Author Topic: 401k newbie questions  (Read 7146 times)

griffin

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401k newbie questions
« on: January 29, 2014, 10:24:25 AM »
Hi everybody!
Recently discovered MMM and the site is very exciting! Nonetheless, I still feel a bit lost when it comes to investing.
Some quick background: I'm 22 years old, earning (as of December) somewhere between 50-57k a year, before taxes. I also have about 20k in cash. My living expenses are fairly low, probably around 9-10k a year (I have started tracking them, but won't have a realistic number till 2015).
Since I make significantly more money than I can spend, it seems like I should max out my 401k, but I'm not sure where to allocate these funds. My fidelity account offers me 32 options.
The first 12 are Target Date Funds, ranging from 2005 (for those hoping to retire nine years ago?) through 2055. They carry an Exp Ratio of 1.07%. This number seems high, from what I've read (which, admittedly, is not much). My other options are as follows, which the number in parenthesis being the exp ratio:

Stock Investments   Company Stock   INTEL STOCK FUND (.02)
Stock Investments   Large Cap Growth   FID GROWTH COMPANY (.9)      
Stock Investments   Large Cap Blend   LARGE CAP US STOCK (.27)      
Stock Investments   Large Cap Blend   VANG INST INDEX PLUS (.02)
Stock Investments   Large Cap Value   DODGE & COX STOCK (.52)      
Stock Investments   Mid-Cap Blend           FID LOW PRICED STK (.8)
Stock Investments   Small Cap Blend   SMALL CAP US STOCK (.52)
Stock Investments   Small Cap Blend   BTC RUSSELL 2500 (.03)
Stock Investments   Foreign   INTERNATIONAL STOCK (.55)
Stock Investments   Foreign   AF EUROPAC GROWTH R5    (.55)
Stock Investments   Foreign   BTC ACWI EX US IMI (.1)      
Stock Investments   Diversfd Emerging Mkts   LAZARD EMERG MKTS EQ   (.83)   
Stock Investments   Diversfd Emerging Mkts   BTC EMERGING MKTS (.1)
Bond Investments   Intermediate-Term   GLOBAL BOND FUND    (.59)
Bond Investments   Intermediate-Term   PIM TOTAL RT INST (.46)   
Bond Investments   Intermediate-Term   BTC US DEBT (.025)   
Bond Investments   Stable Value   STABLE VALUE FUND (.32)
Short Term Investments   Short Government   INV GOVT & AGCY PRT (.14)

My research has led me to the conclusion that index funds are the way to go, and ideally through vanguard and ideally covering close to 100% of all companies (at least in the US). I was thinking about something like

Stock Investments   Large Cap Blend   VANG INST INDEX PLUS (.02) - 30%
Stock Investments   Mid-Cap Blend           FID LOW PRICED STK (.8) - 30%
Stock Investments   Small Cap Blend   BTC RUSSELL 2500 (.03) - 30%
Bond Investments   Intermediate-Term   BTC US DEBT (.025)    - 10%

as my 401k allocations. Does this seem reasonable? Or am I way off track?
My other question (sorry this is getting long) is what I should do with the rest of my money. Even after maxing the 401k, I expect to make about 20k more than I can spend this year; should I max out a Roth IRA and invest the rest through vanguard a la Mr. Collins? (http://jlcollinsnh.com/2011/06/14/what-we-own-and-why-we-own-it/).

Thank you very much for taking the time to read this - I really appreciate it. This whole thing is very exciting!
Cheers,
Griffin

Beerswiller

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Re: 401k newbie questions
« Reply #1 on: January 29, 2014, 01:01:46 PM »
Looks like you're on track, but I would skip the FID LOW PRICED STK fund.  The expense ratio is too high.  And... this fund strikes me as mostly a gimmick - investing in companies with share prices of $35 or less.  Share price alone is a poor indicator of investment quality.

I would opt for some international exposure instead.

griffin

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Re: 401k newbie questions
« Reply #2 on: January 29, 2014, 08:24:15 PM »
Yeah, I agree that the Fidelity fund seemed a weaker choice than the others. Would something like this look better?

Stock Investments   Large Cap Blend   VANG INST INDEX PLUS (.02) - 30%
Stock Investments   Foreign   BTC ACWI EX US IMI (.1)   
Stock Investments   Small Cap Blend   BTC RUSSELL 2500 (.03) - 30%
Bond Investments   Intermediate-Term   BTC US DEBT (.025)    - 10%

Basically the same as above, only replacing the mid cap allocations with a foreign index fund?
Thanks for the advice!
Griffin

Will

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Re: 401k newbie questions
« Reply #3 on: January 29, 2014, 08:52:23 PM »
If I was 22, I would hold off on bonds for now and just go 1/3 each of the others.

Since your question about what to do with the rest hasn't been addressed yet, I would recommend reading http://www.madfientist.com/traditional-ira-vs-roth-ira/ where he addresses whether Roth is better for you than Traditional.  He makes some very good points.  I would definitely say max out the IRA.  And yes, I would then do Vanguard via the Collins plan.




griffin

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Re: 401k newbie questions
« Reply #4 on: January 31, 2014, 12:22:41 PM »
Thanks for the links! That site has a lot of great information on it.

Another thing I was wondering about what the speed at which I should max out my 401(k). I have two options, as I see it.
I can either 1.) Deduct 17500/26 from each of my paychecks, giving me a maxed out fund at the end of the year, or contribute the maximum allowed by my employer (50% of my paycheck, or ~$1000) and have a maxed out fund about 34 weeks into the year. Since I don't spend any of the money I make from paychecks anyway, it seems like the second option is superior. Am I correct in this logic?
Thanks,
Griffin

Will

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Re: 401k newbie questions
« Reply #5 on: January 31, 2014, 09:41:36 PM »
Thanks for the links! That site has a lot of great information on it.

Another thing I was wondering about what the speed at which I should max out my 401(k). I have two options, as I see it.
I can either 1.) Deduct 17500/26 from each of my paychecks, giving me a maxed out fund at the end of the year, or contribute the maximum allowed by my employer (50% of my paycheck, or ~$1000) and have a maxed out fund about 34 weeks into the year. Since I don't spend any of the money I make from paychecks anyway, it seems like the second option is superior. Am I correct in this logic?
Thanks,
Griffin

Do you get any kind of employer match?  I've heard about someone who missed out on some employer matching money by maxing out too soon. I don't remember the details though.

Ok, here are the details:  http://news.morningstar.com/articlenet/article.aspx?id=631927
« Last Edit: January 31, 2014, 09:57:53 PM by Will »

Workinghard

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Re: 401k newbie questions
« Reply #6 on: February 01, 2014, 04:22:06 AM »
We try to max out by Oct-Nov, so we have more in our paychecks around the holidays and when some larger bills are due.

BTW, you're off to a great start!

soccerluvof4

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Re: 401k newbie questions
« Reply #7 on: February 01, 2014, 04:30:15 AM »
1) Like Will said , Do you get an employer match ? if so make your decision by maximizing that

2) In any portfolio I would have some bond exposure. Your young and can take more risk but I would do maybe 15% as well as I would also have exposure to Reits again maybe 15% .


MissPeach

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Re: 401k newbie questions
« Reply #8 on: February 03, 2014, 07:20:11 AM »
This is different than a lot of the advice you get on is board but I noticed you had access to company stock as well and it looks to be Intel. I personally am invested in it and think it pays a good dividend and I feel it's undervalued at the moment.

My question is whether you get any stock discounts? If so is there a penalty to cash out immediately? My previous company gave us a 15% stock discount and it was off lowest valuation in 6 months. It was also a stable stock. This is a little riskier approach because you are putting a lot of eggs in one bracket but if you company meets the above you'll get a min. that percentage return on your money. So in the case above I got 15% plus market gains. INTC also pays a 4% div if I remember correctly.

My current company charges us market rate so I don't do this with my current job.

It doesn't look like it's an option in the 401k (they are actually charging you there) but usually there is an optional employee stock deduction separately.

Just though I would mention it as another idea if it's available as an employee benefit. I still agree it's good to pay your 401k and get the match money. Since you are in a lower tax bracket, employer stock can sometimes be a better place for the difference if there is a good discount on it.
« Last Edit: February 03, 2014, 07:24:23 AM by MissPeach »

c12mintz

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Re: 401k newbie questions
« Reply #9 on: February 03, 2014, 11:03:32 AM »
As mentioned above, the best thing to do is find low expense (.3 or less) funds that will give you exposure to international, growth (Russel), and core market (S&P 500 equivalent).

The spreads you pick are up to you. I do 65 core, 20 int, 15 growth. Some people go as aggressive as 40 core 30 int 30 growth.

If you either aren't withdrawing immediately to live on the funds or within the next 4-5 years (under 60 typically), then bond funds are nothing but a drag on your returns. The advantage to bond funds is they typically appreciate when the market is in a panic due to the i/r effect and safety effect (interest down/value up due to easing coupled with increased demand for safety). This is very helpful if you are taking 4-8% down each year, but does little to nothing for you over a 10+ year timespan unless you are magically picking 1998 to 2008...


AccidentalMiser

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Re: 401k newbie questions
« Reply #10 on: February 03, 2014, 12:58:07 PM »
First, Iíd like to congratulate you on finding MMM and your plans to implement what you find here.  I have a son in nearly the same position that you are in.  Hereís the advice I gave him, slightly adapted for your situation:

As far as mix goes, Iíd go with 40% SP, 30% Russell, 10% INTC (as peach said, good stock, favorable purchase conditions, decent dividend), 20% Foreign stocks.  Be aware that the next few quarters may be rough sledding but it builds character.

Personally, I just take 17500/26 and stick that in.  The main reason is that if I dump all the money in the account by July, I lose my employer match for the remainder of the year (ask me how I know.)  The company I used to work for would put in their match regardless of when you put your money in.  I found out thatís the exception.  Most of them will stop matching if you stop contributing.

To that end, I have considered maintaining a base contribution of 6% throughout the year and front-loading the rest of my contributions, but itís a hassle and I like things simple.  Also, stocks seem to frequently sag during the latter part of the year and I like to have some contribution room during the last quarter of the year.

With your income while youíre single, pre-tax is probably the way to go (there is much written in these forums about this), if you get married, then you should re-evaluate.  This could also be impacted by when you plan to retire.  There are multiple threads on this topic as well.

Finally, think about an HSA.  My son is on my policy and we decided to leave him there for the time being.  If you have your own policy through your work, the HSA gives you some additional tax savings and should be considered.  (Thereís a great article at http://www.madfientist.com/ultimate-retirement-account/ about the virtues of the HSA.)

The most important thing in all of this is to start as soon as you can and make adjustments once you get going.  Please donít wait six months or a year trying to figure everything out before you start saving.  When youíre 22, time is on your side and  you can afford just about anything except for procrastination!

griffin

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Re: 401k newbie questions
« Reply #11 on: February 04, 2014, 04:58:49 PM »
First off, thank you everyone for your input - it is extremely helpful and it means a lot to me!
First note, it terms of my employer's stock (INTC), I am enrolled in a program similar to the one described by MissPeach (a 15% stock discount off the lowest valuation in 6 months), however it is capped at a limit of 5% of my paycheck. On that note, there is a "quick-sell" option, that liquidates all stock acumulated over the 6 months immediately after the 6 month period is over. If everyone were to use this option, wouldn't the stock price drop for a bit while everyone is selling? Would it make sense to wait to sell for a couple weeks or something (I'm probably incorrect here - it seems like market timing is a no-no).
 It doesn't appear that I get a discount on this stock in my 401k, so I'm not it is a sound idea to include that in my 401k allocations. In light of that, I figure I'll probably stick with 40% SP, 30% Russel and 30% Foreign? I think I can tough out the market ride :)

Thank you for pointing out the employer match - I didn't even think about that! I believe I'll be eligible for it sometime in november, so I'll be careful not to max out before then. I've been meaning to set up my HSA, thank you for reminding me (probably through Vanguard, rather than my insurer?).

I believe I'll be staying in the 15% tax bracket this year, but even then it seems like a traditional IRA may be more appropriate, espeically considering the "rolling to roth" option. Searching the forums was helpful there! 

Again, thank you all very much. I deeply appreciate your help.
Griffin

wtjbatman

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Re: 401k newbie questions
« Reply #12 on: February 04, 2014, 06:38:37 PM »
First note, it terms of my employer's stock (INTC), I am enrolled in a program similar to the one described by MissPeach (a 15% stock discount off the lowest valuation in 6 months), however it is capped at a limit of 5% of my paycheck. On that note, there is a "quick-sell" option, that liquidates all stock acumulated over the 6 months immediately after the 6 month period is over. If everyone were to use this option, wouldn't the stock price drop for a bit while everyone is selling? Would it make sense to wait to sell for a couple weeks or something (I'm probably incorrect here - it seems like market timing is a no-no).

Just want to point out, this quick-sell option won't have any appreciable effect on the share price. Today alone, there were over 50 million shares of Intel traded. How many shares do you think every employee using this quick-sell option would sell in one day?

MissPeach

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Re: 401k newbie questions
« Reply #13 on: February 04, 2014, 10:37:00 PM »
Griffin - It's up to you whether you want to realize your gains right away or hold the company stock. I purchased the stock to hold for a few years.

The reason is that it's mostly being invested and seen as a computer company but it has some new chip designs a few years ahead of the competitors like Taiwan Semiconductor. I believe the company will eventually get a lot of orders on it and no one will be able to catch up technology wise as long as Intel keeps innovating. Since it's not seen as a mobile company with an impressive new technology I feel it's undervalued. Intel has spent a lot of money lately on innovating new products. While many of the market analysts are talking about how the hardware business is dying - which Intel is still in the lead and won't go anywhere with big data, cloud,etc. emerging. In the meantime it pays a nice dividend to wait.

I know that was all over the place but hopefully gives you some idea on why I bought some.
« Last Edit: February 04, 2014, 10:40:00 PM by MissPeach »