Advice on how to make the most of my opportunity

**disneysteve** · 06-07-2014, 05:22 PM

It all depends on what the money is for. Money that you anticipate needing within 5 years should be in safe vehicles like money market accounts and CDs. Money that you won't need for 5 or more years could be invested in equities. Money that is for retirement should be in tax-sheltered accounts like 401k or Roth IRA.

**loss4words** · 06-07-2014, 05:29 PM

Thanks Steve! I would really like to use that money for a down payment on a future house or an apartment. My plan is to eventually relocate to a different (more affordable than NY) state in few years and purchase a home there. I was looking at some CDs and Money Market offerings today but the interest return on those seem to be less than what my current savings account is offering.

**snafu** · 06-07-2014, 07:48 PM

While DS correctly explains the 5 yr. time frame for investment I wonder if your employer offers any type of matching funds for retirement. I'd hate to see you lose valuable 'free' money. Have you explored saving rates for electronic accounts. www.bankrate.com

**loss4words** · 06-07-2014, 08:58 PM

Thank you SO MUCH for the recommendation, snafu!!

I have not previously looked into my company's retirement plan. Would you mind if I post their offering here for you to take a look?

Company's retirement plan:

"As a participant, you may contribute up to 5% of your base salary for the pay period as salary reduction contributions. Company will make a matching contribution equal to your salary reduction contribution. Company will also make a non-matching contribution of 5% of your base salary for each pay period regardless of whether you elect salary reduction contributions. Contributions will continue for as long as you meet the Plan's eligibility requirements and, with respect to salary reduction contributions and matching contributions, have a valid salary reduction election in effect. Company has selected The Vanguard Group and TIAA-CREF to offer investment
options under the Plan. The Plan is authorized under Section 403(b) of the Internal Revenue Code."

From the above it seems that since my base salary is $50,000 and if I contribute 5% annually ($2,500) my company will contribute a matching contribution of $2,500 (5%) and a non-matching contribution of $2,500 (5%) making the total annual amount going into my account $7,500. That sounds too good too be true

I am definitely planning to meet with my company's financial advisor to discuss this!

The only drawback is that they do not allow to withdraw money from account while I'm still employed with them or unless I'm 60. When I leave them I may cash out but income taxes will apply to the amounts I cashed out. I can, however, rollover the balance to an IRA or another retirement plan.

As far as savings accounts I only have one with former INGDirect (or Capital One now) with a 0.75% APY. I see that there are some savings accounts with up to 0.95% APY but I'm not sure if it's worth switching over to them.

A very newbie question but would it make sense for me to invest in IRA or Roth IRA accounts as well?

Thank you so much again and I'm looking forward to hearing back from you.

**kv968** · 06-08-2014, 02:06 AM

Originally posted by loss4words View Post

Thank you SO MUCH for the recommendation, snafu!!

I have not previously looked into my company's retirement plan. Would you mind if I post their offering here for you to take a look?

Company's retirement plan:

"As a participant, you may contribute up to 5% of your base salary for the pay period as salary reduction contributions. Company will make a matching contribution equal to your salary reduction contribution. Company will also make a non-matching contribution of 5% of your base salary for each pay period regardless of whether you elect salary reduction contributions. Contributions will continue for as long as you meet the Plan's eligibility requirements and, with respect to salary reduction contributions and matching contributions, have a valid salary reduction election in effect. Company has selected The Vanguard Group and TIAA-CREF to offer investment
options under the Plan. The Plan is authorized under Section 403(b) of the Internal Revenue Code."

From the above it seems that since my base salary is $50,000 and if I contribute 5% annually ($2,500) my company will contribute a matching contribution of $2,500 (5%) and a non-matching contribution of $2,500 (5%) making the total annual amount going into my account $7,500. That sounds too good too be true

I am definitely planning to meet with my company's financial advisor to discuss this!

The only drawback is that they do not allow to withdraw money from account while I'm still employed with them or unless I'm 60. When I leave them I may cash out but income taxes will apply to the amounts I cashed out. I can, however, rollover the balance to an IRA or another retirement plan.

As far as savings accounts I only have one with former INGDirect (or Capital One now) with a 0.75% APY. I see that there are some savings accounts with up to 0.95% APY but I'm not sure if it's worth switching over to them.

A very newbie question but would it make sense for me to invest in IRA or Roth IRA accounts as well?

Thank you so much again and I'm looking forward to hearing back from you.

I'd start contributing 5% to the 401k as soon as you can. It sounds too good to be true but it's not. The company will do exactly what they said, match 5% plus 5% regardless. Like Snafu said, basically "free" money. That extra 5% regardless whether you contribute or not is a nice addition, a lot of plans don't have that.

One thing to keep in mind however is how long you've been with the company and their vesting schedule. It's nothing to worry about since it's common practice, just something to be aware of. Usually a company won't actually give you all of the money they contribute until you've been with them for 5 years or so. In other words, in year one you may only be vested 20% in the they put in. So if you were to leave after a year only 20% of the company's contribution would actually be yours. Year 2 would another 20%, year 3 another 20%, etc. until you reach 5 years and then you'd be fully vested and it's all yours. And this is only the money the company put in. The money you put in is always yours. And yes you can't touch either while your employed with them or until you're 59 1/2 but that's great because you shouldn't be touching it since it's for retirement.

And they may give you an option to contribute either pre-tax or post-tax. Do it pre-tax. If you do and you bring home about $3k/month or $50/yr, contributing 5% would be about $157 less monthly in your take home pay.

I'd also suggest that you open a Roth IRA and start contributing to that also. It would be nice if you could max that out per year($5500) but if you can't you could start for as little as $1k and contribute as little as $100/month. I know you'd like to save money for a house but with your circumstances you can do that while also starting a decent retirement savings plan.

Post your investment options the 401k offers and me or others on here will gladly give you our opinions on them and some suggestions on what might be best for you.

**loss4words** · 06-08-2014, 07:10 AM

Thank you for the advice!! I really appreciate it

According to the online documentation for the plan I will be fully 100% vested as soon as I begin participating.

I'm now starting to realize that taking out of retirement plan for a new home might not be a wise idea at all because of the penalty associated with the withdrawal, and that I should be investing as much as I can into retirement. I decided to start contributing the full 5% since I can see the benefits down the line. Also, while the company does not match contributions above 5% I can still contribute up to IRS annual limits, $17,500.

I will certainly be looking for the Pre-Tax option while filling out the form, thank you!

How important/what are the benefits in investing in Roth IRA vs leaving the $5500 in the savings account? Over the 3 year period that could be $16.500 in savings towards a downpayment and I understand that I should have 3-6 month worth of rent/mortgage money in savings just in case.

For retirement plan investing options I can choose Vanguard or TIAA-CREF. I can choose to invest with one provider or spread investments between both. There are many different funds I can invest into from either provider. I honestly have no idea what fund to choose invest in and what the numbers mean, but here's an example of 2045 retirement funds:

For Vanguard 2045 Retirement Fund:
Total Annual Operating Expenses: as a %=0.18%; per $1000=1.80
Average Annual Total Return: 1 Year=17.30%; 5 Year=15.32%; 10 Year=7.63%; Since Inception: 8.13% (10/27/2003)

For TIAA-CREF Lifecycle 2045 Fund:
Performace Data as of 6/6/2014: Net Asset Values=$11.27; Net Change=+0.05; YTD Return=3.87%
Average Annual Total Returns as of 5/31/2014: 1 Year=16.79%, 3 Year=10.92%; 5 Year=15.40%; Since Inception: 4.47%

Again, thank you SO much for your help guys! It's been very eye opening so far

**snafu** · 06-08-2014, 08:55 AM

While I admire your plan to grow saving, starting a retirement plan to take advantage of free

money from your employer is even more important. Your contributions are pre tax so there will be a small tax reduction. The major point is to grow small amounts over many many years. Understand you cannot withdraw money - your contribution, employer's contribution or income generated for any reason until 59 1/2 y/o. It's not a put-in/take-out savings plan; for your protection the government discourages cashing out with penalties and tax as you will need every dime by the time you're a senior. Vested, should you change employment sometime in the future you can transfer your plan to a new employer or to Vanguard's self managed retirement.

Vanguard is the Mutual Fund [MF] collection many of us measure other MFs against because they do not charge commissions and have a very low Management Expense Ratio [MER]. Personally, I suggest starting with their Index Fund. Later, when you have significant sums, you could add other, higher risk funds. If you call Vanguard 8 in77-662-7447 ask for an information package.

When you've signed on to your employer's retirement program, I hope we can all discuss details about saving for a home etc.

**loss4words** · 06-08-2014, 09:13 AM

Thanks Snafu!

I've pretty much decided to max out the 403B with 5% with employer contributions as well as max out in Roth IRA. With this I should have 13K/year in savings. Please feel free to stop me

Would you suggest I go 100% Vanguard? Thanks for you suggestion about the Index Fund. Are there any reasons it is better than 2045 Retirement Fund? I guess I would be looking for a fund that requires minimal interaction from me since I don't know anything about investing in stocks or bonds.

**moneysma** · 07-03-2014, 07:35 AM

Everyone else talked about saving for your retirement, so I will chime in about your savings for a house.

Since you are looking at moving in a short period of time, your options are more geared towards savings accounts and CDs. As you mentioned, right now they pay squat. The only place you will get a better return is to take on more risk and invest in the stock market. But I wouldn't do this with the house money. Too much risk.

It stinks to get a low interest rate, but there isn't anything you can do about it. Look around and see what various interest rates you can find for CD lengths of 1 year, 18 months, and 2 years. If they are better than your savings account, consider creating a CD ladder where you put an amount of money into each term. Then when the 1 year comes due, you can either invest in another 1 year CD (hopefully rates will be higher) or move the money back to cash. Same for the other CDs too.

Hope that helps.

**loss4words** · 07-10-2014, 11:36 AM

Thanks a lot, everyone! I'm contributing to the company match now with 100% Vanguard but can't decide if I want to put the rest in savings account or ROTH IRA if the plan is to buy a home in few years and I want to save for a down payment.

If everything goes well without contributing to ROTH I expect to have approximately a total of 85K saved 5 years from now. With contributing to ROTH I will have about 60K total savings. If the total cost for a house is around 300K what do you guys recommend I do?

**snafu** · 07-14-2014, 03:08 PM

I'm so pleased you took action and opened a retirement a/c to take advantage of free money from your employer. What Vanguard product did you choose? If you ask, Vanguard will send you details on their various funds. You can change funds in the future or add an additional fund. The point is to let compounding do it's magic over your entire career.

As time goes on we're happy to respond to any questions or concerns based on your specific circumstances. Our motivation is wanting you to succeed. What did you decide about savings for a downpayment for a house? If you submit your budget [month to month spending] we might be able to point out ways to accelerate savings. The government says it plans to end the QE program [Quantitative Easing] which will negatively affect Bond rates. Have you looked at bankrate.com shopping for rates? If you have a 5 year timeframe, look at the top ten holdings for Vanguard's Dividend Fund as that may be a possibility for risk/reward ratio.

**loss4words** · 07-14-2014, 03:44 PM

Thank you, Snafu!!

My employer signed me up for Vanguard 2050 Retirement Fund. I was also thinking about opening another Vanguard 2050 Retirement Fund for Roth IRA to make it simple for me.

Here are my monthly spendings/savings:

Monthly salary = $2800 after contributing up to employer 403B match
Rent/Bills = $600
Food/Entertainment = $400
Savings = approximately 1800/month.
Currently in Savings - just about $8,000.

In 5 years I'm hoping to have enough to put a 20% downpayment + closings costs on up to 300K home, as well as to leave some money for emergency in my savings account.

Thank you!!!

**Dsquared513** · 07-14-2014, 03:55 PM

I'm assuming that your employer has restrictions of their own to prevent early withdraws, because the IRS penalty for withdrawing before 59 and 1/2 is only 10% and who cares about that when you are getting instantaneous 200% returns?!?

**loss4words** · 07-14-2014, 04:01 PM

Yep, my employer doesn't allow early withdrawals from 403B.

Advice on how to make the most of my opportunity