High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

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ReadySetMillionaire
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High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ReadySetMillionaire » Wed Jan 09, 2019 11:50 am

Summary: I project that my wife and I will earn close to $190,000 this year, which is about $90,000 more than we are use to having. But, we have a little kiddo on the way in March, I still have $149,000 in student loan debt, and we have $113,000 remaining on our mortgage. Quite frankly, this high of an income comes with a ton of investment options, and I'm completely overwhelmed with where to put money moving forward.

My Plan In General -- Debt Free by 40 but Still Investing: I am not by any means obsessed with FIRE, but I do have two main goals: (1) debt free by 40, (2) maintain good cash flow, and (3) be as efficient as possible with investments/taxes (i.e., use tax-advantaged vehicles to my advantage).

Based on this, and being 31 years old, my current plan is to invest as much as possible while paying off the student loan and mortgage debt to have them paid off in nine years.

The issue, though, is that paying off debt and being efficient with tax-advantaged space aren't necessary parallel goals. I do feel like I'm striking a balance here -- I'm not going full Dave Ramsey and dumping anything and everything towards my debts, and this allows me to invest quite a lot every year.

I could write an entire essay on why I want to be debt free by 40, but basically, I simply want to have infinite flexibility when I'm 40. I want to be able to take a step back from my practice and coach sports, travel with my kids, etc. I want to be able to buy a vacation home in Maine and not blink about it. This is negotiable by a couple years, but it's a target I'm shooting for as of writing this.

I'm wondering from the community here whether this approach is reasonable and sound, or whether I should target goals more specifically.

About Me (Family/Income): Let's start with the most important thing: my wife and I are expecting a little one in March. Aside from me having no idea how to change a diaper, this probably has me extra concerned about where money is going this year, especially when it comes to cash flow.

My wife (31) is a speech therapist who makes about $60,000 per year. She is going to be taking 12 weeks off (unpaid) but fully intends to go back to work -- she loves her job and does not see herself being a SAHM.

I (31) am an attorney. I previously made about $50,000 per year, but started my own practice last year. My practice has really taken off, as I made $66,000 in just seven months last year. I will have made $36,000 at the end of this January. I am projecting a $150,000 income this year.

Importantly, I have basically structured my practice so that it almost automatically makes $50,000 a year if I were to get zero clients. This is done through appearance work, public defender lists, etc. But I have a steady stream of calls, and honestly, I can't imagine making less than $100,000 in income in any given year.

Total 2019 Income = $200,000
Bad Years = $150,000

Monthly Expense Overview: The following is a monthly expense overview:

Mortgage (w/ Property Tax/Insurance Included): $893
Utilities: $286
Hulu: $11
Groceries: $750
Cell Phones: $85
Car Expenses (Both Paid Off, so Gas/Insurance/Maintenance): $550
Life Insurance: $64
Student Loan Payment: $404
Law Firm Expenses: $800
Social/Discretionary: $700
TOTAL: $4,543

So, we have a pretty modest standard of living, and we are happy with it -- 1,100 square foot ranch in a great neighborhood, two paid off cars (2014 Honda CR-V, 2013 Toyota Rav-4), no cable except Hulu, etc. You'll also note that I run my law practice pretty lean, and I really like it that way as well. I may even ditch the office soon.

Assets: The following is a breakdown of our current assets:

House: $130,000
2013 Toyota Rav-4: $13,000
2014 Honda CR-V: $13,500
Checking Account: $5,000
Ally Account (2.00%): $25,000
HSA (Not Currently Invested): $8,800
Wife Rotha IRA: $12,000
Wife 401k: $59,500
My 401k: $45,000

In summary, we have $38,800 in cash if you include the HSA, $116,500 in retirement assets, and $156,500 in physical assets.

Liabilities: We fortunately do not have any consumer debt -- both cars are paid off, no credit card debt, no personal loans, etc. But both of our student loans were substantial upon graduation. For better or worse, we focused on paying off my wife's loans ($70k), which we accomplished in 2018. This is what we have left:

My student loans (6.41%): $149,000
Mortgage (4.50%): $113,000

Note that the student loan rate is an average of a bunch of rates -- it's actually 11 loans or so. There are a couple loans in there that are as high as 7.65% interest. I am targeting those first.

Current Net Worth: A brief net worth calculation:

Assets: $312,000
Liabilities: $262,000
Net Worth: $50,000

My Detailed Strategy in Tackling All This: As stated previously, I'm trying to gauge everything towards when I'm 40 years old. I'd love to have $1,000,000 in assets by then and zero debt, and accomplish all of that while maintaining good cash flow and being efficient with available tax-advantaged space.

Here's my plan for yearly contributions, and please note that these are in order of priority (i.e., if I don't have extra money to throw at debt in any given year, then I won't):

Income: $190,000

Law Firm Expenses (Tax Deductible): $8,000 -- Includes rent, insurance, CLE's, etc.

My Solo 401k: $40,000 -- I like the idea of using only my 401k here. My wife's plan does not have any match, and further, it's better to contribute from my end because I have to pay self-employment tax and the SS/Medicare tax. So, doing it this way reduces our tax burden more, but also allows me to hold onto the cash (rather than through her paycheck deductions) until we know we are comfortable and can put the $40,000 into the account.

HSA: $6,900 -- I'm still cautious about investing this, but I'll cross that bridge when I get to it.

Income Taxes: $35,000 -- I think this is a bit of a high projection, but with the tax laws graduating every year, I'm shooting for a higher estimate.

Home Expenses: $55,000 -- I'm adding about $5,000 based on having a kid and not knowing what that expense is.

Son's 529 Plan: $2,500 -- We are making the intentional decision not to pay for our kid's entire schooling. I calculate $2,500/year to be about $80,000 when he's 18. That's $80,000 more than I had.

Roth IRA: $11,000 -- I know we are very close to the income limit on this, but I love the idea of Roths because we can take our contributions out tax and penalty free. This provides another layer of available cash, which I stated as one of our primary goals earlier.

Extra Student Loan Payment: $22,000 -- This amount will be paid over nine years and will have the loans paid off when I'm 40 (approximately 15 years after I graduated). I plan to target the highest rate loans first and then pay off the lower ones. I don't think this is too turbo-charged, but perhaps I'm wrong.

Extra Mortgage Payment: $8,400 -- This amount over nine years, plus our regular monthly payment, will pay off the note in nine years. This is the lowest priority, and we will only do it if we have the funds readily available.

TOTAL: $188,800 -- Just a tiny bit of give here.


Your Thoughts: So this is my general plan. I'm posting here because I'm confused and overwhelmed by all the potential options, but I think I've put together a plan that balances taking advantage of tax-advantaged space (401k, Roth, 529), while also tackling debt at a rate that doesn't cripple me everywhere else.

Sorry if this is a rather long post here, but I thought I'd lay it all out there. Thanks for reading.

mhalley
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by mhalley » Wed Jan 09, 2019 12:00 pm

The plan looks pretty good to me. Have you checked into refi of the student loans? Wci has some good stuff at his site on refi etc. you could also check out his podcast #1 that discussed student loan refinancing.

https://www.whitecoatinvestor.com/stude ... financing/

I would recommend you incorporate your plan into your ips.
https://www.bogleheads.org/wiki/Investm ... _statement

If you are concerned you might exceed the Roth income limits, you can just go ahead and make the contibutions using the backdoor method.
Last edited by mhalley on Wed Jan 09, 2019 12:11 pm, edited 1 time in total.

boglewill34
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by boglewill34 » Wed Jan 09, 2019 12:08 pm

I'd consider paying off the highest interest student loans first, basically immediately. I'd also consider refinancing the house, the interest rate isn't all that great, you can get a 10-15 year fixed and save a good buck. Beyond that with the mortgage I wouldn't do anything, that would be the last thing to pay off after the student loans imo.

From there, I wouldn't do anything until 6 months to a year after the baby is born. Don't pigeon hole yourselves into a strategy now, let the new life come to you. You both may want something different than what you are projecting now when that time comes.

ktip
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ktip » Wed Jan 09, 2019 12:15 pm

Does your 5k budget for your kid include daycare after your wife returns to school? Daycare alone would likely be 5k/ year or much more, but it really depends on where you live and what your own situation is — maybe you have childcare covered some other way? Daycare where I live is relatively cheap and a little over 5k/ year, and I budget 10k/year for a baby, which is after taking into consideration tax breaks.

I think your plan looks great. I’d second the idea above to consider refinancing student loans. I’d also want see what the different loan rates are and would adjust the amount of money to loans per year dependent on the rates. E.g., if the 7.65% loans total 50k, I’d put more towards that the first year and less towards the 401k, and then later increase the 401k and reduce student loan payments when you only have the lower rate student loans.

Also, I would figure out how much you need in cash in the HSA to feel comfortable and then start investing the rest.

nix4me
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by nix4me » Wed Jan 09, 2019 12:17 pm

I think your plan is solid but I have 2 comments.

Your plan assumes no raises for 9 years, what will you do with excess?

What about large purchases over the next 9 years? Car, roof, etc? I would pile up some cash as well.

My plan is similar. I picked a date and based my plan on meeting all goals by that date in a balanced approach.

I would also invest some of my money in a taxable account instead of all in 401k and IRA. That way when I got to that super flexible age of 40, I could use some money instead of having it all locked up in retirement accounts until 59 1/2

Thegame14
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by Thegame14 » Wed Jan 09, 2019 12:18 pm

Where is daycare??? That is anywhere from $1,500-$1,800 PER MONTH for a good daycare, so that is $18-$22K per year you don't have listed.

FoolMeOnce
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by FoolMeOnce » Wed Jan 09, 2019 12:20 pm

I would take all the extra mortgage payments and direct them to the student loans that have a higher rate. Why pay down then lower rate first? (I think there may be reasons to pay even lower rate student loans first, too).

Afty
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by Afty » Wed Jan 09, 2019 12:23 pm

I'd caution that your new baby may throw a giant wrench in these plans. Priorities change once that first little one comes along.

Also agree with the others on daycare -- I don't see a line item for that in your budget?

Topic Author
ReadySetMillionaire
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ReadySetMillionaire » Wed Jan 09, 2019 12:30 pm

Thanks a ton for the comments thus far -- I appreciate the insight and emphasis on things I may have missed. A response to the main concerns:

Daycare: We are fortunate that we have this covered by family for the foreseeable future. My wife works 4 days/week. Her parents live 3 miles away, and her dad only works 2 days per week and he is dying to babysit. Her parents and my parents will make up the difference.

Healthcare: I'd also add that healthcare comes from wife's company. It's decent but not great at all.

Refinancing the Student Loans: I like having federal loans because of all the protections -- if something happens, my payment goes to $0; if i die, they are completely dissolved with no liability against my spouse; and with my current repayment plan (REPAYE), the government actually subsidizes half of unpaid interest. So with my monthly payment being $404, I actually get a bit of a subsidy here, reducing my interest rate. I've received quotes on rates, but it's like maybe a percent difference.

Excess: If we have an excess, then I'll probably just load up the 401k to the max because we will be in such a high tax bracket.

Large Purchases: We have $25,000 in cash now. I think this will cover basically any big expense, and then we would just replenish the savings. Quite frankly I think this amount of cash on hand is high (especially when you add the checking account, HSA, and Roth contributions), but with a kid on the way, I'm being very conservative here.
Last edited by ReadySetMillionaire on Wed Jan 09, 2019 12:33 pm, edited 1 time in total.

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Soul.in.Progress
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by Soul.in.Progress » Wed Jan 09, 2019 12:33 pm

Congrats on the upcoming baby!!


I will try to post more comments later, but on first glance I am wondering about healthcare insurance and costs? I didn’t see that listed in your budget.
Last edited by Soul.in.Progress on Wed Jan 09, 2019 12:33 pm, edited 2 times in total.
Start by doing what is necessary; | then do what is possible; | and suddenly you are doing the impossible. | -- Francis of Assisi

bgf
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by bgf » Wed Jan 09, 2019 12:33 pm

thats a great start as a solo practitioner. what area of law do you focus on?

pay off student loans asap. you cant get a guaranteed return anywhere near it in public markets.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

aristotelian
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by aristotelian » Wed Jan 09, 2019 1:11 pm

What kinds of costs do you anticipate under "home expense"?

In your tax bracket, I would do everything possible to prioritize spouse also maxing her 401k. Especially because you mention early retirement, you should have a lot of years to draw down your pretax accounts at a low rate.

jj
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by jj » Wed Jan 09, 2019 1:20 pm

Term Life Insurance - for both parents
...it is madness to risk losing what you need in pursuing what you simply desire. Warren E. Buffett

Topic Author
ReadySetMillionaire
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ReadySetMillionaire » Wed Jan 09, 2019 1:40 pm

bgf wrote:
Wed Jan 09, 2019 12:33 pm
thats a great start as a solo practitioner. what area of law do you focus on?

pay off student loans asap. you cant get a guaranteed return anywhere near it in public markets.
Real estate law, employment law, and basically any other civil litigation.

My hesitation in rushing to pay off the loans is that I will lose tax-advantaged space that I can't make up in the future.
aristotelian wrote:
Wed Jan 09, 2019 1:11 pm
What kinds of costs do you anticipate under "home expense"?
Basically everything in my monthly expense breakdown.
jj wrote:
Wed Jan 09, 2019 1:20 pm
Term Life Insurance - for both parents
We both have policies for 20 years, $750,000. Might buy more but that's enough for right now.

Topic Author
ReadySetMillionaire
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ReadySetMillionaire » Wed Jan 09, 2019 1:44 pm

nix4me wrote:
Wed Jan 09, 2019 12:17 pm
I would also invest some of my money in a taxable account instead of all in 401k and IRA. That way when I got to that super flexible age of 40, I could use some money instead of having it all locked up in retirement accounts until 59 1/2
This is a really, really, really good observation, and perhaps it is what where I'll put the excess.

boglewill34
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by boglewill34 » Wed Jan 09, 2019 1:46 pm

ReadySetMillionaire wrote:
Wed Jan 09, 2019 1:40 pm

My hesitation in rushing to pay off the loans is that I will lose tax-advantaged space that I can't make up in the future.
I can't make sense of this. Are you convincing yourself that it's a good deal to pay 7.5% in order to get 30% (or whatever %) of that back?

aristotelian
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by aristotelian » Wed Jan 09, 2019 1:47 pm

ReadySetMillionaire wrote:
Wed Jan 09, 2019 1:44 pm
nix4me wrote:
Wed Jan 09, 2019 12:17 pm
I would also invest some of my money in a taxable account instead of all in 401k and IRA. That way when I got to that super flexible age of 40, I could use some money instead of having it all locked up in retirement accounts until 59 1/2
This is a really, really, really good observation, and perhaps it is what where I'll put the excess.
It is not true that the funds are locked up. If you can save 5 years expenses in taxable, you can do a Roth conversion ladder to access pretax funds with no penalty. Again, I would advise OP in his tax bracket to max both 401k's. https://www.madfientist.com/how-to-acce ... nds-early/

Grt2bOutdoors
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by Grt2bOutdoors » Wed Jan 09, 2019 1:52 pm

ReadySetMillionaire wrote:
Wed Jan 09, 2019 1:40 pm
bgf wrote:
Wed Jan 09, 2019 12:33 pm
thats a great start as a solo practitioner. what area of law do you focus on?

pay off student loans asap. you cant get a guaranteed return anywhere near it in public markets.
Real estate law, employment law, and basically any other civil litigation.

My hesitation in rushing to pay off the loans is that I will lose tax-advantaged space that I can't make up in the future.
aristotelian wrote:
Wed Jan 09, 2019 1:11 pm
What kinds of costs do you anticipate under "home expense"?
Basically everything in my monthly expense breakdown.
jj wrote:
Wed Jan 09, 2019 1:20 pm
Term Life Insurance - for both parents
We both have policies for 20 years, $750,000. Might buy more but that's enough for right now.
Do you have disability insurance? What will be your annual expenses going forward with child? $750k will pay off mortgage and leave about $600k. A 4% withdrawal rate is $24k pretax, 6% is $36k. Is that amount plus social security enough to take care of your family?

College today costs $80k plus for 4 years in quite a few states (public). In 18 years, it’s $162k, the difference will be loans - so long as you are fine co-signing for them.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

MotoTrojan
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by MotoTrojan » Wed Jan 09, 2019 2:00 pm

boglewill34 wrote:
Wed Jan 09, 2019 1:46 pm
ReadySetMillionaire wrote:
Wed Jan 09, 2019 1:40 pm

My hesitation in rushing to pay off the loans is that I will lose tax-advantaged space that I can't make up in the future.
I can't make sense of this. Are you convincing yourself that it's a good deal to pay 7.5% in order to get 30% (or whatever %) of that back?
Agree. Pay off the higher interest loan and get the tax-free 6%+ growth.

Topic Author
ReadySetMillionaire
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ReadySetMillionaire » Wed Jan 09, 2019 2:20 pm

boglewill34 wrote:
Wed Jan 09, 2019 1:46 pm
ReadySetMillionaire wrote:
Wed Jan 09, 2019 1:40 pm

My hesitation in rushing to pay off the loans is that I will lose tax-advantaged space that I can't make up in the future.
I can't make sense of this. Are you convincing yourself that it's a good deal to pay 7.5% in order to get 30% (or whatever %) of that back?
My understanding of Bogleheads investment order is that it's a poor decision to waive tax-advantaged space in a rush to pay off debt, even if that debt is 7.65% interest.

This is because your money is likely taxed at a much higher rate now than when you will withdraw it, so it's wise to use pre-tax space (i.e., your 401k space) while you can. And if you don't use that space, it's gone forever -- it's not like you can go back to 2015 and make a Roth contribution for that right now.

Using oversimplistic calculations, if my family made $100,000 per year, and contributed $30,000 to pre-tax investment accounts, then only $70,000 in earnings are subject to income tax. Then we would pay about $13,000 in income tax. This means we got to use $87,000 of the money that year ($30,000 in pre-tax investments, $57,000 in post-tax wages). And this invested pre-tax money grows in a tax-deferred account, and with the power of compounding and earnings, makes the later taxes pretty nominal.

Conversely, if you didn't make any pre-tax investments, you pay about $17,000 in taxes. This leaves you with only having $83,000 to use for the year. This is a less efficient use of the $100,000 because more is being taken for taxes.

The difference becomes more significant when you are talking about $200,000 in annual income. With no contributions, you could be as high as $44,000 in income taxes; but with contributing $47,000 to pretax accounts, your income tax falls to $31,000.

So that's my thinking. I may have this wrong because this is relatively high interest debt? I don't know -- that's why I'm posting here. I'd actually love to hear that I'm wrong because I'd probably like to wipe out these loans in a year or two if that's the right mathematical choice.

magicrat
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by magicrat » Wed Jan 09, 2019 2:46 pm

ReadySetMillionaire wrote:
Wed Jan 09, 2019 2:20 pm
boglewill34 wrote:
Wed Jan 09, 2019 1:46 pm
ReadySetMillionaire wrote:
Wed Jan 09, 2019 1:40 pm

My hesitation in rushing to pay off the loans is that I will lose tax-advantaged space that I can't make up in the future.
I can't make sense of this. Are you convincing yourself that it's a good deal to pay 7.5% in order to get 30% (or whatever %) of that back?
My understanding of Bogleheads investment order is that it's a poor decision to waive tax-advantaged space in a rush to pay off debt, even if that debt is 7.65% interest.

This is because your money is likely taxed at a much higher rate now than when you will withdraw it, so it's wise to use pre-tax space (i.e., your 401k space) while you can. And if you don't use that space, it's gone forever -- it's not like you can go back to 2015 and make a Roth contribution for that right now.

Using oversimplistic calculations, if my family made $100,000 per year, and contributed $30,000 to pre-tax investment accounts, then only $70,000 in earnings are subject to income tax. Then we would pay about $13,000 in income tax. This means we got to use $87,000 of the money that year ($30,000 in pre-tax investments, $57,000 in post-tax wages). And this invested pre-tax money grows in a tax-deferred account, and with the power of compounding and earnings, makes the later taxes pretty nominal.

Conversely, if you didn't make any pre-tax investments, you pay about $17,000 in taxes. This leaves you with only having $83,000 to use for the year. This is a less efficient use of the $100,000 because more is being taken for taxes.

The difference becomes more significant when you are talking about $200,000 in annual income. With no contributions, you could be as high as $44,000 in income taxes; but with contributing $47,000 to pretax accounts, your income tax falls to $31,000.

So that's my thinking. I may have this wrong because this is relatively high interest debt? I don't know -- that's why I'm posting here. I'd actually love to hear that I'm wrong because I'd probably like to wipe out these loans in a year or two if that's the right mathematical choice.
This isn't the right way to think about it.

You have two options:

Option 1: Pay down debt. This returns you 7.65% risk free.
Option 2: Invest. If you invest in something risk free, like short-term government bonds, you'll earn ~2% risk free (I didn't look up exact yields). Or you invest in something risky.

If I could invest all of my money at a guaranteed 7.65%, I would do so in a heartbeat.

Topic Author
ReadySetMillionaire
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ReadySetMillionaire » Wed Jan 09, 2019 2:50 pm

magicrat wrote:
Wed Jan 09, 2019 2:46 pm
This isn't the right way to think about it.

You have two options:

Option 1: Pay down debt. This returns you 7.65% risk free.
Option 2: Invest. If you invest in something risk free, like short-term government bonds, you'll earn ~2% risk free (I didn't look up exact yields). Or you invest in something risky.

If I could invest all of my money at a guaranteed 7.65%, I would do so in a heartbeat.
Are you saying you would forgo putting money in a 401k until the high interest student loans are paid off?

Anybody else have any thoughts on this?

aristotelian
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by aristotelian » Wed Jan 09, 2019 2:51 pm

magicrat wrote:
Wed Jan 09, 2019 2:46 pm

This isn't the right way to think about it.

You have two options:

Option 1: Pay down debt. This returns you 7.65% risk free.
Option 2: Invest. If you invest in something risk free, like short-term government bonds, you'll earn ~2% risk free (I didn't look up exact yields). Or you invest in something risky.

If I could invest all of my money at a guaranteed 7.65%, I would do so in a heartbeat.
He gets a guaranteed return by investing his money pretax. In his tax bracket, that is worth much more than 7.65%.

Sic Vis Pacem
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by Sic Vis Pacem » Wed Jan 09, 2019 3:12 pm

Attorney here also. I'm a bit older and with a good firm, so I readily appreciate this advice may be less applicable with your solo practice. But... pay off the loans. Forget the hard numbers for a minute (I know, this is Bogleheads, stay with me. Plenty of other posters can help you there). You may not want to stay with your practice as long as you think you do now. You may want to slow down, change specialties, take on partners/associates, or make other adjustments to your plan. Getting rid of those loans provides you with flexibility, and with your take-home on a small private practice (Kudos on that, by the way), you can easily do so.

I paid off a similar amount at similar rates in the first three years of practicing. Was it the most optimal / efficient decision? I don't know. But the feeling of freedom and security was more than worth it for me and I would not change a thing.

My $.02.

MI_bogle
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Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by MI_bogle » Wed Jan 09, 2019 3:57 pm

Others have covered a bunch of the priority with loans/tax advantaged space

Couple other things not mentioned
Aside from me having no idea how to change a diaper
Don't worry, this is like the easiest part of parenting :D
HSA: $6,900 -- I'm still cautious about investing this, but I'll cross that bridge when I get to it.
I would be cautious of investing it as well for the next several years. Expect to max out your deductible and OOP max due to birth and related expenses, and all the doctor visits in the child's first year of life.

Once you weather that storm you can decide what course you want to chart with regards to investing, receipt saving, etc

bgf
Posts: 718
Joined: Fri Nov 10, 2017 9:35 am

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by bgf » Wed Jan 09, 2019 4:03 pm

aristotelian wrote:
Wed Jan 09, 2019 2:51 pm
magicrat wrote:
Wed Jan 09, 2019 2:46 pm

This isn't the right way to think about it.

You have two options:

Option 1: Pay down debt. This returns you 7.65% risk free.
Option 2: Invest. If you invest in something risk free, like short-term government bonds, you'll earn ~2% risk free (I didn't look up exact yields). Or you invest in something risky.

If I could invest all of my money at a guaranteed 7.65%, I would do so in a heartbeat.
He gets a guaranteed return by investing his money pretax. In his tax bracket, that is worth much more than 7.65%.
i dont follow. he gets a risk free and tax free gain of 7.65% by paying down loans with after tax dollars.

how is he getting the same or better guaranteed tax free return through his 401k?
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

aristotelian
Posts: 5070
Joined: Wed Jan 11, 2017 8:05 pm

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by aristotelian » Wed Jan 09, 2019 4:08 pm

:arrow:
bgf wrote:
Wed Jan 09, 2019 4:03 pm
aristotelian wrote:
Wed Jan 09, 2019 2:51 pm
magicrat wrote:
Wed Jan 09, 2019 2:46 pm

This isn't the right way to think about it.

You have two options:

Option 1: Pay down debt. This returns you 7.65% risk free.
Option 2: Invest. If you invest in something risk free, like short-term government bonds, you'll earn ~2% risk free (I didn't look up exact yields). Or you invest in something risky.

If I could invest all of my money at a guaranteed 7.65%, I would do so in a heartbeat.
He gets a guaranteed return by investing his money pretax. In his tax bracket, that is worth much more than 7.65%.
i dont follow. he gets a risk free and tax free gain of 7.65% by paying down loans with after tax dollars.

how is he getting the same or better guaranteed tax free return through his 401k?
He is in a high tax bracket. For $1k that he could put after tax to his loans, he could put perhaps $1400 in his 401k. That is without any investment return. His tax bracket in retirement may not be zero but it will be less than it is now.

bgf
Posts: 718
Joined: Fri Nov 10, 2017 9:35 am

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by bgf » Wed Jan 09, 2019 4:22 pm

aristotelian wrote:
Wed Jan 09, 2019 4:08 pm
:arrow:
bgf wrote:
Wed Jan 09, 2019 4:03 pm
aristotelian wrote:
Wed Jan 09, 2019 2:51 pm
magicrat wrote:
Wed Jan 09, 2019 2:46 pm

This isn't the right way to think about it.

You have two options:

Option 1: Pay down debt. This returns you 7.65% risk free.
Option 2: Invest. If you invest in something risk free, like short-term government bonds, you'll earn ~2% risk free (I didn't look up exact yields). Or you invest in something risky.

If I could invest all of my money at a guaranteed 7.65%, I would do so in a heartbeat.
He gets a guaranteed return by investing his money pretax. In his tax bracket, that is worth much more than 7.65%.
i dont follow. he gets a risk free and tax free gain of 7.65% by paying down loans with after tax dollars.

how is he getting the same or better guaranteed tax free return through his 401k?
He is in a high tax bracket. For $1k that he could put after tax to his loans, he could put perhaps $1400 in his 401k. That is without any investment return. His tax bracket in retirement may not be zero but it will be less than it is now.
what you are counting as a "gain" isn't a gain, its just the amount of income that will be taxed at an unknown rate in the future. the amount of taxes he'll pay in the future you aren't including in your calculation.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

aristotelian
Posts: 5070
Joined: Wed Jan 11, 2017 8:05 pm

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by aristotelian » Wed Jan 09, 2019 4:33 pm

bgf wrote:
Wed Jan 09, 2019 4:22 pm


what you are counting as a "gain" isn't a gain, its just the amount of income that will be taxed at an unknown rate in the future. the amount of taxes he'll pay in the future you aren't including in your calculation.
Agreed. I am just saying it is not as simple as guaranteed return vs risky investment in 401k. It is guaranteed return vs risky investment *and* tax benefit. He is in a high tax bracket, so the tax benefit is substantial.

HornedToad
Posts: 895
Joined: Wed May 21, 2008 12:36 am

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by HornedToad » Wed Jan 09, 2019 4:35 pm

ReadySetMillionaire wrote:
Wed Jan 09, 2019 2:50 pm
magicrat wrote:
Wed Jan 09, 2019 2:46 pm
This isn't the right way to think about it.

You have two options:

Option 1: Pay down debt. This returns you 7.65% risk free.
Option 2: Invest. If you invest in something risk free, like short-term government bonds, you'll earn ~2% risk free (I didn't look up exact yields). Or you invest in something risky.

If I could invest all of my money at a guaranteed 7.65%, I would do so in a heartbeat.
Are you saying you would forgo putting money in a 401k until the high interest student loans are paid off?

Anybody else have any thoughts on this?
I would split it between debt and 401k with more of an emphasis to debt unless you plan on retiring in early 40s where the 401k tax savings would be more significant. I wouldn't be paying extra on mortgage though until I paid off the student loans and potentially was maxing out retirement space.

Topic Author
ReadySetMillionaire
Posts: 13
Joined: Thu Jul 02, 2015 6:59 am

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ReadySetMillionaire » Wed Jan 09, 2019 6:07 pm

HornedToad wrote:
Wed Jan 09, 2019 4:35 pm
I would split it between debt and 401k with more of an emphasis to debt unless you plan on retiring in early 40s where the 401k tax savings would be more significant. I wouldn't be paying extra on mortgage though until I paid off the student loans and potentially was maxing out retirement space.
This is basically my approach, but if and when the student loans were paid off, then it's paying off a 4.50% loan verse investing, and then I'd probably hear bloody murder for paying off the mortgage. I thought just slowly paying off the mortgage -- not crazy, but accelerated -- was a fair balance. I also thought putting some towards the mortgage at least had some equity in it that I could get back, whereas the same could not be said of the student loans. Fair?

Northern Flicker
Posts: 4138
Joined: Fri Apr 10, 2015 12:29 am
Location: Taking a break from Bogleheads

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by Northern Flicker » Wed Jan 09, 2019 6:25 pm

Congrats on your and your spouse’s successes.

If you are itemizing deductions and getting net value over the standard deduction by deducting your mortgage, I likely would not focus on paying it off, but any fixed income allocation you need to hold in taxable space should be implemented by using the funds to pay down the student loans first and then mortgage at current bond rates.

You probably want long-term disability and term life insurance for both you and spouse, though you may be able to get some benefits through your spouse’s employment, and spouse may have disability and life insurance through employment.

Employment-based spouse life insurance works well. Employee life insurance can be more problematic because a terminal illness may lead to giving up the job and insurance while still alive.

You probably want to open a SEP-IRA or solo 401K. The SEP-IRA is easier and with a baby in the way you will be busy so that is probably a good start. If and when you setup a solo 401K you can roll the SEP assets into the 401K plan if desired.
Taking a break from Bogleheads.

dcw213
Posts: 89
Joined: Sun Dec 16, 2012 3:04 pm

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by dcw213 » Wed Jan 09, 2019 7:21 pm

Generally speaking your plan makes a lot of sense and seems well thought out. You are clearly a planner. I would echo advice that others have said to relax a bit from the details and acknowledge that your life will change drastically in March. My own experience was that the first 1.5 years were a blur and I found very little time to do anything beyond acceptable effort at work (I had previously always gone above and beyond) and taking care of the baby (we both were working). It was great but chaotic.

That's awesome that your family is willing to help but I have seen several instances where after a few months (or weeks) parents or in laws want their lives back after realizing that 40-50 hours per week of infant child care was easier in theory than in practice (ie they wanted to enjoy retirement not have a full time challenging job). All I am saying is see how things go for the first 6-12 months before getting too attached or committed to a specific plan. Do continue to consider options as you have but be flexible as parenting and raising children is all about pivoting and adapting to change.

Topic Author
ReadySetMillionaire
Posts: 13
Joined: Thu Jul 02, 2015 6:59 am

Re: High Income for First Time, Kid on the Way, and I'm Overwhelmed with My Options (Long)

Post by ReadySetMillionaire » Thu Jan 10, 2019 1:14 pm

dcw213 wrote:
Wed Jan 09, 2019 7:21 pm
Generally speaking your plan makes a lot of sense and seems well thought out. You are clearly a planner. I would echo advice that others have said to relax a bit from the details and acknowledge that your life will change drastically in March. My own experience was that the first 1.5 years were a blur and I found very little time to do anything beyond acceptable effort at work (I had previously always gone above and beyond) and taking care of the baby (we both were working). It was great but chaotic.

That's awesome that your family is willing to help but I have seen several instances where after a few months (or weeks) parents or in laws want their lives back after realizing that 40-50 hours per week of infant child care was easier in theory than in practice (ie they wanted to enjoy retirement not have a full time challenging job). All I am saying is see how things go for the first 6-12 months before getting too attached or committed to a specific plan. Do continue to consider options as you have but be flexible as parenting and raising children is all about pivoting and adapting to change.
Thanks for the comment. I think the thing that I need to keep in mind is to keep cash on hand and make my plan as malleable as possible, and approach things on a year-by-year basis. In other words, my plan as laid out above is not necessarily scripture, but it will change year-to-year; the above is just a goal.

Some very smart people have told me repeatedly that it's hard to understand how expensive kids are, and how much one thing can affect a year's plan, so I need to take that into account every year.

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