401K suggestions

[kalpit210]

Hi all,

Brand new to investing. 25yo medical student, who by random change got introduced to investing and have been learning a LOT over the past few weeks. I currently can't invest (close to 100k in student loans, still a student = $0 income) but plan on living a frugal lifestyle till the loans are paid off after I'm done with school.

I did recently talk to my parents about what their retirement investments are - almost nothing. So I was hoping to get them started. Their AGI is about 100K with an EF in place that should cover 6-8 months, rest of the money is in TD Ameritrade brokerage account (~15K). My dad (55 yo) has been dabbling in "trading" stocks for the past couple years - sustained a net loss, no Roth IRA. My mom (48 yo) has a 401k at work with 6% matching contributions but no Roth IRA. She has been putting in about 10%/paycheck for the past couple years and has about 20k in her account. She has 100% of her money in the Principal Lifetime 2030 R6 fund that has an expense ratio of 0.92%. It was recommending by the advisor when she first opened the account and hasn't touched it since. Based on what I've been reading - that's fairly high. Her options are limited though, here's a screenshot of what's available with respective expense ratios and average returns. Would you guys recommend allocating the funds to a mix of maybe 3-4 funds with lower ER?

www flickr com/photos/98763459@N04/9262103719/
(forum rules won't let me post links... please add dots after www and flickr - sorry I'm breaking rules, just don't know how else to show the list of available options!)

I also talked with them about the benefits of Roth IRA. They are probably going to get one within the year with Vanguard and invest in some of the index funds or ETFs recommended on other threads. Is there significant advantage to one over the other? The only one, given my parents situation, is that with ETFs they will be able to diversify from day 1 with an initial contribution of 3K and then maxing out the annual contributions before the year end.

Thanks for the help and suggestions!

[Petunia 100]

Hi all,

Brand new to investing. 25yo medical student, who by random change got introduced to investing and have been learning a LOT over the past few weeks. I currently can't invest (close to 100k in student loans, still a student = $0 income) but plan on living a frugal lifestyle till the loans are paid off after I'm done with school.

I did recently talk to my parents about what their retirement investments are - almost nothing. So I was hoping to get them started. Their AGI is about 100K with an EF in place that should cover 6-8 months, rest of the money is in TD Ameritrade brokerage account (~15K). My dad (55 yo) has been dabbling in "trading" stocks for the past couple years - sustained a net loss, no Roth IRA. My mom (48 yo) has a 401k at work with 6% matching contributions but no Roth IRA. She has been putting in about 10%/paycheck for the past couple years and has about 20k in her account. She has 100% of her money in the Principal Lifetime 2030 R6 fund that has an expense ratio of 0.92%. It was recommending by the advisor when she first opened the account and hasn't touched it since. Based on what I've been reading - that's fairly high. Her options are limited though, here's a screenshot of what's available with respective expense ratios and average returns. Would you guys recommend allocating the funds to a mix of maybe 3-4 funds with lower ER?

www flickr com/photos/98763459@N04/9262103719/
(forum rules won't let me post links... please add dots after www and flickr - sorry I'm breaking rules, just don't know how else to show the list of available options!)

I also talked with them about the benefits of Roth IRA. They are probably going to get one within the year with Vanguard and invest in some of the index funds or ETFs recommended on other threads. Is there significant advantage to one over the other? The only one, given my parents situation, is that with ETFs they will be able to diversify from day 1 with an initial contribution of 3K and then maxing out the annual contributions before the year end.

Thanks for the help and suggestions!

You can diversify quite nicely with 1k if you choose one of Vanguard's Target Retirement Funds. ETFs are a bit cheaper, but not much.

You are quite right to be concerned about high investment costs. If your mom is able to lower her costs by choosing 3 - 4 funds and quitting the Principal Lifetime fund, then yes, she should do that. She will want to be sure she holds US large, US small, foreign stocks, and bonds.

[snafu]

Do your parents have other assets like house free of mortgage, military pension, Defined Pension from employment in the 80's, items that have increased in value etc? Are they in good health and able to extend their careers indefinitely? The whole premis of self funded retirement is that individuals will contribute something like 10% of gross income annually to an instrument of choice which can compound with reinvestment dividends for 35-40 work years. The accumulated sum would be drawn down at about 4% during approximately 35 years of retirement assisted with SS.

What sum do your parents need to pay monthly expenses? Do they have a mortgage, loan[s], consumer debt? How do they envision retirement? Would they sell house and move to a condo to reduce work of maintaining property? Do they expect to travel, have hobbies to pursue? or ?

By age 50 most long term investors are reducing instruments of risk and moving towards more conservative holdings.

[feh]

Is there a reason you want to steer them toward a Roth IRA instead of traditional IRA?

[Freddy McFrugal]

Ditto on Vanguard Target Retirement fund. One of the really nice things is it's so simple and takes into account what age people are in terms of the risk it takes on. You just pick a date when they want to retire, and go. The percent Vanguard takes to manage the money is quite low.

Ideally they can make contributions in a tax-deferred way. I'd only go to the Roth IRA once they've maxed out contributions they can make to employer-sponsored tax-deferred pension plans.

Really the biggest thing they need to do is save a lot more money. To get there, they appear to need a wake-up call, b/c their asset level suggests they've been unaware up until now of their precarious situation. Of course, having a physician offspring won't hurt in terms of having money available if their funds prove insufficient.

[kalpit210]

Do your parents have other assets like house free of mortgage, military pension, Defined Pension from employment in the 80's, items that have increased in value etc? Are they in good health and able to extend their careers indefinitely? The whole premis of self funded retirement is that individuals will contribute something like 10% of gross income annually to an instrument of choice which can compound with reinvestment dividends for 35-40 work years. The accumulated sum would be drawn down at about 4% during approximately 35 years of retirement assisted with SS.

What sum do your parents need to pay monthly expenses? Do they have a mortgage, loan[s], consumer debt? How do they envision retirement? Would they sell house and move to a condo to reduce work of maintaining property? Do they expect to travel, have hobbies to pursue? or ?

By age 50 most long term investors are reducing instruments of risk and moving towards more conservative holdings.

So they have a paid 5 years down on a 15 year mortgage. They make 13 payments a year. No other loans, cars are payed off. They pay off their credit cards monthly.

My mom has a 401k through work that she contributes 10% into and gets an employer match of 6%. Dad has nothing through work. No pensions, etc. Both of them moved from India with us in 2000 - that's 2 kids, at the time in 3rd and 7th grade with almost no savings/investments to their name. Only thing we do have in India is a small apartment that they are renting right now - income from that (not much) is being invested in india. They have spent the last decade putting us through school (I finished undergrad and now in medical school with some loans, my brother is an undergrad with some loans). They had saved up a bout $200k, of which they used $100k as downpayment on the house they bought in 2009. The other $100k is sitting in various checking accounts and low-rate CDs. This is their savings from future income is what I'm hoping to help them invest and looking for help here.

As far as retirement - I am not sure how they envision but I doubt they see long European vacations as a way of spending them. Given what they enjoy now, I see them spending their times maintaining a busy social life with friends in the area and taking small, local day trips. They are both in great health and plan on working as long as they can. Mom is 48, dad 55. I would like to help them invest whatever they are able to save right now after expenses - Now that they are helping both my brother and I, they are about to save about $15k/year on a combined income of about $130k before taxes. Their retirement income (after they stop working) will come from SS + whatever is in their retirement accounts + contributions from myself (and brother probably).

[kalpit210]

Is there a reason you want to steer them toward a Roth IRA instead of traditional IRA?

No specific reason. Like I mentioned, I'm fairly new to the whole world of finance and investing and every place I've read has said that Roth IRA is the first place to put your money into. I understand there are some rare disadvantages to this. I know that if they were to put money in a traditional IRA, they will pay the income tax when take the money out on their future income and get tax breaks now. They plan on working as long as they're healthy and luckily they are in good health. However, I do not see their income increasing substantially in the next 10-15 years - they make a combined $130k before taxes right now. Is a traditional IRA a better idea for them as their tax rate (unless the govt changes the tax code) probably won't change, and once they do stop working, they will possibly be paying taxes at a lower rate on their withdrawals?

Or is it better to pay the taxes now and let it grow tax-free and withdraw tax-free from a Roth

[bUU]

You can Google around for the full mathematical explanation, but generally this issue always boils down to speculation about what income tax rates will be: Higher tax rates once you start withdrawing, as compared to current rates, are typically what is required to put Roth above traditional investments. Regrettably, no one knows the future, so we cannot know whether things will stabilize where they are versus change significant toward that which benefits Roth over traditional.

[feh]

Is a traditional IRA a better idea for them as their tax rate (unless the govt changes the tax code) probably won't change, and once they do stop working, they will possibly be paying taxes at a lower rate on their withdrawals?

Or is it better to pay the taxes now and let it grow tax-free and withdraw tax-free from a Roth

I would suggest a traditional IRA, given it is likely their income will be less in retirement than it is now.