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Young Professional Seeking Advice
Old 09-28-2012, 12:50 PM   #1
Confused about dryer sheets
Join Date: Jul 2012
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Young Professional Seeking Advice

Hi everyone. I stumbled across this forum a few months ago and have been hooked ever since. From a young age, the idea of being financially independent has been intriguing and it is now towards the top of my priority list.

I am 24 years old and have been w*rking for a little over a year. I have zero debt and don't plan on acquiring any soon. I track my expenses carefully and am very serious about saving.

My expenses are around 20% of my gross income, taxes are roughly 25% (federal, state, payroll) and I save the rest. I currently max out a Roth 401k, Roth IRA, HSA. I put in 10% into an after tax 401k which will be rolled over into a Roth IRA every year. My company offers company match on the 401k and also a company sponsored defined contribution pension plan. I also take advantage of a employee stock purchase program where I put 5% of my pay and can buy the stock at a discount.

I invest in low expense index funds in my 401k (85% equities and 15% bonds). For my IRA, I have a couple of stocks and low expense index tracking ETFs. I play around a little with my after tax cash but am considering not wasting my time and go 100% low expense ETFs. However, I think I would always think 'what if' if I didn't invest at least a small % (5-10%) of my assets in individual stocks.

My goal is to continue saving a lot and slowly start pulling out of the market and buy short to medium term bonds. Then at some point I'll have enough assets to cash-flow match my expenses (including inflation) and hopefully at that time the interest rate environment will be more favorable. At that point I plan to transfer those assets into longer term bonds, hold a sizable cash cushion for emergencies and leave the rest in equities for long term growth.

Now I have a few questions. I am currently in the 25% marginal tax bracket and expect to jump to the 28% marginal bracket next year (I also w*rk in a state with >5% income tax). What are your thoughts on having me switch to a traditional 401k from a Roth to save on taxes?

I know the rule of thumb is if you expect to be in a higher tax bracket when you retire then it is better to use a Roth now. I know my tax bracket will increase over the next few years but won't I have more control over my income in retirement? I imagine that I would try and time my withdrawals in a tax efficient manner.

Another thought to consider is if I decide to retire young then I shouldn't touch my traditional accounts before I am 59.5 unless if I take a SEEP distribution. However, with a Roth 401k I would be able to easily roll that over to a Roth IRA and after 5 years I would be able to withdraw my contribution penalty free. That seems more ER friendly. But if I did do the traditional 401k then I would be able to save more after tax (from the tax savings) which would help with ER too. There is a big difference between 25% tax bracket and 15% if you include state tax as well.

In the end it seems like there are too many unknowns so there is no 'right' way of doing this. I could always do a 50/50 split between the two.

My next questions is regarding i-bonds. They seem like a great idea, very safe, inflation protection and more depending on current interest rates. What are your thoughts on having me purchase some? Am I too young to be thinking of such conservative investments? I sort of thought of it as a saving vehicle that would protect my initial investment by keeping up with inflation. I also like TIPS but they seem expensive right now.

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Old 09-28-2012, 01:46 PM   #2
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Welcome! Based on both your writing content and style, I'd say you are off to a great start. You are at the age to let the magic of compounding do the work for you.

With regard to controlling your level income in retirement, as you may know traditional IRAs have required minimum withdrawals while Roth IRAs do not. So, Roth gives you more control. Even so, IMO it's best to keep some portion in traditional and some in Roth. Such an approach provides flexibility with regard to taking taxable vs. non-taxable withdrawals during retirement, so you can hopefully better adjust to whatever future tax laws bring.

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Old 09-28-2012, 07:10 PM   #3
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You are in great shape. I think you should definitely put some of your retirement contributions into a trad. 401k. First, because you don't want for all of your retirement income to be not taxable, because you get a pass on some of it- standard deduction and personal exemption. At least as the tax code is currently written. The other thing to consider is whether you see a spousenor family in your future, and where your tax bracket might go. I was contributing to a trad. 401k when I was in the 25% bracket. Got married and ended up staying home for a year w/ our 1st kid. DH made significantly less than I did, so I rolled that$ into a Roth at 10% & 15% taxes, which worked out really well.
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Old 09-28-2012, 10:19 PM   #4
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Keep up the efforts to save. Keep up the efforts to learn. Keep up the efforts to adjust and "manage" the landscape but don't jerk your efforts or money around. We found steady and regular savings with a full control of the spending appetite will get to the critical mass needed to make real choices as to lifestyle, retirement age, and reduction in stress re: money. In the end many silver bullet...equation is simple...spend less and don't let possessions control you.
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Old 09-28-2012, 10:33 PM   #5
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Originally Posted by Graphics View Post

My expenses are around 20% of my gross income, taxes are roughly 25% (federal, state, payroll) and I save the rest.

I'm going to take a bit of a contraian view. My simple arithmetic says you save 55%. That is comendable but I'd suggest that you may be saving too much. If you make $55M/yr then a 55% savings rate may be to low. If you make $55K a 55% savings rate may be too high.

You are 24 years old. Next year you will be 25 and 51 years from now you'll be 75. At 75 you may be able to afford to do whatever you want (50 years of compunding should make that a no-brainer). Will you be alive then? Will you be able to walk onto an airplane for the trip "you've always saved for". You have to balance your life and spend a bit when you're young to enjoy being young. You only get one chance at being young, don't blow it.
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Old 09-29-2012, 02:33 AM   #6
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At 24, and in the 28% bracket, I'd go with 401(k) to reduce my fed taxes. Especially if single. If the fund choices and expenses are horrible, I go up to match, and then fill Roth. I don't think you will be able to get tax advantage for an IRA given the income, so use Roth and 401(k).

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