Crossroad of what to do next?

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newtoohere
Posts: 48
Joined: Mon Mar 09, 2009 7:07 pm

Crossroad of what to do next?

Post by newtoohere » Fri Aug 10, 2018 8:24 am

Hello all – thanks in advance for the advice.

I feel that my DW and I are at a crossroad and need some good Bogleheads’ advice.

We are trying to determine what should be our next step regarding our finances. Here is our current situation:

Personal:
Ages: 39
Married filed jointly
4 children – 9, 7, 5, 1

Assets
$250k yearly salary
$650k in retirement – 3 fund portfolio; all Vanguard index funds
6 months of emergency fund
$25k in savings account
$15k in 529
Home Value = $600k

Debts
$440k @ 4.375 – Mortgage (30 years left)
$45k @ 3.325% - Student Loan

New annual contributions
$18.5k his 403(b)
$18.5k her 403(b)
Plus 6% match on total salary

We have roughly $2.5k/month extra after everything is accounted for. We can’t decide what is the best area to put this money. Each month, I feel we have a different thought of where we should put that money towards. In our minds, here are the options to put the extra money:

1) Backdoor Roth – we would have to pay taxes on our Rollover IRA money that is right around $150k to start this
2) Taxable account – I like the thought of having cash available but not sure if it makes the most sense
3) 529 for kids – Not sure we can pay for 4 years for all 4 kids. The plan is state schools with help from the Bank of Mom & Dad. Plus we currently have kids in a private K-12 school so money can be used here as well. State of PA gives up $28k tax credit ($14k/individual) for 529
4) Student Loans – been paying the minimal and have another 10 years to go. But the rate is so low that I have placed this on the backburner
5) Mortgage – Probably makes the least sense in our situation
6) Emergency Fund – again, more cash is never a bad thing
7) Other - I'm sure I'm missing a place that is obvious to invest in?

So the big question is: where would you put the extra money? And if you were going to divide up the money, how much where?

KlangFool
Posts: 10139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Crossroad of what to do next?

Post by KlangFool » Fri Aug 10, 2018 8:30 am

newtoohere wrote:
Fri Aug 10, 2018 8:24 am

$45k @ 3.325% - Student Loan


So the big question is: where would you put the extra money? And if you were going to divide up the money, how much where?
newtoohere,

1) Pay off the student loan. Why are you thinking about 529 of your children when you are paying your own student loan?

2) If you or your spouse are unemployed, your children may qualify for financial aid if you do not have a large balance in the 529 plan.

KlangFool

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car733
Posts: 121
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Location: Chicago, IL

Re: Crossroad of what to do next?

Post by car733 » Fri Aug 10, 2018 8:37 am

KlangFool wrote:
Fri Aug 10, 2018 8:30 am
Why are you thinking about 529 of your children when you are paying your own student loan?
Sorry, can you explain what's the issue?

staythecourse
Posts: 5965
Joined: Mon Jan 03, 2011 9:40 am

Re: Crossroad of what to do next?

Post by staythecourse » Fri Aug 10, 2018 8:38 am

Look to be doing well. The obvious to me is any possibility of moving to an area with good public schools, i.e. FREE at a similar price point of your current house. That will free up a lot of money per month. I can't imagine paying for what will be: 52 years of private school tuition. That is the lowest hanging fruit in freeing up more money to invest.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

Flyer24
Posts: 265
Joined: Sun Apr 08, 2018 4:21 pm

Re: Crossroad of what to do next?

Post by Flyer24 » Fri Aug 10, 2018 8:46 am

Pay the student loan off. It doesn’t make sense to be saving for your kids when you still owe from your own college. I would put it up near the top of the list and be debt free.

KlangFool
Posts: 10139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Crossroad of what to do next?

Post by KlangFool » Fri Aug 10, 2018 8:46 am

car733 wrote:
Fri Aug 10, 2018 8:37 am
KlangFool wrote:
Fri Aug 10, 2018 8:30 am
Why are you thinking about 529 of your children when you are paying your own student loan?
Sorry, can you explain what's the issue?
car733,

If the parent cannot pay off his own student loan, why worry about the children's college education?

KlangFool

soccerrules
Posts: 803
Joined: Mon Nov 14, 2016 4:01 pm

Re: Crossroad of what to do next?

Post by soccerrules » Fri Aug 10, 2018 8:55 am

You have $30K a year, assuming this stays the same or perhaps increase/decreases.

1) Roll over IRA's into your company 401K /403B plans -- if allowed. This avoids the pro-rata rule on IRA's. It appears you know about the pro rate rule, but if not research it.
2) THEN $5,500 to Backdoor Roth for each of you. If you don't take advantage of it -- you lose the opportunity each year. Tax Free Growth and Tax Free Withdrawals
3) I would take remaining $19K and either send all to student loans or split some to student loans and some to 529 (for tax credit). Normally I would say all to Student Loans, but the Tax credit makes a difference and does help with funding college. if you have decided the kids are going to have to figure out college on their own-- then all to your loans.

$650K at 39 is pretty good. There are calculators (www.calculator.net) out there that can project your savings at retirement. Are you looking to FIRE ? (what age?) Compounding Interest is your best friend.

One note. KIDS are expensive and your are blessed with 4. My opinion is that you really have not realized the true impact of how expensive your kids can be because yours are pretty young. You may be seeing it a little with your oldest but it really starts to take off once they hit 10/11 and Middle School. Be prepared for this.
1) Competitive Sports, Band, Cheer, Hobbies etc
2) Clothes and activities just cost more.
3) Braces X4, Wisdom Teeth X4
4) Car and Car Insurance (optional, maybe)

Best of luck
Don't let your outflow exceed your income or your upkeep will be your downfall.

gotester2000
Posts: 580
Joined: Sun Nov 12, 2017 1:59 am

Re: Crossroad of what to do next?

Post by gotester2000 » Fri Aug 10, 2018 8:57 am

First towards student loan and then towards mortgage.

KlangFool
Posts: 10139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Crossroad of what to do next?

Post by KlangFool » Fri Aug 10, 2018 8:58 am

OP,

Your gross income is 250K. Your annual savings is 37K + 30K = 67K. Your annual expense is probably around 100K to 120K. Besides the house, you have about 700K.

If you are continuously fully-employed over 10 to 20 years, you are doing fine. But, if you or your spouse are permanently under-employed or unemployed, with the annual expense of 100K to 120K, it won't take long to wipe you out.

Furthermore, at your current saving rate, you do not have money for your kids' college education.

KlangFool

KlangFool
Posts: 10139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Crossroad of what to do next?

Post by KlangFool » Fri Aug 10, 2018 9:36 am

newtoohere wrote:
Fri Aug 10, 2018 8:24 am

Ages: 39
Married filed jointly
4 children – 9, 7, 5, 1

$15k in 529

Debts
$440k @ 4.375 – Mortgage (30 years left)
$45k @ 3.325% - Student Loan
newtoohere,

Your investment is around 700K. Your annual savings is about 67K. Your annual expense is about 120K.

1) Pay off your student loan.

2) Put the additional savings into the taxable account and/or Backdoor Roth IRA.

3) Do not save for your kid's college education.

A) If everything goes well and you are fully-employed continuously over the next 9 years, your portfolio will be big enough. You can pay your kid's college education from your annual savings of 67K.

B) If you are ever unemployed over the next 9 years, you can spend your taxable account and Roth IRA. You may want to spend your 529 too. Then, your kid may qualify for financial due to your low income.

It works out both ways.

KlangFool

megabad
Posts: 555
Joined: Fri Jun 01, 2018 4:00 pm

Re: Crossroad of what to do next?

Post by megabad » Fri Aug 10, 2018 9:40 am

I am afraid I am going to have to disagree with some of the other posts. I would contribute up to the maximum state tax deduction to the 529. I think in your case this is probably only $600 or so per month, but I have no experience with PA state taxes. You are already spending qualified moneys (for private k12), so by not using the 529 you are simply deciding to pay the state more income taxes every year.

Since you have a 403b, I am assuming you are employed in a stable profession. You expenses are moderately high (wild guess $11,000 a month) and you have a lot of dependents so this may impact what you do with your extra cashflow. It looks like you have $100k in readily available cash and this seem sensible to me. With that many dependents and private school, I might even increase a little, but everyone's comfort level is different. I am assuming you already have a crapload of life insurance (say $3 million+), if not use some of the money for that.

The rest of the money is a toss up in my mind, but you may want to increase your retirements savings. You are saving a good amount, and I would argue you are on track for a "normal" retirement (say age 65-70) assuming your maintain your current standard of living. An early retirement might be more in reach with higher contributions. I would probably contribute to a 457 first if available. If not, I would do one spouse's backdoor roth and then I would look into rolling the IRA into the 403b (excellent suggestion above) and then doing the other. I would probably put the rest in taxable, but if it blows your skirt up then go for the student loan.

flyingaway
Posts: 1884
Joined: Fri Jan 17, 2014 10:19 am

Re: Crossroad of what to do next?

Post by flyingaway » Fri Aug 10, 2018 9:44 am

Agree with others. Pay off your loans and mortgages. It is very difficult to get any safe investment with returns higher than 3.5%.

aristotelian
Posts: 4669
Joined: Wed Jan 11, 2017 8:05 pm

Re: Crossroad of what to do next?

Post by aristotelian » Fri Aug 10, 2018 9:50 am

If one of your 403B plans will accept rollovers, you can roll your pretax IRA into your employer plan and then open up Backdoor Roth.

Otherwise, my approach was to split between paying down debt and investing in brokerage account. Rationally, it would make sense to prioritize the mortgage, but I would be tempted to get rid of the student loan just for simplicity.

newtoohere
Posts: 48
Joined: Mon Mar 09, 2009 7:07 pm

Re: Crossroad of what to do next?

Post by newtoohere » Fri Aug 10, 2018 10:01 am

Thanks everyone for the responses so far!

Here's more information and just some thoughts:

- Our monthly expenses are right around $9k. Take home is $11.5k
- I could dramatically decrease monthly expenses if things took a turn for the worse.
- We have discussed switching to the public school as private school costs us roughly $1.5k/month
- I didn't think the student loans were killing us as the payment is $500/month and the interest rate is so low.
FIRE is probably unrealistic with 4 children - college, weddings, life, etc will keep me in the workforce close to another 25 years. I am ok with that as I enjoy what I do and I want to provide for my family.
- Stable jobs in predicted growing field though you never know!
- DW currently works part-time (full time at home). She will have the ability to work full time if we choose once college comes around. Depending on cost and how much we want to pay for each child, it may not become a choice.
- With annual return of 5% and no increase in yearly amount, I project we will have close to $5 million for retirement. At 3.5% annual withdrawal, that would leave us with $168k/month plus social security in todays number. Much more then we are spending now and our expenses should be dramatically lower.

newtoohere
Posts: 48
Joined: Mon Mar 09, 2009 7:07 pm

Re: Crossroad of what to do next?

Post by newtoohere » Fri Aug 10, 2018 10:22 am

aristotelian wrote:
Fri Aug 10, 2018 9:50 am
If one of your 403B plans will accept rollovers, you can roll your pretax IRA into your employer plan and then open up Backdoor Roth.

Otherwise, my approach was to split between paying down debt and investing in brokerage account. Rationally, it would make sense to prioritize the mortgage, but I would be tempted to get rid of the student loan just for simplicity.
Unfortunately, the employer plan does not allow money to be rolled into the plan.

I've thought about the mortgage but worried that money going into the house is difficult to get out in the case of needed it vs brokerage account or freeing up money by paying down the student loan debt. Granted, if I threw the entire $2500 towards the mortgage, I would have the mortgage paid off right around the time our first child started school. This is the timing for the student loans as well if no additional money is added to the student loans

KlangFool
Posts: 10139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Crossroad of what to do next?

Post by KlangFool » Fri Aug 10, 2018 10:28 am

newtoohere wrote:
Fri Aug 10, 2018 10:01 am

FIRE is probably unrealistic with 4 children - college, weddings, life, etc will keep me in the workforce close to another 25 years. I am ok with that as I enjoy what I do and I want to provide for my family.
- Stable jobs in predicted growing field though you never know!
- DW currently works part-time (full time at home). She will have the ability to work full time if we choose once college comes around. Depending on cost and how much we want to pay for each child, it may not become a choice.
- With annual return of 5% and no increase in yearly amount, I project we will have close to $5 million for retirement. At 3.5% annual withdrawal, that would leave us with $168k/month plus social security in todays number. Much more then we are spending now and our expenses should be dramatically lower.
newtoohere,

1) You are assuming everything goes well for 25 years.

<< 4 children - college, weddings, life,>>

2) You do not budget or accounted for those future expenses.

3) A more realistic view would be your saving rate will drop in the future due to those expenses.

<<DW currently works part-time (full time at home). She will have the ability to work full time if we choose once college comes around. Depending on cost and how much we want to pay for each child, it may not become a choice.>>

4) With the age spread of your children, (1 to 9), how is that possible? The childcare cost will eat out her additional income. Hence, it will be a wash.

5) How much is your PITI / Mortgage every month? Where do all your money go? Your annual expense is 108K per year. Private school is only 18K per year. Mortgage = 30K per year? This still leaves 60K per year.

KlangFool

SagaciousTraveler
Posts: 123
Joined: Thu May 03, 2018 6:05 am

Re: Crossroad of what to do next?

Post by SagaciousTraveler » Fri Aug 10, 2018 10:43 am

soccerrules wrote:
Fri Aug 10, 2018 8:55 am
One note. KIDS are expensive and your are blessed with 4. My opinion is that you really have not realized the true impact of how expensive your kids can be because yours are pretty young. You may be seeing it a little with your oldest but it really starts to take off once they hit 10/11 and Middle School. Be prepared for this.
1) Competitive Sports, Band, Cheer, Hobbies etc
2) Clothes and activities just cost more.
3) Braces X4, Wisdom Teeth X4
4) Car and Car Insurance (optional, maybe)

Best of luck
Really? Granted my kids are 5 and 2 but I can't imagine it getting more expensive than it is now. Daycare, diapers, clothing and preschool/kindergarten (not paid by property taxes). I would imagine once the kids are in the public school system and daycare/preschool/kindergarten costs go away, I would be shocked if that amount saved was overtaken by the above annually.

For example when my oldest is 9 and my youngest is 6 and they are both in public school system. We will see an annual savings of $18,000 from daycare alone.

FlyAF
Posts: 174
Joined: Tue Jan 23, 2018 11:14 am

Re: Crossroad of what to do next?

Post by FlyAF » Fri Aug 10, 2018 10:55 am

You're going to put 4 kids through private k-12 on 250k gross?

indexfund56
Posts: 17
Joined: Fri Aug 10, 2018 11:00 am

Re: Crossroad of what to do next?

Post by indexfund56 » Fri Aug 10, 2018 11:04 am

Pay off the student loads. Regardless of the interest rate, I would first be completely debt free (with the exception of the mortgage) before investing in anything else.

newtoohere
Posts: 48
Joined: Mon Mar 09, 2009 7:07 pm

Re: Crossroad of what to do next?

Post by newtoohere » Fri Aug 10, 2018 11:09 am

KlangFool wrote:
Fri Aug 10, 2018 10:28 am

5) How much is your PITI / Mortgage every month? Where do all your money go? Your annual expense is 108K per year. Private school is only 18K per year. Mortgage = 30K per year? This still leaves 60K per year.

KlangFool
Take Home Pay - $11,900

Monthly Expenses
PITI - $3,600 - P&I - $2400 (we pay $200 extra) T&I - $1200
House Maintenance Fund (cause things break) - $300
Daily Living Expenses - $3500/month (we budget and this includes everything to live - groceries, utilities, fuel, etc)
Student Loan - $500
Private School - $1500
Leftover - $2500

Flyer24
Posts: 265
Joined: Sun Apr 08, 2018 4:21 pm

Re: Crossroad of what to do next?

Post by Flyer24 » Fri Aug 10, 2018 12:28 pm

SagaciousTraveler wrote:
Fri Aug 10, 2018 10:43 am
soccerrules wrote:
Fri Aug 10, 2018 8:55 am
One note. KIDS are expensive and your are blessed with 4. My opinion is that you really have not realized the true impact of how expensive your kids can be because yours are pretty young. You may be seeing it a little with your oldest but it really starts to take off once they hit 10/11 and Middle School. Be prepared for this.
1) Competitive Sports, Band, Cheer, Hobbies etc
2) Clothes and activities just cost more.
3) Braces X4, Wisdom Teeth X4
4) Car and Car Insurance (optional, maybe)

Best of luck
Really? Granted my kids are 5 and 2 but I can't imagine it getting more expensive than it is now. Daycare, diapers, clothing and preschool/kindergarten (not paid by property taxes). I would imagine once the kids are in the public school system and daycare/preschool/kindergarten costs go away, I would be shocked if that amount saved was overtaken by the above annually.

For example when my oldest is 9 and my youngest is 6 and they are both in public school system. We will see an annual savings of $18,000 from daycare alone.
It will definitely get much more expensive. My girls are 12 and 15. It is crazy how much comes out of the wallet.

KlangFool
Posts: 10139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Crossroad of what to do next?

Post by KlangFool » Fri Aug 10, 2018 1:36 pm

newtoohere wrote:
Fri Aug 10, 2018 11:09 am
KlangFool wrote:
Fri Aug 10, 2018 10:28 am

5) How much is your PITI / Mortgage every month? Where do all your money go? Your annual expense is 108K per year. Private school is only 18K per year. Mortgage = 30K per year? This still leaves 60K per year.

KlangFool
Take Home Pay - $11,900

Monthly Expenses
PITI - $3,600 - P&I - $2400 (we pay $200 extra) T&I - $1200
House Maintenance Fund (cause things break) - $300
Daily Living Expenses - $3500/month (we budget and this includes everything to live - groceries, utilities, fuel, etc)
Student Loan - $500
Private School - $1500
Leftover - $2500
newtoohere,

Take home pay = $11,900 X 12 = $142,800

403B = 37K

Pre-tax expense plus tax = $142,8000 - 37,000 = $105,800. The whole 105K cannot be all taxes.

So, how much is your pre-tax vision/dental/medical insurance, HSA/FSA and so on? It is probably at least another 10K.

Mortgage PITI = $3,400 x 12 = $40,800

Living Expense = $3,500 X 12 = $42,000

Private school = $1,500 X 12 = $18,000

Your annual expense is about $108,000 to $118,000.

If you are laid off and choose to cut your expenses,

PITI = 40K
Living Expense = 20K (cut 50%)
Medical/dental/vision insurance = 10K
No private school
The total is 70K.

Those are the numbers. And, you still have not accounted for the future expense of college, wedding, and so on.

KlangFool

blevine
Posts: 1989
Joined: Sat Feb 27, 2010 3:57 pm
Location: New York

Re: Crossroad of what to do next?

Post by blevine » Fri Aug 10, 2018 1:43 pm

Paying off high rate debt like student loans gives you the best return on investment. Once that is done, you can consider the next best roi.

Emergency fund for possible loss of income would be a priority too, before worrying about ira vs 529 etc.
But get there asap, so you can take that next step to saving over reducing debt/risk.

newtoohere
Posts: 48
Joined: Mon Mar 09, 2009 7:07 pm

Re: Crossroad of what to do next?

Post by newtoohere » Fri Aug 10, 2018 2:34 pm

blevine wrote:
Fri Aug 10, 2018 1:43 pm
Paying off high rate debt like student loans gives you the best return on investment. Once that is done, you can consider the next best roi.

Emergency fund for possible loss of income would be a priority too, before worrying about ira vs 529 etc.
But get there asap, so you can take that next step to saving over reducing debt/risk.
What rate is high rate debt? Is ours at 3.375% high rate?
How much emergency fund should one have? We have 6 months of expenses plus another $25k in cash.

I think we have already passed many of these discussions hence the question on what to do next

newtoohere
Posts: 48
Joined: Mon Mar 09, 2009 7:07 pm

Re: Crossroad of what to do next?

Post by newtoohere » Fri Aug 10, 2018 2:44 pm

KlangFool wrote:
Fri Aug 10, 2018 1:36 pm
newtoohere wrote:
Fri Aug 10, 2018 11:09 am
KlangFool wrote:
Fri Aug 10, 2018 10:28 am

5) How much is your PITI / Mortgage every month? Where do all your money go? Your annual expense is 108K per year. Private school is only 18K per year. Mortgage = 30K per year? This still leaves 60K per year.

KlangFool
Take Home Pay - $11,900

Monthly Expenses
PITI - $3,600 - P&I - $2400 (we pay $200 extra) T&I - $1200
House Maintenance Fund (cause things break) - $300
Daily Living Expenses - $3500/month (we budget and this includes everything to live - groceries, utilities, fuel, etc)
Student Loan - $500
Private School - $1500
Leftover - $2500
newtoohere,

Take home pay = $11,900 X 12 = $142,800

403B = 37K

Pre-tax expense plus tax = $142,8000 - 37,000 = $105,800. The whole 105K cannot be all taxes.

So, how much is your pre-tax vision/dental/medical insurance, HSA/FSA and so on? It is probably at least another 10K.

Mortgage PITI = $3,400 x 12 = $40,800

Living Expense = $3,500 X 12 = $42,000

Private school = $1,500 X 12 = $18,000

Your annual expense is about $108,000 to $118,000.

If you are laid off and choose to cut your expenses,

PITI = 40K
Living Expense = 20K (cut 50%)
Medical/dental/vision insurance = 10K
No private school
The total is 70K.

Those are the numbers. And, you still have not accounted for the future expense of college, wedding, and so on.

KlangFool
You are correct that money is missing. That amount is not including the 2 extra pay that we get over the course of the year - $11,900
Pre-tax deductions make up another $13k
- $6.5k for medical insurance
- $7.5k for dependent care and health savings account

The rest is taxes.
If stuff hit the fan, we could reduce cost to about what you said and survival for over a year with cash on hand. At that point everything would need to be reconsidered so I’m not too worry about college or weddings, etc.

I’m really trying to figure out what is best from where I’m at now even though I know the worse could happen.

Thoughts?

KlangFool
Posts: 10139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Crossroad of what to do next?

Post by KlangFool » Fri Aug 10, 2018 2:57 pm

newtoohere wrote:
Fri Aug 10, 2018 2:44 pm
KlangFool wrote:
Fri Aug 10, 2018 1:36 pm
newtoohere wrote:
Fri Aug 10, 2018 11:09 am
KlangFool wrote:
Fri Aug 10, 2018 10:28 am

5) How much is your PITI / Mortgage every month? Where do all your money go? Your annual expense is 108K per year. Private school is only 18K per year. Mortgage = 30K per year? This still leaves 60K per year.

KlangFool
Take Home Pay - $11,900

Monthly Expenses
PITI - $3,600 - P&I - $2400 (we pay $200 extra) T&I - $1200
House Maintenance Fund (cause things break) - $300
Daily Living Expenses - $3500/month (we budget and this includes everything to live - groceries, utilities, fuel, etc)
Student Loan - $500
Private School - $1500
Leftover - $2500
newtoohere,

Take home pay = $11,900 X 12 = $142,800

403B = 37K

Pre-tax expense plus tax = $142,8000 - 37,000 = $105,800. The whole 105K cannot be all taxes.

So, how much is your pre-tax vision/dental/medical insurance, HSA/FSA and so on? It is probably at least another 10K.

Mortgage PITI = $3,400 x 12 = $40,800

Living Expense = $3,500 X 12 = $42,000

Private school = $1,500 X 12 = $18,000

Your annual expense is about $108,000 to $118,000.

If you are laid off and choose to cut your expenses,

PITI = 40K
Living Expense = 20K (cut 50%)
Medical/dental/vision insurance = 10K
No private school
The total is 70K.

Those are the numbers. And, you still have not accounted for the future expense of college, wedding, and so on.

KlangFool
You are correct that money is missing. That amount is not including the 2 extra pay that we get over the course of the year - $11,900
Pre-tax deductions make up another $13k
- $6.5k for medical insurance
- $7.5k for dependent care and health savings account

The rest is taxes.
If stuff hit the fan, we could reduce cost to about what you said and survival for over a year with cash on hand. At that point everything would need to be reconsidered so I’m not too worry about college or weddings, etc.

I’m really trying to figure out what is best from where I’m at now even though I know the worse could happen.

Thoughts?
newtoohere,

My original recommendation still stands. Pay off the student loan. I know that the interest rate is low. But, the student loan hides the fact that you had spent the money. It is a bad thing. Pay it off.

My recommendation prepares for both cases: the best and the worst. Then, you can handle anything in between.

<<Your investment is around 700K. Your annual savings is about 67K. Your annual expense is about 120K.

1) Pay off your student loan.

2) Put the additional savings into the taxable account and/or Backdoor Roth IRA.

3) Do not save for your kid's college education.

A) If everything goes well and you are fully-employed continuously over the next 9 years, your portfolio will be big enough. You can pay your kid's college education from your annual savings of 67K.

B) If you are ever unemployed over the next 9 years, you can spend your taxable account and Roth IRA. You may want to spend your 529 too. Then, your kid may qualify for financial due to your low income.

It works out both ways.>>

KlangFool

OnTrack2020
Posts: 277
Joined: Mon Mar 20, 2017 10:24 am

Re: Crossroad of what to do next?

Post by OnTrack2020 » Fri Aug 10, 2018 4:04 pm

You can have your students loans paid off in 1-1/2 years.

Then I would take the rest and split between 529 and taxable. You can always use some of the taxable to fund kids' college expenses.

blevine
Posts: 1989
Joined: Sat Feb 27, 2010 3:57 pm
Location: New York

Re: Crossroad of what to do next?

Post by blevine » Sat Aug 11, 2018 7:31 am

You asked for advice, having already excluded some of the choices. I was in a similar situation and I paid off all loans.

First, note that the rates you pay are from your post-tax income. To earn enough to pay the loans, by investing the loan amounts, you need to earn a higher taxable rate than your loan rates. You would be funding a certainty to pay with an uncertain higher risk asset to earn the necessary return. Based on federal tax alone, you must earn about 4.5% to pay the 3.325% loan after taxation of any taxable fixed incone bonds. Or 3.325 on tax exempt bonds. The Vanguard intermediate tax-exempt fund now yields 2.33%. So earn 2.33 to pay 3.325 back, you are losing money each day. You have state income tax in PA so the difference is a bit larger. Not sure if you will deduct mtg int, but for many people the std deduction is used starting 2018.
https://www.valuepenguin.com/mortgages/ ... ction-2018
If not deducting, comparison to tax-exempt bond yields make sense, if deducting you can compare to higher taxable yields but Total Bond yields 3% vs your 4.375%.
If you want to consider equity investing, not sure how you know if this is a profitable leverage (borrowing to invest is leverage). And it is a mismatch, certainty you must pay (non-dischargable stu loans and presumably you dont want foreclosure) vs an uncertain equity return.

Yes your rates sound low but rates in general are low and it is relative rates that matter. If you had a crystal ball and were certain rates will rise significantly, you would have to invest at a loss until that happens (at current rates) wait it out, to eventually have a positive spread. So a longer term break even requires some assumptions on how fast and how much rates will rise to make your loans look ridiculously cheap. Could work out, but people have often predicted this for last few years, and it’s come up a bit but not enough yet.

But if this reasoning to disuade leverage risk does not bother you, and you want to take this risk for possible rewards, then maybe the question was better presented as “what is best, 529 vs roth ira vs ...” without context (that surely would have been requested later;-)

Paying taxes to fund back door, sounds like your marginal rate is close to 30% with state income tax. I would not pay 30% of my 401k/ira rollover to move to roth, though there may be some age where it makes sense in the long run, others can comment on that. You are likely at the cusp age-wise. Mostly backdoor makes sense to do for non deductible contributions in a TIRA, not deductible contributions for those already in a high tax bracket.

529 is helpful even for public university, they are not free.

Emegency fund sufficiency depends on many things.
How transportable are your skills to find a comparably paying job in what amount of time. The answer depends on many things, not just profession, but location, age, flexibility to move etc. Ability to reduce expense as you indicated should already be factored into your expense assumption, so all that matters is how fast you assume the income could be replaced. Also likelyhood of job loss, if a doc in private practice, maybe layoffs are not a major factor, but for most people, it is a factor to estimate possible time without income. 6 months may be fine, maybe not depending on above answers.

But again, many in this board like the idea of living debt free, low risk strategy for admittedly modest but sure returns.

newtoohere
Posts: 48
Joined: Mon Mar 09, 2009 7:07 pm

Re: Crossroad of what to do next?

Post by newtoohere » Sat Aug 11, 2018 7:54 am

blevine wrote:
Sat Aug 11, 2018 7:31 am
You asked for advice, having already excluded some of the choices. I was in a similar situation and I paid off all loans...
KlangFool wrote:
Fri Aug 10, 2018 2:57 pm
My original recommendation still stands. Pay off the student loan. I know that the interest rate is low. But, the student loan hides the fact that you had spent the money. It is a bad thing. Pay it off.
blevine, KlangFool, and others - thank you for your advice. I now see where you are all coming from and the reasoning of why makes a lot of sense. When I posed the question, I didn't think the answer would be the "student loan" and I can see how my responses probably showed this.

With that being said, we have $25k in savings over our 6 month emergency. Should we just throw all that towards the student leaving $20k. We then could pay the remaining amount off in 8 months. Thoughts?

indexonlyplease
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Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: Crossroad of what to do next?

Post by indexonlyplease » Sat Aug 11, 2018 7:59 am

KlangFool wrote:
Fri Aug 10, 2018 8:46 am
car733 wrote:
Fri Aug 10, 2018 8:37 am
KlangFool wrote:
Fri Aug 10, 2018 8:30 am
Why are you thinking about 529 of your children when you are paying your own student loan?
Sorry, can you explain what's the issue?
car733,

If the parent cannot pay off his own student loan, why worry about the children's college education?

KlangFool
There is debt. You had to ask.

indexonlyplease
Posts: 1180
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: Crossroad of what to do next?

Post by indexonlyplease » Sat Aug 11, 2018 8:01 am

Debts
$440k @ 4.375 – Mortgage (30 years left)
$45k @ 3.325% - Student Loan
You have a great yearly salary, maxed out investment accounts. NOW payoff that debt. Everything gets better with no debt.

carolinaman
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Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: Crossroad of what to do next?

Post by carolinaman » Sat Aug 11, 2018 8:14 am

You say you can probably not pay for 4 years of college for all 4 of your children, yet you are sending children to private school k-12. It would seem those priorities should be reversed. Save enough to assure 4 years of college per child. Then, if you have funds available, send the kids to private k-12 school.

mortfree
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Re: Crossroad of what to do next?

Post by mortfree » Sat Aug 11, 2018 8:41 am

newtoohere wrote:
Sat Aug 11, 2018 7:54 am


With that being said, we have $25k in savings over our 6 month emergency. Should we just throw all that towards the student leaving $20k. We then could pay the remaining amount off in 8 months. Thoughts?
If you are comfortable throwing 25k in one fell swoop towards the student loans then go for it.

Other alternative is take 5k per month over 5 months (or some other breakdown of dollars and time) to apply the 25k. This gives you the ability to adjust your plan in case something unexpected comes up.

KlangFool
Posts: 10139
Joined: Sat Oct 11, 2008 12:35 pm

Re: Crossroad of what to do next?

Post by KlangFool » Sat Aug 11, 2018 9:18 am

newtoohere wrote:
Sat Aug 11, 2018 7:54 am
blevine wrote:
Sat Aug 11, 2018 7:31 am
You asked for advice, having already excluded some of the choices. I was in a similar situation and I paid off all loans...
KlangFool wrote:
Fri Aug 10, 2018 2:57 pm
My original recommendation still stands. Pay off the student loan. I know that the interest rate is low. But, the student loan hides the fact that you had spent the money. It is a bad thing. Pay it off.
blevine, KlangFool, and others - thank you for your advice. I now see where you are all coming from and the reasoning of why makes a lot of sense. When I posed the question, I didn't think the answer would be the "student loan" and I can see how my responses probably showed this.

With that being said, we have $25k in savings over our 6 month emergency. Should we just throw all that towards the student leaving $20k. We then could pay the remaining amount off in 8 months. Thoughts?
newtoohere,

It is up to you. Can you sleep at night with that decision? I am not you. If you can, yes. If not, no.

KlangFool

blevine
Posts: 1989
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Location: New York

Re: Crossroad of what to do next?

Post by blevine » Sat Aug 11, 2018 10:47 pm

Think about the emergency fund questions I raised and consider if your 6 months is sufficient or not. If not, split somehow between EF and loans, else I would payoff asap.
I also agree that gradual payoff over a few months or immediate is ok either way, it’s a balance of stability vs optimal savings. Insuring against job loss has a cost no doubt, but one worth spending $.

TwstdSista
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Joined: Thu Nov 16, 2017 4:03 am

Re: Crossroad of what to do next?

Post by TwstdSista » Sun Aug 12, 2018 3:38 am

newtoohere wrote:
Sat Aug 11, 2018 7:54 am
....
With that being said, we have $25k in savings over our 6 month emergency. Should we just throw all that towards the student leaving $20k. We then could pay the remaining amount off in 8 months. Thoughts?
Yes. Or pay the loan down to $25k over 8 months and then pay off the rest in one fell swoop. I also like the $5k/month suggestion. Whichever helps you sleep at night.

tibbitts
Posts: 8003
Joined: Tue Feb 27, 2007 6:50 pm

Re: Crossroad of what to do next?

Post by tibbitts » Sun Aug 12, 2018 10:15 am

newtoohere wrote:
Fri Aug 10, 2018 2:34 pm
blevine wrote:
Fri Aug 10, 2018 1:43 pm
Paying off high rate debt like student loans gives you the best return on investment. Once that is done, you can consider the next best roi.

Emergency fund for possible loss of income would be a priority too, before worrying about ira vs 529 etc.
But get there asap, so you can take that next step to saving over reducing debt/risk.
What rate is high rate debt? Is ours at 3.375% high rate?
How much emergency fund should one have? We have 6 months of expenses plus another $25k in cash.

I think we have already passed many of these discussions hence the question on what to do next
Whether it's high rate or not depends on your outlook for investments. Looking at 1-2% annual real return after tax over the next decade or so, I'd say it's high-rate.

newtoohere
Posts: 48
Joined: Mon Mar 09, 2009 7:07 pm

Re: Crossroad of what to do next?

Post by newtoohere » Sun Aug 12, 2018 3:26 pm

After rereading all the posts and discussing with DW, we have decided to pay off the student loan $5k at a time (each month $3k from savings and $2k from the leftover). This should take us roughly 9 months to hammer out the SL.

We have also started the discussion of switching from private to public school. We are pretty much confident that we will be doing public high school as the private high schools in our area are significantly more expensive. The switch might occur when each child hits middle school in 7th grade.

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