28 y/o teacher looking for investment advice/critique

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Topic Author
nsherman2006
Posts: 14
Joined: Wed Jun 14, 2017 11:53 am

28 y/o teacher looking for investment advice/critique

Post by nsherman2006 »

Hello,

I am a 28 year old teacher finishing up my 6th year of teaching. I just transferred to a CT technical high school, so I am a state employee, but am continuing with the Teacher's Retirement Board plan. I'm in the midst of setting up my retirement accounts again and would like some general advice/critique.

My current financial status:

Salary: $54,000 annually (will increase to around $60k next year pending completion of degree)
Cash Savings: $16,000
Retirement Savings: $55,000 ($31,000 Roth IRA and $24,000 403(b))
Debt: $57,000 (mortgage on rental property)
Other Assets: 3 rental houses, total value approximately $300,000, monthly income (net) approximately $2,000. Vehicles paid off.

My goal:

Retirement at 58 with 35 years of service into CT TRB, which would provide me an annual pension of 70% of my average salary (top 3 years). In today's dollars, my pension would likely be around $63,000 annually. I live a relatively frugal lifestyle...my general strategy is to purchase quality used goods (cars, tools, clothing, etc.), and to perform as many of my own necessary services as possible (from home/vehicle maintenance to haircuts). I enjoy less frugal hobbies such as travel, golf, and skiing, but I try to do those on a conservative budget. I don't anticipate my lifestyle changing dramatically, but do foresee children in the near future and want to be prepared for that financial impact. I am unmarried, but dating a pharmacist who significantly out-earns me, so my current strategy is to plan for future events as if I was single, which should be erring on the side of being conservative.

Investment Options:

At my past employer, I only had the option of a Traditional 403(b) through Fidelity. I chose to max out a Roth IRA for the past 4 years (got started late due to home expenses), and contribute to a 403(b) in addition. I now have the option to contribute to a traditional or Roth 403(b), with the following choices of funds (please ignore the PDF text):

American Funds American Mutual Fund®—Class R-6* PDF file opens in new window
American Funds EuroPacific Growth Fund®—Class R-6* PDF file opens in new window
Calvert Bond Portfolio—Class I* PDF file opens in new window
Connecticut Stable Value Fund PDF file opens in new window
DFA Real Estate Securities Portfolio—Institutional Class* PDF file opens in new window
Fidelity VIP Contrafund Portfolio—Initial Class**
Fidelity VIP Mid Cap Portfolio—Initial Class**
JPMorgan Mid Cap Value Fund—Class I Shares* PDF file opens in new window
MetWest Total Return Bond Fund* PDF file opens in new window
TIAA-CREF Equity Index Fund—Institutional Class* PDF file opens in new window
TIAA-CREF International Equity Index Fund—Institutional Class* PDF file opens in new window
TIAA-CREF Large-Cap Growth Index Fund* PDF file opens in new window
TIAA-CREF Small-Cap Blend Index Fund—Institutional Class* PDF file opens in new window
TIAA-CREF Social Choice Equity Fund—Institutional Class* PDF file opens in new window
Vanguard® Explorer™ Fund—Admiral™ Shares PDF file opens in new window
Vanguard® Inflation-Protected Securities Fund—Inst* PDF file opens in new window
Vanguard® Institutional Index Fund—Institutional Plus* PDF file opens in new window
Vanguard® Mid-Cap Index Fund—Institutional Shares* PDF file opens in new window
Vanguard® REIT Index Fund—Institutional Shares* PDF file opens in new window
Vanguard® Total Bond Market Index Fund—Institutional* PDF file opens in new window
Wells Fargo Advantage Premier Large Company Growth Fd—Inst* PDF file opens in new window

My Current Plan:

I plan on contributing $500 per pay period ($13,000 annually) to a Roth 403(b) allocated as follows:
60% Vanguard Institutional Index (VIIIX)
20% Vanguard REIT Index (VGSNX)
10% Vanguard Total Bond (VBTIX)
10% Vanguard Inflation-Protected Securities (VIPIX)

I also plan on contributing $5500 annually to a Roth IRA through Vanguard allocated as follows:
33% Vanguard Extended Market (VEXAX)
67% Vanguard Total Internation (VTIAX)

This would move my target AA in retirement funds to:
VIIIX - 42% / VEXAX - 10% / VTIAX - 20% / VGSNX - 14% / VBTIX 7% / VIPIX 7%. (86% equity / 14% bonds)

The goal here is a buy-and-hold approach (I might periodically rebalance, but the intent is for this to be mostly hands-off once setup), though I may temper it to something less aggressive as I age.

I would also like to do a Roth conversion from my current traditional 403(b) to my current Vanguard Roth IRA. This would increase my income by $24,000 this year, but this is my last year as a student, and my salary will increase significantly next year, so it seems best to take the tax hit now.
My current Vanguard account is split evenly between two funds (Dividend Growth VDIGX and Selected Value VASVX). This rollover would increase my balance to $55,000. I would like to sell all of VASVX and move $10,000 each to start investing in Admiral Shares of Extended Market (VEXAX) and Total International (VTIAX). I would invest $5,000 in Vanguard Short-Term Bonds (VFSTX), and would leave the remaining $30,000 in Dividend Growth (which is a large blend that is closed to new investors that I do not want to sell out of, and seems to be a suitable replacement to a large index fund).

This would leave me with a current AA of: 91% equity/ 9% bonds (55% US large, 18% US small/mid, and 18% total international, 9% short term bonds).

My overall target is a core four AA with ~50% US Equities, ~20% Int'l Equities, ~15% REIT, and ~15% Bonds.


The decisions to stay in VDIGX rather than an index fund and immediately make my portfolio bonds short term are admittedly (small) attempts to time the market, but I don't feel they are unreasonable ones.

Any input/advice?

Thanks!

-Neal
amythius
Posts: 27
Joined: Wed Jun 06, 2012 9:31 am

Re: 28 y/o teacher looking for investment advice/critique

Post by amythius »

Just some high-point questions that stand out to me:

1) What percentage of 403(b) are Roth now? I am assuming none as you described the Rollover to Roth IRA when exiting existing employer.

2) Are you aware of the tax implications of Converting $24k from 403 to Roth in this tax year? Do you have the cash/funds to cover such a transfer? I considered this when I was younger, but ultimately decided not too -- as it seemed most advantageous in my 22% marginal tax rate to continue utilizing the tax advantaged space and worry about Roth / Roth conversions at retirement age. No one can predict this, but there are many articles and ideas surrounding this.

3) I am assuming you are filing taxes as Single at this point: could you give more insight as to why you are choosing Roth 403 instead of traditional? I would think at your income and tax rate, that it may be beneficial to utilize the Traditional given a lifetime career as a teacher and projected tax rates. I truly look forward to other's advice here, as I am far from an expert.

4) It may help to obtain the Expense Ratio for each of the funds you listed. It is a little difficult to choose between some of the fund without this information, as it is advantageous to look for lower expense ratios when comparing like or similar fund choices.

5) Given your plan and Asset Allocations: my personal advice is they are tilted too high to REIT and international exposures. But just my preference. Consider more of a 3 or 4 fund approach if you can. But you obviously are educated enough to make your own decision. Just my cheap two-cents here.
User avatar
CyclingDuo
Posts: 4347
Joined: Fri Jan 06, 2017 9:07 am

Re: 28 y/o teacher looking for investment advice/critique

Post by CyclingDuo »

nsherman2006 wrote:Hello,

I am a 28 year old teacher finishing up my 6th year of teaching. I just transferred to a CT technical high school, so I am a state employee, but am continuing with the Teacher's Retirement Board plan. I'm in the midst of setting up my retirement accounts again and would like some general advice/critique.

My current financial status:

Salary: $54,000 annually (will increase to around $60k next year pending completion of degree)
Cash Savings: $16,000
Retirement Savings: $55,000 ($31,000 Roth IRA and $24,000 403(b))
Debt: $57,000 (mortgage on rental property)
Other Assets: 3 rental houses, total value approximately $300,000, monthly income (net) approximately $2,000. Vehicles paid off.

My goal:

Retirement at 58 with 35 years of service into CT TRB, which would provide me an annual pension of 70% of my average salary (top 3 years). In today's dollars, my pension would likely be around $63,000 annually. I live a relatively frugal lifestyle...my general strategy is to purchase quality used goods (cars, tools, clothing, etc.), and to perform as many of my own necessary services as possible (from home/vehicle maintenance to haircuts). I enjoy less frugal hobbies such as travel, golf, and skiing, but I try to do those on a conservative budget. I don't anticipate my lifestyle changing dramatically, but do foresee children in the near future and want to be prepared for that financial impact. I am unmarried, but dating a pharmacist who significantly out-earns me, so my current strategy is to plan for future events as if I was single, which should be erring on the side of being conservative.

Investment Options:

At my past employer, I only had the option of a Traditional 403(b) through Fidelity. I chose to max out a Roth IRA for the past 4 years (got started late due to home expenses), and contribute to a 403(b) in addition. I now have the option to contribute to a traditional or Roth 403(b), with the following choices of funds (please ignore the PDF text):

American Funds American Mutual Fund®—Class R-6* PDF file opens in new window
American Funds EuroPacific Growth Fund®—Class R-6* PDF file opens in new window
Calvert Bond Portfolio—Class I* PDF file opens in new window
Connecticut Stable Value Fund PDF file opens in new window
DFA Real Estate Securities Portfolio—Institutional Class* PDF file opens in new window
Fidelity VIP Contrafund Portfolio—Initial Class**
Fidelity VIP Mid Cap Portfolio—Initial Class**
JPMorgan Mid Cap Value Fund—Class I Shares* PDF file opens in new window
MetWest Total Return Bond Fund* PDF file opens in new window
TIAA-CREF Equity Index Fund—Institutional Class* PDF file opens in new window
TIAA-CREF International Equity Index Fund—Institutional Class* PDF file opens in new window
TIAA-CREF Large-Cap Growth Index Fund* PDF file opens in new window
TIAA-CREF Small-Cap Blend Index Fund—Institutional Class* PDF file opens in new window
TIAA-CREF Social Choice Equity Fund—Institutional Class* PDF file opens in new window
Vanguard® Explorer™ Fund—Admiral™ Shares PDF file opens in new window
Vanguard® Inflation-Protected Securities Fund—Inst* PDF file opens in new window
Vanguard® Institutional Index Fund—Institutional Plus* PDF file opens in new window
Vanguard® Mid-Cap Index Fund—Institutional Shares* PDF file opens in new window
Vanguard® REIT Index Fund—Institutional Shares* PDF file opens in new window
Vanguard® Total Bond Market Index Fund—Institutional* PDF file opens in new window
Wells Fargo Advantage Premier Large Company Growth Fd—Inst* PDF file opens in new window

My Current Plan:

I plan on contributing $500 per pay period ($13,000 annually) to a Roth 403(b) allocated as follows:
60% Vanguard Institutional Index (VIIIX)
20% Vanguard REIT Index (VGSNX)
10% Vanguard Total Bond (VBTIX)
10% Vanguard Inflation-Protected Securities (VIPIX)

I also plan on contributing $5500 annually to a Roth IRA through Vanguard allocated as follows:
33% Vanguard Extended Market (VEXAX)
67% Vanguard Total Internation (VTIAX)

This would move my target AA in retirement funds to:
VIIIX - 42% / VEXAX - 10% / VTIAX - 20% / VGSNX - 14% / VBTIX 7% / VIPIX 7%. (86% equity / 14% bonds)

The goal here is a buy-and-hold approach (I might periodically rebalance, but the intent is for this to be mostly hands-off once setup), though I may temper it to something less aggressive as I age.

I would also like to do a Roth conversion from my current traditional 403(b) to my current Vanguard Roth IRA. This would increase my income by $24,000 this year, but this is my last year as a student, and my salary will increase significantly next year, so it seems best to take the tax hit now.
My current Vanguard account is split evenly between two funds (Dividend Growth VDIGX and Selected Value VASVX). This rollover would increase my balance to $55,000. I would like to sell all of VASVX and move $10,000 each to start investing in Admiral Shares of Extended Market (VEXAX) and Total International (VTIAX). I would invest $5,000 in Vanguard Short-Term Bonds (VFSTX), and would leave the remaining $30,000 in Dividend Growth (which is a large blend that is closed to new investors that I do not want to sell out of, and seems to be a suitable replacement to a large index fund).

This would leave me with a current AA of: 91% equity/ 9% bonds (55% US large, 18% US small/mid, and 18% total international, 9% short term bonds).

My overall target is a core four AA with ~50% US Equities, ~20% Int'l Equities, ~15% REIT, and ~15% Bonds.


The decisions to stay in VDIGX rather than an index fund and immediately make my portfolio bonds short term are admittedly (small) attempts to time the market, but I don't feel they are unreasonable ones.

Any input/advice?

Thanks!

-Neal
With your three rentals, don't you feel you've got enough in real estate percentage wise? Suggest to skip plans for the REIT fund and put that portion in Total Bond Fund.

I wouldn't convert the 403b to your ROTH IRA - unless you are paying high ER fees. Just continue to contribute to your ROTH IRA with new money each year. At your age, and annual contributions already going to your ROTH - you'll be fine. You are age 28. Even if all you socked away for the next 30 years was $5500 each year, and then $6500 once you hit age 50 for the final 8 years before your target of 58 to retire - that's nearly a quarter million in principal alone that you would contribute. Add in returns and reinvestments over the 30 years, and your current ROTH IRA is going to pack a nice powerful punch. I think your plan is solid and will produce good results. Run your current balance of $31K in your ROTH, your current age of 28, additional investments, rate of return, etc... and that alone should set you up well. Combine this with your pension and SS (assuming you get it unless you are in a state where teachers do not get it) to get a picture.

At your new job, suggest opting for the traditional 403b for the pre-tax deduction to keep your income tax down - especially with the taxable income of rental (and if you end up having any taxable gains and ordinary income in taxable accounts). Again, you already have your ROTH IRA which you should continue to contribute to every year. The combination of the traditional 403b tax deferred, ROTH IRA, Pension, Social Security gives you nice options for the goal of retiring at 58 and filling the gap years until you take SS.

One glaring hole that stands out for me when looking at your "plan" is a fund for maintenance/repair issues of your three rental properties. You only have a cash savings of $16K, and if you average out your annual costs over time to maintain three properties as repairs and maintenance issues come along - don't you see yourself needing a bigger slush fund to handle things like roof, paint, plumbing, appliances, flooring, etc... on three properties? You don't have any taxable account investments outside of your real estate. Any plans or thoughts on adding that to your investment plans? You'll have the need for cars, maybe a relationship, vacations, maybe a child some day, vacations - shorter term goals that might be 5 - 10 years out where you would like to build investments to help finance what comes along.
"Save like a pessimist, invest like an optimist." - Morgan Housel
Topic Author
nsherman2006
Posts: 14
Joined: Wed Jun 14, 2017 11:53 am

Re: 28 y/o teacher looking for investment advice/critique

Post by nsherman2006 »

Thanks for the input!
amythius wrote:Just some high-point questions that stand out to me:

1) What percentage of 403(b) are Roth now? I am assuming none as you described the Rollover to Roth IRA when exiting existing employer.

2) Are you aware of the tax implications of Converting $24k from 403 to Roth in this tax year? Do you have the cash/funds to cover such a transfer? I considered this when I was younger, but ultimately decided not too -- as it seemed most advantageous in my 22% marginal tax rate to continue utilizing the tax advantaged space and worry about Roth / Roth conversions at retirement age. No one can predict this, but there are many articles and ideas surrounding this.

3) I am assuming you are filing taxes as Single at this point: could you give more insight as to why you are choosing Roth 403 instead of traditional? I would think at your income and tax rate, that it may be beneficial to utilize the Traditional given a lifetime career as a teacher and projected tax rates. I truly look forward to other's advice here, as I am far from an expert.

4) It may help to obtain the Expense Ratio for each of the funds you listed. It is a little difficult to choose between some of the fund without this information, as it is advantageous to look for lower expense ratios when comparing like or similar fund choices.

5) Given your plan and Asset Allocations: my personal advice is they are tilted too high to REIT and international exposures. But just my preference. Consider more of a 3 or 4 fund approach if you can. But you obviously are educated enough to make your own decision. Just my cheap two-cents here.
1) All of my 403(b) is currently traditional (Roth wasn't an option at my previous employer)

2) Yes, I am aware that this will be a significant taxable event. However, my earnings for this current year are relatively low (previous pay was much lower, I am doing less summer work than last year, and I'm not expecting a significant net profit from the rentals this year), plus it is the last year I will be a student. I don't anticipate any future years with less income (including retirement). Obviously income isn't the sole variable which determines tax liability, but I feel like if I'm going to pay taxes on this money, this year might be the best part.

3) I anticipate earning roughly $63k annually (or the equivalent in today's dollars) from my pension at retirement. If there is a year that I anticipate having more income than that, I will begin contributing to a traditional IRA. For me, that appears to be 2 years in the future. I'm trying to sock away as much Roth money as I can afford before my income reaches that level.

4) The ERs on the funds I selected were the lowest of their type in my list of options (The Vanguard REIT fund is the only REIT option), so if my choice of fund categories is reasonable, I'm confident that the particular fund selected is my best option.

5) See response below re REIT allocation
CyclingDuo wrote:
With your three rentals, don't you feel you've got enough in real estate percentage wise? Suggest to skip plans for the REIT fund and put that portion in Total Bond Fund.

I wouldn't convert the 403b to your ROTH IRA - unless you are paying high ER fees. Just continue to contribute to your ROTH IRA with new money each year. At your age, and annual contributions already going to your ROTH - you'll be fine. You are age 28. Even if all you socked away for the next 30 years was $5500 each year, and then $6500 once you hit age 50 for the final 8 years before your target of 58 to retire - that's nearly a quarter million in principal alone that you would contribute. Add in returns and reinvestments over the 30 years, and your current ROTH IRA is going to pack a nice powerful punch. I think your plan is solid and will produce good results. Run your current balance of $31K in your ROTH, your current age of 28, additional investments, rate of return, etc... and that alone should set you up well. Combine this with your pension and SS (assuming you get it unless you are in a state where teachers do not get it) to get a picture.

At your new job, suggest opting for the traditional 403b for the pre-tax deduction to keep your income tax down - especially with the taxable income of rental (and if you end up having any taxable gains and ordinary income in taxable accounts). Again, you already have your ROTH IRA which you should continue to contribute to every year. The combination of the traditional 403b tax deferred, ROTH IRA, Pension, Social Security gives you nice options for the goal of retiring at 58 and filling the gap years until you take SS.

One glaring hole that stands out for me when looking at your "plan" is a fund for maintenance/repair issues of your three rental properties. You only have a cash savings of $16K, and if you average out your annual costs over time to maintain three properties as repairs and maintenance issues come along - don't you see yourself needing a bigger slush fund to handle things like roof, paint, plumbing, appliances, flooring, etc... on three properties? You don't have any taxable account investments outside of your real estate. Any plans or thoughts on adding that to your investment plans? You'll have the need for cars, maybe a relationship, vacations, maybe a child some day, vacations - shorter term goals that might be 5 - 10 years out where you would like to build investments to help finance what comes along.
Re: REIT Allocation: Although I do own rental real estate, it is all in the same town (where I used to work), and is not very diversified. It is a great college rental market, but town issues and a terrible school system (why I'm leaving) are likely to keep real estate depressed there for the near future. I am looking for REIT allocation in my portfolio to capture commercial real estate and also to keep my retirement portfolio well diversified. I'd like my portfolio to be viable as a stand-alone investment, as I will likely get out of this rental market (and possibly real estate entirely) at the next viable opportunity. I am not considering any immediate changes to my portfolio to include REITs, so it would only be 14% of my new contributions tilting toward REIT. But it is a valid point and one that I will continue to consider.

The current 403b is with Fidelity. Some of the motivation for converting is to get these to become Roth funds now, while my income is as low as I anticipate it will ever be (again, I anticipate earning more in retirement). The remaining motivation for conversion is to consolidate for convenience, and to open the ability to invest in Admiral shares (with their lower expense ratio) of the funds I've selected.

I will not be collecting SS (or if I do, it will be a very, very small amount from my pre-teaching employment), so that's not worth considering.

As far as a "rainy day fund", that's one other motivation for contributing to Roth. Access to contributions in the event of an unexpected emergency is a nice security blanket to have, and one that makes it possible for me to save aggressively. As far as real estate expenses, part of the reason that $16k is so low is that I've done a significant amount of work on the houses recently (2 new roofs, 20 new windows, 2 entire houses of new flooring), but I have between $500-$1000 per month going into my cash account on top of expenses. I don't earn interest on anything above $10k, so I haven't been very motivated to save more than that in cash. I do nearly all of the maintenance myself (including plumbing, electrical, and carpentry), so I'm quite comfortable with a $10k cash reserve.

However, I am anticipating selling one of the rentals within the year which will net me slightly over $100k, paying off my mortgage and leaving about $45k cash which I will likely leave as cash to use as a down payment for a house. I anticipate that being the next major event where I have to reevaluate my income/expenses and determine If I am saving too much/too little.

A few questions I have:

1) Do others who are significantly exposed to the real estate market outside your investment portfolio avoid REIT? I like that there is significant non-correlation to the broader market (and still have 70% of my portfolio allocated to other equities), but if this is inadvisable, I will reconsider

2) Is there any reason that I would want to leave assets in traditional 403(b) accounts if I anticipate earning more in retirement?

3) If I am contributing aggressively to a Roth, and assuming that I am using that as my only savings vehicle, is there a reason I should lower my contributions to a Roth and contribute to a taxable savings account to have access to cash? To me, it seems like using the Roth as my only savings vehicle until I have enough available to max out Roth contributions (or until it becomes advantageous to switch to a traditional) makes more sense than putting some in a Roth and some in a bank.

Your input is greatly appreciated, thanks!
Topic Author
nsherman2006
Posts: 14
Joined: Wed Jun 14, 2017 11:53 am

Re: 28 y/o teacher looking for investment advice/critique

Post by nsherman2006 »

CyclingDuo wrote:
You'll have the need for cars, maybe a relationship, vacations, maybe a child some day, vacations - shorter term goals that might be 5 - 10 years out where you would like to build investments to help finance what comes along.
Also I forgot to address this last part in my reply. I currently have more cars than I know what to do with (3 cars and 2 parking spaces), plus a couple of motorcycles. I don't think I need to allocate any more to cars than I already have. I definitely feel able to vacation within my means (this summer looks like just a bunch of weekend trips), as my last couple cross country motorcycle jaunts have been $2-3k for 1-2 months of travel.

Assuming that my current relationship works out, that will only alleviate finanical issues (of course until the child part comes along). So while all of these are very valid concerns, I think they are under control for the near future.
User avatar
CyclingDuo
Posts: 4347
Joined: Fri Jan 06, 2017 9:07 am

Re: 28 y/o teacher looking for investment advice/critique

Post by CyclingDuo »

nsherman2006 wrote:Thanks for the input!
amythius wrote:Just some high-point questions that stand out to me:

1) What percentage of 403(b) are Roth now? I am assuming none as you described the Rollover to Roth IRA when exiting existing employer.

2) Are you aware of the tax implications of Converting $24k from 403 to Roth in this tax year? Do you have the cash/funds to cover such a transfer? I considered this when I was younger, but ultimately decided not too -- as it seemed most advantageous in my 22% marginal tax rate to continue utilizing the tax advantaged space and worry about Roth / Roth conversions at retirement age. No one can predict this, but there are many articles and ideas surrounding this.

3) I am assuming you are filing taxes as Single at this point: could you give more insight as to why you are choosing Roth 403 instead of traditional? I would think at your income and tax rate, that it may be beneficial to utilize the Traditional given a lifetime career as a teacher and projected tax rates. I truly look forward to other's advice here, as I am far from an expert.

4) It may help to obtain the Expense Ratio for each of the funds you listed. It is a little difficult to choose between some of the fund without this information, as it is advantageous to look for lower expense ratios when comparing like or similar fund choices.

5) Given your plan and Asset Allocations: my personal advice is they are tilted too high to REIT and international exposures. But just my preference. Consider more of a 3 or 4 fund approach if you can. But you obviously are educated enough to make your own decision. Just my cheap two-cents here.
1) All of my 403(b) is currently traditional (Roth wasn't an option at my previous employer)

2) Yes, I am aware that this will be a significant taxable event. However, my earnings for this current year are relatively low (previous pay was much lower, I am doing less summer work than last year, and I'm not expecting a significant net profit from the rentals this year), plus it is the last year I will be a student. I don't anticipate any future years with less income (including retirement). Obviously income isn't the sole variable which determines tax liability, but I feel like if I'm going to pay taxes on this money, this year might be the best part.

3) I anticipate earning roughly $63k annually (or the equivalent in today's dollars) from my pension at retirement. If there is a year that I anticipate having more income than that, I will begin contributing to a traditional IRA. For me, that appears to be 2 years in the future. I'm trying to sock away as much Roth money as I can afford before my income reaches that level.

4) The ERs on the funds I selected were the lowest of their type in my list of options (The Vanguard REIT fund is the only REIT option), so if my choice of fund categories is reasonable, I'm confident that the particular fund selected is my best option.

5) See response below re REIT allocation
CyclingDuo wrote:
With your three rentals, don't you feel you've got enough in real estate percentage wise? Suggest to skip plans for the REIT fund and put that portion in Total Bond Fund.

I wouldn't convert the 403b to your ROTH IRA - unless you are paying high ER fees. Just continue to contribute to your ROTH IRA with new money each year. At your age, and annual contributions already going to your ROTH - you'll be fine. You are age 28. Even if all you socked away for the next 30 years was $5500 each year, and then $6500 once you hit age 50 for the final 8 years before your target of 58 to retire - that's nearly a quarter million in principal alone that you would contribute. Add in returns and reinvestments over the 30 years, and your current ROTH IRA is going to pack a nice powerful punch. I think your plan is solid and will produce good results. Run your current balance of $31K in your ROTH, your current age of 28, additional investments, rate of return, etc... and that alone should set you up well. Combine this with your pension and SS (assuming you get it unless you are in a state where teachers do not get it) to get a picture.

At your new job, suggest opting for the traditional 403b for the pre-tax deduction to keep your income tax down - especially with the taxable income of rental (and if you end up having any taxable gains and ordinary income in taxable accounts). Again, you already have your ROTH IRA which you should continue to contribute to every year. The combination of the traditional 403b tax deferred, ROTH IRA, Pension, Social Security gives you nice options for the goal of retiring at 58 and filling the gap years until you take SS.

One glaring hole that stands out for me when looking at your "plan" is a fund for maintenance/repair issues of your three rental properties. You only have a cash savings of $16K, and if you average out your annual costs over time to maintain three properties as repairs and maintenance issues come along - don't you see yourself needing a bigger slush fund to handle things like roof, paint, plumbing, appliances, flooring, etc... on three properties? You don't have any taxable account investments outside of your real estate. Any plans or thoughts on adding that to your investment plans? You'll have the need for cars, maybe a relationship, vacations, maybe a child some day, vacations - shorter term goals that might be 5 - 10 years out where you would like to build investments to help finance what comes along.
Re: REIT Allocation: Although I do own rental real estate, it is all in the same town (where I used to work), and is not very diversified. It is a great college rental market, but town issues and a terrible school system (why I'm leaving) are likely to keep real estate depressed there for the near future. I am looking for REIT allocation in my portfolio to capture commercial real estate and also to keep my retirement portfolio well diversified. I'd like my portfolio to be viable as a stand-alone investment, as I will likely get out of this rental market (and possibly real estate entirely) at the next viable opportunity. I am not considering any immediate changes to my portfolio to include REITs, so it would only be 14% of my new contributions tilting toward REIT. But it is a valid point and one that I will continue to consider.

The current 403b is with Fidelity. Some of the motivation for converting is to get these to become Roth funds now, while my income is as low as I anticipate it will ever be (again, I anticipate earning more in retirement). The remaining motivation for conversion is to consolidate for convenience, and to open the ability to invest in Admiral shares (with their lower expense ratio) of the funds I've selected.

I will not be collecting SS (or if I do, it will be a very, very small amount from my pre-teaching employment), so that's not worth considering.

As far as a "rainy day fund", that's one other motivation for contributing to Roth. Access to contributions in the event of an unexpected emergency is a nice security blanket to have, and one that makes it possible for me to save aggressively. As far as real estate expenses, part of the reason that $16k is so low is that I've done a significant amount of work on the houses recently (2 new roofs, 20 new windows, 2 entire houses of new flooring), but I have between $500-$1000 per month going into my cash account on top of expenses. I don't earn interest on anything above $10k, so I haven't been very motivated to save more than that in cash. I do nearly all of the maintenance myself (including plumbing, electrical, and carpentry), so I'm quite comfortable with a $10k cash reserve.

However, I am anticipating selling one of the rentals within the year which will net me slightly over $100k, paying off my mortgage and leaving about $45k cash which I will likely leave as cash to use as a down payment for a house. I anticipate that being the next major event where I have to reevaluate my income/expenses and determine If I am saving too much/too little.

A few questions I have:

1) Do others who are significantly exposed to the real estate market outside your investment portfolio avoid REIT? I like that there is significant non-correlation to the broader market (and still have 70% of my portfolio allocated to other equities), but if this is inadvisable, I will reconsider

We don't avoid REITs, but the percentage allocated to it totals 6% of the overall investment portfolio. That's not including our home ownership. And the REITs are a mix of corporate, residential, and unfortunately - shopping mall/strip mall investments. We only asked about your portfolio allocation as you should consider your rentals that you currently own. Modern Portfolio Theory certainly will have a portion of your overall portfolio going to REITs. Your current $300K tied up in rental real estate represents 80% of your portfolio. Why try to have 15% in your investment portfolio on top of the rental real estate of $300K you already own? That's a huge amount of your net worth allocated to on asset class. Fine, if you sell the three rentals and are getting your asset allocation going - then target 15% for REIT's. However, as long as you have 80% of your assets in real estate at the moment, we would say forget REITs. In our opinion of course.

2) Is there any reason that I would want to leave assets in traditional 403(b) accounts if I anticipate earning more in retirement?

If you really run the numbers of tax deferred vs. after tax contributions as in a ROTH, the taxes are going to be paid either way on one end or the other and the end result won't - in most cases - be that drastically different for a teacher. Who knows what your tax rate will really be 30 years from now? You may be filing joint married. You may be living in a different state. The pre-tax deduction to lower your overall tax base - especially since you won't benefit from SS - leads to the question of why pay Uncle Sam now if you can lower your ordinary income by contributing to the 403b and put that money to work as tax deferred for several decades?

We are teachers as well, and here's how we put it in words for retirement:

Bucket #1: Money we need now (Taxable Investment accounts, Tax Deferred Annuities, Pension)
Bucket #2: Money we need later (all the aforementioned plus Traditional IRA's, 403b's, and Social Security)
Bucket #3: Money we will never need (ROTH IRA's - which is our most aggressive investments and is targeted to be passed on to our heirs)

ROTH IRA's are indeed one of your tools for funding retirement. As good as it is, other tools would be nice to have in your pool of buckets. There are a plethora of great articles available as to why the ROTH may not be the end all be all as it is touted. Hopefully you have read many of those articles to develop a clear plan.


3) If I am contributing aggressively to a Roth, and assuming that I am using that as my only savings vehicle, is there a reason I should lower my contributions to a Roth and contribute to a taxable savings account to have access to cash? To me, it seems like using the Roth as my only savings vehicle until I have enough available to max out Roth contributions (or until it becomes advantageous to switch to a traditional) makes more sense than putting some in a Roth and some in a bank.

No reason to lower your annual ROTH maximum of $5500 - especially if that is your only savings vehicle. Just suggesting that once you get above that $5500, and if you continue with a pre-tax 403b voluntary contribution plan (assuming you get no employer match for that as it goes to your mandatory state pension) have you considered taxable account investing? Many BH's have quite a good portion of their portfolios in the taxable brokerage accounts/mutual funds (even after 401k/403b/457/pension/Roth and or Traditional IRA). Again, we are teachers and both have 403b's, a pension, both will get Social Security in our state, both have ROTH IRA's, both have Taxable IRA's, we have a joint Tax Deferred Annuity, and also joint as well as and individual taxable brokerage accounts. That provides us with plenty of options, as well as savings vehicles to contribute to once we've maxed out what we can max out - ROTH ($6500 each at our age) and 403b ($24K each per year at our age). Why is taxable important? In spite of your current automobiles, roofs, carpet, flooring, landscaping, etc... - something will, and always does, come up. Wedding. Kids. New car. Major repair. New home purchase. Layoff/job transfer/move. The unexpected when you least expected it. Based on life experience we can safely say this will happen "without fail" sooner or later.

Your input is greatly appreciated, thanks!
"Save like a pessimist, invest like an optimist." - Morgan Housel
Topic Author
nsherman2006
Posts: 14
Joined: Wed Jun 14, 2017 11:53 am

Re: 28 y/o teacher looking for investment advice/critique

Post by nsherman2006 »

CyclingDuo wrote:
1) Do others who are significantly exposed to the real estate market outside your investment portfolio avoid REIT? I like that there is significant non-correlation to the broader market (and still have 70% of my portfolio allocated to other equities), but if this is inadvisable, I will reconsider

We don't avoid REITs, but the percentage allocated to it totals 6% of the overall investment portfolio. That's not including our home ownership. And the REITs are a mix of corporate, residential, and unfortunately - shopping mall/strip mall investments. We only asked about your portfolio allocation as you should consider your rentals that you currently own. Modern Portfolio Theory certainly will have a portion of your overall portfolio going to REITs. Your current $300K tied up in rental real estate represents 80% of your portfolio. Why try to have 15% in your investment portfolio on top of the rental real estate of $300K you already own? That's a huge amount of your net worth allocated to on asset class. Fine, if you sell the three rentals and are getting your asset allocation going - then target 15% for REIT's. However, as long as you have 80% of your assets in real estate at the moment, we would say forget REITs. In our opinion of course.

2) Is there any reason that I would want to leave assets in traditional 403(b) accounts if I anticipate earning more in retirement?

If you really run the numbers of tax deferred vs. after tax contributions as in a ROTH, the taxes are going to be paid either way on one end or the other and the end result won't - in most cases - be that drastically different for a teacher. Who knows what your tax rate will really be 30 years from now? You may be filing joint married. You may be living in a different state. The pre-tax deduction to lower your overall tax base - especially since you won't benefit from SS - leads to the question of why pay Uncle Sam now if you can lower your ordinary income by contributing to the 403b and put that money to work as tax deferred for several decades?

We are teachers as well, and here's how we put it in words for retirement:

Bucket #1: Money we need now (Taxable Investment accounts, Tax Deferred Annuities, Pension)
Bucket #2: Money we need later (all the aforementioned plus Traditional IRA's, 403b's, and Social Security)
Bucket #3: Money we will never need (ROTH IRA's - which is our most aggressive investments and is targeted to be passed on to our heirs)

ROTH IRA's are indeed one of your tools for funding retirement. As good as it is, other tools would be nice to have in your pool of buckets. There are a plethora of great articles available as to why the ROTH may not be the end all be all as it is touted. Hopefully you have read many of those articles to develop a clear plan.


3) If I am contributing aggressively to a Roth, and assuming that I am using that as my only savings vehicle, is there a reason I should lower my contributions to a Roth and contribute to a taxable savings account to have access to cash? To me, it seems like using the Roth as my only savings vehicle until I have enough available to max out Roth contributions (or until it becomes advantageous to switch to a traditional) makes more sense than putting some in a Roth and some in a bank.

No reason to lower your annual ROTH maximum of $5500 - especially if that is your only savings vehicle. Just suggesting that once you get above that $5500, and if you continue with a pre-tax 403b voluntary contribution plan (assuming you get no employer match for that as it goes to your mandatory state pension) have you considered taxable account investing? Many BH's have quite a good portion of their portfolios in the taxable brokerage accounts/mutual funds (even after 401k/403b/457/pension/Roth and or Traditional IRA). Again, we are teachers and both have 403b's, a pension, both will get Social Security in our state, both have ROTH IRA's, both have Taxable IRA's, we have a joint Tax Deferred Annuity, and also joint as well as and individual taxable brokerage accounts. That provides us with plenty of options, as well as savings vehicles to contribute to once we've maxed out what we can max out - ROTH ($6500 each at our age) and 403b ($24K each per year at our age). Why is taxable important? In spite of your current automobiles, roofs, carpet, flooring, landscaping, etc... - something will, and always does, come up. Wedding. Kids. New car. Major repair. New home purchase. Layoff/job transfer/move. The unexpected when you least expected it. Based on life experience we can safely say this will happen "without fail" sooner or later.

Your input is greatly appreciated, thanks!
1) Understood. Holding off on REIT from a portfolio percentage perspective makes sense. I guess my only concern is that I'm not really exposed to the overall real estate market.


2) As far as future tax uncertainty, that part I understand. And again, I am planning on switching at least my 403(b) contributions to traditional within the next few years (as soon as my income eclipses my projected pension). However, I feel a crucial part of investing is making assumptions. We invest more heavily in equities than bonds because we assume that (long-term), growth of equities outpaces growth of bonds. Similarly, I am making the assumption that my income at retirement will be higher than my income now. I understand that this is not guaranteed, but the number of scenarios in which I earn less in retirement than I do now is far fewer than the number of scenarios in which I earn more.

So, that brings me to my next question, which is: If the above assumption holds, is there a reason why I should avoid putting as much money in Roth as I can afford with my current low salary?

3) This is the part that I could use some clarification on. I currently can't afford to max out both a Roth and a 403(b), but I am not far away from that (potentially next year). But why would I want to have a taxable account before maxing out my ability to contribute to a Roth?

Since contributions can be withdrawn at any time, I don't see any reason to favor a taxable account over a Roth for access purposes.I'm sure that large expenses will be in my future. But if I over-contribute to a Roth and need more than what is in my emergency fund, I can just take out the contributions I've made (as long as the account has been open 5 years, which I'm not quite at yet). Am I missing something here?
User avatar
CyclingDuo
Posts: 4347
Joined: Fri Jan 06, 2017 9:07 am

Re: 28 y/o teacher looking for investment advice/critique

Post by CyclingDuo »

nsherman2006 wrote:
So, that brings me to my next question, which is: If the above assumption holds, is there a reason why I should avoid putting as much money in Roth as I can afford with my current low salary?

No, max out the full $5500 if you can! We know that is 10% of your current gross income, so it is a lot over and beyond your mandatory pension. How much goes into your pension each month with the mandatory contribution from you (and your employer's match)?

3) This is the part that I could use some clarification on. I currently can't afford to max out both a Roth and a 403(b), but I am not far away from that (potentially next year). But why would I want to have a taxable account before maxing out my ability to contribute to a Roth?

Absolutely max out the ROTH IRA if you can (I am assuming the 403b gets no employer match as it is a voluntary retirement investment over and beyond your mandatory pension). If your employer offers a match for the 403b as well - that's a different story as you would want to take advantage of that "free money" benefit.

But we are assuming you don't receive a 403b match due to the pension. If that is indeed the scenario, then once your ROTH IRA is maxed out with your annual $5500 contribution, you would go back to the 403b if you have some money not needed for your living expenses or debt servicing that you could invest in the 403b if you feel the need for building more retirement account balances than you already are doing. You mention your plan of $500 per pay period or $13K a year going to the 403b. The worry we raise is are you "over-saving" for retirement in retirement accounts? What about the years before retirement with possible goals of children and being wed? Plan on at least about $12-15K per year per child to raise them. That requires a big pot of money and household income to finance. Having just finished raising two children, we can attest to the financial end of it.

http://money.cnn.com/2017/01/09/pf/cost ... index.html


Since contributions can be withdrawn at any time, I don't see any reason to favor a taxable account over a Roth for access purposes.I'm sure that large expenses will be in my future. But if I over-contribute to a Roth and need more than what is in my emergency fund, I can just take out the contributions I've made (as long as the account has been open 5 years, which I'm not quite at yet). Am I missing something here?

http://finance.zacks.com/can-funds-take ... -1292.html

https://www.nerdwallet.com/blog/investi ... -accounts/

http://www.moneycrashers.com/need-taxab ... etirement/

No, it is not a requirement to have a taxable investment account. You just never know when something might come along where it would be nice to have a chunk of your nest egg in taxable that you can draw on and not touch your retirement reserves. A brokerage account where you can invest in individual stocks, bonds, ETF's, funds, bond funds, CD's, etc.. have a credit card with rewards attached to it, a check book, wire/bank transfers, and have the kind of flexibility that could come in handy for you in your investing for the future journey. It will most likely take care of itself down the road when your household income grows to the point that affords you to max out a ROTH IRA, contribute to your 403b, and still have money after that looking for an investment home.

If we were in your situation with the mandatory pension (most likely totals 12-15% of your gross income based on the combination of your contribution and the employer's match), we'd fund the ROTH IRA next (which is another 10% of your current gross income), then if we really felt the need to contribute more to retirement accounts, we would take advantage of at least some pre-tax deduction to go into the 403b (no need to max it out though at your age if you are already saving at 20-25% in retirement funds via the pension and ROTH IRA to begin with). Your ambitious plan of $13K per year at your age and current needs is fine, but just throwing out our words of caution about some of that upcoming "life" you are perhaps about to face (kids, wife, home). Instead, we'd put some in taxable to have more flexibility with investment choices in all of those pots, and knowing what comes up in life - and leave the retirement reserves alone.

Just going with your upcoming $60K salary, if your mandatory pension plus employer match equals 15%, plus the ROTH IRA $5500, plus your plans for $13K going to a 403b - that's a total of 45.8% of your gross income going to retirement funds. That's way beyond the 50/30/20 formula: where 20% goes to savings, 50% goes to necessities, and 30% goes to discretionary. Most financial planners would recommend 10-15% of your income (as a rough guideline) should go to retirement savings beginning in your 20's. Others would say 20% is the magic number. We like the simple formula of saving the equivalent of one hour's wages per day, every day of the year for retirement. So if we break down your $60K into a 40 hour work week (which we know doesn't really fit the academic calendar, but let's entertain that for the moment) then you will be making the equivalent of $28.85 per hour. So if you saved $28.85 per day, 365 days per year, that would be $10,530.25 per year. Starting with your current balance of $55K in retirement funds, using your age of 28, and factoring annual contributions of $10,530.25 per year with a 6.6% annual return (could be higher, could be lower), that's about $1.4 Million at age 58. Plus you'll have your pension. If we go with your aggressive plans of 45.8% retirement savings rate, that means adding $27,500 every year to your $55K retirement account using the same return would be $3M at age 58 plus your pension.

You mentioned your pension would be about $63K per year in today's dollars. Using 2.9% inflation, 7% returns pre-retirement, 4% returns during retirement, the $3M balance would provide an additional $5458 per month or $65500 per year after taxes and inflation for 30 years just on the returns alone - not even touching the principal. The $1.4 M would provide an additional $2531 per month or $30372 per year after taxes and inflation just on the returns alone - not even touching the principal. Obviously things to think about when you decide on how much you can and should be directing to the retirement funds in your savings formula, and how much you are actually going to need from age 58 and beyond.

Your plan makes sense if your goal is to sock away as much as you can now before marriage, kids, and all that "life" comes along with the reality of those expenses. We were just pointing out that positioning everything for a variety of scenarios should at least be entertained. The links provided above point out some reasoned thoughts.

But back to some of the savings perhaps going to taxable accounts for upcoming "life"...

Until you get to that point via either need or desire or salary increases or a dual household income, your plan at your age of focusing on the annual $5500 in the ROTH IRA is fine coupled with your mandatory pension contributions. It's the money beyond that which might someday find its way into a taxable investment account (your current $13K plans for the 403b). Having that money saved and invested and ready in taxable so you can then move it to children's education funds once they come along and have SS #'s, as well as all of the other expenses and costs that come when having children in your life might be worth considering as you have the luxury now to think about positioning your assets.

There will be other money going to taxable accounts in the future. Say you sell your three rental properties. Or inherit a windfall from your parents.

That being said. You're doing great. Kudos!
"Save like a pessimist, invest like an optimist." - Morgan Housel
Topic Author
nsherman2006
Posts: 14
Joined: Wed Jun 14, 2017 11:53 am

Re: 28 y/o teacher looking for investment advice/critique

Post by nsherman2006 »

Thanks for the time you have taken for those responses!

I am going to take the time to read the links you provided. I don't remember my exact pension contribution, but it's around 10% for the first 10 years then drops by 3% after 10 years. I haven't yet gotten my first paycheck from the new job, and all of the paperwork is currently at school.

No employer contributions to 403b unfortunately.

I think I understand your general point, that I should be saving for not only retirement, but for the substantial pre-retirement expenses that I anticipate.

Let's say I plan on maxing out Roth, and the discussion is now centered on what I do with the remaining 13k I have allocated to savings. My options are:

1. Traditional 403b
2. Roth 403b
3. Taxable savings account
4. Some combination of the 3.

Let's also assume that that entire 13k is earmarked for use before retirement (we'll say the Roth IRA and pension will service my retirement needs).

Option 1 doesn't work because I won't have free access to the funds except in rare cases.

Option 2 provides a choice of a few excellent funds which I would be happy to have as a 2 fund portfolio, and I can withdraw contributions at any time. The only drawback here is if I need both the contributions and the earnings on them.

Option 3 provides the most flexibility, but provides no tax advantages.

Option 4 seems to be the best case if I separate my savings for retirement from my savings from my savings for the near future (and likely what I will do once I'm earning more and a traditional 403b makes more sense)

I totally agree that earmarking all this money for retirement use and not planning for the 30 years before retirement is farsighted. I just don't see the Roth 403b as a retirement account per se. To me it is a hybrid account that gives me tax advantages on any earnings but allows access to principal.

To illustrate my idea best, let's look at a hypothetical scenario. I have 18.5k per year to save. I decide that 10.5k should be retirement savings and 8k should be savings for pre-retirement years.

If I max out the Roth Ira and contribute 5k to a 403b, and put the remaining 8k in a taxable savings account, I think I will be in good shape.

But if I max out the Roth Ira then put the rest in a Roth 403b, I retain the nearly all of the flexibility, but the earnings are untaxed. If I need any of that 8k I would have put in a taxable account, I can take it.

I hope I'm not coming across as contrarian, I deeply appreciate the time you have taken to thoughtfully address my questions. But I'm still not seeing any disadvantage to using a Roth 403b over a taxable savings account even for pre-retirement money. Is there one that I'm missing?

I will most definitely start contributing to a traditional 403b (and by necessity, reduce Roth 403b contributions) as my income increases. But while I'm earning little but spending less, these seem like the ideal years to go all in on Roth accounts. Thoughts?

Thanks!
User avatar
CyclingDuo
Posts: 4347
Joined: Fri Jan 06, 2017 9:07 am

Re: 28 y/o teacher looking for investment advice/critique

Post by CyclingDuo »

nsherman2006 wrote:Thanks for the time you have taken for those responses!

I am going to take the time to read the links you provided. I don't remember my exact pension contribution, but it's around 10% for the first 10 years then drops by 3% after 10 years. I haven't yet gotten my first paycheck from the new job, and all of the paperwork is currently at school.

No employer contributions to 403b unfortunately.

I think I understand your general point, that I should be saving for not only retirement, but for the substantial pre-retirement expenses that I anticipate.

Let's say I plan on maxing out Roth, and the discussion is now centered on what I do with the remaining 13k I have allocated to savings. My options are:

1. Traditional 403b
2. Roth 403b
3. Taxable savings account
4. Some combination of the 3.

We would probably vote for #4. What does the plan provider for your potential Roth 403b - or traditional 403b - charge as a wrap fee? The ER wrap fee may be added to each underlying fund, or it may be paid separately as an annual maintenance fee, or the plan provider may "hide and disguise it" so you're not really sure. Most are likely in the neighborhood of .17 to .20 if it is a quality relationship between the state and the 403b insurance provider who is offering the plan.

Let's also assume that that entire 13k is earmarked for use before retirement (we'll say the Roth IRA and pension will service my retirement needs).

Option 1 doesn't work because I won't have free access to the funds except in rare cases.

Option 2 provides a choice of a few excellent funds which I would be happy to have as a 2 fund portfolio, and I can withdraw contributions at any time. The only drawback here is if I need both the contributions and the earnings on them.

Option 3 provides the most flexibility, but provides no tax advantages.

Option 4 seems to be the best case if I separate my savings for retirement from my savings from my savings for the near future (and likely what I will do once I'm earning more and a traditional 403b makes more sense)

I totally agree that earmarking all this money for retirement use and not planning for the 30 years before retirement is farsighted. I just don't see the Roth 403b as a retirement account per se. To me it is a hybrid account that gives me tax advantages on any earnings but allows access to principal.

Nothing wrong with that. Access to selling the amount within the funds, waiting for those funds to clear, and receiving the check or wire will most likely take more time than in a taxable brokerage account where a couple of mouse clicks and a few minutes later it's there. So just be aware of the planning ahead time allotment to accomplish that.

To illustrate my idea best, let's look at a hypothetical scenario. I have 18.5k per year to save. I decide that 10.5k should be retirement savings and 8k should be savings for pre-retirement years.

If I max out the Roth Ira and contribute 5k to a 403b, and put the remaining 8k in a taxable savings account, I think I will be in good shape.

This gets our vote based on the past 30+ years of experience in investing/saving, raising kids, dealing with real life expenses.

But if I max out the Roth Ira then put the rest in a Roth 403b, I retain the nearly all of the flexibility, but the earnings are untaxed. If I need any of that 8k I would have put in a taxable account, I can take it.

Well, if your plan's provider of the Roth 403b includes investing in individual stocks, ETF's, CD's, Bonds, bond funds, mutual funds, index funds, annuities- the whole gamut, then yes the flexible nature would be attractive. Our guess is that it is not quite that flexible. Keep in mind the educational funds as well and being able to take some of the tax advantages of some of those investment vehicles down the road. Obviously, in your scenario you would withdraw 403b funds for that to move into the education needs if that crops up.

I hope I'm not coming across as contrarian, I deeply appreciate the time you have taken to thoughtfully address my questions. But I'm still not seeing any disadvantage to using a Roth 403b over a taxable savings account even for pre-retirement money. Is there one that I'm missing?

No worries. Our response and thought process comes from what we have been through and experienced. In terms of missing anything? Nothing huge, really. You would have to pay tax on the earnings if you withdrew more than your contributions between the 5 year vested period and reaching age 59 1/2. What if junior #1 and junior #2 come along before you hit the 5 year mark at age 33 and you need the money? Or you need to replace a couple of $20K roofs on your rental investments? Or the car pfutts out and you need to buy a new one for cash and give a check for $35K plus taxes? Or perhaps a two income household becomes a one income household for a period of time to raise a toddler? Or the costs of daycare overwhelm the income stream for a few years? Or you get a wonderful opportunity to teach overseas for a Semester or year, but need to finance everything at home while your expenses overseas are barely covered by the institution paying you? Or a kitchen/bathroom remodel prices out at $50K? What happens if index funding implodes at some point? It can all come at you fast and furious, so our response is more a rear-view mirror look of having been there, done that, and what we learned along the way by going through it. Your plan sounds solid, but we responded from a point of view based on what we saw with suggestions to at least contemplate.

I will most definitely start contributing to a traditional 403b (and by necessity, reduce Roth 403b contributions) as my income increases. But while I'm earning little but spending less, these seem like the ideal years to go all in on Roth accounts. Thoughts?

Yup. That part you've got right. Sock it away while you can. Don't neglect your skis and bindings, your courtship, your discretionary fun portion of your income (be it the suggested 30% or whatever makes you happy). It's fun and exciting to talk about investing money for retirement, but we only get one trip at the "years before retirement life game". You are doing a great job and in amazing financial shape for your age.

We were about where you are at age 28 with $50K in investments, and were married with dual incomes. We also had a debt free home worth around $250K which is the equivalent of your $300K rental house units minus your debt. We saved more along the lines of 15% in retirement accounts along the way. 4 years after marriage, along came the start of our children and funding their education accounts. Having them graduate debt free was our goal and we accomplished that so that they can start their working careers with no loans. That's not where you are yet, so....

All that to say, your plan looks solid for now.


Thanks!
"Save like a pessimist, invest like an optimist." - Morgan Housel
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