Quote:
Originally Posted by MomofFour
I am 33, my husband is 37, we have four young children. We have been working with a financial advisor for several years now. I am tired of paying loads for mutual funds, and high commissions for stock purchases. We are in the process of transferring our money so we no longer work with him, I would like to take care of our finances on my own. I have read several books and checked out numerous websites, but I still have questions specific to our circumstance that I can’t ever find answers for! I have read many of your posts over the last few weeks and I think I’ve found just the place to help me!
Here goes…
Our combined yearly earned income is around 50k/ year
Our only debt is a 15 yr. fixed mortgage, appr. 73k left, at 5.625%
Retirement accounts:
My husband has a 401k through Fidelity with 103k, current contribution 20%
Roth IRA, mine, 18k
Roth IRA, my husband, 14k
(Our Roths are in the now in the process of being transferred to Fidelity)
Taxable accounts:
We have 78k in GSHAX
Brokerage acct. with 31k in individual stocks (GRMN,COH,CROX,HANS,JNJ,SO,&UNH) and 22k in mutual funds (CVGRX & CWGIX)
Money market savings accounts, combined 147k
Now for the questions.
1. Should we use some of the money in the money market account to pay off our mortgage?
2. What brokerage firm should I move my taxable account to?
3. What is your opinion on GSHAX, should we sell some of it or keep it since we already paid a load to buy it? We do receive about $530 in dividends a month that we have been using to live off of, but if we paid off our mortgage or changed the 401k contribution we wouldn’t need that any more.
4. Suggestions for where to put the money market money, or do you think we should leave it in the bank?
Any suggestions/ comments are greatly appreciated!  |
You are doing a GREAT job.
1) No- do not pay off mortgage
2) I like T Rowe Price for my investments (taxable or not). If you like Fidelity, use them instead. Keep all your money in one spot is my advice.
3) this question makes me think you are retired. if so, maybe #1 changes.
4) before I answer anymore- are you retired? Why use interest to pay off mortgage?
My initial reactions were this:
Making 50k, saving 20% is EXCELLENT. I assume you can live off of 40k gross?
103k in 401k
32k in Roth IRAs
78k in mutual fund 1 (I was not familiar with tickers you listed)
31 k brokerage
147k in money market
Here is what I would do:
set aside 3 months expenses (from money market) and leave in cash
set aside another 3-12 months expenses (from money market) and put in a really moderate investment. A mutual fund like PRPFX (that is what I use). RPSIX (I own that too) or any other mutual fund which is atleast 60% bonds (maybe a 40-60 fund). The purpose of this fund is for larger emergencies, house repairs, car repairs etc... and this money should grow and keep up with inflation (but this also has some more risk than the money market you have now).
I assume the above strategy would take about 30-50k from the money market.
You would have 120k left I would add the 120k into the overall asset allocation, which is next issue.
You have high savings, but I saw little mention of your goals, risk tolerance for achieving the goals, or your asset allocation for managing the risk level you define. I would add the 120k, and realize you have about 340k you need to invest with a clear goal of the desired outcome.
With 340k, and saving 20%, My guess is you can retire with 2 doubles, which might take 12-18 years (depending on the risks you are comfortable taking). 2 doubles means 340 doubles to 680k, then 680k doubles to 1360k (1.3 M).
In that same 12-18 years the mortgage would pay itself off with normal payments, and the mortgage is only costing you 5.6%, where as most of the investments the 340k would be put in would be 6-12% returns on average, so it makes sense to invest (if you are comfortable with that level of risk).
Do not let me or anyone else tell you what risks you need to take. Define how much risk you want to take, then we can help you.
3 risk profiles for you:
retire in 12 years. aggressive growth. Worst case, IMO, with this profile is retirement in 18-24 years. Invest in 80% equites and 20% bonds. Do not pay off mortgage early because you are expecting 12% returns from investments. 30% large cap domestic, 10% mid cap domestic, 10% small cap domestic, 20% foreign large cap and 10% foreign small cap/emerging markets. 20% bonds spread out amongst government (5%) inflation protected (5%) foreign (5%) and high yield (5%). A fund like RPSIX gives all these in one bond fund.
retire in 18 years. Moderate growth. Worst case is this plan does not work because markets did not do what I said. I have a hard time envisioning this plan not working. Do not pay off mortgage early, because within 18 years, it will be paid off anyways. Looking for a solid 8% return from the investments. Invest 60% equites and 40% bonds. I would do 20% large cap domestic, 5% domestic mid cap, 5% domestic small cap, 20% foreign large cap, 5% emerging markets and 5% foreign small cap. 10% bonds in each of four classes I mentioned above.
retire in 24-36 years. Low risk. Pay off mortgage. Look for 6% returns from investments with a 40-60 mix or 60-40 mix similar to allocations stated above. Because less capital is growing now (because of mortgage payoff), your biggest risk here is actually inflation, not the markets.
There is probably a 4th risk profile where mortgage is paid off and you go aggressively for 12 year retirement. If you state your risk tolerance and goals, it might be easier to help.
2 edits:
Might make sense to put 74k into the moderate investment for house repairs, as this could be cashed in anytime if you chose to pay off mortgage. It would not change the double plan, as you only "need" 1.25M to retire on and the plan I listed estimated final value at ~1.4 M.
If you like the dividends coming in, I would not worry about taxes, because you are probably being taxed only 5% on the dividends, and that income stream should be quite helpful in retirement (dividends tend to outpace inflation), so dividend investing at the core of an income investing strategy is a good thing, IMO, if that is defined within the asset allocation which manages your risk tolerance. Especially if you choose the 12 year retirement route, you have 12 years where the 5% taxes slow you down (5% taxes on dividends) and then 50 years or more??? where the low taxes on dividends save you money (same withdraw from a 401k would cost you 15% or 25%).
I do not see tax efficiency as a need if you choose the early retirement path.