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Posted by ChiSaver on November 6, 2006, 5:14 pm
Long time reader, first time poster. I have always appreciated the
thoughtful and highly useful information provided by this group. I was
hoping you could help me decide how best to allocate additional funds.
Situation: My wife (30) and I (29) have 2 kids (2.5 and 1) and an
annual income of just over 300k. We are both extremely committed to
savings in an effort to retire early and live comfortably. Obviously,
by retire, we do not mean quit working, but having the independence of
choice of employment/hobbies.
Assets:
Cash/Savings (short term): 10,000
Money Market (emergency): 25,000 - adding 500 a month
Taxable Mutual Funds (diversified American Funds): 125,000 - adding
3,000 a month
IRA (rollover from my first 401k): 20,000
Roth IRA (one for each of us): 8,000 total - income limits on additions
Annuity (I know, but we were young and stupid): 32,000 - no more
additions
529 Plan (Child 1): 17,000 - adding 350 a month
529 Plan (Child 2): 7,000 - adding 350 a month
Wife 401k: 90,000 - maxing out each year - no company match
My 401k: 90,000 - maxing out each year - 3% match
House: approx 480,000
Debts:
Mortgage: 360,000 @5.75 (1 year into a 30 year fixed)
Wife Student Loan: 13,000 @3.875 - paying 700 a month
Car: 10,000 @1.9 - paying 350 a month
We have almost 3 million in Life Insurance between the two of us.
About 1/4 of this is whole life through Northwestern Mutual that is
paying around 8% annually in dividends. For this purpose, figure we
pay about 1,200 a month in Insurance.
So here is the million dollar question. A lot of our money is tied up
in retirement assets that we can't tap until 59.5. However, we both
plan on "retiring" by or before our 50th birthday's. What is the best
investment vehicle that will provide us ample funds between retirement
and the magical 59.5 age, when all projections show us fine? We were
using the whole life and taxable mutual funds for this purpose, but now
I question the first.
Let me know if I need to provide more information. Sorry for the long
post, but I am trying to cover all my bases. Thanks.
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Posted by joetaxpayer on November 6, 2006, 5:48 pm
ChiSaver wrote:
> Long time reader, first time poster. I have always appreciated the
> thoughtful and highly useful information provided by this group. I was
> hoping you could help me decide how best to allocate additional funds.
>
Welcome. You are saving $30K in 401k's and $36K in taxable accounts.
Over 20% of income. You are well on your way. Keep in mind you may take
401k withdrawals, post employment, without penalty at age 55. So you
would only need to bridge from 50 to 55, and the mutual fund savings
appears to be adequate for that purpose. The mix of pre and post tax
investments should be monitored. Too much pre-tax can be
counterproductive to your goals, given the lack of a match from your
wife's employer.
Also note - the 30 yr mortgage will not be paid by 50 at the regular
payment rate. Consider calculating the payments to reduce the
amortization down to 20 more years from now.
JOE
JoeTaxpayer.com
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Posted by Mark Bole on November 7, 2006, 10:01 am
joetaxpayer wrote:
[...]Keep in mind you may take
> 401k withdrawals, post employment, without penalty at age 55. So you
> would only need to bridge from 50 to 55,
Nope. That exception only applies if one works up to the year one turns
age 55. These folks want to quit "regular" employment by age 50. On
the other hand, they could start the "annuitized withdrawal" option at
age 50 with no penalty.
To the OP -- it is nice you are planning to give your kids a free ride
through college, but remember, they can take out loans for school (which
you can always choose to help them pay back). You can't take out loans
for retirement.
Also, I expect you are getting a big hit each year for AMT, much bigger
starting next year. Your mortgage interest and student loan interest
deductions are also being limited, in fact many tax benefits are
probably lost due to your income level. I didn't see any child care
expenses shown. Have you considered one spouse spending some time at
home with kids? A different kind of investment, to be sure, but one
worth thinking about, especially when weighing the cost of LTC insurance
vs. the likelihood that one of your kids will actually be willing to
take you into their home in your decrepitude.
-Mark Bole
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Posted by ChiSaver on November 7, 2006, 11:30 am
> To the OP -- it is nice you are planning to give your kids a free ride
> through college
The kids won't even know about this saving. Both my wife and I put
ourselves through school and appreciate our parents pushing us to find
scholarships/loans (there wouldn't have been another way). This is
more about saving for freedom of choices (i.e. I can go to state school
for free but I got into Harvard.....guess what, we can help you out).
It is a very small portion of our overall savings plan at this point.
> Also, I expect you are getting a big hit each year for AMT, much bigger
> starting next year.
No AMT yet. Always a fear, but hasn't been reality up to this point.
>Have you considered one spouse spending some time at
> home with kids?
Child costs are around 25k a year. Our income split is more 60%-40%,
so from a financial standpoint it wouldn't be a good tradeoff.
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Posted by Mark Bole on November 7, 2006, 9:30 pm
ChiSaver wrote:
>
>>Also, I expect you are getting a big hit each year for AMT, much bigger
>>starting next year.
>
>
> No AMT yet. Always a fear, but hasn't been reality up to this point.
Are you sure about that? For Married Filing Joint status, two
dependents, a pretty normal mortgage and other Sched A items, and
combined wages of $300K less $28K for 401k contributions... my rough
calculation shows you owing almost $8K additional tax due to AMT
(alternative minimum tax) for tax year 2005. Plus all the phased out
deductions, exemptions, and credits I mentioned earlier.
If I'm wrong, I would appreciate the opportunity to learn why. I agree
with the opinion I have seen elsewhere, that AMT is by default becoming
the flat tax that some advocate and some fear, so I'm interested in
knowing about ways to avoid it.
-Mark Bole
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