Author Topic: Case Study: Natural Saver / Reluctant Investor  (Read 3658 times)

SteelTurkey

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Case Study: Natural Saver / Reluctant Investor
« on: May 02, 2017, 09:31:53 PM »
Newbie to the community!

I have always been a natural saver, but reluctant to invest thinking I may need the capital to finance a wild ambition (i.e. starting a company, traveling the world, etc).  My ambition never developed.  I am now 31 yrs old continuing my career in Corporate America and saving $70-100k per year.

Here is my current position.

NW:$593

Cash: $220
IRA/Old 401k: $130
Vanguard: $56
Old Mutual Fund: $11
SEP IRA: $22
Fundrise: $15
Lending Club: $43
Home Equity: $96 (duplex valued at $450k.  Living in half and renting other unit)

I know, I know.  Too much cash. 

Mentally struggling to invest my entire cash position into today's stock market so plan to DCA $100k over the next year or so.  Considering a rental property for remaining $100k, and plan to invest my month wage savings in Vanguard account.

Recommendation on how to increase my Badassity and expedite FIRE?


MDM

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #1 on: May 02, 2017, 09:49:16 PM »
Mentally struggling to invest my entire cash position into today's stock market....
Yes, the market could tank the day after you invest.  But, can you do at least as well as Bob: What if You Only Invested at Market Peaks?

zolotiyeruki

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #2 on: May 03, 2017, 05:09:49 AM »
I think the general Investment Order still applies.  You just have a larger sum to start off with, and you have the freedom to spread out some of the contributions if you want.

Personally, here's what I'd do:
1) invest $110k this year by:
2) maxing out the 401k
3) maxing out a traditional IRA
4) sticking the rest in an index fund
I'd dollar-cost-average all those contributions/investments over the course of the year.  And next year, I'd do the same thing.

SteelTurkey

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #3 on: May 03, 2017, 05:48:22 AM »
My current employer provides SEP IRA (employer contribution only) so 401k not an option. 

My AGI is too great to tax deduction from traditional IRA or standard contribution to Roth IRA.  Is backdoor Roth the next best option?  I already have a Traditional, Rollover, and Roth IRA with Fidelity.  Should I contribute/consolidate there or open new IRA with Vanguard?  Link to instructions for Back Door Roth?

zolotiyeruki

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #4 on: May 03, 2017, 09:41:37 AM »
My current employer provides SEP IRA (employer contribution only) so 401k not an option. 

My AGI is too great to tax deduction from traditional IRA or standard contribution to Roth IRA.  Is backdoor Roth the next best option?  I already have a Traditional, Rollover, and Roth IRA with Fidelity.  Should I contribute/consolidate there or open new IRA with Vanguard?  Link to instructions for Back Door Roth?
With such a high income then, I don't know that the backdoor Roth (or any Roth) would be a good choice.  The Roth is predicated on the idea that your tax rate will be higher in retirement than it is now, and that's almost certainly not the case for you--you're in a high marginal bracket now, and you'll almost certainly be in a lower bracket in retirement.

In that case, I'd just start plowing that money into a taxable investment account and forget about it.  Yes, you could purchase a rental property, but then you'd have to report that income now, when you're in a high tax bracket to begin with.

MDM

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #5 on: May 03, 2017, 10:37:46 AM »
With such a high income then, I don't know that the backdoor Roth (or any Roth) would be a good choice.  The Roth is predicated on the idea that your tax rate will be higher in retirement than it is now, and that's almost certainly not the case for you--you're in a high marginal bracket now, and you'll almost certainly be in a lower bracket in retirement.

In that case, I'd just start plowing that money into a taxable investment account....

The "Roth vs. traditional" decision does depend on relative future vs. current tax rates.

The "Roth vs. taxable" decision depends on absolute future tax rates: it's better to pay no tax (Roth) than to be taxed (taxable).

Depending on the amount of OP's traditional IRA balance, however, the backdoor Roth may not be advisable.  See Backdoor Roth IRA - Bogleheads for details.

runewell

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #6 on: May 03, 2017, 01:59:45 PM »
The Roth is predicated on the idea that your tax rate will be higher in retirement than it is now
Or your tax rate could be the same as now, in which case a Roth is just as good.
It's probably best to have traditional IRA money + Roth money so that you can have a combination of taxable and tax-free retirement income to draw from. 

zolotiyeruki

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #7 on: May 03, 2017, 02:08:32 PM »
With such a high income then, I don't know that the backdoor Roth (or any Roth) would be a good choice.  The Roth is predicated on the idea that your tax rate will be higher in retirement than it is now, and that's almost certainly not the case for you--you're in a high marginal bracket now, and you'll almost certainly be in a lower bracket in retirement.

In that case, I'd just start plowing that money into a taxable investment account....

The "Roth vs. traditional" decision does depend on relative future vs. current tax rates.

The "Roth vs. taxable" decision depends on absolute future tax rates: it's better to pay no tax (Roth) than to be taxed (taxable).

Depending on the amount of OP's traditional IRA balance, however, the backdoor Roth may not be advisable.  See Backdoor Roth IRA - Bogleheads for details.
Sorry, most of my comments come with an assumption of "my spending will be within the 15% tax bracket at retirement, so taxable investments won't actually be taxable."  In which case, traditional investments are preferable to a Roth, since they don't have any of the restrictions/penalties that come with a Roth.

MDM

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #8 on: May 03, 2017, 02:52:40 PM »
In which case, traditional investments are preferable to a Roth, since they don't have any of the restrictions/penalties that come with a Roth.
Agreed - with the further assumption that future tax treatment of LTCG and QD will be the same as current.

One could also note a similar caveat about the non-taxability of Roths.  FWIW, one might guess that it would be politically easier to change the LTCG/QD treatment than the Roth treatment but who knows...?

SteelTurkey

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #9 on: May 03, 2017, 06:21:19 PM »
I expect my retirement tax bracket will be below current tax rate- likely 15%.

My IRA position:
Roth IRA: $14
Rollover IRA: $110
Traditional IRA: $6
SEP IRA: $22

I did not understand all IRA funds must be transferred and (if not already) taxed during backdoor Roth IRA conversion process.  My original thought was to backdoor only new non-tax deductible traditional IRA contributions.

Brokerage account looks to be best option.

MDM

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Re: Case Study: Natural Saver / Reluctant Investor
« Reply #10 on: May 03, 2017, 07:07:00 PM »
My current employer provides SEP IRA (employer contribution only) so 401k not an option. 
Consider talking with your employer about a better 401(k) plan - Bogleheads.

 

Wow, a phone plan for fifteen bucks!