Skip to comments.Questions about Investments: Roth 401K and Roth IRA
Posted on 09/14/2011 6:45:12 AM PDT by wrhssaxensemble
I am 26 and recently graduated from school. For the past almost 2 years I have been running a 401k with the tiny percentage of money I can afford to put into it with the full expectation that Social Security won't be around when I'm eligible for it, regardless of the fact I've had to pay into it. I find it really scary how many people I know around my age that aren't saving at all. At first my work only offered a regular 401 so I put in slightly above the % for employer matching. Then they offerred a Roth option. I realized that since I am currently making a low hourly wage (slightly above minimum wage) and likely will have my salary shoot up significantly over the course of my life that Roth made a lot of sense as it will keep me taxed at my current tax bracket and not the bracket I will be in about 40 years from now. But there are two things troubling me now:
1. I am leaving this position for a higher paid one in about a month and a half and hope to move my Roth 401 into a Roth IRA. I have not yet decided where to open a Roth IRA. Anyone have any good recommendations?
2. Also, I imagine it is a problem most people with investments are having right now but my 401 has been tanking the past year. Last year I had a surprisingly huge ROI of 25%. This year it is -9%, mostly because of my allocation to foreign stocks- one of which has an ROI of -38.13% at this point (but only makes up 5% of my portfolio). I know I'm young so I can afford to take risks and actually the risks make me better off in the long term (as long as I get more conservative as I get older) but any thoughts on whether I should be worried that my 401 has lost such a huge amount this year or should I just ride out the storm? I know at least some of you might say to invest in gold but that's not an option through my provider. The market is cylcical but it seems everything Obama does makes it worse- do you see the market recovering at all?
i’m in about the same position as you, just a couple years older.
i got worried a couple years ago when the stock market dropped and called my advisor. he laughed at me. he explained that at a young age, don’t worry about it when the stock market goes down- all that means is you’re buying more shares at a lower price, with the same amount of money. they should be worth significantly more when you’re getting close to ready to retire.
You are so ahead of the game...good for you.
The rule of thumb as it was handed to me was...if your company offeres a matching contribution to your 401k, contribute the max into it that you can up to the company matching contribution amount. Example, my company matches 50% up to 8% of my contribution. I contribute 8%, the company matches with 4%. After that, I fund my Roth to the max allowed (6k for me, I’ve over 50). Whatever is left, if any, then goes to Roth IRA.
I started funding the Roth Ira at my company only this year..and rolled back some of my deferred contribution percentages in the 401K as I am geting closer to retirement.
I currently have my Roth IRA in TD Ameritrade(I like buying individual stocks)..but will likley move over to Ameriprise (My financial advisor is there). They have an option where I will have a steady income with dividend stocks..and allows me to trade individual stocks as well.
You are going to be just fine. I took the same approach as you, not count on Social Security and have saved as much as I could over the years. Hopefull that planning will allow me to retire from my current job sooner rather than later. Good luck to you.!!!
Of course, financial advice is as good as what you pay for..try looking for an accredited or certified financial planner.
Over time, equities will out perform bonds so diversify your portfolio 70% equities, 30% bonds and leave it there. Again, over time you’ll be find.
If your 401K or Roth allows you the option of investing into ETF’s or other funds backed by physical precious metals, energy, or agriculture I would recommend allocating a portion of your savings into those areas simply to counteract some of the risk of the portion you invest in equities. You are smart to start so young. One caveat I have though for 401K’s and Roth’s is if the government gets itself in a big enough financial mess, don’t be surprised if they try to gain control of those funds, so to that end, you might also consider investing some portion of your savings into physical precious metal bullion that you can control and hide. After a 30-35 year career of savings, you should have a nice accumulation to fall back on should the government wrest control of your 401K/Roth accounts from you. Good luck, and stay away from bonds.
There will always be social security. There’s no way DC is going to tick off millions of senior citizens. The govt will simply print more currency. Gramma and gramps might have to pay $12 for a gallon of milk, but there will always be social security.
I have a 401k that when I left the company was worth $2K. A few years later, At the height of the internet bubble, it was worth $12K. Then it went back down to about $2K. Now it’s valued at about $11K. Since I only personally put in about $500-$1,000, even at its lowest I was ahead of the game.
I think you have to consider how much YOU personally invested, not what the value becomes, in order to keep yourself unworried. At your age, you really can’t go wrong whatever you do.
My IRA is self-directed with Scottrade where I buy individual stocks. Since I don’t understand mutual funds at all, I buy dividend producing stocks that are blue chip: IBM, Kimberly Clark, Johnson Controls, Exxon Mobil, Proctor and Gamble, etc. I’ve also found utilities to be very stable with nice dividends. What I do with the IRA is wait until I have enough dividends saved up, then buy another batch of stock.
At your age, even though you may buy a clunker here and there, time is on your side and unless you’re completely stupid, which you’re not, you really can’t go wrong.
I highly recommend a subscription to “The Moneypaper,” which is how I began to understand the stock market and began to buy individual stocks on my own. Here’s their website:
Try calling USAA brokerage services. USAA is membership only for anyone honorably discharged but I think their brokerage is open to anyone. Check and see if they will allow you to open a Roth IRA.
But moving to any Roth IRA will be an improvement over a 401k since it is rare to find a self-directed 401k (where you can invest in individual stock of your own choosing).
Stay away from ETFs as they are only short term trading vehicles.
The trend will be away from government/state bonds as investors will turn to dividend payers in the regular markets first. Then with the flood of funny money the regular stock markets will rise as that money looks for a home to park in.
Commodities or commodities based funds along with precious metals or mining stocks will do well until at least 2020 but it will be a wild ride with some nasty corrections along the way as investors will panic in and out of positions as governments screws with everything.
Remember, cash is a position (like now, the US$ is relatively strong), you can sit in cash and sometimes be hurt less than holding stocks through a correction so don’t forget to sell for profits when you are in the green. Sometimes it is better to sell for profit and then move on to another stock, unless they are dividend payers or just sit in cash and wait to buy back in (the same stock) at lower prices.
I’d take 10% of your cash and buy physical gold and/or silver just to have it in your reach and call it your own.
In the meantime, nothing moves in a straight line, the stock market will move up and down giving you chances to move in and out of stocks.
I retired at age 63 and live comfortably on 3 acres in a semi-rural area. My advise to you is this; as soon as you are financially able - 1. Max out your 401(k) contribution, 2. Max out your Roth IRA contribution, 3. Buy rental properties with cash. When you decide to retire you should be debt free and be able to live off of your dividends, interest and rental income. You might also want to invest in lead, copper and brass to protect your assets, but that’s another topic for another day.
Buy stocks in solid basic companies e.g. JNJ KFT D T SLB PTR SO PG SCCO etc. that pay consistent dividends and whose dividends grow overtime. Buy on dips of 10 to 30%. Diversify into different sectors and some foreign stocks.. Invest about 10% in gold and/or silver ETF's. e.g. GLD SLV. Avoid FAD STOCKS. e.g. "green technology" etc.