Author Topic: Newbie, just have a simple Q  (Read 1509 times)

anthony574

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Newbie, just have a simple Q
« on: October 27, 2020, 11:46:38 AM »
Hello, I am new to this community.

My situation is I am debt-free, live pretty cheaply, and make a low to moderate income. I have little in way of investments besides a 401k that I am currently rolling into an IRA. After reading most of the articles on this website, I am still confused as to whether it is recommended to have both a retirement acct AND a brokerage acct. I am going for as simple as possible an approach (coming from basically having no financial discipline besides being naturally minimalistic).

So if you were me, dude in his early 30s with no debt, low costs of living, and about 15k sitting around in the bank, what would you do? Keep contributing to the IRA, or split investments between that and something more liquid like a brokerage acct?

I realize this question may seem to be the result of lack of my own research...but I actually have read a lot of the topic and find that my brain shuts down due to information overload. This site is the sole reason why I have regained an interest in my personal finances, but I am really trying to keep it simple to fit my rather simple situation.

If anyone can take the time to answer this question, or point me in the right direction (maybe a book or something?) I would really appreciate it!

ctuser1

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Re: Newbie, just have a simple Q
« Reply #1 on: October 27, 2020, 12:01:14 PM »
Obligatory post of the investment order :-). It's free, no need to buy a book.

https://forum.mrmoneymustache.com/investor-alley/investment-order/

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There is nothing, in principle, wrong with having both 401k and taxable. However, in practice, if you have a "moderate income" then you will most likely be better off just using the various tax deferred accounts.

First figure out how much money can you "save" each year (no need to be exact).

Once you have the approximate $$ figure, follow the investment order to fill different buckets. You will notice that taxable brokerage account is the very last step (i.e. Step #8). So, unless you are planning to save many tens of thousands of $$ every year, you are unlikely to reach there in the investment order.

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If you feel that the investment order thread is information overload (it likely will be unless you are very familiar with investment topics), post here with your questions and I am sure people here will post to clarify.
« Last Edit: October 27, 2020, 12:03:58 PM by ctuser1 »

anthony574

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Re: Newbie, just have a simple Q
« Reply #2 on: October 27, 2020, 12:31:18 PM »
Yes, I had read through that post and found a lot of the information to be overwhelming and outside of my knowledge. I get the gyst, however, and thankfully I am further down the list due to my lack of debt, or a mortgage. I see that retirement accounts are prioritized, and in my case I feel satisfied since I am in the process of setting up an IRA (of some kind). But since that money is for the big long-term, I figured that it would also be a priority to put idle money into some other kind of interest-bearing acct that can be utilized if needed. Am I way off on this point? Should I just be plowing my excess money into a retirement acct and not worry about brokerage until I have way more money? Ahh, I'm so confused. This site ignited an interest in my finance, but once again, I am feeling quite overwhelmed.

terran

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Re: Newbie, just have a simple Q
« Reply #3 on: October 27, 2020, 12:46:31 PM »
I'll second the Investment Order post. Go through it step by step and if you hit a step you don't understand ask a question here or in a new thread. The short version: With no debt, keep your cash emergency fund, fill your tax advantaged accounts (IRA/401(K)/etc) then open a non-retirement (brokerage) account if you still have money to invest.

If you expect to retire before age 59.5 you eventually want 5 years worth of spending in Roth contributions (not gains) and your brokerage account, but it's pretty unlikely you'll be able to retire before age 59.5 if you only save enough to fill a traditional IRA and a 401(k) every year. If you're unusual in that you have particularly low spending (such that saving ~$25.5k/year will get you to retirement before age 59.5), you have more than a normal amount of tax advantaged space (like if you work for a government institution with a 403(b) and a 457(b)) or you'll have a pension then let us know and someone can provide more guidance.

anthony574

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Re: Newbie, just have a simple Q
« Reply #4 on: October 27, 2020, 12:55:55 PM »
Thank for the info! I suppose that I should just calm down and focus on setting up my IRA rollover and learning more about retirement accts in general before moving onto brokerage.

I'm new to the idea of making idle money work for you, so I'm just distraught at my relatively late start, and all the years of money just sitting around in uncashed checks or bank accts with no interest. But I can't dump all my funds into a locked retirement acct...so I'm just not sure what to do. But in the meantime, I'll read and save more.

ctuser1

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Re: Newbie, just have a simple Q
« Reply #5 on: October 27, 2020, 01:03:03 PM »
hypothetical scenario:

Let's assume the following:
1. You have $30k/year to invest - plus or minus a couple grand.
2. Your employer offers a 25% match up to $6k
3. You have HSA option with your health plan. Single, no kids, so limit is $3550.

Then,
A. Put $6k in 401k.
B. Put $3550 in HSA. You've maxed it out now.
C. Put another $6k in Roth. This is the limit for Roth in 2020, so you've maxed it out.
D. Max out 401k. This will require another $13500 contribution.

By Step D, you are at $29050 saved for the year. If you still have some money left, then perhaps open a brokerage account and invest in taxable funds.

You will probably need to select a broker for most of the above (Roth, HSA, taxable). Fidelity, Schwab or Vanguard are all perfect brokers to use, as are many other banks out there that offer free trades to compete with these brokers.


anthony574

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Re: Newbie, just have a simple Q
« Reply #6 on: October 27, 2020, 01:16:14 PM »
That's a very helpful illustration. I guess I'm just confused about the idea of early retirement (or just good ol financial freedom), but having so much money locked away into a retirement acct. If you were to hit, say, age 45 and you had a ton of money in retirement accts but not much outside of it, I don't see how you could effectively retire. This all makes more sense to me if I consider a taxable acct that you can tap, but I know that I just don't see the big picture.

I have faith in the wisdom of the community, so my lesson for today is focus on maxing out retirement accts yearly, and only worry about brokerage if I have extra (unlikely to occur anytime soon)

ctuser1

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Re: Newbie, just have a simple Q
« Reply #7 on: October 27, 2020, 01:30:45 PM »
If you were to hit, say, age 45 and you had a ton of money in retirement accts but not much outside of it, I don't see how you could effectively retire.

There are some mechanisms using which people withdraw from retirement accounts before they hit 55 or 59:
1. You can withdraw only the "contributions" from Roth IRA. If you contribute $6k/year, that will be $60k in contributions that you can withdraw any time after 10 years. After 20, it is $120k.
2. If you roll over money from 401k to Roth, that counts as contributions after 5 years of rollover. Hence @terran's comment upthread about 5 years living expenses.

The above is a very short version. There are some additional complications you need to worry about eventually. e.g. rolling over from 401k -> Roth = income, and hence income taxes.

I'd suggest that you first focus on the saving part as detailed in the investment order post, and then start reading up on your spare time. In a couple  of years, or five, you will be sufficiently knowledgeable to figure out if you need to tailor the investment order or the plan to any of your specific needs.

tl;dr
Start with the template investment order -> gain knowledge over a year or two or five -> revisit if you need to customize
 
« Last Edit: October 27, 2020, 01:50:44 PM by ctuser1 »

terran

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Re: Newbie, just have a simple Q
« Reply #8 on: October 27, 2020, 02:53:43 PM »
ctuser1 did a good job summarizing it, and as mentioned this is why I alluded to having 5 years outside retirement accounts. Here's some more information https://www.madfientist.com/how-to-access-retirement-funds-early/

MDM

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Re: Newbie, just have a simple Q
« Reply #9 on: October 27, 2020, 04:44:44 PM »
If you were to hit, say, age 45 and you had a ton of money in retirement accts but not much outside of it, I don't see how you could effectively retire.
While not impossible, it seems unlikely that one would
a) have enough in retirement accounts to last ~50 years, but
b) not have enough affordably accessible money to last the 4-5 years it takes to prime the Roth conversion ladder pump.

swashbucklinstache

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Re: Newbie, just have a simple Q
« Reply #10 on: October 27, 2020, 06:25:22 PM »
One note for your current situation is that if you have, say, 2.5 years of expenses in a checking account and only need, say, 0.5, you can also consider putting the maximum percentage possible (for your plan) into your 2020 401k and live off your checking account. If that doesn't get you down to 0.5 by the end of the year, you can max your 2020 IRA early in 2021. If that still doesn't get you down to 0.5, you can keep your 401k contribution % high. The only thing to watch out for there is that some plans will only match at the paycheck level so if you max out your contributions for the year early you may be leaving money on the table.

anthony574

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Re: Newbie, just have a simple Q
« Reply #11 on: October 27, 2020, 11:22:33 PM »
Thank you for the responses! After a walk in the woods, I feel like I have a better grip on what is going on. My plan of action in the next months/year(s) is to fund as much as I can my pending IRA rollover (I currently dont have access to a 401k) and tighten up my spending. If I max that out, I'll just keep going down the list! Finding ways to increase income is also on the to-do list, of course!

I'm coming from a lifetime of either being a student, or just being in denial about money. My eyes are open now, and I'm eager to get started. It feels great to feel a sense of control over my finances...and even hope! I've been lucky in my life to be able to get by fortunately enough because I'm not a spender and I've always been afraid of financing anything, but I haven't really ever saved or planned ahead. So naturally I'm in information-overload and decision paralysis...but the magic of MM is that he distilled the info down effectively enough that even a money-denier like me couldn't help but recognize the wisdom I was seeing.

Thanks again everyone
« Last Edit: October 27, 2020, 11:29:42 PM by anthony574 »

Malcat

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Re: Newbie, just have a simple Q
« Reply #12 on: October 28, 2020, 05:24:52 AM »
You're making the common mistake of getting overwhelmed before you have to.

You don't have to worry about the details of having your money tied up until you are 55 or 59 or whatever, until you have too much money tied up.

You have years of lead time to read and learn and figure out the details. There's no rush. You don't have to have it all figured out to get started.

Financial.Velociraptor

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Re: Newbie, just have a simple Q
« Reply #13 on: October 28, 2020, 08:54:13 AM »
I'm one of the heretics here who actively trades in a taxable account.  I sometimes get questions from friends, family, former co-workers, etc. on 'how to invest'. 

I always tell anyone who feels like they need to ask that they should be maxing out tax advantaged accounts and indexing therein, at least until they know more and have a firm understanding of their risk tolerance. Understanding your risk tolerance probably requires riding out at least one 20%+ decline and analyzing your mental state during that time.

Otherwise, relax bro.  Being debt free in your thirties and having sufficient income to save puts you in the top 5% of Americans easily finances wise.  You are basically on autopilot towards winning the game.

BicycleB

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Re: Newbie, just have a simple Q
« Reply #14 on: October 28, 2020, 01:49:55 PM »
Hi, @anthony574. Welcome!

Great answers already, especially the ones saying to keep calm and take just a couple of steps (invest using the investment order).

I notice that step 0 is to establish an emergency fund. Really, that's the first thing. That's where you put the cash you will use when variable expenses come up: replace car (if you have & need one), sudden medical expense, need to move, cash flow gap from switching jobs, etc. Some people put three months' expenses in there; others, a year or two. It's your call. Any idea how much you'd like to keep in there?

Fwiw, this can all became a source of calm and safety. Glad you're asking questions and thinking these things through. Your actions will allow your worries to melt away in due course.

« Last Edit: October 28, 2020, 05:38:55 PM by BicycleB »

DeniseNJ

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Re: Newbie, just have a simple Q
« Reply #15 on: October 29, 2020, 07:21:12 AM »
When you have enough money to even consider retiring within say 5 years, then you can start putting money in brokerage accts if you need to--although you'll have enough in Roth contributions not to need to.  Right now, you don't have enough money to worry about it. Have an emergency fund in a savings acct or CD, and plow as much as you can into your 401K and Roth.  In the meantime, you keep learning, keep following the investment order, keep reading MMM articles, keep maximizing your life while minimizing your expenses, and you'll be "rich" and FI in no time.

Car Jack

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Re: Newbie, just have a simple Q
« Reply #16 on: October 30, 2020, 06:46:17 AM »
Take a breath.  If you don't have a 401k, that's not a huge problem.  You certainly can put money into a taxable account.  You don't get the advantageous tax treatment of a 401k, tIRA or Roth, but you can still invest in the market.

There are periodic threads where posters ask "where's a safe place that I can park some money for a few years but take it out whenever I want and still get high return or interest?".  Here's the answer.......nowhere.  Like the rest of us, you separate what you may need in the next 5 years and put it in a 0.6% high yield savings account.  Other "investment" money goes into the retirement targeted accounts.  Sure, you can take money out of a Roth (the contributions) anytime.  But I don't like relying on that.  It sort of sets your mind to more easily raid the Roth and spend it on crap rather than treat it as retirement money and leaving it the hell alone.

If you want to put some money into a semi-locked up place for more than that 0.6%, you can look into CDs and iBonds.  You'd need to be ok not having access for some amount of time, but they're both safe and give you some % that's potentially much better than that 0.6%.  iBonds are also state income tax free and if they're used for your kids' education (income limits apply), the gain can become completely tax free.

 

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