Author Topic: Advice for Complete Newbie  (Read 6184 times)

Rh1234

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Advice for Complete Newbie
« on: October 19, 2014, 05:59:32 PM »
Hello,

Relatively new to the site and it has been a joy to read thus far.  I was hoping for someone to point me in the right direction after a quick breakdown of my financial scenario.  I am 27 and my wife is 25.  After I graduated I did an okay job dumping money into my 401 and Roth, but then I started playing golf/got married/paid for a wedding.  Looking to get back on track, as I am now serious about retiring early.

Me
Salary: $80,000 b/w base and commission- trending towards making closer to $100k in 2015
Roth IRA: Vanguard Target 2055 Retirement Fund (assume I'm going to get destroyed for this?)
$16,000
Currently investing $250/mo in Roth
401k: $35,000 again a Target 2055 fund
Currently investing 4% in 401

Wife
Salary: $51,000
Roth IRA: $3,000
Currently investing $70/mo in Roth
401k: $12,000
Currently investing 4% in 401

Other Stuff
- paid $30,000 for a wedding in 2014. No debt left after that.
- recently pulled out $3,000 after being conned into buying a bunch of whole life insurance by my (then) financial adviser for three years. 
- saving $2,000/mo for a house- currently about $6,500 in the fund
- 0 credit card debt
- $18,000 in student loans at about 6% interest
- both cars paid off


When I buy a house early next year, I will be looking to increase the amount in all investments. 
- do we pay off student loans first?
- am I throwing away money with the Target Retirement Fund?
- do I increase the contributions in 401 or roth first?  I have read you max roth first.
- any other general advice?


Thanks very much for the help!

clifp

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Re: Advice for Complete Newbie
« Reply #1 on: October 19, 2014, 06:57:31 PM »


When I buy a house early next year, I will be looking to increase the amount in all investments. 
- do we pay off student loans first?
- am I throwing away money with the Target Retirement Fund?
- do I increase the contributions in 401 or roth first?  I have read you max roth first.
- any other general advice?


Thanks very much for the help!
Student loans 6% is expensive but not crazily so. If your medium term objective is to save enough for a down payment for a house than I'd pay what is owed.  How much are housing in your areas and what have the prices been doing recently? Certainly you want to pay them off before embark in any stock market investment in a taxable account.

Target funds especially Vanguard are good enough. Yes you'll save money and arguable do better investing in individual funds, but with $60K we are talking $50 a year or so in savings. At 100K probably worth getting out of the target fund.  When you hit $250K. You shouldn't be in them if you've stuck around a place like MMM and learned stuff.

Definitely contribute to the 401K to get the match.

Roth vs 401K it depends. At the 25% bracket I'd be inclined to max out the Roth. At 150K you just creeping into the 28% bracket and which point I think I'd be inclined to up the 401K deduction. 
It also depends on if you live in a low or high tax state and where you think you may want to retire at. I am tend to be bigger fan of a tax deduction today is worth more than one in the future.

You are doing very well almost excellent.. Keep up the savings and good money management.

wtjbatman

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Re: Advice for Complete Newbie
« Reply #2 on: October 19, 2014, 06:58:23 PM »
do we pay off student loans first?
If they are 6% like you said, then yes, focus on them first. That's a guaranteed 6% "return" on your money.

am I throwing away money with the Target Retirement Fund?
Absolutely not. There's a reason Vanguard created those funds. They are an incredibly simple, low cost way for individuals to invest. And in this case, simple does not mean bad. Sure, doing something like a three fund portfolio made up of low cost index funds can have slightly lower fees than a target retirement fund, but when you're just starting out there is absolutely nothing wrong with investing in them.

do I increase the contributions in 401 or roth first?  I have read you max roth first.
People generally suggest investing in Traditional 401k until you are in the 15% tax bracket, then do a Roth. As your household income is between 130k-150k, you really should focus on maxing your Traditional 401ks first to save on those higher taxes. If maxing out your 401ks gets you down to $96k household income, then you can contribute to Traditional IRAs and deduct those contributions as well. See the IRS website for details.

any other general advice?
Pay down any debt over 4-5%, invest the remaining in low cost index funds or low cost target retirement funds.

Rh1234

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Re: Advice for Complete Newbie
« Reply #3 on: October 19, 2014, 07:12:04 PM »
do we pay off student loans first?
If they are 6% like you said, then yes, focus on them first. That's a guaranteed 6% "return" on your money.

am I throwing away money with the Target Retirement Fund?
Absolutely not. There's a reason Vanguard created those funds. They are an incredibly simple, low cost way for individuals to invest. And in this case, simple does not mean bad. Sure, doing something like a three fund portfolio made up of low cost index funds can have slightly lower fees than a target retirement fund, but when you're just starting out there is absolutely nothing wrong with investing in them.

do I increase the contributions in 401 or roth first?  I have read you max roth first.
People generally suggest investing in Traditional 401k until you are in the 15% tax bracket, then do a Roth. As your household income is between 130k-150k, you really should focus on maxing your Traditional 401ks first to save on those higher taxes. If maxing out your 401ks gets you down to $96k household income, then you can contribute to Traditional IRAs and deduct those contributions as well. See the IRS website for details.

any other general advice?
Pay down any debt over 4-5%, invest the remaining in low cost index funds or low cost target retirement funds.

Thanks to both for your response!

Couple follow ups:
- when you say focus on student debt, do you mean throw everything at it and temporarily cut back on Roth?
- if the majority of my salary is commission (probably 60/40), does that change the way you would allocate between 401 and Roth?

bdbrooks

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Re: Advice for Complete Newbie
« Reply #4 on: October 19, 2014, 07:20:42 PM »
Quick review: you're 27 years old with $18k in student loans, no other debt, and $66k invested. You are decades ahead of the masses.

Target Date Funds: I would not suggest anyone invest in these. However, they are not "that bad" that you should get out of them this second. This is something you should research, and develop an investment strategy. I would leave your target date funds while you are learning and researching.

From my limited understanding of your goals and priorities, I would take in as much cash as possible for your down payment on a house. If at all possible you want to avoid PMI. Pay minimum student loan payments. Stop Roth contributions (leave 401k contributions up to the match). Try to get up to 20% down payment. After this, you should be ramping up EITHER retirement contributions OR paying off student loans. Stock market valuations imply that returns over the next decade are going to be crummy. Look at the CAPE ratio or total market cap / gdp. The market is expensive and I doubt you will get better return than paying off 6% student loans. However, if the market crashes I would take every cent available to me and throw it in investments.

After you get the downpayment for the house, you should have several thousand a month to shovel into investments (3k-7k depending on the size of your mustache). Since you are making 130k, I would lean towards traditional over Roth. MadFIentist.com has great articles about Roth vs traditional. I would at least want to get down out of the 25% tax bracket before going into Roths.

The main thing you need to focus on is learning. These are all details. The more you learn and put into practice when you are young, the better off you will be.
« Last Edit: October 19, 2014, 07:22:58 PM by bdbrooks »

bdbrooks

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Re: Advice for Complete Newbie
« Reply #5 on: October 19, 2014, 07:33:55 PM »
do we pay off student loans first?
If they are 6% like you said, then yes, focus on them first. That's a guaranteed 6% "return" on your money.

am I throwing away money with the Target Retirement Fund?
Absolutely not. There's a reason Vanguard created those funds. They are an incredibly simple, low cost way for individuals to invest. And in this case, simple does not mean bad. Sure, doing something like a three fund portfolio made up of low cost index funds can have slightly lower fees than a target retirement fund, but when you're just starting out there is absolutely nothing wrong with investing in them.

do I increase the contributions in 401 or roth first?  I have read you max roth first.
People generally suggest investing in Traditional 401k until you are in the 15% tax bracket, then do a Roth. As your household income is between 130k-150k, you really should focus on maxing your Traditional 401ks first to save on those higher taxes. If maxing out your 401ks gets you down to $96k household income, then you can contribute to Traditional IRAs and deduct those contributions as well. See the IRS website for details.

any other general advice?
Pay down any debt over 4-5%, invest the remaining in low cost index funds or low cost target retirement funds.

Thanks to both for your response!

Couple follow ups:
- when you say focus on student debt, do you mean throw everything at it and temporarily cut back on Roth?
- if the majority of my salary is commission (probably 60/40), does that change the way you would allocate between 401 and Roth?

Yes that is what he means when he says focus on it. My suggestion is to wait (minimum payments) on this until you get your house down payment. This is up to you. You know your situation best.

Once you are done with a house down payment, and student loans you will have enough money to max out 2 401ks and 2 IRAs ($46k total). Income 130k - 35k 401k contributions =95k taxable income. So you are close to the phase out of traditional IRAs. So I would lean towards Roth just so that you don't have to potentially have to mess with recharacterize a tranditional contribution to a Roth. Since you are on commission, it makes it hard to plan it out and know where you will be at the end of the year.

Rh1234

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Re: Advice for Complete Newbie
« Reply #6 on: October 19, 2014, 07:52:59 PM »
Looks like some differing opinions, which would make sense based on the limited info given.

All very helpful. Looks like I have some more research to do. I had originally planning on only putting down 4% based on my timeline on when I would like to own a house (1yr)

wtjbatman

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Re: Advice for Complete Newbie
« Reply #7 on: October 19, 2014, 08:04:01 PM »
Looks like some differing opinions, which would make sense based on the limited info given.

All very helpful. Looks like I have some more research to do. I had originally planning on only putting down 4% based on my timeline on when I would like to own a house (1yr)

Some of it, like bdbrooks said, is up to your personal preference. You aren't going to go "wrong" by choosing to focus on saving money instead of paying down debt, or by choosing a Roth instead of a T IRA.

With your household income, you should eventually be able to max out your retirement accounts. Congrats, focus on that, and you'll be in great shape.

bdbrooks

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Re: Advice for Complete Newbie
« Reply #8 on: October 19, 2014, 08:09:04 PM »
Looks like some differing opinions, which would make sense based on the limited info given.

All very helpful. Looks like I have some more research to do. I had originally planning on only putting down 4% based on my timeline on when I would like to own a house (1yr)


It is limited information. In Kansas City (where I am), my wife and I were able to get an $85k foreclosure that only ugly (we did several cosmetic things nothing that cost that much). In this case, 20% is $17k. Since you already have 6.5k that would mean you need another 10k. If you ramped up the savings for just a few months then it would be attainable. Then again if you live in San Francisco, then this math is about as useless as looking for leprechauns riding unicorns.

If 20% down payment will take you 3-4 years to save up (very aggressively not most Americans pathetic way of saving), then this is not near as applicable.

Cwadda

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Re: Advice for Complete Newbie
« Reply #9 on: October 19, 2014, 08:21:10 PM »
1. Contribute to the 401k enough to get the match - it's free money. You can contribute up to ~$17,500 per year for each 401(k). That is tax-deferred investing.

2. Consider contributing to a Traditional IRA rather than a Roth at this time to get the tax benefit. Later on, you can use a Roth conversion ladder to turn the Traditional IRA into a Roth and get tax-free growth. Know the contribution limits for your income level.

3. Set goals. I.e. Pay off student loans by the end of the year, max your 401(k) accounts by April 15th, 2015. Seriously, goal setting is awesome and will make you feel determined more than ever.


Rh1234

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Re: Advice for Complete Newbie
« Reply #10 on: October 21, 2014, 08:23:38 AM »
Thank you everyone for the advice, I appreciate it.

My financial advisor also has both my wife and me investing $30.00 per month each in added disability insurance.  Starting to think based on his previous recommendations that this is the wrong move at this point in my life.  What are your thoughts?

Cwadda

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Re: Advice for Complete Newbie
« Reply #11 on: October 21, 2014, 10:09:50 AM »
Thank you everyone for the advice, I appreciate it.

My financial advisor also has both my wife and me investing $30.00 per month each in added disability insurance.  Starting to think based on his previous recommendations that this is the wrong move at this point in my life.  What are your thoughts?

What exactly does the disability insurance cover? I would say look into the details.

In general, be wary of financial adviser advice. I had an adviser about a year ago for my Roth IRA but when I looked into the details I was getting hit with a 5.75% load fee right off the top - that's how these people make money. He was a great guy and I learned a valuable lesson - I need to manage my money by myself because it pays to be knowledgeable about your finances in the long run.

Rh1234

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Re: Advice for Complete Newbie
« Reply #12 on: October 20, 2015, 10:32:03 AM »
Hello All,

It has been a full year since originally posting.  I have learned a lot and have made some strides, but still have a long way to go!  I was hoping to get some updated advice based on my current scenario.


Me
Salary: $150,000 (estimate for 2015- in sales). Well above my original prediction.
Roth IRA: $22,000
401k: $53,000

Wife
Salary: $55,000
Roth IRA: $6800
401k: $19,500

2015 accomplishments 
- maxed my 401
- didn't max wife's but is currently investing 15%. Made switch in middle of year
- will have both IRAs maxed by EOY
- saved $7.5k for safety fund this year
- will have saved $8k for Europe trip in 2016 by EOY
- bought a house and are still furnishing: $25k+
- student loan debt down to $15,500. Re financed during year for lower interest rate.
- current net worth is $100k (excluding $ saved for Europe)

2016 goals
- pay off student loan debt by February
- max both 401s
- max both IRAs
- reach $200k total net worth

My goal is to go ahead and max my Roth IRA with my 2015 tax return, and pay my wife's each month.  401k investments have already been changed to $1.5k per month for each to hit max.

Our expenses are still very high. Still working to improve on this piece.

After investing in wife's Roth, and after all expenses, I estimate we will be left with about $2750 extra per month to invest. 

Do you recommend I open up a Vanguard taxable acct? Which one is the standard around here?  Should I make additional house payments (30 yr at around 4%)? Or maybe a combination of both?  What do I do on months where I make significantly more?

If you need more specifics please let me know.

As always I appreciate the help.
« Last Edit: October 20, 2015, 10:41:18 AM by Rh1234 »

Cwadda

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Re: Advice for Complete Newbie
« Reply #13 on: October 20, 2015, 01:08:36 PM »
It sounds like you are making some serious strides to FIRE.

I would say write out a breakdown of your expenses and we can critique them. Also, what is your student % interest?

Rh1234

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Re: Advice for Complete Newbie
« Reply #14 on: October 22, 2015, 02:14:48 PM »
Thanks for your reply.

I feel confident that I know what needs to be cut from our monthly expenses... Just need to do it!

I was hoping to get advice on how best to invest $2-4k per month when the IRA/401 is being maxed.

Thanks!

MDM

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Re: Advice for Complete Newbie
« Reply #15 on: October 22, 2015, 10:29:49 PM »
I was hoping to get advice on how best to invest $2-4k per month when the IRA/401 is being maxed.
Best?  Nope, can't tell you that.  Unless you'd like to know what you should have done this time last year - that I could do. ;)

If, however, you could settle for a "likely good" strategy, then your 2055 Target Date is a perfectly reasonable choice, even for a taxable account.  You could make the same investments with slightly lower fees by using the admiral share class of the underlying investments, but you have to do your own rebalancing.  Depends on your valuation of the relatively small time saved vs. the relatively small extra cost.  See http://forum.mrmoneymustache.com/investor-alley/wealthmentbetterfront-nail-in-the-coffin-article/msg739765/#msg739765 and subsequent posts in that thread.

There are many other perfectly reasonable choices.  See https://www.bogleheads.org/wiki/Three-fund_portfolio for some discussion.

Rh1234

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Re: Advice for Complete Newbie
« Reply #16 on: February 04, 2017, 10:32:16 AM »
Hello again,

It has been over a year again since I have posted.  The last two years I have been focused on getting rid of debt, maxing 401k, and setting goals.  Now that I am a couple years into moving towards FI, I was hoping to get some advice on how to bridge the gap  between when I retire, and when I have access to 401k, Roth, etc.

Here is a quick breakdown:
Cash: $4k (usually stays around $1.5k.  Haven't made additional payment to principal on home loan yet this month)
Safety: $7.1k

401k (combined with spouse): $149.6k
Roth (combined with spouse): $47.7k
HSA (combined with spouse): $6k
- Max 401k and Roth each year, will max HSA this year
Vanguard Brokerage (100% VTSAX): $67k

Overall net worth (not including house): $280k.
- Stretch goal this year is $450k
Jan 2016 beginning net worth: $120k
Jan 2015 beginning net worth: $70k
House: $255k left.  Been making an extra payment to principal each month for last 5 months. 

Last year spouse and I made close to $270 together.  Don't expect to be quite that high this year.

Expenses are around $80k/year now including house payments.  I am assuming they will stay the same in retirement, regardless of a paid off house, because of kid(s)/travel/etc.  We are shooting to retire in 2026 with $2M.

One of my strategies to retire early is to have a paid off house.  Where we live is small, but hope to be here for at least 8+ more years.  If I continue to make double payments, it will be paid off by FI date. 

I have done some research but wanted to get your general thoughts on how to bridge the gap between FI date and the age I can pull from 401k/Roth.  Is it dangerous to continue investing only in VTSAX right now?  Should I diversify somehow in another investment bucket?

I appreciate the help!

Rh1234

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Re: Advice for Complete Newbie
« Reply #17 on: February 04, 2017, 11:07:12 AM »
Thank you very much for the reply, great info.  If spouse and I are already maxing 401k and Roth (this year through backdoor), does this apply to us?

I expect our income growth prospects to stay (hopefully) relatively close to where they are now over the next 10 years.  When we have a kid, the spouse will more than likely either not be working for the first few years, or working a bit from home if current company will allow it.

MDM

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