Author Topic: What should I do with extra income?  (Read 1464 times)

mamabear18

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What should I do with extra income?
« on: January 21, 2022, 08:20:17 PM »
Hi Everyone- thank you in advance for your help. Need some guidanceÖ.

Iím 48 and my spouse is a few years younger. We have 2 kids under 8. Just bought a house and havenít debt. Just got a little over $1 mil due to the stock market - all in 401k.
Cash and investment accounts approx $50k. No debt - except the house.

We make $8000 a month after taxes.
Currently saving a total of 12% on 401k
$2200 mortgage

We donít budget - but after expenses (needs and wants), we can save at least $1,000 or more a month. Iím not sure where to put the money.

1. Should i increase 401k? I feel like thereís enough money there and itíll double in 10 years (no guarantees of course). Not super motivated to put it there. I like having cash available (mentally satisfying) instead of having it locked up.

2. Should I put it all in an investment account? Iíd like to retire at 55 or 60 and could use the cash for that or work part time after I hit 55 to help with house payment.

Any other ideas?  We have some college savings - under $15k - but not motivated to tie up money there. I believe my kids should help pay for college. Also have thought about having some money for kids house and/or wedding. Donít believe in paying for expensive weddings lol.

Your help is appreciated and happy to answer any questions.

RWD

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Re: What should I do with extra income?
« Reply #1 on: January 22, 2022, 07:22:10 AM »
Have you looked at the Investment Order post?

RWD

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Re: What should I do with extra income?
« Reply #2 on: January 22, 2022, 07:23:35 AM »
Also, if you're worried about your 401k being "locked up" maybe you should read this thread:
https://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/

goodmoneygoodlife

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Re: What should I do with extra income?
« Reply #3 on: January 22, 2022, 07:25:52 AM »
Damn, 7k spendings a month - remind me not to have kids.

How to save / invest for retirement is based on a few factors, like:
How much money do you want to spend each year after retirement?
How much average inflation do you think there'll be?

The link I put has some formulas you can plugin to figure out how much you need to have by the time you retire.

Also, how much risk do you wanna take? As an example, trailing 60y inflated adjusted returns for SP500 is 5.05% or so. So your spending power will increase 5%. But SP500 could be volatile and if you absolutely need the money (which you probably will since your run rate is like 7 months). For high diversification you might want to do something like the all weather portfolio:
1. Stocks (maybe 30%)
2. Diversified commodities(maybe 7.5%) like corn, oil, etc.
3. Some bonds (15% on short term bonds and 40% on long term bonds)
4. Precious metals (7.5%).

One thing I don't like about the above is 30% on domestic stocks. You can probably look into doing maybe a 15-15 and/or 20-10 of domestic vs. international stocks instead.

Google Sharpe ratio for each and see how it fits in your projected spending and risk tolerance.

mamabear18

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Re: What should I do with extra income?
« Reply #4 on: January 22, 2022, 10:19:34 AM »
Goodmoneygoodlife-yes kids are expensive. We make a lot if we had no kidsÖÖ let me clarify- about $4000-$4500 to cover basic needs- mortgage, food, utilities, gas, etc.  since we donít budget and have no help with our kids- we do spend what we need to keep the kids busy and babysitters too. We do go out to dinner and weekend activities add up - Iím sure we could save $2,000 k a month. Without tracking and budgeting we usually have about $1k or more left over.

Thank you got your advice. I will check that out. I  invest 100% of the money in s&p 500 (Iím a risk taker) since I was in my twenties. I delayed kids for a very long time so I socked away a lot when I was single. I will also add that the $1 mil is just my savings. My spouse stays at home with the kids and has a very small 401k. So the $1 mil is for both of us when we retire.

mamabear18

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Re: What should I do with extra income?
« Reply #5 on: January 22, 2022, 10:21:40 AM »
RWD - I just did- quick question- I have an HSA. Why put more money there over the 401k? Should I take account expenses into consideration- never thought of that. Thx!

mamabear18

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Re: What should I do with extra income?
« Reply #6 on: January 22, 2022, 10:34:08 AM »
Red- just looked at your link - good read!!! Thank you!

RWD

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Re: What should I do with extra income?
« Reply #7 on: January 22, 2022, 10:45:14 AM »
RWD - I just did- quick question- I have an HSA. Why put more money there over the 401k? Should I take account expenses into consideration- never thought of that. Thx!
Because it has more tax advantages. Money isn't taxed when it goes in, grows tax free, and can be withdrawn tax free (for medical bills). In the case that you have more in there than you need for medical you can still withdraw it for regular expenses just by paying taxes on it like you would with a 401k. Further reading:
https://www.madfientist.com/ultimate-retirement-account/

cool7hand

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Re: What should I do with extra income?
« Reply #8 on: January 22, 2022, 10:56:34 AM »
For high diversification you might want to do something like the all weather portfolio:
1. Stocks (maybe 30%)
2. Diversified commodities(maybe 7.5%) like corn, oil, etc.
3. Some bonds (15% on short term bonds and 40% on long term bonds)
4. Precious metals (7.5%).


+1 on considering the all seasons (aka all weather) portfolio. That's what we use.

JGS1980

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Re: What should I do with extra income?
« Reply #9 on: January 22, 2022, 11:25:55 AM »
We donít budget - but after expenses (needs and wants), we can save at least $1,000 or more a month. Iím not sure where to put the money.

1. Should i increase 401k? I feel like thereís enough money there and itíll double in 10 years (no guarantees of course). Not super motivated to put it there. I like having cash available (mentally satisfying) instead of having it locked up.

2. Should I put it all in an investment account? Iíd like to retire at 55 or 60 and could use the cash for that or work part time after I hit 55 to help with house payment.

Any other ideas?  We have some college savings - under $15k - but not motivated to tie up money there. I believe my kids should help pay for college. Also have thought about having some money for kids house and/or wedding. Donít believe in paying for expensive weddings lol.

Your help is appreciated and happy to answer any questions.

This one's easy... if you are not maxing your 401K, then do so ($20,500/year). This will, ultimately, decrease your yearly taxes. Place that tax refund in your [Taxable] Investment Account in April/May every year. As for the remainder of your $1000 monthly family surplus, just continue to add that to your [Taxable] Investment account every month.

Another option: take that 12K per year and learn how to do 2 Backdoor Roth's every year.

https://www.physicianonfire.com/backdoor/

JGS

mamabear18

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Re: What should I do with extra income?
« Reply #10 on: January 25, 2022, 08:19:29 AM »
JG- I might need a face punch for this question - so help me wrap my head around this-
I understand the tax savings part of it - but if I max out either my hsa or 401k - that leaves less cash flow for us. Instead of locking the money up in pre tax accounts - why not put all that money in taxable accounts so I can have access to it if needed? Are there any other benefits besides tax savings?

I was having a discussion with my DH about what would happen if I died. He stays at home with the kids- we have no idea how long it would take for him to have access to any death benefits from life insurance or other accounts- (outside of emergency fund)  is he supposed to take out 401k money with penalties to pay the bills for a few months until everything settles?

My other thought is - if he did have to take 401k money out - through back door Roth - isnít he paying similar taxes than those to just cashing out on investments? Pardon my ignorance - but I know have my own issues with having money tied up in pretax accounts. A part of it is - what if I donít budget enough for big purchases - then I have no money to access for a vacation or furniture - budgeting doesnít come easy to me - so in my brain - itís easier to have extra money in taxed accounts - Iím trying to change this perspective so if you have any other suggestions on how I can see that in a different light - that would be helpful. Thank you!

SailingOnASmallSailboat

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Re: What should I do with extra income?
« Reply #11 on: January 25, 2022, 08:32:48 AM »
For me, the whole point of an emergency fund is just this. It's got 3 months or so of regular living expenses so there's no worry about cash or where to get money. It's there.

And on the IRA stuff. Again, for me, a HUGE part is that that money is not touchable. It's not an emergency fund, not really. It's not for big purchases or other "hey I'd like this" or vacation- the planning for that goes into regular planning. Definitely not an expert but IIRC if you take money out of an IRA for general living expenses and you're not over 59.5 there's a 10% penalty. I know there are ways you can access it before then but I believe those take some planning ahead of time.

I'll also put in my $.02 on the college question, just as a thought process. Investigate what an in-state college tuition and fees are and think about what that represents. When I went to school, you could cover those costs in a decent summer's job ($3000 was the cost back then). These days, not a chance in hell ($30 k is the cost now). I know DH and I are super lucky in that we did not have any debt when we graduated, which opened up many many options to us. We planned so our kids have that same advantage. I totally wanting them to have some skin in the game but the costs are astronomically higher now than 20 years ago. I personally don't follow the logic on wanting to help them with a wedding or house cost but not wanting to help more with college, but everyone has their own thinking.

feelingroovy

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Re: What should I do with extra income?
« Reply #12 on: January 25, 2022, 08:57:01 AM »
It doesn't take months to get a life insurance payout. My sister's husband died when she was a stay at home mom. It took maybe a week, and part of that was getting the death certificate. But a call to your life insurance agent would give you a better answer and probably a lot of peace of mind.

I agree you need short term savings and or an emergency fund to help you feel better about socking away more in retirement funds.

I get this way too. I can feel "poor" if cash flow is tight and I don't have some easily accessible cash available. It can help to have two goals: to hit that 3 month emergency fund in cash and to maximize retirement contributions.

When you pay attention to tax saving strategy, it really accelerates savings.

JGS1980

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Re: What should I do with extra income?
« Reply #13 on: January 25, 2022, 09:23:24 AM »
JG- I might need a face punch for this question - so help me wrap my head around this-
I understand the tax savings part of it - but if I max out either my hsa or 401k - that leaves less cash flow for us. Instead of locking the money up in pre tax accounts - why not put all that money in taxable accounts so I can have access to it if needed? Are there any other benefits besides tax savings?

I was having a discussion with my DH about what would happen if I died. He stays at home with the kids- we have no idea how long it would take for him to have access to any death benefits from life insurance or other accounts- (outside of emergency fund)  is he supposed to take out 401k money with penalties to pay the bills for a few months until everything settles?

My other thought is - if he did have to take 401k money out - through back door Roth - isnít he paying similar taxes than those to just cashing out on investments? Pardon my ignorance - but I know have my own issues with having money tied up in pretax accounts. A part of it is - what if I donít budget enough for big purchases - then I have no money to access for a vacation or furniture - budgeting doesnít come easy to me - so in my brain - itís easier to have extra money in taxed accounts - Iím trying to change this perspective so if you have any other suggestions on how I can see that in a different light - that would be helpful. Thank you!

1. You need an Emergency Fund so you don't have to worry about bills after dying or miscellaneous large expenses.
2. You need a Vacation "sinking fund" for expected large expenses that you use routinely (vacation, car maintenance/purchase, house repairs)
3. In regards to "locking up" money in pre-tax accounts, remember that the whole point of investing is to allow your money to make money for you. The very act of maxing your your pre-tax will give you an immediate 24% return. This is a gift from God and the IRS. Take the gift and move on. If you can't max out 20.5 K/year despite making >100K per year, then you have a spending problem that is inconsistent with your stated goal of retiring early at 55.

mamabear18

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Re: What should I do with extra income?
« Reply #14 on: January 25, 2022, 05:30:36 PM »
JG- love the gift from god comment lol - thank you. Makes total sense!

Morning Glory

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Re: What should I do with extra income?
« Reply #15 on: January 25, 2022, 07:00:06 PM »
Do you have state taxes ? If so:
Is there an incentive for contributing to a 529?
Do you plan on staying in the same state after retirement?

Dicey

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Re: What should I do with extra income?
« Reply #16 on: January 25, 2022, 07:33:03 PM »
What?? Fourteen replies and no one's linked to our buddy, JL Collins NH?

https://jlcollinsnh.com/

He also has a well-regarded book, but the blog is free and starts as soon as you click the link.