Author Topic: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?  (Read 14949 times)

GumbyPickles

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So, recently I decided that I would like to retire by age 40, and found this website/forum during my investigation. I specified I'm an Engineer ME since I've seen so many other engineers on here and I believe even read a blog post about it, funny how a mind-set can attract a certain profession.    I can't believe how popular this blog's specific forum is - that's amazing. 

Financially, I've been battling the last year paying down all my debts (Car loan paid off, student loans paid off -  aside from low interest $2k)  Anyway, I'm sure these get posted way too often, but I figured it was worth a chance and I appreciate any feedback to help me reach my goals. 


I'm trying to determine Where should I put my money, and in what order? 


Income: $83,000 Gross, +$2,500 bonus placed into HSA Account
(Monthly net approximately $4,500 after taxes/401k)

Current Monthly Expenses:
Rent: $625 (Split $1,200/mo with roommate)
Utilities: $200
Auto Ins/Gas: $200
Alcohol/Bars: $200
Restaurants: $150
Fast Food: $100
Groceries: $100
Other $100
Student Loans $30  (2.05% Interest Rate)
TOTAL: ~$1,705 Monthly, or 38% of Take-Home



Assets:

Savings Acct: $35,000 (For house down payment, 0.9% APY)
401k Account: $30,000 (2050 Fund)
HSA Account: $4,000 (Vanguard Funds for $2k, $2k FDIC Insured)
Checking Acct: $13,000 (Emergency/Cash Fund)


Where do I go from here?  We're quickly approaching the end of the year and I've only saved 5% monthly toward the 401k, which employer matches.  That will total to $8,000 approximately.   



My current thoughts:



1) Contribute max to HSA

2) Contribute max to Traditional IRA this year ($5,500)

3) Nov 1st increase my 401k contributions to 15% of income, which will put me right near the $17,500 max for next year and up this year's payments to ~$10,000.

4) Keep $35,000 in bank for down payment on a home, which will likely include PMI as costs in area are fairly expensive ($250k+ likely)


Thanks for any/all insight. 
« Last Edit: November 05, 2014, 02:03:07 PM by GumbyPickles »

GumbyPickles

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I would increase the 401k contribution as high as possible to see if you can max it out for the year.  Do this before you contribute to an IRA.  The reason for this is you can contribute to an IRA up until April 15 for the previous year, but you only have until Dec 31 to contribute to the 401k.

I would not pay off the student loan early since it is at 2.05% interest.  You didn't mention your auto loan rate.

Also, do you really need to buy a house?  You want to retire in 13 years.  Are you planning to stay where you're at once you retire?

I have no idea where I'd like to be when I retire to, but I've always wanted to own a place, sick of sharing walls, and wish my rent was going toward *something*.  I would be able to retain a roommate guaranteed who would pitch in $600/mo minimum.  Can't see myself moving any time soon, but who knows. 

Also, sorry I wasn't clear, I paid off my 2.99% APR Auto Loan last year, which might have been dumb but I didn't think about it at the time.  I guess I was in a "debt free" mindset haha. 
« Last Edit: October 20, 2014, 07:38:19 AM by GumbyPickles »

ADK_Junkie

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Yeah, max out your 401(k), HSA, and put $5,500 in a Roth IRA (not the Traditional one).

After that, save as much as you can in a regular brokerage account (most around here like Vanguard) and accumulate VTSAX.

Knock out your Student Loan (rate is higher than your savings account, so this is a no brainer).

You have a great savings rate (based your expenses, assuming this holds true), just might be able to reach FIRE by 40 (see the shockingly simple math behind early retirement).

Ready for your face-punch.  Do NOT buy a house. 
Your cost of living is ridiculously cheap right now.  The transaction costs of owning a home are huge.  With an apartment, you have incredible mobility.  Homes are not good investments (see JLCollinsNH.com).  Houses eat up cash and time.  Lastly, you have no idea what your "needs" are going to be in ten years (or even five years).  You may end up with six kids and need a bigger house in a better school district.  Far better to invest in the market and only purchase a home when you are (1) ready to settle down, or (2) absolutely want the luxury (and burden) of more space.  You will destroy your odds of FIRE if you purchase a house now.

GumbyPickles

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Thanks guys.  I appreciate both of your inputs.

Knaack: Good call on going for the 401k first, due to the annual contributions being allowed for an IRA into March 2014.  I didn't even think of that.  I just finished off my HSA after I saw these posts, got me excited to polish one tax-free account off! 

ADK: Regarding the house, I might or might not go for it.  I understand the cause for concern, but I will still have a roommate to help pay off the monthly payments.  I also feel that the area is appreciating and anything invested into the home would be easily recoverable. 

Interesting that you both recommended different types of IRA.  Time for more resarch!

Kingomri

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At your salary range, assuming you're single (since you have a roommate), you definitely want to max out your 401(k), Traditional IRA, and HSA. For my employer, you can specify a dollar amount or a percentage for your 401(k) contributions. You can run the calculations on what you need to max the 401(k), and contribute accordingly if your employer works similarly to mine. Keep in mind that your employer's matching contributions do not count towards the $17,500 contribution limit.

You can definitely afford to max everything. My salary is right around the same range as yours, and my monthly expenses are significantly higher due to having a family, and I'm (barely) able to max out a 401(k), two traditional IRAs, and an HSA. You'll benefit even more than I will because you're in the 25% bracket instead of the 15% bracket.

Buy vs. Rent is a common dilemma, and you'll need to run some calculations to decide if it's worth it. The fact that you have a roommate who will pay rent definitely helps tip things in favor of buying, but it's far from an automatic decision.

As it stands right now, you're paying $625/month for rent. The costs of owning a home that you need to consider are:
  • Maintenance Costs, usually estimated between 1-2% of the property's value
  • Higher utility bills, since houses are generally larger than apartments
  • Possibly utilities that the place you're renting normally pays (e.g. I pay for trash and water/sewer, where I didn't used to when I was renting)
  • Loan interest, and as you specified in your case, likely PMI
  • Property Tax
  • Opportunity cost of tied up home equity (if you invested that $35,000 down payment in the stock market or a balanced stock/bond portfolio, what kind of return could you expect on that?)
  • Transaction costs of buying/selling the house (loan closing costs when buying, 5-6% realtor commission when selling) averaged over the time that you own the home
  • Homeowner's Insurance (minus the cost of renter's insurance you're currently paying

Take all of those costs, add them up, subtract the rent your roommate would be paying, and compare that cost to your current rental cost. Then decide if it's worth it based on the intangibles like sharing walls or not, being free to move vs. locked down to one location, the risk inherent in holding a mortgage, having to take care of the raccoons that took up residence in your attic yourself vs. being able to just call the landlord (personal experience speaking here...), being able to make a place your own/have a sense of permanence, etc. You're an engineer, so I can trust you're mathematically strong enough to run the numbers. Buying made sense for me, mostly because I live in a low cost of living area, and I have a family. It may or may not for you.

Regardless, you'll easily be able to retire by 40 at your current rate of saving, so congratulations on doing a great job so far!

Edit: Forgot property tax!
« Last Edit: October 20, 2014, 08:58:06 AM by Kingomri »

welliamwallace

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In your case, buying a home will probably not improve your time to FIRE. Probably will set it back unless you rent out some spare bedrooms in your home.

I went from renting for about $1.2k a month (rent + utilities), to owning a house. Now I pay $2k a month, with another $0.2k from repairs and maintenance ($1000 for a water heater last week!). However, I also rent out two bedrooms for $1.2k income, which is the only thing that made the house purchase make sense.

When I get married in 2 years, I'll probably have to kick the renters out. I'm stretching out the engagement as long as possible ! (shhh don't tell the fiancee).

Just kidding, we communicate fully about this stuff

Pooperman

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Interesting that you both recommended different types of IRA.  Time for more resarch!

Traditional is generally better than Roth if you're looking to FIRE (see Traditional vs Roth), but in your case you might not be eligible to contribute to a traditional, which is why I said "or Roth IRA if not eligible for traditional" in my original post.  You can see the limits on the IRS site.  You are probably in the phaseout range.

Traditional down to 15% bracket, Roth otherwise. For Traditional to be the same as Roth, you have to invest the amount saved in taxes in a taxable account. Dollar for dollar, a Roth is worth more and is the better choice if your income bracket is the same as the one you intend to retire to. State taxes can also factor in the decision of Roth vs Traditional. Some states treat IRA accounts and HSA accounts as taxable accounts. If you happen to live in one of these states, Roth comes out ahead slightly based on this. Again, if you get yourself to the 15% bracket, everything else should be Roth if possible. Plus, with a Roth IRA, you can put your e-fund in there (in cash) and withdraw if/when necessary. You can put the money back as well, and there is no penalty for doing this, so it's a way of hitting your $5,500 every year when you are just starting out and don't make enough to fully fund a 401k, HSA, and IRA every year.

Bob W

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Nice work and welcome!

I echo those with the don't be in a hurry to purchase a home crowd.   Your rent is way too cheap.  Homes are typically not investments and are very expensive in general.   Perhaps a duplex is in your future? 

$200 a month for booze is $180 too much. 

Would like  you to change your mind set slowly to shoot for 80% of net in savings. 

Read lots more of the blog and forum to see how this is possible.   

At that rate you could shoot to retire at age 35 easily.

Set some incremental goals such as "by February 28th I will be at  ______% savings rate.   Use the calculators to see how these percentages effect your target dates.   

In reality you probably won't really want to retire at 35 but you will want to be FI.  When you're FI you can make decisions like -- "I think I'll spend a year in _______.    I think I'll go on a part time consulting gig.  I think I would like to work in Switzerland for a couple of years."

Also,  I don't recommend high wage earners to keep any cash or cash like investments.   You don't need an emergency fund that pays virtually zero.  Wasn't clear on your HSA?  Is that basically a zero account too?  Could it be put in an S and P 500?

For emergency backstop see the posts on playing the credit cards for cash and air miles game. 

I'm not telling you how to live your life just prodding you to be more aggressive now while you're young.   Setting too long a horizon will tend to make folks complacent with their budgeting. 

zolotiyeruki

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I'll just reaffirm the recommendations to max out 401(k), HSA, and traditional IRA first.  Being single with no kids, you want to drive that taxable income down as much as you possibly can.  You're already well on your way to FIRE if you're 27, single, making >$80k, and saving a large percentage of your income.

There's a big thing others have missed, though:  the years between the time you retire and the time you gain access to your 401(k)/IRA money.  Since you're starting early and can have an enormous savings rate, you should have no problem retiring well before you turn 40.  That leaves a LOT of years before you can tap your 401(k) or IRAs without penalty.  You'll need some regular ol' taxable investment accounts to cover those 15-25 years before your 401(k)/IRA are available.  Since you'll be tapping your traditional investments long before your 401(k) and IRA, I would prioritize those next after maxing out 401(k)/IRA/HSA.

It also puts you in the happy position of taking advantage of a Roth IRA conversion ladder, so you'll never have to pay taxes on that money :)

Some other suggestions/words of counsel:
1) I'd put your "saving for a home" money in something better than a savings account.  Stick it in an index fund and forget about it until you actually need it.  The only reason to keep it in a savings account is if you can't afford to take *any* risk or you want to be able to withdraw it at any moment.
2) Since you're single, I'd suggest you either keep renting with roommates, or buy a house and rent out rooms.  There's no (financial) sense in living alone in a single-family house.
3) You've got one part of the FIRE strategy down--saving lots.  But you didn't say much about your long-term PLANS:
----a) what is your expected spending in retirement?  Don't forget you'll likely be paying for your own health insurance
----b) as a follow-up, what is your "magic number" that will allow you to retire?
----c) do you have plans/expectations of getting married/having kids some day?
4) Cut out the fast food.  Not so much for the financial gains, but for the health benefits.  Same goes for the alcohol, but that's just my opinion, and I don't drink :)

thedayisbrave

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I understand wanting to have a place with no shared walls.  I did the same thing when I was 23.  I was irritated with my neighbors and had the money to build a house, so I did.  As nice as it is to own my house, it wasn't the best financial move.  If I had it to do over again and I really wanted to own something, I would go into it with an investor mindset.  That means I would most likely buy a duplex or fourplex and rent out the other unit(s), plus perhaps have a roommate to help accelerate my FI date.  The numbers would have to make sense as a long-term rental if I didn't occupy one of the units.  Then, when I wanted to move, I would be able to rent out my unit and have a nice cash flowing property.  If I couldn't find a place that made sense as a rental, that means it's a renter's market instead of a buyer's market and then I would keep renting.

This is literally exactly what I did 3 years ago.  Turns out to be one of the smartest decisions I've made so far, even though greenhorn 21 year old me saw the place and said "I can make $1,000 every month and not do anything? Cool, I'll take it!" I've lived here 3 years and am moving on (new job, new city).  I ended up buying in the new city as well, and will not only fully rent the 1st property but will have a roommate in the new one to offset costs (aka pay the mortgage).  There are two different mindsets that you can go into homebuying with.  You can go in as an investor,  buy the one that gives you the #s you want, and put up with maybe some things you don't like while living there, but ultimately making the sacrifice(s) knowing you are building your stache (and getting paid to live in your own house, what what).  OR like most people you can go into homebuying as "I want to find a place I love".  Generally speaking if the emotions work out, the #s won't.  But it's important to figure this out BEFORE you commit.  I had to make this decision with my newest purchase and though it was more in favor of "love," I still am breaking even ish which is fine with me because I went into it differently.

You're definitely going to get lots of differing opinions on buying vs. renting but ultimately it's up to you and what you are comfortable doing.  It's your life! Personally mine has been enhanced knowing that I live in my own house but to each his own. 

But yeah, I'm with the guys that said you can afford to cut down your spending a little bit more.  For example, $100/mo on FAST FOOD?!? CUT THAT SHIT OUT RIGHT NOW! Alcohol is too high as well. 

Oh, and welcome :)

GumbyPickles

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Perhaps a duplex is in your future? 
I would love to own a duplex, but none are available in my area and it's become extremely pricey due to the housing market booming.  Nothing reasonably priced lasts more than a week, usually goes for over asking,  and a duplex hasn't been available for over 6 months.

$200 a month for booze is $180 too much. 
But, I enjoy spending time with friends AND booze.  :(

Would like  you to change your mind set slowly to shoot for 80% of net in savings. 
That'd be great, but even with just bills/utilities/gas that's pushing my entire spending.




Also,  I don't recommend high wage earners to keep any cash or cash like investments.   You don't need an emergency fund that pays virtually zero. 

This is actually a good point.  If I were to lose my job for whatever reason, we have a pension account I totally forgot about that I could cash out.  It's going to pay $6,000/yr at 62 currently, something like that, but you can cash it out when leaving if you choose to for lump sum.    Plus any left over vacation days. 

Wasn't clear on your HSA?  Is that basically a zero account too?  Could it be put in an S and P 500?


I have $2k in investment accounts, Vanguard International and Vanguard Market  I keep $2k in a savings account portion, again probably don't need to....


For emergency backstop see the posts on playing the credit cards for cash and air miles game. 
Already have 24 cards, that was my "financial fun" before this....lol



Thanks again for your insight.

GumbyPickles

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I'll just reaffirm the recommendations to max out 401(k), HSA, and traditional IRA first.  Being single with no kids, you want to drive that taxable income down as much as you possibly can.  You're already well on your way to FIRE if you're 27, single, making >$80k, and saving a large percentage of your income.

Just finalized 40% of gross to go to 401k til end of year. Crazy...

It also puts you in the happy position of taking advantage of a Roth IRA conversion ladder, so you'll never have to pay taxes on that money :)

Thanks for the link and good points, I had heard of this before.  Very interesting. 


1) I'd put your "saving for a home" money in something better than a savings account.  Stick it in an index fund and forget about it until you actually need it.  The only reason to keep it in a savings account is if you can't afford to take *any* risk or you want to be able to withdraw it at any moment.

Then it might not be there when I "need" it...

2) Since you're single, I'd suggest you either keep renting with roommates, or buy a house and rent out rooms.  There's no (financial) sense in living alone in a single-family house.
Of course not, most I would ever consider would buy house and rent to girlfriend.

4) Cut out the fast food.  Not so much for the financial gains, but for the health benefits.  Same goes for the alcohol, but that's just my opinion, and I don't drink :)
Chipotle is too delicious :(

Bob W

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I can see there are some "mind set" issues.  lol

Seriously, You can drink at home, in the yard,  at the park, at a friends, at your crib just about anywhere but a bar.   Hell even at a bar the water is free! (no need to drink and drive!) 

So for 30 bucks you can buy yourself 6 750 mls of quadruple filtered (or triple distilled) vodka per month for a per drink average of 30 cents a drink.  Think about that next time your at the bar paying $4 for one beer.

So over 37 years (about the time you're 65) your $2100 in savings from drinking somewhere other than a bar will add up to about 500,000 (9%).   

Another hint,  if your buddies won't hang with you and drink your vodka for free somewhere other than a bar,  then they aren't very good buddies.   Conversely,  if you're always the designated driver they will always pay for gas, sodas and hamburgers.   Plus you get to be sober while hitting on the drunk girls. 


skunkfunk

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Do you live at my house? Very similar age, household income, occupation, assets etc. etc.

I will mention that one thing that has really stroked both the engineer and the beer snob in me is homebrewing. I nerd out on that pretty badly, really.

I also spent probably about that on fast food and restaurants before finding this site myself. Since, I've found that I do not have quite the taste for that sort of food that I once did and fast food spending is basically nil. I went out for a rare lunch out of the office today however, so I think perhaps I shouldn't lay into you like I would like to.

zolotiyeruki

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Let me see if I can get these nested quotes right...
I'll just reaffirm the recommendations to max out 401(k), HSA, and traditional IRA first.  Being single with no kids, you want to drive that taxable income down as much as you possibly can.  You're already well on your way to FIRE if you're 27, single, making >$80k, and saving a large percentage of your income.

Just finalized 40% of gross to go to 401k til end of year. Crazy...
Sweet. That's a good start!  What kind of reaction did you get when you told them to change it?

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1) I'd put your "saving for a home" money in something better than a savings account.  Stick it in an index fund and forget about it until you actually need it.  The only reason to keep it in a savings account is if you can't afford to take *any* risk or you want to be able to withdraw it at any moment.

Then it might not be there when I "need" it...
:)  that's why I put that "risk" qualifier in there.  It really is up to you.  If I were in your shoes, though, I'd stick it in an index fund and forget about it.  You mentioned that housing is going through a boom in your area.  Where are you located?  Do you expect to live there long-term?
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2) Since you're single, I'd suggest you either keep renting with roommates, or buy a house and rent out rooms.  There's no (financial) sense in living alone in a single-family house.
Of course not, most I would ever consider would buy house and rent to girlfriend.
This might not sound as polite as I intend, but what *is* your plan for housing?  Or are you just exploring options at this point?
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4) Cut out the fast food.  Not so much for the financial gains, but for the health benefits.  Same goes for the alcohol, but that's just my opinion, and I don't drink :)
Chipotle is too delicious :(
Ok, ok, I'll admit that Chipotle is good.  But is it "worth buying every other day" good?

And Chipotle can't hold a candle to Cafe Rio, in case you ever make it to Utah... :D

Bob W

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http://forum.mrmoneymustache.com/share-your-badassity/homemade-vodka-easy-4-cents-a-drink/msg429236/#msg429236

Check this post if your interested in drinking for less than 4 cents per drink.   I'm the OP.  I'm in the final stage of the Halfka (Halfka because it requires no distilling and is half as strong as vodka)experiment.   

Someone who is an engineer might enjoy taking it to the next step and doing a little home distilling.  You could theoretically make the worlds finest vodka for like 10 cents a drink.   For 4 bucks you could invite 4 friends over and have 10 drinks each.   


GumbyPickles

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I can see there are some "mind set" issues.  lol

Seriously, You can drink at home, in the yard,  at the park, at a friends, at your crib just about anywhere but a bar.   Hell even at a bar the water is free! (no need to drink and drive!) 

So for 30 bucks you can buy yourself 6 750 mls of quadruple filtered (or triple distilled) vodka per month for a per drink average of 30 cents a drink.  Think about that next time your at the bar paying $4 for one beer.

So over 37 years (about the time you're 65) your $2100 in savings from drinking somewhere other than a bar will add up to about 500,000 (9%).   

Another hint,  if your buddies won't hang with you and drink your vodka for free somewhere other than a bar,  then they aren't very good buddies.   Conversely,  if you're always the designated driver they will always pay for gas, sodas and hamburgers.   Plus you get to be sober while hitting on the drunk girls.

I'm just as much into the scene as they are; my fault.  I know it's highway robbery, but it's always a fun time and entertainment as well.  You make great points though and I've been attempting to cut back recently. 

Looking through my Mint it's CRAZY how much went toward Alcohol/Bars.  Average of $300+/mo.  I will say I live in a urban center with full walkable community of bars/resturants so DD/taxi stuff isn't an issue.  (Also the problem w/ housing costs, lot of demand)

Thanks for the homebrew recipe though, I'm definitely going to try this...looks fun and saves $ (best of both worlds).

CryingInThePool

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Did you read http://forum.mrmoneymustache.com/ask-a-mustachian/what-would-you-take-a-do-over-on-from-the-past-decade-of-your-life-why  ?

A lot of do-overs on the house buying front.  I didn't chime in there but I will here and say its my do over too.  You've received great advice about approaching the topic from a numbers and not an emotional perspective but it's still a huge regret to have that I don't think you've fully balanced against different future scenarios.

You don't really comment on your current happiness level with your job but try to imagine being 40 and hating every single day and knowing you'd be free if you'd hadn't bought.  Does owning your own walls still win?  What if the love of your life asks you to move a state/country away? Do you really want to be a landlord?   Put in a lot more effort and thought into the decision and take your time while you seriously feed those investments to cover you between 40-65. 

My 2cents would be to always choose flexibility and freedom over any want.  If you do that at 27 you'll be set for life.  Plus it'll be easier if you make that decision before all your bar buddies start settling down  so you won't feel any pressure to follow them down the lifestyle inflation path - you'll be kicking ass on  your own path that leads to FIRE at 40.



GizmoTX

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My spouse & I married at 22 in 1969 & lived in apartments for 7 years. We were STEM DINKs & saved an amazing amount. We shopped for a month for our first new car, a Ford Maverick, financed it thru the company CU, & paid it off in less than 6 months. Drove it for 10 years until it really died. We initially rented a few pieces of furniture & replaced them with quality items on sale for cash. We still have some of the pieces. We built desks out of 2-door filing cabinets & prefinished doors from a lumber supply house. Renting for so long really helped our bottom line. Eventually we bought a house, but it requires lots of yard work & equipment. What's funny is that a number of our friends have now moved back into condos for a lock and leave lifestyle.

yddeyma

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DO NOT max out your 401k forever.  This is what I did and now I can't get to the money now because I don't want to fully retire.

Here's my situation.  I, too, decided to retire early.  I had always heard the mantra "Max out your 401k" and so I did, also sticking a little bit in a Roth IRA.  Now its 8 years later and my life has changed a LOT.  I got married, had kids, bought a house, the whole sh-bang.  Here are the issues I'm seeing.  When I first started planning and maxing out my 401k, I was single and thought I'd always be.  By having everything in my 401k, my options are pretty limited.  Even the fancy tax strategies recommended by MadFientist and MMM don't apply to me, because I have a spouse who loves his job and wants to keep working.  That means if I withdraw any from my 401k I'll still have a pretty hefty tax bill because he's still working (we're both engineers).  I wish I had thought about some tax advantaged and accessible money diversity in my account choices.  Retirement accounts, by design, are meant for people to leave them along until they're 60 or so.  There are ways around this, but it does limit your options.

Anyway, I know you don't really care about my situation.  The point I'm trying to make is that sticking all of your money in one account limits your options later on.  If it were me and I could do it over, here's what I'd do and why:

1. Put enough in the 401k to get the match, because, duh, its free money.

2. Put enough in the 401k to buy a house.  That means max it out for 3 years or so.  My 401k rules allow me to borrow from my 401k and pay the interest BACK TO MYSELF, and WITHOUT TAXES!  The rate is 2.25% right now.  I mean, why pay a bank when you can pay yourself?  Plus no origination fees.  The issues with this are that if I separate the loan comes due immediately.  Also, I can only borrow up to $50k.  In my area, I can still get an entire house for that, but just barely.  Check the rules, each 401k plan is different.  But since I ended up buying a house while I was still working, this would've been a good option for me.

3. Max out a Roth.  Why?  Well, I'll already have a good size chunk in my traditional 401k when I quit.  I'll have paid back my 401k loan plus however much it's grown.  When I separate from my job, that'll roll into a Traditional IRA.  Investing in a Roth gives me some tax advantaged diversity.  I chose not to because with two engineer salaries I figured we're in one of the highest tax brackets of our lives right now.

4.  Put EVERYTHING else in a regular taxable account.  Why?  Because its my money, I want to be able to get to it.  If you plan well and your earned income is low enough, you can withdraw it tax free anyway.  Just don't spend it.  That's the downside.  With retirement accounts, its a lot harder to see something new and shiny and spend your savings.  A taxable investment account is pretty darn accessible. 

Anyway, my opinion and its worth what you paid for it.  I'm sure there are flaws with this plan, too.  The main thing is that you're thinking about it and you have a plan. 

dragoncar

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DO NOT max out your 401k forever.  This is what I did and now I can't get to the money now because I don't want to fully retire.

Here's my situation.  I, too, decided to retire early.  I had always heard the mantra "Max out your 401k" and so I did, also sticking a little bit in a Roth IRA.  Now its 8 years later and my life has changed a LOT.  I got married, had kids, bought a house, the whole sh-bang.  Here are the issues I'm seeing.  When I first started planning and maxing out my 401k, I was single and thought I'd always be.  By having everything in my 401k, my options are pretty limited.  Even the fancy tax strategies recommended by MadFientist and MMM don't apply to me, because I have a spouse who loves his job and wants to keep working.  That means if I withdraw any from my 401k I'll still have a pretty hefty tax bill because he's still working (we're both engineers).  I wish I had thought about some tax advantaged and accessible money diversity in my account choices.  Retirement accounts, by design, are meant for people to leave them along until they're 60 or so.  There are ways around this, but it does limit your options.

Anyway, I know you don't really care about my situation.  The point I'm trying to make is that sticking all of your money in one account limits your options later on.  If it were me and I could do it over, here's what I'd do and why:

1. Put enough in the 401k to get the match, because, duh, its free money.

2. Put enough in the 401k to buy a house.  That means max it out for 3 years or so.  My 401k rules allow me to borrow from my 401k and pay the interest BACK TO MYSELF, and WITHOUT TAXES!  The rate is 2.25% right now.  I mean, why pay a bank when you can pay yourself?  Plus no origination fees.  The issues with this are that if I separate the loan comes due immediately.  Also, I can only borrow up to $50k.  In my area, I can still get an entire house for that, but just barely.  Check the rules, each 401k plan is different.  But since I ended up buying a house while I was still working, this would've been a good option for me.

3. Max out a Roth.  Why?  Well, I'll already have a good size chunk in my traditional 401k when I quit.  I'll have paid back my 401k loan plus however much it's grown.  When I separate from my job, that'll roll into a Traditional IRA.  Investing in a Roth gives me some tax advantaged diversity.  I chose not to because with two engineer salaries I figured we're in one of the highest tax brackets of our lives right now.

4.  Put EVERYTHING else in a regular taxable account.  Why?  Because its my money, I want to be able to get to it.  If you plan well and your earned income is low enough, you can withdraw it tax free anyway.  Just don't spend it.  That's the downside.  With retirement accounts, its a lot harder to see something new and shiny and spend your savings.  A taxable investment account is pretty darn accessible. 

Anyway, my opinion and its worth what you paid for it.  I'm sure there are flaws with this plan, too.  The main thing is that you're thinking about it and you have a plan.

Uh, no, max out your 401k.  There are always exceptions, but the rule is sound.  A.Engineer, have you considered living off your spouse's salary now and living off your 401k when he retires?

GumbyPickles

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Ha, that's pretty much been my "fear" about the whole 401k/HSA/IRA stuff since the beginning, and I was just starting to get over it since I had a decent amount saved in cash accounts! 

mxt0133

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Even the fancy tax strategies recommended by MadFientist and MMM don't apply to me, because I have a spouse who loves his job and wants to keep working.  That means if I withdraw any from my 401k I'll still have a pretty hefty tax bill because he's still working (we're both engineers). 

Have you done the calculations on filing your taxes as Married filling separate?  Yes, your husband's tax liability will go up but then you would be able to drop to a lower tax bracket to start a Roth rollover pipeline.

Pooperman

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Even the fancy tax strategies recommended by MadFientist and MMM don't apply to me, because I have a spouse who loves his job and wants to keep working.  That means if I withdraw any from my 401k I'll still have a pretty hefty tax bill because he's still working (we're both engineers). 

Have you done the calculations on filing your taxes as Married filling separate?  Yes, your husband's tax liability will go up but then you would be able to drop to a lower tax bracket to start a Roth rollover pipeline.

There's always SEPP.

yddeyma

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Yep, I"ve still got options, such as filing separately or SEPP, or living off my spouse.  And those options have different pros and cons. All I'm saying is that I'd have more options if every last dollar wasn't tied up in one type of account with one set of rules.  The "rule" of maxing out your 401k in isolation doesn't make sense to me.  It's for people who are going to retire at 60.  I'm not saying you should never max it out, all I'm saying is fund some other types of accounts before you do. 

Look, if you get to 40, are still single and your life hasn't changed, then yes, maxing out your 401k will be completely adequate for what you propose.  No worries there.  All I'm saying is that life may change.  Heck, tax rules may change.  So its nice to have some account diversity.

boarder42

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A.Engineer

It is a widely held FACT in the ER community that the fastest way to ER is infact maxing out your 401k. 

To the OP

I'm 27 - I'm and Engineer - My wife's an engineer.  - We plan to retire at 40.  If the market had cooperated we'd be at 200k in retirement savings.  still very close hoping for a rebound.   That said.  - you can get to retirement faster and easier by putting into taxable accounts.  Consider this - assuming your tax rate is 28% give or take.  and you max your 401k - thats 17500 but you dont pay that 28% tax on it so it hits you at 12600 that gives you ~5000 to put into a taxable account 5000 in increased savings per year thats 100k in a taxable account if you should choose to put it there at the time youre 40.  100k (thats at 7% interest so more or less calculated in today's dollars)  you live on 20k a year now and lead what most would consider to be extravagant on here.  Not counting any interest earned on the taxable money you arent using.

So lets just do the 2 scenarios to simplify this. assuming you only invest 17500  you have 30000 in your 401k now if you max it will be worth 433k when you retire.  this allows you to fund a taxable account at 5k per year.  thats worth ~100k at retirement.  you now have 100k more dollars than if you hadnt done it and you can actually retire

SWR @4% of 433k = 17.3k
SWR @4% of 533k =  21.3k - more than you need. 

cuts 2 years off as it would take 2 more years to make 100k investing purely in taxable. 

i dont get how this math is hard for the engineers here.

boarder42

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I guess engineers understand the math Y'all just tend to be much more risk averse than I am.  Open up live a little the world isnt gonna melt

Also OP

you shouldnt have 35k in an account making .9% -
I dont know your fund option but typically target date funds arent the best option in 401ks
also can you even get the tax break on a Trad IRA my guess is no b/c you have an employer sponsored retirement account.  and you make alot.  single is a MAGI of 59k you may be walking a fine line here.  you may just need to go Roth.

GumbyPickles

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I guess engineers understand the math Y'all just tend to be much more risk averse than I am.  Open up live a little the world isnt gonna melt

Also OP

you shouldnt have 35k in an account making .9% -
I dont know your fund option but typically target date funds arent the best option in 401ks
also can you even get the tax break on a Trad IRA my guess is no b/c you have an employer sponsored retirement account.  and you make alot.  single is a MAGI of 59k you may be walking a fine line here.  you may just need to go Roth.

My $35k is in a low-risk account for potential down payment availability.  I just opted for a self-directed account today for my 401k, so thank you.  Looks like I need to research all this Trad IRA tax break stuff because I honestly have no clue - I thought investing up to $5,500 into any IRA was tax-deductible automatically. 

Philociraptor

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From http://www.bogleheads.org/wiki/Prioritizing_investments :

Investors who are able to place their investments in several different kinds of accounts (such as taxable accounts, 401k, or IRA) need to decide which ones to prioritize. In order to maximize the tax efficiency of a portfolio, the general rule for investing priority is:

1.Company plan (401k, 403b, etc.) up to the company match
2.Health Savings Account, if eligible.
3.Roth IRA or deductible traditional IRA up to maximum contribution limit, depending on personal circumstances and eligibility.
4.Company plan up to maximum contribution limit
5.Taxable investing

If the company plan offers good, low-cost funds, it may be preferable to contribute to the company plan before contributing to an IRA.

teen persuasion

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I guess engineers understand the math Y'all just tend to be much more risk averse than I am.  Open up live a little the world isnt gonna melt

Also OP

you shouldnt have 35k in an account making .9% -
I dont know your fund option but typically target date funds arent the best option in 401ks
also can you even get the tax break on a Trad IRA my guess is no b/c you have an employer sponsored retirement account.  and you make alot.  single is a MAGI of 59k you may be walking a fine line here.  you may just need to go Roth.

My $35k is in a low-risk account for potential down payment availability.  I just opted for a self-directed account today for my 401k, so thank you.  Looks like I need to research all this Trad IRA tax break stuff because I honestly have no clue - I thought investing up to $5,500 into any IRA was tax-deductible automatically.

Traditional vs Roth is a trade-off: taxes now or taxes later.  With the traditional, you get a tax deduction now, but future withdrawals are taxed as regular income.  With the Roth, there is NO tax deduction now, but future withdrawals are completely tax free.

GumbyPickles

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I guess engineers understand the math Y'all just tend to be much more risk averse than I am.  Open up live a little the world isnt gonna melt

Also OP

you shouldnt have 35k in an account making .9% -
I dont know your fund option but typically target date funds arent the best option in 401ks
also can you even get the tax break on a Trad IRA my guess is no b/c you have an employer sponsored retirement account.  and you make alot.  single is a MAGI of 59k you may be walking a fine line here.  you may just need to go Roth.

My $35k is in a low-risk account for potential down payment availability.  I just opted for a self-directed account today for my 401k, so thank you.  Looks like I need to research all this Trad IRA tax break stuff because I honestly have no clue - I thought investing up to $5,500 into any IRA was tax-deductible automatically.

Traditional vs Roth is a trade-off: taxes now or taxes later.  With the traditional, you get a tax deduction now, but future withdrawals are taxed as regular income.  With the Roth, there is NO tax deduction now, but future withdrawals are completely tax free.

Yeah, I know that aspect.  My point was the $5,500 deduction for an IRA - I thought that would be automatically applying if I contributed, but now I see it's based on AGI.  If I contribute enough to a 401k to get my AGI below $70,000, can I take that deduction as well? 

boarder42

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so you have money that is losing money sitting waiting for a house you dont even know where or if you're going to buy... seems like a strong waste of money.  IMO - i'd invest that money.  what do you have to lose - if the market goes down you can postpone the home buy since there is no purchase currently lined up.  This is a risk fear that i think people dont understand completely.  You're losing 2%+ a year to infaltion on that money. 
Look at the risk from the other side.  you could be making 6% after inflation.  you're risking lost profits.  too me thats a bigger risk than the what if the market completely tanks when i find the house i want. 

boarder42

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also with your current situation i wouldnt consider buying a house with PMI you have cheap living costs where you are.  The house will increase those... invest the money till you can put down 20% and have no PMI.

GumbyPickles

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I guess engineers understand the math Y'all just tend to be much more risk averse than I am.  Open up live a little the world isnt gonna melt

Also OP

you shouldnt have 35k in an account making .9% -
I dont know your fund option but typically target date funds arent the best option in 401ks
also can you even get the tax break on a Trad IRA my guess is no b/c you have an employer sponsored retirement account.  and you make alot.  single is a MAGI of 59k you may be walking a fine line here.  you may just need to go Roth.

My $35k is in a low-risk account for potential down payment availability.  I just opted for a self-directed account today for my 401k, so thank you.  Looks like I need to research all this Trad IRA tax break stuff because I honestly have no clue - I thought investing up to $5,500 into any IRA was tax-deductible automatically.

Traditional vs Roth is a trade-off: taxes now or taxes later.  With the traditional, you get a tax deduction now, but future withdrawals are taxed as regular income.  With the Roth, there is NO tax deduction now, but future withdrawals are completely tax free.

Yeah, I know that aspect.  My point was the $5,500 deduction for an IRA - I thought that would be automatically applying if I contributed, but now I see it's based on AGI.  If I contribute enough to a 401k to get my AGI below $70,000, can I take that deduction as well?

It is based on MAGI.  As I mentioned in a previous post, you are probably in the phaseout range ($60,000-$70,000), so you will be able to take a partial deduction.  You can view the IRS details here.

Thank you.  I understand now.  I found a handy Calculator from Fidelity that shows the amount you can deduct based on salary: https://scs.fidelity.com/products/mobile/ira/ira-calc.shtml

Bob W

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Not to over think this,  but if you keep drinking at bars (I love to do this too!) at your current rate of spending and saving,  you will need to work 3-4 additional years in order to support that as an ongoing habit.     There are many choices in this world.   Just wanted to make sure you understood the impact.

 

dragoncar

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Not to over think this,  but if you keep drinking at bars (I love to do this too!) at your current rate of spending and saving,  you will need to work 3-4 additional years in order to support that as an ongoing habit.     There are many choices in this world.   Just wanted to make sure you understood the impact.

 

Luckily, drinking at bars is something you should grow out of.  Not that it's a great expense now, but most people don't continue their 27-year-old bar spending into perpetuity.

boarder42

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uhh i have some family members that would disagree with the bar spend.  I think its not something people looking to retire early do ... but going out to bars just turns into going out to dinners etc when you have kids.  I would say this spend typically continues in america.

Bob W

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The bar spending is an indicator species in my opinion.  Fits right in with cable TV, gym memberships,  Starbucks coffee, expensive cell phones, restaurant eating and other habitual consumer "needs."   If one were to participate in 6 or 7 of the "normal" habits they could completely derail their savings.

I'm not saying never drink in a bar or never eat at a restaurant, let's just don't encourage them as habits.  It can be an especially large set back for young mustachians.

I live in a retirement community and can tell you that bar spending tends to actually be a big hobby here for those that got in the habit.  I see folks where it is their primary entertainment and they probably blow  $500 per month easily on it.

There are several recent posts here to check such as the no weeknight  drinking and alcohol free September posts.   

Would love to see a post titled --"I broke the bar drinking habit"

Sorry to derail the thread in this manner,  but the bar drinking seems to be the OPs largest discretionary low hanging fruit.




GumbyPickles

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Sorry to derail the thread in this manner,  but the bar drinking seems to be the OPs largest discretionary low hanging fruit.

Yeah, I agree completely.  My budget used to be in the $300-500 range monthly, so I thought this was pretty good haha.  (Think about how much more cash I'd have if...)

However, it is tough for me because of the social aspect.  I laugh at stupid purchases like $1,000 sofas, Smart TVs, the latest iPhone, etc - but then struggle with "experience/social" spending such as travel, concerts, and alcohol. 

If I looked back at the last 3 years of alcohol alone though - which I could look at - we're probably easily talking $10k+

boarder42

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have friends over to your place to watch the game...

you can also be social and not drink as stated many many times above.  Maybe your friends will pick up your ticket to the concert if you DD... you can bring a tagalong flask when you go out and mix that if you want to drink with them... just order a pop and mix it up. 

Bob W

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Looked this up last week ---

If you are drinking more than 8 drinks per week or 4 drinks a day that puts you in the high risk category.

Lets say you are at the 8 drinks per week and only at the bar.   That should still come in around $150 or less per month.

So if you're over that, you are pretty close to having a problem. 

So the question to ask yourself,   "is drinking a crutch so that I can be social?"   Probably so,  it is for most drinkers,  myself included. 

skunkfunk

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Looked this up last week ---

If you are drinking more than 8 drinks per week or 4 drinks a day that puts you in the high risk category.

Lets say you are at the 8 drinks per week and only at the bar.   That should still come in around $150 or less per month.

So if you're over that, you are pretty close to having a problem. 

So the question to ask yourself,   "is drinking a crutch so that I can be social?"   Probably so,  it is for most drinkers,  myself included.

Depends whom you ask.

http://www.niaaa.nih.gov/alcohol-health/overview-alcohol-consumption/moderate-binge-drinking

Those guys say 4/day and 14/week is ok, which is about in his range.

Bob W

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Looked this up last week ---

If you are drinking more than 8 drinks per week or 4 drinks a day that puts you in the high risk category.

Lets say you are at the 8 drinks per week and only at the bar.   That should still come in around $150 or less per month.

So if you're over that, you are pretty close to having a problem. 

So the question to ask yourself,   "is drinking a crutch so that I can be social?"   Probably so,  it is for most drinkers,  myself included.

Depends whom you ask.

http://www.niaaa.nih.gov/alcohol-health/overview-alcohol-consumption/moderate-binge-drinking

Those guys say 4/day and 14/week is ok, which is about in his range.

Yeah I was looking at a nongovernment site.   lol

Still doesn't address the "crutch" concept.   My wife is still amazed that 25% of the population are lifelong abstainers and 50% rarely or never drinks.  She says they just can't hang with the big dogs. 

skunkfunk

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Looked this up last week ---

If you are drinking more than 8 drinks per week or 4 drinks a day that puts you in the high risk category.

Lets say you are at the 8 drinks per week and only at the bar.   That should still come in around $150 or less per month.

So if you're over that, you are pretty close to having a problem. 

So the question to ask yourself,   "is drinking a crutch so that I can be social?"   Probably so,  it is for most drinkers,  myself included.

Depends whom you ask.

http://www.niaaa.nih.gov/alcohol-health/overview-alcohol-consumption/moderate-binge-drinking

Those guys say 4/day and 14/week is ok, which is about in his range.

Yeah I was looking at a nongovernment site.   lol

Still doesn't address the "crutch" concept.   My wife is still amazed that 25% of the population are lifelong abstainers and 50% rarely or never drinks.  She says they just can't hang with the big dogs.

I'm not sure what you mean by that.

If by big dogs she means guys like my coworker who just got out of detox and is outpatient rehab, then yeah lets not hang with them.

frugalnacho

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Didn't read all the replies, but with your situation I would:

Max 401k
Max tIRA
Max HSA
Put extra money into taxable vanguard (and you should certainly have tons more money to invest even after maxing those tax advantaged accounts out)

Move 100% of the down payment money into an index fund.  It might not ALL be there when you "need" it, but it also won't grow in your savings account.   You can always hold off buying a house too.

Or if you want to buy a house I would suggest buying it soon and renting out some rooms.   I know you want to not have roommates, but you could pay your entire mortgage by renting out a couple rooms and that extra income will catapult you towards FI.  Small sacrifice now for big pay off later.

GumbyPickles

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  "is drinking a crutch so that I can be social?"   Probably so,  it is for most drinkers,  myself included.

Of course it is...you did see I was an engineer, didn't you? :)

Zamboni

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Quote
have friends over to your place to watch the game...

Some types of friends will bring more booze over than they drink, so you will end up ahead with this strategy.

Keep maxing out the accounts you have already mentioned.

Regarding the home purchase, I have a question:
Is $250K range for a place of comparable size to where you live now?  Or is it for a much bigger place with some land to go with it?

If I was in your shoes, here's what I would do regarding the "gotta have a place to live" conundrum:
Go on biggerpockets.co and learn.  Read the landlord forum part of this blog.  Also, research two numbers extensively: 
1)  what a home similar to your current living space near your job would cost per month (include taxes, increased insurance, and some set aside for maintenance) with minimal down payment, and
2)  what the type of home you would really love to buy brings in monthly on the rental market.  Start with your just not wanting to share walls, but think small, and then consider what happens to the overall rental income to total purchase price number as the floor space and yard size grows.

Because, like others have suggested, if I had to do it over at your age I would go back and buy property not based upon what I thought looked nice, but based upon rentability and rate of return as a rental.  I wouldn't worry so much about appreciation, just cash flow. Probably home of type #1 makes more sense for that.  Then I would find such a place, which you can already easily buy, put the minimum down the bank allows, live in with roommates for whatever amount of time is required (2years?) while saving up for the next down payment, then move on to the next similar place while renting out the original purchase.  Within a decade you should own 4-5 cash flow rental properties for very little of your own money out of pocket for the down payments and without having to "share walls."

All of this assumes that the numbers work in your area for landlords.  If it's too much of a renter's market, then just keep renting yourself.

yddeyma

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A gazillion dittos on what Zamboni just said about houses.  I've always regretted buying a bigger home than we needed when we started out.

sobezen

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GumbyPickles, your income is solid at 27 years young! Congratulations!

Id recommend the following actions:
1) Contribute maximum to the HSA the 2014 limit is $3,300.
1a) Adjust to $3,350 during your open annual enrollment period.
1b) Read http://www.madfientist.com/hsa/
2) Increase your 401k contribution to the max you can afford. Id recommend cutting back in other areas in your budget to achieve this goal. YMMV. The fact you get an employer match is great, not everyone does (myself included).
2a) Adjust budget for 2015 your 401k contribution limit to reflect the new maximum $18,000.
2b) Re-balance your 401k holdings. If you are only in the 2050 Target Date fund, consider changing it to something else. Look at the other fund offerings.
3) Contribute max to Traditional IRA in 2014 $5,500.
3a) Contribute max to Traditional IRA on January 1, 2015 $5,500.
3b) Read about Roth Ladder Conversion http://www.madfientist.com/traditional-ira-vs-roth-ira/
4) Open a taxable brokerage with Vanguard or Fidelity. Save anything extra into here.
5) Contribute adding your bonuses to the $35,000 home down payment stach.
5a) Consider investing some or all of that stach into a diversified portfolio, unless homes in your area only cost $100,00.  Personally if I was in your shoes Id reconsider buying a home and focus on saving more to reach FIRE. You can always buy a home or property later by yourself or with a partner.
6) Consider merging food expenses (restaurants, fast food, groceries, alcohol into one). Can you reduce your alcohol consumption and fast food in-take? Reducing or completely eliminating those two will certain benefit your long-term health. By the way, Im single and I spend only $300 for all four expenses. YMMV.
6a) You dont mention how physically active you are and if you enjoy fitness. I recommend factoring that into your quality of life and building your frugality and actual muscles.
7) Exam ways to reduce your utilities, without a breakdown it appears high.
8) Define other? If this is fun money just mention it so we can get more context.
9) Keep renting, this will easily become your highest expense and most stressful responsibility once you become a property owner.

Hope this helps give you more ideas. Good luck! You are definitely on the right path. Cheers! :)
« Last Edit: October 24, 2014, 05:57:46 PM by sobezen »

GumbyPickles

  • 5 O'Clock Shadow
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  • Posts: 53
GumbyPickles, your income is solid at 27 years young! Congratulations!

Id recommend the following actions:
1) Contribute maximum to the HSA the 2014 limit is $3,300.
1a) Adjust to $3,350 during your open annual enrollment period.
1b) Read http://www.madfientist.com/hsa/
2) Increase your 401k contribution to the max you can afford. Id recommend cutting back in other areas in your budget to achieve this goal. YMMV. The fact you get an employer match is great, not everyone does (myself included).
2a) Adjust budget for 2015 your 401k contribution limit to reflect the new maximum $18,000.
2b) Re-balance your 401k holdings. If you are only in the 2050 Target Date fund, consider changing it to something else. Look at the other fund offerings.
3) Contribute max to Traditional IRA in 2014 $5,500.
3a) Contribute max to Traditional IRA on January 1, 2015 $5,500.
3b) Read about Roth Ladder Conversion http://www.madfientist.com/traditional-ira-vs-roth-ira/
4) Open a taxable brokerage with Vanguard or Fidelity. Save anything extra into here.
5) Contribute adding your bonuses to the $35,000 home down payment stach.
5a) Consider investing some or all of that stach into a diversified portfolio, unless homes in your area only cost $100,00.  Personally if I was in your shoes Id reconsider buying a home and focus on saving more to reach FIRE. You can always buy a home or property later by yourself or with a partner.
6) Consider merging food expenses (restaurants, fast food, groceries, alcohol into one). Can you reduce your alcohol consumption and fast food in-take? Reducing or completely eliminating those two will certain benefit your long-term health. By the way, Im single and I spend only $300 for all four expenses. YMMV.
6a) You dont mention how physically active you are and if you enjoy fitness. I recommend factoring that into your quality of life and building your frugality and actual muscles.
7) Exam ways to reduce your utilities, without a breakdown it appears high.
8) Define other? If this is fun money just mention it so we can get more context.
9) Keep renting, this will easily become your highest expense and most stressful responsibility once you become a property owner.

Hope this helps give you more ideas. Good luck! You are definitely on the right path. Cheers! :)

Hey thanks for the break down, much appreciated.  I think these are all solild points and have already started down the list, completed 1-3 so far in the past week!

Other includes everything, just averaged out over the course of a year.  Vacation/Dentist/Car Stuff....just whatever comes up. 

Utilities are pretty average I think, I was on the high side in my monthly estimate.  $89 Internet/TV, $75 Gas $75 Electric, $50 water/sewer.  Divided by 2.  Probably closer to $150/mo.