Author Topic: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice  (Read 11761 times)

cchekan

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Hello Mustachians,
I recently graduated from Virginia Tech in May 2013 and am twenty-two years old. I got my B.S. in Civil Engineering and just started my new job (after many applications over the last few months) this past Monday. I am currently living with my parents and only have to commute fifteen minutes to my job in North New Jersey. I received a $52,000/year salary with payed overtime. Included were many benefits as you could imagine, one of which is $200 extra a month for waiving my medical benefits and staying on my dad's medical plan through his job (until I'm 26). So, after some simple math, I'd be making $54,400/year.

With one week in the books, it's come time to invest. Something I've learned in my academic career. This is where I need your help. My job offers investing through Vanguard. I can invest up to fifty percent of my income and after one year of working, my company will match 50% of my investing up to 6% (ex. if I invest 12%, they will match me at an additional 6%). Pretty standard from what I hear. From reading within MMM, it sounds like I should invest in the Vanguard Total Stock Market Index Fund. Reliable and guaranteed (hopefully) for success on the long run.

I've always been frugal, but not knowing much about finance and being new to the real "job" world, I could use some advice. I am lucky and don't have many expenses other than food and drinks. Free rent, loaded fridge at home, no car/college loans, etc. Very fortunate I know. That's why I want to invest while I can and help my retirement as much as I can.

So when I go to work, I assume I'm going to sit down with somebody in accounting and tell them how I want to invest (or do it myself on Vanguard.com, I don't know honestly). How much should I invest? 15%, 30%, 50%? Should I invest all into the index fund, or should I think about splitting my investments into multiple accounts, so if needed, I can have access to the money before I retire (ex. down payment on a house, etc.). If so, what other investments should I make (ex. ING account). Any wisdom or experience would be greatly appreciated. I am willing to invest a lot of my income now while I don't have many expenses. Trying to be smart and start early.

Let me know, and thanks in advance!
@MMM Mr. Money Mustache

matchewed

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #1 on: July 28, 2013, 06:48:46 PM »
Go to http://jlcollinsnh.com/category/stock-investing-series/ and start with the Part 1 and work your way through that.

I'm assuming what you mean when you say your job offers investing through Vanguard is that you will have a 401k through Vanguard. What you will need to do is find out what options are available to you as each plan is decided between the employer and the company the 401k is with. Whatever option you pick it is highly recommended that you contribute whatever percentage will get you to the max ($17.5k). In addition to this open a Roth IRA with Vanguard/Fidelity or any other low cost Roth IRA administrator. Max that ($5.5k). Whatever money is left over would have to be invested in a standard taxable account.

In the meantime learn about investing. Understand why the advice is good or bad.

tpozywio

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #2 on: July 29, 2013, 07:55:12 AM »
Thats great advice!

aj_yooper

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #3 on: July 30, 2013, 04:47:09 PM »
Welcome and Wow!

First, you need to learn about hedonic adaptation.  http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-adaptation-and-how-can-it-turn-you-into-a-sukka/

If you want to become FI, then try and save most of your paycheck for a few years, say 60% or more.  Yes, I am serious!  Max out your 401k, do a Roth IRA, if your company has a HSA, max that out too.  So that is $23k.  Build up an emergency fund, even though you are covered now by your family, and then start a taxable account with Vanguard, say putting your monthly contributions into the total stock market index and total international index.  Go for it for a few years and then you can taper off later or not.  You are probably used to living on just enough from college so keep it going.  The advantages of speedloading your investment accounts are awesome.  Let compound interest do some real hard work for yourself.

Good luck!

Freeyourchains2

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #4 on: July 31, 2013, 07:58:42 AM »
Welcome and Wow!

First, you need to learn about hedonic adaptation.  http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-adaptation-and-how-can-it-turn-you-into-a-sukka/

If you want to become FI, then try and save most of your paycheck for a few years, say 60% or more.  Yes, I am serious!  Max out your 401k, do a Roth IRA, if your company has a HSA, max that out too.  So that is $23k.  Build up an emergency fund, even though you are covered now by your family, and then start a taxable account with Vanguard, say putting your monthly contributions into the total stock market index and total international index.  Go for it for a few years and then you can taper off later or not.  You are probably used to living on just enough from college so keep it going.  The advantages of speedloading your investment accounts are awesome.  Let compound interest do some real hard work for yourself.

Good luck!

Again, this community will say to max out your 401k, IRA, HSA, and run it through some very very age restricted loopholes for a possible withdraw without a 10% penalty before age 59.5, and then taxes at "retired" %. It's a very complex IRA pipeline, with at least a 5 year wait period for only withdrawing your first initial contribution investments, and subsequent contributions (the ones by then that are earning you the most!) per year. Any "Big Earnings" in the stocks markets, no matter how skilled you are, will have to wait until you are age 59.5 to use to retire "extremely early". This approach locks in a minimum of working for at least a decade if not longer, based on your cost of living, unless you can get it down to $17.5k. ($17.5k 401k investment would have to be rolled over into an IRA every year after "third party" fees of hundreds of dollars. Then 5 years later after the "grace period" which may change at anytime by them, you may withdraw that 17.5k contribution to use for FI. However you may not withdraw the earnings made from that 17.5k until age 59.5. And to keep this going you would have to work 10 years, to withdraw $17.5k/year for ten years. But you may not withdraw ANY EARNINGS until age 59.5.)

Yeah, you save a lot on taxes initially, but you are "locking up" all your investment earnings for 30-40 years to the will of the fund managers and future Federal Government's Agenda to most likely be taxed over your lifetime, once the Government's spending starts defaulting America (because US Government has become very very Anti-mustacian).

Why do you think the Government wants your investment money too? It's like luring you in with a $1,000 bill to save on taxes that they control the tax rate of anyway, to then lock up your lifetime savings and any investment earnings until you are at their determined retirement age, and one day tax it as well once they have you waiting in their "grace period". The government survives off of income tax and consumer tax. They want you to work till your dead. If you do save and invest, they want to control that huge treasury of money, and be able to lock it up for your lifetime so they can tax it at will if they need too.

I prefer Dividend Mantra's Mantra as one way to diversify and invest. (www.dividendmantra.com He uses Dividend Growth Investing After Tax. This keeps your after tax cash available to you at all times and under your control for life. It also allows the middle class earners to invest in their own startup-businesses AT ANY AGE, real estate properties, etc. that you couldn't do otherwise in IRA's/401ks, because your money and especially any earnings is locked up behind penalty bars until their determined age, and or withdraw and tax rules.

I still recommend getting any employer match, but I just want to note, there are other ways to reach FI. Like making $1,000,000 from a successful startup company after a few years.

By maxing your 401k/IRA/HSA, you would have to borrow money for a startup or real estate property, which really hampers your ability to make it profitable and successful. Anyone making $100k, can of course max out their 401k/IRA/HSA and still have taxed money left over to easily invest in a business or real estate property to make them wealthier.

However, people that make less then that...won't ever be given the chance for other investment options if they max out their 401k's/IRAs. Until they Earn $80k-$100k/ year in a normal job. (normal job where it's up to the bosses and how greedy they may be to determine if your and your co-workers get a raise that year, and also up to them to see who is victorious at the office politics and backstabbing for that "rare" promotional opportunity. You could be VP, and still be asked to do something that is against your beliefs. Then it's "recommended" you start your own business, though all your money was spend on living costs and is locked up in maxing out your 401ks/IRAs. All bosses care about is making them more profits and being able to pay you the minimum they can to max their profits, while you do the most labor you can. It's a very grey matter of morality indeed. CEO's especially need to learn how to profit share.)

401k to IRA savings, prevents businesses from being created, and keeps you working normal day to day grind jobs for years.

Warning, My Political Opinion Ahead:

Not to frighten you but Obama is willing to negotiate "grid locks" with Republicans right now with things like this, "He will lower the corporate taxes from 35% down to 28%, if he is allowed to close all corporate tax loopholes."

After he raised Corporate taxes in his first term to 35%.

If need be after Trillions and Trillions more spent frivolously, the Government can create a tax on 401k/IRA earnings. Then negotiate things like, "We will lower the Earnings tax on 401k/IRA's down to zero again, if we can close all the withdraw loopholes for both contributions and earnings." And with the min 5 year "grace periods" for withdrawing rolled over contributions only, you are at whim to any of these changes in the future.

But all citizens are at the whim to any and all Government taxes, as we don't get a say anymore into what the tax money is being spent on. It's Corruption at it's finest.
« Last Edit: July 31, 2013, 08:21:56 AM by Freeyourchains2 »

Sebastian

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #5 on: July 31, 2013, 08:43:11 AM »
Welcome and Wow!

First, you need to learn about hedonic adaptation.  http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-adaptation-and-how-can-it-turn-you-into-a-sukka/

If you want to become FI, then try and save most of your paycheck for a few years, say 60% or more.  Yes, I am serious!  Max out your 401k, do a Roth IRA, if your company has a HSA, max that out too.  So that is $23k.  Build up an emergency fund, even though you are covered now by your family, and then start a taxable account with Vanguard, say putting your monthly contributions into the total stock market index and total international index.  Go for it for a few years and then you can taper off later or not.  You are probably used to living on just enough from college so keep it going.  The advantages of speedloading your investment accounts are awesome.  Let compound interest do some real hard work for yourself.

Good luck!

Again, this community will say to max out your 401k, IRA, HSA, and run it through some very very age restricted loopholes for a possible withdraw without a 10% penalty before age 59.5, and then taxes at "retired" %. It's a very complex IRA pipeline, with at least a 5 year wait period for only withdrawing your first initial contribution investments, and subsequent contributions (the ones by then that are earning you the most!) per year. Any "Big Earnings" in the stocks markets, no matter how skilled you are, will have to wait until you are age 59.5 to use to retire "extremely early". This approach locks in a minimum of working for at least a decade if not longer, based on your cost of living, unless you can get it down to $17.5k. ($17.5k 401k investment would have to be rolled over into an IRA every year after "third party" fees of hundreds of dollars. Then 5 years later after the "grace period" which may change at anytime by them, you may withdraw that 17.5k contribution to use for FI. However you may not withdraw the earnings made from that 17.5k until age 59.5. And to keep this going you would have to work 10 years, to withdraw $17.5k/year for ten years. But you may not withdraw ANY EARNINGS until age 59.5.)

Yeah, you save a lot on taxes initially, but you are "locking up" all your investment earnings for 30-40 years to the will of the fund managers and future Federal Government's Agenda to most likely be taxed over your lifetime, once the Government's spending starts defaulting America (because US Government has become very very Anti-mustacian).

Why do you think the Government wants your investment money too? It's like luring you in with a $1,000 bill to save on taxes that they control the tax rate of anyway, to then lock up your lifetime savings and any investment earnings until you are at their determined retirement age, and one day tax it as well once they have you waiting in their "grace period". The government survives off of income tax and consumer tax. They want you to work till your dead. If you do save and invest, they want to control that huge treasury of money, and be able to lock it up for your lifetime so they can tax it at will if they need too.

I prefer Dividend Mantra's Mantra as one way to diversify and invest. (www.dividendmantra.com He uses Dividend Growth Investing After Tax. This keeps your after tax cash available to you at all times and under your control for life. It also allows the middle class earners to invest in their own startup-businesses AT ANY AGE, real estate properties, etc. that you couldn't do otherwise in IRA's/401ks, because your money and especially any earnings is locked up behind penalty bars until their determined age, and or withdraw and tax rules.

I still recommend getting any employer match, but I just want to note, there are other ways to reach FI. Like making $1,000,000 from a successful startup company after a few years.

By maxing your 401k/IRA/HSA, you would have to borrow money for a startup or real estate property, which really hampers your ability to make it profitable and successful. Anyone making $100k, can of course max out their 401k/IRA/HSA and still have taxed money left over to easily invest in a business or real estate property to make them wealthier.

However, people that make less then that...won't ever be given the chance for other investment options if they max out their 401k's/IRAs. Until they Earn $80k-$100k/ year in a normal job. (normal job where it's up to the bosses and how greedy they may be to determine if your and your co-workers get a raise that year, and also up to them to see who is victorious at the office politics and backstabbing for that "rare" promotional opportunity. You could be VP, and still be asked to do something that is against your beliefs. Then it's "recommended" you start your own business, though all your money was spend on living costs and is locked up in maxing out your 401ks/IRAs. All bosses care about is making them more profits and being able to pay you the minimum they can to max their profits, while you do the most labor you can. It's a very grey matter of morality indeed. CEO's especially need to learn how to profit share.)

401k to IRA savings, prevents businesses from being created, and keeps you working normal day to day grind jobs for years.

Warning, My Political Opinion Ahead:

Not to frighten you but Obama is willing to negotiate "grid locks" with Republicans right now with things like this, "He will lower the corporate taxes from 35% down to 28%, if he is allowed to close all corporate tax loopholes."

After he raised Corporate taxes in his first term to 35%.

If need be after Trillions and Trillions more spent frivolously, the Government can create a tax on 401k/IRA earnings. Then negotiate things like, "We will lower the Earnings tax on 401k/IRA's down to zero again, if we can close all the withdraw loopholes for both contributions and earnings." And with the min 5 year "grace periods" for withdrawing rolled over contributions only, you are at whim to any of these changes in the future.

But all citizens are at the whim to any and all Government taxes, as we don't get a say anymore into what the tax money is being spent on. It's Corruption at it's finest.

Lol I'm assuming you were banned Freeyourchains? As you are now Freeyourchains2... Here comes another huge flame war.

matchewed

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #6 on: July 31, 2013, 09:36:08 AM »
Welcome and Wow!

First, you need to learn about hedonic adaptation.  http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-adaptation-and-how-can-it-turn-you-into-a-sukka/

If you want to become FI, then try and save most of your paycheck for a few years, say 60% or more.  Yes, I am serious!  Max out your 401k, do a Roth IRA, if your company has a HSA, max that out too.  So that is $23k.  Build up an emergency fund, even though you are covered now by your family, and then start a taxable account with Vanguard, say putting your monthly contributions into the total stock market index and total international index.  Go for it for a few years and then you can taper off later or not.  You are probably used to living on just enough from college so keep it going.  The advantages of speedloading your investment accounts are awesome.  Let compound interest do some real hard work for yourself.

Good luck!

/snip

Lol I'm assuming you were banned Freeyourchains? As you are now Freeyourchains2... Here comes another huge flame war.

Pretty sure he wasn't banned. Maybe lost the password.

matchewed

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #7 on: July 31, 2013, 10:02:55 AM »
Welcome and Wow!

First, you need to learn about hedonic adaptation.  http://www.mrmoneymustache.com/2011/10/22/what-is-hedonic-adaptation-and-how-can-it-turn-you-into-a-sukka/

If you want to become FI, then try and save most of your paycheck for a few years, say 60% or more.  Yes, I am serious!  Max out your 401k, do a Roth IRA, if your company has a HSA, max that out too.  So that is $23k.  Build up an emergency fund, even though you are covered now by your family, and then start a taxable account with Vanguard, say putting your monthly contributions into the total stock market index and total international index.  Go for it for a few years and then you can taper off later or not.  You are probably used to living on just enough from college so keep it going.  The advantages of speedloading your investment accounts are awesome.  Let compound interest do some real hard work for yourself.

Good luck!

Again, this community will say to max out your 401k, IRA, HSA, and run it through some very very age restricted loopholes for a possible withdraw without a 10% penalty before age 59.5, and then taxes at "retired" %.

Because it gives you more money to save. It actually mathematically means you save more money by using tax deferred investment vehicles. The 10% penalty is only if you choose to withdraw from the tax deferred vehicles directly.

It's a very complex IRA pipeline, with at least a 5 year wait period for only withdrawing your first initial contribution investments, and subsequent contributions (the ones by then that are earning you the most!) per year.

Not at all complex. Convert what you need to live on for a year five years early from an IRA to a Roth IRA, pay income tax on that amount. Repeat every year. When you hit year five withdraw tax free. Something isn't complex just because you don't like/don't understand it.

Any "Big Earnings" in the stocks markets, no matter how skilled you are, will have to wait until you are age 59.5 to use to retire "extremely early". This approach locks in a minimum of working for at least a decade if not longer, based on your cost of living, unless you can get it down to $17.5k. ($17.5k 401k investment would have to be rolled over into an IRA every year after "third party" fees of hundreds of dollars. Then 5 years later after the "grace period" which may change at anytime by them, you may withdraw that 17.5k contribution to use for FI. However you may not withdraw the earnings made from that 17.5k until age 59.5. And to keep this going you would have to work 10 years, to withdraw $17.5k/year for ten years. But you may not withdraw ANY EARNINGS until age 59.5.)

Wrong. It is based on amount converted not contributed when you use the pipeline. You are confusing two different terms contribution and conversion. It seems like you don't even research these things. It may do you good to do so. It does not lock in any age restriction and in fact allows you to pull the FIRE trigger earlier. You seem to be unable to understand math - http://www.madfientist.com/retire-even-earlier/.
As for fees there may or may not be fees for conversion. The great thing is that when you leave employment you can roll your 401k into an IRA where you get to look at if there are any fees. Then make a decision for yourself whether the company you're rolling your 401k over to is worth it.

Yeah, you save a lot on taxes initially, but you are "locking up" all your investment earnings for 30-40 years to the will of the fund managers and future Federal Government's Agenda to most likely be taxed over your lifetime, once the Government's spending starts defaulting America (because US Government has become very very Anti-mustacian).

No you're not. And whatever the future bogeyman government you want to picture can go after your capital gains and dividends just as much as it can change the tax rules regarding retirement. And also here's a scenario. As the Baby Boomers reach the ages where they're withdrawing from these accounts and have the most political clout in the country amongst age demographics; what is more likely -

a) Government changes rules regarding 401ks, which many Baby Boomers have, in order to get more money from them, thereby angering the strongest political age group.

or

b) Finding a different way to tax the working population.

Why do you think the Government wants your investment money too? It's like luring you in with a $1,000 bill to save on taxes that they control the tax rate of anyway, to then lock up your lifetime savings and any investment earnings until you are at their determined retirement age, and one day tax it as well once they have you waiting in their "grace period". The government survives off of income tax and consumer tax. They want you to work till your dead. If you do save and invest, they want to control that huge treasury of money, and be able to lock it up for your lifetime so they can tax it at will if they need too.

This has nothing whatsoever to do with the discussion and muddles any sort of dialogue.

I prefer Dividend Mantra's Mantra as one way to diversify and invest. (www.dividendmantra.com He uses Dividend Growth Investing After Tax. This keeps your after tax cash available to you at all times and under your control for life. It also allows the middle class earners to invest in their own startup-businesses AT ANY AGE, real estate properties, etc. that you couldn't do otherwise in IRA's/401ks, because your money and especially any earnings is locked up behind penalty bars until their determined age, and or withdraw and tax rules.

But wait why can't I do both? Why can't I max my 401k, my Roth IRA and then do a taxable account? Oh wait... you can.

/snip for brevity because you're going into one of your rants
401k to IRA savings, prevents businesses from being created, and keeps you working normal day to day grind jobs for years.

Citation needed. You would need to prove that there have been less entrepreneurship happening in the United States since the advent of 401ks and IRAs.

Warning, My Political Opinion Ahead:

/snip for the same reason as the last one

Freeyourchains2

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #8 on: July 31, 2013, 02:42:58 PM »

Again, this community will say to max out your 401k, IRA, HSA, and run it through some very very age restricted loopholes for a possible withdraw without a 10% penalty before age 59.5, and then taxes at "retired" %.

Because it gives you more money to save. It actually mathematically means you save more money by using tax deferred investment vehicles. The 10% penalty is only if you choose to withdraw from the tax deferred vehicles directly.

The government currently gives you no other incentive, except to use their tax deffered investment vehicles. What if I think these "investment vehicles" are ageist, controlling, lobbied toward Fund managers, and third party "conversion" businesses and don't wish to use them? Why aren't they giving tax break incentives toward creating businesses, trading stocks, trading houses, dividends, rent, etc?

It's a very complex IRA pipeline, with at least a 5 year wait period for only withdrawing your first initial contribution investments, and subsequent contributions (the ones by then that are earning you the most!) per year.
Not at all complex. Convert what you need to live on for a year five years early from an IRA to a Roth IRA, pay income tax on that amount. Repeat every year. When you hit year five withdraw tax free. Something isn't complex just because you don't like/don't understand it.

This is equivalent to signing up for a credit card, just to jump through their controlled obstacle maze of 29.99% interest rate "gotchas" for a "free" $200 bonus. No thanks.

Any "Big Earnings" in the stocks markets, no matter how skilled you are, will have to wait until you are age 59.5 to use to retire "extremely early". This approach locks in a minimum of working for at least a decade if not longer, based on your cost of living, unless you can get it down to $17.5k. ($17.5k 401k investment would have to be rolled over into an IRA every year after "third party" fees of hundreds of dollars. Then 5 years later after the "grace period" which may change at anytime by them, you may withdraw that 17.5k contribution to use for FI. However you may not withdraw the earnings made from that 17.5k until age 59.5. And to keep this going you would have to work 10 years, to withdraw $17.5k/year for ten years. But you may not withdraw ANY EARNINGS until age 59.5.)
Wrong. It is based on amount converted not contributed when you use the pipeline. You are confusing two different terms contribution and conversion. It seems like you don't even research these things. It may do you good to do so. It does not lock in any age restriction and in fact allows you to pull the FIRE trigger earlier. You seem to be unable to understand math - http://www.madfientist.com/retire-even-earlier/.
As for fees there may or may not be fees for conversion. The great thing is that when you leave employment you can roll your 401k into an IRA where you get to look at if there are any fees. Then make a decision for yourself whether the company you're rolling your 401k over to is worth it.

Not wrong. I understand the math and terms perfectly. 401k to IRA conversion have fees of various kinds. (Ever so increasing as baby boomers retire too. It's a gold mine to third parties and Banks. Don't you see all the advertising going on to "Roll-over" now!)

$17.5k is a contribution to your 401k on year one. The next year your convert that $17.5k over to an IRA, get feed for doing so. After 5 years, you may then withdraw this initial IRA contribution amount, and be taxed.

If you wish to retire in 6 years minimum on $17.5k/year. You must follow their orders and the "grace period". Since you can not withdraw any earnings made from any converted to IRA contributions...until you are age 59.5. You can't "retire" on any earnings made inside of your IRA for withdrawal, without incurring a 10% penalty fee.

Some investment vehicle, huh? You can only withdraw converted principal from your IRA. Never any earnings within your IRA. So all that compounding of earnings making more earnings is all locked up until your age 59.5. When they tell you, you may retire without a 10% penalty.

In a taxable account, yes you don't "save" as much money because of their controlled taxes, and yes you don't "save" as much money because of their controlled double taxes on your investment vehicles, which henders your compounding earnings....but at least you have the ability to expand into any investment vehicle you desire without restrictions. Create a Billion dollar Business, own ten real estate properties, play monopoly and buy/sell/trade other businesses, etc without "others" locking up your earnings upon earnings on these ventures until you are age 59.5.

Basically it's incentive for the middle class not to create. Only to keep lending out their money to other's so they may lock it up and control it as they see fit.

b) Finding a different way to tax the working population.

The government wants us all to be their working, taxed, consuming financial slaves. MMM goes against this to the core of his beliefs. But the government will make sure we all keep working until we die and then they get to tax us some more.

You would need to prove that there have been less entrepreneurship happening in the United States since the advent of 401ks and IRAs.


As for those $50,000 a year income earners whom want to start a business without having to borrow $100k to start it. They can do it now after some after tax savings, instead of 20-40 years down the road.

In fact they can become successful, and make a higher living with after tax money, without ever having to contribute a max to their 401ks/IRAs that would have hampered their potential at starting a business until they made closer to $100k/year (if ever).

Boss/CEO/Gov given 3% raises a year on a $50k salary, only equates to $90k/yr after 21 years.

Entrepreneurial complete ownership, you determine your SALARY and raises every year.

Not maxing your 401k/IRA, maximizes your potential of Entrepreneurial  ownership from starting your own businesses with your own after tax savings. As you can't start a business with 401k/IRA locked up money.



matchewed

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #9 on: July 31, 2013, 04:18:46 PM »

Again, this community will say to max out your 401k, IRA, HSA, and run it through some very very age restricted loopholes for a possible withdraw without a 10% penalty before age 59.5, and then taxes at "retired" %.

Because it gives you more money to save. It actually mathematically means you save more money by using tax deferred investment vehicles. The 10% penalty is only if you choose to withdraw from the tax deferred vehicles directly.

The government currently gives you no other incentive, except to use their tax deffered investment vehicles. What if I think these "investment vehicles" are ageist, controlling, lobbied toward Fund managers, and third party "conversion" businesses and don't wish to use them? Why aren't they giving tax break incentives toward creating businesses, trading stocks, trading houses, dividends, rent, etc?

If you think these retirement investment vehicles (no need for air quotes it is what they are called) are ageist it is because they're designed for people to use to retire which is traditionally an older age. That's not ageist it is designed, after all they don't call 401ks and IRAs savings accounts, they're retirement investment vehicles.

It's a very complex IRA pipeline, with at least a 5 year wait period for only withdrawing your first initial contribution investments, and subsequent contributions (the ones by then that are earning you the most!) per year.
Not at all complex. Convert what you need to live on for a year five years early from an IRA to a Roth IRA, pay income tax on that amount. Repeat every year. When you hit year five withdraw tax free. Something isn't complex just because you don't like/don't understand it.

This is equivalent to signing up for a credit card, just to jump through their controlled obstacle maze of 29.99% interest rate "gotchas" for a "free" $200 bonus. No thanks.

http://en.wikipedia.org/wiki/False_equivalence AKA apples and oranges. Just because you don't like something doesn't mean it is bad.

Any "Big Earnings" in the stocks markets, no matter how skilled you are, will have to wait until you are age 59.5 to use to retire "extremely early". This approach locks in a minimum of working for at least a decade if not longer, based on your cost of living, unless you can get it down to $17.5k. ($17.5k 401k investment would have to be rolled over into an IRA every year after "third party" fees of hundreds of dollars. Then 5 years later after the "grace period" which may change at anytime by them, you may withdraw that 17.5k contribution to use for FI. However you may not withdraw the earnings made from that 17.5k until age 59.5. And to keep this going you would have to work 10 years, to withdraw $17.5k/year for ten years. But you may not withdraw ANY EARNINGS until age 59.5.)
Wrong. It is based on amount converted not contributed when you use the pipeline. You are confusing two different terms contribution and conversion. It seems like you don't even research these things. It may do you good to do so. It does not lock in any age restriction and in fact allows you to pull the FIRE trigger earlier. You seem to be unable to understand math - http://www.madfientist.com/retire-even-earlier/.
As for fees there may or may not be fees for conversion. The great thing is that when you leave employment you can roll your 401k into an IRA where you get to look at if there are any fees. Then make a decision for yourself whether the company you're rolling your 401k over to is worth it.

Not wrong. I understand the math and terms perfectly. 401k to IRA conversion have fees of various kinds. (Ever so increasing as baby boomers retire too. It's a gold mine to third parties and Banks. Don't you see all the advertising going on to "Roll-over" now!)

$17.5k is a contribution to your 401k on year one. The next year your convert that $17.5k over to an IRA, get feed for doing so. After 5 years, you may then withdraw this initial IRA contribution amount, and be taxed.

If you wish to retire in 6 years minimum on $17.5k/year. You must follow their orders and the "grace period". Since you can not withdraw any earnings made from any converted to IRA contributions...until you are age 59.5. You can't "retire" on any earnings made inside of your IRA for withdrawal, without incurring a 10% penalty fee.

Some investment vehicle, huh? You can only withdraw converted principal from your IRA. Never any earnings within your IRA. So all that compounding of earnings making more earnings is all locked up until your age 59.5. When they tell you, you may retire without a 10% penalty.

In a taxable account, yes you don't "save" as much money because of their controlled taxes, and yes you don't "save" as much money because of their controlled double taxes on your investment vehicles, which henders your compounding earnings....but at least you have the ability to expand into any investment vehicle you desire without restrictions. Create a Billion dollar Business, own ten real estate properties, play monopoly and buy/sell/trade other businesses, etc without "others" locking up your earnings upon earnings on these ventures until you are age 59.5.

Basically it's incentive for the middle class not to create. Only to keep lending out their money to other's so they may lock it up and control it as they see fit.

Yes it's still wrong - http://www.irs.gov/publications/p590/ch01.html
Quote
Converting From Any Traditional IRA Into a Roth IRA
Allowable conversions.   You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.

Do you see that sentence that says you can withdraw all or part of the assets from a traditional IRA into a Roth IRA. Here's a realistic scenario. I leave my job. I have 250k in a 401k. I roll that over to an IRA, then convert 20k or whatever I need to live on for a year into a Roth IRA, I pay taxes on that conversion. Then after five years I get to take that money out. There is no 17.5k limit to an IRA to Roth IRA conversion.

Quote
Since you can not withdraw any earnings made from any converted to IRA contributions...until you are age 59.5. You can't "retire" on any earnings made inside of your IRA for withdrawal, without incurring a 10% penalty fee.

This sentence tells me you don't understand this process and your arguments are the equivalent of sticking your fingers in your ears and lalalallalaing. You can retire on those earnings as those earnings can be converted to the Roth without the 10% penalty.

b) Finding a different way to tax the working population.

The government wants us all to be their working, taxed, consuming financial slaves. MMM goes against this to the core of his beliefs. But the government will make sure we all keep working until we die and then they get to tax us some more.

To your first sentence - You may not like particular taxes or the amount of the taxes but regardless of your personal feelings towards taxes they are a guaranteed reality. To your second sentence - I'm glad that you can appeal to authority and put words into someones mouth at the same time. It shows a skill set that is sorely lacking... oh wait no it isn't just listen to a political pundit for five minutes. And to your third - The government can't be setting up ageist policies and retirement investment vehicles to aid people in retiring and work them to death at the same time those are two opposing ideas. It is American's own culture which is chaining them to the lifetime of working. In fact I'd argue given my previous section on publication 590 and the clear as mud method to get access to your retirement money the government has given us the tools to perform early retirement while our culture has given us the chains (c wut i did thar?).

You would need to prove that there have been less entrepreneurship happening in the United States since the advent of 401ks and IRAs.

As for those $50,000 a year income earners whom want to start a business without having to borrow $100k to start it. They can do it now after some after tax savings, instead of 20-40 years down the road.

In fact they can become successful, and make a higher living with after tax money, without ever having to contribute a max to their 401ks/IRAs that would have hampered their potential at starting a business until they made closer to $100k/year (if ever).

Boss/CEO/Gov given 3% raises a year on a $50k salary, only equates to $90k/yr after 21 years.

Entrepreneurial complete ownership, you determine your SALARY and raises every year.

Not maxing your 401k/IRA, maximizes your potential of Entrepreneurial  ownership from starting your own businesses with your own after tax savings. As you can't start a business with 401k/IRA locked up money.
To the bolded part - bullshit

It's cool if you want to say "Hey guys here's another option. After tax investments. Look at this dividend strategy. Or entrepreneurship." But spreading bad information because you either don't understand it or just don't care to understand it is silly. Stop spreading lies. I don't care if you're deliberately lying or not but they are lies because they are not true.

You seem to latch onto the concept that because something is less complicated it is better therefore after tax investments are better because there are less rules governing them. That isn't always the case and it hasn't always been this easy. And it may not be the case in the future.

ender

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #10 on: July 31, 2013, 04:57:12 PM »
So uh, you guys might be having a conversatino which is not at all relevant to the OP...

matchewed

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #11 on: July 31, 2013, 05:12:22 PM »
So uh, you guys might be having a conversatino which is not at all relevant to the OP...

The OP is asking how much to put into his 401k. Freeyourchains2 believes the answer to be 0 or enough to match for his sited reasons. Some legitimate some not. I'm saying to max your 401k for my sited reasons some legitimate... well I'm interested to see where I don't have a legitimate point.

So as for relevance; I'd say it's quite relevant as it deals with 401k and amount to invest.

Freeyourchains2

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #12 on: August 01, 2013, 12:56:35 PM »

Do you see that sentence that says you can withdraw all or part of the assets from a traditional IRA into a Roth IRA. Here's a realistic scenario. I leave my job. I have 250k in a 401k. I roll that over to an IRA, then convert 20k or whatever I need to live on for a year into a Roth IRA, I pay taxes on that conversion. Then after five years I get to take that money out. There is no 17.5k limit to an IRA to Roth IRA conversion.

Ok, when you convert from traditional IRA to Roth IRA, you pay ordinary income taxes. At which point, you are equivalent to investing in a taxable account with your after tax dollars.

And if you chose the Roth IRA, your earnings are still locked up until age 59.5.

If you chose a business, real estate rental, or dividend growth investment stocks with side potential of Capital Gains, you can live on your earnings/returns.

"As you can't start a business with 401k/IRA locked up money."
To the bolded part - bullshit

Hmmm, no where does it say you may use IRA funds to invest in a business. Not even under all those exceptions to the 10% penalty fee.
http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230854

So as you have shown us. You can't start a business with 401k/Traditional IRA/Roth IRA money. Not until after you take your fully taxed distributions.

matchewed

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #13 on: August 01, 2013, 01:23:33 PM »

Do you see that sentence that says you can withdraw all or part of the assets from a traditional IRA into a Roth IRA. Here's a realistic scenario. I leave my job. I have 250k in a 401k. I roll that over to an IRA, then convert 20k or whatever I need to live on for a year into a Roth IRA, I pay taxes on that conversion. Then after five years I get to take that money out. There is no 17.5k limit to an IRA to Roth IRA conversion.

Ok, when you convert from traditional IRA to Roth IRA, you pay ordinary income taxes. At which point, you are equivalent to investing in a taxable account with your after tax dollars.

And if you chose the Roth IRA, your earnings are still locked up until age 59.5.

If you chose a business, real estate rental, or dividend growth investment stocks with side potential of Capital Gains, you can live on your earnings/returns.

No it's not equivalent to investing in a taxable account with after tax dollars. Because I deferred my taxes on that money until the time where I can perform that conversion at little to no taxes. With investing after tax dollars and ignoring a 401k or IRA you are being taxed the maximum that you can. I actually avoid more taxes with the pipeline.

Yes your earnings are locked up until 59.5 but that does not apply to contributions or the conversion.


"As you can't start a business with 401k/IRA locked up money."
To the bolded part - bullshit

Hmmm, no where does it say you may use IRA funds to invest in a business. Not even under all those exceptions to the 10% penalty fee.
http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230854

So as you have shown us. You can't start a business with 401k/Traditional IRA/Roth IRA money. Not until after you take your fully taxed distributions.

Did you even go to the link?

*Edit* I mean my link.

hybrid

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #14 on: August 01, 2013, 02:13:35 PM »
To the OP, curious what your home arrangements are like.  Are your parents encouraging you to stay at home for a while and build a nest egg?  Are you contributing to utilities and the like?

I think, as a parent of a college grad, there are many very good reasons why someone would still be at home after college.  Perhaps you simply have a very strong family and enjoy each other's company.  But I would suggest insisting on pitching in financially all the same if you are not already.  Living at home is cool.  Living at home and letting your parents carry your load post-graduation is not cool, even if they are perfectly comfortable doing it.  At the very least pick up your share of the utilities.

Oh, and welcome to the boards.  Your first thread didn't get off to such a great start, but there is a lot to think about all the same.  I'm also in the max out your 401K - get a Roth camp.  Especially since those Roth earnings grow without future taxes coming from them.  And you can get at those funds if needed for a few exceptional circumstances without incurring a penalty.

AJ

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #15 on: August 01, 2013, 02:58:55 PM »
So when I go to work, I assume I'm going to sit down with somebody in accounting and tell them how I want to invest (or do it myself on Vanguard.com, I don't know honestly).

My 401k is through Vanguard and I make my investment changes online. You can probably do the same.

How much should I invest? 15%, 30%, 50%? Should I invest all into the index fund, or should I think about splitting my investments into multiple accounts, so if needed, I can have access to the money before I retire (ex. down payment on a house, etc.). If so, what other investments should I make (ex. ING account). Any wisdom or experience would be greatly appreciated. I am willing to invest a lot of my income now while I don't have many expenses. Trying to be smart and start early.

Earlier conversation digression notwithstanding, the answer to this is going to be completely dependent on your goals. There is a good chance you don't know precisely what those are just yet, and that is ok. It is very typical to not have your life planned out yet at age 22. Here is my suggestion if your goals are...uh...fluid at the moment:

1. For the first year (before your employer will match contributions) max out your ROTH, then contribute as much as you can to 401k. "As much as you can" might actually be the max ($17.5k) since you live at home and have a good income. I suggest this not so much because you need the tax deduction (though it is nice) but more because it is forced savings during a time in your life when things will be changing a lot. You can pull out ROTH contributions for a home purchase, and you can borrow against the 401k. Not that those are ideal, but there is some flexibility.

2. When your employer starts matching, take the match first, then ROTH, then back to as much as you can in 401k.

3. When you start to feel settled into adult life, and you have good reason to believe you will be in the same location for a long time, and if you feel like you want to own a home, then reduce your savings down to 12% (to get the match) and maxing your ROTH. Put the rest in a boring savings account for your down payment. With your income, you should be able to make quick work of saving the down payment. Don't fall in love with any houses before the ink is dry. Houses are like spouses: you want a sober, clear-headed view of them before you commit, and rose-colored glasses after. Houses (and spouses too) are a lot of work. More work than they sound. Don't feel pressure to sign up for that too early. Renting is not "throwing money away" and can be very strategic.

Statistically, people save more when it is automatic rather than manual, earn more when they invest in index funds rather than active funds (or active trading), and spend more when using credit cards rather than cash. If you think you can beat the odds you're not alone - most people think they are smarter and more disciplined than average too :) It would be wise to default to the statistically validated choice, and deviate from it only if you have VERY good reason to believe you are an exception to the rule.


Freeyourchains2

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #16 on: August 02, 2013, 11:10:00 AM »
I know people happily living off of their earnings from any investment they desire with after tax money. They gained FI at a very young age, and once they retired extremely young they then contributed excess money into a 401k/IRA account to further cushion for when they are much much older, and to keep their taxes at zero (or negative) from age 35 on.

Yes you can live off of contributions or (greater third party and expense ratio fee'd) conversions, with matchwed's strategy after you pay lowered taxes.

But what happens when those contributions you withdrew, were you initial long term investments? If you invested at Coca Cola inside your IRA at a stock price of $15, then 5 year later you withdraw those conversions or contributions to live off of, you must then sell your initial investment of Coca Cola at $40 and give up your potential (by then) of 7% dividend earnings annually forever more.

This initial investment gets taxed, and then you spend it on necessities. Your earnings,  of capital gains and dividends inside of your IRA, are never realized and are then locked up until age 59.5, except for a 10% Fee if you want it.

When if you took the taxes initially (at age 22-30). you deal with higher after taxes, then you deal with earnings taxes; HOWEVER, YOU GET TO RETIRE OFF OF YOUR EARNINGS AT A MUCH YOUNGER AGE, if you are successful at compounding earnings from any form of your investments.

Especially if your EARNINGS ARE 120% annual RETURNS, or higher from any form of investments, including start-up businesses!

(10% a month earnings are being made here: http://www.mrmoneymustache.com/forum/investor-alley/investor-alley-stock-trading-game/)

It's kind of like if you win the lottery. Do you take the Cash now after paying more taxes?...Or do you take an annual amount for life and get taxed less?

With "IRA annuity pipeline" option, you then must also wait around for your contributions, and if you make it to age 59.5, then any earnings. Pray you don't get killed somehow by any number of things, and if you do get killed, they get to tax the rest of what you made in earnings at the highest TAX rate (if you didn't reach FI). In the case of the lottery system, it then goes back into the lottery system.

If you take the cash now, you actively can fight against inflation in the younger FI date sense AND you can actively invest in ANYTHING you desire, especially with re-invested earnings. Giving you more POTENTIAL TO RETIRE/FI FASTER!

Even MMM's latest articles are trying to get people to start-up their own businesses to make more income!

They can't do that if they put all their eggs into maxing out 401k's/IRA/HSA. Yeah it has the greater tax savings now, but hampers your potential to make more money now while your young and still living.

GreenGuava

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #17 on: August 02, 2013, 11:27:37 AM »
Didn't a moderator ask Freeyourchains2 to stop trolling the investment forums a while back?

OP:  Please ignore the trolling from Freeyourchains2.  We have the same argument with him every time this comes up.  We only respond to keep a serious investor from thinking that this person's "advice" has any merit.

A 401(k), especially through Vanguard as you have available to you, is a fantastic opportunity.  Pick an asset allocation that is reasonable for your goals and time horizon and stick with it.  There are plenty of ways to access that money pre-59.5 if your additional, taxable investments aren't able to cover you (although they likely will).

Don't waste your time with hiring an investment advisor or an accountant for your investing (if your tax situation is complicated, consider the CPA for that).  It's very easy to do with Vanguard.com.  My suggestion for how much is "as much as you can."  Take full advantage of your tax-preferred accounts.  Decide if your taxable investments are going to be treated as part of the same portfolio or not;  if they are, learn about tax-efficient fund placement. 

If you need help allocating the money to accounts, let us know.  Tell us how much is in various IRAs, how much you have available for taxable, how much you own in taxable, and your 401(k) choices (once that becomes available to you).  We'll help you set up the right portfolio for you.

The fact of the matter is that, as a civil engineer starting early with the financial advantages you have, you'll probably hit FI before you even realize it.  As in, if you focus on saving and maintaining a reasonable asset allocation, one day you'll just realize you don't need your paycheck anymore.  Live a life that is what you want in the meantime and after - you'll be fine.

Freeyourchains2

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #18 on: August 02, 2013, 11:43:08 AM »
Didn't a moderator ask Freeyourchains2 to stop trolling the investment forums a while back?

OP:  Please ignore the trolling from Freeyourchains2.  We have the same argument with him every time this comes up.  We only respond to keep a serious investor from thinking that this person's "advice" has any merit.


Then You are a troll as well. You only say and think one way of investing is possible. And anyone whom thinks differentl,y you treat them as a "troll" and try to shut them out of the community. If this was the case, the entire audience that MMM is reaching would come into the forums, and you would label them all as "trolls". Even though a lot have probably retired well before you using some other means.

Shouldn't the moderator consider people like that harmful for development of outside the box investing?

2527

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Re: 22 years old - New Job - $52,000/year - Want to Invest - Need Advice
« Reply #19 on: August 02, 2013, 12:14:00 PM »
Congrats on a great job and finding this website.

Use Vanguard as much as possible.  Max out your 401K (Roth if possible), max out a Roth IRA, invest in taxable accounts.  Stay close to 100% in stocks, but maybe build up cash now and buy on the next dip/crash, like Warren Buffett does.  Work hard at your job, take all the over time offered, learn your job and become good at.  Keep your living expenses low.  Read about investing.  Be good to your parents.  In a few years, you will be worth a quarter million dollars.  I did these things and crossed the $1M mark at age 43.  Remarkable to the general population but nothing special to people on this website.