Portfolio advice: What to do with overfunded emergency fund?

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Portfolio advice: What to do with overfunded emergency fund?

Postby Guessed » Mon Jul 01, 2013 8:03 am

Hi Bogleheads,

Long time lurker; first time poster. It's the time of the year when I develop my budget and investing plan, so I thought I'd ask for some advice.

Emergency funds: $115,000 (almost 3 years of expenses)
Debt: $100,000 in a 15-year mortgage at 3.25% (12 years remaining; paying extra $200 per month on principal)

Tax Filing Status: Married filing jointly (my wife does not currently work)
Tax Rate: 25% Federal (just barely); 9% State
State of Residence: IA
Age: 35, spouse 32
Combined gross income: $70,000 (in a tenured faculty position)
Desired Asset allocation: 70% stocks / 15% real estate / 15% bonds (using TIAA traditional as a proxy, if that's ok)
Desired International allocation: 30% of stocks

Current Retirement Assets: $92,000 (not counting any of the $115,000 in emergency funds)

Taxable
3% in domestic, large-cap, dividend paying stocks (in a Loyal3 account)

TIAA-CREF 403b account
28% CREF Equity index (TIQRX; 0.32%)
17% in TIAA Traditional
15% TIAA Real Estate account (TRRSX; 0.78%)

Vanguard Roth IRA
10% VXUS (international)
9% VTI (total U.S. stock)
7% VSS (international small cap)
7% VBR (small cap value)
7% VOE (mid cap value)

New Annual Contributions (anticipated):
$10,000 into 403b (including company match)
$5,500 into Roth IRA
$12,000 into my online checking account
$7,400 in 529 plans for 2 kids (ages 1 and 3)

===== Advice that I'd like =====
1. I have too much sitting in cash, but I don't know what to do with it. At only 3.25%, I don't think it makes sense to pay off my mortgage any more quickly. Should I increase my contributions to the TIAA-CREF account? Is it possible to open a Roth IRA for my wife (who is not currently working)? Should I open a taxable account?

2. Out of ignorance, I've been using TIAA Traditional as a safe alternative to stocks. Should I put future allocations into a TIAA-CREF bond fund?

3. Should I reduce the amount I have in the TIAA Real Estate account? If so, where would you recommend I put that money?

4. Should I simplify my Roth IRA holdings? Based on my desired allocation, would I be better off simply holding VXUS, VTI, and VSF (the extended market index)?

5. If I stay in my current position (highly likely), my children will get free tuition at any of several private undergraduate universities. With this in mind, should I continue to contribute so much to 529 plans? Are there other tax-advantaged accounts I can use to save money for my kids?

Thanks in advance for any advice you can give me.
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Re: Portfolio advice: What to do with overfunded emergency f

Postby Watty » Mon Jul 01, 2013 4:31 pm

Tax Rate: 25% Federal (just barely); 9% State
.....
Combined gross income: $70,000


Double check your tax brackets. Unless you have a lot of other income then you might even be able to get close to the zero percent federal tax bracket with a spouse, standard deductions, multiple personal exemptions, a couple $1,000 child tax credits, deductable retirment contributions, etc.

http://turbotax.intuit.com/tax-tools/ca ... taxcaster/

===== Advice that I'd like =====
1. I have too much sitting in cash, but I don't know what to do with it. At only 3.25%, I don't think it makes sense to pay off my mortgage any more quickly.


An endless argument can be made about this but the question I ask is "If you had a paid off house would you take out a mortage just to invest the money?" Most people would not, some would.

An alternative would be to see if the lender would "recast your mortage" (google this) if you pay off 50% of the balance. (or whatever percentage makes sense to you) If you did this then your mortage payment would be cut by the same percentage and you could the save the difference.

With only 12 years left on the mortage paying it off very earely, and then saving your mortage payment, would not be huge mistake since there is a limited about of time that you could have the money invested and hopefully earn more that 3.25%


Should I increase my contributions to the TIAA-CREF account?

Yes up to the deductable limit, if you are really in the 34% marginal tax bracket so that would be hard to pass up.

Is it possible to open a Roth IRA for my wife (who is not currently working)?
It depends on the income limits but if not you may be able to do a back door Roth (Google this) If possible a deductable IRA would likely be better.

One thing you can do if you have last years tax software is to make up dummy tax returns to see what is and is not possible and what the atertax affect would be.


Should I open a taxable account?

With that much cash yes.
http://www.bogleheads.org/wiki/Principl ... _Placement

5. If I stay in my current position (highly likely), my children will get free tuition at any of several private undergraduate universities. With this in mind, should I continue to contribute so much to 529 plans? Are there other tax-advantaged accounts I can use to save money for my kids?

Other than saving to help them out with college expenses you are not in a position to really save for your kids unless one of them is disabled or something like that.

By far the best thing you can do is to build up your own rock solid financial situation so they they never have to help you financially. If you are rock solid financially then it is likely that they will inherit something some day so you do not need to feel guilty about not giving them more money now.
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Re: Portfolio advice: What to do with overfunded emergency f

Postby Clearly_Irrational » Mon Jul 01, 2013 5:16 pm

For your primary residence I think paying it off is a slam dunk. Where else are you going to get a safe 3.25% return? As an added bonus, it would be easy to re-mortgage it later if you get in real crunch. On top of all that reducing your monthly payments will decrease the amount you need in emergency savings and actually allow you to put more of your cash to work in the market. Rough guess if you payed it all off now you'd still have a respectable 6 month emergency fund and a much improved cash flow.
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