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« Happiness Does Not Require Wealth | Main | FMF March Money Madness, Round 1, Posts 17-20 »

February 18, 2013

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1. I think it makes a lot of sense to start moving some of your retirement savings into traditional accounts.

2. I've done some research into the house/condo/coop decision. Basically as you move down the list, the number of restrictions become more onerous thanks to homeowner's associations. I like the idea that condos and coops have maintenance fees which get me out of having to do anything handy (which I will fail at). Where I live: Coops are usually the cheapest, but I don't like the idea of having to be vetted by some random group of people in order to buy a home.

We have two kids. 4 yrs and 8 mos. So I can speak to that piece of your questions. We live in the suburbs of a large midwest city.

Question 3. I'm not sure you can do much here. I wish your medical plan was better. You should be able to deduct some of that with your taxes next year. We were very fortunate- it cost us about $350 our of pocket for our youngest's birth last summer.

4. For quality childcare, you're looking at around $1300/month for an infant and it goes down from there. In our case, we have a 4 year old and an infant in the same day care and pay $2100/month. I would try to find someone you trust who can watch your infant at a home day care that may be cheaper (when your wife goes back to work). We had that situation with our 4 year old when he was an infant, and it worked beautifully and was cheaper.

Both my wife and I work. If your wife can stay home with the baby as long as possible, then all the better. She'll never get that time back.

Good luck to you sir!

The bill for my third child was about $10K. First, you say "I calculated my out-of-pocket expenses for childbirth costs to be around $6,300." You can't do this calculation. The lousey insurance I've always gotten through being self-employed always ends up not covering as much as you calculate (many items end up not being covered at all or the price called 'unreasonable' and you are left with them). Just a heads up.

Whatever you do beforehand negotiating price, working with insurance co, petitioning unpaid claims from insurance, etc, etc., in the end don't pay the bill before going through a medical costs negotiator. There are a couple on the net that you just send them your itemized bills and they look through them for the ridiculously overcharged items (there are always many) and work with the providers directly to reduce your bill. They generally then charge you a third of whatever cost they "save" you. So this is a last step, but one that saved me a couple of thousand on that $10K bill.

Congratulations on the upcoming addition you to family. There really is nothing like seeing that child for the first time. With that said, child care is a significant expense. I live in a low cost of living area and a decent day care for an infant was going to run about$700/month. Depending on how much income your wife can generate, it may not be worth it for her to work outside the home.

Also, I suggest you negotiate with several hospitals for delivery services. Call them and explain that you are going to pay cash for delivery and want to work out payment in advance. I wouldn't be surprised if you can cut that delivery bill in half.

1. We have our Roth/Traditional split about half and half right now (we're 30), but will be focusing in on the traditional for the next 5 or 6 years because that's part of our early retirement plan. Traditional IRAs (and 401Ks that can be rolled into them) can be accessed without penalty before age 59.5 through what's known as a stretch IRA. From what I've been told, Roths really can't be without paying big penalties - though you can take out Roth principle payments.
2. We vote house (without HOA) every time. What seems to go ignored in much of this debate is how much of your finances you are tying in with other people when you go HOA/condo/co-op. You might have 1 vote in what the bills look like, but if everyone else is spendier than you, your bills will be higher than they would otherwise be. Similarly, if other people make a mess of their finances and fall behind on their dues/maintenance fees, you will be part of the contingent that has to make up for that.

In regards to having some savings in traditional retirement vehicles I do think it is a good idea. You can withdraw up to whatever tax bracket you want to pay and then take the rest out of Roth accounts. The only downside would be if your RMDs push you into a higher tax bracket.

On the house/condo/coop question, I'd speak with a trusted real estate agent about appreciation. I live in a medium sized city in the south east and most condos simply do not appreciate in value. However, it sounds like you are in an expensive city and I know that in places like NYC condos do just fine. It may not be the deciding factor in your decision but something to consider.

@GP,

Based on your take home pay after taxes it looks like you are probably close to the 15/25% bracket cut off.

If you are paying some taxes in the 25% bracket then I would put as much money as you could in traditional vehicles to lower your taxable income to the 15% bracket and put the rest in the Roth.

If however you are already in the 15% bracket and do not pay any in the 25% bracket then I think the benefits of using the tax deductible vehicles over the Roth are questionable. You still might put a little bit in them but I would still heavily favor the Roth if you are in the 15% bracket.

If your wife intends to get employment later then save the traditional vehicles for that time as her employment will certainly push you into the 25% bracket and then you can do all 401-k type money at that time and it will be far more beneficial.

I am amazed at how you are able to spend only $200 for groceries a month. I spend upwards of $400 for my husband and me and we live in the Midwest. That is somewhat offset by your nearly equal work lunch money.

As for investing in traditional (are you talking about IRA or regular brokerage?) - max out your tax advantaged accounts before you look into it. The one good thing about a regular account is that you can write off investment losses.

The only thing I don't see is life insurance. As the sole breadwinner you should have term life insurance policy no less than $1 million. At your current age it should cost $50 a month or less. Once your child is born you need a will and trust. Make sure you protect your family.

Your emergency fund is rather small. You do have a lot of money in the targeted savings funds but if you move now on the house and on paying off your wife's student loans, then you may find yourself with very low buffer. Things happens and even though you have budgeted for a regular birth expenses, it may be safer to keep some of your options open (e.g. don't buy the house yet) just in case you have some unforeseen medical expenses

We do both traditional and Roth retirement savings - since my employer match goes in traditional we do our own in Roth. If you don't have an employer match, in your case with lower current tax brackets I would probably do majority Roth but go 20-30% traditional for diversification

We have 2 kids. The biggest expense by very far is day care/preschool. Almost all of our kids clothes/toys/gear were second hand from friends and colleagues (if you have people with a bit older kids around you just hint - sometimes people are reluctant to offer) - I started buying some clothing for my older one only when she turned 4. Diapers and formula (if not breastfeeding) are not much - maybe $50 a month or so. Day care however in our area (close to NY) is $850 at its cheapest (the neighborhood place where our 2 year old goes) and $1200 at decent preschools (the Montessori where our 4 year old goes). With summer camps and a couple of after school activities, this year we'll be paying ~$23K for both. See if you have any options through your church

As your quote states, for a financial analyst you totally amaze me!

"However, I wasn’t so lucky with my taxable accounts. I basically went against the market in 2008 and executed a lot of bearish trades (i.e. buying leveraged bear ETFs and short selling individual stocks). The large success I got from these trades in late 2008 and early 2009 eventually led to my financial demise. I became attached to being a bear, and continued to trade actively for two additional years. I believed that whatever recovery the market had during 2009 and 2010 would soon reverse its way back to a new low. Even when the market kept going up and up, Boy was I wrong big. I quickly lost triple the amount I had made".

I have been extremely successful in my investing and haven't had a losing year since my retirement in 1992.

There are four rules you should take to heart.
1) The KISS principle (Keep It Simple Stupid)
2) The Trend is your Friend.
3) Don't Lose Money.
4) Understand the Power of Compounding.

I have tried a couple of times to make money by shorting the market and very soon gave up on the idea. I then went to finding something that was in a nice low volatility uptrend and stayed with it until it weakened when I would then search for something else to switch into.

Shortly before retiring at age 58 I discovered Investor's Business Daily and the CANSLIM method developed by its founder William O'Neil - his method is based upon Momentum. O'Neil used stocks but his principles apply equally well to both equity and bond mutual funds.

Fortunately I retired just as the Internet was coming in and as you know it spawned one of the greatest bubbles of all time. I retired with a portfolio of $319,950 on 12/28/92, rode it all the way to the top, which for me was $3,369,058 on 3/9/2000 and when it lost its momentum & started to form a sharp peak, I sold everything over 4 trading days, finishing with $3,021,835 on 3/15/2000.
From then until 10/1/2007 the market was pretty poor with the S&P500 only managing a 1.32% annual gain but I managed to get 7.34% annual gain by trading in and out of an assortment of stock and junk bond funds. Then on 10/1/2007 the 4 indicators I tracked for the Up/Down Volume and New Highs/New Lows for the NYSE and NASDAQ were so dire that at the age of 73 I made the decision that the stockmarket was over for me and I went into corporate and muni bonds where I still am to this day. I like the fact that the income from my taxable accounts are tax free, from the IRAs the income is tax deferred and all the worry has disappeared yet our income from all sources is very close to $400K.

@Old Limey,

Lots of talk about Bonds topping right now. I know you invest a lot in PIMIX and some PTTDX for your son's 401-k. I believe you said you intended to add to your PIMIX position at the beginning of the year. These funds have flat-lined in the last month. They haven't really turned down yet but some bond funds have. How do you feel about bonds going forward and what are you doing with your personal investments in PIMIX and PTTDX?

I have to say you and your wife are doing a great job thus far. Please keep it up. And congratulations in advance on the new born you are expecting. Below are my advice.
Please, pay off that student loan. You can’t earn 6.8% on that money anywhere, plus the cash flow and peace of mind from not having a student loan will go a long way when your baby arrives.
For house purchase, start with www.homepath.com. This I believe is a Fannie mea website that shows homes that are foreclosed and first-time homeowners are giving the first opportunities to buy before investor. But you might need an agent that will help you put in a bid and get his/her commission from the seller. Trust me, you can knock off a great deal from house price/appraised value. I think you might get a good house with putting 20% down with the $55k you already have. I would buy a single family house rather than condo. Condo association fees are ridiculously high and not worth it if more than $200/mnth.
I went through your monthly expenses and found you ways you can save. It is not much, but it will make you balance your budget. Note that when your child comes, you will need more cash flow. So I will advise you forfeit shopping, reduce entertainment and if possible, reduce lunch at work to once a week.
Our monthly cash flow:
• Rent - $1,300
• Roth IRAs - $900
• Roth 401k - $355
• Travel fund - $300
• Car insurance/maintenance/gas/toll - $275
• Health insurance - $270
• 529 Plan - $250
• Dining out - $250 Cut it to $150 max
• Bus/subway - $225
• Cell phone bills (incl. wife’s grandmother’s) - $200
• Groceries - $200 – Why so small?
• Lunch at work - $175 .You can pack lunch and save at least $125.
• Donations/Gifts - $150 Is this tithe or gift to people?
• Personal care/Entertainment - $150
• Shopping - $100. What are you shopping for, Clothes or ..?
• Cable/Internet - $90
• Electricity - $15
• Heat/water - Free
• Total - $5,205
Why don’t you try shopping for private insurance with Bluecross Blueshields for example? I would wait till 3-6mnths after your baby arrives. My wife and I with 2 kids, all healthy family pay less than $400 a month. Although we started with about $270/mnth with a $3500 deductible, the rates have been going up, hence increasing the deductible to $5000. We recently got a notice it will go up again to about $480. Remember, we are a healthy family. We only went to the hospital once or twice last year and majority was for yearly physical.
For daycare expenses, expect at least $150 if not $250/week since you said you live in a high cost metropolitan area. You just have to weigh if it will be worth your wife working or staying home to save that monthly expenses. My wife stayed home during those years and we saved a whole lot. Wish you and your wife nothing but the best.

FMF, you might consider not running these stories on holidays. They always receive less comments, and there's less back-and-forth.

Are you receiving the full 401k match from your employer?

Between lunch @work and dinner, you eat out a lot. Like you said, having a baby will cut out dinners, but you should consider reducing your lunches too.

Your employer may offer a bus/subway benefit, where you can purchase credits tax-free. You may want to check and see.

You're doing pretty well, but your emergency fund is pretty small.

@APEX
I continue to add new income to PIMIX.
For me it's a fabulous fund. In 2012 it was up 22.37% and had an incredible "maximum drawdown" of only -0.89%. It has had flat periods before but don't forget even in a flat period it still pays its monthly interest which amounts to 5.4% annually. I have about $500K in it and when about $800K of 5% CDs mature later this October I plan on putting that to work in PIMIX. However I am a trend follower and if it were to go into a downward trend I wouldn't stay in it too long. However for taxable income the corporate bond market doesn't appeal to me. In fact I have had some nice yielding bonds redeemed recently, fortunately my CDs cannot be redeemed. In the tax exempt field I am having to pay a little more than I like to find 5% muni bonds in the secondary market. By the way I moved my son's 401K out of PTTDX and went into a Fidelity target fund with the money.

Hello,
This is GP. My son was born a couple of weeks ago. Very hectic (and sleepless) days for me, but it's so worth it! The birth of my son is the most beautiful and happiest thing that happened in my life.

@My Financial Independence Journey:
Thanks for your information and thoughts on the house/condo/co-op issue. Have you bought a place to live? Did you use a broker? If so, how did you find one?

@Kevin:
My wife is currently staying home looking after our child. We are very fortunate to have my in-laws living closeby who can support us with childcare for now. My wife is already looking for a job and when she starts working again, we'll be searching for a daycare center. I really like your idea: "I would try to find someone you trust who can watch your infant at a home day care that may be cheaper." Instead of spending a lot of money on a daycare center I might ask my mother in law if she could do the job for less (e.g. maybe $1,000/month instead of $1,300). My in-laws are not doing well financially after my father in law got into a huge car accident eight years ago and couldn't work for five years (he did not have disability insurance). They are getting back on their feet now to make ends meet but I doubt they'll be able to retire before my son goes to middle school. I'm also worried that my mother in law and grandmother in law currently don't have health insurance.

@Strick:
You're right -- my calculation for the birth of my child was wrong, but in a good way. The total out-of-pocket costs actually came out to be a little over $2,600. This was because I had been too conservative on the issue of price negotiation between the hospital/doctors and the insurance company.

@SR:
"There really is nothing like seeing that child for the first time" -- So true! "Depending on how much income your wife can generate, it may not be worth it for her to work outside the home" -- What do you think the break-even salary is? For instance, if my wife has an offer from a company that will give her $40K a year, should she work for that company or stay at home taking care of the child?

@Mrs. Pop @ Planting Our Pennies:
Thanks for your input! Very helpful.

@Lance at Money Life and More:
Yes, now I'm also thinking it's a good idea to have a mix between traditional and Roth.

@Erik:
Thanks, will do.

@Apex:
Thank you for your idea. We are in the 25% bracket and my wife intends to work. "If your wife intends to get employment later then save the traditional vehicles for that time as her employment will certainly push you into the 25% bracket and then you can do all 401-k type money at that time and it will be far more beneficial." If I am currently in the 25% bracket, do you mean I should still wait until my wife gets a job? Or should I start putting some in traditional vehicles to lower my taxable income to the 15% bracket regardless of my wife's employment?

@JY:
I am referring to our IRA's and 401k when I say traditional vs. Roth. As you know already, they are both tax-advantaged in different ways. I currently put everything into Roth accounts. I agree with you on life insurance. I should soon look into that further.

@Ivy:
Thank you for your insight!

@Old Limey:
Kudos to your success! As for your comment that I interpreted as: "How can you be a financial analyst and still screw up so badly in the market!?" -- I am not a securities analyst but, yes, I do see how that amazes you. It was an expensive but good lesson for me. Thanks for the tip!

@BJ:
I do believe packing lunch would save me north of $100 a month but, to me, the stress of buying more groceries and making lunch is not worth it. I will start reducing the number of times we dine out, however. The "shopping" category is for apparel and household items. Donations vary every month and go to my church, and gifts include birthdays and Christmas presents.

@Paul:
Yes, my company only gives a 2% match. I'm currently contributing a little more than that. I'm taking full advantage of my bus/subway tax benefit. I agree that my emergency fund is quite low. Maybe we'll have to hold off on the house purchase front until we reach an emergency fund that amounts to five months' living expense.

@GP,

The latter. If you are in the 25% bracket now then I would put some money into a traditional 401-k type vehicle now until you get down to the 15% bracket. I would attempt not to put anything into the traditional 401-k that would be coming out of the 15% bracket.

Be careful about this calculation. Your brackets are based on your "TAXABLE INCOME" not on your "ADJUSTED GROSS INCOME." This is the number after you have deducted for personal exemptions and standard deduction or itemized deductions. For 2013 the 25% bracket for married filing jointly starts at $72,500. This number goes up every year so realize that it's a moving target.

If you are able to project your taxable income to be lets say $75,000 next year then I would put no more than $2,500 in a traditional 401-k. If your income is a little variable and you think your taxable income is probably going to be between $77,000 and $80,000, then I would put in $4,500 because if you put more you might put 15% money in there. Then put the rest to Roth vehicles. As your income rises and your wife works you will have plenty of money in the 25% bracket to contribute to the traditional 401-k. I would not risk putting any 15% money in there now. But certainly if you know you have some 25% money that you could put in now I would do it now.

@GP,

The break even on working outside the home goes like this:

25% federal tax (all of her income will be in the 25% bracket because it goes on top of yours, don't forget that. Every dollar she earns is 25% federal tax)
7.65% FICA tax
x.xx% state tax. Here in MN that is 7.05% unless you get up over 141k

@GP,

Oops hit enter and somehow got my handle replaced with a dot. I will just start the post over:

The break even on working outside the home goes like this:

25% federal tax (all of her income will be in the 25% bracket because it goes on top of yours, don't forget that. Every dollar she earns is 25% federal tax)
7.65% FICA tax
x.xx% state tax. Here in MN that is 7.05% unless you get up over 141k

So that totals up to just about 40% tax.

Then you subtract out other costs such as extra driving, extra business clothes etc if you have extra costs there (although you still need clothes and travel, she isn't just going to sit home every day), but maybe there are a few thousand more there. Then you subtract out daycare.

So lets just run some assumptions.

40K - 40% = 24K
24K - 4K travel, clothes, more eating out over lunch maybe?, etc = 20K.
20K - 12K daycare (don't know what your number will be, put that number here) = 8K.

So you make an extra 8K after taxes using these numbers. It's not zero but it sure pales in comparison to 40K huh?

You and her have to decide what number is worth it.

One thing to consider though is if she is in a field that has career track components to it, putting in the time now will move her along so that when the kids are in school she is making 60K instead of starting with 8 year old skills at the bottom at maybe 30K.

It's probably worth it even if the money now is not that much after all expenses.

GP,

I would have 100% of my 401k and IRA's in Roth accounts. If you could retire with just a Roth, then your tax rate goes down to 0%. In addition, Roths and traditional IRA's are not equal weighted. What I mean is that there is a single but huge difference between the two and that is that the earnings from a Roth grow tax free and traditional does not! You'd have to jump an enormous hurdle and the economy would have to go on steroids before traditional ever becomes the better choice.

@Luis,

I am sorry but this comment is very wrong. It can be shown quite conclusively with some simple math that if you will be in a a lower bracket in the future than now, a traditional vehicle is better than a Roth for the same contribution amount. Recall that he is not maximizing his contributions so in fact a traditional would actually allow him to make a higher contribution amount than a Roth because he could put the amount saved in taxes into a higher contribution.

I love Roth IRAs but your advice here is quite bad and would lead to bad decision making.

@ Apex

The Roth 401k calculator online shows that one would need to drop down to 14% from the current 25% to break even.

http://www.calcxml.com/calculators/ret10;jsessionid=F95EE6352C0106B55DF7843A716C94D5?currentAge=29&retirementAge=65&yearsNeeded=30&accBeforeTaxReturn=8%25&distBeforeTaxReturn=8%25&accTaxBracket=25%25&distTaxBracket=14&annualContribution=15000&option=2&Dispatch=submit&skn=&mobileEnabled=1

GP,

Take full advantage of the Roth 401k. Not all employers offer it so maximize now and in the likely future you change jobs you will have plenty of time to contribute to a regular 401k. Hopefully by then your salary will.be high making the pretax much more worth it than it is now.

@Luis,

You are right that there are times when the Roth is clearly better but there are a few problems with the calculator example you gave.

First you selected option 2 which has the same amount of money going into the accounts and the extra going into a separate taxable account. As I explained in my comment he is not maxing his contributions so he can put all the tax savings into the 401k account as higher contributions. That is option 1 in the calculator example you gave. For option 1 they come out exactly equal if the bracket stays at 25 and far more beneficial with the 401-k if the retirement bracket drops to 15%.

Now if you are maxing all contributions then Option 2 is appropriate. However, unfortunately this calculator, has an incorrect assumption which throws those numbers off.

They calculated taxes on the separate taxable account at the full 25% rate each year while it was compounding. That would never happen with a normal retirement investment portfolio. Nearly all indexed mutual funds are lightly trading in stocks and have minimal taxable distributions each year and most of the ones that they do have are long term gains. That means that they should be taxing most of it at 15% not 25% and they should not be taxing all of the gains each year, but only a small percent of the gains each year, the rest should be left to compound and taxed at withdrawal time.

If you were to assume that 20% of the gains got taxed each year with the rest getting taxed at withdrawal time that leads to a tax rate pretty close around 19-20% for breakeven, not 14%.

If you are going to be in a high bracket that certainly makes the Roth a better option. But if you are not likely to be so then the 401-k is a better option and as I said in the opening, if you are not maxing your contributions currently then it is actually a wash at the same rates (based on option 1 on your calculator) and a huge benefit at any bracket lower than your current default bracket.

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