The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: aspiring_stash on April 22, 2013, 11:53:05 AM
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Hi fellow Mustachians,
I found MMM several months ago and have been incorporating Mustachian principles into my life ever since. I'm hooked on the concept of retiring early and want to make sure I'm headed down the right path. I'm trying to develop my FI game-plan and I'm still working out some of the kinks. I would like to 'retire' in approximately 10 years.
Here is my situation:
- 27 years old
- $63k gross income, $44k after taxes
- Maxing out 401(k). Which is T. Rowe Price Retirement 2055 Fund Class R and has a balance of $20k. No Employer Match (but i am enrolled in ESOP).
- Contributes $600 month to Vanguard LifeStrategy Growth Fund. $5k currently held.
- Emergency fund is an EE bond that is worth approx $14k and will earn interest for another 10 years or so.
- My annual expenses run about $15k-18k and i'm debt free.
Here are some of the things I'm unsure about:
- One thing that i'm troubled by is the high expense ratio on my 401(k) ~ 1.28%. but since this is through my work I'm at the mercy of staying within Wells Fargo, no? can/should I direct my tax-advantaged account elsewhere?
- What about my non-tax advantaged account, is the VASGX a tax-efficient choice?
- At what point should i consider reducing my 401(k) contributions and focus on building a nest egg for passive income before age 59 1/2?
- Should i hold onto my EE bond or is it better invested elsewhere?
let me know if you need any more details and thank you!
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1. You should be able to contribute to a traditional IRA at your income, which would give you access to lower-cost investments. So you'd contribute $5500 to the IRA and reduce your 401(k) contributions by the same amount. The tradeoff is that you can't make a Roth IRA contribution if you do this.
2. You would be a little better off investing in a 100% stock fund in your taxable account (VTSMX), especially since you have a sizable emergency fund so the extra stability shouldn't be needed. The bond portion of VASGX is not very tax-efficient. VASGX also holds a portion of international, but because it's a fund-of-funds you don't qualify for the foreign tax credit on those dividends. These details are probably only costing you about $10 per year given the amount you own, but that amount will increase if you keep buying over time. If the current value of this holding is similar to or lower than its cost basis I'd recommend exchanging; otherwise, you'd at least be better off switching your buys over to VTSMX. Once you have about $10k in VTSMX, you might want to think about adding an international fund to the mix.
3. http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
4. Using an EE bond for an emergency fund seems like a good idea to me, what's the interest rate you're getting?
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Thanks for the response, I have some follow-up questions for you:
1. If I open a traditional IRA with Vangaurd why must I reduce my Roth 401(k) by that same amount? I thought it was possible to contribute to both of these while staying under the respective limits for each?
2. Great advice, i will switch over to VSTMX.
3. Awesome article, just what I was looking for.
4. I think interest rate is around 4%, i'll check on that though.
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You don't have to, you could certainly contribute to an IRA and a 401(k) in the same year. But your stated goal is to reduce the expenses you're paying for your retirement investments, and the only way to do that is to reduce 401(k) contributions. Putting the money in an IRA lets you save the same amount at less expense. If you decide you want to save even more in tax-advantaged accounts, then you have no choice but to contribute to both.
By the way, there's more on the issue of expensive 401(k)s here: https://forum.mrmoneymustache.com/investor-alley/escape-high-cost-401k-choices/
That savings bond is doing really well for you, I think it makes sense to hang onto it for at least the next couple years. That's the best return you can hope for in a stable asset these days.