BH Next Steps for Single 34 Year Old with Savings and Roth IRA (VASGX)
Without knowing your plans for the future, it's a little difficult to provide exact guidance. So I'll be general.
--Your major goal is to save more for retirement.
--You are paying into SS.
--If you have sufficient savings, you can delay taking SS until age 70 to max you benefits.
--Your annual earnings will continue to increase.
--If you can find a new employer with a retirement plan, then you can set aside more tax-advantaged savings annually.
--You'll one day marry and have a home and family.
--You are currently in the 22% fed income tax bracket. (Income and investment brackets are slightly different.)
--State tax bracket is unknown because not revealed.
--You'll retire and be in a comparable tax bracket.
You are at the age where buying I bonds is an options. They mature in 30yrs (assumes you start redeeming them at age 65and are retired), are tax-deferred until redeemed, exempt from state income tax when redeemed, and bought in a taxable account. Annual limit is $10K/per SS number.
Playing the annual “$5K paper I bonds back on federal tax return” makes doing taxes less onerous and increases your annual purchase to $15K.
Roth IRA vs Traditional IRA.
Roth IRA? Your retired self will appreciate the flexibility of not having to make the RMDs. You will not need the RMDs if you have saved sufficiently in a 401k and taxable investing and delay SS until age 70.
Traditional IRA? If you anticipate that you will need the RMDs during retirement to meet your annual living expenses, then would be better to get the tax deduction now for a tIRA (traditional IRA), and pay the tax on RMDs during retirement.
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
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).
Try to find an employer that allows after-tax contributions to a 401k. Why?
After-tax 401k or 403b.
If you have the option to contribute after-tax dollars, then consider this.
See: https://thefinancebuff.com/rollover-aft ... -roth.html
And the “mega backdoor Roth IRA” concept.
See: http://www.google.com/search?q=mega+bac ... rg%2Fforum
If you start a side business, then set up a solo 401k that allows after-tax contributions.
Mega backdoor Roth in solo 401k
See: https://thefinancebuff.com/executing-me ... -401k.html
= tax-deferred accounts + tax-free accounts.
Tax-deferred accounts (solo 401k, SEP IRA, Simple IRA, defined benefits plan; 401a, 401k, 403b, 457B; tIRA,...).
Many suggest skewing these toward bonds. Why? As you need bonds and they have less growth, so less tax will be owed upon withdrawal.
Tax-free accounts (r401k, rIRA,…).
Many suggest skewing these toward equities. Why? Since they are tax-free upon withdrawal, so the greater expected growth of equities is an advantage.
Use only the most tax-efficient options. As there is no annual contribution limit, it's easy, after populating your limited annual tax-advantaged space with your best options, to rebalance to your desired AA with new money in taxable. This is also the best place to hold emergency funds as it avoids the need to steal eggs from the golden goose sitting on your tax-advantaged retirement nest egg.
All-in-one funds. Do not use an all-in-one fund in your taxable space. Why? Most use taxable bonds that are inappropriate in a taxable account, and you can’t buy/sell only stocks/bonds (must buy both) so it’s more difficult to rebalance and harvest capital gains and tax losses. This is also true of tax-managed funds (using municipal bonds).
For taxable accounts and if in 25%+ fed tax bracket, a municipal (tax-exempt) bond fund can be used as part of our taxable retirement investment (substituted for TBM in 3-fund portfolio) and do double-duty as one tier of our savings/EFs*. The use of munis is not "all or nothing" as you can mix taxable bonds in your tax-advantaged accounts with munis in your taxable accounts.
"Daily-accrual" muni fund. A daily-accrual muni fund (not ETF) is exempt from IRS 6mo holding period requirement to protect tax-exempt dividends. Meaning shares are easy to sell (only simple CG reporting required) so it can perform multiple duties:
--no contribution limit, so can skew tax-advantaged accounts to equities for more tax-sheltered growth,
--to save for short-term goals (home projects, vacation, new car,...) instead of taxable CDs/savings,
--as last/largest formal EF tier, less CG consequence and more immune to market noise than equities,
--as dry powder to use during market correction.
See "Loss on mutual fund shares held 6 months or less": https://www.bogleheads.org/wiki/Tax_los ... harvesting
An intermediate-term (taxable, or national muni) bond fund is reported to be the sweet sport for total return investing (= share price appreciation + distributions (dividends + capital gains)). Vanguard's IT national muni fund is VWITX.
Vanguard also has a municipal mmkt fund: VMSXX.
What I wish someone had told me when I was in my 30s.
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 wise retirement investing.
Date… or Soul Mate
, Warren: priceless if it helps avoid bad marriage/divorce.
The Only Guide to a Winning Bond Strategy You'll Ever Need
, Larry Swedroe: so you avoid bad bonds.
Get the books from your local library.
You can also being reading in the Wiki (link provided above).
Keep your financial life simple.
My retirement plans are based on an emergency fund, small rIRA (to turn off RMDs), large taxable investments, defined benefits pension plan, and SS. I’ve never had access to a 401k.
My EF is 12mos of living expenses in checking/savings/TE mmkt. I use the ABP by CC technique to earn 2%/yr tax-free on that money in low-interest accounts. This helps me avoid the urge to chase bank teaser rates so keeps my financial life simple.
See ABP by CC technique: viewtopic.php?p=3794477#p3794477
My total investments are age-appropriate (stock/bond ratio).
My small rIRA is all equities for the greater growth potential.
My taxable investing is based on the 3-fund portfolio. It contains an additional 3yrs of living expense in VWITX masquerading as part of my taxable-account bond allocation. It’s easy to sell during an emergency.
Many prefer shorter-duration muni funds to minimize interest rate risk by increased price stability (52wk price spread: VWSTX ~10-cents, VWITX ~50 cents, VWLTX <$1). But I prefer Vanguard's long-term muni funds. Why? When considering total return investing (= share price appreciate + distributions (dividends + capital gains)), the majority of a bond fund's total return comes from dividends. So, within reason and since I'm not selling (so don’t worry too much about share price stability), I prefer more dividends to less.
I select muni funds based on TBM. I generally only consider a muni fund to be an appropriate replacement if it produces more after-tax income than TBM. A second look must consider whether I can tolerate the muni’s additional risk.
VWITX is an exception. I use it as a portion of my bond allocation, last/largest tier of my formal EFs, home project/new car, and dry powder fund. Why? Thought it's after-tax return is not always as good as TBM in the 25% fed tax bracket, it is better than bank CDs. So in that EF role, it serves well enough for me.
My major muni holdings are in VWLTX and a single-state muni. These do return more after-tax than TBM, but are more risky than TBM.
--Maximize your Roth annually.
--Set aside 1yr of living expense as an EF. Use the additional money to begin taxable investing.
--Begin investing in an age-appropriate 3-fund portfolio in a taxable account. (Maybe first skew toward bonds---safer than equities---to build-up an extended EF tier, future home purchase?)
--Find a new job with an employer with a 401k. (Preferable one that allows after-tax 401k contributions.)
--Find the Wiki list of recommended “books” (search term) and read several over the coming years to increase your investor education.
Above is general advice and what I’ve done based on the same advice. The advice may or may not be appropriate for you. For better advice, you’ll need to tell us more about your situation and plans.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.