Need to Quickly Decide How Much to Invest In American Funds

[Nera]

Per my employer, I have 24 hours (yes; I know; eyeroll) to decide how much I want to put in a SIMPLE IRA with American Funds as of 1/1. Employer does a match up to 3% so I know I will do that much but am not sure how much further to go because I really, really do not understand the fundamentals of investing and am afraid to make such an uniformed decision.

I'm 31 with $0 in retirement. Only $22k in the bank. Own a small Brooklyn apartment with 13.5 years left on my mortgage of $99k. No other debt. Married with a HHI of $130k and husband has a whopping $10k sitting in old 401(k)s so yes, we are behind on everything. No kids yet.

The adviser was giving me a lot of pressure to invest 15% of my income with American Funds so I catch up sooner rather than later. I can afford to do it, strictly speaking, but am afraid I should be either saving for emergencies or at least waiting until I have some semblance of financial literacy before making this investment. What do you think I should do? Thanks.

 

[youbet]

Since you need to move quickly, invest 3% in the Simple IRA to get the match. It would be a shame to pass that by. Read and learn. Then invest additional retirement savings into a contributory or Roth IRA, etc., based on your new knowledge........

You do need an emergency fund. You do need some financial literacy. Make it happen.....

 

[golfnut]

Do you have any alternatives other than American Funds as respects the SIMPLE IRA.
If not, check out the American Funds Capital Builder (CAIBX) Fund. It's a balanced fund (both stocks and bonds). Approx. 65% stocks and 35% bonds/cash. You are correct, invest at least up to the employer 3% match. How much further you can go is a question only you and your hubby can answer.

In your last paragraph, you make mention of an advisor. Please elaborate and be careful. They make some serious money (out of your pocket) if you go with American Funds. An emergency fund is of utmost importance. For financial literacy, check out some John Bogle or Rick Ferri books.

 

[Nera]

Thanks for the responses. I come from a background where my parents are solely going to be dependent upon SS when they retire (they are 70+ and still work) and I just don't have the savvy. On one hand, I feel like I should just contribute the 3%. On the other, wouldn't biting the bullet and just investing $11.5k, even if I don't understand what's happening to it, help over 30 or 40 years? I don't want to retire early; I just don't want to end up like my parents who have no assets at all and live paycheck to paycheck in old age.

 

[foxfirev5]

It looks like you would qualify for separate Roth IRA's with your HHI of $130k. If so I'd go with the 3% at work and investigate a Roth at Vanguard or Fidelity for another $5500 per year each for you and your husband.

 

[Nera]

Per my employer --who is not well-informed but I assume they set the rules-- I do not qualify for a Roth or a SIMPLE IRA from any source other than American.

 

[golfnut]

Thanks for the responses. I come from a background where my parents are solely going to be dependent upon SS when they retire (they are 70+ and still work) and I just don't have the savvy. On one hand, I feel like I should just contribute the 3%. On the other, wouldn't biting the bullet and just investing $11.5k, even if I don't understand what's happening to it, help over 30 or 40 years? I don't want to retire early; I just don't want to end up like my parents who have no assets at all and live paycheck to paycheck in old age.

I think it is important for everyone to learn about finances/investments. You mentioned you do not have the savvy. Just go to your public library and start reading. It is not difficult to learn about investments. A lot of people make it sound like it is but it is quite simple if you invest a little time into it.

Golfnut

 

[youbet]

Thanks for the responses. I come from a background where my parents are solely going to be dependent upon SS when they retire (they are 70+ and still work) and I just don't have the savvy. On one hand, I feel like I should just contribute the 3%. On the other, wouldn't biting the bullet and just investing $11.5k, even if I don't understand what's happening to it, help over 30 or 40 years? I don't want to retire early; I just don't want to end up like my parents who have no assets at all and live paycheck to paycheck in old age.

Sounds like you're trying to justify not learning what you need to learn. The only reason to rush is to get the 3% match. Then dig in and make it a priority to learn simple retirement saving/investing principles before investing more.

A lot of folks stop by this board for advise on how to get out of retirement investments they made with high cost, low flexibility firms/plans in a rush and under pressure from time deadlines and sales people. Don't do it. Get the match being offered, its a nice deal. Then, read and learn (it's not that hard). Invest additional funds going forward to cover all your needs (emergency, non-retirement, retirement, etc).

 

[youbet]

Per my employer --who is not well-informed but I assume they set the rules-- I do not qualify for a Roth or a SIMPLE IRA from any source other than American.

More reasons to learn, learn, learn. Your employer is giving you bad info. You may or may not qualify for a Roth based on your income but American Funds and your employer have NOTHING to do with qualifying. You open and contribute to a Roth or contributory IRA on your own totally outside of work.

I think your employer means that the Simple IRA plan he has set up is contracted through American. So you're stuck there for your Simple IRA and getting your 3% match. But beyond that, you have the world of contributory IRA's, Roth IRA's (directly or back door - read about this) and non-deferred investments to consider.

Don't feel locked into American Funds beyond the Simple IRA at work.

I commend you for not wanting to retire on SS only and being concerned about getting started with investments. Just remember that getting started doesn't mean tossing some money over the transom to see what happens to it over the next 30+ years.

 

[Gotadimple]

Per my employer --who is not well-informed but I assume they set the rules-- I do not qualify for a Roth or a SIMPLE IRA from any source other than American.

Your employer has no other source of funds than American.

You are being pressured to do this so that your employer can continue to fund the match for high earners. If enough high earners don't participate they will have to remove the match from the high earners.

For now, do the simple thing, sign up for 3% payroll deduction, then if you are interested, pursue additional reading to understand personal finance and how it impacts you.

Bottomline: these funds are not bad, but you can invest elsewhere and have more of your money work for you. For now, don't pass up the match, you can't get that kind of return on any investment anywhere else. Pick a fund that has 50% of its investment in stocks and 50% in bonds.

-- Rita

 

[pb4uski]

+1 For 2013, I would suggest that you put in the 3% to optimize the match and save the other 12% on your own to build up an emergency fund. Then during 2013, you can read, learn and decide what is in your best interests for 2014 and beyond. I'm afraid that you may be rushing into a poor decision that you will come to regret.

It seems odd that you only have once a year to make this decision and such a short timeframe. Smells fishy.

 

[youbet]

Your employer has no other source of funds than American.

You are being pressured to do this so that your employer can continue to fund the match for high earners. If enough high earners don't participate they will have to remove the match from the high earners.

For now, do the simple thing, sign up for 3% payroll deduction, then if you are interested, pursue additional reading to understand personal finance and how it impacts you.

Bottomline: these funds are not bad, but you can invest elsewhere and have more of your money work for you. For now, don't pass up the match, you can't get that kind of return on any investment anywhere else. Pick a fund that has 50% of its investment in stocks and 50% in bonds.

-- Rita

Nicely stated Rita. But, did you mean "low" earners in the second paragraph?

 

[aaronc879]

You seem to be off to a reasonably good start. $130K HHI is very good. The fact that you bought a small home even though you could afford a bigger one is a good thing. You have no debt other than the mortgage which is rather rare at your age. I wouldn't pass up the company match but I wouldn't go beyond the 3% with American Funds. AF has a front load of around 6%. That means you're down 6% right from the start. I would invest in a ROTH IRA at Vanguard. A seperate account for each of you. You can make your 2012 contribution anytime thru the end of March. Read up on Roth's before so you know the rules. If you're reasonably satisfied with your job security then i'd go ahead and max both Roth's for 2012($5000 per account). Then you can rebuild your emergency savings before making your 2013 Roth contributions. Good Luck.

 

[Gotadimple]

Nicely stated Rita. But, did you mean "low" earners in the second paragraph?

No, I meant high income earners. They want all the employees involved. They wouldn't necessarily withhold a match from low income earners, but they would from high income earners who get a greater income tax break for participating, whether or not there is a match.

Rita

 

[MichaelB]

Nera, you are getting good advice in this thread, especially from Youbet and Gotadimple. It's all you need, but let me add one more thing, which is to print this thread, review it tonight with your DH (if you have time) and then sing up tomorrow for the 3%. If you can save more, great, go open a Vanguard account and invest there.

 

[ChadR]

No, I meant high income earners. They want all the employees involved. They wouldn't necessarily withhold a match from low income earners, but they would from high income earners who get a greater income tax break for participating, whether or not there is a match.

Rita

What your wrote and what you meant don't agree. If you look at the bolded word you would realize you have a type. As you need sufficient participation from "low" income folks in order for the "high" income folks to receive the match.

 

[rodi]

My husband's company uses AmericanFunds... In fact an exceptionally crappy subset of them, with very high expense ratios... and worse... LOADS.
See my post about it here:
http://www.early-retirement.org/forums/f28/wwyd-husbands-craptastic-401k-plan-63390.html

Our decision was to put in the same amount he'd otherwise put in an IRA (since our income makes it an either 401k/or IRA, not both situation.). He gets the match, which helps offset the loads and expenses of these funds.

Employers need to do a better job of finding good investment options for their retirement programs... it's bad for the employer and employee to have these high cost funds as the only option.

Ok - end of my rant...

My advise is to contribute enough to get the full match and/or what you would otherwise invest in an IRA - whichever is higher. Depending on your time horizon (your age) focus on the lowest loads/fees and/or the highest yields.
A list of the expense ratios by fund can be found here:
https://www.americanfunds.com/funds/returns/alphabetically.html

 

[dmdunca44]

It looks like you would qualify for separate Roth IRA's with your HHI of $130k. If so I'd go with the 3% at work and investigate a Roth at Vanguard or Fidelity for another $5500 per year each for you and your husband.

+1

Right now, I'd contribute enough to get the match. After that, I would not put any other money into American Funds. If you want to open a Roth or Trad IRA on your own, you have until April 15, 2013 to contribute for 2012. I'd definitely go with Vanguard or Fidelity. If you don't want to have to learn a lot right away, put the funds into a Target Retirement fund. Then contribute the max allowable every year.

 

[Bestwifeever]

Nera, I think putting the most you can even into a crappy fund is better than putting in just enough to get the employer match IF you are not likely to follow up with your own self-directed plan. Heresy, but we never had an emergency fund or much savings outside of company plans, but we socked those away aggressively and it made all the difference. Since you've not been doing this independently all along on your own, just wanted to put this out there.

 

[Nera]

Thank you, thank you, thank you all for your advice. I have a lot of reading and research to do and you all have given me a good point of departure. I've decided to to contribute 3% and work hard to get a measure of understanding quickly so I can invest in something better, like a Roth at Fidelity or Vanguard.

(And Bestwifeever, I agree with your heresy and so if I don't stick to a self-directed plan, I'll put more into American in 2014 because I know I can't save for retirement with a savings account.)

I'm really heartened to see that so many people have been able to figure out retirement and investment for themselves. It took me years to truly buckle down on cashflow and I've only recently gotten aggressive enough in my salary negotiations that we do have a HHI of $130k. So thanks for your patience and I'll be studying these forums, along with a bunch of suggested reading material closely.

 

[Lazarus]

Nera, an advantage of talking to people on this board is that many have already succeeded at retirement.

Financial advisors are still at work! And many are nothing more than salesmen for their companies products.

No one on this board is selling anything. Just free advice from people who would like to see others succeed.

 

[Bestwifeever]

Thank you, thank you, thank you all for your advice. I have a lot of reading and research to do and you all have given me a good point of departure. I've decided to to contribute 3% and work hard to get a measure of understanding quickly so I can invest in something better, like a Roth at Fidelity or Vanguard.

(And Bestwifeever, I agree with your heresy and so if I don't stick to a self-directed plan, I'll put more into American in 2014 because I know I can't save for retirement with a savings account.)

I'm really heartened to see that so many people have been able to figure out retirement and investment for themselves. It took me years to truly buckle down on cashflow and I've only recently gotten aggressive enough in my salary negotiations that we do have a HHI of $130k. So thanks for your patience and I'll be studying these forums, along with a bunch of suggested reading material closely.

Sounds like a good plan and hopefully at the end of 2013 you will find you have saved even more that 15 % all together and you'll be financially literate to boot. I wish we had had the expertise of the folks on this board when we were your age!

 

[FUEGO]

+1

Right now, I'd contribute enough to get the match. After that, I would not put any other money into American Funds. If you want to open a Roth or Trad IRA on your own, you have until April 15, 2013 to contribute for 2012. I'd definitely go with Vanguard or Fidelity. If you don't want to have to learn a lot right away, put the funds into a Target Retirement fund. Then contribute the max allowable every year.

Nera, I'll second this advice. No real need to rush, since you can open an IRA any time in the next 4 months. Just double check that your income won't prohibit you from participating in an IRA. In 2013 you and your spouse can put a total of $11000 a year into IRAs, so that will go a long way toward your retirement savings (when it grows over 30 years).

I'll recommend one book: The Bogleheads' Guide to Investing: Taylor Larimore, Mel Lindauer, Michael LeBoeuf, John C. Bogle: 9780470067369: Amazon.com: Books

The Bogleheads Guide to Investing

The book covers investing, taxes, and money management and starts at a fairly basic level that is great for beginners that don't know all about investing terms and the lingo that is used in the financial advising world.

The bottom line is that investing doesn't have to be highly complicated, and even a beginner can do it on their own with a little up front learning.

 

[growing_older]

American Funds are generally well run, but some have excruciatingly high expense rations and when sold through advisors (even 401k advisors) can carry obscene loads. The fact that you are being pressured to make a quick decision indicates this plan was not well thought out and increases the chances you will be hit for fees that can make this a terrible investment, even if American runs a good fund.

You absolutely need to know expense ratios on the Funds and if there are any loads or fees involved. 401k can charge terrible fees, especially in small plans. Sometimes so terrible you would do better even without the match or tax deduction. You need to know more to make this choice.

 

[racy]

Nera, Fuego recommended a good book. The Bogleheads also have a great website. Here's a link to their "getting started" page: Getting Started - Bogleheads