Q: My wife and I have just become credit card debt free and really want to focus on saving for the future. We have a monthly income of about $6,800, which can vary by about $1,000 since I work on commission. We have about $3,500 a month in household expenses. I am 34 with $3,500 in a Roth Vanguard target date retirement fund. She is 31 with about $15,000 in her company 401K. She currently saves 4% to get the full company match of 2%. Which is also a target date fund. Are the Target date funds too conservative, and do you have any suggestions on where to go from here? I would like to get into a real-estate investment property. I am a big do-it-yourself guy, and I think it would be something I’m good at. However, I’m not sure how I should balance the savings for the first investment property and retirement. Also, should we open her a Roth account, and fully fund both before saving for an investment property, or, is this complicated enough that I need to sit down with you. I’m just not sure I have enough saved to make the cost of a financial planner worth while.
A: Congratulations on paying off your credit card debt. That will help you greatly in reaching your retirement savings goals provided you execute a disciplined savings plan.
If you and your wife both have qualified deferred contribution plans through your work (ie 401k, 403b, 457, etc), you should maximize those to take advantage of the tax deferred savings and tax deferred growth while lowering your taxable income.
Max personal contributions for 2014 are $17,500 per participant if your under 50 and $23,000 if you are 50 or older in 2014.
Target date funds are a great mechanism for saving and your annual rebalance is included in the cost of the funds. They range from aggressive to conservative allocations depending on the target date you pick. A Target 2045 fund is going to be considerably more aggressive than a Target 2020 fund, but each fund option offered by your plan administrator should have a detailed breakdown on the investment allocation. Outside of target funds most plans offer a mix of Large Cap, Mid Cap, Small Cap and International Stock funds, Sector funds and Bond Funds so you can develop your own allocation based on your risk appetite.
Investing in individual investment properties can be very risky and require a great deal of up front capital. There are Real Estate investment funds available such as REITs, Real Estate and Mortgage Backed Securities funds that offer exposure to a more diversified basket of real estate assets when compared to the prospect of investing in an individual investment property. Also, these funds are considerably more liquid than an individual property might be.
If you are just starting to build a nest egg, I would strongly urge you to maximize your deferred savings and deferred growth options first such as a 401K, IRA or Roth (depending on your MAGI).
I would urge you to talk to multiple investors who have experience in investing in investment properties before you head down that path.