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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Daniel1973 on September 20, 2015, 09:48:14 PM

Title: Investing Priorities
Post by: Daniel1973 on September 20, 2015, 09:48:14 PM
Hello,
My wife and I are looking for some advice regarding where we currently are financially, and how we should plan for several future items such as retirement, paying for college for two children (3yrs old and 1 year old), as well as potentially selling our existing home and buying a more expensive home in a few years. I am looking for some advice on what my wife and I should focus our investing priorities on once we fully fund my 401K at $18,000, and we both fully fund our Roth IRAs $11,000. I posted another thread with my information when I joined this site here, but I am including some more updated information below. My wife and I just started funding her 403b, but we are wondering with our current situation if that money would be better off going into 529s for our two children (3 1/2 and 1 1/2), or possibly placing it into a taxable account at Vanguard to allow it to grow and potentially be used in several years if we decide to move into a different house, etc.

My updated details are below:

State of residence: Arizona

Emergency Fund Savings: 6+ months

Debt free other than mortgage

Mortgage:
30yr fixed at 3.875% (Just refinanced at no-cost earlier this year when rates were good)
$207K Balance
Home value around $290-$300K

We roughly try to follow an 80%ish/20%ish Stock/Bond Ratio using low cost Index Funds

Me (age 41)
Salary: $100k+
401K (My employer now offers a Roth 401K option as well as traditional)
(Currently maxing out, with an employer 75% match on the firs 8% I contribute).

Current balance in employer 401k, approximately $515,000
  Currently maxing with 8% Pretax and 7% Roth
  50% S&P 500 Index Fund
  25% International Index Fund
  18% Bond Market Index Fund
  8% Russell 2000 Index Fund

Roth IRA (Vanguard)
$125,000 ($25k Vanguard Total Bond Market Index Fund Admiral Shares, $28k Vanguard Total International Stock Index Fund Admiral Shares, $71K Vanguard     Total Stock Market Index Fund Admiral Shares)
Contributing 56% to Total Stock Market, 24% Total International, 20% Total Bond Market Index Fund)

Taxable Account 1
$11K in Vanguard Total Stock Market ETF
Have not invested in this account in about 10 months, as my wife took a leave from her job for 1 Ĺ years to stay home with our second child.
Originally opened an earmarked as a future account for my two children.

Taxable Account 2
$550 in Vanguard Total Stock Market ETF
Have not invested in this account in about 10 months, as my wife took a leave from her job for 1 Ĺ years to stay home with our second child.
Just opened as a long term account for my wife and I to have something outside of retirement funds.

I am thinking of selling the ETFs and buying the Total Stock Market Index equivalent so I can potentially setup automatic contributions and also make full use of the money I transfer, unlike ETFs where you have to buy full shares. I have not contributed in about a year so I assume all the gains should be taxed at capital gain rates.
I may transfer enough from the larger account into the smaller account to meet the $3000 minimum for VTSMX. Once the balances grow, I may also sell to add in some international index funds as well. I am trying to stay away from bonds in my taxable account, using them instead in my 401K and Roth accounts.

Pension
At age 62, about $18,500 a year.


Wife (Age 33)
Salary $40k
Roth IRA (Vanguard)
$25K ($5k Vanguard Total Bond Market Index Fund Admiral Shares, $6k Vanguard Total International Stock Index Fund Admiral Shares, $14K Vanguard Total Stock Market Index Fund Admiral Shares)
Contributing 56% to Total Stock Market, 24% Total International, 20% Total Bond Market Index Fund)

403b
My wife has had a 403b option, but we only just started contributing to it and we are currently contributing $200/month.
$400 balance
60% Spartan Total Market Index Fund - FSTVX - 0.07% Expense Ratio
30% Spartan Global ex US Index Fund - FSGDX - 0.28% Expense Ratio
10% Spartan US Bond index Fund - FSITX - 0.17% Expense Ratio


Pension
Her pension is estimated to be a little over $2k a month when she retires.

529 (Son)
Utah Educational Savings Plan, Age based aggressive domestic
$900

529 (Daughter)
Utah Educational Savings Plan, Age based aggressive domestic
$900


Questions:
1. With the current balances in my 401k and our Roth IRAs, and with plans to continue maxing them out, should we be contributing to my wifeís 403b as well, or would those funds be better directed towards something else, such as saving for college for our two children, putting money in a taxable account so all our money is not tied up in retirement accounts, etc? Since my wife is several years younger than me, should that factor into whether or not we should be funding her 403b vs. 529s, taxable accounts, etc?  She has a 457 option as well, but I am trying to see what the options are and with which companies.

2. For my 401k, should I be using all Roth, all traditional, or a mix of contributions to my Roth? Since I am maxing my 401K contributions, is it beneficial to do all Roth as that would allow me to effectively save more?

3. If we decide to move into a more expensive home in the next few years (2-5), how would that affect your advice on our investing priorities?  Should we stop contributing to my wife's 403b, for example, to save up for the new house, etc?

4. We may be getting a $5k-$10 gift within a year. Where would you advise putting it?

5. We also get a large tax return every year (I know, itís an interest free loan to the government. Not a good financial idea). Where would you advise putting an $8k-$10k refund when filing next yearís taxes?

6. If I sell my ETFs and buy back the mutual fund equivalent, does anyone see that as any type of issue when it comes to reporting taxes? I don't think wash sale rules would apply since overall I will be reporting a gain.

Thank you again,
Daniel
Title: Re: Investing Priorities
Post by: Radagast on September 20, 2015, 11:27:59 PM
Lots of detailed info, but you didn't say what your goal is, which I felt was an important omission since you are already pretty well off. So I am just going off what I would do.

If I read right, you already have $1,000,000 in retirement accounts plus a decent amount elsewhere, with ~17 years before you can withdraw without using tricks. Even if you just contribute enough to get the employer match there is a better than even chance you will have over $2,000,000 by the time the first kid is in college, and around $3,000,000 by the time you start to withdraw at 60, which should be good to withdraw ~$100,000 per year. You already made it. You don't need more in your retirement accounts. I'd use the 401k just enough to get the employer contribution. Then do whatever you want with the rest. Pay for college, buy a house, or retire early. In fact I'd put the remaining money to a three way split between those goals.

This might not be the detailed answer you were hoping for, it is just my opinion.
Title: Re: Investing Priorities
Post by: Daniel1973 on September 21, 2015, 07:11:01 AM
I modified my original post to avoid confusion with the balance in my 401k, which is about $500k.  My question is with what my wife and I are saving, would you recommend still contributing to her new 403b that we just opened, or should I use that money to fund 529s and save for a new house instead?

Thank you
Title: Re: Investing Priorities
Post by: grettman on September 21, 2015, 08:23:00 AM
Why do you want a more expensive/different house?  What is driving that requirement.  As I was reading your post I thought I was going to read that you wanted to downsize but was surprised to see you are looking to spend more.  There isn't anything wrong with that but when it comes to setting priorities, it is important.  Saving for kids college in my mind is a higher priority than buying a different house if there isn't anything wrong with the current one.
 
Title: Re: Investing Priorities
Post by: rmendpara on September 21, 2015, 09:16:41 AM
Hello,

Questions:
1. With the current balances in my 401k and our Roth IRAs, and with plans to continue maxing them out, should we be contributing to my wife’s 403b as well, or would those funds be better directed towards something else, such as saving for college for our two children, putting money in a taxable account so all our money is not tied up in retirement accounts, etc? Since my wife is several years younger than me, should that factor into whether or not we should be funding her 403b vs. 529s, taxable accounts, etc?  She has a 457 option as well, but I am trying to see what the options are and with which companies.

2. For my 401k, should I be using all Roth, all traditional, or a mix of contributions to my Roth? Since I am maxing my 401K contributions, is it beneficial to do all Roth as that would allow me to effectively save more?

3. If we decide to move into a more expensive home in the next few years (2-5), how would that affect your advice on our investing priorities?  Should we stop contributing to my wife's 403b, for example, to save up for the new house, etc?

4. We may be getting a $5k-$10 gift within a year. Where would you advise putting it?

5. We also get a large tax return every year (I know, it’s an interest free loan to the government. Not a good financial idea). Where would you advise putting an $8k-$10k refund when filing next year’s taxes?

6. If I sell my ETFs and buy back the mutual fund equivalent, does anyone see that as any type of issue when it comes to reporting taxes? I don't think wash sale rules would apply since overall I will be reporting a gain.

Thank you again,
Daniel

1) I'm no expert on college savings outside of a 529 plan. There are plenty of nuances, but at a high level, you should try to shoot for less than what you expect to spend on kids college... unless you are comfortable giving away the remaining balance to someone else (or keeping for grandkids) or paying the 10% penalty to withdraw for other purposes.

2) Given you are solidly in the 25% federal bracket, probably still under the FICA limit (like 115k I think for medicare/SS), plus a state utah or arizona tax ~5%, it's very beneficial to contribute tax-deferred rather than post-tax as much as possible. For you, that means maximum to a pre-tax 401k, and then maximum to roth (no need to go nuts on Roth). If your income ever drops to 15% bracket, feel free to convert some to Roth if that helps you feel more balanced. Your annual picture would then look like this:
18k - 401k (pretax)
11k - roth ira (post tax)
403b (don't know details here, but I think it's similar to 401k, so pretax here as well)
Here's a good article regarding pre vs post-tax retirement accounts
http://www.madfientist.com/traditional-ira-vs-roth-ira/

3) I'd look into differences between your 401k vs spouse's 403b (may be almost the same). Assuming no significant differences, I'd just split it in half and cut contributions to both by whatever you need to keep in cash or outside the accounts.

4) If you are planning on a new home, then I'd keep this in an aftertax account. Mostly cash, if not all.

5) Same. If you plan to buy a home, then you should keep in cash, or other aftertax account.

6) If you want to avoid it completely, you could potentially just buy from a different provider. For example, sell your Vanguard ETF's and buy the Fidelity equivalents. Fees will be essentially the same.

General comments: Gerat job on the retirement savings! Assuming you plan to retire around age 55, the 640k (401k and roth) today retirement savings alone should hit ~1.5 million assuming 6% returns. Given you likely have 15+ years left, and not sure about your spouse, the tax-deferred compounding could be very valuable. Given you have nearly all your assets in retirement accounts, and ~100k in home equity, you could potentially benefit from having more savings in aftertax accounts (non-retirement), if you prefer to have some available assets.

Things for you/spouse to think about as you plan long term:
- if/how much you want to contribute to children's college (consider putting half or some other amount in a 529 plan)
- how much new house to buy
- if/when you and spouse plan to retire from full-time work... OR would like to have the option to retire from full-time work

Just looking at some high level numbers, you're in a solid position today. If I were in your position, I would want some more assets in aftertax accounts plus a bit more cash (for the upcoming home purchase). Given how much you already have in retirement accounts, I'd contribute enough to get the full employer match, maybe a bit more, and divert some assets into the following:
- aftertax investments
- cash
- 529 plan (the earlier the better, since this grows tax free)