Saving for Unknown Future Expenses

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Saving for Unknown Future Expenses

Postby assumer » Wed Feb 13, 2013 12:33 pm

As of today, I don't have definitive plans to buy a house or get married within the next 5 years. However, I PROBABLY will do both those things, if not within 5 years, then within 7.

But ideally I should start saving for them now. How do you wrap your head around saving for something which may or may not come up soon, rather than just putting excess money in a taxable account for retirement?

Not looking for any real investing maximization, but more on the psychology side of things.
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Re: Saving for Unknown Future Expenses

Postby DSInvestor » Wed Feb 13, 2013 12:54 pm

I wanted to have options and having more assets saved up gave me more options. I maxed out contributions to tax advantaged accounts and invested in taxable accounts too. Having a large emergency fund and assets in taxable account put me in a better position to avoid credit card debt, take vacations, buy a car, buy a house or even retire early.
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Re: Saving for Unknown Future Expenses

Postby pkcrafter » Wed Feb 13, 2013 3:25 pm

assumer wrote:As of today, I don't have definitive plans to buy a house or get married within the next 5 years. However, I PROBABLY will do both those things, if not within 5 years, then within 7.

But ideally I should start saving for them now. How do you wrap your head around saving for something which may or may not come up soon, rather than just putting excess money in a taxable account for retirement?

Not looking for any real investing maximization, but more on the psychology side of things.

First, you are going to have a long-term retirement portfolio that you are going to build shovel by shovel, and you don't want to have to stop shoveling or tap what you've saved. To avoid that, you'll need an emergency fund and a second portfolio for shorter term goals that you also need to save for. The shorter term goals need a different asset allocation (lower risk) and they can't be in a tax deferred account that you can't or should not access.

To optimize these portfolios you can do some mental accounting and that would allow you to blend some short term funding with retirement funding to minimize tax consequences, number of accounts, and portfolio placement. If you end up not spending the short term money you can always redirect it to another goal or shift it to the retirement portfolio. If you do decide to shift some to retirement, it is no longer accessible for anything else.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Saving for Unknown Future Expenses

Postby assumer » Wed Feb 13, 2013 3:32 pm

pkcrafter wrote:To optimize these portfolios you can do some mental accounting and that would allow you to blend some short term funding with retirement funding to minimize tax consequences, number of accounts, and portfolio placement. If you end up not spending the short term money you can always redirect it to another goal or shift it to the retirement portfolio. If you do decide to shift some to retirement, it is no longer accessible for anything else.


I guess my problem right now is that I have a hard time estimating how large my savings portfolio should / needs to be.
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Re: Saving for Unknown Future Expenses

Postby billern » Wed Feb 13, 2013 3:47 pm

assumer wrote:
pkcrafter wrote:To optimize these portfolios you can do some mental accounting and that would allow you to blend some short term funding with retirement funding to minimize tax consequences, number of accounts, and portfolio placement. If you end up not spending the short term money you can always redirect it to another goal or shift it to the retirement portfolio. If you do decide to shift some to retirement, it is no longer accessible for anything else.


I guess my problem right now is that I have a hard time estimating how large my savings portfolio should / needs to be.
I'm in a similar position and my philosophy is the larger the better.

I've already accumulated a sizable taxable account so I am maxing out my 401k to reduce income tax. The 401k contributions do significantly reduce what I can save in taxable accounts. If you don't have a sizable amount outside retirement accounts and, especially if you are not in a high tax bracket, reducing retirement plan contributions to build up your taxable savings may make sense.
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Re: Saving for Unknown Future Expenses

Postby DSInvestor » Wed Feb 13, 2013 3:55 pm

assumer wrote:I guess my problem right now is that I have a hard time estimating how large my savings portfolio should / needs to be.
One starting point may be to look at having 20% down for your first home. If you live in SF Bay Area where starter homes are %500+K, that's 100K which may take some time to accumulate. If houses are 100K, that's 20K for a 20% downpayment. Owning a home will almost certainly cost more than renting. If you can estimate the cost of owning your home (mortgage, insurance, property tax, maintenance, condo dues etc), you can save the difference between that and what you're paying for housing now to build up your taxable account. I suggest doing this while maxing out your tax advantaged retirement contributions. IMO, if I can't afford to max out my retirement contributions and pay for my home, I can't afford the home.
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Re: Saving for Unknown Future Expenses

Postby Savvy » Wed Feb 13, 2013 4:04 pm

A couple of thoughts...
1) I-bonds
2) Invest heavily in tax-advantaged accounts and wait until the probability and/or timing of future events becomes more clear. Once it becomes clearer, spend a year or two investing less in tax-advantaged accounts (but still at least get 401K employer match) and add heavily to a taxable account or savings account for these events.
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Re: Saving for Unknown Future Expenses

Postby interplanetjanet » Wed Feb 13, 2013 4:40 pm

assumer wrote:As of today, I don't have definitive plans to buy a house or get married within the next 5 years. However, I PROBABLY will do both those things, if not within 5 years, then within 7.

But ideally I should start saving for them now. How do you wrap your head around saving for something which may or may not come up soon, rather than just putting excess money in a taxable account for retirement?

Look at the scale of the expenses you are pondering.

If you are saving $50k/yr, and a house down payment & wedding might come to around $100k, then I would keep shovelling money into retirement savings until you get to within two years or so of needing to do one or the other, and then divert the money towards saving for the shorter-term goal. One of the hidden perks of a high savings rate is that when push comes to shove, if you need money for something else you can divert quite a lot out of your normal budget. If maxing out your tax advantaged accounts becomes difficult during this time, consider draining down your taxable investments to make sure that you don't lose the space.

If you suffer a reduction in income during this period then it may take you longer to accumulate the money you need. In that case, for a house at least, you might want to scale down what you purchase or delay the purchase.

Out of curiosity, how do you figure that you will probably be married and buy a house within seven years? I can't remember ever having any kind of certainty on that time scale, it's not like I would have gotten married if the right person hadn't come along.
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Re: Saving for Unknown Future Expenses

Postby Dandy » Wed Feb 13, 2013 5:49 pm

The way I looked at it was if in x years I have a lot of money and don't have a pressing need for it -- how bad would that be? I'm sure I could find some great things to do with the money. As long as you are having a decent standard of living currently saving for a possible expenditure that doesn't happen will not be a downer - it will open up possibilities that you don't have now.
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Re: Saving for Unknown Future Expenses

Postby bucksfan2 » Wed Feb 13, 2013 5:54 pm

assumer wrote:As of today, I don't have definitive plans to buy a house or get married within the next 5 years. However, I PROBABLY will do both those things, if not within 5 years, then within 7.

But ideally I should start saving for them now. How do you wrap your head around saving for something which may or may not come up soon, rather than just putting excess money in a taxable account for retirement?

Not looking for any real investing maximization, but more on the psychology side of things.


If I were you I would max out my employer 401K match first. Then I would need to make a decision as to how much I would "probably" need to spend on a down payment and/or wedding. I would begin to create an emergency fund and once that is complete I would start a high yielding (if there is a such thing) savings account either at a local community bank or an online bank. At the end of each year (or by tax day) I would examine how my funds stacked up to my future expenses and decide how much to contribute to a Roth IRA. It would be nice to put the max in an IRA but if you have a house in the plans it would be nice to have enough money set aside for a 20% down payment without having to pay PMI on a mortgage loan.

It probably isn't the most "tax efficient" way to do things, but it may give you the best peace of mind.
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Re: Saving for Unknown Future Expenses

Postby assumer » Wed Feb 13, 2013 6:55 pm

interplanetjanet wrote:Out of curiosity, how do you figure that you will probably be married and buy a house within seven years? I can't remember ever having any kind of certainty on that time scale, it's not like I would have gotten married if the right person hadn't come along.


I'm definitely not certain about that time scale. I just look at other people my age, and those I know about 5-7 years older than me, and see what situations they are in.

I guess the real question is about asset allocation. I plan to keep the same savings rate regardless, but if that money is towards my "retirement" portfolio, I should be loading up heavily on stocks. Yet if I might need that money for expenses such as house or wedding or something equally large, then that money should be in safe investments. So again the real question comes down to how should my savings (which I will be having regardless) be allocated with such uncertainty.
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Re: Saving for Unknown Future Expenses

Postby crowd79 » Wed Feb 13, 2013 7:04 pm

assumer wrote:As of today, I don't have definitive plans to buy a house or get married within the next 5 years. However, I PROBABLY will do both those things, if not within 5 years, then within 7.

But ideally I should start saving for them now. How do you wrap your head around saving for something which may or may not come up soon, rather than just putting excess money in a taxable account for retirement?

Not looking for any real investing maximization, but more on the psychology side of things.


Buy I-Bonds from Treasury Direct. Your money will grow with inflation. Federal tax deferred until redeemed and exempt from state income taxes.

Jeff
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Re: Saving for Unknown Future Expenses

Postby assumer » Wed Feb 13, 2013 7:15 pm

crowd79 wrote:
assumer wrote:As of today, I don't have definitive plans to buy a house or get married within the next 5 years. However, I PROBABLY will do both those things, if not within 5 years, then within 7.

But ideally I should start saving for them now. How do you wrap your head around saving for something which may or may not come up soon, rather than just putting excess money in a taxable account for retirement?

Not looking for any real investing maximization, but more on the psychology side of things.


Buy I-Bonds from Treasury Direct. Your money will grow with inflation. Federal tax deferred until redeemed and exempt from state income taxes.

Jeff


Thanks, Jeff. That is currently my plan, just put thousands into i-Bonds until I decide how to allocate and what I need to save for... although I was thinking maybe I should have some in stocks in taxable.
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Re: Saving for Unknown Future Expenses

Postby crowd79 » Wed Feb 13, 2013 7:29 pm

assumer wrote:
crowd79 wrote:
assumer wrote:As of today, I don't have definitive plans to buy a house or get married within the next 5 years. However, I PROBABLY will do both those things, if not within 5 years, then within 7.

But ideally I should start saving for them now. How do you wrap your head around saving for something which may or may not come up soon, rather than just putting excess money in a taxable account for retirement?

Not looking for any real investing maximization, but more on the psychology side of things.


Buy I-Bonds from Treasury Direct. Your money will grow with inflation. Federal tax deferred until redeemed and exempt from state income taxes.

Jeff


Thanks, Jeff. That is currently my plan, just put thousands into i-Bonds until I decide how to allocate and what I need to save for... although I was thinking maybe I should have some in stocks in taxable.


For any money that you may use in less than 5 years, I do not recommend risking it in stocks. For 5-10 years, you could risk a very small portion of it, but the main thing is to preserve capital and have money grow with inflation, especially for a defined large expense such as a wedding or house downpayment, as you seem likely to do.
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