Starting our IPS - a little feedback?

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Starting our IPS - a little feedback?

Postby mamarachel » Thu Jun 27, 2013 11:46 am

We are just starting our IPS. We've been saving for a while, but with no real targets, meaning, or strategy aside from "put something in the 401K". We've never drawn from the 401K, but we have wavered in contribution amounts. We are a mid-30s couple, 2 young children and considering a 3rd.

Step 1 was to complete a budget - with accruals for known future expenses like car replacement, repairs, home repairs, children's activities, etc. - Complete - operational 12 months
Step 2 was to payoff all non-mortgage debt (personal preference rather than holding some low interest long term student loans... I just wanted them out of our life).
Step 3 build the IPS (where I am now)

The first part of the IPS I think, for us, is developing a strategy of the order in which we will invest in what types of vehicles to maximize tax strategy. This is not an allocation IPS, but something I think we needed prior to that so we have a plan outline.

The only real problem I am having now is balancing getting the Emergency fund to where we want it with our tax liability. I believe our AGI will be upper 100s/low 200s this year. The deductions for 401K contributions are very valuable, and is tax-deferred space I don't think we can lose long-term. We've decided to simultaneously contribute to the Oregon earner's 401K at a rate of 12%+match, which although isn't the maximum of 17,500 for 2013, is reducing our federal tax liability by about $2500, plus $800 for state income taxes. I view that tax savings as "free money" for now. We are contributing to the EF at a rate that should have it fully funded by mid-2014 and in cash assets (including accruals stated above) we do have 3-months earnings in cash at a credit union. Is this wise?

FIT solid 28%
SIT 9% on 60% of our income. Other income is exempt for non-residency.

That said... any additional feedback on the following?

Image

Thanks very much in advance. This forum over the last while has been very helpful for me to see that without a strategy, we have no idea what we are aiming for.
Last edited by mamarachel on Thu Jun 27, 2013 12:06 pm, edited 1 time in total.
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Re: Starting our IPS - a little feedback?

Postby mamarachel » Thu Jun 27, 2013 11:53 am

For clarity. We have the option of an HSA at this time, but due to not having our Emergency Fund complete, and the high expected contributions, we've decided to maintain our PPO insurance for another year at a premium of $200 per month. The PPO insurance is very good, with 90/10 coverage and a very low family deductible. Open enrollment will come again in August 2014 for plan year Sept 14-Aug 15.
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Re: Starting our IPS - a little feedback?

Postby Peter Foley » Thu Jun 27, 2013 6:03 pm

I'm an advocate for including some of your goals and milestones in one's IPS. I think it helps set priorities.

So, let's say your long term goal is to retire at age 62 and collect SS some years later. How much money do you need to do this? Is your present 401k savings plan sufficient to get you there with an average portfolio return of 6% to 8%? If this is your top long term priority, making adjustments now would have tax implications and would then help you better define your next goal. Pay off mortgage by age x? Fund x% of childrens' college education.

The next step in my mind is to establish how you are going to save. Are you going to use index funds or target retirement funds? How are the funds' expenses in your respective plans? What will your asset allocation be, and where is the best place for you to hold the bond portion of your portfolio?

There is a sample fill in the blank IPS in one of my slide presentations as part of the Bogleheads' Financial Literacy Project. That should provide you with some additional ideas.
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Re: Starting our IPS - a little feedback?

Postby mamarachel » Thu Jun 27, 2013 6:56 pm

I think this is just the "outline" of our first IPS. Thus, the goals stated are an order in which to pursue things. The next step would certainly be to identify our risk tolerances, long-term goals, etc., and write them in.

I've looked at the IPS examples, and this stuff I did above doesn't seem to be included. I thought that perhaps, having an over-reaching plan, beyond what we invested in, came first.

Our retirement goal is the older spouse retiring at age 65 (younger will be 62). The end-goal is to live off of 65% of our current income in retirement from self-funded retirement, SS would be a bonus. We think this is reasonable because we are currently saving at 20%, which would cease, our tax rate will be reduced, and we'll own our home outright.

Is 5% (net inflation) average rate too high to consider for compounding?

Our goal is not a specific dollar amount, but making it to age 95 without running out of money. I'm not planning to leave money to our children. That would be a bonus to them if we kicked the can early.
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Re: Starting our IPS - a little feedback?

Postby Peter Foley » Fri Jun 28, 2013 2:23 pm

In the models I set up for myself while in the accumulation phase, I estimated a portfolio return of 8% based on a 70/30 AA. I used 4% as the inflation rate. In the withdrawal phase I used inflation of 4%, SS and defined pension increases of 3%, and portfolio return of 4% based on a 50/50 portfolio.

Regarding the IPS - the fill in the blank form was developed by the Minnesota Bogleheads group. It is not the way I would have done it personally, rather it is a stripped down version which attempts to get folks to adopt a plan if they don't have one.

There is a link to my actual plan on the Wiki. It is listed as a "real life" example at the bottom of the page.

http://www.bogleheads.org/wiki/Investment_Policy_Statement

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Re: Starting our IPS - a little feedback?

Postby mamarachel » Mon Jul 01, 2013 3:47 pm

Thank you Peter for your thoughts.
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Re: Starting our IPS - a little feedback?

Postby LadyGeek » Mon Jul 01, 2013 4:04 pm

FYI - The OP is requesting portfolio help in: Are we saving enough?

(It's best to keep all the information in one spot, but these are 2 different topics.)
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Re: Starting our IPS - a little feedback?

Postby mamarachel » Mon Jul 01, 2013 4:09 pm

So should I link all of my posts together LadyGeek?
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Re: Starting our IPS - a little feedback?

Postby LadyGeek » Mon Jul 01, 2013 4:17 pm

I sent you PM. Look for a link similar to (1 new messages) in the upper left corner.
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