401k Tutorial

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Re: 401k Tutorial

Postby Pitt87 on Thu May 02, 2013 3:13 pm

AlexPKeaton wrote:This is the math behind the compount interest:

M = P( 1 + i )^n where n i is the expected return and n is the number of years of investment.

(continuous vs yearly interest calculation is negligable, this is the yearly interest formula so it is slightly conservative but good enough to illustrate my point)

So 1000 over 40 years with a 5% return yields:

M = 1000*(1+0.05)^40 = 7040

But with compound fees, the formula becomes:

M = P(1+(i-f))^n where f is the fee

Therefore assuming a 1.5% fee and a 5% return over 40 years is:

M = 1000*(1+(0.05-0.015))^40 = 3959, a 44% reduction in your total amount. The more years, the greater fee, the greater the loss. But even a realistic 1.5% fee over a more realistic 40 years is a huge loss (44%)

Edit:

If you were going with a managed fund with a 1.5% fee, in order to match your original 5% return with no fees, you would need to earn 6.5%, a 1.5% greater than an index fund (average) over THE ENTIRE FORTY YEARS OF YOUR INVESTMENT. The odds of this happening are non-existant.


Again, I think your consideration of one factor is clouding the issue. The formula you are using assumes and average annual return, but ignores other factors. Try this one, as it accumulates capital and measures incremental investment: FV = [ ( (1 + i)n ) * PV ] + [ PMT * ( ( (1 + i)n - 1) / i ) ]

Or, in scenario:

If you have 25,000 in your account today, and you contribute 6,000 annually ($3k from you, $3k match) for 30 years, assuming your return is in line with the market (7%, long-term CAGR), with a .5% fee, this is what you can expect to have at the end of 30 years:

717,294.54

If you adjust for a 1.5% fee:

583,115.36

This is ~19% difference. Not a small amount, but lets consider an investment strategy that is more realistic. Lets say that you follow the same scenario for 5 years, and get promoted every 5 years. When you get promoted you add $1000 to your annual contribution, which is actually adding $2k with your match. This is your FV with a .5% fee:

1,491,496.29

And again, at 1.5:

1,206,229.03

Still about 20% to fees... I agree its significant, but as I keep saying, its one of many factors in any investment. Also consider that this represents a total of $435k investment, so its still better than sticking it under your mattress. It also indicates that the best way to get a better return is to find a way to invest as much as you can afford.
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Re: 401k Tutorial

Postby eddysnake on Wed Jul 24, 2013 9:25 am

found out today from PASSHE that ING is no longer being supported as an option for my 401k. I have to move over to VALIC, FIDELITY, or TIAA-CREFF. Does anyone have history/suggestions with any of these options?
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Re: 401k Tutorial

Postby columbia on Wed Jul 24, 2013 9:46 am

eddysnake wrote:found out today from PASSHE that ING is no longer being supported as an option for my 401k. I have to move over to VALIC, FIDELITY, or TIAA-CREFF. Does anyone have history/suggestions with any of these options?


I have had and currently have TIAA-CREF through work. I feel like their choice of funds is pretty limited and their expense ratios are too high.
For example, I have my 403b in a S&P 500 style fund (TRSPX) and the ratio is .32%...A similar fund through Vanguard (VFIAX) charges .05%.

I would imagine that Fidelity's rates are closer to Vanguard than TIAA-CREF....it's definitely worth doing a comparison.

EDIT: Here's an S&P 500 fund from Fidelity:
https://fundresearch.fidelity.com/mutua ... /315911701

The gross expense ratio is .07%.
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Re: 401k Tutorial

Postby eddysnake on Wed Jul 24, 2013 10:35 am

columbia wrote:
eddysnake wrote:found out today from PASSHE that ING is no longer being supported as an option for my 401k. I have to move over to VALIC, FIDELITY, or TIAA-CREFF. Does anyone have history/suggestions with any of these options?




EDIT: Here's an S&P 500 fund from Fidelity:
https://fundresearch.fidelity.com/mutua ... /315911701

The gross expense ratio is .07%.


is that decent? I have no idea what I'm looking at
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Re: 401k Tutorial

Postby ExPatriatePen on Wed Jul 24, 2013 10:39 am

eddysnake wrote:
columbia wrote:
eddysnake wrote:found out today from PASSHE that ING is no longer being supported as an option for my 401k. I have to move over to VALIC, FIDELITY, or TIAA-CREFF. Does anyone have history/suggestions with any of these options?




EDIT: Here's an S&P 500 fund from Fidelity:
https://fundresearch.fidelity.com/mutua ... /315911701

The gross expense ratio is .07%.


is that decent? I have no idea what I'm looking at


Your paying over 2/3 of 1% of the total invested balance regardless of the performance of that fund (Whether it makes money or not). What a freak'n racket.

I recently read an article in WSJ or Barrons or somewhere that mentioned that a lot of firms are rushing to own a piece of the Mutual Funds/Hedge Fund market. Hell, it's easy money.
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Re: 401k Tutorial

Postby columbia on Wed Jul 24, 2013 1:03 pm

2/3?
What are you talking about?

@eddysnake .07% is lower than probably 98% of any kind of managed fund out there.
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Re: 401k Tutorial

Postby eddysnake on Wed Jul 24, 2013 1:26 pm

much obliged columbia
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Re: 401k Tutorial

Postby ExPatriatePen on Wed Jul 24, 2013 1:56 pm

columbia wrote:2/3?
What are you talking about?



2/3 of 1% is .66 --- Which is .04 off... a rounding error of four basis points... I don't get the outrage.
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Re: 401k Tutorial

Postby columbia on Wed Jul 24, 2013 1:58 pm

.07 != .70
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Re: 401k Tutorial

Postby largegarlic on Wed Jul 24, 2013 2:22 pm

eddysnake wrote:found out today from PASSHE that ING is no longer being supported as an option for my 401k. I have to move over to VALIC, FIDELITY, or TIAA-CREFF. Does anyone have history/suggestions with any of these options?


What up fellow PASSHE employee. I got the same notice. Thanks for posing the question here, and thanks to columbia for the comparative info. My wife said at her old job, Vanguard and Fidelity were the two most popular 401K choices, and there was much complaining when Fidelity was eliminated as an option. She worked with a bunch of engineers who were mathematically inclined and pretty tightfisted with money, so I'm taking that as a good endorsement of Fidelity.
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Re: 401k Tutorial

Postby eddysnake on Wed Jul 24, 2013 2:33 pm

largegarlic wrote:
eddysnake wrote:found out today from PASSHE that ING is no longer being supported as an option for my 401k. I have to move over to VALIC, FIDELITY, or TIAA-CREFF. Does anyone have history/suggestions with any of these options?


What up fellow PASSHE employee. I got the same notice. Thanks for posing the question here, and thanks to columbia for the comparative info. My wife said at her old job, Vanguard and Fidelity were the two most popular 401K choices, and there was much complaining when Fidelity was eliminated as an option. She worked with a bunch of engineers who were mathematically inclined and pretty tightfisted with money, so I'm taking that as a good endorsement of Fidelity.


that's where I'm at as well, put some emails into the reps asking them some questions, but it looks like Fidelity is the way to go. not sure if it's possible to get in this through them, but I know my old man has been making a killing on it

https://fundresearch.fidelity.com/mutual-funds/summary/741480107
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Re: 401k Tutorial

Postby columbia on Wed Jul 24, 2013 3:03 pm

Just to follow up on the diversity of choices through Fidelity, here's the index funds they offer:
https://www.fidelity.com/fund-screener/ ... sortDr=asc

899 of them.

TIAA-CREF probably offers 25, for index, bond and target retirement funds combined.
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Re: 401k Tutorial

Postby thepittman on Fri Jul 26, 2013 10:20 am

Can someone that knows what they are doing look at mine and tell me if I'm an idiot or not?-

http://www3.troweprice.com/fb2/fbkweb/s ... cker=TRRMX
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Re: 401k Tutorial

Postby KennyTheKangaroo on Fri Jul 26, 2013 10:39 am

those target date funds can be tricky. generally speaking though, a 2050 retirement fund is going to lean on the risky side though with a lot of exposure to stocks.
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Re: 401k Tutorial

Postby thepittman on Fri Jul 26, 2013 10:42 am

KennyTheKangaroo wrote:those target date funds can be tricky. generally speaking though, a 2050 retirement fund is going to lean on the risky side though with a lot of exposure to stocks.


I'm 30, I though you are supposed to play the risk around this age.
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Re: 401k Tutorial

Postby columbia on Fri Jul 26, 2013 10:45 am

I'm 100% in stocks.....there's a plenty of time to recover from any crash.
And if there's not, then it probably doesn't matter, because everyone would be 100% hosed.

I plan to switch to 20% stocks a few years before retirement (2038).

As Tomas would say: that's not financial advice. :)
Last edited by columbia on Fri Jul 26, 2013 10:51 am, edited 1 time in total.
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Re: 401k Tutorial

Postby ExPatriatePen on Fri Jul 26, 2013 10:51 am

columbia wrote:I'm 100% in stocks.....there's a plenty of time to recover from any crash.
And if there's not, then it probably doesn't matter, because everyone would be 100% hosed.

As Tomas would say: that's not financial advice. :)


That's not what you said you were going to do a few months ago... did you have a change of heart?

BtW, when do you think the 10-15% correction is coming, because it's not a matter of *if* it's a matter of when.

If it's not coming until stocks are 20% higher than they are here, your strategy is sound. If it's coming in August though...

And yes, I know what they say about "timing the market"...
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Re: 401k Tutorial

Postby columbia on Fri Jul 26, 2013 11:00 am

Yeah, i changed my mind
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Re: 401k Tutorial

Postby KennyTheKangaroo on Fri Jul 26, 2013 11:11 am

thepittman wrote:
KennyTheKangaroo wrote:those target date funds can be tricky. generally speaking though, a 2050 retirement fund is going to lean on the risky side though with a lot of exposure to stocks.


I'm 30, I though you are supposed to play the risk around this age.


Again, generally speaking, yes as a 30 year old you are supposed to lean towards riskier assets. But thats easier said that done when there is a stock market correction and you see 20% or 25% less in your retirement account.
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Re: 401k Tutorial

Postby newarenanow on Fri Jul 26, 2013 11:22 am

IMO, even if there is a correction, to me, it's not a big deal. Unless you are willing to constantly trade and monitor your funds daily (which most people don't, at least younger people), the market to me is a like someone playing with a yo-yo walking up a hill. There will be constant up and downs, especially in riskier investments, but the highs continue to get higher, and the lows are not as low.

You should diversify, and should check into your investments (not completely ignore them), but at the same time, know that when y ou are in your 20s, 30s, 40s, you can absorb those lows as it is going to increase again in the future at a greater rate.
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Re: 401k Tutorial

Postby King Sid the Great 87 on Fri Jul 26, 2013 11:28 am

ExPatriatePen wrote:
columbia wrote:I'm 100% in stocks.....there's a plenty of time to recover from any crash.
And if there's not, then it probably doesn't matter, because everyone would be 100% hosed.

As Tomas would say: that's not financial advice. :)


That's not what you said you were going to do a few months ago... did you have a change of heart?

BtW, when do you think the 10-15% correction is coming, because it's not a matter of *if* it's a matter of when.

If it's not coming until stocks are 20% higher than they are here, your strategy is sound. If it's coming in August though...

And yes, I know what they say about "timing the market"...


No offense, but you speak of this looming correction as often as Bernanke tell us that the economy taking off and GDP going to 4+% is right around the corner.
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Re: 401k Tutorial

Postby ExPatriatePen on Fri Jul 26, 2013 11:37 am

King Sid the Great 87 wrote:
ExPatriatePen wrote:
columbia wrote:I'm 100% in stocks.....there's a plenty of time to recover from any crash.
And if there's not, then it probably doesn't matter, because everyone would be 100% hosed.

As Tomas would say: that's not financial advice. :)


That's not what you said you were going to do a few months ago... did you have a change of heart?

BtW, when do you think the 10-15% correction is coming, because it's not a matter of *if* it's a matter of when.

If it's not coming until stocks are 20% higher than they are here, your strategy is sound. If it's coming in August though...

And yes, I know what they say about "timing the market"...


No offense, but you speak of this looming correction as often as Bernanke tell us that the economy taking off and GDP going to 4+% is right around the corner.


I don't think you've been listening to the same Ben Bernanke that the rest of us have. He's said NOTHING of the sort.

If he had, it would actually argue against your point (That Bernanke is wrong) and for a sustained market rally from here.

So you don't think that history provides a guide?

Have you looked at the 10 and 20 year charts?

newarenanow wrote:IMO, even if there is a correction, to me, it's not a big deal. Unless you are willing to constantly trade and monitor your funds daily (which most people don't, at least younger people), the market to me is a like someone playing with a yo-yo walking up a hill. There will be constant up and downs, especially in riskier investments, but the highs continue to get higher, and the lows are not as low.

You should diversify, and should check into your investments (not completely ignore them), but at the same time, know that when y ou are in your 20s, 30s, 40s, you can absorb those lows as it is going to increase again in the future at a greater rate.


Very very very sound advice.

However, it makes the most sense if your "averaging in" if you were to get a big inhertance or something (a large 'lump sum'), that changes the equation a bit.
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Re: 401k Tutorial

Postby King Sid the Great 87 on Fri Jul 26, 2013 11:50 am

You've been predicting this looming correction for probably 18 months now. So in that time you've either been sitting on the sidelines not making money (however artificial the gains may be) hand over fist, or when a correction happens, which no doubt will happen, you really can't take too much credit for the prediction. Predicting it will happen is the easy part. Nailing the time and magnitude is where the skill is required.

It's like someone in '96 saying the Buccos will have a winning season somewhere down the road.

Not a personal attack. Just saying. If the market corrects 10%, anyone who has been in in the last 18 months is still taking a pile of profit. And if you aren't 55+ or an active trader, a 10% correction is a welcome occurrence.
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Re: 401k Tutorial

Postby ExPatriatePen on Fri Jul 26, 2013 11:59 am

King Sid the Great 87 wrote:You've been predicting this looming correction for probably 18 months now. So in that time you've either been sitting on the sidelines not making money (however artificial the gains may be) hand over fist, or when a correction happens, which no doubt will happen, you really can't take too much credit for the prediction. Predicting it will happen is the easy part. Nailing the time and magnitude is where the skill is required.

It's like someone in '96 saying the Buccos will have a winning season somewhere down the road.

Not a personal attack. Just saying. If the market corrects 10%, anyone who has been in in the last 18 months is still taking a pile of profit. And if you aren't 55+ or an active trader, a 10% correction is a welcome occurrence.


Sid, you need to realize there are multiple ways to play the market. Going long or sitting on the sidelines holding cash are only two examples.
You've got options, etc...

Plus I'm a big proponent of averaging. Making small moves frequently as opposed to making big bets.

The longer you stay in the markets, the more you'll understand.
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Re: 401k Tutorial

Postby ExPatriatePen on Fri Jul 26, 2013 12:08 pm

From two years ago next week:

ExPatriatePen wrote:Ben Graham talked about the markets as being "Manic" sometimes. To be sure, it's a stock pickers market here.

Personally I'd go for the high yielding stocks who's dividends are not only safe, but have a history of increasing. PM looks especially good down here if you don't mind being in a tobacco stock. CAT looks good and so does Berkshire Hathaway at these prices, but for BRKA you have to have 107K laying around and not to many of us do.


BRK/A is now $174K that's $67K more than it was when I made the recommendation.

CAT (including the dividends paid out) went as high as $120 and is now back around the same level as when I made the call

PM was at $69 and is now at $88.14 and pays a healthy 4+% dividend on top of that.
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