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Message
Need help with 401(k) allocation
Posted on 5/16/13 at 11:56 pm
Posted on 5/16/13 at 11:56 pm
Here is my 401(k) allocation. I am 31 years old and only have about $60k in my account. Any thoughts on my asset allocation and tips on how to make up for some of the lost time? I have just picked the allocation that I thought gave me a little bit of diversification and haven't changed it in over two years. I know very little about investing except that I need to start saving for retirement as early and as much as I can.
This post was edited on 5/16/13 at 11:58 pm
8
Posted on 5/17/13 at 12:00 am to stendulkar
quote:
I am 31 years old and only have about $60k in my account.
In my opinion, that's pretty good. I'm 24 and only have a roth with 7k in the account.
Wife is 28 with a big 1k in her 401k.
Once I land a job (very soon) we'll be saving machines. Started putting 10% of her as a minimum in her 401k and starting an ira for her, as well.
I wish I could help your allocation as I am no expert either. Since you're young, maybe lower the bond %?
Posted on 5/17/13 at 8:59 am to stendulkar
Based on asset classes I think you are doing okay. You are high in equity type investments which is typical for your age but you are reasonably diversified.
The only things that stand out to me are the FID Freedom 2050 Target Date fund and your exposure to the bond market.
The idea of the Target Date fund is that you put all of your money in it and the Fund Manager adjusts the fund over time to reduce your risk as you near retirement. Theres no harm in putting in less than 100% but those funds are pretty much for unsavvy investors who would rather let a fund manager do the work for them.
Historically you'd be fine with the 20% in Bonds but as the DJI has risen many investors have moved to equity positions i.e. stocks and most expect that if and when interest rates rise the bonds currently on the market will take a beating.
The only things that stand out to me are the FID Freedom 2050 Target Date fund and your exposure to the bond market.
The idea of the Target Date fund is that you put all of your money in it and the Fund Manager adjusts the fund over time to reduce your risk as you near retirement. Theres no harm in putting in less than 100% but those funds are pretty much for unsavvy investors who would rather let a fund manager do the work for them.
Historically you'd be fine with the 20% in Bonds but as the DJI has risen many investors have moved to equity positions i.e. stocks and most expect that if and when interest rates rise the bonds currently on the market will take a beating.
This post was edited on 5/17/13 at 9:01 am
Posted on 5/17/13 at 1:29 pm to wiltznucs
Thanks for the input guys.
So I have been trying to use Excel to calculate how much I need to put into 401(k) going forward and I am hoping someone can help verify my numbers.
Suppose let's say I want to guarantee myself $2,000,000 when I retire 25 years from now (Is that a good number to shoot for at retirement?). Assuming a return of 8% over that period (again is this a good guess?), and taking into account the fact that I already have $60k saved, I calculated that I need to put ~$21700 per year in my 401(k) here on out.
Here is how I calculated it:
Value of $60k 25 years from now = FV(0.08,25,0,60000) = $410,909
Remaining target: $2,000,000 - $410,909 = $1,589,091
Payment calculation going forward = PMT(0.08,25,0,1589901) = $21737 per year.
Are my numbers correct? How do I put $21k when the limit is only $16.5k per year? Should I look at other savings options?
So I have been trying to use Excel to calculate how much I need to put into 401(k) going forward and I am hoping someone can help verify my numbers.
Suppose let's say I want to guarantee myself $2,000,000 when I retire 25 years from now (Is that a good number to shoot for at retirement?). Assuming a return of 8% over that period (again is this a good guess?), and taking into account the fact that I already have $60k saved, I calculated that I need to put ~$21700 per year in my 401(k) here on out.
Here is how I calculated it:
Value of $60k 25 years from now = FV(0.08,25,0,60000) = $410,909
Remaining target: $2,000,000 - $410,909 = $1,589,091
Payment calculation going forward = PMT(0.08,25,0,1589901) = $21737 per year.
Are my numbers correct? How do I put $21k when the limit is only $16.5k per year? Should I look at other savings options?
This post was edited on 5/17/13 at 2:06 pm
Posted on 5/17/13 at 1:42 pm to stendulkar
quote:
How do I put $21k when the limit is only $16.5k per year? Should I look at other savings options?
$16.5K in your 401(k) and $5,500 in a IRA seems like the best bet...
This post was edited on 5/17/13 at 1:43 pm
Posted on 5/17/13 at 1:59 pm to stendulkar
How long do you plan on working? If it is 20 or more years....you are really leaving a lot on the table having any of your allocation in bonds. No need for it....you aren't close enough to needing the cash to live on. Even though some conventional wisdom might tell you it aids in diversification.....accomplishing that vs what you are giving up capturing potential gains when the stock market rises is a lot more than you might think.
Edit:SP
Edit:SP
This post was edited on 5/17/13 at 2:01 pm
Posted on 5/17/13 at 2:01 pm to stendulkar
Are you assuming a 0% ROI from now until retirement?
Posted on 5/17/13 at 2:05 pm to stendulkar
quote:
stendulkar
There are super legit 401k retirement calculators out there and most don't do targeted amounts but you just can change the amounts to what you want.
Also, don't forget to factor in inflation. Since we have started targeting inflation rates, the rates have stayed a pretty steady 2-3%.
Also, you get catch up rates after you hit a certain age of an additional 5000$ per year
Everyone I have talked to though suggests that you should look a little worse than expected. Return of 6%, Inflation per year 4%
Posted on 5/17/13 at 2:05 pm to Cold Cous Cous
quote:
Posted by Cold Cous Cous
Are you assuming a 0% ROI from now until retirement?
Why do you say that?
Posted on 5/17/13 at 2:07 pm to stendulkar
Never mind, misread.
Posted on 5/17/13 at 2:08 pm to GenesChin
quote:
Return of 6%, Inflation per year 4%
You mean a net of 6, correct?
Posted on 5/17/13 at 3:44 pm to stendulkar
quote:
Suppose let's say I want to guarantee myself $2,000,000 when I retire 25 years from now (Is that a good number to shoot for at retirement?).
Depends on how much monthly income you want when you retire and how long you'll need it to last.
quote:
Assuming a return of 8% over that period (again is this a good guess?)
Depends on how you're investing; with your allocation you should get 8% over the next 25 years. You will have to add in inflation though to get a better idea of how much money you'll need.
quote:
Should I look at other savings options?
I would. I'd contribute up to the employer match on the 401(k) and max a roth (if you're eligible).
Posted on 5/17/13 at 4:09 pm to stendulkar
Read :
Unconventional Success: A Fundamental Approach to Personal Investment
By David Swensen.
Very technical book , but, it pretty much breaks down what allocations are "ideal". Of course it is not perfect, because your allocation also depends on age, risk assesment and other factors. But in that book Swensen also explains WHY you need to have the asset breakdown he recommends.
Much better than any other book I've ever read on the subject. Keep in mind that it is VERY DRY. If you are not patient, this book is not for you.
Unconventional Success: A Fundamental Approach to Personal Investment
By David Swensen.
Very technical book , but, it pretty much breaks down what allocations are "ideal". Of course it is not perfect, because your allocation also depends on age, risk assesment and other factors. But in that book Swensen also explains WHY you need to have the asset breakdown he recommends.
Much better than any other book I've ever read on the subject. Keep in mind that it is VERY DRY. If you are not patient, this book is not for you.
Posted on 5/17/13 at 4:30 pm to stendulkar
Your exposure to bonds and foreign equities is a bit high IMO. I would only have about 5% in bonds at your age and maybe 10-15% in foreign stocks.
I'm milking this bull market for all its worth until about 2017.
I'm milking this bull market for all its worth until about 2017.
Posted on 5/17/13 at 5:12 pm to stendulkar
A 401k should only be a portion of your investment vehicles, ideally. Thus, you can contribute up to the limit if you want, but there are other options to allocate further investments.
As for allocation, it might be a good idea to choose more volatile options in your 401k because of the contribution structure. By volatile options, I mean stock-heavy funds that fluctuate in value more than your other options. Because of the contribution structure - investing a set amount on a biweekly or monthly basis your basically dollar cost averaging, so you're paying less per share when the value drops.
As for allocation, it might be a good idea to choose more volatile options in your 401k because of the contribution structure. By volatile options, I mean stock-heavy funds that fluctuate in value more than your other options. Because of the contribution structure - investing a set amount on a biweekly or monthly basis your basically dollar cost averaging, so you're paying less per share when the value drops.
Posted on 5/18/13 at 12:36 am to Dead Mike
OP - you are young. Go aggressive on equities. If they drop, you have lots of time to make up lost ground. FWIW, my 4 from your list:
ARTQX, VINIX, FKMLS and VEXMX or, since 2 of these are mid-caps, drop one of the mid caps and go with 3.
I would avoid the foreign (FDIKX) with the -13.6 loss in 2011.
Review every 6 months.
ARTQX, VINIX, FKMLS and VEXMX or, since 2 of these are mid-caps, drop one of the mid caps and go with 3.
I would avoid the foreign (FDIKX) with the -13.6 loss in 2011.
Review every 6 months.
Posted on 5/18/13 at 10:10 pm to stendulkar
Do you have other options?
Posted on 5/19/13 at 9:04 am to stendulkar
Do not take you allocation advice from a message board. Take the time to research allocation strategies and portfolio theory.
For instance, many don't understand the role bonds play in a portfolio so they push the 100% equity approach. Research the concepts of efficient frontier, correlation between asset classes and modern portfolio theory. Also, check out bogleheads.org.....good info there.
Its not about your timeline. Its about the incrementally smaller additional returns that you get for taking on larger and larger amounts of risk.
Good luck!
For instance, many don't understand the role bonds play in a portfolio so they push the 100% equity approach. Research the concepts of efficient frontier, correlation between asset classes and modern portfolio theory. Also, check out bogleheads.org.....good info there.
Its not about your timeline. Its about the incrementally smaller additional returns that you get for taking on larger and larger amounts of risk.
Good luck!
This post was edited on 5/19/13 at 5:56 pm
Posted on 5/20/13 at 12:09 am to SquatchDawg
Squatch - What bonds are you recommending for a 50-something looking to retire in 3 years?
Everyone I talk to says do not expect bonds to make any positives when the rates start going back up again. My bonds are up 1.1% this year and advisors say it is good return (I stay away from hi-yield for obvious reasons)
Everyone I talk to says do not expect bonds to make any positives when the rates start going back up again. My bonds are up 1.1% this year and advisors say it is good return (I stay away from hi-yield for obvious reasons)
Posted on 5/21/13 at 7:57 pm to matthew25
Sorry for the delay.
That's tough because there are competing theories and your individual circumstances factor in to the mix as well. At your age the focus should be shifting to preserving what you have from market punches. I know more than a few folks who took a 40% hit at the worst possible time in their retirement horizon.
The simplest answer is to take the largest dollar loss you think you could absorb, divide this by 40% and this would be your equity allocation. This would give you the ability to take a 40% shock.....I.e. 2008.
If you start factoring in macro moves in interest rates then it gets much more difficult. I agree that that rates have to move up....but under that scenario nothing is safe....and you're trying to predict the future.
Pick a allocation based on your own thoughts and research...dig deep and don't take traditional approaches as gospel as we're in strange times.
Good luck. We're all shooting in the dark somewhat....
That's tough because there are competing theories and your individual circumstances factor in to the mix as well. At your age the focus should be shifting to preserving what you have from market punches. I know more than a few folks who took a 40% hit at the worst possible time in their retirement horizon.
The simplest answer is to take the largest dollar loss you think you could absorb, divide this by 40% and this would be your equity allocation. This would give you the ability to take a 40% shock.....I.e. 2008.
If you start factoring in macro moves in interest rates then it gets much more difficult. I agree that that rates have to move up....but under that scenario nothing is safe....and you're trying to predict the future.
Pick a allocation based on your own thoughts and research...dig deep and don't take traditional approaches as gospel as we're in strange times.
Good luck. We're all shooting in the dark somewhat....
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