Author Topic: Where should the money go? Debt or post-tax investments?  (Read 2666 times)

kmh

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Where should the money go? Debt or post-tax investments?
« on: November 12, 2013, 08:26:59 AM »
My partner and I are in our mid 40s with 2 young kids (ages 8 and 11) and up until now we've always been classic about 25% savers rather than full blown Mustachians.  Yes, we insulated the heck out of our house and have tiny utility bills, yes, I don't commute and my partner's commute is all on a company car with a company gas card.  Our cable/internet bill is literally zero due to some corporate benefits. We do need to rejigger our cell phone plans to something more mustachian, but our biggest controllable expenses are a very high end grocery bill, eating out and kids enrichment activities/after school childcare. You know -- emotionally invested stuff. I don't want to debate where we can find more cash, though, let's just take what I tell you I have to work with as a given and concentrate on a different part of the problem.

Income:
  160k plus bonuses

Debts
  Mortgage: 256k  4.5% interest
  Heloc          35k  3% interest

Savings                                           Balance                                Additions
  Pretax investments for retirement:  500k in IRAs, 401ks, etc    -- contributing 30,500 annually including employer match
  529s for college                          :  60k                                  -- contributing about 7200 annually
  Savings account                          : 16000                               -- recently hit hard. Putting back about 300 a month

Every year, once a year I see a decent sized bonus. If it's been a good year, it's about 22k -- say 15k in cash once taxes and a cut for 401k are pulled out of it.  In the last few years that's gone to subsidizing a construction project on our house (which is where the HELOC comes from) which was essentially a tear down 2 bedroom in a very nice neighborhood with great schools in an expensive metro area which we GC'd ourselves and which we turned into a 4 bedroom 2200 square foot space more or less equal to the other houses surrounding us.

So.... 15k as a cash injection coming soon and I'm certain I can find another few hundred in monthly cash. I don't want to debate that precise number, I'd rather focus on what to do with it here.

My options as I see them are as follows:

1. I am sorely tempted to drop every dime of our cash, both bonus and emergency savings on the HELOC and be done with it almost completely in March.  That would expose us to a lot of risk, but would immediately completely free up 8400 a year.  I have young children and a job that would be hard to replace. It would be a nasty risk to take, but my job has been quite stable for a long time and I'm the primary breadwinner.  I'd still have an untapped HELOC with a 100k credit line and some of our tax deferred accounts to raid if we got into real trouble.

2. Accept that the HELOC is only 3% interest and will be retired in about 5 years at the rate we're going and use the cash in March plus any extra I can scrape up (and there will be some monthly) to start on post-tax investments. Because we have NONE and can't retire early without some.

3. Use the 15k to shore up our badly battered emergency fund (which just sits in cash) and only use whatever new cash I can scrape up monthly to start on post-tax investments.

4. Use the 15k to shore up the emergency fund, put whatever new cash I can scrape up into post tax investments AND save less into our 401ks, but use the cash that comes out of 401k to put more into post-tax investments so we have something to support us before age 65.

Oh-- and as a final question for the group:  If you're short of creative brain space for investments (and I confess I am) is the right thing to do just to open a regular Vanguard post-tax investment account and dump it all into an S&P 500 index fund? Is there soe other no-brainer 1st choice there?

Thoughts deeply appreciated.

« Last Edit: November 12, 2013, 09:24:24 AM by kmh »

Catbert

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Re: Where should the money go? Debt or post-tax investments?
« Reply #1 on: November 12, 2013, 12:31:45 PM »
I'm relatively conservative so I would probably go with a 5th option.  Use your bonus to pay on the HELOC but let your e-fund continue to grow.  Use next year's bonus and kill it off.

The logic for me:  HELOCs are usually adjustable rates and will increase eventually (admittedly probably now for at leave 2 years).  I knew people who counted on their LOC for an emergency fund and then found the bank had cancelled the LOC w/o notice.  (One was using it for college tuition for her son and discovered the available balance was 0 when she went to write the check.)  It sounds like you are already well aware that especially with 2 children emergencies can happen...sometimes several right in a row.

Could you refi the 1st?.  4.5% isn't bad but you might be able to beat it if your credit is great.

kmh

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Re: Where should the money go? Debt or post-tax investments?
« Reply #2 on: November 12, 2013, 02:27:37 PM »
Refi hasn't seemed sensible although our credit rating is solid. Interest rates from my credit union are some of the best generally and they're not different enough for a new 30 year fixed that I'd bite. I also, at 44 really don't want to reset the clock on a 30 year fixed again.

Your conservative approach is actually a lot like what we're by-default doing. My trouble with it is I'm trying to shake out whatever options we really have for building a post-tax investment stash starting with more significant cash *now*. We really can't retire before 65 without one and we've neglected it completely. I'm not likely to empty the emergency stash for all the reasons you lay out. It really does have to grow...

So the part of my question I guess really needs more attention is the question of whether we have enough at 45 in the 401k to stop feeding it so hard and push cash to the post-tax space.

dadof4

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Re: Where should the money go? Debt or post-tax investments?
« Reply #3 on: November 12, 2013, 03:09:46 PM »
Refi hasn't seemed sensible although our credit rating is solid. Interest rates from my credit union are some of the best generally and they're not different enough for a new 30 year fixed that I'd bite. I also, at 44 really don't want to reset the clock on a 30 year fixed again.
I suggest you check that rate with Amerisave.com. Their site give an easy quote with no personal information, email or registration needed.
I was wary of using an "online" lender, so I tried to get my CU and local lenders to match. Their jaws dropped at the rates I was getting. Process was very smooth.

As for "I'm too old for another 30 year mortgage" - that's not a good excuse! You can get a 30 year mortgage at great rates, and get a lot of flexibility if things go wrong in the future. If they go right, you can always prepay.
If you know you want to finish the mortgage in 5/10/15 years, then get an appropriate mortgage (for example, a 5/1 ARM will give you unbeatable rates for the next 5 years, but still give you flexibility to pay it off in 30 years if there's trouble)

So the part of my question I guess really needs more attention is the question of whether we have enough at 45 in the 401k to stop feeding it so hard and push cash to the post-tax space.
Not an expert on this, but have you looked at SEPP? If you can forecast your needs from ER till age 59.5, you can get a simple pipeline from your IRA to use.

Also, depending on your tax bracket now and your intended withdrawal rate in retirement, the math could work to continue to to feed the 401k and just eat the 10% fee later.

kmh

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Re: Where should the money go? Debt or post-tax investments?
« Reply #4 on: November 13, 2013, 07:39:16 AM »
I had somehow missed this post about SEPP until you mentioned it.
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
Thanks. That does make me less concerned about our complete lack of post-tax savings.  We should certainly *have* some post-tax savings and can work on it, but it makes the number I need to reach seem a lot less insurmountable. Whatever I do, I won't mess with the 401k withholdings.