Author Topic: Case Study: 25 yrs old -- Where should we put our stache?  (Read 4951 times)

Indenturedservants

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Case Study: 25 yrs old -- Where should we put our stache?
« on: January 15, 2013, 10:53:09 PM »
Hi Everyone!

My husband and I are in a serious stache building phase of life and would appreciate advice on where to put our money. We’re making $340,000 annually (about $240,000 after taxes) and live off about $40,000 ($24,000 of which is housing -- more on this below). We’re both currently 25. I feel pretty good about our spending amounts, but here’s the summary so you can have a better picture of our expenses and assets.

Our current financial situation:
•   No debt (already paid off student loans, bought a used car for 3,000 3 years ago).
•   No mortgage.
•   250,000 in current stache, and we’re saving about 16,000 - 17,000 a month.

Expenses: About $40,000 a year ($3,325 a month)
•   1,950 – rent (We moved this past summer to our current location for my husband’s job, and we fully intend to go back to the much cheaper part of the country we came from in the next few years to buy a house and settle down. Currently, we couldn’t get a much better deal than this, and we’re pretty pleased with our small apartment.  We’re renting a condo from an individual, and by asking around seem to be getting a very good deal compared to our friends who are renting from companies.)
•   400 – food (groceries, going out to eat, alcohol for the house.  We are both vegetarian, and eat lots of fresh organic foods and shop a lot at farmers’ markets, so this is a value of ours and has already been significantly trimmed.)
•   50 – utilities
•   10 – laundry (coin machine in the building; this covers 5 loads of laundry per month)
•   20 – household supplies (toothpaste, light bulbs, TP, etc.)
•   100 – Misc. (we each get 50 for any clothing we want, fun activities with friends, work happy hours, coffee, etc.)
•   50 – Gifts ($600 per year for Christmas, Weddings, charities, etc.)
•   20 – Prescriptions
•   70 – My cell phone  (down from $120 per month; his company pays his bill)
•   120 – Gas ( I have to commute about 25 miles roundtrip, but husband is able to bike to work; if we moved any closer to my work, he wouldn’t be able to bike to his.)
•   35 – Car insurance
•   30 – Car repairs/services
•   70 – Internet (tax deductible)
•   400 – air travel (partially tax deductible; I know this is a lot, but we started out trying to fool ourselves that we could get this down, but going back to my home for Christmas, thanksgiving and 2 other times in the year, as well as going to visit his family in the summer, makes it so that not exceeding this number is very hard. This is a non-negotiable for us, and we were well aware of the expense this would add when we decided to move for work.)

Assets:
•   112,000 Vanguard index fund
•   25,500 stock experiments
•   10,250 Lending club
•   20,000 My 403B
•   9,000 Husband’s 401K
•   30,500 Husband’s Roth IRA
•   20,000 Husband’s stock option current value (fully vested)
•   22,000 in savings account (we haven’t transferred this to another option yet – we try to move money once a month)

So here’s where our questions really start.
  • My husband has maxed out his retirement account (his work matches his investments up to 3% of his total salary, meaning he can get $7,000 from his match, so he only has to contribute $10,500 on his own) because of my change in work place, my employer no longer matches anything for me. Is it worth it for me to continue to contribute to an IRA? It’s kind of hard to stomach doing that without any matching money. We currently have about 30K in traditional retirement accounts (20K in 403b and 9K in 401k). We’ve looked into converting this money to a Roth account because we are so young and most of the account value would be investment gains. Should we convert now even though our income is very high, or wait to convert in a few years when we’ve shifted to a lower income tax bracket? (I’m holding off on opening a roth IRA until we determine whether or not to convert my traditional 403b to roth.)
  • As of now we have a total of about 60K in “old person” retirement money. How much money do we really want to put into our old person money accounts at this age? By my calculations, if we have 150,000 in our retirement accounts by the time we’re 29.5, assuming a 5% annual return, we will have about 650,000 by the time we’re 59.5 and next have access to that money. Isn’t that enough if we plan to have other “middle age” retirement money to live off of between the ages of 30 and 60?
  • Also, because of our age we are more willing to be a bit risky with our money. Where should we be putting our “middle age” retirement money?

One complication with investments is that when we move back to the cheaper homeland we intend to buy a house (probably around 500,000) so we’re not sure how much we should have liquid at that point. This is probably 2-4 years out.  It doesn’t make sense to be only counting on 5% interest (stock market) or even 10(+)% interest (lending club) if we’re going to be paying a high interest rate on mortgage (I have no idea where interest rates will be by then.) So basically we’re asking for ways to make our money work as hard as it can for us. We’ve really embraced the idea of lending club as a relatively risky way to make higher returns than our index fund. We were talking tentatively about putting about 30% of our total savings into lending club, and then the rest into index funds – does that make sense? We’re a little uncomfortable about the lack of diversity, and if anyone has any other cool ideas for us we would love to hear them.

I’m including an excel spreadsheet that we made detailing our financial picture post retirement (starting at age 30 and continuing for 70 years.) The plan is to spend 26,000 a year (we just kind of guessed on this number, but as it is about what MMM we think it is reasonable, and we do intend to have kids, so we don’t expect to be able to keep as low of a spending rate as we have now. Plus 24,000 a year on a mortgage (planning on buying a 500,000 – 600,000 house, meaning 150,000 – 250,000 would be down payment, and we’d take out a 350,000 mortgage over 30 years, which equates to about 2,000 monthly payments. This assumes that interest rates when we buy still make it such that it is a better option to have some sort of mortgage.) The spreadsheet also demonstrates that we think we can continue to count on 10,000 post tax income until we’re 60 (realistically this is very conservative, but I’d rather not have to take a job/project unless I/he really wants to.) The spreadsheet assumes a “middle age retirement” stache of 650,000 and an “old person retirement” stache of 150,000 plus we would need our down payment on our home (150,000 – 250,000.) Meaning that as soon as we get to a million we’re set.

Thank you so much if you got this far. I didn’t want to bore you, but I also wanted to give you a good look at our entire financial picture. Any advice you can give (riskier investment options, info about Roth conversions, etc.) would be very much appreciated!

Phoebe

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #1 on: January 15, 2013, 11:17:57 PM »
Wow!!  You guys are going to be at FI before you know it!!  Our spending is similar to yours but we don't make as much (and are a few years older).  You're well on your way - Congrats!!

marty998

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #2 on: January 16, 2013, 04:01:46 AM »
"Indenturedservants"? seriously?

Get yourself a good accountant and a good financial planner.

The right investment mix is crucial. Suggest you diversify with min $50k in each asset class (property, shares, fixed interest, REITs, maybe infrastructure securities). I'd stay away from lending club. Not because I think it is a bad investment but it sounds like you are getting greedy, seduced by high returns.

There's a lot to be said for boring rent/dividend collecting, and 40 years of compounding. Play your cards right and you could easily end up with $10m+

bo_knows

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #3 on: January 16, 2013, 06:55:05 AM »
You're certainly in great shape.

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As of now we have a total of about 60K in “old person” retirement money. How much money do we really want to put into our old person money accounts at this age? By my calculations, if we have 150,000 in our retirement accounts by the time we’re 29.5, assuming a 5% annual return, we will have about 650,000 by the time we’re 59.5 and next have access to that money. Isn’t that enough if we plan to have other “middle age” retirement money to live off of between the ages of 30 and 60?

Well, if you're talking about the typical Safe Withdrawal Rate (SWR) of 4% for old-people money, you just need to multiply your annual expenses (roughly) by 1/.04 to know how big a stache you need. Then, you can work backwards to figure out how much you need in there per year until age 29.5.  Because you have such a high income, and such low expenses, I would put some cushion in your numbers if I were you.  Think you're going to spend $26k in retirement? Why not assume $36k instead?  You have so much time to compound until then.

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Also, because of our age we are more willing to be a bit risky with our money. Where should we be putting our “middle age” retirement money?

People will have differing opinions on this.  I, along with a lot of MMM followers, like to keep things simple.  Split it between a Total Stock Market Fund and a Total Bond Market fund.  The more risky you feel, the higher percentage stocks you hold.  Typical "younger" portfolios are something like 80/20 stocks/bonds, or 90/10.  Some people even like 100/0.   Find some low fee funds, set up automatic deposits, and don't look back.

unpolloloco

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #4 on: January 16, 2013, 08:13:19 AM »
Couple of things: employer contributions don't count towards the 17.5k limit for 401Ks, so you can contribute more to it.  Also, look into 72(t) disbursements - the "old people" money doesn't have to be only for when you're old.

Also, the opportunity cost of a 500k house is about the same as the 2k in rent you're paying now (at a 5% market return), and that's not including maintenance, upkeep, taxes, and increased utilities.  Not to say you shouldn't buy a house of that cost, but you should be aware of that.

iamsoners

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #5 on: January 16, 2013, 09:50:12 AM »
Regarding retirement, I would continue to max out any tax-advantaged accounts you have available while you are in such a high tax bracket.  Can you also open an HSA?  Are there FSA options?  Look for any way possible to decrease your taxes.

Along with that, yes, wait until later to convert to Roths.  I am a big fan of Roths but no use doing it now at such a high tax rate when you intend to drop much lower in less than ten years.

Finally, you make it sound like where you're from is a much a cheaper place to live--is a $500k house really a choice you want to make or is there something more reasonable you could get?  That just locks up a lot of capital.

Indenturedservants

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #6 on: January 16, 2013, 11:51:17 PM »
Thanks for all the advice, everybody!

@Phoebe – Thanks! I checked out your blog and was really inspired. You’re a fantastic writer!

@marty998 – Glad you appreciated our facetious username ;) The problem we’re having with financial planners is that it is hard to differentiate the good ones from the bad ones (i.e. just want to resell certain products). Any tips on how to identify good non-commissioned consultants? Can you clarify your concern about lending club? We recognize the value in diversifying our portfolio but are having trouble locating other investments with a similar risk profile. Suggestions?

@bo_knows – Good feedback on the SWR and something we’ve been thinking a lot about. Check out our spreadsheet; we think the combo of leftover middle age assets plus old person retirement assets (assuming 150k at 30 years old) provide sufficient cushion. Certainly if we hit our middle age retirement target then we will continue to build our old person investment as well.

@unpolloloco – super helpful! It sounds like there’s no downside to building up our IRAs… does 72(t) mean that we can put our IRA toward a down payment? We’re definitely struggling with the housing decision, and recognize that a house is more expense than asset, but we tend to disagree somewhat with MMM on issues of housing (and higher education).

@soners – Thanks for the advice! Per your advice we plan to max out our traditional retirement accounts while in this tax bracket, and then when we down shift convert it all to roth. I checked out the math and it looks like more significant savings than I’d imagined.

Anyone else in a similar situation and have tips on relatively high risk, high return investments? I think we’ve figured out how best to proceed on the “old person” retirement money.

marty998

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #7 on: January 17, 2013, 12:14:30 AM »
Hi again,

I don't know enough about lending club to comment on whether it is good or bad, but the tone of your original post suggested you were getting into it for the wrong reason ("I want bigger returns" as opposed to "I'm looking for a good investment")

Virtually all financial planners are shitheads that are out to relieve you of your hard earned. It's very hard to find a good one, but I would actually suggest you try and find 2 good ones. Always good to compare what they come up with.

Talk with enough of them and you will know which ones are good or bad. The good ones talk about your goals and putting in place a structure that will help you achieve how you want to live your life. The bad ones just want to sell you a product and clip the trailing commission.

If you were in Oz I'd suggest a couple of firms I am familiar with. But thats is obviously not relevant to you. Not sure if they have the concept of "private bankers" over there, but if they do then your personal bank manager is a good place to start.

chucklesmcgee

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #8 on: January 17, 2013, 09:39:37 PM »
I'm in basically the same boat as you, 25, roughly the same income, same spending level, same stache. It sure gets tempting to up your spending a bit and rationalize it as "oh well, it's still just X percent of my income" doesn't it?

I'm not sure if your expense projections are that accurate. If you intend on maintaining the same standard of living, $26,000 in 30 years is going to buy way less than $26,000 today. You need to factor in inflation.

1.I would say it's worth it to keep contributing to IRAs/401ks/403bs especially Roth IRAs/Roth 401ks at our levels of savings. Retirement savings will only be a small fraction of your total annual savings. Also, I think taxes in 40 something years are probably going to be much higher than today. Roth conversions are your friend and backdoor conversions are even better.

2. That alone is probably not enough. Sure it'll be $650,000 in your retirement account...but that'll be $650,000 in 35 years. You really need to consider inflation here. Did you know that a dollar today is only worth half as much as when we were born? And inflation for the last 25 years has been fairly modest. Slightly elevated inflation in the next 35 years could leave you with less than a quarter of the purchasing power. Plus you'll still owe taxes on the half that's non-Roth.

3. I've put an enormous amount of my money into p2p lending with prosper, but that's ultra risky. I think a vanguard total stock market index is probably as risky as you want to go, especially if you're going to start relying on that money in 5 years or so. I personally love the concept of P2P lending, the level of returns and the limited volatility (a diversified lending portfolio will not fall 10% in one month, whereas the stock market routinely does). There's really nothing else I can think of that has a chance of doing as well as P2P loans short of investing in a marijuana operation or investing in some shaky European bonds (hey, even after the haircut, those Greek bondholders got 7% interest). At the same time these p2p sites have only been around so long and who knows, everyone might decide not to pay you back after the lending company goes bankrupt for one reason or another. I can never really feel comfortable encouraging other people to take on that much risk, even if I'm ok with it for myself.

I'm mostly aiming to hit FI as soon as possible, but I don't really intend to stop working. Sinecure best describes my current job and the level of commitment involved, so for me it's more about having peace of mind in the event my gravy train end prematurely. Given our savings and spending rates, it shouldn't be all that hard to hit a stache size where the interest alone should comfortably exceed expenses- allowing you to never have to touch the principle. I just can't really imagine stopping work anytime soon considering how much fun I have doing it and my current flexibility and level of commitment.

As far as wealth management goes, I think it's best to do as much research on your own and be able to ask very specific, directed questions at advisers. Also, I would try to find advisers who work on a retainer or an hourly rate, not necessarily through a mutual fund company or on a commission. When they're getting a paycheck from you their interests will be in providing the best advice possible rather than selling you on some pricey products, in theory at least. Haven't used an adviser yet but I probably will.

Phoebe

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #9 on: January 17, 2013, 11:01:53 PM »
Quote
@Phoebe – Thanks! I checked out your blog and was really inspired. You’re a fantastic writer!


Thanks!! :)

CDP45

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Re: Case Study: 25 yrs old -- Where should we put our stache?
« Reply #10 on: January 18, 2013, 12:46:41 AM »
These people must be geniuses to be able to make this kind of money yet they are getting robbed blind by the government.

1)They need to contact an experienced CPA EA or similar tax advisor.
  • max out 401k for each to reduce taxable income
  • buy a cheap condo/property to get the mortgage deduction

If they're paying $2000/mo in rent that's nearly a $400000 house and a $360,600 mortgage @3% 30yrs is $1517 in p+I. Interest is 900monthly*12mo =10,800yr*.35 marginal tax rate is $3,600 saved the first year and the principle in rent is 617.

Obviously max out tax advanced investment account, then pump as much as possible into regular accounts and enjoy the capital gains rate. They can easily save $150,000 and retire in 10 years.

P2p is a joke, don't waste your money, S&P returned 13% last year not incl div. and is at a 5 year  high.