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gradyo
Joined: 28 Aug 2011 Posts: 2
Posted: Sun Aug 28, 2011 10:02 pm?? ?Post subject: Please help with 401k choices, IRA, student loan allocation!
I've just finished graduate school and recently started a new job and could use some advice in navigating my financial options. I'm 37 years old and have just a few thousand in a CD and a few years of 401k savings from a previous job. Nothing else. Loan repayment (~$25,000, most at 6.8%) begins in late November. I'm essentially starting over again financially and need to figure out how to allocate my available income among my new 401k, an IRA if that's a good idea, and student loan repayments. And anything else I should be considering as I begin. I'm essentially a newbie on this front and will be grateful for any advice you may be able to dole out. With the economy what it is right now, I wonder about following one of the cookie-cutter 40 growth/45 growth and income/10 equity income and balanced/5 bond approaches for someone at my age.
401k options: My employer does not match. I can choose from the following funds through American Funds (followed by the labels AF applies to them):
- AMCAP Fund (Growth)
- New World Fund (Growth)
- The Growth Fund of America (Growth)
- Capital World Growth and Income Fund (Growth and Income)
- Fundamental Investors (Growth and Income)
- The Income Fund of America (Equity Income)
- American Balanced Fund (Balanced)
- American High-Income Fund (Bond)
- The Bond Fund of America (Bond)
- U.S. Gov't Securities Fund (Bond)
- American Funds Money Market Fund (Cash Equivalent)
Thanks in advance for your wisdom!
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Duckie
Joined: 08 Mar 2007 Posts: 232
Posted: Wed Aug 31, 2011 9:58 pm?? ?Post subject:
gradyo, we need to know roughly how much you earn and how much is left over after your basic living expenses are covered. That way we have a better idea of where to funnel the remaining money for retirement and debt.
Concerning your 401k options, is the list complete? We need the ticker symbols (if possible) and the expense ratios (including any management or 12b1 fees) for each fund. How much can you contribute to this each year?
Break down your loan debt so we can see how much is owed at what interest rate. For example:
$15K @ 6.8%
$3K @ 5.5% etc.
Where is your old 401k held, roughly how much is it, and what is it invested in?
Do you have an emergency fund? Do you have any other debt? Do you have any upcoming expected large expenses?
Do you have an Investment Plan? See Asking Portfolio Questions for the standard format.
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centrifuge41
Joined: 17 May 2010 Posts: 606
Posted: Wed Aug 31, 2011 10:34 pm?? ?Post subject:
gradyo,
Welcome to Bogleheads! Agreed with Duckie. We hope to see expense ratios if you can find them. It'll help to guide your investing decision. It seems that the only choices you have are American Funds. I hope you have R6 shares (the cheapest ones) because otherwise they can be pretty expensive funds.
Typically, to keep things simple, we suggest a three fund portfolio. The closest analogues are probably:
Total Stock Market index --> Growth Fund of America
Total International Stock Market index --> EuroPacific Growth Fund (does not seem to be offered, so it may make sense to use an IRA to hold total international index)
Total Bond market index --> Bond Fund of America
With a better picture of your various accounts, other debt, emergency fund, we can make more solid recommendations.
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gradyo
Joined: 28 Aug 2011 Posts: 2
Posted: Wed Aug 31, 2011 10:57 pm?? ?Post subject:
Thanks to you both.
To answer your questions, Duckie:
- I started the new job two weeks ago at $65,000/yr but that will go up to $90,000/yr in mid-November.
- I'm guessing that my post-rent/expenses remainder will be ~$1300/mo. until mid-November and then $1950/mo. from then on (student loan repayment begins right around then also). At that rate, it'll be ~$23,400/yr. that I'll have available to invest/save.
- That list is of 401k options is complete. I have added the ticker symbols and expense ratios here:
- AMCAP Fund (Growth) - RAFCX - 1.08%
- New World Fund (Growth) - RNWCX - 1.47%
- The Growth Fund of America (Growth) - RGACX - 0.99%
- Capital World Growth and Income Fund (Growth and Income) - RWICX - 1.13%
- Fundamental Investors (Growth and Income) - RFNCX - 0.99%
- The Income Fund of America (Equity Income) - RIDCX - 1.00%
- American Balanced Fund (Balanced) - RLBCX - 0.97%
- American High-Income Fund (Bond) - RITCX - 1.13%
- The Bond Fund of America (Bond) - RBFCX - 0.97%
- U.S. Gov't Securities Fund (Bond) - RGVCX - 1.03%
- American Funds Money Market Fund (Cash Equivalent) - RAGXX - 1.02%
- I believe I can contribute the max of $16,500 per year.
- My student loan debt breaks down as follows:
- $16.5k @ 6.8% (subsidized 'til November)
- $8.5k @ 8% (unsubsidized)
- My old 401k is held at Principal Financial Group. I have $51k in there now, all in the Principal Trust Target 2040 Fund with an expense ratio of 0.64%.
- The CD I have has just $3,100 in it now. My emergency fund is down to about $2,000 (I've been living on it through/post grad school). I have no other debt and no other large expenses coming in the near future. I would like to buy a house at some point but am not at all in a hurry.
- I do not have an investment plan - yet. That's all starting now, I guess. Thank you for pointing me toward those links. I'll start digging in.
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grabiner
Joined: 21 Feb 2007 Posts: 6261 Location: New Jersey
Posted: Wed Aug 31, 2011 11:58 pm?? ?Post subject:
gradyo wrote:
- My student loan debt breaks down as follows:
- $16.5k @ 6.8% (subsidized 'til November)
- $8.5k @ 8% (unsubsidized)
Since youre employer doesn't match your 401(k) contributions, paying these down is the best investment you can make. After this year, your loan interest won't be deductible, so paying down the loans gives you a risk-free return of 8% and 6.8%. You can't get close to that from any investments you might make.
Once the loans are gone, you can start a Roth IRA; this is a better deal than the 401(k) because your 401(k) expenses are high.
Quote:
- My old 401k is held at Principal Financial Group. I have $51k in there now, all in the Principal Trust Target 2040 Fund with an expense ratio of 0.64%.
Presumably, since you have held this fund for years, you are comfortable with its risk level.
You can roll the 401(k) over to a Vanguard IRA to get lower expenses. I couldn't find your fund on Morningstar, but assuming it is comparable to Principal's retail fund (which is 90% stock), a reasonable plan would be 60% Total Stock Market, 30% Total International, 10% Total Bond Market.
Given the quality of your current 401(k), I would recommend the following investing priority:
1. Pay off all student loans.
2. Contribute to Roth IRA.
3. Convert rollover IRA to Roth IRA (and pay tax on the amount); split the conversion over two years if it would push you into the 33% tax bracket.
4. Invest in 401(k) up to max.
Once you do have the 401(k) investments, you can use the American Funds in your portfolio instead of Vanguard index funds in the same classes; they aren't index funds, but American is reasonably conservative, so the funds won't stray too far from an appropriate index. (New World won't behave like Total International because it holds more emerging markets, but it will behave like a mixture of developed and emerging markets.)
You'll have plenty of time to look into the funds and decide which of the lowest-cost funds fit your investment philosophy. _________________ David Grabiner
Okay, you don't have plan yet. While you're researching I'll recommend something to start: 70% equities and 30% fixed with 30% of equities being international. This breaks down to roughly 49% US stocks, 21% International stocks, and 30% bonds. Right now all you have is your former 401k. I think you should roll that over to Vanguard and invest in the following:
Vanguard Rollover IRA -- 100% -- $51K 49% (VTSMX) Vanguard Total Stock Market Index Fund Admiral Shares (0.07%)
21% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.20%)
30% (VBTLX) Vanguard Total Bond Market Index Fund Admiral Shares (0.11%)
401k -- 0% -- $0 currently. When you start contributing use:
(RBFCX) American Funds Bond Fund of America (0.97%)
Put everything here at first until you've used up all your 30% bond space (decreasing the VBTLX as you go). Then start adding (and decreasing your VTSMX):
(RFNCX) American Funds Fundamental Investors (0.99%)
grabiner wrote:
1. Pay off all student loans.
2. Contribute to Roth IRA.
3. Convert rollover IRA to Roth IRA (and pay tax on the amount); split the conversion over two years if it would push you into the 33% tax bracket.
4. Invest in 401(k) up to max.
I agree with grabiner. You need to pay off those student loans first, especially that 8% one. Since you really need to bump up your emergency fund, and since Roth contributions can be withdrawn if necessary, I think funding a Roth IRA is fine. I'm not sure about converting. Rolling over is a good idea, but you need to think about the cost of the conversion. I've done it in your tax bracket, but I didn't have a lot of debt to deal with, and I had the assets outside of the IRA to pay the taxes. You've got awhile before a Backdoor Roth IRA will be needed. So I agree with #1, #2, and #4. #3 is iffy.
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