Stockpile cash now to increase retirement savings later?

[JuniorTT]

Hi all. Hoping you can weigh in on an idea I have.

First some background...

I'm 29 and DW is 30. I was pretty good at saving right out of college, but got addicted to it about 5 years ago so I think we are doing really well, especially for our age.

We max out 401k(s), IRAs, and HSA every year. No credit card debt, no car loans. The only debts are $12k in student loans at 1.625% and $180k left on our mortgage at 5.375% (15 yr fixed).

We've got a 12 month emergency fund plus another $50k in savings. We are both lucky to be in good contracts right now so we are bringing in an extra $10k/mo combined net. That should last until ~June and then we'll be back down to our usual $2500/mo surplus.

The plan, however, is for DW to be home with kiddies starting in a year or so. At that point, if we want to keep our savings maxed out we'll be on a negative budget. So I'm thinking we keep stockpiling cash now and draw down on it later until we're forced to cut back our retirement savings.

Given our propensity to be super savers, what do you think about a cash out refinance sometime down the road to re-build the cash stockpile, allowing us to keep maxing out 401k/IRAs/HSA longer? If I had it to do over again, I wouldn't have put all that extra principal toward the house.

Someday DW will go back to work, but that might not be for another 10 yrs+. So unless I get some big raises in the next couple years we'll eventually have to reduce our retirement savings

Thoughts?

[KTP]

how are taxes not eating you alive???

[JuniorTT]

how are taxes not eating you alive???

Our contracts have big per diems and mileage reimbursements (both are non-taxable). Maxed out 401k, traditional IRAs, and HSA don't hurt either.

[jIM_Ohio]

I think you are chasing money and thinking about the problem bass ackwards.

Let me restate what I think you want to do (maybe I misunderstood)

You spend $X per month now and save $Y per month now
you will spend $X per month when current contracts ends, and then save $Z when the contracts end (Z<Y)
When wife stops working, you will spend $X and you want to still save $Y per month, even though $X is now less than you earn?

Rethink how you think about money is my suggestion
Step 1 is to make sure you spend less than you earn, whether on one income or two.
If you are going from 2 incomes to 1 income, can you sustain your current spending on just the one income? Focus on saving a percentage of the income, and not saving a fixed amount per month.

Step 2 is to prioritize the money available for spending.

My advice:
1) use 401k to put yourself into 15% tax bracket (if possible)
2) use Roth IRA to get 15% of income into retirement accounts

1)+2) should be 15% or more of gross income
3) use HSA for health care savings, max out early on, once kids are "mature" (think ages 7 or 8) to where doctors visits are less frequent, ramp this down if you need more money for other parts of budget.
4) max 401k or use taxable accounts (depends on retirement plans)
5) pay down mortgage
6) fund child's college education

If you follow thru in that order, retirement will not be affected.

I have a feeling if you have 401ks maxed and HSAs maxed now, you will be able to handle the priorities above (401ks might not be maxed, but as a percentage of income, my guess is you will still be saving close to what you are now as a percentage).

[KTP]

Our contracts have big per diems and mileage reimbursements (both are non-taxable). Maxed out 401k, traditional IRAs, and HSA don't hurt either.

oh ok. I was guessing you didn't qualify for a tax deductable IRA because of income level (10,000 net each month is more than we have available after taxes and thrifty living and we don't qualify for a stick of gum from the government). I had to do the sneaky thing with rollover just to get a friggen roth ira for the wife.

[JuniorTT]

I think you are chasing money and thinking about the problem bass ackwards.

Let me restate what I think you want to do (maybe I misunderstood)

You spend $X per month now and save $Y per month now
you will spend $X per month when current contracts ends, and then save $Z when the contracts end (Z<Y)
When wife stops working, you will spend $X and you want to still save $Y per month, even though $X is now less than you earn?

$X would then be more than I earn, but I think that's what you meant. By "saving", I'm talking about tax-deferred retirement investing.

Rethink how you think about money is my suggestion
Step 1 is to make sure you spend less than you earn, whether on one income or two.
If you are going from 2 incomes to 1 income, can you sustain your current spending on just the one income??

No, I couldn't. Eventually my stockpile of cash would run out if I don't get a raise or reduce expenses.

So what I'm trying to do is take all extra cash now and build up taxable accounts (savings account) so that later I can have a negative budget while I still maximize contributions to tax-deferred accounts. (kind of like moving my current taxable assets into tax-deferred ones later). Once the taxable stockpile gets down low I replenish it with a cash-out refi or reduce tax-deferred contributions from max allowable to something that will bring the budget neutral.

My advice:
1) use 401k to put yourself into 15% tax bracket (if possible)
2) use Roth IRA to get 15% of income into retirement accounts

1)+2) should be 15% or more of gross income
3) use HSA for health care savings, max out early on, once kids are "mature" (think ages 7 or 8) to where doctors visits are less frequent, ramp this down if you need more money for other parts of budget.
4) max 401k or use taxable accounts (depends on retirement plans)
5) pay down mortgage
6) fund child's college education

#1: Would be possible (I'm at ~$63k base, $75 w/ bonuses right now)
#2: Raises a separate thought I've had about using the cash stockpile to pay taxes on a Roth conversion(s) when DW is at home with kids and we're in the 15% bracket.
#5&6: My in-laws got zero need-based grants for their kids in college because, in-part, they had paid down their mortgage early. My parents got a bunch of grants, in-part, because they didn't. At some point, I'll need to seriously evaluate doing 529s before putting any extra money toward a mortgage.

Thanks for the comments. Good stuff!

[jIM_Ohio]

$X would then be more than I earn, but I think that's what you meant. By "saving", I'm talking about tax-deferred retirement investing.



No, I couldn't. Eventually my stockpile of cash would run out if I don't get a raise or reduce expenses.

So what I'm trying to do is take all extra cash now and build up taxable accounts (savings account) so that later I can have a negative budget while I still maximize contributions to tax-deferred accounts. (kind of like moving my current taxable assets into tax-deferred ones later). Once the taxable stockpile gets down low I replenish it with a cash-out refi or reduce tax-deferred contributions from max allowable to something that will bring the budget neutral.



#1: Would be possible (I'm at ~$63k base, $75 w/ bonuses right now)
#2: Raises a separate thought I've had about using the cash stockpile to pay taxes on a Roth conversion(s) when DW is at home with kids and we're in the 15% bracket.
#5&6: My in-laws got zero need-based grants for their kids in college because, in-part, they had paid down their mortgage early. My parents got a bunch of grants, in-part, because they didn't. At some point, I'll need to seriously evaluate doing 529s before putting any extra money toward a mortgage.

Thanks for the comments. Good stuff!

Here's my take...

Most financial issues like this have 3 distinct portions... and the answers to 1 are not Dependant on the other 3...

Meaning look at each of these separately first:
1) income (list income- gross and net, monthly and yearly)
2) expenses (list monthly and yearly, do not consider investments/retirement accounts expenses
3) savings and debt reduction (make this a percentage of gross pay, 15-20% suggested)
then from there decide which accounts get priority.

Meaning 401k to match
then Roth
then HSA
then 401 to max
then 529
mortgage payoff etc...


I realize you are currently maxing out 401ks (31k per year), Roths (10k per year) and possibly HSAs or other (5k per year).

If you are trying to solve 2011 investing issues (like Roth deposits), setting aside 10k now for those purposes makes sense.
If you are trying to set aside 31k in 2010 to max 401ks in 2011, you might be able to convince me this makes sense depending on your tax status... with an income of 75k married filing jointly, it does not make sense "on the surface" because you are deep in the 15% tax bracket and maxing Roths would be the priority IMO.

Because your budget does not balance once wife stops working, I would focus on the expenses, and see if you can get budget to balance, then focus on saving a percentage of your lower income on that new budget, which balances.

My best friend told me some good advice when I got married- be able to live on one income- and if you can find a way to live on one income, you will save even more if spouse returns to work.

[feh]

If I were in your shoes, I'd be investing now. It would need to be in a taxable account, but I wouldn't be stockpiling cash.

[MonkeyMama]

Some personal insights having been somewhat in your shoes. I wouldn't over-think the long-term.

So you are assuming that *your* net take-home will remain the same, you won't get any raises, your wife will stay home for 10 years, etc., etc.

None of which may be true. My spouse quit working 7 years ago to be home with our kids, and our financial picture is NOTHING like we envisioned. I would say most of the last 7 years have not played out anything like we planned. (Mostly in a good way - though some tougher financial obstacles than I expected, too. IT's really gone both ways).

Um, the most useful thing I can tell you is that going down to one income is extremeley favorable, tax-wise. In the end, you should be able to squeeze more cash out of your paycheck (less to taxes). You probably have more to work with than you are accounting for.

If you regret putting more down on your home, is it terrible to refi? Probably not. BUT, then again, might not make a lot of sense. We could have done the same the last few years, and it could have turned out pretty ugly. In the end, it kind of works out. 2009 was our most prosperous post-child year, financially, and the best time to invest in the last few years, anyway. Living on one income, I much prefer a smaller mortgage payment, rather than wishing I put less down on my house. Just some other points of view.

If you are super saver, you will work it out on one income. Might not happen overnight, but you'll get there.

[swanson719]

Before you worry about 529's, I would worry about ESA's. Education Savings Accounts with any brokerage allow for $2,000 a year for each kid from birth to high school graduation. It's invested the same as a Roth, and can only be used for college or higher ed. And by not investing your money now, you're giving up compound interest, which more than balances out the taxes. I would worry more about getting in the market now than I would about tax deferral.

[daviddane]

Saving play a important role in the life of every individual and it makes a sense to life to lead a relaxed life. I think your post will put a thought in everyone's mind.