Mutual Fund recommendation for young (20s) kid in 401k rollover

[VacationForever]

Sorry, but I have'ta say this is not a good idea. IMHO, no 20-something should be looking at any sort of annuity. These no reason for a young-person (or for that matter, anyone still building retirement funds) to tie up their $$ that way, or pay the hefty fees that insurance companies charge for doing what? Managing your investments the same way you could yourself, for free.

They serve a certain niche for those who need the security, but as for me: I'm not a fan.

I have become a huge fan of deferred income annuity. I wish I had learned of it a while ago. I lost half a million in stock market trying to manage it myself. While I know better now that I am a terrible investor and I have turned my money over to a wealth management company several years ago, I began researching deferred income annuity. The payout is something that beats most investments because part of the high returns is due to others dying off and the annuity holder benefiting from it. I just bought 2 annuities. One of them starts in 17 years from now and the payout is greater than 3 times the principal sum. It is conservative and yet the high returns is guaranteed.

 

[SMHarman]

I have become a huge fan of deferred income annuity. I wish I had learned of it a while ago. I lost half a million in stock market trying to manage it myself. While I know better now that I am a terrible investor and I have turned my money over to a wealth management company several years ago, I began researching deferred income annuity. The payout is something that beats most investments because part of the high returns is due to others dying off and the annuity holder benefiting from it. I just bought 2 annuities. One of them starts in 17 years from now and the payout is greater than 3 times the principal sum. It is conservative and yet the high returns is guaranteed.

They are still a poor deal.

It is theoretically possible to arbitrage them, the mortality tables are so conservative.

 

[dioxide45]

I have become a huge fan of deferred income annuity. I wish I had learned of it a while ago. I lost half a million in stock market trying to manage it myself. While I know better now that I am a terrible investor and I have turned my money over to a wealth management company several years ago, I began researching deferred income annuity. The payout is something that beats most investments because part of the high returns is due to others dying off and the annuity holder benefiting from it. I just bought 2 annuities. One of them starts in 17 years from now and the payout is greater than 3 times the principal sum. It is conservative and yet the high returns is guaranteed.

You just gotta hope you aren't the one dying off so everyone else gets the payout.

 

[VacationForever]

You just gotta hope you aren't the one dying off so everyone else gets the payout.

With deferred income annuities, there are many options. I picked the one that if I die off before the start date, my beneficiary gets back the premium. If I die after collecting the first payment, my beneficiary gets the rest of the payments for the term. So I really lose nothing.

 

[VacationForever]

They are still a poor deal.

It is theoretically possible to arbitrage them, the mortality tables are so conservative.

No other investments can guarantee that your money will triple in x number of years.

 

[bogey21]

Understanding that I have not analyzed Deferred Income Annuities I am thinking that a guaranteed triple your money back in X years may work better than the uncertainty of the financial markets for an unsophisticated investor. One big risk is the quality of the entity providing the annuity.

George

 

[geekette]

Ask any financial planner or guru and they would disagree. I don't know a single one that recommends whole life insurance policies as a means to replace investing in an IRA.

especially if this is a rollover 401k, keeping it as an IRA and not adding new money to it preserves the option to roll it into a future 401k.

 

[VacationForever]

In case anyone wonders, when I looked at the 2 deferred income annuities, the returns is calculated based on compounded interest of between 6 to 7 percent each year. In other words, no downturn like the stock market. The longer you hold off before the income stream begins, the greater the payout.

 

[bogey21]

Vaguely I think I remember reading that Deferred Income Annuities can be held inside a 401k and are exempt from the age 70 1/2 payout calculation.

George

 

[geekette]

Vaguely I think I remember reading that Deferred Income Annuities can be held inside a 401k and are exempt from the age 70 1/2 payout calculation.

George

It would have to be offered as part of the 401k plan. I've had a lot of 401ks and closest I've seen is the guaranteed income fund. It could be offered as a distribution option at termination? I had a 403b that had term-time annuity features that I gave up when rolling out of that plan. The subtle difference is that I cannot contribute to an annuity twice a month, it's generally a one-time buy, which is why it would be on the far end, termination.

So far as I know, the only escape from 401k RMD is if you are still working at age 70.5. This would be true only for the current 401k, any old 401ks rolled to IRA are part of RMD regardless of work status. Of course, if one has not co-mingled, they could roll their rollover IRA back into 401k to ward off RMD if still working. I have no plans to do this, but have kept new money out of my rollover to preserve the option to roll it into a 401k.

 

[pedro47]

Fidelity and Vanguard are both low on expenses.

You might look at the appropriate Vanguard Target Funds. (Target 2060, for example, is designed for people who would retire the year 2060 or thereabouts.) These are funds that automatically adjust asset allocation (bond vs. stocks) as retirement dates approach.

I agree both mutual funds have very low expenses and some very good investment funds. No bonds in your portfolio at this time because of your age and do a monthly cost average contribution. Contribute monthly and treat it as a force bill to pay and good luck.

To the OP if you have deferred comp on your job; please look into it and track their investment record for the past 5 or 10 years. They may be invested in Vanguard, Fidelity or T. Rowe Price mutual funds..

 

[VacationForever]

Vaguely I think I remember reading that Deferred Income Annuities can be held inside a 401k and are exempt from the age 70 1/2 payout calculation.

George

You can use Rollover IRA or other IRA to buy outside of the IRA account, which was what I did. A 2014 law went in to allow distribution from IRA to start as late as 85 years old for a deferred income annuity, provided that not more than 25% of IRA money goes towards a late distribution, and up to a maximum of $125,000.

 

[Talent312]

From an article by Walter Updegrave at CNN Money... on whether one should use $500K to buy an anuuity (abridged) --

The main issue for retirees or near-retirees considering an annuity, is whether you need more guaranteed retirement income than the amount you're scheduled to receive from Social Security. If your Social Security payments are large enough to cover all or nearly all of your essential retirement expenses, then you may be able to get by quite nicely on Social Security plus periodic withdrawals from your diversified portfolio of stocks, bonds and mutual funds to cover excess expenses as well as emergencies and occasional splurges.

As long as you keep withdrawals within reason, you should have a good chance that your savings will be able to support you for the rest of your life. Similarly, if your nest egg is large enough relative to your expenses that you're highly unlikely to deplete it even over a long life, then you probably don't need an annuity.

Of course, your nest egg will still be subject to the ups and downs of the financial markets. But you should be able to deal with that volatility by coming up with a mix of stocks and bonds that provides downside protection in line with your tolerance for risk yet also can deliver enough growth to support a reasonable level of withdrawals.

OTOH, if your Social Security payments fall well short of providing you with sufficient assured income to cover basic expenses -- or, if you just prefer the emotional comfort of having a larger cushion of guaranteed income -- then you may want to consider devoting a portion of your savings to an annuity.

It's important to remember, though, that however appealing an annuity's guaranteed income might be, it comes with downsides. One is that if you die prematurely, you could end up collecting a lot less income from an annuity than you expect, or even none if you die before you reach the age when your annuity begins making payments. So if you have good reason to believe you'll have a shorter-than-average lifespan, you're probably not a good candidate for an annuity.

Another downside is that you typically no longer have access to your dough once you buy an annuity. So even if you decide you do want the extra guaranteed income an annuity can provide, you wouldn't want to put all, or probably even most, of your nest egg in an annuity. You'd want to have at least enough left in a diversified portfolio for emergencies and such as well as to provide some capital growth.

 

[3kids4me]

I agree both mutual funds have very low expenses and some very good investment funds. No bonds in your portfolio at this time because of your age and do a monthly cost average contribution. Contribute monthly and treat it as a force bill to pay and good luck.

To the OP if you have deferred comp on your job; please look into it and track their investment record for the past 5 or 10 years. They may be invested in Vanguard, Fidelity or T. Rowe Price mutual funds..

Hi Pedro - This is actually for my son and not myself. His new company does have a 401k plan but no matching, and given that he is probably in the lowest tax bracket he will ever be in again, and that Roth growth is not taxed, it seemed wise to have him open a Roth rather than participate in the new 401k. (He also probably won't be below the Roth income cutoff for that many years either - hopefully!) He can't afford to do both so it's an either/or thing for him. If there is some logic I'm missing, let me know.

Thanks!

 

[bogey21]

Hi Pedro - This is actually for my son and not myself. His new company does have a 401k plan but no matching......

No matching is the key. Open the Roth while he qualifies. No need to have a 401k with what will most likely be an ex-employer at some point.

George

 

[geekette]

Hi Pedro - This is actually for my son and not myself. His new company does have a 401k plan but no matching, and given that he is probably in the lowest tax bracket he will ever be in again, and that Roth growth is not taxed, it seemed wise to have him open a Roth rather than participate in the new 401k. (He also probably won't be below the Roth income cutoff for that many years either - hopefully!) He can't afford to do both so it's an either/or thing for him. If there is some logic I'm missing, let me know.

Thanks!

I would be very surprised if he could not do both. I would at least put 1% salary to 401k since it is automatic and pretax and 1% is a tiny dribble. It's not clear what method he will use to fund his Roth. Young people can find many ways to use the money today vs save, so I would urge the 401k regardless. Hope he keeps up Roth contributions but if he doesn't, at least the 401k will have been getting infused without him having to think about it or take action.

I am almost always a proponent for more of different types of accounts. But keep in mind that 401k monies can be converted to Roth later if he so chooses. If he gets above the contrib ceiling on Roth, the 401k/IRA money is going to be the only pathway in through that back door.

 

[3kids4me]

I would be very surprised if he could not do both. I would at least put 1% salary to 401k since it is automatic and pretax and 1% is a tiny dribble. It's not clear what method he will use to fund his Roth. Young people can find many ways to use the money today vs save, so I would urge the 401k regardless. Hope he keeps up Roth contributions but if he doesn't, at least the 401k will have been getting infused without him having to think about it or take action.

I am almost always a proponent for more of different types of accounts. But keep in mind that 401k monies can be converted to Roth later if he so chooses. If he gets above the contrib ceiling on Roth, the 401k/IRA money is going to be the only pathway in through that back door.

Not sure what the rationale would be for both. Why not put it all in the Roth? What is the benefit of the 401k at all if no matching? He is doing automatic monthly bank account withdrawals in the Roth, just as he does to pay his student loans and his car loan. He's pretty disciplined so not too worried about him suddenly stopping them - but just as easy to stop 401k as it is Roth!

 

[WinniWoman]

Not sure what the rationale would be for both. Why not put it all in the Roth? What is the benefit of the 401k at all if no matching? He is doing automatic monthly bank account withdrawals in the Roth, just as he does to pay his student loans and his car loan. He's pretty disciplined so not too worried about him suddenly stopping them - but just as easy to stop 401k as it is Roth!

Right. My 28 year old son's employer has a 401k with a discretionary matching that isn't quite spelled out how it works in the employee handbook or how often they have actually contributed to the employee's plans. I told him to just skip it and put the max in his Roth IRAs.

He has done that for a number of years. Now he will be needing a car and his financial situation has changed (no more room mates and an apartment that costs 50%of his low income) and I told him to put whatever he can in a "New "used" Car" fund and skip the Roth for just a couple of years so he can pay cash for the car because he doesn't have the income to afford car payments (His job pays a small bonus a few times per year which is what he saves).

 

[SMHarman]

Right. My 28 year old son's employer has a 401k with a discretionary matching that isn't quite spelled out how it works in the employee handbook or how often they have actually contributed to the employee's plans. I told him to just skip it and put the max in his Roth IRAs.

But that is free money he is likely leaving on the table. No matter how sporadic contributions are.

 

[geekette]

Not sure what the rationale would be for both. Why not put it all in the Roth? What is the benefit of the 401k at all if no matching? He is doing automatic monthly bank account withdrawals in the Roth, just as he does to pay his student loans and his car loan. He's pretty disciplined so not too worried about him suddenly stopping them - but just as easy to stop 401k as it is Roth!

The pretax nature of 401k allows me to save on taxes Today. Why wait 50 years for a tax break? 401k is not just about the match.

In my view, it is always good to have options. One never knows what rule changes may come about to cause an "I wish I woulda...."

In 10 years your son might need a wad of dough for some unexpected whatever. He can tap the Roth, but only what he has put in over 5 years old, not earnings, and cannot put that money back once taken out. He could do a loan from 401k and replace that money same way it got there, payroll deduction, tho not pretax at that point. cheapest loan ever, borrowing from yourself. Not limited to time line on when the money got there. I saved aggressively and did tap the 401k a few times and was damned glad I had it.

I could in the future pay the tax and roll my 401k/iras to Roth (I likely won't but I like having the option). This will allow me to backdoor funds to the Roth once I've maxed out annual contribution. If you have nothing in IRA to backdoor, once Roth is maxed or your salary too high, no more Roth additions for you.

I'm glad he has Roth contribution automated. That's the most important thing. Really, saving at all is the big deal.

 

[WinniWoman]

But that is free money he is likely leaving on the table. No matter how sporadic contributions are.

Bottom line is the match is discretionary meaning sometimes they might match and sometimes not. He doesn't even know how much they match or how much you have to put in for them to match. Nothing in the employee handbook as far as details. What the fees are, etc. Seems strange to me.

At least with the Roth he has control. He can withdraw his principle in case he needs the money for an emergency. (not that he intends to). He got a good start with it. 401k's- you have all kinds of rules and fees and so on.

Anyway, right now he needs to save for a car on a fairly low income. He couldn't afford to have any more money taken out of his paycheck.

When he is in a different position in the future, I suppose he could find out more about the 401k from human resources.

 

[WinniWoman]

The pretax nature of 401k allows me to save on taxes Today. Why wait 50 years for a tax break? 401k is not just about the match.

In my view, it is always good to have options. One never knows what rule changes may come about to cause an "I wish I woulda...."

In 10 years your son might need a wad of dough for some unexpected whatever. He can tap the Roth, but only what he has put in over 5 years old, not earnings, and cannot put that money back once taken out. He could do a loan from 401k and replace that money same way it got there, payroll deduction, tho not pretax at that point. cheapest loan ever, borrowing from yourself. Not limited to time line on when the money got there. I saved aggressively and did tap the 401k a few times and was damned glad I had it.

I could in the future pay the tax and roll my 401k/iras to Roth (I likely won't but I like having the option). This will allow me to backdoor funds to the Roth once I've maxed out annual contribution. If you have nothing in IRA to backdoor, once Roth is maxed or your salary too high, no more Roth additions for you.

I'm glad he has Roth contribution automated. That's the most important thing. Really, saving at all is the big deal.

Most financial gurus say that 401k loans are always a bad deal.You are paying tax on your money twice.

 

[dioxide45]

Most financial gurus say that 401k loans are always a bad deal.You are paying tax on your money twice.

Ultimately the financial gurus are wrong on this. Suze Orman was a big opponent of 401K loans because of "double taxation". This is proven to be a myth. Obviously there are other reasons that a 401K loan is a bad choice; like if you lose your job it becomes taxable with penalty unless you can repay and also the fact that your money is out of the market.

If you Google "401K Loan Double Taxation Myth", you will learn why it is a myth. Yes, you do pay double the tax on the interest you repay to yourself, which is usually a pretty small amount, but the principle is never double taxed. This is because you took it out to buy or use for whatever with pretax money. You still only pay tax on it when you withdrawal it for good.

 

[Jason245]

401k loans are a bad idea because: 1-you are giving up returns which would probably exceed interest you would pay yourself.
2- you are taking bankruptcy protected assets out of protected status.

3. If you lose your job or find yourself unable to repay the loan you are hurting your retirement.


My general suggestion is to never take money out of retirement accounts while working and go bankrupt instead. .

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[Jason245]

As for Roth vs traditional. . General guidance is do both.. when you are below 25 percent bracket Roth is usually best bet.. when above 25 percent traditional and at 25 percent either or will probably result In same end result finance wise..



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