Author Topic: Mustachian noob Question (please help!)  (Read 1688 times)

Sirose11

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Mustachian noob Question (please help!)
« on: February 24, 2017, 09:09:09 AM »
Hello expert mustachian's,

I've been reading the blog posts on this site for the past three months or so and am really interested in the concept of early retirement.

I've nailed down the number that my wife and I will need to live within the 4% rule.
I've bought into investing through Vanguard's Market Index Fund.

I just had two questions:

1) When opening an account through Vanguard - what kind of account does everyone recommend opening (For long term early retirement)? 

2) From what I've read, it looks like dividends pay out every quarter, is there a way to have dividends pay out every month?

Thank you for the feedback in advance!

JoseS

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Re: Mustachian noob Question (please help!)
« Reply #1 on: February 24, 2017, 09:42:12 AM »
Such a simple question. Ha.

It really depends on many things, are you self-employed or working for a company? Does your company offer a 401(k) or better yet a Roth 401(k), How much are you putting in? etc. You get the idea.

Can you give more details?

To start I would say:

Maxed out Roth IRAs for both of you to start.

I also have a Health Savings Account (HSA.) You can only use the money in it for health expenses. But they have a triple tax advantage: Tax free contributions, tax free gains, tax free withdrawals. Long term retirement involves large health care bills. The only caveat is that you have to have a high deductible health plan too. But I think is worth it.

I'm not sure on the dividend question. I think that is just whatever are the policies of the fund.

With This Herring

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Re: Mustachian noob Question (please help!)
« Reply #2 on: February 24, 2017, 09:44:47 AM »
Oh golly.

When opening accounts in Vanguard, you will need multiple kinds of accounts.  You and your wife will each need a separate IRA account (you can't share an IRA); please refer to the MDM quote below to determine whether to use a Traditional IRA (contributions tax-deductible now, grows tax-free, withdrawals taxable later) or a Roth IRA (contributions taxable now, grows tax-free, withdrawals taxable later).  If you two have more savings to invest beyond your IRA limits, HSA limit, and 401(k)/other employer retirement plans limit/self-employed retirement plan limits, then you will also want a normal, taxable account with Vanguard.

As for dividends, the dividend payout schedule is determined by the stock/index fund/mutual fund.  So, Vanguard index funds tend to pay out quarterly.  Many stocks pay out quarterly, but there are a few that pay out semi-annually, annually, or monthly.  You cannot change the dividend schedule of the security you buy.  However, this is okay!  You should be setting all dividends to reinvest in the fund that generated them.  When you retire, you can sell shares to fund your retirement; you do not rely on dividend payouts alone.  You should read J.L. Collins Stock Series (which is free and won't take you too long) to give you a good understanding of many investing concepts you will find useful.

THere are a number of ways that you can access money in both your IRA nad 401(k) penalty free before age 59.5 
There's even a sticky on it.
72t/SEPPs are one method, as is setting up a ROTH conversion ladder.

IF you want to buy a rental income then you should weigh that against the tax advantages of fulling funding your 401(k)s.  How much a benefit that may be to you depends on your tax bracket.  In most cases the tax advantages of fully funding your 401(k) are worth it, but if you have no other way of saving up for a large down payment than some of that money shoudl be diverted to post-tax savings.

+1. Sticky is http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Generic investment order rules of thumb:
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b.
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. 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 #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   https://www.bogleheads.org/forum/viewtopic.php?f=2&t=182081,
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   

Bogleheads has a similar list.

Sirose11

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Re: Mustachian noob Question (please help!)
« Reply #3 on: February 24, 2017, 10:08:17 AM »
You guys are awesome.

@ JoseS -
Right now, both my wife and I work for companies that offer 401k retirement accounts. However, my 401K options are pretty limited (it doesn't even have the Vanguard Market Index Fund as an option - they are mainly date-based retirement options. IE target retirement year of 2040 etc.). We are putting in just enough to receive the employee match (4% dollar for dollar).

I may need to re-educate myself on the workings of an IRA - I was always under the assumption that I couldn't touch retirement accounts until a certain age or else I'd accrue a penalty. If that's the case, are dividend payouts a different category? Can i just not touch the principle until a certain age with Roth IRAs?


@ With This Herring -
Great feedback! Thank you for the advice!

With This Herring

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Re: Mustachian noob Question (please help!)
« Reply #4 on: February 24, 2017, 10:30:24 AM »
You guys are awesome.

@ JoseS -
Right now, both my wife and I work for companies that offer 401k retirement accounts. However, my 401K options are pretty limited (it doesn't even have the Vanguard Market Index Fund as an option - they are mainly date-based retirement options. IE target retirement year of 2040 etc.). We are putting in just enough to receive the employee match (4% dollar for dollar).

I may need to re-educate myself on the workings of an IRA - I was always under the assumption that I couldn't touch retirement accounts until a certain age or else I'd accrue a penalty. If that's the case, are dividend payouts a different category? Can i just not touch the principle until a certain age with Roth IRAs?


@ With This Herring -
Great feedback! Thank you for the advice!

Even if your 401(k) investment options aren't what you'd want, it's still generally better to put money into 401(k) accounts before taxable accounts.  The expense ratios of the funds are going to be important.  A target retirement fund is not necessarily a bad thing.  Vanguard has target retirement funds with decent expense ratios that are simply a blend of the total US and international markets for stocks and bonds.  The further out the target retirement date, the higher a percentage of stocks contained in the target fund.

If you would like, you can post the full names and expense ratios of the investment options in your 401(k) and posters here can suggest to you which funds might be best.

No, dividend payments are not special.  They stay in the same account.  If an investment in your Traditional IRA generates a dividend, that dividend stays in your Traditional IRA.  You can't take out the dividends in a retirement account without following the same rules as apply to the rest of the account.  Do read the link MDM posted on how to withdraw 401(k) funds early without penalty.

Roth IRAs are special in that you can withdraw the amount of the contributions without tax or penalty.  So, if you put in $1,000 and buy VTSAX, and the investment in VTSAX increases to $1,300 from increase in share price and dividends, then you can take out just that $1,000 contribution at any time without paying taxes or penalties.  The $300 of growth must be left in the Roth IRA until you hit the appropriate age or else you will pay penalties.

Sirose11

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Re: Mustachian noob Question (please help!)
« Reply #5 on: February 24, 2017, 11:26:25 AM »
You guys are awesome.

@ JoseS -
Right now, both my wife and I work for companies that offer 401k retirement accounts. However, my 401K options are pretty limited (it doesn't even have the Vanguard Market Index Fund as an option - they are mainly date-based retirement options. IE target retirement year of 2040 etc.). We are putting in just enough to receive the employee match (4% dollar for dollar).

I may need to re-educate myself on the workings of an IRA - I was always under the assumption that I couldn't touch retirement accounts until a certain age or else I'd accrue a penalty. If that's the case, are dividend payouts a different category? Can i just not touch the principle until a certain age with Roth IRAs?


@ With This Herring -
Great feedback! Thank you for the advice!

Even if your 401(k) investment options aren't what you'd want, it's still generally better to put money into 401(k) accounts before taxable accounts.  The expense ratios of the funds are going to be important.  A target retirement fund is not necessarily a bad thing.  Vanguard has target retirement funds with decent expense ratios that are simply a blend of the total US and international markets for stocks and bonds.  The further out the target retirement date, the higher a percentage of stocks contained in the target fund.

If you would like, you can post the full names and expense ratios of the investment options in your 401(k) and posters here can suggest to you which funds might be best.

No, dividend payments are not special.  They stay in the same account.  If an investment in your Traditional IRA generates a dividend, that dividend stays in your Traditional IRA.  You can't take out the dividends in a retirement account without following the same rules as apply to the rest of the account.  Do read the link MDM posted on how to withdraw 401(k) funds early without penalty.

Roth IRAs are special in that you can withdraw the amount of the contributions without tax or penalty.  So, if you put in $1,000 and buy VTSAX, and the investment in VTSAX increases to $1,300 from increase in share price and dividends, then you can take out just that $1,000 contribution at any time without paying taxes or penalties.  The $300 of growth must be left in the Roth IRA until you hit the appropriate age or else you will pay penalties.

That makes a lot more sense. Appreciate the feedback!

Heroes821

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Re: Mustachian noob Question (please help!)
« Reply #6 on: February 24, 2017, 12:08:31 PM »
The MDM post is gold, I hand wrote a shorter copy that I keep in a notebook with me all the time to help keep me on track.

After absorbing that post, I would reconsider the decision to not cap your 401k.  Even without vanguard funds available you might have some solid low cost fund options AND there are tax benefits depending on your income that a maxed 401k will accelerate fire faster than throwing your extra money into a taxable account.