This FIRE may never burn

[Moneybadger]

Hi all. My name is Suzanne. I'm a 48 year old single female. I'm a lower income wage earner and am getting a bit of a late start on my retirement. I've been reading these forums for the last few weeks, and I sure could use some advice. Some background:

My gross yearly income is 43k. I have 60k in a traditional 401(k). I have 25k in savings. I have no debt and excellent credit. Yay me!

I have low rent/living expenses and live pretty frugally in a small condo in the middle of the city, but I know this deal can't last forever. I have 25k in savings because I wanted to buy a house and had been saving towards that. I'd been nervous about home ownership and couldn't pull the trigger, and now with the housing market coming back in my area I am slowly being priced out. I believe now, this is a blessing in disguise. Even though I'd love to own my own home, I don't want to be slave to one. And on my income I would be.

I am becoming increasingly concerned about my financial future. My first idea is to start an IRA. Take the max amount (5,500 for this year) from my savings and put it into an IRA. I'm familiar with the differences between the IRA and Roth, but still can't decide which to open. Which should I open? Also, should I wait for a market dip or just open my IRA/Roth ASAP? Also, I've been looking at the Vanguard Target Retirement 2035 Fund. I think I'm comfortable in a one-and-done fund like that. It seems simpler and seems to have good returns. Any ideas on that?

Right now I am contributing 10% to my 401(k). I think I should increase that now. But how much? Going forward, I'd like to max out my IRA every year also. Between my 401(k) and savings, I've put over 25% of my income aside this year.

I'm not asking for investment advice. I guess what I'm asking you savvy folks is how do I maximize for my retirement? What would you do if you were in my shoes? What steps should I take? I thought about seeing a financial planner, but honestly there's not a lot of finances to work with.

Thanks in advance for any advice or help.

 

[RonBoyd]

I don't have a lot to offer in the way of advice but found this article to be germaine to your plea:

When Homebuying Is A Waste of Money: Five Smart Moves - Forbes

Home ownership is one of the great myths of the American dream. But there’s nothing wrong in having a home. Buying it may not make the most financial sense.

“While there is no question that homes have become the most valuable asset for U.S. households, our research finds that homeownership is often not the best strategy for building wealth,” said Matt Fellowes, founder and CEO of HelloWallet and a former scholar at the Brookings Institution.

He added: “Workers need to take a hard look at other investment choices before deciding to buy a home. Employer-sponsored retirement or health savings programs, 529 college savings plans, or even IRAs may be more effective vehicles for families to build wealth and get ahead.”

 

[heeyy_joe]

Keep the condo. Explore Roth 401(k). Consider a year or two of additional part-time employment (seasonal?). Best to you, keep the faith.

 

[Totoro]

Hi and welcome! Where I would start is to get a more complete overview of your financial future starting with what will happen once you hit SS age.

Don't focus on early retirement now, focus on a solid "normal" retirement first.

Some questions:

• How much SS will you expect at age 65?
• What is your yearly current net income (after tax)? Without investment income.
• What are your current yearly expenses (excluding contributions to IRA/savings)?

In terms of advice: you may be right on the home ownership issue (although I am a bit biased against owning real estate in general). Why your house is a terrible investment is a helpful read.

Basically, don't buy in the mantra "rent is money thrown away" by default. Do the math first, then decide.

Other than that, from what you have posted I can give my two cents:

• 25% is a good savings rate. Try to keep it up or even increase if you can find additional income somewhere
• If you want (and you should) put money into stocks, start doing it right away in small amounts. Read up on dollar cost averaging. The market will crash eventually, and it will soar too. No-one knows when that will happen so don't try to time it.

And lastly, while seeing a good financial planner can be very helpful, start reading and learning the basics yourself first. It's cheaper and that way in the future if you still want one, you can get a lot more value out of it.

Hope this helps!

 

[Ronstar]

Welcome Moneybadger! I'll echo the thoughts of others and suggest keeping the condo. Saving 25% is excellent - just keep it up. Try to cut expenses even more and put more into your 401k if possible. But be patient - FIRE doesn't happen over night, it takes a while. Just keep your expenses down, savings up, and FIRE will come to you.

 

[Gotadimple]

Hi all. My name is Suzanne. I'm a 48 year old single female. I'm a lower income wage earner and am getting a bit of a late start on my retirement. I've been reading these forums for the last few weeks, and I sure could use some advice. Some background:

My gross yearly income is 43k. I have 60k in a traditional 401(k). I have 25k in savings. I have no debt and excellent credit. Yay me!

I have low rent/living expenses and live pretty frugally in a small condo in the middle of the city, but I know this deal can't last forever. I have 25k in savings because I wanted to buy a house and had been saving towards that. I'd been nervous about home ownership and couldn't pull the trigger, and now with the housing market coming back in my area I am slowly being priced out. I believe now, this is a blessing in disguise. Even though I'd love to own my own home, I don't want to be slave to one. And on my income I would be.

I am becoming increasingly concerned about my financial future. My first idea is to start an IRA. Take the max amount (5,500 for this year) from my savings and put it into an IRA. I'm familiar with the differences between the IRA and Roth, but still can't decide which to open. Which should I open? Also, should I wait for a market dip or just open my IRA/Roth ASAP? Also, I've been looking at the Vanguard Target Retirement 2035 Fund. I think I'm comfortable in a one-and-done fund like that. It seems simpler and seems to have good returns. Any ideas on that?

Right now I am contributing 10% to my 401(k). I think I should increase that now. But how much? Going forward, I'd like to max out my IRA every year also. Between my 401(k) and savings, I've put over 25% of my income aside this year.

I'm not asking for investment advice. I guess what I'm asking you savvy folks is how do I maximize for my retirement? What would you do if you were in my shoes? What steps should I take? I thought about seeing a financial planner, but honestly there's not a lot of finances to work with.

Thanks in advance for any advice or help.

Hi, Suzanne,
You are going to get a lot of advice here.

First of all, you are correct, that you should stay in the condo for as long as it is available for rent to you. It keeps your expenses down, letting you put more in savings. Congratulations on socking away $60K in your 401k!

The savings you had set aside for buying a house, needs to be invested in something more than a savings account. If you have a brokerage account and have it invested in a balanced mutual fund - that's great! If not, think about opening one with Vangard, Fidelity, or Schwab. Each of these companies does have advisors who can help make basic decisions. They earn no commission for providing you with information so you can make an informed decision. One of these may have an office in your town where you can walk in and get help, or reference materials.

But as one other poster said, it is in your best interests to start reading first, so you are knowledgeable. You worked hard to earn the money, and probably want to make sure you invest it well and that you know what you are investing in.

Investing in an IRA can be a good thing - especially if you are in a lower tax bracket and it will give you a tax deduction. However, just like the 401K, you will pay taxes on the money AND the earnings when you begin to withdraw it. A Roth IRA might be a better idea: you invest after tax earnings and all the money is available at retirement with no income taxes due.

If you are comfortable with a single mutual fund, then the one you suggest might be a good idea. Vangard has many mutual funds. Others to consider are Wellsley and Wellington. These are balanced funds, that is, they are invested in both stocks and bonds. Wellsley is 40% stocks, 60% bonds, while Wellington is 60% stocks, 40% bonds. If you split your investments (either from your savings account, your IRA/Roth) between them, you have a 50-50 allocation which is generally considered conservative.

But! that recommendation all depends on how your 401(k) is invested. You want an asset allocation that meets your needs. You can create a simple one, but you should incorporate how your 401(k) is invested along with the cash you'll be investing in a IRA/Roth.

So before you do anything, it's time to do some reading: see the Links above for a list of books. You can get them at the library. You need to consider asset allocation (Rick Ferri, All About Asset Allocation is a good one). Then you need to consider who you want to invest with (see the latest Money Magazine or Kiplingers Personal Finance for a review of the big stock brokers).

It's a lot to chew on. Take your time (except for the IRA/Roth). You won't go wrong in starting one or the other right away - just so you get the money working for you.

-- Rita

 

[pb4uski]

Well first, welcome and congratulations on thinking more about your financial future than most people.

Based on the info you provided I suspect that you are currently in the 15% tax bracket while working and will likely be in the 10% tax bracket in retirement, so tax-deferred savings is inviting but not as attractive as for someone in a higher tax bracket. I would be lukewarm on a Roth considering that dividends and long-term capital gains are tax free in your tax bracket any taxable account savings will be close to tax-free anyway the Roth has minimal incremental benefits and introduces some unnecessary constraints.

I would suggest that you save or retirement in your 401k only to the extent of an employer match if applicable, and divert any more retirement savings to an deductible IRA where you'll have more investment flexibility and lower costs. If what you want to save for retirement exceeds the IRA limit, then use the IRA and use the 401k for any excess of your target over the IRA limit.

The 2035 fund sounds ok, but I would prefer Vanguard's Wellington fund over the 2035 fund. You can set up the IRA and fund it now in a money market fund in the IRA and then value average into Wellington or the fund you chose over a period of time. So for example, put $5,000 in the MM now and $500 in Wellington. A month from now, transfer whatever you need to from the MM fund to Wellington to bring Wellington up to $1,000. A month later, transfer whatever you need to from the MM fund to Wellington to bring Wellington up to $1,500. Repeat until the MM fund is gone.

If your savings is in a low interest savings account, you could consider an online savings account. Mine currently pays 0.85% and most are in that range.

 

[Walt34]

Welcome to the forum! I cannot disagree with any of the advice given so far but wanted to throw in my own suggestions on books to read. There is a huge amount of information to digest, but while it comes slowly, it is not hard to do.

The Millionaire Teacher. How a guy with about your income became a millionaire by age 30. Okay, he did some extreme things early on but settled in to more "normal" later on. It is not too late for you.

The Millionaire Next Door. A classic for good reason. Some of the numbers are somewhat dated but the principles are not.

A Random Walk Down Wall Street. Another classic, again for good reason.

How a Second Grader Beats Wall Street. Excellent advice and he describes a "couch potato portfolio" that works well.

Your Money and Your Brain. Understanding why you do what you do with money.

Predictably Irrational. Another book that expands a bit more on why people do weird things with money and how to avoid doing so yourself.

Most if not all of these books should be on the shelf at your local library. If they're not ask about inter-library loans so you can read all of them for free.

 

[Bestwifeever]

Hi all. My name is Suzanne. I'm a 48 year old single female. I'm a lower income wage earner and am getting a bit of a late start on my retirement. I've been reading these forums for the last few weeks, and I sure could use some advice. Some background:

My gross yearly income is 43k. I have 60k in a traditional 401(k). I have 25k in savings. I have no debt and excellent credit. Yay me!

I have low rent/living expenses and live pretty frugally in a small condo in the middle of the city, but I know this deal can't last forever. I have 25k in savings because I wanted to buy a house and had been saving towards that. I'd been nervous about home ownership and couldn't pull the trigger, and now with the housing market coming back in my area I am slowly being priced out. I believe now, this is a blessing in disguise. Even though I'd love to own my own home, I don't want to be slave to one. And on my income I would be.

I am becoming increasingly concerned about my financial future. My first idea is to start an IRA. Take the max amount (5,500 for this year) from my savings and put it into an IRA. I'm familiar with the differences between the IRA and Roth, but still can't decide which to open. Which should I open? Also, should I wait for a market dip or just open my IRA/Roth ASAP? Also, I've been looking at the Vanguard Target Retirement 2035 Fund. I think I'm comfortable in a one-and-done fund like that. It seems simpler and seems to have good returns. Any ideas on that?

Right now I am contributing 10% to my 401(k). I think I should increase that now. But how much? Going forward, I'd like to max out my IRA every year also. Between my 401(k) and savings, I've put over 25% of my income aside this year.

I'm not asking for investment advice. I guess what I'm asking you savvy folks is how do I maximize for my retirement? What would you do if you were in my shoes? What steps should I take? I thought about seeing a financial planner, but honestly there's not a lot of finances to work with.

Thanks in advance for any advice or help.

A., I love your user name (and your real name ).
B., you are doing really well as a self-described "lower income wage earner." I don't know that the Roth vs traditional IRA would be any different in the end for you. I would just open it all at once.
C., great job with planning to save 25 percent of your income in retirement accounts.

 

[Katiek]

Welcome and congrats for thinking about these issues at an age before many other people do. If you can save 25% , that's very good. Personally, I wouldn't try to time the market and wait for a "dip". I'd figure out what asset allocation I wanted and get started with the IRAs. The first step of setting things up is the hardest and it will get easier once you have the savings framework established.

 

[2B]

Welcome to the forum. I hope we can be of help to you.

I wouldn't call you a "lower income wage earner" at $43k/yr but you aren't a high wage earner either. Our government just loves your tax dollars.

I can't see much advantage to opening a deductible IRA but the Roth could provide you with a minimal amount of tax savings. It wasn't clear if you were eligable for a 401k match at your work. If you are, I'd recommend putting in enough to get any match. If available, you should consider converting to a Roth 401k. I wouldn't get too excited about maximizing your contributions until you get at least one year's living expenses outside of your 401k. I'd be concerned about only having $25k available in an emergency. Your tax situation doesn't propbably provide much incentive to maximize deferred taxes.

Your first read should be Millionaire Teacher by Andrew Hallam. It may not be available in your local library but I think it's about $10 on Amazon. It will give you a good review of index investing which is what most people recommend here.

You're doing all the right things. You are saving aggressively, have no debt and are living below your means. You full social security will probably replace most of your current living expenses so your saving now could lead to your ability to retire earlier than full SS age. You'll need to see how the next 10 years work out.

My one suggestion on a personal level is to avoid long term relationships with broke, in-debt people.

 

[Walt34]

My one suggestion on a personal level is to avoid long term relationships with broke, in-debt people.

+1 on that!

That or a major health issue are about the only things that stand in the way of a good retirement for you.

 

[Moneybadger]

Well, a big giant thank you to everyone who replied. I really appreciate all the advice and encouragement. I feel really hopeful after reading your posts. A few days ago I thought I'd be working full-time into my 70's, but now I know I will have a great retirement and will even FIRE with proper planning. What a great sense of relief!

I didn't understand some of the info shared, so will have some follow up questions for some of you. In the meantime I put some advice to use:

I thoroughly went through my 401(k) to understand it and my current allocations. I picked up a couple of the recommended books (yes, from the library), All About Asset Allocation and Millionaire Teacher. Next stop is the Social Security website. It feels wonderful to be able to take charge. And I'm chomping at the bit to start my IRA/Roth (I've never been so anxious to part with so much money before ).

Thanks again!

 

[Totoro]

Great to hear!

For any future questions, silly or otherwise, I think this is the right place. It is by far the most helpful forum in the personal finance (and life-advice too) area I've ever seen, and stocked with well-meaning and smart, also wise people.

And if you feel in charge now, just wait until you see and feel your new financial plan come together with every passing year

 

[RetireBy90]

Welcome Suzanne - while I am not as successful as many on this site in the journey to early retirement, I am about 2 years away from being able to retire. There are a couple things I have learned along the way that work very well for me.


1) one of the most important determiners of how much your savings can grow is time in the market. Over the short term small numbers don't have a big impact on the growth, but over the mid to long term they have a big impact. Increasing my 401K by only 1% a year didn't seem to have a big impact, but after several years it has really made a big difference. Same lesson, the earlier your contribution the longer it has to grow. A contribution today of $1 has a bigger impact than $1 next year or in 10 years. watching your total investment grow can be slow and painful in the early years, but know that if your 401K earns 7% then it will double every 8 years, before any more contributions. So, 60K becomes 120K to 240K to 480K after 24 years.


2) Learn as you go. If Financial Independence is important to you, keep learning about how to protect and grow your financial base. There are many different views on the right thing to do, but none are fool proof. Some principals are widely accepted (you need an emergency account of 3 or 6 or 12 months for example) but vary in details. If you keep learning, listening to various points of view, you can then be learned enough to make your own call for you. Don't take any one point of view as gospel, think about it and consider for your self.

 

[NgineER]

Welcome Moneybadger!

I'm glad you are taking control and feel like you are in charge of your future. You have already gotten excellent advice from many people.

I encourage you to go over your expenses and go to the social security website and get your actual forecasted number.

I'd also second visiting with a fee only financial advisor, I use Vanguard, but any of the major low cost brokerages would work. You might even have a free service at work.

As far as giving you a handle on how much you need, you'd first need to know your current expenses and your expected SS. Were you always single, I recently learned here that you could get your ex spouse spousal benefit, even if you are no longer married.

As far as 401k, tIRA or Roth IRA. it depends on your taxes (current and future), fund selections and expense ratios for those funds.

I am a proponent of reducing your taxes now, while also giving you a mix of after tax, tax free and tax deferred. As everyone else, I would suggest contributing to get the max match, if you get any. Then I would contribute some to a tIRA and some to a Roth IRA. You already have quite a bit of after tax savings, so put those to work for you as well. The max you can contribute to the IRA is a combine 5500 this year, but it doesn't have to be one or the other.

Good luck. And update us when you have your expense estimate and SS numbers