Starting a 401k, need some help with allocation

[Born2bwire]

you can select a lifecycle fund and it will auto adjust the allocations for you (set it and forget it method), if thats available for you.

Vanguard Retirement Targets have been doing pretty well lately, it's what I put my IRA into. Kinda wish I could do that for my 401K, the IRA has been performing much better. Oh well.

The Target funds automatically adjust their diversification according to how long you have until the retirement.

 

[shadow9d9]

Just wanted to comment on this part... NO

That's the exact opposite of the investment philosophy you want. The younger you, are the more risk tolerant you should be. The reason being is that you have a lot of time to make the money, so you can easily withstand significant market fluctuations. The older you are, the more stable of an investment choice is needed as your withdrawals will be imminent.

Agreed.

"Of course, since I'm starting at a younger age "

Younger than what? You are starting late, not early.

 

[ultimatebob]

If you really wanna try a bond fund, try FAGIX. That sucker is filled with high yield corporate bonds, and is up over 110% over the last 6 years. Some of my stock funds in my IRA haven't performed that well.

It's considered to be risky, though, so most 401k's will not offer it.

 

[nboy22]

Thanks everyone for the advice! I have selected to just keep everything in the VFFVX fund. As for the young comment, I am still fairly young. I know a lot of people right now who are my age that can't even find a good job, so I feel fairly lucky to be able to contribute to a 401k and have my employer match it. It's not ideal, but with my salary history it just wasn't possible to start throwing money into a 401k when I was a few years younger.

Now for my next question. There is the "Automated Account Realignment" section. I have no idea what this means or what problems could occur if I select Yes or No. Any advice there?
Oh yeah and one other thing. Would you advise Regular Deferrals or Roth Deferrals? Everything I am reading says go with the Roth because of tax rates rising.

Thanks again guys for being so helpful!

 

[DaveSimmons]

Alignment: this will re-balance funds for you if the %s no longer match because one fund grows faster than others. Doesn't matter if you only have 1 fund.

Traditional vs. Roth:

Trad is pre-tax contribution, meaning it lowers your gross income and lowers your tax bill now. This is good because you can afford to contribute more. Say you put in $5,000 but you save $500 on your tax bill. It then only "cost" you $4,500 to contribute.

Roth is after-tax. It does not lower your gross income so $5,000 costs you $5,000. The benefit from Roth is that at retirement you pay no taxes on the withdrawals, your 401k grows tax-free.

With Roth you're betting your tax rate at retirement will be lower than it is now, and giving up your tax break now to get that.

Since you have other debt, you might be better off with the trad and using the tax break now to pay off that debt and build up emergency savings.

 

[Exterous]

Suggesting that someone max out ($17.5k/year) in their 401k when they're only making $40k/year is absurd.

Suggest you put the maximum $17,500 in per year. Let it grow, you'll have over $1M when you retire.

I am going to go with option C: Neither of you know enough about his financial situation to say one way or the other

Now for my next question. There is the "Automated Account Realignment" section. I have no idea what this means or what problems could occur if I select Yes or No. Any advice there?

Oh yeah and one other thing. Would you advise Regular Deferrals or Roth Deferrals? Everything I am reading says go with the Roth because of tax rates rising.

The 'Automated Account Realignment' sounds like it will adjust holdings to stay within your allocation percentage

DaveSimmons has some excellent pointers on the Standard vs Roth. Its a tough call. I would lean slightly towards the Roth if you can afford it. There are a couple of calculators you can play around with. here's one:
https://www.schwabplan.com/download/RothCalc/RothCalculator.htm

Some think its a good idea to diversify your tax risk. In an example case you would have a Roth IRA and a traditional 401k so you'd have both tax advantaged scenarios. Sure the Roth is tax free now but no one knows what the future rates will be. People once thought pensions were a sure thing...

 

[seepy83]

I am going to go with option C: Neither of you know enough about his financial situation to say one way or the other.

OK, but I'll stick with playing the odds and say that there are very few 27 year old people in the world that are $9.9k in debt, earn $40k/year, and can afford to put 43.75% of that income into a retirement fund. If he is in the financial situation where he could afford to not touch 43.75% of his income until he retires, then he wouldn't have a $9.9k loan right now.

Sure, I'm making assumptions, but that logic is pretty bulletproof.

 

[mike2fix]

You guys are really slipping, not one "Put it all on black, (or red)".

In any case, hats off to OP for asking questions about an important topic.

 

[ultimatebob]

You guys are really slipping, not one "Put it all on black, (or red)".

In any case, hats off to OP for asking questions about an important topic.

Yeah, we forgot to recommend Hookers and Blow, too. For shame!

 

[QuantumPion]

I am going to go with option C: Neither of you know enough about his financial situation to say one way or the other



The 'Automated Account Realignment' sounds like it will adjust holdings to stay within your allocation percentage

DaveSimmons has some excellent pointers on the Standard vs Roth. Its a tough call. I would lean slightly towards the Roth if you can afford it. There are a couple of calculators you can play around with. here's one:
https://www.schwabplan.com/download/RothCalc/RothCalculator.htm

Some think its a good idea to diversify your tax risk. In an example case you would have a Roth IRA and a traditional 401k so you'd have both tax advantaged scenarios. Sure the Roth is tax free now but no one knows what the future rates will be. People once thought pensions were a sure thing...

Roth IRA seems kind of dumb to me. You are betting that the government graciously decides not to change the tax rules in the future to your detriment instead of taking advantage of the certainty of not paying taxes now. If you go Roth you lose the potential earnings from the amount you pay in taxes now for bet that taxes will be lower 30+ years in the future.

 

[pete6032]

Roth IRA seems kind of dumb to me. You are betting that the government graciously decides not to change the tax rules in the future to your detriment instead of taking advantage of the certainty of not paying taxes now. If you go Roth you lose the potential earnings from the amount you pay in taxes now for bet that taxes will be lower 30+ years in the future.

Considering his salary right now he should assume he will be making more when he retires and thus should take the tax hit now rather than later.

 

[seepy83]

Roth IRA seems kind of dumb to me. You are betting that the government graciously decides not to change the tax rules in the future to your detriment instead of taking advantage of the certainty of not paying taxes now. If you go Roth you lose the potential earnings from the amount you pay in taxes now for bet that taxes will be lower 30+ years in the future.

Right, but like he said...it's all about diversifying your tax risks. It's basically impossible to predict which one would have been the smarter investment, so you put money in both hoping that it helps to balance out the likelihood of getting screwed over by the tax situation n number of years from now.

 

[nboy22]

Considering his salary right now he should assume he will be making more when he retires and thus should take the tax hit now rather than later.

This is my train of thought on why Roth would be better for me. I plan on going up from $40k of course!

 

[Exterous]

Roth IRA seems kind of dumb to me. You are betting that the government graciously decides not to change the tax rules in the future to your detriment instead of taking advantage of the certainty of not paying taxes now. If you go Roth you lose the potential earnings from the amount you pay in taxes now for bet that taxes will be lower 30+ years in the future.

By that reasoning you shouldn't do a T401k either because the government may decide you should have paid taxes on the contributions.

It's not dumb to do a Roth style fund because none of your retirement options have any guarantees. Having a Roth is a good way to minimize your tax risk and you'll be hard pressed to find anyone in finance who argues otherwise.

By any stretch of the imagination a 15% tax rate is pretty low and its far more likely that he will pay a higher tax rate when he retires so a Roth offers a pretty good chance at minimizing his taxes

OK, but I'll stick with playing the odds and say that there are very few 27 year old people in the world that are $9.9k in debt, earn $40k/year, and can afford to put 43.75% of that income into a retirement fund.

Statistically I agree with you however I think its bad form to offer advice based on unstated assumptions.

If he is in the financial situation where he could afford to not touch 43.75% of his income until he retires, then he wouldn't have a $9.9k loan right now.

I disagree. I can think of many scenarios where someone now able to afford saving 43.75% of their income was not always able to do so and managed to rack up $10 in debt of in car loans or some other manner.

 

[Schfifty Five]

Hey everyone,

I'm looking at starting up my 401k this next quarter since my employer matches 100% up to 3% and 50% up to 5%.

I will be turning 27 next month and I currently make $40k a year and am planning on putting 5% of that ($2,000 a year) into my 401k. I have about $9,900 in car loan debt that I am currently attacking aggressively due to ATOT's advice in one of my previous threads, but that is my only debt. The car loan should probably be paid off around the end of this year, or early next year since I'm throwing about $1200 a month at it.

I took a little survey that was included with the vanguard packet I received from my workplace and it said that I should invest 70% into stocks and 30% into bonds. Of course, since I'm starting at a younger age I would rather be more stable and make the most money in the safest way possible. Does this sound on target for someone my age?

Also, I have a sheet of selections that I can allocate percentages to: http://postimg.org/image/o07kxkg15/

Not sure if you guys could give me some tips on which bond(s) and stock(s) I should be allocating my money too, but I would greatly appreciate any advice!

Actually, if you're younger, you want to be more risky and aggressive since you have time to recoup losses and allow investments to grow. If you are older and closer to retirement, you don't want to risk losing your money.

However, you can do whatever you want. Having a diversified portfolio is always a good thing. As other posters have said, target funds are very convenient. I invest in some with my retirement accounts.

 

[Schfifty Five]

By that reasoning you shouldn't do a T401k either because the government may decide you should have paid taxes on the contributions.

It's not dumb to do a Roth style fund because none of your retirement options have any guarantees. Having a Roth is a good way to minimize your tax risk and you'll be hard pressed to find anyone in finance who argues otherwise.

By any stretch of the imagination a 15% tax rate is pretty low and its far more likely that he will pay a higher tax rate when he retires so a Roth offers a pretty good chance at minimizing his taxes



Statistically I agree with you however I think its bad form to offer advice based on unstated assumptions.



I disagree. I can think of many scenarios where someone now able to afford saving 43.75% of their income was not always able to do so and managed to rack up $10 in debt of in car loans or some other manner.

The OP is the one who asked for opinions. Those guys gave it. What's the big deal?

 

[seepy83]

Statistically I agree with you however I think its bad form to offer advice based on unstated assumptions.

Free advice is worth what you paid for it.

If we're going to go back to the start of this thread, and gather more info (instead of making assumptions) before any recommendations are made, then the first question out of everyone's mouth (including yours) probably should have been "what's the APR on that car loan?" No advice can be given until that's known.

Edit: also, the OP already said he plans to put $2k/5% of his income into his 401k. That's a long way off from $17.5k/44%. I'm going to take a shot in the dark and try to guess why he decided to to put that much it....It's probably what he can afford! Do I, personally, think 5% is too low? Yes. Do I think there is anyone in the world that earns $40k per year and can afford to put $17.5k into a retirement fund? No.

 

[Schfifty Five]

Free advice is worth what you paid for it.

If we're going to go back to the start of this thread, and gather more info (instead of making assumptions) before any recommendations are made, then the first question out of everyone's mouth (including yours) probably should have been "what's the APR on that car loan?" No advice can be given until that's known.

:thumbsup:

 

[JM Aggie08]

Diversify, bitch.

 

[Exterous]

The OP is the one who asked for opinions. Those guys gave it. What's the big deal?

Bad logic.

If we're going to go back to the start of this thread, and gather more info (instead of making assumptions) before any recommendations are made, then the first question out of everyone's mouth (including yours) probably should have been "what's the APR on that car loan?" No advice can be given until that's known.

Er...no we wouldn't because the OP asked at the start of the thread about allocation percentages and plan recommendations - NOT how much he should save or save vs pay down debt. I am not aware of a situation where a car loan APR would affect a 401k retirement percent allocation and fund choices for a 27 year old

 

[Schfifty Five]

Bad logic.



Er...no we wouldn't because the OP asked at the start of the thread about allocation percentages and plan recommendations - NOT how much he should save or save vs pay down debt. I am not aware of a situation where a car loan APR would affect a 401k retirement percent allocation and fund choices for a 27 year old

I disagree. Great logic.

OP asked many things. It's clear he is new to this and eager to learn, so there's nothing wrong with them saying "max out your 401k" or "you shouldn't' max out if you're at $40K".

Those are broad general sayings, just like how saying if you're young, you should be aggressive more. But I guess we shouldn't say anything at all b/c we don't know his financial situation right?

 

[DaveSimmons]

For 99.99% of all employees, contributing up to the level that your employer matches is a no-brainer.

Even if a car loan was at 15% APR, in the OP's case there is 100% and then 50% matching. 50% instant free money beats 15% APR.

 

[Schfifty Five]

For 99.99% of all employees, contributing up to the level that your employer matches is a no-brainer.

Even if a car loan was at 15% APR, in the OP's case there is 100% and then 50% matching. 50% instant free money beats 15% APR.

Agreed. In the OPs case, it's like a $1,600 per year raise.

He gets 100% of the first 3%, then 50% of the next 2%, for an effective total of 4% of his salary.

 

[Fritzo]

If you don't know what you're doing, never allocate yourself. Most 401K's have auto-allocated funds for conservative, moderate, and aggressive growth. If you're below 50 you should be on an aggressive growth allocation.