401K help

[The-Noid]

If you use target date funds, 100% of your money should be in the target date. The manager will adapt the portfolio for your risk tolerance as you age.

They are either 0% or 100% investments. Don't mix and match them.

There's a lot of great white papers out on the concepts, depending how much due diligence you want to do.

Not investment advice, etc. etc.

 

[NoCreativity]

Alright, I'll just do the 2055 index thing then. Surely online strangers wouldn't do me wrong


2011 was the first year we had any retirement and I just did 3% to get the 3% emplohyer match. This January I wised up a bit and upped it to 7% + 3%. Now my company is being bought out (hence the change to ING) and they give 4% so I'm upping my part to 11% to get 15, or I might even do 20%. If I hit the cap during the year, will my employer automatically stop contributions?

This is a great question and something you will have to find out from them. Where I work you would lose out on some of the match if you max out early.

Also remember that the target funds should not be your retirement date but the date on which you plan on drawing from that account.

 

[HardcoreRobot]

there are a lot of variations between 401 plans. the match is usually applied per pay period, so front loading and maxxing out too early could result in missed match later in the year. some plans include a 'true-up' that applies the next year to rectify that. some companies will give straight contribution, regardless of yours. just lots of variations...

everywhere i have worked, payroll has kept track of the contributions and stopped it at the limit. only tricky part was moving jobs mid-year, but i just needed to inform payroll what my limit should be and they were able to override it.

 

[JimKiler]

Alright, I'll just do the 2055 index thing then. Surely online strangers wouldn't do me wrong


2011 was the first year we had any retirement and I just did 3% to get the 3% emplohyer match. This January I wised up a bit and upped it to 7% + 3%. Now my company is being bought out (hence the change to ING) and they give 4% so I'm upping my part to 11% to get 15, or I might even do 20%. If I hit the cap during the year, will my employer automatically stop contributions?

If your employer is only matching the first 4% i would consider only contributing 4% and then setting up auto payments for the remaining 7% to an IRA which give you unlimited choices compared to this small list.

 

[DaveSimmons]

If your employer is only matching the first 4% i would consider only contributing 4% and then setting up auto payments for the remaining 7% to an IRA which give you unlimited choices compared to this small list.

Good advice if you can afford to do it. Get a Roth IRA at Vanguard.com, where I'd still recommend their Target <year> as a single fund to buy for instant diversification.

With a Roth IRA you don't get the tax savings right away, but in return you don't pay any taxes when you take the money out at retirement. I think of it as being able to put more of your money into tax-sheltered savings by paying the taxes up front.

Vanguard's target fund almost certainly has a lower expense ratio than ING's 401k version, so it will grow a bit faster over the years.

 

[eLiu]

I'd do 50% 2055 target fund, 25% large cap growth, 25% mid cap blend. Maybe throw some in one of the international funds too.

I'd suggest some international stuff too. Maybe take 5-10% out of target & mid-cap, then add 10-15% into world and/or emerging markets (so 10-15% total in internationals, not 10-15% in each of those funds)?

 

[DaveSimmons]

I'd suggest some international stuff too. Maybe take 5-10% out of target & mid-cap, then add 10-15% into world and/or emerging markets (so 10-15% total in internationals, not 10-15% in each of those funds)?

Look at the makeup of the target fund first though -- Vanguard's Target xxxx already includes international stocks.

I realize getting just one fund seems too easy or like cheating, but most target funds are funds-of-funds so (since I know you like diversity) they already diversified your diversification.

 

[jagec]

Look at the makeup of the target fund first though -- Vanguard's Target xxxx already includes international stocks.

I realize getting just one fund seems too easy or like cheating, but most target funds are funds-of-funds so (since I know you like diversity) they already diversified your diversification.

Yo dawg, I herd you like diversified investments...

 

[yh125d]

The 4% company contribution they call "safe harbor", they contribute that even if I don't put any in, and the way they worded it sounds like the employer contribution doesn't count towards the max of 17.5k? So I can go up to the max on my own contribution but still get the 4% all the time, does that sound right?

A couple of you are saying the choices are limited, would it be better to just take the 4% and then contribute my own portion to a different 401k/ira/roth/etc? They did explain that our employer pays for all associated plan fees, costs, etc. Wouldn't I have to pay that stuff elsewhere?

I understand that IRAs give a lot more options to where to put my money, but at this time I don't have the time to educate myself enough to know where I want to put it. I like the idea of sticking it all in a good fund and letting it sit for 40 years. I might in the future become more savvy and manage it myself more


If I do contribute to a different account, what would you folks recommend for someone like me? Young, making good money already and should continue to get considerable raises for years to come, I can easily see myself wanting to contribute over 17.5k in just a few years. Roth? Simple? Other?

 

[DaveSimmons]

Your employer pays the 401k management fee, but you pay the feeds in the funds themselves. Look at the fund's prospectus or a summary sheet provided by ING for the details.

Note that the Roth IRA has a lower max contribution, $5K per year. I'd sign up with Vanguard.com and get their own target <year> fund.

Then you also do the 401k contribution to whatever level you can afford, possibly the full $12.5K if you can afford that. Get the ING target 2055 fund. It probably has much higher fund fees than Vanguard but it looks better than the other choices.

If you change jobs in a few years, you then move your ING 401k money to a rollover traditional IRA at Vanguard, and buy more of Vanguard's Target <year> shares. Keep doing that with every other job until you retire.

 

[Bignate603]

If not bonds, then they should have a money market account. Can't get much lower risk in a 401K.

Extremely low risk is a pretty poor strategy for a 22 year old. Stuff may go down temporarily but over the next 40 years it's a very safe bet that stocks will do better than bonds by a significant amount.

 

[rcpratt]

Your employer contributions do not count towards the annual limit.

 

[yh125d]

So I should focus on maxing out roth contributions first, then the rest in my 401k? I contribute over 5k yearly already so maxing roth and then some extra shouldn't be a problem. I had always thought Roth was the way to go, if for no other reason than I'm still in a low tax bracket now while I'm young, so may as well pay lower taxes early and THEN grow for 40 years.

 

[DaveSimmons]

Right. Normally you would want to do the 401k first, up to the level that your employer matches, but it sounds like you get matching as a % of salary even if you put in 0%. I'd make sure of that with HR, you don't want to miss any matching.

 

[yh125d]

Yeah there's no matching, just the flat 4%


Alright then, I'll go do a vanguard roth IRA (I already have $5k cash to put in it to cover this year) and will probably up my contribution to the 401k to 15% total (4% employer + 11%), and start putting $5k in my roth every January.


thanks folks, I appreciate the advice!

 

[Exterous]

Most plans have a target retirement account. For you, it's be something like 2052 (Christ that looks like a unfathomable number!).

They'll be index heavy up front and then slowly rebalance to income based stocks/bonds/treasury as it gets closer to the target date. For the unitiated investor, they are probably your better bet.

Something to keep in mind target retirement plans differ on the % international and how much/how quickly they transition into bonds.

And you definately want to be very careful about mixing target date and separate funds. Adding your own in could offset your allocations robbing you of diversification

 

[JimKiler]

Yeah there's no matching, just the flat 4%


Alright then, I'll go do a vanguard roth IRA (I already have $5k cash to put in it to cover this year) and will probably up my contribution to the 401k to 15% total (4% employer + 11%), and start putting $5k in my roth every January.


thanks folks, I appreciate the advice!

Good Luck and when you get time do some research, it will help you at least get a baseline with all this confusing stuff.

BTW, there usually are fees with IRA's but after a certain dollar threshold they will waive them. T Rowe Price used to have fees but now it is a min of $1000 to open an IRA and your contributions need to be at least $100. Vanguard is also a good company for buying funds.

Also check the load fees, called front end loads and back end loads which can also suck your fund dry.

 

[Yossarian]

You may want to get into the habit of waiting to contribute to the Roth until you do your taxes each year. There is a cap on the Roth contribution depending on your taxable earnings, so if you put in too much you'll have to withdraw it and file extra forms with your taxes. There is also a penalty in some circumstances.

If you wait until you file your taxes you'll know exactly how much you can contribute.

 

[Xcobra]

You may want to get into the habit of waiting to contribute to the Roth until you do your taxes each year. There is a cap on the Roth contribution depending on your taxable earnings, so if you put in too much you'll have to withdraw it and file extra forms with your taxes. There is also a penalty in some circumstances.

If you wait until you file your taxes you'll know exactly how much you can contribute.

THIS! A lot of people don't seem to understand that there are income limits as to whether you can contribute or not. I think for single it starts phasing out at 110K and 173K for married.

 

[alkemyst]

If you're putting it in bonds when you're 22, you're doing it wrong. I'm not going to dig up the link, but take there is a cool figure that shows returns over any given 30-year period - they're pretty much always positive and larger than bonds returns. You have 40 years until you retire. Small fluctuations in the market are nothing to worry about at this point.

Stick it in a target-age fund or index fund, or a mix of those. Can't tell you much more without knowing your choices.

If bonds could guarantee you 7% returns, everybody would be doing that. That sounds a bit high.

Be careful on 'target funds', they are usually high cost investments.

 

[DaveSimmons]

Be careful on 'target funds', they are usually high cost investments.

Depends completely on the company. Vanguard target funds are 0.18%, lower than most non-Vanguard index funds and the same rate as their Total International index fund.

 

[alkemyst]

Depends completely on the company. Vanguard target funds are 0.18%, lower than most non-Vanguard index funds and the same rate as their Total International index fund.

I use vanguard. Unless you have $10k you are paying $20 a year.

I am in VTSAX with them.

 

[xanis]

Funny enough, I started a new job this week and was just filling out the paperwork for my Vanguard Simple IRA when I saw this thread. How convenient.

 

[DaveSimmons]

I use vanguard. Unless you have $10k you are paying $20 a year.

I am in VTSAX with them.

I think the website says you can avoid the $20 fee now if you sign up for paperless electronic delivery of statements and other documents.

 

[The-Noid]

Explain to me the whole idea of fees. I agree that fees make a difference if a manager consistently underperforms them or you are looking at specific equity sector/index exposure; however let's look at at a simple example.

Investment A. 5 Year return -.47% net, annualized. Fees management .17%, trading .01% (estimated).

Investment B. 5 Year return 7.07% net, 10.89% gross, annualized. Fees, short rebate and trading .60%, Management, 1.91%, incentive 1.21%

Investment A. Vanguard 500.

Investment B. A fairly well known hedge manager.

I guess were it my money, net returns would be more important than gross.

Even equity replacement, long bonds + equity futures with 1.0% expense ratios outperforms the SPX, fairly handily.