I'm on fidelity and opted to invest in default life path index returns on my 401k. Is that a good one, or suggest change to a different one? Also, is maxing out on 401k a good idea? In case I need money before retirement, the risk of penalty is what i am thinking about. 10% Thanks in advance for all the valuable inputs on this forum.
Check the expense ratios. Index funds like sp500 or total market fund might have lower fees. I see the large cap index offering, probably total US equity index fund. I would just put it in that if you're ok with rebalancing the closer you get to retirement. Target date funds tend to be less riskier (hence lesser returns) than all equity even for someone who's young and can tolerate more or all stocks, at least for my taste. Yes maxing out 401k is a good idea. If you need money for something, you need to plan for it and not tap into 401k unless there is no other option like an emergency(in which case, the penalty will be the least of your concerns).
Thanks. What do you mean by rebalance here?
The way target date funds work is - they will start out with say 80% stock, 20% bonds when you're young and gradually reduce the stock exposure and increase bonds since as you get closer to retirement, you are less tolerant to stock market risk. At the time of retirement, the fund may comprise of just 10% or maybe even 0% stocks and 90%+ bonds. If you're putting it in an index fund, this rebalancing is not going to happen and you will have to do it yourself based on your own risk tolerance. Maybe keep it in the index fund until you're 45 or so and then slowly start rebalancing to bonds as you get closer to retirement.
To address the question of whether to max out your 401k or not: yes you should. Your concern about accessing money before retirement age can be addressed by contributing to a Roth 401k where the contributions (not growth only the actual contribution amounts) can be withdrawn without penalty anytime you want as long as it’s at least 5 years after the contribution. Alternatively, if you are doing a traditional 401k you can periodically convert traditional to Roth in lower tax years to achieve the same result. If possible, you could also consider doing a mega backdoor where you max out your traditional 401k contribution limit up to $23,000 this year and then contribute additional after tax (different from Roth) and do an in plan conversion from after tax to Roth. This caps out around $$66,000 however this cap includes any employer contributions as well so be careful. This way all of the additional (potentially $30-40k Roth money) could be withdrawn starting 5 years after its contribution while still getting the tax deduction benefits from the traditional 401k contributions. Assuming you are in a high tax bracket this would probably be the most tax efficient method, assuming you can swing that high of contributions. It also isn’t necessary of course to completely max out the mega backdoor Roth, just contribute what you want/need. As for the specific fund, I’m not familiar with that one in particular but it looks to just be a generic target date fund, which is likely fine. Maybe could do better on the expense ratio (0.39%) if you look around for other target date funds, but you could also definitely do worse. FWIW mine is also in a vanguard target date fund (0.08% expense ratio) split between Roth and traditional like I described above. Another option would be to just put it all in a VTI/VTSAX if that’s an option but the target date fund may be less maintenance on your part as you don’t have to worry about rebalancing as you get older.
Thanks.
My employer does 4.5% match on 401k. 4.5 in traditional 401k Remaining additional percentage on Roth - to have both traditional 401k and the ability to take it out when needed? Does this make sense or am I missing something here. I cannot do more than 23k/ yr overall in 401k.
Is this all you have to choose from? Looks like your company's plan doesn't have much selection. You picked 2055, so you are around 30 now? Like others have said, when young, just pick a stock index fund. The blkrk us eq mkt idk looks like one. Check the expense ratio, make sure it's low (< 0.5%, preferably 0.1% or lower) Max 401k, like others said, yes. Emergency? Have 9-12 months (barebone) living expenses in a savings. That's mortgage, food, gas, bills. And you can also look into a 401k loan. Up to 50% of your 401k balance or 100k, whichever is smaller. Up to 5 years term with no questions asked, and all interests go right back into your 401k
Thanks. In mid 30s. Might have to change to 2045 or even earlier is that a good idea. Why would people take 401k loans though?
Change to 2045, not necessarily. I think the underlying concept is when you are further away, it's more stock (high risk, high *long term* yield), when it's closer, it becomes more bond and money market (low risk low yield, but you now have a bigger base/principal). Mid 30s still a few decades away, so heavy stock, like the index fund is the way to go, IMO. Just make sure you don't look at the balance very often and panic when it's down. 401k loan allows you to borrow money from yourself so you pay yourself the interests rather than the bank
They should have Vanguard SP500 (VOO equivalent) and total intl market (VTI equivalent). That should be better because of much lower expense ratio
I maxout because 1. I’m going to put similar amount in VOO anyways so might as well make it pre-tax and 2. i dont plan on making withdrawal for a very long time (like until I turn 60).
Thanks. By 1. Your 401k fund to VOO ?