Case Study - Ready to invest on our path to FIRE

[The_Stash]

Topic Title: Early retirement advice

Life Situation: IRS filing joint, 26 Male Engineer/26 Female Teacher, Living in Texas

Gross Salary/Wages: ~$114,000 guesstimate (Employer has yet to provide W2 and currently unemployed) We calculated a post tax income of ~$85,500 in 2016.

Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc. - At this time we only have TRS and it is $302.09 a month.

Current expenses: ~27,000 year. See attached

No house. We have owned and sold our first house.

No kids. We envision having kids within the next 8 years.

We have $176,000+ sitting in the bank making .001% interest.

We have one active roth IRA 2016 invested in VSTMX and are ready to start additional investments. We both plan to contribute to employer offered retirement plans moving forward. We had never invested prior and were raised by families who saw investing as gambling money away.

Specific Question(s): We want to be financially independent in 14 years. What advice, comments, suggestions and general feedback do you have?

[kpd905]

I would max out the 2016 IRAs now, then just immediately max out the 2017 contributions as well.  Max out the 401k.  Then keep 3-6 months expenses in cash and throw the rest in a taxable account.

[slugsworth]

Wow awesome job!

A couple of questions:

You said you had one 401k, does that mean the other person doesn't have access at all? Have you checked to see if the teacher has access to a 457.  No mention of HSA's . . .

If it was me, I would start simple and pick a target date IRA from Vanguard that meets you risk tolerance and load up your Roths up to the limits with both 2016 and 2017 limits (if possible) - no reason to do it monthly with that sort of pile of cash laying around.  I would also max out the 401k (and any additional tax deferred space you have but didn't mention) and put the rest in a vanguard taxable account unless except for an emergency fund and any specific short term savings goals you have which you could keep in the Ally account. 

[MDM]

See Investment Order for some thoughts.

Unless you are already fully vested in a lucrative pension - highly unlikely for folks in their mid-20s ;) - traditional is likely better for you than Roth.  See the Traditional vs. Roth link in the post linked above for more.

Welcome to the forum, and just ask if something doesn't make sense.

[The_Stash]

Thank you to all for the replies.

I would max out the 2016 IRAs now, then just immediately max out the 2017 contributions as well.  Max out the 401k.  Then keep 3-6 months expenses in cash and throw the rest in a taxable account.

Sorry for the confusion. We did max out the 2016 Vanguard IRAs (one account is still awaiting approval). We invested the full amount in VSTMX. We did not want to invest all of 2017 just yet for two reasons. 1) We do not know fully understand the tax part. That is we invested $5500 and thought it would be less with tax being taken, but vanguard shows we have the full $5500. In addition we do not know how this will affect our tax filing this year as we have never done this. 2) Having never done this we thought we should figure out what we are doing before dumping the full amount in both years. We know 2016 contribution period ends in a few months so we maxed it. Before we max 2017 (another $11,000) we want to make sure we resolve any kinks and/or learning curves.

401K, I was meeting company match. Moving forward this is not possible. I was trying to not over complicate things, but I have parted with this employer and am currently weighing options for my new employer. To make matters worse the one I am leaning towards most does not offer a company 401K.

Check on the emergency fund. We are still trying to figure out the taxable account part.

[The_Stash]

Wow awesome job!

A couple of questions:

You said you had one 401k, does that mean the other person doesn't have access at all? Have you checked to see if the teacher has access to a 457.  No mention of HSA's . . .

If it was me, I would start simple and pick a target date IRA from Vanguard that meets you risk tolerance and load up your Roths up to the limits with both 2016 and 2017 limits (if possible) - no reason to do it monthly with that sort of pile of cash laying around.  I would also max out the 401k (and any additional tax deferred space you have but didn't mention) and put the rest in a vanguard taxable account unless except for an emergency fund and any specific short term savings goals you have which you could keep in the Ally account.

We do not know. All we are familiar with at this time is TRS and trying to better understand 403B (which is offered). We require further education on best course of action with teacher retirement.

We do not have any HSA setup.

See prior comment on 2017 IRA contribution. Can we split up where money goes so 2016 stays where we put it and we do as you said with 2017 amount. Can money move easily to different investment without penalty or fee?

Any advice on picking the right taxable account? As mentioned in OP so many similar options.

Thank you

[The_Stash]

See Investment Order for some thoughts.

Unless you are already fully vested in a lucrative pension - highly unlikely for folks in their mid-20s ;) - traditional is likely better for you than Roth.  See the Traditional vs. Roth link in the post linked above for more.

Welcome to the forum, and just ask if something doesn't make sense.

0. Establish an emergency fund to your satisfaction Complete           
1. Contribute to your 401k up to any company match Complete, but situation soon to change. See prior comment.           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield. Complete           
3. Max HSA Incomplete, had no immediate plans for this one. Is this us being young and dumb to think this way?           
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level Complete, Roth IRA for two.           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5) Unable to do this. See prior comment.           
6. Fund mega backdoor Roth if applicable N/A?           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield. Complete           
8. Invest in a taxable account with any extra. Ahh the golden question. Suggestions on this are appreciated. Options seem overwhelming. We understand different sectors, but we are not investing based on personal beliefs and whatnot. We want lowest fees best history of returns. Set it and forget it. Is a best option to spread out the investments?

No pension.

We chose Roth because we thought we were in lower tax, we saw it as better opportunity to take from if ever needed and based on online reading it was our understanding once income increases we can always open traditional. Have we calculated our bracket incorrectly at this time? We require additional learning in regards to investing/early retirement and how to handle the taxes.
Thank you and glad to be here.

[6-Saturdays]

You may want to check but as a teacher in Texas, you should have access to the following:

TRS=Pension (should be vested after 5 years)
403B=similar to 401K for government and public service employees.
457=similar to 401K for government and public service employees, with the added bonus that once you retire/stop working you can withdraw from the 457 with no early withdraw penalty.

You can have both a 403B and 457 at the same time. I would check to look for low cost index funds in both of these and max out before your taxable account.

[The_Stash]

Following a safe withdraw rate and the trinity study we hope to not touch the principal.

I just wanted to make sure you understood that the Trinity study looked at spending the portfolio down to zero as a "success". Its safe withdrawal rate was not based on not touching "the principal".

Well done on the savings!

Thank you. Sorry for the confusion. Our preference is to not touch principal on the Stash. I hope side jobs make this a reality. I would hate to return to work after 30 years of financial independence.

[MDM]

1. Contribute to your 401k up to any company match Complete, but situation soon to change. See prior comment.           

As others have noted, it isn't clear what 401k/403b/457/etc. options you do have between the two of you...?

3. Max HSA Incomplete, had no immediate plans for this one. Is this us being young and dumb to think this way?

Probably. ;)
If you are eligible for an HSA (e.g., your insurance is a qualifying HDHP, etc.), it's probably a good idea to use it.  See HSA - The Ultimate Retirement Account.

4. Max Traditional IRA or Roth (or backdoor Roth) based on income level Complete, Roth IRA for two.

You mentioned "Post tax income of ~$85,500" - do you know your (expected) taxable income (cell 'Calculations'!G19 in the case study spreadsheet, or line 43 on 2016 Form 1040)?

8. Invest in a taxable account with any extra. Ahh the golden question. Suggestions on this are appreciated. Options seem overwhelming. We understand different sectors, but we are not investing based on personal beliefs and whatnot. We want lowest fees best history of returns. Set it and forget it. Is a best option to spread out the investments?

Wanting low fees is good.  Chasing "best history of returns" can get you in trouble - see Callan periodic table of investment returns - Bogleheads.  See Three-fund portfolio - Bogleheads for some thoughts on specific funds.

[The_Stash]

Update.
Sorry for the delay. Big thanks to MDM & everyone else for the replies.

I (engineer) am currently unemployed. Have had a few interviews and am likely relocating to Austin soon. Wife will join me in late spring and hopes to obtain a position with TEA. If unable to acquire work with TEA she will continue as teacher.

We finally figured out my wife has the following options:

She is enrolled in a mandatory TRS program that takes 7.7% of her paycheck. They are not matching any contributions. If she retires off TRS early her SS benefits may be reduced by as much as 2/3rd. Current balance $11,891.23 membership is tier 5. Highest salary was $54,100 and current monthly contribution is $302.09.

She is eligible to participate in an employer approved 403b or employer sponsored 457 plan with no contributions offered by employer. The sponsored website is https://www.omni403b.com/PlanDetail.aspx?clientID=VqQq3BCCF9s=
We are still doing our research on which plan to choose and from who.

I have yet to receive my W2 from prior employer, but with the help of MDM we believe we fell somewhere above the 25% tax bracket.
Because of this we determined that the roth account was not the best choice and are working with vanguard to re-characterize and/or open 2017 IRAs as traditional.

Our plan is to not lump sum our entire cash savings at this time, especially with me being unemployed. Instead we have come up with the following:

Goal was ~55% US TOTAL STOCK & ~15% INT TOTAL STOCK.

My ROTH IRA $0
Her ROTH IRA $5,500 US TOTAL STOCK VTSMX Expense fee .16% (This is what we have already invested and are debating the re-characterization while also considering switching to bond if possible.)

My IRA $10,000 US BOND VBTLX Expense fee .06%
Her IRA $5,500 US BOND VBMFX Expense fee .16% (Turn this admiral if we transfer and change the existing roth)

Together Taxable $20,000 US TOTAL STOCK VTSAX Expense fee .05%
$10,000 INT TOTAL STOCK VTMGX Expense fee .09%

Adding that all up I get allocation of:
50% US TOTAL STOCK
20% INT TOTAL STOCK
30% US BONDS (would be willing to take more risk, but based on boglehead reading it is best to keep the bonds in IRA accounts. If we switch her ROTH to bond in IRA it will further increase this ratio, but also provide her lower fees.)

Total initial investment of $51,000 leaving us at least $100,000 in extra savings that we look to then distribute monthly and in a way that our allocations match goal.

We have yet to execute and are open to feedback.

Mods: I believe you have now created a case study section. I plan to continue adding onto this over time. Can this be moved or would you like for me to open new post in case study section? Thank you