The Money Mustache Community
General Discussion => Share Your Badassity => Topic started by: Little Benny on February 26, 2015, 10:54:05 AM
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I'm a fellow Denver suburbanite, I recently found this incredible blog and started from the beginning about a month ago, working up to Feb of 2012 so far. I've learned a lot, and it's been a whirlwind month. This month alone, my wife and I sold our beastly 2012 Jeep gas guzzler through Craiglist with 5, count em, 5 $400 35 inch tires, taking us down to just a 2008 CRV we purchased used (we have 2 kids). We did not owe anything on the Jeep, so that $30k is being split 50/50 between the mortgage and investment accounts. We also purchased a bike trailer from CL as we're aonly about 3 miles from groceries, Home Depot, the library and the public pool. My wife is a stay at home mother and is really looking forward to putting that to use.
We dropped cable and switched to Centurylink for internet, saving about $60 a month and getting us away from the tv.
Then I looked at our Roth and 401k. We have about $250k in there, enough to easily fund a nice retirement with compounding at age 60 (I'm 36 and my wife it 32), so I cut contributions entirely to the Roth and dropped the 401k to 6% to get the full 1:1 match. Now it's time to build the pre-60 stash while rapidly paying off the remainder of our mortgage.
I like the idea of rebalancing and just took a look at that Vanguard fund that does it for you, but I'm wondering if there's a simpler way, especially when it comes to tax prep time. What if... instead of selling something that has posted a big gain, incurring taxes and possibly requiring you to pay attention to lots for tax basis, etc, you simply divert your new funds going forward to the assets that are low on the balance side. With our savings habits, we should have about $1500 a month to put into our Scottrade account. I figure I'll just keep an eye on my allocations and purchase more in the categories that are behind. Maybe that just doesn't work once balances are high enough, but starting out with about $20-30k (also moved our 6 months of "emergency" fund into the market), I would think I could keep it balanced without messing with selling and repurchasing.
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Then I looked at our Roth and 401k. We have about $250k in there, enough to easily fund a nice retirement with compounding at age 60 (I'm 36 and my wife it 32), so I cut contributions entirely to the Roth and dropped the 401k to 6% to get the full 1:1 match. Now it's time to build the pre-60 stash while rapidly paying off the remainder of our mortgage.
Re: the bolded phrase - why?
Your Roth contributions are withdrawable at any time without penalty. The more Roth contributions, the more tax-free returns.
And just because the employer stops matching at 6% doesn't mean it's bad to contribute more. After retirement, 401k->tIRA->Roth pipeline to Roth IRA.
There may be perfectly good reasons to do what you describe, but they would be unusual reasons.
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Then I looked at our Roth and 401k. We have about $250k in there, enough to easily fund a nice retirement with compounding at age 60 (I'm 36 and my wife it 32), so I cut contributions entirely to the Roth and dropped the 401k to 6% to get the full 1:1 match. Now it's time to build the pre-60 stash while rapidly paying off the remainder of our mortgage.
Re: the bolded phrase - why?
Your Roth contributions are withdrawable at any time without penalty. The more Roth contributions, the more tax-free returns.
And just because the employer stops matching at 6% doesn't mean it's bad to contribute more. After retirement, 401k->tIRA->Roth pipeline to Roth IRA.
There may be perfectly good reasons to do what you describe, but they would be unusual reasons.
You should Max the 401k and depending on income max a traditional IRA.
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Heading a bit off topic, but now I'm curious. Maybe I'm confused, but I assumed everything in 401ks an Roth IRAs could not be touched before 59.5 years of age without incurring a penalty and/or taxes, excluding the equal distribution method MMM discusses in an early article that equates to a grocery budget level of penalty free distributions. If I remember you can take principal out of the Roth, although that makes up a MUCH smaller portion of the $ than the 401k.
My thought, those accounts will grow to about $1.2 - $1.5 million by the time they can be drawn upon, more than enough to live happily. I don't want to give up free money, so I'll keep going with the 6% as my company matches that dollar for dollar.
I'm looking to be out of the daily grind way before 59.5, so I assume I need to start building up a taxable account (I'm going for low cost Vanguard ETFs to start). What am I missing here? Are you saying you can withdraw from tax deferred or tax advantaged accounts without penalty (given the two named exclusions above)?
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Madfientist.com
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There are MANY ways to access tax deferred funds penalty free in FIRE. Not to mention pay lower taxes on the funds than paying income tax and capital gains tax in a taxable account.
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Are you saying you can withdraw from tax deferred or tax advantaged accounts without penalty (given the two named exclusions above)?
See http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/msg415140/#msg415140.
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Nice, very interesting. I knew a little about the conversion from company sponsored 401ks to Roth but I assumed you'd have to convert enough that you'd pay pretty decent taxes at that point. I definitely need to read more. All in all, sounds like you still need a taxable account to bridge, which I am just starting to build. Thanks for the info!!!
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All in all, sounds like you still need a taxable account to bridge, which I am just starting to build. Thanks for the info!!!
You'd require enough money to cover 5 years of expenses. This could be from a mixture of Roth contributions and non-tax advantaged investments.
Overall sounds like you are off to a good start, but I would highly suggest you reevaluate contributing to your IRA and 401(k).
See http://forum.mrmoneymustache.com/forum-information-faqs/frequently-asked-questions/msg415140/#msg415140.
That link provided by MDM will be the best place to start.
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What if... instead of selling something that has posted a big gain, incurring taxes and possibly requiring you to pay attention to lots for tax basis, etc, you simply divert your new funds going forward to the assets that are low on the balance side.
Yep, lots of people do that instead. When adding new smaller sums of money (which aren't a part of my pre-authorized bi-weekly automatic buying), I always throw it at the underperformer. But I do a proper full rebalance at the ends of June and December if things are still significantly off.
I was reading the "Living an FI" blog yesterday (who just retired early?) and noted he did all his rebalancing with money put towards the underperformers after getting burned a few times on capital gains.