Advice for What to Do

[gerette22]

I’m new to the forum and have found so much valuable information here! I hope I am putting this in the right spot....I could use some advice, so am posting my first post!

My husband (47 y/o) and I (46 y/o) have a little money in our accounts and would like to try to make it work for us. We aren’t to financial savvy, so aren’t sure what direction to take. This is what we currently have:
$10,640 in a 13 month CD @ 1.05% (matures September 2011)
$10,500 in a savings accounting @ .05%
$500 extra in our checking account @ .05%
$1,000 in a savings account for our 10 year old son’s college fund @ .05% (Our goal is simply to cover two years at a community college…….this is the same arrangement we had with our older two boys)
$80,000 in husbands 401k - currently contributes 8% (50% company match up to 6%)
$118,000 in my 401k – currently contribute 10% (50% company match up to 6%)
In April, we will have an additional $1,000 available for savings per month.

$41,000 owed on our mortgage @ 4.875%
$8,000 owed on recreational property @ 7.24% (are listing this for sale in April due to non use)
$19,775 owed on 2010 Caravan @ 0%
$ -0- credit card debt

This is what we are considering doing:
-Opening 2 Roth IRA’s with $10,000 of the savings account (Considering Vanguard Target)
-Opening an internet savings account @ 1.20% for our son’s college savings (we do not want a 529 plan or any other plan where the person MUST go to college – just in case that ends up not being his plan!) We anticipate putting $150 per month into this account.
-With the $1,000 of extra savings……….save$800 monthly for emergency fund, pay $200 monthly extra on recreational property.
-Reducing my 401k contribution to 6%. Leaving husbands @ 8% since his company seems to mess up paperwork!

What we haven’t figured out yet:
-What to do with the CD when it matures in September. It’s been rolling over for 4+ years now, and receiving a smaller interest rate each time.

Any advice and/or suggestions on the above would be GREATLY appreciated. Thank you so much for taking the time to read my post!

[bjl584]

I would probably keep the CD money as cash and use that as an EF. Then take the extra $1000 a month and invest it in a taxable brokerage account.

I like the idea of opening up the Roths with the other money.

[jpg7n16]

Is there any particular reason why you are using so many cash equivalent investments for your goals? (CDs, savings accounts, internet savings accounts)

Is this from a low risk tolerance perspective, or a 'we just don't know any better options' perspective?

A primary concern I have for you is that given that your son has 8 years until college (if he so chooses), inflation and taxes could eat away all the earnings from a cash savings account earning 1%. 8 years is a good enough timeframe to take some risk (stock and bond combination). Maybe open a brokerage account (in your name, but intended for your son) with 50% stock mutual funds and 50% bond funds? Without knowing anything about you, your choices so far seem pretty risk averse, and a 50/50 split would be more conservative than what I'd personally do. This account would be in addition to your IRA accounts.

I also like the Roth idea.

[gerette22]

Thank you both for your responses!!

Our cash accounts are not because of low risk........it's honestly because we just don't know what to do with the funds. The money has sat in those accounts for a few years now, and after reading through some different forums about money recently, we finally realized we need to do something productive with it!

Thank you both for the brokerage account idea! That was not something I had considered, because I don't know much about them, but will start researching them.

Sounds like the Roth is a definate then! :-)

Thanks again for your input!!

[bjl584]

Thank you both for your responses!!

Our cash accounts are not because of low risk........it's honestly because we just don't know what to do with the funds. The money has sat in those accounts for a few years now, and after reading through some different forums about money recently, we finally realized we need to do something productive with it!

Thank you both for the brokerage account idea! That was not something I had considered, because I don't know much about them, but will start researching them.

Sounds like the Roth is a definate then! :-)

Thanks again for your input!!

You can set up an account with some brokerage firm when you go to set up your Roths. Fidelity, Vanguard, etc. My account has two parts. One is my Roth IRA, and the other is my taxable account.

Have you considered a 529 savings plan for your son?

[littleroc02us]

What I would say is that you already have the EF ready to go, how much of an EF do you want? 3-6 months is average. You have over 20k in cd's and savings, use that to fund it and use the rest to tackle your debts using the Debt Snowball method. The one thing I did notice is that for your age, you seriously need to work on your retirement. I use a formula to tell where I should be in retirement by a certain age. You take your age and X's it by your yearly gross income and divide it by 10. That figure is how much you should have for retirement currently. It's a pretty aggresive formula but it gives you a goal to achieve. Get rid of the debt before you start the Roth's....

[jpg7n16]

Have you considered a 529 savings plan for your son?

we do not want a 529 plan or any other plan where the person MUST go to college – just in case that ends up not being his plan!

Technically they could not go to college if you saved in a 529 plan, but you'd get taxed plus a penalty on earnings. (if you put in $10k and it grew to $15k, you'd only be penalized on the $5k of earnings) You don't lose your money though.

Thank you both for your responses!!

Our cash accounts are not because of low risk........it's honestly because we just don't know what to do with the funds. The money has sat in those accounts for a few years now, and after reading through some different forums about money recently, we finally realized we need to do something productive with it!

Thank you both for the brokerage account idea! That was not something I had considered, because I don't know much about them, but will start researching them.

Sounds like the Roth is a definate then! :-)

Thanks again for your input!!

Well I think that Brian's idea for setting up the brokerage after funding your IRAs can help you achieve a few of those goals at once (namely save for college and to do something more productive with your assets)

Though you should be aware you're taking on some risk to invest that way. No investment returns are guaranteed, and you may even end up losing money. But the potential returns are much greater than 1% in cash. And in my view, it's worth the risk to try for them - especially when you have the timeframe for it. Anything over 5 years can handle the risk. Your son has 8 till college, you have several 15+ till retirement.

And I would typically have you pay off the recreational property cause of the interest rate, but you're selling it anyways, and your time is running out for your 2010 Roth contribution, so I'd go with that now. Get the $10k in for 2010, and you have the rest of the year to do another $10k for 2011. If you waited until the vehicle sold, you'd likely miss out on that 2010 contribution and could never get it back.


And I disagree with littleroc on 2 accounts: 1) You guys actually are now saving a decent amount for retirement at 10% + employer match + maxed Roth IRAs now, and 2) he'll tell you to pay off the 0% car loan as part of a debt snowball before investing, which I'm completely against. Once you have the 0% loan, you may as well keep it around and invest the money in the meantime. It's free money.

Strive to put away 20% of your income towards retirement and you'll be fine. No sense beating yourself up over a number you were supposed to have by now. You can't change that, but you can change how much you save going forward - and you guys are already on the right track there


Do you mind if we ask what your 401ks are invested in? Hopefully some sort of predominantly stock investments. You should be around 80% stocks and 20% bonds.

[littleroc02us]

And I disagree with littleroc on 2 accounts: 1) You guys actually are now saving a decent amount for retirement at 10% + employer match + maxed Roth IRAs now

I disagree, because I don't think $198,000 IRA's is enough at 46 and 47 years old. I consider it UAW (underachiever of wealth/"The Millinaire Next Door") Plus you have to subtract all the debt that have currently....

[jpg7n16]

I disagree, because I don't think $198,000 IRA's is enough at 46 and 47 years old. I consider it UAW (underachiever of wealth/"The Millinaire Next Door") Plus you have to subtract all the debt that have currently....

See the following paragraph for a fuller explanation of what I meant.

And I disagree with littleroc on 2 accounts: 1) You guys actually are now saving a decent amount for retirement at 10% + employer match + maxed Roth IRAs now...

Strive to put away 20% of your income towards retirement and you'll be fine. No sense beating yourself up over a number you were supposed to have by now. You can't change that, but you can change how much you save going forward - and you guys are already on the right track there

[littleroc02us]

See the following paragraph for a fuller explanation of what I meant.

Sounds good to me, It's just something I like to use a a goal for retirement. If I do my own calculation I'm not there either, but it makes me work harder to try and catch up.

[gerette22]

So much to think about!!

Thank you all so much for your input. Your ideas have gotten me thinking about other avenues (ex: Brokerage account) and also rethinking the 529.

We have decided against paying extra on the recreational property, and put those extra funds towards our retirement savings instead. I will work our budget to incorporate shooting for a 20% of income goal.

To answer the question regarding our emergency fund........I thought what we had was adequate, but then I read (Suze Orman) that 8 months is the goal - so, I thought I should put some focus on growing that. We will definitely use the CD as our emergency fund, and add to it when extra funds are available! Will make the retirement savings more of a priority though if 3-6 months is more common a goal for the EF.

Thank you again so much!!

[gerette22]

Sorry, I forgot to post where my 401k is invested!! Not sure where husband's is invested - I was able to copy and paste mine from the internet.

*Fixed Income
Principal Global Investors 0.12%
Bond and Mortgage Sep Acct
Principal Real Estate Inv 2.12%
U.S. Property Sep Acct
*Balanced/Asset Allocation
Vanguard Group 8.86%
Vanguard Asset Allocation Fund
*Large U.S. Equity
Edge Asset Management, Inc. 6.30%
Equity Income Separate Account
Janus 15.32%
Janus Aspen Forty Institutional Fund
Principal Global Investors 7.04%
LargeCap S&P 500 Index Separate Account
Wells Fargo Fund Management 23.80%
Wells Fargo Advantage Growth Inv Fund
*Small/Mid U.S. Equity
Fidelity Management & Research 10.47%
Fidelity Advisor Mid Cap I Fund
T. Rowe Price Associates, Inc. 4.96%
T. Rowe Price Small-Cap Stock Fund
*International Equity
Principal Global Investors 3.22%
Diversified International Separate Account
Principal Global Investors/DFA 17.79%
International SmallCap Separate Account
Total 100.00%

[jerrycates]

Best thing to do to avoid financial ruin is to spend wisely, be spend-thrifty, live within ones means, and totally know what your basic needs are. Nothing much, nothing more. It may sound harsh and difficult, but it can be done. Single people are best to do this so easily!

[gerette22]

Spending is not our problem, it's where to save our money that was the issue! But we are all set now. Thanks.

[jpg7n16]

well did some thinking about this one. Let's say you want to save up for his college and you're comparing the two options: saving in a regular brokerage account vs saving in a 529 plan where you're not locked into 1 school, and have full control over investment options. That way, you can invest the same way regardless.

If you invest say $10k in the brokerage and it grows to maybe 14 or 15k, you'll be taxed on the 4-5k gains, but will never have a penalty.

If you invest in the 529 plan, same contributions, same investments = same growth. Then if junior goes to college, you get 4-5k gains tax free. If he doesn't, you pay taxes + 10% on 4-5k. Since you would have paid taxes anyways, the penalty is the only consideration of a $400-500 fee.

But some states allow you to deduct 529 contributions on your state tax return (not federal). So if you are in one of those states, you may be elligible to save more than 400-500 on state taxes by contributing the $10k. (8% state tax * $10k contributions = $800 state tax savings)

I'm in Texas with no state tax. So it wouldn't work for me - but then I also never have to pay state income tax I'm okay with that!


My point is, depending on how your state treats 529 contributions, it may be in your best interest to use the 529, even if he winds up not going to go to college. You should prob check with a CPA in your area to see if there are any backlashes to deducting contributions, if you wind up pulling out the money for a non-college purpose. But as far as I know, there are none.

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Your 401k seems more on the aggressive side. I'm thinking you need about 80% in stocks and 20% in bonds to be a moderate investor. You have virtually 95% in stocks and 5% in bonds (through the fixed income and balanced funds). Is that something you're okay with?

I personally can handle the risk, so I'd have no problems with my 401k being set up like yours is. But if you don't have as high of risk tolerance as I do - this may cause you to lose some sleep at night.

Just something to think about