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Am I starting off right?
Old 10-06-2013, 01:33 AM   #1
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Am I starting off right?

I've been a long time reader and first time poster here so I thought I would ask those of you who have been doing this longer if I have a good game plan to start my retirement planning journey.

I graduated from college 2 years ago and got a job with a large corporation making mid $50s. Other than obtaining the employer 401k match I have focused exclusively on paying off my student loans. As a risk adverse person (sometimes) I assumed taking the guaranteed 6.8% interest rate for the loans was preferable to taking a gamble with the market for someone who was just starting out. In the middle of this year I managed to pay off the last of my $34,000 worth of loans, thus freeing myself of over $700 in loan payments and am ready to really start investing for retirement because the thought of working 9-5 at my current job for the next 45 years does not appeal to me. Don't get me wrong, I do enjoy my job and can see myself being there for many years happily, but well... you know, its work and the sooner I can theoretically walk away the easier it will be for me to go every day.

So far I've decided to take several avenues to stretch my investable money and have set up what I'd like to see as a longterm lifestyle of saving for retirement for myself.

1. I've now maxed out my 401K contributions through my employer, which when combined with the company match gives me 24% in contributions yearly or roughly $13,500.

2. I'm on track to make the maximum Roth IRA contributions for 2013 and plan on making equal monthly payments starting in 2014 to max my contributions each year in equities funds. This fund will focus on growth.

3. My employer offers a single health insurance option that has an HSA, my employer also contributes $875 annually to the HSA. Starting next year I plan to contribute enough to max the HSA. Once I have enough to begin investing this money I will select fairly conservative investments for this fund.

4. Through a combination of tax returns, bonuses, 3rd paychecks of the month, and my special savings rewards program through my bank I plan on plowing money into a basket of blue chip dividend stocks. Based on some calculations I predict I can put between $8,000 and $10,000 annually into this fund. From there the dividends would be reinvested back into the stocks.

5. I'm working on building an emergency fund which I will keep in a high interest checking account and once the maximum balance has been reached I plan on sending the excess interest payments to my dividend portfolio to help protect against inflation.


I'm a fairly frugal person who also religiously tracks his expenses via excel spreadsheets. My goal is to establish habits when I'm young now so that I can keep them up for the life of my career. My biggest uncertainty is with this dividend portfolio I've been thinking of doing. I would do this myself and continually reinvest the proceeds. My short term goal with this is to reach annual dividends of at least $4,000. That way the amount of dividends would be enough to either help the fund grow more rapidly or be useful to fund expenses in the future such as a global vacation or children's college savings plans or even as emergency income if I for some reason needed a temporarily supplemental income source. I also might need to pull some of this dividend investment money elsewhere when I decide to settle down with the long term GF. Is this basket of dividend stocks a good idea or should I plow those funds into addition equities for growth instead? And how does this plan look for someone who is just starting the path towards early retirement? Just looking for some tips or advice from some of the more veterans savers and retirees to make the most of my early years so compounding interest can work the magic
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Old 10-06-2013, 03:19 AM   #2
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Moonman, welcome as a new poster here. You sound very disciplined, organized and well on your way to a strong financial position. A couple of minor suggestions: it is early in your investing life...look into diversifying your stock portfolio into small caps, midcaps, foreign stocks. You may want to add alternative equities to the big dividend-producing stocks that have more capital appreciation potential. Also, don't forget to keep enough money in your front pocket to live life with. You're only young once, so don't forget to build some fantastic memories with your GF/wife/family along the way with the occasional splurge for a trip or other family experience. Congratulations on a great start, and best of luck to you.
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Old 10-06-2013, 08:15 AM   #3
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Green, I'm only a few years ahead of you in this game, but I'll comment.

1. I agree with your concern about "this dividend portfolio [you've] been thinking of doing." Why do you think it's better than, say, just buying Vanguard's Total Stock Market Index Fund? I imagine that the index fund would be lower cost, lower maintenance, and more widely diversified. You should do some research on the dividend vs. total return approach to investing. When I was in your shoes, it took me a while to realize that this stuff has been pretty much figured out already, and I wasn't going to discover a genius way to beat the market or eliminate risk by doing a few thought experiments.

2. Very nice job paying off $34k in debt (you made the right choice at a 6.8% interest rate) and maxing out your retirement contributions within two years of college. The hard part is maintaining that discipline as you go forward. When we first graduated and started earning real money, I remember all of my peers being excited about saving and investing because it was easy; we were still accustomed to living like college students. A few years later, I think most of them have gotten away from that in favor of expensive lifestyle choices: big houses, cars, gadgets, etc. Marrying the right woman (who shares your vision for long-term savings) is one of the most important financial decisions you'll ever make.

Tim
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Old 10-06-2013, 12:26 PM   #4
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One thing to consider is tax implications of your retirement investments vs non-retirement investments.

I've always understood that it's better to place high yield dividend investments in a tax advantaged retirement portfolio (IRA, 401k) with the idea that you'll potentially pay less taxes on those dividends when withdrawing in your retirement tax bracket versus now.

My tax bracket changed significantly upon ER (now 0%) so the above is how I planned my tax advantaged vs. taxable investments.
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Old 10-06-2013, 12:33 PM   #5
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Good start. Don't overspend, and you'll FIRE. About your investments, I had done similar at your age, but wish I had put more into growth stocks that pay no dividend, such as BRKB. On such investments you pay zero tax until you sell them, which, if you hold them for decades, makes them similar to an IRA without any of the restrictions of an IRA. In some ways they are even better than a tIRA since tIRA withdrawals are taxed as ordinary income, whereas sales of stock are taxed at the typically lower capital gains rate.
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Old 10-06-2013, 02:29 PM   #6
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Thanks for the insight everyone, I really do appreciate it. I should probably had said that I am a CPA so many of the tax advantages of investments are fresh in my mind which is why I wanted to get a mix of pre and post tax investments for the future. That's also why I've got my budgeting down so well.

My only reasoning for a dividend portfolio is like many young people I won't be receiving a pension in retirement so building my own faux pension gives me some peace of mind to compensate for that. But for long term purposes it appears that going for growth now and then moving that particular balance to income producing products would be wiser. Still might build a small dividend basket so I can have a little money to play with since I do enjoy the world of investing, even if I'm not going to hit return rates that rival the professionals.

I've always made sure to live life to the fullest and travel extensively throughout the US each year. I know its important to make memories constantly and not live in a cave alone just to cut all costs until you're 45!

Still got many years to go until I reach FIRE but better to start early than later
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Old 10-06-2013, 06:13 PM   #7
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Hey, the professionals manage the mutual funds, with research staffs and all year long to decide what to hold and what to sell. They only beat market averages half the time. Forget about them and do your own thing. Think asset allocation, low cost, and long term goals. And you're right, you can fill your dividend basket any time you want...even 6 months before you retire.
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