Retirement Plan Needs a Tune Up (Plus a kid on the way!)

[redlbj01]

Hello All!

My wife and I are expecting our first born to arrive in about a week!! We've been fairly frugal, and I believe have saved a nice little bit for retirement relative to our income. My wife is a Middle School Teacher, and I'm in Sales. Total Gross income for 2013 will be $85,000 not including a $9,000 bonus I have coming in a month.

With the kid coming, and all of the changes that will bring, we aren't real sure on what to prepare for in terms of additional costs. Daycare is going to be an expensive reality for us in about 3 months. We are looking around $700/ month (which I hear is a low price nationally) for daycare. So that will eat up a nice chunk into our saving ability.

I've been feeling our portfolio could us a tune up. So I open up our financial lives to the experts on the this forum. Give me the good, the bad, and the ugly.

Emergency funds: $19,000 (broken up between a Money Market and extra cash cushion in our bank account). Equals a little over 6 months expense. Going to push to get a years worth within one – two years.

Debt:
New SUV For Wife: $17,000 & 1.45%. Monthly payment $300, 4.5 years left
Probably my biggest financial blunder so far. Should have bought a slightly used vehicle. But my “wing man” (wife) didn't help much in the saying no department. We will keep this thing for a minimum of 15 years. Debating on whether it's worth it to just pay it off with the taxable fund to free up monthly cash flow (and thus throw that into the 401k).
Mortgage: $127,000 30 year @ 4.875%. Been considering contacting Pen Fed to get a lower rate. The only wrinkle is I don't know how long we plan in staying in this house to make the re-financing worth it. We may try for # 2 kiddo in a few years, and our current home would be a little tight at that point. I'd consider dipping into the EF to refinance.

Tax Filing Status: Married, Filing Jointly. Will have a new dependent in about a week!!
Tax Rate: 25% Federal, 7% State
State of Residence: NC
Age: 31/30
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 15% of stocks

Portfolio Size: $144,000 (EF not included)

Current retirement assets

Taxable-$48,500.
100% American Century Moderate Fund (ACOAX) ER 1.06%
I realize this fund is expensive and not tax efficient. However, this is my wife's trust money left over from her Grandfather's estate. My father in law picked the fund and as such there is some family politics involved with this cash. I want to get it moved to a lower cost, tax efficient fund. Any suggestions?

His 401k - $56,000
19% Black Rock US Debt Index – ER .36%
46% Black Rock Equity Index-C – ER .03%
21% Blackrock Extended Equity Market-K -ER .11%
15% Blackrock ACWI ex- US Index -ER .11%
Company match- 100% Match on 3%, 50% match on additional percentage up to 5%

His Roth IRA at Vanguard- $30,000 (max every year)
14% VANGUARD Emerging Markets Stock Index (VEIEX) ER .33%
20% VANGUARD Mid Cap Growth Index (VMGIX) ER .24%
16% VANGUARD Small Cap Growth Index (VISGX) ER .24%
19% VANGUARD Total Bond Market (VBMFX) ER .22%
31% VANGUARD Total Stock Market Index Fund (VTSMX) ER .18%

Her Roth IRA @ Vanguard- $10,441 (max ever year)
100% VANGUARD Retirement Fund 2055 (VFFVX)- ER .18%

Her NC Teacher Retirement Program
Don't have a lot of info this, but they take around 6% of her salary every month. IF she stays in the system for 30 years, the annual benefit she will receive 1.82% of her final compensation X total years of service. Frankly, I don't even include this potential money into our plans.


2013 Contributions

New annual Contributions-25% of Annual Income to Retirement and 19% into cash
$8,000 HIS 401K (was $14,000, but with baby coming, I pulled back a bit to see how our budget will be effected). I realize this is a priority to get it maxed out.
$5,500 HIS ROTH IRA
$5,500 HER ROTH IRA

Available funds

Funds available in his 401(k)
Invesco Stable Value (?????)- ER .36%
Black Rock US Debt Index (????)– ER .07%
PIMCO Total Return-Inst (PTTRX) – ER .46%
VANGUARD Retirement Fund 2015 (VTXVX) -ER .16
VANGUARD Retirement Fund 2025 (VTTVX)- ER.17%
VANGUARD Retirement Fund 2035 (VTTHX)-ER .18%
VANGUARD Retirement Fund 2045 (VTIVX)-ER .18%
VANGUARD Retirement Fund 2055 (VFFVX)- ER .18%
Eston Vance Large Cape Value-V (EILVX) -ER .60
Black Rock Equity Index-C (CIECX)– ER .03%
American Century US Large Cap Growth Equity Trust (????) -ER .58%
Blackrock Extended Equity Market-K (????) -ER .11%
Blackrock ACWI ex- US Index (BDOAX) -ER .11%
Dodge & Cox International Stock (DODFX)- ER .64%
Thornburg International Study (????) -ER .60%
Company Stock (NWL) -ER .00


Questions
1. Should I pay off the car loan right away? We have lived debt free for years, but the wife wanted a new car to replace the extremely tired car we had before. My current employer provides a company car and free fuel for my use, so we won't be needing another car for sometime, unless the worst case scenario happens.
2. Should we refinance the mortgage? I expect to be in this house for 5 more years.
3. What to do with the taxable account? It was a trust provided to my wife from her now deceased Grandfather. It's meant to spent on her continued education to get her master's. Which is not something she really wants to be honest. Her father talked to her into an expensive “moderate” account with American Century. It's a touchy subject because the money has “memories” for her. Strange, I know, but I do believe she'd be willing to transfer it to a lower cost tax advantaged fund if I walked her through it.
4. I'm frustrated that we haven't been able to max out my 401k yet. It would be an extreme stretch for the monthly budget (items pop up) for us to attempt to max out the 401k on a monthly basis. Any suggestions on how i can fully fund the 401k? Maybe transfer cash from the taxable account to the Roth's, instead of funding them monthly?


Thanks for your assistance!

[NYBoglehead]

Congrats on the baby, that's awesome. For starters, it looks like you guys are doing well. Especially if you are not even counting the DB pension for your wife, that'll be gravy on top of your portfolio so long as that formula stays the same (and based on comparisons to other public employee pension calculations, that % of income x years worked seems like it should be sustainable).

1. With the car interest rate being so low, I don't think its necessary to pay it off at the expense of lowering your EF. Especially since you are in sales and I'd imagine your income is somewhat irregular.

2. You need to run the numbers on how much the refi would cost you and how long it would take to recoup those costs. If you plan on staying in the house beyond that point it may be worth it.

3. While the ER on that fund from the grandfather's estate is high, I'd probably just hang on to it. I don't think the potential for hurt feelings with your father-in-law or the other family politic BS is worth dealing with. Just my opinion, I wouldn't want to deal with that. If your wife doesn't want to use it to get her master's I'm sure you two will find something to do with it down the road.

4. If you're not maxing out Roths and 401ks, I'd sell some of the taxable so that you can get more of your assets in tax-advantaged accounts.

[Duckie]

redlbj01, you want an AA of 80% stocks, 20% bonds (a little low for your ages), with 15% of stocks in international (low). That breaks down to 68% US stocks, 12% international stocks, and 20% bonds. Here is a possible retirement portfolio:

Taxable -- 33%
21% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
12% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

His 401k -- 39%
15% (CIECX) BlackRock Equity Index Fund Investor C Shares (0.03%)
4% (N/A) BlackRock Extended Equity Market Fund K Shares (0.11%) <-- Roughly 80% large caps (Equity Index) plus 20% mid/small caps (Extended Equity) makes up the total US stock market.
20% (N/A) BlackRock US Debt Index Fund (0.07%)

His Roth IRA at Vanguard -- 21%
21% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)

Her Roth IRA at Vanguard -- 7%
7% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)

-- This ignores the tax cost of selling in taxable.

-- This has TISM in taxable to take advantage of the 
Foreign tax credit and at Vanguard because it's better than His 401k international options.

-- Does her job have a 403b or 457b plan besides the pension plan? Most school districts have a 403b plan.

-- Is the taxable account still in the trust? Is she allowed to liquidate and move the assets? Was it a gift or an inheritance? Do you know the taxable basis? How much would you pay in taxes if she sold it all? Who's paying the taxes on it now? Money is just money, it doesn't have "memories". It's not like the family farm or grandfather's favorite rocking chair.

-- I recommend increasing the bonds to 25% of the portfolio and international stocks to at least 20% of stocks. Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the discussion and the Vanguard paper link. Vanguard splits the difference and uses 30% in their Target Retirement and LifeStrategy funds.

Something to think about.

[Default User BR]

New SUV For Wife: $17,000 & 1.45%. Monthly payment $300, 4.5 years left
Probably my biggest financial blunder so far. Should have bought a slightly used vehicle. But my “wing man” (wife) didn't help much in the saying no department. We will keep this thing for a minimum of 15 years. Debating on whether it's worth it to just pay it off with the taxable fund to free up monthly cash flow (and thus throw that into the 401k).

Leave the auto loan be. Use the taxable money for living expenses, which will allow increased 401(k) contributions.

Mortgage: $127,000 30 year @ 4.875%. Been considering contacting Pen Fed to get a lower rate. The only wrinkle is I don't know how long we plan in staying in this house to make the re-financing worth it.

Look into no-fee refinances. Then there's no consideration for recovery of the expenses.


Brian

[redlbj01]

Congrats on the baby, that's awesome. For starters, it looks like you guys are doing well. Especially if you are not even counting the DB pension for your wife, that'll be gravy on top of your portfolio so long as that formula stays the same (and based on comparisons to other public employee pension calculations, that % of income x years worked seems like it should be sustainable).

1. With the car interest rate being so low, I don't think its necessary to pay it off at the expense of lowering your EF. Especially since you are in sales and I'd imagine your income is somewhat irregular.

2. You need to run the numbers on how much the refi would cost you and how long it would take to recoup those costs. If you plan on staying in the house beyond that point it may be worth it.

3. While the ER on that fund from the grandfather's estate is high, I'd probably just hang on to it. I don't think the potential for hurt feelings with your father-in-law or the other family politic BS is worth dealing with. Just my opinion, I wouldn't want to deal with that. If your wife doesn't want to use it to get her master's I'm sure you two will find something to do with it down the road.

4. If you're not maxing out Roths and 401ks, I'd sell some of the taxable so that you can get more of your assets in tax-advantaged accounts.

Thanks for the response!

(1) Car Loan: I was thinking the same thing. But figured there was something nice about having simplicity with one less payment per month.
(2) Refi:Looking into this now. It's just confusing as hell, because each lender presents the details differently.
(3) Politics: Agreed on the family poltics talk, but I maybe able to talk the wife into putting the cash into more efficient investments, and start putting some money into the college fund for the kid.
(4) What tax implications do I need to consider when selling the taxable account funds? Can I just do a straight transfer of the taxable to my 401k?

[redlbj01]

redlbj01, you want an AA of 80% stocks, 20% bonds (a little low for your ages), with 15% of stocks in international (low). That breaks down to 68% US stocks, 12% international stocks, and 20% bonds. Here is a possible retirement portfolio:

Taxable -- 33%
21% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)
12% (VTIAX) Vanguard Total International Stock Index Fund Admiral Shares (0.18%)

His 401k -- 39%
15% (CIECX) BlackRock Equity Index Fund Investor C Shares (0.03%)
4% (N/A) BlackRock Extended Equity Market Fund K Shares (0.11%) <-- Roughly 80% large caps (Equity Index) plus 20% mid/small caps (Extended Equity) makes up the total US stock market.
20% (N/A) BlackRock US Debt Index Fund (0.07%)

His Roth IRA at Vanguard -- 21%
21% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)

Her Roth IRA at Vanguard -- 7%
7% (VTSAX) Vanguard Total Stock Market Index Fund Admiral Shares (0.06%)

-- This ignores the tax cost of selling in taxable.

-- This has TISM in taxable to take advantage of the 
Foreign tax credit and at Vanguard because it's better than His 401k international options.

-- Does her job have a 403b or 457b plan besides the pension plan? Most school districts have a 403b plan.

-- Is the taxable account still in the trust? Is she allowed to liquidate and move the assets? Was it a gift or an inheritance? Do you know the taxable basis? How much would you pay in taxes if she sold it all? Who's paying the taxes on it now? Money is just money, it doesn't have "memories". It's not like the family farm or grandfather's favorite rocking chair.

-- I recommend increasing the bonds to 25% of the portfolio and international stocks to at least 20% of stocks. Vanguard has found between 20% and 40% of stocks in international to be the "sweet spot". See the discussion and the Vanguard paper link. Vanguard splits the difference and uses 30% in their Target Retirement and LifeStrategy funds.

Something to think about.

Duckie,
Thanks for the response, apologies about the late reply, been a little crazy at home in prep for the baby.

Taxable- I like these options for funds a lot with the low ERs! I'll talk to the wife about how comfortable she is with moving the cash over.
401k: Easy adjustment, and this is where I felt I needed a tune-up.
Roths: I'll make this adjustment accordingly.

-What tax implications do I have to keep in mind when selling the taxable funds?
- She does have a 401k plan (no match), NC 457 plan, and a 403 (b) plan. We frankly haven't had the spare cash to invest in any of these options, as we haven't maxed out my 401K plan yet. Which of the three would be a good priority? Should we move cash from the taxable into one of these?
-The taxable money is out of the trust and is hers to do with as she (we) please. As I mentioned in the OP, it was primarily for her to use for continued education. In this case, getting her Master's Degree (music ed). Music ed degrees are super expensive (at least compared to others). So I supposed we could take 20 to 30k out of the taxable account and still have enough for her to get her master's in the future if she so desired.

[Duckie]

What tax implications do I need to consider when selling the taxable account funds?

You need to know what the cost basis is. How much did your wife inherit? (You don't need to tell us, but the two of you need to know.) Was all of it put into the American Century fund? Were dividends/distributions reinvested? Do you have all the statements? Adding up the original investment plus all subsequent reinvestments and subtracting that number from the amount you would get if you sold now gives you the capital gain amount which is taxable.

Can I just do a straight transfer of the taxable to my 401k?

No. However you can use the liquidated dollars to live on while increasing your 401k contributions. This is a round-about way of getting more assets into the 401k.

She does have a 401k plan (no match), NC 457 plan, and a 403 (b) plan. We frankly haven't had the spare cash to invest in any of these options, as we haven't maxed out my 401K plan yet. Which of the three would be a good priority? Should we move cash from the taxable into one of these?

The only way to know is to find out the choices inside the three plans. If you list the fund names, ticker symbols, and expense ratios we can figure out what's best. One of them might even be better than your plan (although I doubt it). Even if you don't contribute now, it's nice to know your options.

So I supposed we could take 20 to 30k out of the taxable account and still have enough for her to get her master's in the future if she so desired.

Any money needed for her education should be removed from the retirement portfolio and, if this is expected to happen in the next few years, should not be in stocks. (You don't want the value to take a nose-dive right before a tuition payment.)