Author Topic: Prioritization Question  (Read 1360 times)

ardrum

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Prioritization Question
« on: September 22, 2017, 09:23:23 PM »
I wanted to start by mentioning I have read the following.

Quote
WHAT           
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund mega backdoor Roth if applicable           
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account with any extra.           
           
WHY           
0. Give yourself at least enough buffer to avoid worries about bouncing checks           
1. Company match rates are likely the highest percent return you can get on your money           
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs for that purpose.
    At worst, the HSA behaves much the same as a tIRA after age 65.
4. Rule of thumb: traditional if current federal marginal rate is 25%; Roth if 10% or lower, or if MAGI is too high to deduct a traditional IRA; flip a coin otherwise. 
   See Credits can make Traditional better than Roth for lower incomes and other posts in that thread about some exceptions to the rule.
   See Traditional versus Roth - Bogleheads for even more details and exceptions.  State tax (or lack thereof) should also be considered.
   The 'Calculations' tab in the Case Study Spreadsheet can show marginal rates for savings or withdrawals*.
5. See #4 for choice of traditional or Roth for 401k.  In a 401k there are no income-based limits for deductions or contributions.     
6. Applicability depends on the rules for the specific 401k           
7. Again, take the risk-free return if high enough.  Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.
8. Because any earnings, even if taxed, will help your FI journey.

I'll list my relevant assets/debts next.

Assets:
Vanguard Roth IRA: $65,964
Company 401k (invested with Vanguard): $35,117
Vanguard Traditional IRA: $6,001
Checking/Savings: $1,406
HSA*: $225.08

Total Assets: $108,774

Debts:
Student Loans (refinanced with SoFi thanks to MMM): $23,501 (4.74% variable rate; has been going up by about 0.01%/month lately)
Auto Loan: $14,414 (0.9%)

Total Debts: $37,915

Net Worth: $70,859 (two years ago I was around NEGATIVE $5,000!)

*The HSA is fairly new, and next year it will match dollar for dollar for $600.

I wanted to attempt to follow the above quoted recommended order for U.S. Mustachians, and I figured having some extra eyes on me could help catch mistakes I might be making.  I googled the 10-year treasury note yield, and unless I'm looking at the wrong figure it said 2.25%, which makes #2 refer to ~7.25% and #7 refer to ~5.25%.  Here goes...

0) I am comfortable with a small emergency fund.  I keep at least $1000 cash and could use Roth contributions as an emergency as well.  My job security is very high, and I'm constantly contacted by job recruiters trying to get me to go elsewhere.
1) I max 401k to $18k.
2) No debts at 7.25%...skipping for now to next...
3) Maxing HSA next priority. Check.
4) Maxing out traditional IRA (gross income around $73k+). Check.
5) Maxing 401k already. Check.
6) N/A
7) No debts at 5.25% (but student loan is close and rate might rise over time)... skipping for now to next...
8) I don't currently have a taxable account...


I guess my question is primarily at steps 7 and 8.  Is the consensus that I should only make minimum payments on my student loan if the rate remains less than ~3% higher than the 10 year treasury note yield (~5.25% today) if that allows for me to open a taxable account with what extra remains?  I've currently been putting all remaining income toward reducing that student loan debt, thinking I'd open a taxable account after it is gone.  I'm living on about $19k/year and trying to hold steady at this level.
« Last Edit: September 22, 2017, 09:44:55 PM by ardrum »
Multiples of Annual Living Expenses "Stache" Goals by Year
2017: 4.07x
2018: 6.27x
2019: 8.57x
2020: 10.98x
2021: 13.52x
2022: 16.18x
2023: 18.98x
2024: 21.92x
2025: 25x

Bracken_Joy

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Re: Prioritization Question
« Reply #1 on: September 22, 2017, 09:35:51 PM »
My only clarification point- are you maxing your 401k space ($18k/yr) or only maxing to company match?
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ardrum

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Re: Prioritization Question
« Reply #2 on: September 22, 2017, 09:43:30 PM »
My only clarification point- are you maxing your 401k space ($18k/yr) or only maxing to company match?

Maxing to $18k.
Multiples of Annual Living Expenses "Stache" Goals by Year
2017: 4.07x
2018: 6.27x
2019: 8.57x
2020: 10.98x
2021: 13.52x
2022: 16.18x
2023: 18.98x
2024: 21.92x
2025: 25x

Bracken_Joy

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Re: Prioritization Question
« Reply #3 on: September 22, 2017, 09:48:35 PM »
Yeah, so the next step looks like it would be taxable! My only question on that is, do you have any expensive near-term goals? Down payment, wedding, big trip, something like that coming up in the next 1-5 years? Personally (and a lot of other people agree with the sentiment) I think this should not go into the market, but rather be held as CDs or cash or bonds for less volatility.

Also depends on risk tolerance- personally, a variable rate student loan would make me uneasy. I would throw money at it personally, but I could see waiting to see what happens with it.

PS- looks like you're doing great, based on the info provided! Well done.
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ardrum

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Re: Prioritization Question
« Reply #4 on: September 22, 2017, 09:54:32 PM »
Yeah, so the next step looks like it would be taxable! My only question on that is, do you have any expensive near-term goals? Down payment, wedding, big trip, something like that coming up in the next 1-5 years? Personally (and a lot of other people agree with the sentiment) I think this should not go into the market, but rather be held as CDs or cash or bonds for less volatility.

Also depends on risk tolerance- personally, a variable rate student loan would make me uneasy. I would throw money at it personally, but I could see waiting to see what happens with it.

PS- looks like you're doing great, based on the info provided! Well done.

I don't have any major expenses coming up in the near future, but I'll keep in mind having a more stable investment choice should I need to partition some savings for such an expense. Thanks!

The variable option did make me more uneasy vs. fixed rate, but thus far (almost a year since refinancing) has been significantly lower than the fixed quoted rate.  It's probably just dumb luck, but it also motivates me to get rid of it by imagining it as a ticking time bomb that might blow up into terrifying rates in the future.  Before I refinanced, my rates were anywhere from 5.25-6.8%. 

I think I'm still emotionally attached to paying off the student loans before taxable even though the often quoted priority table seems to suggest taxable could be started.  Perhaps I'm splitting hairs at this point though and it makes little difference either way.


Multiples of Annual Living Expenses "Stache" Goals by Year
2017: 4.07x
2018: 6.27x
2019: 8.57x
2020: 10.98x
2021: 13.52x
2022: 16.18x
2023: 18.98x
2024: 21.92x
2025: 25x

Laura33

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Re: Prioritization Question
« Reply #5 on: September 23, 2017, 08:00:21 AM »
So first, yes, you are splitting hairs at this point.  You have put yourself in a great position, and so now you get to choose between two good options.

Personally, I would recommend a little more post-tax cash right now.  Yes, you can withdraw from the Roth in a pinch -- but then you can't ever put that back.  So the cost of that emergency is decades of lost tax-free growth. 

I also want to echo what Bracken_Joy said:  you need to watch for the big unexpected expenses, so you don't need to fall back on debt or the Roth for things you could have planned for.  E.g., car maintenance/replacement, traveling for someone's wedding, moving/new security deposit, etc.

Finally, consider disability insurance -- you don't want to end up blowing through everything you have worked so hard to save because you're in a car accident and can't work for six months or a year. 

In sum, you have already taken care of the hair-on-fire priorities and are on the road to building a nice, solid future.  You don't want bad luck or some idiot texting to undo all that work, and you are at a point where you can afford to divert a few bucks toward protecting yourself from unexpected bad things.
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Gin1984

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Re: Prioritization Question
« Reply #6 on: September 23, 2017, 11:33:39 AM »
Eh, I might increase your EF but your taxable account can also double as a EF to some extent.  It depends on what your plan is.  Do you have an investment plan?  How much cash or cash products are in that plan?

dcamnc

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Re: Prioritization Question
« Reply #7 on: September 24, 2017, 08:53:57 AM »
I echo what others have said, bigger cash fund. You just never know, I just had emergency surgery that was 5 grand out of pocket; glad I had it in my cash account. I personally have some issues with that debt/investment priority list that's been floating around; it's geared for pure gains, excluding everything else. It locks too much up in retirement accounts for my tastes. I would also pay down more than the minimum on that variable rate student loan in case rates go up.

Bracken_Joy

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Re: Prioritization Question
« Reply #8 on: September 24, 2017, 08:59:39 AM »
I echo what others have said, bigger cash fund. You just never know, I just had emergency surgery that was 5 grand out of pocket; glad I had it in my cash account. I personally have some issues with that debt/investment priority list that's been floating around; it's geared for pure gains, excluding everything else. It locks too much up in retirement accounts for my tastes. I would also pay down more than the minimum on that variable rate student loan in case rates go up.

Oh yes, I will say, in times of crazy high insurance deductibles and OOPs, I recommend keeping at least your deductible in accessible cash once you're stable enough elsewhere! (Of course, I'm biased, I'm a nurse, but trust me when I say IN the hospital is not when you want to try and figure out moving/liquidating investments).

Which reminds me of my second point, which builds on Laura's: be sure you have an advance directive and power of medical attorney in place. Current beneficiaries on all your accounts. Insurance as needed. Stuff like that.
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Paul der Krake

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Re: Prioritization Question
« Reply #9 on: September 24, 2017, 10:55:59 AM »
be sure you have an advance directive and power of medical attorney in place.
Hey where can I get this done for free or very cheap? It's usually mentioned along with wills, and I have no need for a will.

To answer OP's question: I disagree with the 3% more than the 10 year treasury thing. 1%, sure, not 3%. I would pay down that 5.25% debt before opening a taxable account.

Bracken_Joy

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Re: Prioritization Question
« Reply #10 on: September 24, 2017, 11:20:04 AM »
be sure you have an advance directive and power of medical attorney in place.
Hey where can I get this done for free or very cheap? It's usually mentioned along with wills, and I have no need for a will.

To answer OP's question: I disagree with the 3% more than the 10 year treasury thing. 1%, sure, not 3%. I would pay down that 5.25% debt before opening a taxable account.

First off: obviously I'm not a lawyer and this isn't legal advice, just my best understanding of stuff.

For advance directive: As long as you have a witness, you can do it for free. For example, the state of Oregon just has it online: http://www.oregon.gov/DCBS/shiba/Documents/advance_directive_form.pdf
This one claims to be state of washington, but I didn't find an official website: http://www.caringinfo.org/files/public/ad/Washington.pdf

Power of medical attorney: there are lots of forms online, and this needs witnesses too. But my mom's was just written by her, pretty simple, and signed off with witnesses, and it held up just fine for me to make medical decisions for her at one point. Admittedly, no one challenged it, and that's where the big question marks come up, but I don't think they're like a will where having a lawyer help is a good idea a lot of times. There also seem to be some templates online.

I haven't filled out a medical PoA, because by default it would be my husband, and he is who I would want as my PoA. I think the medial PoA is just mainly if you're single, or want someone other than your spouse to be PoA? Anywhere it could be vague who would be making the decisions. Having an advance directive is a good idea though, and you can put them on file with your primary care doctor in a lot of cases, in case you're hospitalized. There are also tiny print outs for wallets I've seen.
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MDM

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Re: Prioritization Question
« Reply #11 on: September 24, 2017, 08:18:59 PM »
I guess my question is primarily at steps 7 and 8.  Is the consensus that I should only make minimum payments on my student loan if the rate remains less than ~3% higher than the 10 year treasury note yield (~5.25% today) if that allows for me to open a taxable account with what extra remains?
That's a very good question, and the only definitive answer can be given in hindsight.

Some folks will suggest you look at what is "likely" to happen, others will focus on "guaranteed" results.  Neither perspective is necessarily better than the other.

Note also the explanation to step 7:
Quote
Note that embedded in "high enough" is the assumption that your alternative is "all stocks" or a "fund of funds"
   (e.g., target retirement date) that provides a blend of stock and bond returns.  If you wish to consider separate bond funds, compare the yield on a fund
   with a duration similar to the time remaining on the loan, and put your money toward the one with the higher interest/yield.

Gin1984

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Re: Prioritization Question
« Reply #12 on: September 25, 2017, 09:15:49 AM »
be sure you have an advance directive and power of medical attorney in place.
Hey where can I get this done for free or very cheap? It's usually mentioned along with wills, and I have no need for a will.

To answer OP's question: I disagree with the 3% more than the 10 year treasury thing. 1%, sure, not 3%. I would pay down that 5.25% debt before opening a taxable account.

First off: obviously I'm not a lawyer and this isn't legal advice, just my best understanding of stuff.

For advance directive: As long as you have a witness, you can do it for free. For example, the state of Oregon just has it online: http://www.oregon.gov/DCBS/shiba/Documents/advance_directive_form.pdf
This one claims to be state of washington, but I didn't find an official website: http://www.caringinfo.org/files/public/ad/Washington.pdf

Power of medical attorney: there are lots of forms online, and this needs witnesses too. But my mom's was just written by her, pretty simple, and signed off with witnesses, and it held up just fine for me to make medical decisions for her at one point. Admittedly, no one challenged it, and that's where the big question marks come up, but I don't think they're like a will where having a lawyer help is a good idea a lot of times. There also seem to be some templates online.

I haven't filled out a medical PoA, because by default it would be my husband, and he is who I would want as my PoA. I think the medial PoA is just mainly if you're single, or want someone other than your spouse to be PoA? Anywhere it could be vague who would be making the decisions. Having an advance directive is a good idea though, and you can put them on file with your primary care doctor in a lot of cases, in case you're hospitalized. There are also tiny print outs for wallets I've seen.
This is a state dependent thing.  In California for a while there was no default and without the paperwork, two MDs decided for you.   However, it was free to do and just required two witnesses.

ardrum

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Re: Prioritization Question
« Reply #13 on: September 27, 2017, 05:18:21 AM »
Thanks for all the wonderful suggestions/feedback!
Multiples of Annual Living Expenses "Stache" Goals by Year
2017: 4.07x
2018: 6.27x
2019: 8.57x
2020: 10.98x
2021: 13.52x
2022: 16.18x
2023: 18.98x
2024: 21.92x
2025: 25x