Appreciate some financial advice

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gnosis
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Appreciate some financial advice

Post by gnosis » Wed Aug 13, 2008 9:33 pm

Scroll all the way down to the most recent postings for my most updated financial picture

I've read a few beginner's books to investing and countless threads on this forum. I'd like to know what to do with my money at this point in my life. Here's my profile:


Liquid funds/3-month emergency fund:
$12,000 in ING checking/savings accounts @ 3% interest
$13,500 in CD @ 4%

Debt:

Student loans:
$190,000 @ 3% x 30 years
$29,500 @ 5% x 10 years <--payments on this one don't start for another 12 months, and neither does interest accrual.

Mortgage = $327,000 @ 6.5% x 30 years

one car loan = $25,000 @ 5% x 5 years

$7,500 credit card balance 0% interest. Paying minimum payments and
transferring to a new 0% card every 12 months.

Tax filing status: Married filing jointly

Tax rate: 28% federal, 6% state, Pennsylvania
Expect to move to 33% federal tax rate in 5 years and after that until retirement

Age: I'm 30. She's 28.

Desired Asset allocation: 80% stocks/20% bonds


Intl allocation: 33% of stocks

IRA & investments:
Her 401(k) = $11,000, with max 8% contributions and employee match

Her 401(k) portfolio:

15% Bonds
25% Large-Cap Stocks
32% Mid/Small-Cap Stocks
28% International Stocks
0% Individual Equities

Investments_________________Current Allocation_______Investment style
Vanguard Md-Cp Idx;Inst__________34%_______Mid/Sm-Cap Stk, Lg-Cap Stk
Vanguard Tot I Stk;Inv____________28%_______Intl Stk
Vanguard Instl Indx;InsP__________21%_______Lg-Cap Stk
Vanguard Total Bond Market In______8%_______Bonds
PIMCO Total Return Fund___________7%_______Bonds
American Funds New Perspectv______2%_______Intl Stk, Lg-Cap Stk

(Above allocation = 100%)


I have no IRA or personal/retirement accounts. For now, any extra money we have at the end of each month goes into ING @ 3% interest.

Question:
Should I pay down the student loan with the highest interest rate which is $29,500 @ 5%, or should we work on building an emergency fund? Again, that particular loan is not currently accruing interest and won't start accruing until 12 months from now, and I can pre-pay any amount now or anytime if I like.

Misc stuff:
We'd like to have $4,000/year for vacations.
We plan on having our first kid in 3-4 years.

Any feedback is greatly appreciated.
Last edited by gnosis on Wed Oct 19, 2011 6:46 pm, edited 23 times in total.

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PiperWarrior
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Post by PiperWarrior » Wed Aug 13, 2008 9:44 pm

Welcome to the forum!

Your debt has fairly low interest rates, so I think it's highly up to you to decide whether you want to reduce your debt. You might be interested in reading Paying down loans versus investing.

If you are looking for portfolio advice, you might want to read Investment Planning and then post your situation in the format provided in Asking Portfolio Questions. Among other things, please be sure to list the funds available in your wife's 401(k) plan.

Are you eligible for Roth IRA contributions? You can check the eligibility with Publication 590.

It would be nice if you could you could edit your original post to add the requested information in Laura's format by clicking Image on the upper right corner of your post. That would keep all the information about you in one post.

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gnosis
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Post by gnosis » Wed Aug 13, 2008 9:46 pm

ahh I don't know how I looked over that sticky! Thanks, and it's been edited now.

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Post by Valuethinker » Thu Aug 14, 2008 5:02 am

gnosis wrote:ahh I don't know how I looked over that sticky! Thanks, and it's been edited now.
Beyond emergency funding, I would hold no fixed income (bonds and money markets).

Because instead of holding fixed income, I could reduce my debt, and earn an excellent after tax interest rate, as well as lowering my personal risk.

Emergency funding, in your case, given the size of your debt load (I don't know your income) would be at least 12 months of interest + normal living expenses. I would also make sure I had Long Term Disability coverage (probably a private, personal plan) with an 'own occupation' definition of disability.

Given the size of your debts, I stress 12 months of cash flow held in a safe money market fund or FDIC insured accounts and CDs. I could even make a case for 18 months.

But I wouldn't own any bonds. If I did, it would be the minimal (say 20%) in TIPS in a tax deferred account (there are diversification benefits to same).

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Re: Appreciate some financial advice

Post by Valuethinker » Thu Aug 14, 2008 5:08 am

gnosis wrote:I

I have no IRA or personal/retirement accounts. For now, any extra money we have at the end of each month goes into ING @ 3% interest.

Question:
Should I pay down the student loan with the highest interest rate which is $29,500 @ 5%, or should we work on building an emergency fund? Again, that particular loan is not currently accruing interest and won't start accruing until 12 months from now, and I can pre-pay any amount now or anytime if I like.

Misc stuff:
We'd like to have $4,000/year for vacations.
We plan on having our first kid in 3-4 years.

Any feedback is greatly appreciated. I'm already learning a lot just from the first reply! Thanks very much. I loved this forum from day one.
Hi

Emergency fund first. Then retire that higher interest student loan.

Your level of debt I find shocking, but I don't know your income / prospects. In particular $7,500 on credit cards - I probably spend the equivalent of USD 25k a year on credit cards (or credit card, I should say) but I never carry a balance over the month end. When I have owned cars, I have paid cash.

However you are young, and there is lots of time to amortise debt. I just wouldn't bother holding bonds until I had liquidated my non-mortgage debt. You might want to treat your low interest long term student loan in the same vein.

Similarly, I wouldn't make any contributions to equities, *other than to get the match from employer* and to *use tax free annual limits that expire* before I had paid off my non-mortgage, non LT student loan debt.

That may all be too conservative for you.

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Post by gnosis » Thu Aug 14, 2008 5:56 am

The $190k student loan balance is the combined total of my med school loans and my wife's college loan.
Our current gross annual income is $150k, and I expect it to increase about 10% annually until it plateaus around $250k with smaller 1-3% increase each year afterward.

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Post by guest42 » Thu Aug 14, 2008 7:06 am

I agree with those above - an emergency fund first. You have the beginnings of an emergency fund with this:
Funds:
$12,000 in ING checking/savings accounts @ 3% interest
$13,500 in CD @ 4%
You didn't mention medical insurance? Sure, you are young, but surprise bad things can happen (as you must know from your medical training).

Personally, I have always been totally debt adverse, but then again I grew into adulthood with 14% interest rates on mortgages. Believe me, there was no other place where I could earn as much, as paying down mortgage debt. In your case, your 3% student loan, almost looks like free money to me (being roughly equivilent to an average inflation rate).

I'm not sure what the debate points are ROTH versus Traditional IRA, but if you can get the tax deduction from an Traditional IRA (income limits and all) - it seems to me like that's the goverment lending you 35% (your tax rate) to earn future earnings on.

Do your best to contribute whatever you need to contribute to obtain employer matches.

Save up for those vacations - Do not add them to future debt.
Likewise, save up for those future children. Will your wife continue to work, or not?

In tackling that mound of debt you have; I would knock out that credit card balance first. I subscribe to the school of paying off credit cards in their entirity every month. I would then pay off that car - interest on a car loan isn't deductable (last I looked).

It is a shame how our doctors need to accumulate such huge student loans. My neice's husband (anasteseiologist) picked up extra cash, substituting for doctors who took vacations (well, he did this before his own children started arriving).

Just some ideas.
Linda-room42

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gnosis
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Post by gnosis » Thu Aug 14, 2008 7:59 am

We both have health insurance. Sorry, I assumed that was a given.

I feel the same way about my 3% student loan. At that rate, it's effectively not even gaining interest when adjusted for inflation.
With the exception of the 0% credit card balance, we always pay off our other monthly credit card statements in full. We never pay interest on any cards.

When we have our first child, my wife will continue to work after taking several months off on maternity leave.

About paying off the car... I didn't think about that, the 5% interest on the car loan is non-deductible on taxes, but it is on the 5% student loan. Therefore it makes sense to pay down the car loan before that 5% student loan, right?

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Post by guest42 » Thu Aug 14, 2008 10:53 am

gnosis wrote:About paying off the car... I didn't think about that, the 5% interest on the car loan is non-deductible on taxes, but it is on the 5% student loan. Therefore it makes sense to pay down the car loan before that 5% student loan, right?
I know nothing about student loans - don't know if they are deductable or not. But if it is as you say; student laon at 5% deductable, car loan at 5% not deductable --> Then your student loan is cheaper, because the government is subsidizing your interest payment. Thus, pay off the car first.

By the way, tax wise, you know how they say mortage interest is great, because it is deductable? Guess what? If your total deductions are less then the standardized deduction, that's even better - tax wise. Just thought I'd mention this, because this was the prevalent myth, back in the day when I had mortgage interest. Like somehow paying mortgage interest was good for taxes. The only thing I can think of that makes mortage interest a good thing, is after you consider inflation and home aprreciation (if such a thing ever comes about again). -- By the way, after 28 years of home ownership (multiple different homes) I've never made a dime on real estate, but have enjoyed living in my own home.

Linda-room42

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gnosis
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Post by gnosis » Thu Aug 14, 2008 11:05 am

room42 wrote:Guess what? If your total deductions are less then the standardized deduction, that's even better - tax wise.
Linda-room42
I don't understand. Why is this?

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Post by Valuethinker » Thu Aug 14, 2008 12:44 pm

gnosis wrote:We both have health insurance. Sorry, I assumed that was a given.

I feel the same way about my 3% student loan. At that rate, it's effectively not even gaining interest when adjusted for inflation.
With the exception of the 0% credit card balance, we always pay off our other monthly credit card statements in full. We never pay interest on any cards.

When we have our first child, my wife will continue to work after taking several months off on maternity leave.

About paying off the car... I didn't think about that, the 5% interest on the car loan is non-deductible on taxes, but it is on the 5% student loan. Therefore it makes sense to pay down the car loan before that 5% student loan, right?
Given your financial track (lots of income):

- insurance and especially disability insurance has to be a large and early priority. As much as you can feasibly buy

- life insurance (cheap term, 20 year) to pay off your debts if you die and leave your wife/child

- emergency funds (6-12 months) although a doctor can always work, so you might figure 3-6 months

Then I would focus on paying down high interest debt first.

I still wouldn't have bond investments until I had paid off all non-mortgage, non LT student loan debt.

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Post by guest42 » Thu Aug 14, 2008 12:54 pm

Offhand, I don't know exactly what the Standard Deductions are, but this is close (maybe 2007's);

Say your Adjusted Gross Income is $50,000.

Say your Mortgage Interest is $10,000.

Say the Standard Deduction is 10,700 married filing jointly.

Say, for example, by Itemizing (including that wonderous mortgage interest - $10,000 for nice round numbers) you can tally up $15,000 for a itemized deduction ... or without that wonderous mortgage interest, you would only be able to tally up $5000 in deductions, thus it would be better off to use the standarized deduction of $10,700.

$50,000
- $15,000 Itemized Deductions including Mortage Interest
= $35,000 you pay taxes on

OR better; no mortgage, no mortgage interest, you only can tally up $5,000 in deductions, better to go with the Standarized deduction of $10,700

$50,000
-10,700
= $39,300 you pay taxes on

Wait a minute, you say - I don't get it? Paying that Mortgage Interest, I pay taxes on only $35,000, whereas, if I had no mortgage, I would have to pay taxes on $39,700

$39,700
-$35,000
= $4,700 more I have to pay taxes on, @35% -- Oh my gosh! I have to pay $1,645 MORE in Taxes without that Mortgage Interest! Why is that a good thing?

Because $1,645 in taxes is way, way cheaper then the $10,000 you paid in Mortgage Interest. In fact, a savings of $8,355 more would be in your pocket.

Moral of this story? Taxes are less expensive then Mortgage Interest.

I believe it is a grand misconception propagated by the Mortgage lenders. Yes, sure, the US goverment encourages home ownership by allowing you to deduct your Mortgage Interest --- But as you can see, Taxes are way cheaper then Mortgage Interest. Now compound that $8,355 you save by not having a mortgage year after year after year; say - after you've turned 40 (because it does take a while to fully own your home) for 20 years, though when you're 60 --- Oh my gosh! That's a whopping $167,100 more I get to keep, that doesn't go into the pockets of the Mortgage Lenders.

I am extremely debt adverse. When I was young, of course I needed a mortgage (14% - 30 year fixed) and a car loan (8% - 3 years) - How else was I to have someplace to live (that I called my own) and get back and forth to work? But all debt was paid off by the time I was 36. I have never had any debt since, of any kind. I know I am the extreme.

Personally, I would not be adverse to your 3% Student Loan, however - because that is like free money - 3% being about the average inflation or CD yield rate breakeven point. Shoot, if someone would lend me money at 3%, I am sure I could earn better then 3% on it - in any economy. And would be tempted to make an exception to my no debt policy, in the case of 3%

Does that make sense?
Linda-room42

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Post by gnosis » Thu Aug 14, 2008 8:12 pm

Valuethinker wrote: Given your financial track (lots of income):

- insurance and especially disability insurance has to be a large and early priority. As much as you can feasibly buy

- life insurance (cheap term, 20 year) to pay off your debts if you die and leave your wife/child

- emergency funds (6-12 months) although a doctor can always work, so you might figure 3-6 months

Then I would focus on paying down high interest debt first.

I still wouldn't have bond investments until I had paid off all non-mortgage, non LT student loan debt.
Interesting point of view... no bonds necessary because it makes more sense to build life/disability/emergency insurance/funds at my early stage in the game.

What I'm gathering from everyone's feedback so far is that my order of priorities should be: getting LT disability insurance as soon as possible while at the same time building the emergency fund, then maybe pay off the car early, then the 5% student loan.

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Post by gnosis » Thu Aug 14, 2008 8:19 pm

Linda-room42, that was a nice numbers crunch that made sense, that was good stuff. I often think about how low the interest is on all of my loans, relative to how high interest rates can go historically, like your 14% mortgage, etc. Should I even be so concerned about my financial situation right now considering everything is no higher than 5% interest, other than my so-so 6.5% mortgage?

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Post by Blue » Thu Aug 14, 2008 8:34 pm

I would echo the need for long-term disability insurance that is specialty specific and a term life insurance policy.

One thing I ran into with the disability insurance was not being able to get adequate disability coverage until I had a signed contract for after residency. A resident's salary didn't qualify for the the needed disability coverage. Also, since disability insurance is typically capped at $10k/month, it is preferrable to purchase this with after-tax dollars so that the benefit would not be taxed, effectively raising your net benefit.

In regard to the student loan interest deduction, at $150k gross income you are close to the point where student loan interest is no longer deductible. I don't think that changes the end result for you.... but it does change the calculus somewhat.

Blue

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Post by Blue » Thu Aug 14, 2008 8:41 pm

gnosis wrote:Linda-room42, that was a nice numbers crunch that made sense, that was good stuff. I often think about how low the interest is on all of my loans, relative to how high interest rates can go historically, like your 14% mortgage, etc. Should I even be so concerned about my financial situation right now considering everything is no higher than 5% interest, other than my so-so 6.5% mortgage?
To take this line of thinking one step further.... Jeremy Siegel I recall recommending more than 100% equities (up to 130%) in his latest book for young investors.

This is a perfect example of where you can use unsecured, cheap debt to build up your financial position elsewhere.

For example, I have a $140k 2.875% 30 year student loan outstanding with ample investments to pay this off, but I don't because I would rather have the monies in our Vanguard equity index funds.

With a relatively stable income/career, you can afford to take more equity risk.

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Post by guest42 » Fri Aug 15, 2008 7:16 am

gnosis wrote:Linda-room42, that was a nice numbers crunch that made sense, that was good stuff. I often think about how low the interest is on all of my loans, relative to how high interest rates can go historically, like your 14% mortgage, etc. Should I even be so concerned about my financial situation right now considering everything is no higher than 5% interest, other than my so-so 6.5% mortgage?
I think, that people would have lots of different opinions - debt versus investment.

Yes, I paid 14% for a mortgage, but if I recall correctly, CD's were paying ridiculously, possibly even higher back then - if you had the right opportunity - however, I had no money at the time (other then my 10% down - which was standard back then). It was 1980 - think of what the stock market did in the next 2 decades.

I just checked returns for Vanguard S&P 500 Index VFINX and it is reporting today - 10 year returns of 2.83%

My point is you can not compare today's interest rates, with yesterdays - nor can you compare todays 10 year index returns, with 1982's through 2000 - they are not comparable, more like apples and oranges.

Personally, I hate debt. My brother (no doubt raised with similiar values) calls debt - economic slavery. No matter what happens, in good times or bad - someone else owns you - or is after a regular payment from you. This limits your options in life. Period. You are not free.

I think of the time I took a 4 month sabatical - I had to make sure those creditors got paid. I think of the time I gave up the corporate world to start my own business - I had to make sure those creditors were paid. I also remember the time I got laid off - all my creditors were paid, but I had no emergency fund - you can not eat your house or car, you must have an emergency fund. Therefore - it is a balance.

For some reason, your line of questioning, makes me think of "opportunity cost". What is the cost of this or that opportunity? For you the cost of the opportunity to train as a doctor is 3% & 5%. The cost of the opportunity to own your own home is 6.5%. The cost of the opportunity to drive the car you do - 5%. Likewise, if you continue to carry that debt, and instead of paying it off invest in XYZ - the opportunity cost of XYZ is based on the cost of the debt you carry. XYZ has got to earn more then 6.5% (minus the relative small tax offset you get) before XYZ starts to make you any money. This right here is what propelled me to pay off my 14% mortgage - nothing, not even the stock market could earn me more then 14%. Likewise, with your 6.5% mortgage, is the US Stock market expected to offer returns in excess of 6.5% over then next 10 years? I think for you, as it was for me - the projections are break even. So you see, the number that is the interest rate, is only relative to other opportunities of the time and place - not relative to the past or future.

With the debt you carry, you are locked into the big city doctor model. You don't have the option of rural doctoring, or international Doctors without Borders, and I imagine that starting your own practice (rather then joining someone else's practice) would even be a stretch. You are not free.

However, there is one big exception to debt versus investment, that I know of, and that is in employer matches, to employee retirement contribution plans - such as a 401K match of dollar for dollar for the first 6% say. By all means, contibute that 6% - to get that 6% match - that is free money.

It is all very relative, you see. It is a balance.

I owe no one. My home is not an investment, it is where I live. It is not even a cost effective solution. I sunk an extra 100K into it, to gain a workshop my husband operates a Handyman busines out of, and a greenhouse for me to tinker in. I don't imagine I will ever get that 100K back out of it. The level of business my husband does, on it's own, would never pay for the investment, of that workshop. I have 100K in capital tied up - not earning me a dime. But we are free. To live as we choose.

What's the price of freedom?

Personally, I don't think debt is the way to get there - with the exception of that first mortgage, and that first car loan -- most folks have to do that starting out from scratch. No one helped me (not even my husband). I did it all by myself.

I ramble. I think if you use the yardstick measure of "opportunity cost" you will come to conclusions that are correct for you and your family. There is something to say for leverage - at the right time, at the right place, for the right opportunity --- your student loans are a perfect example of this.

Linda-room42

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Post by guest42 » Fri Aug 15, 2008 8:21 am

gnosis wrote:Our current gross annual income is $150k, and I expect it to increase about 10% annually until it plateaus around $250k with smaller 1-3% increase each year afterward.
Just an aside ... Your debt load - roughly $500K-$600K is more then double your future peak earnings ... I don't think I ever carried more then double my current earnings. It makes me wonder how your monthly cash flow looks? Is it positive? Are you earning today, monthly - more then your current monthly bills? My parents (depression era) and hence me, by my upbringing - has to wonder how you can contemplate $4000 vacations, when you are so far in debt?

... However, I don't think your situation is uncommon, as I understand it - the past decade has sought (by business) to encourage credit beyond anything sustainable - hence, the current credit crisis.

Think about this. 1980. I had a college degree and an entry level corporate computing job with a Fortune 500 company. My earnings future was bright. I could not get a car loan (without a co-signature) until I had been on that job for 6 months. Max duration of car loans was 3 years. I walked to work for those 6 months, just as I had walked to college. 10% down was required for home loans (5% FHA) and you couldn't be lent that money. I rented for 2 years, saving up that 10%. The rule of thumb, I learned from my parents, is that you save for the future 10%, right off the top of your paycheck - and I did so, from the very first day of my first salaried job.

My - times sure have changed! But is today's credit economy really a better model, then even as recent as 1980? I think not. As Johnny Cash sang "You owe your life to the company store".

Linda-room42

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Post by gnosis » Fri Aug 15, 2008 2:14 pm

Your philosophies and perspectives are new to me, and they're very interesting. That's ultimately why I decided to post on this great forum. I really appreciate this.
I won't be on the computer here for the next few days, but I'll check here again as soon as I'm back. Thanks to all of you again for your priceless input.

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Post by Valuethinker » Sat Aug 16, 2008 3:15 am

gnosis wrote:
Valuethinker wrote: Given your financial track (lots of income):

- insurance and especially disability insurance has to be a large and early priority. As much as you can feasibly buy

- life insurance (cheap term, 20 year) to pay off your debts if you die and leave your wife/child

- emergency funds (6-12 months) although a doctor can always work, so you might figure 3-6 months

Then I would focus on paying down high interest debt first.

I still wouldn't have bond investments until I had paid off all non-mortgage, non LT student loan debt.
Interesting point of view... no bonds necessary because it makes more sense to build life/disability/emergency insurance/funds at my early stage in the game.

What I'm gathering from everyone's feedback so far is that my order of priorities should be: getting LT disability insurance as soon as possible while at the same time building the emergency fund, then maybe pay off the car early, then the 5% student loan.
Paying down a debt is equivalent to investing in a risk free bond. Normally, after tax, it pays a higher return.

Yes. And I would add, enough term life insurance on you to discharge your debts (does student debt discharge if you die?) so that your wife has a clean slate-- when you have a child, you'll need more again.

The key with term life is that it is cheap, don't let the salesman sell you something else. You need 20 year term, with guaranteed premium (ie if your health deteriorates, the premium stays the same) enough to put your wife in the same position as if you were working full time.

Read EmergDoc's posts going back about LTD insurance for medics -- good grift there. We've had a few discussions.

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Post by ddb » Sat Aug 16, 2008 6:03 am

gnosis wrote:The $190k student loan balance is the combined total of my med school loans and my wife's college loan.
Our current gross annual income is $150k, and I expect it to increase about 10% annually until it plateaus around $250k with smaller 1-3% increase each year afterward.
In your original post here, you said you expect to be in the 35% federal bracket in a few years, which would imply taxable income of at least $357,500, but now you say you expect gross income to plateau at around $250K. Which is it?

Also FWIW, I fully agree with Valuethinker's thoughts to skip the bonds until debt is paid off/paid down.

Not sure if anybody has put a number on the term insurance yet, but if I were you, I'd try to get at least $3 million of 20-year term. If you're in excellent health, this would cost less than $100 month. $3 million sounds like a big number, but at a 4% withdrawal rate, this would still only provide $120,000 per year to your survivor(s), some of which could be taxable. This pales in comparison to what you expect your income to be within a few years.

- DDB
"We have to encourage a return to traditional moral values. Most importantly, we have to promote general social concern, and less materialism in young people." - PB

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Post by gnosis » Sun Aug 17, 2008 4:19 pm

ddb wrote:In your original post here, you said you expect to be in the 35% federal bracket in a few years, which would imply taxable income of at least $357,500, but now you say you expect gross income to plateau at around $250K. Which is it?
Thanks for catching that error, I fixed it now. I meant 33%, not 35%.

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Re: Appreciate some financial advice

Post by gnosis » Mon Mar 23, 2009 6:52 pm

Keep scrolling down to the most recent postings for my most updated financial picture

Updated! Main updates are:

1. I changed some 401k funds and contributions based on advice I got from here: http://www.bogleheads.org/forum/viewtopic.php?t=26443
2. Almost done with refi to 4.75% on 30-year fixed
3. Maxed out her first year of ROTH
4. Got private long-term disability insurance for myself
5. The correct PA income tax level is 3% flat, not 6%.
6. Student loan interest is actually 2.675%, not 3%.

I have new questions at the bottom of this post. Thank you all for your advice so far. I love this place.

Liquid funds/3-month emergency fund:
$16,000 in ING checking/savings accounts @ 1.5% interest
$14,000 in CD @ 4%

Debt:

Student loans:
$190,000 @ 2.675% x 29 more years
$27,500 @ 5% x 9 more years

Mortgage = $325,000 @ 4.75% x 30 years

one car loan = $23,000 @ 5% x 5 years

$6,700 credit card balance @ 0% interest. Paying $100 minimum payments and transferring to a new 0% card every 12 months.

Tax filing status: Married filing jointly

Tax rate: 28% federal, 3% state, Pennsylvania
Expect to move to 33% federal tax rate in 5 years and after that until retirement

Age: I'm 30. She's 28.

Current/Desired Asset allocation: 85% stocks/15% bonds

Intl allocation: 33% of stocks

IRA & investments:
Her 401(k) = $13,000 contributing 6% up to the 100% company match

Her 401(k) portfolio:

15% Bonds
??% Large-Cap Stocks
??% Mid/Small-Cap Stocks
33% International Stocks
0% Individual Equities

Investments_________________Current Allocation style
Vanguard Small Cap Index_________6%
Vanguard Mid-Cap Index;Inst_______3%
Vanguard Instl Indx;InsP__________50%

Vanguard Total Int'l_______________21%
Vanguard Emerging Mkts___________5%

Vanguard Total Bond Market In______8%
PIMCO Total Return Fund___________7%

(Above allocation = 100%)

Her ROTH IRA:

$5,000 Vanguard TR 2045


Questions:

Some of you recommended not even bothering with bonds at this point because we have a 5% car loan as well as some student loans at 5% (interest deductible). But we're about 14% of our total investments in bonds for the sake of risk reduction and diversification. If we wanted to eliminate bond investments, is there another good alternative to reduce risk, since the rest of our portfolio would be 100% equities (index funds)? We're not afraid of doing 100% stocks, but I just thought it was foolish to do this when adding just 10-20% bonds significantly reduces risk without reducing reward much at all.

I think it makes more sense for us to continue to invest as much as possible, maybe in a new IRA under my name this time, rather than using this money to pay down 5% car loan.

Which reminds me... Typically with car loans from the dealer, isn't all of the interest already accrued right away up front, so I'm not ever saving any money by paying it down? It's like the payoff amount today is the same amount as it will be at the end of the loan term, right?

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gnosis
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Post by gnosis » Wed Oct 20, 2010 7:29 pm

Update! It's been over 2 years since my original post, and I'd like to share with you all of the wonderful new changes in my financial picture. We decided this year to pay off our car instead of funding Roth. We plan to start a nice debt snowball by using the $500 monthly car loan money towards paying down my $23k student loan @ 5%.

Here's what's new...

1. Paid off my only car loan. Awesome feeling! Was $20k @ 5%
2. Paid off $6,700 credit card balance that was 0% interest
3. Refi'd home to 4.625% on 30-year fixed
4. Opened up a Roth for myself

Liquid funds/3-month $28k emergency fund:
$12,500 in ING checking/savings accounts
$15,500 in CD ladder @ 1-5 years @ 1-3.25%

Debt:

Student loans:
$165,000 @ 2.675% x 28 more years
$23,500 @ 5% x 8 more years

Mortgage = $328,000 @ 4.625% x 30 years

Tax filing status: Married filing jointly

Tax rate: 28% federal, 3% state, Pennsylvania

Age: I'm 32. She's 30.

Current asset allocation = desired: ~80% stocks/20% bonds
and international allocation: ~1/3 of stocks

IRA & investments:
Her 401(k) = $35,000 contributing 8% + 2% company match

Her 401(k) portfolio:
Vanguard Instl S&P 500 Index_______36%
Vanguard Total Int'l_______________36%
Vanguard Total Bond Market In______28%

(Above allocation = 100%)

Her ROTH IRA:

$14,000 Vanguard Total Stock Market

My ROTH IRA:

$6,000 Vanguard Total Stock Market

TOTAL investments = $55,000
Last edited by gnosis on Wed Oct 20, 2010 7:51 pm, edited 2 times in total.

retiredjg
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Post by retiredjg » Wed Oct 20, 2010 7:41 pm

You have made some real progress!

I hope some of the new people read this thread and see that you actually can make a big difference just by doing a few things right and avoiding the stupid stuff. :wink:

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gnosis
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Post by gnosis » Wed Oct 20, 2010 9:10 pm

Thanks, it's a great feeling. It's nice to become borderline obsessed with doing things that are good for you -- paying down debt and saving for the future.

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gnosis
Posts: 347
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Re: Appreciate some financial advice

Post by gnosis » Wed Oct 19, 2011 6:29 pm

============================================================================================================

Question: How should I reallocate the Vanguard funds shown below in each retirement account, if at all?

It's been over three years now since my original post. Updates and changes in the past year:

1) Decided to pay off the loan from my parents instead of paying down my $23k student loan @ 5% interest.
2) Wife got a new job.

Age: I'm 33. She's 31.
Current asset allocation is desired: 80% stocks/20% bonds
and international allocation: ~1/3 of stocks

Her new 401(k):
  • 7% Total Stock
    2% Total Bond

Her old 401(k):
  • 29% Total Stock
    24% Total Int'l
    5% Total Bond
Her Roth IRA:
  • 15% Intermediate-Term Treasury bonds - VFITX
    4% Total Stock
My Roth IRA:
  • 14% Total Stock
TOTAL investments = $80,000

New contributions will max out the new 401(k) + 6% company match, max both Roth IRAs.
Last edited by gnosis on Wed Oct 19, 2011 7:31 pm, edited 3 times in total.

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Toons
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Location: Hills of Tennessee

Re: Appreciate some financial advice

Post by Toons » Wed Oct 19, 2011 6:43 pm

"$190,000 @ 3% x 30 years
one car loan = $25,000 @ 5% x 5 years
$7,500 credit card balance 0% interest. Paying minimum payments and
transferring to a new 0% card every 12 months"


Is the debt decreasing? :D :D
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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gnosis
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Re: Appreciate some financial advice

Post by gnosis » Wed Oct 19, 2011 6:54 pm

Toons wrote:"$190,000 @ 3% x 30 years
one car loan = $25,000 @ 5% x 5 years
$7,500 credit card balance 0% interest. Paying minimum payments and
transferring to a new 0% card every 12 months"


Is the debt decreasing? :D :D
Ah those were the good ol' days... not!

retiredjg
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Re: Appreciate some financial advice

Post by retiredjg » Thu Oct 20, 2011 10:19 am

I guess I don't really understand the question. Your portfolio seems to reflect what you say you want. I don't see a need to do anything.

You could roll her old 401k into her new 401k perhaps. I would not roll it to tIRA since it appears you will need to use the back door approach to Roth IRA when your salary gets higher.

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gnosis
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Re: Appreciate some financial advice

Post by gnosis » Fri Oct 21, 2011 6:10 am

I know that the general recommended strategy is putting stocks into Roth, and bonds into pre-tax (401k, tIRA). Just yesterday though I found a nice thread about how this is not always the right strategy. In any case, the main issue I have though is that I prefer Treasury over Total Bond, but Treasury is not available in the 401k's, so I'm left with putting most of my bonds as Treasury in Roth.

Looking at the big picture though, I realize I'm just starting to accumulate, I have about a 30-year horizon, so at this early on it's almost splitting hairs to be concerned with this, but I'm here to learn, so I thought I'd raise the question now. Great run-on sentence!

retiredjg
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Re: Appreciate some financial advice

Post by retiredjg » Fri Oct 21, 2011 8:24 am

gnosis wrote:I know that the general recommended strategy is putting stocks into Roth, and bonds into pre-tax (401k, tIRA).
I don't think this is a general recommended strategy. It's an opinion that many people share, but others will disagree and their reasoning also makes sense to me. In your case, if you want treasuries, Roth is the only place to put it.

I think your portfolio idea is just fine. Saving money is the most important thing. Your stock to bond ratio is next. Your international allocation is fairly important as is tax-efficient placement of funds. Most everything after that is kind of like sprinkles on the icing in my opinion.

campy2010
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Re: Appreciate some financial advice

Post by campy2010 » Fri Oct 21, 2011 8:26 am

Take advantage of low interest rates and refinance your car loan at 1.99% (available at penfed among others).

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