Recent Music School Grad Needing Advice

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Marketgarden
Posts: 4
Joined: Fri Jan 12, 2018 1:46 am

Recent Music School Grad Needing Advice

Post by Marketgarden » Tue Feb 13, 2018 3:34 pm

Hi guys,
I just wanted to redo this post as my portfolio and work situation has changed. I'm a freelance musician and a year removed from graduating with my doctorate in music education. My current income(40-45k) is solid for my low day to day overhead but I will hopefully be making close to six figures by teaching fulltime at a college and playing higher end gigs in the next few years. I've been doing a lot of research on investing and I wanted to start building my long-term wealth. I recently read "The Intelligent Investor" and opened a Vanguard account. My goal is to do my "due diligence" for retirement while quickly paying off my loans and building my resume for higher paying teaching/performing jobs.

Emergency funds: about 6 Months(8k in a 1.25% Ally Account)
Debt: 190k Student Loan (paying to parents, 0% interest)
Tax Filing Status: Single
Tax Rate: 12% Federal
State of Residence: CA
Age:33
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 25%

Taxable
35.5% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) (0.15%)
16.7% Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares (VCAIX) (0.19%)
23.9% Vanguard Total International Stock Index Fund Investor Shares (VGTSX) (0.18%)

Roth IRA at Vanguard
23.9% Vanguard LifeStrategy Growth Fund (VASGX) (0.15%)

$23,369.28 in Vanguard Assets

Contributions (Hopefully more as my income goes up)
$5,500 for my Roth IRA (Lump Sum at the start of the year)
$250/Month in taxable (Split evenly between funds)


Questions:
1. I'm a pretty frugal guy (I save around 40% of my income), but now I feel like its time to aggressively start paying down my student loans. I mainly wanted to check with you guy on my "set it and forget it" retirement strategy.

2. Besides retirement, I'd also like to put money toward a house downpayment. I know the loans are priority #1 but I'd like to help contribute in this fund with my girlfriend. Is a savings account the best vehicle to store the fund?

3. Does anyone have a experience on establishing an LLC and a sep-ira? I think that is something I should look into as my performance income goes up.

Anyways, Thanks for all of your help. This forum is awesome!

jalbert
Posts: 2500
Joined: Fri Apr 10, 2015 12:29 am

Re: Recent Music School Grad Needing Advice

Post by jalbert » Tue Feb 13, 2018 3:47 pm

You don't need an LLC to establish a SEP-IRA. Setting up a SEP-IRA for yourself only is virtually as easy as setting up a Roth IRA. There is one additional form, which is perfunctory if you are the only participant. If you have employees in the plan, then managing a SEP-IRA is a bit more complex.

If you set one up, then you can hold bonds there and then no longer need to take on the credit risk of single-state munis.
Risk is not a guarantor of return.

bubbadog
Posts: 473
Joined: Wed Mar 26, 2014 9:17 pm

Re: Recent Music School Grad Needing Advice

Post by bubbadog » Tue Feb 13, 2018 4:35 pm

1) I would start fairly aggressively paying back your parents.

2) I would not fund a future house account with a girlfriend. (wife=yes, girlfriend=no)

Best of luck with your music career.

Hogan773
Posts: 247
Joined: Thu May 07, 2015 11:14 am

Re: Recent Music School Grad Needing Advice

Post by Hogan773 » Tue Feb 13, 2018 5:36 pm

bubbadog wrote:
Tue Feb 13, 2018 4:35 pm
1) I would start fairly aggressively paying back your parents.

2) I would not fund a future house account with a girlfriend. (wife=yes, girlfriend=no)

Best of luck with your music career.
What does OP's parents say about the payback? I agree about paying back but from a purely financial point of view they are the most attractive thing he could find (0% interest loan) so if his parents aren't pushing for "aggressive" payback then I would actually say he could do a lighter payback and continue focusing on saving for house, investing, etc. Otherwise we might find that the parents also kick in later with another "loan" to help buy a house. You never know. Some parents are quite wealthy and chilled out....

bubbadog
Posts: 473
Joined: Wed Mar 26, 2014 9:17 pm

Re: Recent Music School Grad Needing Advice

Post by bubbadog » Tue Feb 13, 2018 6:59 pm

Since the OP stated it was a loan and not a gift, there is the expectation to pay it back at some point in the future. Since the loan was interest free, it just doesn't seem right to drag this loan out as long as possible. I understand that he would be better off financially by delaying/extending the loan but probably not the best way to treat the parents.

Who knows it may be a "loan" which is really a gift.

livesoft
Posts: 59206
Joined: Thu Mar 01, 2007 8:00 pm

Re: Recent Music School Grad Needing Advice

Post by livesoft » Tue Feb 13, 2018 7:09 pm

Instead of SEP-IRA, consider an individual 401(k) if you will be self-employed with no other employees working for you.

As for saving for a home down payment, I would encourage you to be realistic. Many people say "save in a savings account", but I think you will take forever to get anywhere with that. We saved by investing in equity mutual funds. We didn't care if the stock market went up or went down. We had a long time horizon because we lived in a HCOL area and knew that it would take a decade or more to get a down payment at our contribution rate. If we had used a low-interest-paying savings account (that was about 7% back then, but inflation was higher), we never would have made it.

We were prepared that if stocks tanked (they did in 1987), then we might have to wait until they recovered (they did) or make a smaller down payment. In the end, we moved to a LCOL area and could make a 100% down payment, though we only made a 20% down payment.
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Alexa9
Posts: 768
Joined: Tue Aug 30, 2016 9:41 am

Re: Recent Music School Grad Needing Advice

Post by Alexa9 » Tue Feb 13, 2018 7:12 pm

This would be my priority:
1. Invest: Solo 401k? IRA? Roth?
2. Pay down loans
3. Save for a home

feehater
Posts: 56
Joined: Fri Jul 14, 2017 10:14 am

Re: Recent Music School Grad Needing Advice

Post by feehater » Wed Feb 14, 2018 10:42 am

1. There's absolutely no reason to invest in taxable when you have all these other (better) tax advantaged account options people keep mentioning. Unless the $250/month you mentioned for taxable is your home down payment fund and you're choosing to invest it. This is doubly true in your income range since you are close to getting the saver's tax credit.

2. You should absolutely have some sort of sep-ira or preferably a solo-401k if you have lots of 1099 income. Just a reminder, some (or many) of your gigs might be running payroll and treating you as a w2 employee, which makes that income ineligible for self employed retirement plans. In the eyes of the irs, you'd just be a part time employee of that group, and not a "freelancer."

3. If you're hoping to get a tenure-track teaching job, are you not planning on being able to move anywhere in the country to accept it? Seems like now would not be a great time to buy a house (but saving up for a down payment is good!)

ReedMan
Posts: 83
Joined: Mon Jul 28, 2014 9:19 pm

Re: Recent Music School Grad Needing Advice

Post by ReedMan » Sun Feb 18, 2018 8:16 am

As a music professional myself, I thought I would share my experience.

I teach private lessons and gig. All of my income, unless I get a W4(only happened twice), flows through my s-corp (and a separate business checking). I have a SEP-IRA, recommended by my accountant as it’s the easiest with my current setup. There are limits to how much you can contribute for any SEP/Solo/etc., based on your setup and income, so be aware of those.

Right now 90% of my income is lessons. I live in a suburb near a metropolitan area, where the gigs have been drying up for years. I’m a union member, but outside the orchestra and ballet, there’s not much union work. Like most places, work has been drying up over the last 25 years. Hopefully your location, networking, and expertise will hold you afloat.

What is the purpose of your taxable account? What label have you put on those funds? We have a taxable account, and savings at Ally. Ally is for our escrow and near-term savings (like buying new horns :D ) and our taxable is for saving to replace cars, and even that is a conservative LifeStrategy fund.

I would agree, paying back the loans should be priority. Though I’d guess there’s not pressure to pay it back, there’s a good feeling in working towards now having debt, especially from family. If you’re going to save for a house, I would keep it in Ally if you think you can purchase in <5 years. But I would keep funds separate until you are a married.

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Watty
Posts: 12495
Joined: Wed Oct 10, 2007 3:55 pm

Re: Recent Music School Grad Needing Advice

Post by Watty » Sun Feb 18, 2018 8:45 am

Marketgarden wrote:
Tue Feb 13, 2018 3:34 pm
2. Besides retirement, I'd also like to put money toward a house downpayment. I know the loans are priority #1 but I'd like to help contribute in this fund with my girlfriend. Is a savings account the best vehicle to store the fund?
LOTS of people have gotten into trouble with mingling funds or buying property with someone they are not married to. If you do not want to get married then if you want to do this you should hire two lawyers, one for each of you, to write up the legal agreements as to how this will work. In addition to breaking up there are lots of permutations of things that can happen like deaths, disabilities, job losses, lawsuits, bankruptcies, kids, etc. that people can run into that could cause a mess if your finances are mingled without a formal agreement. To get the legal paperwork will likely cost you a couple of thousand dollars to do it right.

If you don't want to get married and you don't want to set up the right paperwork then you really should not mingle your finances.
Marketgarden wrote:
Tue Feb 13, 2018 3:34 pm
I've been doing a lot of research on investing and I wanted to start building my long-term wealth.
Focus on your net worth.

One thing I have done for years is to update a very simple spreadsheet each year with my assets and debts on January first. From what you have said you have a net worth of about -$140,000 so hopefully you get the teaching position you mentioned. With any extra money you have your net worth will increase the same amount if you save it or pay down debt.

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CyclingDuo
Posts: 1184
Joined: Fri Jan 06, 2017 9:07 am

Re: Recent Music School Grad Needing Advice

Post by CyclingDuo » Sun Feb 18, 2018 9:27 am

Marketgarden wrote:
Tue Feb 13, 2018 3:34 pm
Hi guys,
I just wanted to redo this post as my portfolio and work situation has changed. I'm a freelance musician and a year removed from graduating with my doctorate in music education. My current income(40-45k) is solid for my low day to day overhead but I will hopefully be making close to six figures by teaching fulltime at a college and playing higher end gigs in the next few years. I've been doing a lot of research on investing and I wanted to start building my long-term wealth. I recently read "The Intelligent Investor" and opened a Vanguard account. My goal is to do my "due diligence" for retirement while quickly paying off my loans and building my resume for higher paying teaching/performing jobs.

Emergency funds: about 6 Months(8k in a 1.25% Ally Account)
Debt: 190k Student Loan (paying to parents, 0% interest)
Tax Filing Status: Single
Tax Rate: 12% Federal
State of Residence: CA
Age:33
Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 25%

Taxable
35.5% Vanguard Total Stock Market Index Fund Investor Shares (VTSMX) (0.15%)
16.7% Vanguard California Intermediate-Term Tax-Exempt Fund Investor Shares (VCAIX) (0.19%)
23.9% Vanguard Total International Stock Index Fund Investor Shares (VGTSX) (0.18%)

Roth IRA at Vanguard
23.9% Vanguard LifeStrategy Growth Fund (VASGX) (0.15%)

$23,369.28 in Vanguard Assets

Contributions (Hopefully more as my income goes up)
$5,500 for my Roth IRA (Lump Sum at the start of the year)
$250/Month in taxable (Split evenly between funds)


Questions:
1. I'm a pretty frugal guy (I save around 40% of my income), but now I feel like its time to aggressively start paying down my student loans. I mainly wanted to check with you guy on my "set it and forget it" retirement strategy.

2. Besides retirement, I'd also like to put money toward a house downpayment. I know the loans are priority #1 but I'd like to help contribute in this fund with my girlfriend. Is a savings account the best vehicle to store the fund?

3. Does anyone have a experience on establishing an LLC and a sep-ira? I think that is something I should look into as my performance income goes up.

Anyways, Thanks for all of your help. This forum is awesome!
Once you begin teaching full time at a college or university, you will have a 403b, employer match, health benefits, etc... . Take advantage of the 403b and employer match for your retirement contributions.

Since you have already set aside money in your taxable and IRA - great. The power of time and compounding is underway. Continue to contribute what you can to those until the other plans kick in (403b/SEP IRA). Take on those student loans in an aggressive fashion.

Forget about a house right now. It's low on the totem pole for you at this point. A house is a lousy investment: https://www.usatoday.com/story/money/co ... 340516002/

We would suggest revisiting home ownership around age 40-42 after your college/university teaching career is well underway, your student loans have been paid off, and you are settled into your teaching career.

On the income you make outside of W-2, yes - setting up a SEP-IRA would allow you to max out your contributions in the 403b at a college/university, and the SEP-IRA allows up to $55K or 25% (whichever is less in 2018) to be contributed of your self-employed income earned with your gig/private studio money as that "retirement plan" is considered separate from the income and retirement plan at the full time job.

We musicians have been part of the gig economy for several hundred years. :mrgreen:

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