Author Topic: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?  (Read 14955 times)

falala123

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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! :)

Great advice, and great thread, as someone in a similar position. One question is, Is the maxing the traditional IRA tax-advantaged, based on the 80k+ salary?  Perphaps I am misunderstanding something.
Thanks.

GumbyPickles

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #51 on: November 04, 2014, 06:55:54 PM »
From my understanding, Traditional IRA is beneficial so that you can avoid current taxes.  If you make $80k you would need to get below $70k in Adjusted Gross Income to start seeing a benefit of the Traditional IRA.  ($65k would be 50% of the $5,500 tax free, I believe and $60k would be 100%)

So at $80k contribute $17,500 to 401k and $2,500 to a health savings account and you'll see the full benefit of the Trad IRA.  (I'm not an expert, someone correct me if I'm wrong!)

Rage

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #52 on: November 04, 2014, 10:17:42 PM »
Does this late 90's educational bookmark help clear things up at all?

Rage

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #53 on: November 04, 2014, 10:29:25 PM »
WRT to 401k vs Roth IRA:

Someone mentioned that Roth IRA is taxed now, 401k is taxed later.  This implies it's a wash, but it's not.

Roth IRA is for people in low income tax brackets
401k is for people in high income tax brackets

If you're in a high income tax bracket you want your money to be taxed later at a lower tax rate - this is the situation OP is in.  401k FTW.

If you're in a low income tax bracket, you want to be taxed now.  By low I mean 0%.

Schaefer Light

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #54 on: November 05, 2014, 07:20:16 AM »
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 agree with her.  Bunch of f*** lightweights ;).

zolotiyeruki

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #55 on: November 05, 2014, 10:30:16 AM »
Roth IRA is for people in low income tax brackets
401k is for people in high income tax brackets

If you're in a high income tax bracket you want your money to be taxed later at a lower tax rate - this is the situation OP is in.  401k FTW.

If you're in a low income tax bracket, you want to be taxed now.  By low I mean 0%.
That's a fair way of putting it, but a more *specific* way would be this:
Roth IRA is for people who expect to pay higher tax rates in retirement than currently
401(k)/tIRA is for people who expect to pay LOWER tax rates in retirement than currently

So there are scenarios where a person who pays little or no income tax now will actually prefer the 401k/tIRA.  If you plan to retire and pay no taxes forever via a Roth IRA ladder, AND if you have kids who drive your current income taxes to 0 (or beyond), then the 401(k)/tIRA may actually be the better option.

I'm an example of this.  My salary is about $86k.  Between deductions and exemptions, our taxable income dips down into the 10% tax bracket, and the Child Tax Credit wipes out any tax liability.  Then the Additional Child Tax Credit then gets us a net *refund*.  So any adjustment in our taxable income means a corresponding 10% change in our refund.  I.e. an additional $1k in a 401(k) means $100 less tax liability and therefore $100 more refund.

I also plan, when I retire, to do a big ol' Roth ladder to avoid taxes forever, so even though I currently pay zero income tax, I expect my *marginal rate* to be even lower in retirement. 

GumbyPickles

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #56 on: November 10, 2014, 07:34:41 AM »
Roth IRA is for people in low income tax brackets
401k is for people in high income tax brackets

If you're in a high income tax bracket you want your money to be taxed later at a lower tax rate - this is the situation OP is in.  401k FTW.

If you're in a low income tax bracket, you want to be taxed now.  By low I mean 0%.
That's a fair way of putting it, but a more *specific* way would be this:
Roth IRA is for people who expect to pay higher tax rates in retirement than currently
401(k)/tIRA is for people who expect to pay LOWER tax rates in retirement than currently

So there are scenarios where a person who pays little or no income tax now will actually prefer the 401k/tIRA.  If you plan to retire and pay no taxes forever via a Roth IRA ladder, AND if you have kids who drive your current income taxes to 0 (or beyond), then the 401(k)/tIRA may actually be the better option.

I'm an example of this.  My salary is about $86k.  Between deductions and exemptions, our taxable income dips down into the 10% tax bracket, and the Child Tax Credit wipes out any tax liability.  Then the Additional Child Tax Credit then gets us a net *refund*.  So any adjustment in our taxable income means a corresponding 10% change in our refund.  I.e. an additional $1k in a 401(k) means $100 less tax liability and therefore $100 more refund.

I also plan, when I retire, to do a big ol' Roth ladder to avoid taxes forever, so even though I currently pay zero income tax, I expect my *marginal rate* to be even lower in retirement.

How in the world could you possibly take an $86k salary down to $0 taxes.  That blows me away.



GumbyPickles

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #59 on: November 11, 2014, 09:25:19 AM »
http://www.gocurrycracker.com/the-go-curry-cracker-2013-taxes/

Ah, so make less money, have kids, and put everything possible away in government sponsored employer accounts. 

Can't, can't, can't, can't. 

zolotiyeruki

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #60 on: November 11, 2014, 12:22:22 PM »
How in the world could you possibly take an $86k salary down to $0 taxes.  That blows me away.
Here's how: 
Start by taking off FICA taxes and then 5% for the 401(k) (yeah, I'd like to contribute more, but we're kinda tight right now, for reasons that will soon become evident)
Deductions: between mortgage insurance and property taxes, that's close to $15k (that's why I can't contribute more to my 401(k)!).  Another $9k in charitable contributions, and a few thousand more for state income or sales taxes, car mileage when volunteering, etc.
Exemptions: last year we had 5 kids on our tax return, so 7 exemptions for another $27,300 reduction in taxable income.
Taxable income:  now about $27k, so taxes are around $2700.
Child tax credit: wipes out the $2700 tax liability
Additional tax credit:  gives us the excess Child Tax Credit ($2300) back.

Heck, had we only had 3 kids at the time, we still woulda been about $0 for tax liability.  This year's taxes will be even further in the hole--we had our six child! :D

Rage

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #61 on: November 11, 2014, 12:50:54 PM »
How in the world could you possibly take an $86k salary down to $0 taxes.  That blows me away.
Here's how: 
Start by taking off FICA taxes and then 5% for the 401(k) (yeah, I'd like to contribute more, but we're kinda tight right now, for reasons that will soon become evident)
Deductions: between mortgage insurance and property taxes, that's close to $15k (that's why I can't contribute more to my 401(k)!).  Another $9k in charitable contributions, and a few thousand more for state income or sales taxes, car mileage when volunteering, etc.
Exemptions: last year we had 5 kids on our tax return, so 7 exemptions for another $27,300 reduction in taxable income.
Taxable income:  now about $27k, so taxes are around $2700.
Child tax credit: wipes out the $2700 tax liability
Additional tax credit:  gives us the excess Child Tax Credit ($2300) back.

Heck, had we only had 3 kids at the time, we still woulda been about $0 for tax liability.  This year's taxes will be even further in the hole--we had our six child! :D

Just to summarize, it sounds like the trick is: spend too much on mortgage interest, give too much to charity, and have too many kids.

dragoncar

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #62 on: November 11, 2014, 01:03:51 PM »
How in the world could you possibly take an $86k salary down to $0 taxes.  That blows me away.
Here's how: 
Start by taking off FICA taxes and then 5% for the 401(k) (yeah, I'd like to contribute more, but we're kinda tight right now, for reasons that will soon become evident)
Deductions: between mortgage insurance and property taxes, that's close to $15k (that's why I can't contribute more to my 401(k)!).  Another $9k in charitable contributions, and a few thousand more for state income or sales taxes, car mileage when volunteering, etc.
Exemptions: last year we had 5 kids on our tax return, so 7 exemptions for another $27,300 reduction in taxable income.
Taxable income:  now about $27k, so taxes are around $2700.
Child tax credit: wipes out the $2700 tax liability
Additional tax credit:  gives us the excess Child Tax Credit ($2300) back.

Heck, had we only had 3 kids at the time, we still woulda been about $0 for tax liability.  This year's taxes will be even further in the hole--we had our six child! :D


zolotiyeruki

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Re: 27 Year Old Engineer. Desire retire by 40 - Where to put $$ and what order?
« Reply #63 on: November 11, 2014, 01:55:48 PM »
How in the world could you possibly take an $86k salary down to $0 taxes.  That blows me away.
Here's how: 
Start by taking off FICA taxes and then 5% for the 401(k) (yeah, I'd like to contribute more, but we're kinda tight right now, for reasons that will soon become evident)
Deductions: between mortgage insurance and property taxes, that's close to $15k (that's why I can't contribute more to my 401(k)!).  Another $9k in charitable contributions, and a few thousand more for state income or sales taxes, car mileage when volunteering, etc.
Exemptions: last year we had 5 kids on our tax return, so 7 exemptions for another $27,300 reduction in taxable income.
Taxable income:  now about $27k, so taxes are around $2700.
Child tax credit: wipes out the $2700 tax liability
Additional tax credit:  gives us the excess Child Tax Credit ($2300) back.

Heck, had we only had 3 kids at the time, we still woulda been about $0 for tax liability.  This year's taxes will be even further in the hole--we had our six child! :D

Just to summarize, it sounds like the trick is: spend too much on mortgage interest, give too much to charity, and have too many kids.
Yup, that's about right!