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32 Y/O Young Dreamer needing financial advice
Old 03-22-2016, 11:53 AM   #1
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32 Y/O Young Dreamer needing financial advice

Hi everyone, new to the board and I have been trying to save for the past 7 years without much guidance besides reading articles. I come from a family that spends every last dollar and is relying on social security and I don't want to go down that path. I have a goal of retiring by 57 at the latest, but early 50's would be more ideal. I don't know if it is possible and was wondering if I could get some advice on how I'm doing and my current investment strategies.

Background.
Me-32 y/o; wife, 2 kids, and mom
401K: $114,000; currently maxing out at $18,000 / yr
Roth IRA: $30,000; currently not contributing

Debt:
Mortgage: $257,000 @ 4.625% (beginning 2/7/14); Pay $350 extra / month
Car: $20,000 @ 1.9% (beginning 6/1/15); will start paying $500 more per month beginning in April to pay it off.

I got a few questions.
1. I quit contributing to Roth and started maxing out my 401k since my wife and I are in a higher tax bracket now than I think we will be when we retire. Is this the right thing to do?

2. I love the idea of having no debt, so we are paying extra in the mortgage and car, which totals an extra $850/month. The reasoning is that I have the ultimate goal to have no debt so my wife can begin to work less and it just makes me feel good that I don't owe anyone money. Would it be wiser to use this extra money to fund the Roth, open another 401k for my wife, or quickly pay off my debt?

3. Last but not least, am I just dreaming about early retirement or do I look like I'm on the right path for retiring in my early 50's?

Thanks for taking the time and for your input!
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Old 03-22-2016, 12:23 PM   #2
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You look like you're well on your way!

1) 401k is good if you're in a higher tax bracket now than you will be after retirement. Although, there are some rules around early withdrawals, you may want to investigate. I'm not American so not totally sure how it works.
2) If you're going to pay extra, pay all the extra on the mortgage since the interest rate is so much higher. Unless you can calculate that your tax savings on having a mortgage is more than the difference in interest. Again, not American, so not sure how that all works.
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Old 03-22-2016, 01:11 PM   #3
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In general, I agree with Spudd to pay off the higher interest rate debt, but the extra $500 per month should get the loan paid off by the end of 2017. The good feeling of getting that debt payment gone can outweigh the higher interest rate that could have been saved. Remember to put the entire car loan payment (including the extra $500) against the home loan after 2017. That will let you be debt free in 11 years (if your mortgage is a 30 year) or 8 years (if a 15 yr mortgage).
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Old 03-22-2016, 01:17 PM   #4
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Good choices with 401k.

Your mortgage rate is high. I'd refinance to a 15 year fixed, current rate is about 3.125%, so with your current extra payment, you'd only have to pay $100 more per month. Alternatively a 20 year fixed would have you pay about the same you do now, but more towards principle.

I'd do more tIRA or a 401k for your wife in order to have a lower tax burden now, there are quite a few options to withdraw early.

Madfientist.com has good suggestions
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Old 03-22-2016, 02:30 PM   #5
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You are in pretty good shape, and well ahead of most of your peers. While I agree that eliminating debt is beneficial, if you can find investments that pay better than your loan rates with acceptable risk, then you might shift some of your extra payments that way. It does not have to be all or nothing. Your net worth can grow faster that way than if you go whole hog for debt reduction.
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Old 03-22-2016, 07:37 PM   #6
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Welcome, and you're doing well to even be thinking about retirement at 32. Evidently at least one apple fell pretty far from the tree!

Suggested books are: The Millionaire Next Door (numbers are dated but the concepts are not, it is a classic for a reason) The Millionaire Teacher, Your Money & Your Brain, A Random Walk Down Wall Street, The Four Pillars of Investing, Predictably Irrational, and if you're really curious about why people are weird with money, Thinking, Fast and Slow, by the only psychologist to win a Nobel Prize in economics. It is not a quick read but I found it fascinating.
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Old 03-22-2016, 08:05 PM   #7
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Personally I feel funding the Roth would be a good idea since its fairly limited space and if you don't take advantage of that year's space then you miss out for good. With so many years until retirement it never hurts to have some diversification. There was a story about a couple who were able to get the max Obamacare subsidy because they structured their retirement income to be a mix of Roth, Pre-tax, and Post-tax savings. Hard to say where we'll be in 20-30 years but at least you might have some tools to play with.
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Old 03-22-2016, 08:38 PM   #8
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I make it a point to contribute to a Roth IRA and limit my pre-tax 401k. I plan on retiring in a few years and I am 30, so I don't want $$ I can't access in pre-tax. With a Roth IRA, I can access my contributions after the 5-year period without being penalized.
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Old 03-22-2016, 10:51 PM   #9
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Originally Posted by Greencheese View Post
Personally I feel funding the Roth would be a good idea since its fairly limited space and if you don't take advantage of that year's space then you miss out for good. With so many years until retirement it never hurts to have some diversification. There was a story about a couple who were able to get the max Obamacare subsidy because they structured their retirement income to be a mix of Roth, Pre-tax, and Post-tax savings. Hard to say where we'll be in 20-30 years but at least you might have some tools to play with.
+1. I regret not funding my Roth IRA for years. Should have put my emergency fund in Roth IRA instead of keeping it in taxable. Now that's space that I can't get back. As for ACA subsidies, probably GoCurryCracker.

Quote:
Originally Posted by pihwoah View Post
I make it a point to contribute to a Roth IRA and limit my pre-tax 401k. I plan on retiring in a few years and I am 30, so I don't want $$ I can't access in pre-tax. With a Roth IRA, I can access my contributions after the 5-year period without being penalized.
Actually, you can withdraw contributions to a Roth IRA at any time (even the next day). It's the principal for Roth conversions that have a 5-year clock per conversion. Earnings, there's a 5-year account age (of oldest Roth IRA) and 59.5 age minimum.

That said, I also suggest saving on taxes now and contributing as much as possible to traditional 401k. Once you're retired, you can do annual Roth conversions from trad 401k to Roth IRA while spending from Roth contributions and/or taxable aacount. The conversion principal will be available to spend in 5 years (Roth conversion ladder).
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Old 03-23-2016, 11:17 AM   #10
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Originally Posted by watdaflo View Post

3. Last but not least, am I just dreaming about early retirement or do I look like I'm on the right path for retiring in my early 50's?

Thanks for taking the time and for your input!

What is your income and what are your current expenses?
These two numbers combined with assumed rates of return will give you the number of years you need to work before being FI.

Checkout this post: The Shockingly Simple Math Behind Early Retirement

Which is based on the book Early Retirement Extreme by Jacob Lund Fisker.

-gauss

p.s. this type of analysis leaves out any streams of income (ie pension, Social Security that you may have access too). Personally I take what I have currently accrued so far under Social Security and write off about 1/3 of it. This still makes a huge difference to shortening the time needed.
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Old 03-23-2016, 01:03 PM   #11
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Originally Posted by Walt34 View Post

Suggested books are: The Millionaire Next Door (numbers are dated but the concepts are not, it is a classic for a reason) The Millionaire Teacher, Your Money & Your Brain, A Random Walk Down Wall Street, The Four Pillars of Investing, Predictably Irrational, and if you're really curious about why people are weird with money, Thinking, Fast and Slow, by the only psychologist to win a Nobel Prize in economics. It is not a quick read but I found it fascinating.
+++1 Especially Your Money & Your Brain by Jason Zweig.
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Old 03-23-2016, 01:48 PM   #12
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Me-32 y/o; wife, 2 kids, and mom
You are supporting your mom too? Is this forever or a short term plan? I am not sure how this will fit into your plans...but that seems like a tough hurdle to overcome.


For your extra $850, I would pay off the car and then stick your extra money into savings. Pre-tax or after tax, hard to say...I thought the same when I was your age that I would be retiring to less than what I was making when I was 30. But somehow, my salary and spending has really ratcheted up the last few years and I wished I had saved more into ROTH at a younger age to give myself more options. Oh well
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Old 03-23-2016, 02:52 PM   #13
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You are supporting your mom too? Is this forever or a short term plan? I am not sure how this will fit into your plans...but that seems like a tough hurdle to overcome.
In some cultures, that's normal. Our grandparents lived with us. Built-in babysitters. As long as there's no unexpected medical surprises, it's really not all that expensive to have another adult in the house.

And yep, I'm preparing to subsidize my parents' retirement.
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Old 03-23-2016, 03:36 PM   #14
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As long as there's no unexpected medical surprises
That's the hurdle I'm worried about.

Although I always forget about the free daycare possibilities. My family lives 1000 miles away and currently daycare is my biggest expense.
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Old 03-23-2016, 03:49 PM   #15
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Welcome. As others have mentioned, the ability to retire depends not only on how much you have saved, but how much you spend. You're doing a good job saving, but you're also hitting the age when lifestyle creep can hit stride. Kids are expensive and as they get older they start more activities which can lead to more expenses.

Keep track of spending so you know where your money goes (and you can make informed choices about spending)

But you're off to a great start and the fact you're trying to learn more about investing - and you're planning early for retirement will likely show in your results!
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Old 03-23-2016, 08:29 PM   #16
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Yes my mom has and will be living with me permanently. But to summarize, it sounds like I'm on the right track. Instead of paying off my mortgage/car, especially car since it has a low rate, invest the money to fund my ROTH.

Also, I will plan on looking into a mortgage, most likely a 15 yr, with a lower interest rate.

Thanks for everyone's comments so far!
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Old 03-24-2016, 03:36 PM   #17
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Originally Posted by gauss View Post
What is your income and what are your current expenses?
These two numbers combined with assumed rates of return will give you the number of years you need to work before being FI.

Checkout this post: The Shockingly Simple Math Behind Early Retirement

Which is based on the book Early Retirement Extreme by Jacob Lund Fisker.

-gauss

p.s. this type of analysis leaves out any streams of income (ie pension, Social Security that you may have access too). Personally I take what I have currently accrued so far under Social Security and write off about 1/3 of it. This still makes a huge difference to shortening the time needed.
+1 Good points, I wish I had planned more carefully in my late 20's and early 30's. It's important to have a % savings target based on when you think you want to retire. Then coerce your income and (especially) you spending to meet the targets. I had a much more vague idea of what it would take to retire. Nevertheless, I doubled by savings rate in my early 30's, and fortunately I got out in my 40's.

In you 30's it may be wise to focus on Financial Independence, as opposed to specifically Retirement. It's a long road, so it helps to enjoy the journey as much as possible while still keeping sight of the big goal. Once you are FI, then you can do whatever you want! Even well before full FI, you'll have the financial strength to weather life's storms better than most.

FB
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Old 03-24-2016, 03:59 PM   #18
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Yes my mom has and will be living with me permanently. But to summarize, it sounds like I'm on the right track. Instead of paying off my mortgage/car, especially car since it has a low rate, invest the money to fund my ROTH.

Also, I will plan on looking into a mortgage, most likely a 15 yr, with a lower interest rate.

Thanks for everyone's comments so far!
I'm glad you're thinking about this stuff now! Some folks don't even get to this in their 50's+


Looks like the Roth vs 401K was well-addressed by earlier replies, but here a few thoughts on other important areas, if case you haven't already tackled them:

Do you have a 3-6 month emergency fund?? A good part of this should be in cash (ie interest-bearing online savings, eg Ally). Beyond 3 months, you may consider holding part, say 20-35%, in a stock index fund, and perhaps some in short-term bonds (if rate at time easily beats savings account) if you're inclined to invest. The contributed part of your ROTH can be part of this, but it would be wise to have a few months in a savings account for fast access. Keep in mind, though, that the whole point is to maintain a backup cash position in case of trouble like job loss, medical issues, repairs, etc even if the stock market has tanked.

How strong is your and DW's life insurance? I think most here would recommend term life insurance to replace lost income if the unthinkable happens. It shouldn't be too expensive since you're young. While this may seem like a low risk now, the consequences are obviously severe given your debts and number of dependents. Some depend on life insurance through work, but consider if it is enough and what happens if you lose the job.

Sorry to bring these "unfun" topics up, but I do believe it is important to prepare for downside risk even before focussing on upside fun (FI and RE).

FB
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Old 03-25-2016, 06:41 AM   #19
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I'm glad you're thinking about this stuff now! Some folks don't even get to this in their 50's+


Looks like the Roth vs 401K was well-addressed by earlier replies, but here a few thoughts on other important areas, if case you haven't already tackled them:

Do you have a 3-6 month emergency fund?? A good part of this should be in cash (ie interest-bearing online savings, eg Ally). Beyond 3 months, you may consider holding part, say 20-35%, in a stock index fund, and perhaps some in short-term bonds (if rate at time easily beats savings account) if you're inclined to invest. The contributed part of your ROTH can be part of this, but it would be wise to have a few months in a savings account for fast access. Keep in mind, though, that the whole point is to maintain a backup cash position in case of trouble like job loss, medical issues, repairs, etc even if the stock market has tanked.

How strong is your and DW's life insurance? I think most here would recommend term life insurance to replace lost income if the unthinkable happens. It shouldn't be too expensive since you're young. While this may seem like a low risk now, the consequences are obviously severe given your debts and number of dependents. Some depend on life insurance through work, but consider if it is enough and what happens if you lose the job.

Sorry to bring these "unfun" topics up, but I do believe it is important to prepare for downside risk even before focussing on upside fun (FI and RE).

FB
Yes I have a little over 6 months worth of income in savings saved for a 'rainy day'. I have 750k for myself and 500k for my wife for term life which i started when I was 26 (20 year term).
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Old 03-25-2016, 07:01 AM   #20
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How strong is your and DW's life insurance? I think most here would recommend term life insurance to replace lost income if the unthinkable happens. It shouldn't be too expensive since you're young. While this may seem like a low risk now, the consequences are obviously severe given your debts and number of dependents. Some depend on life insurance through work, but consider if it is enough and what happens if you lose the job.
I have the same advice, but substitute "disability insurance" for "life insurance". Both are important.
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