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Financial Planning / Foolish 401(k)s

URL:  http://boards.fool.com/you-start-off-with-a-refrence-to-a-hobbit-and-with-18373936.aspx

Subject:  Re: New Fool needs advice Date:  1/3/2003  3:57 PM
Author:  FuskieFool Number:  15671 of 25234

You start off with a refrence to a hobbit and with the Force. You are truly a techie... <grin>

You have already gotten some other opinions so let me give my 2 cents worth. You are young but with a lot of potential life costs (especially if you choose to populate that new house with little techies). After contributing to your 401K, you have $400/month left over. The first thing you do is ignore what all the old fogies at the office are doing and focus on what your needs are.

Let's take a step back and evaluate your goals. First, you want to retire sometime around age 65-70. Second, you have an idea what kind of lifestyle to which you would like to be accustomed, so you need to guestimate, based on your current salary and inflation, what you income will need to be. From that you can establish your retirement target. There are many wonderful on-line calculators that can walk you through this process (check with your new 401K manager).

Once you know where you want to go, you have to determine your risk level in getting there. You are very young should be able to tolerate significant risk over the 40+ years you have to invest before retirement. Again, on-line calculators can help you refine your asset allocation, but most will agree that you should put at least 90% in equities, 10% in bonds (of the equities, maybe 20% in international funds). As you approach middle age you will want to be more balanced and by retirement you would tilt toward the safer bonds and minimize your equity stance.

Next you need to diversify your equities and bonds. On the bond side, remain agressive and explore high-yield funds that pursue lower-rated bonds with high return potential. On the stock side, allocate different ammounts for small, medium and large cap companies, as well as international companies. Fools do like index funds and you can find good index funds that focus on these market capitalizations as well as managed funds.

Another consideration is whether you want to focus on growth or income. Long term investors may have the patience to wait out the economic downturn and let their stocks grow over time. If you would like to build capital appreciation early, consider an income (dividend-paying) fund. Ideally a stock that does both in a tax-deferred account is a great find.

My personal preference right now is small or mid cap undervalued companies which I believe will be best positioned to take advantage of a market recovery. It really is up to you where you feel most comfortable. Only you (and your wife) have to live with your decisions.

Now I mentioned additional life costs at the top. If you plan on purchasing a car or other luxuary item in the near term, you may want to start putting some money away in a cash appreciation instrument, such as a CD or money market fund. Decent rates can still be found with on-line institutions.

If you plan to start a family, consider starting a 529 educational account. The costs of college are enourmous and if you can start saving early, you can spare yourself headaches when your child becomes a 3rd year Junior.

As far as a Roth goes, they are great if you believe your tax rate now will be less than it will be in retirement, or you have maxxed out other retirement instruments. First meet your employer-match amounts in the 401K - never turn down free money, especially when we tax payers are footing the bill. :-) If you like the fund choices, go ahead and max out your contributions. Your wife should do the same.

Next take care of yourself. Keep an emergency cash fund handy for 6 months of minimal living. Put money aside for vacations and luxury purchases (always try to pre-pay yourself for these items rather than use debt management). If you open a Roth, you can put in $3000 a year for the next few years (then the limit increases by $1000), and either invest in funds or play the market directly (depending on the brokerage).

Whatever you decide, at 25 you are in great shape to be already looking out for your future. You may be 3 years out of school but do not stop learning. Devour the Foolish resources available here and explore other avenues available to you. Make sure you understand the pros and cons of your choices before making your decisions. Welcome to your future!

FuskieFool
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