Day Late and Dollar Short

[PureLifeNoob]

After lurking for a while, I decided to register and am looking for advice, if anyone wants to take a crack at my scenario :)

My situation?  I would like to figure out how to best allocate my income to pay for

1.  Retirement
2.  Kid's college
3.  Paying off mortgage

I'm late to the game - wasn't very interested in saving smartly earlier in life.  However, I get it now and want to try to make up for lost time.  I'm going to assume that I'm starting at square 1.

I make 84K per year and after taxes, I get $4158. 

I currently contribute 8% to my TSP - similar to 401(k) - and get 5% matching from my employer - this totals $10,890 per year.  I realize I need to contribute a lot more.  TSP savings today are $71,600.  I am 46 and would like to retire at 60 or 62.  I should get a retirement pension that I'm ball parking at maybe $20K / year and eventually Social Security - hopefully.  My husband's retirement is very similar to mine.  $20K retirement pension and about $80K in his TSP.

Kids are 14 and 17.  Both are honor roll students but I'm not expecting scholarships.  Our financial situation is solid.  We don't expect to qualify for financial aid.  However, we're not affluent enough to easily pay for their college.  One wants pre-med and the other wants law school.  Not cheap.

Mortgage is financed at 4.35% for $167K.  We owe about $147K.  We have about 19 years to go.

I'm not going to factor in my husband's income because we divvy up bills between us and have separate bank accounts.  We keep the peace by keeping things separate.  At this time, I just want to scrutinize my income/spending/goals.

Financially, I am responsible for the mortgage at $1,230/month.
I have $550.00 in monthly costs/bills which include gas, helping out my parents, etc.
I keep a balance in savings to cover emergencies and big expenses like getting a new roof or home improvement.  I have a kitchen loan that I will pay off in May and a credit card debt that will be paid off around the same time.  So, I will have some maneuvering room very soon.

In short, I will have $2428 available per month that I would like to distribute between retirement, college and paying off the mortgage. 

We get a large tax refund each year that I expect to total around 8K this year.  We withhold at the highest rate and I kick in $50 extra / per pay check.  I don't have a good reason why I decided to with withhold the additional $50 but it seemed like a good idea at the time.  I set that up when I first started my job 10 years ago and never changed it - I like the large tax return and looking back, it's probably a stupid investment strategy.

However, I was thinking of taking the 8K and putting it toward Kid #1's school for 3 years which would equal 8 x 3 = $24K.  If I started an allotment for college at $300 / paycheck x 26 paycheck, I could save an additional $7,800 per year for her.

I was also thinking about increasing mortgage payments by $300 / month for an additional $3600 / year toward the principle.

And, I was thinking about increasing my TSP savings by 7% which would be an additional $451.08 / month.  With 5% company match, my yearly TSP contribution would be $16,754.40 (max contribution I think is $18,500).

I know I'm moving in the right direction but I'm having a very difficult time prioritizing between these 3 goals because they all seem equally important.  Any recommendations?






 

[Phoenix_Fire]

Welcome to the forums,

I think you need to decide which is most important to you, taking care of your retirement or helping your kids with college.  Since you listed retirement as number one, I'm going to assume that is.

You say that you keep your finances separate from your husband, but you mention getting an $8,000 tax refund.  Is that yours, his, or both?  If both, then is only $4,000 of that open to work with on your options?

I calculated your "Available" cash flow after expenses at $2378, $50 less than you did (Salary 4158 minus Mortgage 1230 minus Other 550 = 2378).  Maybe small in the great scheme of things, but when wanting to optimize it all matters.

Do not pay extra on your mortgage.  The rate is low, and you have other priorities at this point.  That extra $300 can be used more efficiently elsewhere.  If you are overpaying now, consider making only the minimum to free up more.  There are also lots of threads on here about how paying your mortgage down is a mistake mathematically.

Max out your TSP.  You can contribute the full $18,500.  Your employers match is allowed to go over that.  Bump your contribution up to 22%.  That will be $1541 a month.  If your worried, try running a paycheck calculator to see how things will look:  https://www.paycheckcity.com/calculator/salary/   Throw in different options with TSP contributions and number of allowances. 

While we are on the topic of paychecks, use that calculator to figure out how much you should be having withheld.  You are correct in that overpaying on taxes monthly is a bad thing.  It hampers your cash flow.  You can invest it in whatever you want.  Plus, it will make increasing your TSP contribution easier. 

Next, open a Roth IRA.  Get that maxed if you can as well.  Depending on how much your husband makes you guys might be close to hitting the income limits for that.

For college, are community colleges an option?  In my state students in the top 10%, maybe even lower can get 2 years of community college paid for.  If that is a possibility, that can buy 2 more years to save.  I would let both of your kids know now, if they don't already, that you might be able to help with college, but will not be able to pay for it all.  The younger one should have time to keep their grades up and still possibly get scholarships if they are a great student. 

Pay off that credit card debt as quickly as possible, throw all the extra at it if you aren't already.  Then get that kitchen loan knocked out.  Don't wait until May to do it if you can do it sooner.

Making a plan is a huge step.  It's great that you are starting to take control of your finances and plan.  It is going to be stressful at first, but once you decide on a path, it will be a relief. 

[Nick_Miller]

OP, what is your plan with your kiddos' education? Specifically...

1) Are you tackling paying for their schooling yourself? Husband is not involved in this?

2) Are you tackling paying for both kiddos' schooling, or just kiddo 1?

3) Are you planning to pay for undergraduate AND med/law school?

I guess my response would depend somewhat on your answers, but generally speaking, you are way behind on retirement savings, you have very little home equity, and you're still paying on debts (although I know these will go away soon)

If you choose to pay for 4-8 years of schooling for 1 (or 2) kids, that is going to have a gigantic impact on your ability to catch up. I know it is a personal decision, but deciding to put 2 kids through law/medical school is a huge commitment, especially since many (all?) med schools forbid students from working. I know many law schools also forbid or discourage outside employment (that was the case for mine). Would you be paying your kids' living expenses, insurance, etc, the whole way through? Have you sat down and talked to the kids about expectations?

[TheWifeHalf]

As an example, I had 3 kids. 2 of them got 2 years at a community paid for, went on to other schooling. They are now in the health field earning $80,000 or so.
The third went  into the military and came out with an education.

No one is going to pay for your retirement, I think that is your first priority.  There are other sources for the kids college. May not be pretty, but they are there.

[PureLifeNoob]

Welcome to the forums,

I think you need to decide which is most important to you, taking care of your retirement or helping your kids with college.  Since you listed retirement as number one, I'm going to assume that is.

You say that you keep your finances separate from your husband, but you mention getting an $8,000 tax refund.  Is that yours, his, or both?  If both, then is only $4,000 of that open to work with on your options?

I calculated your "Available" cash flow after expenses at $2378, $50 less than you did (Salary 4158 minus Mortgage 1230 minus Other 550 = 2378).  Maybe small in the great scheme of things, but when wanting to optimize it all matters.

Do not pay extra on your mortgage.  The rate is low, and you have other priorities at this point.  That extra $300 can be used more efficiently elsewhere.  If you are overpaying now, consider making only the minimum to free up more.  There are also lots of threads on here about how paying your mortgage down is a mistake mathematically.

Max out your TSP.  You can contribute the full $18,500.  Your employers match is allowed to go over that.  Bump your contribution up to 22%.  That will be $1541 a month.  If your worried, try running a paycheck calculator to see how things will look:  https://www.paycheckcity.com/calculator/salary/   Throw in different options with TSP contributions and number of allowances. 

While we are on the topic of paychecks, use that calculator to figure out how much you should be having withheld.  You are correct in that overpaying on taxes monthly is a bad thing.  It hampers your cash flow.  You can invest it in whatever you want.  Plus, it will make increasing your TSP contribution easier. 

Next, open a Roth IRA.  Get that maxed if you can as well.  Depending on how much your husband makes you guys might be close to hitting the income limits for that.

For college, are community colleges an option?  In my state students in the top 10%, maybe even lower can get 2 years of community college paid for.  If that is a possibility, that can buy 2 more years to save.  I would let both of your kids know now, if they don't already, that you might be able to help with college, but will not be able to pay for it all.  The younger one should have time to keep their grades up and still possibly get scholarships if they are a great student. 

Pay off that credit card debt as quickly as possible, throw all the extra at it if you aren't already.  Then get that kitchen loan knocked out.  Don't wait until May to do it if you can do it sooner.

Making a plan is a huge step.  It's great that you are starting to take control of your finances and plan.  It is going to be stressful at first, but once you decide on a path, it will be a relief.

Thanks for the welcome Phoenix_Fire.  I appreciate your thoughts!

The 8K tax refund is both of ours.  I have the full 8K to work with.  It gets deposited in my account but we mutually agree where/how to spend it.  Because I'm more preoccupied with financial planning at this time in our lives, I have a lot of latitude with that money and he's supportive.  In the past, I have used this 'windfall' to pay for braces for the kids, paying off a car, painting the house - etc.  Practical choices - it isn't play money.

Thank you for the calculator.  I will run different options with TSP and allowances, as you suggested.  It looks like it's going to be a very useful tool.

I know you are imparting the conventional wisdom of not paying down the house quickly/as a priority.  I see this advice frequently online but I don't understand the reasoning behind it.  I will look for the threads that you mentioned that indicate its a mistake mathematically.  I know there must be excellent reasons why... but it isn't clicking for me.  I don't know if I'm being short sighted or WHY I don't get it.  In my mind it appears that if I pay off the house before I retire, I am free to sell the house for a profit - I'm estimating around 200K at my retirement age.  I could buy a smaller house outright and bank the rest.  Since housing has historically been our biggest expense, less retirement income is needed once the mortgage is gone.

As far as community college, it's certainly open for discussion.  Kid #1 is taking a few AP classes and maxing out math and science classes in her schedule by forgoing study halls in preparation for college.  She should be able to take the exams and get college credits for the AP classes - which helps.  She is also eligible for dual enrollment in CC and earn college credits at a discounted $100/credit as opposed to $300.  She's not opposed to doing CC at all.  She's smarter than I was at her age and doesn't want to start out life under a mountain of debt.  I'm not sure what her class percentile is but she's an A student - high honor roll past 2 years.  While this is great, there are LOTS of smart and capable kids in her grade, you know?  She's in the National Honor Society just like dozens of other kids in her grade are.  I don't want to minimize her academic strength but I guess I'm just recognizing the fierce competition for these very limited scholarships.  If she got a scholarship, we would be proud and thrilled to tears but I can't count on it.

Again, thank you for taking time to respond.  I appreciate your advice and you've given me a lot to think about.

[LWYRUP]

One of the best reasons to not pay off the house early is that by failing to save in tax advantaged accounts you are leaving money on the table for the taxman. 

If you put the extra $8k in your TSPs you will save an amount equal to your state and federal marginal rate combined in taxes.  Let's assume that's 25%.   That means that you could cut your taxes by $2,000 by upping your TSP contributions.  Or, in other words, you could up your TSP contributions by $10k and your take-home pay would be the same.  Magic!

That is, by the way, what I personally do if I were you. 

You should also check if your state offers incentives for 529s.  My state offers a state tax deduction and for a limited period of time also straight up gave away cash just for opening an account.  (Sadly, I had already opened an account like a month before they did this and so I didn't get it.)

[PureLifeNoob]

OP, what is your plan with your kiddos' education? Specifically...

1) Are you tackling paying for their schooling yourself? Husband is not involved in this?

2) Are you tackling paying for both kiddos' schooling, or just kiddo 1?

3) Are you planning to pay for undergraduate AND med/law school?

I guess my response would depend somewhat on your answers, but generally speaking, you are way behind on retirement savings, you have very little home equity, and you're still paying on debts (although I know these will go away soon)

If you choose to pay for 4-8 years of schooling for 1 (or 2) kids, that is going to have a gigantic impact on your ability to catch up. I know it is a personal decision, but deciding to put 2 kids through law/medical school is a huge commitment, especially since many (all?) med schools forbid students from working. I know many law schools also forbid or discourage outside employment (that was the case for mine). Would you be paying your kids' living expenses, insurance, etc, the whole way through? Have you sat down and talked to the kids about expectations?

Thanks for your response!  I don't want to give the impression that the husband isn't involved.  He's supportive but isn't driven financially or thinking a decade or two down the road.  For me, 16 years seems right around the corner, I need to PLAN NOW because we're behind and he sees 16 years as a long way off.  It's a different philosophy.  He recognizes its important to me so he's supports me calculating the route forward, if that makes sense? 

I plan to tackle the school loans myself because I've got more leeway in my paycheck and earn about 12K more than his salary.  His income pays for health insurance, utilities, food, entertainment/eating out occasionally - basically everything outside the mortgage, kitchen loan and credit card.  Kitchen and credit card loan will be paid off by May of this year - sooner if I can - I'm on track to knock those out within 3 months.  He also contributes to his TSP but at a smaller percentage 6% + 5% employer matching.
 
Yes, I plan to help pay for college for both kids.  If I were to split my income 3 ways between TSP, college and mortgage prepayment, I tentatively/roughly figured I could give each child about $47,400 each toward undergraduate education - at this point in time.  I arrive at this number by adding $24,000 (income tax return 8K x 3 years) + $23,400($300/month x 26 pay periods x 3 years).  We are fortunate in our employment because we are guaranteed periodic pay increases/step increases.  I will be able to contribute more as the years go on because of these step increases.  In 3 years, I will be making about 90K and in 9 years about 100K.  I anticipate being able to pay a substantial amount of their college education because of my income potential.  However, I ball park $47K at this point in time because I'm not yet actually making that salary.  Speculation is useful but I don't want to get too far ahead of myself either.

I have sat down with my daughter and discussed some expectations regarding college.  However, it's difficult to give definitive boundaries/limitations/hard figures because I'm still working this out in my head.  I've made some cursory comments to my son regarding his education.  Neither child is expecting a full ride but I do believe I can get them a good way through it.

As far as putting them through med and law school, I believe I can continue to help them for years.  No, I can't pay for everything and they understand this.

And yes, I absolutely agree with you.  I am behind in retirement savings.  I can begin to remedy this very soon though.

 

[PureLifeNoob]

As an example, I had 3 kids. 2 of them got 2 years at a community paid for, went on to other schooling. They are now in the health field earning $80,000 or so.
The third went  into the military and came out with an education.

No one is going to pay for your retirement, I think that is your first priority.  There are other sources for the kids college. May not be pretty, but they are there.

Sounds like you've got 3 very successful children!  You're right about retirement, too.  I need to improve there - and will.

[former player]

The argument about mortgages is that you can expect money invested to increase at 7%, so effectively by having a mortgage at 4% you are free to invest the principal amount of the mortgage at a margin of 3% in your favour.  There is a certain amount of risk, of course.  And it depends on your money being invested so as to get the 7%, which means low-cost index funds, as this level of return is calculated on that basis.

On your timeline it could take 11 years or more before younger kid is out of college, which puts you at 57 years old.  That's way too late to start funding a retirement that starts at 60 or 62: you need to maximise retirement investing now to get the most benefit out of what you are putting in.

You talk about selling your house at retirement age.  What about selling it sooner?  Younger kid will be off your hands in four to six years, even with two years of community college.  Selling up at that stage and buying something smaller would free up income during the crunch years of fully funding your pension while supporting the kids at college.


I would suggest -

1.  Check where your retirement funds are invested.  Make sure that you are getting good returns in low-cost index funds.

2.  Set your taxes so that you pay only what you owe and set your retirement contributions at the maximum allowed ($18,500).  Effectively you are redirecting your $8k tax refund into tax-free retirement investments and getting it there up to 12 months earlier than if the taxman gets it first and then gives it back to you.

3.  Max out your other savings into other tax-free spaces: this could be a Roth IRA and/or  529s.  Again, this money needs to go into low-cost index funds

4.  Make sure you are putting money aside in taxable accounts for future consumer spending (house maintenance and improvement, new cars, etc.) so that you don't ever take out any more consumer loans.

5.  Consider selling the big family house and moving somewhere smaller once both kids are gone.

[kimmarg]

I would suggest -

1.  Check where your retirement funds are invested.  Make sure that you are getting good returns in low-cost index funds.

All of TSP is low cost.

[Laura33]

I know you are imparting the conventional wisdom of not paying down the house quickly/as a priority.  I see this advice frequently online but I don't understand the reasoning behind it.  I will look for the threads that you mentioned that indicate its a mistake mathematically.  I know there must be excellent reasons why... but it isn't clicking for me.  I don't know if I'm being short sighted or WHY I don't get it.  In my mind it appears that if I pay off the house before I retire, I am free to sell the house for a profit - I'm estimating around 200K at my retirement age.  I could buy a smaller house outright and bank the rest.  Since housing has historically been our biggest expense, less retirement income is needed once the mortgage is gone.

To address this bit, the answer is math.  Your scenario:  pay off mortgage (say at 4%), when you retire, poof, mortgage is gone, ergo lower living expenses.  My scenario:  pay minimum on mortgage, invest the rest.  Assume average 7% returns.  When you retire, you want the mortgage gone.  Ok, you sell investments and pay off the mortgage -- but you still have all the extra money you earned from getting 7% returns vs. avoiding 4% in interest. 

Same thing if you sell the house:  if you have the mortgage paid off, you get $200K in hand.  If you don't have the mortgage paid off, you only get $200K minus the outstanding mortgage balance.  Ok.  But you also have all the money you have been investing over the past 20 years! 

Find an interest calculator online and run it yourself.  I did a super-fast one, assuming either $100K put toward a 4% mortgage or $100K invested at 7%.  Over a decade, your $100K mortgage is going to accrue about $50K in interest, so using your money to pay that off will save you $50K.  But $100K in the market at 7% will be worth $200K in that same decade!  So even though your loan payoff "avoided" $50K in interest, you actually lost another $50K that you gave up by not investing it.  It's called opportunity cost:  you can only use each dollar for one thing, so you want to put it toward the option that gives you the highest overall return.

The other thing to keep in mind is that your house value is not dependent on how much equity you have in it -- if it is worth $200K, it is worth $200K, regardless of whether you have 100% equity or 0% equity.  Whereas the amount you earn in stocks is highly dependent on how much you put into it -- if you put $100K into stocks, you'll end up with 10x as much as if you put $10K in. 

Basically, as long as the market makes more than your mortgage rate over the next @20 years, you will be better off investing your extra money than putting it toward your house.  And with mortgage rates still very very close to their historic lows, I pretty much figure that if the market doesn't do better than my mortgage rate (2.875%!) over the next decade, then, well, we have massively bigger problems with our economy and I'm not retiring anyway.

[Fomerly known as something]

On the TSP, when you make the change use a dollar amount, not a percentage Feds have an option to do either.  The $18,500 is the amount you can put it, the Governments match is not counted in this part so don't take it into account. 

If you are with NFC you have 27 paychecks this year instead of 26 FWIW.  Now we are a couple of paychecks into the year but the maximum dollar amount this year is $686.00 the government adjusts to whatever is the correct amount to get to $18,500 in the last paycheck for you. 

Again if you have NFC you can literally adjust this every paycheck so if you aren't comfortable doing the complete $686, you can could do something like start at $500 paycheck #1, and go to $505 in paycheck #2, this would mean finishing the year contributing $130 more a paycheck than when you started.  And hey what's another $5.   

[better late]

How are your kids at standardized testing? From what I've seen in my upper-middle class neighborhood, high scores on the SAT and ACT (and PSAT for super-high scorers) are the source for most of the scholarships. (My kid raised their ACT score by 4 points and one school increased an already nice scholarship by $7,000 a year.)
Both my kids had AP credits that equaled a semester of school; those classes can be a huge $ saver as long as your kids college gives credit for them.

[Zamboni]

Add me to the list of folks who think you should forget about paying off your house and max your tax advantaged retirement accounts. This will include opening up Roth IRA's if you qualify (sounds like you do) on top of your TSP's. Pay yourself first.

Once you get the credit cards down to having no carried balance, which you should do ASAP, then you can adjust the money dedicated to that into 529 accounts if you have aspirations of paying for college.

Paying for medical or law school should be taken off the table . . . they will be adults at that point and should figure out their own plans. At best, you can try to contribute some to their first college degree.

[Civex]

How are your kids at standardized testing? From what I've seen in my upper-middle class neighborhood, high scores on the SAT and ACT (and PSAT for super-high scorers) are the source for most of the scholarships. (My kid raised their ACT score by 4 points and one school increased an already nice scholarship by $7,000 a year.)
Both my kids had AP credits that equaled a semester of school; those classes can be a huge $ saver as long as your kids college gives credit for them.

+1

In my home state, if you score 30 or higher on the ACT, you qualify for a full ride at any public in-state school. Definitely look into this; if your eldest is succeeding in AP classes, I would think with preparation they could hit that number. I'd take it once for a baseline, take a few months for subject review/reading test preps, and then hit it again.