Author Topic: Vanguard funds and general advice  (Read 8284 times)

rockstache

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Vanguard funds and general advice
« on: March 13, 2013, 09:25:56 AM »
Hi everyone,

I am new to the stache community and beginning to dip my toes in the waters of the mustachian lifestyle. I came across the MMM website about a month ago, and quickly read every post, and many of the links/suggestions to other posts as well. I was amazed by how much wonderful information and advice there is here, and I was hoping that maybe someone could straighten out a few questions I have.

As a quick bit of background, I work full time and just completed school. My husband works part time and goes to school full time. We have a fairly low income for our area, but no debt. I currently contribute 12% to my company's 401K plan (which has a 3% match) and my husband contributes a very small amount ($50/month) to an AmeriFunds account which he had before we got married. I am looking to significantly ramp up our savings (especially hoping that hubby will get a full time job soon after graduation) and I love all of the info that I have read about Vanguard, so I will probably go that way. My questions are as follows:

1. I have heard it said that the best savings strategy for retirement is (in this order): contribute enough to company 401K to get the match, then fully fund an IRA, then if you can still save beyond that, max out your 401K, and finally once that is done, invest elsewhere. This doesn't strike me as a very mustachian philosophy, seeing as that is a lot of money towards the after 65 retirement, and not very much towards any early retirement. For someone with limited funds and only one income, what is the recommended strategy? Does anyone have any other ideas?

2.  When Mr. Money Mustache goes into detail about the various Vanguard funds (VBINX, VSAX etc...) is he referring to investing in these funds within an IRA or just directly into these funds without any relation to retirement? Can anyone explain these funds a little bit more with regards to risk etc..? I did read the MMM post on it, but there seem to be many more options that were not touched on that have come up in later posts.

3. Along the same lines as question 3, when it comes to target retirement accounts, are those within IRA accounts only, or is he suggesting that you can set up a stock/bond portfolio with a target date?

If anyone could please help to clear up my confusion, I would be very grateful. I am very timid about my lack of knowledge regarding investing, but I know that I want to learn to do it myself as I do not trust a financial advisor to have our best interests in mind. My husband is very much on board with all of my plans, but he is a very disorganized (albeit loveable!) individual, and if anyone is going to learn this stuff, and start to apply it, it has to begin with me.


JamesL

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Re: Vanguard funds and general advice
« Reply #1 on: March 13, 2013, 09:40:34 AM »
Hi Rockstache,

I can't claim to be an expert, but I can shed some light on how I'm investing that pertain to your questions.

Question 1:
In order of priority:
Max out any matching employer 401ks.
Max out Roth IRA and HSA (less than 10k total per year)
Max out 401k if it makes a big dent in your taxes; for me, it doesn't so I only invest 15% of my income (with maxing out the above).
Then I throw all of my money into indexes like VTI, which is a total stock index, or VFIAX which is an S&P 500 index. I also put some into REIT indexes with Vanguard (VGSLX).

Question 2:
I invest in the same funds in my retirement funds as I do with my normal funds, because I see them both as retirement. I'm also 100% stock and will be for a long time, if not always. Although I'll also be doing rental properties soon, so my "portfolio" will be stocks and real assets (real estate).

Question 3:
I don't like target retirement accounts.

Overall, I suggest not to panic sell, ever. Stocks go up and down, but the stock market as a whole always goes up. Therefore if you're invested in indexes that cover the entire stock market or the big players, chances are you'll gain money.

mm31

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Re: Vanguard funds and general advice
« Reply #2 on: March 13, 2013, 10:07:09 AM »
For 3), I assume you mean target retirement funds. Target retirement funds will cost you less in taxes if within an IRA. The reason is that these funds have bonds in them and bonds  are not tax-efficient, so any bond holdings you have should be in a tax-deferred account.

CanuckExpat

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Re: Vanguard funds and general advice
« Reply #3 on: March 13, 2013, 12:08:50 PM »
Rockstache: Congratulations on making the jump.
You most certainly want to contribute enough to your 401k to get the full employer match, almost certainly want to make maximum Traditional/Roth IRA contributions, and then depending on the fees and your tax situation, you might want to max out your 401k.
Do not worry about 401k/IRA being for "traditional" retirement: If you retired early, you would still want money after you are 60, second, if you are retired early and want some of the money from those accounts, there is a way to get it out without paying a penalty (Substantially Equal Periodic Payments).

As for your specific investing questions: If possible, you would want to keep your bond funds in a tax sheltered account (401k, IRA, etc) for tax efficiency. While this is a concern, it's not something you should worry about too much when you are starting.

I always think the Bogleheads wiki is a great source of information: http://www.bogleheads.org/wiki/Getting_Started
It is after all named after the guy who founded Vanguard!

Crash87

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Re: Vanguard funds and general advice
« Reply #4 on: March 13, 2013, 04:43:07 PM »
1. I have heard it said that the best savings strategy for retirement is (in this order): contribute enough to company 401K to get the match, then fully fund an IRA, then if you can still save beyond that, max out your 401K, and finally once that is done, invest elsewhere. This doesn't strike me as a very mustachian philosophy, seeing as that is a lot of money towards the after 65 retirement, and not very much towards any early retirement. For someone with limited funds and only one income, what is the recommended strategy? Does anyone have any other ideas?

Your order of what-to-invest-in-first is correct. Make matching contributions first. Then most of us prefer to max out a Roth IRA because we can easily withdraw the principle. Roth IRAs are useful as the principle can double as an emergency fund. Next comes your 401k, then last are plain old taxable investments.

I believe most of us using 401ks plan to convert the 401k into a roth IRA so we can live off of the principle. http://www.bogleheads.org/wiki/Backdoor_Roth_IRA


2.  When Mr. Money Mustache goes into detail about the various Vanguard funds (VBINX, VSAX etc...) is he referring to investing in these funds within an IRA or just directly into these funds without any relation to retirement? Can anyone explain these funds a little bit more with regards to risk etc..? I did read the MMM post on it, but there seem to be many more options that were not touched on that have come up in later posts.

3. Along the same lines as question 3, when it comes to target retirement accounts, are those within IRA accounts only, or is he suggesting that you can set up a stock/bond portfolio with a target date?

My advice is either to:
use a target retirement date fund:
1) If you don't have much to invest or don't want to read a bunch of stuff I would just pick a target retirement account like Target 2050 or whatever. You won't be as tax efficient this way, but Vanguard will handle the asset allocations and rebalancing for you. The fund will gradually get less risky as you get closer to the target retirement age. Any fund can be held in an IRA, in a taxable account, or both.

or handle your own investments:
1) keep it simple: http://www.bogleheads.org/wiki/Lazy_Portfolios
2) be tax efficient: http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement
3) be aware of fund fees: http://www.bogleheads.org/wiki/Mutual_Funds_and_Fees#The_effect_of_high_costs
4) every year or so you will want to rebalance: http://www.bogleheads.org/wiki/Rebalancing

As you can see... I like bogleheads.org :)

rockstache

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Re: Vanguard funds and general advice
« Reply #5 on: March 15, 2013, 08:49:50 AM »
Thank you so much everyone! I am taking some time and reading through the bogleheads site, but there is a lot to absorb. Sometimes I have to walk away from an article and then come back and read it, and then it sinks in a little better the second time around. I'm not a total dumbo, but sometimes the in depth financial stuff is really hard for me to read and comprehend. Bogleheads seem to break it down pretty easily.

Spork

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Re: Vanguard funds and general advice
« Reply #6 on: March 15, 2013, 09:01:50 AM »
1. I have heard it said that the best savings strategy for retirement is (in this order): contribute enough to company 401K to get the match, then fully fund an IRA, then if you can still save beyond that, max out your 401K, and finally once that is done, invest elsewhere. This doesn't strike me as a very mustachian philosophy, seeing as that is a lot of money towards the after 65 retirement, and not very much towards any early retirement. For someone with limited funds and only one income, what is the recommended strategy? Does anyone have any other ideas?

Your order of what-to-invest-in-first is correct. Make matching contributions first. Then most of us prefer to max out a Roth IRA because we can easily withdraw the principle. Roth IRAs are useful as the principle can double as an emergency fund. Next comes your 401k, then last are plain old taxable investments.

I believe most of us using 401ks plan to convert the 401k into a roth IRA so we can live off of the principle. http://www.bogleheads.org/wiki/Backdoor_Roth_IRA


Okay... I have a followup to this. 

I have a significant amount in a traditional IRA that was rolled over from a 401k several years ago.
I also have a Roth that I put the max amount in every year.

Should I be converting my Traditional to the Roth?  If so, I'm not entirely sure what formula to follow to figure out how much I should be converting (or if this changes the amount I can fund each year.)

KatieSSS

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Re: Vanguard funds and general advice
« Reply #7 on: March 15, 2013, 09:48:54 AM »
@rockstache: I also get overwhelmed by the Boglehead site even though it is all explained in a pretty concise manner. With investing I have to read things over and over again to understand them. I'm used to understanding things rather easily, so this has been a challenge! Right now I'm trying to soak up information for when I want to make a decision on switching my Roth IRA to Vanguard (it is currently with Wells Fargo and has some fees attached to it that I don't like). But for now I know I'm not informed enough about Vanguard and index funds to make that decision, plus my main goal this year is to pay off my student loan. I've bookmarked this thread for future reading, though. Thanks for bringing up this topic!

Crash87

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Re: Vanguard funds and general advice
« Reply #8 on: March 15, 2013, 05:16:30 PM »
Okay... I have a followup to this. 

I have a significant amount in a traditional IRA that was rolled over from a 401k several years ago.
I also have a Roth that I put the max amount in every year.

Should I be converting my Traditional to the Roth?  If so, I'm not entirely sure what formula to follow to figure out how much I should be converting (or if this changes the amount I can fund each year.)

I'm 10 - 15 years away from retirement, so I haven't researched the specifics of using a Backdoor Roth IRA. However, my plan is to convert my 401k to a Roth in segements that keep me in the 15% tax bracket.

For example, if I were semi-retired, single, didn't itemize, and made $20,000 in 2012, my imaginary taxes would be as follows:

Wages:                     $20,000
Exemptions:              ($3,800)
Standard Deduction:  ($5,950)
Taxable Income:        $10,250

Since the top of the 15% in 2012 was taxable income of $35,350, I could convert $25,100 of my 401k to a Roth IRA and still be in the 15% bracket!

Keep in mind that you won't be able to use the backdoor roth IRA contributions for 5 years. So in the above example I won't be able to use the $25,100 until 2017.

Spork

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Re: Vanguard funds and general advice
« Reply #9 on: March 16, 2013, 05:39:45 PM »
Okay... I have a followup to this. 

I have a significant amount in a traditional IRA that was rolled over from a 401k several years ago.
I also have a Roth that I put the max amount in every year.

Should I be converting my Traditional to the Roth?  If so, I'm not entirely sure what formula to follow to figure out how much I should be converting (or if this changes the amount I can fund each year.)

I'm 10 - 15 years away from retirement, so I haven't researched the specifics of using a Backdoor Roth IRA. However, my plan is to convert my 401k to a Roth in segements that keep me in the 15% tax bracket.

For example, if I were semi-retired, single, didn't itemize, and made $20,000 in 2012, my imaginary taxes would be as follows:

Wages:                     $20,000
Exemptions:              ($3,800)
Standard Deduction:  ($5,950)
Taxable Income:        $10,250

Since the top of the 15% in 2012 was taxable income of $35,350, I could convert $25,100 of my 401k to a Roth IRA and still be in the 15% bracket!

Keep in mind that you won't be able to use the backdoor roth IRA contributions for 5 years. So in the above example I won't be able to use the $25,100 until 2017.

How does that affect Roth contributions?  I.e., can I backdoor $25k and still make my max yearly Roth contribution?

grantmeaname

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Re: Vanguard funds and general advice
« Reply #10 on: March 17, 2013, 07:16:32 AM »
Yes. Your contribution limit is only for money that is new to IRAs entirely in a given year. Money that moves from an IRA to another IRA doesn't count towards your contribution limit.