Financial Independence Daily FI discussion thread - December 05, 2020 |
- Daily FI discussion thread - December 05, 2020
- The 401k early withdrawal penalty is really not that bad
- Visual Results of u/melonbalon's financial independence survey!
- Who is literally saving receipts for 30+ years for HSA use in the future?
- Does a back door Roth conversion always make sense?
- Pension fund- the big motivation
- [Milestone] 31M hit $1,000,000 this morning!
- How do balance money for the future and enjoying life in the moment?
| Daily FI discussion thread - December 05, 2020 Posted: 05 Dec 2020 12:08 AM PST Please use this thread to have discussions which you don't feel warrant a new post to the sub. While the Rules for posting questions on the basics of personal finance/investing topics are relaxed a little bit here, the rules against memes/spam/self-promotion/excessive rudeness/politics still apply! Have a look at the FAQ for this subreddit before posting to see if your question is frequently asked. Since this post does tend to get busy, consider sorting the comments by "new" (instead of "best" or "top") to see the newest posts. [link] [comments]  | ||||||||||||||||||||||||||||||
| The 401k early withdrawal penalty is really not that bad Posted: 05 Dec 2020 06:39 AM PST I often hear of those not wanting to contribute much to their 401k due it being "locked away until 59.5." However in my view, the penalty does not make the 401k an untouchable lockbox. All it is is a fee, not some illegal or super complicated thing. In fact, if you were to FIRE, you could very well come out ahead by putting money into your 401k and then eating the fee vs investing in taxable brokerages. The combination of tax deferment, compounding growth, and effective tax rates could work in your favor. Quick and Dirty Math: Alice and Bob both plan to FIRE and each needs $40,000 per year to sustain their lifestyle. Alice has $25,000 gross income per year to invest and contributes it to her taxable brokerage account. Bob will take the same $25,000 gross income and invest it between his pre-tax 401k and traditional IRA. We will assume both Alice and Bob are in the 24% federal tax bracket, making about $100k/yr as single filers, and that they receive a 5% annual return. Using the 4% rule, Alice's FIRE target is 25x40,000 = $1,000,000. She does not meet the threshold to pay any capital gains taxes on withdrawal. Bob has to adjust his FIRE target since he knows he will be paying the early withdrawal penalty (10%) plus the effective tax rate on his annual withdrawals. His FIRE target is $1,225,825, based on 25x ($40,000 + 10% Penalty + Federal Effective Tax Rate of ~8.4%)
Summary: Due to the upfront tax burden at a top marginal rate of 24%, Alice can only contribute $19,000 out of the $25,000 she allocates to invest per year. She reaches FIRE in the middle of Year 27. Bob reaches FIRE in the middle of Year 26, about a year ahead of Alice, despite having a higher target. He gets there first because:
Other Thoughts:
Conclusion: The early withdrawal penalty will not kill you. While this is a simplified scenario and your situation may vary, it's very possible you can eat the penalty and still come out ahead of investing outside retirement accounts. Of course there are caveats (don't eat the penalty too early) and there are better paths than doing what Bob did - diversifying your tax buckets, Roth conversion ladder, etc - but he committed what is often seen as a financial sin and still comes out just fine. [link] [comments]  | ||||||||||||||||||||||||||||||
| Visual Results of u/melonbalon's financial independence survey! Posted: 05 Dec 2020 09:49 AM PST 4 years ago u/melonbalon posted fantastic survey data from nearly 1,400 redditors capturing anonymous information about who they are and where they live, their finances, their FI/RE progress, and so much more. I've compiled some of the results into a visual with the hope of providing more insight into what traits tend to be shared amongst both those groups in pursuit of FI/RE as well as those who have achieved it. A few highlights:
If new survey data were to be made available I would love to create a more updated version of this as I'm sure this last year in particular has altered financial behavior in a number of ways. Note: While this visual also sits on my website (which I won't be linking out of fear of ban), I will never require a subscription or a paywall to access it given that it wouldn't have been possible without community involvement. Nor will I for any visualizations of future survey results. [link] [comments]  | ||||||||||||||||||||||||||||||
| Who is literally saving receipts for 30+ years for HSA use in the future? Posted: 04 Dec 2020 05:24 PM PST The HSA can be triple tax advantaged if you use the funds eventually for medical expenses. Pre-tax contribution, tax-free growth, tax-free medical expenses. If after 65, you can use HSA for non-medical expenses, but will be taxed. So 1 out of 3 of the tax advantages is gone. I've seen common thinking to just let HSA grow with it's tax advantages, pay for medical expenses out of pocket now, but save those receipts for later. So you can get more out of the tax free growth. This seems bonkers to me. Who is saving and keeping track of medical receipts for 30+ years? [link] [comments]  | ||||||||||||||||||||||||||||||
| Does a back door Roth conversion always make sense? Posted: 05 Dec 2020 09:31 AM PST I am trying to better understand the back door Roth conversion and when it makes sense. I am 32. My income is about 200k and my wife's is about 160k. She will stop working mid next year to look after our kids. We are above the limit for pre tax IRA contributions. My wife and I have both contributed after tax to Traditional IRAs last year. I would like to start backdooring money into my Roth My question is if it makes sense to do it and when. I would like my money to growth tax free in a Roth for the next 20 years. However, wouldn't I be paying higher taxes on a conversion today, then when I retire? My current employer does not offer a 401k. My expected income at retirement is ~60k. I have listed me investments below. So should I convert is all at once or little by little? I am thinking of doing it once my wife stops working and our income goes down as a result. Me Rollover IRA- 126k (before tax) Traditional IRA- 6.5k (after tax) Roth IRA- 3.5k Limited partnership- 51k Brokerage- 8k Joint Brokerage-20.5k Wife 401k- 233k Traditional IRA- 8k (after tax) [link] [comments]  | ||||||||||||||||||||||||||||||
| Pension fund- the big motivation Posted: 05 Dec 2020 11:41 AM PST Healthcare workers( especially who work in areas, departments relate to COVID) are exhausted. Longer shifts, short staff, higher volume of work and job hazard are pretty draining. My coworkers are hard working and amazing people, but I just found out many of them don't know that our company offers pension. Conversation with a younger coworker yesterday: Me: "Do you know you can run an estimate report for your pension online?" CW:"what pension? You meant 401k where they( the employers )contribute x% a month? Me:"No, pension pension... not 401k. Let me show you..." And I showed him... after looking at the estimation report, he had a huge smile on his face. That made me happy... hahah don't know why...soon enough, he showed few other people, and their smiles are pretty big too. The rest of the shift went a little faster. By the way, how do you include your pension in your FIRE calculation? I tried to search for the answers, but no luck. Have a good weekend! [link] [comments]  | ||||||||||||||||||||||||||||||
| [Milestone] 31M hit $1,000,000 this morning! Posted: 04 Dec 2020 08:38 AM PST Longtime lurker here and hit a pretty major milestone this morning that I wanted to share with at least someone. In exchange for some self-validation, I'm also going to provide as much info on my journey thus far as I can. I do things a bit differently than the mainstream consensus here, so hopefully I can spark some interesting discussion.
When I logged into my Personal Capital account this morning, I was greeted by a second comma in my NW number for the first time! Breakdown is as follows:
I know a lot of that doesn't look like the standard FIRE playbook, so I'll provide some additional backstory.
Student Loans
Early Career After finishing my first 6 months of training, I got a pay bump to $120k and grossed around $135k in my first full calendar year (2013). Since I wasn't sending all of my money each month towards student loans any more, I opened a Vanguard account after finding this sub (lurked with no account for a long time) and starting depositing all of my leftover cash each month into VTSAX. After a year in the field (so halfway through 2013), I was pulled in for a short-term project that was office-based in another state. Since this was only supposed to be a 6-month "temporary relocation", I was provided a furnished corporate apartment and daily food stipend. That 6-month assignment turned into a 1yr assignment and then a month later that same boss found another 1yr project he wanted me for, so I ended up living rent-free in that corporate apartment for 2 years and continued shoveling all of my extra cash each month into my Vanguard account. There was also another pay bump when I started the second assignment and, including imputed income from the apartment, I grossed $186k in the second full calendar year. The end of that second assignment happened to coincide with my completion of the training program and I was missing my old rotation schedule, so I accepted a job as an ops supervisor in our deepwater fleet and went back to the 14/14 life. I "returned" to Houston to avoid state income taxes while working offshore ("merchant mariner" since I only worked in federal waters) and upgraded my storage room to a utilities-included garage apartment I found for $500/month. This new job was also a promotion, so my gross pay for calendar year #3 ended up being $205k. That brings us to the end of 2015. At that point, I had worked 3.5 years, had made it past the $200k comp mark, had only paid rent for 6 months ($3k total lol), and had ~$300k saved between my Vanguard account, 401k, and Roth.
Buying a House (Wtf is that "Holding" account???) I had also hired a financial advisor in early 2017 when I hit the $500k NW mark and later that year was when I started house shopping. I know financial advisors get a lot of hate here, but I've been pretty happy with mine. He was a guy that had been working as an assistant for my parents' FA that I had talked to a couple of times already. He's only ~8 years older than me and was always the guy that came up with creative ways to boost wealth generation. He had decided to leave the firm that my parents were using to start his own team and was taking on new clients, so I jumped on board. After talking with him extensively about it, I decided to go the route of a Securities Backed Mortgage (SBM) when buying my house. This is why there is a separate "Holding" account listed above. I knew this wasn't going to be my Forever Home, so I also combined the SBM with a 10yr I/O ARM. What all of this means is that I was able to buy a $495k house with a 0% down payment, no PMI, and I have only made interest payments during my 3 years of ownership. When I bought in Jan 2018, I had ~$285k in my Vanguard account and had ~$40k cash from the relocation package that I planned to use for the down payment. Instead of selling shares to come up with a traditional down payment and then locking up a bunch of capital in home equity, I used the SBM to get credit for a "20% down payment" by giving them a lien on enough shares to be a 30% down payment (~$150k). I still have direction over that account (with a few reasonable rules), but it is tied to the house until I have 20% equity (or sell it). That $150k is the maintenance number that I have to stay above, so I moved the full $285k from Vanguard into that holding account to provide enough buffer to weather a ~50% market downturn before getting hit with a call for peace of mind. The $40k cash is what I used to open the actively managed account as a trial and set up a recurring $1k/month that is essentially what would have been going to mortgage principal with a traditional note. So instead of a $99k down payment and a $2,400/month note ($1600 interest / $800 principal), I kept that $99k invested in index funds and pay $1,500/month in interest while voluntarily making a $1,000/month "house payment" to myself. Without getting too deep in the weeds on the numbers, all of this has netted me an extra ~$45k gain over the last 3 years.
MLI's
FIRE Numbers [link] [comments]  | ||||||||||||||||||||||||||||||
| How do balance money for the future and enjoying life in the moment? Posted: 04 Dec 2020 06:07 PM PST We work and make money to have things in our life. You can't take it to the grave and with the right decisions you can still leave some for your loved ones when you die. But how do you determine whats worth spending on now and enjoying your "better years" vs saving it all up for early retirement and cushion. I'm young and want to enjoy my money in the present. For example if I decide I want to buy a new sports car that cost 70k many would take umbrage with this decision. Especially with spending a large amount of money on a depreciable asset. But whats the point of investing if I can't enjoy the money I earn in things that bring me joy or want. I'm just making money to reinvest it for more money that I never "use". Its nice to see balances go up but you make it to spend it. I'm currently trying to establish a fine balance. I recently bought a $1300 designer coat which is admittedly pricey but I liked it and wanted it. I felt a little guilty about the purchase (cause its not my normal price range) but I told myself I'm ahead of my financial goals for my age. Student loans are paid for, I can retire by 60 even if I only contribute $200 a month to my 401k, no debt, I have 6 months rainy day savings, etc. I know I'm fortunate to be in this position and not everyone can relate. I'm still inherently reticent of spending despite having room to go wild. How do you find that balance? Is there a guideline or principle you adhere to? I want to responsibly live more in the moment cause tomorrow isn't promised Edit: People are really focusing on the sports car price tag but im just using thag as an example of something one may decide to do despite the general opinion against it. [link] [comments]  |
| You are subscribed to email updates from financial independence / early retirement. To stop receiving these emails, you may unsubscribe now. | Email delivery powered by Google |
| Google, 1600 Amphitheatre Parkway, Mountain View, CA 94043, United States | |
No comments:
Post a Comment