29 and looking for advice to get a leg up on ER

[EvrClrx311]

Hi, my name is Evr (29) and I live in the suburbs of D.C. I married young 3 weeks after we graduated from college. DW is a year behind me in age. We have two children (3yrs and newborn) and plan for one more within the next couple years figuring nothing will keep us on our toes like being outnumbered at home .

JOB (110K + benefits)
I am an Engineer and have a very stable position and good opportunity for job growth. My base salary started at 75K (2005) out of school and has risen steadily to 110K (today). I typically get another $15,000-35,000 on top of that in bonuses, overtime and fringe payouts. I've worked for the same company since graduation and although I am not naive enough to think I'll stay with them for an entire career (the average engineer today turns over about every couple years) I am happy and can see myself staying put for at least another 5 years.

DW used to work, but currently stays at home with our kids. Our plan is to have her at home until our 3rd is in kindergarten. Currently we're entertaining the idea of starting a home business that she can manage part time in an area she loves, education.

RETIREMENT ($153,000)
I am honestly ashamed reading others posts about how they have grown their retirement nest eggs, because although I think we're doing extremely well there, it was forced on us rather than something we had any control over. My company had an outstanding retirement package when I started working for them, they set aside 20% on top of employees salaries into their 401(K). Starting about a year ago they dropped that to 9% and now match an additional 5% on 6%. So for the first time in my career I'm finally contributing something towards my retirement, but I've had the luxury of 20% being socked away by default all this time.

My main question below relates more specifically to 401K vs Roth since just last year I starting putting a little bit into a Roth.

OTHER SAVINGS ($19,500 kids college, $12,000 emergency fund, $11,000 taxable investments)
We are putting away $250 a month and $3,000 up front for every child we have. I have decided not to take advantage of 529 plans because I don't like losing that control over the investments, and knowing if my child gets a scholarship I can't just use it to add to my own savings... but we have all of that money being earmarked for our kids' education. Currently the value is $19,500 and is invested according to the acceptable 18 year risk (I don't mind how wild the ride is if it means a better return in the end).

Emergency fund could definitely use some work because it was just devoured by refinance last summer to drop our interest rate from 6.25% down to 4.50%. It's currently sitting at about $12,000 and we hope to get it to $25,000 by next summer.

Other investments are at $11,000 and were also tapped for the refinance. Looking back I wish I had saved the cash instead of reducing our rate. Was nice to see $100,000 in savings/emergency/investments outside of our retirement - but that underwater thing on the house was just getting too emotionally draining (we put down close to $75,000 to make that refinance possible... maybe it wasn't worth the 1.75% rate drop).

EDUCATION
I'm currently enrolled in a master program in Information Security (basically a MS in Hacking), with 3 classes left to complete. I plan down the line to apply for a PhD program in either Physics or another computer related field (the difference between something I LOVE and something I just enjoy). That will probably take a long time with how busy life is these days.

HOME ($375,000 mortgage, $425,000 value)
We bought a house at the absolute worst time, summer of 2005. Back then those foolish lenders (actually, were they the foolish ones or us?) approved us to build a half million dollar townhouse on stated income while DW and I were still in school. We got married 21 days after graduating and signed/moved into our new house 3 days after that. Luckily we had the opportunity to refinance out of the ARM 6 months later when the house appraised for (or at least they told us) 20% higher than what we bought it for. Phew...dodged that bullet. I can see now how foolish a decision that was, but at the time I (we rather) didn't know any better - "you're stupid not to buy a house right now, if possible"

As I mentioned above, we did one more refinance last summer to get our rate down from 6.25 to 4.50. That cost us tying $75,000 into equity, but did reduce our monthly payments by about $800 and a lot less money is being thrown towards interest.

Currently the house situation is in a much more reasonable state, our mortgage is approx $375K and the house is worth $425K (huge improvement compared to just a year ago when we owed $475,000 and the house was worth $390,000. It is due to be paid off when we are in our mid to late 40s, although I don't expect we'll stay put all that time. Our goal is to find that dream home for a bargain over the next 10 years that we can move into and pay down prior to reaching 50.

OTHER DEBT
We have one car completely paid off that I'm driving and plan to drive until it dies (8-15 years down the road). The other was a recent purchase that I think we went a little overboard on - a new 2012 Odyssey Touring Elite (price tag around $42,000). We're paying that off over the next 5 years at 1.75% and like the Accord, plan to keep it until it dies - or our kids get to HS age, whichever comes first.

No credit card debt. Never have, never will...

QUESTION
Last year I read a few articles about 401K vs Roth for younger investors. They almost all implied that you need to take advantage of Roth while your income and taxes are low.

I have the ability to switch the 6% I'm putting towards my 401K (that is matched) into a Roth 401K. Is that a good idea in my current situation?

By my calculation, if I continue setting aside 20% a year I'm going to be well into the millions by the time I reach 50 for the 401K... wouldn't it be better to unload the taxes now?

I'm also looking for advice on how not to lose this opportunity to get a leg up on retirement. I know that kids and cars are money pits, and that large houses (particular newly built ones) aren't the best of investments.

I think the main part we need help on is trying to Live Below Our Means. I find that we stretch ourselves thin financially (avoiding the major red flags, but CC debt) on our regular income, and have only been able to build savings through unconventional means (ie: $10,000 fringe payout going straight to emergency fund, $15,000 bonus going straight towards taxable savings, $8,000 tax refund that I've allowed to get abnormally high... on purpose... goes into savings.) Seems the only time we save is when we receive these huge amounts of money all at once. Ironically, even the $500 a month we're putting into the self appointed "college fund" is being stolen from the taxable investment account and shifted over to the fund I've labeled "EF" for education fund... which means, don't touch this ever, even for a refinance .

Its scarey to think that if we had those cash amounts coming in monthly rolled into our income, that it would be spent along with everything else and we'd really be living no different - might have a few more flashy toys, but nothing to show for it down the line. Funny how it disappears without a trace when it drips into the checking account like that. Maybe I need to change my withholding to a number 5 ticks higher (at least we are very good at not spending what isn't there... as in never getting out of control and carrying a balance on the CC)

Longer term, I think our time to really buckle down and surge towards that $1,000,000 mark will be as soon as DW starts working again. I'd like to see if it might be possible to start sooner... I hate knowing that $5,000 saved today will mean who knows how much I don't need to save later... or how many years more I'll have to work to reach that magic number that works for us.

Thanks for reading!

 

[EvrClrx311]

correcting an error as I re-read my post:

"We are putting away $250 a year and $3,000 up front for every child we have"

I meant $250 a month (so we're at $500 a month now with 2 kids)

 

[GrayHare]

Roth 401k vs. traditional 401K: go for the Roth. After decades of compounding, the Roth's tax free distributions will be sweet.

 

[MichaelB]

Hi Evr and welcome to the forum. You do indeed have a m leg up and should feel good about that. Starting out and raising a family is not easy, but you are on the right track. Regarding saving the bonus but not any of the monthly income, there is nothing wrong with that as long as you don't start making exceptions or looking for reasons to divert bonus money to reduce other current savings.
As to Roth vs pre-tax savings, you currently have a lower rate because your deductions and exemptions are high. This will not last forever, and hopefully your income will grow as well. In other words, soon you will find yourself in a higher tax bracket and the Roth opportunity will no longer be there, so take advantage of it while you can.

 

[EvrClrx311]

Thanks for the input.

I'm attempting to think through this, and please correct anything I might be wrong about.

My current taxable income, after deductions is in the neighborhood of $100,000 putting it in the tax bracket of 25% on top (for $69,000 and up).

Historically speaking tax rates are at an all time low (Plus for Roth)... but the trend is down (Plus for Traditional)

Current conventional wisdom is that our country is getting itself into a financial mess and higher taxes are coming probably (Plus for Roth)

My retirement, in today's dollars, would need to be approximately $2,000,000 to safely pull $90,000 a year and afford the same lifestyle we have right now in retirement... if I choose the retire early path, I'm not sure 2 million is something I'll reach, but actually that is a moot point because I can't pull from the account until I reach some much later age. Correct?

Odds are, my retirement will exceed that $2,000,000 million amount in todays dollars on its current path... before I start pulling from it (Plus for Roth)

Is there any reason to believe the government, in a financial disaster, would renege on its promise to not tax twice a Roth account... could they ever determine a person who did awfully well for themselves deserves to pay a 'fairer' share at the future tax rate that might be higher?

That is my main fear for putting money into a Roth... not paying tax now is a guarantee benefit... a promise for the future seems like something the government has done before and taken away.

Anyone care to weigh in on that? Are my fears completely insane... I'd hope so - Roth does seem like the better deal for me now.

 

[MichaelB]

Is there any reason to believe the government, in a financial disaster, would renege on its promise to not tax twice a Roth account... could they ever determine a person who did awfully well for themselves deserves to pay a 'fairer' share at the future tax rate that might be higher?

That is my main fear for putting money into a Roth... not paying tax now is a guarantee benefit... a promise for the future seems like something the government has done before and taken away.

Anyone care to weigh in on that? Are my fears completely insane... I'd hope so - Roth does seem like the better deal for me now.

It is impossible to know what will happen, but tax authorities are more likely to apply taxes to income that has not been taxed at all and then increase rates on income that is being taxed at low rates before taxing a second time income that has already been taxed.

My advice to my adult children is to max the Roths.

 

[GrayHare]

There exist various ways to early-withdraw funds from retirement plans, but all come with various strings attached.

Can the rules/laws change? Sure, but since it's impossible to know in what way they'll change, IMO you proceed on the assumption they'll remain largely the same. It's clear Medicare entitlements are overpromised, so that's where the bulk of changes will come, such as via reduced coverage, means testing, taxation of benefits, inflation, or a combination.

 

[arky]

Don't drive yourself crazy worrying about future tax issues. Make a decision and go with it. If I were you I would not choose between a 401K and a Roth IRA, I would do both. The contribution limits on a Roth IRA are so low, think of it as a bonus savings plan.

 

[meekie]

My retirement, in today's dollars, would need to be approximately $2,000,000 to safely pull $90,000 a year and afford the same lifestyle we have right now in retirement... if I choose the retire early path, I'm not sure 2 million is something I'll reach, but actually that is a moot point because I can't pull from the account until I reach some much later age. Correct?

Mostly. You can do a 72t, which you can get the money without a penalty by taking equal payments. I wouldn't worry about that too much at this point. Put as much as you can into the 401k. Once your wife starts working again, you'll probably have more opportunities to put money into savings that will be easier to get to.

Is there any reason to believe the government, in a financial disaster, would renege on its promise to not tax twice a Roth account... could they ever determine a person who did awfully well for themselves deserves to pay a 'fairer' share at the future tax rate that might be higher?

I think it's possible. Hopefully not, but I don't think you can count on it being guaranteed. Especially since we're looking so far into the future.

I don't know about Roth 401k vs regular 401k, it's actually something I need to look at myself. You should consider contributing to a Roth IRA while you can, you can withdraw your contributions to it, which makes it a good place to get started on the money you'll need for ER.

 

[EvrClrx311]

Thanks for helping me think through this. I guess it makes the most sense to contribute the 6% I can into Roth 401k with the other 14% in Traditional 401k, where it is obligated to go. Then I can play the tax card to my own advantage down the road with a portion of my retirement in each.

I've had ideas to start raising the amount I contribute above 6% despite no match existing. I might begin contributing an additional 1% of my raise each year towards that to hopefully get the Roth and Traditional contributions up in the same neighborhood. I certainly never miss the money I don't see (in my checking account).

 

[Mulligan]

EVRCLR- Congrats on your good start. I wont get into investment detail as I am no expert, but there is a gimmick that works well for me and a few of my friends. I only will mention this because it is a gimmick and you mentioned money dissappears once it hits your checking account and you do better with chunks of money at a time. You could consider changing your W-2 to zero on withholdings and recieve a big refund tax time. I know that traditionally it was considered a free loan to govt, but now it is not earning money in bank account anyway. My friend and his wife both did it this past past year filing changing to zero and $75 extra each month, and got back $10k on taxes last week (family income about $100k with 2 kids). They had never been able to control spending to save so they were excited to recieve this amount and now have savings for the year. I do it also, though being single only a little over $5k myself and not as many deductions as he had. It is a pure gimmick, but if you disdain actually budgeting and have good cash flow, it defintiely will give you a big chuck at once!

 

[meekie]

Found some good links on Roth 401k's vs traditional 401k's.
http://en.wikipedia.org/wiki/Roth_401(k)
Traditional vs. Roth 401(k) Calculator

I guess they're actually somewhat rare, although my company has them. Right now, using post tax dollars would cost me quite a bit more, and take my paycheck down to almost nothing. (really, 30% for 401k, 15% for espp, I hardly take home anything now)

You should still look into a ROTH IRA as well, if you can put some more money aside.

Do you currently track your spending? I've had a spreadsheet that I've used for years, although I'm working on switching to Quicken. It's the easiest way to control your costs and starting living below your means.

Your numbers are pretty similar to what mine were at your age, so it's really interesting for me to see what you're doing.

 

[savory]

I noticed there was little conversation on spending. You did not mention tracking your expenses. What helped me was making sure I lived below my means. Tracking expenses (mint or yodlee) and developing a saving target by year (Fidelity retirement/analyzenow.com) are tools I have used.

 

[pb4uski]

First, congratulations on your progress thus far.

At your age with some many "demands" for spending I found it easiest to pre-program my savings out of my paycheck into accounts that I couldn't easily access (like 401k, Roth, savings at a bank across town, etc) because once the money hit my regular checking or savings accounts it would be spent.

Then any windfalls, like bonuses, tax refunds, etc. a portion would be made available for spending and the remainder would be saved and invested. Also, I would typically save about half of any raises I received.

We adjusted our lifestyle to the amount available to us after savings were taken out (the old "pay yourself first").

 

[EvrClrx311]

Good advice and I like the idea of tracking expenses - though I'll admit I've never been very good, or disciplined at it. Is there a program that people recommend more than any other? I did set up an account on Mint a couple years ago, and I check in from time to time as it's a great way to estimate overall net wealth. I never bothered to look too much into the expense tracking side of the site... is it comparable to a program like Quicken?

I'm guessing it would behoove us to invest some time in one of those two programs.

 

[savory]

When I was 29, I used Quicken. It was time consuming because each spending event needed to be entered. Mint or Yodlee are comparable. I started with Mint but it was having trouble talking to my bank. Yodlee has been flawless for me and frankly I think their customer service is superior. Once you spend the short time to set it up, the time you need monthly is minimal. If Mint is working for you, stick with it and just register your 'spending' accounts ( credit cards, checking, etc.). Get the categories right and I expect in less then 60 minutes a month, you will be able to track your expenses. This time is just to make sure things are categorized correctly. Add some time for analysis.

 

[ronocnikral]

Welcome from another fellow 29 yo engineer!! (with just one newborn)

Up until recently, we were maxing out my roth 401k and roth ira's for both DW and me. the wheel fell off the wagon about 6 months ago when I switched j*bs and the roth 401k option is no longer available to me. Also, b/c of a big move, it threw us into the nasty 28% tax bracket and we aren't eligible for a Roth IRA in the traditional sense (will probably have to backdoor it, espeically since we already contributed to DW's). My reasoning for using the roths was - I am young and my working tax bracket is likely to rise and you can save "more" when comparing after tax dollars, assuming your marginal tax rate doesn't change. My plan was eventually to phase out the Roths when I hit my mid 30's (DW is +5 years older). But, that decision has been made for me.

I think tracking expenses is an excellent idea and a great practice. I just use the world's best spreadsheet (created by me). My gut feeling is you may find your emergency savings is a little low for your tolerance (I like 12 months in cash + we are looking at putting some extra in ST bonds). $12k wouldn't let me sleep at night. But, I am extremely conservative when it comes to my emergency fund.

My rules for windfalls was to divide the after tax portion into thirds - 1/3 got saved (cash, roths, taxable accounts etc), 1/3 extra went to pay down the mortgage and the other 1/3 was split between DW and me - either for a vacation or for us to spend on whatever we wanted (DW's portion was not tracked on the spreadsheet, which tremendously helped her enjoy it more).

Good luck, and I look forward to reading your posts.

 

[ronocnikral]

oh, and my state's 529 allows one to pay the taxes due and cash out penalty free if my child dies, receives scholarship etc. I think it is important with multiple kids to have at least a slightly overfunded 529 for the 1st kid if your plan allows you to roll down to another beneficiary. I would keep the money for hopefully the grandchildren if somehow we had a surplus after all the kids run the college gauntlet.

 

[pb4uski]

I have used Quicken for years and find it very easy. Most of my expenses (any item >~20) go on credit cards which are paid off in full every month and the transactions are downloaded into Quicken. Since many of the places I charge are the same, once I categorize something in Quicken it will memorize that category and put future charge to that store in that category. I try to avoid splitting charges if possible. After a few months of doing this about 90% of transactions are pretty much automatically categorized. Since most of my spending is via credit card I don't bother to track my cash spending but just have a single category called "Spending Money" that ATM withdrawals, etc are charged to.