best investment/retirement strategy for me

[sneezel22]

Hey all,

I have been thinking about my financial planning for the last couple months and have come up with my own strategy, but I would like to see what you recommend for me. Below are my key details, let me know if you need more info:

Age: Just turned 23
Salary: 62,000
No loans
Total monthly expenses usually around $1200-1400

$15,000 in online savings account that earns 1.1% apr
$6,000 in an online brokerage account that I manage myself

Currently I have a 10% of my salary deducted from my paycheck that is deposited to my 401k, which is invested in a 2055 portfolio strategy. My employer matches this to 4%. However, to attain the 4% match I only need to put 5% in myself.

I've recently discovered the concept of the Roth IRA. I plan on continuing to keep the putting 10% into my employers 401k plan, keep their match of 4%, and also put 415 per month into a Roth IRA (but I still need to choose where I do it, and what to invest it it)

Since I assume I will need some money in the future (buying a car in a year or two, buying a house a few years down the road as well) I am having trouble figuring out what balance to strike between putting money into my savings account vs my 401k. Is my strategy good so far? Or should I only be putting 5% into my 401k and the other 5% into savings that I can use for down payments on a car or house in the future.

I would be putting money into CD's rather than savings accounts, but the RoR on cd's is so bad right now it doesn't seem worth it to me to have that money locked up.

All advice is welcome.

Thanks,
Eric

[junkstuff1]

I don't know your tax situation exactly, but assuming a 25% overall tax rate I get the following with a 5% 401k and $5k Roth IRA contribution:

Income: 62k annual
401k: 3100
Taxes: 14.7k

After-tax income: 44.2k
Roth IRA: 5k
Expenses: 17k (high side of what you stated)

Leftover: 22k

I don't see why you have to compromise on your retirement savings for other things at this point. Great job keeping expenses low.

With this strategy, you'll be saving the equivalent of about 20% of your pre-tax income for retirement (the Roth contribution is after-tax, so I added the tax back in to calculate the savings percent. It also includes the employer match). This is plenty if you plan to retire around 65.

You should definitely get the employer match. It's a free raise. After that, I think the Roth IRA is better because you have a lot more investment options and it's a bit more flexible.

With the rest of the money, though, it seems like you need to define some goals. That will make it clear what to do with it.

[sneezel22]

Hey thanks for advice js.

I forgot to mention the fact that I am single so that will help you with the tax calculation. It's looking like after all my current deductions (HSA, 401k @ 10%) I am paying about 21.5% total taxes on my income.

The cash value of my paychecks that I receive ends up being around 3400 per month which after expenses usually means I have somewhere in the ballpark of $2000 cash leftover per month. So, this gives me about 24k. If I take 5k more out for the Roth, that leaves me with $19k that I can't figure out what I should do with it. Right now I have been putting it in the 1.1% APR online savings account, but I feel like theres just got to be something better.

I'm not sure exactly what you mean by goals. Do you mean reaching a certain amount of money by a certain time? If so, I don't think I really need that since I don't have a problem saving the money. I just am having trouble figuring out a model to maximize my returns on the 19k that I will be receiving. I already have 6k with an online brokerage that I used to satisfy my "day trader" desires, and with the way that has been going, I probably shouldn't put any more money into that account.

The only thing I can think of right now is mutual funds with the online broker I use, but something scares me about putting that money to risk. Also if I do that, I'm missing out on the 1.1% interest which in my opinion is actually pretty good since there is no risk. Any better options?

[Mr Nice Guy]

Originally Posted by sneezel22

Hey thanks for advice js.

I forgot to mention the fact that I am single so that will help you with the tax calculation. It's looking like after all my current deductions (HSA, 401k @ 10%) I am paying about 21.5% total taxes on my income.

The cash value of my paychecks that I receive ends up being around 3400 per month which after expenses usually means I have somewhere in the ballpark of $2000 cash leftover per month. So, this gives me about 24k. If I take 5k more out for the Roth, that leaves me with $19k that I can't figure out what I should do with it. Right now I have been putting it in the 1.1% APR online savings account, but I feel like theres just got to be something better.

I'm not sure exactly what you mean by goals. Do you mean reaching a certain amount of money by a certain time? If so, I don't think I really need that since I don't have a problem saving the money. I just am having trouble figuring out a model to maximize my returns on the 19k that I will be receiving. I already have 6k with an online brokerage that I used to satisfy my "day trader" desires, and with the way that has been going, I probably shouldn't put any more money into that account.

The only thing I can think of right now is mutual funds with the online broker I use, but something scares me about putting that money to risk. Also if I do that, I'm missing out on the 1.1% interest which in my opinion is actually pretty good since there is no risk. Any better options?

Go with the mutual funds. It is the best middle ground path you can take. You don't want to lose money day trading, and you also don't want inflation to eat up all your gains either. Inflation is a silent killer, making prices rise like 1-3% annually.

[sneezel22]

Ok, sounds good. By the way, I am having trouble understanding how to open/fund a Roth account.. should I just put 5k into one right now and at the beginning of each year (assuming I can afford it, which I believe I can...) or is it in my advantage to just put 415 in it per month?

Also, what type of mutual fund strategies would you recommend that I pursue?

[junkstuff1]

Originally Posted by sneezel22

I'm not sure exactly what you mean by goals.

What I mean by goals is figuring out what you're saving for. If you're saving for a house, a car, or a vacation, it can significantly affect your investment strategy. For instance, if you need to buy a car within the next two years, you will want to keep your money in a low-risk investment, or even cash. If you're saving for a summer home 30 years from now, you should go after the higher return potential that comes with higher risk.

[snafu]

With inflation @ 3% and increasing, 1.1% interest is losing buying power. Your comment suggests your trading a/c is losing money and you need to turn these around before increasing losses. You've done the right thing by contributing to a matched retirement plan. 1st rule in investing is only use money you do not expect to need for 5 years. 2nd rule is to try to honestly assess your risk tolerance. At 23, you have a lot of years to absorb the highs and lows of the economy. Both stock/equity and bonds/interest go up and down and you need to have investments that let you sleep at night.

While you learn more, I suggest you start with something simple like a Vanguard Index Fund or an Exchange Traded Index Fund [ETF]. You might find a Dividend Fund more appealing. Look on-line at their top 10 holdings and ask yourself..."if I were as rich as Mark Zuckerberg, would I buy shares in those companies?

Mutual Funds [MF] can be a good way to start because they offer Dollar Cost Averaging [DCA] with contributors evening out unit costs by making a set monthly contribution. It's shocking how fast value accumulates.

Are you willing to read a couple of books often mentioned on this site? Kiplinger's [magazine] is a fast, easy read.

[maat55]

Originally Posted by sneezel22

Ok, sounds good. By the way, I am having trouble understanding how to open/fund a Roth account.. should I just put 5k into one right now and at the beginning of each year (assuming I can afford it, which I believe I can...) or is it in my advantage to just put 415 in it per month?

Also, what type of mutual fund strategies would you recommend that I pursue?

I have T. Rowe Price auto draft my account each month. Between I and DW, we use 6 different funds for our Roths. They have target funds, as well.

[sneezel22]

thanks for the help guys. i took 5000 out of my savings account and opened a Roth IRA. still looking for a little more advice - specifically, how much should i be putting into my 401k. it is feasible for me to max out my contribution, but that would require nearly 25% of my salary to do that.

right now i am taking 10% of my salary towards my 401k, my employer matches 4%. with this strategy, after taxes and stuff, i am getting about 3400 per month in cash. my expenses are about 1200-1400 per month.

should i continue to put 10% in my 401k? should i up it to 25% to max my annual contribution? my concern is that in the next 2 years or so i will most likely need to buy a new car, and 5-8 years down the road i will be looking to buy a house so i dont want to have the majority of my money tied up in 401k funds.

thanks,
eric

[Slug]

Tell us more about the 401k. What are the offerings and expense ratios?

[sneezel22]

its through american funds, I can choose between about 15 mutual funds and also have about 10 target date funds to choose from. currently i have all my money going into the 2055 plan, but will probably be changing that to diversify more.

expense ratios generally look to be between about 1% to 1.5%

[snafu]

First, how do American Funds rank against their competitors, particularly their 2055. It's important to sort out your goals and the actions needed to get there. Take time to work out your risk tolerance. There are many questionnaires available to help you.

Start with your 4% employer retirement match. If you wish you can increase retirement savings anytime during the next 42 years. How much do you anticipate needing for a car purchase by target date fall 2013? Will you be happy with a depreciated 2 y/o vehicle or do you long for the smell of a new ride? What interest rate do you anticipate? To keep payments to 3 yrs/36 months what sum will be needed? If you invested in a Dividend Fund could you raise 8% per year? Some savings a/c could pay 3%.

You have a longer time frame saving for your 1st house. What is the average current price in your preferred community; extrapolate 20% for an approximate dollar figure. By dividing by 50 months you get a target figure to strive towards. You might decide to add any salary increases to your savings goal along with any windfalls. If you are comfortable with the idea of Mutual Funds or Exchange Traded Funds you easily increase your holdings.

It takes two business days for MF sums to show up in your linked bank account when you order a Sell.

[elessar78]

Sneezel, it might just be my experience, but I've found that this forum is great as a supplement to your own research. You're getting a lot of good advice so far, but the WHY is the more important thing. It's hard to get into the WHY in such a short format.

WHY is day trading risky?
WHY mutual funds over individual equities?
WHY do I need to pay attention to tax implications and expense ratios?

And a host of other questions. Rarely, you might come across a post that on the surface is good advice but not a fit for your investment objectives.

[sneezel22]

My parents are going to help me purchase my first car as a late graduation gift. They will probably be giving me about $10,000 to put towards the car when I decide to make the purchase. I'm not sure yet whether I'll be buying new or lightly used, but the price range I will be looking in will probably be the $23,000 - $27,000 range.

As far as housing goes, that really depends a lot on where I decide to live. If I choose to stay in/near my city, I could be paying around 250-300k for a pretty small, basic house. However (obviously) the more I go away from the city, the more I will get for my money. Either way, I would assume the price that I am looking to buy at would be somewhere in the range of $200,000 to $250,000 price range.

To reiterate, what I'm looking for now is some advice to strike that balance between putting money into my 401k as opposed to putting into regular mutual funds.

Thanks!

[snafu]

sneeze...you are seeking an easy, instant answer to a very complex decision making process which has serious implications for you many years from now. There are tax implications, employment circumstances and I can only begin to imagine the changes a government $14.+ trillion in debt might impose to thwart your plan over the next five decades. The simplest Golden Rule for retirement that I've seen is Divide your age by two, and put that percentage of earnings into a retirement plan about 12%.

How much money do you think you will need to live comfortably when you retire? How do you propose to get there? A Roth 401K was designed to be advantageous to younger employees who are in a lower tax bracket than they might be when they retire. Do you care what your tax bracket might be when you are drawing down? Will you always be an employee? What is the probability of being self employed?

At start we had defined pension plans and aimed to put 8% of net income into a retirement designated plan and 12% into a non retirement investment plan. The government changed the retirement allowable so many times I've lost track. We didn't always meet those figures but they were something to aim for.

[sneezel22]

i know there is no easy answer, i'm mostly looking for some theories/logic about what people think. i am completely fine if one person tells me to only put 5% into my 401k right now, and a different person suggests i put in 20%. it is their justification that im interested in.

at my current rate, i am putting $6200 away per year with my contribution to the traditional 401k and another $5000 per year into the Roth IRA. So thats like 18% of my gross income. obviously i cannot predict what will happen in the future, but I am just wondering if there is much of a downside with putting "too much" money into the 401k plan too fast since i will obviously be needing money in the future for large purchases.

i am curious why it matters if i plan on being self employed? IF that were to happen, it would be years down the road. otherwise i would say my employment is very stable and my salary will likely increase by about 2% year over year, in the long run.

thanks!

[maat55]

I would first apply 15%(fund 401k to the match, fully fund roth, apply anything left to 401k) to investments, then decide how much you would like to have for an car, house and other funds. If you come up with those numbers and still have money left, I would add more to the 401k.

You have to decide how much you wish to use for lifestyle. 15%(considering the ineptness of Congress, you might want to invest 20% or payoff house quicker) is sufficient for retirement, I would likely just use any extra savings as a car and house fund.