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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: warpgirl on May 14, 2013, 07:38:49 PM

Title: Investment allocation for early retirement?
Post by: warpgirl on May 14, 2013, 07:38:49 PM
Hi there,

My husband and I live in Washington, DC, which was recently named the least affordable city in the U.S. :-( Yet somehow we are saving about 50% of our $110,000 combined gross income. My confusion is about what we should be investing in so we can reach our goals of 1) maybe, someday buying a house (not in DC, prices and the market are crazy); 2) not go into debt having kids; 3) retiring early.

Here are the details:

Combined annual gross income: $110,000 (we both make $55k)
Monthly (after tax) take-home pay: $6000

Rent: $1250 (very good deal in our area, and we live behind a grocery store and within biking/public transportation distance of both workplaces)
Utilities: $90
Food: $230
Mobile phone (mine): $84
Restaurants: $100
Netflix+Hulu: $26 (no cable or internet- we use our landlord's wifi)
Gym (mine): $35 (actually $70 but company reimburses half)
Public transportation: $150
Other random, un-mustachian purchases: $700 (need to reduce this!)

401(k)s: $50,000
Roth IRAs: $50,000
Other non-retirement accounts: $38,000

Cash: $36,000

Debt: $0 (never had student loans, don't own a car, no mortgage)

So the question is what the heck to do with the extra money we make a month? Obviously save some for an emergency fund, but how much or what percentage should we be socking away for "regular" retirement in 401(k)s and Roth IRAs and how much in taxable accounts that we can use for early retirement/house downpayment? I'm currently putting $5,500 (10%) a year into my 401k, and I can probably do more, but I don't think I can manage the maximum deduction a year. My husband is putting in a little more than me. My company adds another 4% to my 401k. We max out the Roths every year.

Would really love a roadmap or guideposts, like "once we each have $XXXk in our 401k, we can stop contributing and just let compound interest grow it to retirement age."

Thanks so much for your help and advice!

Title: Re: Investment allocation for early retirement?
Post by: KingMe on May 14, 2013, 09:33:39 PM
I would look into getting reimbursed for public transportation commuting costs if that's costing you $150 per month. It's common in DC. Bike commuting reimbursement is getting more popular as well.

You have more than enough cash for an emergency fund. You have a lot of money that could be used for a healthy downpayment on a house. If you've got extra to invest now, personally, I would increase 401(k) contributions and try for the max. DC has relatively high state income taxes that you could legally avoid, let alone the Federal taxes you could defer.

In response to your question about when do you have enough in your 401(k), I wish I knew. We have no idea what our families' needs are going to be over the coming decades. My wife and I keep on socking away as much as we can year after year. It helps us minimize or avoid taxes that probably don't apply to you at this time - the alternative minimum tax and Affordable Care Act taxes (extra Medicare taxes and surtax on investment income) on high earners. Perhaps we have too much in retirement accounts versus taxable accounts, but I'll deal with that problem as retirement gets closer to a reality. If we need to scale down our 401(k) contributions in the future and devote our savings to taxable accounts, we can do that.
Title: Re: Investment allocation for early retirement?
Post by: Fite4Rite2Party on May 15, 2013, 12:11:36 AM
As an initial response, I would say definitely max out the 401(k)s and IRAs. Assuming you will not need the money before 65, the employer contribution plus the tax benefit will go a long way towards increasing your long-term return on these accounts.

As for a guidepost, I think there are two important factors to consider. First, how much money do you need for each year of retirement. Second, when do you plan to retire - when will you start drawing on the account and for how many years? Once you take these factors into account and assume an average annual return on the money in the account, you can guestimate the tipping point.

You may find this calculator useful:
Title: Re: Investment allocation for early retirement?
Post by: warpgirl on May 15, 2013, 09:39:44 AM
Thank you KingMe and Southern dude! I'll try to get closer to maxing out the 401(k) and put any extra after that into an index fund or something.

I probably shouldn't have included the transportation costs in the monthly estimate, since those are actually pre-tax deductions, which helps a little.

Title: Re: Investment allocation for early retirement?
Post by: aj_yooper on May 16, 2013, 04:26:57 PM
Maxing out the 401k is solid advice; you avoid paying 25% of the $35,000 ($8750) sent to the 401ks.  Roths are very nice, but not as nice as the tax break.  If you can do both, Wow!  I also think you have plenty in cash already.  Only buy a house if you plan on staying in it for at least 5 years.