Asset Allocation

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I would also give you a "pep talk" about stocks/equity mutual funds.

You are young, you are a high earner.

You have a chance to really accumulate some wealth over your lifetime if you get a little more aggressive with your portfolio. You are good savers; that much is evident.

You have to get comfortable with the idea of being an "investor."

When you are an "investor", it literally means you own things. You own some of Walmart, some of Pepsi, some gold, silver, some real estate, whatever. You will have some losses to deal with over the years for sure, some downturns. . .but I can see you guys ending up with some substantial wealth.

You just need to let go of the idea that you have to constantly guard yourself against a loss. Go for mutual funds to start and then you can speculate.

Good luck.

[jIM_Ohio]

You just need to let go of the idea that you have to constantly guard yourself against a loss. Go for mutual funds to start and then you can speculate.

Good luck.

And to add, time will probably teach this lesson. The key is to get started. Even if OP starts more conservative, then realizes they CAN take more risks after some wealth is built up makes sense.

[atomicrc11]

A Traditional IRA is out of the question, as the maximum AGI to make a partial contribution is $61,999. This is the case as both husband and wife are eligible for employer sponsored plans.

A Roth IRA is possible, as the maximum AGI stated above is $122k, and the maximum AGI for a full contribution is $150k. It phases out from $150k-$159,999k. If you can, definitely stash some cash in a Roth, as you cannot put any more into your 401k, but all your earnings will grow tax free in your Roths. You can put a maximum of $5k in your Roth and a Roth in your wife's name for a total of $10k each year.

[jIM_Ohio]

A Traditional IRA is out of the question, as the maximum AGI to make a partial contribution is $61,999. This is the case as both husband and wife are eligible for employer sponsored plans.

A traditional IRA has no income limits, does it?

A traditional IRA has a tax deduction limit (which I think is the $61999) and other qualifiers (not covered by employer plan and other criteria). But anyone of any income level (provided they have EARNED INCOME) can contribute max to a traditional IRA to get tax defferred growth on contributions. $5000 for under 50, $6000 for over 50.

Please correct me if I am wrong.

[lucasrd]

Jim, I believe you are right...I can contribute to an IRA, but I can't deduct the contribution...

I Just started doing my taxes and came across this..

As far as the Roth..I recall last year I wasn't eligible, but might be this year since i contributed more to 401K and lowered my AGI

[jIM_Ohio]

I would contribute to Roth when eligible in your situation, then "recharactorize" to a traditional at tax time if you find yourself not eligible.

If you know you will NOT be eligble, I would use the traditional IRA as a place to get tax free compounding. You can then convert to a Roth either in retirement or when tax code allows a transfer.

There are techniques to transfer a traditional to a Roth and pay no or little tax on the transfer. If you can get years after age 59.5 where your income is ZERO, that is best year to transfer to a Roth, because it's possible no taxes will be due.

At minimum after age 59.5, a person should cap out their tax bracket (if they earn 70k and tax bracket caps at 100k, then there is 30k of room to cap out bracket and pay minimal taxes on a transfer to Roth.

[anonymous_saver]

A Traditional IRA is out of the question, as the maximum AGI to make a partial contribution is $61,999. This is the case as both husband and wife are eligible for employer sponsored plans.

A Roth IRA is possible, as the maximum AGI stated above is $122k, and the maximum AGI for a full contribution is $150k. It phases out from $150k-$159,999k. If you can, definitely stash some cash in a Roth, as you cannot put any more into your 401k, but all your earnings will grow tax free in your Roths. You can put a maximum of $5k in your Roth and a Roth in your wife's name for a total of $10k each year.

Yep, I guess I spoke wrong about the Traditional IRA. Oops. But I was also conserned they may make more than the $159,999 level to be considered for the phased out Roth IRA, since the OP said that his wife makes $88,000 and he makes "about the same".

Either way, I still suggest putting to the max. allowed into both of their 401(k)'s.



To the initial poster, what is that money earmarked for in your savings account? Are you saving for different goals? Down Payment? 529? Emergency fund? Just curious.

[lucasrd]

the 60K in cash (goal to be 100K) is just a cushion we feel comfortable with.

[atomicrc11]

About the $100k, I would say you should have at least 6 months worth of expenses. If you're only spending 55% of your 9800/month income, for an entire year of emergency fund you would need $50k. I would say keep at least 1 month of your emergency fund in a high yield savings that you are able to access easily. With the rest, put it somewhere that you can get in within a week or so, but will get higher yields. As interest rates go down, having that much in a savings account, or even in CD's will result in you losing money due to inflation. If it makes you feel better keep $10k in the high yield savings, and put the rest in a higher interest money market or even some sort of bond mutual fund. The money would still be fairly liquid but not erroded as easily by infation. Also I heard yesterday that Fidelity's Magellan Fund is open to new investors. This is quite a good fund with a good manager. You may want to look into it. The expense ratio is quite good at 0.54% and should fair better that index funds for the next few years, probably even more.

[anonymous_saver]

Wow a $100,000 emergency fund. That would be about 26 months worth of an emergency fund ($3,801 monthly expenses * 26 months = $98,826).

Do you have any debts? If you have any that are 8%+ I would pay that off first before increasing your emergency fund to $100,000.

[RedHotLama]

You should look for high yield savings account at a local bank. WAMU offers one with 4.75%APY.

You sing up for free checking online and they give you option open online savings account with the 4.75% APY. You can do like 6 transfers within WAMU a money and if you put both names on account you can have 200,000k in the wamu bank and have it insured. So open the checking at same time. and money will be readily accessible.

That beats 100k at 0% in cash.

Heres link to savings account

htttps://w w w .wamu.com/personal/savings_account/online_savings_account/default.asp

Heres link to checking plus savings

https:// online.wamu.com/apply/startapplication.aspx?appType=FC

You will need to remove the spaces, as i cannot post links yet.

[jIM_Ohio]

the 60K in cash (goal to be 100K) is just a cushion we feel comfortable with.

I think 100k cash is a good goal. Considering what a visit to ER costs these days, a good goal. This is an EF of 24 months expenses based on what is posted. A few points:

1) 100k is the max deposit to be federally insured.
2) Money markets are NOT federally insured, yet have higher interest rates.
3) I might suggest putting 50k in each of two banks, or 50k in one bank and 50k in a money market. The bank rate will be less than the money market if FDIC insured.

4) I might suggest OP consider I-bonds for a portion of this 100k. Maybe 6-12 months expenses worth (25-50%) into I-bonds. Pros and Cons. I-bonds have a return which is guaranteed to keep pace with the CPI (consumer price index) which is what measures inflation. If CPI goes up 2%, so does the I-bond. This 2% gain is taxed, so keep this in mind.

I bonds have a bond component (so have a bond risk), but are backed by the US government, so if he lives in USA, I would consider that risk to be low (if the government falls, who cares about money, get guns and ammo).

I might construct a portfolio which looks like this with 100k cash

90 day CD with 3k
90 day CD with 3k
90 day CD with 3k
(this represents 3 months expenses, with each CD maturing 30 days from prior CD).

50k in money market account (high yield)
41k in I bonds. 12 month duration, 3.4k per I-bond, with one I-bond maturing each month.

The CD ladder captures current interest rates and locks them in for 90 days. I'd expect average rate to be 2.5% over time, maybe 3% in a good year.
Then money market interest rate will fluctuate. 2-5%. I'd expect the return to be 3% over time.
The I-bonds should return at least 3% (because inflation is historically around 3% per year). This year it was 6%, so this helps protect the purchasing power of about half the cash with not much risk (IMO).

[lucasrd]

I should clarify that the current 60K (100K goal) is currently distributed between a checking account (5K), Regular savings (5K which can be transfered into checking immediately), the other 50K is at ING in a mix of Electric Orange, CDs, and Money Market.

I have the electric orange so, if need be, I can have instant access to money in my ING account by transfering into the electric orange account.

the 100K might be slightly overboard, but I think it's what we need in order to feel comfortable sticking more into the market...at least this what i've been starting to realize through out the dialogue on this post....

thanks again to everyone

[jIM_Ohio]

Cash is a good thing. You have the ability to invest significant amounts in the market. If you didn't have lots of cash on hand, but were investing 72k per year, I would have suggested other courses of action.

Are your CDs laddered, or are they just "there". A ladder is group of cash investments arranged so they mature and even intervals (like rungs on a ladder). This allows you to capture interest rate trends. If you have one CD and it matures this week, you get a low rate (because rates are low now) until that CD matures again. If you have a ladder, when rates go up, you will have a CD maturing in time to capture that rate increase.

My CDs are in 90 day ladders. You could probably get a 180 day ladder (6 CDs, one maturing every 30 days). Longer term CDs have much better yields than shorter term CDs.

[lucasrd]

i've just been opening a $1000 CD every month for a one-year term...when the one comes due, I renew it for a 2-year term, and open a new one for a 1-year term...

probably Bass Ackwards