401(k) and Investing

[Big G]

Currently I have a 401k which I put 5% of my paycheck into (my company matches part of the 5%) The 401k is split between 2 mutual funds:
BARON GROWTH and H & W LG CAP VALUE I (60/40 split) Besides that I put 3% into a company stock purchase plan (get to put stock at a discount, but if I sell the stock before a year I only get back what I paid) and finally $100 per paycheck into my HSBC account.

What else should I be doing with my money? I'm currently 24 years old and I earn about $32,000/yr ... I will be getting married this summer and will be moving over to my finance insurance I was thinking of upping the amount I put into retirement after I get rid of the health insurance expense. My job just started offering a Roth IRA ... should I take the money which was going into Health Insurance and put it in an IRA? What is the advantage of an IRA over my 401k? (Sorry for all the new questions, I'm new here and trying to get my finances on track)

[bjl584]

Go for the Roth. The advantage of a Roth is that it is not taxed when you start to withdrawl from it as you are with a traditional IRA or a 401K. You contribute to a Roth on an after tax basis as oppsed to before as you do with a 401K. If you can work it into your budget, defenitely start up a Roth in addition to your other accounts.

[jIM_Ohio]

Originally Posted by Big G

Currently I have a 401k which I put 5% of my paycheck into (my company matches part of the 5%) The 401k is split between 2 mutual funds:
BARON GROWTH and H & W LG CAP VALUE I (60/40 split) Besides that I put 3% into a company stock purchase plan (get to put stock at a discount, but if I sell the stock before a year I only get back what I paid) and finally $100 per paycheck into my HSBC account.

What else should I be doing with my money? I'm currently 24 years old and I earn about $32,000/yr ... I will be getting married this summer and will be moving over to my finance insurance I was thinking of upping the amount I put into retirement after I get rid of the health insurance expense. My job just started offering a Roth IRA ... should I take the money which was going into Health Insurance and put it in an IRA? What is the advantage of an IRA over my 401k? (Sorry for all the new questions, I'm new here and trying to get my finances on track)

Goal #1 would be 10% overall savings based on gross pay. This means add your gross pay to your fiance's. Is 10% being invested for retirement?

could be 5% 401k+5% to Roth, but it needs to be 10% based on a few factors.

If you are saving 10%, you are clearly living below your means. If something happens you can stop the retirement contributions to get a 10% raise (short term). 15 or 20% savings rate would be even better, 10% is where it all starts (if you want some examples, please ask).

Goal #2 would be an emergency fund equal to 2-3 mos expenses of your new combined gross income.

You did not mention fiance's income, savings level, debt level etc... Prior to getting married, we needed to pay off my wife's consumer debt and do a few things to repair her credit score.

Have you taken a financial course with your spouse? We took one thru our church and it was a positive experience. We took a second during pre-canna. I strongly suggest starting financial discussions now... even after doing the two courses, we argue more about finances than we do anything else.

[Big G]

Originally Posted by jIM_Ohio

If you are saving 10%, you are clearly living below your means. If something happens you can stop the retirement contributions to get a 10% raise (short term). 15 or 20% savings rate would be even better, 10% is where it all starts (if you want some examples, please ask).

I've always heard to set aside 10% but I don't know why. So I guess I'll take you up on examples. I have no idea of what percentage I'm investing now, I know 5%(401k)+3%(employee stock option) =8% I would assume stock options do not count in this figure.

Originally Posted by jIM_Ohio

Goal #2 would be an emergency fund equal to 2-3 mos expenses of your new combined gross income.

I would count my savings account as an emergency fund, it gets $200 a month.

Originally Posted by jIM_Ohio

You did not mention fiance's income, savings level, debt level etc... Prior to getting married, we needed to pay off my wife's consumer debt and do a few things to repair her credit score.

Have you taken a financial course with your spouse? We took one thru our church and it was a positive experience. We took a second during pre-canna. I strongly suggest starting financial discussions now... even after doing the two courses, we argue more about finances than we do anything else.

We haven't really talked about finances yet ... I never thought of taking a financial course, will have to look into that! She's a teacher and it making a little less then I am, she has some credit card debt, and student loans. She has a retirement from the state, not sure of the percentage

[jIM_Ohio]

Originally Posted by Big G

I've always heard to set aside 10% but I don't know why. So I guess I'll take you up on examples. I have no idea of what percentage I'm investing now, I know 5%(401k)+3%(employee stock option) =8% I would assume stock options do not count in this figure.

If any of this gets too long, either start a new thread, or ask me to hone in on what questions you have.

You have the distinct advantage over many people which earn more... SS will replace a larger % of your income than it will mine (SS replaces only 25% of my income, it will probably replace close to 75% of yours).

You make 32k per year. Saving 10% knocks your "livable" wage down to 29k and invests 3.2k per year. You will be conditioned to live on 29k (90% of your income level).

To earn 32k in retirement you need to have $1,000,000 ($1 M) to replace this income. This assumption includes a 25% increase in wages (you could make up to 40k and this is still true), and assumes 4% is withdrawn every year in retirement.

the 3.2k you save each year will be enough to reach the $1 M goal. I'll list this later. You have many cushions built into the $1 M. One is you have been conditioned to live on less (have you read you need 80% of what you make in retirement?), as you are living on 90% to begin with.

All retirement savings rates come down to saving "relative to an income level". Meaning save 10% of income level (or 15% or 20%). The issue for someone making 6 figures is $10,000 (or more) a year is MUCH MORE to save, and much harder to actually do.

Here are some checkpoints for you to replace 32k in income for retirement
Assume retirement at age 67. $1 M goal. Current age of 24.

If you have saved

15k by age 31, you need a 12% return to retire
31k by age 34, you need a 11% return to retire
31k by age 31, you need a 10% return to retire
31k by age 27, you need a 9% return to retire (or 62k by age 35 @ 9%)
62k by age 31, you need an 8% return to retire
62k by age 25 (can you get there by next year? LOL), you need a 7% return to retire
125k by age 31, you need a 6% return to retire

If you hit any of these ages/milestones, you will be "on track" AND be able to replace 100% of 32k income.

Now take a person making 100k. If they saved same amount as you (3.2k) each year, they are only saving 3% for retirement. They would have same milesstones as you... but would be only replacing 30% of their retirement income. This person would likely have to move (to a smaller house) and spend less money in retirement because they saved too little.

However, if the person making 100k saved 10%, their milestones would look like this. Need 3.125 M to retire (income range betwen 100k and 125k), 4% withdraw rate.


48k by age 31, need a 12% return to retire
98k by age 34, need a 11% return to retire
98k by age 31, need a 10% return to retire
97k by age 27, need a 9% return to retire (or 195k by age 35 @ 9%)
195k by age 31, need an 8% return to retire
195k by age 25, need a 7% return to retire
390k by age 31, need a 6% return to retire

So if you made "more money" notice how you need to still stick away 10% just to sustain your income level/ spending level in retirement.

The milestones show savings needed to retire at age 67. If you hit ANY of those milestons (amount saved by given age), you could contribute "nothing" more and still reach goal (based on rate of return and compounding).

Couple of points- if you want 11% or 12% return, good luck.
10% and 9% return would be ~100% equity (maybe 90-10?)
7 and 8% return are 75-25, maybe 60-40 if early years are higher than 7-8%.
6% could be 30-70 mix.

This chart always favors getting more money in early. For example, on my chart, I am REAL close to the age 35 miletone (I just turned 34) for 9% return. Meaning that my additional contributions contribute to early retirement and my existing fund are enough if I leave it be... We are "selling out" this year to get more into the accounts, knowing we'll probably cut back a few years later.

Saving early is more important than saving often.

[Big G]

jIM_Ohio Thanks for all the info, It's a lot to wrap my mind around ...

So it sounds like I need to up my retirement amounts to 10%. Should I put the extra 5% into my 401k or a Roth IRA? Also I am unsure of the mutual funds I am invested in, someone who knows a great deal more then I do about finances told me that those were the two I should invest my money in, I ran a report for last year (2006) and it said my rate of return was 14%.

[jIM_Ohio]

How much is in your 401k now? My numbers were not meant to scare you...

here is whole 9% chart

9.0%
8.0 years to double

age
67 1,000,000.00
59.0 500,000.00
51.0 250,000.00
43.0 125,000.00
35.0 62,500.00
27.0 31,250.00
19.0 15,625.00

31k in 3 years might be tough, but 125k by age 43 is quite doable.

List your 401k choices (including tickers) and I'll tell you what I think...

How much you have saved and what return rate (8%-10%) you are shooting for would help as well.

I think you will see biggest bang for buck in 401k. There is a tax deduction NOW which will help you. I might consider NOT using the company stock and put that 3% (or 4%) into 401k. Because 3% into stock is post tax, you might be able to put 4% into 401k and not see a change in take home pay.

Conventional wisdom suggests put money into 401k up to match, then put 4k into Roth, then more into 401k. I do agree with the math... but at same time the immediate tax savings to someone of your income level will help "more money" works for you now, worry about taxes later. Once you get more income, add that additional income to Roth (you'll then be saving 3.2k+4k=7k of 36k income>20% savings rate).

At that point yoo'll hit the milestones previously listed sooner.

[Scanner]

I agree with the poster who said this - go for the Roth, since a tax deduction at 32K/year isn't really that big in the scheme of things.

When you retire, that money is yours, free and clear of taxes.

Also I am unsure of the mutual funds I am invested in, someone who knows a great deal more then I do about finances told me that those were the two I should invest my money in, I ran a report for last year (2006) and it said my rate of return was 14%.

You should understand what you are in and what relative risk they have of losing principal.

You need to be comfortable with the risk and the potential reward.

[jIM_Ohio]

Originally Posted by Scanner

I agree with the poster who said this - go for the Roth, since a tax deduction at 32K/year isn't really that big in the scheme of things.

When you retire, that money is yours, free and clear of taxes.



You should understand what you are in and what relative risk they have of losing principal.

You need to be comfortable with the risk and the potential reward.

Going for the Roth is NOT a bad suggestion. If OP cannot fully fund Roth, it might cost him $10-$25 a year in IRA fees until balance is north of 10k. Assume it takes 4 years to get to 10k... that is $40 extra. Where as the savings on the tax deduction is probably $40-$100 now per month. That could be a $520 swing per year. I would need to run more exact numbers to be sure... but remember it's always easiest to spend someone else's money.

[Big G]

Originally Posted by jIM_Ohio

How much is in your 401k now? My numbers were not meant to scare you...

As of the end of the day yesterday my 401k has a balance of $3,892.29. I will have been paying into it for 2 years this June. My company only started kicking in after I had been with the company for 6 months.

Originally Posted by Scanner

You should understand what you are in and what relative risk they have of losing principal.

You need to be comfortable with the risk and the potential reward.

I'm comfortable with taking risks, I have had my friend look at how my 401k is doing and he said my rate of return last year was good so I shouldn't worry, but I wanted to get some more input on the 2 mutual funds I am invested in.

[disneysteve]

Originally Posted by Big G

We haven't really talked about finances yet

You are already getting great financial advice, so I'm going to go in a different direction and address this comment.

The number one thing couples fight about and ultimately one of the top reasons for divorce is finances. If you are engaged to be married and have not yet discussed finances, you need to do it NOW.

It sounds like you are living below your means and saving for your future. You want to marry someone who shares those values and practices. Scan these boards and you'll see how many threads there are from one spouse complaining about the spending habits of the other spouse. Better to get all those issues out in the open now and decide together how you will handle everything once you get married (or even before you get married).

My wife and I combined all of our finances shortly after we got engaged - converted everything to joint accounts and started looking at all of our income and savings as one big pool of money to be managed together.

I think this is one aspect of a relationship that far too many people ignore until it is too late and they find themselves constantly battling with their spouse over money. Make sure you are both on the same page about your spending habits, your saving habits and your hopes and goals for the future. You are in this together for the long term and need to work as a team.

[Big G]

I know we need to talk about finances, we haven't talked about it at all ... planning for the wedding seems to take up most of the time (unknown to me there are about 4 million things to do for a wedding) ...
We will have to sit down soon and talk it over.

[anonymous_saver]

The 10% savings amount is a somewhat arbitrary amount of saving towards retirement. Most just state this amount as a first step - it is a good goal to start off with.

I also would argue that it is more difficult for someone who makes $32,000 to put 10% into retirement over someone who makes $100,000 a year. Someone who makes $32,000 a year probably needs most of their income to pay for necessities, while someone who makes $100,000 a year doesn't (necessarily) need all of their money for necessities, they would likely have much more "wiggle room" to have more fun with their money. Just my opinion though.

It is really just a case by case basis. For example, I save 25% of my income and I have a pension. My goal is to retire by age 50-55 though (I'm 24 now and make $35,000/yr.) so that is why I am saving so aggressively.

[disneysteve]

Originally Posted by anonymous_saver

The 10% savings amount is a somewhat arbitrary amount of saving towards retirement. Most just state this amount as a first step - it is a good goal to start off with.

It isn't entirely arbitrary. It is based on the % of income you would need to save throughout your working years to adequately replace your income when you retire. However, it assumes you start saving when you start working in your mid-20s and that you work until age 65. If you don't start saving until later in life and/or plan to retire early, you need to save more than 10%.

[jIM_Ohio]

Originally Posted by anonymous_saver

The 10% savings amount is a somewhat arbitrary amount of saving towards retirement. Most just state this amount as a first step - it is a good goal to start off with.

I also would argue that it is more difficult for someone who makes $32,000 to put 10% into retirement over someone who makes $100,000 a year. Someone who makes $32,000 a year probably needs most of their income to pay for necessities, while someone who makes $100,000 a year doesn't (necessarily) need all of their money for necessities, they would likely have much more "wiggle room" to have more fun with their money. Just my opinion though.

It is really just a case by case basis. For example, I save 25% of my income and I have a pension. My goal is to retire by age 50-55 though (I'm 24 now and make $35,000/yr.) so that is why I am saving so aggressively.

It is easier for the person making 32k to retire with close to their income level than it is for the person making 100k.

SS will replace close to 50-75% of the 32k income for the lower income person (and not be taxed?). So if person could not afford to save 10%, or missed the $1 M goal, SS will bail them out and it still might appear to be "normal".

For the 100,000 k earner, SS MIGHT replace 25% of income level, and depending on other sources of income, would be taxed. So the person making 100k needs to save MORE (as a % of income) than the person making 32k.

[jIM_Ohio]

Originally Posted by Big G

As of the end of the day yesterday my 401k has a balance of $3,892.29. I will have been paying into it for 2 years this June. My company only started kicking in after I had been with the company for 6 months.

My numbers probably shocked you... my bad. This table is meant to be a stepping stone. You have been saving for 2 years. NO WAY would you have hit those numbers. NO WAY.

Create a short term plan to MONITOR progress. This table is the monitor, you are saving enough and just need more time. To make sure you are on track, check the table once you hit ~15k.

The 12% chart is this.

12.0%
6.0

age
67 1,000,000.00
61.0 500,000.00
55.0 250,000.00
49.0 125,000.00
43.0 62,500.00
37.0 31,250.00
31.0 15,625.00

You are well on your way to 15k at age 31. You could lose money and still be here (saving 10%@7 yrs*3200 yr).

This would be your "minimum". 12% return can be done for short amounts of time. 12% returns for ~3 years should move you to 10% table.

Then look at 10%.

10.0%
7.2

age
67 1,000,000.00
59.8 500,000.00
52.6 250,000.00
45.4 125,000.00
38.2 62,500.00
31.0 31,250.00
23.8 15,625.00

You can then say 31k at age 31 is more likely ( 7 years, 3k each each year (if saving 10%), is $21000. You will be close with 6% returns between now and age 31.

You will be living the 10% world until you reach either 31k at age 31 or 62k at age 38. The you can move the area of more conservative investing (for early retirement).

The sheet is designed to tell me when I can adjust my risk downward (own more bonds). Right now I am at 0% bonds because I am in 10% territory. Getting to a 9% milestone means I had 2-3 good years since hitting a 10% milestone a few years back.

It's a way to emasure progress. My wife only has 10k in her 401k and isn't even on any of the charts (no where close). My Roth is barely on the charts as well (meaning I have more work to do).

[jIM_Ohio]

I'm comfortable with taking risks, I have had my friend look at how my 401k is doing and he said my rate of return last year was good so I shouldn't worry, but I wanted to get some more input on the 2 mutual funds I am invested in.

I'd increase from 2 funds to about 3-4.

Large Cap
Small Cap
International

Check my blog... I actually use 7 funds for my typical portfolio for proper diversification.

Large Cap Value
Large Cap Growth
Mid Cap
Small Cap
International Large Cap
International Small Cap

I have one extra fund (emerging markets bond) which I keep a small position in. it has given me >10% returns last 3 years... so I have my reasons for picking it and keeping it.

I THINK Scanner has 3-4 funds he uses (I think it's domestic, international, REITs and commodities).

Either strategy should be diversified enough. Steve might argue I am to dependant on CEOs and I might argue he's too dependant on materials. But we are both diversified. In more than 2 funds.

[Big G]

jIM_Ohio,
I guess I am confused, should I be putting more into my retirement or does everything look to be on track? The one thing I could easily do is next quarter drop the employee stock plan and move that 3% over to retirement bringing that total up to 8% invested.

Should I be in an stock plan at this point? I know I am making money with it, when purchasing the stock I get it at a big discount so when I sell it the profit should be that much higher. The stock is TYL ...

[Scanner]

Jim,

I hadn't thought about Roth IRA fees entering the equation. Good point.

Peak earning years are generally 35 to 55. . .so I am not sure we can make too much judgement on what the earning potential of this couple is. One is a teacher - that says to me that there will be a pension 25-30 years down the road, much earlier than 65 y.o. I think pensions are taxed as income so it's why my gut went with the Roth.

I know you mean well by punching the numbers but I think you are overwhelming him here.

I think you told me that a Roth has a potential for prinicipal withdrawal and there's a good chance they'll need that for something someday (house, medical bills, college, home improvement). The 401(k) is entirely hands off.

BTW, I'm the one with commodities - no biggie. You and Steve are the CEO guys My silver recoverd like .25% today, LOL.

[jIM_Ohio]

Originally Posted by Big G

jIM_Ohio,
I guess I am confused, should I be putting more into my retirement or does everything look to be on track? The one thing I could easily do is next quarter drop the employee stock plan and move that 3% over to retirement bringing that total up to 8% invested.

Should I be in an stock plan at this point? I know I am making money with it, when purchasing the stock I get it at a big discount so when I sell it the profit should be that much higher. The stock is TYL ...

You'll know in about 4-8 years if you are "on track"... you hadn't hit the "checkpoints", which means you still need to contribute.

Company stock purchased at a discount... has pros and cons.

What I saw was your company is worth ~$500M. I think it's stock would be volatile (unless company would grow to $2 B-$ 5B territory.

I started at a small company 10 years ago... worth $450 M, we got bought out 4 years after I started. There are pros and cons of holding company stock.

My advice would be:

short term, 8% to 401k, no company stock. This lasts until you hit a 10% milestone.

mid term reduce 401k to 7% and use 1% for stock purchase. Watch purchasing any mutual fund which invests in your company's stock.

long term- as investment picture clears up (in 8% or 9% return range and on cruise control), I would look at a larger position in taxable stock accounts.

Then we could start a tax discussion and not a savings discussion.