22 year old college graduate planning for ER

[ArizonaDreaming]

Hello,

I should probably introduce myself first. My name is Chris and I graduated from college this past May with a steady job that provides a decent income. I currently live with my girlfriend and she is going to school for her RN in August.

I'd like to get some advice to get me on the path to an early retirement. At the moment, I have about $8K in an Edward Jones account, another $15K or so in the bank split between a couple CD's and my savings/checking account, and lastly I have $2K in a Scottrade account that I don't check as often as I should. I also have $26K in student loans that will start being paid at the beginning of September. No car payments or credit card debt.

I'm thinking of starting a ROTH IRA at Vanguard, would this be a good move at my current point in life? I'm thinking of taking $5500 from my savings account and transferring it to a Vanguard mutual fund. Good idea?

I'm not yet able to start paying into my 401K as I need to be at the company for 3 months before I can start contributing. Under the current system, the company will match 3% as long as I contribute 6% to the 401K which I figure is already a great return on my investment. No pension plan though...like most companies nowadays, they did away with that a few years ago for new employees.

What's the best way to start saving for an early retirement at my age? I'm decently knowledgeable about stocks and mutual funds but I still have much to learn. Recommendations would be appreciated.

As far as income, I gross about $40K/ year right now but that will be going up next year to about $54K-ish.

It's a bit intimidating reading some threads on this forum because everyone seems to be doing so much better than I am. Ideally I'd like to be about 52 when I retire, it seems to be an acceptable age in my mind when I can slow down. Hopefully I'd have enough investment income to sustain me until age 60 when I would plan on starting to withdraw from my ROTH IRA.

Advice? Investment options? Anything is appreciated.

 

[omni550]

Welcome aboard, Chris! You're already way ahead of the pack simply because you aren't up to your eyeballs in consumer debt and are looking far down the road as to what you can do NOW to assure an early retirement.

Biggest suggestion: always LBYM (live beneath your means)!

omni

 

[Arifriekinel]

A ROTH IRA was strongly recommended for me, I'm 19, living with my boyfriend. I am self-employed, so without 401k employer match, everyone said a ROTH is the way to go.

Take this with a grain of salt, and listen to the others if they correct me, but I'd recommend definitely doing up to the employer match for the 401k when you can, maxing out your ROTH, and getting as close to the max on your 401k as you can every year, as far as saving for retirement.

Good luck, and welcome

 

[ArizonaDreaming]

Any opinions on good Vanguard funds for a ROTH? Since Vanguard's minimum is $3000, I figured it'd be best to invest the entire $5500 this year into a single fund and add more funds as the years go by. Can I still buy into the Wellington Fund or is that closed to new investors?

 

[omni550]

Looks like Wellington is still open to new investors https://personal.vanguard.com/us/funds/snapshot?FundId=0021&FundIntExt=INT#tab=0

 

[gauss]

Welcome Chris!

I like your thinking!

When my wife to be and I started our jobs, my thought was to save as much as possible early in my career, because with the exponential returns on investments over time, every $1 not saved the first year and so on would be worth many many less down the road. (think of the slope of an exponential curve on the right hand side of the graph).

The way that we accomplished this was to baseline ourselves with a standard of living not too far about what we were as college students and then save/invest the rest of the money.

As we received raises as time went on, we could slowly increase our standard of living (ie a few new furniture purchases one year, maybe an international trip the next). We were very happy with our lifestyle and didn't miss what we didn't spend on stuff. I stared working full time in 1990 and ER'd this year!

You have to have a mindset of not trying to keep up with Jones to pull this off. I believe the term 'hedonic adaptation' refers to the study of the effect that you quickly achieve a similar level of happiness in life, no matter what level of spending you choose. You may feel a temporary bump in happiness if you increase spending, but it will likely wear off with time.

I have always thought that Madison Ave is trying to sell you a lifestyle for their profit at your expense. I wanted to be FI as early as possible in life so as not have the stress that goes along with needing a paycheck/job. Getting a head start on the savings early in life has payed secondary dividends in terms of never having to really worry about money during the career.

Be careful of large recurring expenses (cable TV, cell service, new cars). I was so happy that I finally could jump on the smartphone bandwagon this year when I found a data only plan for ~ $10/month out the door (have seen friends pay upwards of $100/month!). I have been buying used cars for over 10 years now, drive them into the ground, and have learned to repair them myself along the way. I do value paying for experiences over stuff. Lifetime memories can be made from the experiences especially if you do them with people who you may be friends with over a lifetime.

Start the savings snowball rolling early in your career and, due to the nature of compounded returns, you won't regret it later.

Good Luck and Welcome!
-gauss

 

[Arifriekinel]

Any opinions on good Vanguard funds for a ROTH?

I posted about switching to Vanguard recently, and a couple users recommended some of their core funds to build my ROTH.

https://personal.vanguard.com/us/funds/vanguard/core

 

[Animorph]

#1 Figure out your approximate after-tax income and create a budget. At least 15% of your gross (pre-tax) income should be going to retirement savings for normal retirement. More gets you there earlier. Then figure out how your living expenses fit within what's left. Include saving for your next car (pay cash) and saving for a house if that's what you want. Anything left over, go ahead and invest some more.

#2 While you're in the 15% tax bracket and below the Roth contribution income limits, a yearly Roth contribution is probably a good idea. Normally right after getting the employer match in the 401k. A Roth contribution now is OK (and contributions, but not earnings, can be withdrawn in an emergency), but make sure you will still be able to contribute to the 401k to get any match.

#3 Depending on your student loan interest rates, you may want to pay those off as soon as possible, probably before taxable investing. But maybe not before the Roth and 401k match are taken care of. Stay lean on your budget until the loans are paid off.

 

[ArizonaDreaming]

I really appreciate all the replies. My goal is to invest about 20% of my income and so far, I've been able to do that.

As far as expenses...I have about $700/ month in necessary bills. I am saving for a down payment on a house as well. Never had a car payment, I feel a bit dependent to say that every car I've had is a hand-me down from my parents. I'm an only child and they trade up every three years, I get their "old" vehicle with 30k miles or so, and they'll trade in whatever I'm driving. It's just worked well so far and I'm not complaining.

Ill need to look at the ROTH suggestions. I want to get off on the right foot investing for retirement.

 

[timwalsh300]

I tend to think that aggressively paying off your student loans (after contributing enough to get your 401k match) is the best plan. Especially if your rate is 6.8%, which seems common. I would liquidate the Edward Jones and Scottrade accounts immediately and put the money toward the loans. Besides getting the guaranteed return on investment, eliminating the debt gives your more flexibility to change jobs, take on some risk, and try to increase your income. Becoming financially independent is mostly about earning, and ultimately saving, a big pile of money.

When the student loans are gone, I'd refocus savings on the 401k (depending on what funds are available in the plan) and/or an IRA at Vanguard. If you are comfortable with the risk profile for Wellington, I would look at LifeStrategy Growth or LifeStrategy Moderate Growth. They are less expensive and more diversified.

...Scottrade account that I don't check as often as I should...

By the way, as someone committed to investing in a fixed asset allocation of low cost index funds, there are all kinds of red flags for me in the quote above. It's a matter of some controversy, but you might want to check out an investment book written by someone like John Bogle, William Bernstein, or Burton Malkiel.

Tim

 

[pb4uski]

Chris,

IMO the most important things to retire early is to LBYM (live below your means) and invest regularly in no-load, low cost index funds (I prefer Vanguard but there are other good players out there and a whole lot of scoundrels) and stay the course. You seem to be of a mindset to do all of this and have accumulated a good nestegg at such a young age.

At the same time however, you need to live, enjoy life and not deprive yourself. I have a granduncle who scrimped and saved for his retirement, retired early and unfortunately dropped dead from a heart attack 6 months later and I feel that he did somewhat deprive himself and it didn't work out for him.

I like the idea of optimizing the company match in the 401k and putting additional retirement saving in a Roth, particularly if you hope to retire at 52 as the Roth will provide funding for your ER years from retirement to age 59.5 when you can access 401k monies without penalty. Later on when your income grows and you are in a higher tax bracket, tax deferred saving in the 401k over the Roth might be better for you.

For someone your age, I would go with 70% Vanguard Total Stock Index (domestic companies) and 30% Vanguard International Stock Index (international companies) assuming that you are willing to watch your balances go up and down without fretting (which you can do at our age since time is on your side).

I also suggest that you use Quicken Lifetime Planner (included in buy Quicken Deluxe or higher) to model out your future as you build your nestegg and use it. While at your age the results will naturally be very assumption bound, at least it will give you some idea if you are on track and saving enough (or too much).

Best of luck.

 

[MBAustin]

Welcome, Chris!

You are definitely on the right track.

One thing to think about is what effect having children will have on your income and expenses. DH and I decided when we got married to live on essentially one salary for all intents and purposes and save the other (not all for retirement - we also have paid cash for every vehicle we've ever purchased, including our RV, and put 2 kids through private college). That then gave us the flexibility for one of us to stay home with the kids when they were young if we wanted to do that. As it turned out, I was itching to get back to work within a couple of weeks after DD was born (although I did take a few months of when DS was born a few years later). So we just kept saving by LBYM (for example, we only bought houses we could afford on one income). We don't buy lots of clothes or expensive name brands, we don't eat out often (although when we do we don't scrimp on it), we use the public library, we keep our cars a long time, etc.

If you start out like this from the day you are married and are on the same page financially, you are much more likely to succeed.

Good luck!