Author Topic: Case Study 26 year old  (Read 3144 times)

jmras5

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Case Study 26 year old
« on: July 26, 2016, 01:06:13 PM »
Looking for a little advice on where to begin......I am 26 years old and married with 2 kids. 2 and newborn...

Myself - Self Employed - Contractor/Realtor
Salary - Around $40000 Pretax
Investments - Roth IRA - $11000 - Currently held at a brokerage...thinking about moving it over to Vanguard...not sure how I do that.

Wife - Nurse
Salary - Around $45000 Pretax
Investments - Roth 401k through employer - $34,000. Have been making post tax contributions but thinking we should switch to pre tax.

House - Owned - Worth $200000. With 30% Equity

Vehicles - 2004 F150 for work. No loan
                2011 Ford Taurs. No loan

Cash - $35,000

Currently live on $44000 per year. Big hunk of it is between daycare (1,000 per month) and House (935 per month)

Currently my wife works 9 days out of a 2 week pay period. We would like to get her down to 6 days per pay period.

End goal is for her to work 3 days a week....hopefully only tuesday, wednesday, thursday eventually to allow for easy traveling/vacations.
I enjoy my job and have a lot of flexibility so I don't really have a set retirement goal. Once we reach FIRE I can easily take as long as I want off whenever I want, so I plan on doing at least some kind of work till I am pretty old.

We are planning to start saving as much as possible but need some advice on where to put the money. Meaning what accounts should we max out first or just any advice from people who went through a similar path but are farther along.....thanks!

2Birds1Stone

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Re: Case Study 26 year old
« Reply #1 on: July 26, 2016, 01:11:49 PM »
You would save ~$3-4k in taxes every year by doing pre tax 401k each year.

I would also max out Roth/Traditional IRA.

Mother Fussbudget

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Re: Case Study 26 year old
« Reply #2 on: July 26, 2016, 01:13:53 PM »
We get questions like this often, and in every case, the answer varies according to your financial situation.
[If you really want spending advice, and the maximum input possible, follow the 'case study' form, and enter detailed spending information.]

I assume everyone sets aside a 3-6 month emergency fund, and works forward from there.  After that... 

The investment order I recommend:
1) Max out your 401K contribution to get the dual benefit of saving pre-tax dollars, and reducing taxable income.
2) Max out your HSA account (must have a HDHP to have an HSA account).  http://www.madfientist.com/ultimate-retirement-account/
3) Max out a T-IRA or ROTH IRA contribution.  A tax-advantaged $5,500/year saving bucket above and beyond the 401K/Roth401K.
4) Invest in a taxable account.  You can always invest in a taxable account. Purchase low fee ETF's >> Total Stock Market Fund / Total Bond Market Fund, and/or REIT's if you want a real-estate component to your investment portfolio but don't want to be a landlord (http://www.mrmoneymustache.com/2011/08/15/become-a-lazy-landlord-with-reits/)

Also... setup your investments to DRIP - Dividend Re-Investment Program.  Each stock trading company lets you re-invest dividends into the stock that generates dividends.  In most cases, you'll have to manually specify you want dividend reinvestment for each holding in your account. 
Keep up the good work, and all the best!

jmras5

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Re: Case Study 26 year old
« Reply #3 on: July 26, 2016, 01:35:25 PM »
Thanks! Where do I find the case study form?

zolotiyeruki

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Re: Case Study 26 year old
« Reply #4 on: July 26, 2016, 02:23:25 PM »
Thanks! Where do I find the case study form?
Right here :)

It sounds like you guys are off to a great start, honestly.  No car debt, high home equity, and you're already saving at a young age.  That's a great place to be in your 20's. 

Taxes-wise, once you take out your deductions and exemptions, you're well under the 15% bracket, and if you maintain your current spending levels, you'll be looking at very little federal income tax in retirement.  One realization I came to recently is that (and I hate to say this) Roth IRAs are overrated for mustachian people.  The reason is this: in retirement, your income is going to be low, so your effective tax rate is going to be really low.  Thus, the tax-free withdrawals from a Roth aren't as beneficial.

Assuming you have $40k/year outside your spending, and that you're taking the standard deduction, here's what I'd suggest:
1) contribute enough into your 401k(s) to get the maximum match.
2) contribute the max into two traditional IRAs ($11k/year)
3) contribute the rest (down to your $44k spend) to your 401k, assuming it has low fees.  Otherwise, stick it in a taxable account.

MDM

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Re: Case Study 26 year old
« Reply #5 on: July 26, 2016, 02:38:03 PM »
Thanks! Where do I find the case study form?
http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/.

In addition to the text in that post, the spreadsheet linked there contains a variety of information.  E.g., see the 'Investment Order' tab for thoughts on "where to put the money", the 'Calculations' tab for a look at your cash flow, taxes, time to FIRE, etc.

jmras5

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Re: Case Study 26 year old
« Reply #6 on: July 26, 2016, 06:05:20 PM »
What is the advantage of contributing to two traditional iRA's before maxing out my wife's Roth 401k with pre tax contributions? The fees on the 401k are minimal and it already has 34000 in it so wouldn't it be smarter to add to that first as it already has the most money in it...

MDM

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Re: Case Study 26 year old
« Reply #7 on: July 26, 2016, 06:19:57 PM »
What is the advantage of contributing to two traditional iRA's before maxing out my wife's Roth 401k with pre tax contributions?
One does not make pre tax contributions to a Roth account - please clarify...?

boarder42

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Re: Case Study 26 year old
« Reply #8 on: July 26, 2016, 06:53:05 PM »
You need to read jlcollins stock series. You need to understand the types of accounts and how to invest

zolotiyeruki

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Re: Case Study 26 year old
« Reply #9 on: July 27, 2016, 07:22:10 AM »
What is the advantage of contributing to two traditional iRA's before maxing out my wife's Roth 401k with pre tax contributions? The fees on the 401k are minimal and it already has 34000 in it so wouldn't it be smarter to add to that first as it already has the most money in it...
MDM is right--Roth contributions are, by definition, after-tax. 

The reason I prefer to max out the traditional IRA before the 401k is simply because I have more control over it, and for a lot of people, the 401k options are not very good.

jmras5

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Re: Case Study 26 year old
« Reply #10 on: July 29, 2016, 12:42:49 PM »
Since I am self employed,would I be better to set up a solo 401k or sep Ira instead so I can contribute more than $5500. As far as my wife's Roth 401k goes I was thinking I could just switch and start making pre tax contributions instead but everything we have put in up to this point would still be counted as after tax contributions. Sorry if some of my questions are dumb but it's very helpful to get insight from guys like you...

MDM

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Re: Case Study 26 year old
« Reply #11 on: July 29, 2016, 04:53:21 PM »
Since I am self employed,would I be better to set up a solo 401k or sep Ira instead so I can contribute more than $5500.
See Solo 401(k) plan - Bogleheads and links therein for some pro/con thoughts.

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As far as my wife's Roth 401k goes I was thinking I could just switch and start making pre tax contributions instead but everything we have put in up to this point would still be counted as after tax contributions.
Yes, she should be able to switch between Roth 401k and t401k by notifying payroll.  And yes, the contributions already made would stay where they are.

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Sorry if some of my questions are dumb but it's very helpful to get insight from guys like you...
Not a problem - sometimes it is obvious what is meant even with typos, but sometimes there are too many possible interpretations so we'll just ask for clarification.  Good luck!