Annual Check-Up

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Annual Check-Up

Postby Testing 123 » Thu Dec 27, 2012 2:50 pm

Hello,

I got started investing last year with this thread http://www.bogleheads.org/forum/viewtopic.php?f=1&t=87394 and am looking at how things have gone so far. I got some great info from that thread and on this site and I tried to implement it, so hopefully I am still on the right track.

Relevant info: My wife is a PRN nurse so her schedule is weird and it is hard to budget her salary. It also means she doesn't have any 401k options or anything at work. She is applying to med school this year, and if she gets in she will start in the fall of 2014. Since this might cause us to move and other variables to change, we are not really saving specifically for a house or any big purchases in the near term (3-5 years). I am getting an MBA that my employer reimburses about 85% of. When I get a reimbursement check I put it in a separate account because if I leave before 2 years of graduation I have to pay it back, so I am not considering that in our portfolio. It is an expense for another year that limits our savings a bit.

His age/Her age: 25/24
His Salary (Before Taxes): $79,000
Her Salary (Before Taxes): $32,000
Tax Bracket: 25% *(Caused some confusion last year so I included my calculations at the bottom of the post. Hopefully someone like Bob's Not My Name will take a look :happy )

Emergency Funds: 6-8 months expenses. This will not be included in anything else I list here.
Debt: $0
State: TN
General Savings (Bank savings account): $15,000
Retirement Savings: $33,500
Desired AA: 80/20
Current AA: 85/15 (I think)

His 401k (Contributing to Company Match Limit): $23,500 (70%)
FID FREEDOM K 2050
63% Domestic Equity Funds
24% International Equity Funds
13% Bod Funds

His Roth IRA (All 2012 contributions): $5,000 (15%)
Vanguard Target Retirement 2030 Fund
55% Vanguard Total Stock Market Index Fund
24% Vanguard Total International Stock Index Fund
21% Vanguard Total Bond Market II Index Fund

Her TIRA (All 2011 contributions): $5,000 (15%)
Vanguard Target Retirement 2035 Fund
60% Vanguard Total Stock Market Index Fund
26% Vanguard Total International Stock Index Fund
24% Vanguard Total Bond Market II Index Fund

Questions:
1. Should we move our Fidelity account to a more conservative retirement fund to get to the 80/20 AA? That may be a question we have to ask ourselves, but what about: What would you do if you were me?
2. We are planning on putting some money from savings in my wife's TIRA this year. Based on the research I did last year it seemed hard to tell if a Roth or Traditional would be better for us, since our tax brackets are likely to go down if my wife goes to med school, then up if she's a dr, then down when we retire, so we have been trying to invest in both (Roth for me TIRA for her). I also understand that the traditional IRA could be used to fund education expenses, so we are thinking about maxing out the $5k in the TIRA this year which could be used for med school if it happens. Any other thoughts on using some money from general savings to fund additional retirement savings?
3. Plan for next year: Keep contributing to 401k up to company match (~4k from me & ~3k from employer, invest in his Roth IRA bi-weekly ($5k total), invest in her TIRA bi-weekly ($3-$5k total), and increase general savings. Those last two will depend on how many shifts she works PRN. We will be paying for school again next year, which limits our total savings ability a little. How does that sound?
4. Any other thoughts would be appreciated.

Thanks in advance for any input.

*Here is how I came up with our tax bracket for 2012
His Salary (Before Taxes): $79,000
Her Salary (Before Taxes): $32,000
Total (Gross): $111,000
His 401k: $4,329
Insurance: $800
AGI: $105,871
Standard Deduction: $11,900
Two Personal Exemptions: $7,600
Taxable Income: $86,371 (25% Bracket; 0% state)

(We paid for my wife's education this year, so we should qualify for some of the LLC, but it wasn't as large of an amount as it was last year.)
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Re: Annual Check-Up

Postby NYBoglehead » Thu Dec 27, 2012 3:18 pm

It looks like you're off to a good start. I would guess that you are in a much better position than the majority of 24/25 year olds out there, so congrats on that first and foremost. As to the questions about your portfolio:

1. I'd keep the Fidelity Fund you're in if that is the best fund in your plan. If you are looking to get closer to 80/20, you can do that with your IRAs. Keep in mind that Target Date Funds gradually become more conservative, so the Fidelity fund will add more bonds over time too. I think sticking with what you've got is fine.

2. I prefer Roth IRAs over TIRAs, but that's just me. You have to run your own numbers and do what you are comfortable with. Especially since you already have tax-deferred savings in the 401k, I like to have Roth investments so that any tax changes down the road will have zero effect on that part of my portfolio.

3. I think you've got a good plan for 2013. Always contribute up to the match to get the "free" money. Maxing out IRAs is also a good plan, and with any extra savings I'd contribute more to the 401k to lower your taxable income.

4. I think the most important thing for you guys is to limit the amount of debt you accumulate when the Mrs. goes to medical school. Large student loans with higher interest rates are a drag on your overall financial health. If you're borrowing money at 6%+ it will make more sense to knock out any debt with every single penny of extra cash, since you won't find anything remotely safe that will pay 6.8%. I'd also make sure that I stayed with your company long enough to avoid the MBA payback penalty. Even if that means you live separate for a few months. Not sure where you're going or the cost of the program but I'm sure it'll be a hit that's several tens of thousands of dollars if you leave before the probation period.

Good luck, it sounds like you are off to a good start and obviously with a Doctor in the family you should do well going forward.
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Re: Annual Check-Up

Postby zebrafish » Thu Dec 27, 2012 5:08 pm

If your wife is going to medical school in a couple years, why are you not saving cash now for this?

Having done the med school thing myself and living with the burden of >$100,000 of debt for several years before paying it off, I recommend avoiding this if possible.
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Re: Annual Check-Up

Postby FNK » Thu Dec 27, 2012 6:17 pm

If I were you, I wouldn't worry about the 15% bonds. That's because I do age-10 in bonds. By the time you're 30 the TR funds will get you there.
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Re: Annual Check-Up

Postby Testing 123 » Sat Dec 29, 2012 11:29 am

Thanks for the replies!

Zebrafish, I guess that was kind of part of my question. My understanding is that the IRA fund(s) could be used to pay for med school. Since we don't know for sure that she will get in to med school, we don't want to miss out on the opportunity to invest in tax advantaged funds right now. So it seems like a better idea to fund those accounts as much as we can, rather than savings cash.

Thoughts? Anything else?
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Re: Annual Check-Up

Postby retiredjg » Sat Dec 29, 2012 12:29 pm

Testing 123 wrote:1. Should we move our Fidelity account to a more conservative retirement fund to get to the 80/20 AA? That may be a question we have to ask ourselves, but what about: What would you do if you were me?

I would change the fund to one that has the stock to bond ratio that is consistent with my targets. This one is probably 90/10. That does not make sense unless it is cheaper and I don't think it is.


2. We are planning on putting some money from savings in my wife's TIRA this year. Based on the research I did last year it seemed hard to tell if a Roth or Traditional would be better for us, since our tax brackets are likely to go down if my wife goes to med school, then up if she's a dr, then down when we retire, so we have been trying to invest in both (Roth for me TIRA for her). I also understand that the traditional IRA could be used to fund education expenses, so we are thinking about maxing out the $5k in the TIRA this year which could be used for med school if it happens. Any other thoughts on using some money from general savings to fund additional retirement savings?

I'd stay with traditional. If you use Roth, the money will be taxed at 25% going in. If you use traditional, the money will certainly be taxed at significantly less than 25% if it comes out to pay for school which seems likely. Secondly, using traditional now saves on taxes now, leaving you with the ability to save more.


3. Plan for next year: Keep contributing to 401k up to company match (~4k from me & ~3k from employer, invest in his Roth IRA bi-weekly ($5k total), invest in her TIRA bi-weekly ($3-$5k total), and increase general savings. Those last two will depend on how many shifts she works PRN. We will be paying for school again next year, which limits our total savings ability a little. How does that sound?

I might switch the order of His Roth and Her TIRA.

Remember that you can also take out your contributions (not earnings) to Roth anytime. So you could use Roth money for school as well. However, you will have paid 25% getting that money into Roth and 0% getting her contributions into traditional. So I'd concentrate on building Her traditional IRA before His Roth IRA.

In fact, I'd probably use traditional for Him as well if the likelihood of getting into to med school is good. Same story - why pay 25% to get money into Roth status when you could use traditional and pay a lot less than 25% getting the money out?
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