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93EXCivic
93EXCivic MegaDork
1/13/21 8:29 p.m.

So currently I have no debt other then our house. I have a 401k with company matching and my wife has a 403b and a pension plan as a teacher. About to build a garage but I believe I have more then enough in savings to not take any debt to build and have a decent emergency saving still. I want use to get more serious about saving towards retirement and we need to start for the kids college (he is 6 months old and we have some saved but no plan with it). 

So thoughts I have had is one a traditional Roth IRA plus either a 529 or mutual fund for the kid's college. Or doing a Indexed Universal Life Policy to do both. Currently have term life insurance. Or some combo of the above? 

Also I was considering putting some of our emergency funds into a municipal bonds instead of it just earning .0nothing interest. It would gain more interest, can be access reasonable quickly and are fairly safe it seems. 

Thoughts? Other investing ideas I should be looking at that will make my money work harder for me?

preach (fs)
preach (fs) Reader
1/13/21 8:32 p.m.

I have a smaller etrade account that is up 148% in about 10 years. 

I have done really really well on some things and got beat hard on others.

mtn (Forum Supporter)
mtn (Forum Supporter) MegaDork
1/13/21 8:40 p.m.

Send me a pm, I'll send you a document I wrote up on this. 
 

If you have access to an HSA, use it. Max it out.

529 should be your absolute last savings vehicle for a number of reasons. Even for your kids college fund, it shouldn't come before your retirement accounts. There are ways to get it out of most retirement accounts, especially Roth accounts (including backdoor conversions), so unless you've maxed out both you and your wife's iras, don't consider it. 
 

Here is an abridged version of the document I have written up:

  • 401k – Employer-provided defined contribution plan (403b is included in this as well – same rules for any conversion at our level).
    • 2020 limit is $19,500 for those under 50. If you’re over 50, there is a catchup provision that lets you contribute another $6.5k.
    • This is open to anybody that has it through their employer. There are income limitations for highly compensated employees, but that is close to $300k – well above my paygrade
    • Traditionally this will be a pre-tax option, but I’ve now had a Roth (after tax) option for ¾ employers I’ve worked for. Unlike a Roth IRA, there are no income limitations (outside of the highly compensated employee limitations) for contributing to the Roth.
    • Often have a match. In my case, the match goes into whatever account I’m saving to – Roth or Traditional
    • Usually you have limited fund options that you can pick, determined by your employer. Most of them are some sort of target date fund.
  • IRA – Individual Retirement Plan. You do this on your own.
    • 2020 limit is $6,000, with an additional $1,000 catchup if you’re over 50
    • Can be Roth or Traditional, or both, but total contribution limit is $6k
    • Contributions to the Roth IRA can be distributed without penalty after 5 years.
    • Depending on the institution you hold it at, it can be in stocks, bonds, mutual funds, etc. For instance, I have one with Vanguard that is all in VTSAX and another with Fidelity that is in individual stocks.
  • HSA – Health Savings Account, offered with some health insurance plans
    • $3,550 limit for an individual and $7,100 for a family. As far as I know, it is all pre-tax. You can have it in cash, or in stocks/bonds/mutual funds (i.e. I manage mine through TD Ameritrade)
    • It is the BEST retirement savings account available. Why? Because you can reduce your income with the pre-tax, enjoy tax free growth, but also get tax free distributions – IF you plan it right
      • Designed for health expenses – eyeglasses, dental, doctor visits, hospital visits, prescription meds, along with a bunch of other stuff. The idea is that you use it to pay for those things as they occur, great! That was tax free. But there is currently no expiration date to those distributions. So if I pay for medical bills in 2020 for $5,000, I can pay for them in cash, keep all the receipts (and digital copies too), and in 2025 say that something happens and I need $5k quick – I can then use the receipts from 2020 to get a $5,000 distribution. I doubt this loophole gets fixed, since it is probably a very small user group using it. The contribution wasn’t taxed, the growth wasn’t taxed, the distribution wasn’t taxed. And if you don’t use the loophole and just take it now, it is still a huge tax advantage.
      • After you turn 65, it acts like a traditional IRA. So the distribution will be taxed as income, but you can take it for anything, even if it isn’t health related
  • Taxable Brokerage account
    • Buy stocks and mutual funds. Using already taxed income, any growth will be taxed as income for holdings under a year and 15% for over a year.

 

There are also other options but the main ones that most people will have/need are the 401k, IRA, HAS, and taxable brokerage accounts. With that, I present the world famous mtn savings order (I probably lifted this from Mr Money Mustache or ProDarwin or dCulberson here) (life insurance is not counted in this as I view it as an expense, not savings):

  1. Emergency fund to your satisfaction. Could be $1,000 cash, could be $100,000 cash, depends on your station in life
  2. 401k up to employer match
  3. Max HSA
  4. Pay off any debts with high interest rates (~8% and greater?)
  5. Depending on which has the lower fees
    1. Max ROTH 401k*
    2. Max ROTH IRA*
  6. Max traditional 401k if Roth 401k is not offered
  7. Pay off debts with low interest rates (above 3%, below my 3rd point)
  8. Invest in taxable account, or your house 
  9. Fishing boats, guitars, cars, tools, stereos,
  10. Pay off extremely low interest rate loans.

*You can go either way with the Roth vs. Traditional, but I believe that taxes will only go up in the future, even the 22% and 24% tax brackets are probably lower than what I think we’ll see in the future (I could be completely wrong). For most people, I think the Roth is the better option, or traditional until your taxable income drops a tax bracket… but as always, do the math for yourself. 

 

For 95% of people, the 401k/403b, IRA, and HSA should be invested in an SP500 or total stock market index fund. It is the simple button, and more often than not, the best bet. VTSAX.

 

For anyone who is trying to figure this stuff out and says “I can’t save anywhere close to that on my salary”… well, I’d challenge them by looking at their daily expenditures. A penny saved is more than a penny earned. The ubiquitous coffee example:

  • Let’s say that you spend $2 on a coffee, 250 days a year. $500 a year in coffee. For a 25 year old planning to retire at 67, that means that they need to save $54.20 a year to be in coffee for the rest of their life after retirement. So their annual cost for coffee is $554.20.
  • Now let’s say that they kick the Starbucks habit, and brew it at home using Folgers. That cup of coffee is going to cost, at most, about $0.40. Annual cost is about $100, and they'll need to save about $10.84 annually to be in coffee for the rest of their life. So their annual cost is $110.84.
  • Seems pretty simple that the savings is $433.36 a year, right? Well, yeah... But the point here that is missed is that you aren't spending that this year, and you aren't spending it EVER. So not only are you spending less, you NEED less. So you have more, but need less. If you invest that $433.36 every year from 25 to 67, when you retire you have an extra $100k, and an extra $4,000 a year to buy... Well, coffee, I guess. But you don't need that coffee, so why not a couple of guided fishing trips, every year of your retirement? Just from switching from Starbucks to Folgers.

Obviously not everyone gets coffee every day and there are often other things that get in the way (medical debt, student loans, rent that is out of control, etc.), but do a pull of every dollar you’ve spent using your credit card or debit card over the last year. How much of it was necessary?

 

californiamilleghia
californiamilleghia SuperDork
1/13/21 8:44 p.m.

I know people that save all the $50 bills they get......

normally you get $20s for change so its not everyday , 

but at the end of the year its a decent amount !

aircooled
aircooled MegaDork
1/13/21 9:15 p.m.

Folgers!?!

 

cheeky

Appleseed
Appleseed MegaDork
1/13/21 9:20 p.m.

I thought this thread would be about the Jaws of Life. 

Datsun310Guy
Datsun310Guy MegaDork
1/13/21 9:31 p.m.

When I was younger I would save 6% in my 401K and when I got a raise I'd bump my 401K a point up without telling the little lady.  

She would ask me - you got a raise but it doesn't seem like you got much after taxes?   Now she's on to me and we maxed out the fund to 15%.  

STM317
STM317 UberDork
1/14/21 5:04 a.m.

mtn's post covered nearly all of it.

The only thing I'll add is that insurance is not a savings/investment vehicle.

And if you're going to contribute to an IRA, you have until April 15 of 2021 to contribute funds for 2020, and then you can contribute funds for 2021 as well. So if you and your wife each had an IRA, you could put $6k into each one for 2020, and another 6k into each one for 2021. That's up to $24k invested immediately. If it's a Roth IRA, this money can be withdrawn after 5 years without taxes or penalty, so it could be used for Kiddo's college, or your retirement, or some unfortunate hardship that comes up. It's a lot more flexible than a 529. But a 529 may not have contribution limits...

thedoc
thedoc HalfDork
1/14/21 5:28 a.m.

I thought this thread would be about the rusted wrench I have soaking in a container of atf mix

tester (Forum Supporter)
tester (Forum Supporter) Reader
1/14/21 5:54 a.m.

To reiterate, index whole life double back flip insurance is pure bullE36 M3. Whoever is trying to sell that crap to you needs to be jettisoned immediately, with prejudice. They are either a con man, if they know what they are doing, or an well intentioned idiot.  Neither of which do you want near your long term investments.  
 

Match beats Roth beats Traditional. 
 

If you want help your kids with college, great! Make sure your retirement is funded to at least 15% of your gross before you even start thinking about putting money in a 529. 

mtn (Forum Supporter)
mtn (Forum Supporter) MegaDork
1/14/21 8:27 a.m.
STM317 said:

mtn's post covered nearly all of it.

The only thing I'll add is that insurance is not a savings/investment vehicle.

And if you're going to contribute to an IRA, you have until April 15 of 2021 to contribute funds for 2020, and then you can contribute funds for 2021 as well. So if you and your wife each had an IRA, you could put $6k into each one for 2020, and another 6k into each one for 2021. That's up to $24k invested immediately. If it's a Roth IRA, this money can be withdrawn after 5 years without taxes or penalty, so it could be used for Kiddo's college, or your retirement, or some unfortunate hardship that comes up. It's a lot more flexible than a 529. But a 529 may not have contribution limits...

Yes, excellent post. Insurance is an expense. I only have it through my job, same with my wife (through my job as well).

Not sure if there is a 529 limit, but it is very limited in terms of what you can use it for. Not to mention, it is the first thing that FAFSA looks at in terms of need, right before parental income. It should come well after 401k/403b, IRA, and HSA. At that point you're looking at $58k of savings before you get to the 529.

WilD
WilD Dork
1/14/21 8:43 a.m.

Is a Roth IRA not subjuect to the income phase out like a traditional IRA when your employer offers a retirement plan?

ProDarwin
ProDarwin MegaDork
1/14/21 8:48 a.m.

Ooo this is my thing!

Nevermind, MTN covered it :)

 

WilD said:

Is a Roth IRA not subjuect to the income phase out like a traditional IRA when your employer offers a retirement plan?

 

Yes but purely income related, not retirement.  The phase out starts at $125k and ends at $140k single.  198 to 208 married.

ProDarwin
ProDarwin MegaDork
1/14/21 8:57 a.m.

Also on points 5/6:  Roth vs. Traditional 401k.  

In my opinion there isn't a right answer here.  It depends on what your current tax rate is like and what you anticipate your retirement tax rate to be.  I'm 95%+ sure that my retirement tax rate is going to be significantly lower than my current tax rate so in my case the Traditional makes sense.

Covered earlier, but just a reminder that Roth vs Traditional IRA is a different story, because they have very different qualification requirements.

Purple Frog (Forum Supporter)
Purple Frog (Forum Supporter) HalfDork
1/14/21 9:14 a.m.

All insurance is not a bad thing.

When i was young with wife and young kid I had life insurance.   Just in case I went, then wife and kid would have a lot of expenses covered and not thrown into big time debt.

Sort of the same concept of having insurance on a new car.

When you are young term insurance is relatively cheap.  Yes, its an expense, but maybe a smart one.

YMMV

Duke
Duke MegaDork
1/14/21 9:19 a.m.

In reply to Purple Frog (Forum Supporter) :

I believe the only criticism of insurance was for the idea of whole life insurance as an investment vehicle.

Term insurance is a necessary expense and is recommended by all in this thread, as far as I know.

 

ProDarwin
ProDarwin MegaDork
1/14/21 9:42 a.m.
Duke said:

In reply to Purple Frog (Forum Supporter) :

I believe the only criticism of insurance was for the idea of whole life insurance as an investment vehicle.

Term insurance is a necessary expense and is recommended by all in this thread, as far as I know.

 

Eh.  I don't have any life insurance.  I don't recommend it, but I also don't recommend against it.  

It depends on your family situation, risk tolerance, etc.

WonkoTheSane (FS)
WonkoTheSane (FS) SuperDork
1/14/21 9:45 a.m.

Random question for the savings gurus, just to stimulate conversation mostly.. I have an old backwater rollover IRA that I haven't contributed to in at least a decade, and kinda forgot about (it's been on the "look into doing something with it" list for a good long while).    It's got about 45k on it.   Should I roll that into my RothIRA (that I actually contribute to) and pay the taxes on it?  By my guestimate, taxes would be about $10,600.

They're both in Vanguard, and both are just sitting on the index funds (Rollover IRA is on VIGAX and the Roth is on VTSAX).

I'm trying to figure out how to do the math to see whether this would be beneficial to me.

Datsun310Guy
Datsun310Guy MegaDork
1/14/21 9:50 a.m.

In reply to WonkoTheSane (FS) :

whats your age? It is part of the equation 

Pay taxes now on 45k or wait 30 years as it grows to 250k and pay taxes then?  What's our tax rate in 30 years?  Will it ever increase?   

Duke
Duke MegaDork
1/14/21 9:56 a.m.
ProDarwin said:
Duke said:

In reply to Purple Frog (Forum Supporter) :

I believe the only criticism of insurance was for the idea of whole life insurance as an investment vehicle.

Term insurance is a necessary expense and is recommended by all in this thread, as far as I know.

Eh.  I don't have any life insurance.  I don't recommend it, but I also don't recommend against it.  

It depends on your family situation, risk tolerance, etc.

I'm about to turn 56 and I plan to retire at 58.  Not coincidentally I have a 15 year term life insurance policy that will expire at about the same time.  I will probably not renew it but if I do I will only extend it for another 5 years.

 

WonkoTheSane (FS)
WonkoTheSane (FS) SuperDork
1/14/21 10:00 a.m.
Datsun310Guy said:

In reply to WonkoTheSane (FS) :

whats your age? It is part of the equation 

Pay taxes now on 45k or wait 30 years as it grows to 250k and pay taxes then?  What's our tax rate in 30 years?  Will it ever increase?   

Good call, I forgot that vital bit of info.  I'm 39, which means (optimistically) 26 years until retirement. 

mtn (Forum Supporter)
mtn (Forum Supporter) MegaDork
1/14/21 10:01 a.m.
WonkoTheSane (FS) said:

Random question for the savings gurus, just to stimulate conversation mostly.. I have an old backwater rollover IRA that I haven't contributed to in at least a decade, and kinda forgot about (it's been on the "look into doing something with it" list for a good long while).    It's got about 45k on it.   Should I roll that into my RothIRA (that I actually contribute to) and pay the taxes on it?  By my guestimate, taxes would be about $10,600.

They're both in Vanguard, and both are just sitting on the index funds (Rollover IRA is on VIGAX and the Roth is on VTSAX).

I'm trying to figure out how to do the math to see whether this would be beneficial to me.

 

You can argue this about 1,000 different ways, but I personally would not touch it and I would not roll it over, with a few situational exceptions: 

  • You're going to need the money soon (meaning the next 5 years and you won't be both retired and 59.5 years old - see this: https://www.madfientist.com/how-to-access-retirement-funds-early/ )
  • You expect your taxes to go up in retirement
  • You're currently in the 10% or 12% tax bracket

At the end of the day, do the math. 22% or 24% i̶s̶ ̶a̶ ̶l̶a̶r̶g̶e̶ ̶h̶i̶t̶ ̶t̶o̶ ̶t̶h̶e̶ ̶c̶a̶p̶i̶t̶a̶l̶ edit: The capital would not be touched, but your gross income goes up so you still owe taxes on it. I would personally avoid it, but I would also do the math as I DO expect taxes to increase. If you didn't have a Roth already that you are contributing to, I'd look harder at it.

 

 

ProDarwin, Rxreven, others may have different opinions on this. As ProDarwin said, Roth vs. Traditional, there isn't a right answer.

 

EDIT: As others have pointed out, I had an error up there. The capital is not hurt, you just owe taxes on it this year. It may or may not be a good time to do it, if you can swing it, especially if your income dropped due to covid. 

ProDarwin
ProDarwin MegaDork
1/14/21 10:02 a.m.
Duke said:

I'm about to turn 56 and I plan to retire at 58.  Not coincidentally I have a 15 year term life insurance policy that will expire at about the same time.  I will probably not renew it but if I do I will only extend it for another 5 years.

 

I'm 37.  If I died today my son(5) would have >1 million when he turns 18 if its left to sit other than being drawn on at child-support rates.  He'll be just fine.  I don't want to pay more money just to ensure he could get even more money if I die.

karplus2
karplus2 Reader
1/14/21 10:09 a.m.
ProDarwin said:
Duke said:

In reply to Purple Frog (Forum Supporter) :

I believe the only criticism of insurance was for the idea of whole life insurance as an investment vehicle.

Term insurance is a necessary expense and is recommended by all in this thread, as far as I know.

 

Eh.  I don't have any life insurance.  I don't recommend it, but I also don't recommend against it.  

It depends on your family situation, risk tolerance, etc.

This is a good point. It really depends on the situation.

I have life insurance. The max through work, plus a 1 million dollar policy. My wife gets ~1.4 mil if I croak. Why do I have this much life insurance? I have young kids. If I die, I want my wife to be able to get the kids through school without having to worry about money. She stays at home and while she could go get a job, it wouldn't be a high enough paying one to be able to support maintaining our current lifestyle. In fact, it would probably be around the poverty line. I anticipate reducing the amount of life insurance I carry as I get older and save up more. If things go as planned, I will drop my life insurance when my kids get to college age.

mtn (Forum Supporter)
mtn (Forum Supporter) MegaDork
1/14/21 10:13 a.m.
ProDarwin said:
Duke said:

In reply to Purple Frog (Forum Supporter) :

I believe the only criticism of insurance was for the idea of whole life insurance as an investment vehicle.

Term insurance is a necessary expense and is recommended by all in this thread, as far as I know.

 

Eh.  I don't have any life insurance.  I don't recommend it, but I also don't recommend against it.  

It depends on your family situation, risk tolerance, etc.

 

As mentioned above, I have it through my employer. I basically have enough to pay off the house, car, give my wife and daughter about a year of expenses, and another $10k or so for unexpected expenses - for instance, she would likely move out of this house, and moving isn't cheap. I should probably add another $30k to it for health insurance for a year or two, just in case. My wife would eventually need to figure out health insurance, and daily living costs. My daughter would get some survivors benefits, though I don't know how much. One thing I do need to do is write all of this out for my wife just in case it happens, so she knows what to do and how to survive until she did get on her feet. We'd be counting on a lot of family help (not financial) at this point as well. 

It is an expense. It is not a necessary one, but it should be considered for everyone. I'm happy it is provided through work. 

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