Author Topic: Case Study: New job, first 401k  (Read 3650 times)

elm21

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Case Study: New job, first 401k
« on: August 15, 2015, 03:59:55 PM »
This is a mixed post of a Case Study, but also to share my Badassity!
First things first.  Thank you.  With my very first post, and several face punches (http://forum.mrmoneymustache.com/ask-a-mustachian/windfall-case-study-too-much-cash-for-a-newbie/)  I am happy to announce that I have spent the last few months changing my life situation.

1.  Changed jobs.  My previous job was unstable and paid $22/hr and my new job is very stable and pays $31/hr plus overtime
2.  Created a budget.
3.  Created financial goals.  First goal is to pay off $16k in credit card debt at around 13% interest.  Second goal is to start saving for early retirement.

My new job offers a 401K which I am vesting in from day 1.  They match 100% for a 3% contribution and 50% for the next 2% contribution.  Additionally, they also contribute 4% into a fund by themselves regardless if I ever contribute a cent.  They also offer an HSA and other benefits like short-term disability, life insurance, and more for emergencies.  I would like to start investing in the 401K immediately and would like to ask your opinions on which fund to choose.

I have 90k in cash in a saving account and with that I plan to pay off the $16k debt first, then contribute 50% of my monthly salary to the 401k (using the cash for monthly expenses $3500), then open a Roth IRA for me and one for my wife and contribute the max of $11k.

The Fidelity advisors at the job suggested using the BlackRock LifePath Index 2040 Fund L and that is what I chose.  However, I have attached a snapshot of some other offerings with low expense ratios (Vanguard). I have also included a snapshot of the LifePath 2040 allocations.

Should I stay put with the LifePath 2040 (I am 40 years old)?  Or should I change?
And, if I keep the LifePath 2040, any suggestions about what to invest in with the Roth IRA?
My financial goal is to not increase my lifestyle with this raise, but instead to catch up on retirement savings of which I currently have $0.

Thank you!




tempesttenor

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Re: Case Study: New job, first 401k
« Reply #1 on: August 16, 2015, 07:54:14 AM »
Congrats on the raise and taking action to turn your financial situation around!

I would avoid actively managed funds like the Blackrock fund which have higher expense ratios than index funds. Have you read about index funds, asset allocation, and lazy portfolios? This Bogleheads wiki article is a good place to start: http://www.bogleheads.org/wiki/Lazy_portfolios

Tjat

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Re: Case Study: New job, first 401k
« Reply #2 on: August 16, 2015, 08:17:43 AM »
You're certainly on the right track - good call paying all the high interest debt first. Regarding the investment selection, choosing the 2040 fund "isn't wrong," but depending your goals may not be "the best" option. For starters, you're 40 now and targeting early retirement. Does a fund assuming that you retire when you're 60 make the most sense?

In my opinion, your first step is finding your target asset allocation. I would advise to keep it simple and start with the Vanguard Balanced fund (mix of stocks and bonds). Then decide if you want to be more agressive in equities or not (add some inst index). dont see international there must thats okay.

mozar

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Re: Case Study: New job, first 401k
« Reply #3 on: August 16, 2015, 09:04:42 AM »
Do you have to spread contributions out in your 401k to get the match, or can you frontload? Doesn't matter for this year where you should try to stuff as much money as you can over the next few months. But it will matter next year.
Like the previous poster said the mix depends on your comfort zone. I plan to retire in 10 years (at the most) and I have a vanguard 2045 retirement fund, because it is 90% equities and 10% bonds. And the lower the fees the better.

Valencia de Valera

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Re: Case Study: New job, first 401k
« Reply #4 on: August 16, 2015, 09:41:40 AM »
I think your plan sounds great, and that's a clever way to turn your windfall into a retirement account. I know this wasn't your question, but I think you should invest part of the 90k somewhere with a better yield than a savings account in the meantime. Based on the numbers that you gave, here's what I come up with:

Annual income (no overtime included): $31 x 40 x 52: $64,480

Max employee annual contributions to 401k: $18,000

Max contribution to IRAs (x2): $11,000

Take-home pay (subtracting 25% for taxes and payroll deductions, max 401k contributions, and IRA): $23,860 or $1988 per month

Monthly expenses: $3500, which means you'll be withdrawing $1512 from the 90k (now 74k after the credit cards are paid off), which will take about 48 months (or longer if your wife starts working as mentioned in the original post). You don't want that money just sitting around in the 3-4 years before you need it, so depending on what the interest is on your savings account you could compare rates on CDs for the time-frame you're looking at, or look into bonds.

elm21

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Re: Case Study: New job, first 401k
« Reply #5 on: August 16, 2015, 12:06:26 PM »
Congrats on the raise and taking action to turn your financial situation around!

I would avoid actively managed funds like the Blackrock fund which have higher expense ratios than index funds. Have you read about index funds, asset allocation, and lazy portfolios? This Bogleheads wiki article is a good place to start: http://www.bogleheads.org/wiki/Lazy_portfolios

Thanks for the article.  It seems like the 3 Fund Lazy portfolios represent the Asset Allocation which appeals to me: 75% stocks, 25% bonds.  So I just recreate this with the funds that are available to me through my 401K? 

For example:
40% Vanguard Growth Index Fund (VIGIX; ER 0.08%) or Institutional Index Fund (VIIIX; ER 0.02%)
35%  Intl Stock Index (ER 0.0618% - short term trading fees of 2% for fee eligible shares held less than 30 days)
25% TIPS Index fund (ER 0.0783%) or PIMCO Total Return Fund Institutional Class (PTTRX; ER 0.46%)

And then I review this every year to make sure I am on track?  Thanks
 

elm21

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Re: Case Study: New job, first 401k
« Reply #6 on: August 16, 2015, 12:21:35 PM »
For starters, you're 40 now and targeting early retirement. Does a fund assuming that you retire when you're 60 make the most sense?

In my opinion, your first step is finding your target asset allocation. I would advise to keep it simple and start with the Vanguard Balanced fund (mix of stocks and bonds). Then decide if you want to be more agressive in equities or not (add some inst index). dont see international there must thats okay.

So essentially, I should be more aggressive if I want to retire early?

In my respond to the previous poster, I decided up 75% stock and 25% bonds as I have 10 or more years to retire.

There are International and Bond selections as well, I just didn't list them because I didn't have room and I didn't know enough yesterday to know that it was important.  I listed the values in my response above to the previous poster, and now I will look into the Balanced Index Fund recommendation.  Thank you!

elm21

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Re: Case Study: New job, first 401k
« Reply #7 on: August 16, 2015, 12:24:07 PM »
Do you have to spread contributions out in your 401k to get the match, or can you frontload? Doesn't matter for this year where you should try to stuff as much money as you can over the next few months. But it will matter next year.

Thank you for your help.  Can you please explain this?  And why it would matter? It is the first time I am hearing of this concept.  Thanks again!

Able was I ERE

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Re: Case Study: New job, first 401k
« Reply #8 on: August 17, 2015, 03:00:23 AM »
Do you have to spread contributions out in your 401k to get the match, or can you frontload? Doesn't matter for this year where you should try to stuff as much money as you can over the next few months. But it will matter next year.

Thank you for your help.  Can you please explain this?  And why it would matter? It is the first time I am hearing of this concept.  Thanks again!

Most employers only match per pay-period, so if you max out your contributions early in the year then you miss out on matching money later in the year.   Some companies do a "true up" contribution at the end of the year, so that you don't have to worry about maxing out too early.

Tjat

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Re: Case Study: New job, first 401k
« Reply #9 on: August 17, 2015, 08:20:17 AM »
So essentially, I should be more aggressive if I want to retire early?


It depends on your current contributions and projected annual expenses. To ballpark your FI number (and this assumes you know time value of money, but online calculators can help) - Once you determine your annual expenses, multiply by 25. You'll then want to calculate the future value based on the year you want to retire (as in, what will I need to have X years from now to replicate my current purchasing power?). This is roughly the retirement savings amount you need to hit to sustain on your savings alone. Once you have that number, you need to assess your probability of attaining using your maximum possible contribution level.

To influence how aggressive you need to be now, you will need to solve for the interest rate needed to hit that number. If it's low (say 3-5%, aggression isn't needed). The higher it gets, the more stock heavy you need to be. Note this doesn't guarantee you'll reach your goal as there's risk involved, but if your target rate is high and you're not aggressive enough, you're chance of success will be very low.

There's also a school of thought that if you are 15-20 years out, you should be aggressive anyways to maximize growth.

robartsd

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Re: Case Study: New job, first 401k
« Reply #10 on: August 17, 2015, 09:46:21 AM »
So essentially, I should be more aggressive if I want to retire early?

Conventional advice is to start out aggressive and gradually move to more conservative as you near retirement. This is what Target Retirement Funds do for you automatically. However, if you are targeting early retirement, then you are already in the time frame conventional advice has you shifting to a safer allocation. On the other hand, most early retirees are flexible enough that the higher risks involved with aggressive investment allocations will not create a financial emergecy. Also, because your money will not have as much time to grow if you save quickly for early retirement, your rate of return does not make as big of a difference as it would if you were saving for a retirement that was 2-4 times further away. The bottom line is that people targeting early retirement may need to do more personal introspection to decide how aggressively they should seek investment returns than people who are targeting conventional retirement while still young.

seattlecyclone

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Re: Case Study: New job, first 401k
« Reply #11 on: August 17, 2015, 10:46:43 AM »
You have some really nice Vanguard Institutional class funds in your 401(k). Unless you really value the simplicity of a one-fund solution like the LifePath fund provides, you should strongly consider picking an asset allocation and then implementing it with the Vanguard funds. You'll save a bunch of money on fees that way.

The Vanguard balanced fund offers a mix of stocks and bonds at a 0.08% expense ratio. It probably has more bonds than you want, so supplement with the 0.02% Institutional Index to add some more stocks. This fund tracks the S&P 500 instead of the total market. If you want to more closely track the total market, also buy some of the small-cap fund (perhaps $1 worth of small-cap for every $4-5 of large-cap).

elm21

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Re: Case Study: New job, first 401k
« Reply #12 on: August 17, 2015, 07:24:17 PM »
Thanks guys!  I don't know which I am more excited about... having a 401K to make elections, or actually understanding what you guys are talking about.  I have been reading and reading and reading some more and it is exciting to begin to understand all of this!  I appreciate all of the advice.