Author Topic: Young & Hopefully not dumb! Advice needed  (Read 8733 times)

Flyingstache

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Young & Hopefully not dumb! Advice needed
« on: December 11, 2017, 12:38:56 PM »
My wife & I are 27 years old & married about a year & a half ago. I posted in this group about a year ago after we purchased a home. We have since sold that home for a slight profit & are currently in contract to purchase another home. I would love your advice on how we can better our financial situation. We live in Central Ohio, have a dog, & have dreams of kids in the future.

Annual Salary – Combined we make around 5k a month. This was significantly higher but I recently switched careers & now work in education. This amount will increase over the years starting next year when my wife (also in education) completes her masters degree.

Monthly Expenses:
Mortgage (will start in Feb.) - $1,100 this would be for a 15yr mortgage with 25% down. Also includes projected insurance/taxes
Land Payment - $250 (Paying this to my parents to gain acreage on land that they own for future purposes)
Utilities - $75 projected
Electric - $60 projected
Gas - $70 projected
Internet - $45
Phone - $70
Food - $300
Gas (Auto) - $75
Entertainment/Misc - $100
Total - $2,145

Bank Accounts
Checking - $4,000
Savings - $55,000* (this includes $50,000 we will be getting from our current home selling in a few weeks)
HSA - $2,250
Total - $61,250

Investments
Vanguard (Total Stock Market Index Fund Admiral Shares) - $19,000
My 401k - $38,000
Wife’s retirement - $5,000
Total - $62,000
Assets
2013 Honda CRV
2004 Toyota Corolla

We have 0 debts at this time.

Our biggest questions are as follows:
•   How much should we put down on the home we are buying. We are paying $167,500 for the home & plan on putting at least 20% down. Should we put more money down to avoid paying any interest. We will be doing some home renovations but they likely won’t occur for a year or more. Also, thoughts on 30yr vs 20yr or 15yr?
•   Should I roll over my old works 401k into a Roth IRA or a traditional IRA. I know there are different views on this topic. Also, should I wait to do this at any specific time for tax reasons? I made significantly more this year (I switched jobs half way through the year) than I will next year.
•   Are there any areas where we could reduce our expenses?

Thanks so much for your input, it is much appreciated.

Bracken_Joy

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Re: Young & Hopefully not dumb! Advice needed
« Reply #1 on: December 11, 2017, 02:09:06 PM »
What sort of interest rate are you looking at on the loan? Generally, rates are low enough that a fixed rate 30 year mortgage is mathematically superior. Letting it ride, and investing instead, tends to be the optimal approach. There is a ton on the forums about "do NOT pay down your mortgage", let me know if you want more links. @boarder42 usually is a good (if strongly opinionated) source of info on this =D

Have you seen the Investing Order? If not, here you go: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #2 on: December 11, 2017, 02:23:02 PM »
What sort of interest rate are you looking at on the loan? Generally, rates are low enough that a fixed rate 30 year mortgage is mathematically superior. Letting it ride, and investing instead, tends to be the optimal approach. There is a ton on the forums about "do NOT pay down your mortgage", let me know if you want more links. @boarder42 usually is a good (if strongly opinionated) source of info on this =D

Have you seen the Investing Order? If not, here you go: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

whoa!! when did we get mentions? or does no one ever link me to things and this is the first time.

But yeah as stated above a few times - partial paydown really increases your risk profile.  Plus paydown in general is far inferior to investing.  So the path of invest it all then when its big enough if you decide to sell it take the tax hit and pay it off go ahead but - Investing FTW in almost all cases.  And i prefer to play with the odds than against them. Its counterintuitive but rarely can you make the math work at today's 30 year fixed rates. 

I would put the minimum down - and i'd also take out a 30 year mortgage - why.  Do you plan to stay 7 years if so 30 year mortgages and investing the difference beat out 15 year mortgages after 7 years in most cases.

Also the market averages 10-11% ROI.  your interest rate is likely 4% give or take on a 30 year right now.  That 4% is fixed forever at today's price so its locked and doesnt go up with inflation.  So we dont have to exclude inflation in our ROI calculation for market return.

Further are you maxing all tax advantaged space - you should be before you ever consider paying more money into a house - its a free gift. 

As for roll over - if you roll to a roth you create a taxable event - generally not something you want to do win accumulation phases but you'd have to do the math.

Most of your questions are math equations and we need more data to solve them. like interest rate and how much money you're currently funneling into your retirement accounts and how much you plan to once you have a house. etc. at 5K per month you're in the 15% bracket already so depending on the savers credit and if you can get there you'll have to do some math.
« Last Edit: December 11, 2017, 02:30:31 PM by boarder42 »

Bracken_Joy

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Re: Young & Hopefully not dumb! Advice needed
« Reply #3 on: December 11, 2017, 02:32:56 PM »
What sort of interest rate are you looking at on the loan? Generally, rates are low enough that a fixed rate 30 year mortgage is mathematically superior. Letting it ride, and investing instead, tends to be the optimal approach. There is a ton on the forums about "do NOT pay down your mortgage", let me know if you want more links. @boarder42 usually is a good (if strongly opinionated) source of info on this =D

Have you seen the Investing Order? If not, here you go: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

whoa!! when did we get mentions? or does no one ever link me to things and this is the first time.

They're new, don't worry =) Only a few days old! This is going to be really cool, I have my collection of links I keep handy for case studies, now I can @ mention my "experts", too!

MDM

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Re: Young & Hopefully not dumb! Advice needed
« Reply #4 on: December 11, 2017, 05:37:02 PM »
•   Should I roll over my old works 401k into a Roth IRA or a traditional IRA. I know there are different views on this topic. Also, should I wait to do this at any specific time for tax reasons? I made significantly more this year (I switched jobs half way through the year) than I will next year.
As already mentioned, this is a simple math exercise.  Well, the math is simple, it's the "deciding what to use for a withdrawal marginal rate" that is uncertain.

See Traditional versus Roth - Bogleheads for that math.  If this is going to be your highest income year for a while, it's probably the worst time for a t->R rollover.

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #5 on: December 12, 2017, 06:52:18 AM »
Thank you all for the input, it is much appreciated!

So far we have been quoted the following interest rates (if we put 20% down or more)

30yr at 3.875% which results in a payment around $875 (with insurance & taxes included)

20yr at 3.75% which results in a payment around $1,025 (with insurance & taxes included)

15yr at 3.5% or 3.375% (15yr has had the only difference in rate so far) which results in a payment around $1,150


We view this home as a great starter home & good investment. We see ourselves living here for 5-10yrs. It is in a great neighborhood & has good rental potential if we go that route. It was being rented out for $1,400/month. With our projected timeline we didn't know if paying as much off now when we don't have kids would be best or paying the minimum & saving/investing is a better idea.


In terms of contributing to investment accounts, we have not found a consistent way of doing so yet. With getting married & both starting new jobs in the last year & a half (& me switching careers about 4 months ago) we have mostly been putting money in when we get an excess from a bonus or have left over money from the month. We have had some unexpected expenses in the last few months that have thrown off our budgeting but we are back on track now. We would like to get to a point where each month we are depositing a set amount into investments.

Thank you again for your help!

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #6 on: December 12, 2017, 06:57:10 AM »
I'd take the 30 year including your feeling of renting it out - 1400 is about 1% of the purchase price give or take and isnt a perfect rental but its not awful.  Give you much more flexiblity on your income level as well. 

Bracken_Joy

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Re: Young & Hopefully not dumb! Advice needed
« Reply #7 on: December 12, 2017, 08:15:26 AM »
In terms of contributing to investment accounts, we have not found a consistent way of doing so yet. With getting married & both starting new jobs in the last year & a half (& me switching careers about 4 months ago) we have mostly been putting money in when we get an excess from a bonus or have left over money from the month. We have had some unexpected expenses in the last few months that have thrown off our budgeting but we are back on track now. We would like to get to a point where each month we are depositing a set amount into investments.

So, especially given the rental possibility, I side with boarder and think the 30 year is the best option. BUT. And this is a major catch here- realize that now your MUST, immediately, set up automatic deductions. You will not have the bigger #s on the mortgage being your "forced savings plan". So make your own. You do not come out ahead if you spend the difference. That's a pretty big key. So step up your 401k contributions, or have a monthly transfer scheduled to an IRA, that sort of thing. It's vital that these be automatic and not manual.

As for the 'unexpected expenses'. This is one I see often. Yes, some expenses are truly unexpected (like appendicitis or something). Some are not though. Your tires needing replaced? Not unexpected. Auto insurance? Not unexpected. Just on a periodic rather than monthly time scale =) If you aren't using a program like YNAB, or using a lot of the "trends" in Mint, then you need to start and really consciously look at the idea of "sink funds".

Oh, and just (re)saw the question about the 401k rollover. This is one area I truly do not know, especially tax implications. I will use my magical summon to mention @MDM and see if he can help- he's brilliant at that stuff.

You guys are on a solid path so far. Keep at it.

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #8 on: December 12, 2017, 08:45:20 AM »
the only thing we havent really touched on is your expenses.  that phone bill sticks out to me as a place to get some savings.  could easily be cut down to about half. everything else is pretty ballpark to being quite mustachian.  if you really wanted to cut you could cut your entertainment.  but i assume this is some restraunts out and date nights and 100 a month isnt awful for that.

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #9 on: December 12, 2017, 09:01:26 AM »
Thank you again for the great advice!

I do agree that we need to start setting up automatic transfers that will not only hold us accountable but also ease our minds. We also have not been using a budgeting tool so I will look into Mint & YNAB as well.

We recently (this week) just switched from Verizon to Project Google Fi. Our phone bill with Verizon was $120/month so we are hoping this drops substantially with the switch. We had to incur some upfront expenses of buying new phones but this should still end up a better value. I rarely use my phone for anything besides the basics but my wife uses technology often & therefore uses much more data than I do. Doing the expenses exercise did show that we need to start tracking this information much better. I typically have a good "feel" of where our money goes each month but I know this means money is likely slipping through the cracks.

My wife & I had very different financial backgrounds coming into the marriage. Her family spent money very loosely so it has been an adjustment getting her on the frugal train. She has done a great job though & is starting to see the method for the madness!

Thanks again!

MDM

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Re: Young & Hopefully not dumb! Advice needed
« Reply #10 on: December 12, 2017, 11:53:19 AM »
Oh, and just (re)saw the question about the 401k rollover. This is one area I truly do not know, especially tax implications. I will use my magical summon to mention MDM and see if he can help
Did the best I could with the info available in reply #4. :)

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #11 on: December 13, 2017, 07:27:26 AM »
Thank you all again for your wonderful input.

We are going to go the 30yr route with 20% to avoid PMI. We will implement the strategies you discussed to make our investments automatic & will also look into budgeting tools. We will also insure we have a better emergency fund set aside for the unexpected expenses & then also the expected (hopefully) future expenses of children.

As for the 401k rollover, I will have to familiarize myself further with taxes & how that whole process works. Of my 401k money from my previous 2 jobs about 70% is in Traditional & 30% in Roth. I would hope this doesn't make a rollover anymore complicated but I will continue to research this. I will also wait to do the rollover as next year I will make less than what I will have made in 2017 by about 15-20k.

Anymore tips to improve frugality are always appreciated. Thanks!

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #12 on: December 13, 2017, 11:16:12 AM »
Thank you all again for your wonderful input.

We are going to go the 30yr route with 20% to avoid PMI. We will implement the strategies you discussed to make our investments automatic & will also look into budgeting tools. We will also insure we have a better emergency fund set aside for the unexpected expenses & then also the expected (hopefully) future expenses of children.

As for the 401k rollover, I will have to familiarize myself further with taxes & how that whole process works. Of my 401k money from my previous 2 jobs about 70% is in Traditional & 30% in Roth. I would hope this doesn't make a rollover anymore complicated but I will continue to research this. I will also wait to do the rollover as next year I will make less than what I will have made in 2017 by about 15-20k.

Anymore tips to improve frugality are always appreciated. Thanks!

Roll your traditional to a traditional IRA and your roth to a roth IRA.  its easy then you can determine from there when it may make sense to roll any traditional money to a roth and pay taxes on it at that time. 

Laura33

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Re: Young & Hopefully not dumb! Advice needed
« Reply #13 on: December 13, 2017, 12:14:54 PM »
As for the 401k rollover, I will have to familiarize myself further with taxes & how that whole process works. Of my 401k money from my previous 2 jobs about 70% is in Traditional & 30% in Roth. I would hope this doesn't make a rollover anymore complicated but I will continue to research this. I will also wait to do the rollover as next year I will make less than what I will have made in 2017 by about 15-20k.

Multiple concepts mixed up here.

When you leave a company, you can usually either leave your 401(k) there or roll it over into an IRA.  If you have a traditional 401(k), you would roll it into a traditional IRA; if you have a Roth 401(k), you would roll it into a Roth IRA.  There is no tax consequence with this kind of rollover, as long as your former employer sends it directly to the IRA company and you don't take any $$ out.

I think what you are thinking of is converting a deductible tIRA (or rollover tIRA) to a Roth IRA.  This does have tax implications, because the amount you convert is treated as income to you in the year you convert it.  This is what you want to do in a lower-tax year.

There is also the Backdoor Roth, but I don't think you need to worry about it now.

Also:  you can see if your current job will allow you to roll your old 401(k) or rollover IRA into your current 401(k). 

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #14 on: December 14, 2017, 07:57:56 AM »
Laura33 thank you very much for your input!

What has confused me is that my 401ks from my previous 2 jobs (first 2 jobs out of college both occurred within the first 2.5yrs) offered both traditional & roth options in the 401k. With box jobs I contributed a mix of traditional & roth into the 401k. Would they be able to separate these out & transfer into similar IRAs (traditional, roth)? Also, can someone have a traditional IRA in their name & also have a roth IRA?

That may be a dumb question but as always I appreciate the input!

Thanks!

Laura33

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Re: Young & Hopefully not dumb! Advice needed
« Reply #15 on: December 14, 2017, 08:31:50 AM »
Laura33 thank you very much for your input!

What has confused me is that my 401ks from my previous 2 jobs (first 2 jobs out of college both occurred within the first 2.5yrs) offered both traditional & roth options in the 401k. With box jobs I contributed a mix of traditional & roth into the 401k. Would they be able to separate these out & transfer into similar IRAs (traditional, roth)? Also, can someone have a traditional IRA in their name & also have a roth IRA?

That may be a dumb question but as always I appreciate the input!

Thanks!

Yes and yes.  On the first one, your old 401(k) company will coordinate directly with your new IRA company to transfer the right funds to the right kind of account.  You can just call Vanguard or any other company and they will point you to the forms you need and tell you how to fill them out -- just make sure to tell them that your 401(k) has some money in the traditional version and some in the Roth version.

The restrictions on tIRA vs. Roth IRA are only on the annual contributions -- e.g., you can only contribute a total of $5500/yr, period, so you can put it all in one kind, or split it between both, but the total cannot exceed $5500.  There are also income restrictions that can tell you if you are eligible to contribute that $5500 to one or the other or both in a given year.  But if you already have both kinds of accounts, you can hold those with no restrictions.  Same answer if you are trying to roll over both t401(k) and Roth 401(k) money into a tIRA and Roth IRA -- it's just the new contributions that are restricted.

Ben Kurtz

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Re: Young & Hopefully not dumb! Advice needed
« Reply #16 on: December 14, 2017, 09:33:59 AM »
First, a few words about retirement accounts:

Set up automatic 401k contributions and max it out if you're not doing so already (it sounds like you're not). At your income level, your marginal income tax rate is 18.46% (federal + state), so if you're been leaving $10,000 of contribution space unused in your current budget plan, you are voluntarily paying $1,846 more in taxes each year, needlessly. Don't do that.

I will assume that your wife does not have access to a 401k plan while she's finishing her masters, but you can open an IRA in her name instead. I'd suggest opening Roth IRAs for each of you and contribute the maximum to each ($5,500 per person per year) instead of converting the existing 401ks. You should have $25,000 or so left in cash after buying the house, so just write out an $11,000 check to Vanguard and call it a day. You can contribute in the name of tax year 2017 until April 2018, so you have a few months to figure this out. Bonus: Principal contributions to a fresh Roth IRA may be withdrawn without tax or penalty, in case something comes up later and you realize you need some of that money back. A Roth IRA containing 401k conversions, however, is subject to a 5 year seasoning period before you can pull out cash. Don't bother trying to convert the 401k money into Roth IRAs at this point.

The reason for this is tax diversification. There will come a point, starting at age 59.5, when you can withdraw from a 401k but avoid taking social security (which is good, because the later you wait to take social security, the higher your monthly check for the rest of your life, which is a very cheap and easy way of giving yourself some insurance against outliving your private savings). Now, a regular 401k withdrawal is treated as taxable income, but the trick to taxable income is that the first $20,000 or so per year per married couple is essentially tax free (adding up your standard deduction and personal exemptions), and the next $18,000 or so is taxed at 10% federal (and at a lower state rate than you pay now). That means you could have $350,000+ in a regular 401k starting at age 59.5, be early retired at that point like a good follower of the blog (meaning no other wage income), and pull all that cash out over the following 10 years while paying vastly lower tax rates than you do now. If you convert now (or fail to max out your 401k now), a big chunk of your nest egg disappears to taxes permanently and early, and you lose the chance for that money to compound and grow to your benefit. Now, tax rates do change from time to time, and neither of us can predict the future with certainty, but the standard deduction and personal exemption are pretty long-lasting aspects of American tax law, so it seems very highly likely that there will be some opportunity under the tax code to pull zero-tax income out of your 401k when the time comes. My view is that you have to expect your 401ks to hit $250,000 in value before even thinking about Roth conversions, with the exception that if you have a year with extremely low income, giving you the opportunity to convert at a tax cost of zero, it's obviously worth taking.

Normally, in this space, I also advise families who are trying for children to start 529 college savings accounts right away and take advantage of any state tax deductions -- name a parent as the beneficiary until you have a kid, and then simply switch the designation. In theory that's right, but given your current income level, state tax rate, and other priorities, the benefit is probably no more than $70 a year, so I wouldn't stress over it. Maybe next year, if the family income is substantially higher. Focus on the 401ks and IRAs for now, which is probably all you really have capacity to fund at the moment.

Second: You need to track expenses better, which other people have pointed out. For starters, you have no monthly line items for irregular automobile expenses such as car insurance, repairs, maintenance and depreciation / replacement reserve. Given your fleet and your gas bill, I'm going to estimate those aggregate to $250 or $300 per month average, if you costed it out properly. Similarly, nothing for clothing or medical expenses (is the $5,000 per month income before or after your contribution to your health plan premium? what about co-pays and out-of-pocket contributions for doctor visits and prescriptions?). No travel or vacation budget? By the time you're done adding all this up, I bet your average monthly spend is much closer to $2,800 or $3,000 than the reported $2,200.

Third: Your automotive fleet is excessive. The '04 Corolla is probably worth around $4,000. The '13 CRV is probably worth close to $18,000. That totals to roughly 15% of your net worth, or a third of your yearly family income. You've said nothing about your travel and commuting patterns, but at a minimum the $18,000 CRV could be replaced with an $8,000 used Honda Civic or Fit, freeing up $10,000 which you could invest or use to pay for your home renovations without side-tracking your automatic savings plans. If you were more aggressive with your lifestyle, it might be possible to go down to a 1 car family, and replace the second car with an electric bicycle or a Vespa-type scooter, which would free up $17,000 of capital and put a good $100+ dent in your monthly ongoing car-related expenses. 

Fourth: Starting a family. This is probably the most important thing. If you want kids, have them sooner rather than later. It doesn't get easier to stay up all night looking after a puking baby when you get older! At the same time, you are in a big transition year in your family's finances and earnings trajectory -- your changing careers, your wife finishing up a masters with the potential for higher earnings in the near future, and your buying a new house. It probably makes sense to wait just a little longer in your case, but I strongly caution against waiting too long: about 2 more years, max, until you start trying is my best guess. But kids are the meaning of life and all that, and if you were hoping for a larger family (4 or more kids) frankly you're better off starting THIS MINUTE and sorting out the finances later. Have an honest conversation with your doctor: fertility problems increase a bit after the mother hits age 30, and a whole lot after she hits age 35. (The age of the father is a much smaller factor.) Don't miss the boat here.

In conclusion: Don't take the above suggestions the wrong way. Your basic habits and instincts seem very good -- decent family income, paid-off cars, no debt except for a reasonable mortgage, a good start on retirement savings, and fundamentally reasonable spending habits based on the big categories you've reported so far (housing costs, food budget, type of car you drive). I think a few of your questions have some pretty clear answers, and there are a few clear points for optimization, but my feeling is you are far from the sort of "HAIR ON FIRE!!!!!" emergency that the blog author loves to speak about with lots of exclamation points. Assuming your family income goes back up a fair bit once your wife finishes her masters, you could find yourself at $100,000 invested net worth, plus $40,000+ in home equity, in just a couple of years. Things will probably slow down a bit once you have children, but if you are in the market for a long-range goal, I'd suggest having $500,000 invested plus a paid-off house to live in by age 40. That will give your family massive flexibility when it comes to work, lifestyle, child-rearing and pursuing outside interests. In those circumstances, one parent could work a half-time job and have more than enough income to sustain the family in the greatest comfort.

Congratulations on the new home, and good luck!
« Last Edit: December 14, 2017, 10:41:29 AM by Ben Kurtz »

Bracken_Joy

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Re: Young & Hopefully not dumb! Advice needed
« Reply #17 on: December 14, 2017, 09:49:10 AM »
Actually, I will also weigh in on the kids point like Ben did. I posted a case study a few years back. We were in transition (DH finishing masters, moving, trying to buy a house), but the overwhelming advice was: kids are important to you, you want a lot of them, start now.

We started trying 16 months ago (when I was 27, husband 28).

It looks like we might finally be closing in on why it hasn't been working (likely a pituitary adenoma, if anyone is curious). I can't imagine how much worse this would have been if we had waited.

Now granted, I also have had friends get pregnant within 1-2 cycles of trying, and that *is* pretty typical in young healthy people. But you really have to decide what would be worse for you: having kids a little earlier than you planned, or potentially losing the opportunity to have as many children as you hoped (or have children at all).

I don't want to fear monger, I just wish infertility rates were more commonly known. Especially for young, seemingly healthy people like my husband and I.

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #18 on: December 14, 2017, 10:07:25 AM »
Ben your tax diversification stuff around 401k's and roth's doesnt make sense around these parts as we retire and gain access to these accounts much earlier than 59.5 ... You should always max traditional accounts to get you to at least to the bracket you plan to FIRE in then that money depending on what other tax advantages could be available should likely flow to a roth.  but if you can continue to max trad accounts to get to the point of earned income tax credits then you can take a large advantage of the system prior to FIRE.

Ben Kurtz

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Re: Young & Hopefully not dumb! Advice needed
« Reply #19 on: December 14, 2017, 10:28:56 AM »
Boarder42,

Yes, with SEPP withdrawals and the like you can expand my point beyond 59.5 years old. But those work-arounds aren't for everyone, and given that the original poster did not seem like a retirement account hotshot, I figured it was easy enough to illustrate the point using the conventional withdrawal strategy so as not to complicate matters.

You are right, though, that it usually makes sense to continue deductible 401k contributions well beyond a $250,000 level for the reasons you allude to -- that's my plan, as well -- but at the very least, once you hit that level it takes a bit more time and thought to run the numbers and figure out exactly what the sweet spot is, and what your limits should be. My point is that below $250,000 in tax-deferred retirement accounts you really don't even need to bother thinking about it. The young couple in the underlying post is perhaps 5+ years from that point, so I chose to over-simplify that part of the message. The can come back in 2022 for follow up advice and you can walk them through the details of retirement account strategies then.

Should they avoid Roth IRAs now and go for deductible IRAs instead, to maximize the tax advantage? There's an argument there, but baby steps: There are many scenarios in which tax diversification will help a couple like this one (they haven't said anything specific about FIRE at a young age, let alone the tax bracket they'll aim for in retirement or the spending level they'll ultimately hope to achieve, so I think we have to plan for a range of outcomes here), plus, given that they are about to buy a house and potentially undertake costly renovations, there is the additional safety factor of being able to pull out Roth IRA contributions without tax or penalty should they need the cash. For the next year or two I think the prudent thing to do is split the difference and max out the deduction on the 401k side while retaining a bit more flexibility on the IRA side. Certainly the advice should be to avoid failing to max out the deductible 401k, and avoid Roth-converting the existing deductible 401k at this point.
« Last Edit: December 14, 2017, 10:38:00 AM by Ben Kurtz »

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #20 on: December 14, 2017, 11:21:05 AM »
Not just sepp withdraws there is the Roth ladder. As well as taking the penalty. Your posts read like you do this for a living and are written by someone who works in the industry.  That's great but there is a lot of knowledge here and with more information from the op a comprehensive optimized plan could be put together quite easily. Your talk on optimization is coming from a normal retirement and not delving deep enough into working the tax system to your advantage. It's highly unlikely that the op should be pumping 36k into 401ks with a dual income salary at 60k they will hit tax advantages before that and will likely need to switch to Roth for that reason. Around here the use of the Roth comes in play much differently than how you describe.

MDM

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Re: Young & Hopefully not dumb! Advice needed
« Reply #21 on: December 14, 2017, 02:35:50 PM »
It's highly unlikely that the op should be pumping 36k into 401ks with a dual income salary at 60k they will hit tax advantages before that and will likely need to switch to Roth for that reason.
+1

Assuming
- each spouse contributes $2K to a Roth IRA
- neither spouse, during any part of 5 calendar months of 2017, was enrolled as a full-time student
- gross income exactly $60K with no other deductions
the 2017 federal marginal rate for traditional contributions is



Wouldn't want to contribute any more than $23K to traditional, as the federal tax saving rate drops to 0% at that point.

Depending on expected future earnings, reasonable arguments can be made for traditional or Roth below that amount.  See Traditional versus Roth - Bogleheads for more.
« Last Edit: May 30, 2018, 10:04:34 PM by MDM »

Ben Kurtz

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Re: Young & Hopefully not dumb! Advice needed
« Reply #22 on: December 14, 2017, 03:33:02 PM »
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It's highly unlikely that the op should be pumping 36k into 401ks

Well, who said anything about "pumping 36k into 401ks"? I sure didn't. In point of fact, I specifically wrote the opposite:

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I will assume that your wife does not have access to a 401k plan while she's finishing her masters...

...before advising the young couple to max out deductible contributions to the husband's 401k (i.e. to an $18,000 ceiling) before going straight to Roth IRA contributions.

Which is almost exactly the right strategy, to within a few thousand dollars, per the analysis the MDM just posted.

When the wife finishes and goes back to work, I would assume they would then have access to $36,000 in deductible 401k space... but then again, they'll also have an unspecified increase in income. I'd guess that income bump works out to a number that justifies maxing out two 401ks, but we'll have to wait and see to know for sure, of course.

I don't work in brokerage or financial planning, and I'm aware of the vast amount of learning that is available to the educated layman by reading through the various resources available on the internet. I'm also savvy enough to realize that people asking the sort of questions that this young couple has asked have not spent a huge amount of time mastering those resources and are not likely to do so anytime soon. They're looking for directionally correct advice that responds to their circumstances in a clear and understandable fashion. Advice that reads: "Max out the husband's 401k, and then put as much as you can in Roth IRAs, and certainly don't Roth convert the existing deductible 401k like you've been considering" is something they can act on tomorrow without too much confusion. Advice that reads: "Here, diddle with this spreadsheet for hours on end until you figure out whether you should use $17,250 or $21,167 of deductible space before switching to Roth contributions" is a recipe for analysis paralysis.

I'm happy to debate my advice on the merits and concede points fairly won, but please, at the very least, grasp what I advise accurately!
« Last Edit: December 14, 2017, 03:39:49 PM by Ben Kurtz »

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #23 on: December 15, 2017, 09:53:55 AM »
Thank you all for the advice! I will share some additional information to help clarify our situation & provide better context for your responses.

I just switched into the education field after being in sales for my first 3.5 years out of college. I was successful in sales but was not enjoying the work & figured now was the time to try a new career while I am young. Because my degree is not in education, this year I am being paid as a long-term substitute (I have a full time position at the school but can't be a classified staff member until licensure is complete) until I finish an alternative licensure path. I should be done with this by April & then will be officially hired on a salary basis. At this point I will be making around $40k/yr & will have access to a 403b in addition to the state teachers retirement system (no choice on being part of that).

My wife is an elementary school teacher who is working while completing her masters online. She makes around $42k/yr but next year will be closer to $45-50k with the masters bump. She moved to her current school of employment last year when we got married. She participates in the state teacher retirement system but currently does not put anything into the 403b offered. She has a small amount of $ in a 403b from her previous employer but she states that she cannot touch that. She has not put anything into the 403b because she figured our vanguard investment account was lower fees & better returns. The school does not match the 403b because it is already matching the state retirement system.

I will admit that we have not done the research we should do on retirement accounts or taxes. I have always leaned towards frugality but was much more of a "put money in the bank" kind of guy until I came across this blog. My wife came from a family that spent spent spent & luckily they made enough money for it not to bite them in the butt!

I will do more research on the 403b & retirement systems within the education world because I know they are slightly different. The nice thing is my wife is going to continue to further her education (at the schools expense) to go into an administration role. This will lead to pay increases every year. She truly loves her job & continuously states that she wants to work (or have the option to work) for a very long time. Myself on the other hand continue to struggle with finding the right job for me or what my passion really is. That is why FIRE is something that appeals to me so much!

Thanks as always & happy Friday!

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #24 on: December 18, 2017, 09:52:53 AM »
@Ben Kurtz  you mentioned that we should have a goal of paying off the house & having $500k invested by the time we are 40 which gives us 14yrs.

Lets assume that our annual combined income stays in the $80-100k range during that time period. Also during that time we would like to have 3-4 kids.

Would these goals still be possible given our current state & if you could provide any tips or a roadmap of sorts to achieve this that would be much appreciated.

This is great stuff!

Thanks again!

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #25 on: December 18, 2017, 10:03:14 AM »
@Ben Kurtz  you mentioned that we should have a goal of paying off the house & having $500k invested by the time we are 40 which gives us 14yrs.

Lets assume that our annual combined income stays in the $80-100k range during that time period. Also during that time we would like to have 3-4 kids.

Would these goals still be possible given our current state & if you could provide any tips or a roadmap of sorts to achieve this that would be much appreciated.

This is great stuff!

Thanks again!

paying off a house at today's rates is a poor idea.  there is no real reason to pay down a mortgage.  you would be far better off investing the money over time. Your goals should be much higher than this as well -

Ben's advice was general advice and i do not think i would take much of it.

At 80k income and 2145 in spending you could easily save 40k a year and you currently have 62k saved. 
this is good compound interest calculator http://www.moneychimp.com/calculator/compound_interest_calculator.htm

if you saved just 40k a year at market avg returns of 6% after inflation you'd have 1MM in your account in today's dollars.  so that goal is a very poor and easily attainable goal that wont really make you stretch or put you on a path to FIRE.
« Last Edit: December 19, 2017, 12:25:01 PM by boarder42 »

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #26 on: December 19, 2017, 09:38:15 AM »
@boarder42

Thank you for your response. The income levels will be between $80k & $100k combined not 180k. We are both young teachers so the pay, while it will continue to rise, right now is not that great!

I would assume this would change some of your projections on savings. Thanks!

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #27 on: December 19, 2017, 12:24:39 PM »
@boarder42

Thank you for your response. The income levels will be between $80k & $100k combined not 180k. We are both young teachers so the pay, while it will continue to rise, right now is not that great!

I would assume this would change some of your projections on savings. Thanks!

no it didnt my previous post meant to say 80k income.  you show 2145 in spending. which is 25.7k per year so you should easily be able to save 40k per year which changes none of my actual numbers. 

basically 500k and a paid off house on 80k annual income with 14 years of savings starting at 60k invested is not really a very mustachian goal.  its more in line with a traditional save 15-20% of your salary goal - which isnt why you're here.

and paying down a house is a bad idea at that interest rate.  Being teachers(everyone really should but many dont) you should be looking to optimize every little green soldier so leveraging your mortgage debt and investing over paying down will accelerate your time to become financial independent.
« Last Edit: December 19, 2017, 12:27:09 PM by boarder42 »

Ben Kurtz

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Re: Young & Hopefully not dumb! Advice needed
« Reply #28 on: December 19, 2017, 12:30:11 PM »
I fundamentally disagree with Boarder42's advice counseling against having a paid-off mortgage at the time a family wants to make the leap into early retirement or semi-retirement (i.e. when pulling the trigger on a big career move that leads to radically reduced earned income). Especially if the family intends mainly to rely on a portfolio of investment securities to meet its needs. There is some legitimate debate over whether one should make extra mortgage payments over time, versus save up the cash in a somewhat conservatively invested "house payoff fund," and only draw out of that fund to pay off the mortgage at the time you make your early retirement move, but it seems obvious to me that having a paid-off house and a nest-egg is a better end-state than a mortgage and somewhat larger nest egg.

The reasoning is this: One the one hand, it is true that a diversified investment portfolio has a long-term expected rate of return that is substantially higher than the interest rate on a home mortgage. For the sake of simplicity, you can model these as an average 8% nominal portfolio return and a 4% nominal mortgage interest rate. For this reason, paying off a mortgage early would be expected to leave you, long term, less wealthy than paying the minimum on a mortgage and investing the rest. All the money you put into paying off a mortgage early could have been put into investments, and over the long term those investments should produce more growth than the mortgage interest avoided by the early paydown, leaving you wealthier. For every $100,000 of mortgage you pay down early, you are giving up an average of roughly $4,000 of investment returns every year, forever. So on the one hand, my advice seems wrong -- yet there is more to it.

Most people posting here aren't interested in absolutely maximizing their number of dollars, so much as they are thinking about paths to early retirement and/or financial independence. You put your question it in very general terms of how to "better our financial situation", and given the context of the blog this forum I gave advice that pointed more in the early financial independence direction than the absolute maximum dollars direction.

When considering early financial independence, you have to consider the "other hand" -- certainty and security in your financial life, year in and year out, and not just maximizing the chances that you'll die with the most dollars. The accepted wisdom on this forum, based on the Trinity Study (look it up) is the 4% safe withdrawal rate on a diversified securities portfolio. Which means: Take your nest egg on the day you retire, multiply it by 4%, and make that your first year payout. Each year, increase that amount for inflation, without regard to the future performance of your portfolio. Most reasonable investment portfolios, when tested against virtually all 30 year time blocks in the past for which we have good data regarding the investment markets, easily sustain this withdrawal level, and in most cases the investor ends up with a larger nest egg than when he started due to investment growth. The point of this study was to prove that higher withdrawal rates aren't safe -- even though a diversified portfolio generally returns 8% nominal, on average, or an all-stock portfolio generally returns 6.5% REAL (above inflation) per year, on average, the volatility of investment markets means you shouldn't use a starting withdrawal rate of more than 4% of your nest egg.

The implications for carrying a mortgage into retirement are this: If your non-mortgage spending is $2,000 per month ($24,000 per year), any you have a paid-off house, you need a nest egg of $600,000 to sustain yourself under the 4% rule. If you add a $1,000 per month mortgage (principal + interest, 30 year amortization, assume you borrow / refinance into it right before you retire), you then have cash flow needs of $3,000 per month or $36,000 per year, which translates to a nest egg of $900,000. Suppose you are working towards that $900,000 nest egg, but find yourself at a certain point with only $815,000. If you retired at that point with that mortgage you'd be below the accepted safe number and probably wouldn't want to do it. Now, the safe number is actually a bit less than $900,000 per year, because we can assume that only your $24,000 in non-mortgage spending is on goods and services whose prices rise with inflation, while the next $12,000 does not need to increase yearly with inflation. Meaning the full $36,000 yearly withdrawal doesn't need to increase each year for inflation, which is what the 4% rule is meant to cover, meaning you are increasing your yearly draws less than the rule expects and putting less stress on the portfolio, meaning it is safe to start with a lower number. But then you're deep in the weeds of trying to model out what exactly is the safe starting number and what your early increases will be, and that's a non-trivial math problem. However, that $1,000 per month 30 year mortgage translates to a borrowed amount of only $215,000 at today's 3.75%-ish rates. Meaning with that same $815,000 nest egg you could pay off the mortgage entirely, be left with $600,000, and be safe retiring immediately on $24,000 per year of non-mortgage spending. Paying off the mortgage converts a person with perhaps another couple years of work (and an annoying long-lived math problem to solve) into someone who is immediately ready to retire without difficult questions under the accepted financial rules of thumb. That's a key reason I advocate for it. It probably leaves you with a somewhat lower net worth when you're dead, relative to retiring on a mortgage, but it also probably gives you back years of your life as a free man, able to retire or radically shift jobs. Boarder42's advice will probably make you richer when you're dead. My advice will make you freer when you're alive.

There is a related behavioral / psychological point. Many people whose main financial support is investments will find it easier to sleep at night knowing that the roof over their head is not imperiled by the gyrations of the stock market. The only way the 4% rule works, especially if you are looking for early independence (meaning the 30 year time horizon tested by the Trinity Study is on the short side of what you really need) is if you maintain a pretty heavy allocation to volatile equities (50% to 75% in most scenarios) and ride through the ups and the downs of the market without flinching. If you get scared and sell your stocks at a low point when everyone is freaking out (like in 2009) then you are toast -- you will have to permanently cut spending, and/or get a reasonably well paying job again at some point, even if you don't want to. If you're worried about making a mortgage payment, every month, for the next 29 years, and you watch your $900,000 portfolio shrink to $700,000 in a matter of months (think: 2009-style crash), you might succumb to the temptation to sell out just at that point to pay off your mortgage so you don't fear for your home -- leaving you with a $485,000 portfolio to support a $24,000 per year spending level, which would probably turn out to be inadequate, especially if you gave in to fear and disproportionately sold stocks instead of bonds at that point, meaning the portfolio won't get much of a bounce back once the crisis passes and the stock market recovers. But if housing is not a worry (and for most people, housing is the single biggest fixed monthly expense, very difficult to change on short notice especially if one has a mortgage instead of a lease), then it is that much easier to ride through market swings without panicking. Sure, people need food and electric lights and vacations as well, but it is a lot easier to tighten the belt a little bit and respond to a market downturn by substituting chicken for beef, or a domestic roadtrip in place of an international flight, reducing the risk of a panicked sale of securities.

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #29 on: December 19, 2017, 12:41:15 PM »
Ben your math is wrong the payoff vs dont payoff has been debated at length here.  i dont know that this is the thread to do it but you do not need 25x your mortgage payment for 2 reasons

1. your mortgage doesnt increase with inflation
2. your mortgage doesnt have an infinite number of years left like your retirment time frame could need to support.

also your 815k paydown doesnt account for the tax hit you're going to take cashing in 215k in funds with some of that being capital gains - to pay down the mortgage.

if you back test having a mortgage vs not having a mortgage in FIRE using a tool like cFIREsim you will see that the person with a mortgage acutally has a higher rate of success in retirement than someone without a mortgage.  compare 1.2MM invested 200k mortgage - 95% chance of success 1MM invested no mortgage 91% chance of success in FIRE.

your advice is incorrect again.  please please please read up on how all of these things work before posting these long novels here - you've neglected many tools in a savvy FIREes arsenal in your advice in this thread.  your advice lines up very well with mainstream advice from any financial planner that can be had other places.  this forum isnt mainstream we live on the edge of the financial world and exploit the system to our advantage to quit working or at least become FI much sooner than the avg bear.
« Last Edit: December 19, 2017, 12:55:27 PM by boarder42 »

Ben Kurtz

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Re: Young & Hopefully not dumb! Advice needed
« Reply #30 on: December 19, 2017, 12:55:37 PM »
Quote
no it didnt my previous post meant to say 80k income.  you show 2145 in spending. which is 25.7k per year so you should easily be able to save 40k per year which changes none of my actual numbers. 

basically 500k and a paid off house on 80k annual income with 14 years of savings starting at 60k invested is not really a very mustachian goal.  its more in line with a traditional save 15-20% of your salary goal - which isnt why you're here.

and paying down a house is a bad idea at that interest rate.  Being teachers(everyone really should but many dont) you should be looking to optimize every little green soldier so leveraging your mortgage debt and investing over paying down will accelerate your time to become financial independent.

They've almost certainly understated their "steady state" spending level by perhaps $1,000 per month. My lengthy previous posts point out a few categories which make this obvious.

And I'll be the last guy to say that $36,000 per year, including housing costs, is an non-frugal spending level.

Accumulating an additional $700,000 over 14 years ($500,000 nest egg plus a paid off "forever" home worth ~$250,000) assumes $32,000 per year saved (close to maxing out both 401ks) and quite conservative investment growth rates, in my view. Saving 40% of the gross on an $80,000 income is my version of reasonably strong frugality. Since their goal was to be on a 'strong financial footing' and start a family, not 'retire within 10 years no matter the sacrifices required,' I didn't think it was right to prescribe medicine stronger than the condition warranted.

By contrast, saving 20% per year, as you suggest, amounts to only $16,000 per year -- at more optimistic 8.0% nominal returns compounded yearly, that gets you to maybe $550,000. Or the half million nest egg but not much of a paid off house. The numbers in your criticism don't even tally.

For my part, I prefer using slightly overly pessimistic investment growth rates, and maybe the young couple will be pleasantly surprised when they hit their goal in 12 years instead of 14 years. They are young, fairly new in their teaching careers, and looking to start a family. If they haven't asked for the full Spartan treatment it could easily do more harm than good to urge it at all costs.

Ben Kurtz

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Re: Young & Hopefully not dumb! Advice needed
« Reply #31 on: December 19, 2017, 01:25:29 PM »
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also your 815k paydown doesnt account for the tax hit you're going to take cashing in 215k in funds with some of that being capital gains - to pay down the mortgage.

Don't be silly. You tax plan this and take the capital gains in the financial year when you're income is within or below the 15% bracket and capital gains are taxed at 0%, so there is no hit (either the year you retire, if you retire early in the year before earnings are too high, or a few months later by doing this in the next tax year). Every educated person who knows the ins-and-outs of early retirement financial planning would get that -- I simplified this point to make my novel slightly shorter, as the exact timing of this sequence of events is immaterial for making my point. It seems odd that you thought to criticize this, when it's an obvious non-issue.

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your advice lines up very well with mainstream advice from any financial planner that can be had other places

Maxing out two 401ks on an ~$80,000 annual income -- giving a ~40% savings rate -- is far from mainstream! It's not as far as some people go here, but I'd say it's well within the ballpark of this forum's ethos.

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1. your mortgage doesnt increase with inflation
2. your mortgage doesnt have an infinite number of years left like your retirment time frame could need to support.

I acknowledge #1 in my post, and that my $900,000 figure was actually therefore somewhat lower in truth, and for #2 deliberately set the mortgage timeframe to match the Trinity Study. And I'll grant you that on reasonable assumptions you can get a simulator to show the advantages of leverage. I'll go beyond that and admit that the advantages of leverage are quite near and dear to my professional life.

But that doesn't answer the behavioral point -- which is more fundamental to my view -- because it can't. We all know people who panicked in 2009. I was crazy enough to double down and buy more stocks... but I'm crazy. It's just my feeling, having spoken to many people over the years, that lots of folks would find it easier to stay the course if the one biggest worry -- the mortgage or rent -- wasn't a worry. When it comes to what prominent early retirement proponents actually do, such as the author of this blog or Dr. Dahle at White Coat Investor, the definite trend is towards paying off the mortgage before (or at the very early stages of) retirement. And they report being massively happy for having done so. While there are arguments on both sides, I find the arguments in favor of owning your house outright to be the winners. So that's what I advise.

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #32 on: December 19, 2017, 02:25:55 PM »
its not a simulator that has to make reasonable assumption its a back tester against real data from the past.

the author of this blog had mortgage rates much higher than what can be obtained today when i would have recommended AND paid my mortgage down. 

The emotional card is a straw man arguement b/c you cant really negate someone saying - but i'd pull all my money out in a down turn.  well again we're not in the mainstream america around here we know not to do that and when the next downturn happens there will be a large group here discussing and supporting eachother not dumping their stocks.  and likely a strong contingent talking about what to see so they can keep buying it on the way down.  i dont need this xyz peice of furniture - CL and get some money in on the down swing.

Happy isnt measurable and i'd argue if people truly understood the metrics and math behind it they would be far happier without a paid off house. 

also good luck with selling 215k worth of a taxable account while withdrawing money to live on AND staying in a 15% tax bracket.

Ben Kurtz

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Re: Young & Hopefully not dumb! Advice needed
« Reply #33 on: December 19, 2017, 06:03:57 PM »
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its not a simulator that has to make reasonable assumption its a back tester against real data from the past.

What's that they say about past performance predicting future returns? They don't? Right.

Back tested financial data is merely indicative, not proof. That's why I shorthand it to "model."


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the author of this blog had mortgage rates much higher than what can be obtained today when i would have recommended AND paid my mortgage down

The author of the blog also published a post by his Canadian friend strongly advocating mortgage paydown, and at least strongly implied the rate in question was around 4%. Dr. Dahle at White Coat Investor paid off his 2.75% mortgage early. And if the author of this blog felt that his decision hinged upon the exact interest rate, he would have re-mortgaged when a good rate came along to re-invest the proceeds. But instead, he specifically wrote about "avoiding the temptation to borrow to expand my investments further."

Granted, mortgage paydown should not be high on the investment order. And throwing incremental cashflow into a relatively illiquid investment year in and year out, to pay things down slowly, enhances certain risks. But reaching an end-state of paid-off house and slightly smaller investment nest egg is actually quite popular with the real gurus of early retirement, and I think that's because on balance the arguments in favor outweigh those against, for most types of people. But not all, I'd be willing to concede.

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also good luck with selling 215k worth of a taxable account while withdrawing money to live on AND staying in a 15% tax bracket.

The 15% bracket runs to $75,900 for married filing jointly. If you can't realize $240,000 worth of cash from your taxable account to cover the hypothetical mortgage paydown and a year of living expenses without keeping your gains below that income figure then you are a virtual Midas AND have suffered from a fundamental failure to plan. Which is a real combination! Especially since you have the opportunity to pick and choose your tax lots to sell only high basis ones, AND you should probably have a fair amount of your slower-growing bond allocation in muni funds (with very little baked-in capital gains) in your taxable account if you've been planning ahead for a mortgage paydown -- you can preferentially liquidate bonds there, and then rebalance to your long-term retirement asset allocation by trading within your tax advantaged space.

Or you could work out a plan to realize the needed cash over two tax years.

Or, if you somehow didn't plan ahead by keeping a good portion of your bond allocation in taxable, you could suck it up and just pay the tax:

If you realized $120,000 gains to free up $240,000 in cash (your LEAST appreciated securities had all doubled!!) in a year in which you earned no other income, you're looking at an overall tax hit of something like $6,500. I'd spend a fair bit of effort and planning trying to avoid that kind of tax bill, but that sum of money, on a one-time basis, barely pushes the needle on a family's retirement finances. 

These objections of yours don't really amount to much.

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well again we're not in the mainstream america around here we know not to do that and when the next downturn happens there will be a large group here discussing and supporting eachother not dumping their stocks

Who wants to be up late at night fretting, turning to an internet chat board for emotional support during a market downturn, when you could have avoided the worst of the anxiety by having less in the securities markets and less of your basic existence riding on how things turned out there?
« Last Edit: December 21, 2017, 05:29:35 AM by Ben Kurtz »

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #34 on: January 03, 2018, 09:28:25 AM »
A few updates.

We are buying a home for $167,000 & will be putting $37k down to make the loan $130k. We are doing a 30yr loan & the payment amount with insurance & taxes will be about $880/month.

The inspection report on the home came back great & even though everything is original to the home (1998) it is in good shape & nothing needs immediate attention. The HVAC & Roof will likely need replaced in the next 5-10yrs but otherwise any other updates would be cosmetic wants & not needs.

We will receive about $60k from the sale of our current home that will close in the next 2 weeks. After fees & closing costs for buying the new home, we will have about $20k left over.

And the biggest surprise at all....my wife is pregnant! It is very early in the process & the due date is early August. This obviously will be a huge life change & I need to do a lot of research about how our finances will change when the newborn arrives.

So the biggest question is what advice do you have on the $20k we will have after we purchase the house. How much should go towards investments vs. sitting in our Ally bank account (1.25% interest) for future updates or child costs. Also, what are your suggestions on the first items to research about the financial changes with a baby arriving?

Thanks so much & I hope everyone had a great holiday season!

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #35 on: January 06, 2018, 08:26:28 AM »
Also, regarding the news from the last post, should we set aside money for a 529 account? Thanks so much!

chaskavitch

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Re: Young & Hopefully not dumb! Advice needed
« Reply #36 on: January 08, 2018, 06:40:12 AM »
Congrats on the baby! 

I have no experience with 529 accounts, but my advice would be to save some of your "extra" money in Ally to pay for your expected and unexpected delivery costs. 

When I had our kid, we had a traditional health plan, so I maxed out my FSA, which covered my individual out of pocket max, and saved a few thousand dollars to cover any unplanned or uncovered medical costs and anything we needed to buy for me during maternity leave or for baby (we probably bought too much, but that's a WHOLE different thread).  Once we felt like we had all the diapers and rockers we could handle, we used the remainder as a start for college/car/"inheritance" savings. 

It was really nice to know we had a cushion if anything unexpected happened, and to know that if we were super sleep deprived and NEEDED to go buy a rock and play so our baby would stop crying, we could do it and it wouldn't affect our budget at all.

Also, you might work toward "saving" your future daycare costs every month.  Daycare is second in our budget only to our mortgage - in most areas, it is an enormous expense, so prepare yourself.

Laura33

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Re: Young & Hopefully not dumb! Advice needed
« Reply #37 on: January 08, 2018, 07:04:35 AM »
Congrats!

What Chaskavitch said.  I know it’s early days, but you and your wife should be thinking about how long you will want to take off with the baby, whether either or both of you will want to go part-time, what kind of daycare you want and what the prices are for however many hours you want — and then figure out how you are going to pay for all of that.  In the interim, practice living on that revised net income reflecting decreased earnings and/or new daycare costs, and put the extra aside. 

And then put the $20k and the new extra cash into savings for now.  Honestly, I’d tell you to set a chunk aside even if it was just the new house coming, because there are always, always unexpected expenses with any new house.  But you also have a second seriously major life change coming in a few months, and you have zero idea how it is going to change your priorities — how much you are willing to work, for how long, whether you want to homeschool or pay for private school, etc etc etc.*  More cash gives you more freedom to figure those things out and change things up if you want.  Once you have settled into your new version of normal, you can revisit whether that money should go to investments, 529, etc.

*I am sure you have some ideas and thoughts about what you want to do.  But don’t make the common mistake of assuming that everything goes as planned and that what you want now is what you are going to want a year or five years from now.

boarder42

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Re: Young & Hopefully not dumb! Advice needed
« Reply #38 on: January 08, 2018, 09:44:17 AM »
Congrats -  we have a baby due in july -  here is what we've done

1. started a spreadsheet for what we think we'll need - around here people say buy less than you think b/c you're not going to need it all - i subscribe to a different mindset in that i use slickdeals and set alerts and when i see screaming deals on something we think we need we'll buy it - if we dont need it i can make money reselling on CL - also start using CL to buy things you need there is tons out there.

2. my wife figured out how much time off she needed and since pregnancy is something that can be planned she saved her PTO so she'd have enough of that in addition to Short Term Disability to get the time off she wants

3. we have started to contact daycares - b/c we want an affordable reliable in home daycare.  baby wont be there til September but we have 5-6 good options within 5 mins of our house - around 125 -160 a week for an infant - this will vary based on where you are

4. if you plan to have daycare. then you need to look into a dependent care FSA - will save you at least your marginal federal rate on your first 5k worth of daycare costs - confirm the daycare you choose will provide you a reciept so you can be reimbursed.

5. Costs of the birth - we have a large amount of money that goes into taxable each year as well as a lot of money in our HSA - so we'll just halt some taxable investments to cover the cost of the birth.  i just assume we'll hit our OOP max on our healthcare plan and move on with my life for us this is 2-3 months of taxable investments so we'll lower that closer to the time of the birth. 

6. mentally i prepared myself to accept if my wife decides to stay home with the baby - i doubt this happens but in reality i have to work 1 extra year to make it happen so it wouldnt be a big deal.

7. 529's i dont see huge value in these currently for college costs - but i'm actively looking into how tax law changes could help me pay for private schooling/daycare with FSA money. - i see the college landscape changing dramatically in the next 20 years and dont think our kids will see anywhere near what the millenial generation saw here.

8. Life insurance - if my wife keeps working we will carry nothing other than what our work gives each of us which is 2 years salary lump sum at death. - Why - SSA survivor benefits and our already huge stache.  we're going to be over 700k in investments when our child is born and SSA survivor benefits will pay the surviving spouse around 50k a year in our cases til the kids are 18 - so we dont see a need for additional term life insurance. If my wife decides to stay home i may take out a 250k term policy til we hit 1MM in invested assets but that too is unlikely.

Flyingstache

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Re: Young & Hopefully not dumb! Advice needed
« Reply #39 on: January 13, 2018, 01:06:57 PM »
Thank you all for the kind words & the great information! The closing date for selling our house is next Tuesday & then we will be closing on our new (much simpler) house by the end of the month. We cannot wait to be in this new home & prepare for the next big adventure of the baby arriving!

After we sell our house & buy the new one, we will have about $20k. Based off of everyones advice, the plan right now is to keep the money in our Ally account while we figure out our needs for expecting the baby.

We are hoping to get most of our items for the baby as hand me downs from family & friends. Obviously the medical expenses will be high so that will be a main focus with the money. We also have an HSA account so we will need to do more research on how best to utilize that. We also are going to start researching daycare. My parents live in the area & we are hoping to get some free daycare out of them!!!

Thanks again for all the help!