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justin559
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Retirement Advise  Reply with quote  

I wanted to start off and say hello, and thank you for your guys help.

I'm 24 making roughly 65k a year in California.

I currently do not own a home or have any debt besides 2k in a student loan.

I have a ROth IRA that was a rollover from a previous employer through vanguard ( about 3200)

Im enrolled through a pension from the state that I have roughly 10k in ( about 7k from this year)

and a 401k with about about 2000 ( investing 6% at 56000; figured 10k would go to pension/year)

My question is I know I am not investing enough in my 401k, but find it hard to factor in a pension. I understand somewhat about how a Pension works (x amount of money goes away for x amount of years, and you receive a payment at retirement age until money is gone. Years served determines how much of base income you get). the help I need is to see if im on track and roughly how much I should be saving into my 401k with my RothIRA factored in. I also wanted to ask what would be my best bet with the roll over ROTHira I created. I have not contributed to it in years, and feel like that money would be better off in a different account ( having one account with all my money in, opposed to many separate ones). any advise is welcome.

Also, what is a safe number of % savings of overall income that would not affect daily living too much, and does buying a house (200k) help your tax bracket significantly or insignificantly.
Post Sun Nov 01, 2015 4:14 pm
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oldguy
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First, the tax effect of a $200k mortgage. The annual interest @ 4% is about $8000/yr. So, when you itemize you deduct the $8000 plus your state income tax bill (maybe $3000?), so around $11,000 total. The IRS standard deduction is $6300 for 2015, so you'll be getting an extra $4500 or $5000 deduction due to adding a mortgage - that probably cuts your Fed Tax bill be around $750/yr.

As for investing, keep your eye on the TYPE of investment and the AMOUNT rather than the type of account that you keep it in. Eg, if your invest $5000/yr in an 11%/yr fund (the longterm average for the generic stock market) it will be $1,100,000 in 30 yrs. Or, if you invest $10,000/yr, it will be $2,200,000. And it will be $2.2M whether you store it in a Roth, a Trad IRA, a 401k, or a taxable brokerage account - only the tax treatment will vary. They are ALL taxed, just at different times and different rates. Conversely, if you use 5% products, that $2.2M falls all the way to $700k, ie, that decision is important to your far-future.

The pension is an annuity, you will be receiving a promised amount when you retire - it dies with you, no inheritance for your heirs. And it ties you to a single employer. So it will probably serve you and your future family better to give priority to the $2.2M rather that the annuity. (SS is also an annuity, so if you switch to the private sector some day, you'll still get an annuity).
Post Sun Nov 01, 2015 5:43 pm
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justin559
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Thank you for the post.

It seems like owning a house gives you a nice tax break.

The types i invest is is definetly something i will need to look into. My concern is the effects of compount interest starting off retirement at this age. The amount of interest i will get will be less if they are in seperate/multiple accounts. 6k in one acound x compound interest x 30 years vs. 2 acounds at 3k x compount interest x 30 years would yeild a higher rate of return. I was wondering if it would be wise to cash out my roth and invest into my 401k . i understand the penalty will take away from potential earnings, but i would hope the interest made on one account acrros the 30 years will make up for it, as i do not contribute to the ROTHira anymore.

it looks like i will need to invest more into my 401k ( 10-15%) apposed to the 6%.

i was under the impression the pension is cashed out to a living relative until the amount of money in the acount is depleted, along with the medical benefits. in these days and age is it even worth contributing to a pension and just using that 10% and contributing to my 401k ( 15-20%, opposed to the 6% )currently.

i debated on seeking a one time appointment with a financial advisor to see what the best course of action is to get my finances in order now, but dont know what a good price is or if it is even worth it.
Post Sun Nov 01, 2015 6:51 pm
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oldguy
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quote:
It seems like owning a house gives you a nice tax break.


Not really. Your Fed Tax is probably about $8000 now, cutting it by $750 is less than a 10% cut, not big enough to be the decision-point on home ownership. (One new furnace will cancel $750 in a heartbeat). Buying a house for the tax break is mostly urban-legend, not reality.

A bigger tax break for you comes from the 401k, a $5000 investment gets you about a $750 break in Fed Tax, maybe $100 more in CA Tax. Or if you bump it up to 15%, that'll get you closer to a $2000 Tax Break, Fed & CA.

quote:
The amount of interest i will get will be less if they are in seperate/multiple accounts. 6k in one acound x compound interest x 30 years vs. 2 acounds at 3k x compount interest x 30 years would yeild a higher rate of return.


No, its the same. A $6k fund at 11%/yr for 30 yrs will be $137,000. A pair of $3k funds at 11%/yr for 30 yrs will be $68.5k each, ie $137,000.

As for cashing out the $3200 Roth, the EARNINGS are subject to 10% penalty, income tax, etc. But, in your case, most of the $3200 is probably your contributions - you have already paid the income tax on that and there is no penalty. Eg, if $3000 is your contribution, and $200 is 'earnings' the 10% penalty and the ~15% Tax will only apply to the $200.

Here's a site that might interest you - it's especially useful to a person who has a long time horizon.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html#.VjZ8fyu8k3h

We've used the SP500 Index Fund, almost since 401k's were invented. When I retired in 1998 there was about a million in it. And our taxable account at Vanguard is also in the SP500 Index.
As Einstein once said when asked about the most 'important equation' - compound interest.
Post Sun Nov 01, 2015 9:02 pm
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justin559
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thank you for this treasure trove of information.

would you agree that buying a house, in the long run, will save you money in retirement in the form of rent? overall , since the tax break is an urban myth now, buying will benefit you in the long run ?

I had the wrong idea of compound interest in terms of equal amount , but in separate accounts, thank you for letting me see this.

As for savings, which would be the best place for it in your opinion, offering the best interest while your money sits for an emergency/payment on a big purchase.
Post Mon Nov 02, 2015 5:11 am
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oldguy
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quote:
would you agree that buying a house, in the long run, will save you money in retirement in the form of rent?


Yes - when you buy, you lock in most of the monthly payment - your 30 yr loans normally have fixed rate interest. Your tax & insurance increase with time but the big cost, PI, is fixed.
And after owning for 40 or 50 years, your cost drops to only tax & insurance.

Meanwhile the renter, after 50 years, will be paying about 3.5 times today's rent (using 2.5%/yr inflation). And a $5000/m rental bill for a 75 year-old retiree could be a nasty hit.


quote:
As for savings, which would be the best place for it in your opinion, offering the best interest while your money sits for an emergency/payment on a big purchase.


Well, most planners recommend that you put a few months expenses in a savings account. I don't do that, it bothers me to keep thousands in a "dead" fund, so I invest it in a Taxable SP500 Fund at Vanguard. It's available in one-day. The danger is that I will be forced to sell in a down-market, And that's true - and that makes the emergency worse - but in my case the 11%/yr return has FAR outweighed any 'forced-sales".
I normally borrow to cover shortterm needs. Eg, I don't save up for house down payments, I keep the money invested. And when it's time to buy, I try to buy with a near-zero down payment so that I can leave my money invested.
Same with buying a car, I leave our money invested and borrow the entire cost of the car for 5 yrs. The arbitrage between earning 11%/yr vs paying 4% or 5% to rent that money accumulates in a major way over a lifetime.
Post Mon Nov 02, 2015 3:51 pm
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