Advice Needed - 401K/IRA/Index Fund

[aehf89]

Hi everyone,

Please let me know if I should be posting this in another forum, or if this has been answered before in another post.

I'm a little lost on how I should be managing my money.

My first question is, how much of my salary should be going to my company 401K or an IRA? I currently have it set at 5%. I guess more broadly, my question is, how much money should I be putting into a 401K/IRA vs taking home and putting into an index fund? I understand there are pros and cons such as, lowering taxable income, vs not being able to use that money without penalties before retirement.

Second question - I have a Vanguard account set up, but currently no investments. It seems that we're overdue for a market correction, but no one knows when. What should a mustachian do? Slowly dollar cost average my current stash into the market, or wait for Armageddon?

Here are my current circumstances.

Age: 28
Income: 110K

401K: 64K
Cash: 45K
Debt: none

I realize so much of this depends on personal goals. But if anyone could tell me at least what questions I should be answering, that would be appreciated! Or what math/other facts I should go away and figure out.

Thanks!

[seattlecyclone]

Max out those retirement accounts! Don't worry too much about penalties during early retirement. See this thread for an explanation of how to get around them in many cases.

[paulgkc]

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Short answer:
1) max the retirement accounts before any taxable. See the above link in addition to the one in the previous post for more info.

2) time in the market >> timing the market. Mathematically, you’re more likely to come out ahead of you dump everything in at once instead of DCA. The market may crash 30% in the next two weeks, but it could also never be this low ever again. The latter is more likely of the two.

[Mother Fussbudget]

Do you find yourself in need of that 5% you're currently putting into your 401K?  Or, like me, you find that you 'hardly notice' that money wasn't in your paycheck because of the tax offsets? (because 401K funds are taken out pre-tax).  If you find yourself needing those funds, you might consider a retirement vehicle like a Roth IRA where you can withdraw CONTRIBUTIONS at any time for any reason without penalty.   If you are single, you must have a modified adjusted gross income under $133,000 to contribute to a Roth IRA for the 2017 tax year, but contributions are reduced starting at $118,000.

Does your 401K program offer a company match?  If so, DEFINITELY contribute at least up to that match amount - that's FREE MONEY for use in retirement.  Beyond that, and depending on your answer to the first question... realize that YOU'RE YOUNG.  Your 50+ year old self will THANK yourself that at the young age of 28, you were smart enough to start contributing to a 401K.  The older you get, the more likely you will want to contribute the maximum yearly limit to your 401K account - for 2017 $18K, for 2018 $18.5K (AND from 1/1-thru-4/15, one can contribute to their PRIOR YEAR 401K/IRA/Roth IRA account if they belatedly decide they want to MAX OUT their savings).

That yearly savings opportunity can't be recovered - use it or lose it.  I've only been maxing out my 401K for the past 4 years.  BUT... I *WISH* I had maxed out my 401K savings for the past 20+ years of my working career.  If I had done so, I would have over $284K in contributions alone - not even considering the ROI of INVESTING those contributions @ 10.58% average return over the last 15 years... or an additional $30K.

As for what to invest in...  VTSAX (Vanguard Total Stock Market Index fund).  Your 401K plan may or may not allow you to purchase Vanguard funds, but if they do, consider the Total Stock Market Index fund.  (to learn more, read JLCollinsHN's 'stock series', or his book "The Simple Path to Wealth"). 

All the best,
(and remember... you're asking the advice of strangers on the internet.  Use your own judgement, and the advice of your investment adviser.)
MFB

[aehf89]

This advice and these links are exactly what I was looking for. Thank you all! I had heard of the Roth pipeline, but I wasn't sure how "mainstream" it was (within this community).

Assuming that I set up the pipeline correctly - does that mean that I effectively have the power to put myself in a lower tax bracket, without paying any additional penalties or limitations outside of the 5 year wait? If so, that's incredible. I will read more.

Mother Fussbudget (great name!) - Yes, I'm taking advantage of the company match right now, but not much more. And yes, I'll be careful with advice from internet strangers. However, I feel the collective wisdom in this forum beats anything I have access to at this time.

[aehf89]

Oh, and I had one more question - I'll read around but might as well ask here too. If I decided now to max out my 2017 401K with a lump sum, would I be able to lower my taxable income on my tax return, and get a larger refund as a result? (because I had been taxed throughout the year)

[TexasRunner]

401k Contributions are cut off on December 31st...   Its already too late.

You can, however, deposit $5500 into a tIRA up until the time you file your taxes.  $11000 if you are married.

I would strongly recommend you do as much of that as you can.

[aehf89]

Thanks TexasRunner. I think I will.