The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: nanu on January 23, 2015, 03:57:00 PM
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Hey everyone!
I'm a senior in college who's about to graduate in a few months and started reading MMM about two months ago (read all posts in about two weeks...).
Reading about MMM and FI has really opened my eyes to the possibility of early retirement (before even starting a real job...) and I'm thinking that
I would (ideally) like to be retired in no more than 10 years (my goal is January 1st 2025).
In 2014 I earned about $29K (summer internship + during the year) and was wondering if I should put any of that into an IRA/Roth IRA, and if so, into which one (and why)?
In August I will be starting my first real job for $105K/year, plus around $35K/year in bonuses+stocks (starting 2016 for the stocks).
I'm guessing my overall income for 2015 will be about $60K or so, which means I can still qualify for IRA and such.
In which case, should I plan on putting money into IRA/Roth IRA for 2015? If so, which one (and why)?
One of the things that I'm unsure about is how people here that are retired pay for their everyday life.
It seems that a lot of their money is locked away in tax-deferred accounts (401k, IRA, HSA) and they can't just take it out without penalty.
Is it using a Roth IRA conversion ladder? Some other way?
It just seems to me that I'm planning on saving plenty of money in 401k, IRA/Roth IRA, and HSA, and I'm not sure how accessible that money will be before I'm old enough to withdraw it penalty-free..
Anyway, any help would be appreciated. This website and forum have really opened my eyes and I'm enjoying learning more daily about the possibility of early retirement. If only the tax code wasn't so complicated....
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http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/
^ has many answers to questions you are asking including the how to access without penalty 401ks/IRAs before traditional retirement age.
Read Jim Collins' stock series: http://jlcollinsnh.com/stock-series/
and this:
http://jlcollinsnh.com/2011/06/08/how-i-failed-my-daughter-and-a-simple-path-to-wealth/
Which is his advice for his own daughter when she was in her early 20s. It applies to anyone just starting out and is damned good advice that I wish someone had told me when I was just starting out since I'd have been retired YEARS ago...
Max your 401k ASAP and choose low expense ratio stock index funds (especially since you're so young, you could go 100% into stock index). You might be able to qualify for a Roth IRA as well but check the income limits, but throw in on that too i you can (open it at someplace like Vanguard and go 100% into VTSAX there if you can). And if you have access to an HSA, go into that too. After that, if you still have money to invest/save, then open a taxable investing account to catch any extra $ but keep that account lean and mean tax-wise so you minimize the money you have to pay out.
So you need to figure out what sort of investing you want to do and this is helpful to figure out:
http://www.bogleheads.org/wiki/Investment_policy_statement
http://www.bogleheads.org/wiki/Asset_allocation
And don't forget to read about where to put what funds for optimal tax efficiency and the overall easiest and best "lazy" portfolio setups:
http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement
http://www.bogleheads.org/wiki/Lazy_portfolios
and don't freak out if you can't do Vanguard funds for some reason - there are workarounds like here for Fidelity:
http://www.bogleheads.org/wiki/Fidelity
If you keep living expenses low, especially with your starting salary, you'll be FI in under a decade and able to pick and choose what you want to do after that. But all of that should get you up to speed and way ahead of most ordinary folks out there!
Good luck!
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What's your current financial situation? I probably wouldn't take out student loans just to save some money in an IRA by the 2014 tax filing deadline, but an IRA could be a good use for money that you already have in a savings account or taxable brokerage account. In 2016 your income will be high enough that tax-deferred investing is probably best. This year where you're only earning real money for half of the year, you could go either way.
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Congrats you are off to a great start on your road to FIRE!
I think Frankies Girl pretty much answer most of your questions. But I will add that for 2014 I would open up a Roth IRA with Vanguard only because you are in such a low tax bracket that you probably won't be there until you RE. You can deduct your contribution if you go with a traditional IRA but I think the tax free growth is more valuable since you have such a long time horizon.
Aside from the investments questions. Since you are still used to your college budget I would seriously question every additional expense that you are thinking of incurring as your earnings increase. Do I really need to upgrade my car? How much will it cost my future self? I'm not saying to not every buy anything but at least know what your opportunity costs are.
Here some tools that you might have already played with, but in case you missed it they are really fun to play around with, and it's free!
http://www.mrmoneymustache.com/2012/07/15/two-fun-tools-from-the-mmm-software-department/
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I read somewhere that you have to open up the account by Dec 31st 2014 if you want to put 2014 money into it. I'm not sure if that's true or not, but if it is, it could be too late for 2014. If you can, I'd do Roth, since your tax rate is going to be low this year, but high in the future, but tIRA is also acceptable.
For 2015, max out your 401k first, then do a tIRA because of the tax break.
For 2016, max out your 401k, then do a backdoor Roth IRA, since that's the only option with your income.
If you have stock options, take advantage of that, if there's an advantage.
When you get more information on your 401k, there could be an option to do a Mega Backdoor Roth:
http://www.madfientist.com/after-tax-contributions/
Somewhere around 40% of 401k plans have an after-tax option. I'd do more research on it, some are having issues with it, but maybe by August they will be worked out.
Then the rest in a non-retirement account.
I believe buying a house isn't advisable until later in life, so even though you can afford it, I'd live in a cheap apartment with a roommmate.
If you spend 25k a year on expenses, and make 140k, you'll have ~80% savings rate (because of taxes). 80% means it'll only take 5.5 years to retire:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
So if you want it, you can get FI in 10 years.
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Thank you everyone for your help! I plan on reading all the links and materials people posted here in the coming days.
Once I start working I plan on living as frugally as possible in New York city (not my choice, but that's where my girlfriend found a job) or nearby (without making the daily commute too long). Since we will be sharing an apartment our costs will be split between the two of us, and I don't think we will be buying a car while living in that area (which we hope will only be 2-3 years).
I plan on contributing the $18K max into my 401k to make use of tax benefits and employer contributions (50% of what I put in for an extra $9K per year). As for the stocks, I will actually be getting the stocks (one year after I start working, and every subsequent month), not just stock options.
My biggest expense (except rent) will probably be plane tickets to Israel (where I'm originally from) once or twice a year (about $1K per round-trip) to visit family. I plan on looking into credit cards that give airline miles or reimburse for travel expenses.
As for my current financial situation, this is pretty much it:
- My last college semester (including housing, but not food) is already paid for.
- $10K in Vanguard VTSAX (as of about two weeks ago).
- $12K in saving/checking accounts (most in saving, a small amount in checking).
- $-3K in student loans at 7% interest - this loan doesn't start accruing interest until 9 months after graduation IIRC. I plan to pay it off in one payment once it starts.
- $500 in Lending Club notes (I decided to try this out to see what's it like with a relatively small amount that I would hate losing, but not lose sleep over).
- Own half an apartment in Israel along with my mom. With the current exchange rate, apartment is worth $95K and mortgage is about $61K, so my equity is about $17K. The rent pays for the mortgage plus a very small amount every month. After expenses, I expect to earn $400 from this apartment per year, not including the extra equity.
- $15K in a tax free investment account in Israel. It was originally meant to be a college fund (kinda like a 529), but I ended up not using it. Whenever I withdraw the money, it'll be completely tax free (I think, I need to look further into this).
- $1K in a pension account in Israel from an old job. Withdrawing this has a 35% tax penalty unless I'm at retirement age, so I plan on just letting this grow.
- $10K in checking account in Israel. I'm thinking about putting some of this money into the mortgage, and if not, into Vanguard VTSAX
Any other advice regarding investments and such would be appreciated, and I'll probably have some new questions once I read the material people linked to here.
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That is a good plan but I'm not for sure if you have ever read the rich dad poor dad book but in it he tells that having and running you're own business is the only way to be able to be financially stable. You should get the book if you can find it and read it, it may change you're life and help you reach you're goals more easier and within you're time frame.