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Am I playing with fire?
Old 11-08-2006, 01:24 PM   #1
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Am I playing with fire?

I was thinking about my current situation, and here it is:

29 years old
Self-employed
No wife (not yet), no kids
Own a triplex (owner-occupied)

My "portfolio" looks like this:

55% US Stocks
35% International Stocks
10% Bonds

and another way of looking at it is:

100% deferred (Roth, solo 401k, rollover IRA)

In other words, I don't own any mutual funds in a taxable account.

I only have a small amount of liquidity in the form of MMs. In addition, I have some I-bonds.

The problem is, the solo 401k allows me to contribute $15,000 + 20% of my income up to $44,000. Last year it was $38,000. This year it will be around the same amount.

I am cash poor, but home equity and nest egg rich, relatively speaking.

I am thinking I need to maybe take it easy on the 401k for a year or two. Maybe just do $15,000. But I like the deduction from the "now" and the contribution to my
retirement (in addition to paying less taxes).

Thoughts?
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Re: Am I playing with fire?
Old 11-08-2006, 01:30 PM   #2
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Re: Am I playing with fire?

You are playing with FIRE! The only issue that I can see is whether you are happy:
1) In your job
2) With your lifestyle

You mention home equity so there would be issues with buying a car or upgrading your house in the event that you decide to cohabit or move.

Also is there any chance that you might be laid off and need some cash to carry you? Otherwise I think you will get plenty of praise here for LBYM...
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Re: Am I playing with fire?
Old 11-08-2006, 01:33 PM   #3
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Re: Am I playing with fire?

I'd say you're fine. You can 72(t) your money out at ~4-5% per year (or less), which is the most you should take anyway, according to the SWR research.
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Re: Am I playing with fire?
Old 11-08-2006, 01:34 PM   #4
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Re: Am I playing with fire?

I think you are doing fine, but make sure you have sufficient liquidity. You have I-bonds. How about a HELOC against the house? Does the solo 401k allow loans?
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Re: Am I playing with fire?
Old 11-08-2006, 01:39 PM   #5
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Re: Am I playing with fire?

As a young person, your bias toward asset accumulation and growth is where i'd be (and where I was).

Only thought is that you should have 3 months cash cushion in case of emergency. This could be in a MM fund, or some others have simply done it with a HELOC so the funds are available.

Otherwise, I'd stay with the deferral.

Tio z
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Re: Am I playing with fire?
Old 11-08-2006, 01:47 PM   #6
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Re: Am I playing with fire?

The money that you save as a younger person is the money that can really snowball.

It would be much easier to save now and then cut back later. Rather than spending now and cutting back the lifestyle later - That would be much harder. And you'd have to save even more just cause the money would have less time to snowball.

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Re: Am I playing with fire?
Old 11-08-2006, 01:47 PM   #7
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Re: Am I playing with fire?

Get a HELOC for emergency cash. other that than you're doing a fine job

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Re: Am I playing with fire?
Old 11-08-2006, 01:56 PM   #8
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Re: Am I playing with fire?

Thanks for the replies.

kcowan, I am plenty happy with my job. My lifestyle is good, I just wish I was able to take more extended vacations vs. a lot of 3-4 day weekends.

No chance of me getting laid off, I am my own boss.

tio, I know about the 3-month reserves recommendation, and that's my biggest issue. I can't find any room in my budget to build up my liquid reserves, *but* I've been fine thus far.

Master, I know about the snowball effect, it's just that sometimes I'd like a little more breathing room. I guess I've done OK thus far, I'll keep trudging along!
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Re: Am I playing with fire?
Old 11-08-2006, 01:57 PM   #9
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Re: Am I playing with fire?

Quote:
Originally Posted by saluki9
Get a HELOC for emergency cash. other that than you're doing a fine job

Ditto.
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Re: Am I playing with fire?
Old 11-08-2006, 02:00 PM   #10
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Re: Am I playing with fire?

Quote:
Originally Posted by LRAO
No chance of me getting laid off, I am my own boss.
Your boss should be more lenient about vacation time. Put some money aside each month for a nice vacation. Plan a trip to Europe, Alaska, Egypt, wherever.
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Re: Am I playing with fire?
Old 11-08-2006, 02:20 PM   #11
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Re: Am I playing with fire?

Quote:
Originally Posted by LRAO
100% deferred (Roth, solo 401k, rollover IRA)
I am cash poor, but home equity and nest egg rich, relatively speaking.
Thoughts?
How much cash would you need, and would you like to pay more taxes with that?

You can tap your Roth contributions any time for cash... and then there's Roth withdrawals for special situations plus 72(t) for the rollover IRA.

If nothing else there's always credit cards or home equity loans, paid off with your salary cashflow.

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Re: Am I playing with fire?
Old 11-09-2006, 07:39 PM   #12
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Re: Am I playing with fire?

lrao, sound like u're doing great for your age. wish i knew better when i was young but....

anyhow, can u give an education of "solo 401k" vs. SEP IRA?? can i make 18k/yr and buy all of 18k using solo 401k?? i understand sep ira allow a "certain" percentage...


enuff

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Re: Am I playing with fire?
Old 11-10-2006, 09:37 AM   #13
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Re: Am I playing with fire?

When you have the ability to save as much as you, I'm actually not a big advocate of maxing out all your tax deferred options. I think its good to have some after tax investments for emergencies and being able to make big purchases like a car. What I'd recommend is that you figure out when you want to retire and how much you'll need in tax deferred and after tax investments using a fairly conservative return of say 6%.

I'm in a situation where I could save $45k per year tax deferred at work, but I do $30k
and put the rest into after tax mutual funds. I know that I'm not maxing out my potential return, but I have flexibility and having 5 or 6 years expenses in after tax is a great feeling.

I know that you have the option to 72(t) money from your tax deferred stuff, but there's nothing like having a stash of savings with no tax liable and not strings attatched. If you're putting $38k away each year why not reduce that to $30k and save the rest after tax to give you some piece of mind.
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Re: Am I playing with fire?
Old 11-10-2006, 09:38 AM   #14
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Re: Am I playing with fire?

The solo 401k allows you to contribute $15,000, no matter what, plus 20% (as a sole proprietor, some corporation set-ups allow 25%) up to $44,000.

The SEP allows for 20 or 25% (same rules) up to $44,000, period.

So if you made $50,000.

Solo: $15,000 + (20% of $35,000) = $22,000, leaving you with $28,000 of taxable income.

SEP: 20% of $50,000 = $10,000, leaving you with $40,000 of taxable income.

Fidelity offers both, Vanguard only offers the SEP.

HTH.
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Re: Am I playing with fire?
Old 11-10-2006, 10:12 AM   #15
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Re: Am I playing with fire?

I've always been in the same type of situation, as far as having nearly 100% in tax deferred.

I agree completely with the snowball effect and how positive it is - now at 43 years old, my deferred balance is large enough that contributions now don't have much of an effect on my ultimate retirement balance.

So I can breathe easy knowing I've got a big chunk working for me; had I saved less in deferred years ago and routed more to after-tax, I imagine that after-tax chunk would have gotten whittled away for various 'needs', and I'd be less wealthy today.

Just my long way of saying I think you're doing fine !
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Re: Am I playing with fire?
Old 11-10-2006, 11:40 AM   #16
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Re: Am I playing with fire?

Bottom line, I think I am going to try to build up my early-life snowball as much as possible, and let it roll from there.

Thanks guys.
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Re: Am I playing with fire?
Old 11-10-2006, 11:56 AM   #17
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Re: Am I playing with fire?

Quote:
Originally Posted by runchman
I've always been in the same type of situation, as far as having nearly 100% in tax deferred.

I agree completely with the snowball effect and how positive it is - now at 43 years old, my deferred balance is large enough that contributions now don't have much of an effect on my ultimate retirement balance.

So I can breathe easy knowing I've got a big chunk working for me; had I saved less in deferred years ago and routed more to after-tax, I imagine that after-tax chunk would have gotten whittled away for various 'needs', and I'd be less wealthy today.

Just my long way of saying I think you're doing fine !
While I carn't really fault your logic and thriftiness, it would worry me to have everything in deferred accounts that I couldn't get at without a penalty. I'm 45 and for every 2 or 3 dollars I put away tax deferred I save one dollar after tax. The after tax money is ER money and I'd only dip into it for things like house downpayments. I have a good nest egg that can grow tax deferred and almost $200k after tax that with the proceeds from a house downsizing will to fund my ER up to 59 1/2.
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