Author Topic: Where to start?  (Read 4678 times)

Nathan12x

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Where to start?
« on: August 18, 2014, 02:33:17 PM »
A friend of mine showed me this site and I have been reading through some of the articles and threads for a little while now. I figured I would put up where I am currently at and see what some more experienced Mustachians would advise.

Details:
$82,000 Gross
7% with 5% match for 401(k)
Savings $17,000
No debt
No investments ouside the 401(k)
Rent a home with the future wife
Mid 20s, enjoyed myself in my early 20s to where I wasn't saving anything.

Soon to be wife:
$85,000 Gross
$9,000 ish Savings
$17,000 car loan - Likely won't get rid of anytime soon
Mid 20s, has been working full time for almost 2 years now after completing school.

Friends and I have talked about rental properties, dividends stocks, and maxing out the 401(k). Some others things as well, but that's not important. We don't plan on having kids in the near future or desire to buy a home in our current location (CA). I like the idea of being able to retire early and have begun to plant the seed with the lady. She gave the initial pushback as expected, but was more recpetive to the idea whenh I used some tips from this site on selling it to the spouse.

Anyhow, where should I/we start?

Thank you.

Edit: A goal I initially wanted to do as a trial was to live off one income and save the rest. Then look into investments and such.
« Last Edit: August 18, 2014, 02:56:03 PM by Nathan12x »

gimp

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Re: Where to start?
« Reply #1 on: August 18, 2014, 03:13:20 PM »
You and your wife should max out the 401k, to reduce your taxeable income by $35k from 167k to 132k. Then you are earning too much for a tradition (pre-tax) IRA, so go for a roth IRA, another $11k total. That's savings of 46k a year plus employer match. Stick that into low-cost index funds (vanguard, fidelity spartan, schwab, whatever your plans offer.)

If you're mid 20s, you might go for an HSA... except if you're planning to have kids, it might make more sense to do a lower deductible health plan. HSAs let you save an extra 6k or so a year, tax-free, with the caveat that the money has to be used for medical expenses. ("Why is that useful?" Because the money is put in tax-free, it grows tax-free, it is disbursed tax-free, and if you wait it out, you get to take it out once you retire tax-free without having to spend it on medical expenses. Also, you can pay medical expenses out of pocket, save the receipts, and cash in on the money at any time - not this year, but at any time later, at your convenience.)

What are your expenses? That's the next piece of the puzzle.

Nathan12x

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Re: Where to start?
« Reply #2 on: August 18, 2014, 04:32:55 PM »
Thanks for the reply, gimp.

For the HSA, are you saying doing this on top of health coverage provided by our employers or in lieu of? We currently both have health insurance through our employers.

Combined Expenses:
Rent: $1,400 (over splurged a bit, but we like it right now)
Electric:$55
Water: $65
Gas: $30
Trash: $23.33 a month/70 every 3 months
Car Payment: $280 (dont have exact figure at this time) 0.89% interest on the loan
Car Insurance (two): $150 (dont have exact figure, but know it hovers right around that)
Renters Insurance: $21.90
Groceries: $300
Vehicle Gas (two): $250
Misc (Pet food, entertainment, etc.): $250
Cell Phones: $160

Total: $2,985.23

What I currently have in my budget. It could probably be narrowed down even further, but this was my starting point. Any ideas or thoughts are appreciated.

4alpacas

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Re: Where to start?
« Reply #3 on: August 18, 2014, 04:50:52 PM »
You and your wife should max out the 401k, to reduce your taxeable income by $35k from 167k to 132k. Then you are earning too much for a tradition (pre-tax) IRA, so go for a roth IRA, another $11k total. That's savings of 46k a year plus employer match. Stick that into low-cost index funds (vanguard, fidelity spartan, schwab, whatever your plans offer.)
+1

Maximize your tax-advantaged accounts, then focus on the other stuff.

minimustache1985

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Re: Where to start?
« Reply #4 on: August 18, 2014, 05:06:37 PM »
You and your wife should max out the 401k, to reduce your taxeable income by $35k from 167k to 132k. Then you are earning too much for a tradition (pre-tax) IRA, so go for a roth IRA, another $11k total. That's savings of 46k a year plus employer match. Stick that into low-cost index funds (vanguard, fidelity spartan, schwab, whatever your plans offer.)
+1

Maximize your tax-advantaged accounts, then focus on the other stuff.
+2, particularly because you are in California.  At your bracket every dollar you tax-defer is 9.3 cents working for future you that CA would have taken.  When I lived there I was itemizing even as a renter because state taxes were higher than the standard federal deduction.  Blech!

gimp

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Re: Where to start?
« Reply #5 on: August 18, 2014, 05:10:11 PM »
You could do better on expenses, but let's circle around to that later to say: well done, you're living on $36k a year and bringing in $167k pre-tax.

An HSA is part of a high-deductible health plan - essentially, it's taking small medical expenses into your own hands. It's a good deal for the young, healthy, and financially savvy. If you are offered them, it takes careful reading to make sure you're okay with the risks. (For me, it means I might have to pay like five grand in the worst case... the odds are low and I have cash if it happens.) But it's also a ridiculously advantaged investment account - because these aren't cash savings, but largely investment savings, that never get taxed if you do it right.

Okay, but let's simplify. You will put in $46k a year, plus employer match, and since you're in a relatively high tax bracket, it will cost you significantly less to do it - probably in the $35k range, but I haven't done that math for your case. So yeah, money away from uncle sam, and into your financial freedom, is a very good deal.

Before worrying too much about fancy things like dividends and stock picking and rentals, I'd read simply this - http://jlcollinsnh.com/stock-series/.

Sleep on it, talk with your wife, start maxing out those tax-advantaged accounts. Nearly $50k a year with a reasonable expected growth can either let you go off and be free very early, or stop working at an older age very well off.

In the back of your mind, let the wheels spin... you can keep your smartphones but drop from 160/month to half that; you can cut down on other spending without missing it. You can pay down debt aggressively (since it's the non-money-earning kind of debt, you know?) or you can laugh at the tiny APR and dump more into investments, but all of it requires some thought and sleeping. Since your hair isn't on fire, you can afford to be a little slow - what's a week? - but sure you're doing the right thing.

Nathan12x

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Re: Where to start?
« Reply #6 on: August 18, 2014, 06:39:08 PM »
Awesome. Thank you for the replies everyone. Looks to be the consensus to maximize the 401(k). I can definitely see where there are some areas where my expenses could be trimmed and just looking at this I can see I forgot internet and gym membership.

All of the feedback is appreciated and something I can talk to my soon to be wife about.

So, with maximizing the 401(k) that money can't be pulled/used until much later in life without penalty. If we wanted to explore the path of retiring in our late 30s to early 40s would you still recommend maxing this out? Then, looking at other opportunities? 

I know this is all hypothetical, but I do appreciate the responses. Thanks again.

gimp

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Re: Where to start?
« Reply #7 on: August 18, 2014, 06:43:57 PM »
Yes.

http://forum.mrmoneymustache.com/ask-a-mustachian/help-me-understand-the-roth-conversion-pipeline-idea-and-its-benefits/

TL;DR:

Once you leave a company, your 401k goes to you, and you roll it into a traditional IRA (no taxes). Then, every year, you roll some into a roth IRA (yes taxes, because it's considered income, but your income should be so low your actual tax rate is zero). Then five years later, you can start withdrawing principal from the roth tax free. So the strategy is: year 0-4 you live off other savings and start converting to roth, year 5+ you keep converting from roth and now are pulling from roth. If you do it right, your withdrawal rate and inflation is less than growth and you're golden.

Nathan12x

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Re: Where to start?
« Reply #8 on: August 19, 2014, 08:31:06 AM »
Awesome, thanks for the thread link and explanation.

Retireme32

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Re: Where to start?
« Reply #9 on: August 19, 2014, 08:35:22 AM »
Thanks for the reply, gimp.

For the HSA, are you saying doing this on top of health coverage provided by our employers or in lieu of? We currently both have health insurance through our employers.

Combined Expenses:
Rent: $1,400 (over splurged a bit, but we like it right now)
Electric:$55
Water: $65
Gas: $30


gimp got that backwards - you make too much for the Roth, you have to go Traditional.
Trash: $23.33 a month/70 every 3 months
Car Payment: $280 (dont have exact figure at this time) 0.89% interest on the loan
Car Insurance (two): $150 (dont have exact figure, but know it hovers right around that)
Renters Insurance: $21.90
Groceries: $300
Vehicle Gas (two): $250
Misc (Pet food, entertainment, etc.): $250
Cell Phones: $160

Total: $2,985.23

What I currently have in my budget. It could probably be narrowed down even further, but this was my starting point. Any ideas or thoughts are appreciated.

brewer12345

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Re: Where to start?
« Reply #10 on: August 19, 2014, 08:55:17 AM »
Awesome. Thank you for the replies everyone. Looks to be the consensus to maximize the 401(k). I can definitely see where there are some areas where my expenses could be trimmed and just looking at this I can see I forgot internet and gym membership.

All of the feedback is appreciated and something I can talk to my soon to be wife about.

So, with maximizing the 401(k) that money can't be pulled/used until much later in life without penalty. If we wanted to explore the path of retiring in our late 30s to early 40s would you still recommend maxing this out? Then, looking at other opportunities? 

I know this is all hypothetical, but I do appreciate the responses. Thanks again.

You already got the response about the roth conversion pipeline.  There are a couple of other options as well:

- 72T/SEPP: This is a little more involved than a Roth pipeline, but there is a provision in the tax code where you can convert an IRA balance into a stream of lifetime payments and avoid the age restrictions on traditional IRAs.  72t.net will tell you way more than you ever wanted to know about this.

- Just pay the penalty: If you are in a low/no tax state and in the 10% tax bracket, you could always just pull money out as needed and pay the 10% penalty.  Paying 20% (10% income tax plus 10% penalty) will be way less than your current marginal tax rate, which is probably closing in on 40%.

Another issue is that if you continue trundling on wit your current earnings and budget, you will probably have extra money to save even after maxing the 401ks.  That money can be invested in an after-tax account and serve as a bridge between when you stop working and when you start pulling money out of a traditional IRA/401k.

Nathan12x

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Re: Where to start?
« Reply #11 on: August 19, 2014, 09:26:14 AM »
Retireme32 - At $167k combined, we are still lower than the $181K limit for Roth IRAs in 2014. Am I missing something?

https://www.fidelity.com/retirement-ira/ira-comparison


gimp

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Re: Where to start?
« Reply #12 on: August 19, 2014, 03:26:50 PM »
Quote
gimp got that backwards - you make too much for the Roth, you have to go Traditional.

Going to need a source on that one, friend.