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 Post subject: Just starting out, need advice
PostPosted: Sun Dec 30, 2012 12:23 am 

Joined: Sat Dec 29, 2012 11:48 pm
Posts: 2
I'm 22 (almost 23) and just graduated college this past summer and got a job about a month ago. I'll be making 37,000 a year and want to make sure I save and invest my money wisely. I work for the state of california and am enrolled in CalPERS, but I also want to contribute to a 401(k) or some tax-advantaged account. The 401(k) plan we have the option to enroll in does not match my contributions. Should I just max out a IRA and avoid their 401(k) plan? Here's a link to their site: https://www.nrsservicecenter.com/iApp/ret/content/landing.do?Role=None&Site=SPPFORU
I'm not sure what the difference is between me choosing their 401(k) or me just doing a IRA except that they have different contribution caps. I'm nervous about picking their 401(k) plan because I've read on here some plans are not really that great and I do not know what indicators people look out to make this determination either. Therefore, a IRA seems good because I can manage it myself. Is this a correct assessment?

I get 3100 a month pretax and wanted to put 15-20% of that into a tax-advantaged account, save 1k after tax per month, and cover my expenses with the rest. Also, the reason I can save so much is because I live with my parents so I don't pay rent or utilities. My only major expenses are car repairs/gas/insurance and cell phone bill. My existing assets include 5k in savings, 2k in ETF's, and 3k in a money market account that I'm averaging in to the same ETF's (broad market indexes) I've already bought.

My goals are....to save, I guess. My only near term goal is going back to school, which would likely require me to not work for three years. Does it still make sense to save for retirement now even though I will have big expenses (cost of school) in the near future? A more medium term goal is saving up to buy a house and beginning to support a family. And for the longer term, all I want is financial independence or not to have to worry about money. Early retirement is not a priority.

I understand that this was a bit of a ramble, but I think I provided all the relevant pieces of my situation to be given some advice. Am I generally on the right track here? My biggest questions are how do I balance my savings between tax-deferred accounts and after-tax savings? I like the idea of maxing out (within my means) of tax-deferred accounts simply because money has the greatest potential to grow, but then again I don't like the idea of locking my money up until I'm 59. Thoughts?


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 Post subject: Re: Just starting out, need advice
PostPosted: Sun Dec 30, 2012 1:38 pm 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
Since you don't like the idea of locking your money up until 59 how about starting a Roth IRA and maxing it out every year. As for the employer retirement vs the IRA... in most cases you cant touch your employer 401k unless you either retire or sever services with them. With an IRA you have more control. Since they dont match funds... I'd look into an IRA.

Retirement vs. School

Part of me wants to say since you plan on leaving your job just save everything to cover your school expenses.... HOWEVER I am learning the hard way that if you don't start saving for retirement early then you're going to be scrambling later in life. I know that I am.

If there is two pieces of advice I can give from my own life.... avoid the credit card game, and save early for retirement. Since you are still young how about putting 10% into a retirement fund and save 10% to cover the cost of your schooling? From my own personal experiences... Check out T. Rowe Price for either a Roth IRA or a Traditional IRA. Their fee's are very reasonable and you have full control over what you want to invest in.

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 Post subject: Re: Just starting out, need advice
PostPosted: Sun Dec 30, 2012 1:57 pm 

Joined: Sat Jun 16, 2012 8:06 am
Posts: 97
We are CalPERS retirees as of 2010; my spouse retired with 41 yrs. First of all, let's establish the basics. If you are in PERS, you are working to earn a pension, payable through your agency's contributions to a 503b (or similar). This is why they don't "match" your 401k. You are getting a MUCH BETTER deal through PERS. We live entirely off the PERS pension, and don't need to touch the 401k account.

CalPERS is one of the largest and best-funded pension funds in the US. Fund mgrs fight to get onto the PERS-approved funds list. Every single fund listed is judged on a three-year rolling average against its market segment peers. If the fund cannot match or beat the performance of its peers, it is dropped and a new fund is selected. There is no "resting on laurels" for a PERS-approved fund.

Second, the cost of the funds' expense ratios is the lowest possible negotiated rate. Even PIMCO, which doesn't lower its fund costs for anybody, had to give PERS a discounted expense rate on its fund (one of their Real Return funds, an excellent fund). PERS itself charges a very minimal management fee. I can't remember the exact amount but it's something like 0.010 percent.

#3: When you consider you are buying excellent quality funds at NAV – net asset value – with no trading or brokerage commissions, I doubt it would be possible for you to better the PERS compounded performance minus the extraordinarily low fund expense costs, no matter what discount brokerage you are thinking of using. Many studies have shown that the real difference in investing results is to have the lowest cost possible funds. PERS has far more "financial weight" than any one individual could have, save for the Republicans' 1%. I don't see how you could duplicate their offering of quality funds at discounted expense.

#4 – Every CA agency negotiates its own contract with PERS. It is a cafeteria plan for employer agencies; an agency can pick and choose specific details. They must pay PERS for managing the plan – those form the reserves that pay your pension. PERS is currently 74% funded against future liabilities. They have been as high as 118% funded; what happens is that the State legislature tends to "raid" the PERS excess to balance the budget. They've done it three times in the last 20 yrs (and no, the State doesn't pay the money back, either). Joining PERS is voluntary; many CA cities do not belong because the cost is high, so they self-insure – a much riskier proposition than PERS.

#5 – the 401k balance is entirely up to you. As you have noted, the limits for a 401k are substantially higher than an IRA. It would be foolish to ignore this; the more you save while young the better off you will be in your 50's and 60's. We truly regret we didn't save more in the 401k. When you consider that we tripled our total contributions with investment profits in a 27-yr timeframe (when he first started they didn't have 401k plans, and we only contributed heavily during the last ten years), it was simply stupid of us not to have taken full advantage of the three decades of compounding.

This is particularly true when you add in that your 401k, like your 503b, has the financial weight of PERS behind it. You have the same high-quality level of funds available for investment, at the same low expense ratios. ICMA, the management company, has an excellent website where it's easy to look at details of each fund, including their top ten investments, costs, and Morningstar rating against their peers.

Although you cannot invest in riskier assets like commodities or emerging markets, you can do an outstanding balanced portfolio, say 75/25% equities/bonds or 60/40% or even 50-50% - I wouldn't go lower on equities than that, at your age – and IF you have any extra after maxing out the 401k limit, open a Roth IRA and invest it in the more volatile asset classes that a pension fund cannot offer due to its fiduciary limitations.

HTH, and feel free to ask if you have any more questions regarding how PERS works.


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 Post subject: Re: Just starting out, need advice
PostPosted: Sun Dec 30, 2012 2:45 pm 

Joined: Tue Jun 30, 2009 9:44 pm
Posts: 300
Location: Atlanta, Georgia
brugality wrote:
My goals are....to save, I guess. My only near term goal is going back to school, which would likely require me to not work for three years. Does it still make sense to save for retirement now even though I will have big expenses (cost of school) in the near future? A more medium term goal is saving up to buy a house and beginning to support a family. And for the longer term, all I want is financial independence or not to have to worry about money. Early retirement is not a priority.

First, whether you save for school or save for retirement (or house/family), you are making a wise choice to save, not spend! Seriously, you are in a prime place to take advantage of all the saving you can do, so it's great that you seem oriented that way already. Beyond that, I would take a balanced approach and save for both retirement and school simultaneously. I was pretty sure I was going to apply to law school after college, but was planning to work for a year before attending. I always put money into Roth IRAs during the years I worked pre- (and during summers of) law school, though I did not have those other retirement vehicles available to me that you do. (And early on, I was in a low tax bracket, so I definitely preferred Roth over Traditional.) But I also saved a bunch into an online *high yield* savings account (interest rates were better then!). So, before you go back to school, that can be your emergency fund, hopefully growing steadily, and then once you're in school, you can live off of the fund, being careful not to deplete it below a comfortable size emergency fund. Note, however, that I think your retirement savings doesn't count against you for financial aid, but cash in regular savings does -- SOMEONE PLEASE CORRECT ME IF I'M WRONG HERE.


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 Post subject: Re: Just starting out, need advice
PostPosted: Sun Dec 30, 2012 3:27 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1177
N2Deep wrote:
Since you don't like the idea of locking your money up until 59 how about starting a Roth IRA and maxing it out every year.

The OP stated that he's going back to school full time for 3 years & if that happens, then he won't be able to contribute to a Roth or a 401K during that time since you have to have an income. There might be a backdoor method for this but none that I'm aware of.

I'd also suggest to him to live with his parents as long as he can.


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 Post subject: Re: Just starting out, need advice
PostPosted: Sun Dec 30, 2012 3:34 pm 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
Tightwad wrote:
N2Deep wrote:
Since you don't like the idea of locking your money up until 59 how about starting a Roth IRA and maxing it out every year.

The OP stated that he's going back to school full time for 3 years & if that happens, then he won't be able to contribute to a Roth or a 401K during that time since you have to have an income. There might be a backdoor method for this but none that I'm aware of.

I'd also suggest to him to live with his parents as long as he can.


True... but he also stated

Quote:
I'm 22 (almost 23) and just graduated college this past summer and got a job about a month ago. I'll be making 37,000 a year and want to make sure I save and invest my money wisely. I work for the state of california and am enrolled in CalPERS, but I also want to contribute to a 401(k) or some tax-advantaged account. The 401(k) plan we have the option to enroll in does not match my contributions. Should I just max out a IRA and avoid their 401(k) plan?


Which leads me to believe he is looking for advice on what to do while he has this state job and before he leaves the workforce to go back to school.

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 Post subject: Re: Just starting out, need advice
PostPosted: Mon Dec 31, 2012 12:01 pm 

Joined: Sat Jun 16, 2012 8:06 am
Posts: 97
It's fine to have plans to go back to school, but I'm sure we know a lot of people who thought that but in the end did not. With so many now questioning the worth of a college degree, we should not assume that everybody who thinks they are going back to school will indeed do so.

Here is the thing about contributing to a 401k under CalPERS: if you leave employment, PERS allows you to either roll the money over OR keep it within PERS for as long as you want. Although I normally recommend consolidating accounts, I would NOT recommend anyone who has money with PERS but leaves before vesting for a pension, remove their funds for the following reason:

- Because a substantial number of state agencies are PERS members, if you ever take a job with another PERS member agency at any time in the future, your previous account is then consolidated with your current account as you earn 'years worked' towards your pension credits.

Because the funds are well managed and the expense costs are low, it would be very hard to duplicate that advantage if the OP moves the original funds. Some agencies allow new employees to transfer in previous employer 401k funds, but some do not!

So, save as much $$ as you can in PERS, keep the account there. Then, when you retire, THEN move the account to consolidate it with your other retirement accounts, if you never did go back to employment with another PERS agency.


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 Post subject: Re: Just starting out, need advice
PostPosted: Wed Jan 02, 2013 5:27 pm 

Joined: Sat Dec 29, 2012 11:48 pm
Posts: 2
Thank you all very much for your informative responses. Your time and insight is appreciated.

One thing is clear: I am happy I enrolled in PERS. I do not plan on rolling over that money once (if) I leave the work force in 2 years. I could very well end up working for the state again after (if) I graduate law school and want to leave that there so I have 2 years "credited" with PERS. Plus, PERS is only going to get less generous over the years and I already am subject to the changes the legislature made this past year.

Regarding the 401(k) vs. Roth IRA: What is the difference? (beside limit contributions). If I understand correctly a 401(k) would withdraw money straight from my paycheck, thereby reducing my taxable income (and shielding this money from taxes until I reach retirement). As opposed to a Roth IRA, which would require me to contribute money after tax, thereby maintaing my maximum taxable income, but allowing me to take my money tax free later in life when I retire. Combined with a lower contribution limit a Roth IRA seems like an inferior choice to a 401(k). Is that reasoning fairly sound?

I want to take advantage of my youth so my money has the potential to grow as much as possible. While I am moderately averse to putting away money for so many years, it appears to make more and more sense to do just that. Some numbers I've seen crunched online show a seemingly small investment now could yield me that amount many times over 40 years form now. And since, according to LeRainDrop, cash on hand would hinder my chances at a financial aid for law school (or any graduate school I assume) that is even more reason to stash my money in retirement accounts.

Right now my paycheck (two a month) is 1568 pre-tax/PERS and after-tax/PERS it's 1205, so effectively losing 23%. If I deduct 415 (415x24≈10K/year) a paycheck to a 401(k) my taxable income is reduced to 1153 and thus I save 100 dollars from taxes (1568x.23=363 compared to 1153x.23=265). After taxes/PERS I'll have 888 each paycheck and could still save 500 after tax in an online savings account, still leaving me with 388 every two weeks to cover all my expenses.

So that's my plan at this point. Thoughts?


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 Post subject: Re: Just starting out, need advice
PostPosted: Wed Jan 02, 2013 5:52 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
brugality wrote:

Regarding the 401(k) vs. Roth IRA: What is the difference? (beside limit contributions). If I understand correctly a 401(k) would withdraw money straight from my paycheck, thereby reducing my taxable income (and shielding this money from taxes until I reach retirement). As opposed to a Roth IRA, which would require me to contribute money after tax, thereby maintaing my maximum taxable income, but allowing me to take my money tax free later in life when I retire. Combined with a lower contribution limit a Roth IRA seems like an inferior choice to a 401(k). Is that reasoning fairly sound?



This reasoning may be a lot of things, but "sound" is not one of them. The roth offers many more benefits than just the time when money is taxed. But, you were looking at the roth vs 401k decision. It is the same, assuming your tax rates are the same. If you think your tax rate in retirement will be lower, the roth is less attractive. If you think your tax rate will be higher, the roth is much more attractive.

I'd look at cash flow at this point. But generally speaking, a Roth benefits someone in your situation much more than higher income people.

brugality wrote:

Right now my paycheck (two a month) is 1568 pre-tax/PERS and after-tax/PERS it's 1205, so effectively losing 23%. If I deduct 415 (415x24≈10K/year) a paycheck to a 401(k) my taxable income is reduced to 1153 and thus I save 100 dollars from taxes (1568x.23=363 compared to 1153x.23=265). After taxes/PERS I'll have 888 each paycheck and could still save 500 after tax in an online savings account, still leaving me with 388 every two weeks to cover all my expenses.


You just can't look at tax "savings" based on your net:gross. It is much more complicated than that. For one, some things, like FICA, come off the top and there is no reducing your liability there. Also, we have a progressive tax system, but your withholding is done on more or less a flat rate. You really should be considering your highest marginal rate when doing this type of analysis.

I'd take your highest marginal rates (state and federal) and see what you actually "save". Then, if after a few paychecks, you find you aren't realizing the savings you thought you would (or too much), you can adjust your W4 if need be.

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 Post subject: Re: Just starting out, need advice
PostPosted: Wed Jan 02, 2013 7:02 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1177
Bichon Frise wrote:
This reasoning may be a lot of things, but "sound" is not one of them. The roth offers many more benefits than just the time when money is taxed. But, you were looking at the roth vs 401k decision. It is the same, assuming your tax rates are the same. If you think your tax rate in retirement will be lower, the roth is less attractive. If you think your tax rate will be higher, the roth is much more attractive.

The gov't will figure out a way to tax the Roth IRA before it's over. They may not call it a "tax" but that will be too much money sitting in those accounts for the Democrats not to 'redistribute' in some way to the deadbeats & slackers so they can get re-elected.


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 Post subject: Re: Just starting out, need advice
PostPosted: Wed Jan 02, 2013 7:06 pm 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
Bichon Frise wrote:
brugality wrote:

Regarding the 401(k) vs. Roth IRA: What is the difference? (beside limit contributions). If I understand correctly a 401(k) would withdraw money straight from my paycheck, thereby reducing my taxable income (and shielding this money from taxes until I reach retirement). As opposed to a Roth IRA, which would require me to contribute money after tax, thereby maintaing my maximum taxable income, but allowing me to take my money tax free later in life when I retire. Combined with a lower contribution limit a Roth IRA seems like an inferior choice to a 401(k). Is that reasoning fairly sound?



This reasoning may be a lot of things, but "sound" is not one of them. The roth offers many more benefits than just the time when money is taxed. But, you were looking at the roth vs 401k decision. It is the same, assuming your tax rates are the same. If you think your tax rate in retirement will be lower, the roth is less attractive. If you think your tax rate will be higher, the roth is much more attractive.


Plus if you're ever in a real serious financial bind...you can pull what you contributed to your Roth tax free as long as you don't touch the dividends. You may still have to pay the 10% "I'm the govt so I get to tell you when you can retire" tax for early withdraw.

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 Post subject: Re: Just starting out, need advice
PostPosted: Wed Jan 02, 2013 7:08 pm 

Joined: Tue Apr 15, 2008 6:48 am
Posts: 526
Location: Arkansas
Tightwad wrote:
The gov't will figure out a way to tax the Roth IRA before it's over. They may not call it a "tax" but that will be too much money sitting in those accounts for the Democrats not to 'redistribute' in some way to the deadbeats & slackers so they can get re-elected.


This is already under discussion from what I have read. Only they were talking about hitting ALL private retirement funds... in order to redistribute the wealth.

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 Post subject: Re: Just starting out, need advice
PostPosted: Wed Jan 02, 2013 7:14 pm 

Joined: Mon Nov 01, 2010 5:15 pm
Posts: 1177
N2Deep wrote:
Tightwad wrote:
The gov't will figure out a way to tax the Roth IRA before it's over. They may not call it a "tax" but that will be too much money sitting in those accounts for the Democrats not to 'redistribute' in some way to the deadbeats & slackers so they can get re-elected.


This is already under discussion from what I have read. Only they were talking about hitting ALL private retirement funds... in order to redistribute the wealth.

I'm not surprised.


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 Post subject: Re: Just starting out, need advice
PostPosted: Wed Jan 02, 2013 10:22 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1942
N2Deep wrote:
Tightwad wrote:
The gov't will figure out a way to tax the Roth IRA before it's over. They may not call it a "tax" but that will be too much money sitting in those accounts for the Democrats not to 'redistribute' in some way to the deadbeats & slackers so they can get re-elected.


This is already under discussion from what I have read. Only they were talking about hitting ALL private retirement funds... in order to redistribute the wealth.

Link please. As recently as August, http://helpdesk.blogs.money.cnn.com/2012/08/09/irs-taxing-roth-ira-withdrawals/, at least in the case of Roth IRAs.


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 Post subject: Re: Just starting out, need advice
PostPosted: Wed Jan 02, 2013 10:24 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1942
Tightwad wrote:
Bichon Frise wrote:
This reasoning may be a lot of things, but "sound" is not one of them. The roth offers many more benefits than just the time when money is taxed. But, you were looking at the roth vs 401k decision. It is the same, assuming your tax rates are the same. If you think your tax rate in retirement will be lower, the roth is less attractive. If you think your tax rate will be higher, the roth is much more attractive.

The gov't will figure out a way to tax the Roth IRA before it's over. They may not call it a "tax" but that will be too much money sitting in those accounts for the Democrats not to 'redistribute' in some way to the deadbeats & slackers so they can get re-elected.

http://www.rothira.com/blog/will-roth-ira-withdrawals-be-taxed-in-the-future


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