Author Topic: Investment options, seeking flexibility  (Read 2750 times)

matimeo

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Investment options, seeking flexibility
« on: May 08, 2014, 01:13:47 PM »
Here's my scenario:
Age 33, income is $80K.  Wife and lots of kids at home, so expenses are up there.  However I have always been a bit of a mustachian and have a bit of a jump on things.

Roth 401k is at about $90K- employer matches up to 4% if I put in at least 5%
Vanguard Mutual funds = 16K
House has 13.5 years left at 2.75% (yeah baby, refinanced at just the right time to a 15 year!) Balance is about 185k, home is worth about 280k.
Only other debt is $415 a month towards a car loan (of the most un-mustacian mistakes I ever made) with 2.5 years left at 0% (that was nice)

I just recently lowered my 401k contribution from 15% to 5%, so I'm still getting the match, but I can invest the rest of the money in more flexible assets (mostly my Vanguard Index fund).  My target FI date is age 50, and the earliest I could get at the 401k is age 59.5 (or 55 if I quit my job, but the details are hazy), so I'd like to have some of that money more available- thus my reasoning for changing the contributions.  The advantage to the 401k is tax free growth of course, but I'm still pumping in the equivalent of 9%. 

I also have an employer sponsored pension that should give me a couple thousand bucks a month when I reach age 65, assuming ER at 50.

Is changing my contributions a good idea or dumb? 

I'm unsure of whether I might want to invest in a rental property as well once I save enough to put a considerable down payment down from my Vanguard funds.  As non-rational as it may sound, I also fantasize about having the cash on hand in 5-7 years to completely knock out my mortgage.  I just love the idea of having no payment.  In reality I don't think I'd do that, but paying off my house has always been my biggest fantasy.

I know there are ways to try to get at 401k money earlier, but I'm not really interested in trying to work the system.

Would you get back to investing more in the 401k or keep it flexible in the case of earlier FI?

matchewed

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Re: Investment options, seeking flexibility
« Reply #1 on: May 08, 2014, 01:25:41 PM »
Dumb :)

http://www.madfientist.com/retire-even-earlier/

Tax deferred investment vehicles speed up time to FIRE.

Your 401k may be limited by the 59.5 in order to access but it doesn't have to be. You could roll it over to an IRA then start converting annual expense money into a Roth IRA which would have to "season" for five years and voila you now have your money which you couldn't touch until 59.5.

Also - http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/

Also - http://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/  (Thanks Nords)

I know you mentioned that you don't want to "work the system." I don't know what you mean by that as even utilizing IRAs and 401ks is the same working the system as using the roth pipeline outlined in the ktces.com blog.

I think you need to come up with a game plan and follow it. My standard advice - Investment Policy Statement, Asset Allocation which makes you comfortable (high or low), run your scenario, run it again with different assumptions, challenge those assumptions and run it some more with nightmare scenarios. Invest knowing your plan can survive a large percentage of the shit that can go wrong.

And what do you mean by flexibility?

matimeo

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Re: Investment options, seeking flexibility
« Reply #2 on: May 08, 2014, 01:31:45 PM »
Flexibility means being able to pay off my house in my 30's if I wanted or being able to diversify by investing in real estate (rentals). 

Frankies Girl

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Re: Investment options, seeking flexibility
« Reply #3 on: May 08, 2014, 01:36:50 PM »
You can access retirement accounts (401k/IRAs) well before 59/55. There are at least two methods I know of - Roth Pipeline and SEPP/72t. There have been numerous threads on how these both work. As such, you dropping your 401k contributions down means that you're not taking advantage of the pre-tax benefits that reduce your taxable income and the ability to put much more into your 401k than you could vs a Roth IRA (17,500 vs 5,500)... so if I was you, I'd think on that part a bit more. It's not that complicated and it's not "gaming the system" since it is allowable and legal to do so, and you could be losing a substantial benefit, so I would run the numbers before arbitrarily deciding that it's not worth it.

http://www.madfientist.com/traditional-ira-vs-roth-ira/
^Good synopsis on how the Roth pipeline works

You can invest in actual real estate (as a landlord if that appeals) or by adding in some REIT funds to your portfolio. I personally have zero interest in dealing with rental properties, so I love the REIT route.

And the debate over paying off a house or investing money is pretty much personal to your point of view. With under 13 years and that low of an interest rate, logically it would make more sense to hit your investments since you'd most likely earn more than 2.75% in the markets over that same period of time, but the satisfaction of owning your house outright in ER can't be measured in "logical" increments. But with your target retirement date pretty far off, it wouldn't make sense to me personally to pay off the house earlier since you won't be retired yet if you stick to the regular payments. If you paid off the house first and then started hitting your retirement accounts hard, you'd have lost out on all that time that would create the beautiful compounding effect, and you can't make up lost time on compounding investments and growth. 

But you're doing pretty well considering you say you're only 33 and supporting a large family. But you do say that your expenses are "up there" so that would be another aspect to scrutinize - since your spending rate is as important (if not more) than your savings rate for ER.  ;)




matchewed

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Re: Investment options, seeking flexibility
« Reply #4 on: May 08, 2014, 01:44:41 PM »
Flexibility means being able to pay off my house in my 30's if I wanted or being able to diversify by investing in real estate (rentals). 

Well Real Estate and Landlording is -----> that away :)

Seriously though if you're looking to put some money down on a house to rent it out you need cold hard cash that isn't going to be afflicted by the volatility in the stock market. Ask yourself how you'd feel if you were just about to pull the trigger and all that money you saved just dropped 10%-40%? If you truly want to get into landlording I'm more serious about poking your head into that area of the forum. I generally would not advise people putting money for short term goals into the stock market.

ZiziPB

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Re: Investment options, seeking flexibility
« Reply #5 on: May 08, 2014, 01:46:32 PM »
Quote
Roth 401k is at about $90K

Is all of your 401k Roth?  In that case you can probably convert it into a Roth IRA when you retire (without a pipeline that others mentioned) and the 59 1/2 rule would not apply.  I am not sure that is true but you should definitely check into it.

matimeo

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Re: Investment options, seeking flexibility
« Reply #6 on: May 08, 2014, 01:59:38 PM »
So I ran some numbers...

My 90K in Roth 401k and assuming I keep paying in 5% (plus 4% match) for the next 17 years (when I'll be 50).  Assuming I never get a raise and that amount will increase, which it will, then at age 50 I'm sitting on roughly $420k.  If I use my 401k as old man money as MMM did, then at age 60 (with no further contributions for the last 10 years), I'm looking at close to $700k (this all assumes a 5% rate of return).  This combined with my pension and any other investment or rental income, at that age, should be plenty to live on I would think. 

So I guess in part my rationale behind pulling back on 401k contributions was to let it be my "old man money" and start building up something to carry me from 50 to 60/65.

Am I still doing something dumb or does this make sense?
« Last Edit: May 08, 2014, 02:07:19 PM by matimeo »

matimeo

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Re: Investment options, seeking flexibility
« Reply #7 on: May 08, 2014, 02:06:16 PM »
But you're doing pretty well considering you say you're only 33 and supporting a large family. But you do say that your expenses are "up there" so that would be another aspect to scrutinize - since your spending rate is as important (if not more) than your savings rate for ER.  ;)

:) Well, since we're a family of seven, I don't know a way around things costing a lot.  But, we're pretty cut back on spending.  No TV, no vacations except for camping and family visits which are mostly free minus gas and misc., never go out to eat, bought an old house and have done all of the needed repairs/upgrades myself, etc.  We could probably trim back a thing or two, but pretty much splitting hairs at that point.  Once I get my minivan off and my last two kids out of diapers, I'll have some more cash to throw at investing and then maybe I can really start to build my stash.  For now I do what I can and enjoy every day with my beautiful family. 

matchewed

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Re: Investment options, seeking flexibility
« Reply #8 on: May 08, 2014, 02:43:20 PM »
So I ran some numbers...

My 90K in Roth 401k and assuming I keep paying in 5% (plus 4% match) for the next 17 years (when I'll be 50).  Assuming I never get a raise and that amount will increase, which it will, then at age 50 I'm sitting on roughly $420k.  If I use my 401k as old man money as MMM did, then at age 60 (with no further contributions for the last 10 years), I'm looking at close to $700k (this all assumes a 5% rate of return).  This combined with my pension and any other investment or rental income, at that age, should be plenty to live on I would think. 

So I guess in part my rationale behind pulling back on 401k contributions was to let it be my "old man money" and start building up something to carry me from 50 to 60/65.

Am I still doing something dumb or does this make sense?

There are a million ways to skin the cat on this one. It all depends on your goals and your particular assets and the various investment vehicles available to you. It's why I encourage the Investment policy statement.

Could you rephrase your scenarios and include some specifics? I'm a little confused as you seem to have bunched two different scenarios into one paragraph and I'm not sure what the strategies are for each one.

Try something like this.

Scenario 1 -

Assumptions:
5% Return
Invest X% into 401k for Y number of years for an ending amount of Z dollars.
Invest A%(or dollars) into IRA or Roth IRA or taxable for B number of years for an ending amount of C dollars...etc.

Also do you know what your number is? That is do you know how much you need for retirement? If not then just thumbing it with lots of "should be enough" is probably a bad idea. Because the answer will always be "maybe?".

I'd start with the goal then build the plan to get you there.