| young worker getting started with 401k |
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jman
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Cash: $ 0.45
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Joined: 07 Feb 2010
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| young worker getting started with 401k |
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Hello all.
I am a 24 years young new employee working for a major rail road company. I'm interested in some second opinions regarding my 401k approach. My employer is willing to match up to 6% of contribution, so I'm definitely going to contribute at least this much. My goal right now is simply to save as much as I possibly can. I enjoy saving money and am very thrifty. I have no loans/debts and a 770 credit score. I guess I would like to retire at an early age, but because I enjoy what I do so much, right now at least this is not a concern.
Here is my tentative plan:
6% contribution for now, increase every year and cap off at most 15-20% if possible.
I'm planning on diversifying my portfolio as such:
25% target retirement mutual fund (80% stocks now, becomes less risky as reaches retirement age)
25% index 500 fund - moderate risk
25% international fund - high risk
25% company stock - moderate risk (though rail road stock is more stable than others)
I plan on checking on my portfolio every few years. Then, during 10-15 year time frame before my targeted retirement age, wait for an economy upswing and put like 90% investments in more stable assets. How does this sound? Specifically, how is this portfolio's risk management?
Thanks for any help.
J
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Sun Feb 07, 2010 11:12 pm |
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oldguy
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Location: arizona
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That's a pretty solid plan. Just to give you a rough guess - if you are now having $6000/yr added to the 401k (basis, 12% of $50k), and if you increase that by $500/yr, you'll have $2,550,000 at age 55, $4,460,000 at age 60. That's based on an 11%/yr return.
And your plan to start moving it about 10 yrs before you retire is good. That is the time to shift from wealth-building to wealth-preservation - you don't want put your principal at risk after about age 50 to 55. Conversely, you want to use all of your available 25 years to build wealth. And that is why it is important to start early, as you are - even 2 or 3 missed years knocks down the end point by 100's of thousands. (As seen by the $2M difference between age 55 & 60)
As for your risk management - I would avoid the RR stock. In general, an invidual stock carries the the risk of a company failure (total bk, such as GM or Enron) plus sector failure. As you broaden the base to 'business sector' you avoid the individual stock failure but still carry the risk of a sector failure. As you further broaden the base to a total market index (or the SP500) you carry neither of those risks. Yet those 3 categories historically have almost the same return, ie about 11% to 12%. Statistically, owning an individual stock carries about twice the risk of an index - and for the same expected return. That is called uncompensated risk (the worst kind) - you want risk but you want compensated risk.
As for the remaining three catagories - you have some redundancy - the Target Fund alone does about what you want - ie, mostly SP500, a bit of international, and a spinkling of bonds. Plus it provides automatic rebalancing. But that isn't important - the important things are the size of your annual input, your input duration, and using 11% to 12% products. Redundancy doesn't hurt.
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Mon Feb 08, 2010 5:15 am |
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TheCaptain
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Location: Florida
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oldguy has some good advice, especially regarding company stock. I tend to recommend using company stock only if it really motivates you. If this is the case then limit it to 5% of your holdings.
Target date funds have seriously underperformed and I do not see much benefit to them. It sounds like you have pretty good risk tolerance, but generally no matter what your age I have found that a balanced investment approach seems beneficial. For example, the Vanguard Wellington fund has been around for about 80 years and it has performed extremely well with less volatility than a stock fund.
As smart as it is to start saving at a young age for retirement make sure you keep some money on the sidelines. That is, make sure you build an emergency fund and have some taxable investments. By the time you are in your 50's you should expect taxes to be significantly higher than they are now, thus deferring at today's rates could really hurt you. Ask your employer if they offer a Roth 401(k) option as paying your taxes now may help you significantly.
Check out
www.therationalinvestors.com
Honest, independent and straightforward financial insight
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Tue Feb 09, 2010 3:33 am |
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coaster
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Is the company match for any of the investments, or just company stock?
~Tim~
Eye Candy : Why Whimsy
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Tue Feb 09, 2010 8:04 am |
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jman
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Cash: $ 0.45
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Joined: 07 Feb 2010
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Thanks everyone for the replies.
Coaster,
Any investment.
TheCaptain,
Good to mention the concept of the emergency fund. I have identified my living expenses and already met my emergency fund amount. This is because I got through college on scholarships, worked, never took loans or owned a credit card, and live frugally.
oldguy,
I really like your advice. Practical and easy to understand.
Now, I have looked into the performance history of my funds:
Target Retirement Fund - 12% average annual return since inception
RR Fund (Company Stock and RR Sector) - 12% average annual return since inception
500 Index Fund - 10% average annual return since inception
International Growth Fund - 11% average annual return since inception
Based on these numbers, should I move anything around?
I like what oldguy said about compensated risk. With this in mind, perhaps I should move my money out of International into something more stable?
Also, I found what oldguy said about automatic re-balancing in Target Retirement Fund interesting. With this in mind, perhaps I should move my 500 Index Fund into the Target Retirement Fund?
Thanks again.
J
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Tue Feb 09, 2010 6:07 pm |
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