Howdy and Feedback on our situation please!

[adc0642]

Howdy there, new user here. Just found this site and figured I'd check in with ya'll for a little feedback.

Here's my position:
Married, 4 kids (5 on the way)
Out of school 10yrs
salary $90k
Mortgage 1: 135k remaining @ 5.25%, 30yr fixed
Mortgage 2: 23k remaining @ 8.75%, 15yr fixed
Car: 11k @ 4.75%
Savings: 90k in brokerage account
401k: 280k
No CC, student, or other debt
Save $10-15k/yr in addition to maxing out the 401k.

Just want a 'course check' here and feedback on how we're doing.

The main thing that jumps out is the 8.75% 2nd mortgage. We financed the house with an "80/15/5" mortage, no points, no PMI, and I handle the taxes & insurance. Rates on the 15% portion of the mortgage are high. I have the ability to pay it off, and maybe I should, as I'm sitting on about 30k in ultra-short bonds @ maybe 3% in the brokerage account. So I'd save 5% overnight by paying off the high-rate mortgage.

Car: this is the family van, paid $15k for 1yr old vehicle. No plans to change, as it's reliable, gets good mileage, cheap to insure.

General houshold expenses are kept low as we consider reasonable. No cable (do have internet), basic cell plan, shop the house brands @ Walmart. Do what we can to live lean, below our means, but we are comfortable.

Feedback? suggestions? Thanks folks, great site!

[Slug]

With quintuplets on the way, I would focus on saving for the future for sure. Unless that was a typo and there's only 1 on the way.

Pay off the 2nd mortgage if you are comfortable with the loss of liquidity. I certainly would.

Do you and your spouse have Roth IRA's yet?

[jpg7n16]

Debt-wise: I'd sell securities/take cash and pay off 2nd mortgage. I would also look into a refi on 1st mortgage. I've seen mortgage rates are near 4% today. Bankrate has 30 year fixed average at 3.98%. http://www.bankrate.com/mortgage.aspx Check with your bank and see what rate you'd qualify for. Good work on the no CC's or other debt.

Investment-wise: If you plan on holding investments with 3% expected returns, pay off the car too. If only holding higher returning securities, don't pay off car. How is your portfolio invested?

Other-wise: 529 plans for the kiddos would be a good idea. Term life insurance if you don't have it - that's a big family to leave unprotected. Hopefully you have 10x income or so in a term policy (maybe even a policy to cover spouse depending on the situation). Update will/beneficiaries upon birth of new child (assuming you mean 5th child on the way). You're doing great on cashflow management, you guys are saving a great % of your income! Good work

[MonkeyMama]

Agreed with jpg. In these type scenarios, life insurance and wills/trusts are often overlooked, so is worth mentioning.

Your savings looks excellent.

I'd personally pay off the auto and refi the mortgages. If you have to pay off some of the mortgage to get a better rate, that would be great. You can get 15 years at 3.25%, 30 years at 4%, if your credit is excellent and you have enough equity. I can only imagine how your numbers would improve with your debt reduced to a 3-4% interest rate.

[artwest]

Here's my 2 cents.

With $90k in savings, I would pay off the 2nd mortgage and car today. I would then refinance the 1st mortgage to a 15 year fixed rate. You should be able to get refinance at under 3.5%.

As jpg7n16 suggested, start 529 for the kids college and take out some term life insurance (8-10 times your annual income) if you do not all ready have.

[disneysteve]

Originally Posted by artwest

You should be able to get refinance at under 3.5%.

FYI, I was just reading a study that showed that over 90% of applicants don't qualify for the best rate that we often hear touted, so don't be so sure that everyone can get those great rates. Apparently, most people can't.

[Hector]

As others mentioned, if your expected rate of return from investment is 3%, what is the point in putting 10-15k/year into investment when you have debt at higher rate? With that 10-15k, I would start paying off all debts(debts with interest rate higher than rate of return from investment) starting with highest interest rate.

[adc0642]

Thanks for the feedback and encouragement! much appreciated.

To address a few suggestions/questions:

Number of kiddos: kid #5 is on the way We had identical twin girls on 4th of July last year, my wife was a little scared this time around, happy there's only 1 baby baking in there this time

Life insurance: Term life for $1M ($200/yr), plus 3x annual salary through work. If I get run over by a truck (I commute via bicycle) the family will be OK financially. I think they'd qualify for Social Security as well. I have a $100k policy on my wife ($32/yr through work), I'll need some help if she's gone....

529 for college: Decided against it for the time being. It shelters the $$ from tax but can ONLY be used for college (from my understanding). We plan to raise the kids with the expectation they will be paying for their own school. We're doing this starting in 1st grade by paying allowance for certian chores/good behavior and requiring 50% goes into the "college fund". My folks did this for me and I worked through college, graduating with no debt.

Savings: my total long-term returns average out to 8.x% over 10yrs. So I'd save 1-2% by paying off the 2nd mortgage (looking @ the average returns from my portfolio).

Refinance 1st mortgage: I've gotten several quotes. People fixate on the low rate and forget about the closing costs. Best offer got it down to 4.x% (I forget exactly), no points, only saved $60/mo, and had $4k in closing costs. I may be wrong but I think of the closing costs as a capital investment, essentially buying an annuity in the form of reduced mortgage payment. Further, I have to take into account we may move in 3-5yrs (for the job), so the refi has to pay off in no more than 3yrs to make it worthwhile.

No Roth IRA’s. I am not totally sold on their financial sense. There is nothing to prevent a law-change in the future to raid a generation’s savings of Roths. This applies to 401k also, that’s a nice fat account the spendthrifts in Washington would love to get into, but I’m up for that risk for now.

Portfolio investment: about 60% in moderate to high risk investments, split about 50/50 domestic/international. Remainder in short term bond fund. I use mostly cheap etf’s from Vanguard, such as the World Fund (VT). I try to buy in $1-2k increments on market dips of 5% or more, and almost never sell. Sitting on around $30k in short term bonds as a parking spot, I got a bit spooked in April/May and sold off in to the (then) peak. Normally I have 80-90% in long-term investments, the leftover is in cash or bonds as I wait for a dip to do some buying.

I think that about covers it. I need to find a real good mortgage calculator to compare true ROI of refinance… if anyone has a suggestion that’d be great!

[jpg7n16]

Originally Posted by adc0642

Life insurance: Term life for $1M ($200/yr), plus 3x annual salary through work. If I get run over by a truck (I commute via bicycle) the family will be OK financially. I think they'd qualify for Social Security as well. I have a $100k policy on my wife ($32/yr through work), I'll need some help if she's gone....

Sounds good to me.

529 for college: Decided against it for the time being. It shelters the $$ from tax but can ONLY be used for college (from my understanding). We plan to raise the kids with the expectation they will be paying for their own school. We're doing this starting in 1st grade by paying allowance for certian chores/good behavior and requiring 50% goes into the "college fund". My folks did this for me and I worked through college, graduating with no debt.

And are the kiddos using 529 plans for that 50% allowance? If they're saving for college themselves, may as well be tax free.

Correct, the funds are to be used for college. You could use them for other things, but there would be a 10% penalty on the earnings portion only. Say you contribute $5,000, it grows to $7500 - child uses for a car instead of tuition, tax and 10% penalty on $2500.

But as far as what you can use the funds for - it's NOT just tuition:

From: Publication 970 (2010), Tax Benefits for Education

Qualified education expenses. These are expenses related to enrollment or attendance at an eligible educational institution (defined on this page). As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time (defined on this page).

1.The following expenses must be required for enrollment or attendance of a designated beneficiary (defined on this page) at an eligible educational institution.

a. Tuition and fees.

b. Books, supplies, and equipment.

2.The purchase of computer technology, equipment, or Internet access and related services if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution. (This does not include expenses for computer software for sports, games, or hobbies unless the software is predominantly educational in nature.)

3.Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution.

4.Expenses for room and board must be incurred by students who are enrolled at least half-time. The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts.

a. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

b. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

You will need to contact the eligible educational institution for qualified room and board costs.

Refinance 1st mortgage: ...
I need to find a real good mortgage calculator to compare true ROI of refinance… if anyone has a suggestion that’d be great!

http://www.bankrate.com/calculators/...alculator.aspx

[kv968]

Originally Posted by adc0642

No Roth IRA’s. I am not totally sold on their financial sense. There is nothing to prevent a law-change in the future to raid a generation’s savings of Roths. This applies to 401k also, that’s a nice fat account the spendthrifts in Washington would love to get into, but I’m up for that risk for now.

I understand your concern over a "law change in the future to raid a generation's savings" (who knows what they'll do?). And with doing the pre-tax 401k contribution you're "locking-in" that tax savings. However, if you think about it, where is there more "risk"? The government imposing taxes on an investment vehicle (Roth IRA) that millions of people paid into with after-tax money all their lives with the understanding that they'd NEVER be taxed on it or them just raising incomes taxes that everyone pays already and would affect all of your 401k withdrawls?

I'm not saying it's not possible for them to do it, but you're talking about affecting the "elderly" with a move like that and they're not too keen on doing anything like that. Raising the income tax seems more of a sure thing to me.

And since neither of us knows what the future holds, why not put some money in both accounts (Roth and 401k) and diversify some of the tax risk also?

[MonkeyMama]

I was thinking of the refinance primarily in terms of consolidating both mortgages, and cutting that 8.75% rate. But, if you plan to move in a few years, I'd agree not to bother. You have the means to just pay off the 2nd mortgage and get rid of that nasty interest rate.

On the ROTH IRAs, I wholly agree those will not last forever, but that said, a retroactive tax law would be extremely unlikely. What is the government doing now to raise revenues? Encouraging people to convert IRAs to ROTHs. In the future, if there are too many ROTHs, and not enough tax revenue, government will come up with other incentives to abandon ROTHs. Or they will simply not allow further contributions. I personally think with the uncertainty of future tax law, it's good to not put all your eggs in one basket. Just some food for thought. A 401k and a ROTH IRA mix is a good hedge for future tax law changes. That said, if income taxes are high, why not just take the tax break now? & forget the ROTHs. I think either choice is fair.

I am not a fan of 529 plans, at all. They make sense for higher income people who start saving early. For the average person, it's hard to overcome the fees and limitations. Anyway, I disagree with the advice to have your kids save in a 529. They have no taxes to shelter, so this simply doesn't make any sense. They would just get a lot of fees and limitations in investments, and nothing in return. Heck, I wouldn't put my own money in a 529 plan. WE have a decent income, but we just don't really pay any taxes in the first place. I'd rather be able to invest anywhere and do what I want with the money. If I had income or assets to tax shelter, would be another story. Then the 529 plan has some benefits.

[jpg7n16]

MM - I understand where you're comin from, I just think differently.

A minor cannot open an account, so the kids couldn't actually open their own acct. The parents would in the child's names, but the kids could 'give' them back money to invest in them. And when the parents contribute, it may be state tax deductible.

FinAid | Saving for College | State Tax Deductions for 529 Contributions

Several 529 options are available with no annual fee:

529 Fee Study

And even considering the amount of fees paid -essentially as mutual fund expenses, etc.- the percentage is very small. $400 out of a $10,000 investment over 10 years is only 4% of the original investment. (Spread over 10 years is very little per year)

You may even save that % on state income taxes by contributing in the first place, and then have 10 years of tax free growth and income.

For the accounts with the annual fee or for the most expensive option, I agree - for small accounts, it's prob not worth it. But absent that annual fee, I don't feel the fees are that high. They're essentially what you'd pay on a mutual fund.


I understand they don't have much income now, but in high school and college, they'll likely earn enough that UTMA accounts would be taxable. So they wouldn't be selling investments today when the income doesn't matter, but would in college when capital gains may matter.

[MonkeyMama]

Originally Posted by jpg7n16

But absent that annual fee, I don't feel the fees are that high. They're essentially what you'd pay on a mutual fund.

Oh, the fees can be pretty ridiculous, plus they are incredibly restrictive. Not just in how the spend the money later, but in what you can invest in now, and how often you can change your investments. (There may be some low fee 529 plans, but the problem is you have to invest in your state's plan to get the state deduction, so it's not even like you can pick the lowest cost plan, in most cases). The fees? There are all sorts of administrative fees with any 529 plan. Many of the fees are rather hidden.

Of course, the whole design in that it is a tax break for the wealthy (& upper middle class). OF course if you are wealthy, none of the above would matter - the tax break would mean far more. Minors fall on the opposite end of the spectrum. Putting the money in UTMA accounts and deferring any tax consequences until college age is fine and dandy if you aren't wealthy and aren't taxed at a high rate. Anyway, you can always convert the money to a 529 plan down the road, if your tax situation changes dramatically, so win-win.

OF course, for some, state tax breaks, and financial aid consideration comes to play. But there are also other options like ESAs to consider.

I think we will have to agree to disagree on this one.

P.S. Edited to add that I did read your links after I posted, jpg. I suppose those don't mean anything to me in relation to experience. I think the short answer is that a LOT of people make money off of 529 plans (financial advisors, investment brokers, etc.) and I find the information on the internet to be VERY skewed in favor of 529 plans. I don't think that study in particular is skewed, but I think it misses the point that one is pretty limited in their choices - so we can't all pick the lowest cost 529 investments. Very few people do.

[kv968]

Originally Posted by MonkeyMama

Oh, the fees can be pretty ridiculous, plus they are incredibly restrictive. Not just in how the spend the money later, but in what you can invest in now, and how often you can change your investments. (There may be some low fee 529 plans, but the problem is you have to invest in your state's plan to get the state deduction, so it's not even like you can pick the lowest cost plan, in most cases). The fees? There are all sorts of administrative fees with any 529 plan. Many of the fees are rather hidden.

Granted your investment choices may be somewhat limited and some of the 529's have higher than normal fees, but there's still some advantage to them without being wealthy. Take for example Iowa's 529 plan. They use Vanguard funds, have a decent blend of investment options and the expense ratios, including administrative fees, is 0.34. That's exactly the same expense as Vanguard's STAR Fund, about the average of Vanguard's other funds and about 40 basis points lower than a typical mutual fund so as far as expenses are concerned they're not relevant in this case.

If you were to invest $1000/year for 18 years at a "conservative" 5% return you'd have $28,132 or a gain of $10,132 in that time. Even if you had a real federal tax rate of 15%, that would be $1520 you'd owe in taxes. Say you don't live in Iowa and have to pay a state tax of 6%, that would be $608 on the gains. So all said and done, even though you pay the state tax, you'd still have saved $912 over that time in taxes. Sure, it's not that much and might not be worth it for you but even in a relatively low federal tax bracket and paying a decent state tax, you can still save money.

[Redraidernurse]

"you have to invest in your state's plan to get the state deduction" - by monkey mama

Can someone explain this?

We live in Texas and chose the New Hampshire 529 plan through Fidelity.

[adc0642]

Originally Posted by MonkeyMama

I personally think with the uncertainty of future tax law, it's good to not put all your eggs in one basket. Just some food for thought. A 401k and a ROTH IRA mix is a good hedge for future tax law changes. That said, if income taxes are high, why not just take the tax break now? & forget the ROTHs. I think either choice is fair.

Good point - I'll look @ Roth again and consider diversifying for tax hedging as you suggest. It's 'pay now or pay later', and thus far I've followed the precept 'never pay a tax now you can delay till another day'. But if income tax rates rise (and chances are good) then my 401k starts to loose value. hmmmm.

Redraidernurse on the 529 plan: State tax exemption for 529 only applies if your state has income tax. TX does not (part of the reason I live here too ) so the only benefit is shelter from Federal income tax.