Author Topic: Need general financial guidance, baby on the way...  (Read 2269 times)

csa222

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Need general financial guidance, baby on the way...
« on: November 21, 2014, 08:45:30 AM »
Hello all,

Hoping you can help!

Finance is not a strength for me, nor my husband and we've relied on the "off the shelf" investment options for far too long. We have incredible/intelligent friends who are educated in finance and focused on their financial future that are willing to give advice; however, that advice can sometimes conflict and we find ourselves having to make decisions we're not comfortable making.

Our general situation is this...
- We're both above average earners (have been D.I.N.Ks for 15 years)
- We each have decent 401ks (BOTH are sitting with a previous employer and we're in the process of registering with Vanguard to move them to IRAs)
- My husband has additional stock, I have an additional savings account with a substantial balance including profit from the sale of investment property, and a small IRA bundled with my old 401k
- We have a decent sized mortgage, but it's about 30% of our combined monthly income with condo fees
- We are expecting our first baby and would like to prepare for his/her future
- We'd also like to purchase the condo adjacent to ours to expand our space (we live in a major city with a high COLI) but unsure of combining properties and renovating is the best solution financially, it would significantly increase our costs.

Here are my questions...
1) In general, is moving from 401k to Vanguard IRA the best choice? I read another post where it was recommended that we do a side-by-side analysis -- is there a general rule of thumb?
2) If moving to the Vanguard IRA, should we select traditional or Roth, and why?
3) If moving the chunk of savings from the online account, is it best to move that into the IRA as well and can I do a large lump sum when I open the IRA if I'm already transferring my old 401k?
4) Does it make sense to make extra payments on our mortgage if in the long term, it calculates to 40% reduction in payments? That seems very obvious to me not to "throw away" that extra money, but my one friend says other forms of investment are significantly more lucrative.

Thank you all in advance, I realize I have a laundry list here. I hope we will get more comfortable once we've begun using Vanguard.


BarkyardBQ

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Re: Need general financial guidance, baby on the way...
« Reply #1 on: November 21, 2014, 09:58:52 AM »
You'll probably get some more detailed responses and opinions on this from more experienced folks here soon, but I thought I'd get you started.

1) I think most people here would advocate Vanguard is the best route to go any time that option is available for you. So yes, a Vanguard IRA is a good choice.
2) You'd want to do a 401k to Traditional IRA and then convert that to a Roth. It's called a conversion ladder, you'll pay less taxes and you can get contributions out of the Roth that you can't get from the Traditional. Resources:
http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
http://forum.mrmoneymustache.com/ask-a-mustachian/help-me-understand-the-roth-conversion-pipeline-idea-and-its-benefits/
3) Depending on your situation your cash in savings has multiple purposes, but you cannot contribute more than $5500/year to any one IRA. If you both have 401ks, you should move each 401k to a T.IRA and then build your Roth conversion ladder. For savings, is it there for emergency fund, home down payment, car purchase. There are several mentalities for how much liquid cash you should keep. If your income is stable and you don't have the possibility of being laid off, then you might not need a large emergency fund. We keep 2 months expenses in savings or $5000, but we have CCs if we really have an emergency, and can pay it off next month. If you transfer your 401k to IRA I believe you could still transfer 5500 to T.IRA. You wouldn't want to transfer it to a Roth if your going to start converting cause you can move more than $5500 from a Traditional to a Roth.
4) There are several threads on this forum and articles on the internet and resources in books that argue against paying off the mortgage faster vs investing in tax advantaged and taxable accounts. If you pay more into your mortgage you cannot sell the bathroom if you need extra cash, but you can aways pull contributions out of your Roth (after 5 years), or sell some shares in your taxable accounts. Also, you'd have to recast or refi your mortgage to lower the payments making extra payments to your mortgage this month or for any term does not lower the payment the following month, it just lowers the amount of interest vs principal you pay. Your basic payment will always be set at X dollars until the term is up or your loan is paid off early. The people around here who are trying payoff early are doing so for emotional reasons and piece of mind. It's better to invest your extra money if your interest rate is decent.
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
http://forum.mrmoneymustache.com/share-your-badassity/real-cost-of-paying-off-mortgage/

Lowering your housing expenses would be a good option. 30% of your income is a huge chunk. However if you intend to eventually sell your condo + renovations and you consider it an investment make sure that it's worthwhile.

My wife and I are planning on getting pregnant next year, a lot of our planning has been around trying to lower our cost of living as much as possible before the baby arrives to find out what our basic needs and comfort level is. This also shows us our savings rat, and when we have a baby we know that the extra expense will not break us. You can start another thread and do a Case Study and everyone here will help you break down your situation and show you all the options to help you plan.
« Last Edit: November 21, 2014, 10:12:20 AM by zdravé »

mxt0133

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Re: Need general financial guidance, baby on the way...
« Reply #2 on: November 21, 2014, 10:08:02 AM »
It would help if you were most specific with your goals so we can give you our rationale for choosing a particular options vs another.  What is your risk tolerance, by that I mean how well can you financially handle a temporary job loss, can you handle a large unexpected expense, how long is your investment horizon, how would you handle large fluctuations in your investment balances?

csa222

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Re: Need general financial guidance, baby on the way...
« Reply #3 on: November 21, 2014, 10:30:06 AM »
zdravé - thank you very much for the advice and links! This is a great start for me to learn more about how the conversion ladder works among other things. I also appreciate the definitive answer on the mortgage payments, makes sense. I hadn't really thought about lowering expenses as much as making wiser investment choices, so I'll have to do an analysis to see where we're at. What I listed for our mortgage cost was a quick estimate, and I rounded up a bit. I should probably do a more exact calculation.

mxt0133 - I'll do my best to provide more detail for you:
- What is your risk tolerance, by that I mean how well can you financially handle a temporary job loss, can you handle a large unexpected expense?
**As of today, my liquid savings could support both of us for about 6 - 8 months. We're okay there.
- How long is your investment horizon?
**We are both in our late 30s. Would love to retire in our late 50s or early 60s. But realize that might not be the case. Would also consider taking a few years with a single or reduced second income for the baby.
- How would you handle large fluctuations in your investment balances?
**Not sure how to read this question... emotionally, I am not happy to see large fluctuations if that is that the question; however, I tend to look at YTD and as long as I'm ahead, I'm somewhat comfortable. If you're asking what action I would take if I experienced a large fluctuation... today, I would let it sit and hope it turns around.



BarkyardBQ

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Re: Need general financial guidance, baby on the way...
« Reply #4 on: November 21, 2014, 10:48:59 AM »
You bet. Lowering your expenses and saving the difference is the golden rule here. Have you read MMM's blog posts? Making wise investment choices is a great goal, investing is smart, but investing and saving as much as possible is smarter and efficient. If you lower your expenses and can save more and you can significantly decrease your working career by years... each 5-10% you save and invest will cut your career exponentially. If you want to work til your 60 that's great, then you can give more to your kids. If you want to shorten your career to give more time to your kids and yourself that is also possible.

http://www.mrmoneymustache.com/2013/02/22/getting-rich-from-zero-to-hero-in-one-blog-post/
http://www.mrmoneymustache.com/category/mmm-classics/
http://www.mrmoneymustache.com/all-the-posts-since-the-beginning-of-time/
http://www.mrmoneymustache.com/2011/04/15/getting-started-3-eliminate-short-termitis-the-bankruptcy-disease/


Handling large fluctuations in your investments is about your time horizon and risk tolerance. For instance... Wife and I are both 30. We have a FI date 10 years from now. We can invest in more volatile stocks (100% stocks including Foreign and Small Cap Value) knowing that we may see large fluctuations in the value of our portfolio from time to time. As our portfolio grows there could be days/months/years where we see a 25-50% drop in our portfolio. Risk tolerance and your ability to ride the roller coaster says that when this happens you will feel either of 2 things, 'OH SHIT! SELL! I CAN'T HANDLE THIS I'VE LOST EVERYTHING' (in which case you'd want more stable investments that fluctuate less) or "Today's value doesn't matter because I am looking 10-20-30 years away and it will come back, but right now stocks are on a 25% discount, let's go shopping(buy more)". In 10 years we plan to semi-retire, so we will pick up part time jobs and that income should cover our cost of living, the value of our portfolio won't matter as our Time Horizon is beyond 10 years and any fluctuation is temporary.
« Last Edit: November 21, 2014, 10:57:22 AM by zdravé »