Author Topic: Reader Case Study - What should I do with my extra $$?  (Read 765 times)

strunzo

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Reader Case Study - What should I do with my extra $$?
« on: January 04, 2019, 03:48:06 PM »
First time poster here! I'm 28, live in San Diego, and make $91,500/year. In mid-2017 I got on the early-retirement train and since then have been maxing out my employee pre-tax retirement plans, paying down my student loans, and now starting to build up some savings. My husband and I both max out our FSA (he has a Dr. note to use FSA for personal training/gym expenses) and I am dealing with complicated knee issues, so that should be money well spent this year.

Here are my applicable stats:
Savings: 5k, working on getting back up to 10k where I like it
Checking: 1k
Investments:
Vanguard Traditional IRA (rollover from previous employer): $38k
Vanguard Roth IRA (rollover from previous employer): $400
Employer-sponsored 457 (basically like a 401k for government employees): 17k
Employee-sponsored 401a (employer only contributions of 90$/month): 1k
I also contribute to CalPERS (pension) but can't start reaping the benefits of that at age 52 (ideally older to get the max. benefit factor). I still haven't quite figured out how a pension works with early retirement…assuming I would want to retire much earlier than 52?? Anyone have input on this?

…Anyways, I've got everything at vanguard in VTSAX and everything at the employee-sponsored plan in Broad Market Index funds (input on this would be appreciated as well, I'm kind of winging it here.)

Debts:
Mortgage (I own the house with my husband, currently valued at 525k): ~400k @ 3.75%
Student Loan: 18k @ 5%

Other than my debts, health, and basic living expenses, I modify my spending based on my investing/savings goals for the year. I'm really looking for some advice on what to do with the rest of my money at this point. This will be the first year that maxing out my pre-tax retirement account will feel easy for me, so I want to make sure I stay on top of spending creep and put all my leftover money into something good.

Some things I'm considering: maxing out my Roth IRA, paying down student loans (although I would like to keep my cash somewhat liquid), saving up to invest in real estate (either short term or long term, but not sure if I'm ready for the risk of REI yet). Is there anything else I should consider? I feel like I may get stuck in paralysis analysis if I try to figure out which of these options would be the best, I think I just need to go with one.

All advice is appreciated! Thanks!

ysette9

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Re: Reader Case Study - What should I do with my extra $$?
« Reply #1 on: January 04, 2019, 04:01:14 PM »
Hi there!

Every time I see a topic titled “what should I do with my money?” The voice in my head always says “give it to me!!” :)

Do you have joint finances with your husband? It is a little odd to only see one half of the whole picture.

You need to add in some details like loan balances and interest rates, and what your investment options and fees are for your retirement accounts.

ysette9

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Re: Reader Case Study - What should I do with my extra $$?
« Reply #2 on: January 04, 2019, 04:02:30 PM »
And of course, check out the investment order for general advice on what to do with your money, in what order, and why.

https://forum.mrmoneymustache.com/investor-alley/investment-order/

strunzo

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Re: Reader Case Study - What should I do with my extra $$?
« Reply #3 on: January 04, 2019, 04:10:49 PM »
Hi there!

Every time I see a topic titled “what should I do with my money?” The voice in my head always says “give it to me!!” :)

Do you have joint finances with your husband? It is a little odd to only see one half of the whole picture.

You need to add in some details like loan balances and interest rates, and what your investment options and fees are for your retirement accounts.

The loan balances are listed with interest rates, those are the only loans in my name. My husband and I keep our finances pretty separated, he makes similar to what I do and we found it was the fairest and most logical way to do things. I'm only trying to figure out what to do with my extra money, not his (yet!)

Employee-sponsored plans are at VantagePoint, so fees can be found there.
« Last Edit: January 04, 2019, 04:15:04 PM by strunzo »

ysette9

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Re: Reader Case Study - What should I do with my extra $$?
« Reply #4 on: January 04, 2019, 04:26:01 PM »
Sorry I missed your balances and interest rates in my initial read. Mortgage shouldn’t be pre-paid. Student loan is sort of on the cusp, so that might be a personal decision of how fast you want to be rid of it. That balance isn’t that high so you might just want to wipe it out so you don’t have to think about it.

I’m pretty but I’m lazy and I’m not going to look up your investment choices and fees for you. Generally the advice is to find the lowest fee something that resembles a broad market index fund. If you have bonds in your asset allocation then put them in a tax-advantaged account do you aren’t paying income tax on the income they generate.

ysette9

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Re: Reader Case Study - What should I do with my extra $$?
« Reply #5 on: January 04, 2019, 04:26:52 PM »
Does your employer-sponsored retirement plans have a mega backdoor Roth option?

strunzo

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Re: Reader Case Study - What should I do with my extra $$?
« Reply #6 on: January 04, 2019, 05:28:05 PM »
Does your employer-sponsored retirement plans have a mega backdoor Roth option?

no, 457's max at 19k, they are actually deferred compensation plans and don't have that upper 55k limit like 401k plans do.

i'm already invested in a low-fee broad market index fund through my employee-sponsored plan. Sounds like I'm on the right track there.

Freedomin5

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Re: Reader Case Study - What should I do with my extra $$?
« Reply #7 on: January 05, 2019, 05:44:27 PM »
Welcome!

With regard to pensions, they reduce the size of the stash you need. You basically only need to save enough to tide you over until your pension kicks in, and then to top off the difference between your pension and your projects expenses.

There is a post on the “bucket” approach to calculating the stash you need on the forums. Basically, you split your life into stages, and then calculate the stash you need to save (in current dollars) for each stage. So for example, you might have two stages, before-pension, and after-pension. Let pretend your pension gives you $40k per year, and you project to spend $50k, your stash will need to generate $10k per year.

10k x 25 = $250k

So you need $250k current stash to fund your post-pension needs.

Then calculate pre-pension needs. Let’s pretend you still project needing $50k per year, and you hope to be retired for 10 years before accessing your pension.

50k x 10 years = 500k (because you can spend down your savings)

But really, you need to actually save less than 500k because of compound interest. But how much you actually save depends on how far away you are from your projected FIRE date. If you’re planning to retire next year, you’ll need to save 500k. If your projected date is 10 years out, you need to use a compound interest calculator to calculate the actual amount you need saved.

** Pleae note that I’ve made up all of the above numbers. The method/process/calculation is what you should focus on.

I believe FIREcalc has a good calculator for this, as well as engaging-data.

strunzo

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Re: Reader Case Study - What should I do with my extra $$?
« Reply #8 on: January 06, 2019, 12:43:52 PM »
Welcome!

With regard to pensions, they reduce the size of the stash you need. You basically only need to save enough to tide you over until your pension kicks in, and then to top off the difference between your pension and your projects expenses.

There is a post on the “bucket” approach to calculating the stash you need on the forums. Basically, you split your life into stages, and then calculate the stash you need to save (in current dollars) for each stage. So for example, you might have two stages, before-pension, and after-pension. Let pretend your pension gives you $40k per year, and you project to spend $50k, your stash will need to generate $10k per year.

THANK YOU! That is super helpful information. I've been diving into my pension plan this weekend to see what my options are and how early retirement can impact the benefit I receive. Seems like the longer I can wait the better.
10k x 25 = $250k

So you need $250k current stash to fund your post-pension needs.

Then calculate pre-pension needs. Let’s pretend you still project needing $50k per year, and you hope to be retired for 10 years before accessing your pension.

50k x 10 years = 500k (because you can spend down your savings)

But really, you need to actually save less than 500k because of compound interest. But how much you actually save depends on how far away you are from your projected FIRE date. If you’re planning to retire next year, you’ll need to save 500k. If your projected date is 10 years out, you need to use a compound interest calculator to calculate the actual amount you need saved.

** Pleae note that I’ve made up all of the above numbers. The method/process/calculation is what you should focus on.

I believe FIREcalc has a good calculator for this, as well as engaging-data.