like 35-40% tax hit if you remove it early. I'm just trying to understand what I would do here. Would I simply have to save up to whatever amount would make it to where when 40% was removed, I was then left with the amount I needed - the amount which is 25 times my income?

I mean if I retire from my job and roll it over into a roth IRA, I'm still gonna have to pay taxes as soon as I put it in (which might be less than removing from 401k altogether). But, is there an age limit with a penalty on this too fro removing funds early?

Taxes are ridiculous.

G-dog

  • Senior Mustachian
  • ********
  • Posts: 14099
Re: 401k questions - Am I doing the best thing for me?
« Reply #7 on: November 16, 2015, 02:09:41 PM »
Just another note on your 401k - you've picked a target date fund. This means that Vanguard will be shifting the asset allocation in this fund as you age. Right now the asset allocation is about 90% stocks and 10% bonds, but the fund managers will shift this as you age to reduce the percent in stocks and increase the percent in bonds, reaching the final target allocation in 2050 when you will be about 65 yo (whatever your traditional retirement age is).
Because this is more actively managed by the company, the expense ratio is likely higher than if you can select a whole stock market index fund, and a whole bond market index fund and set your deposit to the 90/10 ratio. You'd have to see what funds are offered, and there expense ratios to see if you would save on fees.

Please consider doing some more reading, such as the stock series on jlcollinsnh.com. Jim does a great job and created a great resource that explains the stock market, index funds, asset allocation, etc. in very simple terms via short blog posts with clear graphs (as needed).

And yes, your 401k contributions reduce your taxable income (likely coming out pre-tax), and so thus is a benefit you don't get via an IRA. You can contribute up to $18000 to your 401k in 2015, this is the (IRS) max that is frequently referred to. Technically, you can contribute more than $18k, but anything above that max will still be taxed. I would encourage you to increase your contribution every year, at my work we could do that automatically. Don't just wait until your mortgage is paid off, I assume this will take YEARS! You want all those years to be on your side growing those 401k contributions - that is so much more powerful than trying to catch-up later (check out compounding, time-value of money, historic stock market trends).