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I recently got a new job and I am starting to invest in my 401k. My company offers up to 6% matching and offers pretax posttax and Roth 401k as options. I am 32 and has about 20k or so debt but it is on 0% interest until mid 2015. It is no brainer to put at least 6% for matching but my questions are How much more I should put in and whether it be pre post or roth. I put it in roth for now... do I know my monthly rent plus utility is 1310. And I make mid 80 just below the next bracket... Thanks
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My reaction is you need to think about how much interest you will be paying on your 20K of debt vs after tax dollars on investment.

Nothing wrong with putting funds into an IRA, but I see two considerations:

#1 You don't know what return you will get on those investments in the next few years - you might have negative returns if the market declines.

#2 It seem likely to me, you will have a certain interest cost, paid with after tax dollars beginning in mid 2015.

So why not minimize that post mid-2015 cost instead of funding the IRA? Once the debt is paid off, begin using whatever the monthly amount you budgeted for the debt into an IRA. Since you have not been spending the funds, you will not see any change in your standard of living.
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Put in the 6% to get the full match. No more than 6%.

Anything else, put in non-IRA/non-401K taxable account, into index funds like SPY. On this money you'll pay only long-term capital gain tax. Eventually. Maybe not for another 30+ years when you retire.

On 401K & IRA, you pay ordinary income tax.
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I see.. so I put in 6% now into roth 401k and work on paying off debt. Once I pay it off I can put in more percentage? I also have Roth ira account too so if I have any extra I put into that?

In terms of investing...I have 50% small caps 35% large caps and 15% international caps. I do have company stock option and bond options too..
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First of all, if you are going to put money in the stock market, you should learn how to evaluate stocks, and when to buy and when to sell. This is not terribly difficult, and you can get good candidates from the "overlaps" on the Mechanical Investing board.

Don't just put money in some stocks and then leave it there. Re-evaluate on a daily basis and take the appropriate action. If a stock begins to tank, sell it immediately. It is better to have a realized gain than an un-realized loss (Duh!).

Index funds are OK, but if you check it out you well see that when the market is in rally mode, the small caps out-perform the large caps. So buy IWM. The (8,55) EMA crossover does pretty well for trading it - certainly better than buy and hold, even though it is not perfect. Look at a chart to see that.
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Good points. I am not sure I have the options to select individual stocks though.. the company uses fidelity as investment manager. There are some long term managed portfolios available but at 1$+ per 1k I believe...
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Take joelxwil's advice with a grain of salt. He's not entirely wrong, but he doesn't seem to realize that some people don't want to sit and look at their portfolio of stocks multiple times per day.

I see nothing wrong with choosing to use low cost index funds in more of a set-it-and-forget-it fashion. Just don't forget it completely. You do need to monitor long-term investments periodically - say every quarter or so.

I think it's far more important to do two things:
1. SAVE.
2. Don't be stupid.

The more you save, the more likely you'll be able to retire comfortably.

And there is no such think as a get rich quick scheme that actually works. (Unless you are the promoter of the get rich scheme! But that occasionally comes with jail sentences and big legal bills, so I don't recommend that either.)

--Peter
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Take joelxwil's advice with a grain of salt. He's not entirely wrong, but he doesn't seem to realize that some people don't want to sit and look at their portfolio of stocks multiple times per day.

I see nothing wrong with choosing to use low cost index funds in more of a set-it-and-forget-it fashion. Just don't forget it completely. You do need to monitor long-term investments periodically - say every quarter or so.


I agree with this. There's no way to backtest it, but I strongly suspect that spending that same amount of time working on increasing your earnings (or just enjoying life!), rather than analyzing securities, will result in a higher long-term gain.
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Any idea on the breakdown for investment? I have 50% small medium cap 35large 15 international. There is bond and targeted retirement and managed index funds...and of course company stock around 90...
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You are chasing last year's return.

A 50% allocation to small caps is very risky.
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My standard advice to people is to put it all in S&P500 fund---until you learn more about investing and asset allocation.

After you get educated, some S&P500, some international, some smallcaps, no bonds, no target-dated funds. But after you get educated, you'll be able to pick your own asset allocation.
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I agree with Rayvt on allocation. But please spend the time to learn and understand: a) its not hard b) someday you may be making more on your job then on your investments.

I think paying off your debt after it stops being 0 needs to be number 1 (after the company match). After that then you have to think hard where you want to put your money. For example putting it in the 401K or an IRA means the money won't be used for a downpayment on a house. So if you are thinking of buying a house you may want to save in taxable accounts.

However beside for that the more you can save sooner without going into debt the better off you will be later in life. I was fortunate enough to be able to pump a lot of my salary into 401Ks and IRAs when I was in my 20s and early 30s. Once I got married and had kids I really couldn't afford more then the company retirement plan and the 401K match but because of my early start and the power of compounding I was way ahead and am now well positioned to retire at 55 in about a year.

Moe
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IMHO, order of importance…

…pay off debt. Either in lump sum or in 12 monthly installments (soon to be 11) to get it paid off before 2015. So just under $2k/month. Having no debt offers one a great amount of freedom, least of all the ability to take advantage of an opportunity when it appears.

…if you have money left after paying off debt, consider building up an emergency fund. Most suggest 6 months of living expenses. Why? That is usually when long term disability insurance kicks in. Plus, if you were to become unemployed next week, it gives you some time to make good decisions instead of panicked decisions. Again, maybe set aside $X/month until you've reached your target over the next year.

…with the above taken care of, then do up to the company match. That 6% is free money.

…I agree with another poster, until you get more "educated", stick it in an S&P 500 index fund. Or consider one of these Lazy Portfolios

http://assetbuilder.com/lazy_portfolios/

…last piece of advice, everyone thinks they can tolerate volatility until they experience it. What would your reaction be if you woke up tomorrow and your portfolio was cut by 30% or more. Remember, you don't have to hit home runs, a bunch of singles and doubles will still get you in the Hall of Fame (or retirement).

JLC
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This is a very good source for financial matters except I would go somewhere else for investment advice. Don't use his "providers" for investment advice. Plenty of other places for that part.
save, save, save, and.........don't do anything stupid (I did that for you). Hopefully you won't have to go there. Be patient and think long term stable companies/investments.

http://www.daveramsey.com/home/
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AS long as you have debt that potentially incurs interest in 2015, your first move should be to retire that debt. Then, you need to have a few months' net pay as emergency funds.

After you have accomplished the above, you should be in a position to really concentrate on your retirement accounts.

Donna (has 13 months emergency funds plus retirement and brokerage accounts - retired debt prior to investing)
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Wow rely appreciate it. I will definitely follow the good advice about paying off debt first... as for the investments I Did do some research and Did see a morningstar research showing a decent risk and reward chart with about 50% in large caps and the rest in small medium international. in terms of buying a house I need savings in post tax account since I don't get penalized?
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You will suffer severe penalties if you withdraw from a tax-deferred account prior to the age of 59-1/2. I suggest you (1) pay off your debt; (2) start an emergency fund; (3) begin your retirement program, at least to the point that you receive an equal match from your employer and (4) begin your home purchase savings (all in that order). One must remember that upon purchasing a home, there are other expenses, i.e., maintenance, emergency repairs, etc.

Good Luck,

Donna
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You will suffer severe penalties if you withdraw from a tax-deferred account prior to the age of 59-1/2. I suggest you (1) pay off your debt; (2) start an emergency fund; (3) begin your retirement program, at least to the point that you receive an equal match from your employer and (4) begin your home purchase savings (all in that order). One must remember that upon purchasing a home, there are other expenses, i.e., maintenance, emergency repairs, etc.

Good Luck,

Donna


--------------------

I will offer another perspective.

I would fund the 401K first. At least up to the max dollar for dollar match. That is a 100% return right there and will far exceed any interest paid on debt not retired. Getting out of debt is a good thing for sure. If you have the free cash flow then do both. but if it comes down to either/or, I would take the 100% return.

No question that an emergency fund is a good and necessary thing. But consider that a Roth can serve that purpose. Recall that you can withdraw your contributions at any time with no tax consequences. So if you need it in an emergency, it is there. If not, then it stays in the Roth and grows tax free. Just don't invest it in anything risky to the extent it must be there in an emergency, but you would do that anyway in a regular account that was your emergency fund.
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This guy http://www.controlyourcash.com/ makes a good argument why an "emergency fund" is a bad idea and is pretty useless advice. Among other things, he says that (almost) nobody has an e-fund, anyway.

If that 20K is CC debt or anything > 10% interest, make it a priority to pay off. Hmm, the OP says it's 0% until mid 2015. So no hurry. Income 80K, so plenty of income available. About $5000/mo after taxes


I would prioritize in this order:

* 401K to get the full employer match (6% = $4,800/yr = $400/mo)
* $1100/mo into a bank account at ALLY or Alliant CU, etc. earning not quite 1%.
* Any excess, into that same bank account.
* When the bank account equals the debt, or when it stops being 0%, pay the debt from the bank account.
* Then put money into long-term non-IRA, non-401K investments. This is your "emergency fund". See the CYC blog.
* ASAP, start a Roth IRA -- even as small as $100. In 5 years you can withdraw what you've put in, tax free. Put $5000 in it as soon as you can. In 5 years from the time you opened it, that'll be your "emergency fund".
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This guy http://www.controlyourcash.com/ makes a good argument why an "emergency fund" is a bad idea and is pretty useless advice. Among other things, he says that (almost) nobody has an e-fund, anyway.

I only read a bit of his site, but I don't find his argument that you don't need an emergency fund because you can insure against most things, and true emergencies are really rare to be convincing. If I lose my job tomorrow, I still need a way to pay my mortgage and eat, and I can't insure against that. Unemployment only pays me a very small portion of my pay, so I would need to tap savings. I've been unemployed for 9 months and then another time for a year, and so having enough cash available to continue paying things like our mortgage, COBRA (which was almost as much as the mortgage) and general expenses like food was a pretty big deal, hence why I do still think people should have an emergency fund.

In the downturn of the 1990's, I watched friends and neighbors lose everything and declare bankruptcy when both partners lost jobs and they could no longer afford their houses because they ran out of what little emergency funds they had.

* 401K to get the full employer match (6% = $4,800/yr = $400/mo)
* $1100/mo into a bank account at ALLY or Alliant CU, etc. earning not quite 1%.
* Any excess, into that same bank account.
* When the bank account equals the debt, or when it stops being 0%, pay the debt from the bank account.
* Then put money into long-term non-IRA, non-401K investments. This is your "emergency fund". See the CYC blog.
* ASAP, start a Roth IRA -- even as small as $100. In 5 years you can withdraw what you've put in, tax free. Put $5000 in it as soon as you can. In 5 years from the time you opened it, that'll be your "emergency fund".


I generally agree with your order here, particularly as you cannot go back in time to contribute to a retirement account, and I find an employer match, together with compounding over time, to be too good to pass up.

As far as treating the Roth IRA as an emergency fund, I highly disagree with this. I find that a lot of folks nowadays seem to think of a Roth IRA as an easy place to get money, and I think retirement savings should be just that. Looking at it as the place to take out money for other expenses seems too close to thinking about your house as a four-sided credit card, and I think that sets up bad financial habits.

I much prefer contributing to retirement accounts, and having taxable investments outside of those accounts to have some flexibility on finding funds for things besides retirement. And I still like to have a solid efund for those things that are unexpected and emergencies like losing your job.
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ASAP, start a Roth IRA -- even as small as $100. In 5 years you can withdraw what you've put in, tax free.

That's not right.

You can withdraw your Roth contributions at any time tax free. But the earnings in the account are not tax free until the account has been open for 5 years AND you are over 59.5 years old. (You can substitute being dead or disabled for being 59.5, although I don't recommend either of those for planning purposes.)

--Peter
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ASAP, start a Roth IRA -- even as small as $100. In 5 years you can withdraw what you've put in, tax free.

--Older post

That's not right.

You can withdraw your Roth contributions at any time tax free. But the earnings in the account are not tax free until the account has been open for 5 years AND you are over 59.5 years old. (You can substitute being dead or disabled for being 59.5, although I don't recommend either of those for planning purposes.)

--Peter

That's still not quite right. While you can withdraw your Roth contributions at any time tax (and penalty)free in a non-qualified distribution, there is another qualifier for qualified Roth distributions that Peter omitted. After the 5 year waiting period an individual can take qualified Roth distributions of up to $10,000 per lifetime towards qualifying home purchase. See Pub 17 p 132 middle of page.

It is recommended to take contributions tax free and use this qualified distribution on taxable earnings.
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ok i do have a roth from previous job (~15k). With regards to the 6%, should i place it in pre/post tax or roth 401k? seems roth 401k makes more sense? I will definitely check out ALLY bank as I have seen a lot of commercials about it but never really minded it... I will change my investments into more large caps (60%) and split the rest... I feel i probably wont have much/any left for home purchase until i pay off the debt though...
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Ally Bank (Ally Financial) is the former GMAC. Previously bailed out by us.

http://en.wikipedia.org/wiki/Ally_Financial
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