Author Topic: Newbie questions: 401k allocations and more  (Read 3113 times)

MuchoMula

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Newbie questions: 401k allocations and more
« on: May 01, 2015, 10:47:32 PM »
For clarity in questions, I currently have:
Husband's 401k ($60k)
My Individual 401k (new, $0)
Vanguard Explorer Fund VTIVX ($20k)
Managed Investment Account ($100k)
REIT ($20k)
Savings Account ($130k)
We do not own a home.
$35k in student loan debt
We are early 30's

Confession #1: I've been investing for several years without really knowing what I'm doing, but hey at least I'm saving, right? I have a few questions if anyone can help shed some light:

1. Contribution Allocations

My husband has a TSP, the federal employee equivalent of a 401k, with ability to distribute allocations across 5 funds:
Government Securities
Fixed Income Index
Common Stock Index
Small Cap Stock Index
International Stock Index
...OR the option to select a target retirement date, where the distributions automatically re-allocate as you near retirement. Any advice on what to do?

I am fully self-employed, and working to set up an individual 401k through Vanguard. I can choose any fund(s) I want or do the auto-pilot here, too. I know VTSAX is hailed on this site, is that appropriate/recommended fund to invest as a 401k?

2. Savings for indecisive people
Confession #2: We've been stashing money in a savings account for years now because we're currently in the military and can't decide if we want to stay in or get out and buy a house (also why we've kept the student debt). We have $130k right now in there doing nothing for us in the event that we decide to get out (in 1 year) and need it, but investing it feels like "tying it up". Isn't it bad/expensive to pull money out of an investment account? I need help understanding how this works and if it's really better to have little savings account in our situation.

3. Managed Investments vs. DIY
Since I know nothing about investing, it felt like a good idea to have our account managed. Seems like a lot of advice on this forum leans towards not wasting money on managed accounts. But it also seems that people on this forum know a lot more about investing than I do, so I'm not sure. Does it make any sense to set up a non-managed account in addition to a managed account, maybe to monitor how one does vs the other for a while? If I do decide to transfer everything into say a Vanguard account, are there typically expenses involved in this?

Lastly, any book or site recommendations to better understand investment strategies?

Thank you!!



MDM

  • Walrus Stache
  • *******
  • Posts: 9246
Re: Newbie questions: 401k allocations and more
« Reply #1 on: May 01, 2015, 11:57:12 PM »
No first hand knowledge, but based on your military position...are you familiar with http://the-military-guide.com/?

Nords, who founded the site, is a frequent contributor here.

TheBuddha

  • Stubble
  • **
  • Posts: 237
Re: Newbie questions: 401k allocations and more
« Reply #2 on: May 02, 2015, 02:02:25 AM »
Lastly, any book or site recommendations to better understand investment strategies?

https://www.bogleheads.org/wiki/Getting_started

Monkey Uncle

  • Handlebar Stache
  • *****
  • Posts: 1468
  • Location: West-by-god-Virginia
Re: Newbie questions: 401k allocations and more
« Reply #3 on: May 02, 2015, 06:15:11 AM »
1. Does your husband have any interest in self-managing his TSP?  If not, I suggest one of the target date funds, which will choose an appropriate allocation based on the date you expect to start drawing down the account.  If he is interested in self-managing, I would suggest equal allocations to the C, S, and I funds.  That's assuming it will be a decade or more before he starts drawing down.  As he gets closer, the traditional advice would suggest that he put 30-40% in the F fund, and use the G fund as a temporary holding bucket for money that he expects to take out in the next year or two.  Note: most people would advise that you overweight the C fund relative to the I and S fund because C is perceived as less risky.  I disagree, as I think the US economy is unlikely to continue growing the way it grew during the 20th century.  My guess is that US large cap performance going forward is going to look more like the recent performance of western European markets (i.e., a lot of sideways volatility without much long term growth).  Everybody has an opinion; that's just mine.

2.  You really can't afford to leave $130k in a savings account that is losing ground to inflation.  Unless the interest rate on the student loans is really low, I'd suggest paying those off right now.  Then keep whatever you think you'll need for a house down payment in a money market or short-term government bond fund.  Invest the rest.  If you invest with a low-cost broker that offers no-load funds, there should not be any cost associated with taking money out, assuming you don't take it out right after you put it in.  Many no-load funds charge a redemption fee for withdrawing any funds that have been invested for less than 90 days, but after that, they shouldn't charge you anything for the privilege of accessing your own money.

3.  I see no reason to pay someone to run your investments.  Most money managers do not generate better-than-market returns.  If you don't have the inclination to manage investments yourself, there are low-cost life-cycle funds available from discount brokers like Vanguard and Schwab.  These are similar to the TSP target date funds -- "set it and forget it."

Nords

  • Magnum Stache
  • ******
  • Posts: 3166
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Newbie questions: 401k allocations and more
« Reply #4 on: May 02, 2015, 11:32:06 AM »
Confession #1: I've been investing for several years without really knowing what I'm doing, but hey at least I'm saving, right? I have a few questions if anyone can help shed some light:

1. Contribution Allocations

My husband has a TSP, the federal employee equivalent of a 401k, with ability to distribute allocations across 5 funds:
...OR the option to select a target retirement date, where the distributions automatically re-allocate as you near retirement. Any advice on what to do?

I am fully self-employed, and working to set up an individual 401k through Vanguard. I can choose any fund(s) I want or do the auto-pilot here, too. I know VTSAX is hailed on this site, is that appropriate/recommended fund to invest as a 401k?

2. Savings for indecisive people
Confession #2: We've been stashing money in a savings account for years now because we're currently in the military and can't decide if we want to stay in or get out and buy a house (also why we've kept the student debt). We have $130k right now in there doing nothing for us in the event that we decide to get out (in 1 year) and need it, but investing it feels like "tying it up". Isn't it bad/expensive to pull money out of an investment account? I need help understanding how this works and if it's really better to have little savings account in our situation.

3. Managed Investments vs. DIY
Since I know nothing about investing, it felt like a good idea to have our account managed. Seems like a lot of advice on this forum leans towards not wasting money on managed accounts. But it also seems that people on this forum know a lot more about investing than I do, so I'm not sure. Does it make any sense to set up a non-managed account in addition to a managed account, maybe to monitor how one does vs the other for a while? If I do decide to transfer everything into say a Vanguard account, are there typically expenses involved in this?

Lastly, any book or site recommendations to better understand investment strategies?
Welcome to the forums, MuchoMula!

First, put together an asset-allocation plan.  As already mentioned, the Bogleheads Wiki is a great place to start that research for free.  You can also read library copies of the Bogleheads Guide to Investing and the Bogleheads Guide to Retirement. 

"The Military Guide to Financial Independence and Retirement" might be at your base library or family support center.  You can also start here:
http://the-military-guide.com/start-here/

Once you've picked an asset allocation, then you can start picking the accounts and funds.  For example the TSP has the lowest expenses and international funds have some of the industry's highest expense ratios, so if you decide to invest in international or small-cap indexes then you're better off buying those in the TSP.  But... and this is important... decide on your investing policy statement and your asset allocation before you start scampering around the candy store picking everything that looks tasty.

If your asset allocation reading leaves you more confused (or annoyed) than before then put your TSP in one of the L funds and pick Vanguard index funds for the rest of your accounts. 

Your $130K is a great home downpayment fund or an excellent transition fund.  (Probably both at once.)  You could feel better about its earnings if you put it into three-year CDs of about $20K each, and if you needed to tap the money before a CD's maturity then you'd only need to break them one at a time for minor early-redemption penalties.  This is what my spouse and I do with our two years of spending cash.  We'd only break into a CD if the markets went into a recession for over a year, and then we'd only need to break them one at a time.

The best way to deal with the $130K, however, is to change your thinking about it.  The reason you're keeping cash is so that if you decide to get out of the service and buy a home, then you don't have to liquidate other assets or even go further into high-interest debt.  When you're ready to buy a home, the larger down payment will save you quite a bit in interest rates and mortgage insurance.  In other words, the cash might be losing money to inflation now, but when you need to use it (1) it'll be liquid and immediately available and (2) you'll be able to negotiate substantial discounts for using cash instead of having to be approved for a higher loan amount (and interest rate).  This will more than make up for the low earnings that it's getting right now.  Don't be tempted to "chase yield"-- a three-year CD is a pretty good compromise.  If you need to redeem the CD early then it's an hour of paperwork, an e-mail or fax, and a few working days for the credit union to process your request.

Instead of managed accounts, I'd recommend either (1) figuring it out with your spouse and creating a plan, then putting everything in autopilot or (2) paying a fee-only CFP to help you figure it out-- and then putting everything in autopilot.  If you're seeking a fee-only CFP then I can refer you to a military retiree who has plenty of experience with military finances and will help you create your plan.  He will not sell you product-- only his time & labor.  He's a good friend who's helped a lot of servicemembers & families over the years.  USAA or Vanguard or Fidelity will be happy to do the same, although with more management upselling and higher fees.

You mention student loans.  If their interest rate is below 4% then you're probably not getting hurt too badly.  If they're below 3% then they're probably worth paying off as slowly as seems reasonable, especially if you can still sleep at night.  If they're federal loans then your military service makes you eligible for Public Service Loan Forgiveness, and after 10 years of service (in a wide variety of civilian careers, not just military) your balance will be forgiven.  If you have more questions about this then I can go into a lot more detail.


MuchoMula

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Newbie questions: 401k allocations and more
« Reply #5 on: May 02, 2015, 02:41:56 PM »
Thanks all, this is really helpful!

Quote
"The Military Guide to Financial Independence and Retirement" might be at your base library or family support center.  You can also start here:
http://the-military-guide.com/start-here/

Looks like exactly what I need, nice!

Quote
You could feel better about its earnings if you put it into three-year CDs of about $20K each, and if you needed to tap the money before a CD's maturity then you'd only need to break them one at a time for minor early-redemption penalties.

I love this idea, thank you! I do agree that the hefty downpayment will eventually prove beneficial, especially considering we have no idea what mortgage rates are going to be like in the next couple years.

Quote
(2) paying a fee-only CFP to help you figure it out-- and then putting everything in autopilot.

So this is a financial expert who advises where to put money and only charges one time fee or basically whenever you need them? I just checked our statements for the managed account and looks like we are paying about $480/quarter in "advisor fees" to manage our $100k. How does that compare to CFP fees? I know this is part of the sales pitch, but the argument for the manager has always been that while they don't seem necessary in prosperous times, they can save you from losing everything in a huge downfall. While we weren't with our advisor in 2008, I did see their stats showing that they made some pretty smart moves for clients before things got really bad. Truth or fear tactics at play?

Quote
You mention student loans.  If their interest rate is below 4% then you're probably not getting hurt too badly.  If they're below 3% then they're probably worth paying off as slowly as seems reasonable, especially if you can still sleep at night.  If they're federal loans then your military service makes you eligible for Public Service Loan Forgiveness, and after 10 years of service (in a wide variety of civilian careers, not just military) your balance will be forgiven.  If you have more questions about this then I can go into a lot more detail.

You got me excited about this, but it's a Sallie Mae loan, and doesn't look like that qualifies. :( The rate is 3.12%, so it's not terrible, but still frustrating to be paying hundreds in interest each year when we have the cash to dissolve it. But then again, the bigger picture is being able to use the cash to negotiate a home purchase.

Monkey Uncle,

Quote
1. Does your husband have any interest in self-managing his TSP?

No, haha, that's why his wife manages it :)

Quote
As he gets closer, the traditional advice would suggest that he put 30-40% in the F fund, and use the G fund as a temporary holding bucket for money that he expects to take out in the next year or two.  Note: most people would advise that you overweight the C fund relative to the I and S fund because C is perceived as less risky.  I disagree, as I think the US economy is unlikely to continue growing the way it grew during the 20th century.  My guess is that US large cap performance going forward is going to look more like the recent performance of western European markets (i.e., a lot of sideways volatility without much long term growth).  Everybody has an opinion; that's just mine.

Thanks for this tip and thought-provoking opinion!

Nords

  • Magnum Stache
  • ******
  • Posts: 3166
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Newbie questions: 401k allocations and more
« Reply #6 on: May 02, 2015, 03:32:33 PM »
Thanks all, this is really helpful!

So this is a financial expert who advises where to put money and only charges one time fee or basically whenever you need them? I just checked our statements for the managed account and looks like we are paying about $480/quarter in "advisor fees" to manage our $100k. How does that compare to CFP fees? I know this is part of the sales pitch, but the argument for the manager has always been that while they don't seem necessary in prosperous times, they can save you from losing everything in a huge downfall. While we weren't with our advisor in 2008, I did see their stats showing that they made some pretty smart moves for clients before things got really bad. Truth or fear tactics at play?
You're paying $1920/year to service $100K, which works out to an advisor's annual fee of 1.92%.  (This is in addition to the other fund expenses you're already paying, so your annual expenses are higher than 2% of your $100k assets.)  I believe that the high fees you're paying qualify as what MMM refers to as a "hair on fire emergency".  It's less than some people pay for a daily latté (if they do it every day) but as a percentage it's insanely high.  It's legal but (in my opinion) it's unethical.

The advisor offers sleep-at-night comfort and hand-holding during a recession.  That is valuable, especially if you don't (or won't) find the time to learn enough to develop your own self-confidence.  However someday you'll have a much larger portfolio, and when you retire you'll want to withdraw about 4%/year from that portfolio.  When you do that, even if your advisor gives you a "volume discount" you'll still be paying over 1% in annual fees.

In other words you'll be forking over at least a quarter of your annual portfolio withdrawal to... your financial advisor.  Three dollars for you, a dollar for them.

One of America's most experienced rock-star financial managers, Rick Ferri (who's also a Boglehead), will do the same with index funds and a 0.37% annual fee.  (http://portfoliosolutions.com/home/low-fees)  Or, in your case, you could have Team Ferri for about $92.50 per quarter.  You can even read most of Rick's 14 books at the library for free and follow his advice without paying him a cent.  E-mail your current financial manager, ask him how many books he's written, and why he's more than 5x better than Rick.  Better still, invite your financial advisor to attend FinCon with me and explain his extraordinary client value to Rick in person.  We'll ask Michael Kitces to moderate the discussion.  I'll split the ticket sales with you.

Did I mention that Rick is a retired Marine aviator, and his son is also in uniform?  He understands military financial management.

Every financial advisor saves you from losing everything in a huge downfall.  They do that in one of two ways, which range from simple to horribly complicated:
1.  Cash out.  (Hopefully they figure out when to buy back in.)  Many, many credible peer-reviewed reproducible studies show that you lose more money in this market-timing manner than if you'd just ridden the entire recession from peak to pit and back and done nothing.  However you'll still pay your advisor at least $1920/year for this help.
2.  Rebalance.  You told them what you wanted for an asset-allocation plan and when you wanted to rebalance.  They did what you told them to do.

Here's a typical conversation:
You:  The market's way down, and this sucks.
Advisor:  Stay the course!  We'll take care of you.
You:  Really?  Thanks!  (Sleeps comfortably at night.)

Three months later:
You:  The market still sucks.  I hate this.
Advisor:  Stay the course!  We just sold more of your overpriced X and bought some of value-priced Y.  We'll rebalance every day and steer you through these troubled times.  We're on it! 
You:  Really?  Thanks!  (Sleeps comfortably at night.  Mostly.)

Two or three rounds later:
You:  I really hate this.
Advisor:  Well, we're just doing what you agreed we should do.  But if you don't want to do that anymore then we have a have a new product which may help ease the pain of risk of loss and market volatility.  You won't get as much when the market goes up, but you'll lose less when the market goes down.
You:  Why didn't you tell me about this months ago?
Advisor:  Well, when you signed on with us, we agreed that you could handle a more aggressive risk profile.  Our new product also costs a little more in fees.  But if you reeeeally can't handle this market right now, then let's put you into a different asset allocation.
You:  Really?  Thanks! 
Advisor:  We'll send you an invoice and deduct it from your account.  You won't have to do a thing!

They were perfectly truthful, and they played on your fears like a fiddle.

We rode our asset allocation all the way from the 2007 peak down to the 2009 pit... and all the way back up through the recovery to today.  We sold and bought as part of that rebalancing, and some of those sales lost money, but overall we saved more in taxes than we lost in capital gains.  The key was that we stayed fully invested in our asset allocation, we didn't "miss out" or have to time the market, and when the recovery came it left us much better off than when the recession started.  We've gone from "enough" to "more than enough" and now it's bordering on "ridiculously luxurious travel for half the year".

Your choice is to pay the fees or to learn enough to handle your own finances, but the key is to do so in a manner that you believe in (your investment policy statement from the Bogleheads Wiki, your asset allocation) and in which you don't have to make a bunch of frequent willpower-depleting decisions (auto-deductions from your paycheck, rebalancing). 

You can also choose to let someone handle your money for you, but you don't have to pay such high fees for it.

I think you have the potential to learn how to handle your own assets, and you'll develop the self-confidence.  You'll certainly have the time.

If you want to ask individual questions and pay one-time fees, then I'd recommend CFP Rob Aeschbach:
http://militaryfinancialplanner.com/services/
He can advise you on a monthly fee, but he'd rather do it during the one or two times per year when you have a gnarly question or need to do some spreadsheet analysis. 

And if you want to ask a bunch of other questions before paying for Rick's or Rob's certified knowledge and experience, we'll do that here for free.

Monkey Uncle

  • Handlebar Stache
  • *****
  • Posts: 1468
  • Location: West-by-god-Virginia
Re: Newbie questions: 401k allocations and more
« Reply #7 on: May 03, 2015, 04:43:28 AM »
Thanks all, this is really helpful!

So this is a financial expert who advises where to put money and only charges one time fee or basically whenever you need them? I just checked our statements for the managed account and looks like we are paying about $480/quarter in "advisor fees" to manage our $100k. How does that compare to CFP fees? I know this is part of the sales pitch, but the argument for the manager has always been that while they don't seem necessary in prosperous times, they can save you from losing everything in a huge downfall. While we weren't with our advisor in 2008, I did see their stats showing that they made some pretty smart moves for clients before things got really bad. Truth or fear tactics at play?
You're paying $1920/year to service $100K, which works out to an advisor's annual fee of 1.92%.  (This is in addition to the other fund expenses you're already paying, so your annual expenses are higher than 2% of your $100k assets.)  I believe that the high fees you're paying qualify as what MMM refers to as a "hair on fire emergency".  It's less than some people pay for a daily latté (if they do it every day) but as a percentage it's insanely high.  It's legal but (in my opinion) it's unethical.

The advisor offers sleep-at-night comfort and hand-holding during a recession.  That is valuable, especially if you don't (or won't) find the time to learn enough to develop your own self-confidence.  However someday you'll have a much larger portfolio, and when you retire you'll want to withdraw about 4%/year from that portfolio.  When you do that, even if your advisor gives you a "volume discount" you'll still be paying over 1% in annual fees.

In other words you'll be forking over at least a quarter of your annual portfolio withdrawal to... your financial advisor.  Three dollars for you, a dollar for them.

One of America's most experienced rock-star financial managers, Rick Ferri (who's also a Boglehead), will do the same with index funds and a 0.37% annual fee.  (http://portfoliosolutions.com/home/low-fees)  Or, in your case, you could have Team Ferri for about $92.50 per quarter.  You can even read most of Rick's 14 books at the library for free and follow his advice without paying him a cent.  E-mail your current financial manager, ask him how many books he's written, and why he's more than 5x better than Rick.  Better still, invite your financial advisor to attend FinCon with me and explain his extraordinary client value to Rick in person.  We'll ask Michael Kitces to moderate the discussion.  I'll split the ticket sales with you.

Did I mention that Rick is a retired Marine aviator, and his son is also in uniform?  He understands military financial management.

Every financial advisor saves you from losing everything in a huge downfall.  They do that in one of two ways, which range from simple to horribly complicated:
1.  Cash out.  (Hopefully they figure out when to buy back in.)  Many, many credible peer-reviewed reproducible studies show that you lose more money in this market-timing manner than if you'd just ridden the entire recession from peak to pit and back and done nothing.  However you'll still pay your advisor at least $1920/year for this help.
2.  Rebalance.  You told them what you wanted for an asset-allocation plan and when you wanted to rebalance.  They did what you told them to do.

Here's a typical conversation:
You:  The market's way down, and this sucks.
Advisor:  Stay the course!  We'll take care of you.
You:  Really?  Thanks!  (Sleeps comfortably at night.)

Three months later:
You:  The market still sucks.  I hate this.
Advisor:  Stay the course!  We just sold more of your overpriced X and bought some of value-priced Y.  We'll rebalance every day and steer you through these troubled times.  We're on it! 
You:  Really?  Thanks!  (Sleeps comfortably at night.  Mostly.)

Two or three rounds later:
You:  I really hate this.
Advisor:  Well, we're just doing what you agreed we should do.  But if you don't want to do that anymore then we have a have a new product which may help ease the pain of risk of loss and market volatility.  You won't get as much when the market goes up, but you'll lose less when the market goes down.
You:  Why didn't you tell me about this months ago?
Advisor:  Well, when you signed on with us, we agreed that you could handle a more aggressive risk profile.  Our new product also costs a little more in fees.  But if you reeeeally can't handle this market right now, then let's put you into a different asset allocation.
You:  Really?  Thanks! 
Advisor:  We'll send you an invoice and deduct it from your account.  You won't have to do a thing!

They were perfectly truthful, and they played on your fears like a fiddle.

We rode our asset allocation all the way from the 2007 peak down to the 2009 pit... and all the way back up through the recovery to today.  We sold and bought as part of that rebalancing, and some of those sales lost money, but overall we saved more in taxes than we lost in capital gains.  The key was that we stayed fully invested in our asset allocation, we didn't "miss out" or have to time the market, and when the recovery came it left us much better off than when the recession started.  We've gone from "enough" to "more than enough" and now it's bordering on "ridiculously luxurious travel for half the year".

Your choice is to pay the fees or to learn enough to handle your own finances, but the key is to do so in a manner that you believe in (your investment policy statement from the Bogleheads Wiki, your asset allocation) and in which you don't have to make a bunch of frequent willpower-depleting decisions (auto-deductions from your paycheck, rebalancing). 

You can also choose to let someone handle your money for you, but you don't have to pay such high fees for it.

I think you have the potential to learn how to handle your own assets, and you'll develop the self-confidence.  You'll certainly have the time.

If you want to ask individual questions and pay one-time fees, then I'd recommend CFP Rob Aeschbach:
http://militaryfinancialplanner.com/services/
He can advise you on a monthly fee, but he'd rather do it during the one or two times per year when you have a gnarly question or need to do some spreadsheet analysis. 

And if you want to ask a bunch of other questions before paying for Rick's or Rob's certified knowledge and experience, we'll do that here for free.

You're a great teacher, Nords.  That's fantastic advice for our young friend.  I would add one thing, though.  You can basically get the same strategy that you suggest by investing in low-cost lifecycle funds, which cuts out the fee-for-service advisor entirely.  Of course, if you don't have the stomach to stay the course through volatility, a good CFP might help.

Nords

  • Magnum Stache
  • ******
  • Posts: 3166
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Newbie questions: 401k allocations and more
« Reply #8 on: May 03, 2015, 10:47:29 AM »
I would add one thing, though.  You can basically get the same strategy that you suggest by investing in low-cost lifecycle funds, which cuts out the fee-for-service advisor entirely. 
Yep.  Compared to the status quo, there are lots of better choices.

MuchoMula

  • 5 O'Clock Shadow
  • *
  • Posts: 8
Re: Newbie questions: 401k allocations and more
« Reply #9 on: June 02, 2015, 09:10:36 PM »
Okay, okay! I'm going to address this hair on fire emergency this week, I promise! Thanks you for your guidance!!