Poll

How best to move cash into investments?

$5k/mo into stock mutual fund + $5k/mo into bond fund
$10k/mo into stock mutual fund + $10k/mo into bond fund
$5k/mo into stock mutual fund
$10k/mo into stock mutual fund
$20k/mo into stock mutual fund

Author Topic: Reader case study - please critique my savings to investment plan  (Read 4886 times)

ac

  • Stubble
  • **
  • Posts: 104
Age = 33
4 person family, single income

Income
salary = $113k/yr
employer match to a SIMPLE IRA = $3.3k/yr
Total annual = $116.3k/yr

Current expenses
Monthly average = $4k
Includes home mortgage with $98k left on 15 yr mortgage 3.125%

Assets: Amount & description
home value = $140k
paying $1470/mo towards mortgage that only requires $980/mo (includes tax and insurance)
cars = $15k
cash in savings/checking/uninvested cash in investment accounts = $200k (this is stupid)
investments = $210k (needs more cash)
subtotal = $555k

Liabilities: Amount - rate - description
home mortgage with $98k left on 15 yr mortgage 3.125%

Specific Question
Can you help with my tactics of pushing the large cash amount into investments? 
My current plan is to

move $5k/mo from cash into a vanguard fund like VFINX OR VIMAX
also move $5k/mo from cash into a bond fund like VFSTX
Total of $10k/mo from cash into investments including stock mutual fund and also bond fund

Once the cash is down to ~$5k, then push bond fund money $5k/mo into stock mutual fund like VIMAX


That way I dollar cost average my way back into the market, reaching a steady state in a few years where I only have ~$5k in cash and everything else in stock mutual fund investments.

Thanks for the help!

ac

mxt0133

  • Handlebar Stache
  • *****
  • Posts: 1559
  • Location: San Francisco
Re: Reader case study - please critique my savings to investment plan
« Reply #1 on: May 22, 2014, 01:38:13 PM »
I'm not going to comment on dollar cost averaging vs lump sum investing, it's a personal decision and based on your age the difference will be a minor blip based on your investment time horizon.

I would recommend that you keep your bond fund investments in your non-taxable accounts and keep your stock funds in taxable accounts for tax efficiency.  So in your case whatever amount you decide to invest into your bond funds, invest them in your SIMPLE IRA first, then in a Roth 401k account, and then into your taxable accounts.

One question to really ask yourself is how comfortable/committed would you be if there was a sudden 10-20% market correction?  I ask because you have so much in cash right now, seems like you were trying to time the market and waiting for a correction but then missed the gains the past few years and don't want to get left behind again, could be wrong just a guess.  The worst thing you could do is pull them out at a loss in a panic.  So really think about how you would react to a correction and if you are committed to your long term investment goals.




nereo

  • Senior Mustachian
  • ********
  • Posts: 10581
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Reader case study - please critique my savings to investment plan
« Reply #2 on: May 22, 2014, 02:04:50 PM »
interesting conversations in previous threads about lump-sum vs DCA investing (assuming you have a large sum to invest up front).  I started out on the DCA train but have been swayed into thinking the lump-sump is teh way to go when you have a timeline of decades in front of you.

That said, what I would do first is determine what AA you want in terms of % stocks vs % bonds.  You are talking about investing your remaining cash 50/50.  Your AA will be influenced by what your SIMPLE IRA is invested in, but investing that half of your cash into bonds will give you a AA that I consider too heavy on the bond side for someone who is 33 (my age).  personally, I'm shooting for a 90/10 allocation.

Once you know what you want you AA to be, then calculate how much of your ~$200k you will need to put into each index fund to get you there.

EDIT: If you want more detailed help feel free to do a thorough case study.  This one's more of a "simple question about how to invest a bunch of cash".  More detail is needed about your budget to give complete answers.

ac

  • Stubble
  • **
  • Posts: 104
Re: Reader case study - please critique my savings to investment plan
« Reply #3 on: May 23, 2014, 09:49:55 AM »
Thanks for the replies.  Could you please expand on this?  I dont understand the tax implications of bonds vs stocks.
"I would recommend that you keep your bond fund investments in your non-taxable accounts and keep your stock funds in taxable accounts for tax efficiency.  So in your case whatever amount you decide to invest into your bond funds, invest them in your SIMPLE IRA first, then in a Roth 401k account, and then into your taxable accounts."

Yes I had grand plans of swooping in during a market correction and buying low like I did on a small scale in 2009 when I didnt have much money.  Right now I feel pretty stupid since yes I've largely missed the big gains over the past couple years.

I find it easier to dca into mutual funds rather than individual stocks and to keep money in the index mutual funds rather than jerking it out.  So I'm not worried about "selling low" because the plan is index mutual funds that I'll just keep dca'ing into. 

Yes 90% stocks makes sense.  I was planning on moving the bond money again - this time into stocks.  However after typing out my plan instead of just thinking about it, my mortgage of 3.125% with $98k left is a pretty good return compared to bonds.

The math could indeed show me that lump sum could result in more money.  However I just don't enjoy monitoring the market.  I'd rather spend my time doing damned near anything else.  Especially since I freak out when everyone says its about to crash.  And they've been saying that for a year now.  If you can handle it and profit from it, go for it!  Not for me it turns out.

Scandium

  • Handlebar Stache
  • *****
  • Posts: 2198
  • Location: EastCoast
Re: Reader case study - please critique my savings to investment plan
« Reply #4 on: May 23, 2014, 09:58:48 AM »
The math could indeed show me that lump sum could result in more money.  However I just don't enjoy monitoring the market.  I'd rather spend my time doing damned near anything else.  Especially since I freak out when everyone says its about to crash.  And they've been saying that for a year now.  If you can handle it and profit from it, go for it!  Not for me it turns out.

Then this should be easy. Dump $150k into stocks, $50k into bonds tomorrow and don't look at the market for another 10 years. Done. Frankly, putting $5k into two different funds each month for years sounds a like a pain to me, but to each their own.

Emg03063

  • Bristles
  • ***
  • Posts: 458
Re: Reader case study - please critique my savings to investment plan
« Reply #5 on: May 23, 2014, 10:53:30 AM »
No advice here on the benefits of dca vs lump sum.  It's personal preference IMO.  I'm just posing to reinforce the point that you should be maxing out a Roth IRA in addition to your SIMPLE.  The tax implications of bond funds vs stocks is that bond funds pay interest income for which you are tax liable if held non-tax advantaged accounts.  (Stock funds distribute capital gain & dividend income, but more of your appreciation should come from unrealized than realized gains, so it should be a smaller fraction of the fund growth, especially in an index fund where stock turnover is negligible).

nereo

  • Senior Mustachian
  • ********
  • Posts: 10581
  • Location: Just south of Canada
    • Here's how you can support science today:
Re: Reader case study - please critique my savings to investment plan
« Reply #6 on: May 25, 2014, 08:19:17 AM »

P.S. I am happy to hear any critiques about my own plan, in case someone thinks I'm totally messing up :)

sure!

Quote
I had 85K in the bank. I make around 200k a year. However, since I am self-employed I may or may not make that amount every year/month. I am approximately your age (29). I also have a family: wife, 2 kids and one more on the way (last one, I promise). We are also single income.

So, I decided to dollar cost average into the market.  I increased my automatic monthly contributions to $4,000 in stocks [Vanguard index funds].

That still left me with the cash. My home mortgage rate is 4.375% for 30 years on $165,000. I also had an option of investing in a "fixed account" option through a life insurance policy I purchased years prior....  with a guaranteed 3% return (tax free growth because of the investment vehicle) and the ability to withdraw the money any time.

Anyway, I decided to put $24,000 in the 3% account and pay another $20,000 on my home loan. My thoughts are exactly as you expressed: those are better returns than bonds will provide.
That left me with $40,000 cash on hand. That is a lot, but given that I could make $1,000 next month or $50,000  and that I have a family I keep an unusually large cushion. As well, the $4,000 a month is coming from that money.

If I continue to produce monthly surpluses of cash (likely) then I'll have to decide between continued increases in my monthly contribution or paying off my home mortgage faster. I'm still undecided about that. I can't justify holding more than $40,000 in cash.
I don't see any red flags there.  By investing $4k/month and paying down the mortgage faster you're doing better than the vast majority of Americans, and probably 99% of people under 30. So bravo there.  However, given your stated "200k a year" earnings I suspect you're also spending a lot - cutting your spending further (and putting it towards savings/debt reduction) will have the biggest impact on your FI at your young age.

A few thoughts; I realize and sympathize with having drastically different incomes month-to-month.  You may have already figured this out, but a good way of mitigating this is to determine your monthly expenditures, and then consider what time span you do see some stability and keep that long a time-span in cash reserves.  For example, you said on any given month you could earn $1k or $50k.  But over a 6 month time span do the down months average out with the up months?  9 months?  Whatever that time frame is, that's the amount of monthly expenditures I'd keep on hand.

As for where to invest when your cash reserves exceed a certain point (eg > $40k) - that's largely your choice.  Paying down a 4.375% mortgage is a fine and safe choice.  Putting more money into your investment funds doesn't break the 'rules' of DCA.  To avoid fretting about it, i'd write down an investing plan for yourself that goes something like this: "At the end of every month, I will look at my bank account(s) and invest anything over $40k into my index funds and the mortgage, spitting it 50/50".  Since you aren't making your decision based on the market it's not market timing.  YOu shuold adjust the plan to whatever makes you most comfortable - putting all of it into the mortgage, or maybe reducing your cash-on-hand number to $30k, etc.

Also, you didn't mention tax-advantaged accounts (t-IRA, 401(k), HSAs, etc) but definitely make sure you are taking advantage of those.  You might be over the income limits for some of those.

TomTX

  • Magnum Stache
  • ******
  • Posts: 3442
  • Location: Texas
Re: Reader case study - please critique my savings to investment plan
« Reply #7 on: May 25, 2014, 11:39:55 AM »
Rp, have you thought about setting up a SIMPLE IRA for your business? I did this over 15 years ago for the small business I worked for. Called up Vanguard, they sent the paperwork - really, it was pretty easy. Vanguard charged nothing for setting it up. Administration is simpler than 401(k) - you can put in $12k/year, plus a 3% employer match. If you are making $200k, that makes it about $18,000 a year.

After 2 years, you can generally roll it into a regular IRA if you wish.

Rpesek6904

  • Guest
Re: Reader case study - please critique my savings to investment plan
« Reply #8 on: May 25, 2014, 06:18:04 PM »
TOM TX, Thanks. I have not heard of the SIMPLE IRA. The advice I was hearing was SEP and Solo 401k and it sounded like a headache. I've been thinking about it since I posted and I suppose I was just being a "complainy pants" and I do need to figure out how to invest some money before taxes. I'll check into the SIMPLE IRA. Thanks for the suggestion.

rmendpara

  • Pencil Stache
  • ****
  • Posts: 602
Re: Reader case study - please critique my savings to investment plan
« Reply #9 on: May 26, 2014, 10:52:03 AM »
Age = 33
4 person family, single income

Income
salary = $113k/yr
employer match to a SIMPLE IRA = $3.3k/yr
Total annual = $116.3k/yr

Current expenses
Monthly average = $4k
Includes home mortgage with $98k left on 15 yr mortgage 3.125%

Assets: Amount & description
home value = $140k
paying $1470/mo towards mortgage that only requires $980/mo (includes tax and insurance)
cars = $15k
cash in savings/checking/uninvested cash in investment accounts = $200k (this is stupid)
investments = $210k (needs more cash)
subtotal = $555k

Liabilities: Amount - rate - description
home mortgage with $98k left on 15 yr mortgage 3.125%

Specific Question
Can you help with my tactics of pushing the large cash amount into investments? 
My current plan is to

move $5k/mo from cash into a vanguard fund like VFINX OR VIMAX
also move $5k/mo from cash into a bond fund like VFSTX
Total of $10k/mo from cash into investments including stock mutual fund and also bond fund

Once the cash is down to ~$5k, then push bond fund money $5k/mo into stock mutual fund like VIMAX


That way I dollar cost average my way back into the market, reaching a steady state in a few years where I only have ~$5k in cash and everything else in stock mutual fund investments.

Thanks for the help!

ac

My opinion:

1) Simplify your life. Pay off your mortgage. You'll have an extra $1k/mo with no mortgage payment, which you can then continue investing for the rest of your life.

2) You seem very careful. If you pay off the mortgage, you'll have ~$100k left in cash. I would target 1 yr of living expenses in cash. This is sub-optimal for investing, but will it help you sleep at night? If yes, then target ~$50k in liquid cash.

3) With no more mortgage, and income $9k/mo vs expenses of $3k/mo (no more mortgage), you have a lot you can start automatically investing every month and on an ongoing basis.

This is the simplest and easiest way to do it, without getting into the complexities of when/how much/what to invest in.

Next, consider the investments. Since you're in early 30s, I would be at least 80% stocks, maybe 90-95%.

ac

  • Stubble
  • **
  • Posts: 104
Re: Reader case study - please critique my savings to investment plan
« Reply #10 on: May 27, 2014, 11:24:24 AM »
Thanks everyone.

Rp, no worries about highjacking.

I'm in a 2 person company, and I set up our SIMPLE IRA and also our SEP IRA via Vanguard.  My guess is SEP would be best for you since you can put $52k/year into it pre-tax compared to $12k/yr pretax with the SIMPLE.  The Vanguard set up forms are really quite simple.

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-SEPs-Contributions

« Last Edit: May 27, 2014, 11:28:49 AM by ac »