Author Topic: Review my case study - is strategy sound?  (Read 3124 times)

moustache79

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Review my case study - is strategy sound?
« on: January 22, 2016, 12:50:48 PM »
Hi, I would like to revisit my case study.  I have made a great deal of progress in the last 2 years.  My goal is to keep on course and move all savings going forward to Vanguard, currently looking to put cash into VWINX (Wellesley Fund).  I realize this is the risk tolerance that is correct for me.  Objectives - family of 5; Another kid on the way.  Our life is hectic, I work a lot, my wife stays at home to take care of 3 kids.  I want to get out of debt and on track to retire early / work less.   Goal is to have $1.5M in savings in order to achieve job freedom...Looking for any suggestions or things i am missing here.    Thanks!

My salary income after tax & deductions (medical, 401k, mass transit): ~$10,000/mo.  $1,850 a month going into 401k including employer match.  $500/Month going to ESPP (15% discount).   Figures above exclude bonus which is variable but could be a big number in the ~$50k+ area before tax.

Current Avg Monthly Expenses
Mortgage $1720 includes $450 per month for prop taxes and $60 per month for homeowners ins.
Heat, Electric, water, trash $250
TV, Phones, Internet $175
Car payment $500 (28 months remaining)
Student loan $105
Car insurance $40
Term life $40
Parking $25
Kids school $600 (will increase in future years as more kids get to school age)
Gasoline $100
Groceries $1000
Gym $70 (2 memberships w/ childcare)
Other $500 (dining, shopping, kids activities)

$5,125 per month spending

Assets
401k $160,000 (mostly in low cost stock funds)
checking $6,000
I Savings bonds $16,000
CD's $60,000 @ ~2.25%
IRA $10,000
529 college savings $20,000 (3 young kids)
investments $56,000 (some ESPP employer stock, mix of other stock/bond/etf)  Plan to move at least half to VWINX over the next month
Vanguard (VWINX) - $6,000
property value $220,000
Paid-off car $6,800
Total $560,800 (excluding stock noted below)

Other: Un-vested Company stock $215,000 vests over next 5 years; after tax.  Upon vesting I plan to sell and move most if not all proceeds to Vanguard.  Possibly some into CD's depending on available rates.

Debt
mortgage $163,700 @ 3.375% (15 year fixed)
student loan $19,000 @ 2.25% fixed
Car $14,600 @ 0% interest (value $14,000)

Total $197,300

NW: 363,500
NW +  Un-vested Stock: $578,500

BigRed

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Re: Review my case study - is strategy sound?
« Reply #1 on: January 22, 2016, 04:09:58 PM »
Wow, that's pretty good.  Your savings rate is over 50%.

I'd suggest a couple things.  First, you probably need more life insurance at least until you get to FI.  Both on you and on your wife.  You probably only need 10 year term, because you'll be FI by then if you keep this up, but $40 a month probably isn't enough right now.

I would pay off the SL immediately.  The 2.25% from the CD equals the interest on the loans, and you probably make too much to deduct the SL interest while you pay tax on the CD proceeds.  Even paying them off immediately would leave you with well over 6 month's expenses liquid.

Gin1984

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Re: Review my case study - is strategy sound?
« Reply #2 on: January 22, 2016, 04:22:14 PM »
Wow, that's pretty good.  Your savings rate is over 50%.

I'd suggest a couple things.  First, you probably need more life insurance at least until you get to FI.  Both on you and on your wife.  You probably only need 10 year term, because you'll be FI by then if you keep this up, but $40 a month probably isn't enough right now.

I would pay off the SL immediately.  The 2.25% from the CD equals the interest on the loans, and you probably make too much to deduct the SL interest while you pay tax on the CD proceeds.  Even paying them off immediately would leave you with well over 6 month's expenses liquid.
Why would one pay off the lower rate loan, instead of the higher rate loan(mortgage).  That said, I would not pay either and keep investing.

onlykelsey

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Re: Review my case study - is strategy sound?
« Reply #3 on: January 22, 2016, 04:23:59 PM »
Quote
Why would one pay off the lower rate loan, instead of the higher rate loan(mortgage).  That said, I would not pay either and keep investing.

Assuming it's his primary home, tax deduction on interest may bring the effective rate down quite a bit on the mortgage.  Also, student loans are not dischargeable (probably a remote worry in this case, but not for all, I imagine).

BigRed

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Re: Review my case study - is strategy sound?
« Reply #4 on: January 22, 2016, 04:40:15 PM »
Why would one pay off the lower rate loan, instead of the higher rate loan(mortgage).  That said, I would not pay either and keep investing.

Good point about the mortgage.  Even with the deduction it's a higher rate than the SLs, and it probably isn't fully deductible, unless OP lives in a high income tax state. 

At any rate, you're right that the loans aren't worth worrying about, and investing whatever possible is the right call. 

moustache79

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Re: Review my case study - is strategy sound?
« Reply #5 on: January 22, 2016, 05:44:51 PM »
Thanks.  No student loan deduct due to income    I deduct mortgage due to high state taxes 3.75% plus prop tax ~$5k. 

I should say i have a $500k term policy which is $40/mo.  Goes to 2027

Then i have $600k policy thru work

csprof

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Re: Review my case study - is strategy sound?
« Reply #6 on: January 22, 2016, 10:59:01 PM »
Quote
Why would one pay off the lower rate loan, instead of the higher rate loan(mortgage).  That said, I would not pay either and keep investing.

Assuming it's his primary home, tax deduction on interest may bring the effective rate down quite a bit on the mortgage.  Also, student loans are not dischargeable (probably a remote worry in this case, but not for all, I imagine).

Concur with this.  The cashflow benefits are worth eliminating the SL completely, all things considered, though it's probably about equal to just paying on the mortgage.

One thing to consider is whether you can "rebase" your mortgage with the money you have in your CDs.  You may have to call your mortgage holder to check about this.  Unlike a normal prepayment, a rebase reduces your monthly outlay.

Any money you take from your CDs to pay off your mortgage gets you about a 0.7% improvement in income (you pay something like 2.36% effective on the mortgage after the tax deduction, and earn something like 1.6% effective on the CDs after paying taxes on the interest).  But your CDs are earning a great interest rate for an emergency fund -- so I look at them and ask if there's a way to get a better interest rate while mitigating the risk a bit, and a rebase seems like exactly the thing to look at.

I'd consider paying down an extra $20k or so of the mortgage with those CDs -- reduce them to whatever you think your reasonable emergency fund amount is.  It's a minor win, but you'd reduce your monthly mortgage payment by about $150.  Combined with having paid off your SL, you'd have about an extra $255/month available to direct into investments, and $255/month less to worry about as an emergency fund expense.  That would leave you with about $21k in your CDs as a nice-interest-rate-earning emergency fund.

Drawbacks:  There's often a fee (perhaps $500) associated with a rebase, and you have to throw a decent chunk of money (e.g., $20k) in at once to do it.

moustache79

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Re: Review my case study - is strategy sound?
« Reply #7 on: January 28, 2016, 07:05:54 PM »
Oddly enough i prefer to have CD's even with negative carry vs. Mortgage.