Author Topic: 401k or after tax investment....  (Read 2414 times)

dandeliongirl75

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401k or after tax investment....
« on: December 24, 2014, 01:02:54 PM »
I know this gets asked a lot, I know the general answer is to put as much money as possible in 401k style accounts as the lack of tax allows for faster growth....however, I am still not convinced if it is best for me so would appreciate input on my specific situation if anyone is willing....

Please note, I am really new to all of this....I am reading and learning a lot but I am sure I am getting a lot of it wrong.

Summary of current life situation and goals:

I am recently separated. I have the job I would prefer to keep if I accept I need to work for a while ( I generally say I love my job though I will admit i would prefer not to have to work at all or at least not full time)
I know my company (small niche market) may not last more than 10 more years (though it may, currently pretty successful, but also the owner is getting older and if he were to die and his family were to inherit the business it would be a mess etc...)
I would love to be living cheaply somewhere warm working only part time in about 10ish years (I know this may be unrealistic)
I am currently 39 - no kids.

Debt - mortgage -  $133,000
(on a house valued between $140 - $180 depending...) interest 4.35%

IRA - $76,000
(which I intend to move to vanguard in January)

401k - $16,000
(at current company with horrid options for investment with the lowest fees being at least 1.5%ish - talking to owner about getting this changed over the next year - he is fortunately open to this)

Vanguard VBIAX  - $10,500
(as I was too chicken to go for 100% stocks to start with) - started with awesome work bonus a month ago

Misc cash about $5000

Salary - $48,000 (gross)

Bonus this year - $15,000 (gross)
(previously it has been nearer $3000 but hoping next year will be good too)

Living costs - about $24,000
(working on lowering this)

I am currently working on reducing living costs and increasing income where possible.

My main question is where to put the money I am not spending. I took a chunk of my bonus and opened the Vanguard account this year.
I do not even come close to maxing out my 401k and I have not been contributing to my IRA.

I am more inclined to put money in the after tax Vanguard account. This is because I feel I already have a fair amount in retirement and if I want to live off of this money before I reach 60ish I will need money I can access easily. I know about the IRA ladder thing (kind of) but my understanding is that takes 5 years after retiring to work out....I would need money to live on between retiring and reaching traditional retirement age.....

Is this a really bad approach ? I would still put about 15% of my salary into my 401k....

I would plan to drastically reduce my living costs if I retired early by selling my house and moving somewhere tiny - possibly a trailer, where I do not need a car, possibly in central america.....I would also plan on working part time of course as I think I would have to......but I think I could live on about $15,000 / year...(less if a friend who is interested in this does it with me)......

Any thoughts? Am I wrong to keep putting my "extra money" in Vanguard? I love how when I save $100 here or there I can just put it right in there....the retirement accounts don't quite feel the same so some of this is emotional......

Thanks.....




money_bunny

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Re: 401k or after tax investment....
« Reply #1 on: January 04, 2015, 08:13:22 PM »
Was there any replies to this post?

MDM

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Re: 401k or after tax investment....
« Reply #2 on: January 04, 2015, 09:52:32 PM »
Odd, usually we don't miss one - must have been the time of year....

Anyway, using the spreadsheet downloadable from here (with some assumptions...), the "time to FI" for various investment options are below:
All taxable: 20 years 4 months
Roth 401k: 19 years 2 months
traditional 401k: 16 years 10 months

Again, there are assumptions.  If the assumptions are correct, the results probably are correct also (always a possibility of spreadsheet writer error).  If the assumptions are not correct, then of course the results will not reflect reality.

dandeliongirl75, sorry for the long response time - does this start to answer your question?





CategoryMonthly amt.CommentsAnnual
Salary/Wages$5,000Guesstimate$60,000
Federal Adj. Gross Inc.$5,000$60,000
Federal tax$6562014 rates, item. ded., 1 exemption$7,873
State/City tax$250Guess, using 5.00% * Fed. AGI$3,000
Soc. Sec.$310Assumes 1 earner paying$3,720
Medicare$73$870
Total income taxes$1,289$15,468
Income before other expenses  $3,711$44,532
Monthly Expenses:
Mortgage$831$9,968
Miscellaneous$2,000$24,000
Non-mortgage total$2,000$24,000
Total Expense$2,831$33,968
Total to invest$880$10,564
Available for taxable investment:$880$10,564
Summary:
"Gross" income$5,000$60,000
Income taxes$1,289$15,468
After-tax income$3,711$44,532
Living expenses$2,831$33,968
After-tax investable$880$10,564
Time to FIRE?:
Time to FIRE20.35years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments6.00%percent
Real, after tax, return on taxable investments4.50%percent
Expected retirement total tax rate10.00%
Current Savings
Taxable$10,500
Tax-deferred (e.g. trad. IRA/401k)$92,000
Projected Savings at Retirement
Taxable$365,905
Tax-deferred (e.g. trad. IRA/401k)$301,136
Total projected stash$667,040
Projected Expenses in Retirement
Non-loan, non-work expenses$24,000
Income taxes$2,667
Total$26,667
Stash needed for retirement @4.0% SWR$666,667
Have $374 extra.



dandeliongirl75

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Re: 401k or after tax investment....
« Reply #3 on: January 05, 2015, 09:25:54 AM »
Thanks that helps a lot; I need to spend some time looking that over and playing with the spreadsheet - I love spreadsheets!
I may have more questions after that.....

(I think my post got missed due to when I posted it.)