Source: Trying out a new (slightly less anatomically accurate) truck graphic this time, from Tumundografico

Each financial post I do brings at least a few questions about my plan or different investment strategies. Before we get to it, I'll start with my usual disclaimer that I have no background in finance or financial planning, and taking financial advice exclusively from the guy living in a box truck probably isn't a sound strategy. With that out of the way, let's get to the questions.

Do you invest in bitcoins?

Nope. Aside from reading the white paper on Bitcoin, I'm not all that knowledgeable about it, and my current allotment of funds is about the right level of risk for me (>90% stocks, all broad index funds). Plus, I think unless you really know what you're doing, it's dangerous to treat a currency like a commodity.

Why race to pay off a loan with 3.4% interest? That's equivalent to investing at a 3.4% annual return, which is not a great return rate.

This is referring to my now non-existent student loans. I don't have a great answer for this one, except that I did delay paying the loans off for about six months, for exactly the reason given in the question. However, I do think there's something to be said about the psychological comfort of not having any debt looming ominously overhead. In my opinion, that was worth the decreased rate of return on my investment. In any case, I'm clearly not rushing to get a mortgage any time soon.

Another way of looking at it is that paying off my loans was a way of de-risking my portfolio a bit. The overwhelming majority of my portfolio is stocks, so "investing" $20,000 at 3.4% is like a really well-performing bond. It's a bit of a stretch, but the math works out.

Seems like you're putting a lot of money into accounts you won't be able to access until you're around 60 years old. Wondering if you're planning to save enough in cash or non-IRAs to live on from when you're in your 30s until you are able to withdraw from the tax-advantaged accounts. Have you done the math on how much you'll need during that time?

Nope, haven't done much of the math around this, but we can dabble in it now. I've been known to throw around phrases like "Trinity Study" and "Safe Withdrawal Rate", which is to say once I have a nest egg equal to 25x my yearly spending, I can (in theory) be financially-independent indefinitely. And while that's a good high-level description, it glosses over some of the details mentioned in the question here, mainly that my "nest egg" isn't a single account, it's spread over a bunch of different types of accounts, some of which have disparate and intentionally complicated rules.

My plans are nicely summed up by a Vanguard article I came across recently, titled 5 ways to make your portfolio more tax-efficient. The first item on their list is "Save as much as you can in tax-advantaged accounts", which I definitely do. I max out every possible tax-advantaged account I can get my hands on. The thinking is that the less money I subject to taxes (either now or later), the more money is available to grow and compound.

Skipping item two (and four and five), the third item from the Vanguard article is "Tap into your accounts in the right order", and this is where the math and planning come into play. For the sake of argument, let's say that I do this for 9 years. The first account to draw from is my non-tax-advantaged, normal brokerage account. About a year and a half into my adventure, this account has collected about $55,000 dollars. Doing some extremely conservative calculations (5% growth, yearly compounding, +$33,000/year), I'll have about $450,000 at the end of that 9 year period.

Once I've sucked all of the money out of my brokerage account, the next fund I would dip into is my Roth IRA. The big trick here is that I can withdraw the principal without paying any tax or penalty. Since I'm contributing the max $27,000/year to that, that's an additional $243,000 (remember, just the principal, no gains) I can take out whenever I need. After that's been exhausted, I can take out some tax-free HSA money offset with medical expenses paid out of pocket over the next nine years, and there are a few other rules and exceptions I can use to squeeze out a few more penalty-free dollars (SEPPs, Roth Conversion Ladders, Other Exceptions, oh my!).

Conservatively, that means I'll have $450,000 + $243,000 + HSA and other stuff = ~$700,000. Since 9 years have passed in this hypothetical example, I'd be around 33 years old. Do I think I could make $700,000 last for the 27-32 years until I can start taking penalty-free 401k, Roth IRA, and HSA distributions? Using the rule-of-thumb Safe Withdrawal Rate, this means I'd be living on ~$28,000 a year. While not impossible, it'd be a little tighter than I'd like it to be. I have a few options here for augmenting that income: 1) mess around with SEPPs and conversion ladders, 2) take the penalty, which isn't totally unreasonable, or 3) don't retire in 9 years.

It's very likely that the actual solution here is: 4) all the above. If my goals are in the same place in five years or so, I'll probably quit working in the traditional sense, and pick up one-off contract jobs like I used to do in college. I could also work remotely/part-time. The supplemental income from the part-time work would hopefully be enough to live minimally, but comfortably.

Is there a fee for each time you do the rollover? If so, have you done the analysis to see how long you should wait to do the rollover to the Roth?

Nope! No fees, but I do have to remember to do it every paycheck, because you do have to pay taxes on the gains when you do the rollover. So if I do it immediately, there's usually either $0.00 or $0.01 of tax to pay. But because I'm extremely easily distracted, sometimes I'll forget about it for a week or so, and then I end up having to pay like a whole dollar or two of tax. Not a big deal, but it's something I'll likely have to think about when doing my taxes this month.

I thought if you maxed out your normal 401k (the pre-tax one) you could not contribute more funds to the after-tax 401k in the same calendar year. Am I mistaken about that?

In short: yes, you are indeed mistaken.

In slightly less short: the IRS has two separate limits that are relevant here. The first is the pre-tax employee 401k contribution limit, which is $18,000 for 2017, and only includes your own personal contributions. The second limit is the overall 401k contribution limit, which is $54,000 for 2017 and includes your personal contributions, employer contributions, and after-tax contributions. I contribute $18,000 to pre-tax, and my employer matches $9,000, which leaves me $54,000 - ($18,000 + $9,000) = $27,000 to contribute to my after-tax 401k in 2017.


Thanks for joining us me for probably the least interesting, most detail-oriented Q & A thus far. As always, if you have any burning questions, feel free to pose them in the box to the right (or bottom on mobile), or shoot me an email.