Portfolio analysis and savings strategy - 33 year old couple with 2 kids

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sjt
Posts: 82
Joined: Fri May 26, 2017 3:03 pm

Portfolio analysis and savings strategy - 33 year old couple with 2 kids

Post by sjt » Wed Jul 11, 2018 9:51 am

First off, a huge thanks to the BH community. I’m an active lurker here and have learned so much. I’m also a big fan of Mr Money Mustache for helping so many become more frugal and increase savings rate. We have recently been able to start contributing the maximum toward tax advantaged accounts.

Emergency funds: $25k
Debt: Mortgage $175k at 3.25% fixed (15 year loan, 14.5 years remaining)
Home estimated value: $350k
Tax Filing Status: Married Filing Jointly
Tax Rate: 22% Federal (Maybe 12% - see questions below), 5.75% State
State of Residence: North Carolina
Age: 33, DW 33
Children: 4 year old twins
His Occupation: Engineer at large megacorp
His Salary: $93k (potential for ~10k bonus if personal and company goals are met)
Her Occupation: Public High School Teacher
Her Salary: $49k

New Annual Contributions: (Recently paid off all debt besides mortgage and began maxing 401ks in January 2018)
$5500 His Roth IRA
$5500 Her Roth IRA
$26870 His 401k (including company match and contribution)
$18500 Her 401k
$4800 His HSA
$3000 Her Teacher Pension
Total: $61170

Goals:
-FIRE at age 55 (Year 2040), earlier if markets and saving rates are friendly. Possibly do something part time / flexible / low pay but fulfilling – (bicycle mechanic, county park ranger, volunteering, etc).
-Retire young enough to thru hike the AT. Or sail up and down the east coast or to the Caribbean. Or travel the country in an RV. Or something else I feel like doing. Retire early enough to do some living before I’m too old.
-Maybe get into real estate investing later in life, do maintenance / upkeep / repairs myself when kids leave the house / no longer want to hang out with dad.
-See kids through college (4 year old twins), not planning to pay full college costs but rather ensure they are not burdened by overwhelming debt. What college costs will be in 15 years is an unknown.
-Pay off mortgage by age 40 while maxing tax advantaged accounts. (May not be a good goal – see questions below)
-Pay for international / study abroad programs for kids if opportunity / interest arises.
-Sleep well at night.
-Do my own taxes.



Annual Expenses

$20k Mortgage
$30k Credit card spend (groceries, clothes, fuel, utilities etc)
$3k insurance (health, auto)
(not included - $20k preschool expense for next school year which cash is already set aside to fund)

Desired Asset allocation: 90% stocks / 10% bonds
Desired International allocation: 30% of stocks

Current portfolio size: $370k tax advantaged, $25k taxable


Current retirement assets

Taxable - $24k (plan to use this to pay off mortgage – not necessarily retirement)
0% cash (for investing – do not include emergency funds)
2.5% Schwab Intl Index Fund SWISX (0.06% ER)
3.3% Schwab S&P 500 Index Fund SWPPX (0.03% ER)

His 401k (Managed by company – no ticker symbols) - $188k
9% Bond Fund (0.15%)
9% US Large Cap Index (0.01%)
9% US Small / Mid Cap Index (0.06%)
18% International Index (0.05%)

Company match: 100% match to 6%, additional 3% annual company contribution.

His Roth IRA at Schwab – $128k
4.6% Schwab International Small Cap Equity ETF SCHC (0.12% ER)
4.6% Schwab Emerging Markets ETF SCHE (0.13%)
4.6% Schwab International Large Cap SWISX (0.06%)
6.1% Schwab US Small Cap SWSSX (0.05%)
10.7% Schwab Total Market SWTSX (0.03%)

Her Roth IRA at Vanguard - $67k
4.8% Vanguard 500 Index Fund Admiral (VFIAX) (0.04%)
5% Vanguard FTSE All World Ex US (VFWAX) (0.11%)
6.5% Vanguard Total Market (VTSAX) (0.04%)

Her 401k at Prudential - $2k
0.5% NC Large Cap Index (N/A) (0.04%)

His HSA - $7k
0.6% Vanguard Institutional Index (VIIIX) (0.02%)
0.3% Vanguard Small Cap Index (VSIAX) (0.07%)
0.3% Vanguard Total International (VTPSX) (0.07%)
0.3% Vanguard Value Index (VVIAX) (0.05%)


Total of All Accounts Together (not each account individually) should equal 100%.





Contributions

New annual Contributions
$5500 His Roth IRA
$5500 Her Roth IRA
$26870 His 401k (including company match and contribution)
$18500 Her 401k
$4800 His HSA
$3000 Her Pension Fund
Total: $61170



Questions:
1. I have a tax preparer do my taxes, so I can’t put in the additional dollar and see how much additional tax I pay on it. What is my marginal tax rate? Total household income is about $142k, but we have many deductions / deferrals to lower taxable income to $71k – am I understanding this correctly – see deductions below. Does this put us into the 12% marginal tax bracket?
$24k MFJ Standard Deduction
$18.5k his 401k
$18.5k her 401k
$4800 HSA
$5000 Flexible Spending – Childcare account
Total deductions: $70.8k

2. Would we benefit from Roth 401k?
3. DW and I are both only children, and will likely see significant ($1-3M total estimated) inheritance eventually (parents and most grandparents are still alive). Should this change my investing strategy Traditional vs Roth?
4. I want to pay the mortgage off. Should I simply pay extra principal payments, or rather stash the money in a taxable investment account in the event I need it for something else? Or half and half?
4b. After putting this post together, it seems we are saving a decent amount of money compared to earnings. At what point does savings become too obsessive? I’ve seen Savings vs. spending discussions on here and I’m feeling like I need to loosen the purse strings a bit, but wanted to get a bit more comfortable financially. I feel it’s better to save heavy now and gradually let a little lifestyle creep in than save too little, but having trouble finding that equilibrium. We only really have 10-15 years with our kids before they will be on their own, and I don’t want to miss out on things with my family because I was aggressively paying off the mortgage and building up retirement accounts. How do you find a good balance?
5. Any recommendations for the retirement accounts – reorganizing etc?


Thanks in advance!
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

niceguy7376
Posts: 2103
Joined: Wed Jul 10, 2013 2:59 pm
Location: Metro ATL

Re: Portfolio analysis and savings strategy - 33 year old couple with 2 kids

Post by niceguy7376 » Wed Jul 11, 2018 10:25 am

Just some random thoughts.
You are putting aside a significant amount compared to salary. Your spouse can contribute to a 401k and pension? Does she contribute to SS as well?

As for relaxing a bit on saving, I assume that the 20K preschool expense is on its last year. If so, one year from now, you have 20k money available for spending on other activities without changing any of your savings.

I wont count on inheritance till .....

ExitStageLeft
Posts: 809
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio analysis and savings strategy - 33 year old couple with 2 kids

Post by ExitStageLeft » Wed Jul 11, 2018 8:20 pm

Wowsers, wish I could have drafted off you when I was 33. It took me a much longer time to find my financial footing.

One thing that comes to mind is that the above-mentioned $20k per year will get eaten up by increased expenses as the kids grow. Music lessons, organized sports, braces, etc, will add to the gradual expense creep that in part is unavoidable. It's also a great time for both parents to engage with the kids in some of these activities. My daughter got into Taekwando, and for several years the whole family was training together. My daughter and I have some wonderful memories of our trips to the national championships.

You've got a pretty long horizon, but it would be worth running your assumptions through some of the online retirement planners. I just input your current and future savings into http://www.cfiresim.com/ and if you continue saving $52k per year your should be able to spend about $135k per year in retirement. Add in any social security, pension, or inheritance and you'll be doing even better.

EDIT: Whoops, I used your contribution and neglected employer match. At $61k per year it looks like $150,000 per year in retirement.

sjt
Posts: 82
Joined: Fri May 26, 2017 3:03 pm

Re: Portfolio analysis and savings strategy - 33 year old couple with 2 kids

Post by sjt » Thu Jul 12, 2018 8:30 am

niceguy7376 wrote:
Wed Jul 11, 2018 10:25 am
Just some random thoughts.
You are putting aside a significant amount compared to salary. Your spouse can contribute to a 401k and pension? Does she contribute to SS as well?
Spouse contributes to pension and SS, can put $18.5k in either 401k/403b, and can put $18.5k in a 457 (may use this if we indeed pursue early retirement)
niceguy7376 wrote:
Wed Jul 11, 2018 10:25 am
As for relaxing a bit on saving, I assume that the 20K preschool expense is on its last year. If so, one year from now, you have 20k money available for spending on other activities without changing any of your savings.

I wont count on inheritance till .....
The upcoming school year will be the last for preschool expense. They will attend public school starting Autumn 2019. I agree that I won't be counting on inheritance - I'm trying to save as though we will receive $0 inheritance.

ExitStageLeft wrote:
Wed Jul 11, 2018 8:20 pm
Wowsers, wish I could have drafted off you when I was 33. It took me a much longer time to find my financial footing.

One thing that comes to mind is that the above-mentioned $20k per year will get eaten up by increased expenses as the kids grow. Music lessons, organized sports, braces, etc, will add to the gradual expense creep that in part is unavoidable. It's also a great time for both parents to engage with the kids in some of these activities. My daughter got into Taekwando, and for several years the whole family was training together. My daughter and I have some wonderful memories of our trips to the national championships.
I was lucky that my family encouraged Roth IRA contributions from the start. On the other side of the coin, I wish I had found bogleheads earlier. That's a fantastic idea about doing activities together since time seems to be flying by already! Although I hope activities don't consume all of that $20k - our current spend levels don't account for house repair, car replacement fund, vacation, etc.


ExitStageLeft wrote:
Wed Jul 11, 2018 8:20 pm
You've got a pretty long horizon, but it would be worth running your assumptions through some of the online retirement planners. I just input your current and future savings into http://www.cfiresim.com/ and if you continue saving $52k per year your should be able to spend about $135k per year in retirement. Add in any social security, pension, or inheritance and you'll be doing even better.

EDIT: Whoops, I used your contribution and neglected employer match. At $61k per year it looks like $150,000 per year in retirement.

I like using firecalc - thanks for the cfiresim recommendation. I am also getting some high retirement income numbers, but I don't anticipate living lavishly in retirement, especially with a paid off house, kids gone, etc. Currently trying to have a high savings rate and gradually allow lifestyle creep, plan for lower market returns, and be conservative overall.




Any comments on taxation? Is it possible to shelter too much in tax deferred accounts (should I take advantage of Roth 401k)? Part of my fear is to defer so much now and be stuck paying high taxes during RMD. To avoid this, I think early retirement and early 401k withdrawl utilizing 72(t) rule (if it still exists) could be a strategy for drawing down one of our 401k accounts before being hit with RMD...
"The one who covets is the poorer man, | For he would have that which he never can; | But he who doesn't have and doesn't crave | Is rich, though you may hold him but a knave." - Wife of Bath tale

ExitStageLeft
Posts: 809
Joined: Sat Jan 20, 2018 4:02 pm

Re: Portfolio analysis and savings strategy - 33 year old couple with 2 kids

Post by ExitStageLeft » Thu Jul 12, 2018 9:02 am

sjt wrote:
Thu Jul 12, 2018 8:30 am
...
Any comments on taxation? Is it possible to shelter too much in tax deferred accounts (should I take advantage of Roth 401k)? Part of my fear is to defer so much now and be stuck paying high taxes during RMD. To avoid this, I think early retirement and early 401k withdrawl utilizing 72(t) rule (if it still exists) could be a strategy for drawing down one of our 401k accounts before being hit with RMD...
That's another issue for which I often get sucked into an analysis black hole. One of the frequent commenters posted a while back on tax-deferred versus Roth and it stuck with me. Their objective was to hit age 70 with roughly equal portions of the portfolio in tax-deferred and tax-free. I ginned up Yet Another Spreadsheet to look at my situation and it turns out to be a pretty useful benchmark for us when we hit RMD age.

I'm age 56 and hoping to retire within a couple years. DW and I have almost all our savings in tax-deferred (wish I found Bogleheads sooner too!) Our solution will be to do small Roth conversions every year until we get to that 50/50 point. We both have pensions and our portfolio is pretty small, such that taxes from RMDs really aren't a big concern. At least while I'm still alive. Once one of us dies, the survivor will jump a bracket or two as a single filer. That and estate issues are our primary motivation for moving our assets to Roth.

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