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 Post subject: Next investing step
PostPosted: Mon Aug 20, 2012 7:30 am 

Joined: Mon Aug 20, 2012 7:22 am
Posts: 2
I am at a crossroads and hoping for some guidance.

I currently have my 401K contribution through my employer maxed out. My wife's employer does not offer a 401K and our combined income does not allow us to put into a Roth IRA or a regular IRA for my wife.

We purchased our current house in 2007 and have been making significant additional payments to get us above water (with a goal to be able to refinance this year and take advantage of the low interest rates available - my current LTV ratio won't allow this though).

We have our emergency fund in place and currently own a rental property that pays for itself (and provides a small profit).

I am wondering what my next move should be.


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 8:57 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
many will probably reply that you should be doing a "backdoor" roth contribution. I don't think that is always the best and you should consider more things than just what the number's poop out based on assumptions.

a lot of what you would/should do depends on your goals and overall financial picture. We know the house is underwater, but it may not be the best thing to throw more money at it. Again, more details are needed.

Regardless of the banter which will ensue, you should educate yourself. I recommend people use their public library to check out the boglehead's investing book.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 9:11 am 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1592
Location: Seattle, WA
If your wife isn't eligible for a deductible traditional IRA contribution, that means that your household income is over $169,000. Of that you are saving $17,000 into your 401(k) - about 10%. That's the minimum for retirement savings, rule of thumb wise anyways. And for someone with your income, the rule of thumb is inarguably too low, since social security will replace less of your income than it would an average earner's, upon retirement. And that's just the minimum rule of thumb - really one should save 15% or 20% of income just for a comfortable retirement. So you have to save in long-term investments, just for retirement, even though it may mean you need to put money into a taxable brokerage account for that purpose.

Other than that, your plan to get the mortgage above water so you can refinance, seems like a good plan.


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 9:21 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1749
Both Stannius and Bichon Frise make valid points. There simply isn't enough information available to determine your next step. In addition to their queries, I'd also want to know your ages and how much you already have saved for retirement, plus the asset allocation.


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 10:34 am 

Joined: Mon Aug 20, 2012 7:22 am
Posts: 2
I appreciate the responses and understand what I provided was not a full picture...here are some more details (let me know if there is something else specific).

My wife and I are both 40. We had a late start investing in what we do have in our retirement today (then took a hit with the crash a few years back). Today we have about $75k in our retirement (much lower than where I want to be). I take care of my mother-in-law (we own a duplex that we live in one side and she in the other ***this is also the property that is underwater).

We have no credit card debt or loans besides that of the houses and one car. Also, we have no children - but my parents are aging and I will have to take care of them / help them financially one day too.


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 12:28 pm 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1592
Location: Seattle, WA
ASSUMPTIONS ABOUT NOW
age 40
retirement savings $75,000
income $169,000

ASSUMPTIONS ABOUT THE FUTURE (which I don't claim are correct, just a ballpark)
retirement age 67
inflation 3.50%
returns 11% (including inflation)
401k contribution $17,000
401k contribution and salary both go up with inflation

I calculate that you'd have (in this hypothetical, idealized scenario) $1.35 million dollars at retirement. But that's only $516,280.51 in today's dollars. Or to put it another way, in 2040 if your household income simply keeps up with inflation, you'd be making $427,835 per year. A 1.35 million dollar portfolio at 4% withdrawal rate is only $51k, 12% of your pre-retirement income. I wouldn't count on social security to make up the other 78%.

My point is simply that just one maxed out 401(k) is not going to be enough for you and your wife to retire on in 27 years.


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 12:42 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
I agree that you are behind if you have any desire to retire. What is your "bare bones" budget - food, shelter, basic utilities? And what do you normally spend? How do you plan to spend in retirement? European vacations? collecting junk off the street and trying to resell? eating cat food? This will more or less dictate how much money you need to save.

The house is still a wild card. You are underwater, but if you have a decent fixed rate and can handle payments, I would leave that be for the time being. You were happy making that payment at one point, so it shouldn't change just b/c others are getting a better deal.

You may be happy working until you die, so saving may not be the utmost priority. Of course, you may not be able to work, so saving would be prudent even if you have no desire to retire.

The good news is, many retire with less than what you have saved thus far. So, you won't starve and die on the street. At least I fail to see seniors starving and dying on the streets where I live.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 1:21 pm 

Joined: Mon Feb 04, 2008 7:35 am
Posts: 1148
Location: Maryland
In your follow up post, you mentioned having a car loan as well. Is this where most of your money has been going?

Does your company match your retirement, and how long have you been maxing it out?
Your money has gone/is going somewhere, but I'm not seeing it.

You say you have your emergency fund funded, but how funded?

There's a gap somewhere that I can't find. Maybe further explanation will help.


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 2:24 pm 

Joined: Fri Sep 12, 2008 12:29 pm
Posts: 1592
Location: Seattle, WA
Bichon Frise wrote:
The house is still a wild card. You are underwater, but if you have a decent fixed rate and can handle payments, I would leave that be for the time being. You were happy making that payment at one point, so it shouldn't change just b/c others are getting a better deal.


Sometimes personal finance is more about math than mind. Does it matter if someone is "happy" paying a mortgage at a particular interest rate? The OP doesn't say what the interest rate is, but in 2007, 30 year fixed rates were in the ballpark of 6%. Refinancing at 4% would lower their interest costs 33% every year and their monthly mortgage payment 20% (if they keep a 25 year loan). I would be pretty darn happy lowering one of my largest expenses by 20%, personally.

Not that I'm saying the OP should definitely, aggressively work towards a refinance. It depends on a lot of those missing details, and has to be fit into the entire framework of his household's financial status. But with just the few details we've been provided, at a glance it seems probable that it would be a good move.


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 Post subject: Re: Next investing step
PostPosted: Mon Aug 20, 2012 2:52 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
yeah...I generally agree. I had actually typed out that if they were under 5%, they would probably be relatively happy leaving it be. BUT, do they need to come up with $5k? $50k? $150k? As you mention, it's all speculation at this point.

Sometimes as well, we get bogged down in the, "everyone else is doing this, so I have to." And I think we would both agree that isn't always the best. It's good to look at all the options, and I am just trying to give examples of other options, not just the status quo (which may indeed be the better path). I apologize if that came off as a "must do" recommendation.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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