I need help on how much money I should be saving. I'll give some background and also list the advice I was given.28, Married with two kids. I recently got a nice promotion. For the first time I am equipped to invest fairly aggressively into my retirement.Current Base Salary: 118000Bonus:25% of Base salary on an annual basis.Live in East TennesseeI have a mortgage and just bought a new vehicle, otherwise I have no debt.Our retirement planner at work suggested I put 15% into 401k. My company matches 75% upto 6% of my salary. Additionally he suggested maxxing out a Roth IRA for both my wife and myself. Additionally my company offers a fixed fun which is guaranteed 6% return, compounded daily. He also suggested that i put the maximum annual contribution into this, which is 10K.Therfore that is 17500(limit) into 401K + 5310 company match. 11000 into Roth IRA's. 10000 into the Fixed Fund. Total Savings is 43810. Is this excessive? Seems like I could be enjoying some of that money rather than saving so much.
Not sure what a fixed fund is but I agree that you should contribute at least 6% to your 401k to get the free money. Also, the Roth IRA for you and DW is smart. If you like the investment options of your 401k, then you could certainly continue adding to it after your Roths are fully funded. Any time I hear an investment has a guaranteed return, I think annuity and it make me nervous because they tend to carry high costs and commissions. You have to ask yourself is whether 6% is the best you can do. If not, you may be better off putting that $10k to work yourself.At 28, you have a lot of years to grow your money for retirement. Have you also considered your more immediate saving needs, such as paying down your mortgage faster or paying off the car faster? Will your kids have needs for which you want to have money set aside, such as braces, sports, vacations to Disney World, take the wife on a second honeymoon? Did you want to set aside money for their college educations?FuskieWho offers one other word of caution - this is a publically accessible discussion board and you may not want to post details of your salary here...
I have considered the expenses that you mention. Those are things that I want to be able to provide, thats really why I was asking the question about putting so much into retirement. Is that much more than what is necessary or is it a normal amount?The Fixed Fund is an annuity that I can make an after tax contribution that is a guaranteed 6%. Our Fidelity guy says it is unheard of but at my age i could probably do better on my own. It was the last step in his plan.
There's no such thing as a normal amount but yes, that's probably more than average. Would you believe a lot of people don't contribute enough to get the free money offered by their employers? At your age, I think you can afford to post most of your savings at risk but positioned for long term growth. If you worked through Fidelity's online retirement savings calculators, they'll probably tell you that you fit an aggressive investment allocation model. Sticking money into an annuity at your age doesn't seem like the best choice.Here are some articles that may help you make an informed decision about this:http://www.goodfinancialcents.com/should-you-buy-annuity/http://www.allthingsannuity.com/articles/age_for_annuities.h...http://www.investopedia.com/articles/retirement/05/063005.as...If individual equity or ETF investing is something that interests you, then take some cash and dip your toe in the water. Gain some experience and confidence and you might find you enjoy having this control over your financial future. There are a lot of resources here on the public Fool.com to help you, starting with the 13 Steps at Fool School:http://www.fool.com/how-to-invest/index.aspxYou may even want to consider one of the TMF Premium Subscription Services to give you investment ideas and investment education. The advisory services can be as low as $199/yr and offer 30 day money back trials. There are also real money portfolio services that open periodically during the year where TMF puts up their own money and invites you to invest along with them.FuskieWho brings this back to point by saying if you've contributed at least 6% to your 401k and maxed out your Roth IRAs, then the next priority should be your other savings goals and if after making reasonable contributions there, returning to your 401k until you hit your maximum contribution is a reasonable measure, and if you still have funds left over, you are way ahead of the game...
Sorry, forgot to add this link:http://www.fool.com/shop/newsletters/index.aspxFuskieWho definitely encourages you to explore Fool School if you haven't already to gain a basic education in personal finance and investing...
Thanks for the advice. May I ask why you suggest the IRA's before maxing out the 401k?
The most important part of this is to develop a regular savings plan. Pay yourself first. Which means make sure part of each raise or bonus goes into savings.Once you max the pretax portion of 401k and Roth IRAs, some would continue with after tax contributions to the 401k to max the plan.Others would begin a taxable investment program focusing on the long term buy and hold strategy. You pay taxes only when you sell and then at capital gains rates.As to how much to save, work out how much is appropriate for you. You want a comfortable lifestyle. Your family will have needs in the future such as education of your children. Savings gives you more choices. And with success the ability to retire early or start your own business or pursue your dreams.Every family is different. One size does not fit all. But an attractive target if you can arrange it is to save 1/3 of gross pay. Then you live on one third, pay one third for taxes and benefits, and save the last third. If you manage to achieve that, early retirement etc becomes possible.
May I ask why you suggest the IRA's before maxing out the 401k?You may certainly ask. You're young. Not so young that I hate your youth, but young enough where I'm jealous and wish I had been thinking more about money at your age. Your youth is a huge advantage. You are most likely making less money now than you will make in 20, 30, 40 years. With your little tax deductions, you are probably in a lower tax bracket now than you'll ever be in the future. This makes investigating through a Roth IRA extremely attractive. You contributions aren't tax-deductible but your tax liability will be lower because of your tax bracket compared to making these same contributions 10, 20, 40 years down the road. Best of all, you can take your contributions out any time you need the cash (I recommend this only as a last step), and upon reaching age 59 1/2, you can take distributions of both your contributions AND any earnings or gains tax free.Yes, Tax Free. Imagine in your golden years being able to tell Uncle Sam thanks but no thanks, I gave during my youth! With the 401k, you trade off getting a tax deduction now but your distributions in retirement are taxed as income, and while your income will probably go down once you stop taking a paycheck, continuing to pay taxes while drawing down your fixed income can be a real pain. Most people who are able go for a combination of the two, a Roth IRA and a traditional 401k. Some lucky people get to contribute to a Roth 401k. If you get that option, I recommend taking it.FuskieWho notes also some 401k plans don't really have great investment choices, so while I would recommend contributing enough to get your free company matching contribution, in these cases you may not want to put any more into the 401k plan and instead look for more aggressive or less expensive self-directed options...
An additional reason why a 401k suffers versus a Roth IRA is the fact that basically you can invest in any equities on the open market where most 401Ks limit you to potentially terrible managed funds with high expenses and underperformance against the index they are attempting to beat. Buying a blend of low cost index funds that mimic what you were doing in your 401K could increase your overall returns by 1-2% depending on how bad your options are.If you do paper simulations, if you assume tax rates are the same and returns are the same, a 401K and a Roth are equivalent. However, most people assume taxes will be lower in retirement and the 401K wins that battle. However, this is a fairly big assumption and tax rates have varied significantly over 30 year periods. You could also move to a different state with different income tax - lower or higher. Congress could pass a 30% flat tax. You could do quite well and actually have more income in retirement than you do now.However, even if you assume a 25% tax rate now and 15% tax rate in retirement, your Roth might win with an extra 1% return factored in. Taxes are significant but not the entire story. (Of course, you can move a 401K to an IRA when you leave your company but this is even more projection...)Also, based on your income, you have to start paying attention to Roth contribution limits. I'm not sure how variable your bonus is or if your wife works, but you are closing in on the limits. A backdoor Roth IRA is an option if you don't have other IRAs. You may not be able to put contributions directly into a Roth IRA in the future if your career trajectory keeps moving up.I would also consider the fact that you may not be able to maintain this salary level for your entire career, at least not without any gaps. You could also be hit with unforeseen expenses (medical, house) and retirement assets are generally protected in bankruptcy. If you "prime" your retirement savings now, when it is easy, it can give you the option to trim it in the future if your employment situation changes or if you are planning a large family vacation or something like that.It's really a family decision, but I would consider what your current budget looks like versus your expected income after maxing out your retirement options. Don't look at your bank account and see it as an excuse to spend money. Think about things that you would really enjoy doing and put that in the context of your budget.
Thanks to everyone for the advice. I do have a Roth 401K option, which is what I have historically contributed to until my last Salary bump. I made the changes to lower my taxable income. I'm thinking 2 annually fully funded Roth IRAs as well as hitting the IRS limit on the 401k for the next 27 years(targeting 55 to retire) should have me looking pretty good. I am also fortunate enough to have a pension with my employer, so that helps as well.
The AGI phase-out range for taxpayers making contributions to a Roth IRA in 2015 is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000.FuskieWho thinks it highly unlikely Congress will ever pass a flat tax but also strongly endorses, and should have mentioned, maintaining an Emergency Fund (efund) valued at 3-6 months monthly expenses, as well as a household fund (hFund) as a reserve to plan for maintenance expenses such as new HVAC, roofs, water heater, etc...
Honestly, forget the taxes and stick with the Roth 401k. If you have this much available to save, you can afford the taxes and the benefit 30-40 years down the road will vastly outweigh the tax deductions you're receiving now.FuskieWho notes you'll probably have to pay income tax on your pension distributions as well, so why not minimize the amount of tax you'll have to pay in retirement when you'll have less flexibility with your income streams...
Our retirement planner at work suggested I put 15% into 401k. My company matches 75% upto 6% of my salary. Additionally he suggested maxxing out a Roth IRA for both my wife and myself. Additionally my company offers a fixed fun which is guaranteed 6% return, compounded daily. He also suggested that i put the maximum annual contribution into this, which is 10K.Therfore that is 17500(limit) into 401K + 5310 company match. 11000 into Roth IRA's. 10000 into the Fixed Fund. Total Savings is 43810. Is this excessive?Assuming that you want to retire in your mid - late 60's, that does seem a bit aggressive to me. For someone at your age, I have generally seen estimates of saving 12% - 15% of your total income in retirement savings each year, assuming that they will retire at the Social Security defined 'Full Retirement Age' (67 in your case). If you want to retire earlier, you may need to save a bit more than the 12% - 15%. Here is an article that I found that provides some guidance on saving 15% and some explanation about 'why 15%?' that you might find useful: http://www.forbes.com/sites/davidmarotta/2012/09/03/how-much...I would also strongly suggest getting a complete understanding of what the 'fixed fund' rules for distributions and withdrawals are, as well as if the money is really yours, or if it still belongs to your employer, before putting any money into it. If it is a non-qualified deferred compensation vehicle, I would suggest staying far away from it, as money in these types of plans is generally considered to be the employer's, not the employee's, and can be used to pay obligations of the employer. Seems like I could be enjoying some of that money rather than saving so much.Before you start 'enjoying' all the money that you decide not to invest, be sure you have a fully funded emergency fund (generally 6 - 12 months of expenses), and that you are putting aside sufficient funds for things like college for your kids, replacements for vehicles, remodeling projects, large home maintenance projects (like a new roof or new A/C), etc.AJ
bcgorilla,Fuskie wrote, Not sure what a fixed fund is but I agree that you should contribute at least 6% to your 401k to get the free money. Also, the Roth IRA for you and DW is smart. If you like the investment options of your 401k, then you could certainly continue adding to it after your Roths are fully funded. Any time I hear an investment has a guaranteed return, I think annuity and it make me nervous because they tend to carry high costs and commissions. You have to ask yourself is whether 6% is the best you can do. If not, you may be better off putting that $10k to work yourself.At 28, you have a lot of years to grow your money for retirement. Have you also considered your more immediate saving needs, such as paying down your mortgage faster or paying off the car faster? Will your kids have needs for which you want to have money set aside, such as braces, sports, vacations to Disney World, take the wife on a second honeymoon? Did you want to set aside money for their college educations?To which you replied, I have considered the expenses that you mention. Those are things that I want to be able to provide, thats really why I was asking the question about putting so much into retirement. ...Did you consider the costs I highlighted in bold in Fuskie's response? Cost (expense ratio) is a key consideration when making an investment. You need to understand that. And I'm heartily in agreement with Fuskie on this issue. Your fixed fund is almost certainly an annuity. Annuities are insurance contracts - a stupid thing to have in a retirement account to begin with - and insurance companies are notorious for hiding the costs associated with these. Be suspicious. Likely your company's advisor has a vested interest in recommending this investment.Also you said, The Fixed Fund is an annuity that I can make an after tax contribution that is a guaranteed 6%. Our Fidelity guy says it is unheard of but at my age i could probably do better on my own. It was the last step in his plan.What's unheard of at your age? Getting a 6% rate of return? Seriously? You probably can do better on your own - at least if you actually had control of the investment and knew what you were buying. My advice? At your age, pick either a broad stock market index or a target date retirement fund. Either should have a low expense ratio. Contribute as much as you can. Learn about investing along the way. At some point you may want to experiment with either amping up your returns or lowering your risks.As for contributions, when I first started investing for retirement I put aside half of every raise or bonus I got as a retirement contribution. I kept doing that until I was maxed out. Along the way I started building up savings and investments outside my retirement accounts. These days I contribute as much as I can to tax-advantaged accounts. The opportunity to do so only comes once/year. Once the opportunity is gone, you can't get it back...Retirement comes up faster than you'd think. And once you get older, you're likely to beat yourself up for not saving sooner. So get into a habit of doing as much as you reasonably can now. You'll be glad you did ... in a decade or two.- Joel
neileng,You wrote, An additional reason why a 401k suffers versus a Roth IRA is the fact that basically you can invest in any equities on the open market where most 401Ks limit you to potentially terrible managed funds with high expenses and underperformance against the index they are attempting to beat. Buying a blend of low cost index funds that mimic what you were doing in your 401K could increase your overall returns by 1-2% depending on how bad your options are.But investment options in a 401ks aren't always bad. You need to research it before reaching a conclusion about any given person's situation. Given the OP talks about an annuity in the plan, you're probably right in this case. However, my employer subsidizes my 401k and covers all expenses. The mutual funds available in the regular part of the plan are for the most part institutional shares of publicly available mutual funds. But as institutional shares, the expense ratios tend to be lower. We also have a brokerage option and the expenses are identical to the transaction expenses for an IRA. The 401k is at Fidelity, so brokerage transactions are $7.99/trade; there is a list of fee-free ETFs available; dividend reinvesting is free; and I can buy brokered CDs, bonds, treasuries, preferreds and other exchange-traded securities.- Joel
bcgorilla,You wrote, I do have a Roth 401K option, which is what I have historically contributed to until my last Salary bump. I made the changes to lower my taxable income. ...Unlike Fuskie, I think it's a good idea to have a mix of pre-tax and tax-free investments. The point of putting money into these options is to minimize taxes. To optimize your tax situation across your entire life, you need to have both pre-tax and tax-free retirement assets you can draw on. The pre-tax option lets you reduce the taxes you pay at your marginal rate today. The tax-free option lets you draw from assets that won't push you unnecessarily into a higher tax bracket in retirement.But if you put nothing into the pre-tax option, your marginal tax rate in retirement could theoretically be 0%. To me, such a situation would indicate a huge lost opportunity during my working years.The reverse can also be true. Put nothing into tax-free (Roth) and you might end up in a higher bracket in retirement. (Don't laugh - I know it can happen.) This could mean you lost out on the opportunity to save on taxes in your retirement years by paying (lower) taxes in your youth.To minimize either scenario, I'd recommend making a mix of contributions and look at adjusting your contributions (or doing a Roth conversion) when you get older. As you approach retirement you should be able to better forecast how much income you are going to have (vs need), giving you a better idea of whether paying now or later will cost you less.- Joel
"But investment options in a 401ks aren't always bad. You need to research it before reaching a conclusion about any given person's situation.Joel"I would like to reiterate/second this. I am an investment advisor who specializes in 401(k) plans. About 85% of my clients (the company sponsoring the plan) pick up my fees (as well as the Trustee and Record Keeper's) and thus the plan participants only expense is the expense ratio of the mutual funds. We use institutional mutual funds with Dimensional Fund Advisors and Vanguard. The average expense ratio of our funds is 0.26%/year. Our S&P fund is .05% which is less expensive than an individual can get even through most ETF's.
bc just as a general guideline, at your age consider having about 15-20% in cash, 25% in precious metals (gold & silver), 25-30% in equities, and about 25% in real estate. There are a couple of reasons to get set up like this, one being you don't want to potentially be overburdened by taxes when you retire. There's no way to project what tax rates will be decades down the road, but you'll want to consult with a tax advisor about the most tax-efficient way to save. Although the article refers to 457 plans, they're basically the same as your 401(k): http://457planinfo.com/attack-of-the-457-plan-tax-zombies-pa... The other consideration is that if you have most of your wealth in your 401(k), if you have a balance in that account when you pass away, your heirs will have to pay income tax on the account. This is not the case with assets held outside of accounts like an IRA or 401(K). The issue is called income in respect of a decedent (IRD) but that's beyond the scope of the conversation at this point. The bottom line is to just be careful about "overfunding" things like a 401(k) or IRA. I like the idea of a Roth IRA and ask your employer if they allow Roth contributions to your 401(k). I hope this helps!
SeanTankarian,You wrote, ... at your age consider having about 15-20% in cash, 25% in precious metals (gold & silver), 25-30% in equities, and about 25% in real estate. ...I happen to think this is an incredibly conservative, risk-averse portfolio. I have no problem with the equities or real estate in general. But having 40-45% in cash and gold at 28 just seems like really bad advice to me.Precious metals are commodities. Over long periods of time, commodities tend to follow inflation. It's true that as an asset class they are not well correlated to other assets. This can make them useful as a hedge. They can also be an interesting short-term play, if you follow the market closely - though I'd say it becomes more like a gamble than a serious investment at this point. I'm not saying you can't make money in gold. I'm saying you can't just set gold as a large, long-term, fixed percentage holding (in other words, set it and forget it) and expect the gains in value to contribute substantially to your retirement.A 15-20% cash reserve is also a pretty conservative recommendation for most portfolios. Cash basically earns nothing. In fact it loses value over time through inflation. At 28, bcgorilla probably shouldn't be too conservative. Of course at 28, there's a good chance a proper e-fund could be 15-20% of his entire net worth; but if we're just talking about his investment portfolio, that leaves a pretty large percentage in cash doing nothing.I won't say what an ideal mix might be. I'm not a financial advisor and I simply don't know enough about his situation. But your recommendation just seems "way out in left field" to me, compared to the kind of professional recommendations I've seen for people his age.- Joel
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