The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: kirsten on June 08, 2013, 03:53:53 AM
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New Mustachian here and would greatly appreciate your insights. Once you max out your 401k/IRA, etc., what is the best way to save money outside of those accounts - so you can live off that money when (not if!) you plan to retire before 65?
Last year, I opened a Vanguard Target Retirement account (not IRA - just a regular mutual fund from their website), and figured I could use this account for pre retirement. It's after tax money, and I assume you "just" pay the capital gains when you withdraw. I'm wondering if this was the best thing to do.
I know investing in a rental property is mentioned a lot on this site, I'm just not quite there yet. I do have anxiety over missing out on the steals in real estate over the last couple of years though.
Anyway, just wondering what everyone else is doing - and what is the best plan (taking taxes, cap gains, etc into consideration).
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There is no 'best' plan. Best way to make God laugh is tell him your plans.
Do what makes you feel comfortable, don't be pressured into anything that won't let you sleep at night. Suggest you experiment with a couple of different strategies and find out what works for you. You can analyse all you want but you're not going to know until you dip your toe in the water.
If you feel you've missed out on real estate don't feel bad, the deal of a lifetime comes around every week if you look hard enough.
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Annuities are the only other tax-advantaged route to savings once you have maxed out IRAs and 401ks, etc. There are some great out ones out there today which are as good as having a brokerage account only with a slightly higher cost but potentially less volatility about payments and definitely lower tax hit.
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I do this.
- I put 4% of my income towards my company's 401k which is then matched by my employer. I would put more in except the fund is horrible. If you have a good fund (low expense ratios, index fund) than feel free to go up to the max.
- then I put the annual max into a ROTH 401k through Vanguard. ($5500)
- then I put the annual max into a Health Savings Account (HSA) because I have a high deductible health insurance policy. ($3250) This money is also tax free, grows tax free, and as long as I use it for healthcare, will never be taxed, even when pulled out. This is my old lady healthcare money. I don't intend to tap into it until I'm an old fart.
- then money goes into individual Smarty Pig accounts for future purchases I know I will have to make. The next computer. Christmas. Vacation. Www.smartypig.com
- finally, the rest goes into regular Vanguard funds that are not tax sheltered
- I don't own rental property because nothing on this earth would get me to be a landlord and deal with that nonsense. To fulfill that part of my portfolio, I invest in REITs.
- I don't own gold, collectibles, antiques... In my opinion, if you can touch it, it's probably not an investment.
- I don't own annuities. Annuities are a poor option most of the time. But that's a whole other conversation. If you can be mature enough in your investing and accept the degree of risk that comes with the ups and down of the market, you don't need annuities.
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- I don't own rental property because nothing on this earth would get me to be a landlord and deal with that nonsense. To fulfill that part of my portfolio, I invest in REITs.
- I don't own gold, collectibles, antiques... In my opinion, if you can touch it, it's probably not an investment.
- I don't own annuities. Annuities are a poor option most of the time. But that's a whole other conversation. If you can be mature enough in your investing and accept the degree of risk that comes with the ups and down of the market, you don't need annuities.
+1
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Taxable mutual funds are a good idea, but you might want to read up on tax efficient fund placement: http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement.
Basically, rather than holding Target Retirement funds (which contain both stocks and bonds) in your tax-sheltered and taxable accounts, you can hold the funds with the best tax treatment in your taxable accounts and funds on which you would owe more taxes (like bonds) in your tax-sheltered accounts.
The Bogleheads forum is a great place to go if you need help hashing that out.
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Not sure why people think rentals are so much work. I definitely spend less time managing rentals than most do managing their investments. An hour per month per rental maybe.
Of course you can always get a property manager as well.
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We are planning on a military pension, which helps a lot, and we will likely own at least one managed rental property which by then should have a very nice cash flow. Also (and I know this is controversial), we will likely have a high 6 figure, conservatively, inheritance coming to us at some point. I know, I know, anything can happen, but given the situation, it's extremely unlikely that anything will happen to wipe out most of that. Of course, our hopes are that it won't come to use for years after we retire. And we are working to have a paid-off house. I know that's not always ideal, but given our situation, we think it's the right choice for us, and it will mean we have a mostly free place to live
Additionally, we invest in regular, taxable investment account. These accounts are all mutual funds and I've attempted to optimized tax-efficiency, but it did make my head spin a bit and I'm sure a pro could do a bit better.
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My wife and I max out our 401ks. Everything else we can save goes into an S&P 500 index fund. That's it. We try to apply the KISS principle.