Author Topic: What 401k fund(s) should I sign up for?  (Read 8097 times)

appleguy

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What 401k fund(s) should I sign up for?
« on: April 15, 2015, 11:35:49 AM »
Hi,

I have an opportunity to contribute to a 401k with a 4.5% match of salary if you contribute at least 6.5% of your salary to a 401k. I'm selecting the Roth 401k option.

I'll be adding about $10,500 a year to the account, with that match I'll have close to $15,000 coming in.

My choice of funds include a few Target funds, all Today - 2055. I'm 25 so I'd likely go with a 2055 fund but I'm not sure that would be the best choice.

Their Blended fund:

Wells Fargo Advantage DJ Target 2055 Adm  WFLHX

They say the gross expense ratio is .3 for this fund.

Vangaurd Funds:

Vanguard Institutional Index Fund Institutional Plus Shares (VIIIX)
Vanguard Mid-Cap Index Fund Institutional Plus Shares (VMCPX)
Vanguard Small Cap Index InstlPlus (VSCPX)

Other funds:

US ANALYST STRATEGY
WT MID CAP OPPS
ABDN EMERG MKTS INST (ABEMX)
AF EUROPAC GROWTH R6 (RERGX)
SSGA GLB EQ EX-US C
PYR SMALL COMPANY FD
PIM ALL ASSET INST (PAAIX)

Bond Funds:

UHG STABLE VALUE
DODGE & COX INCOME
NT DAILY TIPS INDEX
SSGA BOND INDEX C
BROKERAGELINK


What do you guys think? The plan is to save about 10% income into our 401k until we retire, either early or normal, then we have an additional nest egg if we do retire early to use when we get to 65 if needed for things like longterm care.

Whats the best fund? I'm 25 and i have a lot of time (40 years until I'm 65)..

Edited:

They also offer access to Fidelity Brokerage Link, https://www.mysavingsatwork.com/taxexempt/assets/370190_FidelityBrokerageLink.pdf which sounds like I maybe able to get access to a Vangaurd 2055 fund. Any pros or cons to this approach?
« Last Edit: April 15, 2015, 11:51:03 AM by appleguy »

James

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Re: What 401k fund(s) should I sign up for?
« Reply #1 on: April 15, 2015, 11:44:29 AM »
Expense for VIIIX is .02%, I would go with that as your main fund.

If you want to add some bonds or smaller cap funds fine, but at your age I wouldn't bother, I would just use VIIIX to keep it simple and low expense. Diversify with additions to other funds in the future at some point as you feel the need.

(The expense for the two other Vanguard funds are .06%, so they aren't much worse than VIIIX, which pretty much tracks the S&P500. Adding 10-20% of each wouldn't be a bad idea.)
« Last Edit: April 15, 2015, 11:47:15 AM by James »

littleturkey

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Re: What 401k fund(s) should I sign up for?
« Reply #2 on: April 15, 2015, 11:53:22 AM »
You want to retire at age 65?  Not early?  Check out MMM article called "the shockingly simple math behind early retirement".  Look at the graphs.  Consider putting way more than 10% in.

MDM

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Re: What 401k fund(s) should I sign up for?
« Reply #3 on: April 15, 2015, 12:28:16 PM »
I have an opportunity to contribute to a 401k with a 4.5% match of salary if you contribute at least 6.5% of your salary to a 401k. I'm selecting the Roth 401k option.

Why Roth instead of traditional?

Vertical Mode

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Re: What 401k fund(s) should I sign up for?
« Reply #4 on: April 15, 2015, 01:00:35 PM »
You want to retire at age 65?  Not early?  Check out MMM article called "the shockingly simple math behind early retirement".  Look at the graphs.  Consider putting way more than 10% in.

We don't have much context here about OP's current financial situation (income, current assets, short term need for cash, padding E-fund to a comfortable level, debt elimination, etc.) This is relevant because our advice might be very different if OP is just starting out, already has 1MM invested, etc.

I very much agree that OP should give strong consideration to deferring greater than 10%, but any financial advisor with fiduciary responsibility would want to be sure the other boxes are checked first and that one is on solid footing before investing.

I have an opportunity to contribute to a 401k with a 4.5% match of salary if you contribute at least 6.5% of your salary to a 401k. I'm selecting the Roth 401k option.

Why Roth instead of traditional?

I'm also curious about this one?

at 25, you have a long enough time horizon for investing that your best allocation would probably be heavy on stocks. Index funds, such as the Vanguard options in that portfolio, are an extremely efficient way to own a diversified stock portfolio. They aren't the only game in town, but many on the forum who math much harder than I do swear by them. You're looking at the expense ratios, which is great and should help you make an informed decision that compares apples to apples. Fees will erode returns much more than most people realize.

Most importantly, you're actually participating in your 401(k) plan, which means you're already miles ahead of most 25 year-olds. Keep kicking ass!

appleguy

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Re: What 401k fund(s) should I sign up for?
« Reply #5 on: April 15, 2015, 01:23:05 PM »
You want to retire at age 65?  Not early?  Check out MMM article called "the shockingly simple math behind early retirement".  Look at the graphs.  Consider putting way more than 10% in.

We don't have much context here about OP's current financial situation (income, current assets, short term need for cash, padding E-fund to a comfortable level, debt elimination, etc.) This is relevant because our advice might be very different if OP is just starting out, already has 1MM invested, etc.

I very much agree that OP should give strong consideration to deferring greater than 10%, but any financial advisor with fiduciary responsibility would want to be sure the other boxes are checked first and that one is on solid footing before investing.

I have an opportunity to contribute to a 401k with a 4.5% match of salary if you contribute at least 6.5% of your salary to a 401k. I'm selecting the Roth 401k option.

Why Roth instead of traditional?

I'm also curious about this one?

at 25, you have a long enough time horizon for investing that your best allocation would probably be heavy on stocks. Index funds, such as the Vanguard options in that portfolio, are an extremely efficient way to own a diversified stock portfolio. They aren't the only game in town, but many on the forum who math much harder than I do swear by them. You're looking at the expense ratios, which is great and should help you make an informed decision that compares apples to apples. Fees will erode returns much more than most people realize.

Most importantly, you're actually participating in your 401(k) plan, which means you're already miles ahead of most 25 year-olds. Keep kicking ass!

Sure.

I'm 25 and wife is 24, we make $140,000 combined. Our only debt is a $10,000 loan on a new car we recently bought after her car was totaled. We save about $4,000 a month. My wife does not want to early retire, nor does she want me to. I think as we get older, we may wish to early

We pay rent about $1300 a mont in Denver. We're looking to buy in the next 1-2 years with a $30-80k down payment.

We live on about 44% of our total take home pay after taxes. We save the rest. I'm planning for a 65 retirement with an annual withdrawal of about $60,000 to $90,000, mostly for traveling.

Financial Plan Timeline

This Year: Save 10-15% for retirement (until we retire, save that every year), save for a house, save emergency fund
Next Year: Buy a house, may have children, bump emergency fund to 6 months
5 Years: have 2-3 kids by now, 100k~ in retirement, wife is a stay at home mom
10 years: House paid off, direct all surplus cash into savings for long term investment / money goals
20 years: 500-800k retirement 401k or similar, maybe early retire, buy some rentals if not

MDM

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Re: What 401k fund(s) should I sign up for?
« Reply #6 on: April 15, 2015, 01:45:49 PM »
I'm 25 and wife is 24, we make $140,000 combined.

I'm planning for a 65 retirement with an annual withdrawal of about $60,000 to $90,000, mostly for traveling.

Given that, one can only ask again: why Roth instead of traditional (for your 401k)?

appleguy

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Re: What 401k fund(s) should I sign up for?
« Reply #7 on: April 15, 2015, 01:47:56 PM »
I'm making the bet that taxes will be higher in my 60's then now.

JLee

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Re: What 401k fund(s) should I sign up for?
« Reply #8 on: April 15, 2015, 02:05:13 PM »
I'm making the bet that taxes will be higher in my 60's then now.

You are planning on spending more than $140k/yr in retirement?

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Re: What 401k fund(s) should I sign up for?
« Reply #9 on: April 15, 2015, 02:20:34 PM »
I'm making the bet that taxes will be higher in my 60's then now.

I think MDM's point is that if you went the tIRA route instead, you could significantly reduce your AGI up front and pay a LOT less in taxes. Not that the Roth is a bad option, as that money will be yours tax-free in the future, but Uncle Sam is siphoning off more of what you're earning along the way. If current income is ~140k/yr, and future drawdown is projected at 60-90k (inflation-adjusted for ~40yrs into the future), it would seem as if much could be gained by mitigating your current tax liability, is all. You mention that you may change your mind about retiring early, and in that scenario the Roth makes sense because you can tap your principal at any time. I should add here that you can also use the Roth conversion ladder strategy to tap 401(k) funds without early withdrawal penalties, there is much information around the forum about this.

Thanks for the update and additional info, I really should have qualified my previous response saying that some people aren't entirely comfortable talking about their own financial math on the interwebs. From what you've posted - I'm not worried. You have clearly done your homework and have a workable plan. I wouldn't be surprised if you wind up reaching your ~20 year goal much faster than that. Best of luck to you.

appleguy

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Re: What 401k fund(s) should I sign up for?
« Reply #10 on: April 15, 2015, 02:24:55 PM »
I'm making the bet that taxes will be higher in my 60's then now.

You are planning on spending more than $140k/yr in retirement?

It's not about spending, it's about tax brackets. At $90k, to where I'm now, we're in a 28% tax bracket. I am planning on being within the 90-140k bracket at some point in my later years. For things like crazy amounts of traveling and medical care

MDM

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Re: What 401k fund(s) should I sign up for?
« Reply #11 on: April 15, 2015, 02:53:17 PM »
I'm making the bet that taxes will be higher in my 60's then now.

I'm planning for a 65 retirement with an annual withdrawal of about $60,000 to $90,000, mostly for traveling.

It's not about spending, it's about tax brackets. At $90k, to where I'm now, we're in a 28% tax bracket. I am planning on being within the 90-140k bracket at some point in my later years. For things like crazy amounts of traveling and medical care
You may be correct about tax increases - no way to prove one way or another now.  A few things:
  - Assuming your filing status is MFJ, $140K gross minus $20,600 in standard deductions and exemptions puts you at $119,400 and a 25% marginal tax rate.
  - An $80K gross income would pay 15.0% marginal, and 10% overall, tax rate.
  - Above is for federal income tax only.  State/local/SS/Med is separate.

In other words, you will save 25% from any traditional 401k deductions now.  Assuming your post-retirement income comes solely from 401k withdrawals, you will pay 10% on those withdrawals.  Rates would have to increase a lot to change the picture.

Again, one can't guarantee what will or won't happen with tax rates.  With Republicans generally against any tax increases at all, and Democrats generally against any tax increases in the lower brackets...well, who knows?

Of course if you have income other than 401k withdrawals, the effective tax rate on those withdrawals will increase - "by how much?" depends on the specific amounts.

« Last Edit: April 28, 2015, 03:01:06 AM by MDM »

BarkyardBQ

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Re: What 401k fund(s) should I sign up for?
« Reply #12 on: April 15, 2015, 02:59:39 PM »
At $90k, to where I'm now, we're in a 28% tax bracket.

Taxes are marginal, in that you are not paying 28% tax on all your income, it's tiered.


http://www.forbes.com/sites/kellyphillipserb/2014/10/30/irs-announces-2015-tax-brackets-standard-deduction-amounts-and-more/

JLee

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Re: What 401k fund(s) should I sign up for?
« Reply #13 on: April 15, 2015, 03:01:10 PM »
I'm making the bet that taxes will be higher in my 60's then now.

You are planning on spending more than $140k/yr in retirement?

It's not about spending, it's about tax brackets. At $90k, to where I'm now, we're in a 28% tax bracket. I am planning on being within the 90-140k bracket at some point in my later years. For things like crazy amounts of traveling and medical care

How is it not about spending if you are withdrawing $40k in retirement, vs $140k in current earnings? Many people here (especially those with 50%+ savings rates) are going to require far less income in retirement than they are earning right now, which reinforces the traditional argument.

I do work with a guy who's over $70k filing singly and he's doing Roth, because he anticipates having a much higher income in retirement than he does now so he'd rather pay up front. If you're going MMM-style and minimizing retirement expenses, I think most people would be better served with a Traditional account. It'll vary person by person, of course.
« Last Edit: April 15, 2015, 03:08:32 PM by JLee »

MDM

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Re: What 401k fund(s) should I sign up for?
« Reply #14 on: April 15, 2015, 03:05:27 PM »
At $90k, to where I'm now, we're in a 28% tax bracket.
Taxes are marginal, in that you are not paying 28% tax on all your income, it's tiered.

OP was likely looking at the brackets for single filers, although based on "I'm 25 and wife is 24, we make $140,000 combined" it appears they are MFJ.

The marginal rate is the correct rate for calculating savings from traditional deductions, while the overall rate is the correct rate for calculating losses on withdrawals.

seattlecyclone

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Re: What 401k fund(s) should I sign up for?
« Reply #15 on: April 15, 2015, 04:11:11 PM »
Do be aware that if a significant fraction of your money during retirement is coming out of Roth accounts, your taxable income will likely be much lower than your spending. If your accounts are a 50/50 split between Roth and traditional, you can take out $140k but only be taxed as if you earned $70k. Therein lies the rub with Roth accounts: the more money you already have in there, the less likely it is that you'll be better off adding to the account instead of making traditional pre-tax contributions.

At your income level you probably can't make pre-tax IRA contributions. You'll have to make Roth contributions when maxing out your IRAs. Therefore since you'll already have some Roth exposure regardless, I would recommend taking full advantage of your pre-tax 401(k).

As to your fund choices, Vanguard Institutional Index for most or all of it. Add in some mid-cap and small-cap if you feel like it (maybe an 80/10/10 ratio to come close to a total market fund equivalent).

frugalnacho

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Re: What 401k fund(s) should I sign up for?
« Reply #16 on: April 15, 2015, 05:08:06 PM »
I'm making the bet that taxes will be higher in my 60's then now.

Yea but the tax code is progressive, you pay the most tax on the last dollar you earn, and the least tax on the first dollar.  By contributing to an IRA or 401k you are trading in today's "last dollar" for a future "first dollar".  In fact for MFJ the first $20.6k is tax free.  So if you made $41.2k, and contributed $20.6k to a tax deferred account you would be left with $20.6k this year, which you would owe $0 tax on after you take the standard deduction and exemptions.  Then you retire and next year you earned $0, but pulled out the $20.6k you deferred from last year, you will pay $0 tax.

Or a more extreme example, say you earned $1M this year.  You would have a huge tax bill, but what if you could contribute $980k to a 401k plan?  Well you would owe $0 this year.  Then you could take out $20k next year and pay $0, and repeat each year.  You could effectively earn $1M and pay no taxes ever.  Of course this isn't realistic because you can't defer that much money, but I was trying to illustrate a point.

Stupendous

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Re: What 401k fund(s) should I sign up for?
« Reply #17 on: April 15, 2015, 05:59:59 PM »
Edited:

They also offer access to Fidelity Brokerage Link, https://www.mysavingsatwork.com/taxexempt/assets/370190_FidelityBrokerageLink.pdf which sounds like I maybe able to get access to a Vangaurd 2055 fund. Any pros or cons to this approach?

I have Brokerage Link at work and use that over the other funds that are available. I do this because I look at my portfolio as a whole (401k, IRA, and taxable) and it makes it much easier to manage that way than with target date funds. I have a lazy 3 portfolio and buy FSTVX, FSGDX, FSITX.

http://www.bogleheads.org/wiki/Three-fund_portfolio

Quote from: appleguy
We save about $4,000 a month. My wife does not want to early retire, nor does she want me to. I think as we get older, we may wish to early

No guarantee you can both work until you are 65. If you can save more for retirement it's probably a good idea to do that.

kpd905

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Re: What 401k fund(s) should I sign up for?
« Reply #18 on: April 15, 2015, 06:32:47 PM »
I'd go with the Vanguard funds.

At your income, you should be able to max out a traditional 401k, if not two for $36,000 a year.  You are at a high tax rate, so I'd defer as much as possible.

And your wife thinking she wants to work until 65 after working for what, two or three years?  At least give yourself the option to retire early.  You can always keep going if you want to.