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 Post subject: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sat Mar 23, 2013 2:30 pm 

Joined: Sun Sep 30, 2012 10:51 am
Posts: 7
Hey all,

You all helped me refinance our house the last time I posted (many thanks!). Hopefully I can get the same helpful advice this time around for more personal finance stuff :)

I'm wondering what our next big 'step' should be. We've just topped off our emergency fund (a full 6 months of expenses - woo!) and I'm not sure what to tackle next since it seems like there's a few directions we could go.

Me: 27, income ~70k
Wife: 26, income 44.5k (she's a teacher - this is important)

Our current retirement account setup is like so..

- Me: 4% to 401k (that's up to employer match), fully funding a Roth IRA at Vanguard
- Wife: 6.4% pre-tax to state pension fund (mandatory and unchangeable), $150/month to 403b
- We also have a joint Vanguard account gifted to us with about $40k all invested in VASGX, and we've not made any contributions.

Our only debt is our ~245k mortgage, which we recently refinanced as a 30-year @ 3.375%. Currently paying the minimum $1650 payment that covers PITI. We are planning on keeping this house long-term, and renting it out if/when we get another place.

Here's where I'm split on what to do. Typically I feel like the advice would be to max out our 401k/403b contributions. My 401k has a few good funds (S&P index and T Rowe Price target funds), but my wife's 403b is with Oppenheimer and it's all annuities with a ton of fees.

The few options I've considered are:
- Max out 401k and 403b
- Open an Vanguard IRA for my wife
- Pay down mortgage aggressively (could do an extra 1.5-2k/month if this was our only goal)
- Contribute post-tax to joint Vanguard account

And I'm sure there are others I'm not thinking of. This is why I'd like the great minds at GRS to help me decide what my next steps should be - I'm open to whatever makes the most sense!


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sat Mar 23, 2013 10:04 pm 

Joined: Wed Oct 07, 2009 4:16 pm
Posts: 959
I'd start working on getting rid of the PITI while also maxing out a ROTH IRA for both of you.

Leave the 40k alone for now.

_________________
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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sun Mar 24, 2013 7:32 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
I disagree about paying any extra on the mortgage. I would pay the minimum and put it to work elsewhere.

I would also sell out of the VASGX, it is not a tax efficient fund. It has a pretty high turnover (10%) and also bonds, which may be paid out in the form unqual divs (taxed at your marginal tax rate). You need to consider all accounts as a whole. For instance, my 401k just has an S&P 500 index fund. It is the cheapest available and I get exposure to other areas in other accounts.

1) I would max out the IRA's for both you and your wife.
2) Max out your 401k
3) Taxable savings
4) go on vacation
5) give to the homeless
6) pay down your mortgage

http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

_________________
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: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sun Mar 24, 2013 9:29 am 

Joined: Sun Mar 10, 2013 12:10 pm
Posts: 120
Thanks for the link, BF. Good stuff.

I'm surprised, though, that such a thorough treatment of tax-efficient retirement investing did not mention HSAs. If I was retiring today, I'd much rather have my last $200k sitting in an HSA than a traditional retirement savings vehicle, including the much-venerated Roth.

Maybe HSAs often go unmentioned because many are not eligible for them and/or the future of health-related legislation is murky?


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sun Mar 24, 2013 10:51 am 

Joined: Sun Sep 30, 2012 10:51 am
Posts: 7
Thanks for the input so far, everyone. BF: After reading through that link, it seems like I definitely need to restructure. I have an S&P 500 Index available through my 401k as well, and it also happens to be the lowest expense ratio I can choose. Done!

Also planning on opening a Roth IRA for my wife (I assume this is the best choice, unless there's a reason she should have a traditional). Had two questions about that.. we're not at the 2012 contribution deadline, right? My IRA is fully funded for 2012, but I could grab $5k from savings and quickly fund the one we're opening for her if there weren't any gotchas. We've already filed our 2012 taxes, if that makes a difference.

Second IRA question - we've decided as a couple what our risk tolerance is, equity/bond ratio, etc. -- should I just duplicate my Roth investment (currently 100% VTIVX) or purposely choose something else to diversify a bit?

Ranger, I've looked into HSAs a bit too. I'm on a HDHP at work, but no HSA - just an HRA. I emailed HR about the possibility of setting up a payroll deduction into an HSA I open, because I've read if the deduction comes through payroll you can avoid SS tax on it. If I was to open an HSA, should that come as priority right after maxing out my 401k? Any recommendations on what company to go with?

Lastly, regarding my wife's 403b - I looked further into it and they do have mutual fund choices. I moved 100% of the ~4k into OAAAX, simply because it had the lowest expense ratio (all of their funds are front-loaded at 5.75%). We're only contributing $150/mo at this point - I'm not sure if this is worth putting more money into (or even diverting the $150 elsewhere). Thoughts?


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sun Mar 24, 2013 11:04 am 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1146
Location: Illinois
Ranger wrote:
Maybe HSAs often go unmentioned because many are not eligible for them and/or the future of health-related legislation is murky?

That, and many of them have horrible investment options. I've seen a few good ones, but they seem to be the exception to the rule.


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sun Mar 24, 2013 11:30 am 

Joined: Sun Mar 10, 2013 12:10 pm
Posts: 120
bpgui wrote:
Ranger wrote:
Maybe HSAs often go unmentioned because many are not eligible for them and/or the future of health-related legislation is murky?

That, and many of them have horrible investment options. I've seen a few good ones, but they seem to be the exception to the rule.


True that. But, given the myriad tax advantages you don't need to even make market for the HSA to be a good deal. If my math is right, a 6% annualized return on $ invested equates to a nearly 9% return once the tax advantages are factored in (40% in my case, between state/fed/FICA).


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sun Mar 24, 2013 1:49 pm 

Joined: Sun Mar 10, 2013 12:10 pm
Posts: 120
slamjam wrote:
If I was to open an HSA, should that come as priority right after maxing out my 401k? Any recommendations on what company...


To be sure, it makes sense for some folks to max the HSA after reaching the match on their 401(k). I would not go so far to say that makes sense for everyone. As has been noted here, some HSA providers simply suck. Obviously, that would play into the calculus of whether or not to prioritize the HSA above further savings in a traditional retirement account.

If I had my druthers (and I don't, because my employer makes me have an HSA through J.P. Morgan Chase), I would have an HSA with the following provider because they offer access to Vanguard funds.

https://hsaadministrators.info/vanguard-funds-list


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sun Mar 24, 2013 3:26 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
Ranger wrote:
I'm surprised, though, that such a thorough treatment of tax-efficient retirement investing did not mention HSAs. If I was retiring today, I'd much rather have my last $200k sitting in an HSA than a traditional retirement savings vehicle, including the much-venerated Roth.

Maybe HSAs often go unmentioned because many are not eligible for them and/or the future of health-related legislation is murky?


I'm not eligible to have an HSA...so I don't know much about them. I think the big drawback is locking the money up for health care specific costs, especially when you can probably fly under the radar and just pay the "tax" for ACA. Time will tell. But, I only see healthcare in the US becoming more "socialized" or "subsidized" rather than VV.

slamjam wrote:
Also planning on opening a Roth IRA for my wife (I assume this is the best choice, unless there's a reason she should have a traditional). Had two questions about that.. we're not at the 2012 contribution deadline, right? My IRA is fully funded for 2012, but I could grab $5k from savings and quickly fund the one we're opening for her if there weren't any gotchas. We've already filed our 2012 taxes, if that makes a difference.

Second IRA question - we've decided as a couple what our risk tolerance is, equity/bond ratio, etc. -- should I just duplicate my Roth investment (currently 100% VTIVX) or purposely choose something else to diversify a bit?

[...]

Lastly, regarding my wife's 403b - I looked further into it and they do have mutual fund choices. I moved 100% of the ~4k into OAAAX, simply because it had the lowest expense ratio (all of their funds are front-loaded at 5.75%). We're only contributing $150/mo at this point - I'm not sure if this is worth putting more money into (or even diverting the $150 elsewhere). Thoughts?


You can make 2012 IRA contributions until 4/15. Assuming you didn't put your wife down for any other IRA contribution, contributing to a Roth will have no impact on your tax liability. You could file an amended return, I would just hold on to the 5498 once it is sent to you and let the rest ride.

Since you have your AA, I fill in the holes else where. Rebalancing becomes kind of tricky across multiple accounts, so I try to have some overlap (a fund held in at least 2 accounts). I have modified Bernstein's Coward's portfolio and keep the slice and dice towards small cap value, reduce bond allocation percentage, sliced bond beyond "short-term", sliced and diced REIT to include VNQI and upped my exposure to international closer to 35%. The Boglehead wiki has articles on "slice and dice" and "lazy portfolios."

In a long winded way, I hold a lot more of my "riskier" investments in my Roth accounts. REIT's (VGSLX& VNQI), value tilts, small caps etc. Of course, it isn't all risky, just a toned down version (e.g. small exposure to bonds). I'm fortunate enough to be able to hold admiral funds for whatever I do and definitely once that is true, I would kick the target date fund to the curb.

I would skip your wife's 403b. a 5.75% haircut at the start is tough to grin and bear.

good luck.

_________________
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: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Sun Mar 24, 2013 5:41 pm 

Joined: Sun Mar 10, 2013 12:10 pm
Posts: 120
Bichon Frise wrote:
I think the big drawback is locking the money up for health care specific costs, especially when you can probably fly under the radar and just pay the "tax" for ACA. Time will tell. But, I only see healthcare in the US becoming more "socialized" or "subsidized" rather than VV.


Yeah, the increasing socialization of healthcare is my only trepidation regarding HSAs. It is said that a couple retiring this year at age 65 can expect to pay over $200,000 out-of-pocket for healthcare costs during retirement. That's a screaming endorsement for HSAs. But, in 25 years when I retire, will I realize significant health care costs directly out of pocket? Or, will those costs be taxed out of me and big and small ways? As you say, friend, time will tell. We all know which way the pendulum is swinging...if only we could see how far it will go!

As far as accessability is concerned, there is a 20% penalty if you use HSA funds for nonqualified expenses and are younger than 59. The penalty drops to 10% at age 59 (maybe 59 1/2). Then, at age 65 the penalty completely goes away. So, by age 65 an HSA is treated like a pretax 401(k) when used for nonqualified expenses, but retains its tax-exempt status when used for qualified expenses such as Medicare premiums, long-term care insurance, and all that good stuff.


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Mon Mar 25, 2013 4:44 am 

Joined: Tue Mar 11, 2008 12:19 pm
Posts: 1727
Location: Ottawa, Canada
Bichon Frise wrote:
5) give to the homeless
6) pay down your mortgage


Why would you prioritize enabling drug-addicts above your own family's financial security?


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Mon Mar 25, 2013 7:34 am 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1904
kombat wrote:
Bichon Frise wrote:
5) give to the homeless
6) pay down your mortgage


Why would you prioritize enabling drug-addicts above your own family's financial security?

Because if you followed the first 3 steps, you can afford to help others without jeopardizing your family's financial security. Of course, there's also karma.


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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Mon Mar 25, 2013 9:12 am 

Joined: Sat Dec 10, 2011 7:25 am
Posts: 735
Pay down you mortgage...
1) each dollar of principle you pay off early saves you a fortune in interest payments over the years
2) those savings are guarenteed no matter what the oh so fickle kmarket does
3) close you eyes nd visualize what your life would be without a mortgage - let me assure you it will be oh so cool...
4) now close you eyes and think if you took the extra money and putit in the market tell me how you think you will feel if the market tanks again.

Always retire debt first it is the safest and most prudent play...every home foreclosed on it by a bank has what? A mortgage.


Last edited by RayinPenn on Mon Mar 25, 2013 11:34 am, edited 9 times in total.

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 Post subject: Re: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Mon Mar 25, 2013 9:27 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
RayinPenn wrote:
Pay down you mortgage...
1) each dollar of principle you pay off early saves you a fortune in interest payments of the years
2) those savings are guarenteed no matter what the oh so fickle kmarket does
3) close you eyes nd visualize what your life would be without a mortgage - let me assure you it will be oh so cool...
4) now close you eyes and think if you took the extra money and putit in the market tell me how you think you will feel if the market tanks again.

Always retire debt first it is the safest and most prudent play...every home foreclosed on it by a bank has what? A mortgage.


Is this me speaking...or is it my alter-ego?

_________________
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: No non-mortgage debt, full e-fund - where to focus now?
PostPosted: Mon Mar 25, 2013 9:34 am 

Joined: Mon Feb 07, 2011 6:33 pm
Posts: 1146
Location: Illinois
Bichon Frise wrote:
RayinPenn wrote:
Pay down you mortgage...
1) each dollar of principle you pay off early saves you a fortune in interest payments of the years
2) those savings are guarenteed no matter what the oh so fickle kmarket does
3) close you eyes nd visualize what your life would be without a mortgage - let me assure you it will be oh so cool...
4) now close you eyes and think if you took the extra money and putit in the market tell me how you think you will feel if the market tanks again.

Always retire debt first it is the safest and most prudent play...every home foreclosed on it by a bank has what? A mortgage.


Is this me speaking...or is it my alter-ego?

You or your alter ego must be spoofing IPs, since you have different IP addresses. :)


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