Author Topic: Step 2 is Dumping money into vanguard?  (Read 6546 times)

manchops

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Step 2 is Dumping money into vanguard?
« on: June 28, 2012, 12:02:38 AM »
Step 1. Debt free.
Step 3. Stop going to my day job.

I recently paid off my fiance's and my student loan debt, officially making us debt free. With the same stroke, I evened us out to an 80/20 split of asset allocation (stocks/bonds). I haven't done the breakdown in a while, but conservatively, we're living on 1/2 of my income and she's just quit her job for a career change (will likely spend the next 6mo-1yr in self-study, then will be looking for a job).

So what now? Do we just continue dumping our money into an 80/20 split of Vanguard's total stock market and total bond market until we have a bunch of money in there, then retire?

If any more information would be helpful in providing direction, just ask. I'm happy to provide it.

EDIT: I should mention that I already contribute max to my 401K (getting a significant match from my employer [I think its 50%])
« Last Edit: June 28, 2012, 12:07:17 AM by manchops »

grantmeaname

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Re: Step 2 is Dumping money into vanguard?
« Reply #1 on: June 28, 2012, 06:01:52 AM »
Yeah, pretty much. If you're already paying the max on your 401(k) (as in, $17k, not just the max to get employer match), the next step is to max out IRAs for you and your fiancee (although her IRA can't have more than her total earned income for the year in it, which may be something to keep in mind for 2012 and 2013).

For early retirement, you need 5 years of expenses between Roth IRAs (in contributions alone) and brokerage accounts (in contributions as well as earnings), because it takes five years for Traditional 401k money to become usable in a Roth IRA.

Kriegsspiel

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Re: Step 2 is Dumping money into vanguard?
« Reply #2 on: June 28, 2012, 07:35:56 AM »
Well, I don't want to offer any expert opinion, but that's what I'm doing.  After a couple years of picking individual stocks, I'm slowly phasing them out and going with those two funds you mention. 

grantmeaname

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Re: Step 2 is Dumping money into vanguard?
« Reply #3 on: June 28, 2012, 07:56:32 AM »
My last post dealt with the investment vehicles. You also have to consider the holdings themselves, which you must have realized because you asked about it. Until Kriegsspiel's post I totally missed that half of your question.

Some people are willing to accept more risk in exchange for more growth, and so they'll purchase a little bit of a small-cap index or an international index, for example. You could also dial down the proportion of your bonds; in my opinion, 60/40 is really conservative. If you're retiring at a traditional age it's often important to be conservative, especially since higher returns will mean less to you, but I think MMM followers have a much higher capacity for risk. If another 2008 comes around, and your portfolio drops 25%, you could always jump back into the workforce, downgrade to a smaller house or otherwise cut your expenses, or pick up a side gig and invest a bit more of your time into it until another 2009 comes around. Your 70-something parents can't do many or any of those things. It would be worthwhile to look around the Bogleheads wiki (start here) and perhaps post in or at least look through forums to decide what asset allocation is a good fit for you.

arebelspy

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Re: Step 2 is Dumping money into vanguard?
« Reply #4 on: June 28, 2012, 07:58:40 AM »
Yeah, pretty much.

+1.

Ideally step two is: read and learn about investing. Determine the proper asset allocation given your personal situation and personality (risk tolerance).  Invest your money to work for you.

Then you hit step 3.

But really, many of us believe that step 2 boils down to what you said.
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manchops

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Re: Step 2 is Dumping money into vanguard?
« Reply #5 on: June 28, 2012, 08:54:48 AM »
Yeah, pretty much. If you're already paying the max on your 401(k) (as in, $17k, not just the max to get employer match), the next step is to max out IRAs for you and your fiancee (although her IRA can't have more than her total earned income for the year in it, which may be something to keep in mind for 2012 and 2013).

For early retirement, you need 5 years of expenses between Roth IRAs (in contributions alone) and brokerage accounts (in contributions as well as earnings), because it takes five years for Traditional 401k money to become usable in a Roth IRA.

I think I make too much money to contribute to an IRA (> 110k/yr).

JohnGalt

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Re: Step 2 is Dumping money into vanguard?
« Reply #6 on: June 28, 2012, 08:59:32 AM »
You might double check that.  My salary is over the limit to contribute - but, due to deductions, I drop to just under the Adjusted Gross Income amount to fully contribute.  I believe the top range will also change once you and your fiance are married.

manchops

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Re: Step 2 is Dumping money into vanguard?
« Reply #7 on: June 28, 2012, 09:05:22 AM »
Ideally step two is: read and learn about investing. Determine the proper asset allocation given your personal situation and personality (risk tolerance).  Invest your money to work for you.

So I've read through the Boglehead's guide to investing. I've decided I have a high tolerance for risk right now and I'll be 80/20 for now. Maybe when I'm actually retired, I'll adjust that (maybe to look at dividend yielding stocks).

My asset allocation is actually a bit wacky. Last year, we got a windfall and bought a bunch of vanguard funds (5, I think). The original goal was to diversify across many asset classes (based on advice from a book which I thought was titled "The smallest investment book you'll ever need", but I can't find it in a search). I think for simplicity's sake, we'd like to go with total bond market / total stock market going forward until we know a bit more.

500 Index: $3k
Small Cap: $3k
Total Bond Market: $7.8k
Emerging Markets Stock: $3.5k
Total Stock market: $21k
Mid-Cap Index: $3k

---

Also to JohnGalt, the max for individual contribution is $66k and married is $110k. I think there is maybe some benefit still for me, but its not clear what it is. My fiance is doing the research on it now. (based on http://iracontributionlimits2010.com/2010-ira-income-limits/2010/07/ )

EDIT: Turns out I was looking for 2010 stats. http://iracontributionlimits2010.com/roth-rules/2011/10/ -- Those are the 2012 stats, but I still don't qualify unfortunately. I likely will next year, however.
« Last Edit: June 28, 2012, 09:11:03 AM by manchops »

JohnGalt

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Re: Step 2 is Dumping money into vanguard?
« Reply #8 on: June 28, 2012, 09:29:45 AM »


Also to JohnGalt, the max for individual contribution is $66k and married is $110k. I think there is maybe some benefit still for me, but its not clear what it is. My fiance is doing the research on it now. (based on http://iracontributionlimits2010.com/2010-ira-income-limits/2010/07/ )

EDIT: Turns out I was looking for 2010 stats. http://iracontributionlimits2010.com/roth-rules/2011/10/ -- Those are the 2012 stats, but I still don't qualify unfortunately. I likely will next year, however.

I think you may be looking at traditional IRA deductions.  ROTH IRA contributions are much higher.  They begin phasing out at $110,000 AGI for single filers and something like $170,000 AGI for married filers.

Even if you hit those limits, you can do a non-deductible IRA contribution and convert it to a ROTH to back into the ROTH contribution. 

Mr Mark

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Re: Step 2 is Dumping money into vanguard?
« Reply #9 on: June 28, 2012, 03:00:57 PM »
I do like VWELX as a core fund, because it automatically rebalances for you to keep a 65/35 stock bond ratio. So if your core target is 80/ 20, holding 60% as this will cover all your bonds, and the other 40% can cover non-bigcap us stocks.

This makes rebalancing your AA easier, IMHO, especially in the early years.

mikek

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Re: Step 2 is Dumping money into vanguard?
« Reply #10 on: July 02, 2012, 08:31:59 PM »
For early retirement, you need 5 years of expenses between Roth IRAs (in contributions alone) and brokerage accounts (in contributions as well as earnings), because it takes five years for Traditional 401k money to become usable in a Roth IRA.

Can you elaborate a bit more on this?   Is one only able to do this for 5 years?  Or is the lead time 5 years due to the 'seasoning' requirements, but the conversion can be done for as many years as needed (until 59.5)?

sol

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Re: Step 2 is Dumping money into vanguard?
« Reply #11 on: July 02, 2012, 08:47:38 PM »
Can you elaborate a bit more on this?   Is one only able to do this for 5 years?  Or is the lead time 5 years due to the 'seasoning' requirements, but the conversion can be done for as many years as needed (until 59.5)?

The five years is just due to the seasoning requirement, and you can in theory convert from a 401k to a Roth as often as you like, which most people here assume means annually.  Predict your retirement income needs five years in the future, rollover that amount to the Roth, repeat every year and when the five years is up you can live off that portion of the Roth you converted five years ago.  Then you've got a 5 year pipeline going until your 401k is dry.

That's only a viable strategy if:

1.  Your 401k plan allows annual rollovers to a Roth IRA.  Some don't.  Mine doesn't.

2.  You can bank five years of expenses somewhere else to live off of while you wait for your first rollover to season.

3.  You've got enough money in your 401k to support all of your expenses.  This is hard to do for people with moderate to high expenses, since you just don't have enough time to get a lot of money in there.

4.  The tax laws don't change before then. 

arebelspy

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Re: Step 2 is Dumping money into vanguard?
« Reply #12 on: July 02, 2012, 08:53:56 PM »
2.  You can bank five years of expenses somewhere else to live off of while you wait for your first rollover to season.

This, more specifically, is what Grant was referring to.  Get the 5 years of expenses in a Roth (all as contributions, ignore any earnings), then you can access those contributions penalty free for the first 5 years while seasoning the 401k rollovers.  Or - less optimally - you can use taxable accounts, as noted.
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