[4 year update - would like another review]

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Submariner1980
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[4 year update - would like another review]

Post by Submariner1980 » Fri Feb 06, 2015 12:29 pm

Hi,

I have previously received excellent advice and would like to get a status check on how I am doing. I also have a different life situation compared to the last time I checked-in 4 years ago (viewtopic.php?f=1&t=61932&p=852303#p852303) with 2 kids, and a new job with an Employee Stock Purchase Program (ESPP) option. Overall, I'd like to get a recommendation as to how I'm doing and if I'm directing funds with approriate prioritization.

Emergency funds: 6 months in money market savings account

Debt: $186k mortgage at 4.125% 30-year fixed. Just purchased in May 2014 with 20% down, so ~80% LTV

Tax Filing Status: Married filing Jointly

Tax Rate: 25% Federal, 5.8% state. Single income family, ~$115k annually

Age: husband 34, wife 29, 2 sons ages 3.5 and 2

Desired asset allocation: 80 stocks/20 bonds, shifting to 75/25 this year

Intl allocation: 20-40% of stocks

Current portfolio (~$230k)

Taxable: None outside of emergency fund MMSA (not included in total)

His Roth at Vanguard:
4.6% Vanguard TIPS (VIPSX)
10.4% Vanguard REIT Admiral (VGSLX)
5.6% Vanguard Total Bond Admiral (VBTLX)
10.4% Vanguard Total Stock Admiral (VTSAX)

His Former Employer 401k - have not rolled over, no plans to unless advice dictates otherwise, custodian is Vanguard
3.0% Vanguard TIPS Institutional
3.2% Vanguard Total Bond Institutional
23.3% Vanguard Total International Institutional
27.4% Vanguard Total Stock Institutional

His Current Employer 401k
2.4% Vanguard Target Retirement 2030 Trust
Company matches 4.5% of first 6% employee contributions
Outside of Vanguard Target funds, options are high fee actively managed funds

Her Roth IRA
5.3% Vanguard Target Retirement 2030 (VTHRX)

Her Former Employer 401k - have not rolled over, been sitting idle since she quit job in 2011
2.7% Fidelity Spartan Total Market
0.5% Harbor International
0.7% PIMCO Total Return Institutional

HSA
0.6% Cash

ESPP - paycheck deduction occurs for 6 months, then purchase is made with 15% discount on the stock price as of period ending date. Immediately available to sell.

Future contributions:
His Current 401k - $21,000 (includes match)
His Roth IRA - $5,500
ESPP - $5,300 each 6 month window. Plan is to sell immediately (netting ~$6200) and invest in taxable in accordance with desired asset allocation. Only in second period since starting with this employer; first period was sold immediately and used to bolster emergency fund.
HSA - $6,650

Questions:
1- I drive a 14-year old truck with close to 200k miles on it, and I would hate to draw from emergency fund to purchase a new-to-me vehicle if something catastrophic happens to it. I don't currently have other savings dedicated to a future car purchase. How should I handle this? Temporarily LOWER my contributions somewhere in order to build up a short-term fund (which contributions would I lower first)? Accept a 3-year car loan, lowering contributions somewhere to manage the new montly payment?

1a- More generic than a specific truck fund, should I be allocating dollars to a taxable account, other than those contributions to ESPP? It would be nice to retire early and have access to funds outside of 401k/IRA, or in the more near-term, have a fund to draw from for things that come up but aren't currently in consideration (home improvements? family vacation?)

2- I have prioritized putting money in the HSA over funding her Roth IRA the past 2 years. I have maxed it out each year for the past 3 years, but we have blown through it with 2 child births and therapy for one child that will last for about one more year. Should I re-prioritize and try to fund her Roth? We currently use the HSA for all medical expenses instead of paying from checking account and allowing HSA to grow.

3- This is the first time I have had ESPP available in a job. With the 15% discount and immediate availability to sell, should I be maxing this out (max allowable contribution is ~2x current contribution)? If so, at the expense of what other savings? I'm throwing enough into savings to feel stretched (~40% of gross pay); I would like a good "saving-but-living-now" balance, thus the reason for framing the question as "at the expense of what other savings". Or should I be evaluating my budget and saving higher % of gross and not backing down other savings?

4- Regarding single income family - Working parent has $300k individual life insurance policy, additional $550k through group life at work. About the right amount given debt and retirement accounts, or should I consider more or less?

There is probably lots of overlap between the questions, so maybe one more overarching question:

How am I doing and what should I be doing differently or thinking about for the future?

Submariner1980
Posts: 81
Joined: Thu Feb 18, 2010 2:36 pm

Re: Guidance on Prioritization

Post by Submariner1980 » Mon Feb 09, 2015 11:38 am

Bumping this since it got down to the 3rd page without any responses. Any takers?

kaudrey
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Re: Guidance on Prioritization

Post by kaudrey » Mon Feb 09, 2015 11:49 am

If you need more cash outside of the retirement space, then contribute to the 401(k) just up to the match and use the rest of that money for car fund/vacation fund whatever. You could also use the ESPP money as your car fund or to replenish your emergency fund if you need a car before then. That's a nice chunk of change.

Also, remember that you can use the contributions to your Roth at any time without penalty (not the gains, but the contributions). So some people use that as their emergency fund.

You are saving a LOT of your income, which is great, but life is a balance. If you don't have plans to retire super-early, what is the point of saving 40% of your income? Reduce it to 25-30% and see how that feels as far as giving you room to do things now, but still save for the future.

You have 2 kids; but I didn't see a mention of 529s or other savings for college. What is your plan there?

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Re: Guidance on Prioritization

Post by Alex Frakt » Mon Feb 09, 2015 1:04 pm

Submariner1980 wrote:Bumping this since it got down to the 3rd page without any responses. Any takers?
I edited your title. I suspect you'll get a few more responses now. Note that our requirement that titles be meaningful is as much for the posters as readers.

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Meg77
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Re: [4 year update - would like another review]

Post by Meg77 » Mon Feb 09, 2015 3:00 pm

Submariner1980 wrote:Questions:
1- I drive a 14-year old truck with close to 200k miles on it, and I would hate to draw from emergency fund to purchase a new-to-me vehicle if something catastrophic happens to it. I don't currently have other savings dedicated to a future car purchase. How should I handle this? Temporarily LOWER my contributions somewhere in order to build up a short-term fund (which contributions would I lower first)? Accept a 3-year car loan, lowering contributions somewhere to manage the new montly payment?

In your situation financing a good newer car (with better gas mileage) over 3-5 years is not a bad idea. You need an emergency fund, and auto loans are dirt cheap these days. You can make the payment work by slightly lowering 401k contributions if you have to. But who knows raises over time might more than make up for a reasonable payment. Obviously start saving now if you can (maybe roll those ESPP sales into a car fund), but if you have to finance don't sweat it.

1a- More generic than a specific truck fund, should I be allocating dollars to a taxable account, other than those contributions to ESPP? It would be nice to retire early and have access to funds outside of 401k/IRA, or in the more near-term, have a fund to draw from for things that come up but aren't currently in consideration (home improvements? family vacation?)

Not until you're maxing your wife's Roth and all other tax advantaged space. Roth contributions are always accessible though so max that out first even before an emergency fund. Better to get the money in there while you can. It's nice to not have all investments tied up in retirement accounts, but not nice enough to contribute when you could be maxing out tax advantaged space instead, in my opinion. If you retire early you can always convert your traditional 401ks slowly to Roths once you're in a super low tax bracket and then access them (you have to wait 5 years after conversion to take the money out tax free so you'd need 5 years of expenses in non-converted roth accounts, cash, and taxable investments).

2- I have prioritized putting money in the HSA over funding her Roth IRA the past 2 years. I have maxed it out each year for the past 3 years, but we have blown through it with 2 child births and therapy for one child that will last for about one more year. Should I re-prioritize and try to fund her Roth? We currently use the HSA for all medical expenses instead of paying from checking account and allowing HSA to grow.

Keep maxing the HSA! This is the most tax advantaged account there is. Plus you've demonstrated that you actually need and use it. Why would you quit contributing? Let that money pile up forever if you can, or use it for medical needs as they arise. Either way it should be high on the financial priority list.

3- This is the first time I have had ESPP available in a job. With the 15% discount and immediate availability to sell, should I be maxing this out (max allowable contribution is ~2x current contribution)? If so, at the expense of what other savings? I'm throwing enough into savings to feel stretched (~40% of gross pay); I would like a good "saving-but-living-now" balance, thus the reason for framing the question as "at the expense of what other savings". Or should I be evaluating my budget and saving higher % of gross and not backing down other savings?

Yes you should max it out. But if you're doing it at the expense of the budget then just put the money back into emergency funds when you cash out, and drain the EF slightly as you contribute between payouts, netting yourself the 15% discount. My husband and I roll in and out of his ESPP similarly. He has to hold for a quarter after contributing, so we buy every pay check (artificially lowering our monthly income) then have mini "bonuses" 4 times a year when we sell which we use to replenish savings.

4- Regarding single income family - Working parent has $300k individual life insurance policy, additional $550k through group life at work. About the right amount given debt and retirement accounts, or should I consider more or less?

You might have enough, but you may want some on your wife as well. If you die tomorrow how long will $800K last your wife and kids? That money would generate $32K a year before taxes, or it could be used to pay off the mortgage and any other debt, lowering expenses slightly. Could she go back to work and earn enough to replace the gap between your current spending and investing needs and what that policy would provide? A lot of this depends on her earning potential. If she's uneducated or could only command minimum wage then you need a lot more insurance. If she took a break from a 6 figure job to have kids, I'd say you're OK since she could go back to work once the kids are in school and save for her own retirement, etc. in addition to the windfall you leave her.

There is probably lots of overlap between the questions, so maybe one more overarching question:

How am I doing and what should I be doing differently or thinking about for the future?
You're doing great! For your age and income level you have a great portfolio and are thinking about all the right issues. One thing I'll say is not to worry yourself too much about college funds. Your kids will qualify for financial aid at your income level (and hopefully scholarships), or they can take out their own loans. Better to take care of your retirement and free them from the burden of caring for you in your old age. You can always offer them financial help later, if you have it to give, but I know too many parents beat themselves up for not being able to save 6 figures toward college funds.

I would lower your 401k if you have to in order to max the HSA and Roths for you AND your wife. Roths are more flexible and accessible which will make you feel better anyway. Start maxing out the ESPP and replenish cash with every sale (use for emergency fund and/or truck fund). Then enjoy your young family. Cheers!
"An investment in knowledge pays the best interest." - Benjamin Franklin

Submariner1980
Posts: 81
Joined: Thu Feb 18, 2010 2:36 pm

Re: Guidance on Prioritization

Post by Submariner1980 » Tue Feb 10, 2015 9:00 am

Alex Frakt wrote:I edited your title. I suspect you'll get a few more responses now. Note that our requirement that titles be meaningful is as much for the posters as readers.
Thanks Alex.
Meg77 wrote:
Submariner1980 wrote:Questions:

1a- More generic than a specific truck fund, should I be allocating dollars to a taxable account, other than those contributions to ESPP? It would be nice to retire early and have access to funds outside of 401k/IRA, or in the more near-term, have a fund to draw from for things that come up but aren't currently in consideration (home improvements? family vacation?)

Not until you're maxing your wife's Roth and all other tax advantaged space. Roth contributions are always accessible though so max that out first even before an emergency fund. Better to get the money in there while you can. It's nice to not have all investments tied up in retirement accounts, but not nice enough to contribute when you could be maxing out tax advantaged space instead, in my opinion. If you retire early you can always convert your traditional 401ks slowly to Roths once you're in a super low tax bracket and then access them (you have to wait 5 years after conversion to take the money out tax free so you'd need 5 years of expenses in non-converted roth accounts, cash, and taxable investments).

3- This is the first time I have had ESPP available in a job. With the 15% discount and immediate availability to sell, should I be maxing this out (max allowable contribution is ~2x current contribution)? If so, at the expense of what other savings? I'm throwing enough into savings to feel stretched (~40% of gross pay); I would like a good "saving-but-living-now" balance, thus the reason for framing the question as "at the expense of what other savings". Or should I be evaluating my budget and saving higher % of gross and not backing down other savings?

Yes you should max it out. But if you're doing it at the expense of the budget then just put the money back into emergency funds when you cash out, and drain the EF slightly as you contribute between payouts, netting yourself the 15% discount. My husband and I roll in and out of his ESPP similarly. He has to hold for a quarter after contributing, so we buy every pay check (artificially lowering our monthly income) then have mini "bonuses" 4 times a year when we sell which we use to replenish savings.

4- Regarding single income family - Working parent has $300k individual life insurance policy, additional $550k through group life at work. About the right amount given debt and retirement accounts, or should I consider more or less?

You might have enough, but you may want some on your wife as well. If you die tomorrow how long will $800K last your wife and kids? That money would generate $32K a year before taxes, or it could be used to pay off the mortgage and any other debt, lowering expenses slightly. Could she go back to work and earn enough to replace the gap between your current spending and investing needs and what that policy would provide? A lot of this depends on her earning potential. If she's uneducated or could only command minimum wage then you need a lot more insurance. If she took a break from a 6 figure job to have kids, I'd say you're OK since she could go back to work once the kids are in school and save for her own retirement, etc. in addition to the windfall you leave her.

There is probably lots of overlap between the questions, so maybe one more overarching question:

How am I doing and what should I be doing differently or thinking about for the future?
You're doing great! For your age and income level you have a great portfolio and are thinking about all the right issues. One thing I'll say is not to worry yourself too much about college funds. Your kids will qualify for financial aid at your income level (and hopefully scholarships), or they can take out their own loans. Better to take care of your retirement and free them from the burden of caring for you in your old age. You can always offer them financial help later, if you have it to give, but I know too many parents beat themselves up for not being able to save 6 figures toward college funds.

I would lower your 401k if you have to in order to max the HSA and Roths for you AND your wife. Roths are more flexible and accessible which will make you feel better anyway. Start maxing out the ESPP and replenish cash with every sale (use for emergency fund and/or truck fund). Then enjoy your young family. Cheers!
Thank you for the response. I appreciate your perspective on maxing out her Roth, and converting 401ks to Roth IRAs if retiring early. That helps to address a concern of mine - how do I fund an early retirement if everything is getting socked away for age 59.5 or later? Let me make sure I understand - in order to assist in the funding of an early retirement, are you suggesting a strategy of withdrawing a portion of contributions to Roth accounts before 59.5 to avoid penalties?

Going forward, I think I will:
-Continue maxing out HSA and his Roth IRA;
-Start maxing her ROTH IRA; and
-Max out ESPP during the next period - to make it through the 6 months of lower cash flow, I will most likely back off 401k contributions (still getting the full match), and pull as necessary from EF. Upon cashing out, replenish EF, re-evaluate cash flow for next 6 months and adjust 401k contributions as necessary.

Wife has in-demand skills in the health care industry, so I think we are okay on the life insurance front. Thanks for your input on that as well.

kaudrey - I have passively thought about the kids and college. I haven't taken any action, hoping that:
-There is a huge education bubble, and college will be cheaper by the time they reach that age, or
-My kids will go to less expensive in-state schools, or West Point or Annapolis, or
-I'll have the mortgage paid off and have extra cash flow, or
-Wife will be back at work by then and we can use her salary to pay for it, or
-Suspend funding of retirement accounts for the ~6 years one or both are in college.

I think I might feel a little better if I begin funding a 529 for each child with a portion of the proceeds from the ESPP cash out. Opinions on that thought are welcome.

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SC Hoosier
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Re: [4 year update - would like another review]

Post by SC Hoosier » Tue Feb 10, 2015 10:04 am

I would maximize the ESPP and use that money to fund an upgrade in vehicle. I disagree with many on this forum on cars. Monthly cash flow is precious. Don't fill your budget with commitments. Save up $10-15k and buy the best used vehicle you can. Cost of ownership goes way down if you do this. When something unforeseen happens, job loss, medical bills, major car or home repair, you will be glad you don't have a car payment.

I would stop contributing to the HSA until I got a better car. My goal would be to get the car in the next 12 months, then contribute to both roths and HSA again.

Also, after contributing 6% to 401k, my next priority would be the Roths and HSA because of better investment options. Thus, I would reduce 401k contributions to 6% and focus on:

1. ESPP
2. Car
3. Roths
4. HSA
5. Some extra on the mortgage
6. 401k above 6%

You are doing great and asking great questions. With your focus, at your age, your financial future looks bright.

Relax and enjoy the ride.

PS. I'm kind of doing the same wait and see approach to kid's college. Somethings gotta give with the tuition costs happening today.
I live in No Payment Land. It is wonderful, and I'd love for you to live here too.

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SC Hoosier
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Re: Guidance on Prioritization

Post by SC Hoosier » Tue Feb 10, 2015 10:11 am

Submariner1980 wrote: I think I might feel a little better if I begin funding a 529 for each child with a portion of the proceeds from the ESPP cash out. Opinions on that thought are welcome.
Sometimes, in an attempt to be wise, I try to do too much at once. You don't have to do it all now. Your most pressing need is a vehicle. Once you check that off the list, then focus on the next thing. Remember, you'll have an income ten years from now too. Most likely it will be higher than what you make today, even considering inflation. Do what you can and trust that it'll work out. Remember that it is good for kids to have a job during college. Work has limitless benefits for kids development into independent adults.
I live in No Payment Land. It is wonderful, and I'd love for you to live here too.

Submariner1980
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Re: [4 year update - would like another review]

Post by Submariner1980 » Tue Feb 10, 2015 2:10 pm

SC Hoosier wrote:
Also, after contributing 6% to 401k, my next priority would be the Roths and HSA because of better investment options. Thus, I would reduce 401k contributions to 6% and focus on:

1. ESPP
2. Car
3. Roths
4. HSA
5. Some extra on the mortgage
6. 401k above 6%
SC Hoosier - Just to clarify, I have the full line up of Vanguard Target Funds in my 401k with ~0.0X% ER, so I'm quite happy with the options because I can pick the fund that matches my desired allocation. It is true that other options are pretty bad, but I have all I need in the Vanguard Target Date Funds, so the other options are a moot point.

That said, does that change the order of priorities you listed?
SC Hoosier wrote: Do what you can and trust that it'll work out.
That's excellent advice, thank you. I often need a reminder that I can't worry about things I don't have control over.

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SC Hoosier
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Re: [4 year update - would like another review]

Post by SC Hoosier » Tue Feb 10, 2015 2:19 pm

Submariner1980 wrote:
SC Hoosier wrote:
Also, after contributing 6% to 401k, my next priority would be the Roths and HSA because of better investment options. Thus, I would reduce 401k contributions to 6% and focus on:

1. ESPP
2. Car
3. Roths
4. HSA
5. Some extra on the mortgage
6. 401k above 6%
SC Hoosier - Just to clarify, I have the full line up of Vanguard Target Funds in my 401k with ~0.0X% ER, so I'm quite happy with the options because I can pick the fund that matches my desired allocation. It is true that other options are pretty bad, but I have all I need in the Vanguard Target Date Funds, so the other options are a moot point.

That said, does that change the order of priorities you listed?
SC Hoosier wrote: Do what you can and trust that it'll work out.
That's excellent advice, thank you. I often need a reminder that I can't worry about things I don't have control over.
I wouldn't change the order of the list because of your point. You may change your mind someday and want different fund options. If so, then more of your money will be in the Roth, where you can choose pretty much any fund you want without paying 401k fees.
I live in No Payment Land. It is wonderful, and I'd love for you to live here too.

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Meg77
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Re: Guidance on Prioritization

Post by Meg77 » Tue Feb 10, 2015 2:39 pm

Submariner1980 wrote:Thank you for the response. I appreciate your perspective on maxing out her Roth, and converting 401ks to Roth IRAs if retiring early. That helps to address a concern of mine - how do I fund an early retirement if everything is getting socked away for age 59.5 or later? Let me make sure I understand - in order to assist in the funding of an early retirement, are you suggesting a strategy of withdrawing a portion of contributions to Roth accounts before 59.5 to avoid penalties?

Going forward, I think I will:
-Continue maxing out HSA and his Roth IRA;
-Start maxing her ROTH IRA; and
-Max out ESPP during the next period - to make it through the 6 months of lower cash flow, I will most likely back off 401k contributions (still getting the full match), and pull as necessary from EF. Upon cashing out, replenish EF, re-evaluate cash flow for next 6 months and adjust 401k contributions as necessary.

Wife has in-demand skills in the health care industry, so I think we are okay on the life insurance front. Thanks for your input on that as well.
I like your plan. Yes, if you retire early you can draw down any taxable savings and investments first and then take distributions of any contributions you've made directly to Roth IRAs tax and penalty free.

However may early retirees also set up Traditional IRA conversion ladders. Once you quit your job you are usually in a very low tax bracket; your only taxable income will be Traditional IRA distributions and capital gains/dividends/interest (also some rental income in your case perhaps). Rather than making distributions straight from the T-IRAs and facing early withdrawal penalties, you can convert the T-IRA balances (including $$ from 401k rollovers) to Roth IRAs first. If you convert a little each year you could pay little or no income taxes on the conversion due to your new low tax bracket. You don't want to convert the entire balance at once, because that would probably put you in a very high tax bracket since you have to pay taxes on the conversion as income.

The catch is that when you CONVERT to Roth versus making a direct contribution, you have to wait 5 years to withdraw any money tax and penalty free. So a lot of folks convert a little bit every year - just enough to keep them under the 15% tax bracket and/or meet their planned expenses - and then after 5 years you can start taking distributions of the same amount from the Roth. Effectively this sets up a "ladder" where you convert a little every year from traditional to roth, and distribute a little every year from Roth. You just have to have enough in taxable (or regular Roths you didn't convert) to last you that five year period between when conversions begin and when you can start making Roth distributions.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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