Author Topic: Noob Question #2  (Read 13567 times)

Holmes

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Noob Question #2
« on: February 23, 2012, 02:45:57 PM »
Hey Guys,

I love this forum! I am learning so much. I have been reading and rereading the forums and MMM's articles and I can't seem to find the answer to this seemingly very simple question..... What account do you open and invest in in order to prepare for an early retirement? I have a pension and a 457 but these do not allow for early withdrawl and do not pay out dividends before a certain age.

If I open a Roth I cannot get the money until 60's. Can I open a seperate 401k if I already have a pension and will this pay out dividends?

Anyone else in this situation? What do all you pensioners do and how do you calculate early retirement!

Thanks guys, Holmes

p.s. I'm 32 and want to retire in 20 years! I'm gonna do it!

arebelspy

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Re: Noob Question #2
« Reply #1 on: February 23, 2012, 02:51:56 PM »
Well there are a number of other savings vehicles you can use, but I'll just correct the misconceptions in your post, and maybe you can just use those!

I have a pension and a 457 but these do not allow for early withdrawl and do not pay out dividends before a certain age?


Possibly false and false.

1) Regarding the pension, your company very well could have a lump sum option, so you take the whole thing instead of over time.

2) Second point regarding the pension, you can often take them early (at a penalty).  I'm planning on taking my pension at a reduced rate starting at 50 (even though I'm not eligible until 60), because mathematically it makes more sense to take it then, even if I don't need the money.

3) Regarding the 457, you CAN in fact take it out early without the 10% penalty - that's the beauty of 457s. When you sever employment (i.e. retire early), you can withdraw your 457.  You will be taxed (of course), but at the normal rate, same as you would if you took it after 60.  There is no early withdrawal penalty taking it then.

If I open a Roth I cannot get the money until 60's.

False.  You can't access the interest it's earned, but you can access the contributions.  So if you contribute 5k/yr for the next 20 years, you will have access to 100,000 you can use to help bridge the gap to the age when you can access the earnings penalty free.

Roth and 457 are both decent vehicles for early retirement savings.

Feel free to ask any followup questions and I'll try to answer (and I'm sure other Mustachians will chime in), but hopefully that clears up a few of the misconceptions you've picked up along the way.  :)
« Last Edit: February 23, 2012, 02:53:31 PM by arebelspy »
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Holmes

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Re: Noob Question #2
« Reply #2 on: February 23, 2012, 03:14:06 PM »
Wow! I have alot to learn. So if I have extra money after I max out the pension contribution and the 457, should I open a Roth IRA or open something else?

arebelspy

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Re: Noob Question #2
« Reply #3 on: February 23, 2012, 03:28:27 PM »
if I have extra money after I max out the pension contribution

Is your pension contribution variable, such that you can "max it out"?  Or is it a fixed amount you contribute, regardless?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Holmes

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Re: Noob Question #2
« Reply #4 on: February 23, 2012, 03:47:24 PM »
The pension is a fixed amount. I contribute about 25% to my 547.

arebelspy

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Re: Noob Question #2
« Reply #5 on: February 23, 2012, 06:51:38 PM »
Keeping in mind that I know nothing about the rest of your financial picture (mortgage, car loans, any other debt, income, etc.) or even how much that 25% into the 457 is, so this is a very guesswork-type answer, I'd say that starting a Roth now with extra funds to balance some investments as post tax (Roth) and pre tax (457) since tax rates in the future are hard to project.

In any case, saving extra money never HURT anyone.  ;)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Guitarist

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Re: Noob Question #2
« Reply #6 on: February 23, 2012, 10:05:25 PM »
Are you looking into opening a taxable account where you can pull the money out at any time?

Holmes

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Re: Noob Question #2
« Reply #7 on: February 24, 2012, 07:31:29 AM »
Ideally what I would like is an account where I could invest money in index funds in order to recieve passive income at a later date. This sounds like it would be a Roth IRA.

So my financial picture is this;

Renter
No Debt
Pension - Maxed
457 - Maxed

Extra Money - Roth IRA?

arebelspy

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Re: Noob Question #2
« Reply #8 on: February 24, 2012, 07:51:31 AM »
Pension - Maxed

Remember, your pension isn't "maxed" since it's a fixed amount you contribute.  You could just as easily say you contribute the minimum to it, and still be correct.


457 - Maxed

So you're contributing 17k/yr to your 457?  Yes, I would open a Roth with any extra (likely even before maxing out that 457), and then go to a regular taxable account after that.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

shedinator

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Re: Noob Question #2
« Reply #9 on: February 24, 2012, 08:05:34 AM »
Ideally what I would like is an account where I could invest money in index funds in order to recieve passive income at a later date. This sounds like it would be a Roth IRA.

So my financial picture is this;

Renter
No Debt
Pension - Maxed
457 - Maxed

Extra Money - Roth IRA?
Roth IRA is a good place to start, but the maximum contribution is $5,000 ($6,000 if you're over 50, which you're not). If you're maxing out Pension, 457, and Roth IRA, you should know what % that is of you're income.  You're hoping to be FI in 20 years, at which point you'll be 52, which is going to require about a 42% savings rate (http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/), so you'll probably want to set up an individual investment account with Vanguard and start putting the difference between 42% and your savings rate into indexes. Of course, you could up that to 50% and retire at 49, if you're interested...

Holmes

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Re: Noob Question #2
« Reply #10 on: February 24, 2012, 08:18:34 AM »
Awesome! Thanks for all the advice guys. I think that 42% is about all I can save now so I think I'll be just opening an IRA and putting the money there.

If I can get over 42%, what sort of individual investment account should I look into opening?

Ben

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Re: Noob Question #2
« Reply #11 on: February 24, 2012, 09:10:13 AM »
Probably something cheap and broadly indexed. If you want to keep it simple, Vanguard has a 40% bond Index/60% Total stock market index that will rebalance itself. If you want to get a little bit more complex, I would read 'the intelligent asset allocator' by William Bernstein (MMM posted a review recently) to get a better idea of how to spread your assets across a few different investment opportunities.

Holmes

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Re: Noob Question #2
« Reply #12 on: February 24, 2012, 09:24:09 AM »
What is the account though that I would purchase these funds through? (IRA, 401K)

arebelspy

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Re: Noob Question #2
« Reply #13 on: February 24, 2012, 09:26:46 AM »
What is the account though that I would purchase these funds through? (IRA, 401K)

Once you have the 457 and Roth, it would just be an individual investment account for the various Vanguard index funds, or a brokerage account for various individual stocks, bonds, etc.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Holmes

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Re: Noob Question #2
« Reply #14 on: February 24, 2012, 10:01:47 AM »
Cool! Just to make it super obvious - which one of these are you taking about .... https://personal.vanguard.com/us/whatweoffer

Mutual Funds, ETF, Stocks and Bonds ............ what account do I choose?

Holmes

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Re: Noob Question #2
« Reply #15 on: February 24, 2012, 10:16:27 AM »
oh wait would I open a brokerage account here .... https://personal.vanguard.com/us/whatweoffer/stocksbondscds

Matt K

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Re: Noob Question #2
« Reply #16 on: February 24, 2012, 10:52:09 AM »
I notice in your description you are a renter with no debt and you're definitely preparing for the long term investments.

My question to you is this: Is home ownership something you are interested in? There are plenty of perfectly good reasons to own a house, and plenty of good reasons to rent (so long as you are investing the difference between renting and owning - which you appear to be doing).

But here's my suggestion to complicate your planning - if home (house or condo) ownership is something you value, make sure you are saving/investing in a way that will allow you to acces the funds for a down payment. Chosing to pay off the house will reduce your passive income, but it will also lower your monthly expenses. By lowering the monthly expenses you can either bank more of your income, or it gives you the freedom to do different things without fear of "but I need to pay all these bills".

As I said, I don't know anything about your tax system, and it sounds like you can access your contributions from a Roth IRA.

It is amazing how quickly priorities change. I went from 'Happily renting, thinking about owning a house in 2 - 3 years' to owning a house in a few months.

Holmes

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Re: Noob Question #2
« Reply #17 on: February 24, 2012, 11:16:17 AM »
A house! No way! Ilive in an expensive urban environment. I love it but the one downside is the housing prices! My wife and I have a cheap renting option so we take that and forgo any thoughts of buying ..... maybe a rental property in the future......

Matt K

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Re: Noob Question #2
« Reply #18 on: February 24, 2012, 12:14:37 PM »
A house! No way! Ilive in an expensive urban environment. I love it but the one downside is the housing prices! My wife and I have a cheap renting option so we take that and forgo any thoughts of buying ..... maybe a rental property in the future......

That's a good answer. I just wanted to make sure it was something you had considered and decided against. As I said, I see plenty of very good reasons to rent for life. But I've also been in the position of going "Damn, that life change (and related expense) came up much sooner than I'd been thinking. Kinda wish I had more funds accessible to pay for it."

sourabhdube

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Re: Noob Question #2
« Reply #19 on: February 25, 2012, 10:13:09 AM »
A house! No way! Ilive in an expensive urban environment. I love it but the one downside is the housing prices! My wife and I have a cheap renting option so we take that and forgo any thoughts of buying ..... maybe a rental property in the future......

That's a good answer. I just wanted to make sure it was something you had considered and decided against. As I said, I see plenty of very good reasons to rent for life. But I've also been in the position of going "Damn, that life change (and related expense) came up much sooner than I'd been thinking. Kinda wish I had more funds accessible to pay for it."

Hi all, another noob here.
Actually a lot of this discussion applies to me as well, but for me buying a house is in the planning. In that case, I need to keep money liquid for the downpayment which means I can't "max" out any retirement accounts (plus no employer-matching for me).
In this case, is a personal investment account the best option? i.e. if I invest for 2-3 years, then I can withdraw as much as I need to buy a house.
(Of course I realise that I'm better off not touching any retirement type savings for a house...)

arebelspy

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Re: Noob Question #2
« Reply #20 on: February 25, 2012, 10:29:47 AM »
In the short term (2-3 years, like you say), investing in the market is risky.

Traditional recommendations for purchasing 2-3 years out would be to invest in something secure, like CDs, though they'll earn you a very low interest rate.

I personally would be comfortable doing something like the Permanent Portfolio for a few years (seeing as how it's had very few losing years, ever, and even then I think it was down like 3% or something like that), but it depends on your risk tolerance and if you can push back that purchase a bit if the timing is not good to "cash out" (i.e. you'd be forced to sell low, so you decide to rent for a bit longer).  If you can do that, then investing isn't a bad choice, IMO, though against the traditional advice, given above.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Sunflower

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Re: Noob Question #2
« Reply #21 on: February 25, 2012, 12:11:36 PM »
Actually a lot of this discussion applies to me as well, but for me buying a house is in the planning. In that case, I need to keep money liquid for the downpayment which means I can't "max" out any retirement accounts (plus no employer-matching for me).
In this case, is a personal investment account the best option? i.e. if I invest for 2-3 years, then I can withdraw as much as I need to buy a house.
(Of course I realise that I'm better off not touching any retirement type savings for a house...)

You can pull $10,000 out of a Roth for a down payment on your first home. (And, as has been stated before, you can pull out any principal that you put in without penalty - assuming its still there). I'm not looking to buy a house in the near future but I do have loans that will be due in the next 2-3 years. Although I don't have a very high income, I've chosen to max out my Roth each year and save as much as I can elsewhere. Right now, my Roth funds are mostly in low risk/gain funds and as I continue to save more each year, I'll reallocate them to include more higher risk funds. There's absolutely no way that I'll be able to save enough to max out my Roth each year AND have enough money sitting around in a bank account to pay off my loans when they're due but at least this way any money that I make in the Roth will be tax free and (assuming it doesn't completely tank in the short term....) I'll be able to pull out what I need to pay off my loans.

I'd definitely be interested to hear other opinions on the best way to save for large payments (houses, etc.) when you aren't able to simultaneously max out a retirement account.

MacGyverIt

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Re: Noob Question #2
« Reply #22 on: February 25, 2012, 05:03:26 PM »
I'd definitely be interested to hear other opinions on the best way to save for large payments (houses, etc.) when you aren't able to simultaneously max out a retirement account.

I think this line of conversation would be applicable to your question:
http://www.mrmoneymustache.com/forum/investor-alley/where-to-put-emergency-fund-for-returns-no-early-withdrawal-penalty/