Author Topic: First in my family, don't want to be stupid about this...  (Read 4303 times)

MsMonopolyDog

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First in my family, don't want to be stupid about this...
« on: August 16, 2017, 06:59:39 AM »
Hi everyone!

I'm a brand new Mustachian at the age of 33 and I'm embarrassed about it. I grew up in a family where budgeting and planning for the future (college, retirement) were non-existent. I am teaching myself everything from scratch and doing as MUCH research as I can do I don't make any stupid choices in my quest toward FI.

I started a new job making 80K (highest i've ever made; bonus of 5% every year based on performance) and was hoping you could guide me on the best way to allocate to my company's 401K. This is the first time i've ever contributed to a 401K (I know, it sucks)...

Here is what my company offers:
- Employees are automatically enrolled in the 401K plan at 3% of pay (until employee changes this)
- 1:1 match on first 2% of pre-tax plus $0.50 for each $1 pre-tax contribution on the next 4% of pay
- employee may contribute 1% - 30%
- limit is 18K per year

Second question:
I am a single woman who is renting an apartment. Can you also advise me on the smartest way to fill out my W2?

I live in a high COL city so taxes are quite high.

THANK YOU EVERYBODY!!!!

ysette9

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Re: First in my family, don't want to be stupid about this...
« Reply #1 on: August 16, 2017, 07:17:21 AM »
The easy part is to mac out your 401(k) if you can. If you want advise on which funds specifically to choose, feel free to post your options here and we can comment. Have you checked out the sticky tab on investment order? I'm on a phone so I can't link easily, but it is on the top in the investments subforum. That discusses what you should do with your money, in what order, and why.

Laura33

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Re: First in my family, don't want to be stupid about this...
« Reply #2 on: August 16, 2017, 08:00:08 AM »
Welcome, and congrats!!  So the simplest thing to do right now:  look at your investment choices in your 401(k).  Find a broad market index fund, like something that says S&P 500 fund, or a Total Stock Market Index Fund.  Look at the annual fees -- they should be very low, like 0.2%.  Choose that one (if you have more than one broad market index fund, pick the one with the lowest fees).  Then sign up for the full $18K max -- because if you've never earned this much before, you sure won't miss it!

Note that this might not be your "final" choice -- there is a lot out there to learn, a lot of questions about 401(k)s vs. IRAs, index funds, target-date funds, asset allocation, etc.  The goal here is to get you saving a large amount ASAP while you take the time to figure out all the rest of it.

Also, if you haven't already, start saving an emergency fund.  You need at least $1-2K as a start, but I like to have several months' worth of expenses covered in case everything goes to shit. 

GizmoTX

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Re: First in my family, don't want to be stupid about this...
« Reply #3 on: August 16, 2017, 08:30:02 AM »
18K might be tough to do within 2017 if you don't have enough savings to cover living expenses; if so, go at least for your employer match. Then contribute the full 18K if you can during 2018. Know that t401K contributions lower your Adjusted Gross Income for federal income tax, so you should be claiming at least 1 allowance in your W2. Play around with a tax calculator to predict how much withholding you need. You do need an emergency fund & should use a money management app like YNAB (You Need A Budget).

Laura33

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Re: First in my family, don't want to be stupid about this...
« Reply #4 on: August 16, 2017, 08:51:53 AM »
18K might be tough to do within 2017 if you don't have enough savings to cover living expenses; if so, go at least for your employer match. Then contribute the full 18K if you can during 2018.

This is a good point.  What I meant was sign up to contribute $1500/mo, so that in a normal (full) year you will hit the $18K federal max.  If you can do more than that for the rest of the year, that's gravy.

[But keep an eye on that max -- it might go up to @$18,500 or something similar next year.  Your company will tell you if the max changes]

patchyfacialhair

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Re: First in my family, don't want to be stupid about this...
« Reply #5 on: August 16, 2017, 12:11:23 PM »


I'm a brand new Mustachian at the age of 33 and I'm embarrassed about it.

please don't be embarrassed. think about this: most people don't save much for retirement and depend entirely on social security + medicare to survive.

just try to improve your savings rate each year, and before you know it you're an early retiree. if you can max your 401k already, you're already doing better than many folks on these forums.

MDM

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Re: First in my family, don't want to be stupid about this...
« Reply #6 on: August 16, 2017, 12:20:46 PM »
I started a new job making 80K (highest i've ever made; bonus of 5% every year based on performance) and was hoping you could guide me on the best way to allocate to my company's 401K. This is the first time i've ever contributed to a 401K (I know, it sucks)...
As already mentioned, Investment Order is usually a reasonable guide.

See also Investment Planning - Bogleheads.org and the link at the bottom of that post for the information one needs to make non-generic investment recommendations.

Quote
Second question:
I am a single woman who is renting an apartment. Can you also advise me on the smartest way to fill out my W2?
At least one of
http://forum.mrmoneymustache.com/taxes/best-way-to-calculate-w-4-exemptions-for-2016/
http://forum.mrmoneymustache.com/taxes/would-you-rather-owe-or-get-a-refund/
http://forum.mrmoneymustache.com/taxes/am-i-witholding-too-much/
http://forum.mrmoneymustache.com/ask-a-mustachian/turbo-tax-vs-cpa/
http://forum.mrmoneymustache.com/taxes/best-paycheckwithholding-calculator(s)/
might be useful.

Dicey

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Re: First in my family, don't want to be stupid about this...
« Reply #7 on: August 16, 2017, 01:51:12 PM »
You're asking the right questions. I did a lot of things wrong and still got to FIRE, although not all that early for this crowd. Focus on the future and you'll be just fine.

nexus

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Re: First in my family, don't want to be stupid about this...
« Reply #8 on: August 17, 2017, 04:51:47 PM »
Contribute at least 6% that way you get the dollar per dollar match on the first 2% and then the $0.50 per dollar match on the next 4%. You won't be leaving money on the table that way if you're not ready to dive into maxing it out every year right away.

If you do the math on that, for every $6 you put in, your company will match you with $4. That's what, an extra $66.70 for every $100 you contribute? 

If your company has a stock purchase plan, perhaps allocate something like 1-5% to it. My company does random bonuses in company stock, so it's nice to add a little on to that. (pretty sure I have to have the ESOP in order to get the bonuses anyway.)

Separately, if they have a discount stock purchase plan, I'd DEFINITELY get in on that. For example, you put X% towards purchasing their stock at a discount each pay period, then you're awarded the shares, possibly at the lowest price they were sold at during a 52 week period (HCSG does this for employees, for example). You can turn around and sell them for full/current market price right there for a guaranteed 'profit' of whatever the discount was. So even if at the end of the year the stock dropped from $20 to $12, you still get it at your company discount of $9 (pretending 25% discount), meaning you can sell all those shares that you paid $9 for at $12/share.

In more detail, not that it matters because this probably isn't an option for you, is that you contribute a set amount per pay period over the year, then they execute one large transaction, purchasing stock for you at the discount. You pay whatever the lowest stock price during that 52 week period, less your (10%, 15%, 20%) discount. Sell off immediately because that's too many eggs in one basket and it's a guaranteed return of at least whatever your discount was (probably more if the stock price is higher than its lowest point of the year). Invest those funds in something more stable and diversified and you're set. Repeat, repeat, repeat. (not sure if this was a retirement account feature, or just in some taxable account. Leaning towards some sort of taxable account.)

+1 for picking funds with the lowest expenses. That keeps more money in your pocket!
Some math...
0.05% =$0.50 in fees per every $1,000 you own
0.10% = $1 in fees per every $1,000 you own
0.24% = $2.45 in fees per every $1,000 you own
0.60% - $6 in fees per every $1,000 you own

S&P 500, NASDAQ 100, Total Stock Market, and maybe even International Index Funds are going to have the lowest expenses. If there's an employee stock option plan, that should have 0 fees.

Please beware of vesting -- long story short, if you don't stay with a company long enough you'll forfeit all or some percentage of the company match, meaning if you quit your job your 401k will take a hit because they'll get back all (or some) of the money they matched. Policies vary by employer. Some are 100% vested from day 1, meaning if you leave at any time you get to keep all employer matches. Some have a deadline like 100% vested after 1,2,3,etc years. So if you leave at 2.5 years in and needed a full 3 years to be vested, you just lost 2.5 years of company matching in your 401k. They'll get their cut back when you try and roll over the 401k to an IRA or another employer. Others have a tiered structure. You get to keep 20% of their matches after 1 year, 40% after 2 years, until finally 100% 'X' years later.

Hope this helped! Best of luck!

BigLou

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Re: First in my family, don't want to be stupid about this...
« Reply #9 on: August 17, 2017, 05:25:18 PM »
As I understand your question, you're asking for advice on how to allocate your 401(k) contributions, not necessarily how much you should contribute, so my 2 cents will focus on that. In general, the younger a person is, the greater percentage of the retirement account should allocated to stocks, and as the person ages, the percent allocated to stocks should be gradually reduced. I'm a federal government employee and our 401(k) is known as the TSP (Thrift Savings Plan). The TSP offers what are called "Lifecycle Funds", where all the employee has to do is contribute to the fund within the plan that comes closest to the year the employee thinks he / she might retire. For example, if the employee thinks he might retire in or close to the year 2040, then he could contribute 100% to the "L2040 Fund", and the fund will automatically reallocate slowly over the years away for the stock portion of the fund and into the more conservative portions of the fund. If the company you work for offers something similar within your 401(k) you might want to take a look at that. You could always manually reallocate yourself, but the L Funds do it for you, so it's kinda like being on autopilot. But either way, the general idea is that the younger you are the higher the allocation to stocks can be because you have plenty of time to recover from market setbacks, but as you get closer to retirement you should dial back on, but not eliminate, stocks from your retirement account.
« Last Edit: August 17, 2017, 05:32:53 PM by BigLou »

katsiki

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Re: First in my family, don't want to be stupid about this...
« Reply #10 on: August 17, 2017, 07:59:19 PM »
My advice is to find out how often you can increase your 401k contribution level.  Make a plan to ratchet it up as often and as much as you can.  I started with a couple hundred bucks per month.  As I paid down debt and made more money, I raised it.

You're on the right path.

martyconlonontherun

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Re: First in my family, don't want to be stupid about this...
« Reply #11 on: August 18, 2017, 07:57:29 AM »
The easy part is to mac out your 401(k) if you can. If you want advise on which funds specifically to choose, feel free to post your options here and we can comment. Have you checked out the sticky tab on investment order? I'm on a phone so I can't link easily, but it is on the top in the investments subforum. That discusses what you should do with your money, in what order, and why.

Sorry I'm hijacking this thread. My natural instinct is a lot of domestic Vanguard stock, but I dont think there is a great option for international stocks. I want some risk in portfolio as Im younger but dont want the few with it. 


Wells Fargo Stable Return Fund N has total gross annual operating expenses of $3.55 per $1000 invested.
Vanguard Total Bond Market Index I has total gross annual operating expenses of $0.40 per $1000 invested.
Templeton Global Total Return R6 has total gross annual operating expenses of $7.30 per $1000 invested.
Prudential Total Return Bond Q has total gross annual operating expenses of $4.30 per $1000 invested.
Prudential High Yield Q has total gross annual operating expenses of $4.50 per $1000 invested.
Target Retirement 2050 Fund has total gross annual operating expenses of $0.80 per $1000 invested.
Target Retirement 2055 Fund has total gross annual operating expenses of $0.80 per $1000 invested.
Target Retirement 2045 Fund has total gross annual operating expenses of $0.80 per $1000 invested.
Target Retirement 2040 Fund has total gross annual operating expenses of $0.90 per $1000 invested.
Target Retirement 2035 Fund has total gross annual operating expenses of $0.90 per $1000 invested.
Target Retirement 2030 Fund has total gross annual operating expenses of $0.90 per $1000 invested.
Target Retirement 2025 Fund has total gross annual operating expenses of $1.00 per $1000 invested.
Target Retirement 2020 Fund has total gross annual operating expenses of $1.10 per $1000 invested.
Target Retirement 2015 Fund has total gross annual operating expenses of $1.20 per $1000 invested.
Target Retirement Income Fund has total gross annual operating expenses of $1.30 per $1000 invested.
Vanguard Extended Market Index Inst has total gross annual operating expenses of $0.60 per $1000 invested.
Vanguard Institutional Index I has total gross annual operating expenses of $0.40 per $1000 invested.
Wells Fargo Emerging Gr Inst has total gross annual operating expenses of $10.10 per $1000 invested.
Vanguard Equity Income Adm has total gross annual operating expenses of $1.70 per $1000 invested.
T. Rowe Price Blue Chip Growth I has total gross annual operating expenses of $5.80 per $1000 invested.
Goldman Sachs Small Cap Value R6 has total gross annual operating expenses of $10.00 per $1000 invested.
Vanguard Total Intl Stock Index Inst has total gross annual operating expenses of $0.90 per $1000 invested.
Templeton Foreign R6 has total gross annual operating expenses of $7.20 per $1000 invested.
Oppenheimer Developing Markets I has total gross annual operating expenses of $8.80 per $1000 invested.
Invesco Global Real Estate R6 has total gross annual operating expenses of $8.10 per $1000 invested.
Columbia Acorn International Y has total gross annual operating expenses of $9.00 per $1000 invested.
American Funds EuroPacific Growth R6 has total gross annual operating expenses of $5.00 per $1000 invested.
Company Stock Fund has total gross annual operating expenses of $0.00 per $1000 invested.
PIMCO Commodity Real Ret Strat Instl has total gross annual operating expenses of $10.70 per $1000 invested.

Thanks for any advice

MDM

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Re: First in my family, don't want to be stupid about this...
« Reply #12 on: August 18, 2017, 09:15:08 AM »
Sorry I'm hijacking this thread.
...
Thanks for any advice
Start a separate thread.

carozy

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Re: First in my family, don't want to be stupid about this...
« Reply #13 on: August 18, 2017, 09:19:52 AM »
I had found a calculator which helped me figure out what percent to contribute to my 401k to max it and take the best advantage of my company's match.  Here is one that's similar (I can't find the one I used):

How do I maximize my 401k match?
https://www.calcxml.com/calculators/qua09

You put in the numbers/info that applies to you and it shows you what percent of your contribution vs. your company's match makes up your fund.

The IRS has a withholding calculator that I used to help me figure out how much I should withhold on my w2.  Everyone's situation and goals are different, but this one helped me figure out what was best for me:

https://apps.irs.gov/app/withholdingcalculator/

Hope that helps!

MsMonopolyDog

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Re: First in my family, don't want to be stupid about this...
« Reply #14 on: August 18, 2017, 09:28:27 AM »
Thank you everyone!! Here's an UPDATE and question:

I have chosen my fund to be the S&P500 and decided to put in 6% for now. However, my company gives options to make contributions from the following areas:

1. before-tax base salary
2. before-tax bonus

Should I take all 6% out of my base salary, or split in half? I want to be sure that my checks look a bit bigger and less tax is taken out per paycheck. I can't risk having a LOWER paycheck than I do now.

THANK YOU!!

MDM

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Re: First in my family, don't want to be stupid about this...
« Reply #15 on: August 18, 2017, 09:32:23 AM »
I had found a calculator which helped me figure out what percent to contribute to my 401k to max it and take the best advantage of my company's match.
Good point if one's employer match does not have a feature called a true up.  If the employer does a "true up" then contribution timing does not matter.

The only way to know whether a specific plan does this is to ask (or read information such as the summary plan description).

MDM

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Re: First in my family, don't want to be stupid about this...
« Reply #16 on: August 18, 2017, 09:36:37 AM »
- Employees are automatically enrolled in the 401K plan at 3% of pay (until employee changes this)
Should I take all 6% out of my base salary, or split in half? I want to be sure that my checks look a bit bigger and less tax is taken out per paycheck. I can't risk having a LOWER paycheck than I do now.
If by "than I do now" you mean a 3% contribution to the 401k, any amount greater than 3% will result in lower take home pay than you get now.

MsMonopolyDog

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Re: First in my family, don't want to be stupid about this...
« Reply #17 on: August 18, 2017, 09:40:19 AM »
- Employees are automatically enrolled in the 401K plan at 3% of pay (until employee changes this)
Should I take all 6% out of my base salary, or split in half? I want to be sure that my checks look a bit bigger and less tax is taken out per paycheck. I can't risk having a LOWER paycheck than I do now.
If by "than I do now" you mean a 3% contribution to the 401k, any amount greater than 3% will result in lower take home pay than you get now.

Hey MDM,

Sorry I should have been clear! Up until today none of my paychecks had a 401K contribution removed from it. I became an official employee last week so now this option is allowed.

My hope was that taking all 6% from my base pre-tax salary would put me in a lower tax bracket and therefore lead to less taxes being taken out, resulting in a slightly bigger paycheck.

Did that make sense?

MDM

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Re: First in my family, don't want to be stupid about this...
« Reply #18 on: August 18, 2017, 09:58:46 AM »
My hope was that taking all 6% from my base pre-tax salary would put me in a lower tax bracket and therefore lead to less taxes being taken out, resulting in a slightly bigger paycheck.

Did that make sense?
I think I understand the hope, but taxes don't work that way.

Tax brackets don't apply to your entire earnings.  The 0%, 10%, 15%, 25%, etc. rates apply only to the income within those brackets.  E.g., see Tax Brackets in 2017 - Tax Foundation.

Because the 6% would be pre-tax, your take home pay won't be 6% lower.  If you are in the 25% bracket it will be (1 - 25%) * 6% = 4.5% lower.

Laura33

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Re: First in my family, don't want to be stupid about this...
« Reply #19 on: August 18, 2017, 10:48:48 AM »
I can't risk having a LOWER paycheck than I do now.

I don't understand:  if this job pays more than you have ever made, and you are currently contributing only 3% to retirement, why can't you get by on the slightly lower paycheck from upping that to 6% or more?

If things are really that tight, I suggest doing a full case study for some more specific advice.

MrsPete

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Re: First in my family, don't want to be stupid about this...
« Reply #20 on: August 19, 2017, 06:00:10 PM »
I'm a brand new Mustachian at the age of 33 and I'm embarrassed about it. I grew up in a family where budgeting and planning for the future (college, retirement) were non-existent. I am teaching myself everything from scratch and doing as MUCH research as I can do I don't make any stupid choices in my quest toward FI.
I grew up in this same type of family, and between 17-20 I realized that it was very possible to live differently.  I didn't have any money at that point, but I started reading.  In college I'd go to the library and read anything dealing with finance:  Magazines, books, everything.  I read about frugal living first because I found that easiest to understand; I could relate to it more easily.  Then I read about investing, real estate, retirement accounts.  I just read.  And when I finished college, I was ready to start. 

My advice:  Read.