Stop contributing to your retirement accounts now!

Like I mentioned in yesterday’s post, Girl Ninja and I recently took $14,000 out of our savings account and transferred it to a taxable investment account. Many of you were curious as to why we would do such a thing considering we only contribute to one Roth each year (instead of two) and I don’t max out my 401k. Here was a reader question from that post:

What is your rationale of investing in brokerage accounts prior to maxing out both Roth IRA’s? I’m new to figuring out my investment plan but the way I see it Roth IRA’s are the best of both worlds. You can still have your contributions available for withdrawal if you’d like to spend it in the future. But gains are allowed to accumulate tax-free. I figured the gains will be minimal for the first few years that I wouldn’t really “need” to use it but I’d be slowly gaining wealth.

It’s a fair question and a perfect example of how “PERSONAL” personal finance can be. What makes sense to one person, might seem silly to another.

If you didn’t already know, here is how we do things: 

    • Contribute 10% to my 401k (employer matches 5%)
    • Girl Ninja contributes 5% to her 403b (employer matches 5%)
    • Max out my Roth IRA ($5,500 this year)
    • Put any additional funds in to my taxable investment account (hence the $14,000 contribution)

Just because I do things this way, doesn’t necessarily mean you should too.

Max out your 401k(s) first:

Sam, over at Financial Samurai, sings a different tune. He’s all about maximizing one’s 401k contributions, up to the $17,500 threshold, then investing in a traditional IRA up to the max. He is not shy about hating on the Roth IRA.

Max out your Roth(s) first:

The commenter above, it seems, believes in the Roth IRA. He wants us to throw another $5,500 at a Roth for girl ninja. Then, if we needed to down the road, pull money out of our Roth for a second house or kids’ college tuition.

Sure I can pull my Roth contributions out at any time without penalty to pay for college, but that would be silly. Withdrawing $50,000 from my Roth at age 40 would deal a huge blow to my accounts ability to compound. That $50,000 withdrawal could easily end up costing me $150,000 or more in lost gains. No thanks. Retirement accounts are for retirement.

I don’t follow either of these practices for one simple reason. 

I’m scared of OVER investing in our retirement accounts. 

Yes, I just used the term “over investing”.

The Math: 

Let’s assume we earn an average 9% return on investment over the next 40 years (historical average is more like 11%). We’ll knock off 3% to account for inflation, so let’s call it a 6% ROI.

If I maxed out my 401k every year for the next 35 years, I’d end up with $4.1 million waiting for me at age 62.

401k max

If I followed my blog readers advice, and stuck to 10% in my 401k but then maxed out BOTH mine and my wife’s Roths, we’d end up with $1.6 million in Roths, and $2.4 million in my 401k. In other words, a total retirement portfolio of about $4,000,000.

Sounds freaking wonderful doesn’t it? 

But why the crap would I want $4,000,000 waiting for me in my 60’s? I mean, my cost of living will almost certainly be lower by that age. All of my children will be grown and out of the house and we should no longer have a mortgage payment.

Imagine how little you would need to make today if you didn’t have to pay rent or a mortgage. Now add a few million to your net worth. You’d literally have more cash than you knew what to do with. 

  • Maxing out our Roths and 401ks does very little to help our 40-year-old selves.

You’ll probably say I’m wrong, but I think we’re already doing enough when it comes to retirement. Using the same 6% ROI above, we’re looking at having about $3.3 million in our retirement accounts. Sure, its $700,000 to $1,000,000 less than if we followed the advice above, but need I remind you, IT’S STILL THREE MILLION DOLLARS. 

I’ve got 60-year-old me covered. Our new taxable investment account will serve as a means to get 45-year-old-Me equally on point.

 

Remember, you gotta be thinking about ALL stages of life, not just the last stage.

 

It really comes down to a simple question:

Would you rather go hard investing in your retirement accounts and have $5,000,000 waiting for you at age 60, or mix things up and have $1,000,000 waiting for you at 45, and $2,500,000 waiting for you at age 60? 

I’m picking the latter every time, even if it means my retirement account balances are halved.

p.s. I should also note that as a federal employee I will have access to a pension come retirement to further supplement my income. Around $30k/yr.

Our savings account just lost $20,000.

Put up or shut up. 

I don’t know how many time’s I’ve written about short-term investing, specifically in taxable investment accounts. I just know it’s been too many considering I am yet to contribute a single penny to one.

I mean, one of my top referring blog posts of all time was titled “If you have more than $10,000 in the bank, I think you’re silly.” Yet here I am, being a big ol hypocrite, keeping much more than that in my own savings account.

It’s easy to tell other people what they should do. It’s hard to make those changes myself.

We’ve had a boat load of cash in savings for years now, at one point breaking $100,000. But now that we’ve bought a place, spent our down payment money, and have a good idea of what our monthly expenses are, it’s time to put my money where my mouth is. 

AND FINALLY DO IT.

A few days ago, we withdrew $20,000 from our savings account and plan on dropping it in our taxable investment account this week.

But Ninja, why would you do this when the dow is at an all time high? 

Because I can’t time the market, that’s why. Anyone that invests should understand that their goal is for the markets to always trend towards an all-time high. Yes, they are at an all time high right now, but ten years from now they should theoretically be at a NEW all time high.

How will I be investing this money? 

Probably in this vanguard fund, VTTVX. It’s a target retirement fund for people looking to retire in 2025, ten-ish years from now. It’s split between 70% stocks and 30% bonds. I like this because it is equity heavy, and I’m aggressive, but still provides a little relief in the event the markets plummet.

Target retirement funds are not the most efficient taxable investments.

Who freakin’ cares. Wanna know what isn’t efficient?

Wasting hours of my life trying to figure out what is the most efficient means of investing.

Or how about having $100,000 in a savings account earning 0.7%, when the markets shoot up 30%. I’m not trying to beat the market. I’m simply trying to earn a reasonable 3% to 6% return with minimal effort on my part. This account should do just that.

You look really sexy. 

Thanks.

Don’t you have a baby on the way? This seems risky. 

Yes, Baby Ninja is coming in June. And he is exactly the motivation I needed to finally get this taxable investing thing going.  Girl Ninja and I racked our brains, trying to think of what major expenses are on the horizon, and couldn’t come up with anything in the next five to ten years. Since we don’t envision needing this $20,000 at any point in the near future, the only logical thing to do was put it in some type of investment so it hopefully grows faster than inflation.

What if the markets tank? 

Even if the markets drop 50% in one year, which is almost unheard of, we’d still have $10,000 of our original $20,000 investment. It’s not like I’m putting all my chips on black okay. Is this a risk? Sure, but a calculated one.

If that doesn’t answer all of your questions about why now is finally the right time for the Ninja household to start short-term investing, feel free to ask them below and I’ll do my best to get back to ya.

Remember, it’s not about working harder, but working smarter 🙂

This is why you invest in your 401k

Got a quarterly statement from the Thrift Savings Plan (the government version of a 401k) yesterday and it tickled my fancy in ways my fancy has never been tickled before.

unicorn tickles

There was a good amount of information on there that seemed totally pointless. Like the section that told me if I was 62 years old (I’m only 28) and retired today, I could expect to withdraw $364/mo from it.

Woopdy-freaking-do. 

But the very last section on the form made reading all the useless stuff worth it. The section was titled “Your total lifetime contributions”.

I frequently think about my retirement contributions.

  • As a percentage of my income (10%)
  • As a dollar amount out of each paycheck ($310)
  • As an amount I hope to have in my TSP come retirement (millions)

But I don’t think I’ve ever considered exactly how much money I have put in to my TSP. According to this quarterly statement, I’ve invested a total of $28,122 over the last six years I’ve been working.

Here’s where things get sexy.

I’ve put $28,000 of my own money in to this account, but my total account balance is about $72,000 as of this writing.

That right there friends is why I freaking love my retirement accounts. My $28,000 investment has made for itself an additional $44,000 in gains. In the words of that kid who got drugged up at the dentist 9db

Since I don’t make a million dollars a year nor am I anticipating being gifted a million dollars, the only way for me to reach millionaire status is by investing diligently. Deciding to contribute to my 401k at 22 years old was probably one of the better decisions I’ve ever made. Hopefully it will continue to pay off handsomely for years to come.

Now go up your contributions!

 

Don’t avoid risk, embrace it.

How many of us are guilty of allowing fear to keep us from doing potentially great things?

 

ME! I’M GUILTY OF THAT!

 

I wrote last week about my desire to add a two bedroom rental unit to the side of our house. About 10% of you thought it was a good idea in theory. The other 90% of you thought it was too risky.

 

  • What if I couldn’t find renters?
  • How would this effect Baby Ninja if he is raised in a major construction zone?
  • Where would we get the money?

Of course, these are all things worth considering, and believe me I have. It is my families well-being on the line after all. There is definitely risk in adding a $100,000 addition to our house

But there is also risk in NOT exploring this idea.

  • Our cash savings continues to depreciate since the interest it earns wont keep up with inflation.
  • I forfeit the potential to earn $700/mo profit on a $100,000 investment.
  • Our house will remain less marketable since we only have one bathroom.
  • Etc, etc, etc.

You get the point. 

Whether my accessory dwelling unit idea comes to fruition remains to be seen. I got a ton more calculations to do and people to meet with before I can fully wrap my brain around it. But I’ll be darned if I’m going to let some risk paralyze me from doing potentially great things.

A reader of MMM said it best…

Risk cannot be completely eliminated and trying is a fool’s mission. Focusing on eliminating it in one area pushes it into another. I can completely eliminate the risk of flying by never getting on an aircraft (unless one then falls on my head). But that elimination shifts the risk to train, boat, car or bicycle risk. Eliminate all of those and I’m stuck at home, statistically the place most accidents happen. Life is not certain. Ying and yang are the norm. Understanding the risk inherent in anything and that of the alternatives can then inform our choices. That’s about all you can do.

Preach. 

How do you account for risk when you make your financial decisions? 

Put emotions to the side and make me move.

So ya know how last blog post I wrote about investing $100,000 in to our house so we could build an attached two-bedroom apartment? That’s still an option, but so is something else…

SELL OUR HOUSE

Yeah, I just said that. 

We bought in July, moved in in September, and here we are five months later, thinking about putting the house on the market. Is that crazy or what? 

You may or may not recall when we put our offer in on the house this summer, we found ourselves in a multiple offer situation. The other buyers offer escalated up to $378,000. Ours only up to a smidge over $350,000.

Fortunately for us, the sellers took our offer. 

Since move in, we’ve spent about $8,000 making our place a little more homey (new appliances, light fixtures, carpet, electrical work, tree service, etc).

And now, here we are, thinking about cashing in on all the sweat equity we’ve put in to the place.

Turn off emotions and profit:

I’ve been watching the local inventory like a hawk and I’m not seeing much competition out there. There are a bunch of houses for sale in our area for $500,000 or more, but it’s slim pickings for buyers with less than $450,000.

Limited supply is always good for a seller.

I’ve run the numbers and decided if we could sell our house for $425,000 (about $70,000 more than we paid for it five months ago), Girl Ninja and I will gladly pack our bags and hand over the keys.

I don’t want to bother our realtor just yet with an appraisal so I decided to test the waters myself by taking advantage of Zillow’s “Make me move” feature. We listed our house at our dream price, $425k.

It’s been on the site for a few days now and I’ve already received a few soft inquiries. Nothing too serious where I think people really want to buy the house, but I’m encouraged people are taking the time to shoot over emails and ask questions about our property.

Is our house worth $425,000? Doubtful. 

But when inventory is low, and buyers are freaking out because they think interest rates will shoot up very soon, the stars just might align in such a way that we find someone willing to pay us our asking price.

If we did end up selling, we would walk away with $103,000 after commissions and fees. Sounds pretty appetizing to me. We’d then likely rent a two bedroom condo somewhere until the next real estate correction comes; three, five, or ten years down the road.

Buy low, sell high, right?

How much cash would you have to walk away with in order to sell your house right now? Everyone has their price, what’s yours? 

The $100,000 addition.

Our house sits on a 15,000 square foot lot in such a way that adding on to the structure shouldn’t be too big of a deal. Here’s a quick picture from our backyard for reference…

463144_3353598331710_370226328_o

You see how much space there is on the left side of our house, that big grassy area that runs by the white picket fence. 

Call me crazy, but I feel like the gods above are practically begging us to spend $100,000 and add some square footage to our abode.

There is enough yard there we should be able add about 700-800sqft of living space.

“But Ninja, why do you need more living space?” -you guys

Short answer, WE DON’T.

Introducing the Additional Dwelling Unit (AKA a mother-in-law):

As many of you know, prior to buying our house, Girl Ninja and I rented a mother-in-law unit above a million dollar home. It was a tiny one bedroom, but had awesome finishes and a view of Puget Sound. Check out how dope the main house was (the staircase running up the right side of the house went to our front door)…

Screen shot 2014-02-18 at Feb 18, 2014, 8.38.54 PM

We paid $1,200/mo (utilities included) to live there. Since our landlord paid cash for his house, he literally had no housing costs. That’s right, our rent completely covered his property taxes and utility expenses. We stayed there for two years and loved every minute of it.

The plan:

If we could add a small, attached, two bedroom apartment (about 800 sqft) to our house for about $100,000 (works out to $125 per sqft), I can’t think of a reason why we shouldn’t. The math seems to work in our favor. 

The math:

Let’s assume Girl Ninja and I pay $30,000 from savings, and borrow $70,000 at 6% on a 30 year term. Our housing payment would increase by about $513 in this scenario, increasing our total PITI obligation to about $2,200/mo.

Since Girl Ninja and I looked at renting in our current neighborhood two years ago, we have an idea where rent prices are, although they’ve probably gone up a bit.

We should fetch between $1,200 to $1,500 a month in rental income from this place.

(leaving us with only a $800 house payment).

Do you get what that means!? 

We would be profiting $700/month minimum right off the bat. What’s more, rent prices over time would increase but our payment wouldn’t.

And don’t forget, the extra bedrooms and bathrooms would increase the overall value of our property. Booya for this idea not being a sunk cost. 

Passive income is very attractive and lord knows I need to start diversifying outside of my retirement funds. This seems like the most reasonable way to do both.

I can rent out 800sqft of our house (while we live in the other 1900sqft) and have over half of our house payment paid by someone else.

Is this not the financial stars aligning before my very eyes?

Someone with knowledge shed some light on the situation. Is this a pretty awesome idea? Or am I totally overlooking something?

side note: Our current roommate/friend is paying us $400/month to live in a small 10ft by 13ft room in our basement (she has full access to our house). 

Keep your credit card debt. It’ll be good for you.

Do you have an income?

Do you have expenses?

If you answered yes to either of those questions, you darn well better have some financial priorities in place.

While there are a million different things we could talk about in regards to financial priorities, today I want to focus on just one.

Which comes first: investing or paying down debt?

I think financial priorities are something most of us think we have figured out, but don’t always truly understand.

Today I’m going to show you why investing in your 401K is often a better option than paying down high interest credit card debt.

Let’s look at an example:

Jane, makes $50,000 year. She’s 30 years old and her employer fully matches 5% of any contributions she makes to her 401K plan. Jane also has $5,000 in credit card debt, at 15%. What should Jane do, pay down the card as quick as possible, or start building up a nice little nest egg for retirement?

A 15% APR, on a $5,000 balance, means Jane will be paying about $62/month in interest. If she made nothing, but minimum payments, it would take her a little over 22 years to pay that sucker off. She’d also pay $5,729 in interest over that time resulting in a total payment just shy of $11,000. Yikes, that $5,000 original bill became a whole lot more expensive. Better pay that sucker off ASAP, right?

Now let’s examine the investing route.

Jane would be investing $208/month in her 401K if she contributed 5%. Her employer matches that and gives her another $208. If she earned a doable 6% return on this money, and never got a raise in her life, she would end up retiring at age 67 with $683,030 in her 401K. Not bad at all.

If Jane decided to postpone contributing to her 401K, she could use that $208 to make accelerated debt payments each month. But let’s not forget, that 208 number is pretax, so in reality she’d have about $175 extra to throw at her credit card. With the additional payment, Jane will now be credit card debt free in 20 months and will have only paid about $673 in interest. Sounds a heck of a lot better than the 22 years it was going to take in the first example.

Here’s where it gets interesting.

Wanna know what Jane’s 401k would look like if she didn’t start investing until after she became CC debt free? She lost nearly two years of company matching and compound interest, resulting in $596,388 in her 401K. That’s $86,642 less then if she started investing at age 30.

Guys and girls, this point is SOOOO important it can not be overlooked. It is absolutely in Jane’s best interest to start investing in her companies 401K, even though she is not debt free. If she waits until she has her credit card paid off, she loses a crap load of money. I know this seems to go against the grain. Credit card debt is evil, don’t get me wrong, but that doesn’t mean it should always be at the top of our financial priorities.

Obviously, in a perfect world you will have enough discretionary income that you can not only contribute to your retirement, but also pay down your debt quickly. I always have been, and always will be a DEBT PUNCHER, but only when it is in your best interest.

Does your employer offer a 401K match? (I’d like as many people as possible to answer this question since I’ve heard a lot of the retirement benefits in the private sector have been getting cut left and right). Are you taking full advantage of that match? If not, you’re crazy. I’m sorry, you just are. You are literally giving up FREE money. In Jane’s situation would you go the way of Dave Ramsey and still pay down your credit card first, or would you let number’s guide you and start contributing to your retirement?