[READ BEFORE POSTING] The Long-Term Investing and Retirement Savings Thread: You put WHAT in my 401k?
I am starting this because right now there is really no place for quick questions on asset allocation and long term investing strategies. I have seen a few people in random threads looking for something like this so I figured I would just get one started and see how it goes.
I'm going to try to cobble together a little FAQ here, if you have any ideas for additions let me know and I'll add them in.
Also, in the interest of full disclosure, I am not a financial adviser of any sort. Just another corporate drone that is trying his hardest to score an early retirement.
How much should I be saving?
This depends totally on your individual goals, age, and risk tolerance. It stands to reason that if you are 22 years old and don't want to retire for 40 years, your needs are going to be different than the poor schmuck that is just starting to save for retirement at 50 years old.
That said, if you are young and fairly new in your career, which you most likely are if you are reading this forum, 10% of your pre-tax salary is an absolute baseline minimum amount that you should be saving. The more aggressively you save on top of that, the better off your long-term financial outlook will be.
Here is a decent calculator to help you run different savings scenarios.
I'm in my early 20s, why do I need to save for retirement?
Saving early in your career is extremely important for a few reasons:
1) It will never be easier to save money than when you are young. You are not married, you don't have kids, you probably don't own a house. If you can't save money now, when will you be able to??
2) Compounding interest is a wonderful thing when it works in your favor. Consider this scenario: Let's say there is a 25 year old kid that is making $50k per year. He starts contributing 10% of his salary to a 401k plan every year, until he retires at 65. Assuming that his salary remains equal to inflation, he will retire at 65 with about $2 million in savings, assuming an average 8% return.
Now let's say that same kid waited until, say, 35 years old. He would need to contribute 50% of his pre-tax income to end up with $2 million. YIKES! It is VITAL to invest when you are young, to avoid such a scenario!
The market is getting killed, shouldn't I wait it out for a while?
NO!! A bear market like we are currently experiencing is the best possible thing for long-term investors! Consider this somewhat-famous Warren Buffet quote:
quote:
short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Investing now means that, in essence, you are buying "on sale". This is a good thing.
Roth IRAs, 401(k)...I'm confused. Where do I start?
There are two basic types of savings accounts -- tax-advantaged, and taxable. Tax-advantaged savings are where you will most likely be doing the grand majority of your savings until later in your career.
There are 3 main types of tax-advantaged savings accounts -- Roth IRA, Traditional IRA, and 401(k) (or equivalent). I could explain all of these in detail, but the Motley Fool has already done a pretty good job right here. In general, most people would want to follow these rules:
1) Contribute to 401(k) up to employer match
2) Max out Roth IRA ($5,500 this year)
3) Max out 401(k) ($17,500 limit this year)
4) If you were able to finish Step 3, you will end up rich in all likelihood. Start a taxable savings account, or go out and blow some money at a strip club or something.
I have all these different funds to choose from, where do I start?
This is where the fun begins. Vanguard's target retirement funds are a great place to start if you are a passive investor. That said, if you are investing in 401(k), there's a good chance that you will have very limited options. In general, all long-term investors should have some exposure of U.S. equities, international equity, and fixed income. The exact ratios again depend on your age, goals, and risk-tolerance. I am 25 years old and I try to keep to my plan of 45% intl equity/40% US equity/15% fixed income. We can definitely answer individual questions in this thread.
I think that should cover a lot of basic questions.
edit: Some reading recommendations from unormal
Unormal posted:
Here's some reading recommendations:
Fundamentals
The Four Pillars of Investing
http://www.amazon.com/Four-Pillars-...o/dp/0071385290
Vanguard Investor Education Pages
https://personal.vanguard.com/us/pl...ation/education
Why Smart People Make Big Money Mistakes
http://www.amazon.com/Smart-People-...ref=pd_sim_b_45
Deeper Cuts
Intelligent Investor
http://www.amazon.com/Intelligent-I...ref=pd_sim_b_39
Stocks for the Long Run
https://personal.vanguard.com/us/pl...ation/education
A Random Walk Down Wall Street
http://www.amazon.com/Random-Walk-D...ref=pd_sim_b_23
The Intelligent Asset Allocator
http://www.amazon.com/Random-Walk-D...ref=pd_sim_b_23
All About Asset Allocation
http://www.amazon.com/Random-Walk-D...ref=pd_sim_b_23
Economic Interest
Devil Take the Hindmost
http://www.amazon.com/Devil-Take-Hi...ref=pd_sim_b_41
Against the Gods
http://www.amazon.com/Against-Gods-.../ref=pd_sim_b_1
A Splendid Exchange
http://www.amazon.com/Splendid-Exch...15291970&sr=1-4
