Young & Ready to Retire

[mmg2681]

Good evening to everyone.
I am new to the board, and am looking forward to reading about everyone's experiences, and their planning for ER.

To tell you a little about myself, I am a 25 year old who has been out of college for 4 years, and am ready to retire! Oh...except for the funds needed to do so.
I am working on that, and this forum will surely help from what I've read on many other posts.

I currently make a decent living at $37,500/year with low expenses (mortgage, car, utilities, and entertainment within my means). I invest 10% in my 401k at work, and my employer matches at least 3% once a year (profit sharing). I also have funds in mutual funsds as well as bonds, and am looking for other places to stash away some of my after-tax money for investment.

I live a life of frugality, which I am hoping will help me to stash away even more money to help with ER.

Any suggestions, I would love to hear.
In 2007, my goals are to start saving $5,000/year after-tax to put away for retirement.
I have invested in a Roth IRA in the past and they pretty much robbed me with all of the fees. I took the money out and invested into something new and have had great success. However, I dont want to have all of my eggs in one basket.
I need to diversify even more.

Once again, any suggestions for a 25 year old would be greatly appreciated.

I am getting married in May of 2007; however, we have our home (the house I purchased 3 years ago, we plan on living in for many many years), the wedding is paid in full (thanks to a small wedding at a beautiful bed & breakfast for immediate family only), and possibly start a family in the next few years. I know I should have invested more 3 years ago when signed up for the 401k ...but just this year was able to invest the full 10%.

Thank you in advance.

~M

 

[crazy connie]

Ok you asked for it. Read about Vanguard & Fidelity and look at a Roth again with a target date fund. What will your soon to be wife bring to the table with income? Sock away all you can now and later once the babies come hopefully the compounding returns can allow a slight ease off. Also, plan to bank 50% of all salary increases.

Congrats on being focused at an early age! That is the biggest half of the battle.

 

[mmg2681]

CrazyConnie,

Thank you for the fund names.
I have those with Fidelity with my current employer. I will take a look into Vanguard's as well.

My soon-to-be-spouse is going to be my husband and he currently makes around $32,000/year. He is 10 years older than I am, but really does not dream of early retirement as much as I do.
Right now, we still have our seperate accounts, and just opened up a joint account for the utilities/mortgage/entertainment. I like having our own seperate accounts so that we can invest in whatever we each feel comfortable with. For me, I dont like high-risk investments mainly because I dont like to see my money DECREASE in value. It makes me very anxious.

We are not married yet, and our finances are not yet completely combined (he still has an apartment for the next month and a half), so it is hard to say how much extra I will have with him contributing to the monthly expenses. I can tell you that my goal is to be able to save at least 25+% of my after-tax income.

I am also torn between paying the house/car off early to decrease the amount of interest paid, or to put it all into investments to grow over time.

The pay increase bank is a great idea - give some to me, give some to the piggy.

Thank you.

~M

 

[AltaRed]

I would recommend keeping your finances separate for now other than the joint account. Just makes good business sense for the first few years until you can (and he) can be confident you are on the same page or not. Much easier to combine later if you both are on the same train.

You don't say what the interest rate on your auto loan is, but unless it is extremely low, I would tend to pay it off first before investing. It is non-tax deductible cost whereas anything that generates income will be taxed.

 

[mmg2681]

Mortgage : 5.5% fixed for 30 years on a $68,725 mortgage
I paid an additional $200/month for an entire year which shed 2 years off of my mortgage

Car : 6.5% interest for 5 years on $12,000 loan.
I have been paying an extra $50/month on it (I know, it's not much, but it's an extra 2 payments a year which should cut it down to a 4 year loan)

My 401k investment is currently at 16.2% YTD (just checked before I replied).
Diversity! Diversify! Diversify!
This is what is always going through my head.

Also, every time I think about money, I think of an Economics Professor from college who always said in her adorable English accent: Get the best bang for you buck. Every decision I make financially, I think about what will give me the best bang for my buck (which is why I decided to buy my house at the age of 22 as a single female with no money down instead of paying for rent until I could get the 20% down (and not pay PMI), and to get a car that got 40MPG with less expensive tires/brakes than the one I purchased when I graduated from college because I drive 70 miles round trip/day).

~M

 

[simple girl]

Hi M and welcome to the board!

It's great to see another young person starting out on the right path. My advice to you would be:

* keep living below your means!

* pay off the loan on the auto (and, not sure if it is used, but IMO used cars are the way to go due to depreciation of new cars once you drive them off the lot)

* max out your 401K

* after your max out your 401K, try to max out a Roth (you won't be robbed with fees if you go with a no-load, index fund via a company like Vanguard)

* in your taxable account choose tax-managed or tax-efficient index funds (I suggest some type of large cap index fund from Vanguard)

* track your net worth

* make sure you have an asset allocation set (stock/bond/cash and then within stock, the % you want in large, mid, small, international, & REIT) and then rebalance yearly as needed

* make sure you understand the importance of keeping fund expenses low (look at the expense ratio)

* use a site like morningstar.com to analyze your funds. Look at how they compare to similar funds (+/- their category)

You are way ahead of the pack already. Lots of people don't even start contributing to their 401K's until their 30's or 40's...or later...

 

[shiny]

m,

It looks great so far, the only thing I'd recommend is to put that extra mortgage payment money toward the car payment instead - the interest rate is higher and its not deductible (which is important if you are itemizing on your tax return)

Welcome and good luck! shiny

 

[mmg2681]

Wow...

GREAT advice.
I will look online right now to see how much additional I have to put on car to pay off in 2 years, 3 years and 4.

Thank you again... great information.
I cant wait to read more!

~M

 

[mmg2681]

I just calculated it - I will have to pay $140 more a month to make my car loan a 3 year loan. $53.00/month to make it a 4 year loan.

I will have to look at the budget to see what I can afford / feel comfortable doing.

Thanks again.

~M

 

[Ed_The_Gypsy]

This is my advice to my kids:

1) Avoid debt like the plague.

2) Live below your means.

3) Put away 20% of your gross income if at all possible.

4) I would fund a Roth before anything else. The future benefits are simply unbelievable. Then contribute to your 401K to the extent that your employer matches.

5) To start with, I would put 50% into Vanguard Total Stock Market Index Fund and 50% into Vanguard Total International Stock Index Fund (or their Fidelity or Schwab equivalents). Study investing for a few years before you change anything. After three years there might be enough difference between them to rebalance.

Keep your eyes on the prize.

Good luck.

 

[MooreBonds]

Mortgage : 5.5% fixed for 30 years on a $68,725 mortgage
I paid an additional $200/month for an entire year which shed 2 years off of my mortgage

Welcome to the board M!

One other not-too-well-known factoid on mortgages: there is another way to EFFORTLESSLY shave several YEARS off of your 30 year mortgage: bi-weekly payments. (added to your additional payments will shave off even more!)

It works like this: instead of making 12 monthly payments each year to your mortgage company, make 24 payments every 2 weeks. While it may not sound like it would do much, that payment arriving 2 weeks early every 2 weeks shaves just a little bit of interest off of each payment - while not requiring you to pay any additional money (except having the money available 2 weeks earlier). As with most financial timespans, the incredible power of compounding over time makes those ever-so-small shavings snowball into giant savings in interest over the course of the 30 years. Some mortgage providers don't allow you to prepay mortgages (or if you do, they don't credit you with the early payment); others do. From the sounds of your comment above, it might be worth checking out. Also, with a mortgage balance of $68k, it's not going to save as much as a $200k mortgage...but $10 here and $20 there sure adds up fast. (hopefully you can pay electronically, since the added postage costs might take a bite out of those savings ).

Peter, a recently-turned-30 ( ) fellow ER-hopeful.

 

[mmg2681]

Peter,

Thank you for the post.
I've looked into the bi-weekly payment plan with the mortgage company and they do not have the option. My fear is that if I just started to do it on my own (yes, I pay it online), that they would take that extra money and consider it "principal only" and then when I pay the other half at the end of the month, they would see my payment as short.

I will have to call them to figure out if I can do this without being considered short on my mortgage payment each month.

And Ed ...
Thank you for the advice.
I will definitely start looking into Roth IRA's again for 2007.
My concern is the stock market. I am affraid of putting all my eggs in the stock market (with my 401k at work, and my personal mutual fund), and then one day (God forbid) something happens as it did in 2001 that the stock markets will go down considerably. Is anyone else worried about this?

~M

 

[Arc]

I will definitely start looking into Roth IRA's again for 2007.
My concern is the stock market. I am affraid of putting all my eggs in the stock market (with my 401k at work, and my personal mutual fund), and then one day (God forbid) something happens as it did in 2001 that the stock markets will go down considerably. Is anyone else worried about this?

~M

You've come to the right place. Keep posting and reading and you will soon get over your fear. With the time horizon you are looking at, you cannot afford to not have significant exposure to the market. You've done a lot of the right things already - keep up the good work!

 

[Ed_The_Gypsy]

~M,

...then one day (God forbid) something happens as it did in 2001 that the stock markets will go down considerably.

Something WILL happen to the stock market! Expect it. It is still the best place to be in the long run (>10 years), and we are talking about the long run here.

An advisor by the name of Les Antman ('search' on this board for his name for links to his site) has said, "It is OK to get out of the market to avoid the -40% drops, as long as you don't mind missing the +400% rises ". The broad US market has returned an average of about 11% per year (capital gains plus dividends) for about the last 125 years, through the Great Depression, two world wars, Korea, Viet Nam, Gulf Wars I & II, Spanish Flu and the Energy Crisis. You just have to be patient. It can be scary if you are a young investor, though. When I was younger, I bailed out of Magellan when it dropped 10% one year. If I had stayed in, I would be retired today. Low cost index funds should help with your confidence. The entire US economy is not going to disappear.

There is a little (really little) book you can find at the coffehouseinvestor.com which should help you with your confidence. Give it to yourself for Christmas! It has only about 3 graphs in it. One shows how there have been only 3 ten-year periods in all that time (starting in 1929, 1930 and 1931, if I remember correctly--read the book to get the right numbers!) when the S&P 500 was lower than it started. (Remember, those stocks were still generating dividends during that price collapse, though. Dividends are important!) So, if you look at US stocks only, you have to be strong for ten years at the most. Les Antman said that a 50/50 US/international mix would be OK in less time. (I think it is now up to 7 years, but that is an improvement! The data doesn't go back as far as for the S&P.)

I stayed fully invested all through the Crash of '87, through the Asian Flu and 2001, too. I am WAY ahead of where I was in 2001, by the way. My mix of mutual funds is roughly as I suggested. I like 50% overseas because I don't like all my eggs in the US basket.

To reduce volatility (at the loss of some return), some folks recommend a 60/40 mix of stock funds and bond funds, rebalancing every year. They are relatively uncorrelated, which means that both usually don't go south together. Volatility does not bother me now. When I stop working, I may get a lot more conservative, but for now, I want to hang on for the return.

It is time for you to do some reading on investments.

I have dug up a number of links in the past in my posts on this board. If you search on my nom-de-plume you will find them. (Ignore the cheap shots and drivel.) One good one is something like Retire At The Coffehouse, which is a long tutorial based on the Coffehouse Investor site. Google for it.

Another good one-stop shop is the Retire Early Home Page, by our parton saint, John Greaney. He published a number of articles which are to be found in his chronological index which are well worth going over. He also published a couple of monographs for which he charges a nominal $5 or so which summarize the whole thing and are excellent.

By the way, I am almost 60. Old Dutch saying: "We grow too soon old and too late smart." You are getting a great start. If you can't quite muster the nerve to get into the stock market yet, save anyway. Get into the habit and cram it into CDs at your bank while you educate yourself. Just do not fall for managed funds or funds with a sales load when you finally get your feet wet.

All the best.

Gypsy

 

[Coach]

M, you are off to a GREAT start! You've obviously got the most important thing at your age down -- control expenses.

If you haven't yet, I would recommend you read The Millionaire Next Door. It will just reinforce that you're doing the right thing, and let you recognize the less-successful strategies that you'll see your friends following in the years ahead.

Then read some books on investing -- there are great recommendations in prior threads on here.

I hope your future husband gets on board (or leaves you in charge of the finances )

Coach

 

[astromeria]

Congratulations on your outstanding start in creating your own financial security--and on your upcoming wedding!

I would focus next on setting up an emergency fund equal to at least 3 months of family income (more if you and your fiance cannot live on only one of your paychecks or if at least one of you works in a job or company where the danger of layoff is high). And second, I'd focus on paying down the 6.5% car loan as was recommended in an earlier reply (does your fiance also have a car loan?).

I recommend searching online for Paul Farrell's Lazy Man portfolios (they have names like couch potato portfolio, no-brainer portfolio, margarita portfolio, and coffeehouse portfolio). These portfolios are made up of slightly different combinations of inexpensive index funds that are diversified and relatively uncorrelated (it's good to understand the meaning of these words). Uncorrelated investments have less volatility--that means they swing up & down less than more concentrated portfolios, which makes it easier to "stay the course"

The most important decision you need to make as an investor is what percentage of your portfolio do you want to keep in fixed income (investments that pay a pre-determined amount of interest like bonds and CDs, also money market funds /accounts...detail: interest paid on MM accts and bond funds can fluctuate over time, but they're still considered fixed income). At your age, the typical recommendation is 15-20% fixed income. At my age (57), it's more like 40% (we have about 45% as I'm already retired and my husband is semi-retired).

Don't continually tweak to "perfect" your allocation. Wail till once a year (or alternatively, whenever an allocation exceeds/falls short of its desired amount by at least 10 or 20%).

If you're too worried about losing money on stock investments in the early years of your new Roth, consider using it to hold fixed income investments. Unlike holding bonds & CDs in a taxable account, you won't be paying taxes on the interest so the total builds up faster.

I recommend NOT checking your investment accounts more often than once a month. Stay calm through the inevitable blow-downs of the market. There was a market "correction" last spring that took away 5% of the overall value of my stock investments. But the rest of the year was flat or positive--so much so that I was up 18% in my stock accounts last time I checked (end of November).

I was going to wish you Good Luck, but I don't think you'll need it. Just some more of that good planning you have demonstrated so far

 

[mmg2681]

Thank you all for the great advice.
I found a Roth IRA from Vanguard that I am comfortable with - and will be investing in start 2007. I also plan on upping my 401k contribution by 5% (15% + employer contribution) to see how I do on less income. I can always change it month to month if needed. As well as the above two items, I am planning on investing in more bonds/CD's this year.

So, it looks like I have a lot of planning to do within the next two weeks.
Good thing I love planning... and I love numbers.

I was thinking last night while in bed ... by this time next year, my portfolio will be DOUBLE what it is by December 30, 2006. That, in itself, makes me very eager to start all of these investments!

Thank you again to everyone - invaluable advice.

~M

 

[Tracy42]

Something I found very helpful (and still find helpful) is to do a 5 year financial plan. I use this as my roadmap for what I want to achieve in the next 5 years. I start with my current balances, separated by before and after tax investments. In after tax I include my home equity. I make assumption about my return rates (targeting 7% average for my investments). I add in what my contributions (before tax, after tax, additional payments to home equity, etc.) will be, and I set goals for each of the 5 years. Usually twice a year, and again at the end of the year, I pull out my plan (very low-tech--I just do it on 5 sheets of paper--1 for each year) and I calculate my net worth as compared to plan. I'm on my 3rd "5 year plan," and I find it helps to keep me focused on the end goal --early retirement! Tracy