I'm in a profession that doesn't start earning money until my mid 30's. I know I'm behind & need to catch up. My earning potential is very good but I have missed out on 15 years of savings. Right now I'm maxing out my 401k with a generous match, funding my wife & my IRA's, & putting away away in a general index fund account, & maxing out my HSA. My wife doesn't work (stays at home with the kids). Is there anything that I'm missing out on? Any advice?

529 plans for the kids?

https://www.whitecoatinvestor.com/

529's are well stocked. I just want to make sure I'm doing everything I need for myself.

What is your asset allocation in your 401K and IRAs? It's correct to have them maxed out, but you still need to pay attention to how they are invested.

20% to 30% Bond index
30% - 40% Large Cap index
~25% Intl index
~20% Small cap index
As things grow, add an REIT index for inflation protection.

Vanguard has all those in mutual fund and ETF formats.

Be aware of taxes. If you think your income bracket will be lower in retirement, then keep dividend producing securities (Bonds) in the 401K and growth securities in your brokerage accounts. If it's all for retirement in your plan, then keep both 401K and brokerage combined in your allocation strategy.

Set up a spreadsheet for your net worth and create three pools of money.
#1 -- Emergency fund -- Decide what you think you need and allocate it conservatively. Cash, ST bond funds, etc.
#2 -- Life goals -- Kid's college, new house, career change etc.
#3 -- Long term goals -- 30 years of retirement more than 20 years away. Invest as aggressively as you feel comfortable. Still keep ~20% bonds for stability and keep it diversified. Don't forget that international and small company funds are a good way to pick up uncorrelated risk and return.

Combine your totals in the spreadsheet and you should be able to figure out what your overall allocation should be based on the timeframe that you need each bucket of money. Just make sure that your emergency fund (#1) is outside your retirement accounts. I think it's generally OK to keep #2 & #3 combined in concept as long as the total outside the retirement accounts can support your goals in #2. You will have to re-allocate the money in your 401k + IRAs as you spend those bigger amounts (house, college, etc) anyway.

tldr: Figure out an allocation strategy that includes your life goals. http://money.cnn.com/tools/assetallocwizard/assetallocwizard.html

That is way too much money in bonds. He's young, he can afford to be a lot more aggressive.

Morning Ags,

I've been lurking the B&I boards for awhile now as I like to read perspectives on investing. I notice the recommendation to max out 401K and IRA quite often and was wondering, is this more for safe guard? Obviously more is better when it comes to money, but is this really necessary to be able to retire or is this for more lofty retirement plans, i.e. Traveling the world and such?

Theres a Spirit said:

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Morning Ags,

I've been lurking the B&I boards for awhile now as I like to read perspectives on investing. I notice the recommendation to max out 401K and IRA quite often and was wondering, is this more for safe guard? Obviously more is better when it comes to money, but is this really necessary to be able to retire or is this for more lofty retirement plans, i.e. Traveling the world and such?

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Maxing IRA and then 401k (if you can) is more about taking advantage of taxes. If your employer matches your 401k contributions then that is basically free money. As with the IRA, you don't have to pay capital gain tax on your investments. There are other advantages too.

Also I suggest your read The Millionaire Next Door if investing perspectives are interesting to you. The book changed my life.

This is just internet forum advice. You have to tailor it to your own situation. I just want to pass on what I know to whoever wants to listen. I'm not an investment professional, but I haven't met an investment professional that I trust more than myself.

On the Bond mix topic, I tried to explain the "why" behind it so that it could be tailored. For that long term bucket, I don't think that 20% bonds is unreasonable. You need something (like bonds, real estate, emerging markets) that is statiscally uncorrelated to the stocks to balance out the dips. The current crop of investors hasn't lived through a 2008 or 2002 dip and needs to be reminded.

Here's some math to help with the target on how much to put away. 15% is sort of a magic number to use as a starting point for an illustration. If you make the same amount every year for your lifetime and start investing at 20 to put away 15% per year at 6% per year, you would be able to withdraw that salary at 65 at a sustainable rate (3% per year --i.e. living off the yields).

Set up a recursive spreadsheet with your own career plan. It's not that hard and very revealing.

Key assumptions that you have to adjust for:

• You won't make the same amount of money every year. You will probably make a lot less early in your career than later. The math works out to a sort of weighted average of your salary trend, but due to compunding, it's not the time-weighted average of your earnings. The early years are more heavily weighted. So, you probably want more than the "average" salary delivered by the illustration.

Conclusions: #1 Start early. #2 Extra dollars early count more than later. Even if you start early, you will still be behind, so #3 take advantage of windfalls and catchup opportunities as the come along.

• The 6% per year is a key input and needs to be discussed further. First, it needs to be a "real" rate of return (i.e in excess of inflation), so 6% needs to be a 9% average on your bank statement if inflation is 3%. That starting to be a pretty big number. Also, as you near retirement, you will need to back off on how aggressively you are invested. Lastly, gains on your smaller "young" portfolio are amplified over time by compunding.
Conclusion: Early on, you need to be aggressively invested to account for inflation and enhance compounding.

Aggressive does not mean undiversified as in the "more stocks" argument above, but generally, the market pays for risk and stocks are riskier than bonds. Higher risk investments are expected to earn higher returns, but in turn, you stand to lose more. So, use statistics to your advantage. Search out "uncorrelated" risks in your investments so that you reap the advantage of added risk but the dips and peaks level each other out.

Spread that risk among your portfolio mix. Investigate putting a portion of your stock mix into leveraged index funds (correlated market risk unfortunately). Investigate putting a portion of your bond mix into High Yield funds (adds company risk). Allocate a portion to Emerging Markets in stocks or bonds (adds uncorrelated market risk).

If we're recommending books, look into "The Investor's Manifesto" by William Berstein.

Bernstein does an amazing job of starting from the beginning if you've never invested, but he doesn't dumb it down. As an engineer, it's the only investment book I've read that has challenged my math skills and despite having a full semester-long investment finance class on the efficient frontier, I never really understood it until I read this book.

Cool thanks for the next read.

Employer offers a Roth 401K and matches up to 4% of salary so I definitely take full advantage of that and then some. Between my wife and I, we contribute 20-25% of take home not including match to our Roth 401ks..

In regards to the tax savings, this seems to be another subject people differ on. Many here suggest the Roth options due to anticipated higher taxes during retirement. At what point do we weigh deferring taxes in order to gain present tax saving advantages?