This is just peachy

Oerdin · June 11, 2003, 14:08

In an oh so happy confluence of events I received both my yearly IRA statement and my Social Security benefits statement on the same day that I was tearing out my hair trying to figure out how my 401k worked. Ah, yes. The joys of retirement planning. Imagine my relief to learn that my IRA’s current year to date return was only –1.08%; why that means my average annual return is only –29% instead of the –32.5% average from last year.

Not to be to worried, after all, I still have social security right? Why yes in deed; and according to our good friends at Social Security if I were to be disabled today then they would give me a whopping $514 per month. Looks like it will be dog food for my dinner.

Jaguar · June 11, 2003, 14:10

Has anyone ever said "this is just peachy" in a non-sarcastic way?

Arrian · June 11, 2003, 14:13

I didn't even open my last 401(k) statement.

-Arrian

Cruddy · June 11, 2003, 14:17

You lucky sod. Dog food? I dream of beans on toast when I'm munching away on gravel.

FrustratedPoet · June 11, 2003, 14:17

What does IRA mean?
Besides "Irish Republican Army", of course.

Japher · June 11, 2003, 14:18

Individual Retirement Account

Oerdin · June 11, 2003, 14:21

Individual retirement account. It's a government scheme where you are able to place pre-tax income into a long term retirement account without having to pay any taxes on them as long as you agree not to touch the money until retirement.

I also have a 401k which is a similiar type of arrangement except your employer is responsible for putting some matching contributions in as well. Unfortunately, 401ks have become much more common then the old pension system.

Japher · June 11, 2003, 14:26

Quote:

Individual retirement account. It's a government scheme where you are able to place pre-tax income into a long term retirement account without having to pay any taxes on them as long as you agree not to touch the money until retirement

As long as you retire after your 59.5, also there is the Roth IRA that uses post-tax dollars, but you are not taxed on gains of that money, as long as you don't touch until your 59.5 y.o.

Also, IRA's have yearly contribution caps that are much lower than your 401k contributions...

I have a Roth and a 401k and a brokrage account, and a pension... I spend to much on investments

Sorry about your loss, what are you investing in on your IRA? Why don't you trade it? Really, the best thing to invest in with retirement accounts are indexes... Unfortunatly, my IRA has changed at all, but I guess that is better than going down...

Also, I wouldn't be counting the money in your Social Security account, it ain't going to amount to a hill of beans and you will never see a penny of it anyway..

Oerdin · June 11, 2003, 14:39

Three years ago I began investing in the Janus Mercury Fund which then was flying high and the managers were all getting written up as being the best thing since sliced bread. The problem is the tech bubble burst right after I invested and the much vaunted managers all jumped ship rather then have their perfect records tarnished by record losses. They read the tea leaves and left before the losses were made public. I retrospect I should have gotten out at the same time the management switched over but I told myself I was in it for the long haul and if I just wait it out everything will turn out fine. After all the fund was an aggressive growth fund which I wouldn’t be needing for 35-40 years so I just had to ignore the volitility and let the law of averages work over the next several decades. So far I’m still waiting.

At least with my 401k I’m much better diversified. With my Roth I followed the thinking of the longer the investment term then the higher the risk you should be willing to tolerate. Admitablely, my loss have been less then $10k but it still sucks to see money you’ve sweated get decimated. I should have just take $100 bills and rolled them into joints. I mean at least then I’d have a story to tell about how I lost my money.

Arrian · June 11, 2003, 14:42

I have my 401(k) primarily in stocks (medium to high risk) and since I'm in this for the long haul (I'm 26), I'm not overly concerned by the current downturn.

My Roth IRA is medium - low risk stuff. Less risk, less return.

-Arrian

Japher · June 11, 2003, 14:44

Quote:

told myself I was in it for the long haul and if I just wait it out everything will turn out fine

One thing I see people write in books over and over is to not change your stratagey for investing. You told yourself that your in it for the long haul. Stay in it for the long haul, just start diversify your IRA and you should be fine. Who knows, after 10 years that same fund may be up 70% from when you bought it, and that wouldn't be bad, a 7% gain over 10 years... beats the S&P... Stick out.

Oerdin · June 11, 2003, 14:47

How do you decide when to cull an under performing fund? Also I'm trying to decide how much of my pay check to have auto deducted for my 401k. Any suggestions? My father says I should stuff in as much as I can possibly afford after my credit card is paid off.

Harry Seldon · June 11, 2003, 15:22

Doesn't contributions to your 401k affect how much you can contribute to your Roth? I had thought about starting a small Roth account but I thought there were restrictions.

I'm 26, too. Fifty percent of my 401k is invested in the Vanguard 500 index. High risk is nice but I had a friend that lost everything by going high risk. He's mid-thirties now and starting over.

As for autodeducting, put in at least as much as you can get matched by your employer and ideally as much as you can and survive. It's cut before you actualy get ahold of it so it's like you never really had it in the first place. I deposit a large chunk of my check in my savings account, put my employer-matched 5% into 401k, and keep the rest for bills.

Japher · June 11, 2003, 15:24

Quote:

How do you decide when to cull an under performing fund?

That is something you have to decide before you make the investment... "I am going to hold this investment until it bottoms out/drops below value X/goes above value Y". That way you are in more control of your risk factors. You said that you would hold it for the long haul, what did you mean by that? How long is the long haul? I'd say hold it until it disappears, that way if does go up again you aren't kicking yourself for selling it.

Basically, make that decision before you invest. However, since you may not of known that, I will give you permission to, this one time, decide for yourself if you want to keep it or not

... Maybe set a time limit on it, as well as a specified amount. You just have to have discipline... I would still keep it, or at least some of it, and invest in other things with my new money.

Quote:

Also I'm trying to decide how much of my pay check to have auto deducted for my 401k. Any suggestions? My father says I should stuff in as much as I can possibly afford after my credit card is paid off.

The secret to life is compounded interest. The more you can put away now, the less you will have to later to reach your financial goals. Your dad gives good advice.

How much can you afford? Can you max it out at $11,000/year? Can you max out your IRA? How much longer will you be making less than 95k/year and still qualify for the IRA?

I try to max out my 401k to the level where my company still matches. I then max out my IRA. Once this happens I adjust my 401k contributions to as high as I possibly can while still maintaining the quality of life I enjoy.

This is because you only get rights to the IRA as long you earn less than 95k/year, and I plan on making more than that someday. Also, I like to invest in my brokrage account for things I will need before retirement, i.e. house, vacations, etc...

Every pay raise I get I adjust my 401k to match, and keep my life style the same. Any bonus I use to fund either my IRA or brokrage, and maybe buy something fun for myself (like a trip).

I have friends who have been maxing out their 401k from the beginning. Meaning they have been investing 11k/year in it. Yet, if they want it before they retire they will take a big hit on it. I want vacations, I want to buy a house, and I want to invest in what I want to invest in, not what my companies plan is telling me. So, I take the free money, and deal with the rest of it myself.

Oerdin · June 11, 2003, 15:27

I just turned 27 three weeks ago so it looks like we're all in the same age group. My employer will match 5% of gross income so I'm for sure going to grab the free money. The main question is how high to go after that. Both my father and my aunt have told me now is the time to push it as high as possible since I have no real bills and this money will be compounding for the longest possible time.

P.S. I believe your IRA contributions and your 401k contributions are totally unrelated. I believe for people our age IRA contributions are capped at $3k per year (but supposedly going up to $5k soon) while your 401k is capped only by how much your employer will let you put in it.

Harry Seldon · June 11, 2003, 15:34

I think 401k is maxed at 11,000. The roth is getting bumped up to five or six thousand. I thought the amount put there had to be deducted from 401k.

I gues that wouldn't make sense, though. Damn, I hate finance and accounting!

Japher · June 11, 2003, 15:37

Quote:

Doesn't contributions to your 401k affect how much you can contribute to your Roth? I had thought about starting a small Roth account but I thought there were restrictions.

Yes, they are unrelated. Yet, you can only contribute to a IRA if you make less than 95k (single) and than only so much a year (yes it is 3k, and it will be going up).

You can contribute as much as you want to your 401k regardless of what your employeer tells you, yet the max is 11k, set by the IRS... Your match (5%) is based on your salary however.

I think that your aunt and dad are right... Give it all you can. I am just saying that you should also max out your IRA (since you too will be making more than 95k/year one day).

Also, I really want a house, so I am saving for that, taking it from contributions I would normally give to my 401k. A 401k is a nice investment, but you can't touch it until your 59.5 y.o. I know that I will have financial needs before than; kids, college fees, etc... Housing prices also compound, plus I can use my home's equity to borrow against it at a lower rate than would my 401k... Also, a 401k is not weighed as heavily as is proeprty when figuring in equity for loans to a) invest in more property, b) finance my kids college, or c) retire early...

Harry Seldon · June 11, 2003, 15:46

What do you do that you'll be making over 95k a year?

edit - and more importantly, are they hiring?

Japher · June 11, 2003, 15:51

I'm a Chemical Engineer for the Pharmaceutical Industry

Oerdin · June 11, 2003, 15:55

I'm a Geologist and I'm hoping to make about $40k this year. Pathetic isn't it? Still, I'd like to follow my parents into the realeaste business by buying a couple of rental properties over the next few years. It's a really great part time way of increasing your income and assets.

Longer term I'd like to start my own consultancy though first I'm going to have to build up my experience a bit.

Arrian · June 11, 2003, 15:56

Quote:

I'm 26, too. Fifty percent of my 401k is invested in the Vanguard 500 index. High risk is nice but I had a friend that lost everything by going high risk. He's mid-thirties now and starting over.

Half of my 401(k) is going into an S&P 500 Index, 25% into high-risk growth (oversees investment), and 25% in something else I forget now. I also have a chunk of money sitting in a fund that I can no longer add to (they got rid of it, but allowed those that had money in it to keep their money in it), which is also a stock fund - and that's been my best one.

I'm throwin' down 15% of my income into my 401(k). The max, IIRC, is 20%.

My IRA... well, I need to get on that for this fiscal year. Time to scrounge up a few thou.

-Arrian

Japher · June 11, 2003, 15:57

That is why I am saving, Oerdin. I don't have parents that will help me get into that kind of field, if your parents will help you to increase your cash flow sometime in the future than max out that 401k to the best of your ability (also max out the IRA).

Oerdin · June 11, 2003, 16:03

My current distribution for my 401k is:

20% mid cap aggressive growth
30% large cap growth and income
20% small cap agressive growth
20% international
10% High yield bonds

I'm debating on ditching the high yield bonds and distributing that 10% amoung a few of the other funds. Opinions?

My Roth IRA is 100% Aggressive Growth

Harry Seldon · June 11, 2003, 16:04

There's some good rental properties around town here I've looked at but I don't even own my own house yet so that'll probably have to wait unless something gold comes along.

Oerdin · June 11, 2003, 16:07

Quote:

Originally posted by Japher
That is why I am saving, Oerdin. I don't have parents that will help me get into that kind of field, if your parents will help you to increase your cash flow sometime in the future than max out that 401k to the best of your ability (also max out the IRA).

Their help would be limited to co-signing and they most certainly would want a cut of any income and properity appriciation. The reality is I think they want me to manager their properities for them while they retire and simply collect the checks.

Still...

I'm planning on buying my own home by the 1st of the year. So far I've saved $10k for that purpose and I have my VA home loan benifets from when I was in the Army. I'm hoping that will be enough even if I do have to rent out a couple of the spare rooms.

Harry Seldon · June 11, 2003, 16:09

I heard bonds are as low as they've been since it started being recorded. Drop em and grab an index; it's as safe as bonds and will probably do better in the long run.

Of course, this is coming from someone even his mother wouldn't label as a financial genius...

Japher · June 11, 2003, 16:10

small cap growth

most economic recoveries (which I think we are in now) begin with small cap growth. I also like investing in these funds since I don't like investing in individual small cap stocks... This way I cover that basis.

I am currently invested in 50% small cap and 50% fixed interest (large cap, bonds, and money market funds). I am up 10% on the year thus far...

JohnT · June 11, 2003, 16:29

This Vesayen thread might help you a bit: If you had $500,000 to put in stocks, what would you put it in-also stock stories!

The encapsulated version:

1. Do not buy managed mutual funds, as over 98% of all funds, including those that failed, underperform the market over a long-term period when you include maintenance and transaction costs. Of those that do not fail, just 95% of them underperform the market.

2. Buy index funds, especially Vanguard funds. If you must buy a managed fund, Dodge and Cox are highly recommended if you can get in them.

3. Do not forget to rebalance your funds once every year or so. "Rebalancing" means ensuring that your asset allocation remains at the same level over a long period of time.

For example, let's say that I put 60% of my portfolio in stocks and 40% in bonds. If the stock market shoots up so that in two years we have a 65%/35% split, I will want to rebalance my accounts by selling off 5% of my stock holdings and buying 5% into bonds, therefore "rebalancing" my portfolio.

Rebalancing forces upon you the discipline of selling your winners and buying into losers - in short, selling high and buying low.

4. There is no point 4.

Oerdin · June 11, 2003, 16:34

Japher: 10% is an impressive return these days.

I'm going to do as everyone has suggested and max out my contributions. It will require belt tightening but in the long run it will be worth a little sacrifice now.

Harry: I also agree the bond fund isn't a smart investment. I'm going to cut them.

JohnT: I really don't know how index funds work and I'm reluctant to invest in something I don't understand. Care to explain how they work and why they are better?

Boris Godunov · June 11, 2003, 16:39

Oerdin, for pete's sake, you are my age! Why the hell are you worried about your 401(k) now?!

Calm down, relax, and take deep breaths. The stock market will fluctuate a lot over your lifetime, so don't put any credence on what things are like now.

Your SS payment will also go up considerably as you put more into the system.

Chill!