Investment Status Check - 34 Years Old

[pb4uski]

A nit, but from a tax efficiency perspective I think you might be better off to keep your bond allocation in the IRA and/or 401k and divert the difference into the Roth.

See Principles of tax-efficient fund placement - Bogleheads

Also, in your planning you should be able to access some of your Roth monies penalty free before you turn 59 1/2 if the 72t is insufficient.

 

[Totoro]

Hi,

Am the same age (34) as you with almost exactly the same net worth (about $780k usd last count). Also single male.

Incidentally, I already did this year what you are planning to do a bit later: gave up 'real work' and taking some time off right. Might not even go back at all, don't know. My spending requirements are a bit lower than the 65k you mentioned, so I can make it work right now.

Anyway: I just want to counterbalance a little bit the enthusiastic market believers here.

Am currently invested about 45% in equities, and 55% in fixed income (high yielding savings accounts and CD ladder mostly).

My target allocation is ultimately more like 85%/15% but I just don't think throwing it all in there is the wisest move. I rather wait for a market correction, or if that doesn't arrive sometime in the next five years, I'll just DCA but over a longer time period (five years probably, not one year as others suggest).

It's all about correctly anticipating regret really. Are you emotionally ready to lose 30% - 50% of your capital? If not, adjust your allocation accordingly and sleep better at night.

Of course, if you have cash yielding 0% you might want to consider moving that portion to a high yielding account or even a CD ladder.

Buying bond funds though I'm not too sure that's a wise thing to do right now, especially with long durations.

Just saying, before you make drastic allocation changes examine the downsides too. Especially since the markets have been running up so hard the past five years.

 

[RetireBy90]

First, congrats on being in a position to consider this at an early age. Others should be shown your journey as an example!!


One more thought you might consider, about 7 years our from my target FIRE date, I started buying a CD every year to fund about 1/2 of my needed retirement draw. I planned on doing this for 5 years, but I have 2 more years before FIRE and I will continue to buy a CD each of the next 2 years. You may want to think about this for part of tour initial retirement funding. The switch from how to amass a big pile of money to how to safely draw on that pile for living expenses is a big change for me. This having a part of my plan already in place is comforting to me. Even if I mess up other parts, this will give me some fixed retirement income while my equity pile grows.


At some point you need to do some planning on how to get the living expenses out and it can change your investment strategy. Looks like some have already suggested ideas with that in mind, and you have by looking how to get $$ out of the tax advantaged funds without a penalty. If you contribute to a ROTH account, after 5 years you can withdrawal your contribution tax and penalty free. You would give up on the tax savings now but that can give you some flexibility for those 13 years you would need to fund before penalty free withdrawals.


Just one more option.

 

[jlenhart80]

Hi,

Am the same age (34) as you with almost exactly the same net worth (about $780k usd last count). Also single male.

Incidentally, I already did this year what you are planning to do a bit later: gave up 'real work' and taking some time off right. Might not even go back at all, don't know. My spending requirements are a bit lower than the 65k you mentioned, so I can make it work right now.

Anyway: I just want to counterbalance a little bit the enthusiastic market believers here.

Am currently invested about 45% in equities, and 55% in fixed income (high yielding savings accounts and CD ladder mostly).

My target allocation is ultimately more like 85%/15% but I just don't think throwing it all in there is the wisest move. I rather wait for a market correction, or if that doesn't arrive sometime in the next five years, I'll just DCA but over a longer time period (five years probably, not one year as others suggest).

It's all about correctly anticipating regret really. Are you emotionally ready to lose 30% - 50% of your capital? If not, adjust your allocation accordingly and sleep better at night.

Of course, if you have cash yielding 0% you might want to consider moving that portion to a high yielding account or even a CD ladder.

Buying bond funds though I'm not too sure that's a wise thing to do right now, especially with long durations.

Just saying, before you make drastic allocation changes examine the downsides too. Especially since the markets have been running up so hard the past five years.

Thanks Totoro - Gave up "real work". Nice job! I may take some advice of the CD ladder with some of my cash allocation. Another option would also be a money market. I don't think I'll extend beyond my cash allocation and put more into a lower interest bearing investment. I think that for at least the next year, the market will continue on a positive trend that will beat anything a CD could offer. I'm not saying there won't be a correction throughout the year...probably will....but I don't see a big correction. Timing is in-fact everything.

 

[jlenhart80]

First, congrats on being in a position to consider this at an early age. Others should be shown your journey as an example!!


One more thought you might consider, about 7 years our from my target FIRE date, I started buying a CD every year to fund about 1/2 of my needed retirement draw. I planned on doing this for 5 years, but I have 2 more years before FIRE and I will continue to buy a CD each of the next 2 years. You may want to think about this for part of tour initial retirement funding. The switch from how to amass a big pile of money to how to safely draw on that pile for living expenses is a big change for me. This having a part of my plan already in place is comforting to me. Even if I mess up other parts, this will give me some fixed retirement income while my equity pile grows.


At some point you need to do some planning on how to get the living expenses out and it can change your investment strategy. Looks like some have already suggested ideas with that in mind, and you have by looking how to get $$ out of the tax advantaged funds without a penalty. If you contribute to a ROTH account, after 5 years you can withdrawal your contribution tax and penalty free. You would give up on the tax savings now but that can give you some flexibility for those 13 years you would need to fund before penalty free withdrawals.


Just one more option.

Hi Retireby90. Nice name. ha! Thanks for the congrats. A little bit of luck and a lot of hard work. Anyway, yes figuring out how to fund the gap between ER and when I can draw from 401k/IRA/ROTH is on my mind. I guess your suggestion is one way to do it to ensure a stable income. Similar to the CD ladder that was shown in the post above yours.

In terms of the ROTH idea. It is a good idea, but my hands are pretty much tied in terms of any further ROTH contributions, I think. All of the contributions in there were put in prior to me exceeding the maximum allowable income limits the IRA has set. Am I misunderstanding something?

 

[jlenhart80]

A nit, but from a tax efficiency perspective I think you might be better off to keep your bond allocation in the IRA and/or 401k and divert the difference into the Roth.

See Principles of tax-efficient fund placement - Bogleheads

Also, in your planning you should be able to access some of your Roth monies penalty free before you turn 59 1/2 if the 72t is insufficient.

Hi Pb4uski. OK. This is very interesting. I did not realize this. So, Bonds to tax deferred (or tax free) because most returns come from dividend yield...and if it is in a taxable account is taxed as ordinary income. Assuming that at time of withdraw the tax rate is lower, this is a benefit.

 

[NgineER]

See if your company allows after tax contributions to your 401k...
After tax contributions are above and beyond the $17500 tax deferred maximum. It depends on the company if it is allowed or not. Some companies allow up to 75% from what I've seen, mine only offers 9%, but hey, it is better than nothing.
After tax contributions can be rolled over to a Roth 401k while on service, or a Roth IRA when you terminate service.

 

[RetireBy90]

In terms of the ROTH idea. It is a good idea, but my hands are pretty much tied in terms of any further ROTH contributions, I think. All of the contributions in there were put in prior to me exceeding the maximum allowable income limits the IRA has set. Am I misunderstanding something?

One option to check into for the ROTH is you can make a non-deductible IRA contribution no matter how much you make, then you can convert that IRA to a ROTH right away and only have to pay taxes on the earnings. One possible glitch is if you have other traditional IRAs with contributions that were deducted on you taxes. IRS has rules that say if you take $10K from a traditional IRA you must partition that into deductible and non-deductible portions, based on your entire traditional IRA holdiings. Say you have $90K in deductible IRA and $10K in non-deductible IRA, 90% of any draws are deductible. Others may reply with more information on how the mechanics work, but if you don't have deductible IRA then you could fund a non-deductible and convert to get $$ into a ROTH.

 

[jlenhart80]

See if your company allows after tax contributions to your 401k...
After tax contributions are above and beyond the $17500 tax deferred maximum. It depends on the company if it is allowed or not. Some companies allow up to 75% from what I've seen, mine only offers 9%, but hey, it is better than nothing.
After tax contributions can be rolled over to a Roth 401k while on service, or a Roth IRA when you terminate service.

I had no idea you could do this. So you can contribute after tax money into a 401K, then move that after tax money into a ROTH with no special charges, etc.? I have to look into this. My company does in-fact allow up to 75% after tax $ to be contributed to the 401K.

 

[pb4uski]

Yup. Bonanza. Get it while you can.

IRS Issues 401(k) After-Tax Rollover Rules - Forbes

Isolating Basis for a Roth Conversion - Fairmark.com Fairmark.com

 

[Sunset]

So my only thought is the OP went from huge cash view to fully invested (which is correct).
But why was he in so much cash in the first place?
If it was because he is one of those fearful types, then he will be the kind to sell after stocks drop 40% and go back to cash.
If there is any possiblility of that happening, prior to all his investment choices, he should pay off the car with cash, just to prevent him from paying it off with 40% less money later.

 

[jlenhart80]

First, congrats on being in a position to consider this at an early age. Others should be shown your journey as an example!!


One more thought you might consider, about 7 years our from my target FIRE date, I started buying a CD every year to fund about 1/2 of my needed retirement draw. I planned on doing this for 5 years, but I have 2 more years before FIRE and I will continue to buy a CD each of the next 2 years. You may want to think about this for part of tour initial retirement funding. The switch from how to amass a big pile of money to how to safely draw on that pile for living expenses is a big change for me. This having a part of my plan already in place is comforting to me. Even if I mess up other parts, this will give me some fixed retirement income while my equity pile grows.

Hi again RetireBy90 - another question for you on CD's. I was looking at CD's and CD ladders for my cash allocation and was targeting 1 year CD's. Seems the interest rate is about 1.2%. Does that seem right to you? Or are you doing something different to achieve better rates? Thanks!

 

[jlenhart80]

One option to check into for the ROTH is you can make a non-deductible IRA contribution no matter how much you make, then you can convert that IRA to a ROTH right away and only have to pay taxes on the earnings. One possible glitch is if you have other traditional IRAs with contributions that were deducted on you taxes. IRS has rules that say if you take $10K from a traditional IRA you must partition that into deductible and non-deductible portions, based on your entire traditional IRA holdiings. Say you have $90K in deductible IRA and $10K in non-deductible IRA, 90% of any draws are deductible. Others may reply with more information on how the mechanics work, but if you don't have deductible IRA then you could fund a non-deductible and convert to get $$ into a ROTH.

Hi RetireBy90 - I do have a Traditional IRA, that I rolled over from a previous employers 401K some time ago (see my allocation table in one of the earlier posts). Has about 130K in it now. So, with that said, I don't think what you propose above is going to work for me. I'll end up paying a bunch of taxes. Or?

I think the best option for me is to put post tax dollars into my company's Roth 401K. I can invest up to 75% of my earnings. Then, if I ever leave the company I can roll that into a Roth IRA...I think.

 

[jlenhart80]

See if your company allows after tax contributions to your 401k...
After tax contributions are above and beyond the $17500 tax deferred maximum. It depends on the company if it is allowed or not. Some companies allow up to 75% from what I've seen, mine only offers 9%, but hey, it is better than nothing.
After tax contributions can be rolled over to a Roth 401k while on service, or a Roth IRA when you terminate service.

Hi Molof. I think this is my best bet for tax advantage. My company does allow up to 75% into the ROth 401k. If I ever leave, I would plan on rolling that into a Roth IRA. Thanks for the suggestion.

 

[jlenhart80]

Yup. Bonanza. Get it while you can.

IRS Issues 401(k) After-Tax Rollover Rules - Forbes

Isolating Basis for a Roth Conversion - Fairmark.com Fairmark.com

Hi Pb4uski. I did some looking into this and call my 401K broker my company uses. They told me I can in-fact do this, but I cannot do it while I am in-service (an employee). While I am an employee I can contribute up to 75% of my after tax dollars into a Roth 401K and can invest in the same funds that are available to my tax deferred 401K. When/if I leave the company I can at that time roll the after tax money into a Roth IRA. And of course, I can roll the tax deferred money into a traditional IRA, if I want.

Seem correct?

 

[NgineER]

Hi Pb4uski. I did some looking into this and call my 401K broker my company uses. They told me I can in-fact do this, but I cannot do it while I am in-service (an employee). While I am an employee I can contribute up to 75% of my after tax dollars into a Roth 401K and can invest in the same funds that are available to my tax deferred 401K. When/if I leave the company I can at that time roll the after tax money into a Roth IRA. And of course, I can roll the tax deferred money into a traditional IRA, if I want.



Seem correct?

That sounds right. You should be able to roll over your contributions to your AT 401k into a Roth 401k.
Most companies do not allow rollovers to IRA's while in service as they want to keep your money with them.

 

[pb4uski]

Hi Pb4uski. I did some looking into this and call my 401K broker my company uses. They told me I can in-fact do this, but I cannot do it while I am in-service (an employee). While I am an employee I can contribute up to 75% of my after tax dollars into a Roth 401K and can invest in the same funds that are available to my tax deferred 401K. When/if I leave the company I can at that time roll the after tax money into a Roth IRA. And of course, I can roll the tax deferred money into a traditional IRA, if I want.

Seem correct?

Yes.

 

[TomH]

I skimmed most of the comments but can tell you that you need to invest in Vanguard's S&P 500.


Why?
-Less than 4% of funds have beaten the S&P 500
-The one's that do, you need big money to invest with them
-Most funds do not beat the index even using Morningstar's 5 star grade, it's easy to fudge the numbers since past results are not a guarantee of future success
-The market is too volatile and you don't want to pay someone to manage your money. Anything higher is like giving your mutual fund company free money

 

[jlenhart80]

Yes.

Well, I did some more checking on the Roth 401K and there seems to be another limitation. I can contribute a MAXIMUM of $18,000 between the 401K and Roth 401k.

With that fact, it seems more effective to contribute the full $18,000 into my 401K and not my Roth 401K. I went to a couple different comparison calculators on the web and they all basically gave me a similar result (better to contribute to 401K), assuming that the taxes saved by investing in traditional contributions is invested elsewhere (e.g. individual account).

Here is an example of one of the calculators I went to:
Traditional 401k or Roth IRA Calculator

If you disagree for some reason, I welcome your comments.

 

[NgineER]

The idea I proposed is that you'd contribute $18,000 to your tax deferred 401k, and any extra you have left over you can invest in your AFTER TAX 401k, not the Roth 401k. The after tax portion can later be rolled over into a Roth 401k while you are working, or into a Roth IRA when you leave your company.

Hope this helps.

 

[pb4uski]

If your expected tax rate when you withdraw the 401k funds (presumably in retirement) is lower than your current marginal tax rate (the tax on the last $1 of income), then the 401k is typically viewed as preferable because of the tax savings.

For example, most of my deferrals were at the 28% rate or higher when I was working and I expect my withdrawals will generally be at 15% or less so I'm saving a bundle.

 

[NgineER]

Here is more information...

http://www.bogleheads.org/wiki/After-tax_401(k)

 

[UnrealizedPotential]

We have a young guy with a lot of money. I think it takes a lot of nerve to tell him he is doing it wrong. Of course, it's easier to have a lot of nerve when it comes to someone else's money.

Jlenhart, I have no advice, but I do offer my congratulations in your excellent job so far.

Ha

That is precisely the reason I usually do not post in threads like this. I read them , but that is about it. I will probraly have $250k in investable assets sometime this year which compared to the OP is not a level which justifies giving him advice. But I tip my hat off to the OP. He is doing well and has a nice asset base going forward.

 

[jlenhart80]

If your expected tax rate when you withdraw the 401k funds (presumably in retirement) is lower than your current marginal tax rate (the tax on the last $1 of income), then the 401k is typically viewed as preferable because of the tax savings.

For example, most of my deferrals were at the 28% rate or higher when I was working and I expect my withdrawals will generally be at 15% or less so I'm saving a bundle.

I am in the 28% bracket and I do expect my withdraws to be in the 15% bracket as well. So it seems I am doing the right thing in this case.

Thanks!

 

[jlenhart80]

The idea I proposed is that you'd contribute $18,000 to your tax deferred 401k, and any extra you have left over you can invest in your AFTER TAX 401k, not the Roth 401k. The after tax portion can later be rolled over into a Roth 401k while you are working, or into a Roth IRA when you leave your company.

Hope this helps.

Thanks for this...and thanks for the bogleheads link in your other post. I just called my companies investment provider and asked them about an AFTER TAX 401k contribution. They seem to think an AFTER TAX 401k contribution is not allowed as part of my company's plan. I am going to speak to the plan administrator at my company on Monday.

Thanks again. I do understand more clearly the difference between the 401k, after tax contribution for a 401K, and Roth 401K.