Author Topic: Case study: Investment tips (already decently frugal!)  (Read 2749 times)

MoonLiteNite

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Case study: Investment tips (already decently frugal!)
« on: September 09, 2016, 05:06:39 AM »
Life Situation:
29, male, Texas, USA
No SO, no kids (and will NEVER happen)
When i was 18  i told myself i wanted to retire by age 45. By age 20 I bought a house while making 8$/hr, i viewed it as my first investments, lucky me, this was a few weeks before the big bubble! Ever since then i have thrown every extra penny i had, at the house. That is every penny that i wasn't wasting. I wasn't wasting alot, but i wasn't saving alot. House is 70% paid off at this point. I could have completed but over the last 2 years, i have shifted my extra money into other investments, due to the low rate i was able to get with a personal loan from my father.
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Goals:
FI between 38-45
After that, lots of volunteer work! And start back up my own business. Personal income level may actually be higher after a few years
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My question:
Need some advice on how to divide up 401k, and other investments.
I felt that a rIRA was nice because i can easily pull out my money and use that without any tax issues or limits.  And i kept r401k since i could roll it over into the rIRA and then pull out the contributions without penalties. But after some recent postings, people are suggesting otherwise.
Should i be using after-tax 401k? I just learned of this and it seems like a 2nd version of roth that lets you get up to 42k/yr in total. So another 20k extra! Would seem that I should.
If i put everything into the 401k options, i will have almost nothing left for taxable accounts, would that be OK?
What options should be using in my 401k? Current setup can be seen here. https://i.gyazo.com/6303533f822acff8fd48d1d592f92095.png I really am at a loss on this, it feels like almost throwing darts. I am a TA person, funds like "pick whatever and hope for the best" I guess i am looking for high reward, high risk with this, at least for now.
And finally should i be putting extra towards my house at all? Father is 100% OK with me investing, as long as i pay my payments on time.

And all the details below. Please feel free to call me stupid :) As i said, i had a plan and threw money at a house. Now i really want to get this going right!
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Income sources:
42,000/yr - main job
4,200/yr - i get a 10% bonus of base pay every year,this can vary, but most likely it will remain 10% for the next 3 or so years, if anything it may go up
~~up to another 50,000/yr - main job.
My work includes gobs of OT and DT, and travel with per a diem. So in my last 3 years with this company my yearly incomes have been 52k, 100k, 76k, and this year looks to be around 65k
1,000/yr - youtube, twitch, parked domains, uberish type driving, fixing computers on the side, etc...
12,000/yr - Roommates, i charge flat 500$ no bills, and generally i have 2 people living with me at a time at any point in time

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Expected inheritance:
250k-500k from my father. He is in decent health and still works, age 55. So who knows when i will get that money. It will be raw cash, no IRAs or anything else.
Do not expect to get any other funds at any other person in my life.
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Current Investment setup:
401k - 25%
r401k - 15%
After-tax - 0%
(I figured with around 40% i should be hitting the 18k max, i just recently learned of the 42k limit using after-tax)
HSA - 0% (will be looking to enroll in this next year, seems easy enought to max)
ESPP - 15%, of standard working hours (no OT $) - Basic plan, buying period and ending period, lowest price gets 15% discount and a buy at that price. Can quick sell or hold, no restrictions
rIRA - 5,500/yr
Tax account1 - day/swing trade account - 0/yr
Tax account2 - vanguard - 12,000/yr
Tax account3 - P2P lending - 4,000/yr
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Current account funds:
401k - 30,000 (about 50/50 on t401k and r401k)
ESPP - 5,500 (just sold around 26k worth of shares last month, over 50% gains)
Tax account1 - swing/day trade - 8,100 (Account started with 2k about 1 year ago. I think i have done pretty well, do not plan to add more money into this account, just play with what i have)
Tax account2 - Vangaurd - 14,800 (FIAX 90%, and some VIG, VNQ, VXUS)
Tax account3 - LendingClub - 4,100 - 6 months in and adjust returns is at 11.61%, do believe this will go down to around 9%, would be nice if it didn't
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Current expenses:
House      -   12,000/yr (basically paid for my roommates)
Home ins    -   1,200/yr
Land tax    -   3,500/yr
Gas(house)    -   480/yr
Electrcity    -   1,100/yr (that is with solar panels, more than 75% of that is due to fees and taxes)
Water/sewage/trash -   888/yr
Cell/phone    -   480/yr (read below)
internet    -   1,080/yr (read below)
Healthcare (all) -     520/yr
Car (maint/gas) -   2,500/yr (plan on lower this by 50% due to carpool/biking)
Car ins       -    1,200/yr (changing to 650/yr in 3 months)
Groceries    -   1,800/yr (attempting to lower this, WHILE lower my eating out cost)
eating out   -    500/yr (this was around 3,000 up until 6 months ago)
Clothes, bathroom, cleaning items - <200/yr
Alcohol    -    80/yr (everclear and some juice!)
PC games/hardware   - 200/yr
Other fun money    - 0/yr (i have no life)
Total 27,000~ Hopefully can lower to around 25k within the next 12 months
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Debts:
Home - $66,000 @ 3.73%, with 1000/mo payments. The loan is a personal loan with my father. So no tax credit. I paid 180k for it, and it is est to be worth 205k, but i have 40k worth of solar panels on the roof. So around 245k value.
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So some things to point out.
House - Roommates basically cover house payments
Food/eating out - Really will cut back on eating out. New Soylent Bars are from the heavens! Finally! something to fill me up and eat while working 18 hour shifts.
Internet - Need my fiber connection. I host tor nodes for the world and minecraft servers for kids. This is my charity work :) and i love it.  I should brag and say that when i signed up and they told me the promotion would last for 1 year, i refused and said to make it last a life time. Proud to say it expires in the year 2114 (ATT)
Cell phone - I host a few friends and family members on a family plan, my share is 40$. Once currect pre-payment is up i will be closing the service and getting a cheap 20/mo plan.
Power - Last item for savings is to use a bit less power. Funny enough i make more power than i use, but due to the way credits work, i end up losing my credits at the end of each year, so when summer rolls around. I have very little credits left.
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edit:
Damn 0s are needed when dealing with maths
« Last Edit: September 09, 2016, 05:49:28 AM by MoonLiteNite »

boarder42

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Re: Case study: Investment tips (already decently frugal!)
« Reply #1 on: September 09, 2016, 05:32:43 AM »
ok so on investments as in the other thread. 

if you have the ability to max both trad ira and and trad 401k do both.

also if you have an HSA b/c you're on an HDHP max that too

once thats all maxed IF your company plan allows for in service withdrawals funnel the rest into a mega backdoor roth since you have the first half (after tax 401k) but you havent indicated if you have the second half(in service withdrawals).  this works by putting money into the after tax 401k then you immediately roll it out into a roth ira.  now you have this roth funding you're so craving.  otherwise you should just put the extra in taxable at this point. if you dont have the mega back door roth option .

as for the investment options ... seems like you're overcomplicating it to me no reason to have anything in the target date fund. would need to see what the expense ratios are on the rest and where your were investing your mega back door roth/taxable/trad IRA(this may have to be roth due to income levels)



MoonLiteNite

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Re: Case study: Investment tips (already decently frugal!)
« Reply #2 on: September 09, 2016, 05:46:41 AM »
if you have the ability to max both trad ira and and trad 401k do both.
Check - going to read links from other forum post :)

also if you have an HSA b/c you're on an HDHP max that too
Check - I have HDHP, but did not sign up for HSA, will be maxing this come 2017

once thats all maxed IF your company plan allows for in service withdrawals funnel the rest into a mega backdoor roth since you have the first half (after tax 401k) but you havent indicated if you have the second half(in service withdrawals).  this works by putting money into the after tax 401k then you immediately roll it out into a roth ira.  now you have this roth funding you're so craving.  otherwise you should just put the extra in taxable at this point. if you dont have the mega back door roth option .
I looked around on the website, i see nothing about "in service withdrawals". Only for qualifying events, or i can pay penalties, or take out a loan. I will call them tomorrow after noon and see if they have it. If not, i may just keep the rIRA, but do full t401k

as for the investment options ... seems like you're overcomplicating it to me no reason to have anything in the target date fund. would need to see what the expense ratios are on the rest and where your were investing your mega back door roth/taxable/trad IRA(this may have to be roth due to income levels)
That is what i figured... but i had thrown these up 3 years ago when i was hired full time. The exp rations are all low, the S&P500 is actually less than vanguard at only .05%, as well as the sm, md, and lg cap funds. The target date fund  is .08%

edit:
Fully understand the idea for the mega back door roth now.
Max pre-tax + employers match > those get moved into tIRA
You also max the after-tax (which is kinda like a ROTH, but not really, and has a 42k cap combined with the r401k and t401k) > those get moved over to rIRA
And all gains from both pre-tax and after-tax get moved into the tIRA as well.

From there the tIRA can be used in the IRA ladder, and the rIRA can be used as i was planning on using it before.
Makes sense,  i just updated my 401k for 40% after tax (since i already hit my 401k limit for the year).
And next year i will do the math and max t401k ASAP and then fill up as much as i can on the after-tax amount.

I also plan to cut back on all other investment accounts. MAYBE keep a small (100/mo) trickle going into the vanguard/LC accounts.
And of course max out HSA in 2017!

I am open to anyone else thoughts :)
« Last Edit: September 09, 2016, 06:29:33 AM by MoonLiteNite »

boarder42

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Re: Case study: Investment tips (already decently frugal!)
« Reply #3 on: September 09, 2016, 06:47:24 AM »
no you dont understand. you shouldnt be putting anything in your after tax 401k if you dont have inservice withdrawals. you may as well just put it in a taxable with vanguard.

boarder42

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Re: Case study: Investment tips (already decently frugal!)
« Reply #4 on: September 09, 2016, 06:48:09 AM »
you need to read JLcollins stock series. 

boarder42

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Re: Case study: Investment tips (already decently frugal!)
« Reply #5 on: September 09, 2016, 06:56:58 AM »
you are confusing many different things here

lets start with accounts and accumulating wealth then move on to withdrawal strategies.

accounts

1 t401k - pret tax - all of your contributions and any employer match end up here max you personally can contribute - 18k
2. r401k - post tax - i wouldnt use it but if you do your employer match still ends up in the t401k
3 tIRA - pre tax personal account savings outside of your work with vanguard typically - 5500 max
4. rIRA - post tax personal account savings outside of your work with vanguard typically - 5500 max
5. after tax 401k - this account is basically a taxable account and should ONLY BE USED if you have inservice withdrawals otherwise you're just limiting your number of fund option to whats in your 401k
6 Mega back door roth - combination of after tax 401k and rIRA in which if you have
              1. and after tax option in your 401k - which you do
              2. inservice withdrawals
    will allow you to protect all investment gains from taxes if rolled to a roth - it sounds like you dont have number 2 so you cant do this which means you should put nothing in your after tax 401k you arent getting any gains
7. taxable - where the leftovers go

withdrawal strategies.

1. tIRA - t401k will roll to this - Sepp 72t or roth ladder
2. rIRA - r401k will roll to this - contributions can be taken out til 59.5 at which point everything can be taken out tax free
3. taxable - LTCGs and QDs arent taxed here if you stay in the 15% bracket making it essentially a roth IRA if you stay in the 15% bracket when retired.

you need a 5 year bridge of taxable and roth contributions to get the ladder working for you. 

MDM

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Re: Case study: Investment tips (already decently frugal!)
« Reply #6 on: September 09, 2016, 10:21:56 AM »
My question:
Should i be using after-tax 401k?  If and only if your company plan allows, and you have maximized all other tax-advantaged accounts.
If i put everything into the 401k options, i will have almost nothing left for taxable accounts, would that be OK?  Yes.
What options should be using in my 401k?  Really need to see the expense ratios you are being charged for each, but 100% into Vanguard TR 2060 is a defensible choice.
And finally should i be putting extra towards my house at all? Father is 100% OK with me investing, as long as i pay my payments on time. It's a close call but I'd play the odds and invest.  See the 'Investment Order' tab in the case study spreadsheet.

See also http://www.bogleheads.org/wiki/Traditional_versus_Roth.  Unless you know for sure that you will be paying 25% or higher marginal rate when it comes time to withdraw funds, traditional will be better than Roth for you now.

Goldielocks

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Re: Case study: Investment tips (already decently frugal!)
« Reply #7 on: September 09, 2016, 10:31:58 AM »
Until your dad formalizes an inheritance transfer plan, to you, before his death, do NOT count on inheritance, or even think about it in the same mind frame as your financial goal planning.

Why?

You may likely be 69 years old before you see it.  !!

--There is a 50% chance that it will be almost nothing when you do (if Dad needs extended care at the end of life, you will be happy to pay for the extra services for him out of his retirement money, at that time).
--There is a 25% chance that it will be far, far more than you expect right now (if market continue to do well for 30+years..)
-- He could decide to donate the bulk of it, or transer it to other family, because "you are doing well" and don't need it by the time you are 50 years old.



seattlecyclone

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Re: Case study: Investment tips (already decently frugal!)
« Reply #8 on: September 09, 2016, 10:41:45 AM »
Should i be using after-tax 401k? I just learned of this and it seems like a 2nd version of roth that lets you get up to 42k/yr in total. So another 20k extra! Would seem that I should.

The after-tax 401(k) isn't very good on its own as a long-term investment vehicle. Any gains will be taxed at your regular income rate when you withdraw, which makes a taxable account better in almost all cases because the capital gains tax rates are lower. The main use for this account is then as a vehicle for funneling extra money into your Roth IRA before it grows very much. If you can do "in-service withdrawals" that means you can move this money into the Roth IRA while you're still working for the company. This is the ideal scenario, since you can move the money out right away before it has a chance to grow at all. However even without in-service withdrawals the after-tax 401(k) can still be pretty good if you plan to change jobs within a few years. You'll still be able to move the post-tax part into a Roth IRA and there probably won't be too many pre-tax gains to worry about.

Quote
If i put everything into the 401k options, i will have almost nothing left for taxable accounts, would that be OK?

It depends on your near-term financial goals, but for retirement purposes it's generally fine. You have a house already. That would be the one thing lots of people would want to have some taxable savings to cover. Otherwise, loading up the retirement accounts before you do taxable investing can be a great idea, especially if you have after-tax 401(k) giving you lots of easily accessible Roth basis in case of an emergency.

Quote
What options should be using in my 401k? Current setup can be seen here. https://i.gyazo.com/6303533f822acff8fd48d1d592f92095.png I really am at a loss on this, it feels like almost throwing darts. I am a TA person, funds like "pick whatever and hope for the best" I guess i am looking for high reward, high risk with this, at least for now.

Consider working on an "Investment Policy Statement" that says what percentages of your investments will be in which asset classes, among other things. A three-fund portfolio can be a good place to start, and many people have no real need to branch out beyond that. The exact numbers are a very personal choice that we really can't advise you on. The Vanguard Target Retirement funds basically implement that for you, so you can't go too wrong with just putting 100% of your money into one of those.

Quote
And finally should i be putting extra towards my house at all? Father is 100% OK with me investing, as long as i pay my payments on time.

This is really up to you. If you can sleep at night just fine with a mortgage, investing is likely to be the better choice.

MoonLiteNite

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Re: Case study: Investment tips (already decently frugal!)
« Reply #9 on: September 09, 2016, 05:00:38 PM »
Until your dad formalizes an inheritance transfer plan, to you, before his death, do NOT count on inheritance, or even think about it in the same mind frame as your financial goal planning.

It is. He has under a 5k living exp and earns around
83k/yr + 10% + around another 40k a year with OT and DT, no sign of this decling or him turning it down
Basically his will is divide it 25% between 4 kids, the fuckup, the slacker, the well off one, and myself. Mother already died a few years ago :(
So fairly sure it will come one day, but yes most likely not until i am in my 50s
So his saving, but non-investing rate is through the roof to say the least.


MoonLiteNite

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Re: Case study: Investment tips (already decently frugal!)
« Reply #10 on: September 09, 2016, 05:02:37 PM »
no you dont understand. you shouldnt be putting anything in your after tax 401k if you dont have inservice withdrawals. you may as well just put it in a taxable with vanguard.

Ok that is what i am missing.
I believe i get it now, and no 401k plan does NOT have that option.
So there is no point in doing after-tax in 401k, better to just put into a tax account and have more investment options.
UNLESS, as someone else pointed out, i plan on leaving my job soon, because at that point i can roll it over into the rIRA.