22 year old needing investment advice

[shanesauce]

Hello, I am absolutely loving this website and all the knowledge there is to gain on here!

So I am just going to get to the meat and gravy of this, I need advice on WHERE to put my money. Me and my wife of 5 years currently bring home $48k and our annual spending is going down as the days go by. We are renting and I am not sure when we should buy a house. I am currently 3 years into my state pension of "high risk" work which puts me vested at 8 years or retiring at 30 years which would give me 90% of my current pay or a cash payout. She is working in the health field but has access to a 401k.
I want me and my wife to both max out a Roth and maybe look into Vanguard Index Funds? Does this sound like a disaster waiting to happen? Will I be able to pull dividends from my accounts once I turn 49 and retire with my state pension?

Here is my current plan that needs a bit of work, please point out the best possible avenue for me and my family.

Step 1 - $1k emergency fund
Step 2 - Pay off all debts
Step 3 - Finance a home? (not sure about this one)
Step 4 - Establish 3-6 months of expenses for a nice cushion
Step 5 - Start maxing out 2 Roth IRA's
Step 6 - Invest a large portion of our checks into Index Funds
Step 7 - Stay as mustachian as possible

Any help is greatly appreciated!

[GGNoob]

Step 1 - $1k emergency fund
Step 2 - Pay off all debts
Step 3 - Finance a home? (not sure about this one)
Step 4 - Establish 3-6 months of expenses for a nice cushion
Step 5 - Start maxing out 2 Roth IRA's
Step 6 - Invest a large portion of our checks into Index Funds
Step 7 - Stay as mustachian as possible

I would probably change that to the following:

1 - Invest enough to get full employer match from work retirement plan (401k/403b or whatever)...this is free money!
2 - $1k emergency fund
3 - Pay off debt
4 - 3-6 months for emergency fund
5 - Max out Roth IRAs
6 - Max out work retirement plans (401k/403b or whatever)
7 - Invest remaining in taxable investment account

If you decide buying a house is better than renting, then save up 20% down and that could be before or after maxing Roth IRAs. You'll probably want your full emergency fund saved up when you buy a house so that if anything major happens, you have money right away. Don't put yourself in the situation where you buy the house and deplete all of your funds and have to resort to credit cards for an emergency.

[RyeWhiskey]

I agree with Logan however I would modify it one tiny bit:
1 - $1k emergency fund (**This should be the first thing that is done. We simply never know what the future holds.**)
2 - Invest enough to get full employer match from work retirement plan (401k/403b or whatever)...this is free money!

Emergency fund first, then employer match. While the free money is great, having emergency cash when you need it is better.

[shanesauce]

What do you mean invest enough to get a full employer match? I pay nothing into my pension. I do believe there are some deferred compensation type accounts that I could invest in through great west, voya etc.

[GGNoob]

I agree with Logan however I would modify it one tiny bit:
1 - $1k emergency fund (**This should be the first thing that is done. We simply never know what the future holds.**)
2 - Invest enough to get full employer match from work retirement plan (401k/403b or whatever)...this is free money!

Emergency fund first, then employer match. While the free money is great, having emergency cash when you need it is better.

RyeWhiskey is probably correct here. In my situation, a $1k emergency wouldn't be an emergency as we can shuffle our budget around enough or contribute less to a retirement account to make up for it. But if that isn't the case for you, then get that little buffer saved up. Taking on more debt for an emergency will just delay your plan.

If you need help knowing which funds to invest in with your employer sponsored plans, feel free to post what is available and we can help. We'll need fund names, tickers/symbols, and expense ratios.

Your emergency fund should be in a "high yield" savings account. Those will range from 0.75% to 0.95% interest.

For your Roth IRA, open an account at Vanguard for each of you. If needed, you could toss your money into a Target Retirement Date Fund until you feel comfortable investing in specific funds or ETFs on your own. The Target Retirement Date Funds require a minimum of $1,000 to open. Otherwise, there is no minimum for a brokerage account to invest in ETFs. I invest in ETFs myself and would recommend this simple allocation to start with:

56% VTI (Total US Stock Market)
24% VXUS (Total International Stock Market)
20% BND (Total US Bond Market)

This allocation is based on the Bogleheads' Three Fund Portfolio. A good book to read would probably be The Bogleheads' Guide to Investing.

You cannot withdraw earnings from your Roth IRA until your are 59.5 years old. However, contributions can be withdrawn anytime. For example, if you contributed $5,500 a year to your Roth IRA for 30 years, you would have $165,000 of contributions to withdraw tax and penalty free. There are ways to withdraw money from a 401k early (Roth IRA ladder for example), but you can worry about that down the road. For now, create a plan that allows you contribute as much as possible to tax-advantaged retirement accounts and then stick with that plan.

[GGNoob]

What do you mean invest enough to get a full employer match? I pay nothing into my pension. I do believe there are some deferred compensation type accounts that I could invest in through great west, voya etc.

If you have a link to your employer's retirement options, feel free to share and we can help you figure it out.

I'll use my wife's 401k for an example on the "full employer match":
My wife's employer offers her a 401k. The employer will contribute 4% if she contributes 5%. So my wife currently contributes 5% to her 401k and the employer "matches" another 4% for a total of 9% of each paycheck.

My employer offers a pension and they contribute 16% to the pension and I contribute 8%. Because of the pension, they do not match (or contribute to) my 401k or 457 plans.

[shanesauce]

I don't know very much about the options that are available to me through my employer but I will look into it. Everyone at work talks about how much they invest every paycheck and how their plan is either low, medium or high risk. I actually made a mistake I currently invest 3%  into my state pension and I couldn't tell you how much that leaves the state responsible for, all of this is new to me.

As soon as I get more information about other investments through my employer I will definitely let you guys know.

edit: I believe this link might be some of the options that I can choose from, but like I said I don't know if there is employer matching or not.
https://www.myfloridadeferredcomp.com/SOFWeb/default.aspx

[GGNoob]

Most employers have a "benefits guide" or "benefits overview" that would talk about insurance and retirement plans. That would usually tell you what options are available and if there is a match. A match is a good benefit so it would usually be something advertised somewhere. Contact your HR department if you need a copy.

The link talks about the Florida pension plan, but won't have anything specific to your employer.

[shanesauce]

After a little digging I found this.

The Deferred Compensation Plan (also called a “457” plan) allows for tax-deferred savings to supplement Florida Retirement System and Social Security benefits. Participants have the opportunity to determine an investment strategy based on their pre-taxed contributions. The State does not match the participant's contribution.


Also I am in the pension plan and I could have opted for the investment plan within 5 months of my hiring but I never switched over. So it looks like I will be better off not paying into what my employer has to offer?

[GGNoob]

After a little digging I found this.

The Deferred Compensation Plan (also called a “457” plan) allows for tax-deferred savings to supplement Florida Retirement System and Social Security benefits. Participants have the opportunity to determine an investment strategy based on their pre-taxed contributions. The State does not match the participant's contribution.


Also I am in the pension plan and I could have opted for the investment plan within 5 months of my hiring but I never switched over. So it looks like I will be better off not paying into what my employer has to offer?

A 457 plan is ideal for anyone who might retire early. It is basically deferring your compensation until you quit/retire from your job. So if you worked there until 45 and retired, you could start withdrawing from your 457 plan immediately without any tax penalties. All you would pay is normal income taxes. If you left the job and didn't want to keep the 457, you could roll it over into a Traditional IRA. After a rollover however, you would lose the benefit of withdrawing the money before age 59.5 penalty free.

My work offers a 457 plan and I just upped my contributions to $1,500 a month so that next year I'll max it out. I am actually making this a priority over any Roth IRA contributions because it not only is great for early retirement, it also lowers my taxable income (the same as contributing to a 401k does). But I still plan on being able to max out my Roth IRA in 2015.

Edit to add: My work does not offer a match either. But because I want the ability to retire early if we choose, we are making the 457 a priority (after getting my wife's 401k match).

[Mighty-Dollar]

When you get to step 6 you have reached financial freedom.
https://personal.vanguard.com/us/funds/tools/recommendation?reset=true

[shanesauce]

Is a 457 the same as a 401k in terms of the $17,500 maximum annual contribution? If that is the case I will just max out the 457 which would be the ideal choice for early retirement.

Also, I am in the 15% tax bracket so would I be better off investing in a traditional or roth ira?

If my math is correct I can invest 45% of our net income over the next 10 years and have roughly 300k given a 7% return. Is the 7% a good number to go by considering I am doing this calculation for 10 years versus 30 years?

[GGNoob]

Is a 457 the same as a 401k in terms of the $17,500 maximum annual contribution? If that is the case I will just max out the 457 which would be the ideal choice for early retirement.

Also, I am in the 15% tax bracket so would I be better off investing in a traditional or roth ira?

Yes it's the same...$17,500 for 2014 and $18,000 for 2015. You can contribute the max to both a 457 and 401k.

I would do the Roth IRA.


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[shanesauce]

Thanks for all of the help. It is much appreciated.