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40 yrs old, 4 kids, maxed out qualified, what's next? Help!
Old 11-23-2014, 11:41 PM   #1
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40 yrs old, 4 kids, maxed out qualified, what's next? Help!

Here is the nitty gritty, just turned 40, would like to retire at 60. Would like to work some in a different fun field part time after that. Owe 200k in mortgage debt @ 3 percent on 15yr. No other debt. Maxed out 401k, HSA, disability, term life. 500k in 401k, 75k in 529. Savings 50k. Kids about 6 years out from college. Retirement home bought and paid for, value 650k. Income 400k. Spouse is stay at home dad. Option to work less is not there. People want to sell me whole life, annuities, the moon. I worked my butt off for years for this situation, after I got tired and that wore out, I started on my elbows! So I don't want to do something dumb! Not financially savvy in terms of stocks/financial markets. What is the next step? Low -cost index funds? Whole life? Annuity? Pay down mortgage? Real estate? Llama farm in Timbuktu? What is a fee for service financial advisor going to say? (not that I have time to go to one!!) what is a mega bank financial advisor going to say? Help! We would value some advice. Thanks


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Old 11-24-2014, 06:40 AM   #2
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Welcome to the forum!
You'll find great advice here. Follow Buffet's lead and get into low cost index funds.

You are doing great income wise, and should be able to pull it off in 20 years, even earlier if you reign in some spend I'm sure.

I'd recommend that you or your DH tracks your spend the last couple of years, just to get a feel for what you will need to save in order to retire in 20 years.

Whole life is a bad idea in general, but it might be different for a really high earner.

One area of concern is your spending, it appears that you are behind on that compared to your take home.

One area to look at to be able to put away more would be an after tax 401k contribution. This contribution can be rolled over to a Roth 401k without any penalties.

Good luck!
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Old 11-24-2014, 06:48 AM   #3
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Hi Phish. Welcome. My short answer is stop entertaining proposals from people who want to sell you something. They want to make a commission more than assist you. Term life yes. Whole life no. Annuities no. For someone making 400k a year you haven't saved a great deal so I'm assuming you have poured cash into purchasing your retirement home. At this point after fully funding your 401K each year and 529's for the kiddos, I'd start socking away cash into taxable accounts and invest in low cost index funds across the spectrum of investment classes with an AA that matches your risk tolerance. There is a link to a good reading list on this site. Start there. Good luck.
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Old 11-24-2014, 08:13 AM   #4
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Originally Posted by Phish View Post
Maxed out 401k, HSA, disability, term life. 500k in 401k, 75k in 529. ... Not financially savvy in terms of stocks/financial markets.
You are almost certainly invested in stocks (mutual funds) already. What are your accounts invested in? At a minimum check here or at some of the free online services like futureadvisor. No need to pay, just use them to get an idea of what a well balanced investment account looks like.

If you want to save more, check on a Roth IRA but that sounds like a drop in the bucket for your income--and your income may be too high to allow it. Check out a "backdoor" Roth if your company allows it.

Good luck!
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Old 11-24-2014, 04:18 PM   #5
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[...]
I'd recommend that you or your DH tracks your spend the last couple of years, just to get a feel for what you will need to save in order to retire in 20 years. [...]
Strongly agree with this - this is the single most important factor in both getting to retirement and figuring out what your target number is.

Investing strategy will have an impact - but even should you go with expensive Financial Advisors who'll leech off of your investment earnings (showing my bias here), what you do with your strategy will likely have less impact than what you save in the next 20 years.

I'm not sure if you gave your whole financial picture, but what you've given is the following for your net worth:
- Retirement home (+650k)
- 401k (+500k)
- Section 529 (+75k)
- liquid (+50K)
- mortgage(-200k)

This yields a net worth of $1,075,000 or a little over 2.5 times your annual income.

You didn't mention if the retirement home is your current home or a separate home - so there may be some more home equity in there, but regardless, given an income of $400k, this isn't a huge net worth for a 40 year old.

This could be for various reasons (for example if your income was previously significantly smaller), but could also point to a high spending level.

The key, in my opinion, is to get a handle to where the money is going and how your spending in retirement will relate to your pre-retirement spending.

Another way to look at it:
- If you're saving less than 10% of your current income, and your spending will continue at a similar level in retirement, no type of investment will help you retire at 60.
- Conversely, if you're saving more than 60% of your income, and are able to reduce expenses even more in retirement, then you will succeed again almost with no respect to how you invest the money.
(Obviously, you'll probably fall in the middle ground between these extremes, so having a reasonable investment strategy will matter, but my point is that the first order of business is looking at spending)

For more investing advice, I recommend bogleheads.org
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Old 11-24-2014, 08:21 PM   #6
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I would go with the llama farm.
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Old 11-24-2014, 10:29 PM   #7
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Thanks to all who responded, it is very helpful. To clarify some things, I have not been making this type of money for very long, about 4 years, and before that made about 200k for about four years. Paid off about 250k total for myself and husbands student loans (long Ph D program for myself) We have two homes, primary home worth 500k, owe 200k, vacation/retirement home worth 650k, paid off. The reason I am posting this now is that we have been focusing on paying off student loans and our vacation place and had the goal to pay it off by the time I turned 40, which we just did. We have said no to a lot to accomplish that, we don't live extravagantly and our expenses are not crazy, my car is 10 years old and I pack my lunch. Right Now we are looking for the "next thing", whatever that is!
I don't hear people saying they regret not buying whole life way back when. It seems like paying down our mortgage would be potentially missing out on other investments. I am too busy with work and kids to put energy into real estate in the form of a rental. I don't have a financial background or great knowledge of how the stock market works. It seems like a low cost diversified index fund might be a good option for me. Right now that is what we have our 401k and 529 funds in. Part of my idea of posting this is to gain advice but also to know what to expect and what questions to ask when we likely go to a financial advisor soon, thanks again.


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Old 11-24-2014, 11:45 PM   #8
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Ah - the picture is much clearer now. Congratulations on getting out of debt!

I think you're absolutely on the right track with the low cost index funds. Unfortunately financial advisors will tend to be in it to sell you something and might steer you in the wrong direction.

I'd recommend testing anything a financial advisor tells you against advice in these forums and the Boglehead forums before you pull the trigger. That way you can make the most informed decision.

Just remember that there's no magic to investing - if something sounds too good to be true, it probably is. If someone tells you they have a strategy that consistently beats the market, they're probably wrong. If someone tells you they can reduce your risk without affecting your returns, they probably can't. If someone tells you they can guarantee the performance of your investments, they're probably lying.

You sound like you're in great financial shape with solid spending habits - you just need a good conservative investing strategy that'll keep you well out of the claws of inflation, and your savings will do the rest of the work.

Edit: One other thing to note: While for someone with a lower income owning a second home with a goal of retiring there in 20 years might be a somewhat extravagant expense, in your case, it does give you an additional inflation hedge - and you can afford it, in my opinion.
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Old 11-25-2014, 07:44 AM   #9
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I'd recommend testing anything a financial advisor tells you against advice in these forums and the Boglehead forums before you pull the trigger. That way you can make the most informed decision.
Hi Phish, the above is excellent advice. If you do find a fee only financial adviser, post his thoughts here, and people will give you their honest feedback.

Here are some thoughts, now that I have gotten some more information

1. Track your spending, it is easy to get life style creep, because you feel like you deserve it. Tracking your spend is an extremely valuable exercise.
a. It will let you know how much you need to retire
b. It gives you the opportunity to choose what you want to spend your money on. It doesn't mean that you have to go on a budget of spending only $30k a year, it gives you the facts and it gives you the choice of spending $50k on vacation or $200k on a fancy car or choose not to spend to get out earlier. If I had your high compensation, I would certainly spend more money than I do now, because I would be deserving it...

At this point, you pay about $100k in taxes each year. If you have living expenses of $150k, then your current total expenses is $250k and your savings is $150k.
In retirement you would only need ~$210k to sustain the same standard of living as your taxes drop, and you no longer need to save. If you assume you'll live to 90 years old, you'd want to have 30x210=$6.3M

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Originally Posted by Phish View Post
To clarify some things, I have not been making this type of money for very long, about 4 years, and before that made about 200k for about four years. Paid off about 250k total for myself and husbands student loans (long Ph D program for myself) We have two homes, primary home worth 500k, owe 200k, vacation/retirement home worth 650k, paid off. The reason I am posting this now is that we have been focusing on paying off student loans and our vacation place and had the goal to pay it off by the time I turned 40, which we just did.
If I read you correctly, you have been able to save $1.4M over the last eight years. I imagine that most of that would have been over the last four years as you more than doubled your take home. If you keep that up, you will have a very good chance of hitting your target.

The following is a very simplistic back of the envelope calculation which might not hold up for a short time horizon like 10 years...

The power of compounding is fantastic...
The rule of 72 is the rule of doubling. Divide 72 by your annual return on investment and it will give you the doubling time. ie, return of 8% doubles your money in 9 years without contributing any to it, return of 4% doubles it in 18 years... If you assume 7.2% return (not conservative) your money will double in 10 years.
In 20 years, your 401k will be $2M, without contributing another dime...
If you can save another $1.5M in the next 10 years and allow that to grow at 7.2% between 50 and 60, you'd have $3M from those savings.
Putting away another $1.5M between 50 and 60...

$2M+$3M+$1.5M=$6.5M

2. Don't pay off your mortgage @ 3%, you should be able to get better return than that

3. See if there are opportunities for you to do After tax 401k contributions, these can be rolled over into a roth, and you could, if allowed in your employer plan, invest a large amount of money into a Roth, which would not be open to you otherwise given your income.

4. Invest conservatively, as you have a very large pay check and could easily achieve your goal of retirement by 60.

5. Invest in low cost index mutual funds, Vanguard's Wellington is not the cheapest 0.18%, but it gives you both bonds and stocks in one fund, which you could just keep investing in and not worry about asset allocation too much. You'd also want some international exposure too. Bogleheads forum has lots of information on asset allocation.

A lot of rambling, but it seems like you have a good head for meeting your goals. Find a fee FA and bounce their suggestions off of this board and bogleheads and you should be able to attain your goals.

Good luck and keep us posted.
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Old 11-25-2014, 07:59 AM   #10
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D'Oh - Moloff beat me to the idea of seeing if you are able to make after tax contributions to your maxed out 401(k). Google up 'mega back door roth' For those whose plan allows after tax contributions and the ability to take in service distributions, this may be the best retirement benefit to come along to the highly compensated, ever, in my opinion.

OP, congrats on your success so far. You are well on your way! And best wishes for a successful llama farm...
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Old 11-25-2014, 08:08 AM   #11
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At your income level/tax bracket, while whole life or annuities might have some tax deferral benefits, it is usually at a steep cost. It looks as if you have optimized the tax deferral opportunities available to you. The next step would be taxable savings in low-cost, no-load index funds (I prefer Vanguard) and making sure your investments are placed tax efficiently. In short, that means having the fixed income portion of your portfolio which generates income that is taxable in your tax-deferred accounts and investing taxable funds in equities that pay qualified dividends and generate long-term capital gains which are both tax advantaged.

If you do go with Vanguard, it would probably be worthwhile to have their financial planning folks do a financial plan for you.

I wouldn't be in a hurry to pay off a 3% mortgage. I like the idea of some post-tax 401k savings that you can later roll over into a Roth IRA.

I would suggest that you or DH buy Quicken Premier or Quicken Home and Business and use the Lifetime Planner to sketch out your path to retiring at 60. Lifetime Planner is an intuitive, easy-to-use tool that helps you cover the bases on what you need for retirement and other life costs (college, weddings, etc.). You can also use Quicken to provide information on your spending if you want, as the key to knowing if you "have enough" to retire is to know how much you annual living expenses are.
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Old 11-25-2014, 08:08 AM   #12
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Wow, four kids! Good for you! I'm sure you are taking time to enjoy them and how great Mr Phish is manning (pun intended) the homefront.

Keep the mortgage, find a lazy portfolio in low-cost index funds that doesn't need monitoring for the $$ you are not already putting aside (keep doing that too), enjoy your life.
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Old 11-25-2014, 12:52 PM   #13
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I would go with the llama farm.
Well, that is an option of course, but I would suggest these books first:

The Millionaire Teacher.

A Random Walk Down Wall Street
.

The Millionaire Next Door.

How a Second Grader Beat Wall Street
. Very highly recommended. He gives specific concrete examples of what the other authors are saying.

Predictably Irrational. Why you (and other people) do unwise things with money.

Your Money and Your Brain. Another look at why people do emotional things with money that are not in their own best interests.

And although you are not there yet, you want to end up in a position to give positive answers to these questions. Some Important Questions to Answer Before Asking - Can I Retire?
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