Case Study - Turning 30 and Debt Free - Next Steps

[keystone]

Life Situation: Long time reader since I found the website in college. Since graduating in 2013 I've focused most of my efforts on paying off 45k in student loans and 89K on my house (which will be paid for in May).

IRS filing status: Single
number & ages of dependents 0
Living in PA in what many would consider to be a LCOL area. 

Gross Salary/Wages: recently increased to 62K (depending on overtime)

Current Investments: Rollover 401K to Vangard VIGAX - $26K  and $1,500 in VASGX

Other Ordinary Income: Side hustle LLC construction and custom projects +/- 2k per year (scalable if I made more time for this)

Current expenses: Currently my expenses with the house paid will be about 1,100k per month / $13,200 per year but will probably not be this low in the future. The construction company I work for bought me a truck and covers fuel and insurance. Cell phone and health insurance are also covered by the firm but there is no 401k at this time. Other than working, my hobbies are funded and I preform my own house renovations. I have some family on the west coast and might do a fishing trip here and there but vacations have been limit since COVID, and work piles up deep if I leave for more than a day or two.

I know I'll need to put a figure on my future expenses to cover health insurance, cell phone, fuel and insurance, which will impact my FIRE numbers considerably. 

Mortgage payments: 1bed 1bath house to be paid off 5/2021

Assets: House valued at $125K, 401k Rollover at $26K, Taxable account at $1500, $5k Cash

Liabilities: None

Specific Question(s): As you can see, I've been very debt adverse and have not been investing as much as I probably should have. I'm looking for recommendations to get my investments up to par to cover my annual expenses. I've just started to make decent money in the last year and I'd like to take advantage of this before I downshift to part time or working for myself more often. I'm also trying to figure out how far out a downshift / COAST FIRE or FIRE might be. 

The path up to this point has been pretty straight forward to me but I'm looking for input on the next steps and where I should be focusing my efforts. I'm thinking of focusing on more taxable investments since I'd probably max out the IRA options but I'm very open to suggestions. Thank you in advance.

[Freedomin5]

Have you looked at the Investment Order?

[jeroly]

Congratulations on being debt free!

When you say that your expenses after paying off your mortgage are only $13k, I wonder if you’re underestimating things.  For example, after you stop working, your company won’t be buying you a truck or paying your health insurance.

Big picture, though, a lot depends on whether you remain single and child free. Let’s say you do, and with extra spending in retirement on hobbies, travel, and healthcare, you need $30k/yr, so you would want to have perhaps $750k in savings not taking social security into account. If you net $50k a year and spend $15k, you’d be able to save $35k/yr and would hit that $750k in about 14-16 years.

If you make assumptions of getting something from social security, which I think is reasonable, you’d need less and be ready to FIRE sooner than that - maybe three years sooner or so.

[ericrugiero]

Per the Shockingly Simple Math post https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ if you saves $35K out of $50K and doesn't spend more when you retire, you would be ready to FIRE in 8.5 years.  You have $26K in the 401K already so that would take off almost a year.  You are looking at around 7.5 years for "normal" FIRE at your current spend rate. 

Big questions that remain are:
-  Do you need more for medical, truck, travel, etc  (probably yes).  Better bump your savings goals up a bit. 
-  Will you want to spend more as you get older?
-  Will your life situation change?  Getting married or having kids changes the math big time. It's not a bad idea to have some cushion in case things change.
-  How likely are you to make money after retiring?  Being in construction, you could easily have a side gig and make some money whenever you feel like it.  This lowers your expenses and is super flexible for you.  You could easily work ~5 years (saving about $250K) and then start coasting.  If you cover most of your expenses by making $10-15K, the $250K would keep growing and be plenty for your low expenses.

[keystone]

I appreciate the referenced links and outside perspectives. Yes I do think my expenses will increase in the future, especially when work does not occupy the majority of my time. Trying to define the future variables of family, healthcare, transportation, etc are my biggest challenge at this point.

[Freedomin5]

I think you can just estimate your future variables for now -- just to give you a ballpark. The expectation is that you'll stay flexible and adjust your estimates as you get closer to your FIRE date.

[Zamboni]

Follow the investment order already linked, but I want to put in another plug for the value of you maxing a Roth IRA. Remember, money in the Roth can be set up so it will never be taxed again! Think of the Roth as your old man money and just max it every year and put it all in stock index funds.

By the time you withdraw the Roth money at ~60, you will have $1.4 million in there after only putting in $6K a year . . . and you don't have to pay tax on the earnings! That math is a no brainer. You will have put in a measley $180K and earned more than a million dollars in tax free money. Old man keystone will love you for this.

Don't do what I did and withdraw some of the Roth contributions in an "emergency". Gosh, that was stupid of me!

You can also read up on the mega backdoor Roth, but I think you should just think of the Roth as old many money and go with a regular taxable account for the rest of your fortune. Good luck, and nice job finding this site in college and getting those debts paid off!

[zolotiyeruki]

OP doesn't have a 401k, so a Mega Backdoor Roth isn't an option.

Dang, keystone, you are killin' it.  Paid off $134k of debt, plus $26k of 401k, in 7 years on a low income?  That's awesome.

If you really want to understand when you can downshift, you'll need to build yourself a spreadsheet that starts with your current assets, plans out your investments and expected returns, and shows how, once you eventually start to withdraw those funds, your assets might perform.  I have one that I've built, and not only is it great for planning the future, it's fantastic for seeing how tweaks to the plan can affect it.

As far as where you should put all your extra cash flow, the Investment Order thread (linked above by freedomin5) is a great place to start, but I'd suggest some tweaks.  The fact that you have no debt, have no access to a 401k, have far more money available to invest than the $6000 you're allowed to contribute to an IRA, plan to retire early, and are currently earning WAY more than you spend, I'd suggest the following:
1) Max out a traditional IRA (you're single, and the 22% tax bracket starts at ~$40k)
2) Invest the rest in an index fund

Since the bulk of your investing will go into a taxable account, the concept of the Roth Ladder is irrelevant to you, so things are a lot simpler.

[keystone]

This is great info and just the input I was hoping for. I'm familiar with the investment options you all are recommending and can focus some more energy in these directions.

This scope of investment planning is a little beyond what  any of my circle has any real / long term experience with so this thread has been helpful so far.

[MDM]

I want to put in another plug for the value of you maxing a Roth IRA.

Max out a traditional IRA

Let's hear it for diversity of opinion! ;)

The Investment Order's primary recommendation for the t vs. R question is "consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth."

keystone, if you choose to do such a comparison, what do you get?

[zolotiyeruki]

I want to put in another plug for the value of you maxing a Roth IRA.

Max out a traditional IRA

Let's hear it for diversity of opinion! ;)

The Investment Order's primary recommendation for the t vs. R question is "consider comparing current marginal tax saving rate vs. predicted marginal withdrawal tax rate.
      If current > predicted, use traditional.  Otherwise use Roth."

keystone, if you choose to do such a comparison, what do you get?

Aren't these forums great? :D

It's important, when calculating future marginal tax rates, to take into account where the income will be sourced.  Specifically, if you cover some or all of your expenses from a taxable brokerage account, you'll only be taxed on the gains, not the full amount.  So you might pull $20k/year from a brokerage account and $10k/year from a traditional IRA, but only have $15k of taxable income (before deductions, etc).  In OP's current situation, there will be a lot more invested in taxable accounts than tax-deferred accounts, which will free up a bunch of space in the lower tax brackets.