Author Topic: How is my order?  (Read 464 times)

Raymond Reddington

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How is my order?
« on: July 07, 2018, 04:36:49 PM »
I am targeting an ER date of around age 50-55 (I am currently 32). 2% of my gross is also contributed to my defined benefit pension plan, which I will fully vest at age 50 (can collect at 55 - hence my target ER dates). Married, NYC resident, no kids.

0. Establish an emergency fund to your satisfaction
As homeowners, we keep about 40,000 in cash readily available in case any major calamity hits (mostly in my accounts).

1. Contribute to your 401k up to any company match
Part of my wife's compensation includes the company automatically paying around 8% of her gross into a retirement account for her. (It comes from them, not from her)
I, as a government employee, am not eligible for any company match in a 401(k) or 457, due to my defined benefit pension plan. I contribute 2% of my gross towards this.

2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
No debts.

3. Max HSA
I have very low cost healthcare for both of us with no copays as long as we stay in network, so this is a non issue.

4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
I'm ineligible to make deductible contributions to a Traditional IRA due to my pension plan. I've made nondeductible contributions in the past to the Traditional (as well as deductible contributions before I got this job) and converted most of that to Roth this year, which I will be applying this year's tax refund and reducing the liability somewhat through charitable contributions to a cause important to me. The final conversion should be done sometime mid 2019, and I will begin making backdoor contributions each year starting in 2019, while maintaining a minimal balance in the Traditional IRA to keep it open.
My wife contributes an additional amount to a Roth account each year.

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)
I contribute around 11,000 a year to my 457 account and raise the number slightly with each wage increase. My employer often gives raises retroactively, in which case I contribute the maximum retro pay (around 80%) to my 457 account to avoid the higher taxes on the retro pay, since it is treated as supplemental for tax purposes.

6. Fund a mega backdoor Roth if applicable.
Some years, mine and my wife's MAGI is too high to make direct Roth contributions, so I have the backdoor option open. Going forward, I hope to keep the amount contributed into the IRA family around 2-5 K a year.

7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
We pay off our mortgage (over 300K left at 3.75%) with extra dollars per year. Between the two of us, we try to contribute an extra 4K a year directly to pay down principal. We also get 1% cash back on the mortgage payments from the bank, which goes towards the principal.

8. Invest in a taxable account and/or fund a 529 with any extra.
I try to put around 13,000 a year into a taxable account. My reason for doing this is that I can access it anytime (there are no minimum ages for withdrawals as with some of the other accounts) so if I'm successful and able to retire at 50, I can use this money to sustain me until my pension payments kick in at 55.

My wife has significantly larger assets than me due to inheritance, which allow her to generate roughly 20,000 a year in dividend income. She does not actively contribute to that account, but will withdraw money from it to pay taxes on income generated by that account (and nothing more). So in a way, she "contributes" the dividend income less her tax liability.

I also have about 9000 invested in CD's, and another 1000 or so in savings bonds.

My income is around 95,000, my wife's is around 90,000 between her two jobs and investment income.

We are not perfect, we both own cars (she bought hers new, I bought mine used), eat out too much, have the mortgage, and I have a tendency to keep too much money in cash.

How are we doing?
« Last Edit: July 07, 2018, 04:43:05 PM by Raymond Reddington »

MDM

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Re: How is my order?
« Reply #1 on: July 07, 2018, 08:48:37 PM »
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
I've made nondeductible contributions in the past to the Traditional (as well as deductible contributions before I got this job) and converted most of that to Roth this year.... The final conversion should be done sometime mid 2019, and I will begin making backdoor contributions each year starting in 2019, while maintaining a minimal balance in the Traditional IRA to keep it open.
My wife contributes an additional amount to a Roth account each year.
Perhaps even better would be to roll the pre-tax part of the IRA into your 491k or 457b, then do backdoor Roth with no taxes.

Do you each contribute $5500/yr?

Quote
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)
I contribute around 11,000 a year to my 457 account and raise the number slightly with each wage increase. My employer often gives raises retroactively, in which case I contribute the maximum retro pay (around 80%) to my 457 account to avoid the higher taxes on the retro pay, since it is treated as supplemental for tax purposes.
Why not each of you contributing $18,500?

Quote
6. Fund a mega backdoor Roth if applicable.
Some years, mine and my wife's MAGI is too high to make direct Roth contributions, so I have the backdoor option open. Going forward, I hope to keep the amount contributed into the IRA family around 2-5 K a year.
Note that there is a difference between "backdoor" vs. "mega backdoor": one refers to IRAs, the other to 401ks.

Quote
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
We pay off our mortgage (over 300K left at 3.75%) with extra dollars per year. Between the two of us, we try to contribute an extra 4K a year directly to pay down principal. We also get 1% cash back on the mortgage payments from the bank, which goes towards the principal.
Especially if the cash back is an interest rebate, but even if not, why do you want to pay ahead on a 3.75% mortgage?

Raymond Reddington

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Re: How is my order?
« Reply #2 on: July 07, 2018, 10:08:44 PM »
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
I've made nondeductible contributions in the past to the Traditional (as well as deductible contributions before I got this job) and converted most of that to Roth this year.... The final conversion should be done sometime mid 2019, and I will begin making backdoor contributions each year starting in 2019, while maintaining a minimal balance in the Traditional IRA to keep it open.
My wife contributes an additional amount to a Roth account each year.
Perhaps even better would be to roll the pre-tax part of the IRA into your 491k or 457b, then do backdoor Roth with no taxes.

Do you each contribute $5500/yr?

Historically, it has depended on what the accountant comes back with regarding MAGI (my wife's taxes are more complicated, so we don't do our own taxes). This is actually new for me as the conversion to Roth took place in the spring of this year. My target for this year and every year subsequent is at least 5500 a year. Before conversion, it's been 1000-5000 on a non-deductible basis into the traditional just to contribute something (without incurring a penalty), but the goal was always to convert someday. With the Trump tax changes taking place this year, we agreed it made sense to do the conversion this year rather than last since the marginal rate on the conversion will be lower.

My wife is much more of a spender than I am. I have talked her into managing her money more frugally, and reducing/cutting out certain expenses, but upping her savings rate seems to be an incremental battle - she has typically always maintained a low cash balance, and so while she has more assets than I do, her priority has been increasing her liquidity as we have settled into this lifestyle. We are also both thinking about how we evaluate purchases, and the utility and enjoyment we derive from them, as well as our home, and whether or not the things in it add to our happiness, or we are better served selling/getting rid of them. I have always hoarded cash, to the point that I was stunned when I looked at the income I generate from my net worth and was stunned at how low the "yield" was, so I am trying to significantly up my investment rate to make up for lost time spent sitting on oodles of cash in checking accounts earning .01% interest. So, we both have our battles.

We've never truly commingled our finances - preferring a more postmodern arrangement where what's in my name is mine, what's in her name is hers, and what's in both our names is 50/50 (such as real estate and joint accounts).

Quote
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)
I contribute around 11,000 a year to my 457 account and raise the number slightly with each wage increase. My employer often gives raises retroactively, in which case I contribute the maximum retro pay (around 80%) to my 457 account to avoid the higher taxes on the retro pay, since it is treated as supplemental for tax purposes.
Why not each of you contributing $18,500?

Primarily, fear of going over the deductible amount, at which point any retro pay is not contributed, and instead taxed at almost 50% as a supplemental payment. Secondarily, hoping to derive utility from money that is invested in the taxable account instead before age 55, since if I retire at 50, my pension checks won't start until 55, and I'll need to sustain myself until then.

Quote
6. Fund a mega backdoor Roth if applicable.
Some years, mine and my wife's MAGI is too high to make direct Roth contributions, so I have the backdoor option open. Going forward, I hope to keep the amount contributed into the IRA family around 2-5 K a year.
Note that there is a difference between "backdoor" vs. "mega backdoor": one refers to IRAs, the other to 401ks.

Ah, got it now. I suppose that I am unsure how my tax picture will look in retirement. Most of my pension will be exempt from federal taxes, so a Traditional IRA would seem to be better in some respects. However, I do anticipate continuing to save aggressively and have low expenses in retirement (read: less deductions) so having already taxed income streams (such as Roth money) would seem to be a very good idea as well until we see how the tax code changes over the next 2 decades. Nothing in my 457 at present is Roth basis anyway, and I plan at staying in my current employment until at least 50 to fully vest my pension (I am partially vested at present).

Quote
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
We pay off our mortgage (over 300K left at 3.75%) with extra dollars per year. Between the two of us, we try to contribute an extra 4K a year directly to pay down principal. We also get 1% cash back on the mortgage payments from the bank, which goes towards the principal.
Especially if the cash back is an interest rebate, but even if not, why do you want to pay ahead on a 3.75% mortgage?

Mainly timing. One of the keys if I want to retire at 50 is to have the house paid off since that will eliminate around half my present monthly expenditures at that time. Based on my most recent review of the amortization tables, as of now the house will be paid off when I am approximately 57 (we bought 3 years ago), so if I want to have it paid off by 50, I've still got more to go. The 1% back from the bank is not a true interest rebate, it's 1% of the monthly mortgage payments applied annually to the principal...basically a couple hundred bucks a year. So in addition that, I've been diverting some cash to the purpose of reducing the mortgage duration each year.

I do suppose you make a good point, namely that I should significantly adjust my 457 contributions in years where I expect no retro pay, so as to hit the max. No sense sitting at 11K a year in years where there's no risk of retro pay hitting and putting me over the cap.
« Last Edit: July 07, 2018, 10:19:26 PM by Raymond Reddington »

Joel

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Re: How is my order?
« Reply #3 on: July 07, 2018, 10:25:48 PM »
Quote
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)
I contribute around 11,000 a year to my 457 account and raise the number slightly with each wage increase. My employer often gives raises retroactively, in which case I contribute the maximum retro pay (around 80%) to my 457 account to avoid the higher taxes on the retro pay, since it is treated as supplemental for tax purposes.
Why not each of you contributing $18,500?

Primarily, fear of going over the deductible amount, at which point any retro pay is not contributed, and instead taxed at almost 50% as a supplemental payment. Secondarily, hoping to derive utility from money that is invested in the taxable account instead before age 55, since if I retire at 50, my pension checks won't start until 55, and I'll need to sustain myself until then.

You donít seem to understand how taxes work. While supplemental paychecks may have high withholdings, the impact on actual taxes owed is the same. Withholdings happen throughout the year based on the election you make on your w4. You want your withholdings to be roughly equal to what you actually owe. However, you calculate taxes owed at the end of year on your 1040 irrrespective of withholdings.

Needless to say, you really should be maxing your 401ks before paying a penny extra on a 3.75% mortgage.