Author Topic: Newbie Mustachian evaluating options  (Read 5296 times)

MoustacheKnittah

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Newbie Mustachian evaluating options
« on: April 03, 2015, 10:56:19 AM »
Hello Mustachians,

Hopefully you can help me wander into the murky waters of investing in a confident fashion. I'm in my early 30's, but have been trying to fight lifestyle inflation as I transitioned from grad school into an actual job. I feel a bit behind the savings curve compared to my friends in the tech sector who have been working "real" jobs since their early 30's and saving pretty aggressively. (I know they also spend pretty aggressively.) Although I feel behind the curve, I know I'm actually doing ok since I just hit $100k net worth (Roth+403(b)+car+liquid savings, according to Mint). Huzzah!

I don't really know how much I "save" right now, as my money gets broken up into a convoluted set of "piggy bank" savings accounts that get spent occasionally. (Vacation fund, electronics/major purchase fund, charitable donation fund, general savings) My boyfriend and I have an incredibly cheap mortgage, and we have done some pretty significant improvements to the house over the years. I did buy a new (financed) car a few years ago, but I am currently paying that down in an aggressive fashion. (I plan to drive it forever, and hope to pay cash for my next car.) Other than ~$5k on my car loan I have no other debt, and bf has the house (maybe ~$50k principal on that).
 
Current investments:
I work at a university and thus have a mandatory TIAA-CREF 403(b) contribution that I cannot change.
I max out my Roth IRA contribution with Vanguard.

For additional investments, I am considering:
Supplemental annuity through TIAA-CREF (assuming I cannot touch this until "normal" retirement age of ~60)
Index fund purchases through Vanguard (I assume this would be more "liquid")

For additional income/income savings, I am considering:
Food budget/limiting eating out (we are terrible)
Making sure I sock away windfalls in a more judicious fashion (I have a few small side jobs that pay ~1-2k annually)
Considering keeping our current house as a rental property if we move, as it is very close to the university and would probably yield significant rent

So, where should I put extra money (rather than just "savings" at CapitalOne 360) and should I end my piggy bank approach to budgeting (and just put most of that money towards my Mustachian future)?

ThatGuy701

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Re: Newbie Mustachian evaluating options
« Reply #1 on: April 03, 2015, 11:28:20 AM »
Make sure to check with your university that they don't offer a separate retirement plan in which you can contribute more. They may also offer a 457 plan to which you could contribute too. Most universities have a set plan in which you are forced to put in a certain amount but then offer other plans as well. 

Depending on what your income level is you can contribute to an IRA and get tax reductions from that, however, if you are over the income limit you will not get a tax reduction but your money will still grow tax free.

I would suggest not buying an annuity. Do some more research on annuities and you will find out why.

If you find our you aren't able to put more money into your current employers plan and are currently maxing out your IRA you can start investing in taxable account or start saving up to buy a rental property.

I would take out your car out of your net worth equation. Your car would only reduce your net worth if you still owe money on it. It would only add to your net worth if you plan on selling it.

As far as saving more, start tracking your spending for a few months to identify where most of your money is going. Once you have identified where it is going to will easily see where you can trim some of the excess.

Good Luck!

MoustacheKnittah

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Re: Newbie Mustachian evaluating options
« Reply #2 on: April 03, 2015, 11:32:34 AM »
Can I have a traditional IRA in addition to a Roth?

velocistar237

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Re: Newbie Mustachian evaluating options
« Reply #3 on: April 03, 2015, 11:36:41 AM »
Here's me for example: My employer takes a pre-tax amount and puts it in the 401k. I plan to put in the max for a Traditional IRA each year, to get the tax deduction (I didn't actually realize I could do this until this year). I don't really use my Roth IRA right now, but it's good to have for rollovers later. At the end of each month, I take all the money in my checking account above a certain amount and transfer the remainder to my Vanguard taxable account. I make sure my investments across accounts complement each other and meet the overall asset allocation I've decided to follow. I keep all the investments that have complicated taxes out of my taxable account.

So, I recommend this:

Index fund purchases through Vanguard (I assume this would be more "liquid")

or do the same thing but with ETFs instead of funds. Vanguard just consolidated their fund and brokerage accounts, so just open up an account, handle the banking details, and buy whatever ETFs you want. I don't really understand annuities. To me, it's something you buy later if you want to reduce the risk of going broke.

I've found the Boglehead wiki to be pretty good about investment basics.

... should I end my piggy bank approach to budgeting (and just put most of that money towards my Mustachian future)?

In terms of budgeting, I use Mint to track my spending and saving, and that's enough for me usually. Occasionally, I'll review my spending against an old budget I posted to my journal, and that's helpful.

In terms of how much you want to save, it's a trade-off between buying other stuff vs. buying your freedom to not work, and you have to decide that balance for yourself.

velocistar237

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Re: Newbie Mustachian evaluating options
« Reply #4 on: April 03, 2015, 11:38:06 AM »
Can I have a traditional IRA in addition to a Roth?

Yes, you can have both kinds of accounts, but the combined contribution is limited. You have to choose where to put the dollars each year.

Frizhand

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Re: Newbie Mustachian evaluating options
« Reply #5 on: April 03, 2015, 11:40:53 AM »
Some people will argue you can make a higher return on your investments than you are paying in interest on your debt. Therefore, investing first is a good idea (i.e., if you make 7% in the stock market and are paying 3% on your mortgage, you are 4% ahead). This is a personal choice. I prefer to live debt free since there are no guarantees in the stock market but you will have to pay your debts...but again, that's my opinion.

So, if I were you, I'd pay that off the car loan asap since you don't owe much on that.  And if you're paying more than 4% I'd pay that off before putting more money into an IRA!

Are you (or your school) maxing out the 403B?  I'd max out contributions to all tax-advantaged accounts (403B and IRAs), pay off the car loan as fast as you can and then open a Vanguard account for the rest. I wouldn't go the annuity route; too expensive.

Also, open a Mint (or similar) account to track your spending and make a budget. If you have no debt and track your spending you won't need multiple piggy banks!

MoustacheKnittah

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Re: Newbie Mustachian evaluating options
« Reply #6 on: April 03, 2015, 11:51:55 AM »
Maxing out 403(b) - Yeah. The university has a defined contribution and a defined match for everyone. I can't change this up or down.

IRAs - I see, so I just have $5500 I can put, TOTAL, into IRAs whether they be Roth or traditional.

Vanguard ETF - Yeah I was just looking at their website today, seems pretty seamless now to have multiple accts under the same login. Whether it be ETF or index, I haven't done much reading on this since I am new to the Mustachian philosophy :)

Car - My car loan is pretty low interest. 1.9% or something like that. I did a bunch of math a while back when I upped my payment and paying it off 6 months sooner only ended up saving me like $50. I'm paying it off more aggressively than I need to (I think $130 over my minimum payment), but I don't think it's necessary to shovel all of my money into it. Right now it will be paid off in about a year. I think my current payment is like $450/mo with the extra. When I'm done, I will take part of that (maybe $150-200/mo) and put it in a new piggy bank that is "long term major maintenance/new car." I have 7 years extended warranty, so assuming I keep the car 10+ years and don't have huge repair expenditures, I'd be able to pay cash for whatever new/used thing I buy when I'm done with this. Or we'll all just Uber everywhere in 15 years, who knows. The rest I will probably put towards ETF or whatever other savings.

Mostly I am skeeered about paying capital gains since all of my investments thus far have not had any tax burden. I will just have to put on my big girl pants and deal.

MoustacheKnittah

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Re: Newbie Mustachian evaluating options
« Reply #7 on: April 03, 2015, 11:55:24 AM »
Just checked TIAA-CREF, doesn't seem like there are any other products offered by my university other than this SRA /Supplemental Retirement Annuity. Of course, TIAA-CREF will sell me a gorillian dollars of life insurance (my university plan is already pretty generous), and then they have IRA/mutual funds/other financial products you can get from any brokerage place. So I think just doing 403(b) through the university and then doing my own thing through Vanguard is the way to go.

seattlecyclone

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Re: Newbie Mustachian evaluating options
« Reply #8 on: April 03, 2015, 11:58:15 AM »
For additional investments, I am considering:
Supplemental annuity through TIAA-CREF (assuming I cannot touch this until "normal" retirement age of ~60)

Is this an actual annuity, or a 403(b) account with mutual fund options? The terminology here is kind of confusing because I believe 403(b) plans used to be limited to annuities, and they still are often referred to as "tax-sheltered annuity" plans in official documentation.

My advice: if it's a real annuity, skip it. If it's mutual funds, find the lowest-fee funds you can and max out your contributions.

As to your idea that "you cannot touch this until 60," this is incorrect. Contribute pre-tax now to retire even earlier. See my blog post on the matter for more info: https://seattlecyclone.com/accessing-your-retirement-accounts-early-yes-you-can/

As someone else mentioned, you should also look into whether your university has a 457 plan available. These plans are great for early retirees because the contributions are made pre-tax just like a traditional IRA or 403(b), but the difference is that you can take the money out at any age (after you leave your job) and pay no early withdrawal penalty.

If you max out whatever 403(b) and 457 mutual funds options you might have, then you can open up a taxable account at Vanguard and invest any extra money there. Do the pre-tax saving first though.

Quote
So, where should I put extra money (rather than just "savings" at CapitalOne 360) and should I end my piggy bank approach to budgeting (and just put most of that money towards my Mustachian future)?

I personally view the "piggy bank" or "envelope" system to be good for people who are just getting started controlling their finances. They help you stop yourself from acting on every temptation you might have, forcing yourself to spend only a certain amount per month on categories of purchases that you want to cut back on. A more advanced approach is to stop wanting so much in the first place. When there is something you decide to buy, you can feel free to buy it out of your single pot of general-purpose cash. You'll have to evaluate where you are on that spectrum to make a decision that works for you at this time.

DrF

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Re: Newbie Mustachian evaluating options
« Reply #9 on: April 03, 2015, 12:01:49 PM »
Just checked TIAA-CREF, doesn't seem like there are any other products offered by my university other than this SRA /Supplemental Retirement Annuity. Of course, TIAA-CREF will sell me a gorillian dollars of life insurance (my university plan is already pretty generous), and then they have IRA/mutual funds/other financial products you can get from any brokerage place. So I think just doing 403(b) through the university and then doing my own thing through Vanguard is the way to go.

This doesn't make any sense. Universities usually do a "mandatory" plan, that you have to contribute to no matter what. They take it out of your paycheck and it is the same percent for all faculty.

Then you should have additional options like a 457 or other. Please call your HR/benefits person. You should be able to save $18k pre-tax in an additional account, such as a 457 (in addition to your "mandatory" 403b).

MoustacheKnittah

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Re: Newbie Mustachian evaluating options
« Reply #10 on: April 03, 2015, 12:09:55 PM »
Quote
Then you should have additional options like a 457 or other. Please call your HR/benefits person. You should be able to save $18k pre-tax in an additional account, such as a 457 (in addition to your "mandatory" 403b).

Yeah, this kind of sounds like what is offered, but they call it a "supplemental retirement annuity" and not a 457 - more like a mutual fund with a max contribution ($17.5k) and no employer match. Money goes in pre-tax, you pay taxes when you withdraw. https://www.tiaa-cref.org/public/products-services/retirement/employer-sponsored/supplemental

My 403(b) contribution is mandatory and a fixed % of my salary, yes.

Quote
I personally view the "piggy bank" or "envelope" system to be good for people who are just getting started controlling their finances. They help you stop yourself from acting on every temptation you might have, forcing yourself to spend only a certain amount per month on categories of purchases that you want to cut back on.

Yeah, I agree. I started this approach when I first started reading PF blogs probably 5-6 years ago and I was still a grad student and paying off some CC debt and student loans. I haven't really shifted this approach. Especially as I've been making a decent salary for a few years, I can buy most things I want and I am finding I just don't need to buy things that often anymore. Hence I am trying to make my money work harder so I don't feel as tempted to be like, "hey I have $2000 sitting in that 'major electronics purchase' piggy bank, time for a new laptop that I don't really need." Etc. We're already pretty frugal, but I want to start making my money work harder if it's just sitting there.

rpr

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Re: Newbie Mustachian evaluating options
« Reply #11 on: April 03, 2015, 12:11:40 PM »

Just checked TIAA-CREF, doesn't seem like there are any other products offered by my university other than this SRA /Supplemental Retirement Annuity. Of course, TIAA-CREF will sell me a gorillian dollars of life insurance (my university plan is already pretty generous), and then they have IRA/mutual funds/other financial products you can get from any brokerage place. So I think just doing 403(b) through the university and then doing my own thing through Vanguard is the way to go.
My plan is also called a Supplemental Retirement Annuity and from TIAA-CREF but in reality it is a 403b plan from TIAA-CREF which contains various options such as mutual funds and various annuities which are in fact mutual funds as well. TIAA-CREF has a couple of great options including the TIAA Traditional Annuity and the TIAA Real Estate Annuity. I can contribute up to $18k which is the limit per year. In addition, my employer contributions go into a separate account. Check to see how it works for you. I find that some of the HR and benefits people are not as well informed as to how the plan works. Download and read the plan documents yourself.


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MoustacheKnittah

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Re: Newbie Mustachian evaluating options
« Reply #12 on: April 03, 2015, 12:19:19 PM »
So, I have another question now. Based on this page below, it seems like the total pre-tax contributions I can make in 2015 is $18k. They already make me contribute 5% of my salary, which let's say is $2500. Then there is employer match, which I don't think counts toward my total. Does that mean I can contribute an additional $15.5k to "whatever TIAA-CREF mutual fund" in the form of the "supplemental retirement annuity"/457 plan?

https://www.tiaa-cref.org/public/products-services/retirement/employer-sponsored/defined-contribution

DrF

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Re: Newbie Mustachian evaluating options
« Reply #13 on: April 03, 2015, 12:23:57 PM »

Yeah, this kind of sounds like what is offered, but they call it a "supplemental retirement annuity" and not a 457 - more like a mutual fund with a max contribution ($17.5k) and no employer match. Money goes in pre-tax, you pay taxes when you withdraw. https://www.tiaa-cref.org/public/products-services/retirement/employer-sponsored/supplemental

My 403(b) contribution is mandatory and a fixed % of my salary, yes.

If you have access to this, then this is what you should do. Set it up, then you don't have to think about what to do with the "extra" money in your paycheck every month. It'll already be working for you.

rpr

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Newbie Mustachian evaluating options
« Reply #14 on: April 03, 2015, 12:30:48 PM »
So, I have another question now. Based on this page below, it seems like the total pre-tax contributions I can make in 2015 is $18k. They already make me contribute 5% of my salary, which let's say is $2500. Then there is employer match, which I don't think counts toward my total. Does that mean I can contribute an additional $15.5k to "whatever TIAA-CREF mutual fund" in the form of the "supplemental retirement annuity"/457 plan?

https://www.tiaa-cref.org/public/products-services/retirement/employer-sponsored/defined-contribution
I would recommend calling up and checking directly both with your employer HR and/or TIAA -CREF in order to get details on how your specific plan is structured. Advice received from strangers on the Internet may or may not be applicable as each plan is set up differently. 

Edit: If you have a 457 plan, that is completely separate from the 403b and has its own separate limits.

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« Last Edit: April 03, 2015, 12:32:57 PM by rpr »

seattlecyclone

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Re: Newbie Mustachian evaluating options
« Reply #15 on: April 03, 2015, 12:35:19 PM »
So, I have another question now. Based on this page below, it seems like the total pre-tax contributions I can make in 2015 is $18k. They already make me contribute 5% of my salary, which let's say is $2500. Then there is employer match, which I don't think counts toward my total. Does that mean I can contribute an additional $15.5k to "whatever TIAA-CREF mutual fund" in the form of the "supplemental retirement annuity"/457 plan?

https://www.tiaa-cref.org/public/products-services/retirement/employer-sponsored/defined-contribution

All of your 403(b) accounts have a combined contribution limit of $18k. A 457 plan has a separate $18k contribution limit. You'll have to determine what type of plan your "supplemental retirement annuity" is, to determine how much you can actually contribute. If it's a 457 plan, you can contribute $18k. If it's a 403(b) plan, you can contribute ($18k - mandatory contribution).

sandandsun

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Re: Newbie Mustachian evaluating options
« Reply #16 on: April 03, 2015, 12:38:44 PM »
If your school has a 403 and a 457, you can max out both, 18k each, each year...  The match they give you will be in addition to that, and you can then max a Roth... I've done this for years...

MoustacheKnittah

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Re: Newbie Mustachian evaluating options
« Reply #17 on: April 03, 2015, 12:56:51 PM »
Quote
I would recommend calling up and checking directly both with your employer HR and/or TIAA -CREF in order to get details on how your specific plan is structured. Advice received from strangers on the Internet may or may not be applicable as each plan is set up differently. 

Edit: If you have a 457 plan, that is completely separate from the 403b and has its own separate limits.

Ha, yes, definitely. Was more looking on advice on which route to go, since this SRA thing sounded really weird initially. Much here has clarified the issue, although I will contact HR or TIAA-CREF to confirm if the SRA is part of the 403(b) or if it is a 457. Also making a lot more sense now on max out pre-tax investment opportunities first.

velocistar237

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Re: Newbie Mustachian evaluating options
« Reply #18 on: April 03, 2015, 12:58:50 PM »
Because your employer makes the first plan non-optional, they can still offer a 403b. This means that the $18K is in addition to the other plan, on top of the 5% you put into the other plan.

Are you sure that the A in SRA stands for annuity?

Talk to your plan administrator about what happens after you stop working. It could be that one the non-SRA plan (457?) has payout method restrictions. The best option would be to roll the whole thing over into a Traditional IRA and go from there, so it would be good to know whether that's possible.

MoustacheKnittah

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Re: Newbie Mustachian evaluating options
« Reply #19 on: April 03, 2015, 01:03:47 PM »
Are you sure that the A in SRA stands for annuity?

That's what they call it on my HR dept page, although TIAA-CREF just calls it "supplemental retirement plans"
https://www.tiaa-cref.org/public/products-services/retirement/employer-sponsored/supplemental

MoustacheKnittah

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Re: Newbie Mustachian evaluating options
« Reply #20 on: April 03, 2015, 01:11:34 PM »
Digging deeper into my university's HR, they are calling this an "elective 403(b)" and it looks like the max contribution is $18k, in addition to the 5% mandatory contribution (which also seems to be going to a 403(b), but whatever, I will call to sort this out). Still not finding any option for a 457 account. You can choose to do pre- or post- tax income and do a traditional or Roth 403(b).

velocistar237

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Re: Newbie Mustachian evaluating options
« Reply #21 on: April 03, 2015, 01:30:07 PM »
Sounds a lot like our setup. I do the non-elective plan and the traditional supplemental elective plan. Beyond that, a traditional IRA and a taxable account, both in Vanguard.

I don't think the non-elective plan is a 457, but I don't know what it is.

DrF

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Re: Newbie Mustachian evaluating options
« Reply #22 on: April 06, 2015, 07:46:50 AM »
Digging deeper into my university's HR, they are calling this an "elective 403(b)" and it looks like the max contribution is $18k, in addition to the 5% mandatory contribution (which also seems to be going to a 403(b), but whatever, I will call to sort this out). Still not finding any option for a 457 account. You can choose to do pre- or post- tax income and do a traditional or Roth 403(b).

I recommend doing the pre-tax option. Let that savings grow tax free.