Questions regarding my aspirations

[autoxer]

Re: Questions regarding my aspirations

My question is basically: I want to have money I can get at down the road before I am 59.5 and I am wondering if it's better to have a portion of money outside of 401k/IRAs (but still have 401k/IRA) which is taxed but won't be subject to penalties OR go all out of sheltered accounts and just pay the penalties and taxes for when I withdraw before I am 59.5?

For money that I know I will use within 5 or 10 years, a taxable account would make sense. If I wanted the money in 2 or 3 years, I would use something more stable, like a money market. For longer term money, I would use the tax advantaged accounts (401k, Roth IRA). If you want to retire at 50, then you can really take advantage of the tax deferred accounts from now until you turn 40, then re-evaluate your nest egg and funnel more money into the shorter term accounts. The tax deferred accounts will have to support you from age 60 for another 25 or 30 years. The taxable accounts will have to support you from age 50 to age 60. They don't need to be nearly as large. And if you max out your Roth every year until you turn 50, you will have >$140,000 of principal that can be taken out without penalty.

Part of me says I need to go 100% all out on my 401k asap, and start a Roth IRA after I purchase a house, all before any taxable investments - but part of me says I should at least start (even if I don't contribute much to right now) some taxable investments (such as stocks) so that I can get my investments established, in order, and take advantage of compounding interest over time.

You can buy stocks within your Roth IRA. They don't have to be in a taxable account. What part of you wants to pay taxes on your earnings?

[hrbatyfan]

Re: Questions regarding my aspirations

For money that I know I will use within 5 or 10 years, a taxable account would make sense. If I wanted the money in 2 or 3 years, I would use something more stable, like a money market. For longer term money, I would use the tax advantaged accounts (401k, Roth IRA). If you want to retire at 50, then you can really take advantage of the tax deferred accounts from now until you turn 40, then re-evaluate your nest egg and funnel more money into the shorter term accounts. The tax deferred accounts will have to support you from age 60 for another 25 or 30 years. The taxable accounts will have to support you from age 50 to age 60. They don't need to be nearly as large. And if you max out your Roth every year until you turn 50, you will have >$140,000 of principal that can be taken out without penalty.


You can buy stocks within your Roth IRA. They don't have to be in a taxable account. What part of you wants to pay taxes on your earnings?

Thanks for this, it sounds great.

One question, @ 40 or so start these taxable accounts with non-IRA principal money right?

I'm assuming let the IRA principal compound tax-free until I absolutely have to get at it?

[sweeps]

Re: Questions regarding my aspirations

One question, @ 40 or so start these taxable accounts with non-IRA principal money right?

I'm assuming let the IRA principal compound tax-free until I absolutely have to get at it?

Yes, I can't see any reason to pull money out of a tax-advantaged account to fund a taxable account. Let your tax-advantaged accounts grow as long as you possibly can.

[TBH]

Re: Questions regarding my aspirations

hrbatyfan:
Your plans sound great and I can tell you're excited. It seems like you've done a good job educating yourself. But I'd say you'd be better off focusing on one thing at a time.

Here's what I see as a reasonable timeline.

1. Start your 401k and contribute enough to get the match. You've done that.
2. Save a 3-6 month E fund, which can also be seed money for a house downpayment.
3. Start a Roth and work up til you've funded it to the max.
4. Save like crazy for that downpayment.
5. Once you've got your house, a solid E fund, and a maxed Roth, think about boosting your 401k contributions.
6. Once your 401k is maxed (if your income potential is as good as you think, you will probably get to this point sooner than you think), start a taxable account for additional retirement savings.


I really think you should avoid the taxable account for now. If you really want to retire by 50, you'll probably need to max your 401k throughout your career AND save in a taxable account. And I think the 401k is more important.

I suggest you resist the temptation to dabble in individual stocks til you've got a solid well balanced portfolio in mutual funds. I had a tiny little portfolio at age 20 and a bee in my bonnet to test my theories about the stock market. I bought some (you guessed it) tech stocks and a couple blue chips and was left holding the bag.

I agree with others who have said that someday you'll wake up and your expenses will be waaaay higher than they are now. Kids and spouse will do that, but so will home ownership. Do you have any idea how much stupid sh** like replacement doorknobs cost? You are going to be so glad you saved as much as you are now, when you have low expenses, because chances are you won't be able to save 30% of your income forever. Some people manage to do it, but it's hard to sustain.

Go for it, and keep us updated! You have a great plan.

[TBH]

Re: Questions regarding my aspirations

PS. But if you reaaallly want to invest now, and you can't wait, it wouldn't really hurt to set up a taxable autodeposit thingy with those "Direct Purchase Plans and Automatic Dividend Reinvestment plans" you mentioned.

Just don't let that deter you from more important goals.

Give yourself a set amount to play with each month, $50 or $100, no more, and invest it in whatever you want.

Meanwhile, continue to keep chipping away at the 401k, the Efund/house fund, and the Roth. Those are the things that are going to build real lasting financial security. The taxable stuff is just gravy.

[vsjhoc]

Re: Questions regarding my aspirations

Hi,

I am 22 years old and I work full-time where I earn a 30k base salary, plus commission. I have only been working 3 months, but down the road there is the potential to make a pretty high salary due to commission.

Bar none, my goal is to retire early. I have no specific age, but ideally before 50.

It's great that you are so oriented towards saving.

On a completely different note, it concerns me that you have been working for only three months and all you can think about is retiring. Do you really hate what you are doing? Sure, making money is important, but you're going to be working for another 30 years. You might as well do something you like. It doesn't have to be the same job or occupation; my resume is a total checkboard. Maybe you should put some of your energy into finding something to do so you won't be counting down the days to retirement. Just a thought.

[hrbatyfan]

Re: Questions regarding my aspirations

hrbatyfan:
Your plans sound great and I can tell you're excited. It seems like you've done a good job educating yourself. But I'd say you'd be better off focusing on one thing at a time.

Here's what I see as a reasonable timeline.

1. Start your 401k and contribute enough to get the match. You've done that.
2. Save a 3-6 month E fund, which can also be seed money for a house downpayment.
3. Start a Roth and work up til you've funded it to the max.
4. Save like crazy for that downpayment.
5. Once you've got your house, a solid E fund, and a maxed Roth, think about boosting your 401k contributions.
6. Once your 401k is maxed (if your income potential is as good as you think, you will probably get to this point sooner than you think), start a taxable account for additional retirement savings.


I really think you should avoid the taxable account for now. If you really want to retire by 50, you'll probably need to max your 401k throughout your career AND save in a taxable account. And I think the 401k is more important.

I suggest you resist the temptation to dabble in individual stocks til you've got a solid well balanced portfolio in mutual funds. I had a tiny little portfolio at age 20 and a bee in my bonnet to test my theories about the stock market. I bought some (you guessed it) tech stocks and a couple blue chips and was left holding the bag.

I agree with others who have said that someday you'll wake up and your expenses will be waaaay higher than they are now. Kids and spouse will do that, but so will home ownership. Do you have any idea how much stupid sh** like replacement doorknobs cost? You are going to be so glad you saved as much as you are now, when you have low expenses, because chances are you won't be able to save 30% of your income forever. Some people manage to do it, but it's hard to sustain.

Go for it, and keep us updated! You have a great plan.

Thanks for the advice.

I do agree that I need to make the Roth and 401k my focus for now. It's obviously nice how down the road you can get at the principal in a Roth IRA tax/penalty free. I guess it's impossible to get at the 401k money easily because well, the tax deferment.

[hrbatyfan]

Re: Questions regarding my aspirations

It's great that you are so oriented towards saving.

On a completely different note, it concerns me that you have been working for only three months and all you can think about is retiring. Do you really hate what you are doing? Sure, making money is important, but you're going to be working for another 30 years. You might as well do something you like. It doesn't have to be the same job or occupation; my resume is a total checkboard. Maybe you should put some of your energy into finding something to do so you won't be counting down the days to retirement. Just a thought.

Well, you bring up a good point, I'm glad someone recognized it.

I like my job right now, and it has fantastic income potential, but I am not sure if I will be doing it long-term.

I don't mind working hard and saving hard, if it means I can retire early. i really miss school, and frankly I don't like working (in general) much. I am not miserable with the thought of working my whole life, however I want to retire early because life is way too short.

[vsjhoc]

Re: Questions regarding my aspirations

I am not miserable with the thought of working my whole life, however I want to retire early because life is way too short.

That's exactly my point. Life is too short to spend 30+ years not doing the things you want (both at work and in your personal life) because you're hanging out for the golden years... which may never come.

[TBH]

Re: Questions regarding my aspirations

It concerns me that you have been working for only three months and all you can think about is retiring. Do you really hate what you are doing?

Ouch, you struck a nerve with me.

I wonder if it's a generational thing? I know my work ethic is nothing like my father's. I like my dayjob fine, but I would not go if I didn't have to. I'm really not crazy about working full time. Working part time (with long vacations) forever would be just fine with me. I have been thinking about retirement since I was 20 years old, since before I got my first full-time job.

Maybe I, too, need to try to find a job that I would look forward to every morning when I woke up, rather than thinking about saving money so I can eventually not have a job at all.

[hrbatyfan]

Re: Questions regarding my aspirations

Ouch, you struck a nerve with me.

I wonder if it's a generational thing? I know my work ethic is nothing like my father's. I like my dayjob fine, but I would not go if I didn't have to. I'm really not crazy about working full time. Working part time (with long vacations) forever would be just fine with me. I have been thinking about retirement since I was 20 years old, since before I got my first full-time job.

Maybe I, too, need to try to find a job that I would look forward to every morning when I woke up, rather than thinking about saving money so I can eventually not have a job at all.

We're pretty much thinking the same thing.

Again, by no means do I hate my job. I work with some great people, I like my boss, I am not micromanaged and I have a lot of freedom, and it has great earning potential.

It's just that I'd rather be doing other things than working, but such is life.

[TBH]

Re: Questions regarding my aspirations

I work with some great people, I like my boss, I am not micromanaged and I have a lot of freedom, and it has great earning potential.

Ditto for me, except for that part about the earning potential.

[disneysteve]

Re: Questions regarding my aspirations

I like my dayjob fine, but I would not go if I didn't have to.

Same here. As far as I'm concerned, the point of working is to build up savings until I can afford to retire. I love my job, but as soon as I can afford to give it up, I will do so happily.

I was thrilled when my wife went back to work last year (more thrilled than her - LOL). I told her every dollar she earns puts us that much closer to retirement. We joke about it, but I'm serious. With her maxing out her 403b, we'll be able to retire a few years earlier than originally planned.