A Couple Becoming a Family: Please Let Us Know Your Thoughts

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

A Couple Becoming a Family: Please Let Us Know Your Thoughts

Post by Chindsey »

Good evening,

My wife and I (32 and 33, respectively) are expecting our first child in eight months. As such, we are hoping to get your thoughts on courses of action we can take in an effort to provide a comfortable life for our family (of eventually three or four), as well as for a comfortable retirement.

Currently, we are renting a two-bedroom apartment. We likely will purchase a home within the next three years.

Combined Annual (Pre-Tax) Income: ~ $200,000
Tax Bracket: 28%
Approximate Monthly Expenses: $4,500
Debt: None

Savings Account: ~ $72,000
Vanguard Investments: ~ $200,000 (40% Short-Term Tax-Exempt Bond, 40% TSM, and 20% TISM)
Vanguard Roth IRAs: ~ $72,000 combined (Target Retirement Date 2030)
TSP Accounts: ~ $180,000 combined (50% C, 15% S, 30% G, and 5% F)

My wife and I both max out our TSP contributions and Roth IRAs.

Now that we are married and filing jointly, the amount we are able to contribute to a Roth IRA(s) likely will change.

What should we be thinking about? Life insurance, disability insurance, umbrella insurance, an FSA and/or an HSA, a Coverdell ESA or 529 Plan, etc.?

Thank you in advance. We really appreciate your insight and guidance.
Bob's not my name
Posts: 7416
Joined: Sun Nov 15, 2009 9:24 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Bob's not my name »

Chindsey wrote:Combined Annual (Pre-Tax) Income: ~ $200,000
Tax Bracket: 28%
My wife and I both max out our TSP contributions and Roth IRAs.
Now that we are married and filing jointly, the amount we are able to contribute to a Roth IRA(s) likely will change.
You shouldn't be in the 28% bracket and I see no reason why your Roth contributions should change as a result of marrying.

$200,000 gross income
- $35,000 TSP contributions
- $2,500 pre-tax health, dental, and disability insurance premiums withheld from your pay (guess)
- $1,500 FSA contributions (guess based on your having maternity expenses)
------------
$161,000 AGI --> $17,000 under the Roth phaseout, and you could make back door contributions even if you were in it
- $7,800 personal exemptions (around $12,000 next year)
- $12,200 standard deduction
------------
$141,000 taxable income --> in the 25% bracket with $5,400 of headroom under the 28% bracket
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

Thank you for the reply.

Currently, our TSP contributions are to the Roth TSP. Does that change your analysis?

I apologize. I forgot to include the "Roth TSP" information in my original post.
User avatar
frugaltype
Posts: 1952
Joined: Wed Apr 24, 2013 9:07 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by frugaltype »

If you haven't done so already, be sure to have wills written for each of you, and powers of attorney for healthcare/living wills. I am not familiar with married legal stuff, but as a single person I have a revocable living trust. Being married may affect what you do there. Decide who gets the kids if you both buy the farm.
Bob's not my name
Posts: 7416
Joined: Sun Nov 15, 2009 9:24 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Bob's not my name »

Ack. Why Roth?
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

Thanks, frugaltype. I accidentally left out the need for wills and powers of attorney. We'll get on 'em!
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

From everything we've read and heard, we thought it was the right move. Should we think again?
Bob's not my name
Posts: 7416
Joined: Sun Nov 15, 2009 9:24 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Bob's not my name »

I'll say. You're paying 35% tax on your Roth contributions. Yikes.

Do you guys have huge government pensions lined up or something?
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

I had no idea we were paying 35% on our Roth TSP contributions.

Neither of us will have a large government pension (approximately $75,000 - $80,000 combined, annually).

Is it a "no brainer" that we should invest in the Traditional TSP now and pay taxes when we withdraw the principal and interest during retirement?
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

According to the article:

"Like traditional 401k versus Roth 401k for the private sector employees, whether the Traditional TSP is better than the Roth TSP depends on the tax bracket now and the tax bracket in the future, which is unknown. In my previous post The Case Against Roth 401(k), I argued that most people should stay with Traditional 401k, except those who have a pension and already contribute the maximum.

However, for TSP participants, I say that most should switch to the Roth TSP.

Why the difference between private sector 401k and TSP? One word: pension.

Federal civilian employees do get a pension. The FERS program pays 1.1% of highest average pay during any consecutive 3 years for each year of service if you retire after 62 with 20 or more years of service (1% of high-3 average per year of service if under 62 or fewer than 20 years of service). For a 30-year service, that’s 33% of the pre-retirement income, covered. Social Security will cover another 1/3 of the pre-retirement income. Both FERS pension and Social Security are adjusted for inflation.

At retirement, withdrawals from the TSP will be taxed at the marginal rate, on top of pension and Social Security. For those who already contribute the maximum $17,000 a year to TSP, switching to the Roth TSP will effectively put more money into the TSP. You should lean toward doing the Roth TSP unless:

You will not work long enough to qualify for a pension; or
You have substantial income from other sources now (spouse, outside employment), which puts you in a high tax bracket; or
You will retire early, but postpone drawing from your pension (use TSP withdrawals for gap years); or
You live in a state with high state income tax but you will retire to a state with no or low state income tax; or
an increase in Adjusted Gross Income will make you lose some other tax benefits (child tax credit, American Opportunity Credit, etc.)"
Easy Rhino
Posts: 3273
Joined: Sun Aug 05, 2007 11:13 am
Location: San Diego

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Easy Rhino »

health insurance for your wife
health insurance for chindsey jr. (figure out who's plan the little one will go on)
wills
life insurance
disability insurance

start saving up to buy a house.


Babies don't actually cost that much money at the beginning, as long as you get the hospital and doctors paid. don't sweat the college savings yet.

Our daughter just turned 1. We're in a two bedroom apartment. It's sufficient for us, although sometimes our living room floor looks like a babies r us exploded. We are looking for a new house though, to be prepared for number 2.
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

Haha. Thanks so much, Easy Rhino. We really appreciate your thoughts!
mars
Posts: 23
Joined: Fri Dec 28, 2012 12:23 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by mars »

Congratulations on saving a strong amount at your age.

My wife and I are similar age.

My sense is that you guys can be a little more aggressive in your asset allocation, that is, more in stocks. The size of your bond holding and the relatively short life cycle of your target retirement plan may skew your portfolio to the more conservative side than is advisable. Then again, considering you are planning to buy a home -- and I assume you will tap your investments to help fund the down payment -- a more conservative allocation may be entirely appropriate. It is similar to how my allocation looked prior to my and my wife's home purchase this year.

I've also been looking into umbrella insurance coverage as assets are starting to grow to guard against any unexpected events that would derail the plan.

Best of luck.
User avatar
joe8d
Posts: 4467
Joined: Tue Feb 20, 2007 8:27 pm
Location: Buffalo,NY

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by joe8d »

Reading your heading, I thought you were William and Kate :D
All the Best, | Joe
michaelsieg
Posts: 598
Joined: Mon Jan 07, 2013 11:02 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by michaelsieg »

I would get term life insurance - coverage should be enough to pay off a (future) mortgage, enough to allow the surviving spouse to work part time or to pay child care until the child is in school full time and enough to set aside college savings - just checked terms for a 30 year old on the Met life website (the only website I found where I didn't need to enter personal information) - if you are born in 1980, healthy, male and nonsmoker, 750K coverage for 20 year term life insurance costs $43/month - coverage for a female with same age is $35/month - definitely something worth looking into.
Bob's not my name
Posts: 7416
Joined: Sun Nov 15, 2009 9:24 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Bob's not my name »

Chindsey wrote:According to the article:

"Like traditional 401k versus Roth 401k for the private sector employees, whether the Traditional TSP is better than the Roth TSP depends on the tax bracket now and the tax bracket in the future, which is unknown. In my previous post The Case Against Roth 401(k), I argued that most people should stay with Traditional 401k, except those who have a pension and already contribute the maximum.

However, for TSP participants, I say that most should switch to the Roth TSP.

Why the difference between private sector 401k and TSP? One word: pension.

Federal civilian employees do get a pension. The FERS program pays 1.1% of highest average pay during any consecutive 3 years for each year of service if you retire after 62 with 20 or more years of service (1% of high-3 average per year of service if under 62 or fewer than 20 years of service). For a 30-year service, that’s 33% of the pre-retirement income, covered. Social Security will cover another 1/3 of the pre-retirement income. Both FERS pension and Social Security are adjusted for inflation.

At retirement, withdrawals from the TSP will be taxed at the marginal rate, on top of pension and Social Security. For those who already contribute the maximum $17,000 a year to TSP, switching to the Roth TSP will effectively put more money into the TSP. You should lean toward doing the Roth TSP unless:

You will not work long enough to qualify for a pension; or
You have substantial income from other sources now (spouse, outside employment), which puts you in a high tax bracket; or
You will retire early, but postpone drawing from your pension (use TSP withdrawals for gap years); or
You live in a state with high state income tax but you will retire to a state with no or low state income tax; or
an increase in Adjusted Gross Income will make you lose some other tax benefits (child tax credit, American Opportunity Credit, etc.)"
My superficial reading of the Missouri tax code indicates you have another incentive to go Roth. You might end up paying effectively 14% state tax on IRA distributions, because they are taxed and they can cost you the pension exemption on a dollar-for-dollar basis. Have you reached the same conclusion? Of course if you move to another state that changes. Illinois, for example, exempts IRA distributions, which argues for traditional over Roth.
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

Thank you all for the feedback and advice. It's invaluable.

My wife and I are taking notes. Please keep it coming!
Grt2bOutdoors
Posts: 23904
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Grt2bOutdoors »

Chindsey wrote:I had no idea we were paying 35% on our Roth TSP contributions.

Neither of us will have a large government pension (approximately $75,000 - $80,000 combined, annually).

Is it a "no brainer" that we should invest in the Traditional TSP now and pay taxes when we withdraw the principal and interest during retirement?
:oops: I will chalk that statement up to your youth - FYI A pension of any amount let alone one exceeding $50K per annum even for a couple is "large" including if it is 25 or 30 years into the future.Your incomes will grow over time, as will the pension if the forumla isn't rejiggered or altered over your career. The vast majority of folks do not have access to a pension or pre-tax retirement plan allowing them to accumulate large sums.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

Grt2bOutdoors,

My statement was made in response to Bob's not my name's question, "Do you guys have huge government pensions lined up or something?"

Both my wife and I recognize how fortunate we are to have a pension.
bhead33
Posts: 137
Joined: Thu Dec 29, 2011 4:13 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by bhead33 »

My wife and i are in the same age/income group and just had a child (6 months ago).

Some things we did:

1) not buy a house - still renting a one bedroom 7 minutes walking from work. Don't want to buy until we know of the situation with respect to having more kids/school situation etc. We don't feel that there is a rush to do so. This allows us for a lot of flexibility in terms of coming home early, at any time in the day etc.

2) max out all retirement vehicles. + try to contribute as much in traditional vanguard mutual fund account. 3 fund portfolio.

3) have FSA, dependent FSA

4) Got wills made up inc. power of attorney etc. cost 1800 (ouch).

5) Signed up for daycare a year before the kid was born - you might want to get on the waiting lists now

6) Traveled a LOT. Got a lot of it out of the system. Vegas, Greece, Turkey, Asia - anywhere we thought of going. GO NOW.

Our intention is to have the kid in a private/or catholic school for 8 years and then retire at the age of 43. Might live where we are now or might move somewhere cheaper. But not tying ourselves down.
jlawrence01
Posts: 1707
Joined: Mon Feb 25, 2013 1:34 am
Location: Southern AZ

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by jlawrence01 »

Just to reiterate things that have been said above - a couple of times.

First, have a will written specifically identifying who raises the child in the case of your demise. Without a will specifying that, you can be sure that the person you feel would do the best job raising the child will do so, especially if the individual is not a relative.

Second, make sure that both partners have great term life insurance. I am so tired of seeing 24 year old widows who say "sure, he had insurance ... a lot of it ... $100k." Or "we were going to get life insurance NEXT year."
RNJ
Posts: 857
Joined: Mon Apr 08, 2013 9:06 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by RNJ »

If you haven't done so already, be sure to have wills written for each of you, and powers of attorney for healthcare/living wills.
First, have a will written specifically identifying who raises the child in the case of your demise. Without a will specifying that, you can be sure that the person you feel would do the best job raising the child will do so, especially if the individual is not a relative.

Second, make sure that both partners have great term life insurance. I am so tired of seeing 24 year old widows who say "sure, he had insurance ... a lot of it ... $100k." Or "we were going to get life insurance NEXT year."
I agree with the above. None of this is fun to do, but it becomes very difficult to accomplish after the baby is born. Get to it!

One piece of advice: Don't be a victim of the "Baby-Industrial Complex". All your little one really needs is you, your wife, diapers and a really good car-seat. New parents are heavily marketed to but, the fact is, there is very little "stuff" you guys need.

Congratulations and good luck!
sesq
Posts: 582
Joined: Wed Jan 30, 2013 9:24 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by sesq »

Make sure term life insurance is in place ASAP. I am eight years ahead of you (with a daughter about to turn 8). We got $1M on me, 500K on my wife who stays home. Two quotes - USAA and Selectquote (IIRC). My employer provides another 500K on me and 100K on my wife. There was a big price difference between 20 year level term and 30 year level term at the time. I selected 20 year on the thought that since I am a saver, my expectation is that my need for insurance will decline as my NW increases. I find this to be mostly true, but an expanding family, inflation, lifestyle creep is a bit of a counter-balance in terms of how much that $1M policy is. A bit later after my son was born I thought about upping it (another tuition bill), and found the premiums do rise as you age. In general, I think we are close enough, but I may be a little light on my wife's policy as it would not truly free me to focus on my family in tragedy.

+1 on the get a will advice. You have to name guardians. My father is an estate planning attorney so I have a living trust too, whose primary benefit in my mind is to limit the kids from striking it rich at 18. I also split the trustee role over the money from the guardianship role, although that should protect my kids from having their college funds spent out from under them, it may eventually lead to a bit of conflict too.

Good job saving and congrats. Babies are really tiring. Make sure you and the spouse stay on the same page.
User avatar
DiscoBunny1979
Posts: 2044
Joined: Sun Oct 21, 2007 10:59 am

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by DiscoBunny1979 »

Chindsey wrote:
Now that we are married and filing jointly
This is why getting advice from an Internet Website might be misleading. While the folks on here do offer good advice, not taking into consideration the state you live in and the fact that you might be in a new marriage suggests that there should be something in the way of a pre-nup (or in this case a post-nup) considering the liquid assets - like taxable investments or savings. For instance, in a community property state, assets or property obtained before marriage is the property of the spouse that earned it or purchased it, unless there's some co-mingling of funds in which a determination can't be made as to which funds belongs to which spouse. While it's nice to combine everything because a marriage is a joint obligation based on love, the reality is that the law is the law - and law is not based on love, but based on facts. What assets were obtained before marriage and what assets are to be co-mingled as joint. That needs to be one of the first things decided upon in writing so there is no confusion how the marriage began if and when there is a divorce 10, 20 years down the road.
stlrick
Posts: 508
Joined: Mon Apr 14, 2008 4:37 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by stlrick »

Regarding the Roth versus pre-tax decision, there is one additional consideration, and that is to diversify the tax situation for the sources of your retirement income. You basically have four possibilities - Roth accounts, pre-tax accounts, and in your non-retirement accounts, investments for which taxes are paid annually and investments with capital gains deferred until you sell. Eventually, you will be in the best position if you have meaningful assets in all of them. This will allow you to control taxable income in any given year of retirement, which can have very significant consequences. If you save thoughtfully and appropriately, you are saving with a goal of life-style consistency. You will not want your retirement income to be all that much lower than your pre-retirement income. If you save enough, do not assume you will be in a much lower tax bracket.
Grt2bOutdoors
Posts: 23904
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Grt2bOutdoors »

Start a 529 plan - don't delay, college is costly - just view all of the posts about this topic here on the forum.
If you have any thoughts of paying for all or some of schooling - target 4 years of public state university costs today, add some inflation factor to arrive at end goal (personally, I think 6% annual increases is too high, even if it seems to be standard for schools - trees do not grow to the sky forever).
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

Thank you all again. I cannot tell you how helpful we are finding all of your thoughts and commentary. The more and more responses we receive, the clearer the picture/path will become.

stlrick - Do you by any chance live in the St. Louis area?
stlrick
Posts: 508
Joined: Mon Apr 14, 2008 4:37 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by stlrick »

Chindsey wrote: stlrick - Do you by any chance live in the St. Louis area?
Yes. Bought in Clayton. The school district was worth every penny.
Topic Author
Chindsey
Posts: 153
Joined: Mon Jun 03, 2013 5:09 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by Chindsey »

That's great! Clayton's a wonderful area.

My wife and I recently moved to St. Louis and, so far, we love it.

Do you know whether there's a St. Louis Boglehead group that meets up?
stlrick
Posts: 508
Joined: Mon Apr 14, 2008 4:37 pm

Re: A Couple Becoming a Family: Please Let Us Know Your Thou

Post by stlrick »

Chindsey wrote:That's great! Clayton's a wonderful area.

My wife and I recently moved to St. Louis and, so far, we love it.

Do you know whether there's a St. Louis Boglehead group that meets up?
Other than the information here:

http://www.bogleheads.org/forum/viewtop ... =9&t=91746

which you already know about, no, I don't.
Post Reply