What to do? Never had money to worry about before.

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What to do? Never had money to worry about before.

Postby go_outside » Wed Feb 06, 2013 7:52 pm

Hi – I hope I am doing this as correctly as I can. Here goes nothing…

Gross salary: Normally $53K-$55K (likely in the mid-40s this year (7 weeks FMLA unpaid)
Annuity: $6,100/year after tax for life
Minimum Monthly expenses (around $2000 including funding Roth)

Emergency funds: Two years of expenses (job is stable now but politician changes in the future may affect that – little action in my field right now to find a new job)
*$35,000 in savings at Barclay (currently 1.00%)
*$10,000 i-bonds (2013’s max). Will probably continue to move $10k per year until all emergency funds are in i-bonds.
*$5,000 B of A (.01% - but where my checking is and most immediate access)

Debt: Zero debt. House and cars are paid off. No student loans. One credit card used to get points and paid off monthly.

Tax Filing Status: 2012 – Married (I guess… my wife died 12/15/12)
2013 forward…single

Tax Rate: 25% Federal, 5% State (2012) – For 2013, I anticipate my salary after maxing out a 457 to barely creep into the 25% bracket, if even that. State remains 5%.

State of Residence: IL

Age: 42 in May

Desired Asset allocation: xx% stocks / xx% bonds – I am not sure…70/30 to 85/15 ???
Desired International allocation: xx% of stocks – I am not sure

Current retirement assets

His 401k
No 401k – I have a 457 available through ICMA-RC which I plan to max out. Fund choices and expense ratios:
http://www.icmarc.org/investments/457-a ... plans.html

Currently at $0. Will contribute max $17,500 per year beginning March 2013 (biweekly contributions) (I am currently on unpaid FMLA).

His Roth IRA at Vanguard
100% Target 2035 (VTTHX) (0.18%) I just opened and fully funded a Roth IRA for 2012 in this fund yesterday. I receive an annuity from my wife’s pension ($508.25 after S-0 withholding, state exempt) per month for life. This monthly amount covers monthly contributions of $458.33 to that Roth IRA from here on out (until max contribution amount exceeds it). I deposited for Jan & Feb today. Therefore, balance right now is $5916.67.

I also have a municipal pension. I am currently 13.6 years in, fully vested. Thankfully, the State of Illinois politicians cannot touch this fund like the other ones in the state. Cannot provide any frther info on the pension right now because they locked me out for too many wrong passwords and I have to wait for them to SNAIL MAIL me a reset code. :oops:


Contributions

New annual Contributions
$17,500 in 457 (no match)
$5,500 Roth IRA


Available funds
$75,000 I do not know what to do with. Currently sitting in a life insurance “draft account” earning 0.50%

Questions:
1. I’m not sure what to do when it comes to picking funds in the 457.

2. Is target 2035 in Vanguard good for my Roth?

3. I’m REALLY not sure what to do with the $75,000.

Ideally, I would like to be able to keep my job at least 11.5 more years. 25 years in should be a big help in my pension amount. This would put me at 53 years old. If possible, I’d like to retire sooner rather than later (ie late 50s/early 60s vs 70+) and do something I really like to do for money (part-time or otherwise) vs. tolerating my job like I do now.

I would consider myself conservative to moderate. I don't have the stomach for aggressive. My wife made $60K+ a year and that's gone for good.

Thanks for any help or suggestions you have… I’m in a position I’ve never been in (at a great cost) and don’t want to screw it up.

Dave
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Re: What to do? Never had money to worry about before.

Postby bottlecap » Wed Feb 06, 2013 10:07 pm

Dave, I'm very sorry about your wife. Please accept my condolences.

The TR 2035 is fine for your IRA. What fund options do you have in your 457? Do you have any plans for the $75k? Generally, we suggest all funds should be considered as a whole for long term investing.

I'm sure others will have questions, but these are the ones that jump out at me.

JT
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Re: What to do? Never had money to worry about before.

Postby runner9 » Wed Feb 06, 2013 10:19 pm

Just want to made my condolences on the loss of your wife.

Also, welcome to the site, you'll learn a lot and get a lot of great advice.
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Re: What to do? Never had money to worry about before.

Postby go_outside » Wed Feb 06, 2013 10:22 pm

Thank you bottlecap and runner9- I'm beginning to heal. Spending the last 6 weeks in Florida NOT freezing has helped wonders. I go back to reality next week.

Here are my options (with expense ratios) with my 457K : http://www.icmarc.org/investments/457-and-401-plans.html - they also have target funds, albeit at a higher expense ratio than Vanguard.

As for the $75K I have no idea. Part of me wants to buy a house near where I have a bunch of family in Florida (and where I want to end up) and rent it out but the thought of being a landlord does not sit well with me. That and it will be 20 years before I move down here and god knows what the area (and the house) will be like then, so I have pretty much ruled that out. In this area (Palm Bay) I could buy a house cash with that, but it just seems like a major pain.

So... I'm not sure where to put it. Wherever it is it I know it will be taxable, but I do not want it to sit in a 1% account. OTOH I don't want to sit at a blackjack table with it, either. I'm halfway through The Boglehead book, but I am going to need a lot more reading to figure things out. Like I said, I've never been concerned about this stuff because we had no investments, so I am a bit overwhelmed.
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Re: What to do? Never had money to worry about before.

Postby JimInIllinois » Wed Feb 06, 2013 10:56 pm

Very sorry about your wife. You may feel old right now, but you are still young with much ahead of you.

Regarding the Roth IRA, you can save $275 per year in IL taxes by contributing to a traditional IRA and immediately converting to a Roth since your income allows you to deduct the IRA contributions but IL does not tax the conversion. See "Backdoor BOTH".
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Re: What to do? Never had money to worry about before.

Postby BL » Thu Feb 07, 2013 12:47 am

So sorry for your loss. Please take care of yourself and don't feel you have to make major decisions for at least a year if possible. It is fine to consider possibilities and handle what is necessary and some of what is needed now. There is no problem in leaving money in bank accounts even if they don't earn much interest while you get your life together. There will be another adjustment as you get back to work so don't pressure yourself to solve everything right away. You don't need any more stress in your life and you may have a different viewpoint on some things a year from now. (A friend bought a house and moved shortly after loosing a spouse and later regretted it.)
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Re: What to do? Never had money to worry about before.

Postby go_outside » Thu Feb 07, 2013 8:03 am

Thanks everyone- I truly appreciate the kind words re: my wife.

JimInIllinois I will look into that. Thanks.

I am not adverse to leaving the $75K in a meager savings account for a while (although I'd probably transfer it to Barclays to get twice the interest), but I'd like to start my 457 as soon as I get back. If I pick their target 2035 fund for now, is .91 expense ratio bad? I mean compared to Vanguard everything seems bad. They have other funds with expense ratios in the low 20s too. Or should I pick something like 60-70% this http://www.icmarc.org/prebuilt/static/funds/profile/WH9800.html and the rest something like this http://www.icmarc.org/prebuilt/static/funds/profile/WN9800.html ?? They both have .21 e/r

I have some time to keep reading, as my first paycheck with a 457 deduction won't be until March 6th.

Thanks :)
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Re: What to do? Never had money to worry about before.

Postby BL » Thu Feb 07, 2013 10:29 am

I used to have ICMARC and was in expensive funds because I didn't know better. I believe you can change to different funds without expense (check it out) later, so then it isn't such a permanent decision. At this point I would have chosen the index funds, possibly using age in bonds as a starting point. That is, 40% bond index and 60% equity index. Cost is really the only thing you can control in getting the most out of your funds.
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Re: What to do? Never had money to worry about before.

Postby Snow Boarder » Thu Feb 07, 2013 12:31 pm

First and foremost, I am sorry for your loss but I am glad you found this site.

There is alot of knowledge here. Mostly you will get good advice and a little bit of well-intentioned advice that is a little off-the-mark for your personal situation. Manythings here are laced with the commentors opinion as there are alot of topics that have no right answer (pay off your mortgage or use the extra money to invest). Keep reading and educating yourself.
That said here is my opinion.

Questions:
1. I’m not sure what to do when it comes to picking funds in the 457.
Normally bogleheads treat their portfolio as a 'whole' Since you have not figured out your asset allocation, fund location etc. and considering you have to make choices in the 457 plan by March 6th I would look at the 457 as if was the only thing you had. Use the age in bonds philosophy 60/40. Direct your 457 contributions 60% VT Vantagpoint Broad Market Index er=.21 and 40% VT Vantagepoint Core Bond Index er=.21.

2. Is target 2035 in Vanguard good for my Roth?
I think the TD 2035 is OK. If you go to the Vangaurd website and 'look under the hood':
TD2035 is 86% stock and 14% bond.
TD2025 is 79% stock and 21% bond.
Both more aggressive then 60/40. But remember the is no mandatory withdrawal age of 70.5 yo like a traditional so your time horizon is longer.


3. I’m REALLY not sure what to do with the $75,000.
You don't a have a time crunch on doing something with the $75k. I would put it in an FDIC insured bank and let it sit for 6-12 months allowing you to grieve and educate yourself on your AA, treating your portfolio as a whole and just envision how you want your life to look going foward. Then you will be able to decide whats best for you.

Just my 2 cents.
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Greenville (SC) Chapter Coordinator | greenvillebogleheads@gmail.com
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Re: What to do? Never had money to worry about before.

Postby JimInIllinois » Thu Feb 07, 2013 12:39 pm

go_outside wrote:If I pick their target 2035 fund for now, is .91 expense ratio bad? I mean compared to Vanguard everything seems bad. They have other funds with expense ratios in the low 20s too. Or should I pick something like 60-70% this http://www.icmarc.org/prebuilt/static/funds/profile/WH9800.html and the rest something like this http://www.icmarc.org/prebuilt/static/funds/profile/WN9800.html ?? They both have .21 e/r


Absolutely go with the two index funds. Since you're new to this and don't know how you'll react during the next market crash you should not be more aggressive than age-in-bonds. Just put 60% in the stock index, 40% in the bond index, and ignore it for a couple of years.
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Re: What to do? Never had money to worry about before.

Postby donall » Thu Feb 07, 2013 1:02 pm

Condolences on your loss.

I think the advice given is good, so do nothing for a few months and study your options. Just reading this site you will learn a great deal. In addition to the recommended books from this site, read your IMRF (my assumption with your description) Benefits book for Tier I. Note page 6:
Making additional contributions to IMRF
You can increase your retirement savings by making additional contributions to IMRF. You may contribute up to an additional 10% of your salary to IMRF’s Voluntary Additional Contribution (VAC) program. At retirement, your VAC may be taken as a lump sum or as an additional monthly pension.
Your VAC are after tax—they are not tax-deferred like your usual IMRF member contributions. Some members may be better served by
contributing a portion of their salary on a pre-tax (tax-deferred) basis to
their employer’s deferred compensation plan, e.g., 457 or 403(b).

Earning interest on your VAC
Unlike VAC themselves, the interest credited to your VAC account is tax-deferred. The interest rate paid is currently 7-1/2%. This interest
rate can change in the future. If the interest rate changes, IMRF will not notify VAC participants of the change.
VAC interest is credited differently from a traditional savings account:
• A traditional savings account credits interest on the current amount
in the account.
• IMRF credits interest at the end of the year on the beginning of
the year amount. Therefore, you will not earn any interest the first
year you begin making VAC.

There is probably more, but this caught my eye.
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Re: What to do? Never had money to worry about before.

Postby retiredjg » Fri Feb 08, 2013 12:36 pm

Welcome to the forum!

You have some good choices in your 457b. Below is a suggestion based on the "three fund portfolio" that is often recommended here for people who are seeking a basic portfolio that covers all the necessary bases (total US stock market, total international stock market, and total bond market).

You have not yet posted a desired stock to bond ratio, so I'll use a number on the conservative side of middle of the road for your age of 41 (65% stocks/35% bonds). Another very reasonable choice would be close to your age in bonds (60% stocks/40% bonds)

Every 5 years, increase your bond percentage by 5% and you'll stay pretty close to where you want to be.

For now, I'll leave out the $75k since you are as yet undecided. I'll also leave out the $35k since I'm not sure what that is for (unless it is your emergency fund?). Things would start out in March like this:

457b
0% Vanagepoint Broad Market Index .21% <--same as total stock market
0% Vantagepoint Core Bond Index .21% <--same as total bond market

Roth IRA
100% Vanguard Target Retirement 2020 (currently at 64% stock/36% bonds)


By the end of the year, it would look more like this:

457b 62.5% ($17,500)
27.5% Vantagepoint Broad Market Index .21%
35% Vantagepoint Core Bond Index .21%

Roth IRA 37.5%($10,500)
18.5% Vanguard Total Stock Index VTSMX .18%
19% Vanguard Total International Stock Index VGTSX .22%

To get there, in the 457b you would send about 56% to the bond fund and 44% to the stock fund (the first year). In the Roth IRA, as you near the end of the year, you could exchange from the Target 2025 fund into the 2 stock funds shown. There is no tax cost for exchanging funds within an IRA/Roth IRA.

In future years, you would figure out your total contribution (let's say $29000 for 2014) and send 35% of that to bonds, 19% of that to international, and just put the leftovers into the Total Stock/Vantagepoint Broad Market funds.

An alternative approach would be to use a target type fund in both the 457b and the Roth IRA. However, the high expense ratio of the target type fund in the 457b makes this a poor choice.

Another alternative approach would be to use 3 funds in the 457b and a target type fund in the Roth IRA. I did not choose that approach because the international fund in the 457b is not nearly as complete as the international fund offered by Vanguard. The fund in the 457b is large and mid cap stocks from developed countries only. It is missing the emerging market countries completely (an important class of stocks) and the small cap international stocks as well.

I have a few other comments, but I'll post this and start a new post for those.
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Re: What to do? Never had money to worry about before.

Postby retiredjg » Fri Feb 08, 2013 1:00 pm

JimInIllinois wrote:Regarding the Roth IRA, you can save $275 per year in IL taxes by contributing to a traditional IRA and immediately converting to a Roth since your income allows you to deduct the IRA contributions but IL does not tax the conversion. See "Backdoor BOTH".

go_outside, I think this is something you should consider. In your reading, be sure you don't confuse Backdoor Both with Backdoor Roth. It would be an easy mistake to make, especially if you don't realize they are 2 different things (although similar).

But...if your contributions are going to trickle in on a monthly basis, there will be a bit of a paperwork trail hassle with this. If you decide to do it, you might start fresh in 2014 with a lump sum contribution of $5,500 (or whatever the limit is in 2014) and do a clean conversion a day or two later. This way, you don't have to keep up with how much your contributions have grown or shrunk during the year with your monthly contributions. It will just be easier. Then the money from your annuity can simply flow into savings, to be ready for the next year's contribution.

For the rest of 2013, I'd just keep on doing what you are doing with your Roth IRA contributions.

For your $75k, you might consider putting it into an intermediate term tax-exempt bond fund for now. An example - https://personal.vanguard.com/us/funds/ ... IntExt=INT This would certainly be a better choice than a savings account unless you can find a high yield savings account you like (look at bankrate.com ) I suspect in a year or so, what you want to do with that money will become apparent to you. It is possible you'll just want to fold it into your retirement nest egg. That would be pretty easy and would just require you to move a few things around (also easy).

I would not make any quick decisions on this money - especially buying in Palm Bay (very attractive right now with all the foreclosures, but we don't even know where the coastline will be in 20 years :wink: and you know there will be 3 to 8 hurricanes in the meantime).
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Re: What to do? Never had money to worry about before.

Postby ResNullius » Fri Feb 08, 2013 5:40 pm

Sorry for your loss. Regarding the possibility of buying a house in Florida, I would not do that. You are way too far away from the time when you might move, and circumstances could easily change between now and then. In addition to the cost of the house, you'll have the cost of the various types of insurance you would need in the middle of a hurricane zone. Add in utilities and upkeep, plus fees to the rental agent, and you'll likely be close to negative on cash flow, plus you'll be out the investment return you could have gotten by investing the money in stocks, bonds, or mutual funds. I would keep it simple, very simple, then let time be the healer of all things.
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Re: What to do? Never had money to worry about before.

Postby retiredjg » Fri Feb 08, 2013 6:28 pm

Come to think of it...

    -My friends who bought land near the coast on the FL panhandle divorced and had to sell it.

    -My friend who bought land in the Blue Ridge area now has it for sale since she decided to retire in different state instead.

    -My friends who bought land on the Gulf side of the FL peninsula ended up with a power line along their property line 10 years later and have now decided to retire in a different location.
It seems that nobody I know is retiring to the little piece of paradise they bought 10 or 20 years earlier. Hmmm.
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Re: What to do? Never had money to worry about before.

Postby go_outside » Sun Feb 10, 2013 11:36 pm

Thanks so much for the info. I am finishing up her final resting place (eternal reef) in Florida and will be driving home this week. I will process this all when I get back.

As for the house in Palm Bay or Melbourne - yes I thought of these things among others and that's why I never even looked at anything the seven weeks I was down here.
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