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Author: mikelly39 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75792  
Subject: Retirement strategy suggestions? Date: 1/17/2007 10:36 AM
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I wanted to bounce this off of someone, and get some opinions.

Current situation:(37 years old)
Contribute 15% of my salary to my 401(k).
Receive a 5% match, plus 5% profit sharing.

Wife(36) is a Stay @ home Mom. I have 3 girls (1) 2yrs old, and (2) 7 month old twins. I have 27 years of mortgage left, which I can still deduct interest.

My scheme of the day is this:
1) Reduce my 401(k) contributions to 5%. This will allow me to continue to get the match & profit sharing.
2) Put 5% (After Tax) in my Roth
3) Put 5% (After Tax) in a 529 for the girls
4) Any extra monies, put towards mortgage (which should leave me with < 20 years of mortgage payments)

I'm thinking I should be paying the tax on that 10% now(#2 & #3), instead of later. Since I have 3 little tax deductions, & a mortgage, my tax liability is fairly low, right now.

According to my calculations, I could very well be in a higher tax bracket when I retire. (aiming for age 55)

Our mentality towards college has always been "That's what student loans are for", but I have the feeling that will change as we get older, so I want to be able to provide something for them.

We do not have any debt, besides the mortgage. I also have plenty of emergency money, and I have a pretty solid budget setup for everything else.

thanks for looking.
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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: 55163 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 10:52 AM
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What's your wife's situation in regard to retirement savings and life insurance ?

Unless something's changed, there's no disability insurance for SAHMs so you also may want to fit something in to cover that issue.

rad

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55164 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 10:59 AM
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Wife(36) is a Stay @ home Mom. I have 3 girls (1) 2yrs old, and (2) 7 month old twins. I have 27 years of mortgage left, which I can still deduct interest.

My scheme of the day is this:
1) Reduce my 401(k) contributions to 5%. This will allow me to continue to get the match & profit sharing.
2) Put 5% (After Tax) in my Roth
3) Put 5% (After Tax) in a 529 for the girls
4) Any extra monies, put towards mortgage (which should leave me with < 20 years of mortgage payments)

I'm thinking I should be paying the tax on that 10% now(#2 & #3), instead of later. Since I have 3 little tax deductions, & a mortgage, my tax liability is fairly low, right now.

According to my calculations, I could very well be in a higher tax bracket when I retire. (aiming for age 55)


What's the interest rate on that mortgage? I can think of a few reasons that paying it off early don't make sense, but these may or may not apply to you. First, if the interest rate is low, you may be able to make more by using that money to invest. For instance, I have a 15-year FRM at 4.75% so it makes no financial sense to prepay my mortgage since I can get a better rate just by putting the money into a money market account. Second, you will build up equity, but you lose access to that money for any other need you may have along the way. In fact, it might make more sense to put that money into an investment account to have it grow because that would leave you access to the money, and you could still decide down the road to take some of it and pay off the mortgage.

Although 529s can be a good option for college, I don't care for the inflexibility of having the money there. Plus, you have a twin issue where if one twin goes to college and the other doesn't or quits part-way through, you may not have enough time left to switch the funds to the other twin, so you may end up paying penalties to get your own money back or switching the beneficiary to someone else that may not have been in your plan. My twins are high school sophomores, so college planning is something I've been doing for a while, and I think you will have some of the same issues.

To retire early, I'd be more inclined to put the money that would go to the extra mortgage payments into a taxable account and invest from there. Even with your low income tax rate, capital gains are only taxed at 10 or 15%, so that would still be low for accessing your money later. If you end up being in a higher tax bracket, you'd just be paying the 15% taxes on the capital gain since the invested money would be after-tax dollars.

Personally, I also don't see how you would be able to have enough money to live on if you want to retire at 55 if you're not doing more saving now, so I think I'd be looking to do more investing either in taxable or tax-deferred accounts, but the last place I'd be putting my dollars would be into the house.

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Author: mikelly39 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55165 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 11:20 AM
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Wife has some $ in a Rollover IRA, but we are not actively contributing anything.

Life insurance is covered for both of us.

Hrmmm... disability insurance. I have coverage through work. Guess I should investigate what our options are for her. (Yet another new thing to learn about)

thanks rad.

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Author: 2gifts Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55166 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 11:44 AM
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Wife has some $ in a Rollover IRA, but we are not actively contributing anything.



Why not? Even if you follow the plan you have laid out in that you want to put aside after-tax retirement dollars in a Roth IRA, why wouldn't you max out what you can put into a Roth, and to do that, you should be contributing to one for you and one for your DW?



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Author: mikelly39 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55167 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 11:49 AM
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Rate is 5% on a 30yr FRM.

What I was thinking I would do, is try to have my mortgage end & retirement start around the same time. Sell the house to downsize, or possibly rent, & live off of that money until 59.5, or better.

529: It was an idea. I am not aware of any other places to put money away for their continued education. Now that I think about it, having 3 girls, could put a strain on WEDDING planning. Maybe an account I could use for either wedding/college would be best. There should be a father of the bride/college account somewhere.

thanks.

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Author: mikelly39 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55168 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 11:55 AM
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Because we r dumb? (just kidding)

Currently, we have been putting $ into my 401(k), and everything else went towards the mortgage.

What it is starting to look like, is we are better served paying the minimum on the mortgage, and investing/saving the rest.

That should leave plenty to put towards Wife's IRA.

thank you.

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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: 55169 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 12:00 PM
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Why not? Even if you follow the plan you have laid out in that you want to put aside after-tax retirement dollars in a Roth IRA, why wouldn't you max out what you can put into a Roth, and to do that, you should be contributing to one for you and one for your DW?

I would fully fund both Roths before a 529 or other education savings because of the flexibility of the Roths. I'm also sensitive about funding your wife's, particularly while she's home - she's doing a job that she'll want to retire from, too.

rad
P.S. 2gifts - this reminds me of your story about when your father retired :)


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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55170 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 12:17 PM
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I don't think I'd pay down the mortgage, if it were me. Especially if its low rate (I thought I read in one of the follow ups that its at 5%).

Saving only 5% in a 401k and 5% in a Roth wouldn't allow ME to make it to retirement comfortably. Have you calculated how much you will need to comfortably retire? Do you know about when you want to retire? Are the 5% contributions you are planning for adequate to achieve this?

If it were ME, I'd sit down and figure out just how much retire (and college, too) will cost. Then I'd fund in this order:

1) Contribute enough to the 401k to get the match
2) Contribute enough to max out both you and wife's Roths
3) If you need to save more to reach your retirement goals, then do so via your 401k
4) Fund 529 plans for the girls

Only AFTER your retirement goals are funded should you think about funding the 529 plans. They can get scholarships for college, but you have to fund your own retirement plans. And remember, its okay to make sacrifices. Like if you want to retire 5 years later so you CAN fund the 529's, then that's fine too. Just make sure you understand the sacrifices and are okay with it.

An ditto on the disability suggestion for your wife. Don't forget about life insurance for her as well. If she dies, you'd have the added expense of child care.

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Author: mikelly39 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55172 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 12:40 PM
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Yes, it is 5% FRM.

I do get 10% from my employer (5% match & 5% profit sharing). So I have been adding that to the equation.

In addition, I receive a cash bonus of ~ 10% annually. Maybe I should put some of that towards the 529, and pay for disability ins for the wife.

We are covered in the life insurance area. we have adequate life insurance for both of us. (20 year term)

Thank you.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55173 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 12:42 PM
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..4) Any extra monies, put towards mortgage (which should leave me with < 20 years of mortgage payments)....

Unless you your numbers come up showing that this is a slam dunk great choice, I would open a separate account and keep the house payoff fund invested there until you have enough to pay it off as a lump sum. The reason is that if interest rates and inflation spike upwards, then a fixed rate mortgage in the ballpark of 6% might look extremely good. In a few years if you change you mind, you could always pay down the mortgage then.

...3) Put 5% (After Tax) in a 529 for the girls...

The 529 has gotten better but unless you are in one of the states with tax breaks for contributions, then they still don't really impress me for someone that is not in a real high tax bracket. There seem to be just too many ways for them to not work out well.

I ended up moving my kids college money to iBonds about five years before he was ready to start college because of the tax advantages, safety, and flexibility. They are too conservative for your long time frame, but when they are older(and you might be in a higher tax bracket) they are worth considering.

..According to my calculations, I could very well be in a higher tax bracket when I retire....

But not all your income will be taxable, or may be taxed at capital gains tax rates, in addition you will no longer have some of your biggest expenses(mortgage, retirement savings, kids, etc.) If you are in a high tax state now and might retire in a low tax rate state, the Roth would be less desirable.

Like the kids at Lake Woebegone, that are all above average, people sometimes tend to think that their biggest financial problem in retirement is that they have so much money that they would be paying painfully high taxes. While that is possible, realistically "stuff happens" and I've seen a lot of people with financial or life setbacks and a lot more modest retirement than they expected.

I would concentrate on getting the "core " retirement funds in the 401K and traditional IRA built up first in case you have a setback before you retire. If the tax laws are anything like they are now, you will want to have maybe $40K or so in taxable income each year because of the lower tax rates on your first chunk of income. Until you are on track to have that much, I would tend to fund the other tax deferred retirement accounts before the Roth.

You also need to consider your tax rates over your entire retirement, a lot of people base their decisions on their first few years of retirement when they might be indeed be in a higher tax bracket but not for their entire retirement. For example: if you retire at 55 you might indeed be in a high tax bracket for a few years, but to still be in a high tax bracket at 75 would be very exceptional when you could only be halfway through your retirement if you live to be 95.

Greg


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Author: iamdb Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55174 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 12:47 PM
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Start indoctrinating your girls now about how wasteful big weddings and funerals are, and how much better it is to have simple wedding and spend the money on education and retirement. You might even contribute the money that would be wasted on a big wedding toward down payments for your daughters' future homes.

db

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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: 55175 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 12:47 PM
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Maybe I should put some of that towards the 529, and pay for disability ins for the wife.

The problem will probably be you won't be able to get disability insurance for her so you will need a plan for covering child care and household help if she becomes disabled.

Probably sounds strange but when I was home, having to somehow deal with this was a big worry for me when ours were all very young.

rad


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Author: mikelly39 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55177 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 12:58 PM
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I think my prayers have been answered for the twins college:

http://forums.slickdeals.net/showthread.php?threadid=426951
"If you got twins, Lake Erie College in Painesville, Ohio, has a nifty deal. Send both twins to college for the price of one ($22,000 a year). Call 1-800-916-0904 or send an email admissions@lec.edu


Hopefully they still offer this deal in 18 years. :)


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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55178 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 1:03 PM
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...Lake Erie College in Painesville...

It sounds like the setting for a 'B' grade horror movie.


Greg


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Author: MonksterFool Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55179 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 1:41 PM
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Don't you need earned income to contribute to a Roth? Can a working husband do this for a SAHM?

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55180 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 2:00 PM
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I think the rules are different, and this is called a Spousal IRA. Not real sure, though. IRS Publictation 590 anyone?

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55181 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 2:05 PM
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I do get 10% from my employer (5% match & 5% profit sharing). So I have been adding that to the equation.

I guess the real point I was trying to make is that aiming for saving a particular percentage of your pay doesn't really mean much. You have to evaluate how much you think you will spend so you can figure out how much you need to save.

For some, saving 10% of their pay would be plenty. For others it wouldn't be nearly enough. So try not to focus on the percentage you're saving as much and try to focus on how much you need overall.

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Author: Fuskie 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: 55182 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 2:24 PM
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3) Put 5% (After Tax) in a 529 for the girls

This results in a 5% reduction in your retirement savings. I know you want to prepare for your kids future, but not at the expense of your own.

Fuskie
Who did not see any indication of an emergency and/or household fund...

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Author: yddeyma Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55183 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 2:30 PM
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Don't you need earned income to contribute to a Roth? Can a working husband do this for a SAHM?

Found it! IRS Publication 590 says:

You can contribute to a Roth IRA for your spouse provided the contributions satisfy the spousal IRA limit (discussed in chapter 1 under How Much Can Be Contributed?), you file jointly, and your modified AGI is less than $160,000.

Here's a link to the publication if anyone needs any bedtime reading: http://www.irs.gov/publications/p590/ch02.html#d0e8836

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55184 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 3:04 PM
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3) Put 5% (After Tax) in a 529 for the girls

This results in a 5% reduction in your retirement savings. I know you want to prepare for your kids future, but not at the expense of your own.

Fuskie
Who did not see any indication of an emergency and/or household fund...


I agree with Yeddema, Fuskie and others. In addition, if you DO oversave for retirement (can there BE such a thing), you can gift to your children funds necessary to pay down student loans (often at a good rate).

Having said that, if you DO use a 529, don't forget that money you don't use for your children can be used by YOU to take college courses in retirement ... pretty neat.

Hockeypop



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Author: mikelly39 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55185 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 3:18 PM
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Fuskie
Who did not see any indication of an emergency and/or household fund...


In my original post...

"We do not have any debt, besides the mortgage. I also have plenty of emergency money, and I have a pretty solid budget setup for everything else."






I know you want to prepare for your kids future, but not at the expense of your own.

I agree.

It seems I have some more "figuring" to do now.





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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55186 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/17/2007 6:04 PM
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Your effective tax rate is lower now so deferral is not that attractive.

Plus it makes sense to diversify the way retirement income will be taxed.

buzman

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Author: MsPepper Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55191 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/18/2007 11:10 PM
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We have similar situations. I am 40, have 2 three year old twins and DH stays home with them.

I max out my 401K as I have always done and contribute as I am able to Roths for DH and me and last to the 529 plans.

I tend to try to get us into Roths with any money I might get from a tax refund and/or any work bonus I receive (or the extra pay toward the end of the year when I've maxed out on the 401K and on social security).

I agree with the others who don't like the idea of paying down your mortgage in this scenario.

There are options in how to pay for college but you and DW are alone in funding your retirement. Fund it first.

Another good word about Roth IRAs - I don't know the details but believe you can take money out of Roths to pay for college for your kids without penalty. Best to double check this.

If you max out your 401K year after year you will hopefully have a comfortable nest egg when you get close to retirement (which will be not long after your kids finish college). Saving now in Roths could help you feather that nest. Even if you can't put the maximum in Roths, putting something in is a good idea.

Treat the 529 plans (and you should have one for each child, the way I understand it) as extra savings. When your checking account looks great towards the end of a pay period, send in some money to the plans. In leaner months, contribute less or forego contributing.

One last note: we have moved to a state (SC) where participating in the state's 529 plan gives us a state income tax deduction. It's worth investigating whether your state has the same.

Best of luck.
MsPepper

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Author: mikelly39 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 55196 of 75792
Subject: Re: Retirement strategy suggestions? Date: 1/19/2007 12:28 PM
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Best of luck.
MsPepper


Thank you MsPepper. Lots of great information.
DW & I talked about it, and came to a very similar solution.

We will probably max out our Roths, and put as much as possible into my 401(k).(Minimum of 5% of my pay) Any bonus $ will go towards the girls' savings.

thank you.

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