Author Topic: New to MMM and Early Retirement, Advice on my Financial Situation?  (Read 2667 times)

missmoneymachine

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I'm just starting to get my feet wet on early retirement planning (just found this website this week) and I was hoping to receive any input/advice on my work-in-progress plan...

Right now, I make just under $70k a yr, not including overtime (all overtime money goes towards my travel fund).  I am in my mid twenties, single, and have had this job for about 8 months.  Had a temp job right out of college for a year with no benefits, but saved pretty much everything and paid my 21k in student loans off in a year after graduation.  I also inherited about $20k around 9 mo ago.

My take-home pay is around $3,600 a month and I spend about $600-$800.  I contribute to employer 401k (about $7,300/yr with match)

I have $25k in a money market deposit account as an emergency fund (yes I know, wayyyy too much)
I have $10k in another money market and contribute $625/mo for down payments for investment properties I plan to start buying
I will be inheriting another 30-40k soon that I want to use as a down payment for my first investment properties (then buy w/ money I'm saving)
I opened a Roth IRA at Vanguard that I contribute $250/mo to (3,000k/yr)
I am saving $1100/mo for a down payment on my own house to buy in ~1.5 yrs

This leaves me with about $700/mo extra to invest in taxable accounts right now (haven't opened this account yet)
I really don't want to max out my retirement accounts because I won't have any money leftover for taxable accounts, which I think is very important to have when you are shooting for ER.  I am going to invest in Vanguard's total stock market index fund.

In the future (1.5 yrs) when I own my house my take-home pay will rise to about $3800 (have built-in raises)
So I will have about $1500 living expenses (cost of living in my area is very low, plan on buying a house for less than $100,000 with 20% down)
$1,000 will go to taxable accounts
$1,000 to money market for investment property purchases
$250 to Roth IRA
Also $7300 a yr minimum (not including OT) goes into my 401K with my contributions and employer match
I plan to do this for 10 years then hopefully retire and live off of my investment property income and not touch any of my investment accounts
I plan on spending $25,000 in ER (which I hope is in ~11.5 years) so I want enough rental property income to cover this, I know I won't have enough saved up in investment account for 4% withdrawal rates by then.

Does this sound reasonable? 
Should I take $10k or $15k of my emergency fund and invest it into taxable account right now?
Should I not invest so much of my money now ($625/mo) and in 1.5 yrs ($1,000/mo) into money mark. for investment properties and just put this money into the taxable account and pull out when I need it?
Give me a good reason why maxing out retirement accounts instead of contributing to taxable is more beneficial for me
Am I in way over my head?

« Last Edit: March 01, 2016, 08:03:46 AM by missmoneymachine »

mandy_2002

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Re: New to MMM and Early Retirement, Advice on my Financial Situation?
« Reply #1 on: March 01, 2016, 08:12:02 AM »
Money in tax sheltered accounts can be accessed before traditional retirement age. Here's a little story about it: http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/ 

There's a few different options, but at my young age, I think I'll do a ladder to a Roth before SEPP since you are forced to continue SEPP.

GrowingTheGreen

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Re: New to MMM and Early Retirement, Advice on my Financial Situation?
« Reply #2 on: March 01, 2016, 08:26:02 AM »
You're not in over your head.

I get your desire to be able to access the money, but it isn't truly "locked up" once in retirement accounts. You can either put it in your 401k and do a Roth ladder as the PP suggested or you can put it directly in the Roth. Roth contributions can be withdrawn without penalty--you just can't touch your earnings (the money that your contribution makes).

How many rental properties do you plan on purchasing? It seems as though you already have enough cash for at least one. If you're only planning on having one, you're a little cash heavy. Remember that cash doesn't make you money :)

little_brown_dog

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Re: New to MMM and Early Retirement, Advice on my Financial Situation?
« Reply #3 on: March 01, 2016, 09:13:21 AM »
Generally the tax sheltered accounts are beneficial to almost everyone for 3 reasons:

1 - they immediately lower your current tax bill (ex: if you make 70k, and sock away the IRS max of 18k, you are only taxed on a salary of 52k), allowing you to use the money you save on taxes to pay for expenses, save, or invest.

2 - there are ways to withdraw funds early from tax sheltered accounts. it can be a bit complicated, but it is possible.

3 - when you do retire, chances are you will be trying to live off a lower yearly income, and will be in a lower tax bracket as a result. so by hiding as much money as you can in tax sheltered accounts during your working years, and then specifically making an effort to withdraw a low amount when you do retire, you inherently end up paying less in taxes than you theoretically should over the course of your lifetime. So if you were in the 28% bracket through most of your working years, but you downsize your life to be able to live on an income in the 20% bracket in retirement, you save the difference. If you didn't hide this money, it would have been taxed at 28% every year you were working. This approach can result in thousands and thousands saved in taxes.
« Last Edit: March 01, 2016, 09:21:36 AM by little_brown_dog »

missmoneymachine

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Re: New to MMM and Early Retirement, Advice on my Financial Situation?
« Reply #4 on: March 01, 2016, 11:20:36 AM »
How many rental properties do you plan on purchasing? It seems as though you already have enough cash for at least one. If you're only planning on having one, you're a little cash heavy. Remember that cash doesn't make you money :)

There are condos available to purchase on a college campus in my area for 50k-60k, so I plan on investing in 2-3 of those with the money I will be inheriting soon.  I hope to buy one or two more in the future as well, which is why I am sitting aside some cash in a money market right now. 

After writing this, I realized that having 25k in an "emergency fund" was just way to much cash sitting around.  It makes me feel good to have it nice and secure at my credit union, but like you said cash won't make me money.  So, I just opened up a taxable account at vanguard and will be putting 10k from the emergency fund into total stock market admiral shares.  This will hopefully cure my desire to contribute heavily to a taxable account.

I have $2500 left to contribute to my 2015 roth, so I will put that amount in to max it, and change my monthly contribution to $450 in order to max 2016.  I will also work on gradually increasing my 401k contributions until I hit the 18k max.  If there's anything left over (I still have to do the math), I'll contribute to my taxable I just opened up.  I just read a thread of others who are maxing out their 401k, so I know I can do it too!

Thanks to everyone who has replied to my lengthy post

MDM

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Re: New to MMM and Early Retirement, Advice on my Financial Situation?
« Reply #5 on: March 01, 2016, 02:13:46 PM »
Give me a good reason why maxing out retirement accounts instead of contributing to taxable is more beneficial for me
Because, assuming your income continues to grow, at some point you will run out of tax-advantaged space and be "forced" to use taxable accounts.  At that point you might wish you could go back some years and use the space you neglected - but you can't.

You have the cash flow now to fill up your tax-advantaged space.  Can't guarantee anything, but your future self will likely thank your current self if you use it all.

Looking back, we're very happy to have used all the tax-advantaged space we did.