Investing Question(s)

brij2006 · September 2015

Okay, so H and I are getting things set up to start all of our retirement investing. Here is where we're trying to figure things out and I'm confused as to the best route to go with this.

We follow Dave Ramsey to a T, and he says to do 15% until your home is paid off. After it is paid off (ours is), then you can invest more but that investing can be into other outlets like real estate.

Okay, so last year we grossed $102,000 in income. However, our base income (without commissions, bonuses, and overtime) is roughly $78,000. The other stuff can fluctuate from month to month, but the overtime is usually a guarantee.
This is where we sit. We plan to put 10% of H's income into his 401k through his employer (plus 1% match on top). My employer does not offer anything, but does give me a $2k stipend each year for retirement. So all of my investing, and the extra 5% of H's income will be done after tax.

We are planning to fully fund 2 Roth IRA's. So that is $11,000 each year into those, plus the 10% H is putting into his 401k.

Here's where I'm having an issue. If it's a month where we do not have much of the extra income, then it really puts us "investing poor." Or so it feels to me. Our Roth contribution each month is about a $1,000 expense in the budget. On a month with no extra income, that is about 20% of our budget. Our fixed expenses are 60% of our base income. So that only leaves 20% in the budget for saving/spending/giving, and any other things that may need to be budgeted in that month.

Should we do something different than this? I feel like this is just SO much money in our budget. Maybe it's because I'm looking at it in after tax numbers, so I feel the pain from needing to actually write out a check (well, EFT). But I also want to make sure that this is enough.

So in a non-overtime year, this will put us at investing 20% of our income. In a regular year it is right at 15%.

Would it be smart to maybe fund both of these, then any months where we do have the extra income, we put a percentage of that toward saving up to buy a rental or put into a regular IRA?

Obviously I'm just thinking out loud here. Just trying to figure out our options and what's going to make the most sense. A fluctuating income makes things a bit tricky.

AprilZ81 · September 2015

We also save monthly to contribute to our ROTHs but we don't currently actually invest that money each month (we are working on it with our broker).

Could you put the money aside each month but only invest it quarterly so if you have a few lean months without overtime you can delay the actual contribution if you need the cash for something else.

Also, be sure that you have investment options that aren't "retirement accounts". With you guys being debt free and investing heavily you may be in a position to retire early. You want to make sure you can actually get to your investments penalty free before retirement age, so look at mutual funds, individual stocks and other programs I'm not aware of. It would suck to have the money sitting there waiting for you and not be able to touch it for another 10 years because you made the right decision to prepare for your retirement.

brij2006 · September 2015

@AprilZ81 That's a good point. We are hoping to retire very early (50ish), if we can help it.

You can pull from Roths at 59.5, right?

We will also have $100k in a mutual fund as a starting investment. We thought maybe we can add to that whenever we have heavy months, and that be the money we pull from if we choose to retire early and need to pull from it.

AprilZ81 · September 2015

brij2006 said:

@AprilZ81 That's a good point. We are hoping to retire very early (50ish), if we can help it.
You can pull from Roths at 59.5, right?

We will also have $100k in a mutual fund as a starting investment. We thought maybe we can add to that whenever we have heavy months, and that be the money we pull from if we choose to retire early and need to pull from it.

I'm not sure when you can pull from the ROTHs, but you will need enough income streams to bridge the gap between your desired retirement age and when you can get to your retirement accounts and social security. Income from the farmland may make up a big part of that, but mutual funds will help.

Also keep in mind you will need to pay for your health insurance until you are eligible for Medicare. That cost is a big question mark, but I know that is the only reason my Mom hasn't retired (she is 59).

smerka · September 2015

59.5 is when you can start pulling money out of retirement accounts without paying the 10% tax penalty. You can also only put in $5,500 into an IRA per year, Roth and traditional combined. You might actually already be bumping up against some of the income thresholds for IRA deductions/contributions. My opinion would be to do 15% based on your base income. When you get bounses, put some of that aside as well. I am pretty sure that DR would consider putting money aside to buy a rental part of that 15%. But I would first fund the Roths and get the matches on the 401ks before setting any money aside for buying real estate (I personally do not agree with DR on real estate being a good investment)

maple2 · September 2015

My understanding is that you can withdraw anything from a Roth IRA penalty free after 59.5. You can withdraw contributions at any time without paying tax or penalties, but the 59.5 age applies to any earnings.

We typically contribute 15-20% of our income to retirement savings in any given year. It definitely does limit how much we can contribute to other things (saving, giving, travel, etc.), but we have decided the trade-off is worth it to us. I'm not sure what we would do if we decided to focus on other types of investments like real estate. Probably we would stop contributing to our non-tax advantaged accounts that we have earmarked for retirement (just mutual funds) and put money elsewhere to save for a purchase. Or else we would keep putting money in the mutual funds with the plan to draw from there if/when we want to buy property.

vlagrl29 · September 2015

My DH has a money market that he can invest like you can with the stock market that has no penalty if withdrawing earlier than retirement age. I want to say it's with TD Ameritrade.

lbonga1 · September 2015

Just out of curiosity, how are your fixed expenses so high if you don't have any debt? Sorry if that's rude; you don't have to answer if you don't want.

I've been reading the Mr. Money Mustache blog recently. I'm not sure if you've read it at all, but he retired when he was like, 30, and now only works when he wants to. There's a couple Vanguard index funds that he recommends. For real estate investments, he recommended finding a crappy house in a good neighborhood, then fix it up yourself.

Regardless, I would still focus on saving at least 15% of your income for retirement, or more depending on how early you want to retire.

short+sassy · September 2015

brij2006 said:

Okay, so H and I are getting things set up to start all of our retirement investing. Here is where we're trying to figure things out and I'm confused as to the best route to go with this.

We follow Dave Ramsey to a T, and he says to do 15% until your home is paid off. After it is paid off (ours is), then you can invest more but that investing can be into other outlets like real estate.

Okay, so last year we grossed $102,000 in income. However, our base income (without commissions, bonuses, and overtime) is roughly $78,000. The other stuff can fluctuate from month to month, but the overtime is usually a guarantee.
This is where we sit. We plan to put 10% of H's income into his 401k through his employer (plus 1% match on top). My employer does not offer anything, but does give me a $2k stipend each year for retirement. So all of my investing, and the extra 5% of H's income will be done after tax.
We are planning to fully fund 2 Roth IRA's. So that is $11,000 each year into those, plus the 10% H is putting into his 401k.

Here's where I'm having an issue. If it's a month where we do not have much of the extra income, then it really puts us "investing poor." Or so it feels to me. Our Roth contribution each month is about a $1,000 expense in the budget. On a month with no extra income, that is about 20% of our budget. Our fixed expenses are 60% of our base income. So that only leaves 20% in the budget for saving/spending/giving, and any other things that may need to be budgeted in that month.

Should we do something different than this? I feel like this is just SO much money in our budget. Maybe it's because I'm looking at it in after tax numbers, so I feel the pain from needing to actually write out a check (well, EFT). But I also want to make sure that this is enough.
So in a non-overtime year, this will put us at investing 20% of our income. In a regular year it is right at 15%.

Would it be smart to maybe fund both of these, then any months where we do have the extra income, we put a percentage of that toward saving up to buy a rental or put into a regular IRA?

Obviously I'm just thinking out loud here. Just trying to figure out our options and what's going to make the most sense. A fluctuating income makes things a bit tricky.

I think this makes the most sense because it gives you more flexibility for the leaner months...though, you also want to make sure you'll end up with enough in "non retirement" vehicles to be able to retire early, if you all want to.

And, while I am obviously a big fan of buying rental properties as an investment, there are other ways to invest in RE that are more "hands off". For example, you can invest in mortgage notes. I don't know a lot about mortgage notes, but they can be bought/sold and they pay a monthly income in addition to just being a valuable asset.

Or there are RE companies that pool investor monies together to buy commercial properties or a group of rental homes. I'd like to look more into this someday but, although starting investments can be as low as $5K-$10K, under the new Frank-Dodd Act, investors need to have a fairly sizable net worth or liquid assets to be allowed to participate. I'm going off the top of my head, but I think it is $100K liquid or $250K net worth.

Bigger Pockets is the go-to place to learn anything you want to know about RE investing. It's free to search or post in the forums and there are people 100x more knowledgeable than myself when it comes to notes and/or RE investment companies.

dragonstarjk · September 2015

I didn't read everything so this has probably already been covered, but you can withdraw contributions to a Roth at ANY TIME. You do not have to wait until 59 1/2. You just cannot withdraw the earnings on those contributions early.

hoffse · September 2015

Yes, 59.5 is the time you can withdraw from an IRA, but if you can live off of other income streams at that time it's a good thing. Roths can be a pretty good way to transfer wealth.

I would also check and see if your H's employer offers a Roth 401(k). That lets you increase your after-tax contributions to Roth accounts. That means you don't have required minimum distributions at a certain age, and they grow tax-free. It's expensive since you are paying taxes now (I cringe every time I get a pay stub), but it's pretty sweet to have completely tax-free retirement growth.

If you guys have a year where your income phases you out of Roth IRA contributions, you can always just do a back-door conversion. That's what H and I are doing this year. Yes, the IRS has blessed it.

If you want to retire at 50, you need to fund 10 years with non-retirement accounts. I would look at working income streams either through real estate or dividend funds. If you do it right, you may not need your actual retirement accounts when retirement comes, and that makes the Roth accounts even more valuable as your retirement vehicle, because you are never required to start draining them (you are required to start draining traditional 401(k)s and IRAs at a certain age). If you can live off your other income stream after age 59.5, then Roths can be for extra stuff - travel or medical care or funding some education for grandchildren, etc. Or you could never touch them and use them to transfer wealth to future generations.

Personally, I fund our Roth IRAs once a year. I just save that money in cash until making the investment. That gives me some float in lean months, and usually by the time I need to pull the trigger I have enough float in our other accounts that it doesn't feel like a hit.

I am working to get our contribution earlier and earlier. If you think about it, you can build in an extra year growth by front-loading IRA contributions in January, vs. doing them in December.

This is not related to retirement, but in your circumstance, I would also look at doing a lump-sum contribution to your daughter's 529. You can do 5 years' worth at a single time without paying gift taxes, the only rule is you can't then make contributions for the next 5 years. But seriously, that money is WAY MORE VALUABLE if you do it in a single lump sum in year 1, vs. dragging it out in years 2, 3, 4, and 5. Anybody who can afford to do it should do it IMO.

**EDIT: PP is correct that you can withdraw your IRA contributions at any time and the penalties/taxes are only related to earnings, but please don't do this short of a "we need to avoid bankruptcy" type emergency. You need those contributions to fund growth.

hoffse · September 2015

Oh and I don't think 20% of gross is too high. That seems right on target to me. If you want to stick to 15% only, then I would take that 5% difference and invest it somewhere else if you can afford it.

dragonstarjk · September 2015

I agree, I don't think 20% is too high.

MommyLiberty5013 · September 2015

AprilZ81 said:

brij2006 said:

@AprilZ81 That's a good point. We are hoping to retire very early (50ish), if we can help it.
You can pull from Roths at 59.5, right?

We will also have $100k in a mutual fund as a starting investment. We thought maybe we can add to that whenever we have heavy months, and that be the money we pull from if we choose to retire early and need to pull from it.

I'm not sure when you can pull from the ROTHs, but you will need enough income streams to bridge the gap between your desired retirement age and when you can get to your retirement accounts and social security. Income from the farmland may make up a big part of that, but mutual funds will help.

Also keep in mind you will need to pay for your health insurance until you are eligible for Medicare. That cost is a big question mark, but I know that is the only reason my Mom hasn't retired (she is 59).

Bolded is a great and important point to consider. HI isn't cheap (as we all know). My dad retired at 72 (he loved his job and working), so he was already eligible for Medicare. My mom is also retired but not yet eligible for Medicare. Thankfully, her previous job has a retirement plan for HI (she was with the Cleveland Clinic Health System), that will cover her up to and probably beyond the age for Medicare.

For the rest of us, like DH and me, (he has forced retirement at age 65 as a commercial airline pilot), we have to have HI coverage in place.

Your choices are to either work longer OR save more money.

BlueBirdMB · September 2015

MommyLiberty5013 said:

AprilZ81 said:

brij2006 said:

@AprilZ81 That's a good point. We are hoping to retire very early (50ish), if we can help it.
You can pull from Roths at 59.5, right?

We will also have $100k in a mutual fund as a starting investment. We thought maybe we can add to that whenever we have heavy months, and that be the money we pull from if we choose to retire early and need to pull from it.

I'm not sure when you can pull from the ROTHs, but you will need enough income streams to bridge the gap between your desired retirement age and when you can get to your retirement accounts and social security. Income from the farmland may make up a big part of that, but mutual funds will help.

Also keep in mind you will need to pay for your health insurance until you are eligible for Medicare. That cost is a big question mark, but I know that is the only reason my Mom hasn't retired (she is 59).

Bolded is a great and important point to consider. HI isn't cheap (as we all know). My dad retired at 72 (he loved his job and working), so he was already eligible for Medicare. My mom is also retired but not yet eligible for Medicare. Thankfully, her previous job has a retirement plan for HI (she was with the Cleveland Clinic Health System), that will cover her up to and probably beyond the age for Medicare.
For the rest of us, like DH and me, (he has forced retirement at age 65 as a commercial airline pilot), we have to have HI coverage in place.
Your choices are to either work longer OR save more money.

I'd like to chime in on the bolded as well. The laws will most likely change a few times more before you are this age, but as things stand now, early 60's health insurance, if you need to individually purchase it, is astronomically priced if you are still earning a middle class income at this age. My parents spend $16k a year to have insurance that has premiums so high, they have never actually used it (literally they have never used a penny of it besides a yearly physical) and that was their cheapest option. I have no idea if retirement income would count towards what the new insurance laws consider to be "income", however. If you have no true income, insurance would be subsidized completely regardless of your assets. Might be something to think about a bit.

My parents are both in their early 60's and are self employed. They love their business and have no intention to ever fully retire. My grandfather is in his late 80's and still runs his business and plans to work until he dies. I also own a business that I could run until I die. We have all saved for retirement, but the thought of actually retiring sounds horrible to me. The thought of retiring in my 50's??? No freaking way, but to each his own.

csuave · September 2015

@hoffse how do you do a "back-door conversion" to the Roth?

hoffse · September 2015

@Csuave you open a traditional IRA, fund it, then covert it to a Roth. That allows you to bypass the income limits on direct contributions to Roths, because there are no income limits to either fund a traditional IRA or convert a traditional IRA to a Roth IRA. It's a really dumb loophole that tax people figured out about 0.2 seconds after Congress passed the law, and it makes the income limits on Roth accounts meaningless because all it requires is one extra step to get exactly the same result. That extra step is so common that the IRS actually has a form to report the transaction each year on your taxes, and banks like Fidelity allow you to do the entire thing online. Congress may close the "back door" someday, but I don't see it happening anytime soon. Frankly, I think most of them use the back door themselves. You do need to make sure you will qualify. If you already have a traditional IRA that has pre-tax dollars in it, then you get into a situation where you can only fund your Roth IRA up to some ratio. It gets sticky, and I would ask somebody at your bank or a tax pro for help in that situation. But if you don't have a traditional IRA, or your traditional IRA is $0, then converting it is pretty simple, and you can fund the entire amount. I actually just opened the traditional IRAs for us this morning. I'm going to fund tomorrow and convert on Thursday.

brij2006 · September 2015

Guess I have to use the HTML format in order to post anything.... - In regard to retiring at 50. We would like to just semi-retire from our regular jobs. We would still probably work doing something, just not our day to day jobs. - Insurance is definitely something we're going to have to think of when the time comes. That will be a major monthly expense we don't have now. @lbonga1 That is our regular budget with the strings loosened a bit. It includes everything though. Tithe to church, eating out, entertainment, groceries, gas, clothing, etc. So it isn't necessarily all of our fixed expenses, it's all of our budgeted expenses. We're still just having a hard time trying to figure out the good balance. We're good with fully funding the RothIRA's for both of us, and the 10% of his income into a 401k. On months that are lean, then we will just stop any extra spending we may have had that month. It's the extra % we're having a hard time figure out how to balance. On a good month we have a minimum of an extra $1,000 to do something with. That amount is going to be needed to save up for newer vehicles, do house repairs, extra investing, extra giving, vacations, etc. That's also where in turn I'm feeling like 20% of our budgeting going to the Roths every month, feels steep. We still need to do all of that saving on top of it, and there isn't a ton left to do so on lean months.

vlagrl29 · September 2015

BlueBirdMB said:

MommyLiberty5013 said:

AprilZ81 said:

brij2006 said:

@AprilZ81 That's a good point. We are hoping to retire very early (50ish), if we can help it.
You can pull from Roths at 59.5, right?

We will also have $100k in a mutual fund as a starting investment. We thought maybe we can add to that whenever we have heavy months, and that be the money we pull from if we choose to retire early and need to pull from it.

I'm not sure when you can pull from the ROTHs, but you will need enough income streams to bridge the gap between your desired retirement age and when you can get to your retirement accounts and social security. Income from the farmland may make up a big part of that, but mutual funds will help.

Also keep in mind you will need to pay for your health insurance until you are eligible for Medicare. That cost is a big question mark, but I know that is the only reason my Mom hasn't retired (she is 59).

Bolded is a great and important point to consider. HI isn't cheap (as we all know). My dad retired at 72 (he loved his job and working), so he was already eligible for Medicare. My mom is also retired but not yet eligible for Medicare. Thankfully, her previous job has a retirement plan for HI (she was with the Cleveland Clinic Health System), that will cover her up to and probably beyond the age for Medicare.
For the rest of us, like DH and me, (he has forced retirement at age 65 as a commercial airline pilot), we have to have HI coverage in place.
Your choices are to either work longer OR save more money.

I'd like to chime in on the bolded as well. The laws will most likely change a few times more before you are this age, but as things stand now, early 60's health insurance, if you need to individually purchase it, is astronomically priced if you are still earning a middle class income at this age. My parents spend $16k a year to have insurance that has premiums so high, they have never actually used it (literally they have never used a penny of it besides a yearly physical) and that was their cheapest option. I have no idea if retirement income would count towards what the new insurance laws consider to be "income", however. If you have no true income, insurance would be subsidized completely regardless of your assets. Might be something to think about a bit.

My parents are both in their early 60's and are self employed. They love their business and have no intention to ever fully retire. My grandfather is in his late 80's and still runs his business and plans to work until he dies. I also own a business that I could run until I die. We have all saved for retirement, but the thought of actually retiring sounds horrible to me. The thought of retiring in my 50's??? No freaking way, but to each his own.

we think alike. Both of us are self employed as well and couldn't imagine retiring at 50. I think I will always do what I love doing up to a certain age. Example - there was a music teacher south that retired more than 10 years ago and then started working up north teaching. I can tell you she is probably in her 70s and just fully retired last year I think.

lbonga1 · September 2015

@brij2006 Got it. I thought you meant just necessities, like electricity. Well in that case, being in your 20's and already being out of debt puts you in a really good position already for the future. I think the compounding interest is important, but I think living your life is important too. Maybe you could do like 17-18% towards retirement as a compromise for now?

BlueBirdMB · October 2015

@vlagrl29 I can't imagine a time when I won't be teaching at least part time. It's a fantastic "retirement job". When we have a baby in the next few years, I want to go down to part time, and then work my way back up to full time later. Then be part time in my older years. It's perfect. I wish my husband could have that option. Who knows what life will bring though

vlagrl29 · October 2015

I won't be able to go back to full time teaching until the 2nd kid we have which isn't even born yet is in Kindergarden. Who knows if I will ever fully go back to full time private teaching but I sure enjoy the gigs. We are playing at THe President Hotel up in the ballroom tomorrow night for a corporate event. It's a string trio for 3 hours and it was a $900 gig - just too good to ever stop doing ya know?

dragonstarjk · October 2015

I would like to retire at 55 and then spend my time volunteering for organizations that I've always wanted to volunteer for, but can't because it's during working hours. Like being a museum tour guide or an usher at our local theater.

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