Young couple starting out.

[Blazerdude20]

Hey everyone,

My wife and I are trying to take control of our retirement plans and well, make a plan. I am 22 and she is 23. We bought a house last year and are working on paying down our credit cards and student loans.

She contributes 5% to her 401K and her employer puts in 2%. I will be starting mine at the start of 2013. Contributing 5% and my employer 4%. We're not really sure on how to go about investing in our 401k's. Age targeted plans or international stock markets, etc. We are also curious about a Roth plan as we plan to retire in our early 50's.

We are currently paying 1K a month to eliminate our credit cards (will be paid off in February). The thought is that we would pay about half of the money we pay to cc's a month to pay down student loans faster and invest the other half. We currently have about 4 months expenses in savings and save about 5% of our income to a "high interest" savings account.

We have been thinking lately that we will buy a bigger home when we have kids and rent out our current house. Our neighbor across the street (exact same floor plan) rented out his home for about $200 more per month than our mortgage payment. Thinking this could be a good way to build equity.

I'm rambling and will leave it with a question. What should we be doing to advance our plan towards retirement?

Thanks!

 

[frayne]

Pay down/off your CC and student loan debt. Stay put, renting isn't always what you want it to be. Capture your employer's 401K match and then put as much as you can into a Roth. Live within your means and don't get caught up in the culture of keeping up with the Joneses. Strongly consider having most of your investments in index mutual funds. Don't try to time the market and only buy term life insurance.

I pretty much did exactly as I mentioned above with the exception of Roth IRAs as they weren't around back then. I was fortunate to retire at 55 with a good chunk of dinero. Problem was, I didn't get smart about money management until I was in my late 30s.

Just by virtue of your age and the fact you are even asking the questions, puts you way ahead of the learning curve of most.

Good luck, go for it and enjoy life !

 

[Blazerdude20]

Thanks for the response Frayne.

I forgot about life insurance in my post. We got a quote for whole life from new york life insurance. For 150k it was $200 a month. We were flabbergasted. I think we will be taking your advice on term insurance.

 

[braumeister]

You're off to a great start.
Rule #1 is pay off the highest interest debt first (normally this is credit cards).
As for investing, I would suggest that while you're learning the ropes about investing (go to the Bogleheads forum to start), you might want to just get a total stock market index fund if it's available in your 401k.

 

[kumquat]

If both you and your wife have jobs, no kids etc. you [-]may[/-] probably have no need for life insurance (yet). LI is used to provide an income stream to a dependant. If one of you dies would that put the other in a financial bind? If not wait untill you need it.

 

[Milton]

LI is used to provide an income stream to a dependant. If one of you dies would that put the other in a financial bind? If not wait untill you need it.

+ 1.

Insurance is most appropriately used to protect against reasonably foreseeable contingencies with substantial adverse consequences ... it is least appropriately used as a sort of lottery ticket.

We don't know all of your circumstances, but on the face of it you and your spouse have no apparent need for life insurance (term or otherwise). The premiums would probably be better spent on adequate disability insurance coverage.

 

[Blazerdude20]

+ 1.

Insurance is most appropriately used to protect against reasonably foreseeable contingencies with substantial adverse consequences ... it is least appropriately used as a sort of lottery ticket.

We don't know all of your circumstances, but on the face of it you and your spouse have no apparent need for life insurance (term or otherwise). The premiums would probably be better spent on adequate disability insurance coverage.

This is kind of where our thought is now. We are planning on having kids in the not too distant future but i think we will get term LI.

The reason behind the looking for insurance is because my wife's sister lost her first husband at 24 due to cancer that crept up in a matter of months. They had no LI because they were young and were just having their first child. Left her in a very bad place financially til SS kicked in (6+ months later).

The 150k figure would have paid off the house, eliminating one worry for her (or me). We are thinking now that a smaller amount is right for us. Enough to cover lost income till the survivor can sell the house, EOL expenses, etc.

 

[growing_older]

That's just what people were telling you about life insurance. If it's just the two of you, an untimely demise is tragic but not financially devastating unless you need both incomes, such as for mortgage or KIDS. Once you start trying to have kids, you need to be insured as if you already have them, because you cannot control the timing of events between pregnancy and unexpected death, like your wife's sister's husband.

 

[brewer12345]

I would make it a priority to kill the student loans. There is a particularly nasty feature of student loans: you can discharge nearly any other debt via bankruptcy if things go really badly, but not student loans. Kill them off ASAP and you will be better off.

If you are confused about 401k investment options, go with a target fund or a blanaced/moderate allocation fund. You can get fancier later, if necessary.

 

[freebird5825]

Have you gone through the excercise of building a spreadsheet, detailing Income, Liabilities, and Expenses ? Don't forget Projected Expenses that will require saving a set amount, and an Emergency Fund.
It does not have to be done in 1 day, but I found it to be a very useful thing to do [-]in nauseating detail[/-] before I FIREd. I made constant modifications until it was in a format that was useful to me.

 

[ducky911]

I don't think that a policy to cover the house payments is out of line. But get a term policy it will be oh i don't know...more like 15 dollars a month. When you have kids you can up it.

 

[Blazerdude20]

Have you gone through the excercise of building a spreadsheet, detailing Income, Liabilities, and Expenses ? Don't forget Projected Expenses that will require saving a set amount, and an Emergency Fund.
It does not have to be done in 1 day, but I found it to be a very useful thing to do [-]in nauseating detail[/-] before I FIREd. I made constant modifications until it was in a format that was useful to me.

I have a spreadsheet that has our income, monthly expenses (bills, food, gas, spending, etc.), and savings. It also has a section that i update monthly with all of our loan balances and interest rates. That last part really bums me out looking at it.

 

[someguy]

One thing to think about on the rental plans: most new landlords underestimate the margin needed to make it work in the long run. You don't say what the base PI (principal & interest) or PITI (PI + taxes & insurance) are, but typically you want your rent collected to exceed PITI by more than most new landlords think. Real estate agents will tell you that as long as the monthly rent amount covers your monthly payment, you're golden. They like to say that someone else is paying for you to build equity. What about things like vacancy, late payments, and repairs? These can easily wipe out a modest apparent profit margin.

You've got a while before the rental thing comes up, but I would suggest you dig into this more before you get ready to do it.

 

[FinanceDude]

Hey everyone,

My wife and I are trying to take control of our retirement plans and well, make a plan. I am 22 and she is 23. We bought a house last year and are working on paying down our credit cards and student loans.

She contributes 5% to her 401K and her employer puts in 2%. I will be starting mine at the start of 2013. Contributing 5% and my employer 4%. We're not really sure on how to go about investing in our 401k's. Age targeted plans or international stock markets, etc. We are also curious about a Roth plan as we plan to retire in our early 50's.

We are currently paying 1K a month to eliminate our credit cards (will be paid off in February). The thought is that we would pay about half of the money we pay to cc's a month to pay down student loans faster and invest the other half. We currently have about 4 months expenses in savings and save about 5% of our income to a "high interest" savings account.

We have been thinking lately that we will buy a bigger home when we have kids and rent out our current house. Our neighbor across the street (exact same floor plan) rented out his home for about $200 more per month than our mortgage payment. Thinking this could be a good way to build equity.

I'm rambling and will leave it with a question. What should we be doing to advance our plan towards retirement?

Thanks!

Pay off the credit cards first. Then attack the student loans. I am fairly sure they are at a lower rate than the credit cards. Then build up a reserve of 6-12 months of living expenses in a liquid account. If you can handle it, ramp up that 401K savings amount. Chances are you won't miss the smaller checks after a couple months. Best of luck!

 

[meekie]

I spend a few hours researching my 401k options, then put 20% into the 5 I liked the most, getting a pretty good variety of stuff. They've done pretty well for me over the years. The age targeted stuff is usually pretty decent if you don't have time to do the research now.

We just moved out of our first house and are renting it out. We didn't have kids, but just wanted to live in a neighborhood we could walk places. Since we live in CA, the property taxes on the old house won't go up, and that alone makes it a good reason to keep it a rental.

I recommend increasing your 401k contributions as you can, and look into Roth IRA's as well. Those do have income limits, so if you expect your income to go up, you might need to contribute sooner rather than later.

 

[Texas Proud]

Thanks for the response Frayne.

I forgot about life insurance in my post. We got a quote for whole life from new york life insurance. For 150k it was $200 a month. We were flabbergasted. I think we will be taking your advice on term insurance.

Do not use life insurance as an investment vehicle..... if you need to protect an income stream.... buy the term for that protection.... when you no longer need it.... stop paying... invest the difference someplace with better returns....

 

[Texas Proud]

I spend a few hours researching my 401k options, then put 20% into the 5 I liked the most, getting a pretty good variety of stuff. They've done pretty well for me over the years. The age targeted stuff is usually pretty decent if you don't have time to do the research now.

We just moved out of our first house and are renting it out. We didn't have kids, but just wanted to live in a neighborhood we could walk places. Since we live in CA, the property taxes on the old house won't go up, and that alone makes it a good reason to keep it a rental.

I recommend increasing your 401k contributions as you can, and look into Roth IRA's as well. Those do have income limits, so if you expect your income to go up, you might need to contribute sooner rather than later.

Yes, look at the ROTH option if available.... if both of your incomes are low, you will be in a low tax bracket... saving some taxes now is not high priority... protecting income from future taxes is how you want to go...

 

[frayne]

Do not use life insurance as an investment vehicle..... if you need to protect an income stream.... buy the term for that protection.... when you no longer need it.... stop paying... invest the difference someplace with better returns....

Exactly !

 

[obgyn65]

Welcome to the forum, Blazerdude20.

 

[BruceinGa]

Remember not to go overboard investing in company stock in your 401K. I made that mistake with Lucent Technologies, with 100% in the stock. I lost about $400K.

 

[EvrClrx311]

IMO, no need for insurance unless you have kids. Once kids are in the picture, I'd recommend looking at term instead of whole... but I suppose that is a personal preference. Just understand that someone selling something always has their own interests involved - we'd like to think they would always put ours above theirs, but that usually isn't the case. Check commissions and ask what they are making by selling you whatever product they are recommending.

Our thought process for going with Term was that since we are planning to be financially secure by our late 40's early 50's... what point does life insurance serve beyond that? So we've covered the years that our kids are at home (approx 20) to protect against disaster; paying off the house for the surviving spouse... if we both went, then grandparents would have a very nice sum of money to put kids through college and get them off to a great start.

7 years later... and our 401K is already 1/3rd of our term policy, so looks like we're well on our way to not needing the insurance anymore.

BTW... $500,000 term coverage at your age is probably in the $15-20 per month range. My advice, is to invest the difference in a college fund for your kids.

 

[CMH in CO]

Good advice from Someguy. Make sure you know what you are getting into by taking on being a landlord. What is the rental market like in your area? How far is the rental from your own house for when you have to go handle a problem? Make sure you list all your expenses including things like estimates of utility bills between renters and advertising. Who will be your backup when you go on vacation, etc........

Cass