401k/early retirement questions

[jbigelow]

Young mustachian here looking for some advice. I'm currently heavily investing into my 401k every year right now while paying down my school loans. Once they are paid off, I was planning on contributing to a RothIRA as well. My question is at what point do I start transitioning to Mutual funds and other investments so I can actually retire early since with a RothIRA I can only withdraw contributions and with a 401k I can't touch the money til I'm 59.5? Do people usually take the hit on 401k tax and withdraw early if they want to retire before 40 or just invest in other avenues?

[windawake]

Check this out: http://www.madfientist.com/retire-even-earlier/

I asked a similar question in my journal and got some great responses: https://forum.mrmoneymustache.com/journals/windawake's-journal/

[Eric]

Or you could decide to access that 401k money early without penalty.  That's usually recommended over paying the penalties.  ;)

http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/

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

[AlanStache]

Mutual funds are an investment product that (IMHO) one should not use, typically have high fees and most any mutual fund has a equivalent etf.

Investment products:
Mutual funds: can own stocks/bonds/hold cash/gold or any combination of these. commonly have high fees.
ETF: normally hold one class of stocks/bonds/hold cash/gold
CD's: fixed pay out with small risk - direct loan to a bank
stocks: direct ownership in a company
bond: loan to a government of some type.
REIT: special thing (similar to ETF) specializing in the owner ship of property.

Really any of the above can pay dividends if that is how you wanted to 'live off your savings'.

[beltim]

Mutual funds are an investment product that (IMHO) one should not use, typically have high fees and most any mutual fund has a equivalent etf.

Investment products:
Mutual funds: can own stocks/bonds/hold cash/gold or any combination of these. commonly have high fees.
ETF: normally hold one class of stocks/bonds/hold cash/gold
CD's: fixed pay out with small risk - direct loan to a bank
stocks: direct ownership in a company
bond: loan to a government of some type.
REIT: special thing (similar to ETF) specializing in the owner ship of property.

Really any of the above can pay dividends if that is how you wanted to 'live off your savings'.

A lot of these are not quite accurate.  Bonds, for example, are not exclusively loans to governments. In fact, the non-government bond market (typically corporate or mortgage bonds) is bigger than the government bond market in the US. (http://www.learnbonds.com/how-big-is-the-bond-market/).  And REITs do specialize in ownership of property, but are individual companies and thus are individual stocks (not etfs, which as far as I know never hold only one companies stock).  Your point about mutual funds having high fees is a generalization.  There are plenty of mutual funds that reflect stock indices and have very low fees.  These have advantages over ETFs that may make them more appealing for some investors.

[AlanStache]

right forgot about corporate/mortgage bonds.

The comparison of REITs to etfs was wrt being composed of a basket of properties.  was clear in my head :-)

[Frankies Girl]

Mutual funds can be one of the best deals out there according to most of the sites I read - MMM and JLCollins both recommend Vanguard's total stock market index fund and there are index bond funds and even REITs that have extremely low expenses. Sure, there are plenty of mutual funds that have high fees, but using a low fee index mutual fund means that you don't have to worry about checking stuff all the time - index funds as a whole tend to be lower cost and lower involvement for good returns. There are many investors that don't want to deal with the hassle of day trading or tracking ETFs... like me for instance. ;)


OP - Not sure what you're invested in right now with your 401K or planning for your Roth, but you can buy anything at any time as long as you have the minimum investment amounts. ETFs are fine if you like tracking stuff daily (and even hourly), but mutual funds can be your best friend if you want to set up a "lazy" portfolio and minimize your interaction and fees. For the Vanguard Total Stock Market index fund they have three different versions - exchange traded fund (ETF, and symbol is VTI), the investor shares level that takes a minimum of 3K to get into (VTSMX), and the admiral level (VTSAX) that takes a minimum of 10K. Fidelity has their versions in their Spartan series -  FSTMX is their investor level at $2,500 and FSTVX is their advantage/10K level. ALL of these funds come with super low expenses and they track the total stock market.

You really need to figure out your comfort with risk, what your goals are and then get an asset allocation figured out.

Eric's right; you will be able to access 401K money before you're "old" - there's several methods to withdraw it without penalties or even taxes depending on what level of income you're expecting in (early) retirement.

Recommended reading:
http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/
http://jlcollinsnh.com/stock-series/
http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

[nereo]

Mutual funds can be one of the best deals out there according to most of the sites I read - MMM and JLCollins both recommend Vanguard's total stock market index fund and there are index bond funds and even REITs that have extremely low expenses. Sure, there are plenty of mutual funds that have high fees, but using a low fee index mutual fund means that you don't have to worry about checking stuff all the time - index funds as a whole tend to be lower cost and lower involvement for good returns. There are many investors that don't want to deal with the hassle of day trading or tracking ETFs... like me for instance. ;)

I think the terminology gets a bit muddled. When most people thing of "mutual funds" i suspect they are thinking of actively managed funds.  Most people think of mutual funds that actively invest in stocks, but there are some that only invest in bonds, and many that invest in a mixture.

Index funds by design passively track a particular index, like the SP 500 or the DJIA or the total market.  Good ones have *very* low fees, like the Vanguard 500 Index fund.  But even here 'there-be-dragons'.  I ran across an index fund where the broker charged a whopping 2%, all to do the exact same thing that Vanguard does for less than 0.1%.

Taken as a group, actively managed mutual funds don't do very well.  Close to 80% fail to beat their respective benchmarks over a 5+ year timeline.  There are of course exceptions - Lynch's Magellan fund (Fidelity) smashed the market for 13 years.  Bt they are the exception, not the rule.

That's why there are so many strong proponents to passively managed index funds here, and why some people were advising against "[actively managed] mutual funds". 

[AlanStache]

OP - Not sure what you're invested in right now with your 401K or planning for your Roth, but you can buy anything at any time as long as you have the minimum investment amounts. ETFs are fine if you like tracking stuff daily (and even hourly), but mutual funds can be your best friend if you want to set up a "lazy" portfolio and minimize your interaction and fees

Some 401k plains may limit what participants can invest in.

etf's can be just a hands off-set it and forget it-as mutual funds - just dont check finance.yahoo.com during the day.  The underlying assets in a MF also very during the day-its just the daily high/low is not reported to the investor.

If an index mutual fund can offer competitive fees to an etf-go for it.  Maybe this comes down to individuals, I am perfectly happy doing buy & hold investing with all etf's.  They all should be tracking the underlying index anyway.

[beltim]

I think the terminology gets a bit muddled. When most people thing of "mutual funds" i suspect they are thinking of actively managed funds.  Most people think of mutual funds that actively invest in stocks, but there are some that only invest in bonds, and many that invest in a mixture.
...
That's why there are so many strong proponents to passively managed index funds here, and why some people were advising against "[actively managed] mutual funds".

That's why I was responding to what was written, not implied words that you inserted into italics.  Again, there are many low-fee passively managed mutual funds.

[jbigelow]

Thanks for all the replys! By mutual funds I did mean something like a Vanguard. I guess it is definitely best to invest the tax free routes until they are maxed out. Thanks for the advice/reading.