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401(k) savings: Huge plus, even when retiring at 45

401(k) savings defer taxes and can fund second retirement phase for high earner who wants to retire at 45. See question No. 2 in the reader mailbag for 401(k) discussion. 

By Guest blogger / May 10, 2012

This 2005 file photo of trays of printed social security checks waiting to be mailed from the U.S. Treasury's Financial Management services facility in Philadelphia. Before social security and 401(k) benefits roll in at age 59, an early retiree at 45 is going to have save in stocks and bonds.

Department of Treasury/AP/File


What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Roth and Traditional IRA
2. Investing for very early retirement
3. Clutter caused by family
4. Next steps for expectant parents
5. Finding direction in retirement
6. Pay off house or invest?
7. Right age for financial lessons?
8. Time to buy a house?
9. Is Netflix streaming cost effective?
10. Is our house worth it?

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The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.

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I’ve come to find that most of the time, the anticipation that comes with waiting for something is at least as fun as the actual moment you’ve been waiting for.

The holidays are nice, for example, but I find the planning and preparation to be at least as much fun at this point. The same goes for birthdays and other events. I enjoy the lead-up, the anticipation, the planning. The event itself isn’t a culmination, but almost an afterthought for me.

Q1: Roth and Traditional IRA
Is it possible or legal to have both a Roth and traditional IRA? I’m not sure where to look to figure it out.
- Lincoln

You can certainly have both types, and it might make sense to do so if you’re interested in hedging your bets when it comes to retirement savings and taxes.

However, you are only allowed to contribute up to the annual cap each year across all IRAs, regardless of type. In 2012, that limit for most people is $5,000.

So, you could contribute $3,000 to a Roth IRA and $2,000 to a traditional and be just fine, or any other combination that added up to $5,000.

Q2: Investing for very early retirement
I’m 28 years old. I just started a rather stressful job that pays me very well – on the order of $200,000 per year. I do not want to do this for the rest of my life. Instead, I’m striving to live on about $25,000 per year and banking the rest, with a goal of retiring at age 45.

How should I financially structure this? Where should I be putting my money?
- Lucas

One way to look at this is that you’re essentially saving for two different periods. You’re saving for the period from age 45 to age 59, and then from age 59 onwards.

For the first time frame (ages 45 to 59), savings in retirement accounts isn’t going to help you at all. Thus, what you’re going to want to do is save in non-retirement accounts for those years. You’re going to want to thoroughly cover fifteen years of living expenses as well as the inflation that’s going to occur over the next twenty to thirty five years. I would do that in a brokerage account that doesn’t involve fees and invest using a mix of stocks and bonds, focusing heavily on the stocks at first and then switching your contributions to bonds as time goes on. I’d save at least half of my money this way.

The other time frame will allow you to use a 401(k) to maximal advantage (if you have one) and use an IRA to a bit of an advantage. Your income is so high that an IRA won’t give you a big advantage over regular brokerage investing because you won’t be able to deduct your contributions right now, but deferring taxes on your earnings will help some. Your 401(k), though, will be a huge help and you should contribute at least up to whatever match you can get from your employer.

Q3: Clutter caused by family
My husband and I have a fourteen month old little girl. Our first child and the first grandchild on both sides. I myself have never been able to stand clutter, I spent most of my childhood in a small apartment with my father and from a young age every year before Christmas and my birthday was instructed to clean out my toys and such to make room for more. Further more I have a lot of anxiety issues and clutter stresses me to the max.

My mother-in-law and sister-in-law are nearly constantly buying gifts for my daughter. Toys, clothes, etc etc. Things she doesn’t need. Nor do they ever ask what she DOES need before they decide to buy her something. So far my strategy has been polite thank yous, dropping hints about how she doesn’t need things, and putting them into this yard sale I am having in May.

Since she isn’t MY mother I try to let my husband handle any ‘serious’ conversations with his mother, but I’m just not sure what to do, especially after my yard sale, to curb the clutter. And it’s not just the clutter, I don’t want my daughter thinking every time she sees them she has to get something. It’s not the way I want her raised.
- Kelly

Don’t address this from a clutter standpoint. The aspect that should be worrisome is the expectation that the child will get something each time they see that relative. That will put strain on their relationship in the future.

If you’re not comfortable bringing this up, you should have your husband discuss it with her.

In the end, it really is your mother-in-law’s decision. Rejecting the gifts out of hand is going to cause far more problems with the family than dealing with excess clutter. If you have too much clutter, then have a yard sale, as you mentioned.

My worry would be the relationship between grandmother and grandchild, and I’d approach it that way.

Q4: Next steps for expectant parents
I am 33 married, dual income with a baby on the way.

I feel like I am at a cross-roads in my life where my decisions over the next few years will make a huge difference 20 years from now. I have successfully eliminated debt except our mortgage which is currently 125k @ 4.875% with 28 years left, but paying an extra $400 a month in principal. Currently, looking at a refi to a 15 or 20 yr loan.

The numbers: I make 100k and my wife makes 40k so we have a nice income for the area. I save 16% of my income to my 403 while my wife saves 10%, and we both receive a 10% match from our employer for putting in 5%.

Current accounts:
Cash – $112k – 80k in MMkt
IRA(s) (401k rollovers) – $170k – Target date funds, stocks, and bonds – aggressive mix
403b(s) – $51k – Target date funds, stocks, and bonds – aggressive mix
After Tax Investments – 11k – various bonds & stocks – Where we have been putting cash recently since our nest egg has reached the point it is at.

As you can see, I have been very risk adverse building a large nest egg and even though I have eliminated all non-mortgage debt I have been reluctant to pay down my mortgage more aggressively. My real question is should a refiance? Should I go down to a year’s worth of a nest egg and put that toward my mortgage? I enjoy the flexibility & security of knowing I have enough cash to live 2+ years given our current living expenses, but I feel like I am missing a huge opportunity to make my family’s financial future more secure than it will be unless I make a more aggressive decisions within reason.
- Jason

A refinancing won’t cut your interest rate a lot. If your credit is really good, you may be able to knock a percentage point off of your rate, but you need to make sure that the costs of doing so aren’t going to eat up what you gain from doing it. It’s usually not worth it to refinance if you’re only cutting half a percentage or less.

With that much cash sitting on hand, though, I would pay down that mortgage regardless of refinancing. Even with a child on the way, that’s a lot of cash to have on hand. The only advantage to cash is the liquidity of it, and if you have a year’s worth of living expenses in cash, the rest of it should be working harder for you in something that’s a little less liquid.

If I were you, I’d retain a year’s worth of living expenses in cash and put the rest toward your mortgage, knocking it down substantially.

Q5: Finding direction in retirement
I’m 66 years old and married for 44 years. About a year ago, I retired. I had a lot of dreams of spending my days playing golf and gardening and doing things like that. But now I’m just bored to death. I don’t feel like I’m really doing anything worthwhile and most days I barely even want to get out of bed. My wife thinks I am just depressed and wants me to see a psychiatrist, but I know exactly what I’m missing. I miss my job.

The obvious answer is to go back to work, but I’ve already called some people at my old company and they’re not interested in hiring me back.

I’m not sure what to do. We don’t need the money. I just need to feel useful again.
- Alan

If I were in your shoes, the first thing I’d look for is a charity that could really use my skill set to improve their ability to bring about positive results in the community.

What organizations in your area could really use the skills you can bring to the table? I don’t know what your expertise is, but I’m willing to bet that you have at least some skills that a local charity could really use.

Go there and volunteer. Take on a schedule that gives you real responsiblity there, a responsibility that directly impacts the lives of others.

You’ll not only feel useful again, you’ll get to see your actions improving the lives of others on a firsthand basis.

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