Author Topic: Playing catch-up  (Read 6422 times)

taf87

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Playing catch-up
« on: October 05, 2014, 01:57:00 AM »
I could kick myself for not getting started on this earlier, but....now is as good a time as any, right?

I'm 34, earn about $27k/yr, (hourly wage) have never been in debt, never carried a balance on a credit card or paid a penny of interest, rent, own a fuel-efficient car from 1995, and will be attending grad school in the coming year----(it will either be a full-ride along with award stipend or paying in-state tuition depending on the school)

I got around to opening my first Roth IRA with Vanguard this past March VTIVX - 2045.
I started with $1000.00, which, admittedly, was difficult to do as I have always been pretty conservative with my money.
The refrain is to contribute regularly to such funds, and as such, I set up automatic deposits of $50.00/mo., (along with another side contribution of $300) until I feel a little more at ease with the regular contributions:

So, here's where I am:

Roth IRA (Vanguard VTIVX 2045): $1602.69
At the bank (checking and useless savings account): $7028.35

Not working with much, but I'm a bit lost when it comes to what to do next.
Nominally, I'd like to get something else with Vanguard; perhaps something that isn't tied up in something "inaccessible" like an IRA. (Or should I just dump what I can into my existing IRA or hedge against that one with another IRA?)

I know that these forums are inundated with questions like mine, so I am grateful to anyone who takes any time to read and/or reply.

« Last Edit: October 05, 2014, 02:12:58 AM by taf87 »

GGNoob

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Re: Playing catch-up
« Reply #1 on: October 05, 2014, 06:39:31 AM »
You should keep 3-6 months of expenses in cash for an emergency fund (probably in a "high yield" online savings account). The number of months is up to you, based on how secure your job is and how much you think you need for other emergencies.

If $7k in cash is more than you need, then you could go ahead and contribute the rest of it to your Roth IRA. There would be no point to open another one. As long as you have the extra cash, try to max out your 2014 IRA contributions ($5,500) by April 15, 2015. The sooner you max 2014 out, the sooner you can start working on 2015 (but starting no sooner than Jan 1 of course).

If you have any other questions, feel free to ask!




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mitlaura

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Re: Playing catch-up
« Reply #2 on: October 05, 2014, 03:05:43 PM »
You can invest your money in many ways. Are you not comfortable with investing in the stock market, or having someone else manage your money? Or do you just not want to lock a certain portion of income away for the next 30 years? If the later, you know that once your IRA is 5 years old, you can withdraw your contributions (but not any capital gains) penalty-free. Read more here http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Assuming you will move into a high income situation once you have a graduate degree, and that you foresee living a long life, it makes sense to put in a lot of money into a Roth IRA now through grad school as future gains will be tax-free once you reach 59. After graduating, you'll want to shelter some of your income from taxes by contributing to an employer plan or a traditional IRA, but will pay taxes on all that money +gains when you retire into a lower income tax bracket.

How much do you need to live on for now, will your expenses drop or increase in grad school (medical insurance is usually covered for grad students so any medical emergency might not need to be budgeted for in your emergency savings).

And if you decide to buy a house 5 years from now and need your money, you can withdraw penalty free from a Roth as a first-time home buyer.

If however, you might drop out of grad school and move to Argentina, then perhaps you should keep all your money out of any retirement accounts (you can contribute to vanguard mutual funds through an ETF (no minimum) or brokerage account but a minimum purchase will apply).

mitlaura

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Re: Playing catch-up
« Reply #3 on: October 05, 2014, 03:09:45 PM »
Also in the past a saver's credit applied at tax time to people with low income contributing to a Roth. Don't know if it's still happening for this year, but you can look up form 8880 http://www.irs.gov/uac/Form-8880,-Credit-for-Qualified-Retirement-Savings-Contributions

Some free money just for being responsible.

wtjbatman

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Re: Playing catch-up
« Reply #4 on: October 05, 2014, 03:12:32 PM »
Are you saving in a Roth for retirement? Or for your emergency fund? Or both? If you want your Roth IRA to be multi-use (half retirement/half emergency fund or house down payment), then you will need to break up the investments. Put the retirement part of it in a Target date fund, and the rest in something with less short term risk, such as a short term Bond fund or TIPS fund.

Otherwise, if we're just talking about putting some money away that you want quick access to, perhaps a high interest online savings account would be better.

taf87

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Re: Playing catch-up
« Reply #5 on: October 06, 2014, 01:41:50 PM »
I appreciate the replies, wtjbatman, mitlaura, and Logan!

Wow, I'll definitely look into the 8880 form. Every bit helps. I was also unaware of being able to withdraw IRA contributions!

I am interested in saving for retirement along with something for the relatively short-term that isn't fraught with leanings towards gambling/trying to make a fast dollar.

I might have to borrow for grad school, but it will be a 2- to 3-year program, and post degree, yes, I should move up in my tax bracket.
My job is pretty secure, and I actually passed on a promotion a few months back because I want (and need) to maintain flexibility in my schedule to not only accommodate my school, but because it would have also meant more harrowing hours and more responsibility than what I currently work - all for a modest raise.

Assuming I am able to contribute $5500 to my existing IRA, what would be the ideal investing path if I were to continue with modest monthly contributions for now? I just feel like I'm not working with much and don't want to sputter about with one IRA that I can't touch for a while.

With that said, I'll look into Bond and TIPS funds.



wtjbatman

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Re: Playing catch-up
« Reply #6 on: October 06, 2014, 07:11:11 PM »
Assuming I am able to contribute $5500 to my existing IRA, what would be the ideal investing path if I were to continue with modest monthly contributions for now? I just feel like I'm not working with much and don't want to sputter about with one IRA that I can't touch for a while.

Why not keep investing in your target retirement fund, VTIVX? Sometimes the simple, one fund solution is best. Then put the emergency fund half in Vanguard's TIPS fund (VIPSX).

taf87

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Re: Playing catch-up
« Reply #7 on: July 22, 2015, 12:14:24 AM »
So, since I originally posted, my Roth IRA account has just passed the $7k mark, (yep, I winced and maxed out the $5500 for 2014, intending to do so this year as well) and is divided between VTIVX and VTSMX.

I now have an opportunity to contribute to a 401k at work, but want to go about this in an optimal manner as there seem to be an array of options before me. My income is around 30k.

As it stands, my company designates an automatic 2% from each paycheck, but I'd obviously like to contribute more:

After logging in for the first time, I saw a "Contribution election" field divided between Roth 401k and pre-tax. I did not know that a Roth 401k was an option and was going to start with a 10% deduction from each paycheck. I'm open to any other suggestion on how to proceed re: dividing my contributions.

Additionally, I received documentation pointing to a 001.13% expense ratio -- More than that of my Vanguard account!

The other images show the different investing options I have. My workplace defaults to "Blackrock Global Allocation A fund"
Any suggestions on which funds might be a good choice are appreciated.

Financial.Velociraptor

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Re: Playing catch-up
« Reply #8 on: July 23, 2015, 10:49:58 AM »
I recommend:

1) Take Grad School seriously.
2) Take the networking and job search part of Grad School even more seriously.

You could greatly increase your earning power (and thus your savings rate).  Or you could end up with a largely worthless piece of paper.  It will be what you take the time to make of it.

taf87

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Re: Playing catch-up
« Reply #9 on: July 25, 2015, 03:33:25 PM »
I am approaching grad school with the utmost seriousness and have been since planning to attend.

The "networking" element you mention, however, is one that has already been taking place, and won't necessarily be an instance of angling for a job during the degree program since it is for an MFA degree.

With my 401k options, I have discovered that the company "default fund," BlackRock, is currently mired in litigation for charging excessive and unreasonable maintenance fees to its clients, so I am wary of aligning my 401k account with them:

http://www.investmentnews.com/article/20140814/FREE/140819950/blackrock-fights-lawsuit-claiming-excessive-fees
http://www.law360.com/articles/636534/blackrock-can-t-escape-suit-alleging-excessive-fees

I've also read that selecting target-date funds, if available, is usually a good choice for a 401k allocation. There are a handful available to me, and from what I see, do not have any associated maintenance fees.

The employer-match schedule is as follows,
and I have been with the company for 1 year, 8 months, with benefits offered to me as of July 1st:

Years of Service                      1          2       3
Employer Match w/vesting   33%       66%   100%
            
Employer NEC                           33%       66%   100%

(I am planning to, at least, stay with my employer up to the three-year mark to ensure full vesting)

Again, I am rather lost where selecting my 401k allocations is concerned and would truly appreciate any suggestions.
I am attaching three images of the funds available to me along with the associated expenses. Another question concerns how to (and if) I should divide these allocations between the 401k and Roth 401k designations.

Thank you all for reading along with your comments!
Have a great weekend!

Financial.Velociraptor

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Re: Playing catch-up
« Reply #10 on: July 25, 2015, 03:51:59 PM »
Even a crappy 401k option is worthwhile up to whatever point you are getting an employer match.  Take full advantage in whatever Blackrock option is the least fee intensive.  And maybe you'll get a refund of fees pending lawsuit resolution.

forummm

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Re: Playing catch-up
« Reply #11 on: July 25, 2015, 05:30:00 PM »
Given that your income is pretty low, your tax bracket is pretty low as well. And you may have extra deductions and tax credits due to being a student. Without knowing more about your specific tax situation, I would contribute exclusively to the Roth 401k (post tax) and not to the traditional 401k (pre tax). In the worst case you will be barely in the 15% bracket. But you could easily be in the 10% bracket. You are very likely to be at least in the 10% or even 15% bracket when you're retired, so you don't want to forgo paying less tax now in order to pay more tax later.

taf87

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Re: Playing catch-up
« Reply #12 on: July 26, 2015, 02:03:17 PM »
Thanks for the replies, Financial.Velociraptor and forummm!

-You're right about taking advantage, even if it's a crappy 401k program. Is there any reason why I should just default to the BlackRock fund when there are a total of 34 options available? I've read that target date funds are usually a good choice, but there seem to be a number of sources out there saying that they aren't. Might as well flip a coin. ;-)

-Noted re: utilizing the Roth 401k! You are absolutely right about paying those taxes on the funds now. It's doubtful that I'll be able to claim the 10% bracket though. I'm not yet enrolled in a grad program and am in the process meeting with committees to see where I'd like to go. With my salary, I'm not quite sure how much I can afford to put into the Roth 401k (being that I am contributing the max to my Roth IRA), but it will be great to have another holding going!

forummm

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Re: Playing catch-up
« Reply #13 on: July 26, 2015, 02:52:15 PM »
Thanks for the replies, Financial.Velociraptor and forummm!

-You're right about taking advantage, even if it's a crappy 401k program. Is there any reason why I should just default to the BlackRock fund when there are a total of 34 options available? I've read that target date funds are usually a good choice, but there seem to be a number of sources out there saying that they aren't. Might as well flip a coin. ;-)

-Noted re: utilizing the Roth 401k! You are absolutely right about paying those taxes on the funds now. It's doubtful that I'll be able to claim the 10% bracket though. I'm not yet enrolled in a grad program and am in the process meeting with committees to see where I'd like to go. With my salary, I'm not quite sure how much I can afford to put into the Roth 401k (being that I am contributing the max to my Roth IRA), but it will be great to have another holding going!

I would go with the SSgA S&P 500 and the SSgA Mid Cap funds. Something like 75%/25% would be fine. They are the 0.7% expense ratio funds.

taf87

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Re: Playing catch-up
« Reply #14 on: August 07, 2015, 12:04:59 AM »
I went ahead and selected these two allocations at 10% in a Roth 401k.
This is a massive help! Thanks for taking the time to reply, forummm!

taf87

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Re: Playing catch-up
« Reply #15 on: September 19, 2015, 03:23:18 PM »
With my next paycheck, I will have maxed out my Roth IRA contribution for this year, totaling $11,000 in contributions between VTIVX and VTSMX. Considering that I was a little uptight about dropping the initial $1000 to open my account last year, I am pretty proud of my modest progress and sticking with it. :-) I just wish I had started so much sooner.

My Roth 401k is now at ~$400, (a pittance, I know) but I dialed back my contributions from 10% to 7% since, between this and my Roth IRA, my take-home pay has been really taking a hit. (This still affords me the max employer match of 2% where the total contribution (deducted pay+match) is ~$100 per paycheck, and I will be fully vested in about a year). There is no way that I can even come close to maxing out my 401k, and everything I read/hear suggests that this is a must.

I contributed the vast majority of this year's Roth IRA allowance during the recent dips, excited for the opportunity to buy at a much lower cost. I know that, generally, "timing" the market is frowned upon, and with good reason, but what about merely making strategic purchases in order do bring your average cost down? Whenever I see that prices are less than my average cost, I'd buy as much as I could since I can't afford to make a lump-sum contribution of $5500.00 on the first of the year.


It doesn't seem like there are many threads/posts where people are investing on a low income,
so, at times, it's a bit difficult to gauge how to proceed or draw immediate parallels.

I'll also be able to establish a Self-401k soon, but what else can I do with a $30k salary and grad school coming?


Roth IRA: $11,000.00 contributed (VTIVX and VTSMX)
Roth 401k: $400.00 (7% plus 2% match SSgA S&P 500 @ 75% and SSgA Mid Cap @ 25%)
Liquid: ~$4000.00 (between checking/savings)
Debt: Zero.

Thanks as always, everyone -- Your guidance continues to be really helpful!
« Last Edit: September 19, 2015, 05:34:30 PM by taf87 »