Financial Independence Daily FI discussion thread - Sunday, April 04, 2021 |
- Daily FI discussion thread - Sunday, April 04, 2021
- Isn't Traditional 401k almost always better than Roth tax-wise?
- Financially Independent at 31 with the help of a side-gig
- Importance of Conducting a Capital Needs Analysis (DIY Financial Planning)
- Getting started
- Would you rather have $5 million in stocks or rental real estate property when retired?
| Daily FI discussion thread - Sunday, April 04, 2021 Posted: 04 Apr 2021 02:00 AM PDT 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]  | |||||||||||||||||||||||||||||||
| Isn't Traditional 401k almost always better than Roth tax-wise? Posted: 04 Apr 2021 08:17 AM PDT Since both tax savings are commutative, the only thing that matters is the effective tax rate paid at the end. Let I = pre-tax income, r = annual return, x = years invested Roth = I * r^x * current_marginal_tax_rate Traditional = I * r^x * future_effective_tax_rate So the only time Roth is more advantageous is if your current marginal tax rate is lower than your future effective tax rate. Most people won't withdraw more than their annual income from their traditional 401k, so we can assume that marginal_tax_rate >= effective_tax_rate. The common advice is if you're at the beginning of your career, you're earning lower, so you should put it in a Roth. The Federal marginal tax rate between 40 and 85k (reasonable starting income range) is 22%. To reach an effective Federal tax rate of 22%, you'd have to earn 227k. Meaning, you would have to expect to withdraw 227k per year from your traditional 401k for Roth to start making sense, a whopping 167% higher than the top income in that bracket. Against intuition, Roth seems to actually do better when you're in the 85k to 163k bracket. The breakeven point is 270k per year, only 65% higher than the top income in that bracket. Then, once you're in the 163 to 207k bracket, Roth performs considerably worse. The breakeven point is 800k per year, or 286% of the top income in that bracket. For the 207 to 518k bracket, the breakeven point is 2MM, or again 286% of the top income in that bracket. Once you're past 518k, there's never a breakeven point. Additional assumptions: almost all your income at retirement comes from 401k, since the rest are taxed as long term capital gains. If you have rental income, it could flip towards Roth since traditional withdrawals are now taxed at marginal instead of effective. I also simplified the calculations to only federal taxes since each state is different; some have flat rates, and brackets are different per state. Caveat: a wrench that could throw off the calculations is future tax increases, which we currently can't predict, but the 65% to 167% buffer is quite high so even moderate tax increases wouldn't put Roth ahead. EDIT: /u/Jr712 mentioned a nice article in the comments with visuals: https://thefinancebuff.com/case-against-roth-401k.html [link] [comments]  | |||||||||||||||||||||||||||||||
| Financially Independent at 31 with the help of a side-gig Posted: 04 Apr 2021 02:07 PM PDT I've been a long time lurker, and reading about others success towards achieving financial independence has been a huge source of inspiration for me throughout the past decade. Thank you all! This week I put my 2 weeks notice at my job. I'm 31, and the Mrs. is 29. I've been going hard as a Software Developer for about 10 years, and while I have enjoyed it - it has never been my calling. Simply something to pay the bills. However, I was able to later combine this skillet with a passion of mine (a SaaS business). Yes, I am being intentionally vague - but it's business is primarily data analytics. Household Income Progression: Yrs - Income 1 - $50k 2 - $75k 3 - $100k 4 - $115k 5 - $135k 6 - $140k 7 - $145k + $45k (Business) 8 - $160k + $120k (Business) 9 - $180k + $250k (Business) 10 - $190k + ~$400k (Business) Throughout our careers we stashed away just about everything we could in 401k's, IRA's, HSA's, and taxable accounts. No stock options or grants, and no bitcoin windfall. Got super into the credit card churning game at some point, sold a ton a mile/points. Overall, my wife and I are pretty frugal. We don't really have a taste for fancy things. Our one car is a beat up 15 yr old Nissan Altima. We also have committed to not having children (Just a bunch of dogs). About mid-way through my career I started working on a software product in my free time. The first iteration was a complete flop, and garnered no traffic/customers. I continued to work on it for a couple of years, and in 2017 I pivoted to a similar SaaS (Software as a Service) product. This SaaS product then slowly grew since 2017, and is now netting $47,000 per month (MRR). I expect it to continue to grow at least for the next 6-12 months. While this business was in it's infancy, my typical workload ranged from 10-40 hours a week. It was definitely tough balancing with a full-time job at times. Often I would have to wake up at 3AM to deal with an outage, and then have to work at 9AM. Now that the business is more automated/stable, it's more like 10-15 hours a week. I don't yet have any employees (well, except for my amazing "Executive assistant" - the Mrs). Current NW Stats: Cash/T-Bills: $375,000 (Preparing to move to new house, paying cash) Taxable: $763k Tax Deferred: $674k Primary Residence Value: $450k Mortgage: ($228k) Expenses: $1,750/mo Mortgage: $1,912/mo After quitting job, moving to our new house (~$480k), and selling our current house it will be like: Expenses: $2,200/mo Tax/Insurance: $420/mo Asset line interest: $300/mo Health Insurance: $580/mo Total: $3,500/mo Yes, I know this is not quite the "Achieved FI, and I'm retiring for good" post. I will say due to the highly competitive nature of my business, I wasn't confident in quitting my full-time W2 job until we achieved FI without relying on business income. With no income we'd be right around 2.5-2.75% withdrawal rate. For now I get to put off the existential questions about what I will do with my free time, as I'll be running my business. I do intend to sell it at some point soon, so that may be sooner rather than later. I hope this doesn't come off as gloating, but I was just hoping to maybe share our slightly unique path to FIRE! [link] [comments]  | |||||||||||||||||||||||||||||||
| Importance of Conducting a Capital Needs Analysis (DIY Financial Planning) Posted: 04 Apr 2021 10:52 AM PDT Hey folks, Within the last month, I decided to create a template for a formal DIY financial plan that is based off of the Certified Financial Planner (CFP) Board's Job Analysis Domains. This is what you study to become a certified CFP. I got this idea from Joshua Sheats at Radical Personal Finance. Great podcast by the way. I figured why reinvent the wheel. Once the template was created, I started filling out my own personal financial plan. After completing the budget section and the Statement of Financial Conditions (Balance Sheet), I compared that to my prior year's taxes and earned income before taxes. A surprising $15,500.00 was completely missing that was not accounted for in the budget, federal income taxes, state taxes, property taxes, or my retirement accounts. Upon completing this shameful quest of self discovery, I found all of the $15,500.00 and where it want.
So I thought to myself, wow that's something to truly take in. If I had lost my job, then over the last year there would have been $12,000.00 of non-budgeted, unaccounted for and unplanned expenses. Since I was gainfully employed, I was easily able to absorb these costs. If I were not, my emergency fund would have been entirely depleted, and I would have been in debt. The thing that stood out to me was that these issues that came up are not really emergencies. They are expected realities that should be budgeted for. What did this lead me to do? Well, I determined since I can't be trusted to budget for things 2-3 years out as demonstrated over the last year, then I should boost my emergency fund up by another two months worth of expenses because 2020 demonstrated how exposed I am living in just a modest 2 bed 2 bath condo with an old car in the city. Time went on and I kept filling out the DIY financial plan. That's when I got to the Capital Needs Anaylsis section. I didn't know what this meant or how I was supposed to fill it out, so I started googling around for it to see how other businesses put this stuff down on paper. It reads like what you might expect, Business X needs new work trucks in 2023 EST $500,000, new employee hires after hire freeze 2022 $300,000, and general liabilities they expect over the next 10 years. I got to work: here is the result.
$21,500 short of where I should be based on projected outlays. It makes sense to conduct a Capital Needs Analysis because a failure to plan should not impact one's budget nor should it constitute an emergency worth depleting an emergency fund. Failure to plan for future liabilities means that you don't have a budget but rather you have a spend plan that might be acceptable for the next three months. A true emergency expense should be something that is completely, wildly out of the blue that is unaccounted for in your insurance planning, budgetary planning, or capital needs analysis. [link] [comments]  | |||||||||||||||||||||||||||||||
| Posted: 04 Apr 2021 03:41 PM PDT Hey everyone. For the first time in my life I'm about to enter a high paying job ($85,000 p.a). I've always been in the low income bracket until now, which means I've been unable to save. All money went to living, basically. I'd love to eventually become financially independent. What are some things I should do to get started? Really appreciate your help. Thanks! [link] [comments]  | |||||||||||||||||||||||||||||||
| Would you rather have $5 million in stocks or rental real estate property when retired? Posted: 04 Apr 2021 12:51 PM PDT For those of you that have reached this type of wealth, what would be better for retirement income and how much could your monthly income be with $5 million in stocks or rental property? [link] [comments]  |
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