Author Topic: What should I do with extra money?  (Read 1731 times)

jnk715

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What should I do with extra money?
« on: June 23, 2017, 06:28:11 PM »
Hello FI Community,

I am new to the forum but I have been a reader of MMM for years. I need your help in deciding what to do with my extra cash on hand.

Age: 34 years old
PA Resident
25% fed tax rate

72K in Trad TSP Contributing 5% for match.

75% C Fund
15% S Fund
10% I Fund

9k Roth IRA with Vanguard. MAX Contribution
100% VTSMX

118k in 1.50% No Penalty CD
61k in Checking Account

As you can see i have a lot of cash on hand. I would like to keep my CD for a down payment on house and/or emergency fund.

My thinking is to increase my contribution in my TSP.

1. My question is should I also take about 40k from my checking account and open up a Taxable account with Vanguard. If so, I like the tax managed funds they offer. Which would be the Cap Appreciation, small cap, and tax exempt inter term bond.  Do you agree?

2. Are there any federal employees in the forum that retired early? How did you do it? Live off savings until pension and TSP could be taken out?

Thanks!


Guide2003

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Re: What should I do with extra money?
« Reply #1 on: June 23, 2017, 07:36:09 PM »
1. My question is should I also take about 40k from my checking account and open up a Taxable account with Vanguard. If so, I like the tax managed funds they offer. Which would be the Cap Appreciation, small cap, and tax exempt inter term bond.  Do you agree?

I would take way more out of the CD and start earning actual money with it. As a federal employee you should have great job security, and if you need to you can always pull out of your Roth or float expenses on credit cards for a month while a couple more paychecks come in. I'd encourage you to look into the benefits of putting the minimum down on a mortgage to avoid PMI and then reaping the benefits of leveraging a mortgage while your money's in the market. Put the 20% down on a reasonable house if you think buying is best, keep $10k in your bank account and invest the rest with vanguard.

2. Are there any federal employees in the forum that retired early? How did you do it? Live off savings until pension and TSP could be taken out?

I'm military but younger than you. Leaning towards retiring at 20 and using the stash to buy a place in a midsize city and try to reduce living expenses to the level of the pension. It remains to be seen whether I should draw down on the stash or be a Walmart greeter to offset any extra expenses once I get there. Already prepping for the interview with Walmart in 12 years!!

Beach_Stache

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Re: What should I do with extra money?
« Reply #2 on: June 24, 2017, 06:51:56 AM »
I would also take some money out of the CD and invest in post-tax and the same from the checking account.  Keep the amount in the CD that you want for a down payment if you plan on buying in the next few years and that's your down payment.  I would max out your TSP though before you max out your Roth, or even better, do both!  If you are a Fed then you will get your pension, but look at the new laws they are trying to pass, high 5 year vs 3 year, no COLA...  If you get no COLA then your pension will just be really decreased every year that you retire.  The TSP rates are like 0.03% or something, you won't beat that in Vanguard or Fidelity's lowest index fund, so right now you are paying 25% tax on the ROTH IRA rather than maxing out your low cost TSP at 18k.  If you retire early you can take money out of the TSP and roll into the Roth if you want, or you can even do the Roth TSP up to 18k, but again that's post tax. 

The job security of being a Fed is good, but look at the current political climate.  I'm not feeling as secure as I was 2 or 5 years ago.  If you are at an agency like the EPA or TSA or Energy (basically any non-DoD and even the Feds there are at risk) then I wouldn't feel super comfortable.  They also want us to increase the contribution to our FERS by 1% each year for the next 6 years, which is essentially another pay decrease.

You seem to be doing very good at saving, but I would take full advantage of the TSP for as long as you can, fully maxing out before you go Roth.  If we still do get a pension then you'll have that counting against your income at retirement, but a 30% pension is much less than 100% income so your tax rate at retirement should be a lot lower.  If you retire early then you'll be in great shape with as much money in your TSP as possible.  I am 37 with 9 years of gov't service and plan on doing 30 years and retiring at 58 with a 30% pension.  If I do that and retire early, I can move money from my TSP into my Roth and pay a much lower rate, maybe 15% on taxes as opposed to the 25 or 28% tax bracket I'm in now.

I currently max out my TSP, DW maxes out her 401k, I max my Roth IRA (trying to get DW to do the same this year and into future) and then post-tax investments with everything else left over.  Not saying you have to take that advice, but at the rates of TSP I would certainly use that as your first line of defense.  If you have plenty of money in savings then you can afford to  max out  your TSP at least for the next decade or so.  Just my $0.02.

the_fella

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Re: What should I do with extra money?
« Reply #3 on: June 25, 2017, 12:47:04 PM »
Why do you need so much cash on hand? I'd invest the vast majority of that. My preference is to invest in VTI or similar, REITs, private prison stocks, and JNK, a junk bond index. But that's just me. I'd also find something else to do with that CD. You're losing money to inflation. You could try to do a backdoor Roth with some of it, but make sure you're aware of the tax implications (http://www.rothira.com/what-is-a-backdoor-roth-ira). But the advantage here is that you can withdraw the principal from a Roth IRA at any time, without penalty. What are you doing to lower your tax rate? Tax avoidance should always be part of a retirement strategy. I'm not familiar with how TSPs work; do you get to "deduct" the amount you contribute from your income, as with a 401(k)? This may also interest you: http://www.thefinancepatriot.com/pay-lower-taxes-by-itemizing-deductions-every-other-year/