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Author: luke5579 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: Here's my financial plan... advice? Date: 8/14/2003 3:46 AM
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Here is my financial plan, any advice would be great. I know very little about finance so all of this is just based on a hunch, probably not the best way :)

Me and my wife are both 24 years old, we have been married 3 years. My salary is 75,000 dollars per year. I clear about $4,400 per month(after 350 for health insurance) and I currently contribute nothing to 401K. My wife just graduated school and will start as an RN in 1 month. She will make 41,000 dollars per year. If I am doing my math right she will clear around $2,400 per month. She will receive a 1,000 dollar bonus every quarter for the first year as well.

Right now we are living on my income with about 500 dollars left over every month. This could be more if we really tried but we honestly dont, eat out alot, buy more things than we should, etc etc.

Once she starts working we want to each put 5% into 401K and start 2 ROTH IRA's and contribute 2,000 each year into each of those. So that would be $3,750 a year for me to my 401K or roughly $300 per month. That would be $2,000 a year for her to her 401K or roughly $175 per month. Thats $475 per month to 401K and $350 combined payment to our Roth IRA's. All together thats $825 a month we will be putting towards investments. Since we arent putting any up for retirement now that sounds like an enormous amount of money. We should be clearing around 7,000 dollars per month so we would be investing roughly 11-12% of our take home pay. We also want to save 800-1000 per month until we have 15,000 in savings. Once this is reached then I am not sure what we will do with that 800-1000, maybe just keep putting it into savings... With the savings and investment contributions we will almost put away her entire salary, should leave about 800 per month of her salary. Not sure what we will do with this, I am sure we will find something :)

Oh yeh, both of our employers will match 3% of our salary for 401K.

My problem is what will this plan give us in 10 years? 20 years? 30 years? If we wanted to retire in 20 years will this be a strong enough plan to make that happen? What about 30? Sure would be nice to retire in 20 years when our kids that we are going to have in 5 years will be starting High School.

Thanks,
Luke

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Author: luke5579 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36913 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/14/2003 3:50 AM
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Also I forgot to add...

We are currently renting a house at 850 dollars a month, we are in the process of buying a 107,000 dollar house that appraises for 110,000. We are doing a 15 year FHA loan at 5.65 percent, our payments after tax and insurance will be 1050 dollars per month.

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36915 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/14/2003 7:41 AM
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Once she starts working we want to each put 5% into 401K and start 2 ROTH IRA's and contribute 2,000 each year into each of those. So that would be $3,750 a year for me to my 401K or roughly $300 per month. That would be $2,000 a year for her to her 401K or roughly $175 per month. Thats $475 per month to 401K and $350 combined payment to our Roth IRA's.

With your income leve, I would fully fund the Roths ($3K each) this year and every year you can because it looks likely to me that you will only be eligible for a few years because of income limits. Fund the 401K to the point of a full match(if matching is available) first but then really try to max out the Roths while you can.

My problem is what will this plan give us in 10 years? 20 years? 30 years?

There are statistics and history that can give you estimates but the only way to know is to be in a no-risk investment and that will probably not get you where you want to be.

I'll leave the scrolly post to Mark - because he's really good at them.

rad

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36921 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/14/2003 11:35 AM
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luke5579, you asked:

<< Here is my financial plan, any advice would be great. I know very little about finance so all of this is just based on a hunch, probably not the best way :)

Me and my wife are both 24 years old, we have been married 3 years. My salary is 75,000 dollars per year. I clear about $4,400 per month(after 350 for health insurance) and I currently contribute nothing to 401K. My wife just graduated school and will start as an RN in 1 month. She will make 41,000 dollars per year. If I am doing my math right she will clear around $2,400 per month. She will receive a 1,000 dollar bonus every quarter for the first year as well.

Right now we are living on my income with about 500 dollars left over every month. This could be more if we really tried but we honestly dont, eat out alot, buy more things than we should, etc etc.

My problem is what will this plan give us in 10 years? 20 years? 30 years? If we wanted to retire in 20 years will this be a strong enough plan to make that happen? What about 30? Sure would be nice to retire in 20 years when our kids that we are going to have in 5 years will be starting High School.
>>

The first thing you might do is go the library or a book store and get a good book on personal financial planning (e.g. Ernst & Young's Personal Financial Planning Guide; Ernst & Young's Retirement Planning Guide) and read though it a couple of times taking some notes. You'll find a great deal of good information and it'll help you in the kind of planning you're trying to do.

You'll find that there's an emphasis on first establishing an Emergency Fund equal to about 6 months living expenses. In your case, base on the numbers you've given, that amount would be around $23,000. This should be VERY high on your priority list. And always remember that an Emergency Fund is JUST for emergencies. It's not a spending fund. One should try to leave it alone and use it ONLY for emergency cash needs and when used, it should be replenished as soon as possible. Also note that the emergency funds should increase as your living expenses increase (there's typically an inflationary factor).

If you were to put $900 month away for an Emergency Fund it would take you about 2 years to accomplish this. However, I'm not suggesting that doing only this might be the best way. If you've got matching 401(k) program, it would be a good idea to put in only amounts that are matched and then the balance towards the Emergency Fund.

Yes, it would be nice to be able to retire in 20 years, but that's not really a very long time to be able to build up to a point where you can live off only your money – “critical mass” as some might call it. For example, if you take inflation into account (using something like 3% per year), in 20 years that $3,900 your now living off of ($4,400 after taxes - $500 after expenses) would be about $7,000. In other words, in 20 years you'd need $7,000 month for living expenses and that amount over the next 40 years will rise with inflation. So, just how much do you need to generate future income? That'll DEPEND on just what assumption YOU feel you are willing to make and remain somewhat conservative to be sure that you'll have a high probability of succeeding.

Putting away 10% of one's net income over 20 years will most likely not produce enough to reach “critical mass”. Putting $900 a month away and increase it with 3% inflation and using a constant rate of return of 8.5%, might achieve about $650,000 in 20 years. That's far from enough to produce $7,000 month retirement income at that time. Now if you put about 25% away, then it a much higher probability of happening. And for all practical purposes, 25% very likely could accomplish a 20 yr. to retirement plan (assuming you're starting from zero and have no other assets coming into the picture).

The two MAIN factors for accumulating a retirement fund is TIME (the longer the compounding time the better) and CONTRIBUTIONS (the more you can contribute the better. Note that early contributions have a much stronger effect on the results than rates of returns. Too often people focus too much rates of return and not enough on the contributions.

Well, perhaps you can see that when planning for retirement, you need to make some specific goals that you feel are attainable. Once you decide on what those numbers are, you can pretty much calculate how you can get there and what your probabilities are. A good personal financial planning book can be a lot of help to this end. . . . especially if you're not going to hire professional help.

BTW: The purchase of the house looks like a GOOD decision. The numbers look like you'll net about the same expense for housing as you're currently paying.

I hope you find this helpful. Good luck.


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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36923 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/14/2003 12:05 PM
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luke5579 wrote, We are currently renting a house at 850 dollars a month, we are in the process of buying a 107,000 dollar house that appraises for 110,000. We are doing a 15 year FHA loan at 5.65 percent, our payments after tax and insurance will be 1050 dollars per month.

TTRoberts responded, BTW: The purchase of the house looks like a GOOD decision. The numbers look like you'll net about the same expense for housing as you're currently paying.

I agree that the purchase of the house looks like a good decision. My only question would be why are using an FHA loan versus a conventional loan? I do not mean to discredit the FHA loan, my DW and I had one when we bought our first house a few years ago, but often times you can get more favorable terms on a conventional.

If it is because you will not have a downpayment for the house, you can get an something like an 80/20 loan. By doing that, you will avoid paying the PMI every month. In addition, with an FHA loan, you will be required to pay an upfront mortgage insurance premium. However, if you refinance out of the FHA loan you may receive a partial refund of that amount. We refinanced a few months ago and received a refund of roughly $2500 from the MIP.

I would urge you to visit the Buying/Selling a Home board to discuss your options with regard to the mortgage. There may be options out there that will save you money but you are just not aware of them.

dt

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Author: FuskieFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36934 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/14/2003 2:53 PM
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5 Fuskie Foolish Recommendations

1) No mention of e-fund. You want to save up to 6 months expenses in case of emergency.

2) You are getting near the cut-off for Roths so you might want to contribute the full $3000/yr. If you are into self-managing your money, consider Scottrade where there are no IRA or account maintenance fees, and no mutual fund transaction fees.

3) On the other hand, if your marriage tax relief and new home deductions do not lower your AGI enough, your 401K may be another way to reduce your tax burden. If your 401k's plan has some really good funds, that may be another reason to park your assets there.

4) It is good you are already renting a home. I assume you are taking care of most of the fiancial and maintenance on your rental so you are prepared for the cost of owning. Don't forget to include any Association dues and be prepared for other incidentals. In addition to the e-fund, consider a UeX-fund, or Unanticipated Expense fund. You could should put either into a high interest savings or money market account (I can refer you to ING at 2% and you get a $25 bonus).

4) Are you and DW going to start a family? If so, consider starting a b-fund (Baby Fund) as well as a 529 Coverdell Education Savings plan and signing up fo Upromise.

5) Do you have access to a credit union? You should be able to get a better rate for a 15yr loan. If you can put 20% down, you can avoid PMI and have immediate equity in the home. Try to avoid putting your property tax into escrow. Better you stick that money into your ING account and make it work for you until you have to pay it.

Bonus Rec:

6) Consider additional expenses you want to save for, like a car or vacation. To save money for these, go on a fiscal diet. Shop at Costco or Sams instead of the Piggly Wiggly. Turn your home into a restaurant (cook for DW a couple times so she does't think you think she runs the restaurant) instead of going out so much. See afternoon movies at discount. Shop with coupons. Think about wants versus needs, and give yourself a spending cap on the wants.

Best of luck!

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36937 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/14/2003 3:09 PM
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529 Coverdell Education Savings plan and signing up fo Upromise.

A 529 and a Coverdell are entirely different animals and you need to have the child and SSN pretty much before you start them.

rad


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Author: luke5579 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36943 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/15/2003 1:58 AM
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Nice post... thank you.

One question though, yes you are right with inflation in order to have the same amount of money we have now we will need 7,000 per month instead of 3900, but i shouldnt need as much money then...

I wont have a house payment (hopefully), wont have credit card payments, no car payments, etc etc. I should be able to live on WAY less than I live now, so should I still plan on needing the same amount of money that I use now?

I wouldnt think so...


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Author: luke5579 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36944 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/15/2003 2:10 AM
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FHA because my credit score is 600 which is not good, I know. It was due to me not understanding credit and making all kinds of mistakes when I was younger. FHA is our only option, also this requires less down...

I will look on the other board too, thanks a million!


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Author: luke5579 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36945 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/15/2003 2:23 AM
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When I say savings, I mean an Efund.

What is the cutoff for Roth's? My wife will be going back to school in 1 year to get her Nurse Anethesist Degree, once she graduates she will make 95-115K, which we will have to rebudget again for that. I am assuming that our chances at Roth IRA will be done then...

We plan on doing something small for a college/baby fund but we want to get a strong base for our retirement first, then worry about baby and college funds.

Our credit is why we cant get a better rate, its about 600 for a score. We do not have 20 percent down payment, we are struggling for the 4k we need to get 3 percent down.

Also speaking of lowering our living expenses we are going to do that as well. Looking forward to it actually.


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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36946 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/15/2003 2:42 AM
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One question though, yes you are right with inflation in order to have the same amount of money we have now we will need 7,000 per month instead of 3900, but i shouldnt need as much money then...

I wont have a house payment (hopefully), wont have credit card payments, no car payments, etc etc. I should be able to live on WAY less than I live now, so should I still plan on needing the same amount of money that I use now?


Your expenses may go down in retirement but they may not go down as much as one would expect. One of the largest expenses in retirement is healthcare. Most likely, this expense will increase dramatically for you once you are retired.

Also, now that you have all that free time to pursue hobbies and/or travel, it will require more money than you spend right now on those aspects of your life.

I asked a related question over at REHP regarding the expenses in retirement and whether or not they increased or decreased. It seems that most people have seen a decrease to some extent. However, some people have also moved to an area with a lower cost of living. Will you move when you retire? What hobbies do you plan to participate in?

The answers to those questions may assist you in getting a picture of what your expenses will be like in retirement.

dt

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36947 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/15/2003 2:45 AM
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FHA because my credit score is 600 which is not good, I know. It was due to me not understanding credit and making all kinds of mistakes when I was younger. FHA is our only option, also this requires less down...

I am not sure what the criteria is like for a mortgage but that may qualify you for a conventional loan. The rate may be slightly higher than if your credit score was better but it might still be possible.

And if you were able to qualify, you could manage 100% financing with a first and a second mortgage. However, be sure to run the numbers either way to make sure you are getting the best deal for your circumstances.

dt

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Author: dsemmler Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36948 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/15/2003 2:51 AM
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What is the cutoff for Roth's? My wife will be going back to school in 1 year to get her Nurse Anethesist Degree, once she graduates she will make 95-115K, which we will have to rebudget again for that. I am assuming that our chances at Roth IRA will be done then...

Assuming that you will be filing your income taxes as Married Filing Jointly, the Roth limits are as follows:

Income less than $150k allows full $3000 contribution ($3500 if over the age of 50).

Income between $150k and $160k allows a partial contribution.

Income over $160k does not allow a contribution.

It is important to note, these figures use your Adjusted Gross Income to determine your contribution level.

dt

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Author: TTRoberts Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36953 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/15/2003 11:30 AM
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luke5579, you asked:

<< Nice post... thank you.

One question though, yes you are right with inflation in order to have the same amount of money we have now we will need 7,000 per month instead of 3900, but i shouldnt need as much money then...

I wont have a house payment (hopefully), wont have credit card payments, no car payments, etc etc. I should be able to live on WAY less than I live now, so should I still plan on needing the same amount of money that I use now?

I wouldnt think so...
>>

As I said, you and your wife will have to decide just what numbers and goals are appropriate for you. Once you decide on your specific goals you'll be able to determine just what numbers to work with. A good financial planning book and/or the use of a professional can be very helpful in that issues can be brought up that you may not have the life experience to even be aware of yet.

The reality of retirement, especially at a ripe old age of 45 or so <grin> (I wish I were that “old” again), is that living expenses tend to not go down all that much . . . especially at this age. What does change is what those expenses are. For example, if you retire at age 45 and live off your investments, you no longer have an employer provided health care. You may want to pick up other types of insurance, like dental coverage and Long Term Care coverage. You also tend to spend money on various recreational activities (depending on just how active of a person you and/or your wife is). AND . . .the kids, don't underestimate what it's going to cost in 20 years. The children very often need/want help getter their lives started and that's above and beyond the cost of education. Properly taxes still have to be paid and that amount tends to rise too. Cars don't last forever, so car payments, car maintenance and insurance are an ongoing expense. If you stop working at age 45, this will affect your social security income at age 67 or whenever you begin drawing from it, since you won't have increasing earned income to pay into the SS & Medicare system. And if you retire at age 45, one needs to figure that they're probably going to be living on retirement income for about 45 years.

When retiring at this young age, people tend to actually spend more each year for a few years than they did in the prior year to retirement. They're off having a great time doing a lot of fund things. So, as you do your planning you might want to break down your retirement years into different phases and make allowances for different living styles in those phases.

I'd say that when you're 85 years old . . .. yes, you could “live on WAY less” than you do now. But until then, it's not likely. Based on my experience with other retirees and my own so called early retirement, one who's still in their 40's and 50's doesn't really want to live a life style of a typical 85 year old or so. <VBG>

Again, it's you and your wife who'll have to decide on just what kind of lifestyle(s) you'll want to live and at what stages.



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Author: luke5579 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 36955 of 75383
Subject: Re: Here's my financial plan... advice? Date: 8/15/2003 4:27 PM
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Great post...

You are right, when we retire at 45 we arent going to want to sit around and watch basic cable eating 2 for a dollar tv trays. We are going to want to see the mountains, no the Rocky's, how about the Alp's?

That helps put it in perspective.

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