A Roth 401k or Roth IRA? There may or may not be an option for a Roth 401k at all.
At least for a Roth IRA, usually it is a good idea for younger folks if they have the income to spare for it. Generally if you expect your income and tax burden to be higher when you get older.
Of course, “for most people” is not the same as “for everybody”. And it does represent some loss in flexibility. As above, the IRA contribution limit (for all IRA accounts you have combined) for this year is $7000, so that is another factor that should be considered. And no employer matching, either.
It’s common now for companies to have both a traditional 401k and a Roth 401k. When you configure your contributions, you may see the option to contribute as a pre-tax (traditional) or post-tax (Roth). I would recommend going with the Roth 401k option for simplicity sake for situations like the OP. Going with a traditional (pre-tax) can be a good choice if someone is highly compensated and expects to be in a much lower tax bracket in retirement. But for most regular folks, their working tax bracket and retired tax bracket may be pretty much the same bracket. Roth plans are simpler in that there’s no tax on the money that comes out and you can keep it in the plan forever.
I’m thinking that the OP may be early in career and might be more highly compensated later. Plus again the option to find funds aligned with their belief system not of their current list.
Typically, it’s all the same investment funds regardless of whether it’s a traditional or Roth retirement plan. Like with that VMFXX fund, it could be held in the traditional and/or Roth plans. The type of plan is kind of like a container that affects how taxes are applied to the funds held within the container. The same funds can be in both kinds of plans.
Outside of the employer’s 401k, you can open a completely separate IRA or Roth yourself. This would involve you going to an investment firm like Vanguard or Schwab and opening an account there. You send your own money to the investment firm and direct how the money should be invested. If you had specific investment goals which weren’t met by the 401k’s funds, then you could find an investment firm which matched your goals and put your post-paycheck money into those funds.
Periodic rollovers out of an employer’s 401k are typically not supported. You can do a rollover out of the 401k into another firm when you leave the company. But while you’re employed, it stays in the 401k. You could make an early withdrawal and just pull the cash out, but then that would trigger taxes and penalties.
To the OP:
Playing with a compound interest calculator can be fun.
—You enter the dollar amount of savings/investments you’re starting with.
—Then enter your projected monthly contribution.
— Enter the length of time (e.g. 30 yrs)
— Then enter the projected interest rate. A money market acct might earn 2-3%. A medium term bond acct might average 4-6%. A popular equity mutual fund, like Vanguard 500, might average 7-8%.
—You also enter a compounding frequency — monthly is fine. then press Calculate.
You’ll probably be surprised at the difference between 6% and 7% interest over the course of 30 years — let alone the difference between 3% and 8%.
I agree with this, as a broad index fund evangelist. I will only quibble that I’d like to see a little in VFIAX, as the S&P 500 has just been unstoppable for decades.
If you’ll permit this non-professional a little boasting, I’ve been 80% S&P 500 since 1996, and based on the online calculators that index has returned a CAGR (for @Reply, that’s basically the annual return you’re getting, think of it like interest at the bank) of 10.11%
Which means doubling your money every 7 years. I’m 30 years into my career, and I remember being proud of saving (with match) $3,900 of my $30k salary in 1996. So if I could somehow extract just that tranche today, it’s probably worth around $16,500. And if we keep the status quo and I retire in 7 years it will be $33,000.
Of course, you have to live with the risk you can live with. I’ll just caution that money market rates can drop to near zero, so you’ll want to keep an eye on that. When that happens you’re losing to inflation.
You seem like a smart guy. Most of us here have no finance background, but there are hundreds of good and reputable websites out there that can help you learn. And, of course, most of us Dopers seem happy to go on at great lengths giving advice.
^^^ with this alternative suggestion: Match the employer’s contribution and instead of putting more into the 401k plan, open a Roth IRA account with a well-regarded brokerage firm (Vanguard, Schwab and Fidelity all have pretty good reps, avoid Edward Jones & Wells Fargo IMO). You will have more investment choices in the Roth and for a young person with disposable income it is going to be a better deal in the long run when you can take it out tax free.
@Reply, I think a lot of your apprehensions could be eased by making an appointment with a certified FEE ONLY financial advisor (“fee only” means you pay them for their services, they don’t work for a brokerage house and will not try to sell you products). The last time I used mine, he was charging about $250/hour and I used 2 hours of his time. It was money well spent. Check references with people you trust before selecting one. Stick to low-fee index funds, and NEVER let anyone trade your portfolio for you. If a financial advisor wants you to let them “manage” your account, find another one.
As far as the feelings of impending doom go, I get it. There is no risk-free way to plan for chaos, as has been noted, even “cash” isn’t risk-free. I’ve been trying to diversify my retirement savings as much as possible: my 403b is about 1/2 in various stock index funds, 1/2 in bond indexes of various maturities, and my cash reserves are 2/3 in a money market fund and 1/3 in physical gold and silver. I’m not touting this as an ideal portfolio, just to give you an idea of some of your choices.
I think it should be appreciated that it’s hard to save money. Like take money you could spend, that you “need” to spend, set it aside, and not spend it. And just have the mindset to look at it and never spend it even though you could. It’s really really hard. It’s a habit that has to be learned. It takes time.
Any advice I give, starts there. Teach someone how to do without money / not spend / forgo today’s pleasure / appreciate needs and wants. I don’t really care where they put it or how much interest it earns - just learn to part with it. It’s much more important to know how to save money. Returns are pretty pointless if you don’t actually save, or save that much, or you save and then need to cash out because you really do need cash. Having cash pays extremely important dividends beyond the measly interest rate on a savings account.
Said differently, no kid ever took their birthday money and put it into an Growth-Oriented ETF because it was the smart play and would compound over decades, etc. It is the smart thing to do and the compounding would be insane. But no one does that (except Buffet, he did that) or even says to do that. Adults tell kids to take their money and save it in a piggy bank - no mention of interest or inflation. Just teaching kids the art of saving. It’s good advice and a good habit to teach. I think the piggy bank is best because the money is right there and you could spend it. But, some kids never learn that, and grow up to be adults who don’t understand how or why to save money, or that you shouldn’t buy something just because you can afford it. Even when you read about it as an adult, it’s hard to appreciate. And then adults tell other adults it’s not smart to save money in a savings account. Why does the good advice change?
Learn how to save. Then tinker with interest rates and risk.
*This is a bit of a tangent, maybe even a soapbox, and obviously it’s not best to save just cash for retirement, but I do think everyone should have lots of cash on hand, and some people need to learn how to save before they need to care about interest rates.
The secret of saving is to look at your expenses. We save tons of money by seldom eating out. We like to cook, and we do it well, but we can eat for an entire week on what we’d pay for a couple of restaurant meals.
Even if you can afford luxury cars, is rich Corinthian leather on the seats worth $20,000? If you use the car for work, perhaps. But if Detroit has convinced you that you are somehow a better person driving a fancy car, they’ve convinced you to pay more than you have to.
The Millionaire Next Door goes into this well. IIRC, they have a section about how doctors making good money get into financial trouble if they live in a wealthy neighborhood where there is social pressure to spend, versus a good neighborhood where there isn’t.
And this is the great thing about automatic payroll deductions. If the money just automatically comes out of each paycheck and gets deposited in your retirement account, then you just get accustomed to living off of, say, 80% of your actual income. You never develop the sort of lifestyle that would require spending every cent you earn, because you never actually see that money. (This, of course, assumes 80% of your income is sufficient to live on. If you’re just barely scraping by to begin with then this doesn’t work.)