Author Topic: Young Investor - How am I doing?  (Read 8586 times)

Frugal_NYC

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Young Investor - How am I doing?
« on: April 30, 2015, 09:34:01 AM »
Background
I'm a 24 y/o finance professional in the media industry.  In less than 3 years since graduation I've managed to increase my salary about $30K through promotions and a job change.  I have always been frugal, especially compared to the typical NYC young professional who would make Tom Stanley roll over in his grave, but since discovering this site and Dave Ramsey last year I have ratcheted things up.  The result is that I have built a decent little portfolio for someone my age.

Asset Overview

Currently make around $80k/yr, 3% match + 2% contribution at year-end for 401K, no debt, rent an apartment

1) Liquid (Checking/Savings/points,etc): $24K
2) 401K: $29K
3) Roth IRA: $20.6K
4) Taxable investment account: $30.5K

Total: $105K approx.

Investment Overview

401K: 78% in T Rowe Price 2055 Fund, 22% in T. Rowe Price New Horizons Fund (PRNHX)
Roth IRA: 100% in Spartan Extended Market Index Fund - Fidelity Advantage Class (FSEVX)
Taxable: 29% in FAMRX - 85/15 stock to bond, 71% in Fidelity Four in One (FFNOX)

Questions
1) Should I make changes to my taxable account?  I feel like there's no point to own 2 different funds here and the FFNOX fund even partially owns FSEVX which is in my Roth - how can I simplify here?

2) I am debating going back to school which would probably cost around $40K all in - is it OK to put more $ in my taxable account knowing that I may have to withdraw at some point to pay for school?  I already fully funded my Roth for 2015.  I just think I have too much liquid $ lying around

3) This kind of goes against #1, but if I wanted to allocate a portion of my $ to REIT/Healthcare index funds how much would you suggest and would I do this in the taxable account or the Roth?

4) any other tips/advice?  I want to own a home but I see that a minimum of 5 years down the road


Derrian

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Re: Young Investor - How am I doing?
« Reply #1 on: April 30, 2015, 10:45:58 AM »
2) I am debating going back to school which would probably cost around $40K all in - is it OK to put more $ in my taxable account knowing that I may have to withdraw at some point to pay for school?  I already fully funded my Roth for 2015.  I just think I have too much liquid $ lying around

If you are planning on going back to school, I would put those funds into a tax-deferred account for a couple reasons. First, you defer the taxes on the portion that you contribute. When this is calculated for taxes, tax deferred accounts defer taxes on the last dollars you earn, which at your income level would certainly be taxed at 25%. If you put those funds into a 401k you will avoid paying the 25% tax now and instead will pay taxes when you withdraw the money (penalty free for education) which will most likely be taxed at the 10 and 15% (only 25% after $36,000) federal rate instead. If you do this, make sure you put the funds into a vehicle that is appropriate for your timeline.


fartface

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Re: Young Investor - How am I doing?
« Reply #2 on: April 30, 2015, 11:29:28 AM »
Nice job, young man! What're your monthly expenses? I think I'd contribute more to the 401k to reduce your current tax consequences. Also, you seem to have an unusually high amount in savings @24k. I assume it's earning next to nothing in interest, in which case I'd transfer some to the taxable brokerage or max out my 401k and use it to pay expenses since maxing your 401k will reduce your take home pay.

Also, why go back to school and in the hole 40K? You seem to be doing well in your field...I'd keep the momentum going there and forego the extra schooling...

At any rate, you're doing well, and I see nothing wrong with your investment strategy/asset allocation. Good luck!

wjmyers22

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Re: Young Investor - How am I doing?
« Reply #3 on: April 30, 2015, 12:21:05 PM »
Very nice!  I looked at your finances and they are almost identical to my own.  You have a head start on me since I'm 29, but I'll offer you my two cents.  My IRA is entirely in the FUSVX fund like yours, and my 401k is 85% s&p index fund and 15% low fee bonds.  I max out my 401k every year.  My taxable investment account is a mix between the FFNOX and the FUSVX.  I essentially use this combo to get a bigger portion of my fund into the FUSVX since you can't change the distribution of index funds in the FFNOX yourself.  Finally I keep only about $6k-$7k in my checking and savings at any one time.  $24k is too much, if you ever needed that amount of money for an emergency then you could sell from your taxable account, but odds are that won't happen.  When you do want to use it for a house or education you can plan for the withdrawl.

I also wouldn't go back to school just yet.  I'd still do it if that's what you want, but you will be in a better position financially later in life.  If you are free from having to work and have saved enough then you might enjoy the schooling even more!

rmendpara

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Re: Young Investor - How am I doing?
« Reply #4 on: April 30, 2015, 02:26:02 PM »
Living in NYC means you should absolutely be maximizing any pre-tax vehicles.

If grad school is a possibility, I would put any remainder of your investments in a a taxable account (maybe a little bit in the Roth, although this may not be accessible if it hasn't been in there for long enough--5 yrs I think?), and keep a slightly above average amount of cash on hand for tuition and living expenses.

You're still in the early part of your career and education, so don't get too caught up in retirement. If you simply get through your education with none or very minimal debt, you've done a good job. All the while you've got nearly 100k in investments working for you.

Personally, I would rather take on student loans than withdraw investments... depending on the rate you get. Certainly take any subsidized loans even if you have the cash (free money, huh?). And then partially or fully pay if there are any non-subsidized loans. Paying interest on interest is no fun.

Whether it's saving for a degree or a house, any big purchase expected in the upcoming few years should be saved in cash. No need to complicate things by investing a ton. At 24k in cash today, you've got solidly half of what you need liquid and would probably be able to pay off the rest of the borrowed amount within 1-2 years quite easily.

Otherwise, I'm sure your budget is fine given where you are at today. I'd be more concerned with giving your career a boost than how to squeeze out another 5% from your budget...

skyrefuge

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Re: Young Investor - How am I doing?
« Reply #5 on: April 30, 2015, 02:58:19 PM »
1) Should I make changes to my taxable account?  I feel like there's no point to own 2 different funds here and the FFNOX fund even partially owns FSEVX which is in my Roth - how can I simplify here?

Yeah, your fund mix is a little screwy. FAMRX, FFNOX, and T Rowe Price 2055 can all be considered "all-in-one" funds. So owning three different versions is kind of like owning three different "all-in-one" exercise machines. It's just confusing with no real benefit. Now, there can certainly be reasons to own more than one of these (like if your 401(k) doesn't have the all-in-one that you prefer; this would be equivalent to owning a different all-in-one exercise machine at each of your two houses), but you should have a good reason like that.

Similarly, there can be reasons to own standalone funds alongside all-in-one funds (like owning some freeweights alongside your machine), but again, all-in-one funds were generally intended to be used alone to prevent you from having to add extra complexity.

Next, FSEVX by itself is an odd holding. That's an "S&P500 completion fund". The reason it exists is for people who wish to own the total US stock market, but only have access to an S&P500 fund in their 401(k). FSEVX holds the total US stock market minus the ~500 stocks in the S&P500. So the idea is to hold the S&P500 fund in your 401(k), and FSEVX in an IRA to "complete" the total market. Since you don't actually appear to own an S&P500 fund directly, it's a bit strange to hold its completion fund.

So I recommend first determining your desired asset allocation for your entire portfolio:

http://www.bogleheads.org/wiki/Asset_allocation

Then figure out how to achieve that allocation across your multiple accounts:

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement
http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

Some mix of Fidelity's Spartan Funds (US stock/international stock/bond/REIT) is all you really need across all your accounts (except your 401(k) where you probably don't have that freedom).

Changing the funds in your taxable account will likely incur capital gains taxes, so you will want to weigh that cost against the benefit of having a less-confusing portfolio. If you'll be returning to school full-time (and thus, lowering your income dramatically), then you should wait until that point since you won't be charged taxes then.

Matt J

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Re: Young Investor - How am I doing?
« Reply #6 on: April 30, 2015, 02:59:45 PM »
When you say go back to school, did you mean stopping working to go to school or going at night? I think that will make a difference in how you put money aside for the education expenses.

Cwadda

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Re: Young Investor - How am I doing?
« Reply #7 on: April 30, 2015, 03:02:59 PM »
I think the general advice people give is to max out your 401(k) to $18k/yr, whatever percentage of your pay that is. This is because you'd decrease your taxable income. To my understanding if you max $18k in there and your tax rate is 15% then you'd be saving $2700/year. With your income and spending situation, maxing seems reasonable.

Another recommendation would be to utilize an HSA. To do this you must have a high-deductible health insurance plan. An HSA allows you to contribute $3350 to a tax deferred account (a pseudo Traditional IRA). Also when you contribute to your HSA via an automatic payroll deduction, you are able to avoid paying Social Security and Medicare taxes on your contributions. This money can be invested as you see fit or drawn with qualified medical expenses if necessary.

Hope this helps!

NICE!

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Re: Young Investor - How am I doing?
« Reply #8 on: April 30, 2015, 03:09:36 PM »
you're doing great, especially for your age.

Read through everything skyrefuge posted. It is gold. This is in his links, but you probably don't want to hold bonds in your taxable accounts (except for certain types, but the fund you mentioned isn't holding those).

Doulos

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Re: Young Investor - How am I doing?
« Reply #9 on: April 30, 2015, 05:28:47 PM »
I want to lean in on the side of "Awesome!".

My advice/question is.
Why do more school?  What is the time cost?  Are you still working or just going to school?  What are the opportunity costs of this extra schooling?  How much more pay 'should' you make with this additional education investment?
That all leads to "What is the ROI?" (Return On Investment).

Further education is an investment.  Just like other investments, it is matter of cost in vs profits out.  And what the risks.

So, for example, if you make $80k now.  And you theoretically will make $90k with this new education.  And you work the whole time.  And it only costs $40k.
The education will pay itself off in 5 years (with post tax dollars, interest rates on loans, etc).
Thus if you are planning to work for greater than 5 additional years after this education upgrade, you start making money on it then.

In summary.  Do the math and go in on this education investment with your eyes open. 
- Too many people 'get an education' and end up with a life long financial loss instead of a brighter future; with $200k debts and no job prospects.

Frugal_NYC

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Re: Young Investor - How am I doing?
« Reply #10 on: April 30, 2015, 10:16:36 PM »
Thanks for the replies everyone - looks like a lot of good info I need to sift through

Regarding going back to school - I would only go back to school in a part-time capacity to get my MBA.  What's difficult is that the $40K option is the "cheap" option, the alternative is $120K at an ivy league school.  I'm very conflicted, on the one hand I work in a corporate environment with C-level executives so the idea of a fancy education appeals to me in the sense that I'll theoretically gain respect and advance faster.  However, the mustachian in me realizes the power of $40k-$120k invested instead of spent on an education that may or may not net me significantly more down the line.





Spondulix

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Re: Young Investor - How am I doing?
« Reply #11 on: May 01, 2015, 02:49:12 AM »
Yikes... I would never go to an Ivy League school as a means of gaining respect faster. That's like saying you can purchase your way into a fast track in a career. It takes hard work, time, and doing your job well to move up a field.

Are you considering going FIRE, or are you looking to have a 20-30 year career in the field? That should factor into your decision, also.

Frugal_NYC

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Re: Young Investor - How am I doing?
« Reply #12 on: May 01, 2015, 02:34:01 PM »
Yikes... I would never go to an Ivy League school as a means of gaining respect faster. That's like saying you can purchase your way into a fast track in a career. It takes hard work, time, and doing your job well to move up a field.

Are you considering going FIRE, or are you looking to have a 20-30 year career in the field? That should factor into your decision, also.

I think this is why most people go to a Top 10 business school - if it doesn't fast track your career then the time and $ investment probably didn't pay off.  Graduates of these schools expect to get jobs paying $125K+

Regarding FIRE - I want to be in a position where I can retire early if I wanted too, but I think I would enjoy working at least part-time through my mid-40s at least.  Money motivates me now because freedom motivates me in the long run


Frugal_NYC

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Re: Young Investor - How am I doing?
« Reply #13 on: May 01, 2015, 03:06:09 PM »
1) Should I make changes to my taxable account?  I feel like there's no point to own 2 different funds here and the FFNOX fund even partially owns FSEVX which is in my Roth - how can I simplify here?

Yeah, your fund mix is a little screwy. FAMRX, FFNOX, and T Rowe Price 2055 can all be considered "all-in-one" funds. So owning three different versions is kind of like owning three different "all-in-one" exercise machines. It's just confusing with no real benefit. Now, there can certainly be reasons to own more than one of these (like if your 401(k) doesn't have the all-in-one that you prefer; this would be equivalent to owning a different all-in-one exercise machine at each of your two houses), but you should have a good reason like that.

Similarly, there can be reasons to own standalone funds alongside all-in-one funds (like owning some freeweights alongside your machine), but again, all-in-one funds were generally intended to be used alone to prevent you from having to add extra complexity.

Next, FSEVX by itself is an odd holding. That's an "S&P500 completion fund". The reason it exists is for people who wish to own the total US stock market, but only have access to an S&P500 fund in their 401(k). FSEVX holds the total US stock market minus the ~500 stocks in the S&P500. So the idea is to hold the S&P500 fund in your 401(k), and FSEVX in an IRA to "complete" the total market. Since you don't actually appear to own an S&P500 fund directly, it's a bit strange to hold its completion fund.

So I recommend first determining your desired asset allocation for your entire portfolio:

http://www.bogleheads.org/wiki/Asset_allocation

Then figure out how to achieve that allocation across your multiple accounts:

http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement
http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

Some mix of Fidelity's Spartan Funds (US stock/international stock/bond/REIT) is all you really need across all your accounts (except your 401(k) where you probably don't have that freedom).

Changing the funds in your taxable account will likely incur capital gains taxes, so you will want to weigh that cost against the benefit of having a less-confusing portfolio. If you'll be returning to school full-time (and thus, lowering your income dramatically), then you should wait until that point since you won't be charged taxes then.

Thanks for this, very helpful.  I will probably just keep the T Rowe Price as is for simplicity.

For my Fidelity accounts could I do this split:
Spartan Total Market Index Fund - Investor Class ( FSTMX ) 55%
Spartan International Index Fund - Investor Class ( FSIIX ) 25%
Spartan U.S. Bond Index Fund - Investor Class ( FBIDX ) 10%
Spartan Real Estate Index Fund - Investor Class ( FRXIX ) 10%

OR

Fidelity Freedom 2055 Fund (FDEEX) 100%

I assume option 1 would save me on expenses but option 2 reduces the complexity and re balancing headaches.  What do you guys think?



skyrefuge

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Re: Young Investor - How am I doing?
« Reply #14 on: May 01, 2015, 03:46:51 PM »
Thanks for this, very helpful.  I will probably just keep the T Rowe Price as is for simplicity.

For my Fidelity accounts could I do this split:
Spartan Total Market Index Fund - Investor Class ( FSTMX ) 55%
Spartan International Index Fund - Investor Class ( FSIIX ) 25%
Spartan U.S. Bond Index Fund - Investor Class ( FBIDX ) 10%
Spartan Real Estate Index Fund - Investor Class ( FRXIX ) 10%

OR

Fidelity Freedom 2055 Fund (FDEEX) 100%

I assume option 1 would save me on expenses but option 2 reduces the complexity and re balancing headaches.  What do you guys think?

Yep, your assumptions on the tradeoffs are correct.

Except you don't want the Fidelity Freedom 2055 Fund, you want Fidelity Freedom Index 2055 Fund (FDEWX). The latter invests in a handful of index funds, like your FFNOX does, while the former invests in a zillion expensive managed funds, which makes that fund both expensive itself, and philosophically stupid, since throwing a ton of managed funds together will just make them average out like an index fund anyway.

So if it was 0.78% ER of FDEEX vs. the ~0.10% ER of the individual Spartan funds, the decision would be easy, but with the 0.16% ER of FDEWX, it comes down much more to preference.

For what it's worth, in my 17-year investing career, I've never had to actively rebalance. Rare and minor adjustments to my contributions have been sufficient to keep my asset allocation where I want it. If you went with the individual funds, I would recommend holding the largest component of your AA (FSTMX) in your taxable account, and the other three in your IRA. That both keeps a tax-efficient fund in your taxable account, and minimizes the chance of any future rebalancings occurring on the taxable side.

Financial.Velociraptor

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Re: Young Investor - How am I doing?
« Reply #15 on: May 01, 2015, 04:00:59 PM »
Thanks for the replies everyone - looks like a lot of good info I need to sift through

Regarding going back to school - I would only go back to school in a part-time capacity to get my MBA.  What's difficult is that the $40K option is the "cheap" option, the alternative is $120K at an ivy league school.  I'm very conflicted, on the one hand I work in a corporate environment with C-level executives so the idea of a fancy education appeals to me in the sense that I'll theoretically gain respect and advance faster.  However, the mustachian in me realizes the power of $40k-$120k invested instead of spent on an education that may or may not net me significantly more down the line.

Have you asked your supervisor if there is an option to have work pay tuition or at least reimburse?  That usually means a five year commitment to the employer (you owe the money back if you leave before 5 years vesting).  I'd skip B-school otherwise.  I paid for my MBA but it was only about 1500 a semester at a regional university in Texas.  Hindsight 20/20, CPA would have been a better choice.

Doulos

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Re: Young Investor - How am I doing?
« Reply #16 on: May 01, 2015, 05:06:27 PM »
Thanks for the replies everyone - looks like a lot of good info I need to sift through

Regarding going back to school - I would only go back to school in a part-time capacity to get my MBA.  What's difficult is that the $40K option is the "cheap" option, the alternative is $120K at an ivy league school.  I'm very conflicted, on the one hand I work in a corporate environment with C-level executives so the idea of a fancy education appeals to me in the sense that I'll theoretically gain respect and advance faster.  However, the mustachian in me realizes the power of $40k-$120k invested instead of spent on an education that may or may not net me significantly more down the line.

Have you asked your supervisor if there is an option to have work pay tuition or at least reimburse?  That usually means a five year commitment to the employer (you owe the money back if you leave before 5 years vesting).  I'd skip B-school otherwise.  I paid for my MBA but it was only about 1500 a semester at a regional university in Texas.  Hindsight 20/20, CPA would have been a better choice.

This is an excellent point.
My wife just got a scholarship through work that has no strings attached.
So, if this degree you are pursuing really is important to your work, they might have the same kind of Scholarship program.  Or at the very least they would have the compensation program mentioned by Velociraptor here.

Frugal_NYC

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Re: Young Investor - How am I doing?
« Reply #17 on: May 04, 2015, 02:53:10 PM »

Yep, your assumptions on the tradeoffs are correct.

Except you don't want the Fidelity Freedom 2055 Fund, you want Fidelity Freedom Index 2055 Fund (FDEWX). The latter invests in a handful of index funds, like your FFNOX does, while the former invests in a zillion expensive managed funds, which makes that fund both expensive itself, and philosophically stupid, since throwing a ton of managed funds together will just make them average out like an index fund anyway.

So if it was 0.78% ER of FDEEX vs. the ~0.10% ER of the individual Spartan funds, the decision would be easy, but with the 0.16% ER of FDEWX, it comes down much more to preference.

For what it's worth, in my 17-year investing career, I've never had to actively rebalance. Rare and minor adjustments to my contributions have been sufficient to keep my asset allocation where I want it. If you went with the individual funds, I would recommend holding the largest component of your AA (FSTMX) in your taxable account, and the other three in your IRA. That both keeps a tax-efficient fund in your taxable account, and minimizes the chance of any future rebalancings occurring on the taxable side.
[/quote]

Thank you, you've been incredibly helpful!! 

Does anyone know of good charting tools where I could plug into symbols and compare value of $X invested over periods of time?  I've used Yahoo finance's but I'm not terribly fond of it.

Also RE: school, I still have to take the GMAT and after I would have a discussion with my boss about potential reimbursement - I'm nearly positive my company does not have an official reimbursement policy but there is a chance I could get special treatment.  However, the more research I do, the more I think this whole process may not be worth it.  I had a co-worker make a bit of a stink last year so my company sent our team to multiple training classes at a well-regarded professional institute so I think I will try to go to more of those this year.  Obviously this is far from an MBA but I think it shows I have desire to continually develop my knowledge base.

skyrefuge

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Re: Young Investor - How am I doing?
« Reply #18 on: May 04, 2015, 03:21:01 PM »
Does anyone know of good charting tools where I could plug into symbols and compare value of $X invested over periods of time?  I've used Yahoo finance's but I'm not terribly fond of it.

It sounds like Morningstar's "Growth of 10k" charts are what you're looking for. They importantly included reinvested dividends to show the total return, unlike many other charts that simply show the price. You have to enter a mutual fund symbol to create such a chart (I seeded the one in the link with FSTMX), but once you have the growth chart, you can add ETFs or individual stocks for comparison in addition to mutual funds.

aschmidt2930

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Re: Young Investor - How am I doing?
« Reply #19 on: May 04, 2015, 05:31:27 PM »
Apologies if you answered this already, as I didn't read all of the posts.  What are your life goals?  If your goal is to retire early, I would put some serious thought into it before going back to school.  The 120k option will push back your FIRE date substantially, 40k may get you there quicker, and it may not.  If your goal is to have a long career and make it to the C-Suite in finance, then yeah, you probably should. 

Frugal_NYC

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Re: Young Investor - How am I doing?
« Reply #20 on: May 05, 2015, 08:21:59 AM »
Does anyone know of good charting tools where I could plug into symbols and compare value of $X invested over periods of time?  I've used Yahoo finance's but I'm not terribly fond of it.

It sounds like Morningstar's "Growth of 10k"charts are what you're looking for. They importantly included reinvested dividends to show the total return, unlike many other charts that simply show the price. You have to enter a mutual fund symbol to create such a chart (I seeded the one in the link with FSTMX), but once you have the growth chart, you can add ETFs or individual stocks for comparison in addition to mutual funds.

Thanks again!  I also did some digging on my 401K options...I think I will create my own mix with the highlighted funds below as the 2055 fund was charging a hefty .76% fee.  My plan has a free auto-rebalance feature so that will take care of itself.

BONDS
   PTTRX   PIMCO TOTAL RETURN INSTL   
   BBT   US BOND ENHANCED INDEX TRUST B 10%

STOCKS
   RERGX   AMERICAN FUNDS EUROPAC GRW R6      
   THBFD   BALANCED INDEX FUND   
   XCT   EQUITY INDEX TRUST CLASS C   40%
   NAT   NEW HORIZONS TRUST CLASS A   
   ODVYX   OPPENHEIMER DEVELOP MARKETS, Y      
   PRSVX   SMALL-CAP VALUE FUND   
   T2T   TRP BLUE CHIP GROWTH TRUST T2   
   TRVLX   VALUE FUND   
      VEXAX VANGUARD EXTENDED MKT INDEX 25%
   VTIAX   VANGUARD TTL INT STOCK IND ADM    25%

I think that gives me this mix:
S&P 500 40%
Rest of Market 25%
International 25%
Bond 10%

My only question is should I just make the non-bond funds even at 30% each for simplicity?  Then based on everyone's advice I will duplicate this mix in my Fidelity account or just use the 2055 Index Fund if I want to not have to split things up.
« Last Edit: May 05, 2015, 08:26:42 AM by Frugal_NYC »

Ftao93

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Re: Young Investor - How am I doing?
« Reply #21 on: May 05, 2015, 08:30:45 AM »
I hate you!  You make a way better wage and have invested wisely/have no debt! :P.

All sarcasm aside, keep it up!  You have a great opportunity to do what you like and invest the rest.  Your hard work has paid off nicely, and if you keep investing like that you can't help but put a lot of people to shame later on.  It seems that you like what you do too, which is an amazing thing in life.

skyrefuge

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Re: Young Investor - How am I doing?
« Reply #22 on: May 05, 2015, 09:44:40 AM »
I think I will create my own mix with the highlighted funds below as the 2055 fund was charging a hefty .76% fee.  My plan has a free auto-rebalance feature so that will take care of itself.

Sounds like a good call, especially with the auto-rebalancing available. Going to 30/30/30 in your equities wouldn't really make anything much simpler, so you shouldn't let that be a tail that wags your dog's actual desired asset allocation.

Also, with your current 40/25 ratio for S&P500/Extended Market, that 25% is already overweighting the Extended Market. To duplicate the total market index, the two funds should be held in a 4:1 ratio. So that would change your 40/25 to 52/13. Now, overweighting the Extended Market (essentially overweighting mid- and small-caps) is certainly a defensible strategy, but just be aware that's what you'd be doing with a 40/25 (and even moreso with a 30/30).