My first post-Laying it out there

[formerdebtslave]

Wow,
What a great forum, glad I found it!

I'm 36, married to a stay at home mom, with 2 kids and a cute puppy. I make a good living, but spend a LOT! Here is where I am:


Company Stock- $592K (A very good company)
Retirement Fund- $76K
Wifes Retirement fund- $12K
Wife's IRA- $12k
Brokerage Account- $11k
Savings- $10k
Home Equity $100k
Children's 529's $20k

Mortgage- $170k
Car Lease- $482 per month
Boat Loan $47k (Boat is worth about $80K)

I recently paid off a personal loan of $12k, a HELOC of $30k, and about $8k in Credit Card debt.

Now, after having some "ah-ha" moments I am serious about saving, and not having to buy things on credit. The reason I am here is to find out where and what to do. My thoughts are, finish the last 6 months on my wife's lease, and buy a used vehicle for say $25k cash. My car is paid for by the company, so having zero car payment would be nice.

The boat is our summer cottage, and essentially our reason we work so hard, so it and the expenses that go along with it are going to stay. I figure it costs us about $10k per year in expenses, plus the loan.

Our mortgage is at a very competitive rate, and I would like to start paying down more principal.

I pay $10k a year in private school tuition.

We would like to move in the next two years. We would be looking for something around $350k.

My wife plans on going back to teaching once our youngest reaches full time school. (Figure 2010, making $40k)

I make about $180K per year. I know I should have saved more, but I guess that's why I'm here. Please feel free to judge, critique and more importantly offer advice!

[JinCO]

Here are some initial suggestions based on the info you've provided:
- You need to reduce the amount of money tied up in your company stock. Even if you believe it is a good company, your exposure is much too high.
- Build up a 6-month emergency fund. It looks like you have $10K in savings but I'm guessing that would not cover 6-months of expenses.
- Is the line item "retirement fund" a 401K? If so great, try to max this out as it will have great tax benefits given your earning. If this is not a 401k account, do you have the opportunity to open one through work?
- I agree with your comment about ditching the lease and purchasing your wife's car outright. I am in the process of doing the same thing.

Do you have a budget?
Do you know how much you are saving per year vs. your income?
A good rule of thumb is to save 20% of your income, so $36K per year.

[formerdebtslave]

Thanks, the company stock is not something that I can sell. It's an investment plan put together by our founder, and it is very sound. I know, Enron etc, but trust me this is not them! (we are privately held) We have been profitable every quarter the company has been in business, which is 40 years. The plan is for "Executive Level" employees and is an "award" of sorts. I receive roughly $40k a year in contributions to this plan, so it continues to grow. This money unfortunately will be considered deferred ordinary income when I quit, retire, terminated, or for my wife if I *gulp* die.

The retirement fund is a 401K, but I am limited to how much I can contribute because of earnings.
I have no budget, and am horrible at them. Maybe that's a good start.

[JinCO]

I'm not sure what you mean with this statement: "The retirement fund is a 401K, but I am limited to how much I can contribute because of earnings."

You should be able to put in $15.5K per year into your 401K. I am not aware of any earning caps (unless your only option is a Roth 401K). My wife and I both put in $15.5K per year. She makes about the same amount per year as you and I earn slightly less.

A budget would be a great place to start. What I would do is look at your last 12 months of spending and use that as a starting point. I have used a budget not so much as a spending tracking mechanism but more to understand where my money is going. You should also document your financial goals both short term and long term and create a plan for reaching these goals.

[minnie1928]

Originally Posted by formerdebtslave

I am limited to how much I can contribute because of earnings.
I have no budget, and am horrible at them. Maybe that's a good start.

I have a couple of ideas. First, I know what you are saying about the 401k restrictions...my husband is in the same situation. Instead, why don't you max out the contribution to your wife's IRA (then 401k when she starts working again).

Second, you do need some sort of budget. I would start by tracking how you spend your money...all your money. I personally use Quicken for this, but I know many others use spreadsheets, journals, etc. Do this for at least a month. Use this spending history as a base for a budget. Also consider any bills that you pay quarterly, annually, etc.. I think the most important thing to remember when creating a budget is that it will change over time. Budgets shouldn't be written in stone...there needs to be flexibility.

[minnie1928]

Originally Posted by JinCO

I'm not sure what you mean with this statement: "The retirement fund is a 401K, but I am limited to how much I can contribute because of earnings..

My husband triggers this too, it has something to do with what the other employees are contributing to their 401k. I think it only pertains to what the IRS considers "highly compensated employees".

[disneysteve]

Originally Posted by formerdebtslave

Savings- $10k

Boat Loan $47k (Boat is worth about $80K)

finish the last 6 months on my wife's lease, and buy a used vehicle for say $25k cash.

The boat is our summer cottage, and essentially our reason we work so hard, so it and the expenses that go along with it are going to stay. I figure it costs us about $10k per year in expenses, plus the loan.

Our mortgage is at a very competitive rate, and I would like to start paying down more principal.

Welcome. I'm at work so don't have time to totally pick through your numbers, but here are some initial thoughts.

I agree with finishing the lease and never leasing again. However, how do you intend to buy a 25K car for cash when you only have 11K in savings? I'd suggest a much more modest car, perhaps 10K tops. Cash would be great but don't totally deplete your savings and emergency funds to do so. If you need to take a small loan for no more than 3 years, that wouldn't be terrible.

Your "summer cottage" is costing you 10K plus loan payments per year. That is an awful lot for your summer vacation, isn't it? Boats are money pits. Have you looked into renting a boat for the time that you actually use it? I bet you could meet your needs for a lot less than you are currently spending.

You say your mortgage has a good rate and you don't have enough in savings. So why would you possibly want to pay more to the loan principal? Keep the mortgage and work on building your savings.

[formerdebtslave]

Originally Posted by minnie1928

My husband triggers this too, it has something to do with what the other employees are contributing to their 401k. I think it only pertains to what the IRS considers "highly compensated employees".

This is correct on both fronts. Because I am an "HCE" and because the "average" of my plan's contributors don't max their 401K's out , I am limited.
Thank you for the advice, budget is next on the agenda!

[JinCO]

Originally Posted by minnie1928

My husband triggers this too, it has something to do with what the other employees are contributing to their 401k. I think it only pertains to what the IRS considers "highly compensated employees".

I haven't heard of that before. Is this something that is enforced by the employer? Hopefully we don't cross the threshold of "highly compensated" any time soon!

[formerdebtslave]

Originally Posted by disneysteve

Welcome. I'm at work so don't have time to totally pick through your numbers, but here are some initial thoughts.

I agree with finishing the lease and never leasing again. However, how do you intend to buy a 25K car for cash when you only have 11K in savings? I'd suggest a much more modest car, perhaps 10K tops. Cash would be great but don't totally deplete your savings and emergency funds to do so. If you need to take a small loan for no more than 3 years, that wouldn't be terrible.

Your "summer cottage" is costing you 10K plus loan payments per year. That is an awful lot for your summer vacation, isn't it? Boats are money pits. Have you looked into renting a boat for the time that you actually use it? I bet you could meet your needs for a lot less than you are currently spending.

You say your mortgage has a good rate and you don't have enough in savings. So why would you possibly want to pay more to the loan principal? Keep the mortgage and work on building your savings.

Good Points, I get a $50K end of yr bonus, so I was going to use some of that to buy the car free and clear, and the rest in savings.

The boat, it's just non-negotiable! I wouldn't want to rent one, as ownership and sleeping on the boat every weekend is the best family investment I can make. It's not a financial decision to us, but a lifestyle one. Maybe I could just pay off the boat and get a small car loan?

[minnie1928]

Originally Posted by JinCO

I haven't heard of that before. Is this something that is enforced by the employer? Hopefully we don't cross the threshold of "highly compensated" any time soon!

It's due to our friends at the IRS. Around March of every year we get a letter from my husband's employer telling us whether or not we've "crossed the threshold". If we put in too much, then I think the excess money will be refunded back to us in the form of taxable income.

[jIM_Ohio]

JinCO- Highly compensated employees are limited to how much they can contribute to 401ks based on the amount average paid employees contribute to the 401k.

I'm 36, married to a stay at home mom, with 2 kids and a cute puppy. I make a good living, but spend a LOT! Here is where I am:


Company Stock- $592K (A very good company)
Retirement Fund- $76K
Wifes Retirement fund- $12K
Wife's IRA- $12k
Brokerage Account- $11k
Savings- $10k
Home Equity $100k
Children's 529's $20k

Mortgage- $170k
Car Lease- $482 per month
Boat Loan $47k (Boat is worth about $80K)

I recently paid off a personal loan of $12k, a HELOC of $30k, and about $8k in Credit Card debt.

Now, after having some "ah-ha" moments I am serious about saving, and not having to buy things on credit. The reason I am here is to find out where and what to do. My thoughts are, finish the last 6 months on my wife's lease, and buy a used vehicle for say $25k cash. My car is paid for by the company, so having zero car payment would be nice.

The boat is our summer cottage, and essentially our reason we work so hard, so it and the expenses that go along with it are going to stay. I figure it costs us about $10k per year in expenses, plus the loan.

Our mortgage is at a very competitive rate, and I would like to start paying down more principal.

I pay $10k a year in private school tuition.

We would like to move in the next two years. We would be looking for something around $350k.

My wife plans on going back to teaching once our youngest reaches full time school. (Figure 2010, making $40k)

I make about $180K per year. I know I should have saved more, but I guess that's why I'm here. Please feel free to judge, critique and more importantly offer advice!

Here is my take on the above:

713k is saved (cash and retirement accounts)

I would consider getting a relatively new car with 25k. That will get a new Toyota or Honda which should last 10-15 years. I have a friend which has a Corolla with 250k miles on it and the car is 15 years old.

I would look to do the following:

180k salary, save 20% which is 36k per year.
How you allocate the 20% is up to you (401k, IRA, taxable accounts). Make sure 15% goes towards retirement. The other 5% should increase cash positions, pay down mortgage or go to kids college fund.
I would try to have about 1/2 of what is invested in company stock invested in cash in taxable accounts. 10k for you in cash accounts is not enough. 500k in corporate account needs 250k in bonds and cash, IMO. Counter the risks. Others suggested eliminating the risk, I saw that you cannot, but I also would not advise reducing this if you could- just manage your risks and hedge your risks is my advice.

Do you know what 1 months expenses are? I would keep 6 months expenses in savings as emergency fund 1.

I would then create a second layer emergency fund (emergency fund 2). 10k for annual boat expenses, 10k for private school tuition, and make sure the total amount in this second emergency fund is about 2 years expenses total. I would look at municipal bonds for this to avoid taxes on the money. This can go towards the 250k I suggested you have set aside to leverage the risk of the company retirement plan.

Because you suggested you want to buy a new house, I would hold off on paying down current mortgage. I would look to increase cash accounts until home is purchased, then look to pay off new loan with extra payments.

My generic mortgage paydown advice is make sure retirement accounts are properly funded and at a level where compounding gets you what you need. You may or may not be at that level depending on expenses.

• If you spend 100k per year now (100k of annual expenses), you will need 25X that amount when you retire ($2.5 M). You have $710k of this now at age 36. It should be $1.4M at age 45 and $2.8M M at age 53, so I would suggest you are on track.
• If you have 150k of annual expenses, you need $3.75M, so the 710k-1.4M-2.8M is behind for retirement at age 53.

Know your expenses and make decisions appropriate for your family.

My comment is fund retirement, at least 15% of gross. Add some cash and bonds to what you have now because of way company retirement plan is configured (being 40% bonds and cash might make sense in this case).

In addition by holding muni bonds in a taxable account, you can start to consider tax saving retirement withdraw strategies as 180k and 220k of income will surely have a high tax bite.

Once retirement is funded at 15%, save 5% for other financial issues. My suggestion is see if 5% of gross pay towards mortgage has you mortgage free before kids start college. If so, consider paying down mortgage before kids start college, then using the mortgage payment for a federal tax deduction towards tuition when kids start college and mortgage is paid off. Once kids finish college you could then retire because it appears most of the other portions of retirement plan are in place.

[formerdebtslave]

Jim,
Thank you very much for your detailed advice! I have 10 yrs until college for the kids, so I think I can be mortgage free without mortaging my retirement, so to speak.

I think budget and emergency fund(s) are the right next steps, so I guess it's time to get to work!

[jIM_Ohio]

Originally Posted by formerdebtslave

Jim,
Thank you very much for your detailed advice! I have 10 yrs until college for the kids, so I think I can be mortgage free without mortaging my retirement, so to speak.

I think budget and emergency fund(s) are the right next steps, so I guess it's time to get to work!

That secondary emergency fund I mentioned could be a taxable retirement account too. One reason I suggested muni bonds is because of taxes, another reason is they should be able to return principal with less risk than other investments. A third reason to do this is that if you fail to pay down mortgage, you could withdraw from the muni bonds to fund the college expenses with little tax consequence.

I assume even in your tax bracket you can deduct the 529 contributions. My comment will be some dialog might exist between that tax deduction (something you probably like based on income) needs to be weighed towards financial stability of the family. I suggest 2 years expenses because if things get bad (company is bought out, you get laid off, injured or similar) you need cash on hand so you don't lose the house and can still take a ride on the boat.

When your wife returns to work (as a teacher?) she may want to look at retirement plans available to her and see if she can defer taxes on much of that 40k income- even if that means you stop contributing to some of your accounts- her deductions will save you more in the long run I think.

[formerdebtslave]

Agreed. I certainly need to look at the tax ramifications. She is(was) a teacher, and has a TIAA Cref 401K and it would absolutely get maxed out.

Can you clear up how me decreasing my contributions will save more? Thank you!

[LivingAlmostLarge]

Less in taxes. Sure you put in $15.5k/year in a 401k but likely in your bracket it's really only $11k of real money.

Question, why can't you sell your company stock? It's privately held until retirement? What happens if you choose not to work there anymore? Do you lose it?

I like Jim's idea of splitting it, but I read earlier you can't sell it right?

[jIM_Ohio]

Married filing jointly is what I will assume

I assume salary/gross income of 180k now and 220k when wife returns to work.

I assume you will save 20% of gross in both cases

180k means you will pay 28% taxes (28% over $131450)
220k means you will pay 33% taxes (33% over $200300)

Can you outline how you would invest 36k now?
How much goes to 401k? I will assume 8k
I assume the other 28k is taxable and invested in taxable accounts.

So with gross income of 180k, you pay taxes on 172k. Std deduction of 10900, +3500 for each of 4 dependants (self, wife, 2 kids)- I think these deductions get phased out, but I will assume you have them for now- 10900+4*3500=24900
172000-24900=147100
Tax is $25550+28%*(147100-131450)=$29932 tax owed. Even though you invested 28k of the money you earned, you paid tax on it first.

Now assume Wife works and can contribute as much as she wants of a 40k income to retirement plan.

220k gross salary, 20% of this is $44000. Assume 8k tax deferred for you (to 401k) and that wife can contribute 36k to her 401k or similar plan at work.

That whole 44k is now pre-tax. The 220 gross is now reduced to 176k. $24900 is your adjustment based on std deduction and exemptions.

176000-24900=$151100 is your taxable income. Taxes owed on this are $25550+28%*(151100-131450)=$31052 taxes owed

You had 40k higher income in second situation and your tax bill went up only 2k.

If you saved in taxable accounts in second scenario, this will get a larger tax bill very fast. If you live in a high tax state like Ohio (where there is no married filing jointly on state tax return) this won't even paint the right picture for state taxes... but for federal, with NOT using the wife's 401k, here are the numbers

220k income, $44000 saved, 8k to your 401k, nothing to wife's 401k.

220k-8k=212k, 24900 adjustment to income= 187100
25550+28%*(187100-131450)=$41132 taxes owed

your tax bill went up 10k if you do not use 401k for the savings if available.

Things to check-
how much can you put into 401k?
At what level are the exemptions phased out (income level)

I am still new at doing this type of analysis, and no state taxes were factored in either. Always double check my math.

[jIM_Ohio]

Originally Posted by LivingAlmostLarge

Less in taxes. Sure you put in $15.5k/year in a 401k but likely in your bracket it's really only $11k of real money.

Question, why can't you sell your company stock? It's privately held until retirement? What happens if you choose not to work there anymore? Do you lose it?

I like Jim's idea of splitting it, but I read earlier you can't sell it right?

He doesn't need to split it- it appears this stock is for a company which is privately held and the private stock tends to perform well. What he needs to do is increase the amount of conservative investments he has in other places (wife's accounts, brokerage accounts, emergency funds) such that he has half the value of company stock in conservative investments (1/3 of portfolio would be conservative until this benchmark is hit, then this might decrease to around 25% once the "company stock/2" is in bonds and cash- then contributions can go towards equities and similar investments.

His company wants managers to hold company stock as an incentive to make the company do well. As an employee or investor I would want the same thing (what would that tell a customer, investor or employee if a senior manager was dumping company stock?).

[formerdebtslave]

Originally Posted by LivingAlmostLarge

Less in taxes. Sure you put in $15.5k/year in a 401k but likely in your bracket it's really only $11k of real money.

Question, why can't you sell your company stock? It's privately held until retirement? What happens if you choose not to work there anymore? Do you lose it?

I like Jim's idea of splitting it, but I read earlier you can't sell it right?

If I choose or they do, I have to wait 3 yrs, collecting 9% interest and am then paid out. It's a great plan, but an inflexible one, which is fine by me because it has grown significantly.

[Scanner]

Thanks, the company stock is not something that I can sell. It's an investment plan put together by our founder, and it is very sound. I know, Enron etc, but trust me this is not them! (we are privately held) We have been profitable every quarter the company has been in business, which is 40 years. The plan is for "Executive Level" employees and is an "award" of sorts. I receive roughly $40k a year in contributions to this plan, so it continues to grow. This money unfortunately will be considered deferred ordinary income when I quit, retire, terminated, or for my wife if I *gulp* die.

Now I'm going to lay it out there -

Horse Hockey.

Famous last words -" it was different." "They are different."

That's like a line I would have used when I was 19 to try to land a chick in the sack.

Fine, they gave you the stock.

You should be able to sell it or do with it as you please. I'd sell 3/4's of it and place it somewhere else. Luckily everything is down so transferring it from one equity to another wouldn't be that much of a hit.

His company wants managers to hold company stock as an incentive to make the company do well. As an employee or investor I would want the same thing (what would that tell a customer, investor or employee if a senior manager was dumping company stock?).

Um. . .that he wants to minimize risk while maximizing gain in his portfolio?

You are saying he has to hold onto the stock for political reasons?

Horse hockey.

I don't like that at all.