gh Intro and our situation

[gh]

Greetings, girlfriend and I currently work in IT and both dream of FI. I began my technology career 6 years ago at 30 and didn't get serious about becoming financially independent until we discovered this board, thank you one and all.

Our situation is as follows:

Kids - none, no plans

Debt - 5,000.00 car loan @ 0% (girlfriend, family loan), 17,800.00 car loan @ 2.9% (me), 6,000.00 consolidation loan @ 12.9% (me - yes, I know, bad move)

Savings - 61,237.00 (combined total: separate 401K, IRA, savings accounts)

Allocation - 60/40 Coffeehouse portfolio + VGHCX, Q (old ESPP from Qwest), CBKM (UTMA account)

Strategy or lack thereof:

1. Maintain Mutual Funds in tax-deferred accounts, cash in ING
2. Not sure what to do about getting married, we do plan on being together for a long while
3. Currently a little out of whack in our allocations, trying to remedy by buying up our under allocated funds rather than selling
4. Recently started new 401k @ 20%, GF will start with 6% to receive company match
5. Spare income will go toward debt recovery and our respective Roth accounts

We have tightened up on our spending and we are trying to eliminate our debt. Although, I do feel the auto-loans are reasonable for a Civic and recently acquired 4cyl. Accord, they will be driven as long as they run safely.

I am also considering federal or state employment to secure a pension and healthcare benefits. This is especially appealing to me because I will presumably be able to apply 7+ years of active military service to my retirement eligibility. I would also like to regain the feeling that I am working for something larger than myself.

Questions:

1. Am I a victim of mental accounting to maintain a 20% 401k contribution rather than concentrating on debt reduction?

2. We had a run-up in VGHCX which accounts for 21.6% of our overall portfolio, should we sell this down or continue trying to build-up around this fund?

3. Any tips on getting in Uncle Sam's door from current or retired federal employees? (Resumes have already been created on several fed sites)

Thanks in advance,

gh





 

 

[TromboneAl]

Welcome. Why can't you immediately pay off the $6,000 loan with savings?

 

[gh]

Mostly the money is in the IRA/401k accounts. Although, I could knock it out by year's end if I tried.

 

[REWahoo]

Mostly the money is in the IRA/401k accounts. Although, I could knock it out by year's end if I tried.

If I were you, I would try very hard to pay it off and get out from under that 12.9% interest rate.

REW

 

[JPatrick]

Question>>2. We had a run-up in VGHCX which accounts for 21.6% of our overall portfolio, should we sell this down or continue trying to build-up around this fund?>>>
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This is a fine sector fund that has faltered ever so slightly in the last few months.  I have held this fund for longer that I'd admit, but recently I've switched some of those healthcare bucks into FSHCX.  Check out the performance comparison.  In any case, your fund has a superb long term track record and deserves to be held. 
However, I would say 20% of your portfolio is far to much to have in one sector.  I'd perhaps cut 25-50% out of health and go elsewhere. Off hand, I don't remember what the coffee house portfolio consists of, so I don't know if you have any emerging markets. If not, there is a good one from Vanguard.  How about energy? Everyone needs some energy. Vanguards requires 25K.  To much for one shot especially right now.  Consider Fidelity FSESX or FSENX at 2.5K.  Energy is a bit topy right now so don't get overly aggressive say on Monday.
Good luck!

 

[maddythebeagle]

I would put together more of a plan (budget, age you want to retire, and how much savings you will need). Having it in a spreadsheet will make it more real and you can track your progress. At age 36 and less than 100k in investments, you probably need to be aggressive (up your savings rates).

 

[Nords]

Welcome to the board, GH!

Kids - none, no plans

Hmmm, that's how we acquired our family...

2. Not sure what to do about getting married, we do plan on being together for a long while
3. Currently a little out of whack in our allocations, trying to remedy by buying up our under allocated funds rather than selling
4. Recently started new 401k @ 20%, GF will start with 6% to receive company match
5. Spare income will go toward debt recovery and our respective Roth accounts

2. If you have to think about it then you're probably not yet ready to get married. When you're ready there won't be any doubt. Financially the marriage tax is much lower than it used to be but that shouldn't be a part of the decision.
3. That would probably make you a lot happier than selling off a big chunk of the Vanguard long, long-term winner and then watching it double. Although you're not gonna be happy if you keep it all and then watch it lose 25%, either. You do have a long horizon before you'll need that money. If you have a strong tolerance for volatility (not a bad thing), then consider selling enough to get about halfway back to your desired asset allocation and make up the rest of the difference from new contributions. One trap to avoid would be cap gains in a taxable account.
4, 5. Conventional wisdom would have you contribute to 401(k)s up to the full amount of the match (monthly contributions), then max out your Roths (lump sum at the beginning of the year or DCA, your choice), then kill off the debt from the benefits of your spending controls.

As for that CBKM, is that really Consumers Bancorp? If that's the case then yikes, take a look at that cost basis and think hard about why you're still holding. What's the tax implication of a UTMA account at age 36?

I am also considering federal or state employment to secure a pension and healthcare benefits. This is especially appealing to me because I will presumably be able to apply 7+ years of active military service to my retirement eligibility. I would also like to regain the feeling that I am working for something larger than myself.

It's been a while since I've looked at the numbers but buying in your military service is usually a wise upfront move. If you're really looking for something "larger than yourself", have you considered the Reserves or Guard? Navy Reserve healthcare has improved steadily over the last five years and may even become a permanent feature of service, whether you're on active duty or just drilling. At age 36 it's a little hard to get excited about TRICARE Retired but when you're 60 but it's a great deal. You've already invested seven years and the other 13 can be done before you're 50. Combining civil service & Reserve duty is not too difficult.

Questions:
1. Am I a victim of mental accounting to maintain a 20% 401k contribution rather than concentrating on debt reduction?
2. We had a run-up in VGHCX which accounts for 21.6% of our overall portfolio, should we sell this down or continue trying to build-up around this fund?
3. Any tips on getting in Uncle Sam's door from current or retired federal employees? (Resumes have already been created on several fed sites)

1. Up to the employer's match it's a smart move. Above the match it's usually better to pay off the debt before going back to that 20% number. BTW, the potential compounding of a 20% 401(k) contribution is probably one of the single most important factors to get you to ER in the next decade...
2. If it's not a taxable account then there's nothing wrong with selling off a little of a big winner. If it's a taxable account then I'd look at the tax bite from selling enough to get about halfway back to your asset allocation. If you don't mind volatility then I'd hold it and restore the AA by buying other things with new contributions. But keep an eye on your AA and consider selling if your life situation significantly changes your volatility tolerance. (Like acquiring a mortgage payment or a big family.)
3. Yeah, like any other job search it's who you know. Keep developing civil-service contacts/mentors/friends and checking in with them. Keep screening the websites and asking the human-resources people about your chances for jobs you like. Keep applying for the jobs you like even if it's just for interview practice. If you haven't had a VA disability screening then get one-- even a crooked pinkie is justification for preferential hiring. Think hard about where you want to work (especially federal overseas) because some parts of the world pay considerably better than others and with no kids you guys could work just about anywhere. And ask around here-- you might find someone on this board who's in the civil service in a location/career that interests you.

 

[Patrick]

6,000.00 consolidation loan @ 12.9% (me - yes, I know, bad move)

Can you acquire a low or no inerest rate credit card to pay off this debt, ala JG?

3. Any tips on getting in Uncle Sam's door from current or retired federal employees? (Resumes have already been created on several fed sites)

1. Go to your local library and look for ARCO civil service test books on the jobs you are interested in.  They are very helpful.

2. Apply for all jobs that you qualify for - this increases your chances of getting hired. 

3. If you have friends in civil service, ask them to set up a "mock oral board" so you can practice answering the types of questions you will be asked.  Prepare in your mind the answers and go over them often until they become second nature.

Luck is when preparation meets opportunity - Vince Lombardi

 

[gh]

Thanks for the responses. I've made some progress and look forward to continuing on the path to FI.

 

[wildcat]

We had a run-up in VGHCX which accounts for 21.6% of our overall portfolio, should we sell this down or continue trying to build-up around this fund?

Being a sector fund I think it would be wise to cut back.  Some people hold a max of 15% in a diversified fund such as large cap blend of S&P 500.  So 21% in a non-diversified fund...you get the picture.  Keep it around for play money though, nothing wrong with that. 

Am I a victim of mental accounting to maintain a 20% 401k contribution rather than concentrating on debt reduction?

I wrestle with the same idea but if it is low int debt you might as well maintain 20%.

Anyone know about the current status of health benefits/pension for state/fed employees? Things usually change for the worse. Cut back in benefits could touch the state/fed level. Some people that post here talk about how great it was for them but it may only apply to a person that started 'X' number of years ago and was part some old benefit package (my pop being one of them). Not for sure on that one but I think it is an idea to consider for someone your age.

 

[gh]

Update to original post, dated August ‘05.

Total debt has been decreased by 16k. Remaining debt, consisting of an auto loan at 2.9% will be paid off on schedule in mid 2008. 

Total savings increased from 61k to 90k, and we anticipate reaching 108k by years end. We’ve also started a separate down-payment fund which is not included in the above numbers.

Savings Rate:

Me – max 401k & Roth contributions, extra cash to savings. I am attempting to save 40% of my gross salary.

Girlfriend – 12% 401k + max Roth contributions. She is slowly but surely increasing her savings rate.

Plans:

1. Consolidate IRA accounts from discount brokerage to Vanguard.
2. Continue selling off individual stocks (CBKM, Q).
3. Beef up emergency & down-payment funds then, shift to taxable investing.
4. Buy small, affordable house in a decent neighborhood.
5. Continue re-balancing out of VGHCX to VTTHX in girlfriend’s Roth IRA to diversify her accounts and to better suit our overall asset allocation.

I’ve also created a spreadsheet which tracks our rough budget, account balances, planned v. actual contributions and monthly savings goals.

Overall, I think we’re on the right track. Our savings rate has increased and we’ve cleared our high interest debt.

 

[spideyrdpd]

I would be in no hurry to pay down a loan thats at 2.9%

 

[rs0460a]

2. We had a run-up in VGHCX which accounts for 21.6% of our overall portfolio, should we sell this down or continue trying to build-up around this fund?

GH - welcome to the board.....

That being said, I can give you some information concerning VGHCX.  I won't tell you what you should do, since everybody has their own opinions (among other things!).

My DW/me have held VGHCX for over 10 years, and we have done quite well by it.  I have 11.5% in my retirement portfolio; DW holds 26.5%.  As one poster suggested, over 20% "may" be too much.  In my case, I redirected about 20% of VGHCX late last year from my portfolio.  DW expects to do the same thing with her holding, over the next few months.

What is interesting, is that even though VGHCX in our portfolios are as stated above, our exposure to healthcare (in total, by exposure by our remaining holdings) is quite high.  For me, it is 21.7%; for DW it is 37%.  That shows that your risk is not only with VGHCX, but also exposure to a sector that is also the "target" of other funds.  You may want to run an X-Ray to find out where you may actually stand.

Only other thing to say is that I would not eliminate VGHCX completely, since it is currently closed.  While its short term returns have been suffering, it has been (and with the aging population - me/DW included!) is sure to be a good long term holding.

Anyway - that's my thought on the situation...

- Ron

 

[gh]

Ron,

I've cut our exposure to healthcare in half and will continue diluting it down to 5-10%.  My thought is that over a long enough period of time that VGHCX will return what the overall market returns so, I am also toying with closing it completely at some point.

Thank you for your service to our country.

gh

 

[TromboneAl]

Hey, thanks for the update. Congrats on eliminating the high-interest debt and increasing savings by 50%.