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New to ER: Novice Investor needs some Guidance
Old 05-07-2015, 12:44 PM   #1
Confused about dryer sheets
 
Join Date: May 2015
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New to ER: Novice Investor needs some Guidance

Hello all. I am a new member of the ER community and am looking for some guidance on how to approach the next few years financially in order to reach that ER! I apologize if I don’t include all of the acronyms, but I am learning as I go.
I recently moved from Iowa to Arizona with my new wife, and want to get a grasp on our financials sooner rather than later. I am going to be 28 soon and she is 26. We both have stable jobs and are fairly good about saving money. Our annual income is somewhere between 110k and 130k depending on commission and bonuses. As I have only been focusing on our financials for the past few months, and we have had a cross country move, wedding, and honeymoon, I don’t have our monthly expenses dialed in quite yet. I have been using an online tool the past few months to track and budget our expenses and it is somewhere in the region of 2,500-3,500 per month.

Our current finances as of today are:
My Roth IRA: $13,000
Her Roth IRA: $7,500
My 401k: $17,500 (current contribution is 6% - company matches 50% at 6%)
Her 401k: $12,000 (current contribution is 10% - not sure what her match is. “Already failing at planning”)
High Yield Savings account - $55,000 (1.00% APY just started a few months ago)
Checking and Savings - $8,000 (Branch Bank, very little return)
Brokerage - $5,000 (money market fund) – used to but ETF beginning of every month
7-10 ETF - $2,000 (just started a month ago. 65% stock 35% Bond)
1 Car - $15,000 (fully paid off)
No DEBT!

Our current strategies for investing are:
1.Contribute to our employers 401k (me 6% and her 10%)
2.Monthly contributions to our own Roth IRA that equals the max at end of year $5,500 (Her first year she didn't max out)
3.$1,000 monthly investment in 7-10 ETF (65% stock 35% bond) Through all of my research I started this strategy, but am still not 100% confident.
4. All other money goes to our high yield saving account.

Our goals:
We are planning on purchasing a home within the next year and possible starting a family within the next 2. That being said we are trying to keep some funds liquid for a good down payment.
We would like to retire early, duh that’s why I am on ER, but I don’t know what it attainable. She likes to throw out numbers like 40 years old and I just can’t see it. I have read many articles and forums talking about CD ladders, life insurance (wholesale investment strategy), mutual funds, individual stocks, etc. etc. and I don’t know which direction to go at this point in my life.

What I am looking for in guidance is:
Is our plan on track for ER?
What are some improvements or things we shouldn’t be doing?
How can I figure out what a realistic target retirement date is based upon our current financial state?
Is there a general guideline or rule of thumb to be able to estimate funds once you pull the trigger for retirement?

I appreciate any and all feedback. Thank in advance, and I am so thrilled to find a forum that is supportive towards everybody’s goals. If you have any questions I would be happy to answer for clarification.
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Old 05-07-2015, 01:48 PM   #2
Recycles dryer sheets
 
Join Date: Dec 2006
Posts: 406
You are doing a great job. Looking back, I did almost exactly what you are
doing. Similar investing. Now that I'm retired. What worked the best for
me was having rental properties. Today, Rentals are paid for. Rental Income keeps pace with inflation. Also, if you buy in the correct location,
appreciation is great.

Also, with your good incomes, the "depreciation" you get on Rentals, will
lower your taxable income.

If you go the "landlord" route, you have to be your own handyman in the
early years. Later, when you retire, you can hire out, cause your income
will be good, and property paid for.

Not everyone, has the mental attitude and work ethic to be a landlord,
but it does pay off in the long term. Also, you will meet a lot of people,
and learn how to fix and deal with people. Lot's of fun, if you have the
right attitude.

Other posters on this site, have gone the rental route. I also, have CD's and other equity investments. Retired at 55.
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Old 05-07-2015, 02:18 PM   #3
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First, welcome! Second, you're ahead of the game in that you are thinking about it at a relatively young age. It is impossible to tell you if you'll be able to retire at age 40, but the best advice for that is that you have to have a really impressive savings rate to get there, and a high income helps. If you want to retire that early, you're going to ignore the standard advice of save 10-15% and you're going to be closer to 50% savings.

When you're this early in the plan, saving as much as you can is important. At 26/28, your expenses are going to change. Your standard of living is likely to change. And there's an awful lot of time in there for the unexpected to happen.

You'll find that many of the members here, including me (age 37 aiming for FI by 42) are some form of Boglehead. Specifically, focused on index funds and long-term maintenance of some asset allocation split between stocks (US and Foreign) and Bonds. (I'm 85/15, with 30% of stock as foreign).

There are many flavors of investors, including rental property magnates, but that's not for everyone. It creates "passive income", but property management/landlording is anything but "passive"! It takes a lot of work, but it can help you retire early from your "real job"!

If I were in your shoes, and I was once, I'd save as much as possible. Once you have your downpayment set and an emergency fund, focus on your 401K match, then max your Roth IRAs, then max your 401K, then fund taxable investment accounts. Among those, buy broadly diversified index funds in your major investment vehicles.

To retire by age 40, you're going to have to have quite a few taxable assets to help you bridge the gap to 59.5, though there are options (72t) to withdrawal from your IRAs early. It'd also help to have some sort of defined benefit pension if that's available or you can find an employer who offers one.

Good luck!
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Old 05-07-2015, 02:54 PM   #4
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Welcome, AZ59, and congratulations on such a great job of savings at such a young age.

To me the most striking thing about your financial situation is that you appear to be in the 25% tax bracket, yet your income is close enough to the 15% bracket that you could probably get into it with the right amount of tax deferred savings in your 401k. I don't want to emphasize this point too much, since there are many facets to financial planning for a young couple such as you describe yourselves. But still...to me it makes no sense to take $1,000 from your paychecks each month after paying 25% federal tax and investing it in a 65/35 portfolio. You needed to earn $1,333.33 in income to pay the tax and be left with $1,000 to invest.

So, in your shoes one of my first areas of investigation would be to see if I could increase your combined 401k contributions enough to get into the 15% tax brace by reducing or eliminating the $1,000 per month that you plan on investing in a taxable ETF account. This might prove to be a little difficult to forecast, since your annual income can vary between $110k and $130k. But you should know your target - in 2015 a married couple filing jointly, taking the standard deduction and with two exemptions will be in the 15% tax bracket on the first $95,500 in adjusted gross income. Anything above that will push you into the 25% bracket. So, if your income is $110k, you will need a total of $14,500 in 401k contributions to get into the 15% tax bracket this year.

I would also reexamine exactly why such a young couple with "stable" jobs needs so much in their high yield savings and bank accounts - it's at least 18 months of expenses based on your estimate of $2,500-$3,500 per month. There definitely could be a good reason for this, such as saving for a down payment on a house. But if the only reason for it is that you don't know how to invest it, then I would say that you're sacrificing a lot of potential growth and just delaying the day that you're able to retire.
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Old 05-07-2015, 03:53 PM   #5
Confused about dryer sheets
 
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Thanks wolf,

I actually had a townhome with a 3.4% interest rate before we moved to Arizona. I went back and forth on whether to sell or rent the property once we moved to Arizona. Some days I look back on it and kick myself as it was in a fantastic location with a low rate, but other days I am glad I sold it due to my lack of experience in rental property and being 2,500 miles away. I would have had to go straight to having a property manager with being so far away and with an upcoming move, wedding, and honeymoon I didn't take the leap and fork up the up front costs for the management.

Thank you for your insight, and at some point, real estate and rental properties are on my list of items I would enjoy investing in.
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Old 05-07-2015, 04:04 PM   #6
Confused about dryer sheets
 
Join Date: May 2015
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Thank you Karluk,

I appreciate and will investigate the tax bracket idea. My wife's income can have some extreme swings but I will definitely look into what it would take over the next month or so to possibly get into the lower bracket.

I agree with you that there is too much sitting in a savings account. This is one of the main reasons I have been doing so much research (and joining ER) and trying to learn investments and how best to plan for the future. It doesn't feel right having that money just sit and earn 1.00%. The reason is, within the next year we are looking to purchase a home. As I am not confident at all in market trading I feel at a loss of what to do. As we want those funds at least fairly liquid for a down payment I don't want to invest in a CD or some time related investment. The 1.00% in the high yield savings is better than any 1 year CD I can find and definitely better than a 6 or 9 month CD.

I am a novice investor and am just trying to learn some good strategies.

Thank you for your advice.
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Old 05-07-2015, 07:12 PM   #7
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Quote:
Originally Posted by AZ59 View Post
Thanks wolf,

I actually had a townhome with a 3.4% interest rate before we moved to Arizona. I went back and forth on whether to sell or rent the property once we moved to Arizona. Some days I look back on it and kick myself as it was in a fantastic location with a low rate, but other days I am glad I sold it due to my lack of experience in rental property and being 2,500 miles away. I would have had to go straight to having a property manager with being so far away and with an upcoming move, wedding, and honeymoon I didn't take the leap and fork up the up front costs for the management.

Thank you for your insight, and at some point, real estate and rental properties are on my list of items I would enjoy investing in.
At your age you are doing a great job. Hindsight, You can do 1031 trades with rental property. Can be complicated, but you defer any capital gains.

So, even if you move, you can "move" the equity in your rental property
to another like kind rental property where you live. Just something to
think about.
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