PixelHarmony

Hey guys, I just started work and am planning to enroll in the companies 401K plan.

They match up to 50% up till the first 4%, so I'm planning on doing minimum of 4% so I can get 2% from the company.

I'm only 22 right now so I'm trying to figure out how I should invest everything.

Should I go all equities or diversify? I feel like I can win some and lose some and not really care about it. But I wouldn't know what's best.

Any advice would help.

uu

Always contribute to the maximum you can.

Scrib

Why not 10%? 15%?


All you'll end up doing is becoming dependent on having more money in your pocket now, and less money down the road.

But going for say, 15% now you are setting yourself up to be more deciplined and live off less. Plus, you're preparing for when you need money the most... When you're retired and NOT working.

zendrive

Congratulations on making a choice to save now! I would seek the assistance of the administrator of the 401k plan at your company, however, I would consider putting 20% of your monthly savings into an index fund and the other 80 percent in a developing market mutual fund with a low expense ratio.

Check the performance of the funds against the average for that type of fund before choosing.

You have time on your hands, and even if you were to start saving 10% of your income at a very conservative 7% annual, you will be a multimillionaire.

Think of that before you make impulse purchases!

PixelHarmony

Yea, a few guys here told me to invest about 15% depending on how much I can give up each month. Down the road figures look really nice on that too.

Since I still have some debt to pay off right now I'm not going to put as much as 15% right now but hopefully by Q2 of 2007 I'll up my investment to around 10-15%.

My 401K administrator suggested I invest very aggressively because I can afford short term loss but long term gains. I'm looking some of these figures and it seems that large value equities, real estate, and small value equities seems like the way to go. Now it all depends on how I want to mix and match my percentages.

I remember learning about investing 15-20-30-20-15 on the top and right side of the 9 point grid. They said it'll be flawless in always earning the most while protecting my assets.

Anyone else have any input on what style of investment I should make as a 23 year old going into a 401k?

mrsteve

iTrader: (1)

All most all of my funds are considered "growth." And yes there are some short term losses from time to time but the gains overall have been pretty impressive. At our age we have a few years to take a higher "risk" in our investments.

mrdeeno

I'm 28 and started contributing when I started working around your age. I look at it this way...

There are several ways to minimize risk...one is diversification. But another way to minimize risk is timeline...the more time you have, the less risk there is because you aren't dealing with the ups and downs of the short term.

I would say that 99% of my 401k holdings are equity holdings. about 75% of the total is in growth type stocks, 25% are value/income oriented. Of the 75%, about half are aggressive growth stocks.

Depending on your company, the choices they give you may have decent historical performance. I know my company watches the choices...if they find it underperforms, they take it out of the available choices.

But I read an article somewhere that said that most of the gains made in the long run have more to do with how much you are putting in and not really the choices of investment in your 401k. I don't agree with that completely, but do agree that it's usually better to put more into a mediocre performing investment with your time horizon than putting less into an aggressive but risky/volatile investment.

corey415

4% is not enough.

Take advantage of compounding interest and max out your 401k.

I put in 16% and dont even miss the money from my paycheck.

GIBSON6594

While I generally agree with your theory, somtimes people can't put that much in. They have bills and things that need to be paid for. It may not be feasable to put in 16% if he is paying for a car, mortgage/rent, food, utilities, ect...

Don't just start putting all that money in forcing you to eat peanut butter and jelly sandwhiches everyday.

doopstr

Figure out how much a year you want to stick into retirement. And do a split between 401k and Roth IRA.

Do the 4% to get the most company match then rest to the Roth. If the total amount you can save a year is greater than the 4% and the $4k the Roth allows then put more in 401k.

mrdeeno

some people can't put that much in, especially starting out, but put in as much as you can at this point in your life.

As the years go by and you get a higher salary, you can put in a lower percentage of income, but still end up putting in more actual dollars than you did earlier.

And it's much easier to save while you're young without other obligations to take care of. Some peopel think they can increase their contributions later on, but it gets harder and harder.

My first 5 years out of college was spent traveling around the world on the company tab with expenses paid along with bonuses, so I was able to max out every year as well as put aside enough money to buy into real estate investments. Now that I stopped traveling, I have bills to pay. I never realized how much I spend on food every week or how much car payments would be.

juniorbean

iTrader: (5)

I've generally always put in at least 10%... but typically had it maxed out except when we got married, bought the house, etc. At those times I adjusted it dow to 10%, but always re-upped it to 12% after things settled. My company also contributed 4.5% (well 100% up to 3%, then 50% up to 6%... so that averages out to about 100% at 4.5% if I'm calculating that right), so at 10% I was getting 14.5%, 12% I was getting 16.5%. I'm also invested in both aggressive and moderate funds. I'd say probably 65% moderate, 35% aggresive. So far it's been paying off nicely.

I've done this since I was 18 years old... and although I haven't contributed in 2006 (contractor now, and I haven't setup my own plan yet) I still have a very nice amount built up already. Plus, so far I'm seeing ~$12k per year just in returns on my invested money. So even if I don't invest any further into that plan and switch to a new one I'll be getting about $10-$12 annually added to my account.

Before you buy a house and start a family and stuff, always invest the most you possibly can. It will pay off big-time in the long run...

uu

I remember when I took my first job out of college, I was asking my boss about 401K, he said to me "Always pay yourself first, then uncle Sam and others". I always kept that to me, maximize my pre-tax 401(K), pay all my bills one day before the due date, etc. True, when you first started working, it will be tight, which is like what everyone else suggested, work out a budget. As you salary goes higher, put more money into 401(K).

There is a lot of benefit of 401(k), say later on you need money to buy your first house, you can take out a loan against your 401(K). But you do need to pay it back and with interest, but you are paying back to yourself. But NEVER borrow/withdarw money from 401(K) for reasons other than your 1st house, otherwise you will be penalized. I borrowed some from my 401(K) when I bought my apartment just to pad my saving account to pass the Co-op board review, after everthing is signed, I just put the money right back

Another suggestion, since you are young, try more of your 401(K) distributions into riskier funds, such high yields, stocks, etc.

juniorbean

iTrader: (5)

LOL... I thought I was the only one who did that! I have my online BillPay setup to have the payment arrive one day before the due date

corey415

Better to eat PB & J now instead of PB & J later in my opinion.

Anyways, almost everyone can increase their 401k if they minimize their costs. Dont eat out as much, buy a less expensive car, so on.

mrdeeno

i just recently used my last check from 5 years ago (First summit bank, then bought by fleet, then bought by BoA)...

If i was regularly paying bills by check, then it would be like weeks ahead of time. With online payments, i think everyone should pay one day before the due date...thank GOD for online bill payment.

PixelHarmony

Thanks for the input guys. Right now I set my investment at 8%. I wish my company matched 100% up to 4%. cheap bastards... that's what I get for going into a mid sized business.

Anyway I ended up diversifying 20% Real Estate, 20% Large Value Equity 20% Large Growth Equity, 20% Small Value Equity and 20% Small/mid growth equity. If anyone thinks I should change that a bit let me know. All them showed about 10-20% growth over 10 years, some loss in short term, but definately long term growth.

Also should I set everything to readjust every 3 months?

mrdeeno

Your investments actually seem somewhat conservative for me at your age (remember, you have over 40 years), but I don't know your comfort level so I can't really say.

As for readjusting, I wouldn't worry too much at this level yet. I'd keep track of it, but not do too much adjusting unless there's an underperforming fund or really outperforming fund...I would try to keep the ratio between the different investment types and change the ratio amounts depending on what I want to focus on. The only readjusting I usually do are changing the distribution to each fund. I've only done it twice or 3 times in the past 5 years.

BlueCLS6

I might lean a little more towards the 'Small' stuff at your age, tends to be a little more risky but the rewards are higher. I am currently funneling 50% into our Small Cap fund. It is the most 'aggresive' fund in our portfolio, but I figure with time on my side I should come out ahead.

I am now (after 6 years) getting a 100% up to 8% company match! Took a while, but it's nice! Up until then it was 50% up to 8%. It is of course in company stock, which I sell off from time to time if it goes over ~10-15% of my total.

p.s. I currently have a loan out on my 401K (used as a down payment for condo) and while it sounds great (interest is paid back to yourself) keep in mind you are paying full income-tax rate on that money TWICE. Once because it is paid back with after-tax money, and again when you withdrawal it (assuming it was put in before-tax). Anyway, it should really only be used as a last resort because it's not a great a deal as it first sounds...

fast-tl

Suze? Is that you?

yunginTL

wait difference between 401k and roth ira again, i swear i get the two ALWAYS mixed up.....

the ROTH IRA is the one thats limited to a certain deposit amount each yr right? and also with both what do you invest in? mutual funds? stocks? bonds? or each company you have u thru has certain groups of investments to choose from?

juniorbean

iTrader: (5)

^ Correct.. Roth is limited on the amount you can contribute each year. You're also contributing after-tax funds... however, when you withdraw the money when you're 65, you are not taxed on anything.

Regular 401k the money is pre-tax, meaning it's not taxed as income, so if you make $2000 per paycheck and contribute $200 to 401k, you only pay taxes on $1800. However, when you withdraw your money at 65, you are taxed based on your tax bracket.

Personally I have both, a Roth and a 401k. Now that I am self-employed I will continue to max out my Roth while contributing slightly to my 401k as well.

yunginTL

thanks for clearin it up man, basically, to me, it makes sense to put more money in the ROTH IRA when im younger, and as i get a higher payin job contribute more to the 401k, because if you make a higher salary, y not get taxed less on ur income salary for the price of havin pre-taxed money taken out and taxed later in life?

mrdeeno

Because it depends on what your income will be when you're retired.

Depending on how you manage your income when you retire, you could be in a higher tax bracket at retirement than you are now...therefore your 401k withdrawals would be taxed at a higher rate so it's better to pay lower tax rates now with a Roth.

But if you expect to be in a lower or the same tax bracket, then it's better to put more in before taxes, so you have more money to grow. Most people will probably end up being in a lower tax bracket at retirement, but no one really knows for sure.

Roth 401k's are starting to appear too...which is similar to a roth IRA (after-tax money into a 401k type account).

Both IRAs and 401k's have limits you can contribute per year.

yunginTL

lets say you by the time u retire u make over 200k or whatever the salary is where u start to not get income taxed, then what happens?

mrdeeno

I'm not understanding your question.

Are you saying that right before you retire, you're making $200k?
Or are you saying that you are bringing in $200k during retirement?

let's cover both scenarios:

1) You are making $200k salary while working. Since this puts you in the 33% tax bracket, you should contribute MORE to a pre-tax account in order to lower the amount of taxes you pay @ 33%.

When you retire and your income is much lower, you will be in a lower tax bracket and therefore your withdrawals from 401k are taxed at a lower rate.


2) You are bringing in $200k during retirement. Assuming that all of this is taxable income, you will be paying a lot of taxes at 33%. This is where a Roth IRA would have made more sense, because you wouldn't be paying taxes on those withdrawals. If you have a 401k and still bringing in $200k in retirement, you'd have to pay withdrawals at 33% which is not good.

Another advantage of a 401k though, is that because it is pre-tax, more money actually goes to work in the investment...that paired with the lower rate during withdrawal means you're at an advantage.

Scenario 2 is possible if you're in the situation I'm planning on being in (although i have a way around that also).

I'm accumulating investment real estate which produces income which I pay taxes on. If I retire with these investments, I will be bringing in a lot of money in retirement, and therefore my tax rate may be high. This is where a Roth would come in handy, since I would have a lot of money that I'm not paying taxes on.

But I plan on eventually incorporating, whcih means that I only pay income on my "salary" that I choose to pay myself for running the corporation. That could be $100 a year for all I care, since I have control over the corporation's money (for example, I could buy a car through the company, but it would technically be the company's car, not mine...but it really makes no difference). the corporation would have to pay taxes, but it's also able to write off a lot of stuff that I personally can't..for example, the car expenses.

The goal is to minimize the amount of taxes paid, whether it be now or in retirement, or both.


It becomes a complicated pain though, such as now...as much as I bring in with my job and investment real estate, I have a hard time qualifying for a mortgage because my net taxable income is so low...a person can have $1,000,000 in assetts (liquid or otherwise), and be turned down for a $150,000 mortgage because the net income is too low and personal expenses too high.

yunginTL

interestin post....isn't there something like after a certain amount of income you don't need to pay income tax?

mrdeeno

huh? where did you get that idea?

If the income qualifies as a taxable income, you pay taxes on it...and the more of the taxable income you have, the more tax you pay.

You can get a head start, but there's no way to escape that tax man.

juniorbean

iTrader: (5)

I WISH!! There's no such thing as not paying income tax. You pay tax no matter how much you make... and generally the more money you make, the more tax you pay.

So the advantage to the Roth is that you're putting in after-tax money now. In theory, you should be making more when you're older... so doing it this way means you're ahead of the game and would have paid less tax on that money since your tax bracket now should be lower then when you're older.

With the 401k, you pay tax based on your bracket when you take the money out, not when you contribute... so you could potentially be liable for a ton of tax by the time you withdraw. The smart thing here would be to not touch the money until you have to, and live off of other investments. This means your annual income will be WELL below what you were making when you worked full-time, resulting in you having to pay taxes in a lower tax bracket... and more money in your pocket instead of Uncle Sam's...

yunginTL

i think im thinkin about someone that owns a business that is incorporated...

juniorbean

iTrader: (5)

I own 1 business as a proprietor and opening 4 as an LLC and I can tell you that even with the business, there's no such thing as not paying tax regardless of how much or how little you make.

You have write-offs which reduce your taxable income... but very rarely can someone have enough write-offs to not pay any income tax unless they only make only a few thousand a year off of the business and write-off anything and everything...

yunginTL

yea i guess i meant lower taxes instead of none

mrdeeno

In theory, people make more when they're older, but then their taxable income takes a nosedive once they retire and stop working. That's the advantage of pre-tax accounts...they are now in a lower tax bracket in retirement.

There are many people who in the other boat who are still in a high tax bracket in retirement, but not as common as people who worked everyday jobs and retired.

But it seems many people plan things this way...they just work in their career and save up whatever in their 401k until they retire and then die, so they don't have much to worry about pre-tax or after tax...they'd probably benefit more from pre-tax contributions.

But then there are people like Juniorbean and me who are involved in other shiz that complicate things and require a little more planning such as pre-tax or after-tax contributions.

mrdeeno

I can think of a few professions where you pay no income tax...street pharmacist is one example.

but the tax man still gets you in the form of cigarrette taxes, gas taxes, sales taxes, etc. etc. etc.

Run, run, run, but the tax man still catches you.

juniorbean

iTrader: (5)

^ LOL, true. But I'm assuming if he's talking about someone who went through the trouble of incorporating themselves and filing the necessary paperwork to form a business, it's a legit business

yunginTL

the beauty of america...thats what cash money is built from

mrdeeno

are you saying street pharmacy isn't legit?

juniorbean

iTrader: (5)

^ Depends. I'd have to see the filing papers

mrdeeno

filing papers? I think your terminology is wrong...it's "rolling" papers. My street pharmacist will show you his "rolling" papers.

juniorbean

iTrader: (5)

^ LOL, whatever he uses, I need to see them before passing final judgement.