So, here's my situation:
Age 41, wife is 40, makes a nominal amount of money as she mostly takes care of the kids.

Kids, 7 and 9, they each have $200 in savings

house is worth $230k and is fully paid for. I have a 100k credit line I can draw on, but have never really used it.

401k worth $140k, but I have 40k in cash in the account. I can buy ETF's including gold and silver ETF's.

I invest 5% of my 65,000 salary to get the company match. I usually get a $6000 yearly bonus, but don't always. I actually work in the financial services industry, but I don't like how advisors are paid. Such as, they make no money telling you to pay off debt, so obviously they won't tell you to pay off debt.

I feel like I should be saving more. I think I should be putting more like 10% away. So really that's just an extra $250 a month.

So I figure I have 4 options:

1) physical metals - but How much? I am thinking silver as I can buy a little at a time close to spot. That said, perhaps buying and ETF like SLV is a better bet with all the cash I have? Maybe just take the extra $250 a month and buy silver? But it's after tax money. The other "idea" is, since I have no silver right now, buy a large chunk $3-5k with a 401k loan (since I have a lot of cash doing nothing and I'm paying myself back). Or use the line of credit at 4%?? I found a real good deal on silver at spot so thought I should jump at it. I go back and forth on this one as I've bought and sold precious metals a lot in the past year. Some swear it's "real money, others think is serves no real purpose.


2) Or should I just invest in stocks or bond ETF's in my 401k? I like the dividend payers as you at least get something back, and I get the tax deferral.

3) Save for the kids college?

4) build up cash as we don't really have much on hand as we've paid off the house. But we do have the line of credit if needed.

5) spend it.
a) On the practical: We do need new carpeting for the house. Not want, we really need it.
b) On the frivolous: I don't own anything. Between paying for expenses and paying off the house, we've never spent money. Heck, I used to have a pretty cool guitar and firearm collection I sold off the past few years which helped pay down the mortgage, but I now kind of regret it.

Any help is appreciated!

That's great that your house is totally paid off and you have some decent-sized investments. I think you should (1) replace the carpeting and (2) both save for the kids' college and continue contributions to your 401(k). I like the year-targeted mutual funds for that. You may also want to look into your options for a Roth IRA (or a Roth 401(k) if that is available through your employer). I personally split my retirement contributions evenly between a traditional 401(k) and a Roth 401(k) since my employer offers both options. You should also buy yourself and your wife a little treat every now and then!

P.S. Your kids are at great ages to be learning certain concepts relating to money management. I hope you pass on some good lessons and get them personally *invested* in having good money habits

Having paid off the house by early 40s is really pretty good. The downside of that is having a paid off house isn't a great way to build wealth that you can retire on; the only way to tap that equity is to sell the house. That said, now you can repurpose that mortgage payment to other forms of savings.

How much in savings? well, I'd look online for some numbers but as a rough guide, but given a 4% withdrawal rate, to keep your income the same, you'd need 65,000/0.04 = 1,625,000. Obviously SS, reduced expenses, etc can reduce the need for income, but still its something to keep in mind.

What to invest or spend on? Metals strikes me as a bad idea in general to grow wealth and really bad right now as prices are clearly at an ultra high point. Trying to time a bubble is risky at best. Borrowing the money from the 401k to buy into an asset bubble is twice as crazy.

Of your remaining options, all sound good. Personally I'd recommend some form of a total market index etf for low expenses, good growth rates of the long term etc. Bonds and bond funds are, in my opinion, going to disappoint over the next few years as we continue to come out of the downturn.

College is expensive and you only have about a decade to save for it. Costs currently for college are $20,000 - $40,000 a year (public/private). Ignoring the likely rise in prices, thats still $160,000. So yeah, saving sooner rather than later is a good idea.

Cash on hand is good, obviously. Most advice is to keep several months of cash/near-cash available. The exact number varies from 3-8 months, depending on situations.

If you need carpet, then you need carpet. Not a lot to argue with there. Spending on frivolous things is also fine as long as it doesn't mess up your other goals, but just do so with a plan.

Did someone just take an INCOME and multiply it by 25 to get a magic number? I should point out, that is a very rough number for a couple of reasons:

1) we have no idea what your goals are.
2) Your income does not equal your expenses.
3) Your current expenses do not necessarily equal your expenses in retirement (see #1)
4) 4% may or may not be applicable for your (or anyone's) situation

I'm not sure if you are trying to prioritize your savings, but you need goals. Without them, you are lost and running around like a chicken with its head cut off. But, I disagree with what I think my fellow posters are trying to say about college savings. To me, it is low on the totem pole. Here's why:

1) if you use tax advantaged education savings account, it becomes costly to remove the money from that savings vehicle for anything other than education. So, everything else needs to be in order before you do that
2) Who knows if junior or juniorette will actually go to college, see #1
3) scholarships, grants, loans abound to fund a college education. None of those are available for your retirement.

If you do decide to do college savings, You don't have much time to be aggressive. Please read the link below to give you a good idea of AA as a function of the child's age...

http://thefinancebuff.com/asset-allocat ... -plan.html

Finally, If you are looking to prioritize and have any desire to retire in comfort, here is my suggestion. 1 year EXPENSES in e-fund. Max out your 401k. Max out your IRA. MAX out your spouse's IRA. Taxable accounts to get you caught up on being a bit behind on your retirement savings. College savings.

PS, Having a house which is paid off does have some value for retirement. It removes an expense, and quite potentially could be viewed as an annuity like investment. Of course, if you calculate retirement numbers using income rather than expenses, You won't realize this value.

Bingo! Retirement is all about generating cash flow from investments. NOT having a $500 monthly mortgage payment is just like having $6000/0.04=$150000 extra in your retirement fund. More if you consider taxes.

I did admit it was a rough number. But the 4% is a decent starting point as a guide as its a safe withdrawal rate. No real "magic" about it, just a reasonable starting point. Yes I realize the flaws in that withdrawal rate, as well as that $65k may or may not be what the op is interested in having his investments return yearly.

I see the point about no mortgage being an asset, but its a poor one. By that I mean that first, I have to keep putting money into it (taxes, insurance, repairs, etc). Second, regardless of if I have a house valued at $250k, $500k, $1m, etc, it doesn't help me fiscally beyond holding my stuff. More clearly, a person with a $1m house but little retirement is in a much worse position relative to a person with a $500k house and $500k in savings. Its not that the house is unimportant, its that it is only a small piece of the total puzzle.

Thanks for all the replies so far, it's giving me a lot to think about.

A few clarifying things...

I posted this on a few forums to get a few different views. On a precious metals forum I expect one response and a frugal forum I expect a different one.

The reason I mentioned buying silver is it kind of solves 2 of my issues - "investing" and buying items for me. I have a collectors mentality and had some very cool collections over the years, all of which have been liquidated at various times, which I really regret. My wife thinks I have deep seated guilt about having money and things, which is why I sold all my stuff and paid off the house. Anyway, all my money goes for basic necessities and the family. I don't spoil them. We live pretty lean.

As far as goals, that may be the underlying problem here (and why my post is kind of all over the place). I went here:

http://www.ameriprise.com/financial-pla ... -goals.asp

and none of that really appeals to me or applies to me at this point in life. Perhaps as I get older goals will be more focused.

We're arguing two different things. Some sort of sheltered is needed to sustain life. Most people would view a home to be a necessity entering retirement in the US or canada. And there is a cost to that. If you rent, it is how much your rent is, perhaps some insurance if you aren't very brazen. If you own, it can be mortgage, taxes, insurance, upkeep etc. So, you have some cost to putting a roof over your head. If you carry a mortgage, that is a large part of the cost to home ownership on a recurring basis (in terms of cash flow). If you don't carry a mortgage, you have more/need less cash flow. If you do, you need more cash flow (and therefore more assets). Either way is perfectly acceptable going into retirement.

You said:



Which isn't true. The absence of a mortgage is less cash flow you need, and therefore less money you in theory need to save. Say you own your house worth $200k outright. Since mortgage rates are within the realm of more reasonable (and conservative) withdrawal rates. Would you rather invest that money and use the cash flow to pay the mortgage, or would you rather pay off the mortgage and need less cash flow? I assume you're young since you're spouting off the latest personal finance blug-o-sphere crap, b..b..b..but the paying off the mortgage brings much more peace of mind. Imagine, your $200k sitting in your account in 2007, sitting pretty. Then imagine it in 2009, trying to siphon off the same amount of cash flow. Carter-esque rates make the decision much much easier.

It isn't a question of what you can buy with the value of your house or what the costs to ownership are, it's about the effect on cash flow.

Run away from ameriprise. www.bogleheads.org has all the info you need.

It WAS a safe withdrawal rate, in the past, for people who retired at a certain age. We don't know if it will be safe in the future.



You are mixing up so many things here. Property taxes, insurance, repairs, and so forth are ownership costs. They are incurred whether there is a mortgage balance or not so they don't come into play in a discussion about whether to pay off a mortgage. And comparing the situation of a $1 million house and no retirement savings to a situation with half a million in savings and owning a house worth half a million is like comparing apples to celery.

The question is how to allocate net worth given a certain house value. There is nothing wrong with allowing the house value to go up or down except that changing the house is a major decision and involves many factors that are not financial.

The two tables below illustrate the decision. In both tables the house is assumed to be valued at $500k. The first column is for the person not paying off the mortgage and investing extra money in savings. The second column is for the case of paying off the mortgage. equity fraction of 30% is assumed for the person keeping the mortgage but that could be changed as well. The bottom line of each table show the net income from the decision (income from savings minus the amount spent on mortgage interest).

The first table assumes that the savings is invested somewhat aggressively to earn a 6% return. In the second case a safer investment is assumed (treasuries perhaps, or CDs.) Both situations assume the same mortgage rate of 4%.

Mortgage rate 4% 4%
Equity 30% 100%
House value 500000 500000
Mortgage balance 350000 0
Mortgage cash flow 14000 0
Savings 850000 500000
Net worth 1000000 1000000
Savings return 6% 6%
Income 51000 30000
Mortgage expense 14000 0
Net income 37000 30000


Mortgage rate 4% 4%
Equity 30% 100%
House value 500000 500000
Mortgage balance 350000 0
Mortgage cash flow 14000 0
Savings 850000 500000
Net worth 1000000 1000000
Savings return 2% 2%
Income 17000 10000
Mortgage expense 14000 0
Net income 3000 10000

Obviously paying off the mortgage produces a higher return under the safe investment scenario and keeping the mortgage produces more income if more risk is tolerated. It all comes down to whether the mortgage rate is higher than the return produced by alternative savings. Neither choice is always better or worse.

It is interesting in this case that the OP is considering buying silver. There is essentially only one reason to hold silver and that is as an inflation hedge. Precious metals have not done their job in keeping pace with inflation over long periods. But let's assume that they do in the future. We should also assume that real estate values also keep pace with inflation...which they have done in general since Roman times.

That means that if we experience high inflation both the house value and a silver investment will go up (not a prediction but a consequence of the assumptions). But the leverage of the mortgage will make it go up faster. So, if you expect high inflation it might be better to hang onto the mortgage.

What about deflation? Well, then we'll all be in trouble.

I'm going jump on this and maybe go out on what appears at first to be a tangent but goes to the heart of the matter for the OP I think. I totally agree with you on this Mr. Frise.

I think some of this confusion is created by the financial planning and investment community and spread through those simplistic online tools that help you figure out how much you need to save. They almost always start out with income and assume you need to produce retirement income that is some fraction of your preretirement income, maybe 75%. But that is completely ridiculous.

Let's take someone not too different from my wife and I. In round numbers here's where money might go:

Preretirement income: $200000
Taxes: -$45000
Mortgage: -$25000
Savings: -$65000
Expenses: -$65000

Do we need 0.75 times $200000 = $150000 income after retiring? No way. Here's how expenses will look after retiring:
Taxes: -$10000 (no FICA and no tax on taxable account withdrawals)
Mortgage: $0 (it will be paid off)
Savings: $0 (don't need to save for retirement during retirement)
Expenses: -$65000

The total is $75000 so that's what we need. That's half of what a calculator says based on the "experts". It's a little more complicated than that but not much!

Generating $75000 using that 4% number takes $1.875 million. If the mortgage is not paid off we need $625000 more. I think Ameriprise (and their ilk) would prefer I send that money to them rather than sending a much smaller amount to the mortgage company so they try to convince me of that with their calculators.

.

Okay, "putting money into it" is irrelevant to paying off a mortgage. You're going to have those expenses if you have a house, with or without a mortgage. That's like saying if you pay off your car, you'll have to pay for gas. While that is true, you'll also have to pay for gas if you have a car and a car loan.

So, paying off the mortgage really is an investment, and in my opinion, a good one. What isn't a good investment is buying more house than you need or paying too much for a house in the first place.

What kind of silver do you collect? I buy some silver rounds/bars and junk silver (90% dollars, half dollars, quarters), although they are easily traded for cash at spot if needed, I'm not sure how well they'd hold up as an investment.

Personally, I recommend stocks. I just read this great book on stocks nearly a year back called "What Works on Wall Street" (Fourth Edition). You can pick it up on amazon.com for less than $30.

I looked at the book and started making a ton of portfolios, making observations, and finally arriving at a great system for buying stocks. If you're interested, I'll create a portfolio for you for free (No more than 1 free portfolio per person though. I charge after that).

You can check out my stock portfolio forum at prostockpicks.proboards.com . All 11 of my posted portfolios are beating these 5 indexes: AMEX, NASDAQ, NYSE, S&P 500, and DJIA. All of my portfolios that are 6 months old or older are beating all of these indexes by more than 7%. Most people recommend having portfolios of 20-25 stocks for diversification purposes. If I don't manage to find enough stocks for the size of portfolio you want, I'll be willing to make a second portfolio a month or two later for free. (My portfolios change slowly.. which is why I can't just run the numbers again the next week and expect a ton of new stock recommendations to pop up suddenly)