Retirement investing advice

[Turin39789]

So not too long ago I took a new job that I am very excited about. Seems like a dream job so far and I'm probably going to stay here for a good long while.

They gave a nice boost in pay, but they also don't offer the same level of benefits as I am used to. Which is ok, they just pay us more instead of providing the benefits. When I took the job I just assumed I would take what I was putting in before and also start putting in what my employer offered so that the same percent is going into the bucket.

When it comes to retirement, we have a 401k here but there is no company matching.
In the past I had always heard to put into your 401k to max out the employer max and then fund a roth ira to the max. If you're putting in more than that I didn't hear any great answers and didn't really need to pay attention.

With no company match what is my best option? I never got around to doing a Roth before, though I was putting in more into my 401k than I needed to get my employer match.

I have one 401k with schwabb from two employers ago, my last employers is with Fidelity. I never bothered to roll either as I wasn't being charged any fees to keep them where they were at. The new companies offering is with Mass Mutual, though I haven't signed up yet and don't know what the offerings are.

I'm thinking I will try and open a Roth and if I fund it to the max I will try to figure out which 401k has the best investment offerings and will go with it. My salary is commission based, but if all goes well I should be able to max out the Roth. I did like having the money automatically taken so it was somewhat hidden from my grubby hands, but I suppose I can start doing it after I get paid.

If the Roth is the way to go, any suggestions as to where? I'm not 100% idiot but I also don't necessarily feel like spending tooooooo much time figuring out what to invest in. I'm used to not having many options with the 401k, and I'm really tempted to just go with all or mostly index funds in the roth until I have time to get more involved or higher an advisor. Or maybe I'll just keep it all as index funds until I die 15 years before retirement since most/all managers can't beat index funds over the long term anyway.



/novel

 

[DaveSimmons]

Vanguard has great index funds, with some of the lowest management fees in the industry.

If you just want to buy one fund, which is a good idea to keep fund fees low, their Target (year) fund is one fund made up of shares in their other index funds -- you get the total US stock market, several foreign index funds, and a bit of bonds.

For your old 401ks, it might make sense to roll them over to a single traditional IRA at some point to give you a better choice of funds. The 401k fund choices at my employers have always been second-rate

As for your new 401k, once you've done the Roth it can still make sense to put money into it even without matching, since you get the instant 20% or more in tax savings on that money.

 

[Jadow]

IRA first before 401k if there's no match. Either a Roth or regular IRA depends on your tax situation. However If you're going to put more than 5k a year in (or 10k if married), then go ahead and do the 401k as well.

For old 401ks just roll them into an IRA, as for where, go with Fidelity or Vanguard, or you could go with a discount broker like Scottrade, but since Fidelty lowered their commissions and has free trading of ishares etfs, they're tough to beat for an IRA.

 

[Turin39789]

Other pertinent info - 28 and marred

 

[Elbryn]

Other pertinent info - 28 and marred

what tax bracket? roth is the right way to go if you expect yourself to be in a higher tax bracket in retirement. ie: if it costs you 15% in taxes now to get into the roth, do it because it's highly likely that you'll be in a higher tax bracket in retirement either due to having more taxable income or because taxes got raised. if you're currently in the 35% bracket, it may make more sense to open a traditional ira and save yourself 35% in taxes now, expecting to be in the 25% bracket in retirement.

if you're currently in a low tax bracket, roll your past 401k's to a fidelity or vanguard where you get some good low cost funds and consider doing an estimate on how much you can convert over to a roth ira based on the tax bracket implications. ideally, you'll also pay the taxes on that conversion out of pocket, rather than with retirement funds.

if you were able to put in more than the match in your earlier job, i'm assuming this one pays more. dont expand your lifestyle with the raise, rather dump it all into retirement. if you're 28 and married, i'm guessing kids are a future expectation? do yourself a favor now and load up on retirement contributions, the compounding interest effect will be far more effective in generating returns that assuming you'll raise contributions later on down in life.

 

[Turin39789]

Thanks, sounds all like good advice. It is a little difficult to plan right now just because the job is entirely commission based, but I do expect/hope to be in the higher tax brackets by the end of the year.

It's a little strange because I'm used to a defined salary and having all this figured out and contributed to paycheck by paycheck, though for this first year it might make more sense to wait awhile and leave it in a savings account until I have a better idea of what my tax bracket will be for the year.

Kids are on the horizon, and I'm also thinking about trying to help put my neice through college, so now I'm looking at 529 plans as well.

My new general idea is to get into a traditional IRA, depending on all the income limits etc it seems that this might be my better option. It seems to me now that the traditional scenario of 401k to match and then roth gets skewed anyway as you start to move up the dollar chart. I'll probably just siphon off 10 percent or more for awhile until the commissions make it in and then work on opening the accounts and rolling things.

I'm used to a lower salary so I may try to IRA/401k/529 anything that spills into the higher brackets.

 

[dullard]

In general, unless you work at a major corporation, investment firms charge an arm and a leg for a 401k. Plus, in general, you don't get many investment choices for a 401k. So, typically you don't want to automatically max out the 401k. You want to first see if it is a good idea (which it often is). Note: some major corporations are big enough that investment companys bend over backwards and charge low 401k fees and give lots of 401k choices. If that is the case for you, then feel free to just automatically max out the 401k.

The general rule-of-thumb is this:
1) Invest in the 401k up to the company match. Then stop for now (see #3 later).
2) Invest in a tax-advantaged IRA (or Roth if you qualify and choose to go Roth) up to the IRA/Roth IRA max.
3) If you still have more money to invest, then you have a choice. (A) If you want more tax deferred investments (ie your tax bracket is high now and you expect it to be lower when you retire), then max out your 401k. Or (B) If you want to pay tax now (ie your tax bracket is quite low now and you expect it to be higher when you retire), then you might want to just invest on your own outside of a retirement account.
4) If you still have more to invest, put it in a non-retirement investment account.

It seems like you had #1 and #2 down, but were unclear about #3 and #4.

As for your old 401k accounts, it is fine for now to leave them there (assuming your old company lets you). But, it looks like you are scattered. That scattering leads to two possible problems. (1) You may already now or may in the future (if they change rules) have to pay lots of different account fees. (2) Lots of investment companies open many investment doors if you have over a set amount of money. It is hard to reach that threshold if your investments are scattered over many companies.

For example, at Vanguard if you reach $100k of total investments then you start getting lots of goodies. Investment choices that were closed are now open. Fees for accounts are dropped. You get free or reduced cost professional advice. Etc. $100k is quite easy to reach if you add up your 401k + your IRA/Roth IRA + your wife's 401k/IRA/Roth IRA + your normal investments + any investments for your kids. If you can reach that threshold, I'd highly encourage you to take advantage of their perks by combining all investments into one company.

Index funds are perfect until you have enough money that it matters where you put it. And in that case, you have enough money to either hire a professional outright or get free professional advice simply by having enough money in one investment company.

 

[Elbryn]

other thing i'd say to take note of is your wife's plans assuming she works. you should consider all your options. if you expect to be in high brackets, it may make sense to reduce your agi via increases in 401k to meet income limitations on roth/ira. if you're saving a lot for retirement, roth may still be the better option.

529- check your state 529 plan. you may get a state income tax deduction for contributing to your state's 529. but balance that against the expenses of the plans. my ohio plan lets me deduct 2k of income for state taxes and has a good range of low expense funds from vanguard.

heh, getting back on the soapbox, i'd start with what's your overall goal? how much do you need and how many years are left to get there? if you have the goal in mind, that'll dictate how much you ought to be saving per year. with those numbers set, you can determine what mix of investments you need based on historical returns/standard deviations. If that's too risky for you, then you need to dial down risk and compensate by saving more. Then it's a simple matter of figuring out where to best place those investments to optimize for taxes in the now. get the big picture figured out, then any future movement or changes can be easily fit into the plan.

 

[dullard]

heh, getting back on the soapbox, i'd start with what's your overall goal? how much do you need and how many years are left to get there? if you have the goal in mind, that'll dictate how much you ought to be saving per year.

I'll play devil's advocate here. I don't quite like that very commonly used logic. How about this? If you aren't hitting the 401k + IRA max, then you aren't saving enough. Period. Note, you are free to hit that amount through other investment means, but you should invest at least that much. That is a very high bar for many families to reach. But it should be their goal. They need to earn more or spend less if they can't reach it.

 

[CoinOperatedBoy]

I'll play devil's advocate here. I don't quite like that very commonly used logic. How about this? If you aren't hitting the 401k + IRA max, then you aren't saving enough. Period. Note, you are free to hit that amount through other investment means, but you should invest at least that much. That is a very high bar for many families to reach. But it should be their goal. They need to earn more or spend less if they can't reach it.

If this were valid advice, investment planners would be out of a job. Goals and individual circumstances matter. Maxing out IRA and 401(k) is not a reasonable goal for someone who only makes 30k a year, but might be good advice for someone making 200k.

 

[Blackjack200]

I'll play devil's advocate here. I don't quite like that very commonly used logic. How about this? If you aren't hitting the 401k + IRA max, then you aren't saving enough. Period. Note, you are free to hit that amount through other investment means, but you should invest at least that much. That is a very high bar for many families to reach. But it should be their goal. They need to earn more or spend less if they can't reach it.

This makes no sense for me. Why live like a pauper for 40 years so I can have a nice retirement?

It's important to save for retirment, but it shouldn't dominate your finances. Right now my projections show me being able to retire at 65 with around the same income I get from my job. If it's a little short, I'm sure there will be some social security in there (even if it's not the full amount) and I can continue working part time, which I'd probably do anyway.

 

[isp_eng]

I think maxing your employers contribution is almost always a good idea. It's free money after all.

Even if you are to break your 401k and cash it out, taxes come to a total of what, 25%? So you're still getting half of the employers contribution as FREE money if you break your 401k right then and there.

I'm not an expert on 401ks, but that's how mine works. I work for a very large company, and they only match 4.5% @ 100% contribution. It used to be 6%.

 

[Blackjack200]

I think maxing your employers contribution is almost always a good idea. It's free money after all.

Even if you are to break your 401k and cash it out, taxes come to a total of what, 25%? So you're still getting half of the employers contribution as FREE money if you break your 401k right then and there.

I'm not an expert on 401ks, but that's how mine works. I work for a very large company, and they only match 4.5% @ 100% contribution. It used to be 6%.

I only get 4%, and that's the level I contribute at. I agree, it's free money once it vests.

 

[Turin39789]

other thing i'd say to take note of is your wife's plans assuming she works. you should consider all your options. if you expect to be in high brackets, it may make sense to reduce your agi via increases in 401k to meet income limitations on roth/ira. if you're saving a lot for retirement, roth may still be the better option.

529- check your state 529 plan. you may get a state income tax deduction for contributing to your state's 529. but balance that against the expenses of the plans. my ohio plan lets me deduct 2k of income for state taxes and has a good range of low expense funds from vanguard.

heh, getting back on the soapbox, i'd start with what's your overall goal? how much do you need and how many years are left to get there? if you have the goal in mind, that'll dictate how much you ought to be saving per year. with those numbers set, you can determine what mix of investments you need based on historical returns/standard deviations. If that's too risky for you, then you need to dial down risk and compensate by saving more. Then it's a simple matter of figuring out where to best place those investments to optimize for taxes in the now. get the big picture figured out, then any future movement or changes can be easily fit into the plan.

Yea, that what drew me to the 529 plan, as the neice in question is already a freshman in HS. I figure whatever I can afford to throw her way I can at least give to her tax free.

http://www.kentuckytrust.org/ourplan/index.html

Contributions and Earnings Used to Pay for Qualified Higher Education Expenses Are Federal and Kentucky Income Tax Free
The earnings portion of any distributions used to pay for qualified higher education expenses will be free from federal and Kentucky income tax. This federal income tax-free treatment of qualified withdrawals and other federal tax benefits are permanently in place for 529 plans through the passage of the Pension Protection Act of 2006.

I think I may just try to throw it into a savings account for this year while I adjust to the new salary and figure this all out. Then at the end of the year if I want to reduce our AGI I can put it into an IRA/529, or I can go with a roth. I may try to get to it this summer if I get impatient, because I'm ready for it to grow and be out of my reach.

Otherwise the kitchen remodel budget will find a way to upgrade itself.

 

[Elbryn]

I'll play devil's advocate here. I don't quite like that very commonly used logic. How about this? If you aren't hitting the 401k + IRA max, then you aren't saving enough. Period. Note, you are free to hit that amount through other investment means, but you should invest at least that much. That is a very high bar for many families to reach. But it should be their goal. They need to earn more or spend less if they can't reach it.

we're kinda illustrating the same point. retirement planning is a big picture thing. everyone's picture is different, your standard of 401k+ira is your measuring stick. my measuring stick isnt the same as yours. if you dont think big picture, how do you know where you stand? a guy planning to retire in new york city, 401k+ira for 30 years, probably isnt going to be enough. a guy planning to retire in the middle of montana, it may be too much. hard to create a plan without quantifying the goal. even harder to determine if you're on track without a goal. what i'm advocating is take some time to set your big picture. that's what will quantify whether you are putting away enough or not.

 

[Blackjack200]

we're kinda illustrating the same point. retirement planning is a big picture thing. everyone's picture is different, your standard of 401k+ira is your measuring stick. my measuring stick isnt the same as yours. if you dont think big picture, how do you know where you stand? a guy planning to retire in new york city, 401k+ira for 30 years, probably isnt going to be enough. a guy planning to retire in the middle of montana, it may be too much. hard to create a plan without quantifying the goal. even harder to determine if you're on track without a goal. what i'm advocating is take some time to set your big picture. that's what will quantify whether you are putting away enough or not.

The problem is that the vast majority of people have no idea where they will be in 30 years. There are too many plans and formulas out there. Set aside some money, invest it in low cost, indexed, tax-protected (through 401(k) or IRA) vehicles, and don't touch it. IMO that's all you really need to do.

 

[dullard]

If this were valid advice, investment planners would be out of a job. Goals and individual circumstances matter. Maxing out IRA and 401(k) is not a reasonable goal for someone who only makes 30k a year, but might be good advice for someone making 200k.

Of course someone making $30k won't likely be able to put away $21k for retirement. But that still should be that person's goal, if he/she wants to retire. Clearly, that person is not making enough money to have a nice retirement. Of course, retirement doesn't necessarilly need to be a goal. There is nothing wrong with working into your 80s, assuming you are healthy.

But, you certainly don't need to earn $200k to put away $21k (only ~$16k would be needed since this would be pre-tax dollars most likely). It is quite reasonable for someone making well under $100k to put the equivalent of $16k away. It isn't as hard as you make it sound. Again, that should be their goal. You don't have to hit a goal each and every year of your life to do well.

 

[JS80]

Other pertinent info - 28 and marred

Where are you marred? Is the scar visible?

 

[dullard]

This makes no sense for me. Why live like a pauper for 40 years so I can have a nice retirement?

Finding $16k ($21k in post tax dollars) is certainly not living like a pauper for many families. We've tried Elbryn's method (not just automatically maxing out) for quite some time. What is the result? Disaster in my opinion.

The average person in the 65-74 age group who has a retirement plan (ie ignoring people with $0 in retirement savings) can safely withdraw $8700 a year. "Safely" in this post is defined as assuming a good stock-market return and wanting to life a long life (adjust up or down for shorter lives or worse stock market yields). Is $8700 a year really going to buy them retirement? Heck no. Social security will help, but they certainly won't have much money either way. People have been saving far, far too little. That is why I gave them a difficult, but achievable goal.

How about I put it this way. I'll assuming Turin39789 retires at 65, gets 8% average return on his portfolio, and we have inflation at 3.4% (historicaly that was the average). If that is the case, then Turin39789 gets to safely withdraw 2.36 times each year what he puts in each year. If he puts in $10,000 a year, then he can withdraw $23,600 a year (inflation adjusted dollars), safely. Remember, that would be taxed since we are talking about 401k investments, so he'd get far less than $23,500 to use. Is that enough for him to retire? Probably not. But if he put in $21,500 a year, he'd be able to safely withdraw $50,700 a year. That is a good sum to live on.

 

[moparacer]

"Vanguard has great index funds, with some of the lowest management fees in the industry."

I made the switch to Vanguard 3 years ago. I just wish I had been with them from the beginning.

I put the max contribution into my IRA yearly and right now I have 100 percent of it in the target 2030 fund.

If you do go with the target date funds dont pay attention to the date as much as the asset allocation of the fund.

They tend to be on the aggressive side IMO.

 

[Elbryn]

Yea, that what drew me to the 529 plan, as the neice in question is already a freshman in HS. I figure whatever I can afford to throw her way I can at least give to her tax free.

http://www.kentuckytrust.org/ourplan/index.html



I think I may just try to throw it into a savings account for this year while I adjust to the new salary and figure this all out. Then at the end of the year if I want to reduce our AGI I can put it into an IRA/529, or I can go with a roth. I may try to get to it this summer if I get impatient, because I'm ready for it to grow and be out of my reach.

Otherwise the kitchen remodel budget will find a way to upgrade itself.

Careful, dont assume that the kentucky 529 plan has a state deduction
http://www.kentuckytrust.org/faq/tax.html#cttax

Is there a Kentucky income tax deduction?
No, there is no Kentucky income tax deduction.

also compare expenses
https://www.collegeadvantage.com/cas/FundPerformance.aspx
http://www.kentuckytrust.org/ourplan/fees.html

the only benefit you gain is freedom from taxes on gains in that account. you may not have a whole lot with a 4 year time frame. assuming you stay conservative with a 4 year window with say 2k. after 4 years at 5% growth you have 2431 not taking into account yearly expenses. it's good but not much difference than if you offered to take her out to dinner a couple times a year. contrast- 2k in ira @ 25% fed tax rate you save yourself 500 today. will have to pay later on but that money will have grown a long time before that day comes.

My inclination would be to go the retirement route and help the niece out of pocket from your regular income stream. if you want to give her cash, consider it a gift, you can gift 13k a year without taxes up to a million dollar lifetime limit. or just dont say anything and i dont think the irs is going to notice a few hundred here and there. or just buy her some beer, she'll probably appreciate that more

 

[CoinOperatedBoy]

Of course someone making $30k won't likely be able to put away $21k for retirement. But that still should be that person's goal, if he/she wants to retire. Clearly, that person is not making enough money to have a nice retirement. Of course, retirement doesn't necessarilly need to be a goal. There is nothing wrong with working into your 80s, assuming you are healthy.

But, you certainly don't need to earn $200k to put away $21k (only ~$16k would be needed since this would be pre-tax dollars most likely). It is quite reasonable for someone making well under $100k to put the equivalent of $16k away. It isn't as hard as you make it sound. Again, that should be their goal. You don't have to hit a goal each and every year of your life to do well.

You seem to think that maxing IRA and 401(k) is the best or only appropriate savings goal for everyone. I disagree with you. It's completely dependent on the individual's complete financial situation. Again, it's pointless for the $30k individual because he will never meet it. After retirement, he may simply want to maintain the standard of living he's had throughout his working years, and the kind of savings plan you describe is unnecessary for that. It's an unreasonable goal.

Neither did I say that $200k is the minimum one must earn to meet this goal, only that it makes more sense for someone who can comfortably do so.

 

[Blackjack200]

How about I put it this way. I'll assuming Turin39789 retires at 65, gets 8% average return on his portfolio, and we have inflation at 3.4% (historicaly that was the average). If that is the case, then Turin39789 gets to safely withdraw 2.36 times each year what he puts in each year. If he puts in $10,000 a year, then he can withdraw $23,600 a year (inflation adjusted dollars), safely. Remember, that would be taxed since we are talking about 401k investments, so he'd get far less than $23,500 to use. Is that enough for him to retire? Probably not. But if he put in $21,500 a year, he'd be able to safely withdraw $50,700 a year. That is a good sum to live on.

The $23,000 would be taxed in a low bracket (as it is today). Add in social security, the fact that he likely already owns his house and car, and he that shouldn't have any debt to worry about, and I think he'd be fine. If he's developed his hobbies throughout his life (because he was spending money and not squirreling it away) he should be able to find part time work that is enjoyable, relaxing, and not stressful to give him some spending cash.

If he's not that motivated, ~28k (I'm only assuming $5k SS) should be enough to chill at home, read at the library, watch TV, and take a modest vacation every year.

I'm not saying you're wong, btw. If you are focused on having as much money at retirement as possible, then that is certainly your perogitive.

 

[dullard]

I'm not saying you're wong, btw. If you are focused on having as much money at retirement as possible, then that is certainly your perogitive.

My focus is to have a respectable retirement, not to have "as much money as possible". I just don't think $28k, before tax, is sufficient for a typical married couple in retirement. Health costs alone will be massive. Plus, you assumed the house is paid for. Housing is a form of savings. I said right at the beginning that "Note, you are free to hit that amount through other investment means". So, in your scenario, they saved through a house which would subtract from the need to save as much in a 401k type investment. What is the typical amount put into a house, $10k a year? Add $10k a year for the house plus $10k a year to reach the $28k in retirement withdrawls, and we are right back at where I started: about $21k a year is needed to save.

 

[Turin39789]

thanks for all the advice guys, I'll reference it when it comes time to sign up for accounts. So far I've only heard Vangaurd, so while I will research others they will get a good deal of attention.

now to consider that heart disease runs in the family and I probably won't ever retire.