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    New member/what to do?

    Hi all,
    I am 48 years old, divorced. I have about $700 a month left after I pay my bills. My question is, how should I best use that money?
    Some stats:
    Home loan: $91,000 balance 15 year fixed rate at 4.75% (10 years left to pay off) My home is worth about 250k.
    Home Equity LOC: $19,000 balance at 3.75% ($12,000 of this was for a car, my old one died, the rest was for badly needed home improvements)
    No other debt other then usual living expenses. No credit card debt.
    EF: funded for 4 months
    Retirement: I only have about 30k saved. I had to start from scratch after my divorce a few years ago. I have a low tolerance level for risk when investing.

    How should I best allocate that $700 a month? I really hate debt, and my first thought was to aggressively pay off the HELOC, then build up EF more, then, really try and sock away as much as I can for retirement, since I am starting over so late. Or, should I split it up between the 3? I appreciate your suggestions.

    #2
    Here's my 2 cents:

    Your mortgage and HE loan are at really low rates, and assuming you can take the interest as a deduction that makes them even better. I would take your excess cash and start really dumping money into your retirement. You said that you have 10 years left on your mortgage, so theoretically your house will be paid for anyway by the time you retire.

    Comment


      #3
      I'd put 10% of your income toward your E fund, continue to pay the home loans without paying extra, and throw everything else at retirement.

      But some more info would help us all make a more informed recommendation.

      * Do you have an employer match for retirement? Are you contributing enough to capture it?

      * What's your income? What percentage of your income does that $700 represent?

      * Is there any danger that the HELOC rate will go up? If so, I might say you should pay a bit extra on that.

      Welcome, and good luck!

      Comment


        #4
        I agree, you are sitting very nicely (No cc debt, 4 Mo of EF) if it were me, I would pay a little extra on the two bills you do have, and I would invest $500 of the extra money. The concern is your age and the lack of compounding interest. Time is not on your side and I think you know this (The reason you are asking). WIth such low interest rates, I would do what I can to invest as much as I can, of course paying a little extra on both bills. If you get them both paid in full in 9 years then you end up with no bills and an additional $54,000 dollars (+ or - for interest and market swing).

        Good luck,
        Raymond

        Comment


          #5
          I'd make sure every penny of the $700 went to retirement.

          I would rethink this though- $700/mo=$8400/year.

          If you make LESS than 56k per year, you are not funding retirement with enough money. Make sure 15-25% of your gross pay is being sent to a retirement account.

          Age 48, 30k set aside- if you have a 56k income now you will probably need around $1 M to retire with an income of 40k at age 65. If you want more income, you need to save more or work longer. If you want to retire before age 65, you need to cut expenses or save more for retirement.

          Comment


            #6
            Thanks for the replies,

            My annual salary is 62k. I work for a college and they contribute 7.25% of my salary into my retirement fund. I do not have to contribute to receive that money, and I am currently not contributing any more to it.

            It has taken me a few years to get myself established after my divorce. My first priority was a house, then some savings, and had to buy the car (I keep them until they die!).

            The interest rate on the HELOC has been steadily decreasing, I don't see it going back up anytime soon.

            Sounds like I should be putting the $700 a month toward retirement. BUT, with the market in turmoil (and I am not a savvy investor, yet, but I am educating myself) should I really be putting new money into the market? This is partly why I though about paying of the equity loan instead.
            Thanks.

            Comment


              #7
              Wink-

              If you went clothes shopping and saw clothes 50% off, would you not buy any clothes until after the sale ended?

              If you went car shopping and a car you liked was 50% off, would you wait for the prices to go back up before buying?

              If stocks are 50% lower than their highs, and you think the company is a great investment, would you wait for the price to go up before investing?

              Buy low, sell high.

              I would put the $700 into the market each month. Then do not watch it each day/week/month/year. At end of year you know you put in $8400- look at balance then (once) and keep on the path of saving for retirement.

              You make 62k per year. If you wanted to spend 50k per year in retirement ($4700 goes to SS/FICA now, some other expenses go away in retirement), that 50k will need to come from an investment pool of $1,250,000 ($1.25 Million).

              How much is your retirement portfolio worth now (including company contribution)? Is this the 30k?

              If you need 1.25 M at age 65 (assuming 65 is your desired retirement age), I would suggest you look at this chart (compounding backwards)

              assuming 8% return (money doubles every 9 years)
              age 65 $1.25 M
              age 56 $625k
              age 47 $313k

              If you had $313k, you would be on track right now. You are 280k behind that target for end of 2011 (you are 44 now, correct?). You would need to find a way to set aside 280k over 3 years or about 400k between now and age 56 (12 years) meaning you need to set aside around 33k per year for next 12 years. $8400 you have found now, plus your employer contribution $4500. You are still 20k per year short to meet your current standard of living in retirement.

              Many solutions to this.
              Work until age 70
              goal would then be $1 M at age 70
              age 70 $1M
              age 61 $500k
              age 52 $250k
              age 43 $125k
              You would need to save about 250k over next 11 years (23k per year, about 10k more per year than you save now).

              Second situation assumes a 5% withdraw rate at age 70 (first was a 4% withdraw rate at age 65).

              Comment


                #8
                Originally posted by jIM_Ohio View Post

                You make 62k per year. If you wanted to spend 50k per year in retirement ($4700 goes to SS/FICA now, some other expenses go away in retirement), that 50k will need to come from an investment pool of $1,250,000 ($1.25 Million).

                How much is your retirement portfolio worth now (including company contribution)? Is this the 30k?

                If you need 1.25 M at age 65 (assuming 65 is your desired retirement age), I would suggest you look at this chart (compounding backwards)

                assuming 8% return (money doubles every 9 years)
                age 65 $1.25 M
                age 56 $625k
                age 47 $313k

                If you had $313k, you would be on track right now. You are 280k behind that target for end of 2011 (you are 44 now, correct?). You would need to find a way to set aside 280k over 3 years or about 400k between now and age 56 (12 years) meaning you need to set aside around 33k per year for next 12 years. $8400 you have found now, plus your employer contribution $4500. You are still 20k per year short to meet your current standard of living in retirement.

                Many solutions to this.
                Work until age 70
                goal would then be $1 M at age 70
                age 70 $1M
                age 61 $500k
                age 52 $250k
                age 43 $125k
                You would need to save about 250k over next 11 years (23k per year, about 10k more per year than you save now).

                Second situation assumes a 5% withdraw rate at age 70 (first was a 4% withdraw rate at age 65).
                You can tweak this if you have other money (like SS coming).

                If your expected SS benefit year 1 is 12k, divide that by the withdraw rate (4% for age 65 or 5% for age 70).

                12,000/.04=300k

                So the $1.25M porfolio really needs to be $900,000 (because 300,000 of the $1.25 M is SS).

                Then the chart looks like
                age 65 900k
                age 56 450k
                age 47 225k

                or the second situation:
                12k/.05=240k
                $1M portfolio becomes $760k.

                age 70 760k
                age 61 380k
                age 52 190k
                age 43 95k

                which means in next 8 years you need to set aside 160k (20k per year, which is 7k more than you are contributing now).

                The assumptions are:
                You are eligible to collect SS
                Your current expenses will be similar in retirement
                You invest with enough risk to get an 8% return (this means 60-80% equities)


                To accomplish this, consider: $700/mo=$8400/year. $8400 is 13.5% of 62k. If you put 14% into a 401k or similar plan, more than likely your take home goes up (because the 401k is pre-tax)... you could probably put aside $10k or $11k into the 401k before you saw your take home drop at all or enough to notice.

                This would be action 1- set 401k to 15% contribution and see your take home. Then every 3 months up the 401k 1%. You will see little change because the money comes out pre-tax.

                Comment


                  #9
                  Jim,
                  Thanks for taking the time to send that analyses. I get it. I am WAY behind for retirement and I now need to make saving for it my #1 priority.

                  I have one last question, should I invest in 401k (pre-tax) or ROTH IRA (after tax ). I have received varied responses to this question.
                  I am 48.

                  Thanks again.

                  Comment


                    #10
                    Jim is right the most important thing is to save for retirement...as much as you can. I'm glad to hear that your employer is funding some retirement for you.

                    I would probably go with a roth...max it out at $5000/year. But also put the rest ($3,400) that you can save into your employers 401K. To save 3400 of $62K you would need to save just over 5% into the 401K. I might even try to bump it up to 6%!! But that's me. You need to do what is right for you.

                    So, really you will be doing both a roth and 401K.
                    My other blog is Your Organized Friend.

                    Comment


                      #11
                      Originally posted by Wink View Post
                      Jim,
                      Thanks for taking the time to send that analyses. I get it. I am WAY behind for retirement and I now need to make saving for it my #1 priority.

                      I have one last question, should I invest in 401k (pre-tax) or ROTH IRA (after tax ). I have received varied responses to this question.
                      I am 48.

                      Thanks again.
                      62k and you file taxes as single I assume (for 2008 and 2009?). You are in 25% tax bracket based on gross income (deductions-like mortgage interest) might make your taxable income fall below 34k which is 15% bracket).

                      25% is regular 401k (defer taxes when taxes are high)
                      15% is Roth (pay taxes when taxes are low)

                      A good financial plan should get you into the 15% bracket in retirement.

                      50k income (in retirement)
                      5700 std deduction+$3650 single exemption would be 9350, so 50k income is 41k taxable... 12k SS would put retirement account withdraws/taxable income at 29k. Well inside 15% bracket and possibly in the 10% bracket.

                      This means taxes for you, based on the assumptions listed, is lower in retirement- so take a 25% deduction now ($1000 contributed saved you $250 in taxes; $8000 contributed will lower your taxes by $2000- meaning you could contribute $10k to 401k and because of the deduction your take home pay probably did not change, much).

                      On the 62k income right now...
                      $10,000 into 401k
                      $5700 std deduction and $3650 exemption is $9350.
                      62k-10k-9.35k=42,650. That number should be on your tax return as taxable income (form 1040 line 43). This is the number which tells me if Roth makes sense. For you, you want this number less than 34k- if it gets less than 34k, put the difference into a Roth account.

                      For example- if you have $1800 of charitable contributions, and $7000 in health insurance premiums (or HSA contributions), that number will drop 8.8k to 33850. You are in 15% bracket by one hundred dollars. Put $100 into a Roth account (you paid only 15% taxes on that $100).

                      If you dropped $1000 below $33950 ($32950 of taxable income) only put $1000 into Roth account.

                      I am coaching you to pay as little tax now as possible. If you would prefer to pay more taxes now, you are under no obligation to follow my advice. I would rather pay 15% taxes now than guess what taxes will be later. But I would not want to pay 25% taxes now thinking they might be higher later.

                      Tax tables for your reference
                      Reference Room

                      Comment


                        #12
                        I suggest you look in your cupboards and pantry to see what products you buy even in recessionary times. Those companies P&G, Johnson, Costco, even the hated W/Mart stock might help ease your risk tolerance if you look at their hi and current value. In order to make-up for lost years of retirement investing...you will have to learn more to increase your risk tolerance.

                        I'm not convinced you will need 1.25M if your home is mortgage free and you carry no debts. the thing that trips you could be medical costs. What happens to those benefits when you retire?
                        Last edited by snafu; 12-19-2008, 05:17 PM.

                        Comment


                          #13
                          Originally posted by snafu View Post

                          I'm not convinced you will need 1.25M if your home is mortgage free and you carry no debts. the thing that trips you could be medical costs. What happens to those benefits when you retire?
                          How much do you suggest OP needs?

                          Will 1.25 M be enough? Probably. For a 30 year retirement (retire at 65, live until 95) I would stake my reputation that $1.25 M is enough and would last 30 years if invested with a 60-40 or 50-50 stock/bond mix from day 1 of retirement. This would maintain current standard of living.

                          Can OP live on less than 4% of $1.25M? (50k per year 1st year, indexed up 3% each year for inflation) Maybe- depends on retirement expenses.

                          Can you suggest a better plan? I wouldn't be giving someone advice that information presented was incorrect without giving new information to support your position.

                          I see the foundation of your point-
                          There is a mortgage in current 62k income/~50k of expenses which I am including in what the $1.25 M covers. That expense goes away in 10 years probably... it might be replaced with new expenses, or it might reduce expenses. When formulating the plan, it's best to base it on current expenses and be pleasently surprised when expenses go away and retirement comes sooner.

                          $1.25 M covers 50k of expenses (1,250,000*4%=50k). If OP at age 59 has 900k invested (planning for an age 65 retirement in 6 years), paid off the mortgage and dropped expenses from 50k per year to 38k per year (assuming 1k/month was being spent on 1st and 2nd mortgage payments), then the new footprint for retirement is 38k, 4% withdraw is 38k/.04=$950k... meaning she needs 50k more set aside and she could retire 6 years earlier, invest more conservatively and work 1-6 more years, or add some other component to her retirement plan (travel, charity work or other).

                          If she shoots for the 38k of expenses now (even though she currently needs 50k+ to live on for forseeable future), she might fall short of the goals, and she cannot get the time back or income back or savings back to correct the situation.

                          The 38k plan will be tough if inflation in next 21 years is high. The 50k of expenses plan has some inflation cushion built into the planning numbers I presented (there is much more detail in the 4% withdraw rate than is being presented here by me).

                          For example- my retirement plan includes covering around 75% of my current expenses. My retirement expense projection is 60k, yet if you look at my budget and substract my mortgage out ($2700/month) you would see 50k of expenses. I need to buffer some (20% in my case) for inflation.

                          I am presenting information using age based withdraw rates:
                          33X (3.3% withdraw rate) for anything under age 60 (40 year retirement means withdraw less initially)
                          25X (4% withdraw rate) for between age 60-70 (30 year retirement is covered by trinity study and is basis for most planning)
                          20X (5% withdraw rate) for anything over 70 (20 year retirement can withdraw more money initially- I won't live 20 years past age 70 I don't think).

                          Once my retirement savings is 33X my expenses, you can bet I will retire (because inflation is built into the withdraw rate based on trinity study). Trinity study suggests 85-95% of past 30 year periods with a 60-40 portfolio did not have a person outlive their savings.

                          Planning is three fold
                          1) know current expenses and project this out to retirement age and amount
                          2) know how much risk I can take investing to reach the amount I think I need
                          3) know what withdraw rates last how long for retirement

                          when 1) and 3) match in a given year (expense multiplier matches withdraw rate for age) and the risk profile is correct (#2), retire. The key to #1 is current expenses- current expenses change over a person's life (kids increase expenses, paying off house decreases expenses, health may increase expenses later in life).
                          Last edited by jIM_Ohio; 12-18-2008, 02:54 PM.

                          Comment


                            #14
                            Originally posted by snafu View Post
                            I suggest you look in your cupboards and pantry to see what products you buy even in recessionary times. Those companies P&G, Johnson, Costco, even the hated W/Mart might help ease your risk tolerance if you look at their hi and current value. In order to make-up for lost years of retirement investing...you will have to learn more to increase your risk tolerance.

                            I'm not convinced you will need 1.25M if your home is mortgage free and you carry no debts. the thing that trips you could be medical costs. What happens to those benefits when you retire?
                            I'll use Medicare, and I'll have to purchase supplemental insurance when I retire. I think my aversion to risk is a hard one to overcome. Thanks for addressing this. I had a nasty divorce and pretty much walked away with nothing except my sanity. I have had to work extremely hard these past few years to own a home of my own, a car, and have some savings. I'm still really a novice when it comes to investing but I am taking responsibility for educating myself. This seems like a good place to learn some things.

                            It scares me to be so far behind for retirement, but it also scares me to see, and read so many stories about people who have invested and are now losing hundreds of thousands of dollars. I know I have to invest, I'm just trying to sort out how, when, and what to invest in.

                            Comment


                              #15
                              I would take my EF to 6 months expenses.
                              Set up a misc. fund for cars etc. Maybe 200 to 250 in a high yield account.
                              Invest the rest in stock mutual funds with an 80/20 or higher equity allocation.

                              Comment

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