Author Topic: US newcomer: help me plan for semi-retirement in 10 years  (Read 6343 times)

fep

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US newcomer: help me plan for semi-retirement in 10 years
« on: October 08, 2012, 10:33:01 PM »
Hello Mustachians.

I need your help to figure out what is the best way to save for the future as we kind of start from scratch (see about us) here in the US.

About us :
40 years old couple + 2 young kids. Relocated to the US from Canada (family reasons) in summer 2012.
Our target goal : semi-retirement at 50 years old (i.e. if needed working 1 or 2 days a week for paying very basic needs).
We have : Registered Retirement=$90K RRSP [Canada]; Cash Saving=$120K; Future house downpayment saving=$200K;Education Kids=$16K
We both work. We are renting for now but plan to purchase a home sometime next year.
Currently we are able to save about $4300 / monthly.
I like to be able to choose low MER investments and plan on using Vanguard.

What we are trying to do :
Basically setting-up the overall plan to achieve our target goal (50 years old semi-retirement or best FI).
I need first to decide under what type of financial vehicles our $4300 could be distributed.

Here are the load of questions we have... thanks in advance and sorry for the large number of ?

1. Registered retirement money : I plan on putting $1,500 monthly in that category.
At my work, they have a 401K but no match. I work as a w2 contract so will change jobs at some point.
If I understand well and tell me if not: the 401K, IRA or ROTH IRA all end-up being available with no penalty at 59 1/2. Both 401K and IRA reduce income tax and are tax-deferred. 401K is employer provided and IRA my choice of investment location. ROTH IRA is tax free. All have contrivution limits per year.

- Is there an interest for me to do the 401K of my employer at all since there is no match? btw it is at a bank which I am sure has high MERs funds...

- Can I both use the IRA and ROTH IRA? is it the combined amount that is subject to the contribution limit of $5K per individual?

If yes, do you think it would be a good option to do something like that :
-max RothIRA @Vanguard (2 x $5K / year) + max IRA @Vanguard (2 x $5K / year) + remaining @Employers 401K

If no, should I go :
- max IRA @Vanguard (2 x $5K / year) + remaining @Employers 401K
OR
- max RothIRA @Vanguard (2 x $5K / year) + remaining @Employers 401K

- How would you do for the split of the $1500 monthly ?

- For 2012 I will have worked 3 months only and my wife 2 months. How can we know the max we can put for each type of accounts?

2. Early retirement money : I plan on putting $2,500 in that category. Which should be about $540K at 50 years old (Cash Saving of $120K + 10 years to go at 4% conservative rate).

- Is it better to just put everything into several taxed investments at Vanguard or is there also additional alternatives?

- Which Vanguard funds would you recommend for nice dividend payouts and relative safety for achieving my goal?

3. Kid Education : I plan for $300 monthly in an account.
I am a little bit hesitant to use a 529 and have penalties if our kids decide to follow university education outside of the US (possible : from my wife and myself, our kids can legally live in 3 place : Europe, Canada or USA). We had saved some money into an education plan in Canada and had to pay heavy fees to get out when moving ;( ! Would like to avoid that again...
What do you think?

Thank you so much. I am sure your input will be very valuable for putting the best plan.

lhamo

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #1 on: October 09, 2012, 05:19:21 AM »
Though the list/rules may change over time, many foreign universities are on the list of institutions approved for use of 529 funds -- you can find the current list here (select "FC" for foreign country to see the list of over 300 institutions that currently qualify based on federal rules:

http://www.savingforcollege.com/eligible_institutions/

Most of the major UK universities and many European ones are currently on the list.


fep

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #2 on: October 09, 2012, 05:40:30 AM »
Thank you lhamo : a good list to you indeed!

twinge

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #3 on: October 11, 2012, 08:36:38 AM »

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- Is there an interest for me to do the 401K of my employer at all since there is no match? btw it is at a bank which I am sure has high MERs funds...
The 401k is still valuable to lessen your tax burden both current income tax and deferred capital gains tax.  You would just have to calculate out: 1) The value of the tax decrease for you 2) the fees on the funds in the 401k vs. any alternatives you are considering and 3) the effect of the constraints on accessing the 401k early on your retirement plan and 4) the anticipated value of deferred tax on capital gains vs. alternative you are considering.


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- Can I both use the IRA and ROTH IRA? is it the combined amount that is subject to the contribution limit of $5K per individual?
The combined total is subject to the 5K limit per individual. 

Often times people will combine 401k and Roth IRA to diversify tax strategies.

offroad

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #4 on: October 11, 2012, 08:51:03 AM »
am working a similar plan for ten year retirement.  see my otehr post, and just comment, so I have your handle-name for eventual group planning this weekend.

fep

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #5 on: October 11, 2012, 06:01:02 PM »
@twinge : thank you for your answer.
@offroad: added a comment on your post ;)

Actually just investigated more today and it seems like employer is also giving the option of Roth 401K. It is very likely that my tax rate will be lower at retirement, so maybe now is best to max 401K and benefit from reducing the tax burden on current income. In case, could I roll over my 401K to a Roth 401K in the future if I ever need more flexibility in the strategy ?

So right now, my gut feeling is to go 401K to Max + Taxable as much as I can in Vanguard funds... and re-visit this strategy in a couple of years. What do you think?


twinge

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #6 on: October 13, 2012, 09:10:01 AM »
Quote
So right now, my gut feeling is to go 401K to Max + Taxable as much as I can in Vanguard funds... and re-visit this strategy in a couple of years. What do you think?

What I do is go 401k to max when we're in a high tax bracket and then Roth and THEN taxable.  Roth contributions are always able to be withdrawn so I figure I might as well have the account.

fep

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #7 on: October 13, 2012, 09:32:46 AM »
Yes I can understand Roth add flexibility in the plan to take back principal after 5 years... thinking of it.

2 other questions I have :

1. When / if I change employer in the future, is it easy to transfer the 401K to a Vanguard IRA for example? Is there any constraint of time to wait or others ? I really plan on keeping the funds at a same location for simplicity...

2. I will invest in 401K, Roth, Taxable etc... and my wife also. What is the best way to go : separate vanguard accounts or joint vanguard accounts (for convenience, tax strategy and flexibility of withdrawal) ?

Thanks again.


twinge

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #8 on: October 13, 2012, 10:07:03 AM »
Quote
1. When / if I change employer in the future, is it easy to transfer the 401K to a Vanguard IRA for example? Is there any constraint of time to wait or others ? I really plan on keeping the funds at a same location for simplicity...

You can do a direct roll-over immediately.

2. I will invest in 401K, Roth, Taxable etc... and my wife also. What is the best way to go : separate vanguard accounts or joint vanguard accounts (for convenience, tax strategy and flexibility of withdrawal) ?[/quote]

retirement accounts have to be individual accounts.  Taxable accounts can be joint.  My husband and I have separate vanguard accounts for roth ira and I keep the taxable account in just mine.

fep

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #9 on: October 14, 2012, 09:39:42 PM »
Thank you! I feel more comfortable with which kind of buckets I am going to use for my semi-retirement goal at 50 years old :
that will be 401K to max, Roth IRA to max and the rest to Taxable...

I now must define which specific funds will go inside each bucket. I want to use Vanguard for the investment company.
From what I have understood, it is best to put :
- funds which produce interest and/or dividend income into deferred tax investments (401K, Roth, IRA...)
- stocks into regular taxable investments

Here are some more wonders / questions / problems I have :

1. Regarding my Taxable Account - planning to use in 10 years
I have 120K$ to put back into the market here in the US (comes from my early-retirement accounts in my previous country of residence). This money is my early-retirement money so logically it should go into a taxable for better accessibility. I will fill the Roth with 5k$ this week but that still leaves 115K$ which should go in the taxable account. My problem is that I can't help but thinking that buying now is the worst possible time to buy stocks.
Any strategy that I could use to not have to buy all now? Does it make sense to buy all full bonds in the Taxable (not best for tax) and then sell it regularly to pick stocks every month (kind of like a dollar cost average thing) for some time : for example, I could sell the bonds and buy ~ $4500 of stocks every month during 2 years...? Any ideas?

2. General question - maybe a stupid question... sorry about that. Why is growth of a portfolio often associated directly with the amount of stocks it has? I mean if someone had very good high-yield bonds (5% and up) only, wouldn't the re-invested dividends provide enough growth?

3. When I will be in need of the money from my taxable account (in 10 years), is it the strategy to sell all stock funds and buy only high yield bonds that provide the dividend to live on?

Thanks for your help... learning slowly... ;)


grantmeaname

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #10 on: October 15, 2012, 08:36:45 AM »
My problem is that I can't help but thinking that buying now is the worst possible time to buy stocks.
Any strategy that I could use to not have to buy all now? Does it make sense to buy all full bonds in the Taxable (not best for tax) and then sell it regularly to pick stocks every month (kind of like a dollar cost average thing) for some time : for example, I could sell the bonds and buy ~ $4500 of stocks every month during 2 years...? Any ideas?
Financial analysts are reading the headlines too, and making their recommendations accordingly. You're not the only one who's feeling tentative about the current global economic climate. That doesn't mean it makes sense to delay investing, though: you should only do that if you think you have some sort of information advantage compared to the financial industry, such that you know that their predictions for the future aren't conservative enough. If you don't know that, then you have no reason to think that the financial world is not worried enough and that the market is overvalued right now. Make sense?

Quote
2. General question - maybe a stupid question... sorry about that. Why is growth of a portfolio often associated directly with the amount of stocks it has? I mean if someone had very good high-yield bonds (5% and up) only, wouldn't the re-invested dividends provide enough growth?
5% is only a 2% real return, while stocks have consistently averaged about 8% over the last 130 years, a 5% real return. That means that stocks are doing 2.5 times as much for your 'stache, so to speak. To do much better than 5% in bonds, you'd have to be hand-choosing some really risky ones, which would expose you to additional risk from poor diversification. Even a single default or bankruptcy would more than tank your results for a year, unless you were investing in more than 20 of them. On top of that, picking yourself would expose you to more brokerage fees.

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3. When I will be in need of the money from my taxable account (in 10 years), is it the strategy to sell all stock funds and buy only high yield bonds that provide the dividend to live on?
No. You need your stache to continue providing value to you throughout your entire retirement, and to do so it has to be growing significantly faster than inflation. A 2% real return is not going to cut it; the idea is that you're living on the difference between the return and inflation, and you'd need a lot more assets to cover all your needs at a 5% return (which is only a 2% real return) than at a 7-8% return (which is more than twice as big a real return). MMM's got a great blog post on the matter about the 4% rule to get you started.

fep

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #11 on: October 15, 2012, 04:12:33 PM »
Thanks grantmeaname, it makes complete sense !


grantmeaname

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Re: US newcomer: help me plan for semi-retirement in 10 years
« Reply #12 on: October 15, 2012, 05:23:49 PM »
Sure thing, glad I could help!