27 and Starting my Retirement Planning

[Davaldez21]

Hello, first time posting, I am excited to be at this forum. Ive been reading other posts and see everyone very helpful and welcoming.

My goal is to plan for retirement at 59.5 and would like to semi retire (work half time after 50 years of age).

Im a 27 yr old Male married, South Texas. Recent College graduate from a couple of years ago, professional degree in the medical field. My wife is still a student, will graduate in a few months as a teacher. I have been working full time for 1.5 years.

Income/Assests:
Gross Income about 145k (plus about 40k when wife starts working)
House worth about 180K

Debt:
Student Loans about 23k (down from 67k from 1.5 years ago)
Estimated Wife Student Loans about 20k total
Mortage 140k (1k monthly)
Car 25k (0.5k monthly)


My current goal is to finish paying my student loans @ 7% INT, both my wife student loans and mortage (15yr) are around 3.5%, so I want to keep paying those slowing and invest my money for retirement.

My current main option is Traditional IRA, not sure what other tax shelter or areas to best invest at my age. My company does not offer 401k, but when my wife becomes a teacher she might get one.

I also recently got offered a life insurance (prudential) with a retirement plan (post tax acct), but not sure if that would be good for me.

thanks in advance for information and opinion

 

[panacea]

Hey Martini, welcome to the forum!

Sounds like you're nicely on your way to a good plan. A few thoughts:

1) Do Roth IRAs as long as you are eligible.
2) Fund a Health Savings Account if you have a high deductible health insurance plan... and don't use the money until retirement.
3) Don't prepay your mortgage; at your tax bracket, you're only effectively paying 2.6% after taxes and you should be able to invest your excess cash for a better return.
4) Be very careful of the Prudential "life insurance retirement plan." Sounds like a lousy way to buy insurance and a lousy way to invest for your retirement. Separate insurance and investing and save huge money. buy plain vanilla term life and keep the premiums super low (maybe $400 per year for $1M) and invest with a discount investment company and avoid the sales commissions.

Good luck!

 

[EastWest Gal]

Also shop around for cheap term insurance. Invest the money you save in low cost indexed funds. Insurance is not an investment vehicle, except for the insurance man.


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[ziggy29]

You don't say what your annual income need is, so it's hard to say. But so far you've received good advice for the most part. If you are a good life insurance risk you may want to lock in 10-15 year level term for about $1M until you can live on accumulated assets.

I'd focus on retiring the car loan first and the student loans next. Whether or not you aggressively pay down the mortgage after that is debatable and people will have strong feelings either way. Your 7% loan should be retired first unless other debts are really small and can quickly be retired. (I know about the Dave Ramsey approach of smallest to largest, but when there's a significant difference in interest rates I no longer buy it).

In particular, say NO to whole life or universal life or any other kind of high-commission life insurance that isn't pure term. The late huckster Charles J. Givens sometimes gave some reckless advice, but he did give one nugget which is spot-on correct: insurance and investments, both essential parts of a sound financial plan, should never be commingled as they serve different roles. Never use insurance as an investment or investments as insurance.

 

[nash031]

Welcome! As Ziggy mentioned, a little more information required to really help, but I agree with EWGal - a good general rule is to never mix insurance with investments. Find good term life, and that should do it.

Otherwise, your debt management plan looks fine to me. I wouldn't pay down the mortgage - accumulate while you are young and let compounding work it's magic. You may not be in that same house forever, after all. 27 is young!

Consider the Roth IRA unless you need the tIRA tax deduction for some reason (probably not, though).

 

[aaronc879]

Hey Martini, welcome to the forum!

Sounds like you're nicely on your way to a good plan. A few thoughts:

1) Do Roth IRAs as long as you are eligible.
2) Fund a Health Savings Account if you have a high deductible health insurance plan... and don't use the money until retirement.
3) Don't prepay your mortgage; at your tax bracket, you're only effectively paying 2.6% after taxes and you should be able to invest your excess cash for a better return.
4) Be very careful of the Prudential "life insurance retirement plan." Sounds like a lousy way to buy insurance and a lousy way to invest for your retirement. Separate insurance and investing and save huge money. buy plain vanilla term life and keep the premiums super low (maybe $400 per year for $1M) and invest with a discount investment company and avoid the sales commissions.

Good luck!

1. Normally I would agree to go with the ROTH instead of Traditional IRA. However, with his high income he's in a higher tax bracket now than he will be in retirement(probably) so shouldn't he defer taxes as much as possible and therefore go with the Traditional IRA?

 

[Davaldez21]

thank you for all the replies. As far as the prudential life insurance/investment option I was quite skeptical as well so passed on it.

As far as the IRA vs ROTH IRA, most of you favor the ROTH. What is the reason?

My reasoning for thinking the IRA was preferable would be bc I felt once i started using the funds from the retirement account I would no longer have a high income (just rely on SS and retirement) so I figured I'd have a much lower tax bracket. Currently im in the 25% tax bracket, and if/when my wife begins to work Id likely be in the 28% tax bracket.

I currently get free medical insurance for my family with my current job so no HSA.

 

[Davaldez21]

I have about at least 50% of net income as dispensable currently after all expenses.

 

[NgineER]

As far as the IRA vs ROTH IRA, most of you favor the ROTH. What is the reason?

My reasoning for thinking the IRA was preferable would be bc I felt once i started using the funds from the retirement account I would no longer have a high income (just rely on SS and retirement) so I figured I'd have a much lower tax bracket. Currently im in the 25% tax bracket, and if/when my wife begins to work Id likely be in the 28% tax bracket.

I currently get free medical insurance for my family with my current job so no HSA.

Roths are good because there is no RMD requirement (except for your heirs). You can utilize the assets to optimize your income for taxes in retirement.

When you eventually hit RMDs for your IRA, you might be in a higher tax bracket than now if you have a good run...