401k Allocation

mikesswimn:

Find the one with the lowest expense ratio and run with it. Usually that's a passive S&P 500 which, I think is T. Rowe's "Equity Income" fund. Otherwise, pick the latest "target date" fund and run with it.

I realize this is a very blunt way of doing it but you're 24 and you can change this stuff later on when you've got more money on the line. I wouldn't overcomplicate it, just making sure you're stocking money away puts you way ahead of the curve.

West Coast rainmaker:

Do you get any sort of matching?

That is a seriously crappy selection of funds. If you do not get matching, I might consider just maxing your ROTH (will only work for the first 1-2 years), then sticking the rest in a brokerage. Not optimal from a tax standpoint, but the liquidity might be worth it if you have any major expenses coming up (MBA, house, marriage/kids, etc).

Do you get enough freedom in a ROTH to invest in individual stocks?

IlliniProgrammer:

Let's get some more info on this.

1.) Do you plan on going to grad school (EG MBA) on a full-time basis at any point in the future? ----> This is important because you can use your 401K to save on taxes, and will change how you will want to save for retirement.

2.) Give me a sense of your job security. Are you a prop trader? Are you an engineer at IBM? ----> This will affect how risky we think about making your portfolio.

3.) Do you have an emergency fund? -----> You probably want to have 6-8 months worth of living expenses saved up first.

4.) If I told you that each year, there was a 1% chance the stock market could lose 40% of its value in six months while corporate bonds lost 20% of their value and treasuries stayed neutral, would you feel comfortable being 75% in stock?

So for instance, if you had managed to save $200K last August and saw that drop to $130-140K , would you feel:

A.) OK, B.) disappointed C.) unhappy D.) miserable E.) suicidal?

5.) Do you plan on spending your retirement in the US? NYC? Alaska? What do you think you'll want to do with your money?

My general advice:

1.) Take the match, invest additional savings in a Roth IRA up to the $5K limit, then, if you must, stick more money into your 401k. 2.) Most 20-somethings probably want 30% cash or shorter-term treasuries and 70% in a mix of REITs, emerging markets, and small-cap value stocks. 3.) Beyond that, decisions in this account should be dictated by management fees. That probably means you will want to avoid the target retirement funds to avoid what I'm guessing will be an extra 50 basis points in fees. So take the lower fee of the Treasury Money Market or Stable Value fund; and the lower fee of your various equity investment choices. 4.) The second you switch employers, cash this thing out to a rollover IRA.

5.) Call HR and tell them you want some low-fee options from Vanguard.

1. I entertain the idea of getting a MBA but it's not something I have planned.
2. I am an Insurance Underwriter. I underwrite management liability.
3. I think i can survive for 6-8 months if I lost my job right now.
4. B) disappointed, but I would try to convince myself that it'll recover evenutally.
5. Would like to retire in Los Angeles.

Right now, I'm taking the match and contributing $300 a month into a Roth IRA.

Thanks!

IlliniProgrammer:

Let's get some more info on this.

1.) Do you plan on going to grad school (EG MBA) on a full-time basis at any point in the future? ----> This is important because you can use your 401K to save on taxes, and will change how you will want to save for retirement.

2.) Give me a sense of your job security. Are you a prop trader? Are you an engineer at IBM? ----> This will affect how risky we think about making your portfolio.

3.) Do you have an emergency fund? -----> You probably want to have 6-8 months worth of living expenses saved up first.

4.) If I told you that each year, there was a 1% chance the stock market could lose 40% of its value in six months while corporate bonds lost 20% of their value and treasuries stayed neutral, would you feel comfortable being 75% in stock?

So for instance, if you had managed to save $200K last August and saw that drop to $130-140K , would you feel:

A.) OK, B.) disappointed C.) unhappy D.) miserable E.) suicidal?

5.) Do you plan on spending your retirement in the US? NYC? Alaska? What do you think you'll want to do with your money?

My general advice:

1.) Take the match, invest additional savings in a Roth IRA up to the $5K limit, then, if you must, stick more money into your 401k. 2.) Most 20-somethings probably want 30% cash or shorter-term treasuries and 70% in a mix of REITs, emerging markets, and small-cap value stocks. 3.) Beyond that, decisions in this account should be dictated by management fees. That probably means you will want to avoid the target retirement funds to avoid what I'm guessing will be an extra 50 basis points in fees. So take the lower fee of the Treasury Money Market or Stable Value fund; and the lower fee of your various equity investment choices. 4.) The second you switch employers, cash this thing out to a rollover IRA.

5.) Call HR and tell them you want some low-fee options from Vanguard.

IlliniProgrammer:

I feel like I am going to have a major expense in the next ~5 years, but I don't know what. Might be grad school, a house, etc.

In both cases, you get a penalty-free withdrawal. In the case of full-time grad school, you would also be shifting income from your current marginal tax rate into a 10-15% tax bracket.

So if you're thinking of grad school, definitely max out that 401k contribution.

Thanks. That is a huge help.

IlliniProgrammer:

I feel like I am going to have a major expense in the next ~5 years, but I don't know what. Might be grad school, a house, etc.

In both cases, you get a penalty-free withdrawal. In the case of full-time grad school, you would also be shifting income from your current marginal tax rate into a 10-15% tax bracket.

So if you're thinking of grad school, definitely max out that 401k contribution.

Do you know if this applies to grad school outside the US? I'm planning to apply to INSEAD, IMD, LBS.

Also, currently have ~25k in my account now. Rode the market in the past 12-18 months. Considering getting out now (shifting all the money in my 401k to a money market and/or TIPS fund) to preserve capital and pay for tuition. Thoughts?

A mistake I made starting out was doing the whole "I'm going to get aggressive since I'm young" thing ... then the first recession or crisis hits and you painfully discover that both your compensation and your portfolio are highly correlated.

Always consider the nature and volatility of your comp when deciding where to invest your PA & 401(k). Comp = volatile, decrease the risk of your PA ... comp is stable, it's increase the risk in your portfolio. Obviously there are a lot of other things to consider and (disclaimer alert!) do not rely on my investment advice alone.

That was a very CFA-like answer, but anyone who's gone through either of the past two recessions/bubbles knows what I'm talking about.

Honestly, if your company provides target retirement date funds, there's nothing wrong with using them. The fees are incredibly low if you pick them in your 401k and the diversification you get is pretty similar to your typically recommended ETF allocation. Plus you won't be kicking yourself for making a "mistake" when the market turns against you.

If you haven't already, open a Roth IRA. Contribute enough to get the company match in your 401k then max out the Roth. If you have cash remaining, dump it in the 401k.

According to Barack Obama and the Democrats, you should be allocating your retirement savings into government bonds that pay 1.5%/year. It's the myRA--demand this product from your employer!

Bump, anyone?

You will need to check and see if you can even contribute if you max out a self directed RothIRA.

https://fundresearch.fidelity.com/mutual-funds/summary/316390772

dump it all in small cap or mid cap value for now. As you get older slowly transition the bulk of your portfolio to less risky stuff. large cap, solid dividend companies, and then some fixed income stuff. That's in 10 years though.