Author Topic: 51 year old starting stash needs help with investing and emergency preparedness  (Read 6654 times)

Rulefollowing

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Hi Everyone,

First, a heartfelt thanks to MMM and this Forum for radically changing the way I understand things. Now I grasp that money is for making more money and for investing for freedom (not buying objects!).

This enlightenment is very liberating!  Thank you!

Although we were relatively frugal before (12 year old Corolla, bicycles, etc.), in the post-Mustachian era, we now clamp down on mindless expenses, max out our 401Kís, use YNAB; scorn clown cars, plan to take on a border, and think about downsizing our house, etc. 

We recently gained some money from selling a home.  We should invest this money.

And this is where we are hoping to get advice from the Mustachians. 

Here is our situation:

We have $60,000 saved in the bank.
Our normal monthly salary income is about $6,300.
Our monthly living expenses are about $4000. 
We pay $1,600/month mortgage payment on a 15 year note now worth $141,000, for which we pay 2.7% interest.
We have a $50,000 student loan debt at 4.875% interest for which we pay $368/month.
Other than the mortgage and the student loan, we have no other debts.
We max out our employerís 401k retirement plans.
I am 51 years old. My wife is 46.

We would be very grateful for advice about how to go forward.

Specific questions:

a) How much should we put aside for an emergency fund?
     
   We have access to credit cards that we could tap in an emergency; we could open a HELOC.  We can also borrow against our retirement accounts at a relatively low rate of interest.
   
   So whatís the least amount we could reasonably save for emergencies? 
   
   If we invest money in the stock market (say Vanguard), how easy is it to get that money back in case of an emergency?  How quickly could one pull emergency money, e.g. $25,000, back out of the market, if necessary?

b) How to invest the remainder of our $60,000 that we donít save for emergencies? 

From reading MMM, we understand that Vanguard Index funds are the best way to go. 

But apparently there is more than one such fund. 

This seems in part to have something to do with allocation, but I donít really understand how to think about allocation. 

So please help a late-blooming Mustachianó

How much of our $60,000 should we invest? How much should we keep for emergencies? And which Vanguard fund do you think should we use, and why?

Thanks so much!

feelingroovy

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I agree with Dmy.  Why not pay off the student loan? 

That will lower your monthly expenses by $368, lowering the stash you'll need to cover expenses.  You can then start investing the $368/month.  It's at a high enough interest rate that it's worth just getting rid of.

That leaves you $10k for an emergency fund...

marty998

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Newsflash. Your student loans are the emergency.

I hope you haven't been carrying them around for 30 years. Assume this is from a mid-life career change?

Pay them off now. Yes now! Open a new tab in your browser, log into your internet banking and transfer $50,000 to your student loan provider.

Otherwise you'll be paying $368 a month for the next 17 years, incurring a further $22,864 in interest.

Now that you've done that, you will have an extra $368 a month.

Since you are paying $1600 a month on the mortgage you are forecast to pay it off in 8.2 years, incurring a further $16,250 in interest. If you slice $10,000 off it with your remaining cash, you will only incur a further $14,000 in interest and your mortgage length drops to 7.55 years.

If you then take that $368 a month and add it to your mortgage payments, you will finish the mortgage in 6 years and save a further $2,800 in interest.

Alternatively you could take the remaining $10,000, stick it in a vanguard fund and set up an automatic investment plan for $400 per month.

Both options are be better than holding cash for emergencies (in your 51 years how often have you had an emergency that has cost $25,000 payable in cash immediately?)

wtjbatman

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Just a heads up, you haven't been nearly as frugal as you claim you've been. $1600 mortgage? 50k of student loans when you're in your 50's? $4000 in monthly expenses? Good god.

Anyway, it sounds like you need a lot of education about investing. I think you should check out the Bogleheads Wiki.

http://www.bogleheads.org/wiki/Getting_started
http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit

Be prepared to spend a lot of time reading. But it will all be worth it in the end. Good luck.

Rulefollowing

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Thanks to all for your kind advice.
Someone mentioned I have a lot to learn about investing, and this is as true as can be!
I have no excuse for my ignorance, can only say it's better to learn late than never.
(I am cluing my younger siblings and nephews, etc., into the MMM website, so they can get the benefit of my experience.)
I will definitely head over to the bogleheads site to learn more.
Thanks for that tip.
We will also consider seriously the idea of paying off the student loans immediately.
I had not previously considered paying off the loans, because I had supposed that if we earned 7% interest in the stock market, that would be superior to 'earning' the 4.875% from paying the loans.
Could some patient person tell me again why that isn't right, please? 
I am eager to learn from you all and grateful to you for your advice.
Rulefollowing...

Prairie Gal

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I am another over 50, late to the party MMM'er. The 7% you could earn in the stock market is a big maybe. The 4.875% you are paying on the student loans is a certainty. Take the bird in the hand.

Jlcollins also has an excellent investing series that you should read. http://jlcollinsnh.com/stock-series/

Eric

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a) How much should we put aside for an emergency fund?
     
   We have access to credit cards that we could tap in an emergency; we could open a HELOC.  We can also borrow against our retirement accounts at a relatively low rate of interest.
   
   So whatís the least amount we could reasonably save for emergencies? 
You're thinking in the right direction here.  The emergency fund is sort of a personal thing, so it's hard to give a firm dollar amount.  Both you and your wife work?  Would you consider your jobs secure?  How long would it take you to find a new job in your field?  Are either of you self-employed?  Are your incomes similar or does one spouse make a much greater share?  What are your deductibles and/or out of pocket maximums for your home and health insurance?

Start answering these questions and you'll have a more personalized answer.  The typical guidline is somewhere between 3 and 6 months of expenses.  But like you say, you can access a CC or HELOC for some of that, so it all doesn't have to be in cash.  As an example, my wife and I have a $8K emergency fund (2.5 months of expenses).  I don't consider a job loss an emergency, as we could live off of one of our incomes, so my fund is solely for covering actual emergencies like a major accident or health issue.  We also don't have kids, don't own a home, and aren't car reliant, so we can afford the take more risks here.  You have to tailor this to your own personal situation though.
   
   If we invest money in the stock market (say Vanguard), how easy is it to get that money back in case of an emergency?  How quickly could one pull emergency money, e.g. $25,000, back out of the market, if necessary?
It depends on the account setup.  If you're investing after-tax money in a regular brokerage account, you can have your money back the next business day, or two at most.  IRAs and other tax advantaged accounts can also be accessed, but there are more rules and restrictions.

b) How to invest the remainder of our $60,000 that we donít save for emergencies? 

From reading MMM, we understand that Vanguard Index funds are the best way to go. 

But apparently there is more than one such fund. 

This seems in part to have something to do with allocation, but I donít really understand how to think about allocation. 

So please help a late-blooming Mustachianó

How much of our $60,000 should we invest? How much should we keep for emergencies? And which Vanguard fund do you think should we use, and why?

Thanks so much!

In addition to the Bogleheads links above, also consider perusing http://jlcollinsnh.com/stock-series/

In general, you'll want to choose broad market index funds, instead of ones that follow certain sectors.  For example, VTSAX is the Vanguard Total Stock Market index fund.  Own this and you'll own part of every publicly traded company in the US.  You'll get the average market return, which will make you an above average investor.  (it's amazing what simplicity and avoiding fees and expenses does for a portfolio)

I had not previously considered paying off the loans, because I had supposed that if we earned 7% interest in the stock market, that would be superior to 'earning' the 4.875% from paying the loans.
Could some patient person tell me again why that isn't right, please? 

I think your thought process is correct, but 4.875% guaranteed return is pretty good.  Maybe better than you realize.  The stock market is pretty volatile and while over the long haul 7% is a decent return estimate, in the short term it could be up, down, or sideways.  I get that it's hard to look and see that the VTSAX went up 17% in the last year and think that you should pay off a 5% loan amount instead of invest it.  But if it goes down 20% next year, then you're going to feel pretty good about it.  With those payments, it's going to take you 11+ years to pay off that loan.  Essentially what it boils down to is that there's no guarantee that you'll beat 4.875% in the market over the next 11 years.  The only guarantee is that you'll pay a lot of interest if you don't pay it off.

Cheddar Stacker

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Nearly 5% debt after a super long bull run in the stock market with a newbie investor = pay off the student loan debt. This leaves you with $10k e fund which is 2.5 months expenses.

While you learn everything you can about investing here, at jlcollins, and at boggleheads you will accumulate another $2,500 in a month, then another $2,500 the next month. If you think you're ready at that point dump it all in and start dumping another $2,500 every month after that.

The only thing that would change my advice is if you aren't contributing or maxing out your 401k's and/or IRA's. If you aren't doing that, you should do that immediately and maybe only payoff 75% of the SL debt until you are sure what your new monthly cash flow will be. This would be the first place I would look to improve your finances.

Rulefollowing

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Thanks again to all for your patient assistance.

Someone remarked that we are not as frugal as we claim.  Don't worry: I only meant that we were _relatively_ frugal, by (admittedly foolish) conventional standards.   I only encountered the real standard of frugality (MMM) for the first time last month, so it is taking us a while to get our heads (and practices) around the new revelations. 

We'll get there, especially with the kind help you offer here.

Thanks to your advice, I read the very enlightening  http://jlcollinsnh.com/stock-series/ and am now starting on the Bogleheads site.

I think we will pay off that student loan today, given your thinking.  This will feel great!

Thanks again, everyone, for taking the time to help a beginner.  I feel encouraged to ask more questions as they come up.

Bob W

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IMHO -

Not a fan of emergency funds -- I would put all the money into the S and P 500 Vanguard.   In a true emergency use a card first and then draw down out of the Vanguard if need be.  Yes,  you may cry if it goes down 30% in the next year, but you still wouldn't draw it down and you would be happy that you are buying $3000 worth of new shares at a discount.  Maybe $200 ever sitting in checking.   You're managing money now, not just throwing it around to feel good. 

The student loan is not a bad a rate, so I wouldn't pay that off.   This is one of the few debts that go away if someone dies.    You might even be able to refi at a lower rate.  (google it)

The house is a great rate!  Would never pay extra,  ever, ever, ever.    I would consider a smaller or cheaper living situation however and definitely make that part of the retirement plan. 

You're doing pretty well although it appears your expenses are way, way high.  I'm wondering just where $2,000 per month goes after the mortgage and student loans.   You may not be aware of this but $2,000 is a lot of money. (sarcasm)

My guess is it is being pissed away somewhere.  The usual culprits are food,  eating out,  utilities,  insurance, vacations and entertainment.    If you're buying cable and your cell phones are over $10 per month per person, you're pissing away your money.   I got 20 bucks says your spending over $800 per month on groceries and eating out???

I'm sure if you put up a full case summary we could cut at least $1,200 out of your monthly budget without batting an eyelash.

Would love to see it!

Lastly I would set a splurge goal of saving somewhere around another 50K and then pissing away 5K on a fancy vacation or whatever.   You could do this in 1 year.  My guess is that after the year you would be so thrilled to have saved 50K and worked so hard at it that you would be hard pressed to piss away even 1K.  This is called building your mustache muscle!

I can see you in 5 years with over 500K in your investment account and feeling like the king of the world!

Icecreamarsenal

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Lots of info missing. However, welcome to the fold.
Determine your comfort level for emergency fund: 3, 6, or 12 months. I'd recommend starting with 3, which you already have.

Open a heloc for max amount with no closing costs. Keep in mind that heloc can be closed in context of job loss. But great for putting out other types of fires.

Vanguard taxable account mutual funds take 2-4 (in my experience) days to clear. Not ETFs.

MMMers and bogle heads are likely to recommend the stock and bond market. Without knowledge of your other assets, unsure, but typical mmm is mutual funds through vanguard with an emphasis on:
-low cost (technically <0.5%)
-dollar cost averaging
-no timing of market
-index funds
-total stock or total bond

This will look like age+10 in stocks (61% in stocks, 39% in bonds)
-half of those stocks will be index total national market, the other half index total international market
-bonds will be total American bind market index
This ratio will be across all your accounts: 401k, Ira, and taxable.

Accelerate payment on student loans; 4.875% is a bit higher than inflation.

Can keep the mortgage, 2.7% is a great rate.
Try to increase income.
Read a LOT more. Go to the library, but use bogle heads for financial advice, mmm for lifestyle advice.

Best of luck: look forward, not backwards.

Icecreamarsenal

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Thanks again to all for your patient assistance.

Someone remarked that we are not as frugal as we claim.  Don't worry: I only meant that we were _relatively_ frugal, by (admittedly foolish) conventional standards.   I only encountered the real standard of frugality (MMM) for the first time last month, so it is taking us a while to get our heads (and practices) around the new revelations. 

We'll get there, especially with the kind help you offer here.

Thanks to your advice, I read the very enlightening  http://jlcollinsnh.com/stock-series/ and am now starting on the Bogleheads site.

I think we will pay off that student loan today, given your thinking.  This will feel great!

Thanks again, everyone, for taking the time to help a beginner.  I feel encouraged to ask more questions as they come up.

Hold off on spending 50k today; I agree with the sentiment, but not the speed, and it wipes the emergency fund. Keep in mind heloc can take 4 weeks to take effect.
Read more before removing 50k liquid funds from your arsenal. Gluck.

Bob W

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Thanks again to all for your patient assistance.

Someone remarked that we are not as frugal as we claim.  Don't worry: I only meant that we were _relatively_ frugal, by (admittedly foolish) conventional standards.   I only encountered the real standard of frugality (MMM) for the first time last month, so it is taking us a while to get our heads (and practices) around the new revelations. 

We'll get there, especially with the kind help you offer here.

Thanks to your advice, I read the very enlightening  http://jlcollinsnh.com/stock-series/ and am now starting on the Bogleheads site.

I think we will pay off that student loan today, given your thinking.  This will feel great!

Thanks again, everyone, for taking the time to help a beginner.  I feel encouraged to ask more questions as they come up.

Hold off on spending 50k today; I agree with the sentiment, but not the speed, and it wipes the emergency fund. Keep in mind heloc can take 4 weeks to take effect.
Read more before removing 50k liquid funds from your arsenal. Gluck.

Wouldn't ever pay off a student loan with that low a rate!  Makes absolutely zero sense.  Do you not realize that the loans will be completely forgiven in the event of death?   Or that the market will average 9% while your loan is 5 ish?   It is a classic financial peace move that will ultimately cost you hundreds of thousands in lost investments.    But to tell the truth I might be tempted to hit the easy button too.  lol

Rulefollowing

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Thanks, everyone-- we're heading to Vanguard!


marty998

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Wouldn't ever pay off a student loan with that low a rate!  Makes absolutely zero sense.  Do you not realize that the loans will be completely forgiven in the event of death?   Or that the market will average 9% while your loan is 5 ish?   It is a classic financial peace move that will ultimately cost you hundreds of thousands in lost investments.    But to tell the truth I might be tempted to hit the easy button too.  lol

Strikes me as a very selfish thing to do. Incur $50k of debt and deliberately take advantage of death to not pay it back. Not a lesson I would want to leave my future kids.

Your debts are your responsibility. If they're not paid, it hurts everyone else through higher interest rates and dare I say it, financial crises too when enough people take that moral hazard option.

plainjane

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How much do you currently have saved for your retirements in 401k/IRA/Roth IRAs?

What are you doing with the other $300/month that isn't in your living expenses or your debt repayment?

fartface

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We will also consider seriously the idea of paying off the student loans immediately.
I had not previously considered paying off the loans, because I had supposed that if we earned 7% interest in the stock market, that would be superior to 'earning' the 4.875% from paying the loans.
Could some patient person tell me again why that isn't right, please? 

Ummm....well in July of 2008, I invested $60,000 in GM. I mean, we're talking General Motors here. The share price had fallen to a 52 week low. They paid a good dividend. I KNEW I'd be able to make AT LEAST a 7% return on this investment.

Oh and then about a year later they declared bankruptcy and I lost the entire nut.

So that my friend is why you should have paid the student loan balance off YESTERDAY.

P.S. I exaggerated the story for effect. The actual amount lost was not 60K but 3K, however, it still hurts to this day!

Icecreamarsenal

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Thanks again to all for your patient assistance.

Someone remarked that we are not as frugal as we claim.  Don't worry: I only meant that we were _relatively_ frugal, by (admittedly foolish) conventional standards.   I only encountered the real standard of frugality (MMM) for the first time last month, so it is taking us a while to get our heads (and practices) around the new revelations. 

We'll get there, especially with the kind help you offer here.

Thanks to your advice, I read the very enlightening  http://jlcollinsnh.com/stock-series/ and am now starting on the Bogleheads site.

I think we will pay off that student loan today, given your thinking.  This will feel great!

Thanks again, everyone, for taking the time to help a beginner.  I feel encouraged to ask more questions as they come up.

Hold off on spending 50k today; I agree with the sentiment, but not the speed, and it wipes the emergency fund. Keep in mind heloc can take 4 weeks to take effect.
Read more before removing 50k liquid funds from your arsenal. Gluck.

Wouldn't ever pay off a student loan with that low a rate!  Makes absolutely zero sense.  Do you not realize that the loans will be completely forgiven in the event of death?   Or that the market will average 9% while your loan is 5 ish?   It is a classic financial peace move that will ultimately cost you hundreds of thousands in lost investments.    But to tell the truth I might be tempted to hit the easy button too.  lol

Op, try to filter out hyperbole, example above: "absolutely zero sense..." Yada yada yada.

The market HAS averaged 10-11% over the life of the stock market. For your window, there is no guarantee that the market will average 9% return.

Paying off sl early is a guaranteed 5% return, with one less bill to pay later.

gatorNic

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Quote
Wouldn't ever pay off a student loan with that low a rate!  Makes absolutely zero sense.  Do you not realize that the loans will be completely forgiven in the event of death?   Or that the market will average 9% while your loan is 5 ish?   It is a classic financial peace move that will ultimately cost you hundreds of thousands in lost investments.    But to tell the truth I might be tempted to hit the easy button too.  lol

It depends on his loans.  Not all student loans are forgiven in the event of death.  Federally backed student loans will, but almost every private student loan will not.  There are very few private lenders who offer the death forgiveness clause on student loans.  Wells Fargo is one of the few.

Personally I don't think I would burn the entire 60K to pay off the loan, but I would certainly use a good chunk to get it down. Student loans I have had keep the time period they are for and readjust the minimum payment if you pay down more than the minimum.  Check with the lender though.

As someone else said emergency funds are certainly very personal.  Some want it, some don't or have minor ones.  Personally, being in a volatile industry and an expensive area I like to keep 6 months emergency.  But I don't have a lot of access to other liquid funds or mortgage credit lines.  In many ways its a peace of mind in case of loss of job, disability or medical emergency.  To each his own. 
« Last Edit: November 17, 2014, 11:19:36 AM by gatorNic »

Fuzz

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I suggest you read about and understand sequence of returns risk when you evaluate that student loan vs investment decision. Sure the stock market "averages" 7 percent returns over sufficiently long periods of time, but did you know that there are many periods where it doesn't come close to that, depending on when you buy and sell?

It seems to me that you have too much money on the line not to be thinking this through pretty carefully. How long would it take you to save $60K? Is it worth spending ~100 hours to figure out how to spend/invest that money? That money represents a ton of work+time.