Author Topic: Best way to use $175,000 sitting in bank  (Read 1495 times)

frugalmama

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Best way to use $175,000 sitting in bank
« on: October 26, 2017, 11:22:30 PM »
I am 33 and my husband is 45.  We have two small kids and both work part time in healthcare.  Our time is our currency, and work 3-4 shifts per week between the two of us, last year grossing about $80,000. We have no debt and own our modest home and two cars.
Our biggest bill is our health insurance premiums, costing me almost $1,000 per month through my company.  We are both saving 10% into 401k plans through work. $900 per month goes to a Roth ($450 each).  we are putting $3,000 per kid per year into a 529 college savings plan.  We have about $100,000 in retirement accounts, including 401k, Roth IRAs, pension plans. 

When we dramatically reduced the amount we were working due to having kids and wanting to spend time as a family, we discussed many scenarios with our financial planner, including very minimal work while kids were young. He recommending allowing savings to accumulate to allow for a dramatic decrease in work at any given point. We have reduced hours and continue to grow our savings account, since we've become extremely frugal.  Our bank account now has about $175,0000.  Much of it is in a money market, earning 1.25% interest.  We are making a career shift soon, where I will be home with kids and my husband will work.  We will likely decrease our income to about $60,000 and decrease healthcare costs by utilizing the ACA.  Even if we spend down some of our savings to allow for monthly contributions to Roth IRA's, I don't see our financial picture changing dramatically this year.  I feel like we should be using the money in the bank to gain interest and use it as income now or for early retirement.  What kinds of options do we have??
Thanks so much for any input!

MDM

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Re: Best way to use $175,000 sitting in bank
« Reply #1 on: October 27, 2017, 03:10:38 AM »
We are both saving 10% into 401k plans through work. $900 per month goes to a Roth ($450 each).  we are putting $3,000 per kid per year into a 529 college savings plan.
Consider dropping the 529 and Roth IRA, and increasing the 401k.  You can generate some very large saving rates due to the saver's and earned income credits by concentrating on the 401ks.  E.g., at $80K gross and $12K for pre-tax medical insurance, $31K into 401ks saves ~25%:


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Our bank account now has about $175,000.  Much of it is in a money market, earning 1.25% interest.  We are making a career shift soon, where I will be home with kids and my husband will work.  We will likely decrease our income to about $60,000 and decrease healthcare costs by utilizing the ACA.  Even if we spend down some of our savings to allow for monthly contributions to Roth IRA's, I don't see our financial picture changing dramatically this year.  I feel like we should be using the money in the bank to gain interest and use it as income now or for early retirement.  What kinds of options do we have??
Yes, drawing from savings to facilitate the $31K (or even $36K) 401k contributions, plus $11K to Roth IRAs, seems a good plan.

Your marginal saving rate as a function of 401k contributions will change when gross income and insurance costs change.  See the case study spreadsheet if you would like to enter your specific numbers and do some "what if...?" looking.

Mr. Green

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Re: Best way to use $175,000 sitting in bank
« Reply #2 on: October 27, 2017, 05:39:47 AM »
Ditto to using savings to "replace" money from your paycheck that is instead used to max out all your tax-advantaged accounts. Not only will you be putting more money into investments that will grow at a higher long term rate than 1.25%, but you'll also capture the "free" money that is the taxes you're currently paying on the dollars you don't contribute to those tax-advantaged accounts.

frugalmama

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Re: Best way to use $175,000 sitting in bank
« Reply #3 on: October 27, 2017, 07:59:23 PM »
Thanks so much for the input.  Originally I think the idea was to avoid paying a lot of taxes on retirement funds later, but I think at this point, I'm just missing out on ways to maximize the 401k.  Am I missing anything else that I should be focused on?!

MDM

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Re: Best way to use $175,000 sitting in bank
« Reply #4 on: October 27, 2017, 08:27:15 PM »
Thanks so much for the input.  Originally I think the idea was to avoid paying a lot of taxes on retirement funds later, but I think at this point, I'm just missing out on ways to maximize the 401k.  Am I missing anything else that I should be focused on?!
Consider How To: Write a "Case Study" if you want specific feedback.  The quality of the feedback may be affected by how much detail you are willing to share.  In particular, it should be worth your while to fill out the spreadsheet mentioned in that post, whether you use it only for internal discussion or post some or all of it.

Dicey

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Re: Best way to use $175,000 sitting in bank
« Reply #5 on: October 27, 2017, 10:55:34 PM »
I third MDM and Mr. Green. Buying time to be with your children when they are small is a wise expenditure of your resources, IMO. I know it's old and laughably dated in sections, but grab a copy of "The Complete Tightwad Gazette" and devour it cover to cover. BTW, you want the big one, with the blue cover. They're hard to find used, so you have my blessing to buy it new. Triple bonus points if you already have it. You could try your library, but it's worth owning. I'm FIRE and I still  re-read it every year. I've help run the quarterly book sales at my library for a decade and I've only seen it twice. I bought both copies. One's my loaner copy and one's my you'll-pry-it-out-of-my-cold-dead-hands copy.

Between Amy D's gentle guidance and MMM's militancy, you'll find you have money left to invest even on one salary, but you can still use whatever you want from the $175k to feed your tax-sheltered account contributions. BTW, in the meantime you will invest all but a comfortable buffer into taxable accounts, a la jlcollinsnh's Stock Series.

Also, I wouldn't be against putting a one time slug of cash (say $5-6k) into each kid's 529 and then turning the tap way down while you transition into this new lifestyle.

clarkfan1979

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Re: Best way to use $175,000 sitting in bank
« Reply #6 on: October 27, 2017, 11:51:55 PM »
If your income is going to decrease by 60K, your tax liability will decrease. I don't understand why everyone is so big on the 401K contributions. I would max out your Roth first and 401K second.

Do you have the stomach for real estate investing? Sitting on 175K cash puts you in a unique position to purchase distressed homes and fix them up.

frugalmama

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Re: Best way to use $175,000 sitting in bank
« Reply #7 on: October 28, 2017, 12:29:05 AM »
We owned a second home for several years and rented it out.  We sold the home after getting burned by an awful tenant.  We decided that we did not, in fact, have it in us to be landlords 😬. 

We don't think we would have the time to fix up homes and flip them.  We have thought about using some of our $ to buy land, build a tiny home on it and retire there someday. 

If we can keep up with max Roth contributions these next years, we probably will.

Dicey

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Re: Best way to use $175,000 sitting in bank
« Reply #8 on: October 28, 2017, 01:56:19 AM »
If your income is going to decrease by 60K, your tax liability will decrease. I don't understand why everyone is so big on the 401K contributions. I would max out your Roth first and 401K second.

Do you have the stomach for real estate investing? Sitting on 175K cash puts you in a unique position to purchase distressed homes and fix them up.
Pretty sure she said it's going to go from $80k to $60k, not "decrease by 60k".

With two small kids, I'd just invest it in the market and let the market do all the work. And I own rental properties ;-).

MDM

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Re: Best way to use $175,000 sitting in bank
« Reply #9 on: October 28, 2017, 02:01:16 AM »
If your income is going to decrease by 60K, your tax liability will decrease. I don't understand why everyone is so big on the 401K contributions.
Appears the OP said "to $60K" not "by $60K". 

From the "making a career shift soon" comment we can presume 2017 will be close to "last year grossing about $80,000."

A reasonable guess of retirement income marginal rate is 15%.

Using the 401k can save 25% now.

Saving 25% now and paying 15% later is a good thing, thus the suggestion to go big on the 401k.