Having First Child a little later in life, Debt just paid, Help Us Check In

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adam61
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Having First Child a little later in life, Debt just paid, Help Us Check In

Post by adam61 » Thu Sep 21, 2017 12:24 am

I've been a "Boglehead" for about the last 8-10 years and have used that and snowballing strategy to pay off all debt over the last 10 years, $10k in CC, $40k in student loans, 3 cars for $70k, and a $240k mortgage (just 2 months ago in fact), max all tax-advantaged accounts and start to build a nest egg. I have a few questions, but with the addition to the family in December I want to make sure I have all my major bases covered and really look at what my plan should be.

I feel like paying off the debt was a game I've now completed (I don't plan to use Installment debt again), and retirement and college savings I would like to approach the same way. I know paying off my mortgage at 2.9% was likely a financial mistake, but I really like the idea of not owing anyone anything and it also frees up monthly cash flow for a lot of flexibility going forward as this was my single largest monthly expense.

Here's our particulars, questions at the bottom...

Emergency funds: $60k (1.3% Savings) for some medical expenses for delivery and this also acts as our car fund gaining cash as car buying time gets closer (about 12 months of living expenses)
Debt: Installment debt $0/Revolving $300k in CC available @ $0 Balance/$150k HELOC @ $0 Balance (No fees on any cards or HELOC)
Tax Filing Status: Married Filing Jointly
Tax Rate: 28% Federal, 0% State
State of Residence: TX
Age: 36M/40F
Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 25% of stocks

Current Tax-sheltered portfolio including IRAs, ROTHs, and 401k/403b ~$600k
Gross Annual Income: $130-150k

Current retirement assets

Taxable
None (Enrolled in ESPP quarterly, but just sell immediately and put in emergency fund and take full hit as personal income)

His 401k (I can not find the tickers ANYWHERE for these, all on Fidelity) Total Size is ~$50k
4% Large Stock Index (ER 0.01%) Benchmark: S&P500
2% Small/Mid Stock Index (ER 0.03%) Benchmark: DJ US Completion TSM
1% Intl Stock Index (ER 0.10%) Benchmark: MSCI ACWI ex US IMI (N)
1% Bond Index Fund (ER 0.04%) Benchmark: BBhBack US Agg Bond
Company match? 3% placed in account annually if employed on grant date

His/Her Roth IRA at Vanguard (Mirrored accounts total combined is ~$150k)
12.5% Vanguard Small-Cap Index Fund Admiral VSMAX (ER 0.06%)
12.5% Vanguard Total Int. Stock Index Fund Admiral VTIAX (ER 0.11%)

His Rollover IRA at Vanguard (Total assets ~$225k)
26% Vanguard 500 Index Fund Admiral VFIAX (ER 0.04%)
11% Vanguard Total Int. Stock Index Fund Admiral VTIAX (ER 0.11%)

Her 403b (Total size ~$175k)
12% Vanguard Total Bond Market Index I VBTIX (ER 0.04%)
18% Vanguard Mid-Cap Index Admiral VIMAX (ER 0.06%)
Company match? 3% placed in account each pay period
This is the worst of the plans besides the funds above and a large cap from Vanguard all options are at an ER of 0.80%-1.8%

Contributions

New annual Contributions
$18,000+$2,500=$20,500 his 401k
$18,000+2,500=$20,500 her 403b
$5,500 his Roth IRA
$5,500 her Roth IRA
$0 Taxable

So the questions a lot going on this year and priorities about to shift obviously, so I want to get this right...

1) How does asset allocation look and would you make any immediate obvious changes or just let it auto-pilot until closer to retirement?

2) I plan to set up a 529 plan in January with $5,000 and fund with $250/month for 18 years. I feel this would give enough to not hurt our retirement goals, but give our child enough to make a serious dent in college costs while still having some skin in the game. Texas seems to offer no special benefit so I was looking at possibly New York's plan based on forum posts.

3) Are we over/under saving? FireCalc and others seem to show a near 0% fail rate at my current rate. Should I look to push harder for earlier retirement, spend more while we are young, or reality check and realize I need to save more?

4) Without all the nitty-gritty conceiving was hard for us so we utilized infertility treatment to the tune of $30k along with your normal expenses for pre-natal and birth and the deduction for a new dependent this will generate much more complex taxes than I'm used to. Is it likely hard enough for a professional to need to take over for the year or should I just buy a nicer version of TurboTax and get all the info in?

5) Lastly, and I know this is kind of general, what's the next step in the "game". I was able to stay focused on the long-term more easily by having clear goals like paying off debt or increasing contribution to max 401k/ROTH etc. Now that those difficult goals are accomplished barring an unfortunate job loss or health crisis they feel like auto-pilot. I need another mid-term difficult goal to keep me sharp and I'm not sure what the next step is.

Thanks for the support you've always given, it's obviously made a huge difference in my financial independence and progress towards long-term goals.

123
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by 123 » Thu Sep 21, 2017 12:54 am

adam61 wrote:
Thu Sep 21, 2017 12:24 am
...
I have a few questions, but with the addition to the family in December I want to make sure I have all my major bases covered and really look at what my plan should be...

... I need another mid-term difficult goal to keep me sharp and I'm not sure what the next step is...
Your next financial goal/project is arriving in December. That project will easily keep you quite busy for 18 - 24 years or longer. Relax and enjoy it.
The closest helping hand is at the end of your own arm.

mega317
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by mega317 » Thu Sep 21, 2017 1:38 am

Awesome! Congrats! Your finances are solid and you're having a baby!

1. I would strongly consider increasing your bond allocation. I think 10% is low for anyone; at your ages I'd recommend at least 20 and maybe closer to 30%. I am nearly your age and i'm "age minus 10" in bonds.

At quick glance you seem pretty significantly overweight in mid/small caps. And overall I think it's just needlessly complex. With so many different accounts you could easily hold only 1-2 funds in each. Without knowing all the choices it's hard to create a sample portfolio but just as an example:
His 401k: 8% total international stock index
His Roth: 12.5% bond index
her Roth: 12.5% total international stock index
His rollover: 37% total US stock index
Her 403b: 30% total US stock index (or mix the large and mid cap options).
That would give you very close to your stated desired allocation with 6 total funds compared to 12 now.

2. This isn't really a question. But I'll offer my strategy which is to max retirement accounts and then save in taxable using tax-efficient funds (stock indexes). That gives me flexibility if I want/need to retire early, or I can use my taxable account or cash flow for college. But 529s are also very good options; I will probably re-evaluate my plan every few years.

3. This depends on what your retirement expenses will be, and very much depends on personality. Some people say enjoy it while you're young, some say save every penny and retire early or with as much cushion as possible. A mix is probably good for most people.

4. Well you have to consider that you'll have an infant during tax-prep time (I'll have an even younger infant), but I don't see your taxes being particularly complicated. Software should do the trick. I have never used a professional but I imagine you have to meet with them and get them all your paperwork, and there will be follow up calls--that probably won't save you time compared to Turbotax.

5. The next step is enjoy your family! There is probably room for optimization. Have you considered a high-deductible health plan with an HSA for more tax advantaged space? (I'd probably wait to be sure mom and baby are healthy.) You could start a taxable account. You could plan other goals such as vacations or home improvements. My own goal once I had things set on autopilot with a comfortable plan was to be able to ignore it about 363 days a year.

As an aside, if your gross income is 150k I don't think you could be in the 28% bracket. 150k minus standard deduction, 3 exemptions (hooray December baby), 36k retirement contributions (and health premiums?) is under 100k taxable. You'd need 50 or 60k additional income to get to 28%.

livesoft
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by livesoft » Thu Sep 21, 2017 5:50 am

viewtopic.php?t=79510 is a thread about minimizing taxes.

Y'all are well on your way.
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bottlecap
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by bottlecap » Thu Sep 21, 2017 6:20 am

You're doing well. Congratulations on the baby.

90/10 is pretty risky, but I presume that was a well thought out decision.

Have you thought about having the grandparents set up a 529? You can still contribute, but it's not considered for financial aid purposes (until the money is withdrawn).

Only you can determine if you are over saving. Can you meet your anticipated expenses? If not, scale back slightly on retirement and start saving a little more each money. Otherwise, max out retirement while you can.

I don't think your taxes are that complex. Get software if you need to.

It's not a game that you need to keep tinkering with. You have a good plan. Just stick to it.

Good luck,

JT

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knpstr
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by knpstr » Thu Sep 21, 2017 6:45 am

adam61 wrote:
Thu Sep 21, 2017 12:24 am
I feel like paying off the debt was a game I've now completed (I don't plan to use Installment debt again), and retirement and college savings I would like to approach the same way. I know paying off my mortgage at 2.9% was likely a financial mistake, but I really like the idea of not owing anyone anything and it also frees up monthly cash flow for a lot of flexibility going forward as this was my single largest monthly expense.
Congratulations! My first is on the way due to arrive in March!

I think you have done very well financially and just need to "keep doing what you've been doing" on that front. You guys are ahead of the game as compared to most. If it gives you peace of mind and less stress, paying off the home was NOT a mistake.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

adam61
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Joined: Sat Nov 08, 2008 6:10 pm

Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by adam61 » Thu Sep 21, 2017 7:40 am

Thanks for the assistance. I rebalanced to a few less funds and an 80/20 Stock/Bond allocation with 20% international stocks and a little less small/mid and a little more large-cap. Not huge changes, but I just hadn't looked in a couple years. See if this looks more appropriate or needs more large-cap maybe?

38% S&P500 Vanguard
15% Mid-Cap Index Vanguard
12% Small-Cap Index Vanguard
15% Total Int. Stock Index Vanguard
20% Vanguard Bond Market Index

Only 2 follow-ups are:

1) Not many mentioned the 529? Is that not a prudent option? I didn't want to overload it, but we asked for gifts for this purpose instead of a lot of the traditional stuff which we got from friends/family/secondhand and that plus some of our own cash was going to be the $5,000 start. And $250 a month seemed small but reasonable enough to grow into something real by Age 18. If a 529 is the right choice is New York a good option or are there other things I'm not considering?

2) As many suggested I'll probably leave this on auto-pilot through next year, but mentally I have trouble breaking into the taxable investing area. How do most people start and what are your goals with this money? Mid-term goals like a car or renovation I simple bulk up the emergency savings account for, and retirement and college seem covered by the above.

NoVa Lurker
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by NoVa Lurker » Thu Sep 21, 2017 9:43 am

1. The general advice on bogleheads is not to stress too much about 529s. Particularly given your ages, it sounds like you are doing the right thing by focusing on your retirement goals and other financial goals first, then just putting a bit in the 529s to make things easier 20 years from now. If you get no state tax deduction in your own state, then you can shop around a bit for the lowest fees, depending on how much risk you want to take with those funds.

We put around $500/month per kid in 529s, but we get a Virginia state tax deduction and our other tax-advantaged accounts are essentially maxed out. Those contributions would be the first thing to go, if we ever needed more liquidity.

2. We mostly dump money into a 1% Ally account, which is for 'emergency' funds, car and house stuff. We have some Vanguard accounts for taxable investments, but we haven't moved money over there since we bought our home. We now have three kids, and we have lots of home projects in mind (e.g., remodeled our kitchen in 2015; re-doing our back patio and surrounding landscaping is the next one), so that soaks up what would otherwise be our taxable savings now.

livesoft
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by livesoft » Thu Sep 21, 2017 9:54 am

If your gross annual income is $130K - $150K and you are contributing $36K to tax-deferred retirement plans and you have other things taken out of your paychecks such as health insurance, then I don't see how you are in the 28% marginal income tax bracket.

With a child, are you not in the 15% marginal income tax bracket?

As for the 529 plan contributions, our kids were born when we were about your ages. We didn't start investing in 529 plans until they were about 10 to 12 years old, and then only haphazardly. In Texas, college is costing us about $20,000 a year all in, so I think in your shoes, I would not worry too much about saving for college right now. If you save instead in a taxable account and invest tax efficient (say ONLY Vanguard Total Stock Market Index and Vanguard Total International Stock Market Index), then you should find that you have money for college later, money for vehicles, money for home repairs, money for vacations, and money for child care. Yes, others can give money to the child(ren) that can go in a 529 plan(s), but you should probably only fund this later.
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adam61
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by adam61 » Thu Sep 21, 2017 11:07 am

The child is due in December so that is a new deduction this year. Income was also higher last year by about 20k and we lowered our contributions somewhat to save for IVF. It’s likely we’d be in the 25% this year, not sure I could reduce to 15%.

I may Just fund the 529 with the gifts and not contribute for a while from there, I don’t want to mislead people who gave us money.

I feel like I’m being silly (I hold series 7/63 licenses for gosh sakes), but I’ve never wanted to deal with the tax considerations and other terms that come with taxable accounts outside CD/SAV/I-bonds which are just simple interest. It seems like something that needs more consistent management than your set and forget 401k/IRA/SAV. Loss harvesting, wash sales, all that I didn’t want to have to micromanage. Please help me get over this silly mental block I’m sure it’s not as annoying as it seems.

livesoft
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by livesoft » Thu Sep 21, 2017 11:10 am

OK, here's the help you need to get over it: Get over it. Taxable account investing is set-and-forget for the most part. Now using an Ally savings account is so much more of a hassle: You get a 1099-INT and interest that you have declare on your tax return.

Whoops! If you already deal with a 1099-INT, then you most certainly can deal with a 1099-DIV. :)

I guess one of my pet peeves is that people pay way too much in income taxes because of fear of the unknown and no wish to read the IRS instructions for Form 1040. I might go so far as to write that one should not be allowed to vote until they fill out their own tax returns. :twisted:

Some folks have a fear of driving. Or a fear of driving on the highway. Or a fear of driving in a city. But they have driver license.
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jmk
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by jmk » Fri Sep 22, 2017 3:50 am

adam61 wrote:
Thu Sep 21, 2017 11:07 am
I’ve never wanted to deal with the tax considerations and other terms that come with taxable accounts outside CD/SAV/I-bonds which are just simple interest.
Mental block aside, you could also use savings bonds to pay college tuition tax free.

mouses
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by mouses » Fri Sep 22, 2017 6:01 am

livesoft wrote:
Thu Sep 21, 2017 11:10 am
I guess one of my pet peeves is that people pay way too much in income taxes because of fear of the unknown and no wish to read the IRS instructions for Form 1040. I might go so far as to write that one should not be allowed to vote until they fill out their own tax returns. :twisted:
I always do my taxes by hand. I suppose if something really exotic happened, I would go to a CPA. I did have a CPA handle the tax returns for my Mom's estate and trust, because that was alien territory.

The benefit of doing your taxes by hand is that you have a good idea of how financial changes are going to affect them. The instructions for each form are your friend. So are a handful of specialized IRS publications and IRS Pub 17 Your federal income tax for individuals.

Olemiss540
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by Olemiss540 » Fri Sep 22, 2017 8:47 am

You are in awesome shape IMO. I would look into taxable investment account purely to give you additional options as your child gets older. That way you can cash flow increased housing expenses or vehicle upgrades. Can also use that money to start traveling as your child gets older or look at early retirement as a more serious option as the taxable account grows.

If nothing else, start by putting half of any additional raises into the market to give you a second tier of long term emergency savings. It would seem your savings rate for retirement is fully funded, so a taxable account will give you flexibility should you have something pop up that you would like to spend money on.

Personally, I am not doing as well on that front and tend to just spend whatever is left once tax advantage accounts are funded. You Just want to make sure lifestyle creep stays in check so you do not go back into debt. Enjoying your children is going to be so much easier with the financial situation you have put your family in. Keep in mind that changes to your work and future that seem unlikely now are very possible in the coming years (single income, part time to spend more family time, etc). Make hay while the sun is shining!

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CyclingDuo
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Re: Having First Child a little later in life, Debt just paid, Help Us Check In

Post by CyclingDuo » Fri Sep 22, 2017 9:22 am

adam61 wrote:
Thu Sep 21, 2017 7:40 am
Thanks for the assistance. I rebalanced to a few less funds and an 80/20 Stock/Bond allocation with 20% international stocks and a little less small/mid and a little more large-cap. Not huge changes, but I just hadn't looked in a couple years. See if this looks more appropriate or needs more large-cap maybe?

38% S&P500 Vanguard
15% Mid-Cap Index Vanguard
12% Small-Cap Index Vanguard
15% Total Int. Stock Index Vanguard
20% Vanguard Bond Market Index

That looks like a very adequate allocation to capture the whole market. :beer

Only 2 follow-ups are:

1) Not many mentioned the 529? Is that not a prudent option? I didn't want to overload it, but we asked for gifts for this purpose instead of a lot of the traditional stuff which we got from friends/family/secondhand and that plus some of our own cash was going to be the $5,000 start. And $250 a month seemed small but reasonable enough to grow into something real by Age 18. If a 529 is the right choice is New York a good option or are there other things I'm not considering?

The 529 is a good option. Great idea for gifts to go into the fund! We think every set of parents have their own views of a college education, and the funding of it. Our household is very pro-education due to our professions, and we came from households that also emphasized education. So saving and paying for it simply went with our goals. Other households feel differently about that, and that's okay.

529's were not yet available at the time when we had our children, so we went the UTMA way setting up one in each child's name with the intent of investing/saving enough that their entire college educations would be paid for after the funds grew for 18-22+ years. No worries filled our minds at the time about "will they or will they not" qualify for student loans as our intent was centered around saving so they wouldn't have to take any loans. And it worked out - undergraduate and graduate school totally funded from the UTMA's with a nice chunk of change leftover for our children to begin their adult working lives completely debt free. Your idea of launching the 529 with $5K, and adding $250 a month is a good one and will should work out just fine! If you have a chance in the first few years to give the fund an additional "goose" from say a grandparent's gift, or you could add an additional $1-$2K a couple of times - then the outcome will be even rosier at the end of the rainbow.

Others have suggested using ROTH IRA's to save and fund education. Others have mentioned cash-flowing as much of the college expense out of your salaries at the time time. There are lots of options - or combination of strategies to do it. Starting the 529 once your child is born and you have a Social Security # so you can open it for them - you'll be good to go.


2) As many suggested I'll probably leave this on auto-pilot through next year, but mentally I have trouble breaking into the taxable investing area. How do most people start and what are your goals with this money? Mid-term goals like a car or renovation I simple bulk up the emergency savings account for, and retirement and college seem covered by the above.

How people start? Way back when (32 years ago), in our early working years due to our particular jobs at the time, we only had Traditional IRA's/SEP IRA's. Once they were funded, we still wanted to save and invest more. Since our jobs did not have tax-deferred 401k/403b options, we invested in taxable (mutual funds, stocks, CD's). Yes, I would say some short term and mid-term goals at the time absolutely included saving up for a downpayment for a house, saving for transportation (cars), saving for vacations, saving for the day we would have children. So after the IRA's were fully funded, we parked money in taxable. At least that's how and why we got started.

As a result, our taxable has grown over the last 32 years to be our largest "bucket" of money. That will most likely change over the next decade as we super-save in our retirement accounts now that we are empty nesters in the final "decade stretch" of working careers. In terms of mentally thinking about it, even if we retire at full retirement age, if we delay taking SS until 70 - there are some gap years to fill before RMD's which we can use taxable for our expenses/needs. Even better to have the taxable investments for these gap years if we FIRE. The withdrawals from taxable investments will - for the most part - be taxed at cap gains rates. Certain distributions will be taxed as ordinary income, and structuring a taxable portfolio to be tax efficient includes the reality of dealing with dividends since they are taxed as ordinary income. Regardless, having such a huge chunk in taxable means once retirement does arrive we can mix and match our withdrawals from taxable, retirement RMD's, and Roth to mitigate taxes year in and year out.

That being said, our taxable account includes shorter term, mid-term, and longer term goals. Once your retirement funds are fully funded, your emergency fund is fully funded, your child's education account is funded - if you have some money looking for a place to park, having a taxable account to use as a vehicle is not a bad idea at all.

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