• filter:

Thanks FW - What now? Long term financial planning

  • Page :
  • 1
  • Text Only
  • Search this Topic »
Voting History
rated:
Life's been really good for the last few years. I returned to college and finished by undergraduate degree, got married, and landed myself in a great company. I followed various threads and would like advice on what to do now.

Financial stats:
- Early 30s with 110k salary as a software engineer in the Bay Area. I've been with my company for two years now and received sizable raises and bonuses. As long as I continue to deliver, I feel I'm in a great position.
- Credit cards and student loans that have accumulated in the last years are paid off. Credit score is 700+ with no derogatory marks.
- Savings: None. Have less than 10k in 401k
- Renting. $1k/month
- No children but planning on it.

Plan for remainder of year:
1. Max out company ESPP which offers 15% discount
2. Max out 401k up to employer match ($4k)
3. Max out $5k in IRA
4. Build up a 6 month emergency savings fund slowly.
5. Max out 401k contribution limit.

Long term:
1. I'd like to purchase a home, but the Bay Area market is are insane. 20% down on even a modest 2BR property is a large chunk of money. It almost feels futile trying to save up that much. Exploring Reno or somewhere out of state is not out of the option.
2. My company stocks are not fully vested. If that goes reasonably well, that could help with the downpayment. (Low six figure payout pre-taxes)
3. Not sure what to do next?? Would be awesome if I can get advice on reducing tax liabilities, ways to continue increasing my salary and savings, or push to buy a home/rental properties. Thanks!

Member Summary
Staff Summary
Thanks for visiting FatWallet.com. Join for free to remove this ad.

rated:
> Max out $5k in IRA

Hopefully you meant ROTH - that is the way to go at your age.
 

rated:
PrincipalMember said:   > Max out $5k in IRA

Hopefully you meant ROTH - that is the way to go at your age.

  There are income limits to Roth contributions, which he might or might not meet depending on his wife's income (if any).  Given his retirement plan at work, it's unlikely with his income he would be able to deduct a traditional IRA contribution, but again that depends on total income, whether his wife works, whether she's covered by a retirement plan, etc.  

Broadly I would say if your tax rate is high, you should go with Traditional if it's deductible (and that counts the high CA tax too).  If he can't deduct it, Roth or backdoor Roth are the remaining options in order of preference.

rated:
110k in the bay area? So basically, minimum wage everywhere else in the US right?

In all seriousness, unless you have plans to make that number increase significantly with promotion I would look for cheaper cost of living areas. You can probably transition to a place with a very close or similar salary but with a MAJOR reduction in all of your monthly expenses.

rated:
Be careful with ESPP. Your company's stock can tank at any time. My employer's stock consistently beat the market for years and when I first started, I maxed it out. By the time I could sell, the stock tanked. So I would have a big loss if I sold now, even with the discount and the stock market at an all time high. I would have been better off putting it into a lazy portfolio. It's especially risky for you to put all you eggs (job, ESPP) in one basket since you have no savings. You could lose your job and the stock could be worthless at the same time, double whammy.

rated:
matrix5k said:   Be careful with ESPP. Your company's stock can tank at any time. My employer's stock consistently beat the market for years and when I first started, I maxed it out. By the time I could sell, the stock tanked. So I would have a big loss if I sold now, even with the discount and the stock market at an all time high. I would have been better off putting it into a lazy portfolio. It's especially risky for you to put all you eggs (job, ESPP) in one basket since you have no savings. You could lose your job and the stock could be worthless at the same time, double whammy.
  For most fortune 500 companies it is still worth maxing out, as despite being high risk, the return is astronomical even if it just remains flat over the holding period.  This is one of the only areas I am ok with rolling the dice from an investment perspective.

rated:
$1K/month rent? Are you living at home, or renting a room from a friend? Aren't market rates much higher?

rated:
- My wife is currently out of the job market. There was a dispute with her previous employer and she's not sure what she wants to pursue at the moment. Our combined income will be below the contribution limit.
- Most of my family is in the Bay Area but I wouldn't rule out moving out of state down the line.
- The total rent is ~$2k, but it's split between us and two other family members. It's a good bargain. We rent out the top half of a house.

rated:
topic said:   3. Max out $5k in IRA
 

  
$5,500. Also, you have a couple weeks left to contribute for 2016 if you can swing a little more.

rated:
Don't fall into the trap of buying a high end car. You can easily waste $10k a year on that.

rated:
xerty said:   
PrincipalMember said:   > Max out $5k in IRA

Hopefully you meant ROTH - that is the way to go at your age.

  There are income limits to Roth contributions, which he might or might not meet depending on his wife's income (if any).  Given his retirement plan at work, it's unlikely with his income he would be able to deduct a traditional IRA contribution, but again that depends on total income, whether his wife works, whether she's covered by a retirement plan, etc.  

Broadly I would say if your tax rate is high, you should go with Traditional if it's deductible (and that counts the high CA tax too).  If he can't deduct it, Roth or backdoor Roth are the remaining options in order of preference.
 

  
Given that he didn't disclose his wife's income - I was assuming there was none. So given that, at 110K joint salary, I kind of knew that he was eligible for Roth and borderline eligible/ineligible for traditional IRA. But most importantly, in a few years, he probably will be in the backdoor Roth situation. But for the backdoor thing to work nicely, having a nice chunk of balance in the traditional IRA is a liability - since he would have pro-rate is conversion between deductible/non-deductible IRA. So why deal with that crap in a few years and instead directly go to Roth now. And since you are xerty, you obviously know that there are people who recommend that Roth is better than traditional since it lets more of your dollars grow tax free. So given all that I am in great favor of young people just do Roth instead of traditional. My son had the opportunity to roll over his 401K to IRA and I didn't let him do it - it would have messed up his backdoor Roth and that part of the planning is working out great.

rated:
$110k for 2 in bay area is not even consider as middle class. If you are paying $1k for rent, I'll keep renting.

  • Quick Reply:  Have something quick to contribute? Just reply below and you're done! hide Quick Reply
     
    Click here for full-featured reply.


Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2017