Author Topic: Planning ER, where do I want to put my money  (Read 4493 times)

dsmexpat

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Planning ER, where do I want to put my money
« on: March 23, 2015, 01:58:19 PM »
Hello everyone, this is my first post on the forum although I've read the entire blog and have been reading the forum for about a month now (I get bored in my cubicle).
I'm 27, British and currently employed in the United States where I plan on staying for the foreseeable future. I've always been frugal but never really done much with my money and reading this blog has helped inspire me to save further and push to retire younger and richer to help me live the life I want. I'm trying to come up with a plan for allocating my surplus income to achieve this.

I'm looking at saving about 60% of my income at present and putting it
Employer 401k up to the match
IRA with the rest
I already have an emergency fund

My reasoning for the IRA over a ROTH is that although my current tax rate is not especially high my planned retirement income is likely to be under, or at very least mostly under, the taxable threshold. If I was planning to retire with 100k or so annual withdrawals then the tax free gains of the ROTH would be valuable but I intend to stay frugal and still retain some income streams on my own terms. In that context having the immediate tax deductible benefits of the regular IRA should, in theory, allow me to invest a larger amount and realize compound gains on that larger amount, while not paying additional taxes down the road. Or at least not sufficiently high extra taxes to offset the larger principle I can invest now. (with credit to the topic linked below)
http://forum.mrmoneymustache.com/investor-alley/go-curry-cracker-roth-vs-taxable/

Within the IRA I'm looking at going 100% in a Vanguard index fund (no bonds etc) for the next decade or so to maximise gains. I read this excellent post http://forum.mrmoneymustache.com/investor-alley/why-would-i-be-in-anything-other-than-100-stocks/msg541078/#msg541078
but I believe I have the discipline to stick it out. At the risk of shaming myself in the eyes of the uninformed I spent some time in my youth playing poker professionally and doing that, and doing it well, requires a lot of training in remaining unemotional in the face of gutwrenching variance. I believe I can stomach the downswings, variance happens but if you diversify and have a large sample size statistics will win in the end. Nearer the end of my timeline to ER I plan to even out my portfolio with a larger proportion of bonds and liquid savings so I'm closer to balanced when I cross the finish line. My reasoning for this is that if my emergency fund is sufficient and my income considerably higher than my expenses then what happens to the stocks on a day to day basis really has no impact on my financial security, I'm ignoring them in the short to medium term, I'm not interested in daytrading.

No significant debts (British student loans are more or less a non factor in the US, can explain at length if anyone really cares) but also not much credit history because the US doesn't especially care about my UK credit history. Happily married with a wife who, while less frugal than me, still has considerable savings and a considerable surplus with the help of her generous parents and is mostly on board with the ER plan (although for her it's likely that in the very unfortunate case of her parents dying she'd never be have to work a day again in her life). We've retained our financial independence from each other so that's a non factor for me but we're more or less on the same page in terms of wanting a life filled with time to spend on our hobbies, passions and with each other and our family rather than working all our lives to accumulate an ever increasing quantity of things.

I'm new to this (and somewhat new to the US (I still think bombs when I hear IRA)) and would appreciate people poking holes in the plan or suggesting things I may not have thought of. Also I'm not sure which Vanguard fund I should be using for the IRA, I don't have a target retirement date so my priorities are diversification within the stocks and low fees. Also, although this is more a question for r/churning, any tips on getting cheap flights to the UK from the US would help move my timeline closer while still allowing me to see my family.

Thank you for reading

pa10ge

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Re: Planning ER, where do I want to put my money
« Reply #1 on: March 23, 2015, 05:52:37 PM »
Try checking out the Mad Fientist's site here: http://www.madfientist.com/archives/

He investigates different savings, tax, and withdrawal scenarios with ER in mind. Might help you out.

AdrianC

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Re: Planning ER, where do I want to put my money
« Reply #2 on: March 25, 2015, 04:07:21 PM »
I did a similar thing you're doing. I came to the US from the UK at age 26 for work. Liked it here and stayed. Made a lot more money here and saved 50-60% of income, and still do. I didn't discover investing until later on - you have a great advantage there - but I did eventually, and twenty years down the road I can retire early whenever I decide. Could have done ten or more years ago if we could live like MMM. I still work now, partly because I enjoy what I do (engineering).

We have been totally invested in stocks for the last 15 years. Have no debt. Don't see the point in bonds at all. Just lately I have lightened up a little on stocks and have put no new money in. 2008 was a gut wrenching time and I don't want to be caught without dry powder the next time.

It looks to me like you have a good plan. This is the land of opportunity for the young, skilled and healthy.

You on an H1B? Get a "green card" as soon as you can. Being tied to one employer really sucks.

By the way, cheap flights would be nice but I've never consistently been able to find them. It hurts spending $6K on flights, as we did to get back last summer, but sometimes you just got to pay up.

AdrianC

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Re: Planning ER, where do I want to put my money
« Reply #3 on: March 25, 2015, 05:18:50 PM »
Oh, you can't contribute before tax to an IRA and a 401k, as far as I know. You can put $5,500/year after tax money into an IRA or ROTH. The ROTH has income limits. If you qualify the ROTH is better.

Of course, your employer matched 401k should be maxed out, assuming the investment choices don't totally suck.

There are no after tax savings schemes here like the TESSA and PEP (do they still have them?).

We do the after tax to the IRA, before tax to a SEP-IRA (self employed). Selection of Vanguard broad-based stock index funds, couple of value-based actively managed funds, plus a few individual stocks for fun (mainly Berkshire BRK-b).

dsmexpat

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Re: Planning ER, where do I want to put my money
« Reply #4 on: March 27, 2015, 08:55:22 AM »
Oh, you can't contribute before tax to an IRA and a 401k, as far as I know. You can put $5,500/year after tax money into an IRA or ROTH. The ROTH has income limits. If you qualify the ROTH is better.

Of course, your employer matched 401k should be maxed out, assuming the investment choices don't totally suck.

There are no after tax savings schemes here like the TESSA and PEP (do they still have them?).

We do the after tax to the IRA, before tax to a SEP-IRA (self employed). Selection of Vanguard broad-based stock index funds, couple of value-based actively managed funds, plus a few individual stocks for fun (mainly Berkshire BRK-b).
My understanding was that IRA contributions are tax deductable which means that come tax refund day they don't count as earned income and therefore the tax you paid on that income is returned to you to be applied at the time of withdrawal. Is that not correct? It's my first year here so I've never actually had to apply my understanding.

To give an example of what I mean by that.
If you earn $20,000 and pay 10% tax on it then they will take $2,000 in tax. If you put $10,000 into a IRA then you can put a $10,000 deduction on your earned income that year, reducing it from $20,000 to $10,000 which means that really you just owed 10% of that, or $1,000. The IRS will then return to you the $1,000 they took out of the $10,000 in the IRA and the money in the IRA will be classified as pre-tax rather than post-taxs.

Assuming I'm not making it up completely I think that between the married tax credit, my relatively low income, large deductable retirement contributions and the standard deductable I can pretty much defer or negate all of the tax.

Also I'm on a K1, Green Card application was in 10 months ago, biometrics all done, individual components of the Green Card applied for through separate expedited forms so I can work/travel etc but the Green Card itself is dragging on indefinitely. I can move jobs but I've not built sufficient work history in the US yet to feel like I can do so and look good doing it.
« Last Edit: March 27, 2015, 09:02:05 AM by dsmexpat »

AdrianC

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Re: Planning ER, where do I want to put my money
« Reply #5 on: March 28, 2015, 07:37:35 PM »
I was thinking you were maxing out the 401k first. My bad. Yes, as long as you are not putting the maximum into the 401k (think it's $17.5k) you can contribute before tax money to an IRA. So (someone correct me if wrong) you can put $12K into the 401k and $5,500 into the IRA, all before tax.

I married a US citizen also. The green card took a few years, but it's no big deal. You can just keep renewing the travel docs and work permit. No problem switching jobs, or doing what I did, which was to quit my job the day I got that work permit (was on an H1B) and start my own shop.

Good luck!

caliq

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Re: Planning ER, where do I want to put my money
« Reply #6 on: March 28, 2015, 07:39:35 PM »
2015 max for 401k's is 18k.

And you can contribute that maximum AND the maximum of 5.5k to a traditional IRA.

So 23.5k total into tax-advantaged accounts, plus employer contributions to the 401k.

tj

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Re: Planning ER, where do I want to put my money
« Reply #7 on: March 28, 2015, 09:42:44 PM »
I was thinking you were maxing out the 401k first. My bad. Yes, as long as you are not putting the maximum into the 401k (think it's $17.5k) you can contribute before tax money to an IRA. So (someone correct me if wrong) you can put $12K into the 401k and $5,500 into the IRA, all before tax.

I married a US citizen also. The green card took a few years, but it's no big deal. You can just keep renewing the travel docs and work permit. No problem switching jobs, or doing what I did, which was to quit my job the day I got that work permit (was on an H1B) and start my own shop.

Good luck!

As long as you are under the income limits for the deductible IRA (which is much lower than the ROTH), you can max out both deductible accounts to your heart's content.

seattlecyclone

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Re: Planning ER, where do I want to put my money
« Reply #8 on: March 28, 2015, 10:49:09 PM »
I was thinking you were maxing out the 401k first. My bad. Yes, as long as you are not putting the maximum into the 401k (think it's $17.5k) you can contribute before tax money to an IRA. So (someone correct me if wrong) you can put $12K into the 401k and $5,500 into the IRA, all before tax.

I married a US citizen also. The green card took a few years, but it's no big deal. You can just keep renewing the travel docs and work permit. No problem switching jobs, or doing what I did, which was to quit my job the day I got that work permit (was on an H1B) and start my own shop.

Good luck!

As long as you are under the income limits for the deductible IRA (which is much lower than the ROTH), you can max out both deductible accounts to your heart's content.

This is correct. The amount you contributed to your 401(k) has no effect on the amount you can contribute to your IRA, and vice versa. If you're near the limit for being able to make deductible IRA contributions, 401(k) contributions can only help you in that regard, never reduce the limit.

AdrianC

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Re: Planning ER, where do I want to put my money
« Reply #9 on: March 29, 2015, 07:47:35 PM »
Thanks for the correction. Here's the relevent IRS table:

http://www.irs.gov/Retirement-Plans/2015-IRA-Deduction-Limits-Effect-of-Modified-AGI-on-Deduction-if-You-Are-Covered-by-a-Retirement-Plan-at-Work

Deductibility depends on filing status.

AdrianC

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Re: Planning ER, where do I want to put my money
« Reply #10 on: March 30, 2015, 12:29:07 PM »
Revisiting this, from the IRS table:

If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction.

If Your Filing Status Is...married filing jointly
And Your Modified AGI Is...$118,000 or more
Then You Can Take...no deduction.


And "covered by a retirement plan at work" does include a 401k.
http://www.irs.gov/Retirement-Plans/Are-You-Covered-by-an-Employer's-Retirement-Plan%3F

You and spouse got to be making less than $118K (adjusted) to get the full deduction on the IRA.
« Last Edit: March 30, 2015, 12:31:22 PM by AdrianC »

dsmexpat

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Re: Planning ER, where do I want to put my money
« Reply #11 on: March 30, 2015, 12:39:07 PM »
I'm probably underperforming compared to most of y'all but my wife and I are nowhere near a MAGI of $118,000. The more I learn about the system the better though, I can dream.

dsmexpat

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Re: Planning ER, where do I want to put my money
« Reply #12 on: March 31, 2015, 02:10:59 PM »
I just learned about the HSA (still new to the US, assume a baseline knowledge of 0) and it seems like the most obviously exploitable thing imaginable. As liquid, healthy, financially literate mustachians we're all self insuring as much as possible because we know that having insurance pay for teeth whitening doesn't actually save us any money unless you can beat the system (sometimes if you're planning kids or whatever you can but as a rule the house wins). My understanding of it is that we get to put money into it tax free and then cash out both the principle and the growth tax free as long as its for medical expenses which, statistically speaking, we're all likely to have at some point. If we assume that the alternative to using this tax free money and growth is using our precious, precious post tax money then the HSA is, in real terms, a huge saving on healthcare costs. And if we don't get sufficiently sick to cash it all out by 65 then we can cash it out as if it were an IRA with deferred taxes on the principle and growth but no penalty.

If my understanding of this is correct then this is shooting up to priority number 2 under 401k match so that it now reads
401k match
HSA
IRA
401k other

Am I missing something here or does it work like that? And what else don't I know?

Also you can get HSA providers to use Vanguard funds but which HSA provider is the Vanguard of HSA provision?