My first 401K, advice on your options greatly appreciated.
Hello everyone, Background: I'm a 27 year old working a great job.
I have a 401k through my employer who matches up to 6%. I contribute 8% every payment. Now for the question. What would are my best options here?
Current Investments- Total Amount $11,350.00
NORTHERN S&P 500 IDX (Lrg cap) 56.64%
AB SM CAP GRTH I (Sml cap) 23.02%
PIM TOTAL RT INST (bond) 20.35%
Just wanted to see what you more experienced players of finance thought. Thank you all for your time.
Mon Mar 07, 2016 5:27 pm
oldguy Senior Member
Cash: $ 715.40
Joined: 21 May 2006
Great start! You are young, this is the time to take risk, take advantage of growth. In general, most of us are given about 30 years of wealth-building, followed by many years of wealth-preservation. Somewhere around age 55 to 60, it's time to dial the risk level down a bit and preserve your wealth, particularly if you have a few million to protect - or, if you've had bad luck, done poorly, and have only $100k or so at age 55, you would choose to push growth a few extra yrs (not much to lose).
The $11,350 is a good amount at age 27. And the 6% match is nice, free money.
Examples - Say that you earn $50k, 14%/yr is $7000/yr. And you add the $7000/y to the $11350 for 30 yrs.
1. 5% $507,000
2. 11% $1,646,000
3. 8% $900,000
1. So, if you invest 100% in bonds, you'll have maybe $507,000.
2. If you choose 100% stocks you'll have $1,646, 000.
3. If you choose 50/50, you'll have about $900,000.
As you can see, that choice has a big effect on your longterm outcome.
Risk & return are directly proportional. The $1,646,000 is nearly twice as much as the $900,000. Conversely, if you go past the tipping point, trying for 14% or 15% returns, the risk becomes one of losing your capital and needing to start over from nothing. That would (and does) keep me away from small cap young companies, I can (and did) make enough wealth using an 11%/yr risk level.
I would switch everything to NOSIX. Here's why - first, you should have 100% of your money working for you, ie you have no need for bonds, wait about 30 yrs. Two - the SP500 is a good cross-section of US commerce, the 500 companies carry about 80% of US Capital, a very good diversification (and an appropriate risk level).
Mon Mar 07, 2016 10:40 pm
Sendmemoneyplz New Poster
Cash: $ 0.45
Joined: 07 Mar 2016
Thank you for taking your time out to respond.
I am going with the 100% in stocks with my 401k. I do believe that I can do that for at least 10-13 more years until I'm in my late 30s or right at 40. Then I will switch to 80/20 for the next 10 years to have a safety net "just in case". When I turn 50 I will go with 100% bonds. I will plan on retiring at 58, so that puts 8 years of my 401k in bonds to ease my mind. Also, it puts my time at employer at 30-31 years.
Age 27-40 - 100% of 401k in Stock. 9% of paycheck + 6% employer match
Age 40-50- 80/20% of 401k in Stock/bond 25% of paycheck + 6% employer match
Age 55-58- 100% of 401k in bonds. 50% of paycheck + 6% employer match
Changing my contribute amount from 8% to 9% as of today.
How does this look for a future plan? Any changes I should make?
Do you advise dumping personal savings into long term stocks? (Non emergency savings, and/or nothing that will put me in a financially difficult place?)
Thank you for your time.
Tue Mar 08, 2016 4:08 pm
oldguy Senior Member
Cash: $ 715.40
Joined: 21 May 2006
quote: 100% of 401k in bonds. 50% of paycheck + 6% employer match
Sounds good. You will run into some govt limits - such as $18,000/yr max into 401k, limit on Roth if you make over a certain amount, etc. But there are 3 account types - 401k (pretax, Roth (posttax), and Taxable account. All 3 are taxed, just at different times - so use all 3. $5M or $8M at age 58 is $5M or $8M no matter what account type.
quote: When I turn 50 I will go with 100% bonds. I will plan on retiring at 58, so that puts 8 years of my 401k in bonds to ease my mind. Also, it puts my time at employer at 30-31 years.
Don't get too safe, you still need a growth component to offset inflation, hopefully for another 30 yrs or more. I retired at 59, I was happy to note that, even tho I quit adding to my 401k, it was still climbing, often over 6-figures per yr. In fact, consider this - that last 50% of paycheck that you add at 58 adds only $50,000 to your fund. Conversely, $10,000 added this year adds $230,000 to your age 58 funds. (The power of compounding!!)
quote: dumping personal savings into long term stocks? (Non emergency savings, and/or nothing that will put me in a financially difficult place?)
The Business Week journalists, the TV talkers, and the WSJ journalists all parrot the "6 months of expenses in the EF". And millions of Baby Boomers have dutifully followed that advice - and now they are "safe" - but still making payments on the boat. So are the journalists, lol.
I avoid letting our EF get above $5k, having a bunch of 'dead' money parked in savings is lost opportunity. I put it all into the SP500 taxable account, it's available in one day. The criticism is that what if you are forced to sell in a 'down' market - but after 40+ years, I can tell you that the 11%/yr average return FAR outweighs the loses of any forced sales.
As a general rule, I avoid pulling money out of our SP500 if I can borrow for shortterm needs. Eg, I buy houses (rentals) as close to zero down payments as possible. Same with new cars - I could sell $35K of our SP500, pay $5k for cap gains tax and use $30k to pay cash for a car. But instead, I finance 100% of the car, 60 months - & sell the old one privately for $5000 - that leaves an extra $40,000 in our SP500 account. On average, that $40k doubles to $80k in about 6.5 years (rule of 72). We haven't paid cash for a car since 1985 (the Jimmy Carter interest, 18%, was way more than I would pay).
Tue Mar 08, 2016 5:46 pm
Cash: $ 3.90
Joined: 28 Jan 2016
Location: South Carolina
Oldguy won't steer you wrong, but I do disagree with him on a few items.
First, don't count your employer match. It's generally recommended you invest 15% of your income. I know this sounds like a lot now, but it'll feel like a lot more later in life if you get used to living on 92-93% of your income compared to 85%. Keeping your expenses low is a key part to building wealth. Back when I was single and your age working 60+ hour/week I ratcheted up to 22% plus employer match and am now enjoying a much larget account despite having to scale back my percentage.
I also recommend keeping some of your money in bonds right now and rebalancing if things get out of proportion. The market in general is high right now and more likely to go down then up. Should a 2000 or 2008 event happen this means buying opportunities everywhere, but you can't buy if you are only holding the stock the just crashed. Keeping 10% of your money in bonds lets you cash back in during a bad situation for everyone else.
If you want to scale back later in life, consider the industry rule of thumb... 100 - (your age) = % of stock you should hold. Some say 110 - (your age). I say you should never hold more than 30% bonds ever... If you build your nest egg large enough even a market crash of 50% should only have you tightening your belt so you can reap huge benefits when it rebounds.
From what your showing on that screenshot the Norther S&P 500 is probably the only fund worth investing. I do notice that "BrokerageLink" account at the bottom. If thats a Fidelity account you can go outside and find funds you like, and trade all of Fidelity's mutual funds for free. Will give you some better options.
Glad to hear someone else getting into thier 401k at a young age. Keep in mind that this is a marathon not a sprint and you'll do great!