Where to go from here?

[Nitstein]

First of all, thanks to anyone who takes time to read this and post their advice/recommendations. 

Started reading articles from MMM not that long ago.  My financial interest has grown tremendously in the last few years but am lacking confidence to move ahead.  Used to go to Ed Jones.  Yeah, I know now that I got ripped off, but I learned a lot.  Way more than the nothing I was taught in school for personal finance.  And overall, I'm much further ahead than I would be if we didn't invest at all with them.  But I'm done adding money to those EJ accounts but will probably let them grow there.  I'm looking for advice to be able to retire early, or just to live life from a position of comfort and confidence, knowing my family will be okay financially.  I have several specific questions for you sharp minded individuals.  But, any advice is appreciated.

Background:
Married (both middle 30's) with two kids 3 and 5 years old.  (All figures are combined)
$110K pre-tax income. 
$360K in various 401k/Traditional IRA/Roth IRA accounts. 
$6K in an after tax mutual funds.  All market investments are aggressive. 
$17K in 529 plans for the kids. 
$6K in EE savings bonds that mature in a few years. 
$31K in low interest bank savings / money market accounts.
Maxing out HSA every year. 
Currently contributing 8% to 401k, and 2% to Roth 401k. 
Owe $200K on a 30 year mortgage at 4.125%.  No PMI.  House valued just under $300K.  Mortgage and Property Taxes $1580/mo.
Carry fairly robust insurance all around, which is not cheap.
No other major debts.  Will probably need a better vehicle in 5 years or so... hopefully.  No auto loans.


Questions:
1. Considering the amount sitting in low interest savings, which is our emergency fund... Should we really invest that and instead take out a home equity line of credit and only use it in an emergency? I like the idea from MMM, but who else does this?
2. Is $17K enough for two kindergarten kids' 529 plans?  I am thinking we should stop contributing.
3. I can't make sense of what to do first... Should we pay down the mortgage, max out the 401k's, or contribute to Roth IRAs?  (We are not currently contributing to Roth IRA's.)  Also, I have that future vehicle purchase in the back of my mind.  There are so many articles that tell you different opinions on this... 
4. What obvious thing am I missing that I should be concerned with?
 

[Ben Kurtz]

From the partial snapshot you provide, I get the impression you have a fairly well-run household. There are a few points to make around the edges, but beyond that it is hard to give much more advice without knowing your overall spending picture and without knowing your overall goals. If you are hanging around a website like this one, a person might guess it would be FIRE, in which case an $110,000 annual family income should be able to get you from your current position to FIRE in about 5-7 years if you buckle down.

To your specific points:

For 401ks, I would suggest making deductible contributions at least until you clean down your 22% tax bracket. After that, it is a bit more of a toss-up whether you stick with deductible or Roth contributions -- depends on your long-term plans and outlook. A 12% tax rate is not a big deal whether you pay it or whether you save it; maybe state income taxes add a few points and make a bit of a difference. I would guess you could make $5,000 to $10,000 worth of deductible contributions per year to clean down your higher bracket, but you should run your own tax estimations on the new code. Read up on the investment order posts here, but in general I would not suggest paying down that mortgage before you max out all your tax-advantaged accounts to the best of your abilities (401ks, IRAs, HSAs, state-tax deductible contributions to 529s, etc.). At 4-1/8% interest, logic dictates putting more in 529s and taxable brokerage accounts before paying off the mortgage, but if you are hoping to FIRE sooner rather than later you might be more comfortable with a paid-off house.

I'm a bit of a "keep it simple, stupid," sort of person, so I simply keep a lot of cash on hand as an emergency fund and buffer for periodic expenditures (I don't spend a lot of time setting up precise sinking funds for my next used car or other things like that). The undersized emergency fund coupled with an undrawn home equity line of course makes logical sense as you have a bit more in the market earning dividends, but I always worry about the behavioral aspects of such arrangements -- will I somehow trick myself into overspending if I set up something like that? Also, without your spending record, it is hard to say whether $30,000 is even the right number -- it works out to $5,000 a month for six months, which is not absurd but still a pretty high cash burn rate around here.

Regarding college savings, $17,000 should certainly double (if not more) by the time college rolls around, but that's certainly not enough to pay for 8 years at full freight, so it is a question of your long-term goals: Do you expect the kids to commute from home to a local state college and pay in-state rates? How much do you expect to pay yourself, as opposed to the kids working, receiving financial aid or taking out loans to pay for their own educations? It might be perfectly reasonable to stop saving now; it depends on your goals.

So far so good, but again: To be able to say much more it would help to have some insight into your saving / spending habits.

[Nitstein]

Thanks Ben,

In general we like to think we keep the spending somewhat low (but surely not to the standards of this website), though we do not track it well.  I don't have a lot of time to do that.  There are a lot of inspiring articles of ways to save on here.  We have room to improve.

Here are spending estimates other than savings.  I think I puked in my mouth a little bit estimating these numbers.

Medical/Dental/Life/Home/Auto/Dismemberment Insurance $540/mo (Yikes!)
Gym $130/mo
Water/Sewer $68/mo
Electric/Gas $210/mo
Home High Speed Internet $70/mo
Cell Phone Plan $130/mo
Gasoline (2 vehicles) $160/mo??
Food (including eating out) $725/mo??
Household and Clothes $125/mo??
Entertainment $125/mo??
Repairs $100/mo??
Infrequent large purchases not included.

I do agree that I am not sure of that emergency fund amount.  That amount actually includes our day to day checking account.  We really don't have a specific point within it where the emergency fund starts.

We need to work on defining our goals.  Ideally we would not have to worry about money too much, and be able to work jobs we want to work until formal retirement.  Not sure if that means full or part time.  In the meantime, I wrote this post basically looking for guidance to put us in the best financial position moving forward while we learn and define these goals.  I think we would be happy to work into our 50s, but on our own terms.

The advice on getting out of the 22% tax bracket makes a lot of sense.  I actually think we will stop contributing to the Roth 401k's, and increase the normal 401k's.  I think it is kind of like saving 22% right away.  My problem with normal 401k's was that we can't touch it until we are elderly.  (I understand Roth IRAs you can access the amount you contributed.)  I have read a few articles on here that indicate there are ways of getting at some 401k money early without the 10% penalty, though I really do not understand it.  I wonder if these methods still apply under the new tax law. 

The 529 account advice also makes sense.  Bottom line is we need to define our goals. 

[schmerna]

I always find it helpful to review the Investment Order, see below.

Overall, you are in pretty good shape.  I would recommend moving the EJ accounts.  They will continue to fleece you.  Vanguard and Fidelity have great customer service and will help you through the transfer.
Are you maxing out all 410ks/403b/457 for both you and your spouse? 
Max out the Roth IRAs for you and your spouse before paying off the mortgage.
What is the maximum limit for your state's 529 deduction?  Your current contributions will likely fund less that one year of tuition at in-state rates. 
How do you plan to pay for the car?  Will you use the emergency fund?

Here is the Investment Order https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153
0. Establish an emergency fund to your satisfaction           
1. Contribute to your 401k up to any company match           
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.           
3. Max HSA             
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level           
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)           
6. Fund a mega backdoor Roth if applicable.         
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.           
8. Invest in a taxable account and/or fund a 529 with any extra.       

Your food costs are outrageous for a family of four with two little ones!  What is going on here?  Are you eating out a lot, wasting food or buying high end groceries? 

You can do better in many of these categories, cell phone, cloths, entertainment are all high.  Clean these up a bit and you will have found money to fund the 401k and Roths.  Many folks here like to track expenses with Mint or YNAB.

[Wayward]

You are already doing very well, congratulations!

I would follow the investment order post for which accounts to max out first.  Also, you do not need to wait until you are 59 ½ to start transferring money out of a traditional 401k!  Read this article: https://www.madfientist.com/traditional-ira-vs-roth-ira/

Personally, my checking account is just where income is deposited, from there it gets put to work either paying debt or being saved/invested.  I have separate accounts for the emergency fund: Ally bank (1.45% APY) or NetSpend/Insight (5% APY) and track everything in Excel so there is no question about what the funds are for. 

I second moving the money from Edward Jones to another provider like Vanguard.  Just because you stop paying into it doesn’t mean you don’t get charged for having them “manage” your account.  Don't let yourself continue to be ripped off!

You seem to realize now that some of your expenses are way out of line; going forward the better you track your expenses, the better you can optimize and plan.  As for the future vehicle purchase, figure out the cost of the car you are interested in and start putting away money each month for it.

How you proceed really depends on your goals.

[Nitstein]

I'm not really sure about the food cost.  It may be less.  But we do buy a lot of organic fresh food, but we try to buy in bulk.  We figure it will pay for itself if we can avoid some health costs down the road.  Eating at restaurants is the part where we could surely cut back.  Even if we just didn't buy drinks when we are out...  I've been thinking about that since I read a MMM article addressing it.  But yeah, point taken.  Thanks

I have only skimmed some of the links you all provided.  I plan to read them fully in the near future.  I am surprised that the advice is to first fund the 401ks to only enough to get the full company match.  Then, you would contribute to IRAs (in our case traditional) before maxing out the 401ks.  I assume that would be because you have more investment options in a IRA vs 401k? Or is it easier to convert to a Roth later on?  Or both?

I'll do some reading. 

I had a conversation with the Ed Jones guy recently about fees.  As I said, since my awakening to the personal finance world, we have stopped contributing to these guys.  Basically he made it sound like its about $100 a year, in our case, to "maintain" the IRAs.  There are also fees to close EJ accounts, close to $100 each I think.  We have six.  Two Roth IRAs, a Traditional IRA, an After-Tax investment account, and two 529 accounts (which we foolishly signed up for).  I wish I could find the notes I had taken during this conversation, but I thought all the automatic reinvestments from market gains and dividends were fee free (no loads) from this point on.  I'll have to read the fine print again.  Getting stuck with $600 in fees to get out of EJ vs $100 a year to keep it in.... I know what the right thing to do is, but #*&^*!  This EJ mess could be an entire new topic.  Maybe I could just roll over the IRAs, which I think are the only ones getting charged yearly fees by EJ.  I'm fine with leaving the After-Tax account and 529s in there to grow, if they are not getting charged. 

[Laura33]

Re: EJ fees:  it’s not just the fees, it’s the expense ratios.  Did he tell you what the expense ratio is on your funds?  I would bet anything it is over 1%. You can get funds at Vanguard for less than 0.1%.  That may not sound like a big difference, but think about it:  if you are paying 1% in expenses, and the market grows by 10%, you are paying a full 10% of your profits to your advisor; if the market makes only 5%, he gets 20% of everything you made.  And what is he doing to earn it?  Mostly sitting on his butt, and occasionally fielding calls from you in which he gives you a sales pitch to convince you to stay.

Re: food costs:  I would also bet money that you are spending more than you think.  Trust me on this: not tracking your spending means money just disappears without you even noticing (ask me how I know).  There are many, many apps that you can use that make tracking your spending easy.  But if that is too big of a commitment, do what I do:  use the notes section of your phone to write down every penny you spend on food, and add it up at the end of the month.  You will be stunned and probably a little nauseated at the end of the month.

[Nitstein]

The few EJ expense ratios I looked up are at about 1.3%.  Wow, I feel stupid.  (Instead of four years of English class, maybe my high school should have included a Personal Finance class.  I know, that is an excuse...)  Looking forward, the only logical thing to do is to transfer the accounts out, even though we paid the big load to get the "good" funds.  We'll probably go to Fidelity since we already deal with them and I hear their customer service is good. 

I'm expecting the account closing fees to be about $600.  Does anyone know if we'll have to write them a check, or will they pull it from the investment account?

Are there any good posts on here regarding transferring the different types of accounts we hold at EJ?  In particular I'm concerned with the tax implications if Fidelity doesn't have the same investment options and we have to go to cash.  Is that cash taxed?  Or can you have pre-tax cash sheltered from tax in an IRA? (for the purpose of the transfer)  What if we want completely different investments than what we had at EJ?

Again, we have an after tax account, two Roth IRAs, one traditional IRA, and two 529 plans with EJ.   Thanks for your advice!

The positive news is we haven't been out to eat quite as much lately.  Also, we are in the process of re-balancing our 401k accounts to bring their expense ratios down. 

[Laura33]

1.  I would absolutely expect them to pull fees from your accounts.  But you may want to pay cash to avoid having $ pulled from your tax-advantaged accounts (because you lose the future tax-free growth on that money).

2.  Yes, selling the funds will trigger capital gains, period (it is based on the fund you sell, and not the stocks the fund holds; not that you want to keep those funds anyway, but I believe EJ has proprietary funds, so there is no way to just transfer them to Fidelity).  The good news is that there are no tax impacts from transferring the IRAs, Roths, and 529s - those are tax-protected accounts, and you can buy and sell as much as you choose.  Just have Fidelity help you with the transfer so you don’t take possession of the money.  But yes, you will owe capital gains taxes from selling the regular post-tax investment accounts - but that is only on your gains, so they may not be too bad given the costs and fees EJ has been charging you.  😉

[Ben Kurtz]

It sounds like you've started to learn your lessons from having had money with Ed Jones, but there is still some more learning from which you could benefit.

Two doctors who write about personal finance come to mind:

William Bernstein -- https://www.theglobeandmail.com/report-on-business/rob-magazine/invest-like-a-legend-william-bernstein/article33736135/
Dr. Dahle at White Coat Investor -- https://www.whitecoatinvestor.com/10-reasons-invest-index-funds/

Both of them have written books which might be in your local library, both have published on the web, and both recommend good books from other writers on the subject.

Another good book to look for in the library is the Elements of Investing, by Malkiel and Ellis. The two authors are some seriously old and old-timey guys, but they pack a lot of fundamental information into a very short book.

[eazyebeneezer]

Re: food costs:  I would also bet money that you are spending more than you think.  Trust me on this: not tracking your spending means money just disappears without you even noticing (ask me how I know).  There are many, many apps that you can use that make tracking your spending easy.  But if that is too big of a commitment, do what I do:  use the notes section of your phone to write down every penny you spend on food, and add it up at the end of the month.  You will be stunned and probably a little nauseated at the end of the month.
[/quote]

Very true! Personal Capital or Mint apps both make this very simple. I used Mint for years and recently started using Personal Capital, which I think I like even more. Just use credit card for spending, and your tracking is done. At the end of the month, check that all charges are categorized accurately. Adjust any that are not categorized correctly. Yes, you just might lose your appetite, but with that knowledge you can start going the right direction. I was shocked at how much restaurant meals were adding to my budget. I've adjusted accordingly, eating out once or twice a month and truly enjoying it.