Author Topic: Asset Allocation with limited funds  (Read 5878 times)

Sebastian

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Asset Allocation with limited funds
« on: October 23, 2013, 08:48:16 AM »
Hey Everyone!

I've been following the ways of MMM since early June of this year. I immediately started pouring money into a 401k and started investing in Roth IRA. Collectively with investing in those two accounts plus saving money... I'm at around 47%-50% savings/investing. Here's what I'm following.

Everything I have read so far on investing goes something like this....

1. Invest in your 401K (up to what the company matches)
2. Invest in a Roth IRA
3. Max out your 401K
4. Take the rest of your money and put it in a taxable account

Soooo yeah.. I definitely don't make enough money to complete steps 1-3. I did start in the middle of the year too... so I probably could max out my 401K if I start at the beginning of the year.

My main question is this - am I missing some AA if I'm not investing in a taxable account along with my tax advantage accounts? Do I really need to max out my 401K or should I be splitting it up into a taxable account as well?

This year I will make about 42K.. after taxes lets just say 30K(maybe more idk), and my expenses will probably be around 15K this year (I will have them lowered next year I promise!)

Overall, I just want to make sure I'm setting myself up for success and not totally missing the boat on taxable accounts.

Should I stick the course and just take all my money and put it in the tax advantage accounts, or should I invest a little less in them so I have money to put towards a taxable account.

Thanks for the advice!


matchewed

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Re: Asset Allocation with limited funds
« Reply #1 on: October 23, 2013, 09:00:17 AM »
We seem to be confusing terms here.

Asset Allocation generally refers to a mix of bonds and stocks (simplistic but the easiest example).

You're speaking about Asset Location or where you put your various assets (commonly referred to as investment vehicles).

But back to your question - should you invest in a taxable account if you haven't maxed your 401k (or rather are you missing out on something if you do so)?

It depends. What are your goals? What are you saving your money for? If it's FIRE then maxing out your 401k can be the best way depending on how you plan on executing FIRE. If not then what is the time frame?

aj_yooper

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Re: Asset Allocation with limited funds
« Reply #2 on: October 23, 2013, 09:18:15 AM »
Congratulations on your impressive savings rate!  Your budget is also tight, so good job.

This tax website includes the federal tax expense and WI taxes at:  http://www.tax-brackets.org/wisconsintaxtable

You can easily do what-ifs there.  I think by maximizing your 401k contribution, you will be better off tax expense wise.  I plugged in the full 401k contribution with your income; the website indicated your total tax bill went down from around $6300 to $2500.  However, the taxable account is a good idea for liquidity that I would pursue via one time events, e.g. expense checks, tax refunds, etc. 

Sebastian

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Re: Asset Allocation with limited funds
« Reply #3 on: October 23, 2013, 09:59:32 AM »
Sorry about misusing some of the terminology. Yes I meant investment vehicles not AA haha..

Anyways, I'm 26 right now... My primary goal now is getting into REI in the next year. My soon to be fiance and I would like to get a duplex rent out the one side live in the other, and do that a few times till I have several properties.

So hopefully passive income from rental properties should bring in enough money that I can be job free in the next 10 years (but being a full time investor which I guess is a job... but a job I'd actually like!)

So I'm not sure if a taxable account would behoove me or not at this point. I plan on living off a max of 25K a year which I believe can be obtained through 600K in investments.

If I end up doing REI I'm guessing the taxable account won't be such a big deal right? Because I'll be able to live off of the passive income ideally, but at the same time I feel like I should contribute to a taxable account so I can start using some of that investment money before I'm 55 YO or whenever the date is to pull money from 401K...

I know there are different methods to siphon your 401K into a Roth so you can use that money before the given age, but would that be enough to live on? I guess it will really depend on how much I'd make from the REI... I have some thinking to do.

Either way thanks for responding and thanks for the compliments on my saving! Any other suggestions or advice would be appreciated :)

RobertBirnie

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Re: Asset Allocation with limited funds
« Reply #4 on: October 23, 2013, 10:46:19 AM »
If you are planning on getting into rental properties then you'll need some sort of downpayment. I would plan this into your equations and probably put more in the taxable account.

dorkus619

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Re: Asset Allocation with limited funds
« Reply #5 on: October 23, 2013, 11:04:19 AM »
It's funny that you posted this because I posted a topic in Investor Alley just a couple minutes ago with a somewhat similar question/situation. Not the same but reading this thread has been helpful anyway. I think I was messing up the terminology too, going by what Personal Capital said. Not sure!

Sebastian

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Re: Asset Allocation with limited funds
« Reply #6 on: October 23, 2013, 12:12:35 PM »
If you are planning on getting into rental properties then you'll need some sort of downpayment. I would plan this into your equations and probably put more in the taxable account.

But I thought investing is a long term thing. Not some place to harbor a down payment on a house. Speaking of which...

If I really wanted to put 20% down on a 200K house/duplex. I'm looking at 40K payment... Isn't it a bit silly to build up that much money with it doing nothing for me?

I'm aware of PMI payments and all that jazz but then there is also stuff like FHA loans.. I'd never do 3.5% down payment, but maybe something like 10%?

Just wanted to see where you were coming from.. I don't invest anything in taxable accounts now. Wouldn't it be best for me to just start saving for a down payment and just keep putting in the kind of money I put in for my 401K and Roth?

dorkus619

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Re: Asset Allocation with limited funds
« Reply #7 on: October 23, 2013, 01:01:42 PM »
Avoid PMI.  $127 per MONTH going right down the toilet in my case. You will pay PMI until you reach 20-22% equity, or a minimum of 5 years I think. AND I just found this little bit "Some FHA loans require payment of mortgage insurance premiums for the life of the loan." on Bankrate. (Gosh I hope my loan is not that type)

If I could do it all again. Well #1 I would have picked a better house - shopped muchhhh longer and really imagined myself living in the house day to day, really considered the quality of neighborhood, where I would put things, the flow, etc. #2 - 15 year mortgage 20% down. period.

Sebastian

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Re: Asset Allocation with limited funds
« Reply #8 on: October 23, 2013, 01:28:45 PM »
Avoid PMI.  $127 per MONTH going right down the toilet in my case. You will pay PMI until you reach 20-22% equity, or a minimum of 5 years I think. AND I just found this little bit "Some FHA loans require payment of mortgage insurance premiums for the life of the loan." on Bankrate. (Gosh I hope my loan is not that type)

If I could do it all again. Well #1 I would have picked a better house - shopped muchhhh longer and really imagined myself living in the house day to day, really considered the quality of neighborhood, where I would put things, the flow, etc. #2 - 15 year mortgage 20% down. period.

sweet thanks for the advice dorkus! that does make sense I was planning on at least looking in my market for 9 months or so before we decided to pull the trigger.

dorkus619

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Re: Asset Allocation with limited funds
« Reply #9 on: October 23, 2013, 01:36:45 PM »
I'm 25 from MD, USA. My conservative goal is FI in 20 years, if I can hit it sooner, good. But my income isn't too high/my mortgage is. My personality is very indecisive/conservative, but typical advice is to start out aggressive/risky. So I am okay with following pro advice. :)

Wow I'm glad that I could help! That's probably the first help I've been able to really give since I'm still learning. But I do have a little experience now that I'm 6+ years into this house, refinanced once already which started my 30 years over. ugh. Idk what to do about that house what a frickin mess.

So I posted my own questions on Investor Alley but haven't gotten any responses/help yet. Hopefully I will get some answers. People with similar questions (after searching) didn't get any responses either. bummer.

Anti-ComplainyPants

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Re: Asset Allocation with limited funds
« Reply #10 on: October 23, 2013, 01:59:15 PM »
I'm in a very similar boat... I recently posted a similar question and was browsing here for guidance.

I'm 26 and low income ($32.5k), hoping to put my money in the right places to be FI as soon as possible, as well as build up a 20% home down payment which I hope to execute in 3-4 years.

I'm contributing up to my employer's match into my 403(b) (5%), and am trying to find where to put aside another 10% of my income (that total 15% is about all I can muster right now). I don't know if I should:

- Put all 15% into a 403(b) now, and have a way to pull out what I'll need for a home down payment in 3-4 years without penalty (somehow).
- Keep contributing 5% to my 403(b), and 10% in a Roth IRA that I can use the principle toward the down payment without penalty
- Investigate some other retirement account that may allow me to withdraw a first home down payment without penalty
- Stick it in a Savings account with a weaksauce interest rate, but I at least know I'll be able to access it for the downpayment in 3-4 years (doubt this is the best option)

Sounds like we're in similar boats, any feedback is appreciated! :D

dorkus619

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Re: Asset Allocation with limited funds
« Reply #11 on: October 23, 2013, 02:07:15 PM »
Hey anti-complainypants! yeah I posted in your thread! :)

We are all young and trying to figure this out! Let's make a club!

I don't know anything about 403b but I would say you should research investment options for your $$ that will allow you to draw $ out for a downpayment. I think both types of IRAs fit in that category?
I agree staying away from savings account. I'm only using that to build/store my 3-6 month emergency fund. Anything with more growth potential and more restricted access seems like a better bet for your retirement/home downpayment $.

nawhite

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Re: Asset Allocation with limited funds
« Reply #12 on: October 23, 2013, 02:21:52 PM »
There was some really good discussion of different allocation schemes in this thread:

www.mrmoneymustache.com/forum/investor-alley/why-do-people-say-to-max-roth-before-401k

As usual, the answer was "depends on income now vs income in retirement" but it basically laid out some examples where using the Roth at all is probably not the best idea.

matchewed

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Re: Asset Allocation with limited funds
« Reply #13 on: October 23, 2013, 03:37:37 PM »
Couple of things here I am seeing.

1) Yes investment is generally long term. You are taking a risk if you are planning on using money invested in stocks for your down payment on a house, if you need that down payment in less than five years. If you are cool with that risk... cool. That risk is that if the market tanks you do not have the money for your down payment. Again if you are okay with that risk cool. If your goal is to be a homeowner in that 3-4 years then a savings account is best regardless of the lack of growth in the savings account (could also use CD's or some such).

2) SethBahookey and Anti-ComplainyPants - I highly recommend having the cash for a 20% down payment and having that in actual cash not squirreled away into an investment vehicle for the reasons stated above. Avoiding PMI or MIP frees up your cash flow for other investments.

3) I'm surprised at the concern about money for a down payment not making more money for you. You're about to dump it into a house which traditionally doesn't make you much money unless you decide to become a landlord.

As I said in the other thread, focus on the things you can control, fees, savings, and education. If you're dead set on a 3-4 year timeline for house purchase then figure out how much you need to put down and work backwards from there on how much to save each week. Then take the time to explore your options, if you discover new information in that exploration then at least you're sitting on enough cash to be flexible.

Anti-ComplainyPants

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Re: Asset Allocation with limited funds
« Reply #14 on: October 23, 2013, 03:56:12 PM »
Thanks for the feedback matchewed, it's very much appreciated!

My initial thought, if I were to invest the 3-4 year savings for a home down payment, that it would be a pretty conservative fund constructed of mostly bonds. I figured this would limit growth, but it would be more than a savings account and minimize risk.

I was also under the impression that saving the money for the down payment (instead of investing that money elsewhere for long-term growth) would actually be in my best financial interests. If I prioritize the 20% downpayment over long-term investing, I would avoid PMI when I do get the house in exchange for missing out on the dividends that money would accumulate elsewhere. I could then start investing as soon as I reach my 20% downpayment.

Of course, in all cases, I'm still contributing my employer-matched 5% to my 403(b). I'm just evaluating where to put an additional 10% or so of my income that I can afford to save; considering I'd really like to get a house in 3-4 years and I only gross $32.5k/year to work with.

matchewed

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Re: Asset Allocation with limited funds
« Reply #15 on: October 23, 2013, 04:23:10 PM »
Bonds have their own risk too, and what about taxation? In short if you're dead set on that 3-4 years you need low risk and high liquidity. If you feel that bonds fit that description for you then cool.

I totally advocate saving the 20% as I said below. I don't think I said anywhere not to.

Chasing yield to hit your down payment is a bad idea. If the math doesn't work out then you need to figure out how to save more or earn more until the math does work out.

nawhite

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Re: Asset Allocation with limited funds
« Reply #16 on: October 23, 2013, 04:58:47 PM »
Overall I agree with the advise of "wait until you have a 20% down payment so you don't have PMI." However, it depends on what housing opportunities you can find.

For me, I had 10% saved up and ready to go when the winds of the housing market started shifting away from a buyers market. We decided to pull the trigger on buying despite not having 20% because we found a place we liked (ridiculously good location), we could lock in a 3.75% 30 year mortgage (while rates were going up), and the NYT buy vs rent calculator said it would pay off within 3 years at the price we could get it at. On top of that, it ended up appreciating 18-22k beyond what we paid (according to a very accurate zestimate) within 6 months because of the shift to a seller's market. So overall, probably the best financial decision of my life even though I still have to pay $84/month in PMI for the moment.

So take all this advice to wait on buying with a big grain of salt that it depends on what opportunities you find.

Sebastian

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Re: Asset Allocation with limited funds
« Reply #17 on: October 24, 2013, 08:22:58 AM »
Thanks for the advice everyone! My biggest challenge now is actually finding the "right" place.

Anti-ComplainyPants

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Re: Asset Allocation with limited funds
« Reply #18 on: October 24, 2013, 09:13:49 AM »
In the interest of being as simple as possible, it sounds like my priorities fall in this order:

- Maintain my 403(b) contribution up to my employer's match
- Save for a home downpayment of 20% in an online savings account, for the security of liquid funds and the highest possible interest rate for that security (Capital One 360, 0.75% variable APY)
      -  That will be all my spare income for a few years, and then once I've saved the 20%:

- Begin investing in a Roth IRA
- Max my 403(b) contributions
- Invest any extra income in Vanguard index funds

Since my income isn't high enough to do all those things yet, it *sounds* like I need to prioritize saving for that 20% home downpayment over additional 403(b) contributions, starting a Roth IRA, or beginning investment in index funds. I know my money would do more for me in those places, but if I don't have the downpayment yet...

Sebastian

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Re: Asset Allocation with limited funds
« Reply #19 on: October 24, 2013, 10:08:29 AM »
In the interest of being as simple as possible, it sounds like my priorities fall in this order:

- Maintain my 403(b) contribution up to my employer's match
- Save for a home downpayment of 20% in an online savings account, for the security of liquid funds and the highest possible interest rate for that security (Capital One 360, 0.75% variable APY)
      -  That will be all my spare income for a few years, and then once I've saved the 20%:

- Begin investing in a Roth IRA
- Max my 403(b) contributions
- Invest any extra income in Vanguard index funds

Since my income isn't high enough to do all those things yet, it *sounds* like I need to prioritize saving for that 20% home downpayment over additional 403(b) contributions, starting a Roth IRA, or beginning investment in index funds. I know my money would do more for me in those places, but if I don't have the downpayment yet...

Yea man in your situation it sounds like it really depends on if you want to get RE first or not. If you do then down payment is a priority... I think that is going to be my route at this point. Although I found a location an hour south of me that has hella cheap properties. I might just make the move down there, I only worry I will find terrible tenants and it'll be in the hood :/

Anti-ComplainyPants

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Re: Asset Allocation with limited funds
« Reply #20 on: October 24, 2013, 11:27:53 AM »
Sorry, I'm not sure what RE means...

I'm not purchasing the home in the interest of renting it out (yet), I'm purchasing it with a 20% downpayment to avoid PMI and debt. I know that once I have the home, my money will work harder for me in index funds than it will paying off the mortgage early (assuming it gets higher returns than the interest on the mortgage) but I'm thinking that mortgage + PMI may outweigh investment returns.

Which would lead my priorities to Downpayment -> Invest -> Pay mortgage