Ready for some Sage Advice

[DaveNineFive]

Hello Everyone!
My name is Dave, I'm 24, living in Chicago, and I'm starting to get serious about trying to retire early (or FIRE myself, I guess ).

I've been out of school for almost three years, and by getting in at a small company that has done very well I'm making some good money these days. I'd like to figure out the best way to invest so I can be the one who decides what I'm doing twenty years from now!

I've spent the last few months saving in cash to build a down payment on a home. I'm up to about $22k, and will be at $30k by June. Other than that, we just got a 401k plan at work (one downside to a small company), so I'm putting in enough to get the full match.

This summer I plan to shift my focus from just saving cash to maxing out my 401k (while still adding to my nest egg at a slower pace), but I'm unsure what comes after that? I have a Roth IRA from before the 401k, but I'd like to invest in something I have access to before I'm 60. Are Index funds the answer? Any advice for someone in my situation would be very much appreciated. Thanks in advance!

[jIMOh]

For basic retirement (age 60-65) saving 10% of your gross income might be enough. For early retirement, saving 15-25%+ of your gross income is probably in order.

I started with 6% in my 401k when I was your age. I am now 35 yo and save 15% of my gross income (actually 15% of combined gross income between wife and me). And my observation is I can retire around age 52-60. To retire earlier I would need to bump savings up considerably to 20-25% level. Or get killer returns the next few years.

[DaveNineFive]

Between my 401k and cash savings, I currently save about 33% of my take-home income. I'm definitely shooting to at least have the option to retire by the time I'm 50 (if not sooner... much sooner...). It's great to hear that 15% has put you in a position to retire early!

My biggest question is what you recommend I put that money into? Once I own a home and the 401k is maxed, what are my best options for investments that I can access before I turn 60?

[jIMOh]

Quote:

Originally Posted by DaveNineFive Between my 401k and cash savings, I currently save about 33% of my take-home income. I'm definitely shooting to at least have the option to retire by the time I'm 50 (if not sooner... much sooner...). It's great to hear that 15% has put you in a position to retire early! My biggest question is what you recommend I put that money into? Once I own a home and the 401k is maxed, what are my best options for investments that I can access before I turn 60?

I would do the following:

1) Send around 10% of income to 401k. This lowers your current tax bill.
2) contribute max to a Roth IRA (5k per year) assuming you are under income limits to contribute.
3) open a taxable brokerage account, and invest rest of savings monies there.

Then as you approach Roth income max, transfer money from 3) to 1). Meaning add more to 401k to lower AGI to keep eligibility for Roth. This will also keep you on top of your income and taxing situation. Maxing out the Roth is more important than the amount going into the 401k, assuming you capture the full match from the 401k.

I am at point where I have 401k at 11% and Roth maxed out. I opened some CDs in 2007 prior to opening my brokerage account.

You will read here about buckets- meaning have money in different types of accounts (Roth, taxable, tax deferred) because we don't know how each bucket will be taxed during retirement in the future. Social security is another bucket. An annuity could be another.

[DaveNineFive]

Thanks for the advice, jIMOh - I really appreciate it! Would saving in this method provide funds for retiring early? If I decide I want to retire at 45, but 2/3 (or so) of my savings is in a Roth IRA and 401k, won't I be forced to wait until I'm 60 to touch that money? (Or pay the early withdrawal fees?)

Is the plan basically to max out the highly-beneficial retirement plans, and then retire when you reach the point that your brokerage account can carry you to 60? I feel like I'm really saving for two different things:

Early Retirement - 60
Index Funds?
Dividend Stocks?
Simple Interest? (Savings? Bonds?)

60-Death
Roth IRA
401k

I don't really like that disconnect, how I'll have a lot of money that I can't get at until a predetermined age, but I understand the tax benefits are too great to ignore, so I do plan on maxing my 401k and Roth IRA out if it makes sense. I feel like that's the easy part. I have not learned the best method for saving for that pre-60 timespan. Any specific suggestions of what works?

[jIMOh]

Quote:

Originally Posted by DaveNineFive Thanks for the advice, jIMOh - I really appreciate it! Would saving in this method provide funds for retiring early? If I decide I want to retire at 45, but 2/3 (or so) of my savings is in a Roth IRA and 401k, won't I be forced to wait until I'm 60 to touch that money? (Or pay the early withdrawal fees?) Is the plan basically to max out the highly-beneficial retirement plans, and then retire when you reach the point that your brokerage account can carry you to 60? I feel like I'm really saving for two different things: Early Retirement - 60 Index Funds? Dividend Stocks? Simple Interest? (Savings? Bonds?) 60-Death Roth IRA 401k I don't really like that disconnect, how I'll have a lot of money that I can't get at until a predetermined age, but I understand the tax benefits are too great to ignore, so I do plan on maxing my 401k and Roth IRA out if it makes sense. I feel like that's the easy part. I have not learned the best method for saving for that pre-60 timespan. Any specific suggestions of what works?

three points-

you can withdraw Roth contributions at any time. The interest must remain until 59.5, but the contributions can be taken out anytime.

check 401k plan rules- you might have access to 401k at age 55 or another age.

IRAs and 401k rollovers (rollover IRAs) have a provision called 72(t) which allows for Substantially Equal Periodic Payments (SEPP). Read up on the rules. To my understanding, a person can SEPP if they:

a) take out money for at least 5 straight years
b) take out an amount which is about the same for each of the withdraws
c) pay taxes at ordinary income levels (no 10% penalty)

Each persons early retirement plan will be different. One reason I suggested a taxable brokerage bucket is to open up some options outside of SEPP -also known as provision 72(t).

I do plan on using dividend paying stocks for a portion my whole retirement plan (dividends tend to keep up with inflation). I think other taxable investments to consider include I-bonds and muni bonds.

[DaveNineFive]

Thanks again, jIMOh, I really appreciate the time you're taking to answer my questions. I will definitely look into all of those suggestions! Looks like the first thing I need to do is a lot of reading.

[CCdaCE]

For your pre-60 spending... one thing that can be used in taxable accounts is tax efficient index funds (Vanguard Total Stock Market, etc.).

I'd make sure your tax advantaged options are full, first, though.

You can always fill taxable accounts in your later years when the taxes won't end up biting as hard. As in, fill them up now and the taxes you realize on the gains after 20-30 years will kill you.

I'm no professional, though. Like you said, start reading. Another good forum for tax efficiency/indexing and related advice is the Diehards.

-CC

[travelover]

Dave, I'd second the suggestion to lurk at the Diehards / Bogleheads site via the link above. You will see many sample asset allocations / investment suggestions there that will help you understand your options. I also found the Bogleheads book to be very straight forward. Understanding investing basics is so important that you owe it to yourself to read at least a couple of good books on the topic.

[Finance Dave]

Quote:

Originally Posted by DaveNineFive Between my 401k and cash savings, I currently save about 33% of my take-home income. I'm definitely shooting to at least have the option to retire by the time I'm 50 (if not sooner... much sooner...). It's great to hear that 15% has put you in a position to retire early! My biggest question is what you recommend I put that money into? Once I own a home and the 401k is maxed, what are my best options for investments that I can access before I turn 60?

Dave,

I'm not a financial advisor...so perhaps someone can validate this...but you CAN get to the CONTRIBUTIONS to a Roth prior to age 60 with no penalties. It's only the EARNINGS you can't get to. Fortunately, with a Roth, when you take a distribution, you get the contributions FIRST.

This is different than a traditional IRA, in which you must take a proportional amount from each earnings and contributions.

I think the Roth is a great tool. IMO what it really boils down to is whether your tax rate will be higher while working or in retirement as to whether a Roth or traditional is better for you. However, the Roth has some other advantages such as the lack of a mandatory withdrawal age and the aforementioned benefit of withdrawing contributions.

Also, you mentioned buying a house. Some people recommend having a portion (I'd say 10-25%) of your portfolio in real estate in some fashion. That could mean buying your own home and counting the equity as this portion, or if you rent it can mean buying REITs.

Good luck...sounds like you have the right mindset.

Dave

[Raul]

With regard to the SEPP, the 5 year min rule only applies if you are 50+ when you initiate it. If it's earlier than that, then the take until 59.5 rule applies. Since you are so young, I'd try to bulk up that 401.K to $250M or so before looking into a SEPP.

I'm currently "pivoting" my IRA/401.k via a SEPP as I look at making another run at RE in the not-to-distant future.