Re-assessing risk tolerance and AA as a new parent

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apb1215
Posts: 8
Joined: Fri Feb 05, 2021 4:54 pm

Re-assessing risk tolerance and AA as a new parent

Post by apb1215 »

36yo here with about $600k joint NW. Wife is having our first baby in 4 months and will be indefinitely leaving her job. My salary will become our sole income which is $100k.

Our portfolio has always been 100% equities. For years we were only able to contribute to tax-advantaged space. This year we've built up about $25k in a taxable account in addition to our $25k emergency fund. This is the only portion of our net worth not in tax-advantaged space.

During these first years with the baby, I'm hoping to continue maxing our tax advantaged space, but there likely won't be much left after that, and whatever there is should probably go into a 529.

Anyway, my worry is that all of a sudden with this major life transition, I feel like we have very little readily available funds relative to the size of our NW should something happen to me like job loss or serious illness. Aside from the $50k liquid, we have maybe $75k in Roth contributions and a $15k HSA. The overwhelming majority of our NW (almost $400k) is locked into our 401k/IRAs.

So I guess I am looking for advice from other parents what helps them sleep most easily at night. We could do any of the following:
1) Change AA to something more conservative. This doesn't prevent the issue of access to tax-advantaged funds in emergency.
2) Take a year or two break from 401k maxing to build up a larger taxable account/EF.
3) Do nothing and adjust to the fear of having a dependent and being single income while letting the portfolio grow.

I'm most inclined to go with #3. The best resolution to this problem would be to grit through a few years of a major financial adjustment and wake up with much more money in my portfolio.
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retired@50
Posts: 7052
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Re-assessing risk tolerance and AA as a new parent

Post by retired@50 »

apb1215 wrote: Fri Jan 14, 2022 5:11 pm Aside from the $50k liquid, we have maybe $75k in Roth contributions and a $15k HSA.
So, a few things come to mind after reading your post.

1. Since you're about to be a single income household with a child, get some term life insurance if you don't already have it, and consider disability insurance, especially if it's not already provided at work.
See links: https://www.bogleheads.org/wiki/Life_insurance
https://www.bogleheads.org/wiki/Disability_insurance

2. Did you know that Roth IRA contributions can be withdrawn without penalty before age 59.5? Not that I'd recommend it, but in a dire emergency, it's possible. Read the "distributions" section of the Roth IRA wiki page: https://www.bogleheads.org/wiki/Roth_IRA

3. If an illness or medical issue pops up, you can always tap into the HSA.

Regards,
This is one person's opinion. Nothing more.
cbs2002
Posts: 217
Joined: Thu Feb 27, 2020 2:10 pm

Re: Re-assessing risk tolerance and AA as a new parent

Post by cbs2002 »

I just looked back at our NW records and we had almost the exact same NW when we had children. My spouse decided to stay home and we went from a two-income couple that barely tracked expenses to a one-income family making a little more than you. We had already bought a home. Here's what happened:

We intentionally dialed my 401K contributions way back and made no other IRA contributions. Our only real net savings for about 5 years was paying down the mortgage and a bit of 529. It amounted to 10-20K/year. I've always considered mortgage paydown part of savings. About five years in, now with two kids, there was a year that we netted slightly negative and I realized we were just moving money around accounts. From that point, we slowly increased savings again. There was some salary growth during those five years that made the transition back to savings easier. We were 100% equities until the oldest kid was about 10. We are now well into the multiple 2-comma club, and while our HHI is quite good by my standards, we are not doctors, attorneys or tech workers. The moral, if there is one, is that 500K in equities at age 36 is SUPER powerful for the long term.

Your concerns about having limited funds in taxable or Roth are legitimate. Here's what I would do in your situation:

1) Lock in the lower 30-year mortgage rate you can and pay the minimum
2) Reduce pre-tax contributions (401K and HSA). Possibly eliminate entirely as your income is not so high that they are a huge benefit right now.
3) Track expenses ruthlessly and know your "number" - how much you need to maintain your lifestyle.
4) Increase taxable and EF until they are at a level that enables you to sleep at night. Remember that Roth contributions can always be withdrawn, but these are often held in equities so are not the best option if you have an emergency during a market downturn.
5) At 600K NW, maybe try to have at least 500K in equities, the rest split between home equity and EF. Hold hold hold. Time is your very best friend.
6) Make sure you have reasonable amounts of short- and long-term disability and life insurance.

2008-9 offers a good test of a "worst case" - if the market drops by half, real estate tanks and you lose your job with a kid at home, what would you do? For me, the most reasonable path would be to have enough in accessible funds to cover essential expenses for a year and have faith that you and your spouse, as a loving and smart couple, will figure it out. There is only so much you can control.

You are way ahead of most even if it does not feel like it. Enjoy the privilege of being able to have one parent at home, and congrats on the new family.
Nohbdy
Posts: 115
Joined: Mon May 10, 2021 12:48 pm

Re: Re-assessing risk tolerance and AA as a new parent

Post by Nohbdy »

apb1215 wrote: Fri Jan 14, 2022 5:11 pm 36yo here with about $600k joint NW. Wife is having our first baby in 4 months and will be indefinitely leaving her job. My salary will become our sole income which is $100k.

Our portfolio has always been 100% equities. For years we were only able to contribute to tax-advantaged space. This year we've built up about $25k in a taxable account in addition to our $25k emergency fund. This is the only portion of our net worth not in tax-advantaged space.

During these first years with the baby, I'm hoping to continue maxing our tax advantaged space, but there likely won't be much left after that, and whatever there is should probably go into a 529.

Anyway, my worry is that all of a sudden with this major life transition, I feel like we have very little readily available funds relative to the size of our NW should something happen to me like job loss or serious illness. Aside from the $50k liquid, we have maybe $75k in Roth contributions and a $15k HSA. The overwhelming majority of our NW (almost $400k) is locked into our 401k/IRAs.

So I guess I am looking for advice from other parents what helps them sleep most easily at night. We could do any of the following:
1) Change AA to something more conservative. This doesn't prevent the issue of access to tax-advantaged funds in emergency.
2) Take a year or two break from 401k maxing to build up a larger taxable account/EF.
3) Do nothing and adjust to the fear of having a dependent and being single income while letting the portfolio grow.

I'm most inclined to go with #3. The best resolution to this problem would be to grit through a few years of a major financial adjustment and wake up with much more money in my portfolio.
Congrats on the family front.

Most Americans can’t find a thousand dollars before payday. You’re probably doing way better than your neighbors already. If you want to do #3 I don’t think it’s terrible, but #2 makes more sense to me, given that you took the time to write this post. Caveot: Always take the employer match. If you are not there to take the employer’s money then why even go?

If your income is expected to continue to be greater than expenses, then my suggestion is to take $20k that you have in taxable (above EF as you stated) and buy I-bonds. Keep in mind that this will tie up $20k for 1 year, but then 1 your I-bonds can be a 2nd tier for your EF with at least some kind of a return.

I would not suggest starting a 529 for a while, at least until you have a better idea of expenses (which I don’t see described in your post at all). At a $100k income I would actually never open a 529 because a coverdell ESA offers greater investment flexibility, and lesser fees. Edit: unless I lived in a state that provided a tax incentive to do so.
chassis
Posts: 714
Joined: Tue Mar 24, 2020 4:28 pm

Re: Re-assessing risk tolerance and AA as a new parent

Post by chassis »

apb1215 wrote: Fri Jan 14, 2022 5:11 pm 36yo here with about $600k joint NW. Wife is having our first baby in 4 months and will be indefinitely leaving her job. My salary will become our sole income which is $100k.

Our portfolio has always been 100% equities. For years we were only able to contribute to tax-advantaged space. This year we've built up about $25k in a taxable account in addition to our $25k emergency fund. This is the only portion of our net worth not in tax-advantaged space.

During these first years with the baby, I'm hoping to continue maxing our tax advantaged space, but there likely won't be much left after that, and whatever there is should probably go into a 529.

Anyway, my worry is that all of a sudden with this major life transition, I feel like we have very little readily available funds relative to the size of our NW should something happen to me like job loss or serious illness. Aside from the $50k liquid, we have maybe $75k in Roth contributions and a $15k HSA. The overwhelming majority of our NW (almost $400k) is locked into our 401k/IRAs.

So I guess I am looking for advice from other parents what helps them sleep most easily at night. We could do any of the following:
1) Change AA to something more conservative. This doesn't prevent the issue of access to tax-advantaged funds in emergency.
2) Take a year or two break from 401k maxing to build up a larger taxable account/EF.
3) Do nothing and adjust to the fear of having a dependent and being single income while letting the portfolio grow.

I'm most inclined to go with #3. The best resolution to this problem would be to grit through a few years of a major financial adjustment and wake up with much more money in my portfolio.
Mostly do 3. Nothing.

Don't do 2. Continue contributing to capture employer match. If there is no match, consider building up a larger EF.

When I was in your shoes (single income with young kids) I stayed the course. Also stay the course through things like 1987, Y2K, 9/11, GFC and C19.

Does the current market volatility have you spooked? Don't let it.

Leave your 401k with a high equity allocation. I recommend 100% equities. You have several decades to be in the market and your portfolio will thank you for the aggressive equity allocation.
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