Feeling late to the game and hoping healthcare savings will help. Thoughts?

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Topic Author
peaceseeker
Posts: 3
Joined: Thu Apr 25, 2019 10:20 am

Feeling late to the game and hoping healthcare savings will help. Thoughts?

Post by peaceseeker » Sat May 11, 2019 7:34 pm

New poster with a ton of questions, particularly regarding investments I plan to use to pay for healthcare in retirement. My wife and I feel late to the game, but I have saved for retirement on and off (Mostly on), and I switched to index funds a few years back to keep costs low. I overthink things and I sought out a comprehensive financial advisor to help put my mind at ease. We did learn some things, but we realized that we had paid for someone to make things overly complex and more expensive, so we parted ways to go back to doing it ourselves. I will draw a lucrative pension in 11 years that will pay approximately 85% of my pay. That said, I don’t want to count my chickens before they hatch, so we are still trying to save above and beyond (Using 15% income savings rate as a rough guideline). We would appreciate any input, advice and/or constructive criticisms on our situation from the community, and I posted some specific questions (Many) near the end of the post. I apologize in advance for any posting/format errors, and I thank everyone for the thoughtfulness and knowledge on this site.


Demographics/Income/Debt/Taxes/Insurance

Income: His 100K; Hers 50K – Self-employed

Emergency funds: 25K (Enough for 6 months expenses)

Additional Cash: 8K – (Above and beyond emergency savings) Advisor set us up with Taxable account, but we closed it when we left. Had some emergency fund here and it was invested. Decided we didn’t like investing emergency savings, even if only a part of it.

Debt: Mortgage - 205K (4.25%) with 29 years remaining; Vehicle – 8.5K (2.99%) with 2.5 years remaining.

Tax Filing Status: Married Filing Jointly with 2 Dependent Children (Ages 10/12)

Tax Rate: 12% Federal, 7.05% State

State of Residence: Minnesota

Ages: Him (44); Her (50)

Desired Asset Allocation: 80% stocks / 20% bonds (Thoughts?)

Desired International allocation: 20%

His Life Insurance: 1 Million of term with 15 years left; 250K through employer plan (I plan to retire from current occupation in 11 years)

His Short-term disability: 6 Months full pay

His Long-term disability: 60% of pay (Through employer plan and I currently pay about 20 bucks per month so that taxes won’t be taken out if I have to draw).

Her Life Insurance: 250K Variable Universal Life TIAA CREFF; 100K term policy (Done in last year with Advisor. Thinking this isn’t enough and that we need to cancel VUL policy and get term – Thinking 500K).

Life Insurance: 30K through his employer (Kids each have 10K as well).

Her Short-term disability: None

Long-term disability:
3K per month - 180 day elimination period.


Current retirement assets

His 457: 130K (65%)
30% - Vanguard Institutional Index Fund (VIIIX) (.02)
6% - Vanguard Mid-Cap Index Fund (VMCPX) (.03)
6% - T. Rowe Price Small-Cap Stock Fund (TRSSX) (.66)
10% - Vanguard Total International Stock Index Fund (VTPSX) (.07)
12% - Vanguard Total Bond Market Index Fund (VBMPX) (.03)

His Healthcare VEBA: 13K (6.5%)
3% - Vanguard 500 Index Admiral (VFIAX) (.04)
.5% - Vanguard Mid-Cap Index Admiral (VIMAX) (.05)
.5% - Vanguard Small-Cap Index Admiral (VSMAX) (.05)
.5% - Vanguard Total International Stock Index Admiral (VTIAX) (.11)
1.0% - PIMCO Total Return (PTTRX) (.55)

His Post-Employment Healthcare Savings Plan (Not an HSA) through employer: 36K (18.5%)
14% - Total Stock Market Index Fund (Proprietary fund – Benchmark is Russell 3000 Index) (.01)
3% - Broad International Stock Fund (Proprietary fund – Benchmark is MSCI ACWI ex USA) (.22)
3.5% - Bond Fund (Proprietary fund – Benchmark is Barclays Aggregate Index) (.09)

Her Roth IRA at TD Ameritrade – 10K (5%)
3% - SPDR Portfolio Total Stock Market ETF (SPTM) (.03)
1% - SPDR Portfolio Developed World ex-US ETF (SPDW) (.04)
1% - SPDR Portfolio Aggregate Bond ETF (SPAB) (.04)
Note – Due to transition away from advisor, we have yet to move to these funds so these are proposed.

Her SEP at TD Ameritrade – 10K (5%)
3% - SPDR Portfolio Total Stock Market ETF (SPTM) (.03)
1% - SPDR Portfolio Developed World ex-US ETF (SPDW) (.04)
1% - SPDR Portfolio Aggregate Bond ETF (SPAB) (.04)
Note – Due to transition away from advisor, we have yet to move to these funds so these are proposed.

His HSA - 11.5K (Currently using this for health expenses now vs. later)
Employer currently contributes $3400 per year. We currently use the account to pay for healthcare, dental and orthodontic expenses. This is all in cash.


Contributions

New Annual Contributions
His Pension: 11K – Required fixed amount
His 457: 15.5K - Just increased annual contributions to 15.5K from 11.5K - No match
His Post-Employment Health Savings: 8K – Funded payout of accrued use it/lose it leave, paycheck is same.
His VEBA: 0 - Benefit switched to Health Retirement account so no new contributions.
Her Roth IRA: 6K
Her SEP: No new money unless we need to contribute to take us down to next lower tax bracket.
HSA: 3.4K

Available funds

Funds available in his VEBA
Vanguard Target Date Funds (.12 to .15)
Vanguard Life Strategy Funds (.12 to .14)

Funds available in her Roth and SEP
Too many to list – The plan is to assemble 3-Fund based on post showing SPDR funds at TD that are similar to Vanguard funds.

Questions:

1. Should we pay off our vehicle loan using savings if we aggressively put the money back into savings?

2. If he retires from current occupation at age 55 and does not obtain a job that offers insurance, the thought was we would fund health insurance first through his VEBA until depleted. With that in mind should we invest VEBA in AA more aligned with say a 2030 Target Date or conservative AA such as age in bonds?

3. Health Care Savings Plan (Not an HSA) should have well over 200K by the time he retires from occupation at 55. The plan is to fund health insurance with this account after VEBA is depleted. Should this account also have an AA that leans more conservatively since we plan to tap into it shortly after he turns 55?

4. Should we invest part of our HSA funds? Should we contribute more or the max? We currently use his HSA to pay for medical, dental and ortho expenses. We plan to keep approximately two years of family maximum deductibles on hand (10,800)

5. With him having 85% income replaced after retirement and having accounts to pay for health care expenses (At least for a while) does it seem too risky for us to have AA for her Roth and SEP and his 457 at 80/20?

6. Should he start a Roth and fully fund that with remainder in 457 or work to max 457?

7. Emergency savings – Thinking of keeping 10K in liquid savings, 12K in laddered 1 year CDs with 1K coming due each month (Too much hassle?) and the remaining 3K or so padding various accounts to eliminate bank account fees (E.g. Minimum account fees, buffer for bill pay and checking accounts, etc.)

8. Should we cancel her VUL Life insurance and get more term?

Thanks for taking the time to view!

togb
Posts: 165
Joined: Mon Oct 23, 2017 8:36 pm

Re: Feeling late to the game and hoping healthcare savings will help. Thoughts?

Post by togb » Sun May 12, 2019 5:00 pm

Welcome, this is a great forum and you will get lots of useful information and observations here. First, let me recommend that you and your wife consider changing from targeting 15% contribution rates, to both of you maxing out contributions. You have a great pension-- but since she's self employed she does not, and her accounts really need to be bolstered.



Desired Asset Allocation: 80% stocks / 20% bonds (Thoughts?) If you really are considering retiring in 11 years, this seems fine. But you've not shared when your wife plans to retire, or what your expenses will be.


Her Life Insurance: 250K Variable Universal Life TIAA CREFF; 100K term policy (Done in last year with Advisor. Thinking this isn’t enough and that we need to cancel VUL policy and get term – Thinking 500K). In most cases, term is better than the other options.

Life Insurance: 30K through his employer (Kids each have 10K as well). Children don't typically need life insurance-- since no one is depending upon their income. Children need to be beneficiaries of life insurance.

Current retirement assets
His 457: 130K (65%)
Her Roth IRA at TD Ameritrade – 10K (5%)
Her SEP at TD Ameritrade – 10K (5%)

It seems you have pretty good health care savings, but total retirement assets are $150K? What amount are you hoping to draw from retirement assets annually? I know you said your pension pays 85% of living expense; it is inflation adjusted? If you wanted to draw say 20K from retirement for a 30 year retirement, the target for portfolio would be 500K. Will you be drawing SS? Do you wish to leave inheritance to your children? Do you have separate funds for their college expenses?

New Annual Contributions
His Pension: 11K – Required fixed amount
His 457: 15.5K - Just increased annual contributions to 15.5K from 11.5K - No match
His Post-Employment Health Savings: 8K – Funded payout of accrued use it/lose it leave, paycheck is same.
His VEBA: 0 - Benefit switched to Health Retirement account so no new contributions.
Her Roth IRA: 6K
Her SEP: No new money unless we need to contribute to take us down to next lower tax bracket.
HSA: 3.4K

I would look to max out HSA, and not draw it down for current expenses. It's triple tax advantaged. I'd also look to have her increase her contributions to the absolute max allowed. Unless I've missed something, she has just $20K in retirement savings? Will wait for others to chime in but those are the top of mind things that sort of jumped out at me first thing.

Topic Author
peaceseeker
Posts: 3
Joined: Thu Apr 25, 2019 10:20 am

Re: Feeling late to the game and hoping healthcare savings will help. Thoughts?

Post by peaceseeker » Sun May 12, 2019 8:43 pm

togb,

Thanks for the response. Your response highlighted some things I missed...

If you really are considering retiring in 11 years, this seems fine. But you've not shared when your wife plans to retire, or what your expenses will be.

Expenses should be within available pension funds as pension replaces 85 percent income and we live under that now. She should work until approximately 65. This fits with me retiring from current occupation at age 55 and working for a few years after.

Do you have separate funds for their college expenses?

No. My thought was we would try to assist with this while still working, and the reason for putting in a few years after retiring from current job (And her still working a few years) would be to get the younger one through college.

Will you be drawing SS?


Yes we both will, however my SS is limited because I haven't contributed since i've been paying into pension.

It seems you have pretty good health care savings, but total retirement assets are $150K? What amount are you hoping to draw from retirement assets annually? I know you said your pension pays 85% of living expense

I think pension should cover most expenses and I am striving to have health savings vehicles cover those expenses. In other words, I hope most of the draw is from VEBA and post retirement healthcare savings vehicle and that other funds in 457, etc. can be held until needed for other bigger ticket expenses such as replacing vehicles, etc.

it is inflation adjusted?

I'm pretty ignorant here, but the percentage I draw will essentially be based on my last few years' salary and it has traditionally paid small COLA increases, so to the extent that I plan it should periodically increase from time to time would that be considered an adjustment? I know some plans trigger COLAs based on inflation measures, but I don't know about mine for sure.

Insurance

Excellent points - Thanks a ton for the input.

Do you wish to leave inheritance to your children?

Our goal is to get them launched and hopefully assist them so that they are not saddled with college debt. Anything extra is nice, but it feel slike we will stay busing making sure our needs are met and my wife and I do a few things we've always wanted to do.

I would look to max out HSA, and not draw it down for current expenses. It's triple tax advantaged. I'd also look to have her increase her contributions to the absolute max allowed.

Great advice. I'm thinking we have enough cash to do this, and I think the barrier is in the for me is the psychology of being able to cover health expenses without it tapping into any other accounts. The rational, unattached part of the mind can see the benefits of banking funds in HSA and reaping tax benefits.

Unless I've missed something, she has just $20K in retirement savings? Will wait for others to chime in but those are the top of mind things that sort of jumped out at me first thing.

Yes, you've picked up on what's been on my mind. I feel like I can see we will be able to cover expenses in retirement, but it feels like we're behind. We are certainly increasing savings as we go forward.

Many thanks for your time and thoughtful reply, togb!

togb
Posts: 165
Joined: Mon Oct 23, 2017 8:36 pm

Re: Feeling late to the game and hoping healthcare savings will help. Thoughts?

Post by togb » Mon May 13, 2019 8:49 pm

I agree with you that you are right. You have not shared enough information for anyone to be able to tell for sure. And that's okay if you are not comfortable. Here's some stuff to mull over.

1. 85% of your living expense is not the same as 100%. And you will pay tax on your pension, so gross vs net is vitally important.
2. No one ever thinks they are getting divorced, and half are wrong. (I was wrong, and trust me, it set me back) Your retirement savings are very uneven, and if you divorce, your 85% will become 42.5%; while you would get have of hers... that won't be much offset.
3. Suggest you determine your true required and desired spending in retirement, including getting a handle on likely medical expenses. (this is the area you are probably best prepared)
4. Once you have that number, deduct your pension amount, your SS amount. Be sure to adjust these for taxes, as you cannot spend the gross, only the net. The difference is what your retirement portfolio should provide. Multiple that amount by 25 for your minimum portfolio amount. If you wnat to be safe, multiply it by 30 and that's your conservative target.

Then make a plan to hit that target before you retire. For the plan to be realistic, you need to include expenses, the assistance you're going to provide your children for college, and I like to include a "buffer" just in case. When I got granular about this exercise, I realized my working assumption that a million dollars would be ample-- it just seemed like so much, right? Well, I was wrong. In my case it's not enough. I had to get real about my target. Once you do that work then you will get clarity, and likely become quite disciplined about getting to your number.

Forgive me if in my desire to be clear, I am being blunt. My intent is to challenge your thinking in a way that helps you get clear on this.

Topic Author
peaceseeker
Posts: 3
Joined: Thu Apr 25, 2019 10:20 am

Re: Feeling late to the game and hoping healthcare savings will help. Thoughts?

Post by peaceseeker » Tue May 14, 2019 8:46 pm

togb,

Your directness/bluntness is appreciated. Thanks for the response. It costs about 4 to 5 K per month for our expenses (With the difference being what stuff we would cut if we had to) so if that info helps comment on stuff feel free. Again - Not offended by bluntness. In the meantime, I will try to approach our situation from the perspectives you suggested and crunch the numbers. Thanks again for taking the time to review and comment.

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