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Catchy title,
Old 05-10-2012, 03:21 PM   #1
Dryer sheet wannabe
 
Join Date: May 2012
Posts: 17
Catchy title,

HI
I have been snooping around for a few days and have visited boglehead too. Perhaps my question is more suited boglehead, but I am drawn here. Would I like to retire early, yes, you'll find me in the young dreamers forum although that is beyond my current situation...

A bit about me
45
female / sole money maker
2kids
Have been working 14 years in the tech sector starting at 29,000 and now 85,000. During this time frame saved money was used for 1) maternity leave, and 2) then a few years later company closing. Started working 6 months later.
Now back on track.

I have no debt other then a mortgage, 3 years in.
I had worked for a small company (8yrs) with no 401k, self-employed (5yrs), was re-saving after jobloss and by the time I was ready to investigate a self-employed 401 I became re-employed w/ a company (the past 1+ yrs). (Previous to my 14 year stint here (in the US) I was in Canada for several years in the same business, but just starting out)

My current goals are retirement fund. I had been putting money into a mutual fund but ditched that last year (due to high fees, and loss) and I wanted to move it into an IRA. (Instead I paid of my credit card and saved another chunk to start IRA)

My current measly, but working on it, savings:
IRA - $5000 cost basis (its a stock).
Cash - 10500
House (bought a fixer upper and will be done with that in a month)

Starting in a month I am able to put 30% of my monthly income towards this goal, which I thought I would max out the traditional IRA (w/ 10% allocated) ... which brings me to my first question,

1) Why is there a preference for ROth over Traditional? Perhaps people who have 401's get tax deferred money there and dont need a traditional IRA? What am I missing? I know one can draw from a ROTH without penalty but isnt deferred tax money good? I can see the benefit of having both, but the caps are small.
2) I also gather people here dont really need take advantage of these IRAs. Is that because one retires early and therefor cannot access these funds (not to mention they would be too small w/ caps to rely on as a FI person)?
3) Apparently I am too stubborn to go to a financial adviser (I did one time and opened that mutual fund) so am learning as I go...

Since I am far from retiring, my new plan would be to save enough to fund my life between 55-65 and then rely SS.

Thanks for now,
Sara
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Old 05-10-2012, 03:35 PM   #2
Full time employment: Posting here.
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Join Date: Jan 2010
Location: Smith
Posts: 743
Hi and welcome! I'm not much help on the investing side. What is your lifestyle like? Do you live below your means? Sound like you have debt generally under control. I'd look to cut your spending and dump the savings into investments. Sounds like your single so living expenses in retirement can be pretty low. I'd take a hard look at what kind of lifestyle you want in retirement and then go about saving enough to fund that. Saving is great, but having a goal give you some perspective.

IMHO, you need to prioritize. If retiring as young as possible is important, your lifestyle and spending will need to change accordingly. If a certain lifestyle or retirement plans (travel, for instance) is the priority, you may have to nudge that retirement date back. With some planning and prioritizing you'll know what you need and you can do what you need to do to get there. There are a lot of ways to live cheaply in retirement and not feel like your giving anything up. But that's up to you.

As far as SS, I don't know if I'd count on it 20 years out unless it was reformed. The longer they wait, the harsher the reforms may have to be. I doubt it will go away, but you might be looking at less than you assume now. Just my opinion.
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Old 05-10-2012, 04:14 PM   #3
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In general, Roth fits best if you expect your income tax rate to be higher during retirement than before, something which is more often true for those who accumulate enough to FIRE than those who do not.
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Old 05-10-2012, 11:30 PM   #4
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Few questions:
If you are 45 now, have you only paid into SS for 14 years? (Or is it just 14 years in the tech sector.) If only 14, then you will want to do some work for at least 30 years if not the full 35 to get a good amount from SS - considering you expect to live off of that. However, living off SS alone is a recipe for the poor house if you ask me, esp. if you claim early.

Are you kids self-sufficient yet, or do they expect funds for school/college?

Have you done any calculations to see how much you will need to live on?
When SS gives you an estimate (you can get it now online), it will expect you to be earning the same amount as you are now until you are 67.

One advantage to the Roth is that you can withdraw your contributions, so it serves as an emergency fund. If you are at all worried about job loss, then building up a couple of years worth of expenses in an emergency fund would be worthwhile before you put it into an account you can't touch until 59.5.
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Old 05-11-2012, 08:35 AM   #5
Dryer sheet wannabe
 
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I know I am way out of league here, so thank you for replying. I do live below my means. I could afford a bigger house, a bigger mortgage etc. nicer car, but I don't. Right now, I want to direct as much as I can towards investments/savings. I am able to put 30% of my income there.

About the SS, yeah, if I am relying on that then I am not quite financially independent (which outs me from these boards). I have worked prior to my 14 years in the tech sector, but these 14 years represent most of my professional life (bigger income), with 3-4 years before that at hourly wages, and then part time jobs prior to that. I lived my 20's working and exploring. I gather if I want to not work 10 yrs prior to 67, then the SS rate will be different then what it is telling me right now as that $$ presumes I will work/contribute thru to 55/67/70+. (whether it even exists then or not)

The perspective on the Roth makes sense now, since people here have a higher income during their retirement then during their working/earning days. My angle was the other way, being in a lower tax bracket during retirement.

I have perused retirement calculators, and I can live off of the same amount in retirement, as I am right now (minus the 30% I would be putting towards investments). Except that health insurance issue - although I am Canadian, living in the US. I plan to return and have that be less of a problem.
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Old 05-11-2012, 08:58 AM   #6
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Welcome to ER.org Sara. A few comments on your questions.

1) Why is there a preference for ROth over Traditional? Perhaps people who have 401's get tax deferred money there and dont need a traditional IRA? What am I missing? I know one can draw from a ROTH without penalty but isnt deferred tax money good? I can see the benefit of having both, but the caps are small.
2) I also gather people here dont really need take advantage of these IRAs. Is that because one retires early and therefor cannot access these funds (not to mention they would be too small w/ caps to rely on as a FI person)?
Almost 1/3rd of my portfolio is in IRAs, so it's very significant. DW and I both have TIRAs that are limited due to caps as you noted. However, we also both have rollover IRAs from 401Ks that are substantial and my IRA also has an old pension lump sum that's also significant. We will indeed rely on income from our taxable accounts in our early years in retirement, but we can make withdrawals at age 59-1/2 which is plenty early. Ideally we'll withdraw in part from taxable and part from sheltered to minimize taxes. As for Roth vs Traditional, there is no one answer, depends on income, future tax rates, etc. Traditional IRA vs. Roth IRA

3) Apparently I am too stubborn to go to a financial adviser (I did one time and opened that mutual fund) so am learning as I go...
If you can learn to invest for yourself, odds are you will be better off without a financial advisor. While some are great, the bad ones outnumber the good ones and "by the time you know enough to choose a good financial advisor, you don't need one."Financial Advisors Encourage Bad Behavior - Forbes

I'd give serious consideration to the posts above re: Soc Sec. Relying entirely or even heavily on Soc Sec for income implies a pretty austere lifestyle. Many people do, but most people plan on having a significant portfolio as well to supplement income and/or unusual/unplanned expenses. Who knows what returns, inflation, health care expenses, Soc Sec changes may come in the decades ahead. It's a very different world ahead IMO...
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