I read about the SPY ETF here on SE ( Where should my money go next: savings, investments, retirement, or my mortgage? ) and I am curious about JoeTaxpayer's comment specifically on the idea of using the SPY ETF as an investment vehicle for retirement, in the case of a young investor with a relatively high income, high marginal tax rate, and a company 401k which has a poor match. I would like more information about this use (or for someone to tell me that I have misunderstood the logic presented in the above post by JoeTaxpayer).
About Me: 28 years old, single Expected gross income (before any deductions, pre or post tax) for 2012 - $100k. $15k student loans, car loan ~$2k, no other debt including credit cards $11k in the Vanguard Windsor II fund Current 401k balance $5k
Note: this puts me in the 28% marginal tax bracket. I think with a $5k standard deduction I would need to contribute $10k to get me right on the edge of the 25% bracket, if I understand it correctly (do I?)
About my employer's 401k plan:
Plan profile (Fidelity Freedom 2050) http://quote.morningstar.com/fund/chart.aspx?t=FFFHX®ion=USA&culture=en-US
"The company matches 10% of an employee's contribution on the first 10% of income that an employee contributes, on a per payroll basis."
In practice this means the best I can get (I think), is to contribute 10% of my income (which is a little challenging for me to do right now, given other financial goals such as a down payment on a home in 3-5 years), and I only get 10% of that as a match.
This match is also on a vesting scale, I am fully vested in 10 years.
The company plan has an expense ratio of 0.8%. Morningstar rates it as three stars.
My "great" idea which I need you all to comment on: (note: when I say "great", I'm saying it tongue in cheek...)
Invest in SPY as a long term savings vehicle, contributing 10% of my income on a TBD (but at least every quarter) basis (for cost averaging), to be used only for the following circumstances:
- Down payment on a house in 3-5 years (potential... depending on the market, I may stay a renter :D)
- True emergencies that cannot be handled by a 6-12mo liquid expenses fund
I currently have $5k in my employer's 401k, I would only contribute to SPY in this scenario, not sure what to do with the current 401k balance.
Expense ratios: my 401k has 0.8%, SPY has an expense ratio of 0.1% (source https://www.spdrs.com/product/fund.seam?ticker=spy) but it could go up (which is ambiguous).
- Is this a good idea? Is it really risky? What are the pros and cons?
- Is it a bad idea to hold both long term savings and retirement in the same investment vehicle, especially one pegged to the US stock market?
- Is buying SPY a "set it and forget it" sort of deal, or would I need to rebalance, selling some of SPY and reinvesting in a safer vehicle like bonds over time?
- I don't know ANYTHING about ETFs. Things to consider/know/read?
- My company plan is "retirement goal" focused, which, according to Fidelity, means that the asset allocation becomes more conservative over time and switches to an "income fund" after the retirement target date (2050). Would I need to rebalance over time if holding SPY?
- I'm pretty sure that contributing pretax to 401k is a good idea because I won't be in the 28% tax bracket when I retire. How are the benefits of investing in SPY outweigh paying taxes up front, or do they not?
- Please comment on anything else you think I am missing
Many thanks in advance, I will monitor this question closely so that I can provide updates and answer requests for further information in a timely manner.