Author Topic: Case Study - Am I doing it "right"?  (Read 3684 times)

Scommm

  • 5 O'Clock Shadow
  • *
  • Posts: 56
Case Study - Am I doing it "right"?
« on: September 20, 2015, 05:16:49 PM »
Here's my current status:

45 y/o guv employee
single, no children (filing single w/2)
rent, no mortgage or loans / debt
Goal is to retire at 55, or earlier if possible. 
Caveat is my pension will pay as indicated below at that rate only if I work until 55.  I can leave employment earlier if I can afford to and start the pension at 55 but the payout will be lower based on years in service, penalty for early withdrawal, etc.

annual salary is usually around 68k
we have access to a 401 and 457 plan but no match (I currently don't participate)
we have a mandatory pension plan we have to participate in (there is a match)
my understanding is I can not contribute pre tax to a traditional IRA as my MAGI appears to be over 70k (usually because of overtime and secondary income)
I am contributing to a Roth $5.5k / year (MAX)
I am contributing to a HSA $3.3k / year  (MAX)
I am contributing to my FSA plan annually.
I am contributing to a taxable betterment account 1300 / month
I have $8k in a safety net
I have $22k in checking
Monthly expenses are around $2k
I have second income that varies from 1-3k annually (sched C)

My pension will pay $31k pre-tax at 56 if I start it then, if I wait until 65 it will pay $71k
My current balance in a betterment taxable account is around $110k
My current balance in a betterment Roth IRA is around $3k
My current balance in a betterment Traditional IRA is around $20k
My current safety net balance is $8k
My current checking balance is around $22k
My current lending club balance is around $2.5k

My questions are should I be investing in a 401 / 457 vs the betterment taxable account even if there is no match?
Should I be investing in any other products or be investing in a different manner than what I listed?

Any MMM opinions are welcome.  I would like to retire earlier if possible but I have just recently started learning.


wordnerd

  • Handlebar Stache
  • *****
  • Posts: 1159
Re: Case Study - Am I doing it "right"?
« Reply #1 on: September 20, 2015, 05:40:03 PM »
I would definitely utilize my tax-advantaged (401/457) options before taxable. Since people are often confused on this point, you CAN withdraw that money before 59.5. See: http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

Also, why do you have $22k in checking if you also have an $8k safety net (4 months of expenses)? Put that money to work for you!
« Last Edit: September 20, 2015, 05:54:36 PM by wordnerd »

Rosy

  • Handlebar Stache
  • *****
  • Posts: 2030
  • Location: Florida
Re: Case Study - Am I doing it "right"?
« Reply #2 on: September 20, 2015, 05:53:31 PM »
Tax Advantage trumps taxable any day of the week and twice on sunday. That is the one thing I have learned for sure so far since finding MMM.

If you don't feel comfortable investing all of the 22K you might consider investing at least 10K of it, unless you have a really good reason to hold onto cash at the current low interest rates.

Scommm

  • 5 O'Clock Shadow
  • *
  • Posts: 56
Re: Case Study - Am I doing it "right"?
« Reply #3 on: September 20, 2015, 05:55:25 PM »
I will look into the 457 options.  My understanding was I could take that out before 59.5.  Other than that I really don't know much differences between the 401 and 457 options. 

My question is in reference to fees.  What should I look for in a 457 / 401 offering from my employer before I take the plunge?  In other words would there be any scenario where a offering / product could be so bad it would be better off investing in a taxable product (such as betterment) instead?  Remember I have no match at my workplace for 401 / 457 accounts.  Another thing my "mind" has always thought about is if I put it in a 401 / 457 and I needed it I would likely not have such easy access to it as I do in a taxable account, but I'm sure that's the wrong way to think about it.

And IDK why I have that much, just used to it I guess.  But I could surely put it to work instead.

csprof

  • Stubble
  • **
  • Posts: 229
Re: Case Study - Am I doing it "right"?
« Reply #4 on: September 20, 2015, 07:29:03 PM »
I will look into the 457 options.  My understanding was I could take that out before 59.5.  Other than that I really don't know much differences between the 401 and 457 options. 

My question is in reference to fees.  What should I look for in a 457 / 401 offering from my employer before I take the plunge?  In other words would there be any scenario where a offering / product could be so bad it would be better off investing in a taxable product (such as betterment) instead?  Remember I have no match at my workplace for 401 / 457 accounts.  Another thing my "mind" has always thought about is if I put it in a 401 / 457 and I needed it I would likely not have such easy access to it as I do in a taxable account, but I'm sure that's the wrong way to think about it.

And IDK why I have that much, just used to it I guess.  But I could surely put it to work instead.

The right way to think about it is to look at your marginal tax bracket for the 1300*12 = $15,600 you're putting in Betterment.  At a 70k AGI, that's about 25%.  So:

If you put it in Betterment, you get $15,600 in post-tax dollars invested.

If you put $15,600 pre-tax into a 401k, you get $15,600 in pre-tax dollars invested
PLUS 25% of 15,600 (the tax savings) = $3,900 invested in betterment.

That's a free almost $4,000 per year.

Just look at the fees, etc.  If your employer lets you invest in Vanguard - or you can choose from some of Vanguard's ETF offerings - you'll be just fine.  But even a slightly higher fee (under half a percent, say) will be more than offset by the tax savings.  If it really stinks, come up with a strategy for rolling it over into some other tax-deferred account like an IRA, and contribute anyway.  Gets a little more complicated but it's worth finding a way to take advantage of the tax deferral.

Free $4k.  There should be a big sign hanging from it in your employer's office that says "PICK ME!  PICK ME!  FREE MONEY EVEN WITHOUT MATCH" :)

(FWIW, I don't get a match either -- my employer does a straight %age of salary contribution no matter what I do -- and I max my 401.)

MDM

  • Walrus Stache
  • *******
  • Posts: 9403
Re: Case Study - Am I doing it "right"?
« Reply #5 on: September 20, 2015, 10:22:58 PM »
My questions are should I be investing in a 401 / 457 vs the betterment taxable account even if there is no match?
Yes, for the reasons already given...plus one other: you will likely be able to contribute enough that your MAGI will drop below $61K thus making you eligible for a fully deductible tIRA.

Quote
Should I be investing in any other products or be investing in a different manner than what I listed?
If your total (excluding tax) expenses really are ~$24K/yr, your marginal tax rate in retirement could be very low.  Low enough, in fact, to make Traditional better than Roth for you even if you drop into the 15% marginal bracket now.  You might spend some time with www.i-orp.com (or other tools mentioned in https://www.bogleheads.org/forum/viewtopic.php?t=115839#p1686175).  E.g., deferring your pension might be worthwhile.

For a simplified look, see the table below.  You can download the template from http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-%27case-study%27-topic/msg274228/#msg274228 and modify your own copy as needed.

CategoryMonthly
Comments
Annual
Salary/Wages for person #1$6,250$75,000
HSA/Pension$275$3,300
FICA base salary/wages$5,975$71,700
Traditional IRA$458At maximum$5,500
401(k) / 403(b) / TSP / etc.$1,200Room to increase?$14,400
457 plans   $1,500At maximum$18,000
Income subject to IRS tax$2,817$33,800
Federal Total Income$2,817$33,800
Federal tax$2552015 rates, S, stand. ded., 1 exempt.$3,064
State/City tax$78Guess, using 4.00% * Fed. Taxable$940
Soc. Sec.$370Assumes 1 earner paying$4,445
Medicare$87$1,040
Total income taxes$791$9,489
Income before other expenses  $2,026$24,311
Monthly Average Expenses:
Miscellaneous$2,000$24,000
Non-mortgage total$2,000$24,000
Total Expense$2,000$24,000
Total to invest$26$311
Summary:
"Gross" income$6,250$75,000
Income taxes$791$9,489
After-tax income$5,459$65,511
IRA+401k/403b/TSP/457 (Savers' credit)$3,158$37,900
Living expenses$2,275$27,300
After-tax investable$26$311
Time to FIRE?:
Time to FIRE9.25years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments6.00%percent
Real, after tax, return on taxable investments5.10%percent
Expected retirement total tax rate10.00%
Current Savings
Taxable$110,000
Tax-deferred (e.g. trad. IRA/401k)$20,000
Roth$3,000
Projected Savings at Retirement
Taxable$177,834
Tax-deferred (e.g. trad. IRA/401k)$485,466
Roth$5,143
Total projected stash$668,442
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 $1,776 extra.


Filing Status11=S, 2=MFJ
# Exempt.1
# Children <171
# of earners1
Total Income$33,800
Std. Deduct.$6,300
Act. Deduct.$6,300
Exemption$4,000
AGI$33,800
MAGI$39,300
Taxable$23,500
Tax$3,064
Savers' credit$0
Tax after n-r credit$3,064
Child Tax Cred.$0
EIC$0
Net Tax$3,064
Monthly$255
State tax$9404.%
Item. Deduct.$940


My question is in reference to fees.  What should I look for in a 457 / 401 offering from my employer before I take the plunge?  In other words would there be any scenario where a offering / product could be so bad it would be better off investing in a taxable product (such as betterment) instead?
Good question.  See https://www.bogleheads.org/forum/viewtopic.php?f=10&t=172808 for some discussion that may help you answer it - let us know if not.

Scommm

  • 5 O'Clock Shadow
  • *
  • Posts: 56
Re: Case Study - Am I doing it "right"?
« Reply #6 on: September 21, 2015, 12:18:22 AM »
Thank you for the replies.  I checked out the links, and it would appear some of the posts are years old now, which makes me wonder if the data behind any of the links supplied there for the different modeling calculators has been updated or if the calculators ALL use older data?

Also; just because I have not researched it yet does anyone have any "down and dirty" advice for a 401 vs a 457?  Also; are you allowed to contribute to both?  If yes can you contribute to max limits for each or is there a max cap across all plans?

I should have mentioned this earlier, my employer offers our 401 / 457 options through Principal.
« Last Edit: September 21, 2015, 01:05:40 AM by Scommm »

MDM

  • Walrus Stache
  • *******
  • Posts: 9403
Re: Case Study - Am I doing it "right"?
« Reply #7 on: September 21, 2015, 01:34:29 AM »
Thank you for the replies.  I checked out the links, and it would appear some of the posts are years old now, which makes me wonder if the data behind any of the links supplied there for the different modeling calculators has been updated or if the calculators ALL use older data?
The most important data is that which you enter about your own situation.  Did you have a particular concern about any of these four specifically recommended in the bogleheads post?
Fidelity Retirement Income Planner
Flexible Retirement Planner
Optimal Retirement Planner
ESPlanner

Quote
Also; just because I have not researched it yet does anyone have any "down and dirty" advice for a 401 vs a 457?  Also; are you allowed to contribute to both?  If yes can you contribute to max limits for each or is there a max cap across all plans?
457 plans are treated separately from 401k/403b plans.  You may contribute the maximum 457 amount to your 457 plan, plus the maximum 401k amount to your 401k plan. 

Withdrawals from 457 plans may be made penalty-free as soon as you retire, while 401k withdrawals when you are below certain age limits get hit with a 10% penalty.  For that reason, if all else (e.g., fund options and fees) is equal you should prefer the 457.

Scommm

  • 5 O'Clock Shadow
  • *
  • Posts: 56
Re: Case Study - Am I doing it &quot;right&quot;?
« Reply #8 on: September 21, 2015, 02:00:06 AM »
Nope I was just hoping they're up to date. I used the ORP one.

Ok on 457. The provider I have access to is Principal. It looks as if they have their own ETF funds - not the Vanguard products.


Sent from my iPhone using Tapatalk

Scommm

  • 5 O'Clock Shadow
  • *
  • Posts: 56
Re: Case Study - Am I doing it "right"?
« Reply #9 on: September 21, 2015, 12:00:07 PM »
I don't want to totally take this thread off topic but in setting up an HSA and now a 457 I have 3 different product vendors, is there a site or way to keep track of ETF's / products from each vendor to make sure you are not running into wash sale problems?

MDM

  • Walrus Stache
  • *******
  • Posts: 9403
Re: Case Study - Am I doing it "right"?
« Reply #10 on: September 21, 2015, 01:07:12 PM »
I don't want to totally take this thread off topic but in setting up an HSA and now a 457 I have 3 different product vendors, is there a site or way to keep track of ETF's / products from each vendor to make sure you are not running into wash sale problems?
It 's your thread, so.... :)

Quicken (from firsthand experience) and Personal Capital (from what I think I've heard) could keep track of multi-vendor purchases and sales.