topic Re: Retirement Planning Beginner in Personal Finance

Retirement Planning Beginner

Anonymous — Sun, 04 Feb 2018 14:21:30 GMT

So i am finally planning and wanting to save towards retirement. Ill be 31 this month and want to ensure a good life after retirement. My question is where to start. I have a small 401K that is managed by morningstar and i set it to high risk bc of my age. My employer puts money in annually and morningstar managed to work up a good 5% last quarter. My question is do start putting money towards my 401K or do i employee someone like TD Ameritrade so i have more options. I believe morningstar is using mutual funds and bonds currently and i dont have a large savings to dump into investing currently. I just want a good place to start. Thank you for your replies!

Re: Retirement Planning Beginner

tacpoly — Sun, 04 Feb 2018 14:44:38 GMT

Perhaps you should do a search first. This topic, and this question in particular, has been asked many times. The answers given on those threads will be the same as what will be given to you since you asked a fairly generic question.

Also, it would be a great idea for you to learn about the benefits that various tax-advantages retirement vehicles (such as a 401K) give you. This way, since you’re the one person who knows your true financial situation and your goals, you can make intelligent decisions on what to do without asking the peanut gallery (who may or may not know what they’re talking about).

Besides, learning how to do research and find information will be helpful as you get more involved in investing. The difference between begging for a fish and learning how to fish, so to speak — with the adage modified.

Re: Retirement Planning Beginner

Anonymous — Sun, 04 Feb 2018 15:42:23 GMT

Sorry to inconvenience, was looking for advice in my particular situation. Hence, the specific details. I'll continue to do my research and make my own decision. There's just so much information that I feel a little lost lol

Re: Retirement Planning Beginner

Anonymous — Sun, 04 Feb 2018 16:56:58 GMT

You could open an account with TD or fidelity and invest in an index fund. Bit contribution to company plan to get the full match

Re: Retirement Planning Beginner

Anonymous — Sun, 04 Feb 2018 19:57:59 GMT

My company deposits a percentage of profit every year into my 401K but does not match. But i wonder if any other company would do anything different than what morningstar already does for me? Is there a benefit in doing two?

Re: Retirement Planning Beginner

Anonymous — Sun, 04 Feb 2018 21:30:36 GMT

Here are a few quick thoughts:

* You write "I believe [the company managing my 401k] is using mutual funds and bonds currently...." The word believe suggests uncertainty. As in you don't know for sure which funds your 401k is invested in, what areas of the market those funds invest in, expenses for those funds, historic return on those funds, whether they are passive index funds or not, etc. A key step would be finding that out for sure.

* A great first step would be learning a lot about how investing for retirement works. The best way to do that is to read a solid reliable introduction. A good fit for you would be the booklet If You Can (by William Bernstein) and which is targeted at people in their 20s and early 30s. It is available for download free. If you find that helpful, I would move on to the longer book (still written for beginners) The Investor's Manifesto (also written by Bernstein).

* You may want to spend some time over at the Bogleheads web site, which has a lot of people willing to give advice.

Re: Retirement Planning Beginner

tacpoly — Mon, 05 Feb 2018 05:41:04 GMT

Your question, in its essence, is should I put money into a 401k or invest it myself? According to you, your company will put a certain amount of money in your 401k account whether you actually contribute or not, so that fact will not change based on your decision to contribute to a 401k. Which is why I said your question is fairly generic and been asked before.

Anyway, I agree with what @CrediGuyInDixie said, specially with starting with If You Can.

Also, I recommend you confirm that your company will not match if you decide to contribute to your 401k. It would be highly unusual if it truly is structured that way.

Re: Retirement Planning Beginner

Anonymous — Mon, 05 Feb 2018 15:09:47 GMT

I started with a ROTH IRA last year. Just start somewhere, even if you keep it in cash funds. (My cash fund is paying 1.25%; not the best but it's safe.) As others have noted, there's a million articles to read.

Re: Retirement Planning Beginner

iced — Mon, 05 Feb 2018 16:29:30 GMT

wrote:
So i am finally planning and wanting to save towards retirement. Ill be 31 this month and want to ensure a good life after retirement. My question is where to start. I have a small 401K that is managed by morningstar and i set it to high risk bc of my age. My employer puts money in annually and morningstar managed to work up a good 5% last quarter. My question is do start putting money towards my 401K or do i employee someone like TD Ameritrade so i have more options. I believe morningstar is using mutual funds and bonds currently and i dont have a large savings to dump into investing currently. I just want a good place to start. Thank you for your replies!

We don't have nearly enough details from you to give you specific advice on this, so instead I'll throw some general things out there to consider:

1. Employer-sponsored 401k plans can have lower fees than doing an IRA. There's also the big perk of employer matching funds - anyone who gets matching funds should contribute enough to their 401k to get the maximum match they're allowed.

2. Most 401k plans have a limit on the number of things you can invest in, but those things are also often nice, broad ETF-like funds that people new to investing should strongly consider. That is, someone who isn't keeping a close eye on the stock market and doesn't understand all of the metrics like EPS, P/E ratios, and the like is likely to do better in the long term letting their money ride in a broad market-wide fund (large cap, mid cap, S&P, etc).

3. 401ks are tax-advantaged today, but not in the future. Roth 401ks (if available to you) are tax-advantaged in the future but not today. Roth IRAs are also tax-advantaged in the future but not today. An individual brokerage/IRA account is neither if you're contributing to a 401k. If your income is low today but you plan on saving a ton of money (starting at 31, this isn't so likely) then you want to go all-in on a Roth. If your income is high today but you plan on retiring and living on less than you make today, traditional 401k/IRA wins out in the tax game.

The ideal situation is that you cap your (Roth) 401k each year ($18,000 currently), cap your Roth IRA ($5500), and contribute to an after-tax brokerage. If you can't do all 3, then the priority order is generally:

1. Contribute to 401k to maximize employer contributions.

2. Max out the either your 401k/IRA or your Roth, depending on your current income/tax situation and which one advantages you the most.

3. Max out the remaining of the 401k/IRA/Roth you didn't max out in step 2.

4. Contibute to after-tax brokerages. It's also quite common to move this step above step 2 or 3 if the tax advantages are minimal or even detrimental from step 2/3. This is particularly true of high-income earners who also plan on having high-income retirements. The tax rate from capital gains will beat out the income tax rates quickly, and such people often will only pull out enough from 401k/IRA plans to stay under a tax bracket then pull the rest from a capital gains source. Before anyone says 'why not just go all in with Roth then', remember that Roth has income limits and many high-earners don't qualify to contribute to Roth.

In summary, when it comes to where to save money, the recurring theme is tax. Picking the best place to park your money really comes down to your current tax situation and which one is going to give you the lowest tax costs in the end. When it comes to what to invest your savings in, it's more personal taste and comfort (ETFs vs individual stocks vs target date funds).

EDIT: I missed HSAs altogether. If you have access to one, it's also a retirement vehicle. Yes, it's meant for healthcare costs, but the wealthy work it like a 401k because it's even more tax-advantaged than a 401k. If you have one, shove it in front of step 2 above.

Re: Retirement Planning Beginner

Anonymous — Mon, 05 Feb 2018 16:42:52 GMT

To give some more insight my main goal right now BEFORE going all in is to pay off my credit card debt. Currently have about $14K in card debt and want that gone. My income is $90K a year and I remember reading somewhere that if you expect to be making less at retirement than to stick to a standard 401K. Not that I'm a master, thats obviously why I'm asking questions lol. I did confirm this morning that my employeer driven 401K does not have any type of Match program. They do stick a percentage of profit every year in there but I would much rather have a match program. Still as morningstar has managed to grow 5% average in the first quarter that I've used them. That isn't awful right? I hate that couldn't make contribuations without going through a paystub which is why I'm trying to decide what a second avenue might be for a place to put extra money. Thank you for all your help. I currently am half way done with my first readthrough of If you Can.

Re: Retirement Planning Beginner

iced — Mon, 05 Feb 2018 18:39:39 GMT

wrote:
To give some more insight my main goal right now BEFORE going all in is to pay off my credit card debt. Currently have about $14K in card debt and want that gone. My income is $90K a year and I remember reading somewhere that if you expect to be making less at retirement than to stick to a standard 401K. Not that I'm a master, thats obviously why I'm asking questions lol. I did confirm this morning that my employeer driven 401K does not have any type of Match program. They do stick a percentage of profit every year in there but I would much rather have a match program. Still as morningstar has managed to grow 5% average in the first quarter that I've used them. That isn't awful right? I hate that couldn't make contribuations without going through a paystub which is why I'm trying to decide what a second avenue might be for a place to put extra money. Thank you for all your help. I currently am half way done with my first readthrough of If you Can.

Depending on the company and the terms, a percentage of profits may be better than a match.

In the long run, 5% is neither horrible nor great. 30 years ago, it would have been horrible given that you could earn 5% just shoving cash in a savings account back then. In 2017-2018 so far, it's also horrible as the stock market has been on a bit of a crazy bull run (by way of comparison, the S&P value growth in the last 12 months has been closer to 25%). That said, the market is consistently inconsistent so to expect that level of growth next year or the year after that isn't realistic. 7% is a more reasonable benchmark to aim for in the long run with 10% being a great year.

Be mindful of fees on your investments as well - those can drain your gains considerably over the years. My personal rule is to avoid anything over 0.5% unless it has something in it I really, really find worth the cost, with a preferred fund being under 0.1%. I do have some money in one fund that's about 0.4% in fees, but all of my other ETFs and non-individual-stock funds have fees between 0.03% and 0.11%.

Re: Retirement Planning Beginner

Anonymous — Mon, 05 Feb 2018 18:44:00 GMT

wrote:
wrote:
To give some more insight my main goal right now BEFORE going all in is to pay off my credit card debt. Currently have about $14K in card debt and want that gone. My income is $90K a year and I remember reading somewhere that if you expect to be making less at retirement than to stick to a standard 401K. Not that I'm a master, thats obviously why I'm asking questions lol. I did confirm this morning that my employeer driven 401K does not have any type of Match program. They do stick a percentage of profit every year in there but I would much rather have a match program. Still as morningstar has managed to grow 5% average in the first quarter that I've used them. That isn't awful right? I hate that couldn't make contribuations without going through a paystub which is why I'm trying to decide what a second avenue might be for a place to put extra money. Thank you for all your help. I currently am half way done with my first readthrough of If you Can.
Depending on the company and the terms, a percentage of profits may be better than a match.

In the long run, 5% is neither horrible nor great. 30 years ago, it would have been horrible given that you could earn 5% just shoving cash in a savings account back then. In 2017-2018 so far, it's also horrible as the stock market has been on a bit of a crazy bull run (by way of comparison, the S&P value growth in the last 12 months has been closer to 25%). That said, the market is consistently inconsistent so to expect that level of growth next year or the year after that isn't realistic. 7% is a more reasonable benchmark to aim for in the long run with 10% being a great year.

Be mindful of fees on your investments as well - those can drain your gains considerably over the years. My personal rule is to avoid anything over 0.5% unless it has something in it I really, really find worth the cost, with a preferred fund being under 0.1%. I do have some money in one fund that's about 0.4% in fees, but all of my other ETFs and non-individual-stock funds have fees between 0.03% and 0.11%.

Morningstar charges .25% in fees. As far as the profit sharing goes the owner doesn't advertise what that is and I see typically $1300-1600 per year put in so that won't get me to my goal in the long run. I'll have to do my own investment other than just the 401K I feel like.

Re: Retirement Planning Beginner

iced — Mon, 05 Feb 2018 18:53:41 GMT

wrote:
Morningstar charges .25% in fees. As far as the profit sharing goes the owner doesn't advertise what that is and I see typically $1300-1600 per year put in so that won't get me to my goal in the long run. I'll have to do my own investment other than just the 401K I feel like.

Money compounds over time as stocks grow and dividends are reinvested. $1500 a year in employer matching over 10 years can grow to to $100,000 or more over 30 years. It's obviously not going to be enough on it's own, but it's certainly a contributor that shouldn't be ignored. More importantly, that $100,000 didn't cost you a cent to get, which is why it's prioritized. It's literally free money.

Re: Retirement Planning Beginner

Kree — Mon, 05 Feb 2018 19:14:06 GMT

wrote:
In the long run, 5% is neither horrible nor great. 30 years ago, it would have been horrible given that you could earn 5% just shoving cash in a savings account back then.

5% in a quarter is quite good. I think you read it as 5% in a year.

Re: Retirement Planning Beginner

iced — Mon, 05 Feb 2018 19:19:42 GMT

wrote:
wrote:
In the long run, 5% is neither horrible nor great. 30 years ago, it would have been horrible given that you could earn 5% just shoving cash in a savings account back then.

5% in a quarter is quite good. I think you read it as 5% in a year.

Yes, that would be correct. I'm used to looking at everything in terms of annual, not quarterly.

Re: Retirement Planning Beginner

Anonymous — Mon, 05 Feb 2018 19:29:13 GMT

wrote:
wrote:
wrote:
In the long run, 5% is neither horrible nor great. 30 years ago, it would have been horrible given that you could earn 5% just shoving cash in a savings account back then.

5% in a quarter is quite good. I think you read it as 5% in a year.
Yes, that would be correct. I'm used to looking at everything in terms of annual, not quarterly.

I'm curious to what I will see at the 1 year mark. I suppose based on this info the best thing I could do is try to max out the allowed 401K per to year to start.

Re: Retirement Planning Beginner

Kree — Mon, 05 Feb 2018 19:33:42 GMT

wrote:
wrote:
wrote:
wrote:
In the long run, 5% is neither horrible nor great. 30 years ago, it would have been horrible given that you could earn 5% just shoving cash in a savings account back then.

5% in a quarter is quite good. I think you read it as 5% in a year.
Yes, that would be correct. I'm used to looking at everything in terms of annual, not quarterly.
I'm curious to what I will see at the 1 year mark. I suppose based on this info the best thing I could do is try to max out the allowed 401K per to year to start.

Probably not 20%. Some quarters you will see 5% some -1. Be happy with 7-10%. If you can do 7-10% longterm you are beating most of the market.

Re: Retirement Planning Beginner

Anonymous — Mon, 05 Feb 2018 19:47:38 GMT

Bear in mind that the market is in an unusual place. The GOP tax cuts are releasing lots of funds which are doing unusual stuff. We are currently in a place of odd bullish optimism (arguably analagous to the sentiment that preceded the crash of the late 20s) where stocks are strongly overvalued and yet people are buying more.

One of the greatest things you will learn from Bernsteins two books is how important disciplined mental habits are to an investor. Bernstein writes at one point that even when you have an intellectual understanding of how human psychology affects investment choices (notably greed, mania, and terror), nothing can quite prepare you for your first experience of an actual market correction (e.g. a "crash"), when you wake up and find out that you have lost a third of what you had the day before.

But a mentor like Bernstein (who was a neurologist in his earlier career and who has a special understanding of the way the brain affects investments) is a good place to start.

Re: Retirement Planning Beginner

iced — Mon, 05 Feb 2018 19:56:35 GMT

wrote:
Bear in mind that the market is in an unusual place. The GOP tax cuts are releasing lots of funds which are doing unusual stuff. We are currently in a place of odd bullish optimism (arguably analagous to the sentiment that preceded the crash of the late 20s) where stocks are strongly overvalued and yet people are buying more.

One of the greatest things you will learn from Bernsteins two books is how important disciplined mental habits are to an investor. Bernstein writes at one point that even when you have an intellectual understanding of how human psychology affects investment choices (notably greed, mania, and terror), nothing can quite prepare you for your first experience of an actual market correction (e.g. a "crash"), when you wake up and find out that you have lost a third of what you had the day before.

But a mentor like Bernstein (who was a neurologist in his earlier career and who has a special understanding of the way the brain affects investments) is a good place to start.

This can't be overstated. There will come a day when stuff starts going sideways and downways in the market (we're having a mini-correction now that bond and interest rates are finally waking up) and the successful people know to do nothing when that day comes. Don't panic, don't sell, don't overreact.

Take comfort in knowing that over long periods of time the S&P returns around 10%. From 2007 to 2017, returns averaged out to just under 10% and from 1987 to 2017 the returns averaged closer to 11%. We also all know that within that timespan, we had two major bubbles and subsequent recessions. Those who panicked and dumped during those recessions lost out while those who stayed the course or bought in made out like bandits.

Re: Retirement Planning Beginner

wa3more — Mon, 05 Feb 2018 19:56:36 GMT

stocks and bonds will get much cheaper in the future. The market will correct itself and revert to the mean averages, which it is doing today and last few days.