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Retirement-Era |OT| How to Invest For Retirement

Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
Was also wrong because apparently you don't necessarily need to file if it's a Roth contribution. But if it's the difference in qualifying for the savers credit or not, it could still be worth filing an amended return.
 
Oct 28, 2017
204
That's a pretty crummy match. How long do you have to be there before the match vests? Surely you don't have to be with the company until retirement.

I wouldn't bother with Merrill over Vanguard or Fidelity for an IRA.

Chances are, the advice will be to still follow the typical investment path. Contribute to your 401K to get the maximum company match, then put further investments in a personal IRA up to the maximum. You can (and generally should) have both. Even if the match isn't good it should still be free money, and if you do end up with the company long enough for it to vest you'll be glad to have it. Unless your 401K fund options are just really bad, you shouldn't lose out on much if you don't get the match and roll it over.

If you're very confident you won't get the match, and/or your fund options are just abysmal, you may want to forgo the 401K, but it's not often that someone would want to do that.
I personally don't feel like I'm going to stay past a year at the job so committing to the 401k when it takes 2-3 years to keep a % of the match is a waste. So it seems like I would have to do a ROTH IRA. Any tips on how I can get started with that?
 
Oct 25, 2017
3,768
I personally don't feel like I'm going to stay past a year at the job so committing to the 401k when it takes 2-3 years to keep a % of the match is a waste. So it seems like I would have to do a ROTH IRA. Any tips on how I can get started with that?
Visit vanguard or fidelity or another site and open account. You still have until April 15 to co tribute for 2018.
 

Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
I did research on them both and I kind of have no idea what I'm looking for. I think I'm leaning towards Vanguard.
The differences are pretty negligible for someone looking to passively invest. Both are well respected and have good funds to invest in with low fees. I'm not sure what the split is on Era but I'd guess it leans slightly toward Vanguard.

Depending on how hands-off you want to be you can either invest in a target date fund and have everything managed for you but with a slightly higher (but still acceptably low) fees, or manually control your allocations and invest in total market funds.

If you manage it yourself, Total US Market is a good starting point. Eventually you will want to add Total Bond Market to balance your risk. And opinions differ on Total International Market but it's another way to diversify.
 
Oct 27, 2017
71
I'm having a hard time trying to figure out the point of using a roth IRA over a traditional IRA. Unless you are very early in your career it seems that most people would expect to have a lower income in retirement than higher, and thus the traditional IRA would be better. The other scenario seems to be a hedge against higher tax rates enacted in the future, but this seems more on the speculation side of things for this thread. So sounds like for a family with $80k yearly income why would I pick a roth?
 
Oct 25, 2017
538
Ottawa
I'm having a hard time trying to figure out the point of using a roth IRA over a traditional IRA. Unless you are very early in your career it seems that most people would expect to have a lower income in retirement than higher, and thus the traditional IRA would be better. The other scenario seems to be a hedge against higher tax rates enacted in the future, but this seems more on the speculation side of things for this thread. So sounds like for a family with $80k yearly income why would I pick a roth?
If you expect to have a lower income after retirement then in most situation, IRA are better than ROTH. There are exception based on actual income (there are calculator on the web that can help figure out in in you are in these.
Of course if tax rate increase in the future that can skew toward ROTH but can you predict the future?
But yes your are most likely right on doing IRA.
 
Oct 28, 2017
204
Short answer: deposit $5,500 into Vangaurd, invest in VTI or VTSAX.
The differences are pretty negligible for someone looking to passively invest. Both are well respected and have good funds to invest in with low fees. I'm not sure what the split is on Era but I'd guess it leans slightly toward Vanguard.

Depending on how hands-off you want to be you can either invest in a target date fund and have everything managed for you but with a slightly higher (but still acceptably low) fees, or manually control your allocations and invest in total market funds.

If you manage it yourself, Total US Market is a good starting point. Eventually you will want to add Total Bond Market to balance your risk. And opinions differ on Total International Market but it's another way to diversify.
Thanks, I definitely want to be hands off for now.
Question here:
Dividends and capital gains
Reinvest
or
Transfer to your money market settlement fund
 
Oct 27, 2017
1,290
I'm having a hard time trying to figure out the point of using a roth IRA over a traditional IRA. Unless you are very early in your career it seems that most people would expect to have a lower income in retirement than higher, and thus the traditional IRA would be better. The other scenario seems to be a hedge against higher tax rates enacted in the future, but this seems more on the speculation side of things for this thread. So sounds like for a family with $80k yearly income why would I pick a roth?
1. Traditional accounts charge a penalty for withdrawing money before age 59.5. For Roth accounts, there is no penalty on withdrawals of the principle. This makes Roth better if you want to retire before 60.
2. Roth is better as an emergency fund because of #1 and because you don't pay tax on withdrawals.
3. Having a traditional IRA balance can prevent you from being able to do the Backdoor Roth IRA method, in the event that your income increases enough that you would want to.
4. You say "The other scenario seems to be a hedge against higher tax rates enacted in the future, but this seems more on the speculation side of things for this thread". I would argue that one of the fundamental tenets of investing is that one must be compensated for risk. If two investments have the same expected return but one has more risk, you should always choose the less risky one. All other things being equal, the fact that there is less uncertainty in the future value of a Roth account is something that is valuable and may be worth sacrificing some expected return.
 
Oct 26, 2017
1,930
1. Traditional accounts charge a penalty for withdrawing money before age 59.5. For Roth accounts, there is no penalty on withdrawals of the principle. This makes Roth better if you want to retire before 60.
2. Roth is better as an emergency fund because of #1 and because you don't pay tax on withdrawals.
3. Having a traditional IRA balance can prevent you from being able to do the Backdoor Roth IRA method, in the event that your income increases enough that you would want to.
4. You say "The other scenario seems to be a hedge against higher tax rates enacted in the future, but this seems more on the speculation side of things for this thread". I would argue that one of the fundamental tenets of investing is that one must be compensated for risk. If two investments have the same expected return but one has more risk, you should always choose the less risky one. All other things being equal, the fact that there is less uncertainty in the future value of a Roth account is something that is valuable and may be worth sacrificing some expected return.
Whats the diff between a Roth IRA and me just opening a Brokerage acct from Fidelity?
 
Oct 25, 2017
3,446
I think I have down what I want to focus on over the next 5 years. Time is the biggest obstacle against me and even though this is just arbitrary, I think it's important to hit that $100K net worth (or $100K in investments) mark as soon as possible to really get the ball rolling. I'm on a good track to actually hit this soon, but the main thing that's been setting me back is my student loan. I have about just 20K on them left at a 4% fixed (5 yr loan), so I don't think I care too much now that I've ran the numbers - it seems like it would be stupid to solely focus on them at that fixed rate with 20K left.

The savings of paying that off over 4.5 years instead of 1.4 results in saving of $1.1K in interest isn't to me worth the psychological feeling of accomplishment (even though having zero debt would feel amazing). If I have a change over heart midway through paying it off, I could use my emergency savings to immediately wipe out the rest of the balance and work towards quickly building it back up over 4-5 months. If I got really unlucky and something else came up then I would consider tapping my ROTH IRA account (not before looking into balance transfer options to 0% if any).

I've been able to take my expenses over the past few years and I now have an understanding of what I can live on comfortably on. For retirement I would like to have double that amount (and I'm not factoring social security which should still be around, even if not as beneficial). I'm assuming I would need it for healthcare related things and I have rent still built into that number (because I'm currently paying rent). I'm glad that I don't really feel the need to spend a ton of money like that each year. Once I get to that 100K milestone, I think should be able to proceed with 12K annual contributions to retirement accounts at minimum and still be on track for a fairly comfortable retirement. That is of course unless all sorts of issues arise with inflation. With that I can focus on other things like assisting with supporting my mom, home ownership and other opportunities.

Taking a read through this was pretty insightful: https://fourpillarfreedom.com/the-math-behind-why-net-worth-goes-crazy-after-the-first-100k/
 
Oct 28, 2017
897
That's a good illustration of the power of compound interest, but I think it focuses a bit too heavily on $100k as some sort of landmark when it's really just an arbitrary figure plucked out of the air for illustrative purposes. "Net worth goes crazy after the first $100k" is a bit reductive, really. If you're saving $1k a year or $50k a year the effect of compound interest is the same, it's just the final figure that scales (assuming that the amount being saved remains constant, of course).
 
Oct 25, 2017
3,446
That's a good illustration of the power of compound interest, but I think it focuses a bit too heavily on $100k as some sort of landmark when it's really just an arbitrary figure plucked out of the air for illustrative purposes. "Net worth goes crazy after the first $100k" is a bit reductive, really. If you're saving $1k a year or $50k a year the effect of compound interest is the same, it's just the final figure that scales (assuming that the amount being saved remains constant, of course).
Yeah, that's why I mentioned that in my post. I know it's arbitrary, but running the numbers, if you get to that and stop contributing, letting that grow for 37 years (if you get to 100K by 30), that could be $1 million by retirement using average assumptions.

All in all, the more you have saved earlier the better. I feel like there are younger people who don't understand this who might be starting off in decent to high paying jobs and not realizing how much good they can do for their future by committing to this for the first few years.

Time is too important of a factor. What I have generally have seen from people is that they live at home the first year or two in order to save up for buying a home. If was in that situation and living at home, I would save 22K-24K a year for retirement (maxing out accounts) during that time period to get a nice boost.
 
Nov 15, 2017
3,670
So I figured I could here for advice. So, my first job out of college had me start my 401(k) with them which I invested in for a year.
I then found another job and have been contributing to a new 401K plan. Problem is, I never did anything with my plan from my previous employer and it seems to have rolled over into an IRA managed by BMO. Since I was only there for a year, the balance is very low and has been gaining almost no interest so i'm not sure what to do with it or where to even begin.

Anyone have any advice? Should I just go to BMO and see what my options are?
 
Oct 25, 2017
13,630
So I figured I could here for advice. So, my first job out of college had me start my 401(k) with them which I invested in for a year.
I then found another job and have been contributing to a new 401K plan. Problem is, I never did anything with my plan from my previous employer and it seems to have rolled over into an IRA managed by BMO. Since I was only there for a year, the balance is very low and has been gaining almost no interest so i'm not sure what to do with it or where to even begin.

Anyone have any advice? Should I just go to BMO and see what my options are?
Roll it over to your new 401(k) plan. Easy.
 
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TheTrinity
Oct 25, 2017
245
That's a good illustration of the power of compound interest, but I think it focuses a bit too heavily on $100k as some sort of landmark when it's really just an arbitrary figure plucked out of the air for illustrative purposes. "Net worth goes crazy after the first $100k" is a bit reductive, really. If you're saving $1k a year or $50k a year the effect of compound interest is the same, it's just the final figure that scales (assuming that the amount being saved remains constant, of course).
I think it's just chosen because it's a significant enough chunk of what a person would generally need for retirement and also versus annual salaries.
Starting from first job after post-secondary I think it took roughly 8 years for the first 100k. 2nd and 3rd took like 1.5 years each.
This is of course also down to a significant increase in salary over that time but it is interesting. It fairly quickly gets to the point where monthly bounces in the investments significantly outstrip job income.
 
Dec 8, 2017
425
Re: traditional vs Roth

Assuming I'm looking to max my annual contribution, isn't the Roth the better option by default since that would maximize the amount of post-tax money I can have in tax advantaged accounts? IOW, putting $6k in a Roth would be better than $6k in a traditional + whatever amount I'm saving in taxes upfront into a non-tax-advantaged account, right?
 
Oct 27, 2017
2,602
If you want to lower your current taxable income, that's an argument for traditional. If you think you'll pay a lower tax rate now than when you retire, that's an argument for roth. If you think taxes will be higher when you retire compared to now, that's an argument for roth.

The cap is the same regardless of which type: $6k so you just decide if you want to pay the taxes on it now or later. You can even split it so $3k in roth and $3k in traditional if you wanted, but the total in any combination of IRA accounts is $6k for 2019 (it was $5.5k last year and you can still contribute to last year until April 15).
 

Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
Re: traditional vs Roth

Assuming I'm looking to max my annual contribution, isn't the Roth the better option by default since that would maximize the amount of post-tax money I can have in tax advantaged accounts? IOW, putting $6k in a Roth would be better than $6k in a traditional + whatever amount I'm saving in taxes upfront into a non-tax-advantaged account, right?
Aside from the tax now/tax later, that's one of the general arguments against a Roth. Less taxes now -> invest more -> more compounding returns -> more money. If those contributions are in the 22% bracket that's $1300 in taxes you could be deferring and investing. And if you qualify for a health savings account you could use that as a second tax advantaged account.
 
Oct 25, 2017
3,446
Aside from the tax now/tax later, that's one of the general arguments against a Roth. Less taxes now -> invest more -> more compounding returns -> more money. If those contributions are in the 22% bracket that's $1300 in taxes you could be deferring and investing. And if you qualify for a health savings account you could use that as a second tax advantaged account.
My accounts are heavily ROTH but I'm honestly thinking about hedging more as I go up income and allocating more to traditional to bring me below the next tax bracket.
 
Oct 25, 2017
13,630
I showed my husband the networthify.com calculator results from the link in that article. He claims he's never gonna be able to retire. But I showed him that even being ridiculously conservative (2% annual ROI when even our savings account is 2.5%) that we could "retire" in 10 years or less. Thanks for the link to the articles, FliXFantatier and Chaosblade . Makes me (and him) feel a lot better.

Tbh I'm only 31 and I personally want to keep working part-time (as I have been for the past 3.5 years) for more than 10 years, but we'll see where my health takes me. I know my husband would be thrilled to retire whenever though. I just checked our state's Obamacare site and if it was just me working and we didn't draw from retirement (we could live on my salary), we'd get a $200/mo tax credit and the cheapest limited network plan would only be about $300/mo in premiums and it includes all of our current doctors anyway.
 
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Oct 25, 2017
3,446
Aside from the tax now/tax later, that's one of the general arguments against a Roth. Less taxes now -> invest more -> more compounding returns -> more money. If those contributions are in the 22% bracket that's $1300 in taxes you could be deferring and investing. And if you qualify for a health savings account you could use that as a second tax advantaged account.
I think the major factors come down to:
1) Comparing current margin tax rate vs estimated future marginal tax rate
2) Likelihood that tax rates increase and tax income brackets shift in future
3) Tax planning opportunities for traditional 401K withdrawals


One thing on some of the more basic financial blog posts to don't discuss often enough the fact that there is tax planning strategies that can be set in place for keeping your taxable income low in retirement. Obviously #2, above can put a wrench in this planning because there's a lot that's unknown.

For me personally, I've decided to start allocating between both ROTH 401K and traditional 401K and continue to boost traditional more as I move up in income. If it's feasible that there's a strategy for keeping income retirement taxable low, then I'm certainly going to focus on making sure I'm looking to that closely, especially if I want early retirement to be an option (if this is something I want to do, I'd like to do it around the age of 50).

Through the time I've spent looking into all this, I've determined that I live a relatively comfortable life on 35K to 40K in expenses and I could probably push that further and be good. This wouldn't be the case if didn't have a career that offered good health insurance. Hopefully this improves for everyone in the US in the future. If I was at 60K+ expenses, I'd be pretty much be balling out on vacations, lol (or if I had a kid).
 
Oct 25, 2017
3,709
OP
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TheTrinity
Oct 25, 2017
245
I don't think the intention is to make you feel bad, you should feel good!

A 25% savings rate leaves a vast gulf between you and the average person who struggles to save even 10%.
 
Oct 25, 2017
3,446
My current savings rate is 40% based on the numbers and the past couple of years. I'm sure I spent more when I first moved here, but I've been pretty efficient about spending through doing lots of research, and timing purchases with sales.

If paying down student loan debt counts towards savings, then savings rate is a little higher than 40% (EDIT: it's 52% if pay down of student loan principal counts?). I pretty much have everything I need and I'm paying $1245 a month in rent. I've already established I can live comfortably on $35,000 of expenses (In Chicago) and I could push this down further if I really tried. Those few 10,000's of income are more valuable because they are taxed a lower marginal rate. I honestly think that most Americans can live $35,000 (adjusted for standard of living by state). I think the biggest X factor for people though is their healthcare costs. That shit will ruin that $30K lifestyle, which is why it's important to eat proper, exercise, and practice good hygiene to supplement what may be shitty healthcare for some of that income level.
 
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Oct 25, 2017
583
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Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
People have been posting "imminent market crash" articles since I made my Roth and have been watching the retirement thread (around 5 years now). One of them will be right eventually, but I don't put much stock in them.
 
Oct 25, 2017
5,018
People have been posting "imminent market crash" articles since I made my Roth and have been watching the retirement thread (around 5 years now). One of them will be right eventually, but I don't put much stock in them.

If everybody thought it was true the prices would have already crashed.

Timing the market requires you to know something that very few others do. Which obviously isn't likely for any of us or based on articles on the internet.
 
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TheTrinity
Oct 25, 2017
245
I don't even have to read the article to know it's BS. This is clickbait, but created for the economic intelligentsia. The people writing these kind of articles gave a one year resting period after the 2008 crash and then started predicting crashes on a regular schedule again.
 
Nov 20, 2017
1,858
I wouldn't really call 87% of the funds he managed being withdrawn a successful track record. 6.7 billion to 1 billion over 8 years. If you just didn't listen to this guy, you would be averaging about 13.4% return per year if you reinvested dividends since 2013. Even a narrow window from 2017-2019 still gives 8.9% returns. I went back and read a few of his older reports. A lot of what he said would happen never really materialized. In 2011 he was whining about historically high commodity prices, and most of those went back down. One can sort through them manually over a 10 year period here:

https://www.nasdaq.com/markets/rice.aspx?timeframe=10y

As far as predicting the previous two crashes... well, most of his articles seen here: http://www.hussmanfunds.com/market-comment-archive/ are negative for years on end. So I don't know how accurate it is to say he "predicted" anything. The guy is just so cynical that eventually he's going to be right.
 
Oct 28, 2017
1,592
I have cash sitting around. It doesn't need to be liquid, but I don't want to store it away forever, nor do I want to risk much, as it's ancillary emergency-fund money, or might be used for a big purchase in the unforeseeable future.

CDs seem to hit around 3% APR if you commit to 2+ years.

Using hypothetical numbers - assume ~$20K - it seems the best way to do this would be to put ~$2,500 into a 2yr CD every three months. After that first two year cycle, I have access to new "Releases" of my interest-bearing funds every three months. Basically, breaking the CDs across a revolving door. Does that make sense? Is it a good idea or a dumb idea? Can't seem to find any advice online.
 
Oct 25, 2017
13,630
My local bank had a deal for a 2.5% savings account if you had a certain minimum balance (can't remember but I think it was $5k?). It doesn't seem to exist anymore, but I got in on it and put all our free cash in there. Much less hassle than floating CDs and there's instant transfers between my checking and savings.
 
Oct 25, 2017
3,366
This year I opened an IRA after realizing that just a 401k that I don't pay attention to is not a good idea. The issue I have right now is understanding asset mix.

I first started buying VTI and more recently have a small amount of BND and VXUS. When I'm in the Vanguard app, I can change the asset mix of stocks, bonds, and short term reserves. Right now it's (foolishly?) at 100% stock which it can't reach cause I have BND in my portfolio.

If I change the percentages, will Vanguard sell some of my stock ETFs and get more of BND; if yes, what if I had multiple bond ETFs, how would it decide? Also, I can't seem to manage the ratio of domestic and international stock percentages. How do I manage this with Vanguard?
 

Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
This year I opened an IRA after realizing that just a 401k that I don't pay attention to is not a good idea. The issue I have right now is understanding asset mix.

I first started buying VTI and more recently have a small amount of BND and VXUS. When I'm in the Vanguard app, I can change the asset mix of stocks, bonds, and short term reserves. Right now it's (foolishly?) at 100% stock which it can't reach cause I have BND in my portfolio.

If I change the percentages, will Vanguard sell some of my stock ETFs and get more of BND; if yes, what if I had multiple bond ETFs, how would it decide? Also, I can't seem to manage the ratio of domestic and international stock percentages. How do I manage this with Vanguard?
The asset mix they show you is just a target. You can set it to whatever you want, but unless you make any changes to your investments yourself it doesn't do anything. It's just there to give you a visual comparison to "what I want" versus "what I have" to help you direct your investments.

I never changed mine, it shows my target at 90% stock 10% bond, but I have 100% stock since that's all I buy.

Also if you're young, 100% stock is fine. Different people will have different recommendations for how much you should hold in bonds, ranging from conservative ideas like holding a lot of bonds, to holding a number relative to your age, all the way to the aggressive approach of never bothering with bonds ever and just riding stocks into retirement.
 
Oct 25, 2017
3,366
The asset mix they show you is just a target. You can set it to whatever you want, but unless you make any changes to your investments yourself it doesn't do anything. It's just there to give you a visual comparison to "what I want" versus "what I have" to help you direct your investments.

I never changed mine, it shows my target at 90% stock 10% bond, but I have 100% stock since that's all I buy.

Also if you're young, 100% stock is fine. Different people will have different recommendations for how much you should hold in bonds, ranging from conservative ideas like holding a lot of bonds, to holding a number relative to your age, all the way to the aggressive approach of never bothering with bonds ever and just riding stocks into retirement.
So the rebalancing that people do is just them doing buys and sells to keep their preferred ratio?
Thank you. I was way off on understanding how that worked. It's great to have some clarification. I'm 28 so I think I'll ride a while longer with having a higher portion of stock.
 

Chaosblade

Resettlement Advisor
Member
Oct 25, 2017
2,670
So the rebalancing that people do is just them doing buys and sells to keep their preferred ratio?
Thank you. I was way off on understanding how that worked. It's great to have some clarification. I'm 28 so I think I'll ride a while longer with having a higher portion of stock.
Yeah, Vanguard won't rebalance between funds you own, but they do have "funds of funds" that are based around certain asset allocations that do get rebalanced to maintain the desired ratio. Target date funds are the most relevant here, but they also have basic balanced funds like 50/50 stock/bond, 60/40, etc.