Best use for a $2k raise for a middle-income teacher

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Operon
Posts: 29
Joined: Mon May 28, 2018 4:33 pm

Best use for a $2k raise for a middle-income teacher

Post by Operon » Tue May 29, 2018 2:03 pm

Hey Bogleheads. Firstly, thanks for existing. I devoured the contents of bogleheads.org the minute I graduated from college, and I give the BH community a lot of credit for many of my decisions that have worked out well for me. Despite my income a few standard deviations lower than the discussion board average (started out earning $31k/year, have managed to double that over 10 years of work) I’ve been able to sleep well at night, feeling confident that I was making frugal, practical decisions that would help me to weather future hardships. I’m never going to be making the bank that a lot of people here do, but I’m very content with what I’ve got, and recognize how fortunate I am compared to most Americans. You can’t put a price on not having to worry that you’re one bad catalytic converter away from ruin.

That being said, my question: Am I sufficiently on-track for retirement that I’d be better off putting a $2000 raise towards intermediate or emergency fund savings than into a 457?

Current Profile:

Emergency fund: 5 months funded. Bucket 1 is $2k in low-interest highly-accessible savings account, Bucket 2 is $8.5k in .1% fixed rate I bonds and $5600 in 4% EE bonds. The EEs start maturing next year, considering converting to more I bonds as they do - open to suggestions but that's not my main purpose here today.
Debt: Mortgage 30-year fixed at 4.25%, PITI ~$980/month, $108k principal and 23 years left, final mortgage payment will be 2 months after retirement and final paycheck. Car 5-year fixed at 1.74%, 4 years left, $288/month. Home improvement loan at 0%, 3 years left, $195/month.
Tax filing status: Single
Tax rate: 22% federal, 5.1% state
State of residence: MA
Age: 36

Desired retirement asset allocation: 80-85% stocks, 15-20% bonds
Desired international allocation: 30-35% of stocks

Current retirement assets: $93k
Vanguard Roth IRA, $64400:
  • 60% in Total Stock Index (VTSAX, ER .04%)
    22.7% in Total International Stock index (VTIAX, ER .11%)
    17.5% in Total Bond Index (VBTLX, ER .05%)
Fidelity Roth IRA, $28600:
  • 58% in Total Stock Market Index (FSTVX, ER .03%)
    42% in Global ex-US Stock Index (FSGDX, ER .06%)
Total current AA in all retirement accounts is 87.1% stocks, 12.9% bonds (yep, I’m off my desired AA, I’m waiting to rebalance until I’ve decided on the answer to my question here). Stock allocation 66.8% domestic, 33.2% international; 79.8% large-cap, 14.6% mid-cap, 5.6% small-cap. Among international, 51.3% Europe, 32.6% Pacific, 3.9% Canada, 11.9% Emerging, .3% uncategorized. Bonds 100% high-quality and taxable.

Retirement contributions: $5500/year post-tax into Roth IRA, and 11% of salary into state teacher pension system.

Retirement: No Social Security. Medicare eligible. Current contract allows retirees to remain on their health & dental insurance at same rates as current employees but who knows if that will change.
Retirement at age 59 in 23 years nets lifetime defined benefit pension of 80% of (basically the) second-to-last year’s salary. I project the pension to pay out $76480 annually in today’s dollars. Pension benefit will be federally taxable but not state, so between no more 11% pension contributions, 5.1% state income tax, or mortgage payments, I figure that would fully cover me at my current lifestyle. Negligible COLA though, only about $300/year in today’s dollars.

Primary objective of retirement savings is therefore to be the COLA, and if investments perform well enough, secondary objective is to also have enough to spend about $5k/year (today’s dollars) on travel and personal enjoyment during those first 10-15 years when I’m hopefully still feeling up to it.

...I have difficulty gauging what the total size of my portfolio will need to be for that, online calculators generally don't appear to be built for this scenario. Consequently, I have difficulty gauging whether my portfolio is on-track or is over- or under-funded.

Other savings: ~$24k. $10k in 1.6% online savings account; $800 in CDs and $1000 in treasury bills that will mature within the next year and will be rolled into online savings and MM instead; and $12k in taxable brokerage at Vanguard: $6k in Prime MM, $3k in tax-exempt intermediate term bonds (VWITX, ER .19%), $3k in total stock index (VTSMX, ER .14% . It served the role of long-term savings, but as I had some big spends last year, I’m exchanging it for VWITX. With less conservative savings sitting around, I think I’ll have less stomach now for its volatility.)
My budget for next year includes $4000 in savings added to the online savings account and prime MM, which is typical for me. I am not eligible for an HSA.


The question: My happy dilemma is that in addition to my above-budgeted savings next year, I’m getting a raise of about $2000 (post-tax and pension contribution) that I need to put somewhere. I’d love your help in deciding where.

Now up until recently, I would’ve just put it into intermediate-term savings by default because my 403b tax-deferred retirement account options through work have been steamy garbage. No match, 500-page-prospectus annuities through the likes of AXA, and even the few index funds have fees no lower than 1% not including surrender fee. Typical for those of us teaching in public schools, sadly. But I’ve now got access to a tax-deferred 457 that looks really good. Still no employer match but a mere .0775% annual fee, and the best investment options are:
  • State Street Global All-Cap Equity Ex-US Index, ER.09%
    State Street Russell Small Cap Index Securities Lending Series I, ER .03%
    State Street S&P 500 Large Cap Index Securities Lending Series I, ER .01%
    State Street US Bond Index Securities Lending Series I, ER .04%
Nice, right? So my raise could go there. However, after a couple of recent big spends, I’m worried I might be thin on more liquid, intermediate-term savings. I don’t have any major planned expenditures coming due in the next couple years, just the omnipresent possibility of unexpected repairs, but in maybe 5-8 years I’ve got a room or two I’d like to renovate, things will start to go wrong in the car right around then, my dog’s going to be old and higher vet bills are likely, etc.

So I’m torn on what the best use of that $2000 would be, and am seeking Boglehead wisdom to honestly assess the current state of my savings, and on that basis, suggest where to put the extra money. Open a 457? (Maybe plow it into the bond fund, and exchanging some VBTLX for VTSAX in my Roth to achieve my AA?) Or am I pretty on-track for retirement and would be better off putting that $2000 into bulking up my non-retirement savings? Split it and do both? Something else I haven't thought of?

Many thanks in advance for your analysis and advice!
Last edited by Operon on Tue May 29, 2018 9:10 pm, edited 1 time in total.

krow36
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Location: WA

Re: Best use for a $2k raise for a middle-income teacher

Post by krow36 » Tue May 29, 2018 7:50 pm

Operon, welcome to the forum! I think you are doing a great job of saving for your retirement. The 5.5k Roth IRA and the 11% contributed to your pension must put you at a retirement savings rate of about 20%?

I agree that the MA state 457 plan is excellent, and that’s where I would put the 2k raise. You might also consider contributing to the 457 some part of the 4k you are budgeting for your taxable account. If you use the traditional 457 not the Roth 457, you’ll save on your income taxes and be able to add that savings into the contributions.

student
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Re: Best use for a $2k raise for a middle-income teacher

Post by student » Tue May 29, 2018 8:17 pm

I am going to suggest something that may be against bogleheads philosophy. For the first year, spend the $2,000 on something that you want but feel wasteful to spend it on. Life is short. You have a good pension and health care for the gap years. After the first year, invest the money in 457.

Grt2bOutdoors
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Location: New York

Re: Best use for a $2k raise for a middle-income teacher

Post by Grt2bOutdoors » Tue May 29, 2018 8:26 pm

student wrote:
Tue May 29, 2018 8:17 pm
I am going to suggest something that may be against bogleheads philosophy. For the first year, spend the $2,000 on something that you want but feel wasteful to spend it on. Life is short. You have a good pension and health care for the gap years. After the first year, invest the money in 457.
+1. I'm going to agree with this here, at age 36, with all the right things you have and continue to do, you should not feel compelled to shovel away every dime while your youth begins disappearing. Take that trip you wanted to go on, go out to dinner with someone special, do something to enjoy the moment, today. You need to stop and smell those roses from time to time, when you can.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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ram
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Re: Best use for a $2k raise for a middle-income teacher

Post by ram » Tue May 29, 2018 8:27 pm

Welcome to the forum.
If inflation is 3% per year for next 24 years then $5000 today will be equivalent to $10000 which is what you desire from your retirement savings for travel. For getting 10K/yr in 24 yrs you will need 250K in retirement accounts (4% withdrawal rate).

With an additional 100 K you will generate an additional 4K/yr which should be able to cover the difference between the non COLA pension and what it would have been if it were COLA ed. So your target retirement saving can be can be about 350K.

I would suggest adding 2K to your emergency fund this year and adding it to 457 from next year onward. Your targeted ratios seem reasonable at your age.

Thanks for teaching. My children have immensely benefited from their excellent school teachers. The linked story might be of interest to you. I attended the Harvard graduation last week where it was told.

https://www.cnn.com/2018/05/25/us/teach ... index.html
Ram

Spewin
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Joined: Thu Sep 12, 2013 6:52 am

Re: Best use for a $2k raise for a middle-income teacher

Post by Spewin » Tue May 29, 2018 8:47 pm

Operon wrote:
Tue May 29, 2018 2:03 pm
...I have difficulty gauging what the total size of my portfolio will need to be for that, online calculators generally don't appear to be built for this scenario. Consequently, I have difficulty gauging whether my portfolio is on-track or is over- or under-funded.
Try the Flexible Retirement Planner. (http://www.flexibleretirementplanner.com/wp/) I use it for similar calculations. The downloadable version is free for individual use.
student wrote:
Tue May 29, 2018 8:17 pm
I am going to suggest something that may be against bogleheads philosophy. For the first year, spend the $2,000 on something that you want but feel wasteful to spend it on. Life is short. You have a good pension and health care for the gap years. After the first year, invest the money in 457.
Just remember that after Federal and State taxes + Pension Contribution + Union Dues (?) will reduce that $2000 substantially.

Operon
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Joined: Mon May 28, 2018 4:33 pm

Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Tue May 29, 2018 8:51 pm

krow36 wrote:
Tue May 29, 2018 7:50 pm
Operon, welcome to the forum! I think you are doing a great job of saving for your retirement. The 5.5k Roth IRA and the 11% contributed to your pension must put you at a retirement savings rate of about 20%?

I agree that the MA state 457 plan is excellent, and that’s where I would put the 2k raise. You might also consider contributing to the 457 some part of the 4k you are budgeting for your taxable account. If you use the traditional 457 not the Roth 457, you’ll save on your income taxes and be able to add that savings into the contributions.
Thanks for the warm welcome and for your advice! Good point that going the 457 route would effectively increase that raise by a bit, I'll definitely keep that in mind.

Determined
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Re: Best use for a $2k raise for a middle-income teacher

Post by Determined » Tue May 29, 2018 8:56 pm

I would put at least some in the 457. I would not count on the pension benefits being what they are now. My mother was also a teacher so I have seen benefits slowly whittled away for a very long time. While I will still be grateful for what I will get (Ohio STRS, no SS) I expect more changes before I hit full retirement in 12 years. One of my colleagues who just retired said she wished she had tax deferred more earlier.

Good for you for saving early.

This is year 24 for me, and I don't regret it. I simply have become wiser about retirement.

Operon
Posts: 29
Joined: Mon May 28, 2018 4:33 pm

Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Tue May 29, 2018 8:57 pm

Grt2bOutdoors wrote:
Tue May 29, 2018 8:26 pm
student wrote:
Tue May 29, 2018 8:17 pm
I am going to suggest something that may be against bogleheads philosophy. For the first year, spend the $2,000 on something that you want but feel wasteful to spend it on. Life is short. You have a good pension and health care for the gap years. After the first year, invest the money in 457.
+1. I'm going to agree with this here, at age 36, with all the right things you have and continue to do, you should not feel compelled to shovel away every dime while your youth begins disappearing. Take that trip you wanted to go on, go out to dinner with someone special, do something to enjoy the moment, today. You need to stop and smell those roses from time to time, when you can.
Haha, apparently my post hinted more strongly at how long it's been since I took a vacation than was my intent! Thanks both for your advice, and it's a relief to hear that it looks to you like I'm on-track enough to afford some rose-smelling.

Operon
Posts: 29
Joined: Mon May 28, 2018 4:33 pm

Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Tue May 29, 2018 9:06 pm

ram wrote:
Tue May 29, 2018 8:27 pm
Welcome to the forum.
If inflation is 3% per year for next 24 years then $5000 today will be equivalent to $10000 which is what you desire from your retirement savings for travel. For getting 10K/yr in 24 yrs you will need 250K in retirement accounts (4% withdrawal rate).

With an additional 100 K you will generate an additional 4K/yr which should be able to cover the difference between the non COLA pension and what it would have been if it were COLA ed. So your target retirement saving can be can be about 350K.

I would suggest adding 2K to your emergency fund this year and adding it to 457 from next year onward. Your targeted ratios seem reasonable at your age.

Thanks for teaching. My children have immensely benefited from their excellent school teachers. The linked story might be of interest to you. I attended the Harvard graduation last week where it was told.

https://www.cnn.com/2018/05/25/us/teach ... index.html
Wow, $350K meeting my goals would be great, my (admittedly very wild) guesses have posited far scarier scenarios.

Thanks for your advice, and also for the acknowledgement and the link! I love my job, and though I believe wholeheartedly in its value regardless, it's still really nice to read examples of my colleagues making a difference in people's lives. I'm glad to hear we served your kids well!

Operon
Posts: 29
Joined: Mon May 28, 2018 4:33 pm

Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Tue May 29, 2018 9:09 pm

Spewin wrote:
Tue May 29, 2018 8:47 pm
Operon wrote:
Tue May 29, 2018 2:03 pm
...I have difficulty gauging what the total size of my portfolio will need to be for that, online calculators generally don't appear to be built for this scenario. Consequently, I have difficulty gauging whether my portfolio is on-track or is over- or under-funded.
Try the Flexible Retirement Planner. (http://www.flexibleretirementplanner.com/wp/) I use it for similar calculations. The downloadable version is free for individual use.
student wrote:
Tue May 29, 2018 8:17 pm
I am going to suggest something that may be against bogleheads philosophy. For the first year, spend the $2,000 on something that you want but feel wasteful to spend it on. Life is short. You have a good pension and health care for the gap years. After the first year, invest the money in 457.
Just remember that after Federal and State taxes + Pension Contribution + Union Dues (?) will reduce that $2000 substantially.
Thanks for the link, I'll be sure to give this calculator a shot! And that $2000 figure is actually post-tax and pension, I apologize for overlooking that and will edit my post.

inbox788
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Re: Best use for a $2k raise for a middle-income teacher

Post by inbox788 » Tue May 29, 2018 9:15 pm

Operon wrote:
Tue May 29, 2018 2:03 pm
Primary objective of retirement savings is therefore to be the COLA, and if investments perform well enough, secondary objective is to also have enough to spend about $5k/year (today’s dollars) on travel and personal enjoyment during those first 10-15 years when I’m hopefully still feeling up to it.

...I have difficulty gauging what the total size of my portfolio will need to be for that, online calculators generally don't appear to be built for this scenario. Consequently, I have difficulty gauging whether my portfolio is on-track or is over- or under-funded.
You seem to be doing fine.

I'm going to suggest an alternative for the $2k, which is don't rebalance (stay aggressive), and pay off your mortgage. You can pay off those last 2 payments right away and retire without a mortgage! But it gets even better, an additional mortgage payment today is probably equal to 3 payments 23 years from now or take off half a year.

Why are you not moving more funding into the 457? You have 5 months emergency fund AND $24k in Other taxable investments? More than enough from the look of things ($4k more next year and $2k raise - is that included in the recurring budget?)

Am I understand the pension correctly, at age 59, you will receive $76k equivalent (today value, no COLA) for life? That sounds like a very nice pension. You won't have 5-6 years gap to fill?

If you consider mortgage as a negative bond, your AA is very aggressive, and you might want to pour more free cash into paying it off sooner. I know that goes against the grain for some. If you consider your pension, and income needed in retirement, you really don't need bonds. You could be 100% invested in stocks if you can stand the volatility. Since you're not likely to do this, most likely your net situation is going to be quite conservative.

Simple math, but $5k * 10-20 year is $100k. Which bucket is that and how full is it? Remember, it doesn't have to be an actual account. If your 457 had an extra $100k when you're 60, the travel fund is taken care of. If you're going to spend it now, might as well be tax efficient about it. Don't forget, if you keep the funds invested, it will grow, so the sooner your reach the $100k milestone, the more you have to spend on travel! You don't need 350k if you spend down the $100k (plus some growth), though your travel expenses may go up if you go to more expensive destinations or longer vacations.

You may not need COLA. Think about this. If your savings rate is 20% and your mortgage is 20%, you're only spending 60% of your income, and your pension is replacing 80% (at least to start). Take and save the extra 20% in the early years and use that as the COLA.

Operon
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Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Tue May 29, 2018 9:29 pm

Determined wrote:
Tue May 29, 2018 8:56 pm
I would put at least some in the 457. I would not count on the pension benefits being what they are now. My mother was also a teacher so I have seen benefits slowly whittled away for a very long time. While I will still be grateful for what I will get (Ohio STRS, no SS) I expect more changes before I hit full retirement in 12 years. One of my colleagues who just retired said she wished she had tax deferred more earlier.

Good for you for saving early.

This is year 24 for me, and I don't regret it. I simply have become wiser about retirement.
Diminished pension benefits is the nightmare scenario, to be sure. They have scaled our pension back several times in the past couple decades, but always with grandfathering. So far, seems that in retirement, we get the deal we were offered when we first started. Meanwhile, the state only puts in 2% to our 11%, and we hope that the incredible bargain they're getting on us vs. if we were on Social Security will help insulate us from drastic cuts in the future. Still... you're right that 50+ years with no cuts is a long haul with a lot of hope.

Best wishes- I hope Ohio honors all your service and keeps their promises to you.

student
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Joined: Fri Apr 03, 2015 6:58 am

Re: Best use for a $2k raise for a middle-income teacher

Post by student » Tue May 29, 2018 9:40 pm

Operon wrote:
Tue May 29, 2018 9:29 pm
Determined wrote:
Tue May 29, 2018 8:56 pm
I would put at least some in the 457. I would not count on the pension benefits being what they are now. My mother was also a teacher so I have seen benefits slowly whittled away for a very long time. While I will still be grateful for what I will get (Ohio STRS, no SS) I expect more changes before I hit full retirement in 12 years. One of my colleagues who just retired said she wished she had tax deferred more earlier.

Good for you for saving early.

This is year 24 for me, and I don't regret it. I simply have become wiser about retirement.
Diminished pension benefits is the nightmare scenario, to be sure. They have scaled our pension back several times in the past couple decades, but always with grandfathering. So far, seems that in retirement, we get the deal we were offered when we first started. Meanwhile, the state only puts in 2% to our 11%, and we hope that the incredible bargain they're getting on us vs. if we were on Social Security will help insulate us from drastic cuts in the future. Still... you're right that 50+ years with no cuts is a long haul with a lot of hope.

Best wishes- I hope Ohio honors all your service and keeps their promises to you.
Although the funding ratio of your plan is not very good, it is at least trying to catch up.
http://publicplansdata.org/quick-facts/ ... /?state=MA

stm
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Re: Best use for a $2k raise for a middle-income teacher

Post by stm » Wed May 30, 2018 11:18 am

I'm leaving KY in a few days precisely over pension plan issues. Got to hope there will be one in the future no doubt!

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dratkinson
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Re: Best use for a $2k raise for a middle-income teacher

Post by dratkinson » Wed May 30, 2018 8:55 pm

BH Best use for a $2K raise for a middle-income teacher

The general advice for new money is:
--Maximize your annual tax-advantaged space. Your retired self will thank you.
--Pay down high-interest long-term debt so you are not still paying for a mortgage in retirement.
--Increase your taxable investing to do multiple duties: as a tier of your EFs, savings for ST goals, and as retirement savings.

After you max your annual tax-advantaged space, then can increase your EFs/saving for ST goals, or pay some toward your mortgage.



I've come around to thinking of my EF structure in this way.

Emergency fund structure.
--1st tier, liquid money (CC, checking, savings, mmkt, CDs, savings bonds, HELOC,....)
--2nd tier, multi-duty bond funds in taxable.
--3rd tier, equity funds in taxable.
--4th tier, tax-advantaged accounts used in doomsday scenario.

If you worry about paying for emergencies, then I'd opt to increase my EFs by contributing to VWITX. Why? (1) VWITX is a "daily accrual" fund so easy to sell during an emergency, as it is exempt from IRS 6mo holding period requirement to protect tax-exempt dividends. (2) It should return more after-tax than CDs in the 22% fed tax bracket. (3) When you have more than enough for any conceivable emergency, then it can be used for ST goals---new car, home projects, vacation. The tax-reporting required to sell is a built-in check, “…do I really want to do this?” (4) It serves are retirement bonds in taxable if not used for another purpose.

I'd fill all my EFs until I had 1yr of living expense saved. Total. Just to reduce my level of worry.

Then I'd continue filling my EFs by putting money into VWITX until I had an additional 2-3yrs of living expenses saved. Why? Some retirees report keeping 5yrs* in cash-equivalents and bond/stable-value funds. Why? So they don't need to worry about selling equities during a down market. Since you are employed, you don't need to sell to fund your lifestyle, but a larger EF will soothe your mind, and the money can sit there earning interest until you have a need for it. (* This assumes market crashes typically recover within 4yrs.)

When the day comes that you believe you have too much in VWITX, then you can start buying equities in taxable. Or pay some toward your mortgage to retire it before you do.



The yield on a EE savings bond drops after it hits the 20yr maturity point, so I'd plan to redeem them after maturity and add the proceeds to VWITX. Why? The yield on VWITX will be greater then the yield on a mature savings bond. The fed tax benefit on VWITX will be greater then the savings bond state tax benefit.



Bottom line. Decided whom to listen to---your retired self, your worried-about-paying-for-an-emergency self, your needing-a-vacation self---then go from there. Act to satisfy your greatest need(s) and (equally) spread the money as far as it will go.



Welcome.
Last edited by dratkinson on Thu May 31, 2018 6:27 pm, edited 1 time in total.
d.r.a, not dr.a. | I'm a novice investor, you are forewarned.

heyyou
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Re: Best use for a $2k raise for a middle-income teacher

Post by heyyou » Thu May 31, 2018 12:10 am

Since you are already doing so many of the right things--saving, living within your means, and living with a sense of gratitude for what you do have, the money will be there for you later. Saving for thirty years does build wealth relative to your current level of spending.

Yes, do spend the first payment of the new pay raise. Set up automatic payroll deductions to direct the new money so you do not see it in your take home pay amount.

Since any extra mortgage payment should go to paying down the principal (check to be sure about that), consider sending some of the extra to there. Your home equity can be tapped for some emergencies, but the out of state check may be held by your bank for a couple of weeks before it clears. If and when your mortgage is paid off, just keep making the same payment but into your taxable savings account. As mentioned by others, invest the rest of the pay raise in a broadly diversified stock index fund and do not watch the daily/monthly price gyrations, just let it ride.

Long ago, the highest performing allocation was 93/7 or 87/13 stocks to bonds, not 100% stocks, since some of the bonds could be sold to buy more stock shares during stock market crashes. Vanguard has mixed mutual funds at a fixed 80/20 Lifestrategy fund, and a Target Retirement fund for year 2065 that is at 90/10 stocks to bonds now. Send the rest of your pay raise to one of those.

Thank you for choosing what you do for a profession. You are improving the world some, for all of us, by helping your students.

Operon
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Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Fri Jun 01, 2018 5:14 am

Thanks for your very detailed response!
I'm going to suggest an alternative for the $2k, which is don't rebalance (stay aggressive), and pay off your mortgage. You can pay off those last 2 payments right away and retire without a mortgage! But it gets even better, an additional mortgage payment today is probably equal to 3 payments 23 years from now or take off half a year.
I've seen some suggestion that a pension should be considered part of the bond allocation, I take it that's the root of the suggestion to remain aggressively invested in stocks. As far as the mortgage payments, I actually already made a sizable prepayment in order to better align the end of my mortgage with my retirement date. The final payment is just part of a month, so I'm not too worried about that, and I actually kind of like that it doesn't perfectly match my retirement month. I figure that will be a pretty hectic time for me, activating my pension benefits, clearing out my room and saying goodbye to my students, final assessment of the state of my portfolio, etc., and I don't mind delaying closing out my mortgage by a month or two just for some sanity.
Am I understand the pension correctly, at age 59, you will receive $76k equivalent (today value, no COLA) for life? That sounds like a very nice pension. You won't have 5-6 years gap to fill?
It is, thankfully. State average is less than half that but I've made a lot of choices that have been beneficial on their own but have also had the effect of increasing it. I will not have gap years before it kicks in.
If you consider mortgage as a negative bond, your AA is very aggressive, and you might want to pour more free cash into paying it off sooner. I know that goes against the grain for some. If you consider your pension, and income needed in retirement, you really don't need bonds. You could be 100% invested in stocks if you can stand the volatility. Since you're not likely to do this, most likely your net situation is going to be quite conservative.
I'll read up more on negative bond and mortgage as; I've seen it mentioned here and there but admit I haven't self-educated on it much yet.
Simple math, but $5k * 10-20 year is $100k. Which bucket is that and how full is it? Remember, it doesn't have to be an actual account. If your 457 had an extra $100k when you're 60, the travel fund is taken care of. If you're going to spend it now, might as well be tax efficient about it. Don't forget, if you keep the funds invested, it will grow, so the sooner your reach the $100k milestone, the more you have to spend on travel! You don't need 350k if you spend down the $100k (plus some growth), though your travel expenses may go up if you go to more expensive destinations or longer vacations. You may not need COLA. Think about this. If your savings rate is 20% and your mortgage is 20%, you're only spending 60% of your income, and your pension is replacing 80% (at least to start). Take and save the extra 20% in the early years and use that as the COLA.
That would be nice! I do find it prudent to assume that I will need it, though. In order to save as I have, I'm already living very frugally. I honestly don't expect my lifestyle in retirement to involve much more cost-cutting than is already the case. Any costs that are cut will likely be off-set by starting to do things for enjoyment that I don't do now, between trying to maximize my savings and always being buried in work.

Operon
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Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Fri Jun 01, 2018 5:20 am

stm wrote:
Wed May 30, 2018 11:18 am
I'm leaving KY in a few days precisely over pension plan issues. Got to hope there will be one in the future no doubt!
Sadly for KY, that is indeed often the outcome of uncertainty around retirement benefits. A lot of smart public servants decide to go help the public in other states. Good luck to you wherever you land!

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munemaker
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Re: Best use for a $2k raise for a middle-income teacher

Post by munemaker » Fri Jun 01, 2018 7:25 am

Operon wrote:
Fri Jun 01, 2018 5:20 am
stm wrote:
Wed May 30, 2018 11:18 am
I'm leaving KY in a few days precisely over pension plan issues. Got to hope there will be one in the future no doubt!
Sadly for KY, that is indeed often the outcome of uncertainty around retirement benefits. A lot of smart public servants decide to go help the public in other states. Good luck to you wherever you land!
Is it true that state employees often relocate due to unfunded pension plans? I googled this and couldn't find anything.

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vineviz
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Re: Best use for a $2k raise for a middle-income teacher

Post by vineviz » Fri Jun 01, 2018 7:48 am

One of my business school professors, who specializes in behavioral economics, helped design an approach in which employees automatically save a portion of any raise they get. I think this kind of approach works very well, and has the benefit of being an easy commitment to understand and describe. Psychologically, this keeps you from having to make a new decision every year: your increase is on autopilot in theory if not in practice.

Say, for instance, you decide that you will save 20% of every raise you get into your 457 plan. Over the course of your career, your savings raise will eventually approach 20% (though obviously you can always dial it back it need be) and you never have to make the decision again.

Maybe the best rate for you is 15% or 25%, but by making the commitment to yourself now you save the hassle of figuring it out multiple times later on.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Operon
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Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Fri Jun 01, 2018 8:50 am

munemaker wrote:
Fri Jun 01, 2018 7:25 am
Operon wrote:
Fri Jun 01, 2018 5:20 am
stm wrote:
Wed May 30, 2018 11:18 am
I'm leaving KY in a few days precisely over pension plan issues. Got to hope there will be one in the future no doubt!
Sadly for KY, that is indeed often the outcome of uncertainty around retirement benefits. A lot of smart public servants decide to go help the public in other states. Good luck to you wherever you land!
Is it true that state employees often relocate due to unfunded pension plans? I googled this and couldn't find anything.
Speaking from my own experience, I know quite a few teachers who relocated because of poor benefits packages in their state, factoring in both salary and pension. And on the flipside, I know others who would like to leave their state for non-work reasons, but don't because they're vested in a good pension. Golden handcuffs effect. And amongst my cohort that graduated from our teacher training program together, a lot were picking which states to consider seeking licensure and settling in based upon salaries and pensions available.

It's not really much different from the private sector, as far as I can see. Especially in fields with shortages, attractive compensation packages, well, attract! Whereas stuff like low salaries and a history of cutting benefits doesn't.

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munemaker
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Re: Best use for a $2k raise for a middle-income teacher

Post by munemaker » Fri Jun 01, 2018 8:54 am

Operon wrote:
Fri Jun 01, 2018 8:50 am
munemaker wrote:
Fri Jun 01, 2018 7:25 am
Operon wrote:
Fri Jun 01, 2018 5:20 am
stm wrote:
Wed May 30, 2018 11:18 am
I'm leaving KY in a few days precisely over pension plan issues. Got to hope there will be one in the future no doubt!
Sadly for KY, that is indeed often the outcome of uncertainty around retirement benefits. A lot of smart public servants decide to go help the public in other states. Good luck to you wherever you land!
Is it true that state employees often relocate due to unfunded pension plans? I googled this and couldn't find anything.
Speaking from my own experience, I know quite a few teachers who relocated because of poor benefits packages in their state, factoring in both salary and pension. And on the flipside, I know others who would like to leave their state for non-work reasons, but don't because they're vested in a good pension. Golden handcuffs effect. And amongst my cohort that graduated from our teacher training program together, a lot were picking which states to consider seeking licensure and settling in based upon salaries and pensions available.

It's not really much different from the private sector, as far as I can see. Especially in fields with shortages, attractive compensation packages, well, attract! Whereas stuff like low salaries and a history of cutting benefits doesn't.
It is different in one respect. State and local government employees get vested in defined benefit pension plans. As you say, these tend to handcuff you into staying where you are. So I was thinking employees would not walk away from these vested pensions, and even take a chance on them if they are underfunded. In the private sector, defined benefit pension plans are becoming scarcer and scarcer, and 401k plans are more portable.

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CyclingDuo
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Re: Best use for a $2k raise for a middle-income teacher

Post by CyclingDuo » Fri Jun 01, 2018 9:25 am

Operon wrote:
Tue May 29, 2018 2:03 pm
Hey Bogleheads. Firstly, thanks for existing. I devoured the contents of bogleheads.org the minute I graduated from college, and I give the BH community a lot of credit for many of my decisions that have worked out well for me. Despite my income a few standard deviations lower than the discussion board average (started out earning $31k/year, have managed to double that over 10 years of work) I’ve been able to sleep well at night, feeling confident that I was making frugal, practical decisions that would help me to weather future hardships. I’m never going to be making the bank that a lot of people here do, but I’m very content with what I’ve got, and recognize how fortunate I am compared to most Americans. You can’t put a price on not having to worry that you’re one bad catalytic converter away from ruin.

That being said, my question: Am I sufficiently on-track for retirement that I’d be better off putting a $2000 raise towards intermediate or emergency fund savings than into a 457?

Current Profile:

Emergency fund: 5 months funded. Bucket 1 is $2k in low-interest highly-accessible savings account, Bucket 2 is $8.5k in .1% fixed rate I bonds and $5600 in 4% EE bonds. The EEs start maturing next year, considering converting to more I bonds as they do - open to suggestions but that's not my main purpose here today.
Debt: Mortgage 30-year fixed at 4.25%, PITI ~$980/month, $108k principal and 23 years left, final mortgage payment will be 2 months after retirement and final paycheck. Car 5-year fixed at 1.74%, 4 years left, $288/month. Home improvement loan at 0%, 3 years left, $195/month.
Tax filing status: Single
Tax rate: 22% federal, 5.1% state
State of residence: MA
Age: 36

Desired retirement asset allocation: 80-85% stocks, 15-20% bonds
Desired international allocation: 30-35% of stocks

Current retirement assets: $93k
Vanguard Roth IRA, $64400:
  • 60% in Total Stock Index (VTSAX, ER .04%)
    22.7% in Total International Stock index (VTIAX, ER .11%)
    17.5% in Total Bond Index (VBTLX, ER .05%)
Fidelity Roth IRA, $28600:
  • 58% in Total Stock Market Index (FSTVX, ER .03%)
    42% in Global ex-US Stock Index (FSGDX, ER .06%)
Total current AA in all retirement accounts is 87.1% stocks, 12.9% bonds (yep, I’m off my desired AA, I’m waiting to rebalance until I’ve decided on the answer to my question here). Stock allocation 66.8% domestic, 33.2% international; 79.8% large-cap, 14.6% mid-cap, 5.6% small-cap. Among international, 51.3% Europe, 32.6% Pacific, 3.9% Canada, 11.9% Emerging, .3% uncategorized. Bonds 100% high-quality and taxable.

Retirement contributions: $5500/year post-tax into Roth IRA, and 11% of salary into state teacher pension system.

Retirement: No Social Security. Medicare eligible. Current contract allows retirees to remain on their health & dental insurance at same rates as current employees but who knows if that will change.
Retirement at age 59 in 23 years nets lifetime defined benefit pension of 80% of (basically the) second-to-last year’s salary. I project the pension to pay out $76480 annually in today’s dollars. Pension benefit will be federally taxable but not state, so between no more 11% pension contributions, 5.1% state income tax, or mortgage payments, I figure that would fully cover me at my current lifestyle. Negligible COLA though, only about $300/year in today’s dollars.

Primary objective of retirement savings is therefore to be the COLA, and if investments perform well enough, secondary objective is to also have enough to spend about $5k/year (today’s dollars) on travel and personal enjoyment during those first 10-15 years when I’m hopefully still feeling up to it.

...I have difficulty gauging what the total size of my portfolio will need to be for that, online calculators generally don't appear to be built for this scenario. Consequently, I have difficulty gauging whether my portfolio is on-track or is over- or under-funded.

Other savings: ~$24k. $10k in 1.6% online savings account; $800 in CDs and $1000 in treasury bills that will mature within the next year and will be rolled into online savings and MM instead; and $12k in taxable brokerage at Vanguard: $6k in Prime MM, $3k in tax-exempt intermediate term bonds (VWITX, ER .19%), $3k in total stock index (VTSMX, ER .14% . It served the role of long-term savings, but as I had some big spends last year, I’m exchanging it for VWITX. With less conservative savings sitting around, I think I’ll have less stomach now for its volatility.)
My budget for next year includes $4000 in savings added to the online savings account and prime MM, which is typical for me. I am not eligible for an HSA.


The question: My happy dilemma is that in addition to my above-budgeted savings next year, I’m getting a raise of about $2000 (post-tax and pension contribution) that I need to put somewhere. I’d love your help in deciding where.

Now up until recently, I would’ve just put it into intermediate-term savings by default because my 403b tax-deferred retirement account options through work have been steamy garbage. No match, 500-page-prospectus annuities through the likes of AXA, and even the few index funds have fees no lower than 1% not including surrender fee. Typical for those of us teaching in public schools, sadly. But I’ve now got access to a tax-deferred 457 that looks really good. Still no employer match but a mere .0775% annual fee, and the best investment options are:
  • State Street Global All-Cap Equity Ex-US Index, ER.09%
    State Street Russell Small Cap Index Securities Lending Series I, ER .03%
    State Street S&P 500 Large Cap Index Securities Lending Series I, ER .01%
    State Street US Bond Index Securities Lending Series I, ER .04%
Nice, right? So my raise could go there. However, after a couple of recent big spends, I’m worried I might be thin on more liquid, intermediate-term savings. I don’t have any major planned expenditures coming due in the next couple years, just the omnipresent possibility of unexpected repairs, but in maybe 5-8 years I’ve got a room or two I’d like to renovate, things will start to go wrong in the car right around then, my dog’s going to be old and higher vet bills are likely, etc.

So I’m torn on what the best use of that $2000 would be, and am seeking Boglehead wisdom to honestly assess the current state of my savings, and on that basis, suggest where to put the extra money. Open a 457? (Maybe plow it into the bond fund, and exchanging some VBTLX for VTSAX in my Roth to achieve my AA?) Or am I pretty on-track for retirement and would be better off putting that $2000 into bulking up my non-retirement savings? Split it and do both? Something else I haven't thought of?

Many thanks in advance for your analysis and advice!
Operon - just wanted to throw in our congratulations to you on doing so well with your savings and planning at your age!
:sharebeer

Maxing out your Roth IRA each year, saving $4K in taxable, your DB contribution, and your consideration of utilizing the 457b plan (well worth it!!!) - it's all good.

With the new raise, which is around $166 per month, you might consider doing something like placing $100 of that in the 457b every month to slowly get it going ($1200 a year), and the other $66 could be used to treat yourself now or placed in your checking account ($792 a year) for your Summer vacation fund, or three day weekend ski trip, etc... . Those may seem like small beginnings for that money, but it would give you time to see how that impacts your cash flow and life before making tweaks and committing to the full $2K going into the 457b right off the bat.

That's the easy part. It's the following part that appears to us needs attention.

The $24K you have sitting not keeping pace with inflation is what jumps out as something that needs attending to at your age.
Operon wrote:
Tue May 29, 2018 2:03 pm
Other savings: ~$24k. $10k in 1.6% online savings account; $800 in CDs and $1000 in treasury bills that will mature within the next year and will be rolled into online savings and MM instead; and $12k in taxable brokerage at Vanguard: $6k in Prime MM, $3k in tax-exempt intermediate term bonds (VWITX, ER .19%), $3k in total stock index (VTSMX, ER .14% . It served the role of long-term savings, but as I had some big spends last year, I’m exchanging it for VWITX. With less conservative savings sitting around, I think I’ll have less stomach now for its volatility.)
My budget for next year includes $4000 in savings added to the online savings account and prime MM, which is typical for me.
Total Stock Market and Total International are very tax efficient in a taxable brokerage account (heck - go for the ETF's of VTI and VXUS as they get you admiral pricing right off the bat and no commission). It just looks like this $24K is not even marking time with inflation with the portion sitting in money market, CD's, and T-bills. If you budget $4k year to go into these funds, what are your goals with this $24K? Are they short term? Is that why you are being so conservative in this taxable account? The balance will grow by $4k per year with your savings contributions if you stick to your budget. How many years of doing this before you start to consider the lost opportunity with this amount of money sitting in your taxable?

Maybe you should have some of that $4K go into your 457b instead with a pre-tax deduction from your paycheck, and some of it into something that will grow in your taxable account (VTI). Using the tax-exempt bond fund, and keeping some in both total US stock market and total international market - you could at least have the three fund portfolio working for you in taxable as well to provide some investment growth.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

Operon
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Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Fri Jun 01, 2018 4:00 pm

munemaker wrote:
Fri Jun 01, 2018 8:54 am
Operon wrote:
Fri Jun 01, 2018 8:50 am
munemaker wrote:
Fri Jun 01, 2018 7:25 am
Operon wrote:
Fri Jun 01, 2018 5:20 am
stm wrote:
Wed May 30, 2018 11:18 am
I'm leaving KY in a few days precisely over pension plan issues. Got to hope there will be one in the future no doubt!
Sadly for KY, that is indeed often the outcome of uncertainty around retirement benefits. A lot of smart public servants decide to go help the public in other states. Good luck to you wherever you land!
Is it true that state employees often relocate due to unfunded pension plans? I googled this and couldn't find anything.
Speaking from my own experience, I know quite a few teachers who relocated because of poor benefits packages in their state, factoring in both salary and pension. And on the flipside, I know others who would like to leave their state for non-work reasons, but don't because they're vested in a good pension. Golden handcuffs effect. And amongst my cohort that graduated from our teacher training program together, a lot were picking which states to consider seeking licensure and settling in based upon salaries and pensions available.

It's not really much different from the private sector, as far as I can see. Especially in fields with shortages, attractive compensation packages, well, attract! Whereas stuff like low salaries and a history of cutting benefits doesn't.
It is different in one respect. State and local government employees get vested in defined benefit pension plans. As you say, these tend to handcuff you into staying where you are. So I was thinking employees would not walk away from these vested pensions, and even take a chance on them if they are underfunded. In the private sector, defined benefit pension plans are becoming scarcer and scarcer, and 401k plans are more portable.
They tend to handcuff you if they look any good. But if the typical pension in your state for new retirees is some $19k and looking shakier every day, giving up even 10 or 15 years of service credits to move elsewhere can be a wash or a straight out net win.

megabad
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Re: Best use for a $2k raise for a middle-income teacher

Post by megabad » Fri Jun 01, 2018 4:53 pm

OP, I am a fan of diversification and you seem to be very reliant on a single state's employee pension plan (23 years into the future) which would be a little worrisome for me personally, but that pension/annuity as is seems great! Since you are contributing to a Roth IRA, this would help alleviate some of my desire for diversity. Calculators exist for your situation, but with so many years until retirement, I think there too many unknowns to make worthwhile.

I think you are doing ok in general with retirement so I would just think about all aspects of future spending at this point. If you find that you can fund your intermediate needs, then your 457 appears to be an excellent opportunity to save for retirement in addition to the Roth IRA and it can be tapped early (after service separation). I generally recommend younger people (ie. 20s and 30s) save more for retirement earlier if you can foresee a "major life change" in the future (ie. marriage, kids, etc) as your finances may need to be redirected to other pots at that point. But everyone's situation is different.

Operon
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Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Fri Jun 01, 2018 7:03 pm

Operon wrote:
Tue May 29, 2018 2:03 pm
Other savings: ~$24k. $10k in 1.6% online savings account; $800 in CDs and $1000 in treasury bills that will mature within the next year and will be rolled into online savings and MM instead; and $12k in taxable brokerage at Vanguard: $6k in Prime MM, $3k in tax-exempt intermediate term bonds (VWITX, ER .19%), $3k in total stock index (VTSMX, ER .14% . It served the role of long-term savings, but as I had some big spends last year, I’m exchanging it for VWITX. With less conservative savings sitting around, I think I’ll have less stomach now for its volatility.)
My budget for next year includes $4000 in savings added to the online savings account and prime MM, which is typical for me.
Total Stock Market and Total International are very tax efficient in a taxable brokerage account (heck - go for the ETF's of VTI and VXUS as they get you admiral pricing right off the bat and no commission). It just looks like this $24K is not even marking time with inflation with the portion sitting in money market, CD's, and T-bills. If you budget $4k year to go into these funds, what are your goals with this $24K? Are they short term? Is that why you are being so conservative in this taxable account? The balance will grow by $4k per year with your savings contributions if you stick to your budget. How many years of doing this before you start to consider the lost opportunity with this amount of money sitting in your taxable?

Maybe you should have some of that $4K go into your 457b instead with a pre-tax deduction from your paycheck, and some of it into something that will grow in your taxable account (VTI). Using the tax-exempt bond fund, and keeping some in both total US stock market and total international market - you could at least have the three fund portfolio working for you in taxable as well to provide some investment growth.
Thanks very much! I admit I've avoided ETFs so far because I don't feel like I have a good handle on the likes of bid/ask spread and various order options. I've usually tried to go the Bogle route of simplicity, and the maxim of 'if you don't understand it, perhaps you shouldn't invest in it.' But that's a good point about the lower fees so perhaps the time has come to do some more reading on them.

As far as goals, that money is more a combination of short and intermediate term goals. Short-term stuff like minor travel expenses, non-serious emergencies of the flat tire or big branch downed in a storm nature, all the normal things that come up but aren't part of the regular monthly budget; and intermediate-term like saving up for home repairs and renovations, future vet expenses in lieu of pet insurance, and more significant travel. I bought some total stock back in the day before I had a house and have been increasingly antsy about it, now that the house - and the repairs - are realities. So it's money that I'd like to treat conservatively, but you're right that I don't want inflation eroding it either. That's why I'm feeling like moving more of it into VWITX - take a little more risk in order to try to match inflation, but not the level of risk needed to really outpace it. Do you think I'm being too conservative?

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CyclingDuo
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Re: Best use for a $2k raise for a middle-income teacher

Post by CyclingDuo » Fri Jun 01, 2018 7:52 pm

Operon wrote:
Fri Jun 01, 2018 7:03 pm
Thanks very much! I admit I've avoided ETFs so far because I don't feel like I have a good handle on the likes of bid/ask spread and various order options. I've usually tried to go the Bogle route of simplicity, and the maxim of 'if you don't understand it, perhaps you shouldn't invest in it.' But that's a good point about the lower fees so perhaps the time has come to do some more reading on them.
The ETF (exchange traded fund) of Total Stock Market is the same as the mutual fund version, but the purchase and sale per share is immediate (no waiting for closing prices to get the NAV of a mutual fund at the end of the trading day to determine price of your purchase or sale). And you must purchase whole shares (unless you use something like Acorns, M1 Finance or a broker that allows fractional shares), so rather than say "I would like $5K of VTSMX", it would be "I would like to buy 35 shares of VTI". I wouldn't even worry about bid/ask spread for the order as for 35 shares you would be dickering over the price of a cup of coffee which doesn't matter for the longer term. Anyway, I mention it because even if you only buy one share - you get the Admiral pricing in terms of ER fees.
Operon wrote:
Fri Jun 01, 2018 7:03 pm
As far as goals, that money is more a combination of short and intermediate term goals. Short-term stuff like minor travel expenses, non-serious emergencies of the flat tire or big branch downed in a storm nature, all the normal things that come up but aren't part of the regular monthly budget; and intermediate-term like saving up for home repairs and renovations, future vet expenses in lieu of pet insurance, and more significant travel. I bought some total stock back in the day before I had a house and have been increasingly antsy about it, now that the house - and the repairs - are realities. So it's money that I'd like to treat conservatively, but you're right that I don't want inflation eroding it either. That's why I'm feeling like moving more of it into VWITX - take a little more risk in order to try to match inflation, but not the level of risk needed to really outpace it. Do you think I'm being too conservative?
Figure out how much of the $24K you need in the 4-7 year or less time frame and keep it conservative enough to at least match inflation. Anything else that might be beyond that time frame should be in more moderate or aggressive investments for growth based on the goal for that particular amount of money. Study the peak to trough and recovery periods of bull and bear markets since 1929 to get an idea of why the shorter time frame money needed for upcoming items or "events" should be kept more conservative. Perhaps a portion of that $24K is ear marked for beyond the 4-7 year time frame, I don't know. But reading your post, it jumped out as a possibility.

https://www.yardeni.com/pub/sp500corrbear.pdf
"Everywhere is within walking distance if you have the time." ~ Steven Wright

texasdiver
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Re: Best use for a $2k raise for a middle-income teacher

Post by texasdiver » Sat Jun 02, 2018 11:39 am

munemaker wrote:
Fri Jun 01, 2018 7:25 am
Operon wrote:
Fri Jun 01, 2018 5:20 am
stm wrote:
Wed May 30, 2018 11:18 am
I'm leaving KY in a few days precisely over pension plan issues. Got to hope there will be one in the future no doubt!
Sadly for KY, that is indeed often the outcome of uncertainty around retirement benefits. A lot of smart public servants decide to go help the public in other states. Good luck to you wherever you land!
Is it true that state employees often relocate due to unfunded pension plans? I googled this and couldn't find anything.
When I taught in Texas I knew a number of teachers who relocated from Oklahoma due to salary issues. Basically at that time a teacher could move from OK to a similar cost of living town in TX and experience a $20k bump in salary with at least comparable benefits. TX teacher retirement benefits are fairly meager (non-COLA pension with no social security) but at least not in danger. So I don't think anyone is moving to TX for the pension benefits. It was more the case of salary and the fact that TX cities are generally nicer than OK cities, especially for younger single types.

dharrythomas
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Re: Best use for a $2k raise for a middle-income teacher

Post by dharrythomas » Sat Jun 02, 2018 6:33 pm

You are doing great. To exceed the $350K goal, you don't need to save additional money. I'd recommend you maintain your current investing rate, put 1/2 of the raise into additional principal payments on you mortgage, and spend the other half. Between income tax and savings, you are already spending less than 80% of salary. Then when you've paid off the house, take 1/2 of the mortgage payment and spend it and one half and increase savings. Don't blow everything now, but don't squeeze unreasonably now for future you. Balance in all things!

Good luck!

Harry

Operon
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Re: Best use for a $2k raise for a middle-income teacher

Post by Operon » Fri Jun 08, 2018 10:28 am

CyclingDuo wrote:
Fri Jun 01, 2018 7:52 pm
The ETF (exchange traded fund) of Total Stock Market is the same as the mutual fund version, but the purchase and sale per share is immediate (no waiting for closing prices to get the NAV of a mutual fund at the end of the trading day to determine price of your purchase or sale). And you must purchase whole shares (unless you use something like Acorns, M1 Finance or a broker that allows fractional shares), so rather than say "I would like $5K of VTSMX", it would be "I would like to buy 35 shares of VTI". I wouldn't even worry about bid/ask spread for the order as for 35 shares you would be dickering over the price of a cup of coffee which doesn't matter for the longer term. Anyway, I mention it because even if you only buy one share - you get the Admiral pricing in terms of ER fees.

Figure out how much of the $24K you need in the 4-7 year or less time frame and keep it conservative enough to at least match inflation. Anything else that might be beyond that time frame should be in more moderate or aggressive investments for growth based on the goal for that particular amount of money. Study the peak to trough and recovery periods of bull and bear markets since 1929 to get an idea of why the shorter time frame money needed for upcoming items or "events" should be kept more conservative. Perhaps a portion of that $24K is ear marked for beyond the 4-7 year time frame, I don't know. But reading your post, it jumped out as a possibility.

https://www.yardeni.com/pub/sp500corrbear.pdf
Got it. Based on your feedback and others, I'm definitely reconsidering moving all out of total stock, might well leave at least some in there. Thanks!

stevekozak2
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Re: Best use for a $2k raise for a middle-income teacher

Post by stevekozak2 » Sat Jun 09, 2018 10:09 am

My suggestion is that you use the money to pay off your car, and then start saving for your bpnext car, so that you can buy with cash. Buying depreciating assets on credit is asinine to me. If you get to a point you have extra, throw it at your mortgage. Being debt free is a wonderful thing!!

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Earl Lemongrab
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Re: Best use for a $2k raise for a middle-income teacher

Post by Earl Lemongrab » Sat Jun 09, 2018 12:29 pm

stevekozak2 wrote:
Sat Jun 09, 2018 10:09 am
My suggestion is that you use the money to pay off your car, and then start saving for your bpnext car, so that you can buy with cash. Buying depreciating assets on credit is asinine to me. If you get to a point you have extra, throw it at your mortgage. Being debt free is a wonderful thing!!
I don't see the point at all. That's a nice interest rate on the loan.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

stevekozak2
Posts: 40
Joined: Sun Dec 25, 2016 12:38 pm

Re: Best use for a $2k raise for a middle-income teacher

Post by stevekozak2 » Wed Jun 13, 2018 6:19 am

Earl Lemongrab wrote:
Sat Jun 09, 2018 12:29 pm
stevekozak2 wrote:
Sat Jun 09, 2018 10:09 am
My suggestion is that you use the money to pay off your car, and then start saving for your bpnext car, so that you can buy with cash. Buying depreciating assets on credit is asinine to me. If you get to a point you have extra, throw it at your mortgage. Being debt free is a wonderful thing!!
I don't see the point at all. That's a nice interest rate on the loan.
The grooviest interest rate is no interest rate at all! :wink:

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Earl Lemongrab
Posts: 5403
Joined: Tue Jun 10, 2014 1:14 am

Re: Best use for a $2k raise for a middle-income teacher

Post by Earl Lemongrab » Wed Jun 13, 2018 10:39 am

stevekozak2 wrote:
Wed Jun 13, 2018 6:19 am
Earl Lemongrab wrote:
Sat Jun 09, 2018 12:29 pm
stevekozak2 wrote:
Sat Jun 09, 2018 10:09 am
My suggestion is that you use the money to pay off your car, and then start saving for your bpnext car, so that you can buy with cash. Buying depreciating assets on credit is asinine to me. If you get to a point you have extra, throw it at your mortgage. Being debt free is a wonderful thing!!
I don't see the point at all. That's a nice interest rate on the loan.
The grooviest interest rate is no interest rate at all! :wink:
Not to me. I like low-cost debt.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

momopi
Posts: 31
Joined: Wed Dec 12, 2007 5:59 pm

Re: Best use for a $2k raise for a middle-income teacher

Post by momopi » Wed Jun 13, 2018 12:40 pm

Operon wrote:
Tue May 29, 2018 2:03 pm
<snip>
That being said, my question: Am I sufficiently on-track for retirement that I’d be better off putting a $2000 raise towards intermediate or emergency fund savings than into a 457?
I assume the $2,000 is a surplus from your annual budget and not a monthly raise?

My suggestions will be a bit different from others:

1. You indicated that you're single. Do you have a SO or plan to find one? At 36, if you plan to find a SO and have a family, don't wait too long. I'm going through IVF with my SO now and it's costly with low chance of success due to our age. If you don't want to have a family then disregard. If you want a family but don't have a SO then consider using the funds toward that goal.

2. What do you have for emergency funds/prep at home? I don't live in MA so I cannot speak for your region. Here in CA we are under constant threat of earthquakes that may knock out utilities and transportation. There are over 18 million people in the Greater LA region and it's impossible for FEMA to deliver sufficient supplies after a major disaster. Supermarket shelves will be empty on day one, and by day 3 people will be fighting over canned cat food. I'd suggest having $500 cash in small bills, and spend another $500 on emergency supply stockpile including long shelf life food, water, and other necessities stored around the house, garage, and backyard shed. Check with FEMA and Red Cross web sites for prep items.

3. For the unlikely (but remotely possible) scenario of hyper inflation, consider buying small quantity of gold and silver Eagles or Maple Leaf coins every year. Buy a sturdy safe and have it bolted down (or to wall studs) in your home. Since precious metals don't earn interest or dividends, don't buy too much.

4. Is there something that you'd like to learn? Consider investing the money in yourself. Take classes, learn a new skill. Tired of getting charged $600 to replace a $70 garbage disposal unit? Take classes in home improvement. Auto shop classes at local community college is also good. For computers/IT, data security is a hot field right now. One of the data security analysts at our company just left for another job that pays over $200K/year.

5. Take a vacation! It's summer, go on a singles cruise. ;) Might meet that special someone.

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