Later retirement - where to put the money?

[SavingsTab]

Hi there.

This may be a different sort of question, and I'm hoping that MMM forum users can help us. Husband and I are both 48 years old, both work for government entities in CA. I'm a social worker and recently got a big supervisor promotion with pay increase, now making $78K/year. He is a high school culinary teacher, and also teaches at night in the local community college culinary program, making $70K/year.

We are debt free, except for the mortgage (around $160K), which we're refinancing to a 15 year loan (saving around $45K in interest over the old 30 year loan!). I have just over $26K in my govt employer's 457(b) and now contribute 10% of my pre-tax pay to this. I'm in the Fidelity Freedom K 2030 plan, and the expense ratio is 0.61%. I also recently opened a Vanguard Roth IRA brokerage account, and have $2300 in it so far. He has not participated in any retirement savings plans to date, but has $30K in a savings account. We both *hope* to have our government pensions and Social Security available to us at some point, but who knows?

We're pretty frugal, but now find ourselves with a lot more money than we need to live. So here's the big question:

WHERE TO PUT THE MONEY?

We would like to retire in 12 years max, by the time we're 60 years old (late my MMM standards, I know), so not sure if all of the early FI information applies to us. MMM recommends index funds, but we need to have investments that will be available to us in 12+ years, not 30+ years.

More specific questions:

Should we both max out the deferred comp offered by our government employers?

Should I stick with the Fidelity 2030 plan or switch to another Fidelity plan?

How should I invest the money in my Roth IRA? (I realize this is up to me and I am seriously lacking in investment knowledge)

Are index funds still a good option for us? If so, are there specific recommendations?

In general, I'd like to thank everyone on the MMM forum, and MMM himself, of course. I am now riding my bicycle to work, we cancelled our cable service, and eat out less to save more money. And we are happier! I just wish I had known this information in my 20s...but better late than never...

~Tabs

[ixtap]

The age of retirement doesn't actually change the investment strategies. You aren't quite close enough yet to worry about the transition, although you should use some of your time between now and then to learn about how things change with the changing timeline.

What are your expenses and how much do you expect from your pensions?

The Fidelity Freedom fund is ok for now: you can make other choices as you become more educated. For example, you will find that is has a higher expense ratio than buying the individual funds index funds, so you will want to make a choice sometime soon.

Index funds will likely be fine for your time range, at least, as much that timeline as a longer one. Your Fidelity Freedom fund is actually a balanced stock and bond fund, so it will have the same issues as you would have if you choose your own index market fund and bond fund.

[DavidAnnArbor]

I would put as much money as possible into the 457 plan, and see if you also qualify at work for a 403b or a 401k plan.
How about your husband's options?
If you lower your Adjusted gross income(AGI) as much as possible, the two of you might then also qualify for the traditional IRA, which would lower your taxes even more.
Here's rules for qualifying for the traditional IRA
https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work

Regarding investment choices (whether it's your Roth, or your 457plan), it's always best to use passive total stock market index mutual funds. These provide you the lowest expense ratios. Over the long term high expense ratios eat up the savings you've invested.
Moreover, in an index fund you aren't trying to guess the market, you're all in, and you're extremely diversified into thousands of companies.

It's good to include an international stock market index as well.

Fidelity offers these low cost passive index funds.

Also refer to the Investment order wiki at the top of this forum

https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

[SavingsTab]

Wow, thank you both so much for the replies. I appreciate it very much. :)

[Radagast]

MMM recommends index funds, but we need to have investments that will be available to us in 12+ years, not 30+ years.
On this forum, EVERYBODY plans to retire in 12 years. At most.

Should we both max out the deferred comp offered by our government employers?
Yes. Max out tax advantaged accounts to the greatest extent possible. This is actually an advantage for you, as you can begin to withdraw as soon as you retire which makes planning easier. You will also soon be able to contribute more. As said by DavidAnnArbor, maxing them out has other benefits like lower tax brackets, IRA eligibility, and maybe even a saver's credit.

Should I stick with the Fidelity 2030 plan or switch to another Fidelity plan?
Look for a lower cost option. I don't know what is available. The expense ratio should be 0.2% at most.

How should I invest the money in my Roth IRA? (I realize this is up to me and I am seriously lacking in investment knowledge)
When in doubt, the Lifestrategy Growth balanced fund (80% stocks 20% bonds) is the closest to a universal mustachian solution I know of. Otherwise maybe a 2040 retirement date fund. Or add it as part of a consistent overall plan, below.

Are index funds still a good option for us? If so, are there specific recommendations?
They are a good option for everyone. Look for funds with expense ratios lower than 0.2%. Most people like funds with the word "total" in front of them (Total US, Total International, Total Bond, etc.) but others are ok also. A good starting point is 50% Total US, 30% Total International, 20% Total Bond. If you are just getting started the total stock funds are the best place to start, then when you have saved enough to be worth preserving start working in bonds.

[matchewed]

Yes all the same investment advice still applies. Max out tax deferred options and stick with low cost index funds which reflect your risk tolerance.

The specific questions:

1) Probably but that depends on the details.

2) Does it reflect your risk tolerance? Is there a cheaper (smaller expense ratio) fund available?

3) http://jlcollinsnh.com/stock-series/

4) Yes. Vanguard, seriously read #3

It's okay to start in your late 40's. With your income you will be just fine as long as you turn those lifestyle efficiencies into savings.


*Note* I reported your other post in Ask a Mustachian as a double post. This is one big board, no need for posting the same request everywhere. :)

[Retire-Canada]

We are debt free, except for the mortgage (around $160K), which we're refinancing to a 15 year loan (saving around $45K in interest over the old 30 year loan!).

Just to be clear the savings will be a lot less than that ^^^ once you factor in inflation. If you also calculate lost investment return for the accelerated payments you will likely spend more money to pay down the mortgage early. Not saying you shouldn't do so, but if your motivation for taking 15yrs off the amortization is the $45K "savings" make sure you understand why that's not really the full picture regarding this decision.

[SavingsTab]

Thank you to everyone who responded! I really appreciate it. We have our work cut out for us, but now have the basic outline of a plan. Thank you again. :)

~Tabs