Don't forget that if you leave your employer any time soon, you can do 401k->IRA->Roth conversion (paying taxes on the Roth conversion, possibly quite low taxes if you are unemployed and convert slowly). If the 401k has not yet grown very much, this is basically the same as just putting it in a Roth to begin with. The disadvantage may be liability sheltering, but there are some advantages wrt withdrawals as well.
akratic's ERE journal
I think the 33% just means that if you are in a 33% tax bracket upon withdrawal, your maxed-out Roth will be worth 33% more to you than the Traditional. Thus, you could say that your Roth account is 33% more valuable.
Sure, if you did the Traditional, you would have 33% extra in the beginning to invest in a personal account. But the personal account does not grow tax-free. If you buy and hold something like BRK, then this doesn't really matter much. If you actively trade or invest in income-producing vehicles, you want as much value in your tax-sheltered account as possible.
In addition to investment style, the advantage is highly dependent on tax rates upon withdrawal. If you are only withdrawing $6k/year, then the Roth advantage is reduced.
Sure, if you did the Traditional, you would have 33% extra in the beginning to invest in a personal account. But the personal account does not grow tax-free. If you buy and hold something like BRK, then this doesn't really matter much. If you actively trade or invest in income-producing vehicles, you want as much value in your tax-sheltered account as possible.
In addition to investment style, the advantage is highly dependent on tax rates upon withdrawal. If you are only withdrawing $6k/year, then the Roth advantage is reduced.
@dragoncar good point about the Roth conversion. I need to look more into that!
@Ralphy, I'm not good at explaining this, but I'll try. With Roth vs Traditional, usually people do math like:
Roth: Start $15k, 33% taxes => $10k, grow 10x, untaxed, now you have $100k
Traditional: Start $15k, no taxes, grow 10x => $150k, taxed 33% to $100k
So they're equivalent, when 33% is used for both now taxes and later taxes. If your tax bracket is higher now, Traditional wins. If your tax bracket will be higher in the future, Roth wins.
But... BUT!... we just saw that $15k in Traditional was the equivalent of $10k in the Roth. So you'd think the contribution limits would be something like $15k in Traditional IRA, $10k in Roth. But they're not. The contribution limits are $16.5k for Traditional 401ks and $16.5k for Roth 401ks. So the Roth lets you save more, and tax shelter more growth. $16.5k in a Roth 401k is the equivalent of about $22k in a Traditional 401k...
So if you're bumping into the contribution limit for the 401k, Roth has an added advantage that people don't usually mention. This is only relevant if you plan to max out your contributions though.
@Ralphy, I'm not good at explaining this, but I'll try. With Roth vs Traditional, usually people do math like:
Roth: Start $15k, 33% taxes => $10k, grow 10x, untaxed, now you have $100k
Traditional: Start $15k, no taxes, grow 10x => $150k, taxed 33% to $100k
So they're equivalent, when 33% is used for both now taxes and later taxes. If your tax bracket is higher now, Traditional wins. If your tax bracket will be higher in the future, Roth wins.
But... BUT!... we just saw that $15k in Traditional was the equivalent of $10k in the Roth. So you'd think the contribution limits would be something like $15k in Traditional IRA, $10k in Roth. But they're not. The contribution limits are $16.5k for Traditional 401ks and $16.5k for Roth 401ks. So the Roth lets you save more, and tax shelter more growth. $16.5k in a Roth 401k is the equivalent of about $22k in a Traditional 401k...
So if you're bumping into the contribution limit for the 401k, Roth has an added advantage that people don't usually mention. This is only relevant if you plan to max out your contributions though.
@The Dude, I've soured on real estate. I'm unwilling to put in the work necessary to be a landlord, and I'm unwilling to tie myself to one address. I've moved at least 15 times in the past three years, so I don't know why I ever thought owning real estate was a good fit for me.
Actually, I do know. I think smart and hard working people can make a *killing* in real estate. But it's not a good fit for me right now.
Actually, I do know. I think smart and hard working people can make a *killing* in real estate. But it's not a good fit for me right now.
== 2010 IN REVIEW ==
My ERE progress in 2010 about matched my very high expectations.
I budgeted to spend $1420.00 / mo. I ended up spending $1422.63 / mo on average. I can't believe how close these two numbers were!
So my spending is about on track. On average in 2010, I spent, per month:
- housing: $550
- travel: $275 (plane tickets + bus tickets + hostels)
- food: $220 (groceries + eating out)
- gifts: $60
- transit: $55 (subway + bike)
- health: $55 (insurance + gym)
- cell phone: $20
- other: $190 (social life + clothes + fun + grooming + possessions + random legal/bureaucratic fees)
My earnings slightly exceeded projections, which was a nice surprise.
Here is a graph showing what real return I would need from my investment strategy in order to be financially independent, by month. The graph starts at 42.20%. The graph ends at 7.44%. Hopefully the 2011 graph will end below 4%!
Actually, I doubt 4% FI will happen in 2011. It could happen in 2012 though! And there's an outside chance of it happening in 2011 if I dramatically decrease my expenses or increase my earnings.
== PLANS FOR 2011 ==
I learned *a lot* about investing in 2010, but I have yet to actually pull the trigger and commit my money. I expect this to happen in early 2011. I hope the investment strategy that I have devised will be able to provide a 4% real return for a long time.
I think my expenses should stay about the same in 2011. If I can convince my girlfriend to move to Chicago, that would probably cut my travel, housing, and food expenses in half, which would do wonders for my FI projections. But I think this is unlikely.
If I cannot convince her to move to Chicago, my housing expenses will probably slightly increase, as I'm getting thoroughly frustrated with living with roommates, and I'm very close to consciously choosing a more expensive studio apartment.
2010 was a bit of a roller coaster as far as my housing situations were concerned. I moved five times, and each time I was excited about the living situation initially... before realizing that there were huge problems with it. I think I finally have enough information to choose the right neighborhood for me, and to choose to live alone. (Seriously, I can't believe the trouble I've been through with craigslist roommates...)
I hope that either way I can do better with food expenses in 2011. I believe it is the area that I am most wasteful, and I don't even derive much pleasure from it. All of my other spending is aligned with my priorities.
== WRAP UP ==
In general, things in my life are going very well. I enjoy my job, my girlfriend, my family, my friends, my body, etc. The most important thing for me to do is simply keep going.
I like goals and improvements though, so here we go.
2011 Goals:
1) invest your money!!
2) continue to learn about investing and tax-efficiency such that your odds of earning 4% after inflation and taxes is maximized.
3) find more people in Chicago that you connect with and foster relationships with them
4) drop food expenses from $220/mo to $150/mo, while also improving the quality of the food by being more deliberate about what you eat
5) move to a studio or 1BR in a nice neighborhood
6) lose 10 lbs of fat
7) do one thing every day that scares you
8) work on making other people feel more comfortable when they are around you
9) continue to make your top priorities out of your job, girlfriend, family, friends, and health.
My ERE progress in 2010 about matched my very high expectations.
I budgeted to spend $1420.00 / mo. I ended up spending $1422.63 / mo on average. I can't believe how close these two numbers were!
So my spending is about on track. On average in 2010, I spent, per month:
- housing: $550
- travel: $275 (plane tickets + bus tickets + hostels)
- food: $220 (groceries + eating out)
- gifts: $60
- transit: $55 (subway + bike)
- health: $55 (insurance + gym)
- cell phone: $20
- other: $190 (social life + clothes + fun + grooming + possessions + random legal/bureaucratic fees)
My earnings slightly exceeded projections, which was a nice surprise.
Here is a graph showing what real return I would need from my investment strategy in order to be financially independent, by month. The graph starts at 42.20%. The graph ends at 7.44%. Hopefully the 2011 graph will end below 4%!
Actually, I doubt 4% FI will happen in 2011. It could happen in 2012 though! And there's an outside chance of it happening in 2011 if I dramatically decrease my expenses or increase my earnings.
== PLANS FOR 2011 ==
I learned *a lot* about investing in 2010, but I have yet to actually pull the trigger and commit my money. I expect this to happen in early 2011. I hope the investment strategy that I have devised will be able to provide a 4% real return for a long time.
I think my expenses should stay about the same in 2011. If I can convince my girlfriend to move to Chicago, that would probably cut my travel, housing, and food expenses in half, which would do wonders for my FI projections. But I think this is unlikely.
If I cannot convince her to move to Chicago, my housing expenses will probably slightly increase, as I'm getting thoroughly frustrated with living with roommates, and I'm very close to consciously choosing a more expensive studio apartment.
2010 was a bit of a roller coaster as far as my housing situations were concerned. I moved five times, and each time I was excited about the living situation initially... before realizing that there were huge problems with it. I think I finally have enough information to choose the right neighborhood for me, and to choose to live alone. (Seriously, I can't believe the trouble I've been through with craigslist roommates...)
I hope that either way I can do better with food expenses in 2011. I believe it is the area that I am most wasteful, and I don't even derive much pleasure from it. All of my other spending is aligned with my priorities.
== WRAP UP ==
In general, things in my life are going very well. I enjoy my job, my girlfriend, my family, my friends, my body, etc. The most important thing for me to do is simply keep going.
I like goals and improvements though, so here we go.
2011 Goals:
1) invest your money!!
2) continue to learn about investing and tax-efficiency such that your odds of earning 4% after inflation and taxes is maximized.
3) find more people in Chicago that you connect with and foster relationships with them
4) drop food expenses from $220/mo to $150/mo, while also improving the quality of the food by being more deliberate about what you eat
5) move to a studio or 1BR in a nice neighborhood
6) lose 10 lbs of fat
7) do one thing every day that scares you
8) work on making other people feel more comfortable when they are around you
9) continue to make your top priorities out of your job, girlfriend, family, friends, and health.
wow, 5 moves in 2010?! Good job on the persistence! It seems like you are moving into subletting an empty room. Have you tried renting a multiple room apartment and then finding roommates to fill it? Maybe it's too late in the game 
, but I feel like the oldest renter in the apartment has the uppermost hand, in general. I wouldn't doubt there's more to it, just sharing my observation of the situation.
, but I feel like the oldest renter in the apartment has the uppermost hand, in general. I wouldn't doubt there's more to it, just sharing my observation of the situation.@rePete, I enjoy having the freedom to just leave if I find that I don't like living with one of my roommates. If I were in charge and I ended up with a bad roommate, I'd have to confront them to try to change them into a better roommate, or I'd have to kick them out. I think it's hard to change people, and I can't imagine what a nightmare it would be to kick someone out, so I prefer having the freedom to walk.
(Of course the best solution is to be so laid-back and flexible that nothing your roommates do bothers you. I like to think I'm somewhat laid-back, and I've had an easy time living with friends in the past, but I've had a terrible time with Chicago craigslisters...)
Here are some things I've learned through this experience:
1) living with friends > living alone > living with craigslist roommates (for me, even factoring in costs)
2) I'm actually not that good of a judge of roommate compatibility based on 15 minute first impressions. I consistently think people will be good rommates upon first meeting them, only to find out later that I was wrong.
Thus I'm going to get a place to myself until I have some friends that I've known for a few months that I want to live with. In Boston I have lots of those. In Chicago, not so many.
(Of course the best solution is to be so laid-back and flexible that nothing your roommates do bothers you. I like to think I'm somewhat laid-back, and I've had an easy time living with friends in the past, but I've had a terrible time with Chicago craigslisters...)
Here are some things I've learned through this experience:
1) living with friends > living alone > living with craigslist roommates (for me, even factoring in costs)
2) I'm actually not that good of a judge of roommate compatibility based on 15 minute first impressions. I consistently think people will be good rommates upon first meeting them, only to find out later that I was wrong.
Thus I'm going to get a place to myself until I have some friends that I've known for a few months that I want to live with. In Boston I have lots of those. In Chicago, not so many.
@m741 thanks! I'm looking forward to the journal. I always read all of the journals...
January 2011 was a good month!*
* all time low in expenses, aided by: $0 spent on travel and $0 spent on surprises (for the first time ever...)
* all time high in net worth, aided by 1) low expenses and 2) end of year bonus.
My girlfriend moved to Chicago this month!
This means that going forward my travel expenses should decrease significantly, as well as my food expenses.
My rent is staying about the same, or maybe going up a little. We got a 1BR together in a great location. I'm really psyched about this! Goodbye sucky roommates!
We learned some great tricks furnishing our 1BR. I think it cost less than $200 total, split two ways ($100 each).
1) you can rent pickup trucks from zipcar for $12/hr!
2) free furniture is easy to find on craigslist and in alleys
3) you can make outrageous lowball offers on the used furniture part of craigslist if you're willing to pay cash and pick up (see #1)
=== ERE Reading ===
How I Found Freedom in an Unfree World by Harry Browne. I liked this book so much I also went out and read Fail-Safe Investing, too.
=== Next Steps ===
I *really* need to invest my money. I've decided on an asset allocation, and I'm just waiting to pull the trigger now. Well, actually I need to get my money transferred into the right accounts, which is taking forever.
Things are looking up though! Having my girlfriend in Chicago should significantly decrease my expenses.
January 2011 was a good month!*
* all time low in expenses, aided by: $0 spent on travel and $0 spent on surprises (for the first time ever...)
* all time high in net worth, aided by 1) low expenses and 2) end of year bonus.
My girlfriend moved to Chicago this month!
This means that going forward my travel expenses should decrease significantly, as well as my food expenses.
My rent is staying about the same, or maybe going up a little. We got a 1BR together in a great location. I'm really psyched about this! Goodbye sucky roommates!
We learned some great tricks furnishing our 1BR. I think it cost less than $200 total, split two ways ($100 each).
1) you can rent pickup trucks from zipcar for $12/hr!
2) free furniture is easy to find on craigslist and in alleys
3) you can make outrageous lowball offers on the used furniture part of craigslist if you're willing to pay cash and pick up (see #1)
=== ERE Reading ===
How I Found Freedom in an Unfree World by Harry Browne. I liked this book so much I also went out and read Fail-Safe Investing, too.
=== Next Steps ===
I *really* need to invest my money. I've decided on an asset allocation, and I'm just waiting to pull the trigger now. Well, actually I need to get my money transferred into the right accounts, which is taking forever.
Things are looking up though! Having my girlfriend in Chicago should significantly decrease my expenses.
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DividendGuy
- Posts: 441
- Joined: Sun Dec 05, 2010 9:58 pm
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Concojones
- Posts: 117
- Joined: Fri Jul 23, 2010 6:57 am
Great progress, akratic! If you're going to invest in 2011, I wonder what you're going to invest in. Nothing goes up in a straight line, but all asset classes have done exactly that, lately, and they seem rather expensive now, compared to the state of the economy. I've been thinking of eliminating some of my investments, but haven't pulled the trigger yet.
You may say, there'll always be an excuse to delay getting into the market, but my rule of thumb is: your profit is made when you buy (cheap). If you find something cheap, let me know.
You may say, there'll always be an excuse to delay getting into the market, but my rule of thumb is: your profit is made when you buy (cheap). If you find something cheap, let me know.
I like the philosophy behind the Permanent Portfolio:
1) assume the four known economic climates (prosperity, inflation, deflation, recession) are equally likely in the future
2) choose investment products for each economic climate
prosperity => total stock market
inflation => gold (personally I think bitcoins are neat too... or maybe even food/oil/medical/etc)
deflation => 30Y US Treasury Bonds
recession => cash (for lack of a better option)
In addition, I will be speculatively putting a portion in a REIT Index, because I rent and want some real estate exposure. And I will be putting some in hand picked dividend stocks, to try that out.
More specifically:
20% VTSAX vanguard total stock market index
20% GLD/IAU gold etfs for now, physical coins later
20% 30Y Treasury Notes, purchased directly on treasurydirect.gov
20% Cash (10% in rewards checking, 5% in i-bonds, the rest across checking accounts for convenience)
20% Speculation ("Variable Portfolio")
- 10% VNQ Vanguard REIT
- 10x 1% dividend stocks (I haven't finished choosing these)
In other words, for the most part I'm giving up speculating on whether an asset class is undervalued or overvalued, and just going to accept the return of the PP. I feel that the PP will do reasonably well across a wide range of possible futures. If it doesn't I'll just earn more money or decrease my expenses.
Also, the Permanent Portfolio backtests absurdly well, and I'm just looking for 4% to 3% after inflation.
The hard part for me right now is #1 getting all the money in the right accounts in the right proportions, and #2 actually pulling the trigger... I think once I pull this trigger, it will be pulled for good, aside from possibly changing up or eliminating the 20% speculation bucket.
PS: since the start of the year, gold is down 3.35%, 30Y is down 4.76%, and stocks are up 6.50%.
1) assume the four known economic climates (prosperity, inflation, deflation, recession) are equally likely in the future
2) choose investment products for each economic climate
prosperity => total stock market
inflation => gold (personally I think bitcoins are neat too... or maybe even food/oil/medical/etc)
deflation => 30Y US Treasury Bonds
recession => cash (for lack of a better option)
In addition, I will be speculatively putting a portion in a REIT Index, because I rent and want some real estate exposure. And I will be putting some in hand picked dividend stocks, to try that out.
More specifically:
20% VTSAX vanguard total stock market index
20% GLD/IAU gold etfs for now, physical coins later
20% 30Y Treasury Notes, purchased directly on treasurydirect.gov
20% Cash (10% in rewards checking, 5% in i-bonds, the rest across checking accounts for convenience)
20% Speculation ("Variable Portfolio")
- 10% VNQ Vanguard REIT
- 10x 1% dividend stocks (I haven't finished choosing these)
In other words, for the most part I'm giving up speculating on whether an asset class is undervalued or overvalued, and just going to accept the return of the PP. I feel that the PP will do reasonably well across a wide range of possible futures. If it doesn't I'll just earn more money or decrease my expenses.
Also, the Permanent Portfolio backtests absurdly well, and I'm just looking for 4% to 3% after inflation.
The hard part for me right now is #1 getting all the money in the right accounts in the right proportions, and #2 actually pulling the trigger... I think once I pull this trigger, it will be pulled for good, aside from possibly changing up or eliminating the 20% speculation bucket.
PS: since the start of the year, gold is down 3.35%, 30Y is down 4.76%, and stocks are up 6.50%.
Isn't there a parallel strategy for entering into the Permanent Portfolio over time (parallel to the redistribution every year system)? It might not be a good idea to buy a lot of gold when gold is high. Instead of going for the correct ratio initially, wouldn't it be better to look at which phase of the economic cycle you are in and buy into those assets that are a good deal now? And over the next few years keep buying in to the sector that has the best price at that time?
Akratic, glad to hear that things are going so well for you! Particularly on the girl and new home - hopefully this home will last a bit better. If you're still interested in boats in Chicago at all, the Chicago Maritime Festival is Sat the 26th at the history museum. What neighborhood did you end up in?
@sky, I don't know whether gold is high or not, because I can't predict whether the future will include lots of inflation or not. Part of accepting the PP for me is accepting that I can't or don't want to try to time the markets. The PP assets are legitimately uncorrelated / negatively correlated with each other, and leave me in a hedged position that still gives 3-5% real return over inflation. That's all I want.
I believe that you could do better (or worse...) by market timing. I don't see much utility in doing better than 3-5% though.
@Seabourne, good to hear from you! I ended up in Wicker Park, after having lived in the following neighborhoods in the past year: Gold Coast, Lincoln Park, Bridgeport (south side), and Lakeview.
I checked out the Chicago Maritime Festival website, and I'm not sure I can really justify the $20 tickets. It would have been cool if they had a presentation on living aboard a sailboat.
I believe that you could do better (or worse...) by market timing. I don't see much utility in doing better than 3-5% though.
@Seabourne, good to hear from you! I ended up in Wicker Park, after having lived in the following neighborhoods in the past year: Gold Coast, Lincoln Park, Bridgeport (south side), and Lakeview.
I checked out the Chicago Maritime Festival website, and I'm not sure I can really justify the $20 tickets. It would have been cool if they had a presentation on living aboard a sailboat.