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Author: LostinUtah Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Thinking about retirement...plans Date: 1/31/2004 3:09 AM
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Hi Everyone

I try to follow this board as best I can, but at 28 I am still trying to pay off credit cards and student loans. I am close to getting out of grad school and have just moved home (to Hawaii) and trying to deal with the cost of living here.

While looking into the state's retirement plans, I notice I have 11 options. While I have not looked at each plan in detail, two are Vanguard plans (Vanguard Wellington Fund and Vanguard Instituitional Index Fund). Before I read the fact sheets of all eleven plans. I would like to respectfully ask for some advice of what to look for.

I have heard a lot of talk about Vanguard but did not realize there were multilpe options (I guess ignorance may not be bliss after all).

Please understand that I am a new investor, I plan on starting my savings, but it will a be meager attempt for the fist year or two.

I am basically asking this board for the main one or two things that I should be looking for. I understand fees, and past performance but not much else. I am considering talking to a financial advisor, but want to wait until I pay off my credit cards (I have already paid off 6 out of 11 grand within 6 months.

My student loans (~70 grand) are still in deferment, but I will have those to deal with in the next 6-9 months. I plan to consolidate once the deferment period is up (probably with direct loans). I hope this is enough detail. Any adivce on what to look for in the plans would appreciated.

Lost
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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38858 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 11:26 AM
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I am basically asking this board for the main one or two things that I should be looking for. I understand fees, and past performance but not much else. I am considering talking to a financial advisor, but want to wait until I pay off my credit cards (I have already paid off 6 out of 11 grand within 6 months.

IMHO, it basically boils down to two things when you're looking at predetermined retirement plans (those you have little choice as to where and what you invest in). One, is there a fund the mimics either the S&P500, Russell 3000, or Wilshire 5000. Two, is there a fund that offers a fixed income/money market return.

Usually actively managed funds perform worse than indexes and have higher fees. I personally wouldn't invest in a bond fund either, just as much risk as an equities fund, thus would opt for the fixed income/money market if possible.

JLC


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Author: wcfenton Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38859 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 11:47 AM
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CNNMoney has an interesting article that might help those who don't know much about investing for retirement and don't really want to spend a lot of time learning:

http://money.cnn.com/2003/12/15/retirement/simplify/index.htm

About the easiest, least expensive, and yet still effective way for starting a retirement nestegg, in my opinion, (and I think that many of us have said this many times before), is to get a Roth IRA through Vanguard and fund it with their Total Stock Market Index Fund (VTSMX)- period. That is not difficult!

http://quicktake.morningstar.com/Fund/Snapshot.asp?Country=USA&Symbol=VTSMX&hsection=quote

http://www.fairmark.com/rothira/index.htm

http://flagship4.vanguard.com/web/corpcontent/scatSvcsRetIRAOV.html?Entry=spotlighton01


Regards,
Bill











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Author: 2old4bs Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38860 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 12:06 PM
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Congrats on paying down that cc debt!

I just went on the Vanguard website and looked up the Vanguard Institutional Index Fund (VINIX). I don't know if this is exactly the same as the one that's offered to you, but it's probably close. According to Vanguard this fund tries to match the S&P500 index and it's expense ratio is .05 (don't know if you can find anything cheaper than that). Check the prospectus you have to see if it's the same one, or close.

Also found a 'Wellington' fund (VWELX), but again yours might be slightly different. This one was a balanced fund of stocks (60-70%) and bonds (30-40%). Claims to be the nation's oldest balanced fund. The bond holdings have an average maturity of 5-15 years. It's always best to check the actual prospectus and see what their current bond holding maturity is. The Expense Ratio is .36 and it has a yield of 2.36%.

Since you're still young, you might not want to hold anything in bonds, so the Institutional Index Fund might be better for you. Also, if interest rates rise, bonds with maturities of longer than 5 years will almost certainly decrease in price, thus decreasing the value of the fund's bond holdings.

So, if I were you, I'd go with the Institutional Index, but as the other poster noted, I'd also look for another fund that matches the Russell 2000. Then you could divide your investment between the two so that you have some exposure to small-cap equities also. What percentage should go to each is really up to you.

That's my 2 cents...

2old

NOTE: All figures and facts given here for the Vanguard funds came from the Vanguard website and I am not responsible for their accuracy!
As the saying goes, "Read your prospectus!"



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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38861 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 12:42 PM
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JLC writes:

<< Usually actively managed funds perform worse than indexes and have higher fees. >>

True, most actively managed funds in any given year do not perform as well as the indexes.

<< I personally wouldn't invest in a bond fund either, just as much risk as an equities fund, thus would opt for the fixed income/money market if possible. >>

This is incorrect. Bond funds do NOT have as much "risk" as equity funds . . . . though one might be able to make a good argument that junk bonds would. One might say that bond funds alone have more risk than if within a portfolio containing equity investments. Within a portfolio, bonds and bond funds provide inverse correlation to equities, which actually reduces the portfolio's investment risk.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38862 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 1:01 PM
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<< I personally wouldn't invest in a bond fund either, just as much risk as an equities fund, thus would opt for the fixed income/money market if possible. >>

This is incorrect. Bond funds do NOT have as much "risk" as equity funds . . . .


I probably needed to clarify myself.

Many people think bonds/bond funds are lower risks because it is not as obvious that you can lose your principle. The important point to remember, bonds are only as good as the company the writes them. Companies go bankrupt or default on payments. Nothing is guranteed. Therefore, since bonds can lose value/principle, IMHO, there is as much risk as equities. I'm sure Enron and WorldCom bonds looked good at one point. Underlying company went down, so did the value of the bonds. A bond fund itself can lose per share value just with an increase in interst rate despite investing in the best bonds available. So no protection there either.

If one is looking to protect principle of look for a steady income, one should be in CDs, T-bills, or money market fund. That was more the point.

JLC

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38863 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 1:02 PM
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At age 28, chances are there will be at least a couple nasty market downs, some significant inflation and a few other events between now and when you get to 65 or 70. That said, there is a good amount of history that says invest in stocks (as opposed to bonds, CDs, etc.)

Most employer sponsered plans have limited options and also limit how often you can change and/or transfer funds. I would suggest you look up all the fund options in Morningstar, ignore results over any time period less then 5 years. Check to see if the manager has changed in the last year or so (if there are multiple managers, chances of a big change in approach are less likly even if one has changed). Pick the fund with the highest rating and return over a long period of time.

If your employer matches your contributions (even if it is only 25 cents for every dollar) put at least that amount in the 401K. That is free, tax defered dollars. Those dollars are more equal.

After that I agree with paying off your credit card debt.

Next look at the trade off between Student Loans and 401K.

What you are doing will amaze you in 30 years. I put some funds in and IRA when they first were created back in the 70s. It is amazing how a few dollars a month is not a large pile of retirement money.

Gordon
Atlanta

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38864 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 1:56 PM
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Therefore, since bonds can lose value/principle, IMHO, there is as much risk as equities. I'm sure Enron and WorldCom bonds looked good at one point. Underlying company went down, so did the value of the bonds.

Your argument seems to be just because there is risk in bonds, the risk is as great as in equities.

Nonesense!

Stock prices are far more volatile than bond prices. As long as the company doesn't default, it is paying dividends on its bonds in a quite predictable manner, whereas stock prices can go up or down based on investor sentiment and the anticipation of future profits or losses.

Even in the extreme case of a company going bankrupt, the bond holders are creditors with a claim against the company (typically after taxes, back wages, and secured loans), whereas the owners (stockholders) are dead last in getting any of the assets and, if the company owes more than it is worth, the shareholders will get nothing.

Generally, bondholders get a lower return than stockholders over the long run because owning a company's debt is usually less risky than owning that company.

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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38865 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 2:07 PM
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About the easiest, least expensive, and yet still effective way for starting a retirement nestegg, in my opinion, (and I think that many of us have said this many times before), is to get a Roth IRA through Vanguard and fund it with their Total Stock Market Index Fund (VTSMX)- period. That is not difficult!

I agree. No one belives me when I tell them they can buy a single mutual fund (VTSMX) and invest in it alone for their entire career (or at least until they're 5 or so years from retirement). It just seems too simple.

Refining the strategy a bit, you might allocate 25% of your wealth to Vanguard's Total International Stock Index Fund, VGTSX, for more international exposure.

Nick



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Author: yobria Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38866 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 2:21 PM
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JLC wrote: Therefore, since bonds can lose value/principle, IMHO, there is as much risk as equities

Mark0Young replied: Nonesense! Stock prices are far more volatile than bond prices

You're both right, depending on your timeframe. In the short term, stock funds are more volatile than bond funds. In the long term, I've read many studies showing diversified stock portfolios (ie stock funds) are actually less volatile than bond portfolios (ie bond funds).

The message: Buy stocks for the long term.

Nick

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38867 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 5:48 PM
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JLC , you clarified:

<< Many people think bonds/bond funds are lower risks because it is not as obvious that you can lose your principle. >>

For the most part, I agree. Many, if not most, people tend to not understand how bond funds work and that this is some risk to principle (certainly more so than just buying the bonds themselves).

<< The important point to remember, bonds are only as good as the company the writes them. Companies go bankrupt or default on payments. Nothing is guranteed. Therefore, since bonds can lose value/principle, IMHO, there is as much risk as equities. >>

Well, I think I understand what you're getting at and the logic being used. You might want to write or express it in a different way??? For example – how about . . . . There's as much risk of losing SOME principle in bond funds as there is in losing SOME principle in equity funds . . . ??? But as far as an amount that's at risk, they're not “as much risk.”

<< I'm sure Enron and WorldCom bonds looked good at one point. Underlying company went down, so did the value of the bonds. A bond fund itself can lose per share value just with an increase in interst rate despite investing in the best bonds available. So no protection there either. >>

That's a good point. But as Mark0Young pointed out, when a company has gone under, those that are creditors have a claim against assets where shareholders only get what's left . . . if anything. That's a big difference is “risk.” Creditors may not get all that's owed to them, as you suggest, but are more likely than shareholders to get something.

<< If one is looking to protect principle of look for a steady income, one should be in CDs, T-bills, or money market fund. That was more the point. >>

Well, you and I probably agree to some extent with regard to bond funds. I don't care for bond funds for income purposes. Owning the bonds themselves makes much more sense for this purpose. Bond funds on the other hand can be helpful in reducing volatility in a portfolio of mutual fund investments.


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Author: yosandiego One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38870 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 7:16 PM
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I'm a recent grad too and am also trying to get my retirement investing figured out so I don't have any advice on that front that the others have not already given you.

The one piece of advice I do have relates to your student loans. You said that you were going to consolidate "once the deferment period is up (probably with direct loans)." You should make sure to consolidate before the end of your deferment period. The interest rate goes up immediately at the end of your "in school grace period" and if you consolidate during the grace period you will actually get to do so at a lower interest rate. With many of the major lenders you can actually set-up the consolidation long before the end of the grace period, but not have it actually kick in until right before your grace period would end (that way you don't have to start making payments early). The interest rates are at their lowest rates in something like 40 years right now (2.8 during grace period) so take advantage and lock in the rate before July when the Fed has a chance to set new rates.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38871 of 76418
Subject: Re: Thinking about retirement...plans Date: 1/31/2004 7:23 PM
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Any advice on what to look for in the plans would appreciated.

As you can see there are lots opinions, all of which are pretty good in one-way or another. Hopefully one more won't confuse you any more.

Here are a few points;

1) Contributing enough to get any employer match is a no brainer, even if it means paying off the other loans slower. (The possible exception is extremely high interest credit cards)

2) If you are saving more than the employers match and your marginal tax rate is still low then contribute to a Roth IRA, if you can, before you contribute more to the employer retirement account. The tax-free income 40 years from now will be great. If you might not have the discipline to save up and actually make the contribution to the Roth then stick with the payroll deduction because it is so easy to do and you won't miss the money if you never see it.

3) Until you have a significant amount in your retirement account it really doesn't matter which fund you invest in since the difference in the performance of even vaguely similar funds is usually just a few percent. Say you have $3,000 in your retirement fund, 1 percent is 30 dollars, not enough to loose sleep over. What does matter is what asset class you invest in like, stocks, bonds, real estate, etc. This is another no brainer, for a 28 year old with a small retirement account, go with 100% stocks. An S&P 500 index fund or the Vanguard total stock market index funds are good choices. When your retirement account gets up to five digits plan on researching this more. Each year increase your retirement savings by one half of any raise.

3) The biggest pitfall in many peoples retirement planning isn't the mechanics of retirement investing; it is lousy financial management outside their retirement account. After getting any employer match, you need to save up an emergency fund of about six months take home pay. You will have financial bumps in you life and this will allow you to get through these.

4) Don't get caught with perpetual car loans. If you do need to get a car loan then buy a modest car and plan on saving up to pay cash for your next car. I know people who have had car loans for 30 years. That is a lot of interest to pay, especially when you consider how much money this would be it was ivested instead.

Greg


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Author: LostinUtah Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38885 of 76418
Subject: Re: Thinking about retirement...plans Date: 2/1/2004 2:15 PM
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Thanks

I have some reading and planning to do.

Lost

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Author: aznred Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 38903 of 76418
Subject: Re: Thinking about retirement...plans Date: 2/2/2004 8:49 PM
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Just wanted to encourage you that it sounds like you're making some great decisions for your future. I'm the same age, and just started actively investing last year, and getting more serious about being responsible with finances. I've been fortunate to have been contributing to a retirement plan for a few years, and it still amazes me how much it's grown even though I didn't pay much attention to it.

I'm almost out-of-debt, and it's always a huge relief to watch the debt load shrinking. Sure, my car has 170,000 miles on it, but I own it, and it gets me around town. :)

I know a married couple who are younger than me, that are in so much debt that it overwhelms me just to hear them talk about it. Three new car payments, maxed credit cards, school loans, and a huge house they can't afford. It's a heavy burden for them to carry. Their finances control them.

You're obviously taking control of your finances, which is a far wiser choice than the alternative... I wish you the best.

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