Check up for early 30s

[sergio]

Hey guy, I haven't done this in a while, but I figured I'd post my situation to get feedback and advice. I'm in my early 30s, married, and have two kids (2 and 11y/o).

Townhouse: worth $255k, $164k mortgage remaining, 15yr @ 3.25%
Cars: two newer cars paid off, under full warranty for another 2.5years
Cash: $145k, most in Ally savings

401k: $188k, 100% AmericanFunds 2045 Target Retirement
Roth IRAs: $66k, 100% TRowePrice 2045 Target Retirement
Taxable: $38k, 80/20 Total US/Total Int'l @ Fidelity
HSA: $36k, 100% Fidelity Balanced Fund
529s: $13k total between two kids

My goal would be to be financially independent around 50 years old since I'm in a field where ageism could be an issue down the road, and have $50k for each kid in their 529s.

Right now I have some extra cash and don't really know what to do with it. Equities are at all-time highs despite COVID and the poor economic situation. I'm not a huge fan of 529s and my state gives a very tiny tax break for these. I'm also hesitant to sink too much more into the mortgage as about 70% of my payment is now going towards principal... Keeping the cash at 1% savings rate is basically losing money thru inflation...

Also because of a job promotion we now expect to have $1k cash left over every month after maxing out HSA, 401k, Roth IRA. I was thinking of splitting that between taxable and the mortgage.

Thanks guys.

 

[SecondCor521]

I don't give advice, but I will tell you my thoughts if I were to wake up in your shoes. ;-)

First, you're doing really, really well for your age. If you continue to max things out, and depending on the lifestyle you want to lead, you'll probably hit your goal.

The cash sitting around is something I would work to deploy. Take the long view, not the short view. Most everyone ahead of me reached their goals by investing every month through good and bad for 20 years or more.

A trick I play there to put things in perspective: In 20 years, will "COVID and the poor economic situation" be a big deal? Sure, maybe. What was the big deal 20 years ago and was it a big deal? Well, 20 years ago the big thing was the dot com boom and bust. The S&P500 was at 1431 then and is at 3271 now. Nasdaq was at 3767 then and is at 10745 now. (*) Would you like to go back in time and buy your mutual funds at their prices 20 years ago? Probably.

New cars and warranties are more expensive on average than quality used cars that are taken care of. I drive a 1993 Lexus that has 188K or so on the odometer. It is probably worth $2500 but I don't care. It gets me safely, comfortably, and economically from point A to point B. If you or your spouse are afraid and want to pay up, then OK. But realize that you're paying up for that.

Personally I paid off the mortgage first and then threw all into taxable. But a 50/50 split is perfectly fine too, and there are those here that would argue for throwing it all into taxable and carrying the mortgage as long as possible.

I would have kept my relationship with my spouse in good shape. Divorces are horrible, especially when kids are involved, and are also horribly expensive.

(*) Adjusted prices per finance.yahoo.com

 

[SecondCor521]

Forgot to mention, I personally went with index funds for my investments. That 0.72% expense ratio of the American Funds 2045 looks high to me for something that I could manage myself a few times a year with some mouse clicks. Also, I hope you're not paying the 5.75% load that is listed for that fund (sometimes you don't inside a 401(k)).

Consider that 0.72% is fully 18% of the 4% you'll be able to take out in retirement. I don't want to pay an 18% tax on my retirement income to someone.

 

[sergio]

Forgot to mention, I personally went with index funds for my investments. That 0.72% expense ratio of the American Funds 2045 looks high to me for something that I could manage myself a few times a year with some mouse clicks. Also, I hope you're not paying the 5.75% load that is listed for that fund (sometimes you don't inside a 401(k)).

Consider that 0.72% is fully 18% of the 4% you'll be able to take out in retirement. I don't want to pay an 18% tax on my retirement income to someone.

We use the R6 shares in our 401k which have an ER of 0.38%, no loads at all. Appreciate your advice and insights above as well!

 

[jollystomper]

From my perspective, continuing to focus on being a good saver is more important that worrying about having "too much cash". Keep things simple and put that "excess" cash into a broad total market index fund and don't worry about it for 20 years.

Just do what you can, as your career continues, to minimize "lifestyle creep" to maintain or increase your savings rate. I am not saying do not enjoy splurging a bit on any income increases you receive... just try to save/invest most of any additional income. Being a good saver with average market returns puts one in a great position.

 

[SnowballCamper]

Keep things simple and put that "excess" cash into a broad total market index fund and don't worry about it for 20 years.

+1

 

[Koolau]

sergio, looks like you are well on your way. I'll just mention a few potential clouds on the horizon to consider.

Health care (potentially 15 years or more before MC if you retire at 50.) I would suggest a good back-up for this period of time. I know from experience that things change in 15 years (I was FI at 51, though retired at 58). My company which had said it would provide subsidized health care for retirees, sort of reneged on that (they DID give us some cash per year to buy our own coverage - nice but not nearly as good.)

I happen to think SS will still be there but I'm guessing there will be significant changes before you get there. Suggest you prepare for some form of "the worst."

Inflation?? Who knows. It's practically non-existent now, but who knows in the future. Inflation is STILL my number one fear and I'm in my 70s!

Best of luck and keep us informed. Love to hear you younguns preparing for FIRE!

 

[pj.mask]

I have 4 hopes for healthcare:
1) stay married, spouse makes it ~16 more years for top company healthcare package
2) USA moves towards a national healthcare plan
3) pony up the $$ for expected $15k/person/year for private plan including moving (if required) to locations with good options.
4) after mostly FI evaluate citizenship/immigration to a country with national healthcare. This would need to consider taxes in retirement but believe with my career would be able to do this. Would also help with cultural integration. Germany has always been a nice country to visit and I know every place has its own issues.

This is 7-12 years out for me. If the stock market explodes and US keeps its stock outperformance maybe it won’t matter.

 

[Love This Community]

Great job on the savings Sergio. While I can't advice on where to invest / park the extra cash, I can understand your dilemma since I'm in the same boat. Need to trust the market and keep socking away in taxable accounts.

 

[WhenIsItTime]

Great job getting to where you are! You do need to get your cash working for you. Save some as emergency fund, but invest the rest. Compounding is your friend. Maybe you have seen these examples before...


https://www.moneyunder30.com/power-of-compound-interest

 

[teetee]

Fidelity has a few index fund with 0% expense ratio.

145k cash is too much cash. Are you planning to buy a big house soon? I usually keep less than 20k of my net worth liquid. Most of time it is around 12k but everyone is different.

If you can save over 100k from your salary every year, you will likely have over 2M when you reach 40 and perhaps consider retirement before 45 but it is up to you and the FIREcalc.

 

[Ncc1701]

Rather than add to the advice you've already received let me just say this. Your statement that "Equities are at all-time highs despite COVID and the poor economic situation" shows that you need to re-evaluate the way you think about investing.

Do you think it will make a huge difference 20 years from now if you invest when the Dow is at 28K or 23K? It won't. Stop trying to time the market. It's the only thing holding you back. You will always find an excuse not to invest.

 

[AZ2020]

Sergio, when I was younger I had the same dilemma, invest or pay down the mortgage. I couldn't decide which was better, so I did both 50/50. Years later I had a lot of money invested and no mortgage. Win/win!

Don't worry about today, or even tomorrow. Keep at it and it will all work out fine.

 

[Closet_Gamer]

Well done! You're in a great spot.

My $0.02:

1) Dig further into your college savings plan.

$50K today is only a down payment on a four year degree at almost any institution other than community college. We prioritized college savings for years and now that my kids are in school I am very happy I did that. A lot of people get crushed (financially, emotionally) when they come face to face with this. For 30 years people have been saying college costs would normalize. The covid video revolution may actually tip this scale, but i wouldn't count on it.

Pennsylvania's GSP program publishes an annual schedule of college tuition costs by category. Typically room/board is a 40% load on the tuition. Every year I would log in, look at the type of school we were saving for, multiply by 8 semesters + 40% and then look at what we had saved to assess whether we were on track. It's been an almost perfect barometer and let me land the saving plane pretty much right where it needed to be.

https://www.pa529.com/pdf/gsp/2020-21-Rate-Card.pdf

(Make sure you're seated or holding onto something sturdy when you first do this math.)

2) As you deploy that cash, do ensure you keep an emergency fund on the side. Its good to have "sleep at night" money and in a crisis can help you avoid cashing equities at a low. I would suggest at least 6 months...though with two small kids...we always kept a year. Never touched it but never regretted having it.

3) You didn't mention life insurance. If you don't have it, and you have two small kids, stop reading this and go get term life insurance. Right now. Since you're starting to have real assets, toss an umbrella policy over everything.

4) Enjoy life! You're doing great, you have kids poised to head into some great years! Save, invest, ensure you can be FI @ 50 ... all of that. But enjoy life. Take the family on some great experiences. Good money management is an aspect of a life well lived, but it is ultimately a means and not an end.

Good luck!