Questions for finance gurus

[kranky]

none of that made any sense to me.

OK, let's walk through it as it's important to understand fees.
That GWPCX fund has a 1.54% annual expense ratio which includes a 1.00% 12b-1 fee. The expense ratio is what the fund charges every year to run the fund (in this case, 0.54%). The 12b-1 fee most likely goes into your advisor's pocket. This is one way advisors can say "You don't pay anything for my services, no fees" - they get your investments to pay them, but it's still out of your money.

So every year, they will take 1.54% of your money for themselves.

Let's say you invest $10,000 a year, and your investments average 5% growth per year.

And assume there is a comparable fund at Vanguard that charges just 0.3% per year.

What difference does a 1.54% expense ratio make compared to a 0.3% expense ratio, if the amount invested is the same, the time frame is the same, and the growth is the same?

A quick Excel analysis shows that in 20 years, you will have $44,000 more at Vanguard completely due to lower fees. And in the 20th year, although you are putting in $10,000, the 1.54% expense ratio applied to your then-current balance in GWPCX will be $4,337 - nearly half of your additional investment for the year is eaten up by fees. In 30 years the difference will be $130,000.

People see a 1% expense ratio and think, "Hey, it's only 1%" but you have to remember that it's 1% year after year after year. Fees matter - a lot.

 

[pontifex]

Just confirmed I have a Vanguard 2045 fund plus LZRD EMRG MKTS EQ IS which is less than 1% of my allocation.

oh damn - my employer only matches 50% of the first 6% of my pay, not the whole 6% like I thought.


This is new....on my contributions page I can contribute to a ROTH IRA now too. Before it used to only show contribution for the 401k plan.

 

[DaveSimmons]

50% is still great, think of it like an instant 50% growth in value for year 1. You definitely want to put 6% into your 401k!

Roth IRA is good as long as you get your full 401k matching or if they do the same matching for the Roth. You do not want to lose that matching.

You said money was tight, so remember that 401k contributions are "pre-tax" which means they lower your taxable income and you pay less tax now.

Roth is "after tax" which does not lower your income, so you pay more taxes now. But you pay less taxes at retirement since all withdrawals then are tax-free.

 

[Nograts]

Just confirmed I have a Vanguard 2045 fund plus LZRD EMRG MKTS EQ IS which is less than 1% of my allocation.

oh damn - my employer only matches 50% of the first 6% of my pay, not the whole 6% like I thought.


This is new....on my contributions page I can contribute to a ROTH IRA now too. Before it used to only show contribution for the 401k plan.

The match that you get defines your investment strategy. You want to dump everything you have into what is matched. I don't get that so I go Roth. While you have this job maintain your match (it's basically free money). The down side is you get taxed on the back end, and presumably, at a higher tax rate.

Regardless, you need to learn how to invest. It's honestly a very easy game to learn as long as you don't muddle it with bullcrap like futures and stuff. It's a lot of fun, and it sounds like you have a good bit of capitol to invest into it. Don't forget Elevenpog when you hit it big.

Cheers. :thumbsup:

 

[pontifex]

50% is still great, think of it like an instant 50% growth in value for year 1. You definitely want to put 6% into your 401k!

Roth IRA is good as long as you get your full 401k matching or if they do the same matching for the Roth. You do not want to lose that matching.

You said money was tight, so remember that 401k contributions are "pre-tax" which means they lower your taxable income and you pay less tax now.

Roth is "after tax" which does not lower your income, so you pay more taxes now. But you pay less taxes at retirement since all withdrawals then are tax-free.

I've been putting 10‰ in 401k for several years now.
Should I lower that, keep it the same, ot split between 401k and Roth?

 

[DaveSimmons]

I've been putting 10‰ in 401k for several years now.
Should I lower that, keep it the same, ot split between 401k and Roth?

That's good. 6% is the minimum you should be investing.

For shifting the 4% to the Roth, can you afford the extra taxes? The 4% will be taxed at your "marginal tax rate" which means the highest tax bracket you are in for the last bit of your income.

For singles, 15% if your taxable income is up to $37,450 and 25% if it is over.

At (say) $40,000 the 4% = $1,600 and so 25% = $400 more a year in taxes. Or roughly 1%. If you can spare that, the Roth is much better for you at retirement -- no taxes to pay. With a 401k it will all be taxable at retirement.

I look at a Roth as a way to "buy" more tax-sheltered retirement money by paying your taxes now instead of later. As you keep working and earn more, you'll hopefully reach the point where you want to save more than your 401k and a separate Roth allows. At that point you have to stick the extra into a taxable brokerage account and pay taxes on some of your gains every year.

Then you'll wish the limits for 401ks and Roths were higher. I'd whine about it, but whining about making too much money would be silly

 

[brianmanahan]

Then you'll wish the limits for 401ks and Roths were higher. I'd whine about it, but whining about making too much money would be silly

does your 401k by chance allow the after-tax contributions with in-service rollovers?

if so, that'd effectively increase your roth IRA limit to about 35$k a year

 

[edro]

Do you have a spreadsheet listing your family income and investments?
It's good to list out your gross income and gross investments.
Most professionals recommend 15%+ of your gross should be going into retirement investments.

 

[TheVrolok]

vi edit nailed it post 2. To echo what others have already said it's fairly simple.

1. Max your matched employer contribution to your 401k (so you're getting as much "free money" as possible)
2. Max a Roth IRA (Vanguard target date fund of your retirement date)
3. Increase funding to your 401k and fund as much as you can (Roth option vs traditional option depends on availability and your career plans)
4. If you have maxed your Roth IRA and 401k contributions for the year THEN you can start thinking about doing other things, but given your income I don't suspect you'll hit the contribution limits of the 401k

As an aside, don't forget about estate planning and insurances (life, disability, etc) as even if you're investments are done "correctly" tragedy can strike and throw a wrench in the gears.

 

[overst33r]

Even simpler

 

[TheVrolok]

Even simpler

Perfect visual of my post. Will save for friends. Dig it.

 

[dullard]

Even simpler

Good start, and in general it is good advice. But, it does leave a lot of cases where it isn't the best possible advice. So, take it with a grain of salt.

For example, if you qualify for an HSA, then it should go before the IRA (since the HSA is tax avoidance while the IRA is just tax deferral). Or, if the debt is low interest rate (such as current mortgages) then that portion of the debt can be paid after the 401k is maxed. Or once you have a bit of a nest egg going, it is better to have a bank willing to loan against your assets than having more than about a month of assets sitting in an emergency fund.

But, overall, a good chart.

 

[Scarpozzi]

I'm going to wait to start saving. I hear when you turn 55, you can put more money in your Roth than they allow when you're under 55....so I'm just going to wait 20 years and start saving then when I can maximize my returns.

 

[edro]

I'm going to wait to start saving. I hear when you turn 55, you can put more money in your Roth than they allow when you're under 55....so I'm just going to wait 20 years and start saving then when I can maximize my returns.

Great advice! YOLO!

 

[dullard]

Pontifex, I would like to back up what others have said here. The MFS Growth Allocation Fund and American Funds are expensive and not really that good. Why pay tens of thousands of dollars in fees that you don't need to?

Put at least 6% in your 401k to get the full company match. Then follow the chart that overst33r posted. Stay away from anything with loads (essentially sales fees). Then avoid anything with high yearly fees (I'd say anything above about 0.5%/year should be eyed with suspicion).

For example, the MFS Growth Allocation Fund takes a 5.75% load fee. That means, in your $8400 example, $483 of it goes to the salesman, not to your future. Then that same fund has another yearly 1.06% fee. That fee compounds. Meaning by the time you withdraw the money in retirement (lets say in 40 years), they will have taken about half of your remaining money. Do you really want them to take 5.75% and then another ~50%?

If you invested in Vanguard's (or some other low cost company) S&P 500 fund, then you'll pay no sales fee and about 0.17% yearly fees. After 40 years, they will have only taken ~7% of your money.

 

[Scarpozzi]

Pontifex, I would like to back up what others have said here. The MFS Growth Allocation Fund and American Funds are expensive and not really that good. Why pay tens of thousands of dollars in fees that you don't need to?

Put at least 6% in your 401k to get the full company match. Then follow the chart that overst33r posted. Stay away from anything with loads (essentially sales fees). Then avoid anything with high yearly fees (I'd say anything above about 0.5%/year should be eyed with suspicion).

For example, the MFS Growth Allocation Fund takes a 5.75% load fee. That means, in your $8400 example, $483 of it goes to the salesman, not to your future. Then that same fund has another yearly 1.06% fee. That fee compounds. Meaning by the time you withdraw the money in retirement (lets say in 40 years), they will have taken about half of your remaining money. Do you really want them to take 5.75% and then another ~50%?

If you invested in Vanguard's (or some other low cost company) S&P 500 fund, then you'll pay no sales fee and about 0.17% yearly fees. After 40 years, they will have only taken ~7% of your money.

I've said this before....when it comes to the decision of Roth vs Traditional IRAs....consider your retirement plans. When you start taking money out of your retirement funds, the federal gubment is going to want their cut and they make you claim your withdrawls as earned income. This is why it's nice to have a Roth. You can structure your retirement withdrawls/annuities to put you in a lower tax bracket and if you need supplemental income, you can use the ROTH to fill gaps without pushing you into the next tax bracket. Just something to think about...it's why you want multiple income streams in retirement and why it's good to have a few tax shelters to rely on.....but definitely wait until you're 55.

 

[overst33r]

Pontifex, I would like to back up what others have said here. The MFS Growth Allocation Fund and American Funds are expensive and not really that good. Why pay tens of thousands of dollars in fees that you don't need to?

Put at least 6% in your 401k to get the full company match. Then follow the chart that overst33r posted. Stay away from anything with loads (essentially sales fees). Then avoid anything with high yearly fees (I'd say anything above about 0.5%/year should be eyed with suspicion).

For example, the MFS Growth Allocation Fund takes a 5.75% load fee. That means, in your $8400 example, $483 of it goes to the salesman, not to your future. Then that same fund has another yearly 1.06% fee. That fee compounds. Meaning by the time you withdraw the money in retirement (lets say in 40 years), they will have taken about half of your remaining money. Do you really want them to take 5.75% and then another ~50%?

If you invested in Vanguard's (or some other low cost company) S&P 500 fund, then you'll pay no sales fee and about 0.17% yearly fees. After 40 years, they will have only taken ~7% of your money.

Fortunately Vanguard has admiral funds, so once he reaches 10,000 they will automatically convert to 0.05% (VFIAX), yielding a significant savings.

Maybe I missed it, but if available in his 401k, he should consider a total market fund (VTSMX) over an S&P500 fund. Much better diversification.

 

[dullard]

.....but definitely wait until you're 55.

Just so others know, Scarpozzi is not serious with the above quote. Or, if he is, he is giving very bad advice.

 

[dullard]

Fortunately Vanguard has admiral funds, so once he reaches 10,000 they will automatically convert to 0.05% (VFIAX), yielding a significant savings.

Maybe I missed it, but if available in his 401k, he should consider a total market fund (VTSMX) over an S&P500 fund. Much better diversification.

Both are valid points. I didn't want to confuse the issue with mentioning how Vanguard's fees lower over time. I just gave the worst case scenario.

As for VTSMX vs VFIAX, that is more of an academic point than anything. Overlay the two charts, they are essentially identical. VFIAX has done slightly better over a 5 year period and VTSMX slightly better over a 10 year period. As in very, very slightly different.

 

[Mursilis]

Just go to Vanguard and open up a Roth IRA account. Start putting money into a targeted retirement account (IE: 2050) and call it a day.

These investment firms are making plump commissions off of your transactions that will erode away significant earnings.

This right here. The investment industry is (mostly) interested in making themselves rich, not making you rich. The only one truly interested in YOUR financial well-being is YOU. Never forget that. There are a LOT of sharks in the financial waters, and they're probably smarter than you. Be careful out there.

 

[zCypher]

OK, let's walk through it as it's important to understand fees.
That GWPCX fund has a 1.54% annual expense ratio which includes a 1.00% 12b-1 fee. The expense ratio is what the fund charges every year to run the fund (in this case, 0.54%). The 12b-1 fee most likely goes into your advisor's pocket. This is one way advisors can say "You don't pay anything for my services, no fees" - they get your investments to pay them, but it's still out of your money.

So every year, they will take 1.54% of your money for themselves.

Let's say you invest $10,000 a year, and your investments average 5% growth per year.

And assume there is a comparable fund at Vanguard that charges just 0.3% per year.

What difference does a 1.54% expense ratio make compared to a 0.3% expense ratio, if the amount invested is the same, the time frame is the same, and the growth is the same?

A quick Excel analysis shows that in 20 years, you will have $44,000 more at Vanguard completely due to lower fees. And in the 20th year, although you are putting in $10,000, the 1.54% expense ratio applied to your then-current balance in GWPCX will be $4,337 - nearly half of your additional investment for the year is eaten up by fees. In 30 years the difference will be $130,000.

People see a 1% expense ratio and think, "Hey, it's only 1%" but you have to remember that it's 1% year after year after year. Fees matter - a lot.

This sums it all up nicely.

 

[brianmanahan]

but definitely wait until you're 55.

wait, that's the second time you said that. please tell me you're not serious.

 

[Jeff7]

- Mutual fund fees matter. If your long-term average return is 7%, a reasonable assumption to make, and your fee is 1%, that means each year you're losing around 14% of your long-term gains to fees. You're trying to pay for your own retirement/future, not a fund manager's.
- Fee comparison calculator. Fudge in some approximate numbers in the first section, then enter some fee numbers: 0.1%, 0.5%, 1%. The longer you're invested, the more the fees hurt. Unless a fund manager can guarantee that they'll produce better results (they can't), you're not really receiving any value for the fee.

- Front-load: It's a fee right at the start. You give $1000 to the fund manager to invest in a mutual fund. Say the front-load fee is 5.75%. Only $942.50 goes into your new investment. One second into investing and you're down 5.75%. Most of Vanguard's funds do not have a front-load fee, as is the case with some of Fidelity's funds. (Their "Spartan" brand of funds are cheap.)
Some also have back-end fees: If your investment grows to $100k, there would be a fee to take your money out. If it's 5.75%, you can wave goodbye to nearly $6,000.
Avoid these funds that punish you for trying to do business with them.


- Investing doesn't have to be hard. A lazy portfolio is one way. Or if you can get cheap target date funds, you can take the "set it and forget it" approach. The mutual fund company automatically handles the nitty-gritty of stock/bond allocation, shifting you toward more stable investments as the target date approaches.
(Note: If you have a Target 2050 fund, that doesn't mean you'll be forced to take your money out after 2050. That's just the year when it reaches the final allocation of stocks and bonds.)


- You can set up auto-deductions for investing in an IRA, or add money when you want to. At least at Vanguard, there's a minimum to invest when you feel like it. If you set up a schedule though, there's either no minimum, or else it's much lower. (Can't remember now, it's been awhile since I set mine up.)

- Some of the IRA funds have a minimum starting investment: $1000 or $3000. If you don't have $3000 available, but could swing $1k, remember that you're not locked into one fund. I started with Vanguard's "Star" fund, symbol VGSTX, and then switched to a Total Stock Market fund when I'd accumulated $3k.

 

[Mai72]

I have a pension with the school district that I'm currently with.

I plan to get into real estate in the near future. My goal is to own apartments. Why? Because I want revenue coming in every month. I want that passive income. We as a country are turning into a renters nation. Look at the stats of young people. Mostly due to school debt, they are unable to buy a house. Also, many lower and middle class people are letting go of this notion that they need a house. Either they can't afford one or they don't want one. In my case, I don't want a house. I need my income to invest. Many people are going to disagree, but IMO home ownership is way over rated. I don't want a mortgage. It's just going to tie and slow me down. Plus, I may just go to Vietnam or Thailand anyway. But, I can do so if I'm making money from my rentals. I will be in the position to generate profits.

The problem is many people don't take their finances seriously. They don't educate themselves, so they leave it up to their employer or the government to take care of it for them. This is the wrong move. The first book that got me thinking about my financial future was "The Richest Man in Babylon." I learned to pay myself first. I've been doing this for years. 10% of my income goes into an account that I've titled "Wealth." Over 20-30 years, compound interest becomes your friend. I'm currently looking to move what I've saved into an account thats going to give me a higher rate than what I'm currently getting.

 

[DaveSimmons]

^ that's one approach, but there is more risk and more work than with an S&P 500 index fund or ETF.

You have (for example) $100,000 tied to a single property instead of divided between 500 mega-corporations.

You have to find a property management company that you can trust, and you have to pay them every month even when apartments are empty. You also have to keep an eye on them to make sure they keep doing their job.

I'd rather spend my weekend watching movies, reading books, playing games, etc. than deal with a call about a burst water pipe. Tenants, insurance, not fun. So it's the index fund life for me