26 Year Old Asking For Advice

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Topic Author
ice1
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Joined: Mon Apr 16, 2018 8:36 pm

26 Year Old Asking For Advice

Post by ice1 » Tue Apr 24, 2018 9:54 pm

Hey guys I'm left with 3k every month after paying all of my expenses. I can either use the 3k as an additional amount paid to my mortgage or I can invest it in my two-fund portfolio: VTSMX and VBMFX. Should I just go for it and contribute 3k a month to my 2 fund portfolio? Should I make it a 3 fund by adding VGTSX? What do you guys think?

TexMexIndex
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Re: 26 Year Old Asking For Advice

Post by TexMexIndex » Wed Apr 25, 2018 6:22 am

Are you a full annual contributor to your 401K and IRA?

Swampy
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Re: 26 Year Old Asking For Advice

Post by Swampy » Wed Apr 25, 2018 6:45 am

You haven't provided enough information to give you any informed advice.
That said, remember - rare is the decision that is an all or none proposition.
If you fail to plan, you plan to fail. | Failure is not an option. | If I have seen further, it is because I was carried on the shoulders of giants.

Hillview
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Re: 26 Year Old Asking For Advice

Post by Hillview » Wed Apr 25, 2018 6:51 am

what is your mortgage rate? How much $ is left? For how long?

what is your savings like now?

How secure is your job?

Do you need and have an emergency fund?

StealthRabbit
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Re: 26 Year Old Asking For Advice

Post by StealthRabbit » Wed Apr 25, 2018 11:40 am

Not enough info (as per above + what your current balances / objectives are) Just a Rough idea as a % of NW, and whether it is discretionary, or investment related / positioned for future need. And... what your overall investment goals for these funds are. What are your other investment tools?

We all have different methods and all have our own successes and failures at times. (such is life)
I have never been in a hurry to pay off mortgages, especially if they are low interest and I can use the capital / liquidity elsewhere.

but... I am also of the persuasion that primary homes / mortgages are NOT asset / growing investments, but instead are liabilities (to your portfolio and free time opportunities). Personal homes are fine, if that is what you desire. I would just LOVE to have had my personal residence sunk capital out making me enough positive cash flows to be living anywhere I please (renting, maybe from my own LLC held props). Investment RE mortgages I am even less likely to pay off (100% offset to earnings, rather than a pitiful 'deduction(?)' at your marginal rate... (spend $100 to recapture $10) :oops: )

We all approach this differently, for our own reasons.
Think it through
Ask good questions
LISTEN
ask more questions
ACT. (diligently and consistently)

ExitStageLeft
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Re: 26 Year Old Asking For Advice

Post by ExitStageLeft » Wed Apr 25, 2018 12:21 pm

Welcome to the forum!

If you do a search on "mortgage" you'll see this question comes up a lot. Sometimes there's a very obvious financial advantage for one over the other. Most times however it comes down to your risk comfort level and is based on a gut check rather than a financial analysis. They are both good choices, so pick whichever is consistent with your investment policy statement.

You do have an IPS, right? :D

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Pajamas
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Re: 26 Year Old Asking For Advice

Post by Pajamas » Wed Apr 25, 2018 12:27 pm

ice1 wrote:
Tue Apr 24, 2018 9:54 pm
Should I just go for it and contribute 3k a month to my 2 fund portfolio?
As others have said, more information is needed to say with any certainty, but based only on the information you provided and assuming that your mortgage rate is low and your investments are in a tax-deferred account, that's what I would recommend. If you your expected return from investing is significantly higher than your mortgage rate, the additional risk of investing vs. paying off the mortgage is probably worth taking at 26.

Topic Author
ice1
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Re: 26 Year Old Asking For Advice

Post by ice1 » Fri Apr 27, 2018 7:49 pm

TexMexIndex wrote:
Wed Apr 25, 2018 6:22 am
Are you a full annual contributor to your 401K and IRA?
Dont have an 401k. Self employed. Live in CA. Fully contributing to my Roth IRA which I started last year.
Hillview wrote:
Wed Apr 25, 2018 6:51 am
what is your mortgage rate? How much $ is left? For how long?

what is your savings like now?

How secure is your job?

Do you need and have an emergency fund?

3.875% 30 year. Took the loan last October. 415k left
I have 10k in the bank and 14k in vanguard. 7k in my IRA
Self employed. Very steady comfortable sells.
Could always ask my parents for help or move in if needed.
ExitStageLeft wrote:
Wed Apr 25, 2018 12:21 pm
Welcome to the forum!

If you do a search on "mortgage" you'll see this question comes up a lot. Sometimes there's a very obvious financial advantage for one over the other. Most times however it comes down to your risk comfort level and is based on a gut check rather than a financial analysis. They are both good choices, so pick whichever is consistent with your investment policy statement.

You do have an IPS, right? :D
Afraid I dont know what an IPS is lol

ExitStageLeft
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Re: 26 Year Old Asking For Advice

Post by ExitStageLeft » Sat Apr 28, 2018 12:52 am

ice1 wrote:
Fri Apr 27, 2018 7:49 pm
...
Afraid I dont know what an IPS is lol
Glad you asked! https://www.bogleheads.org/wiki/Investm ... _statement

From that wiki:
Someone who doesn't have a written policy often bases decisions on day-to-day events, which often leads to chasing short-term performance that may hinder them in reaching long-term goals. Having a policy encourages maintaining focus on the long-term nature of the investment process, especially during turbulent or exuberant times.

ivk5
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Re: 26 Year Old Asking For Advice

Post by ivk5 » Sat Apr 28, 2018 1:00 am

ice1 wrote:
Fri Apr 27, 2018 7:49 pm
TexMexIndex wrote:
Wed Apr 25, 2018 6:22 am
Are you a full annual contributor to your 401K and IRA?
Dont have an 401k. Self employed. Live in CA. Fully contributing to my Roth IRA which I started last year.
Solo 401(k)?

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dratkinson
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Re: 26 Year Old Asking For Advice

Post by dratkinson » Sat Apr 28, 2018 3:20 pm

Please edit your OP (original post, original poster) to include all of the information requested in the sticky "Asking Portfolio Questions". Keep the same format, because we're use to seeing the information presented that way so we know where to go to find the pieces we're looking for.

Old joke.
Patient: Doc, it hurts when I do this.
Doc: Don't do that.

If you want specific advice for your financial situation, then we need the specifics of your financial situation.



General advice.


There are many types of self-employer retirement plans.
See: https://www.irs.gov/retirement-plans/re ... yed-people
More information search: http://www.google.com/search?q=self+emp ... ment+plans


Retirement investing: background information.

See seminal article by William Sharpe: https://web.stanford.edu/~wfsharpe/art/ ... active.htm

See Wiki topic: https://www.bogleheads.org/wiki/Three-fund_portfolio
See forum discussion: viewtopic.php?f=10&t=88005

See Wiki topic: https://www.bogleheads.org/wiki/Princip ... _placement


3-fund portfolio. The 3-fund portfolio is recommended for all account types (self-employed, employer, personal, tax-free, tax-deferred, and taxable). It can be replicated in each account, or spread across all guided by your investment options’ availability/costs. However you get to an age-appropriate 3-fund portfolio is fine: individual funds/ETFs, or an all-in-one fund.


Preferred retirement investing order, generic.
--Employer’s retirement plan to get the company match (it’s free money, but most restrictive choices)
--IRA (more and better choices)
--Spousal IRA (if spouse not working, qualifies based on your earned income)
--Employer’s retirement plan to annual contribution limit (maximize annual tax-advantaged space because more is better than less)
--Taxable investments (if you have more to invest after filling annual tax-advantaged space, no annual contribution limit). Round out your AA using the most tax-efficient options.

See Wiki topic: https://www.bogleheads.org/wiki/Priorit ... nvestments

Begin creating a 3-fund portfolio by investing in your employer’s retirement plan (probably the worst options) by choosing the best options (lowest-cost, broadest-index). Then invest in your IRA (unlimited good options) by buying whatever you need to fill out the missing pieces of your 3-fund portfolio not available from your employer’s plan. Finally, if you have more to invest after filling all of your annual tax-advantaged space, then begin taxable investing (choose only the most tax-efficient options).


Suggested books. What I wish someone had told me when I was in my 20s.

The Only Investment Guide You’ll Every Need, Andrew Tobias. Or…
How to Make the Most of Your Money, Jane Bryant Quinn. Both cover personal finance topics.

The Boglehead’s Guide to Investing: structured overview of BH retirement investing philosophy.

Date… or Soul Mate, Warren: priceless if it helps avoid bad marriage/divorce.

Get the books from your local library. Begin reading in the Wiki while waiting for your books. Read "Getting Started", and everything else that interests you.

Find the Wiki topic on "books" (search term) and read several over the coming years.



Specific advice. We must know the specifics of your financial situation before offering specific advice. This is where your completing the "Asking Portfolio Questions" information comes in.



Welcome.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

TallBoy29er
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Re: 26 Year Old Asking For Advice

Post by TallBoy29er » Sat Apr 28, 2018 9:08 pm

First: I would add to my emergency fund a bit, enough to get me through 12 months should I need it. I would not want to move back in with parents if I could avoid it at any cost. Like...any cost.

After that, you have a great problem. What to do w/ $3k/month. So on the personal side, I hate debt. What I would do (and what I did in my past), is put some toward paying off the mortgage monthly (maybe $1k), and the rest toward accumulating toward savings. Then, you may get to a place in 3-5 years where you have enough in savings to pay off the mortgage. At that point, you can make the decision if you would like to do it, or not. But regardless, you are making a dent in your debt. That always feels good (to me).

peace

yobyot
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Re: 26 Year Old Asking For Advice

Post by yobyot » Sat Apr 28, 2018 10:17 pm

Well, you're getting lots of advice (which is worth what you're paying for it. As we say here in Boston -- that advice and $2.50 will get you a ride on the T).

But I have a question: why on earth are you investing in Investor shares of the two mutual funds you mention? Save yourself about 70% of the costs of these and buy Admiral shares, or better VTI and BND in a brokerage account that offers some free trades.

Thesaints
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Re: 26 Year Old Asking For Advice

Post by Thesaints » Sat Apr 28, 2018 11:03 pm

Calculate how much you are making from bonds after taxes, and how much that mortgage is costing you, again after taxes.
Chances are you don't want to be investing in bonds.
Stocks are another thing.

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ruralavalon
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Re: 26 Year Old Asking For Advice

Post by ruralavalon » Mon Apr 30, 2018 4:07 pm

ice1 wrote:
Fri Apr 27, 2018 7:49 pm
TexMexIndex wrote:
Wed Apr 25, 2018 6:22 am
Are you a full annual contributor to your 401K and IRA?
Dont have an 401k. Self employed. Live in CA. Fully contributing to my Roth IRA which I started last year.
Hillview wrote:
Wed Apr 25, 2018 6:51 am
what is your mortgage rate? How much $ is left? For how long?

what is your savings like now?

How secure is your job?

Do you need and have an emergency fund?

3.875% 30 year. Took the loan last October. 415k left
I have 10k in the bank and 14k in vanguard. 7k in my IRA
Self employed. Very steady comfortable sells.
Could always ask my parents for help or move in if needed.
Since you are self-employed you could consider using a SEP IRA, SIMPLE IRA, or individual (solo) 401k. Vanguard, small-business plans,"Compare plans". Fidelity also offers the same types of plans. Fidelity "Retirement plans for small businesses ". The Bogleheads' wiki has articles on each type of plan. Boglehead's wiki, "SEP IRA". Boglehead's wiki, "SIMPLE IRA". Boglehead's wiki, "Solo 401k Plan".

In m opinion a tax-advantaged account like one of the above is the best place to invest a large part of that extra $3k per month. Each type of account has a limit on how much you can contribute each year.

Is there a High Deductible Health Plan (HDHP) offered at work, so that you are eligible to use a Health Savings account (HSA)? if so you could consider using the HDHP and contributing to a HSA, if suitable for your health insurance needs.

The rest of that extra $3k per month could be contributed to a taxable account at a low cost provider like Vanguard or Fidelity, invested in a very tax-efficient stock index fund like Vanguard Total Stock Market Index Fund. Wiki article "Tax-efficient fund placement".

Here is a general account funding priority that usually works well for many people (when there is no high interest debt or HSA use):
1) Contribute to the work-based plans (401k, 403b, 457, TSP, etc.) enough to get the full employer match (the match is like free money, your best possible investment);
2) Contribute the maximum to an IRA, traditional or Roth, depending on eligibility and personal circumstances;
3) Contribute the remainder of the maximum employee contribution to the work-based accounts; and
4) Contribute to a taxable investing account.
Please see the wiki article "Prioritizing investments".
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Topic Author
ice1
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Joined: Mon Apr 16, 2018 8:36 pm

Re: 26 Year Old Asking For Advice

Post by ice1 » Fri Sep 07, 2018 7:14 pm

Hey guys sorry for not replying, I've been working hard.
All excellent advice from you guys.
I now have 20k in my two fund portfolio (VTSAX, VWUSX) and 10k in my IRA

Should I purchase bonds? Any international stock?
My goal is to have 3-5 million by age 40 to live off investments. I don't plan on having children.

Also, my IRA is Vanguard Federal Money Market Fund. I want to convert it to Vanguard Wellesly fund. Opinions?

Grt2bOutdoors
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Re: 26 Year Old Asking For Advice

Post by Grt2bOutdoors » Fri Sep 07, 2018 7:50 pm

ice1 wrote:
Fri Sep 07, 2018 7:14 pm
Hey guys sorry for not replying, I've been working hard.
All excellent advice from you guys.
I now have 20k in my two fund portfolio (VTSAX, VWUSX) and 10k in my IRA

Should I purchase bonds? Any international stock?
My goal is to have 3-5 million by age 40 to live off investments. I don't plan on having children.

Also, my IRA is Vanguard Federal Money Market Fund. I want to convert it to Vanguard Wellesly fund. Opinions?
You are going to have to save a lot more money to get to $3-5 million in 14 years. More important than your asset allocation is your ability to increase your income. What is your plan for that?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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dratkinson
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Re: 26 Year Old Asking For Advice

Post by dratkinson » Sat Sep 08, 2018 6:06 am

BH 26 Year Old Asking For Advice


High level stuff offered without knowing your details.



Saving $3-5M in 14 years, assuming the market returns 7%/yr, means you need to save $135K ($3M) to $225K ($5M) per year. This is in addition to paying off your mortgage before you retire. (Also assumes a market crash does not change this plan.)

To ensure you never run out of money, you can only spend/withdraw 2.5%/yr of your retirement nest egg. So $75K/yr of your $3M principle, or $125K/yr of your $5M principle.

Why? A safe withdrawal rate of 2.5% should never deplete your principle. A SWR of 4% should deplete your principle in 30 years---okay if you retire at 65 and have a life expectancy of 80 years. (Search forum/wiki for SWR.)

So your current $3K/month ($36K/yr) available to invest (or pay mortgage, but not both) is $100K/yr short of achieving the $3M goal*. If you continue to save only $36K/yr, it looks like you will have ~$800K in 14 years (N=14, I=7, PV=0, PMT=-36K, FV=811K, mode/type=0).

* Don’t be discourage. You’re young and your business will grow, so you can catch up later when you can contribute more. That’s what the “mega-backdoor Roth” and “taxable investing” options, described below, are for; set them up now, so you can use them later, without needing to make any taxable changes.

The most important thing now is that you create a realistic retirement Plan A---everything you will do to save/invest for your retirement---and then begin working your plan---saving/investing for your retirement. Do this and the future will take care of itself.


Do you have a financial calculator, or do you know how to use Excel's financial calculation functions? Why? So you can make these Future Value guesstimates for yourself.

Free financial calculator. There are many Excel functions built into Google documents, including the financial functions. So you don’t need to buy anything, just use Google documents. See next for a quick tutorial on the Google FV (Future Value) financial function to jump-start your learning.
"Financial Calculations with the Future Value (FV) Spreadsheet Function": https://www.wallstreetphysician.com/fin ... -function/



The devil is in the details. And we still don't know enough about yours to be able to offer good advice.

But since you are in CA, seem to plan to earn a high income (be in high tax brackets: fed + state), a first wag would be to target this structure....


Your self-employed retirement plan. (Do you have one?)
--Target date retirement fund (simplicity)

One that allowed after-tax contributions would be better as it will set you up to roll them over into a Roth IRA annually. This concept is called a "mega-backdoor Roth IRA"; search forum for information (don't believe there is a wiki topic). Why? More tax-advantaged space is better than less.

I recall the existence of a tIRA DOES NOT cause a problem with the "mega-backdoor Roth conversion", like it does for the "backdoor Roth conversion". (Double-check this, as my memory may be faulty.)

Are you planning to use the mega-backdoor Roth concept?

N.B. You'll need to research the contribution deadlines for the different self-employed retirement plans. Why? Some deadlines are as late as tax day next April 2019, but some are as early as 31 Dec 2018. So if you're going to contribute to a plan for this tax year, you may have less then 4 months to get it done: research options, open, contribute. Why should you do it this year? More tax-advantaged space is better than less.


Your Roth IRA.
--Target date retirement fund (simplicity)

A traditional IRA might be better for a high-income earner---get higher tax deduction now, then convert to Roth IRA when in lower tax bracket in retirement.

High-income earners (don't remember income limit) are not allowed to contribute to a Roth IRA, directly. But you are allowed to contribute to a tIRA, and then immediately convert your tIRA into a rIRA. This concept is called a "backdoor Roth IRA"; search forum/wiki for information.

But the existence of any tIRA DOES cause a problem with a backdoor rIRA conversion. Search forum/wiki for information. Bottom line: Avoid creating a tIRA if you will be contributing to a backdoor rIRA.

Are you planning to use the backdoor Roth concept?

N.B. You have until next tax day (April 2019) to contribute to an IRA. So if money is tight, can contribute to your self-employed retirement plan now (assumes 31 Dec 2018 contribution deadline), and make your 2018 IRA contribution between Jan-Apr 2019. Ensure you complete the IRA form correctly so the contribution made in 2019, is credited to 2018, and not incorrectly to 2019. Why? More tax-advantaged space is better than less.


Your taxable account.
--TSM
--TISM (or not, your choice)
--Bonds, 50/50 VMLTX (limited-term national muni fund) + VCITX (CA long-term muni fund). (Remembered advice provided by senior forum member to another high-income CA resident.)
--MMkt fund.


Asset allocation: 70/25 (stocks/bonds). Assumes you are an aggressive investor. We're all aggressive investors until the market loses 50% and takes half our retirement wealth with it. But you’re young so have a lot of time for the market to recover. Bottom line: do what allows you to SWAN (sleep well at night).


Emergency fund: 1 year of living expense in checking, savings, mmkt fund**, CDs, savings bonds. Build slowly toward the 1yr total. Why? It’s more important to fill your annual tax-advantaged space. Why? Your retired self will thank you.

** Recall Vanguard has a CA tax-exempt mmkt fund (VCTXX) which should be triple tax exempt: fed, state, city.

VMLTX can perform double-duty as part of your AA, and as an extended EF tier. As it's a "daily-accrual" fund, it’s exempt from IRS 6-month holding period requirement to protect tax-exempt dividends. Meaning it can be used as an extended EF tier with the first dollar contributed---you can immediately remove that dollar***---and any distribution it earns is still tax-exempt. Search wiki for daily-accrual exemption when TLHing (tax-loss harvesting).

*** Vanguard’s frequent trading policy will not allow you to buy back into the fund, online, for 30-days after any sale. But there are work-arounds to VFTP; search forum for information.


Some gotchas.
--Can't spend more than 2.5% of your retirement nest egg per year in retirement.
--Some retirement plans penalize you for withdrawals before age 59.5, but you plan retire at age 40. So you will need to contribute enough to your taxable investing to live between 40-59.5. Research this.
--In retirement, you'll need to keep >5-years of living expenses as a cash reserve in savings or safe bond fund to avoid the "sequence of return risk" in retirement. Why? Assumes most stock crashes recover and investors get well within 4 years. (Search forum for discussion.) VMLTX can fulfill this role.
--If you contract a major medical condition, then all bets are off.
...


Plan B. If everything goes as you plan, then you can retire at age 40. This is your retirement Plan A.

But if things don’t work out, then you will need a Plan B. A Plan B typically means you will work longer/harder before retiring. Search forum/wiki for “Plan B” information.

Bottom line. Those who fail to create a realistic Plan A are guaranteed to need a Plan B. This is why we need your full information, so we can help you can create a realistic Plan A.


Possible source of additional retirement income. Will you be able to sell your business when you retire?



Better advice requires complete information.

You may have noticed that everything affects everything. Meaning, to answer one of your questions, we need to know everything about your financial life---present condition and future plans.

We know you're busy and would like a succinct answer to all of your questions. We can do that, but it can't be done by guessing. So I'll stop guessing and wait for your OP update that addresses all issues in the sticky "Asking Portfolio Questions". Take as much time as you need to compose your complete financial description and ask all of your questions. We'll wait.



Disclosure. In my beginning, before finding this forum, I copied one of the MarketWatch "lazy portfolios" and thought I was doing okay. But a later forum review showed me the many errors I'd made. Luckily for me the 2008-2009 market crash allowed me to make needed changes without owing any additional tax.

What errors did I make, so needed to change? I committed the investing behavioral error known as “Recency Bias”---I copied a lazy portfolio that had done well recently. As a result, my investments were too risky for my age (retired), and the distributions were tax-inefficient so were pushing me prematurely into a higher tax bracket.

The forum's advice made my investments much less risky and much more tax efficient. The money kept coming in, but I delayed by 4yrs entering the next higher tax bracket. And during 2008-2009, when the market lost 40%, my investments only lost 20%---much easier for a retiree to tolerate.

Trust me, it’s much easier to live with, and cheaper, if you set your investments up right the first time. You may not have the luxury of a market crash to do it over tax-free.




Edit. Clean up.
Last edited by dratkinson on Tue Sep 18, 2018 5:52 am, edited 5 times in total.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.

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ruralavalon
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Location: Illinois

Re: 26 Year Old Asking For Advice

Post by ruralavalon » Sat Sep 08, 2018 8:31 am

Have you set up a SEP IRA, SIMPLE IRA, or individual (solo) 401k?

It's very important to make use of tax-advantaged accounts.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Northern Flicker
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Re: 26 Year Old Asking For Advice

Post by Northern Flicker » Sat Sep 08, 2018 9:41 pm

ice1 wrote:
Fri Apr 27, 2018 7:49 pm
TexMexIndex wrote:
Wed Apr 25, 2018 6:22 am
Are you a full annual contributor to your 401K and IRA?
Dont have an 401k. Self employed. Live in CA. Fully contributing to my Roth IRA which I started last year.
Hillview wrote:
Wed Apr 25, 2018 6:51 am
what is your mortgage rate? How much $ is left? For how long?

what is your savings like now?

How secure is your job?

Do you need and have an emergency fund?

3.875% 30 year. Took the loan last October. 415k left
I have 10k in the bank and 14k in vanguard. 7k in my IRA
Congrats on an excellent start on your retirement savings. Given the slack in your budget, I would recommend starting a SEP-IRA also at Vanguard and making tax-deferred contributions to the SEP-IRA in addition to the Roth IRA contributions.

Adding non-US equities to the mix is a good idea. VGTSX is a reasonable way to do that. In a tax-qualified account, you might split it up into VTMGX and VEMAX (4:1 ratio of the two) to get a lower expense ratio, but VGTSX is also fine. When any of the funds reach a $10K balance, ask Vanguard to convert to admiral shares without waiting for it to happen on its own.
Index fund investor since 1987.

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