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Ready Now - With Long Way to Go
Old 11-03-2009, 10:42 AM   #1
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Ready Now - With Long Way to Go

Hi Everyone! I've been reading a few threads and thought some of the members here could give me a little guidance. I have a long way to go, but I'm off to a great start, and I think I have a solid plan.

Some basics:

My name is Ben. I want to retire by the time I'm 42.

I'm 22, have a BS in Computer Science, minor in Mathematics and have been working full time in IT for a rock-solid telecom since I was 18. I attended college full time and worked full time - which was a nightmare, but I survived! My current salary is approximately $45k, hopefully with a big promotion around the corner.

My wife, who is 21, will be graduating with a BFA in Photography in Spring 2010; she's currently working part-time at the same company as me at $12/hr providing multimedia services (shooting, editing, publishing). Most likely, she will be offered a full time position upon graduation at a similar pay rate.


Our debt is manageable - about $16.3k in Student Loans for me @ ~5.5%, and about $20k in student loans for DW @ ~5%. All of these are federal loans. I currently have no plan to accelerate payments on these student loans. Outside of one revolving $2k balance @ 3.9% that I am paying minimally, we have no credit card debt. We rent currently and are debating whether or not to buy.

Our assets are meager but growing quickly. My 401k stands at about $25k value today, with 85% stocks (index funds mostly) and 15% bonds. I recently read Your Money or Your Life and realized just how soon I could retire - and because I'm up over 40% YTD on my 401k, I have been locking in recent profits by slowly adjusting into bonds. My wife has about $3.5k in a Roth IRA. Combined, we have about $5k in ING savings accounts and checking.

The Plan:

Perhaps central to this plan is that we aren't going to have children. Our dogs are enough responsibility.

I'm contributing 18% of my gross pay into my 401k, with 8% company match that is 100% vested. In 2010, I plan to keep this 401k rate the same and scrounge up $1.5k for my Roth IRA. In 2011, I plan to fully fund $5k into my Roth IRA and continue doing that for the rest of my working years. In 2012, I will raise my 401k rate to 20%, fully fund my Roth IRA, and shovel as much as I can into taxable investment vehicles.

When she graduates in May, my wife will contribute 10% to her 401k, with 8% company match that is currently 40% vested. She will fully fund her Roth IRA in 2011 and beyond, and her salary will help with keeping our lifestyle comfortable but frugal. One big helper is that my paycheck + company benefit covers our health insurance. My wife's company benefit (currently $450 per month) will go straight to her 401k.

So from 2010 to 2028, assuming 2% raises (likely to be MUCH higher) I have calculated that we can comfortably contribute the following amounts per year, split between our 401k's, our Roth IRA's, and taxable investments:

$15,162.69 $26,137.41 $26,460.16 $27,721.29 $28,075.72 $28,437.23 $28,805.98 $29,182.10 $29,565.74 $29,957.05 $30,356.19 $30,763.32 $31,178.59 $31,602.16 $32,034.20 $32,474.88 $32,924.38 $33,382.87 $33,850.53
These figures don't include bonuses ($500 - $2000 per year combined), inheritances (likely to be moderate amounts - $10k to $50k), or stock grants & options (currently have approx $10k in future value).

From 2010 to 2022, I will be shooting for an 8% return. 2023 - 2025, I'm shooting for 7%, 2026 - 2027 = 6%, and 2028 and beyond = 5%.

The ultimate goal: $1.2m in safe, interest-bearing capital at retirement time. Enough for $60k/year income pre-tax until we're 100 years old. Including housing and a few too many luxuries, our current monthly expenses rarely top $3k/mo. Chop our housing cost and live more frugally, and we can easily skate by on $2k/mo or $24k/year post-tax.

Here are a few things I've been pondering:

  • Buy a house now with a mortgage or wait until I can pay cash? With no kids (and no more Lifetime Learning Credits), our tax bill is about to sky rocket. Buying a house could help with this. We wouldn't be able to comfortably swing it until late 2010, and I'd be hesitant even then. By that time, the tax incentives, housing prices, and mortgage rates might not be so favorable. Our credit scores are excellent, 720+ and rising. The down payment is our biggest concern. That and having enough left over after closing to cover emergencies like a septic failure.
  • How to balance taxable investments with my 401k? I'm shoveling too much into the 401k I think, but it works for me because I never have to see the money. I know I should at a minimum fully fund my Roth IRA. But what about after that? With our tax future looking dire, the more I contribute to my 401k, the less I'll be taxed. But retiring at age 42 means that I can't tap my 401k for a Loooong time. Any ideas?
  • Should I accelerate my debt payments? This may require cutting back on my investments. The interest rates on our debt accounts are relatively low; I think I can beat them with relatively safe investments in the long run. What do you think?
Please let me know if you see any red flags. Send me words of caution and of encouragement. I'm open to any and all advice.

Thanks in advance!

-Ben
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Old 11-03-2009, 11:19 AM   #2
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1. How have you accounted for inflation? $1.2 million today will be worth much less in 2028. If inflation runs 3%, you'll need $2.1 million in 2028 to have the same purchasing power as $1.2 million would get you today. Maybe that future $60,000 is the inflation adjusted amount you need to get $36,000 a year in expenses today?

2. You assume 5% returns from your nest egg. Presumably adjusted for inflation. This is much higher than the consensus withdrawal rates discussed here, particularly for someone ER'ing at 42.

Double check those numbers and your assumptions. It is doable by the way, since I'm well on the way to ERing around 40 ish and we have made very significant progress in the last 5 or so years. Our portfolio targets, projected expenses, etc are similar to what you are talking about (in today's dollars).
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Old 11-03-2009, 11:29 AM   #3
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Ah - the dreaded inflation. How could I have neglected that in the post?

In truth, since the numbers are so far away, I haven't factored that in yet. I know I should - since even a minimal rate would have a huge impact. Perhaps I'm wishing it away. Perhaps I'm dreaming that my returns are real returns and not nominal. But really, I'm thinking about my own personal rate of inflation rather than what the CPI tells me it is. I think I can be a little more flexible than the CPI when it comes to my own personal purchases.

Can frugality best inflation? Can I whittle down 3% CPI inflation to 1.5% personal inflation?

Quote:
Maybe that future $60,000 is the inflation adjusted amount you need to get $36,000 a year in expenses today?
I think that's my best counter to inflation. I don't really think I need $60k in today's dollars to get me by. That's WAY more than enough; I'm a simple guy. In today's money, $36k / yr ($3k / mo) should be enough for me, especially with housing knocked out of the picture.

Also I should mention that I will probably work a little in "retirement" by choice. Retirement to me means that I don't HAVE to work.
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Old 11-03-2009, 11:34 AM   #4
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You're doing a great job of saving, so far. There's nothing wrong with creating a plan and working toward it, buy I'd caution that flexibility is key. You've decided not to have kids, which is fine, and suits where you are in your lives. My wife and I were also quite sure we'd have no kids; 14 years of marriage later, we have 2 (by choice). :-). The things you want and value will change as you get older. Don't be so locked into your plan that you don't adjust along the way.

Good luck!
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Old 11-03-2009, 11:35 AM   #5
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Can frugality best inflation? Can I whittle down 3% CPI inflation to 1.5% personal inflation?
Sorry to say it, but I believe we live in an era where the "CPI-F" (CPI of Frugality) will be *higher* than the overall CPI.

Demand for discretionary "stuff" goes down and may cause prices to remain stable or drop there (reducing the overall CPI), but the demand for the "essentials" of frugality -- food, transportation, utilities, health care, insurance and taxes -- doesn't tend to erode like the demand for the big ticket discretionary stuff. And it seems to me that most of the inflation we've seen since the bottom of oil prices is in these "essential" categories. Stuff we don't need is often cheaper now than a year or two ago; stuff we need isn't for the most part.

I could be wrong, but I don't see any reason why that will change any time soon.
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Old 11-03-2009, 11:40 AM   #6
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Originally Posted by ProspectiveBum View Post
You're doing a great job of saving, so far. There's nothing wrong with creating a plan and working toward it, buy I'd caution that flexibility is key. You've decided not to have kids, which is fine, and suits where you are in your lives. My wife and I were also quite sure we'd have no kids; 14 years of marriage later, we have 2 (by choice). :-). The things you want and value will change as you get older. Don't be so locked into your plan that you don't adjust along the way.

Good luck!
Thanks for the advice! My wife is an only child. My mom has been dreaming of my kids since I was a thought in her mind. Neither sets of parents know of our decision yet. We're keeping an open mind. I held a baby yesterday and so did DW, and both of us walked away thinking "noooo way."

I plan to wait until I'm 25 and then I'll consider a procedure to make the decision semi-permanent.
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Old 11-03-2009, 11:43 AM   #7
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Sorry to say it, but I believe we live in an era where the "CPI-F" (CPI of Frugality) will be *higher* than the overall CPI.
You make an excellent point. I didn't consider inflation in this light.

I still take a little solace in the gap between my wage and my real wage - the costs of keeping my job. That should help lower my post-ER living expenses even more.

Perhaps I'll add a 2% or 3% inflation rate into my plan and re-figure the numbers. I hadn't really considered that inflation is hitting the essentials hard, while the luxury prices are dropping.

Any YMOYL readers here? The authors of that book are nonchalant about inflation for the most part.
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Old 11-03-2009, 11:48 AM   #8
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Welcome & congratulations on thinking about your finances from such a young age.
Quote:
Buy a house now with a mortgage or wait until I can pay cash? With no kids (and no more Lifetime Learning Credits), our tax bill is about to sky rocket. Buying a house could help with this. We wouldn't be able to comfortably swing it until late 2010, and I'd be hesitant even then. By that time, the tax incentives, housing prices, and mortgage rates might not be so favorable. Our credit scores are excellent, 720+ and rising. The down payment is our biggest concern. That and having enough left over after closing to cover emergencies like a septic failure.
Over the very long term, owning a house is cheaper than renting one. So, if you know where you'll be living for 10+ years, buy the smallest house that meets your needs.

Quote:
How to balance taxable investments with my 401k? I'm shoveling too much into the 401k I think, but it works for me because I never have to see the money. I know I should at a minimum fully fund my Roth IRA. But what about after that? With our tax future looking dire, the more I contribute to my 401k, the less I'll be taxed. But retiring at age 42 means that I can't tap my 401k for a Loooong time. Any ideas?
Put enough in your 401K to maximize your employer's match. Next max out your ROTH IRA. Your tax rate will rise with your earnings, so sock away as much as you can in your ROTH. After you max your ROTH, I'd go back to funding the 401-K to its max.

Quote:
Should I accelerate my debt payments? This may require cutting back on my investments. The interest rates on our debt accounts are relatively low; I think I can beat them with relatively safe investments in the long run. What do you think?
I would pay down the debt before buying a house. I think that minimizing your cash-flow at this point in your live (ie. when you have little saved) is important. If you lose your job, it will make a big difference to your peace of mind.

One big red flag - you haven't thought about inflation.

However... as a 49 year old ancient, here's my advice.

Instead of focusing on detailed plans & predicting the future, focus on the following:
- Keep your earning skills in top shape. Training, networking, finding good mentors etc. Even "rock solid" companies lay off people and fortunes change.
- Keep your marriage on solid ground. Nothing will devastate your finances like a divorce.
- Focus on keeping your living expenses low and reasonable. This is a balancing act that only you can direct.
- Learn about investing from people who have no hidden financial interests. John Bogle and William Bernstein are great examples. You need to read books, not just rely on what you learn from forums.

I tried my best to follow the advice I've given you & was able to ER at 48. However, things don't always turn out the way you plan - even one year in the future - and I'm now looking for work that I will enjoy and can help me supplement my savings.
All the best. Welcome to the forum.
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Old 11-03-2009, 11:54 AM   #9
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My advice. Might be difficult to get there working at a rock solid telecom unless you work your way up to management as a CEO or VP making $250K+ +options per year. If your in a city like seattle, you should seek out startups that you think have a chance of succeeding and get stock options in lieu of a bit lower salary. When the company sells for $300 million, you get a few million (provided you are a valuable enough asset, which if you keep gaining knowledge and experience, you will be). It has happened to several people that I know personally. The other option is to start your own business (web related most likely) and go for the gusto. Happened to me when I was 23. Sold my web business for $10 million. These options strike me as much more likely than scrounging like a squirrel until your 42, but I would guess anything is possible.
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Old 11-03-2009, 11:56 AM   #10
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Inflation tends to impact fixed expenses most: gas, food, healthcare, property taxes, electricity etc... So keeping fixed costs as low as possible (LBYM) is important but that's not enough as Ziggy pointed out. The trick is to keep your fixed costs low relative to your overall budget. If inflation-sensitive fixed costs represent only 1/3 or 1/2 of your budget (with the other 1/2 or 2/3 discretionary expenses), you will be much better equipped to keep your personal rate of inflation low.
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Old 11-03-2009, 11:59 AM   #11
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Nice start, Ben. We have seen here over the years a small group of young members like yourself. You sound like you are on the right track. A few words of wisdom (not necessarily original to me):
  • Don't over-think this since your time span is so long. Lots of assumptions will change like crazy. I'd run FireCalc with your basic numbers, then test them by changing a few at a time.
  • Focus on saving, and on a simple diverse asset allocation. Read books by Solin, Bogleheads, Lucia among others.
  • Don't try to beat the market, just get your fair share
  • God knows what will become of health care reform, but if you have a chance to grab a policy that you can continue after retirement, take it.
  • Don't forget personal disability insurance if your employer's policy is mediocre.
The hardest part for people your ages is waiting for decades. Don't give up your soul to the saving process - have some fun, splurge once in a while. You never know what life will throw at you, so don't wait 20 years to enjoy.
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Old 11-03-2009, 12:06 PM   #12
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Welcome Ben! Your plan looks quite similar to mine, except I'm now in my mid thirties. I'm also a sysadmin, no kids planned, hope to be FI in my early 40's. Since I started investing during the late 90's tech boom, the last decade hasn't been great for my investment returns. Originally I hoped to reach FI by age 40/41, but at the moment it's looking more like 44/45. You have a good opportunity with the recent market drops to add to your portfolio at some low points.

You mention possibly winding up with too much in the 401k vs taxable accounts. In my experience this hasn't been a problem. Have maxed the 401k almost every year since starting work, and as my salary has grown, more and more of my savings exceeds the 401k contribution limits at my company. Currently I'm at 70/30% taxable/tax-deferred (also includes a small Roth). I suspect that as your salaries grow faster than inflation, you'll soon find you wish you had more room in the tax-deferred accounts (especially as your tax rate increases!) If you do wind up with "too much" in the 401k, you could roll it into several IRAs upon retirement and do 72T withdrawals. Also, a Roth will give you a lot of flexibility in this situation since you can withdraw contributions at any time.

Others have brought up the inflation issue. My annual expenses are similar to yours (i also rent), and haven't really changed much in the last 10 years. Some of this is due to my expenses including computers and tech gadgets which usually get cheaper over time. And some is that I've gotten more frugal about some things over the years, like clothes, eating out, and buying fewer gadgets. I expect to run up against the limit of increasing frugality pretty soon though, and do expect my "personal inflation" to begin increasing. Whether it will match the CPI, who knows. Also keep in mind my budget is for just one person - my SO and I don't combine finances.

Another big issue to keep in mind: health insurance. Maybe the healthcare reforms in progress will pan out, maybe not. Even if things change a lot, you may still find yourself with a pre-existing condition and locked out of the private healthcare market. Not sure there is much you can do about this so far in advance, but it's good to keep track of the situation.

Good luck, it sounds like you're off to a great start.
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Old 11-03-2009, 01:02 PM   #13
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If you do wind up with "too much" in the 401k, you could roll it into several IRAs upon retirement and do 72T withdrawals. Also, a Roth will give you a lot of flexibility in this situation since you can withdraw contributions at any time.
This is good info. I just started learning about 72T withdrawals from this forum and will have to take a closer look. I knew that my Roth IRA would be helpful come ER time, since I could withdraw contributions (and earnings for things like buying a house). Rolling over a 401k into IRA's and withdrawing based on 72T sounds like an interesting plan. I'm going to research that some more.

Very interesting how similar our plans - and career paths - are! My wife and I haven't 100% combined our finances. We keep our paychecks separate, and I try to make reasonable requests for her retirement & savings contributions. After that, she's free to splurge on her little Min Pin's wardrobe and making our vacations a little fancier than I would have. Basically, I cover the essentials and 60% of our FI plan. She covers luxuries and the other 40% of FI. I'm sure it will evolve over time.
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Old 11-03-2009, 01:13 PM   #14
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Rich - Thanks for the bigger picture advice. I definitely want to enjoy the next 20 years as much as the 20 post-ER.

walkinwood - Like Rich, thanks for helping me keep an eye on the big picture. I'm really interested in your view on housing.

I am fairly certain, having worked at this company for almost 5 years, that I'll work at this company for the next 10. That would bode well for purchasing a house nearby. I'm not sure that paying down my student loan debt would help with my cash flow much since I'm on a fixed payment plan. It would reduce the principle and the total cost in the end, but not necessarily the monthly payments. I would definitely knock out the remaining $2k credit card balance before buying a house. But what about that extra money you suggest I use toward the student loans? Would those funds be better spent on a bigger down payment?

Certainly, if and when I do buy, I will buy well within my means. I watched my own parents become self-propelled "victims" of the housing mess by purchasing too much house for their needs and for their paychecks. Their negligence spurred me to become financially savvy - thanks Mom & Dad!
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Old 11-03-2009, 01:17 PM   #15
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I'll be a dissenting voice about the "work for startups and get rich on stock" advice. I've had friends who did this and became very very rich and I've had friends who did this and earned only salary for their trouble. It's much more likely to end up with only salary.

What's more a consideration should be doing work you enjoy in an environment that is sustainable. Folks who burn out at startups, whether they get an unlikely payoff or not, are unhappy - sometimes for their entire lives. Folks who work at startups or elsewhere, doing work they love with people they enjoy being around are happier and healthier.

I wouldn't worry about the possibility of ending up with too much in tax sheltered 401k or IRA. Especially with a retire super early plan, you will have many years to gradually bring that money over to a Roth and still keep your nominal taxable income very low, so minimize taxes on the transfer.
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Old 11-03-2009, 01:24 PM   #16
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Agree with all of the above. I admire that (a) you have a plan and (b) you will most likely follow it, albeit changing it as your circumstances also change.

I'm thinking about all the technology that didn't exist 20 years and wondering what life will be like in 2028, your goal date. Flexibility will be the key to your generation's success.
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Old 11-03-2009, 01:25 PM   #17
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I'll be a dissenting voice about the "work for startups and get rich on stock" advice. I've had friends who did this and became very very rich and I've had friends who did this and earned only salary for their trouble. It's much more likely to end up with only salary.

What's more a consideration should be doing work you enjoy in an environment that is sustainable.
Thanks! I was leery of the "work for startups" advice. I've set up my whole life to be a quick but steady tortoise rather than a burnt out hare (sorry for the cliche). I've even turned down a promotion because I didn't like the amount of "off-hours" required by the position. My first manager here was an intolerable micro-manager. I now have the best boss in the world, am following him up the chain, and I'm grateful to work for him. He's a "lifer" at the company, if there ever has been one. Earlier in this thread, someone mentioned finding a mentor, and this is one area that I've really lucked out. I like the company, its values, and most of my coworkers. The company is over 80 years old and has a history of conservative finances, riding this recession out like few other companies could.

That said, my resume is always up to date, and my job is portable. I'll move cross country on a dime if I have to. I'm hoping for the best but prepared for the worst.
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Old 11-03-2009, 04:51 PM   #18
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walkinwood - ... I'm really interested in your view on housing.
...
Scott Burns has written a number of posts on housing & mortgages which are very educational

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Old 11-03-2009, 06:01 PM   #19
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Thanks for the advice! My wife is an only child. My mom has been dreaming of my kids since I was a thought in her mind. Neither sets of parents know of our decision yet. We're keeping an open mind. I held a baby yesterday and so did DW, and both of us walked away thinking "noooo way."
No offense but I think that's related to the fact that both you and your wife are VERY young. DH and I didn't get married until we were 27 and 29, respectively, and had our first child when I was 33 and he was 35. Kid #2 is due in three weeks . I'm just saying that at 22 and 21, most people don't even know what they want to be when they grow up and things definitely change.
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Old 11-03-2009, 06:46 PM   #20
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You make an excellent point. I didn't consider inflation in this light.

I still take a little solace in the gap between my wage and my real wage - the costs of keeping my job. That should help lower my post-ER living expenses even more.

Perhaps I'll add a 2% or 3% inflation rate into my plan and re-figure the numbers. I hadn't really considered that inflation is hitting the essentials hard, while the luxury prices are dropping.

Any YMOYL readers here? The authors of that book are nonchalant about inflation for the most part.
Which YMOYL did you read? The updated version is less nonchalant about inflation than the original.
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