| Turning 26yrs in Jan / retirement situation advice |
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Darga19
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| Turning 26yrs in Jan / retirement situation advice |
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Hi everyone...I'm new to the forum and here hoping to learn!
As I said, I'm turning 26 yrs old in January. I'm currently set up to raise my 401k contribution (slightly) from where I'm at now, to a yearly contribution of $6600 incl my company match. I currently have about $7.5k in this account, which is thru Prudential, and is set for a moderate/slightly aggressive risk/reward setting. It's adjusted automatically thru Prudential's "Goalmaker" program quarterly, and includes a variety of large cap, small cap, small amt of guaranteed income, etc etc. First of all, how am I doing with this account?? Does anyone have any input on how good Prudential's Goalmaker program is? I like it because I really like having the rebalancing done for me so I don't have to worry about it much.
Secondly, I'm thinking about starting a Roth IRA this year to keep in addition to my 401k. I've heard Vanguard is a good choice...but I'd love more input here. I will have about $1000 to start and plan to contribute 100-150 per month to start out, and increase from there. I'm not sure what to invest in really (mutual funds, stocks, etc), but I'd love to have something similar to my 401k that I can keep investing in without many day to day or week to week adjustments...something I really don't have to worry about. Can anyone offer any assistance on what/where/how to invest and how to start this process?
Anything else I should consider or plan for in terms of my situation? I feel like I'm on the right track planning for my age, but any other adivce would be great!!
Thanks everyone.
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Fri Dec 10, 2010 6:18 pm |
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oldguy
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Starting at $7500 and adding $6600/yr for 34 yrs, here are some results:
Invested at 5.5% you will have $660,000.
At 8% it will be $1,140,000.
At 11% it will be $2,280,000.
The $660k won't be a very good retirement at age 60.
The $1.1M gets closer.
And note that the 11%/yr return gives you twice as much money as an 8%/yr return. As you can see, the risk/return has a major effect on your result.
IMO, you should add more risk into your plans - you need risk while you are young so that your accounts can compound over a long period - the power of compounding can be quite a surprise. Prudential is conservative, I would use the most aggressive Goalmaker, you indicate that you have "a small amount of guaranteed income" in your allocation, I would avoid that until you are age 45 or 50. And don't let Prudential sell you an annuity, that's their big business so they might sell them even where they are inappropriate.
I agree with your Roth IRA idea - Vanguard has a Target2050 Fund that would be just right for your plan. If you invest about $2500/yr it should be about $850,000 (tax free) when you are 60. And it would be twice as much if you could max it with $5000/yr.
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Fri Dec 10, 2010 8:26 pm |
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Darga19
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Thank you very much for the reply! 
OK I looked at my Prudential today and I have my Goalmaker set at a "7", which is on the high-ish side of moderate. Anyone else have an opinion on whether or not moving it up even more aggressively is a good idea? I did read that one of the biggest mistakes that people make when investing is to invest too conservatively...but I also don't want to go too aggressive you know? Maybe moving it to an "8" would be a better idea?
Regarding guaranteed income...I believe it's 5% in that right now. I didn't actually choose that...when you select your risk level it just picks everything for you.....which I thought was good considering my limited knowledge.
I was also looking at the Vanguard 2050 fund. Does this also rebalance quarterly for you or would I be responsible for reallocating assets with a target fund of this type? I think this is probably the best option for my Roth IRA...yes?
Also, would keeping the Roth IRA in the 2050 fund or similar be an aggressive or moderate investment strategy? If investing in something like this would it be a good idea to have the 401k be more aggressive and the Roth be more moderate (at least for now of course)?
Thanks again for the advice.
Regards,
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Fri Dec 10, 2010 8:42 pm |
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Darga19
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I just looked at making the Prudential Goalmaker adjustment in more detail.
Moving from a Moderate / 16+ years to retirement (where I'm at now) to an Aggressive / 16+ yrs involves eliminating 9% Stable Value and 6% Fixed Income assets in favor of small 2-3% increases across the board in these catagories: Large Cap Value Stocks, Large Cap Growth, Small/Mid Cap Value, Small/Mid Cap Growth, and International.
Would this be a smart move in my situation? Would keeping the Stable Value and Fixed Income assets be worth it for someone my age?
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Fri Dec 10, 2010 9:07 pm |
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oldguy
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quote:
If investing in something like this would it be a good idea to have the 401k be more aggressive and the Roth be more moderate (at least for now of course)?
No, both should be 'agressive' for now, here's why. You are building wealth for 34 yrs in the future - today's $6600 at 11% = $230,000 of your total wealth. Later, when you are 45, that year's $6600 will be only $31,500 at age 60 - not nearly so important as your early inputs.
Some guidelines - A broad general market index (such as SP500) goes up and down with the US economy. Over a very long term (25 to 30 yrs) it historically trends ever upward at about 11% per year. If you were to select one business sector out of that broad market index, you add the risk of that sector having a recession (such as the crash of technology stocks in 1999). And if you select one individual stock out of that broad market index, you add yet another risk, the risk of that company failing. Those two added risks are uncompensated risk (not good) - ie, the average return of all 3 positions is the same, but the risk is not the same. So - those who patiently used a broad index and took the risk on 11% (and didn't get greedy) were the winners of the last 35 yrs.
quote:
Does this also rebalance quarterly for you or would I be responsible for reallocating assets with a target fund of this type? I think this is probably the best option for my Roth IRA...yes?
Target Funds re-allocate in real time, they tailor the allocation to your age. As for the best option, it's what I would use if I was still in my earning years.
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Sat Dec 11, 2010 12:38 am |
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Darga19
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Thank you for the compliment. I'm thankful every day that I'm one of the lucky ones to still have a good job in this economy!!! My company has a terrific 401k match, which is why I'm able to invest such a large amount. I currently make $60k per year, and I'm investing 6% of my gross into my 401k. My company matches my 6% with 5% of their own, so I'm getting 11% on my 6.
Debt wise, we have like $1600 left on a no interest Home Depot credit card for our appliances, and my wife has a couple of dental bills from before we were married that we're working on. These things will be taken care of by July '11. Other than that we have about $64k combined in student loan debt, the majority of which we're on track to pay off in 2015. Our mortgage is only $105k so our payment is low there also. Because we don't have any cc debt and both our cars are paid off, we really want to focus on paying down this student loan stuff but also start investing more, hence looking into the Roth. Not having lots of extra high monthly payments on credit cards and having our low mortgage allow us to do that. Also, I have a second job a few weekends per month as a working musician, so the $300-$400 I make per month from that allows for every day spending on food and entertainment stuff.
I'm a strange guy I've had the goal of retiring with $1M+ since I was about 17.
Last edited by Darga19 on Sat Dec 11, 2010 3:23 pm; edited 3 times in total |
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Sat Dec 11, 2010 2:30 pm |
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Darga19
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quote:
Originally posted by oldguy
Some guidelines - A broad general market index (such as SP500) goes up and down with the US economy. Over a very long term (25 to 30 yrs) it historically trends ever upward at about 11% per year. If you were to select one business sector out of that broad market index, you add the risk of that sector having a recession (such as the crash of technology stocks in 1999). And if you select one individual stock out of that broad market index, you add yet another risk, the risk of that company failing. Those two added risks are uncompensated risk (not good) - ie, the average return of all 3 positions is the same, but the risk is not the same. So - those who patiently used a broad index and took the risk on 11% (and didn't get greedy) were the winners of the last 35 yrs.
Target Funds re-allocate in real time, they tailor the allocation to your age. As for the best option, it's what I would use if I was still in my earning years.
OK, so a target fund like the Vanguard 2050 I'm thinking about starting, does something like that present a good choice to avoid the uncompensated risk and utilize a broad index as you mentioned? Admittedly, some of what you said I don't completely understand because of the terminology, but I'm guessing that sort of what you mean is that everything must be diversified right??
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Sat Dec 11, 2010 3:04 pm |
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Darga19
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Not sure why that previous post went up twice...hmm....
I just adjusted my Prudential Goalmaker to an "Aggressive" status, which took the guaranteed income out and made the other changes I mentioned above. Potentially big life decisions made on Saturday morning in my pajamas... 
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Sat Dec 11, 2010 3:13 pm |
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oldguy
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quote:
we really want to focus on paying down this student loan stuff but also start investing more, hence looking into the Roth.
OK, but do the math, don't base your decision on emotion - ie, "debt is bad so I must fix it".
I'll make up some numbers - eg, $64k at 4% for 20 yrs costs $93,000. And the $64,000 invested at 11% for 20 yrs equals $516,000. So in this example, you would retain the use of the $64k as long as possible and use it to earn the $516k. Ie, you don't prepay 4% loans and derail a $500k plan.
Keep in mind - for wealth building (but not for revolving consumer debt) debt-free is not the goal, building net worth is the goal. And usually, debt (leverage) is the tool for building wealth.
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Sat Dec 11, 2010 3:40 pm |
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Darga19
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quote:
Originally posted by oldguy
OK, but do the math, don't base your decision on emotion - ie, "debt is bad so I must fix it".
I'll make up some numbers - eg, $64k at 4% for 20 yrs costs $93,000. And the $64,000 invested at 11% for 20 yrs equals $516,000. So in this example, you would retain the use of the $64k as long as possible and use it to earn the $516k. Ie, you don't prepay 4% loans and derail a $500k plan.
Keep in mind - for wealth building (but not for revolving consumer debt) debt-free is not the goal, building net worth is the goal. And usually, debt (leverage) is the tool for building wealth.
This is a good point. Right now, my minimum student loan payment is about $670 per month however (for all mine and my wife's loans combined). Late next year, we're planning on trying to have a family, which is obviously going to increase the amount of $ needed for bills and expenses every month.
My thinking was that paying these debts off as quickly as possible (at least between now and then) would be a good way to cover these expenses. Also, if we can start investing extra $ a little each month, we can stick to that even after the baby is here and while paying down the loans at the same time. And as our salaries increase and debts subside, we can continue to increase the amount invested each month little by little. Another thing to consider is that we'd likely need to move into a bigger house somewhere down the line, which would require more $ each month for a higher mortgage payment. And although my job is pretty secure right now, you really never know...so that was another reason I wanted to rid us of as much debt as possible.
How should one prioritize saving vs debts vs freeing up extra $ each month for future expenses that are going to arise? All things considered...........
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Sun Dec 12, 2010 2:31 pm |
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oldguy
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quote:
Right now, my minimum student loan payment is about $670 per month however (for all mine and my wife's loans combined).
And although my job is pretty secure right now, you really never know...so that was another reason I wanted to rid us of as much debt as possible.
darga, you have this backwards - and that's not unusual, it's counter-intuitive. People seem to forget that, when you prepay a loan, that money comes from somewhere - ie, it is zero sum.
Say that your SL is $64,000 and the terms are 'long & low" - maybe 10 yrs & 5%. If you prepay it, that means that you have $64,000 LESS in the bank. So, consider the end game - if you were laid off, would you rather have $64,000 in the bank and owe $670/m? Or have a paid-off loan and ZERO in the bank? In the first case, you can use your $64k bank account to buy food, gas, for a one year job hunt PLUS pay the $670/m ($8040) with ease. The point - retain the use of the $64k for the full term (assuming that it is inexpensive use of capital).
It is nearly always better to invest your extra income stream rather than prepay 'long & low' debt.
Eg, say that you refi & increase your home loan by $50k, that costs about $300/m, ie $108,000. And you invest that $50k at 11%, that is $1,145,000.
Second example. Say that you 'double' pay a $100k 30 yr mortgage, that cuts your loan cost from $216,000 to $130,000. A savings of $86k?? Well, what if you, instead, invested that extra (double) payment into an 11% fund for 30 yrs? It would be $1,600,000. (And the house would be paid for at 30 yrs).
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Sun Dec 12, 2010 4:17 pm |
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Darga19
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That's a good point. Also my student loans actually right now some have a rate of 6.8% (smaller ones) and most have a rate of 2-4%. The only thing is, what do I invest this $ in? If I put it all in a retirement fund it won't be accessible if ever needed. Also, if it's all in the stock market there still is a chance that the rate of return won't be guaranteed, whereas paying down the debt early is guaranteed savings. What would be the best way to invest the money and still have it accessible if needed? We also do have a $5k emergency fund right now also should something happen FYI. That's sitting in an online savings acct earning about 1.3%.
Plus, with that minimum payment in there, i wouldnt really have the 64k in the bank right?? I'd be investing the extra $250 per month only and making the large minimum payments as required, as opposed to putting the extra $250 per month on the loan.
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Mon Dec 13, 2010 2:38 pm |
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oldguy
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quote:
and most have a rate of 2-4%. The only thing is, what do I invest this $ in? If I put it all in a retirement fund it won't be accessible if ever needed. Also, if it's all in the stock market there still is a chance that the rate of return won't be guaranteed, whereas paying down the debt early is guaranteed savings.
The 2 - 4% loans are 'keepers', keep them for the full term.
At age 26, you should avoid guaranteed returns, they are for old guys (like me) who are in their wealth preservation yrs. You need wealth building investments, the two appreciating assets are real estate and stocks - and you already have the RE. Savings vehicles - CDs, MoneyMarket, prepaid loans - are designed to track inflation, so you cannot build wealth, only maintain your current savings. Prepaying a 2 - 4% loan is mathemaically equivalent to buying a 2 - 4% CD. Hopefully you don't want 2 - 4 % CD's? To build wealth you must get a return that outpaces inflation.
Yes, retirement funds are inaccessible until age 59 1/2 - so you need a taxable fund that is immediately available - use it to build wealth, as a falback EF, rental houses, kid's college fund, early retirement, etc. The SP500 Index Fund at no-load companies is a good place for the fund.
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Mon Dec 13, 2010 5:31 pm |
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Darga19
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I see. That makes sense and seems like the best option as long as the returns pan out...
The only thing I see that could be an issue is the point I mentioned about opening up cash flow. For example, if I payoff our student loans at 30yrs, we then will have that extra income saved to perhaps move into a bigger home at that time. Also, having the minimum payment eliminated would free us up for extra expenses associated with starting a family and things like that.
If I were to keep the loans at a minimum payment and invest all the extra money, there is a chance the investing will have to come to a screeching hault or at least a drastic slow down when expenses like these arise right??
The whole debt vs cash flow for expenses vs investing is a hard thing to sort out sometimes...especially when things change, i.e. starting a family.
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Mon Dec 13, 2010 9:21 pm |
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oldguy
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quote:
If I were to keep the loans at a minimum payment and invest all the extra money, there is a chance the investing will have to come to a screeching hault or at least a drastic slow down when expenses like these arise right??
If you pay the $64k loan at 3% in 20 yrs it costs $355/m. If you pay it in 3 yrs it costs $1861/m. I would pay the $355/m and invest the other $1506/m at 11%, that is theoretically $67,000 in 3 yrs (but you need 25 or 30 years of that so that the averaging effect of good years cancels the bad years - ie, the 3 yr outcome cannot be predicted, it could be anything. But that's how you start.
More importantly, $1506/m is $1,288,000 in 20 yrs. And that has a statistically significant probability of occuring.
What I have done over the years, in an attempt to use long term investments for our short term needs, is to invest in long term products. Then, if they were in a 'low' when I needed money for a down payment for a house, I borrowed that money rather than interrupt the long term compounding of our investments.
Stated another way - save up the money for a house DP, but then DON'T use it for the DP, keep the money in reserve.
Account types - the key metric is return, stay in 10% to 12% investments. The tax status of your accounts is way less important than that return. There are 3 tax status categories - 401k (pretax), Roth (posttax), and taxable. The taxable account is immediately available (2 days) - it grows tax deferred, when you need to sell some you pay only a 15% max capital gains tax on the profit. A very useful account, often overlooked in these days of 401k & Roths. And it is reversible, you can overfund it, and then take it back next week if necessary.
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Mon Dec 13, 2010 11:19 pm |
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