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For my target retirement fund should I go with a pre-tax or roth allocation? How aggressive should I be with my 401K?

I am 25 years old and just started with this job a few months ago. My company will match 25% of the 4% that I contribute after my first full year of employment. I currently live at home but will be moving into a condo within the next six months, I have no car payments, and I have around $14,000 in school loans. When I retire I want to be comfortable with my finances when I am around 62 years old. I currently make around $40,000 a year. I don't know very much about finances which is why I have decided to go with a target fund, but I do not know how "aggressive" I should be when it comes to my financial plans.

Sep 15, 2014 by Rebecca from Manchester, CT in  |  Flag
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Layton Jacob Cox Level 11

Hi Rebecca,

Congratulations. Not only are you fully employed, but you are getting your own place and you are starting to save for retirement. You give Millennials a good name.

A Roth will be your best bet. Ask any expert if they believe taxes will go up in the next 40 years. They are going to say yes. You are also at the start of your earning curve, you will eventually get paid more than $40k a year, so paying the taxes on this money now is the best idea you have.

A target date fund is a great option for 95% of America until something better comes out. Pick the Target 2050 one.

4% is not enough for you to save and reach retirement on time. At this time in your life you are probably not use to living a lavish lifestyle and pumping credit cards full of debt. I suggest you save 10%, aka $4000 into your 401(k). In order to accomplish this goal, you will have to set a strict budget and work on your student loan debts as well.

You are doing a great job. Time is on your side in this battle with retirement. Starting young is the best thing you can do, and you are doing it. The more you save now, the less you have to save in retirement. I love working with people like you and if you are ever looking for more specific asset allocation or advice; Feel free to reach out to me.

Congrats again, you are going great.

Comment   |  Flag   |  Sep 16, 2014 from Tucson, AZ

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You're most likely in the 15% marginal tax rate, so a Roth could be a good option for you. If you suspect that your tax rate will be higher in retirement then Roth's are usually a good idea.

Check and see if your 401(k) plan provider provides any investor education. The information (and potentially calculators) they provide could help you decide how to invest your money.

There is nothing wrong with a Target Date Fund if you receive no guidance or don't want to monitor your investments. If you want to stop working around age 62, then one option would be to select the fund with a target date closest to the date when you turn 62.

Comment   |  Flag   |  Sep 15, 2014 from Alexandria, VA

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I concur with Curt.

Target Date Funds are designed to be more aggressive in the earlier years, and gradually become more conservative over time. So in affect, Target Date Funds decide the level of risk tolerance for you. Since you are 25 and want to retire by 62, that gives you 37 working years ahead of you. So if you were to go with a Target Date Fund, you're likely to choose one that targets 2050 or 2055. You should review the prospectus on the fund to review the asset allocation and fees. Pay attention to the expense ratios and get comfortable that they are reasonable. And of course, over time, you should review and adjust your investment(s).

Comment   |  Flag   |  Sep 15, 2014 from Newport Beach, CA

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I generally agree with Keith and Curt. Target dates funds can be a great solution for those who are unsure about picking their own investments. They should offer you a diversified mix of investments suitable for your age and time horizon. Said simply, target date funds are designed for those who don't want to do it themselves (or don't know how to do it themselves). As for ROTH vs. Traditional, I personally love ROTH. Yeah, you might not save a buck or two on taxes now as you would with a traditional 401k, but you'll be thrilled come 60 and beyond when you all the grow comes out tax free (keep in mind ROTH is not always the best option, and traditional is not always the best option. A more detailed analysis is clearly beyond the scope of this message board). Best of luck, and congrats on getting started early.

Comment   |  Flag   |  Sep 15, 2014 from Exton, PA

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