Retirement Investments

[Nick1994]

Looking for some general advice on retirement investments, that not just I can learn from but perhaps many others on here. I understand there isn’t a one size fits all approach to this. Just looking for tips and tricks.

I’m 26 and started contributing to my 401k 2 years ago in a traditional 401k. I was contributing 6%. Early this year I switched my contributions to my company’s Roth 401k plan, and upped it to 10%, and just last week now 12%. My company matches either 3% of my salary, or $2k, whichever is greater.

Seeking some advice on some other good options for retirement investments? Wondering if I should lower my Roth 401k contribution so that I still get the $2k company match and invest the money I would otherwise contribute to the 401k into a Roth IRA? If so, where do I begin on this?

I’m a noob at all this so pardon my ignorance.

Thanks!

 

[wwillson]

I was contributing 6%. Early this year I switched my contributions to my company’s Roth 401k plan, and upped it to 10%, and just last week now 12%.

You are ahead of 99% of 26 year olds, congrats!

You'll get lots of good advice here as we have many financially intelligent members.

It's nice that you get a company match, but don't worry too much about not getting match past $2000, because there are few retirement investment vehicles that are as tax efficient as a Roth and virtually no non-retirement investments that are as tax efficient. My advice would be to up your contribution and make sure you max out your plan before the end of the year. You likely won't miss the money and you'll retire long before your friends who didn't stuff their 401k.

 

[Wolf359]

The company match is basically free money so you normally want to do the max there to get all the match you have available to you. Then the question of whether to do a Roth IRA on your own depends on what the funds the company has. Some don't have a good mix and you can better control your Roth IRA selections on your own. But if the company has good ones, you can stick with the company ones. Usually though the company funds have higher fees so again it all depends, need more details to figure out which way is best, there's no one size fits all here. Having your own Roth is also good as you get better control of the funds and it's not being held by the company. There used to be stories years ago where companies were having financial trouble and weren't putting in the funds they claimed they were and when they went belly up, the funds were gone. I think they've since cracked down on this and it's easier for people to check that the funds are really in the account. There's lots of big companies out there like Fidelity, Charles Schwab, Vanguard, TD Bank etc, those are all probably safe places to open up a Roth IRA. I don't think anyone is charging any fees these days to open up an account.

 

[Dave Hess]

Contribute the max to both accounts.

 

[FordMan59]

Smart financial move. I started contributing to an IRA account when I was about 18-19 then to an employer 401K in my mid 20's. I think I may have missed contributing to the IRA a few years during the time my children were young and we had more expense. I continued to contribute to the company match 401K up until I got injured and had to go on disability. I'm 61 now and still make yearly contributions to my IRA for the tax benefit. My wife has also been contributing to an employer 401K for well over 20 years so hopefully when she gets to retirement age we can at least keep the bills paid and still be able to enjoy doing some of the things we like to do.

 

[redbone3]

You have a long way to go for retirement. Choose stocks in your 401K, no bonds.

 

[skyactiv]

I'll talk about other aspects. Make sure you have your home paid for by the time you retire, hopefully well before you retire. Don't be that guy who gets a home equity loan to support poor life choices blowing money on things your income can't support.

 

[Davejam]

I would definately do whatever gets you the company match as a first priority. No reason to give up free money.

As far as prioritizing traditional vs. Roth 401K. Each has their merits, but certainly come up with a plan to increase contributions every year.
Review the 401k fund options, pick funds that have the lowest expense and meet your goals. Typically putting it all in a target year fund is a decent strategy with relatively low fees. But this can vary widely.

The advantage of a Roth IRA vs. Roth 401K is the 401K is partially controlled by your company. IE: the fund options.
In your own Roth IRA you would have access to all stocks, funds, etc etc.
But the limit on contributions to a Roth IRA is $6,000/yr.

Do not try to time the market.

 

[Nick1994]

Here's my company's verbiage in match: "The company match is the greater of 100% of your first 3% of eligible contributions or 100% up to $2,000"

 

[dlundblad]

Max everything and live like you’re poor.

 

[samven]

So they will match 3% contribution up to gross income of about 66k/year. At that point you hit the 2k cap. I dont think you can go wrong by parking your money in a Target Date fund. At this point you would be looking at a 2060 fund if nothing changes, if they raise the retirement age you might need a 2065 fund. I wish I had put more in the Roth and less in the traditional as I retired 3 years ago But even at the time they were pushing Roth conversion there was talk about a Flat tax or getting rid of income tax and moving to a Federal sales tax and VAT. Of course it did not happen but if it does in the next 40 years You will have payed income tax on your Roth and when you spend it you will pay the National sales tax so you get hit twice. There is no way to predict what will happen but you can hedge your bets by putting some of your money in a Traditional tax deferred 401k at work and use the taxes you save in a separate Roth IRA.

 

[bullwinkle]

Depending on your tax bracket, it may be better to max out your regular 401K, which will decrease your tax bill & increase your refunds. For instance, I'm old enough (& so is my wife) to do the $6K/person ($12K total) catch-up IRA contribution, and I routinely get $3-4K extra back in refunds from OH & the IRS. Since you'll be withdrawing the money (hopefully) when you have less or no income, you'll pay less taxes on it then now, where a Roth contribution is AFTER taxes.

 

[bullwinkle]

So they will match 3% contribution up to gross income of about 66k/year. At that point you hit the 2k cap. I dont think you can go wrong by parking your money in a Target Date fund. At this point you would be looking at a 2060 fund if nothing changes, if they raise the retirement age you might need a 2065 fund. I wish I had put more in the Roth and less in the traditional as I retired 3 years ago But even at the time they were pushing Roth conversion there was talk about a Flat tax or getting rid of income tax and moving to a Federal sales tax and VAT. Of course it did not happen but if it does in the next 40 years You will have payed income tax on your Roth and when you spend it you will pay the National sales tax so you get hit twice. There is no way to predict what will happen but you can hedge your bets by putting some of your money in a Traditional tax deferred 401k at work and use the taxes you save in a separate Roth IRA.

I would be pretty surprised if a flat or VAT national tax occurs-there's too much of a (moneyed & lobbying) vested interest in keeping the system we have now in the USA.

 

[bullwinkle]

I would use index funds, watch your expenses, and don't freak when the market drops-you're young enough to make it back! I turned 57 today, I'm not sure if I'll still be working long enough to make up the next drop!

 

[Wolf359]

So they will match 3% contribution up to gross income of about 66k/year. At that point you hit the 2k cap. I dont think you can go wrong by parking your money in a Target Date fund. At this point you would be looking at a 2060 fund if nothing changes, if they raise the retirement age you might need a 2065 fund. I wish I had put more in the Roth and less in the traditional as I retired 3 years ago But even at the time they were pushing Roth conversion there was talk about a Flat tax or getting rid of income tax and moving to a Federal sales tax and VAT. Of course it did not happen but if it does in the next 40 years You will have payed income tax on your Roth and when you spend it you will pay the National sales tax so you get hit twice. There is no way to predict what will happen but you can hedge your bets by putting some of your money in a Traditional tax deferred 401k at work and use the taxes you save in a separate Roth IRA.

I'm not a fan of those target funds. They're also a little too conservative. I'd rather go for an S&P 500 index fund, a Nasdaq fund or the Total Stock market. Those target funds tend to include bond funds which haven't been that great for years and OP has a long time to retirement.

 

[AZjeff]

You're so far ahead of the game starting at 24, GOOD JOB. Keep at it, contribute all you can, don't touch it. Nothing wrong with a traditional 401k and a Roth. Know your risk tolerance, hopefully fairly large at your age, and don't look at your investments everyday. You will thank yourself 1000 times when you're in your 50s.

 

[samven]

I'm not a fan of those target funds. They're also a little too conservative. I'd rather go for an S&P 500 index fund, a Nasdaq fund or the Total Stock market. Those target funds tend to include bond funds which haven't been that great for years and OP has a long time to retirement.

They are a bit conservative but they adjust as the target date gets closer. So one 40 years out might be 90% stocks. They are suppose to decrease risk as you get closer to retirement and they re-balance every year.

 

[samven]

I would be pretty surprised if a flat or VAT national tax occurs-there's too much of a (moneyed & lobbying) vested interest in keeping the system we have now in the USA.

I can only hope you are right and I dont expect anything to change except the tax rates for the foreseeable future but 40 years is a long time at the rate our debt is going and social program payouts are. There are a few politicians that are still calling for National sales tax. Its a way to tax all that current non taxable money.

 

[gathermewool]

Pray the stock market tanks often, then rises just prior to retirement…

On a serious note, try to max out your 401(k). I know I wasn’t able to when I started out as a lowly engineer, but now I can. I’ve gotten used to not having the extra money AND, as has been mentioned, it keeps a larger percentage of my taxable income in a lower tax bracket.

 

[opus1]

Max out at work and if you're still able/eligible, don't forget to fund your own IRA outside of that.

Thinking ahead, don't fall for the temptation of taking loans against your 401(k) to finance a house. Several pitfalls there, one of them being that even though "you're paying yourself back with interest", you're taking that money out of the equation for the duration of the loan, and will lose out on what the market could have done with that money if you left it alone.

And kudos to you for starting early.