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Just turned 30, not sure what to do with my money

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SyZ
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That is true, however I'm still doing the 15% in the 401k - if I move some to the Roth, wouldn't it just mean that the $1,325,000 is split between the Roth and the 401k? The amount I'm investing isn't changing from 15% as that seems to be the agreed upon magic number
Post Sun Jan 04, 2015 8:44 am
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oldguy
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quote:
just mean that the $1,325,000 is split between the Roth and the 401k?


Yup. If you invest $X/m @ 11%/yr to get $2M in 30 yrs - it doesn't matter much which of the 3 tax-status's you keep it in, $2M is still $2M. And in all 3 cases you pay taxes, just a matter of when.

BTW, I use all 3 tax status's. The Tax Code is ever-changing and it cannot be predicted. So you don't want to work all your life and then find out that you are 100% in the wrong status. If you use all 3 you'll only be 33% wrong.

Eg, what if congress changes from an income tax to Fair Tax (a huge federal 22% sales tax) in the next 30 yrs? That takes away the tax-free Roth benefit - you'll pay a 22% sales tax when you try to spend that 'tax free' money in retirement. (Not a prediction, just an example)
Post Sun Jan 04, 2015 3:08 pm
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SyZ
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Some interesting updates ..

I looked at the fee today for the S&P500 through my company and it's .08%, isn't that exceptionally low (good?)

They started a new Roth 401K plan for 2015, with the same type of investments as the regular 401k, but you can make it a pre-tax contribution and they will automatically figure it out (ie, I can put 5% pre-tax towards it and it will calculate the tax to charge me then deposit the rest)

I lowered my 401k to 10% from 15%, and the Roth 401k from 0% to 5% - unless I'm missing something, there's no annual fees or anything associated with the Roth. It's like the company wants me to use them and not something like Vanguard. Does this mean I should definitely start using the Roth 401k from my company, or was swapping a bad idea?

The company updated to only match $.80 up to 5%, so it's only 4% this year. I confirmed they only do that once TOTAL, not once for the regular 401k and again for the Roth 401k. I can't decide which of the 401ks is matched, and I won't know which the company chose until two weeks from now when my pay period information is updated

Here's the information they provided to me:

Is Roth 401(k) Right For You?

Looking for a way to have tax-free income in retirement? Then consider making Roth 401(k) contributions.

Compare to Before-Tax Contributions

Roth 401(k) contributions offer a different tax advantage than traditional before-tax 401(k) contributions. The balance you accumulate in a Roth 401(k) account gives you the opportunity for tax-free income during retirement. The tradeoff, however, is that Roth 401(k) contributions won't reduce your current taxable income the way before-tax contributions do.

Compare to After-Tax Contributions

Roth 401(k) contributions and earnings can be distributed tax free if the Roth 401(k) distribution is qualified, but earnings in an after-tax account are taxable when they're paid to you. In addition, for active employees, Roth 401(k) contributions can only be withdrawn for a hardship or after age 59-1/2, whereas after-tax contributions may be available for an in-service withdrawal with no restrictions (if your plan allows it). Roth 401(k) contributions are subject to an annual contribution limit, while after-tax contributions are generally subject only to your plan limit.

Key Features of Roth 401(k) Contributions

In addition to the tax advantage at retirement, there are other features of Roth 401(k) contributions that you should know about.

Roth 401(k) contributions are subject to an annual 401(k) contribution limit. The total of your Roth 401(k) and before-tax contributions can't exceed this limit.

Check your summary plan description to see if your company matches Roth 401(k) contributions, using the same rules as before-tax contributions.

You're allowed to make some or all of your plan contributions via a Roth 401(k).

Roth 401(k) money can be accessed through loans, if your plan allows (check your summary plan description).

Your Roth 401(k) contributions can be accessed through hardship withdrawals, if your plan allows (check your summary plan description).

You can roll over Roth 401(k) money into another qualified plan that accepts Roth rollovers or into a Roth IRA.
Post Tue Jan 06, 2015 3:29 am
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Wino
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quote:
Originally posted by SyZ
I looked at the fee today for the S&P500 through my company and it's .08%, isn't that exceptionally low (good?)
It is very, very good, but not "exceptional." Vanguard admiralty is 0.05, I believe. That fee, though is more than just "acceptable." It is a great fee, especially for a company fund.

quote:
Originally posted by SyZ
I lowered my 401k to 10% from 15%, and the Roth 401k from 0% to 5% - unless I'm missing something, there's no annual fees or anything associated with the Roth. It's like the company wants me to use them and not something like Vanguard. Does this mean I should definitely start using the Roth 401k from my company, or was swapping a bad idea?
Your company fund doesn't appear to have any significant drawbacks, so yes, you should use it. The company MUST have a minimum participation rate from the worker bees so the royalty can also take part. This is why they encourage participation.

quote:
Originally posted by SyZ
The company updated to only match $.80 up to 5%, so it's only 4% this year. I confirmed they only do that once TOTAL, not once for the regular 401k and again for the Roth 401k. I can't decide which of the 401ks is matched, and I won't know which the company chose until two weeks from now when my pay period information is updated
Free money is still free money. As you have an S&P500 fund at 0.08%, you could feel safe putting the entire 15% into it, but only up to the maximum ($17K? Something like that... I haven't checked recently).

quote:
Originally posted by SyZ
Here's the information they provided to me:...

There is NO definite advantage of a Roth over a standard 401K/IRA when it comes to taxes. If your taxes are higher (marginal rate) NOW as compared to when you withdraw them, then the pre-tax IRA/401K is better. If your tax rate when you withdraw will be higher, then the Roth is better. The government gets more taxes in dollar amount, but your actual "usable" money will be identical if your present and future tax rates are the same. I have a thread and spreadsheet where I prove this, but the basic formula is that you have to invest X in an IRA (saving the tax on X), but you have to invest X + its taxes in a Roth, so you are actually putting less money for the "same earnings" into a Roth.

Illustrating the above using numbers (assume a 10% marginal tax rate): If you invest $1000 in a traditional IRA, you put in $1000 for growth. If you invest $1000 in a Roth, you are actually only investing $900, as you paid $100 in taxes. If you put the identical $1000 into the actual Roth account, you had to "use" $100 of your earnings to pay the taxes on it, so you're really investing more money to get the same dollar amount for growth in the fund.

One thing overlooked by those pushing the Roth is that tax laws change all the time. It is quite possible that your Roth will be taxed in the future because you have too much in it, and rich people need to be punished (if the Congress follows previous stupid tactics). However, if you use a pre-tax IRA/401K today, you definitely get this year's tax savings. So you get the peace of mind knowing that you got your gettin's already.

I'm not saying that Roth rules will change, but 30 years is a long time, and I would suggest tax rates will NOT be going down in that time. Due to this, I think the Roth is probably the better plan, but if Congress decides that it's too good of a deal, they could change the rules mid-stream, to punish you.

Apparently, Congress prefers to reward grasshoppers and to punish ants.
Post Tue Jan 06, 2015 4:46 am
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SyZ
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Well, right now I'm making 45k. If I'm a full fledged actuary in 10 years, working for the same company, my salary could be 200k (using today's standards, and the actuarial field can commonly have 5% salary increase a year ..)

In that case, would the Roth of 401k be a better option to start investing in?

Is there any advantage/disadvantage to the 2050 target fund that has 74% stocks, 15% bonds, 11% inflation hedge? What about the brand new real asset fund the company introduced?

The 2050 target fund is averaging 10% over the last 7 years which is beating the S&P500, so just wondering



Real Asset Fund added to investment lineup

With the new Real Asset Fund, you can add variety to your 401(k) investments beyond stocks and bonds, and potentially counter the negative effects of rising inflation on your retirement savings. Until now, the 401(k) Plan has only offered access to real asset investments through the Target Retirement Date Funds.



The Real Asset Fund consists of three types of assets:

Commodities
Real estate
Treasury Inflation-Protected Securities (TIPS)
Post Wed Jan 07, 2015 2:44 am
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oldguy
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quote:
The 2050 target fund is averaging 10% over the last 7 years which is beating the S&P500, so just wondering


When you go 'data mining' over short periods you can get wrong answers. Ie, you picked a bad 7-yr era in the SP500 (only 7%/yr) so if you mix in some bonds, etc, that raises the average. Conversely, if you look at a 8 or 10 yr period where the SP500 averages 18%/yr, that gives you a false 'high' expectation.

IMO, it is better to stick to longterm (30 yrs) results. The 30-yr block is human life cycle, ie that is a typical wealth-building period of a life. (College endowments - Yale, Harvard - are centuries old and have no human-life constraint, they can buy a patch of dirt and wait 150 yrs for Disney to build on it)

quote:
Commodities
Real estate
Treasury Inflation-Protected Securities (TIPS)


The 'commodities' component is essentially 'oil' (usually called 'energy' to please the pc folks). 'Real estate' is usually packaged as REITs which provides the income portion of real estate and not the capital appreciation. And 'TIPs' are income bonds that pay you the inflation rate plus 0.5% to 1%. In all three cases, you, the client, are given the least desirable portion of the investment. IMO, if you want to own Oil, buy it directly. And if you want real estate, buy houses. And so on.
Ie, any time you hire someone to take your risk, they get paid well for that (as they should). The corollary - if you want to earn the returns, you have to own the risk.
Post Wed Jan 07, 2015 3:37 pm
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SyZ
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So my priorities in life right now should be, in this order:

- Putting 15% pre-tax into the company 401k, 100% into the S&P500, get the $.80 match up to 5%, and walk away with $8,550 added per year starting this year. Ignore everything else. Let it ride the 25-30 years until I retire at 55-60

- Aim to finish 2015 with my $13k 6.8% debt paid off completely as this is more than any guaranteed return I could get

- Study daily to pass the first actuarial examination within six months, and the second within twelve months, and actively pursue a job in our actuarial department while maintaining great performance in my current capacity

- Start in that unit with a $60,000 + salary, allowing me to match the $5,500 Roth 401k company match, also in the S&P500 (why change what works? If I'm putting it in here in the 401k, might as well do the Roth 401k as well)

- Pay the minimums on the rest of my debts, and put my leftover funds into short term bonds and CDs with the goal of saving for a home

- Continue my actuarial pursuits and pass exams 3, 4, etc., with a $5,000-$10,000 raise each time, with the goal of becoming an actuarial fellow commanding a salary of over $150,000

- Invest in a 529 for any children

- Purchase the home with a 15 year mortgage when my salary is high enough to support the payments

- Maintain a modest lifestyle while still being free to vacation, drop $200 on a Valentine's Day dinner, etc.

- Pay off the home at year 15 and have no debt

- Retire when my yearly expenses (minimal at this point as everything is paid off) are at 8% of my investments, hopefully around the age of 55

- Buy fast cars, go on month long vacations, donate to charity, do whatever
Post Thu Jan 08, 2015 5:20 am
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oldguy
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You're getting this plan whittled down to size, starting to look good!

quote:
$8,550 added per year


That's about $1,888,800. in 30 yrs. Actually more, you'll leave the 19% fixed and your salary will continue upward. And keep in mind, $1.9M isn't the final number - this doesn't stop when/if you retire at 55. That fund will be going up ~$150,000/yr after you quit working. (I looked at year end, my accounts added over $1.5M since I retired, even tho I take our RMDs each yr).

quote:
paid off completely as this is more than any guaranteed return I could get


"guaranteed" isn't a part of the question. Those rates are currently about 1%. You need to think about 'non-guaranteed' rates, risk is the key to wealth-building. And longterm averages are the other part.



quote:
Purchase the home with a 15 year mortgage when my salary is high enough to support the payments
- Pay off the home at year 15 and have no debt


No. Again, focus on directing your income stream to it's highest and best use.

Example. If you have a $400k house, and if it increases in value at $20k/yr, that adds $20k to your Net Worth. And that is true whether the house is paid for, whether you own 50% of it, or whether you own none of it. So it is better to direct your money to an 11%/yr investment than to direct it to an asset than may (or may not) go up 5%/yr.
The US home loan provides some of the cheapest capital in the WORLD, the other 190 nations require rate-resets every 10 yrs or less. In the US, Joe Blow can walk into a bank, ask for $400,000 to buy a house, insist on a fixed rate for 30 yrs, ask for 4% guaranteed, and walk out with the money. Why would you want to prepay that? And by 15 years? There are way better ways to deploy that money.[/u]
Post Fri Jan 09, 2015 12:27 am
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SyZ
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The reason everything is confusing is I have people telling me:

- Get a 30 year loan at 4% interest and use my capital elsewhere
- Get a 15 year loan, pay it off asap so I can have no debt and freedom to use my capital elsewhere to take larger risks
- Invest in 401k to get 8-11% returns
- Pay off student loans first as I can't get higher than a 6.8% return
- Put money in all 3 tax statuses
- Only put my money in the 401k up to match

etc. etc.
Post Sat Jan 10, 2015 4:52 am
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oldguy
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quote:
The reason everything is confusing is I have people telling me:



Interesting how that works. A financial planner, a tax consultant, lawyer, broker, etc, has to give you the 'party line'. A broker could tell you to buy a 13%/yr risk/return product, and explain carefully that this will fluctuate, there will be down years. Then, after 4 or 5 yrs, it drops 30%/yr for two yrs. Joe Citizen blasts the broker, who responds 'remember out talk about fluctuate'? Joe Citizen calls the broker an impolite name, moves his accounts elsewhere, and tries to sue the firm. Anyway, broker quickly learns that his career depends sticking to the party line.

My math served me in two major ways - it gave me the means to earn a good & steady income for 35 yrs - and it gave me the means to invest my extra income wisely, (So I didn't need to depend on conventional wisdom).

You're math guy - do your own math, pay less attn to others and go where your math takes you. In most cases, your understanding of the world is going to be better than the 'pro'. Eg, in 2006 there were lenders selling liar's loans, - FHA245, TARP, HARP, comoditized, securitized, & bundled mortgages - and they have no clue what they are selling.

I learned early that conventional concepts did not make sense, mathematically. Ie, pay cash for houses, pay off houses quickly, pay cash for cars, yada. In most cases, when I did the opposite of conventional wisdom, I made money.

And that usually requires swimming upstream, against the wind, lol. When I was young & told engineering peers at lunch that I mortgaged my paid-for house and invested the money in stocks, the responses were 'idiot'. (So I quit telling them, lol). IMO, 'convention' is why so many families don't do well financially. Eg, it's not to difficult to become a millionaire today - simply invest $5000/yr in your 401k at 11%/yr for 30 yrs, and enjoy spending the rest. I'm surprised that so few people do it.
Post Sat Jan 10, 2015 4:57 pm
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Wino
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quote:
Originally posted by SyZ
The reason everything is confusing is I have people telling me...
I want to be even more direct that oldguy was:

Make up your own mind using what others have suggested. We aren't you, and we cannot know your true tolerances for risk or your ability to weather the financial storms to come. We have given our preferences, and our reasons for the preferences.

It is now up to you to make a list of things you might do (what you wrote with no "et ceteras" at the end), and then decide which, if any, of those things you want to do.

It's your money, and your decision. We're happy to give you our opinions on topics where you're still hesitant or don't understand a part of it, but in the end, this is your baby and you are the one who gets to (or has to) live with the results.
Post Sun Jan 11, 2015 10:14 am
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SyZ
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I think one of the biggest issues I have is what oldguy said about how easy it is to become a millionaire

I mean, it really does seem easy

And yet, it's supposed to be hard, right?

Hence the confusion / hesitance

In my mind, putting 20% down, financing 80% for 4%, then having 30 years to pay it off while inflation rises and home prices (theoretically) rise as well, is the exact same as financing $15k on a car for .9% interest for 60 months - it makes sense and seems like the correct thing both logically and mathematically, yet so few people seem to agree with it

I've studied about 10 hours this week for the first exam, and I'm feeling good about it so far. I definitely think it's the right path for me, and it just makes sense overall. I went to a top school, I studied the field, I work in insurance, I work in the most complicated and most litigious casualty state (CA), I have high customer service mainly because I can easily explain hard concepts to people who don't understand ... everything about my training and current job is leading me towards this profession, and if I enter it I foresee being able to retire early and financially stable
Post Mon Jan 12, 2015 5:54 am
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Wino
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quote:
Originally posted by SyZ
I think one of the biggest issues I have is what oldguy said about how easy it is to become a millionaire

I mean, it really does seem easy

And yet, it's supposed to be hard, right?

Hence the confusion / hesitance

Mathematically, oldguy's method works if the S&P500 does in the next 30 years what it has done for any given 30 year period historically. (If-count = 1)

His method works if you can invest your money regularly for a long period of time (If-count = 2).

His method works if you don't have an unforeseen emergency that forces you to withdraw the investments during a down period (If-count = 3).

His method works if your earnings ability never changes and follows a typical earnings pattern of regular increases (If-count = 4).

If his method does not work for any of the reasons above, you go bankrupt because you owe much more money than you can pay.

Paying off your house, eliminating all debt, and investing what would have been house and car and other credit payments will work regardless of your income level, provided you don't over-purchase the house (house poor), buy new cars regularly, and don't use credit cards to buy toys.

The pay-off method has many of the same "ifs" as oldguy's method, but if you hit one of those obstacles, you lose your investments, but keep your house, car, and belongings, and don't go bankrupt. Personally, I wouldn't want to bet the house on any stock or index.

Even someone making $30K per year can become a millionaire in 30 years with an 8% market return if he invests $700 per month ($8400 per year). It is easy to become a millionaire, if you have the time, discipline, and income to do the simple job of investing regularly for a long period of time.

Leveraging your investments works, as well, but it has much more inherent risk. Oldguy took the risk, and has more wealth to show for it. I don't mind having proportionately less wealth, but also less risk.

See the link below concerning leveraging investments. Note the last paragraph. In particular see the sentence with the phrase "gains and losses" within said paragraph.
http://www.investopedia.com/terms/l/leverage.asp
Post Mon Jan 12, 2015 8:18 am
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oldguy
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Leverage - here is a quote from wino's site -

quote:
1. Leverage can be created through options, futures, margin and other financial instruments. For example, say you have $1,000 to invest. This amount could be invested in 10 shares of Microsoft (MSFT) stock, but to increase leverage, you could invest the $1,000 in five options contracts. You would then control 500 shares instead of just 10.


It is important to use your management skills to mitigate the risks, it is likely that you will encounter one/some of those 4 "ifs" in a lifetime - and you use your management skills to navigate around them.

And it's important to recognize good leverage from bad leverage. In the above eg (MSFT) your 'lever' has a time-constraint. There is a 50/50 probability that the option will expire worthless (the odds are established by the 'house'). Additionally, your broker will require margin calls (more money whenever your equity gets low). You need to learn to recognize those traps.

Here is an eg of a better 'lever'. If I was asked to invest $250k in real estate, I would NOT buy one $250k rental house - instead I would make $50k down payments on 5 - $250k houses. My equity is still $250k but I 'own' $1,250,000 worth of houses (5:1 lever). And my goal is two-fold. On the equity side of the equation, I'm wanting the houses to increase in value to about $2M in 10 years. (My payments are fixed, my 5 rent checks may go up a bit). My unrealized capital gain is $750k on my $250k investment. On the income side of the equation the goal is to manage the status quo - keep them rented, and keep the loans current. And the 4 - 'ifs' apply to the RE market, same as the stock market. What if the houses don't go up in 10 yrs, what if they go down, upsidedown? Manage it, just keep making the payments and collecting the rent - and wait another 10 yrs for your cap gain (patience). A common mistake is to get emotional and try to sell short cuz you HATE being upsidedown - it's not about emotion, it's about math.

BTW, I recall agonizing over that 'if #1" back in the 1970's, ie "but will it work for MY 30-yr block??'. No computer, no scientific calculator, it was almost like working blindfolded by today's standards. No good history in the SP500, etc. But there were WSJ's stored on microfische at public libraries - slow, cumbersome - I compiled data on a yellow pad, used a slide rule to reduce it. But available - and I got the correct answer. Very Happy
Post Mon Jan 12, 2015 5:29 pm
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SyZ
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I think I'll stick with the S&P500 in the 401k at 15% until I'm done with the 6.8% debters, then I'll reconsider a Roth option, also with the S&P500. The less time I spend thinking about my money while it works for me, the better

If I do become an actuary, my pay will increase so much the only thing holding me back with be real estate investment. I guess to further clarify my points about debt and income - I can see how people with a 30-60k income sometimes have trouble if they're buying new cars and spending money on vacations and eating out and what not all the time -I don't see how people who earn salaries like $130,000 are struggling to make ends meet. How can you earn that kind of salary and then stress yourself to the limits that you're still living paycheck to paycheck?

I mean, all the effort I'm putting into this, and imagine if my income were just doubled. We wouldn't even need to talk about anything other than what high risk investments I want to leverage after making sure I have a six month emergency fund and what area to take out a mortgage in

And, totally aside from the above, what deductions / exemptions should I be taking as a single 30 year old male?
Post Thu Jan 15, 2015 3:37 am
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