Long-time reader, first-time poster

[woodsy]

Hello Everyone,

I'm a 22-year-old software engineering team lead, husband, and father of one (#2 on the way!) - my wife stays at home with our little girl.  I've been lurking around MMM several months now, and finally decided to join the community.  I feel like I'm well on my way to badassity, and looking forward to contributing and finding even better ways to lead a frugal life.

Here are our stats:

Goals: Financial independence by 35, four kids, a nice house.

Expenses:

• Varies, but usually around $1900 - $2300/month.  I'll break it down if necessary.

We also just started putting away $1500/month to a taxable investment account, $500/month to IRAs, and I put 5% of my salary toward my 401k with an employer match of 4%.

Our expenses leave us with roughly $300-$700/month extra that we haven't quite decided what to do with yet - though I'm guessing we'll pump our IRA contribution up to the max for each of us with it.

Income:

• $80,000 base salary

Debts:

• $98,000 mortgage - we pay $800/month

Assets:

• House: $150,000
• 401k: $6000
• Roth IRAs: $7000
• Taxable Accounts: $4000
• Emergency Fund: $35,000 - includes money for baby #2 on the way, car replacement because our car is near the end of its life.
• Money sitting around for no good reason: $15,000 (we need to dollar cost average this into our taxable account...)

Looking forward to future conversations!

Woodsy

[Another Reader]

In your shoes, I would take the $15k and max out the 2012 and 2013 Roth IRA's for both of you.  If that's not enough, I would reallocate from the $35,000.  I would also consider maxing out your 401(k).  You have an irreplaceable opportunity to have this money compound for you tax free and tax deferred at a very young age. 

I would invest any remaining income in taxable accounts and hold on to enough cash savings to get through the birth.  I would plan for the new car, but as a lower priority unless it was on the way to the junkyard.

[woodsy]

Yeah, I think maxing out the Roth for 2012 and 2013 is going to be the best choice for the extra cash - thanks for confirming.

I need to have some money going into semi-conservative taxable accounts, as my wife wants a $400,000 house in about 7-10 years.  I know it's not ideal, but I'm having a hard time negotiating that one.

Perhaps I should to recalculate how much I'll absolutely need in that taxable account for the house, and throw the rest in the 401k?  I could use some help in calculating the trade-offs.  Part of my dilemma is that I'm assuming SEPP isn't going to be able to cover my yearly expenses at 35 alone, so I'm operating under the assumption that I need to have a fairly sizable chunk in taxable amounts that I can SWR out of in addition to the SEPP money.

[Another Reader]

You cannot afford a $400,000 house on your current salary nor can you afford one on what you are likely to make in a few years.  Currently, your house is worth less than twice your income and you are in a very comfortable position.  You would have to be making close to $200k to have the same comfort level with a $400k house.  In your shoes, I would have a long talk with the wife about what's really important.  A $400k house, 4 kids and being FI at 35 might not be compatible goals.

My experience was that I needed multiple sources of income to retire early.  For me that meant leveraged rentals as well as paper assets.  If SEPP means an employee stock purchase program, that's a dangerous place to concentrate assets.  You may want to re-think that.  Your taxable accounts should be part of the FIRE plan, not a place to save up to buy a fancy house. 

Sit down and run some numbers.  An expensive house may DELAY FI by many years.  That house will be too much of your asset base.   

[sherr]

Yeah, I think maxing out the Roth for 2012 and 2013 is going to be the best choice for the extra cash - thanks for confirming.

I need to have some money going into semi-conservative taxable accounts, as my wife wants a $400,000 house in about 7-10 years.  I know it's not ideal, but I'm having a hard time negotiating that one.

Perhaps I should to recalculate how much I'll absolutely need in that taxable account for the house, and throw the rest in the 401k?  I could use some help in calculating the trade-offs.  Part of my dilemma is that I'm assuming SEPP isn't going to be able to cover my yearly expenses at 35 alone, so I'm operating under the assumption that I need to have a fairly sizable chunk in taxable amounts that I can SWR out of in addition to the SEPP money.

Even If SEPP doesn't cover living expenses when you retire it can still be worthwhile to contribute to the 401k. If you are still in the 25% tax bracket after your deductions then putting money in a 401k now will save you that 25%. If you withdraw in retirement you'll be in what, the 15% backet? With an average tax rate of 10% or less (which is what's really important at withdrawal time)? So add in the 10% penalty and you're still saving 5% off of what you would have lost right away in a non-tax-advantaged account, not to mention the capital gains taxes they would have added on top of it.

On the other hand if you are in the 15% bracket after deductions then it's almost certainly not a good idea to contribute more to a Traditional 401k. If you have access to a Roth 401k though that might be an excellent decision.

For those who don't know: Substantially Equal Periodic Payments are a way to get money out of your Traditional accounts early-withdrawal-penalty-free. However you can only take out a certain amount each year (decided by current interest rate levels) and it might be less than you would want.

[sherr]

Oh, I would also +1 the comment that a $400,000 house is too much for you. I am in a very similar situation to you but my wife also works and makes a good salary, and personally I thought the $200,000 house we just bought was a little more than I would have liked to spend.

Your home does not generate income (beyond cancelling the need for rent). So if you need $600,000 to generate the income you need to live on, then you'll need a net worth of $1,000,000 in order to retire in a $400,000 house. The value of your primary residence directly affects how long you'll have to work before retirement. Something to keep in mind.

[Another Reader]

I personally dislike the 72 t plan.  You are locked into an annuitized decumulation frozen at whatever the interest rates are at the time you start.  There is no flexibilty and the rules could be changed before you start the annuity. 

As I understand it, retirement accounts are given less weight in the college financial aid computations.  You may have to educate as many as four children.  This is another reason to maximize the tax deferred and non-taxable forms of savings.

However, the main reason to invest in retirement accounts today is the opportunity to allow the investments to grow untouched for a very long time.

[woodsy]

Thanks for all the responses - I really appreciate the feedback.

Sherr - your logic makes a lot of sense with the 401k.  I think I calculated awhile back that I'll be just short of reaching the 15% marginal bracket, so boosting the 401k to at least that mark is essential. 

Regarding the house - there are a couple anecdotes I haven't shared that I think are somewhat different than the norm:

• I'm expecting my income to increase at an accelerated rate compared to most.  Based on current succession planning, I can get one or two promotions in the next 7-10 years, which would increase my income by $25,000 and another $20,000, with the biggest bump being the next promotion.  This is pre-annual-raises, which my company averages at 5%.  Although I'm not convinced I'll be here forever, the house is definitely operating with the assumption that I will stay at the company, raises will continue, and I'll get those promotions.  My wife has no problem staying in our current house if we can't afford more.
• $400,000 is the absolute max.  My wife is wonderful at finding deals, and I'd very much doubt we actually spend more than $300,000.