Recently I've been looking at different saving strategies trying to find the most efficient route to FI.
Here's what I'm currently doing: 65% of my net income goes into savings and 20% gross + a 5% match into my 401k. From the net savings $420 /mo goes into a Roth IRA that is a dividend stock allocation (yields 5.4%), $200-300 a month goes into a savings account for various living expenses (auto repair & ins., vacations etc), and the rest into my individual account (dividend stocks: yields 6.6%). I also have 5 months living expenses in a dividend ETF (yield 3.14%) with Schwab which is where I bank. My 401k is allocated towards bond and dividend funds (I don't have those #'s in front of me right now).
Recently I've been running some various scenarios thru some excel spreadsheets I've made and doing some research into high yielding stocks. I realized that if I maximized my savings into the individual account by not contributing to the 401k or Roth, and transferring all of my other accounts into the individual account, selling all my current holdings and buying the top 10 highest yielding stocks (which avg 17%) I would be FI in around one year. Hhhmmm...
Now I haven't done this or really even seriously considered it, but it has got me thinking about my current allocation of funds per pay check.
Is it better to max out the 401k and Roth contributions (of which the tax advantages are age restricted and the 5% company contribution is time restricted in terms of vesting), or can that money be better used now?
IE: a more volatile portfolio of a smaller size covering my living expenses could allow me to use 100% of my income to build a more stable long term portfolio (converting the smaller, more volatile funds over to the long term fund when the total dollar amount met the required FI amount at the lower yield rate).
Thoughts?
Savings Strategy
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George the original one
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The Roth IRA contributions can be withdrawn at any age, so they're not really age restricted. The Roth earnings are age restricted. Thus I like the Roth as an emergency fund for the young ERE-bound person that won't benefit from normal IRA deductions.
Roth IRA is also handy for someone older (like myself), as they can withdraw the Roth contributions to bridge the years before a pension kicks in.
Roth IRA is also handy for someone older (like myself), as they can withdraw the Roth contributions to bridge the years before a pension kicks in.
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George the original one
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In terms of how to divvy up the taxable account, I ran several scenarios.
The question was how best to mix "Dividend Growth", "Stable High Yield", and "Tax Free". Numeric definitions based on my portfolio:
Dividend Growth - avg yield = 6.2%, annl avg growth = 6.5%
Stable High Yield - avg yield = 9.8%
Tax Free - avg yield = 7.2%
Many combinations are viable, with the net yield after taxes ranging from 4.3%-6.1% and income growth rates ranging from 4.2%-5.9% (higher yield is lower growth). So it really depends on whether current income is more important to you than income growth. That is, how soon do you need the income? And different tax brackets will likely have different results.
In general, for me, increasing tax free income at the expense of income growth was not worthwhile, but increasing stable high yield might be.
The question was how best to mix "Dividend Growth", "Stable High Yield", and "Tax Free". Numeric definitions based on my portfolio:
Dividend Growth - avg yield = 6.2%, annl avg growth = 6.5%
Stable High Yield - avg yield = 9.8%
Tax Free - avg yield = 7.2%
Many combinations are viable, with the net yield after taxes ranging from 4.3%-6.1% and income growth rates ranging from 4.2%-5.9% (higher yield is lower growth). So it really depends on whether current income is more important to you than income growth. That is, how soon do you need the income? And different tax brackets will likely have different results.
In general, for me, increasing tax free income at the expense of income growth was not worthwhile, but increasing stable high yield might be.
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MacGyverIt
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i've never understood why ERE people and YMOYL people put their money in Roths or other ret. accounts where you can't touch some of the money until 59.
I thought the whole purpose was to retire young and live off your earnings?
If you divert funds into a retirement account, you are prolonging the time it takes to start retirement at a young age.
but I keep seeing people say they still put money in retirement accounts.
You are not really ERE if you do that.
I thought the whole purpose was to retire young and live off your earnings?
If you divert funds into a retirement account, you are prolonging the time it takes to start retirement at a young age.
but I keep seeing people say they still put money in retirement accounts.
You are not really ERE if you do that.
You don't plan on living past age 59, tylerr? You might want something saved for that point in your life. Remember that you are planning for your entire life, not just the first ten or twenty years after you stop working.
More seriously though, everybody's situation is different in terms of age, dependent's etc., and you need to account for your own particular situation. This is not one size fits all!
More seriously though, everybody's situation is different in terms of age, dependent's etc., and you need to account for your own particular situation. This is not one size fits all!
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George the original one
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- Joined: Wed Jul 28, 2010 3:28 am
- Location: Wettest corner of Orygun
> If you divert funds into a retirement
> account, you are prolonging the time
> it takes to start retirement at a young age.
Hardly at all. Remember that your savings rate swamps the effects of compound interest if you're truly going for ERE.
If you deposit $5k into the Roth each year for 5 years earning 8%, then you would only have to leave $6.7k in the Roth. Even at Jacob's expense level, that's like having 25 years of expenses saved and 24 years saved... easily fixed by working a couple more months.
Alternatively, isn't it true that you can roll a 401k into an IRA when you leave employment? Then you could also use the 72T rule to withdraw "substantially equal payments"... though you should investigate this thoroughly before going down that route.
And finally, if you're getting matching money, that will be a far higher rate of return than tax penalties for early withdrawl. Thus it still makes sense to take any matching money.
> account, you are prolonging the time
> it takes to start retirement at a young age.
Hardly at all. Remember that your savings rate swamps the effects of compound interest if you're truly going for ERE.
If you deposit $5k into the Roth each year for 5 years earning 8%, then you would only have to leave $6.7k in the Roth. Even at Jacob's expense level, that's like having 25 years of expenses saved and 24 years saved... easily fixed by working a couple more months.
Alternatively, isn't it true that you can roll a 401k into an IRA when you leave employment? Then you could also use the 72T rule to withdraw "substantially equal payments"... though you should investigate this thoroughly before going down that route.
And finally, if you're getting matching money, that will be a far higher rate of return than tax penalties for early withdrawl. Thus it still makes sense to take any matching money.