Roth IRA Vs Debt Reduction
Our situation today demands us to choose between Roth IRA and paying our parents back.
There are a couple of posts on this. Far less than I expected.
1) Get Rich Slowly discusses his options in “Real-Life Choices: Retirement Savings vs. Debt Reduction”. Decides to put it in Roth IRA.
2) A 21-year old contemplating between retirement and debt reduction – “401k + IRA Vs. Debt”. A lot of different people with a lot of different advice.
3) OmniNerd has a post Home Down Payment vs Roth IRA.
We just started our 401k investment. And we are not funding it to the max this year since we are slightly low on cash flow at this point. But we are committed to funding it fully next year. We will not be eligible for Roth IRA next year. On the other hand, our parents are nearing retirement. They would have taken some money from their retirement savings to loan us part of the down payment. When it’s a decision between funding our retirement and funding our parent’s retirement, I am sure you all agree with me that we should pay back our parents. So that’s what we are going to do.
The 4-0-1-(k) story
I had planned to write about our budget analysis today. But I changed my mind since I had to think about our 401(k) investment yesterday evening.
After a really long period of requests to my husband to sign up for 401(k) at work, he did it yesterday. We had to make decisions about where we wanted to invest the contributions. His employer uses Fidelity. The website was simple and very user friendly. We could get around to do what we wanted in the first few minutes. I think they had a good mix of different mutual funds to choose from. The mutual fund categories that we had to choose from are large blend, large growth, large value, mid-cap blend, small blend, small growth, moderate allocation, conservative allocation and foreign large value. There were 2 bonds.
When I saw that we can invest our contributions and the company’s contributions in different ways, I immediately came to the conclusion that I would choose aggressive investing strategies for the company’s contributions and safe investing strategies for our contributions.
The first thing I did was google for ‘401(k)’ and the following are some of the links that I read:
1. How 401(k) Plans Work
2. About 401K Plans
3. 401(k) Articles
From what I read, there were 2 things that I wanted to remember while choosing my mutual funds: diversification, loads and expense ratios.
We made a list of all the mutual funds available. We gathered information about their expense ratios, investment splits(% of investment in cash, stocks etc), morningstar risk and return categories and their top 10 holdings for each of the funds. The list was:
1. Fidelity Contrafund
2. Fidelity Equity-Income
3. Fidelity Spartan U.S. Equity Index Inv
4. T. Rowe Price Growth Stock
5. T. Rowe Price Personal Strat Growth
6. Vanguard Mid Capitalization Index Ins
7. Lord Abbett Small-Cap Value I
8. Vanguard Explorer Adm
9. Vanguard Small Cap Index Instl
10. Morgan Stanley Inst International EqA
11. T. Rowe Price Personal Strat Balanced
12. T. Rowe Price Personal Strat Income
From the available mutual fund categories, we decided that the company’s contribution would be split like below:
Large cap mutual funds 55%
Small cap mutual funds 15%
International mutual funds 15%
Bonds 15%
From our list of mutual funds, we eliminated those that does not belong to one of these categories. None of the mutual fund options that were offered by fidelity had any loads. So didn’t have to make up my mind there.
Next we compared the expense ratios of the mutual funds in each category. Except in one category, I picked the ones with the lowest expense ratio. The exception was because the mutual fund’s top 10 holdings had Google and Apple. Though the expense ratio of this fund was higher by 0.2%, I was okay with that. So here we go, the list of the mutual funds we picked and the % contributions:
1. Morgan Stanley Inst International EqA 15%
2. Fidelity Spartan U.S. Equity Index Inv 25%
3. Fidelity Contrafund 30%
4. Lord Abbett Small-Cap Value I 5%
5. Vanguard Explorer Adm 10%
6. Bonds 15%
Do you think this is a good choice? Please share your 401(k) experiences.
