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The scuttlebutt I've heard is that, if an actively managed portfolio is your thing, better to buy stocks in international companies which are generally less efficient that US companies, and where therefore a fund manager's insights/insider info/instincts or whatever might get you an edge.

Stateside, if Warren Buffet says to just buy an S&P Index fund and let the market do it's thing for 40 years, I believe him.

Michael wrote: Also with a Roth Ira and 401k you can withdraw for emergencies. Generally, tax deferred is better, but there are cases where this isn't always true.

I think you're saying having emergency cash available for withdraw is better on a tax deferred account than a taxed account, is that true?

Because, assuming status quo on taxes, the taxed Roth is probably better in the long run for most people to contribute to.

G. Keenan wrote:The scuttlebutt I've heard is that, if an actively managed portfolio is your thing, better to buy stocks in international companies which are generally less efficient that US companies, and where therefore a fund manager's insights/insider info/instincts or whatever might get you an edge.

Stateside, if Warren Buffet says to just buy an S&P Index fund and let the market do it's thing for 40 years, I believe him.

I've heard this about the bond market funds as well. I'm not sure how true it is. I will say some fund comparisons may have sample size issues and international is most likely getting more efficient.

vinsanity wrote:

Michael wrote: Also with a Roth Ira and 401k you can withdraw for emergencies. Generally, tax deferred is better, but there are cases where this isn't always true.

I think you're saying having emergency cash available for withdraw is better on a tax deferred account than a taxed account, is that true?

Because, assuming status quo on taxes, the taxed Roth is probably better in the long run for most people to contribute to.

A lot of people consider their Roth as an emergency fund. I think AD (?) does this. Personally, I keep around 3 months of expenses in a cash interest-barring account.

To be candid, I think the Roth approach is most likely better for most people, but I like having the cash available for non-emergency reasons as well. If you're fortunate enough to hit a solid number with your taxable/roth account keeping cash is really more about liquidity than emergencies.

The one argument against a Roth as an emergency fund is if you're buying equities a major swing in the market could seriously impact your ability to cushion yourself from an emergency. Therefore, in your Roth/emergency fund you'll most likely want to buy something like a low risk bond fund, which can be a part of your 3 fund portfolio.

Like most financial questions it's good to have a solid framework, but everyone's situation is unique and there isn't a one size fits all solution.

Michael wrote:The one argument against a Roth as an emergency fund is if you're buying equities a major swing in the market could seriously impact your ability to cushion yourself from an emergency. Therefore, in your Roth/emergency fund you'll most likely want to buy something like a low risk bond fund, which can be a part of your 3 fund portfolio.

Like most financial questions it's good to have a solid framework, but everyone's situation is unique and there isn't a one size fits all solution.

That makes some sense. I personally prefer the Roth as my primary retirement account, while feasible. In order, for me, it was 401k match -> Roth IRA -> fully fund 401k since the Roth's growth is tax free and I'm relatively young, it's an awfully powerful tool.

The last sentence really is the truth.

I am backdooring a Roth right now along with two 401K and a 457

I want to quit working at 55

Woulda been nice to start in my 20s. Oh well.

vinsanity wrote:

Michael wrote:The one argument against a Roth as an emergency fund is if you're buying equities a major swing in the market could seriously impact your ability to cushion yourself from an emergency. Therefore, in your Roth/emergency fund you'll most likely want to buy something like a low risk bond fund, which can be a part of your 3 fund portfolio.

Like most financial questions it's good to have a solid framework, but everyone's situation is unique and there isn't a one size fits all solution.

That makes some sense. I personally prefer the Roth as my primary retirement account, while feasible. In order, for me, it was 401k match -> Roth IRA -> fully fund 401k since the Roth's growth is tax free and I'm relatively young, it's an awfully powerful tool.

The last sentence really is the truth.

That's a fairly standard order of investing operations. In the other thread I posted an expanded order of investing operations (see below).

One aspect to 401K investing I prefer over a Roth is psychological. With a 401k money is automatically so your lifestyle adjusts to it. Contributing to a Roth may feel more optional to people and they might not do it.

Here's a general the order of operations for savings, I think:

1. Establish an emergency fund to your satisfaction (at least 3 mos of expenses?)
2. Contribute to your 401k up to any company match
3. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
4. Max HSA (if applicable)
5. Max Traditional IRA or Roth (or backdoor Roth) based on income level
6. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #5 and #6)
7. Fund mega backdoor Roth if applicable
8. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
9. Invest in a taxable account with any extra.

Individuals will have different ordering based on their specific needs, but I think this is a reasonable starting point. An example of not using this ordering is if you need to access your money in a few years. If that's the case than you don't want to invest in a 401k.

I might also switch 8 and 9.

Here's where I found the ordering with additional details.

Michael wrote:

vinsanity wrote:

Michael wrote:The one argument against a Roth as an emergency fund is if you're buying equities a major swing in the market could seriously impact your ability to cushion yourself from an emergency. Therefore, in your Roth/emergency fund you'll most likely want to buy something like a low risk bond fund, which can be a part of your 3 fund portfolio.

Like most financial questions it's good to have a solid framework, but everyone's situation is unique and there isn't a one size fits all solution.

That makes some sense. I personally prefer the Roth as my primary retirement account, while feasible. In order, for me, it was 401k match -> Roth IRA -> fully fund 401k since the Roth's growth is tax free and I'm relatively young, it's an awfully powerful tool.

The last sentence really is the truth.

That's a fairly standard order of investing operations. In the other thread I posted an expanded order of investing operations (see below).

One aspect to 401K investing I prefer over a Roth is psychological. With a 401k money is automatically adjusted so your lifestyle adjusts to it. Contributing to a Roth may feel more optional to most people and they might not do it.

Here's a general the order of operations for savings, I think:

1. Establish an emergency fund to your satisfaction (at least 3 mos of expenses?)
2. Contribute to your 401k up to any company match
3. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
4. Max HSA (if applicable)
5. Max Traditional IRA or Roth (or backdoor Roth) based on income level
6. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #5 and #6)
7. Fund mega backdoor Roth if applicable
8. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
9. Invest in a taxable account with any extra.

Individuals will have different ordering based on their specific needs, but I think this is a reasonable starting point. An example of not using this ordering is if you need to access your money in a few years. If that's the case than you don't want to invest in a 401k.

I might also switch 8 and 9.

Here's where I found the ordering with additional details.

What's the deal with the treasury yield? Why is that important on interest? I assume it's because that's the easy safe investment and if you can get more than that from other investments you should take advantage of those rather than pay down debt? So for example I bought some land last year, 3% loan. Treasury is 2.8% so I should be investing rather than paying extra on the loan?

Good question. The treasury yield is basically the rate of profit with virtually no risk and is linked to interest rates and inflation.

For example, let's say you bought (buying debt) a corporate bond (selling debt) that pays 5% for $1000, which means you'll receive $1050 after 1 year. And let's assume that's currently better than 2% the t-note is paying. Therefore, the market is saying the price of the risk to buy that corporate bond debt (some risk) over a t-note (no risk) is 3% (5-2=3%). Next, let's say the t-bill rate shot up to 5% in one day (that would be crazy in this environment, but whatever). That would mean the value of the corporate bond you own decreases because that 5% rate on the corporate bond doesn't look so hot when someone can buy a t-bill at the same rate with virtually no risk. Therefore, if you tried to sell your corporate bond you'd have to take less than the $1000 dollars you paid for it to get the rate of return closer to 8%. I'm too lazy to include the math for the sell price, but it exists.

Now let's take the opposite side and assume you are selling debt, like getting a mortgage or personal loan from a bank. In this example let's assume you have a mortgage that has an interest rate of 4% a year and currently the t-bill is paying 10%. In that scenario you have a very valuable piece of debt. You are being loaned money way below returns without risk. In other words, the bank would rather use the money they loaned you to someone else to get a higher rate. On the flip side, if the t-bill went down from 2% to 1% the value of your loan decreases and is bad for you.

So in the investing order list I posted above you can't give a flat interest guideline to determine what debt you should pay off. If you have a personal loan of 9% interest you can only judge its worth against the t-bill. For example, if the t-bill is 10% you have a really nice piece of debt. If the t-bill is 1% you would want to get rid of it.

As a side note - earlier I said a mortgage is a nice portfolio hedge against inflation and hopefully that makes sense now. When inflation/t-bill rises the value of debt goes down. So if you have bonds in your portfolio they'd take a hit, but your mortgage would become more valuable.

I hope this makes sense. Feel free to ask questions.

Michael wrote:A lot of people consider their Roth as an emergency fund. I think AD (?) does this. Personally, I keep around 3 months of expenses in a cash interest-barring account.

To clarify, I also have a straightforward bank savings account emergency fund in addition to the Roth.

Roth withdrawals would not be my first choice if I needed cash. This is because, as you mention, the retirement investments in your Roth may take losses so you end up with less available than you thought and, also because the maximum annual deposit means you may not be able to put your withdrawals back, so there is an additional long-term opportunity cost. That said, to me, the option to make tax and penalty free withdrawals of principle, should the need arise, is worth a lot in the case of a major health/employment or other crisis, which are not crazy black swan scenarios.

This discussion and related reading has me softening a bit about extra contributions to 401k's. I would just caution that while there are ways to get at that money before retirement, they are highly constrained. If you remain employed, they are also subject to approval by your plan's administrator -- it's not enough to decide for yourself that you are willing to pay penalties. If you think you might need that money, don't just lock it up with the hazy sense that it will be available if you need it.

Edit: Not investing in retirement accounts out of a hazy fear of needing the money early is also a mistake, of course.

Edit2: So, I guess my personal order would be something like:

1. The not paycheck to paycheck fund covering ordinary emergencies like car repairs
2. Contribute to your 401k up to any company match
3. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
4. Emergency fund
5. Some but probably not max HSA (if applicable)
6. Max Traditional IRA or Roth (or backdoor Roth) based on income level
7. A larger emergency fund
8. Extra but probably not max 401k
9. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
10. Some split of 401k and taxable account with any extra.