Author Topic: Is my strategy any good?  (Read 4539 times)

BroncoRon

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Is my strategy any good?
« on: October 31, 2013, 02:55:05 PM »
Hi Everyone,

I was hoping that you Mustacians would help me out by taking a look at my current situation/strategy and provide me with some advice.  I should preface by saying that I just turned 27 years old working as an Engineer making 100k base salary with year end bonuses between 10-30k (I do not count on these and do not consider them part of my annual income). My goal is to early retirement around the age of 45.

The Good:
I've been maxing out my 401k and am currently at $80k (employer matches 70 cents on the dollar up to 6 percent of my salary).  I just re-balanced my 401k into a low cost Vanguard Index Fund this week; its called the Vanguard Institutional Index (VIIIX) and is the only low cost index option through my plan.  As it turns out, I would have ended up paying over $300,000 in the long run with the T. Rowe Price 2040 Target Fund @ .58% ER.
This week, I've enrolled in a HDHP with $3,300 HSA for 2014 and will continue to max out the HSA in future years.
I will be opening a Traditional IRA ASAP and investing $5,500 per year (or the future maximum).
Zero credit card debt

The Bad:
Rent: $750/mo - very small studio apartment
Car Payment: $392/mo @ 0.9% ($16k owed)
Car Insurance: $130/mo
Student Loan Debt: $1000/month @ 3.150% ($46k owed, paid down from $115k when i graduated in 2008).
Cell Phone Plan: $91.00 per month (I was just promoted to and will be getting a free phone from work within the next couple of weeks)
Checking: $5,000 (it generally stays right around here after all of my monthly bills and expenses)
Savings: $650

After everything, I'm left with about 900 dollars/month for gas, food, clothes, miscellaneous expenses.

Summary:
1) I think I really should have about $15k in an emergency fund for 6 months of expenses
2) I'm trying to figure out if I should pay off my debts or continue to work on my investments (both of my loans are relatively low interest)
3) I would like to eventually purchase a home, although I've been reading more and more that a 30 year mortgage can be a prison sentence more than anything.
4) How can I retire at 45 if my investments can't be touched until 59 1/2? 65 for the HSA.
5) Should I maybe cut back on my current investments and open my own personal brokerage account to avoid the age restrictions associated with the 401k/HSA/IRA?

Thanks in advance and if you have any questions, fire away!

Ron
« Last Edit: October 31, 2013, 03:40:27 PM by BroncoRon »

goodlife

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Re: Is my strategy any good?
« Reply #1 on: October 31, 2013, 05:31:55 PM »
Congrats on paying down quite a lot of student loans since '08 and saving a good chunk in your 401k at the same time, nicely done! Assuming you get an average bonus this year...which you probably will...this has been a pretty decent year AND you got promoted...you could maybe pay off all your student loans by end 2014 latest. It's your highest cost debt, so I would probably try to get rid of that asap, but I am very debt averse. I also don't know how student loans work and if you can pre-pay them, but if you can, then I would take all my bonus and put it towards that if it was me. Of course you should build an emergency fund as well, so I would make it an equal priority together with student loan pay down.

Your car loan is at a pretty low interest rate, and you can always sell it if worst came to worst, so I would put that as a lower priority.

Regarding buying a home, you are very young, I don't know if you are married, but think about it carefully and think about how likely you are to stay in your area for a long time. So I would put that as a lower priority as well and I would first pay of all my other debt before getting a mortgage and save up a big down payment.

Regarding your investment question, I am not too familiar with the US retirement plans, so I can't comment on those specifically, but yes, you could open a Vanguard account and invest in low cost index funds that way which is money that you can access any time (for retirmenet or an eventual down payment for a house).

Eric

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Re: Is my strategy any good?
« Reply #2 on: October 31, 2013, 06:22:15 PM »
I think you're definitely on the right track.  You had a lot of questions.  I'll tackle this one.

4) How can I retire at 45 if my investments can't be touched until 59 1/2? 65 for the HSA.

Check out this post for strategies:
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

I'm personally planning on retiring around 45 as well and I'm planning on using strategy #2, the Roth Pipeline strategy.  Basically, it works like this.  Every year, roll over 1 years worth of living expenses from your traditional IRA to a Roth IRA.  You pay taxes on that money.  If you let it sit for 5 years, you can then withdrawal it penalty free & tax free.  So as long as you can cover the first 5 years of your retirement using other methods (regular brokerage account, savings account, small side income, whatever) then you'll be able to access your Trad. IRA/401k money penalty free no matter your age as long as it marinates for 5 years in a Roth IRA account.

There's a lot of other info on this Roth Pipeline strategy if you use the search function.

brewer12345

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Re: Is my strategy any good?
« Reply #3 on: October 31, 2013, 07:58:45 PM »
I agree you need an emergency fund.  I would set one up with bonus money.  $15k sounds good for starters.  Once the emergency fund is established, I would work on killing the student loan.  The car loan I would leave alone and just pay the scheduled payments (don't pay extra).  After the student loans are gone, then I would start putting extra money into a brokerage account (after tax).

I don't imagine you will be able to make a tax deductible IRA contribution given your 401k participation and income.  Can you contribute to a Roth instead?  If you can't do that, I would either use the money to help kill the student loan or beef up your emergency fund.

If you do not have a hunger to own a home, I would stay a renter.  At your stage of career, better to remain agile, mobile and hostile than be chained to a house.

Are you well insured?  At a minimum, you need disability insurance and good liability coverage (consider an umbrella policy).

BroncoRon

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Re: Is my strategy any good?
« Reply #4 on: October 31, 2013, 10:11:35 PM »
Thanks for the great insight, guys.  Let me start off by saying that I've learned more in the last week browsing through these forums than you can imagine; for that, I am very grateful.

goodlife - Thank you for the positive feedback and I will certainly continue knocking away at the student loan debt once I get my emergency fund in place.

Eric - That post is EXACTLY what I was looking for.  I really had no idea you could roll a 401k or Traditional IRA into a Roth while bypassing he minimum age requirement; pretty interesting read.  One would think that anyone with a considerable amount in their 401k/IRA should explore that option to avoid the higher tax rate at 59 1/2. 

Brewer12345 - Thanks for the advice, I will plan on putting my bonus towards an emergency fund.  About the IRA - You're right! I had no idea there were deduction limits based on your income and workplace retirement plan.  Wow.  With that being said, I will not be able to deduct the $5,500 since I'm single and my modified AGI is greater than $69,000.   Roth IRA it is. 

Insurance: I have a 4X Life Insurance policy ($400k), 4X Accidental Death & Dismemberment ($400k), and 65% Long Term Disability.

engineerjourney

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Re: Is my strategy any good?
« Reply #5 on: November 01, 2013, 10:19:44 AM »
Brewer12345 - Thanks for the advice, I will plan on putting my bonus towards an emergency fund.  About the IRA - You're right! I had no idea there were deduction limits based on your income and workplace retirement plan.  Wow.  With that being said, I will not be able to deduct the $5,500 since I'm single and my modified AGI is greater than $69,000.   Roth IRA it is. 

Hey BroncoRon, I am not sure if I am misunderstanding your post here but I think you make too much money to do the Roth IRA without the backdoor strategy. 

Single    $112,000 or less   $5,500
    $112,001 to $127,000   Begin to phase out
    Greater than $127,000   Ineligible for a Roth IRA

Maybe I misunderstood but you probably make too much with your bonuses to just open up a Roth? 

SunshineGirl

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Re: Is my strategy any good?
« Reply #6 on: November 01, 2013, 11:06:24 AM »
I'll just speak to buying a house: I'd suggest paying off your debt first and then if you don't like your living situation, find a better rental situation. There's no need to rush to buy a home.

BroncoRon

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Re: Is my strategy any good?
« Reply #7 on: November 01, 2013, 01:33:29 PM »
Brewer12345 - Thanks for the advice, I will plan on putting my bonus towards an emergency fund.  About the IRA - You're right! I had no idea there were deduction limits based on your income and workplace retirement plan.  Wow.  With that being said, I will not be able to deduct the $5,500 since I'm single and my modified AGI is greater than $69,000.   Roth IRA it is. 

Hey BroncoRon, I am not sure if I am misunderstanding your post here but I think you make too much money to do the Roth IRA without the backdoor strategy. 

Single    $112,000 or less   $5,500
    $112,001 to $127,000   Begin to phase out
    Greater than $127,000   Ineligible for a Roth IRA

Maybe I misunderstood but you probably make too much with your bonuses to just open up a Roth?

engineerjourney,

That is a great question.

I'm not quite there for 2013 as I just recently received this promotion; my previous salary was 85k with 5-7% annual bonus so I should be fine for 2013.

2014 - I'd be right at the $112k AGI phaseout threshold with a larger ~$30k bonus less my $17,500 401k contribution and $3,300 HSA Deduction. I should be OK for a couple more years until my annual raises push me over at which time, I'll have to learn about the Backdoor Roth strategy.

Way to keep me on my toes!

engineerjourney

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Re: Is my strategy any good?
« Reply #8 on: November 01, 2013, 01:55:56 PM »
Glad you qualify for this year!  For the next couple years, since it depends on your bonus you can always wait until all your numbers are in for the year to make the contribution since you have until you file taxes the next year to contribute to the years limit.  So you can contribute in say Feb 2015 to your 2014 limit depending on the outcome of the year.   Not that being over the income limit is a bad problem to have, haha.

DTown

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Re: Is my strategy any good?
« Reply #9 on: November 01, 2013, 02:27:05 PM »
Here's a bit of advice that may differ from what you had in mind by 'emergency fund.' $15k is quite a bit of money to have laying around doing nothing. You don't have any high interest debt, so instead of paying off debts in a hurry, you could save and invest all your extra cash and probably get a better return in an index fund. Once you have $15k in investments, that IS your emergency fund. It's just working as an investment instead of sitting in a .01% savings account. If having your emergency fund slightly less liquid than a saving account makes you nervous, you could also open a line of credit at you bank just in case.

I have a fair amount of low interest debt that I'm paying off aggressively, but I waited until after I had $10k in investments plus an unused $9k line of credit to serve as my emergency fund.

BroncoRon

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Re: Is my strategy any good?
« Reply #10 on: November 01, 2013, 09:56:12 PM »
Glad you qualify for this year!  For the next couple years, since it depends on your bonus you can always wait until all your numbers are in for the year to make the contribution since you have until you file taxes the next year to contribute to the years limit.  So you can contribute in say Feb 2015 to your 2014 limit depending on the outcome of the year.   Not that being over the income limit is a bad problem to have, haha.

Thanks bud, thats what I plan to do.  I don't have $5,500 to throw into a Roth right this second, but I will before tax time!

Here's a bit of advice that may differ from what you had in mind by 'emergency fund.' $15k is quite a bit of money to have laying around doing nothing. You don't have any high interest debt, so instead of paying off debts in a hurry, you could save and invest all your extra cash and probably get a better return in an index fund. Once you have $15k in investments, that IS your emergency fund. It's just working as an investment instead of sitting in a .01% savings account. If having your emergency fund slightly less liquid than a saving account makes you nervous, you could also open a line of credit at you bank just in case.

I have a fair amount of low interest debt that I'm paying off aggressively, but I waited until after I had $10k in investments plus an unused $9k line of credit to serve as my emergency fund.

You're right, I might as well put my emergency fund to work.  About opening a line of credit - I have two travel rewards credit cards that I use and immediately pay off; they're good for a combined total of $27k. Would this serve as an OK line of credit for emergencies or should I be looking at something with a lower rate?  They're both about 14% APR (Chase Sapphire Preferred & Barclays)

Thanks again guys

curler

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Re: Is my strategy any good?
« Reply #11 on: November 01, 2013, 10:09:46 PM »
I'd say the credit cards are good enough.  You are just looking for something to hold you over for a few days until you can withdraw money from your investments.  Personally, I still like to keep about $3,000 around in a checking and/or savings account for piece of mind (don't have to think to check balances before I pay bills sort of thing), anyway, but opinions around here seem to vary in that regard.