Am I focusing too much $$ on retirement?

[navydavey]

I've recently been in contact with some financial advisers, and they've noted that I'm putting a lot into retirement accounts (about 34% of my take-home pay). I told them that I've been considering early retirement, or at least would like to have the option when I reach that age. But it did get me thinking, am I putting too much money into retirement?

Bio:
I am currently 24, a renter (600/mo), making about 50k gross (raise to 62k in May). I have 8 months savings in an emergency fund (20k), max out my Roth IRA (5500 for 2013), contribute $550/mo to the TSP (military 401k, no matching), and have been holding the leftovers (a few hundred per month) in a checking account, or spending it on my newly acquired girlfriend.

I'm in the military and anticipate moving for much of my career. I go back and forth on home ownership vs renting, so it has been difficult to determine if I should be saving for a down payment on a home. I have recently felt that the 8 month emergency fund might be a little excessive, as it is pretty unlikely that I'll suddenly find myself without income.

I guess my real decision is, should I cut back on the TSP contributions and instead use those funds for more short/mid-term investments (future home down payment, a ring some day, future child's education) until my income reaches the 25% tax bracket, at which point I might consider putting more into the TSP to reduce taxable income?

Accounts:

Retirement
Roth - 24k
TSP - 7k

Short/Midterm
30k, mostly mutual funds

Cash
22k, low interest savings/checking accts

Debt
25k @ 0.5% interest (USAA career starter loan, 600/mo payment)


Thanks in advance, and please let me know if I need to clarify anything.

 

[UserRequested]

Hi NaveyDavey

Good head on your shoulders for a 24 year old. When I was your age, it was party on weekends and no savings. Mind you I was on a [piss poor salary then too.
You have emergency funds which is excellent. You also have a pretty secure job in the navy. So if you are concerned about home ownership, you may want to look to purchase a good investment property with solid rental returns, so that at least you have a foot in real estate. That way, you have a hedge against property price inflation.

 

[Midpack]

I've recently been in contact with some financial advisers, and they've noted that I'm putting a lot into retirement accounts (about 34% of my take-home pay). I told them that I've been considering early retirement, or at least would like to have the option when I reach that age. But it did get me thinking, am I putting too much money into retirement?

Congrats!

There is no "right answer" of course, but IMO you've answered your own question, underlined above. You are not saving for (early) retirement (RE), you are saving to achieve financial independence (FI). One does not follow the other necessarily, though some people act as though they do. Retiring to something better (whatever that may be) is a good goal, retiring to escape work/career is not. While you can indeed retire too soon (it's not simply a $ decision), you can't achieve FI too soon.

Achieving FI is liberating, even if you continue to work. I could feel a real difference reaching FI while I was still working, it took some pressure off, and made the last 5-10 years working a little easier and more enjoyable. FI opens up all sorts of options, early retirement is but one option.

Beyond life, love, laughter, family, friends, faith - it's hard to think of a greater gift you can give yourself than FI.

And like the above member, you're smart to start now. I was about 30 before I got serious about saving & investing toward FI, and ramped up even more at age 40. Your early start will serve you well, just find your balance between living for now and a bright future. Don't deprive yourself entirely, but the more you LBYM, the sooner the options open up for you. The right balance for you, is unique to you, known only to you.

Best of luck, and thanks for your military service.

 

[Candy83]

I've recently been in contact with some financial advisers, and they've noted that I'm putting a lot into retirement accounts (about 34% of my take-home pay). I told them that I've been considering early retirement, or at least would like to have the option when I reach that age. But it did get me thinking, am I putting too much money into retirement? . . .

You wouldn't be doing it if you couldn't, correct? For the time being, it's good. It doesn't mean it will always be that way. Especially now that you have a girlfriend ... and even more especially if it leads to bigger things. So, you are doing very well.

I guess my real decision is, should I cut back on the TSP contributions and instead use those funds for more short/mid-term investments (future home down payment, a ring some day, future child's education) until my income reaches the 25% tax bracket, at which point I might consider putting more into the TSP to reduce taxable income?

Accounts:

Retirement
Roth - 24k
TSP - 7k

Short/Midterm
30k, mostly mutual funds

Cash
22k, low interest savings/checking accts

Debt
25k @ 0.5% interest (USAA career starter loan, 600/mo payment)


Thanks in advance, and please let me know if I need to clarify anything.

I can't advise you on too much. The fact that you are contributing is great. The fact that you have socked away so much is terrific. The fact that you are doing it early in adult life (whereas I've known people who didn't engage in contributing so much until they were past their 40s) has a favorable longterm impact. Great potential.

As for eight month's worth of liquid ... I don't buy into that. If you can build it further and have closer to 16 months' worth, that would be even better. If that takes considerably longer, so be it. But don't figure that eight months' worth is a number one, including a financial expert, would actually suffice.

 

[rodi]

Compounding is the key... so early contributions will make it easier to RE when you get a little further along your career path.

The Financial advisors might have been looking to divert some of that TSP money to something that would be lucrative to *them*... They can't make money on you if you're saving in the TSP.

 

[RunningBum]

Good question. I wouldn't defer income that is in the 15% bracket if there is no match, though it's not clear to me that you aren't above 15% now. Maybe not by the time you take all your deductions and deferrals. Some people have found that they deferred so much income that they found they were in a higher tax bracket when they hit RMDs. It certainly doesn't make sense to defer 15% income to pay 25% later.

I would certainly max out a Roth IRA assuming you can, since it works well for retirement and also has flexibility for things like buying a house.

Retirement income doesn't have to be in a retirement account. You can also save for early retirement in a taxable account and think long-term for your investments. This accounts certainly help bridge the gap between ER and when you start receiving SS, pensions, tapping 401Ks and IRAs, etc. I'm not really familiar with military pensions and plans, so I'll keep it in general terms.

 

[eridanus]

Saving 34% will still take you over 25 years to be FI (1). I'd keep at it and bank 50% of any raises/pay increases as well.


(1) The Shockingly Simple Math Behind Early Retirement | Mr. Money Mustache

 

[HawkeyeNFO]

My take is different. I recommend max out the Roth IRA, then continue to put as much $$$ as possible into the TSP. Why? Because the TSP has about the lowest cost of any investment vehicle out there. If you can put the money in while you're deployed in a tax-free zone, put in as much as you can afford.

Now, on to the emergency fund. You don't need one. What is required is ACCESS to money if necessary, not money itself. You are single, renting, and have a very stable and predictable paycheck (revisit if one of those 3 changes). Even if you get sick for several weeks, your income won't change. You could always stop contributing to the IRA or TSP if necessary. Keeping that money in the bank is losing against inflation, and you're only 24, so you can afford to take a risk right now.

 

[Animorph]

Putting too much into "retirement", no. But perhaps you are putting too much in retirement accounts. The Roth IRA should absolutely be maxed out. You can access your contributions from the Roth IRA anytime. But the TSP has withdrawal restrictions based on age (right? I don't use it). If you put everything there, you may be FI but unable to easily access your money. So your advisors may be saying to put some of your savings into a taxable account. If you're in the 15% tax bracket, a taxable account is not much less tax efficient than a pre-tax retirement account. When you get into the 25% tax bracket you'll probably want to put enough into TSP to avoid it a little bit longer.

 

[navydavey]

Thanks for the support and kind words. Especially Midpack, who helped separate FI and RE in my mind (something I'd assumed always went hand in hand). HawekeyeNFO, nope, actually about to put on O-2 which equates to about a $1k/mo pay raise for me. Can't wait till the big O-3 paycheck though.

Yes, I am in the 15% bracket and will remain so for at least the next few years. One of the best parts about military pay is that about 30% of it is non-taxable, and I am able to selectively contribute to my TSP from the taxable portions of my income. I'm also a PA state resident on active duty outside the commonwealth, so I don't pay state income tax. Effective tax rate is about 9%.

Animorph, you have hit at what I'm really wondering. The worry I have is that I'll reach FI mid 40's, but won't be able to access all this money in retirement accounts until i'm 60 years old.

If that is the case, do you (the community) think it would be advisable to
1. Contribute less to the TSP and put the difference into a some kind of taxable equities
2. Leave it how it is now, and when I get promoted (extra 1k), put that money into taxable equities
3. Stop donating to the TSP and let my $7k grow until I enter the 25% bracket, then start donating again to lower my taxes
4. Withdraw everything and build a doomsday bunker
5. None of the above

 

[ERhoosier]

Agree with Midpack. FI is liberating whether you ER or not.
The rest is all understanding the specific details of specific savings programs (inc retirement accounts).

 

[jclarksnakes]

Thanks for the support and kind words. Especially Midpack, who helped separate FI and RE in my mind (something I'd assumed always went hand in hand). HawekeyeNFO, nope, actually about to put on O-2 which equates to about a $1k/mo pay raise for me. Can't wait till the big O-3 paycheck though.

Yes, I am in the 15% bracket and will remain so for at least the next few years. One of the best parts about military pay is that about 30% of it is non-taxable, and I am able to selectively contribute to my TSP from the taxable portions of my income. I'm also a PA state resident on active duty outside the commonwealth, so I don't pay state income tax. Effective tax rate is about 9%.

Animorph, you have hit at what I'm really wondering. The worry I have is that I'll reach FI mid 40's, but won't be able to access all this money in retirement accounts until i'm 60 years old.

If that is the case, do you (the community) think it would be advisable to
1. Contribute less to the TSP and put the difference into a some kind of taxable equities
2. Leave it how it is now, and when I get promoted (extra 1k), put that money into taxable equities
3. Stop donating to the TSP and let my $7k grow until I enter the 25% bracket, then start donating again to lower my taxes
4. Withdraw everything and build a doomsday bunker
5. None of the above

Choice number 2 is close to what I think you should do. Instead of putting all of the extra 1K into taxable equities put some of it into a Roth IRA.

 

[bondi688]

You are not saving too much for your future, wait till your relationship developed and/or you have children, then it will be hard for you to save. Nonetheless, you should not completely or in an unreasonable extreme way sacrifice the present to feed the future. A balanced approach is what is needed for everything in life.

 

[Midpack]

Animorph, you have hit at what I'm really wondering. The worry I have is that I'll reach FI mid 40's, but won't be able to access all this money in retirement accounts until i'm 60 years old.

If that is the case, do you (the community) think it would be advisable to
1. Contribute less to the TSP and put the difference into a some kind of taxable equities
2. Leave it how it is now, and when I get promoted (extra 1k), put that money into taxable equities
3. Stop donating to the TSP and let my $7k grow until I enter the 25% bracket, then start donating again to lower my taxes
4. Withdraw everything and build a doomsday bunker
5. None of the above

It's a good question and you're right to think about it now, but only you can decide how much you want tied up in retirement accounts, and how much you want to have access to without penalty in your mid-40's. Once you know that, you're clearly capable of making the placement decisions yourself (deferred vs taxable). I didn't retire until age 57 (even though we were arguably FI by age 50, there's that FI vs RE question again...), so waiting a few years to access deferred accounts wasn't a big issue. And I could never stuff enough in those accounts anyway, when I retired my $ was about 2/3rds taxable/accessible.

That's my take, maybe others have more cut & dried or useful guidance.

And it's a question I would never even have thought to ask at your age. You're way ahead of most of your peers. Congrats!

 

[martyp]

You are not saving too much for your future, wait till your relationship developed and/or you have children, then it will be hard for you to save. Nonetheless, you should not completely or in an unreasonable extreme way sacrifice the present to feed the future. A balanced approach is what is needed for everything in life.

This is good advice as is everything Midpack has said. And of course starting to save early to take advantage of compounding is ideal.

However, I worry about people who are thinking about retirement while they are in their 20's because they don't like or want to work. I think young people should put equal or more time into finding meaningful employment. Find something to do that you love. The next 20-30 yrs is a long time to just be saving for retirement. Balance.

 

[ShortInSeattle]

This is good advice as is everything Midpack has said. And of course starting to save early to take advantage of compounding is ideal.

However, I worry about people who are thinking about retirement while they are in their 20's because they don't like or want to work. I think young people should put equal or more time into finding meaningful employment. Find something to do that you love. The next 20-30 yrs is a long time to just be saving for retirement. Balance.

I started retirement planning at 20 and it hasn't dampened my enthusiasm for work. It did however help hubby and I accumulate a nice nest egg by our mid thirties.

Like you said though, it hasn't been an overwhelming part of our attention. Most of our attention has been on enjoying life and our jobs. if I focused only on the fact that we want to retire, I could get unhappy.

SIS

 

[YoungSaver]

I like this idea.

I agree with the sentiment that being mortgage free by retirement sounds appealing. I've broken down my plan into phases, of which mortgage payoff is last on the list.

1. Pay off student loans (done)
2. Build up nest egg for full retirement at 59.5 in tax deferred accounts. (in progress...)
3. Next, build up taxable account to cover gap between ER and age 59.5 (also in progress...)
4. If practical, pay off mortgage as last step to reduce fixed expenses.
5. Begin living off of investment SWR while still working to test the system while "slowly backing out" of the jobs.

SIS

 

[iam21177]

I don't think you're focusing on it too much! Now is the time!

 

[laurence]

Could you tell me more about that starter loan? What's up with that?

It's a great interest rate but if you are debating between more money into an emergency savings account and paying that off, despite the low interest I'd lean towards the loan. I suspect the savings account is about the same and if you are ever at a loss for income that loan payment is mandatory.

But I'd look into a rental property before either choice above. 8 months is plenty when you are active duty - a paycheck doesn't get much more steady than that.

 

[Sesq]

Stay the course and stay out of real estate (rental or otherwise) while you are active duty and moving around a lot. Way too much transaction costs in real estate.

I really like your option 2.

 

[tkopel]

You should also look into the Roth TSP that was just made available this past OCT. you can put up to the $17500 limit between the Roth and the traditional TSP. this way you will benefit from your current low tax bracket. This does not affect your contribution to a regular Roth also. Save as much as you can while you can so things like children/marriage/change in careers in the future don't derail your goals.
Good luck, you are making a great start!