How to allocate annual raise

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guitarguy
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Joined: Mon Dec 20, 2010 4:10 pm

How to allocate annual raise

Post by guitarguy » Thu Jul 05, 2012 1:17 pm

I just got my annual raise this year, which will take effect on my next paycheck at the end of July (monthly paydates). The raise was 3% and my annual salary is in the low/mid $60k range...so I'll see about $1800/yr and guessing on the math I'll see like $100/m extra after taxes. I'd like to use it to increase savings (or possibly debt reduction) and continue living on my current income figure. My options for allocating it are:

1. Increase 401k savings rate (already at full company match)
2. Save extra after tax and eventually start a second Roth IRA for wife (already maxing 1 Roth)
3. Pay additional extra per month on student loans (low rates from 2.5~3% variable)

Here is a picture of our portfolio:
  • Tax Rate: Fed: 15%, State: Michigan 4.35%

    Age: 27, Wife: 26

    Desired Asset Allocation: 85/15 ish

    63% My 401(k) (Current value $18k)
    28% Dryden S&P 500 Index Fund Fund (0.17%)
    15% Core Bond Enhanced Index/PIM Fund (0.22%)
    20% Small Cap Value/Kennedy Capital Fund (0.90%)

    11% Wife's 401(k) (Current value $3k)
    11% Select Indexed Equity Fund (Northern Trust) MMIEX (0.43%)

    26% My Roth IRA at Vanguard (Current value $7.5k)
    26% Vanguard Total International (VGTSX) (0.22%) - after $10K VTIAX

    New Annual Contributions:
    My 401(k): $6986 incl match (50%)
    Wife's 401(k): $1900 ish incl match (14%)
    My Roth IRA: $5k (36%)
Since we're in the 15% bracket I'm thinking maybe option 2 is best? Although, we won't be able to start the second Roth until we come up with the appropriate fund minimum...whether that may be $1k or $3k or whatever. We'll have more options for lower cost funds there, plus we'll have more flexibility for our goal of eventually moving small caps out of my 401k and into a less expensive VG fund.

Does that sound like solid reasoning?

Is there a 'general rule of thumb' when one is at a good starting point (401ks up to max and 1 maxed Roth) but can then afford to contribute a bit more?

MathWizard
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Joined: Tue Jul 26, 2011 1:35 pm

Re: How to allocate annual raise

Post by MathWizard » Thu Jul 05, 2012 2:42 pm

I suggest contributing to a 2nd ROTH IRA.

The general suggestion is to go tax advantaged before taxable
(save the taxes, either now or in the future).

I suggest the ROTH for two reasons:
1) You are likely never going to be in a lower tax bracket
(Your income will go up putting you in a higher tax bracket, and
my guess is that taxes will be going up, probably sometime soon.)
2) You can withdraw contributions without penalty or taxes (but
you can't put it back in.)

You don;t mention the size of your emergency fund, my guess is that
it not likely very large yet, mine certainly wasn't at that age.
I keep about 15-30K in the bank, and the rest of my EF is in our ROTHs.

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hoppy08520
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Re: How to allocate annual raise

Post by hoppy08520 » Thu Jul 05, 2012 3:02 pm

guitarguy wrote:I just got my annual raise this year, which will take effect on my next paycheck at the end of July (monthly paydates). The raise was 3% and my annual salary is in the low/mid $60k range...so I'll see about $1800/yr and guessing on the math I'll see like $100/m extra after taxes. I'd like to use it to increase savings (or possibly debt reduction) and continue living on my current income figure. My options for allocating it are:

1. Increase 401k savings rate (already at full company match)
2. Save extra after tax and eventually start a second Roth IRA for wife (already maxing 1 Roth)
3. Pay additional extra per month on student loans (low rates from 2.5~3% variable)
Guitar guy, I think you might get different answers.

A lot of people will recommend you attack the debt, especially since the interest rate is variable and because your student loan debt is rather high (approx $41,000). BTW, are you able to deduct from taxes any of your student load payments (see: http://www.getreadyforcollege.org/gpg.cfm?pageid=115)? If you're above the cutoff, and if you could get below the cutoff by shifting Roth IRA contributions to traditional IRA (if you're below the cutoff) or traditional 401k, there might be some advantage to doing so as it will lower your marginal tax rate.

Anyway, with that level of variable debt, I think you're right on the edge between whether to pay it off or save more in tax-advantaged space.

Personally, I'd rather keep a small to moderate amount of low-interest debt on the back-burner and instead put extra money in tax-advantaged savings. Once the year passes (actually, once April of the next year passes), you can never get that money in that precious tax-advantaged space again (I'm echoing what MathWizard wrote). You can probably earn more than 2-3% in a Roth IRA. So, I'd be inclined to pay low-interest debt and invest in IRAs in parallel. I think a lot of Boglehead people here would say "pay the debt first and then invest" but I think there's some motivational aspect to investing and seeing your balances go up. I think that's a personal decision and you have to make the call.

The pay-the-debt-first people will say your priority should be:
1. Contribute to 401k enough to get maximum match
2. Pay down debt
3. Then invest more

They say do #1 because that's free money that you should give away. Well, to me, tax-advantaged savings space is also a valuable thing that you shouldn't give away either. Every year, you can put $17,000 (401k/403b/TSP) + $5,000 (IRA) into tax-advantaged savings (assuming you're within eligibility limits, earning income, under 50 years old, etc.). If you're earning more in the future, you can't go back to the past and put your earnings in for past years when you didn't fill that tax-advantaged space. So take advantage of it every year, in my opinion, before you pay down low-interest debt.

Not to get too academic, but I'd like to see some scenarios of how you'd be better off paying down low-interest debt versus investing (basically, your own personal scenario) to see what's better. Also, since your loans interest rates are variable and not fixed, you should not discount what can/will happen when interest rates inevitably rise. You say you're on course to pay these off within five years, so maybe you'll escape that, but you are taking a bit of a risk. Are there any caps to how much your loans' interest rates can rise?

If you opt for investing over paying down debt, then: Not to throw too much at you, but you might have another option: the deductible Traditional IRA (not Roth IRA) as long as your MAGI is below $92,000 which it might if you're in the 15% tax bracket. Some people would suggest that you might be better off doing more traditional IRA than Roth IRA. It's a tough call. See the links that I posted here (http://www.bogleheads.org/forum/viewtop ... 8#p1431561) for more perspectives on this.

So, to amend your list, I think the first question is: pay debt or invest (or split the difference). If you decide to invest, then you really have to choose between:

Roth IRA
or
Deductible Traditional IRA (if eligible; see: http://www.moolanomy.com/4172/tradition ... on-limits/)

followed by:
401k - last choice

I'm not sure if you're an automatic choice for Roth IRA. In your profile, there's a case to be made for Traditional IRA as well (if eligible). It might be a coin toss. Read some of those links I posted in the other thread (which I linked to above) and make an informed decision.

Until you're maxing out all tax-advantaged space, I'd fill your 401k last because you have better/cheaper options in an IRA (either Roth or Traditional).

guitarguy
Posts: 1761
Joined: Mon Dec 20, 2010 4:10 pm

Re: How to allocate annual raise

Post by guitarguy » Fri Jul 06, 2012 6:25 am

MathWizard wrote:I suggest contributing to a 2nd ROTH IRA.

The general suggestion is to go tax advantaged before taxable
(save the taxes, either now or in the future).

I suggest the ROTH for two reasons:
1) You are likely never going to be in a lower tax bracket
(Your income will go up putting you in a higher tax bracket, and
my guess is that taxes will be going up, probably sometime soon.)
2) You can withdraw contributions without penalty or taxes (but
you can't put it back in.)

You don;t mention the size of your emergency fund, my guess is that
it not likely very large yet, mine certainly wasn't at that age.
I keep about 15-30K in the bank, and the rest of my EF is in our ROTHs.
Our E-Fund is about $10k, which is about 4 months expenses. I'm pretty comfortable with that at this point. Like you, I could tap my Roth for more if truly necessary.

The rest of our short term (taxable) savings goes for cash purchases for cars, home improvements, vacations, etc.

guitarguy
Posts: 1761
Joined: Mon Dec 20, 2010 4:10 pm

Re: How to allocate annual raise

Post by guitarguy » Fri Jul 06, 2012 6:37 am

hoppy08520 wrote:A lot of people will recommend you attack the debt, especially since the interest rate is variable and because your student loan debt is rather high (approx $41,000). BTW, are you able to deduct from taxes any of your student load payments (see: http://www.getreadyforcollege.org/gpg.cfm?pageid=115)? If you're above the cutoff, and if you could get below the cutoff by shifting Roth IRA contributions to traditional IRA (if you're below the cutoff) or traditional 401k, there might be some advantage to doing so as it will lower your marginal tax rate.
Yes. We deduct our interest paid on the student loans (we are well below the cutoff income level for a married couple).

hoppy08520 wrote:Anyway, with that level of variable debt, I think you're right on the edge between whether to pay it off or save more in tax-advantaged space.

Personally, I'd rather keep a small to moderate amount of low-interest debt on the back-burner and instead put extra money in tax-advantaged savings. Once the year passes (actually, once April of the next year passes), you can never get that money in that precious tax-advantaged space again (I'm echoing what MathWizard wrote). You can probably earn more than 2-3% in a Roth IRA. So, I'd be inclined to pay low-interest debt and invest in IRAs in parallel. I think a lot of Boglehead people here would say "pay the debt first and then invest" but I think there's some motivational aspect to investing and seeing your balances go up. I think that's a personal decision and you have to make the call.

The pay-the-debt-first people will say your priority should be:
1. Contribute to 401k enough to get maximum match
2. Pay down debt
3. Then invest more

They say do #1 because that's free money that you should give away. Well, to me, tax-advantaged savings space is also a valuable thing that you shouldn't give away either. Every year, you can put $17,000 (401k/403b/TSP) + $5,000 (IRA) into tax-advantaged savings (assuming you're within eligibility limits, earning income, under 50 years old, etc.). If you're earning more in the future, you can't go back to the past and put your earnings in for past years when you didn't fill that tax-advantaged space. So take advantage of it every year, in my opinion, before you pay down low-interest debt.

Not to get too academic, but I'd like to see some scenarios of how you'd be better off paying down low-interest debt versus investing (basically, your own personal scenario) to see what's better. Also, since your loans interest rates are variable and not fixed, you should not discount what can/will happen when interest rates inevitably rise. You say you're on course to pay these off within five years, so maybe you'll escape that, but you are taking a bit of a risk. Are there any caps to how much your loans' interest rates can rise?
Our rates are indeed capped, I believe at 8% or something. But, my thought is that if rates shoot up to a level where I need to knock out the debt quickly, I could always tap or temporarily suspend Roth contributions. Not the ideal choice and hopefully it will be avoided altogether, but it is at least a fallback plan...

Plus as it is, we're basically splitting debt and additional retirement savings (beyond 401k match). We're putting $416/m into Roth (for $5k per year) and we're currently at $350/m extra on student loans (soon to be $385/m when we knock off my wife's last tiny loan in Sept 8-) ). So we are actually working on the debt and investing at the same time. As I've said on here many times, I don't like putting all my eggs in one basket...so we're working on both.
hoppy08520 wrote:If you opt for investing over paying down debt, then: Not to throw too much at you, but you might have another option: the deductible Traditional IRA (not Roth IRA) as long as your MAGI is below $92,000 which it might if you're in the 15% tax bracket. Some people would suggest that you might be better off doing more traditional IRA than Roth IRA. It's a tough call. See the links that I posted here (http://www.bogleheads.org/forum/viewtop ... 8#p1431561) for more perspectives on this.

So, to amend your list, I think the first question is: pay debt or invest (or split the difference). If you decide to invest, then you really have to choose between:

Roth IRA
or
Deductible Traditional IRA (if eligible; see: http://www.moolanomy.com/4172/tradition ... on-limits/)

followed by:
401k - last choice

I'm not sure if you're an automatic choice for Roth IRA. In your profile, there's a case to be made for Traditional IRA as well (if eligible). It might be a coin toss. Read some of those links I posted in the other thread (which I linked to above) and make an informed decision.

Until you're maxing out all tax-advantaged space, I'd fill your 401k last because you have better/cheaper options in an IRA (either Roth or Traditional).
By the same token (the whole eggs in one basket thing) I like doing both Roth and Traditional retirement accounts. So for me currently, at least one Roth is a no brainer. I will take a look at your link. Up until now I hadn't considered a tIRA. I just figure our tax bracket is only going up in the long term.

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JupiterJones
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Re: How to allocate annual raise

Post by JupiterJones » Fri Jul 06, 2012 9:26 am

hoppy08520 wrote: A lot of people will recommend you attack the debt
And I'm one of 'em! :D

At least that's what I'd do if I were in your situation. Does it optimize your finances when you crunch the numbers? Maybe not. But I would be annoyed as all get-out about having that debt looming over me, and would find tremendous value in having it gone (and having the money that used to go for the monthly payment back in my pocket again).

Others find value differently.

JJ
Stay on target...

dickenjb
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Location: Philadelphia PA

Re: How to allocate annual raise

Post by dickenjb » Fri Jul 06, 2012 11:51 am

I would go for Door #2 (2nd Roth). Once an April 15th passes and you have not funded it that tax advantaged space is gone forever.

guitarguy
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Re: How to allocate annual raise

Post by guitarguy » Fri Jul 06, 2012 12:01 pm

JupiterJones wrote:
hoppy08520 wrote: A lot of people will recommend you attack the debt
And I'm one of 'em! :D

At least that's what I'd do if I were in your situation. Does it optimize your finances when you crunch the numbers? Maybe not. But I would be annoyed as all get-out about having that debt looming over me, and would find tremendous value in having it gone (and having the money that used to go for the monthly payment back in my pocket again).

Others find value differently.

JJ
Yeah...that's a good point. I updated my projection spreadsheet for getting rid of all our debt, and adding in that extra $100/m starting this month has all my loans paid off and my mortgage also paid off about 7 months earlier.

If we keep on and don't stray from this pace, we'll be totally debt free (including the mortgage) in exactly 10 years to the month. Cool! :)

mlipps
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Re: How to allocate annual raise

Post by mlipps » Fri Jul 06, 2012 12:50 pm

Just remember, unless the Bush tax cuts are extended, the student loan interest deduction expires this year, so you won't be able to claim it after 2012 taxes. Just something to keep in mind.

stan1
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Re: How to allocate annual raise

Post by stan1 » Fri Jul 06, 2012 12:58 pm

guitarguy wrote:
Yeah...that's a good point. I updated my projection spreadsheet for getting rid of all our debt, and adding in that extra $100/m starting this month has all my loans paid off and my mortgage also paid off about 7 months earlier.

If we keep on and don't stray from this pace, we'll be totally debt free (including the mortgage) in exactly 10 years to the month. Cool! :)
Given this information ... I'd definitely contribute to the second Roth. Contributing to the Roth is more important than paying off your student loans 7 months earlier or paying off the mortgage before you are 40. You can always pay off the loans -- you can't make up missed Roth contributions.

By the way, what does your wife think about the fact that you have a Roth and she doesn't? I hope your marriage is strong -- if you ever end up getting a divorce you can bet her lawyer will latch onto this anomaly.

guitarguy
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Re: How to allocate annual raise

Post by guitarguy » Fri Jul 06, 2012 2:53 pm

stan1 wrote:
guitarguy wrote:
Yeah...that's a good point. I updated my projection spreadsheet for getting rid of all our debt, and adding in that extra $100/m starting this month has all my loans paid off and my mortgage also paid off about 7 months earlier.

If we keep on and don't stray from this pace, we'll be totally debt free (including the mortgage) in exactly 10 years to the month. Cool! :)
Given this information ... I'd definitely contribute to the second Roth. Contributing to the Roth is more important than paying off your student loans 7 months earlier or paying off the mortgage before you are 40. You can always pay off the loans -- you can't make up missed Roth contributions.

By the way, what does your wife think about the fact that you have a Roth and she doesn't? I hope your marriage is strong -- if you ever end up getting a divorce you can bet her lawyer will latch onto this anomaly.
Seeing as how it's only about $100/m... it's not going to make much more than a "7 month" difference when calculated at this point. But when I consider similar annual raises...the differences will add up to much more than that. And being debt free before 40 sounds AMAZING to me!

But I agree, while I'm torn as to which one is more "important," both are good choices. That's why I posted this...so thanks for your opinion on the situation.

On me having a Roth and her not...it didn't make much sense to split a portfolio of our size and try to spread out funds across multiple accounts considering the fund minimums. It just so happened I started one in my name first...and we really didn't even give it much thought. My wife is not very much interested in finances and she's expressed to me repeatedly that she's more than happy to have me manage things and then we just discuss major decisions or changes when necessary...so giving her another login to manage would've probably just been a PITA for her anyway. Besides, we both know we'll be starting a second Roth in her name, whether now or in a couple years or whenever. A second one is in the cards as soon as we can do it.

And I'd put the strength of our marriage against just about anyone's. :wink:

guitarguy
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Re: How to allocate annual raise

Post by guitarguy » Fri Jul 06, 2012 2:56 pm

mlipps wrote:Just remember, unless the Bush tax cuts are extended, the student loan interest deduction expires this year, so you won't be able to claim it after 2012 taxes. Just something to keep in mind.
Good point...and when they hike back up the SS tax that 2% I may not see anything extra after all starting Jan 2013...but rather a cut in pay from my current take home. :(

mlipps
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Re: How to allocate annual raise

Post by mlipps » Fri Jul 06, 2012 3:07 pm

guitarguy wrote:
mlipps wrote:Just remember, unless the Bush tax cuts are extended, the student loan interest deduction expires this year, so you won't be able to claim it after 2012 taxes. Just something to keep in mind.
Good point...and when they hike back up the SS tax that 2% I may not see anything extra after all starting Jan 2013...but rather a cut in pay from my current take home. :(
:( On a macro level I hate them, but on a micro level... :?

Easy Rhino
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Re: How to allocate annual raise

Post by Easy Rhino » Fri Jul 06, 2012 3:13 pm

You know, common advice for non-boglehead civilians when getting a raise is to "split the raise" and put half of it (or 1% of it) as increased savings in the 401k. That way you never really miss having the extra money to spend.

But you're right on a few things:

1) Saving more in Roth would be slighly more optimal while you're in the 15% bracket. It would also add a "perceived fairness" bonus so your wife could have her own IRA. Personally, I was excited when we set things up so my wife could open up her IRA this year. Then again, I'm not sure if she liked having to fill out the paperwork. :? I think you'd need to save up $1k for Vanguard STAR fund, you could then swap that into something else when you get $3k... although my numbers may be out of date.

2) It would be easier just just save extra in one of your work retirement plans, though. No extra accounts to fund. And it's only $100 a month, so any lack of tax optimality won't really be noticeable over the long term. And your 401k seems to have somewhat better investment options than hers.

3) Paying down debt feels really good. If it was 3% fixed, I wouldn't be in a hurry. In fact, because I'm a daredevil, I'd probably not pay extra on the debt until something bad happens, like the tax deduction goes away, or interest rate goes up.

4) Hey, you got a raise! Take your wife to dinner! Just no place too extravagant. Maybe find a coupon. :beer

guitarguy
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Re: How to allocate annual raise

Post by guitarguy » Fri Jul 06, 2012 4:45 pm

Easy Rhino wrote:You know, common advice for non-boglehead civilians when getting a raise is to "split the raise" and put half of it (or 1% of it) as increased savings in the 401k. That way you never really miss having the extra money to spend.
Yeah...but I suspect most people wouldn't have the discipline to actually put the money away as opposed to just losing track and spending it.
Easy Rhino wrote:But you're right on a few things:

1) Saving more in Roth would be slighly more optimal while you're in the 15% bracket. It would also add a "perceived fairness" bonus so your wife could have her own IRA. Personally, I was excited when we set things up so my wife could open up her IRA this year. Then again, I'm not sure if she liked having to fill out the paperwork. :? I think you'd need to save up $1k for Vanguard STAR fund, you could then swap that into something else when you get $3k... although my numbers may be out of date.

2) It would be easier just just save extra in one of your work retirement plans, though. No extra accounts to fund. And it's only $100 a month, so any lack of tax optimality won't really be noticeable over the long term. And your 401k seems to have somewhat better investment options than hers.

3) Paying down debt feels really good. If it was 3% fixed, I wouldn't be in a hurry. In fact, because I'm a daredevil, I'd probably not pay extra on the debt until something bad happens, like the tax deduction goes away, or interest rate goes up.

4) Hey, you got a raise! Take your wife to dinner! Just no place too extravagant. Maybe find a coupon. :beer
1. My thought exactly, and also it would put us on track to work on getting our small caps out of my 401k and into a cheaper VG fund in a Roth. The $1k and $3k limits are still in effect as of a month ago. After all that planning to redo our AA across the 3 accounts...now we throw in the STAR fund!!?? :oops: :D Plus it'll be kind of annoying having to save up for 3 years to get the actual funds we want to have in that account. :?

2. It would be pretty easy to just throw the money at the debt too, just as easy as upping my 401k contributions!!

3. Paying down debt feels GREAT. That's why we can't bring ourselves to make minimums and just put it all in retirement savings. I know eventually we'd probably come out ahead that way if you consider strictly numbers, BUT, especially when we start our family and my wife stops or drastically reduces her work hours, it'll be nice to have those payments off the books when we see that reduction in income.

4. Already did! 8-)

stan1
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Re: How to allocate annual raise

Post by stan1 » Fri Jul 06, 2012 5:00 pm

Just use Target Retirement for the small Roth IRA -- not STAR.
Minimum is $1K for target retirement funds.

It's $1K for the first year. Don't worry about how it impacts the rest of your asset allocation for the first few years. It's negligible given your other assets. Once you have $3K in it you can include it with your overall asset allocation. There's more than one way to keep things simple.

adamrao
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Re: How to allocate annual raise

Post by adamrao » Fri Jul 06, 2012 5:15 pm

I've been reading the boards for a while now and this thread has re-sparked a question that has come up many times over for me.

Why not use ETFs?

If you want to open a second Roth IRA (let's assume with Vanguard), you can purchase a single fund or even multiple funds with less than $3000 if you use the ETF version instead of the mutual fund. As someone starting out with a relatively small portfolio, ETFs allow me to get the asset allocation I want long-term right away without having to overweight anything significantly. It seems to me that, even if you're using mutual funds elsewhere (and even if you want to use mutual funds in the long-run), you could at least start with ETFs and keep your asset allocation the way you want it.

What's the reasoning behind not doing this? Can you not "convert" your ETFs into Admiral shares later on?

stan1
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Re: How to allocate annual raise

Post by stan1 » Fri Jul 06, 2012 5:22 pm

adamrao wrote:
What's the reasoning behind not doing this? Can you not "convert" your ETFs into Admiral shares later on?
You cannot convert ETF shares to Admiral shares (although since it is in an IRA you can easily sell the ETF and buy Admiral shares of a mutual fund without tax consequences).

Sure you can use ETFs especially if you have no-cost trades (such as buying Vanguard ETFs at Vanguard Brokerage). Some people like the simplicity of mutual funds, others like managing the detail of bid/ask spreads and figuring out where to set your limit order so that you get a "good deal".

Rebecca_S
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Re: How to allocate annual raise

Post by Rebecca_S » Fri Jul 06, 2012 7:12 pm

guitarguy wrote: 1. My thought exactly, and also it would put us on track to work on getting our small caps out of my 401k and into a cheaper VG fund in a Roth. The $1k and $3k limits are still in effect as of a month ago. After all that planning to redo our AA across the 3 accounts...now we throw in the STAR fund!!?? :oops: :D Plus it'll be kind of annoying having to save up for 3 years to get the actual funds we want to have in that account. :?
Why not put equal amounts into the IRAs? Why not put all the contributions for the next 6 months into her IRA until you get over the minimums? There is no reason your IRA should get all the money first and hers be filled only with the extra. Perhaps you should let her catch up and put all the IRA money into her name so she gets $5000 each year and you get the remainder.

I handle all the investments for our family but my husband and I get our IRAs funded equally each year. If you fill out the forms online, you can add transaction authority so you can handle all the transactions for her accounts from your login.

statsguy
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Re: How to allocate annual raise

Post by statsguy » Fri Jul 06, 2012 8:52 pm

When w e were your age we had no savings for retirement and began investing for retirement by buying a $50 savings bond through payroll deductions every other month. From then we put half of every raise into accounts for retirement. Less than 30 years later we retired early with over seven figures invested and two rental properties.

So I vote for putting half of raise into retirement account. If you put it into your 401k before tax deduction your take home will increase by more than half your raise.

Whatever you decide you have already made a great start

Best of luck
stats

guitarguy
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Re: How to allocate annual raise

Post by guitarguy » Sat Jul 07, 2012 8:05 am

Rebecca_S wrote:Why not put equal amounts into the IRAs? Why not put all the contributions for the next 6 months into her IRA until you get over the minimums? There is no reason your IRA should get all the money first and hers be filled only with the extra. Perhaps you should let her catch up and put all the IRA money into her name so she gets $5000 each year and you get the remainder.

I handle all the investments for our family but my husband and I get our IRAs funded equally each year. If you fill out the forms online, you can add transaction authority so you can handle all the transactions for her accounts from your login.
Simple reason...unnecessary extra work and complication. Why split and manage another account? It's a waste of time!

Honestly (and my wife and I talked about this last night) we don't understand the fixation as to whose name the account is in...it's all OUR money anyway. I mean if we were to get that technical with this, we'd have to look at the fact that we've paid off $10k+ of student loans, $3k of bad CC debt, and 2 past due medical bills (all my wife's) before we even started the Roth. So hey, technically I'm still "behind"...only $7.5k in "my" Roth!! When we were paying $800/m extra on her debts the whole "all this money going to her" thing never even crossed my mind. Should we split the $400/m we're now using for debt prepayment and pay toward some debts that are in my name to be even?? I'm not being condescending...we really just don't get it. We're working as a team here. As long as she gets everything if something happens to me and vice versa...we don't really care who's name is primary on what account. If we can put us on there as equals we do that, otherwise it has to be in someone's name and OUR Roth happens to be in mine.

Maybe we've lost our marbles? :? I dunno. We rarely fight or even bicker about money, and if we ever do it's about one of us wanting something we can't afford...definitely have never had an arguement about retirement accounts. So...what we're doing works for us. Not going to complicate things to be "even." We just don't think that way.

Also when we talk about this stuff it's never "my Roth" it's "the" Roth. Notice I even typed it that way above? It's only "my" Roth and "my" 401k and "her" 401k on this website because that's what Laura's format calls for. ;)

guitarguy
Posts: 1761
Joined: Mon Dec 20, 2010 4:10 pm

Re: How to allocate annual raise

Post by guitarguy » Sat Jul 07, 2012 8:07 am

statsguy wrote:When w e were your age we had no savings for retirement and began investing for retirement by buying a $50 savings bond through payroll deductions every other month. From then we put half of every raise into accounts for retirement. Less than 30 years later we retired early with over seven figures invested and two rental properties.

So I vote for putting half of raise into retirement account. If you put it into your 401k before tax deduction your take home will increase by more than half your raise.

Whatever you decide you have already made a great start

Best of luck
stats
Thanks for the idea and the vote of confidence! I hope we can retire a few years early someday too!

In fact, saving half for retirement and putting half toward debt would fall in line with what we've been doing so far. Maybe that is the best route. Diversification!! :)

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