Investing Strategy for Young Worker

[RedHawk]

I started my first after-college job a couple months ago. Since then I have:

1. Set up automated deposits to put 10% of my salary into a 401k (more than what is required to get entire match)
2. Max Roth IRA
3. Max HSA (including employer contributions)
4. Transfer money on a biweekly basis to a savings account for the what-ifs in life

That was the easy part now I have to decide on an investment strategy going forward. Currently my 401k is entirely in a Target Retirement account and I was planning on doing the same in my Roth for now at least until I build up a decent account balance. Is this too simple of an approach? My Roth at VG currently has enough to meet at least 2 fund minimums may be 3.

 

[growing_older]

That sounds like a good plan to me. When you are just starting out, developing habits of saving will matter much more than fine tuning your investment strategy. Target retirement funds make this easy. Some people stick with them, even with considerable balances. You will do fine using them, even for years, while you read books and decide if you want any more complicated strategy or not. Nice job so far.

 

[walkinwood]

Congratuations on a fine start to savings. You have time on your side, so read some good books to educate yourself on a strategy that you will be comfortable with. John Bogle, William Bernstein, Ellis and Larry Swedroe have all written good investment strategy books.

Do the reading, put a strategy together and the good people on this board and bogleheads.org will be happy to help you fine tune it.

All the best.

 

[seabourne]

I'd suggest sticking with the targeted retirement actually. You goal right now, with the best rate of return, is going to be getting better at your job - studying things outside work hours to learn more, making connections, and doing your job well. Your savings total value is low - even if you are an investing genius, making 15% return on your savings isn't going to be nearly as valuable than getting an extra 5% raise, especially since future raises build on the larger base. As you get raises, save them, or save most of them, and you'll be surprised how much difference it will make.

 

[Animorph]

Sounds good to me, roughly what I urged my DS to do (successfully).

I recommend saving 15% of your gross income, which you are likely to be hitting, though maybe not. That won't get you super early retirement, but it will get you there.

The targeted retirement funds are the easiest way to save. You'll have time to learn more about investing and chose something different if you want later.

 

[MooreBonds]

Congrats on a strong start!

One bit of advice:

3. Max HSA (including employer contributions)

Since you're pretty young, make sure you get a quote on an individual health insurance policy. If you're in pretty good health, your age will likely allow you to get an incredibly low quote compared to the group health insurance plan at work. I'd suggest trying ehealthinsurance.com, assurant.com, and your state Blue Cross/Blue Shield carrier. Those 3 sources should yield nearly all of the competitive, low quotes you could get on your own.

Of course, depending on the value of your employer contribution, it may make sense to be on the group health insurance policy...however, the decent employers will give you at least some cash benefit if they pay part of your health insurance policy and you decide to opt out of the company plan, so that could help offset the elimination of the employer contributions.

And remember: if your employer's HSA investment options [-]line the pockets of the insurance company at your expense [/-]suck, it could also be worth it to drop out of the plan and transfer it to another provider with your own HSA policy (HSABank.com partners with TD Ameritrade, for example, to let you invest in nearly anything).

 

[seabourne]

MooreBonds - we've just started an HSA offering at my work, and one thing that jumped out at me - my understanding of the taxation rules are the you are exempted from SS taxes ONLY if the contributions are deducted via employer. Following the route of using an outside HSA banker might lose that exemption worth about 7.65%. I may be incorrect, but be certain before you leave the employer HSA for your own!

 

[MooreBonds]

MooreBonds - we've just started an HSA offering at my work, and one thing that jumped out at me - my understanding of the taxation rules are the you are exempted from SS taxes ONLY if the contributions are deducted via employer. Following the route of using an outside HSA banker might lose that exemption worth about 7.65%. I may be incorrect, but be certain before you leave the employer HSA for your own!

My 2011 $5,500 deductible policy is running $40/month.

The group plan at w*rk employee portion (about 45% of the total cost) w/ a $2,500 deductible is waaaaay higher than that, even counting in the tax benefit.

Last year (for the first time in 3 years), it was roughly break-even in terms of maintaining my $5,000 individual policy versus going w/ the $1,000 deductible group policy - but since I had had an individual policy for the previous 9 years, I just opted to keep it. But this year, several high claims really jacked up the group policy premiums - and the employer had employees pay a higher percentage of it.

I did a quick comparison on ehealthinsurance.com for the director of my office (40 years old, married, 1 teenage son); if he went with a family policy on his own (same $2,000 deductible as the group family plan), he would save $100/month - even AFTER he loses the income tax benefit of paying with after-tax dollars versus pre-tax dollars.

Of course, even after telling all of my co-workers about how to get their own quotes, would you like to guess how many actually did it and purchased their own individual policies to save money?
zero Granted, some wouldn't qualify for as low of a premium due to age....but why complain about something if you're not going to fix it

Also, even if you can save 7.65% on a $3,000 HSA contribution, that only is worth $229. Granted, it's a sizable amount, but my premium savings more than offsets that, and I can invest my money in virtually anything - not some overfeed fund.

 

[RedHawk]

Congrats on a strong start!

One bit of advice:
Since you're pretty young, make sure you get a quote on an individual health insurance policy.

I think my work plan is actually pretty competitive. Part of the reason is I work somplace with a realatively young work force so most of the work force is pretty healthy. Plus my employer contributions when netted against my premiums make my health insurance almost free.

Last year during grad school I had my own insurance bought through ehealthsurance.com and it was $14/month than my employer plan, but the HSA contributions more than make up for the difference.

However, I do need to look into the investment options at the employer provided HSA. Is it possible to transfer money from one HSA to another without incurring a penalty without qualified health expenses?

 

[MooreBonds]

Is it possible to transfer money from one HSA to another without incurring a penalty without qualified health expenses?

Nearly all corporate plans are the same when it comes to HSAs and 401ks. Legally, the IRS allows the plan to offer current employees the ability to transfer out funds without having to terminate their employment; however, 99.9% of companies won't offer that, because the fund providers will be afraid of loosing the easy-money that 401k plans offer to the administrators.

I'm willing to bet that your HSA plan probably doesn't allow you to transfer to another bank/investment account while you're still working for the employer.