Is My Financial Plan Sound?

[questions]

I earn approximately $77k and my wife is a stay-at-home mom. We carry no credit card debt. We have a 3 year old and a four month old. We have about $70,000 in 401(k) savings and between 3-6 months in liquid savings. We currently contribute about 4% of our income to retirement savings which maximizes my company match. We have about 5-10% equity in a $205,000 home and are aggressively overpaying both our 80% first mortgage (a 5.75 30-year) and our 20% HELOC (prime + .5) second mortgage. We have about $90,000 in federal student loans (85% is mine) debt at relatively low, fixed-rates (and consolidated). After the modest 401 contribution and the mortgage overpayment (about $8500 a year) we don't really add anything to savings.

Conventional advice often seems to suggest we focus on retirement savings versus things like 529 plans or even aggressive mortgage overpayment. Since we originally put nothing down on our mortgage (and because I want to maximize our ownership stake for my wife's benefit if I were to die suddenly; I have a $1m term life policy), we have been focused on building equity in our home but less on retirement savings (only that 4% or so). As far as those mortgage overpayments, we have been overpaying both mortgages with the logic that the lower rate 30yr has a much higher balance, and the variable HELOC rate has a much lower balance, but we still expect to sell within 2-3 years. I am almost 34 and my wife is 35. What do you think of the way we are tackling our finances, given goals of increasing net worth, potentially funding college education, retiring at some point, etc. My wife will likely return to work at least part time when our kids are in school in a few years.

[Vapors]

You seem to have a pretty good handle on your situation. I guess you are overpaying your mortgage so you have more equity to use on your next house purchase. If your job is really secure then maybe that's something you can do. If it were me though, I wouldn't upgrade my house unless it was really necessary. And I probably would have focused solely on the HELOC loan with overpayments, in case something changes and you don't move.

I would put more into my 401k and probably start a 529 plan before I paid off my mortgage, but that's just me.

[zetta]

If you think you will move within the next 5-10 years, I see no point in pre-paying the main mortgage. The reason is that you aren't actually saving any interest, just shaving off a bit of the principal -- you won't reap the benefit of the house being paid off in 25 years instead of 30 if you sell in year 5 or 10 -- you're just tying up money in the house. Better to put that money in a CD or mutual fund (depending on your timeframe), benefit from the earnings, and use it in the downpayment of the next house if you so choose.

Pre-paying the HELOC makes a lot of sense though, because it is adjustable and will go up if interest rates rise. Also, if you are paying PMI (maybe you don't because you have the HELOC?) getting to 80% equity and getting rid of the PMI is money in your pocket.

Have you run your numbers through a retirement calculator? Try this one: Future Value/Annuity Calculation

I'm concerned that 4% to the 401k seems low. I made some guesses and with your numbers you might run out of money before you die. Although your wife will return to work in a few years, you can't get back the compounding effect of investing now rather than later. At a 10% return, investing $100 today is equivalent to investing $200 in 7 years.

[humandraydel]

Good post, Zetta. Nearly word for word what I was thinking.

[Ima saver]

Could you and your wife both contribute to a roth ira??

[anonymous_saver]

I think you should try to focus a bit more on retirement savings. Maybe in addition to your 401(k) 4% contribution, you could put up to the max in a Roth IRA for each of you each year? This way, your wife would have some retirement savings in just her name as well.

It sounds like you are doing well with your money, I just think you should try to focus a little less on prepaying the mortgage, and putting more money towards retirement.

How old are you and your wife?

[jIM_Ohio]

Originally Posted by questions

I earn approximately $77k and my wife is a stay-at-home mom. We carry no credit card debt. We have a 3 year old and a four month old. We have about $70,000 in 401(k) savings and between 3-6 months in liquid savings. We currently contribute about 4% of our income to retirement savings which maximizes my company match. We have about 5-10% equity in a $205,000 home and are aggressively overpaying both our 80% first mortgage (a 5.75 30-year) and our 20% HELOC (prime + .5) second mortgage. We have about $90,000 in federal student loans (85% is mine) debt at relatively low, fixed-rates (and consolidated). After the modest 401 contribution and the mortgage overpayment (about $8500 a year) we don't really add anything to savings.

Conventional advice often seems to suggest we focus on retirement savings versus things like 529 plans or even aggressive mortgage overpayment. Since we originally put nothing down on our mortgage (and because I want to maximize our ownership stake for my wife's benefit if I were to die suddenly; I have a $1m term life policy), we have been focused on building equity in our home but less on retirement savings (only that 4% or so). As far as those mortgage overpayments, we have been overpaying both mortgages with the logic that the lower rate 30yr has a much higher balance, and the variable HELOC rate has a much lower balance, but we still expect to sell within 2-3 years. I am almost 34 and my wife is 35. What do you think of the way we are tackling our finances, given goals of increasing net worth, potentially funding college education, retiring at some point, etc. My wife will likely return to work at least part time when our kids are in school in a few years.

You have a good plan. It could be better and it could be much, much worse.

Here is where it could improve:

1) you stated a goal as increasing net worth... yet are doing it inefficiently. Here are 3 things which would increase net worth faster
a) do not pay down either mortgage and invest the difference
b) pay down HELOC only
c) do not fund college savings plan and invest this money for yourself

2) 70k of retirement savings for a 35/34 yo couple is OK. It is not good, and is not great. You can do better.
a) if you have take home income in the 60-85k range, the 70k is almost enough to grow and allow retirement around age 68-70.
b) even 1% more to retirement accounts puts time on your side.
c) I suggest 10% to retirement accounts as a guideline. It won't cost you as much as you think if the money is contributed pre-tax... and you will see the accounts grow at a rate which suggests retirement could come closer to age 55 than age 70.

Do not let the suggestions I make suggest I think you are in a bad spot... if you are comfortable with your progress and value things differently than me, then it makes sense you would make different decisions than me.

The fact you are considering moving suggest to me to not pay down the mortgages at all (keep this money liquid).

FYI-

I am 34/wife is 33. We pay down our second mortgage only after 10% to 401k for me, 6% to 401k for wife, 4k to Roth for me , 4k for Roth for wife, and after we do 2-3 vacations each year. 2nd mortgage is 7.4% and first is 5.75%.

[Tree0164]

I would increase the emergency fund a bit. When only 1 spouse is working everything comes to a standstill if that job is lost.

Increase your 401k saving-that is sooo important. Your young and 70k is a good start for now but the more you add right now the more you will have when you retire.

Have your wife do a spousal Roth IRA. That is what I do. I am a work at home mom I do have some income but my husband is the primary bread winner.

[disneysteve]

Originally Posted by questions

We currently contribute about 4% of our income to retirement savings

aggressively overpaying both our 80% first mortgage (a 5.75 30-year) and our 20% HELOC (prime + .5) second mortgage.

we have been overpaying both mortgages with the logic that the lower rate 30yr has a much higher balance

I think your logic is faulty. It makes no sense to prepay a loan at lower interest when you have another loan at higher interest. If you are goign to prepay anything, it should be the highest interest loan, the HELOC in your case.

I'm not sure I would prepay either, though. Depending on the terms of your HELOC, it might be better to put the money toward retirement. An aggressive, all or mostly stock-based portfolio could yield 10%/year or more which I'm guessing is considerably more than what the HELOC is costing you.

4%/year to retirement simply isn't nearly enough at any age. Even in your mid-30s you should be putting away at least 10%.