Should I split my retirement investment options?

Question

I am in my mid 20s and have both a 401K as well as a Roth IRA and small amounts of stock. Am I spreading myself too thin? Should I focus all my efforts on one or the other in order to maximize my earning power for retirement? I am aware that I have time to be aggressive, but I lost quite a bit in the market after the tech crash and have yet to realiz my original investment from the stocks. Thanks.

Answer 1

Good for you! You do not need to be worrying about being stretched too thin--your return and the effects of compounding are the same, whether your assets are spread between 2 accounts or 100 (though consolidation is good for other reasons; it's much easier to track your performance and asset allocation with fewer accounts).

You are doing the right thing as far as retirement goes. Contribute to a 401k enough to get the match--then max out your Roth IRA. If you can still afford to save more for retirement, go back and start upping your contribution level to your 401k. It's good to have both of these accounts to hedge your bets tax-wise. Your tax rate may be lower when you retire--or it may actually be higher if the government raises tax rates accross the board (which I think they will). So you want to have both types of accounts (taxable and nontaxable at retirement) since you can't be sure which will be most advantageous in the future.

At the same time, I'd be saving at least 5% of my gross income each month in a high yield savings/money market account. This money can be a cushion if an emergency strikes, but it can also be used for irregular expenes (vacations, insurance premiums, car maintenance) and savings for short term goals (new car, downpayment on a home).

As for your small amounts of stock which are presumably held outside of your retirement funds, I'd leave them alone if they're still showing a loss--but I wouldn't be adding to them. You would have to have $20,000 or more in that cash savings account in my opinion--above and beyond what you think you'll need over the next 2 years--before you should start investing in stock in taxable accounts. If you are showing gains (or if you want to take the losses for tax purposes), then you can sell them and just wipe that slate clean and get a head start on your cash account.

Answer 2

I think you're absolutely doing the right thing. A lot of people with general knowledge of the market will tell you to diversify your investment holdings (spread them between different asset classes) which is investing 101 and is extremely important. What some people fail to realize is the need for tax diversification which is exactly what you are doing by utilizing both a 401k and a Roth Ira. By tax diversification I mean that you are spreading the tax risk. With a 401k you are taking the tax benefit today but sacrificing the tax benefit in the future. With a Roth you are sacrificing a tax benefit today to get a tax benefit in the future. Because you are not sure of whether you will be in a higher tax bracket today or in retirement you are absolutely doing the right thing by diversifying this risk and investing in both a 401k and Roth. In addition, by investing also into a standard brokerage account you are doing the right thing by recognizing that you have other long term savings needs other than retirement. For the amount you're allocating to retirement I would suggest you do the following in the order listed below.

1. Allocate into your 401k up to the company match
2. Put as much as you can into a Roth Ira up to the maximum allowable for the year
3. Increase your 401k contribution as much as possible up to the maximum

Answer 3

You should contribute to your 401(k) plan to the extent that your employer matches. After that, the Roth IRA is probably most appropriate for someone your age. If your employer doesn't match, then max out the roth and then any leftover contributions should be allocated to the 401(k).

The reasoning is that a Roth IRA will have a greater future value than your 401(k) if you are in a higher tax bracket when you reach retirement age, all else equal. For most people in their 20s, this is probably a safe assumption. If for some reason you feel that you will be in a lower tax bracket at retirement, then the 401(k) would be a better choice, tax-wise.

The Roth IRA will alos give you the flexibility to invest in whatever you choose, whereas a 401(k) generally has a limited selection of investment options.

Answer 4

The tech bubble should have taught you one lesson anyway. That is do not be too aggressive. A diversified set of investments is the best options. My personal opinion is that a Roth IRA is the preferred method for retirement savings. The 401k is ok to get the employer match, but it does have some limitations. Among those are a limited number of investment options. Some more than others. The other limititation is that you will be socked with a large tax bill when you begin to withdraw.

A decent strategy is to invest some in the various market sectors, small cap, mid cap, foreign, large cap, dividend payers. I believe that is a decent strategy. Peter Lynch refers to it as the 6 part strategy. That is a strategy I tend to follow also for my equities, although I am migration towards more foreign to protect myself from the collapsing dollar.

Find yourself good stocks and good mutual funds and stick with them. Add to them regularly, either annually or quarterly.

Do not jump on the bubble band wagons. Bad strategy. It is a long way for you until retiremnet. Stick with the proven performers. You will due just fine over the long term, if you do.

Answer 5

I would recommend that you max out your 401(k) plan, particularly if your employer matches your contributions. That's basically like getting 100% return on your money if your employer matches. If you still have money left after that, contribute the maximum to your Roth. After that, if you still have money to invest (good for you!), concentrate on building a portfolio. The thing you're going to need to watch, though, is diversification. I don't know how you're invested in your current portfolio, but you may end up a bit heavy in one sector and be completely missing another. Maybe you could go to www.morningstar.com and run their portfolio x-ray. It could be useful in figuring out if you're adequately diversified.

Answer 6

You have a long way to retirement. So do the following:

1. Save something each year.
2. diversify your portfolio
3. invest both pre and post tax.

You will be fine if you do this.

Answer 7

the wonderful element of do is diversify. In my 401k I surely have some short term treasuries, suggestion, small cap, mid cap, super cap advance, super cap fee, international fee, and international advance. those aim date ones artwork actual nicely with people who have not any clue what they are doing yet once you no what you're doing it would be extra useful to easily %. and choose the shape of bonds and inventory money your self.

Answer 8

well take full advantage of your 401k. if that's maxed out, then contribute it elsewhere. the thing is that if you contribute more to your 401k, you'll get a tax break. so if you can afford it, that's what i would suggest.

Answer 9

Be aggressive -- go for the high risk stuff with high reward. Nothing ventured nothing gained. You are 25 -- this is your time! What goes down must come back up.