Author Topic: "Investment Order" applied to my specific situation?  (Read 1498 times)

Levi421

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"Investment Order" applied to my specific situation?
« on: June 24, 2018, 12:41:18 PM »
This is for reference purposes for me and anyone else who needs it
0. Establish an emergency fund to your satisfaction 
         We have $1000.00 in a savings account. For when life happens.  (I would eventually like to have a bigger buffer to help protect against
         job loss.)
1. Contribute to your 401k up to any company match 
         She is contributing as much as she can to get the match (She can not contribute more). I am halfway to my employer match (as soon
         as I get my raise in Oct. I will bump it to 6%)
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
         We are currently putting every dollar extra toward this, we have a TON of debt that is crippling us. All of my side job and a couple
         hundred from our normal take home pay. (I understand that I have skipped ahead here. Our situation is a little more than just black
         and white. We have some short term goals in mind that prevent me from putting the full match from my employer for the next 4
         months. We have weighed the opportunity cost of this move, and we made a decision that creates the most happiness for us.)
3. Max HSA
        I don't think we qualify for this, as we have a $0.00 deductible plan through my wife work. (I might be wrong in not being able to
        qualify)
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
       I like the idea of going with a Roth, I don't want to pay taxes on all my gains. If we did decide to max out 2 Roth IRA's for the both of
       us, all of the money we are putting toward debt would be applied to this leaving nothing for the rest of the list. How is one expected to
       achieve the entire list?  (This is where I get stuck in the planning)
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 deduction, swap #4 and #5)           
6. Fund a 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 and/or fund a 529 with any extra. 

Gross Salary/Wages:
Wife - $23,400.00
Me (primary job) - $33280.00
Me (part-time job) - $9360.00, No benefits here this is just a side gig to help pay off debts that we currently have. (I don't want to keep this long term)



Hello everyone,

I am pretty new to this whole FI and mustaschian philosophy, but I love the idea and wish to seek it out.  I read the "Investment Order" several times over and I am currently working on steps 0-2. I may be looking at this list from the wrong angle, but this seems like achieving all of these would be very hard to do at lower income levels like my family... For instance, my wife and I have a combined income of around $66k gross, right now.  I see some serious obstacles ahead of us on this list... We are on a $0 deductible insurance plan through my wife's work, so I don't think I qualify for an HSA. We are in the 15% tax bracket, and I am leaning toward contributing to a Roth IRA first prior to maxing out my 401k. That is $11k/year after tax for each of us, then maxing out my 401k would be $18.5k pre-tax. My wife has a Pension where 9.5% of her pretax income goes toward.  Just at the 2 Roth accounts and my 401k is close to 50% of our total pay... this seems like a HUGE mountain to climb. At some point I would think I need to quit maxing out the 401k (when I get to the magic "how much is too much" number) to be able to invest that money in a taxable account? Also, I don't think the Mega backdoor Roth applies to my situation given my income.  I know most folks on this website seem to make way more money than I think is possible for me to achieve (at least this is what it seems like to me).

I am just seeking clarification on this list for my income level. If you need more information, please ask. I will do my best to answer what ever you need to know.

« Last Edit: July 08, 2018, 06:56:59 AM by Levi421 »

MDM

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Re: "Investment Order" applied to my specific situation?
« Reply #1 on: June 24, 2018, 12:55:31 PM »
Do either of you get a company match for any portion of 401k (or 403b, etc.) contributions?

Levi421

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Re: "Investment Order" applied to my specific situation?
« Reply #2 on: June 24, 2018, 01:04:24 PM »
Do either of you get a company match for any portion of 401k (or 403b, etc.) contributions?

Yes, She contributes 9.5% of her pay to her pension and the city contributes 34.5 - 39.5% of her salary depending on their annual budget. My employer matches $0.50 for every $1.00 dollar up to 6% of my salary.

MDM

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Re: "Investment Order" applied to my specific situation?
« Reply #3 on: June 24, 2018, 01:48:02 PM »
My employer matches $0.50 for every $1.00 dollar up to 6% of my salary.
And you are thus contributing at least 6% of your salary, correct?

For you own purposes, and to help people comment, you might want to take the list and note step by step what you are doing, are considering doing, and why.  Some of the steps will have his 'n' hers columns (1, 3, 4, 5, and 6), and some simply "ours" (0, 2, 7 and 8).

Levi421

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Re: "Investment Order" applied to my specific situation?
« Reply #4 on: June 25, 2018, 07:38:12 AM »
Quote
For you own purposes, and to help people comment, you might want to take the list and note step by step what you are doing, are considering doing, and why. 

Done. I think... Still not quite familiar with the formatting of the forum options.

MDM

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Re: "Investment Order" applied to my specific situation?
« Reply #5 on: June 25, 2018, 08:36:16 AM »
0. Establish an emergency fund to your satisfaction 
         We have $1000.00 in a savings account. For when life happens.  (I would eventually like to have a bigger buffer to help protect against job loss.)
1. Contribute to your 401k up to any company match 
         She is contributing as much as she can to get the match (She can not contribute more). I am halfway to my employer match (as soon
         as I get my raise in Oct. I will bump it to 6%)
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
         We are currently putting every dollar extra toward this, we have a TON of debt that is crippling us. All of my side job and a couple
         hundred from our normal take home pay.
...
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
       I like the idea of going with a Roth, I don't want to pay taxes on all my gains. If we did decide to max out 2 Roth IRA's for the both of
       us, all of the money we are putting toward debt would be applied to this leaving nothing for the rest of the list. How is one expected to
       achieve the entire list?  (This is where I get stuck in the planning)
0. Yes, it's probably worth building this.  Up to you how fast.
1. You mention your wife's pension, but does she also have access to a 401k with an employer match?
    It's probably worth increasing your 401k amount now instead of paying extra on debt.  You get a 50% return on the 401k.  Don't recall your debt interest rate, but it's probably less than 50%.
2. See #1.
4. Roth may or may not be preferable (I don't know your marginal tax rate) but don't let the amount of taxes sway your choice.  See the commutative property of multiplication as it applies to this choice.

The purpose of the list is to prioritize options, especially when one does not have enough income to do everything listed.  :)

simonsez

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Re: "Investment Order" applied to my specific situation?
« Reply #6 on: June 25, 2018, 09:10:16 AM »

1. Contribute to your 401k up to any company match 
         She is contributing as much as she can to get the match (She can not contribute more). I am halfway to my employer match (as soon
         as I get my raise in Oct. I will bump it to 6%)
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
         We are currently putting every dollar extra toward this, we have a TON of debt that is crippling us. All of my side job and a couple hundred from our normal take home pay.
You aren't following step 1 and are skipping ahead.  You are saying "No thanks" to a 100% return on your money so that you can pay down a debt.  Unless that debt has an insane interest rate, you're coming out behind.

If you were so squeezed that the minimum payments on debt were all you could do, then so be it but since you said with extra dollars - I'd take those extra dollars and contribute to the full match first.

Do you plan on RE or are you just interested in FI?  Has your wife met the vesting requirements for the pension?  The resulting amount you need in your retirement accounts or taxable accounts will be lower if you are receiving a pension at some point.  For example, if you plan to live on 40k/year and the pension is expected to be 10k/year - you are saving toward the difference (30k) instead of the full amount (for the years you will receive the pension, of course - prior to that you would need to bridge the gap if RE). 

I wouldn't worry about your income relative to others - those with above average incomes or high savings rates or multiple commas in their accounts are a little more likely to tell you about it than those who are earlier in their journey or find it marginally more difficult to save.  I mean, by all means increase your income (if that's important to you) provided it doesn't stress your life too much but there is some bias in what you read.  But as long as you are better off relative to YOURSELF if didn't heed any financial advice on here, that's what counts.

Just curious, how much does a $0 deductible health plan cost?

Levi421

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Re: "Investment Order" applied to my specific situation?
« Reply #7 on: June 26, 2018, 09:47:59 AM »
0. Establish an emergency fund to your satisfaction 
         We have $1000.00 in a savings account. For when life happens.  (I would eventually like to have a bigger buffer to help protect against job loss.)
1. Contribute to your 401k up to any company match 
         She is contributing as much as she can to get the match (She can not contribute more). I am halfway to my employer match (as soon
         as I get my raise in Oct. I will bump it to 6%)
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
         We are currently putting every dollar extra toward this, we have a TON of debt that is crippling us. All of my side job and a couple
         hundred from our normal take home pay.
...
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
       I like the idea of going with a Roth, I don't want to pay taxes on all my gains. If we did decide to max out 2 Roth IRA's for the both of
       us, all of the money we are putting toward debt would be applied to this leaving nothing for the rest of the list. How is one expected to
       achieve the entire list?  (This is where I get stuck in the planning)
0. Yes, it's probably worth building this.  Up to you how fast.
1. You mention your wife's pension, but does she also have access to a 401k with an employer match?
    It's probably worth increasing your 401k amount now instead of paying extra on debt.  You get a 50% return on the 401k.  Don't recall your debt interest rate, but it's probably less than 50%.
2. See #1.
4. Roth may or may not be preferable (I don't know your marginal tax rate) but don't let the amount of taxes sway your choice.  See the commutative property of multiplication as it applies to this choice.

The purpose of the list is to prioritize options, especially when one does not have enough income to do everything listed.  :)

Thank you for the links, I will research them and try to make heads/tails of them! I found out yesterday that my wife as access to a 457 plan. However, I am not sure if her employer matches anything in this account. I added some information to the original post to help make things more clear on why we have chosen to skip a little ahead to the debt. I will have to ask her to look into it the 457 account (if she is willing to, lol. Sill working on getting her more on board with this lifestyle/mindset. I am currently making good progress on this issue. We just made a decision that is going to save us long term dollars!)

0. Establish an emergency fund to your satisfaction 
         We have $1000.00 in a savings account. For when life happens.  (I would eventually like to have a bigger buffer to help protect against job loss.)
1. Contribute to your 401k up to any company match 
         She is contributing as much as she can to get the match (She can not contribute more). I am halfway to my employer match (as soon
         as I get my raise in Oct. I will bump it to 6%)
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
         We are currently putting every dollar extra toward this, we have a TON of debt that is crippling us. All of my side job and a couple
         hundred from our normal take home pay.
...
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
       I like the idea of going with a Roth, I don't want to pay taxes on all my gains. If we did decide to max out 2 Roth IRA's for the both of
       us, all of the money we are putting toward debt would be applied to this leaving nothing for the rest of the list. How is one expected to
       achieve the entire list?  (This is where I get stuck in the planning)
You aren't following step 1 and are skipping ahead.  You are saying "No thanks" to a 100% return on your money so that you can pay down a debt.  Unless that debt has an insane interest rate, you're coming out behind.

If you were so squeezed that the minimum payments on debt were all you could do, then so be it but since you said with extra dollars - I'd take those extra dollars and contribute to the full match first.

Do you plan on RE or are you just interested in FI?  Has your wife met the vesting requirements for the pension?  The resulting amount you need in your retirement accounts or taxable accounts will be lower if you are receiving a pension at some point.  For example, if you plan to live on 40k/year and the pension is expected to be 10k/year - you are saving toward the difference (30k) instead of the full amount (for the years you will receive the pension, of course - prior to that you would need to bridge the gap if RE). 

I wouldn't worry about your income relative to others - those with above average incomes or high savings rates or multiple commas in their accounts are a little more likely to tell you about it than those who are earlier in their journey or find it marginally more difficult to save.  I mean, by all means increase your income (if that's important to you) provided it doesn't stress your life too much but there is some bias in what you read.  But as long as you are better off relative to YOURSELF if didn't heed any financial advice on here, that's what counts.

Just curious, how much does a $0 deductible health plan cost?

Indeed I have jumped a head just a bit. I see now that I should have explained our situation a little more to help people understand why we chose to do this. We want to buy a house in a year. So we are preparing for that on our debt load to help with the home ownership and the cost that goes with it.

It would be nice to RE, but I would be happy with getting my financial shit in order first and see what happens next. I am not sure what you mean by "vesting requirements," She has to work there for 10 years to get what her employer contributes, if she chooses to go to another employer. Thank you for explaining how working with different retirement accounts work (I have had problems understanding this). For instance, I have said to myself many times "Why a self directed IRA/Roth IRA and a 401k over just maxing the shit out of my 401k?" I am still having trouble with this issue. This is why I posted this thread.

Also, thank you for easing the tension I have over my income level. I have been worried about this since I started getting into FI. Almost EVERYONE on the forms I read and the podcasts I listen to seem to have astronomically high salaries. It has seemed like it would require me to climb Mt. Olympus when it would take most just a 10ft hill to climb.

As far as the cost of our Ins, I am not sure. I will have to get back to you on that. I know it was a little more than my employers plan which has a $1500 annual deductible and a $4800.00 out of pocket max per person. Hers has no deductible, smaller copays, and $2400.00 per person out of pocket max, at it pays 100% of everything (expect for durable medical equipment, physical therapy, and something else. These 3 things have an 80/20 split. Also has $500.00 per day Inpatient service up to 3 days max.) Based on our medical history and our short term future goals of having kids, we chose to go with her employers plan.


« Last Edit: June 26, 2018, 02:38:58 PM by Levi421 »

Levi421

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Re: "Investment Order" applied to my specific situation?
« Reply #8 on: June 30, 2018, 11:11:38 AM »
Does it matter if my employer does not offer an IRA of any kind?

I logged into my account with Prudential and the only places I can put money toward is into a 401k or a Roth 401k. Is and IRA something I have to seek out myself?

harvestbook

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Re: "Investment Order" applied to my specific situation?
« Reply #9 on: July 01, 2018, 06:37:51 AM »
You can set up your own Roth IRA or traditional IRA on the side. However, given the employer match, you should definitely max up to the match in your 401K before worrying about an IRA.

I was in a similar situation to yours, relatively low income, buying a house, etc. I always maxed to the employer match and also had an IRA on the side. And over time it built up pretty decently, so don't worry about the income-- focus on getting the philosophy right, and then hone the details.

I didn't ever do a Roth even in a low tax bracket because I figured every dollar I saved in taxes could either pay down debt or buy more investments, and opportunities will likely come later to convert to Roth if desired. Now it looks like I will be able to convert my traditional IRA to Roth at no tax consequence over some low-income years heading up to drawing social security as I ease off work. It will work out if you keep moving in the right direction. Good luck.

MrsWolfeRN

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Re: "Investment Order" applied to my specific situation?
« Reply #10 on: July 01, 2018, 07:59:28 AM »
Welcome back Levi421, I'm glad we didn't scare you away with your case study. The investment order is a list of steps to do one at a time, kind of like Dave Ramsey's baby steps, only more mathematically sound. The reason to get your employer match first is because none of your debts are likely to have a rate greater than 50%. In your situation I would get the full match and then start paying off debts, highest interest first. When all of your remaining debts have an interest rate below 5%, you can worry about IRAs or saving for a house down payment.
Can you post a list of your debts with balances and interest rates? Or maybe start a journal to track your progress.


Levi421

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Re: "Investment Order" applied to my specific situation?
« Reply #11 on: July 08, 2018, 06:59:34 AM »
Quote
You can set up your own Roth IRA or traditional IRA on the side. However, given the employer match, you should definitely max up to the match in your 401K before worrying about an IRA.

I was in a similar situation to yours, relatively low income, buying a house, etc. I always maxed to the employer match and also had an IRA on the side. And over time it built up pretty decently, so don't worry about the income-- focus on getting the philosophy right, and then hone the details.

I didn't ever do a Roth even in a low tax bracket because I figured every dollar I saved in taxes could either pay down debt or buy more investments, and opportunities will likely come later to convert to Roth if desired. Now it looks like I will be able to convert my traditional IRA to Roth at no tax consequence over some low-income years heading up to drawing social security as I ease off work. It will work out if you keep moving in the right direction. Good luck.

Thank you for the information and guidance!

Levi421

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Re: "Investment Order" applied to my specific situation?
« Reply #12 on: July 08, 2018, 07:01:51 AM »
Quote
Can you post a list of your debts with balances and interest rates? Or maybe start a journal to track your progress.

Done. I have attached spreadsheets with this information.

Levi421

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Re: "Investment Order" applied to my specific situation?
« Reply #13 on: July 08, 2018, 07:54:28 AM »
I do definitely need to be focused on the earlier steps of this guide for now. However, I would like to be prepared on how to achieve the next step. It would be nice to understand why an IRA is ranked higher in order of importance over the 401k. Also, to know how and where to get the "best" IRA when the time comes. I don't even know if there is a "best" IRA. The only thing I know about them is that they exist and that it is a retirement account.

Zaga

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Re: "Investment Order" applied to my specific situation?
« Reply #14 on: July 08, 2018, 11:11:05 AM »
Okay, a few basics about retirement accounts then.

A 401-K (403-B) is employer sponsored.  You are limited to the options that your employer offers, these options may be expensive (have high fund fees).  This is the first place to invest however because of the employer match.  You get an immediate return (50% in your case) depending on what your employer offers.  Hard to beat an immediate 50% return, even with potentially high fees.

A 457 plan is similar to a 401-K in that it's attached to your employer and is pre-tax.  It has some unique advantages though.  The best in my opinion is there is no penalty for withdrawing from this type of account at any age!  I think you need to be separated from employment to draw from here (I'm not sure of this) but it's a fantastic account for those hoping to retire early.  I would actually put funding this account right after your house purchase and before any IRA's.

An IRA, either Roth or Traditional, is not tied to employment.  You can pick any investment firm you want.  Most people around here choose index funds at either Vanguard or Fidelity, both of these have some great low fee choices.  I use Fidelity, they have been great, others swear by Vanguard for similar reasons.  There are other good options out there.

You said earlier you were in the 15% tax bracket, you'll want to look that up.  The new tax bill came out, and I believe you are now in the 12% tax bracket.  So any money you put in traditional will reduce your taxes by 12% for that amount.  For example, for every $100 you invest in your 401-K traditional or your traditional IRA you will reduce your taxes by $12.  This is a benefit right now.  Roth does not reduce your taxes, but is not taxed at withdrawal, this is a benefit in the future.  However there is lots of math out there saying essentially that if your tax bracket stays the same between now and retirement then there's no difference between the 2.  I don't know, I like to have some of both but we do tilt towards traditional.  I guess what I'm trying to say is that neither choice will make or break you, they are both good.

As for paying down debt, I'm going to disagree with the others here and say that paying down your 17.5% debt to get a better rate on your home loan will pay off big when you go to get a mortgage.  So yeah, do that asap!  Once you no longer have that debt, then get the employer match and save for a good down payment.  Please don't jump into buying a house without a 20% down payment!

simonsez

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Re: "Investment Order" applied to my specific situation?
« Reply #15 on: July 12, 2018, 08:24:32 AM »
I do definitely need to be focused on the earlier steps of this guide for now. However, I would like to be prepared on how to achieve the next step. It would be nice to understand why an IRA is ranked higher in order of importance over the 401k. Also, to know how and where to get the "best" IRA when the time comes. I don't even know if there is a "best" IRA. The only thing I know about them is that they exist and that it is a retirement account.
My IRA isn't ranked higher.  My 401k plan is solid and so I chose to max it out first before filling the IRA bucket.

The investment order does state it can depend on the plans available to you and what your tax situation is like.  If you have a good 401k plan, bully!  If not, go IRA.  IRAs in general have many more low-fee options that will likely have what you want to satisfy your asset allocation.  Vanguard is espoused as a good option when starting an IRA.  Keep in mind, once you open an IRA somewhere you can open another elsewhere if not satisfied so it isn't like you are stuck.

Levi421

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Re: "Investment Order" applied to my specific situation?
« Reply #16 on: July 15, 2018, 11:37:21 AM »
Great info you guys! Thank you!

I have thought of another question about the IRA.

If you set this up a traditional IRA yourself, how is it pretax? Is it auto drafted from your paycheck or would it be reimbursed at tax time?

Zaga

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Re: "Investment Order" applied to my specific situation?
« Reply #17 on: July 15, 2018, 12:11:01 PM »
Great info you guys! Thank you!

I have thought of another question about the IRA.

If you set this up a traditional IRA yourself, how is it pretax? Is it auto drafted from your paycheck or would it be reimbursed at tax time?
Good question, it's reimbursed at tax time.  You can adjust your tax withholdings to compensate though.  You'll just need to calculate how many exemptions you actually need on your W-4, which may not match what they have in the calculator for you.