Author Topic: Case Study - 401K where should i start?  (Read 3490 times)

cmetzstash

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Case Study - 401K where should i start?
« on: April 23, 2015, 01:20:34 PM »
Hello,

Nice to meet you all, I’m 26 years old, currently employed in the state of FL in the field of IT (technical support). Single /w a roommate. I’m also very new to the FIRE concept, but my new hobby is reading MMM/MadFientist and jlcollinsnh blogs. Earning 38K a year before taxes, never imagined thinking about FIRE, let alone a 401K and investments (I’ll be the first in my entire family history to date). This is sort of like a journal and contains many reminders to myself so please excuse my writing format if it states many things you all know well already…

So my journey has officially begun. And although this isn’t the first step (I’ll explain later:Debt) it is a vital one. Choosing between my employers FRS(florida retirement system) Retirement Plan. They gave me two options to choose from.

1.   FRS Investment Plan: (401K)
a.   Designed for employees who do not plan to stay with an FRS employer until retirement (minimum 1 year)
b.   Benefits based on contributions, investment performance over time.

2.   FRS Pension Plan: (Traditional retirement pension plan)
a.   For employees who plan to stay with FRS till retirement (or over 8 years)
b.   Guarantees monthly retirement benefit based on salary/service

Choice: #1
Reasoning:
•   Will not stay in Florida for many years (very car dependent, big no no for FIRE)
•   According to my readings investing/choosing Index funds at my phase (wealth building) is the best option
•   Employer will match 3.3% of my monthly salary

Investment Options presented.

Retirement Date Funds   Net Expense Ratio
FRS 2015 Retirement Fund (2015) 0.20%
FRS 2020 Retirement Fund (2020) 0.18%
FRS 2025 Retirement Fund (2025) 0.15%
FRS 2030 Retirement Fund (2030) 0.09%
FRS 2035 Retirement Fund (2035) 0.08%
FRS 2040 Retirement Fund (2040) 0.08%
FRS 2045 Retirement Fund (2045) 0.08%
FRS 2050 Retirement Fund (2050) 0.08%
FRS 2055 Retirement Fund (2055) 0.08%

Money Market   
FRS Money Market Fund (60) 0.06%

Bonds   
FRS U.S. Bond Enhanced Index Fund (80) 0.05%
Pyramis Intermediate Duration Pool Fund (90) 0.12%
FRS Core Plus Fixed Income Fund (310) 0.24%

US Stocks   
FRS U.S. Stock Market Index Fund (120) 0.02%
U.S. Large Cap Equity Fund (320) 0.39%
FRS U.S. Small/Mid Cap Equity Fund (330) 0.64%

Foreign & Global Stocks   
FRS Foreign Stock Index Fund (200) 0.03%
American Funds New Perspective Fund (210) 0.49%
American Funds Euro-Pacific Growth Fund (220) 0.49%
“Self-Directed Brokerage Account: The Self-Directed Brokerage Account (SDBA) allows you to invest in thousands of different investment options in addition to the Investment Plan's primary investment funds. To participate in the SDBA you must maintain a minimum balance of $5,000 in the Investment Plan's primary investment funds and initial and subsequent transfers into the SDBA must be at least $1,000. An SDBA is for experienced investors and is not suitable for all members. There are risks associated with many of the investments in the SDBA and you assume the full risk and responsibility for the investments you select.”

I would like to set it and forget it, according to my readings I should be looking for Vanguard Total Index Funds, with low expense ratio. Seeing as I’m not provided with any Vanguard options my eyes draw to

Undecided: (between)
1.   Retirement Date Funds at 0.9-0.8%
2.   FRS U.S. Stock Market Index Fund (120) at .02%

PS: if you’re interested you can find the entirety of the FRS investment info here http://www.myfrs.com/InvestmentFundTabs.htm


 On another note----

Before I found this fountain of knowledge about FI, Mr. jlcollinsnh, MMM, and madFIentist I moved from NY to FL (still here) found a job, purchased a car and found a place to live.

Mistakes made;
1.   Did not anticipate cost of car/travel from work to home 40 Miles round trip(not bike distance)
2.   Purchased 2013 car (by a miracle I didn’t go for a total new 2015 at the time)
3.   Entered into a Financing debt of 4%+ on 13k, put 3500 down on credit.
4.   Leased too much apartment for me $775 a month (not including utilities)
5.   Did not take advantage if the employee HSA offered plan

Upsides;
1.   Paid off car loan with savings I’d previously stashed. Current savings 7k (2 1/2 months’ Income)
2.   Paid off credit card Current balance: 0
3.   Debt free
4.   Purchased Toyota Corolla 2013 LE with 35k Miles (Certified) which should last till the end of time?


My current goals
1.    Decide on the 401k options before the deadline of 5/29/2015.
2.   Crunch the numbers to what will lead me to FIRE
3.   Save 50% of after tax income
4.   Save up to 6 months’ rent to have on hand
5.   Reduce current expenses
6.   Using the 7k savings in bank to open up a Vanguard Total Stock Market Index Fund (VTSAX) 3k minimum Traditional IRA account. Max to 10K and move to Admiral Shares – set to reinvest.
7.   Research HSA offered by current employer/add to Porfolio
8.   Possibility of selling the 2013 Car and get an older model?? Invest the difference. I fear getting an older model from craigslist or non-certified and receive something that’ll just cause me headaches (as I don’t know much about car mechanics)
9.   Get CCNA/Microsoft Server Admin Certified to increase pay

Current Cash Flow (Expenses) from 3/25/2015 - 4/23/2015
----------- Please see attachment -------------------

Questions! From this noobie Mustachian (ill try to keep them brief)
1.   Is my thinking in the correct path?
2.   After choosing to go with the Investment Plan (401K) which should i fund the Date Retirement or US Index 120?
3.   Should I save up 6 months’ rent first before using the current 7k savings for investing?
4.   Should I keep the 2013 or sell (get older model) and invest the difference (will probably be around 1-3k cash)
5.   Should I have waited to pay off the car loan and invested that 10k+ money!!! UGH THIS HAUNTS ME EVERY NIGHT!....

…..My brain has now drawn a blank!, please feel free to take what I’ve said here and destroy/rebuild it. This humble Mustachian will absorb all of your feedback with joy!

Thank you and sorry for the long POST!

« Last Edit: April 23, 2015, 08:34:53 PM by cmetz »

MDM

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Re: Case Study - 401K where should i start?
« Reply #1 on: April 23, 2015, 07:03:03 PM »
Questions! From this noobie Mustachian (ill try to keep them brief)
1.   Is my thinking in the correct path?
2.   Which investment of the two options should I head for?
3.   Should I save up 6 months’ rent first before using the current 7k savings for investing?
4.   Should I keep the 2013 or sell (get older model) and invest the difference (will probably be around 1-3k cash)
5.   Should I have waited to pay off the car loan and invested that 10k+ money!!! UGH THIS HAUNTS ME EVERY NIGHT!....

1. Seems reasonable.  In general, don't do any taxable investing until you are out of room in your tax-advantaged options.
2. Need to know the Defined Benefit details.  You should look at the effective return guaranteed by this option, and compare that with what you are  "reasonably sure" you could do with the self-investing plan.  Of course, if you know you won't stick around long enough to qualify for the DB then there's really no realistic choice.
3. Depends on your job security.  If low, then yes.  If high, then $7K may be enough of an e-fund.
4&5. No comment - up to you.

Retired To Win

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Re: Case Study - 401K where should i start?
« Reply #2 on: April 23, 2015, 07:44:54 PM »
I'm a very big believer in having an adequate Emergency Reserve Fund.  I personally maintain -- separate from my investment accounts -- a savings account with one year's worth of basic living expenses as my Emergency Reserve.  Less "extreme" folks (maybe you) could be comfortable with a six-month emergency reserve.  This reserve needs to cover not just your rent, but all your basic living expenses (which does not include travel, vacations, savings, entertainment, etc).

Setting up this Emergency Reserve should come first, before getting into investments.  Because financial emergencies don't give advance warning that they're coming.

cmetzstash

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Re: Case Study - 401K where should i start?
« Reply #3 on: April 23, 2015, 08:43:53 PM »
Questions! From this noobie Mustachian (ill try to keep them brief)
1.   Is my thinking in the correct path?
2.   Which investment of the two options should I head for?
3.   Should I save up 6 months’ rent first before using the current 7k savings for investing?
4.   Should I keep the 2013 or sell (get older model) and invest the difference (will probably be around 1-3k cash)
5.   Should I have waited to pay off the car loan and invested that 10k+ money!!! UGH THIS HAUNTS ME EVERY NIGHT!....

1. Seems reasonable.  In general, don't do any taxable investing until you are out of room in your tax-advantaged options.
2. Need to know the Defined Benefit details.  You should look at the effective return guaranteed by this option, and compare that with what you are  "reasonably sure" you could do with the self-investing plan.  Of course, if you know you won't stick around long enough to qualify for the DB then there's really no realistic choice.
3. Depends on your job security.  If low, then yes.  If high, then $7K may be enough of an e-fund.
4&5. No comment - up to you.

Thank you for taking the time to read this "cluttered book".

i should have been more clear on question #2, i've gone ahead and fixed that. My intended question was after choosing to go with the investment retirement option (401k) because i know well that i will not be staying in FL till retirement. Which of the investment options suits my situation best? the Dated Retirement Funds or The FRS US Index funds 120?


I'm a very big believer in having an adequate Emergency Reserve Fund.  I personally maintain -- separate from my investment accounts -- a savings account with one year's worth of basic living expenses as my Emergency Reserve.  Less "extreme" folks (maybe you) could be comfortable with a six-month emergency reserve.  This reserve needs to cover not just your rent, but all your basic living expenses (which does not include travel, vacations, savings, entertainment, etc).

Setting up this Emergency Reserve should come first, before getting into investments.  Because financial emergencies don't give advance warning that they're coming.

I completely agree with your point as to having adequate Emergency Reserve funds, just needed a punch in the face to relax my new found FIRE enthusiasm! , thank you for checking me on that. i will first fund my personal cash/reserve to cover at least 6 months worth of living expenses (articles ive read in the past state this is the average time frame to find another job).

MDM

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Re: Case Study - 401K where should i start?
« Reply #4 on: April 23, 2015, 09:00:48 PM »
Which of the investment options suits my situation best? the Dated Retirement Funds or The FRS US Index funds 120?
At 26 years old, your investments can withstand more variability and still likely be higher come retirement, vs. someone having a much shorter time horizon.  Given that, I'd lean toward the US Index 120 (it emulates the Russell 3000).  But one can make a defensible case for the 80/20 retirement fund as well.

The main thing is that you are choosing wisely to invest in either of these - keep up the good work, and good luck!

Fuzz

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Re: Case Study - 401K where should i start?
« Reply #5 on: April 24, 2015, 06:53:53 PM »
There is a fair amount of debate around the emergency fund. I consciously choose to have somewhere between 1-2 months cash on hand, plus credit cards. The rest gets saved. I have insurance. I drive cheap cars. My income is relatively stable. I don't have dependents. So If you're similar to me, it might make sense to max out your ROTH (especially in your tax bracket) before worrying too much about an efund. Poke around the forum, there are lots of arguments. Also, I would avoid the target date fund and just dump it all in the stock market fund with the low expense ratio. When you've got more invested, then worry about asset allocation.