Musicians needing financial tuneup advice

[Kavakos]

First, let me add my thanks to all of you who have contributed to this forum. The experience of finding a group of people dedicated to ideas and habits that were only loosely beginning to form in my life is very exciting. It reminds me of how I felt when I ran my first local race. I had watched the elite runners on tv and wished I was lucky enough to have that kind of talent (much like I have wished to have made a fortune already) but considered my speed quite excellent based on all the average joggers (or average consumers) I would pass on my runs. It wasn't until that first race that I realized there was a whole class of seemingly normal people who could run fast (not fast enough to get on tv) and had done it through their own perseverance and smart training techniques. This quickly shifted my perspective from looking backwards at those slower than me to learning from those ahead of me. It's a simple enough analogy but the best comparison I have for what the FI discussion has done for me.

I have a few questions I am struggling with and would greatly appreciate any input from the experienced and clever minds on this forum. While there are already many unique and fascinating stories here, hopefully a look into the finances of two musicians may be interesting to some of you.

So here goes, DW and I are both in our early 30s currently working for the same employer. She makes about 80k and her position is tenured making it very secure (or at least as secure as the financial health of our employer). I am currently making about 75k but my contract is temporary and will likely end in one year cutting our income in half. I judge there is a 5-10% chance I will get the tenure track position I am filling in for. Because of this likely loss of job, I am increasingly eager to develop a good investment plan for the upcoming year. If I don't get the job I will freelance and teach making probably 10-20k per year. Our hope is that it may be realistic to be FI in about ten years. We are not interested in having kids.

Our current finances are the following:
1. $160k and 13+ years remaining of a 15yr 3.5% mortgage on a house worth about $240k
2. $45k student loans at 2.6%
3. $50k in 403b (nonprofit version of 401k) account invested in Vanguard 2045 target retirement fund (VTIVX expense ration 0.18%)
4. $75k in Roth IRA invested in Schwab 2045 retirement account (SWERX expense ratio 0.81%)
5. $95k 30 yr loan at 3% on approx $200k worth of musical instruments (needed until we retire but then could be sold)
6. $40k cash in a savings account making 0.5%
7. Own one 10yr old car and excellent credit rating.

Our monthly spending:
$8000 including debt payments (mortgage, student loans, instrument payment)
$5400 excluding debt payments

In addition to our retirement accounts we have a pension plan and 10 yrs of social security wages which if we retired today would pay about $2500-$3000 (in todays dollars) a month if we retire at 60 as close as I can figure out from the calculators.

Here are the questions I have been debating:
1. What to do with the $40k in our savings account? this money has been our 'emergency fund' but I've been questioning how necessary it is to keep it in cash that is earning essentially nothing. It seems that with the ability to access the money in our Roth accounts without penalty or worse case take out a home equity loan we could cover any unexpected expense. Plus as mentioned before DW essentially cannot lose her job unless the whole organization fails which seems unlikely. We also have fairly extensive health, disability and home insurance.

2. What should I do with our additional savings? I am hoping in the next year to be able to save $50k-$60k. I have been toying with the idea of trying my hand at real estate and buying a $100k-150k house or condo to rent. But with no experience in this area I am hesitant to risk very much on such a project.

3. If we decide not to go this route, where is the best place to distribute our future savings: Roth IRA, 403b or taxable account? It seems to me that with our defined benefit plans plus the amount we currently have in IRAs our cash flow post 60 will be plenty. On one hand I feel like it might be wise to max out our 403b (our employer does not do matching funds) and a traditional IRA because this coming year may be our highest tax rate but on the other hand I don't want to get too much money tied up in accounts that we can't access until our 60s. I like the Roth IRA because of the ability to withdraw before retirement age without penalty but of course it doesn't help our current tax situation and has contribution limits.

4. Lastly, what do you think about these target retirement mutual funds as investments? We bought them when we were just starting out because of the simplicity but I'm now wondering if it is the best option. I have no desire to do any kind of active investing or stock picking but I could see myself learning how to develop a simple ETF portfolio and doing periodic asset allocation.

Any thoughts or pointers to previous threads would be greatly appreciated. I know there are many ways we can cut down on our spending but my first goal is to create a more detailed financial plan.

Thanks!

[ERD50]

Your loans are all at good rates, I wouldn't be in any hurry to accelerate payments on those. Many posters here have a strong emotional aversion to any debt in any form, so you will likely get different opinions on that. It doesn't appear to worry you to have that debt, so decide for yourself.

But I'm confused, maybe I missed something - $96,000 in annual expenses, $80,0000 for DW income, you are planning on $10,000 - $20,0000 future income, so where does the ability to save much of anything come in? It looks like you will likely be negative in a year? Unless you are talking about the one year of income you have coming, but you need to think long term.

And a 10 year old car will need to be replaced at some point.

I think the target funds are perfect for your situation. Yes, you need an emergency fund, but IMO, liquidity is more important than it being 'dollar good' (Money Market type fund). Many mutual funds have check writing privileges. Some people here who were counting on home equity loans had them frozen just when they needed them. There is some small risk to that.

No experience in being a landlord makes it very risky, IMO.

I'm curious about the $200K in musical instruments. What do you play? Tuba, French Horn, Bassoon, piano? Just off the top of my head, those sound like expensive instruments for symphony level playing. But I would still think $200K would buy a lot.

-ERD50

[MooreBonds]

Quote:

Originally Posted by Kavakos Our current finances are the following: 1. $160k and 13+ years remaining of a 15yr 3.5% mortgage on a house worth about $240k 2. $45k student loans at 2.6% 3. $50k in 403b (nonprofit version of 401k) account invested in Vanguard 2045 target retirement fund (VTIVX expense ration 0.18%) 4. $75k in Roth IRA invested in Schwab 2045 retirement account (SWERX expense ratio 0.81%) 5. $95k 30 yr loan at 3% on approx $200k worth of musical instruments (needed until we retire but then could be sold) 6. $40k cash in a savings account making 0.5% 7. Own one 10yr old car and excellent credit rating. Our monthly spending: $8000 including debt payments (mortgage, student loans, instrument payment) $5400 excluding debt payments In addition to our retirement accounts we have a pension plan and 10 yrs of social security wages which if we retired today would pay about $2500-$3000 (in todays dollars) a month if we retire at 60 as close as I can figure out from the calculators. Here are the questions I have been debating: 1. What to do with the $40k in our savings account? this money has been our 'emergency fund' but I've been questioning how necessary it is to keep it in cash that is earning essentially nothing. It seems that with the ability to access the money in our Roth accounts without penalty or worse case take out a home equity loan we could cover any unexpected expense. Plus as mentioned before DW essentially cannot lose her job unless the whole organization fails which seems unlikely. We also have fairly extensive health, disability and home insurance. 2. What should I do with our additional savings? I am hoping in the next year to be able to save $50k-$60k. I have been toying with the idea of trying my hand at real estate and buying a $100k-150k house or condo to rent. But with no experience in this area I am hesitant to risk very much on such a project. 3. If we decide not to go this route, where is the best place to distribute our future savings: Roth IRA, 403b or taxable account? It seems to me that with our defined benefit plans plus the amount we currently have in IRAs our cash flow post 60 will be plenty. On one hand I feel like it might be wise to max out our 403b (our employer does not do matching funds) and a traditional IRA because this coming year may be our highest tax rate but on the other hand I don't want to get too much money tied up in accounts that we can't access until our 60s. I like the Roth IRA because of the ability to withdraw before retirement age without penalty but of course it doesn't help our current tax situation and has contribution limits. 4. Lastly, what do you think about these target retirement mutual funds as investments? We bought them when we were just starting out because of the simplicity but I'm now wondering if it is the best option. I have no desire to do any kind of active investing or stock picking but I could see myself learning how to develop a simple ETF portfolio and doing periodic asset allocation. Any thoughts or pointers to previous threads would be greatly appreciated. I know there are many ways we can cut down on our spending but my first goal is to create a more detailed financial plan. Thanks!

Some general observations:

1. Mortgage - you mention you have a 15 year at 3.5%. What are current 30 year or 15 year rates in your area? Even if you only shave $100/month from your mortgage payment by refinancing today, that's $100/month more in your pocket! Also, you'd want to refi not only while rates are low, but while you have your income to show in addition to your wife's. You might squeak by the total debt:total income ratios on just your wife's income, but would be better to list yours (even as an independent contractor).

Pentagon Federal credit union is open to anyone (as long as you pay a one-time $20 fee to join a national military association), and many posters (including me) have used their outstanding loan products for low low rates and very competitive fees. Any credit union (especially Pen Fed) isn't in the business to gouge you and maximize their profits - they exist to serve the members first.

2. Regarding your overall contributions to tax-advantaged accounts: for now, there is no obvious answer. Just realize that it will take a lot of different 'what if' scenarios next year, depending mainly on
a. your job after your contract is up
b. your family benefits (are you on your wife's plan, or are you buying individual insurance through an exchange - which is impacted by total household income, which would be directly impacted by how much you/your wife contribute to tax-advantaged plans that lower your income)

3. Real estate - I'd echo ERD's comments about avoid real estate. Especially for a real estate newbie AND your likely future situation with just one main income earner a possibility in the future, the last thing you need is something to go wrong with your condo (condo fees, mortgage payment, someone not paying rent), which would then spiral everything out of control into an overall financial disaster. For now, stick with diversified mutual funds. If you want, spend a little time learning about investment classes and the like, rather than looking at possible real estate investments. Also, you can spend that time playing 'what if' scenarios on your family's total taxes owed based on your current and future household income and what different pre-/post-tax investments would do to your overall tax bill.

[heeyy_joe]

OK, so as predicted, I will jump on the aversion to debt theme. I think you should concentrate this next (and possibly last year of high dual income) in knocking out the musical instrument and student loan debt with the intention of writing a budget that gets you both living within her income only. IMO, this is not the time to be focused on increasing your retirement savings - you should be focused on cash flow.

[Kavakos]

Quote:

Originally Posted by ERD50 But I'm confused, maybe I missed something - $96,000 in annual expenses, $80,0000 for DW income, you are planning on $10,000 - $20,0000 future income, so where does the ability to save much of anything come in? It looks like you will likely be negative in a year? Unless you are talking about the one year of income you have coming, but you need to think long term. And a 10 year old car will need to be replaced at some point. I think the target funds are perfect for your situation. Yes, you need an emergency fund, but IMO, liquidity is more important than it being 'dollar good' (Money Market type fund). Many mutual funds have check writing privileges. Some people here who were counting on home equity loans had them frozen just when they needed them. There is some small risk to that. No experience in being a landlord makes it very risky, IMO. I'm curious about the $200K in musical instruments. What do you play? Tuba, French Horn, Bassoon, piano? Just off the top of my head, those sound like expensive instruments for symphony level playing. But I would still think $200K would buy a lot. -ERD50

I'm a little bit confused too but already becoming less so as I examine this thread and face a bit of reality... You are right about our spending vs income for the second half of 2014 and beyond. The spending numbers I took were based on our average from the previous year in which we did quite a bit of traveling and were both working. This was also before the FI seed had firmly been planted and we felt that we were saving plenty compared to most. Our hope is to lower our spending numbers considerably the following year. In my original post by 'additional savings' I was referring to the $50k+ I hope to save in the coming year. I know it will be very difficult for us to save anywhere close to this amount without my current job.

Thanks for your points about the emergency fund and replacing the car. This reinforced some opinions that my wife had made but I won't hold it against you I suspect you are right about the real estate idea too. I thought it might be a productive way to use the large amount of free time I may have coming up but the risk is probably not worth it.

As for the instruments, yes if we were wind players 200k would buy a lot, but fortunately/unfortunately (depending on how you look at it) we are string players and 200k for the two of us doesn't actually go that far. Old italian instruments can easily reach the 7 digit figures and even single bows can be worth more than 100k. There is not a lot of information available about appreciation rate but one study I found suggested that they might average around 4%. The good thing about our instrument loan is that it is with a family member and could easily be renegotiated if we had a cash flow problem.

[Kavakos]

Quote:

Originally Posted by MooreBonds Some general observations: 1. Mortgage - you mention you have a 15 year at 3.5%. What are current 30 year or 15 year rates in your area? Even if you only shave $100/month from your mortgage payment by refinancing today, that's $100/month more in your pocket! Also, you'd want to refi not only while rates are low, but while you have your income to show in addition to your wife's. You might squeak by the total debt:total income ratios on just your wife's income, but would be better to list yours (even as an independent contractor). Pentagon Federal credit union is open to anyone (as long as you pay a one-time $20 fee to join a national military association), and many posters (including me) have used their outstanding loan products for low low rates and very competitive fees. Any credit union (especially Pen Fed) isn't in the business to gouge you and maximize their profits - they exist to serve the members first. 2. Regarding your overall contributions to tax-advantaged accounts: for now, there is no obvious answer. Just realize that it will take a lot of different 'what if' scenarios next year, depending mainly on a. your job after your contract is up b. your family benefits (are you on your wife's plan, or are you buying individual insurance through an exchange - which is impacted by total household income, which would be directly impacted by how much you/your wife contribute to tax-advantaged plans that lower your income) 3. Real estate - I'd echo ERD's comments about avoid real estate. Especially for a real estate newbie AND your likely future situation with just one main income earner a possibility in the future, the last thing you need is something to go wrong with your condo (condo fees, mortgage payment, someone not paying rent), which would then spiral everything out of control into an overall financial disaster. For now, stick with diversified mutual funds. If you want, spend a little time learning about investment classes and the like, rather than looking at possible real estate investments. Also, you can spend that time playing 'what if' scenarios on your family's total taxes owed based on your current and future household income and what different pre-/post-tax investments would do to your overall tax bill.

The Pentagon Federal Credit Union is an interesting idea. Just from a brief look at their website it looks like we may be able to lower our interest rate by almost 1%. I still don't have a really firm grasp of how the entire equation works out with closing costs and points etc. We did a refinance a little more than a year ago but it seems it may be worth it again?

I will definitely keep running what-if scenarios and am close to scrapping the real estate idea.

[Kavakos]

Quote:

Originally Posted by heeyy_joe OK, so as predicted, I will jump on the aversion to debt theme. I think you should concentrate this next (and possibly last year of high dual income) in knocking out the musical instrument and student loan debt with the intention of writing a budget that gets you both living within her income only. IMO, this is not the time to be focused on increasing your retirement savings - you should be focused on cash flow.

I understand the psychological aversion to debt especially among a group of saving conscious people but am not totally sure I agree with it. IMO one of the big advantages of having good credit in our current economic environment is access to cheap loans that can be used to improve net worth. I am also curious why you suggest paying down the lower rate loans (student loans 2.5% and instrument 3%) instead of our mortgage (3.5%).

I agree that cash flow in the coming years will be our greatest concern which is why I am trying to figure out how much, if any, we should continue putting in our IRAs/403b.

[yakers]

While I hate, hate, hate debt and personally avoid it on principle, I do understand that this is a good time to borrow money: chaep rates and a good posibility of inflation in the future.

[obgyn65]

Please feel free to use this website's Google function search button at the top right quadrant of your screen. Welcome to the forum.

Quote:

Originally Posted by Kavakos Any thoughts or pointers to previous threads would be greatly appreciated. I know there are many ways we can cut down on our spending but my first goal is to create a more detailed financial plan. Thanks!

[daylatedollarshort]

Are the instrument that expensive a job requirement? For you or your wife or both? Is that standard in your business for other people with your kind of jobs to have your instruments cost that much?

Is the 10 - 20K you might be making gross or net after paying down your share of the musical instrument debt? What is the ROI on your instruments?

I guess that is the main financial item that jumped out for me from your post.

[ERD50]

Quote:

Originally Posted by Kavakos .... As for the instruments, yes if we were wind players 200k would buy a lot, but fortunately/unfortunately (depending on how you look at it) we are string players and 200k for the two of us doesn't actually go that far. Old italian instruments can easily reach the 7 digit figures and even single bows can be worth more than 100k. There is not a lot of information available about appreciation rate but one study I found suggested that they might average around 4%. ....

I hope you don't mind a little side-tracking of this thread, we could always start a new one if it interferes too much, but I'm curious about these instruments...

I'm a very amateurish musician, so I was thinking that for high quality instruments, the winds with all those valves and linkages and so forth would be expensive, or the big brass instruments, due to the amount of brass to form and the valves, and of course grand pianos have thousands of parts and tons of forces so they aren't cheap. String instruments would appear to me to be rather less costly to construct. But it looks like you are talking collector quality, old Italian instruments.

I've always wondered about the 'mystique' surrounding the old Strads and Amatis and other old makers. As I understand it, orchestras were tuned a semi-tone (several?) lower than current A-440. Between that, and gut strings versus steel, I would think that the qualities that made a great violin under those conditions wouldn't work so well under other conditions. I've also read that many of these instruments have been modified over the years, necks shortened, new scrolls added, etc. It just seems hard for me to believe that these instruments could really still be superior in tone to a modern instrument designed with modern playing in mind. As an engineer with music as a hobby, the physics just don't make sense to me. Though even at my low level of ability, I'm well aware of how the player can sense very minor changes in their instrument - things that few (if any) listeners could pick up on. But I still believe there is some physics behind that, just very subtle sometimes.

Your thoughts?

-ERD50

[Bestwifeever]

Quote:

Originally Posted by daylatedollarshort Are the instrument that expensive a job requirement? For you or your wife or both? Is that standard in your business for other people with your kind of jobs to have your instruments cost that much?....

Son-in-law was a highly accomplished violinist through high school and his violin (now in careful climate-controlled storage) cost $50,000 (I believe this amount includes the bow) so I am not surprised at $200,000 in instruments owned by two professional and teaching musicians.

[haha]

If these instruments are used in Schedule C endeavors like private teaching and performing, they can likely be depreciated and also the interest used to carry them can be deducted above the line-ie. in schedule C rather than Schedule A.

This may also be true for people who only have institutional income, but I do not know.

Also, the OP should be able to make considerably more than he stated just by teaching violin to private students- if he is good and reasonably personable. And you don't get a university job unless you are good. Way back in the early 90s my son paid $50 hour for his violin lessons. Local teachers, even journeymen level, make much more than this today-like twice as much.

Ha

[Meadbh]

Instruments are the OP's tools of the trade. They can cost serious money and need careful maintenance. And I would imagine that a professional musician would need a backup instrument. I hope they are insured, whether they are Stradivarii, cellos, violas or double basses!

What I find shocking is the huge entry cost to being a professional classical musician (training, instruments) and the relatively low financial ROI, even for successful musicians. It must involve enormous dedication to the art.

[ShortInSeattle]

Hi there! Nicely organized introduction by the way.

Here are a few thoughts:

1) I think you should keep your emergency fund, and keep it stable and liquid. Because your DW has tenure, you might be OK with 4-6 months, instead of the 8 months I keep as a self-employed person. Cash technically loses a bit of value due to inflation. You can look for a stable bond fund if you want a bit more lift, but this does have some risk to principal. For now, until you build your investment plan, leave it in cash. Emergencies are not always job loss. They can come in the form of a sick relative, a car crash, and more. It's important to have a buffer.

2) the best way to answer this question is to learn about investing and then build yourself a plan. Go to the Bogleheads website and on the Wiki page look at "investing Policy Statements" including lazy portfolios. Then read the Bogleheads Guide to investing, all about asset allocation, and the four pillars of investing. Then once you have come up with your investing plan, come back to here (and Bogleheads) and post your plan for feedback.

You can see what I'm getting at, right? If you just blindly listen to us on an internet board, you're just substituting our judgement for yours. It won't take long to learn enough to form your own judgements. Then you can tweak.

3) What should you contribute to first? It's going to depend on your goals, your retirement age, and your retirement budget, amongst other factors. Here is a snippet of our investing policy statement that applies to our situation, but yours will probably be different.

Order of Investments
Investment (and surplus) dollars are allocated each year in the following order:
1. Tax-advantaged accounts up to employer match.
2. Pay down consumer debt (currently zero).
3. HSA up to maximum permitted.
4. Tax advantaged accounts up to contribution limits.
5. Special Vacations/Fun (take as needed)
6. Taxable Account Contributions

4) I think target date funds are OK, and the fees don't seem outrageous. A good place for your investments for now. As you said, you might move to indexes later on.

5) My gut says "for the love of God, stay away from real estate."

6) Start cultivating ideas/contacts for your next job, as it looks likely you'll need one. Can you do better than 10-20k? If so, this will help.

Opinions will differ, bit I'd consider using your extra earnings this year to start a "debt payoff snowball" and start knocking down those debts. It may make as much sense to use the money to fund a taxable brokerage fund and start building your pot of money to tide you over between ER and the pension/SS.

Good luck.

SIS

[Kavakos]

Quote:

Originally Posted by ERD50 I've always wondered about the 'mystique' surrounding the old Strads and Amatis and other old makers. As I understand it, orchestras were tuned a semi-tone (several?) lower than current A-440. Between that, and gut strings versus steel, I would think that the qualities that made a great violin under those conditions wouldn't work so well under other conditions. I've also read that many of these instruments have been modified over the years, necks shortened, new scrolls added, etc. It just seems hard for me to believe that these instruments could really still be superior in tone to a modern instrument designed with modern playing in mind. As an engineer with music as a hobby, the physics just don't make sense to me. Though even at my low level of ability, I'm well aware of how the player can sense very minor changes in their instrument - things that few (if any) listeners could pick up on. But I still believe there is some physics behind that, just very subtle sometimes. Your thoughts? -ERD50

The instrument debate is tricky. There have been some very small studies done comparing old Italian instruments to modern in blind situations. Often very experienced ears cannot tell the difference. I think it is similar to the studies done on professional wine tasters whose expert opinion has shown to be influenced by price. So we have a bit of both... one instrument is a modern maker who is still alive and does not have the same kind of investment value but is a good sound for the price and the other is an older instrument with more potential price growth. I think that a big part of the 'secret' of the great makers is the narrative and mystique surrounding them. Many of these instruments have been passed down by generations of great players (getting names like the ex-Gingold Strad violin, ex-Du Pre Strad cello etc) which adds an important psychological component. As for a purely technical analysis of the sound they produce, I'm not sure you could find a specific reason for their fame.

Quote:

Originally Posted by haha Also, the OP should be able to make considerably more than he stated just by teaching violin to private students- if he is good and reasonably personable. And you don't get a university job unless you are good. Way back in the early 90s my son paid $50 hour for his violin lessons. Local teachers, even journeymen level, make much more than this today-like twice as much. Ha

I do plan on charging at least $60 per hour teaching and hope to eventually bring in more than 10k-20k. It does take a while to build a studio and because my first love is performing I don't want to feel too much pressure to take on a lot of students right away.

[haha]

Epoch Times | The Genius of William Carboni

Eric Shumsky was a professor at UW, and I went with my son to about a year of his lessons. My son was a violist, and Eric played both this Carboni violin, and his Carboni viola. It was an intimate environment, a house in the woods. I looked forward to these evenings with all my heart, because Eric was an outstanding musician and teacher, and because this instrument had the warmest, most lovely tone imaginable.


Eric and his father Oscar made recordings of some viola and violin duets.

Shumsky Music Recordings

I hope your teaching is very successful and enjoyable for you. A child who is serious about his lessons and has some aptitude gets a great gift.

Ha

[ERD50]

Quote:

Originally Posted by Kavakos The instrument debate is tricky. There have been some very small studies done comparing old Italian instruments to modern in blind situations. Often very experienced ears cannot tell the difference. ... I think that a big part of the 'secret' of the great makers is the narrative and mystique surrounding them. Many of these instruments have been passed down by generations of great players (getting names like the ex-Gingold Strad violin, ex-Du Pre Strad cello etc) which adds an important psychological component. As for a purely technical analysis of the sound they produce, I'm not sure you could find a specific reason for their fame. ...

Thanks for that feedback, very interesting to me. I think that's a very realistic view of it. Even though I'm a 'numbers' guy, I can't dismiss that 'mystical' quality when it comes to music performance. So even if the instrument isn't really any better (or even if it is), the performer may be inspired knowing that it has been handled by past masters. And I suppose that sometimes the difference between a 'great' performance and a 'magical' performance may be the mood of the performer, so maybe the instrument history played a part in this?

Similarly, I love the moment that the CSO has entered the stage and they are tuning up and warming up with some runs and it is a random mix of noise. At that moment I just reflect on the history of the hall and all the great performers, conductors and performances that have taken place over the years. It puts me in a receptive mood. Would another hall, even with superior acoustics invoke that same feeling, and make me as receptive to what I'm about to hear? Maybe not. Yet, the numbers might say another hall is better.

I guess that's part of the magic of music. I think it was Aaron Copeland who said something to this effect - ' the thing that makes music so special is that we have no way to communicate what it means to us or how it affects us'. It really seems to exist in a separate part of our brains, disconnected from speech and logical thought.

-ERD50