Mid's 30's family...what now

[beer-man]

Mid's 30's couple, 3 young kids, wife stays at home with the kids
FL residents(no income tax!)
100-110k income depending on overtime
Wife gets 6k in farm rental income

Assets
260k IRA(Vanguard Target date 2045) maxing every year
10K in 401k but contributing max with a 4% match
100k in savings(this is where my question comes in later)

Expenses:
45k a year including mortgage, insurance charitable giving, everything
10k a year in higher education that i am funding through cash flow(done in 3yrs)

Taxes have historically been pretty low due to tons of itemization and 3 kids. Basic forecast I've done have me paying little to no taxes for 2018

We do not have an HSA as my insurance is not a high deductible plan. I am in the process of researching this option though.
I do plan on setting up a taxable account for each of my kids in the next year or so(for college or trade school) and get it started with 3-5k each.


My question really comes down to what the hell do i do with that 100k sitting in our savings. Its making hardly nothing and having it in the bank doesn't give my wife and I the financial security we originally thought it would. My hope is to be able to consider a semi-retirement at around 40-45 and in order to do that I would need to have an taxable portfolio of around 200k. My fear lies in jumping into equities at a high point. Is this an irrational fear? Should I buy in over the course of a year or just buy in all at once? I was considering either buying the Vanguard total stock market fund or split it 60/40 equity bond. Any thoughts?

[MDM]

10K in 401k but contributing max with a 4% match

When you say "contributing max" does that mean $18,500 for 2018?

Does your wife also contribute $5500 to an IRA?

[jlcnuke]

/snip

My question really comes down to what the hell do i do with that 100k sitting in our savings. Its making hardly nothing and having it in the bank doesn't give my wife and I the financial security we originally thought it would. My hope is to be able to consider a semi-retirement at around 40-45 and in order to do that I would need to have an taxable portfolio of around 200k. My fear lies in jumping into equities at a high point. Is this an irrational fear? Should I buy in over the course of a year or just buy in all at once? I was considering either buying the Vanguard total stock market fund or split it 60/40 equity bond. Any thoughts?

Invest that $100k. Your fear is, historically, irrational. Sure, it "could" be a bad time to invest and the market could go down, but historically that isn't what happens. Statistically speaking, it is generally better to "buy all in at once" based on historic US data.  No one can say what will happen in the future, but pretty much all evidence points to investing your money grows your net worth and buying power while letting it sit in a bank account causes it to lose value to inflation.

[ysette9]

First, congrats on having a good problem to solve! How did you end up with so much cash to being with? Were you saving for something in particular that fell through? Was it just for lack of a plan?

I think you should start with creating a personal investment policy statement. https://www.bogleheads.org/wiki/Investment_policy_statement This should be your big picture plan for what your goals are, your risk tolerance, and what your strategy should be for investing. You will probably figure this out in kart by having some conversations with your spouse over a glass of wine about what your long term goals are and how you feel comfortable getting there. One of my personal favorite FI bloggers has a nice discussion of his IPS here: https://livingafi.com/2015/02/10/an-investment-policy-statement-update/

Lump sum investing is statistically likely to perform better than dollar cost averaging. Remember “time in the market, not market timing”
https://personal.vanguard.com/pdf/s315.pdf

[zolotiyeruki]

Sounds like you're in a great spot! 

Here's my advice:  stick that $100k in a taxable index fund and forget about it.  When you're ready to FIRE, you'll be able to set up a SEPP from the IRA to access some of the funds penalty-free, and you'll need other investments to cover the remainder of your spending.

[boarder42]

You're in good shape. I'd get all that money invested if it were me. I'd also change from a target date fund and make your own mix of vtsax to vbtlx. It will cost you less money in fees. 100k sitting idle would have made you 20k or more invested in taxable last year.

[ysette9]

Minor note on bond funds: stock those suckers in the tax-advantaged account (401(k) or IRA) and not your taxable account for to shelter the income produced from taxes.

[zolotiyeruki]

Minor note on bond funds: stock those suckers in the tax-advantaged account (401(k) or IRA) and not your taxable account for to shelter the income produced from taxes.

I respectfully disagree.  For someone planning to retire at or after 59.5, sure.  But if you're looking to RE, and you're expecting a more modest spending level, then Roth IRAs really lose their luster.  Assuming the current exemptions remain on qualified dividents/capital gains within a $75k AGI, and your expected spending is below that, withdrawals from taxable accounts and Roth IRAs will be taxed the same, i.e. at 0%.  Taxable accounts have the advantage of being readily available penalty-free before age 59.5, however.

[ysette9]

I think we are taking about completely different things. I’m not advocating a Roth IRA or not; I am saying to hold the bonds that you choose to hold in your retirement account rather than the taxable account. This advice comes straight to me from the vanguard rep I spoke with a couple of years back when I initially made this mistake myself. We are talking about tax avoidance now in the accumulation phase regardless of what tax bracket you will be in at FIRE.

[zolotiyeruki]

I think we are taking about completely different things. I’m not advocating a Roth IRA or not; I am saying to hold the bonds that you choose to hold in your retirement account rather than the taxable account. This advice comes straight to me from the vanguard rep I spoke with a couple of years back when I initially made this mistake myself. We are talking about tax avoidance now in the accumulation phase regardless of what tax bracket you will be in at FIRE.

Ah, I see what you're saying.  Is the advice to treat bonds differently (tax-wise) than you would treat equities/index funds?  Why?

[Kierun]

I think we are taking about completely different things. I’m not advocating a Roth IRA or not; I am saying to hold the bonds that you choose to hold in your retirement account rather than the taxable account. This advice comes straight to me from the vanguard rep I spoke with a couple of years back when I initially made this mistake myself. We are talking about tax avoidance now in the accumulation phase regardless of what tax bracket you will be in at FIRE.

Ah, I see what you're saying.  Is the advice to treat bonds differently (tax-wise) than you would treat equities/index funds?  Why?

Straight from Bogleheads:
"Some investors see bonds or bond funds as tax-inefficient because almost all of the return comes from the dividend yield, which is fully taxed as ordinary income.  In contrast, stocks get most of their return from price appreciation, which is not taxed until the stocks are sold and is taxed at the capital-gains tax rate. Therefore, these investors regard bonds as being less tax-efficient than stock index funds (which rarely sell stock) and hold bonds in tax-advantaged accounts when possible."

[ysette9]

Spot on. Thanks for the quote. I was too lazy to look up a reference on my phone while walking :)

[zolotiyeruki]

Ah, thanks for clarifying.  I didn't realize the dividends were taxed as regular income regardless

[beer-man]

First, congrats on having a good problem to solve! How did you end up with so much cash to being with? Were you saving for something in particular that fell through? Was it just for lack of a plan?

I think you should start with creating a personal investment policy statement. https://www.bogleheads.org/wiki/Investment_policy_statement This should be your big picture plan for what your goals are, your risk tolerance, and what your strategy should be for investing. You will probably figure this out in kart by having some conversations with your spouse over a glass of wine about what your long term goals are and how you feel comfortable getting there. One of my personal favorite FI bloggers has a nice discussion of his IPS here: https://livingafi.com/2015/02/10/an-investment-policy-statement-update/

Lump sum investing is statistically likely to perform better than dollar cost averaging. Remember “time in the market, not market timing”
https://personal.vanguard.com/pdf/s315.pdf

We have been putting this money in savings over the past 2 yrs as I didn't have access to a 401k for the past 12yrs. My wife and I didn't have alot of investing education and come from families of aggressive under-the-mattress savers. Since this initial post I have started a Vanguard taxable account, put 70k into vanguard tax managed balanced fun, and set up automatic weekly investments from my remaining savings. I will hold steady in this fun for the long haul or until the market tanks considerably. At that point I may switch over to a Total Market fund and dump maximum funds into it.


After doing some more researching and thinking the goal is to work as much as possible in the next 6-7yrs and then partially retire at 40. Goals being to get the IRA up to 400k and taxable up to 300k.

[2Birds1Stone]

great update!

[ysette9]

Remember “time in the market, not market timing”
https://personal.vanguard.com/pdf/s315.pdf
[/quote]. I will hold steady in this fun for the long haul or until the market tanks considerably. At that point I may switch over to a Total Market fund and dump maximum funds into
[/quote]

Good update! Just be careful with what you have above. You are talking about market timing. I’d recommend again reading with Living a FI day’s on writing an investment policy statement. He specifically addresses when to look at changing your asset allocation, in response to life changes, not market performance.

Good luck!

[ThatGuy701]

How much is left on your mortgage? Are you planning to own your home or rent in the future? If you are planning to own your home why not pay the mortgage down with the $100k?

[boarder42]

How much is left on your mortgage? Are you planning to own your home or rent in the future? If you are planning to own your home why not pay the mortgage down with the $100k?

B/c its likely a terrible idea due to the fact that keeping your mortgage and investing that 100k in VTSAX will lead you to FIRE earlier - along with the added benefit of that money being liquid in the event of a job loss.

[beer-man]

How much is left on your mortgage? Are you planning to own your home or rent in the future? If you are planning to own your home why not pay the mortgage down with the $100k?

I have $160k left on my home, and trust me it has crossed my mind to try to pay it off. The past 3 yrs i aggressively paid it down from $190 and haven't really gotten that far. That same money invested in the market over the past 3yrs would have increased substantially.

 I"m still paying down the mortgage slowly but am more focused on getting into the market.

[boarder42]

How much is left on your mortgage? Are you planning to own your home or rent in the future? If you are planning to own your home why not pay the mortgage down with the $100k?

I have $160k left on my home, and trust me it has crossed my mind to try to pay it off. The past 3 yrs i aggressively paid it down from $190 and haven't really gotten that far. That same money invested in the market over the past 3yrs would have increased substantially.

 I"m still paying down the mortgage slowly but am more focused on getting into the market.

Great idea this is a conclusion not easily arrived at for most people. Cutting that out only having list 3 years is an excellent move.