Author Topic: Reader Case Study – Where to direct surplus?  (Read 823 times)

Arbit Trage

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Reader Case Study – Where to direct surplus?
« on: May 30, 2018, 01:15:58 PM »
MFJ (36 & 37) with 1 dependent (age 10)
Western NC area

Annual Gross Income:
Me: 51,800
Wife: 56,700
NET monthly income is 6200.

Monthly budget is 3200 (pretty streamlined, can go into further detail but feel that we have a good handle on expenses).
The question is where to direct the 3K monthly surplus…

Home – Market Value 215,000…owe 171,000 @ 4.25%

2015 Rav4 – Clean Retail 19,000…owe 11,500 @ 2.9%
2015 Corolla – Clean Retail 15,000…owe 8,500 @ 2.9%

My tIRA: 26,255
My 401K: 8,164

Wife tIRA: 0
Wife 401k: 19,000

I contribute 6% and employer matches 3%

My wife currently contributes: 1% to 401k and 6% mandatory state retirement
Her employer contributes 8% to 401k and 7.5% to state retirement

Current plan is to open Wife’s tIRA and each contribute 458.33/month
Bump up Her 401k % to 27% (from 1%) and increase mine to 32% (from 6%)... I’ve tried to look at net pay calculators and I think those percentages should work to exhaust the surplus.

Question #1 is should I stick with the plan, or should I spread some risk and pay down mortgage more and/or cars.

Question #2 is about the actual investments.
My tIRA: FLGEX (Fidelity Large Cap Growth expense ratio .39) but I want to move it to FSTMX (expense ratio .09)
My 401k: NOSIX (Northern Trust S&P 500 Index) closest I could find to total market index fund and exp ratio is .02.

Wife’s tIRA: going to put her in FSTMX
Wife’s 401K: this is where it gets a little complicated:
4% Fixed Income Fund
5% Fixed income Index Fund
9% Large Cap Core Fund
9% Large Cap Index Fund
20% Small/Mid Cap Fund
24% Global Equity Fund
11% International Fund
9% Inflation Responsive Fund
5% Stable Value Fund

I think this is supposed to reflect a moderately aggressive investor. The Large Cap Index Fund has a .04 expense ratio and mirrors S&P 500. Should she change future contributions to 100% this fund? Should she move all existing funds into this fund too? I’m not sure how that works exactly.


  • Handlebar Stache
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Re: Reader Case Study – Where to direct surplus?
« Reply #1 on: May 30, 2018, 01:26:00 PM »
Investment Order

I agree that your wife's 401k looks way too complicated. You should be able to rebalance to the single SP500 index fund and then direct all future investments to that too. Some additional reading on investing, if you haven't seen it already:

Arbit Trage

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Re: Reader Case Study – Where to direct surplus?
« Reply #2 on: May 30, 2018, 02:20:29 PM »
This may be a dumb question but I'm going to ask it anyway: are we overstating the compounding effect of our portfolios when they are broken up into 4 or 5 or more separate investments? Isn't an FIRE calculator assuming that all funds are in one lump investment and not broken up?


  • Magnum Stache
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Re: Reader Case Study – Where to direct surplus?
« Reply #3 on: May 30, 2018, 02:35:33 PM »
It doesn’t matter whether the money is in different accounts or not. Presumably once you retire you will roll them all over into one place anyway for easier management.

I think you need to be called out for your care. I realize they are reasonable models, but why are you spending so much buying two new cars? Are you doing a ton of driving? Even if you are, it seems a better use of your cash would be to sell, get something older/cheaper with cash, and free up that cash flow to invest instead. I wouldn’t pay down the mortgage early due to the low interest rate.
"It'll be great!"


  • 5 O'Clock Shadow
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Re: Reader Case Study – Where to direct surplus?
« Reply #4 on: May 30, 2018, 02:41:05 PM »
In regards to your first question, it depends how debt averse you are.

Mathematically, you should put the vast majority of that surplus to work for you in retirement accounts. Max those 401ks out. And then the tIRAs.

If you really don't like car payments, you could get those out of the way pretty quickly. But at those interest rates, I would almost leave those put.

Do you have any basic savings accounts or anything like that?

Arbit Trage

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Re: Reader Case Study – Where to direct surplus?
« Reply #5 on: May 30, 2018, 02:56:28 PM »
Yeah the rates on the cars makes me want to leave those be...probably a bad decision when we bought them new back in 2015, but I didn't discover FIRE until this year and figure we can drive them for the next 10 years or so and have plenty of equity. As far as basic savings, have about 6K that is in a money market paying 1%.


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Re: Reader Case Study – Where to direct surplus?
« Reply #6 on: May 31, 2018, 06:21:15 AM »
I'd split between paying down the mortgage and putting in retirement. Partly because I hate debt. I paid off my house even while my retirement accounts were small and I have never regretted it. (Can't remember the rate but it was a 15-year under 4 percent back in 2012.) Mathematically I could've come out on top by investing, but who knew that at the time? Having a house paid off makes planning a lot simpler and reduces a lot of "needed income" stress (worry about job loss or other crisis). Of course, this is largely a personal psychological issue and not something anyone can say has the best possible outcome, since none of us know the future. Personally I don't see how anyone would want to enter FIRE or conventional retirement with a mortgage. Paying off the home is a guaranteed 4.25 percent return, and once you are out of debt you have even more money to invest.

Otherwise I'd just shoot for the cheapest investments, although I'd want an international index fund split instead of relying solely on the S & P. Again, we don't know the future, and it's unlikely to be like the past. The S & P may well be "good enough" but relying solely on it is suffering confirmation, recency, and home-country bias.

I wouldn't worry about the cars unless it was all that was keeping you from FIRE. We did the same thing, bought new cars in cash with the expectation of keeping them 15 years. Sounds like you have a good handle on things and are on a good path, especially given you low cost of living. Good luck.