Yeah, so my first year has passed with my current employer and I am now eligible to do 401k. The question I have is this:

My company only matches up to 3% of my contributions, with end-of-year bonus contributions of undisclosed amounts, based on performance. My quandary is this...should I invest more? Falling a tax bracket or so would be of immense benefit to me right now, as I'm a single honkey male. Financial gurus...I could use some help here, especially in light of the fact that I have minimal withholding due to immense personal debt and I've been trying to get caught up. PM me if you need more specifics to make a better call on this.

8/26/2009 2:37:12 PM

hi.

the dudes in the stock market thread will help.

8/26/2009 2:38:47 PM

Get the match first and foremost. If the debt is relatively high interest, pay it off ASAP.

After that, it's just a matter of risk appetite, investment objections, and play money you want to have.

8/26/2009 2:51:17 PM

Max out 401(k) up to the point of the company match. (3% for you)
Pay off debt
Put any retirement savings above that 3% into a Roth IRA**


**That is, if you are disciplined enough to do so. Part of the great thing about a 401(k) is the automatic deduction by your company. Although you can set up a similar system with a roth, it requires a little more discipline.




[Edited on August 26, 2009 at 3:29 PM. Reason : I'd pay off consumer debt before starting a Roth, personally]

8/26/2009 3:05:52 PM

^ I agree, but I've also heard to pay off personal debt that doesn't exceed half of your salary. So, $30,000 in student loans should wait unless you make more than $60,000.

One thing, it doesn't make financial sense to be paying 14% interest on a credit card while you are getting ~4% return in your 401(k). That is a net loss so eliminate your high interest debt first then work on investments. But, if your company matches you should ALWAYS contribute as much as you can to get their max. After all, it is free money.

A ROTH IRA is a steal and should be your first concern. If your company didn't match your 401(k) a ROTH would (most often) be the better choice (401k vs. ROTH IRA).

8/26/2009 4:16:23 PM

my company tried to talk me into doing all 401k and no roth IRA. apparently they didn't want to setup my taxes on it.

got it done anyway.

8/26/2009 4:21:32 PM

you can do a roth ira without your company

also, it should be noted that you can no longer contribute to a roth ira once your income passes a certain amount. i dont remember off hand but i think its $150,000

so if you ever plan on making more than 150k, max your roth early and yearly and take advantage bc its not something you will always have access to.

8/26/2009 4:57:13 PM

roth 401K ftw

8/26/2009 11:39:02 PM

^
Agreed, but not many companies offer those right now

1) Setup your 401k up to the amount your company matches, no more. Look for the "target year retirement" mutual funds if you unsure what to pick.
2) Setup a Roth IRA (or Traditional, depending on income, Roth works better for most of us right now). If you can afford to do so, put the maximum amount you are allowed to contribute per year into it.
3) Wait 30 years. Profit. Over time, both your 401k and IRA should return (on average) 10% or more per year.

If you are looking to save beyond your 401k AND beyond a Roth IRA, AND don't have any short-term plans for large ticket items (read: a house), then definitely seek out a financial advisor.

I'm personally going to pursue #2 AFTER most of my debts have been eliminated. Student Loans at a measly 3% don't concern me. Credit cards at higher rates do.

[Edited on August 27, 2009 at 7:23 AM. Reason : .]

8/27/2009 7:21:01 AM

PackBacker nailed it...as a beginner that's all you need to know

^ 10% is a pretty grand assumption, I'd say 6-8% over the next 30 is more realistic. And I'd keep half of my holdings in foreign funds, US will be slowing down...

8/27/2009 7:27:41 AM

Quote :

"Setup your 401k up to the amount your company matches, no more."

I'm curious, why do you say no more?

I would argue that one should make as much effort to contribute up to the federal limit each year. Of course this won't be feasible for most recent grads (took me 5 years before I made enough/paid off enough debt to do it) who have entry level salaries and debt, but i'd say

1) contribute enough to max the company match
2) max out roth IRA ($5000/year)
3) increase 401k contributions to federal match. ($16,500/year)

in that order, which till get you $21,500 per year towards retirement.

8/27/2009 7:47:17 AM

Quote :

"I'm curious, why do you say no more? 1) contribute enough to max the company match 2) max out roth IRA ($5000/year) 3) increase 401k contributions to federal match. ($16,500/year) "

The only good thing about a 401(k) is the company match. It's an instant 50%-100% return....depending on how much they match.

Generally speaking, 401(k)'s suck as investment vehicles. You usually have 10-15 crappy mutual funds and bond funds to choose from that have way too high expense ratios and that's the only choice you have. In an IRA, your choices are practically limitless, and there are numerous other advantages to a 401(k), particulary with the Roth. (For instance, you can withdrawl contributions with no penalty, etc)

Your list is fine... but before you contribute anything over the company match you should max out a Roth IRA. If you've maxed out a Roth, then definitely add more to the 401(k). We're just saying don't contribute 6% to your 401k when they only match 3%.... put the rest in a Roth IRA


[Edited on August 27, 2009 at 8:07 AM. Reason : ]

8/27/2009 8:03:39 AM

i would agree that initially you should put in the company match, then max your roth then come back to your 401k.

however, the percentage of people in their 20s that contribute to a 401k at ALL is extremely depressing, anyone who is contributing is doing well.

8/27/2009 10:41:37 AM

Quote :

"You usually have 10-15 crappy mutual funds and bond funds to choose from that have way too high expense ratios and that's the only choice you have."

I suppose this is valid for those who have a crappy 401k fund selection. More and more companies are moving to a self-directed 401k option where you can invest in whatever you want via your 401k-- stocks, mutual funds, etfs, options, derivatives... whatever you want.

but yeah, if you work for a company with a really shitty fund selection, then you're right.

8/27/2009 10:55:10 AM

I have a really shitty fund selection. Maybe I need to hire one of you guys or buy you pizza and beer to help me pick how I want my investments allocated. Aw hell, here's the list of funds:

Stable Return Premier
Harbor Bod Fund
Dodge & Cox Balanced Fund
Dodge & Cox Stock Fund
American Funds Growth Fund of America R5
Vanguard 500 Index Fund
Goldman Sachs Mid Cap Value
Munder MidCap Core Growth
Third Avenue Small-Cap Value
T. Rowe Price New Horizon
American Funds EuroPacific Growth

I just need a financial advisor, period. I'm a damn engineer, not a finance guru.

8/27/2009 11:01:25 AM

Quote :

"The only good thing about a 401(k) is the company match."

What about the deferred taxes?

8/27/2009 11:07:10 AM

I'm just in the Agressive Investor Fund, which means they take my stuffs and push 'em to the most agressive stocks. I'm young, I can be agressive right now. I'll change it when I hit 45.

8/27/2009 11:14:51 AM

^^^

I'm no financial advisor by any means, but for long term investment, I'm a huge fan of the S&P500 index funds. You've got Vanguard 500 Index Fund as an option to track the S&P, and vanguard tends to have REALLY REALLY low expense ratios for their funds. The one in question is only 0.19%. I didn't look at the other funds, but many of those other options will be several times more expensive.

This is fairly lengthy but an excellent read (still shorter than reading a book)
http://www.sanfranmag.com/story/best-investment-advice-youll-never-get

8/27/2009 12:09:16 PM

Quote :

"I'm curious, why do you say no more?"

Wife contributes to her 401k up to match, I contribute to my 401k up to match, we both contribute /max out a Roth IRA, we have debt to pay off, house to payoff (which can always be done sooner rather than later), and then future plans to improve the home.

After all of that, if you still have leftover cash in hand, go talk to a financial advisor, heh. The only reason I recommend against extra in the 401k is because there are heavy restrictions on how you may withdraw before you retire. You don't think you'll need to, but nobody can predict what will or won't happen several years from now. You can still stick it into a retirement type thing if you so choose (traditional IRA, for example), but, not a 401k due to the restrictions.

8/28/2009 6:57:36 AM

Quote :

"What about the deferred taxes?"

Traditional IRA has deferred taxes....plus many other benefits to a 401k

Quote :

"for long term investment, I'm a huge fan of the S&P500 index funds"

Agreed. I think it would be a safe bet to put the majority of your contributions into an index fund. Over a 20-30 year span, very few, if any, mutual funds are going to beat them. S&P 500 indexes are a safe long-term investment. If your index fund crashes, we're going to be carrying AK-47's in the street so your 401(k) is worthless anywho

I invest in indexed ETF's heavily, which are practically the same thing.

zxappeal, You need to a do bit of research on those funds. Not familiar with them. I'd probably allocate something like this for someone in their 20-30's.

70% - Domestic mutual funds / entire market or broad based index funds (Such as S&P 500 index)
20% - Worldwide/emerging market mutual funds
10% - Bonds/Bond Funds/Money Market Funds

I, personally, only have about 5% going to bonds, and I'm 26. Then again, I'm aware enough to where as I get older, I'm going to move that percentage upwards

Everyone has a different opinion on this, but the younger you are, the more aggressive you should be. i wouldn't put over 25% in foreign markets, and you don't need much in bonds if you're young...you can afford more risk because you don't need the money for 30+ years

Look for an 'expense ratio' for each fund. You want funds that are lower, and preferably below 1%. That's basically how much of your money they take off the top each year to pay the guy running the fund. Also check out 10 year returns. Growth funds and value funds I'm generally a big fan of, but mix it up if you want to select individual funds (as opposed to just putting most of it in the index fund, which is perfectly fine)

If you don't think you'll keep track and update over your career (To change allocation percentage as you get older to more conservative investments), a 'Target Fund' wouldn't be a bad choice as it will do that for you. Not sure if you have that, but as an example, it would be named something like the 'Fidelity Freedom 2040' 'Fidelity Freedom 2035', etc (I obviously have Fidelity) and will have a bunch of different years listed in the name such as 2020, 2030, 2040. You can basically pick the year closest to when you retire, and your 401(k) is on autopilot. If you allocate yourself, generally, you can do better than the target funds, but you have to update things every 5-10 years to change your allocations.


[Edited on August 28, 2009 at 8:13 AM. Reason : ]

8/28/2009 7:44:24 AM

What are the pros/cons of having both a 401k and a roth ira? I currently have a 401k that I have been contributing to for 4 years, but do not have a roth ira.

8/28/2009 7:47:55 AM

You have to pay taxes on the 401K money when you take it out. You don't with the roth plus I'm pretty sure you can withdraw the principle at any time and you can also withdraw money penalty free after 5 years to put towards your first home.

Quote :

"Traditional IRA has deferred taxes....plus many other benefits to a 401k"

Yeah, but its caped at 5K so I throw 5K in an IRA and then fill up the 401K.

8/28/2009 10:56:37 AM

If you want a good financial advisor, i would suggest Sloan who is a professor at State. Not sure what the name of his business is but its in North Raleigh. He runs his own business and deals with this crap all the time and makes it sound good in class. He knows what hes talking about.

Sound Financial Management

[Edited on August 28, 2009 at 10:12 PM. Reason : found the business]

8/28/2009 10:09:38 PM

Fidelity has some great funds to invest in for the not so investment savvy people. I don't know know how they stack up with other companies with their Roth IRA but I would look into them. They have some target date funds that will be more aggressive the further away you are from that date and the closer you get the more conservative they get.

Oh and Roth 401k ftw if you can get one

8/29/2009 9:51:31 AM

you need to diversify yo bonds

8/29/2009 12:19:12 PM

I too have shitty stock choices.

I'm actually doing better in my CDs percent return wise not factoring in company match.

8/29/2009 10:16:28 PM

YTD?

8/30/2009 5:19:04 PM

I have 5% set up which my company matches 3.5%. ( 1:1 for the first 2% 1:0.5 for the next 4%) If I increase to 6% i'd have the full company match 4% for a combined 10%.

My current contribution make up is

Bond Index 3%
Value Large Cap 15%
Blend Index (S&P 500 based) fund 18%
Fidelity Contrafund 15%
Large Cap Growth 25%
Small-Cap Fund 6%
Foreign Index 18%

8/31/2009 8:27:03 AM