Maxed out Roth and in grad school

[chocolate123]

Hello All,

I am entering grad school this fall after several years in the work force. I have maxed out my Roth this year already. I will be receiving a living stipend while in graduate school that I will report on a 1099 form. I have substantial savings from working, and would like to invest them. After graduation, I have a government job lined up that will offer me access into the Thrift savings plan.

I would like to know what is my best investment vehicle for the next two years for my money after I have already maxed out the $5500 Roth contributions to my Vanguard index funds.

Thanks!

[disneysteve]

Welcome. The main question is what is your goal for that money? Is it for retirement? Is it for shorter term needs like buying a house or replacing a car? Are you single - Might there be wedding expenses in your future? Do you have a fully funded emergency fund? Do you have any consumer debt?

How you invest your money depends on what it is being invested for, and when.

[chocolate123]

My longterm goal is retirement (growth). I have a fully funded emergency fund (30,000). I have zero debt, and do not plan to buy a home (free housing via my job). I have an inexpensive car that I plan to upgrade after finishing grad school ("upgrading" means buying a used Civic or Accord to the tune of $4,000-$5,000 using savings that I plan to accumulate using my living stipend).

[smk]

when investing for retirement, the first thing you want to do is estimate the monies you will need during your retirement years (figure they will increase with inflation) and look to the assets which will match most closely with them. the second factor to consider may be the current market value of those assets and whether it makes sense to lock them in at current levels. the third factor would be how much deviation you feel you can withstand from meeting your objective. you can measure how much risk you are willing to take and that will tell you how much you can add of other asset classes.

the old way to do this was try to maximize your weatlh and hope that you can meet your ultimate aim of retirement income using a 4% withdrawal rate on your portfolio. most professionals now don't view a 4% withdrawal rate as viable, so when you maximize your wealth at a particular point in time, you don't really know whether you can meet your objectives of retirement income with it.

the approach in the first paragraph (called asset-liability management or liability driven investing) was initially used in the 1980's to help the bank and thrift industry deal with more volatility in the financial markets than they could handle. more recently major firms such as blackrock are using it for individual investors, noting that the pension industry used the old method and have largely been destroyed by volatility. i would suggest that if you don't know how to use the method in the first paragraph, you should learn how and then embark on an investment plan. that way you start and end your plan with your actual objectives in sight and objectively measured.

[chocolate123]

For now, I think I will concentrate on the second approach, as I am in my mid 20's with a long investment horizon. With that said, what investment options do I have if my only income this year is a living stipend via a 1099 form?

[Petunia 100]

For now, I think I will concentrate on the second approach, as I am in my mid 20's with a long investment horizon. With that said, what investment options do I have if my only income this year is a living stipend via a 1099 form?

A stipend is not considered earned income. To contribute to any type of tax-advantaged retirement account, you must have earned income.

Did you have any earned income in 2013? If so, you may contribute to an IRA.

If not, or if you wish to invest more than the annual IRA limit, use a taxable account. Low turnover funds are best for taxable accounts. Total market index funds are a very good choice. Or, look for funds with "tax-managed" in the title.

One way to approach this is to look at your taxable and tax-advantaged accounts as a single portfolio. Keep tax inefficient investments (bonds, high turnover funds, high dividend funds) inside tax-advantaged accounts.

Edit: My bad. Your title says you have already maxed your Roth. Taxable it is, then.

[smk]

For now, I think I will concentrate on the second approach, as I am in my mid 20's with a long investment horizon. With that said, what investment options do I have if my only income this year is a living stipend via a 1099 form?

The only reason to use the second approach is if you want to increase the chances of failing to meet your objective of providing enough retirement income. People think it simplifies the problem. But it does that by doing the wrong things and that becomes incredibly complex. You probably need to do an updated study of safe withdrawal rates for current interest rate environment. Low yields lower returns on bone and all competing products such as stocks. Otherwise you are just rolling the dice with your retirement funds. May work...may not...good luck.