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 Post subject: Retirement
PostPosted: Mon Sep 10, 2012 2:52 pm 

Joined: Mon Sep 10, 2012 2:44 pm
Posts: 18
I'm currently 25 almost 26 and have a Roth IRA of $21,000. In S&P 500 Index Fund 60%, Small Cap Growth 20%, and Large Cap Growth 20%. I also have a 401K totalling $2,000 exclusively in S&P 500. My question is are my fund allocations appropriate? Is saving for retirement really worth it? I have had my roth since I was 17 and have only appreciated my investments $1,500. Older people I ask never seem to have saved for retirement and can't attest to compounding interest. I've seen the hypothetical charts and wonder if the money really will be there.


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 Post subject: Re: Retirement
PostPosted: Mon Sep 10, 2012 6:10 pm 
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namesbond wrote:
I'm currently 25 almost 26 and have a Roth IRA of $21,000. In S&P 500 Index Fund 60%, Small Cap Growth 20%, and Large Cap Growth 20%. I also have a 401K totalling $2,000 exclusively in S&P 500. My question is are my fund allocations appropriate? Is saving for retirement really worth it? I have had my roth since I was 17 and have only appreciated my investments $1,500. Older people I ask never seem to have saved for retirement and can't attest to compounding interest. I've seen the hypothetical charts and wonder if the money really will be there.


You are in good shape. Your allocations are good. I could make minor suggestions but you seem to be on the right track.

You must be consistent and save every month for at least a couple of decades. That's what we did and have almost $1 million in investments and a net worth including some retirement entitlements of just over $2 million. The older people you know who saved but don't have much are probably forgetting to tell you how much they spent along the way. I am married, late 40s. We will be retiring in 3 years. You have more than I did when I was your age.


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 4:17 am 

Joined: Sat Jun 16, 2012 2:11 am
Posts: 192
The future real value of $23.000 in 40 years time with 5% interest rate is $161.900 in todays value. That is no doubt a very nice start for someone your age. I do wonder though if that money is not better spent as a huge down payment on a home you will buy anyway the upcoming 4-8 years.

Today, many (most) people experiense the following the 20 years running up to retirement:

1) student loans payed off
2) best salary of their life
3) low (or no) mortgage compared to market value of home
4) kids move out and take care of themself
5) because of 3, you can move to a smaller home
6) you have accumulated alot of the "stuff" you need or want

Those 15-20 years is as far as I am concerned when you should finance the major part of your pension. Saving $1.500 per month for 18 years at 5% real return gives you the equivalent of $526.000.


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 6:26 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
namesbond wrote:
I have had my roth since I was 17 and have only appreciated my investments $1,500. Older people I ask never seem to have saved for retirement and can't attest to compounding interest.


Keep in mind that "compounding interest" isn't really part of the equation here, as you're 100% invested in equities. The key point to remember is that equities experience dynamic growth, which means they don't grow steadily but instead go up and down and may experience long periods of no growth. But the overall long-term trend should be upward and that's what you're counting on. The value of your portfolio right now doesn't matter, nor does it matter whether you're gaining or losing value. What matters is the ultimate value of your portfolio when you're ready to start needing the money, which is many years into the future. As others here have said, in that regard you're in good shape.

The only thing I'd suggest is that you examine the MERs of the funds you're invested in to see if you can find comparable investments at lower cost. The index funds probably have a low MER, but the others might be higher. Let's say your combined MER works out to 0.44%: that would mean you're paying $124/year in fees on your current investment. But if your combined MER is 1.07% you're paying $246/year in fees. As you keep investing and the value of your portfolio increases, the MER will become a bigger and bigger consideration. If you have a portfolio of $500,000 with a combined MER of 1.07% you're paying $5,350 in fees every year, whereas with a combined MER of 0.44% you'd be paying $2,200. Probably the only way to get the lowest MERs is by buying ETFs, which may not be an option for you.


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 7:58 am 

Joined: Mon Sep 10, 2012 2:44 pm
Posts: 18
I'm not sure what MERs are. I have .17% to .24% listed for my expense ratios.


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 8:29 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
namesbond wrote:
I'm not sure what MERs are. I have .17% to .24% listed for my expense ratios.


That's good. MER = management expense ratio. Anything below 1% is good; 0.17% is excellent and 0.24% is just fine.

Some actively managed funds have ridiculously high MERs -- 2% or more. The people who buy those funds lose a lot of their earnings through fees, throwing away many thousands of dollars year after year. And in almost all cases, the earnings from those managed funds don't make up for those losses. They might over the short term, but in the long term the index funds with their lower fees come out ahead.

You're doing fine.


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 8:44 am 

Joined: Mon Sep 10, 2012 2:44 pm
Posts: 18
Thanks, for the advice. I just graduated college with only $14,000 in student loans which I should be able to clear out fast. My vehicle is paid off and has atleast 5 years left before problems strike. I have $6,200.00 in an emergency fund and no credit card debt. I'm working for the State and they contribute 11% to my 401k with a 2% employee match. They pay 5.5 % on the behalf of the employee. So I get 13% in my 401k plus I put in an extra $25.00 a month. It is my goal to max out my Roth each year and build up my emergency fund so that I never dip into it. I'm currently putting 700.00 a month into my Roth trying to make up for the first few months that I was still in college this year. I can't wait until January when I can bring it down to $416.00 per month to max it out.


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 9:49 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 867
By the way, you have until April 15th of next year to complete your Roth Contributions for 2012.

Also, what is interesting is you have zero exposure to international securities and bonds.

Bonds are tricky right now. But, they do help to reduce your volatility.

Also, you should have some international exposure. Here is piece done by Vanguard which explains diversification benefits of international securities. https://personal.vanguard.com/pdf/icriecr.pdf

Most important, at least to me, is figure 8 which shows the differential between US stocks and non-US stocks. As you can see, there are times when US stocks dominate and times when non-US stocks dominate. The point is, when you "buy and hold," it is always implicitly behind the scenes that you also rebalance. So, with figure 8 starting to head towards US stocks outperforming the rest of the world, guess what I am selling and guess what I am buying? This illustrates the point of how diversification, even bonds, can help to reduce the volatility of a portfolio and give similar, if not better, returns IF YOU REBALANCE.

As far as how much you should hold in int'l securities, the Vanguard piece answers that in the conclusion,

Quote:
In light of quantitative analysis and qualitative considerations, we have demonstrated that domestic investors should consider allocating part of their portfolios to international securities, and that a 20% allocation may be a reasonable starting point. Although finance theory dictates that an upper asset allocation limit should be based on the global market capitalization for international equities (currently approximately 58%), we have demonstrated that international allocations exceeding 40% have not historically added significant additional diversification benefits, particularly accounting for costs.


I would also suggest the Boglehead's investing book (at your local library).

You have a good start. The final thing I would add, have some fun as well.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 10:05 am 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
I'm not sure that reducing volatility is so important for someone in their 20s, though. I think it's something you need to pay close attention to as you get closer to needing the money. The value of your porfolio could drop all the way to zero when you're 26 and you could still be a multimillionaire by the time you're 60 -- it's just a blip on a long path and recovery isn't really helped by bonds; they just give the illusion that you haven't "lost" so much money. But you haven't lost money at all -- your shares have simply lost value, and they'll gain it back and then some if you have time for them to grow, which someone in their 20s certainly does.

I totally agree that international exposure is a good idea, and diversification in general is a good idea. I just don't think you'd need to allocate much to bonds when you're still 40 or more years away from retirement.


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 10:40 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 867
I'm not saying got 50% bonds, but some do help (10% or so) for a younger person. for instance, from 2008 to last year, which did better, bonds or equities? and if one rebalanced (moved proceeds from bonds to equities, essentially, selling high and buying low on a relative valuation) did they do better than if they just rode it out 100% equities?

I also link volatility with risk...and I would rather accept slightly smaller gains than ride the rollercoaster. In other words, I'll play it much safer for slightly smaller returns. That's the principal of efficient frontiers (if you buy into MPT). But many times, having a less volatile portfolio has some qualitative benefits as well e.g. doesn't mess with your head with an impending falling sky.

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 2:25 pm 

Joined: Mon Sep 10, 2012 2:44 pm
Posts: 18
Which Vanguard international fund would you recommend?


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 3:14 pm 

Joined: Thu Apr 05, 2007 3:05 pm
Posts: 1356
You may or may not have access to all the Vanguard products through your employer's plan. The ETF I would buy is VXUS, and if you can find a fund that's close to that you'd probably do well. On a quick glance it looks like the closest analogue in a fund might be the Total International, which holds about 6,000 stocks (https://personal.vanguard.com/us/funds/vanguard/core#International). It has a minimum investment of $3,000.


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 Post subject: Re: Retirement
PostPosted: Tue Sep 11, 2012 8:43 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 867
my expectation would be that the S&P fund with your employer's plan has the lowest expense ratio available. If so, I would keep contributing to the S&P fund and look to your Roth for the diversification. If I were you, I would also have no problems grabbing the admiral version of the total international fund (assuming you want to do a fund) and letting your contributions fill in the rest of the gaps.

Also, have you seen the bogleheads wiki on "lazy portfolios"? It should give a getting starting place to diversification buckets.

http://www.bogleheads.org/wiki/Lazy_Portfolios

_________________
Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Retirement
PostPosted: Wed Sep 12, 2012 2:20 pm 

Joined: Mon Sep 10, 2012 2:44 pm
Posts: 18
I took a thousand from each of the three funds and began my VXUS international fund. Thanks for the help. I'm going to keep maxing out my Roth and see where it goes. I personally don't want to get into bond funds at this point because I want to remain more aggressive since I'm still young.


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 Post subject: Re: Retirement
PostPosted: Thu Sep 13, 2012 9:12 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1985
namesbond wrote:
I'm currently 25 almost 26 and have a Roth IRA of $21,000. In S&P 500 Index Fund 60%, Small Cap Growth 20%, and Large Cap Growth 20%. I also have a 401K totalling $2,000 exclusively in S&P 500. My question is are my fund allocations appropriate?

Just curious: why the emphasis on growth funds? They've historically not performed as well as value funds over the long term.


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