Author Topic: 28 Year Old Lurking Mustachian Needs Advice (Retire by 40 goal)  (Read 3072 times)

Tripdub7

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28 Year Old Lurking Mustachian Needs Advice (Retire by 40 goal)
« on: September 24, 2015, 03:03:21 PM »
Hi fellow mustachians,

I am looking for advice on dealing with my minor amount of debt based on my financial situtaion.

Income 120,000 to 160,000 a year. (Currently only pulling in about 70,000 due to the fact my wife isn't working, and my commission checks come in waves) I have my 401k to max my matching which is 5% (9% total including 4% company match). I'm saving about 5-6000 a year in my 401k but want to really take this up a notch by living solely on my income and putting my wife's entire paycheck into investments and savings (roth ira or traditional ira, or conventional account). Currently renting a house for 1800 a month (this is an unbelievable deal, and the rent will not be raised. We live in the San Francisco Bay Area and we are getting quite the bargain on the rental and our "budget" is about 3100 a month, including the 1800 a month in rent.

The only debt we have are my student loans which tally 18,750 at about 6.5%. (2000 Honda CRV that is well maintained, that should last for a long time. no credit cards.) I know the goal is to get rid of the debt as fast as we can but I have a hard time putting more money away to get rid of my federal student loans (which have a lot of flexibility) as opposed to investing that in a mix of lendingclub, vanguard, and 401k(which over time will return more than 6.5%). We would love to buy a house in the next 3-5 years, and we are looking to retire at age 40 (12 years from now).

Any advice on splitting the money put into savings between paying off loans, investment accounts, roth ira, and 401k? (401k has relatively high fees around 1%, so any extra I have to put away goes into my Roth Ira.) Since I plan to retire by 40 are there ways to obtain the tax savings while still investing on Roth or IRa or 401k?

I am looking for advice on what would you do personally in my situation. (Also, my communication isn't always the clearest, and would be happy to clarify anything)

Thanks in advance fellow mustachians!

Nolan


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Re: 28 Year Old Lurking Mustachian Needs Advice (Retire by 40 goal)
« Reply #1 on: September 24, 2015, 05:12:16 PM »
MAX out your 401k and an HSA if available.  Toss the rest at debt, gaurenteed 6.5% return with 0 risk, better than current market returns.

MDM

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Re: 28 Year Old Lurking Mustachian Needs Advice (Retire by 40 goal)
« Reply #2 on: September 24, 2015, 05:23:12 PM »
Don't dismiss the 401k, particularly if you won't be staying long at that company.  See http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/.

As for prioritization, see the following.
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

Roots&Wings

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Re: 28 Year Old Lurking Mustachian Needs Advice (Retire by 40 goal)
« Reply #3 on: September 25, 2015, 06:00:08 AM »
WHAT
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
   
WHY      
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)

Though if you're in a higher income bracket check the traditional IRA deduction limits. If you can't deduct the traditional IRA contribution, I'd do a Roth: http://www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

Tripdub7

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Re: 28 Year Old Lurking Mustachian Needs Advice (Retire by 40 goal)
« Reply #4 on: September 25, 2015, 08:34:32 AM »
Hi MDM,

Thanks for the reply. This is really helpful. Why MAX out HSA before ROTH, Traditional, or 401k? What are the benefits of having it in an HSA if the funds can only be used to go to Health?

Thanks,
Nolan

DaveR

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Re: 28 Year Old Lurking Mustachian Needs Advice (Retire by 40 goal)
« Reply #5 on: September 25, 2015, 08:42:55 AM »
What are the benefits of having it in an HSA if the funds can only be used to go to Health?

Only for health before age 65. After that, withdrawals for any expense. Medical expenses are still tax-free.

TomTX

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Re: 28 Year Old Lurking Mustachian Needs Advice (Retire by 40 goal)
« Reply #6 on: September 26, 2015, 09:14:56 AM »
Follow this priority sequence.

Done.

Don't dismiss the 401k, particularly if you won't be staying long at that company.  See http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/.

As for prioritization, see the following.
In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial