The best way to 401k

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Staff member
Dec 14, 2002
New Jersey
Hi, Since there are a lot of folks on here knowledgable about investing, etc., I have a question. I am a federal employee, DoD Civilian. I am elligible for the TSP (thrift savings program),and have maxed out my contributions since I started working there. My contribution is 14% of my pre-tax salary. My 'agency matching' starts on Friday, and will amount to 5%, so Ill be putting away 19% of my salary towards retirement. I can afford to keep paying the 14% to the TSP, as I still live thrify, though I do indulge (bought a new saab), and am house shopping. My question is, what is the best way to do my retirement investment? The TSP provides a government securities fund, bond fund, S&P index, small cap index and international index. The funds are a very good deal, as the yearly maintenance fees, etc are below .1% That said, would I be better off puting less into that for now, and pay off a house much faster? To that Id think no, because of tax advantages of having a mortgage. But what about instead putting money directly into stocks in an IRA (which I already have), or other funds to diversify further? Id appreciate any advice you can give. Thanks, JMH
What is the real estate market like where you are? With interest rates so low, kkep those contributuins up there!
The real estate market is OK. There are lots of new 'starting in the $500s' communities coming up, but the area where I want to live (Collingswood/Haddonfield, NJ) has great schools, and there are 'right size' (3br) houses to be had at reasonable prices ($175-275k). To me thats reasonable, because my hometown in North, NJ, prices were in the $200s since I was pretty young, and now a $500k house is a low price. So my expectations of valuation are way off! That said, Smart Money's recent valuation guide has the Phila. area at 15% overvalued, but still in the "acceptable" range. JMH
Real estate doubles as an investment and a necessity as it provides you shelter. You can always change your "salary reduction" as needed, I would take advantage of the max on the match portion. I think the best mix for investing is the SPX fund and the small cap fund. after you turn 50 reduce your exposure by weaning into fixed income investmnts year by year. JMO
Originally posted by GROUCHO MARX: after you turn 50 reduce your exposure by weaning into fixed income investmnts year by year. JMO
I have a long way to until then (Im 24) [Big Grin] JMH
I know nothing about the specifics of your funds. In some ways I lean towards simple broad based index funds as hyped for the last 5+ years. ON the other hand I don't buy into it......there are some real weaknesses to following the market like a stooge. 1) Sounds like you have your head on straight. I think it took me a few more years after 24. If you start now, as you are, you are doing's just a matter of HOW right (max money). 2) Consistency is key. 3) I'm not sure I would buy into any bond fund at your age - especially with today's rates/prices....but there is some statistical evidence that bonds can even out and eventually help gains with capital preservation....but bond funds tend to bug me because you take the hit in NAV when rates go up. Of course as the incomes buys new shares at lower prices, it evens out. So either ignore the bond funds OR go 5%-5%-30%-30%-30% in your: "government securities fund, bond fund, S&P index, small cap index and international index" That may sound radical but man you are YOUNG (trust me) Now I HIGHLY doubt the expenses on these funds are less than 0.1%.......
Buy the house and keep the investments. The first few years on your mortgage will be mostly interest payments which will mean a huge tax break. Later on you'll get closer to the standard deduction, and you can rethink your position. By then (decade or two away) you'll see what long term interest rates, inflation, and return on your investments may or may not have done by then.
You want a majority of your withholding going to stock while you are young, every 5 years or so re evaluate to see if you need to change your allocations. by the time you retire you allocation would be mostly cash and bonds. Start out 75% stocks 20% bonds 5% cash. Within the stocks divide them up 35%(C Fund) large caps 20% small caps(S fund) and 20% (I fund) internnational. On the bonds you only have one choice (F) fund 20% (or less) Lastly cash equivalents like short term government securities the (G Fund) 5%.
Originally posted by Pablo: Now I HIGHLY doubt the expenses on these funds are less than 0.1%.......
Actually, a little web surfing would show that it is true. Here is the link. Select "Fund Sheets" over on the right and then click any fund. They all list 0.10% annual expense. Looks like the government did a pretty good job on this one. My advice: put in what you need to to get any government matching funds. Put the rest in Roth IRAs so you can get at the contributions (penalty free I understand) if you need them. Nothing worse in my book than tying up money long term with no way to get at it.
my current allocations are 5% gov't securities, 30% S&P index, 35% small cap, 30% int'l I love investing in individual stocks, however, it is not particularly cost-effective toinvestin large company stock on, say $200 every two weeks, because commissions end up making break-even points higher, and overall costs substantially more. ANd until I have enough to, say, buy 50 shares of a $50 stock, the money isnt doing anything, making 2.25% at ING. I could buy lower priced securuties, but then risk increases, and dividends dont really pay or get re-invested. Just throwing my thoughts out here... I have a fairly substantial roth IRA and regular trading account, but I fed them with multi-thousand dollar chunks early on, years ago. At this point, I have a few hundred every pay period, which is a bit of a factor making things more difficult, unless I buy into no-load funds, which puts me back where I belong. How do you deal with buying securities, if you want to buy companies with relatively high share price, and not enough cash at any one time to buy a round lot? Thanks! JMH
Keep putting away the maximum. Use the 'S' fund (small stocks), and just let it ride. Don't take a loan back from the savings plan either. Let those $ work for you tax free. Theoretically, what you're doing is dollar cost averaging into the most volatile of the funds, which is good for the long run. This is almost "religious" argument, but don't try to time the market. You might hit it right, but you can hit it wrong just as easily. Contrary to what you hear from the "believers", it is a 50-50 guess. If you want to gamble, go to Vegas or become a stock trader (lower house rake).
I stand corrected on the expense ratio....and he did write "index funds" yes that is GREAT!! (Especially the International) I thought 0.2% was good. I swear there are funds out there >1.5%!!!!
my current allocations are 5% gov't securities, 30% S&P index, 35% small cap, 30% int'l
I wouldn't change a thing!!!
Here's my 2 cents worth. My spouse and I both are govt employees, so we have thought long and hard about TSP strategies. At your age, my recommendation would be to be 100% invested in stocks. Most studies show that stocks on a long term basis (in your case at least 31 years or so) will provide the best yield. Personally, I am invested in the common stock fund, because I like to sleep at night. The small stock and international stock funds carry additional risks, but because you are young, you can certainly be 33% in each, without a problem. As you get older, then you can adjust your stock fund percentages as you see how the market has gone. At some point before retirement you will want to "freeze" all your gains by moving to something really safe, like government bond fund. You are already contributing the max per year and you should keep that up. Depending on your income level, you might want to look into opening an IRA and adding to it. Our income level generally prohibits us from getting a tax break from IRAs, so I don't bother anymore. I retained the old IRAs I have, but don't contribute to them any more. I also believe the mortgage interest deduction is my best friend. That is because my kids are grown and I have no other deductions to take. My choice was nicer house, or pay more taxes. I chose nicer house. As young as you are, you may have other priorities for your money, but I firmly believe purchasing a house rather than renting is a better use of my money.
I hate to sound like a repeat, but good advice is good advice -- max out your 401(k) donations and at your age be heavy into stocks. Some bonds are OK, but you have a long time to go before retirement and should play it a somwhat risky now for long-term gains. I wouldn't go more than 10%, if even that much, into bonds at your age. And something to keep in mind should you ever find yourself in the private sector, never, EVER, bet your 401(k) on company stock. You're taking enough risk in working for a place as it is, and to compound that risk by being heavy into your company's stock is doubling that risk -- if the company goes under, you're out a job AND your retirement savings. Some places make you put your money into the company's stock to get their match, so if that's the case, do what you have to to get the match and then move it into something else ASAP. I realize you're working for the government now, but you never know with the way things work today, and this is something to keep in mind. As for the house, if you can come up with just $50/month more to put towards your principal, you'll knock about 7 years off of a 30-year mortgage. If you can't, don't sweat it. Put what you can into the 401(k) first.
Do this...put 40% in C Fund, 20% in I fund and 20% in G fund. The G fund is government securities and has been shelling out between 3 to 4% per year. The C fund is the same as the S&P fund, which has been FINALLY getting better. The I fund is the international market which deals a lot in China and Japan. Chinese markets are growing like crazy. Remember, you can change these funds within 24 hours over the web if you have a PIN. Just watch the S&P market and business news. That can usually give you a warm fuzzy on which way the market might go. If you need some cash, you can always borrow against your 401K way cheaper than at the bank. If the market goes up more than what it was when you borrowed, you get the difference. Sweet deal. Also, don't forget, you have to change your allocations as well as your bank.
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