What would you do if you were me?

[disneysteve]

Originally Posted by jIM_Ohio

When in retirement, 3 years income needs to be in CDs.

I know a lot of retirees keep the bulk of their money in CDs and collect the monthly interest to live on, but I never heard the specific advice of keeping 3 years worth of income.

[jIM_Ohio]

For me, my strategy plans to be "7 years income in cash" from day 1.

Most reading I have done suggests the biggest risk to retirement savings lasting "forever", or for 30 years, is a down market within first 3-5 years of retirement. Drawing down in a negative early retirement year has many compounding effects which will ripple throughout portfolio.

My hedge to that risk is 7 years cash the day before I retire. 3 years spending in CDs, 1 year in savings, the other 3 in inflation indexed securities.

The primary problem with this strategy is that it's "cash heavy". Actually requires me to "oversave" relative to "income/.04".

But income/.04 strategy has the risk of "early down year", so I am looking to protect that.

[MoneyTard]

Our taxes are like 30%, it's rediculous. But we usually get between 4-7k back every year.

Steve, I said dh and I don't have life insurance but we want to get it.

Not sure what healthcare proxie is. We don't have wills.

If we set aside 20k as an emergency fund, we'd have no problem NOT touching it. I like the CD idea if it meant we'd get more returns from them.

We both have 401k's and we contribute 6% our income to them which is what our company matches. They're with Charles Schwab "aggressive model" whatever those are.

I feel like we need to play catch-up with our retirement funds now. I had "planned on" openning a roth for 5 years and just never did it.

Are there any retirement funds that double as education funds? if our kids dont' want to go to college, I'd like to have the option of keeping the money for retirement.

[jIM_Ohio]

One thing to look at with EF- is some banks will give you advanced features on checking accounts if you have 50k or 100k in other accounts.

So 20-50k in CDs might get you something out of a checking account you don't have now. Overdraft protection, higher interest rates, free online bill pay... something.

[disneysteve]

Originally Posted by MoneyTard

Are there any retirement funds that double as education funds? if our kids dont' want to go to college, I'd like to have the option of keeping the money for retirement.

Yes, though some would disagree (and I happen to be one of them). Contributions made to a Roth can be withdrawn at any time for any reason without penalty. So you can fund a Roth each year and decide to take the money out to pay for college. I happen to oppose that idea because I believe retirement accounts are for retirement and shouldn't be touched for anything else, but others feel differently.

[tinapbeana]

which begs the question: why haven't they created something like a roth but specifically for education? or not even for education, but 'child development' or something. it could be an 'individual development account', so we'd have IRA and IDA like frannie and freddie...

[disneysteve]

Originally Posted by tinapbeana

why haven't they created something like a roth but specifically for education?

That's pretty much what a 529 is: a tax-sheltered account specifically for education.

The drawback to the 529 is if you don't use the money for educational purposes, there is a penalty.

[Scanner]

My question would be how much home equity do you have? 130K of debt on a ??? appraised house?

I think having $44,000 sitting around in cash is a little too conservative for my taste.

I'd maybe have 10K and just keep a home equity line of credit open that is free to maintain. Invest the other 34K.

With that amount of money sitting in cash, you are going to have nearly 50% of your portfolio sitting in very conservative investments at 35 y.o.

[disneysteve]

Originally Posted by Scanner

I think having $44,000 sitting around in cash is a little too conservative for my taste.

I'd maybe have 10K and just keep a home equity line of credit open that is free to maintain.

Here is where personal risk tolerance comes into play. Neither answer is right or wrong.

I happen to feel that my emergency funds should be actual funds, not available lines of credit. My thinking is that if an emergency were to arise such as a job loss, taking on new debt such as a HELOC would require me to make monthly payments. Having a new bill to pay while I am out of work is exactly the situation I'm trying to avoid by having an EF.

As they continue to contribute to their 401K and Roth accounts, the percentage of assets in stock will gradually drop so within a few years they will have a more appropriately aggressive portfolio.

[MoneyTard]

The house hasn't been appraised currently. But judging from the sale price of houses behind us and accross the street (all with much smaller lots than ours), our house should be worth ~350k. And we're making repairs to ours.

I finally looked at our mortgage statement. We Actually owe 145k with an interest rate of 6.1%. We'll be eligable for refinancing it in November if we choose.

I decided (for the time being) to set aside 20k for EF into my ING account. Possibly opening a 9mth CD with half of that. Speaking of ING, I (we) have 8k of the 50k in an ing savings account and it makes more in interest than the other 42k combined. Wamu mm accounts pretty much useless.

We paid off our car today. The other was already paid in full.

For education, I'm liking 529's less and less. Although I want to be able to pay for college, I want to make our kids work a little for it too. I had everything handed to me growing up and I didn't learn much from the experience except that I'm good at being lazy.

Perhaps I can open a single college fund for both girls? I still need to research the options more before making a decision with this.

It seems we have too many bank accounts. 3 savings and 1 checking at 3 credit unions, 3 checking and 1 mm at wamu, and 1 savings at ing. LOL! It's rediculous.

I'm closing the mm and one checking at wamu. But can't decide on the credit union accounts. For loans, the credit unions have the lowest rates. One is ibm, one is post office (or something) another is where dh's mother works and she set it up for the grandkids and deposits $5 per pay period.

[Scanner]

I guess my opinion gets skewed because I'm a business owner, as are you, DisneySteve.

I'm going to venture a guess that your office, even if it is on the small side takes about $15,000/month in operational overhead. My office is a small operation and it takes maybe 5K/month.

Have you ever had $90,000 sitting around in cash if you have a disability? Sure, you can cut overhead. . .roll some heads should something happen. ..but you still have a lease, some minimal utilities, , ,you'd have to pay a locum tenens doc. . .maybe you would still come out ahead but maybe not. . .I have a LOC that I keep on hand for such an emergency.

I guess I tend to think of my household as a "mini-business" that way.

I am not saying having 100% of emegency funds be from a LOC but at least some it. Even with a devasating job loss and minimal disability, you should be able to sell your house and liquidate in a years time.

It does depend on how much equity you have though, I'll admit. With about 60% equity in the house, I think it's not too risky to just keep some cash on hand and invest the rest. They definitely should have the open line of credit BEFORE any emergency happens or they may not be able to open one.

[MoneyTard]

What do you think of putting the monthly payment we used to make on the car towards the house?

[disneysteve]

Originally Posted by Scanner

I guess my opinion gets skewed because I'm a business owner, as are you, DisneySteve.

Actually, no, I'm currently an employee of my practice. I don't have an ownership interest at this time.

Have you ever had $90,000 sitting around in cash if you have a disability?

Since I don't own the business, I'm not concerned about that. Personally, I have disability income insurance to cover me if I become disabled and unable to work.

I am not saying having 100% of emegency funds be from a LOC but at least some it.

It does depend on how much equity you have though, I'll admit. With about 60% equity in the house, I think it's not too risky to just keep some cash on hand and invest the rest. They definitely should have the open line of credit BEFORE any emergency happens or they may not be able to open one.

Agreed. After the emergency happens, you may not qualify for the LOC. Better to have it in place already just in case you need it.

It also depends on your other investments. Personally, I've got substantial assets in taxable accounts holding individual stocks and stock mutual funds. In an extended period of income loss, I could liquidate some of those holdings as needed to cover my living expenses, so I can manage with a smaller cash EF than someone without those resources to tap. OP, however, doesn't have any other accounts so would need a larger cash EF.

[disneysteve]

Originally Posted by MoneyTard

What do you think of putting the monthly payment we used to make on the car towards the house?

I'd vote no on this (I almost always do). But you will get strong opinions on both sides of this issue. There are far better investments, in my opinion, than prepaying your mortgage. The after-tax rate on your mortgage is 4.575%. So you only need a taxable investment return of greater than 6.1% to outperfom prepaying the mortgage. That's not too tough to achieve. The S&P 500 was up over 15% last year as was the Vanguard Total Stock Market Index.

As Scanner suggested, your current portfolio is overly conservative given your age. Using spare cash to pay down low-interest debt makes it even more conservative. I think you need to be boosting your equity exposure and, in turn, boosting your returns.

Another point - don't forget that cars don't last forever. You should be setting aside money each month toward your next car purchase so that you either don't have to finance at all or can finance a smaller amount with a shorter term.

[MoneyTard]

Originally Posted by disneysteve

So you only need a taxable investment return of greater than 6.1% to outperfom prepaying the mortgage.

But to outperform prepaying a 145k mortgage, wouldn't I need a return greater than 6.1% ..on 145k? which I dont' have ?

We bought our house in 2002 and after 5 years of mortgage payments, we have only paid about ~8k principal of the original 154k mortgage.

Unless we attack the mortgage, it's going to continue to feel like a no-win battle.

[PrincessPerky]

Originally Posted by MoneyTard

But to outperform prepaying a 145k mortgage, wouldn't I need a return greater than 6.1% ..on 145k? which I dont' have ?

We bought our house in 2002 and after 5 years of mortgage payments, we have only paid about ~8k principal of the original 154k mortgage.

Unless we attack the mortgage, it's going to continue to feel like a no-win battle.

For exactly that reason...the no win battle. I vote to pay off at least some to the house, but I do think some aside for next car/car repairs is also good.

A house is not actually an investment to me, it is a roof over my head, and I see no point in saving for retirement if I will need to save extra to cover a house not paid for!

But then I am anti debt all the way, I would rather never borrow. Never owe. Own what I have, save for what I want.

Though I also have a car loan and house loan! So it isn't like I have avoided debt! But Our plan is pay off the car super fast, then pay down the house, almost fast..well faster than 30 years anyway.

[MonkeyMama]

I am with Steve on the mortgage. I used to think that like you, but if I put all the money into retirement and none to the mortgage I should have enough to pay it off in just about 7 years. When you think at it in those terms it may change your mind. I have put too much to my mortgage in the past and am rather illiquid right now - regret it a bit. So have made a conscious decision to put all my money to tax-deferred retirement. Retirement is safe from bankruptcy, lawsuit, etc. Not your home. Doesn't mean my house won't be paid off long before I retire.

If you can max out all your retirement vehicles and have money to spare you may consider putting 1/2 the remainder to mortgage and 1/2 to investments. Kind of the best of both worlds. What I am aiming for now.

I am as anti-debt as they come but I have gone on and on why the mortgage is different and the only debt I would ever consider.

But this has been debated heatedly here.

The reason I really wanted to reply was to say yes, you can open a 529 plan for 1 child and you can use the money for both kids (or even their cousins, other relatives). My MIL has a huge college fund started for my older son when we intend he will go to public school (most likely) and shoulder some of the costs himself. So I asked her to please not open another 529 plan for my 2nd child. They will share the first, and if there is too much it is likely their cousins will go to private school and we can arrange a deal to give them the money for college, maybe reimburse my MIL if my kids don't use it. Just FYI. It has to be in 1 kid's name but is transferable to certain relatives.

[disneysteve]

Originally Posted by MoneyTard

But to outperform prepaying a 145k mortgage, wouldn't I need a return greater than 6.1% ..on 145k? which I dont' have ?.

That's the beauty of compound interest.

Here's an example.

$154,000 mortgage at 6.1% for 30 years. Monthly principal and interest is $933.23. Total interest paid over life of loan is $181,963.51.

Add $100/month as an extra principal payment and you will pay the loan in 23 years. Total interest paid will drop to $134,829.77. You will have saved $47,133.74 in interest payments.

Sounds pretty good, right?

HOWEVER, if instead of paying an extra $100/month to the mortgage, you put that $100/month into your 401K or Roth and earn 8%/year, after 23 years (when the mortgage would have been paid off) your money will have grown to $79,498.93. You will be ahead by $32,365.19 by investing rather than prepaying the mortgage!