401k/Ira/retirement plan advice

[Big Pete]

I've never worked for a public co before. My work has a pretty great 401k, IMO. They will contribute 3% of your pay whether you contribute or not and match your contributions up to 4%. However the 3% all goes in as company stock (they changed the rule for this year, the first that I am eligible. I figured maybe once per quarter I will sell some of it to maintain balance/diversity. I was looking at the account though and notice that the price listed on those shares is way less than what the stock is trading at. Anyone have any experience with this type of thing?

Also, to start, I elected to contribute 4% to get the maximum match. I didnt realize it would take so long for changes to take effect. I always planned to contribute more, but I was thinking that I would contribute another 4% to a post tax Ira. Is this a good idea or should I just contribute 8% to the 401k?

Any help is appreciated.

[cegan09]

This is relevant to my interests as well. I've been dumping a bunch into company retirement since I started, but unsure what to do to make it better.

[cheu_f50]

I'm not am expert in this field so consider what I'm suggesting as a recommendation that you should research and confirm.

1) sounds good about selling. Diversifying is good. Half your eggs in one basket is bad. No idea about price difference between price listed vs exchange price. Someone else should answer, but perhaps it's a different type of stock.

2) if you were to contribute another 4%, tax advantage wise a Traditional IRA would be the same as your 401k. I would look into what the 401k offers in terms of investment selection compared to what you are able to invest in otherwise. Fees between investment selection for 401k and fees for whatever you decide to invest in IRA could make a huge difference.

Another thing to consider is Roth IRA which is investing with post tax money, but you don't get taxed on gains upon withdrawal.

[Big Pete]

Yeah if I go the IRA route it would be post tax. I don't really believe in trying to beat the market, my retirement is in mostly index type stuff with as few fees as possible and I don't move it around much. I figure a mix of pre and post tax dollars would be the biggest advance of putting some in the Roth IRA. Also I have heard that with an IRA you can withdraw some money without penalty to buy a house, and I wouldn't mind the flexibility to do that because at some point I need to buy one of those.

[cheu_f50]

So Wikipedia is actually pretty good with explaining the summary between Traditional IRA vs Roth IRA. And the sources they use are great resources to confirm the summary.

What company do you work for?

[cheu_f50]

As for where to invest. There are definitely people who are more qualified than me to give recommendations. I can however share where I personally put my money so you guys can research and see if that is suitable for you as well.

For my Roth IRA, because I don't have the time and effort and constantly research and make adjustments to, Vanguard provides a wide variety of mutual/index funds to choose from, along with ETF that could be suitable for y'all.

The Vanguard Target Retirement 2050 is one of the cheapest, no effort index fund I've found that does basically everything for me retirement wise.

Because I don't mind taking on additional risks, I also have money in Vanguard 500 Index Fund Admiral Shares because of the super low expense ratio. But that fund I'm investing on the side amongst other things that isn't strictly used for retirement.

[Big Pete]

I didn't really want to make this a what funds or stocks to buy thread since it appeared there were already a couple of threads where that would be more appropriate.

I hoped this thread could be used to discuss the pros and cons of 401k vs Roth vs traditional IRA and leave investment choices for the other threads.

[mthaynes]

A 401k with a company match is one of the best investments you can make.

If you were just investing in the stock market, you would earn a return that was acceptable to the market. When you invest in a matching 401k you get the return that the market is willing to give you + that employee matched portion. In summary you earn more than the market!

the best option is to contribute to the max that way you get the maximum of the above benefit. This advice only holds if you can do this without borrowing money at a rate that is greater than the benefit gained. an example. say the market is earning you 5% and your employer gives you 3% via match. your consolidated return is 7%. now say you owed money on a credit card and that card cost you 10%. Your net is now -3%. here your best option is to stop the 401k and pay the card.

next point - the market does not compensate you for company specific risk. it only compensates you for market risk. OK what the fuck does that mean. an example. Say you only buy home depot stock and the CEO of HD gets busted with dead hookers and blow in his car. Home depot stock will take a plunge. Now if you owned HD and Lowes equally, only half of your portfolio would take a hit. Lowes stock may actually go up. Now say housing starts fall off. both HD and lowes will take a hit, but if you added in equal portion Apple as a stock only 2/3 of you portfolio would be impacted by the decline in housing starts. Moral of the story - diversify your investments. the market will not compensate you for putting eggs in one basket. Why did i bring this up. You are being matched with company stock. the last thing your going to want to do is buy more company stock, because you will be needlessly exposing yourself to company specific risks.

OK so diversification is king now how the hell do I invest in that. Easy. I would be surprised if your 401k did not have atlas one market index fund. A market index fund is a mutual fund that holds stock in % equal to a well know index fund such as the s&p500. if you take 50% of your contribution and throw it at this one fund you will be diversified. If the market feels a little risky to you (you are risk adverse) then add a bond fund as this will bring down the risk, but also the return. Want to take some chances throw some money at maybe a technology fund or an international fund. Your employer will give you about a dozen options to chose from. they will all be sold funds. Make the market your base and then spread it around.

Hope this helps. call if you have questions. I have a lot of degrees in this shit. Never actually used it professionally