Author Topic: Where to continually invest?  (Read 6772 times)

cbr shadow

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Where to continually invest?
« on: October 02, 2012, 08:49:30 AM »
Hi All,
I'm new to the forum but have spent the last 2 weeks reading almost all of the blog posts here, and this morning discovered the forum.  I'm a 28 yr old engineer who went to college a bit late, but finished 2 years ago with an industrial technology degree and now work as a design engineer and make about $50k/yr before tax/deductions.  My wife is a business intelligence consultant and makes roughly $100k before taxes/deductions.
We have no kids, no credit card debt, no car payments (My 2006 Scion XB w/ 110k miles and her 2011 Kia Sorento w/ 30k miles are both paid off).  She recently started a new job which is about 5 miles away from our home compared to the 25 mile traffic commute she had before.  I'm 9 miles away.

Without giving you more info than you're probably looking for, we have about $20k sitting in a "high yield savings account".  High yield meaning 0.75% intrest..lol.   So I'd like to know what the best place to invest would be.  I have a 401k that I put 10% of my check into, and my wife does the same.  Both companies match up to 6%.  Should I open a Roth IRA with our savings?  I hear a lot about people on the forum putting money into index funds, but I dont know a lot about those.  After reading the posts on this website I feel like should have that $25k starting to "snowball" by investing most of it somewhere.  Do my wife and I each open a Roth IRA?  Do we increase our 401k contributions?  One financial blog I read online was giving someone the advice of putting into the 401k only up to the max your company will match, then max out a Roth IRA ($5000/yr), then if there's money left over increase your 401k some more. Thoughts?

Also in large part due to this site we've cut our expenses dramatically.  We used to go out to dinner many times every week and are now grocery shopping instead.  We're limiting going out to an inexpensive dinner 1x per week for now.  Also I dont come home for lunch anymore (a stupid way I was DOUBLING my commute) and no more fast food ever.  My "hobby budget" no longer exists, which was $125/month to do whatever I wanted with.. instead that goes to savings.

It sounds wrong to say this, but one of my big motivators is to see my coworkers and friends spending (wasting) their money on lavish items ($40,000 cars/trucks, super expensive exotic vacations, huge luxury home renovations) and knowing that instead of doing those things I have bank account that is growing by the minute.


Zaga

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Re: Where to continually invest?
« Reply #1 on: October 02, 2012, 09:25:00 AM »
You make $150K with no kids?  You're probably in a high tax bracket, so you should get as close to maxing out your 401-K as you can.  That's $17K each of your contributions, the match is above that.  This will help to lower your current taxes so you can save more.

Then if you can still invest put in $5K a year to a Roth each.

cbr shadow

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Re: Where to continually invest?
« Reply #2 on: October 02, 2012, 10:00:49 AM »
Is maxing the 401k a bad idea if we plan to retire early?  If we put all of our 'surplus' money into 401k we wont have anything to retire early on, and will get taxed on 401k withdrawls, right?  Please let me know if this logic is correct.
I guess it would have helped if I stated my goals in the original post :)  We would like to retire around 40 if we can.. which means piling away our stash for 12 or so years.

Zaga

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Re: Where to continually invest?
« Reply #3 on: October 02, 2012, 10:02:58 AM »
There are others who know more about this than me.  Google 72t withdrawals, and also the Roth pipeline.  Both are options for getting your money penalty free before age 59.5.

cbr shadow

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Re: Where to continually invest?
« Reply #4 on: October 02, 2012, 10:13:43 AM »
Thanks I'll look into those things.  Also, do you (or anyone else) have suggestions on where to invest the $25k in my savings that is currently only getting 0.75% interest?  $10k of that can go towards the first year of Roth IRA.. or should I invest it elsewhere?  When people on here discuss their investments snowballing, where are they snowballing?

matt_g

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Re: Where to continually invest?
« Reply #5 on: October 02, 2012, 11:53:22 AM »
Read the book "A Random Walk Down Wall Street" by Burton G. Malkiel
Open a Vanguard account.  You can just call them.
Max out 401K
Max out Roth IRA
Invest the rest in Real Estate or a Brokerage Account

If you are making $150k before tax, thats 150K-17k-17k-5k-5k = 106k
« Last Edit: October 02, 2012, 11:57:37 AM by matt_g »

cbr shadow

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Re: Where to continually invest?
« Reply #6 on: October 02, 2012, 12:48:03 PM »
Thanks for the response.  I do have a Vanguard account through work for my 401k, and my wife has the same.  I agree w/ your math below, except that the 107k would be less because the Roth IRA takes money after taxes and then you aren't taxed when you take it out.

Zaga

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Re: Where to continually invest?
« Reply #7 on: October 02, 2012, 02:05:51 PM »
So you have a Vanguard 401-K account, it will be super easy for you to open a brokerage account with them as well to put your investing above the 401-K's and IRA's.

reverend

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Re: Where to continually invest?
« Reply #8 on: October 02, 2012, 03:51:49 PM »
Vanguard's VTSAX seems like a good place to "set and forget" some money. That should return around 8% annually over time (if I remember right).

Kriegsspiel

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Re: Where to continually invest?
« Reply #9 on: October 02, 2012, 04:05:29 PM »
Vanguard's VTSAX seems like a good place to "set and forget" some money. That should return has returnedaround 8% annually over time (if I remember right).

I changed some words.  But yea, VTSAX (or just saying American stocks!) is a good move.

cthulhu

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Re: Where to continually invest?
« Reply #10 on: October 19, 2012, 08:32:20 AM »
Hi,

I recently met with my retirement financial guy - and he had one tip that may or may not apply in this situation - but it was new news to me so i thought i'd throw it on here even a few days late.

NOTE - i am not a financial advisor nor do i play one on tv - i offer this as something to research if it applies to you

In the case of a high earner, who intends to retire early, and who is maxing out their 401k - my guy told me I would do better to fund index funds in a taxable portfolio than dropping money in an IRA or either type.  The tax benefits start to cancel each other out at a certain point, and if you earn enough you're disqualified from a Roth - even if you aren't above that number now if you are going to be in the next 5yrs it ends up being a limited pile of money you can't really add to.  Combine that with the fact that you will need some pool of money that is not penalized for early withdrawal and my gentleman, who i do trust, told me i was better off maxing out the 401k, then doing the taxable portfolio in index type funds with dividend reinvestment.  just a thought

Al

arebelspy

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Re: Where to continually invest?
« Reply #11 on: October 19, 2012, 08:43:19 AM »
Hi,

I recently met with my retirement financial guy - and he had one tip that may or may not apply in this situation - but it was new news to me so i thought i'd throw it on here even a few days late.

NOTE - i am not a financial advisor nor do i play one on tv - i offer this as something to research if it applies to you

In the case of a high earner, who intends to retire early, and who is maxing out their 401k - my guy told me I would do better to fund index funds in a taxable portfolio than dropping money in an IRA or either type.  The tax benefits start to cancel each other out at a certain point, and if you earn enough you're disqualified from a Roth - even if you aren't above that number now if you are going to be in the next 5yrs it ends up being a limited pile of money you can't really add to.  Combine that with the fact that you will need some pool of money that is not penalized for early withdrawal and my gentleman, who i do trust, told me i was better off maxing out the 401k, then doing the taxable portfolio in index type funds with dividend reinvestment.  just a thought

Al

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Another Reader

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Re: Where to continually invest?
« Reply #12 on: October 19, 2012, 09:17:57 AM »
The advisor is saying it is better to max out the 401k and then put money into taxable funds rather than IRA's for a high earner.  Converting the taxable IRA to a Roth before retirement would be heavily taxed.  A high earner will likely continue to have high income in retirement and a correspondingly high tax rate, making the Roth conversion less desirable after retirement.  Also, the traditional IRA is locked into MRD's, which requires more planning for a high earner.

The part I do not agree with is the advice to ignore the Roth because it will only involves a small amount of money, as the OP will exceed the income limit early on.  That happened to me - under $40,000 in contributions before I had too much income.  However, I recently gutted the contributions, added the amount to some additional money and bought a rental.  That property has already appreciated significantly, produces a good return and has tax benefits.  The remaining contributions and the returns are still in the account, all available as tax free money any time after age 59 1/2.

I would max out the Roth while I could and keep my options for that flexible pile of money open.

dragoncar

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Re: Where to continually invest?
« Reply #13 on: October 19, 2012, 11:55:54 AM »
Depending on the specifics, you may not be eligible for an IRA deduction.  In which case, a Roth IRA is a no-brainer.   

1) You are already paying taxes on the money, why pay taxes on the earnings?
2) You can contribute without income limit until they close the conversion loophole.
3) You can always withdraw contributions without penalty or additional tax.  So you're only sequestering the earnings (which you can 72t).

destron

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Re: Where to continually invest?
« Reply #14 on: October 19, 2012, 06:44:00 PM »
Thanks I'll look into those things.  Also, do you (or anyone else) have suggestions on where to invest the $25k in my savings that is currently only getting 0.75% interest?  $10k of that can go towards the first year of Roth IRA.. or should I invest it elsewhere?  When people on here discuss their investments snowballing, where are they snowballing?

If you decide to put the money into a Roth IRA, you can contribute $5000 each this year, wait until after the new year, and contribute $5000 each more.

Zaga

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Re: Where to continually invest?
« Reply #15 on: October 23, 2012, 07:48:43 PM »
Don't forget about the backdoor Roth option.  Even if you're above the contribution income limit you can still contribute to a Roth by contributing to a traditional nondeductible IRA then immediately rolling it over to a Roth. 

Just something that's an option.

jrhampt

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Re: Where to continually invest?
« Reply #16 on: October 24, 2012, 10:10:06 AM »
We are also DINKS in a higher tax bracket where Roth contributions are phased out, so we max out 401ks to lower our AGI, contribute extra to the mortgage, and invest regularly in taxable accounts.  He has a different strategy for taxable investments, but I have automated investments in Vanguard's S&P 500 index fund and a muni bond fund in my taxable account.  I will probably also add their total international fund.

Quick240

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Re: Where to continually invest?
« Reply #17 on: October 24, 2012, 11:57:36 AM »
If you decide to put the money into a Roth IRA, you can contribute $5000 each this year, wait until after the new year, and contribute $5000 each more.

Actually, they recently announced the limit for next year will be $5500.  Even better...