Author Topic: Questions about how to best allocate my savings to achieve FI ASAP  (Read 3683 times)

wildcatengineer

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I have been lurking here and reading through the MMM articles for the past month.  Prior to discovering this site, I had resigned myself to thinking that I would be retiring no sooner than age 59.5 (I am in my mid twenties).  Now that I have a new perspective, I am questioning my previous strategy of maxing out my tax advantaged retirement accounts before even thinking about taxable accounts.  My employer has a SIMPLE IRA plan that matches my contributions up to 3% of my salary and I can max out my contributions at $12,000 per year.  This account has basically the same rules as a traditional IRA (contributions deducted from taxable gross income; withdrawals are heavily penalized prior to age 59.5; withdrawals will be taxed).  I am also currently contributing biweekly to fully fund my Roth IRA.  Also, I have overfunded my emergency fund and  I plan to invest about $30,000 of it very soon.  I have all of my investments in Vanguard's Target Retirement 2045 fund right now, and I plan to purchase the underlying funds of this fund once I can purchase admiral shares.

My current plan is to continue fully funding my Roth, use $5,500 of the $30,000 to fund my wife's Roth, and leave the rest invested in admiral shares of Vanguard total market index funds in a taxable account.

My questions:
1.  Should I stop contributing to my SIMPLE IRA beyond 3% of my salary and instead put that money into a taxable account?
2.  Should I continue fully funding both my and my wife's Roth IRAs if our goal is to reach FI in our 40's ( knowing I can withdraw principal without penalty)?
3.  Should I try to time the market when investing the $30,000 since it is at an all-time high (or use dollar cost averaging or some other strategy)?
4.  Will my investments be converted to admiral shares if I have a total of $10,000 of a fund held between my taxable and IRA accounts, or only if I have $10,000 of a fund in a given account?

Joet

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Re: Questions about how to best allocate my savings to achieve FI ASAP
« Reply #1 on: May 13, 2013, 11:39:15 AM »
what tax bracket are you in?

You can convert IRA funds to a Roth in a low-income year at a zero/near zero federal tax rate making it normally better to take the tax advantage now if you expect a few years between say 40 and 67 or whatever full SS retirement age is.
I would keep contributing to the tax advantaged SIMPLE IRA plan since it's pretty hard to beat an immediate ~25% or so net return elsewhere[the tax savings], especially given if you plan on having some years of low/less/zero income in which you can convert some of this tax-free to a Roth/yearly

Roth space is precious, always max it out.
Nobody has any idea where the market is headed, dollar cost average if you must to feel better but statistically that will cost you some $$$

admiral conversions are done automatically, dont worry about it

wildcatengineer

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Re: Questions about how to best allocate my savings to achieve FI ASAP
« Reply #2 on: May 13, 2013, 12:09:34 PM »
Thanks!  Our top marginal federal rate last year was 25%.  I was not aware of the option to convert a SIMPLE to a Roth tax-free.  I believe that tax rates will eventually go up for everyone, which is one reason I prefer a Roth to traditional (pay the taxes now while they are low).  My main concern is that tax advantaged accounts all seem to be geared toward a traditional retirement age.  I want to make sure that I am not tying up so much of my income in these accounts that it will be difficult to retire early.  If I max out all of our tax-advantaged options, that would be about 30% of our gross income.

Also, I know that Admiral conversion is automatic if you have all the shares in a single account, but what if I had $5,000 of a fund in my Roth, $2,500 in my wife's, and $2,500 in my SIMPLE, would it still happen for me?

Thanks for the reassurance on the fallacy of dollar cost averaging.  I guess I should just take the plunge, but it just seems counter-intuitive to go all in when the market is on a high.

matchewed

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Re: Questions about how to best allocate my savings to achieve FI ASAP
« Reply #3 on: May 13, 2013, 12:48:13 PM »
General advice while you do more research.

Invest in a 401k (or equivalent) until match is full. Invest in a Roth IRA until maxed. Finish the 401k (or equivalent). Then "other" (other being index funds, or if you're more knowledgeable individual stocks or managed funds, money for building/buying businesses, or money for purchasing rentals).

The best advice for hitting FI ASAP is to save a very large portion of your income. Which is basically making your savings percentage as large as you can. It doesn't matter which side you approach it from via reducing your spending or raising your income, just make that percentage grow (although personally I find reducing spending to have multiple benefits beyond just raising your savings percentage).

Any other fancy advice beyond that will make small impacts on your FI date. Your savings percentage or rate will have a big impact on your FI date.

wildcatengineer

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Re: Questions about how to best allocate my savings to achieve FI ASAP
« Reply #4 on: May 13, 2013, 01:03:02 PM »
Thanks, matchewed.  We have been pretty frugal by societal standards, but we are working to get it up to Mustachian standards.  I am also very confident that my income will increase over the next few years of my career.  I understand that the overall idea is to maximize savings and keep it working for me.  My biggest fear is that I may "technically" reach FI at age 40, but what if 2/3 of that money is tied up in tax advantaged accounts?  I know I can make principal withdrawals penalty-free from a Roth, but the SIMPLE is not so flexible.  I am afraid I may not adequately fund the interim period from early retirement to age 59.5.

matchewed

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Re: Questions about how to best allocate my savings to achieve FI ASAP
« Reply #5 on: May 13, 2013, 01:12:54 PM »
I'm fairly certain that 72t rules apply to Simple IRAs, and for that matter the Roth pipeline method may also be valid. Double check with publication 590 which covers these things.

*edit* Spelling mistake.
« Last Edit: May 13, 2013, 02:43:24 PM by matchewed »

wildcatengineer

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Re: Questions about how to best allocate my savings to achieve FI ASAP
« Reply #6 on: May 13, 2013, 02:28:36 PM »
Thank you.  You have definitely eased my mind.  This link on irs.gov: http://www.irs.gov/pub/irs-tege/early_distributions.pdf indicates that 72t rules do apply to my Simple.  I will read into the Roth pilpeline method later.  Here is my plan:  I will immediately invest my $30,000, maxing both my and my wife's Roths for the year with a portion of it.  I will also continue fully funding my Simple.  The remainder of the $30,000 will be in a taxable account until January 1, 2014 when I will immediately fund my 2014 Roths from it.  The remainder of my saved income will go into the taxable account.  I appreciate everyone's help!