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Old 03-26-2015, 07:14 PM
 
2 posts, read 2,198 times
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Folks,

I have been flying solo in terns of investment advice, and just putting in money in 401k without putting in much thought. I am turning to you guys, because a) I am still a newbie and b) hoping to get a no BS answer/advice which I cant get from a fund manager who has an ulterior motive.

So I am 31, married and recently moved to the mid-west as my wife needed to go to school there. While I was single, I used to contribute the bare minimum 4% of base to match my employers contribution. This was when I was 25. From there, I have gone to maxing out my 401k this year, and that's without my employer contribution, which is an additional 4.5%. I currently have $110k in my 401k, which started in 2009 has accrued a total of 15% gain since inception. I understand that's hard to maintain in the long run, so I am looking for a conservative 6% return long term.

Besides my 401k, I also have employee stock purchase program and RSU's, 70% of which I have sold to put a down-payment on my condo. I have about $30k in my brokerage account (from shares sold), and I can easily add $23k per year to this account as I just sell my RSU and stock every 6 months when they mature. I don't need this money for now, so I am thinking of storing this for my retirement. Hoping to get a 6% return for this too.

My wife is 30, and she graduates next year from dental school with about $130k in debt, which, believe me is on the lower end than her peers because we stay together and save on living expenses. I believe she will take 2 years to pay down her loans, but I am advising her to max out her 401k account too if we can.

We currently file joint returns, cuz my wife is not earning at this moment. That may change in the future based on our tax bracket. I am worried about my brokerage account though. I want to transfer all of that money, and my annual contribution of ~$25k to Vanguard account and invest in their low-expense mutual funds. I have read articles speaking about IRA's, but I am not sure whether I am eligible, or what are the advantages of IRA over 401k, or if I can/should scale back on my 401k a bit and instead invest in an IRA.

I want to retire when I am 55, but wont be needing my 401k or other retirement accounts till we turn 62 as hopefully we can sustain on my wife's income. We believe my wife would retire by 62, as a dentists' back generally gives way after ~30 years of practice. It's at that point in time that we may tap in our retirement funds. I sometimes find it weird that we have it all planned out so much in advance, but I don't want to live paycheck to paycheck, and spend just because I can.

Ok, getting back on track, I would really appreciate some advice on investment options after one's 401k is maxed out. Given my situation described above, which investment options make sense from a tax perspective?

Please let me know if there are some aspects of retirement planning which I may have overlooked. Thank you!
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Old 03-26-2015, 09:41 PM
 
Location: Idaho
1,451 posts, read 1,153,086 times
Reputation: 5472
skywalker,

I am expecting mathjak107, the cd forum resident financial expert, to answer your questions shortly and in great details.
I can only tell you our experience and what I know.

You should be able to save both in 401K and IRA. We have been doing it for years. Our employers give generous 401K match and being large companies, the fees/fund expenses are lower than investing outside the plan, we have tried to contribute up to the max 401K limit whenever we can. We have also tried to max out the IRA contributions. I assume that you are aware of the before and after tax IRA categories based on your income. For the after tax IRA, we put whatever allowable limit to Roth IRA since the gain will be completely tax free when we withdraw it in retirement & only regular IRA and 401K are counted in the required minimum distribution at age 70 1/2.

In the early part of our careers when our companies gave 15% discount, we bought the company stock but stopped later for two reasons: 1) the discount was reduced to 5% and 2) the company stock shares had constituted a large part of our portfolio. It is a frequent financial advice to reduce exposure to the company stock. If the company does badly, it's a double whammy, you loose your job and loose money in company shares. Naturally, it's a bad thing to invest 401K in the company stock but I have seen some my colleagues invest all their 401K in the company stock. Some lucked out when the stock price went up and they cashed out in time but others had suffered losses. The worst case that I had seen was a friend who got laid off and listened to the financial adviser to moved his saving to cash & bond. This was right after a big market dip so he 'locked' in his losses!

In the early years of investing, we were more dazzled by a stock or fund performance in terms of 1year, 5 years, 10 years return and did not take into account all the fees and expenses. As we get wiser, we moved quite a few of our funds to Vanguard.

If you want to keep some money in your brokerage account for their investment expertise, ease of stocks buying/selling etc, you can just keep the money there. If the brokerage account does not offer better services than Vanguard and/or you don't want to bother with buying/selling individual stocks and just want to invest in say low cost index funds then just move the money to Vanguard.

The only individual stocks that we own are the ones which pay good dividends. You can search the web for the list of dividend aristocrats. If you don't want to spend the time to track individual stocks or don't want to keep your eggs in few baskets, you can invest in Vanguard Divident Growth Fund (VDIGX), VG Dividend Appreciation ETF (VIG), Vanguard High Dividend Yield ETF (VYM) etc.

Since long term capital gain is taxed at a lower tax rate than income and all 401K & IRA withdrawal will be taxed as income, we keep our 'income' producing divident/bond funds in 401K/IRA (with the percentage increases slowly as we get older) and invest non retirement saving in growth funds.

I think the standard advice of asset allocation and investing in low fees/low cost funds is a good one. You don't make a killing in the market at any given time but in the long run, you will be ahead of the market timers/gamblers. The most important thing is stay the course, don't get panicked or excited by big market movements.

It is great that you are serious about saving and investing money early. It sounds like you know what you are doing. My financial suggestions could be superfluous so I would like to share one more life experience. Looking back at our life, my regret is that we did not invest more and earlier in other life aspects such as traveling and hobbies. We did not travel abroad and did not engage in serious hobbies/activities like scuba diving, flying and rowing until after our daughter graduated from HS. If we had done these activities when she was younger, we would have many more memorable family time together. Doing so would have certainly cost us some money but I don't think that it would have made a significant difference in our current net worth. We are quite frugal in our daily life and even while doing those activities, we always try to find the least expensive way to do them. So save, invest etc. but don't forget to splurge a bit every now and then and treat yourself and your wife to some wonderful memorable trips, events. Life is short, plan for the future but don't forget to live for the moment ;-)

Last edited by BellaDL; 03-26-2015 at 10:17 PM..
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Old 03-26-2015, 10:03 PM
 
26,084 posts, read 28,478,940 times
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It would help us greatly if you gave us a run down of the funds in your plan and their expense ratios.
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Old 03-27-2015, 02:28 AM
 
71,490 posts, read 71,652,652 times
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well thanks , but i am no expert. i just find learning about different aspects of planning interesting.

i don't give one on one advice but like mystical said ,tell us what your choices are and we will see what potential they have.
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Old 03-27-2015, 07:07 AM
 
2 posts, read 2,198 times
Reputation: 10
Thanks for sharing! It's really great that you and your spouse started investing early, and hopefully are now on your way to a financially secure retirement. Please check for my response inline...

Quote:
Originally Posted by BellaDL View Post
skywalker,

I am expecting mathjak107, the cd forum resident financial expert, to answer your questions shortly and in great details.
I can only tell you our experience and what I know.

You should be able to save both in 401K and IRA. We have been doing it for years. Our employers give generous 401K match and being large companies, the fees/fund expenses are lower than investing outside the plan, we have tried to contribute up to the max 401K limit whenever we can. We have also tried to max out the IRA contributions. I assume that you are aware of the before and after tax IRA categories based on your income. For the after tax IRA, we put whatever allowable limit to Roth IRA since the gain will be completely tax free when we withdraw it in retirement & only regular IRA and 401K are counted in the required minimum distribution at age 70 1/2.
Yep. I looked up ROTH IRA contribution limits, and the limit is $5500. Not sure if that's individual or joint, but would love 2 open 2 accounts for my wife and myself. Also, the income limit for married filing jointly is ~$190k, and I believe we will be well past that next year and every year after that. With that in context, does it make sense to stay invested in a ROTH IRA for a couple of years?


Quote:
In the early part of our careers when our companies gave 15% discount, we bought the company stock but stopped later for two reasons: 1) the discount was reduced to 5% and 2) the company stock shares had constituted a large part of our portfolio. It is a frequent financial advice to reduce exposure to the company stock. If the company does badly, it's a double whammy, you loose your job and loose money in company shares. Naturally, it's a bad thing to invest 401K in the company stock but I have seen some my colleagues invest all their 401K in the company stock. Some lucked out when the stock price went up and they cashed out in time but others had suffered losses. The worst case that I had seen was a friend who got laid off and listened to the financial adviser to moved his saving to cash & bond. This was right after a big market dip so he 'locked' in his losses!
A 5% discount, for lack of a better phrase, is just terrible. But yet, it's a guaranteed 5% return. My employer ESPP is very generous. 10% of base can be contributed. Discount of 15% for the lowest stock price in a span of 2 years with a snapshot of 6 month interval. The actual gains are closer to 30%, even when the stock has done really really bad. Also, I usually sell them off immediately after they vest, including RSU's (which is basically free money), so I don't stay invested too long. My 401k was managed by JP Morgan Chase, which got consolidated under Empower Retirement, and I have $0 invested in my own company. The distribution I have right now is as follows.

Mutual Fund, Expense Ratio %, Percent allocated
Blackrock US Debt Index-T, 0.07, 16%
Fidelity Spartan 500 Index-Adv, 0.07, 12%
Blackrock US Equity Market Index-F, 0.09, 25%
Blackrock Extended Equity Market-F, 0.08, 29%
Harbor International-Inst, 0.76, 18%

Harbor International is probably the only fund which has a high expense ratio, but I needed something in my portfolio that gave me some exposure to international stocks. Also, I have stuck with these MF's since the beginning of 2009, and my choice has primarily been driven by a low expense ratio. I am open to ideas to how to craft a well balanced portfolio, but my choices are limited with the Mutual fund options provided by Empower Retirement.


Quote:
In the early years of investing, we were more dazzled by a stock or fund performance in terms of 1year, 5 years, 10 years return and did not take into account all the fees and expenses. As we get wiser, we moved quite a few of our funds to Vanguard.

If you want to keep some money in your brokerage account for their investment expertise, ease of stocks buying/selling etc, you can just keep the money there. If the brokerage account does not offer better services than Vanguard and/or you don't want to bother with buying/selling individual stocks and just want to invest in say low cost index funds then just move the money to Vanguard.
Yep. I saw a documentary on Netflix a couple of years back on "Retirement and America", and had a section featuring John Bogle, and he came across as a very straightforward man, which is very uncommon given the greed of Wall Street. That's when I started researching about Vanguard and low Index funds. I don't think I have the mental capacity or the inclination to juggle my day-job and also research and pick individual stocks. Rather, I would like to stay invested in Vanguard index funds for long periods of time, and take whatever average returns the market has to offer. I value peace of mind above all else, and that's something I believe Vanguard can offer.


Quote:
The only individual stocks that we own are the ones which pay good dividends. You can search the web for the list of dividend aristocrats. If you don't want to spend the time to track individual stocks or don't want to keep your eggs in few baskets, you can invest in Vanguard Divident Growth Fund (VDIGX), VG Dividend Appreciation ETF (VIG), Vanguard High Dividend Yield ETF (VYM) etc.
That's a good alternative. I don't see that as an option in 401k fund plan, but perhaps this is offered if I open up an IRA with vanguard.

Quote:
Since long term capital gain is taxed at a lower tax rate than income and all 401K & IRA withdrawal will be taxed as income, we keep our 'income' producing divident/bond funds in 401K/IRA (with the percentage increases slowly as we get older) and invest non retirement saving in growth funds.

I think the standard advice of asset allocation and investing in low fees/low cost funds is a good one. You don't make a killing in the market at any given time but in the long run, you will be ahead of the market timers/gamblers. The most important thing is stay the course, don't get panicked or excited by big market movements.
Great advice. Willing to stay the course in the up's and down's.



Quote:
It is great that you are serious about saving and investing money early. It sounds like you know what you are doing. My financial suggestions could be superfluous so I would like to share one more life experience. Looking back at our life, my regret is that we did not invest more and earlier in other life aspects such as traveling and hobbies. We did not travel abroad and did not engage in serious hobbies/activities like scuba diving, flying and rowing until after our daughter graduated from HS. If we had done these activities when she was younger, we would have many more memorable family time together. Doing so would have certainly cost us some money but I don't think that it would have made a significant difference in our current net worth. We are quite frugal in our daily life and even while doing those activities, we always try to find the least expensive way to do them. So save, invest etc. but don't forget to splurge a bit every now and then and treat yourself and your wife to some wonderful memorable trips, events. Life is short, plan for the future but don't forget to live for the moment ;-)

Again, great advice! I could not agree more. It's great that you are enjoying all those activities, which you could not earlier, but hoping that you are in good health for the foreseeable future, you and your spouse are good. I understand where you are coming from. Since you shared some of your life experiences, let me share some of mine. I am in immigrant to this country, and I am grateful to all the opportunities and liberties afforded to me by this amazing country. My parents though still are back in their home country. Growing up, my parents like those of their generation, were huge on saving. They saved in every investment vehicle possible, gave my brother and me fantastic education and also invested in their retirement. Right after they got retired, my mother was diagnosed with a terminal illness. She always wanted to go to Europe, and had saved enough to go there, but because of her illness now, they can't do that anymore. All the time while we were growing up, all she spoke about was visiting Europe, specifically the Vatican City.

This particular incident has changed my perspective for life in general. I no longer sweat the small stuff, and try to live a day at a time. Of course, this thread was to discuss the larger picture, but rest assured, I understand to live a little and also save for the longer term. My wife and I have travelled from California to New York and most of the hot-spots in between (including Hawaii) in the past 3 years since we have been married. We plan to have our first kid sometime next year, so we want to squeeze one big trip before we do that, so we are doing Paris, Venice and Rome (and Vatican City) this summer. I will be probably doing FaceTime using my phone with my Mom while there, so she can find some solace to see it with my eyes.

Anyway, not to get sidetracked , point being, the money we are saving right now is the money left after splurging on travel, dining out and shopping, all within limited means.

I am still confused on whether to save in a ROTH IRA only for a couple of years (because of income restrictions kicking in once my wife starts working), or to invest in a Traditional IRA, or just stay in a normal Vanguard account with money invested in Mutual Funds. I am not sure of the tax implications, but I believe when my wife and I retire, we would be basically be in the same tax bracket with our income from retirement funds. So keeping that in mind, what would be the best investment strategy?

Thanks again to everyone who have commented on this thread. Really appreciate your advice.
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Old 03-27-2015, 08:00 AM
 
Location: Idaho
1,451 posts, read 1,153,086 times
Reputation: 5472
Quote:
Originally Posted by skywalker_ca84 View Post
Yep. I looked up ROTH IRA contribution limits, and the limit is $5500. Not sure if that's individual or joint, but would love 2 open 2 accounts for my wife and myself. Also, the income limit for married filing jointly is ~$190k, and I believe we will be well past that next year and every year after that. With that in context, does it make sense to stay invested in a ROTH IRA for a couple of years?
The limit is for an individual. Yes, you can open 2 accounts for you and your wilfe. The income limit is for AGI. In any year that we could contribute to Roth IRA, we contributed up to the max phase-out limit. You can also convert regular IRA to Roth IRA and just pay taxes on the gain in the conversion year. IMO, it makes sense to invest in Roth IRA even for only a couple of years especially when you are a long way from retirement.

Another very nice thing about Roth is that unlike regular IRA, there is no penalty for early Roth IRA withdrawals-- income tax- and penalty-free -- for things like supporting yourself after a disability or buying a first home

BTW, I just remember one of your question regarding comparing saving in 401K and IRA. You can borrow against 401K but not IRA. Investment advisers are always against borrowing from 401K but we have done it in the past to add to the down payment on a 2nd home and repaid after we sold the 1st home.

Quote:
...(regarding VG dividend funds). That's a good alternative. I don't see that as an option in 401k fund plan, but perhaps this is offered if I open up an IRA with vanguard.
Yes, that is exactly what we did.

Quote:
right after they got retired, my mother was diagnosed with a terminal illness. She always wanted to go to Europe, and had saved enough to go there, but because of her illness now, they can't do that anymore. All the time while we were growing up, all she spoke about was visiting Europe, specifically the Vatican City
Yes, I have seen similar thing happened to our MIL!

Quote:
I am still confused on whether to save in a ROTH IRA only for a couple of years (because of income restrictions kicking in once my wife starts working), or to invest in a Traditional IRA, or just stay in a normal Vanguard account with money invested in Mutual Funds. I am not sure of the tax implications, but I believe when my wife and I retire, we would be basically be in the same tax bracket with our income from retirement funds. So keeping that in mind, what would be the best investment strategy?
Since you expect to have high income in retirement, if I were you, I would put as much money in a ROTH IRA as possible.
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Old 03-28-2015, 10:18 AM
 
2,409 posts, read 2,638,094 times
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Does your employer offer a Roth 401k? If so, max it out instead. If not, does your employer allow in-service distributions? If so, roll your traditional 401k to a traditional IRA and convert the traditional IRA to a Roth IRA. Since you are young, it's better that you pay income taxes now than later.
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