I'm 41 years ripe and my small profit sharing account with my employer is pretty abysmal. I don't get to contribute and quite frankly it's done terrible over the last 6 years or so hovering at almost the same amount or dropping each year. It's basically just yo-yo-ing.
I know that index funds are a great way to passively build wealth. I've kinda got a basic idea of what it all is and after some quick reading it seems like maybe Fidelity is a good choice but for my years of occasional mustachianism absorption always seemed to favor Vanguard. I'm wanting to dip my toes into this slowly with say $100-200 monthly contribution with plans to ramp up slowly in the next year. Should I start an account with both and divide the contribution of $100 per fund? Is one better in the fee department?
Should I avoid the zero fees funds or are they still a worthy candidate?
Easy button would be a target retirement fund for the appropriate target year either with Fidelity or Vanguard. With Fidelity, make sure to pick the index version. Don't ask me how I figured that out...
I would stick with one of them - I do most of my investment via Vanguard, but still have a rollover IRA parked at Fidelity that I really should be moving over. But either of the three low cost investment houses (Schwab, Fidelity, Vanguard) should be fine.
IIRC the zero fee funds at Fidelity are fine if they mirror what you want to invest in.
I'm assuming that you're looking at investing inside a retirement type account? Like IRA/Roth IRA? For anything that's in a regular taxable account, you want to pick ETFs rather than mutual funds due to their much more favourable tax treatment.
I will second doing ETFs. Recommend doing something simple and total market to start like VT or VTI through vanguard. I got that recommendation on here 5 years ago and have been glad every day for the money we've put in there.
Fidelity doesn't have a total market ETF to rival VtI, but the internet says you can buy VTI even through fidelity.
as you get started I (personally) would put all my money into one to build a good base, and start contributing to a second after a little while.
BoxheadTim said:
I'm assuming that you're looking at investing inside a retirement type account? Like IRA/Roth IRA? For anything that's in a regular taxable account, you want to pick ETFs rather than mutual funds due to their much more favourable tax treatment.
Honestly that's something I'm not really sure of. I just planned to start the index fund contribution but if there's one that's more tax friendly since I'm going long term of say 25 years then I'd rather focus on that if the returns are still good.
In reply to captainawesome :
Your description sounds like you're looking at a regular taxable account.
if you're not familiar with options, check into IRAs, both traditional and Roth, to see if one might make more sense for you to start with.
One thing to keep in mind re ETFs is that most of the big investment houses don't allow fractional share investing, so one tends to end up having cash floating around in the investment account until the next contribution comes in. Not a big deal, but if you want to invest every penny you contribute immediately, mutual funds work better.
In reply to classicJackets (FS) :
I guess I need to figure out what an EFT is then? One of the videos I watched mentioned it and I recall something to the effect you sometimes have to activate reinvesting returns under settings. I kinda glazed over that because I assumed the standard index was something I was looking for.
In reply to classicJackets (FS) :
So this is where my ignorance is hindering me. I assume that means I can contribute to the IRA account but still manage those funds in any index or EFT with the tax shelter?
In reply to captainawesome :
For a brief and nontechnical description: index funds you buy into a fund with a dollar amount, and that's kind of it. There's usually a minimum buy-in amount of ~$3000.
ETFs basically act like buying a "piece" or a "stock" of the same underlying asset pool as an index fund. No minimum buy-in, you can buy partial "shares" (at vanguard anyway), and you have a set buy-in price when you go to sell and take profits in your 25 year span. I've never done index funds, my entire investing career of 5 years has been entirely ETFs.
edit in reply to your next post:
IRA (traditional or Roth) is just an account type. Once you put money into the IRA, you would then have to choose what fund to invest that money in so it will keep growing.
captainawesome said:
BoxheadTim said:
I'm assuming that you're looking at investing inside a retirement type account? Like IRA/Roth IRA? For anything that's in a regular taxable account, you want to pick ETFs rather than mutual funds due to their much more favourable tax treatment.
Honestly that's something I'm not really sure of. I just planned to start the index fund contribution but if there's one that's more tax friendly since I'm going long term of say 25 years then I'd rather focus on that if the returns are still good.
A lot of investment vehicles these days - especially in the index space - come in both flavours (ETF and mutual fund). IIRC the main difference with a taxable account is that if the mutual fund ends up selling shares at a profit, you as an investor get to pay taxes on that profit the year the sale happened. That caught out a few investors a couple of years ago when (IIRC) Vanguard rebalanced/restructured a fund.
IIRC taxes on gains for ETFs are only due when you sell them, so you've got more control over the tax situation.
If you're eligible and these are retirement funds, I'd definitely look into investing in a Roth IRA. Yes, it'll be after tax money, but it grows tax free from that point onwards, whereas a regular IRA is only tax deferred.
Note, I'm not a tax expert so this is my layperson's understanding.
Sounds like I need to start looking at the Roth IRA contribution first. I assume using the same investment house is advantageous for that, but are there also fees to consider as well?
Disclosure: my wife and daughter both work for Fidelity, but I am not a finance professional and my advice may be worth what you're paying for it.. If you want to read a good distillation of simple investment choices, read 'The Simple Path to Wealth' by JL Collins. You can read most of it for free on his website, https://jlcollinsnh.com/stock-series/. I have followed essentially this path (total market index funds) throughout my career and done well while not stressing over the minutiae.
As far as providers, pick one unless you just like doubling your administrative tasks and tax filing stuff. Vanguard is a great company, and I think they and some of the other low cost providers have essentially pushed the other players in the industry to offer free/low cost funds. Fidelity offers a zero fee total market index fund (FZROX) that would probably be a great start IMO.
Most of the providers offer various target date funds as mentioned above. These are basically just combinations of their other funds that shift the mix from Stocks --> Bonds as they get closer to the date. So a 2025 target fund would be very conservative (the assumption is you'll need that money soon, and don't want to risk your capital). A 2055 target fund would be heavy on stocks right now with the goal of bringing you good gains over time, and would get more conservative as the target date approaches.
Note that these assumptions may not be right for your circumstances, and it's often cheaper to just roll your own and buy one or two funds and shift the proportions over time as you like. It doesn't have to be fancy, consistency in investing and time are your best allies.
Edited to address the IRA types and fees a bit: absolutely contribute to an IRA first before a taxable account, up to the max (currently $7k for folks under 50). It gives you a tax break that regular accounts do not get; the catch is that you have to wait until retirement to withdraw it or pay a penalty.
You contribute to a traditional IRA with "pretax" money; whatever you put into it this year doesn't get taxed on your tax return this year. It then grows tax free until you withdraw it, you pay taxes on the withdrawals then. The Roth contributions are after tax money, so you have to pay taxes first and then contribute. Then the Roth account grows tax free and may be withdrawn tax free as well in retirement. Note that assuming equal tax rates when you contribute and withdraw your money, the traditional and Roth IRAs are equal in tax treatment, you don't get a free ride either way, you either pay tax up front or in retirement. That's the gist of it; there are of course wrinkles and details I'm glossing over.
In reply to Kendall Frederick :
I'll give that a read!
The target date was something I wasn't aware of. I just assumed it was get out when you want to.
I think it's abundantly clear I need to get some further education on this more than surface level. In the meantime any further suggestions for the knowledge train are very appreciated. To be honest I'm more of a visual learner so if there's someone that's taken some book format stuff and created a more visual experience that would be easier for me to digest.
captainawesome said:
In reply to Kendall Frederick :
The target date was something I wasn't aware of. I just assumed it was get out when you want to.
I think it's abundantly clear I need to get some further education on this more than surface level. In the meantime any further suggestions for the knowledge train are very appreciated. To be honest I'm more of a visual learner so if there's someone that's taken some book format stuff and created a more visual experience that would be easier for me to digest.
The target date fund, like an index fund, is just a bucket to put your money into. Index funds are designed to spread your investment over a broad sample of the market without having to pick individual stocks. The FZROX fund I mentioned above holds shares of most of the companies listed in the US stock market, so if the broad US market is going up, your fund will go up. These index funds have low fees, because you're not paying a manager to do research and claim they're going to beat the market (hint: most of the active managers do not actually beat the broad market!) You can change buckets any time by buying and selling funds. If it's money in an IRA you have to buy and sell within that IRA to avoid taxes.
f I think of something with a charts or pictures and a simple explanation, I'll come back and link it. FWIW, I think that usually the more charts and graphs you see in an investment article, the more overcomplicated somebody's trying to make it.
I'll give you one more link: this is the Bogleheads wiki, named after John Bogle, the founder of Vanguard. The Bogleheads are proponents of index fund investing and keeping it simple.
https://www.bogleheads.org/wiki/Main_Page
In reply to Kendall Frederick :
Besides Bogle, Warren Buffett also recommends low expense ratio funds indexed to the S&P 500 unless you are a very knowledgeable investor.
Regarding Roths vs traditional IRAs, Roths are not subject to RMDs (Required Minimum Distributions) like traditional IRAs. RMDs currently kick in at age 73 and per IRS rules are set up to require you remove all of your tax deferred retirement account investments in 10 years. This is so Uncle Sam gets his piece of that pie rather than letting it get transferred to the next generation tax free via inheritance.
Smarter people here than me have answered but I can't see you going wrong with a Roth IRA at vanguard and throwing whatever you have at VOO. It's a S&P500 index fund and I think it's a good one. It's a bit on the aggressive side of retirement savings but if you're catching up a little that might be a good thing.
Max IRA contributions are annoying so check that before going all in. At $100-200 a month you'll be well under that limit. However, compound interest is best given the maximum amount of time you can give it. Each dollar saved this year is more effective than a dollar saved next year.
I can't comment on here due to FINRA, but if you'd like some insight, msg me and I'll get some contacts to you to reach out to. I recommend Vanguard or T Rowe Price as firms to work with, especially if coming in green. Full disclosure, I'm on T Rowe's payroll.
In reply to captainawesome :
You should find an advisor with the heart of a teacher.
IRA is like a jacket around your investment. It is an individual retirement arrangement, an IRS designation for how the money in the account is treated. You put in before tax money to get a tax deduction today. If you don't itemize, this is not a good deal because you get no benefit. When you pull the money out, it will be taxed. Also, it has required minimum distributions starting in your 70s so GOV gets their tax money. You can buy any mutual fund, exchange traded fund, individual stock or bonds inside an IRA.
The Roth IRA, uses after tax money. You miss out on the tax deduction today, but the money in the account is tax free forever. Almost no one itemizes so this is far and away the best way to go under current tax code.
I would not suggest a non-tax advantaged account until you have maxed out the Roth IRA and 401K.
If possible, I would get sell off any any single stocks, including company stock and buy mutual funds or ETFs.
No shade to captdownshift, but I moved all my stuff out of T Rowe Price because all their processes felt like they hadn't caught up with digitalization yet (3 years ago). I found their website and forms clunky and tough to understand, so I swapped that IRA to Vanguard.
We are definitely behind when it comes to this type of investment but we always made sure our house being paid off as well as vehicles were a higher priority. We have less than 9 years left on the mortgage which is a huge milestone. We also recently purchased the lot next to us for a fraction of the going rate. The plan is to either build a smaller home on that lot and rent our current home, or sell the lot when we get past the capital gains minimum. Preferably I'd like to sell sooner than later but lot prices in our area have continually sky rocketed and there seems to be no slowing down. So waiting it out might be the best option.
I currently don't itemize as I don't have enough deductions to outweigh the standard. Based on our income it appears we each can contribute $7k per year to a Roth. I would like to get to the point where we are each maxing that out every year but it's difficult to get the wife to plan for tomorrow.
Speaking of the wife, I found out her current employer's 401k is through Fidelity. We are going to sit and look at what she has all lined out and each start our own Roth IRA. I started the process of that last night for myself which was surprisingly easy. Since she's already with Fidelity it seemed like a sign to just go through them. She also has a 401k that needs transferred over from a previous employer which may be a good idea to do a rollover IRA?
Edit: My employer doesn't offer any 401k option so the "profit sharing" plan is all I have access to and that is fully funded by the company. I can't make any additional contributions or have any say in how it's invested. It sounds like the IRA route is my only solution.
A few more thoughts now that I'm slightly caffeinated:
- As usual, lots of good advice here.
- Keep it simple, and regular. The investing, that is. While I invest in more than a target date fund, I try to keep it as simple as possible with the added complication of having some of my emergency fund in investments, too. But for the main retirement investing, I follow the pretty simple 2 funds for life strategy. Then again, one of the beauties of this whole investment thing is that you can make it as simple or complicated as you want to. Just don't let people convince you that a) complicated is better than simple and b) that they have the only answer, because they don't.
- In that vein, avoid taking investment advice from a certain shouty radio "personality" out of Nashville when it comes to investing. He keeps peddling the myth that active managed funds are better than passive/index funds despite a ton of academic research showing that he's plain wrong about that.
- Roth IRAs have both an income and a contribution limit. Check that you're OK with them.
- Does the employer offer a 401(k), preferably not with an insurance company and a reasonable selection of index funds? That might be the simplest way of starting to invest for retirement in full auto mode if they offer a reasonable choice.
In reply to BoxheadTim :
We both qualify for the $7k max Roth contributions based on income.
My employer doesn't offer any 401k so I'm limited to the Roth or other means.
I have no desire to do any day trading and have heard nothing but great things about index funds. The only downside I've ever seen mentioned is if the market dips right when you are at the retirement age.
captainawesome said:
Speaking of the wife, I found out her current employer's 401k is through Fidelity. We are going to sit and look at what she has all lined out and each start our own Roth IRA. I started the process of that last night for myself which was surprisingly easy. Since she's already with Fidelity it seemed like a sign to just go through them. She also has a 401k that needs transferred over from a previous employer which may be a good idea to do a rollover IRA?
She doesn't have to roll over the 401k from a previous employer, but I'd take a good look who it is with (insurance company? Nope out) and what the fees and investment choices are. If your wife decides to move the 401(k) out of the old employer's plan, she should be able to roll it over into her current 401(k), although a rollover IRA can make sense if the current 401(k) doesn't offer the investments she's looking for.
Which reminds me, I probably should do something about a rollover IRA I've had parked at Fidelity for a long time now that my current employer's 401(k) offers rollover options that don't involve Fidelity sending me a check.
In reply to BoxheadTim :
We are going to take a gander at it and see if it's worth keeping in theirs or rolling into her current. If the plan isn't great it might be worth putting into the traditional IRA. Especially if fee structure eats most of any yields.
captainawesome said:
In reply to BoxheadTim :
I have no desire to do any day trading and have heard nothing but great things about index funds. The only downside I've ever seen mentioned is if the market dips right when you are at the retirement age.
Good index funds should give you the market return in the corner of the market that they cover, and that's generally the best you can hope for in the real long term. Just make sure you're using index funds based on a solid index - after all, I could make up an index comprising Elbonian mud futures and meme E36 M3coins and build an index fund based on that. You probably wouldn't want to invest in that 
.
Market drops are certainly a risk, and that's where diversification (and a certain amount of bond holdings as you get towards retirement, although those didn't help much in the last year or two) come in. Plus, don't forget that you don't just cash in all of your investments the day you hit retirement age and that's what you have to live on. The investments should recover/keep growing while you're in retirement and start to draw on the money.
