Case study - savings strategy - single mom late 30s

[Anniemaygo]

Hi All,

Long time reader, first time poster.  I am looking for feedback on my savings / retirement strategies.  I went through a divorce a few years ago and between splitting assets and paying a lawyer, I am happy with what I have done so far to bounce back.

I am 38, I have two kids 16 and 13

Current Assets are:
401k             = 268k
Roth IRA       =   17k    just started backdoor Roth last year
HSA              =    4k    first year, hoping to let it grow
Emergency    =   35k    in savings account
CD ladder      =  30k    I consider this part of emergency fund as well
House equity = 150k   Value $280k, Mortgage $130k
Car               =    3k   No loan, 195k miles but hoping it will make it a few more years and become my kid's car
Brokerage     =    6k   


Income         =  14,766 / month 
Benefits        =    - 274 / month
HSA (max)    =    -438 / month
401k (max)   =  -1,500 / month
Taxes            =  -4,426 / month
___________________________
Net pay         =  8,128 / month   

I also have a 6% 401k match for another $886 contribution per month
My receive some child support but deposit directly into brokerage acct for future expenses (car ins, college, etc)

If I get a tax refund or bonus, it goes into house projects or savings

Expenses:
Mortgage P&I =  1,450 / month
Tax & Ins       =     520 / month
Roth IRA        =     458 / month - maxed out
Electric          =     180 / month average - I run my pool and a/c in the summer, line dry clothes careful about usage
Cable/internet=     180 / month - this is phone/cable/internet.  I have looked for cheaper options but this is the best deal for what I "need"
Car ins & gas =      223 / month
Heating oil     =     125 / month
Food             =      450 / month
Spending       =   1,000 / month - this covers everything else, pets, clothes, sports, movies, activities, vacations, charity. 
_____________________________

Total base expenses        = 4,586 / month
Extra mortgage payment = 3,500 / month

I know my "spending" category is high, it is really a combination of my lifestyle choices.  My kids do some sports, I have 3 dogs and 2 cats, we enjoy going on vacations and donating our time and money to local causes.  This includes birthdays, christmas, etc.  It is a bit of a catch-all category because I basically spend what is left over after all the other expenses. There is definitely extra spending that could be eliminated, but I don't worry about it because of my maxed out retirements and healthy savings rate (I consider the extra mortgage as savings). 

So, I am currently paying an extra $42,000 per year on my mortgage.  At this rate I will have it paid off middle of 2018 and then 14 months later my older kiddo will be starting college.  The money that is excess every month would go to helping the kids with college and my own savings.  I know this may not be the best financial decision, but I want the mortgage gone so bad, it is an emotional decision and challenge to myself to have it gone by 40.  I don't think my kids have a great shot at financial aid for college given my income, but I think this strategy of maximizing retirement and primary residence would be the most beneficial for that purpose.  Once the kids are out of college, I will be mid-40s with a paid off house and (hopefully) around $700k in retirement; at that point I would like to work part time or in a less demanding job.

Feedback appreciated!
A

[nereo]

"A"

Well I'll start out by saying that you seem to be doing quite well overall.  So there's reason to be proud of where you are.
Now the nitty-gritty...

A few things jump out at me:
1) you have a huge amount of cash sitting around on the sidelines (e.g. in your "ER" fund).  Not only do you hae $35k in a savings account, ubt you also have $30k in a CD ladder and $6k in (unspecified) brokarage account.  This represents an 18 month emergency fund if you stopped paying extra towards your mortgage (which presumably you'd do in a real financial emergency).
2) I'm confused why you would be starting a ROTH ladder now with your income level so high.  You'll almost certainly pay the maximum amount of taxes by doing it now when your income is >$168k/year.
3) other than the brokerage account, you don't seem to have any taxable accounts.  That's understandable considering your maxing out your 401(k), HSA and IRA, plus contributing $3,500 extra toward your mortgage every month.  Still, it will make your life quite a bit easier to ER (if that's actually your goal) if you start building up a taxable account to draw from later on.  Sure there are SEPP and the Roth conversion ladder, but you need to fund 5 years for a really effective ladder and SEPP payments will only give you some of the income you currently use.

I understand that you really, really, really want that mortgage debt gone.  That's your decision, and given your accelerated time frame it's not the worst mistake ever.  I might just urge you to adjust slightly and begin investing, say, $750/month into a taxable account.  It will push your "mortgage payoff date" back by only a few months, but it will give you some normal investment accounts that can be extremely useful should you decide to FIRE in the years to come.

Overall - Keep up the good work!

[Anniemaygo]

Thanks :-)
1. I do have a lot sitting around, I like the security, especially as single-income household.  I don't worry so much about job security but medical issues or needing to take it,e off to care for parents or kids.  What do you suggest? 
2. I thought you it would be good to have after-tax savings for diversity, do you suggest a standard IRA?
3. The brokerage account is savings for child support payments.  Since I don't need it for current expenses, I put it aside (~1000/month) for college or other expenses.  I put it all in Nasdaq composite fund. 

Appreciate the feedback, I will look to put money into taxable accounts!

[nereo]

Thanks :-)
1. I do have a lot sitting around, I like the security, especially as single-income household.  I don't worry so much about job security but medical issues or needing to take it,e off to care for parents or kids.  What do you suggest? 
2. I thought you it would be good to have after-tax savings for diversity, do you suggest a standard IRA?
3. The brokerage account is savings for child support payments.  Since I don't need it for current expenses, I put it aside (~1000/month) for college or other expenses.  I put it all in Nasdaq composite fund. 

Appreciate the feedback, I will look to put money into taxable accounts!

Regarding the E-fund, consider what you are protecting against. The majority of large (>$2k) emergency (i.e. completely unexpected or predictable) expenses involve job loss, medical, home repair or legal trouble.  Since you are a lawyer, I'll leave that last one up to you. For you job loss is your only big worry, and you have to decide how secure it is and how hard it would be to find another job.  For everything else... I assume you have medical insurance, and you already have $4k in your HSA that you could tap to pay medical expenses (though you may want to given its rarefied tax-exempt structure). You also have $3500 each month that you are currently putting towards the mortgage that you could divert for a few months to pay for an emergency.  You could also temporarily suspend IRA and 401(k) contributions to get you to $5500 in one month. I'm guessing you have a HELOC that you could also tap. Then there's the brokerage account, and in extreme cases your ROTH and other expenses.
Short answer - I think 6 months (~$27k in your case) is more than sufficient.  What you are really protecting against is the duration of a job loss, or job loss + an additional expense or two.

For after tax savings I would suggest going with a simple low-cost index fund like the total market index.  Vanguard is very popular around here (for good reason) but there are many other low-cost brokerages that offer low-cost (<0.2% fees/year) index funds. Since you are maxing out a ROTH you cannot also contribute to a standard IRA.

hope that's helpful.  Keep posting with updates!
~N~