NEW 28 y/o invstr - Advice IUL policy-IRA-investments

[fishinthemarket]

Hello Everyone,

I am new to investing and am working on ER overseas hopefully around my late 30's. (it might be too soon i know). I am looking for advice on my current investments and also any other/better investments I should be looking into.

I am 28 years old and work as a freelance employee. Because of this I do not have steady income (my jobs last from 1-3 weeks generally) and over the past 3 years I have averaged around 80k/year - which should stay steady through the years between 80-100k/year ( i hope). Also, because of this I do not have access to a 401k.

My rent is $1k/month and I have about $500 in additional expenses (health ins/utilies/cell/etc). I have no debt - car and student loans are paid off.

My investments thus far:

1. Traditional IRA started in 2013 - $10,500 invested conservatively so far (2013 & 2014).
I plan to fund it $5,500/year or up as max allowed increases.

2. Personal savings account w/ING Direct(now capital one) - $28k
(this account doesn't pay me really anything on the money - I'm thinking of investing this money somewhere else??)

3. Personal Savings account with Financial Advisor - $29k
($3.5k invested in a stock, the rest invested Conservatively)

4. Stock Market Investment Account - $11k
(I don't plan to add more money to this account - it's make or break. If i gain I will keep adding (hopefully).

5. IUL Term Insurance Policy - $5,130
(Started in 2013. I have a $200k term insurance policy ($1,200/year) that I overfunded the max in 2013. My financial advisor told me about this account as another way to invest. I haven't added to this policy for 2014 yet as I'm not sure exactly if i should keep it and keep overfunding or open a Roth IRA, or something else?
As of now I do not have any debt, or kids (no reason for an insurance policy). - I dont know if I will have a need for one in the future which is why I am debating on keeping this policy and overfunding. Or Maybe I should cancel it so I'm not throwing away the $1,200/year for insurance policy and invest all the money elsewhere?


Any advice or feedback (good or bad) is greatly appreciated.

Do you think i should convert my Traditional IRA to a Roth IRA in order to have access to funds i deposit into it before i turn 59 (since that is 30 years and a world away for me as of now)?

My IUL Life Insurance policy - Is this a good investment to overfund it, or would my money be better some place else?

Should i move my personal savings account money with Capital One 360 to another area?

Thanks!

 

[brewer12345]

To put in bluntly, your financial adviser is almost certainly cornholing you left, right and center. Do you know how much you are paying them? The IUL policy is a dead giveaway as well.

 

[NgineER]

Hello Everyone,

I am new to investing and am working on ER overseas hopefully around my late 30's. (it might be too soon i know). I am looking for advice on my current investments and also any other/better investments I should be looking into.

I am 28 years old and work as a freelance employee. Because of this I do not have steady income (my jobs last from 1-3 weeks generally) and over the past 3 years I have averaged around 80k/year - which should stay steady through the years between 80-100k/year ( i hope). Also, because of this I do not have access to a 401k.

My rent is $1k/month and I have about $500 in additional expenses (health ins/utilies/cell/etc). I have no debt - car and student loans are paid off.

My investments thus far:

1. Traditional IRA started in 2013 - $10,500 invested conservatively so far (2013 & 2014).
I plan to fund it $5,500/year or up as max allowed increases.

2. Personal savings account w/ING Direct(now capital one) - $28k
(this account doesn't pay me really anything on the money - I'm thinking of investing this money somewhere else??)

3. Personal Savings account with Financial Advisor - $29k
($3.5k invested in a stock, the rest invested Conservatively)

4. Stock Market Investment Account - $11k
(I don't plan to add more money to this account - it's make or break. If i gain I will keep adding (hopefully).

5. IUL Term Insurance Policy - $5,130
(Started in 2013. I have a $200k term insurance policy ($1,200/year) that I overfunded the max in 2013. My financial advisor told me about this account as another way to invest. I haven't added to this policy for 2014 yet as I'm not sure exactly if i should keep it and keep overfunding or open a Roth IRA, or something else?
As of now I do not have any debt, or kids (no reason for an insurance policy). - I dont know if I will have a need for one in the future which is why I am debating on keeping this policy and overfunding. Or Maybe I should cancel it so I'm not throwing away the $1,200/year for insurance policy and invest all the money elsewhere?


Any advice or feedback (good or bad) is greatly appreciated.

Do you think i should convert my Traditional IRA to a Roth IRA in order to have access to funds i deposit into it before i turn 59 (since that is 30 years and a world away for me as of now)?

My IUL Life Insurance policy - Is this a good investment to overfund it, or would my money be better some place else?

Should i move my personal savings account money with Capital One 360 to another area?

Thanks!

Brewer is right...
Run away from our FA as fast as you can. IUL is a bad idea, you don't need life insurance and you can invest money elsewhere.

This is what I'd do and in this order- there are lots of smart people here that can fill in the blanks I am missing...

1. RUN away from your FA!!!

2. RUN away from your FA!!! He is not enabling YOUR retirement, he is enabling HIS by his recommendations... I assume all funds he have you invested in are either load funds or high fee funds. I am pretty certain that nay cash you have with him is also earning less than your Capital One account.

3. Unwind your IUL, no reason for you to have life insurance and a lousy investment for you.

4. Continue to live below your means, this is one way to become FI.

5. Continue to earn that good pay check and figure out ways to make it grow, you really need to make as much as possible and save as much as possible to meet your goal.

6. Pay off any debt - You are good here

7. Establish emergency fund to cover one year of expenses - You are good here, I say one year due to self employment... $1,500*12=$18k

8. Read some good books on investing - there are many recommendations on the reading lists on this site.

9. Invest any excess aggressively - You cannot afford to invest conservatively if you want to get out as early as you want to get out. It is better in your shoes to invest heavily and aggressively and work one or two more years vs. investing conservatively and not have enough money... And when I say aggressively, I don't mean penny stocks, just 100% equities, in low expense no lad index funds.

As self employed, you can open your own 401k, a Solo-401k, where you can input $17500, but your llc or corporation can add in 25% of you profits, up to a total contribution of $52,000.

I'd balance your 401k contribution with a Roth IRA rather than a traditional IRA, you can only fund a combined $5500 to a Roth and tIRA.

10. Consolidate your investment into one place, if you are traveling a lot, it would make sense for you to have access to all your accounts in one place, at least that is my preference. Personally I use Vanguard for my IRAs, Roths and After tax accounts, Fidelity is my employer 401k provider. Do go with a brokerage that gives you access to low cost no load funds...

11. Keep your existing tIRA- make sure it is invested in low cost index funds, you might want to roll it over to wherever you decide to consolidate your accounts.

12. I'd take the $10k from your capital One account and invest in a total equity market index fund (leave the $18k as your one year emergency fund) in an after tax account
Take the $29k from your FA account and invest in the same index fund as above.
Take the $11k from your stock account and roll into the same mutual fund.

I assume that your IUL is not tax advantaged in any way, unwind it and roll the $5k into your after tax account.

This gives you $45k in your after tax account, all in one fund and in one place...

13. I'd hold off on converting your tIRA into Roth until you retire and will be in a lower tax bracket hopefully. Ensure you build up five years of taxable investments so that once you retire you can roll over your forecasted living expenses from your 401k to a Roth IRA each year until you deplete the 401k. You have to wait five years to touch that money and your five years of after tax will tie you over until you can start spending that money.

14. Continue to read this board and provide us with updates...

15. This is just my two cents, take it for what it is worth, I am in no way a financial adviser...

 

[fishinthemarket]

First off - Thank you VERY much for the in depth response. I am learning everyday and appreciate all the feedback and help.
I have responded below to a few questions i have to.

Brewer is right...
Run away from our FA as fast as you can. IUL is a bad idea, you don't need life insurance and you can invest money elsewhere.

This is what I'd do and in this order- there are lots of smart people here that can fill in the blanks I am missing...

1. RUN away from your FA!!!

2. RUN away from your FA!!! He is not enabling YOUR retirement, he is enabling HIS by his recommendations... I assume all funds he have you invested in are either load funds or high fee funds. I am pretty certain that nay cash you have with him is also earning less than your Capital One account.

I agree. Now that I've researched what he has told me and put me in I think this is exactly what is happening. Unfortunately, i trusted him as my girlfriend and another friend highly recommended him and i didnt do my DD.

3. Unwind your IUL, no reason for you to have life insurance and a lousy investment for you.

I am going to close this account next month.

4. Continue to live below your means, this is one way to become FI.

5. Continue to earn that good pay check and figure out ways to make it grow, you really need to make as much as possible and save as much as possible to meet your goal.

6. Pay off any debt - You are good here

7. Establish emergency fund to cover one year of expenses - You are good here, I say one year due to self employment... $1,500*12=$18k

Copy that.

8. Read some good books on investing - there are many recommendations on the reading lists on this site.

I'll search the site and see what is being recommended. Any in particular that you like?

9. Invest any excess aggressively - You cannot afford to invest conservatively if you want to get out as early as you want to get out. It is better in your shoes to invest heavily and aggressively and work one or two more years vs. investing conservatively and not have enough money... And when I say aggressively, I don't mean penny stocks, just 100% equities, in low expense no lad index funds.

Copy. I'll look into switching up my accounts as all right now are conservative.

As self employed, you can open your own 401k, a Solo-401k, where you can input $17500, but your llc or corporation can add in 25% of you profits, up to a total contribution of $52,000.

I didnt realize I could open a 401k. I'll look into this.
If i am looking to retire way before the age to pull money out of 401k (70) and IRA (59.5) how will a 401k benefit me in the early years of retirement?

I'd balance your 401k contribution with a Roth IRA rather than a traditional IRA, you can only fund a combined $5500 to a Roth and tIRA.

Ok. I will go with the Roth IRA from 2015 on.

10. Consolidate your investment into one place, if you are traveling a lot, it would make sense for you to have access to all your accounts in one place, at least that is my preference. Personally I use Vanguard for my IRAs, Roths and After tax accounts, Fidelity is my employer 401k provider. Do go with a brokerage that gives you access to low cost no load funds...

This is a very good point. Also to have access to them online would be good - which i don't have right now with my current situation. I'll research the low cost no load funds.

11. Keep your existing tIRA- make sure it is invested in low cost index funds, you might want to roll it over to wherever you decide to consolidate your accounts.

Why do you think I should keep the tIRA that I have setup right now and not convert this to a Roth IRA?
Also, am i allowed to keep this tIRA open if I don't fund it anymore?

12. I'd take the $10k from your capital One account and invest in a total equity market index fund (leave the $18k as your one year emergency fund) in an after tax account
Take the $29k from your FA account and invest in the same index fund as above.
Take the $11k from your stock account and roll into the same mutual fund.

I assume that your IUL is not tax advantaged in any way, unwind it and roll the $5k into your after tax account.

No it is not. If i close the account now i have a surrender fee of about 4k so i will only get back just over 1k.
My FI wanted me to fund it 1200 for the next few years so that I could get back my full investment instead of surrendering some. I don't understand this thinking because I'd be losing this 1200 each year i am putting in anyways.

This gives you $45k in your after tax account, all in one fund and in one place...

13. I'd hold off on converting your tIRA into Roth until you retire and will be in a lower tax bracket hopefully. Ensure you build up five years of taxable investments so that once you retire you can roll over your forecasted living expenses from your 401k to a Roth IRA each year until you deplete the 401k. You have to wait five years to touch that money and your five years of after tax will tie you over until you can start spending that money.

So after 5 years of investments in my 401k I can roll over my living expenses to my Roth and am able to withdraw from my Roth each year or month for what I need?

14. Continue to read this board and provide us with updates...

15. This is just my two cents, take it for what it is worth, I am in no way a financial adviser...

Thank you i really appreciate all of this!

 

[brewer12345]

Basically, if you are trying to retire early but are subject to a healthy tax rate, it is wise to take advantage of tax deferred accounts. Avoiding 35% taxes now so that you can pay 15% taxes 20 years in the future and compound on the deferred taxes in the meantime is a no-brainer. To bridge the gap between when you pull the plug and age 59.5 when you can tap a traditional IRA, you can use one or more of the following:

- Save additional funds in after tax accounts and use these until you can tap IRAs.

- Start a series of substantially equal partial payments (SEPPs) under section 72t (google 72t) to tap IRAs before 59.5.

- Use a Roth conversion pipeline (google this) to fund living expenses with IRA money.

 

[NgineER]

I'll search the site and see what is being recommended. Any in particular that you like?

A Random Walk Down Wall Street, written by Burton Gordon Malkiel
The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William Bernstein

I didnt realize I could open a 401k. I'll look into this.
If i am looking to retire way before the age to pull money out of 401k (70) and IRA (59.5) how will a 401k benefit me in the early years of retirement?

See Brewer's comments... There are ways to do Roth roll-overs to access when you are in a lower tax bracket... Or roll over one years targeted spending five years out (accessible tax free after five years without penalties). Do this every year to access the money five years out. You will need to have five years spend accessible to you to tie you over for five years - the first year that the first roth conversion would be accessible.

Why do you think I should keep the tIRA that I have setup right now and not convert this to a Roth IRA?
Also, am i allowed to keep this tIRA open if I don't fund it anymore?

You are in a higher tax bracket now than you will be in early retirement...
You should be able to keep this tIRA open without funding it anymore. You might want to roll it over into your solo-401k or a new tIRA if your costs are high currently. You might also choose to not use Roth IRA contributions now, rather tIRA, depending on your tax situation. If you do a Roth, you can access all those contributions when you retire, not the gains however.

No it is not. If i close the account now i have a surrender fee of about 4k so i will only get back just over 1k.
My FI wanted me to fund it 1200 for the next few years so that I could get back my full investment instead of surrendering some. I don't understand this thinking because I'd be losing this 1200 each year i am putting in anyways.

Figure out what the best way to get your money back, I have not been in your situation.

So after 5 years of investments in my 401k I can roll over my living expenses to my Roth and am able to withdraw from my Roth each year or month for what I need?

No, you can roll over from your 401k to a Roth and after 5 years withdraw that penalty free, only the contributions, not the gains...

Lets just assume you have $200,000 in your 401k and $100,000 in your after tax account, and you have $20,000 in living expenses.

Year 1:
Roll over $20k from 401k to your Roth,spend $20k from your after tax
Balances: 401k $180k, after tax $80k, Roth $20k
Year 2:
Roll over $20k from 401k to your Roth,spend $20k from your after tax
Balances: 401k $160k, after tax $60k, Roth $40k
Year 3:
Roll over $20k from 401k to your Roth,spend $20k from your after tax
Balances: 401k $140k, after tax $40k, Roth $60k
Year 4:
Roll over $20k from 401k to your Roth,spend $20k from your after tax
Balances: 401k $120k, after tax $20k, Roth $80k
Year 5:
Roll over $20k from 401k to your Roth,spend $20k from your after tax
Balances: 401k $100k, after tax $00k, Roth $100k
Year 6:
Roll over $20k from 401k to your Roth,spend $20k from your Roth
Balances: 401k $80k, after tax $00k, Roth $100k

The data above does not include any investment gains/returns for simplicity. It is important to know that you can only withdraw contributions from your Roth after 5 years, not gains until you are 59.5 years old