Author Topic: Investment concerns (part 1)  (Read 3299 times)

lordrtype1

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Investment concerns (part 1)
« on: February 05, 2014, 04:37:56 PM »
Hello.

I'm new here, but not to investing, since I've always contributed to some type of 401k/pension/whatever when I've had the chance.  At present, I'm only contributing about 6% of my income, but I'm hoping that after I finish settling basically the majority of my unsecured debt (this month!?!!) and most of my secured (close to the end of the year, projected), I would like to start dumping money into various investments.  Here's the basics of my portfolio:

Income: 2013 - 51k Gross (1st year-2012 was 75% of '13, 2011 was 40% of '13, 2010 was 30% of '13. That's another story)
(AGI was about 48k)
HSA: 1k
401k: 4k
sharebuilder: 500
other savings: 1k

I'm digging out of a hole, 5 years in the making, as a result of not working for 3 years (08-11), so being debt free is more of a priority for me than a goal.  That's why my contributions aren't great.  My goal is to pay down my car (sorry, don't live in a biker's paradise here) and budget for my only real planned debt: a house/condo.  housing and car (today) are 725/mo, and my total bills (minus my debt payoffs) is about 1100/mo.  I want to basically nearly pay off my car before I buy my house, after buying my house, finish paying off my car and then attack the house. Take home presently is about 2600/mo, after HSA, 401k, and insurance. I will say that 'living with parents' is not a long term viable option (as it had been the last 3 years), so housing is a priority.

I read (and listened) to some from MMM, and I understand why in many markets a 130k-260k house might be the best option for many, because of where it'll be and who will be around you (i.e., nicer, safer).  However, I will personally say that while I've never considered the places I lived bad, I've never spent more than 45k on a house, and even now, the houses/condos I've considered are 'move-in ready' at 55k-80k, so I don't think I'll go higher on that.

Here is the plan:

-pay car down (less than half of what it was bought for, to about 7k-8k), while saving 20% for down (about 15k-20k)
-next year, buy house (target price 50k-65k), and pay down in 2-4 years
-while doing this, try to save a little more (I will probably up 401k to at least 10 percent, but I'm flexible)

here are the caveats:
-I'm going out of country, so I will have that expense this year, I'm saying about 4k-5k (all inclusive, in an expensive place)
-between sharebuilder and savings, I would like to do more investing, but I'm also concerned with how much is best to reserve for when 'something' happens.  Conventional wisdom is 6 months salary (likely 28k this year-really?), but I couldn't do that, while doing ALL this, at the same time (or can I?...)
-I'm single, but if I were to marry, I want to be sure marriage itself (i'll worry about the financials for the 'day' then) won't somehow derail any of this, if she's on board with everything. I'm talking from a tax/kids standpoint.
-this is merely a thought, during my financial reversal, I had to cash out my 401k (about 8k) for food in '10. Can I do catch ups, after I max out my contributions, and is there a tax benefit?  And what would the cutoff be, since I doubt it'll be this one? (i'm already out 4k in 2014 paying debt-I carried over money from last year to pay it, and where I work, I get paid extra working during my plant's shutdown in dec).
-final point, should it be an option, I can borrow against my 401k (up to 50%) should I desire, but it should be known that it is put back on an after tax basis, and won't be invested while loaned. I would likely only do it for my house, since it has value, and i can put the money back as fast (or slow) as I want. I only bring it up because I can, not because I will.

I say part 1, because this is a starting point.  I would like to plan for my (early) departure from the workforce, but the funny part is I may not before I'm supposed to, just because of age and health, but I want to at least roll the ball in that direction.

What I'm looking for is whether I'm trending in the right direction with my goals, or if I need to have my head examined by you nice folks.  Thanks in advance everybody.

Cheddar Stacker

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Re: Investment concerns (part 1)
« Reply #1 on: February 05, 2014, 05:03:49 PM »
My first goal if I were you would be to shoot to stay within the 15% tax bracket. You sound like you're barely outside it right now based on your numbers so it shouldn't be hard. In 2013 the taxable income limit for the 15% bracket was $36,250. After standard deduction and exemption you are at about $38K ($48K AGI - $6,100-$3,900) taxable income, so the last $2K or so is taxed at 25%. I'd increase my 401K contribution slightly if I were you. Look up the 2014 tables/exemptions if you plan to do this since they're slightly higher.

If you can get a house that cheap that you will enjoy living in and be able to sell when you're ready, you'll be in a good position to invest quite a bit very soon.

Pay down the car loan ASAP. Skip the out of the country vacation if possible to do so.

You don't need an emergency fund right now. If you buy a house, you will likely need one, but you might be able to just get a home equity line of credit instead.

I'm not aware of any way to make a catch-up contribution to your 401K unless you're over 50 years old.

You can take a 401K loan, but there are risks and rewards. The good - you pay the interest to yourself, and it acts like a bond within your portfolio with a fixed return on investment. 401K loans are limited to 50% of total balance up to $50K. The bad - if you lose your job you have to pay it back right away, or take a distribution. You have to pay it back with after tax money.


lordrtype1

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Re: Investment concerns (part 1)
« Reply #2 on: February 05, 2014, 05:35:51 PM »
Good point about the tax bracket, I didn't think about that, and I was afraid I was going to be taxed more, because I thought I was further in.  The overseas trip is non-negotiable, because its the first (and probably last) time I've been outside the states, and the cause is worth a lot more than the financial sacrifice.  I'm going to see if I can start contributing more to stay below the 15% threshold, though.  That's a big help just with that.

soccerluvof4

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Re: Investment concerns (part 1)
« Reply #3 on: February 06, 2014, 05:23:48 AM »
If your only going to spend 45-50k on house (which is awesome by the way) I dont see how 15-20k is 20% down. Having said that the more down the merrier.

Cheddar Stacker is spot on. +1

wtjbatman

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Re: Investment concerns (part 1)
« Reply #4 on: February 06, 2014, 06:08:21 AM »
You might want to post in the Ask a Mustachian subforum. Do a reader case study post.

lordrtype1

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Re: Investment concerns (part 1)
« Reply #5 on: February 10, 2014, 05:10:44 AM »
I would prefer to spend 40k to 50k, But since the houseing market is slowly (SLOWLY) rebounding, by next year I expect it could be more for what I see now.

I'm saying 15-20k because a 70k place would be 14k @ 20%, and I don't like taking all of my cash and zeroing my accounts, even for this, especially if I have to replace a water heater, heat pump, fridge, etc. right after I buy the place.  And, I might need a stove, fridge, water heater, etc when I buy the place, because it didn't come with one (except the water heater; It better have that! I mean, really?).

I'll look into posting on the case study post as well.  Thanks for the direction!

lordrtype1

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Re: Investment concerns (part 1)
« Reply #6 on: February 11, 2014, 05:32:30 AM »
This is an update, I was informed NOT to duplicate posts in different areas, so I'll simply report the updated info:

The basics of my portfolio:

Income: 2013 - 51k Gross (1st year-2012 was 75% of '13, 2011 was 40% of '13, 2010 was 30% of '13. That's another story)
(AGI was about 48k)
HSA: 1k
401k: 4k
sharebuilder: 500
other savings: 1k

This is the present day, plus I will update my statement above with a few projections as to how this (may) happen, barring the unexpected (marriage, lawsuit, death, Nuclear winter, car issues, etc.):

Current Year Projections:
 Income: gross, about 57K (take home-3100-3300/mo-wages on tiny stair-step up)
Expenses (actual): 1400
Total Savings (projected-still have some one time costs): about 1500/mo., including 200/mo to 401k

Deductions from those savings:
-Already paid out:
--Debts (5k)

-Financed with savings:
--Out of country trip (estimating 6k, but expecting 3-4k)
--In country travel (estimating 4k, expecting 2.5k)

Note, the % I gave is based on base wages, my gross this year includes a lot of mandatory overtime, since I work maintenance, and we have 24/7 coverage on the building, and my base is like 46k, I think. And the last 7-10 days of the year are 'free money' days, I get paid if I don't come in, or paid 3x more when I do, but it'll carry into the next year (like it already did this year from last).

5 year projections:

2015:
Gross: 59k (3300-3400/mo)
401k: 400/mo
Expenses (with house pmt.): 2100
Savings:
-House overpayment: 600/mo
-Other savings: about 300/mo (likely investing-this is what I do for fun, and only reason I don't just dump all on house)

2016:
Gross: 62k (3400-3500/mo)
401k: 500/mo
Expenses (with house pmt.): 2100
Savings:
-House overpayment: 600/mo
-Other savings: about 300/mo

2017:
Gross: 64k (3500-3600/mo)
401k: 600/mo
Expenses (with house pmt.): 2200 (inflation)
Savings:
-House overpayment: 600/mo
-Other savings: about 300/mo
-Also note, without paying anything more than what I do in 2014, car will be paid off this year-I'm leaving in because I'm not sure exactly when

2018:
Gross: 66k (3600-3700/mo)
401k: 700/mo
Expenses (with house pmt.): 1800
Savings:
-House overpayment: 800/mo
-Other savings: about 300/mo
-I think I estimate the house should be down to 8k this year, so I'll project it into the next, but if I can pay it off in 2018, IT WILL HAPPEN!!!

2019:
Gross: 69k (3800-3900/mo)
401k: 900/mo
Expenses (with house pmt.): 1800
Savings:
-House overpayment: 400/mo
-Other savings: about 700/mo (likely investing-this is what I do for fun, and only reason I don't just dump all on house)
-I don't want to buy another car in this year, but I estimate I'll have 190K on mine, and while that's fine in city, I don't trust it out of state, like I have to regularly. May rent a car, may not.
 
2020 (final projected):
Gross: 72k (3900-4000/mo)
401k: 900/mo
Expenses (with house pmt.): 1200
Savings:
-House overpayment: 600/mo
-Other savings: about 1200/mo

I stop here for two reasons:
1) You're gonna be sick of looking at my numbers
20 I have no reason at thie time to not doubt I would be here after this. Not because I don't want to be, because of what is likely to happen that year.  I'm probably reading too much into toom little, But I want to stop there.

These are my estimates:
-car (value): 1500 (HA!-Let's move on...)
-House: 70k (condos don't go up fast here, but I like 0 outside maintenance, and free rec room, exercise room, etc., so...)
-401k: about 72k (It should be more, but this is conservative, and I ALWAYS invest agressive, in everything)
-savings (invested): about 60k (VERY conservative--I expect a learning curve, and I will admit I'll probably be a more active investor than most.  I honestly plan for making about 72K with what I save, since I'll have a lot in certain places that I already know pay at or above DJIA or S&P avg. annual)

Please check my math.  On the 401k, I used a 7-9% percent annual return, on my savings 9-15% return (thru investments).  Historically, though, my 401k has returned 12%, and I have no track record for savings, as I've barely had any.

Based on MY projections, I could retire in 2025-2028, but I'm guessing, since this is getting into higher math than I'm used to, and I may add in things I might need along the way (like a wife and/or kids). Pie in the sky says I could range from 353k (2025 lo) to 737k (2028 hi) given what everything COULD do.  I'm shooting for 600k to 650k, so my agressive stance is likely to be maintained to get this to work in this time frame, unless I could save more early.  Any input on my numbers is welcome. And, contrary to what this may show, I'm really a blank canvas right now.  I don't have much of anything tied up in anything.

matchewed

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Re: Investment concerns (part 1)
« Reply #7 on: February 11, 2014, 06:40:16 AM »
lordrtype1, what is your question? You list you have concerns and then say you make X and save Y. What concerns do you have?

The more specific your questions are the better people can help you. Leaving a general "what do you think?" is going to get a cricket like response as there isn't much to think on, the best response to "what do you think?" that I've got is "good?"

lordrtype1

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Re: Investment concerns (part 1)
« Reply #8 on: February 12, 2014, 12:04:39 AM »
Sorry about that, I guess it wasn't really clear what I'm after, after all of these posts.  Here are the questions: (Modified-I found some answers, but will leave the questions so I can still get input.  I will mark the ones I did get an answer for, though).

1)Is there anything I need to consider with making a long term plan, to improve my success?*
2)Is there any investment options I'm overlooking for the money I save?
3)Is there any costs that I can consider cutting, even if I realize I can't completely?
4)Should I invest more heavily into my 401k, or divert less there and into something possibly more accessible/flexible,etc?
5)Are my estimates for my forward-looking goals realistic, or should I expect smaller/larger returns?*
6)Are there any expenses I should expect when FI, that may not come up while working? (i.e., I pay my property taxes vs. escrow)  If so, What can I expect?
7)Does anyone know if there is any concerns with saving TOO much money? (i.e., getting into a crazy tax bracket, because your investments get too big, or you can't draw enough down to a manageable size-silly, but it's my question)
8)Are there things, beyond capital gains, that I should worry about with taxes, at federal level?  Local is simpler, but I'll worry about that when I'm closer.
9)What cost-cutting measures has everyone taken to save more, that maybe I haven't mentioned? (which is probably a lot)
10)Can you recommend any particular articles MMM has on any of these?  I have time to read some at work, but not time to read approximately 7 years worth of articles.  I've barely started the 'start here,' I'm just wondering where to go from there.*

These are the questions I'm asking. I've merely offered the info in my posts regarding my finances and my goals to help everyone know where I stand, and if I can actually get there from here. I know I'm asking a lot, and I don't expect one person to answer all the questions, just answer what you know works for you.

Thanks Again.

*Found an answer or two.
« Last Edit: February 12, 2014, 04:34:26 AM by lordrtype1 »