Tight Budget Noobie help with Retirement

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murael23
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Tight Budget Noobie help with Retirement

Post by murael23 » Tue Jan 10, 2017 6:07 pm

Long time lurker/reader, first time poster here. I'm looking for any general financial advise along with my investments, so feel free to ramble off any suggestions you may have. I have found this community very educational as I continue to expand my knowledge in investing, I sure have a lot to learn still!

Emergency Funds: None, currently all non retirement saving is allocated for an upcoming mortgage down payment/repair costs (1st time home buyer)

Debt: 2 vehicle loans amounting to about $34,000 at about 3.5% interest (Soon to have a $220,000 mortgage @ ~ 4%)

Tax Filing Status: Married Filing Jointly

Tax Rate: 25% Federal / 5.1% State

State of Residence: MA

Age: 37 & 28

Desired Asset Allocation: 100% Stocks / 0% Bonds (I have a state pension that I categorize as my "bonds" allocation)

Desired International Allocation: 0% of Stocks

Current Total Portfolio: ~ $20,000

Current Retirement Assets:

Taxable
0% Cash
0% Fund Name
0% Stock Company Name

His Pension:
At retirement age will pay 50-65% of my 3 highest paid years

His Traditional (Rollover from a 401k) IRA at Vanguard:
19.5% VG 500 Index Fund Investor Shares (VFINX) .16% ER
19.5% VG Dividend Growth Fund (VDIGX) .33% ER
19.5% VG Explorer Value Fund (VEVFX) .63% ER
19.5% VG Selected Value Fund (VASVX) .39% ER

His ROTH IRA at Vanguard:
22% VG STAR Fund (VGSTX) .34% ER

Her 401K:
She is just now beginning contributions
0% BlackRock Global Allocation Inst (MALOX) .79% ER
0% American Beacon Small Cap (AVFIX) .81% ER
0% VG Institutional Index (VINIX) .04% ER
0% American Funds Europacific Growth R5 (RERFX) .54%ER

New Annual Contributions:
10% of Gross income his State Pension
$1,200 his IRA/Roth IRA
$2,160 her 401k (including match)
Unfortunately we are on a very tight budget and this is all we can afford to contribute for now.

Questions:
1. Should I roll my current Traditional (rollover) IRA into my Roth? (I'm expecting a similar tax rate in retirement FYI)

2. Should I make future contributions to my Traditional or to my Roth?

3. I used Vanguard's Portfolio Recommendation tool which suggested that I do 60% VG Total Stock Market Index Fund Investor Shares (VTSMX) and 40% VG Total International Stock Index Fund Investor Shares (VGTSX). This seems like a high amount for international to me, which historically has underperformed domestic stocks. Should I convert all current and future holdings to these funds at these allocations? Keep my current and only change future? Keep the 60/40 allocation as suggested or change that?

4. Am I correct to assume that a backdoor roth is irrelevant to me since I cannot afford to max out my roth contributions anyway?

Thank you in advance for your advice!

murael23
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Re: Tight Budget Noobie help with Retirement

Post by murael23 » Wed Jan 11, 2017 9:48 am

Got flooded to second page with no feedback. I hate to bump but still hoping for some advice here.
Thanks.

autopeep
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Re: Tight Budget Noobie help with Retirement

Post by autopeep » Wed Jan 11, 2017 10:42 am

It seems like you two are underfunding your retirement. I don't know your salary but it's unclear to me why someone in the 25% tax bracket is so cash strapped. Where is the money going?

A couple of comments/questions.

I wouldn't do any taxable investments until I maxed out my retirement accounts and got rid of the car debts.

Why did you select the vanguard funds in your rollover account. Is it part a tilt strategy? I personally would simplify to cheaper funds.

International allocation has been extensively discussed on this forum. Forum members have widely ranging international %. I would caution you on avoiding it due to historical returns. That's how you buy high, sell low

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KlingKlang
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Re: Tight Budget Noobie help with Retirement

Post by KlingKlang » Wed Jan 11, 2017 11:03 am

Here's a few of my observations:

Consider keeping enough emergency funds so that you don't have to borrow in case of unexpected costs on that new home.

You say that you want a 100% allocation to stocks but your Roth IRA STAR account is actually 63% stocks, 25% bonds, and 12% cash.

You have $20k split between 5 Vanguard funds in your TIRA and Roth IRA accounts. Consider using just the Total Market and Total International index funds, you will be able to convert to lower ER Admiral shares once each account balance reaches $10k.

The amount of international holdings is a personal decision, anywhere from 0% to 50%. I would concentrate on just the US Total Market index until its balance is over $10k and you can get Admiral shares.

I'm not sure how your wife selected her 401(k) holdings, the American and Blackrock funds ERs are not that bad but still higher than necessary. Treat your and your wife's holdings as one combined portfolio - if she doesn't have any low cost small cap and international selections in her 401(k) then just have her use the VG Institutional Index and put some lower cost Vanguard small cap and international index funds in your IRA.

If you are eligible to deduct your TIRA contributions then theoretically contributing to your TIRA or Roth IRA is a wash up. Check your 2016 tax returns to see if a larger TIRA contribution would have made you eligible for the Saver's Credit. I'm not an expert on Roth IRA rollovers or back doors but I don't see any reason for you to use them at this point.

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BL
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Re: Tight Budget Noobie help with Retirement

Post by BL » Wed Jan 11, 2017 11:08 am

murael23 wrote:Long time lurker/reader, first time poster here. I'm looking for any general financial advise along with my investments, so feel free to ramble off any suggestions you may have. I have found this community very educational as I continue to expand my knowledge in investing, I sure have a lot to learn still!

Emergency Funds: None, currently all non retirement saving is allocated for an upcoming mortgage down payment/repair costs (1st time home buyer)
How committed are you to buying? Waiting until you have vehicles paid off at a minimum would help a bit. There are often unexpected expenses when buying a house. Are you currently renting? Also consider following a budget and seeing what expenses you can cut: cell phones, cable, eating out, clothing, booze, gym?, vacations, etc. Something has to go! I have heard YNAB suggested here.

Debt: 2 vehicle loans amounting to about $34,000 at about 3.5% interest (Soon to have a $220,000 mortgage @ ~ 4%)
Could you sell one and get a beater? Find a lower rate?

Tax Filing Status: Married Filing Jointly

Tax Rate: 25% Federal / 5.1% State

State of Residence: MA

Age: 37 & 28

Desired Asset Allocation: 100% Stocks / 0% Bonds (I have a state pension that I categorize as my "bonds" allocation)

Desired International Allocation: 0% of Stocks

Current Total Portfolio: ~ $20,000

Current Retirement Assets:

Taxable
0% Cash
0% Fund Name
0% Stock Company Name

His Pension:
At retirement age will pay 50-65% of my 3 highest paid years

His Traditional (Rollover from a 401k) IRA at Vanguard:Consider one fund such as total stock market, Target Retirement Date fund, or Life Strategy Aggressive. This is now biggest account, so any rebalancing could be done here. If you had the cash to pay the tax, you could convert to Roth, but I don't see the spare cash.
19.5% VG 500 Index Fund Investor Shares (VFINX) .16% ER
19.5% VG Dividend Growth Fund (VDIGX) .33% ER
19.5% VG Explorer Value Fund (VEVFX) .63% ER
19.5% VG Selected Value Fund (VASVX) .39% ER

His ROTH IRA at Vanguard:
22% VG STAR Fund (VGSTX) .34% ER Consider Total Stock Market unless this is your back-up emergency fund (Target date fund if you don't have 3k in there.

Her 401K:
She is just now beginning contributions
0% BlackRock Global Allocation Inst (MALOX) .79% ER
0% American Beacon Small Cap (AVFIX) .81% ER
0% VG Institutional Index (VINIX) .04% ER I might stick with this one, unless you have other Vanguard funds available.
0% American Funds Europacific Growth R5 (RERFX) .54%ER

New Annual Contributions:
10% of Gross income his State Pension
$1,200 his IRA/Roth IRA You may need the tax deferral of tIRA, otherwise Roth is great. Target Date funds only require 1000 to start, just like Star.
$2,160 her 401k (including match)
Unfortunately we are on a very tight budget and this is all we can afford to contribute for now.

Questions:
1. Should I roll my current Traditional (rollover) IRA into my Roth? (I'm expecting a similar tax rate in retirement FYI)

2. Should I make future contributions to my Traditional or to my Roth?


3. I used Vanguard's Portfolio Recommendation tool which suggested that I do 60% VG Total Stock Market Index Fund Investor Shares (VTSMX) and 40% VG Total International Stock Index Fund Investor Shares (VGTSX). This seems like a high amount for international to me, which historically has underperformed domestic stocks. Should I convert all current and future holdings to these funds at these allocations? Keep my current and only change future? Keep the 60/40 allocation as suggested or change that?
Once you have it figured out, change it all. Some Target or LS would give you some international. I would be concerned with adding some bonds first.

4. Am I correct to assume that a backdoor roth is irrelevant to me since I cannot afford to max out my roth contributions anyway?
Probably your income isn't high enough to worry yet.

Thank you in advance for your advice!

Do some reading in the Wiki and threads here, see Getting Started. Read a couple recommended books. Here is a great little pdf to get you started:
https://www.etf.com/docs/IfYouCan.pdf

Elbowman
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Re: Tight Budget Noobie help with Retirement

Post by Elbowman » Wed Jan 11, 2017 11:20 am

Hi Autopeep,

A couple comments:

1. You should be paying more attention to costs. Out of the four funds you listed for her 401k, the only one I would invest in is VG Institutional Index (VINIX). You can use your IRA (where you have more / lower cost options) to balance your overall portfolio. And speaking of your IRA, you are paying 0.63% for VG Explorer Value Fund to get small cap value exposure, but you can get that with VBR for 0.08%.

2. At this point the most important factor is savings rate. You should be saving at least 15% of your pre-tax income. I understand you are saving for a downpayment, and I would count that towards the 15%. But once you purchase your house, I would not count the mortgage payments towards the 15%. If you can't save 15% at that point you are spending too much.

3. 100% stocks with no emergency fund is a recipe for disaster.

4. I wouldn't worry about the difference in historic returns between US and international. In the years before you retire, how many times do you expect the US to win WWII and ascend to a global super power? If the answer is less than one, the future will likely be different from the past.
Last edited by Elbowman on Wed Jan 11, 2017 11:23 am, edited 1 time in total.

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englishgirl
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Re: Tight Budget Noobie help with Retirement

Post by englishgirl » Wed Jan 11, 2017 11:23 am

We need to look at your budget and see if there is room for additional savings. Can you break it out for us?

For example, how much are you spending on gas? How much of that is because one of your vehicles is a gas guzzler? Could that be reduced if you sold that vehicle and bought a small second hand car with better mpg? That would kill or partially kill a car loan and reduce gas/insurance payments at the same time. How much are you spending on cell phones? My plan is $35 a month and gives me everything I need. Others here have cheaper plans.

What chance is there to increase your incomes in the near future?

And no one should be worrying about back door Roths if they qualify to directly contribute to a Roth. The back door stuff is for richer folks than you and me!
Sarah

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warowits
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Re: Tight Budget Noobie help with Retirement

Post by warowits » Wed Jan 11, 2017 11:30 am

murael23 wrote:
Questions:
1. Should I roll my current Traditional (rollover) IRA into my Roth? (I'm expecting a similar tax rate in retirement FYI)

2. Should I make future contributions to my Traditional or to my Roth?

3. I used Vanguard's Portfolio Recommendation tool which suggested that I do 60% VG Total Stock Market Index Fund Investor Shares (VTSMX) and 40% VG Total International Stock Index Fund Investor Shares (VGTSX). This seems like a high amount for international to me, which historically has underperformed domestic stocks. Should I convert all current and future holdings to these funds at these allocations? Keep my current and only change future? Keep the 60/40 allocation as suggested or change that?

4. Am I correct to assume that a backdoor roth is irrelevant to me since I cannot afford to max out my roth contributions anyway?
1. Doesn't really matter, though you will take a curent tax hit.

2. Again, with similar tax rates the choice probably won't matter. Just remember you have to contribute more if in traditional to pay those taxes later.

3. Opinions vary wildly. You're clearly uncomfortable with high international, so maybe 75/25? What would you do if you weren't American, would you still be 100% US?

4. Yep

It seems like you will be fine. Some emergency fund, even just $1000 in a savings account, should be part of your plan though. Normally I would say people are overly dramatic about possible future cuts to their pensions or social security, but in your case they will make up a very large part of your retirement. You may want to oversave just a little so a larger portion of your retirement is under your control.
There are an army of people whose pay checks depend on convincing people to invest in ways that are against their self interest. This forum is the volunteer army that fights back!

murael23
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Re: Tight Budget Noobie help with Retirement

Post by murael23 » Thu Jan 12, 2017 2:47 pm

Thank you all for your responses. I think I have all the answers I was looking for as far as investments go.

However, a few of you commented on why my budget was so tight or didn't understand where all my money was. So I am going to post my budget below in hopes that someone can offer some advice on savings, although we are living very modest lives already.

Keep in mind, my wife is pregnant and it is hard to rent with a dog in our state, so we are looking to buy a house for the stability it offers for families. Renting any longer is really not an option.

Our projected budget with the home purchase looks like this:


Deductions:
Union Dues - 80
Medicare - 105

Taxes:
Social Security - 160
Federal - 810
State - 335

Retirement:
401k/Pension - 580
IRA's / Investments - 100

Housing:
PMI - 140
Mortgage - 1200
Property Taxes - 350
Home Insurance - 100
Gas/Electric/Oil - 200
Water/Garbage - 30
Phones - 80
TV/Internet - 100
Emergency Fund - 100

Food:
Groceries - 300
Dining Out - 100

Transportation:
Gas/Fuel - 250
Excise Taxes - 40

Entertainment / Misc:
Clothing - 40
Alcohol - 80
Christmas Fund - 50
Dog Supplies/Bills - 50
Entertainment - 80

Debts:
Auto Loans - 650

Insurance:
Auto - 105
Health - 400
Life - 10
LTD / STD - 110
Dental - 25

Kids:
Day Care - 200
Child Support - 630

Monthly Gross Income = ~ $7800
Total Spending = 7590

As you can see, there is not a lot of wiggle room. Granted, we don't spend the 80 a month on Alcohol all the time, or on Entertainment. But other than those, there isn't much we can do for savings that I can see.
I am quite open to suggestions, although I'm not very big on the driving a beater vehicle route, as in my experience, that is more trouble than it is worth. Unless you know a good mechanic that will work for cheap, it always ends up being a waste of money on repeated repairs for me.

murael23
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Re: Tight Budget Noobie help with Retirement

Post by murael23 » Thu Jan 12, 2017 8:01 pm

Elbowman wrote:Hi Autopeep,

2. At this point the most important factor is savings rate. You should be saving at least 15% of your pre-tax income. I understand you are saving for a downpayment, and I would count that towards the 15%. But once you purchase your house, I would not count the mortgage payments towards the 15%. If you can't save 15% at that point you are spending too much.

3. 100% stocks with no emergency fund is a recipe for disaster.

There is no way I can save 15%. See my above budget. I disagree that I am spending too much. I do not live lavishly at all. I drive a honda civic, I rent a shit apartment, and am going to be buying the cheapest house I can find that meets our needs, probably around $200-220k. I wish I could afford to save more, but I just don't see how to do that without earning more, which I am definitely trying to work on.

Whatever available cash we have left after we close on a house will go towards an emergency fund, and I have budgeted (see above) $100 a month towards it until it gets to where it needs to be.

Grt2bOutdoors
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Re: Tight Budget Noobie help with Retirement

Post by Grt2bOutdoors » Thu Jan 12, 2017 8:25 pm

How many years until the vehicles are paid off? That is the biggest budget buster. Not recommending you get rid of it, recommending that once you pay off the car loans, you save that money to be used for a new "used" car with low mileage next time around. Drive the new car until the wheels fall off. Agree, you can't draw blood from a stone, so I wouldn't worry about retirement yet. How much longer do you have to pay child support for? - is that a long term thing? $80 a month on alcohol and $100 on dining out? How much of that do you think you'll be doing in year one of a baby? I can count on one hand how many times my wife and I were able to go out in year one. Agree, you can't draw blood from a stone, so I wouldn't worry about retirement yet. This forum is uber uber when it comes to saving for retirement or saving just in general. Do what you can, but when the next raise shows up, put half of it into your retirement plan and/or savings.

How much money will you have left over after you buy the house? Will you have any money at all in cash or investments? A home is a major investment, more than that - things can and will break from time to time and you will need funds to repair it, even if you are handy. A loan will not be the way to go and it appears that since you'll be paying PMI, you'll have little equity in the home to begin with. My suggestion on a second look at budget is to forget about taxable investing for time being, focus on saving 6 months expenses in an FDIC insured savings account, you need to create a little breathing room between you and your next emergency, running a tight budget is right and it can cause unneeded stress.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

murael23
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Re: Tight Budget Noobie help with Retirement

Post by murael23 » Thu Jan 12, 2017 8:48 pm

Thanks for your response.

As far as the vehicles go, they are both new "used" vehicles. I bought my 2014 civic about 18 months ago with about 35k miles on it. I owe about 7k left on it, paying 300 a month towards it even though payments are 250. We just bought a 2014 Chevy truck with about 45k miles on it, against my better judgement. The wife was adamant on it, even though I wanted something smaller/more affordable. So that 350 a month payment for 6 years is a tough pill to swallow.

The child support still has about 12 years left, so yeah, that one is an even tougher pill to swallow.

You are right about not spending so much on dining and alcohol with a newborn baby. However, I didn't budget for diapers, and any other baby stuff either, so that will eat into that budget item.

We have about 12k cash saved up right now for the house. Likely only putting 3.5% down, so we will probably have only 2-4,000 left over once we close on a house. I do get 2 raises per year for the next 5 years, so that is a positive outlook. I'm also studying for a promotion that would net me about 20k more per year, but my chances are a long shot.

Thank you all for the feedback.

Nate79
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Re: Tight Budget Noobie help with Retirement

Post by Nate79 » Thu Jan 12, 2017 8:51 pm

One thing that I didn't see in your budget is planning for home repairs and auto repairs (and maintenance for both).

rr2
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Re: Tight Budget Noobie help with Retirement

Post by rr2 » Thu Jan 12, 2017 8:59 pm

You do have a tight budget situation. One thing I noticed --
Mortgage of 220K at 4.5% for 30 years comes to about $1050 while you list $1200 in your budget for the mortgage amount.

murael23
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Re: Tight Budget Noobie help with Retirement

Post by murael23 » Thu Jan 12, 2017 9:03 pm

Nate79 wrote:One thing that I didn't see in your budget is planning for home repairs and auto repairs (and maintenance for both).
Isn't that what an emergency fund is for?
rr2 wrote:You do have a tight budget situation. One thing I noticed --
Mortgage of 220K at 4.5% for 30 years comes to about $1050 while you list $1200 in your budget for the mortgage amount.
Nice catch :shock: I try to over budget on some things so I know I'll be able to stay under budget in reality..

newbie_Mo
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Re: Tight Budget Noobie help with Retirement

Post by newbie_Mo » Thu Jan 12, 2017 9:08 pm

How much are you paying for rent now?

Did you budget for home repair if you are buying an old house as you indicated?

Do you live in a HCOL area?

Are you sure purchasing a house is the right choice at the moment? How much your wife and you made each? How stable is her income?

newbie_Mo
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Re: Tight Budget Noobie help with Retirement

Post by newbie_Mo » Thu Jan 12, 2017 9:12 pm

murael23 wrote:
Nate79 wrote:One thing that I didn't see in your budget is planning for home repairs and auto repairs (and maintenance for both).
Isn't that what an emergency fund is for?

Your $100 per month emergency fund saving would be wiped out in no time with a minor repair. Unless you already have a large emergency fund saved.

Grt2bOutdoors
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Re: Tight Budget Noobie help with Retirement

Post by Grt2bOutdoors » Thu Jan 12, 2017 9:12 pm

murael23 wrote:
rr2 wrote:You do have a tight budget situation. One thing I noticed --
Mortgage of 220K at 4.5% for 30 years comes to about $1050 while you list $1200 in your budget for the mortgage amount.
Nice catch :shock: I try to over budget on some things so I know I'll be able to stay under budget in reality..
So, the e-fund will be $3K in year one, plus what is left over - let's call it $5K. The creep comes in when you start buying things for the house - watch out for this.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Will do good
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Re: Tight Budget Noobie help with Retirement

Post by Will do good » Thu Jan 12, 2017 9:13 pm

Any possibility of free lance work? When I was younger I made additional 20+% of my income doing free lance.

murael23
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Re: Tight Budget Noobie help with Retirement

Post by murael23 » Thu Jan 12, 2017 9:28 pm

newbie_Mo wrote:How much are you paying for rent now?

Did you budget for home repair if you are buying an old house as you indicated?

Do you live in a HCOL area?

Are you sure purchasing a house is the right choice at the moment? How much your wife and you made each? How stable is her income?
Paying 1125 in rent now. Damn near everywhere in MA is HCOL. Although I am outside of the Boston area, I would say it is Medium cost of living.
We have no choice but to purchase a house. Wife has a dog that she will absolutely not get rid of. It's impossible to rent with a large dog, and we are having a child this summer, so we need a stable environment. I make about 60k currently, which will go up to about 75k in the next 5 years. She makes peanuts, like 35k or so. Her income is stable, but she does work under contract, so the client could potentially pull the plug any given year, although they have held her company's contract for like 12 years now or something.
Will do good wrote:Any possibility of free lance work? When I was younger I made additional 20+% of my income doing free lance.
I do work a 2nd job part-time. I get about 300 a month from that, but I don't count it in budgeting because I don't know how long I'll be able to continue that. I've been trying to come up with other avenues of income, specifically that I can make from home, since I'll have a newborn to care for in about 7 months.

Nate79
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Re: Tight Budget Noobie help with Retirement

Post by Nate79 » Thu Jan 12, 2017 10:38 pm

murael23 wrote:
Nate79 wrote:One thing that I didn't see in your budget is planning for home repairs and auto repairs (and maintenance for both).
Isn't that what an emergency fund is for?
rr2 wrote:You do have a tight budget situation. One thing I noticed --
Mortgage of 220K at 4.5% for 30 years comes to about $1050 while you list $1200 in your budget for the mortgage amount.
Nice catch :shock: I try to over budget on some things so I know I'll be able to stay under budget in reality..
I have read that the average homeowner should set aside 1% of the home purchase price for yearly maintence. Things happen, things get old and need repaired - carpet, paint, old deck needs to be replaced, plumbing problems, roof repair/replace, furnace/AC,....... Then you need new furnishings, appliances, flowers, shrubs, yard maintenance, lawn mower, .....

A few $100s per month would not be unusual as regular expenses, not big emergencies for your size of home.

aristotelian
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Re: Tight Budget Noobie help with Retirement

Post by aristotelian » Thu Jan 12, 2017 11:13 pm

PMI and the car loans are red flags in my opinion. That means you are buying a house without a down payment while you still have to pay off $34k for the cars. I am in a better position than you (no offense) and I drive a 2003 Prius and the wife is in a 2004 Outlander. I think you are living beyond your means, especially when you now add the house into the equation.

When you only have 20k invested, any reasonable investment will do. The real question is how can you guys save more. I would reconsider buying the house at this time, and possibly look at downgrading your cars.

TheHouse7
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Re: Tight Budget Noobie help with Retirement

Post by TheHouse7 » Fri Jan 13, 2017 2:52 am

Please consider saving more of an EF before putting 10% down on your house. Your budget is not prioritizing anything. I'm sure short term disability is not needed if you had an emergency fund. Temporarily stop retirement saving as much as possible to clean up your consumer debt.
"PSX will always go up 20%, why invest in anything else?!" -Father-in-law early retired.

murael23
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Re: Tight Budget Noobie help with Retirement

Post by murael23 » Fri Jan 13, 2017 4:55 am

aristotelian wrote:PMI and the car loans are red flags in my opinion. That means you are buying a house without a down payment while you still have to pay off $34k for the cars. I am in a better position than you (no offense) and I drive a 2003 Prius and the wife is in a 2004 Outlander. I think you are living beyond your means, especially when you now add the house into the equation.

When you only have 20k invested, any reasonable investment will do. The real question is how can you guys save more. I would reconsider buying the house at this time, and possibly look at downgrading your cars.
Not buying a house is really not an option as I've stated throughout this thread.

As for the vehicles, well how long do you think you have before those 10+ year old vehicles start having repair bills adding up. One thing I can't stand is paying off an auto loan then instantly having to trade it in again because it's got 175 thousand miles on it and falling apart. I chose to go the route of buying a recent model with decent mileage in the hopes of driving it a solid 5 to 8 years after it is paid off, without major repair bills. This is what I have read is the most economically efficient way of owning vehicles in the long run.

Granted I do wish I could have talked the wife into a cheaper vehicle than a 4x4 crew cab truck, but my attempts were unsuccessful.

cherijoh
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Re: Tight Budget Noobie help with Retirement

Post by cherijoh » Fri Jan 13, 2017 7:23 am

murael23 wrote: Questions:
1. Should I roll my current Traditional (rollover) IRA into my Roth? (I'm expecting a similar tax rate in retirement FYI) <-- It rarely makes sense to do a Roth conversion unless you have the cash for taxes available outside of tax-advantaged accounts. You don't even have an emergency fund. This is really putting the cart before the horse!

2. Should I make future contributions to my Traditional or to my Roth? <-- You didn't mention your income, but are you sure you are eligible to make tax-deductible contributions to your t-IRA? (There are income limits for people with workplace retirement plans). Roth IRA is definitely the better choice vs. a non-deductible t-IRA contribution.

3. I used Vanguard's Portfolio Recommendation tool which suggested that I do 60% VG Total Stock Market Index Fund Investor Shares (VTSMX) and 40% VG Total International Stock Index Fund Investor Shares (VGTSX). This seems like a high amount for international to me, which historically has underperformed domestic stocks. Should I convert all current and future holdings to these funds at these allocations? Keep my current and only change future? Keep the 60/40 allocation as suggested or change that? <-- IMO you should have some international, but I don't know about 40%

4. Am I correct to assume that a backdoor roth is irrelevant to me since I cannot afford to max out my roth contributions anyway?<--- Your question makes me believe that you don't understand what a Backdoor Roth actually is. You have ONE annual contribution limit - $5500 for those under 50 y/o. It can be any combination of Traditional or Roth, but cannot exceed your annual limit. A backdoor Roth is simply a two step process: (1) a non-deductible traditional IRA Contribution followed by (2) a conversion of the t-IRA to a Roth. It is only used by people who exceed the income limit to make a regular Roth contribution. BTW the fact that you have a Rollover IRA means that you couldn't pull off a true Backdoor Roth anyway - some of your conversion would end up being taxed.

why3not
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Re: Tight Budget Noobie help with Retirement

Post by why3not » Fri Jan 13, 2017 7:52 am

murael23 wrote:
aristotelian wrote: Granted I do wish I could have talked the wife into a cheaper vehicle than a 4x4 crew cab truck, but my attempts were unsuccessful.
I assume this is a joke.

cherijoh
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Re: Tight Budget Noobie help with Retirement

Post by cherijoh » Fri Jan 13, 2017 8:15 am

murael23 wrote:
Elbowman wrote:Hi Autopeep,

2. At this point the most important factor is savings rate. You should be saving at least 15% of your pre-tax income. I understand you are saving for a downpayment, and I would count that towards the 15%. But once you purchase your house, I would not count the mortgage payments towards the 15%. If you can't save 15% at that point you are spending too much.

3. 100% stocks with no emergency fund is a recipe for disaster.
There is no way I can save 15%. See my above budget. I disagree that I am spending too much. I do not live lavishly at all. I drive a honda civic, I rent a shit apartment, and am going to be buying the cheapest house I can find that meets our needs, probably around $200-220k. I wish I could afford to save more, but I just don't see how to do that without earning more, which I am definitely trying to work on.

Whatever available cash we have left after we close on a house will go towards an emergency fund, and I have budgeted (see above) $100 a month towards it until it gets to where it needs to be.
Actually by Boglehead standards, you ARE spending too much if you can't save for retirement first - it shouldn't be an afterthought.

The lavishness of your lifestyle (or lack thereof) is not the determining factor regarding whether you are spending too much - it is a simple cash flow determination. BTW, being able to qualify for a mortgage doesn't mean that you can really afford to have a house. (The lender is only worried about you being able to cover the mortgage payment, it couldn't care less about you saving for retirement or whether you have to eat beans and rice). This is the classic definition of being "house poor" - when you have all your available money tied up in an illiquid asset like a house. And in your case you wouldn't even have any equity if you were forced to sell the house - closing costs would eat up that and more.

You mention that your wife is pregnant. What happens if God forbid your wife gets put on bedrest and can't continue working or you have unexpected baby-related expenses? You should be increasing your emergency fund - not draining it down to nothing.
aristotelian wrote:PMI and the car loans are red flags in my opinion. That means you are buying a house without a down payment while you still have to pay off $34k for the cars. I am in a better position than you (no offense) and I drive a 2003 Prius and the wife is in a 2004 Outlander. I think you are living beyond your means, especially when you now add the house into the equation.

When you only have 20k invested, any reasonable investment will do. The real question is how can you guys save more. I would reconsider buying the house at this time, and possibly look at downgrading your cars.
+1

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Shackleton
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Re: Tight Budget Noobie help with Retirement

Post by Shackleton » Fri Jan 13, 2017 8:18 am

You keep arguing for why you need to spend these amounts so it seems like neither you nor your wife are really focused on getting out of debt. You appear to have more of a desire so I would at least try to get your wife to your level of effort for economizing. But overall I think you are setting yourself up for years of living paycheck to paycheck with your mindset.
“Superhuman effort isn't worth a damn unless it achieves results.” ~Ernest Shackleton

DoTheMath
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Re: Tight Budget Noobie help with Retirement

Post by DoTheMath » Fri Jan 13, 2017 8:54 am

Welcome murael23! Folks here are giving useful advice and I hope it doesn't come across as judgmental. Everyone has their own priorities and circumstances. What they would do may not work for you, but it is well worth listening to folks' suggestions. Take it as food for thought which can hopefully be adapted in some form to your own situation.

My comment would be to reiterate what some other's have said already. The actual buying of a house is the cheap part of owning a house :-). There will be an infinite number of things you'll find yourself buying (lawn mowers, snow shovels, paint, carpet cleaning, towels, furniture, landscaping, holiday decorations, ....). I was astounded the first time I bought a house. You can't overestimate the costs involved beyond the obvious mortgage/insurance/etc. And that's not even accounting for the possibility of a $5k expense in six months or a year because of a dead furnace, burst pipe, etc.

It would help if your wife was able to bring in more income. I'm guessing that this isn't an option, though. Especially with a kid on the way.

The reality is that you're facing several years of very tight budgets. There is no magic fix, especially since it sounds like really radical changes are off the table. In five years you'll have the cars paid off, hopefully a higher salary, and your kid will be in school. Then things should ease up quite a bit.
“I am losing precious days. I am degenerating into a machine for making money. I am learning nothing in this trivial world of men. I must break away and get out into the mountains...” -- John Muir

blueman457
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Re: Tight Budget Noobie help with Retirement

Post by blueman457 » Fri Jan 13, 2017 9:09 am

There needs to be some more conversations with your wife to determine what your life and financial goals are. I don't disagree with your statement that your budget is tight, but you can't reasonably afford all the luxuries that you want. While you may disagree on what I view as a luxury, here are things that I would reduce/cut out:

-Auto loan (discussed already)
-Dog (discussed already)

If your wife can't compromise on the above, then the following should go:

-Entertainment/Dining/etc...
-Christmas fund
-TV

Otherwise you're living paycheck to paycheck

aristotelian
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Re: Tight Budget Noobie help with Retirement

Post by aristotelian » Fri Jan 13, 2017 12:33 pm

murael23 wrote:
Not buying a house is really not an option as I've stated throughout this thread.

As for the vehicles, well how long do you think you have before those 10+ year old vehicles start having repair bills adding up. One thing I can't stand is paying off an auto loan then instantly having to trade it in again because it's got 175 thousand miles on it and falling apart. I chose to go the route of buying a recent model with decent mileage in the hopes of driving it a solid 5 to 8 years after it is paid off, without major repair bills. This is what I have read is the most economically efficient way of owning vehicles in the long run.

Granted I do wish I could have talked the wife into a cheaper vehicle than a 4x4 crew cab truck, but my attempts were unsuccessful.
What is the reason that not buying a house is not an option? I may have missed that, but not buying a house should always be an option. It should be the default option. You should only buy a house if you are living within your means. PMI tells me you are not living within your means. Nobody is entitled to live a middle class lifestyle with two cars and a house. No judgment here, just an objective perspective. I would strongly advise against buying a house. Maybe upgrade your rental if you must.

MI_bogle
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Re: Tight Budget Noobie help with Retirement

Post by MI_bogle » Fri Jan 13, 2017 12:46 pm

murael23 wrote: Not buying a house is really not an option as I've stated throughout this thread.


Granted I do wish I could have talked the wife into a cheaper vehicle than a 4x4 crew cab truck, but my attempts were unsuccessful.
I think there are a lot of red flags popping up here. And please, like someone stated above, I hope these replies are not coming across as educational and conversational, not judgemental.

This may seem like semantics, but let's be honest about your situation and apply the proper definitions.

Not buying a house certainly IS an option. You have just chosen to reject alternative options. Your wife won't get rid of the large dog (an option, but she has decided not to). I always try to avoid stating things in such a way that it seems I am a victim of circumstances out of my control.

It's absolutely reasonable to want to have the dog, and buy a house for an expanding family. But don't pretend there are no other alternatives - you just don't happen to like those other alternatives. A powerful difference in phrasing/attitude. By phrasing things differently, you are giving yourself control (and at the least, ownership) over large life decisions.


Secondly, your wife and you seem to be on different pages - this is as much a relationship issue as it is a financial issue.

It seems you have some level of financial stress that is directly related to some large purchases that were driven by your wife. Maybe you could have an open and honest conversation with her about the level of financial stress these are causing, and you two could come to an understanding?

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