28 looking for advice... late start

[kikechico]

Hello everyone. I been feeling old lately and I been thinking about retirement . I haven't made good choices with my money before and is time to start thinking about my future. I am looking for any input and advice from members of this wonderful site.

My goal is to retire at the age of 45. We are shooting for $30,000 per year during retirement; in our area we can live well with that money.
Currently 28 and will be 29 in January. I am married and have two cats. We are planning on having kids within two years... no more than two .

Currently we have the following assets:
14k cash
1K my 401K
1K her 401K
100-120K home equity

Debt
80k mortgage

No car payments or student loans.

Our current income is of about 116K. I currently make 67k and the wife 49k. We are sending about 3k extra to the mortgage and we are going to start sending 4k on top of the mortgage payment in about 3 months. We are trying to pay off the house as soon as possible and it should be paid of by December of 2014.

My 401k contribution is 4% and my company matches 50% up to 6%. My wife's contribution is 4% and her company matches 50% up to 4%. I also have 1000 shares of a stock option that could be valued at around 25k if the company goes public.

Any advice?

Thanks

[Al in Ohio]

How is it that you each have only $1,000 in you 401k's when your employers match more than that? You need to be slamming those hard each year and getting the maximum match from day 1. Then get up to 15% or more yourself in as few years as possible.

[kikechico]

Quote:

Originally Posted by Al in Ohio How is it that you each have only $1,000 in you 401k's when your employers match more than that? You need to be slamming those hard each year and getting the maximum match from day 1. Then get up to 15% or more yourself in as few years as possible.

The wife just finished her PHD so she just started working and I was eligible for 401K just a few months ago.

thanks

[Jack_Pine]

You will get a lot of good advise here. Welcome and good luck.

For me, I would at least contribute the max that the employers matches into 401. I did not do that until I was in my low 30's...mistake on my part IMHO.

[Al in Ohio]

My path worked pretty well. Start out at say 6% on your end and increase 2% each year thereafter. I was at the legal max in my late twenties, then by 30 I was maxing the Roth as well. The sooner the better. Don't even get used to a full raise. I'd convert half my raises and bonus into investments before Ii could possibly experience the change in after tax income.

[GrayHare]

If the rate on your mortgage is about 4% or less, don't prepay, rather extend it as long as possible: remember you repay with inflated (devalued) dollars. If inflation runs 3%, a 4% mortgage is costing you only 1%, and you can probably earn more than that by investing elsewhere.

Fund your 401k up to the match. A Roth IRA might be worth doing too. $30k/year expenses sounds like you are not planning to fund college for your children.

[kikechico]

Quote:

Originally Posted by Al in Ohio My path worked pretty well. Start out at say 6% on your end and increase 2% each year thereafter. I was at the legal max in my late twenties, then by 30 I was maxing the Roth as well. The sooner the better. Don't even get used to a full raise. I'd convert half my raises and bonus into investments before Ii could possibly experience the change in after tax income.

I just raised my contribution to 6%.

Thanks

Quote:

Originally Posted by GrayHare If the rate on your mortgage is about 4% or less, don't prepay, rather extend it as long as possible: remember you repay with inflated (devalued) dollars. If inflation runs 3%, a 4% mortgage is costing you only 1%, and you can probably earn more than that by investing elsewhere. Fund your 401k up to the match. A Roth IRA might be worth doing too. $30k/year expenses sounds like you are not planning to fund college for your children.

I understand but I just want to have no debt. Like I said it will be paid off next year so I will only miss one year of maxing out my 401K. After I pay my house I will go all in.

An for my kids college, I will pay for a year of college and they can pay the rest. They can do what I did; 2 years of cheap community college and 2 years at the university. The wife got everything paid by scholarships even her PHD.

[jollystomper]

Quote:

Originally Posted by kikechico I understand but I just want to have no debt. Like I said it will be paid off next year so I will only miss one year of maxing out my 401K. After I pay my house I will go all in.

Remember the power of compounding. IMHO you don't want to miss out a year of maxing out your 401K when you are so young. That year will have many years for it to grow. It may not seem like a big deal but I think an extra year of 401K max will benefit you more than delaying paying down the mortgage for a year will hurt you (and you are also getting a tax break on the mortgage).

Also, does your 30K target for retirement account for both the cost of kids and inflation over the next 17 years?

[chasesfish]

You know, I used to have the same opinion that you do, wanted nothing more than to pay my house off. I then realized how little interest is due monthly on a 150k mortgage and see started maxing our 401ks, You can reduce your taxable income by $34,000, which is significant with you and your wife both working.

[kikechico]

Quote:

Originally Posted by jollystomper Remember the power of compounding. IMHO you don't want to miss out a year of maxing out your 401K when you are so young. That year will have many years for it to grow. It may not seem like a big deal but I think an extra year of 401K max will benefit you more than delaying paying down the mortgage for a year will hurt you (and you are also getting a tax break on the mortgage). Also, does your 30K target for retirement account for both the cost of kids and inflation over the next 17 years?

I meant 30k cash today money at retirement, whatever that is in the future....

We probably can live well with 25k

Quote:

Originally Posted by chasesfish You know, I used to have the same opinion that you do, wanted nothing more than to pay my house off. I then realized how little interest is due monthly on a 150k mortgage and see started maxing our 401ks, You can reduce your taxable income by $34,000, which is significant with you and your wife both working.

Understand thanks.

[Rothman]

Your $30k goal would require a fund of about $1M to provide. Congrats on recognizing goal and wanting effort to achieve. If I read correctly you want that in only 15 years so your savings would have to be extraordinary. I agree taking all the match starting tomorrow, max out 401k as soon as possible after. Then back door Roth IRAs to max. If then you still fail and retire at 50 I guess you won't feel too bad, right?

[Al in Ohio]

Quote:

Originally Posted by chasesfish You know, I used to have the same opinion that you do, wanted nothing more than to pay my house off. I then realized how little interest is due monthly on a 150k mortgage and see started maxing our 401ks, You can reduce your taxable income by $34,000, which is significant with you and your wife both working.

I had a 20 year mortgage at 9.5% and it was still more important to max my 401k than to speed up the mortgage payoff. That's when interest earnings were higher. You want both that mi tax credit and to tax defer as much of your income as possible while building early investment wealth that will compound.

[Larro Darro]

Welcome. It has been said, but I will say it again. Max out your 401K's. The mortgage will still be there waiting on you. Anyway, the time to pay extra is at the beginning. Your money will have much more effect then than near the end.

And 28 is younger than most start planning for retirement. You can do it. Maybe not at 45, but still early. Good luck.

[chasesfish]

Just to be clear, you're doing a better job than 95% of people your age, The idea of having a home paid off at 30 is awesome and having a free and clear home is as much of a financial decision as it is a psychological decision.

At $80,000, your interest is probably $3,200/year.

At a 30% marginal income tax rate (25 fed, 5 state), you can defer paying $10,200 in taxes.


I am a couple years older than you, but my compromise was to put my remaining balance on a seven year loan at below 3%. I also have just enough in a regular taxable account to payoff the house if I got a wild hair tomorrow.

[kikechico]

Quote:

Originally Posted by Rothman Your $30k goal would require a fund of about $1M to provide. Congrats on recognizing goal and wanting effort to achieve. If I read correctly you want that in only 15 years so your savings would have to be extraordinary. I agree taking all the match starting tomorrow, max out 401k as soon as possible after. Then back door Roth IRAs to max. If then you still fail and retire at 50 I guess you won't feel too bad, right?

Thank you. Yes we want a 30k combined income. I will be fine working to 50 if I have to.

Quote:

Originally Posted by Larro Darro Welcome. It has been said, but I will say it again. Max out your 401K's. The mortgage will still be there waiting on you. Anyway, the time to pay extra is at the beginning. Your money will have much more effect then than near the end. And 28 is younger than most start planning for retirement. You can do it. Maybe not at 45, but still early. Good luck.

Thanks

Quote:

Originally Posted by chasesfish Just to be clear, you're doing a better job than 95% of people your age, The idea of having a home paid off at 30 is awesome and having a free and clear home is as much of a financial decision as it is a psychological decision. At $80,000, your interest is probably $3,200/year. At a 30% marginal income tax rate (25 fed, 5 state), you can defer paying $10,200 in taxes. I am a couple years older than you, but my compromise was to put my remaining balance on a seven year loan at below 3%. I also have just enough in a regular taxable account to payoff the house if I got a wild hair tomorrow.

I agree 100%. Most of the people that I know around my age do not have a cent. No home equity, huge student loans, no 401k and no savings at all. The people on this site are very blessed and IMO represent a really small percentage of my population.

I decided to max out my 401k and my wife's 401k next year and sent the rest of the money to my mortgage. If I do that by December of 2014 I should have a mortgage of 30k.

Oh and our current mortgage rate is 3.75 for 30 years.

[mountaintosea]

Hey you can do it! In my early 40s I had around 80k. It occurred to me I might want to save for retirement even though I would receive a pension. By the time I was 55 I retired with 1m. So it took about 15 years. I tracked my expenses. Co-workers teased me because they thought I was miserly. But hey I retired at 55 quite suddenly because I was tired of the politics at work. I walked out never to look back. You can do it!

[intent]

This is from a kidless person, so take it with a grain of salt, but if you reconsider having children you could probably significantly increase your chances of making it out by 45.

That's obviously a very personal decision and I'm not suggesting you don't have kids, just throwing it out there as food for thought.

[Milton]

Quote:

Originally Posted by kikechico The people on this site are very blessed and IMO represent a really small percentage of my population.

Luck is very important; but making the decision to become FIRE and accepting the necessary trade offs of LBYM is equally significant. Ultimately we all make choices (see Intent's post immediately above).

[nash031]

Quote:

Originally Posted by kikechico I just raised my contribution to 6%. I understand but I just want to have no debt. Like I said it will be paid off next year so I will only miss one year of maxing out my 401K. After I pay my house I will go all in.

This is a mistake, IMO. Your first goal should be to build a rainy day fund in the event of a job loss, major medical expense, etc. The second goal should be to max your 401Ks. Then if you want to get debt free, that's an honorable goal. Doing steps two and three in reverse is going to cost you money, and the peace of mind isn't worth it in your late 20's. You can't double your savings rate into the tax-deferred account to make up for it and you won't ever get the compounding effect back.

All that said, I wouldn't say you're off to a late start. The bulk of people ten years younger than me don't have the first clue about retirement savings, and many don't own a home. You have more than you think! If you lay out a plan to retire by 45, I bet you can accomplish it!

[chasesfish]

I forgot to add that I think it's entirely possibles you can retire in 15 years. The biggest choice you'll make then is what your spending levels will be relative to the cost of working an additional year,

You've received a lot of advice, but you're already most of the way there - you're living on 30-40% less than you make. Congratulations