Where to start?

[Seeker]

Hubby and I are DINKs, married 5 years ago; he's 42, I'm 48. His income is approx $40K, mine $80k.

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.

We also own some arces of land in another state and may reture there when we get of age, because frankly the cost of living in California is probebly going to be too high when we are "retired." Right now it's an empty lot that we pay $200 property taxes on each year.

I know we are far behind where we should be in retirement savings and we need to get organized. As I am the money manager in this household.... where do I start?

Been reading about ROTHs, but cannot tell if the 401k's reduce the ROTH contribution allowed?

I'd appreciate any advice anyone can offer.

[sweeps]

Been reading about ROTHs, but cannot tell if the 401k's reduce the ROTH contribution allowed?

No, contributions to your 401k don't affect your eligibility for Roth contributions. Using a Roth to catch up on your retirement savings is a very good idea. If you open your Roth IRA accounts before April 15, you can contribute for both 2007 and 2008.

[project15]

I would pay off most (or all) of the education debt with those CDs since the CDs probably aren't making 7.something percent.

[Like2Plan]

Seeker,
Some questions for you:
1. How many years until you plan to retire?
2. Will either you and your DH receive a pension?
3. If you will receive a pension, will you receive Cost of Living Adjustments (COLAs) on your pension?
4. Percentage wise, how much of your current income will you need in retirement? I was told by a financial planner to figure on what I receive now minus what I save because that is what I am actually spending now. It is rather simplistic and you have to make adjustments, but it does give you a place to start.
5. Have you made your wish list for retirement? (ie Do you anticipate any large capital expenditures in retirement such as build a new house or take a year long trip around the world, etc for which you will have to save?)

Once you have answered the above questions, you will have an idea of how much money you need to save and the amount of risk you need to take on in order to reach your goal--or if it is possible to reach your goal within your time horizon.

[Like2Plan]

Here is a link to a retirement calculator CNN Money retirement calculator

[Like2Plan]

Once you have decided how much you need to save, the rate of return within your time horizon will pretty much determine what type of investments you need to make.

There is one catch and that is your risk tolerance. I notice that most of your savings (outside your retirement plans) is tied up in CDs. That could mean many things--one is you haven't thought about investments very much and CDs seem to be a safe place to stash the money. Or, maybe your risk tolerance is more on the conservative side. This is something that you should think about, too. If you are apt to invest in the stock market when stocks are doing well, but take the money out of the stock market when it dips down, you RoR will not be very good.

Inflation is also another risk that sneaks up on you. So, when you invest in ultra conservative low RoR investments, you may not even be keeping up with inflation. (Just one more thing to balance in your equation. )

[Seeker]

Seeker,
Some questions for you:
1. How many years until you plan to retire?
2. Will either you and your DH receive a pension?
3. If you will receive a pension, will you receive Cost of Living Adjustments (COLAs) on your pension?
4. Percentage wise, how much of your current income will you need in retirement? I was told by a financial planner to figure on what I receive now minus what I save because that is what I am actually spending now. It is rather simplistic and you have to make adjustments, but it does give you a place to start.
5. Have you made your wish list for retirement? (ie Do you anticipate any large capital expenditures in retirement such as build a new house or take a year long trip around the world, etc for which you will have to save?)

Once you have answered the above questions, you will have an idea of how much money you need to save and the amount of risk you need to take on in order to reach your goal--or if it is possible to reach your goal within your time horizon.

Sweeps -- thanks for answering the ROTH portion! We will do that.

Project15 -- oops on looking at this further, they adjusted the last rate to 8.02 %. Time to pay this off.

Like2plan -- You ask difficult questions.
1) probably 17 years for me. That will put me at 65 y.o. If hubby still has to work to get full benefits, I may extend it too. He's 6 years younger than me.
2&3) I will receive a pension from my 9 years service in CalPERS. But I have no idea how to calculate it -- there's a current 6/07 balance of slightly more than 45k there; and no contributions currently though I should be vested.
4) Once the debts are cleared, we should be saving 3k/month just from clearing those 3 1k payments that I've been throwing at them (in a nice way of course). Currently we spend approx $1500/month on utils, gasoline, groceries, association fees, repairs, gifts, entertainment, etc. Though for the holiday we have a bigger CC bill to clear. So maybe 60% of what we earn? Sound reasonable?
5) Probably no year long vacations -- lol -- I'd need a decade to recover from that. Hubby and I plan to buy a small motorhome and see parts of the US we've not.... and maybe a month or so each year in parts of Europe.
Maybe we'll build a cabin in the other state.... maybe not. Hubby does not like to be away from Cities too long. Short attention span.

And yes, you're right. I've not thought about retirement because until this last year, we were both earning 50% less than what we have earned 2007. Both of us converted from being "contractors" to being permanent full-time employees at our two places of work. The savings that I have put aside were mostly done pre-marriage; and I've been digging into them instead of adding to them.

But I know that I need to look into other things besides CDs. And after the ROTHs are setup, hubby and I need to sit, write down and plan everything out.

Thanks for everyone's input. It helps a lot.

[Scanner]

25k automobile @6.5% (his car was falling apart due to having to drive 350 miles/week just for career)

Normally, I don't give out "frugal" advice on the forum but if he is putting 16800 miles/year just for work (which probably translates to 20,000/year when you add personal in), you/he is going to have to break the "new car" habit since you are behind on retirement. I don't know if it's "new" but that's a new car price.

My neighbor drives a little more than that every week (from S. Jersey to NYC) and he buys what he calls "disposable cars" - a clunker for $1000-2000 that when it goes, he has it towed away and he buys another clunker.

Now, I am not suggesting that your hubby has to do that, but laying down $25,000 every 3-5 years isn't going to help you reach your goal. Since he was in bankruptcy, I suggest a modest change to his lifestyle.

Aim for a used car around 10K and devlope a relationship with a trustworthy mechanic.

BTW, with that much equity in your home, don't fret too much. . .you are at where most people are at in America - with the majority of their wealth tied up in their home. Just play some "catch" up with your 401(k)'s and Roths.

[Like2Plan]

2&3) I will receive a pension from my 9 years service in CalPERS. But I have no idea how to calculate it -- there's a current 6/07 balance of slightly more than 45k there; and no contributions currently though I should be vested.
4) Once the debts are cleared, we should be saving 3k/month just from clearing those 3 1k payments that I've been throwing at them (in a nice way of course). Currently we spend approx $1500/month on utils, gasoline, groceries, association fees, repairs, gifts, entertainment, etc. Though for the holiday we have a bigger CC bill to clear. So maybe 60% of what we earn? Sound reasonable?

Seeker,
It looks like you will be receive a defined benefit pension (which makes you very lucky because defined benefit plans are becoming more scarce ).

Since you are no longer working there, you can probably estimate pretty accurately what you will receive in your pension by going to the CalPers web site and plugging in some numbers. It looks like they use a formula based on your highest salary (not sure if it is your high 1 or high 3 years) and how many years of service.

Calpers retirement web site

They also have a link to an online calculator which might help, too.

If you still have questions, see if you can't contact HR from your old organization to help you.

With 17 years to go, I think you have a real good shot at getting yourself in good shape for retirement if you can get a good handle on your expenses and with your plan of putting an additional 3K per month aside.

However, 17 years is a long time and a lot can happen. There are things you don't think about when you are in your 40's and are in good health. Do you and your DH have disability ins?
Also, it might not be a bad idea to start looking at long term health care ins.
It is a balancing act. The younger you are when you start making the payments, the lower the premiums. However, you pay the premiums for the rest of your life. If it is an expense that is a struggle to pay and you end up dropping coverage, it would be a waste to sign up in the first place. On the other hand, if you wait too long to sign up, the payments will be higher. And, it is a good idea to sign up when you are in good health before any chronic health issue crops up because that will cause the price to up (if you can get it at all).

[jIM_Ohio]

Hubby and I are DINKs, married 5 years ago; he's 42, I'm 48. His income is approx $40K, mine $80k.

A simple goal would be to save 10% of this amount (12k) per year in 401ks and IRAs.

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.

I might suggest listing a budget and payoff situation for this. it might make sense to pay off 25k quickly if you can take the $1000/month type payment and invest it.

25k automobile @6.5% (his car was falling apart due to having to drive 350 miles/week just for career)

Consider opening a HELOC and putting car on HELOC. This will lower interest rate (can you get a HELOC for less than 6.5%?) and possibly allow for more tax deductions.

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.

Another HELOC possibility. If the HELOC is lower than 6.5%, this makes sense. If on a HELOC, both the car and student loan interest would be deductable.

Savings approx:
30K is CDs that have a various due dates throughtout the year and rates. We generally renew.

I assume rates on this are between 2 and 3%? I would suggest investing this in equites or a balanced fund for a higher return.

15K in checking and for emergency fund.

Good

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.

75-85k is quite a range. Have you looked at accounts recently? At ages 48/42 you have less than 30 years to go (for retirement), so I would consider the 75k a start, but you need to pay attention to this.

We also own some arces of land in another state and may reture there when we get of age, because frankly the cost of living in California is probebly going to be too high when we are "retired." Right now it's an empty lot that we pay $200 property taxes on each year.

Good. Building on this gives you something to look forward to.

I know we are far behind where we should be in retirement savings and we need to get organized. As I am the money manager in this household.... where do I start?

The simple goal of saving 10% of gross income (12k in your case) is the best place to start. I would also consider increasing this to 20% if possible. I would look at websites like T Rowe Price and do their retirement planners and similar calculators. Spend around 2-8 hours per week on this if possible.

Been reading about ROTHs, but cannot tell if the 401k's reduce the ROTH contribution allowed?

NO. Roths do not reduce 401k contribution limits. 401ks make actually help you make Roth contributions if AGI on tax return was around 160k.

I'd appreciate any advice anyone can offer.

Invest as much as possible. I would go with an 80-20 stock bond mix at your age. If you want to take some chances, go 100% equities. If you are more conservative, consider 60% stocks, 40% bonds.

80-20 should give you a mix which gets you an 8-10% annual return. Part of reading you need to do will be to determine asset allocation. At same time you will need to learn what your current budget is. Maybe cut some things out so you can save more.

Here's some sticker shock for you:
If you spend every penny you earn now (120k), you will need $4 Million to retire on.
If you learn to live on 90% of this (saving 10%), you will need $3.6 million to retire on.
If you learn to live on 80% of this (saving 20%), you will need $3.2 million to retire on.

Lowering your spending now will make the goal for retirement much lower. Using a Roth IRA will also make this lower (as that subjects you to fewer taxes down the line). Removing the expensive car habits would also help this.

Here are some goals to consider.

If you can assume you can live on 70% of what you make now (lower taxes not in CA, saving between 10-20% anyway), and retire at age 68, the need is $2.8 million. If you are investing 24k per year, earning 10% each year, I see the goal being reached at age 70 for the older of the two spouses (so the other spouse is 64 when this happens).

Your situation is slightly better, as my formula does not account for a pension (what level benefit does the pension have- more research).

I would also have a professional do your taxes this year. Ask him when they are finished if you used the standard deduction or itemized. if you itemized the HELOC idea I gave above will save you considerable money at tax time. This would allow you to take home more money and invest this for retirement.

[Seeker]

1)
We don't really have "expensive" car habits.

The new car we did buy recently is a hybrid and he's getting pretty close to 50 mpg on it. His old car was bought used and it was 8 years old. It had it's life.

With the $3.39/gal that gasoline costs over here, we are saving money in gas somewhat; and I have a bit of peace-of-mind (no more stuck on the road calls, or missed work calls, or lost).

I understand what you're all saying, but it's not going to be replaced 3-5 years, probably not even 7 years. We do take care of the stuff we own. My car is approaching 9 years, and running fine (but then I drive less than 100 miles/week for work). And we also tend to use my car for the short stuff and driving around home; probably will for the long trips too.

Jim -- thanks for your input. This gives us a clear goal, and we will probably be able to easily save 10%... so will make it 15%.... and see how it goes to start.
On totalling all the 401k variants, it's closer to 95k inclusive of the 45 in CalPERS. But yes, we need to save more for retirement and stocks/bonks/mutuals are what we'll be looking at soon. Your ratios to look at helps, immensely.

As far as taxes, we're using the standard deduction. We do not pay enough interest to be able to itemize even with the education debt, prop tax, car taxes, etc. -- hmmm, maybe this year with the car maybe we will have enough to itemize this year. We'll need to check into that too.

HELOC may be a possibility as well. But I don't know if worthwhile since we'll probably be pretty much done with all three debts in the next 2 years, or 2.5 years tops.

We don't spend 120k... we're not even close because frankly we've not had this much to work with before.

[Seeker]

Another possibility and one I'm considering at this point:

Is to pay off the education debt and pay 1500 toward the other two debts until they are finished.

If DH and I can manage that, we'd be debt free in just over 1 year and 5 months.

Currently we'd continue to save a minimum of 1k per month, and afterward, we'd be saving 4k.

[jIM_Ohio]

Another possibility and one I'm considering at this point:

Is to pay off the education debt and pay 1500 toward the other two debts until they are finished.

If DH and I can manage that, we'd be debt free in just over 1 year and 5 months.

Currently we'd continue to save a minimum of 1k per month, and afterward, we'd be saving 4k.

My advice would be to create a broad financial plan and implement it now.

You should create a spreadsheet which shows two scenarios

$1500 invested now and for next X years to retirement
$4000 invested in 1 year and 6 months, for x-18 months to retirement.

See which is higher. I am guessing the cash flow on the 4k is the better plan. You may want to consider the HELOC idea to reduce this timeframe some.

Is this 1500 per year or per month? Is the 4000 per month or per year?

If per year, then $1500 invested now will win.
If per month, then $4000 invested in 1 year and 6 months will win.

[TBH]

Another possibility and one I'm considering at this point:

Is to pay off the education debt and pay 1500 toward the other two debts until they are finished.

If DH and I can manage that, we'd be debt free in just over 1 year and 5 months.

Currently we'd continue to save a minimum of 1k per month, and afterward, we'd be saving 4k.

I like this plan the best, except that I'd probably use some of that money that's currently going toward the student loans to start a separate savings account to save for the next car. Maybe put $200/month into an online savings account earmarked for a car. If your car is 9 years old, even if you take good care of it you'll probably need to replace it in 5 years or so. Wouldn't it be nice to pay cash for a nice USED car at that point?

I'm sorry if it makes you feel defensive, but I agree with others that buying a new car, and a hybrid at that (which takes almost the life of the car for the gas savings to recoup the premium you paid up front) was probably excessive.

Congrats on increasing your income so much. If you can manage to continue to live on your old salary and save most of the increase, you'll be in great shape. I think you're doing very well, and I hope you come back so we can see your progress.

[jIM_Ohio]

I like this plan the best, except that I'd probably use some of that money that's currently going toward the student loans to start a separate savings account to save for the next car. Maybe put $200/month into an online savings account earmarked for a car. If your car is 9 years old, even if you take good care of it you'll probably need to replace it in 5 years or so. Wouldn't it be nice to pay cash for a nice USED car at that point?

I'm sorry if it makes you feel defensive, but I agree with others that buying a new car, and a hybrid at that (which takes almost the life of the car for the gas savings to recoup the premium you paid up front) was probably excessive.

Congrats on increasing your income so much. If you can manage to continue to live on your old salary and save most of the increase, you'll be in great shape. I think you're doing very well, and I hope you come back so we can see your progress.

I disagree with this.

The OP is behind on the retirement savings. $2400 per year (200/month) earning 5% in a savings account, when it could be compounding at 9%-15%-25% type returns invested for retirement is a bad financial plan.

I would actually suggest financing the new car, allowing all money to compound for retirement planning and retirement savings. The finance rate would probably be 5%, the rate of return for that money when invested could be as high as 25%, more probably 9%.

If the HELOC idea is implemented, the effective rate on the car might even be less than 5%, making investing the $200/month an even better proposition.

This couple could pay off their debt in 1 year and 6 months, but based on current income, I'd be hard pressed to think they can retire in 20 years unless they make a conscious effort to set aside a significant amount for retirement. $36,000/year set aside for retirement is where I'd begin the discussion, $48k per year is a great step towards the savings gap.