Author Topic: The first plunge toward Freedom  (Read 925 times)

zf_laflare

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The first plunge toward Freedom
« on: April 24, 2018, 04:22:27 PM »
I stumbled across this blog about 3 months ago and it has changed my life completly. I have been an avid reader, learner, and try-to-doer of the MMM way of life. From MMM I have branched out and started reading other blogs such Jim Collins and the Mad Fientist trying to learn as much as possible. After hours and hours of reading and contemplating I am ready to take the plunge into badassity. This has led me to this point, my first post on any such site asking for help. There has been so much information and I need some guidance putting it into practice full time. Here is some info about me and any advice would be greatly appreciated!

About Me:
25 year old male
Live in California
Employed making 60k/yr pretax.
Hoping to reach FI by age 40/45.

Financial Info:

Debt:
10k student loan debt @4.6% interest.

IRA Questions:
Currently have a Roth but having read about the Roth conversion ladder I am curious about switching to a traditional and would like some input.
Should I keep my IRA funds in Target Date 2050 (what it is currently) or move it to something like VTSAX? My IRA is funded for 2018.

401k:
I become eligible for my companies 401k next month (May 2018). They will match 4% if I contribute 5%. I plan on contributing to get the match but I am wondering if it is more advantageous to max my 401k for the tax benefits or to contribute that money to a taxable account. The 401k fund would be Great-West S&P 500 Index Fund with an ER of .54. All other options have ER much closer to or over 1%.

Liquidity:
I have an emergency fund of around 8k in a High yield savings account @1.6%.

Expenses:
By my calculations after all my required expenses, (food, rent, gas, insurance, student loans, etc) I have around $2000 a month to invest.

I am looking to take advantage of my age and plant the brightest future that I can starting now.

Any advice is greatly appreciated!

Interest Compound

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Re: The first plunge toward Freedom
« Reply #1 on: April 24, 2018, 04:55:11 PM »
Personally I'd put all future IRA contributions towards a Traditional IRA instead of a Roth IRA.

I'd pay off the Debt ASAP, as a 4.6% guaranteed return is pretty good in my book :)

I'd max out the 401k ($18,500 a year), with all of it in that S&P500 fund. It's not the best, but the tax advantages more than make up for it, and when you leave the job, you can roll it over to your Vanguard IRA.

Fun graph:



Keep it up, you're doing great!
Passive investing has a deep humility at its core--the aim is not to separate winners from losers, but rather to hold the entire market. Volatility is only temporary, but you can permanently cripple your portfolio trying to avoid it.

Radagast

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Re: The first plunge toward Freedom
« Reply #2 on: April 24, 2018, 11:11:38 PM »
I would throw the $8k emergency fund at the debt along with 2,000 friends. No sense having 10K cash at 1.6% and 10k debt at 4.6%. This will also free up cash flow for the 401k and IRA.

I favor IRA over Roth because it helps lower your marginal rate. At 60k single you are looking at a 22% marginal rate. Subtract $18,500 for the 401k and $5,500 for the IRA and you will be at $36,000, which puts you at 12% rate, where you do not pay long term capital gains. Add in an HSA and you have room to grow your income and keep that rate low.

This is just my preference, but since you have so much going into the S&P500 in the 401k I'd favor international and small company stocks in the IRA, possibly even VSS (international small). For now your E-fund (once you build it back) can count as all the bonds you need.

joleran

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Re: The first plunge toward Freedom
« Reply #3 on: April 26, 2018, 10:09:41 AM »
I favor IRA over Roth because it helps lower your marginal rate. At 60k single you are looking at a 22% marginal rate. Subtract $18,500 for the 401k and $5,500 for the IRA and you will be at $36,000, which puts you at 12% rate, where you do not pay long term capital gains. Add in an HSA and you have room to grow your income and keep that rate low.

$60k - $12k standard deduction - $18.5k 401k max = Only $30k taxable, all the way down to the 12% bracket without needing the IRA, and at that taxation level, the Roth is probably the best bet imo (the bet being that you will pay more than 12% top marginal when you are withdrawing retirement income from a traditional IRA).

I would hazard a guess that making $60k at 25 means that the income trajectory is going to be relatively high, so it makes even more sense to me to get the Roth in that light.

Paying off the student debt is going to be helpful in many ways, I would however use up your IRA space before focusing the debt down in your case because the debt isn't at particularly bad rate and you have a nice long timeline to grow tax-free and a collapsing window to contribute this (and each) year.


Radagast

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Re: The first plunge toward Freedom
« Reply #4 on: April 26, 2018, 08:11:51 PM »
That's a good point I should not neglect the higher deduction. Given that state taxes are high and I don't know how they work as I don't live there, plus I am not sure how precise 60k is (63k +5k bonus?) I am not in a position to give detailed tax advice (what if you go IRA and move to another state?). Staying with Roth if you would be in the 12% bracket either way is good advice though. Staying in the 12% bracket if at all possible is also good advice.