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28 year old looking for some sage advice
Old 09-25-2012, 07:56 PM   #1
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28 year old looking for some sage advice

Hello ER,

I have been perusing the boards for the past several months now, indulging in some of the stories, ideas, and advice. I am finally ready to take the plunge and reveal myself. I am looking for an honest appraisal of where I am today in terms of FIRE and perhaps some areas of improvement that I might not have thought through clearly.

And here we go....

28 years old, Male, Washington DC Metro Area
Occupation: Financial Analyst for fortune 500 company since 2007 (same company) in roles of increasing responsibility.

Gross Income: 80K per year base.
Net Income: 3,761 per month (After deductions, before spending)
Monthly Expenses: ~ 2,000 (Rent of $550, Car Payment $250 @ 0% financing).

Assets
401K: ~83K (I contribute 17K statutory limit, employer matches 5.5%)
Roth IRA: ~21K (I contribute 5k statutory max limit)
Taxable Accounts: ~7500 (includes lending club account, and investment in gold of 5K through ETF IAU)
Cash: 55K (Includes ~12 months living expenses)
Car: 2010 Corolla value approx ~9K

Liabilities:
Car Loan: ~7.2K (~29 months remaining)

Net Worth: ~167K

I have no credit card debt and no student loans. I am currently pursuing my MBA in accounting in the evening and employer is picking up about 85%-90% of the cost and I will use some of my cash to cover the remainder but it is not much. I also need the cash because I pay up front and am reimbursed at the end of the semester.

Plans are to finish school in about two years from now and settle down. Not sure if I will relocate to new area or stay here which is why I am slightly disinterested in buying a home at the moment. My philosophy is that owning a home is not always a wise move. I much rather be a disciplined saver and invest the difference in renting versus owning into the market. I believe that at the end of the day wealth eventually flows to the owners of capital.

Anyways, if if you all could give me your thoughts on my situation and some feedback I would be greatly appreciative!

All the best.
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Old 09-25-2012, 08:02 PM   #2
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31 here, also in the DC metro area.

I think you're doing pretty well for yourself. My wife and I just finally worked our way up to fully maxing out our 401k/IRA this year, so you're ahead of the game.

$550 on rent is freaking amazing around here. I assume roommates. Where are you living, out of curiosity?

I think that in your situation, owning a home isn't necessarily a good move.

Good luck with everything. Nice to see some DC folk on here.
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Old 09-25-2012, 08:06 PM   #3
Confused about dryer sheets
 
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Hey bo_knows,

I live in 'burbs of NoVa. One bd One bath apartment with my girlfriend. She pays the other half of the $550 . Perhaps now it is not so great when you consider that?
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Old 09-25-2012, 08:22 PM   #4
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Quote:
Originally Posted by FreeLunch
Hey bo_knows,

I live in 'burbs of NoVa. One bd One bath apartment with my girlfriend. She pays the other half of the $550 . Perhaps now it is not so great when you consider that?
Eh, still pretty good :-)

I'm in Fairfax City for what it's worth.
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Old 09-26-2012, 07:10 AM   #5
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FreeLunch,
Welcome aboard!! You are off to a great start!! Be sure that your 401K has good diversification and balance. What worked for DW and I was in our mid to late 30's we set our standard of living well below our means and as our incomes grew faster than inflation we saved half of raises and bonuses and spent the other half. As our incomes later started to level out we were saving 1/3 spending 1/3 and giving 1/3 to tax and charity.
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Old 09-27-2012, 07:44 PM   #6
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401K is currently split as follows:

40% S&P Index 0.05% Expense Ratio
25% Small Caps Index 0.11% ER
20% All world Ex-US Int'l Index 0.06% ER
15% Bond Index 0.04% ER

Yes, those ERs are THAT low. Plan administrator offers very good deal for employees on broad-based index funds.
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Old 09-27-2012, 08:16 PM   #7
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Old 10-01-2012, 11:26 PM   #8
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Welcome Freelunch from another MBA. You are doing fantastic for your age. As so many here will tell you, LBYM and saving like crazy for decades is how ER can be achieved for many of us.

There is something that lots of us wish we had thought about sooner. If you want to retire early you need non-retirement funds for covering the years until you are 59 1/2. Under current laws the IRS will charge a 10% penalty for withdrawing retirement funds early. There are some ways around it that may or may not work for you. The 2 that I have looked at are 1) 72 t-creation of a SEPP from a Traditional IRA; 2). Retiring after age 55 and annuitizing your 401-k from your (retired from) employer (if they let you). There is lots of info on both of these. The reason I bring it up is that many of us diligently saved in 401-k's or other retirement funds without it ever entering our thoughts that we would need funds for ER that isn't penalized. I see that you do have non-retirement funds and that is good. But realize that ER to age 59 1/2 needs to be planned out. I wish someone had mentioned that to me at about your age (and I wish I had this forum then).

Cass
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Old 10-06-2012, 07:32 AM   #9
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Cass,

You mention an excellent point about non-retirement savings. As you said, I am starting down that path, but for the most part, outside of retirement savings for me is held in cash. I understand the importance of non-retirement taxable investing but I also have upcoming financial milestones like paying college expenses, possibly buying a home, and setting money aside for a car.

I have really struggled with the topic of whether to compartmentalize savings for specific goals. For example, I plan to buy a house one day but don't know whether that will be in 3 years, 5 years, or 10 years based on my career. Is it better to keep a savings account specifically for a home purchase even if the date of purchase is a huge unknown or rather invest that money in the market? I know it depends on the length of the time horizon but as you can see in this case the unknown factor can extend that time horizon well into the future.

How does one think about this sensibly?
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Old 10-07-2012, 11:34 PM   #10
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We have found over the years that we reach our goals when we specifically assign our money to them. You may not know when you will purchase a home, but you are much more likely to have a great down payment if you assign a certain part of your savings plan specifically to the future home purchase. When you have allocated specifically to that goal, it psychologically becomes more imperative to you that the money goes there as you planned. If you pool your savings without specifying what it is for, you are more likely to use it for something outside of your goals. This doesn't mean that every penny is allocated to something. Also, you may assign some savings to a goal and find in several years that your goal has changed. That is ok. Life has a way of throwing our plans out of whack. It is perfectly fine to change the assignment to something else. Set up different savings funds for each goal or combine them if you are good tracking that this much of it is for this and that much is for that. I would have the home fund, but only one or two more at a time. You will start to feel you will never reach the goals when you have to spread out the savings over too many of them.

The other thing you mention is what financial vehicles do you use? You don't want to be very risky with your home purchase fund so Federally insured CDs or a Money market fund is safer. Your retirement savings will serve you best with your time horizon in low fee mutual funds that have good long term track records. An example is the Vanguard Wellington fund as one of several in which you should diversify. I've learned my lesson to only invest in mutual funds with good long term track records. But I am more conservative than most and certainly don't have the years ahead that you do. Only you can choose your risk tolerance. But you will find that your time horizon for the particular purchase will also determine where you put your savings.

Cass
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Old 10-08-2012, 09:07 AM   #11
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I see the advice to put money you need in a few years (like a house downpayment) in safe investments like a CD all the time. I never did it that way. If I had a specific obligation where I needed an exact amount of money, then I might consider that, but a house downpayment (and many other short term savings goals) are not like that. Instead of getting virtually no return, I go ahead and invest in my normal asset allocation based on my tolerance for risk. If the time comes and my investments are up - woo hoo - I won the game and have more (sometimes much more) to spend than I would have if my money was stuck in a mattress or a "savings" account. If the time comes to spend the money and the investments are down - too bad, now I have a choice. I can go ahead with the purchase and it will cost me a little more, which was the risk I took. Or I can adjust my plans to put a little less down, or delay my purchase a little while, or buy a little less of a thing than I had originally planned. It's life, sometimes I have to adjust my plans. Over many years, I am very, very far ahead with this strategy and the few times I have had to make adjustments, they have been minor and worked out just fine.
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Old 10-10-2012, 10:53 PM   #12
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You do have a good point, growing_older. It is definitely a psychological thing with me from being so conservative. What have you typically invested dollars in that was for a future purchase?

Cass
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Old 10-10-2012, 11:38 PM   #13
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FreeLunch, Cass makes a great point about needing to have a large blob of money to get you to age 59.5 at which time you will gain unfettered access to your IRA, for example.

When I retired 4 years ago at age 45, I was able to cash out my large company stock holdings at low tax rates (long-term cap gains using NUA - Net Unrealized Appreciation) and avoid the 10% early withdrawal penalty on nearly all of what I cashed out. This gave me a sufficient blob of money whose monthly dividends (in bond funds) I am using to cover my monthly expenses.

I have also built into my ER budget a cushion or surplus in case unforeseen things occur. This enables me to live the same day-to-day lifestyle without having to worry about having enough money from month to month.

A big issue you need to consider is health insurance, as you won't be eligible for Medicare until you turn 65 (or more, by the time you get there). Then again, with the ACA this may not be as big a concern.

Once I turn 59.5, I will have unfettered access to the IRA, as I mentioned above. But I will also have access to my frozen company pension and Social Security once I get into my 60s. I call those 3 things my "reinforcements" which will make things easier for me at that time, so the main challenge is getting TO age 59.5 which is now only 10 years away. I advise you to split your time horizons into two parts.
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Old 10-11-2012, 12:12 AM   #14
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Quote:
You do have a good point, growing_older. It is definitely a psychological thing with me from being so conservative. What have you typically invested dollars in that was for a future purchase?
Well, the biggest example I have is funds for kids' college. Conventional arguments are to start aggressive but become more conservative as start date nears and be almost all in cash or bonds during school. Something like "you don't want the market to be down just as you need the money" is the usual reasoning.

I left the kids' college funds 100% invested up until the year they needed them, then sold between a quarter and a years worth as tuition bills became due. The market was down a few years and sometimes it cost me more shares to fund a particular semester, but the funds always came roaring back and I've been able to fund a lot more school than I would have if I had backed off to a more conservative strategy earlier. It was a risk. If the market went down and stayed down I would have had to find funds elsewhere or take more school loans. But that risk was balanced by the upside possibility that I would have more if markets were better, or at least decent. They were.

I've done the same with my emergency fund. A little I leave in "cash" as a buffer in my checking account, but the rest is all invested with my usual asset allocation. By now, it's grown so much that even if the market tanks I'll still be ahead from where I would have been if it was in a safe money market all along. Had an emergency happened, I might have had more or less available than I wanted, but it was all a pretty rough guess how much I needed for an emergency fund anyway, so it wasn't like I needed a specific exact amount on a specific date. I made sure I had enough to cover any sort of generally likely emergency - mostly job loss - and meanwhile it did a good job of growing while invested.

I don't do this with my retirement funds. I don't have a good fallback plan for that and the alternative to just keep working is sufficient unappealing that I am willing to sacrifice some potential gain for greater likelihood of having as much as I think I need when I want it. I'm not all bonds, but I picked a good asset allocation I am comfortable with maintaining and I rebalance to keep it that way.
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