Author Topic: Beginner here. Please rate my current plan  (Read 2252 times)

degrom7

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Beginner here. Please rate my current plan
« on: September 20, 2018, 11:26:46 PM »
Hi all. I'm brand new to the site and have been reading a lot of topics. I'm a public school teacher in my early 30's making 90K a year. My wife makes 50K a year and we're both trying to save money to buy a house. Here are my current accounts.

1) 403B - $55K - tax deferred annuity which offers a guarantee 7%. I contribute about 18% ($16,000) of my salary to this plan. I've been playing it safe all these years by putting money in the 7% fixed fund but wondering if I should change it to one of funds (balanced fund, equity fund,etc).

2) 457 Roth Plan $0- I just enrolled in this and will contribute $5,000 a year in the 2055 target find. Should I be contributing more to this account or my 403B? I'm allowed to put in $18,500 each year.

3) City Pension - Won't be receiving this for 30 more years but will get 60% of my salary each year when I retire. This will probably be over 70-80K in the future.

4) Traditional IRA of $6K. It's currently locked in a CD of 2.5% APY for one year. Once that matures, I plan to invest it in a brokerage account.

5) Taxable: Wealthfront/Robinhood/Fundrise/LendingClub - $25K in these accounts to get my feet wet into investing and diversifying. Wealthfront consist of SCHB, VEA, IEMG, SCHD, and TFI. Robinhood app consists mostly of individuals stocks such as Apple, Costco, Nvidia, Activision, Nvidia, and a few other ones.

6) 100K in savings. My SO is really against me investing and I'm trying to convince her but right now is in a high yield savings account since we want to purchase a house in a year or two.

Please rate my current investments. I'm a total beginner and would love your feedback.

Also, since I already have a 403B, 457 Roth Plan, and a future pension, should I join Vanguard and invest in a low fee index fund like a lot of members here recommend or so I already have enough?

I know a lot of you have IRA accounts but what about Taxable accounts? If I can make some more money and put a larger down payment on a house, that would be great.

Thanks everyone!

Linea_Norway

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Re: Beginner here. Please rate my current plan
« Reply #1 on: September 21, 2018, 04:10:36 AM »
Disclaimer: I don't know anything about American tax systems.

But your first point, a tax deferred annuity with a guaranteed 7% return is something to keep. This 7% is what we expect the stoch market to return on average before inflation. If you can get that risk free, do it. But check that the yearly cost of that system doesn't eat up much of your return.

Your third point, a pension, sounds good. But are you planning to work the whole period to earn this full 60% pension? Or do you expect to leave before full period? Which financial impact does that have? Call them and ask questions.
Are you sure your city will be financially stable long enough to provide you your pension? I have heard on this site that some cities/states might be close to bankruptcy and have problems paying out early pensions to people like firemen.

About point 6. Investing in the stock market is something you do with a long horizon. Not with money that you want to invest in a house in 1-2 years. The stock market will have dips. What if you stash is suddenly worth only 30% when you found your dream house?

Mgmny

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Re: Beginner here. Please rate my current plan
« Reply #2 on: September 21, 2018, 04:24:00 AM »
You have 100k saved, you have enough for a down payment on your house. Go buy it, unless you are trying to purchase a McMansion (>400k), then don't!

If you plan on retiring early, then don't plan on the city pension.

Most people on here will tell you to get out of Wealthfront and Robinhood and only invest in vanguard low cost index funds.

You do NOT invest your home down payment in the stock market as the stock market WILL eventually go down. You don't want that to happen to funds you need in the next year.

Google Millionaire Educator, he has a ton of advice for teachers like you (and your wife?) for how to save money in an effective tax avoidance strategy. (e.g. Max out your 403b and 401k yearly, wife does the same and you just put away something like 70k yearly tax free - assuming your wife is also a teacher).

As for the funds, everyone will tell you to look for low cost index funds your plan offers. Never heard of a 7% fixed fund, and I wonder if you're paying into an annuity which I would be wary about.

As for the Roth, I wouldn't put any money in a Roth if you can qualify for a traditional tax deterred account. I don't know anything about 457 accounts.

What is your wife investing in? If nothing, you are saving 21/140 a year of your income, which is something like 14% (mental math, I think that's correct?) Savings rate.

You make good money, you should be saving at least 3x that if not 4-5x that in tax deterred accounts. As teacher(s) you have really great access to tax deterred options.

I don't know where in the country you are, but your 100k should easily get you a 20% down payment on a home. What are you waiting for? Don't invest that money if you are dumping it all into a home, that's too risky.

Don't invest any more into taxable accounts until you've gotten your pre tax to at least 50% of income. Once you are there, then we can talk.

terran

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Re: Beginner here. Please rate my current plan
« Reply #3 on: September 21, 2018, 05:24:01 AM »
Here is the recommended investment order: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Post your investment options including the expense ratio in your 403(b) and 457 if you'd like advice there.

If you're going to use it to buy a house in the next few years then your wife is right about not investing the savings. Generally you shouldn't invest money you need in the next five years.

How much extra do you currently have available to invest after what you're currently contributing and your current expenses?

degrom7

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Re: Beginner here. Please rate my current plan
« Reply #4 on: September 23, 2018, 06:22:39 PM »
Disclaimer: I don't know anything about American tax systems.

But your first point, a tax deferred annuity with a guaranteed 7% return is something to keep. This 7% is what we expect the stoch market to return on average before inflation. If you can get that risk free, do it. But check that the yearly cost of that system doesn't eat up much of your return.

About point 6. Investing in the stock market is something you do with a long horizon. Not with money that you want to invest in a house in 1-2 years. The stock market will have dips. What if you stash is suddenly worth only 30% when you found your dream house?

Thanks for the comment. The 7% has no fees attached to it unlike the other investment fund options. I thought that long term the stock market eventually reaches 10% so shouldn't I change from the 7% fixed interest to a fund with more stocks and some bonds?

degrom7

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Re: Beginner here. Please rate my current plan
« Reply #5 on: September 23, 2018, 06:35:02 PM »
You have 100k saved, you have enough for a down payment on your house. Go buy it, unless you are trying to purchase a McMansion (>400k), then don't!
I live in NYC and the houses are over $700,000.

If you plan on retiring early, then don't plan on the city pension.

Most people on here will tell you to get out of Wealthfront and Robinhood and only invest in vanguard low cost index funds.
Is it because of the fees attached to it? I just opened a Vanguard IRA and will be putting my money in index funds

You do NOT invest your home down payment in the stock market as the stock market WILL eventually go down. You don't want that to happen to funds you need in the next year.
Yes you're right. I will just put it in a high yield savings or CD for now.

Google Millionaire Educator, he has a ton of advice for teachers like you (and your wife?) for how to save money in an effective tax avoidance strategy. (e.g. Max out your 403b and 401k yearly, wife does the same and you just put away something like 70k yearly tax free - assuming your wife is also a teacher).

As for the funds, everyone will tell you to look for low cost index funds your plan offers. Never heard of a 7% fixed fund, and I wonder if you're paying into an annuity which I would be wary about.
The 7% fund is more like a savings account with interest.

As for the Roth, I wouldn't put any money in a Roth if you can qualify for a traditional tax deterred account. I don't know anything about 457 accounts.
The 457 is similar to a 401K but for government or state/city workers. Why traditional and not roth?

What is your wife investing in? If nothing, you are saving 21/140 a year of your income, which is something like 14% (mental math, I think that's correct?) Savings rate.
My wife isn't investing but I think I've convinced her to contribute more to her 401K and IRA.

You make good money, you should be saving at least 3x that if not 4-5x that in tax deterred accounts. As teacher(s) you have really great access to tax deterred options.

I don't know where in the country you are, but your 100k should easily get you a 20% down payment on a home. What are you waiting for? Don't invest that money if you are dumping it all into a home, that's too risky.
It's difficult since I live in NYC

Don't invest any more into taxable accounts until you've gotten your pre tax to at least 50% of income. Once you are there, then we can talk.
Is it because of the huge risk involved in taxable accounts? I thought it was an extra way to increase my income.

degrom7

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Re: Beginner here. Please rate my current plan
« Reply #6 on: September 23, 2018, 06:43:18 PM »
Here is the recommended investment order: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

Post your investment options including the expense ratio in your 403(b) and 457 if you'd like advice there.

If you're going to use it to buy a house in the next few years then your wife is right about not investing the savings. Generally you shouldn't invest money you need in the next five years.

How much extra do you currently have available to invest after what you're currently contributing and your current expenses?

Thanks for the investment order list. For the 403B, I just have my money in a 7% interest bearing account and there are no fees. For the 457, the administrative fees are $20 per quarter, funds assessed at an annualized asset-based fee of 0.04%, and 0.18% fee in the target fund I chose (2050 Fund). Not sure if's too expensive or not but I can contribute up to $36,000 combined from the 403B and 457 each year from my paycheck.

Linea_Norway

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Re: Beginner here. Please rate my current plan
« Reply #7 on: September 24, 2018, 01:40:28 AM »
Disclaimer: I don't know anything about American tax systems.

But your first point, a tax deferred annuity with a guaranteed 7% return is something to keep. This 7% is what we expect the stoch market to return on average before inflation. If you can get that risk free, do it. But check that the yearly cost of that system doesn't eat up much of your return.

About point 6. Investing in the stock market is something you do with a long horizon. Not with money that you want to invest in a house in 1-2 years. The stock market will have dips. What if you stash is suddenly worth only 30% when you found your dream house?

Thanks for the comment. The 7% has no fees attached to it unlike the other investment fund options. I thought that long term the stock market eventually reaches 10% so shouldn't I change from the 7% fixed interest to a fund with more stocks and some bonds?

https://www.creditdonkey.com/average-stock-market-return.html

Your 7% is a guaranteed return without cost. The stock market is uncertain in many ways. Remember that historical average returns are not guaranteed to be repeated forever in the future, although in general we count on it.
I would put my money if your 7% annuity if I could. That is as good as you can get it in my opinion.

Mgmny

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Re: Beginner here. Please rate my current plan
« Reply #8 on: September 24, 2018, 08:39:24 AM »
You have 100k saved, you have enough for a down payment on your house. Go buy it, unless you are trying to purchase a McMansion (>400k), then don't!
I live in NYC and the houses are over $700,000.

If you plan on retiring early, then don't plan on the city pension.

Most people on here will tell you to get out of Wealthfront and Robinhood and only invest in vanguard low cost index funds.
Is it because of the fees attached to it? I just opened a Vanguard IRA and will be putting my money in index funds

You do NOT invest your home down payment in the stock market as the stock market WILL eventually go down. You don't want that to happen to funds you need in the next year.
Yes you're right. I will just put it in a high yield savings or CD for now.

Google Millionaire Educator, he has a ton of advice for teachers like you (and your wife?) for how to save money in an effective tax avoidance strategy. (e.g. Max out your 403b and 401k yearly, wife does the same and you just put away something like 70k yearly tax free - assuming your wife is also a teacher).

As for the funds, everyone will tell you to look for low cost index funds your plan offers. Never heard of a 7% fixed fund, and I wonder if you're paying into an annuity which I would be wary about.
The 7% fund is more like a savings account with interest.

As for the Roth, I wouldn't put any money in a Roth if you can qualify for a traditional tax deterred account. I don't know anything about 457 accounts.
The 457 is similar to a 401K but for government or state/city workers. Why traditional and not roth?

What is your wife investing in? If nothing, you are saving 21/140 a year of your income, which is something like 14% (mental math, I think that's correct?) Savings rate.
My wife isn't investing but I think I've convinced her to contribute more to her 401K and IRA.

You make good money, you should be saving at least 3x that if not 4-5x that in tax deterred accounts. As teacher(s) you have really great access to tax deterred options.

I don't know where in the country you are, but your 100k should easily get you a 20% down payment on a home. What are you waiting for? Don't invest that money if you are dumping it all into a home, that's too risky.
It's difficult since I live in NYC

Don't invest any more into taxable accounts until you've gotten your pre tax to at least 50% of income. Once you are there, then we can talk.
Is it because of the huge risk involved in taxable accounts? I thought it was an extra way to increase my income.

Yeesh, I knew NY was expensive, but MAN, 700k for a home? Are you sure that's your only option? If I were you, I might just have to be content with renting. 700k is an ENORMOUS amount of money...

The reason I (and everyone else) will tell you to always max tax-deferred before taxable is because USA has income tax based on brackets. So, if you can reduce your taxable liability, you will gain instant money.

For example:


Rate   Married Filing Jointly
10%   Up to $19,050
12%   $19,051 to $77,400
22% $77,401 to $165,000


Every dollar you and your wife make beyond $77,400 that isn't sheltered from taxes will be taxed at a rate that is 10% higher the previous dollar (I'm aware of deductions, but i'm keeping this simple as OP makes 140k a year, and I doubt that he has 70k of deductions). So, if you CAN shelter that money, you would instantly have 10% more (than the previous tax bracket, 22% more than you would AFTER taxes) to invest. If you invest that money AFTER tax you would be taxed at 22%. You want to keep as much of your money in as low of brackets as possible. In this case, if you invest all that money before taxes, it's like getting a 10% match or bonus on the money.

Let's say you want to invest $10,000

If you take that off the top of your income after tax that $10,000 turns into $7,800. Now let's say that it grows at 6% every year for 10 years (compounded monthly), you are left at $14,191.29 plus long term capital gains, which i won't account for here, because you'll see in a moment that just makes it worse.

If you invest it pre-tax ($10k over same 10 year period at 6%) you end up with $18,193.97. Now, let's take out the 12% income tax  (because we want everything in the lower bracket), you are left with $16,010.69.

So, you magically ended up with $1,800 extra in 10 years just by avoiding the 22% tax bracket.  THAT is why you want to invest as much pre-tax as possible.

(Now, you COULD argue that when you pay income tax on that $10k in 10 years instead of now, that you will be in the 22% tax bracket anyways. That means you need to be SPENDING $77,400 plus deductibles, meaning you are living a very luxurious lifestyle and not being frugal at all (80k a year translates to $6,700 a month - that's crazy)).


degrom7

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Re: Beginner here. Please rate my current plan
« Reply #9 on: September 24, 2018, 07:55:29 PM »
Disclaimer: I don't know anything about American tax systems.

But your first point, a tax deferred annuity with a guaranteed 7% return is something to keep. This 7% is what we expect the stoch market to return on average before inflation. If you can get that risk free, do it. But check that the yearly cost of that system doesn't eat up much of your return.

About point 6. Investing in the stock market is something you do with a long horizon. Not with money that you want to invest in a house in 1-2 years. The stock market will have dips. What if you stash is suddenly worth only 30% when you found your dream house?

Thanks for the comment. The 7% has no fees attached to it unlike the other investment fund options. I thought that long term the stock market eventually reaches 10% so shouldn't I change from the 7% fixed interest to a fund with more stocks and some bonds?

https://www.creditdonkey.com/average-stock-market-return.html

Your 7% is a guaranteed return without cost. The stock market is uncertain in many ways. Remember that historical average returns are not guaranteed to be repeated forever in the future, although in general we count on it.
I would put my money if your 7% annuity if I could. That is as good as you can get it in my opinion.

Thank you. I will make sure to keep it at the 7% fixed interest fund and max out my contributions of $18,000 in it each year.

degrom7

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Re: Beginner here. Please rate my current plan
« Reply #10 on: September 24, 2018, 08:02:28 PM »
You have 100k saved, you have enough for a down payment on your house. Go buy it, unless you are trying to purchase a McMansion (>400k), then don't!
I live in NYC and the houses are over $700,000.

If you plan on retiring early, then don't plan on the city pension.

Most people on here will tell you to get out of Wealthfront and Robinhood and only invest in vanguard low cost index funds.
Is it because of the fees attached to it? I just opened a Vanguard IRA and will be putting my money in index funds

You do NOT invest your home down payment in the stock market as the stock market WILL eventually go down. You don't want that to happen to funds you need in the next year.
Yes you're right. I will just put it in a high yield savings or CD for now.

Google Millionaire Educator, he has a ton of advice for teachers like you (and your wife?) for how to save money in an effective tax avoidance strategy. (e.g. Max out your 403b and 401k yearly, wife does the same and you just put away something like 70k yearly tax free - assuming your wife is also a teacher).

As for the funds, everyone will tell you to look for low cost index funds your plan offers. Never heard of a 7% fixed fund, and I wonder if you're paying into an annuity which I would be wary about.
The 7% fund is more like a savings account with interest.

As for the Roth, I wouldn't put any money in a Roth if you can qualify for a traditional tax deterred account. I don't know anything about 457 accounts.
The 457 is similar to a 401K but for government or state/city workers. Why traditional and not roth?

What is your wife investing in? If nothing, you are saving 21/140 a year of your income, which is something like 14% (mental math, I think that's correct?) Savings rate.
My wife isn't investing but I think I've convinced her to contribute more to her 401K and IRA.

You make good money, you should be saving at least 3x that if not 4-5x that in tax deterred accounts. As teacher(s) you have really great access to tax deterred options.

I don't know where in the country you are, but your 100k should easily get you a 20% down payment on a home. What are you waiting for? Don't invest that money if you are dumping it all into a home, that's too risky.
It's difficult since I live in NYC

Don't invest any more into taxable accounts until you've gotten your pre tax to at least 50% of income. Once you are there, then we can talk.
Is it because of the huge risk involved in taxable accounts? I thought it was an extra way to increase my income.

Yeesh, I knew NY was expensive, but MAN, 700k for a home? Are you sure that's your only option? If I were you, I might just have to be content with renting. 700k is an ENORMOUS amount of money...

The reason I (and everyone else) will tell you to always max tax-deferred before taxable is because USA has income tax based on brackets. So, if you can reduce your taxable liability, you will gain instant money.

For example:


Rate   Married Filing Jointly
10%   Up to $19,050
12%   $19,051 to $77,400
22% $77,401 to $165,000


Every dollar you and your wife make beyond $77,400 that isn't sheltered from taxes will be taxed at a rate that is 10% higher the previous dollar (I'm aware of deductions, but i'm keeping this simple as OP makes 140k a year, and I doubt that he has 70k of deductions). So, if you CAN shelter that money, you would instantly have 10% more (than the previous tax bracket, 22% more than you would AFTER taxes) to invest. If you invest that money AFTER tax you would be taxed at 22%. You want to keep as much of your money in as low of brackets as possible. In this case, if you invest all that money before taxes, it's like getting a 10% match or bonus on the money.

Let's say you want to invest $10,000

If you take that off the top of your income after tax that $10,000 turns into $7,800. Now let's say that it grows at 6% every year for 10 years (compounded monthly), you are left at $14,191.29 plus long term capital gains, which i won't account for here, because you'll see in a moment that just makes it worse.

If you invest it pre-tax ($10k over same 10 year period at 6%) you end up with $18,193.97. Now, let's take out the 12% income tax  (because we want everything in the lower bracket), you are left with $16,010.69.

So, you magically ended up with $1,800 extra in 10 years just by avoiding the 22% tax bracket.  THAT is why you want to invest as much pre-tax as possible.

(Now, you COULD argue that when you pay income tax on that $10k in 10 years instead of now, that you will be in the 22% tax bracket anyways. That means you need to be SPENDING $77,400 plus deductibles, meaning you are living a very luxurious lifestyle and not being frugal at all (80k a year translates to $6,700 a month - that's crazy)).

Thanks for your detailed post. I appreciate it. For taxable accounts, what adds to my annual salary? Is it the money I deposit, the interest I make off of it, or is it only when I withdraw it that it gets added to the salary?

Mgmny

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Re: Beginner here. Please rate my current plan
« Reply #11 on: September 25, 2018, 08:36:51 AM »


Thanks for your detailed post. I appreciate it. For taxable accounts, what adds to my annual salary? Is it the money I deposit, the interest I make off of it, or is it only when I withdraw it that it gets added to the salary?

Nothing really "adds" to your salary per se, but in order for you to contribute to a taxable account, you need to use after-tax money, so it would simply be a function of your salary from you and your wife's current employment.

It would be the difference between you and the wife making $140,000 taxable income, and taking $10,000 after tax and investing it vs making $130,000 taxable income and investing $10,000 before tax.

To answer your question directly:
"For taxable accounts, what adds to my annual salary? Is it the money I deposit"
Act of depositing the money is not taxable, but acquiring the money from employment is,

the interest I make off of it
Technically yes, this is capital gains tax. I was ignoring this earlier because it just made your after tax situation more dismal, but yes you would get taxed on the interest,

or is it only when I withdraw it that it gets added to the salary
Contributions to after-tax accounts can be withdrawn tax free in most scenarios as you have already paid tax on this money.?

I'm not sure if I'm explaining this well... Let me know if you're still confused.

Taxable events:
Earning income
Withdrawing from pre-tax account (but you're hopefully in a lower bracket at this time in the future, so the impact is lower.)
long term capital gains


edit: formatting
« Last Edit: September 26, 2018, 07:32:21 AM by Mgmny »

degrom7

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Re: Beginner here. Please rate my current plan
« Reply #12 on: September 25, 2018, 03:59:03 PM »


Thanks for your detailed post. I appreciate it. For taxable accounts, what adds to my annual salary? Is it the money I deposit, the interest I make off of it, or is it only when I withdraw it that it gets added to the salary?

Nothing really "adds" to your salary per se, but in order for you to contribute to a taxable account, you need to use after-tax money, so it would simply be a function of your salary from you and your wife's current employment.

It would be the difference between you and the wife making $140,000 taxable income, and taking $10,000 after tax and investing it
vs making $130,000 taxable income and investing $10,000 before tax. So this would be similar to a traditional IRA or 401K where money gets taken out pre-tax.

To answer your question directly: For taxable accounts, what adds to my annual salary? Is it the money I deposit Act of depositing the money is not taxable, but acquiring the money from employment is, the interest I make off of itTechnically yes, this is capital gains tax. Is the tax rate for capital gain tax the same as my federal income tax bracket?
I was ignoring this earlier because it just made your after tax situation more dismal, but yes you would get taxed on the interest
, or is it only when I withdraw it that it gets added to the salaryContributions to after-tax accounts can be withdrawn tax free in most scenarios as you have already paid tax on this money.?

I'm not sure if I'm explaining this well... Let me know if you're still confused. Thanks! I get it now!

Taxable events:
Earning income
Withdrawing from pre-tax account (but you're hopefully in a lower bracket at this time in the future, so the impact is lower.)
long term capital gains