New to Roth IRA

[Capote1]

Hello all,

I am a resident and just opened a Roth IRA with Vanguard. I was only able to contribute $200 to start it and honestly, I don't know where to go from here. My basic understanding is that I should be investing 70-80% stocks and the rest in funds. Is there anything I can do with that $200 at this time or do I need to wait until I have $1000+ to start investing? Thanks for your help.

---

Members don't see this ad.

 

[mvenus929]

Hello all,

I am a resident and just opened a Roth IRA with Vanguard. I was only able to contribute $200 to start it and honestly, I don't know where to go from here. My basic understanding is that I should be investing 70-80% stocks and the rest in funds. Is there anything I can do with that $200 at this time or do I need to wait until I have $1000+ to start investing? Thanks for your help.

I don't know the specifics of Vanguard, so someone might be able to chime in. If you're brand new, though, I'd recommend picking a Target Date Retirement Fund and leaving it be until you have a handle on the different types of stocks and funds. Otherwise, I'd recommend leaving all your retirement investments in index funds--you can use your taxable account (when you have enough money to have one) for your individual stocks if that's an interest of yours.

 

[NITRAS]

Last time I checked, there are lots of stocks that have low minimal investments. Personally I'd pick a growth stock fund, or growth and income and keep it all equities.

Looks like the minimum for funds is $1,000 but their ETS don't have minimums. I'd look into those.

 

[Neuronix]

$200 is too little to start doing anything. Even 1 share of total stock market ETF is $148.58 currently, so I guess you could buy a share of that.

My advice is wait until you can put in $3000 and buy VTSMX (total stock market fund). Once you have $10,000 convert to VTSAX (total stock market fund admiral). Then consider adding a bond fund or mixing things up per: Lazy portfolios - Bogleheads

 

[FlowRate]

If you don't know what you're doing, just put it in Vanguard Target Retirement 2055.

 

[Capote1]

Thank you all for the advice.

 

[Capote1]

One more question, I’m contributing to my residency 403b. I don’t think I can’t contribute to both, this plan and the Roth IRA. Should I just focus on the Roth at this point?

 

[Neuronix]

Depends. If you have a match on the 403b, get that free money first for sure. Typically the fees are higher on those than a Roth IRA which means Roth IRA is better without match.

Also make sure you're paying down and not accumulating high interest debt. You don't want to put money on credit cards that carries a balance just to put money in retirement accounts.

Edit: TMP-SMX pointed out something useful as well. At this point you should be using post-tax (aka Roth) money as much as possible. That doesn't change the advice overall--matched portion of 403b first, Roth IRA sexond, remainder of 403b/ or Roth 403b last (prefer Roth).

 

[TMP-SMX]

You should contribute up to the max employer contribution assuming you will be vested prior to leaving your residency (you can keep their matched contributions when leaving). Ideal would be Roth 403b contributions but those aren't as common.

 

[calvnandhobbs68]

In terms of retirement planning at this stage you should be putting money in in this order (to kind of simply what they're saying above):

1) Hospital 401k/403b up to their match amount (ex. if they match 50% up to 5% of your income, contribute that whole 5% since you're essentially getting 50% guaranteed return for free) which will be taken out pre-tax
2) Roth IRA up to max $5500/yr (most IRAs will let you auto-withdraw monthly out of a savings/checking account if you want to spread it out over the year)
3) If you can afford it after you max out your Roth IRA, have them take more out for your 401k/403b (ex. increase from the 5% above to 10%).

Remember that a 401k/403b is different from an IRA in that you can't just put money in whenever you want. Your employer has to take a set amount out of your paycheck every month, so if you want to contribute more you need to have them take out a little more with each paycheck. On the other hand, with an IRA you can dump $5500 in once any time during the year, spread it out into monthly contributions or anything in between.

Your employer may not offer a Roth option of the 401k/403b, but if they do it's advantageous for you to contribute to that instead of the traditional 401k/403b since your earnings will compound over the next 20+ years tax free (you pay taxes up front but nothing down the line). In a pinch, you can also withdraw your contributions from a Roth IRA or retirement account early if you really need to since you've already paid taxes on them (this would obviously be a last resort). In contrast, your tax savings at this point are pretty minimal from contributing to a traditional 401k compared to how much you'll save in taxes down the line on a Roth 401k/403b.

 

[Capote1]

In terms of retirement planning at this stage you should be putting money in in this order (to kind of simply what they're saying above):

1) Hospital 401k/403b up to their match amount (ex. if they match 50% up to 5% of your income, contribute that whole 5% since you're essentially getting 50% guaranteed return for free) which will be taken out pre-tax
2) Roth IRA up to max $5500/yr (most IRAs will let you auto-withdraw monthly out of a savings/checking account if you want to spread it out over the year)
3) If you can afford it after you max out your Roth IRA, have them take more out for your 401k/403b (ex. increase from the 5% above to 10%).

Remember that a 401k/403b is different from an IRA in that you can't just put money in whenever you want. Your employer has to take a set amount out of your paycheck every month, so if you want to contribute more you need to have them take out a little more with each paycheck. On the other hand, with an IRA you can dump $5500 in once any time during the year, spread it out into monthly contributions or anything in between.

Your employer may not offer a Roth option of the 401k/403b, but if they do it's advantageous for you to contribute to that instead of the traditional 401k/403b since your earnings will compound over the next 20+ years tax free (you pay taxes up front but nothing down the line). In a pinch, you can also withdraw your contributions from a Roth IRA or retirement account early if you really need to since you've already paid taxes on them (this would obviously be a last resort). In contrast, your tax savings at this point are pretty minimal from contributing to a traditional 401k compared to how much you'll save in taxes down the line on a Roth 401k/403b.

Thank you so much. Unfortunately, there is no matching for residents on the employee 403b, and I am suspecting it will be the same way during fellowship. I will stop contributing to the hospital 403b and direct those funds to the Roth and to pay my credit card debts.

 

[Neuronix]

Credit card debts come first. No use carrying a balance paying 18% interest to make 6% or whatever in the market.

 

[Renal_Prometheus]

how does vanguard retirement 2055 work?

 

[NITRAS]

how does vanguard retirement 2055 work?

Target retirement accounts ascribe to the asset allocation theory and will move you % of investments from largely equities to bonds as it gets closer to the retirement date. For example, now the 2055 will be largely equities, but the 2020 one will be largely bonds.

Personally, I don't believe in the philosophy. Automatically moving investments from equities can lock in losses. Also, if your portfolio is well diversified, and large enough, you can weather dips in the markets and enjoy a higher rates of return.

 

[DoubleBogey]

When doing a backdoor roth conversion, do you have to place the cash in an investment with the traditional roth (ie mutual find or high yield fund) or can you just keep the account in cash and transfer the cash to the roth?

 

[Neuronix]

When doing a backdoor roth conversion, do you have to place the cash in an investment with the traditional roth (ie mutual find or high yield fund) or can you just keep the account in cash and transfer the cash to the roth?

Keep in cash and transfer the next day. This is highly preferred--simplifies things tremendously.

 

[Mman]

When doing a backdoor roth conversion, do you have to place the cash in an investment with the traditional roth (ie mutual find or high yield fund) or can you just keep the account in cash and transfer the cash to the roth?

The problem if you place the sum in an investment within the traditional IRA account is if it gains in value before you transfer to the Roth (even overnight), you are creating a taxable gain. It's simpler if it's just in cash that way it won't trigger a gain before being transferred. After it lands in the Roth then you invest it in something else.

 

[FlowRate]

Target retirement accounts ascribe to the asset allocation theory and will move you % of investments from largely equities to bonds as it gets closer to the retirement date. For example, now the 2055 will be largely equities, but the 2020 one will be largely bonds.

Personally, I don't believe in the philosophy. Automatically moving investments from equities can lock in losses. Also, if your portfolio is well diversified, and large enough, you can weather dips in the markets and enjoy a higher rates of return.

Again, it's advice for people who don't know what they're doing (or don't think they know what they're doing.) Or who are just not interested in having as active a role in their fund management.

And just to put it out there for people who read the thread, it doesn't really make sense to invest in a target retirement fund AND other funds or specific stocks, as it throws off your asset allocation.

 

[Mman]

Target retirement accounts ascribe to the asset allocation theory and will move you % of investments from largely equities to bonds as it gets closer to the retirement date. For example, now the 2055 will be largely equities, but the 2020 one will be largely bonds.

Personally, I don't believe in the philosophy. Automatically moving investments from equities can lock in losses. Also, if your portfolio is well diversified, and large enough, you can weather dips in the markets and enjoy a higher rates of return.

It's worth looking at the actual composition of the funds. The 2020 target date fund from Vanguard currently has an allocation of 53.2% stocks, 41.2% bonds, and 5.6% TIPS. The 2055 target date fund has an allocation of 89.6% stocks and 10.4% bonds.

So over 35 years, they transition basically 1% of the fund from stocks to bonds per year. That isn't exactly locking in losses. And even if people are managing their own decisions, they should likely have a higher percentage allocated to bonds at retirement than they did 35 years earlier. The target date funds do it gradually and seamlessly. Doing it on your own (by definition not as gradually as those funds do it) leads to some degree of market timing on how and when your allocations change.

Now I'm not arguing they are perfect, but they aren't bad.

 

[NITRAS]

Equities have higher rates of return than bonds. A large nest egg can tolerate the volatility to get overall a better return.

I don’t plan on having any bonds when I retire. That’s my beef with asset allocation theory.

 

[Mman]

I don’t plan on having any bonds when I retire. That’s my beef with asset allocation theory.

Please tell me you don't plan on having a 100% allocation to equities when you retire, because that's just kinda insane. I mean because by similar logic, you should probably be using margin to increase your exposure beyond 100% now.

 

[NITRAS]

Why is all equities insane? Over the 20 or 30 years, will it be better to have been in equities or bonds? I'm suggesting that using quality long term investments that have better rate of return over 10 and 20 years. Yes, it carries risk, but at 65 y/o I should have a net worth well in excess of $10M and I will be better able to tolerate risk than I am now.

 

[Mman]

Why is all equities insane? Over the 20 or 30 years, will it be better to have been in equities or bonds? I'm suggesting that using quality long term investments that have better rate of return over 10 and 20 years. Yes, it carries risk, but at 65 y/o I should have a net worth well in excess of $10M and I will be better able to tolerate risk than I am now.

The problem with a $10M net worth in 100% equities at age 65 is sequence of returns. What if the market drops 60% the first 2 years you retire and now you have a $3.4M net worth at age 67 ($6M lost in equity plus maybe $600K spent). While you'd likely make that up over the next 30 years you might be dead long before you make it up and now your standard of living is significantly decreased for the rest of your life. I mean your previous spend of $300K per year (easily supported with any normal allocation at 3% withdrawal rate) is now withdrawing almost 10% of your assets and you are only 67. Tough to picture that lasting very long.

The reason for bonds in retirement isn't to improve your long term return, it's to lessen the risk of massive fluctuation that can alter your lifestyle, particularly the sequence of returns risk.

I agree being higher in equities while still on a 30-50 year time horizon is a good thing.

 

[NITRAS]

Do what you want to, but look at 2008. The market dropped in half, then tripled. You go from 10M->$5M (spend a couple hundred thousand a year ->$4.5M, market rebounds to $13.5M. . . . . . .I'd have been ok.

 

[Mman]

Do what you want to, but look at 2008. The market dropped in half, then tripled. You go from 10M->$5M (spend a couple hundred thousand a year ->$4.5M, market rebounds to $13.5M. . . . . . .I'd have been ok.

Why do you think a single down year followed by one of the longest bull runs ever is your worst possible starting point? Why not start in 2000? Why not start in the early 1930s?

Asset allocation is insurance. I mean people can do whatever they want. If you are so wealthy you are only spending like 1% or less of your invested assets per year, it makes no difference what allocation they have. But if you are spending in the 3-5% range of invested assets per year then it can make a meaningful difference. And if your net worth is $10M at retirement, that's probably not enough to weather a storm unless you are only spending like $100K per year. Personally I'd rather spend much more with a higher certainty of not running out of money or having to change lifestyles.


FIRECalc shows a 93% chance of success (not running out of money over 30 years) and a 7% risk of failure from a portfolio at 100% equities and 4% withdrawal rate. Keep in mind these are from actual results in the past, not hypotheticals. 3% withdrawal rate didn't fail in any time period, but scraped close to the bottom a few times.

80/20 portfolio failed 5% of the time. 60/40 failed 4% of the time.

Personally I drop my SWR down to 3% for planning purposes and have my allocation somewhere between 60/40 and 80/20 when retirement comes. I feel like that probably has about as low a risk of failure as you can get. 100% equities will fail a bit too often for my taste. The only way you can comfortably stay at 100% the day you retire IMHO is to be willing to drastically cut spending for a few years early in retirement if the market tanks. Otherwise you are potentially at risk of needing to withdraw 10% of your remaining money just to fund your normal expenses and praying the market goes up 20% or more that year and keeps going up for years to follow. Personally I'd rather kick back and have fun than be sweating that kind of scenario.