Suggestions before seeing financial adviser!

[hettie1]

My company offers a free consultation with a financial adviser, so we figured, "what the heck, we'll see if he has any suggestions for us".  However, before he gives us any BS anti-mustachian advise, I'm hoping some of you smart, money-savvy folks would be able to give us your suggestions first!  We have our basics in line I think, but just want to see if there's anything better we can go in with!

Quick background: married couple, late twenties, no kids, living in the currently FREEZING COLD Midwest, recent mustachian followers, but we were pretty frugal prior to learning about this blog (SO happy we found it too!  We've already made a few changes and are ready to make more for early FI!!!). 

Here's our income and where our money currently goes
** $110,000 combined income
** $220,000 remaining mortgage, 3.1% interest rate; bought house 2 years ago - currently making enough extra payments that we'll be paid off in just under 13 more years...hopefully sooner!)
** $19,000 remaining student debt (started at $45,000 3 years ago - we've been making extra payments and killed all the high interest stuff...the remaining is at an average of about 4% interest and will be gone in 6 years if we make no more extra payments).
** 2 cars - both fuel-efficient chevy aveos; both bought used, for cash several years ago.  I bus to work (company sponsored program), my husband sometimes bikes in the summer and drives (6 miles) in the winter.  We could probably do with one car, but every once in a while we need to travel for work, etc where we can't carpool or bus.  They cost us next to nothing, so we keep them both around.
** monthly bills are pretty low (i.e. $42 total phone bills, $50 internet bill, $300 on food, minimal gas expenses, no cable, free gym membership due to our insurance reimbursements, we don't use A/C in the summer, etc.

** currently have $45,000 in IRA/401K, but now that we both have full time jobs and the high-interest student loans are paid off, we are putting a lot more in.  Including employer matches and factoring approximately a 5% interest rate, we anticipate having a little over $600,000 in retirement accounts/Vanguard funds in 13 years (about the same time our house is paid off and at which time we should be able to live off of the dividends easily or with some additional minimal part time work if needed)

Here's my question:
We think we can call ourselves financially independent in the next 13 years, but we would like to pull this number in if we can - thus the financial adviser to help us decide how to invest/allocate our current extra income....so where should be really be throwing our extra income?
  ** i.e. should we be putting these equal amounts of money towards extra house payments, and retirement funds, and student loans with the goal of having everything paid off and a large sum saved at the end of 13 years?
  ** or should we be throwing all our money at something in particular (i.e. house or student loan) first and then saving in retirement funds second?
  ** or should be be saving in our retirement funds first and continue paying off the house for a longer amount of time?

What are your thoughts and experiences?? We'd love to hear from fellow frugal folks before hearing from someone in the "regular world" who likely does not have quite the same mindset as us!

[Leanthree]

Hi, former Financial Adviser here and I work for a company that does marketing to Financial Advisers so I am pretty intimate with the industry still while understanding its drawbacks yet being reasonably neutral.

There is one reason to not use any adviser and that is they are generally expensive. There are also many advisers who only recommend products to maximize their own revenue. Advisors are salespeople first and advisers second. Be skeptical of any recommendation that involves annuities, selling class A mutual fund shares within 6 years to buy other class A shares, or any "Financial Plan" as these normally are just charging you to make recommendations for things that they then will charge you to execute. While this meeting is being offered as a HR perk, I promise the person having the meeting with you wants to sell you something. I say that not to say the meeting will be useless but just so you know what to expect heading in.

The reason to have an adviser is if any of the following are true of you:
1) You can afford to have someone else do it all for you because you don't feel like it.
2) You don't trust yourself to invest irregardless of market fluctuations*.
3) You don't understand and have no desire to learn Asset Allocation, Diversification and Rebalancing.
4) Family political reasons**

Most people don't need advisers for any reason other than #2 but #2 can totally ruin a nest egg. You seem reasonably savvy so #3 is out. Check Youtube or articles on these. We saw a lot of clients because of #4 but that could have just been our practice.

*Let's say you put $1,000 of each paycheck into the market and the market is down 20%, will you still be able to invest that money or do you just let it sit there.

**e.g. Grandma is going to give a large inheritance or trust grant "only if you use my broker." If this is the situation use the advisor and take the money. Once Grandma dies, you can do whatever you want.

[Kingomri]

You guys are in good shape - congrats on that!

My thoughts:

• Do you have an idea of what you're spending per year total? The details you've given paint a good picture, but a total spending figure would allow for some more specific advice.
• Why are you putting money towards a mortgage with 3.1% tax-deductible interest instead of finishing off the student loans at ~4% average first?
• Max out both 401ks and Traditional IRAs, unless your 401k options are truly atrocious (any details on what kinds of investments are available?). It sounds like you guys probably have very Mustachian spending numbers, so I figure you can afford it. Since your spending is so low and your net worth target of $600k is so low, I assume you'll probably lead a pretty low-spending life in retirement as well. As you're currently in the 25% marginal bracket, you'll want to contribute to as much tax-advantaged space as you can - see http://www.madfientist.com/retire-even-earlier/ - if you're able to get your Adjusted Gross Income down below $60k, which sounds possible if you also contribute to an HSA, you can even get a $400 tax credit for retirement contributions.
• After maxing out 401k and IRA, pay down those 4% student loans. You could consider investing funds and paying the minimum, but to me, 4% is the threshold at which the guaranteed savings are well worth it.
• After paying off the student loans, then you've got the tougher decision of whether to pay off the mortgage (at 3.1%, that's not too bad) or invest in taxable accounts. This could go either way. With 10-year treasury bonds yielding around 2% right now, 3.1% guaranteed isn't too bad, but you're likely to earn more long-term in the stock market, and a fixed-rate mortgage can act as a nice inflation hedge. Like I said, you could go either way on this one.
• A lot of times, investment advisers will give you investment advice based on what's profitable for them, like load mutual funds that earn them a sales commission. Invest in low cost index funds, decide on an asset allocation/glide path, and stick to it. If your adviser gives you advice on what kind of asset allocation to select and directs you towards low expense ratio, no-load funds or ETFs, then you've probably got some good advice. To learn more about HOW to invest money, check out http://www.bogleheads.org/forum - they're good and smart folks over there, and learning to do DIY investing is really pretty easy. The only hard part is staying the course and controlling your emotions when the market is acting crazy.

[Goldielocks]

Here's my question:
We think we can call ourselves financially independent in the next 13 years, but we would like to pull this number in if we can - thus the financial adviser to help us decide how to invest/allocate our current extra income....so where should be really be throwing our extra income?

The big thing to prepare before seeing a financial adviser is having a great discussion with your SO about your goals in LIFE for the next 5 years, and 25 years.  A financial adviser can not tell you what to dream / achieve, only you can.   They can only try to optimize if you give them the goals to start with.

So,  I would better develop your goal / question above -- "Our goal is to be financially independent in the least amount of time, 13 years maximum. What will it take to achieve that and how soon can we make it happen?"   Now add what you want to do after being financially independent -- will you spend no more than $30k per year, or do you want to volunteer, start a new business, move to a warmer location, or backpack through the Andes, or ??? 

Then, if the FA does not talk about net monthly additional you need to save by cutting costs or adding income, does not mention wills and living power of attorneys, but goes straight to rebalancing your portfolio, adding new money, or borrowing to invest, you know that the FA is just trying to sell you something.

On the positive side, I have seen FA's with large company group pension plans that were indeed just a "perk" of getting your company's whole group benefits package, and the FA's just received a flat fee (salary) for a few days of consultation services, and no direct trailing or sales fees to them...

[MDM]

hettie1, welcome to the forums.

If you have some time, it would be worthwhile for you to go through http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit, particularly the part about Investment Policy Statements (IPS):

If you are using some sort of financial advisor, an IPS outlines the ground rules of the relationship between you and that advisor.

If you do write an IPS, feel free to post it here for comments.  It is a good idea to do one whether you use an advisor or not, but particularly good to have if you do meet with an advisor.  E.g., if the advisor suggests you tear up your well-drawn plan and buy high priced funds that would be a bad sign.  If, however, the advisor congratulates you on your foresight and offers some reasonable advice, all the better.

[hettie1]

You guys are the BEST!

@Leanthree - thank you for the insider perspective!  I always think someone is trying to sell me something ;)  Its great to have a good list of specific things to watch out for!  Really appreciated!

@Kingomri
 - to answer your questions:
1. not counting mortgage payment we are spending about ~$27,000 per year.  We know we can get this number a little lower if we tried (i.e. cut out a vacation, etc) and we could realistically live on $23,000 -$25,000 or so if we had to!
2. We are putting extra $$ to the mortgage to try to get this paid off about the same time we plan to try to retire.  But this is one of the things we are considering (paying more towards the loan instead of the house).  Neither are very high interest, so it wasn't a "no brainer" like paying off the high interest student loan was!
3. we are maxing out a Roth IRA each and then contributing to our employer plans enough to get the full employer match (Roth 401K thorugh my employer and regular 401K for hubby), and then contributing everything that's left to Vangaurd funds at the moment.
4. Thanks for the suggestions!!
5. Thank you for the suggestions!!
6. Thanks!  I'll check out that site!


@goldielocks - that's a great idea - we'll make sure to go over our long term goals too!

@MDM - those are great sites!  Thank you for the tip!

[GGNoob]

Including employer matches and factoring approximately a 5% interest rate, we anticipate having a little over $600,000 in retirement accounts/Vanguard funds in 13 years (about the same time our house is paid off and at which time we should be able to live off of the dividends easily or with some additional minimal part time work if needed)

I'm not sure of your entire financial picture, but in 13 years I would think you could have a lot more than that with your income and expenses. My wife and I are very similar to you..same age, similar debt and income, and same amount of current investments. However, our expenses are more than double yours. But in 15 years, we should have about $2.4M saved up. That's enough to be considered FI assuming that our expenses inflate by 3% yearly. Now I'm figuring a 9% return on my 100% stock portfolio. But even at 5% for 13 years, I'm looking at $1.4M. As a reference, we are currently saving about $5,100 a month and will be building that up to $6,400 eventually (counting employer matches and based off of current contribution limits).

In my opinion, you don't need to worry about paying off the house or the student debt early with those interest rates. That money would be better off invested in your retirement accounts.

I agree with checking out the Boglehead's website. They also have a great book, The Boglehead's Guide to Investing, that you could look at.

[Apples]

I want to add my vote that you should pay the student loans before your mortgage, because they have a higher interest rate (possibly unless you don't itemize your deductions?).  Once they're done you can pay extra on the mortgage.  You'll pay it down just as fast, b/c the student loans will be gone sooner so you'll switch to focusing on it sooner.  Though an extra payment every now and then for morale purposes never hurt anybody :p 

Also, over at Financial Samurai there's a post on deciding whether to pay extra on debt or invest.  Basically, you split the difference based on interest rate.  I thought it was an interesting perspective on the common dilemma.  The article is here: http://www.financialsamurai.com/pay-down-debt-or-invest-implement-fs-dair/

[Pooperman]

I want to add my vote that you should pay the student loans before your mortgage, because they have a higher interest rate (possibly unless you don't itemize your deductions?).  Once they're done you can pay extra on the mortgage.  You'll pay it down just as fast, b/c the student loans will be gone sooner so you'll switch to focusing on it sooner.  Though an extra payment every now and then for morale purposes never hurt anybody :p 

Also, over at Financial Samurai there's a post on deciding whether to pay extra on debt or invest.  Basically, you split the difference based on interest rate.  I thought it was an interesting perspective on the common dilemma.  The article is here: http://www.financialsamurai.com/pay-down-debt-or-invest-implement-fs-dair/

The thing about paying off debt vs investing always excludes the reasons it's even a discussion at all. If employment were stable and there were no risks of anything happening, then it can be decided solely on interest rate. However, downturns happen. People lose jobs, underemployment is a possibility. In those conditions, a paid off house can make all the difference on getting by. It will happen again, so always be prepared. Yes, the 6-month emergency fund is there to take care of some of this, but a paid off house lowers expenses considerably (though if you happen to remain employed, bad times = good time to invest)

[Another Reader]

Company-offered financial advisors are usually employees of whatever company provides the defined contribution retirement plan.  They are generally not focused on helping you, but on selling you whatever products benefit them and their company.  For example, the last place I worked had Prudential administer the 457 plan.  At one of their plan update meetings, an older lady that was clearly not educated about personal finance asked what she should invest in to leave something for her kids.  She had been there for decades and had a full pension.  Her words were "I'm fine but I want to leave a little something to my kids."  He told her that she needed a Prudential annuity.  He blathered on about helping her kids now with the little extras.  Yep, that's sure what she needed and wanted, wasn't it?

[Kingomri]

- to answer your questions:
1. not counting mortgage payment we are spending about ~$27,000 per year.  We know we can get this number a little lower if we tried (i.e. cut out a vacation, etc) and we could realistically live on $23,000 -$25,000 or so if we had to!
2. We are putting extra $$ to the mortgage to try to get this paid off about the same time we plan to try to retire.  But this is one of the things we are considering (paying more towards the loan instead of the house).  Neither are very high interest, so it wasn't a "no brainer" like paying off the high interest student loan was!

Nice job on keeping lifestyle creep low - your spending definitely shows you're doing a pretty good job with it :)

That being said, if you plan on continuing to lead a pretty low-key lifestyle, I would strongly suggest Traditional over Roth for 401k and IRAs. Being very generous with lifestyle inflation post-retirement, let's assume you'll be withdrawing $40k in 2015 dollars per year in retirement. Assuming no extra tax benefits from child tax credit/extra exemptions, that's ~$2,000 (again, 2015 dollars) in taxes per year for an effective tax rate of 5%. You're currently paying 25% on every marginal dollar you contribute to Roth. Having children (extra tax benefits) or a lower draw rate further skews the calculation in the favor of Traditional IRAs. Even if taxes increased to 4x what they are now, you'd still be winning out by choosing Traditional over Roth.

[Goldielocks]

I have been getting better financial advice from all of YOU than I ever did from a planner after our first one at age 22.

Including how to get SO and I talking more about future goals.

Thank-you! MMM forum

[Bobberth]

If you are wanting advice on retiring early, you won't get it from 99% of the advisers out there.  That hour of your time will be better spent reading early retirement sites or posting your questions to get specific answers.  Most advisers know nothing outside of putting 10% away and investing it.  A good amount of them aren't very good at saving/investing for themselves.

For your specific situation, I would stop paying extra on the house for now and focus on paying off student loans & saving more.  That paid off house only benefits you in 13 years (assuming you're not itemizing while only paying ~$6k in mortgage interest/year) while you will benefit sooner once the student loans are paid off and the benefit will be immediate with invested assets working for you now.  I think the decision goes with what you feel is better-the knowledge that your returns are more than the 4% interest you're paying on the loans or the feeling of having the student loans paid off.

If you are spending $27k and want to retire with $600k in assets, I would look into a regular 401k for you instead of the Roth 401k you're doing now.  If you need so little to live on, your taxes will be lower in the future so you should take the tax break now instead of later.