Where to start?

[jIM_Ohio]

Originally Posted by Seeker

Greetings Jim --
We are spending close to what me make, only because we've been putting so much extra into our debts.

My real mortgate payment due each month is only really less than $500.

Same with the education debt, less than $500 due each month (for some reason as the debt goes on and the send out the payment stubs for the next 6 months, they decrease the payment due and inscrease the interest rate.... like they wanna keep us paying).

We bought the car, on a 36 month payment plan. So what's due there is somewhere around $750 per month.

But yes, with these three debts gone, we should be able to put $3000 monthly (not yearly) into savings/retirement. That is in addition to the approx 1000 we are saving currently per month.

Building a cabin on our 5 acres in another state, is a possibility of getting out of high-cost California when we do retire. And a small motor home to visit some of the places in the US that we'd like to see is also a possibility.

With being able to save 4000 per month after these debts are done... I think that'll put us in a good position for catch-up time. We may not be in the 4 million range for retirement, but possibly 2.5 or so million? It's really going to depend on the types and results of the market as a whole.

I would not use the logic that "retirement quality will depend on market performance". You have much more control over the outcome than this. What you need is TIME.

Paying down the debt and accomplishing the short term financial goals is admirable. The problem with retirement savings is that if a person makes retirement saving a "short term" goal, that person will probably not have enough, because the time factor is by far the biggest multiplier for retirement savings. Another way top put it, if short term goals (like paying down debt, buying a car etc...) always take priority, the long term goal (retirement) never gets the attention it deserves.

The best thing you could do is make sure retirement savings get the priority over paying down debt. Make the minimum debt payments, direct other discretionary money to retirement savings.

There are exceptions- $1500/month now or $4000/month in 18 months, then $4000/month makes more sense.

I see no issue with financing the car or the student loans. I do see an issue in paying down a loan with 7% interest rate when an investment will earn 9% (or more). Attention to basic math like this will help the retirement problem.

More retirement planning would include figuring out current expenses. If you do spend less than 120k per year, GREAT. How much do you spend? This gives the most realistic scenario for how much you need to save. Take the yearly expenses, multiply by 25 (4% withdraw rate) and that is the most accurate predictor for amount needed.

You can then back the pension amount out of expenses, you could back SS out of the expenses, and come up with another number, which is the low side of the target you want to plan for.

HTH

[Seeker]

Logically speaking, yes financial control should be within the hands of the people earning those dollars, and it is, but only to the extent that we can understand what to do and how to proceed. Frankly I do not feel "in control" of finances; though I'm trying to understand and learn.

I know that we've lost the TIME aspect; and that's why we're in this position of catching-up and watching everything. I can only go forward and adjust and replan as needs dictate.

Budget (from memory since i'm at work now):
120/ month = Hubby's mad money
120/ month = My mad money
80 / month = Utilities = Water, Elect and Gas (heating)
40 / month = Land line phone (local calls & DSL)
80 / month = both our cell phones (long distance and emergency)
320/ month = HOA fees (increased for 2008 -- this is the increased amt)
200/ month = other insurances (contents & autos -- increased because of the new car)
300/ month = groceries (this is probably overestimated)
250/ month = gasoline (the two cars probably overestimated a bit)

=== $1510/month for the cost-of-living expenses

I rarely spend my mad money for much of anything (usually we go to movies once a month, or to the zoo, parks, limit outside dining to once a month unless there are special events going on, etc). So my mad money is usually spent on "us" or gifts. We rarely watch TV (so no cable), and a lot of our "free" time is spent on the computers (Internet (news/gaming), art (animation)).

1000/ month = education debt
1000/ month = mortgage
1000/ month = auto
1000/ month = savings

=== so now spending $5510 with debts (though you may not consider the $1k savings as a "debt").

Combined, after 401k deductions, medical/dental/vision, and the various state/federal/disability taxes, we bring home approx 3000 every two weeks. This excludes yearly bonus that we both earn, but I don't have any idea how much that will be for 2007. Those bonuses will be used to either pay off that 8.02% education debt or a major portion of it; the rest could come from a borrowing from the EF.

We will probably roll some of the cds into ROTHs for both 2007 & 2008.

Once the education debt is done; we can throw 500 more into the mortgage and the auto:

1500/mo = mortgage
1500/mo = auto
1000/mo = savings

and then 18 months forward (Oct 2009), being debt free.... that 4k per month represents 48k per year of savings. Catch-up time for doing that stuff that we want to be able to do finanncially 20 years or so down the line.

So, if we go this route of being able to put 4k per month into savings, 240 months (20 years) - 18 months = 222 months ... if we can consistently put away 4k for 222 months we would have put away 888,000 without calculating any compounding, gains in value, etc. That also assumes that all expenses stay about the same (which is probably not reasonable as even the HOA fees went up for this year) and work remains about the same (which is also not reasonable) and cost-of-living does not change either (not-reasonable expectations again).

Calculating the way you recommend, I'm going to calculate based on expenses of 3000/month because I really view the 1000 savings per month as a "regular expense" -- a lifelong one that comes with earning an income and I'm putting in an additional 500 because prior to last year, we were living on 50% of what we make now -- true we didn't save a lot, but we had a minimum payment and were paying more than minimum on the two debts.

So our regular needs based on expenses would be 3k x 12 = 36k per year x 25 = 900,000.

So either way figured we were living on 50% of what we make now and I certainly would feel more comfortable on having more than 900k for retirement.

If 8%-10% gains is possible with a 80/20 mix of stocks/bonds, then what would be the results 20 years later? What kind of stock and bonds should we be looking at since we're so late in starting? equities? What would you do beginning now if you were in our shoes?

[Seeker]

48000 X 20 years at 6% return = 1.8 mill
48000 x 20 years at 7% return = 2.1 mil
48000 x 20 years at 8% return = 2.3 mil

That's not including:
current cds (30k that need to be moved into stocks/bonds)
current equity in our home
401k returns from workplaces (currently 50k after recent calcs)
pension (on 45k for 9 years service)

I guess the biggest questions in my mind, is how do I keep on monitoring and tracking and managing all of this?

How would I know "$x" is not doing well enough for where it's at and I should move it to "$y"? What if "moving it to "$y" was actually the wrong choice and suddenly "$x" is the better investment of the two?

What prevents me from making a wrong choice and incurring a loss instead of a gain?

How do I know what is a good investment versus what is a bad one? What do I need to look for to understand that investment "z" may be going bad? How can I go from being "reactive" to being "predictive" with a fairly decent return throughout?

[jIM_Ohio]

Originally Posted by Seeker

Logically speaking, yes financial control should be within the hands of the people earning those dollars, and it is, but only to the extent that we can understand what to do and how to proceed. Frankly I do not feel "in control" of finances; though I'm trying to understand and learn.

I know that we've lost the TIME aspect; and that's why we're in this position of catching-up and watching everything. I can only go forward and adjust and replan as needs dictate.

$1510/month for the cost-of-living expenses
$1000/ month = education debt
$1000/ month = mortgage
$1000/ month = auto
$1000/ month = savings

$5510 with debts

Combined, after 401k deductions, medical/dental/vision, and the various state/federal/disability taxes, we bring home approx 3000 every two weeks. This excludes yearly bonus that we both earn, but I don't have any idea how much that will be for 2007. Those bonuses will be used to either pay off that 8.02% education debt or a major portion of it; the rest could come from a borrowing from the EF.

We will probably roll some of the cds into ROTHs for both 2007 & 2008.

Once the education debt is done; we can throw 500 more into the mortgage and the auto:

1500/mo = mortgage
1500/mo = auto
1000/mo = savings

and then 18 months forward (Oct 2009), being debt free.... that 4k per month represents 48k per year of savings. Catch-up time for doing that stuff that we want to be able to do finanncially 20 years or so down the line.

So, if we go this route of being able to put 4k per month into savings, 240 months (20 years) - 18 months = 222 months ... if we can consistently put away 4k for 222 months we would have put away 888,000 without calculating any compounding, gains in value, etc. That also assumes that all expenses stay about the same (which is probably not reasonable as even the HOA fees went up for this year) and work remains about the same (which is also not reasonable) and cost-of-living does not change either (not-reasonable expectations again).

**snip many good comments**

If 8%-10% gains is possible with a 80/20 mix of stocks/bonds, then what would be the results 20 years later? What kind of stock and bonds should we be looking at since we're so late in starting? equities? What would you do beginning now if you were in our shoes?

This is the details of financial planning

$x for y months at 8% return equals $Z
$a for b months at 8% return equals $C

get out a spread sheet and run the numbers. If you keep the rates of return equal, that will be easiest comparison.

You have the idea of measuring for 240 months vs 220 months. 20 years is more than enough time to let money compound.

In earlier posts by me, it was not clear that you invested $1000/month already. If you are investing and paying down the debt at same time. It will lead to a similar conclusion. What you do and what I would do are different, but it is your money, your decision. If you have questions for how to measure it, ask questions.

My basic spreadsheet which I do my calcuations on is measured by year

columns

year contributions (for year) return amount
1 $12000 8% (48k+12k)*1.08%=64.8k
2 $12000 8% (65k+12k)*1.08%=82.9k
3 $48000 8% (83k+48k)*1.08%=141.5k
... ... ... ...

I then make two tables side by side. One with investing more earlier (if you did not pay down debt, what would the 12k column be?)

In general, the column with money invested earlier wins- IF the time the money is invested is significant. In this case 2 years (18 months) won't change the calculation much.

If the $12,000/year for 10 years (starting at age 25, ending at 35) was compared to $48,000 for 10 years (starting at 45, ending at 55), my numbers show 12k wins, even though less money was originally invested. This has little to do with your situation (you cannot go back in time and invest more money while younger). It is done to illustrate time is a bigger multiplier than the amount invested.

Back to your problem-
Paying off the debt in 18 months means something to you, do it. Continue investing the $1000 per month those 18 months, then ramp up the retirement savings to $4000 per month. It is a good plan.

[jIM_Ohio]

Originally Posted by Seeker

48000 X 20 years at 6% return = 1.8 mill
48000 x 20 years at 7% return = 2.1 mil
48000 x 20 years at 8% return = 2.3 mil

That's not including:
current cds (30k that need to be moved into stocks/bonds)
current equity in our home
401k returns from workplaces (currently 50k after recent calcs)
pension (on 45k for 9 years service)

I guess the biggest questions in my mind, is how do I keep on monitoring and tracking and managing all of this?

How would I know "$x" is not doing well enough for where it's at and I should move it to "$y"? What if "moving it to "$y" was actually the wrong choice and suddenly "$x" is the better investment of the two?

What prevents me from making a wrong choice and incurring a loss instead of a gain?

How do I know what is a good investment versus what is a bad one? What do I need to look for to understand that investment "z" may be going bad? How can I go from being "reactive" to being "predictive" with a fairly decent return throughout?

Now we are talking about investing. I do better with this than some of the other stuff.

You need to learn about asset allocation. Meaning invest in more than one thing at the same time. Try to choose investments which invest in different things and don't move in tandem with each other.

Examples: Large company stocks, Middle sized company stocks (mid caps), Small company stocks (small caps), Foreign stocks, bonds, currencies, commodities (like oil, gold, silver, oranges and grain).

I don't own commodities. I am planning on adding some soon. I don't own any foreign currencies, I plan to add some soon.

Then you need to decide how much of each to hold.

Large company stocks are probably the core of most investment portfolios. Microsoft, Proctor and Gamble, General Electric. The biggest companies in the world (USA).

I hold 43% of my investments in large cap companies.

Mid caps are not on every investors radar. I put 15% of my investments to middle sized companies.

Small Caps are usually more defined for most people. I put 15% of my investments to small companies.

I put 25% of my investments to foreign companies. Depending on the account, the 25% looks a little different.

my 401k 15% to large companies in stable countries, 10% to large companies in emerging markets (meaning countries are smaller and less established politically)
IRA- 15% to large companies and 10% to small companies (some emerging market exposure, but not much)
wife's 401k- all 25% to large companies

I put 2% into bonds. I increase this percentage by 1% every 6 months.


When choosing funds, it depends on account type.
In my 401k, I only have one choice in each category, so I take the choice I am given.
In my wife's 401k, she has 2-3 choices in each. I researched the funds and decided some funds were better than others.
In the IRA I had full control. I love T Rowe Price's offerings. Cheap, managed funds which are well run. More than one fund in most categories, I chose the ones with longest manager tenure, best 5 and 10 year returns, and reasonable cost (most T Rowe funds within an asset class have quite similar expense ratios, this was less of a factor).

You could construct a portfolio like this with Vanguard or Fidelity as well. I might also suggest using a brokerage (like TD Ameritrade) if you want one Vanguard fund, one Fidelity fund, with a third T Rowe fund. You just need to make your decisions on this at the beginning.

You are older than me, it's probable your percentages will be different than mine.

The returns of larger companies tend to be between 8-10% per year.
Mid caps don't have a long term number, I will guess between 8-12% per year.
Small caps have a long term return of 12%. Small caps also move up more than large caps, they also move down more than large caps (so the roller coaster goes higher and lower). In addition small caps have historically had longer periods of underperformance (meaning there might be 5 to 10 year periods where small caps do little, then another 3-7 year period where they generate higher returns)
Foreign stocks have a similar 8-10% type long term return. One issue to understand is that the value of the US dollar can influence the returns of foreign investments. many of my best performing funds in 2007 were foreign funds with 25-40% type returns. Much of this return is because the US dollar is weak and if the US government takes a stance to make dollar stronger, the returns of these investments decrease (nothing to do with companies the mutual fund invested in).

I created logic to myself that the 43% position return would equal the dollar value of a 15% return position in certain market conditions. There are other issues which could be argued for lowering mid cap and small cap positons, there are other issues which could be argued to increase the % to foreign as well.

I am comfortable with the risks I take investing.
You need to be comfortable with the risks you take as well. Do not let someone (like me) tell you how much risk to take.

[RedHotLama]

Here is my take on things.

Debts:
25K mortgage @6.25% (not tax deductable due to mostly paying principal now). Condo was a 1990's purchase for approx 150K and is worth approx 350k right now -- though I expect that will come down somewhat with the current housing situation. So we have a lot of equity here.
25k automobile @6.5% (his car was falling apart due to having to drive 350 miles/week just for career)
15K education debt remaining at a variable rate that is too high (7.something at this point). We have not renegotiated this loan because it was in "Default" status -- Hubby was in bankruptcy in the late 90's before I met him.

Savings approx:
30K is CDs that have a various due dates throughtout the year and rates. We generally renew.
15K in checking and for emergency fund.

Retirement approx:
Hubby contributes a max at work and had none prior to my telling him to sign up for his 401k... I think it's like 5% he contributes that his company matches.
I contribute 10%, with I believe 5% matched, and have approx 75K - 85K in a combination of various 401k, 457, and CalPERS retirement plans.

Since you have 15k in checking and you outlined a monthly expense of 1500 + about 1500 in minimums on debt you are looking at about 5 months of emergency savings. You may want to add another month to that and bring the total to 18k. You also said that this is in a checking account, so i assume its earning no interest. You should look into a high yield savings account/MMA. WAMU has a free checking account and you get a savings account with 4.75 APY when you sign up online. I would move your money over there. It allows fast access. You can transfer money upto 6 times a month i think, so it will be readily accessible and you will earn a nice amount of interest every month, about $50 at that amount.

Next i would take the money from your CDs and apply it to your Education date, since it seems that it has the highest interest rate. (Allow it may be close to the auto rate if you get a deduction on this debt during tax season.) So take the money from CDs and pay off that debt ASAP.

Once the education debt is paid off, start using that money on the auto loan. And when you are making those payments have you told them that you want the extra payments going to the principle? They may just be apply it to the total of what you owe principle plus interest. You want to confirm that those payments are paying PRINCIPLE!!!

As for the mortgage debt, you said that it is in mostly the priciple payoff stage, since the loan is amortized. So paying extra on this account will yield little in saving money. As by your own admission you yield little in the form of tax deductions. So by paying extra you may be only paying off an interest of 1-2% and your money can earn more elsewhere like HYS/MMA. So i would consider this good debt and not worth paying off early.

The next thing i would do is see if you can increase your 401k contributions to higher than 10%, most places allow up to 20%. The yearly limits for 401k this year is 15k. If you increase to 20% you will be a little over that. so you will only need to do 18.75% and that will get you to the max. This will impact your take home pay by about 6-7%, since it will reduce your taxes. So you save extra 8.75% but only impacts your paycheck 6-7%. The advantage to starting this now is the money grows in a tax deferred account and is better off than saving in CDs and like better than using the 6-7% in paying off debt.

If you hubby can increase his % he should do so as well.

The other thing would to start fully funding a IRA. It would be a good idea to fund a ROTH IRA with your after tax money. Since this will provide you with some different sources of income in retirement and can help you in controlling your tax liability then. Since you be able to choose between taxable and nontaxable funds. As example you could tax out money till you hit max of 15% tax bracket, then tax any other money you need from ROTH tax free so that you dont end up paying 20% tax on the money. This is just an example.

You and your hubby can both contribute 5k per year, 10k total as you are under income limits. This will cost you 835ish a month. And would be preferable to do this now instead of putting it towards debt as it will grow tax free and be tax free when you take it out.

Also you have till April 15 to fund 2007 IRA, you may want to consider funding the 2007 IRA before April 15.

Also once you take the money from monthly payment of education loan after you pay it off apply that auto loan and get those payed off faster.

Once you get those loans payed off and not the mortgage (since it is costing you so little since its mostly principle), have increased your 401k, and started contributing to ROTH/traditional IRA. you can start adding more to emergecy savings. And you can also look at some other investment vehicles. Or just add more to high yield as you seem risk averse, or look at vanguard index fund, low expense, tracks the market, like SP500.

In review


1. Get emergency funding into high yield savings account or MMA with easy access.
2. Increase 401k contribution if possible
3. Start IRA and fund last year if possible
4. Take money from CD and pay off education loan first, then auto loan.
5. Make sure extra payments on auto loan are only going towards principle. Call and ask about old payments too, and have them adjust if necesary to apply extra to only principle.
6. Add more to emergency fund. You can do this a little slow as you have 5 months already.
7. Start saving for a new car for you, as yours is 9 years old, and if you have money set aside when you need one you wont have to get a loan.



Sorry its so long but those are my ideas.

[Saving in So Cal]

You should have gotten a CalPERS statement within the last 2-3 months. If you did not, contact CalPERS and make sure they have your correct contact information. The CalPERS statement will tell you what retirement formula applies to you.

For instance, my formula is 2% at 55. In the most simplistic terms, that means I can retire at age 55 and receive retirement benefits equivalent to 2% of my pay for every year of service. So, if I retire at age 55 and I have 25 years of service, I will receive 50% of my pay each year (plus COLAs).

It is important for you to know this because it will affect how much you need to save now. Also, even though you no longer contribute to CalPERS, you may still be able to go to one of the free retirement workshops CalPERS hosts. I would definitely look into it as it may help you address some of your other savings questions.

[Seeker]

Originally Posted by Saving in So Cal

You should have gotten a CalPERS statement within the last 2-3 months. If you did not, contact CalPERS and make sure they have your correct contact information. The CalPERS statement will tell you what retirement formula applies to you.

For instance, my formula is 2% at 55. In the most simplistic terms, that means I can retire at age 55 and receive retirement benefits equivalent to 2% of my pay for every year of service. So, if I retire at age 55 and I have 25 years of service, I will receive 50% of my pay each year (plus COLAs).

It is important for you to know this because it will affect how much you need to save now. Also, even though you no longer contribute to CalPERS, you may still be able to go to one of the free retirement workshops CalPERS hosts. I would definitely look into it as it may help you address some of your other savings questions.

I get the statement from CalPERS every June -- once per year. I can contact and request the info, but since it's been awhile since I've worked in the public sector, I don't expect much.

Just as an update to this, DH and I setup ROTHs for last year. He expects his bonus surprise soon; mine probably won't come until March or April. We'll pay a good chunk of the education debt with that and then as cd's come up for renewal, we'll withdraw and pay off the rest of that debt.

Our checking account needs to be looked into and while it's an interest bearing checking account, it is a very low interest rate. Need to go back to that bank and open up combining high-yield accounts where we can transfer money back-and-forth as needed.

We'll continue to look into (read) investments and we'll how to best allocate the cd's and furture savings into stocks/bonds/mutual funds, etc.

Thank you all for your inputs.

[Seeker]

Originally Posted by Seeker

I get the statement from CalPERS every June -- once per year. I can contact and request the info, but since it's been awhile since I've worked in the public sector, I don't expect much.

Just as an update to this, DH and I setup ROTHs for last year. He expects his bonus surprise soon; mine probably won't come until March or April. We'll pay a good chunk of the education debt with that and then as cd's come up for renewal, we'll withdraw and pay off the rest of that debt.

Our checking account needs to be looked into and while it's an interest bearing checking account, it is a very low interest rate. Need to go back to that bank and open up combining high-yield accounts where we can transfer money back-and-forth as needed.

We'll continue to look into (read) investments and we'll how to best allocate the cd's and furture savings into stocks/bonds/mutual funds, etc.

Thank you all for your inputs.

Using your calculations, 9 years service at 2% would be 18%? Then if I made 40k back then = $7200 a year or 600/month? I'd have to check on what I was making back then.... it's been a long while.