Author Topic: Advice needed and appreciated! Emergency fund extra, life ins., long-term care  (Read 606 times)

Turtle fun(ds)

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Hi All! I'd really appreciate your thoughts on a few questions (see bottom of post).

Life Situation: Wife and I are 42-years-old with one child (10-years-old). Small town in middle of country - affordable.

Gross Salary/Wages: Wife: $40,000; Me: $110,000 (primarily salary, one salary coming from my primary job and the second coming from a side-job. A little - $3,000 comes from a business); $150,000 total (this fluctuates +-10%/yr)

Individual amounts of each Pre-tax deductions: I max out my ROTH 403(b) (similar to ROTH 401(k)), and my wife maxes out her traditional 403(b).  My employer provides additional 8% of my salary to 403b. Max out our HSAs and ROTH IRAs and have done so for years.

Current expenses: We don't keep a budget (I know, I know... We should). Basically, we max out retirement accounts plus put about $5,000 away in addition to brokerage account. The rest is spent on travel, food, entertainment, electricity, insurance, etc.

I currently have a $750,000 term life insurance policy that is scheduled to end when I'm 57 (son should be out of college by then). My wife has the same. We pay $1,300 premium per year, in total, for the policies.

Assets: House ($175,000); Cars (2) ($25,000) (house and vehicles are paid for); $110,000 in brokerage account earning nothing; $1,265,000 is invested in retirement accounts (see above) and HSAs. Money in retirement accounts is 55% stock and 45% bonds.

I do not have a pension. My wife's pension is small and will pay out about $800/month beginning at 60-years-old.

Liabilities: None, other than monthly credit card bill which varies. In the future, I may end up paying for part/all of son's college.

Net Worth (including home value, but not vehicles): $1,550,000

Some Financial Goals:
(a) Have the capacity to "retire" when I'm 50 (if my son's college isn't too onerous). I love my job and have 3+ months vacation each year so I may not want to quit, but I want the option.
(b) I'd like a budget of $60,000-70,000 (after tax) to spend/yr.

QUESTIONS:
1. Do we need to continue paying the $1,300 / year for the term life insurance? I worry that if I die my wife would need it for income replacement and to send son through college if need be. Thoughts?

2. I'm contemplating purchasing long-term care insurance. I recently got a quote of about $3,500 / year. This would pay out $4,500/month for 5 years and covers both my wife and me (max combined coverage $540,000). I'm weighing the benefits of being covered with the opportunity cost of losing $3,500/year invested. Given family history, it's likely one or both of us will need  to be in a nursing home... Thoughts?

3. I've always considered our "emergency fund" the $110,000 we have in the brokerage account. It's earning virtually zero interest. My wife and I have extremely secure jobs so the only thing that could stop us from working unexpectedly, realistically, is our health. With this bull market I'm nervous to put it in the market. Suggestions? Thoughts?

4. Finally - and this is an important question to me - what am I missing? I'm maxing out all tax-advantaged accounts I have available to me. I don't want to be a landlord and buy rentals. My income will likely rise in the next few years, but not by much, frankly. Is there anything else I should be thinking about and doing to be in a better position? Do you see anything above that you that seems off such as asset allocation or anything else?

If you have any thoughts/advice on all or only some of the questions above, I'd GREATLY appreciate it!


Hotstreak

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QUESTIONS:
1. Do we need to continue paying the $1,300 / year for the term life insurance? I worry that if I die my wife would need it for income replacement and to send son through college if need be. Thoughts?


With how much money you have saved already I don't think it's likely you would need that much money, but it's hard to say without seeing a budget.  If you died in the next few years your wife and child should both receive social security survivors benefits in the neighborhood of ~1500+/ month (check your Social Security statement for details) & household expenses would go down.  Once you are retired or nearing retirement you definitely don't need it - your investments will easily cover.


2. I'm contemplating purchasing long-term care insurance. I recently got a quote of about $3,500 / year. This would pay out $4,500/month for 5 years and covers both my wife and me (max combined coverage $540,000). I'm weighing the benefits of being covered with the opportunity cost of losing $3,500/year invested. Given family history, it's likely one or both of us will need  to be in a nursing home... Thoughts?


The max payout would be $540,000, or only $270,000 if just one of you needs it.  You have enough money put away that you don't need to insure against this level of loss, which would only possibly occur once, at the end of life, when there's much less concern about spending down savings.



3. I've always considered our "emergency fund" the $110,000 we have in the brokerage account. It's earning virtually zero interest. My wife and I have extremely secure jobs so the only thing that could stop us from working unexpectedly, realistically, is our health. With this bull market I'm nervous to put it in the market. Suggestions? Thoughts?

Oohf, that's of money at 0%.  How much do you feel you really need for emergencies?  Take that amount and put it in a high interest savings account to earn 1%, and put the rest in the market.  Put your annual investments in the market as well.



4. Finally - and this is an important question to me - what am I missing? I'm maxing out all tax-advantaged accounts I have available to me. I don't want to be a landlord and buy rentals. My income will likely rise in the next few years, but not by much, frankly. Is there anything else I should be thinking about and doing to be in a better position? Do you see anything above that you that seems off such as asset allocation or anything else?

I think you're on a pretty good path.  Keep saving money and you should be able to retire on your schedule (or significantly ahead of it).  It would be good to see a budget, or at least the average amount you've spent over the past few years.  It would also be good to see a full breakdown of your assets.  How much in ROTH & at what basis, how much in HSA, how much in traditional 401k/IRA's.

You didn't mention social security, are you paying in to this?  If so, count those future benefits in your retirement income calculations.  Cut them down to 60 or 70% of expected amount if you're not confident social security will remain fully solvent

Is there a reason you're doing a roth instead of traditional 403b?  At your income level you would generally benefit from contributing to a Traditional (See threads here on how to withdraw 401k funds early without penalty, go to GoCurryCracker's blog and look at the "No Taxes" posts, they spend less than you but many of the principals and strategies apply).

Your asset allocation is heavier on bonds than most folks around here.
« Last Edit: March 07, 2017, 09:16:08 PM by Hotstreak »

A440

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UESTIONS:
1. Do we need to continue paying the $1,300 / year for the term life insurance? I worry that if I die my wife would need it for income replacement and to send son through college if need be. Thoughts?
This does seem a bit much.  I think some life insurance is not unreasonable, but you could also look into a lower dollar value and/or shorter time frame, and see how the costs would change.  Also the loss of your wife's income is probably not crucial the older your child gets.  i.e. you are probably not going to hire a housekeeper or nanny, etc.   My husbandand  I have have as much life insurance as you do, but we have 3 small children, and he is not great at the frugality thing. But one thing we did consider is that if both of us died, we would not want taking the kids to be a hardship to family.  But we may start looking at decreasing the life insurance in the next couple years. 

2. I'm contemplating purchasing long-term care insurance. I recently got a quote of about $3,500 / year. This would pay out $4,500/month for 5 years and covers both my wife and me (max combined coverage $540,000). I'm weighing the benefits of being covered with the opportunity cost of losing $3,500/year invested. Given family history, it's likely one or both of us will need  to be in a nursing home... Thoughts?
  I feel like long term care insurance is a huge sinkhole. It seems like companies are always trying do something sketchy or just get out of the market altogether.   If you are very concerned about leaving an inheritance, then maybe it is more worth it.  Otherwise I would save what you can, and there is always Medicaid.  By the time you need a nursing home, they may have caregiver robots!

3. I've always considered our "emergency fund" the $110,000 we have in the brokerage account. It's earning virtually zero interest. My wife and I have extremely secure jobs so the only thing that could stop us from working unexpectedly, realistically, is our health. With this bull market I'm nervous to put it in the market. Suggestions? Thoughts?
If you feel like you need something more stable, you could look into a CD or ladder of CDs or savings bonds. But I agree with Hotstreak that you probably don't need quite that much readily available. 

4. Finally - and this is an important question to me - what am I missing? I'm maxing out all tax-advantaged accounts I have available to me. I don't want to be a landlord and buy rentals. My income will likely rise in the next few years, but not by much, frankly. Is there anything else I should be thinking about and doing to be in a better position? Do you see anything above that you that seems off such as asset allocation or anything else?
It sounds like you are doing great.  Do have a 529 and/or Coverdell ESA for your son, if you do plan to pay for his college?

MDM

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Turtle fun(ds), welcome to the forum!

Term life insurance is not unreasonable.  I'd keep it.

No comment on LTC insurance.

Can you do better than Bob at market timing?  Probably. :)
If so, putting at least 1/2 that e-fund into the market is not unreasonable.

Agree w/ Hotstreak's traditional vs. Roth suggestion.  You need ~$2.4MM in traditional accounts before a 4% withdrawal rate from that alone will put you in the 25% bracket.  The small pension will reduce that need somewhat, but you could also be saving 30% (due to the child tax credit phaseout) on the second 403b if that were traditional instead of Roth.  Try putting your numbers into the case study spreadsheet to verify.

minimalistgamer

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I would definitely recommend you put that $110k into a high yield savings account. You will get about $100 interest each month. Basically, your cell phone, netflix and occasional lunch could be covered from the interest you earn on this money.
I paid off my mortgage! You can read the details here -
https://minimalistgamer.blogspot.com/2017/01/paid-off-our-mortgage.html

Feel free to ask any questions.

Hotstreak

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I would definitely recommend you put that $110k into a high yield savings account. You will get about $100 interest each month. Basically, your cell phone, netflix and occasional lunch could be covered from the interest you earn on this money.


From a cash flow perspective this is true. 


From a purchasing power perspective the value of the $110k is being reduced by an amount equal to (inflation % - account yield), and in order to maintain the same level of "emergency coverage", OP needs to contribute additional funds to make up the difference.  Depending on inflation this contribution would likely be in the neighborhood of 1-2%/year.  That contribution can be covered by income, or alternatively, if OP invests a large portion of this fund in the market at expected returns of 4-5%, those average investment gains would be sufficient to cover for emergencies (with excess gains).

ltt

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I would keep the term insurance, but only for about 6-7 more years, and your investments will also grow during this time.  By then, your child will be working part-time and, more than likely, will start saving money for college.  I'm not saying that part-time wages from a child's job will pay for college (at least not for a university, but for a community college), but, at least you know the child is able to contribute to college expenses.   And, should something happen, the child would be able to attend college part-time and pay their way/some loans if need be.  Plus, you will also have growth from investments during the next 6-7 years where you can help the child with tuition, etc., if something should happen. 

$1300 x 7 years = $9100 for $750,000 for term insurance....not bad.

We had 15-year term insurance when our boys were little.  So, when the term ended, and the rates increased substantially, we dropped it.  Our boys were in high school and earning their own money, so they have been able to contribute to college expenses, plus our investments have grown for us to be able to help them.  It really helps if the child attends a community college for their general ed credits.  It just saves so much money.

   

Secretly Saving

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I was certain that why my parent bought their Long Term Care policy that it would be a good idea. 
It was not. 
Over the years my parent paid +$30k in the yearly fees.  The policy had a value in the high $300,000s. 
We received a check for $555 dollars TOTAL.   That was all that was reimbursed...
so, I will not be getting a LTC policy.