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27 and I have a couple questions...
Old 07-15-2008, 02:13 AM   #1
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27 and I have a couple questions...

I'm 27 (28 in a couple days!) and my wife is 28. Here are the stats:

Current Investments:
Me:
401K = $7,700
Roth 401K = $800
Roth IRA = $2,400
IRA = $41,000
Total Taxable = $48,700
Total Tax Free = $3,200

Wife:
IRA = $7,200
403(b) = $3,000
Total Taxable = $10,200

No consumer debt, thank goodness.... Less than $3,000 left on my student loan, at 3.125%. We have 3 months of savings and are currently saving for a down payment, closing costs, etc. for a house. No car payments or any other loans.

Current Income:
Me = $72,000/yr including bonus. Should get 5-6% raise, maybe more with an expected promotion next year.

Wife = $39,000/yr, but going to $47,500 in Sept. and $52,000 at the first of the year with promotion already in hand. Should get 5-6% raise going forward.

Currently saving:
Me:
Roth 401K = 5%
401K = 5% + 4% company match

Wife:
403(b) = 10% and her waiting period will be over this winter and the company will then contribute 12%/yr for a total next year of 22%/yr.


So, now that you know way more than I ever thought I'd divulge on the internet, my question is this: With a goal to FIRE off hopefully at 50 or so, if not sooner, what should my goals be going forward? One question is if we retire well before the 59.5 years of age, how do you tap your taxable accounts? We live in Washington and do not have state income tax, but due to our income level and lack of house for tax break our taxes are large. I'm trying to split our investments going forward to pay some taxes now, some deferred, etc. but I'm not sure how to best do this. Should I max the 401K first? Or just contribute to get full match, then go to the Roth IRA and/or Roth 401K. Also, I'm considering opening up a regular account with Fidelity (where our IRA's, etc. are at). Should I try and do minimum 401K to get match and another 5K to Roth IRA and 5K to a regular account?

I know, lot's of info and lot's of questions but I figured I'd hit the ground running with post #1. Thanks for any help and/or suggestions.
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Old 07-15-2008, 04:45 AM   #2
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River-
I'm totally jealous... being outdone by a 27 year old... Urg.
No, but really, I am just getting warmed up here as well and I have some very similar questions to yours...
But since you asked them first, I'll just sit back and read
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Old 07-15-2008, 07:53 AM   #3
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Quote:
Originally Posted by River View Post
So, now that you know way more than I ever thought I'd divulge on the internet, my question is this: With a goal to FIRE off hopefully at 50 or so, if not sooner, what should my goals be going forward? One question is if we retire well before the 59.5 years of age, how do you tap your taxable accounts? We live in Washington and do not have state income tax, but due to our income level and lack of house for tax break our taxes are large. I'm trying to split our investments going forward to pay some taxes now, some deferred, etc. but I'm not sure how to best do this. Should I max the 401K first? Or just contribute to get full match, then go to the Roth IRA and/or Roth 401K. Also, I'm considering opening up a regular account with Fidelity (where our IRA's, etc. are at). Should I try and do minimum 401K to get match and another 5K to Roth IRA and 5K to a regular account?
Ok, first I must admit I'm quite new here myself. I haven't even introduced myself on this sub-forum . The reason for not doing it is that I also like you want to collect all the data and post it here, so other people might make some comments and give some advice. Probably I'll do that early 2009 .

As regards to your situation, you are doing wonderful at your age. I think you could be a great example in the crowd of all young people to show how responsible they should be about their finances from the start, so then they won't need to whine to the media how bad life is nowadays.

About your downpayment... It depends how big a downpayment you need and how fast you want a house. Another question is whether you plan to have kids. If so, you might wish to start a 'kiddie fund', because expenses relating to babies can catch you off guard if you don't plan in advance .

As far as contributions to 401k, etc. go, that's what I've heard recommended by so called experts in the financial media and I think it's a good advice:

- If your employer offers good investments (low expenses, no loads, reasonable funds), then invest up to the employer's match first;
- Max out your Roth IRA (IMO, considering your and DW ages, Roth is a great thing);
- If still have $ left, go back to the 401k and max it out;
- Invest in taxable accounts.

That's how my DH and I do. Both 401k's and Roth IRAs are maxed out, investing in taxable accounts + saving residual amount. We've got kids (I mean the 2nd one will be here next month), so we need to save bigger amounts for their expenses and sure enough we'd like to have vacation starting next year.

If you retire well before 59.5, you'll have no problems tapping your taxable accounts. You can cash out them any time except that you'll have taxes to pay on any gains. 401k and IRA are ruled by fed laws how and when to tap. I think you should continue accumulating your wealth for the next 15 years and then come back and ask questions about tapping retirement accounts because laws might change over time. But if your concern was tapping your taxable accounts, that's yours and you do whatever and whenever you wish with them as long as you file your taxes correctly every year .

Good luck.

PS. I'm curious though. Are your friends/relatives also as responsible as you both are? Do you discuss financial stuff with them? I'm so glad to "meet" more 'old-fashioned' young people.
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Old 07-15-2008, 08:59 AM   #4
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We're trying to save 5% on a $350,000 home plus $7,000 in closing costs. I know that may sound like a lot to some people, but in Seattle that will get us a fixer in the city. We hate commuting and with gas prices we'd rather live close to our offices.

Yes, we'll have kids some day, probably within the next 5 years, but we'd both rather wait a few years to get financially stable and a house over our heads first. I know kids will dip into the savings a bit, and that's why we've plugged away a good amount to start.

I guess my real question relates to how much to save to bridge the gap between 50-59.5 till our taxable accounts are available to tap. I've read something about equal/large withdrawls from a 401K or IRA being possible before 59.5 without penalties. How is this done and is it reasonable to plan for being able to do this? Obviously, I haven't included expected costs/yr in the data above, but I'm kind of just ballparking that for right now internally. I'm more so looking at what I withdraw per year to not run out at the end of a sweet 95 (hoping!). My excel sheet has 9% return while working and 7% return while retired.

Thanks for everyone's help and kind words. In regards to my friends/relatives, I'd say my wife's side is pretty fiscally responsible, but I was long before I met her as well. Maybe not in regards to some early consumer debt on my part, but I've been reading about retirement investing since I was in high school. My parents and my side of the family is not very savy when it came to investing, so unfortunately I've had to educate myself in that department. Fortunately a college degree helped some there.
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Old 07-15-2008, 09:24 AM   #5
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Hi River, and welcome aboard! You sound like you're off to a great start.

Here's some info on tapping retirement savings with an early retirement:

Retire Early Can I withdraw money from my IRA before age 59

Coach
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Old 07-15-2008, 10:15 AM   #6
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You can tap your retirement accounts early using the 72(t) section of the tax code and can read more than you care at Welcome to 72t on the Net. If you don't retire until you're 55, you can withdraw your money from your 401(k) at that time.

We bought a $260k townhome quite a while ago with just 5% down. You may want to look at PMI for 10% down as well. Or, at the very least, consider the return for getting in at 5% (great market to buy in many places) and then pay extra to get to where you can cancel your PMI.

I'm just a bit older (30), but I've taken a few lumps here and there. I regret not putting money into a Roth when I had the chance.

You've gotten the basics down... pay yourself first, live below your means, start young. You'll go much further than most.
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Old 07-18-2008, 04:46 AM   #7
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Quote:
Originally Posted by River View Post
So, now that you know way more than I ever thought I'd divulge on the internet, my question is this: With a goal to FIRE off hopefully at 50 or so, if not sooner, what should my goals be going forward? One question is if we retire well before the 59.5 years of age, how do you tap your taxable accounts? We live in Washington and do not have state income tax, but due to our income level and lack of house for tax break our taxes are large. I'm trying to split our investments going forward to pay some taxes now, some deferred, etc. but I'm not sure how to best do this. Should I max the 401K first? Or just contribute to get full match, then go to the Roth IRA and/or Roth 401K. Also, I'm considering opening up a regular account with Fidelity (where our IRA's, etc. are at). Should I try and do minimum 401K to get match and another 5K to Roth IRA and 5K to a regular account?

I know, lot's of info and lot's of questions but I figured I'd hit the ground running with post #1. Thanks for any help and/or suggestions.
River, welcome to the forum and thanks for posting. I think you're off to a great start...especially not having consumer debt.

IMO, the Roth IRA is your best bet. You'll get disagreement on this, ultimately which one is better will depend on your tax rates now vs. in retirement...but the ROTH gives you so much flexibility on the back end. I'd fund the 401k to get match first, then fully fund Roth, then if you have more do more in the 401k.

To FIRE at 50, I think you're going to have to bump up your savings rates from current levels. I'd ratchet the rate up 2% per year until you reach 15%...for each of you (from all sources).

To get to your retirement funds, you have several options. I'm in the same boat...currently 46 and hope to FIRE at 53.
1) Use rule 72t (Google it) to get to 401k money
2) Save some in after-tax accounts
3) Use your Roth (the contributions to a Roth can be deducted without having to pay taxes, and prior to 59 1/2 - read here Roth IRA: How Can I Withdraw? )
4) Passive income, such as from a rental home
5) I'm sure there are other options I'm not thinking of

There are a zillion ways to determine how much you need to retire. Since you're many years away, I'd recommend simply a high level approach of getting to the point of saving about 15% of your income. You can fine tune this as you get into your 40s....by then you can start running an income needs analysis.

If you like to play around with calculators on the web, here are a couple good sites...just don't put too much faith in the exact numbers...they are merely estimates.

Calculators - Retirement Planner

Flexible Retirement Planner

Retirement Calculator - Parameter Form

and my personal favorite Monte Carlo Retirement Planning

In addition, I always recommend to people Money 101. It will likely take you weeks to get through all chapters...but there is some good info on insurance, estate planning, budgeting, asset allocation, home ownership, taxes, debt, etc.
Money 101 - Financial Advice & Lessons Made Easy by CNNMoney

Good luck.

Dave
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Old 07-18-2008, 12:23 PM   #8
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I appreciate the response Dave.

Does the Roth 401K have the same "benefits" as the Roth IRA does in terms of withdrawls? Couldn't I always just switch my Roth 401K over to a Roth IRA later to get the flexibility if not?

Also, my wife's 403 (b) is through the YMCA Retirement Fund and is paid out as a "guaranteed" annuity. I'm not too keen on an annuity, but since the company contributes 12% for free I won't be complaining. I'm wondering though, if it wouldn't make more sense for us to put her 10-15% away in a Roth IRA for her first and then maybe into her IRA. Any thoughts on that approach?
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Old 07-18-2008, 12:42 PM   #9
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If your taxes are high now, skip the Roth 401k and just put money into the regular 401k. Roth IRA is OK, but the tax deduction now might be better than tax free later.

Pay taxes when taxes are cheapest. 111k of gross income puts you in middle of 25% tax bracket. I would suggest deferring taxes now as much as possible (do not give in and pay 25% tax on investments when you can put 25% more money to work for you). Increase 401k contributions now, save yourself 25%, then do some tax planning with your investing and withdraw techniques (if you can plan to withdraw at a rate of less than 25%, you will have saved yourself money- if you withdraw at 25% you break even).

If you get a house soon, it's very possible it pushes you into the 15% tax bracket based on mortgage deduction and property tax deduction. When you are in 15% tax brackets, get as much money into Roth accounts as possible.

Our gross income is similar to yours (120k), and based on 401k and house/ tax deductions, our taxable income last year was 65k (at top end of 15% tax bracket). It is my goal from a tax planning perspective to increase 401k and HSA contributions enough to keep us in 15% bracket for as long as possible.
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Old 07-18-2008, 02:59 PM   #10
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Two things I'd balance are the fact that we're in one of the lowest tax periods we'll probably see, so a Roth might be a better bet. However, if the government of the future is very cash-strapped, there's no reason to think that they wouldn't declare Roth accounts to be taxable (maybe at a stepped-down basis). After all, if you're "rich" and have a lot of money in a Roth, it's not a stretch to think you'd be a target.

We're playing a bit with ours... I'm maxing out my Roth 401(k), my wife is maxing out her traditional 401(k). I do wish that I had contributed to a Roth IRA when I had a chance.
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