Author Topic: Case Study - Help rescue our savings/investing plan  (Read 4718 times)

LizzyBee

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Case Study - Help rescue our savings/investing plan
« on: February 16, 2015, 03:58:45 PM »
Short story: We've been debt free with a healthy savings rate for a while. We've been satisfied with our savings rate and havenít thought too much about taking the fastest route towards FIRE. We need help figuring out how to be more efficient with how and where weíre investing our money.

Monthly income after deductions:
Husband: $2481 (works part time at 75%)
Me: $4825
Extra: $835 (this is money from my FIL. Itís mostly regular, but not always)
Total:  $7306 - $8141

Monthly Expenses including savings:

Total monthly expenses: $4153
Total monthly savings: $4041

Breakdown of Savings:
Extra Mortgage Payment: $400
My IRA: $458
His IRA: $458
Index Fund: $1250
529: $100
Savings: $450
Savings Deductions from paychecks before tax:
My Pension: $500
HAS: $225
Husbandís 401k: $200

Assests:
My Vanguard Target Retirement Fund (VFORX): $29,604
Husbandís Vanguard Target Retirement Fund (VFORX): $29,294
Vanguard Total Stock Market Index Fund (VTSAX): $45,805
Husbandís Charles Schwab 401K: ~$10,000
FNBO and Credit Union Savings Accounts: $47.440
My and husband's HSA: $5,000
529: $4657
House: $350,000
Total: $521,800

Liabilities:
House $215,000 @4.5%

Net Worth: $306,800

Weíre really looking for advice on how to maximize our savings plan in this case study so I have not provided a breakdown of our expenses.  Iíve come to realize that weíve been saving not from a numbers perspective, but from what feels good. I like that weíre saving in a way that spreads everything out. I also like paying down the mortgage a little even though I know the numbers donít make sense. I havenít liked the idea of maxing out our 401Ks because I wouldnít like seeing my husbandís salary at almost nothing and it would leave us little left over to invest elsewhere. Iím ready to let go of all of the emotional reasons for why I invest and do it from a numbers perspective only. 
 
We have a larger amount in our savings accounts and want to continue to put money in those accounts even though they earning very little interest because it includes our emergency fund, cash for replacing our vehicles (vehicles are 10+ yrs old), a landscaping project coming up, C-section for our 2nd baby in July (~$3,000 not covered by the HSA savings) and maternity leave. We have been putting the money from our FIL in our savings because of our large expenses this year.

Our goals are to save in a way that is more tax efficient, possibly buy a rental property in the next 5 yrs (thus needing a funding plan for this), and to be able to retire in 10 yrs or less. Our expenses have gone up and down due to our expanding family so we havenít set a date  or gotten too specific with numbers for FIRE.

How can we save better to meet our goals and decrease our tax rate?













starterstache

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Re: Case Study - Help rescue our savings/investing plan
« Reply #1 on: February 16, 2015, 04:24:37 PM »
Wow, so many questions and suggestions here I don't even know where to start :)  Honestly, if you want us to help you save more - we need to see a detailed breakdown of your expenses.  Also, with a 2nd baby on the way I wouldn't expect your savings to go up a whole lot (provided you've already optimized other outgo in your budget).

Since you asked about tax savings and said you'd listen to a purely numbers approach; I would highly, highly recommend you start maxing out your husbands 401k immediately.  Do you know what type of match, if any, he receives?  Regardless, while it might make his paycheck seem smaller - those are pre-tax dollars you are missing out on by investing elsewhere.  Putting your money there will significantly reduce your tax liability each year.

I'm sure others may have a different opinion, but I personally think you have way too many different investment/savings accounts.  Personally I'd stick to his 401k, an T-IRA for each of you, and potentially a Roth IRA for longer term savings and/or eventually acting as a pipeline to retire prior to 55 (see other posts and articles about the ROTH conversion pipeline).

I'm sure others will come along with even more detailed suggestions shortly, but I'd be prepared for others to ask to see your current budget as well.

Good luck!

-SS


dandarc

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Re: Case Study - Help rescue our savings/investing plan
« Reply #2 on: February 16, 2015, 04:39:31 PM »
I havenít liked the idea of maxing out our 401Ks because I wouldnít like seeing my husbandís salary at almost nothing and it would leave us little left over to invest elsewhere.

My wife had this concern about us basically zeroing out her paycheck to front-load her 457.  Checking the account balances more frequently has helped her see that this money is furthering our goals.

As far as reducing your tax bill, the pat answer is to put more into traditional retirement accounts - you could max your husband's 401K, and depending on your tax rate still have a few hundred / month to throw into VTSAX.

gluskap

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Re: Case Study - Help rescue our savings/investing plan
« Reply #3 on: February 16, 2015, 05:12:20 PM »
I agree with PP. Max out the 401k so you pay less in taxes.  Doesn't matter if your husband's take home seems less since you are working on your financial goals as a couple right?  You should do what makes sense for both of you.  If you have a lot of upcoming expenses, I would reduce your mortgage extra payments before reducing putting money into your investments.  I think you will make more in your taxable accounts then prepaying the mortgage since your rate is fairly low.  You can always take money from the taxable and throw it at your mortgage when you are ready or close to retiring.  I would also see if you can refinance to bring that rate down a bit.

LizzyBee

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Re: Case Study - Help rescue our savings/investing plan
« Reply #4 on: February 16, 2015, 06:53:11 PM »
So, in summary, we will definitely start maxing out the husband's 401K. I know my reasoning for not doing so was illogical.

What about me? I am eligible for a 403b or 457b in addition to my Pension. Should I chose one and max it out as well? Is there any difference between the two as far as benefits? 

Also, instead of the Roth, we will switch to traditional IRAs and stop putting extra money into our mortgage. Will I be able to rollover the money in my Roth into a traditional IRA or would I just open a separate T IRA and stop contributing  to the traditional?

Gluskap, we were definitely going to look into refinancing very soon. We just moved in and have started to feel settled, and then used to be being pregnant with a second, and so the thought seems overwhelming, but the potential savings is huge motivation.

Starterstache, I think you're right in that we're spreading our money over too many places. I think that's why I feel like we're moving along at snail's pace sometimes. Our net worth is increasing healthily, but I have to look at more than a handful of accounts just to get a sense of where we're at.

Should I keep putting a a couple hundred in our savings accounts? I know it's not earning hardly any interest, but I do want a healthy savings account in case the opportunity arises to buy a rental property. We do have a HELOC at $65,000 with a balance of $0 right now so that could be a possibility for financing. I hope that doesn't sound incredibly naive. I actually don't know if the HELOC is an option for financing at all. We have a lot of research to do before we would buy a rental.

 

MDM

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Re: Case Study - Help rescue our savings/investing plan
« Reply #5 on: February 16, 2015, 07:23:01 PM »
Monthly income after deductions:
...
How can we save better to meet our goals and decrease our tax rate?
You have a lot of company, but all those who start with "income after deductions" miss a valuable perspective.  Particularly in light of your ending question: take a look at your cash flow starting with gross income, and the reason folks are suggesting maximum tax-advantaged investment may become (even more) clear.

LizzyBee

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Re: Case Study - Help rescue our savings/investing plan
« Reply #6 on: February 16, 2015, 07:42:09 PM »
Monthly income after deductions:
...
How can we save better to meet our goals and decrease our tax rate?
You have a lot of company, but all those who start with "income after deductions" miss a valuable perspective.  Particularly in light of your ending question: take a look at your cash flow starting with gross income, and the reason folks are suggesting maximum tax-advantaged investment may become (even more) clear.

MDM, I think I know where you are going, and I hate to be so dense, but can you explain more?

My pre-tax income is $83,500. My husband's is $53,693, which is after about a $10,000 bonus so isn't reflected in our monthly income.

MDM

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Re: Case Study - Help rescue our savings/investing plan
« Reply #7 on: February 16, 2015, 09:20:43 PM »
MDM, I think I know where you are going, and I hate to be so dense, but can you explain more?

My pre-tax income is $83,500. My husband's is $53,693, which is after about a $10,000 bonus so isn't reflected in our monthly income.
If you don't already have a similar or better tool, take a look at the spreadsheet downloadable from this post.  If you have any questions, note them here or PM me.

Compare cash flow and investment growth available if you increase your 401k/403b/457b contributions substantially, compared with your current practice.  I think you probably do know where this is going, but better for you to figure it out yourself than be handed the answers. ;)

After you get your feet wet with that tool, head over to www.cfiresim.com for a more comprehensive look.  The water's warm - jump in! 


BCBiker

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Re: Case Study - Help rescue our savings/investing plan
« Reply #8 on: February 16, 2015, 09:49:31 PM »
With your income and savings rate you could likely put all of your savings into tax advantaged accounts with some creativity.  See whitecoatinvestor.com for some ideas on this.  You have a ton of cash. You have mentioned some of the reason why but that is definitely something that is not rational from a numbers perspective. Consider a HELOC or 0% CC for your emergency fund that way your cash is not tied up in futility. These could be thought of as bridges if you have a major emergency, because you have large non-tax-advantaged accounts that could be liquidated if necessary in the medium term.

If you are concerned about your savings being tied up in retirement accounts only accessible at 59.5 years of age, I highly recommend madfientist.com for how to use money in FI prior to 59.5.  He also has awesome tax strategies!

From what you have said, it looks like you have a lot to learn but you are in awesome shape so any effort in gaining additional knowledge will pay huge dividends over your investing career. If you commute consider listening to the financial mentor podcast series and then dive deep into radical personal finance if you are still hungry for more.

dandarc

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Re: Case Study - Help rescue our savings/investing plan
« Reply #9 on: February 17, 2015, 08:21:31 AM »
Looks like you've got the tools to make this happen if you really want to:

http://rootofgood.com/make-six-figure-income-pay-no-tax/

If it is a governmental 457, that's where I'd go first, unless there is matching in the 403B that there isn't in the 457.  Same basic rules, but no early withdrawal penalties - you just have to separate from the employer.

LizzyBee

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Re: Case Study - Help rescue our savings/investing plan
« Reply #10 on: February 19, 2015, 07:44:37 PM »
Thanks, all, for your suggestions and the resources. I can't wait to dig into everything and make the necessary changes.