New to Site 42 and a lot to learn

[hilltide]

Hey everyone. Stumbled across the site as my quest for early retirement continues. I know there are a lot of different strategies and I am excited to get some valuable insight from everyone here!

We are 42 years old. My wife and I are 4 months away from being completely debt free including the house. We have been following the Ramsey plan because it is simple stupid and his podcasts have kept us motivated.

Our current status is House is worth 400k and have about 300k total in retirement 401k's and mutual funds.

We are getting ready to come up with a master plan as we will not have any debt by the first of the year. We make a good living combined but not sure how long that will last as I am in sales and it is a roller coaster ride.

My initial thought is to continue maxing out 401k, come up with a flat amount to contribute to mutual funds and the rest save for a few cash purchased rental homes once the market cools down?

My job is very stressful and I do not feel I will be able to keep this up for more than another 10 years. Excited to be a part of this forum and eventually unscript!

 

[MBAustin]

Welcome, hilltide! Congratulations on being nearly debt free - if you keep up the LBYM that got you there, your savings/investments will grow that much faster.

I'm not personally a rental real estate fan but that doesn't mean it isn't a good strategy for some - including several who post regularly - so I'm sure you'll get some advice there.

One thing that has come up repeatedly in recent posts is folks who do not have enough after-tax savings to get to 59-½. So investing outside of your 401K definitely is a good idea.

In your stressful line of work, I strongly suggest taking care of yourself (and your marriage) as a top priority - take vacations, unplug regularly, eat well, exercise, etc. You want to have something left when you get to ER!

 

[pb4uski]

I suggest that you use Quicken Lifetime Planner, included in Quicken Deluxe and higher, to prepare a lifetime savings and retirement plan.

 

[45th Birthday]

Welcome! I think the very first step anyone on your journey should take is to start tracking expenses in detail. Know what you are spending and what on. Then start to forecast/budget your expenses and see how you do.

At some point look at ways to reduce spending. $1,000 in spending is at least $25,000 in assets needed to support your FIRE.

You won't know whether the gas in your tank will take you to your destination unless you know your gas mileage (and of course-to push the metaphor-how far you plan to drive).

 

[Erbragg1]

One thing that has come up repeatedly in recent posts is folks who do not have enough after-tax savings to get to 59-½. So investing outside of your 401K definitely is a good idea.

I am fairly new to this forum as well and found the advice from those here to be excellent. I am 48 and, like you, in a stressful j*b and looking to get out ASAP.

MBAustin hit the nail on the head for me. I have too much of my savings in tax advantaged accounts (about 80%). I wish I had joined this forum ten years ago and changed some of my investment decisions to put more into after tax savings. I probably could have had enough to retire a couple years earlier if I did.

Good luck to you!

 

[hilltide]

I have been glued to this site the last few days and very happy that I have found it. A lot of great info. I lost every penny I had 8 years ago and it has been a dog fight to rebuild career and life to this point. I learned a lot from my past mistakes. I am sure I will make more just hopefully not the same one's, lol.


Great advice on after tax savings. My wife and I were having this "discussion" a few weeks ago. We are on a budget and have been watching our money through the every dollar Ramsey site. I have this area in my budget that will haunt me forever called fishing and boating repairs. Oh well, You have to have an outlet!

 

[hilltide]

I am fairly new to this forum as well and found the advice from those here to be excellent. I am 48 and, like you, in a stressful j*b and looking to get out ASAP.

MBAustin hit the nail on the head for me. I have too much of my savings in tax advantaged accounts (about 80%). I wish I had joined this forum ten years ago and changed some of my investment decisions to put more into after tax savings. I probably could have had enough to retire a couple years earlier if I did.

Good luck to you!

Erbragg- Outside of 401k, what tax advantaged savings accounts do you recommend? I spoke to someone about a deferred comp plan which my employer is willing to do. Someone I spoke to told me to just take the money now and not defer.

 

[NgineER]

Erbragg- Outside of 401k, what tax advantaged savings accounts do you recommend? I spoke to someone about a deferred comp plan which my employer is willing to do. Someone I spoke to told me to just take the money now and not defer.

He is talking about non tax advantaged accounts. Investments after taxes have been paid.

There are several ways to access tax deferred investments before 59.5, 72t or SEPP, Roth roll laddering, so I would not be too concerned about saving in after tax accounts.

I learned about after tax 401k contributions here, it allows you to contribute money that can be rolled over to a Roth IRA. If allowed by your company, you can contribute $18k pre tax and a percentage of your salary (set by your employer) above and beyond the $18k.

Dave Ramsey got me started thinking about my finances, but he is far from perfect. I favor having a mortgage, I actually owned a rental property free and clear and financed it in order to get more money available to buy more properties. Once I have acquired enough properties, I'll start snowballing the debt in order to have them free and clear when I retire. It is beneficial IMO to have the debt and depreciation while working to reduce your taxable income and when you are retired, you can have the full benefit of owning them free and clear with a better cash flow.

 

[hilltide]

He is talking about non tax advantaged accounts. Investments after taxes have been paid.

There are several ways to access tax deferred investments before 59.5, 72t or SEPP, Roth roll laddering, so I would not be too concerned about saving in after tax accounts.

I learned about after tax 401k contributions here, it allows you to contribute money that can be rolled over to a Roth IRA. If allowed by your company, you can contribute $18k pre tax and a percentage of your salary (set by your employer) above and beyond the $18k.

Dave Ramsey got me started thinking about my finances, but he is far from perfect. I favor having a mortgage, I actually owned a rental property free and clear and financed it in order to get more money available to buy more properties. Once I have acquired enough properties, I'll start snowballing the debt in order to have them free and clear when I retire. It is beneficial IMO to have the debt and depreciation while working to reduce your taxable income and when you are retired, you can have the full benefit of owning them free and clear with a better cash flow.

Thanks for responding. On the 401k, after the 18k, would I be limited to the $5500 per year for the Roth?

I hear ya on the buying of rental properties. I Before my current career, I was in the Real Estate industry for 12 years. The scars are just healing now. I like your model just not sure I can convince the wife after my prior track record. Florida market is out of control right now. Going to sit back and see if it depresses again and pick up a few in the future.

 

[NgineER]

The after-tax 401k contribution Roth roll over maximum is set by your company, but the total max for 401k is $54k I believe. That includes your contribution max of $18k, employer match and your after tax portion. My company limit allows me to put away $12k every year into Roth on top of the $5.5k.
Your employer sets the limit, I have read online that some companies allow up to 75% of salary, where's my company limits it to less than 10%.

 

[movaly1]

Does anyone happen to know if federal employees have the option of adding additional funds into the TSP over the $18000?

 

[ace8]

Welcome to the site!

MBAustin hit the nail on the head for me. I have too much of my savings in tax advantaged accounts (about 80%). I wish I had joined this forum ten years ago and changed some of my investment decisions to put more into after tax savings. I probably could have had enough to retire a couple years earlier if I did.

A couple of people made this comment.

A better way to look at tIRAs is as a means to "even" your "income" over time thus minimizing taxes. Making some assumptions on returns etc., you would need about ~900K in a tIRA as you started 30 years of 50K inflation adjusted withdraws.

Look at that as a rough cut then you can fine tune the plan to try based on how most tax things are tiered and try and get ACA subsidies or 0% LTCG ...

When your tIRA balance starts to get you over your j*b income levels, you might want to reduce your tIRA savings rate and use Roths or brokerage accounts, etc.

 

[Erbragg1]

Erbragg- Outside of 401k, what tax advantaged savings accounts do you recommend? I spoke to someone about a deferred comp plan which my employer is willing to do. Someone I spoke to told me to just take the money now and not defer.

As others have responded already, I was referring to non-taxed advantaged accounts. I earn too much to be eligible for a Roth IRA now, but ten years ago I could have put money into a Roth rather than Traditional IRA. Had I done that, I would have had penalty free access to that money sooner which would have helped me bridge the gap from ER to 59.5. I also could have put money into a brokerage account rather than the IRA so I had access to it whenever I wanted it.

I probably could ER in a couple years (48 now) if I had enough post tax savings to bridge the gap from 50-59.5. I have a total of $2.25M invested, but only about $450K post tax and $75k of that is needed for college expenses for my kids. I need $110k per year until mortgage is paid off in 8 years. Then expenses drop by $20k to $90k per year. I will save an additional $50k per year for the next few years. If I tried to RE at 52.5, I would need roughly $840k to bridge the gap. I will only have about $600k at 52.5. Not going to make it..... Need another couple years to be comfortable.

So, the moral of the story is to do the math on how much you need to save outside of the tax advantaged accounts to bridge your desired gap between ER and SS and/or 59.5.

 

[hilltide]

As others have responded already, I was referring to non-taxed advantaged accounts. I earn too much to be eligible for a Roth IRA now, but ten years ago I could have put money into a Roth rather than Traditional IRA. Had I done that, I would have had penalty free access to that money sooner which would have helped me bridge the gap from ER to 59.5. I also could have put money into a brokerage account rather than the IRA so I had access to it whenever I wanted it.

I probably could ER in a couple years (48 now) if I had enough post tax savings to bridge the gap from 50-59.5. I have a total of $2.25M invested, but only about $450K post tax and $75k of that is needed for college expenses for my kids. I need $110k per year until mortgage is paid off in 8 years. Then expenses drop by $20k to $90k per year. I will save an additional $50k per year for the next few years. If I tried to RE at 52.5, I would need roughly $840k to bridge the gap. I will only have about $600k at 52.5. Not going to make it..... Need another couple years to be comfortable.

So, the moral of the story is to do the math on how much you need to save outside of the tax advantaged accounts to bridge your desired gap between ER and SS and/or 59.5.

Thanks ER! This is great advice. Jan., our house will be paid off and it's game on. I am in my prime earnings years. The last 2 years have been great. Hope to get another 5 years at this level of income. Wont be able to contribute to a Roth but will be loading up a brokerage account.

Hate to ask this question because I am sure it is a thread in itself. As we draw closer and closer to election or re election, does everyone start becoming a little more conservative in their portfolio's? This has been on my mind.

 

[NgineER]

As others have responded already, I was referring to non-taxed advantaged accounts. I earn too much to be eligible for a Roth IRA now, but ten years ago I could have put money into a Roth rather than Traditional IRA. Had I done that, I would have had penalty free access to that money sooner which would have helped me bridge the gap from ER to 59.5. I also could have put money into a brokerage account rather than the IRA so I had access to it whenever I wanted it.

I probably could ER in a couple years (48 now) if I had enough post tax savings to bridge the gap from 50-59.5. I have a total of $2.25M invested, but only about $450K post tax and $75k of that is needed for college expenses for my kids. I need $110k per year until mortgage is paid off in 8 years. Then expenses drop by $20k to $90k per year. I will save an additional $50k per year for the next few years. If I tried to RE at 52.5, I would need roughly $840k to bridge the gap. I will only have about $600k at 52.5. Not going to make it..... Need another couple years to be comfortable.

So, the moral of the story is to do the math on how much you need to save outside of the tax advantaged accounts to bridge your desired gap between ER and SS and/or 59.5.

If you feel like you have enough money, you could retire at 52.5 and do $120k in Roth conversions every year for the following three years. This would be enough to allow you to burn through the $600k over five years, and after five years you would have access to $120k every year for three years until you are 60. Following that you would have unfettered access to your tIRA.
It might still be a good idea to continue with Roth conversions to distribute the tax burden.

 

[hilltide]

Makes sense. The Ole Back Door Roth. My wife has been bothering me about these. I need to research them and figure out how to execute. I hate when she's right, lol and it's often. I always tell her if it wasn't for her I would be in a 1 bedroom apartment with a 250k boat. Thanks for the intel !

 

[Blue Collar Guy]

I have been glued to this site the last few days and very happy that I have found it. A lot of great info. I lost every penny I had 8 years ago and it has been a dog fight to rebuild career and life to this point. I learned a lot from my past mistakes. I am sure I will make more just hopefully not the same one's, lol.

Would you mind sharing how you lost every penny 8 years ago? I would like to not do what ever happened to you. Thank you.

 

[Blue Collar Guy]

I like this, the next time I chat with someone who is having trouble seeing the light at the end of the tunnel Im going to use it. Thanks.

 

[ace8]

I probably could ER in a couple years (48 now) if I had enough post tax savings to bridge the gap from 50-59.5. I have a total of $2.25M invested, but only about $450K post tax and $75k of that is needed for college expenses for my kids.

I thought tIRA distributions used for qualified higher education expenses are exempt from the 10% early distribution penalty.

You also did not detail the timing but another approach would be to take loans (student and/or parent) and pay them in retirement potentially before 59.5 with 72t distros from the tIRA.

That is an impressive balance for a tIRA @48. Is it total for two people?

 

[ace8]

I have a total of $2.25M invested, but only about $450K post tax

A better way to look at tIRAs is as a means to "even" your "income" over time thus minimizing taxes.

Making some assumptions on returns etc., you would need about ~900K in a tIRA as you started 30 years of 50K inflation adjusted withdraws.

Think about this. If you @48 you let your 1.8M tIRA grow ~12 years to 60 with contributions at 5% CAGR(real), you will have 3.2M. This would fund 175K per year distributions under the above assumptions (in 2017 $)

It might still be a good idea to continue with Roth conversions to distribute the tax burden.

Could not agree with this more. Roth Conversions, 72T, higher ed ... you need to manage that tax liability.

 

[hilltide]

It had more to do with being young and stupid more than a financial move. will try and summarize. Very long story short. I am not sure I could of avoided some of the results but learned some valuable lessons along the way. I have always been financially conservative or at least I thought. There wasn’t any particular investments to avoid but here are a few of my takeaways. A lot of this most of you probably know, but being young and self-employed, I had to learn the hard way. No regrets though. Isn’t life about learning from your failures. If at first you don’t succeed, try ,try again.

• When owning your own business, do not reinvest every penny back into the business. Make sure you are still saving for the future. When I was with a mega corp, did a great job saving. Owning my own business, I pushed it aside.

2)When working like crazy, make sure you still put time into your marriage.
3)Avoid business partners if possible
4)Read the fine print. Was debt free personally but personally guaranteed some business loans. When S*it hit the fan, so did the personally guaranteed business debt.

 

[Erbragg1]

I thought tIRA distributions used for qualified higher education expenses are exempt from the 10% early distribution penalty.



You also did not detail the timing but another approach would be to take loans (student and/or parent) and pay them in retirement potentially before 59.5 with 72t distros from the tIRA.



That is an impressive balance for a tIRA @48. Is it total for two people?

I am not sure if you can take money out of tIRA for education without penalty. Will have to look into that. Thanks for the suggestion! That would possibly knock almost a year off of my "problem."

I thought about the loan thing, but I make too much for any subsidized loans. All I would be able to get would have interest rates >6% and begin accruing immediately. I would be better off with a HELOC since I have equity in my home.

My tIRA balance is from two of us. DW and I have been maxing out 401(k)s since we graduated college. Rolled over into tIRAs after leaving jobs. Have been using tIRA as a brokerage account and buying stocks on my own. I have beat the S&P for the past twelve straight years. Nothing magical, just buy and hold solid companies such as Apple, Home Depot, CVS, P&G, ExxonMobil, Applied Materials, Corning and a few others.

 

[Erbragg1]

If you feel like you have enough money, you could retire at 52.5 and do $120k in Roth conversions every year for the following three years. This would be enough to allow you to burn through the $600k over five years, and after five years you would have access to $120k every year for three years until you are 60. Following that you would have unfettered access to your tIRA.
It might still be a good idea to continue with Roth conversions to distribute the tax burden.

That is a very intriguing idea! I like the way engineers think (especially cuz both my wife and I are also engineers)! I will need to research the Roth Conversions more to make sure I fully understand the risks/benefits/tax implications of that. Thanks for the suggestion!

 

[NgineER]

Read up on Roth conversions/ladders at Kotex's, madfientist and fairmark. They all lay it out differently and they are all good to read.

I especially like combining those strategies with Roth horse race rollovers as you can game the conversion and only pay taxes on the best performing asset class.

 

[tinlizzy]

Game on....I like it!

I'm not a fan of Dave Ramsey because I hate budgets, they just don't work for me and make me feel deprived.

After I paid off my house I added up everything I spent in the previous year, including vacations and cc charges for gifts, misc, etc. - everything. I had been happy throughout the year and started with this spending figure for the next year. Then I decided what to do with any income that would be left over. Basically it's the old 'pay yourself first' I maxed out my 401k and IRA and still had some extra so I funded a brokerage acct, bought I bonds, set up my employee stock purchase plan.

For me this has been freeing because I know that I have X amount of money to spend every month and I can spend it all.

You should try and come up with a savings goal for retirement and then use the financial calculators out there to guess how much you need to put away to get there.

I'm 50 and 90/10 stocks and bonds. Stocks don't frighten me and I've survived watching my portfolio drop twice now and didn't panic. Your comfort level may be different.