Hi all,
I am new to the MMM community. I would like ask for your opinion in regards to our plan to not max out 401k.
Here are some backgrounds.
1) We are double income family with 2 kids that requires a good expense in private school/after school care.
2) Our income hits 25% bracket (or 28%?? not sure).
3) Currently expense is just basic expense with no mortgage. So we are able to max out 401k, Roth IRA and still some extra money for saving.
4) We have 75% in 401k and 25% in Roth IRA. Feel too heavy on 401k. We have about 40-50k as emergency fund. Basically we don't have extra cash on hand for stock market or real estate investment for now.
So we would like to save more cash on hand, waiting for stock market downtown to buy. So we were thinking about reducing contribution in 401k, but still max out Roth IRA and put remaining money aside.
Given our tax bracket, does this make any?
Also, what is your recommendation in terms of proportion between 401k, Roth IRA and taxable investment?
Thanks!
No, it does not make sense - at least to me.
Maxing your 401K means two things - you reduce your taxable income, and are saving/investing money that is tax deferred. If you have the opportunity to max them without eating too far into your other obligations, it seems foolish to me not to max those out ASAP.
You are also trying to time the market but "waiting for stock market downtown to buy" this is almost universally wrong to try to do since NO ONE can accurately predict what the market will do. You are much better served by investing your money in regular intervals by dollar cost averaging. As long as you're looking at a buy and hold long-term, the ups and downs even out. You can't be looking at daily and monthly or even yearly downturns since those don't mean much in a 20-30 year investor's portfolio. The thing that WILL make a difference is how long you're actually in.
And wow, having 40-50K sitting in a low interest savings account as an emergency fund seems wasteful. I'd probably take a good look at moving some of that over to something. If you have access to your investment accounts, and credit, I personally wouldn't hold more than $10K in a plain old savings for emergency funds.
If you both maxed your 401Ks, then there is a possibility that you'd drop to a lower tax bracket (woot!),
and you'd be saving a great amount of money that will be growing tax-deferred for you. THEN I'd max both Roths, and whatever is left over would go into the taxable account.
And just so I cover this part too... you
can access retirement accounts before you're old. There's several different ways to funnel the 401K/IRA money with low or no-tax options. It's not locked in until you're 59.5.
Have you read jlcollins' stock series? It sounds like you might be where I was last year - stock market was kind of scary and investing made me pretty nervous... might want to give it a read. It definitely helped me figure stuff out.
http://jlcollinsnh.com/stock-series/And also MMM's take in a nutshell:
http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/The more you learn, the less scary all of this will seem.