New Here - 32 Married & Looking for Advice

[SkinsFan0521]

Hi,

I recently came across this forum and have been reading all types of threads on here for the past week or so. I've been studying ER for the past year or so and I'm looking for some advice from all of you smart people! My wife & I would like to achieve FI as close to 50 as possible and 55 at the latest. Depending on our work situation at that time, we can decide if we'd like to keep working or go part time, etc.

So, anyway, here's our current financial situation:

• Tax Bracket: 25%
• Debt: $154k between mortgage and cars. Mortgage will be paid off by the time we're 45. Mortgage @ 3.75%, cars @ 1.99% & 2.8%
• Roth IRA: $20k
• Traditional 401k: $294k
• Roth 401k: $50k
• Cash: 6-9 months expenses

In 2016 we both maxed our Roth 401ks for the first time based on the advice of our FA (who we're trying to decide if we think is necessary or if we should just go it on our own). However, I'm wondering if that's a strategy we should be using going forward or if we should be maxing out traditional 401k and then taking that tax savings and investing it in a brokerage account?

In 2017, our finances will allow us to either both max our Roth 401k & max our Roth IRA and invest nothing in a brokerage account. Or we could both max Traditional 401k & max Roth IRA and then take that tax savings $ and invest in a brokerage account.

One of my biggest concerns right now is that I'd like to make sure we have a plan to bridge the years between when we decide to quit working and 59.5 (or whatever the age will be by then!) when we'll be able to start accessing our retirement accounts. So, I'm thinking of changing to max the traditional 401ks and invest the tax savings in a brokerage account. That will allow us to invest in some income producing (thinking dividends?) ETFs now and start to build up that portfolio to bride us for that 7-10 years before we can access our retirement accounts. Thoughts on that strategy?

In retirement we plan to stay within the 15% tax bracket if possible. In 2016 dollars, that's something like $95k of income pre tax before deductions and that would leave us with something like $85k after tax, right? Assuming my math/understanding is correct, that would be no problem for us and is more than we currently live on after taking out savings, retirement investments, mortgage, car payments. Plus, with the flexibility of having money in Roth IRA and some in Roth 401k, we should be able to manage that taxable number reasonably well.

Then, my last question would be about where we should start a brokerage account if we do in fact go that direction? I know that Fidelity and Vanguard are the preferred options on here (and may other places I've read), but keep in mind that we don't currently have one and won't have a large balance (probably adding a total of less than $10k to it in 2017), so the fees will be different than if this were an account with several hundred thousand dollars in it. Also, we'd prefer to contribute little bits at a time to this account monthly (or even weekly), so that factors into the trading fees as well.

There's lots more that I still need to learn and number crunching to determine if we'll be able to retire when we want, but right now I'm focused on investing as much as possible and having it invested in the right spots. My opinion is that with it being at least 17 years away, I don't think there's any reason I should be worried about things like how much healthcare will cost because that's going to change so much between now and then.

Thanks a lot for all your help and let me know if there was any information that I left out that would be useful for you to give some advice!!

 

[eta2020]

One of my biggest concerns right now is that I'd like to make sure we have a plan to bridge the years between when we decide to quit working and 59.5 (or whatever the age will be by then!) when we'll be able to start accessing our retirement accounts.

And my (now that I am FI) is how to bridge RE age and 65 when you get Medicare. That is without wasting too much money......

 

[brucethebroker]

I will take some of the "low hanging fruit" and let others tackle your more detailed questions.

Congratulations on how much progress you have made thus far. My guess is that you are well ahead of most of your peers.

Have you considered paying off your cars before adding more to your Roths? My wife and I have always considered wiping out debt as getting a "guaranteed return of __" on our money (in your case, 1.99 & 2.88%). Plus, it feels really good to only have a mortgage as debt. Since there is no deduction for the Roth contributions, it may be a good trade off. (In our experience, once you break the borrowing to buy a car habit, you won't go back-another great benefit!) Using the "rule of 72" as a quick and dirty analysis, you should be in good shape since you are planning to continue funding your 401-k, Roths, etc. over the next 15 years or so. But others here will be happy to recommend websites that project ER with greater detail and accuracy.

Consider that not everyone who ER's stops working entirely. Some, like me, wanted a chance to do something new and exciting while still earning a little money. Not as much as a prior career perhaps, but once you ER, it doesn't take much $ to really stretch out your savings. A friend took a year off to think things through, travel and decompress, then found something he really loved, and made a little money in the process. He loves his "retirement".

You will find that ER is not a one-size-fits-all by reading on the forum. Exciting stuff!

Good luck.

 

[broadway]

In 2016 we both maxed our Roth 401ks for the first time based on the advice of our FA

A financial advisor?

Why?

I have never had one.

 

[jonat]

Nothing wrong with a Financial Advisor if you don't trust your own judgement/knowledge. Not everyone is an expert - and I am not, so I use a FA and am comfortable with it. You do need to make sure that they are working for your interests and not just to earn commissions.

You can go very low cost with Vanguard or Fidelity. Pick an index fund and just keep investing for now.

I do think you should follow the "pay yourself first" strategy - save as much as you can and live below your means on the rest. That's the best path to FI.

 

[broadway]

Nothing wrong with a Financial Advisor if you don't trust your own judgement/knowledge. Not everyone is an expert - and I am not, so I use a FA and am comfortable with it. You do need to make sure that they are working for your interests and not just to earn commissions.

You can go very low cost with Vanguard or Fidelity. Pick an index fund and just keep investing for now.

I do think you should follow the "pay yourself first" strategy - save as much as you can and live below your means on the rest. That's the best path to FI.

A financial advisor can take about 1.5% in fees and that is on top of the questionable "investments" they have their clients buy.

As a Boglehead, I am very anti-FA.

I have seen the FA-inspired portfolios posted on the Bogleheads forum. They aren't pretty.

 

[RobbieB]

What's a Boglehead?

 

[SkinsFan0521]

@brucethebroker - Yes, I've thought about it, but it doesn't weigh on me enough to make it "worth it" for me to pay them off first. I feel that the money would be better suited to grow in the market and make more than the interest rate is costing me. That said, we are paying a bit more on our mortgage than the minimum payments.

@broadway / jonat - The real reason why we have a FA is that he's my parents' FA and he helped them RE while they both only ever had not very high paying blue collar jobs and have no defined benefit plans. That and the fact that my parents started my Roth IRA with that FA as a college graduation present. We haven't used him for much of anything since the bulk of our net worth is outside of our Roth IRAs. So, because of that, I'm not sure that I'm interested in paying his fees on the Roth IRAs when I could just move them to Vanguard or Fidelity.

Thanks for the replies and I hope to get some advice from all the smart people on here that would be able to let me confidently go it on our own without a FA.

EDIT: Also, just wanted to point out (for what its worth) that I 100% trust our FA because he's had plenty of opportunities where we've actually brought him money to invest with him and he's told us to do something else with it instead. Plus, like I said, he's helped my parents out tremendously. I'm just not convinced that I have the same need for a FA as my parents did/do.

 

[mamadogmamacat]

I have never had an FA. Not against them per se. it is just that for me, perhaps being an engineer, numbers are a fascination for me, and not at all intimidating. So, that, along with not wanting to pay a fee as I did not see it as justified, is why i have never had one. Since the OP seems to have a similar interest in the ins and outs of investing, I would also recommend ditching the FA. Rather too bad he had one in the first place, as simply reading a few books on investing would suffice.

 

[DrRoy]

A Boglehead is a follower of John Bogle, the founder of Vanguard. They have their own forum like this on financial subjects, mostly do it yourself index investing. I like it better here as the topics are more varied.

SF0521 - Do keep fully funding your Roths. It's the best deal going. I had a FA in the past but found that for me he did not earn his fee so I am back to full self management. I have most of my funds at Fidelity. You can get a free FA there even at modest levels, but you get more attention above $250K. You will get there and can consolidate accounts with them to speed it up. Vanguard is good too but I have less experince with them. Yes, you need to plan for non-retirement "bridge" money in your 50's, but you are on a pretty good path and have a plan for that too. You are doing nicely - keep going.

 

[Dd852]

Great start. Just always save at least 20% of your pay, use index funds, never take on stupid debt (e.g. Credit card) and honestly the other questions won't even matter that much.

 

[Breedlove]

Currently using Fidelity Roth and some others . Some stock . Can Always use a better rate of return . Lots of things will happen over the next few years . Your house is an asset . A thing that I did years before retiring , I wanted to live outside of the city . Currently my home is in Cypress Texas an area that if you blink a new fast food restaurant or business is built. I shopped for land years ago in the country on the idea land always goes up in price . State of Texas had foreclosed land all over the state at a reasonable price and good interest . I bought a few pieces in Grimes county for 1600.00 per acre . Out of cash flow we built our retirement home . We are still in the country but the city is getting closer. The land we bought for 1600.00 an acre is selling for 10,000.00 an acre . Buy some cheap land let it appreciate. We will sell our house in Cypress and use that money to add to our retirement . ( remember real estate is real property ) Not like a car a boat or a stock certificate . ..........just me talkin.

 

[medved]

A financial advisor can take about 1.5% in fees and that is on top of the questionable "investments" they have their clients buy.

As a Boglehead, I am very anti-FA.

I have seen the FA-inspired portfolios posted on the Bogleheads forum. They aren't pretty.

Sure, there are some bad financial advisors who charge too much money and recommend lousy investments. Just like there are bad doctors who miss obvious diagnoses, and bad plumbers of fail to fix the leaky pipe, and bad auto mechanics who recommend unnecessary repairs, and bad accountants who miss clear deductions.

But that fact that there are some bad apples does not indict the entire profession. There are lots of really good financial advisors who are loyal to their clients and who work hard to provide their clients with good advice and keep their clients from making costly mistakes. Sure, they charge a fee. Every professional charges a fee. But for lots of us, that fee is money well spent. (On the other hand, doing it yourself is fine too, if you feel like you have the time and expertise to do it right -- same with preparing your tax returns, or repairing your car, or replacing your furnace -- if you have the skill to do it right, and the time to devote to it, DIY will be cheaper).

 

[REWahoo]

There are lots of really good financial advisors who are loyal to their clients and who work hard to provide their clients with good advice and keep their clients from making costly mistakes.

Correct, and I'd like to think your description applies to the majority of financial advisors. However, the only way to know if your advisor really is one of the good guys/gals is to educate yourself on the basics of investing - and once you've done that, you really don't need an advisor.

 

[medved]

Correct, and I'd like to think your description applies to the majority of financial advisors. However, the only way to know if your advisor really is one of the good guys/gals is to educate yourself on the basics of investing - and once you've done that, you really don't need an advisor.

The same argument could probably be made for auto mechanics and plumbers. The only way you can tell whether you have a good one is to learn enough about their trade that you are in a position to evaluate their work. And once you have learned that, you can do it yourself.

I have seen enough smart people do financially dumb things to appreciate the value of professional advice. But then again I am generally inclined toward paying for expertise, while I know other people who are generally inclined toward doing things themselves.

 

[REWahoo]

The same argument could probably be made for auto mechanics and plumbers.

True, but picking a bad one is unlikely to risk your financial well-being for the remainder of your life.

 

[broadway]

@broadway / jonat - The real reason why we have a FA is that he's my parents' FA and he helped them RE while they both only ever had not very high paying blue collar jobs and have no defined benefit plans. That and the fact that my parents started my Roth IRA with that FA as a college graduation present. We haven't used him for much of anything since the bulk of our net worth is outside of our Roth IRAs. So, because of that, I'm not sure that I'm interested in paying his fees on the Roth IRAs when I could just move them to Vanguard or Fidelity.

All you have to do is to post what your FA put in your parents' account.
The funds including ticker symbols and expense ratios.

They may have done even better without his advice.

 

[N02L84ER]

SkinsFan,
You are doing great. I would not make paying off those low interest debts a priority, just pay them on the regular schedule.
It sounds to me like your thinking is correct on the investments. If you are in the 25% tax bracket now and expect it to drop when you retire early (which is what happened with us), you are better off contributing to a traditional 401k now. You can convert a lot of money from the traditional 401k to a Roth after you retire and are at a lower tax bracket (which is what we are doing).
Figure out what asset allocation lets you sleep at night. Put all of the fixed income / bonds in the traditional 401k since they are taxed as regular income when the money is taken out. I would guess you would still have room for lots of stock funds in there as well. Only use stock funds in the other vehicles. I would simply use a single Total Stock Market Index fund in the taxable account until you have built it up to $50K+. We have money at both Fidelity (FSTVX) and Vanguard (VTSMX). There would be no extra fees to add small amounts to mutual funds and it would generate minimal taxable income while you are earning higher incomes.
Welcome and best wishes for success.

 

[ugeauxgirl]

In 2016 we both maxed our Roth 401ks for the first time based on the advice of our FA (who we're trying to decide if we think is necessary or if we should just go it on our own).

This is good advice that did not benefit your FA in any way (He could have advised you to put it in an account with him that would have made him money) If you decided to keep working with a FA, this one seems to have your interests ahead of his own.

 

[someguy]

Generally if you expect to have a lower tax rate in retirement than while working and accumulating, it's better to start with pre-tax accounts (e.g., traditional 401(k)) instead of post-tax (e.g., roth 401(k)). And obviously, most people on here are LBYM which suggests most will pay lower (in many cases MUCH lower) taxes in retirement. You can always get money out early for regular 401(k)s without penalty, although there is some extra effort to do so.

Also, be aware that some of the advantages of Roth IRA don't apply to Roth 401(k). The biggie I know of is that the Roth IRA doesn't have RMDs while the Roth 401(k) does.

So unless there's a major piece of info you've left out, I would suggest maxing a traditional, pre-tax, 401(k) before touching Roth IRA/401k. If either of you has self-employment/1099 income, check out the individual 401k which can allow each of you to contribute up to $53K/year to a 401k and/or roth 401k.

 

[Starsky]

I'm really impressed with the progress you've made at 32. At your young age, the most important thing for you to do is to accumulate as much money as you can in your accounts to take advantage of the time value of money. You definitely need to consider your access to those funds for the first early retirement years and maybe even sooner. Others have already provided excellent 401K/Roth advice, but you will need to make your own decisions - and they can change year to year. Long-term tax planning may not always be your #1 priority.

I just have a couple of thoughts to share that you might want to consider. First, the economy tends to move in 7-year cycles. You are young, and at some point in your life a bubble will burst and you may find yourself with a lot of money saved up and an economy at a low point with lot of undervalued investments. You will know when it's time to make bolder moves with your investment strategy to multiply your money faster. Timing is everything. Which leads me to my second thought.

At some point when the timing is right and you have a lot of savings, you will want to take advantage of leverage. Leverage makes it possible for you to get other people (like banks and tenants) to help pay for your investments. Debt is not a bad thing. Especially today when money is very cheap. Use it wisely and you can realize much higher than market returns on your money [that may even supersede your market-based tax strategy]. (Keep your credit score high!)

I like residential real estate, and our returns are good, but not exceptional from what I've read. Between 2011 and today We were able to leverage $150K to $500K in equity plus [pre-depreciation] income of $25K+ per year. Our NW increased passively around $500K in 5 years with a $150K cash investment! Again, timing is everything and i don't think we can do that again right now in my market. But I'll be ready for the next cycle...

The more you have the more you can earn. If you continue to grow your net worth, it will multiply faster and faster. Getting from $0 to $1M is much harder than going from $1M to $2M. Good luck!

 

[enginerd]

I agree with what some others have said. If you are in the 25% tax bracket and will be retiring into the 15% bracket, then you should maximize your regular 401k/IRA before saving any ROTH or after tax funds. But, where are you at in your careers? I thought the same thing when I was earning in the 25% bracket, so I maxed all my pre-tax contributions. Years later, I am now in my late 30's and we're in the 33% bracket, with lifestyle creep, I expect to be retiring in the upper 28% bracket. I wished I had saved more into ROTH earlier in my career when I was in those lower brackets. It's like hitting a moving target, what will your salary be, what will your spending be, and what will the tax brackets be? Who really knows?

Bridging the gap until 59.5. There are actually two ways to get money out of 401k/IRA before 59.5: ROTH conversion ladder (for this option you will need at least 5 years of expenses to bridge the initial gap) or 72t SEPP withdrawals (although if interest rates stay as low as they are now, you need a lot of money for the calculated withdrawals to be high enough to cover expenses).

One other note: If you have a Fidelity brokerage account, you can buy and sell Fidelity Index ETFs without commission (I think there might be a small fee when you sell, but it is really really minor). Other brokerages have this as well. This should resolve your small contribution problem.