401k Allocation

redng's picture
Rank: Senior Chimp | 19

How should I allocate my 401k if I'm 24? The following are the options:

Target Date
T. Rowe Price Retirement Income
T. Rowe Price Retirement 2005
T. Rowe Price Retirement 2010
T. Rowe Price Retirement 2015
T. Rowe Price Retirement 2020
T. Rowe Price Retirement 2025
T. Rowe Price Retirement 2030
T. Rowe Price Retirement 2035
T. Rowe Price Retirement 2040
T. Rowe Price Retirement 2045
T. Rowe Price Retirement 2050
T. Rowe Price Retirement 2055 (TRRNX)

Money Market
T. Rowe Price U.S. Treasury Money Fund (PRTXX)

GIC/Stable Value
T. Rowe Price Stable Value(

Bond
PIMCO Total Return (PTTRX)

Large U.S. Equity
T. Rowe Price Inflation Protected Bond (PRIPX)
T. Rowe Price Equity Income (PRFDX)
Vanguard Institutional Index (VINIX)
T. Rowe Price Blue Chip Growth (TRBCX)

Mid U.S. Equity
T. Rowe Price Mid-Cap Growth (RPMGX)

Small U.S. Equity
T. Rowe Price Small-Cap Stock (OTCFX)
T. Rowe Price New Horizons (PRNHX)

International
T. Rowe Price International Stock (PRITX)

Thanks!

Comments (41)

Feb 19, 2013

What a crappy collection they offer you...

I don't believe in RDFs. Maybe you do, if so, just find the right target date.

On actual allocation, Ellenbogen has done well with New Horizons, so i would go for that. Surprised diversified small cap growth is not offered since they are offering t rowe funds. MCG is also a good choice, berghuis has done well over a long time.

I would just go with index if you are not trying to get small/mid cap exposure, because the large cap and international offerings are really lackluster. PIMCO for bond allocation for sure.

*This is my personal view and does not constitute sales/advertising.

    • 1
Feb 19, 2013

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.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

Feb 19, 2013
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.

VINIX is the one you're looking for and that's where I would put it out of this selection of funds.

Feb 19, 2013

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).

Feb 19, 2013
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?

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Feb 19, 2013
Hooked on LEAPS:
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?

Roth = pay tax up front and cash out tax free. There are roth 401ks and roth iras. Assuming you meant roth ira then yes, a Roth ira is like any other brokerage account as far as investing goes. You might want to consider rolling your 401K into an IRA so you can self direct the funds (buy and sell whatever you want as you see fit). I plan on finalizing that process later tonight.

Feb 19, 2013

I appreciate the responses. The company will match my contributions .50 cents on a dollar up to the first 6% of my base salary.

Feb 19, 2013

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.

Feb 19, 2013
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!

Feb 19, 2013
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.

VINiX is 0.04%. It's an equity index fund on his fund menu (from Vanguard, if it matters).

Feb 19, 2013

Ok, the fees leave some to be desired, but given that at least some of the equity funds are 75-85 basis points, you're not getting hurt that badly even if you stay at the same firm for five years. (I was more concerned about 130 or 150 basis point fees)

Schwab and Vanguard ETFs charge about 20 basis points, which mean that on a $100K retirement portfolio, you'd save $500-$700/year.

Feb 19, 2013

I've actually been struggling with this decision myself - my company has no match, and terrible 401k funds. No ETFs to speak of.

I have been maxing my ROTH IRA, then dumping the excess into a brokerage account. 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.

I don't want to have my money locked up in a 401k if I need it. I have an adequate emergency fund (~15k). How can I save more efficiently?

Best Response
Feb 19, 2013

1. I entertain the idea of getting a MBA but it's not something I have planned.
---> Ok. So we're talking maybe a 20% chance? If it gets to 40%, you will want to be making extra deposits into your 401k (unless you are already maxing it out) to transfer income from high marginal tax rate years to lower ones.

2. I am an Insurance Underwriter. I underwrite management liability.
----> So you have a pretty safe job, aside from the occasional insurance company blowup. You can do 30% cash/ 70% equity if you feel comfortable with it. Just (1) stay away from your company's stock and bonds while you work there and (2) don't get too carried away on buying your firm's products. You don't want to lose your assets at the same time your company is going bankrupt.

3. I think i can survive for 6-8 months if I lost my job right now.
Even without withdrawals from retirement accounts? If that's the case, then you're in good shape.

4. disappointed, but I would try to convince myself that it'll recover evenutally.
5. Would like to retire in Los Angeles.

Ok, so I'm going to recommend 30% cash and 70% in equities. Maybe 25% international and the other 45% in the lowest-expense equity fund?

    • 2
Feb 19, 2013

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.

    • 1
Feb 19, 2013
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.

Feb 20, 2013
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?

Feb 19, 2013

Wow, leave it to STAL to point out the one non T Rowe fund hidden in plain sight. Obviously this should probably be the bulk of OP's equity investment (though some diversification is still worth the 80 basis points in the other funds.)

@West Coast Rainmaker- just be careful, the new home withdrawal is a one time withdrawal with a max of $10K, and can only be taken out of an IRA rather than a 401k.

http://www.irs.gov//Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Individual-Retirement-Arrangements-%28IRAs%29

So my assumption here is that you will switch firms at least once before you need to buy some big ticket item. Failing that, you *can* take a 401K loan out, but those are usually a bad deal and leave you facing a huge tax bill if you get laid off and can't pay the loan back to yourself.

Feb 19, 2013

IP -- How did you become so knowledgeable about personal finance? Most guys on wall street don't have a clue about things like IRAs and even how to invest their own money. I feel more knowledgeable than most because I have aging parents on one end and young kids on the other, so I've had to deal with 529 plans and 401k rollovers and required minimum distributions for IRAs (and a whole bunch of other stuff) for at least someone in my family. But, for a single young guy, I'm surprised you know as much as you do.

Feb 19, 2013

IP -- How did you become so knowledgeable about personal finance? Most guys on wall street don't have a clue about things like IRAs and even how to invest their own money.

I watch the Suze Orman Show. It is like going to church once a week. If you want to drink less, go to a Baptist church every Sunday morning. If you want to cut your spending by 5% over the next week, watch Suze. If you want to accept living in a smaller apartment to save on rent, watch Suze for a couple months before you go apartment hunting.

Also my Dad is a tax accountant and I am paying for school by using my 401k as a vehicle for shifting income from one very high tax bracket to a lower tax bracket. So the personal finance I learn from suze and the tax tricks I learn from Dad.

Feb 19, 2013

Thanks Fellas. I really appreciate the help. I learned a few things, today was a success.

Feb 20, 2013

^^ IRS Publication 970 would have a more definitive answer on that. Look for the term "qualifying educational institution" and see how the IRS defines it.

Feb 20, 2013

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.

Feb 20, 2013

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.

Feb 20, 2013

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.

Feb 20, 2013

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!

Feb 20, 2013

Bump, anyone?

Feb 20, 2013

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

Follow the shit your fellow monkeys say @shitWSOsays

Life is hard, it's even harder when you're stupid - John Wayne

Feb 20, 2013

What restrictions are there on contributing to a 401K if you max a Roth IRA?

Feb 20, 2013

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.

Feb 20, 2013
job.resume:

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.

Thanks, appreciate your insight. That is what someone at my job was telling me as well.

Feb 20, 2013
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Feb 20, 2013