50k excess emergency funds. UPDATE.

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fortfun
Posts: 262
Joined: Tue Apr 19, 2016 7:31 pm

50k excess emergency funds. UPDATE.

Post by fortfun » Tue Dec 05, 2017 12:55 pm

Last week, I posted about how I've got an extra 50k+ of built up emergency funds. I received many helpful suggestions, including checking to see if we have access to a 457. Turns out we do! So, my new plan, is to go ahead and contribute an extra 15k (ER=.22% target date fund-lowest fee, half traditional and half ROTH), per year, until the excess emergency funds have been spent down to a more reasonable level (thru regular expenses). We've maxed 401Ks, 403Bs, Roths. 529s and Emergency funds are good. Only debt is 120k mortgage (1k/month, approx 10 yrs left, 3%). Hoping to retire in about 8 years, when wife turns 55, and begin drawing her retirement (4% of $1M+). I have a decent pension, that starts in 5 years, when I turn 50 (approx 70k per year until both die). When I turn 59, start drawing on my 401k (4% of $1M), if necessary or when required. We can continue working as long as necessary but would prefer an early retirement (nothing fancy).

Question:
1. Does the extra 15k/yr, in 457, to get wife's IRA up to $1M+ by retirement seem like best use of drawing down excess emergency funds?
2. In my estimation, pre-retirement & retirement income will be similar. Does putting 7.5k in each Roth and traditional seem reasonable (Roth in case we need to help with college expenses, above 529s).
3. Previously, some said to pay off mortgage. In light of this 457, do some still feel paying off mortgage is better.
4. Use it on something else that I'm missing? Cash for a new car (hoping to drive our Toyotas for another 100k miles). After tax ETF, etc?

We are pretty frugal but I hope to have enough leftover to do a couple of family vacations each year, etc. If necessary, we'd cut back on the 457 to do this.
Thanks!

MotoTrojan
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Re: 50k excess emergency funds. UPDATE.

Post by MotoTrojan » Tue Dec 05, 2017 1:03 pm

If you stick with your plan, go ahead and put it in a similar fund in taxable. If you get gains, you pay tax to move it into the tax-advantages; oh well. If you get loses, you still receive same number of shares in tax-advantaged, but report a loss and save taxes. No reason to sit on excess cash for 3 years until you can fully contribute.

fortfun
Posts: 262
Joined: Tue Apr 19, 2016 7:31 pm

Re: 50k excess emergency funds. UPDATE.

Post by fortfun » Tue Dec 05, 2017 1:37 pm

MotoTrojan wrote:
Tue Dec 05, 2017 1:03 pm
If you stick with your plan, go ahead and put it in a similar fund in taxable. If you get gains, you pay tax to move it into the tax-advantages; oh well. If you get loses, you still receive same number of shares in tax-advantaged, but report a loss and save taxes. No reason to sit on excess cash for 3 years until you can fully contribute.
Thanks Moto. What you think about putting the extra towards mortgage principal, instead of taxable funds? I know 3% is low but some have said to pay it off anyway.

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welderwannabe
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Re: 50k excess emergency funds. UPDATE.

Post by welderwannabe » Tue Dec 05, 2017 4:36 pm

I would pay off the mortgage.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

fortfun
Posts: 262
Joined: Tue Apr 19, 2016 7:31 pm

Re: 50k excess emergency funds. UPDATE.

Post by fortfun » Tue Dec 05, 2017 9:53 pm

welderwannabe wrote:
Tue Dec 05, 2017 4:36 pm
I would pay off the mortgage.
Thanks welderwannabe. Any particular reason?

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welderwannabe
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Re: 50k excess emergency funds. UPDATE.

Post by welderwannabe » Tue Dec 05, 2017 10:03 pm

fortfun wrote:
Tue Dec 05, 2017 9:53 pm
welderwannabe wrote:
Tue Dec 05, 2017 4:36 pm
I would pay off the mortgage.
Thanks welderwannabe. Any particular reason?
Sure. I would want no mortgage the day I retire. Paying the mortgage off early is a guaranteed 3% risk free return. There aren't any other risk free ways to get 3% right now.

The general comparison people make when deciding to pay the mortgage off is comparing paying it off to to the returns on the stock market. In my mind that is really apples and oranges as there is a big difference in risk between the stock market and paying your mortgage down. The market has been doing good for the last 7-8 years and it feels like it will keep going forever. It won't.

When tbills or savings accounts (risk free options_ start paying 3% then maybe I would change the plan and slow the mortgage payoff, but as long as you are putting a decent amount in retirement already (15%-20% of annual income) then the rest should hit the mortgage to knock it out. Getting a guaranteed 3% on money right now is a good deal, and as long as you feel you are sufficiently invested in the stock market already via your current retirement plan, then any excess should go to get the mortgage out of your life.

Just my opinion. I am about 5-6 years younger than you and I am aggressively going after the mortgage. My wife and I each put about 15% of our income in our retirement plans and the rest is going to eliminate the mortgage.

Best of luck!
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

Sandi_k
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Location: SF Bay Area

Re: 50k excess emergency funds. UPDATE.

Post by Sandi_k » Tue Dec 05, 2017 10:57 pm

I'd do it slightly differently. You say you have 10 years left on the mortgage, and 8 years before retirement.

Balance is $120k, at 3% interest. I don't know your original payment pattern, but putting those figures into an amortization calculator, I get $1159 per month as a payment.

If you were to instead decide to pay it off BEFORE retirement, your payments would be amortized over - say 7.5 years, or 90 payments (instead of 12x10 years, and 120 payments). That would make your monthly payment $1490.

So I would chose to pre-pay the $1490 (7.5 years payoff) -$1159 (10 years payoff) = $331 additional per month NOW.

Anything is excess of that $331 additional principal payment would go to the 457.

I find that an either/or thinking is not helpful - I try to optimize over a couple of different axes when looking at financial decisions.

fortfun
Posts: 262
Joined: Tue Apr 19, 2016 7:31 pm

Re: 50k excess emergency funds. UPDATE.

Post by fortfun » Tue Dec 05, 2017 11:19 pm

Sandi_k wrote:
Tue Dec 05, 2017 10:57 pm
I'd do it slightly differently. You say you have 10 years left on the mortgage, and 8 years before retirement.

Balance is $120k, at 3% interest. I don't know your original payment pattern, but putting those figures into an amortization calculator, I get $1159 per month as a payment.

If you were to instead decide to pay it off BEFORE retirement, your payments would be amortized over - say 7.5 years, or 90 payments (instead of 12x10 years, and 120 payments). That would make your monthly payment $1490.

So I would chose to pre-pay the $1490 (7.5 years payoff) -$1159 (10 years payoff) = $331 additional per month NOW.

Anything is excess of that $331 additional principal payment would go to the 457.

I find that an either/or thinking is not helpful - I try to optimize over a couple of different axes when looking at financial decisions.
Makes sense Sandi! Thanks. I wish I was better at money. I guess that's why I'm grateful for Bogleheads. I like your plan, and yes, your your number (1,159) is correct. The 529s are complicating matters. I'd like to cut back on them (I don't want to pay a 10% penalty) at the same time, I don't want to under save. I guess that's what the Roth547 could be used for? So, infact, the cut back from the 529 will be used to pay for the 547 and the excess emergency fund will be used to pay down the mortgage. I'm a bit afraid of spending down all of the excess emergency funds at once, just in case we end up needing them for something else. So, I do like your plan of an extra 331 a month. I would like to try to get my wife's retirement up to $1M by the time she's 55 but I guess we can always work longer too. Thanks for your suggestion!

Sandi_k
Posts: 462
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: 50k excess emergency funds. UPDATE.

Post by Sandi_k » Tue Dec 05, 2017 11:21 pm

fortfun wrote:
Tue Dec 05, 2017 11:19 pm

Makes sense Sandi! Thanks. I wish I was better at money. I guess that's why I'm grateful for Bogleheads. I like your plan, and yes, your your number (1,159) is correct. The 529s are complicating matters. I'd like to cut back on them (I don't want to pay a 10% penalty) at the same time, I don't want to under save. I guess that's what the Roth547 could be used for? So, infact, the cut back from the 529 will be used to pay for the 547 and the excess emergency fund will be used to pay down the mortgage. I'm a bit afraid of spending down all of the excess emergency funds at once, just in case we end up needing them for something else. So, I do like your plan of an extra 331 a month. I would like to try to get my wife's retirement up to $1M by the time she's 55 but I guess we can always work longer too. Thanks for your suggestion!
Glad it was helpful! ;)

MotoTrojan
Posts: 869
Joined: Wed Feb 01, 2017 8:39 pm

Re: 50k excess emergency funds. UPDATE.

Post by MotoTrojan » Wed Dec 06, 2017 5:17 pm

fortfun wrote:
Tue Dec 05, 2017 1:37 pm
MotoTrojan wrote:
Tue Dec 05, 2017 1:03 pm
If you stick with your plan, go ahead and put it in a similar fund in taxable. If you get gains, you pay tax to move it into the tax-advantages; oh well. If you get loses, you still receive same number of shares in tax-advantaged, but report a loss and save taxes. No reason to sit on excess cash for 3 years until you can fully contribute.
Thanks Moto. What you think about putting the extra towards mortgage principal, instead of taxable funds? I know 3% is low but some have said to pay it off anyway.
I think getting as much tax-advantaged space as you can is always a good option, but beyond that hard to say. I just paid off a 1.9% 3-year remaining car-loan since I wanted to increase cash-flow, so I can't claim to say I haven't done something like this before, but I am maxing my Roth (only thing I have now). If I had a 401k as well, and relied on the money for that, I wouldn't (I am also only 26 though, so many years of compounding ahead).

Now that the car is gone, I can cash-flow and easily fund my existing Roth, future 401k, and still have margin for major expenses and hopefully a good bit of taxable investing.

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