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80k posted:Target Retirement xxx (as slap me silly recommended) is certainly better than being clueless and picking funds randomly. But reading one book (like William Bernstein's Four Pillars of Investing or his new Investor's Manifesto could benefit you for a lifetime. I agree wholeheartedly with this. I'd recommend the Investor's Manifesto one for more casual investors, as it is more up-to-date with information from the real-estate bubble, and it is aimed more at those without much financial education background. Either one will take you probably no longer than about 6 hours in total to read - time well spent to give you a solid foundation of understanding invesment for longterm goals.
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Dec 14, 2009 19:25
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Cornholio, if I were you with those horrible expense ratios, I would put 100% of the 401k in the cheapest fund (the 500index @ 1.66% expense ratio  ). Then I would open a Roth IRA and diversify the rest of it there. Keep in mind that you shouldn't worry about trying to diversify each account separately. You just need to diversify your portfolio as a whole, which includes other IRAs, taxable accounts, etc. Otherwise you're just going to be getting raped in expenses inside that 401k. Now obviously if you don't have enough extra income to invest outside of your 401k, then you'll have problems. But you said that you're only contributing 4% of your income (I assume that gets you the maximum matching? if not you should do more there before opening a Roth). If thats the case and thats the max match they will do, then hopefully you have quite a bit of income headroom to invest outside of your 401k. flowinprose fucked around with this message at 16:57 on Jan 8, 2010 |
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Jan 8, 2010 16:55
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CornHolio posted:I've maxed out my company matching. I contribute 4% while they contribute 2%. I'd lose this with a Roth IRA. Would it still be worth it? I'm not suggesting you contribute any less to your 401k, but is 4% of your income all you're contributing to your retirement at all? If so, you are probably going to be hard-pressed to be able to retire with anywhere near enough money to sustain the same standard of living that you have now (especially with those lovely-rear end expense ratios).
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Jan 8, 2010 17:25
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80k posted:Cornholio, I am at a loss for words. That could be the worst 401k plan I have ever seen. The expense ratios are criminal. I really do suggest you talk to the plan fiduciary. Tell him/her/them that: It will probably be tough to change the minds of the company to switch the 401k plan to something less expensive. Unfortunately, the fact that they went with a plan that charges such high expense ratios probably means the employer is getting charged less. That combined with the meager 2% max matching tells me that Cornholio works for a company that is pretty stingy with their benefits. I think the only way you could probably change their minds would be if you got a large segment of the workforce to wake up and realize how lovely their benefits are and petition to get it changed. If you have a union they might be able to help? The only other way would be to educate other employees about how badly they're getting screwed and get them to all start bitching about it collectively (which will put you in an akward position if the company bigwigs find out you're trying to cause an uprising).
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Jan 8, 2010 17:54
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Leperflesh posted:Is it possible to file for my 2009 taxes in February, as soon as I get my W-2s and 1099s back, and then use my tax refund to fund a Roth IRA that would 'count' for 2009? Or is this a chicken-and-egg problem where I really have to fund it before I file? Maybe you missed the part of the 1040 instructions where it actually states you can have your refund directly deposited into a Roth IRA for the same tax year as the return (as long as you can verify that the refund will be deposited by the deadline of the return). See page 73 of the 1040 instructions linked here.
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Jan 13, 2010 01:43
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Chin Strap posted:My benefits document says: I don't think they're listing 3 different options; I think in the last part of that sentence they're describing the Roth 401k for people who are unfamiliar. As for which choice is better, I think its really a toss up. You'll hear arguments either way, but all things being equal it's probably a wash if both vehicles have the exact same investment choices within them.
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Feb 17, 2010 04:53
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80k posted:No, an after-tax 401k contribution is a legitimate 3rd option. So this amounts to effectively the same as non-deductible traditional IRA contributions? I guess that would have the benefit of being able to withdraw your contributions without tax consequences if you want (but do you have to still pay the 10% penalty if before 59&1/2 ?)
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Feb 17, 2010 05:14
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dv6speed posted:If you don't have the time and inclination to understand investing in stocks, then you should stick to passively managed ETF's. Most people will be better served by learning how to dollar cost average an SP500 ETF like SPY, than dealing with individual stocks OR actively managed funds. As far as PoorUser is concerned, I think this is the key point to take away from this discussion. I'm not really sure why there seems to be an argument evolving here. You and 80k seem to both be in agreement on what you said in the quote above.
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Feb 25, 2010 00:47
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I disagree that 20% matching is better than paying off a credit card debt at 15%. If you are in the 25% income tax bracket (and assume that you'll be in the same bracket when you retire) that 20% match will eventually be taxed at 25% (or higher depending on your state tax rate). 401k plans are tax-deferred, but should not be viewed as tax exempt. Paying off debt should be viewed as equivalent to investing in a completely tax-exempt security, and a 15% tax-exempt return on investment is really equivalent to a 20% taxable ROI if your tax rate is 25%. Eliminating debt has less risk involved (think of it being equivalent of a bond that can't possibly default). Paying down credit card debt also more closely resembles investing in a more liquid asset as compared to investing in a retirement account. Thus, paying down a 15% interest debt is like investing in a completely tax-free, non-defaultable bond that has a very short maturity (and no additional fees/expenses). The alternative is investing in your 401(k) and get a starting taxable return of 20% on an investment that probably carries much more risk (it depends on your 401k portfolio) and has some expense ratio. If you ask me, paying off the debt sounds like a better idea.
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Mar 15, 2010 22:15
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Actually, thinking about it a little more... I guess you can't compare them as taxable vs. tax exempt, because if he contributed $100 less to the 401k in order to pay more of the CC debt, then that $100 is going to be taxed before he can use it to pay the debt. So I guess it really is more like they are the same rate of return: 15% vs. 20%, its just that one is going to have expense ratios and more volatility, while the other is expense free and has no volatility. And paying the debt is a more liquid investment than throwing it in a 401k. Edit: so I've changed my opinion -> mathematically speaking, investing up to the maximum employer match would be better than eliminating the CC debt in this case. flowinprose fucked around with this message at 23:20 on Mar 15, 2010 |
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Mar 15, 2010 23:01
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Morris posted:It's actually a 30% match, so yes, the employer match is better mathematically -- but my question was about the best way to plan a 401k rollover when I can't do a Roth conversion right away, not whether I should be paying off debt or contributing to my 401k. Leperflesh and I were discussing CobiWann's situation. Sorry for the confusion, there were multiple posts in a row about very similar issues. With regards to your situation: My understanding is that if you are going to roll over the 401k into anything other than another company's 401k, then it has to first go into a traditional IRA somewhere. Then you can decide later whether you want to do a Roth conversion. Since you're already in lower part of the 25% tax bracket, unless your new job is going to triple your salary or something, then you'd be okay just waiting until you have enough to cover the taxes on the Roth conversion. If you see yourself eventually earning a lot more, then it would make sense to convert to a Roth as soon as economically feasible while you're still in a low(er) tax bracket. You're only getting 13% return on your contributions, so I'm pretty sure that it would make much more sense mathematically to just get rid of the credit card debt for now instead of continuing to make 401k contributions at your current job.
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Mar 17, 2010 16:42
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necrobobsledder posted:When contributing to a 401k, is the maximum $16.5k counting employer's contribution or just yours? What should I do if I max out my Roth IRA, 401k / IRA, and do not care about a yacht fleet (but may want a house in Silicon Valley, which costs roughly the same)? Employer contributions are not considered in the 16.5k max. That max only includes your contributions. Transfer of money/property inbetween spouses is not in any way taxable as far as I know. I'm not certain if that holds true if you are filing separately. In any case, the limit for the gift tax is around $13,000 per year, which is more than enough to contribute $5,000 to a Roth without any concern.
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Apr 1, 2010 19:14
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waar posted:Why self directed? Because you can choose pretty much anything to invest it in, instead of being limited to the (generally) horribly expensive choices of your employer's 401(k) plan.
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Apr 29, 2010 00:36
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waar posted:Ah my bad thought y'all were talking about thishttp://en.m.wikipedia.org/wiki?search=Self+directed+Ira Actually that is what we're talking about. The "trustee" or "custodian" it is referring to in that link would be the company that you use to open the IRA, such as Vanguard, Fidelity, etc.
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Apr 29, 2010 22:53
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Choicecut posted:Debt consists of two car payments both at 7% interest and a mortgage at 6% which we have been doubling up on because, well, gently caress mortgages: Should be paying the cars off long before the mortgage for 2 reasons: 1) The car loans have a higher interest rate 2) You can deduct mortgage insurance from your taxes if you have a big enough deduction to override the standard deduction on taxes... which with your payment is very likely to be the case. What this means is that the interest rate on your mortgage is effectively even lower than 6% when you take into account what you deduct from taxes. For example, if you're in the 25% tax bracket and lets say just for shits and giggles that you don't have state income tax (because that could count as yet another deduction), then your 6% mortgage is more like 4.5% = [0.06 * (1-0.75)] Edit: Since your matching is so low, it might be worth it (depending on your tax situation) to reduce your 401(k) contributions in order to "pound out" those car loans that much faster. Its up to you, but getting 7% guaranteed return on "investing" in those car loans will be pretty difficult to reproduce (without substantial risk) by investing it in your 401k. flowinprose fucked around with this message at 03:41 on May 22, 2010 |
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May 22, 2010 03:33
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gvibes posted:401(k) v Roth is basically a bet as to what your tax bracket will be now versus when you withdraw (i.e., retirement). Personally, I think that our tax rates will need to markedly increase, so I think the Roth is a great idea. If you have the means, I highly recommend it. It's also a bet as to whether or not Roth IRA distributions will be taxed in the future. I kinda doubt they will be (I contribute the full amount to a Roth every year), but that doesn't mean it isn't something to consider.
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Jul 12, 2010 22:43
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waar posted:Not sure what you mean here. The $5k limit on contributions is a limit to all Roth and traditional IRA's you might have, not $5k to Roth and $5k to the trad. If you want to contribute more than $5k to your retirement in a year then refer to the OP: I think he meant to say he's going to exceed the income limit (and thus not be able to make any contributions).
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Jul 13, 2010 01:01
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Droo posted:I already own junk bonds. I additionally listed a total bond market fund on my buy list. Are CD's really less tax efficient than dividend stocks in the face of the current situation with qualified dividends disappearing (barring congressional action) at the end of this year? Junk bonds are equally tax inefficient if you don't own those in a retirement account. I will try to save you some effort by pointing out that in this thread you're not likely to find much advice on picking individual stocks. That is because in the long term (which is what this thread is about), picking individual stocks will increase your risk astronomically with very little (if any) evidence that your return will increase accordingly.
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Jul 21, 2010 22:54
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CD rates are lovely (and pretty much always have been and always will be). There's really only a few reasons to invest in CD's: safety, stability, and relative liquidity. Those properties are valuable in retirement, when your cash flow needs to be stable and safe. Tax efficiency is a problem, yes, but I was simply trying to point out that tax efficiency is problem with many investment options, and thus is cancelled out of the equations when making a decision on what to invest in. When you're comparing junk bonds to CD's, they are taxed the same, so questions like price stability, default risk, expenses, and inflation (which you now point out as a problem, and I agree it is a big one with CD's) are what matter.Droo posted:I do enjoy that you think the only way to own a diverse stock portfolio for "the long term" is through a mutual fund. You're putting words in my mouth. My comments regarding stock picking were not as much a statement of my own opinions as they were an observation of the general range of opinions you can expect from this thread. If you have a million dollars at your disposal, then you certainly have the necessary capital to throw around to build your own individual stock portfolio. Replicating an existing index fund if you have the necessary capital to do so relatively cheaply probably would be a better choice than buying the fund itself. However, you were asking for advice in picking specific stocks, which is much different than taking an index and replicating it.
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Jul 22, 2010 04:09
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alreadybeen posted:I've read a couple articles that have made the point that while people know they should be heavily allocated in equities in the early portion of their retirement contribution, they often are under-allocated in equities when you look at the total amount allocated across time. I can sort of see where you're going with this, but I think its much more complicated than that... since if you're contributing $30k/year by age 45, your total retirement savings by that point would probably be very large compared to what they were when you were 25. In other words, the amounts you're contributing into bonds are higher, but the percentage that those contributions make up of your total retirement savings at the time is lower. To take your example of $4500 equities / $500 bonds, if that's your first year of contributions then your contribution is 100% of your total portfolio value. Lets say you raise your contributions to $30k by age 45 as you suggested, if that was the case then by that time your total portfolio would probably be in the range of $300,000 (this is assuming you increased your amounts proportionally over the 20 years from age 25 to 45). Thus, your contribution at age 45, even though it is 6 times what it was at age 25 is only 10% of your total portfolio value at the time. To make a long story short, once you get to age 45-55, the re-balancing and/or altering of existing allocation has a much greater effect than your contributions each year. I don't think the math is quite as simple as it seems at first glance.
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Aug 6, 2010 03:40
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unprofessional posted:It seems like this guy was mainly hurt by bad timing? I think rather he was hurt by lack of experience combined with extreme overconfidence. The guy obviously has some psychological issues that came into play. Timing did play a role, but no person really has control over that. He did, however, have control over what investment strategy he was using and whether or not to continue using it when its flaws became glaringly apparent. He chose to continue (failing several times, if you go by how many times he experienced margin calls). I believe it was Einstein who said the definition of insanity is repeating the same action and expecting a different result. I think the gist of the thread to me is that most people technically already "mortgage" their retirement by utilizing leverage in order to purchase other necessities, such as an education, a home, and a car. That is to say that if you didn't take a loan to do these things, then you would've otherwise had to save up a considerable amount of cash to buy them, which would take a while and thusly push back the timeframe in which you could contribute as much to a retirement account. These types of loans though are much less risky than his ideas of MYR. That's not to say that they're completely without risk, as evidenced by the housing bubble and subsequent crash where many people are defaulting on their mortgages. However, when you're leveraging an asset class that is prone to swings of 30% with relative regularity, you have to account for the fact that your leverage will thusly amplify such swings to the point that you are at extremely high risk of losing everything. To put it another way, the MYR strategy essentially amounts to a person who only has a $1,000 bankroll sitting down to play poker at a no-limit holdem game with a $200 big blind. Could you potentially win big? Sure, if you get really lucky really early on. The odds suggest, however, that you're probably going to get busted out very quickly since you can only afford to see the flop 5 times without having won a hand.
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Aug 6, 2010 16:05
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abagofcheetos posted:I went like 80% bonds in my 401k in February and am sitting at 3.5% up. The good news is that with inflation essentially at a standstill for the moment, your 3.5% is effectively a 3.5% real return. Of course, don't expect that to hold true for the long-term.
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Aug 12, 2010 23:00
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Chin Strap posted:Anyone? I'm just making sure I'm not being too conservative. I'm pretty risk tolerant. Here's a list of all the Vanguard funds in my plan (the others have too high an expense ratio). A few thoughts (these are my opinions, but I am by no means an expert): 1) Regardless of risk tolerance/age, I am going to go with Ben Graham and say that there aren't any fundamental reasons anyone should hold more than 75% equities or less than 25% equities. 2) You're overweighting (if you go by marketcap) the extended market index. The completion index comes out to around 20-25% of total stock market capitalization. Historically, small caps have outpaced large caps, but if you've read the Four Pillars then you know past performance does not necessarily correlate to the future. 3) You're also underweighting the international markets (or overweighting U.S. if you want to look at it that way). World stock market cap has the U.S. with about 35-40% of the capitalization. Right now you have about 66% of your stocks in U.S. funds. This is pretty sketchy though, as more and more today U.S. companies (particularly larger ones) are heavily effected by international operations/growth. So I don't think this really matters much. 4) You've pretty heavily overweighted in the REIT index with a 10% allocation. You might consider scaling that back to around 5%. In summary, my recommendation would be something more like this: BONDS = 25% VBTIX (bonds) = 25% of total, 100% of bonds STOCKS = 75% VIEIX (mid/small cap) = 15% of total, 20% of stocks VGSNX (REIT - real estate) = 5% of total, ~7% of stocks VINIX (large cap) = 25% of total,~33% of stocks VGTSX (total int'l stock) = 30% of total, 40% of stocks
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Aug 16, 2010 19:49
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I don't see any reason why you couldn't have your emergency funds in a CD ladder or something similar. I mean you could keep around 1-2 months expenses directly in a checking/savings account, and then have the rest (6-8 months of expenses) in a CD ladder. It's not like something is going to come up where you need to have a one day turnaround to withdraw 6 months worth of expenses.
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Aug 23, 2010 18:56
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bam thwok posted:I'll be making bi-monthly investments the first Tuesday after each paycheck. Based on the link you sent me, you can't really beat the $4 per trade they offer, especially since I'm not really interested in real-time trades at all (for my Roth, at least), and I'll almost exclusively be buying mutual funds and ETFs. Gonna go with moana and say that if you're gonna use ETF's and mutual funds, Vanguard would be a better choice, as they don't charge ANYTHING if you're buying their funds/etfs (which you probably should be anyway if you're a long-term investor, due to the low expense ratios).
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Sep 16, 2010 16:13
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namelesstwo posted:Another newbie 401k question The max this year is $16,500 - but that figure is only for your contributions. There actually is a figure for the maximum combined bewteen your contributions + match, but it is much higher at $49,000 (note that this would require your employers matching to be rather ludicrous at roughly 3 to 1).
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Sep 23, 2010 20:43
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Eggplant Wizard posted:Total newbie. Hold my hand! Obviously I have not read the whole thread and I am sorry. But I have been reading a bunch about IRAs and retirement planning. I got a bit lost trying to figure out which firm or type of fund would suit me best, though, so I turn to you folks. First question: as a grad student, do you have "earned" income? In order to contribute to a Roth IRA you must have at least as much earned income as you are contributing. If you get a w2 from being a TA or something (or if you have a job on the side) at the end of the year then that would count, but I'm not sure that just a grad student stipend qualifies for this requirement. Second question/concern: is that American Funds account already in some kind of tax-sheltered vehicle (i.e. Roth IRA / 429 plan)? I'm guessing its not, but you need to be sure of this before you start moving it around. Since it's probably not in any kind of tax-sheltered status, then you need to figure out what the capital gain (if any) will be if you sell it in order to move it. This is important, because it might end up with you owing a big tax bill at the end of the year if the capital gain is significant. In answer to your (#2): There is pretty much no reason at all to go with anything but Vanguard at this point. What I would recommend is opening a Roth IRA with brokerage account, and putting $3,000 (the minimum) into their default money market fund. Then, set up your portfolio using either the target retirement funds (if you want to be pretty much hands-off), or selecting several Vanguard ETF's to purchase through the brokerage account if you want to be a little more involved (and have even lower fees). In answer to your (#3): In any given year, you either are completely below the Roth IRA income limit (in which case you can contribute the full amount), completely above the income limit (in which case you can contribute nothing for that year), or you are within an income "window" where your contribution limit phases out. These limits are imposed per year. So one year if you make $150,000 modified adjusted gross income (MAGI), you can contribute nothing. The next year if you only had $100,000 in MAGI, you could contribute the full amount. The income limits are different for single vs. married, but they have no component of multiple-year phaseouts like you're describing. Its pretty black and white in any given year what you can contribute. Nothing happens to what you've already contributed from previous years, it stays in the account to grow without penalty.
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Sep 25, 2010 22:06
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). I'd be willing to use this to seed the Roth IRA instead if it seems like a good idea in terms of fees and such.
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Eggplant Wizard posted:Thanks for the huge and detailed answer (1): You can only contribute as much as you have earned in that year. Your MAGI may actually be zero (due to deductions) but this is fine as long as you aren't contributing more than what you earned (think box #1 on your W2 form). By the way, those dividends from your AF account don't count as earned income. So if you earn $100, you can contribute only $100 (even if you have millions in assets). If you earn $60,000 you can contribute $5,000 (since that's the limit). (2):For the LOVE OF GOD, DO NOT put any more money in that AF account. You will get absolutely hammered by the front end sales load (5.75%). Its not a terrible idea to leave the money that is already in it alone, since the sales load has already been paid for that. The sales load shouldn't be assessed on dividend reinvestments either, so that is fine if you want to continue reinvesting the distributions. Its expense ratio on what is already in there is not absolutely horrid at 0.7% (so you're paying around $70 per year on $10-11k), but getting ETF's at vanguard beats the pants off of it. However, if the tax situation from selling the AF account is okay (it probably is, since you're very likely in a low tax bracket - in fact you may pay almost NONE if your taxable income is less than $34,000), then I would seriously consider selling out of it and using that money to fully fund a Roth IRA from Vanguard and then stick the rest of it in a taxable brokerage account (also at Vanguard) and purchase a Vanguard ETF like VTI. You can then sell shares of VTI in the future if you need to in order to fund your Roth IRA again, or just keep the money in VTI and fund the Roth from your own income. Edit: note that if the above is true (your income is lower than $34,000) then you should absolutely sell that AF fund by the end of this year (if you're going to at all), because next year the minimum long-term capital gains tax goes from zero up to 10%. So you really need to look into this, as I suspect you fall within this category. flowinprose fucked around with this message at 02:23 on Sep 26, 2010 |
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Sep 26, 2010 02:09
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Leperflesh posted:You're getting great answers, but I have a quick question (since you're a grad student): Thats a very good point, Leperflesh, and I completely missed that fact...  Good catch!
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Sep 26, 2010 03:13
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Eggplant Wizard posted:My 10% a year saving for retirement number doesn't include the minimum 7% general savings I'm doing as well. I hope to build that up and use it to really aggressively pay off the student loans. As if I'm not loaded enough, apparently I have another trust thing in the UK that I get next year... I'll be back when I hear about that. Anyway, I'm not worried. One of the reasons I suggested VTI for purchase outside of a tax-sheltered account is that it is fairly tax-managed since it is a total-market type of fund. This means there will be very little change in its portfolio, leading to fewer/lower capital gains distributions. This means less taxes, but since your tax bracket is so low at the moment it probably won't make that much difference for the immediate future. Until you climb into a higher tax bracket, you could just use the 2050 Fund in your taxable account as well without any major repercussions. So what I would suggest if you want a relatively hands off approach is simply to pour $5,000 into your Roth IRA in the 2050 fund, and then do the same in your taxable account. Then right off the bat in 2011, you can just sell $5,000 worth of the 2050 fund that is in your taxable account and deposit it into the Roth IRA for your max contribution for that year. If you would like a more hands-on approach, I can give you further recommendations to break down your portfolio into several ETF's split between your taxable/non-taxable accounts. In order to really get any benefit out of that, though, you'd have to be willing to learn a bit more about it yourself so that you could figure out when/how to rebalance it accordingly.
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Sep 26, 2010 20:52
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Insane Totoro posted:My annual salary is now $24,000 a year and my fiancée makes about $13,000 annually. With your income being that low currently, I think you'd be better served by contributing to a Roth IRA than the employer plan. The reason being is that your income is most likely lower currently than it will be later. This is assuming you already have enough emergency savings and other personal finance issues out of the way first. Not sure about "writing off" the loan on your taxes.... for one thing, you won't be able to get any deductions for it until you start making payments on it. The interest rate will depend on whether or not you can get a federally subsidized loan, but it will probably be around 6-8%. Also keep in mind that you're only able to deduct interest, and that the total deduction you can take has a maximum. Since we routinely recommend in this thread that people consider paying off debt (even at that low of an interest rate) as an investment strategy, it might be wiser to just pay the tuition out of pocket instead of incurring that debt/interest in the first place. This decision will have a lot to do with how much cash you have on hand, how it will effect your quality of life, and how quickly you can repay the debt after you finish your degree. You might be worse off by not getting a loan if it means you don't have adequate emergency savings, etc. This is more of a question for the Student Loan Thread in the Ask/Tell forum.
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Oct 7, 2010 05:31
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JohnClark posted:I started my career as a federal employee two years ago (I'm 27 now) and I've been contributing 5% to my TSP since the FAA matches that dollar for dollar. However, once 2012 starts I'll be above the income limits to contribute to a roth IRA, so I'm considering just maxing out my TSP contribution (which I believe is 16,500 right now). Is that a good way to go for the long term? There's a possiblity that the Roth limits might be raised next year (we may not find out until late October / early November). Another possibility is that your contributions to the TSP may put you back under the limit for Roth IRA contributions. So you might be able to do a mixture of the two. Here's a rough calculation showing how this might be possible: Let's say your Gross Income for 2011 is going to be $130,000. You're contributing 5% ($6500) to the TSP already, so this means your modified adjusted gross income comes down to $123,500. At this point you're still above the $120,000 threshold to make any contribution to a Roth. However, if you increase your TSP contribution to 10% ($13,000), you're now in the phase-out window with a MAGI of $117,000. So if the rules stay the same next year, you could contribute 5000 * [(120-117)/15] = $1000 to your Roth IRA. This would be even larger if you went up to the full $16,500 TSP contribution. Of course none of this will apply if your income is greater than $136,500. If that's the case, then contributing more to your TSP is probably still a good idea. The good news is that the TSP has really really low expenses, and a exceptionally good cash equivalent type investment with the G-fund. So putting your money into the TSP is probably as good if not better than any investment vehicle you could find otherwise.
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Oct 7, 2010 05:53
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Insane Totoro posted:This is separate from anything that I might put in myself. The employer contribution is completely not dependent on me putting in any money. It's not "matching funds" but literally a "giveaway." This is why it doesn't make any sense to contribute anything to it unless you've already maxed out your Roth contribution. You're not getting matched either place you invest it, but the money you put in the employer plan will be taxed when you take distributions of it later on. Assuming that your income will be higher later in life than it is now (I certainly hope it will be), then logically you would want to pay the taxes on it now while they are low and invest within a Roth IRA, which will not be taxed when you withdraw it. That is unless they change the rules and start taxing Roth IRA's, but I think that legislation would have a very tough time getting passed.
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Oct 7, 2010 19:22
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Cheesemaster200 posted:I am getting very antsy with this upward drive on the indexes. I have 17% gain on my 401(k) overall and I am thinking of moving it into some money market/fixed income funds to keep it until the inevitable blows over some. Do not watch the market fairly regularly if you expect to keep any sanity with regard to your retirement savings. You should occasionally rebalance, but not any more often than about 4 times a year (and that is probably too often unless the markets are really volitile). Even when you do decide to rebalance, you don't need to micromanage it that much. Just take a look at your allocations, and don't touch them unless they are out of whack. Like if you were 30% large-cap stock, leave that alone unless its percentage has up'd to 33% or more. If you were 75% stocks and 25% bonds, leave that alone unless it has shifted on its own to like 80/20. But do not just move stuff around simply because you are anxious about where you think the market is going, because you don't (no one does).
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Oct 18, 2010 21:05
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alreadybeen posted:Is giving up dollar cost averaging a big enough disadvantage to purposefully wait on contribution of an IRA? It has been demonstrated that a completely random investment strategy is statistically no worse than set amounts at set intervals with all other variables (total investment, fees, etc) being equal. I don't have the source for that off the top of my head, so take that however you will. That being said, there are definitely a couple of things to think about when you consider DCA: 1) Are you paying transaction fees with each time you invest? If so, you might want to seriously consider lumping some of those transactions into larger, less frequent purchases. 2) Are you the kind of person who watches the market frequently, or gets anxious about your contributions when the market fluctuates? If so, you might want to consider using a DCA strategy with a scheduled automatic investment program so that you aren't tempted to put off your next contribution due to emotional and/or "analytical" anxiety. alreadybeen posted:I figured the longer your money is in the account, the more time it has to grow so get as much in as soon as possible. Over a period of 50 years contributing will average out so lump sum yearly contributions would be OK. You just contradicted yourself. If over 50 years, contributing in lump sums averages out, then what difference does either method make? Other than that first year, the timeframe could simply be shifted such that it makes no difference mathematically when in the year that contribution was made. Over a long period of time, either strategy will end up the same (statistically speaking) unless you are paying fees with each investment, in which case the more frequent and smaller your contributions the higher your total fee percentage will become. Other than that, the only difference between the two strategies would be that your larger less frequent contributions would tend to cause more variance in your returns, with no effect on the average return. tl;dr version: Is it a big disadvantage to give up DCA? No, unless you end up screwing yourself up by not abiding by an automatic investment schedule and psyching yourself out because of what you perceive is happening in the market.
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Oct 31, 2010 18:39
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Droo posted:If stocks go up 8% a year on average, an even contribution amount would earn about 4% in the first year, and a lump sum on January 1st should earn 8%. All other years being equal except the first, if done every year it should make a nice average portfolio value difference of +4% or so of the total value of your IRA when you retire, assuming you contribute on Jan 1st every time. So if you manage to accumulate $1,000,000, now you would end up with about $1,040,000. You're assuming that the market went up in the first year (which is the only year which will make any difference). If the market went down X% in the first year, then your final value will be equivalently lower.
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Oct 31, 2010 19:28
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abagofcheetos posted:Are you able to predict what the market is going to do? No, and I don't understand how you could construe anything I said in that manner? My response to Droo's post was that an X% average gain over a long period of time does not necessarily mean that the first year is an average year. So you can't say that lump sum contributions always have an advantage over DCA of 1/2 * X% average gain in your final portfolio value. If the first year is an up year, the lump sum strategy would statistically be better, if it was a down year, DCA would be better. The point is that the difference between strategies is completely negligible except for differences in variability, with lump sum having the higher variance.
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Oct 31, 2010 20:26
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Let me lay out what I'm saying as simply as I can, and we'll see if we all agree: Investment strategy 1 "Lump Sum": Contribute $5000 on January 1st every year for 25 years Investment stragety 2 "DCA" Contribute $5000/yr divided into 52 equal payments for 25 years. So what happens when we subject these strategies to a randomly generated set of weekly market returns centered on 0.1154% +/- 6%... ? (By the way, this results in an average yearly return of 6%). What happens is that you generate two bell curves, each with a mean of right around around $312,500. The bell curve for strategy 1 will look slightly (maybe even imperceptibly) "thinner" in the middle than the bell curve for strategy 2. Why, do you ask? Because the standard deviation in strategy 1 will be slightly larger. Both strategies are actually the SAME investment strategy with different periods of time between contributions. Isn't it intuitive that the strategy with less frequent, larger contributions would result in a larger variation in possible total return?
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Nov 1, 2010 00:53
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Droo posted:I'm not really sure why you focused on that (instead of return) since it seems fairly obvious that this would happen, but I wanted to point it out in case you think we don't understand what you are saying. I focus on the variance because it is very important to do so when you are investing for retirement. Because at some point, you're going to stop contributing and expect to live off the money you generated in your portfolio. Lets say you estimate that you will need at least $200,000 in retirement savings in order to retire 30 years from now (probably not going to be enough, but I'm using a number similar to what you have generated with your data for arguement's sake). So you formulate an investment plan, and decide how much money over that period of 30 years that you need to contribute (within limits constrained by how much you could possibly contribute) given an assumed rate of return in order to reach your savings goal. In our example we are contributing $5000/year with an assumed average rate of return of around 5.5%. Just using the numbers above, 5000/year over 30 years with 5.5% return yields an average of just above $380,000 as you've shown. Sounds great, with an average rate of return considerably higher than our $200,000 estimated minimum for retirement. Except that this information alone says absolutely nothing about the probability of success. Even if the mean final value is $380k, if there remains a 40% chance of ending up with less than $200k, then the variance is probably unaccetably high. (I'm pulling this probability out of my rear end for illustrative purposes) This is the entire concept behind developing an asset allocation appropriate for your retirement goals. If we just recommended to everyone to invest in whatever had the highest expected return without regard to variance, then there would be an awful lot of 60 year olds allocated into a 75/25 stock/bond mixture with overweighting into small caps, value, and emerging markets. Except that intuitively we know thats not such a great idea for someone planning on retiring in 5-10 years unless they have an investment portfolio large enough to withstand the volitility and not end up with a high chance of being below their minimum retirement age needs. Does any of this matter in our example of comparing 5000/yr on Jan 1st to spreading out investments to each week? Probably not, because I suspect the variance is pretty low. It turns out that any potential increase in return is equivalently pretty low. Either method should be fine, but my opinion is that for most people, setting up automatic contributions with their weekly/bi-weekly/monthly paychecks probably makes more sense because they are more likely to stay with it and avoid trying to time the market. Unless they are incurring transaction fees, in which case they should limit the number of contributions and increase their size. Of course if you're investing for retirement you probably shouldn't be investing with anything that incurs transaction fees... but that is another can of worms entirely. Sorry for the  Either method is fine, the differences are slight. Use whichever works best for you. If you have the money to do one lump contribution per year, then fantastic, go ahead. Just be wary of your own ability to psych yourself out of contributing when its due because of what you perceive is going to happen in the market. I consider the matter closed.
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Nov 1, 2010 18:52
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| # ¿ May 12, 2024 20:25 |
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Edit: Nevermind, this derail has gone on long enough.
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Nov 1, 2010 23:21
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