Author Topic: What to do with large bonus? -abbreviated case study-  (Read 1505 times)

Nick_Miller

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What to do with large bonus? -abbreviated case study-
« on: September 21, 2018, 12:56:08 PM »
I have earned a large bonus ($34K) that I should receive in early Nov. So basically, what would you do with this bonus?

I know some folks around here earn much larger bonuses, but this is the most money I've ever earned at one time in my professional life. Even assuming it's just $24K or so after taxes, it's still a big chunk of change.

We are considering two main options:

1) Pouring it into my 401k by hugely upping my contribution this year (would take about $15K of it), paying off the car, and putting the rest, about $4K on student loans. It would be awesome to max out my 401k this year, especially since I'll almost certainly move into "HCE" territory next year, which will affect my ability to contribute in 2019.

2) Taking the bonus, pulling out about $22K in cash, and paying off my student loans. I am 44 years old, and the thought of paying off my student loans this year fills me with...just unmitigated joy. I mean, you have no idea. Yes, the loans are at a low rate, but they wear heavily on my psyche, like a rusty anchor chaining me to the murky ocean depths.

Thoughts?


If it helps, our abbreviated vitals are below:

Us: Married couple, 44/39, both work FT, have two kiddos, 9 and 13 going to public school

Income: Me (roughly $100K/year including bonuses) Her (roughly $55K/year, including bonuses) My Side Business (about $15K/year)

Monthly: Each month we have enough to put in about $750 in my 401k and $1500 in my wife's 401k, so $2,250 total each month. Roth IRAs are maxed for the year. No taxable accounts. We could have been putting more into savings these last few months but we are cash flowing a large vacation for spring.

Assets:

Home: Value $200K
Stache: Combination of 401ks, IRAs, current total balance: $177K
Cash: Approximately $30K
Cars: $18K
Home Stuff: $5K
Total Assets: $430K

Liabilities:

Mortgage: $126K, Year 1.5 into a 30 year term, 3.75%, currently paying about $950 monthly including escrow (not paying any extra)
Student Loans: $46K, at 4.25%, currently paying $1K per month
Car 2: $3.5K at 1.99%

Total Liabilities: $177,500

Net Worth:  $254.5K

« Last Edit: September 24, 2018, 07:57:12 AM by Nick_Miller »

onlykelsey

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Re: What to do with large bonus? -abbreviated case study-
« Reply #1 on: September 21, 2018, 01:21:24 PM »
Is there an option 3? 15K in to 401K, remainder in to student loans?  I'm not sure why you'd pay off the 1.99% car loan before the 4.25% student loans. 

Maybe paying a chunk of student loans will fill you with unmitigated joy, and it will definitely move the moment of unmitigated joy forward about a year.

ysette9

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Re: What to do with large bonus? -abbreviated case study-
« Reply #2 on: September 21, 2018, 01:22:16 PM »
I vote for putting as much into your 401k as humay possible, especially since that door will be closing partially. Can you do post-tax contributions to get it up to $55k this year?

Nick_Miller

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Re: What to do with large bonus? -abbreviated case study-
« Reply #3 on: September 21, 2018, 01:27:33 PM »
Is there an option 3? 15K in to 401K, remainder in to student loans?  I'm not sure why you'd pay off the 1.99% car loan before the 4.25% student loans. 

Maybe paying a chunk of student loans will fill you with unmitigated joy, and it will definitely move the moment of unmitigated joy forward about a year.

Paying off the car is really more about "cleaning out a debt" and simplifying our balance sheet. I prefer to "knock things out" rather than "knock things down," but yeah the car balance and rate are low and I do not sweat them at all. It is due to be paid off around March.

And yeah, tossing $9K at the loans would get them into the low $30s, which would seem like a big deal.

ixtap

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Re: What to do with large bonus? -abbreviated case study-
« Reply #4 on: September 21, 2018, 01:36:18 PM »
The simple answer is that bonuses follow your investment plan, just like everything else. Look at the order of investments sticky.

That must be one heck of vacation if you have $2250 a month going to that rather than savings for several months. Clearly you have not been choosing to focus on getting rid of the student loans, so don't short change yourself on tax advantaged accounts to suddenly attack student loans.




Nick_Miller

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Re: What to do with large bonus? -abbreviated case study-
« Reply #5 on: September 21, 2018, 01:44:12 PM »
I vote for putting as much into your 401k as humay possible, especially since that door will be closing partially. Can you do post-tax contributions to get it up to $55k this year?

Probably can't do the post contributions part just because time is short in the year. But we could definitely max out my $18.5K, and then we could triple check that my wife is on pace to max hers out as well (we checked a few months ago, and I remember thinking we had it figured out, but it's worth going back and looking again)

ysette9

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Re: What to do with large bonus? -abbreviated case study-
« Reply #6 on: September 21, 2018, 01:46:14 PM »
Look into bumping up your contributions to as much of your paycheck as you can to still leave enough to pay taxes. Then live off of the bonus. That is what my husband is doing right now as I finally got him on board with the in-plan Roth conversion/Mega backdoor Roth. I actually had a bonus just hit my checking account myself so out situations are very parallel in that sense.

Nick_Miller

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Re: What to do with large bonus? -abbreviated case study-
« Reply #7 on: September 21, 2018, 01:49:26 PM »
The simple answer is that bonuses follow your investment plan, just like everything else. Look at the order of investments sticky.

That must be one heck of vacation if you have $2250 a month going to that rather than savings for several months. Clearly you have not been choosing to focus on getting rid of the student loans, so don't short change yourself on tax advantaged accounts to suddenly attack student loans.

No no, we have not been been spending $2250 per month on a vacation. Maybe I wasn't clear. I just meant that our $2250 per month could have been probably closer to $3000 per month if we had not been cash flowing the vacation. Still, your point is taken that we haven't been attacking the student loans with the utmost urgency. At the current $1/K per month pace, they are due to be paid off in under 5 years. Now I'm looking back at the option to max my 401k and toss the rest at the student loans.

CalBal

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Re: What to do with large bonus? -abbreviated case study-
« Reply #8 on: September 21, 2018, 03:34:11 PM »
I would definitely max that 401k, because you don't get that time back, and then with the rest, do what you think will make you the happiest in terms of reducing the debt. :)  If that means paying off the car to clear that line item, and then tossing the rest at the SLs, it might still get the SL under 40k, which psychologically would be great to see that first number tick to 3!

cchrissyy

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Re: What to do with large bonus? -abbreviated case study-
« Reply #9 on: September 21, 2018, 06:56:06 PM »
I don't understand why you have 30k sitting in cash when you are so very driven to wiping out that student loan.

I also don't get how you put 2250 monthly in an ira when the annual max is a combined 11000

but whatever, I agree with your plan to max this year's 401k and to put the rest to clearing out that little car loan and a chunk of the student loan. Also I think you should throw half your cash into student loan paydown since you care about it so much.  AND/OR dial up 2019's 401k so that you never again find yourself this far into the calendar year and not taking enough advantage of it.  What I mean is, if you hold this bonus money as your cash reserves, you can comfortably dial up your 401k withholdings at the new year and slowly spend this cash on your monthly expenses. And if you can do a bit better at cutting expenses and not use the cash, cool, divert it to your student loans in another chunk next year.

Goldy

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Re: What to do with large bonus? -abbreviated case study-
« Reply #10 on: September 23, 2018, 05:26:09 AM »
Conventional retirement advice is to have 2.5 times your salary saved by the time you are 40 and from what I see you are barely breaking the 1x level.  You are behind where you should be for a standard retirement and way behind where you should be for a MMM retirement.  In my opinion you need to dump as much into the 401k as possible and continue to do so moving forward.

Why do you have so much in cash?  I donít know what your monthly expenses are so take this with a grain of salt but cutting back to 3mo emergency fund and dumping the rest at those student loans might make sense. You can always withdraw contributions from a Roth penalty free should a major catastrophe strike both jobs but this is incredibly unlikely.

The good news is your housing is super affordable so the bulk of your expenses should be manageable for a couple making $170k.

Tuskalusa

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Re: What to do with large bonus? -abbreviated case study-
« Reply #11 on: September 23, 2018, 10:13:30 AM »
Congrats on your bonus!  Well done!

I vote to max out 401k and put the balance towards your student loan.

Since you only owe $3.5k on the car, I suggest you use your savings to wipe that out ASAP. Start allocating that car loan payment amount over to your student loans. Make a commitment not to take on any more consumer debt, at least until your student loan is paid off.

Your next order of business is to throw all resources at that student loan. Make a plan to have it gone as soon as humanly possible.

You will then be set up with no debt except a very reasonable mortgage. How cool is that? 

Let us know what you decide.

PaulMaxime

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Re: What to do with large bonus? -abbreviated case study-
« Reply #12 on: September 23, 2018, 10:36:46 AM »
I will always vote for paying off student loans. The problem with these loans is that they are so toxic. You can't discharge them in bankruptcy so if there's a large financial hiccup you are stuck with them forever.

You are probably not in this situation but I bet you'll feel a whole lot better after dealing with them once and for all. Then put that monthly payment into your investments. I'm a big fan of having some capital that is outside of qualified plans, personally. I'd recommend opening a regular investment account and auto-investing that monthly payment in there.

This goes against the conventional wisdom on this forum but I've found that having that money for me is a huge source of comfort. And if there's a large emergency or you decide to buy a new car or a house or pay for a kid's education you are not forced to scramble or draw from retirement funds early.


Steeze

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Re: What to do with large bonus? -abbreviated case study-
« Reply #13 on: September 23, 2018, 11:07:23 AM »
I get a bonus around 20k-30k a year for 4 years now. This is what I did:

Year1: 100% to student loans
Year2: 100% to student loans
Year3: Max IRA, pay off student loans, bought engagement ring
Year4: Max IRA for wife and I, rest in taxable account

Year3 is the first year I maxed my 401k and IRA & debt free
Year4 is the first year we maxed both 401ks and IRAs


For you I would say, max 401ks, max IRAs, then the rest goes to student loans. Forget the car, it will be paid off soon enough. Mortgage is a nice low rate over a long period. I wouldn't pay extra on the mortgage unless it was my last debt, my emergency and car replacement funds were full, and my only other choice was a taxable account.

Personally I am a renter, but I do intend on buying and owning a home free and clear before FIRE. So I am not in the "never pay down your mortgage" camp. Depends on your plans. The math is pretty straight forward, it makes more cents to never pay down your mortgage and invest instead, but I want the lower overhead and sense of accomplishment of having no debt and a paid for home. More of an emotional choice for me.

Steeze

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Re: What to do with large bonus? -abbreviated case study-
« Reply #14 on: September 23, 2018, 11:16:00 AM »
Also agree with what others said, up your 401k contributions in 2019 so they are maxed each year with regular payroll deductions. Lear to live on the lower take home pay, it will be the best gift you ever buy yourself.

Path2FIRE

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Re: What to do with large bonus? -abbreviated case study-
« Reply #15 on: September 23, 2018, 10:15:47 PM »
Be cautious with taxes, my experience with large bonuses is that the company will withhold a flat percentage (25% federal with my past experience) and depending on your typical withholding and tax situation they might not withhold enough. Set aside a reserve in case you have an unexpected tax bill at the end of the year. I have gotten large bonuses in the past and have been surprised at tax time to owe when I thought I would get a refund.

Finances_With_Purpose

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Re: What to do with large bonus? -abbreviated case study-
« Reply #16 on: September 23, 2018, 11:36:56 PM »
I would definitely max that 401k, because you don't get that time back, and then with the rest, do what you think will make you the happiest in terms of reducing the debt. :)  If that means paying off the car to clear that line item, and then tossing the rest at the SLs, it might still get the SL under 40k, which psychologically would be great to see that first number tick to 3!

Max the 401k.  You can't go back in time.  Your balance sheet is more than good enough to make the best choices now. 

Also, you know this, but you already have more in savings than you do in student loans.  So, theoretically, you could pay them all off tomorrow anyway.  For me, it took a tremendous amount of stress away once I hit that point. 

You're not really beholden to them anymore, you're just choosing to keep some cash in your pocket. 

If you really hate them that much - and I get it, because I did - then consider wiping them out sooner by going cash poor for a year or so and let the emergency fund build back up...

Nick_Miller

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Re: What to do with large bonus? -abbreviated case study-
« Reply #17 on: September 24, 2018, 07:17:32 AM »
I can't respond to everyone, but I did want to give folks an idea of what we're going to do...

1) max my 401k
2) everything else to student loans

Just to be clear, our IRAs ARE maxed for the year. And my wife's 401k is on schedule to be maxed by year's end. If I max out my 401k, this would mean we're putting $48K into retirement accounts this year. We have NEVER done that before.  Also to be clear, with me being a HCE next year, I probably won't be able to max out my 401k contributions again, so that always weighs towards maxing it out this year while I can. (Also, this is our highest earning year EVER, it's not reflective of most of our prior years' earnings, and in those years we were fighting against huge day care bills - $800-$1,200 - and chopping down student loans that were almost $100,000.

Regarding our cash savings: My wife is very risk adverse and conservative by nature. She feels much (much) more comfortable with 4-6 months of expenses in cash available. I would probably not save up so much cash if it were just me, but it's not just me, and this is a not a huge sacrifice to make to my wife in return for her being more comfortable.

And our general plan is to focus on building up the Stache so we can "downshift" in 3-5 years, but we obviously have a lot of work to do before getting to that point. I've recently switched my focus to hitting $500K net worth in the next 40 months. At that point, we'll have more options.

Thanks, everyone!
« Last Edit: September 24, 2018, 07:19:26 AM by Nick_Miller »

ysette9

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Re: What to do with large bonus? -abbreviated case study-
« Reply #18 on: September 24, 2018, 08:24:13 AM »
Sounds like you have a good plan there. Good luck and congrats again on this great problem to have. :)