Savings review

[Newdad2012]

Hello everyone. I am new to this site and this is my first post. I would like a review of how my wife and I are currently allocating our excess income between retirement savings, debt reduction, emergency funding, college savings, etc.

My wife is 32 and I am 31 years old. We both have stable good paying jobs (combined gross monthly income of 15k) and we have both been saving for retirement since we entered the work force after college.

Here is an overview of our financial position:

Retirement:
Rollover IRA - 67k
Roth IRA - 8k
401k (current employer) - 11.5k
Spouse 401k (former employer) - 40k
Spouse 401k (current employer) - 69k

We both currently contribute 12% to our 401k. In addition, she gets a 3% employer match and I get a 3% match plus an additional 6% employer contribution regardless of whether or not you contribute. All in, the contributions/match is about 33k per year at our current salaries.

Savings/taxable mutual funds:
Savings - 18.5k
Mutual funds - 7.6k

15k of this is our emergency fund. 3k is reserved for a 529 plan (we had our first child last week). The remaining is allocated to sinking funds for medical bills, home repair/improvements, rental property repairs and special assessments, and car repairs.

Debt:
Primary residence mortgage - 324k - 20 yr fixed @ 3.75%. We just refinanced this week and our first payment is due 9/1.
Rental property mortgage - 118k - 5/1 ARM interest only. This is in its 8th year and the rate is 3.5%. Monthly rent is 1150 and regular monthly expenses (int, condo fees, taxes, insurance) are 1010 excluding repairs and assessments. We currently pay 150/month principal and the loan will start amortizing in year 11.

Other:
Life insurance - we both have 500k term life policies (including AD&D) and our employers both provide 2 years salary in the event of death.

We have no primary mtg payment due on 8/1 so about 2.5k additional will go in savings. My wife is on full paid short term leave for the next 8 week (no day care exp yet) and I expect we will save another 4k during that time.

Once day care starts I have budgeted that our excess take home pay per month will be 1900. I am currently planning to put 1050 of that per month into our sinking funds savings, 300 to the 529, 250 per month as a vacation fund, 150 towards the rental mortgage, and 150 into the taxable mutual funds.

A few questions...

1. Do you think our current retirement savings/contributions are sufficient? I would like to retire by 60. Dave Ramsey suggests 15% excluding employer match, but since our matching contributions are really good, I haven't put more in.

2. Should we put some money back into Roth IRAs? I had previously contributed but our income was too high in 2010 due to a large severance I received so I stopped contributing. Looking back at 2011 we were just under the income limitations and I believe that will be the case this year too.

3. Should we pay more towards the mortgages? Before the refinance, I was paying an additional 325 per month. The refinance reduced our minimum payment about 45/month but reduced the term from 30 to 20 years. I am tentative to put too much money into the rental condo as the value continues to decrease. I would estimate our equity in the condo is currently about 40k.

4. Am I going overboard with the sinking funds and would this money be better seved going somewhere else? I like having cash in the bank to cover big ticket expenses. I am also expecting about 6k in special assessments for the condo over the next 5 years and the hvac unit is well past its shelf life.

Any feedback would be greatly appreciated.

[mrpaseo]

1. Do you think our current retirement savings/contributions are sufficient? I would like to retire by 60. Dave Ramsey suggests 15% excluding employer match, but since our matching contributions are really good, I haven't put more in.

I believe Dave's philosophy is:

1. Contribute up to the match on the 401k.
2. Cully fund your ROTH IRAs
3. Contribute the remaining amount to 401k.

This should total your 15% pre-tax income. So, in your case your wife would put 3% towards her 401k (Which is what her company matches), then she would contribute up to $5,000 into her ROTH IRAs. Let's say that is 8% of the income. Then she would contribute an additional 4% to the 401k to total 15% towards retirement. You would do the same with yours.

Of course, if you can afford to do more towards the 401k that's good after you fully fund the ROTH IRAs.

Otherwise it looks like you are doing pretty good, I'll let the smart people chime in on the other questions.

Ray

[kv968]

Rental property mortgage - 118k - 5/1 ARM interest only. This is in its 8th year and the rate is 3.5%. Monthly rent is 1150 and regular monthly expenses (int, condo fees, taxes, insurance) are 1010 excluding repairs and assessments. We currently pay 150/month principal and the loan will start amortizing in year 11.

1. Do you think our current retirement savings/contributions are sufficient? I would like to retire by 60. Dave Ramsey suggests 15% excluding employer match, but since our matching contributions are really good, I haven't put more in.

2. Should we put some money back into Roth IRAs? I had previously contributed but our income was too high in 2010 due to a large severance I received so I stopped contributing. Looking back at 2011 we were just under the income limitations and I believe that will be the case this year too.

Welcome Newdad.

Although I didn't dig into all your numbers, a few things did pop out at me.

First, I'd suggest you do fully fund both of your Roth's. If you reach the income limit where you can't directly contribute, you could always start a non-deductible IRA and just roll the money over into a Roth from there.

The other thing that stuck out to me was that interest-only ARM loan. Have you factored into your budget what the monthly payment will be once it starts to amortize in the 11th year? I imagine it's going to WAY higher than what you're paying now and it seems as if you're just barely breaking even with the rent as it is. I know you're putting an extra $150 towards it but have you factored the higher payment that's coming into everything also?

[feh]

I'd be interested in seeing your full budget before offering specific advice. Given your salaries, I'd think you could be saving more than you are.

[Slug]

I'd be interested in seeing your full budget before offering specific advice. Given your salaries, I'd think you could be saving more than you are.

Yeah this. Perhaps you've been in school for many years though and are just starting to earn real $. Please lay out your monthly budget (with daycare).

You must fully fund those Roths as long as you are eligible. No one can predict tax rates in 30 years so having some money that the government can never tax is an excellent hedge against rising tax rate risk.

I would increase the emergency fund, but the size is really a personal decision. Regardless of the size, it's for high cost unexpected expenditures so it should be liquid. You could do some CD laddering with an ALLY bank 5 Yr CD with some of it since the penalties on early withdrawal are so low (2 months interest). However, this is as far as I would ever go in tying up an emergency fund.

[Newdad2012]

Thanks to everyone for the feedback. I will post the budget tomorrow. I agree that we should fund roth iras while we still can. We will not know what taxes will be in 30, but there is a good chance they will go up considering that our government can't seen to follow a budget.

For the condo, I am thinking I will probably try to sell it before the loan starts amortizing. It's not a good investment at this point.

[jIM_Ohio]

I believe Dave's philosophy is:

1. Contribute up to the match on the 401k.
2. Cully fund your ROTH IRAs
3. Contribute the remaining amount to 401k.

This should total your 15% pre-tax income. So, in your case your wife would put 3% towards her 401k (Which is what her company matches), then she would contribute up to $5,000 into her ROTH IRAs. Let's say that is 8% of the income. Then she would contribute an additional 4% to the 401k to total 15% towards retirement. You would do the same with yours.

Of course, if you can afford to do more towards the 401k that's good after you fully fund the ROTH IRAs.

Otherwise it looks like you are doing pretty good, I'll let the smart people chime in on the other questions.

Ray

Focus on the person needing the advice (the original poster), not the person giving the advice (Dave Ramsey). I disagree with the blue part above.

The person which needs the advice admitted a gross income of 15k per month, which is 180k of gross income. This means they are probably not eligible for Roth IRA without some other tax related assistance.

I would strongly advise the OP ask the same question to their CPA and see if the advice is the same as the board.

[Newdad2012]

My budget will be posted following this post, but first I wanted to talk further about the Roth IRA and potential income limitations in 2012. I do not believe there will be income limitations this year, here is an estimate of our MAGI for 2012.

Gross wages (including bonuses) = 189,255
Capital gains, divis, int income, etc = 600

Less:

401k contributions (assuming 12% for all of 2012) = 22,495
Medical (health and dental contributions) = 4,886
Med FSA = 300
Transit FSA = 996 (i take mass transit to work)
Dependent care FSA = 2080 (max contributions will start my next paycheck)

MAGI = 159,099

I have excluded the rental income from this calc since we have net taxable losses (after depreciation) but have income limitations from taking deductions.

Even if we pull some of our contributions away form the 401k to fund Roth IRAs, we should still be under the imcome limitations.

Can someone verify my calc above?

[Newdad2012]

Okay, so here is our current budget (still assuming 12% 401k contributions)...

Net pay: For this, see the various deductions from gross pay from my previous post. We live in a city and are subject to city wage taxes on top of state and federal taxes. Also, I have about 40/paycheck deducted for our gym memberships. We are paid bi-weekly and have based the monthly takehome pay for this budget on receiving two paychecks each per month. There are two months each year where we each receive 3 paychecks.

We each claim 1 on our W-4 plus an additional $25/check withheld. We owed close to $1k for our 2011 fed return. I haven't decided if we will modify this with the addition of the baby since we owed taxes last year and since our mortgage interest will be reduced due to the refinance.

Me - 4,308.18 (this does not include the decution for dependent FSA that will occur)
Wife - 4,032.24
Rental income - 1,150
Total - 9,490.42

Expenses:
Primariy Mortgage - 2,083.96 (assumes no additional principal)
Electric - 175
Water - 36
Gas - 15
House Cleaner - 160
Cell Phones - 140.84
Cable - 104.74
Home phone/internet - 50 (we have a landline for our home security system)
Home Security - 35
Netflix - 17

Life Insurance - 60
Car Insurance - 93.83/month (pay every 6 months)
Jewelery Insurance - 17/month (paid annually)

Day Care - 1,050
Condo Mortgage (investment property) - 712 (assumes $150 pricipal payment)
Condo Fees - 437
Condo Insurance - 13/month (paid annually)

Dog - 225 (includes food, dog walker, and overnight boarding as needed)

Groceries - 600 (includes baby supplies, wife is havings success breast feeding so this may drop)
Restaurants/order-in - 350 (again, may decrease now that baby is here)
Entertainment - 250
Baby sitter - 100
Starbucks/work lunches - 80
Taxi/Bus/Subway/Parking - 70
Liquor Store - 25

Clothing - 100
Dry Cleaning - 75

Manicure/Pedi (wife) - 100
Haircuts (wife) - 76/month (cut and color every two months)
Cosmetics (wife) - 50

Running (race entries, shoes, etc) - 75

Car (gas, oil change) - 100
Books - 25
Misc - 239.05

Savings/Sinking Funds:
529 Plan - 300
Taxable mutual funds - 150 (may reallocate)
Vacation fund - 250
Emergency fund - 50
Major car repairs - 50
Condo Special Assessment - 150
Condo Repairs - 150
Gifts - 100
Medical - 150
Home Furnishings - 50
Home Repairs - 150
Baby items - 100
Vet - 50
Clothing Fund (suits/formal dresses) - 50

[LivingAlmostLarge]

Looks good to me. The only thing is the condo. So you are getting $1150/month pretax rental income, how is that taxed?

Then you pay out $712 + 437 + 13 = $1162/month but $150 towards principal for an interest only loan. When will this mortgage be paid off? Do savings in case you lose your renters? What is the $150/month condo special assessment? How much is the full bill?

I think you have enough slack in the budget to carry the condo without worrying but I think there could be issues in the future.

If you wanted to you could up your 401k contributions to the maximum $17k/year per person and this would definitely put you under the threshold to contribute to a Roth IRA. It would also probably mean a much tighter budget though because you'd need an extra $1k to 401k savings/month and $1k for Roth IRA.

I think this would guarantee your ability to retire at 60. Right now at 31 and 32 you have $187k saved for retirement or 1x income. Do you project having 25x your income or $4.75M in savings by age 60? I'd work backwards from there and see if you need to save more.

[Slug]

Nice attention to detail. I also agree that the condo is the low hanging fruit.

Also agree that you should be looking to be at around $5M for retirement savings. That's about what I'm shooting for too. I'm only about 4.75M off right now

[Newdad2012]

There is a net loss for tax purposes on the condo rental once depreciation and miscellaneous repairs are considered. I however cannot deduct the losses for my federal return since we make too much money from our wages. Our city considers investment properties a business so I am charged a business privelage tax on the gross income receipts. This is a very small pecentage and is only about $20/year.

The condo mortgage will be forced to amortize over 20 years starting in 2015. We have not had vacancies during the last 4 years of renting although we have had 3 different tenants. I do not save additional in anticipation of loss rental income, I figure that would come from the emergency fund. I had a special assesment of about $2k and the end of 2011 that I paid in full at the begining of the year (5% discount if paid that way instead of monthly). I believe there will be 3 similar assessments to occur over the next 5 years so I am allocating 150/month in a sinking fund in anticipation of this. Our current tenants lease ends may of next year. I am thinking we will put it up for sale near the end of this lease term. The equity we could pull out of the property now I believe would be better served in another form of investment, possibly a REIT fund if we still want the real estate allocation.

I have run some calculations of what our retirment savings could be worth when we are sixty and i think we have a decent shot of being at 4.75M given our current contributions, asset base, etc. assuming we can get close to historical returns in the market. Additional savings couldn't hurt however.

[jIM_Ohio]

My budget will be posted following this post, but first I wanted to talk further about the Roth IRA and potential income limitations in 2012. I do not believe there will be income limitations this year, here is an estimate of our MAGI for 2012.

Gross wages (including bonuses) = 189,255
Capital gains, divis, int income, etc = 600

Less:

401k contributions (assuming 12% for all of 2012) = 22,495
Medical (health and dental contributions) = 4,886
Med FSA = 300
Transit FSA = 996 (i take mass transit to work)
Dependent care FSA = 2080 (max contributions will start my next paycheck)

MAGI = 159,099

I have excluded the rental income from this calc since we have net taxable losses (after depreciation) but have income limitations from taking deductions.

Even if we pull some of our contributions away form the 401k to fund Roth IRAs, we should still be under the imcome limitations.

Can someone verify my calc above?

I would argue it is better to put $12k more in the 401k and save 28% than to pay 28% now and not pay 15% or 25% tax later. Even if the 15% bracket increases rate higher, you have 13% wiggle room before you even break even.

$12k more in 401k or $9380 in Roth... I would argue 401k and take the tax break now.
Any year where you have low income, consider converting a portion to Roth when in the 15% bracket

In 15% bracket Roth is a winner
In 28% bracket, I would side with 401k is winner with a tax deduction.

[LivingAlmostLarge]

Sometimes you need to contribute the maximum to the 401k to get to contribute to the Roth to boot.

[ecoadapt]

I believe you both are doing pretty good!