Author Topic: Case Study: Where to invest 50,000 annually?  (Read 5097 times)

tablemesa

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Case Study: Where to invest 50,000 annually?
« on: March 19, 2015, 07:43:24 PM »
Hi Folks,

I'm new to the forum and appreciate all the helpful insight that is being provided.  I've also been reading through MMM  and jlcollinsnh and enjoying it.

My wife and I have 50,000 to invest annually and we are looking for advice on which vehicles, 401k, IRA's and taxable accounts we should fund and in what order.  I understand this has been asked alot in other threads but hoping to narrow down the information for our particular situation.

Net Worth:  718,000
Income: Current gross is 113,000; 90,000 for me and 23,000 for her
Ages:  I'm 54 and she is 50.  Looking to retire in 6 or 8 years.

Current expenses:

Rent:  1250/mo; 15,000/yr
Utilities: (Gas, Elec, CellPhone, Cable/Int.) 545/mo; 6,540/yr
Food:  600/mo; 7,200/yr
Auto loan:  22,000@1.9%; 420/mo;5,040/yr
Auto Gas:  280/mo; 3360/yr
Insurance: (Auto 3cars (mine, wife,son), Rent, TermLife) 314/mo;3768/yr

Totals:  3409/mo; 40,908/yr


Assets:
tIRA - 525,000 Edward Jones (I know, I know.....)
401k - 55,300 (mine; 100% employer match to 6%)
401k -1,700 (hers, 100% employer match to 4%)
HSA's - 3879
Roth(1) - 16,500
Roth(2) - 4,300
529's - 23,858
Cash - 110,000
Total - 740,537

Liabilities: 22,000@1.9% auto loan

Specific Question(s): The large cash amount will be broken out for house down payment, emergency fund, 2014 IRA catch up, 2015 IRA max out, and remainder for taxable accounts.  For the house were are looking to stay below 150,000 cost using 20% down @ 2.75% for 15 years.  So at this point with our age and years to retirement we're not sure if we should be maxing out the 401k @ 24,000/year (100% employer match up to 6%), then onto deductable tIRA or Roth.  I know we are tax deferred 'heavy' so does it make more sense to fund taxable investments?

Sorry if I have left anything out, I will edit my post as questions arise.

Appreciate taking the time to look this over and provide any guidance.
« Last Edit: March 19, 2015, 08:35:35 PM by tablemesa »

Gin1984

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Re: Case Study: Where to invest 50,000 annually?
« Reply #1 on: March 19, 2015, 07:46:00 PM »
Does she have access to a 401k?

jmusic

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Re: Case Study: Where to invest 50,000 annually?
« Reply #2 on: March 19, 2015, 08:04:58 PM »
A few notes:

1.  Congrats on already having a sizeable nest egg.  To me the fact that it might be considered "suboptimal" (Edward Jones) is less important than the fact that you've actually been TAKING ACTION!
2.  There are a few things that you could change that would allow you to retire MUCH sooner.  I know we talk about that stuff a lot here, but what many people fail to realize is that expense reduction reduces the "burn rate" of assets in retirement.
  • Car payments - This should go ASAP.  Either sell/downsize the car or redirect other spending to pay off the loan.
  • Utilities.  $6500 is a LOT OF MONEY!  You could get Netflix and cut the cord, or just go without altogether.  There are also ways to optimize cellphones to get out of ridiculous-land (I pay ~$35/mo).
  • Term life insurance can go if you're retired.  The point of Term is to replace income that would be lost if you were killed.  Once you're retired there's no need to maintain it...

britton

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Re: Case Study: Where to invest 50,000 annually?
« Reply #3 on: March 19, 2015, 08:08:01 PM »
I would max out 401k and all tax deferred options before considering a taxable account. You will be able to access your money penalty free in only 5 years give or take and your wife in 9 years. Everything I've read says that tax deferred is always the way to go. Plus, if you wanted your money out earlier than when you are 59.5 yrs old, you could always use a SEPP (https://personal.vanguard.com/pdf/s164.pdf).

tablemesa

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Re: Case Study: Where to invest 50,000 annually?
« Reply #4 on: March 19, 2015, 08:45:55 PM »
Does she have access to a 401k?

Yes, hers is 100% match up to 4%.  All Fidelity funds with high expense ratios though.

A few notes:

1.  Congrats on already having a sizeable nest egg.  To me the fact that it might be considered "suboptimal" (Edward Jones) is less important than the fact that you've actually been TAKING ACTION!
2.  There are a few things that you could change that would allow you to retire MUCH sooner.  I know we talk about that stuff a lot here, but what many people fail to realize is that expense reduction reduces the "burn rate" of assets in retirement.
  • Car payments - This should go ASAP.  Either sell/downsize the car or redirect other spending to pay off the loan.
  • Utilities.  $6500 is a LOT OF MONEY!  You could get Netflix and cut the cord, or just go without altogether.  There are also ways to optimize cellphones to get out of ridiculous-land (I pay ~$35/mo).
  • Term life insurance can go if you're retired.  The point of Term is to replace income that would be lost if you were killed.  Once you're retired there's no need to maintain it...
  Yes, thank you.  Been through a lot of hurdles over the years but tried to keep somewhat a focus on savings/investing.  I agree on the expenses and we will be eliminating a lot of those shortly.

I would max out 401k and all tax deferred options before considering a taxable account. You will be able to access your money penalty free in only 5 years give or take and your wife in 9 years. Everything I've read says that tax deferred is always the way to go. Plus, if you wanted your money out earlier than when you are 59.5 yrs old, you could always use a SEPP (https://personal.vanguard.com/pdf/s164.pdf).

  That's what I've been reading too britton and I'm leaning toward that.  Going over taxes with my accountant in a couple weeks so looking forward to his weigh-in also.  EJ recommended to max out Roths and then brokerage account with them, but I'm not feelin warm and fuzzy about that.

Gin1984

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Re: Case Study: Where to invest 50,000 annually?
« Reply #5 on: March 19, 2015, 08:59:40 PM »
So you could max up to $18K each so $36K, then trad IRA $5500 for you and like $4500-5K her. That gets you to 46K. The remains can go into a taxable.  I'd not pay off the car loan because I like the rate.  I assume you will pay it off before you retire, so I do not see the issue.  That will save you over $5000 plus the savings in insurance, which I assume your son would be able to his own pay in six years, yes?  Oh, wait, you have an HSA.  Max that out before the 401ks so no taxable for you.  ;)

Gin1984

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Re: Case Study: Where to invest 50,000 annually?
« Reply #6 on: March 19, 2015, 09:02:06 PM »
You don't need to use SEPP.  You will be 60 and can pull money out of your retirement accounts and she can, under many plans (check her specifically) pull money out of her 401k from 55-59.5 as long as she does not roll it over to an IRA.

MDM

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Re: Case Study: Where to invest 50,000 annually?
« Reply #7 on: March 19, 2015, 10:46:05 PM »
Took a quick look and you might be ~4 years from FI.  Significant unknowns include upcoming college and housing costs.  You might find www.cfiresim.com, Quicken's Lifetime Planner, or the Reader Case Study spreadsheet useful to enter your own specifics and evaluate different options.  Numbers below are from the RCS spreadsheet, with inputs from the OP, some guesses, and some assumptions.  Primary assumption is that you follow the good advice already given and put as much as you can into tax-deferred funds.

Nice work to get where you are, and best wishes for the future.

CategoryMonthlyCommentsAnnual
Salary/Wages$9,417$113,000
HSA/Pension$554$6,650
FICA base salary/wages$8,863$106,350
Traditional IRA$917At maximum$11,000
401(k) / 403(b) / TSP / etc.$3,000At maximum$36,000
Income subject to IRS tax$4,946$59,350
Federal Adj. Gross Inc.$4,946$59,350
Federal tax$2412015 rates, MFJ, stand. ded., 3 exempt.$2,890
Soc. Sec.$549Assumes 2 earners paying$6,594
Medicare$129$1,542
Total income taxes$919$11,028
Income before other expenses  $4,027$48,322
Monthly Expenses:
Rent$1,250$15,000
Home/Rent Insurance$314Also auto & life$3,768
Cable TV$545All utilities$6,540
Fuel/Public Transport$280$3,360
Groceries$600$7,200
Non-mortgage total$2,989$35,868
Loans:
Auto$420$5,040
Total Expense$3,409$40,908
Total to invest$618$7,414
Summary:
"Gross" income$9,417$113,000
Income taxes$919$11,028
After-tax income$8,498$101,972
IRA+401k/403b/TSP/457 (Savers' credit)$3,917$47,000
Living expenses$3,543$42,518
Non-mortgage loans$420$5,040
After-tax investable$618$7,414
Time to FIRE?:
Time to FIRE4years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Expected retirement total tax rate10.00%
Current Savings
Taxable$21,000
Tax-deferred (e.g. trad. IRA/401k)$585,879
Roth$20,800
Projected Savings at Retirement
Taxable$56,405
Tax-deferred (e.g. trad. IRA/401k)$914,715
Roth$25,283
Total projected stash$996,403
Projected Expenses in Retirement
Non-loan, non-work expenses$35,868
Income taxes$3,985
Total$39,853
Stash needed for retirement @4.0% SWR$996,333
Have $69 extra.


Filing Status21=S, 2=MFJ
# of earners2
AGI$59,350
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.3
Exemption$12,000
Taxable$34,750
Tax$4,290
Savers' credit$400
Tax after n-r credit$3,890
# Children <171
Child Tax Cred.$1,000
EIC$0
Net Tax$2,890
Monthly$241
Mtg. Int. (guess)$0
Prop tax$0
Charity$0
Item. Deduct.$0

rpr

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Re: Case Study: Where to invest 50,000 annually?
« Reply #8 on: March 20, 2015, 01:16:18 AM »
401k max is 24k per person if age>50.


Sent from my iPad using Tapatalk

tablemesa

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Re: Case Study: Where to invest 50,000 annually?
« Reply #9 on: March 22, 2015, 08:23:31 AM »
Thanks everyone!   MDM, thanks for taking your time to run some initial numbers.

We appreciate the spreadsheet and after spending a little effort the numbers clarified some areas that we could make changes for an immediate impact.  We have funded our tIRAs for 2014 and 2015 (VTSAX/80 & VBMFX/20) and have up'd our 401s.  Next is reducing expenses (plenty of opportunity there) and home purchase.  Although rents in our area are higher than ownership, we still need to research if it makes sense for our longer term retirement/travel plans.

If anyone happens to see any glaring issues with the numbers below don't hesitate to give a shout....

CategoryMonthlyCommentsAnnual
Salary/Wages$9,451 113412
Pretax Health Ins.$195 $2,337
Pretax Vision/Dental Ins.$41 $495
Healthcare Flex Savings Acct. (FSA)$0 $0
Daycare FSA$0 $0
HSA/Pension$455 $5,455
Pretax Commuter costs$70 840
FICA base salary/wages$8,690 $104,286
Traditional IRA$1,083 Room to increase?$12,996
401(k) / 403(b) / TSP / etc.$2,500 Room to increase?$30,000
457 plans   $0 Room to increase?$0
Employer Match$0 $0
Income subject to IRS tax$5,107 $61,290
ESPP/After-tax 401k 0
Union dues $0
Life/LTD Insurance$29 $350
Paycheck income before tax$5,078 $60,940
Other ordinary income 0
Qualified dividends $0
Alimony 0
Foreign Income Exclusion $0
Rental income 0
Rental real expenses 0
Rental depreciation expense 0
Rental taxable income$0 0
Federal Adj. Gross Inc.$5,107 $61,290
Federal tax$382 2015 rates, MFJ, stand. ded., 3 exempt.$4,581
State/City tax$72 Guess, using .40% * Fed. AGI$858
Soc. Sec.$539 Assumes 2 earners paying$6,466
Medicare$126 $1,512
Total income taxes$1,118 $13,416
Add Daycare reimb.$0 $0
Add Health care reimb.$0 $0
Add Excluded Foreign Income$0 $0
Income before other expenses  $3,960 $47,524
Monthly Expenses:
Mortgage$0 $0
Rent$1,250 15000
HOA$0 $0
Property Tax$0 $0
Mortgage Insurance$0 $0
Home/Rent Insurance$45 $540
PMI$0 0
Beauty Shop$0 0
Bicycle Maintenance$0 0
Cable TV$110 1320
Car Insurance$147 $1,768
Car Maintenance, Registration, etc. $0
Charitable contributions $0
Child activities $0
Childcare $0
Christmas/Holidays$100 $1,200
Clothing/Shoes$50 $600
College costs $0
Computer (paper/software/etc.) $0
Credit card fees $0
Dental Insurance $0
Dentist $0
Dining (Pizza, Restaurant, etc.)$100 $1,200
Donations/Gifts$50 $600
Dry Cleaning 0
Electricity$100 $1,200
Emergency Fund 0
Entertainment$25 $300
Financial Fees 0
Fuel/Public Transport$300 $3,600
Gas/Oil for heating$20 $240
Groceries$600 $7,200
Hair Care$30 $360
Home Alarm System 0
Household; Maintenance 0
Internet$30 360
Landscaping/Yard work 0
Life Insurance$80 $960
Lunches$0 $0
Medical (Doctor, Hospital, etc.) $0
Medical Insurance $0
Medicine (OTC + Prescription) $0
Miscellaneous $0
Parking $0
Pets$70 $840
Phone (cell)$245 $2,940
Phone (landline) $0
Recycling/Trash $0
School Tutition/Books/Etc. $0
Sports/Recreation $0
Subscriptions (paper/magazines/etc.) $0
Travel/Vacation$170 $2,040
Water/Sewer 0
Wine/Beer/Tobacco 0
Work/Professional fees $0
Non-mortgage total$3,522 $42,268
Loans:
Student Loan$0 $0
Car$420 $5,040
0 0
Other tax-advantaged investments:
Roth IRA $0
Roth 401k/403b $0
529 plan/ other investment 0
Total Expense$3,942 $47,308
Total to invest$18 $216
Additional Mortgage Principal 0
Additional Loan payments 0
Available for taxable investment:$18 $216
Summary:
"Gross" income$9,451 113412
Income taxes$1,118 $13,416
After-tax income$8,333 $99,996
IRA+401k/403b/TSP/457 (Savers' credit)$3,583 $42,996
ESPP+529/other$0 0
Living expenses$4,312 $51,744
Non-mortgage loans$420 $5,040
After-tax investable$18 $216
Time to FIRE?:
Extra income after RE (pension, SS, etc.)$0 /year
Time to FIRE6years
Safe Withdrawal Rate4%percent
Real return on tax-deferred investments7.00%percent
Real, after tax, return on taxable investments5.95%percent
Expected retirement total tax rate10%
Current Savings
Taxable$74,000
Tax-deferred (e.g. trad. IRA/401k)$622,100
Roth$21,000
Projected Savings at Retirement
Taxable106175.9
Tax-deferred (e.g. trad. IRA/401k)1241167.2
Roth31515.3
Total projected stash1378858.5
Projected Expenses in Retirement
Non-loan, non-work expenses$42,268
Income taxes$3,163
Change in spending after RE-$13,800/year
Total$31,631
Total loan principal due$22,000
Stash needed for retirement @4.0% SWR$812,777
Have $566,082 extra.
Filing Status21=S, 2=MFJ
# of earners2
AGI$61,290
Std. Deduct.$12,600
Act. Deduct.$12,600
# Exempt.3
Exemption$12,000
SL int. (guess)$0
Taxable$36,690
Tax$4,581
Savers' credit$0
Tax after n-r credit$4,581
# Children &lt;170
Child Tax Cred.$0
EIC$0
Net Tax$4,581
Monthly$382
Mtg. Int. (guess)$0.00
State tax$858 1.400%
Prop tax$0
Charity$0
Item. Deduct.$858

MDM

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Re: Case Study: Where to invest 50,000 annually?
« Reply #10 on: March 22, 2015, 10:48:46 AM »
If anyone happens to see any glaring issues with the numbers below don't hesitate to give a shout....
Not glaring, but if you could reduce your AGI by ~$1300 (e.g., more 401k) you would get a $400 Saver's Credit from the IRS.

That $245/mo cell phone bill, however, is very glaring.  See http://forum.mrmoneymustache.com/share-your-badassity/communications-tech-son-of-the-superguide!/ for some ideas.

Keep up the good work.

kpd905

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Re: Case Study: Where to invest 50,000 annually?
« Reply #11 on: March 22, 2015, 10:55:18 AM »
  EJ recommended to max out Roths and then brokerage account with them, but I'm not feelin warm and fuzzy about that.

Don't invest with Edward Jones.  They are going to sell you into some high fee funds to put money in their own pocket.

boarder42

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Re: Case Study: Where to invest 50,000 annually?
« Reply #12 on: March 22, 2015, 11:03:46 AM »
50k. I'd max 401ks that will be around 25k out of pocket to hit 36k. Then I'd max your HSA then max Roth IRAs then put the rest in vanguard taxable accounts   leave Edward Jones on the roadside they aren't worth your time or money

Gin1984

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Re: Case Study: Where to invest 50,000 annually?
« Reply #13 on: March 22, 2015, 11:06:11 AM »
I'd also point out that if you max your wife's 401K, she will have no taxable income in which to fund the IRA.  I know if she was not working she could use your money to fund it, but I am not sure if she could in this case.

MDM

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Re: Case Study: Where to invest 50,000 annually?
« Reply #14 on: March 22, 2015, 11:49:01 AM »
I'd also point out that if you max your wife's 401K, she will have no taxable income in which to fund the IRA.  I know if she was not working she could use your money to fund it, but I am not sure if she could in this case.

See http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits:
Quote
If you file a joint return, you may be able to contribute to an IRA even if you did not have taxable compensation as long as your spouse did. The amount of your combined contributions canít be more than the taxable compensation reported on your joint return. See the formula in IRS Publication 590-A.