Beginner questions regarding target date funds/tax advantaged accounts

Investing
#1

New to FIRE, eager to learn! Just finished reading The Simple Path to Wealth and Quit Like A Millionaire. Now trying to put that information into action. I’m just starting out, so I have some beginner questions on my current tax advantaged accounts.

I’m 31yo, earning ~140k per year.

Bank accounts: ~80k

Student debt: ~29k (interest is <2% and I pay ~1k/month)

401k: ~30k (run by Vanguard, and is an employer based target date fund…I think? it’s called [employer name] Retirement Path 2055 Fund Institutional Shares and it has a gross expense ratio of 0.44%)

I selected the fund 4 years ago when I started working and had no idea what any of this meant. I also have barely been contributing to the 401k because I was building an emergency fund/focused on paying off student loans/fearful of the unknown. Now, I know a bit better and I want to use this extra cash for investing.

Questions:

  1. Obviously the first step is to max out my 401k. Is it ok to continue doing this with the target date fund? Is it even a target date fund? Is an expense ratio of 0.44% too high? Or should I be picking out my own index funds like VTSAX?

  2. With my income, I’m not eligible for the Roth IRA. I suppose the next step is to max out a Traditional IRA and invest in index funds?

  3. After the 401k and traditional IRA, I still have extra cash I want to invest. That means opening up a regular, nontax advantaged account and putting however much money in there, correct?

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#2

Welcome @tmfire11!

Hm… that 0.44% is really high for a Vanguard Target Date Fund. Vanguard’s funds are around 0.15% at the highest. I suspect your account is through Vanguard but the target date fund isn’t… which is unfortunate, but not much you can do. When picking investment options from an employer sponsored account, I choose from the first available option in this priority order:

  1. Target date index fund (expense ratio < 0.25%)
  2. 3-fund portfolio of index funds (expense ratios < 0.25%)
  3. Target date fund
  4. 3-4 diversified mutual fund

Since your target date doesn’t qualify for #1, I probably would look into constructing your own 3-fund portfolio, assuming there are low-fee index fund options. If there aren’t, then you’re right where you need to be at priority 3.

I would pay off your student debt today. Think about it in the reverse. What if you had $51K in the bank and $0 debt. Would you go borrow $29K at 2% interest so you can lovingly stare at $80K in the bank and make $1K/month payments on the loan? Get the debt out of your life, never borrow again, then vector those payments into investing. That’s called building serious wealth (with minimal stress).

Regarding the IRA, I’d look into a backdoor Roth IRA. Take a look at this post for how to prioritize filling up your accounts. With your kind of income, you’ll likely be on step 5 of the the accounts.

As to what you should invest in, my preference is generally target date index funds for these reasons:

Or, a very close second best is a three fund portfolio:

Way to go on the huge income. Keep it up!

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#3

@Jeremy Thank you so much for your thorough reply! I’ve been reading through the forums and I have to say that you are so helpful, supportive and welcoming! Awesome work, Jeremy!

I’m researching the other funds that are options in my 401k, and it appears (among many others) that “Vanguard Institutional Total Stock Market Index Trust” (there’s no ticker symbol…because it’s an institutional version of VTSMX? Is that significant in any way other than name difference?) and “Vanguard Institutional Total Bond Market Index Trust” are available to me. There are no international market index funds available. With that, I guess I’m planning to move 100% of my 401k into those two index funds…which an allocation of majority held in stocks.

I haven’t paid the debt off yet for a few reasons–low interest and helping my credit score (which is high 700s/low 800s). Also, I want to keep ~40-50k cash on hand as an emergency fund, and I was thinking of using the remaining 30-40k to immediately invest. Wouldn’t the return on that immediate large investment be better than entirely paying off my low interest debt, returning back at my emergency fund level and then incrementally investing afterwards?

#4

Sweet, doing something like 90/10 Total Stock Market/Total Bond Market is amazing. I suspect the total stock market is VITNX. It’s just a lower fee version of VTSAX that you have access to since it’s a group discount through your employer.

I still think you should pay off the debt. Your credit score is/will be fine. Don’t focus on your credit score, focus on your net worth score.

Some more reasons why you should pay off all your debt before you invest.

Imagine it… You can have NO payments. No bank in your life. 100% of your income for YOU and start plowing into investing, risk free (i.e. if the market crashes you’re not gonna have your loans still coming after you)

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