How are we doing at 35?

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How are we doing at 35?

Postby Ghosh_Bogled » Thu Dec 20, 2012 6:13 pm

Cash reserve: 80K (40k in online ING Direct account, accumulating interest @ 0.75%) -- too much, I realize but we are diffident investors
Debt: Mortgage (Financed 187000 @ 3.25% fixed rate for 15 yrs; 173K left to pay off; begun mortgage payments June 2012; targeting 13 mortgage payments in 12 months)
Tax Filing Status: Married Filing Jointly
Tax Rate: effective 16.74% Federal, 0% State
His Age: 35
Her Age: 35

Total household income (before taxes): 175K
Current Asset allocation in her 401k: 65% domestic stock / 10% foreign stock / 19% bonds / 6% short-term
Current assets in her 401k: 47K (contributing 8% of income; employer contributes 50c to 1$ upto 8%)

Current total assets in her Vanguard taxable mutual fund account: 20.5K
Current Asset allocation in her Vanguard taxable mutual fund account: 50% stocks, 50% bonds (VFINX, VDAIX, VEIPX, VIGRX, VWINX)

Current Asset allocation in his 401k: 77% stock / 23% bonds
Current total assets in his 401k: 28K (contributing 5% of income; unsure of exact employer contribution)

Not a whole lot of room in his 401k. Currently contains 25% Target Retirement 2045, 15% Vanguard 500 index, 15% Vanguard REIT index, Vanguard Small-Cap index + Vanguard Total Bond Market index + Vanguard Wellington all 15%.

Questions :-
1. What should I invest our cash reserves in?
2. Neither of us have Roth IRAs - should we create one? Why?
3. Should I scrap the ING Direct account altogether? Does anyone know of a high-yield online savings account where we could park our emergency fund?

Thanks,
GB
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Re: How are we doing at 35?

Postby letsgobobby » Thu Dec 20, 2012 8:30 pm

You should focus on saving more money, at least 20% at your income level, perhaps 25%. Conveniently 20% would be equivalent to maxing out both 401ks each year, and 27% would be equivalent to maxing out two 401ks and two Roth IRAs. So yes, you should open a Roth IRA and fund them. You have til April 15 to fund your 2012 IRAs.

I would invest your non emergency cash per your written IPS - you should have one of those along with the Roth IRAs.

We put our emergency funds in a high yield checking account, which tend to yield in the 2% range, ours is 2.5%. All that is required is 12 debit card transactions per month, direct deposit, and e-statements.

For more specific portfolio advice please post n the recommended format.

Welcome!
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Re: How are we doing at 35?

Postby Majormajor78 » Thu Dec 20, 2012 8:32 pm

Your mix is sound enough with lots of index funds but how you are doing depends a lot on your savings rate. If you have the ability you should max out all of you potential tax advantaged space including ROTH's.

Ghosh_Bogled wrote:1. What should I invest our cash reserves in??

Higher yield savings is good for some of it. I think a couple of months in a bank is good and the rest can be in short-term bonds, rolling CD's, or you can start building a stockpile of I-Bonds. I-bonds are great as long as you can afford to have new deposits inaccessible for the first year.

Ghosh_Bogled wrote:2. Neither of us have Roth IRAs - should we create one? Why?
You guys are right by the cutoff for the ROTH's so I'd take advantage of them before you move on in your careers and get phased out. Roths make a good place to keep bonds so some people keep there emergency fund in them and collect the bond revenues tax free.

Ghosh_Bogled wrote:3. Should I scrap the ING Direct account altogether? Does anyone know of a high-yield online savings account where we could park our emergency fund?
Interest rates are low everywhere. You might be able to find some place with a .25% higher but that still will not keep up with inflation... another benefit of I-bonds.
"Oh, M. le Comte, it is only a loss of money which I have sustained... nothing worth mentioning, I assure you."
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Re: How are we doing at 35?

Postby NorCalDad » Thu Dec 20, 2012 8:59 pm

I agree with bobby that your retirement savings is too low for your income. We have about the same income, a bigger mortgage payment and a higher-tax state, and we're maxing out 401ks and Roths. I'm not sure why you need $80k in cash reserves - I would immediately start contributing more to your 401ks rather than accumulate more cash.

I like Roth IRAs for their flexibility (you can withdraw contributions penalty-free) and to diversify your tax options in retirement. As for your overall net worth, you're doing OK, maybe a little below where you should be. I would really focus on giving your retirement accounts a shot in the arm.
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Re: How are we doing at 35?

Postby moneywise3 » Thu Dec 20, 2012 11:03 pm

Congratulations on the high household income. Do you have an IPS? Might want to have that first.
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Re: How are we doing at 35?

Postby NYBoglehead » Thu Dec 20, 2012 11:21 pm

I agree that you need to develop an IPS.

I think you should absolutely open Roth IRAs for the both of you. Why...because you should take advantage of all tax-advantaged space and a Roth IRA offers tax diversification as your 401k withdrawals will be taxable but distributions from your Roth accounts will not.

You make a lot of money, but I think you need to better on the savings front.
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Re: How are we doing at 35?

Postby sunspotzsz » Thu Dec 20, 2012 11:56 pm

what is IPS?

even google search didn't give me much.

is this it? if so, how do you set these up?

thanks


A security that comprises a common share and a high-yield bond packaged together to distribute an issuer's cash flow to investors in a tax-efficient manner. An income participating security generally trades on an exchange, and its two components can be separated later and traded individually. The cash flow to investors consists of dividends from the common share component and interest payments from the bond component.


Read more: http://www.investopedia.com/terms/i/inc ... z2Feh4LNFp
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Re: How are we doing at 35?

Postby zebrafish » Fri Dec 21, 2012 12:18 am

Man those tax rates are freakin incredible
Paying 25% fed and 10% CA tax is killing me
:(
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Re: How are we doing at 35?

Postby letsgobobby » Fri Dec 21, 2012 12:28 am

sunspotzsz wrote:what is IPS?

even google search didn't give me much.

is this it? if so, how do you set these up?

thanks


A security that comprises a common share and a high-yield bond packaged together to distribute an issuer's cash flow to investors in a tax-efficient manner. An income participating security generally trades on an exchange, and its two components can be separated later and traded individually. The cash flow to investors consists of dividends from the common share component and interest payments from the bond component.


Read more: http://www.investopedia.com/terms/i/inc ... z2Feh4LNFp


http://www.bogleheads.org/wiki/IPS
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Re: How are we doing at 35?

Postby bogleblitz » Fri Dec 21, 2012 2:49 am

1. What should I invest our cash reserves in?
Max out your 401k every year. 17k per person every year either in 401k or IRA.
Put some extra money towards your mortgage.

2. Neither of us have Roth IRAs - should we create one? Why?
Yes. Max out your Roth IRA at 5k a year. Although you might be making too much to do a Roth IRA, you'll have to do a backdoor Roth IRA

3. Should I scrap the ING Direct account altogether? Does anyone know of a high-yield online savings account where we could park our emergency fund?
Keep the ING Direct for now. I have ING as well and it pays pretty well.

I am also around the same age and salary.
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Re: How are we doing at 35?

Postby Noobvestor » Fri Dec 21, 2012 2:55 am

Buy 20K in I Bonds this year, 20K in the new year, and in a year you'll be able to cash them out with a 3-month interest penalty. With inflation at, say, 2.5%, even after that penalty you'll do better than a high-yield savings account. Basically, after one year this becomes part of your emergency fund. If you want, keep the other 40K liquid for now to feel extra-safe, then invest it when the 40K in I Bonds hits the one-year mark. Also, yes, I would max out the Roth space too.
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Re: How are we doing at 35?

Postby NYBoglehead » Fri Dec 21, 2012 8:49 am

You've got 80k sitting in cash earning absolutely nothing right now.

For 2012, each of you can contribute 5k to a Roth IRA, so that's 10k that you can immediately add to your retirement savings.

For 2013, each of you can contribute 5.5k to a Roth IRA, after that you'll still have 59k in cash savings.

Both you should max out your 401ks, even if doing this means you are gradually reducing your cash savings. It is worth it to put the money into an investment vehicle that can grow and you are lowering your current tax liability.
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Re: How are we doing at 35?

Postby retiredjg » Fri Dec 21, 2012 11:06 am

I'll take a stab at your portfolio. It could be MUCH simpler than what you have now.

Apparently you have:

Her Taxable 20.5k

Her 401k 47k

His 401k 28k

A total of 95.5k, divided up into 15 to 20 or 25? funds. This is a lot of trouble. There is no need to have this many funds. Many just overlap each other in ways that don't make a lot of sense.


Here's a rough example at 75% stocks and 25% bonds.

Taxable 21.5%
21.5% Vanguard Total International Index

Her 401k 49.2%
34.2% US Stocks
15% bonds

His 401k 29.3%
14.3% Total Stock Market
5% REIT
10% Total Bond Market

This suggestion is just to show you how you can have a basic Core Four portfolio without having 20+ funds. It does not take into account that selling something in taxable might trigger taxes or that we don't really know what you have available. It does get rid of having Wellesley Income in the taxable account - the bonds in that fund make it not tax-efficient.

Is the money in the taxable account intended to be kept segregated as "hers"? Is there a reason to have $80k in reserves or did that money just sort of end up there by accident? It seems that $80k may be a really big emergency fund.

Yes, you should probably be starting Roth IRAs for the two of you.

If you want more help with the portfolio, we'll need more information (see the link below).
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Re: How are we doing at 35?

Postby Bob's not my name » Fri Dec 21, 2012 12:24 pm

You are nowhere near the Roth phaseout, so go ahead and contribute to two Roth IRAs. The phaseout for 2012 is $173,000 - $183,000 MAGI, and for 2013 it is $178,000 - $188,000 MAGI.

It looks like your 2012 MAGI would be under $160,000, but you can get it even lower by maxing both 401k's in 2013. For example:

$175,000 total household income
- $4,000 pre-tax health, dental, and disability insurance premiums deducted from your pay.
- $35,000 401k contributions
- $3,000 FSA contributions
----------------
$133,000 MAGI --> $45,000 under the Roth eligibility phaseout

You are very probably in the 25% Federal bracket. If you have two or more children your bracket is effectively 30% due to the child tax credit phaseout.

Next year the 25% Federal bracket will be 28%.
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Re: How are we doing at 35?

Postby wander » Fri Dec 21, 2012 12:27 pm

Ghosh_Bogled wrote:Questions :-
1. What should I invest our cash reserves in?
2. Neither of us have Roth IRAs - should we create one? Why?
3. Should I scrap the ING Direct account altogether? Does anyone know of a high-yield online savings account where we could park our emergency fund?

2. Yes. The sooner, the better.
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Re: How are we doing at 35?

Postby 325e » Fri Dec 21, 2012 6:11 pm

I won't talk about AA any, because it doesn't matter as much how much you save (within reason).

My personal checklist is:
1. Keep housing costs in check
2. Keep car costs in check
3. Emergency fund in place
4. Max out 401k and other tax advantaged
5. Throw any extra at the mortgage

You're doing good on the housing cost for income. According to Millionaire Next Door, housing cost is the biggest driver of how much you spend overall. That is because it's a big cost and also can drive keeping up with the joneses. So great job there.

Emergency fund is plenty there, probably could be put more to use, but that is a lower risk than not having one in place. I'm 35, have similar income, and have $145k in 401k, my wife about the same. We started maxing it out a few years ago after a friend suggested it (otherwise I would have kept doing 5-10%), and it starts really adding up especially when the market drops for a while. Start trying to max out the 401k, it's a no brainer. It lowers taxes and starts doing its thing tax free.

Depending on how liquid you want to be, you could throw some of that $80k at the mortgage, or just use it as others have suggested, to load up the Roth or to load up the 401k. The nice thing about the roth is that you could put it in very safe investments (like a bond fund), have the ability to take it back out if needed, and now you won't have to pay taxes on the earnings.

One other thing that may be more fun than 13 months every 12 months for the mortgage. If you match your principle portion of the mortgage every month, you are doubling up months. For instance, if your payment is $2k, and $200 is principle, $2200 will knock off two months. The trick is that in year 10, to match it might be $3500. Anyways, you can knock out a few years with a couple hundred bucks a month like that and it is a fun way to do it.
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Re: How are we doing at 35?

Postby Easy Rhino » Fri Dec 21, 2012 6:20 pm

Based off your current income and debt, it seems like you should have more saved up. Did income recently go up? Are you spending lots of money on other things? But to be honest, you're doing better than average just because you aren't carrying a lot of debt and you're still putting 6% or so away in retirement accounts.

I'll confess, I found a full bogleheads approved IPS too daunting for my own use. Here are the three keys for me personally:
1) Where do I want my asset allocation across all accounts? (we need to know this from you)
2) how do I want to change it as I age?
3) How will I change this (rebalance) as the market fluctuates? which it inevitably will.

What's your marginal (not effective) tax rate?

We'll also need to know if you have significant unrealized capital gains or losses in your wife's taxable vanguard account.

After these, then we'll want to see the available options in your 401ks.

Yes, Roth IRAs are probably good idea, assuming investment options at vanguard are superior to whatever is in the 401ks.
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Re: How are we doing at 35?

Postby ruralavalon » Fri Dec 21, 2012 6:47 pm

Welcome to the forum :) .

The only thing that immediately jumps out at me is, try to increase your savings rate substantially. Initially thats going to be the most important factor (under your control) in portfolio growth -- viewtopic.php?t=6833&mrr=1291908362 .

I don't really have enough information (e.g. marginal tax rate, identities & expense ratios of offerings in the 2 401ks, etc.) to comment further. You might want to provide more data in your original post, using the "edit" button, please see this for format -- viewtopic.php?t=6212 .
"Everything should be as simple as it is, but not simpler." - Albert Einstein
Wiki article link:Getting Started
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Re: How are we doing at 35?

Postby strcmp » Fri Dec 21, 2012 7:31 pm

Ghosh_Bogled wrote:Tax Rate: effective 16.74% Federal, 0% State

Questions :-
1. What should I invest our cash reserves in?
2. Neither of us have Roth IRAs - should we create one? Why?
3. Should I scrap the ING Direct account altogether? Does anyone know of a high-yield online savings account where we could park our emergency fund?


1. Perhaps a bond etf if you are risk averse 'diffident investors'
2. Yes, should maximize all your retirement vehicle choices. Roth is taxed up front, no tax later even if you grow your account.
3. Maybe check bankrate.com for higher yield savings accts.

Pretty nice tax rates on the household income.
I am curious how your effective federal tax rate is only 16.74%?

Thanks
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Re: How are we doing at 35?

Postby Bob's not my name » Fri Dec 21, 2012 7:50 pm

strcmp wrote:I am curious how your effective federal tax rate is only 16.74%?
It does seem about 1% low, but we don't know what credits and itemized deductions they have.
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Re: How are we doing at 35?

Postby Ghosh_Bogled » Sat Dec 22, 2012 12:55 pm

Thanks everyone, for the feedback.

From what I see, this is what I need to do for now :-
1. Create an IPS (this seems daunting)
2. Max out my and his 401ks
3. Create Roth IRAs for the 2 of us

The reason we have that much in cash reserves is because we were saving up for a down payment. Put down 100k this year, plus 20k besides regular monthly mortgage payments. However, not that it's done and over with, I'd like to invest the money somewhere.

Someone mentioned investment bonds. I don't know enough to buy some. But, maxing out Roth and conventional seems like a no-brainer.

I will need help sorting out my taxable Vanguard account, but don't know enough to ask the right questions. Thank you anyhow, I did not expect such an enthusiastic response.
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Re: How are we doing at 35?

Postby retiredjg » Sat Dec 22, 2012 1:24 pm

Ghosh_Bogled wrote:1. Create an IPS (this seems daunting)

I know the IPS example in the Wiki is very thorough and perhaps too much for you to tackle right now. It does not have to be that daunting. Part of it is simply writing down what you have in your mind already.

My IPS is something like 5 or 6 sentences.

    I will maintain my stock to bond ratio at _____.
    I want ___ of my stocks in international.
    I will rebalance when my stock to bond ratio is ______ away from those targets.
There is something about simply writing things down that helps you maintain sanity during the crazy times. All you have to do is look at the decisions you made when your brain was clear. There is no need to figure out "what do I do now?" which people have trouble doing when they think the sky is falling. That's really all an IPS is - making sensible decisions when you are not under pressure and then carrying out those decisions when things go amuck.


I will need help sorting out my taxable Vanguard account, but don't know enough to ask the right questions. Thank you anyhow, I did not expect such an enthusiastic response.

The first thing to do is figure out your "unrealized gains" in each of these mutual funds because you may wish to sell some of them and don't want to be hit with unexpected taxes. You probably have gains and some of these gains may have already been taxed as dividends. The part that has not been taxed yet is your "unrealized" gains. This is what will be taxed if you sell. Alternatively, you might have losses instead of gains. Or some might have gains and some losses.

The other thing to look at is whether the gains (or losses) are long term or short term (held less than a year). This information is available somewhere in your account on the internet (sorry - I can't describe where since I no longer have a taxable account). If you can't find it, call Vanguard and ask.

You have this account labeled as "hers". Do you wish to keep this account separate from the family finances?

What is the purpose of this money? That will help determine how to invest it.

Once we know the purpose of the money and the tax consequences of cleaning up the account, it will be easier to help you figure out what to do.
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Re: How are we doing at 35?

Postby Ghosh_Bogled » Sat Dec 22, 2012 1:34 pm

Thanks for explaining the IPS in simple terms. I can work along those lines.

As for the taxable Vanguard account, I labeled it 'hers' for no particular reason. I started the Vanguard account because I got tired of waiting for my husband to take an interest in family finance, and we were basically storing our savings in our checking accounts. I used the VG account to learn about mutual fund investing, starting with a nominal amount. While this held under my name, there is full disclosure between the two of us. Is there any particular advantage to holding the VG account jointly?
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Re: How are we doing at 35?

Postby retiredjg » Sat Dec 22, 2012 1:51 pm

Ghosh_Bogled wrote:Tax Rate: effective 16.74% Federal

This is probably an effective tax rate. What we need is the marginal tax rate. Compare your taxable income (line 43 of form 1040) to this chart to determine your marginal tax rate. This is the rate usually used to make decisions.

1. What should I invest our cash reserves in?

Once we know some of the other information, the answer to this will be much clearer. See the link below (Asking Portfolio Questions) for the other information needed. Just ask for help if you don't understand something.
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Re: How are we doing at 35?

Postby retiredjg » Sat Dec 22, 2012 1:55 pm

Ghosh_Bogled wrote: While this held under my name, there is full disclosure between the two of us. Is there any particular advantage to holding the VG account jointly?

The reason I was asking is that sometimes people have money before the marriage that they want to keep separate for whatever reason. But it sounds like this is "our" money as opposed to "her" money.

As for whether this should be held jointly, I can't really say. If something happened to you, I guess it would be easier for him if the account is joint.
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Re: How are we doing at 35?

Postby RenoJay » Sat Dec 22, 2012 4:21 pm

Given the low mortgage rate and relatively short term (15 years), I wouldn't be in such a rush to make an extra payment every year. Instead I'd invest that money, because you're already paying a lot of mortgage principle each year. Also, you may want to look into refinancing. CashCall is advertising 2.5% for 15 years where they eat 100% of the closing costs, so from your perspective it's simply a reduction in monthly spending.
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Re: How are we doing at 35?

Postby Ghosh_Bogled » Sat Dec 22, 2012 5:11 pm

Marginal tax rate: 25%. Thanks for the link and explanation. I am learning slowly.
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Re: How are we doing at 35?

Postby retiredjg » Sat Dec 22, 2012 5:48 pm

Ghosh_Bogled wrote:Marginal tax rate: 25%. Thanks for the link and explanation. I am learning slowly.
I don't think anyone posted this link yet....keep learning! :happy

Wiki article link: Getting Started
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