Dreaming - need a review

[ER-Dreamer]

Hi everyone, another ER dreamer here. I'm 31, happily married with one small child, with plans to someday have a second child. We are a single income family of ~$100k/yr. I like to think of retiring at age 50. Our annual plan has been to first max out the 401K, Roths, and the HSA. Anything extra goes to the taxable brokerage while keeping a minimum amount in the cash savings.

My company does not offer a traditional retirement, but does match the 401K a few % and provides a once per year savings contribution into the 401K. Our investments are in various mutual funds, currently at 65% domestic, 20% foreign, and 15% bonds. I am considering reallocating to 60/25/15 to minimize some risk.

Savings,
401K - $320k
My RothIRA - $40k
Wife's RothIRA - $45k
Taxable brokerage - $20k
Cash savings - $10k
HSA - $30k
529 - $5k

Debts,
House - $115k @~3.2% APR ($65k equity)
Car - $11k @~1.2% APR

We are going to have to pull from the brokerage, cash account, and IRA contributions if I retire at 50, so my focus will be to keep funding these in the meantime. As my income continues to increase, so will the amount saved in the brokerage. I don't see a need to quickly pay off the house and car since the interest rates are so low. Life insurance is company sponsored, so as long as I remain employed I feel my family will be secure.

My company offers a Roth 401K. Should we consider that instead of the traditional 401K, at least a mix%?

Should our investment strategy be more aggressive?

Are there things that we are overlooking?

 

[exnavynuke]

For your 401k, at your income level, I'd be either 100% Roth 401k OR a 50/50 split depending upon your opinions on taxes in the future (keep the system the same for the next 60 years = go all Roth, changes likely then I'd hedge and split it 50/50). Keep in mind it takes more of your gross pay to max out the Roth 401k than a traditional, but at the same time you do get the after-tax contribution availability of the Roth if you roll it over (subject to the 5 year rule) to help fund the "early" portion of early retirement.

If you're not using your brokerage and/or Roth IRAs as your emergency savings, you may need to consider bumping up the savings level a bit. Some people (myself included) don't mind using investments as our emergency savings as long as the investments are well above our desired emergency savings levels.

If you continue to save/invest enough to max out your 401k and Roth accounts, plus put some in your taxable account, I don't see any reason you shouldn't be able to have enough to retire in 19 years.

Regarding your AA, "domestic" could be very very aggressive (all in small caps) or could be in a balanced mix or could be all large cap, same with foreign etc. "Domestic/foreign/bonds" isn't very descriptive of your AA so I can't say anything other than 85/15 equity/bond is a bit more conservative than I'd be at your age (I was 95%+ equities through my 30's) but I also have no idea about your risk tolerance.

 

[Scuba]

I would go 90-100% equities in retirement accounts at your age. You're giving up a lot of potential appreciation with a lower equity allocation. You have plenty of time to ride out any market declines, unless you just can't sleep at night seeing a volatile portfolio balance.

 

[NgineER]

I applaud you for having achieved a net worth of half a million at your age.

I would recommend balancing your 401(k) and Roth 401(k) to stay in the 15% tax bracket, if you retire at 50, you should have plenty of time to rebalance any imbalance in traditional versus Roth accounts. I would not go all out and risk twin paying 25% in taxes know if your taxes will be lower in retirement.
I also echo scuba above and recommend a higher fraction in equities at your age.
Also do you look into your life insurance policy through work, I found it much less expensive to get my own term insurance outside of work and got a much larger amount and the max was at work.
If I was to get life insurance again, I would get five or six policies with different durations. As you grow older, the need will be less and less for your income to support your family so I would get five or six different policies in duration increments of five years. The first one would be five years for 500,000, the second one 10 years were 500,000, the third one or 15 years for 500,000 and so on until you get to your FI number. They would all start at the same time, so you would have the maximum amount the first five years and for every five years to drop off half million in coverage, I think this would be a lot less expensive than what your current option through work is. My work option maxes out at seven times my annual salary, which is not sufficient.
I would also investigate to see if your work allows for after-tax contributions to your 401(k), these can be rolled over to Rob I have a race and there is no upper limit other than your company limit and the $54,000.
Roth contributions can be drawn for use as emergency funding, college funding and is available to you before age 59.5.

 

[OldShooter]

... Our investments are in various mutual funds ... /QUOTE]Hopefully low-cost index or passive funds. Actively managed funds are statistically guaranteed to reduce your yields over the long term. They could easily cost you 2% in fees and costs. If you believe a number like 8% for long term nominal equity growth, this is 25% of your gains.

 

[MooreBonds]

For your 401k, at your income level, I'd be either 100% Roth 401k OR a 50/50 split depending upon your opinions on taxes in the future (keep the system the same for the next 60 years = go all Roth, changes likely then I'd hedge and split it 50/50).

Because I'm a big proponent of diversification, unless you're solidly in one of the book-end income tax brackets now and expect to be in a much different one when retired, I'd second the 50/50 split of the ROTH and regular 401k. Not only because of income taxes, but also asset taxes (I.e. the ROTH IRA becoming taxable).

Don't think you would ever see double income taxation on a ROTH IRA? Then explain how up to 85% of your social security payments are taxable, when 35% of it was already taxed when those people were working! If politicians can get away with double-taxing the sacred cow of social security, they can get away with double-taxing anything - including a ROTH IRA.

 

[Golden sunsets]

With a single income family, your emergency fund becomes more important. I would shoot for 6 months of expenses in that account. You are doing very well asset wise for one who only earns 100k per year. How did you accumulate so much? Did your wife contribute to the net worth with her salary pre children? If so, does she expect to reenter the work force at some point? You will have a much better chance of reaching your goal of early retirement with a two income household. And I would echo the suggestion of using a split strategy between traditional 401K and Roth 401k.


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[DrRoy]

Hopefully low-cost index or passive funds. Actively managed funds are statistically guaranteed to reduce your yields over the long term. They could easily cost you 2% in fees and costs. If you believe a number like 8% for long term nominal equity growth, this is 25% of your gains.

+1 Max the Roth. You are doing quite well. Carry on.

 

[Cassius King]

Okay, and this is why this site is awesome, educate me on the difference between a Regular Roth and a Roth 401k? I have a Roth 401k available to me at work, but have been maxing my regular 401k and contributing to a Roth outside my plan. Is there a benefit to me of using my work Roth 401k over my regular Roth I have setup at Schwab? Thanks!

 

[phil70]

Okay, and this is why this site is awesome, educate me on the difference between a Regular Roth and a Roth 401k? I have a Roth 401k available to me at work, but have been maxing my regular 401k and contributing to a Roth outside my plan. Is there a benefit to me of using my work Roth 401k over my regular Roth I have setup at Schwab? Thanks!

One quirk is that if you leave your Roth 401K to your descendants, they have to continue RMDs based on their ages. If you leave a Roth IRA to your descendants, there are no RMDs. Sort of a loophole for the Roth IRA as a way to pass wealth to the next generation. You might want to do some more research on that one. If I'm wrong, I'd be glad to find out.

There are the other obvious differences as well: smaller caps on IRA contributions, income based phase-outs on IRAs, vs. no income phase-out for 401ks.

 

[jcnyc]

I am your age and my 401k is 100% in equities, 50/50 foreign/domestic. Among the domestic it is mostly in Healthcare+tech etfs.

Have about 20k in my Roth only because i couldn't contribute to it anymore since about 5 years ago. All high yielding REITS in that account for the hell of it.

Most of my money is in my brokerage account, which again is 100% in equities. Mostly in tech, and a few divi aristocrats (T, MMM, TGT, WMT, etc.)

Depending on how early you want to retire, I don't see many advantages of the Roth401k. Not only are the investments prohibitive, but I don't want to wait until 59 to access it.