Advice Wanted for Retirement/Down Payment Saving

[NYBuilder]

First time posting, and really jumped at registering to get some feedback on what path I should take considering the following situation:

Just turning 24 this summer, and nearly finishing my 2nd year of employment post-graduation (undergrad). I'll have my student loans paid off in the next couple of months, and pay off my credit card bills in full each month.

I'm already maxing out my 401(k) contributions to take advantage of my company's 100% match, and have a personal account with Scottrade for other investments. With money for loan payments no longer going to the loans, I'm looking into ways to invest the money for retirement/wealth accumulation, as well as begin saving for a down payment on a house/apartment.

I'm not sure what might be the best means of working towards these goals. I know Roth IRA's allow me to withdraw contributions without penalty and also build up a separate IRA (from my 401k) without taxing my gains, but there's the annual limit to consider. I also know that more stable investments (CD's, mutual funds) are wiser for down payments (though mine may be in +/- 10 years) so my savings aren't as sensitive to market swings when I'll actually be utilizing those funds.

So my question is, with these goals in mind, what would the ideal strategy to allow my savings to grow, while keeping the long-term retirement and shorter-term down payment in mind?

[jIM_Ohio]

Goal 1 should be a comfortable retirement 20-30-50 years down the line. Fund this with 15% of your gross income (minimum). I would use 401k and Roth IRA in most cases for this.

Goal 2 should be an emergency fund with 3-6 months expenses in it. I did not see you mention this.

Goal 3 should be short and mid term goals (new house for example). Fund this with what you have left after #1 and #2 are accounted for. Might be 1% of gross income or 50% of gross income.

Do not sacrafice a long term goal (retirement) for a short term goal (house). Saving is a habit, stay in the habit as long as you are earning money.

I am going to assume the following:

15.5k into 401k is more than 15% of gross income- goal #1 is met if the max you contribute is 15.5k per year.

I would calculate monthly expenses, multiply by 6, and leave this in cash. High yield savings account, CDs or similar.

I would then save for a house. You need some data so you can apply a timeline to the goal.

If houses cost 200k, you should expect to need 40k to put down. If you have 1k per year to save, it will take 40 years to reach the goal. If you have 5k to set aside it will take 8 years. If you have 10k to set aside 4 years...

If the timeline between house down payment and savings per year suggests more than 8 years is needed, I would invest the house down payment for growth in a taxable investment account (avoid IRAs because of penalties). If timeline is between 4 and 8 years, consider using bonds to mitigate some of the risk. Any timeline shorter than 3 years suggest to keep the whole investment in cash (unless you buy bonds at a place likfe treasury direct.com).

Always fund longest term goals first, and keep the long term goal as a constant in any budget you create.

After saving for the down payment, consider investing the money used to save for house back into your retirement plan (boost savings rate from 15% to 25%). If using a high savings rate, diversify across 401ks, Roth IRAs and taxable accounts.

[NYBuilder]

Thanks for the suggestions.

You're correct in that Goal #1 goes over 15% of gross income - in fact, its about 25%.

I did a quick calculation for monthly expenses, and figured I'm about half way to reaching the 6 month emergency fund that I had forgotten about until you put that as Goal #2.

And thanks for the suggestions regarding saving within the time frame for the down payment.

I think my plan for now will be to maintain my 401(k) contribution, pump up the emergency fund until it hits the 6-month expense value, and then begin pushing the extra cash into my investment account (no IRA).

[jIM_Ohio]

If you are saving 25% to retirement, I could see directing 15% to retirement and 10% towards house short term. As long as progress is being made towards retirement and long term goals, it is OK to temporarily lower a high savings rate to gain the liquidiity needed for another mid term goal (home ownership).

Maybe direct 15% of retirement contributions to a tax deferred account. Then direct 10% to a taxable account (which is growth oriented). Then direct the savings for the house to same taxable account. You might look at that account in 3 years and decide the house is worth cashing in, or you might decide to cash out only a portion in 6 years...

There is no one right answer.

[maat55]

Thanks for the suggestions.

You're correct in that Goal #1 goes over 15% of gross income - in fact, its about 25%.

I did a quick calculation for monthly expenses, and figured I'm about half way to reaching the 6 month emergency fund that I had forgotten about until you put that as Goal #2.

And thanks for the suggestions regarding saving within the time frame for the down payment.

I think my plan for now will be to maintain my 401(k) contribution, pump up the emergency fund until it hits the 6-month expense value, and then begin pushing the extra cash into my investment account (no IRA).

At 24, I don't think it would hurt to invest 10% longterm and 15% toward your short term goals. To make your home a better investment, I suggest you put the 20% down and take out a 15 year note on 25% of your take home pay. Sounds like you are going to do fine. Also read some books, I suggest these:

The Millionaire Next Door
The Total Money Makeover

[anonymous_saver]

Once you pay off your CC, don't use them again unless you can pay them off every month. That is, never pay interest on these again.

I would stop with your Scottrade contributions immediately. I would take this money aside and put towards a Roth IRA instead. I would try with a place like Vanguard. They have some of the lowest fees around.

So once you pay off your CC and student loans, and have your 6th month worth of an emergency fund saved up (in a high interest online savings account). At this point, I would start a sub-account at that same online savings account to start saving up a down payment on a home. How much extra money do you have at the end of each month? How long from now would you like to buy a home? Since you are already saving a good amount with your 401(k), I would think of focusing on the down payment fund over fully funding your Roth IRA, although that obviously depends on how much money you make!!