- last updated on FEB 12, 2018 -
This first part of updates from my life in 2017 will be about my investments. Most of my money is in tax-advantaged retirement accounts. Those currently include Roth IRA, traditional 401(k), 457(b), and 414(h). There are other retirement accounts out there, so research what you have access to. I’ll certainly add to my list of different retirement accounts if it makes sense financially for me. After taking full advantage of those, I’ll eventually invest using a taxable account as well.
I’ll start with the 414(h), since most people probably never heard of it. It’s called a pension plan where I work, and it’s only for government employees. For me specifically, it’s pretty much a glorified savings account earning 5% compounded interest that I can contribute pre-tax. I wrote here why pre-tax is important. 5% return on investment is amazing for no risk. I hope for higher with my other retirement accounts, but those are dependent on the market and carry risk. The current percentage of my paycheck going to my 414(h) is 3.5%, and it’ll be 4.5% in 2018. I believe it was 3% when I started in September 2016. I don’t choose the percentage. It’s based off my salary.
Most people don’t have access to a 457(b), but I do as a government employee. 401(k) and 457(b) have the same dollar limit to contributions, and they don’t overlap. You can contribute to each up to the limit separately. A 457(b) is basically a 401(k), but you can withdraw from it without penalty before age 59.5. This is a ridiculously good perk. If you have access, I implore you to contribute. I still plan to withdraw from my 401(k) before I’m 59.5 years old, but most people probably don’t want to deal with that hassle. By the way, 2017 is actually my first year contributing to one of these or an IRA. I just turned 24 this month, so it’s never too early to start!
Now you know why I focus on maxing out my 457(b) first, which I did this summer by contributing since January with 75% of my work paycheck. That’s actually the maximum percentage I’m allowed. I then started contributing the same percentage to my 401(k) and put in around $3k, but I had to start saving for my tuition to Fullstack Academy. I would have maxed it out otherwise. I’ll start contributing to my 457(b) again with 75% when 2018 starts and hope to max out within 6 months. I did it this year, and it should take a tiny bit faster in 2018 due to a raise this past June. 401(k) and 457(b) pre-tax contribution limits have increased by $500 each for 2018.
I don’t have a plan set for 401(k) next year, but I will definitely contribute. My hope is to find another job very soon after graduating from my bootcamp program, and I can just use the 401(k) with the new employer. With a higher salary, I’d max it out faster anyway. I’m also hoping for employer matching, which most companies have. I don’t currently get any employer contributions. It might get messy contributing to two different 401(k) plans in the same year, but I might just have to if I don’t find another job early enough.
I also maxed out my Roth IRA this past March for the year of 2016. I’m planning to max out my IRA for 2017 by April 2018, but it might be traditional instead of Roth. I haven’t made up my mind yet. Keep in mind that you have until Tax Day of the following year to contribute for any given year. Since my current salary isn’t the greatest, I kind of just hold onto my would-be contribution money as emergency funds until Tax Day.
Last thing to talk about is my investment portfolio. Unlike most people in the FI community, I don’t have a strict asset allocation or any funds with Vanguard. My Roth IRA is actually with Charles Schwab and comprises their funds, which seem to have the lowest fees in the game. My 401(k) and 457(b) are through the New York City Deferred Compensation Plan. The actual funds are managed by various investment firms. My investment asset allocation is currently 100% stocks with 80% from United States and 20% being international. I don’t carry bond funds or any cash equivalent in my portfolio due to my young age and high risk tolerance.
I unfortunately don’t have a fund option in my 401(k)/457(b) that tracks the total U.S. stock market. It’s a good thing there’s not much difference from tracking the S&P 500, which has yielded 11-12% in annualized return from 1976 through 2016. Thankfully, I do have a fund option for that in my 401(k)/457(b). After reading The Simple Path to Wealth by JL Collins, I transferred everything from a target date fund that I had been invested all in. A target date fund may be totally hands-off, but it typically comes with higher fees. It’s made up of several different funds, and I realized that I really only needed one.
I did recently just add a fund that tracks the S&P 400 to my 401(k)/457(b) to get some diversity. Using low-cost funds that track mid-cap indexes like the S&P 400 and small-cap indexes like the Russell 2000 can help approximate the total U.S. stock market index. Check here on how to do so. I personally do 80% for the fund tracking S&P 500 and 20% for the fund tracking S&P 400, because the S&P 500 makes up around 80% of the total U.S. stock market in capitalization. I also have a fund option for tracking the Russell 2000 and would have used that, but this particular one has a really high expense ratio. I think I should be okay though.
Having diversification is important, and that’s why tracking the total stock market is so much better than buying stocks of indivdual companies. I have only talked about the U.S. market so far, but there’s plenty of action overseas to capture in a portfolio as well. I do have a fund option available in my 401(k)/457(b) for international stocks, but it has a high expense ratio. Expense ratio (ER) is what I mean by fund fees, and minimizing fees is vital for maximizing returns. You can’t predict future returns, but your current fees are known. To get exposure to the international stock market, I use a single fund from Charles Schwab in my Roth IRA. This particular fund SWISX doesn’t have exposure to the Canadian market, emerging markets, and the international small-cap market. This is sort of like the difference between tracking the total U.S. stock market and tracking the S&P 500. Again, I think I’ll be fine.
I will most likely keep this overall asset allocation for the foreseeable future. The average ER across all my funds is a little over 0.05%. I have to manually buy and sell funds to adjust my IRA portfolio, so I’m probably just going to keep everything in one fund for now. It works out to a percentage of my overall portfolio that I’m comfortable with anyway. For my 401(k)/457(b), I just set the percentages for what funds I want. My portfolio there gets automatically rebalanced accordingly. Of course, my overall allocation will change depending on returns and additional contributions. When I switch jobs, I’ll also have a different 401(k) plan with different fund options. I’ll cross that bridge when the time comes.
Sorry for the long post. It’s my first year with this stuff, and I want to document it thoroughly. There’s still a second part to my financial summary to talk about everything outside of investments!