Author Topic: Why am I putting 15% in my 401k?  (Read 8592 times)

davef

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Why am I putting 15% in my 401k?
« on: December 30, 2014, 12:03:40 PM »
I am 32. Married, no kids.
our joint income is about 100-110k per year.
Until 30 we put all of our extra income into paying off debt (house and cars) and only started saving for retirement 2 years ago.
We currently have a rental property worth 200k (about 50% equity) it is listed for sale.
and our residence worth 340k (25% equity)
and we have 2 paid off cars.

Our aside from our emergency fund and checking account  (12k) we have the following investments:

Brokerage account 20,000 (8-9k is reserved for a new roof within 3 years)
401k 51,000
My Roth IRA 6,000
My wifes Roth IRA 6,000

Our brokerage account and IRAs are all in ETFs mostly fidelity Spartan funds.
Our 401k is a mixture if mutual funds, which have fees that are not terrible, but much higher than the ETFs.
I'm considering dropping my 401k contribution to the match % (6%) from 15% and putting that money in a traditional IRA so I can invest that money in lower fee funds.
Your thoughts? 

Mississippi Mudstache

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Re: Why am I putting 15% in my 401k?
« Reply #1 on: December 30, 2014, 12:10:03 PM »
I think you should max out your 401k and IRAs for you and your spouse and an HSA if you have the option. On that income, the tax savings alone will far outweigh the fees of the mutual funds.

DoubleDown

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Re: Why am I putting 15% in my 401k?
« Reply #2 on: December 30, 2014, 12:11:47 PM »
My thoughts are continue to max out your 401k (up to $18,000 limit) AND put the max amount for you and your wife ($5500 each, I believe) into IRAs AND invest in some taxable funds (or maybe rental real estate) on top of that. Here at MMM, we don't do 15% savings -- we do 50% or more :-)

edit: As I hit "Post" a similar response appeared

davef

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Re: Why am I putting 15% in my 401k?
« Reply #3 on: December 30, 2014, 12:12:18 PM »
More info:
Current investments in my 401k. Fees are .04-.087
Stock Investments Large Cap DODGE & COX STOCK  15%
Stock Investments Large Cap FID CONTRAFUND K  20%
Stock Investments Large Cap NB LG CAP VAL INST  5%
Stock Investments Large Cap SPTN 500 INDEX INST  10%
Stock Investments Mid-Cap BARON GROWTH INST  10%
Stock Investments Mid-Cap FID LOW PRICED STK K  5%
Stock Investments Mid-Cap SPTN EXT MKT IDX ADV 15%
Stock Investments Small Cap ABF SM CAP VAL INST  10%
Stock Investments International FID DIVERSIFD INTL K 10%

Jack

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Re: Why am I putting 15% in my 401k?
« Reply #4 on: December 30, 2014, 12:13:01 PM »
The problem with putting your money in an IRA instead of a 401K is that the limit is only $5,500 instead of $18,000. Where are you going to put the other $12,500?

Otherwise, you're absolutely correct that you should contribute up to the match in your 401K, then max your IRA, then max your 401k.

MDM

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Re: Why am I putting 15% in my 401k?
« Reply #5 on: December 30, 2014, 12:18:02 PM »
Our 401k is a mixture of mutual funds, which have fees that are not terrible, but much higher than the ETFs.
I'm considering dropping my 401k contribution to the match % (6%) from 15% and putting that money in a traditional IRA so I can invest that money in lower fee funds.
Your thoughts?

Quote
Current investments in my 401k. Fees are .04-.087

Fees of 0.04% to 0.087% aren't "much higher" than 0%, let alone whatever the ETFs charge.  Unless you mean 4%-8.7%.... ;)

davef

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Re: Why am I putting 15% in my 401k?
« Reply #6 on: December 30, 2014, 12:20:57 PM »
My thoughts are continue to max out your 401k (up to $18,000 limit) AND put the max amount for you and your wife ($5500 each, I believe) into IRAs AND invest in some taxable funds (or maybe rental real estate) on top of that. Here at MMM, we don't do 15% savings -- we do 50% or more :-)



Last year I figure we were around 40%
We invested 10k in post tax investments
5,500 in each Roth IRA,
15% in 401k
8k in principal to refinance down to 3.125%
+ equity on 2 mortgages. (1700 and 1000 monthly 3.125% & 4.25%) (don't forget that 18k of that income was rental income and there is a second mortgage to go along with it.

I plan to continue with the Roth IRAs Maxed. But I don't see why I should be using a 401k that forces me to use moderate fee funds when I could be using a traditional IRA and lower fee funds.

James

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Re: Why am I putting 15% in my 401k?
« Reply #7 on: December 30, 2014, 12:22:53 PM »
I agree with Mississippi Mud on the 401k max to get the tax deduction. .04% isn't bad, I assume that is for the full index which is a great spot for your money. You can always put your other investments in funds to create whatever balanced portfolio you wish to have.

Make sure you see if your company allows you to roll over your 401k while still employed, 75% of companies allow that and you can then invest in exactly the company and funds you wish.

Overall you are doing well, but like you said the biggest need is your retirement accounts. Maxing your 401k is the biggest bang for your buck in that regard, and you can invest after tax money in your Roth/Brokerage accounts. Just calculate the tax savings so you can compare the tax savings with the fee difference, I think the choice will be obvious.

Edit: I am realizing you are talking about donating pre-tax to your traditional IRA, which I assume would be the same as your pre-tax 401k contribution. In that case I wouldn't see any difference, as long as that worked fine, and you would have lower fees. But if you can transfer from your 401k it still might be better to just do regular transfers to your traditional IRA from your 401k instead of maintaining 2 separate deposits every paycheck.

Obviously the important part is getting your full tax deduction possible for the retirement savings.
« Last Edit: December 30, 2014, 12:30:37 PM by James »

davef

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Re: Why am I putting 15% in my 401k?
« Reply #8 on: December 30, 2014, 12:24:29 PM »
Whoops. I take that back, the Spartan funds are .04 and .05 the others are .4 to .87

davef

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Re: Why am I putting 15% in my 401k?
« Reply #9 on: December 30, 2014, 12:25:48 PM »
I agree with Mississippi Mud on the 401k max to get the tax deduction. .04% isn't bad, I assume that is for the full index which is a great spot for your money. You can always put your other investments in funds to create whatever balanced portfolio you wish to have.

Make sure you see if your company allows you to roll over your 401k while still employed, 75% of companies allow that and you can then invest in exactly the company and funds you wish.

Overall you are doing well, but like you said the biggest need is your retirement accounts. Maxing your 401k is the biggest bang for your buck in that regard, and you can invest after tax money in your Roth/Brokerage accounts. Just calculate the tax savings so you can compare the tax savings with the fee difference, I think the choice will be obvious.

My company does NOT allow a rollover while I a am employed. That is why I am considering this.

lhamo

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Re: Why am I putting 15% in my 401k?
« Reply #10 on: December 30, 2014, 12:29:13 PM »
Why not just stick with the Spartan funds in your 401(k), contribute the max, and then seek diversification in your other accounts? 

.04 and .05 for Spartan is not bad -- in my 403(b) Spartan ranges from .07-.18

.4-.78 is also not bad for managed funds.  Some of the ones in our plan are 1.4!


NathanP

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Re: Why am I putting 15% in my 401k?
« Reply #11 on: December 30, 2014, 12:43:25 PM »
I am in the same boat as you: same age, similar income, and similar 401k choices. My wife and I both max our 401k out to the IRS limit which allows us to get our taxable income low enough that we can contribute some of our annual IRA limit to a Traditional IRA. This yields additional tax savings in the 25% bracket. If we go over the traditional limit, we will put the money in a Roth.

As was suggested, put all of your 401k money in the super low cost index funds. You can diversify by having your Roth and taxable accounts in more exotic funds. I have my 401k money in Institutional Vanguard funds with 0.05% fees (thankfully we have 3 of these among the super expensive managed funds) and my IRA money is in international funds, emerging markets, and REITs.

In summary I would highly suggest you continue to max your 401k and any pre-tax savings such as an HSA and Traditional IRA when your marginal tax rate is not 10% or 15%. Take the savings now!

Iron Mike Sharpe

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Re: Why am I putting 15% in my 401k?
« Reply #12 on: December 30, 2014, 12:56:33 PM »
My thoughts are continue to max out your 401k (up to $18,000 limit) AND put the max amount for you and your wife ($5500 each, I believe) into IRAs AND invest in some taxable funds (or maybe rental real estate) on top of that. Here at MMM, we don't do 15% savings -- we do 50% or more :-)



Last year I figure we were around 40%
We invested 10k in post tax investments
5,500 in each Roth IRA,
15% in 401k
8k in principal to refinance down to 3.125%
+ equity on 2 mortgages. (1700 and 1000 monthly 3.125% & 4.25%) (don't forget that 18k of that income was rental income and there is a second mortgage to go along with it.

I plan to continue with the Roth IRAs Maxed. But I don't see why I should be using a 401k that forces me to use moderate fee funds when I could be using a traditional IRA and lower fee funds.

You only get $5500 total, per person, per year for IRAs.  One person can't do $5500 in a Roth and $5500 in a T-IRA.

wtjbatman

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Re: Why am I putting 15% in my 401k?
« Reply #13 on: December 30, 2014, 01:17:22 PM »
There's some goofy stuff going on this thread.

First of all, although you didn't list every available fund and their expense ratio from your 401k, it looks super legit. Fidelity index funds with .04% isn't just "not bad", it's as good as you're going to get. So, looks like your fund options are very comparable to even investing in an IRA with Vanguard. Therefore, I suggest maxing out your 401k first. Especially with that income. You just need to change what funds you invest in within your 401k, you currently have some goofy ones.

Second, hopefully you meant switching from Roths to Traditional IRAs. IMS pointed out the IRA contribution limits ($5500 per person per year).

Third, you should be able to max out everything. If you can't, you should cut your expenses until you can. Seriously, if it wasn't for debt paydown, me and my fiance would be able to max my 401k + 2 IRAs with our combined income of 65k a year. With 105k a year you shouldn't have a problem putting away $29k or so pre-tax.

MDM

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Re: Why am I putting 15% in my 401k?
« Reply #14 on: December 30, 2014, 02:30:41 PM »
Quote
Our brokerage account and IRAs are all in ETFs mostly fidelity Spartan funds.
Our 401k is a mixture of mutual funds, which have fees that are not terrible, but much higher than the ETFs.

The Spartan funds are not available in the 401k - they are the benchmark to which the OP is comparing the 401k choices.

The tax advantage of the 401k, however, will more than compensate for ~0.5% additional fees.

Another Reader

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Re: Why am I putting 15% in my 401k?
« Reply #15 on: December 30, 2014, 03:15:21 PM »
Per Reply #3, he does have the two Spartan funds.  If fees are your concern, max out your 401k with those two funds.  I would look at the small cap and the international funds to see if the performance and holdings supported adding those into the mix.  Complete your asset allocation in your other accounts.

And you only get $5,500 each year in your IRA's, whether traditional, Roth, or a mix.

wtjbatman

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Re: Why am I putting 15% in my 401k?
« Reply #16 on: December 30, 2014, 03:19:18 PM »
The Spartan funds are not available in the 401k - they are the benchmark to which the OP is comparing the 401k choices.

As Another Reader pointed out, the OP posted the funds in his 401k he is currently invested in, and some of them are clearly Spartan Index funds. I don't believe he has posted every fund from his 401k, but those alone put him on the path to a diversified and low fee portfolio.

MDM

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Re: Why am I putting 15% in my 401k?
« Reply #17 on: December 30, 2014, 03:27:24 PM »
Maybe so.  Depends on what OP meant by "Whoops. I take that back, the Spartan funds are .04 and .05 the others are .4 to .87"

I took it to mean "...the Spartan funds [outside the 401k] are .04..." but it could have been "...the Spartan funds [inside the 401k] are .04..." instead.

OP?

davef

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Re: Why am I putting 15% in my 401k?
« Reply #18 on: December 30, 2014, 03:41:24 PM »
Sorry guys, those funds ARE options in my 401K. Should I just max the 401k and put it all into those 2 funds and use the Roth to diversify?
I am doing the Roth as opposed to a traditional IRA because I plan to be self employed soon, and never actually plan to fully retire. I'm sure I will be in a higher tax bracket in 35 years than I am now...

wtjbatman

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Re: Why am I putting 15% in my 401k?
« Reply #19 on: December 30, 2014, 03:58:26 PM »
Maybe so.  Depends on what OP meant by "Whoops. I take that back, the Spartan funds are .04 and .05 the others are .4 to .87"

I took it to mean "...the Spartan funds [outside the 401k] are .04..." but it could have been "...the Spartan funds [inside the 401k] are .04..." instead.

OP?

Read the 4th post in the thread (OP's first reply). You can see the funds he is investing in in his 401k, and two of them are Spartan index funds.

Sorry guys, those funds ARE options in my 401K. Should I just max the 401k and put it all into those 2 funds and use the Roth to diversify?
I am doing the Roth as opposed to a traditional IRA because I plan to be self employed soon, and never actually plan to fully retire. I'm sure I will be in a higher tax bracket in 35 years than I am now...

Sounds like a good plan, and that's what I would do.

MDM

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Re: Why am I putting 15% in my 401k?
« Reply #20 on: December 30, 2014, 04:30:39 PM »
Read the 4th post in the thread (OP's first reply). You can see the funds he is investing in in his 401k, and two of them are Spartan index funds.
Yes, OP has confirmed the 401k expenses.  Investing directly with Fidelity the fees would be straightforward.  Investing in a 401k, however, the fees can be whatever the 401k administrator charges. 

wtjbatman

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Re: Why am I putting 15% in my 401k?
« Reply #21 on: December 30, 2014, 04:38:52 PM »
Read the 4th post in the thread (OP's first reply). You can see the funds he is investing in in his 401k, and two of them are Spartan index funds.
Yes, OP has confirmed the 401k expenses.  Investing directly with Fidelity the fees would be straightforward.  Investing in a 401k, however, the fees can be whatever the 401k administrator charges.

I imagine that when he said some of the funds have expense ratios of .04, he was likely talking about the Fidelity Index Funds :) Which, actually, he confirmed in a post of his.

I've mentioned a couple times that the OP hasn't listed every fund available in his 401k, which is what I recommend anyone who wants advice on their portfolio do. That said, I doubt any of the other funds available in his 401k will be superior to those two Spartan funds. Maybe as good, if there are more than just the two. Now that's something the OP could provide.

davef

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Re: Why am I putting 15% in my 401k?
« Reply #22 on: December 30, 2014, 05:21:04 PM »
The only other investment options are managed target date funds and bonds. I'm all in on stocks at this point. 90% domestic 10% international.

Any reccomendations on how to diversify? Bonds? REITS? Notes?

If I go solely in the 2 Spartan funds I continue to be all in with an even smaller cross section of domestic stock. In the short term I think I'll change the investment allocation but not shift the balances for 90 days.

My Roth IRAs are in different Spartan funds FXEIX and FSTMX at this time.
What would I buy with my 5500 investments next year? I was planning on trading up for some of the Spartan funds that have a 10,000 buy in and lower fees. But it seems I should likely look at other options as well.
« Last Edit: December 30, 2014, 07:25:21 PM by davef »

James

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Re: Why am I putting 15% in my 401k?
« Reply #23 on: December 31, 2014, 07:51:29 AM »
I have a REIT fund at about 10% of my total, the rest are in the full US index.

I am happy with my decision to drop bonds, even though they did well this year despite the poor forecast. I have plenty of time and stocks should provide better returns over the long haul.

I am torn about international. My gut feeling is that international index funds just aren't going to perform well going forward, and if international stocks end up doing well, then US index will be doing even better. My idea for international would be to pick a region, like European and/or Pacific, rather than the full EX-US index. But for me I just skip it completely at this point trusting my international exposure in large cap US stocks to provide me with that aspect in my portfolio.

Mr.Chipper77

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Re: Why am I putting 15% in my 401k?
« Reply #24 on: December 31, 2014, 12:38:51 PM »
If there is one thing today I would do differently 30 years ago would have been to max out my 401k First and above all.  Now I am playing catch up and thankfully get the extra 5k per year to put in so my advice...MAX it out!

dandarc

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Re: Why am I putting 15% in my 401k?
« Reply #25 on: December 31, 2014, 12:55:07 PM »
If there is one thing today I would do differently 30 years ago would have been to max out my 401k First and above all.  Now I am playing catch up and thankfully get the extra 5k per year to put in so my advice...MAX it out!
This - only 9 years removed from my first "real" job, but any time I think about what I could have done if I had been a wiser 23 - 29 year old . . . I mean, might be already retired, or at least a lot closer to it.

Frankies Girl

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Re: Why am I putting 15% in my 401k?
« Reply #26 on: December 31, 2014, 01:09:05 PM »
OP, at your age, there's nothing really too wrong at being all in on stocks (through the index funds), but if you want a little cushion you could diversify using REITs and bonds.

I have FSRVX, SPARTAN REAL ESTATE INDEX FID ADV CLASS for the REIT... as about 10% of my portfolio.

FSITX, SPARTAN US BOND INDX FIDELITY ADV CLASS for the bond component (about 10% again).

I was lucky as I had the option for the Spartan Total Market Index (FSTVX) in my 401k, so that's 100% of what my 401k contributions are in, and I hold the bond and REIT components in a separate IRA. Your 401k has a Spartan S&P 500 and Extended Market index fund per your posting - those are going to be low fee (doubt they'd be more expensive in your 401k) and would be my choices if I had the same setup.

And yes, max that 401k out! Those are good (if not great) options and you're losing out on the double win of lower taxable income and tax free savings/growth.