Young and desperate for advice

[mrfinesse84]

Hello all. I am relatively new to 401(k)'s and investing in general. I'm starting to regret not taking business courses in college but I figured I'd ask for some of your opinions on my current situation. Any advice would be helpful. Here is my financial situation as of today:

Current age: 23

Salary: $42,000/yr.

401(k) contribution: 9% (starting as of paycheck on 2/22/08 - I contributed 0% prior to this point)

Current 401(k) assets: $710 all contributed by my Firm. Another Firm contribution coming in March - 6% of
salary.

401(k) assets allocation: 50% in stable principal fund, 30% in PTRAX, 10% in ABALX and 10% in ANCFX. (I
was just fooling around with the percentages one day and here's how I
distributed them in the "safe" funds being offered in my plan)

Liquid assets: $1,000 in ING Checking Acct (2.25% APY)
$500 in PNC Checking Acct. (no interest)
$4,000 in ING Savings Acct. (3.40% APY)

C.D.s: $10,000 at 5.45% APY for 7 months (matures in late March)
$8,000 at 4.24% APY for 7 months (matures in late August)

Here's the kicker: I plan on leaving my job in late August to attend law school. Obviously I'll need money for law school but I'll most likely take out student loans which can be deferred until I graduate (3 years). Keep in mind, the more I make in salary, the less student aid I'll receive from individual law schools. That's why I wanted to invest in my 401(k) to reduce the amount I "make" to increase chance of getting more free money for school.

By the time I officially leave my job, I plan on having approx. $3,000 in my 401(kit) plan - with my 9% contribution + my Firm's contribution in March + current funds in the plan. Its not a lot but its something. What are your suggestions on how I can maximize these funds for the future. I've read I should allocate my 401(k) funds into much more aggressive funds as I have over 30 years till retirement. My plan offers funds like DODFX, AEPGX, PVADX and ANCFX, which all have 5-star Morningstar ratings (although they've all taken hits in the past 3 months). Here's what I'd like advice on:

A.) With the market being as depressing as it is now, should I leave my funds in safe bonds/cash assets
until these "Recession" talks are quieted? Q2 or even late-Spring / early-Summer?

B.) When I leave my job, should I cash out my 401(k) and invest the money into a C.D.? Since its not a lot
of money.

C.) Would it be stupid to allocate 80%+ of my 401(k) funds into the "aggressive" mutual funds? Like
DODFX and AEPGX? Moreover, when looking at costs of funds, should I mainly be looking at expense
ratios to determine which funds would cost me the least? For example, DODFX has a 5-star rating and a
.66 ratio, does that mean that's more bang for my buck?

D.) Compared to other 23-years olds...how am I doing as far as planning for the future? Am I where most
of you were back when you were in your 20's? Am I not doing enough? I'd love to hear advice from
people who have been there and learned for better or worse during their early-mid 20's and investing

I know I threw a lot your way but any advice from those who know better than me would be helpful. Thank you.

[jIM_Ohio]

I would backup and look at a mid term plan.

DO NOT invest in the 401k if you plan on cashing it out in 6 months. You are better off just tucking the money away in CDs if that was the plan.

What are your real financial ambitions, now, and in the future.

Investing for 6 months and stopping is not a sound financial plan. I think you need to rethink what your goals are.

If you want to invest NOW for RETIREMENT (no matter what the amount), you want to use equity based investments in a 401k or similar vehicle. If you leave your job this should be rolled over into an IRA.

If you want to save money NOW for LAW SCHOOL, I woould skip the 401k and set money aside in a checking account.

If you want to split the pot, then do both with some logic as to how much you want invested for retirement (I suggest 10% of gross pay) and save whatever you can afford for law school.

More than likely the rate of return on the 401k (8-12% annually) will be higher than the interest rate on a student loan (5% or less). Investing more and keeping less cash will be best long term solution. But if short term goals are more important, this logic might have exceptions to rules.

[maat55]

As young as you are, any money you are investing longterm should be in aggressive growth, growth and income, growth and international funds. When you leave your job you should roll your 401 into an IRA diversifying into the funds above. I would prefer to see you save a boat load of money over the next two years before you jump into a lot of SL debt, but either way your degree will provide good income to tackle the debt you aquire for school. Hopefully you will concentrate heavily on paying off your debt after you become a lawyer instead of buying expensive cars and homes. You sound like you will do well. Good luck.

[disneysteve]

With the market being as depressing as it is now, should I leave my funds in safe bonds/cash assets
until these "Recession" talks are quieted?

Let's ask that differently and see how you would answer.

Should you invest in the stock market now when prices are down a fair amount or should you wait until the prices have gone back up and then buy?

What do you think?

[Broken Arrow]

Yeah, let me second what Steve said, because it's so important.

Truth is, anytime is a good time to invest, because the most important thing in investing is to actually do it! (Maybe it's a given for the SA crowd, but some people don't even get this far.)

However, if you must wait for a good time to jump into the market with investing... that time happens to be NOW!

[parafly]

A.) With the market being as depressing as it is now, should I leave my funds in safe bonds/cash assets until these "Recession" talks are quieted? Q2 or even late-Spring / early-Summer?

No. Short term fluctuations in the market will have very little effect on your retirement savings in 40+ years. At this stage in the game, you should have a high risk tolerance. Also, casual investors who try to "time the market" usually get burned.

B.) When I leave my job, should I cash out my 401(k) and invest the money into a C.D.? Since its not a lot of money.

No. Take your 401K and roll it over into an IRA with Fidelity, T Rowe Price, Vanguard, etc.

C.) Would it be stupid to allocate 80%+ of my 401(k) funds into the "aggressive" mutual funds? Like DODFX and AEPGX? Moreover, when looking at costs of funds, should I mainly be looking at expense ratios to determine which funds would cost me the least? For example, DODFX has a 5-star rating and a .66 ratio, does that mean that's more bang for my buck?

At your age, you should be 100% in aggressive funds. Expense ratio is important and you obviously want it as low as possible, but don't let that stop you from investing in a fund you really like. Just put your money in a fund you feel comfortable with and let the magic of compounding interest work in your favor.

D.) Compared to other 23-years olds...how am I doing as far as planning for the future? Am I where most of you were back when you were in your 20's? Am I not doing enough? I'd love to hear advice from people who have been there and learned for better or worse during their early-mid 20's and investing

You are doing great, probably in the top 1% percentile for your age. My only advice would be to stick to the aggressive funds and don't worry about the short term flucuations in the market. You are in it for the long haul, so no need to worry.

Also, by the sound of it there is a good chance that you will be priced out of investing in a Roth IRA at some point in your life and you will be taxed at a high rate when it's time to retire. Max out a Roth IRA every year while you still can. I would recommend a Target Retirement Fund which automatically adjusts for you and has a low expense ratio like VFIFX.

[mrfinesse84]

I'm almost certainly I'm not going to cash out the 401k in 6 months, esp. with everyone telling me not to b/c I'd probably lose 30-50% of the money with taxes. So the money is def. going to be staying in the 401k.

As far as rolling into a IRA. According to my Firm's benefits listing, as long as the 401k value is more than $1,000.00 I will not be asked to cash it out upon departure and I may be allowed to keep the money in the same plan. So if this option is available to me, what would the (dis)/advantages be of rolling over into IRA or keeping it as is in its current plan?

Of course law school isn't going to be cheap. But I'm not going to be struggling to pay off upcoming debts. I have money of my own and my parents will be there to help (I know I know - but I'm only 23! Give me a break). So, its not like I'll be needing the money in the 401k to pay for school. Plus, I hope to land a decent job both as a Summer Associate during law school and after law school to help ease the burden of the bills.

But I guess my main question would be pros and cons or rolling into an IRA if I don't have to. Remember, I'm not too savvy on this topic...do IRA's have better returns? Are they cheaper? etc...

[mrfinesse84]

Disneysteve - You're totally right. I would be a wise move to jump onthings what are cheaper than regret it later on. I think I'll alter my allocation from its current 50% in stable principal fund, 30% in PTRAX, 10% in ABALX and 10% in ANCFX into the following:

(I'm only listing the 5-star rated mutual funds my Plan offers. I know something that's 5-star this year may not remain so in the future, but thats why I'll stay on top of this and alter then when time arises)

2% Stable Principal Fund
3% PTRAX
10% PVADX
10% FSCDX
10% ANCFX
32% DODFX
33% AEPGX

Is this more aggressive and applicable to my long-term outlook on retirement plans?


By the way, I'd like to thank everyone who was kind enough to help me on this. I'm still very naive on this topic and plan on relying on your advice in the future. Its comforting to know there are people to help a youngster out...

[disneysteve]

But I guess my main question would be pros and cons or rolling into an IRA if I don't have to. Remember, I'm not too savvy on this topic...do IRA's have better returns? Are they cheaper? etc...

A 401K is an account that your employer controls. An IRA is an account that YOU control. That's one difference. The other big difference is that in the 401K, you are limited to the investment choices they offer. Once the money is in your control, you can invest in any way you'd like - your options are limitless.

IRAs and 401Ks are just types of accounts. What kind of return you can/will get depends totally on how you invest the money within those accounts.

[jIM_Ohio]

A 401K is an account that your employer controls. An IRA is an account that YOU control. That's one difference. The other big difference is that in the 401K, you are limited to the investment choices they offer. Once the money is in your control, you can invest in any way you'd like - your options are limitless.

IRAs and 401Ks are just types of accounts. What kind of return you can/will get depends totally on how you invest the money within those accounts.

also mention that 401k rules usually state you can begin qualified withdraws at age 55 (check plan rules) where as IRS rules require earliest withdraw at age 59.5, unless rule 72(t) SEPP is used.

[jIM_Ohio]

Disneysteve - You're totally right. I would be a wise move to jump onthings what are cheaper than regret it later on. I think I'll alter my allocation from its current 50% in stable principal fund, 30% in PTRAX, 10% in ABALX and 10% in ANCFX into the following:

(I'm only listing the 5-star rated mutual funds my Plan offers. I know something that's 5-star this year may not remain so in the future, but thats why I'll stay on top of this and alter then when time arises)

2% Stable Principal Fund
3% PTRAX
10% PVADX
10% FSCDX
10% ANCFX
32% DODFX
33% AEPGX

Is this more aggressive and applicable to my long-term outlook on retirement plans?


By the way, I'd like to thank everyone who was kind enough to help me on this. I'm still very naive on this topic and plan on relying on your advice in the future. Its comforting to know there are people to help a youngster out...

can you post names and asset classes of funds please?

[maat55]

Suzie Orman said something about being able to invest in Roths at any income in 2010 and you could roll regular ira's into them at that time.

[disneysteve]

3% PTRAX - bonds
10% PVADX - Small cap Value
10% FSCDX - Small cap Growth/Value
10% ANCFX - Large cap Growth
32% DODFX - International
33% AEPGX - Europe/Pacific Basin

That wouldn't be my portfolio, but I'm not you.

I certainly believe in international investing, but I think 65% is far too much. I'd have less in international, more in large caps and probably nothing in bonds at age 23.

Jim, your thoughts?

[maat55]

World funds types invest in US and International. I have one that is 13% over the last 15 years.

[jIM_Ohio]

That wouldn't be my portfolio, but I'm not you.

I certainly believe in international investing, but I think 65% is far too much. I'd have less in international, more in large caps and probably nothing in bonds at age 23.

Jim, your thoughts?

65% int'l is too much currency risk for MY taste.

10% domestic large cap is way too low for MY taste.