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Sounds to me like you're doing exactly what you should be doing.
You're starting to save at 22, which puts you ahead of most people, and that extra time is significant thanks to compound interest. 6% matching is pretty good (better than I'm getting right now), and that money you're putting in has more buying power in the current market. The value of your account may go down some in the short term, but certainly not more than you're gaining just from the matching. And that's in the short term- in the long term, the economy will recover, and the extra shares you're able to buy thanks to their current low prices will increase your return when it's time to retire.
Vanguard funds are generally pretty good, with low fees. They're not available with my 401k, but I was planning on opening up a separate account with one of their life-cycle funds- it's been highly recommended to me by both online and offline sources. If you want to do more and have some extra cash, you may want to look at those too- the amount of risk taken in those funds adjusts according to your age. You can get a Roth IRA and start dumping money in there too. You pay into a Roth with money that's already been (income) taxed, and it's not taxed again when you withdraw it. Any money you make on the investments in there is also tax-free.
edit- Keeping abreast (heh) of the economic situation can help you feel more confidant. I don't spend too much time on it, but I like to briefly hear what's going on from an objective (non-sensationalist, non-partisan) source. Calculated Risk is a pretty good blog for this purpose, if you just want to plug that into your rss reader. It's probably better than absorbing information from the guys bitching about their stocks and home values around the water cooler.
The statement "Probably won't be there in 4 years" is a kneejerk reaction made by people who have seen their retirement funds drop by 20% this past year. It's not reality.
If you're looking for consolation, I set up the exact same fund through my employer just last month -- the Vanguard Target 2045. I'm on a 403(b) but that's just a technicality because I work at a not-for-profit.
If you're looking for whether it was a good idea, yes. How much does your employer match? That's an automatic return right there, so if your employer matches 20%, with a 20% drop you would essentially have gained nor lost no value. If your employer matches more, you're gaining more than the market simply by receiving extra money from your employer.
If your employer is matching 100% of your 6%, then yes, even in today's market you are practically doubling your money each paycheck.
The stock market and the US economy isn't going anywhere. This is a particularly bad recession, but I'd argue that it's probably a good time to start investing, since the market is down. Last year would've been a bad year to start, for obvious reasons, but you'll note that the stock market has been relatively stable for the last month or so, with the DOW hovering in the 8000s.
As with all investing, it's putting money towards the future. If you're destitute and that 6% is the difference between going hungry or homeless, then yes, you should pull your money out.
Anyway, the reason you invest in stocks while you're young is that you have more time to ride out dips & recessions. Bonds are not a sure thing, due to the fact that many business bonds are callable, especially now with rates low in general. If you look through your Vanguard book, you'll see that the Target 2015 is about 50% bonds -- why? Because bonds are less risky. They return less money, but you're pretty much guaranteed to get those funds unless a serious financial calamity occurs. And when you're 58 and looking to retire in 7 years, you don't want a couple hundred thousand dollars disappearing.
Many people don't really understand how they should manage their retirement funds, so "target" funds are usually a safe bet because the investing company will gradually shift the fund to something less risky as they get closer to their target date. An individual most likely wouldn't do that -- they'd pick a risky fund when they're 40 and leave it in there until they're retiring, complaining vehemently whenever a dip in the market occurs.
Don't fall into the trap of checking your 401k every week, or even every month. Remember that over the next 40 years, there will be ups and downs. Checking on it often will needlessly raise your stress levels.
Also, if your 401k offers different investments(examples, The Dodge Cox Balanced Fund, Templeton World, etc), consider consulting a financial advisor and splitting investments.
And finally, don't freak about the market conditions. This may even be a good time to start dropping money in it since you are getting shares/units at low prices, and the market will eventually recover.
DragonPup on
"I was there, I was there, the day Horus slew the Emperor." -Cpt Garviel Loken
Today I logged into the investing website for the first time (Wachovia) to take a look at my default plan. It was set at Vanguard Target Ret 2045, which is 90% stocks and 10% bonds, roughly. From what I understand, that is a higher-risk option, which is best for my age.
Lately I've been hearing from people about their 401k's and how they 'probably won't be there in the next 4 years' (You can guess who they voted for). My question is: Do I have anything to worry about with investing into my 401k? Should I back off and put my money into a much safer and less touchable plan? Is there a plan that the govt. can't touch? Pardon my ignorance on the situation, but I'm not 100% sure about how all of this works, and I'm well aware of how tough it will likely be when I'm ready to retire... so your ideas on this subject will be a great help.
Thanks,
The Target Ret 2045 funds are geared to match risk to the expected date of the fund owner's retirement. So the 2045 fund is set to automatically reduce the risk of your holdings as the date of 2045 approachs, removing the need to micromanage your retirement allotment. So if you plan on retiring in 2045, that fund is probably a decent enough bet.
Also, people bitching about 401k's are generally of two minds I've seen, neither of which has much validity. The first are people who think we are going to have a depression that wipes out all stock market equity. If that is the case the last thing you should be worried about is your 401k. Guns, ammo and canned food would probably be your primary concerns. I think it is highly unlikely anyhow, so there you go.
The second type of person are those who think the Democrats are going to remove the 401k instrument of savings. This is even more unlikely than the Mad Max scenario. The Democrats finally got a taste of winning and their aren't going to throw that all away by confiscating the primary retirement of so many of the very Americans who voted them into office. The political fallout from such a move makes it untenable.
So keep investing. And look at some Roth IRAs to gain tax diversification if you wish to invest beyond your match (a good idea IMO).
A good way to do a mental check on your investment is to simply take the amount of the deduction in each paycheck, and then multiply that by the total number of paychecks so far. So, if it's, say, $50 a paycheck, and you get paid 26 times a year, each year would've been $1300, pre-tax, that you would've received in cash. Compare *that* calculation to your total -- it should almost always be a greater sum in the investment, which is a good way to feel better about it even when you're not at the high point currently.
Plus, you're getting a good matching deal. On your 6%, pre-tax, you're getting 75% free money simply by saving it. I only get 20% on 3% of my total salary.
Like everyone says, you're doing exactly what you should be doing. It's a good time to be getting into the market. If anything, I'd look at something more aggressive (you're basically burning 10% of your money in bonds).
To put it in perspective: since the founding of Wall Street, no reasonably-diversified investment has beaten small-capital stocks over a twenty-year period. Ever. Mid-capital stocks come in behind that, large-capital stocks come in behind that, with other investments dragging behind all of those. Mind you, this is over a twenty-year period (any twenty-year period), so it's still very possible to perform poorly in the short-term. However, you're 22, and investing for retirement; you don't give a shit about the short term.
Furthermore, even if you lost it all right now, it wouldn't be a big deal. However, if you maintain a 10% average interest rate over the next 40 years (probably about when you start divesting from stocks, and that's a fairly conservative estimate), every dollar you invest now turns into a bit more than $45 in 40 years. If you're investing in bonds, instead, you'll probably hit something closer to around a 7% average interest rate (and that's a pretty optimistic estimate), which means that for every $1 you invest now, you'll have a bit under $15 in 40 years. Are bonds safer? Yes. Are they significantly safer over a very long period of time? Slightly, yes. Is the slight added safety you're going to get from bonds or any other non-stock investment worth giving up a near-sure shot at tripling your money relative to the bond investment? Absolutely not.
Do all 401k plans have interest? I didn't notice anything like that, at least nowhere obvious. How often is that accrued?
It doesn't accrue interest, but for purposes of investment, you treat appreciating stock value like interest, because it works out mathematically the same. So, yes, one year your stocks will rise by 20%, the next drop by 7%, the next raise by 12%, the next raise by 3%, etc. Over a long period of time, however, we can normalize that, and treat it as an average interest rate. Over forty years, for a small-capital portfolio, 10% is a very pessimistic estimate for average interest rate, but over that time, it really is going to be a "gain 25% one year, lose 12% the next year" kind of thing. It's a roller coaster, and it only really works out to your benefit over the long haul. But historically, it has always worked out to the benefit of the investor over the long haul.
Do all 401k plans have interest? I didn't notice anything like that, at least nowhere obvious. How often is that accrued?
It doesn't accrue interest, but for purposes of investment, you treat appreciating stock value like interest, because it works out mathematically the same. So, yes, one year your stocks will rise by 20%, the next drop by 7%, the next raise by 12%, the next raise by 3%, etc. Over a long period of time, however, we can normalize that, and treat it as an average interest rate. Over forty years, for a small-capital portfolio, 10% is a very pessimistic estimate for average interest rate, but over that time, it really is going to be a "gain 25% one year, lose 12% the next year" kind of thing. It's a roller coaster, and it only really works out to your benefit over the long haul. But historically, it has always worked out to the benefit of the investor over the long haul.
You also get dividends at the end of the year which I recommend reinvesting in your fund. Don't hold yourself to 6% make sure you max out your donation limit for the year (if you can afford it) Also remeber you have until April 15th to make donations against the previous years limit. I highly recommend a roth IRA as youstart out. Since the money is taxed now when your earning less it'll be at a lower rate than when you retire and are earning more.
Mishra on
"Give a man a fire, he's warm for the night. Set a man on fire he's warm for the rest of his life."
-Terry Pratchett
Do all 401k plans have interest? I didn't notice anything like that, at least nowhere obvious. How often is that accrued?
It doesn't accrue interest, but for purposes of investment, you treat appreciating stock value like interest, because it works out mathematically the same. So, yes, one year your stocks will rise by 20%, the next drop by 7%, the next raise by 12%, the next raise by 3%, etc. Over a long period of time, however, we can normalize that, and treat it as an average interest rate. Over forty years, for a small-capital portfolio, 10% is a very pessimistic estimate for average interest rate, but over that time, it really is going to be a "gain 25% one year, lose 12% the next year" kind of thing. It's a roller coaster, and it only really works out to your benefit over the long haul. But historically, it has always worked out to the benefit of the investor over the long haul.
You also get dividends at the end of the year which I recommend reinvesting in your fund. Don't hold yourself to 6% make sure you max out your donation limit for the year (if you can afford it) Also remeber you have until April 15th to make donations against the previous years limit. I highly recommend a roth IRA as youstart out. Since the money is taxed now when your earning less it'll be at a lower rate than when you retire and are earning more.
401(k) isn't necessarily the best place to be putting his money. In fact, a Roth IRA may be where he wants to go before he maxes out his contribution limit on his 401(k) (obviously, you want to max whatever they're matching first, before doing anything else, though).
I believe dividends off of a 401(k) are automatically reinvested into the 401(k). But yes, dividends are treated the same as appreciating stock value (mostly because they are the same).
Do all 401k plans have interest? I didn't notice anything like that, at least nowhere obvious. How often is that accrued?
It doesn't accrue interest, but for purposes of investment, you treat appreciating stock value like interest, because it works out mathematically the same. So, yes, one year your stocks will rise by 20%, the next drop by 7%, the next raise by 12%, the next raise by 3%, etc. Over a long period of time, however, we can normalize that, and treat it as an average interest rate. Over forty years, for a small-capital portfolio, 10% is a very pessimistic estimate for average interest rate, but over that time, it really is going to be a "gain 25% one year, lose 12% the next year" kind of thing. It's a roller coaster, and it only really works out to your benefit over the long haul. But historically, it has always worked out to the benefit of the investor over the long haul.
You also get dividends at the end of the year which I recommend reinvesting in your fund. Don't hold yourself to 6% make sure you max out your donation limit for the year (if you can afford it) Also remeber you have until April 15th to make donations against the previous years limit. I highly recommend a roth IRA as youstart out. Since the money is taxed now when your earning less it'll be at a lower rate than when you retire and are earning more.
401(k) isn't necessarily the best place to be putting his money. In fact, a Roth IRA may be where he wants to go before he maxes out his contribution limit on his 401(k) (obviously, you want to max whatever they're matching first, before doing anything else, though).
I believe dividends off of a 401(k) are automatically reinvested into the 401(k). But yes, dividends are treated the same as appreciating stock value (mostly because they are the same).
I'm sorry You're right. SInce I don't get a 401K amounts to the same thing for me. I'd put in as much as your company will match in the 401K first, then max the roth like you said. If you start off paying 10% in taxes right now and end up paying 15% by you retire, every dollar invested has earned an extra 5%
Mishra on
"Give a man a fire, he's warm for the night. Set a man on fire he's warm for the rest of his life."
-Terry Pratchett
I don't see "IRA Roth" as an option in my plan choices... Here's the wall of text I see:
Mtb Small Cap Stock A $0.00 0.00 % 0 %
Vanguard Target Ret 2045 # $XXXX.xx 100.00 % 100 %
Vanguard Target Ret 2035 # $0.00 0.00 % 0 %
Vanguard Target Ret 2025 # $0.00 0.00 % 0 %
Vanguard Target Ret 2015 # $0.00 0.00 % 0 %
Vanguard Target Ret 2005 # $0.00 0.00 % 0 %
Evgrn Money Market/I $0.00 0.00 % 0 %
WACHOVIA DIVERSIFIED BOND A $0.00 0.00 % 0 %
Wachovia Equity Index $0.00 0.00 % 0 %
HotChkis&Wiley Lcap Val/A # $0.00 0.00 % 0 %
American Funds Growth R4 # $0.00 0.00 % 0 %
Diamond Hill Small Cap A $0.00 0.00 % 0 %
TRowe Price New Horizons $0.00 0.00 % 0 %
Evgrn Intl Equity/I # $0.00 0.00 % 0 %
Vanguard Target Ret Income # $0.00 0.00 % 0 %
GOLDMAN SACHS MDCAP VAL/INST $0.00 0.00 % 0 %
THORNBURG CORE GROWTH R4 $0.00 0.00 % 0 %
VANGUARD LONG-TERM BOD INDEX # $0.00 0.00 % 0 %
VANGUARD EXTENDED MKT/INV # $0.00 0.00 % 0 %
VANGUARD TOT INTL STK IDX # + $0.00 0.00 % 0 %
WESTERN ASSET INFLATION INDXD PLUS $0.00 0.00 % 0
Roth is not a 401k fund choice, it is a seperate investment vehicle. Basically (and I am sure someone will cover this more in depth/more accurately), the 401k offers pre-tax deposits (IE the money deposited comes from gross income and not net income) and taxable withdrawals. The Roth IRA offers post-tax deposits (comes out of your out of pocket net income) and tax free withdrawals upon retirement.
Generic advice is to invest in your 401k until match, invest in Roth until the cap (there is a finite amount you can put in a Roth in a given year), invest in 401k until cap, pursue something else. Follow that list until you run out of money you can invest in retirement.
I think of them as accounts. You put money in the accounts, and then you can invest that money in funds. The vanguard ret 2045 is a fund. That list is a list of funds that you can invest in with your 401k moneys.
You get your 401k through your employer. It gets pre-tax money- meaning that they take money out of your paycheck and put in it there, and then they withhold income tax from the rest of it. The money in the 401k is taxed when you withdraw it when you're retired. You would get a Roth IRA through another institution- I get mine through my credit union. The Roth IRA gets post-tax money, so your employer doesn't really have to be involved. They give you your salary, which has been taxed, and you take some of that money and put it in your Roth IRA. You choose a fund or funds to invest in with that money.
I'll add my own question here, I think it probably applies to you too:
So, my CU only lets me invest money from my Roth in CDs. I opened it this time last year, and the 1 year cd I got worked out pretty well, but now I need to transfer it to another institution and invest in other funds- preferably a vanguard target fund or small cap fund. Where do I go for this? Vanguard.com's not loading now, so I can't check there. I'd rather not go through a bank like BoA- I switched to a CU because I was tired of fees and the typical bank shit, and I don't want to go back to that. tl;dr- where's the best place to open a Roth IRA to invest in vanguard funds?
The only thing that matters, if you have a Target 2045 plan, is how much the shares of that plan are worth in 2045. Not tomorrow, not 5 years from now, not even 20 years from now. The only thing that matters is growth in the extreme long term.
Also, if your 401k offers different investments(examples, The Dodge Cox Balanced Fund, Templeton World, etc), consider consulting a financial advisor and splitting investments.
Not enough lime.
Seriously, those targeted funds, like anything else that claims to be "set it and forget it" (do you know those Ronco rotisseries actually have warning labels that say "don't literally forget that you're using it?) can backfire horrifically. Your best bet is to have an financial advisor look over the options that you have for investing in your 401(k), and select funds that are best for your situation. I recently had to do this, and it was worth taking the time to see my advisor and work out how to get my Roth and my 401(k) playing nice-nice with each other.
Like everyone says, you're doing exactly what you should be doing. It's a good time to be getting into the market. If anything, I'd look at something more aggressive (you're basically burning 10% of your money in bonds).
To put it in perspective: since the founding of Wall Street, no reasonably-diversified investment has beaten small-capital stocks over a twenty-year period. Ever. Mid-capital stocks come in behind that, large-capital stocks come in behind that, with other investments dragging behind all of those. Mind you, this is over a twenty-year period (any twenty-year period), so it's still very possible to perform poorly in the short-term. However, you're 22, and investing for retirement; you don't give a shit about the short term.
Furthermore, even if you lost it all right now, it wouldn't be a big deal. However, if you maintain a 10% average interest rate over the next 40 years (probably about when you start divesting from stocks, and that's a fairly conservative estimate), every dollar you invest now turns into a bit more than $45 in 40 years. If you're investing in bonds, instead, you'll probably hit something closer to around a 7% average interest rate (and that's a pretty optimistic estimate), which means that for every $1 you invest now, you'll have a bit under $15 in 40 years. Are bonds safer? Yes. Are they significantly safer over a very long period of time? Slightly, yes. Is the slight added safety you're going to get from bonds or any other non-stock investment worth giving up a near-sure shot at tripling your money relative to the bond investment? Absolutely not.
Well, it's better to have consistent moderate gains, instead of seeing your investments yo-yo between big gains and big losses, because every time you go into the hole, it takes bigger rates of return to get you back out. This is why I don't go all out balls to the wall aggressive.
As people have pointed out, the order of investment vehicles should ALWAYS be:
401(k) to the match. Seriously, this is a no-brainer. 3% match == 3% raise.
Roth IRA to the limit (currently $5K/annum as long as you're under the lower ceiling). Roth IRAs are tax-exempt, meaning you get all their yummy growth tax-free.
401(k) to the limit. Sadly, 401(k)s are tax-deferred, so you'll pay capital gains when you take the money out. Still, their tax rates are better than anything else out there.
Other vehicles like traditional IRAs, real estate, etc. By the time you get here, you should be working with a financial planner (and to be honest, at this point, having a lawyer look things over isn't a bad idea either.)
But don't forget that you should also never pay credit card interest unless absolutely necessary, and don't invest or live above your means.
It was only this year that I felt comfortable investing anything, despite having been at my job for 6 years. Likewise, I've got an idiot coworker who talks about "blowing money at the mall" on expensive shit, but has $1000 in credit card debt that she's paying the minimum on each month and has a seriously horrible credit score.
You should have highly liquid savings, such as an ING account (sorry WaMu!) or Charles Shwab checking account, that pays a modest amount of interest but is easy to access (as in, no fees, can use it to pay bills if you plan a couple days ahead). It should have enough in there to cover between 3-6 months of your normal expenses, in case you lose your job or come across other unexpected problems. Pay off full credit card balance each month.
Then invest. Nothing sucks more than socking away retirement money only to have to take it out at a huge loss thanks to fees because you're otherwise living paycheck to paycheck.
I think of them as accounts. You put money in the accounts, and then you can invest that money in funds. The vanguard ret 2045 is a fund. That list is a list of funds that you can invest in with your 401k moneys.
You get your 401k through your employer. It gets pre-tax money- meaning that they take money out of your paycheck and put in it there, and then they withhold income tax from the rest of it. The money in the 401k is taxed when you withdraw it when you're retired. You would get a Roth IRA through another institution- I get mine through my credit union. The Roth IRA gets post-tax money, so your employer doesn't really have to be involved. They give you your salary, which has been taxed, and you take some of that money and put it in your Roth IRA. You choose a fund or funds to invest in with that money.
I'll add my own question here, I think it probably applies to you too:
So, my CU only lets me invest money from my Roth in CDs. I opened it this time last year, and the 1 year cd I got worked out pretty well, but now I need to transfer it to another institution and invest in other funds- preferably a vanguard target fund or small cap fund. Where do I go for this? Vanguard.com's not loading now, so I can't check there. I'd rather not go through a bank like BoA- I switched to a CU because I was tired of fees and the typical bank shit, and I don't want to go back to that. tl;dr- where's the best place to open a Roth IRA to invest in vanguard funds?
I have both my Roth IRA and small cap investments handled through vanguard directly, it's pretty easy to set up. They charge no fees once your over 10K in an account, but I switched to all online updates and they dropped the fees on my traditional investment account.
Mishra on
"Give a man a fire, he's warm for the night. Set a man on fire he's warm for the rest of his life."
-Terry Pratchett
As people have pointed out, the order of investment vehicles should ALWAYS be:
401(k) to the match. Seriously, this is a no-brainer. 3% match == 3% raise.
Roth IRA to the limit (currently $5K/annum as long as you're under the lower ceiling). Roth IRAs are tax-exempt, meaning you get all their yummy growth tax-free.
401(k) to the limit. Sadly, 401(k)s are tax-deferred, so you'll pay capital gains when you take the money out. Still, their tax rates are better than anything else out there.
Other vehicles like traditional IRAs, real estate, etc. By the time you get here, you should be working with a financial planner (and to be honest, at this point, having a lawyer look things over isn't a bad idea either.)
Hmm I disagree about the second two. Only Roth what you can. You do need some liquidity especially just starting out. Also, I don't think adding any more to your 401k above the match is worth it. You're better off with a less restrictive stock fund you can buy/sell at any time. After the 401k and maybe Roth, get more liquid assets like EggyToast said.
Like everyone says, you're doing exactly what you should be doing. It's a good time to be getting into the market. If anything, I'd look at something more aggressive (you're basically burning 10% of your money in bonds).
To put it in perspective: since the founding of Wall Street, no reasonably-diversified investment has beaten small-capital stocks over a twenty-year period. Ever. Mid-capital stocks come in behind that, large-capital stocks come in behind that, with other investments dragging behind all of those. Mind you, this is over a twenty-year period (any twenty-year period), so it's still very possible to perform poorly in the short-term. However, you're 22, and investing for retirement; you don't give a shit about the short term.
Furthermore, even if you lost it all right now, it wouldn't be a big deal. However, if you maintain a 10% average interest rate over the next 40 years (probably about when you start divesting from stocks, and that's a fairly conservative estimate), every dollar you invest now turns into a bit more than $45 in 40 years. If you're investing in bonds, instead, you'll probably hit something closer to around a 7% average interest rate (and that's a pretty optimistic estimate), which means that for every $1 you invest now, you'll have a bit under $15 in 40 years. Are bonds safer? Yes. Are they significantly safer over a very long period of time? Slightly, yes. Is the slight added safety you're going to get from bonds or any other non-stock investment worth giving up a near-sure shot at tripling your money relative to the bond investment? Absolutely not.
Well, it's better to have consistent moderate gains, instead of seeing your investments yo-yo between big gains and big losses, because every time you go into the hole, it takes bigger rates of return to get you back out. This is why I don't go all out balls to the wall aggressive.
No, it isn't. You are wrong. Over the long-term, it doesn't matter what your gains or losses in any individual year are. What matters is your aggregate gain. If I lose 90% of my principle every odd year, but get a 10,000% gain every even year, this is better than having a 100% interest rate. And over any given twenty-year period, small cap stocks have out-performed every other well-diversified investment. This is not to say that this will happen over the next twenty years, but it has happened over every other twenty-year period since the establishment of the stock market. And we're not talking slow and steady gains, we're talking about a complete roller coaster. Once you start getting within 20 years of retirement, then is when you want to start looking at slower, safer investments. But talking about a retirement account in your twenties, if you're not going balls-to-the-wall, you're basically throwing money down the drain. Tons of money.
Yeah, Than's right with the aggregate calculations. I've been in a few finance classes and I played around with my fancy calculator -- there's no difference at the END point if there were wild swings, because the high gains will net you more capital, reducing the impact of your losses, which affect your gains, and so on, so it truly does even out. The point about moving to less risk is to guarantee that your assets remain stable when you start to withdraw them, because you don't want to potentially start withdrawing on down years.
You simply cannot beat the value of a company match into your 401(k). Set your 401(k) investment so that you get the absolute most company match, but no more. A company match is an instant and huge return on money invested.
As for picking a particular fund into which your 401(k) investments go to - I would strongly suggest an index fund.
Index funds seek to match the market. Period. You might be thinking - "but - I could invest in a fancy mutual fund with a genius manager that picks stocks that maximize my growth!"
The trouble is - these actively managed mutual funds charge you. After all, the mutual fund manager needs to get paid. These management fees typically make a mutual fund return less to you than your basic index fund.
quoting from The Motley Fool (a great website for financial advice):
Here's our oft-repeated fact that you should get through your head: The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general. That means that before your dollar even gets to the fund manager to invest, his company has already taken two cents off the top.
You'll do better with the index fund.
As for the recent stock market panic:
Yes, the stock market has dropped massively lately. I check my 401(k) this year and it tells me my year-to-date change has been something around -50%.
If you're in your twenties, this doesn't mean a damn thing.
Keep in mind - a 401(k) is a retirement investment fund. All you should care about is the long term return. So the value of your stocks has plunged now - big deal. You shouldn't be taking money out of your 401(k) when you're young, anyways - the penalties are pretty high. As long as you keep investing, you're buying stock in the short term on the cheap. The market will recover. Historically, the market has consistently returned quite well.
On the other hand -
I work with a few guys in their 60s. One of them tells me his losses due to the recent stock market collapse have been in the six figures. He had hoped to retire within a few years.
This guy is a fucking retard, financially speaking.
When you are young - you want to invest in stocks. High risk, high reward. You can tolerate big swings because you won't be touching this retirement money for a long time.
When you are getting near retirement - assuming you have a nice nest egg built up - you should be looking to transfer your investments to lower yield investments that are less volatile. Shifting from stocks to bonds.
When you are in your twenties - who cares if the market drops 40% in a year? You aren't going to be touching that money for a long time.
When you are in your sixties - you will need to start withdrawing that money to pay for retirement within a decade or so. You can't tolerate big swings. You need consistency.
So anyways, my advice:
1) Put enough into your 401(k) to max the company match
2) Put this money into an index fund
3) When you near retirement, THEN you start looking at shifting money into lower risk, lower return investments.
When you are in your twenties - who cares if the market drops 40% in a year? You aren't going to be touching that money for a long time.
This is the most important thing here, your money isn't going anywhere. I also have money in Vanguard's 2045 target fund, but I have also put money into some other funds to diversify a bit (STAR and TSMI) and because I can take the risk to lose it. Like other people have said, now is the best time for a new investor in the market because you are able to buy things below-value, so when the market rebounds (even if it never gets back to where it was previously), you will have more and it will have cost you less.
There is a lot of general investment information there and as a young investor it's a great help to getting your feet set. And don't be afraid to call, the people on the other side of the phone are there specifically to help you with these kind of questions.
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You're starting to save at 22, which puts you ahead of most people, and that extra time is significant thanks to compound interest. 6% matching is pretty good (better than I'm getting right now), and that money you're putting in has more buying power in the current market. The value of your account may go down some in the short term, but certainly not more than you're gaining just from the matching. And that's in the short term- in the long term, the economy will recover, and the extra shares you're able to buy thanks to their current low prices will increase your return when it's time to retire.
Vanguard funds are generally pretty good, with low fees. They're not available with my 401k, but I was planning on opening up a separate account with one of their life-cycle funds- it's been highly recommended to me by both online and offline sources. If you want to do more and have some extra cash, you may want to look at those too- the amount of risk taken in those funds adjusts according to your age. You can get a Roth IRA and start dumping money in there too. You pay into a Roth with money that's already been (income) taxed, and it's not taxed again when you withdraw it. Any money you make on the investments in there is also tax-free.
Also, don't take advice from anyone who complains that 4 years with a Democrat in office is going to ruin their retirement plan.
edit- Keeping abreast (heh) of the economic situation can help you feel more confidant. I don't spend too much time on it, but I like to briefly hear what's going on from an objective (non-sensationalist, non-partisan) source. Calculated Risk is a pretty good blog for this purpose, if you just want to plug that into your rss reader. It's probably better than absorbing information from the guys bitching about their stocks and home values around the water cooler.
Though I don't get my deposits matched by my employer so I'm used to giving up 15%.
If you're looking for consolation, I set up the exact same fund through my employer just last month -- the Vanguard Target 2045. I'm on a 403(b) but that's just a technicality because I work at a not-for-profit.
If you're looking for whether it was a good idea, yes. How much does your employer match? That's an automatic return right there, so if your employer matches 20%, with a 20% drop you would essentially have gained nor lost no value. If your employer matches more, you're gaining more than the market simply by receiving extra money from your employer.
If your employer is matching 100% of your 6%, then yes, even in today's market you are practically doubling your money each paycheck.
The stock market and the US economy isn't going anywhere. This is a particularly bad recession, but I'd argue that it's probably a good time to start investing, since the market is down. Last year would've been a bad year to start, for obvious reasons, but you'll note that the stock market has been relatively stable for the last month or so, with the DOW hovering in the 8000s.
As with all investing, it's putting money towards the future. If you're destitute and that 6% is the difference between going hungry or homeless, then yes, you should pull your money out.
Anyway, the reason you invest in stocks while you're young is that you have more time to ride out dips & recessions. Bonds are not a sure thing, due to the fact that many business bonds are callable, especially now with rates low in general. If you look through your Vanguard book, you'll see that the Target 2015 is about 50% bonds -- why? Because bonds are less risky. They return less money, but you're pretty much guaranteed to get those funds unless a serious financial calamity occurs. And when you're 58 and looking to retire in 7 years, you don't want a couple hundred thousand dollars disappearing.
Many people don't really understand how they should manage their retirement funds, so "target" funds are usually a safe bet because the investing company will gradually shift the fund to something less risky as they get closer to their target date. An individual most likely wouldn't do that -- they'd pick a risky fund when they're 40 and leave it in there until they're retiring, complaining vehemently whenever a dip in the market occurs.
Also, if your 401k offers different investments(examples, The Dodge Cox Balanced Fund, Templeton World, etc), consider consulting a financial advisor and splitting investments.
And finally, don't freak about the market conditions. This may even be a good time to start dropping money in it since you are getting shares/units at low prices, and the market will eventually recover.
Currently painting: Slowly [flickr]
The Target Ret 2045 funds are geared to match risk to the expected date of the fund owner's retirement. So the 2045 fund is set to automatically reduce the risk of your holdings as the date of 2045 approachs, removing the need to micromanage your retirement allotment. So if you plan on retiring in 2045, that fund is probably a decent enough bet.
Also, people bitching about 401k's are generally of two minds I've seen, neither of which has much validity. The first are people who think we are going to have a depression that wipes out all stock market equity. If that is the case the last thing you should be worried about is your 401k. Guns, ammo and canned food would probably be your primary concerns. I think it is highly unlikely anyhow, so there you go.
The second type of person are those who think the Democrats are going to remove the 401k instrument of savings. This is even more unlikely than the Mad Max scenario. The Democrats finally got a taste of winning and their aren't going to throw that all away by confiscating the primary retirement of so many of the very Americans who voted them into office. The political fallout from such a move makes it untenable.
So keep investing. And look at some Roth IRAs to gain tax diversification if you wish to invest beyond your match (a good idea IMO).
Plus, you're getting a good matching deal. On your 6%, pre-tax, you're getting 75% free money simply by saving it. I only get 20% on 3% of my total salary.
To put it in perspective: since the founding of Wall Street, no reasonably-diversified investment has beaten small-capital stocks over a twenty-year period. Ever. Mid-capital stocks come in behind that, large-capital stocks come in behind that, with other investments dragging behind all of those. Mind you, this is over a twenty-year period (any twenty-year period), so it's still very possible to perform poorly in the short-term. However, you're 22, and investing for retirement; you don't give a shit about the short term.
Furthermore, even if you lost it all right now, it wouldn't be a big deal. However, if you maintain a 10% average interest rate over the next 40 years (probably about when you start divesting from stocks, and that's a fairly conservative estimate), every dollar you invest now turns into a bit more than $45 in 40 years. If you're investing in bonds, instead, you'll probably hit something closer to around a 7% average interest rate (and that's a pretty optimistic estimate), which means that for every $1 you invest now, you'll have a bit under $15 in 40 years. Are bonds safer? Yes. Are they significantly safer over a very long period of time? Slightly, yes. Is the slight added safety you're going to get from bonds or any other non-stock investment worth giving up a near-sure shot at tripling your money relative to the bond investment? Absolutely not.
You also get dividends at the end of the year which I recommend reinvesting in your fund. Don't hold yourself to 6% make sure you max out your donation limit for the year (if you can afford it) Also remeber you have until April 15th to make donations against the previous years limit. I highly recommend a roth IRA as youstart out. Since the money is taxed now when your earning less it'll be at a lower rate than when you retire and are earning more.
-Terry Pratchett
I believe dividends off of a 401(k) are automatically reinvested into the 401(k). But yes, dividends are treated the same as appreciating stock value (mostly because they are the same).
I'm sorry You're right. SInce I don't get a 401K amounts to the same thing for me. I'd put in as much as your company will match in the 401K first, then max the roth like you said. If you start off paying 10% in taxes right now and end up paying 15% by you retire, every dollar invested has earned an extra 5%
-Terry Pratchett
It sounds like you need some basic financial/investing information. Like some definitions or a glossary. Try here.
Also, listen to the Than man.
Let 'em eat fucking pineapples!
Roth is not a 401k fund choice, it is a seperate investment vehicle. Basically (and I am sure someone will cover this more in depth/more accurately), the 401k offers pre-tax deposits (IE the money deposited comes from gross income and not net income) and taxable withdrawals. The Roth IRA offers post-tax deposits (comes out of your out of pocket net income) and tax free withdrawals upon retirement.
Generic advice is to invest in your 401k until match, invest in Roth until the cap (there is a finite amount you can put in a Roth in a given year), invest in 401k until cap, pursue something else. Follow that list until you run out of money you can invest in retirement.
You get your 401k through your employer. It gets pre-tax money- meaning that they take money out of your paycheck and put in it there, and then they withhold income tax from the rest of it. The money in the 401k is taxed when you withdraw it when you're retired. You would get a Roth IRA through another institution- I get mine through my credit union. The Roth IRA gets post-tax money, so your employer doesn't really have to be involved. They give you your salary, which has been taxed, and you take some of that money and put it in your Roth IRA. You choose a fund or funds to invest in with that money.
I'll add my own question here, I think it probably applies to you too:
So, my CU only lets me invest money from my Roth in CDs. I opened it this time last year, and the 1 year cd I got worked out pretty well, but now I need to transfer it to another institution and invest in other funds- preferably a vanguard target fund or small cap fund. Where do I go for this? Vanguard.com's not loading now, so I can't check there. I'd rather not go through a bank like BoA- I switched to a CU because I was tired of fees and the typical bank shit, and I don't want to go back to that. tl;dr- where's the best place to open a Roth IRA to invest in vanguard funds?
Not enough lime.
Seriously, those targeted funds, like anything else that claims to be "set it and forget it" (do you know those Ronco rotisseries actually have warning labels that say "don't literally forget that you're using it?) can backfire horrifically. Your best bet is to have an financial advisor look over the options that you have for investing in your 401(k), and select funds that are best for your situation. I recently had to do this, and it was worth taking the time to see my advisor and work out how to get my Roth and my 401(k) playing nice-nice with each other.
Well, it's better to have consistent moderate gains, instead of seeing your investments yo-yo between big gains and big losses, because every time you go into the hole, it takes bigger rates of return to get you back out. This is why I don't go all out balls to the wall aggressive.
As people have pointed out, the order of investment vehicles should ALWAYS be:
It was only this year that I felt comfortable investing anything, despite having been at my job for 6 years. Likewise, I've got an idiot coworker who talks about "blowing money at the mall" on expensive shit, but has $1000 in credit card debt that she's paying the minimum on each month and has a seriously horrible credit score.
You should have highly liquid savings, such as an ING account (sorry WaMu!) or Charles Shwab checking account, that pays a modest amount of interest but is easy to access (as in, no fees, can use it to pay bills if you plan a couple days ahead). It should have enough in there to cover between 3-6 months of your normal expenses, in case you lose your job or come across other unexpected problems. Pay off full credit card balance each month.
Then invest. Nothing sucks more than socking away retirement money only to have to take it out at a huge loss thanks to fees because you're otherwise living paycheck to paycheck.
I have both my Roth IRA and small cap investments handled through vanguard directly, it's pretty easy to set up. They charge no fees once your over 10K in an account, but I switched to all online updates and they dropped the fees on my traditional investment account.
-Terry Pratchett
Hmm I disagree about the second two. Only Roth what you can. You do need some liquidity especially just starting out. Also, I don't think adding any more to your 401k above the match is worth it. You're better off with a less restrictive stock fund you can buy/sell at any time. After the 401k and maybe Roth, get more liquid assets like EggyToast said.
Let 'em eat fucking pineapples!
You simply cannot beat the value of a company match into your 401(k). Set your 401(k) investment so that you get the absolute most company match, but no more. A company match is an instant and huge return on money invested.
As for picking a particular fund into which your 401(k) investments go to - I would strongly suggest an index fund.
Index funds seek to match the market. Period. You might be thinking - "but - I could invest in a fancy mutual fund with a genius manager that picks stocks that maximize my growth!"
The trouble is - these actively managed mutual funds charge you. After all, the mutual fund manager needs to get paid. These management fees typically make a mutual fund return less to you than your basic index fund.
quoting from The Motley Fool (a great website for financial advice):
Here's our oft-repeated fact that you should get through your head: The average actively managed stock mutual fund returns approximately 2% less per year to its shareholders than the stock market returns in general. That means that before your dollar even gets to the fund manager to invest, his company has already taken two cents off the top.
You'll do better with the index fund.
As for the recent stock market panic:
Yes, the stock market has dropped massively lately. I check my 401(k) this year and it tells me my year-to-date change has been something around -50%.
If you're in your twenties, this doesn't mean a damn thing.
Keep in mind - a 401(k) is a retirement investment fund. All you should care about is the long term return. So the value of your stocks has plunged now - big deal. You shouldn't be taking money out of your 401(k) when you're young, anyways - the penalties are pretty high. As long as you keep investing, you're buying stock in the short term on the cheap. The market will recover. Historically, the market has consistently returned quite well.
On the other hand -
I work with a few guys in their 60s. One of them tells me his losses due to the recent stock market collapse have been in the six figures. He had hoped to retire within a few years.
This guy is a fucking retard, financially speaking.
When you are young - you want to invest in stocks. High risk, high reward. You can tolerate big swings because you won't be touching this retirement money for a long time.
When you are getting near retirement - assuming you have a nice nest egg built up - you should be looking to transfer your investments to lower yield investments that are less volatile. Shifting from stocks to bonds.
When you are in your twenties - who cares if the market drops 40% in a year? You aren't going to be touching that money for a long time.
When you are in your sixties - you will need to start withdrawing that money to pay for retirement within a decade or so. You can't tolerate big swings. You need consistency.
So anyways, my advice:
1) Put enough into your 401(k) to max the company match
2) Put this money into an index fund
3) When you near retirement, THEN you start looking at shifting money into lower risk, lower return investments.
This is the most important thing here, your money isn't going anywhere. I also have money in Vanguard's 2045 target fund, but I have also put money into some other funds to diversify a bit (STAR and TSMI) and because I can take the risk to lose it. Like other people have said, now is the best time for a new investor in the market because you are able to buy things below-value, so when the market rebounds (even if it never gets back to where it was previously), you will have more and it will have cost you less.
And the one thing I can't recommend more is to go to our website http://www.vanguard.com/
There is a lot of general investment information there and as a young investor it's a great help to getting your feet set. And don't be afraid to call, the people on the other side of the phone are there specifically to help you with these kind of questions.