| Question about 401k and investment vehicles |
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ADLeatherman
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| Question about 401k and investment vehicles |
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Hello all -
First time user here. I had a couple questions for some of you people with a good amount of real life financial expertise.
Background: I'm 23 years old and work for a company that offers a pretty generous 401k plan. They match 50% on up to 6% of my pretax contributions. They also offer a 3% safe harbor contribution, regardless of if you contribute or not and also a 2% discretionary contribution (aka profit share). So basically when I contribute 6%, the company puts in 8% on my behalf and it is 100% vested. If I were to contribute nothing the company would still contribute 5%. Soon I will be getting an 8.5% raise from a promotion plus our annual employee incentive program bonus.
My first question is: When I get my raise should I increase my contributions by 2% in order to match the amount my company is putting in on my behalf? (i.e. at that point I would be putting in 8% and the company putting in 8% as well) Or should I use that as an opportunity to open an IRA. I am currently vested at 6% so I receive the company match in additions to 3% safe harbor and 2% profit share.
Second question: With my bonus I would like to begin investing. I'm not sure what the actual dollar amount will be, but a safe assumption would be in the neighborhood of $1250. What are some financial/investment firms to for beginners to start out with? Would it be wise to open an IRA as an investment vehicle or can I invest in other ways without using an IRA?
With the investment or IRA account, I plan to use that primarily as a vehicle to purchase house before I begin to use it as a retirement asset, so that may give you more of an idea of my mindset. I'm also regularly contributing to a savings account to help with a home purchase also. I don't carry any credit card debt, and I'm in the process of repaying my student loans. Any and all advice is appreciated.
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Tue Feb 07, 2012 7:34 pm |
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oldguy
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The obvious point is to capture the 8% free money - and you already do that. So additional contributions is more a matter of what tax-status you want for your future investing.
There are three tax-status catagories - pretax, posttax, and taxable. You have the pretax covered with the 401k. It is usually a good plan to have all 3 - you need a pre-age 59 1/2 taxable account. If you use a stock index fund, the account grows tax-deferred, it is immediately available as a fallback EF, andthe profits get preferential tax teatemt if you sell some. The posttax catagory is the Roth IRA, you can add up to $5000/yr to it.
Whichever account-type that you choose, the important thing is to invest in equity funds that historically grow at 11%/yr - that is the key metric, much more important than which account-type that you keep it in.
What field are you in? And what are the details of the student loans? Low rates?
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Tue Feb 07, 2012 8:19 pm |
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ADLeatherman
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I currently work as a chemist for a company that makes filtration/separator membrane for lithium ion batteries. We support the consumer electronics market as well as the emerging electric drive vehicle market.
Currently I owe roughly $14,000 on student loans at an interest rate of 6.875%. My required monthly payment is about $160 per month, but I add extra and pay $200 per month.
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Tue Feb 07, 2012 10:28 pm |
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coaster
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That's an exceptionally generous employer!! You have every right to feel very lucky. 
Yes, I agree, contribute whatever gets that employer match. You can't beat free money. What does the match go into? The one mistake you want to avoid making is being too concentrated. The company I used to work for was most generous if you bought the company stock. That's fine until that one holding makes up most of your net worth. Then if the company goes through a bad period, the stock tanks, and it happens just when you need to money, you're screwed. So if you can diversify, that's the way to go. Eventually, anyway. You don't have to be too concerned about that right now.
~Tim~
Eye Candy : Why Whimsy
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Tue Feb 07, 2012 10:35 pm |
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ADLeatherman
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Cash: $ 1.70
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I use the advice track program through Wells Fargo, who administers our 401k program. I think from the questions I answered about my risk tolerance etc., it has me in at 70% stocks, 20% bonds and 10% conservative funds. So far I'm pretty pleased with it, my contributions have grown by about 8.5% since I was enrolled in October.
Also could someone point me to a good starting place for an investment account? Vanguard maybe? Or one of the discount brokers?
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Tue Feb 07, 2012 11:05 pm |
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oldguy
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That sounds like a very solid field - batt research is going to one day be the answer to our carbon pollution. I'm looking forward to the 700 mile battery (a full day's drive & a motel plug in) - that makes service stations unnecessary, just plug in at home every couple of weeks.
Team 700-mile elec cars with reactors to replace the coal-fired power plants - and you just got rid of 90% of US pollutants.
IMO, your investments are too conservative, at age 23 you can be more agressive, use 100% equities. Eg, if you (and your co) are investing $10,000/yr into the fund, at 11%/yr that is $2,750,000 at age 55. But if you water it down with 70% stocks, 30% items that return 5%/yr, you'll have $1,850,000. Doesn't seem like a big deal when yo are making the choices - but an extra million at age 55 is not to over-looked.
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Tue Feb 07, 2012 11:26 pm |
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coaster
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Agreed with the above. At your age, 20% bonds is ridiculous. Bonds are for income for old folks.  Direct that 20% elsewhere for the next 20 - 25 years and I think you'll be quite pleased you did. There will be more bumps in the interim, but just remember that history says the up bumps bump up more than the down bumps bump down.
~Tim~
Eye Candy : Why Whimsy
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Wed Feb 08, 2012 4:22 am |
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ADLeatherman
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Hmm...thanks for the advice. I'm going to round up what my investment options are outside the advice track program and let you guys have a look at whats good, whats not.
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Wed Feb 08, 2012 4:09 pm |
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ADLeatherman
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Balanced/Lifestyle:
Oakmark Equity & Income I
Money Market:
Wells Fargo Stable Return Fund G
Bonds:
Wells Fargo Bond Index Fund G
Loomis Sayles Strategic Income A
Stocks:
American Funds Invmt Co of Amer A (AISVX)
Wells Fargo S&P 500 Index Fund G (DSPF1)
Fidelity Contrafund (FCNTX)
American Funds Growth Fund of Amer A (AGTHX)
Wells Fargo S&P MidCap Index Fund G (DMSF1)
Columbia Acorn Z (ACRNX)
Federated Kaufmann R (KAUFX)
Lord Abbett Small-Cap Value A (LRSCX)
Thornburg International Value R4 (THVRX)
American Funds New Perspective R3 (RNPCX)
I only listed the stocks tickers, since at my age I should stay away from the conservative investments. Are you guys familiar with any of the stock options? Should I just allocate 10% to each investment?
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Wed Feb 08, 2012 4:26 pm |
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oldguy
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quote:
I only listed the stocks tickers, since at my age I should stay away from the conservative investments. Are you guys familiar with any of the stock options? Should I just allocate 10% to each investment?
Rather than just scattergun the list, it would be better to learn what they are. Many (most?) on the list own the same stocks so it would be redundant to buy them all. Plus the added admin expenses of 10 small holdings. Some (acorn) hold many small companies and buy/sell based on a manager's analysis, so you probably wouldn't buy that one.
Persoanlly, I would pick either the SP500 Index Fund or the Fidelity Contra - I normally use the SP500 Index 100%. The index gets a better return than 85% of the managed funds, so I tend toward the unmanaged index funds. (The reason is that the managed funds have OH, maybe 2% - so they would need to consistently get a 13%/yr return in an 11%/yr generic market - that si tough to do.
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Wed Feb 08, 2012 6:39 pm |
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ADLeatherman
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Thanks!
So would an allocation of 50% in Fidelity Contra and 50% SP 500 Index be a reasonable investment?
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Wed Feb 08, 2012 7:00 pm |
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oldguy
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quote:
So would an allocation of 50% in Fidelity Contra and 50% SP 500 Index be a reasonable investment?
Yes - or 100% in either one. Remember, you are projecting an outcome that is over 30 yrs into the future - so you need a macro view - if you try to "time" the market by picking winners - planning for specifics such as a Greek bond failure, the Chinese purchase of Canadian/African natural resources, WW3 in 2025, and so on - you will probably be wrong. So you need to buy a generic top-down metric of the world business.
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Wed Feb 08, 2012 8:03 pm |
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ADLeatherman
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Now that we've established the 401k/pre tax account, who are some good brokerage/investment firms that I should consider? Vanguard? Edward Jones? Charles Schwab? Or one of the discount brokers?
I need some recommendations.
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Thu Feb 09, 2012 1:42 am |
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oldguy
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Cash: $ 309.30
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Vanguard or Fidelity.
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Thu Feb 09, 2012 3:36 am |
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