New Member - Early 30's

[kestu]

Hello everyone - I love the site - just discovered it earlier today but I've already wasted a significant amount of time reading through other posts.

I'm 32 with a wife and 2 boys. I use excel to track all our spending, college funding and retirment goals and have been doing so since getting married. Prior to that I wasn't too focused on any long term goals. Now that I need to look forward more effectively, I have our a budget/plan set until my wife and I turn 90!

A couple questions that I'd be interested in hearing feedback about:

1) My company matches 100% of my 401k contributions up to 3% and while in previous years I've consistently put 7% into the 401k, starting on 1/1/08 I decided to put this additional 4% into a ROTH IRA with the assumption that I will be in a higher tax bracket during retirment than I am right now. With my wife staying home and 2 young boys - I pay an effective tax rate of around 4% for both federal and state taxes. I assume this rate will only increase for the rest of my working life. Does anyone disagree with this line of thinking?

2) Another question I'd pose to the group is whether or not I should use this 4% to pay down my HELOC quicker (currently at 8%). I debated this issue for a few months at the end of last year, but at the end of the day decided that with the tax benefit of the HELOC lowering my effective interest rate closer to 6% I'd prefer to build my nest egg.

Any thoughts?

Thanks.

 

[clifp]

Hello everyone -

A couple questions that I'd be interested in hearing feedback about:

1) My company matches 100% of my 401k contributions up to 3% and while in previous years I've consistently put 7% into the 401k, starting on 1/1/08 I decided to put this additional 4% into a ROTH IRA with the assumption that I will be in a higher tax bracket during retirment than I am right now. With my wife staying home and 2 young boys - I pay an effective tax rate of around 4% for both federal and state taxes. I assume this rate will only increase for the rest of my working life. Does anyone disagree with this line of thinking?

Good for you a saving rate of 7%+3% match and 4% ROTH IS 14% a good amount to achieve Financial independence at a reasonable age.

2) Another question I'd pose to the group is whether or not I should use this 4% to pay down my HELOC quicker (currently at 8%). I debated this issue for a few months at the end of last year, but at the end of the day decided that with the tax benefit of the HELOC lowering my effective interest rate closer to 6% I'd prefer to build my nest egg.

Any thoughts?

Thanks.

8% is a lot even with the tax break it is far from clear going forward that you'll earn more than 8% over the long term in stock investments in your ROTH. Although historically you would have.
I'd refinance using Penfed Home Equity Loan at 4.99%. This will give you upto 10 years to repay your balance. I don't have a major problem with borrowing against your Home equity for home remodels, even major purchases like cars, or college tuition. However, I think HELOC have the real potential to be abused. It is far to easy to treat your home like a piggy bank and think heck the interest rate is only 7 or 8% and its tax deductable lets put the vacation,motorcycle, or DW new jewelry on the HELOC. In a few years you'll think I can save money and refi... suddenly your are buying vacations on a 30 year installment plan.

If the kitchen remodel cost $60K fine take a 10 year Home Equity loan (HEL) out, since your appliance will likely last at least that long. A new car (better to buy used but...) for $30K plan on keeping it for a long time and take out a 7 year HEL. If you notice that your cash flow is really tight because of all of the payments welll case what stop buying new stuff!!

If you want to keep a HELCO fine but don't plan on keeping balances on it no matter what the rate. A HELCO is a reasonable emergency fund until you can save enough pre tax.

 

[bongo2]

Good for you a saving rate of 7%+3% match and 4% ROTH IS 14% a good amount to achieve Financial independence at a reasonable age.

I think the OP was talking about a total of 10% not 14% (the 4% in question was either Roth or 401k, not both). I think this level of savings (or even 14%) is far too low to achieve financial independence at a reasonable age unless you happen upon fabulous investment returns. One way to improve this is to put all future raises into savings. If you want to retire early I think you should have significant contributions to your 401k, and your Roths, and saving in non-qualified accounts.

On the Roth v pre-tax 401k, your total tax rate is irrelevant - it is your marginal rate that matters. If you have a 15% marginal rate or less (plus state taxes as long as those aren't expected to change in retirement), then you should go with the Roth. You can make the argument that some savings should go into Roth regardless from a diversification of tax risk standpoint. If you make over $110k, then your tax rate could be higher than you think (much higher than your tax bracket) due to the loss of credits, deductions, exemptions, and the AMT.

On the HELOC I think it is a matter of taste and risk tolerance. You can see all the "pay off the mortgage" debates for more info (look in the FAQ). From your comments, though, you may not pay enough taxes to make the deduction worthwhile, in which case the taxes mean you should probably pay it off.

 

[kestu]

Thanks for the advice. Bongo2 was right - it is 10% total, but I'm expecting to continue the same level of spending for the next 3 years and at the same time, increase our saving levels to 15% within 5 years and 18% by 2015.

Our HELOC was used for the purchase of our house to avoid PMI about 5 years ago (live in the northeast) and we haven't taken any additional money out since the purchase. I also will be tripling up the payments starting in about 18 months and hope to pay this off about 20 years earlier than the 30 year life we are allotted.

Good point about the total tax dollars I spend each year Bongo2 - I hadn't taken that into account, was thinking more along the lines of the fact that stocks right now should be a bargain price compared to what they will be over the next 30 years (when I expect to be cashing them in).

I have no real expectation of retiring earlier than 59/60, but I appreciate the advice.