Meant to add that although the tax benefits of contributions are sometimes helpful to today’s tax return - they pale into insignificance when compared to the tax free growth and boost to the compounding of tomorrow’s account value.
You got stuck in a temporal anomaly too, huh? No wonder we look older than the age on our passports.
Good links to learn from:
Wiki I mentioned:
http://www.bogleheads.org/wiki/Getting_Started
A good discussion forum with a reasonable signal to noise ratio:
Fair enough. But I am pretty savvy with this stuff and I’ve never had an employer offer me an option to automatically contribute to a Roth. It’s something you’d have to look into, figure out, and then implement. With a 401K you just set it up on your first day when you are doing all your other benefit stuff.
To the OP: Two points that no one has made yet.
You can also shift large amounts of money from a 401k into a Roth. You just take a tax hit for doing it. Say you work somewhere for a few years and then leave. You’ve got $25K in your 401k. You can either move it to the new employers 401k, leave it alone, or you can move it into a Roth. If you do that, you’ll pay a few grand in taxes, but it’s often worth doing.
One important thing I forgot: The biggest weakness of the 401k and Roth systems hasn’t been mentioned yet. Marriage.
If you do well you’ll have a few hundred grand in there before you know it. If you get married half of that belongs to your spouse, depending slightly on what state you live in. When you get divorced the spouse gets half. Marry someone who is also planning for their retirement or get a prenup.
It’s a bit weird looking back on this now, but five years after making this thread I have finally opened my Roth IRA. I know a bit more about investing than I did when I started this discussion, but my preferences are still broadly the same; all my investments are going into a Target Retirement Fund (with Vanguard). In a few years, I might diversify and get a 500 index fund, but at least for now my goal is to max out my annual contributions to the fund each year.
Now, it would have been better to have opened this when I still was 21, but even at my current age (26) it’s better late than never.
Saving for retirement is a great goal. I started when I was even younger than you were when you started this thread. I’m glad I did.
There’s an old saying that the best time to plant an oak tree is fifty years ago. The second best time is today. Congratulations on planting your oak tree. Stick with it.
For a little bit of motivation, I’ll note that $2,000 invested in the Vanguard Target Retirement 2060 fund on the day you started this thread would be worth $3,132 today. If you had contributed $2,000 on 7/31 each year after that, your $10,000 of contributions would be worth about $13,196 today. That was an exceedingly good period for the stock market and the next five years are unlikely to be quite that good but if you contribute a little bit each month, you will see the account grow pretty steadily. Be prepared for the occasional downturn in the market and use them as opportunities to purchase more shares at a lower price if you can.
Best wishes.
To mitigate a market downturn loss, diversify your IRA accounts; a great option available to you is private bank’s Roth IRA CDs; Capital One has rates as high as 2.9% for 5 years. You can ladder those CDs and it’s all still tax sheltered.
Also, being prepared for a downturn means not panicking and selling, as you will only be locking-in your losses. Think long term, and as stated, move money gradually to more conservative investments the closer it is to the time you will need it. At the OP’s age, this should not be a concern, presently, so probably OK to stick with high-growth (riskier, more volatile) investments, as there is plenty of time to gain back (and more) any short-term losses.
26 is not late. Sure, it’s later than 21, but it’s plenty soon enough, and vastly better than average.
Note that all the advice about preparing for a market downturn is hard to intellectualize. It really is an emotional thing. You were just a teenager for the last major downturn (which was my first one as an adult), so you (probably) weren’t aware of it on a visceral level the way you might be now that you’re more independent.
I’m happy to say that I didn’t do any panic selling in the last one, but I didn’t really stick to my asset allocation plan (I stopped all investment except the auto-401k and hoarded cash). I certainly now understand the fear that leads people to do so. Hold on, and let an honest appraisal of how you feel in the coming (at some point) downturn inform your actions afterward so you’re more prepared for the one after that.
Your Target Retirement Fund likely has a large allocation to Vanguard’s Total Stock Market Index Fund, so adding an S&P 500 fund wouldn’t add much diversification benefit. Since the Total Stock Market and S&P 500 funds are capitalization-weighted, the correlation coefficient between these two is something like 0.99.
Oh, and as you get older, don’t spend all day listening to the crack pots on the financial tv at stations. Gloom and doom or else extreme exuberance gets ratings.
I want to emphasize how much I agree with this. A market downturn, to a person less than 45 years old, should be an event that requires no intervention on your part. The biggest reason people lose money in downturns is that they miss out on the recovery because they sold when the prices were low. You have to be prepared to hold your investments through the dips.
At your age, I would invest everything in an S&P500 index fund, and never look at your statements. Put as much money in as you can, and if your employer offers some amount of matching for 401k contributions, be sure to get the maximum amount of their free money.
Don’t worry that much about whether you’re using a Roth or IRA - the key characteristic of both of these is that your gains get compounded without being taxed, which effectively increases the interest rate that they get by 25% or so. And there’s a huge difference over time between an account that grows at 6% compounded and one that grows at 8% compounded. One doubles every 12 years, the other doubles every nine years.
Congrats on starting your savings. My wife and I started aggressively saving into what was then a newfangled thing called a 401k back in the mid 1980s, and now I’m 57 and plan to retire in the next couple of years to try to spend all this money.
Target Retirement <Date Far In The Future> has better expected performance than 100% stock over the long haul since it’s going to still be mostly stock, but will also auto-rebalance on dips.
But they also frequently have higher fees than the index fund which may or may not end up making it a wash.
It’s still a very solid choice.
This.
I had barely started investing for retirement for the 1987 crash but the 2000-2002 & 2008-2009 market drops hit me hard but by ignoring them and sticking to my monthly purchases I did fine.
I lost 41% in the first and 43% in the second - but - in about the same timespan as the decline, I recovered everything. No rebalancing and no selling.
I have a rule - if I notice that the market is down since I last checked my balances, I don’t look.
IMHO, he’s too young and likely committing too little money to the market to worry about this. In the long run, he’ll likely make more with stocks and I think he’s just better off getting used to some volatility in the stock market. He probably makes enough in a couple of weeks to close any losses he will experience in the stock market over the next few years. His portfolio is reasonably well diversified. The key now is sticking with it.
I agree.
This is basically true, although I think the correlation to the S&P 500 will be a bit lower than .99 due to the Target Retirement Funds’ (all of them) allocation to small caps, international stocks, and bonds.
I wish my father had taken this advice.
Some target date retirement funds charge extra fees but not Vanguard’s. His choice is a solid one in part because it avoids this problem.
I recommend keeping an eye on it but not getting too invested in the ups and downs. Market is up? Yay. I’m worth a little more. Market’s down? Yay! If I save a little more, I can buy shares at lower prices. My dividend yield is going up and my reinvestments will occur at lower prices, so future growth is even better. It’s a philosophy that’s worked for me so far. I don’t watch the market obsessively though. Checking my portfolio once or twice a month is plenty.
My Target Retirement Fund, which is still weighted to around 91% stocks, is dated to 2055. The allocation isn’t set to change at all for another twelve years.
At that point, you will be 38 - I stayed at 90% quite a bit longer than that. At 60 I was still 75% stocks. I am shooting for 60 at 70.
I think of my portfolio in two pieces - a conservative part good for 10+ years of spending & a riskier part I hope to leave to the kids.
Right, and that means that at some regular interval (quarterly, maybe?) they rebalance the fund to be at 91% stocks. That involves selling asset classes that have overperformed and buying ones that have underperformed.
It’s essentially a mechanical way of buying low and selling high repeatedly.
Which is why, for example, a regularly rebalanced 90/10 or 80/20 stock bond split will outperform 100% stocks on average over a longer period even though the bonds will underperform on average.
No. Historically a 90/10 portfolio has not outperformed 100% equities over the long term, and a 80/20 portfolio certainly did not outperform:
https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults
It’s also worth noting that the “rebalancing bonus” is a zero-sum game. We can’t all achieve higher returns simply by rebalancing.