Author Topic: I would like advice from any Mustachian regarding Vanguard  (Read 6294 times)

MustacheCash

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I would like advice from any Mustachian regarding Vanguard
« on: June 12, 2014, 01:06:00 PM »
First of all, thank you to all of the Mustachians on this forum because you have already helped me tremendously.  Secondly, I will keep this short, but we are opening up two Vanguard accounts (investment and retirement) and would like some advice from any of the many smart people on here.

I have a two-part question, but first here are the details:

My wife and I file jointly
We gross ~80k annually, both are age 30, and have two young children
Only debt is mortgage
We want to retire in approximately 15-20 years
We have no other investments other than my (non-maxed out) 401k with about $70k, but invest enough to get the match and my wife has a 403(b) (no match) with about $10k in it

For the investment account, I like index funds, but we only have around $3k so would the VTSMX be the best fit for us (jlcollins recommends 100%) until we have enough for VTSAX?  Are there dividends from the VTSMX fund?

As for the retirement account, my wife is a teacher with a 403(b) with no match, but will be transferring all of it (about $10k) from that into a Vanguard fund.  I am little confused because some people on here say taxable account until retirement, but others say Roth IRA before a taxable account.  I am not sure what the minimum is, but I am thinking my wife should do a Vanguard Roth IRA (Target Retirement 2035 fund) and would love to get an opinion on this.

Any help at all would be much appreciated!  Thanks!

kyleaaa

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #1 on: June 12, 2014, 01:12:58 PM »
1.) Yes, and yes. They are identical funds with the exception of the expense ratio.
2.) Definitely Roth IRA before a taxable account, no question. And that fund is an excellent choice.

ivyhedge

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #2 on: June 12, 2014, 01:25:48 PM »
@OP: building on kyleaaa's contribution: Generally a good path is 1) max 401s/403s; 2) max roths; and, 3) taxable equity or ibonds. Certain tax brackets make the order different for some folks, but those are the big considerations that should be on your radar, especially in your earnings category. ;)

jamaicaspanish

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #3 on: June 12, 2014, 03:27:05 PM »
re:  your wife is a teacher.
is she eligible to "buy" years toward her pension?
I was able to tax-shelter into my 403b every year and then roll that money over into the state's retirement plan without penalty.  Buying years of my life seemed like an excellent investment.
It's worth at least asking about.

MustacheCash

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #4 on: June 12, 2014, 09:10:38 PM »
Thank you for the replies!

@kyleaaa:  Thank you for your input.  I have lost many hours of sleep trying to figure out what would be the best fund(s).  I am not very proficient at this (yet), but I am trying to learn as I go so I am glad a Mustachian gives a vote of confidence!

@ivyhedge:  You may have flipped my thinking a little.  So, are you suggesting we should forgo the Roth IRA altogether and keep the 403(b)?  Utilize both?  As you can see, our earnings category is the 25% bracket.  We do not anticipate jumping to the next bracket anytime soon as we both love what we do, but I suppose it is not out of the question.

@jamaicaspanish:  Wow, I have never even heard of this and did not even know it was an option anywhere.  The state is Indiana if it matters, but we will definitely be looking into this for sure.  Thanks!

FrugalSpendthrift

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #5 on: June 12, 2014, 09:37:23 PM »
@ivyhedge:  You may have flipped my thinking a little.  So, are you suggesting we should forgo the Roth IRA altogether and keep the 403(b)?  Utilize both?  As you can see, our earnings category is the 25% bracket.  We do not anticipate jumping to the next bracket anytime soon as we both love what we do, but I suppose it is not out of the question.
You don't forgo the Roth, you just max out the 401k/403b first, because of the immediate tax deduction.  If you have more money to save beyond that, then you find the Roth IRA.

milesdividendmd

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #6 on: June 12, 2014, 09:57:46 PM »
Don't forget VTI.  Expense ratio 0.05, no cost to trade through vanguard, and for a buy and hold investor there is no advantage or disadvantage to holding an ETF vs a mutual fund.

I agree that you should shelter every single dollar you legally can prior to investing in a taxable account.

And if you are planning on retiring early you may consider investing in an IRA instead of a Roth as long as you can deduct the contributions.  (I am not sure if you are subject to the phase out at your income level.)  The reason is that you can convert your IRA to a roth Tax free when your income drops in retirement.

See here,

http://www.gocurrycracker.com/never-pay-taxes-again/

Enjoy,

Alexi

MustacheCash

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #7 on: June 16, 2014, 10:18:58 AM »
@FrugalSpendthrift:  Thank you for clearing that up!  So, what about if neither of us can max out our 401/403 to $17,500 each year?  Would it still be advantageous to follow funding 401/403 first (even with my wife not getting any match with her 403), then Roth IRA, then taxable?  As posted earlier, we do not anticipate changing from the 25% bracket anytime soon.  Also, another option we are thinking about is a Vanguard 529 so where would this fall on the path you mentioned?

@milesdividendmd:  Thanks!  I have actually seen this option on a few posts in the past (possibly from you), but quite honestly, I am just not familiar with ETFs and I try to only invest in things I know.  My ignorance of this should not be a barrier for investing, but I will look into this more so thank you for mentioning it.

FrugalSpendthrift

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #8 on: June 16, 2014, 11:30:55 AM »
@FrugalSpendthrift:  Thank you for clearing that up!  So, what about if neither of us can max out our 401/403 to $17,500 each year?  Would it still be advantageous to follow funding 401/403 first (even with my wife not getting any match with her 403), then Roth IRA, then taxable?  As posted earlier, we do not anticipate changing from the 25% bracket anytime soon.  Also, another option we are thinking about is a Vanguard 529 so where would this fall on the path you mentioned?
Funding the 401k, then ROTH IRA, then taxable account is just a strategy to minimize taxes, which is more effective while you are in the higher income tax brackets.  In a lower tax bracket, the ROTH becomes more valuable.  There isn't any correct place to slot the 529 plan in there, because that is a balance between saving for your retirement vs. saving for your children's education.  You just have to do what feels right for you, just make sure you take care of yourself first.

Even though the 403b doesn't have a match, you still get the tax deferral benefit.  If you can't max both the 401k and 403b, then you might want to compare the investment choices that each plan provides.  If the 403b has better choices (lower fees), then you might want to put just enough into the 401k to get the match, and then as much as you can into the 403b.  The choice between a ROTH and a traditional deferred account is much clearer when you are in a really low tax bracket or a really high tax bracket.  For your situation it is a little fuzzy.  Ideally you would defer taxes in the 25% bracket, and build up enough of a stash, that can fill in the lower tax brackets in retirement, so you may only pay 10% or 15% when you withdraw it.  If your traditional accounts are on track to do that, then the ROTH becomes more valuable.

rmendpara

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #9 on: June 16, 2014, 12:47:25 PM »
First of all, thank you to all of the Mustachians on this forum because you have already helped me tremendously.  Secondly, I will keep this short, but we are opening up two Vanguard accounts (investment and retirement) and would like some advice from any of the many smart people on here.

I have a two-part question, but first here are the details:

My wife and I file jointly
We gross ~80k annually, both are age 30, and have two young children
Only debt is mortgage
We want to retire in approximately 15-20 years
We have no other investments other than my (non-maxed out) 401k with about $70k, but invest enough to get the match and my wife has a 403(b) (no match) with about $10k in it

For the investment account, I like index funds, but we only have around $3k so would the VTSMX be the best fit for us (jlcollins recommends 100%) until we have enough for VTSAX?  Are there dividends from the VTSMX fund?

As for the retirement account, my wife is a teacher with a 403(b) with no match, but will be transferring all of it (about $10k) from that into a Vanguard fund.  I am little confused because some people on here say taxable account until retirement, but others say Roth IRA before a taxable account.  I am not sure what the minimum is, but I am thinking my wife should do a Vanguard Roth IRA (Target Retirement 2035 fund) and would love to get an opinion on this.

Any help at all would be much appreciated!  Thanks!

If you want to retire early, you'll have to use money that's not in retirement accounts to get by until age 59-ish when you can start accessing the various IRAs. You can withdraw the principal from a Roth penalty free at any time, but this sort of defeats the purpose of a Roth as it is no longer growing.

You will need to invest heavily in your retirement accounts, but also in a taxable account (to use before reaching retirement age), or rental property, or a part time job, or some combo of all those.

I'd spread my eggs between Roth, 401k, and taxable accounts.

MustacheCash

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #10 on: June 17, 2014, 11:23:23 AM »
@FrugalSpendthrift: Really great post and thank you for explaining.  Now, because of our situation, I am thinking our plan will be this:  contribute to 403 at 6% (wife) and contribute to 401k to match + 4% (me), then max out Roth IRA, then back to the 401/403 as much as possible, then VTSMX.  Vanguard 529 be damned (for now).

@rmendpara:  It is a good point to bring up because it had not been addressed yet and I failed to mention it in my original post.  I have a part-time job teaching music every week and I plan to start with rental property as soon as possible.  Thanks for the reply!

Philociraptor

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #11 on: June 17, 2014, 01:12:45 PM »
Why Roth IRA? $80k puts y'all into the 25% bracket, wouldn't a traditional, deductible IRA be a better choice? Odds are unlikely that you will be in the 25% bracket come retirement.

MustacheCash

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #12 on: June 17, 2014, 02:22:11 PM »
Why Roth IRA? $80k puts y'all into the 25% bracket, wouldn't a traditional, deductible IRA be a better choice? Odds are unlikely that you will be in the 25% bracket come retirement.

If I am understanding this correctly, all of it will be taxable upon withdrawal which would be be after age 59.5.  While I will most likely be in a lower bracket at this point, I will retire well under age 59.5, but would need to cover my expenses until then.

Philociraptor

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #13 on: June 17, 2014, 02:26:56 PM »
Why Roth IRA? $80k puts y'all into the 25% bracket, wouldn't a traditional, deductible IRA be a better choice? Odds are unlikely that you will be in the 25% bracket come retirement.

If I am understanding this correctly, all of it will be taxable upon withdrawal which would be be after age 59.5.  While I will most likely be in a lower bracket at this point, I will retire well under age 59.5, but would need to cover my expenses until then.

When you "retire" before 59.5 and don't have a large income, you can convert portions of your traditional IRA to Roth (taxing them at a lower rate).  After 5 years they can be withdrawn tax-free from the Roth.

MustacheCash

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #14 on: June 17, 2014, 02:41:57 PM »
Why Roth IRA? $80k puts y'all into the 25% bracket, wouldn't a traditional, deductible IRA be a better choice? Odds are unlikely that you will be in the 25% bracket come retirement.

If I am understanding this correctly, all of it will be taxable upon withdrawal which would be be after age 59.5.  While I will most likely be in a lower bracket at this point, I will retire well under age 59.5, but would need to cover my expenses until then.

When you "retire" before 59.5 and don't have a large income, you can convert portions of your traditional IRA to Roth (taxing them at a lower rate).  After 5 years they can be withdrawn tax-free from the Roth.

Oh, right.  You and milesdividendmd, who posted the link, have a great point.  I am really going to look into this and crunch some numbers.  Thank you so much for your reply.

Philociraptor

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #15 on: June 17, 2014, 02:55:50 PM »
Sounds good.  For 2014, filing as married, you enter the 25% bracket at $73,800. The deduction phase-out begins at $96k, with no deduction at $116k. Definitely crunch the numbers, as with a few minor deduections your AGI might be below $73,800, keeping you out of the 25% bracket and making the Roth your vehicle of choice. Cheers!

wtjbatman

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #16 on: June 17, 2014, 03:03:14 PM »
There are two ways to withdraw money early from tax advantaged accounts. The first is a roth pipeline. The second is a 72(t), or SEPP. Don't let that 59 1/2 age limit prevent you from investing in tax advantaged accounts that will reduce your taxable income now.

LostInTheWoods

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #17 on: June 18, 2014, 12:37:23 PM »
Focus on fees. Lower fees higher returns

MustacheCash

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Re: I would like advice from any Mustachian regarding Vanguard
« Reply #18 on: June 18, 2014, 01:00:59 PM »
@LostInTheWoods:  I am not sure what the general consensus is, but I try to do everything at or below an expense ratio of .50%, but I occasionally bend it a little if I like the fund.