First timer seeking advice

[otiswanders]

Hi everyone, I'm a newcomer here although I have been reading bogleheads and Mr. Money Mustache for a few years now.

My significant other and I recently received a windfall of $245k.

We are wondering the best course of action for: 1) paying off debt (and if so, which ones in which order) while 2) retiring early ASAP generating $25k yearly income.

We are in our early 30's and live in NJ currently but will not be retiring here.

Debts:

Student Loans: $11,500 @ 6.650%
+$31,925 @ 5.25%

Car Loan: $7k at 0.9%

Credit Card: $13k at 0% till March 2016

Mortgage: $228k at 4.125% 30 yr fixed

Total Debt: -290,600

Assets:

Retirement: 16,500 tIRA Vanguard
64,089 401A (required by employer) TIAA CREF

Retirement Contributions: $7365/year

Checking/ Emergency Savings: $2k

Life Insurance: $500k ROP policies

Home Value: $300k

Personal Property: $20k

Income: $60k/ year Federal Box 1 W2

Total Assets: +$400,837 (not including windfall of $245k)


Total Monthly Expenses: $3300

House 1825 (includes prop. tax & ins.)
Car 273
Student Loans 275
Everything else 1k

Our thinking right now is to pay off the student loans, credit card, and possibly the car loan.

The remainder we would like to put in a taxable account at Vanguard, but what does that entail as far as allocation?

How should we structure our retirement accounts' allocation knowing that if we retire early we will have to draw down the taxable account far before our regular retirement accounts?

Thank you for your help and insight!

 

[LOL!]

1. Put $5500 into each of your Roth IRA as soon as possible and the max annually thereafter.

2. Increase your contribution to 401(k)/403(b) plans to the maximum possible, say $18,000 for each of you. If you can adjust your last paychecks of 2015, do it.

Neither of the above will put a crimp on your early retirement at all.

3. Pay off all that student loan debt.

4. Vow to not pay income taxes or as little as possible going forward.

5. Invest tax-efficiently. I think Bogleheads are probably the best source of how to do that.

 

[bingybear]

While I agree with much of LOL!'s comments, there is one thing that pops out that I would plan on getting rid of,

Credit Card: $13k at 0% till March 2016

I've never used these offers, but my understanding is that if you don't pay it off by the end of the 0%, you will get to pay the interest for the total time. Most of these offers count on people not reading the details.

 

[38Chevy454]

1. Put $5500 into each of your Roth IRA as soon as possible and the max annually thereafter.

2. Increase your contribution to 401(k)/403(b) plans to the maximum possible, say $18,000 for each of you. If you can adjust your last paychecks of 2015, do it.

Neither of the above will put a crimp on your early retirement at all.

3. Pay off all that student loan debt.

4. Vow to not pay income taxes or as little as possible going forward.

5. Invest tax-efficiently. I think Bogleheads are probably the best source of how to do that.

I agree, and x2 on bingybear's advice to pay off that credit card. Your mortgage rate is not too bad, but that is really better since Uncle Sam helps you with mortgage deduction to make it less painful. Car loan is not so bad at 0.9%. I strongly encourage you to pay off the student loans and then max out your 401 and Roth contributions, that will have more benefit to early retirement and being able to minimize taxes paid.

 

[Sunset]

What others have said is good, except:
- keep the car loan as its really cheap.
- I'm going to say max Roths every year, but put minimum into 401K's as you are in 15% tax bracket, if you can switch your 401K to a roth 401K then max it as well.
(minimum in 401K is to get employer match).
- Your house mortgage interest is about $9,405/yr so what other itemized things do you have that make it worth more than the standard deduction? If you are only getting say a few thousand more than the standard deduction is it really worth paying $9,405 for that small difference ? If not then pay down the house mortgage so its paid off sooner (even a $20K payment would shave many years off the mortgage life).

 

[otiswanders]

thanks everyone for the replies!

While it'd be nice to max a roth as one mentioned above at 18k each a year, making 60k total between the two of us makes that a little of a stretch

We do plan on paying off the CC and student loans.

Early retirement for us isn't 59, 55 or 50, but more like 40. We will be living in a much different area (possibly out of the country) with zero mortgage. After 10 yrs of living on roughly 1k-1.2k/month not including mortgage, we are confident 25k/year will allow us to continue our current lifestyle in an area with lower COL while also allowing for decent healthcare/ins (500/mnth)

If we plan on retiring at say 40(7-10 yrs from now), we will obviously not be able to utilize the money from roths/401a for quite a while. Does it still make sense to contribute to those?

In this growth/accumulation phase, what allocations should we divy up into each account (taxable vs. retirement?)

Once we pull the plug what allocation should we have in each account? Should largely bonds be in retirement accounts and mostly index funds in taxable account? What would be the best allocation in the taxable account to periodically draw from to live off?

Thanks in advance for the responses: Keep them coming!

 

[cyber888]

Pay all student loans now. Pay all other loans once they are NOT zero interest, except for mortgage. Pay off some of the house mortgage loans, maybe leave $100,000 - $120,000 and then refinance it to 3.5% - 3.75%. Then, whatever mortgage you have will be much lower.

 

[RetireAge50]

Right now it looks like you are like most of the population with student debts, car debts, cc debts, mortgage.

If you want to be different and retire really early with a low income you need to figure out how to not be so normal.

I would suggest you pretend like you did not get the windfall and see if you can dig yourself out first.

 

[bingybear]

you have so much potentially going on that I find it hard to provide actionable advice.

Have you looked at what countries would allow you to stay for an extended time frame? What are their entry criteria? What are their standard of living and health care? Don't get me wrong, there are places that will work for this, but you need to get a target set of placing for planning purposes.
Planning on keeping US citizenship? If so, you may have to file taxes here even when living outside the country. Giving it up, which country do you want to become a citizen and what would this mean.
Healthcare is quite a wild card. You're healthy one day, the next you've got large healthcare expenses. So how do you insure? If you can keep your income low enough, you can get subsidized or free insurance in the US (based on current law). What about other countries? Or is it cheap enough there that insurance is not necessary? I suggest you look at the ACA site for insurance for a couple at age 50 or so to get a feel for insurance cost.
If you are planning a bailing at 40 or so, have you projected what your investable nest egg would be? If you assume you have these all after tax in low distribution funds, etfs and individual stocks, based on current law your federal tax could be zero assuming the distributions are Q-dividends and LTCG and were not above the 15% bracket. So just doing after tax may be OK.

My advice is to work out what your plan is besides retire at about 40. Given that is your premise, how do you plan on covering expenses for 60 or more years? How will your plan handle inflation, market fluctuation, emergency,LTC and healthcare expenses.
Try running your plan on FIRECALC to see what you need as a nest egg to last 60 years... and remember it is just a back testing program, no guarantees.

I suggest this not to be mean, but going through the process may help to understand what is needed, what trade offs have to be made, etc. One needs to understand the risks vs rewards.
good luck.

 

[Fishingmn]

Another way to think about it in regards to what you'd have if you sold it all today -

181k = $245k windfall - all debts beside house
60k = Sell your house today after selling expenses & mortgage
81k = Retirement accounts
2k = Checking

324k Total

Then the question is what is the number you need to generate $25k (if that's the right number). This needs to take into account the long retirement window and your breakdown in retirement vs non-retirement accounts. I think many here would be leery of using a SWR of 4% given how early you want to retire.

I do agree that having a big chunk of the funds in retirement funds may prove problematic given your proposed age of retirement.

 

[VFK57]

Pay off your Debt first

 

[meekie]

Pay off the debt, but not the house, since you won't be keeping it, there's no reason to pay it down.

Look into the ROTH, you can withdraw your contributions at any time, and leave the earnings to grow tax free.

At 7-10 years out, you do want to start building up that taxable account, or start thinking of ways to invest that will provide income. Will you rent out your house or sell it? Do you have experience or hobbies that can bring in a little bit of money after you retire?

We're 3-5 years out from semi-retiring in our 40's, but a house rental, me working seasonally as a tax preparer, and running a business are a big part of our income plans until we can get at our retirement accounts.

 

[dallas27]

Biggest problem i see is after you pay off credit and car debt, you will probably not stop spending, as thats how you got there in the first place.


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