27 years old, married no kids, looking to retire by 50

[NOLA Rob]

Hi all. I'm a 27 (almost 28) attorney in New Orleans, married with no kids but planning on some in a few years. I mostly just read the posts but thought I'd join up so I can comment occasionally.

My goal is to be FI at 50. I love my job so I'm not locking myself into retiring at that time, but I'd like to have the freedom to retire and only keep working if I still love it (obviously I have no idea how I'll feel in 22 years).

I'm maxing out my Roth 401k, a Roth Ira, and my wife is maxing out a roth Ira (no retirement plan at her work until several years in). We are aggressively paying off her student loans (I don't have any) and have a home mortgage of about 9% of our gross monthly income. The student loans should be paid off in 5 years, at which point we will figure out how to allocate the huge portion of our income we have been allocating to the student loans (increased savings, pay off mortgage really early, kids college, etc...). Not planning on ever getting any social security so I'm not counting that into my planning.

Thanks!

 

[jclarksnakes]

Welcome to the forum. Your plan sounds good.

 

[ronocnikral]

welcome!

I guess any SS will be lagniappe?

 

[PennStateCLJ]

My goal is to be FI at 50.

I'm maxing out my Roth 401k, a Roth Ira, and my wife is maxing out a roth Ira (no retirement plan at her work until several years in).

Welcome to the forum, I know you really didn't ask any questions but I'll bring this up anyway.

This assumes you'll have no substantial pension (meaning 50% or more of pre-retirement income). If you or the wife do, I take it back.

I'm assuming your income is pretty decent as a lawyer, even early on in your career. Why roth 401k instead of traditional? Especially since you plan to early retire and will have time to convert that money in a lower marginal bracket than currently from age 50 - 70.5. The LA tax brackets are 6% for everything over $50k so I'm assuming you're paying at least 31% aggregate tax rate between fed (25%?) and state (6%) taxes. I'd go traditional 401k and get the $17k deduction now. Do your Roth on the side to get some tax diversification. Convert the traditional to Roth in increments within say a 15% marginal bracket fed in the future at age 50 and lower your tax liability throughout your life. Even if your state marginal remains the same and your combined is then 21% you're saving 10%.

 

[NOLA Rob]

I guess any SS will be lagniappe?

You bet! It would be a great "something extra" but we'll see.

I'm assuming your income is pretty decent as a lawyer, even early on in your career. Why roth 401k instead of traditional? Especially since you plan to early retire and will have time to convert that money in a lower marginal bracket than currently from age 50 - 70.5. The LA tax brackets are 6% for everything over $50k so I'm assuming you're paying at least 31% aggregate tax rate between fed (25%?) and state (6%) taxes. I'd go traditional 401k and get the $17k deduction now. Do your Roth on the side to get some tax diversification. Convert the traditional to Roth in increments within say a 15% marginal bracket fed in the future at age 50 and lower your tax liability throughout your life. Even if your state marginal remains the same and your combined is then 21% you're saving 10%

I've wrestled with this a fair amount. I'm going to couple this with a new question actually, related to my interest in switching to a traditional 401k for a few years to up the payments on my wife's student loans. Ultimately, I've kept contributing to the roth 401k because my wife's view is "we can afford to do it now and we don't know what our situation will be like when we retire." I'm mixed on this point and have accepted her position for the time being (as I've been unable to definitely conclude that it would certainly be better to do a traditional 401k). All the budget deficit issues and the state of social security have caused me to plan for tax rates to skyrocket. I think the roth gives us the best chance to be protected if that happens. In addition, if we are able to save a good amount in taxable accounts on top of maxing the tax-advantaged accounts, then we may end up having an income in a range that would cause us to be in a higher tax bracket. For example, what if we have $100,000 in income at retirement, and the tax brackets have been revised to tax that level of income at 30-35%? It seems to me that we would do better if we had half our savings in Roth accounts and the remainder in taxable accounts, to lower our taxable income.

 

[PennStateCLJ]

What if something like a value added tax is imposed on Roth accounts? I like them too, but they're not a panacea. I'd do some traditional 401k and Roths on the sides. Taxable accounts also once the mortgage and loans are paid. I like the traditional for you now also for more take home pay to pay off the student loans like you mentioned.

 

[PennStateCLJ]

I'd also add for most people working right until taking SS, that your vision probably applies. But you plan to stop or tone it down at 50, leaving lots of time in the lower marginal brackets.

The Case Against Roth 401(k)

 

[NOLA Rob]

I had not considered the concept of some sort of tax on roths. Definitely not sold on continuing the Roth 401k forever. Thanks for the advice! I'm going to have to dive into it and run the numbers.

 

[MooreBonds]

For example, what if we have $100,000 in income at retirement, and the tax brackets have been revised to tax that level of income at 30-35%? It seems to me that we would do better if we had half our savings in Roth accounts and the remainder in taxable accounts, to lower our taxable income.

You are correct, in that "no one knows" what your particular situation will be in retirement...however, given the potential magnitude of the dollars involved over many years, many on the forum recommend diversification in your type of accounts as well as your portfolio positions. By putting some in a traditional 401k and some in a ROTH, you're guaranteed to have an ok situation -just like investing in index funds 'guarantees' that you'll have a decent return that most managers can't match, but which also won't put you in an 'all-or-none' boat that could shoot you to the moon, but also might end up with engine failure.

Don't forget - just as the gov't changed its tax policy on SS distributions, they could change their policy on ROTH IRAs:

Before the 90s, you only had to pay taxes on up to 50% of your SS income (essentially, your employer's contribution); but now, you might pay taxes on 85% of your SS income, even though you already paid income taxes on your 50% of your SS contribution when you earned the income. In the same way, Congress could just as easily slap a ROTH "windfall" tax on a ROTH account if you take out certain amounts each year, for example.

By hedging your bets, you're guaranteed to benefit partially from whatever tax/income situation you find yourself in down the road, instead of putting it all on Red and hoping the roulette wheel doesn't land on black.

 

[NOLA Rob]

By hedging your bets, you're guaranteed to benefit partially from whatever tax/income situation you find yourself in down the road, instead of putting it all on Red and hoping the roulette wheel doesn't land on black.

I like that. I posted the info on the FIRE and Money forum about roth 401k v. traditional 401k as a direct question and it seems like the consensus was that I should be doing the traditional rather than the roth for the majority of those contributions. It makes sense to me so I think I'm going to start putting the majority (15k maybe) into traditional, which would leave 2k in roth and the 5k in the roth ira.

Honestly, I'd never really considered the possibility of a taxes on roths in the future (much less a national VAT), but trying to protect against that as much as possible is in line with my philosophy of hedging my bets as much as possible. Thanks!

 

[YoungSaver]

You want to retire at 50, but you're basically only investing in retirement accounts. It sounds like you haven't even thought about how to fund your retirement between the ages of 50 and 60. And what if they raise the ages for IRAs to 65 or even 70?

 

[NOLA Rob]

You want to retire at 50, but you're basically only investing in retirement accounts. It sounds like you haven't even thought about how to fund your retirement between the ages of 50 and 60. And what if they raise the ages for IRAs to 65 or even 70?

I've certainly thought about it! Seriously though, the only reason we are not contributing to taxable accounts is because we are aggressively paying off my DW's student loans. We are on schedule to pay them off in 3-4 years. Once we do that, we will have about $36,000 a year to put in taxable accounts on top of the retirement accounts. If the DW gets a job with a 401k then that will drop to 19,000 a year at our current income. That is also assuming our income never goes up. Hopefully we can increase that amount every year, but who knows. Anyway, I've thought about it a good bit, but with large student loans with rates between 5 and 8.5 %, it is not an option right now.

 

[YoungSaver]

I basically pointed it out to you because I'm in a very similar position. I'm 31 and feel that I have contributed too much to my retirement accounts already. 75% of my investments are in retirement accounts. I was just trying to see what you had planned I used to throw all my extra toward my mortgage, but since refinancing I feel the interest rate is too low to throw extra money at. I'm around 3.3%.

 

[NOLA Rob]

I basically pointed it out to you because I'm in a very similar position. I'm 31 and feel that I have contributed too much to my retirement accounts already. 75% of my investments are in retirement accounts. I was just trying to see what you had planned I used to throw all my extra toward my mortgage, but since refinancing I feel the interest rate is too low to throw extra money at. I'm around 3.3%.

Yeah, honestly my plan at this point has been limited to the 'get those loans paid off and then start saving in taxable accounts' plan. I like the aspect of the tax advantaged accounts being able to grow untouched until I'm 59.5 or later. I think that you can withdraw from traditional Ira / 401k prior yo 59.5 by doing some sort of substantially equal withdrawals provision, but have not focused on it because I'm no planning on using those accounts prior to 59.5.

I am in a holding pattern right now due to the loans because any extra money, raise, etc..., just goes to pay down the principal. Once I get those paid off, I'm going to sit down and calculate everything out to see when I can retire / what we need to save to retire at 50. What are your plans? It seems like the tax advantaged accounts are too good not to max out and also I wouldn't have enough in them alone to retire at 50 anyway even with maxing out. So my thought is to keep maxing out and try to build up substantial taxable savings. Thanks to the student loan enforced curbing of lifestyle inflation, we should have a good amount to put away each year starting when I'm your age (roughly).

Edit: I have a 3.875% mortgage and do not plan to pay extra on it until at least 15 years from now since it is so low.