Author Topic: Getting started question  (Read 2749 times)

tracipam

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Getting started question
« on: November 04, 2012, 04:45:12 PM »

Hello, wise mustachians!

I recently finished graduate school (yay!) started a job (double yay!).  On Jan. 1st I will be eligible to start investing in my company's 401K (with a 4% company match) which will not-so-coincidentally be exactly the same time I am done paying off my student loans and making a downpayment on a house.  So, the first of the year is my starting date to start saving like crazy for early retirement! 

My goal is to save at least $40,000 a year, which will be used first to both max out my 401K and Roth IRA.  I had started my Roth in graduate school, which I have been keeping in roughly 1/3 each large cap, small cap, and international index funds/ETFs.

When I was looking over my 401K the options weren't great.  The lowest expense ratio is an S&P index at 0.2; the others get up to the 0.8-1 range (this excludes some completely ridiculous >1  or 12b1 charging funds).  At this early stage in my investing, does it matter much whether I lump it all into the lowest expense ratio versus sorting it into large cap/small cap/international bins?  If it does, which is preferable?

Secondly, I am completely unfamiliar with taxable investments (not having had any money up until now!).  I will have at least $17,000 a year to put somewhere that won't be protected by either the Roth or the 401K.  Does anyone have any suggestions on what to do with this?  I was considering Vanguard admiral shares or LendingClub...  not sure what other options are out there, aside from real estate, and I already am getting ready to own a home that may double as a rental property in the future if I move for work (it passes the 50% rule.  Yay!)

I would really appreciate any advice from you wiser and bushier heads as I get started! 

Thanks! 

Tracy

arebelspy

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Re: Getting started question
« Reply #1 on: November 04, 2012, 05:33:35 PM »
All of that is very impressive.  You're off to a great start!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

StashinIt

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Re: Getting started question
« Reply #2 on: November 04, 2012, 09:15:57 PM »
When I was looking over my 401K the options weren't great.  The lowest expense ratio is an S&P index at 0.2; the others get up to the 0.8-1 range (this excludes some completely ridiculous >1  or 12b1 charging funds).  At this early stage in my investing, does it matter much whether I lump it all into the lowest expense ratio versus sorting it into large cap/small cap/international bins?  If it does, which is preferable?

I too faced a similar decision. I decided to go with the lowest expense ratio fund, which was also the S&P index fund) for my 401k. Assuming that you change jobs a couple of times throughout your career (as most do) you'll be able to roll over those funds into an IRA (or Roth IRA) at that time.

Secondly, I am completely unfamiliar with taxable investments (not having had any money up until now!).  I will have at least $17,000 a year to put somewhere that won't be protected by either the Roth or the 401K.  Does anyone have any suggestions on what to do with this?  I was considering Vanguard admiral shares or LendingClub...  not sure what other options are out there, aside from real estate, and I already am getting ready to own a home that may double as a rental property in the future if I move for work (it passes the 50% rule.  Yay!)

I would caution against trying Lending Club until you are further established. Another idea might be to use the capital to start a side business. Looking at your interests would be the first place to start.

michaelrecycles

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Re: Getting started question
« Reply #3 on: November 04, 2012, 11:13:55 PM »
1) I wouldn't be too concerned about diversification within your 401k alone. Your total portfolio construction is what matters. Choose the low cost S&P fund for your 401k. You can always invest more in mid- and small-cap index funds in your Roth to create the overall balance you want.

2) Maxing out your 401k and Roth is fantastic so early in your career. My first suggestion for the surplus savings would be to save it for a down payment for your home or an investment property. It sounds like you already have that base covered, though. If so, a non-tax advantaged brokerage account could make sense. This is my plan after getting the real estate portion under my belt.

If you go that way, consider what you will invest in with that account, in relation to your total portfolio and the space in your other accounts. For example, your brokerage account is a more logical choice for tax-exempt bond funds, tax-managed stock funds and international index funds than your 401k and Roth accounts. Here is a great place to start reading: http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

3) Also, consider maxing out other tax-advantaged space, such as a 529 or Health Savings Account, if those options make sense for you.

tracipam

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Re: Getting started question
« Reply #4 on: November 05, 2012, 05:42:23 PM »
Thanks for your advice, all! 

I hadn't seriously considered the HSA option--good idea.  I'll have to start mulling over the side business idea, too.  I want to sock away the main structure of my retirement account ASAP (~5 years) and let it incubate while I  "retire" from my full time job to do something else that doesn't require sitting in a cubicle for 40 hrs a week.  I suppose the next five years are a good time to start seriously considering what form that business should take...

Tracy