Investment advice for 23 year old

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SeattleFinance
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Joined: Thu Oct 28, 2021 1:14 am

Investment advice for 23 year old

Post by SeattleFinance »

Fellow Investors,

Thank you for all advice in advance.

I make roughly $62,400 a year, have a solidified emergency fund, a maxed out Roth IRA, and contribute to a roth 401k with a 3% company match.

I want to start making the right investment decisions as early as I can. Based on my age and income, am I investing smartly?

1. Is it smart to have a Roth IRA and a roth 401k?
2. Is the flow of solidify emergency fund > company match > Roth IRA > Roth 401K max > taxable brokerage the right flow?
3. How should I be saving for purchases such as a house, marrriage, etc.?
4. Should I be investing all of my money but an emergency fund?

Anything I have missed and you would like to contribute would be greatly appreciated. Thank you for your time.

SeattleFinance
billfromct
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Re: Investment advice for 23 year old

Post by billfromct »

At 23 years old with potentially 40 or more years until retirement, I would put as much money into Roth retirement account as you can afford so that those Roth retirement investments can grow tax free & be taken out state & Federal tax free after age 59.5.

When you get into a higher tax bracket & closer to retirement, you can contribute to the tax deductible 401k.

Others will say that you can contribute to a tax deductible 401k, invest the tax savings & come out ahead. I think the average person doesn’t invest the tax savings but use it to pay bills, take a vacation, etc.

When you’re in retirement you won’t remember what you did with those tax deductible 401k savings but you will be thankful that you contributed to those Roth retirement accounts.

I recommend to my kids to max out their Roth retirement accounts in their 20s, while probably in the lowest tax bracket of their career, then once they hit 30 years old to review their tax bracket to see if tax deductible 401k or 403b contributions were warranted.

bill
fup
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Re: Investment advice for 23 year old

Post by fup »

Im 31 now, keep doing what your doing, but buy real estate
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Peculiar_Investor
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Re: Investment advice for 23 year old

Post by Peculiar_Investor »

SeattleFinance wrote: Thu Oct 28, 2021 1:23 am Anything I have missed and you would like to contribute would be greatly appreciated.
Welcome to the community. Congratulations on having the foresight to start thinking and educating yourself at a young age.

You might want to read the wiki article Getting started - Bogleheads for further ideas and concepts.
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retiredjg
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Re: Investment advice for 23 year old

Post by retiredjg »

Welcome to the forum. :happy

1. Is it smart to have a Roth IRA and a roth 401k?
There is a great deal of discussion and disagreement on this topic. There is also a Wiki page.

The mainstream answer is to use as much tax-deferral (put off taxes till retirement when you will pay a lower rate) as you can (all traditional 401k) and supplement that with Roth IRA. I used to agree with that but now believe that an overall target of half traditional and half Roth may be a better choice for many. To achieve that, while younger and probably in lower tax brackets, I'd use more than half Roth. As brackets go up, I'd use more than half traditional.

There will be times in life/career when using one or the other will definitely have a known advantage. For example, if/when you reach the 37% federal tax bracket, it is hard to argue against deferring taxes as much as you can. During other times, when the best route is not so clear, I'd go for half and half.

2. Is the flow of solidify emergency fund > company match > Roth IRA > Roth 401K max > taxable brokerage the right flow?
This is one of several "right" flows although you might want some traditional 401k in there as well. Deferring taxes is a solid way to end up with more money of your own in retirement.

3. How should I be saving for purchases such as a house, marrriage, etc.?
Savings account, CDs, high yield savings, etc.

4. Should I be investing all of my money but an emergency fund?
Yes and no. You should invest all the money you intend to set aside for retirement or other very long term goals. You should probably not "invest" money for shorter term goals (house downpayment, next car, and such).

Other advice? Don't sweat the small stuff. Just save money on a regular basis. Try to save some in all kinds of different accounts (tax-deferred, tax-free, and taxable). Invest in a way that you will be comfortable with and stick with when the bad times come (have some bonds in your portfolio).
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Sandtrap
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Re: Investment advice for 23 year old

Post by Sandtrap »

SeattleFinance wrote: Thu Oct 28, 2021 1:23 am Fellow Investors,

Thank you for all advice in advance.

I make roughly $62,400 a year, have a solidified emergency fund, a maxed out Roth IRA, and contribute to a roth 401k with a 3% company match.

I want to start making the right investment decisions as early as I can. Based on my age and income, am I investing smartly?

1. Is it smart to have a Roth IRA and a roth 401k?
2. Is the flow of solidify emergency fund > company match > Roth IRA > Roth 401K max > taxable brokerage the right flow?
3. How should I be saving for purchases such as a house, marrriage, etc.?
4. Should I be investing all of my money but an emergency fund?

Anything I have missed and you would like to contribute would be greatly appreciated. Thank you for your time.

SeattleFinance
You would receive more comprehensive and contextual suggestions and input if you "use the pencil icon" edit your post to include more data that applies specifically to you and in this format. It would help.
Asking Portfolio Questions
https://www.bogleheads.org/forum/viewt ... =1&t=6212

5. At your age, the quickest way to increasing your investing power is to increase your income by growing your skillsets, education, career advancements, etc.

j :D
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ruralavalon
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Re: Investment advice for 23 year old

Post by ruralavalon »

Welcome to the forum :) .

First your savings rate is about 41%, which is excellent.
($25.5k/$62.4k).

Some additional information will be useful in answering your 4 questions.

What is your tax bracket, both federal and state?

Do you have any debt? If so what types, amounts and interest rates?

Is a High Deductible Health Plan (HDHP) offered at work so that you are eligible to use a Health Savings Account (HSA)?

How far in the future is "house, marrriage, etc".?

Will you be eligible for a substantial pension in addition to Social Security? What is your profession or occupation? How much do you currently have in traditional tax-deferred accounts?

Could you also please list the funds offered in the 401k, giving fund names, tickers, and expense ratios? Please see this for information needed and format: "Asking Portfolio Questions".

Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all your information is in one place.


SeattleFinance wrote: Thu Oct 28, 2021 1:23 am Fellow Investors,

Thank you for all advice in advance.

I make roughly $62,400 a year, have a solidified emergency fund, a maxed out Roth IRA, and contribute to a roth 401k with a 3% company match.

I want to start making the right investment decisions as early as I can. Based on my age and income, am I investing smartly?

1. Is it smart to have a Roth IRA and a roth 401k? Possibly
2. Is the flow of solidify emergency fund > company match > Roth IRA > Roth 401K max > taxable brokerage the right flow? Probably
3. How should I be saving for purchases such as a house, marrriage, etc.? In very safe savings vehicles, depends on how far off that may be.
4. Should I be investing all of my money but an emergency fund? Invest all but the emergency fund and shorter term savings for house, marriage, etc.

Anything I have missed and you would like to contribute would be greatly appreciated. Thank you for your time.

SeattleFinance
Geneal priority.
Here is a general account funding priority that usually works well for many people (when there is no high interest debt or HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, SIMPLE IRA, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
3) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
4) Contribute to a taxable investing account.

"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments", link.


Roth versus traditional.
Will you be eligible for a substantial pension in addition to Social Security? What is your profession or occupation? How much do you currently have in traditional tax-deferred accounts? For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

But we don't know if you fall in the category of "most people".

Because the tax code is progressive, when you withdraw from your 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension in addition to Social Security? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

If able to make maximum annual Roth 401k contributions, and in a high tax bracket then Roth 401k contributions may be best. TFB blog post, “Roth 401(k) for People Who Contribute the Max“. “According to a study by Vanguard, only 10% of people contribute the maximum. . . . . What if you are one of the 10%? . . . . Roth 401k and “Traditional 401k + Taxable” break even if the marginal tax rate at retirement in 30 years is 28%, versus the current marginal tax rate of 35%. That means the higher effective contribution limit is worth about 7 percentage points.”

Wiki article, "Traditional vs Roth".
Last edited by ruralavalon on Thu Oct 28, 2021 6:26 pm, edited 2 times in total.
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esteen
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Re: Investment advice for 23 year old

Post by esteen »

SeattleFinance wrote: Thu Oct 28, 2021 1:23 am Fellow Investors,

Thank you for all advice in advance.

I make roughly $62,400 a year, have a solidified emergency fund, a maxed out Roth IRA, and contribute to a roth 401k with a 3% company match.

I want to start making the right investment decisions as early as I can. Based on my age and income, am I investing smartly?

1. Is it smart to have a Roth IRA and a roth 401k?
2. Is the flow of solidify emergency fund > company match > Roth IRA > Roth 401K max > taxable brokerage the right flow?
3. How should I be saving for purchases such as a house, marrriage, etc.?
4. Should I be investing all of my money but an emergency fund?

Anything I have missed and you would like to contribute would be greatly appreciated. Thank you for your time.

SeattleFinance
You're doing so well! Keep up the great work!

1. probably. As most mention, due to your young age your current tax bracket is likely lower than your future anticipated tax bracket, because peak earning years are often 40s-50s. If I were you, I would absolutely do as much Roth as is available to me that I can afford to do.
2. That's the general flow. You may have specific life circumstances that change the order of operations but without knowing more specifics, it sounds right to me.
3. If it were me, for anything with <5 year time horizon I would save in a high yield savings account.
4. This entirely depends on what your life goals are other than retirement. If you're going to keep significantly more cash on hand than is needed for an emergency fund plus general solvency of your checking account, then IMO you should have a plan for that money with an end goal. If you are keeping around a bunch of cash with no plan, invest it.
This post is for entertainment or information only, and should not be construed as professional financial advice. | | "Invest your money passively and your time actively" -Michael LeBoeuf
smectym
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Re: Investment advice for 23 year old

Post by smectym »

SeattleFinance wrote: Thu Oct 28, 2021 1:23 am Fellow Investors,

Thank you for all advice in advance.

I make roughly $62,400 a year, have a solidified emergency fund, a maxed out Roth IRA, and contribute to a roth 401k with a 3% company match.

I want to start making the right investment decisions as early as I can. Based on my age and income, am I investing smartly?

1. Is it smart to have a Roth IRA and a roth 401k?
2. Is the flow of solidify emergency fund > company match > Roth IRA > Roth 401K max > taxable brokerage the right flow?
3. How should I be saving for purchases such as a house, marrriage, etc.?
4. Should I be investing all of my money but an emergency fund?

Anything I have missed and you would like to contribute would be greatly appreciated. Thank you for your time.

SeattleFinance
Seattle, posters above are far more adept than I at nuance, but as an overlay, let me add the overriding maxim “Don’t Lose Money.” Not saying don’t accept equity price volatility reasonable for your time horizon, but stay conservative in the sense of steering well clear of speculation. A smart and capable relative of mine recently got burned by yielding to some of the Robinhood-style dabbling in options &c.
invest4
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Re: Investment advice for 23 year old

Post by invest4 »

ruralavalon wrote: Thu Oct 28, 2021 6:10 pm Geneal priority.
Here is a general account funding priority that usually works well for many people (when there is no high interest debt or HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, SIMPLE IRA, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Contribute the maximum to an IRA, traditional or Roth (or backdoor Roth technique), depending on eligibility and personal circumstances;
3) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
4) Contribute to a taxable investing account.

"If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA." Please see the wiki article "Prioritizing investments", link.


Roth versus traditional.
Will you be eligible for a substantial pension in addition to Social Security? What is your profession or occupation? How much do you currently have in traditional tax-deferred accounts? For most people traditional deductible 401k contributions will likely be better.

The income tax code is progressive, with a lower tax rate for lower income. Retirement usually means that employment income has ended. Therefore, most people are in a lower tax bracket in retirement and for most people traditional deductible 401k contributions will probably be better.

But we don't know if you fall in the category of "most people".

Because the tax code is progressive, when you withdraw from your 401k in retirement the income is not all taxed at the marginal tax rate specified for your tax bracket. TFB blog post, "The case against Roth 401k". Because the tax code is progressive, "Until you know you can generate from your Traditional 401(k) enough income to fill the lower brackets, it doesn’t make sense to contribute to a Roth 401(k). For people without a traditional defined benefit pension plan, it means the majority of the retirement savings should go to a Traditional 401(k), not Roth."

Will you be eligible for a substantial pension in addition to Social Security? A pension changes that analysis, so that Roth contributions are likely better if you have a significant pension coming in addition to Social Security. TFB blog post, "Most TSP participants should switch to the Roth TSP". That post discussed the effect of a federal pension, but the analysis should hold for other pensions.

If able to make maximum annual Roth 401k contributions, and in a high tax bracket then Roth 401k contributions may be best. TFB blog post, “Roth 401(k) for People Who Contribute the Max“. “According to a study by Vanguard, only 10% of people contribute the maximum. . . . . What if you are one of the 10%? . . . . Roth 401k and “Traditional 401k + Taxable” break even if the marginal tax rate at retirement in 30 years is 28%, versus the current marginal tax rate of 35%. That means the higher effective contribution limit is worth about 7 percentage points.”

Wiki article, "Traditional vs Roth".
+1 As highlighted above, you will need to make some assumptions for yourself and then take action accordingly. If unsure, splitting it up a bit is not the worst thing you could do until you have more clarity. Ultimately, you want to continue to live beneath your means and endeavor toward maxing out each tax advantaged space as your income grows.

I am super excited that you have found this forum at such a young age. You are off to a great start.

Best wishes.
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Ben Mathew
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Re: Investment advice for 23 year old

Post by Ben Mathew »

- Roth vs traditional may need some more thinking. It's possible that contributing more to the traditional account may be better in your case than contributing less to the Roth. It's a complex decision that depends on a lot of factors. For most people, contributing more to a traditional account will likely be better because marginal tax rates tend to be lower in retirement. That may not be true for a heavy saver. If you expect your income to rise substantially in the future, putting you in a significantly higher tax bracket, then all Roth now may be the better option. The traditional contributions can be made in higher income years.

- Having a separate bucket named "emergency fund" is not important. A high savings rate is the best emergency plan, regardless of where the savings are located. The fact that it can sometimes be hard to pull money out of retirement accounts makes things a bit complicated. But contributions to a Roth IRA can be withdrawn anytime tax and penalty free, so that may be all you need.

- Consider investing all of your savings. If it's not psychologically distressing and you won't panic sell during crashes, a 100% stock allocation would typically be appropriate at your age.

- To save for a house downpayment or a wedding, as the time approaches, lower your retirement account contributions (don't give up the company match though) and build up the savings in taxable. These funds don't all have to be in safe bonds unless you actually need the safety. If the market crashes, would it be really painful to put off home ownership or cut back on wedding expenses? If you are prepared to make these adjustments, then the funds can be invested aggressively. Short horizons don't require a safe asset allocation. Non-negotiable funding goals do.
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cjcerny
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Re: Investment advice for 23 year old

Post by cjcerny »

Sounds like you are doing fine to me. I would just make sure that all your investments in Roth and regular IRA accounts and anything else for that matter, is in low cost index funds and not manager advised funds with high expenses.
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