Author Topic: Reader Case Study - Retirement Plan?  (Read 2258 times)

Brake?

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Reader Case Study - Retirement Plan?
« on: September 27, 2015, 04:45:21 PM »
Life Situation: I am almost 29 years old and live in Houston, TX with my girlfriend and her kid.  I purchased/built the house for $145,00 in February 2013 with a 30 year conventional mortgage at 3.5% and owe $38,600 on it today.  My plan is to have it paid off by December 2016.  I pay for the house - the lady pays for utilities and groceries.  I own a 2006 Mazda 3 (standard) with 154,00 miles on it and drive 15 miles one way to work five days a week.  I enjoy my job and wouldn't mind staying there for quite a while - but my ultimate goal is to be able to retire and travel 8-10 months out of the year whenever I feel like it.

Gross Salary/Wages: $70,000 (ends up being about $4,375 net per monthly paycheck)

Pre-tax deductions: 3% into a SIMPLE IRA through Fidelity (with 3% employer matching).  This is split four ways between Biotechnology, Value Strategies, Industrials and Consumer Staples Funds.  Considering maxing this out after the house is paid off, but I would rather put the money into a Vanguard mutual fund rather than Fidelity.  I have $6,850 in this currently.

Taxes: I paid $4,878 in taxes (county/property/ISD) in 2014.  I'm in the 25% income tax bracket.  With the homestead exemption and whatnot I usually get a couple thousand back at the end of the year.

Current expenses:
House - I usually pay $2,500 a month towards the principal...more if I have it.
Home - Taxes/Insurance - I put $600 a month in VFIAX for taxes/insurance
Auto Insurance - $288 every 6 months
Travel - random but usually between $700 - $1,500 per year
Food - The lady buys all the groceries but sometimes I get tired of soylent and buy lunches....we'll say $100 per month
Gas - $120 per month
Health Insurance - $162 per month
Cell Phone - work takes care of this
Entertainment - Google Play Music & Netflix cost about $18 per month
Gifts - I usually end up paying around $800 in gifts per year

Assets: $45,813 in VFIAX (I add $600 per month - $5,000 or so will come out of this for taxes at the end of the year)

Liabilities: I owe $38,642 on my house and am paying $2,500 per month right now.  Will start paying a little more next year in order to pay it off by December 2016.

Specific Question(s):  So right now my plan is to just save as much as possible after my house is payed off.  I like my job and the people I work with and don't think I'll have any problem working for another ten maybe even twenty years.  My question is - what is the smartest thing to do with my excess money?  I've read about traditional/roth IRA ladders and HSAs and all that but I'm still unsure as to which would be most beneficial to me since I don't know when exactly I'll be retiring.  I could just dump everything into VFIAX or VTSMX and let compound interest do it's thing - but then I'll miss out on the benefits of tax advantaged accounts.  That being said, I don't know if I'll be retiring at the right time for a traditional to roth ira conversion to work for me.  Also, can I transfer money from Fidelity to Vanguard without penalty?  Any guidance is much appreciated.  Sorry if this is unorganized...my brain is all over the place right now.  Thanks!

MDM

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Re: Reader Case Study - Retirement Plan?
« Reply #1 on: September 27, 2015, 06:14:55 PM »
Pre-tax deductions: 3% into a SIMPLE IRA through Fidelity (with 3% employer matching).  This is split four ways between Biotechnology, Value Strategies, Industrials and Consumer Staples Funds.  Considering maxing this out after the house is paid off, but I would rather put the money into a Vanguard mutual fund rather than Fidelity.  I have $6,850 in this currently.
Brake?, welcome to the forum.
See https://www.bogleheads.org/wiki/Fidelity for Fidelity options comparable to Vanguard.
Also, would you consider maxing the SIMPLE IRA plus a traditional IRA now, instead of pre-paying the mortgage?

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Specific Question(s):  So right now my plan is to just save as much as possible after my house is payed off.  I like my job and the people I work with and don't think I'll have any problem working for another ten maybe even twenty years.  My question is - what is the smartest thing to do with my excess money?  I've read about traditional/roth IRA ladders and HSAs and all that but I'm still unsure as to which would be most beneficial to me since I don't know when exactly I'll be retiring.  I could just dump everything into VFIAX or VTSMX and let compound interest do it's thing - but then I'll miss out on the benefits of tax advantaged accounts.
In the lists below, differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).     Also, think SIMPLE IRA where it says 401k.  With the 10-year Treasury ~2.2%, these guidelines suggest prepaying the mortgage should be the last thing you do.
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
4. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #3 and #4)   
5. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
6. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic.)
4. See #3 for choice of traditional or Roth for 401k   
5. Again, take the risk-free return if high enough   
6. Because earnings, even if taxed, are beneficial   


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That being said, I don't know if I'll be retiring at the right time for a traditional to roth ira conversion to work for me.
See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

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Also, can I transfer money from Fidelity to Vanguard without penalty?
Without penalty (i.e., from the IRS)?  Yes.  Without fee (i.e., from Fidelity)?  It depends on your exact holdings.

Kroaler

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Re: Reader Case Study - Retirement Plan?
« Reply #2 on: September 28, 2015, 01:08:48 AM »
See the Post by MDM. Prepaying the mortgage is not the *most* financially optimal thing to do.   I was doing that because I wanted to sweet feeling of no mortgage, but I switched to maxing my tax advantaged accounts first.  Makes a decent difference over a 10-20 year period.

zolotiyeruki

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Re: Reader Case Study - Retirement Plan?
« Reply #3 on: September 28, 2015, 01:12:18 PM »
I think a lot depends on what your long-term plans are regarding your girlfriend and her child.  Do you have plans for marriage?  Because that changes a LOT of financial things, starting with your taxes. 

If you're in the 25% bracket now, I'd focus on reducing your taxable income so that you're in the 15% bracket instead.  That's an instant (and significant) savings.  I'd get the max employer 401k match, then max out IRA, then add enough to the 401k to get into the 15% bracket.  If you have to reduce your extra mortgage payments, so be it.

I totally understand the motivation to pay off the house--I was doing the same thing when I lived in Houston (house cost $105k, PITI on a 15-year mortgage was $1k/mo, we were paying >$2k/mo).  After you've gotten yourself into the 15% bracket, go ahead and put the rest towards the house.  The balance is low enough, and your interest rate low enough, that you're hardly paying anything in interest anyway.  Early investing is quite important! :)