31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

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Topic Author
freeflowme
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31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by freeflowme »

Hey all,

Here's my stats:

31 y.o. Married w/ 2 kids. Wife and I both self-employed.

Gross income ~100k/yr
Net income ~70k/yr
50k in cash on hand
Both making maximum "employee" contribution of 18k/yr to i401(k) for a total investment of 36k/yr.

At most recent check, accounts value were at:
My Roth IRA - 78k
Wife's Roth IRA - 91k (opened these before we had access to an i401k)
Wife's Roth 401k - 102k (funded this before realizing the power of tax savings by contributing to traditional)
Wife's Trad 401k - 30k
My Trad 401k - 52k (funding these more recently and for foreseeable future)
Total Retirement Accounts value - 353k
All these accounts are invested in Vanguard Target Retirement 2050 (don't know if I should diversify more, given that the point of these funds is to be self-diversified)

~115k left on mortgage.

Basically, I feel like we're making the maximum tax-advantaged contributions we can every year and at present there's no real point in making contributions to any funds that aren't tax-advntaged, but I always want to be doing more. Any thoughts / ideas much appreciated.
Last edited by freeflowme on Mon Feb 05, 2018 11:29 pm, edited 1 time in total.
DSInvestor
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Re: Here's What I'm Doing - What Can I be Doing Bettere

Post by DSInvestor »

You can make employer contributions to the i401k of around 20% of net business income to give you some extra tax advantaged space. If your tax situation is such that you’re in a very low or 0% tax bracket, reduce traditional employee i401k and increase Roth i401k contributions. Employer profit share contributions are always traditional.

Beyond the 401k, look into Roth IRA, taxable investing, paying extra mortgage principal.

Deadline for 2017 IRA contributions is APR 17, 2018. You still have time for employer i401k contributions.

If you’re eligible for ACA premium tax credit, play with retirement contributions and their impact on AGI/tax credit.
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Topic Author
freeflowme
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Re: Here's What I'm Doing - What Can I be Doing Bettere

Post by freeflowme »

DSInvestor wrote: Mon Feb 05, 2018 1:59 pm You can make employer contributions to the i401k of around 20% of net business income to give you some extra tax advantaged space. If your tax situation is such that you’re in a very low or 0% tax bracket, reduce traditional employee i401k and increase Roth i401k contributions. Employer profit share contributions are always traditional.

Beyond the 401k, look into Roth IRA, taxable investing, paying extra mortgage principal.

Deadline for 2017 IRA contributions is APR 17, 2018. You still have time for employer i401k contributions.

If you’re eligible for ACA premium tax credit, play with retirement contributions and their impact on AGI/tax credit.
Thanks, DSI. We hit the 0% tax bracket this year. I should look at allocating our 2018 contributions between Roth / Traditional to make sure we don't put a dollar more in Traditional than we have to to stay at 0% and the rest in Roth.

Utilizing the i401(k) Traditional contributions has made a WORLD of difference in saving us money with ACA premiums. I'm afraid that the current system may not last, but we'll see what the future holds. For now, contributing to retirement not only means we pay less tax but get better health insurance for less. Win-win-win for us.
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Watty
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Re: Here's What I'm Doing - What Can I be Doing Better?

Post by Watty »

freeflowme wrote: Mon Feb 05, 2018 1:54 pm Any thoughts / ideas much appreciated.
One thing you could do would be to check with your lender to see if they will "recast your mortgage"(Google this) if you make a large prepayment. They are not required to but they usually will for a small processing fee. The way this works is if you pay the loan balance down by 33%(or whatever) then your required mortgage payment will be reduced by the same percentage. The interest rate and length of the loan will stay the same which can be important if something happens like interest rates rise or you are laid off.
radiowave
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Re: Here's What I'm Doing - What Can I be Doing Better?

Post by radiowave »

Just checking if you have your cash in a high yield savings account like Ally, AMEX, Discover, etc. current yields around 1.35% 12 mo CDs around 2.0%. Every little bit helps.
Bogleheads Wiki: https://www.bogleheads.org/wiki/Main_Page
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freeflowme
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Re: Here's What I'm Doing - What Can I be Doing Better?

Post by freeflowme »

Watty wrote: Mon Feb 05, 2018 10:29 pm
freeflowme wrote: Mon Feb 05, 2018 1:54 pm Any thoughts / ideas much appreciated.
One thing you could do would be to check with your lender to see if they will "recast your mortgage"(Google this) if you make a large prepayment. They are not required to but they usually will for a small processing fee. The way this works is if you pay the loan balance down by 33%(or whatever) then your required mortgage payment will be reduced by the same percentage. The interest rate and length of the loan will stay the same which can be important if something happens like interest rates rise or you are laid off.
Hmm... most things home-mortgage are new to me, as I’ve never really considered putting money there under the logic that saving 2.75% doesn’t compare to earning 6+% in the market. May be worth looking at, though.

And, I couldn’t figure out how to multi-quote on my phone, but yes our cash has been with Ally for the past 7 or so years. Happy to see there rates go up again recently.
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Watty
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by Watty »

freeflowme wrote: Tue Feb 06, 2018 10:47 am Hmm... most things home-mortgage are new to me, as I’ve never really considered putting money there under the logic that saving 2.75% doesn’t compare to earning 6+% in the market. May be worth looking at, though.
If you did a mortgage recast your cash flow would also be improved because your mortgage payment would be reduced.

Investing the money and getting a higher return is riskier than it sounds because you will have sequence of returns risk and ongoing mortgage payments. Here is the example I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
The problem is that even if you get a good average investing return over the next 20 years you could still do badly if you have some bad years early in the process.
Topic Author
freeflowme
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by freeflowme »

Watty wrote: Tue Feb 06, 2018 11:49 amIf you did a mortgage recast your cash flow would also be improved because your mortgage payment would be reduced.

Investing the money and getting a higher return is riskier than it sounds because you will have sequence of returns risk and ongoing mortgage payments. Here is the example I have posted before.
 If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To break even the next year you would need to gain back the $16K and another $6,000 for the next years mortgage payments which is $22K. That would take a 25.6% return on the remaining $84K just to break even.
The problem is that even if you get a good average investing return over the next 20 years you could still do badly if you have some bad years early in the process.
It's definitely something I need to learn more about and understand better. I think it was actually DSInvester (above) who, in a thread I started a few years ago asking if I should pay off the remainder of our mortgage (which we could do in 3-4 years if we chose to), exhorted me not to instead stating the merits of taking full advantage of tax-advantaged accounts. Since we're self-employed, we have access to 50-60k+ of tax-advantaged contributions a year, which if we take advantage of also saves us thousands not only in taxes but in health insurance premiums due to the current ACA situation.

I guess what I'm saying is I feel like I've gotten the exact opposite advice here before, so maybe people just take different approaches to things? :confused
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Watty
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by Watty »

I may have misunderstood the situation when I saw the word "maximum". From your original post;
freeflowme wrote: Mon Feb 05, 2018 1:54 pm Basically, I feel like we're making the maximum tax-advantaged contributions we can every year and at present there's no real point in making contributions to any funds that aren't tax-advntaged, but I always want to be doing more.
I assumed that they were maxed out. Looking back on it the post sounds like they were not maxed out but you had gotten down to zero federal taxes so making more deductible 401k contributions does not make sense because you would eventually need to pay taxes on the money when it is withdrawn.

There are still might be options to;
1) Make Roth 401k (or similar) contributions.
2) Do Roth conversions in the zero percent tax bracket.

And I agree that doing those before payging down the mortage would make sense.

If you get to the point here you would be investing money in a taxable account then paying down the mortgage would be worth considering even with the low interest rate.
cmb16
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by cmb16 »

As I am also 31 y/o, 2 kids, single income (wife SAHM) in the same ballpark (92-95k gross), I must say I am beyond impressed at your savings. Without delving too personal, I would love to know how you are doing this, because to max out both 401k's would leave me with $350 per week take home. I don't know if high COL vs. low COL area has anything to do with it (I'm in MA), but I'm stunned. Well done, sir.
omeganuts0213
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by omeganuts0213 »

You are doing really well in savings. I am really late to savings for retirement, just started maxing out the past few years
Last edited by omeganuts0213 on Thu May 16, 2019 10:33 am, edited 1 time in total.
Topic Author
freeflowme
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by freeflowme »

cmb16 wrote: Tue Feb 06, 2018 1:34 pm As I am also 31 y/o, 2 kids, single income (wife SAHM) in the same ballpark (92-95k gross), I must say I am beyond impressed at your savings. Without delving too personal, I would love to know how you are doing this, because to max out both 401k's would leave me with $350 per week take home. I don't know if high COL vs. low COL area has anything to do with it (I'm in MA), but I'm stunned. Well done, sir.
My wife and I sit down and worked out a budget together before the start of each new calendar year, and our necessary expenses usually total up somewhere around $25k/yr. We just happen to live in the very cheapest house in our development (and kind of in our whole area), just because it was the only one we could afford when we were looking; we have two cars that both are almost 20 years old, so we have no payment and insurance costs next to nothing. We both work from home, so we spend relatively little on gas. I haven't bought new clothes or shoes in about 5 years. I turn the heat off at night.

Basically, once I realized straight out of college that I'm in a field where my earning ability isn't ever going to be very high, I figured I wanted to get to $1 mil in investments ASAP, because the only way I was ever going to have long-term financial security would be to let the market do a lot of the work for me along the way. So, for the past 10 years being a pretty cheap bugger has been my #1 hobby. Sometimes I wonder if the current sacrifice is worth the potential future gain...
Olemiss540
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by Olemiss540 »

Marginal state tax rate? If in a 0% tax state, I would be very tempted to continue fully funding Roth accounts while in the 12% bracket. You are on path to have a very large investment balance. What is your retirement date? Maybe put enough traditional to get up to the bottom of the 12% projected at your retirement date based on 4% withdrawals and 5% appreciation....
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
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freeflowme
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by freeflowme »

Olemiss540 wrote: Tue Feb 06, 2018 7:57 pm Marginal state tax rate? If in a 0% tax state, I would be very tempted to continue fully funding Roth accounts while in the 12% bracket. You are on path to have a very large investment balance. What is your retirement date? Maybe put enough traditional to get up to the bottom of the 12% projected at your retirement date based on 4% withdrawals and 5% appreciation....
Honestly, I haven't given a lot of thought to retirement date. My focus thus far has been pretty single-minded: accumulate. I used to think I wanted to retire ASAP, but I enjoy my work a lot more now, and I think I'd like to get to a point where our investments can replace our income while still increasing in overall value each year instead of starting to tap them at a point where we eventually eat them up. Then I can work less if I so choose. I suppose I need to run the numbers on when that should be. Hopefully in my late 30s / early 40s?

EDIT: But yes, I should probably start paying attention to how much I allocate to Roth vs. Traditional each year to try to maximize our tax savings now while also making sure that we pay as close to 0 tax as possible when we take money out in retirement.
Olemiss540
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by Olemiss540 »

freeflowme wrote: Wed Feb 07, 2018 9:32 am
Olemiss540 wrote: Tue Feb 06, 2018 7:57 pm Marginal state tax rate? If in a 0% tax state, I would be very tempted to continue fully funding Roth accounts while in the 12% bracket. You are on path to have a very large investment balance. What is your retirement date? Maybe put enough traditional to get up to the bottom of the 12% projected at your retirement date based on 4% withdrawals and 5% appreciation....
Honestly, I haven't given a lot of thought to retirement date. My focus thus far has been pretty single-minded: accumulate. I used to think I wanted to retire ASAP, but I enjoy my work a lot more now, and I think I'd like to get to a point where our investments can replace our income while still increasing in overall value each year instead of starting to tap them at a point where we eventually eat them up. Then I can work less if I so choose. I suppose I need to run the numbers on when that should be. Hopefully in my late 30s / early 40s?

EDIT: But yes, I should probably start paying attention to how much I allocate to Roth vs. Traditional each year to try to maximize our tax savings now while also making sure that we pay as close to 0 tax as possible when we take money out in retirement.
Work through the MrMoneyMustache Case Study spreadsheet. It is invaluable for projecting and planning taxes/roth vs trad/etc etc. It is a googledocs spreadsheet you can download.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
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freeflowme
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Re: 31 y.o. - Here's What I'm Doing; What Can I be Doing Better?

Post by freeflowme »

Olemiss540 wrote: Wed Feb 07, 2018 10:22 amWork through the MrMoneyMustache Case Study spreadsheet. It is invaluable for projecting and planning taxes/roth vs trad/etc etc. It is a googledocs spreadsheet you can download.
Perfect. Thank you. Was not aware of this.
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