Am I Doing Things Out of Order?

[TheRagingLoon]

Hey folks, I'll try to be as detailed as possible, but I could use a gut check on some things.

This is working for me now, but I am curious what others think.

Goals: Be done with full-time work within 10 years. I live in HCOL area (Northern Virginia) and will likely leave once I have a comfortable cache of investments. I would likely still work a part-time job doing something more fulfilling. If I am working until 59, I will lose my mind.

So here is my dilemma...

I could max out my 401(k) account, but I don't want to wait until 59 to touch it. I also do not have my brokerage account to a level where I could live off it and do a Roth-ladder with the 401k to a Roth IRA. Maybe some day, but it is not there yet. Maybe I need to rethink this, but curious what others think.

I am 30 yo and the 401k is at around $115,000 all in Fidelity SP500 index. My Roth IRA is at $18000 in VTSAX and my brokerage is around $5000 in VTSAX.

My current order of operations with every paycheck is the following:

1. 12% into 401k (company matches $0.50 up to 6%...) This does NOT max out of my 401k for the year.
2. Max out Roth IRA
3. Fund brokerage account with $300 weekly into VTSAX
4. Pay bills (rent, a 1.9% car loan on an Accord... I know, I know...). The car will be paid off in 2 years and I hope to drive it for another 10-15.

After all my bills are paid, I throw some cash to the side into my HYSA, and then I am left with a surplus of $1000-1500.

Do I go back and re-route that $ into my 401k, guaranteeing that I max it out for the year, or do I dump that $ into my brokerage account?

I like the flexibility of accessing the $ now if I need to.

That surplus is pretty much the equivalent of current disability pension from the US Army (untaxed). I will have this for life. I am counting on using it in the future to help smooth the ride when i do decide to hang it up.

Thoughts?

[ChpBstrd]

I agree you should eliminate the surplus by increasing your 401k contribution. This will defer income taxes now while putting more money into a place where you don't have to pay annual taxes on dividends, interest, or capital gains. Those deferred taxes then keep compounding your wealth. The Roth ladder is a tried-and-true method to retire early when most assets are in a pretax IRA, so there's no reason to fear a fat 401k. You'll start this ladder about 5 years prior to anticipated retirement.

It's good you are maxing out your Roth too, because that provides flexibility, especially alongside a reasonable emergency fund . Overall I agree with the investment order you're doing: 12% to 401k, then max out the Roth, then send the rest to the 401k. Obviously in reality you'd just set a higher 401k deferral instead of having a 3 step process, but we all get the point. :)

Enjoy the rush of saving up a ton of money now, because lemme tell ya, sometimes it doesn't last. I was maxing out my 401k and Roth, and still piling up cash in my taxable account, until my spouse became unable to work and started racking up medical bills. Our 50% savings rate went to 0% overnight, where it has stayed for 3 years. I am now passing my originally planned retirement date nowhere close to retiring. My advice is to keep the pedal to the metal until you are FIRE. Don't let up, don't give in to lifestyle inflation, etc. because until you're in the clear a situation like mine could set you back years.

[midweststache]

Hey folks, I'll try to be as detailed as possible, but I could use a gut check on some things.

This is working for me now, but I am curious what others think.

Goals: Be done with full-time work within 10 years. I live in HCOL area (Northern Virginia) and will likely leave once I have a comfortable cache of investments. I would likely still work a part-time job doing something more fulfilling. If I am working until 59, I will lose my mind.

So here is my dilemma...

I could max out my 401(k) account, but I don't want to wait until 59 to touch it. I also do not have my brokerage account to a level where I could live off it and do a Roth-ladder with the 401k to a Roth IRA. Maybe some day, but it is not there yet. Maybe I need to rethink this, but curious what others think.

I am 30 yo and the 401k is at around $115,000 all in Fidelity SP500 index. My Roth IRA is at $18000 in VTSAX and my brokerage is around $5000 in VTSAX.

My current order of operations with every paycheck is the following:

1. 12% into 401k (company matches $0.50 up to 6%...) This does NOT max out of my 401k for the year.
2. Max out Roth IRA
3. Fund brokerage account with $300 weekly into VTSAX
4. Pay bills (rent, a 1.9% car loan on an Accord... I know, I know...). The car will be paid off in 2 years and I hope to drive it for another 10-15.

After all my bills are paid, I throw some cash to the side into my HYSA, and then I am left with a surplus of $1000-1500.

Do I go back and re-route that $ into my 401k, guaranteeing that I max it out for the year, or do I dump that $ into my brokerage account?

I like the flexibility of accessing the $ now if I need to.

That surplus is pretty much the equivalent of current disability pension from the US Army (untaxed). I will have this for life. I am counting on using it in the future to help smooth the ride when i do decide to hang it up.

Thoughts?

You don't indicate how close you are to maxing your 401k. Would the surplus max the 401k or more than cover a max? Personally, I agree with @ChpBstrd and would max the 401k (or get as close as possible), but you might chose to add $500 to your 401k contributions and put $500 in brokerage, just for the flexibility.

[use2betrix]

What’s your current income, spending, and expected FIRE amount?

[reeshau]

How much is in your HYSA?  What is its purpose?  Emergency fund?  Down payment on a house?  Other?

Good points so far.  I would also counsel that the pre-59 1/2 penalty isn't the end of the world.  What is your current tax bracket?  You live in HCOL, so likely 22% or more.  You are living toward FIRE, so your expenses are much less.  You can earn / withdraw $47k as a single at the 12% bracket.  Add in the 10% penalty, and what do you have?  Same 22%.

With caveats:  it's not exactly the same, because the 22% bracket today only starts at $47k.  But it's not like you are suddenly paying 50%.  It's a tie in the tax optimization game, rather than a win.  Also, with elements of the 2017 tax law due to expire in 2025, there will likely be significant changes in taxes coming; things may or may not stay this way.

[wcschenk]

You are doing great first and foremost!!! Don't forget that or think we all don't recognize that.

A few things before the advice part....you are still very young and may not be fully aware of the challenges of being older yet (health (far bigger concern than most 30 year olds truly understand), more limited career and job options, not having the same energy levels and so on....

That said, I didn't see HSA in your list of qualified accounts? Is that an option for you OR do you get government benefit or a PPO for health care?  If you DO qualify for an HSA I would max that THROUGH PAYROLL DEDUCTIONS and put that 2nd in your pecking order just after getting the 6% 401k match. Why....HSA money is a tax deductive the year it goes in AND tax free coming out when used on health care (believe me...there can be A LOT more healthcare costs after 40 and that only goes up and up each 5 years as you continue to age). ALSO....HSA accounts when the contributions IS FROM PAYROLL DEDUCTIONS ONLY.....do not have social security or medicare withholdings (not even 401k's or IRAs get those....or roths). LASTLY.....HSA is ALSO a backdoor IRA....lets save you "oversave" in your HSA. At age 65...you can make withdrawals and pay income tax then ... making it an IRA essentially (you still got the federal/state tax break when you made the contribution AND the social security/medicare break).

Now for your brokerage funds.....do you have an emergency fund? I don't think I read about that. If not....get a HYSA with at LEAST 1 month of expenses ASAP....stop ALL brokerage contributions til you hit that. Ideally you have 3 months expenses .... but I think you could use your brokerage funds in the event of an emergency....but you REALLY need 1 month CASH or cash equivalent so you are not tempted to sell for super short term emergencies or forced to take on higher interest loans.

What to do after all that....personally THIS would be my pecking order if I were you (with the very limited knowledge I have about you lol)

1st* - top off emergency funs - 1 month CASH....then ideally additional months cash OR 4 months in investments (this covers your a** if there is a recession (investments drop a lot in value) and you get laid off
1st - 6% into the company 401k to get the full match
2nd - max HSA (if applicable)
3rd - max Roth IRA
4th - max 401k
5th - 529's and brokerage accounts

Notes:

I TOTALLY get where you are coming from with wanting the flexibility. HOWEVER....lets say you leave your job in 10-15 years.....you roll your 401k into an IRA and then you can do SEPP (substantially equal periodic payment) withdrawals until you hit 59.5. https://www.investopedia.com/terms/s/sepp.asp

The only reason to maybe save into a brokerage for "flexibility" is for a mid term event (something 7+ years out) .... maybe you want to take a year or two off of working, buy a house or yada yada....and the event is far out enough to bounce back from down markets. That OR you want a "emergency fund" with aggressive growth....in which I would recommend AGAIN....1 month cash....4 months investment with the mindset that it will cover you for 3 months. Of course....as it grows....youll have more and more over time to cover you.

[TheRagingLoon]

Hey folks, some more details

Pre-tax income from work is around $110-115k per year. I receive 5-8% increases yearly.

My company also dumps 5-7% of gross earnings into my 401k as a yearly bonus

I do have a military pension at around $18,000 per year that receives a COL adjustment every once in a while.

If I include that as part of my future income, my FIRE number is around $600-700k in investments

I have 2-3 months in my HYSA at all times.

I do not have an HSA. My healthcare needs are guaranteed for life through the US Army and Veterans Affairs at very low rates. My employer does cover all premiums and has very low co-pays for medical, dental, and vision.

[MDM]

I could max out my 401(k) account, but I don't want to wait until 59 to touch it. I also do not have my brokerage account to a level where I could live off it and do a Roth-ladder with the 401k to a Roth IRA. Maybe some day, but it is not there yet. Maybe I need to rethink this, but curious what others think.

Speaking of order, the Investment Order suggestions are generally appropriate for most.  You might have a unique situation that would indicate otherwise, but it doesn't appear that way from what has been posted.

If you think your marginal tax rate will be higher when withdrawing than contributing (if so, why?), and thus think traditional contributions unwise, do you have a Roth 401k option?

[TheRagingLoon]

I could max out my 401(k) account, but I don't want to wait until 59 to touch it. I also do not have my brokerage account to a level where I could live off it and do a Roth-ladder with the 401k to a Roth IRA. Maybe some day, but it is not there yet. Maybe I need to rethink this, but curious what others think.

Speaking of order, the Investment Order suggestions are generally appropriate for most.  You might have a unique situation that would indicate otherwise, but it doesn't appear that way from what has been posted.

If you think your marginal tax rate will be higher when withdrawing than contributing (if so, why?), and thus think traditional contributions unwise, do you have a Roth 401k option?

I want to clarify that my position is not that I think traditional contributions are unwise. Nor is my question from a tax based approach. My taxes should be much lower when it’s my time to relax. My military pension will cover a lot of my needs and that is tax free.

I’m curious to why brokerage accounts are placed so low on the order of operations if the goal is to retire early.

I know I need a large base in my 401k, and I’ll continue to contribute above the company match, but I believe for my own comfort that fatter brokerage account contributions will be best. I will want access to the $ without any complicated mess, plus I want easy access to liquid assets if things go south.

[simonsez]

I could max out my 401(k) account, but I don't want to wait until 59 to touch it. I also do not have my brokerage account to a level where I could live off it and do a Roth-ladder with the 401k to a Roth IRA. Maybe some day, but it is not there yet. Maybe I need to rethink this, but curious what others think.

Speaking of order, the Investment Order suggestions are generally appropriate for most.  You might have a unique situation that would indicate otherwise, but it doesn't appear that way from what has been posted.

If you think your marginal tax rate will be higher when withdrawing than contributing (if so, why?), and thus think traditional contributions unwise, do you have a Roth 401k option?

I want to clarify that my position is not that I think traditional contributions are unwise. Nor is my question from a tax based approach. My taxes should be much lower when it’s my time to relax. My military pension will cover a lot of my needs and that is tax free.

I’m curious to why brokerage accounts are placed so low on the order of operations if the goal is to retire early.

I know I need a large base in my 401k, and I’ll continue to contribute above the company match, but I believe for my own comfort that fatter brokerage account contributions will be best. I will want access to the $ without any complicated mess, plus I want easy access to liquid assets if things go south.

Brokerage dollars are post-tax and then you pay capital gains taxes (a 2nd round of taxes!).

With traditional or Roth dollars contributing toward a retirement vehicle, one side of the equation is giving you a tax break.  I.e. Just one round of taxes.

Retirement space is finite and due to the tax benefits, it's why it's recommended to max out those vehicles first before brokerages.

In addition to the many resources on this forum about accessing the dollars earlier than 59.5, here is this:
https://www.madfientist.com/how-to-access-retirement-funds-early/
Even after paying the 10% early penalty in one of the scenarios, it still came out ahead of the taxable brokerage strategy.

"...even if you don’t want to mess with things like Roth Conversion Ladders or SEPP distributions, it still makes sense to max out your pre-tax retirement accounts and then just pay the early-withdrawal penalty! The Penalty scenario (Scenario 2a) has over $200,000 more than the Taxable scenario (Scenario 1) by age 60 and will provide an additional decade of elevated income during standard retirement!"