New to investment, trying to not mess it up

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Topic Author
lostpacket
Posts: 7
Joined: Thu Dec 08, 2022 12:00 pm

New to investment, trying to not mess it up

Post by lostpacket »

Emergency funds:
• Yes, we have $128k in savings. Could probably lower to $75k and put the rest into a better investment.

Debts:
• 2 car loans, each have $9k left on the loan that needs to be paid off. 3.09% and 3.94% interest rates.
• College student loan, $25k, 0% interest.
• Mortgage, $331k with interest rate of 2.99%.
• Credit cards are paid off in full each month.

Tax filing status:
• Married filing jointly.

State of residence:
• Georgia

Age:
• Wife and I are both 30

Desired asset allocation:
• Tracking my age until retirement. So, currently 30% bonds, 70% equity until age 55 where I’d like to be at 55% bonds, 45% equity. However, if I can invest all in Vanguard Target Retirement funds, this should manage itself.

Current retirement assets:
• Taxable: 24% - $53k cash
• His traditional IRA at Vanguard: 25% - $55k, all in Target Retirement 2050 (VFIFX) (0.08%)
• His 401k: 15% - $34k in my employer retirement account
• Her 401k: 36% - $79k in my wife’s employer retirement account
• Her pension: Will pay $4,796 per month once she retires at 55 – assuming she stays at her current company until then. If she leaves earlier, she gets less. Not sure how to account for this as a retirement asset percentage.

New annual contributions:
• In 2021, 4% contributed $8k to his 401k plus 5% company match, total $18k
• In 2021, 6% contributed $7k to her 401k plus 6% company match, total $14k

Available funds in his 401k:
• MassMutual Select TRP Retirement 2055 M4 (MMDMX) (.89%)
• And other MassMutual Select TRP Retirement funds. No Vanguard funds.
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Available funds in her 401k:
• Vanguard Target Date 2045 (VTIVX) (.08%)
• Other Vanguard Target Date funds.
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More about my wife and me:
• We both work in IT. She has a corporate job that pays roughly $125k gross per year. I founded an IT consulting firm, we currently do $3m in revenue per year. I have 33% ownership in the firm and my gross income is $400k per year. I suspect a large part of our retirement will come from selling my ownership stake but I’m unable to forecast when that will be or for how much.
• Other income to report is $36k per year gross in passive income.
• No kids and unsure if we’ll have any. We like to travel a lot which costs quite a bit. Our average monthly spend is $18.5k, which includes all bills, living expenses, vacations. Including our trips and other purchases, last year we spent $225k.

Questions:
1. For roughly 1 year I won’t have a 401k with my employer. Where should I redirect my monthly investments? Perhaps double up my wife’s 401k?

2. My wife’s company offers an HSA plan, however we do not want to give up a good health insurance PPO plan with a low deductible. She’s only eligible for the HSA if we switch to a high deductible plan. Any thoughts on how else we can save for future medical expenses in a tax-savvy manner?

3. The funds in my traditional IRA with Vanguard are from previous employer 401k’s that we rolled into an account with Edward Jones. I became educated enough to understand Edward Jones was focused on making money from me, not for me, so I closed that account and moved the money in Vanguard. I like the Target Retirement fund because it’s no-frills; set it and forget it – my kind of investing.
My understanding is that I can only contribute $6,000 per year to this account. So, if we’d like to invest more for retirement, what’s the best plan of action?

Any help or guidance is appreciated!
Last edited by lostpacket on Thu Dec 08, 2022 4:15 pm, edited 1 time in total.
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retired@50
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Location: Living in the U.S.A.

Re: New to investment, trying to not mess it up

Post by retired@50 »

lostpacket wrote: Thu Dec 08, 2022 12:24 pm
Available funds in his 401k:
• MassMutual Select TRP Retirement 2055 M4 (MMDMX) (.89%) <- This is EXPENSIVE. Use the S&P 500 fund instead for 0.21%
• And other MassMutual Select TRP Retirement funds. No Vanguard funds.

Available funds in her 401k:
• Vanguard Target Date 2045 (VTIVX) (.80%) <- Hopefully, this is a typo and you meant 0.08%
• Other Vanguard Target Date funds.

Questions:
1. For roughly 1 year I won’t have a 401k with my employer. Where should I redirect my monthly investments? Perhaps double up my wife’s 401k?

2. My wife’s company offers an HSA plan, however we do not want to give up a good health insurance PPO plan with a low deductible. She’s only eligible for the HSA if we switch to a high deductible plan. Any thoughts on how else we can save for future medical expenses in a tax-savvy manner?

3. The funds in my traditional IRA with Vanguard are from previous employer 401k’s that we rolled into an account with Edward Jones. I became educated enough to understand Edward Jones was focused on making money from me, not for me, so I closed that account and moved the money in Vanguard. I like the Target Retirement fund because it’s no-frills; set it and forget it – my kind of investing.
My understanding is that I can only contribute $6,000 per year to this account. So, if we’d like to invest more for retirement, what’s the best plan of action?

Any help or guidance is appreciated!
Welcome to the forum.

1. Yes, contribute more to the wife's 401k.
2. If you don't want to use a HDHP, then there really isn't any tax efficient way to save for future medical expenses. Why the aversion to an HDHP? Do you have ongoing medical issues with high costs?
3. Normally people don't continue to make non-deductible contributions to traditional IRAs. Tracking the basis can be a hassle. Consider adding a taxable investment account if you've exhausted all other possibilities. See the prioritizing investments wiki page for details.

To make up for the lack of good low cost index funds in "His 401k", I'd suggest using the S&P 500 fund, and then getting your bond and international stock exposure by using your wife's 401k. The Vanguard target date funds available to her are globally diversified and probably low cost. Just pick the one target date fund in her account that provides you with the appropriate level of bond funds to meet your asset allocation goals. This may change depending on whether or not you switch things around in "His 401k".

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: New to investment, trying to not mess it up

Post by MattB »

There is no reason not to take full advantage of your 401ks with combined incomes as large as yours. Suggest maxing your wife's 401k this next year, and both of yours when you have access again.

I also agree with retired@50 that the mass mutual retirement 2055 fund you're holding is too expensive to justify. Suggest using the S&P 500 fund for 0.21% and holding bonds somewhere else, possibly in wife's 401k.

Lastly, it's not clear from your post that you're saving enough to retire on time and on target.

You need 25x current spending to support 30 years of that same spend in retirement. 25 * 225,000 = 5,625,000. You would need to save about $10k/mo from now until 60 to save $5.6m at 3% real rates.

This analysis is conservative in some regards, assuming 3% real returns and ignoring what you might receive from selling the equity stake in your company, your wife's pension, and social security. But it is not conservative in others; it assumes you and your wife will be working until 60. In either case, it might make you think about saving more now, while time is on your side, then later in life.
tashnewbie
Posts: 4283
Joined: Thu Apr 23, 2020 12:44 pm

Re: New to investment, trying to not mess it up

Post by tashnewbie »

Agree with the others on fund selection. I would look for funds with the word "index" in them in each 401k. The S&P 500 index fund in his 401k would be sufficient for that account, coupled with other options in her 401k.

I agree that there's no reason why you shouldn't max 401ks at your income level. You listed 2021 contributions. Did you make any in 2022?

I would try to transfer his TIRA into his current 401k, to open the way for easy, uncomplicated backdoor Roth maneuvers. You can read more about them here. Don't attempt to do them without doing some research and confirming you know how to complete the associated tax paperwork. If you don't want to bother with the backdoor, I agree that taxable investing would be your next option (unless you decide to use a HDHP with an HSA).
Topic Author
lostpacket
Posts: 7
Joined: Thu Dec 08, 2022 12:00 pm

Re: New to investment, trying to not mess it up

Post by lostpacket »

retired@50 wrote: Thu Dec 08, 2022 1:26 pm Welcome to the forum.

1. Yes, contribute more to the wife's 401k.
2. If you don't want to use a HDHP, then there really isn't any tax efficient way to save for future medical expenses. Why the aversion to an HDHP? Do you have ongoing medical issues with high costs?
3. Normally people don't continue to make non-deductible contributions to traditional IRAs. Tracking the basis can be a hassle. Consider adding a taxable investment account if you've exhausted all other possibilities. See the prioritizing investments wiki page for details.

To make up for the lack of good low cost index funds in "His 401k", I'd suggest using the S&P 500 fund, and then getting your bond and international stock exposure by using your wife's 401k. The Vanguard target date funds available to her are globally diversified and probably low cost. Just pick the one target date fund in her account that provides you with the appropriate level of bond funds to meet your asset allocation goals. This may change depending on whether or not you switch things around in "His 401k".

Regards,
Thanks for the response retired@50. Yes, thanks for the catch on the typo! We will definitely increase my wife's 401k. Yeah, we've got some health concerns so don't want to gamble with the HDHP. Any reason why I shouldn't make my yearly contribution to the TIRA then convert it to a Roth via backdoor? We will also be changing my 401k funds to the S&P500.
User avatar
retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: New to investment, trying to not mess it up

Post by retired@50 »

lostpacket wrote: Fri Dec 09, 2022 5:43 pm ...
Any reason why I shouldn't make my yearly contribution to the TIRA then convert it to a Roth via backdoor?
Since the T-IRA account has other (presumably tax-deferred) money in it, you'll be subject to the pro-rata rule. Many people find dealing with this rule a hassle that makes the backdoor Roth strategy not worthwhile.

For more details on the pro-rata rule, see the Bogleheads wiki page on backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth

ETA: If your wife doesn't have a T-IRA, then she may be free to do backdoor Roth contributions without the hassle of the pro-rata rule.

Regards,
Last edited by retired@50 on Fri Dec 09, 2022 5:49 pm, edited 1 time in total.
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
lostpacket
Posts: 7
Joined: Thu Dec 08, 2022 12:00 pm

Re: New to investment, trying to not mess it up

Post by lostpacket »

MattB wrote: Thu Dec 08, 2022 1:51 pm There is no reason not to take full advantage of your 401ks with combined incomes as large as yours. Suggest maxing your wife's 401k this next year, and both of yours when you have access again.

I also agree with retired@50 that the mass mutual retirement 2055 fund you're holding is too expensive to justify. Suggest using the S&P 500 fund for 0.21% and holding bonds somewhere else, possibly in wife's 401k.

Lastly, it's not clear from your post that you're saving enough to retire on time and on target.

You need 25x current spending to support 30 years of that same spend in retirement. 25 * 225,000 = 5,625,000. You would need to save about $10k/mo from now until 60 to save $5.6m at 3% real rates.

This analysis is conservative in some regards, assuming 3% real returns and ignoring what you might receive from selling the equity stake in your company, your wife's pension, and social security. But it is not conservative in others; it assumes you and your wife will be working until 60. In either case, it might make you think about saving more now, while time is on your side, then later in life.
Thanks for your response @MattB. We'll certainly be taking full advantage of her 401k and mine moving forward - swapping mine to S&P500. And thank you for posting the rule of thumb for estimating retirement costs, I hadn't seen it framed that way before. 10k per month is certainly more aggressive than what we've been saving, but you're right - easier now than later.
Topic Author
lostpacket
Posts: 7
Joined: Thu Dec 08, 2022 12:00 pm

Re: New to investment, trying to not mess it up

Post by lostpacket »

retired@50 wrote: Fri Dec 09, 2022 5:47 pm
Since the T-IRA account has other (presumably tax-deferred) money in it, you'll be subject to the pro-rata rule. Many people find dealing with this rule a hassle that makes the backdoor Roth strategy not worthwhile.

For more details on the pro-rata rule, see the Bogleheads wiki page on backdoor Roth: https://www.bogleheads.org/wiki/Backdoor_Roth

ETA: If your wife doesn't have a T-IRA, then she may be free to do backdoor Roth contributions without the hassle of the pro-rata rule.

Regards,
Awesome, thanks!
Topic Author
lostpacket
Posts: 7
Joined: Thu Dec 08, 2022 12:00 pm

Re: New to investment, trying to not mess it up

Post by lostpacket »

tashnewbie wrote: Thu Dec 08, 2022 4:00 pm Agree with the others on fund selection. I would look for funds with the word "index" in them in each 401k. The S&P 500 index fund in his 401k would be sufficient for that account, coupled with other options in her 401k.

I agree that there's no reason why you shouldn't max 401ks at your income level. You listed 2021 contributions. Did you make any in 2022?

I would try to transfer his TIRA into his current 401k, to open the way for easy, uncomplicated backdoor Roth maneuvers. You can read more about them here. Don't attempt to do them without doing some research and confirming you know how to complete the associated tax paperwork. If you don't want to bother with the backdoor, I agree that taxable investing would be your next option (unless you decide to use a HDHP with an HSA).
Thanks for your response @tashnewbie. She and I did both make 401k contributions in 2022, although mine were a bit complicated because of some work stuff that happened this year.

I'll have a look at what the process is for transferring my TIRA into my current 401k. However, because I won't have an active 401k in 2023, this may have to wait. Again, appreciate your input!
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ruralavalon
Posts: 26351
Joined: Sat Feb 02, 2008 9:29 am
Location: Illinois

Re: New to investment, trying to not mess it up

Post by ruralavalon »

lostpacket wrote: Thu Dec 08, 2022 12:24 pmDebts:
• 2 car loans, each have $9k left on the loan that needs to be paid off. 3.09% and 3.94% interest rates.

. . . . .

Current retirement assets:
• Taxable: 24% - $53k cash
I suggest that you use $18 of that cash to pay off the car loans.

I suggest that the other $35k cash, plus the extra cash in your emergency fund, be invested in a taxable brokerage account at Vanguard using:
1) Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%; and
2) Vanguard Total International Stock Index Fund (VTIAX) ER 0.11%.

Also consider
3) Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) ER 0.09%.

What is your tax bracket, both federal and state?

lostpacket wrote: Thu Dec 08, 2022 12:24 pmQuestions:
1. For roughly 1 year I won’t have a 401k with my employer. Where should I redirect my monthly investments? Perhaps double up my wife’s 401k?
Yes increase contributions to her 401k, to the annual maximum.

For tax year 2022 the maximum annual employee deferral limit is $20.5k. For tax year 2023 the maximum annual employee deferral limit is $22.5k.


lostpacket wrote: Thu Dec 08, 2022 12:24 pm2. My wife’s company offers an HSA plan, however we do not want to give up a good health insurance PPO plan with a low deductible. She’s only eligible for the HSA if we switch to a high deductible plan. Any thoughts on how else we can save for future medical expenses in a tax-savvy manner?
If you have large medical expenses then it's wise not to use a High Deductible Health Plan (HDHP), instead continue with a regular low deductible health plan.

If not then using a HDHP with a Health Savings Account (HSA) is wise.

lostpacket wrote: Thu Dec 08, 2022 12:24 pm3. The funds in my traditional IRA with Vanguard are from previous employer 401k’s that we rolled into an account with Edward Jones. I became educated enough to understand Edward Jones was focused on making money from me, not for me, so I closed that account and moved the money in Vanguard. I like the Target Retirement fund because it’s no-frills; set it and forget it – my kind of investing.
My understanding is that I can only contribute $6,000 per year to this account.
With your income you cannot make deductible contributions to a traditional IRA. I suggest NOT making non-deductible contributions to your traditional IRA.

When you are able to contribute to your 401k I suggest making the maximum annual employee deferral.

For tax year 2022 the maximum annual employee deferral limit is $20.5k. For tax year 2023 the maximum annual employee deferral limit is $22.5k.

In my opinion the better funds to consider using in your employer's 401k plan include:
1) MassMutual S&P 500 Index® Fund R5 (over 80% of the U.S. stock market) (MIEZX??) ER 0.21%
2) Empower International Index Fund Institutional Class (developed markets only) (MXPHX ??), ER 0.28%; and
3) MassMutual Total Return Bond Fund Service Class (intermediate-term, investment-grade bonds) (MSPHX ??) ER 0.56%.

Does the plan offer a Stable Value Fund or Guaranteed Income Fund? If so what interest rate is currently being paid and what rate of any is guaranteed?

lostpacket wrote: Thu Dec 08, 2022 12:24 pmSo, if we’d like to invest more for retirement, what’s the best plan of action?
If your wife does not have a traditional IRA then she can make contributions to a backdoor Roth IRA.

At age 30, for 2022 the maximum annual contribution to an IRA is $6k. She has until tax day in April 2023 to make the contribution for tax year 2022. For tax year 2023 the maximum annual IRA contribution is $6.5k.

You can establish a taxable brokerage account at Vanguard (there is no contribution limit) and invest in very tax-efficient stock index funds like:
1) Vanguard Total Stock Market Index Fund (VTSAX) ER 0.04%; and
2) Vanguard Total International Stock Index Fund (VTIAX) ER 0.11%.

Also consider
3) Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares (VWIUX) ER 0.09%.

What is your tax bracket, both federal and state?

About how much (in dollars) do you believe that you might be able to contribute annually to investing (total, all accounts)?

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 of your information is in one place.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
MattB
Posts: 1228
Joined: Fri May 28, 2021 12:27 am

Re: New to investment, trying to not mess it up

Post by MattB »

lostpacket wrote: Fri Dec 09, 2022 5:49 pm
MattB wrote: Thu Dec 08, 2022 1:51 pm There is no reason not to take full advantage of your 401ks with combined incomes as large as yours. Suggest maxing your wife's 401k this next year, and both of yours when you have access again.

I also agree with retired@50 that the mass mutual retirement 2055 fund you're holding is too expensive to justify. Suggest using the S&P 500 fund for 0.21% and holding bonds somewhere else, possibly in wife's 401k.

Lastly, it's not clear from your post that you're saving enough to retire on time and on target.

You need 25x current spending to support 30 years of that same spend in retirement. 25 * 225,000 = 5,625,000. You would need to save about $10k/mo from now until 60 to save $5.6m at 3% real rates.

This analysis is conservative in some regards, assuming 3% real returns and ignoring what you might receive from selling the equity stake in your company, your wife's pension, and social security. But it is not conservative in others; it assumes you and your wife will be working until 60. In either case, it might make you think about saving more now, while time is on your side, then later in life.
Thanks for your response @MattB. We'll certainly be taking full advantage of her 401k and mine moving forward - swapping mine to S&P500. And thank you for posting the rule of thumb for estimating retirement costs, I hadn't seen it framed that way before. 10k per month is certainly more aggressive than what we've been saving, but you're right - easier now than later.
Glad you found it helpful. Good luck and get after it.
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