Today we continue the ESI Scale Interview series where people answer questions about their success at working the ESI Scale.
In short, the series focuses on what the interviewee is doing in the areas of earning, saving, and investing. They also get an opportunity to ask ESI Money readers for suggestions if they choose to do so.
Since the series is just getting started, I’m looking for feedback as well.
Specifically, I’d like to know what you think of the questions — which ones are good, which ones need changed, what should be added, etc. I’d like to get to a consistent list to ask everyone, so I’ll take your thoughts for a few of these posts and then settle down on a final list.
Please note that the questions need to be applicable to a wide a variety of people with very different situations. In other words, a question just for wealthy people won’t fly in this series.
If you’d like to be considered for an interview, drop me a note and we can chat about specifics.
With that said, let’s get started.
My questions are in bold italics and her responses follow in black.
OVERVIEW
Please tell us a bit about yourself.
Hi there! I am Mrs. Adventure Rich, a woman in my late-20s married to the love of my life, the handsome Mr. Adventure Rich.
We have an energetic (that is an understatement…) 2-year-old son (AR Jr.) and live in the beautiful northern Michigan!
What is your current net worth?
Our current net worth (as of mid-November 2017 when this interview was written) is $306K.
This includes:
- $230K house + 10 acres
- $210K in investments (401K, IRA, HSA, employer stock and a small 529Plan)
- $28K in savings (emergency fund, new-roof/house repair fund, and miscellaneous savings)
Our only debt is our mortgage, with a balance of $175K.
You can see our net worth updates and tracking here.
How did you accumulate your net worth?
Our net worth accumulation has come in several ways. And I’m sorry in advance, there are no crazy stories or get-rich-quick ideas here!
Highlights:
- Debt Payoff: When Mr. Adventure Rich and I met in mid-2012, we carried a combined debt balance of $55K including a car loan, credit card debt, and student loans. We aggressively paid this balance down and became debt free by February 2015 (pre-mortgage).
- Frugal Living and Avoidance of Lifestyle Inflation: As a result of our debt payoff goals, we worked to limit excessive spending and focused on avoiding lifestyle inflation as our salaries increased. At first, the frugal living and anti-lifestyle inflation goal aided our debt payoff, then shifted to creating an opportunity to invest more which leads to…
- Heavily Investing in Tax-Advantaged Low-Cost Index Funds: Mr. Adventure Rich and I were fortunate to learn about investing and low-cost index fund investing relatively early on. We have taken advantage of employer matches and have been maxing out my 401k for a few years now. We are also in Year 2 of having an HSA for additional investing opportunities.
EARN
Tell us a bit about your career.
I am just about 6 years into my career at a Fortune 50 company.
I was fortunate to enough to be hired by my employer during my senior year of college. At the time, I was graduating with a degree in Liberal Arts, an interest (but no background) in business, and a willingness to work hard and learn. My employer took a chance and hired me at an entry level in our department.
I work in a shared service role where I conduct spend analysis and market research, develop business cases, manage projects, and negotiate contracts. I love the variety of the work…no two days have been the same in my 6 year career!
Through hard work, an incredible mentor/manager, and a willingness to get outside my comfort zone, I have received several promotions and increased my base salary from the starting $60k to my current base salary of just over $100K.
While I still work in the same department, I have progressed through several roles. Each role has granted me more autonomy and strategic license in the projects I manage and the initiative I am a part of. I have also supported multiple areas within our company, giving me an opportunity to learn a new niche every few years. It keeps the work fresh and exciting!
I think it is worth noting that in the same 6-year timeframe, I met and married my husband, welcomed a son, moved across the country (transitioning to a remote office), and bought a house. It has been an eventful 6 years!
Do you have a side hustle?
I do not have a side hustle right now. Currently, I have my plate full with my career and my focus on career advancement, my family (including a young son!), and my desire to work towards goals that push me in a physical way (half marathons, bike races, etc.).
I do blog, but I have made a grand total of $5.11 from it (and paid much more than that in hosting/fees!)! I see my blog as a potential income stream someday, but it is much more of a “passion project” at the moment.
How happy are you with these results and what future plans do you have for growing your income?
Honestly, I couldn’t have asked for a better career path and income level so far. I certainly cannot complain!
I do want to continue to challenge myself at my job, working to expand my skills and ability to strategize. Growing my career opens the door for further growth in income as well, so this is my primary focus.
SAVE
What percent of your gross income do you save?
I have not tracked our savings rate closely this year, but I believe we are around 35-40% (401k, HSA, Savings Account and Extra Mortgage Savings).
This is the lowest savings rate we have had due to our move, house purchase, and the adjustments around these moves…so we hope to increase this over the next year!
How did you get to this level?
Slowly and steadily!
When I first started my career, I tackled my student and car loans like my life depended on it. I didn’t really know why, but I didn’t like having debt and didn’t want to pay it off in the typical 5-10 years. At the same time, I was introduced to the world of personal finance blogs and started investing in my 401K. That is when the bug really started to bite.
I began to read blog after blog, book after book, devouring my way through the philosophies around personal finance. I quickly learned about the dangers of lifestyle inflation and had a plan for my first raise. I simply increased my savings in my 401K and kept moving.
Now, that savings has grown to a maxed out 401k and HSA and several goal-specific savings accounts (emergency, house repair, charity, and next used car to name a few).
The biggest factors that helped me to get to this point were the awareness of and plan to combat lifestyle inflation and the creation of systems for automatic saving/investing.
The savings goals have given Mr. Adventure Rich and I several “money options”, including the ability to take a new job across the country and buy a house.
How happy are you with these results and what future plans do you have for saving more?
I am very happy with the result of our savings so far.
Sure, there are areas of improvement and areas we need to be more aware of, but we continue to tweak our system and work towards our goals.
I plan to continue to save and invest bonuses and raises, allowing my money to work for me and build a nest egg for future endeavors.
INVEST
What are your main investments?
Mr. Adventure Rich and I primarily invest in low-cost index funds through our tax-deferred accounts.
We have around $100K in my 401K, $11K in his 403b, $58k in his IRA (rolled over from 403b), and $8K in an HSA. We currently max out my 401K and HSA.
We also have about $10K in my employer stock and $5K in a 529 Plan, but we are not actively investing in these accounts right now.
All of these accounts have experienced significant growth over the past few years, tracking with the stock market bull run. The returns certainly don’t look too shabby!
How happy are you with these results and what future plans do you have for investing?
The bull market has looked favorably on our investments so far, but we know that we may head into a wild ride at any point.
Our future plans include continuing to aggressively invest in low-cost index funds (regardless of what the market is doing) and explore the possibility of investing in a rental property.
WRAP-UP
What money mistakes have you made that others can learn from?
Mr. Adventure Rich and I avoided many of the big financial pitfalls, but not all of them.
Mr. AR came into our relationship with about $10K of credit card debt (which we quickly paid off!).
I bought a new Nissan Versa hatchback out of college. It was a great car for my purposes, but in hindsight, I could have saved a bit by exploring the used car route.
And we constantly struggle to make sure we correctly prioritize our wants vs. needs. It seems like a never-ending process and we constantly have to remind ourselves of our bigger goals!
Are there any questions you have for ESI Money readers regarding any parts of your finances?
Yes! Ok, so my big struggle right now is trying to prioritize investments. We currently max out my 401k and HSA. We have some additional monthly savings on top of that, but it is currently earmarked for a new roof (ours is 30+ years old!), charity, and rebuilding our emergency fund after buying a house.
So…if I am looking to save for a down payment/initial costs for a potential real estate/rental property investment, should I reduce my 401k contributions?
Or try to trim cost/create a side hustle for this (which would likely be a slower way to save)?
We have $1,200 in a “future investment” savings account right now, but I think I would need to build that to closer to $15-30K depending on the area of the rental.
Lily | The Frugal Gene says
Yay! Always a delight in reading about Mrs AR. She must have a treasure trove of great career advice too! ^_^
Mrs. Adventure Rich says
Thank you, Lily!
Jason@WinningPersonalFinance says
Wow Mrs. AR. Two guest posts in one week!
Is there a specific rental you have in mind? Why do you think rental real estate will perform better than a 401(k) contribution? It’s about after tax ROI in the end after all. Run the numbers before making a decision.
Sounds like you are doing great over all. I have a feeling you will be part of Mr. ESI’s other Interview series soon.
One idea. A side hustle for Mr. AR may help fund the RE investment.
Kevin says
Jason,
Diversification is key to building wealth. Real Estate has made many multi millionaires. Real Estate is not easy and must be done with lot of care and due diligence. Can be expensive (repairs, not leased, etc). But can be a cash boon since you can depreciate the property and thus not pay taxes and may carry a tax loss though financially you are having a gain. Now your basis goes down and you will be taxed when sold. But is a great way to have very good cash flow then enables you to buy another rental property etc.
I love the stock market. Most of my assets are there. Where I live RE has gone up so much it is crazy. I would love to have a few properties.
I think it is great for the AR’s to go this route, so long as they have done their DD, which based on reading the article I couldnt imagine them not doing.
Good luck.
Mrs. Adventure Rich says
HI Jason and Kevin!
I think Kevin hit my thoughts… While I love the stock market and index investing, I could see a rental as a good way to diversify and possibly create better returns (fixer-upper in the area that Mr. AR could work on, etc) 🙂 It is definitely an interest that we will need to weigh against other opportunities!
Thank you both for the perspectives!
Chris @ Duke of Dollars says
I haven’t heard of the Adventure blog – looking forward to reading the career advice!
Taking advantage of the tax accounts in my humble opinion is a top priority. I noticed you all didn’t have an IRA, any specific reason for that?
Tax-advantaged accounts have restrictions after that year is up and you haven’t taken full advantage of them, the year is gone and you can’t backfill from the past.
Buying real estate and then not having the rental filled, or having to do maintenance, etc can really hurt the returns of the money, while the stock market has continually grown in the long run – plus it sounds like your 2-year-old keeps you busy enough :).
Mrs. Adventure Rich says
An IRA is certainly something we are considering as well! We currently have focused on my 401k and HSA, but the “next investment” is where we are still fuzzy (IRA, small business, Real Estate). My husband recently left his job so we are considering many paths 🙂
Thank you for the advice! I enjoy your blog 🙂
Sean @ Frugal Money Man says
Thank you for sharing your story!
Mr. & Mrs. Frugal Money Man invest pretty much the exact same way you and your husband do! We invest and MAX out 3 tax advantaged accounts using low-cost index funds. I have my Roth 401k, and we both have our separate Roth IRA’s. This year I actually simplified our investments even more by selling previous index funds in our Roth IRA’s, and then putting all the money in to the Vanguard Total Stock Market Index Fund. Our next step is saving for our starter home!
Can I ask where you originally moved from? My oldest sister and her family moved up to Michigan a couple years ago an absolutely love it!
Mrs. Adventure Rich says
We came from southern California where we met and got married. But we are both native “east of the Mississippi-ers”. I grew up in northern MI and Mr. AR is from the East Coast. Michigan has a special place in our hearts and we are really happy we are here 🙂
CashflowKat says
Here’s my advice but it’s controversial (like me!)…I think Mr. AR now has some time on his hands and so this might be great timing for investing in your first rental. You are in the Midwest, so you might be able to find pretty affordable opportunities (also look at things like on-line auctions – like Hubzu.com (which I wrote a post about…love hubzu!) and properties where ya’ll can add value to the property. But of course you don’t have downpayment cash right now…so here’ my controversial advice. Keep investing in the 401k up to the match, then use other income/savings to invest in the rental. Use the 401k or your current principal residence home equity, either to: borrow from as source for your rental property downpayment OR use the fact that you can get such a loan in case of an emergency or unexpected expense. In other words, don’t rebuild the emergency fund in cash, just know that you have asset that you can borrow on in case of said emergency. OK, so there’s risk involved with my plan. But with risk can come reward! Good luck – and either way you’re in good shape!
Mrs. Adventure Rich says
Oooh, very interesting, thank you, CashflowKat! I’ll have to see how my risk barometer reacts to this 😉 but I really appreciate the ideas! And I am checking out Hubzu right now. That has been a thought of ours… find a local rental we can add value to via fix-up with Mr. AR’s time and handyman skills. Thank you!
Bernie Doss says
Interesting question. I would suggest that Mrs. AR continue on with her basic plan, take care of her roofing and replenish the emergency plan to a level that includes inflation at 3% per annum to meet current and unexpected events. Remember, a solid ROOF over their heads will provide you with time to make good decisions. Thanks for the information on your path to your goals.
Mrs. Adventure Rich says
Thank you, Bernie! I definitely like the comfort and security that comes from an emergency fund and a sound house.
Arrgo says
Keeping your lifestyle inflation in check is very important and a smart move. You can certainly do/ buy some things but overall you’ll likely regret blowing too much on nonsense purchases that won’t matter much to you down the road. Good thing you are aware of it. Real Estate isn’t totally my area but my opinion at your age is to max out your 401k plan first. The long term compounding will probably be much easier money earned for you in the future. Sounds like focusing on your career is the best thing to do now but I’d always keep my eye out for a side-hustle that suits you.
Mrs. Adventure Rich says
I agree with the benefit of the long-term compounding in the 401K, which has been one of the motivating factors to our heavily investing in it. And yes, for me, focusing on my career has paid in full and I plan to stick to that! Since writing this, my husband actually left his job so we are thinking of options for him (new career, side hustle, small business, real estate fix up, etc?). It is an exciting and scary time all wrapped into one!
Erik @ The Mastermind Within says
Congrats on the feature Mrs. AR, love your story, and also really enjoyed meeting you at the last FinCon.
On the rental property aspect, as long as the money is going towards investments, I don’t think you’ll be unhappy either way (if you decide to decrease your 401k contribution)
I just upped mine and will be maxing it out for the first time this year 🙂
Happy Friday!
Mrs. Adventure Rich says
Thank you for the perspective, Erik! I really enjoyed meeting you at FinCon too! Congrats on maxing out the 401K this year 🙂 We want to keep the real estate option open, but we know this may not be the best option so we shall see!
Chadnudj says
“Yes! Ok, so my big struggle right now is trying to prioritize investments. We currently max out my 401k and HSA. We have some additional monthly savings on top of that, but it is currently earmarked for a new roof (ours is 30+ years old!), charity, and rebuilding our emergency fund after buying a house.
So…if I am looking to save for a down payment/initial costs for a potential real estate/rental property investment, should I reduce my 401k contributions?”
I wouldn’t reduce the 401k contributions, but I’d certainly stop maxing the HSA if it helps you pay for the new roof quicker. Presumably you already have some money built up in the HSA to cover deductibles and out of pocket expenses for the next year or so, and from all reports/appearances you’re young and healthy….so why not use some of your HSA funds already saved up NOW if you need them, and stop new contributions to the HSA until you have the roof?
I’d certainly do that before stopping/reducing 401k contributions.
Mrs. Adventure Rich says
Thank you for the advice, Chadnudj! We currently use the HSA as a “pseudo-retirement” account (since it is tax-free going in and out and we can invest it), but you are right, we could likely reduce one to help build for a downpayment if that is the route we go. I appreciate the perspective!
Penny @ She Picks Up Pennies says
Rental properties make my hands sweaty, so I’m definitely not the person to ask. I wanted to chime in, though, and say how much I appreciate you pointing out the reasons why you aren’t currently side hustling. It’s not always the panacea that the personal finance world makes it out to be. Thanks for sharing more of your story here!
PS – We were saving for a new roof. Then a microburst ripped apart our shed and part of our roof two Februaries ago. It wasn’t great to pay the deductible and to see a bit of a spike, but if I ever have to make an insurance claim, I figured that was a pretty good one.
Mrs. Adventure Rich says
Haha- yeah, I hear so much about side hustling, but I think my higher ROI comes from increasing my skills with my current career… then leaving the office and spending time with my family 🙂
Oh man, what a crazy situation with your roof! We are looking forward to having the security of a new roof soon!
Tawcan says
Been seeing Mrs AR on the internet a lot. That’s awesome you’re making lots of appearances. 🙂
So glad I met you at FinCon.
Mrs. Adventure Rich says
Thank you, Bob! It was so nice to meet you at FinCon as well 🙂
rcz58z says
I’ve considered rentals as well, but too many horror stories for me.. I invest in Trust Deeds instead which get my @ 8% year and I don’t have to deal with renters.. as well as I’m bit into stock market which includes dividend paying companies, different ETF’s and getting bigger into Int’l emerging markets over the past 2 years. I’m a big proponent of reducing taxes.. I think you should max out your 401k as you are, but also max out your husbands 401k as well.. And if you can take out roth IRA (depending on your income) on top of that, do that as well if not, then standard IRAs for each of you.
This of course AFTER you have 6 months to a year of living expenses saved up…
Mrs. Adventure Rich says
Great advice, rcz! My husband recently left his job so that cuts out a second 401k, but we are also considering more investing in stocks via an IRA or Roth IRA.
Apex says
“and explore the possibility of investing in a rental property.”
Your first step is to do said exploration. Not necessarily to the point of finding a property you want to buy but exploring what kinds of properties you could buy, what the finances look like, etc. Then decide if that is an investment path you want to take and why? If the numbers work out then the reason why you would want to do it is likely because the returns you can get there with leverage will considerably exceed what you can get anywhere else.
If you can get to the point where you can determine this is true in the area you want to invest with the types of properties you want to invest in then the decision becomes pretty easy. You suspend all other savings/investment plans that have lower returns and save up for this investment.
The company match is almost always impossible to beat so you should fund to the company match but beyond that I would stop everything else.
Based on your income your 401-k contributions are not saving you that much tax anyway. With the new tax law you pay 12% tax down from 15% up to $77,400 in taxable income. With the new 24K standard deduction that has you down to about that number already. After you make a few HSA and 401-k contributions to get your company match you are likely down to about $70K in taxable income.
Personally I would not put a single dime extra into a tax deferred plan when the federal tax bracket I am saving from is only 12%. In later years your income will be much higher and then you will be in 22/25/32% brackets and then it will make much more sense to be maxing out those 401-k plans.
Taxes have to go up eventually and its hard to imagine a time when your taxable income rate will be lower than 12% so saving taxes at that rate is not likely to be that beneficial in the long run anyway.
This all presumes you determine that real estate will be a more profitable investment and that it is an investment path you want to go down. It’s not for everyone, but if its for you, you should not dribble money into a down payment account that takes 5+ years to fund. You should put together a plan to have funds available in a year, and divert most savings to moving that plan forward.
Mrs. Adventure Rich says
Hi Apex- thank you so much for the thoughtful response and advice! The information about the new tax law is really helpful… something I need to learn more about 🙂 I also like your ideas on looking at real estate and really doing the due diligence. We keep “sort-of” looking, but not really diving into research. I think this is the motivation we may have needed to start looking in a more organized way. Thank you!
Ray says
I’m going to disagree with Apex on not maxing out the 401k.
1) 401k contributions are automatic and are the ultimate pay-yourself-first savings vehicle. If you reduce what is going into your 401k, it’s easy to used to the extra money and harder to ramp up later.
2) Investments work better the longer you give them. The magic of compound interest and all.
3) You can give the most to a 401k. Assuming you still manually invest the money you are forgoing from placing in your 401k, a Roth IRA is limited to $5500/yr while a 401k goes to $18500/yr. Any remainder will be taxed on the gains.
4) You only get the employer match on a 401k. At a minimum continue enough contributions to get the maximum employer match.
5) Your taxes might not be more in retirement. Look at ESI’s experience – he discovered that his taxes went way down in retirement because his taxable income dropped.
6) To quote Apex – “In later years your income will be much higher and then you will be in 22/25/32% brackets and then it will make much more sense to be maxing out those 401-k plans.” Just because it will make sense to max out in the future doesn’t mean it doesn’t make sense to max out now – no reason you cannot do both. Plus, a $1 invested today will be worth much more to you than a dollar invested in 20 years.
7) The regular investment nature of a 401k forces you to buy when the market is down (and prices are low) and you might otherwise hesitate because of psychological reasons (“I don’t want to invest on the way down”).
In general I think a lot of people let misconceptions about taxes drive their decision making. E.g., not wanting to pay off a mortgage because they’ll lose the interest deduction (hint: not paying any interest to the bank saves you more money). If you are letting taxes drive a decision I recommend sitting down very carefully and reviewing the actual numbers involved.
ThomH says
Great thread. So I’m going to give you the positive view point on real estate. It can be a phenomenal way to build wealth, but I would not reduce your 401k investing to save for a real estate down payment. Find other ways to save for the real estate down payment (bonuses, skipping a few vacations, side hustles, etc). There are numerous ways. Unfortunately none are easy. I was in your position at one time. I’m now fully retired at 52 yrs old thanks to real estate, and owning over fifty rentals. But I also have a massive 401k aging like a fine wine for when I’m 59.5 yrs old. Find creative ways to do both. You’ll eventually find the means, if you really work hard at it. Real estate has many benifits, distinctly different from a 401k. Especially when it comes to taxes, and early retirement income through rental cash flow. But why not have the best of both worlds (401k & REI)?! Stick with the 401k investments, and find the REI down payment elsewhere, it’ll just take a little longer, but it will come. The rewards in the end are well worth the struggle! Good luck!
Apex says
Real estate allowed you to retire at 52. It allowed me to retire at 46. Putting most of their invest-able cash into a 401-k will that mean reaching the financial freedom that it brought both of us to retire early will take them longer. That is just simple math. Having both is great but one does have to realize the trade off one is making. It is also worth noting that the original poster already has enough in retirement accounts that at age 60 they will have a 7 figure 401-k even if they don’t put in another dime. By putting in just enough to get the company match they will have well over 2 million by age 60, over 4 million by age 70. I think that will be great plenty in a 401-k, especially given all the cash flow the real estate will be producing at that time.
As I stated above this poster is only going to be taxed at the 12% federal level for most, if not all, of their 401-k contributions. I don’t think that is a good tax rate at which to pile money into a 401-k just on its own merits let alone as a trade off for investing in real estate. Once the real estate portfolio is established and throwing off some cash flow it can start to fund its own expansion. By that point the income will have increased both from the W-2 job and potentially from real estate. At that point a higher 401-k contribution will have less impact on the real estate portfolio and they will be in a higher tax bracket at which point the 401-k contribution will be much more valuable with respect to tax savings.
Reduce the 401-k contributions now and increase them later when you have more income, more invest-able assets for real estate, and the contribution will have greater tax benefit.
ThomH says
Apex,
Make no mistake, I love real estate as an investment. Assuming one has the experience and demeanor to manage property. I caution an either/or approach for their 401k investing. First of all, I don’t agree that they have sufficient funds to never put another dime into their 401k and have sufficient funds at 60yrs old. My math says, given “$100K in my 401K, $11K in his 403b, $58k in his IRA (rolled over from 403b)” their current total of $169k and a very reasonable estimated rate of return at 7%, (after inflation) they would have approximately $1.38m by age 60 ( I don’t know their actual ages, so I assumed 29yrs old based on being in their late 20’s), as stated. This only generates a salary of $55k per year (assuming a 4% w/d rate), thirty one years from now. With inflation, I personally wouldn’t be comfortable with that assumption. Again, my suggestion is to aim at achieving a great retirement on both sides (401k & REI). They have no experience in REI from what I can assess from the article. Take a smaller approach, possibly divesting the company stock ($10k) and use it as a initial down payment. Get some experience before going all in and changing their current 401k investing approach, which is obviously working for them and ensuring their long term retirement. I wouldn’t risk that, when other options are available. The company stock has it’s own risks, but that’s for another discussion. I think it’s a more reasonable risk to use those company stock funds as a down payment, and it better diversifies them at the same time. My main point is, I wouldn’t short change a great start on the 401k in my 20’s (keep stashing it away wit so many years ahead of them), when there are clearly other options (company stock, future bonuses, side hustle, etc.) to use for real estate. Yes, it may take a little longer. Still continue the real estate option in addition to continuing to invest heavily in the 401k. There are ways down the road to pay even less than 12% taxes, if they build the right portfolio of taxable and non-taxable funds, but that’s also for another discussion. I wouldn’t base my decision solely on today’s low tax rate. Just my opinion. Thanks for the great discussion.
Mrs. Adventure Rich says
Hi ThomH and Apex-
Thank you, both for the insightful discussion! It is good to hear from two early retirees who have built wealth through 401K and REI!
I like the idea of tapping into the Company Stock first… that has been an outlier I’ve been ok with so far, but one that I have wanted think about selling due to the risk of a “one stock basket” risk.
I also want to continue investing in the 401K somewhat aggressively. Maybe not maxing out, but certainly to company match and probably a bit more (like ThomH mentioned, I’d rather build a 401k to be a bit hefty vs. light in retirement since there are many unknowns for us… health, children/college, etc).
You both have given us some great starting points for Mr. AR and me to dive into.
Have a great weekend!
Apex says
Mrs. AR,
One suggestion for you. If you want to put more into retirement funds I suggest looking at your tax rate and only funding a 401-k up to the match as long as you are under the 77.4K taxable income that starts the 22% bracket (this goes up every year usually by a couple thousand). Beyond that I would put all other funds into a Roth IRA since it won’t get you the tax deduction now but will be tax free during withdrawal. I think that is a better use of your retirement vehicles as long as you are in the 12% bracket. It also diversifies your risk to future tax rates. Having all the funds in taxable 401-k and IRA funds gives you no protection against future tax rates and changes. Another thing to consider is since you are working for a fortune 50 company there is a good chance they offer you a Roth 401-k option. If your taxable income is below the $77.4K threshold I suggest looking into the Roth 401-k option. Your match will go in as traditional taxable funds but your contributions could go into a Roth 401-k which is very similar to a Roth IRA.
It is also the case that based on your path and your financial savvy it is highly likely that contrary to all the discussion about how much you can withdraw from these funds in retirement that you will actually find yourself in a place where you don’t want to withdraw the funds and pay tax on them. Come age 70.5 you will be forced to start withdrawing them and paying tax on those funds whether you want to or now. In a Roth IRA, since they are not taxable the govt will let you ride that out for as long as you want giving you more years of tax free growth until you want the funds or until you pass them on to your heirs.
I really think most people don’t give enough thought to the tax rate they are saving their funds at. 12% is too low of a tax savings to use that vehicle extensively especially when there are other options available.
You also mentioned your HSA as a savings vehicle and that is a great point. Most people miss the fact that the HSA is a backdoor Roth IRA with the added benefit of the upfront tax deduction. It is the best of the 3 vehicles available (401-k, Roth IRA, HSA). So if you are going to put money in for the tax deduction, max out the HSA. I did that and don’t even use any of my HSA money for medical. I pay it out of normal savings and let the HSA ride, saving receipts for medical bills now because you can withdraw those funds in the future for past medical bills if you can prove you paid for them. Let the HSA continue to grow tax deductible and tax free into retirement and then draw the funds down against past expenses much later after the account has grown considerably.
Based on that I would suggest your retirement vehicle contribution priorities should follow the following:
1. 401-k up to the match (look into Roth 401-k if available)
2. Max out HSA
3. Any extra you want to save into a Roth IRA or into Roth 401-k if available.
4. Save for Real Estate.
Andrea says
This thread was extremely interesting and informative. Thanks!
Laurie@ThreeYear says
Mrs. AR! It’s so great to see you here! It was great to read your story again from an E-S-I perspective. You guys are doing great, even with the new recent decision to become a one-earner household! Congratulations!!
Mrs. Adventure Rich says
Thank you, Laurie! It will be interesting to see where things go 🙂
Mrs. Groovy says
I love seeing you here, Mrs. AR!
Since you’re a bit fuzzy, in your own words, on the real estate, I wouldn’t change up my investment strategy at the moment.
One tactical tip with the HSA — if you think down the road you may want to apply any of those funds towards prior medical bills, be sure to retain electronic copies of all receipts and EOBs (Explanation of Benefits) and keep them in a folder by year. If you have any paper receipts, scan them, as they fade.
Redfish says
Ms. AR,
Hello from Texas. It makes me feel encouraged about the future world when I hear about “youngsters” paying attention to their finances! Hope your journey to FIRE is fun and pleasant.
Here are some thoughts to consider, Ms. AR, from someone who has been retired several years (life is good!) with investments in tax deferred accounts, tax free (Roths) accounts, taxable accounts, and a little bit of real estate (land). We don’t need to dwell on “if I knew then what I know now”, but my wife and I would be much better off now if we had put more of our savings in Roth IRAs. The issue is having most of your retirement savings in tax deferred accounts means the feds will assign you with required minimum withdrawals when you turn 70.5 years old, even if you don’t need the money. These withdrawals will be taxed as “ordinary income” and this could bump you into a higher tax bracket. So you have all this money earning capital gains in a tax deferred account for many years and when you take it out it is taxed as ordinary income at a much higher tax rate than capital gains rates. In addition, if Social Security is still around in 30 years (I think it will be), the “ordinary income” mandatory withdrawals from the tax deferred accounts will most likely increase the tax you have to pay on your SS income.
With a Roth, there is much more flexibility in retirement, and any withdrawals don’t count as income and are tax free. This very likely will keep a person in a lower tax bracket in later retirement. Yes, contributions to a Roth are taxed now, and there is no tax deduction now in the current year. But you are done with taxes in the future on that money and its earnings. In our situation we would be better off if more of our retirement savings were in a Roth rather than a “taxable as ordinary income when you take it out” IRA type account.
This is something to think about. Contribute only enough to the workplace tax deferred account to get all the company match. Then put extra savings into Roth accounts up to the maximum contribution limit possible each year. If you still have more money you can save, then go back and add more to the workplace tax deferred accounts, fix the roof, pay off debt, or start working on your real estate down payment.
Best wishes to all.