457 Account... What to do???

[ambellamy]

Some background: I am 100% debt free, sans a new mortgage on a condo I bought in Sept of 2009. I'm 24, engaged, and will be married this year to an awesome guy (also will be debt free by the wedding)!

I have a seperate Roth IRA that I put $5,000 a year into. Right now its got about $19,000 in it and its all in CD's and Savings accounts at ING. (It was in mutual funds, but the fees where so high i switched it from sharebuilder to ING's fee free savings/cd account while I learned more about mutual funds--- missed out on the market rebound, but that's one mistake I had to learn. At least i didn't loose money.) I'll be opening a new Roth IRA at Vanguard and investing in a target date account because the fees are really low and it will adjust along the way and give me some good market exposure. I'm planning on keeping the ING Roth Ira, but i'd eventually like the 2 accounts to be divided where 25% is in Cd's and Savings, and 75% is in the Vanguard account, and each year i get older bump 1% to savings and 1% less to investments. (100- age= what should be in cd's).

I currently work for local government with a pension (I pay part of my salary for it, currently 3% and the City pays 5%-- next year we will pay 4%, 4% etc and it could get to the point where we fully fund it-- and i'm okay with that so lets not turn this into crazy land and a horrible pension thread.) If I work till i'm 55-56, i'll have 38 years or service (the max you can have since i've been with the city some years already... so there isn't a point in staying here since the pension won't go up.) It would be worth about $37,943 a year with my current salary figures plugged into it... more if i ever get a promotion.. But with everything that's going on, I don't want to "bank" on my pension being like this forever... They can change the formula and i don't want to miss out on investing years because of something like that. So I was thinking about investing outside of my little Roth IRA (or is that overkill? I make around 43,000 before taxes???).

At my work, we have 2 options for a 457 account Nationwide or ICMA-RC.

I used to have a 401-a account at ICMA-RC (but the city doesn't allow us or themselves to contribute to it anymore)... so the $1000 is just sitting there to grow, but the fees are 1.02% for a target date account... and i don't know if that's bad... its VPRKX....

At Nationwide, I can invest in Vanguard Institutional Index Instl and the fees are .05% and its stock based... but i'm not sure if that fund is better than say Fidelity Contrafund with fees 1.02% but a higher morning star rating.

Advice would be awesome. I'm wearing the financial pants in our soon to be new household and i want to make my fiance proud. We can pay all of our bills and obligations on my income alone, so we are planning on using my fiances income for regular savings, paying down the condo, and fun money after we put 10% into an account to start his first Roth IRA.

[phil5185]

IMO you are correct to use the Target Funds (probably 2050) for your wealth building. I would move the $19k there too - and avoid the CDs and ING altogether. It's important at your age to utilize equities for the 30 yr growth period that most of us have. Then, at about age 55, start the gradual transition from wealth building to wealth preservation.

Here are some numbers - $10,000/yr (two roths) invested at 11%/yr will be $2,200,000 in 30 yrs. But if you used CDs it will be about $350,000. And that is why it is so important to use 11% products while you are young - two wage earners cannot save their way to wealth ($350k is not wealthy). But those same two earners can invest their way to $2.2M and beyond.

Don't prepay the condo, keep the loan for full term and invest your own cash in better things. It would be a shame to derail a $2M plan by applying that money to prepaying a $150k condo.

The two roths, a 457, and a traditional taxable non-retirement fund at Vanguard lets you add as much as you want - ie, if $10k/yr = $2.2M, then $20k/yr = $4.4M. You guys can select your goal based on that. And then have that amount auto-invested every payday - and live on what's left over. (Most people get that backwards - and there is never anything leftover to invest).

You two could become very wealthy unless of course your fiance drives late-model cars, that is the most common cause of financial failure in families.

[Deleted]

Government 457s are fantastic! They work like 401ks only better since when you separate from service you can access that money for free w/o the 10% penalty. DH and I are lucky enough to be retiring next summer (at ages 53 and 50) and we will be cashing my 457 in as a way of bridging retirement until we can access his 401k when he's 59 1/2.

I also have Nationwide and have my money divided between Vanguard S&P 500 and the Oppenheimer International fund. But you really have to look at both soon to be DH's portfolio as well as your own and review your situation holistically. Start doing some reading; favorites of mine are The Millionaire Next Door, a Random Walk Down Wall Street and The Intelligent Asset Allocator.

I don't know how big your City is but unless it's really big there's a good chance you will want to change jobs at some point. Fortunately many cities participate in PERS so you can have some flexibility. When I was working in the SF Bay Area our County did not participate in PERS but the system did have reciprocity. Also if you're either a Planner or Engineer you may also have an opportunity to work for CalTrans (not necessarily for the money but perhaps for the professional leg up), as well as local Transit Districts.

If you do transfer to a private company in the future, don't let anyone talk you into rolling over your 457 into an IRA-the rules are very different.

Good luck!

[ambellamy]

Thanks for the replies everyone.

so my question now is how to judge funds for a 457... is it better to go with a 4 or 5 morning star fund with higher fees, or a 3 or 4 star fund with less fees?

[Deleted]

I'd be more focused on your asset allocation, then the fees.

In general the fees for a no brainer SP 500 index should be cheap, while something more actively managed like the smaller cap and International funds are going to be a little higher.

Since I'm not an active trader and expect to hold stuff for a while, I go to morningstar and take a look at the 10 year rate of return and compare how a fund is doing compared to its peers, then look at cost.

hope that helps.

[phil5185]

is it better to go with a 4 or 5 morning star fund with higher fees, or a 3 or 4 star fund with less fees?

I wouldn't pay much attn to the 'stars' - the 'stars' rate the fund managers - I avoid managed funds and use unmanaged index funds or ETFs, that is a pure investment unaffected by managers. The fees are usu sally small enough to be rounding errors - ie, 1/10 of a percent.

The winner of the last period of choice (1-yr, 3-yr, 5-yr, 10-yr) turns out to be the loser of the next period. And Morningstar must base their 'stars' on history, not speculation of the future.

[ambellamy]

If i end up opening the 457 account with ICMA-RC, then I know I should go with the target date account.

if I go with Nationwide, how should I break up my investments between Large cap, mid cap, small cap, & international stocks or balanced and bond funds? (I don't like their assett alocation funds)

[ambellamy]

NVM... I decided when my fiance and I are finally all setted in, i'll be opening the account at ICMA-RC and continuing with my Target date account.

It's 4 stars, has a small 1% yield that basically eliminates the fees, and it has been performing well for me in the 401a... and its simple. No rebalancing needed.

[phil5185]

continuing with my Target date account

Good - I looked up their Milestone2045. About 5% bonds, 95% stocks. The stocks are well allocated - Dividend, Growth, Small/mid caps, & Int'l. The int'l is 19% of the allocation, looks like a good choice.

[dancinmama]

Feb 19, 2011 3:18:51 GMT -5 @bonnap said:

Government 457s are fantastic! They work like 401ks only better since when you separate from service you can access that money for free w/o the 10% penalty. DH and I are lucky enough to be retiring next summer (at ages 53 and 50) and we will be cashing my 457 in as a way of bridging retirement until we can access his 401k when he's 59 1/2.

Good luck!

If your DH will be 55 when he retires (separates) from his company, he can access his 401k penalty free when retires. Of course income taxes would have to be paid on anything that is withdrawn.

[Deleted]

Dancinmama,

If you re read my post that you quoted, DH and I will be 53 and 50 next summer. So no he won't be retiring at at 55 (or later) and so MUST wait until age 59.5 to access his 401k without a penalty.

Government 457s can be a sweet deal for folks who want to retire early. It can be a bad deal for those who might be tempted to cash it in if they separate from service before retirement.