401k investment help

Quote from jcinc : Yes, if you don't participate in your company's 401k, you are just throwing away free money. The advice every financial planner will tell you is to at least contribute the maximum amount to take full advantage of company matching. My take on that is if you make $100,000 a year, the company will match 50% of the maximum of your $7000 401k contribution. You can contribute more, but the company will limit their match to $3500. The numbers will change if you make less/more money.

So to max out my benefits, I'd set my contribution to 7%? Sorry, i'm just a little confused and trying to understand this so I set this up right.

Quote from Iczer : So to max out my benefits, I'd set my contribution to 7%? Sorry, i'm just a little confused and trying to understand this so I set this up right.

The percentage and matching contribution amount is determined by your company. For example: let's say you make $50,000 per year and:

-Your company's 401k is set up to match up to 5% of your salary dollar for dollar.
-$50,000 x 5% = $3,000. So, for every dollar you put into the 401k per year (up to $3,000), the company will also put in a dollar. Anything more than that and the company won't match it.
-What does that translate to yearly? Putting $3,000 per year into your 401k with the company automatically turns into $6,000. That's why people talk about "throwing away free money."

Of course, not all companies have this exact set up. Percentages are different, some companies only match 50 cents to your dollar, etc.

Quote from impact1400 : The percentage and matching contribution amount is determined by your company. For example: let's say you make $50,000 per year and: -Your company's 401k is set up to match up to 5% of your salary dollar for dollar. -$50,000 x 5% = $3,000. So, for every dollar you put into the 401k per year (up to $3,000), the company will also put in a dollar. Anything more than that and the company won't match it. -What does that translate to yearly? Putting $3,000 per year into your 401k with the company automatically turns into $6,000. That's why people talk about "throwing away free money." Of course, not all companies have this exact set up. Percentages are different, some companies only match 50 cents to your dollar, etc.

Thanks, that helped.

So now I'm just trying to determine how I want to invest. The target retirement fund sounds good, but is that too conservative at my age? From what I'm reading It looks like I should do something like 60% domestic stocks, 25% foreign stocks and 15% bonds.

What do I look for? highest annual return per year?

don't look at highest annual return per year. look at the fees associated with the funds.

Quote from Iczer : any other suggestions?

For someone 26 years old, a 90% stock/10% bond allocation would be more appropriate. If you were particularly risk averse, you could go as extreme as a 75% stock/25% bond allocation, but I personally wouldn't do that because I would be squandering the opportunity of exposure to stocks over so many years.

You have time on your side - let it work for you. With so many years until you'll begin withdrawing the money, you'll want more exposure to potential growth with the stock-type choices. When I said "90% stock" earlier, I was referring to stock-type choices rather than individual stocks. By "stock-type choices", I'm referring to index funds. An index fund is a collection of tiny slices of hundreds or thousands of companies all rolled into one fund. For example, by owning a total stock market index fund, you'll essentially be owning all of domestic publicly traded capitalism (and quite a bit of foreign too since, nowadays, so much of a companies income comes from overseas from them doing business internationally).

Likewise, instead of individual bonds, you'll want to consider bond funds. More specifically, intermediate-term bond funds.

For more guidance on all this, read this investment guide [clarkhoward.com] that divides the paths you can take into three choices: Easy, Medium, or Advanced. You simply choose which path you think best fits your current level of investment knowledge and how involved with your investments you want to be and the guide will walk you through what you need to do to get started.

If you choose the "Easy" path (or the set-it-and-forget-it path), you won't have to be concerned about anything we're talking about. You just put your money into that one fund and, through the years, they take care of the rest). Right now, you'll want to think about which path is best for you (you can always change it later down the road).

Quote from Brian1 : For someone 26 years old, a 90% stock/10% bond allocation would be more appropriate. If you were particularly risk averse, you could go as extreme as a 75% stock/25% bond allocation, but I personally wouldn't do that because I would be squandering the opportunity of exposure to stocks over so many years. You have time on your side - let it work for you. With so many years until you'll begin withdrawing the money, you'll want more exposure to potential growth with the stock-type choices. When I said "90% stock" earlier, I was referring to stock-type choices rather than individual stocks. By "stock-type choices", I'm referring to index funds. An index fund is a collection of tiny slices of hundreds or thousands of companies all rolled into one fund. For example, by owning a total stock market index fund, you'll essentially be owning all of domestic publicly traded capitalism (and quite a bit of foreign too since, nowadays, so much of a companies income comes from overseas from them doing business internationally). Likewise, instead of individual bonds, you'll want to consider bond funds. More specifically, intermediate-term bond funds. For more guidance on all this, read this investment guide [clarkhoward.com] that divides the paths you can take into three choices: Easy, Medium, or Advanced. You simply choose which path you think best fits your current level of investment knowledge and how involved with your investments you want to be and the guide will walk you through what you need to do to get started. If you choose the "Easy" path (or the set-it-and-forget-it path), you won't have to be concerned about anything we're talking about. You just put your money into that one fund and, through the years, they take care of the rest). Right now, you'll want to think about which path is best for you (you can always change it later down the road).

Great info, I really appreciate it.

It looks like my options are index funds when looking at large, mid, small and international stocks.

So for international, the DFA Emerging Markets Value Portfolio Institutional Class (DFEVX) looks like it's #2 in Lipper for 10 years. So this might be a good one for international?

Quote from Iczer : The target retirement fund sounds good, but is that too conservative at my age? From what I'm reading It looks like I should do something like 60% domestic stocks, 25% foreign stocks and 15% bonds.

75% of capitalism is outside of the United States, so you want to have a good bit of exposure to international markets. That being said, that allocation is fine because, at the end of the day, due to the effects of domestic companies getting such a huge share of their sales outside of the U.S. (this was mentioned in my post just above this one) your effective international ownership will be closer to 40% and your effective domestic ownership to 45%

Quote from Iczer : What do I look for? highest annual return per year?

If you decide you want to go with a target retirement fund, your next and main concern, as vbt said, should be the fees associated with that account. I'd choose Vanguard because of their ultra-low fees. Fees can have a massive effect on how much money you have to retire on down the road. For this reason, you want to be with someone who has the lowest fees possible. Vanguard is a perfect choice for this reason.

I see what you mean on fee's. Some of these Vanguard index's are like .60 for every $1000. I just saw one that was $9.70 for every $1000.

Quote from Iczer : Great info, I really appreciate it. It looks like my options are index funds when looking at large, mid, small and international stocks. So for international, the DFA Emerging Markets Value Portfolio Institutional Class (DFEVX) looks like it's #2 in Lipper for 10 years. So this might be a good one for international?

Good question. "Emerging markets" is today's politically correct way of saying "third-world counties" (yea for political correctness). Emerging markets are high risk with potential high reward. Those markets are very volatile, not to mention their currencies themselves can, oftentimes, be unstable. That being said, it's completely fine to have an emerging markets fund as part of your international allocation, but I would keep it a smaller percentage and look to a total international stock index fund to make up the majority of your international ownership.

If you're interested in contributing more to your retirement than the 7% or so of your pay your employer matches in your 401(k), I'd highly encourage you to look into opening a Roth IRA with Vanguard and putting as much as you're willing to contribute into that.

So to make things easier, if i just do the Target Retirement Fund 2050 then I should be fine? Is this pretty conservative for my age or should it be fine?

Quote from Iczer : any other suggestions?

Look at risk versus returns for various asset mixes. Here's a famous graph showing this for mixes of stocks and bonds, from 1980-2004:



Notice that a 100% bond portfoliio was more volatile than an 80% bonds, 20% stocks portfolio, and a 50/50 mix of bonds and stocks was no more volatile as 100% bonds, but it gave a higher return.

Here's how some portfolios have performed from 1926-2010:



I realize that those graphs don't include asset classes such as real estate, precious metals, and natural resources.

Also risk varies by time horizon, as this shows for various holding periods for US stocks:



OTOH I can't think of a reason for you to avoid Target 2050.

Thanks for the info guys, really helped me out a lot. I think for right now I'm just gonna stick with the Target 2050 plan.

Quote from Iczer : So to make things easier, if i just do the Target Retirement Fund 2050 then I should be fine? Is this pretty conservative for my age or should it be fine?

A target retirement fund 2050 will be perfectly fine for you.

I hope I'm not hijacking but I might start putting money into a 403(b). I'm 25 and I'm going to hit a higher tax bracket this year. Is it worth it to put money into the 403 just to stay in my previous bracket? Normally, I would do it, but my employer does not match, so it dampers the whole thing.

I'm not sure if I'm staying in my current job though, maybe for another 2 years or so. Does that change anything? Would Roth be better?