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Retire in 20 years
Old 04-14-2008, 12:15 PM   #1
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Retire in 20 years

I am looking for some practical advice on how to retire in 20 years. I am 30 and my wife is 28; no children now.
Debts: $0 cc; $80k in student loan @1.625%; $20k in car loans
Home: $50K in equity
Retirement accounts:
2 roth ira's: $12k in each: 40% American growth fund
20% Euro pacific growth fund
20% new world fund
20% small cap world fund
My 401k: $20k in a 90/10 stock/bond portfolio. I will contribute the
max this year.
Her 401K: $5k. She contributes to employer match
Emerg fund: about $10k

I know we will be set @ 60 if we continue maxing the roths and one of our 401k's. I am looking to start some taxable accounts to invest over the next 20 years. Any advice? Should I max out the 401k?
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Old 04-14-2008, 01:34 PM   #2
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Originally Posted by scottie1 View Post
I am looking for some practical advice on how to retire in 20 years.
Welcome Scottie1.

Pay off the car loan ASAP. don't buy new cars in the future - buy several year old cars, or older.

Look at expense ratios for your 401(k) and IRA. If you are paying anywhere near 1% look for alternatives. Vanguard and Fidelity tend to be lowest ERs for your IRA. Contribute up to your employer match in 401(k)s, then max out Roth IRAs, then max out 401(k)s,if ERs are reasonable.

Figure out how much you need to retire (approximately 25 times your yearly expenses less SS and pensions), then use an online calculator to figure how how much you need to contribute yearly to meet your retirement goal.

Good luck
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Old 04-14-2008, 03:23 PM   #3
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Welcome to the board, Scottie!

Ditto on the car loans--get rid of it ASAP. I'd guess that the interest on that loan makes it a higher priority than maxing out the 401(k)

Hard to say much else about your plan without knowing your income and expenses. Are you planning on kids?

Your asset allocation is unusual and I like it--I'm working towards something similar myself.
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Old 04-14-2008, 06:31 PM   #4
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Quote:
Originally Posted by scottie1 View Post
I am looking for some practical advice on how to retire in 20 years. I am 30 and my wife is 28; no children now.
Debts: $0 cc; $80k in student loan @1.625%; $20k in car loans
Home: $50K in equity
Retirement accounts:
2 roth ira's: $12k in each: 40% American growth fund
20% Euro pacific growth fund
20% new world fund
20% small cap world fund
My 401k: $20k in a 90/10 stock/bond portfolio. I will contribute the
max this year.
Her 401K: $5k. She contributes to employer match
Emerg fund: about $10k

I know we will be set @ 60 if we continue maxing the roths and one of our 401k's. I am looking to start some taxable accounts to invest over the next 20 years. Any advice? Should I max out the 401k?
I would max out the 401K. Like previous posters said, pay off the car loan.

I like to think of my take-home pay (after paying the max to my TSP/401K) as being in three equal parts. If you spend no more than one of these thirds on housing, and the second third on other expenses, then you have a third left to invest towards your future. I don't know if that would work for someone else, but it worked for me.
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Old 04-14-2008, 11:11 PM   #5
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Question - you mentioned: "Home: $50K in equity" ?

I am presuming you have mortgage debt - not a paid-for house worth 50K?

Could be a large factor depending on the specifics of that situation (amount/type of loan, term, interest rate, trend of housing prices in your area) & your future housing plans.
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Old 04-15-2008, 12:01 AM   #6
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There's lots of good advice here already. I'd reinforce what W2R said by suggesting that if you want to retire in about 20 years, probably the biggest thing you need to do is save about 1/3 of your gross income.

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Old 04-16-2008, 09:47 AM   #7
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Personally, I feel that someone your age should first be concerned about insurance protection. If you are not protected from financial risks from Critical Illnesses, hospitalization, Disability, etc, you cannot expect to have a secure future. Moreover, you are younger, and insurable now. So, do this first, then build up the nest egg.
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Old 04-18-2008, 10:53 AM   #8
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Thanks for all the advice. After housing expenses, monthly bills, 401K contributions, and IRA contributions we have about $3500 each month. Most of which goes to my wife's wardrobe, shoes and her horse. Not kidding. We both have life, disability, and health insurance. Maybe kids in 4-5 years. I am thinking of opening a low cost index fund as a taxable account; Vanguard total stock market index or Schwab 1000 index.
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Old 04-18-2008, 12:08 PM   #9
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Originally Posted by scottie1 View Post
Thanks for all the advice. After housing expenses, monthly bills, 401K contributions, and IRA contributions we have about $3500 each month. Most of which goes to my wife's wardrobe, shoes and her horse. Not kidding. We both have life, disability, and health insurance. Maybe kids in 4-5 years. I am thinking of opening a low cost index fund as a taxable account; Vanguard total stock market index or Schwab 1000 index.
I have no idea of what kind of money it takes to keep a horse, but it sounds like your wife is spending a lot on her wardrobe and shoes. If I were in your shoes, I'd want at least some to spend, too. It's so hard to come to agreement on common financial goals, in a marriage. I hope that you have, or will be able to come to agreement on them. I have read that the most common cause of dissension in marriage is money management. I have Vanguard Total Stock Market Index, and it very well might be a good investment for you, especially since you have a long investment time horizon.
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Old 04-21-2008, 11:21 AM   #10
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Thanks for all the advice. After housing expenses, monthly bills, 401K contributions, and IRA contributions we have about $3500 each month.
OK, so this looks like a rough estimate of your approximate retirement expenses, since after retirement, you presumably won't still have a mortgage, nor will you be saving for retirement. So let's start with that number. $3,500/month. That, of course, is after tax. So assuming (and this is a wild assumption) your marginal tax rate is 35%, you need an earned income of $4,725 to support your lifestyle.

In 20 years, assuming 3% inflation, you'll need $8,500/month to provide the same standard of living. Usually, you would assume a 4% SWR at this point and multiple your annual expenses by 25 to determine the required "nest egg." In your case, however, you're shooting for a pretty early retirement at age 50, so you'd likely be better off going with a 3% SWR instead of 4%. Thus, you'd multiply your annual expenses by 33 instead of 25.

You need $3.4 million to retire at age 50.

OK, so there's your magic number. Let's look at what you already have:
  • $24,000 in Roth IRAs
  • $25,000 in 401(k)'s
It's a bad idea to count home equity or emergency money here, so I'm only considering the dedicated "retirement funds." You've got $49,000 toward your $3.4 million, with 20 years to go.

The last step is to figure out how much you'd have to save every month in order to reach that goal. Of course, this varies a little depending on your assumed rate of return, inheritances, benefits like Social Security, and other factors. There are plenty of calculators available on the web to help you with this calculation, but assuming an optimistic 8% rate of return:

You'd need to save $5,400/month to accumulate $3.4 million by age 50 and retire early.

I'm guessing that's an unrealistic amount for you. At this point, you have several options:
  • Pray you achieve better than an 8% average rate of return. Probably not a good idea to pin your retirement planning on a "prayer."
  • Pray inflation grows at less than 3%. Again, I'm a "hope for the best, but plan for the worst" kind of guy. I don't like to leave things like this up to chance.
  • Cut your living standards when you retire. Some people believe that when you retire, you only need 80% of your pre-retirement income. My calculations here assumed 100%.
  • Work longer. Working longer allows your money to grow longer, and adds more contributions to the accounts. It also allows you to increase your withdrawal rate from 3% to 4%, which decreases the amount you'd need to have saved up.
  • Work part-time in retirement. I may do this myself, but I'd like to have the option of doing it because I want to, and not because I have to.
Hope this helps.

EDIT: Whoops, just noticed your $3,500/month does not include "monthly bills." You'd need to add the amount of your bills to the $3,500/month, then multiply by 12 for an annual amount, then multiply by 1.35 to factor in taxes. Then multiply by 1.81 to factor in inflation. Then divide by 0.03 to get the new grand total (assuming a 3% SWR).
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Old 04-21-2008, 12:39 PM   #11
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$3,500/month. That, of course, is after tax. So assuming (and this is a wild assumption) your marginal tax rate is 35%, you need an earned income of $4,725 to support your lifestyle.

...

EDIT: Whoops, just noticed your $3,500/month does not include "monthly bills." You'd need to add the amount of your bills to the $3,500/month, then multiply by 12 for an annual amount, then multiply by 1.35 to factor in taxes.
For a first cut, I would suggest the OP use their effective rate instead of their marginal rate as you outline above. To give a personal example, my income put me in the 25% federal tax bracket last year but I pay an effective tax rate of about 6.33%. The difference this would have in the numbers would be huge.

Additionally, the OP should plan for state taxes if they have them. They should also, when the time gets closer, do simulations in TurboTax or similar to get a better grasp on taxes.

Finally, for what it's worth, I'm planning on a 4% SWR at age 48, and I think that's plenty conservative in my case. Suggesting OP plan for a 3% rate increases their nest egg requirements even higher. For an ultra ultra conservative person, that might be fine, but I think the OP should also take a hard look at 3% vs. 4%.

Doing some quick back of the envelope calculations says that assuming 10% effective vs. 35% marginal and 25x vs 33x is a 38% decrease in the required nest egg size.

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Old 04-22-2008, 11:19 AM   #12
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Ditto on the car loans--get rid of it ASAP. I'd guess that the interest on that loan makes it a higher priority than maxing out the 401(k)
I don't see where he ever mentions the rate(s) on the car loan(s).

Have you considered using a HELOC to payoff the car loans - it would depend on the rates and your overall financial security.
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Old 04-24-2008, 10:23 AM   #13
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The interest rate on the car loan is 8.49%. So I suppose paying this off asap is my first step. Basically a garaunteed 8.49% ROI, right?
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Old 04-24-2008, 01:21 PM   #14
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The interest rate on the car loan is 8.49%. So I suppose paying this off asap is my first step. Basically a garaunteed 8.49% ROI, right?
I thought I read somewhere that car loans are a special kind of loan, where the loan interest is all factored in up-front, then the grand total is simply spread out over the loan period. Thus, paying it off early doesn't actually save you any interest, you're still paying $x in interest, you're just not spreading it out over n months.

Does anyone know if that's the case, or are they really just the same as any other loan?
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Old 04-24-2008, 01:46 PM   #15
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I thought I read somewhere that car loans are a special kind of loan, where the loan interest is all factored in up-front, then the grand total is simply spread out over the loan period. Thus, paying it off early doesn't actually save you any interest, you're still paying $x in interest, you're just not spreading it out over n months.

Does anyone know if that's the case, or are they really just the same as any other loan?
It just depends. I think the kind of car loan you describe is not as common as it used to be. I only had one car loan in my life and it was a regular simple interest loan, so the sooner I paid it off the more interest I saved. It was a 4 year note and I think we finished paying it off in about 3 years.

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Old 04-24-2008, 03:01 PM   #16
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The interest rate on the car loan is 8.49%. So I suppose paying this off asap is my first step. Basically a garaunteed 8.49% ROI, right?
I think it's even better since it's also tax free. Basically, if you had an investment whose return you used to pay the car loan, you would need to have it return greater than 8.49% since you would be taxed on that return. IOW, you are paying a car payment with after-tax money.
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Old 04-24-2008, 04:05 PM   #17
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$80k in student loan @1.625%
Holy smokes, you got the same deal I got. Mine was about the same amount and the exact same interest. Did you by chance go through Graduate Leverage in 2005?
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Old 04-25-2008, 10:21 AM   #18
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I did graduate in 2005. But mine is through my professional association, not sure who they use.
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