Author Topic: Help With Our Roadmap To FI  (Read 1476 times)

Rudy2860

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Help With Our Roadmap To FI
« on: March 21, 2016, 12:31:50 PM »

Hello All,

New here, discovered the MMM blog and only wish I would have discovered it sooner! I can't even believe such an amazing community exists.

So I could really use some help with my road to FI.

My wife and I are in our late 20's and last year we quit our jobs and left everything behind to travel the world. I know spending a year traveling is an anti mustachian luxury but its something we always wanted to experience and at the time FI had never crossed our mind, so here we are in Paris as I type this.

Now... 9 months into the trip we are set to return home in July and when we do we plan to get started in our quest to early retirement!

Now here a bit of our financial picture...

We own an apartment on Miami which we rented when we left to travel and we will return to it once we are back home.
Currently owe 104k on it in a 15year term at 3.85%

Have absolutely no other debt besides 15k in student loans which will be our first priority when we start working.

Currently have 50k in a traditional IRA which we rolled over from our jobs 401k when we quit and is earning us nothing.

We both worked in Banks and plan to return to that field, As a couple our average Gross Salary is about 110k Annually.
We did some calculations and to live comfortable by our definition we need 45k Annually that includes Vacations etc. ( we are still learning to embrace the full mustachian lifestyle and will definitely improve this)

Now, base on the 4% SWR what we aim to achieve is 35k annually ( our thoughts are that we wont have a mortgage any longer so don't need 45k )  so multiply 35,000 x 25 and If I'm correct we need 825k.

Now the first question that comes to mind, where should our savings be allocated to? For example.. If we can save about 40k annually where should it go? If we max out both 401k at 18k each that would be 36k of our total 40k possible savings. Would this really be the best route?

I can really use some advice on this. The plan is to have the money invested in Vanguard Index Funds.

Also, I have read about Converting the 401k into a Roth and doing a ladder... I'm just a little lost as to how will we take the 4% SWR? Is this based on the dividends or market earnings? Does it get withdrawn just all at once or quarterly?

Lastly, when it comes to our current Traditional IRA with the 50k, Would it be smart to roll it over to a Roth seeing that when we return home in July we will only work from July-December so perhaps being in a lower tax bracket this year will be beneficial to do the rollover now?

Sorry for the long post, I know we are far from FI but want to make sure I have the right plan to make sure all I need to do is execute it.

We are beyond excited to work towards this new goal.

Thank you all





Mother Fussbudget

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Re: Help With Our Roadmap To FI
« Reply #1 on: March 21, 2016, 01:43:23 PM »
Welcome to the community!

Yes, 401K + tIRA/Roth IRA contributions are the best way forward.
As for *converting* (not 'rollover') an IRA into a Roth IRA, yes, a low-income year is the best time to do this because the conversion is a taxable event - tax is due on any gains in the IRA.  Afterward, convert $$ annually ($11K+) to Roth, and after 5 years, the initial conversion amount can be withdrawn tax and penalty free.  Repeat the larger conversions after you reach FIRE when taxable income should be lower.

Where you hold your tIRA & Roth IRA matters in terms of paying the least for the most return on your ETF purchases.  Both Vanguard & Fidelity have brokerage accounts, and their own funds (Vanguard=VTSAX, Fidelity=FSTVX) that can be purchased COMMISSION FREE in a retirement account.  Many people are with Vanguard (and Fidelity) for just these reasons, yet most mom-and-pop investors have no idea of this benefit.

And as far as investing in the total-stock-market ETF's, and total-bond-market ETF's, some recommend investing internationally, and in real-estate via REITS.  (See Become a Lazy Landlord with REIT's  - BTW... the SNH fund yield is up to 9.03% annually!)  Many here have invested in real estate rentals to create a regular income stream as a large part of their FI plan.  Rentals, Mortgage Notes, REIT's, etc.  Your investment strategy is all up to your risk tolerance.  The main point is:  pay down those debts first, then save to invest in whatever.   

Again, Welcome, and Good luck!

MDM

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Re: Help With Our Roadmap To FI
« Reply #2 on: March 21, 2016, 07:29:21 PM »
Have absolutely no other debt besides 15k in student loans which will be our first priority when we start working.
Depends on how high the interest rates are on those loans.

Quote
Currently have 50k in a traditional IRA which we rolled over from our jobs 401k when we quit and is earning us nothing.
Earning nothing because recently the market has been flat, or because you have it in a checking account earning a guaranteed 0.01%?

Quote
Now, base on the 4% SWR what we aim to achieve is 35k annually ( our thoughts are that we wont have a mortgage any longer so don't need 45k )  so multiply 35,000 x 25 and If I'm correct we need 825k.
Plus a little for taxes if you haven't included those already.

Quote
Now the first question that comes to mind, where should our savings be allocated to? For example.. If we can save about 40k annually where should it go? If we max out both 401k at 18k each that would be 36k of our total 40k possible savings. Would this really be the best route?
No guarantees, but (assuming you mean "max out both tIRAs + 401ks") likely. 

Quote
I can really use some advice on this. The plan is to have the money invested in Vanguard Index Funds.
Good plan.  E.g., see https://www.bogleheads.org/wiki/Three-fund_portfolio.

Quote
Also, I have read about Converting the 401k into a Roth and doing a ladder... I'm just a little lost as to how will we take the 4% SWR? Is this based on the dividends or market earnings? Does it get withdrawn just all at once or quarterly?
See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Quote
Lastly, when it comes to our current Traditional IRA with the 50k, Would it be smart to roll it over to a Roth seeing that when we return home in July we will only work from July-December so perhaps being in a lower tax bracket this year will be beneficial to do the rollover now?
Maybe.  There are a variety of considerations:
 - will you be in a lower bracket this year, or after you retire?
 - just how much can you put into 401ks and still have enough cash flow for food, etc.?

Here is one scenario:
 - $55K gross income for 2016
 - contribute $36K to traditional 401k plans
 - convert $18K from tIRA to Roth IRA
As a result, you pay $0 federal tax on the $18K conversion but also save ~19% on your 401k contributions.  At least, that's what a quick pass through the case study spreadsheet showed - if interested you could download and check using your own inputs.  The results depend strongly on hitting the maximum saver's credit bracket.