Wonderful forum

[carlg1977]

This site is really great, one of the best financial sites I have seen on the web.

I have posted here before, but wanted to introduce myself, and ask a few questions now that I am a little more well read on the subject.

I am 30, wife is 27. We both really want to retire early (hopefully when I am in early 50's). Blessed to have a job with a high income, but I lost a lot of working years getting an education. Here is my basic plan, let me know if I am on the right track:

1. starting to save for a house in a high yield savings account. Will save for about 5 years (currently live in a trailer home that is paid for). Will take out 30 years fixed mortgage, and pay an extra 10% per month on the mortgage, this will pay it off in 23 years.

2. plan on saving 20% of gross. Putting maximum contribution into 401K, rest into taxable account. I don't qualify for a roth or traditional IRA due to income. After taxes and savings, my wife and I live on about 50% of our income.

3. avoiding credit cards and other debt (except student loans at 3.5%). Do have a car note, but plan to put enough aside in another high yield account to pay out of pocket for future cars

That's about it, thoughts??

Specific questions:

1. does the government provide any tax exempt or tax deffered ways to save for a home (i.e the equivalent of a 401K or IRA for homes)?

2. what other options do me and my wife have for tax-deferred or exempt savings?? Gross income is over 200K (me= 150K, her=60K)??

3. Is 20% of gross enough?? How much (what percent) of pre-retirement income is needed? I have read 80-100%, which seems high to me?!

4. What are some general tips and strategies that you guys used/are using to early retire??

[MooreBonds]

Originally Posted by carlg1977

This site is really great, one of the best financial sites I have seen on the web.

I have posted here before, but wanted to introduce myself, and ask a few questions now that I am a little more well read on the subject.

I am 30, wife is 27. We both really want to retire early (hopefully when I am in early 50's). Blessed to have a job with a high income, but I lost a lot of working years getting an education. Here is my basic plan, let me know if I am on the right track:

1. starting to save for a house in a high yield savings account. Will save for about 5 years (currently live in a trailer home that is paid for). Will take out 30 years fixed mortgage, and pay an extra 10% per month on the mortgage, this will pay it off in 23 years.

2. plan on saving 20% of gross. Putting maximum contribution into 401K, rest into taxable account. I don't qualify for a roth or traditional IRA due to income. After taxes and savings, my wife and I live on about 50% of our income.

3. avoiding credit cards and other debt (except student loans at 3.5%). Do have a car note, but plan to put enough aside in another high yield account to pay out of pocket for future cars

That's about it, thoughts??

Specific questions:

1. does the government provide any tax exempt or tax deffered ways to save for a home (i.e the equivalent of a 401K or IRA for homes)?

2. what other options do me and my wife have for tax-deferred or exempt savings?? Gross income is over 200K (me= 150K, her=60K)??

3. Is 20% of gross enough?? How much (what percent) of pre-retirement income is needed? I have read 80-100%, which seems high to me?!

4. What are some general tips and strategies that you guys used/are using to early retire??

Welcome (again ) carlg

Sounds like you're off to a strong start right out of the gate. A few thoughts/suggestions:

1. Housing - Some mortgage companies don't let you do this, and others will do it for a small fee, but when you do eventually shop around for a mortgage, see if any of them will let you do a bi-weekly mortgage.

Rather than sending in $1 every month for your mortgage payment, you send in $.50 every 2 weeks. While it doesn't sound like a big difference, it results in you paying 1/2 of your principal off 2 weeks sooner. Over the course of the life of the mortgage, you end up paying off your house in year 27 - with no additional principal payments above and beyond your standard monthly payment. If you want to make additional principal payments, then you'd pay off your house even sooner.

2.a. IRAs - you are correct in that you don't qualify for a ROTH. However, even though you can't deduct your contributions to a Traditional IRA, you can still make non-deductible contributions to a Traditional IRA, and receive tax-deferred compounding! It's a route that I took for 2006/2007, since I don't qualify for a ROTH those years. Even though I'll only have 2 years for a non-deductible Traditional IRA, I simply divvied them up among 3 Vanguard Funds, since I can "set it...and forget it" (as the infomercials say), and reap my tax-deferred compounded rewards years later.

If you plan on not being able to qualify for ROTHs for several years, then you might want to consider other options for a non-deductible Traditional IRA (i.e. brokerage account), or simply take the Vanguard/Fidelity/other low-fee fund route.

2.b. HSAs As several members on this forum have discovered, the HSA (Health Savings Account) is THE single greatest element of the tax code accessible to the average Joe - provided that you're healthy. It allows you to have a high deductible health insurance plan, and put in several thousand dollars into the account AND DEDUCT IT FROM YOUR TAXES, REGARDLESS OF YOUR INCOME LEVEL.

But wait, it gets better - not only do you get to deduct your HSA contribution the year you make it, but any and all earnings are tax free if you use withdrawals for health care costs. If you don't, simply let the earnings grow, and withdraw after age 65 for ANY reason and simply pay income taxes on the withdrawal (it would then be like a regular IRA - albeit tax-deductible for high income earners). Other than expecting to spend a lot on health care costs, there's no reason you shouldn't do an HSA.

Given your incomes, I don't see why you couldn't retire even earlier than your early 50s - it's just up to you and your wife to evaluate your budget and see what you really want to spend now versus being able to retire earlier. You mention that taxes/savings take up about 50% - does that savings figure include your house/car savings plan? If it does, that leaves you and your wife over $100k/year in expenditures - sounds fairly lavish (to most people on this board ). The higher your annual budget, the longer you have to slave away to fund enough to feed that budget monster (unless you're one of the rare ones that can't wait to go to w*rk every day).

Do yourself a favor and throw out that 80%-100% of pre-retirement income quote. You and your wife need to simply figure out what you want to spend when you retire (which would probably be not too far from what you spend these days - it's difficult for people to change drastically one way or the other once they retire), and go from there.

--Peter

[samclem]

carlg1977,

Welcome. MooreBonds gave you some good points, especialy the idea of scrapping the "80% of pre-retirement income" rule of thumb. We've beat it to death here--it is useless. Just figure out what your spending will likely be, and adjust for likely future expense changes (increase in health care costs, decrease in travel as you age, etc).

Originally Posted by MooreBonds

Welcome (again ) carlg

Sounds like you're off to a strong start right out of the gate. A few thoughts/suggestions:

1. Housing - Some mortgage companies don't let you do this, and others will do it for a small fee, but when you do eventually shop around for a mortgage, see if any of them will let you do a bi-weekly mortgage.

Rather than sending in $1 every month for your mortgage payment, you send in $.50 every 2 weeks. While it doesn't sound like a big difference, it results in you paying 1/2 of your principal off 2 weeks sooner. Over the course of the life of the mortgage, you end up paying off your house in year 27 - with no additional principal payments above and beyond your standard monthly payment. If you want to make additional principal payments, then you'd pay off your house even sooner.

The bi-weekly mortgage is handiest if you get paid every two weeks. The main reason the loan gets paid off faster is simply because you are actually making an "extra" monthly payment every year (52 weeks per year = 26 biweekly payments. If each is 1/2 of what your monthly payment would have been, then you've effectively made the equivalent of 13 monthly payments). You can achieve the same effect by simpy mailing in extra funds each month when you make your payment--be sure to tell the mortgage company that the extra amount is to go against your principal. Many people say you should write a separate check for this purpose every month. A small amount of extra $$, especialy in the early months, goes a long way toward decreasing the term of the loan. One of the raging debates on this board is whether it is smarter to pay off yor loan faster or invest that money--but either action will get you to financial independence faster than just spending it.

[donheff]

Our alternative to paying extra on mortgage principle was to pay the extra into a mortgage payoff investment account. It seemed useful to keep the tax deduction level high (more interest than principle) while we were in a high bracket. The extra payments were invested instead. When I ERd we paid off the mortgage on our home. A similar fund is ready to pay off the mortgage on the weekend house when DW ERs in a year or two. We don't count the mortgage payoff money when calculating our readiness to ER (i.e. SWR).

[Sandy]

Welcome:

I also lived in a trailer for 8 years while paying off student loans and saving for my first house. My income, however, wasn't anything like yours, closer to $25K total , so you should be able to do this easily.

Once in the home, I always pay at least 1/12 extra toward the principal. As mentioned that is the same as biweekly payments and results in a 23 year mortgage. As your income increases, if you have some taxable resources for emergencies, are maxing out deferred payments and IRAs then you can add a bit more toward the principal and move the mortgage along even quicker.

At this point I think it will be very difficult, to predict your expense needs in retirement - so many life events along the way - kids, job changes, housing changes, changes in your interests and activities, health, extended family obligations, etc. will all be moving parts in this plan. But, with your income and a good savings practices, you should be able to set target savings goals and monitor those. As you get closer to FIRE (5-10 years) you will be able to assess your expenses a bit more realistically and see how the two align, with still time to make adjustments.

[carlg1977]

Thank you all for the great replies and advice.

The 50% savings/taxes estimate I used was for retirement savings only. So, we will use 50% of our gross for mortgage, cars, all other living expenses. What we will do is have 20-25% of our gross taken out of our paycheck automatically before we even see it. I figured 25-30% would go to state, federal, social security, etc. So that leaves 50% to cover all other expenses. I am all for early retirement, so if our expenses seem less than the 50%, all extra will go to savings. Also, any bonuses/extra income will go to retirement savings. So, we may be able to retire earlier, but I think that if we save 20-25% our gross and get a decent return, then we can probably hang it up in low to mid-fifties.

The biweekly mortgage sounds good. I did something similar for our trailer. I sent in my regular payment, and then an extra payment at the end of each month. I will look into the biweekly mortgage plans when the time comes.

Please keep all the great advice coming.

[bbbamI]

You may want to consider savings bonds. They're not too sexy, but you don't pay tax on the interest until you redeem them.

[Alan]

Your strategy sounds good to me. DW and I had almost the same incomes as you and your DW a few years back, and managed 35% of gross in savings while having 2 kids in college, but mortgage was paid.

However, you are both young so 20 - 25% will do you just dandy if you can maintain it. Enjoy yourselves a little as well

[Finance Dave]

Is there a reason you don't do a 15 year loan rather than 30? I know it increases your payment, but you build equity so much faster it's amazing...take a look at an amortization table to see what I mean. If you use the 30, then move in 8-10 years, you have very little to show for it...and you end up starting over. In addition, with the 15 year loan you typically get an interest rate that's 1/4 percent or so lower.

As another option for investing, you should look into tax-managed mutual funds....there was a recent column on cnn.money.com on this buy author Walter Updegrave...take a look.

Good luck, and congrats for saving so much.

Dave

[carlg1977]

Thank you all for the great responses.

The 15 year mortgage sounds like a great idea as well, I am worried about commiting myself to such a huge note. I essentially made double payments on the place we are in now, but I always worry about things going south and having high amounts of committed debt. With a 30 year, I would have lower mandatory payments and the option of paying more if I want to.

Speaking of paying extra, let me ask you guys and ladies a quick question:

I recently bought a car for my wife. Financed some of the sales price. When signing the papers, I specifically asked the guy who set up the loan what I needed to do to pay down the principal quicker. He said just to send in a check or pay online whatever amount I wanted, and that the overage would be applied to the principle. I believe that this was a lie, and I feel very upset about this. I sent in almost twice the due amount, expecting the excess to be put on the principle. So, of course, I get my next bill and all they did was credit the next month's statement. Everytime I have dealt with issues like this in the past (mortgage, student loans, etc), I get the run-around. Is there a standard protocol here?? Do I have to send in an extra check each month for the amount I want applied to principle or how does it usually work? When I payed of the trailer, I just had to seperate out the payments, is that how it usually works??

Sorry about the rant. I think that this financing guy knew that I was going to get screwed and just hoped I would not notice. Not to mention that I believe that he told me a lie right to my face.

[Gumby]

There is no substitute for reading the loan document - carefully. Does it allow prepayment without a penalty? Does it specify how to accomplish the prepayment if you wish? The "finance guy" at the dealership probably does not know or care about the fine points of prepaying your auto loan. His goal is to get you to sign on the dotted line and he doesn't care after that, so long as the dealer can get the loan origination fee.

What company financed the car? If it is GMAC or FMCC, you can call them and ask them precisely how to prepay the loan. If nothing else, save extra money in a separate account and when it is large enough, pay off the whole loan.

[73ss454]

I was that finance guy at the dealership for 30 years. No fine print really, only one of the banks I did business with had a prepayment penalty of $100 if paid in full in the 1st year. All the others could be paid when ever the customer wanted. As a matter of fact many times FMCC would have an extra rebate of up to $1000 if the customer financed the car through them. I would tell the cash customer to finance the car and pay it off as soon as the 1st payment coupon came in the mail. Was I a bad guy for doing that?

[Nords]

Originally Posted by 73ss454

I would tell the cash customer to finance the car and pay it off as soon as the 1st payment coupon came in the mail. Was I a bad guy for doing that?

That depends-- who got the rebate?

[73ss454]

Originally Posted by Nords

That depends-- who got the rebate?

Well a cash customer wouldn't finance the car unless there was a benefit to them. Otherwise why would they finance the car if they were paying cash?

[Gumby]

Originally Posted by 73ss454

I was that finance guy at the dealership for 30 years. No fine print really, only one of the banks I did business with had a prepayment penalty of $100 if paid in full in the 1st year. All the others could be paid when ever the customer wanted. As a matter of fact many times FMCC would have an extra rebate of up to $1000 if the customer financed the car through them. I would tell the cash customer to finance the car and pay it off as soon as the 1st payment coupon came in the mail. Was I a bad guy for doing that?

I apologize if my post offended. My main point is that the only person who has your best financial interests at heart is you. When you sign on the line and borrow money, the loan document controls your rights and responsibilities -- not what the dealer finance guy tells you. You are borrowing from GMAC or FMCC or whatever, not from the dealership. If you want to prepay the loan, talk to the finance company, not the dealer. And you should always read loan documents carefully before signing. I am amazed at the number of people who don't.

[Nords]

Originally Posted by 73ss454

Well a cash customer wouldn't finance the car unless there was a benefit to them. Otherwise why would they finance the car if they were paying cash?

While I'm not trying to tar all car dealers with the same brush, if the rebate was going to the car dealer instead of to the customer then I can understand how the dealer would be tempted to make the financing appear to benefit the cash customer.

But you knew that already!

[73ss454]

Originally Posted by Nords

While I'm not trying to tar all car dealers with the same brush, if the rebate was going to the car dealer instead of to the customer then I can understand how the dealer would be tempted to make the financing appear to benefit the cash customer.

But you knew that already!

Why, you don't think that if a sales person can offer an additional rebate to a customer it wouldn't sweeten the deal?
Many salespeople are paid flat commissions in dealerships so they could care less if the deal made money or not. Anything they can give to a customer to sell the car makes it eaiser to close the deal.

Also if the dealer was trying to keep the rebate and not tell the cash customer do you think if the sales person ask pretty please the cash customer would finance with the dealer with no other incentive

[brewer12345]

I never understood why Ford ran that silly promotion of an extra rebate if you finance the car. After all, a fair number of cash buyers likely ended up financing and paying off the note immediately, yet it had t o cost Ford something to process the loan.