So I am settled into my new ERE lifestyle: car parked and insurance cancelled (no expenses for that), walking everywhere (free exercise don't need a gym membership), new job started, my rent is $555, utilities low, and food is on a tight budget ($50 a month). So far my total expenses per month are $700 maximum. After tax I am looking at minimum $3000 a month, $36000 a year plus a $3000 bonus for working for this company for 1 year (which I was planning anyway so I took the bonus). I will be working overtime for sure which could add up substantially but I am not counting that yet. SOOO here's is my question: my employer is offering a 401(k) with a 5% match. I think it is 5 years before I am fully vested in that. I simply do not like the idea though of having access to all my available money to start working on providing myself investment income and capital. I WANT to be financially independent in 5 years and take 5-10 years off from full time work. I will plan on supplementing with contract work for a couple months a year. So I am wondering if I should wait on the 401(k) until I am FI and have achieved that goal and then work on starting a tax advantaged account? I just would like some advice on this matter and what others have done. I want to work, get my assets to cover my expenses and start playing music everyday again. The 40 hours per week is manageable at my age (22 years old) but I know in 5-10 years I will start getting antsy to be playing in a band and jamming all night again. I also want to be responsible and financially free (not worry that not working and playing music all night won't pay the bills). Any suggestions are very welcome. Thanks!
Andrew
Question for you all.
Andrew,
Sounds like a very well thought out plan---especially for someone so young. I would emphasize two things though; number 1, life happens, illness or accidents strike everyone at some point in their life so I wouldn't push too, too hard. Also, as you correctly point out, pretty much everyone will work part-time hours whether through need or desire to be useful. I was a former banker and I know of NO ONE who only lives off of their portfolio, hence a definite "$" goal of amount needed to quit is somewhat nebulous, IMHO.
I wish I had a plan in my early 20's.......
djc
Sounds like a very well thought out plan---especially for someone so young. I would emphasize two things though; number 1, life happens, illness or accidents strike everyone at some point in their life so I wouldn't push too, too hard. Also, as you correctly point out, pretty much everyone will work part-time hours whether through need or desire to be useful. I was a former banker and I know of NO ONE who only lives off of their portfolio, hence a definite "$" goal of amount needed to quit is somewhat nebulous, IMHO.
I wish I had a plan in my early 20's.......
djc
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MichaelAndrewLo
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Well the thing I was wondering was if I could simply manage my portfolio with one lump sum of all my money and have the same results as possibly saving less, some money in a 401(k), and possibly relying on 401(k) post 60. Does the 5% match and tax advantage outweigh the maintenance fees?
@ djc what are you talking about no one living off their portfolio? That is the purpose of ERE, which very few people are doing and possibly explains why you saw no one doing it. Look at Jacob for an example: he's living off his portfolio and I fully intend to as well. If I pick up extra contract work that would be purely an option and not out of necessity. I hope to be able to have the option to fully retire by 30. My employer is offering 3% raise every year but I will look for a different job in 1-2 years and my income should double, triple, or even quadruple if I land a good position in san fran or new york.
@ djc what are you talking about no one living off their portfolio? That is the purpose of ERE, which very few people are doing and possibly explains why you saw no one doing it. Look at Jacob for an example: he's living off his portfolio and I fully intend to as well. If I pick up extra contract work that would be purely an option and not out of necessity. I hope to be able to have the option to fully retire by 30. My employer is offering 3% raise every year but I will look for a different job in 1-2 years and my income should double, triple, or even quadruple if I land a good position in san fran or new york.
Whaaaa?! The 5% matching is free money. You have to take it. Also, most plans have at least a handful of fund choices, so it is invested in something you hopefully like.
My employer also offered a scaled matching, with full vesting reached at 5 years as well. So at the end of year 1 you've earned 20% of matched funds. Year 2 = 40%, Year 3 = 60%, Year 4 = 80%, Year 5 = 100%.
I am closing in on my full vesting. Then I will withdraw it when my tax burden is much lower (after I've retired).
My employer also offered a scaled matching, with full vesting reached at 5 years as well. So at the end of year 1 you've earned 20% of matched funds. Year 2 = 40%, Year 3 = 60%, Year 4 = 80%, Year 5 = 100%.
I am closing in on my full vesting. Then I will withdraw it when my tax burden is much lower (after I've retired).
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Robert Muir
- Posts: 280
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Double check that 5-year vesting thing; that's a long time!
However, vesting or no, I would still recommend the 401k to be used as a long-term investment and "oh shit" fund. Treat it as kind of an insurance policy. When you leave your firm, you can roll the money unto a low cost IRA under your direction.
However, vesting or no, I would still recommend the 401k to be used as a long-term investment and "oh shit" fund. Treat it as kind of an insurance policy. When you leave your firm, you can roll the money unto a low cost IRA under your direction.
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RightClawSouth
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Surprised nobody has mentioned this yet:
You should ABSOLUTELY take the match and I would argue that you should put a lot more into the 401k to take advantage of the tax savings.
Once your money is in a 401k it is *not* stuck there. You can use the 72(t) rules to get money out before age 59 1/2 without incurring the 10% penalty (you will still pay tax when you take the money out). You have to set up a withdrawal plan where you would take money out from this account consistently for the rest of your life. There are lots of rules and you should definitely read up on it and/or consult a tax professional but it's definitely worth it.
You should ABSOLUTELY take the match and I would argue that you should put a lot more into the 401k to take advantage of the tax savings.
Once your money is in a 401k it is *not* stuck there. You can use the 72(t) rules to get money out before age 59 1/2 without incurring the 10% penalty (you will still pay tax when you take the money out). You have to set up a withdrawal plan where you would take money out from this account consistently for the rest of your life. There are lots of rules and you should definitely read up on it and/or consult a tax professional but it's definitely worth it.
Tax-advantaged accounts are better than non-tax-advantaged accounts over the long term (generally). But the government limits how much money people can put into a tax-advantaged account each year.
I always put as much money into a tax-advantaged account as I can. If my circumstances change drastically and I really need the money, I can always pull it out (sometimes tax and penalty free, sometimes not).
If I manage to sail through life without having a disaster happen to me, I will be in a better position financially when I decide to live entirely on the income generated by my assets.
I always put as much money into a tax-advantaged account as I can. If my circumstances change drastically and I really need the money, I can always pull it out (sometimes tax and penalty free, sometimes not).
If I manage to sail through life without having a disaster happen to me, I will be in a better position financially when I decide to live entirely on the income generated by my assets.
@MichaelAndrewLo,
I can only go off of my experiences of being a managing bank officer. Several clients could have lived off of their portfolio's but choose to consult or work part-time so as to not touch their principal.
My "geography" is that of living in a Great Lakes port that has a very nice way of life but very poor incomes. This would be the perfect place to practice ERE as very nice residences can now be purchased for <50k and fixer uppers for <20k. If and when the market self-corrects I don't see how anyone will be able to live off of their portfolio----but again, these are only my opinions.
For the vast majority of people ERE will probably mean paying off their homes & debts, banking as much as possible and working easy part-time jobs for their minimal cash needs.
djc
I can only go off of my experiences of being a managing bank officer. Several clients could have lived off of their portfolio's but choose to consult or work part-time so as to not touch their principal.
My "geography" is that of living in a Great Lakes port that has a very nice way of life but very poor incomes. This would be the perfect place to practice ERE as very nice residences can now be purchased for <50k and fixer uppers for <20k. If and when the market self-corrects I don't see how anyone will be able to live off of their portfolio----but again, these are only my opinions.
For the vast majority of people ERE will probably mean paying off their homes & debts, banking as much as possible and working easy part-time jobs for their minimal cash needs.
djc
Yeah, absolutely take the match. Your plan says you will work the full five years to become fully vested. Based on your income numbers, and assuming you file your taxes as a single person, realize that even if you take the money out of the 401k after 5 years and pay the income AND penalty tax all at once, you'll probably have at least 80% more money when compared to not using the match (probably gets you around $8-10k).
Oh yeah, I'm also assuming that 5% match means that your employer matches you dollar for dollar up to 5% of your base salary.
Also, the vesting may be graded-- 20% in year 1, 40% in year 2, etc... and the vesting is only for the company contribution-- not your own, right? So, the match is probably going to help you even if you don't stay for the full 5 years.
Oh yeah, I'm also assuming that 5% match means that your employer matches you dollar for dollar up to 5% of your base salary.
Also, the vesting may be graded-- 20% in year 1, 40% in year 2, etc... and the vesting is only for the company contribution-- not your own, right? So, the match is probably going to help you even if you don't stay for the full 5 years.
A lot of people who are saying take the match - that's a no-brainer. But many people will also advise against sequestering your money in retirement accounts. I believe Jacob is in this camp. However, I plan to max out my 401k and extract it in the following manner:
1) Max out 401k... I don't pay taxes at my current marginal tax rate of about 40%. I will also max out Roth if possible using the conversion loophole. I will also contribute to an individual brokerage account.
2) When I leave the company, I roll it over into an IRA.
3) Now that I'm in ERE, my income is extremely low. I can do a ROTH conversion for however much I want each year (probably the most I can without bumping up to the next tax bracket). I am paying the taxes on these funds at a much lower rate than when I earned them.
4) The conversion amount is considered Roth principal. I can withdraw principal as needed without penalty or taxes.**
5) Eventually, principal may be exhausted and I can use the 72(t) rules to draw on the rest.
In conclusion, 401k is not nearly as sequestered as it may seem to people who are in ERE. For someone who is still in a higher tax bracket, this plan would not work nearly as well. I used this method when I was in law school to convert my old 401k into a Roth, and now I have access to the principal if I need it. I'm not 100% sure it was the best move anymore, because I could have spread out the conversion over a longer period if I waited until I was in ERE.
**There is a 5 year seasoning period, but my current understanding is that you just have to have your first Roth contribution at least 5 years ago, and this is not a per-account or per-dollar seasoning period.
I am not a tax professional, so you must do your own research into my plan.
1) Max out 401k... I don't pay taxes at my current marginal tax rate of about 40%. I will also max out Roth if possible using the conversion loophole. I will also contribute to an individual brokerage account.
2) When I leave the company, I roll it over into an IRA.
3) Now that I'm in ERE, my income is extremely low. I can do a ROTH conversion for however much I want each year (probably the most I can without bumping up to the next tax bracket). I am paying the taxes on these funds at a much lower rate than when I earned them.
4) The conversion amount is considered Roth principal. I can withdraw principal as needed without penalty or taxes.**
5) Eventually, principal may be exhausted and I can use the 72(t) rules to draw on the rest.
In conclusion, 401k is not nearly as sequestered as it may seem to people who are in ERE. For someone who is still in a higher tax bracket, this plan would not work nearly as well. I used this method when I was in law school to convert my old 401k into a Roth, and now I have access to the principal if I need it. I'm not 100% sure it was the best move anymore, because I could have spread out the conversion over a longer period if I waited until I was in ERE.
**There is a 5 year seasoning period, but my current understanding is that you just have to have your first Roth contribution at least 5 years ago, and this is not a per-account or per-dollar seasoning period.
I am not a tax professional, so you must do your own research into my plan.
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jeremymday
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Hi Andrew,
People have already pointed out some good things, but there are a few more you should think about...
Jacob has multiple sources of income although his portfolio income is probably his biggest... (care to comment Jacob?)
Have you honestly done a $50 a month food budget? If so I would like to see it. I've been running numbers lately and that seems fairly hard to do in a healthy manner. I've been calculating how much calories cost me. (i.e. price of steak plus how many cals it gives, price of nuts plus how many cals it gives, etc.)
Hope you don't mind some math...
And please don't assume this math means you will eat the same thing all month long, its a few numbers that you will average out over the whole month and give each one a separate weight...
Beef has about 800-1000 calories per pound. The price varies widely depending on the cut. Ground beef is the cheapest on average at $3 per pound. A nice rib eye will cost $9 per pound. Even at $3 a pound and eating only 1600 calories a day this will cost you $6 x 30 days = $180.00
Thats the high end, whats the low end?
Ice cream is pretty cheap. 300 calories in a cup of ice cream. A gallon of ice cream can be bought for $4 on average. 16 cups in a gallon x 300 cals = 4800 calories for $4. Now you can eat 3 days (4800/3 = 1600 per day). This costs you $40 for the month (30 days divided by 3 days that you eat ice cream = factor of 10 x $4), not bad...
Now for a slightly healthier option...
PB&J...
2 slices of bread = 150 calories = $0.20 cents (Average cost of bread is $2.00 divided by 20 slices = $0.10 cents per slice)
Serving of PB (2 Tbsp) = 200 calories = $0.20 cents (Average cost of PB is $3 for 16 oz which gets you about 15 servings. $3 divided by 15 equals $0.20 cents per serving)
Serving of Jelly (1 Tbsp) = 50 calories = $0.12 cents (Average cost of jelly is $3 for 16 oz which gets you about 25 servings. $3 divided by 25 equals $0.12 cents per serving.)
Add it up and you get about 400 calories for $0.52 cents. This costs you just over $2 per day and $60 per month (assuming again 1600 calories per day, Im done doing the other math.).
From what I know and just demonstrated I can almost assume how many calories you get in a day and what you are eating.
While fruits and veggies are relatively cheap, they also have relatively low calories. Which means when you calculate those out they look more like $100 per month.
I am almost done with my own food budget and will continue to tweak it from there but I doubt I can get as low as $50 per month, AND still get enough calories, AND still get enough nutrition.
So sorry for the long drawn out explanation with math, but please do tell in detail what you food plan is!
Cheers,
Jeremy
People have already pointed out some good things, but there are a few more you should think about...
Jacob has multiple sources of income although his portfolio income is probably his biggest... (care to comment Jacob?)
Have you honestly done a $50 a month food budget? If so I would like to see it. I've been running numbers lately and that seems fairly hard to do in a healthy manner. I've been calculating how much calories cost me. (i.e. price of steak plus how many cals it gives, price of nuts plus how many cals it gives, etc.)
Hope you don't mind some math...
And please don't assume this math means you will eat the same thing all month long, its a few numbers that you will average out over the whole month and give each one a separate weight...
Beef has about 800-1000 calories per pound. The price varies widely depending on the cut. Ground beef is the cheapest on average at $3 per pound. A nice rib eye will cost $9 per pound. Even at $3 a pound and eating only 1600 calories a day this will cost you $6 x 30 days = $180.00
Thats the high end, whats the low end?
Ice cream is pretty cheap. 300 calories in a cup of ice cream. A gallon of ice cream can be bought for $4 on average. 16 cups in a gallon x 300 cals = 4800 calories for $4. Now you can eat 3 days (4800/3 = 1600 per day). This costs you $40 for the month (30 days divided by 3 days that you eat ice cream = factor of 10 x $4), not bad...
Now for a slightly healthier option...
PB&J...
2 slices of bread = 150 calories = $0.20 cents (Average cost of bread is $2.00 divided by 20 slices = $0.10 cents per slice)
Serving of PB (2 Tbsp) = 200 calories = $0.20 cents (Average cost of PB is $3 for 16 oz which gets you about 15 servings. $3 divided by 15 equals $0.20 cents per serving)
Serving of Jelly (1 Tbsp) = 50 calories = $0.12 cents (Average cost of jelly is $3 for 16 oz which gets you about 25 servings. $3 divided by 25 equals $0.12 cents per serving.)
Add it up and you get about 400 calories for $0.52 cents. This costs you just over $2 per day and $60 per month (assuming again 1600 calories per day, Im done doing the other math.).
From what I know and just demonstrated I can almost assume how many calories you get in a day and what you are eating.
While fruits and veggies are relatively cheap, they also have relatively low calories. Which means when you calculate those out they look more like $100 per month.
I am almost done with my own food budget and will continue to tweak it from there but I doubt I can get as low as $50 per month, AND still get enough calories, AND still get enough nutrition.
So sorry for the long drawn out explanation with math, but please do tell in detail what you food plan is!
Cheers,
Jeremy
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AlexOliver
- Posts: 461
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Jeremy, PB&J is your *healthy* option?
Jacob used to quote $50/month numbers, I think when he was living on lentil soup and tuna fish sandwiches (correct me if I'm wrong). It had most of the food groups..."meat alternatives"=lentils, tuna fish; vegetables=onions, garlic; fruit=tomatoes. That would be $20/month (if his costs were accurate), so you could still afford a few bananas or carrots.
Jacob used to quote $50/month numbers, I think when he was living on lentil soup and tuna fish sandwiches (correct me if I'm wrong). It had most of the food groups..."meat alternatives"=lentils, tuna fish; vegetables=onions, garlic; fruit=tomatoes. That would be $20/month (if his costs were accurate), so you could still afford a few bananas or carrots.
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jeremymday
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Had to post a little more for those who care...
There is about 650 calories in a 3lb bag of apples which costs about $3 per bag. Even with a calorie restricted diet of 1300 this is still costing you $6 per day and $180 a month just like steak...
There is about 150 calories in a pound of broccoli which costs about $0.69 cents per pound. So the math is (assuming a 1500 cal per day diet)... $6.90 per day... or about $200 per month.
The cheapest nuts I could find were almonds at $2.99 a pound. They have about 2600 calories per pound. (Most nuts are around this price) If we assume a calorie restricted diet of 1300 cals a day we can eat two days for $1.50 per day. Making the monthly price of food $45! Hooray! Bear in mind these were on sale and we are talking about a calorie restricted diet though. Average price of nuts is easily double.
I got a dozen eggs the other day for $0.79 cents. A large egg has 78 calories in it. 78 x 12 = 936. Assuming a more normal calorie amount of 1800 per day eggs will cost us $1.60 per day which puts us in the $50 per month range. Not bad.
I don't buy milk but in my search I found it costs $2-$3 on average. A gallon of milk has about 2000 calories in it. Again, unless you are on a calorie restricted diet this amount still puts you on a food budget of more then $50 a month.
Sorry to throw all this data on you Andrew, but you just happened to catch me at a time when I am researching all this and $50 just doesn't seem to cut it unless you are calorie restricted (much less then the recommended 2000 calories a day), AND finding some great deals on food!
So yes, I am intensely curious as to how you make it on a $50 a month food budget. Please let us know!
Cheers,
Jeremy
There is about 650 calories in a 3lb bag of apples which costs about $3 per bag. Even with a calorie restricted diet of 1300 this is still costing you $6 per day and $180 a month just like steak...
There is about 150 calories in a pound of broccoli which costs about $0.69 cents per pound. So the math is (assuming a 1500 cal per day diet)... $6.90 per day... or about $200 per month.
The cheapest nuts I could find were almonds at $2.99 a pound. They have about 2600 calories per pound. (Most nuts are around this price) If we assume a calorie restricted diet of 1300 cals a day we can eat two days for $1.50 per day. Making the monthly price of food $45! Hooray! Bear in mind these were on sale and we are talking about a calorie restricted diet though. Average price of nuts is easily double.
I got a dozen eggs the other day for $0.79 cents. A large egg has 78 calories in it. 78 x 12 = 936. Assuming a more normal calorie amount of 1800 per day eggs will cost us $1.60 per day which puts us in the $50 per month range. Not bad.
I don't buy milk but in my search I found it costs $2-$3 on average. A gallon of milk has about 2000 calories in it. Again, unless you are on a calorie restricted diet this amount still puts you on a food budget of more then $50 a month.
Sorry to throw all this data on you Andrew, but you just happened to catch me at a time when I am researching all this and $50 just doesn't seem to cut it unless you are calorie restricted (much less then the recommended 2000 calories a day), AND finding some great deals on food!
So yes, I am intensely curious as to how you make it on a $50 a month food budget. Please let us know!
Cheers,
Jeremy
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jeremymday
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my $2 bag of lentils says it has 14 servings of about 70 calories per serving netting me about 980 calories. This costs me upwards of $4 per day. Maybe it only cost me $1 for the bag, but that still puts me at $1.50 per day for 1500 calories per day...
a can of tuna costs a $1 and only gets me about 200 calories. its very expensive on a calorie basis...
Onions are like the apple equation I gave above but have fewer calories then apples. They come in 3lb bags usually for $3. And you end up getting about 500-600 calories per bag.
I know, this is all surprising to me too...
What is reassuring is that science is continuing to prove that calorie restricted diets help you live longer (assuming you can still get your necessary nutrients).
Cheers,
Jeremy
a can of tuna costs a $1 and only gets me about 200 calories. its very expensive on a calorie basis...
Onions are like the apple equation I gave above but have fewer calories then apples. They come in 3lb bags usually for $3. And you end up getting about 500-600 calories per bag.
I know, this is all surprising to me too...
What is reassuring is that science is continuing to prove that calorie restricted diets help you live longer (assuming you can still get your necessary nutrients).
Cheers,
Jeremy
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jacob
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My income is sorted as follows:
1) Dividends+interest
2) Book sales
3) Blog ads
However, if book sales keep up, royalties will exceed dividends or be of a comparable size. That would be awesome, but I'm not counting on it.
Yeah, $50/month is certainly doable. We do $75/month in California in a place which will give you abrupt sticker shock if you come from the Midwest (but maybe not from NYC). The key is 10, 20, or even 50 pound bags of rice, beans, and lentils combined with similar bags for onions + whatever type of vegetable/fruit is on sale. In California we eat a lot of bananas. If you take out dairy, meat, and preprocessed foods and find the cheapest bulk store in your city, you can reduce your food bill by a lot.
It's not the healthiest diet but it's a lot better than PB&J or the "supermarket index". It's fairly close to what most of the world eats.
1) Dividends+interest
2) Book sales
3) Blog ads
However, if book sales keep up, royalties will exceed dividends or be of a comparable size. That would be awesome, but I'm not counting on it.
Yeah, $50/month is certainly doable. We do $75/month in California in a place which will give you abrupt sticker shock if you come from the Midwest (but maybe not from NYC). The key is 10, 20, or even 50 pound bags of rice, beans, and lentils combined with similar bags for onions + whatever type of vegetable/fruit is on sale. In California we eat a lot of bananas. If you take out dairy, meat, and preprocessed foods and find the cheapest bulk store in your city, you can reduce your food bill by a lot.
It's not the healthiest diet but it's a lot better than PB&J or the "supermarket index". It's fairly close to what most of the world eats.
@jeremymday I'm not yet to the $50 / month level myself, but I'm working on it. This site has a nice meal plan for $100 / month that is more varied than beans and rice: http://www.cookforgood.com/current_menu_month.html. You could maybe get that a bit lower by occasionally substituting cheaper recipes based on what's on sale at the store. Also, I rarely eat dessert which many of those meals include. I picked up two 10lb bags of potatoes yesterday for $1.99 each. Those are some cheap calories!
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jeremymday
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Yep, rice is the best bang for your buck, and also how Sumo wrestlers get so fat...
Rice at its cheapest costs $0.20 per pound. A pound of it gets you upwards of 1500 calories. So this costs us $0.20 per day or $6 a month. Pretty nice! However, most people tend to buy it in one pound bags for a dollar. Which puts it up to $1 a day, which is still pretty good.
Beans give roughly the same calories and usually cost a little bit more then rice.
Bananas are also pretty cheap per calorie per pound. I recently bought a pound of bananas at $0.48/lb. They have about 300-400 calories per pound so that still puts us up near $2 per day (assuming 1600 cals per day). Maybe they are cheaper in California?
Rice at its cheapest costs $0.20 per pound. A pound of it gets you upwards of 1500 calories. So this costs us $0.20 per day or $6 a month. Pretty nice! However, most people tend to buy it in one pound bags for a dollar. Which puts it up to $1 a day, which is still pretty good.
Beans give roughly the same calories and usually cost a little bit more then rice.
Bananas are also pretty cheap per calorie per pound. I recently bought a pound of bananas at $0.48/lb. They have about 300-400 calories per pound so that still puts us up near $2 per day (assuming 1600 cals per day). Maybe they are cheaper in California?
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George the original one
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