27 year old, suggestions to improve/tweak plans?

[younginvestor2013]

Hi All,

I don't intend for this to be a "humble brag" post, despite what it may seem like. I haven't posted a "critique my plan" post in a while, but just curious if anyone has any suggestions for improvements on things I could change/alter for a better outcome, whether from a FIRE standpoint or lifestyle viewpoint. Lately, as time passes, I have learned to enjoy the ride more and enjoy lives luxuries (within my means) and not be so focused on the end goal of FIRE. However, that goal almost never leaves my mind and I think how great it will be once I can finally be FIRE'd. But, I'm also realizing that I need to have something to FIRE to, and without that, I may just be twiddling my thumbs often so I might as well just have a job. To that end, I have tried to develop hobbies and have personal goals outside of work. At any rate, my spending has gone up, but so has (and so will) my income.

Below are some stats, but any suggestions anyone has are welcomed, whether from a financial or non-financial standpoint. My current approach is maxing out my Roth 401k, Roth IRA, and HSA. I have recently decided to also max out my HSA, given the tax savings, and that I can pull out the funds whenever (for medical purposes). In order to max out all of the above, and support my current spending, I am moving over some money from my taxable accounts on a yearly basis. I am wondering if I should eventually taper off my retirement contributions so as to have some tax free cash should I need it before 59.5. Any input you have on that would be appreciated (at what age should I stop retirement contributions? at what $ amount?). Also, I've toyed with the idea of switching to a traditional 401k to reap current year tax savings as my income grows, but the appeal of a Roth always ends up trumping that. Lastly, I have thought of paying off my mortgage, but that would take a substantial portion of my taxable funds off the table.

Total N/W: ~$360k

Taxable/Brokerage Funds: $218k
Roth IRA/401k: $100k
Home Equity: $42k

Current Income: ~$85k
Projected Income 2017: ~$100k

Current Spending (After Tax): $48-50k max

Given the above and my current lifestyle, I would be looking at a nest egg of $2m to retire comfortably to support a 3% SWR.

 

[RobbieB]

Looks good to me, I like a balanced approach.

Some for now to have a nice time, some to save for a rainy day and some so you don't have to work forever.

 

[Henman004]

What about the rest of your background? Are you single/married? Do you have any kids? If no, do you want to have a family? You talked about paying off the mortgage; what is the remaining balance?

Other than that, at 27, and with that net worth, you are way ahead of the game; keep doing what you're doing.

Sent from my HTC One using Early Retirement Forum mobile app

 

[DrRoy]

It looks to me like you are doing pretty well. You raised a good issue regarding retirement vs. non-retirement accounts. If you plan to retire before 59.5 then you need funds to get you there. That has to be part of the plan, but you do have funds in a taxable account. Keep track if it is enough.

 

[Walt34]

Other than that, at 27, and with that net worth, you are way ahead of the game; keep doing what you're doing.

+1 on that!

I's also suggest reading the current thread on people's "biggest financial mistakes". A lot of posts there mention divorce so if you're not already married, and that does become a possibility later, a prenup would be a very good idea. Very few people have the NW that you do at your age and you certainly don't want to risk having to start over.

Given that about 50% of marriages end in divorce, marrying without a prenup could be the financial equivalent of going to 'Vegas and betting all your money on a "double or nothing" bet.

 

[cooch96]

+1 on that.

Given that about 50% of marriages end in divorce, marrying without a prenup could be the financial equivalent of going to 'Vegas and betting all your money on a "double or nothing" bet.

+1. Nice analogy.

Also do a quick check on the marriage common-law laws in your state. Some have a low bar to clear and if you've been cohabitating for any sort of time, the paramour can claim spousal privileges to your money if the relationship turns for the worse.

 

[ponyboy]

You're only 27...life happens, things change. Marriage, kids, health, etc etc. Keep plugging away and you should be fine.

I would start maxing your 401k and roth. You have plenty in your taxable accounts at the moment. Yes if you want to retire before 59.5 you'll need funds to live off of. You can up your savings/taxable later in life...you can also pull money from a roth. Some people use that method if they retire early.

 

[brucethebroker]

Well done.

(I say start a blog to advise other 20 somethings on how to get to a 1/3 million $ NW!)

 

[panacea]

At income of $100k, you're in the 25% tax bracket... or 28%?? I would start socking away money pre-tax in a traditional 401(k) for a while if everything you have is in taxable and tax-free Roth / Roth 401(k) accounts. I like the idea of a balancing tax buckets as evenly as possible since you have such an early start.

 

[exnavynuke]

In order to max out all of the above, and support my current spending, I am moving over some money from my taxable accounts on a yearly basis. I am wondering if I should eventually taper off my retirement contributions so as to have some tax free cash should I need it before 59.5. Any input you have on that would be appreciated (at what age should I stop retirement contributions? at what $ amount?). Also, I've toyed with the idea of switching to a traditional 401k to reap current year tax savings as my income grows, but the appeal of a Roth always ends up trumping that. Lastly, I have thought of paying off my mortgage, but that would take a substantial portion of my taxable funds off the table.

Well, first off, if you're "moving" your retirement funds from one place to another in order to "max" them out, you're not maxing out your retirement so much as "putting some away for retirement and shuffling where other money is". With your stated income going up and estimated $15k next year, you "should" be able to max out your retirement without needing to pull money out of other investment accounts.

Next up - investment allocation/choices. You didn't mention anything about this. At your age, I'd expect it to be aggressive but for all we know you could be invested in 100% bonds or in funds that are costing you 2%/year. This is an area that, unless you're very confident, I'm sure some people here could provide you with some feedback.

Personally, I'm a fan of diversifying tax-advantage account types. Your income now is likely to be in a higher tax bracket than when you retire so it may be worth it to put some into traditional IRA/401k. There are calculators online that can help you by estimating which type of account would be better for your situation, I recommend using them to determine which you'd rather use and maybe even use them both anyway.

Regarding the age to stop investing, for me that age is the age you plan to retire. Keep putting money in until you've got enough you can start taking money out safely. Keep in mind, rules on withdrawals may require you to either not use some of your accounts or use them in specific ways (72(t) payments for example) for your tax advantaged accounts. As such, if you want to retire early it may behoove you to keep/grow your taxable accounts.

Finally, for the mortgage, I'd say keep paying it assuming you have a good interest rate and the money you'd pay it off with would come from your investment portfolio. That is, unless the mortgage gives you anxiety or other similar worries that you'd really really prefer to not have to worry about going forward.

 

[younginvestor2013]

Thanks for all the input.

Yes, I agree, I should have mentioned that I technically am not really "maxing out" my retirement accounts in terms of generating/saving new $$ - a portion of it is just funds moved over from my taxable account. I come close but not fully - this year, not counting funds moved over, I have probably saved $13-15k in "new money".

Regarding a prenup - it is something I have thought about along the road should i ever get married. I am currently single but have dated around a bit. I have never gotten serious enough to talk finances. If things do get serious enough, I likely would wait to talk about finances until we are already serious/have discovered our own attractions in one another, aside from $$. My goal would be to not disclose my wealth until before marrying but late enough where it isn't a game changer, but I still would likely pursue a prenup.

My mortgage balance is currently about $190k, with a 4% interest rate.

I've thought about doing the traditional 401k and think I may next year to get some current year tax savings but am still undecided.

Also, can anyone comment on liability/umbrella insurance? Is this something that I should pursue? I'm not sure at what NW people typically pursue it. I don't have any dependents (no need for life insurance) so maybe it is not necessary but just thought I'd ask.

Thanks for all the input.

 

[Walt34]

Also, can anyone comment on liability/umbrella insurance? Is this something that I should pursue? I'm not sure at what NW people typically pursue it. I don't have any dependents (no need for life insurance) so maybe it is not necessary but just thought I'd ask.

Yes, by all means buy an umbrella policy. It is cheap insurance and when the insurance company is potentially on the hook for a million or more that will get their (and their lawyers!) full attention. You have a high enough income that if you were sued you could be looking at years of making very high payments.

And really, it takes only a second or so of inattention when driving to be at fault in a serious car accident that might put someone in a wheelchair or worse. Or someone falls down the stairs in your house, and the possibilities go on forever.

And you might also want to look into disability insurance. This provides an income if you become disabled.

 

[Henman004]

Thanks for all the input.

I have never gotten serious enough to talk finances. If things do get serious enough, I likely would wait to talk about finances until we are already serious/have discovered our own attractions in one another, aside from $$. My goal would be to not disclose my wealth until before marrying but late enough where it isn't a game changer, but I still would likely pursue a prenup.

Thanks for all the input.

+1 on the prenup; also, on waiting until the right time to disclose your true wealth.

However, considering finances are one of the leading causes of divorce, I would recommend that you DO NOT wait until things are very serious to have that discussion. Start looking for indicators early on, and don't be afraid to ask questions in a non-threatening way. There are plenty of methods you can use to gauge someone's attitudes toward money, spending, saving, debt, and credit, without inquiring in an offensive manner.

 

[Walt34]

However, considering finances are one of the leading causes of divorce, I would recommend that you DO NOT wait until things are very serious to have that discussion. Start looking for indicators early on, and don't be afraid to ask questions in a non-threatening way.

By all means do that!

My first marriage ended because of finances, or at least that was the major symptom. Underlying that, I later figured out, was her immaturity and irresponsibility. There was always credit card debt, a struggle to pay routine bills on time and the like. The only time I was ever late with a rent payment, late on a house payment, bounced a check, received a telephone call about an overdue bill, or routinely had to "play the float" to pay basic utilities on time was during that five years.

For example, when engaged we moved into an apartment. The apartment manager said that it was my credit rating that allowed us to move in. When I later asked the bride-to-be about that she told me that she had not paid some cc bills on time because she didn't have the money so she just skipped the payments.

I didn't see that as the huge red flag it was because we both had pretty good incomes for our ages and I figured with the household income doubling there shouldn't be any money concerns at all. I had no idea how naive that thinking was! BTW, I was 27 at the time.

I learned the lesson well. The next time when dating DW-to-be I simply watched very carefully how she handled her money, credit card use (very little and paid off every month) and the like.

 

[RobbieB]

When I was 27 I had bought my first property (that 900 sq-ft townhouse in Huntington Beach that I shouldn't have sold), was living with my wife to be and got laid off from my first job out of school (but got another in short order) and my net worth was about 15 grand.

You are way ahead of me even considering inflation -

 

[younginvestor2013]

How does one go about getting a personal umbrella policy? Does it just cover against any sort of law suit against you for anything whatsoever? I am pretty clueless on them, their costs, what to look for, etc.

 

[RobbieB]

It's "excess" insurance and it's cheap. Just call your agent and they will let you know. You may have to increase your liability limits on house and auto first and that will cost more than the umbrella.

 

[exnavynuke]

How does one go about getting a personal umbrella policy? Does it just cover against any sort of law suit against you for anything whatsoever? I am pretty clueless on them, their costs, what to look for, etc.

Generally people get it through the same company they have all their other insurance policies through. Some companies (like Geico) don't require you to have all of your policies with them however. Most require you to have specific limits for liability on your other policies or set their policy to not cover the amount up to those limits (i.e. if they require a $500k liability on your car insurance, they won't start covering damages until $500k has been paid by the car insurance or you).

They're pretty cheap and cover most potential liabilities you might have on top of typical insurance policy coverage. There was a thread on it a little while back here that might give you some good insights http://www.early-retirement.org/forums/f28/umbrella-liability-policy-83738.html

 

[younginvestor2013]

Thanks for the responses all. Looking into an umbrella policy is on my "to do" list.

I wanted to resurface the idea of maxing out my HSA at my age. I currently have almost $2,000 in there and by the end of January will have about $3,000 in there due to my employer funding $850 in early January. My question is - does it make sense to keep maxing this out for the next few years? If so, I am looking at a balance at year end 2017 of approximately $5,500. Of course, the tax benefits are great, and I can use the funds towards medical expenses whenever necessary in the future, but given that I am young and healthy (knock on wood), my medical expenses are low. At what HSA balance should I not be so concerned about contributing to it? Guessing I am far from that level....

 

[exnavynuke]

Thanks for the responses all. Looking into an umbrella policy is on my "to do" list.

I wanted to resurface the idea of maxing out my HSA at my age. I currently have almost $2,000 in there and by the end of January will have about $3,000 in there due to my employer funding $850 in early January. My question is - does it make sense to keep maxing this out for the next few years? If so, I am looking at a balance at year end 2017 of approximately $5,500. Of course, the tax benefits are great, and I can use the funds towards medical expenses whenever necessary in the future, but given that I am young and healthy (knock on wood), my medical expenses are low. At what HSA balance should I not be so concerned about contributing to it? Guessing I am far from that level....

If you've got enough to cover your out of pocket maximums in it already (I don't know your medical plan details), then I'd max out your other tax-advantaged accounts first. Once they're maxed out, then I'd generally recommend maxing out your HSA as well for long-term growth (assuming you have reasonable investment options in your HSA as most do).

 

[younginvestor2013]

My deductible is $3,000. By the end of January, I will have about $3,000 in there.

Does it make sense then to not fund my HSA additionally?

For those of you who retired at a young age, can anyone give estimates on how much reasonable health care insurance costs each year? Just trying to gauge how much of an annual spend I'd be looking at.

It would be nice, if say, in 10 years I had $50k in an HSA. That would presumably cover quite a few years of health care premiums/costs.

 

[NgineER]

There are only certain circumstances that you can use the HSA to pay for your premiums. Do a quick search on it.