Author Topic: Reader Case Study: Newly Divorced, Not Sure Where To Put 5-10 yr $$  (Read 2233 times)

sfosue

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Hello!

I've been reading Mr. Money Mustache and the forums for a while, and am hoping to find some help here with my personal situation. The short story is that I've just gotten divorced (effective 12/31/15, though all the paperwork just came through) and am sorting out my own independent financial future. My ex made most of our income, and I'm figuring out my own Mustachio-d plan for the future. No home, no kids, no debt.

I am secure in my retirement funds, and feel confident I would be okay on my current path if I was to remain single and childless (or partnered and childless), but I want to have a child, even if it means having one by myself. And I'm not sure what to do with my non-retirement money given that huge variable, which, if it happened, would happen in the next five years. Depending on how that goes and how job stuff goes here in SF, I would also look at moving to another, less expensive city in 1-3 years if necessary to make that happen, and, if it made financial sense, would want to buy a house wherever I settle. But again, no concrete plans or promises made. I'm looking at what to invest my pre-existing non-retirement funds in, given the above variables, as well as what to put future monthly savings into. I'm maxing out my 403(b) and Roth IRA.

Here is my situation / best guess for my plan moving forward:

Life Situation: single, no dependents, live in SF, CA, 34.

Gross Salary/Wages: $88,900.

Pre-tax deductions:
403(b) $18,000
FSA $1000
Insurance $672.72

Other Ordinary Income: None

Qualified Dividends & Long Term Capital Gains: None

Rental Income, Actual Expenses, and Depreciation: None

Adjusted Gross Income: $69,227.28

Taxes: I haven't done my 2015 returns yet, and they're a bit of a mess because withholding started off as married and then switched to single, but I'd estimate:
Federal: $9000
Social Security: $5200
Medicare: $1232
State: $2568

Current Expenses:
Rent: $12,000 (but will double in 2017; hence my thought that I'll probably have to leave SF)
Internet: $420
Gas/Electricity/Water: $600
Renter's and Car Insurance: $800
Gas: $600
Travel: $5000
Food: $6000
Gifts/donations: $2000
Entertainment: $2800
Misc: $1700

Current savings:
In addition to the pre-tax 403(b)-- currently maxing out-- I also save:
Roth IRA: $5500
High-interest savings account: $1150/month; currently on target for $13,800 in 2016. (I used this account for divorce and moving costs, which is why there isn't as much in it now)

Assets:
Retirement:
Roth IRA: ~$50,000 (will move to Vanguard VTSAX; should any of it go to VTIAX??)
Rollover IRA from various previous jobs: $43,700 (will move to Vanguard VTSAX; should any go to VTIAX?)
Current employer 403(b): $26,000 (in Vanguard 2045 Target Retirement Fund-- best option available through employer)

Other **These are the ones I am unsure what to do with**:
NW Mutual Short-Term Bond Fund: $55,000
USAA Short-Term Bond Fund: $23,000
My Savings Direct 1% interest savings account: $17,500
Checking Account: ~$2000

No debt, no liabilities.

So, my questions:

1) Primary question: What do I do with the short-term bond money (~$78K), and where should I put money that I'm saving every month moving forward? I opened these short-term bond accounts... 10 years ago, with the hopes that I'd buy a house or have a family. Obviously struck out on both of those fronts. Of course, I'm now kicking myself for not just dumping it into a mutual fund then... So I'm wondering if I should just dump that money into VTSAX or VTIAX (as ETFs)... or use Betterment? Or... is there somewhere else to stick that money?

There is a chance I'd want to have a kid and buy a house in 5 years. I hope that happens!? Am I better off with a 3-year CD? Some sort of safe bond fund? VFINX? VBINX? The Mr. Money Mustache article about this is from 2011, so I'm wondering if advice has changed in the past five years. If the real estate market was at all sane in the Bay Area, I might have looked at buying a place to live in and rent out if I leave, but that's a no-go option here.

2) How much should I save in my high-interest savings account as an emergency fund? I was thinking $12,000, which is a reasonable 6-month cushion given current expenses.

3) As part of my divorce settlement, I ended up with a good chunk of stock options for a company that hasn't gone public yet. Of course I'm not taking these into account since it's not real money, but I guess I should disclose that too.

4) Anything else I should be aware of? I'm trying to reduce my expenses and save even more, but again, I'm not sure what vehicle to put those savings in if I'm hoping to use them in 3-5 years.

Thank you!

GrowingTheGreen

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Re: Reader Case Study: Newly Divorced, Not Sure Where To Put 5-10 yr $$
« Reply #1 on: March 09, 2016, 07:39:06 AM »
Man. That is a huge rent increase. I'm sure you already know this (and it may not even be possible given the market in SF) but I'd be looking for an alternative place to live once the increase happens.

1) you need to figure out how much you'd be putting down for a house using a 20% down payment. Whatever is left over out of your bond fund's 78k, toss that into VTSAX. For example, if you're going to need $60k for a down payment, shift $18k into VTSAX. If your horizon is 5 years, bonds are fine. Start shifting towards CDs or savings accounts when your 2-3 years out from purchasing.

2) your plan for 6 months living expenses is solid.

3) that's awesome.

4) for being newly divorced, you're doing pretty damn well. Hell, you're doing better than many people who aren't newly divorced. You've got a nice stash and you've got your priorities straight. Mindset is everything and you've got the mindset. Best of luck!

Axecleaver

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Re: Reader Case Study: Newly Divorced, Not Sure Where To Put 5-10 yr $$
« Reply #2 on: March 09, 2016, 08:27:14 AM »
You're in the 25% tax bracket, and in a high income tax state, so you're better off changing your Roth contributions to a traditional IRA. For a $5500 contribution this year, you'd save 9.3% CA + 25% Fed = 34.3% off your taxes ($1886). That's real money in your pocket. This is especially true if you plan to be in a lower-tax location and income bracket in retirement, which it sounds like in your plan. You can recharacterize if you have already made the contribution. In your situation, with taxable money available in your accounts, you could maximize your IRA contribution on 1/2 every year, neat!

For a discussion about what assets to hold in taxable vs. tax-deferred accounts, see: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

Your other questions are on asset allocation (bonds, stocks, etc.). This is a very personal decision. I like the advice on https://www.bogleheads.org/wiki/Asset_allocation - you'll get some advice here on how folks might allocate in your shoes, but ultimately this is your decision to make, and is a mixture of your risk tolerance, significant event horizons like houses and babies, and future goals. I recommend writing a financial plan and re-evaluating it on a regular basis (I do mine quarterly, many do it annually). Mine is posted on my journal linked below, if you want to see an example.

For your bond funds, once you have your asset allocation figured out, if you do keep them in your taxable accounts, consider shifting to TIPS (lower risk) or Muni bonds (higher risk) which are tax-free. Don't do this in your Roth or tax-deferred accounts because they are lower yield. 

You're right to treat options like lottery tickets. You may want to add to your financial plan a scenario where they pay out. I had an option grant in 1999/2000 with the first Internet boom, but as luck would have it my lottery tickets didn't pay off. Many of my coworkers hired a month before me walked away with $1m-2m each, but my hiring wave was never in the money. The most successful people sold the options immediately every month, and then diversified it into other investments. There are significant tax consequences to options which you must understand, but it's too early to worry about that yet.

Dee18

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Re: Reader Case Study: Newly Divorced, Not Sure Where To Put 5-10 yr $$
« Reply #3 on: March 09, 2016, 01:53:17 PM »
Just wanted to wish you well.  I adopted as a single parent. I hope that choice brings you as much happiness as it did me.

mozar

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Re: Reader Case Study: Newly Divorced, Not Sure Where To Put 5-10 yr $$
« Reply #4 on: March 09, 2016, 02:24:24 PM »
Have you thought about getting your eggs frozen? I think you are going through a lot and bringing another person into the world is a lot to deal with in the next 3-5 years.