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Reading about Roth IRAs, they seem like a bad idea if you're aiming for financial independence, because income after you take some form of early retirement will almost certainly be much less than when you're making maximum bank in preparation for financial independence. What do you guys think? edit: Wikipedia posted:With a Traditional IRA, one always has an option to convert to a Roth IRA; whereas a Roth IRA cannot be converted back into a Traditional IRA. One can choose an optimal (lowest tax rate) time to convert over one's life. Because you have a right, but not an obligation, to convert, this is like an option in finance. As with options in finance, this flexibility, which allows one to hedge future uncertainty, adds some additional value to the Traditional IRA. Cicero fucked around with this message at 21:35 on Jan 31, 2014 |
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Jan 31, 2014 21:26
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Cicero posted:I feel like I'm missing something here because it seems like everyone is always about Roth IRAs. A lot of that has to do with the fact that the tax rate right now is the lowest it's basically been in history and people are banking on the fact that in 20-40 years from now there is no way it will be this low. Now some people have taken that to insane extremes and you get a sort of echo chamber when really the best solution is to work out the math yourself and see what will be the best for you individually.
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Jan 31, 2014 21:35
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Sounds right in practical effect for *MOST* people in this thread. It's not that Roth's are objectively bad, but more that the benefits of a Roth are mitigated by anybody whose game plan is retirement through heavily reduced spending. In any savings year, your income should be higher than your eventual withdrawal rate, so the greater tax benefits are from the traditional IRA. Assuming, like LorneReams said, that tax rate remain constant. But I'm sure they would have some niche uses. Maybe they could serve a purpose as a kind of emergency fund if you're over 65? I need to go re-read the withdrawal rules. I've forgotten them again.
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Jan 31, 2014 21:42
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Cicero posted:This makes it sound like the optimal path is to invest in a traditional IRA and then convert it once you're in a low tax bracket. I feel like I'm missing something here because it seems like everyone is always about Roth IRAs. No Wave fucked around with this message at 22:53 on Jan 31, 2014 |
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Jan 31, 2014 22:27
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On the other hand, if you're maxing it out the Roth lets you put more away. 5500 pre-tax at marginal 30% tax rate is only equivalent to 3850 in a Roth.
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Feb 1, 2014 03:03
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Engineer Lenk posted:On the other hand, if you're maxing it out the Roth lets you put more away. 5500 pre-tax at marginal 30% tax rate is only equivalent to 3850 in a Roth. I did some math and over a long enough timeframe it comes out basically even, but in this case "long enough timeframe" means something like 40 years. I was assuming that you're in the 25% tax rate now and would be in the 15% tax rate during retirement. If your state allows you to deduct IRA contributions from state tax (does any state?) then it's probably a definite win to do Trad IRA and then converting in a low-income year. I'll probably start doing it going forward - not gonna freak out about this year because the timeframe for withdrawal is still long enough to make it come out nearly even... No Wave fucked around with this message at 14:29 on Feb 1, 2014 |
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Feb 1, 2014 14:22
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I like the idea of FI and am moving towards it, but with planning on having a large family and getting reliable liquid returns seems difficult before 65 and getting access to my 401k. I have been investing in non-traded REITS and they have done well for me, but even with $50k invested I am only looking at $300 monthly income. The most reliable way I see is having rental properties, but that is a job in itself and takes so much capital to do it without debt. I just can't see myself being able to generate 50k annually in investment returns without a liquid investment account of 2 million. is there anyone in the thread who is planning on having 3 or 4 kids and planning on having FI in your early 40's?
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Feb 1, 2014 22:35
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I think you're going to have to lower costs as well, 50k each year post-tax is a lot depending on where you live. College for four kids is a whole other ballgame though. I say just invest in SPY+REITs since rental property is more all-in on real estate, but other people can give better investing advice than me. Hustling for more income now(yesterday) in addition to cutting costs is probably your best plan but you are right it will definitely be tough. Jeffrey of YOSPOS fucked around with this message at 22:46 on Feb 1, 2014 |
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Feb 1, 2014 22:43
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I would be careful with private REITs. There's a lot of fly by night ones popping up now, that basically round up investor and ream them with fees.
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Feb 2, 2014 03:25
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I have had 1 get bought out and the other is going public this quarter. ARC is the company. Strong track record. I did my due diligence. It is a very unique sector though. What do you invest in if I may ask? I need to start branching out from mutual funds, insurance companies, and reits (invest in what you know right). Maybe this should be in the long term investing thread. Just curious as to where the FI crew has their money parked to be liquid but still getting returns enough to facilitate an early retirement. SpclKen fucked around with this message at 03:42 on Feb 2, 2014 |
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Feb 2, 2014 03:38
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Harry posted:I would be careful with private REITs. There's a lot of fly by night ones popping up now, that basically round up investor and ream them with fees. vvv A fair point. Jeffrey of YOSPOS fucked around with this message at 03:50 on Feb 2, 2014 |
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Feb 2, 2014 03:41
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Jeffrey posted:This is very much true with mutual funds as well, charging you fees to not beat the market is a racket. Agreed, but those are federally regulated and have a much clearer picture of the fee structure. I work in the industry, and let's just say there's some winners and a lot of suckers. Especially since they're a hot investment tool these days.
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Feb 2, 2014 03:46
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SpclKen posted:The most reliable way I see is having rental properties, but that is a job in itself and takes so much capital to do it without debt. I just can't see myself being able to generate 50k annually in investment returns without a liquid investment account of 2 million. is there anyone in the thread who is planning on having 3 or 4 kids and planning on having FI in your early 40's? - having my mortgage paid off by then - setting up a ton of passive income sources from now until then and hoping one takes off. Here's the thing: fifteen years from now is a lot of time. If you can build something that can pay you a reasonable salary ($30-40k) with minimal effort, then you can do it. Such as setting up a successful blog. Starting a writing career. Doing a fun hobby in a way that turns a profit. I am trying to start one new project every year so that I have fifteen or so chances to have one of them take off. So far so good, of course I need to pinpoint specific stuff to continue working on but I figure the shotgun approach isn't bad initially.
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Feb 2, 2014 05:53
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While it's probably possible, why do you want 3-4 kids? Growing up in a 3 kid household sucked. There is never good seating at restaurants, or you end up waiting forever or get put into one of those crappy chairs at the end of a table things. My dad was retired military, so at least he got all the very cheap health benefits for us, which is crucial if you have any children with issues. I would just be scared that something would happen medical wise.
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Feb 2, 2014 08:08
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Maybe he likes kids... People have different desires and priorities man.
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Feb 2, 2014 15:08
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Cicero posted:Reading about Roth IRAs, they seem like a bad idea if you're aiming for financial independence, because income after you take some form of early retirement will almost certainly be much less than when you're making maximum bank in preparation for financial independence. What do you guys think? If you're planning on a relatively short FI run, you'll generally need high income. This makes you totally ineligible for a traditional IRA and you usually have a 401k too.
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Feb 2, 2014 15:24
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TLG James posted:Growing up in a 3 kid household sucked. There is never good seating at restaurants, or you end up waiting forever or get put into one of those crappy chairs at the end of a table things. Of all the reasons not to have multiple kids, this has to be one of the absolutely most trivial... That said this is the FI thread and it becomes much harder to achieve FI when you have four kids. I grew up in a four kid household and loved it, truly countless hours of playing with my brothers. I felt so bad for my friends who only had one sibling, or worse was an only child.
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Feb 2, 2014 17:01
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Welp it's been a month so I'll throw something out there to bump the thread. I'm entertaining the offer of retiring from full-time work before 45. I'll do some napkin math during a lecture tonight and post that here just to get something going again. e. my internet is making GBS threads itself and won't stay connected for more than 30 loving seconds so I'll have to update this tomorrow 
Guest2553 fucked around with this message at 06:40 on Mar 4, 2014 |
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Mar 4, 2014 02:04
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I'm not sure what you mean by "entertaining the offer", but I'm also aiming to retire around age 45 (based on this calculator). I make a very decent salary, but I'm the sole income earner in the family, we have one kid, and probably will be having another in a year or two. That makes it difficult, but certainly not impossible. After getting used to a certain standard of living, it's hard to reign in expenses to 50% of net income. I'm starting by selling my brand new performance car for something more practical that only costs about 15% of my annual salary instead of 25%. Since I work from home and my wife doesn't work, we can also sell her car. Between insurance, gas mileage, and loan payments I think we can save a couple hundred dollars a month that will go directly into savings.
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Mar 4, 2014 20:17
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I'd like to see the math as I'm also shooting for 45 as a nice target retirement date. Although I just told my boss during my quarterly review that his wife dresses too sexy to be in the office, so maybe retirement will come a bit earlier 
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Mar 4, 2014 20:24
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sim posted:I'm not sure what you mean by "entertaining the offer" It would have better been written as 'entertaining the idea'. I'm in a similar boat - only earner for a family (which includes a babby as of two weeks ago, so I blame my incoherence on that), so it's prettymuch a saving game. Anyways, here are my numbers. Keep in mind that it is a very conservative estimate with the following assumptions: -My career bottoms out, I never get promoted, and can only ever save half my net salary (2000/month for a total of 432K plus 65K I will have by year's end) -TFSAs (  ) are maxed out yearly for both myself and my wife, with the contribution limit increasing by 500 every 4 years-My defined benefit pension disappears and my superannuation contributions evaporate -No tax shelters or other registered accounts are used -Investments compound at 4%, which is a bit less than the worst 15-year S&P 500 index minus MER and transaction fees -My evil twin steals any inheritance I may have Given all of these things, I'd have $673,331.63 - $238,165.82 in each TFSA and $197,000 cash. Not a huge amount, sure, but enough to live off interest for decades. With 7% interest (still significantly less than the 100-year average of 9.4% or the worst 25-year average of 8%), it jumps to $886,102.91 - $344.551.45 in each TFSA and the same 197k in cash. Enough to live on for longer, maybe even buy a house  It is more realistic to assume that I have another promotion or two left in me and could pull in a 50k pension, and there is no way I'd hang on to 200k in cash. There's no way to account for market volatility but in the long term it should be a sufficient wag, especially given my very conservative estimates. I think. Guest2553 fucked around with this message at 05:05 on Mar 5, 2014 |
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Mar 5, 2014 05:03
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Maths wise I thought if; Savings & Investments = (Expenses / 0.02) + Acceptable Buffer You were pretty much good to go even if we were 1 week before the stock market crash of the 20's? You get a nice boost that the first years of retirement are the most at risk of stock market fluctuations, its the period you're skills are still most relevant and employment history still good enough to potentially get you back into work quickly if required. If you're really risk adverse once you hit your go point you can even start a staggered retirement, halving your hours every couple of years till you hit 0.
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Mar 5, 2014 09:55
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Another formula I've seen, is basically whenever your ROI exceeds your expenses, you're good to go; sooner if your withdrawal rate is lower than your ROI. So assuming 50% of my income goes to investments that return 5%, I'll make enough to cover my expenses (also 50% of my income) in 16.5 years. This is basically the table laid out by MMM: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/ you can tweak it with this calculator: http://networthify.com/calculator/earlyretirement?income=100000&initialBalance=0&expenses=50000&annualPct=5&withdrawalRate=4 I'm sure this has already been covered in the thread, so I apologize if its redundant.
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Mar 5, 2014 16:42
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How the hell do you get 5% returns though? A savings account here in the uk gets you about 0.5%
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Mar 6, 2014 19:27
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Laterbase posted:How the hell do you get 5% returns though? A savings account here in the uk gets you about 0.5% Equities.
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Mar 6, 2014 19:33
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blah_blah posted:Equities.
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Mar 6, 2014 20:04
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Is there any reason to put money into a 401k with no matching? It is treated as such common knowledge that I feel like I'm missing something. I'm happy to buy and hold index funds myself, saving me the the fees. I get that I can take money out at a lower tax bracket when I'm 65+, but it's kind of hard to estimate what percentage of my income I will need to save for pre-65 but post-retirement years. That also assumes that marginal tax rates will not go up in the next 40 years, which I'm not sure I want to bet on.
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Mar 6, 2014 21:43
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Jeffrey posted:Is there any reason to put money into a 401k with no matching? It is treated as such common knowledge that I feel like I'm missing something. I'm happy to buy and hold index funds myself, saving me the the fees. I get that I can take money out at a lower tax bracket when I'm 65+, but it's kind of hard to estimate what percentage of my income I will need to save for pre-65 but post-retirement years. That also assumes that marginal tax rates will not go up in the next 40 years, which I'm not sure I want to bet on. Assuming you retire at all, your spending rate is less than your earning rate. That's how you build the savings. When you retire, you only withdraw to your spending rate, you don't keep withdrawing what you use to earn. So the rate you're taxed at after retirement is going to be less than the rate you're taxed at while your saving. So yes, a 401k still saves you a lot of money on taxes.
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Mar 6, 2014 21:51
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Jeffrey posted:Is there any reason to put money into a 401k with no matching? It is treated as such common knowledge that I feel like I'm missing something. I'm happy to buy and hold index funds myself, saving me the the fees. I get that I can take money out at a lower tax bracket when I'm 65+, but it's kind of hard to estimate what percentage of my income I will need to save for pre-65 but post-retirement years. That also assumes that marginal tax rates will not go up in the next 40 years, which I'm not sure I want to bet on. The other benefit is not paying capital gains tax on the growth (the Roth 401K makes this more obvious, but the principle is still the same). For non-retirement accounts you have to pay 15% cap gains tax (unless your total income is below 35K). No Wave fucked around with this message at 21:54 on Mar 6, 2014 |
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Mar 6, 2014 21:51
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No Wave posted:If you're not planning on having other sources of income you can feel pretty safe that at the very least your first 35K of income post-retirement will have a pretty low taxation rate even if tax rates go up. So I'd contribute at least enough to expect that from your retirement accounts (given reasonable expectations). This is assuming that you're making over 40K right now. You don't pay capital gains tax on interest earned in a 401k? I thought you paid tax on all the money you withdraw from a retirement account, if not that's a huge win.
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Mar 6, 2014 21:55
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Jeffrey posted:You don't pay capital gains tax on interest earned in a 401k? I thought you paid tax on all the money you withdraw from a retirement account, if not that's a huge win. No Wave fucked around with this message at 22:02 on Mar 6, 2014 |
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Mar 6, 2014 21:57
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Jeffrey posted:You don't pay capital gains tax on interest earned in a 401k? I thought you paid tax on all the money you withdraw from a retirement account, if not that's a huge win. You do pay tax on the gains; treated as income when you begin to withdraw from the 401k or traditional IRA. Roth accounts you do not pay tax on the gains.
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Mar 6, 2014 21:59
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No Wave posted:All trad 401k withdrawals are treated as standard income, so you'll be paying income tax on the increased amount. EDIT: Have to think more
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Mar 6, 2014 22:00
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Jeffrey posted:EDIT: Have to think more Basically - if you have 10 thousand dollars that turns into 40K when you retire, it doesn't matter if you're taxed 25% now or later, as 7500*4 is 30K, which is 40K-.25(40K) - meaning that the skipping capital gains tax is a big win. It is theoretically possible to put yourself into a HIGHER tax rate in retirement than your current income with retirement accounts alone, it's just unlikely for most people. If you're a super-aggressive saver you'll want to do some thinking, but you'd have to be putting away quite a lot of your income. No Wave fucked around with this message at 22:07 on Mar 6, 2014 |
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Mar 6, 2014 22:03
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Given the unknown of future tax rates, for both income and capital gains, I still think it is beneficial to diversify the types of tax-advantaged accounts you hold. Since I max out my traditional 401k contribution that's a lot of investment with deferred taxes, so I choose to max a Roth IRA rather than a trad IRA to diversify the tax structures.
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Mar 6, 2014 22:11
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Guinness posted:Given the unknown of future tax rates, for both income and capital gains, I still think it is beneficial to diversify the types of tax-advantaged accounts you hold. Since I max out my traditional 401k contribution that's a lot of investment with deferred taxes, so I choose to max a Roth IRA rather than a trad IRA to diversify the tax structures. The math will absolutely vary from person to person, of course.
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Mar 6, 2014 22:14
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No Wave posted:Yeah this is a big one! It didn't really click for me until I read about Roth 401ks and realized that Roth 401ks strictly dominate standard savings and yet were somewhat comparable to trad 401k in terms of tax benefit. Yeah, okay, sounds like a reasonable mix of 401k contributions, self-directed roth ira, and traditional savings is in order. Gotta figure out the fees on my new company's 401k as well. I save around 50% right now but I have no idea what the end result will be. Right now my money is taxed at a pretty high rate, but it is still a low rate historically speaking. I still have to estimate what percentage of my savings I will need to access before I'm in my sixties, anyone have advice there? It's hard to generalize from current spending to future retirement spending, due to weird job perks. (Work pays for all meals during the week, I live in a high-rent area where I don't need a car, so compromising on rent after-retirement might mean car costs.) Jeffrey of YOSPOS fucked around with this message at 22:26 on Mar 6, 2014 |
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Mar 6, 2014 22:22
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That's a good point that I hadn't really considered before. Although yeah the math is going to vary a lot person to person. I'm just barely in the 28% bracket after 401k/HSA deductions, so a "low" income year would mean basically being long-term unemployed in order to get down deep enough into the 15% bracket to be able to convert a meaningful amount of assets from trad to Roth without bumping up to 25%. Then again, thinking about it more, once you reach FI or early-retirement you probably wouldn't be working a W2 salary position anymore and your income might vary a lot more, perhaps even deliberately... Good things to think about.
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Mar 6, 2014 22:23
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Jeffrey posted:Yeah, okay, sounds like a reasonable mix of 401k contributions, self-directed roth ira, and traditional savings is in order. Gotta figure out the fees on my new company's 401k as well. I save around 50% right now but I have no idea what the end result will be. Right now my money is taxed at a pretty high rate, but it is still a low rate historically speaking. I still have to estimate what percentage of my savings I will need to access before I'm in my sixties, anyone have advice there? It's hard to generalize from current spending to future retirement spending, due to weird job perks. (Work pays for all meals during the week, I live in a high-rent area where I don't need a car, so compromising on rent after-retirement might mean car costs.) Remember that you get an exception to the pre-59.5 age withdrawal penalty if you take some version of substantially equal periodic payments from a retirement account. I plan to roll over my 401k into appropriately-sized trad IRAs once I'm ready for early (quasi-)retirement and play with relative amounts to get SEPP subsistence income from one of them, which could be augmented by seasoned Roth contributions in lean years.
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Mar 7, 2014 00:15
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I had a 'realization' the other day that I want a second opinion on. I had previously been thinking that I'd want to wait to buy a house when the market is weak, because of course then home prices are lower. Sounds logical enough, right? Except then I realized, wait, most of my money while saving for a house will be in stocks...which move roughly in tandem with the housing market. So if I wait until the housing market tanks, it may well be that the stock market tanks too, nullifying any housing price advantage, or possibly leaving me even worse off than if I had bought during a normal or strong market. Does that make sense?
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Mar 20, 2014 22:07
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