Conflicting goals, and limited income

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Slov
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Conflicting goals, and limited income

Post by Slov »

Alright, so I have a few long term goals.
1) Save for land and a custom home
2) fully funded retirement fund

Now my current financial situation is very well off. I have no debt. I just maximized my Roth IRA since I started it last January. I will continue to do so until I cannot anymore. I also contribute to the TSP. Now, after deployment I come back with a large sum of money.... around 30k. The money has a plan, except for one specific area. 10k is going to a car, 5k towards emergencies, 5k towards a new bed, mattress, clothes, guns and some things i have wanted for a very long time. The remaining 10k I would like to invest or save. Now, being in the military and not planning on getting out anytime soon, having a home on my own is a very long time away, and such a home would be built when I finally settle down. That could be 10,15,20 or even 30 years for now. Should I invest in a Total Stock Market Index Fund in order for home fund to be allowed to grow over time? Should I save this money in something like CDs? To me CDs seem illogical with the way the market grows in the long run with a buy and hold strategy with a simple Total Stock Market Index Fund.

The other dilemma I have is TSP funding. Now, I have discussed this before, but in relation with my home and car goals, my home seems to be the main long term goal left besides my retirement. I contribute 5 percent. I already contribute 5,500 per year to my Roth IRA which be worth 3-4 million by age 65. With inflation, I would like that number to be higher. However, with goals such as a car, and custom home decades from now what is more important? I feel a custom home and some enjoyable things throughout my life would be nice. I already live off 50 percent off my income back in the states, and I am saving as much as possible ( nearly 95% of my deployment pay) while I am overseas. A 10 percent increase in my TSP takes about 200 dollars with money I cannot access until I am 65. My Roth IRA acts as a last resort emergency fund until I come back from deployment and my emergency fund is fully funded.

This is a dilemma that has plagued me. I just hit E4 with early promotion. Ill get another 200 or so when I hit my 2 year mark in January. My income is obviously limited at that paygrade. Now my total compensation is decent, but my food allowance and other special deployment pays are taken away when I go back home. I also come back under taxes.

What are your opinions? Is it possible to pay cash for a custom home on land I buy? Will I have to sacrifice some retirement contributions in order for that home to be built along with other things I like in life? I like being frugal, but sometimes you need a break. It seems the only way to hit both goals effectively is to increase my income even more by advancing in the military, or getting out to do contracting or working for the government.
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retiredjg
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Re: Conflicting goals, and limited income

Post by retiredjg »

Slov wrote: Mon Oct 09, 2017 11:06 am That could be 10,15,20 or even 30 years for now. Should I invest in a Total Stock Market Index Fund in order for home fund to be allowed to grow over time? Should I save this money in something like CDs? To me CDs seem illogical with the way the market grows in the long run with a buy and hold strategy with a simple Total Stock Market Index Fund.
Ordinarily, house money needs to be in something safe. With your goal at least 10 and maybe 30 years away, you do not need to do that. When you know your home goal is within 5 years, I'd reduce the stock to bond ratio a lot. When it is within 2 years, I'd put it in cash and short term bonds. You won't make much money, but it will be there when you want it.

I would probably invest that money at 80% stocks/20% bonds (simply because I'm not a fan of 100% stocks).

The other dilemma I have is TSP funding. Now, I have discussed this before, but in relation with my home and car goals, my home seems to be the main long term goal left besides my retirement. I contribute 5 percent. I already contribute 5,500 per year to my Roth IRA which be worth 3-4 million by age 65. With inflation, I would like that number to be higher. However, with goals such as a car, and custom home decades from now what is more important? I feel a custom home and some enjoyable things throughout my life would be nice. I already live off 50 percent off my income back in the states, and I am saving as much as possible ( nearly 95% of my deployment pay) while I am overseas. A 10 percent increase in my TSP takes about 200 dollars with money I cannot access until I am 65. My Roth IRA acts as a last resort emergency fund until I come back from deployment and my emergency fund is fully funded.
You don't mention Roth TSP, but while deployed, I understand that is the best option. Tax free in, tax free out.

A 10 percent increase in my TSP takes about 200 dollars with money I cannot access until I am 65.
What does this sentence mean?

What are your opinions? Is it possible to pay cash for a custom home on land I buy? Will I have to sacrifice some retirement contributions in order for that home to be built along with other things I like in life? I like being frugal, but sometimes you need a break. It seems the only way to hit both goals effectively is to increase my income even more by advancing in the military, or getting out to do contracting or working for the government.
Yes, it is possible to pay cash.... Yes, you might have to save less for retirement, but if you do it that way, your expenses will be less in retirement. Or you could save more for retirement, and not pay cash for the home and land.

I don't know which will be better. I'm not sure that can even be predicted. The important thing is that you are frugal and you are saving money. I think the details of which money goes where can be worked out at a later time.
Grt2bOutdoors
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Re: Conflicting goals, and limited income

Post by Grt2bOutdoors »

How do you estimate your Roth IRA will be worth $3-4 million at age 65? If annual contributions are $5,500 from ages 0-49 and then $6,500 from ages 50 to retirement, what percentage annual return are you expecting throughout the investing period?
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Fishing50
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Re: Conflicting goals, and limited income

Post by Fishing50 »

Increase Roth TSP now. Worry about buying the house in 10 or 20 years.
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
venkman
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Re: Conflicting goals, and limited income

Post by venkman »

I think your first step should to formulate an estimate of how much money it will cost to build the home you want to build. Figure out what it would cost to build today, and then assume the cost increases each year with inflation (currently under 2%, but you might assume 3% just to be conservative).

As for what to invest in, you need to narrow down your time horizon. 100% Total Stock Market would be fine for a 20-year horizon, but maybe a bit too aggressive for a 10-year horizon. On the other hand, you might be able to invest more aggressively if you can be flexible with when to build the home (i.e. if you could wait a few years for the market to recover from a crash).

The main issue right now is that you have a general idea of what you want, but until you get more specific with the details, you can't really make a plan for it.
motorcyclesarecool
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Re: Conflicting goals, and limited income

Post by motorcyclesarecool »

Slov wrote: Mon Oct 09, 2017 11:06 amA 10 percent increase in my TSP takes about 200 dollars with money I cannot access until I am 65.
That sounds like a misunderstanding. The current laws allow for you to take a loan of half your TSP balance, up to $50,000 for the purchase of a residence. Additionally, if you separate from service prior to age 65, you can roll your traditional and Roth TSP balances to traditional and Roth IRAs. Do you plan to be in the military for beyond the magic 20 years? (Unless you're opting / mandated into the Blended Retirement System) You'll have ways to access your funds fairly penalty free.
Slov wrote: Mon Oct 09, 2017 11:06 amThis is a dilemma that has plagued me. I just hit E4 with early promotion. Ill get another 200 or so when I hit my 2 year mark in January.
So, in January you'll have the money to be able to kick more into the TSP? Sounds like an encouraging situation.
Slov wrote: Mon Oct 09, 2017 11:06 amI like being frugal, but sometimes you need a break. It seems the only way to hit both goals effectively is to increase my income even more by advancing in the military, or getting out to do contracting or working for the government.
If you have good infantry / special operations experience, there are several interesting Federal civilian career fields such as Federal level Law Enforcement (ICE and CBP are almost always hiring) or becoming a Nuclear Materials Courier. I have coworkers who did a few years with Blackwater after the military, who have paid-off houses now. It sounds like you have worthy goals, and are trying to figure a plan. Be sure to keep your head on a swivel and watch your six when it comes to finances.

What you said about your Roth IRA got my spidey senses tingling. Are you working with some sort of "financial advisor"? Can you help me understand why you are prioritizing putting $5500 into a Roth IRA, when you haven't maxed out the full $18,000 to your TSP? My personal opinion is that the offerings in the TSP are lower cost than people can get in an IRA, and lower costs are the best way to boost investment returns.

Remember, nobody on this board stands to make a penny off of you no matter what you choose to do. You've come to the right place for non-exploitative financial advice and ideas.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.
financeidiot
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Re: Conflicting goals, and limited income

Post by financeidiot »

motorcyclesarecool wrote: Tue Oct 10, 2017 5:38 am What you said about your Roth IRA got my spidey senses tingling. Are you working with some sort of "financial advisor"? Can you help me understand why you are prioritizing putting $5500 into a Roth IRA, when you haven't maxed out the full $18,000 to your TSP? My personal opinion is that the offerings in the TSP are lower cost than people can get in an IRA, and lower costs are the best way to boost investment returns.
Agree. No reason to have a Roth IRA until your TSP is maxed out. Definitely maximize savings in Roth TSP if you get deployed.

Don't worry about the home until you get closer to retiring from the military. You have a lot of variables: location, size, construction, personal taste, spouses' taste, # of occupants, is there an existing home you mostly like that you could modify cheaper?, etc. that will change between now and the future. Good saving habits should get you most of the way there. When you become more certain of your future, you should have the flexibility to start saving more for a house because of early saving.

The missing piece of the puzzle, as motorcyclesarecool pointed out, is what you're going to do for income long-term. If you're getting out of the military, you'll most likely need to plan for some kind of education and next career step (which will also determine where you will want to live). If you stay in the military until retirement, you'll have a lower income but also a pension and other benefits. It's also possible that life decides for you (i.e., bad knees) and you need to roll with a contingency plan.
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Slov
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Re: Conflicting goals, and limited income

Post by Slov »

retiredjg-

So, since there is a bond allocation I would want the funds in a tax deferred account? Typically I cant withdraw from a 401k. The only thing I can withdraw from would be a Roth IRA if I was going 80/20. Im still confused on how I would be able to get away with that Asset Allocation compared to if it was all in a taxable account.


Yea, that would be the best option too, but I am already maxing my Roth IRA. I cant max my TSP unless im deployed, and I plan on actually using al of my deployment money when I come back. I plan on buying a vehicle for 10k, putting 10k towards my emergency fund, and using the remaining 10k to invest either in a taxable account for home fund savings, and some of this money would be used to buy personal things such as a new bed frame and mattress, clothes and some other things I would like.


Sorry. What I meant was that if I increase my TSP contribution from 5 to 15 percent... an additional 200 dollars from my paycheck is invested. Now, to be fair thats only 200 dollars. However, I just recently got a promotion again and I am still living off of 50 percent of my income back in garrison. Right now, I am living off my emergency fund since Im deployed and my only expense is a monthly internet bill here on base that I split with my roommate. Contributing 300 dollars now ( since thats 15 percent of my pay according to my LES) compared to the 100 dollars or so on top of already maxing my Roth IRA at my income is mentally worrisome.


Yea thats true. I just like to have a clear defined plan on where Im going. Now, to be fair I cant plan for 20-30 years in the future besides just living frugally and working on my career, but its still nice to have the mental road map.
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Slov
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Re: Conflicting goals, and limited income

Post by Slov »

Grt2bOutdoors wrote: Mon Oct 09, 2017 12:21 pm How do you estimate your Roth IRA will be worth $3-4 million at age 65? If annual contributions are $5,500 from ages 0-49 and then $6,500 from ages 50 to retirement, what percentage annual return are you expecting throughout the investing period?
I went to bankrate.com and looked at the Roth IRA calculator. I started with 1000 dollars at age 20, and I am maxing it every year at 5,500. I have a 15 percent marginal tax rate due to my income. My expected age of retirement is 65, and my rate of return expected is 9 percent with my Target 2060 Retirement fund. Now, certain things will change such as tax rate and contributions at 6,500 from 50 years old until retirement, but that is how I got my Roth IRA to be approximately worth at retirement. The total balance in a perfect world is around 3.2 million dollars.
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Slov
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Re: Conflicting goals, and limited income

Post by Slov »

Fishing50 wrote: Tue Oct 10, 2017 1:10 am Increase Roth TSP now. Worry about buying the house in 10 or 20 years.
Can you explain in detail why? Im assuming it has to do with higher income in my later years of my career and life?
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Slov
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Re: Conflicting goals, and limited income

Post by Slov »

venkman wrote: Tue Oct 10, 2017 1:22 am I think your first step should to formulate an estimate of how much money it will cost to build the home you want to build. Figure out what it would cost to build today, and then assume the cost increases each year with inflation (currently under 2%, but you might assume 3% just to be conservative).

As for what to invest in, you need to narrow down your time horizon. 100% Total Stock Market would be fine for a 20-year horizon, but maybe a bit too aggressive for a 10-year horizon. On the other hand, you might be able to invest more aggressively if you can be flexible with when to build the home (i.e. if you could wait a few years for the market to recover from a crash).

The main issue right now is that you have a general idea of what you want, but until you get more specific with the details, you can't really make a plan for it.
That seems like a smart idea, but I have no idea where to start for costs. Typically I would be married and have a few kids. How do people typically plan for such a thing? Do they go to professionals first? I dont want a massive house, but I do want a really nice one. Thats all I know.

I would certainly be willing to be flexbile with building a home on a time horizon. I dont know if Im doing 20 years or getting out within 5 to 10. It really depends on what happens with my path in the military and if Im happy with it. Would there be certain goals if the time horizon was 10 years instead of 20? What would you recommenced to invest in?
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Slov
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Re: Conflicting goals, and limited income

Post by Slov »

motorcyclesarecool wrote: Tue Oct 10, 2017 5:38 am
Slov wrote: Mon Oct 09, 2017 11:06 amA 10 percent increase in my TSP takes about 200 dollars with money I cannot access until I am 65.
That sounds like a misunderstanding. The current laws allow for you to take a loan of half your TSP balance, up to $50,000 for the purchase of a residence. Additionally, if you separate from service prior to age 65, you can roll your traditional and Roth TSP balances to traditional and Roth IRAs. Do you plan to be in the military for beyond the magic 20 years? (Unless you're opting / mandated into the Blended Retirement System) You'll have ways to access your funds fairly penalty free.
Slov wrote: Mon Oct 09, 2017 11:06 amThis is a dilemma that has plagued me. I just hit E4 with early promotion. Ill get another 200 or so when I hit my 2 year mark in January.
So, in January you'll have the money to be able to kick more into the TSP? Sounds like an encouraging situation.
Slov wrote: Mon Oct 09, 2017 11:06 amI like being frugal, but sometimes you need a break. It seems the only way to hit both goals effectively is to increase my income even more by advancing in the military, or getting out to do contracting or working for the government.
If you have good infantry / special operations experience, there are several interesting Federal civilian career fields such as Federal level Law Enforcement (ICE and CBP are almost always hiring) or becoming a Nuclear Materials Courier. I have coworkers who did a few years with Blackwater after the military, who have paid-off houses now. It sounds like you have worthy goals, and are trying to figure a plan. Be sure to keep your head on a swivel and watch your six when it comes to finances.

What you said about your Roth IRA got my spidey senses tingling. Are you working with some sort of "financial advisor"? Can you help me understand why you are prioritizing putting $5500 into a Roth IRA, when you haven't maxed out the full $18,000 to your TSP? My personal opinion is that the offerings in the TSP are lower cost than people can get in an IRA, and lower costs are the best way to boost investment returns.

Remember, nobody on this board stands to make a penny off of you no matter what you choose to do. You've come to the right place for non-exploitative financial advice and ideas.

motorcyclesarecool,

I dont know if I will be doing 20 years honestly. To me, unless there is SOF experience involved, conventional military is something not of my interest career wise what so ever. Wouldnt taking out money from my TSP for a home purchase be highly advised against though? I dont want to touch that money unless I have to. If I roll the TSP funds into my IRA, will I be able to withdraw those rolled funds? Would they be treated as contributions ( that can be taken out without penalty from a Roth IRA) or would they be treated as earnings if I was to withdraw them?

Yes, I will have a few extra hundred dollars in the upcoming month or so due to my two year mark within the Army. So, that will be my next pay increase besides the early promotion I received a few months ago. So, Im considering putting that money towards my TSP since its only an additional 200 dollars and I can easily live off the money I will have back in garrison. However, coming back with a few thousand more dollars from deployment in total would be nice.

What is CBP? Sounds very interesting. I have considered contracting work, but to get the good jobs in contracting such as mobile security in the private sector or government contracts you typically need SOF experience unless its static security.

I am not working with a finanical advisor. The reason why I was maximizing my Roth IRA instead of my TSP was for a few reasons:

1) I was able to maximize an IRA based on my garrison/ stateside income. For me, this was a mental goal I accomplish and helps me mentally feel more successful maximizing what I can, where I can. Based on my stateside income, maximizing my TSP is nearly impossible since there is a percentage limit on how much I can contribute of my pay towards the TSP. The mental satisfaction of maximizing something, for me personally, is a big one. I viewed it the same concept of the debt snowball. I would personally want to pay off the smaller debts first, if I had any, in order to mentally feel a sense of accomplishment and move onto the next pile of debt and pay it off even faster.

2) I am able to use the Roth IRA as a 2nd tiered emergency fund. I have had a few goals such as saving for a car, fully funding my emergency fund, and saving for requirement at a young age. What the Roth IRA allowed me to do was make the account dual- purpose. Two birds with one stone as they would say. My Roth IRA would primarily be used for retirement savings, but be the 2nd tier to my emergency fund since I can withdraw Roth IRA contributions at any time without penalty. The first tier of my emergency fund would be placed in my high yield savings account with Ally, which also acts as my car savings fund. So, once my Roth IRA was maxed, and I am slowly building up my emergency fund I can then move onto finishing out the car fund savings with only two accounts. So, in my mind I was hitting multiple birds with one stone without really hindering my progress financially with the goals I had.

Coming back from deployment, I will have 10k allocated for my emergency fund, 10k allocated in my car fund, and the remaining 5-10k will be used for personal expenses/ the home fund I am wanting to start. Currently I am living off my emergency fund since I am deployed and my only expense is a single internet bill I split with my roomate for 80 or so dollars a month.
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Slov
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Re: Conflicting goals, and limited income

Post by Slov »

financeidiot wrote: Tue Oct 10, 2017 11:42 am
motorcyclesarecool wrote: Tue Oct 10, 2017 5:38 am What you said about your Roth IRA got my spidey senses tingling. Are you working with some sort of "financial advisor"? Can you help me understand why you are prioritizing putting $5500 into a Roth IRA, when you haven't maxed out the full $18,000 to your TSP? My personal opinion is that the offerings in the TSP are lower cost than people can get in an IRA, and lower costs are the best way to boost investment returns.
Agree. No reason to have a Roth IRA until your TSP is maxed out. Definitely maximize savings in Roth TSP if you get deployed.

Don't worry about the home until you get closer to retiring from the military. You have a lot of variables: location, size, construction, personal taste, spouses' taste, # of occupants, is there an existing home you mostly like that you could modify cheaper?, etc. that will change between now and the future. Good saving habits should get you most of the way there. When you become more certain of your future, you should have the flexibility to start saving more for a house because of early saving.

The missing piece of the puzzle, as motorcyclesarecool pointed out, is what you're going to do for income long-term. If you're getting out of the military, you'll most likely need to plan for some kind of education and next career step (which will also determine where you will want to live). If you stay in the military until retirement, you'll have a lower income but also a pension and other benefits. It's also possible that life decides for you (i.e., bad knees) and you need to roll with a contingency plan.
Well, with what I pointed out to motorcyclesarecool do you agree with my reasoning for using a Roth IRA to be maximized compared to the TSP? The reason why I dont want to maximize my TSP is because I already have other goals such as fully funding my emergency fund at 10k, buying a car for 10k as well ( since I have not had a car for two years and need to buy one), and then having atleast some play money left over for either taxable investments or personal expenses? I am already maximizing one retirement account and that helps me mentally. My question is, why is it worth giving up those other goals? To me, an emergency fund and a mode of transportation are very important. The area I could sacrifice is the personal expense area, but I live very frugally and I figured some enjoyment of my earnings doesnt seem to hurt as long as its planned and my financial bases are covered.

It seems to me that I need to establish that path first and go from there. I dont know how long I am staying in for, or if Im going to get a degree while Im in, out, or at all. I really dont want to have a lower income. The pension is nice, but the income.... I would much rather have a 2nd career starting at age 40 instead of just one pension. To me, I would be retiring at age 40 if I was to do 20 years. Thats another 25 years of my left that are still free to work in either the same field on the private side, or go do something else. I know that if I do 20 years in the military.... it will not be on the conventional side of the house, and I wont just stop there. If I did 20 years.... I would certainly find another job/ career to keep me busy for the remaining 25.
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teen persuasion
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Re: Conflicting goals, and limited income

Post by teen persuasion »

Right now your income is relatively low (E4), but will grow with time as you progress up the ranks. You can't fund everything you'd like to, at the levels you'd like, right now, so you need to prioritize. Balance short term vs long term, but also keep limits and costs in mind.

Put your first savings in the place they will grow the best, and as you fill buckets move on to the less desirable buckets. Any bucket that gives you a match is the first one to fill, it's free money. Next is a tax advantaged account, maybe the same one as the matching account, just above the match percentage. Choose the one with the best (read: lowest cost) investment options. This is most likely your TSP, it is recognized as having lower costs than even Vanguard. Only after you fill that space do you move on to slightly higher cost tax advantaged buckets, like your IRA. The choice between traditional or Roth is a separate decision, since both TSP and IRAs have both options (and you can split your contributions, some into each type, if you wish).

Taxable investments would be used after exhausting all of your tax advantaged space. Saving for a house down payment would be a valid reason to save in taxable (so that $ is accessible), but that is a far-down-the-road goal. It would make more sense, to me, to focus on filling your limited retirement account space now, and adding taxable savings on top later when your income increases. Tax advantaged space is use it or lose it each year - at some point in the future you will have more savings than space, and the overflow will have to go to taxable. So frontload retirement accounts now, catch up on taxable later when your income catches up.

Be patient, you will get pay boosts quickly. I'm amazed at the difference in DD1's income trajectory, she just made E6, and she's talking about buying a house at her next duty station. MD looks cheap to her, after HI.
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retiredjg
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Re: Conflicting goals, and limited income

Post by retiredjg »

Slov wrote: Tue Dec 12, 2017 6:15 am So, since there is a bond allocation I would want the funds in a tax deferred account? Typically I cant withdraw from a 401k. The only thing I can withdraw from would be a Roth IRA if I was going 80/20. Im still confused on how I would be able to get away with that Asset Allocation compared to if it was all in a taxable account.
I was talking about using an 80% stock and 20% bond allocation in your taxable account - money for the land/house. In the 15% tax bracket, there is little to no harm in holding some bonds in taxable. Or if you prefer, you could invest that money in just stocks. Know ahead of time that account is going to go through some wild swings. That's OK, but do not leave it in all stocks once you see that the house is within reach (but still several years out).

Yea, that would be the best option too, but I am already maxing my Roth IRA. I cant max my TSP unless im deployed, and I plan on actually using al of my deployment money when I come back. I plan on buying a vehicle for 10k, putting 10k towards my emergency fund, and using the remaining 10k to invest either in a taxable account for home fund savings, and some of this money would be used to buy personal things such as a new bed frame and mattress, clothes and some other things I would like.
What I meant was that any money going into TSP during deployment should be Roth TSP, not ordinary TSP. That way, you would never pay tax on it - goes in tax free and comes out tax free.

When you say you are going to use all your deployment money when you come back....that doesn't mean you are not using the TSP while deployed, right? You just mean the money over and above the TSP, right?

Yea thats true. I just like to have a clear defined plan on where Im going. Now, to be fair I cant plan for 20-30 years in the future besides just living frugally and working on my career, but its still nice to have the mental road map.
A general road map is fine. It gives direction. But all you need is direction - I'm headed west. You don't need to know each road you are going to take. There are lots of roads that go west and lots of good ways to get there. Just keep saving money and figure out the details later.

For example, if you save a lot now for retirement and less for the house, when you see the house in view, you can stop saving for retirement for a few years and just save house money very quickly. Or you could save a lot for the house now and save more for retirement later. Not the best choice in my mind, but it could work.

A young person like you with goals and direction combined with a preference for being frugal....I think you'll be fine.
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Re: Conflicting goals, and limited income

Post by Grt2bOutdoors »

Slov wrote: Tue Dec 12, 2017 6:19 am
Grt2bOutdoors wrote: Mon Oct 09, 2017 12:21 pm How do you estimate your Roth IRA will be worth $3-4 million at age 65? If annual contributions are $5,500 from ages 0-49 and then $6,500 from ages 50 to retirement, what percentage annual return are you expecting throughout the investing period?
I went to bankrate.com and looked at the Roth IRA calculator. I started with 1000 dollars at age 20, and I am maxing it every year at 5,500. I have a 15 percent marginal tax rate due to my income. My expected age of retirement is 65, and my rate of return expected is 9 percent with my Target 2060 Retirement fund. Now, certain things will change such as tax rate and contributions at 6,500 from 50 years old until retirement, but that is how I got my Roth IRA to be approximately worth at retirement. The total balance in a perfect world is around 3.2 million dollars.
If institutional investors can not hit a 7-7.5 percent long term return, what makes you believe you will earn 9%?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
jlcnuke
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Re: Conflicting goals, and limited income

Post by jlcnuke »

Howdy! The very first piece of advice I'd like to give you is to stop thinking about "now" as your only plan. Sure, it's great to have a plan for "now" (and you should), but it's better to have a continual plan for your financial future.

I put the following together years ago, and you're already doing some of it, but I wanted to post it up here:
1. Always live “below” your means. I say this because most people do not consider money spent on savings/investments as “living” though it surely is a necessity just like having a roof over your head.
2. Save a 9-12 months emergency fund (monthly expenses only) as soon as possible.
3. Expect to make more money as time progresses, most people do.
4. When you start earning more, make sure you increase your emergency fund to match.
5. As soon as you are earning money, invest some of it. Never say “it’s only $xxx.xx so it’s not worth investing yet” or “I’m too poor to invest anything“. If you can’t afford to invest then you can’t afford your current lifestyle, because investing is a bill you need to be paying yourself as soon as possible.
6. When you start making more, maintain your quality of living (i.e. allow some of that increase to cover inflation/increasing costs of living).
7. Take half of what is left over and put it in savings/investments, use the other half of what is left over to increase your quality of life. Repeat these steps every time you start earning more, whether it’s from a raise/promotion/new career/etc.
8. Set goals in life but don’t be blinded by them. Your goals will likely shift throughout your life and you shouldn’t ignore your new goals simply because you had other goals.
9. Never go a day without a budget. If you don’t know where your money is going then there is a strong chance that too much of it is being wasted.
It's great you want to pay cash for a car and have an adequate emergency fund. Those are things you should be doing. It's nice that you "feel good" about maxing your IRA contributions. however, if you can have cheaper investments (TSP), then for the same asset allocation you should end up with more money over time. Therefore, putting $5.5k into the TSP (with it's industry low fees) is likely to net you more money in the end than putting that same money in higher fee funds in an IRA. Eventually it would be great to max out both, but you're not at a point where that is reasonable yet. Give it time, however, and you should be.

Pay close attention to the second half of the list above (6-9). If you follow 6 and 7, you'll eventually be saving enough to max both your TSP and IRA and have money left over to invest still.. it'll just take time to get there.

Nothing wrong with putting your emergency fund in a Roth IRA though imo. In fact, you could add another $1k onto your planned $10k and have 2 years worth of IRA max contributions taken care of and use that as your emergency fund if needed (I'd still recommend having some liquid emergency fund money personally, but no need for all of it to be liquid generally). Then take all the money you "would" be putting in your IRA each month/paycheck/whenever and shift that contribution to your TSP. This isn't going to be your only trip where you aren't spending much money, so I'd recommend you treat others similarly (use 1/2 - 2/3rds of the savings to boost your savings/investments and the rest on yourself). 2-3 deployments should get a decent down-payment established for that house you'll eventually buy (and if you're not going to buy for 20-30 years I would be investing that money in a low cost index fund personally) as well as continue to boost your savings/investments.

I'd also say this - don't assume you'll get a retirement check. You may decide to get out before then or the service may decide you have to get out before then without a retirement (medical discharge, downsizing, etc). So assume you have to pay for your own retirement completely.

With regard to investment returns, axing your IRA contributions for 42 years (20-62) with a 7% ROI would end up with less than $1.3M. 7% is much more reasonable expectation, but may still be high overall. I surely wouldn't expect 9% returns in any planning scenario though. A good simple calculator for such estimates can be found here http://www.bankrate.com/calculators/ret ... lator.aspx
Olemiss540
Posts: 2135
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Re: Conflicting goals, and limited income

Post by Olemiss540 »

Keep in mind that compound interest is your BEST FRIEND. You need to prioritize your retirement savings before the house for a few reasons:

The earlier you get started and the larger amount you get into your TSP while young, will allow compounded growth for the next 35 years.
Once your retirement nest egg is substantially ahead of schedule, you can always cut back in preparation for home purchase and allow compounding to do the hard work.
You can always get a mortgage for your dream house in 10 or 20 years, you can NOT go back in time and utilize your precious tax advantaged space.

No loans available for retirement, but with a pension and a large retirement nest egg in your future, many good reasons for getting a mortgage if needed since you will have ample cash flow. Once your tax advantaged space (TSP, Roth IRA) is fully maxed each year as your income rises, then you can begin investing in a taxable account for future home buying needs. I know it seems like you want to jump ahead to saving for a house since you feel like you have been too frugal, but know this plan will allow you the utmost flexibility when your time in the service is over.

Thanks for everything you do and STAY SAFE!
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
Topic Author
Slov
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Re: Conflicting goals, and limited income

Post by Slov »

teen persuasion wrote: Tue Dec 12, 2017 7:27 am Right now your income is relatively low (E4), but will grow with time as you progress up the ranks. You can't fund everything you'd like to, at the levels you'd like, right now, so you need to prioritize. Balance short term vs long term, but also keep limits and costs in mind.

Put your first savings in the place they will grow the best, and as you fill buckets move on to the less desirable buckets. Any bucket that gives you a match is the first one to fill, it's free money. Next is a tax advantaged account, maybe the same one as the matching account, just above the match percentage. Choose the one with the best (read: lowest cost) investment options. This is most likely your TSP, it is recognized as having lower costs than even Vanguard. Only after you fill that space do you move on to slightly higher cost tax advantaged buckets, like your IRA. The choice between traditional or Roth is a separate decision, since both TSP and IRAs have both options (and you can split your contributions, some into each type, if you wish).

Taxable investments would be used after exhausting all of your tax advantaged space. Saving for a house down payment would be a valid reason to save in taxable (so that $ is accessible), but that is a far-down-the-road goal. It would make more sense, to me, to focus on filling your limited retirement account space now, and adding taxable savings on top later when your income increases. Tax advantaged space is use it or lose it each year - at some point in the future you will have more savings than space, and the overflow will have to go to taxable. So frontload retirement accounts now, catch up on taxable later when your income catches up.

Be patient, you will get pay boosts quickly. I'm amazed at the difference in DD1's income trajectory, she just made E6, and she's talking about buying a house at her next duty station. MD looks cheap to her, after HI.
Bingo!!! Thank you teen persuasion. The explanation you gave to me certainly does help me realize what I need to prioritize!

So, even though I am not receiving a match, since I am not under the new BRS coming out in 2018 I should still try and contribute as much as a I can even if that leaves no room for house savings?

I think one thing that helped was you telling me that realistically with my income, I wont be able to do everything right now. So, I have to find the short term and long term goal balance. For me, I guess I will have to sacrifice the custom home and land savings for now until I am maximizing my TSP account. The emergency fund, and car short term goals along with the long term goal of maximizing my Roth TSP seems to be a good balance, and still achievable. After completing my emergency fund, I can use that money towards my TSP which would free up another 500 or so dollars a month that I was contributing towards my emergency fund before I left for deployment. So, I will actually have alot of money to contribute to my Roth TSP once I come back from deployment.
Topic Author
Slov
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Re: Conflicting goals, and limited income

Post by Slov »

retiredjg wrote: Tue Dec 12, 2017 7:40 am
Slov wrote: Tue Dec 12, 2017 6:15 am So, since there is a bond allocation I would want the funds in a tax deferred account? Typically I cant withdraw from a 401k. The only thing I can withdraw from would be a Roth IRA if I was going 80/20. Im still confused on how I would be able to get away with that Asset Allocation compared to if it was all in a taxable account.
I was talking about using an 80% stock and 20% bond allocation in your taxable account - money for the land/house. In the 15% tax bracket, there is little to no harm in holding some bonds in taxable. Or if you prefer, you could invest that money in just stocks. Know ahead of time that account is going to go through some wild swings. That's OK, but do not leave it in all stocks once you see that the house is within reach (but still several years out).

Yea, that would be the best option too, but I am already maxing my Roth IRA. I cant max my TSP unless im deployed, and I plan on actually using al of my deployment money when I come back. I plan on buying a vehicle for 10k, putting 10k towards my emergency fund, and using the remaining 10k to invest either in a taxable account for home fund savings, and some of this money would be used to buy personal things such as a new bed frame and mattress, clothes and some other things I would like.
What I meant was that any money going into TSP during deployment should be Roth TSP, not ordinary TSP. That way, you would never pay tax on it - goes in tax free and comes out tax free.

When you say you are going to use all your deployment money when you come back....that doesn't mean you are not using the TSP while deployed, right? You just mean the money over and above the TSP, right?

Yea thats true. I just like to have a clear defined plan on where Im going. Now, to be fair I cant plan for 20-30 years in the future besides just living frugally and working on my career, but its still nice to have the mental road map.
A general road map is fine. It gives direction. But all you need is direction - I'm headed west. You don't need to know each road you are going to take. There are lots of roads that go west and lots of good ways to get there. Just keep saving money and figure out the details later.

For example, if you save a lot now for retirement and less for the house, when you see the house in view, you can stop saving for retirement for a few years and just save house money very quickly. Or you could save a lot for the house now and save more for retirement later. Not the best choice in my mind, but it could work.

A young person like you with goals and direction combined with a preference for being frugal....I think you'll be fine.

I am okay with some wild swings in my taxable account honestly. That goal is very far away, but with you said below regarding choosing retirement to be funded first or the home I would rather choose the retirement account ( TSP) be maxed before I start saving for my custom home project. To me, that seems to be the best option along with you opinion as well. With that being said would it be smarter to fully attack and focus on my TSP before even funding a small taxable account, such as a 3,000 dollar starting amount in a Total Stock Market Index Fund and a small monthly contribution? Thats 100 dollars that could be going towards my TSP.

Lastly, regarding the TSP on deployment. I have been using the TSP since the day I entered the Army. I still currently contribute to it while on deployment. I didnt stop contributing to it when I left the states. When you say, " You just mean the money over and above the TSP, right," what do you mean by this? Maybe I am confused by the wording.
Topic Author
Slov
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Location: Alaska, USA

Re: Conflicting goals, and limited income

Post by Slov »

Grt2bOutdoors wrote: Tue Dec 12, 2017 8:28 am
Slov wrote: Tue Dec 12, 2017 6:19 am
Grt2bOutdoors wrote: Mon Oct 09, 2017 12:21 pm How do you estimate your Roth IRA will be worth $3-4 million at age 65? If annual contributions are $5,500 from ages 0-49 and then $6,500 from ages 50 to retirement, what percentage annual return are you expecting throughout the investing period?
I went to bankrate.com and looked at the Roth IRA calculator. I started with 1000 dollars at age 20, and I am maxing it every year at 5,500. I have a 15 percent marginal tax rate due to my income. My expected age of retirement is 65, and my rate of return expected is 9 percent with my Target 2060 Retirement fund. Now, certain things will change such as tax rate and contributions at 6,500 from 50 years old until retirement, but that is how I got my Roth IRA to be approximately worth at retirement. The total balance in a perfect world is around 3.2 million dollars.
If institutional investors can not hit a 7-7.5 percent long term return, what makes you believe you will earn 9%?
Wow... you are right. I wasn't paying attention to true rates of return after taxes and dividends, along with the market historical average. Its odd how a two percent difference in earnings can mean millions on a Roth IRA calculator, haha.
Topic Author
Slov
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Location: Alaska, USA

Re: Conflicting goals, and limited income

Post by Slov »

jlcnuke wrote: Tue Dec 12, 2017 8:54 am Howdy! The very first piece of advice I'd like to give you is to stop thinking about "now" as your only plan. Sure, it's great to have a plan for "now" (and you should), but it's better to have a continual plan for your financial future.

I put the following together years ago, and you're already doing some of it, but I wanted to post it up here:
1. Always live “below” your means. I say this because most people do not consider money spent on savings/investments as “living” though it surely is a necessity just like having a roof over your head.
2. Save a 9-12 months emergency fund (monthly expenses only) as soon as possible.
3. Expect to make more money as time progresses, most people do.
4. When you start earning more, make sure you increase your emergency fund to match.
5. As soon as you are earning money, invest some of it. Never say “it’s only $xxx.xx so it’s not worth investing yet” or “I’m too poor to invest anything“. If you can’t afford to invest then you can’t afford your current lifestyle, because investing is a bill you need to be paying yourself as soon as possible.
6. When you start making more, maintain your quality of living (i.e. allow some of that increase to cover inflation/increasing costs of living).
7. Take half of what is left over and put it in savings/investments, use the other half of what is left over to increase your quality of life. Repeat these steps every time you start earning more, whether it’s from a raise/promotion/new career/etc.
8. Set goals in life but don’t be blinded by them. Your goals will likely shift throughout your life and you shouldn’t ignore your new goals simply because you had other goals.
9. Never go a day without a budget. If you don’t know where your money is going then there is a strong chance that too much of it is being wasted.
It's great you want to pay cash for a car and have an adequate emergency fund. Those are things you should be doing. It's nice that you "feel good" about maxing your IRA contributions. however, if you can have cheaper investments (TSP), then for the same asset allocation you should end up with more money over time. Therefore, putting $5.5k into the TSP (with it's industry low fees) is likely to net you more money in the end than putting that same money in higher fee funds in an IRA. Eventually it would be great to max out both, but you're not at a point where that is reasonable yet. Give it time, however, and you should be.

Pay close attention to the second half of the list above (6-9). If you follow 6 and 7, you'll eventually be saving enough to max both your TSP and IRA and have money left over to invest still.. it'll just take time to get there.

Nothing wrong with putting your emergency fund in a Roth IRA though imo. In fact, you could add another $1k onto your planned $10k and have 2 years worth of IRA max contributions taken care of and use that as your emergency fund if needed (I'd still recommend having some liquid emergency fund money personally, but no need for all of it to be liquid generally). Then take all the money you "would" be putting in your IRA each month/paycheck/whenever and shift that contribution to your TSP. This isn't going to be your only trip where you aren't spending much money, so I'd recommend you treat others similarly (use 1/2 - 2/3rds of the savings to boost your savings/investments and the rest on yourself). 2-3 deployments should get a decent down-payment established for that house you'll eventually buy (and if you're not going to buy for 20-30 years I would be investing that money in a low cost index fund personally) as well as continue to boost your savings/investments.

I'd also say this - don't assume you'll get a retirement check. You may decide to get out before then or the service may decide you have to get out before then without a retirement (medical discharge, downsizing, etc). So assume you have to pay for your own retirement completely.

With regard to investment returns, axing your IRA contributions for 42 years (20-62) with a 7% ROI would end up with less than $1.3M. 7% is much more reasonable expectation, but may still be high overall. I surely wouldn't expect 9% returns in any planning scenario though. A good simple calculator for such estimates can be found here http://www.bankrate.com/calculators/ret ... lator.aspx
Thanks for the continual plan. Those rules are actually very good and I never thought about having one of those.

So, you pretty much suggest pushing all my efforts into maximizing my Roth TSP since my Emergency fund goal and car goal will be met once I return to the states? After hitting my emergency fund goal that would leave quite a bit of money, around 500 or so that I was using before hand to contribute monthly to my emergency fund.

Well, the whole point of using my Roth IRA as an emergency fund was and still is a temporary measure until my emergency fund goal is reached. From there the IRA in my mind just goes entirely to a IRA account and not two birds with one stone, but still efficiently using my money to the best of my ability. Using a Roth IRA as a emergency fund for me is not a long term goal I have. I want to get away from that as soon as possible, but it works extremely well for the time being.

In regards to deployment, I think if my emergency fund goal is already met and Im already maxing my Roth IRA, the only things I can really do is try and maximize my TSP while deployed, and use the rest of the money for house savings along with some personal expenses you listed. So, in the long run that makes sense. Ill have less goals Im trying to hit with a larger amount of money... 2/3rds to retirement and home savings with 1/3rd going to personal expenses.

Yea, I dont like the idea of depending on someone for retirement. So, planning for it on my own seems to be the best medicine. So I certainly agree with what you are saying.

Yea, with my Roth IRA calculator I used on bank rate the difference of 7 percent down from 9 percent is a large difference. 1.7 million is approximately earned from 20-65 with a 7 percent ROR and 15 percent tax rate. So, I just honestly didnt pay attention to the fact that 7 percent is a more realistic ROR after taxes and dividends. My question is, even though the Roth IRA is paying taxes now, Im still paying taxes on earnings? I thought this was only in a taxable account. I was looking at the Target Retirement 2060 fund, under the performance tab and saw the ROR was 8.8 percent or so after taxes and dividends. So, Im kind of confused. Can I get clarification?
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Slov
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Location: Alaska, USA

Re: Conflicting goals, and limited income

Post by Slov »

Olemiss540 wrote: Tue Dec 12, 2017 8:54 am Keep in mind that compound interest is your BEST FRIEND. You need to prioritize your retirement savings before the house for a few reasons:

The earlier you get started and the larger amount you get into your TSP while young, will allow compounded growth for the next 35 years.
Once your retirement nest egg is substantially ahead of schedule, you can always cut back in preparation for home purchase and allow compounding to do the hard work.
You can always get a mortgage for your dream house in 10 or 20 years, you can NOT go back in time and utilize your precious tax advantaged space.

No loans available for retirement, but with a pension and a large retirement nest egg in your future, many good reasons for getting a mortgage if needed since you will have ample cash flow. Once your tax advantaged space (TSP, Roth IRA) is fully maxed each year as your income rises, then you can begin investing in a taxable account for future home buying needs. I know it seems like you want to jump ahead to saving for a house since you feel like you have been too frugal, but know this plan will allow you the utmost flexibility when your time in the service is over.

Thanks for everything you do and STAY SAFE!
That simple statement reminded me of compound interest, haha. Such a simple concept was over looked in my eyes when asking these questions when the answer was right in font of me. What you are saying makes absolute sense. Even though emotionally I want the custom home and land savings to be worked on now, financial freedom wise prioritizing retirement over the home makes much more sense and like you said, give me much more flexibility. I would rather use the space thats allotted to me per year and not loose it, compared to the fact I can just easily catch up on my home fund in later years and in the process, not lose all that allotted space I had that I never took advantage of in my Roth TSP. That makes much more sense now. Thank you

No problem. Thanks for the support. Ill do my best to stay safe over here, haha.
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teen persuasion
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Re: Conflicting goals, and limited income

Post by teen persuasion »

I think you are making this harder than it really is. Money (and investments) are fungible. TSP, IRA, taxable are all just different buckets to fill, with different rules for each. The important thing is how much you KEEP of your savings/investments. Fill up the most advantageous buckets first (because those have limited space), moving down to the less advantageous buckets (more lost to taxes). Even though the TSP and IRA are labeled "retirement" accounts, you can access at least part of the funds in them for things like first time home purchase.

There are lots of ways to skin a cat - keep your options open. Diversity in types of accounts (tax free, tax deferred, taxable) is a good thing, but it's a bit of a long-term puzzle allocating limited current income to each. Do you fund each type only partially now (at a partial tax cost), and fully only later when income catches up, or do you nab the tax advantages of the retirement accounts and skip taxable now, knowing that eventually you will more heavily fund taxable (because you have no more room in retirement accounts)? Tax changes are always possible, I'd lean to maximizing my tax savings each year.
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retiredjg
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Re: Conflicting goals, and limited income

Post by retiredjg »

I am okay with some wild swings in my taxable account honestly. That goal is very far away, but with you said below regarding choosing retirement to be funded first or the home I would rather choose the retirement account ( TSP) be maxed before I start saving for my custom home project. To me, that seems to be the best option along with you opinion as well. With that being said would it be smarter to fully attack and focus on my TSP before even funding a small taxable account, such as a 3,000 dollar starting amount in a Total Stock Market Index Fund and a small monthly contribution? Thats 100 dollars that could be going towards my TSP.
I think that is your choice. Neither is particularly better financially. You could save nothing for the home now and concentrate on the TSP. Or if putting a little into taxable for the home would give you a warm and happy feeling, put a little into taxable for the home but mostly concentrate on the TSP.


Lastly, regarding the TSP on deployment. I have been using the TSP since the day I entered the Army. I still currently contribute to it while on deployment. I didnt stop contributing to it when I left the states. When you say, " You just mean the money over and above the TSP, right," what do you mean by this? Maybe I am confused by the wording.
Don't worry about that part - I've figured out what you meant.
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Slov
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Re: Conflicting goals, and limited income

Post by Slov »

teen persuasion wrote: Wed Dec 13, 2017 7:36 am I think you are making this harder than it really is. Money (and investments) are fungible. TSP, IRA, taxable are all just different buckets to fill, with different rules for each. The important thing is how much you KEEP of your savings/investments. Fill up the most advantageous buckets first (because those have limited space), moving down to the less advantageous buckets (more lost to taxes). Even though the TSP and IRA are labeled "retirement" accounts, you can access at least part of the funds in them for things like first time home purchase.

There are lots of ways to skin a cat - keep your options open. Diversity in types of accounts (tax free, tax deferred, taxable) is a good thing, but it's a bit of a long-term puzzle allocating limited current income to each. Do you fund each type only partially now (at a partial tax cost), and fully only later when income catches up, or do you nab the tax advantages of the retirement accounts and skip taxable now, knowing that eventually you will more heavily fund taxable (because you have no more room in retirement accounts)? Tax changes are always possible, I'd lean to maximizing my tax savings each year.
Understood. Thanks for the clarification and advice. What youre saying makes sense
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