Suggestions for a recently active investor

[jasc15]

I've been browsing the forums for about 6 months and have learned a great deal. I hope to be able to contribute something to the folks around here in return for what I have learned. The metrics are below, but for those who don't read all that, here it is in english:

I am 29 years old, and have become much more interested in my finances this past year. I realized that it wasn’t an inevitability that you must work until your mid 60’s for retirement to be possible, so I tried hard to increase my savings rate to 50% of gross salary where it is now. It still appears that this won’t allow for early retirement, especially with a home purchase, marriage, etc. in the near future.

So here are the numbers::

Emergency funds: 11 months cash in a savings account (8 months without help from my girlfriend with whom I live.)
Debt: none
Tax Filing Status: Single
Tax Rate: 25% Federal, 6.37% State
State of Residence: New Jersey
Age: 29
Desired Asset allocation: 75% stocks / 25% bonds (?) Age in bonds seems a bit high
Desired International allocation: 25% of stocks (?)

Total portfolio is low 6-figures, approximately 2x gross income.

Current retirement assets

Taxable
27% Fidelity Spartan Total Market Index (FSTMX) (0.10%)

401k (These don't have ticker symbols that I am able to find, so I gave the benchmark mentioned in their data sheets.)
5% Government/Credit Bond Fund (Barclays Capital U.S. Government/Credit Bond Index) (0.03%)
12% Equity Fund (S&P 500) (0.01%)
5% International Equity Fund (MSCI EAFE Index) (0.03%)
3% Emerging Markets Equity Fund (MSCI Emerging Markets® Index) (0.10%)
3% Company Stock
Company match: 3.6% (60% of first 6% of employee contribution)

Roth 401k
I contributed to a Roth 401k for all of 2011 within the 401k mentioned above, and there is about $11,000 there. I've rebalanced my whole 401k since then, so this piece is probably invested to the same proportions as the traditional 401k shown above, but I'm not sure if that's the case.

Rollover IRA at Fidelity
30% Spartan 500 Index Fund (FUSEX) (0.10%)
8% Spartan U.S. Bond Index Fund (FBIDX) (0.22%)
8% Spartan International Index Fund (FSIIX) (.20%)

Contributions

New annual Contributions
$17,000 401k (increasing to $17,500 for 2013)
Employer match of 3.6% of salary, fully vested.
$21,000 to taxable

Available funds

Funds available in 401(k)

Lifetime Income Strategy (0.13%)
Target Retirement 2005 Fund (0.13%)
Target Retirement 2010 Fund (0.13%)
Target Retirement 2015 Fund (0.12%)
Target Retirement 2020 Fund (0.12%)
Target Retirement 2025 Fund (0.12%)
Target Retirement 2030 Fund (0.11%)
Target Retirement 2035 Fund (0.11%)
Target Retirement 2040 Fund (0.11%)
Target Retirement 2045 Fund (0.11%)
Target Retirement 2050 Fund (0.11%)
Target Retirement 2055 Fund (0.11%)

Income Fund (Stable Value Fund managed by my company. According to the data sheet: The Income Fund is managed by the Defined Contribution Investment Committee. The fund enters into investment contracts with different insurance companies) (0.33%)

Government/Credit Bond Fund (Barclays Capital U.S. Government/Credit Bond Index) (0.03%)
Equity Fund (S&P 500) (0.01%)
Small Company Stock Fund (Russell Small Cap Completeness Index) (0.01%)
International Equity Fund (MSCI EAFE Index) (0.03%)
Emerging Markets Equity Fund (MSCI Emerging Markets® Index) (0.10%)
Company Stock


Questions:
1. Should I continue to invest the 21k annually in taxable investments? I know the typical advice is to max tax advantaged before contributing to taxable, but I want to have investment income before age 59 1/2 (hopefully well before then, so I can afford to work part time when I have kids). I also want to buy a home in the next 3-5 years, and investing in equities isn’t good for that time horizon. I could use my cash for that short term goal, and consider some of my taxable investments as an emergency fund. Is this a sound method? (I know many people don’t have a separate “emergency fund”. They would just sell some of their holdings if need be)

2. I am saving/investing about 50% of my income, yet it still appears that I won't be able to retire before 60, especially not if homeownership takes away from investing. Doing some math, I figure I could retire at 45-50 and have enough in taxable investments to provide income until 59.5, and enough in the IRA/401k after then, but that only works with my current expense level, no home purchase in that plan. It seems like I should do better than that with this savings rate.

3. A more minor question: Specific shares in IRA. Does this matter? I know this consideration is for tax purposes, but depending on which shares i sell, i will end up with a different number of shares owned, even though the dollar amount will be the same. The reason I ask, is because I am trying to rebalance by selling equity funds to buy stock funds in my IRA.

Thanks for reading!

Joe

[NYBoglehead]

1. I think you should max out a Roth IRA every year and then go to taxable investing. I understand that you want to retire early, but if you are able to invest 16k/yr in a taxable account I honestly believe you will get there. No need to leave tax-advantaged space on the table in my opinion. I think that your emergency fund should be in cash equivalents, not equities. You don't want to be forced to sell in a down market. That said, I don't think you need 8 months in cash either so maybe 3 months cash and the remainder in a short-term bond fund might be a good idea.

2. I think if you save close to 50% of your income you will definitely be able to retire early. If you buy a home over time your payment will be less and less of your take home pay, and if you keep the savings rate up as you get raises you will be in excellent shape.

3. Moving money around within an IRA does not have any tax consequences. Re-balancing in a tax-advantaged account is not a taxable event so the specific ID does not matter.

Best of luck to you, I think you are on the right track.

[jasc15]

1. I think you should max out a Roth IRA every year and then go to taxable investing.

That said, I don't think you need 8 months in cash either so maybe 3 months cash and the remainder in a short-term bond fund might be a good idea.

2. I think if you save close to 50% of your income you will definitely be able to retire early. If you buy a home over time your payment will be less and less of your take home pay, and if you keep the savings rate up as you get raises you will be in excellent shape.

3. Moving money around within an IRA does not have any tax consequences. Re-balancing in a tax-advantaged account is not a taxable event so the specific ID does not matter.

Thanks for your reply. Questions breed questions:

1. I already have the traditional IRA from a roll over, so it would be convenient to just contribute the 5k to this. Are you recommending Roth specifically, or just that I contribute to an IRA? (I understand the general point of choosing Roth vs. Trad., so I suppose it is up to me to decide.)

As for investing short-mid term dollars in bond funds, aren't bond funds tax inefficient? There seems to be a dilemma for short term investing: low risk investments are tax inefficient, and high risk are more tax efficient. Do I have that right?

2. I agree it would work to my advantage to have a mortgage payment (principle and interest, at least) that decreases relative to my income allowing a steady increase to taxable, but for those first several years my taxable contributions would be diverted to the mortgage and the IRA. I feel like I would be effectively paying for the tax benefits of the IRA at the cost of investment income prior to age 59.5.

3. Thanks. I trust your answer, but can you explain why the number of shares owned doesnt matter (only the dollar amount matters)? It seems to make sense, but there is some mental block to figuring out why.

[jasc15]

Maybe you weren't even implying this when recommending a Roth, but I just became aware of the existence of non-deductible traditional IRA contributions. I havent fully figured my AGI for 2012 yet, but it might just be under the IRA deduction limit. If I am over the limit, the wiki article makes it clear (and supported my immediate suspicion) that a Roth IRA is always preferable to non-deductible traditional IRA.

What I don't see in the article (maybe due to lack of understanding) is wether or not it is wise to contribute to the traditional IRA only up to the deductible limit, and the balance to a Roth.

[Mill]

I am kind of like you, in that I would like to retire early myself. But keeping in mind that tax-deferred space is limited, I try to focus on filling it up. Have you heard of the 72T rule? Im basically counting on it.
http://www.investopedia.com/terms/r/rul ... z2JWJb0ypF

Also, Id suggest go with a Roth IRA. You can withdraw the contributions tax-free and penalty-free anytime you like. That might/could/should also help get you through your early retired years if you choose to tap the contributions, either way its an option. Tons more information over at the Early Retirement forums. Check them out if you havent.

One minor note, I noticed that you hold international stocks in your 401(k). Probably not a huge deal, but for efficiency purposes, most here recommend placing these in a taxable account (if possible) to get a small tax-break. See BH wiki for more info on tax efficiency.
http://www.bogleheads.org/wiki/Principl ... _Placement

[jasc15]

I don't intend on withdrawing any of my IRA funds before age 59.5 (via that 72T rule), however I have considered funding a Roth with the intention of withdrawing the principle for home down payment in lieu of cash savings or taxable investments.

As for the international stocks in 401k, at this point I think it might not be the best idea to have any taxable investments, and just keep it in cash for my short-mid term goals. (maybe this contradicts the Roth plans I just mentioned). I will prob sell my Total Market Index when my shares are held longer than 1 year (hopefully there are no market catastrophes between now and then) and keep it as cash for future home down payment.