Budget allocation between LARGE student loan burden and Retirement_Updated details

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
BobLaw
Posts: 9
Joined: Mon May 04, 2015 3:25 pm

Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by BobLaw » Tue May 05, 2015 6:06 pm

My spouse and I are just getting started on financial planning and are faced with a dilemma of balancing student loan payoff and retirement savings. Our big question is how much to allocate towards one versus the other. Here are the details:

Joint income: 200K
I anticipate that in 2018 our income will change to 400-450K

Student loans: (The monthly interest on these loans alone is $1750, and we are paying $2000 in total)
-200K @ 6.5%
-100K @ 7.6%

Mortgage:
-owe $130K @ 4.375% (don't intend to live here past 5 years)

Current combined retirement savings ($52,000):
1)Roth IRA Savings account: $15,000 (I plan to roll these into Vanguard index funds, and am doing the research to see where to get started- I know there is much on the blog about this)

2)Roth IRA Investments managed by Larsen Financial (in stocks): $17,000

3) 401K: $10,000 (These are for my spouse- employer matches 50% up to 6% of employee contributions, so spouse contributes ~$600/mo and employer add $300/mo). This is w Putnam.
-TCW Funds Total Return Bond Fund I (15.3% of total portfolio), (expense ratio 0.47%)
http://www.morningstar.com/funds/XNAS/TGLMX/quote.html

-Am Fds EuroPacific Growth CL R4 (5.6% of portfolio) (expense ratio 0.84%)
http://www.morningstar.com/funds/XNAS/REREX/quote.html

-Delaware small cap value (2.7% of portfolio). (Expense ratio 1.22%)
http://www.morningstar.com/funds/XNAS/DEVLX/quote.html


-Putnam S&P 500 Index Fund (2.5% of portfolio) (Expense ratio ? <0.8%)
https://www.putnam.com/individual/529/portfolios/750/A

-T Rowe Price Equity Income (2.1% of portfolio) (expense ratio 0.66%)
http://www.morningstar.com/funds/XNAS/PRFDX/quote.html

3)Taxable Investments managed by Larsen (stock and bonds): $10,000

New Clarifications:
-Our monthly expenses including mortgage AND $2,000 towards the loans is $6,500-7,000/mo.
-Net income after health insurance, taxes, 401K contributions is $9,600/mo
-Emergency fund: We have already put away $50,000 in savings living expenses for the next 6 months.

Our Larson Financial planner strongly encourages us to continue investing all our savings (which currently amount of about $30,000 on top of $11,000 to IRAs), supporting that the compounding interest will be worth it in the end. On the other hand, we feel very hesitant about not paying aggressively on these loans considering the high interest rates for the times. We personally would like to pay these off in the next 7 years and then ramp up our retirement savings. Either way, we intend to continue $11,000 annual contributions to IRA and a portion to 401K, but the question is how much more aggressively do we contribute to taxable retirement savings in light of the large debt burden.

Thanks for the input.

401K Offerings from Putnam:

Link to page 1:
https://plus.google.com/photos/11101728 ... 3990100010

Link to page 2:
https://plus.google.com/photos/11101728 ... 3990100010
Last edited by BobLaw on Mon May 25, 2015 6:33 pm, edited 3 times in total.

desiderium
Posts: 673
Joined: Sat Jan 04, 2014 11:08 am

Re: Budget allocation between LARGE student loan burden and Retirement

Post by desiderium » Wed May 06, 2015 3:37 am

This looks like a long term project.

Does your employer match some of your 401K contributions? If so, start with contributing that amount
What kind of cash reserves do you have? You may want to make sure you have a healthy savings account, at least 3 months living expenses
Do you have any prospect of refinancing the student loans at a lower interest rate?

After the above, I would suggest paying what you can on the loans.

When your income resets, do your best to limit the increase in your living costs
You will want to max out your 401K at that time and pay aggressively on the loans.

Also, you might consider your commitment to Larsen Financial. While having less impact than your interest burden, they are also a drag on your financial performance.

Good Luck!

cherijoh
Posts: 4781
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Budget allocation between LARGE student loan burden and Retirement

Post by cherijoh » Wed May 06, 2015 6:39 am

Your financial planner has a conflict of interest in providing this advice - the more you pay down the loan, the less money you invest with them and the lower their fees. Why are you using them in the first place?

Also, why do you have a taxable account with stocks and bonds? If intended for a short term objective (like a home down payment) it shouldn't be invested in stocks. If intended for long term goals, it is very inefficient tax-wise to have bonds in taxable. You are getting peanuts on any bonds but paying interest on your loans at a high rate. This just doesn't make sense. How much capital gains would you owe if you sold your taxable account? I would consider using it towards paying down the smaller, higher-interest-rate loan.

If your 401-k gets a match, you should invest up to your match as your first priority, then go for Roth IRA. After that go after your loans pretty aggressively. I would focus anything extra towards the $100k loan to get that paid off first. Once that is paid off and you have freed up cash flow, I'd consider shifting some of the extra money back towards your 401-k. With your potential salary bump in 2018, you would be able to conquer the loans fairly quickly in the future. If your loans were at a lower rate, I'd favor putting more money towards your retirement savings. But those rates are outrageous in this low interest rate environment. Are the rates fixed?

BobLaw wrote:My spouse and I are just getting started on financial planning and are faced with a dilemma of balancing student loan payoff and retirement savings. Our big question is how much to allocate towards one versus the other. Here are the details:

Joint income: 200K
I anticipate that in 2018 our income will change to 400-450K

Student loans: (The monthly interest on these loans alone is $1750, and we are paying $2000 in total)
-200K @ 6.5%
-100K @ 7.6%

Mortgage:
-owe $130K @ 4.375% (don't intend to live here past 5 years)

Current combined retirement savings ($51,000):
-Roth IRA Savings account: $15,000 (I plan to roll these into Vanguard index funds, and am doing the research to see where to get started- I know there is much on the blog about this)
-Roth IRA Investments managed by Larsen Financial (in stocks): $10,000
401K: $16,000
-Taxable Investments managed by Larsen (stock and bonds): $10,000

Our Larson Financial planner strongly encourages us to continue investing all our savings (which currently amount of about $30,000 on top of $11,000 to IRAs), supporting that the compounding interest will be worth it in the end. On the other hand, we feel very hesitant about not paying aggressively on these loans considering the high interest rates for the times. We personally would like to pay these off in the next 7 years and then ramp up our retirement savings. Either way, we intend to continue $11,000 annual contributions to IRA and a portion to 401K, but the question is how much more aggressively do we contribute to taxable retirement savings in light of the large debt burden.

Thanks for the input.

Professor Emeritus
Posts: 2628
Joined: Mon Aug 13, 2012 6:43 am

Re: Budget allocation between LARGE student loan burden and Retirement

Post by Professor Emeritus » Wed May 06, 2015 6:46 am

I firmly believe student are the absolutely worst kind of debt you can have. Pay them off first.

Jill07
Posts: 150
Joined: Sat Mar 24, 2007 6:19 am

Re: Budget allocation between LARGE student loan burden and Retirement

Post by Jill07 » Wed May 06, 2015 7:19 am

Can you live on one income (or 100k/yr) and dedicate the 2nd income to paying off the loans? Get rid of the financial planner.

User avatar
ruralavalon
Posts: 13313
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Budget allocation between LARGE student loan burden and Retirement

Post by ruralavalon » Wed May 06, 2015 8:25 am

Welcome to the forum :) .

A little more information is needed.

About how much (in dollars, total all accounts) can you contribute annually to paying off student loans and investing? ($41k?)
Is there an employer match in your 401k(s)? If so, how much (in dollars) do you have to contribute to get the full employer match, and how much is the match?
What are the 4 or 5 lowest expense ratio funds (fund names, tickers & expense ratios) offered in your 401k(s)?

Please just add this to your original post using the "edit" button, so that all of your information is in one place.
BobLaw wrote:Our Larson Financial planner strongly encourages us to continue investing all our savings (which currently amount of about $30,000 on top of $11,000 to IRAs), supporting that the compounding interest will be worth it in the end. On the other hand, we feel very hesitant about not paying aggressively on these loans considering the high interest rates for the times. We personally would like to pay these off in the next 7 years and then ramp up our retirement savings. Either way, we intend to continue $11,000 annual contributions to IRA and a portion to 401K, but the question is how much more aggressively do we contribute to taxable retirement savings in light of the large debt burden.

For a general discussion of priorities, please see: wiki article, "Prioritizing investments". Those 7.6% and 6.5% student loans deserve a very high priority. That comes ahead of taxable investing in my opinion.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

User avatar
kenyan
Posts: 2922
Joined: Thu Jan 13, 2011 12:16 am

Re: Budget allocation between LARGE student loan burden and Retirement

Post by kenyan » Wed May 06, 2015 9:03 am

Your financial planner is giving you bad, self-serving advice that is in conflict with your best interest. I would ditch him, but you should probably get a plan in place (i.e. construct an Investment Policy Statement) first.

Definitely prioritize any retirement account matching first. Given your high incomes, I think it is reasonable to also max out your 401k plans for the tax savings, but I wouldn't have a quibble with devoting that money toward loans.

Aside from that, you need to focus upon NOT increasing your standard of living while you pay down your loans aggressively. Knowing few details of your lives (where you live, kids, etc.), I would say that you should be able to pay at least $50k of extra principal per year on that income ($200k-$50k taxes - $24k loans - $40k living expenses = $85k for retirement savings and loan principal). If not, you might need to examine why you are spending so much money, and whether it is truly worth it.

Also, if your income does double, you could live exactly how you have been, use the extra to pay down the loans, and you're debt-free in a couple of years. Defer those pleasures that people who make your kind of income often feel entitled to for just a few years, and your long-run financial goals are basically set.
Retirement investing is a marathon.

Wagnerjb
Posts: 7196
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: Budget allocation between LARGE student loan burden and Retirement

Post by Wagnerjb » Wed May 06, 2015 9:05 am

cherijoh wrote:Your financial planner has a conflict of interest in providing this advice - the more you pay down the loan, the less money you invest with them and the lower their fees.
Cherijoh has nailed the problem. You are getting conflicting advice because your financial advisor is (very likely) being "paid" based on the assets you invest with them. Thus, they are giving you advice that is skewed to inflate your investments.

I agree with those who say to pay off your student loans aggressively. First, get a 401k match, but then focus on the student loans with any other discretionary funds. If the student loan interest rates were much lower, the decision might be a little less clear....but at 6.5% and 7.5% you are essentially getting a "guaranteed" interest rate on the funds you use to pay down those loans. You cannot get a guaranteed rate anywhere close to those rates today.

Best wishes.
Andy

User avatar
kenyan
Posts: 2922
Joined: Thu Jan 13, 2011 12:16 am

Re: Budget allocation between LARGE student loan burden and Retirement

Post by kenyan » Wed May 06, 2015 9:06 am

Also, don't invest in taxable accounts over your 401k. That might be what your financial planner is recommending, but it's again terrible advice for your interests, meant to increase his fees and Assets Under Management (he doesn't get paid for your assets that are being managed by your 401k plan).
Retirement investing is a marathon.

knowsnothing
Posts: 142
Joined: Sat Feb 14, 2015 10:12 am

Re: Budget allocation between LARGE student loan burden and Retirement

Post by knowsnothing » Wed May 06, 2015 9:07 am

kenyan wrote: Also, if your income does double, you could live exactly how you have been, use the extra to pay down the loans, and you're debt-free in a couple of years. Defer those pleasures that people who make your kind of income often feel entitled to for just a few years, and your long-run financial goals are basically set.
Very nicely said.

JW-Retired
Posts: 6779
Joined: Sun Dec 16, 2007 12:25 pm

Re: Budget allocation between LARGE student loan burden and Retirement

Post by JW-Retired » Wed May 06, 2015 9:23 am

Our Larson Financial planner strongly encourages us to continue investing all our savings (which currently amount of about $30,000 on top of $11,000 to IRAs), supporting that the compounding interest will be worth it in the end. On the other hand, we feel very hesitant about not paying aggressively on these loans considering the high interest rates for the times. We personally would like to pay these off in the next 7 years and then ramp up our retirement savings.
Not giving a high priority to 6.5%-7.6% student loans is nuts. I'm going to guess this Larson Financial is the one that specializes in doctors and dentists? How large are the AUM fees you will be paying them if they can keep you as a client? Apparently the planner feels his/her best strategy is to get the maximum amount under management from you quickly...... perhaps before you wise up? Seems a very poor approach to me.

Suggest you check out this website that specializes in good (free) advice for doctor investors. http://whitecoatinvestor.com/
The author of this site posts here as EmergDoc.
JW
Retired at Last

BobLaw
Posts: 9
Joined: Mon May 04, 2015 3:25 pm

Re: Budget allocation between LARGE student loan burden and Retirement

Post by BobLaw » Wed May 06, 2015 10:37 am

Thank you all for this sound advice.

1) Firing financial planner- that has been our strong inclination as our one year contract ends in July. His major conflicts of interest have become very apparent. Appreciate the support in that this is the right call.

2) We have looked into refinancing the student loan debt, here were the challenges:
-The original loan amount when we tried in Fall 2014 was actually $378,000 plus a $17,500 car loan. I have been moonlighting aggressively and we had some savings just sitting in our bank accounts, so we made some big payments and paid off car loan, and brought down student debt to $300K.
Before all these payoffs though, we only got offered a marginal improvement in our interest rate to 6.5% applying to the entire amount, likely because the income to debt ratio was not so favorable. Also, the terms were shorter, along the lines of 10-15 years, committing us to a monthly payment of $5K. We don't have any kids yet, but anticipate kids, need for a new car, possible moving expenses, interviewing/traveling expenses in the next 3 years, so committing to 5K/mo made us a bit nervous.
Either way, we can perhaps reapply now that the numbers are improved.

3) Refinancing mortgage: We have started to look here to see if that would free up another $200/mo, but between closing costs and our likelihood of moving away in the next 2-3 years, it does not quite pan out. Our Financial Planner is "reaching out to his contacts" to see if it would be favorable for us. In the meantime, I have a 2.75% 5/1 ARM offer with $~5,000 closing costs. It would take us 2 years to break even. Doesn't seem like a wise choice, right? We'd be better off putting $5K into student loan principal.

4)Next steps:

-looks like our next project is to transfer over the $36,000 in retirement funds and taxable funds that our financial planner ( his fee is 1.25% of AUM) is managing over to Vanguard. Is that right? Given that our age is 31, should we aim for having it 100% stocks index funds?

-And we should even consider selling the taxable retirement savings and put them towards student loans?

-Would you suggest deferring even IRA contributions for the time being? We intended to do traditional to Roth conversion.

Thank you again :oops:

User avatar
BL
Posts: 8094
Joined: Sun Mar 01, 2009 2:28 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by BL » Wed May 06, 2015 12:29 pm

Reducing $300k loan principal by $0.250k/month ($3k/yr) means it will take almost forever to pay off those loans!

Move to Vanguard. Call them and have them arrange it from their end. Stick Roth IRAs into a Target Retirement fund for now. Sell the taxable funds and apply to the $100k loan (Is it $10k or $30k? In any case it is multiples of what you are now paying down on loans). Since you have two jobs, maybe could borrow some from emergency funds as well. You could do the IRAs later this year so you could "borrow" temporarily there, too.

Don't buy a more expensive house until you get the loans way down.

I think you could do better at lowering mortgage payments. Here is a 5/5 adjustable rate one for 2.75%, up to 2% increase for next 5 years, etc., no origination fee:
https://www.penfed.org/55-Adjustable-Rate-Mortgage/
I am not advocating this, just suggesting that it is better than you found.

Get the book by WhiteCoatInvestor.com and read the website. Good information especially for high-expected-income folks.

Saving$
Posts: 1582
Joined: Sat Nov 05, 2011 8:33 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by Saving$ » Wed May 06, 2015 12:48 pm

1. Get rid of Larsen financial planner. Move the Roth IRA's and taxable fund to Vanguard now.
2. 401k for you and spouse up to the match
3. Max out Roth for you and spouse. Use the Roth as an emergency fund
4. Lower expenses and aggressively pay down the debt
5. Sell the taxable and pay cap gains now R 15% before you get in that $400k tax bracket, and use the proceeds to pay off the debt.
6. Look into refinancing the student loan debt to a lower rate, but that should not dissuade you from paying it off
7. Refi the house with something like the PenFed 5/5 ARM at 2.75% and use the saving to pay off the debt

At $200k income, it is conceivable you could go on an austerity program and aggressively pay down the debt. If you think you can do that and get rid of the debt in 3 or 4 years, I'd also try to max out the 401k's. That is space you lose forever if you don't use it. But I would not do this on the hopes of an income increase. Plan for your hatching chickens (retirement and item 4 above), but don't count them prior to hatching (the increased income)....

myrrh
Posts: 63
Joined: Fri Feb 14, 2014 3:09 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by myrrh » Wed May 06, 2015 1:43 pm

So you are saying you have an extra $2600 per month to put in 401ks/Roths/loan payments. How much is going in the 401k/Roths now? only the $600 per month in her 401k? Do you have a 401k available to you?

Is the doubling of income in a few years a pretty darn sure thing? If it's darn sure then put all excess funds to 401ks and Roths and pay off the loans over a couple of years when the income doubles. You want to use all tax advantaged space you can, especially now when it's at the spot where you can get under the Roth income limits. When you have $400k income, all the 401k and backdoor Roth space adds up to $47000, or slightly over 10% of 400k, and most Bogleheads would say you can/should save a lot more than that, especially if you are used to living below your means.

Just another option to consider.

jpelder
Posts: 551
Joined: Mon Jan 26, 2015 3:56 pm
Location: Charlotte, NC

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by jpelder » Wed May 06, 2015 2:11 pm

KILL THE LOANS!

Get any 401(k) matches, then put all other disposable income toward the student loans (Maybe max out IRAs, too, since that's just $900 per month for both of you). Those rates are barely lower than expected stock market returns, and they're guaranteed. $2000 extra cash flow per month once they're paid off will go a long way toward kids and anything else, and you'll save a boatload of interest in the long run.

User avatar
ruralavalon
Posts: 13313
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by ruralavalon » Wed May 06, 2015 5:16 pm

About how much (in dollars, total all accounts) can you contribute annually to accelerated pay off of student loans and investing? ($41k?)
Do both of you have 401ks?
Is there an employer match in your 401k(s)? If so, how much (in dollars) do you have to contribute to get the full employer match, and how much is the match?
What are the 4 or 5 lowest expense ratio funds (fund names, tickers & expense ratios) offered in your 401k(s)?

BobLaw wrote:-looks like our next project is to transfer over the $36,000 in retirement funds and taxable funds that our financial planner ( his fee is 1.25% of AUM) is managing over to Vanguard. Is that right? Given that our age is 31, should we aim for having it 100% stocks index funds?

-And we should even consider selling the taxable retirement savings and put them towards student loans?

-Would you suggest deferring even IRA contributions for the time being? We intended to do traditional to Roth conversion.
Yes, do transfer the IRAs and taxable account to Vanguard.

That AUM fee arrangement creates a large conflict of interest, and is a large drag on net returns.

I would not suggest 100% stocks. Rather consider 80/20 stocks/bonds. Wiki, "Never bear too much or too little risk"'.

Here is a very general idea of what to do on investing priority:
1) contribute enough to the 401k(s) to get the full match .
2) contribute $5.5k each to IRAs.
3) If the fund choices in the 401k(s) are good, then contribute the rest of the maximum employee contribution to the 401k(s)
4) everything else to the student debt (in other words no more taxable investing for now).
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

BobLaw
Posts: 9
Joined: Mon May 04, 2015 3:25 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by BobLaw » Thu May 07, 2015 11:39 am

Thank you all for the insight and shared links. I think we have our next few steps laid out for us and are grateful for this resource.

To clarify a few remaining questions:
-only my spouse has access to a 401K at the moment.
-I have access to a 401K with the moonlighting I do, but the annual income from each moonlighting service is <30K per year and there is no employer match.
-Once I finish my residency training, I anticipate a pay increase so long as I can still keep working.
-Per month, my wife is putting ~600 into her 401K, and my moonlighting income covers our IRA contributions. So as far as our monthly budget goes, we have roughly another $3K to put towards loans.
-If we bring our cash savings down to 30K from current 50K, that would allow another significant contribution to the princpal.

My final question is re mortgage refinancing: Has anyone used PenFed? I take online reviews w a grain of salt but theirs are quite poor that it makes me nervous about losing money going through the appraisal process then failing to get approved.

Best,
RKO

bigred77
Posts: 1991
Joined: Sat Jun 11, 2011 4:53 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by bigred77 » Thu May 07, 2015 12:53 pm

BobLaw wrote:
My final question is re mortgage refinancing: Has anyone used PenFed? I take online reviews w a grain of salt but theirs are quite poor that it makes me nervous about losing money going through the appraisal process then failing to get approved.

Best,
RKO
I just closed a refinance with PenFed. I was a little nervous after reading some very mixed reviews (including here on bogleheads) but I have to say I had a very pleasant experience. It was all done via email, the loan rep was pretty responsive to emailed questions and updates. We closed on exactly the day I wanted with no hiccups. About 30 or so days from application to close.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by itstoomuch » Thu May 07, 2015 1:27 pm

IMO, YMMV, stop all contributions to retirement funds and kill the debt load.
Be sure you understand and the debt servicing company knows how you will pay down the debt.
Your debt is known, Your investments are unknown in EVERY way. :annoyed

You wouldn't be asking this question unless you are confident in both the debt AND investment. :idea:
:beer
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

User avatar
kenyan
Posts: 2922
Joined: Thu Jan 13, 2011 12:16 am

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by kenyan » Thu May 07, 2015 1:38 pm

BobLaw wrote: My final question is re mortgage refinancing: Has anyone used PenFed? I take online reviews w a grain of salt but theirs are quite poor that it makes me nervous about losing money going through the appraisal process then failing to get approved.

Best,
RKO
We refinanced with PenFed about 18 months ago. They were occasionally lighter on updates than we would have preferred, but everything happened in time with no hitches. We too had a concern about the appraisal - we were doing a no-closing-cost 5/5 ARM but were fairly close to 20% equity, and a bad appraisal would kill the deal as well as transfer the appraisal costs to us. Appraisal came in fine and we did the deal. I'd use them again.
Retirement investing is a marathon.

User avatar
ruralavalon
Posts: 13313
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by ruralavalon » Fri May 08, 2015 10:21 am

I suggest:
1) contribute enough to spouse's 401k to get the full employer match (that's free money, never pass up free money);
2) contribute $5.5k/yr each to two Roth IRAs, one for each of you (the limits are "use it or lose it", in later years you can't go back and make up for years you skipped your contributions);
3) all the rest to the student loans.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Impromptu
Posts: 348
Joined: Mon Nov 03, 2014 10:09 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by Impromptu » Fri May 08, 2015 11:48 am

I signed up with Larson Financial near the end of residency. Much of their advice is wise. And if someone doesn't want to do their own finances, I think they will come out ahead with Larson versus muddling through it on their own. They invested my money in low cost, passive index funds, sliced and diced according to their preferences, mostly DFA, Vanguard, and Schwab funds (according to what was available to me). They found me an excellent doctor loan for my house, encouraged me to buy a low cost house (since I was determined to buy), helped me find the best rates for disability and term life insurance, encouraged me to get umbrella insurance, and encouraged me to refinance with SoFi, giving me a link that gave me a $500 referral link (they got no money for the referral, it all went to me).

I don't know why he is advising you to invest rather than pay off the high interest rate loans. Mine wanted me to pay off my high interest rate student loans prior to investing in the market. He had me start taking a certain amount each month out of my paycheck that I would eventually be investing and pay down the high interest rate ones. Once paid down he had me save that money for several months into an investment fund, then he began investing that money for me, using backdoor Roths and other techniques. He also managed my 401(k) account (the Schwab one) so that I could have all of my investment accounts asset allocations coordinated, including which ones were most tax efficient and inefficient.

The questionable investment strategy (at least to me now) was the Variable Universal Life insurance policy. If I kept with it long term the numbers worked out well enough, especially with tax considerations in retirement. He emphasized many times that it would be a waste of my money if I bailed out early, and that I likely wouldn't break even until 7-10 years into it. While he gets a commission for that sale, he loses the AUM fees for that money, which over 30-40 years would eventually be significant. Cash now or later? Probably better now for him.

I left Larson after 1.5 years. Why? I was too hands on. Once I figured out where my money was going and read a few books, I didn't feel I needed him anymore. Also my results had not been what the graphs showed, nor was I keeping up with a simple 3 fund portfolio. I was already spending all this time looking after my money, so why not take the final step and do it myself? The toughest part of leaving has been that I have kept the asset allocation he set up for me, which split between my 401(k), his/her Roth IRAs, and his/her VULs is getting complicated. I have eliminated the AUM fees and my results now are better, but I may make another move and switch each account to a 3 fund portfolio because I think I can do better still.

Whitecoatinvestor has done a review on him and his VUL product.
http://whitecoatinvestor.com/larson-fin ... qa-series/
http://whitecoatinvestor.com/could-ther ... ul-policy/
I'll gladly pay you Tuesday for a hamburger today.

BobLaw
Posts: 9
Joined: Mon May 04, 2015 3:25 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Moving Forward to next steps

Post by BobLaw » Sat May 09, 2015 1:29 pm

Thank you again.

{Our Larson adviser did help us get set up with disability insurance and home/auto insurance. It has been an expensive lesson, but it has at least forced me and my spouse to get smart about finances.}

I will post my questions regarding the next steps in this post as our background is described here. Most of my questions are painfully simple and may be addressed in some of the resources shared here, but it feels a bit like drinking from a firehose, so please bear with me if I'm not caught up on all the homework.

1) Resources: What are resources that folks use to keep up different funds, specifically. I signed up for morningstar, but are there other recommendations? And how does one explore some of the finer details in trying to determine asset allocation (eg between 60% domestic stock versus 75% domestic stock)? Where can I read more about such details and keep up with them as I manage our portfolios long term.

2) Organization: What is the best tool to keep up with portfolio over time, including rebalancing etc. Excel? Are there templates out there that I can use to get started.

3) IRA transfer from savings to Vanguard: I am inclined to use either the Target Retirement Fund or the 3 fund potfolio. To be honest, this post convinced me to move on the three fund portfolio (http://www.bogleheads.org/forum/viewtop ... 10&t=88005), however since this is for Roth IRAs, is the three fund too conservative of an approach?

We don't truly know our risk tolerance as we haven't had to suffer losses yet, but we do know that we don't have much in retirement savings or spare change for the next 5-10 years, so we probably aren't in a position to loose big sums.

4) Backdoor conversion:
Since we are over the Roth contribution limits, as I understand I need to open a Traditional IRA account AND a Roth.
Once funds from my savings are transferred to the Traditional IRA at VG, the next day, I need to convert them to the Roth IRA.
Is this correct?

Appreciate the look over,
RKO

User avatar
kenyan
Posts: 2922
Joined: Thu Jan 13, 2011 12:16 am

Re: Budget allocation between LARGE student loan burden and Retirement_Moving Forward to next steps

Post by kenyan » Fri May 15, 2015 7:43 am

BobLaw wrote:Thank you again.

{Our Larson adviser did help us get set up with disability insurance and home/auto insurance. It has been an expensive lesson, but it has at least forced me and my spouse to get smart about finances.}

I will post my questions regarding the next steps in this post as our background is described here. Most of my questions are painfully simple and may be addressed in some of the resources shared here, but it feels a bit like drinking from a firehose, so please bear with me if I'm not caught up on all the homework.

1) Resources: What are resources that folks use to keep up different funds, specifically. I signed up for morningstar, but are there other recommendations? And how does one explore some of the finer details in trying to determine asset allocation (eg between 60% domestic stock versus 75% domestic stock)? Where can I read more about such details and keep up with them as I manage our portfolios long term.

Morningstar is a good tool. I used to use T. Rowe Price, which gave free access to some of Morningstar's premium-only tools such as Portfolio X-Ray, but repeated interface problems with TRP caused me to drop that tracking tool and just switch directly to Morningstar (basic). As for fine-tuning one's portfolio, I'd suggest some of the books off of the reading list on this forum, such as Bernstein's Four Pillars of Investing or Rick Ferri's Asset Allocation books. Just know at the outset that choices such as 60% vs 75% domestic/international split are somewhat in the noise, and aren't worth agonizing about too much. The more important factor is that you try to stick to your chosen AA, rather than chasing trends.

2) Organization: What is the best tool to keep up with portfolio over time, including rebalancing etc. Excel? Are there templates out there that I can use to get started.

Spreadsheet programs such as Excel or Google Sheets are probably the tools with the most options. Some people use tools such as MS Money, Mint, or otherwise, but a self-created spreadsheet will give you the most freedom. As for templates, I'd search on this forum; perhaps someone has provided one, but I believe most people create the document themselves. You can start simple, and add complexity as you learn what you really want. I'm assuming that you have a basic knowledge of how to use these programs, though. Perhaps the key enabler is the command to directly pull stock/mutual fund quotes, which will vary by program.

3) IRA transfer from savings to Vanguard: I am inclined to use either the Target Retirement Fund or the 3 fund potfolio. To be honest, this post convinced me to move on the three fund portfolio (http://www.bogleheads.org/forum/viewtop ... 10&t=88005), however since this is for Roth IRAs, is the three fund too conservative of an approach?

We don't truly know our risk tolerance as we haven't had to suffer losses yet, but we do know that we don't have much in retirement savings or spare change for the next 5-10 years, so we probably aren't in a position to loose big sums.

Your Roth IRA is part of your overall portfolio. See 'tax-adjusting your asset allocation' in the wiki if you wish to see how some people think of their Roth assets differently. Choose your overall asset allocation first, then look at how to distribute assets among your different accounts/buckets in the most efficient manner.


4) Backdoor conversion:
Since we are over the Roth contribution limits, as I understand I need to open a Traditional IRA account AND a Roth.
Once funds from my savings are transferred to the Traditional IRA at VG, the next day, I need to convert them to the Roth IRA.
Is this correct?

Basically, yes. You need to open a Traditional IRA, make nondeductible contributions (preferably to a money market fund, so you won't need to deal with potential growth), then convert the full amount as soon as possible. Make sure to fill out IRS Form 8606. At $200k income, you're likely eligible to contribute directly (since your MAGI will be much lower), but if you aren't eligible for the full amount, then a Backdoor Roth is recommended. You didn't mention any other existing IRAs, so hopefully you won't have that complication to deal with. Note that each spouse's Roth conversion is based upon his/her IRA respective IRA assets, though eligibility to contribute will be based upon your joint tax return/MAGI.


Appreciate the look over,
RKO
Retirement investing is a marathon.

BobLaw
Posts: 9
Joined: Mon May 04, 2015 3:25 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by BobLaw » Fri May 22, 2015 1:09 am

Thank you, kenyan. I know those were some elementary questions, but this is very helpful. I do use Excel fairly regularly and that should be a good starting point. Good to know that certain programs will allow me to directly link to the fund quotes, and that will be something I can grow into.

As another update, we have the following opportunities opening up:

1) Mortgage refinance through PenFed has been approved @ 2.75% for a 5/5 ARM with $2K in title fees, appraisal etc. This is a reasonable cost, as it will save me about $240/month in mortgage payment. I'll compensate for the closing costs in about 9 months and then funnel the savings to pay for our student loans. Thank you to the users of this blog for sharing the PenFed link with me- I wouldn't have found this otherwise.

2) SOFI has offered a refinance for the student loans @ 10 year variable rate of 3.4%. Compared to our existing 7.6 and 6.5%, I am very tempted to move forward with this variable rate offer. This is especially considering that we want to pay off the loan soon as possible. Any thoughts on the vulnerability we would expose ourselves to? The alternative are fixed rates in the 5.5% range.

Currently, until the mortgage refinance closes, I am holding off on shifting my IRA funds to Vanguard so it does not complicate the underwriting process. Hopefully we can get to that asap.

Best,

RKO

User avatar
ruralavalon
Posts: 13313
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by ruralavalon » Fri May 22, 2015 7:20 am

BobLaw wrote:New Clarifications:
-Our monthly expenses including mortgage AND $2,000 towards the loans is $6,500-7,000/mo.
-Net income after health insurance, taxes, 401K contributions is $9,600/mo
-Emergency fund: We have already put away $50,000 in savings living expenses for the next 6 months.

Our Larson Financial planner strongly encourages us to continue investing all our savings (which currently amount of about $30,000 on top of $11,000 to IRAs), supporting that the compounding interest will be worth it in the end. On the other hand, we feel very hesitant about not paying aggressively on these loans considering the high interest rates for the times. We personally would like to pay these off in the next 7 years and then ramp up our retirement savings. Either way, we intend to continue $11,000 annual contributions to IRA and a portion to 401K, but the question is how much more aggressively do we contribute to taxable retirement savings in light of the large debt burden.
She contributes enough to her 401k to get the full employer match, you are fully funding the Roth IRAs at $11k/yr, and you have 7 months worth of expenses in an emergency fund. It is still my opinion that the next priority for your extra cash should go toward paying off those 7.6% and 6.5% student loans.

Also I think that you should transfer the two IRAs and the taxable account to Vanguard in July when the contract with Larsen is over.

Is there a list of funds offered in her 40k, with tickers and expense ratios? If so, please give a link to that.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

midmoder
Posts: 75
Joined: Mon Mar 18, 2013 10:27 am

Re: Budget allocation between LARGE student loan burden and Retirement_Moving Forward to next steps

Post by midmoder » Fri May 22, 2015 6:57 pm

BobLaw wrote:
2) Organization: What is the best tool to keep up with portfolio over time, including rebalancing etc. Excel? Are there templates out there that I can use to get started.
Others might be able to recommend something better but I'm happy with a Google spreadsheet based on the one that Sammy posted in this thread:

http://www.bogleheads.org/forum/viewtop ... 4&start=50

Look about 9 posts down to Sammy's spreadsheet link. The spreadsheet uses GoogleFinance functions that automatically pull in fund prices and other data, along these lines:

http://googledrive.blogspot.com/2010/08 ... oogle.html

I only use the first sheet. I removed some of the stuff from the top section I didn't need or care about, and modified the middle section to show Target Allocation versus Current Allocation rather than Current/New.

The only maintenance required is to manually update the number of shares. The spreadsheet does the rest.

midmoder
Posts: 75
Joined: Mon Mar 18, 2013 10:27 am

Re: Budget allocation between LARGE student loan burden and Retirement_Moving Forward to next steps

Post by midmoder » Sat May 23, 2015 1:23 pm

BobLaw wrote: 1) Resources: What are resources that folks use to keep up different funds, specifically. I signed up for morningstar, but are there other recommendations? And how does one explore some of the finer details in trying to determine asset allocation (eg between 60% domestic stock versus 75% domestic stock)? Where can I read more about such details and keep up with them as I manage our portfolios long term.
Don't make things complicated, because it's not. With the kind of Boglehead-type investing most of us do where we're selecting from the best of 401k-available funds (selecting only the low-expense index funds) or selecting a fund or two for our Roths at Vanguard or from the Spartan funds at Fidelity, resources such as Morningstar are not needed. That's the beauty of Boglehead investing -- it makes your choices simple.

Just happened upon an article this morning about this:

http://thefinancebuff.com/morningstar-l ... exing.html
BobLaw wrote:And how does one explore some of the finer details in trying to determine asset allocation (eg between 60% domestic stock versus 75% domestic stock)? Where can I read more about such details and keep up with them as I manage our portfolios long term.
The difference between a 60/40 or 75/25 allocation is all about how much you can tolerating "losing" when the market takes a tumble. A good place to start reading is the Boglehead wiki: https://www.bogleheads.org/wiki/Asset_allocation

Don't stress over rebalancing either. Once a year is plenty, and many go longer. Some don't believe in it. Many do it by simply redirecting contributions to the asset class that needs bumping up. Again, the wiki article: https://www.bogleheads.org/wiki/Rebalancing
Last edited by midmoder on Wed Jul 08, 2015 8:19 pm, edited 1 time in total.

BobLaw
Posts: 9
Joined: Mon May 04, 2015 3:25 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by BobLaw » Mon May 25, 2015 6:41 pm

Thanks for the insight.

ruralavalon, I placed links with the listings on the 401K at the bottom of the original post. Please let me know if you are unable to open them.

midmoder- thanks for those resources. The organizational input is just what I needed. And you are right, it is easy to get caught up in the details and as a beginner it is challenging to know what matters versus where one can use a little less discretion and still be okay. The next week is bit busy so I will come back to this in a few days. Hopefully by then, I will have more information on our refinance projects.

Regards, RKO

User avatar
ruralavalon
Posts: 13313
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by ruralavalon » Tue May 26, 2015 2:11 pm

Asset allocation.
I would not suggest 100% stocks. Rather consider 80/20 stocks/bonds.

If you put 30% of stocks in international stocks then that works out to about: 20% bonds; 25% international stocks; and 55% domestic stocks.

Priority of Investments/debt payment.
BobLaw wrote:Our Larson Financial planner strongly encourages us to continue investing all our savings (which currently amount of about $30,000 on top of $11,000 to IRAs), supporting that the compounding interest will be worth it in the end. On the other hand, we feel very hesitant about not paying aggressively on these loans considering the high interest rates for the times. We personally would like to pay these off in the next 7 years and then ramp up our retirement savings. Either way, we intend to continue $11,000 annual contributions to IRA and a portion to 401K, but the question is how much more aggressively do we contribute to taxable retirement savings in light of the large debt burden.
The fund choice in her 401k are not very good, so until the loans are paid down don't contribute to the 401k any more than necessary to get the fill employer match and skip more taxable investing for now. I suggest:
1) contribute only enough to spouse's 401k to get the full employer match (that's free money, never pass up free money);
2) contribute $5.5k/yr each to two Roth IRAs ($11k total), one for each of you (the limits are "use it or lose it", in later years you can't go back and make up for years you skipped your contributions); and
3) all the rest to the student loans (about $19k/yr).


Accounts & fund selection.
I suggest moving the two Roth IRAs and the taxable account to Vanguard to avoid the Larson management fees, to gain easy access to Vanguard's large menu of low expense mutual funds, and for ease of management.

In selecting funds to use try for a good combination of both broad diversification (to decrease your risk) and low expense ratios (to increase your net return).

A simple "three fund" portfolio will give both good diversification and low expenses. Wiki article, "Three-fund portfolio.


Example portfolio.
Here is an example portfolio to consider, in the 80/20 asset allocation. The percentages on the left are the existing balances.Move the existing balances and future contributions to these funds. This simple portfolio gives broad diversification with low expense ratios. All percentages are rounded off.

Taxable account @ Vanguard, ex-Larson account (19% of total; $10k)
19%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%

Her 401K @ Putnam (19% of total; $10k; adds $7.2k + $3.6k employer match = $10.8k/yr total = 50% of annual contributions)
19%, TCW Total Return Bond I (TGLMX) ER 0.47%
00%, Putnam Equity Income Class Y (PETYX) ER 0.73%, <= add later as need to adhere to your desired asset allocation
00%, Harbor International Institutional (HAINX) ER 0.77%, <= add later as need to adhere to your desired asset allocation

Roth IRA @ Vanguard, ex-savings account (33% of total; $17k; adds $5.5k/yr = 25% of annual contributions)
25%, Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) ER 0.14%
08%, Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) ER 0.17%

Roth IRA @ Vanguard, ex-Larson account (29% of total; $15k; adds $5.5k/yr = 25% of annual contributions)
29%, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) ER 0.05%

. . . . .

Finally, I suggest that you read one or two of the general investing books from this reading list: "Suggested reading".

. . . . .

If you have any questions just ask.

I hope that this helps.
Last edited by ruralavalon on Tue May 26, 2015 2:35 pm, edited 3 times in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Chadnudj
Posts: 713
Joined: Tue Oct 29, 2013 11:22 am

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by Chadnudj » Tue May 26, 2015 2:27 pm

I'd say go with the 3.4% variable student loan from SoFi. You're planning on aggressively paying down your loans anyway over the next 5-10 years, and even if interest rates jump up (and it seems they might), they won't do it quickly enough to get up to the 5.5% fixed rate SoFi is offering you....and even if they did, by the time that happened you would have paid down the loans significantly at lower rates already.

BobLaw
Posts: 9
Joined: Mon May 04, 2015 3:25 pm

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by BobLaw » Fri May 29, 2015 2:20 pm

Ruralavalon,

Thank you for breaking it down. I was hoping to use the admiral shares as much as possible and it is helpful to see you lay it out that way as well. Do you have thoughts on whether we should maintain our taxable account that is about $10K, or liquidate those funds and put them to the student loans. We are very close to signing a refinance offer, hoping that it will settle on the variable 3.4% rate for 10 years (Currently, they have offered us the 15 year term at 4.065%).

Chadnudj and all- I haven't had a variable loan before and am a little afraid to commit to a variable rate instead of a fixed. Is there a way to gauge 'how' variable the terms will be? The loan documents state that the rate can change monthly and will be determined as 3.875%+0.19% (the LIBOR index). Particularly as we anticipate rates will increase, how drastic are the swings likely to be? How long will it likely take to get into the 6.5% to 7.6% % range of the interest we are paying now? I realize that is not an easy question to answer, but what I am getting at is if our rate next month could jump to 7% after being at 3.4% for one month, we haven't achieved much.

Best,
RKO

User avatar
ruralavalon
Posts: 13313
Joined: Sat Feb 02, 2008 10:29 am
Location: Illinois

Re: Budget allocation between LARGE student loan burden and Retirement_Updated details

Post by ruralavalon » Fri May 29, 2015 7:07 pm

BobLaw wrote:Ruralavalon,

Thank you for breaking it down. I was hoping to use the admiral shares as much as possible and it is helpful to see you lay it out that way as well. Do you have thoughts on whether we should maintain our taxable account that is about $10K, or liquidate those funds and put them to the student loans.
I don't see any problem if you wanted to take that $10k from taxable investing and use it to pay down the student debt.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Post Reply