Retirement investment advice for early-mid 20 year olds

Al18 said:
The rest 4, 5 and the last paragraph are not necessary in my opinion. You should be giving a guide, not specifics.
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You mentioned that above. But I'm still not sure what you meant by "I would change 4 to 5% Investment Account."
 
SnowballCamper said:
I think six months of expenses in money market / cash is too much. But it really depends on the job security and career.
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I know someone who got laid off and is about to cash out a bunch of their 401(k) and pay a penalty because she didn't have a sufficient emergency fund. Some people are fine taking that kind of risk and others are not. People have to assess their own risk intolerance. I think a Roth IRA is a good way to handle the issue. Savings, help for retirement, and no penalty for withdrawing the principal.
 
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4. 5% Investment Account

That’s the end of the letter

6 months in a Money Market account is not sufficient in my opinion. I would recommend a year, but that would turn off most people in their 20’s, in my opinion - so 6 months is a good start.
 
I think that's a solid approach. The Roth 401K is a good opportunity where offered-comes out before the spendable pay hits the account.

IME, 6 months of expenses is prudent. I wouldn't sacrifice employer match on a 401k to get there sooner, but getting there is important. I had 4 different employers in the first 10 years out of college before finding my professional footing. A couple of the job transitions were financially challenging. Having a bigger cushion would have made it easier.
 
NomDeER said:
I know someone who got laid off and is about to cash out a bunch of their 401(k) and pay a penalty because she didn't have a sufficient emergency fund. Some people are fine taking that kind of risk and others are not. People have to assess their own risk intolerance. I think a Roth IRA is a good way to handle the issue. Savings, help for retirement, and no penalty for withdrawing the principal.
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Agree that money in a Roth could be a source of funds in a squeeze. Have heard that recommendation before, can't recall the source(s).

The concern I have with that approach for younger adults is twofold:
1. What's the "emergency" threshold to trigger a withdrawal? What I thought was critical in my 20's would now get a quick analysis and decision in a favor of a low or zero cost alternative. Pet medical treatment comes to mind - I spent $$$$ in my 20's on that at the cost of other savings.
2. Once the money leaves a Roth, you can't replace those dollars and their future compounding. I think the opportunity cost is too high to depend on Roth contributions for an emergency fund.

There is no substitute for liquidity, no matter one's age. Important to learn that early.
 
FlaGator said:
I think that's a solid approach. The Roth 401K is a good opportunity where offered-comes out before the spendable pay hits the account.

IME, 6 months of expenses is prudent. I wouldn't sacrifice employer match on a 401k to get there sooner, but getting there is important.
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Good point about not having access to the cash that ends up in either 401k account. And I agree about not sacrificing while building up the emergency fund.
 
FlaGator said:
1. What's the "emergency" threshold to trigger a withdrawal? What I thought was critical in my 20's would now get a quick analysis and decision in a favor of a low or zero cost alternative. Pet medical treatment comes to mind - I spent $$$$ in my 20's on that at the cost of other savings.
2. Once the money leaves a Roth, you can't replace those dollars and their future compounding. I think the opportunity cost is too high to depend on Roth contributions for an emergency fund.
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For number one, you could say the same thing about an emergency fund that isn't in a Roth. And everyone is going to have their priorities and values when it comes to what is critical whether they are drawing from an emergency fund, a Roth IRA, or building up credit card debt. I spent $$$$ on pet medical care in my thirties and then again in my forties, but I rarely ate out. My friends who were spending lots of money at restaurants and bars and expensive weekend getaways (while I didn't) thought I was crazy because of the money I spent on pet medical care. I still don't regret it.

In my mind, putting money in a Roth would have made the money seem more like a true emergency fund rather that just savings more generally, and I think that's probably true for others. In fact, now that I am 59.5 and old enough to withdraw from all my retirement accounts without penalty, I am having a hard time actually making myself do it because, in my mind, that money is for "later."

For number two, if you put money in a money market emergency fund instead of in a Roth that can be used as an emergency fund, then you still end up without the dollars compounding tax free. For a lot of people, especially young people, they are making the choice between the two. When I was young and paying off student loans, I wasn't putting money in retirement accounts. I didn't think I could afford to do that. Then, I was putting relatively small amounts in. It wasn't until later that I was maxing out.

I know someone whose parents started teaching her to save in retirement accounts from the time she started working as a teenager. She did end up eventually taking out some of the money from her Roth IRAs in order to buy a home in her twenties. But, so what? In the interim, she was building up money tax-free and she bought her house before houses got too expensive for her. In fact, now in her thirties, she not only has retirement accounts but also owns a second home that she rents out. She also runs her own business as a hair stylist, which she started at a pretty young age.
 
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I don't see a mention of AA across all account types and treat everything as one retirement portfolio.

If I had to do it different when I was 25, I think I would stick to ETF (if they existed back then lol). I had too many mutual funds.

I have my DD 100% in the SP500 in her 403b. When it gets bigger then she can diversify. Most of her retirement will come from pensions if she's lucky,
 
I've told my younger nephews and nieces simply to put as much as they can afford into their Roth 401K plan, and utilize the company match since the company match by default goes into a pre-tax 401K. Just buy an S&P 500 ETF/mutual fund, and let it ride for the next 30 years.
 
DD is in her post-college job for 4 months now. Company offers simple-ira with 3% match. I said do 3% to get the match and put the rest if she can afford it into her Roth-IRA ($16500 max for 2025 I believe). Invest both in VTI. Invest regularly regardless of what's happening in the market. In about 10 years we can talk about going less aggressive and also consider different traditional/roth ratio as her income grows.
 
surprising said:
DD is in her post-college job for 4 months now. Company offers simple-ira with 3% match. I said do 3% to get the match and put the rest if she can afford it into her Roth-IRA ($16500 max for 2025 I believe).
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I'm pretty sure the Roth IRA limit is lower than that.
 
FedRetired50 said:
$7000 below age 50. This is one of the reasons I'm steering my daughter towards her company's Roth 401k since they have one.
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Back in ancient times when I first opened a Roth IRA, I think the limit was maybe $2000. One of my few good moves, investment wise was always maxing my Roths over the years. Megacorp never offered a Roth 401(k) though I nudged Employee Benefits every time I got a chance.
 
surprising said:
In about 10 years we can talk about going less aggressive and also consider different traditional/roth ratio as her income grows.
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I wouldn't even begin to add bonds until 10 years before retirement (and personally I'm not doing it until 10 years after retirement because my retirement could last 40+ years). The point is to add stability, but at the cost of some growth. With even the biggest downturns lasting less than 10 years and usually less, there's no point in giving up extra growth in the decades before any of that money will be touched. Any dips are just on paper.

Edit: and definitely no point in giving up that extra growth in one's 20s and 30s when compounding is greatest
 
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Koolau said:
Megacorp never offered a Roth 401(k) though I nudged Employee Benefits every time I got a chance.
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If they did have a Roth 401k option, would you have done that instead? One problem my younger daughter may have in 5-10 years is she may hit the income limits for IRA, which won't be a problem for the 401k.
 
FedRetired50 said:
If they did have a Roth 401k option, would you have done that instead? One problem my younger daughter may have in 5-10 years is she may hit the income limits for IRA, which won't be a problem for the 401k.
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I think the devil may be in the details. What are the investment options in the Roth 401(k) (sometimes fairly limited) versus a Roth IRA? Can you have different investments in the traditional part of the 401(k) versus the Roth parts? How easy is it to get access to the Roth money if you need it? For a lot of people, I think it would make sense to get matching in the 401(k) first and then use the Roth IRA to the extent that is available in some way, and then use the Roth 401(k) after that.
 
Why not max 401k? I would skip the Roth 401k. Max Roth IRA too. Slowly build up emergency fund.

I used to max 401k and Roth IRA on a $60k salary. She shouldn't have any problems maxing with her current salary.

My wife has an option for Roth 401k but she chooses t401k. Our tax rate will be lower in retirement so it doesn't make sense to do a Roth 401k now.
 
I agree to get matching first, then Roth IRA, then the rest of the deductible 401k, then taxable brokerage. Fill each bucket in sequence.

Matching because it's free money.
Then Roth to get the long term compounded growth started, and because wages will likely be rising, the tax bracket is lower when contributing to the Roth.
Then fill up the rest of the 401k. It would be saving about 30k a year(7k+23k). But at some point you need to save outside retirement accounts to have some flexibility to retire early if that's the plan.
 
NomDeER said:
I think the devil may be in the details. What are the investment options in the Roth 401(k) (sometimes fairly limited) versus a Roth IRA? Can you have different investments in the traditional part of the 401(k) versus the Roth parts? How easy is it to get access to the Roth money if you need it? For a lot of people, I think it would make sense to get matching in the 401(k) first and then use the Roth IRA to the extent that is available in some way, and then use the Roth 401(k) after that.
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She has good, low-cost index options. The plan I outline in the first post includes 5% for the standard 401k for matching, then 5% to the Roth 401k, then 5% for a post-tax account.
 
ponyboy said:
Why not max 401k? I would skip the Roth 401k. Max Roth IRA too. Slowly build up emergency fund.

I used to max 401k and Roth IRA on a $60k salary. She shouldn't have any problems maxing with her current salary.

My wife has an option for Roth 401k but she chooses t401k. Our tax rate will be lower in retirement so it doesn't make sense to do a Roth 401k now.
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Tax diversification. One Boglehead recommendation is just to split 50/50 traditional/Roth to hedge your bets. Why Roth IRA vs. Roth 401k? Roth IRA has a $7k max, Roth 401k is much higher. I wouldn't count on retirement to have a lower tax rate, mine isn't. If anything it may grow higher for me as I use assets for bigger trips. I will be recommending building up an emergency fund first, along with the 401k match, then expanding to the full portfolio.
 
SnowballCamper said:
I agree to get matching first, then Roth IRA, then the rest of the deductible 401k, then taxable brokerage. Fill each bucket in sequence.

Matching because it's free money.
Then Roth to get the long term compounded growth started, and because wages will likely be rising, the tax bracket is lower when contributing to the Roth.
Then fill up the rest of the 401k. It would be saving about 30k a year(7k+23k). But at some point you need to save outside retirement accounts to have some flexibility to retire early if that's the plan.
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"tax bracket is lower ... Roth". You mean the opposite, right? You only get a tax deduction for standard 401k.

I'm steering away from filling up either the Roth or traditional even though it isn't the perfect tax scenario. She can fill that up later as her income rises, but getting some post-tax investing started - including savings for a car without financing, or house down-payment - needs to start, too.

You are getting where I'm coming from, I want her to have all options on the table if she retires early, which she's very likely to do (she's 22 and already has $21k in her 401k, plus another $10k outside of the 401k). A post-tax investment account will let her have full options. The Roth would give other options like withdrawing the original contributions at any time, then the rest tax-free. Etc.
 
ponyboy said:
Why not max 401k? I would skip the Roth 401k. Max Roth IRA too. Slowly build up emergency fund.

I used to max 401k and Roth IRA on a $60k salary. She shouldn't have any problems maxing with her current salary.

My wife has an option for Roth 401k but she chooses t401k. Our tax rate will be lower in retirement so it doesn't make sense to do a Roth 401k now.
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This young woman may be able to max out the 401(k) and the IRA, which is why I suggested going back to the Roth 401(k) after using up the Roth IRA. But, I think I would take advantage of the Roth 401(k) and not use the traditional 401(k) much, if at all in her 20s. (The matching probably will be traditional and maybe use the traditional a little if it will lower her marginal tax bracket significantly.) And I do think there is benefit to adding some outside of retirement accounts, especially later if she doesn't have access to a Roth IRA. That would be critical for early retirement.

If someone is pretty young and already in a position where they may not be income eligible for a Roth IRA, then they probably are going to be looking at a pretty high tax rate in retirement, especially if they put a lot of their money in traditional retirement accounts. I had wrongly assumed that I would end up in a lower tax bracket in retirement, but I think that I probably will be in a pretty comparable tax bracket at retirement age. I certainly would be paying more taxes if I had put even more of my money in my traditional retirement accounts instead of investing it elsewhere.

Not to mention that, if you are young when you start contributing to your Roth IRA, that is a lot of time for your money to compound tax-free, so I think it makes sense to take the most advantage of the Roth accounts when younger. You get more tax-free by doing Roth when younger, you may defer more taxes in traditional acccounts later, and you have fewer taxable capital gains when you invest in non-retirement later. (I have some old investments that are primarily unrealized capital gains now.) I'm not saying not to invest any money outside of retirement accounts now, but I wouldn't be prioritizing it. It sounds like she'll be making enough money to save and invest outside of retirement accounts even if she maxes out the retirement accounts.

I think that having a mix is a good idea, but I think there are plenty of people here who think they may have put too much into traditional retirement accounts and wish that there had been Roth 401(k)s when they were young.
 
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FedRetired50 said:
If they did have a Roth 401k option, would you have done that instead? One problem my younger daughter may have in 5-10 years is she may hit the income limits for IRA, which won't be a problem for the 401k.
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Excellent question. I never explored the plusses and minuses of a Roth 401(k) so I don't have an answer. Good luck to your daughter as she makes her way through this issue.
 
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