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Balancing financial priorities
Old 03-08-2014, 08:50 AM   #1
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Balancing financial priorities

Hello! I am looking for some insight on how to manage saving for retirement, and saving for other expenses. I am 31 (turn 32 in April)

I recently paid off my credit card debt (over the course of my 20's it totaled around $25k) which leaves me with student loans and a car loan. However, those two are their own animal:

Student Loan: $118k @ 7% interest (just under 22 years left on the loan)
Car Loan: $14k @ 3.75 interest

I am also trying to make some significant purchases in the next few years:
-engagement ring (this year)
-costs associated with a wedding (our families will be helping)
-saving to buy a home (next few years)

In addition I currently have about $1500 in savings. I know that is not enough. Fortunately, with the credit card paid off that allows me to ramp up my saving substantially.

So ultimately I am trying to balance saving for retirement, paying down my remaining debts, building some savings, and saving for some personal goals.

How would you approach this?

Currently my retirement savings look like this:

I just changed jobs so have not yet funded my 401k with the new employer (first change will be this next paycheck and I am contributing 4% to get the match right now)
401k with older employer: approximately 36k with the following AA:
40% S&P Index fund - 0.04 ER
10% Large Cap Value Index Fund - .10 ER
15% Small Cap Index Fund - .10 ER
15% Emerging Markets Index Fund - .18 ER
10% Large Cap International - .10 ER
5% Small Cap International - .15 ER
5% Common Stock Fund (company stock ) - 0.00 ER

In another thread I had mentioned that I had about a 3rd of my 401k in a stable value fund. I actually had held some cash but bought back in because I was thinking I could time the market. Stupid. It worked out this time, but I don't plan to do that anymore.

The old employer also has a pension that I can roll over to a tIRA. Currently the pension is about $6500.

My new employer has a lot of junk funds in their 401k so I have been reluctant to roll it over to the new employer. However after further examination they do have some Vanguard funds. I was spoiled at old employer because they had index funds for pretty much every asset class that I realized I may be underselling my new employer a little bit.

Here are the funds that the new employer currently offers that are worth investing in:

Vanguard Institutional Index Fund (VINIX) - .04 ER
Vanguard Protected Securities Fund - .07 ER
Vanguard Total International Stock Index Fund - .12 ER
Vanguard Wellington Fund (Admiral Shares) - .17 ER
Vanguard Total Market Bond Fund - .12 ER
Vanguard Target Retirement Funds ranging from 2015 to 2060

The only other funds that are worth mentioning in the plan are:
Fidelity Contrafund, a couple of T. Rowe Price funds, and company stock funds. Everything else is not an index fund and ER’s range from around .5 (these are PIMCO bond funds) to 1.6. Majority are over 1%. I plan to allocate the 401k with the new employer as follows:

65% Vanguard Institutional Index Fund
25% Vanguard Total International Stock Index Fund
10% Vanguard Total Bond Market Fund

New employer also offers an HSA which I won't max out this year, but will get close to maxing out with the employer contributions and my own. I have to see what else I can do with their wellness plan to fund it before I determine if I am going to max it or not.

Would you roll the old 401k to the new one or use a tIRA? If the new employer offered a Total Stock Market index fund (outside of the target retirement funds) I would roll over no question, but I know the Vanguard indexes it does offer are not bad either. I am just torn between keeping the 401k in one place, or creating a rollover IRA with the AA below.

I have a Roth IRA with TD Ameritrade and use commission free Vanguard ETF's there. Currently the AA there is as follows:

50% Vanguard Total Stock Market ETF (VTI) - .05 ER
10% Vanguard Small Cap ETF (VB) - .10ER
5% Vanguard REIT ETF (VNQ) - .10 ER
10% Vanguard Emerging Markets ETF (VWO) - .18 ER
10% Vanguard FTSE All World ex-US ETF (VEU) - .15 ETF
5% Vanguard FTSE All World ex-US ETF (VSS) - .25 ER
10% Vanguard Total Bond Market ETF (BND) - .12 ER


So I guess here are my questions/concerns:

1) I know I need to build emergency savings. Should I only contribute 4% to to 401K to get company match until I have 3-6 months of savings? Should I forgo contributing to the Roth IRA in lieu of building savings? I am in favor of maxing the 401k out at $17,500 so that it will lower my taxable income since I am in a higher tax bracket.

2) I am a little disheartened the new employer doesn’t have a total stock market index fund. Should I roll the old employer’s 401k to the new employer, or move to TD Ameritrade and allocate with my ETF AA? It should be noted the 401K does have a $2.66 administrative fee it charges monthly as well

3) In addition to planning my savings I have several big life expenses I am trying to plan for as I mentioned above. I plan to propose to my girlfriend this year and am saving for an engagement ring. We would also like to buy our first home in the next few years, and in addition to that getting engaged means we will have to spend some money on a wedding. How do you recommend balancing these and saving for retirement, and paying down my remaining debt?

4) Thoughts on my AA? I am trying to be aggressive by limiting bonds (My plan is to shift to either a 70/30 or 60/40 AA between now and when I turn 40). Since I have a longer time horizon to invest, I would like to have some exposure to emerging markets and small caps, but I don't want to go too far in to those. For those wondering, my goal is to ER by the time I am mid to late 50's.


My initial thought is to max out my 401k at the $17,500 allowed for the year, roll the 401k from the older employer to an IRA, and use the remaining money I have between savings, funding the Roth, and paying extra on my student loan and/or car loan. However, I am open to other ideas/suggestions on how to approach this. I appreciate any insight you can provide. If it helps to answer the question I make $100K per year, and my total monthly expenses are around $3000 per month (that includes around $1300 which are the car and student loan payments). If I contribute the max to my 401K that gives me around $1000 to $1100 each month to allocate between saving in a Roth, paying additional debts down, and saving for house/engagement ring/emergency savings.

I am a recent convert to accepting these principles of investing and finances (currently reading Bogleheads Guide on Investing and purchases 4 pillars of AA as well as some of the other texts recommended on these forums). For a long time I thought I was smarter and better able to invest than through the passive index approach. I was dead wrong. I have a lot of cleaning up to do with my finances, but I am hoping to learn and make positive changes from here on out. I appreciate any insight you may have on how to best manage my current situation.

Sorry for the long winded post, but I am really interested in feedback so that I can make smarter financial moves in the future than I made in my 20's when I racked up over $25k in credit card debt. I am trying to avoid those mistakes in the future.
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Old 03-08-2014, 09:29 AM   #2
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You are making solid progress and you make enough money that you should be able to keep getting to where you want to be over time. A few thoughts:

- I would roll the old 401k over to an IRA at the brokerage of your choice and assemble a low cost index portfolio there. The pension dollars could either stay where they are and get turned into a pension down the road, or get rolled over too.

- I would not get equity exposure much above 80% even at your early stage of building wealth.

- The new 401k looks like it has reasonable investing options. In your shoes I would put all the money in Wellington and forget about the rest.

But this all ignores the dead body on the dining room table: the big, honking student loan anvil around your neck. This sucker has a 7% rate and that is not tax deductible. If I offered you the opportunity to buy a tax free treasury that yields 7% you should be beating me up to sell you as much as possible of this thing. So I would put enough into the 401k to capture the full match and build other savings to meet your other goals, but every other penny you can scrape together needs to go toward killing the student loan monster.
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Old 03-08-2014, 09:49 AM   #3
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Brewer is right on target with his student loan comments. Where else are you going to earn 7% risk free? Capture the 401K match and then work like crazy to payoff the student loan.

About the emergency fund. You appear to be single and childless. If you think your job security is good and you have decent medical benefits without a large deductible, you can skimp a little on it. Enough to cover a major car repair or two.

As for the 401K roll over, I would roll the old 401k into the new company (better asset protection) and then either go with Wellington or a Vanguard target date fund. Vanguard Target Retirement 2045 (VTIVX) consists of the following

Vanguard Total Stock Market Index Fund Investor Shares 63.0%
Vanguard Total International Stock Index Fund Investor Shares 26.7%
Vanguard Total Bond Market II Index Fund Investor Shares 8.2%
Vanguard Total International Bond Index Fund 2.1%

I think that is a good mix for your age. If you want to be a little more conservative, go with 2035 target date, which has about 16% bond index exposure.
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Old 03-08-2014, 09:51 AM   #4
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As you have clearly identified, there is no right answer here and you have multiple competing priorities, each of which is a laudable goal and you'd like to accomplish.

In somewhat priority order, I'd consider the following.

1. Put at least the amount required to get the match into the current 401k. Be sure you understand the match rules, so you know if you have to spread your contributions equally through the whole year to get the whole match.

2. Both the old 401k and the new 401k are pretty good offering of funds. If you think you might ever want to backdoor Roth (very likely given your high income) then you might want to either leave the old 401k where it is, or roll it into the new 401k instead of an IRA.

3. Engagement rings are costly baubles. Would your fiancee's fiscal responsibility be sufficient to entertain the option of a less costly bauble (but just as showy as she wants) plus a house downpayment, instead of an overpriced diamond. Is this a conversation you are prepared to have?

4. Getting retirement savings into the shelter of the 401k is important, but so is getting out from under that 7% debt. I'd suggest finding a balance between these two, perhaps leaning a little toward eliminating the debt. A guaranteed 7% is hard to beat. Also, have you looked for any cheaper money to help pay this off?

5. Weddings can be just as memorable and special without high expense. Until you have the debt eliminated, could you consider less expensive venues or alternative ways to get married that are romantically connected to your interests as a couple. If you can, you can save money on a party that you will remember fondly no matter what you spend on it.

6. Buying a house will give you a big mortgage to service. Rates are still great, but you might be leery of taking on a new big debt while your student loan is still so high. I've seen lots of recommendations that newly married couples rent for a year or two before committing to buy a house. They will know more about each other and about preferences for living spaces. Also gives that year or two to scrape up a decent downpayment, in your case also gives an opportunity to really reduce that moderately high rate student debt.

I'm sure priorities are highly individual, and you may not share my values. But I hope these are at least useful suggestions to think about. Congratulations on doing so well and best wishes on the (impending?) future marriage.
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Old 03-08-2014, 11:23 AM   #5
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"Student Loan: $118k @ 7% interest (just under 22 years left on the loan)"

I hope you accidentally left out the decimal point and meant to say 2.2 years left on the loan. Paying off that loan should be your top priority. Based on your income you may be able to do it in about 3 years even while saving enough for a reasonable, but not extravagant) engagement ring. Get engaged in 6 months(if she says yes), married a year later. Then rent for a couple of years until you payoff the student loan and build up a house downpayment hopefully with the help of your new spouse(will she be working?). Save only enough to get full 401K match. Good thing you live in OH. You should be able to get a very nice, but modest, home for under $150K. You can upgrade in 5 years if things are looking good. Best of luck.
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Old 03-08-2014, 12:45 PM   #6
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Your main priority should be to "Sink the Bismarck" in your finances which is that student loan.

Get the max 401k match, ensure you have a small cash cushion and then all financial guns should be firing on that beast.

Everything else should be way down the list. If I read the post right, your net worth is something like -$120k and you've got about $1000/mo of investable income, so $12k/yr. Rather than adding to the debt burden with a mortgage, I'd suggest going the other way: get very lean, very quick. See if you can design a plan to get that thing paid off in 5 years or less. Take every penny of every raise you get and put it against that loan until it's gone. Got an expensive car? Sell it, get a Used Honda Civic and put the difference against that loan. Paying it off is hands down the best risk-adjusted return you can possibly get. I don't care how the small monthly payment is on a 22 year amortization, that thing will suck the life out of your wealth creation process. Your annual interest expense alone is over $8k.

Screw the house until it's paid off.

Sure get married, but buy a small ring and have a small wedding. Make sure your spouse is on board with the lifestyle and plan necessary to pay that off. My wife and I went thru something similar with huge college debt. Best thing we ever did financially was put the hammer down and pay it off.

In my opinion, this isn't a time for balance -- it's a time for laser focus.

My $0.02. Good luck.
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Old 03-08-2014, 01:24 PM   #7
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First of all congrats on realizing you need a plan of attack for prioritizing how to approach your debt and savings. You are already ahead of the majority of your peers in that regard. Shoot I can count on one hand the number of people I know my age (43) and older who have a plan for their finances. The rest (and majority of the people I know) just seem to be wandering in the dark.

You have already been given some really good advice on dialing in your finances especially that student loan. Getting on the same page with your significant other should definitely be part of your plan. Hopefully she feels the same way you do regarding finances and saving. Good Luck.....
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Old 03-08-2014, 03:48 PM   #8
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Thanks for the feedback so far. A couple of other notes on my situation.

Regarding the house, my girlfriend and I are about to sign a two year lease on a very nice condo in the suburbs of Columbus that is relatively easy access to everything we like to do. So from that standpoint a house purchase is at least 2 years away, more likely 3-5, and possibly even longer. But I do want to start putting money said for it (if it makes sense).

As another question to those recommending only contributing to the match in my 401k versus and focusing on the student loan (which is an anvil), don't I run the risk of not benefiting from compounding as much as I could if I contributed to the max of my 401k? That is my biggest fear there. I am not sure what the cost/benefit would be of paying extra on my student loan, but also maxing 401k. I would hate to lose out on building my nest egg by losing compounding. I guess I have a bit of a mental block with that......

Quote:
3. Engagement rings are costly baubles. Would your fiancee's fiscal responsibility be sufficient to entertain the option of a less costly bauble (but just as showy as she wants) plus a house downpayment, instead of an overpriced diamond. Is this a conversation you are prepared to have?
We are actually on a similar page when it comes to cost/engagement ring. It will be a chunk of money, but nothing that I am looking at and saying I can't save for in a couple months worth of savings.

Quote:
4. Getting retirement savings into the shelter of the 401k is important, but so is getting out from under that 7% debt. I'd suggest finding a balance between these two, perhaps leaning a little toward eliminating the debt. A guaranteed 7% is hard to beat. Also, have you looked for any cheaper money to help pay this off?
I am honestly not sure where to look for cheaper options to pay off the debt. If I could get an interest rate lower than 7% I'd love to take it. If there any possibilities or ideas, I am open to it.

Quote:
About the emergency fund. You appear to be single and childless. If you think your job security is good and you have decent medical benefits without a large deductible, you can skimp a little on it. Enough to cover a major car repair or two.
I know I am replaceable at my job, but generally speaking I think I have pretty good job security. Benefits are pretty good too. I like this approach and think this is what I will take on savings for the time being.

Otherwise thanks for the feedback so far. Some things to ponder, but the bottom line is coming up the fastest way to pay off the student loan. I always lose sight of the fact that it's essentially like earning a 7% return on your money.
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Old 03-08-2014, 04:50 PM   #9
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Originally Posted by krotoole View Post
Screw the house until it's paid off.

Sure get married, but buy a small ring and have a small wedding. Make sure your spouse is on board with the lifestyle and plan necessary to pay that off.
+1.

Here is a College Humor video on why engagement rings are a scam and a marketing gimmick, but you'll probably buy one anyway:

Why Engagement Rings Are a Scam - CollegeHumor Video

(Crude language / humor warning)

Maybe you could get a heirloom ring from an estate / consignment shop with a smaller than 75% mark up?
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