Are we on the right track?

[Rudem3]

Hi,

I've been doing a ton a research here and other places and feel I'm starting to get a grasp on this. However, I'm second guessing myself on several things and hoping you guys could set the record straight and get me on the right path. Our goal is to invest 40-50% of our take home pay and get to FI sooner than later.

Situation:
Me: 30
Wife: 28
Daughter: 22 months and trying for another.

Quick financial breakdown:
Me: ~60k/yr gross with overtime (average 45 hours/week)
Wife: ~16/yr gross (part time SOHM)
Total gross: ~76k/yr

Emergency fund: 25k. It may be a bit high for most but I'm comfortable with it. Plus since we're trying to another kid, 8k will be coming out for medical so in about a year, it will be around 17k if all goes well.

403b: 42,300. Company match up to 3%
My Roth IRA: 23,900
Wife Roth IRA: 10,500 (Her work does not offer 401k, beautician)
HSA: $800
Total invested:76,800

Average monthly expenses: $2800. It seems to fall around this area.

No debt besides mortgage: $140k

Allocations:

403b:
Baird Aggregate Bond Instl 2.94%
Vanguard Instl Ttl Stk Mkt 31.67%
Bard MidCap Inst 13.33%
William Blair Small Cap Value 12.06%
Vanguard Developed Markts Index 25.84%
Oppenheimer Delveloping Markets 14.15%

My Roth IRA: Target Fund 2050 (VFIFX)

Wife Roth IRA: Target Fund 2055 (VFFVX)

HSA: (through TD Ameritrade) Setting up this week but looking into VFI


Current plan:
1. 403b up to company match
2. Max HSA
3. Attempt to max 403b
4. Rest into Roth IRA.


Questions:
1. Should I go straight traditional 403b contributions even though we're in the 12% tax bracket? I hear about the Roth conversion ladder and that's what's making me think traditional is the way to go. Am I right in this thinking?

2. With regards to the 403b, should this be maxed throughout the year or can it be done earlier without losing on the company match? I'm a bit confused as if the match is paid per pay period or say if it's maxed at 20 pay periods rather than the full 26. I hope this makes sense.

3. With regard to our allocations, where can we do better? The 403b is actively managed at the moment, fees seem to be $65/yr unless I'm missing something. Should I move allocations to straight VTSAX if available? 

4. Roth IRA: Again, should I move these into VTSAX? Or is a Target Fund okay?

Or anything else you guys can see where we can do better or may be missing something?

Any and all help is appreciated. Thanks so much!

[maizefolk]

For #1, are you planning to FIRE at approximately the same annual spending ($2800/month) that you're living on now? If so, you're right that prioritizing traditional contributions to your 403b make sense.

#2 is going to vary company to company, so you'll need to consult your own HR department. But there are at least some places where you can end up getting less match if you max out your 401k/403b/457 before your last pay period, so you're smart to be thinking about this.

#3 In your shoes I'd dramatically simplify the 403b. The most complex allocation you'd really need to work with is 1 total bond index fund, 1 total domestic stock index fund, and 1 total international stock index fund. The simplest would be to pick another target date fund like the ones you're using in your IRAs. It makes sense to compare expense ratios. For some companies a target date fund (essentially having they handle rebalancing for you automatically) costs very little relative to the expense ratios of the underlying funds. However, for other companies you'll end up paying hundreds or even thousands of dollars a year in extra expenses for some rebalancing you can do yourself by just remembering to log into your account 1-2/year.

#4 Is fine as is.

[MDM]

1. Should I go straight traditional 403b contributions even though we're in the 12% tax bracket? I hear about the Roth conversion ladder and that's what's making me think traditional is the way to go. Am I right in this thinking?

In your situation that is pretty much a coin flip.  Good arguments can be made for either.

Do either of you have a pension plan from your work?

[Rudem3]

1. Should I go straight traditional 403b contributions even though we're in the 12% tax bracket? I hear about the Roth conversion ladder and that's what's making me think traditional is the way to go. Am I right in this thinking?

In your situation that is pretty much a coin flip.  Good arguments can be made for either.

Do either of you have a pension plan from your work?

No. No pension for either of us unfortunately.

For #1, are you planning to FIRE at approximately the same annual spending ($2800/month) that you're living on now? If so, you're right that prioritizing traditional contributions to your 403b make sense.

#2 is going to vary company to company, so you'll need to consult your own HR department. But there are at least some places where you can end up getting less match if you max out your 401k/403b/457 before your last pay period, so you're smart to be thinking about this.

#3 In your shoes I'd dramatically simplify the 403b. The most complex allocation you'd really need to work with is 1 total bond index fund, 1 total domestic stock index fund, and 1 total international stock index fund. The simplest would be to pick another target date fund like the ones you're using in your IRAs. It makes sense to compare expense ratios. For some companies a target date fund (essentially having they handle rebalancing for you automatically) costs very little relative to the expense ratios of the underlying funds. However, for other companies you'll end up paying hundreds or even thousands of dollars a year in extra expenses for some rebalancing you can do yourself by just remembering to log into your account 1-2/year.

#4 Is fine as is.

Thanks for the info!

My goal is to become FI and 2800 will allow me to do that. I'd be more comfortable will a tad more to fully FIRE...more like 3k.

[MDM]

Without a pension it will take ~$1 million in traditional accounts to reach the 12% bracket using a 4% withdrawal ratio and 2018 tax law.  Up to you whether to take the bird in hand by contributing to traditional now and until your projected retirement balance hits that number, or contribute to Roth now with the expectation of catching up using traditional later.

[Rudem3]

Without a pension it will take ~$1 million in traditional accounts to reach the 12% bracket using a 4% withdrawal ratio and 2018 tax law.  Up to you whether to take the bird in hand by contributing to traditional now and until your projected retirement balance hits that number, or contribute to Roth now with the expectation of catching up using traditional later.

But not if I'm filling jointly as I'm married, correct? And I don't expect to have deductions enough to get me to the bottom of the current tax bracket when I FIRE. So I'm not sure if the conversions would be worth it since I'm already in the second lowest tax bracket.

If I'm correct, you say to stick it all in Roth for now until I'm in as higher bracket?

[MDM]

Without a pension it will take ~$1 million in traditional accounts to reach the 12% bracket using a 4% withdrawal ratio and 2018 tax law.  Up to you whether to take the bird in hand by contributing to traditional now and until your projected retirement balance hits that number, or contribute to Roth now with the expectation of catching up using traditional later.

But not if I'm filling jointly as I'm married, correct?

That is the number for MFJ.  See cells T2:V29 in the 'Calculations' tab of the case study spreadsheet.  Note that the $1 million would be on the day you retire.

And I don't expect to have deductions enough to get me to the bottom of the current tax bracket when I FIRE. So I'm not sure if the conversions would be worth it since I'm already in the second lowest tax bracket.

The usual situation is to do t->R conversions after retirement, not while working.

...you say to stick it all in Roth for now until I'm in as higher bracket?

I'm saying some back-of-the-envelope calculations, using estimates of future investment returns and tax situation, are needed to make the t vs. R choice any more than a pure guess.  See Investment Order for one way to do those estimates.

[Rudem3]

Without a pension it will take ~$1 million in traditional accounts to reach the 12% bracket using a 4% withdrawal ratio and 2018 tax law.  Up to you whether to take the bird in hand by contributing to traditional now and until your projected retirement balance hits that number, or contribute to Roth now with the expectation of catching up using traditional later.

But not if I'm filling jointly as I'm married, correct?

That is the number for MFJ.  See cells T2:V29 in the 'Calculations' tab of the case study spreadsheet.  Note that the $1 million would be on the day you retire.

And I don't expect to have deductions enough to get me to the bottom of the current tax bracket when I FIRE. So I'm not sure if the conversions would be worth it since I'm already in the second lowest tax bracket.

The usual situation is to do t->R conversions after retirement, not while working.

...you say to stick it all in Roth for now until I'm in as higher bracket?

I'm saying some back-of-the-envelope calculations, using estimates of future investment returns and tax situation, are needed to make the t vs. R choice any more than a pure guess.  See Investment Order for one way to do those estimates.

Great. Thanks for clearing that up and taking the time to help. The provided links really help out!