Financial Planning advise

**disneysteve** · 05-31-2010, 02:20 PM

Welcome. A few comments....

Home equity loan: 20k (took it out just to get tax deduction of interest)

This makes absolutely no sense. Why pay interest that you don't need to pay. It is impossible for the tax deduction to offset the interest cost since the deduction only reduces your taxes by the percentage of your tax bracket. If you are in the 28% bracket, that means for every $1 in interest paid, you save $0.28 on taxes. Therefore, it still costs you $0.72 in interest fro every dollar borrowed. I would pay that off immediately with some of the 200K sitting in the money market.

I would definitely advise upping the 401k contributions. Your goal should be a minimum of 15% of gross income going to retirement not counting the company matching funds.

You earn to much to contribute to Roth IRAs or to deduct traditional IRA contributions, so forget about that. Increasing the 401k contributions will certainly help with taxes, though.

Life insurance is a must if you have dependents. Both you and your spouse should be insured to provide for the other if one of you dies and to provide for your child/children. You want term insurance. How much depends on exactly what you want it to cover. The general rule of thumb is 10 times your income but you need to adjust that up or down based on your debts, personal savings and other factors.

Should your wife become a stay at home mom? There is a lot more to that than the financial aspect, but can you comfortably afford to live on your income alone while still saving 20% of your gross? If so, I see nothing wrong with that at all.

**jIM_Ohio** · 05-31-2010, 06:38 PM

1) Based on above scenario should we be adding more money to 401k for retirement planning

2) My spouse is planning to take 3-4 years off from work. This is because we are planning a second child. We pay 16k in daycare expenses for my son. However should we even consider her taking time off in this economy ? We obvioulsy want to maintain a good lifestyle for kids and us.

3) I have lost 25k in stocks and am just reluctant to put more money in that. However I want to invest 100k in a good investment. The remaining 100k I want to remaining in money market as emergency savings. Is it a good idea to just get equity down in my house by another 100k ?

4) I want to start contributing more towards college savings for kids and also life insurance. Obviously this will get our savings down. Are there good recommendations here.

5) Finally we have been paying huge taxes each year (for last 4 years) to IRS. Almost 5-6k each year even with itemized deductions. Should we start looking into other ways to save taxes like ROTH IRA's ot anything else. Another approach could be to increase our 401k contribution ?

1) YES add more to 401k. Each spouse 15% or more of gross pay to be exact.

2) that is a family decision. My advice would be to bank the paycheck of spouse up until time they leave the workforce

3) Home equity is something which helps cash flow, but does not help investments. Your house might make you 1% per year in cost appreciation, with 5% being a great year. The average year in stocks should get you 9%.

4) Get retirement savings to 250-500k before you save for college. Also get mortgage paid off before you consider college savings.

5) Roth IRAs will not save you anything in taxes this year. 401ks will save in taxes now.
it is OK to have a tax problem... that means you have income getting taxed.
If you use the 401ks more (think 15-25%) your tax bill will go way down
when a spouse stops working, your tax bill goes down
when kid 2 comes, tax bill also goes down.

**jefffou** · 06-01-2010, 06:03 AM

1. YES...This is the most obvious of the 5 questions. $16,500 is the maximum contribution you can make for 2010. Consider making max contributions on both yours and your wife's salary. I'm know I'm biased here, but I would find a good advisor to help with the allocations.

2. Please don't be offended by this, but your child will not care what kind of lifestyle you have. Maybe I'm old-fashioned here, but I think your baby would rather have his/her mother (especially early) around the house. The little one won't be too concerned with your standard of living. Now, if your wife just wants to go back to work, that's a different story.

3. There are a lot of things that you can do to avoid the market risks that you've been exposed to so far. A well-designed portfolio of lowly correlated mutual funds will make a lot of sense. With the salaries you are now bringing home, you have no real need to take a lot of risk. Find a good advisor, invest fairly conservatively and watch it grow.

4. I would look into a 30-year term policy for both you and your spouse. Get a lot. Make sure and insure your life, and hers, to the degree that the economic benefit that either of you would contribute to the family over the next several years would be replaced by the death benefit. Given the salary that you two bring home, that would be quite a bit of insurance. The good news is...30-year term life is cheap. I would probably look at the 30-year term because the baby hasn't been born yet. 30 years would insure your life (and your wife's through the baby's college days.

5. Sometimes, there's not a lot that can be done. This looks like one of those cases. Unless either of you have a business or a farm, you're going to be limited on what you can do to save money on taxes. The new baby will help. I am SURE, however, that you are paying more than 5-6k per year on taxes. This may be what you're having to cough up in April, but you are paying a lot more than that.

**jIM_Ohio** · 06-01-2010, 06:43 AM

Originally posted by jefffou View Post

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4. I would look into a 30-year term policy for both you and your spouse. Get a lot. Make sure and insure your life, and hers, to the degree that the economic benefit that either of you would contribute to the family over the next several years would be replaced by the death benefit. Given the salary that you two bring home, that would be quite a bit of insurance. The good news is...30-year term life is cheap. I would probably look at the 30-year term because the baby hasn't been born yet. 30 years would insure your life (and your wife's through the baby's college days.

5. Sometimes, there's not a lot that can be done. This looks like one of those cases. Unless either of you have a business or a farm, you're going to be limited on what you can do to save money on taxes. The new baby will help. I am SURE, however, that you are paying more than 5-6k per year on taxes. This may be what you're having to cough up in April, but you are paying a lot more than that.

The 30 year term policy really has nothing to do with whether to pay down the mortgage, but I agree is something you need to look into.

The second point in taxes is you need to look at 4 numbers

1) AGI
2) Taxable income
3) Tax liability
4) balance due or refund

I agree with the above reponse that on 180k in gross income, you likely pay MUCH MUCH more than 6k in taxes. If you only pay 6k tax liability on that income, you are doing well tax wise. More than likely you have a tax liability of around $X

the math for this
Salary (self & spouse) : 190k per yr.. (120 self and 70 spouse)

190k gross income
minus std deduction of 11.400
minus exemptions times 3 ($3,650*3=10950)
190k-11400-10950=$167,650

using fairmark tables
Reference Room

and my math is

26,687.50+.28*(167,650-137,300)=$35,185.50 is your tax liability.

If you owe $6000, have another $500 witheld each month from your paychecks and the large bill April 15 will go away. You will still owe $35k in taxes each year, but most of it will come out of your paychecks instead of out of your bank account.

Using a 401k will lower the $167k you are being taxed on, so it will also lower the $35k tax owed.

Ever dollar you put in will lower tax bill by about .$28... for first $8500-$9000 you contribute (the range is given because I am guessing you itemize, and your exact taxable income is not what I guessed at above- might be close, but not exact). If you can manage to find a way to put $9000 into your 401k, you should see the marginal tax rate drop to 25% (so the $9001 dollar contributed is lowering tax bill by $.25 for every $1 contributed).

You are also in income range where the marriage penalty might exist

190k per yr.. (120 self and 70 spouse)

120k for self is taxed in 25% bracket married and 28% bracket single
70k for spouse is taxed in 25% bracket (barely) married and 25% bracket single

it is POSSIBLE you might save in taxes filing separately, but to know for sure, consult a tax professional. When you file seperately, you lose some tax benefits (like Roth IRAs) and other benefits are restricted (like how schedule A is itemized). It might not make sense, but every situation is different. If you don't like a $35,000 tax bill on 190k gross income, find a good tax person to help you.

**jpg7n16** · 06-01-2010, 07:23 AM

Originally posted by itguru View Post

Hello everyone. This forum has been an educational place for me. Following is my situation and I would need some good advice on financial and estate planning. I have a spouse and 1 child (2yr old). Both me and spouse are 35 yrs old.

Salary (self & spouse) : 190k per yr.. (120 self and 70 spouse)
Home mortgage 240k remaining at 30 yr (5.125 fixed). Have 100k equity in the the home
Home equity loan: 20k (took it out just to get tax deduction of interest).
Car Loan: 14k
Credit Card balance: Zero. Pay it off every month.
Personal Savings : Around 200k all sitting in money market
401k: 40k for both spouse and me. We currently contribute 6 percent each which is matched by employer. I am thinking of putting more quite soon
Investments: Invested 50k in stocks and lost half of it.

Currently have 25k remaining in brokerage still invested in stocks.

You have wayyyyy too much in the MM accounts. You should have 6 months of living expenses max.

For you, I would suggest the following:
-Pay off the car. No sense having a car payment for no reason.
-Pay off the home equity loan. See Steve's reply above
-If you're wanting to pay for kids' college, talk to an investment specialist about setting up a Coverdell and/or 529 plan
-Move some of the excess MM funds to a good municipal bond fund

Following are my questions:

1) Agreed with everyone above. If you can do it, fully fund them both. Would be 16,500 for you and 16,500 for her. (assuming exact income figures above, do 13.75% for you; 23.5% for her)

2) That's more of a personal choice than an economy choice. If you guys want her home with the kids, then find a way to make $120k work. $120k is a really good salary as is.

3) Before you invest, read the Intelligent Investor by Benjamin Graham. Especially chapters 8 and 20. Should be at any local library. If you have an hour and a half to listen to virtually the best investor ever, check out this video at Google: Warren Buffett MBA Talk

Then I'd personally invest if you're okay with the risk. But you can't go wrong paying down the mortgage either. Both are good options.

4) See my recommendation above about Coverdell and/or 529 plans

5) ROTH IRA's won't save you any current taxes anyways. Increasing the 401k contributions will lower current taxes. If they are maxed out, you may also qualify for a traditional deductible IRA, which would further save taxes this year.

Coverdell/529 funds grow tax free and can be withdrawn tax free if used for certain education expenses. But will not save any current year taxes.

Also, move taxable income generating securities into retirement accounts (bonds, REITs, etc) Look into investments in Muni bonds outside of retirement accounts. Munis could be a really good alternative for your excess Money market funds, cause they'll earn more interest than the MM, and it's all tax free so bonus!

Concerning your "interest deduction," please re-read Steve's post above. Better to pay 250 extra in taxes but save 1000 in interest.

**jpg7n16** · 06-01-2010, 07:56 AM

Originally posted by itguru View Post

Following is my situation and I would need some good advice on financial and estate planning.

Just noticed this: what estate issues are you concerned with? Do you have a will?

5) Finally we have been paying huge taxes each year (for last 4 years) to IRS. Almost 5-6k each year even with itemized deductions. Should we start looking into other ways to save taxes like ROTH IRA's ot anything else. Another approach could be to increase our 401k contribution ? [/B]

After re-reading Jim's post, I also think you mean something different than what you say. You mean come April you're having to pay an additional 5-6k? That is a withholding issue. You need to increase your withholdings.

Use the withholding calculator from the IRS website: here -> 2010 Withholding Calculator

And then talk to your HR about changing your withholdings.

Like Jim said, if your total tax liability on $190k is only $6000, you're a freakin tax saving genius

**itguru** · 06-05-2010, 10:42 AM

Thank you all for the valuable advise. I have learnt so much thru all the responses over past 1 week. Here is what I plan to do:

1) Payoff my home equity loan completely. wa

2) Look into 30 year term life insurance. If there are any good recommendation or websites to researc these then please let me know

3) Increase 401k contribution to max out contributions in order to decrease taxes.

4) Will hold back on college savings for now as I dont have much savings in retirement.

5) I am also looking into investing into real estate investment (flipping small properties). That is what i meant by building our estates. But currently not finalized this yet. Still deciding between this business or just investing into mutual funds

6) Can you guys recommend some real good mutual fund names ? I am looking to go conservative and as long as I can make 5-8 percent return then am ok.

Appreciate all the advise. Thanks again.
Regards to all.

**lovcom** · 06-18-2010, 02:09 PM

I would not add even one more penny to the 401K plan. Stocks, Bonds, Mutual Funds, it is ALL gambling and a rip off.

I would save up a down payment on the best kept secret investment that will ALWAYS pay off:

Senior Housing Condos, yea! This is not a gamble because (1) the purchase price is negotiated and fix, (2) get a fixed rate loan, (3) rental rates never go down...so therefore NO GAMBLING! :-) Real estate values go up go down crash bubble this bubble that? No worries....with rental income you are so not into caring about values....you are taking the long view...you are not flipping these properties. IN TODAYS MARKET DON'T EVEN THINK ONE SECOND TO FLIP PROPERTIES...THIS FOOLISH AND I'M BEING NICE.

Most every town has these complexes. They are cheap to get, and you can be positive with income very, very quick. The tenents are old people that never trash the place, have lound parties, etc...and since that demographic is growing you'll never have a hard time finding tenents....just place an ad in the PennySaver and you'll get flooded with candidates.

Rental real-estate is still the best way to go....ALL my friends that have been feeding their 401k's for years lost 30, 40, 50% in the last few years.....gambling! Buy a unit every 3 years....do this until you reach 50 or 55...every three years put the saved down payment on another unit...don't cry for leaving your employer's 401k portion on the table....you're going after bigger fish...none of this gambling stock/bonds/mutual funds that the "crowd" or "Lemmings" go for....

Income properties (non detached family homes) are the best way to go.

I got 4 of them and with 15 year notes I'll be stylin very soon...hope to retire by age 55.

Never go with the crowd...they usually lose...go with the Maverick ways....

**jpg7n16** · 06-18-2010, 08:12 PM

Originally posted by lovcom View Post

I would not add even one more penny to the 401K plan. Stocks, Bonds, Mutual Funds, it is ALL gambling and a rip off.

I would save up a down payment on the best kept secret investment that will ALWAYS pay off:

Senior Housing Condos, yea! This is not a gamble because (1) the purchase price is negotiated and fix, (2) get a fixed rate loan, (3) rental rates never go down...so therefore NO GAMBLING! :-)

BAHAHAHAHAHAHAHA

Yes no gamble there. Except if California goes bankrupt and your tenants decide to move to Florida. Then you're stuck with 3 condos with no tenants. Housing values will plummit - no buyers will want your condos at the ridiculous CA prices, and you'll file bankruptcy because you can't afford to make your payments. Or well, you're gambling that won't happen.

Or your senior citizens don't want to deal with earthquakes and leave.

But what am I saying -- tenants never leave/die and housing bubbles never pop, right?

The real story of investing in stocks: Amazon.com: The Intelligent Investor: The Definitive Book on Value Investing. A…

**lovcom** · 06-19-2010, 08:10 AM

Originally posted by jpg7n16 View Post

BAHAHAHAHAHAHAHA

Yes no gamble there. Except if California goes bankrupt and your tenants decide to move to Florida. Then you're stuck with 3 condos with no tenants. Housing values will plummit - no buyers will want your condos at the ridiculous CA prices, and you'll file bankruptcy because you can't afford to make your payments. Or well, you're gambling that won't happen.

Or your senior citizens don't want to deal with earthquakes and leave.

But what am I saying -- tenants never leave/die and housing bubbles never pop, right?

The real story of investing in stocks: Amazon.com: The Intelligent Investor: The Definitive Book on Value Investing. A�

You wrote fantasy. Now here's the reality:

First off there are oodles of elderly that partied during their youth and don't have a pot to pee in, so a senior condo in Cali will never be short of tenents.

And what do housing values have to do with long term rentals? Nothing! Income rentals are not about flipping; they're about the long view, the long run.

What does the bubble have to do with anything? When the bubble burst it actually was BETTER for such rental properties because the market got flooded with a lot of elderly that lost their mortgages and need rentals.

Are earthquacks a new thing for California? No of course not....we've had oddles of them and yet people still live here. And if a tenent leaves, there are dozens ready to take their places.

It seems you've not thought this through

You go ahead and gamble with stocks, bonds, and mutual funds...I prefer sure bets ;-)

**jpg7n16** · 06-19-2010, 02:38 PM

Originally posted by lovcom View Post

You wrote fantasy. Now here's the reality:

First off there are oodles of elderly that partied during their youth and don't have a pot to pee in, so a senior condo in Cali will never be short of tenents.

So they have nothing, and yet can afford steadily increasing rents for the rest of their lives?

And what do housing values have to do with long term rentals? Nothing! Income rentals are not about flipping; they're about the long view, the long run.

Because rents are based on market values - and home values are part of that. Why rent a condo from you at $1000/month, when I can rent this house over here for $750/month? As the home values fall, market sustainable rent rates fall too. (Rental rates for homes, apartments and condos)

What does the bubble have to do with anything? When the bubble burst it actually was BETTER for such rental properties because the market got flooded with a lot of elderly that lost their mortgages and need rentals.

Because if your CA housing bubble pops, the value of homes will become MUCH cheaper - enabling other real estate investors to swoop in, buy homes, and rent them at lower rental rates - that your overpriced condo wouldn't be able to sustain.

If I (as a RE investor) buy a house at $500k - by taking on a 30yr mortgage of $400k @ 5% = $2138/month payment - I need to charge more that 2138 + plus a profit margin for repairs and vacancies - just to break even.

If the housing bubble pops and similiar homes fell in value to $300k - a new investor putting down 20% would only have a mortgage payment of $1283. He could then rent it out for $1600 - which is impossible for me to even cover the mortgage payment let alone repairs and vacancies!

So, if you were a local renter, which would you choose? My home at $2500/month? or an identical home at 1600/month? You'd choose the 1600/month. I'd have a vacant home, I couldn't afford my mortgage payment, I'd get foreclosed on, and since the value of the home fell to $300k, I'd sell the home and still owe the bank another 100k.

Further still - if you are renting your condos at $950/month - and housing prices fall so that an investor can purchase a $160k home with $128k mortgage can rent to cover his mortage of $684/month. Which would a senior citizen living on a fixed income choose: A condo for $950/month? Or a house of their own for $750/month?

If you think that local housing prices have no effect on sustainable rent rates in the condo market, you are sorely mistaken.

Are earthquacks a new thing for California? No of course not....we've had oddles of them and yet people still live here. And if a tenent leaves, there are dozens ready to take their places.

It seems you've not thought this through

You go ahead and gamble with stocks, bonds, and mutual funds...I prefer sure bets ;-)

Yeah you're right. I didn't think it through at all. There is no risk at all in investing in senior living condos.

Those foreclosed senior living condos are just misprints - cause people never lose money investing in them.

Financial Planning advise