Hey guys,
As the title suggests I’ll be enrolling in my companies 403b plan. I’d like to ask you guys some general questions and hopefully get everybody’s opinions on things. Below is my companies policies for our 403b plan. Just some basic information for you guys. I’ll be making another post regarding the funds.
Company Vesting by year:
Less than 3 – 0%
4 years – 20%
5 years – 40%
6 years – 60%
7 years – 100%
Company Contributions:
1-5 years – 3%
6-10 years – 4%
10 or more – 5%
Currently I am 24 years old. I have zero debt (I’ve paid off all my credit cards, etc..) and my bills right now consist of cell phone, car insurance, Internet, and groceries. The rest of my money is being contributed to my GMAC MMA account. Right now I live at home so I’m not paying rent although that might be changing in the next couple of months. So some of my general questions are:
1. What percentage/amount of my paycheck do you guys think I should contribute to my 403b with my current situation?
2. Is there a way to calculate exactly what my paycheck would come to after my 403b contribution is deducted?
3. Do you guys know of any calculators online which would be useful in a situation like this. Where it could help suggest how much I should be contributing by taking into consideration my salary/expenses.
4. How many funds should I be spreading my contributions out between? Is there an ideal number for someone my age or does it depend more on how many worthwhile funds there are to choose from?
These are my basic questions. I would love to here what you guys are currently doing when it comes to contributing to your 401k. I’ll also be making a post with an outline of the fund selection that I have. I decided to leave that to a whole new topic with the suggestion from Paul to really get the discussion going. It will be fun and veerry helpful getting everyones opinions on the funds and which ones I should be picking.
March 20th, 2008 at 7:53 am
Great question!
1. You want to contribute what you can afford. From the data you provided it looks like your company will put in 3% of your pay check if you are contributing. The percentage/amount you contribute is up to you, but remember you have ~35 years before you are going to touch this money. How aggressive do you want to start saving for retirement?
My company matches 50% up to 6% of my salary. So I put in 6% of my salary and my company matches half of what I put in, so 3%.
2. I don’t think your contributions are going to change your tax bracket or anything. Since your contributions are pre tax you can take the % you want to contribute and subtract the amount right from the amount your current paychecks. Although it may be slightly different.
I'll use 5% in this example:
Salary * .05 = yearly_contributions
yearly_contributions / Pay_cycles_per_year = amount_per_paycheck
Current_paycheck - amount_per_paycheck = Paycheck_After_contributions
*My Pay_cycles_per_year = 26. I get paid bi-weekly.
Here is a calculator for this: http://moneyanswertree.com/tools/calculators/
4. I am in 3 different funds that are mostly all aggressive funds. The more funds you are in the more fees you are paying… Is that correct?
March 20th, 2008 at 8:41 am
Alright Nene, If I were you I would contribute as much as I can to get the maximum match. I contribute 6% to get the maximum match of 5% from my company. The money that gets deducted from your paycheck is before taxes thus it reduces your tax liability. So even though you are contributing 6% your paycheck would only go down by about 4% because of that nice tax benefit that you are getting.
This would be the actual calculations for a 5% contribution with a 30% tax rate. ((Your salary *(1-.05)) * (1 – .3))/52 this will give you the weekly paycheck.
Since you don’t know much about the funds that you will be investing in I would look for aggressive funds with low fees. It is also very important to diversify; you need to have large cap, small cap, growth, value and foreign exposure. At different economic cycles some funds will do better then other but over all you will be good. Also remember that the lowest fees come from index funds and index funds give you the best diversification.
http://www.morningstar.com/ is a good place to get information on the funds that you have available to you. Be careful not to select just the 5 star funds, although 5 start funds have the best performance they all tend to revert back to the average and have the highest fees. In my personal portfolio I have a nice mix of top performing market neutral fund, small cap value index fund, large cap growth fund, international mid cap fund and a large cap index fund. I have selected my portfolio about 2 years ago and don’t plan to rebalance it for another 3 years although I do periodically check on performance.
I don’t think that you need more then 5 to 6 funds in your portfolio because it becomes very expensive. There a lot of management fees and upfront fees for just getting into the portfolio. You also shouldn’t plan on rebalancing your picks for around 5 years; this is primarily due to fees. Read carefully the information about the fund you select, some will have a 5% fee that you have to pay for just getting into the fund and a 5% fee if you stay in the fund for less then 5 years.
So imagine you put in $10,000 in to a fund with that 5% front and back load and the fund hasn’t moved in the 1 year period.
1) Front load 5% $10,000 * .95 = $9,500
2) Management fee 1% $9,500 * .99 = $9,405
3) Back load 5% $9,405 * .95 = $8,934.75
So these guys just lost you $1,065.25 dollars in a year and really didn’t have to do anything. Obviously this is a worst case scenario but be careful.
Just my 2 cents
March 20th, 2008 at 9:05 am
Thanks a lot guys for the info. It’s all very helpful for somebody that doesn’t have any experience in any of this. Paul thanks for making that calculator it does def. put me at ease. One thing I was worried about when it come to contributing was how much of a dent it was going to put into my paycheck because I don’t make much. It’s re-assuring to know that contributing something like 7% really doesnt hurt. Luckily my company doesnt require a certain percentage to recieve the company contribution percentages. I’m thinking I’ll most likely contribute 7% and with the companies 3% I’ll be contributing 10%. With pauls calculator it came out to reducing my paycheck by 80 dollars which wouldnt hurt me at all.
Sergey and Paul thank you guys very much for the help. I appreciate it! I’ll be putting a post together now for my fund options and maybe you guys could take a look at that when you have time. Thanks again!
March 20th, 2008 at 9:59 am
nene, i think u should contribute the max, which from what u said is 14% per pay period…. so that would 160 per pay period w/drawn from ur GROSS…. looking at ur percentage…im deducting u make a close range to 30k annually… if u expect a raise this year that would be more than 2k, then that will take u from the 15% tax bracket to 25% (and u dont want that). If I were in ur shoes, id contribute the max since u dont have big bills to pay… also, once u dont see the $, after a while u do w/o it. I max my contributions and wished i started at an earlier age. Yes Nene, u do have about 35 years before u touch that $… but the last few years is what makes compounded interest a HUGE diff… could be a difference from 1.5 million to 3 million w/in a 5 year range…. wouldn’t u want that extra 1.5 mill to retire on?
Here are some calcs…
http://www.bankrate.com/brm/news/retirement.asp
it also contains great material regarding 403b and retirement mistakes…etc.
Last but not least, i have my contributions spread between currently 5 funds…. diversity is a big point in ur retirement. so, try to go w/ an aggressive if not VERY aggressive approach. Dont be afraid of losing $ in ur funds (like RIGHT NOW the way the market is)…cause everytime u contribute, ur buyuing them at a cheaper rate and u have 35 years to recover w/ the market..which means u’ll end up prob making better in the long run.
-Mario.
March 20th, 2008 at 10:12 am
Nene post your options and we will help pick some funds out.
March 20th, 2008 at 10:58 am
Here’s a good article Mario suggested for me which pretty much outlines why you should be aggresive at a younger age as opposed to contributing at a later age.
http://www.bankrate.com/brm/news/BoomerBucks/20070131_get_rich_a1.asp