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Upon graduating in the early 1990s with a degree in English, folks would routinely ask: “Are you gonna teach?” That wasn’t in my plan, though. Instead, I landed an office job as a writer at a major magazine. The pay wasn’t great, but I could say I was a professional writer.
While there, I became eligible for my very first 401(k), administered through Vanguard.
Lucky for me, around that same time, Human Resources brought in a financial advisor to meet with my department, explain a few investment principles, and answer our questions. Just what is a mutual fund, anyway?
Following the meeting, I heard tales of woe from my editor and bureau chief. Both had lost noteworthy sums in personal investments that performed poorly. On the other hand, they spoke glowingly of the 401(k) and the Vanguard funds that were available in it.
The 3% matching contribution made by our employer further sweetened the deal.
I was hooked. From day one I contributed 15% of my pay, investing 10% of that in the Vanguard Prime Portfolio money market fund, 30% in Vanguard U.S. Growth Fund, and 60% in Vanguard Windsor II stock fund.
I don’t recall why I skipped the indexes and chose that mix all those years ago, but it’s a very different approach than I use today. I do know that although the two stock funds were broadly grouped as “domestic equity,” U.S. Growth and Windsor II at least had different investment styles, with Windsor II being more value oriented.
In addition, back then I found bonds confusing and didn’t yet grasp their place in a portfolio. I probably figured stashing some cash in the money market fund would suffice in terms of helping me sleep at night. In hindsight, 100% in stock funds would have worked out well. Live and learn.
As I moved into more lucrative work a few years later, I looked to Vanguard to start a taxable account. Seeking tax efficiency and long-term growth, I considered Vanguard’s 500 index and total stock market index funds. I eventually went with the latter given the wider market focus and minimal difference in performance. I’d also add a Roth IRA to the mix once Roths became available.
Regardless of where I worked, how much I made, or the 401(k) administrator, I always participated and paid myself first. My contributions never dipped below 15% and I leaned heavily on the lowest-cost funds available in the plan: usually broad-market index funds.
The 401(k) experience opened a new chapter in my life and helped me develop the confidence to later invest in the taxable brokerage account and Roth IRA. Having tax-deferred, taxable, and tax-free savings should provide flexibility when I turn the page to retirement.
No, this English major never became a teacher. But thanks to that first retirement plan and the spark it provided, I sure learned some valuable personal finance lessons.
DJ, I think it’s pretty rare for a young person to do things correctly, right from the start of their career. Your story supports the contention that it is possible to pay yourself first, even when dealing with a modest starting salary.
I recall someone around here arguing to save first, and live on what’s left. You did just that!
Dan, things just seemed to align in those early years. One reason I was able to contribute 15% so early was the drugstore job. I was still working weekends there while I was at the magazine during the week. Another reason: my parents allowed me to live at home while in grad school at the time. It was an intense, busy, period and I was very fortunate for their generosity with the offer of shelter.
DJ, did you read any writings of John Bogle back then?
I was just easing into Bogle’s writings at this point, David. I remember first reading his thoughtful investor letters in the funds’ annual reports. (I now wonder if HumbleDollar’s Greg Spears had a hand in those letters.) It was an interview with Bogle, though, that moved me from hesitation on the taxable account. The total market index was still relatively new then, if I recall, and Bogle said something like this: Choose one or the other but invest. You may even do slightly better in total stock.
D.J., respect — your story is a perfect example of prudent retirement saving. I also started young and contributed consistently over the years. And while I understood stock diversification, my downfall was not grasping tax diversification until much later in life. I should have spread money strategically across taxable, tax-deferred, and tax-advantaged accounts. I ended up with far too much in taxable accounts as a result. But I guess it’s a nice problem to have!
It is indeed, Mark. I have to say, I kind of stumbled into the tax diversification thing—and am still likely over allocated to the tax deferred account despite it all.