401k re-balance HELP!

[netskyblue]

I'm ashamed to say I know very little about investments.  I have been in my company's 401k for the 9 years I've been with them, and invested whatever % in whatever funds "the guy from the benefits company" told me to do.

I'm 31 years old, and hope to retire somewhere between 2035-2040.  Right now, my money is in 13 different funds (the first 13 on the list) in varying amounts, from 11% to under 1% of my portfolio, per fund.

In a couple weeks, "the guy" is coming to my work to meet with employees to discuss their portfolios.  I expect I should probably change what I'm investing in, but I have no CLUE to what.  And I'm a little afraid to simply take his word for it.

Could some of you look over the list of funds in the attached jpg and let me know which seem like the best choices for me, and explain to me why?

These are the only fund choices we have available to us.  Let me know if there is pertinent information lacking, I'm not sure what all to be looking at.

[Mississippi Mudstache]

How about index vs. growth vs. value? The names of the funds would be helpful, too. Those are some lousy options, but the brain trust here can do their best help you make chicken salad out of your chicken shit plan.

[BarkyardBQ]

What are the fund symbols? Does your company offer a match?

[netskyblue]

Oh good grief my picture cut off the fund names & symbols.  I wondered what you were talking about!  I will repost it.


Yes, the company offers a match, if we put 4% they put 2%.

[Mississippi Mudstache]

Your best bet is to contribute the first 4% to your 401k to get the match, then fill up an IRA if you're below the income limit (max out two, if you have a spouse), then an HSA (if you have access to one), then finally putting the rest that you're able to save in the 401k. Can you give us more details on (1) your income, (2) single/married, and (3) how much you're able to save each year? Their are quite a few variables involved in putting your investments to maximize their efficiency. If you don't want to divulge more details, no worries.

[BarkyardBQ]

Do you hold any other investments outside this 401k? IE an IRA or Taxable account that can allow us to determine if you should put specific funds in your 401k and keep other funds allocated in different accounts.

[netskyblue]

Fixed picture again to show Morningstar categories.

I do not have any other investments.  In a few years (4-6), once I have my downpayment saved up, I will  be opening a ROTH IRA and put 5k/year in.

I am married (9 months) but we don't have joint finances.  I currently put 8% of my 39,500/year gross into the 401k.  I am saving ~8k/year in cash for the downpayment.  After buying a house, 5k of that will go to retirement savings.

[Mississippi Mudstache]

I would keep it simple if I were you, focusing on a balance of US large, mid, and small-cap funds that prioritize low expense ratios. The expense ratios on the foreign funds are crap. I would steer clear. Since the best expense ratio of the bunch is the mid-cap index, I would probably look at an asset allocation of ~60% large (MCCVX), 30% mid (FMDCX), and 10% small (FSCDX). That's a bit overweight in mid compared to the market at large.

If you feel up to a bit more optimization (but also more complication), you could cap your 401k contributions at 4% to take full advantage of the company match, then put the remaining 4% of your income in an IRA. To pull this off, you would contribute 50% of your 401k contributions (including the match) to MCCVX and 50% (including the match) to FMDCX. Then in the IRA you would split the money 75% in an SP500 index fund (or ETF) and 25% in a small cap index fund (or ETF).

Doing this would give you the same 60-30-10 split and the same tax benefits, but would minimize your expense ratios. You could also feel better about contributing to foreign funds or bond funds if you choose to open the IRA. The options in your plan are unappealing.

Hope that helps.

[netskyblue]

I'm not sure about the tax implications of going with an IRA.  I assume the way you do that is contribute money that you have in cash, then you claim that when you itemize on your taxes?  4% of my gross is $1580.  That's not going to put me anywhere near the standard deduction (I don't own a home, no student loans, nothing else really to deduct).  I'd expect to "lose" nearly $500/year to federal & state taxes.  Not that $500/year is a great deal of money, but I don't make very much!

[BarkyardBQ]

You are correct with the IRA, you claim it on your taxes in April.

-8% of 39500 = 3160
-Subtract (and reduce) your 401k to 4% leaving you with 1580.
-You invest the other 1580 into your Traditional IRA in better, less expensive funds at Vanguard.
-You've invested the same 3160, benefited from the same income tax deductions and you earned 2% match on your 401k.
-It's the same situation contribution wise, but you have saved on your fund expenses

You could also look at doing an inservice rollover with your 401k, and move everything you have in there now to your new IRA and reallocate into less expensive/more diversified funds. Then do this at the end of every year.

Also, not sure how much of a down payment you are saving for but 8k/year is a lot. You could reduce that to ensure you get yourself to 10% of the home price, invest more in your 401k and reduce your taxes even more. 8000*4=32000, 8000*6=48000, are you looking to buy a 300k or 400k house? Not sure how much your wife makes, but the standard rule for not getting too much house is 3 times your income is your max mortgage. Some wealth building rules suggest no more than 2 times your income. How much house do you want?

You could invest more and get 7% average return, and keep a mortgage that costs you 2.5-3.5%. Giving you a return of 4-5% each year with your invested difference.

http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

Apologize if I've jumped to too many conclusions, just brainstorming for you. Food for thought :)

[netskyblue]

I'm the wife :)  I'm looking to put down 30-40% on a 125-150k home.  Couldn't comfortably afford to pay the mortgage, taxes, homeowner's insurance, life insurance, increased utilities, and increased gas costs involved, AND put that remaining 5k of savings into retirement, otherwise.  I pay all the bills, the only impact my marriage has on my finances is with regards to tax filing.  I suppose most people would say I shouldn't get to buy a house.  But that's the thing I want most in life, so I'm willing to do whatever I have to to make it happen.

What I'm saying about taxes, though, is that if I invest the other 1580 in an IRA, I won't have enough deductions to itemize.  I'll have to take the standard deduction, and thus pay taxes on that 1580, which I wouldn't have otherwise, if it had been deducted from my paycheck.

[BarkyardBQ]

Heh. Sorry I wasn't paying enough attention or didn't notice :)

That looks like a solid downpayment and home purchase.

That 1580 contribution to a Traditional IRA reduces your taxable income when you file. So while more with technically be withheld during the year on your paycheck, when you file, your owed taxes would be reduced to your total taxable income. 1580 would not be taxable, and the taxes you already paid/withheld by making those contributions from your out of pocket cash would be returned on your tax refund.

[Indexer]

What I'm saying about taxes, though, is that if I invest the other 1580 in an IRA, I won't have enough deductions to itemize.  I'll have to take the standard deduction, and thus pay taxes on that 1580, which I wouldn't have otherwise, if it had been deducted from my paycheck.

IRA/401k/HSA contributions aren't itemized deductions.  They are just straight deductions from gross income to get to AGI.  They lower your taxable income... period.  So you get them if you itemize or take the standard deduction.

On the 401k.... ouch... those options suck. 

I would contribute enough to get a match, and then max out the IRA, and then max out an HSA.  Then contribute to the 401k as much as you can, and its painful to type that. 

As for what to invest in.  This is difficult.  The only index option is expensive(for an index) and it makes up a tiny piece of the market.  I would do 40% FMDCX, 60% MDDVX.  I would count that as part of my domestic equity exposure.  Then I would do everything else in my IRA using low cost index funds.

[netskyblue]

Oh, I see what you mean about the taxes now, thank you for the explanation!

[netskyblue]

It looks like everything at Vanguard except the target-date funds require a minimum of $3000 or more.  Would you advise I wait 2 years, saving in cash, before opening a Vanguard IRA and buying into the SP500 index fund, and then wait 2 more years (saving up) before buying into a small cap index fund?

[Vilgan]

While those options are expensive, the choice seems pretty simple: put 100% of the money into either the 2035 fund or the 2040 fund. The fidelity target date funds are fine, they worry about "proper" allocation for you, and they won't do anything grievously wrong. While they are unusually expensive, so is everything else in your 401k plan so that's not a reason to avoid them.

In time, when you have a chance to read more and feel comfortable you can come up with an allocation and them adjust your investments to match that target allocation. But until that day comes, a target date fund should be fine.

Note: Something to consider is asking for better funds. The ones you have available are SUPER expensive. Its like at the end of every year someone takes a big knife and cuts out a noticeable portion of your money and runs off with it. You should have a 401k committee that is responsible for picking funds that is made up of employees at your company who are supposed to look out for you. Reaching out to them to ask for cheaper index funds like Vanguard Total Stock Market and Vanguard Total International might be a good idea.

[netskyblue]

You should have a 401k committee that is responsible for picking funds that is made up of employees at your company who are supposed to look out for you.

We're with Fidelity.  Our owner (small business) is the one who handles benefits, and I know he's said at some point that Fidelity "makes" us include certain funds, but I think he (and he alone) has some choices, too.

[Indexer]

You should have a 401k committee that is responsible for picking funds that is made up of employees at your company who are supposed to look out for you.

We're with Fidelity.  Our owner (small business) is the one who handles benefits, and I know he's said at some point that Fidelity "makes" us include certain funds, but I think he (and he alone) has some choices, too.

PERFECT!   Ask if they can include the Fidelity Spartan(index) funds.  Fidelity has index funds, they even have target date funds that include index funds.  They will still probably have that 0.25% fee added onto their normal expense ratio, but they should be significantly lower than your current expenses.

It looks like everything at Vanguard except the target-date funds require a minimum of $3000 or more.  Would you advise I wait 2 years, saving in cash, before opening a Vanguard IRA and buying into the SP500 index fund, and then wait 2 more years (saving up) before buying into a small cap index fund?

Open a brokerage account, and you can use ETFs.  Most of the Vanguard index funds have an ETF counterpart.  Same fund, same low expenses, but you can buy individual shares so no minimum to worry about.  The downside is that you have to buy in shares instead of dollars.  So you can't buy 10k even, you have to buy X of shares which means you will always have a little money left sitting in cash at any given time.

Total stock index fund.  The fund symbol is VTSAX.  The ETF is VTI.  Same fund, but you can buy individual shares.