Late 30s: 2 Years In

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Late 30s: 2 Years In

Postby fulltilt » Tue Jul 16, 2013 9:12 pm

This is a follow up to my first portfolio review post which is available here:
viewtopic.php?f=1&t=88783

Debt:

Mortgage: $140,000 @ 4.375% (30 year)
Her Car loan: $9,233 @ 1.85%
His Car loan: 22,175 @ 1.59%
My student loan: $12,942 @1.65%
No CC debt

Emergency Fund: $10k (If least one of us is working, that could last us for 5 months at least)

Tax Filing Status: Married filing Jointly

Tax Rate: Low 25%

Age: 38

Desired Asset allocation: (66/34)

Intl allocation: 40% of equity
40% Stocks
20% International Stocks
6% REIT
34% Bonds

Current portfolio size is low six figures

Questions:

For the last 18 months, we redirected money that was going into my Roth IRA to paying off my wife's high interest rate student loans. Her student loans are all paid off now which is good news. We paid off her student loans in March, and we have kind of been in a holding pattern since then. We have been hoarding cash as much as we can at a rate of about $1.5-1.75k a month. The bad news is that i bought myself a car and now i have a car payment. :oops:

I purchased a brand new Toyota Camry using a low interest rate car loan. This was by far the most luxurious purchase I have ever made and probably ever will make. It is pretty out of character for me. I don't have a lot of "stuff". My TV is a 13 year old CRT Toshiba that was the Consumer Reports highest rated TV in its class at the time. When i do actually buy things, i tend to buy the highest quality stuff that I can reasonably afford (Yes, in this case, it was probably a little bit more than i should have spent). My previous car was a 1992 Honda Accord that I bought used in 2001 and drove until now. I am plan on driving this car for the next 15+ years.

My wife and I are starting a family, and if all goes well, we are expecting before the end of the year.

As a result of the car payments, daycare, and other baby expenses, our monthly cash outflows will be a little bit higher than i would like. I get kind of stressed when our expenses each month get within $1k of our income each month… I am also stressed that our emergency fund isn't big enough… I am stressed that we aren't saving enough for retirement, and i feel extra stress because i started saving seriously in my early-ish thirties. Plus, hanging out on bogleheads with a bunch of really high earners isn't helping. :twisted:

1. What should my next financial goal be? Paying off her car? Increase emergency cash reserves? Increase investment contributions? Relax and enjoy life?

2. My second question is about my asset allocation. I have a "pension" at work, at least that is what they call it, but i am not sure how to figure it into my asset allocation. It is a defined contribution plan where each year, I accumulate X% of my salary in an account. The amount of the contribution (X) increases every other year by 1/2% (so 5% + %5 + 5.5% + 5.5% + 6% + 6%…). When i leave the company, there are all sorts of different payout options like lump sum, an annuity, etc. The document that explains it has several different options. I am thinking of just taking a lump sum when i leave and immediately buying bonds so I am thinking about treating this as part of my AA as cash. The nominal value never decreases and it doesn't earn interest per se which makes it seem cash-like to me. I would still have money in both my 401k and Roth in bonds for rebalancing purposes. It is roughly 1/5 of my retirement funds. I figure if i wanted to stick at my 66/34 allocation that would put me at something like 80/20 in my 401k & Roth, if i treated it as cash.

Reasonable? Wise?
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Re: Late 30s: 2 Years In

Postby Novine » Tue Jul 16, 2013 9:18 pm

What are the annual retirement contributions for you and your wife? Will your wife keep working after she has a baby?
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Re: Late 30s: 2 Years In

Postby Ged » Tue Jul 16, 2013 9:59 pm

I wouldn't make a firm decision on how to treat your pension in advance. When I collected a pension at age 50 the offer was either a lump sum or an annuity. The annuity payment was about 7% of the value of the lump sum.

I took the annuity and now I'm very glad I did as market returns have been low for pretty much the entire time since I made the decision.

As far as how to treat the pension, there are a bunch of ways of thinking about it. Each has it's pluses and minuses. A key factor is how is this pension guaranteed? If the company were to go bankrupt would you still get whatever is vested in your account? That would be a big factor in whether or not I'd count it at all in my calculations.

What I am doing now with my pension is simply using it to reduce the expenses I expect in retirement when calculating the income stream from withdrawals I will need to support the lifestyle I want in retirement.

However at your age it's harder to figure out what those expenses will be. Perhaps you might want to look at it as both fixed income and also consider what it might look like as an annuity.
Lack of planning on your part does not constitute an emergency on my part.
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Re: Late 30s: 2 Years In

Postby fulltilt » Tue Jul 16, 2013 10:53 pm

Novine wrote:What are the annual retirement contributions for you and your wife? Will your wife keep working after she has a baby?


She is going to continue to work.

Our annual contributions are 10.8% of our gross pay to our retirement accounts. That is excluding her pension plan and mine which makes it a bit more complicated. I would like to contribute more, but domestic tranquility would begin to suffer at more than 15%.
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Re: Late 30s: 2 Years In

Postby fulltilt » Tue Jul 16, 2013 10:58 pm

Ged wrote:As far as how to treat the pension, there are a bunch of ways of thinking about it. Each has it's pluses and minuses. A key factor is how is this pension guaranteed? If the company were to go bankrupt would you still get whatever is vested in your account? That would be a big factor in whether or not I'd count it at all in my calculations.


yes. It is guaranteed.

I am leaning toward treating it like cash rather than an annuity because i doubt i will stay there long enough to accumulate a significant amount of money in the pension. At most, in 26 years when it would max out, the amount would be equal to roughly 4 times the average of my best 3 years salary. I am not sure what the payment would be if I chose the annuity... I also can't recall if there is a COLA or not.
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Re: Late 30s: 2 Years In

Postby 2stepsbehind » Tue Jul 16, 2013 11:23 pm

Your next step should be to build up your liquid savings --Babies can be expensive and there are no guarantees that at least one of you will stay employed. One bad accident etc. and the other might need to serve as caretaker. Also, although you think your wife will want to return to work, she may change her mind as to how quickly she wishes to return or what schedule she plans to work.

Need to know all the options to comment, but I wouldn't favor your approach.
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Re: Late 30s: 2 Years In

Postby LAlearning » Tue Jul 16, 2013 11:58 pm

fulltilt wrote:Debt:
Mortgage: $140,000 @ 4.375% (30 year)
Her Car loan: $9,233 @ 1.85%
!!His Car loan: 22,175 @ 1.59%!!
My student loan: $12,942 @1.65%
No CC debt

Emergency Fund: $10k (If least one of us is working, that could last us for 5 months at least)

Questions:

As a result of the car payments, daycare, and other baby expenses, our monthly cash outflows will be a little bit higher than i would like.
I get kind of stressed when our expenses each month get within $1k of our income each month…
--This means you are spending too much. It's the debt weighing on your mind.

I am also stressed that our emergency fund isn't big enough…
--Then what savings you have left over should be directed towards that. Why don't you make it 20k to start and go from there.

I am stressed that we aren't saving enough for retirement, and i feel extra stress because i started saving seriously in my early-ish thirties.
--And you decided to minimize your cash flow and put it towards a car instead. Maybe you need to re-evaluate this and other choices.
--Although from your income, where is the rest of it going? 110k should be more than enough to max 401k at least....


Plus, hanging out on bogleheads with a bunch of really high earners isn't helping. :twisted:
--Diligent +/- high earners

1. What should my next financial goal be? Paying off her car? Increase emergency cash reserves? Increase investment contributions? Relax and enjoy life?
--Yes. Yes. Yes. which will all lead to a resounding most definite yes!

2. My second question is about my asset allocation. I have a "pension" at work, at least that is what they call it, but i am not sure how to figure it into my asset allocation.
--I stay on the "its not part of your income, you cant sell it, you cant rebalance with it, so don't include it (yet)".

It is a defined contribution plan where each year, I accumulate X% of my salary in an account. The amount of the contribution (X) increases every other year by 1/2% (so 5% + %5 + 5.5% + 5.5% + 6% + 6%…). When i leave the company, there are all sorts of different payout options like lump sum, an annuity, etc. The document that explains it has several different options. I am thinking of just taking a lump sum when i leave and immediately buying bonds so I am thinking about treating this as part of my AA as cash. The nominal value never decreases and it doesn't earn interest per se which makes it seem cash-like to me. I would still have money in both my 401k and Roth in bonds for rebalancing purposes. It is roughly 1/5 of my retirement funds. I figure if i wanted to stick at my 66/34 allocation that would put me at something like 80/20 in my 401k & Roth, if i treated it as cash.
Reasonable? Wise?


Hope this helps.
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Re: Late 30s: 2 Years In

Postby fulltilt » Wed Jul 17, 2013 10:07 am

LAlearning wrote:
fulltilt wrote:
I am stressed that we aren't saving enough for retirement, and i feel extra stress because i started saving seriously in my early-ish thirties.
--And you decided to minimize your cash flow and put it towards a car instead. Maybe you need to re-evaluate this and other choices.
--Although from your income, where is the rest of it going? 110k should be more than enough to max 401k at least....


1. What should my next financial goal be? Paying off her car? Increase emergency cash reserves? Increase investment contributions? Relax and enjoy life?
--Yes. Yes. Yes. which will all lead to a resounding most definite yes!

2. My second question is about my asset allocation. I have a "pension" at work, at least that is what they call it, but i am not sure how to figure it into my asset allocation.
--I stay on the "its not part of your income, you cant sell it, you cant rebalance with it, so don't include it (yet)".

It is a defined contribution plan where each year, I accumulate X% of my salary in an account. The amount of the contribution (X) increases every other year by 1/2% (so 5% + %5 + 5.5% + 5.5% + 6% + 6%…). When i leave the company, there are all sorts of different payout options like lump sum, an annuity, etc. The document that explains it has several different options. I am thinking of just taking a lump sum when i leave and immediately buying bonds so I am thinking about treating this as part of my AA as cash. The nominal value never decreases and it doesn't earn interest per se which makes it seem cash-like to me. I would still have money in both my 401k and Roth in bonds for rebalancing purposes. It is roughly 1/5 of my retirement funds. I figure if i wanted to stick at my 66/34 allocation that would put me at something like 80/20 in my 401k & Roth, if i treated it as cash.
Reasonable? Wise?


Hope this helps.


I admit the car was a riskier play than i like to make. There were several things that entered my line of thinking. First, my old car was an early 90's accord (with no A/C). It was fine for driving myself to and from work, but it wasn't particularly safe. It didn't have center latch seating (for child seats), side curtain airbags, ABS, traction control or any other modern safety feature. Second, it was a reliable car considering that it was over 20 years old, but we were getting to the point where we were starting to have to drop a few hundred dollars annually on maintenance and repairs. Third, the gas mileage wasn't great. I was probably getting about 25 MPG. My new car gets about 30 MPG. When we do have our child, i am going to be the primary transporter to and from daycare. My car was a great car in college and grad school, but it wasn't appropriate for transporting an infant.

Because of these factors, my wife and i decided that i needed to purchase a different car. After looking around for what was on the market in used cars in our area for what we wanted (a safe, reliable car that gets good mileage), we decided that a new car would be a decent fit. On the plus side, it was a new car that we would have total control over how it is maintained. The interest rates on new car loans are really good right now. On the negative side, the payment would diminish our cash flow. When i made the purchase, my intention was that we would finish paying off my wife's student loan, and then pay off her car.

The "rest" of our money is currently being directed to savings at a rate of about $1.5-1.75k a month. Formerly, this was the money that we used to pay off my wife's student loans. My first question in my original post was what to do with this cash flow now that the loans are paid off. Part of me wants to pay off her car for simplicity like i had originally planned, but if i paid down the loan, then i can't use any of that money in an emergency. I could just put the money into a regular old money market savings account which would be fine. The other option would be for me to tweak my 401k contributions to be part stock and part money market account. The money market account in my 401k would be my emergency fund and I would buy stocks in my Roth. In the event of a real emergency, then i would sell stocks in my Roth and buy them in my 401k and withdraw my contributions.

As far as the pension goes, I am not sure that it matters that i can't sell it, use it for income, or rebalance with it. I have cash for emergency needs (granted i need a bit more), I have more than enough bonds for rebalancing, and i don't need it for income. If i had an ibond that was less than one year old, i couldn't do any of those things, but i would certainly count it toward my AA in fixed income...
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Re: Late 30s: 2 Years In

Postby Novine » Wed Jul 17, 2013 10:48 am

You have a lot of current and upcoming financial "needs" to address so the key thing is balance. As far as the debts go, none of them appear to be high-interest or variable rate so while there's often a psychological benefit to paying them off, in your case, I think you need to take a more rationale approach. I personally would't be focused on paying those off until you've completed the following:

1. Built up your emergency fund to a minimum of 6 months worth of monthly expenditures, ideally 12 months. Do you know how much you spend per month? Right now, you can cover $1666 per month in expenses. If one of you is still working, you can stretch that further. But I think most people budget for the worst case scenario if both of you lost your jobs and had no steady income.

2. Ensure that you are putting as much as you can afford to your retirement plans. Your previous post has some great feedback from regulars here discussing the benefits of contributing towards the various retirement options that you and the wife have available. It sounds like you have a match in your 401k and your wife has low fee funds in her 403b. Take advantage of those to reduce your taxable income and to build up your retirement funds. You should update your initial post with your current line-up of retirement accounts with percentages, etc. if you want more specific advice.

In an ideal world, you would accelerate the payoff of your various loans. But based on your other goals - saving up in preparation for a baby and retirement - and likely future goals, like starting a college fund for the new baby - and your comfort level with your current levels of saving versus spending, you have to make some choices. You have to be judicious about how you allocate your income and right now, it doesn't sound like paying off the loans should be a priority.
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Re: Late 30s: 2 Years In

Postby Dave76 » Wed Jul 17, 2013 11:24 am

New cars are wealth killers. Financing a new car, and having to take on the additional cost of insuring the thing, is a huge money pit. I think your 1992 Honda Accord was adequate for your needs. Heck, I rode around in a 1973 Dodge Dart and I'm still alive.
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Re: Late 30s: 2 Years In

Postby fulltilt » Wed Jul 17, 2013 11:58 am

Dave76 wrote:New cars are wealth killers. Financing a new car, and having to take on the additional cost of insuring the thing, is a huge money pit. I think your 1992 Honda Accord was adequate for your needs. Heck, I rode around in a 1973 Dodge Dart and I'm still alive.


I loved my Honda. It was an awesome car for a college kid, grad student, or even a guy with no kids. Having no AC in the summer was a drag, but i could deal with it. Mostly the new car purchase was a safety and piece of mind issue. My wife has been in law enforcement for more than 10 years so she is all too familiar with the realities of car accidents. She has wanted me to get a new car for years. She worries about me a lot when I drive. With kid(s) entering the picture i finally relented to help *her* sleep at night. Our retirement assets help me sleep at night, a safe car helps her sleep at night. Definitely a trade off.
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Re: Late 30s: 2 Years In

Postby Auream » Wed Jul 17, 2013 1:45 pm

fulltilt wrote:
Dave76 wrote:New cars are wealth killers. Financing a new car, and having to take on the additional cost of insuring the thing, is a huge money pit. I think your 1992 Honda Accord was adequate for your needs. Heck, I rode around in a 1973 Dodge Dart and I'm still alive.


I loved my Honda. It was an awesome car for a college kid, grad student, or even a guy with no kids. Having no AC in the summer was a drag, but i could deal with it. Mostly the new car purchase was a safety and piece of mind issue. My wife has been in law enforcement for more than 10 years so she is all too familiar with the realities of car accidents. She has wanted me to get a new car for years. She worries about me a lot when I drive. With kid(s) entering the picture i finally relented to help *her* sleep at night. Our retirement assets help me sleep at night, a safe car helps her sleep at night. Definitely a trade off.


I personally think its a good trade off. Really, there's nothing wrong with buying a decent, low-priced, practical new car. Maybe I'm a heretic on these boards, but my wife and I own two late-model Mazdas (Mazda CX-5 and a Mazda3) that I bought brand new. They are both base models with manual transmissions, and I'll keep them both for at least 10 years barring any major issues (which is very unlikely since Mazdas are very reliable). My overall costs per year will not be significantly more than if I had bought a late model used car, since I got such a good price to begin with on both (well under invoice). The rhetoric about always buying used cars really only applies to people who would otherwise pay through the nose for a new, highly optioned vehicle, finance it, then trade it in for another new car before they even finished paying it off (I have friends who do this).
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Re: Late 30s: 2 Years In

Postby inbox788 » Wed Jul 17, 2013 1:50 pm

fulltilt wrote:For the last 18 months, we redirected money that was going into my Roth IRA to paying off my wife's high interest rate student loans. Her student loans are all paid off now which is good news. We paid off her student loans in March, and we have kind of been in a holding pattern since then. We have been hoarding cash as much as we can at a rate of about $1.5-1.75k a month. The bad news is that i bought myself a car and now i have a car payment. :oops:

I purchased a brand new Toyota Camry using a low interest rate car loan. This was by far the most luxurious purchase I have ever made and probably ever will make. It is pretty out of character for me. I don't have a lot of "stuff". My TV is a 13 year old CRT Toshiba that was the Consumer Reports highest rated TV in its class at the time. When i do actually buy things, i tend to buy the highest quality stuff that I can reasonably afford (Yes, in this case, it was probably a little bit more than i should have spent). My previous car was a 1992 Honda Accord that I bought used in 2001 and drove until now. I am plan on driving this car for the next 15+ years.

You're doing ok overall.
1) Are you maxing out the Roth IRA now? YOU SHOULD!
2) Don't feel too guilty about the car. It's a reasonable purchase, and while costing a little more, gets you real benefits (peace of mind, better mileage, less chance of breaking down, more safety features, more comfort, etc.). It's not a luxury as much as you were being frugal before. Did your Accord have the automatic seat belt? I hated those things!
3) Once you've maxed out your required accounts, consider buying a new LED TV! It's a treat (HD), as well as long term cost savings (helps justify the expense). That CRT TV is wasting electricity every day, while the new LED TVs sip power.

My wife and I are starting a family, and if all goes well, we are expecting before the end of the year.

Congratulations! Start saving up for that 529! Don't buy 75% of the things people tell you that you need. You don't!

1. What should my next financial goal be? Paying off her car? Increase emergency cash reserves? Increase investment contributions? Relax and enjoy life?

1) Make and/or revisit your budget! Given where your interest rates are, just pay the minimum required out of your ongoing budget. Take the extra and bulk up your emergency fund and college savings and retirement savings. Spend a little, just a little. Those buggers are going to be expensive to feed and educate.

2. My second question is about my asset allocation. I have a "pension" at work, at least that is what they call it, but i am not sure how to figure it into my asset allocation. It is a defined contribution plan where each year, I accumulate X% of my salary in an account. The amount of the contribution (X) increases every other year by 1/2% (so 5% + %5 + 5.5% + 5.5% + 6% + 6%…). When i leave the company, there are all sorts of different payout options like lump sum, an annuity, etc. The document that explains it has several different options. I am thinking of just taking a lump sum when i leave and immediately buying bonds so I am thinking about treating this as part of my AA as cash. The nominal value never decreases and it doesn't earn interest per se which makes it seem cash-like to me. I would still have money in both my 401k and Roth in bonds for rebalancing purposes. It is roughly 1/5 of my retirement funds. I figure if i wanted to stick at my 66/34 allocation that would put me at something like 80/20 in my 401k & Roth, if i treated it as cash.

Reasonable? Wise?

I think so, so yes to both questions. Others may disagree and tell you to disregard the pension. You have to figure out how secure the pension is, what risks it carries (bankruptcy, under-performing, etc.) http://www.bostonglobe.com/business/201 ... story.html
I would be conservative with pension estimates, and defer any decisions until the time it needs to be made. It's really out of your hands for a long time until you end your employment. Getting accurate information that is going to be relevant in the distant future is going to be very difficult, so you won't know if you're getting a good deal, a bad deal or pretty much a market deal until the time comes. Expected changes in the pension plan as well as the market when it's time for you to decide.
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Re: Late 30s: 2 Years In

Postby MGBGTV8 » Wed Jul 17, 2013 2:28 pm

1. Relax. Don't worry about the new car purchase. Buy and hold works for cars too. If you keep a car a long time, and maintain it well, buying a sensible new car every 15 years is worth the marginal increase in depreciation cost. Just figure that this is your child's first car. Unless you are handy and don't mind buying and driving a series of beater cars, accepting that cars cost money and buying new isn't the cardinal sin it used to be. The used market doesn't offer a whole lot of savings, especially in the Camry/Accord area.
2. Build up cash. At the point when you have a due date, reevaluate your situation.
3. 1 month before due date, figure out what the short term financial plan will be. Will you use a portion of your savings, or scale back expenditures?
4. When you are back to two incomes again, then figure out what loans to pay off. With interest rates at <2% you are talking about a couple hundred dollars in interest you could avoid at your current savings rate. Keeping the cash will give you flexibility that I think is well worth the cost.
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Re: Late 30s: 2 Years In

Postby Bob's not my name » Wed Jul 17, 2013 3:43 pm

fulltilt wrote:Tax Rate: Low 25%
If your gross income is still around $110,000 you should try to get under the 25% bracket. This is a key point to clear up, because it makes a big difference whether you're in the 25% or 15% bracket -- this is decisive for such questions as whether to prioritize pre-tax (401k or TIRA) or post-tax (Roth) savings. If you're in the 25% bracket with no state tax but in the Child Tax Credit phaseout (see below), a $5,500 Roth IRA contribution could instead be a $7,850 401k contribution. But if you're in the 15% bracket the Roth contribution is more compelling.

Here's an illustrative stack of numbers. Adjust as appropriate to reflect your reality. Use your 2012 1040 as your guide, bearing in mind that (1) Line 1 is NOT your gross income and (2) the brackets and personal exemptions are inflation-adjusted every year (I use 2013 numbers below).

$115,000 gross income
- $16,000 401k contributions
- $3,500 pre-tax health, dental, and disability insurance premiums withheld from your pay
- $2,500 FSA contributions (presumably you're contributing given the normal maternity and childbirth expenses)
- $500 student loan interest deduction (guess)
--------------
$92,500 AGI (bottom line of page 1 of your 1040)
- $11,700 three personal exemptions
- $8,300 itemized deductions (guess)
---------------
$72,500 taxable income --> right at the threshold of the 25% bracket

Besides the 25% bracket threshold, you should try to stay under the Child Tax Credit and Student Loan Interest Phaseouts, both of which start at AGI $110,000. Together they will add about 6% to your marginal rate, putting it over 30%. 401k contributions will reduce both your AGI and your taxable income.
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Re: Late 30s: 2 Years In

Postby fulltilt » Wed Jul 17, 2013 4:44 pm

Bob's not my name wrote:
fulltilt wrote:Tax Rate: Low 25%
If your gross income is still around $110,000 you should try to get under the 25% bracket. This is a key point to clear up, because it makes a big difference whether you're in the 25% or 15% bracket -- this is decisive for such questions as whether to prioritize pre-tax (401k or TIRA) or post-tax (Roth) savings. If you're in the 25% bracket with no state tax but in the Child Tax Credit phaseout (see below), a $5,500 Roth IRA contribution could instead be a $7,850 401k contribution. But if you're in the 15% bracket the Roth contribution is more compelling.

Here's an illustrative stack of numbers. Adjust as appropriate to reflect your reality. Use your 2012 1040 as your guide, bearing in mind that (1) Line 1 is NOT your gross income and (2) the brackets and personal exemptions are inflation-adjusted every year (I use 2013 numbers below).

$115,000 gross income
- $16,000 401k contributions
- $3,500 pre-tax health, dental, and disability insurance premiums withheld from your pay
- $2,500 FSA contributions (presumably you're contributing given the normal maternity and childbirth expenses)
- $500 student loan interest deduction (guess)
--------------
$92,500 AGI (bottom line of page 1 of your 1040)
- $11,700 three personal exemptions
- $8,300 itemized deductions (guess)
---------------
$72,500 taxable income --> right at the threshold of the 25% bracket

Besides the 25% bracket threshold, you should try to stay under the Child Tax Credit and Student Loan Interest Phaseouts, both of which start at AGI $110,000. Together they will add about 6% to your marginal rate, putting it over 30%. 401k contributions will reduce both your AGI and your taxable income.


Thanks Not Bob.

Currently, i think Roth contributions are too far out of reach. I don't see us being able to get down to the 15% bracket. The numbers in your example are fairly close to us, but our gross income is a bit higher and our above the line deductions are lower; We don't flex much, and our premiums are lower.

I suspect that we are going to be close to the phaseouts for the child tax credit and student loan interest. If that is the case, then I will determine if i can use my Roth IRA to travel through time and space to avoid the phaseout. :wink:
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Re: Late 30s: 2 Years In

Postby Bob's not my name » Wed Jul 17, 2013 5:33 pm

To the DeLorean!
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Re: Late 30s: 2 Years In

Postby EJE » Wed Jul 17, 2013 11:23 pm

Agree with the other replies that you should work toward building up your cash reserves / emergency fund.

You mentioned daycare -- that's pretty expensive. Your expenses will go up when the child arrives and so it will help your stress level to have more cash reserve.

Do you have much home equity ? If so and you are planning to stay in the house long term, then you could consider a re-finance to get a lower mortgage rate and perhaps pull out some cash at the same time to bolster your emergency fund quickly. If you could afford a little higher payment, maybe going to a 15 year fixed rate mortgage would be beneficial.
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Re: Late 30s: 2 Years In

Postby Rainier » Thu Jul 18, 2013 6:18 am

Dave76 wrote:New cars are wealth killers. Financing a new car, and having to take on the additional cost of insuring the thing, is a huge money pit. I think your 1992 Honda Accord was adequate for your needs. Heck, I rode around in a 1973 Dodge Dart and I'm still alive.


The car is gone, he sold it and got a new one. We should move on.
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Re: Late 30s: 2 Years In

Postby Leemiller » Thu Jul 18, 2013 7:57 am

First of all congratulations! Second, having a baby is very stressful! If I were you, I'd hoard cash until I hit about 20-25k and then pay off the lower car loan. And I'd hoard the extra cash in a Roth. That would give me the most piece of mind, but you need to consider what works for the two of you. Does your wife have a good paid maternity leave program at work? And frankly I'm jealous of your house payment! Don't forget that some of the high incomes you see are earned in very high cost of living areas!
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Re: Late 30s: 2 Years In

Postby Bob's not my name » Thu Jul 18, 2013 9:17 am

Leemiller wrote:piece of mind
That's a popular eggcorn on bogleheads these days.
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Re: Late 30s: 2 Years In

Postby DFWinvestor » Thu Jul 18, 2013 9:48 am

I think I'd set a goal to have your wife's car paid off in the next 12-15 months. I am guessing your cash emergency fund is earning less than the interest on her car loan, although by a marginal amount. When you have fewer fixed monthly expenses, your emergency fund can be smaller as a result.

Or to look at it another way, if someone gave you $9,233 today, would you choose to pay off her car or put it in a cash account likely earning less 0.5% or less?
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Re: Late 30s: 2 Years In

Postby fulltilt » Thu Jul 18, 2013 10:39 am

I don't have much home equity. I am not planning on staying in the house long term. The only way i could get a significantly lower rate would be to move to an ARM or a 15 year. Those options are somewhat attractive from the perspective of ROI, but I am trying to minimize my cash outflows for the next few years to compensate somewhat for the cost of daycare. I have looked at it though because if we have more than one child, then we are going to need (want) a bigger house in a few years. I am thinking if i have any "extra" cash, i would use it to pay down principal on the loan until i get enough saved up to avoid PMI on the next house purchase.

My wife will then take leave at the end of this year and return to work in April or May. Most if not all of her leave is paid.

If someone gave me $10k, i don't know if i would pay off the loan. On the plus side, my monthly expenses would decrease. On the down side, that money is locked up in equity in my car. It kind of makes me think that the smart move is to keep the money in cash until my emergency fund is more robust.

At this point, it sounds like my plan is wait until May after my wife returns to work and the dust has settled somewhat and see where we stand. I feel like i should just stay the course that i am on. I suspect that we will knock out the smaller car loan next May. The loan will be less than $6k at that time which should be easy pickings.
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Re: Late 30s: 2 Years In

Postby Meg77 » Thu Jul 18, 2013 11:01 am

Congrats on your financial progress, and on the expansion of your family! You are doing really well and while stress is a very normal part of life when you have a pregnant wife, I urge you to relax and enjoy life a little bit.

Financially I think you shuould keep putting excess income into cash until you have $20,000 in emergency reserves - maybe even $25,000. I know this is more than the "6 months" that you probably "need," but with a new baby on the way it is much more prudent to have more cash than you need. It'll help you sleep better at night a lot more than increasing your retirement contributions by a point or two. And besides you never know for sure if your wife will be willing or even able to go back to work after having a child, or even how much the birth will cost out of pocket, so now isn't the time to be scrimping on cash reserves.

Also don't pay down any more debt for now. Not only do you need the cash (see above), but your car loans are at incredible interest rates! My checking account earns 2% right now - there is no way I'd be paying off a car loan that was that low at the expense of my savings. As rates go up it'll make even less sense to pay down those loans early. Psychologically it will feel good, but until you have one year of expenses in cash and are maxing out retirement accounts, please do NOT pay extra on those loans. The exception would be if you have a monthly cash flow crunch/deficit and need to lower monthly fixed costs.

As for retirement savings, I wouldn't sweat this too much since you and your wife both have pensions. When you have cash freed up you really should try to max out Roth IRAs after getting any 401k match (and you should absolutely do this before even thinking about contributing to a 529 or other college savings account for junior), but for now focus on the cash. (I'm not a tax expert but if contributing to 401ks instead of to Roths will get you below some magical AGI point as referenced in a previous post, then by all means do that instead).

So in summary:
1. Double your cash reserves
2. Max out Roth IRAs (or 401ks for tax reasons...)
3. Pay down remaining consumer debt
4. Max out all retirement vehicles
5. Contribute to college fund
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Re: Late 30s: 2 Years In

Postby fulltilt » Thu Jul 18, 2013 11:15 am

Meg77 wrote:So in summary:
1. Double your cash reserves
2. Max out Roth IRAs (or 401ks for tax reasons...)
3. Pay down remaining consumer debt
4. Max out all retirement vehicles
5. Contribute to college fund


For the purposes of maintaining domestic tranquility, I think we are going to keep our savings account at roughly 15-20% of our gross pay for now which is the most we can afford the the moment.

As far as maxing out all of our accounts, that would be a dream. It will never happen though. we have 401k, 403b, 457, and 2 IRAs. We have $63.5K of taxable space in retirement accounts. :greedy That is not including HSAs or 529s. Nice problem to have, right?
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Re: Late 30s: 2 Years In

Postby Bob's not my name » Thu Jul 18, 2013 11:41 am

fulltilt wrote:We have $63.5K of space in retirement accounts.
In 12 years when you turn 50 this will increase to over $85,000 (anticipating inflation increases and the catch ups). You better max all that out or you're a bad person.
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Re: Late 30s: 2 Years In

Postby BigOilTexan » Thu Jul 18, 2013 12:03 pm

fulltilt wrote:For the purposes of maintaining domestic tranquility, I think we are going to keep our savings account at roughly 15-20% of our gross pay for now which is the most we can afford the the moment.

As far as maxing out all of our accounts, that would be a dream. It will never happen though. we have 401k, 403b, 457, and 2 IRAs. We have $63.5K of taxable space in retirement accounts. :greedy That is not including HSAs or 529s. Nice problem to have, right?


I suspect in 10 years you might look back on this post and regret it. It might be a little difficult to make changes now with the baby coming, but its not going to get any easier. Expenses will just get higher. If you can't save enough for retirement now, before kids, college, another house (you mentioned you weren't planning on staying in your current house) when will you be able to?
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Re: Late 30s: 2 Years In

Postby fulltilt » Thu Jul 18, 2013 1:50 pm

BigOilTexan wrote:
fulltilt wrote:For the purposes of maintaining domestic tranquility, I think we are going to keep our savings account at roughly 15-20% of our gross pay for now which is the most we can afford the the moment.

As far as maxing out all of our accounts, that would be a dream. It will never happen though. we have 401k, 403b, 457, and 2 IRAs. We have $63.5K of taxable space in retirement accounts. :greedy That is not including HSAs or 529s. Nice problem to have, right?


I suspect in 10 years you might look back on this post and regret it. It might be a little difficult to make changes now with the baby coming, but its not going to get any easier. Expenses will just get higher. If you can't save enough for retirement now, before kids, college, another house (you mentioned you weren't planning on staying in your current house) when will you be able to?


That is the rate that works for us right now. We have 2 car payments, and soon we will have daycare. The next 5 years are going to be really expensive. After that, i expect that we will have a bit more money kicking around at the end of each month.

You're assuming that saving 15-20% of our income isn't enough saving for retirement. Maybe it is, and maybe it isn't. What do YOU think saving enough is?
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Re: Late 30s: 2 Years In

Postby bungalow10 » Thu Jul 18, 2013 1:58 pm

OP - I know that stressed feeling when the budget gets too close for comfort. For us, it was adding Bungalow Baby #3 to the mix - daycare for one kid is a budget buster, daycare for three makes me want to cry when I write the checks every week.

I've always been the type that saves first and then lives off the rest. If "the rest" means we can afford to eat out, then we do. If "the rest" allows for some splurges, we do. If "the rest" means no spending for awhile, we do that too.

It worked great until our third baby was born. The budget got so tight that I was constantly worried "the rest" wasn't going to cover the bills. So I bought this nifty budgeting software called You Need a Budget (YNAB for short). It took some time to set up, but I LOVE it. I work with it about once a week, just a few minutes, but it gives me peace of mind knowing our expenses are covered, and lets me tuck a little aside for upcoming expenses, or a particularly expensive month, ahead of time.

I really like it, and using it has made me realize that if we are careful our budget does have a little wiggle room. I highly recommend it. You can play with putting the baby expenses in ahead of time and see how your budget plays out.

As far as recommendations - I would get rid of all your car debt and student debt ASAP. I would also build up some additional cash reserves... $10k can go really fast, aim for $20k, but I would do this after wiping out all the other debt.

Question - You mention that you will have more money in five years. Are you only planning to have the one child?
Last edited by bungalow10 on Thu Jul 18, 2013 2:21 pm, edited 1 time in total.
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Don't take the cash.

Postby Taylor Larimore » Thu Jul 18, 2013 2:17 pm

I am thinking of just taking a lump sum when i leave and immediately buying bonds.

Fulltilt:

Taking the lump sum from a pension plan is nearly always a serious mistake because the lump sum is all taxable (at income tax rates) leaving that much less to reinvest. Rolling-over (tax-free) into an IRA is usually a much better option.

Best wishes.
Taylor
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Re: Don't take the cash.

Postby fulltilt » Thu Jul 18, 2013 2:47 pm

Taylor Larimore wrote:
I am thinking of just taking a lump sum when i leave and immediately buying bonds.

Fulltilt:

Taking the lump sum from a pension plan is nearly always a serious mistake because the lump sum is all taxable (at income tax rates) leaving that much less to reinvest. Rolling-over (tax-free) into an IRA is usually a much better option.

Best wishes.
Taylor


Taylor, I was saddened to hear of your loss.

You're correct. I will take it as a rollover into an IRA rather than cash into my wallet or going with the annuity option (assuming the amount remains small).

@bungalow10: I think i decided on one kid, but i think the wife wants two. I feel like I may have more money in the future because the car payments should be gone by then. Plus, my wife is still advancing in her career. Nothing is certain yadda yadda...
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Re: Don't take the cash.

Postby bungalow10 » Thu Jul 18, 2013 3:16 pm

fulltilt wrote:@bungalow10: I think i decided on one kid, but i think the wife wants two. I feel like I may have more money in the future because the car payments should be gone by then. Plus, my wife is still advancing in her career. Nothing is certain yadda yadda...


Don't under estimate how much they cost. It's more than just daycare. Get rid of those car payments and student loan payments now, it won't get better for a long time and they aren't doing you any good. It's not like you will regret paying them off.

The last thing you want is a disagreement with your spouse regarding whether or not you can afford kid number two all because you are carrying around debt.
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Re: Late 30s: 2 Years In

Postby Meg77 » Thu Jul 18, 2013 4:05 pm

fulltilt wrote:
Meg77 wrote:So in summary:
1. Double your cash reserves
2. Max out Roth IRAs (or 401ks for tax reasons...)
3. Pay down remaining consumer debt
4. Max out all retirement vehicles
5. Contribute to college fund


For the purposes of maintaining domestic tranquility, I think we are going to keep our savings account at roughly 15-20% of our gross pay for now which is the most we can afford the the moment.

As far as maxing out all of our accounts, that would be a dream. It will never happen though. we have 401k, 403b, 457, and 2 IRAs. We have $63.5K of taxable space in retirement accounts. :greedy That is not including HSAs or 529s. Nice problem to have, right?


That is a nice problem to have! And for the record I think a 15-20% savings rate is just fine in your position (still relatively young, having pensions, already having some savings and retirement, owning a home). I didn't mean to imply that you should do all of this now or even soon. I just meant it as an example of how I would order my priorities. Once you have the cash reserves where you like them, if I'd use the extra cash for retirement savings and then boost those investments when you get raises, when you get the cars paid off, when daycare is done, or whenever (or never!). Many people never get to the point of maxing out all retirement accounts and that is OK - especially if social security and/or your pension will replace your take home pay in retirement. Bottom line as long as you keep doing what you are doing I think you'll be just fine and can afford another kid in a few years and as happy a retirement as any of us.
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Re: Don't take the cash.

Postby Default User BR » Fri Jul 19, 2013 10:41 am

bungalow10 wrote:Get rid of those car payments and student loan payments now, it won't get better for a long time and they aren't doing you any good.

This makes no sense to me. With those low rates, I would take as long as possible to retire that debt.


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Re: Don't take the cash.

Postby bungalow10 » Fri Jul 19, 2013 10:51 am

Default User BR wrote:
bungalow10 wrote:Get rid of those car payments and student loan payments now, it won't get better for a long time and they aren't doing you any good.

This makes no sense to me. With those low rates, I would take as long as possible to retire that debt.


Brian


OP is having a cash flow problem. Getting rid of the payments frees up cash flow.
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Re: Late 30s: 2 Years In

Postby fulltilt » Fri Jul 19, 2013 11:04 am

I think this is the part where someone jumps in and says that money is fungible.

If I have the money to pay off the loans, then whether or not i actually pay them off doesn't matter. My cash flow is not affected.

Money is fungible. :twisted:
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Re: Late 30s: 2 Years In

Postby Auream » Fri Jul 19, 2013 11:46 am

Yes, money is fungible. But many bogleheads apparently don't know that, or just ignore that fact. Common boglehead wisdom says that if you have a $20,000 car loan at 0.99%, you should pay it off, but if its a home loan at 4%, then you *shouldn't* just randomly pay an extra $20,000 on it if you have extra money (well, it might not be argued against, but at least it wouldn't be a strong recommendation like paying off the car would be). Why? I don't know... somehow the asset the loan is "linked" to supposedly has some bearing on the desirability of paying down the loan, but the interest rate doesn't seem to matter. I really don't get how that works.
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Re: Late 30s: 2 Years In

Postby yosef » Fri Jul 19, 2013 1:24 pm

fulltilt wrote:I think this is the part where someone jumps in and says that money is fungible.

If I have the money to pay off the loans, then whether or not i actually pay them off doesn't matter. My cash flow is not affected.

Money is fungible. :twisted:


I'm 38 also and make about the same as you do. My wife is a SAHM though. I agree that you should focus on building your cash cushion over paying down the loans. The way I always think about it is to ask yourself if you were laid off tomorrow would you rather have no car payment or $10,000? With your current emergency fund I know I would say I'd rather have the money. After you get that built up you can move on to knocking out the loans, and then hopefully the money not going towards payments can be invested.
Last edited by yosef on Fri Jul 19, 2013 7:58 pm, edited 1 time in total.
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Re: Don't take the cash.

Postby Default User BR » Fri Jul 19, 2013 5:28 pm

bungalow10 wrote:OP is having a cash flow problem. Getting rid of the payments frees up cash flow.

How does depleting cash to pay off loans improve cash flow?


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Re: Don't take the cash.

Postby bungalow10 » Mon Jul 22, 2013 3:25 pm

If OP didn't have the consumer debt, there's a really good chance that he wouldn't be posting that he's stressed out about his monthly cash flow.

If OP pays off all the debt and finds he doesn't like having extra cash flow, nothing is stopping him from going out and acquiring debt again.

I have never seen anyone post on Bogleheads or any other financial forum that they wished they had a car loan or that they regret paying off their student loans. For all of you "money is fungible" folks, Penfed has some great rates on car loans, you are free to go borrow as much as they will give you.

Personally, I'd rather not have $44k in consumer debt... but that's just me.
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Re: Late 30s: 2 Years In

Postby Bob's not my name » Mon Jul 22, 2013 7:23 pm

I love my car loan.
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Re: Late 30s: 2 Years In

Postby Default User BR » Mon Jul 22, 2013 7:25 pm

The rates PenFed was throwing around last year were so good I wished I had a decent-value vehicle to refinance. The Bronco was too old. I had to console myself with a home-equity loan.


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Re: Late 30s: 2 Years In

Postby thebogledude » Mon Jul 22, 2013 11:03 pm

fulltilt wrote:
The bad news is that i bought myself a car and now i have a car payment. :oops:

My first car was a 1993 accord. it was stolen a year later but it was an awesome car.

Plus, hanging out on bogleheads with a bunch of really high earners isn't helping. :twisted:

I think some of the high earners are fictitious. I'll leave it at that.

1. What should my next financial goal be? Paying off her car? Increase emergency cash reserves? Increase investment contributions? Relax and enjoy life?
Increase emergency cash reserves (usually 3-6 months living expenses.

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