New to investing - help needed!

[Tatka75]

Hello!

Have been lurking for a while, now need some advice
We have significant changes in income and expenses recently, and we ended up with some extra money, around 2.5-3K monthly.
So, question is - where to invest short term (college for kid 1 in 3 years) and mid-term (college for kid 2&3 in 10-12 years)?
Thank you!

Current standing:
Emergency funds: 3-4 months of expenses
Debt: only mortgage - 3.75%
Tax Filing Status: Married filing Jointly
Tax Rate: 28% Federal 5% State State of Residence

Age: 37 yo both

Desired Asset allocation: don't know just yet

Current portfolio
Taxable : none

His 401k - ~ $80-90K
Schwab Simple IRA, no new contribution
Can't find a list of available investment options

2.5 % DREGX DRIEHAUS EMERGING MRKTS GROWTH FUND
2.5 % JAOSX JANUS OVERSEAS FD CL T
1.0 % PSTDX PIMCO STKSPLUS TR FD CL D
1.0 % SWDSX SCHWAB DIVIDEND EQUITY FUND
1.0 % TMRFX THIRD MILLENNIUM RUSSIA FUND
0.5 % UNWPX U.S. GLOBAL INV WORLD PRECIOUS MINERALS
1.5 % USERX U.S. GLOBAL INVESTORS GOLD & PRECIOUS METALS FD

AXA Equitable
Can't find a list of available investment options too
13% Rs Janus Aspen Overseas
10% Multimanager Technology
9% Eq / Oppenheimer Global
8% Rsg Templeton Global Bond Securities


Her 403b $80-90K - no new contribution
50% Fidelity Freedom K 2040 (FFKFX) 0.63%
Company Match: yes.

Available funds:
ARTISAN SMALL CAP
DAVIS NY VENTURE Y
FID CAPITAL & INCOME
FID CONTRAFUND
FID EQUITY INCOME
FID FREEDOM K 2000
FID FREEDOM K 2005
FID FREEDOM K 2010
FID FREEDOM K 2015
FID FREEDOM K 2020
FID FREEDOM K 2025
FID FREEDOM K 2030
FID FREEDOM K 2035
FID FREEDOM K 2040
FID FREEDOM K 2045
FID FREEDOM K 2050
FID FREEDOM K 2055
FID FREEDOM K INCOME
FID GROWTH COMPANY
FID INFLAT PROT BOND
FID INTERMED BOND
FID LOW PRICED STOCK
FID REAL ESTATE INVS
FID SMALL CAP STOCK
FID SP TOTAL MARKET INDEX
FID VALUE
FIDELITY DIVERSIFIED INTL
FIDELITY PURITAN
FIDELITY STRATEGIC REAL R
NORTHERN SM CAP VAL
SPARTAN 500 INDEX
SPARTAN EXT MKT IDX ADVAN
SPARTAN EXTND MKT INDEX
SPARTAN INTERNTL INDEX
SPARTAN INTL IDX ADVAN
SPARTAN TOTAL MARKET ADV
SPTN 500 INDEX ADV
SPTN US BD IDX INV
SPTN US BOND IDX ADV
TEMPLETON WORLD FUND A




New annual Contributions
$12K his 401k (including matching contributions) - AXA Equitable
$5K Her 401k - new job, fund selections not available just yet

[Pennstateclj1]

Current standing:
Emergency funds: 3-4 months of expenses
Debt: Mortgage - 3.75% 30 fixed, 1% PMI, LTV 95%
Tax Rate: 28% Federal 5% State State of Residence

Age: 37 yo both

Desired Asset allocation: don't know just yet

Current portfolio
Taxable : none

His 401k - ~ $80-90K

Her 403b $80-90K

New annual Contributions
$12K his 401k (including matching contributions) - Schwab Max out with new $
$5K Her 401k - new job, funds selections not available just yet Max out with new $

Hello Tatka, welcome to the forum.

Might I make a suggestion rather than focus solely on the kids college funds with the extra money, that you first devote most of it to both of your 401k's in order to max each out for the year-$17k each. You'll also get a nice tax break, maybe even get into the 25% bracket?

If you list the state you're in, others can tell you if you get a tax break for contributing to a 529 in your state or if you should just do the Vanguard Plan. For the child that goes to school in 3 years, you can't take much risk, so the amount you contribute is more important at this point than what it's in. For the other children, just go with the age-based option or something pretty conservative (40/60 stock/bonds?) since you also don't have too much time to risk that money.

Again, I would consider maxing out all of your available retirement assets before the children's 529s- especially given your account balances and ages. My stance might change if you are going to have substantial pensions, but you didn't list any expected so I didn't assume that.

Also, if you're looking for comments on the other accounts you'll need to list them and all available options in them.

[ilmartello]

Both of you can invest a maximum of $17k each in 401k's plus another 5k a piece in IRA;s.

Objectively you have a low amount of savings. To exact discipline on yourself you ought to devote all future increases in income to your savings, not dragging yourself down with further expenses. You shouldn't be upset about not having investments in taxable accounts, it's preferable to have them in investment accounts.

You should list all the current options in yours and your husband's 40xx accounts. Include the name of the fund ticker, and expense ratio. Although it's no substitute for increasing your savings rate, you should optimize your asset allocation and minimize investment expenses.

fidelity's target retirement is a hideous mix of terrible investment choices with high expense ratios. You ought to so if there is a better alternative.

You said your company matches your 401k, up to what dollar amount?

I would recommend looking long and hard at your expenses in a monthly format in a basic excel sheet. Amortize all the payments you make annually, so even if you pay property tax or certain insurance once or twice a year, divide into 12 and include an excel sheet. There may be some painless ways to reduce expenses, while some may be pain-free. Bundling and shopping around for insurance , threatening to cancel some services to drive down prices (think telephone,cable, internet company) is another one. I notice you don't have any auto loans, or didn't list them. Driving your cars into the ground and not getting new cars is another good money saver..

Best of luck.

[Tatka75]

Hello Tatka, welcome to the forum.

Might I make a suggestion rather than focus solely on the kids college funds with the extra money, that you first devote most of it to both of your 401k's in order to max each out for the year-$17k each. You'll also get a nice tax break, maybe even get into the 25% bracket?

If you list the state you're in, others can tell you if you get a tax break for contributing to a 529 in your state or if you should just do the Vanguard Plan. For the child that goes to school in 3 years, you can't take much risk, so the amount you contribute is more important at this point than what it's in. For the other children, just go with the age-based option or something pretty conservative (40/60 stock/bonds?) since you also don't have too much time to risk that money.

Again, I would consider maxing out all of your available retirement assets before the children's 529s- especially given your account balances and ages. My stance might change if you are going to have substantial pensions, but you didn't list any expected so I didn't assume that.

Also, if you're looking for comments on the other accounts you'll need to list them and all available options in them.

Pennstateclj1, Thank you!
At this point, I don't want to maximize retirement contribution, but we take full advantage of employer match.
Right now, a lot's going on (new job, property sale pending, and other life-changing events might happened in near future), so I prefer to have some flexibility.

I am in MD, don't know much about 529 plan, but for the same reason (flexibility) I prefer to have un-restricted funds.

So, basically I would like to build "second row" safety net/big future expenses.
Ideally -low/medium risk, earnings enough to protect from inflation, diversified allocation that would allow occasional withdrawals.
Where should I go?

[Tatka75]

Both of you can invest a maximum of $17k each in 401k's plus another 5k a piece in IRA;s.

Objectively you have a low amount of savings. To exact discipline on yourself you ought to devote all future increases in income to your savings, not dragging yourself down with further expenses. You shouldn't be upset about not having investments in taxable accounts, it's preferable to have them in investment accounts.

You should list all the current options in yours and your husband's 40xx accounts. Include the name of the fund ticker, and expense ratio. Although it's no substitute for increasing your savings rate, you should optimize your asset allocation and minimize investment expenses.

fidelity's target retirement is a hideous mix of terrible investment choices with high expense ratios. You ought to so if there is a better alternative.

You said your company matches your 401k, up to what dollar amount?

I would recommend looking long and hard at your expenses in a monthly format in a basic excel sheet. Amortize all the payments you make annually, so even if you pay property tax or certain insurance once or twice a year, divide into 12 and include an excel sheet. There may be some painless ways to reduce expenses, while some may be pain-free. Bundling and shopping around for insurance , threatening to cancel some services to drive down prices (think telephone,cable, internet company) is another one. I notice you don't have any auto loans, or didn't list them. Driving your cars into the ground and not getting new cars is another good money saver..

Best of luck.

ilmartello, thank you for your opinion!
Our expenses already optimized, and I have it under control. It is at pain-free minimum right now

I know that our retirement funds are low, but for now it is in line with our priorities:

Cash Emergency fund - check
max employer contribution - check
Safety net (taxable) investments - working on, need some advise on allocation
Maximize our 401k-403b contribution and revisit an allocation - not there yet

Thank you!

[Pennstateclj1]

Right now, a lot's going on (new job, property sale pending, and other life-changing events might happened in near future), so I prefer to have some flexibility.

So, basically I would like to build "second row" safety net/big future expenses.

Ideally -low/medium risk, earnings enough to protect from inflation, diversified allocation that would allow occasional withdrawals.
Where should I go?

So I guess your question is less about the kid's 529s than about increasing your emergency fund? You've got some reading to do below then.

If that's the case since you already have 3-4 months expenses in cash, you may consider a tiered emergency fund (mental accounting). http://www.bogleheads.org/wiki/Emergency_fund

The MD 529 plan info is here- looks like some contributions are deductible, you might want to seach the site for former discussions on the MD 529. http://www.bogleheads.org/wiki/Maryland_529_Plan

As far as investing in a taxable account, you really should prioritize tax advantaged over taxable, especially at a 33% aggregate tax rate. That's $.33 of every marginal dollar that's going right to the tax men. If you're dead set on not increasing your 401k contributions (which is the route I'd go first) you might consider using ROTH IRA's as emergency funds. If you can get your MAGI under $173k for the year you can both contribute $5k to them, and good news, they can also act as an emergency fund because you can take out your contributions at any time without tax consequences. http://www.bankrate.com/finance/retirement/use-roth-ira-as-your-backup-emergency-fund.aspx If your MAGI is over $183k you'll have to do the backdoor ROTH IRA if you wanted to go that route.http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

If you want to go taxable, consider tax-exempt bonds because of your tax brackets. The dividends are tax-exempt and you'll only owe tax on your capital gain when you sell, the long term capital gain rate (held over a year) is set to go up to 20% next year, still lower than your marginal federal bracket. You might consider VWSTX or VWITX, short term and intermediate term tax exempt bonds respectively. I wouldn't go a higher duration than that for emergency fund money that you may need. I'd also keep your safety net of 3 months expenses in a liquid savings account. You might also consider I bonds, set to keep pace with inflation and tax-deferred until you sell. You can buy $10k in your name and $10k in your wife's name annually. http://www.bogleheads.org/wiki/I_Savings_Bonds(buy them at treasury direct)

Something like this, I just made up amounts and the number or different funds to show you options-
$1k in cash at home for power outages/natural disasters/credit cards down.
$10k FDIC insured Savings
$10k CD's
$20k- I bonds
$20k- VWSTX
$30k- VWITX

[Tatka75]

Thank you!
Looks like I have to educate myself more before I can decide what to do...

Roth IRA - great idea, I didn't know about back-door.
What's a best lace to open one? Can't decide between Vanguard (duh!) and Schwab (my husband's choice)?

[Kevin M]

Thank you!
Looks like I have to educate myself more before I can decide what to do...

Roth IRA - great idea, I didn't know about back-door.
What's a best lace to open one? Can't decide between Vanguard (duh!) and Schwab (my husband's choice)?

Vanguard is the best mutual fund company, hands down. Much broader selection of low-cost index funds, and their interests are more aligned with yours, since they are a not-for-profit organization.

I have used Schwab quite a bit in the past. They have a few low-cost index funds, and their minimums are much lower than Vanguard, but now that you can get a Target Retirement fund for $1,000 at VG, I would just start there if you don't have enough to meet the $3,000 minimum of most funds.

Kevin