Author Topic: Help me to decide, please  (Read 3814 times)

hopetogetfi

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Help me to decide, please
« on: March 03, 2015, 08:24:58 PM »
I am 40 years old and currently have approx 15K in my Roth IRA (Vanguard target retirement plan). I am a single parent of a 4-year old, no child support. I recently realized that I might not be able to work until 65 or even 55 due to my health. My employer has a good defined benefits plan, but my monthly pension amount depends on the number of years worked, and again I am not sure how long I will last. My earliest retirement is at 55 (when I can claim my pension). Relying on this pension alone does not feel right. I need to start building additional source of income for old age and college fund. I like the MMM strategy, but need some advice. Ideally, I would like to reach FI in 8-10 years. My happy number is 900K, so that I could have 3K income per month at 4%. I have two mortgage-free houses in Southern CA which I plan to sell at some point. I hope to get maybe 400K for both after taxes, but not sure what the housing prices will be in 8-10 years. We live in one house and the other one is vacant. So I need to accumulate approx 500K in 8 or 10 years (or more for college).

The question is what is the best strategy? I might be able to deposit 2K – 3K per month for the next 10 years, especially if I rent out one of the houses. My employer has the following savings plans available:

TSA plan 403b;
deferred comp 457b (Roth available);
and thrift plan 401k (Roth available).

I understand that 457b is the best option since it allows rollover distribution to Roth IRA and the plan allows payout upon retirement or separation from state service without tax penalty (no age restriction). It also allows some “catch up” for lost time. I understand that there are some management/admin fees and such. Or should I skip all of these altogether?

So far I am thinking that I should contribute $5,500 per year to Roth IRA, $17,500 per year to Roth 457b, and another 10K (or so) into a non-retirement (taxable account with Vanguard). I was thinking about contributing to my son's Roth IRA for household chores, but he is only 4 now. Maybe in a few years. What do you think? Any advice would be appreciated. I am not sure which funds to use and how to diversify between stocks/bonds, probably 80/20. I know I do not want to put everything in stocks. I also do not have time or expertise to buy individual stocks. That leaves me with index funds. Again, your advice would be greatly appreciated. What savings strategy would you use if you were in my shoes?

Thanks!

southern granny

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Re: Help me to decide, please
« Reply #1 on: March 03, 2015, 08:37:36 PM »
I am sorry about your health issues.  I wonder why you have a vacant house?  Rent it out or sell it.  Also re IRA contribution to child, you better check the rules on this.  Sorry, but I don't have the expertise to advise you on investments, but good luck to you.

socaso

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Re: Help me to decide, please
« Reply #2 on: March 03, 2015, 08:44:15 PM »
If you have two houses why don't you rent the vacant one? Rentals are high earners in SoCal, you ought to be able to turn a decent profit until you are ready to sell. If you don't want to do that why not just sell and invest the money for the next several years until you need it? I did a simple calculation on Bankrate and if you put $400k in investments and get just 8% for the next 10 years you will have $887k even if you add nothing to it. That's practically your happy number and you still have another mortgage-free home.

As far as your son is concerned, do you actually have a Roth for him? My understanding was that you can't have a Roth until you have income so young people can't have them until they start jobs. You could put the money in a college fund for him. That's what we are doing with our son. We put any money he is given in a 529. When he gets older (he's 3) he will still have to contribute a percentage of any money he earns or is given to his college fund. We just put everything in there now because he really has no concept of money right now.

jmusic

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Re: Help me to decide, please
« Reply #3 on: March 03, 2015, 09:51:44 PM »
First and foremost, remember the airline rule:  Put your own oxygen mask on before your child's. 

We say that around here because the biggest help you can be for your child is to not need to depend on him for basic necessities later on in life.  Besides that, your son is 4, there's plenty of time for his retirement funding...

+1 on rent/sell the second house.  Even if there's no mortgage, there's still holding costs (maintenance, taxes, insurance, etc).

Also, I'd highly recommend traditional plans instead of Roth, because your tax rates will likely be very low in retirement. 

Backyard Farmer

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Re: Help me to decide, please
« Reply #4 on: March 03, 2015, 10:15:10 PM »
To hopetogetfi.

After 20 yrs of employment with a company that offered (a) pension (defined benefit), (b) 401k (defined contribution), and (c) retireee health, I was recently notified that, due to a corporate re-structuring, I and a few thousand other folks are being spun off to a new, stand-alone company. The pension which I've been planning to [partially] retire on for all these years has now been vaporized (only a fraction of the projected value), and my retiree health coverage has been dropped completely (meaning that my remaining assets will now have to cover a larger chunk of retiree health care costs). So now, the bulk of my retirement is my 401k. Fortunately for us, we've lived without new cars, vacations, or a [sufficiently] big house, and we have no debts except for a mortgage and sleep pretty well at night; so, we've been able to put lot in the 401k. Obviously, we can now see the true wisdom of that.

When figuring your retirement assets, I would suggest that you ONLY include the value of the assets TODAY when you plan for the future; i.e., if you lost your job tomorrow, what pension would you receive and when. Same with social security (plus add a discount factor since they won't give you even what they're promising you as of today). Yes. This will be a pessimistic outlook, but it may be a very real outlook...and it may only get better the longer you work.

Exflyboy

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Re: Help me to decide, please
« Reply #5 on: March 03, 2015, 10:51:05 PM »
To hopetogetfi.

After 20 yrs of employment with a company that offered (a) pension (defined benefit), (b) 401k (defined contribution), and (c) retireee health, I was recently notified that, due to a corporate re-structuring, I and a few thousand other folks are being spun off to a new, stand-alone company. The pension which I've been planning to [partially] retire on for all these years has now been vaporized (only a fraction of the projected value), and my retiree health coverage has been dropped completely (meaning that my remaining assets will now have to cover a larger chunk of retiree health care costs). So now, the bulk of my retirement is my 401k. Fortunately for us, we've lived without new cars, vacations, or a [sufficiently] big house, and we have no debts except for a mortgage and sleep pretty well at night; so, we've been able to put lot in the 401k. Obviously, we can now see the true wisdom of that.

When figuring your retirement assets, I would suggest that you ONLY include the value of the assets TODAY when you plan for the future; i.e., if you lost your job tomorrow, what pension would you receive and when. Same with social security (plus add a discount factor since they won't give you even what they're promising you as of today). Yes. This will be a pessimistic outlook, but it may be a very real outlook...and it may only get better the longer you work.

No doubt the 1% that owned this company got their money!

hopetogetfi

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Re: Help me to decide, please
« Reply #6 on: March 04, 2015, 12:21:15 AM »
I would like to thank everyone who responded to my post. This is very helpful. I am convinced more than ever that I should not rely solely on the defined benefits plan from my employer. I need to start investing independently. I also plan to rent out that second property that I held vacant for my parents who are out of the country. I was afraid that it will get trashed and I will have to pay for a lot of repairs. If I try to sell it now, I will not get 400K, I will maybe get 150K, minus taxes since it is not our primary residence. I meant to say that I would get 400K if I sold both houses today.

Also, how do you know that my taxes in the future will be less than today? As far as I know, (and I am not an expert!), taxes can only go up. I will probably have no dependents to claim on my 1040, so less deductions. And if I retire earlier than 65, then my taxes can only get worse. Maybe after 65 I will get some tax breaks due to age?

GizmoTX

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Re: Help me to decide, please
« Reply #7 on: March 04, 2015, 04:20:06 AM »
Have you ever lived in the vacant house? Tax on the sale is waived if you lived there 2 years in the last 5 years. How long have you lived in your current house?

The vacant house has to be costing you insurance, property tax, maintenance, & some utilities.

desk_jockey

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Re: Help me to decide, please
« Reply #8 on: March 04, 2015, 04:55:08 AM »
Also, how do you know that my taxes in the future will be less than today? As far as I know, (and I am not an expert!), taxes can only go up. I will probably have no dependents to claim on my 1040, so less deductions. And if I retire earlier than 65, then my taxes can only get worse. Maybe after 65 I will get some tax breaks due to age?

Yes federal tax rates are at a low point relative to a few decades ago and they could increase, however chances are your personal tax rates will be lower in retirement.  Right now you’re earning enough to pay the mortgage, pay your living expenses and save for the future.   While working you might be in the 25% or 28% marginal rate federal income tax bracket.   When you retire, you can afford to earn less to live because you’ll no longer need to save for retirement and hopefully your mortgage will be paid off.   

In retirement your earnings from part-time work and retirement plan withdrawals may only put you in the 10% or 15% marginal rate federal bracket.  The money that you earn from your stock investments outside of a retirement plan are (currently) taxed at a lower rates than many here pay on the marginal federal tax rate, and if you work income is low enough you might not pay any taxes on the investments.   Your social security and sometimes your pension plan are taxed at lower rates.   And you have the option move from California and pay a lower state income tax rate.

For most people it’s best to put their money in a tax deferred retirement plan first and after  they’ve reached the maximum they can put that year then put any additional money in the Roth IRA.

alsoknownasDean

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Re: Help me to decide, please
« Reply #9 on: March 04, 2015, 05:17:10 AM »
Should be pretty straightforward if your savings rate is high enough. Maybe 60% or so, especially if you're prepared to move to a lower COL area post-FIRE.

What is your savings rate currently?

socaso

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Re: Help me to decide, please
« Reply #10 on: March 04, 2015, 02:02:35 PM »
In regard to your nervousness about renting the second property just make sure you screen the tenants carefully. I took a class about property management and they suggested coming up with a list of your requirements for a tenant and renting to the first person who meets those requirements. Some suggested parameters: two references from previous landlords, work for current employer for x number of years, no pets or only certain types. You can afford to be ruthless and wait for the right tenant. The house is already vacant.