Author Topic: Young, single w/ high income. What should my strategy be?  (Read 1727 times)

Sliced

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Young, single w/ high income. What should my strategy be?
« on: December 04, 2017, 09:39:31 PM »
Hi all,

A little background: I'm 26 years old and started at my current company in early 2016. I'm in sales. My first year, I grossed 60k. This year, my pipeline exploded and I made 150k. I got promoted and now lead a new division. I have to rebuild my book of business, but I negotiated a guarunteed bonus each much to ensure I make 150k again in 2018, and my pipeline will be rebuilt within a year. Long story short, I will be making 150k in 2018 and possibly in the 200-250k range in 2019 and beyond.   

Here's my financial situation:

Assets:
Cash- 17k on hand. 11.2k in savings and 7k in checking.
401k: 15.5k
Roth IRA/Rollover Accounts: 23k

Liabilities:

CC debt: 1k but that's just the last month of spending. I pay it off every month.
Car loan: 9k
Student loans: 10k

Expenses: Rent- 750 but will soon double to 1.5k. I work in San Francisco and commute one hour each way from the East Bay. I'm going to move to the city for my sanity as I already work 10-11 hour days.
Car payment: 250 + 170 insurance. I plan to sell the car once I move so this will be eliminated.
Cell phone: 95
Food: ~600-800. Yes, facepunch.

I contributed 11k this year to my 401k but am now classified as a highly compensated employee, so next year I will be kicked off the 401k and onto a deferred compensation plan. I've already elected to defer 18k and 3.5k into an HSA. I make too much to contribute to a Roth IRA.

I've never made this type of money and I'm a little out of my depth how to most effectively handle this. How can I best set myself up for the future in my current situation?

Urchina

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Re: Young, single w/ high income. What should my strategy be?
« Reply #1 on: December 04, 2017, 10:42:02 PM »

I contributed 11k this year to my 401k but am now classified as a highly compensated employee, so next year I will be kicked off the 401k and onto a deferred compensation plan.

Can you clarify this? A 401k is a deferred compensation plan, and my understanding is that there is no income limit for participating in one if one is offered by your company.

Sliced

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Re: Young, single w/ high income. What should my strategy be?
« Reply #2 on: December 04, 2017, 11:22:05 PM »

I contributed 11k this year to my 401k but am now classified as a highly compensated employee, so next year I will be kicked off the 401k and onto a deferred compensation plan.

Can you clarify this? A 401k is a deferred compensation plan, and my understanding is that there is no income limit for participating in one if one is offered by your company.

Sure. It's not a 401k plan specifically. Similar but not the same. I've looked over our internal HR explanation of it but here's something I read online that explains it well.

https://www.investopedia.com/articles/personal-finance/052915/how-nonqualified-deferred-compensation-plans-work.asp

JLee

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Re: Young, single w/ high income. What should my strategy be?
« Reply #3 on: December 04, 2017, 11:23:26 PM »

I contributed 11k this year to my 401k but am now classified as a highly compensated employee, so next year I will be kicked off the 401k and onto a deferred compensation plan.

Can you clarify this? A 401k is a deferred compensation plan, and my understanding is that there is no income limit for participating in one if one is offered by your company.

Regarding 401k / HCE:

The test is as follows: the average contributions of highly compensated employees, as a group, cannot exceed the average contributions of nonhighly compensated employees, as a group, by more than about 2 percent. (Age-50 catch-up contributions are not included in discrimination testing.) If the HCEs exceed this threshold and the employer fails to correct the imbalance, the plan could lose its tax-qualified status and all contributions and earnings would have to be distributed to all plan participants. In addition to the 2 percent spread, the contributions of all HCEs as a group may not be more than two times the percentage of other employees' contributions.

Just another instance where you lose retirement account tax benefits if you make too much money (also see Traditional IRA deduction phase-out and Roth contribution phase-out).

tralfamadorian

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Re: Young, single w/ high income. What should my strategy be?
« Reply #4 on: December 05, 2017, 07:39:04 AM »
Congratulations on your work success! I suggest doing a full case study and posting it to that section of the forum. You should get many more replies there.
https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/

My suggestions on a strategy:
- Avoid lifestyle creep with your increased income. It can be so easy to fall into in a HCOL area like SF.
- Read http://jlcollinsnh.com/stock-series/
- Diversify your investments with real estate.

dcheesi

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Re: Young, single w/ high income. What should my strategy be?
« Reply #5 on: December 05, 2017, 08:07:18 AM »

I contributed 11k this year to my 401k but am now classified as a highly compensated employee, so next year I will be kicked off the 401k and onto a deferred compensation plan.

Can you clarify this? A 401k is a deferred compensation plan, and my understanding is that there is no income limit for participating in one if one is offered by your company.

Regarding 401k / HCE:

The test is as follows: the average contributions of highly compensated employees, as a group, cannot exceed the average contributions of nonhighly compensated employees, as a group, by more than about 2 percent. (Age-50 catch-up contributions are not included in discrimination testing.) If the HCEs exceed this threshold and the employer fails to correct the imbalance, the plan could lose its tax-qualified status and all contributions and earnings would have to be distributed to all plan participants. In addition to the 2 percent spread, the contributions of all HCEs as a group may not be more than two times the percentage of other employees' contributions.

Just another instance where you lose retirement account tax benefits if you make too much money (also see Traditional IRA deduction phase-out and Roth contribution phase-out).
Technically, this one is because the rank and file workers aren't sufficiently encouraged to participate. The point being to make sure that 401k plans are practical for all employees, and not just treated as a special tax-dodge for the executives (which is a bit ironic, since my understanding is that that's exactly what the 401k provision originally was).

Of course the rule contains an inherent assumption that there will be more non-HCEs than HCEs, since the former will inevitably contribute less per person no matter how hard you push them to participate. I imagine the problem for many Bay-area startups is that they don't have enough non-HCEs to offset the contributions from the HCEs.

trollwithamustache

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Re: Young, single w/ high income. What should my strategy be?
« Reply #6 on: December 05, 2017, 08:23:25 AM »
Moving into the city will open up a lot of temptations for lifestyle creep. Which, if you are judicious about picking things you truly enjoy, is IMHO ok. 

In a start up type joint can be hard to value delayed compensation and whatever retirement plan they are putting you in. So certainly participate if its a good deal but savings for you will be primarily in regular, taxable brokerage accounts. 

Be aware that many delayed compensation plans require the company to still be in business to pay out, so you may need to take a hard look at the Bankruptcy risk of your small company,

Dpwyatt91

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Re: Young, single w/ high income. What should my strategy be?
« Reply #7 on: December 06, 2017, 04:29:17 AM »
You can still contribute to a roth. Look up about the roth back door. I made over the limit and was able to contribute. The process was easy. I use vanguard but I'm sure it wouldn't be hard with any institution. Look up the financebuff.com he has good info on it.

marty998

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Re: Young, single w/ high income. What should my strategy be?
« Reply #8 on: December 06, 2017, 04:40:42 AM »
Pay off the student loans. You should be able to knock it out tomorrow with the savings you have on hand. You can rebuild your savings easy in the next 2 months.

chasesfish

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Re: Young, single w/ high income. What should my strategy be?
« Reply #9 on: December 06, 2017, 05:40:00 AM »
Congrats on the success, you just got there a couple years before I did.  Don't be afraid of the deferred comp plan, it acts very similar.  I have one that my contributions go into after I maxed out a 401k. 

I would say keep this as simple as possible - Open a regular brokerage account with Vanguard or Fidelity and send the excess each month into an index fund.  I prefer Fidelity because I can walk into an office if I have a real issue to deal with, which has only happened twice in 10 years, but personal preference.

Once you get $100,000 saved up in that account plus paid off your loans, then worry about the more advanced advice.  Having $100,000 in a regular, accessible account is an incredible F-off fund.   I missed a couple investment opportunities in my late 20s because all my money was tied up in tax deferred accounts.  Remember, savings habits are 80-90% of the game, then comes the tax and fee optimization.  You're already there on fee optimization if you go with a Fidelity or Vanguard Index fund and they don't throw off a big tax liability if you don't sell them.

bognish

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Re: Young, single w/ high income. What should my strategy be?
« Reply #10 on: December 07, 2017, 10:21:45 AM »
I lived in SF from 2000 to 2008, so through 2 bust cycles. I kept expenses lowish while still enjoying the city, but put alot of excess income into a taxable fidelity account. That allowed me to bail to a lower cost location with great work experience once the real estate market tanked.

I would caution you to keep fixed costs and commitments low and remember that the income stream can be turned off as fast as turned on. Lots of people who had high fixed expenses and lifestyles had a lot of trouble during the city wide layoffs in 2001 & 2008.

When you are looking to rent in SF ride the public transit that you will commute on during rush hour. Some of the lines can be painfully slow or so packed you can't get on.

Bracken_Joy

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Re: Young, single w/ high income. What should my strategy be?
« Reply #11 on: December 07, 2017, 10:28:11 AM »
Treat the high earnings like it's temporary, because it could be. So- keep fixed expenses low whenever you can, and insure appropriately against disability, if not provided by your company. Stash cash now, in case the gravy train dries up. Cities boom and bust, industries boom and bust, and SF has been on a hell of an upswing. Be a bit of a pessimist, and save accordingly =)