Author Topic: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE  (Read 4126 times)

Eastsider

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JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« on: March 19, 2016, 05:34:32 PM »
Hi all,

New to the forum and really enjoying all of the blogs and candor here. Here's my situation:

- recently married (me 38, she 33)
- Live in Los Angeles where we live in rent control $1k month less than anywhere ($1250 a month current rent)
- We both work far away from where we live (I take public transpo, she drives)
- No debt
- I have gross salary of $105k
- Company offers good 401k, I pay 8% currently and company pays 7% automatically and covers most admin fees (!)
- 401k at $63k and mostly in US index stocks at .30% ER
- Separate IRA around $50k with a financial advisor / brokers that I want to transfer to Vanguard or Betterment (more later)
- Wife salary at $75k, has CA teacher retirement plan around $35k
- She just started new job and is in a Roth 403b with < $1k
- We have about $5k in cash savings with Ally and really want A. to go on a honeymoon this winter and B. buy a new (used) car
- We want to start trying for a kid in about a year

Our biggest priorities are to SLASH our spending. Separately my goal is to encourage her to adopt a mustachian approach in our honeymoon and car purchases (we'll net about $6k from the sale of both our cars and become a one car family), but this ain't easy!

My q's for the forum, with the assumption we're gonna be slashing our spend:

1. How should we allocate savings across 401k, Roth, regular IRA, taxable investments, and cash? (We seem to be about 4 years away from buying a home here, if at all, given the market, and we're not sure where in that mix home down payment - $100k - will come from.)

2. Should we open a betterment account including an IRA transfer from my current, high fee account?

Thanks!

ruraljuror

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #1 on: March 19, 2016, 06:42:00 PM »
How much will you have to put toward savings each year?

Eastsider

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #2 on: March 19, 2016, 07:41:49 PM »
Our goal for Year 1, incl 401k, is 40K.

MDM

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #3 on: March 19, 2016, 07:59:15 PM »
1. How should we allocate savings across 401k, Roth, regular IRA, taxable investments, and cash? (We seem to be about 4 years away from buying a home here, if at all, given the market, and we're not sure where in that mix home down payment - $100k - will come from.)

Here is the "usual advice", current as of the posting date.  See the 'Investment Order' tab in the case study spreadsheet for the latest version.   
"Max..." means "contribute up to the maximum allowed for..., subject to your ability to pay day-to-day expenses."   

It is up to you whether to consider "saving for a house down payment" as a "day to day expense", vs. lumping the down payment savings in with "taxable investments" at the end.   
If you are renting, you may not be throwing away as much on rent as you might think.  See   
   http://jlcollinsnh.com/2012/02/23/rent-v-owning-your-home-opportunity-cost-and-running-some-numbers/ for some thoughts.

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct -   
   unless your 457 fund options are significantly worse than those in the 401k/403b -
   due to penalty-free access to 457 funds at retirement, even if younger than 59 1/2.
   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
Current 10-year Treasury note yield is ~2%.  See   
   http://quotes.wsj.com/bond/BX/TMUBMUSD10Y
   
WHAT
0. Establish an emergency fund to your satisfaction
1. Contribute to 401k up to any company match
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.
3. Max HSA
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)
6. Fund mega backdoor Roth if applicable
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.
8. Invest in a taxable account with any extra.

WHY
0. Give yourself at least enough buffer to avoid worries about bouncing checks
1. Company match rates are likely the highest percent return you can get on your money
2. When the guaranteed return is this high, take it.
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   

The emergency fund is your "no risk" money.  You might consider one of these online banks:   
   http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001
      
If your 401k options are poor (i.e., high fund fees) you can check   
   http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/
for some thoughts on "how high is too high?"   
   
Priorities above apply when income is primarily through W-2 earnings.  For those running their own businesses (e.g., rental property owner, small business owner, etc.), putting money into that business might come somewhere before, in parallel with, or after step 5.

Quote
2. Should we open a betterment account including an IRA transfer from my current, high fee account?
Maybe.  Some would say yes, others would say transfer to Fidelity or Schwab or Vanguard and invest it yourself in something such as described in https://www.bogleheads.org/wiki/Three-fund_portfolio.

GrowingTheGreen

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #4 on: March 20, 2016, 08:08:55 AM »
MDM posted a lot of good stuff.

I'd like to cover something that isn't one of the typical questions.  The "we really want to go on a honeymoon" part.

When my wife and I got married, she was in the middle of a masters degree.  Timing didn't let us travel very far.  We ended up doing what we called a "mini moon".  It was three nights in a location that was within 3 hours (by car) of where we lived.  It was amazing and what was amazing about it was that we kept it low-key and focused on being with each other rather than some sort of activity.  It is one of our fondest memories and I think that it really allowed us to start off our marriage on a good note.

Some may debate with me that the honeymoon is some sort silly social ritual perpetuated by the tourism industry.  Maybe.  But we still got some real enjoyment and happiness out of the experience.  There are some beautiful national parks that aren't too far from where you live.  I don't know if that's your cup of tea, but that's the sort of trip that you can keep inexpensive.  Go for it.  You've got some decent savings, are contributing an effective 15% to your 401k, and are taking steps to improve your spending habits.

I realize that this wasn't really one of your questions, but I just felt the need to say something about it.

Back to being on topic
I'd say go with a low-cost mutual fund (or even lower-cost portfolio of ETFs) from Vanguard instead of Betterment.

If you're only 4 years from purchasing a house, I think it'd be wise to use a CD-ladder or a very conservative stock/bond allocation to save for this.  If you need $100k, then simply stash away $25k/year until then.  If you want, you could do $5.5k of this each year in a Roth--you can withdraw your Roth contributions without penalty.  401k would not be the best option (I'm too lazy to type up a huge explanation of this--Google "use 401k to buy house")

Eastsider

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #5 on: March 20, 2016, 02:15:15 PM »
Thanks MDM and Growing the Green - good stuff!

ShoulderThingThatGoesUp

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #6 on: March 20, 2016, 04:51:29 PM »
Does the rent control depend on your income at all? If so, when do you have to move to market rate? If not, remind me never to be a landlord where you are.

Abel

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #7 on: March 20, 2016, 05:14:05 PM »
Lots of good advice here. I'll chip in my .02 from the not-married-yet perspective.

I want to echo what GTG said. Another thing to consider: Los Angeles, despite the crazy reputation as a post-apocalyptic clown-car landscape, is incredibly conducive to bicycling. Perfect weather, year-round. Consider that your "minimoon" could also be a little test-drive of badassity instead of a fancypants time of endless self-indulgence. Consider that you and your wife could pick up some used road touring bicycles, ride and camp through the Angeles National Forest or any other of the amazing California wildlands, and after all that adventure would have some real assets and skills to show for it, that enrich your life going forward. Given the chance you might fall in love with bicycle commuting. I'm in Orange County and there is probably one day a year that I can't bicycle to work for safety reasons. Every other day, the only reason not to ride is because I'm being a wussypants. How far away from work is "far away"?

Investments: the expense ratio on Betterment or Wealthfront (which I use) is so low, and the tax loss harvesting and ease of diversification in the index funds is so good...honestly I would just do a self-evaluation. If you're the type that gets excited about getting hands on, periodically rebalancing your portfolio, go for Vanguard. Me, I love the Wealthfront interface, how easy it is to see my balances and invest money in the taxable account / Roth IRA, and basically just set and forget it. For me the simplicity outweighs whatever infinitely small % difference in cost, as I am more excited about saving and investing and do it more frequently when the experience is exciting, easy, and pleasant. YMMV.

Housing: I think you'd be crazy to leave your current place and even think about getting a mortgage somewhere. California real estate is insane. INSANE. You have a great deal and it's a perfect opportunity for you to stay put, optimize and slash your spend, and build your stache while enjoying one of the greatest places on earth. Seriously, the weather is so good and there is so much to see and do in Southern California, just gotta stay out of your car.

As to your questions:

#1 is answered above, go down the list top to bottom. Seems like you're doing good with the matching 401k (you're using all of the company match right?) and reducing your taxable income. I do this, and then max my Roth IRA (about $450 a month), set my budgets for necessities and fun money, and usually my monthly Wealthfront taxable investment account deposit is flexibe depending on what is left over. I use my Wealthfront taxable account as my savings account / emergency fund, and other than the $2000 in my checking account I do not have any cash. YMMV here, but I don't see the need to keep a significant amount of cash holdings when you're young and healthy with no dependents and predictable expenses. Keep building the stache and don't worry about a home down payment, if a few years down the road you need one, it's as easy as making a withdrawal from a taxable investment account. And to repeat, you'd be CRAZY to give up your current place to take on a huge amount of debt and get a house. You've got a great thing going, with very low housing costs for the Los Angeles area. Keep building your stache and keep living where you live until for some reason it becomes untenable whether due to jobs or kids or otherwise. The New York Times has a great Rent vs Buy calculator you can Google and it will show you very quickly how ideal your present housing is versus what you'd find on the market for single family homes. The only downside I see to this is location, and the long commutes you and your wife face are partly based on the absurdity of the LA metro area's design. If you could find a similarly priced place that reduced your commute that would be awesome...but this seems unlikely to me. Work with what you've got.

#2, Yes, definitely, sooner the better. Again I think the mental aspect is even more important than the minimal $ savings on fees you'll gain in the near term. You want to feel good about your investments. Even if the amount is small, if I feel like my investments are being wastefully skimmed off the top by a bunch of corporate suits around a table popping champagne, when instead my investments could be allocated almost for free by the most badass algorithm the world has ever seen? I'll be more excited about the latter and I'll probably invest and save more because I feel good about doing it.



Eastsider

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #8 on: March 20, 2016, 07:50:19 PM »
Thanks Abel.  We live in NE LA in a great, diverse, cultural neighborhood, and both work in Mid City. We've looked and we haven't been able to find anything under $2000 / month. Our commutes blow: I drive (soon to bike) 5 minutes to one subway line, take that 10 minutes to another, take that 20 minutes, then take a rapid bus ANOTHER 20 mins which stops right by my office. They're building an extension to the subway line by my building, but that won't be ready for another 3 years. Barely longer than driving. I dream of getting my badass on and biking the 3.8 miles to my work from the second subway stop, but maybe not every day. STILL it's so much better than driving: not only cheaper, but saves my mind/adrenaline.

Frankly we'll need to move closer to where we work when we finally have a kid. 20 mins instead of sometimes an hour and 20 minutes will be worth it in more ways than one, even if we're paying $15k more per year.

Abel

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Re: JUST PAID DOWN DEBT, NEED SAVINGS ALLOCATION ADVICE
« Reply #9 on: March 21, 2016, 12:50:05 AM »
Frankly we'll need to move closer to where we work when we finally have a kid. 20 mins instead of sometimes an hour and 20 minutes will be worth it in more ways than one, even if we're paying $15k more per year.

Oooof that commute is rough! Costly in terms of time, and I don't know how costly in terms of transit fares and such. If you were to bicycle from your front door to your workplace approximately how far would you have to cover? 3.8 miles from the second stop is definitely doable and a great way to start. I typically ride 12 miles one way, 4/5 times a week if you need inspiration :)

The way the LA metro is built is really silly. As if a bunch of sprawling car-dominated metropolises all wasted the land they had and eventually grew together with no sense of coherence. Would be much better off if the city had higher density, mixed-use neighborhoods with quality public transit. We can all dream.

I have a cousin who lives in Pasadena and he and his wife both fight traffic for hour long car commutes in opposite directions. Totally soul-draining. And like you said, it might be worth the increased housing cost to save that time and sanity. Also worth looking into taking jobs close to one another if possible - MMM has some good posts on how much commuting costs Americans and it's worth reducing wherever possible.

Best of luck to you! And put that dream into reality and get a bike! You are seriously in one of the greatest bicycling areas in the world, get out and enjoy it!