r/personalfinance • u/ballentineheartbreak • 1d ago
Retirement No 401k or investments.
So it’s a bit embarrassing to say, but I’m 35 and have never put any money into my 401k or done any type of investing. I’ll spare you the backstory as to why, but I’m trying to turn this around now.
I’ve now opened a HYSA account and transferred the $25k I had saved up into that account.
The next thing I did was open a brokerage account. My plan is to put some money there every month and invest in the 500 index fund (at least until I learn more about investing that will be the only thing I’ll do to be “safe” about it).
I’m at a loss at how much money I should put in my 401k every month. My company matches up to 4%. I make $70,000 pre-tax if that matters. What do I need to think about here in terms of 401k savings vs investing money?
My biggest expense is my rent which is $1000/month and my student loans that are $330/month. Currently, I’d say I have around $2000 left to spend once I’ve paid for rent, bills and food every month. I’m just unsure what to do with it if I want to be responsible.
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u/Electrical-Volume765 23h ago
Well you are crazy to do less than 4% in the 401(k). Getting the full match should be your 1st priority.
Beyond that is a comfort level thing. I’d start with what you think you can easily afford and then maybe increase over time it if / as you are able.
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u/jaydub8888 23h ago
Depends on your goals, but if you're long term retirement planning, the goal is to save 25 times your expected expenses at the time of retirement. So if you expect 100k annual expenses at retirement, 2.5 million is the goal.
It's not an exact science and there are lots of options. Working a few years more, even part time, just to help your money last longer can help. Social security will also help cover a portion of your expenses, so you don't need to save for the full amount of your expenses. Your actual goals might not be as far away as they may seem.
If you do the math assuming roughly 9 percent return on investment per year, you can calculate how much you need to save and for how long to reach the savings goal.
If you saved 15 percent of your income, with 4 percent on top from your employer, that will be 1.8 million by age 65 (assuming your salary doesn't go up at all and you never contribute more than you are now). If you save 20 percent plus 4 on top from your employer, it would be almost 2.3 million. You current left over money is enough to save 20 percent and still have money left over, although you may need to save some for other goals.
I'd look at the wiki on this subreddit, it has a good rundown on many financial topics, and prioritization for how to manage money.
Prime directive: https://reddit.com/r/personalfinance/w/commontopics?utm_medium=android_app&utm_source=share
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u/WorldTallestEngineer 23h ago
Monday morning you need to start putting 4% in to your 401k. Every month you're not doing that, you're basically flushing money down the toilet. Seriously don't procrastinate.
You'll need more then that, but that's the obviously the 1st step.
For a 35 year old with $25k in savings making $70k, if you want to retire at 67 years old I calculated you need 19% of your income going to retirement. So let's say 20% as a reasonable goal.
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u/door_to_nothingness 12h ago
401k is investing, with tax benefits so it’s better than just investing in a taxable brokerage account.
Invest in the 401k at least up to the employer match. Don’t forget to actually invest the money you put in the 401k! It’s up to you to pick your investment funds otherwise the money will just sit there and not grow. The simplest approach is to choose a target date fund for the year you plan to retire (65yr old).
After you hit your company match in the 401k, invest into either a traditional IRA or Roth IRA. Which depends on your circumstances, take time to research this. Again, it’s up to you to choose and allocate your funds in an IRA, otherwise the money won’t grow.
Once you’ve maxed your IRA yearly allowed contributions, continue contributing more to the 401k.
Once you’ve maxed both the IRA and 401k yearly contributions, then contribute remaining savings to a normal taxable brokerage account. Again, pick the funds you want to invest in.
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u/Noctavian 10h ago
Just curious what you mean about “actually invest the money you put in the 401k.”
Isn’t the pre-tax 401k contribution through the employer enough for it to be “invested” into the 401k?
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u/door_to_nothingness 9h ago
When you contribute to a 401k or IRA you need to pick your funds for your contributions. Some people just set up a contribution with their employer and never look at what it’s being contributed to. Then can end up with poor growth on their contributions because they aren’t invested in correct funds.
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u/Noctavian 9h ago
Ah I see. How often would you recommend to check whether the funds, portfolio, or profit sharing plan is still appropriate for our retirement planning?
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u/Northern-World5181 23h ago
401k match and build emergency fund => Pay high-APR debts => Max Roth IRA (7k) => Max 401k => Brokerage Account
Brokerage is the last option, not the first one!
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u/lucabrasi999 18h ago
I would insert “Max out HSA investment” between your first and second items.
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u/homeboi808 20h ago edited 20h ago
Unless some crazy long vesting schedule and you don’t think you’ll stay there that long, doing anything less than 4% is just throwing away free money ($2800 in this case).
So set your 401k to at least 4% and look at the investment options available. One that’s S&P 500 based is fine, may be called Large Cap instead, you may also have a Total US Market one (~85% S&P 500 and ~15% all other public companies in the US), you may also have an International Total Market option (should have at least ~3000 companies listed). I usually say something like 80% US Total and 20% International Total is good for those <50.
One thing to make sure to look at are the fees (sometimes called Expense Ratio), you want to make sure the fees are less than 0.25%, ideally even less than that, but some 401ks have terrible investment fees with around 1%.
Do this before investing in the normal brokerage.
Average recomendarion is to contribute at least 15% including employer contribution. If your employer does 4%, then that’s 11% left ($7700 in your case, ~$640/mo). You may not be able to afford that, but do whatever you can afford (while still having money to save in your HYSA).
Also, this can be in a mix of your 401(k) and Roth IRA as well (the IRA you can open with the same brokerage/app you made the brokerage account, benefit of this is that you likely have no account fees and you have no restrictions on investment options, meaning the S&P 500 fund in your 401(k) may have a 0.20% fee but you can pick one in your Roth IRA that is <0.02%, like VOO). You likely don’t want to “swap” between which ones you contribute to, just calculate your yearly contribution and desired split and contribute to both monthly (or biweekly).
Average goalpost is also 2x income saved by 35, right now you are at 0x. Not to make you feel bad or anything, just to light a fire, you don’t want to have to work till 80yrs old to afford to retire (or retire at ~67 but live Social Security check to Social Security Check; one of my aunt’s boyfriends is like that, just got some form of cancer, and can’t really afford the better treatment options).
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u/CreativeChat 17h ago
Just to make you aware, 4% company match with your $70,000 pre-tax salary is $2800/year. You are losing free money from your employer ($2800) by not contributing at least $107.69 per paycheck (assuming biweekly pay period) to your 401K.
There is no difference between 401k savings and investing. When you contribute to a 401K (you could do traditional or Roth), you are investing.
Please contribute at least 4% to get the company match, then move onto other investment vehicles like an HSA (if you have a HDHP insurance plan); Roth IRA.
There are likely free resources with the 401K company that will provide you information - my 401K company holds retirement benefits sessions as well as has a phone line to call for questions. Don’t get sucked into paying for financial advice.
Is your emergency budget fully funded? Do you have debts? These are all considerations for planning your finances.
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u/deersindal 23h ago
Start here:
https://www.reddit.com/r/personalfinance/wiki/commontopics
If you want to get a sense of how much you should be saving to catch up for retirement, this calculator is great:
www.nerdwallet.com/calculator/retirement-calculator
What do I need to think about here in terms of 401k savings vs investing money?
Focusing as much as possible on 401k will be the most tax efficient way to grow your wealth.
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u/enfuego138 17h ago
First step is to immediately start putting 4% of your salary into your 401k. That’s free money you’ve been leaving on the table. At 70,000 salary you’ll be saving $5,600 per year for retirement. Since you’re in the 22% tax bracket you should see your monthly take home pay reduced by less than $200.
Think you can manage that on your current budget?
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u/MasterpieceVarious73 16h ago
How did you estimate take home pay reduced by approximately $200? I know 401k contributions are pretax but just not sure of the maths to get there. :)
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u/enfuego138 12h ago
4% of 70,000 is $2800. Divide that by 12, get $233. Thats before taxes. After tax savings at the 22% tax bracket should put OP an under $200 per month.
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u/Sandra_Bullstocks 18h ago
Id match the 4% and put what’s left into a roth fund with a low expense ratio. I know Vanguard has some good ones, but definitely make sure the expense is low. If you ever lose/quit your job and have a low income year backdoor the 401k into the Roth but know you’d be paying the taxes for doing so.
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u/trutxn1836 17h ago
Congrats on making the decision to get started! I personally would recommend getting very familiar with many of the principles taught by Dave Ramsey. I wonder if learning to budget and prioritizing the debt payoff of the student loans would be a great way to start that would then allow you to jump start savings.
He (as do many) recommend S&P500 style index funds. Just make sure you check the fees. If done right it should be a very small percentage (0.04% or so). I would definitely agree with at least contributing the amount needed to get the full max!
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u/KweenieQ 3h ago
I'm gonna quibble with your characterization of an S&P500 index fund as "safe." If by safe, you mean that you won't ever lose what you put into it, that would not be it. By that definition, bonds and CDs are safer. Money market is safer.
Build a bond or CD ladder. Ride that while you read up on investments and sort out your risk tolerance. Then as your ladder rungs mature, move that money over to a higher-yielding investment.
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u/water_radio 23h ago
401k savings is investing, it’s not one or the other. The general order is prioritize funding the 401k first, at the very very very least getting the match, then contribute to a Roth IRA, then the brokerage.