Financial Independence Daily FI discussion thread - Thursday, December 30, 2021 |
- Daily FI discussion thread - Thursday, December 30, 2021
- Asset Allocation Across Accounts 101: How to set up a portfolio with a combination of accounts, including 401(k)s, Roth IRAs and taxable brokerages.
- What's the best way to help other people post-FIRE, while not negatively impacting your own FIRE plans?
- Sig. Other considering Leverage to get into Real Estate and achieve FIRE asap -_-
- Savings rate?
- Roth 401k and Retirement Account Prioritization Question.
- Tell me why I shouldn't continue to max my after-tax 401k contributions in 2022
- If I make my money in the US and then move abroad to a LCOL country with good social programs (healthcare etc), do I have to pay any taxes on the wages I earned in the US?
| Daily FI discussion thread - Thursday, December 30, 2021 Posted: 30 Dec 2021 02:02 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] |
| Posted: 29 Dec 2021 11:28 PM PST For people planning to retire early, having various types of accounts is critical for allowing withdrawals at various stages (for both timing and tax reasons). Diversification across post-tax, pre-tax, and taxable accounts is a well-known strategy, but when it comes to allocation, lot of folks start by 'mirroring' allocations across accounts (e.g. holding 70/30 stocks bonds in taxable, and in their IRA and in their 401(k)), which is suboptimal. Taxable accounts are absolutely critical if you're planning to FIRE, but if you do it right, you can save more all around. I'm here to argue that things can be simpler, cheaper, and more tax-efficient if you treat everything as one big portfolio. Here are some examples, including (A) a rather conventional scenario, (B) a case with limited 401k options, and (C) a more complex asset allocation conundrum. Investor A is a baseline case, someone who has good investment options across all accounts
First, hold a balance of things in the 401(k) so you can rebalance tax-free (some each of US/intl/bonds in the 401(k)). At the same time, high-growth things go well in a Roth, so fill that space up with stocks if possible. In the current rate environment, Series I/EE bonds, Treasuries, and TIPS are all OK in taxable (relatively efficient). Solution A: diversify in the 401k and put risk assets in the Roth IRA
There isn't one single solution to this problem, but starting with either (1) high-risk in Roth, and/or (2) high diversification in the Traditional/401(k) both help frame what else goes where. (Note: historically, you'd want to do things a little differently, prioritizing bonds in the Traditional/401(k) account, but this is less key these days). Also note the framing: it's less a matter of percentages within an account than percentages on the whole. Note, too, that with bonds in taxable, you will have fewer cap gains, and can more easily cash in if you're FIRE. Investor B has similar goals, but limited good 401k choices: only one cheap (500 index)
Work backward from available options. In this case: fill up the 401k with that US stock fund, since that's the only good choice; then buy mid/small to complete the US side in the Roth IRA, then fill the rest of the Roth with international (Roths grow tax-free forever, so high-growth options are preferable there), then put whatever's left in taxable. Solution B: prioritize less expensive fund options and diversify in other accounts.
Pretty straightforward in this case, but rebalancing may still be difficult. An alternative option would be to put a bit of bonds in the Roth IRA so you can rebalance there. That, or: rebalance with dividends and new money. Again we see that with bonds in taxable, which tend to have fewer cap gains, you have less in tax costs to liquidate and spend. Investor C is in the same situation as investor (B), but with diversification limitations due to 401k space -- so they not only have just one cheap (500 index) fund, but the 401k is also their biggest account
This is where things get tricky. They could still fill up their 401(k) with US, but it would tilt them farther than they want. There's no one-size-fits-all solution here, so it's going to come down to the expense ratio over other options in the 401(k). So still start with the 401(k) to at least the 35% mark, then determine priorities based on costs. And keep in mind that a 401(k) isn't forever -- when you change employers, you can roll that account into a Traditional IRA and pick the funds you really want. A few ways you could handle things in the meantime: For investor C, if the other options are just absurdly expensive, a 'for now' solution could look like this: Solution C1: tilt for now, fix it later
If there's, say, a not-too-crazy bond fund option (e.g. 0.4% ER), or even a money market, this could work too: Solution C2: accept slightly higher expenses for now, fix it later
Personally, I would lean toward C2 because it will be more on track with the plan plus easier to rebalance within the 401k. Either way, examples like this one are clearly the trickiest, and every situation is different, but if you keep in mind the key points below you can make the best of your situation. Cheers! Why not just have the same allocation in all accounts? For one thing, while it looks simple, it can get confusing and be hard to rebalance. There is also tax drag from this approach. It's not world-ending if it's your best or only option, but it's suboptimal. Regardless, every situation is different, but here are some key takeaways
P.S. I wrote out a lot of example numbers here and would bet money I got at least one wrong, so if you see an error, please feel free to point it out. If you can think of other typical situations I should help explain, LMK. P.P.S. If any of this was unclear or you want to read up on it further, there are a number of links on the sidebar of /r/bogleheads on tax-efficient fund placement and total-portfolio approaches to get you on the right track. [link] [comments] |
| Posted: 29 Dec 2021 07:54 PM PST So I am getting nearer to my FIRE date, nearly finished with accumulation and switching to preservation. Once I FIRE, I really want to do something that really helps people. Donating money to groups won't cut it; with FIRE I've already decided my most valuable thing is my time, not money. The generic "well just go volunteer" is also lacking. Volunteer where? Also vitally important is not risking my own FIRE lifestyle, I never want to be forced back to work. I've considered various ambitious things like becoming a pro-bono lawyer, immigration lawyer, foster parent, nonprofit pharmaceutical company, endangered women's safe house, etc. Those all require significant financial investment, and/or have a reasonably high level of risk personally or financially. Of course I've thought of less ambitious (but still important and admirable!) ideas too. Volunteer for FIRST Lego league, or teach finances to high schoolers or something. But I really want to do more. What impactful things have you thought about doing (or are doing) philanthropically post-FIRE? You folks are smart and I'm wondering if there are some options I haven't considered yet. [link] [comments] |
| Sig. Other considering Leverage to get into Real Estate and achieve FIRE asap -_- Posted: 30 Dec 2021 01:54 AM PST I live in Korea and my S.O. just sold her house. This is her first time gaining some financial capital. We celebrated as she paid off all her debts and invested in stocks! Awesome ^^. Nowadays, she's learning about "Auction" Real Estate in which people buy unpurchased buildings from the government. The idea is to take on serious leverage from a bank - like $100,000 USD - and then use that to buy buildings, sell them, and make big bucks... er, Korean won, quickly. We just started investing this year and and as noted, paid off her debts. She's only 30 but eager to retire as soon as possible and be "rich." I am supportive of her wishes but also concerned for our future as a soon to be family. Taking on a giant debt from the bank with the idea it will make us get rich sooner seems unnecessarily risky to me. Regardless, she's eager to go on this path. Investing in the stock market and retiring in 20-25 years is no longer acceptable to her. She's cited some samples of success stories, but I fear it is a case of Survivorship Bias where only the major successes share their tales (while the majority quietly fail). I'd like to support her fully but also worry about the huge risk this would incur. It's a delicate situation as she is my fiance (3 years together) and I'd love for us to be on the same page and happy going forward. She's very eager to move forward with this plan, but I am not exactly thrilled. Any guidance on how to handle a touchy situation like this would be appreciated! [link] [comments] |
| Posted: 30 Dec 2021 02:21 AM PST Do y'all include company 401k contributions in your savings rate? My company contributes 11% so I feel like is too material not to include. I think the correct calculation would be: (My 401k contributions + company 401k + Investments) / (Income after taxes + company 401k contributions) [link] [comments] |
| Roth 401k and Retirement Account Prioritization Question. Posted: 29 Dec 2021 10:04 PM PST TL;DR at the bottom. Really would like your input. Background: Fresh outta college just took a job offer that leaves me enough money to think about how I need to prioritize my tax advantaged retirement accounts, and which ones I should even choose. Not trying to come off at all douchey, but I think it's relevant to mention that the standard promotion track in my service line means I could be making 135k+ within 4 years here…given everything goes well. Main Point: The company offers a Roth 401k option. Should I immediately switch to the Roth to avoid getting taxed when if I was to switch to the Roth option later on? How I think I should prioritize my accounts:
Depending on what you think about the above:
TL;DR: I anticipate my income growing in the coming years and need to know the priority in which I should contribute to my tax-advantaged accounts. Also, should I switch to Roth 401k first day of job. Thank you guys. Edit: Took out parts about Life Insurance. [link] [comments] |
| Tell me why I shouldn't continue to max my after-tax 401k contributions in 2022 Posted: 29 Dec 2021 08:34 PM PST We have all heard that the mega backdoor Roth is back...for now. I have been maxing out my mega backdoor for a few years now and it has really helped move the needle toward FIRE. We can't know what will happen in US policies in 2022 so let's pretend for argument sake that there is a 50/50 chance of mega backdoor surviving for 2022. My 401k requires me to contribute money gradually due to % contribution limits. There isnt some way that I can leave contributions at 0% and jack up contributions to 50% if the backdoor survives, for example. So if I want to max it out, I need to resume after-tax contributions in January and let it ride all year. So I basically need to decide what to do ASAP. My plan: Resume after-tax 401k contributions at the smallest possible % of my salary to max out next year assuming the mega backdoor survives. I will invest these contributions according to my normal asset allocation but I will NOT roll them over into Roth until the 2022 law becomes clear. Once 2022 law is set, I will either jack after tax to the maximum allowed by the plan to max out asap and begin rolling over to Roth again, including any gains...OR.... if the backdoor is discontinued I will drop contributions to 0 and leave the after tax contributions alone. This way, in the worst case I wind up with some nondeductible contributions in my 401k that I (believe) I can withdraw early (though the gains will be taxed) and in the best case I still get to max out the mega backdoor. Tell me why this plan is flawed. TIA! [link] [comments] |
| Posted: 29 Dec 2021 10:21 PM PST What are the things I would need to do to avoid paying significantly higher taxes on the money I earned in the US? And are there decent ways for me to keep my money in accounts to avoid double taxation on my wealth growth in investment accounts? [link] [comments] |
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