Author Topic: Case Study - Need some advice please.  (Read 4706 times)

Woodreaux

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Case Study - Need some advice please.
« on: December 07, 2013, 12:14:40 PM »
Hello Mustachians!

I'm calling on you ER experts to help me find my way there a little quicker.
I'm 37 yrs old.  Wife is 36, 2 boys (5&3), and a girl on the way. Yikes.

My wife is planning on quitting her job after the baby is born so we will drop to a single income family.

Our income is currently around the 140k range and will go to 110-115k range once she quits.

Expenses :
Mortgage - I'm on my fourth refi after five yrs and have gotten the mortgage to a 12yr 3.5% plan for $1660/mth.
                 Currently I pay $200 extra a month towards principal.  The balance is 165k.
Utilities - $180/mth  includes Elec, Nat. Gas, Water and Garbage (I'm in the process of making house more energy efficient
                thanks to MMM)
Insurance - Home/Auto -$250
                 Life - $370 ($75 Term life policies on me. $295 is for UL policy on me and 3 smaller policies on my wife and kids.)
                          I have a childhood friend who is an agent for one of the major Insurance companies and he talked me into
                          these policies.  I'm pretty sure these policies should go but need input on this as well.
Cable/Internet - $85  Ugh.
Food - $400  This should get a good deal lower once we start menu planning and bulk shopping soon.  We do organic and
                    grass fed local beef.  I have an old bread maker that has come out of hiding as well.
Gasoline - $200  Should decrease as well once wife is at home more.  I'm trying to convince her to go to one vehicle as well.
Phone - $130 - I hate this bill and all the big phone companies after reading about Ting and Republican. 
                      Early Termination fees are evil.  We have AT&T so Ting is less accessible and I'm not keen on
                      forking out $300 for the Moto X. 
Roth IRA - $550/mth for first 10 months of the year.
529 Plan -  $275/mth  Louisiana's START program matches a certain % according to income level  We are at
                the lowest level at the moment.  Uses Vanguard index funds as well.

Assets:
401k - 130k (Allocated roughly 70% Equities / 15% Bond / 15% Money Market) Like a dumbass I tried to time
                     the market, hence the 15% MM)  I am currently maxing it out at $17.5k with a 4% company match.
Roth IRA - 25k (90/10 in this account)  Maxing this out for a few years now.
Savings - 60k  - Thanks to Dave Ramsey I have a nice Emergency Fund :(
Other Investments - 1.5% share in a company that has pays out sporadic distributions.  Waiting on buyer for
                               big payoff.
                             Rental Property - $400 /month  (Owner finance deal)

    My main question for the Mustachian Forum is concerning this large Emergency Fund that I've accumulated.
I would like to purchase another rental property and there are plenty in my area.  I believe I could pick one up for under $100k that would rent for around $900/mth.  Is this worth the risk?
   Should I throw this into my current mortgage?
   Should I open an account with Vanguard an start my Early Retirement Fuck You Account?  Is 401k enough to start backing off?

  Thanks for any and all advice.
  GeauxBig                       
« Last Edit: December 07, 2013, 12:18:56 PM by GeauxBig »

_JT

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Re: Case Study - Need some advice please.
« Reply #1 on: December 07, 2013, 12:48:12 PM »
You should run some calculations on what your 401k will be worth when you can withdraw it. Chances are good that in the next 28 years (assuming you want it at 65), it'll appreciate to nearly a million bucks. I'd say you're probably good on that.

You need to do a lot more reading about what makes a good rental property investment, because 100k for $900 a month is a pretty atrocious return on your investment. You're in Lafayette, or farther west?

Frankies Girl

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Re: Case Study - Need some advice please.
« Reply #2 on: December 07, 2013, 04:39:38 PM »
Definitely get rid of the life insurance policies on the children - there is no good reason to insure a child - they provide no income and don't need to have money replaced in the event of a loss (funeral expenses aside, but it's not a good deal even for that). You should probably have term life on yourself and your wife up until the kids are grown... there are other posters on here that can explain the insurance stuff much better than me, but universal and whole life policies are more for the benefit of the insurance companies than the insured.
http://www.forbes.com/sites/investor/2012/09/13/retirement-disaster-looms-for-universal-life-policyholders/

You already mentioned that you're not happy with the phone, cable/internet and food bills - so I won't hit on those.

You can also open a Roth for your wife (spousal Roth) as well if you haven't already.
http://www.marketwatch.com/story/boost-retirement-savings-through-a-spousal-ira-2013-10-07

Good on you for maxing your 401K. :) Me personally, I wouldn't back off that. It is reducing your taxable income and you can roll it to a IRA->Roth eventually to create a Roth pipeline and avoid most if not all taxes after retirement, so I don't see it as an issue to have as much in there as you can.

That 60K emergency fund... yes, you could throw it at the mortgage, but it's a good interest rate and you should be able to beat that in the market using index funds, so I'd say invest it instead. If you haven't done the spousal Roth IRA, get that open and funded before the 2013 closeout, and you can also max it for 2014 as well. The rest you could technically use to get an investment rental property, but that's not my area of knowledge so I'd personally open a taxable account and get that into index funds (total stock market or similar - but stocks, not bonds or REITs or the like - whatever is the most tax efficient with low turnover so you get low taxable events/capital gains). Having a taxable account means you can tap that any time without restrictions on retirement clauses and is a good stopgap to help you make it to retirement age, if you do plan early retirement.

AccidentalMiser

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Re: Case Study - Need some advice please.
« Reply #3 on: December 07, 2013, 06:51:55 PM »
I agree with Frankies Girl.  Invest the 60k.  I actually prefer income-producing dividend-paying stocks but index funds are also good.  I'd plan on investing in steps over the next six months to a year, in 5 to 10k chunks instead of all at once.  It's an emergency fund but that doesn't mean it has to sit in a zero interest savings.

I would dump all non-term life policies asap.

frugaldrummer

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Re: Case Study - Need some advice please.
« Reply #4 on: December 08, 2013, 02:52:54 PM »
I'll disagree with the posters above and say, hold onto your emergency fund.

Imagine the following scenario - another market crash and economic downturn resulting in you being unexpectedly out of work. That would be the WORST possible time to take your money out of the stock market, yet if that's where you put your emergency fund, you would have to sell at the bottom.

Emergency funds are especially important for one-income families, as you need to be able to cover 3-6 (or, my preference, 9-12) months of living expenses in a dire emergency.  Yes, I know it's frustrating not to have that money earning more, and I'd suggest that you put some of it into shorter-term CDs or money market type accounts where you would access it without penalties if that happened.

Now, if you're comfortable with a 3 month emergency fund, put that money aside and invest the rest.

If you're interested in landlording, make sure to include costs of maintenance and an estimated vacancy rate.  IF you can find a place where you only need 2/3 of the rent to make your mortgage payment (leaving 1/3 of the rent to put aside for vacancies and repairs) it MIGHT be a doable deal.  Run the numbers though.

As for your wife - the good news is, with her quitting her job, your income might not go down at all!  I don't know what you've been paying in child care, but the savings in taxes and childcare (and business clothes and travel and business lunches etc) will probably make up most of her missing salary. 

Daleth

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Re: Case Study - Need some advice please.
« Reply #5 on: December 08, 2013, 03:46:33 PM »
Definitely get rid of the life insurance policies on the children - there is no good reason to insure a child - they provide no income and don't need to have money replaced in the event of a loss (funeral expenses aside, but it's not a good deal even for that). You should probably have term life on yourself and your wife up until the kids are grown...

I second that, big time. There is NO REASON to insure a child. That said, there's also no reason your policy on your wife should be smaller than your own. As I mentioned on another thread, a friend of mine lost his wife very suddenly when they were in their 30s with two kids under 10. The cost of hiring people to do what she had done--cook, clean, take the kids to school/to appointments/etc., watch the kids after school since their school day is much shorter than his work day--is ASTRONOMICAL.

Long story short, life insurance on a stay-at-home parent needs to reflect what it would cost you to pay people to replace that parent's services for as long as you would've needed that parent's services. With two kids 5 and under and a third on the way, that's a lot of services and a LONG time. A term life policy with a 15-year term might suffice, since by the time the youngest is 15 the others should be in college and the 15-year-old will be reasonably independent. However, if you were anticipating that your Mrs. would go back to work once the kids were older and that her money would help fund their college tuition, you'll need to also factor that lost income into the life insurance and perhaps stretch the term out to cover her until at least the oldest kids have graduated--so a 20-year term.


Frankies Girl

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Re: Case Study - Need some advice please.
« Reply #6 on: December 08, 2013, 04:40:28 PM »
I'll disagree with the posters above and say, hold onto your emergency fund.

Imagine the following scenario - another market crash and economic downturn resulting in you being unexpectedly out of work. That would be the WORST possible time to take your money out of the stock market, yet if that's where you put your emergency fund, you would have to sell at the bottom.

Emergency funds are especially important for one-income families, as you need to be able to cover 3-6 (or, my preference, 9-12) months of living expenses in a dire emergency.  Yes, I know it's frustrating not to have that money earning more, and I'd suggest that you put some of it into shorter-term CDs or money market type accounts where you would access it without penalties if that happened.



Yeah, I should have clarified... so my goof. I meant to add that's a huge amount in an emergency fund not working, so I'd take most of it and invest, but hold out 3-6 months expenses in a high yield savings account.

Woodreaux

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Re: Case Study - Need some advice please.
« Reply #7 on: December 08, 2013, 08:06:12 PM »
Thanks everyone for the replies.
It's going to be rather difficult to drop the insurance policies due to the fact that I will have to make that call to a long time friend yet I truly believe that I'm throwing away money here.
I will definitely fund the wife's IRA.  She has a Rollover IRA at this time.
I do feel more comfortable with a small emergency fund but I've let this build up for too long.
I think I will max the wife's IRA for 2013 and 2014 and then open a taxable Vangaurd account with some index funds.
I may put some towards the mortgage just because I'm anxious to get from underneath all debt.
I do want to "retire" within five years and will feel better with mortgage as low as possible.
I will keep maxing the 401k for another year or two. I'd like to see it around 150 -175k mark before backing off.

Thanks again for the advice.

Rebecca Stapler

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Re: Case Study - Need some advice please.
« Reply #8 on: December 08, 2013, 08:20:18 PM »
Thanks everyone for the replies.
It's going to be rather difficult to drop the insurance policies due to the fact that I will have to make that call to a long time friend yet I truly believe that I'm throwing away money here.
I will definitely fund the wife's IRA.  She has a Rollover IRA at this time.
I do feel more comfortable with a small emergency fund but I've let this build up for too long.
I think I will max the wife's IRA for 2013 and 2014 and then open a taxable Vangaurd account with some index funds.
I may put some towards the mortgage just because I'm anxious to get from underneath all debt.
I do want to "retire" within five years and will feel better with mortgage as low as possible.
I will keep maxing the 401k for another year or two. I'd like to see it around 150 -175k mark before backing off.

Thanks again for the advice.

That sucks, but honestly I wonder what kind of friend would sell their friends products that waste their money? Are you sure you have to call the friend to cancel? Or can you call the main number at the company?

Rebecca Stapler

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Re: Case Study - Need some advice please.
« Reply #9 on: December 08, 2013, 08:21:04 PM »
Oh, and as long as your employer is matching your 401k, I would continue contributing the match. You can't beat a 100% return on your investment.

daverobev

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Re: Case Study - Need some advice please.
« Reply #10 on: December 08, 2013, 08:37:10 PM »
$100k for $900 a month is not good ROI, for the US. Look at biggerpockets (or talk to ARebelSpy here) - 2% purchase price a month gross rent is the target for multi-family, and is a wonderful target for single family. 1.5% is ok for single.

Calling the friend.. I'd just lay it straight, "hey friend, I've decided to drop the life insurance, it's just not worth it for me. Can you do that asap? Cool.. so how's life with you?" - like, don't make a big deal about it or anything. Just my thoughts - obviously I have no idea what your relationship is like!!

lhamo

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Re: Case Study - Need some advice please.
« Reply #11 on: December 08, 2013, 09:20:19 PM »
Re:  calling friend.  I'd throw the fact that your wife is going to SAH in there, too -- "No more income for my wife, we need to cut back and just can't afford it anymore..."


_JT

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Re: Case Study - Need some advice please.
« Reply #12 on: December 08, 2013, 09:33:01 PM »
Disagree. The only reason to give him a reason why you're dropping the policy is to give him an opportunity to counter that reasoning. Just say it the way daverobev said it: that's perfect.