Oh T Gal!!!! Can we talk 401k/ retirement again???

[SB621]

For anyone that wasn't around last year I started a post about how daunting it was to look at how much someone like me (late 20's/ early 30's) needs to save for retirment. We had some great insight so I would like to bring it up again to discuss since I found the PS community helpful. Even though it is slightly counterproductive to tell everyone to save more and spend less on a jewelry forum

[URL='https://www.pricescope.com/community/threads/on-track-to-save-for-retirement.186082/']https://www.pricescope.com/community/threads/on-track-to-save-for-retirement.186082/[/URL]

So from this thread I increased my 401k to almost maxing it out. I plan on maxing it out next year when both children are out of daycare and in Kindergarden. I'm well above what I need to stay on track from someone my age at the moment, mostly because I started my 4.1k at 20 years old with a company who matched 100% of what I put in there. Now I work for a different company that does 6% match. Looking through the last 10 years that company match REALLY adds up! However, when I look over my ROR (rate of return) over the last 12 months I'm disappointed to see only 6%. I haven't checked my DH's yet but now I'm curious to see what his is at. It seems low to me and I should probably look into redistributing my investment allocations. The market has been doing really well over the last 9 months + so that also makes me think 6% is pretty bad. I did a quick google and I couldn't find a solid answer on a ROR that was below, average or above.

So all of this leads me to my question:
What is a 'good' ROR?
What is a 'great' ROR?

 

[Huldak]

First off, congrats on your saving! That's fantastic and really, you're still so young.
Yes, you are correct to think you are not getting the return you should be. With regard to stocks, the S&P ror for the past 12 months is 25%, while the Dow is 21%. Meaning if you are invested in a stock only fund, you should be seeing that kind of return. If you are also in other types of investments to moderate your risk, such as bonds, that number will be lower (bonds have been down actually). However, even if you are very conservatively invested, which you should not be at your age, you should be seeing a better return.

 

[NovemberBride]

Sarah,

A good ROR depends on what the market performance is for a particular period. As the PP noted, you should be looking for returns that are higher than 6% for the past year since the markets have done so well. You should not expect to be quite at the same level as the S&P because that would indicate you had a portfolio of 100% stocks, which is not recommended for anyone at any age in a retirement account. 6% is actually a good average to aim for in your portfolio over time (and a good proxy for estimating returns when you are running calculators for how much money you will need in your retirement), but since the market did so well last year, I would have expected to see a higher number to balance years like 2008-2009 where you may have had a negative return.

If I were you, I would check a couple of things:

1. What is your allocation between stocks/bonds? Bonds have taken a beating in the last 12 months. I think you are in your early 30's, so a reasonable allocation for you would be 25-30% bonds and 70-75% stocks. Some people who are very conservative or very aggressive may vary, but for a retirement account I'd suggest staying in those boundaries. This will ensure you have enough stocks to get the type of growth you need to meet long-term savings goals, while still having enough protection from downward swings in the markets.

2. I would assume you are invested mostly in mutual funds (and if not I suggest making that move) and then looking closely at the fees on your investments. Some mutual fund options in 401ks have huge fees that can eat up your returns pretty quickly. You want no-load funds with expense ratios of below 1% (I prefer much lower, but this is dependent on the options available to you). I would also look to see if your plan offers mutual funds that track the S&P 500 or other market indices. Because these funds are not actively managed (they just track whatever is in the S&P 500 or other index), you should have very low expenses (like 0.15%) and should be getting roughly the same returns as the market overall. A simple allocation I like to see in a 401k for someone in their 30's might be:
1. 25% in a no-load, low expense ratio bond fund
2. 40% in a fund that tracks the S&P 500
3. 20% in a fund that tracks a bucket of mid and small cap stocks (to balance out the S&P 500, which only tracks large cap stocks obviously)
4. 15% in a fund that tracks a bucket of international stocks

If you have vanguard by chance, they offer great options for each of these. I am sure the other big fund managers offer the same, I am just not as familiar with them.

 

[sweet_blossom]

Hi SB621, kudos on starting so young and being partners with your husband in planning for your financial future together. Great plan to max out your tax-advantage space (TSP, 401k, Roths). Sounds like you are doing a great job and enjoying life at the same time.

That's a good idea to check out your husband's TSP's return. It's a good test comparison of the type of funds you are currently in vs. the index based TSP (if your funds aren't index funds or as mentioned above depending on your allocation). If you like what you see as far as returns of TSP, you could mimic it with index funds if your plan offers it. Although the expense ratio of TSP can't be beat, one can mimic passive low fee indexing.

I'm not sure if we're allowed to link to other sites--you can Google the Bogleheads site (free). The threads there are informative discussions, including ones with your situation of a military member and non-military spouse. You can read through the threads and wikis there and discuss with your partner what is best for your family life and financial situation as you continue to build for your family's future. That being said, everyone has a different style to investing and what they are comfortable with. Just like everyone may have a different style of ring. Indexing may not be for everyone. Just food for thought in one type of investing.

Since you mentioned seeing yourself on a cruise ship when your children enter freshman year of college in the other thread (which would be before you could dip into retirement accounts), you may want to consider taxable accounts and I bonds as a next goal of building financial security. Those can supplement a military pension/helping your children before reaching the age to access retirement accounts.

Also, since you mentioned that your children's educational futures were important to you and your husband in your other thread, you may want to consider asking your husband to look into transferring his post-911 GI Bill to your children. This is a great benefit to help pay education costs and room and board. That is, if you or he are not planning to or have not already used it.

Hope this is of some help. Sorry if any of this is redundant with your plan, but just food for thought. It's really great that your family does this annual review and ask what's next? It sounds like you are way ahead of the game! Enjoy Europe!

 

[diamondseeker2006]

S, I would just add that stocks being so high right now would make me hesitant to transfer a huge amount at one time to stock funds if your money is not already in a diversified stock fund. I would transfer a little every month or two until it was all in better funds. I am wondering what your money is in to have only yielded 6% in the past year. If you have extra money aside after maxing out the 401k, I'd open a Roth IRA and Fidelty or Vanguard and put the max in that. No tax ever on the capital gains/dividends if withdrawn after age 59.5. We put travel/fun money in those.

NovemberBride, I don't mean to hijack, but what would you say the allocation should be for someone nearing retirement? We did transfer most of my husband's 401k to safe investments a few months ago and did miss some of the climb. However, because he wants to retire at 62 in 4 years and we don't want to take a huge hit at this point. (We do have Roth IRA's in stock funds, too, though.)

 

[Dancing Fire]

yup, Roth IRA is the best deal ever. I purchase individual stocks with our Roth IRAs and my wife's 401k. My wife said... if my luck don't change soon we will be living out on the street...

 

[FancyDiamond]

S, I would just add that stocks being so high right now would make me hesitant to transfer a huge amount at one time to stock funds if your money is not already in a diversified stock fund. I would transfer a little every month or two until it was all in better funds. I am wondering what your money is in to have only yielded 6% in the past year. If you have extra money aside after maxing out the 401k, I'd open a Roth IRA and Fidelty or Vanguard and put the max in that. No tax ever on the capital gains/dividends if withdrawn after age 59.5. We put travel/fun money in those.

NovemberBride, I don't mean to hijack, but what would you say the allocation should be for someone nearing retirement? We did transfer most of my husband's 401k to safe investments a few months ago and did miss some of the climb. However, because he wants to retire at 62 in 4 years and we don't want to take a huge hit at this point. (We do have Roth IRA's in stock funds, too, though.)

Agree with point about transferring funds a little at a time if possible. Same strategy with purchasing/accumulating funds.

Love Roth for its advantage of tax-forgiven profits, especially important for investments accounts held for many years. The tax savings will be enormous as the profits will dwarf the principal. Years ago, one of our stocks was $2. Now it is $66. The tax we paid on the $2 from our wage to buy this stock is nothing (even if you include inflation) compared to the tax savings on the $64 profits. Multiply that by the number of shares, and you will be amazed.

Roth contribution is most ideal for young people who are not at their prime earning stage, because their tax bracket is relatively low.

One last comment about allocation for someone nearing retirement - I am not trying to provide an answer. I think the answer depends on the amount of your retirement savings relative to the amount you need to live (expenses to maintain the lifestyle at retirement). I would divide my retirement savings into 3-4 bins: one for near term, one for intermediate term, one for long term, and one for very, very long term. Money in the near-term will be invested in stable and safe income generating investments. Money in the longest term will be investd in something most aggressive.

 

[diamondseeker2006]

That is an excellent point about near-term versus longer term, FD! Thanks!

 

[FancyDiamond]

That is an excellent point about near-term versus longer term, FD! Thanks!

Thank you.

I also want to point out something important about Roth to people in their fifties and sixties who happen to have lots of deferred retirement savings (e.g., Traditonal IRA, 401K, pension, annuities, and etc.). Note that IRS requires us to take out mimimum distribution from our deferred accounts starting at age 70 1/2. If we have too much deferred money, the amount of minimum distribution may bump up our tax bracket. (Remember that we already have other taxable income at that age, such as social securities, pension, and etc.) Furthermore, the increased income will affect our medicare premium, which is based on AGI.

My recommendation is to start rolling over some of the deferred money to Roth. Calculate the amount rollover such that our taxable income is within the same tax bracket. In summary, do this exercise to make sure that our post-retirement tax bracket will not exceed that before retirement.

Before 2010, Roth rollover was limited by income. Not many people could enjoy the benefits of tax-forgiven Roth until the income limit was removed in 2010. Do Roth rollover before IRS changes the rule, and before we reach 70 1/2 when we are no longer allowed to rollover.

 

[justginger]

These posts make me realize how little I know/understand about retirement. I don't think I'm very financially savvy. We're putting no extra into our superannuation (which is currently employer contributed at 9% of our income, up to 12% in the next couple of years). Instead we're making double mortgage repayments. Our interest rate is at 6%, so I equate that to a 6% return -- we'll have the house paid off in just under 11 years instead of 30. When it is paid off, we will continue to make the same level of repayments, but into our superannuation instead. In the 19 years of less mortgage time, it will equate to (before interest) $800,000. Compounding interest on that amount should be very helpful. Our income levels are high enough there are no incentives in terms of employer-matching contributions or the like.

Is this plan ok? The house will be paid off and we'll start dumping the large payments into super when I am 35. We have no other debts, I have paid my uni fees as I go (and should have a 35% raise, plus inflation adjustments, over the next 10 years due to this course), but do spend a tidy amount on travel and animal rescue. I'm honestly not particularly willing to give up those major expenses though, so am hoping the mortgage plan is good enough!

 

[TravelingGal]

Hey SB! So glad to hear that about your retirement plans (the taking it seriously part, not the 6% return part).

I'll come back and write more later, as I'm recovering from a bad cold, but you have better advice from the others than I could give. The advice I got back then was put it in a fund that would be allocated for me based on retirement age, and then to not look at it for awhile. Probably not the best advice, but I rode out years of the market tanking without a whit of anxiety...because I didn't really look. Such is the luxury of time.

However with the market doing well, I agree with the others that you should be getting better than 6%. I'll read more carefully and respond if I have anything to add.

Yay for you!!

 

[kgizo]

When you look at your ROR for you and DH accounts also look at how much you have in foreign investments. Consider your comfort level with domestic v foreign, like you would conservative v aggressive investments. If you are heavily invested in foreign then consider broader ROR metrics than just S&P or DOw. Also, if you have life insurance policies that are old look at what you are paying in premiums. They have changed a lot over the years and you may be able to get the same coverage with smaller premiums.

JG, I'm a big fan of paying off your mortgage early. Congrats on the progress you are making. It sounds like your employer does a contribution instead of a match. Just make sure you are familiar with your plan's options and there isn't a match you aren't missing out on bc that's free money.

Timely topic and great advice here about investment mixes, timing of contributions and keeping an eye on fees.

 

[SB621]

Thanks NB! I haven't been able to post back or really look at my 401k again because the kids are home this week from daycare and it is a long weekend...near impossible to get ont eh computer. So I'm not entirely sure what I'm invested in but I do know that roughly it is 25% bonds and 75% stocks. It is through Fidelity so I will do some reserach on Tuesday to see what my issue is. I know that on friday I just reallocated a bunch of stuff and went for stocks funds that had a ROR over 15% in the last 3 years....probabably not the best way to pick it. And yes my ROR was actually 6.7%!!!! I still can't believe it. I checked my DH's and his is well over 20%. And I picked out his mix as well!

Sarah,

A good ROR depends on what the market performance is for a particular period. As the PP noted, you should be looking for returns that are higher than 6% for the past year since the markets have done so well. You should not expect to be quite at the same level as the S&P because that would indicate you had a portfolio of 100% stocks, which is not recommended for anyone at any age in a retirement account. 6% is actually a good average to aim for in your portfolio over time (and a good proxy for estimating returns when you are running calculators for how much money you will need in your retirement), but since the market did so well last year, I would have expected to see a higher number to balance years like 2008-2009 where you may have had a negative return.

If I were you, I would check a couple of things:

1. What is your allocation between stocks/bonds? Bonds have taken a beating in the last 12 months. I think you are in your early 30's, so a reasonable allocation for you would be 25-30% bonds and 70-75% stocks. Some people who are very conservative or very aggressive may vary, but for a retirement account I'd suggest staying in those boundaries. This will ensure you have enough stocks to get the type of growth you need to meet long-term savings goals, while still having enough protection from downward swings in the markets.

2. I would assume you are invested mostly in mutual funds (and if not I suggest making that move) and then looking closely at the fees on your investments. Some mutual fund options in 401ks have huge fees that can eat up your returns pretty quickly. You want no-load funds with expense ratios of below 1% (I prefer much lower, but this is dependent on the options available to you). I would also look to see if your plan offers mutual funds that track the S&P 500 or other market indices. Because these funds are not actively managed (they just track whatever is in the S&P 500 or other index), you should have very low expenses (like 0.15%) and should be getting roughly the same returns as the market overall. A simple allocation I like to see in a 401k for someone in their 30's might be:
1. 25% in a no-load, low expense ratio bond fund
2. 40% in a fund that tracks the S&P 500
3. 20% in a fund that tracks a bucket of mid and small cap stocks (to balance out the S&P 500, which only tracks large cap stocks obviously)
4. 15% in a fund that tracks a bucket of international stocks

If you have vanguard by chance, they offer great options for each of these. I am sure the other big fund managers offer the same, I am just not as familiar with them.

 

[SB621]

Interesting I have never heard of boggleheads before but I will definitely check it out!!! Thank you Sweet Blossom! And yes we actually did transfer over the GI bill to our kids. My husband and I already have higher degress(s) so we will never use it. It was an easy decision to make and does take some of the pressure off knowing there is a nice sum coming to them for school in 16 years. Makes it a little less daunting when you start.

Hi SB621, kudos on starting so young and being partners with your husband in planning for your financial future together. Great plan to max out your tax-advantage space (TSP, 401k, Roths). Sounds like you are doing a great job and enjoying life at the same time.

That's a good idea to check out your husband's TSP's return. It's a good test comparison of the type of funds you are currently in vs. the index based TSP (if your funds aren't index funds or as mentioned above depending on your allocation). If you like what you see as far as returns of TSP, you could mimic it with index funds if your plan offers it. Although the expense ratio of TSP can't be beat, one can mimic passive low fee indexing.

I'm not sure if we're allowed to link to other sites--you can Google the Bogleheads site (free). The threads there are informative discussions, including ones with your situation of a military member and non-military spouse. You can read through the threads and wikis there and discuss with your partner what is best for your family life and financial situation as you continue to build for your family's future. That being said, everyone has a different style to investing and what they are comfortable with. Just like everyone may have a different style of ring. Indexing may not be for everyone. Just food for thought in one type of investing.

Since you mentioned seeing yourself on a cruise ship when your children enter freshman year of college in the other thread (which would be before you could dip into retirement accounts), you may want to consider taxable accounts and I bonds as a next goal of building financial security. Those can supplement a military pension/helping your children before reaching the age to access retirement accounts.

Also, since you mentioned that your children's educational futures were important to you and your husband in your other thread, you may want to consider asking your husband to look into transferring his post-911 GI Bill to your children. This is a great benefit to help pay education costs and room and board. That is, if you or he are not planning to or have not already used it.

Hope this is of some help. Sorry if any of this is redundant with your plan, but just food for thought. It's really great that your family does this annual review and ask what's next? It sounds like you are way ahead of the game! Enjoy Europe!

 

[nkarma]

These posts make me realize how little I know/understand about retirement. I don't think I'm very financially savvy. We're putting no extra into our superannuation (which is currently employer contributed at 9% of our income, up to 12% in the next couple of years). Instead we're making double mortgage repayments. Our interest rate is at 6%, so I equate that to a 6% return -- we'll have the house paid off in just under 11 years instead of 30. When it is paid off, we will continue to make the same level of repayments, but into our superannuation instead. In the 19 years of less mortgage time, it will equate to (before interest) $800,000. Compounding interest on that amount should be very helpful. Our income levels are high enough there are no incentives in terms of employer-matching contributions or the like.

Is this plan ok? The house will be paid off and we'll start dumping the large payments into super when I am 35. We have no other debts, I have paid my uni fees as I go (and should have a 35% raise, plus inflation adjustments, over the next 10 years due to this course), but do spend a tidy amount on travel and animal rescue. I'm honestly not particularly willing to give up those major expenses though, so am hoping the mortgage plan is good enough!

I am no expert in retirement savings, but every financial planner I have read or spoke with recommends saving for retirement before anything else including mortgage payments, student loans, etc.. It depends on how aggressive you are but average returns are around 12%. You could put both in compound interest calculator and see what would be the better investment after 20 & 50 years.

 

[partgypsy]

I don't think 12% ror for stocks are realistic, but people do say returns of 7-8% which does beat the house payments.
But everyone's risk tolerance is different. Our mortgage payments are 3.75%, but we refinanced to a 15 year a few years ago, because I want the house payment to be gone!

And I would expect a reliable financial planner to advise paying off debt and setting aside an emergency fund before investing, or at least do them at the same time.

 

[FancyDiamond]

I don't think 12% ror for stocks are realistic, but people do say returns of 7-8% which does beat the house payments.
But everyone's risk tolerance is different. Our mortgage payments are 3.75%, but we refinanced to a 15 year a few years ago, because I want the house payment to be gone!

And I would expect a reliable financial planner to advise paying off debt and setting aside an emergency fund before investing, or at least do them at the same time.

I agree with nkarma that an average return of 12% is realistic. Key is how long you can leave the investments alone without withdrawing, and thus how agressive you can be. I have a portfolio that has 19 mutal funds (4 bond, 2 income & growth, 4 large growth, 4 mid cap growth, 3 select sector, and 2 international income/growth). For the last ten years since January 2004, the total return is 143% (average = 14% per year). If I count only the return for the last 6 years since January, 2008 (that includes the big market crash of 2008 and the mini dip in 2001), the same funds give me a total return of 45% (average = 7.4%). Thus, the longer you invest, the more risk you can tolerate, and you can select a more aggressive portfolio that yield a higher return. For the above reason, I recommend that people divide their savings into various buckets for near-term and long-term savings/investments, so as to maximize return while watching your own risk tolerance.

A big star to justqinger for smartly making double mortage payments that carry 6% interest. I have a difficult time finding SAFE and stable return that yields as high as 6%. Even for my "stable" 7% fixed annuities (7-to 10- year, fixed principal and fixed yearly percent yield), the risk is slightly higher.

Definitely agree with you about paying off debts (car loan, student loan, credit cards, and etc., but not home mortgage) and setting aside emergency fund before investing, unless there are other incentives such as company matching 401K contributions, tax deferred IRA contributions, matching for employee stock purchase, and etc.. After all, there are always risks involved with investing. Don't want to do so agressively with short-term funds.

 

[partgypsy]

Fancy Diamonds, I am very impressed with your rates of return. Are they in mutual funds that are limited (ie have to invest in a certain amount of money to invest in it) or available to everyone.

Everything I've read, says for people not to expect 12% ror going forward.

http://blog.petetheplanner.com/what-rate-of-return-should-you-expect-on-your-investments

 

[rubybeth]

Read John Bogle's book "Little Book of Common Sense Investing." Bogleheads (the website) is based on his Bogle's advice. Bogle founded Vanguard. His main piece of wisdom: invest in low fee index funds that track the S&P 500. Vanguard offers good options for low-fee investments, but you can find index funds with fairly low fees in just about any 401k/457b/403b plan.

I love this infographic on how fees work from PBS's Frontline: http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/how-retirement-fees-cost-you/ You can literally save thousands of dollars more for retirement by keeping your fees as low as possible

 

[FancyDiamond]

Fancy Diamonds, I am very impressed with your rates of return. Are they in mutual funds that are limited (ie have to invest in a certain amount of money to invest in it) or available to everyone.

Everything I've read, says for people not to expect 12% ror going forward.

http://blog.petetheplanner.com/what-rate-of-return-should-you-expect-on-your-investments

They are all Fidelity mutual funds. The minimum amount to start is $2,500 for most and $10,000 for FLVCX. However, if your account is a retirement account such as IRA, Roth, and etc., then the minimum is $2,500 for all.

FYI - the funds are: FTBFX (Total Bond Fund), FBNDX (bond), FTHRX (bond), FAGIX (high yield bond),
FSDIX (Income), FBALX (Balanced), FMILX (Millennium lg growth), FCNTX (Contra lg growth), FDCAX (Captal Appreciation, lg growth), FDGRX (lg growth),
FDVLX (mid value), FSMVX (mid value), FLVCX (mid growh), FMCSX (mid growth),
FSDAX (defense), FSENX (energy), FSMEX (medical equipment),
FIGRX (international), FICDX (CAnadian).

For comparison purpose, the total 10-yr return for Dow is 55%, Nasdaq is 107%, and S&P is 64%. Again, my funds yielded 143%.

I like mutual funds, because I need not watch them as frequently as single stocks. i just leave them alone, market crash or market boom. Once or twice a year, I may make minor changes.

 

[SB621]

Fancy Diamonds, I am very impressed with your rates of return. Are they in mutual funds that are limited (ie have to invest in a certain amount of money to invest in it) or available to everyone.

Everything I've read, says for people not to expect 12% ror going forward.

http://blog.petetheplanner.com/what-rate-of-return-should-you-expect-on-your-investments

They are all Fidelity mutual funds. The minimum amount to start is $2,500 for most and $10,000 for FLVCX. However, if your account is a retirement account such as IRA, Roth, and etc., then the minimum is $2,500 for all.

FYI - the funds are: FTBFX (Total Bond Fund), FBNDX (bond), FTHRX (bond), FAGIX (high yield bond),
FSDIX (Income), FBALX (Balanced), FMILX (Millennium lg growth), FCNTX (Contra lg growth), FDCAX (Captal Appreciation, lg growth), FDGRX (lg growth),
FDVLX (mid value), FSMVX (mid value), FLVCX (mid growh), FMCSX (mid growth),
FSDAX (defense), FSENX (energy), FSMEX (medical equipment),
FIGRX (international), FICDX (CAnadian).

For comparison purpose, the total 10-yr return for Dow is 55%, Nasdaq is 107%, and S&P is 64%. Again, my funds yielded 143%.

I like mutual funds, because I need not watch them as frequently as single stocks. i just leave them alone, market crash or market boom. Once or twice a year, I may make minor changes.

Thank you FD! My 401k is through Fidelity so I will check these out now!