Hello from SF Bay Area! Dreaming of early retirement!

[ken830]

Hi guys! I'm fairly new to the whole concept of early retirement, so some strategies, terminology, and acronyms confuse me. My parents worked so hard to give me every advantage in life. I got an education and have been lucky with always being employed and working towards a good career. I was loyal to my career and never expected or dreamed of early retirement. I just assumed I would work into my 60's. But then my first child was born. All of sudden, my priorities flipped. I now see work more like a means of providing for my family. I'd much rather spend time with my family over anything else. I know I can't retire right this moment to spend these pre-school-age years at home with my kids. but I will take whatever I can get. If I start planning now, I might make it before they're out of the house completely.

I'm planning to just do a lot of reading to see what others are doing, pick up some new ideas, and get a bit of encouragement. Right now, I don't have any specific questions per say, but what led me to this forum was a Google search. I was looking for suggestions of what to do because our combined income is over $200k/year before deductions and we can no longer contribute to our Roth IRA or deduct IRA contributions.

 

[kimcdougc]

Welcome to the forum ken830. You will find many persons here that will give you lots of great advice and encouragement. Look forward to hearing from you again soon.

 

[2017ish]

...I was looking for suggestions of what to do because our combined income is over $200k/year before deductions and we can no longer contribute to our Roth IRA or deduct IRA contributions.

Welcome again Ken (I said hi on the Tesla thread).

Have you found your answer for this question yet? You can each make full nondeductible IRA contributions, then immediately convert that regular IRA to a roth. This is commonly known as a backdoor roth contribution. Here is a nuts and bolts explainer from another good site: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

This is a tool best used if you don't already have a deferred IRA in existence. If you do, it gets messy.

BTW, congrats on the addition(s) to the family!

 

[evilanne]

Welcome Ken,

Living Below your Means, plus saving & investing will get you to your desired endpoint sooner rather than later. Knowing your priorities & having a plan is the 1st big step. Good luck & remember to enjoy the journey!

 

[ken830]

Welcome again Ken (I said hi on the Tesla thread).

Have you found your answer for this question yet? You can each make full nondeductible IRA contributions, then immediately convert that regular IRA to a roth. This is commonly known as a backdoor roth contribution. Here is a nuts and bolts explainer from another good site: https://www.bogleheads.org/wiki/Backdoor_Roth_IRA

This is a tool best used if you don't already have a deferred IRA in existence. If you do, it gets messy.

BTW, congrats on the addition(s) to the family!

Thanks!! No, I didn't really find an answer for what I should do yet. I got here from this old (>10 years) thread: http://www.early-retirement.org/forums/f28/iras-for-income-over-200k-19108.html]. Some of the arguments there FOR making non-deductible contributions made it a very interesting read.

I did stumble across some articles about the IRA conversion two years ago after I had to undo all of my Roth contributions. Unfortunately for this trick, I do have a non-Roth IRA (401K rollover) that's currently around $200K.

Last year, I figured I would just forget about Roth and contribute to the regular IRA. But then I found out that the income limits for deductions are even lower for IRA and I can't deduct anything. So, out of laziness/frustration, I didn't contribute to anything besides my 401K. This year, I'm trying to see if there's anything else I can do.

 

[2017ish]

... Unfortunately for this trick, I do have a non-Roth IRA (401K rollover) that's currently around $200K.

...

Can you transfer this IRA into your present 401k plan? That would clear the decks for backdoor IRA for you. (Your IRA holdings wouldn't impinge upon your wife's ability to do backdoor though!) Here is a discussion of this tool: https://www.nerdwallet.com/blog/investing/rollover-ira-to-401k/ And another: http://thecollegeinvestor.com/17784/understanding-the-ira-to-401k-reverse-rollover/

Otherwise, I'd recommend saving in a taxable account. For early retirees in particular, having a good amount in those accounts is nice. (DW and I are soon-to-be semi-early retirees at 57/56 and are grossly disproportionate towards tax deferred accounts. That would have presented a problem to work around if we had retired a couple of years earlier. As it is, we'll be doing aggressive roth conversions in retirement to avoid tax issues down the road....)

 

[ken830]

Welcome to the forum ken830. You will find many persons here that will give you lots of great advice and encouragement. Look forward to hearing from you again soon.

Welcome Ken,

Living Below your Means, plus saving & investing will get you to your desired endpoint sooner rather than later. Knowing your priorities & having a plan is the 1st big step. Good luck & remember to enjoy the journey!

Thanks for the warm welcome! I'm feeling encouraged already!

I feel guilty whenever I read about how I should live below my means. I mean, when it comes to everyday things, I don't spend extravagantly. I don't buy/drink coffee everyday (I've never even tried coffee), the shirt I happen to be wearing was a gift (from my then-girlfriend, now wife) 10 years ago, I use coupons, comparison shop, buy used stuff from Craigslist/ebay, and turn off the lights as I leave the room.

One big thing that I feel guilty about and struggle with is that I live in one of the most expensive cities in the San Francisco Bay Area, which is itself, one of the most expensive metro areas in the country. And we're even thinking about moving into a slightly more expensive city to get access to better public schools. The reason is that I was raised in San Francisco and me and my wife have lots of family and friends here. I want my kids to be close to their grandparents, great-grandparents, uncles, aunts, cousins, and other family. My kids see my in-laws nearly everyday and they see my side of the family 2-3 times weekly. My career as an electronics engineer is also a strong draw for me to stay in this area. The reason I feel guilty is I think I could immediately sell my home, move just an hour or two away, and probably have enough to semi-retire either now or in a few years. Moving even further to the Central Valley or out of state would probably net me a mansion (by my standards) and an extra 1/2 to 1 million dollars. In the back of my mind, this is always the safety net plan if we run into financial troubles (like double-loss of jobs).

I also feel this way every time I read early retirement articles or spending/budgeting techniques. It just feels like it doesn't apply to anyone living in the Bay Area because our housing expenses are so out of whack compared to most of the rest of the country. Even if I pay off my entire mortgage today, I would still continue to spend $1,200 every month for property tax! I can't even imagine what it's going to be in a few decades. That just sounds crazy. Feels like a rat race but I don't see much of an alternative.

I wonder if others feel this way. And am I crazy to stay?

Can you transfer this IRA into your present 401k plan? That would clear the decks for backdoor IRA for you. (Your IRA holdings wouldn't impinge upon your wife's ability to do backdoor though!) Here is a discussion of this tool: https://www.nerdwallet.com/blog/investing/rollover-ira-to-401k/ And another: Understanding The IRA To 401k Reverse Rollover

Otherwise, I'd recommend saving in a taxable account. For early retirees in particular, having a good amount in those accounts is nice. (DW and I are soon-to-be semi-early retirees at 57/56 and are grossly disproportionate towards tax deferred accounts. That would have present a problem to work around if we had retired a couple of years earlier. As it is, we'll be doing aggressive roth conversions in retirement to avoid tax issues down the road....)

I'm holding a lot of TSLA in my IRA that I'm not ready to give up yet. But I didn't know the backdoor trick would still work for my wife! I will definitely need to explore that option.

Also that second link you posted led me to the article on "Mega Backdoor Roth IRA", which is the first time I've learned of this technique. Very interesting, but boy does that make it complicated for me. I think I have the option for after-tax 401k contributions, but not my wife, so my IRA still gets in the way. But it's very informative and interesting for me to keep in mind if I find myself still working as I get closer to the 55/59.5 age...

But overall, you're right. I don't want to be too lopsided in accounts that are age-restricted if the ultimate goal is early retirement. I've been considering using one of those robo-advisors with a taxable account. They're supposed to be extra tax-efficient due to automated tax loss harvesting algorithms.

If only I didn't have a full time job, long commute, and two young kids, then I would have time to figure all of this out! Isn't that ironic?

 

[NgineER]

Welcome to the forum from a former Bay Area resident.
Why does your traditional IRA stand in the way of a mega Back door Roth IRA? I have both Roth IRAs and traditional IRAs and do a monthly roll over from my after tax 401k directly into a Roth account.

 

[daylatedollarshort]

I also feel this way every time I read early retirement articles or spending/budgeting techniques. It just feels like it doesn't apply to anyone living in the Bay Area because our housing expenses are so out of whack compared to most of the rest of the country. Even if I pay off my entire mortgage today, I would still continue to spend $1,200 every month for property tax! I can't even imagine what it's going to be in a few decades. That just sounds crazy. Feels like a rat race but I don't see much of an alternative.

I wonder if others feel this way. And am I crazy to stay?

If you remain a long time home owner, eventually you may benefit financially from Prop 13 as far as property tax goes. We are long time home owners and our property taxes are now under .5% of our current home value.

We might have been crazy to stay but we did, and now it is a nice place to be retired. The weather is mild and there's a lot of nice parks, cultural attractions and day trips to keep us occupied.

 

[983days]

Welcome. I am also new to these forums with similar ideas and thoughts on retirement.

Have you considered renting out your current residence and then buying a less expensive place in another area. This strategy has worked well me, you may want to consider it.

Having one residence as an income producing asset may give you the additional safety net needed to move you forward with your plans.

 

[exnavynuke]

Welcome. For your taxable account, I strongly recommend doing a bit of research/education on your own and then just manager your own taxable brokerage account. A great intro to a system many advocate can be found here https://www.bogleheads.org/wiki/Three-fund_portfolio

 

[mpeirce]

Welcome!

My advice is to not over think the IRA/Roth angle. Certainly fully fund your IRA and/or 401(k), it's a good deal.

But "regular" taxable savings is important too! Especially if you really do achieve "early retirement". I retired at 49 and we've been living the last 6 years off taxable savings (investments really) and will be doing so for some time.

Once you FIRE and hopefully have a very low "income" for tax purposes, you can convert your IRA to Roth IRAs at low rates. That's what we're doing now.

Finally, the trigger for us leaving the Bay Area was our son hitting school age. Moving to a lower cost of living area that didn't require expensive private schools made it an easy choice for us. We still visit family back there once or twice a year. And of course, each circumstance is different. I'm sure you can make staying work. It just might take a few more years of hard work.

 

[ken830]

Welcome to the forum from a former Bay Area resident.
Why does your traditional IRA stand in the way of a mega Back door Roth IRA? I have both Roth IRAs and traditional IRAs and do a monthly roll over from my after tax 401k directly into a Roth account.

I don't know. I just started reading about the mega back door yesterday (http://thecollegeinvestor.com/17561/understanding-the-mega-backdoor-roth-ira/) and the first bullet point says: "Step 1 - Ensure You Don't Have Any Other Pre-Tax IRA Accounts". Is there something I'm missing?

If you remain a long time home owner, eventually you may benefit financially from Prop 13 as far as property tax goes. We are long time home owners and our property taxes are now under .5% of our current home value.

We might have been crazy to stay but we did, and now it is a nice place to be retired. The weather is mild and there's a lot of nice parks, cultural attractions and day trips to keep us occupied.

Yes, we are already "benefiting" as our home has doubled in value since we purchased it in 2009. But we might give that up since we are now looking at moving to get access to better schools and be closer to my parents who can help with after school pick-up. And the 2% annual increase still adds up quickly.

We definitely have no plans to leave the Bay Area. We grew up here and want to stay as long as the balance of family & financial goals permit us to.

Welcome. I am also new to these forums with similar ideas and thoughts on retirement.

Have you considered renting out your current residence and then buying a less expensive place in another area. This strategy has worked well me, you may want to consider it.

Having one residence as an income producing asset may give you the additional safety net needed to move you forward with your plans.

Do you have kids and did you move far? If so, did you have family/friends that you left behind?

For our next move, unfortunately, we are looking to move to an even more expensive area, so I don't think we would be able to qualify for a third mortgage. But after the kids are done with high school in 16 years, then we definitely want to pivot by move somewhere a bit more affordable. Keeping/renting out will definitely be under consideration as we have already done that once before.

After buying our current home, we kept our previous home (in San Jose, which is a lot less expensive) and rented that out. You're right that the income from that is nice, but every few years when the renters move out, I have to bear a month or two of mortgage without extra income, money for renovations & upgrades, and 1/2 month rent for the management company to place a new family. Overall, it's been a financially positive move and allows us to capture the increase in real estate prices that have occurred since.

Welcome. For your taxable account, I strongly recommend doing a bit of research/education on your own and then just manager your own taxable brokerage account. A great intro to a system many advocate can be found here https://www.bogleheads.org/wiki/Three-fund_portfolio

Thanks! I'm starting to read this now... I like the idea of a lazy portfolio. I'm lazy, so my portfolio should fit!

Welcome!

My advice is to not over think the IRA/Roth angle. Certainly fully fund your IRA and/or 401(k), it's a good deal.

But "regular" taxable savings is important too! Especially if you really do achieve "early retirement". I retired at 49 and we've been living the last 6 years off taxable savings (investments really) and will be doing so for some time.

Once you FIRE and hopefully have a very low "income" for tax purposes, you can convert your IRA to Roth IRAs at low rates. That's what we're doing now.

Finally, the trigger for us leaving the Bay Area was our son hitting school age. Moving to a lower cost of living area that didn't require expensive private schools made it an easy choice for us. We still visit family back there once or twice a year. And of course, each circumstance is different. I'm sure you can make staying work. It just might take a few more years of hard work.

My newb side showing... What's FIRE? Financial(ly) Independen(t/ce) Retire(d) Early?

Nice to hear it's working out well for you by leaving. What year did you leave? Did you own your Bay Area home at the time?

 

[mpeirce]

My newb side showing... What's FIRE? Financial(ly) Independen(t/ce) Retire(d) Early?

Nice to hear it's working out well for you by leaving. What year did you leave? Did you own your Bay Area home at the time?

Yup. Financially Independent Retired Early

We moved out away the summer of 1999 - DS (dear son) started kindergarten that fall.

And yes, we owned a house when we left. Made a bundle off it. I owned three "homes" in the Bay Area:

1. Condo when I was single. Made a nice, but modest profit on it since I sold on a market upswing.
2. Townhouse when I got married. Lost money on this one (see selling condo at a high - this meant we bought on a high and sold when the market was down). We had to write a check to pay off the mortgage when we sold it. That was hard to do!
3. House. Bought this one at a low in the housing market. So sold it for a fairly big profit.

In fact, the profits from the house paid for DW's DD college costs AND provided a hefty downpayment for the new house outside the Bay Area. It worked out very well!

And how time flies: DS started kindergarten in 1999, he starts grad school at NYU this fall!

 

[Nodak]

Welcome aboard

 

[ken830]

Yup. Financially Independent Retired Early

We moved out away the summer of 1999 - DS (dear son) started kindergarten that fall.

And yes, we owned a house when we left. Made a bundle off it. I owned three "homes" in the Bay Area:

1. Condo when I was single. Made a nice, but modest profit on it since I sold on a market upswing.
2. Townhouse when I got married. Lost money on this one (see selling condo at a high - this meant we bought on a high and sold when the market was down). We had to write a check to pay off the mortgage when we sold it. That was hard to do!
3. House. Bought this one at a low in the housing market. So sold it for a fairly big profit.

In fact, the profits from the house paid for DW's DD college costs AND provided a hefty downpayment for the new house outside the Bay Area. It worked out very well!

And how time flies: DS started kindergarten in 1999, he starts grad school at NYU the fall!

Wonderful news about your son attending grad school at NYU! Looks like a promising future is ahead of him!

Welcome aboard

Glad to be here!

 

[GoodWishes]

Originally Posted by mpeirce

My advice is to not over think the IRA/Roth angle. Certainly fully fund your IRA and/or 401(k), it's a good deal.

But "regular" taxable savings is important too! Especially if you really do achieve "early retirement". I retired at 49 and we've been living the last 6 years off taxable savings (investments really) and will be doing so for some time.

+1
As much as you should think about taxes, having taxable savings can be just as important. We semi retired in our early 40s and fully retired now at our early 50s. We also have been living on our taxable portfolio and will be for years to come.

 

[NgineER]

I don't know. I just started reading about the mega back door yesterday (http://thecollegeinvestor.com/17561/understanding-the-mega-backdoor-roth-ira/) and the first bullet point says: "Step 1 - Ensure You Don't Have Any Other Pre-Tax IRA....

The author of that article is wrong, and a couple of commenters are pointing it out as well. For the mega backdoor Roth IRA you can roll your after tax contributions over to a Roth IRA if allowed by your plan, or to a Roth 401k. I do so monthly, directly from after tax 402k to a Roth IRA account. Search google for other sites, this author clearly does not know what he is talking about.

 

[evilanne]

There is no need to feel guilty about living in HCOL area. Life is full of choices & tradeoffs. Family is important and we want to do what is best for our family--there always seems to be multitude factors (pros & cons) to consider which, depending on your priorities, could impact when you will be able to retire. Since you had not even considered ER, you are already moving up your potential retirement date by posting here

 

[983days]

house moves

(http://thecollegeinvestor.com/17561/understanding-the-mega-backdoor-roth-ira/)

Do you have kids and did you move far? If so, did you have family/friends that you left behind?

Yes, young children at home, so the solution for us has been to move only 2 miles away, rent out the previous house, buy another, fix it, then rent it, etc, etc. This way the kids stay in the same great school district, and rental portfolio increases with each move.

It sounds like you are way ahead of the game with properties in the bay area. Congrats...

 

[Katiek]

Welcome, the COL in the Bay Area may be high, but I suspect your income is also higher working in that area. Plus having family in the area is especially important when you have young kids and want them to bond with your extended family.