How best to save additional funds

Long time reader, first time poster. I have always appreciated the thoughtful and highly useful information provided by this group. I was hoping you could help me decide how best to allocate additional funds.

Situation: My wife (30) and I (29) have 2 kids (2.5 and 1) and an annual income of just over 300k. We are both extremely committed to savings in an effort to retire early and live comfortably. Obviously, by retire, we do not mean quit working, but having the independence of choice of employment/hobbies.

Assets: Cash/Savings (short term): 10,000 Money Market (emergency): 25,000 - adding 500 a month Taxable Mutual Funds (diversified American Funds): 125,000 - adding

3,000 a month IRA (rollover from my first 401k): 20,000 Roth IRA (one for each of us): 8,000 total - income limits on additions Annuity (I know, but we were young and stupid): 32,000 - no more additions 529 Plan (Child 1): 17,000 - adding 350 a month 529 Plan (Child 2): 7,000 - adding 350 a month Wife 401k: 90,000 - maxing out each year - no company match My 401k: 90,000 - maxing out each year - 3% match House: approx 480,000

Debts: Mortgage: 360,000 @5.75 (1 year into a 30 year fixed) Wife Student Loan: 13,000 @3.875 - paying 700 a month Car: 10,000 @1.9 - paying 350 a month

We have almost 3 million in Life Insurance between the two of us. About 1/4 of this is whole life through Northwestern Mutual that is paying around 8% annually in dividends. For this purpose, figure we pay about 1,200 a month in Insurance.

So here is the million dollar question. A lot of our money is tied up in retirement assets that we can't tap until 59.5. However, we both plan on "retiring" by or before our 50th birthday's. What is the best investment vehicle that will provide us ample funds between retirement and the magical 59.5 age, when all projections show us fine? We were using the whole life and taxable mutual funds for this purpose, but now I question the first.

Let me know if I need to provide more information. Sorry for the long post, but I am trying to cover all my bases. Thanks.

Reply to
ChiSaver
Loading thread data ...

Welcome. You are saving $30K in 401k's and $36K in taxable accounts. Over 20% of income. You are well on your way. Keep in mind you may take

401k withdrawals, post employment, without penalty at age 55. So you would only need to bridge from 50 to 55, and the mutual fund savings appears to be adequate for that purpose. The mix of pre and post tax investments should be monitored. Too much pre-tax can be counterproductive to your goals, given the lack of a match from your wife's employer.

Also note - the 30 yr mortgage will not be paid by 50 at the regular payment rate. Consider calculating the payments to reduce the amortization down to 20 more years from now.

JOE JoeTaxpayer.com

Reply to
joetaxpayer

joetaxpayer wrote: [...]Keep in mind you may take

Nope. That exception only applies if one works up to the year one turns age 55. These folks want to quit "regular" employment by age 50. On the other hand, they could start the "annuitized withdrawal" option at age 50 with no penalty.

To the OP -- it is nice you are planning to give your kids a free ride through college, but remember, they can take out loans for school (which you can always choose to help them pay back). You can't take out loans for retirement.

Also, I expect you are getting a big hit each year for AMT, much bigger starting next year. Your mortgage interest and student loan interest deductions are also being limited, in fact many tax benefits are probably lost due to your income level. I didn't see any child care expenses shown. Have you considered one spouse spending some time at home with kids? A different kind of investment, to be sure, but one worth thinking about, especially when weighing the cost of LTC insurance vs. the likelihood that one of your kids will actually be willing to take you into their home in your decrepitude.

-Mark Bole

Reply to
Mark Bole

The kids won't even know about this saving. Both my wife and I put ourselves through school and appreciate our parents pushing us to find scholarships/loans (there wouldn't have been another way). This is more about saving for freedom of choices (i.e. I can go to state school for free but I got into Harvard.....guess what, we can help you out). It is a very small portion of our overall savings plan at this point.

No AMT yet. Always a fear, but hasn't been reality up to this point.

Child costs are around 25k a year. Our income split is more 60%-40%, so from a financial standpoint it wouldn't be a good tradeoff.

Reply to
ChiSaver

I had a reply, didn't get posted on google, reposting...

a summary of interpretations from above:

35k from cash 10k+money market 25k, increasing by 6k per year 125k in taxable mutual funds, adding 36k per year 60k in tax deferred IRA, Roth and Annuity 180k in 401k, contributing 15k each annually/ 30k per year.

I think your primary focus should be 3 fold- cash, retirement and taxes.

1) you have 35k in cash accounts. This amount should be about 6 months spending/ expenses (mortgage, utilities, monthly bills). Maybe 35k represents this now, but if not, I would increase this portion of portfolio until the 6 month expense guideline is met.

2) Investments for retirement

The 125k in taxable accounts and adding 36k per year to this would lead to ~1.6 million in 20 years (assuming 8% return).

The 180k in 401k is probably worth ~ 2.2 million in 25 years. This will probably be primary source of income in retirement. 4% withdraw rate suggests around an income of 87k from this pool of money.

The 60k in IRA/ Annuity could be worth ~410k if it grows at 8% for 25 years.

If I add up 4% of the 401k, IRA's and taxable accounts in 20 years, I show an income of ~170k in retirement, which will be taxed at various levels (ordinary income from IRA, 401k and annuity, long term cap gain rates from taxable account and no taxes from Roth IRA)

3) Find a way to lower the taxes you pay 300k in income, you save ~ 25% for retirement. This is excellent. This does not even include the savings for kids college. You also have a house.

Municipal bonds might be a way to lower taxes paid. Consider this as supplement to cash reserve (once it hits 6 months of expenses). Increasing 529 plan contributions would also decrease current tax liability. It might be worth consulting a tax professional to help you find other ways to reduce taxes.

Reply to
jIM

Thanks, Mark, I was wrong on this one. Your suggestion, above, is the right one. JOE

Reply to
joetaxpayer

Are you sure about that? For Married Filing Joint status, two dependents, a pretty normal mortgage and other Sched A items, and combined wages of $300K less $28K for 401k contributions... my rough calculation shows you owing almost $8K additional tax due to AMT (alternative minimum tax) for tax year 2005. Plus all the phased out deductions, exemptions, and credits I mentioned earlier.

If I'm wrong, I would appreciate the opportunity to learn why. I agree with the opinion I have seen elsewhere, that AMT is by default becoming the flat tax that some advocate and some fear, so I'm interested in knowing about ways to avoid it.

-Mark Bole

Reply to
Mark Bole

Wish I could help you out. I have no idea what even triggers AMT, but you are not the first person that has been intrigued that it hasn't hit us yet. We have an accountant, so I don't worry about filling out our individual tax forms. For what it's worth, we made about 50k more this year than in 2005 due to increased salaries and bonsuses. Perhaps we will be hit with AMT this tax year.

Reply to
ChiSaver

In general, the schedule A deductions of State Income Tax, and Real Estate tax are the triggers for most of those hit. I would bet that your combined number for these two is reasonable, eg, state tax is 5% of income, and property tax if any, is under $6K. JOE

Reply to
joetaxpayer

Well you'd better start worrying.

Sure, your accountant prepares the forms, but who signs them?

You and your wife.

Who do you think the IRS will come after if/when there is a problem?

You and your wife.

*You* are responsible for the information presented to the IRS on those forms. Are you telling us that you are signing these ... not fully knowing/understanding what it is that you are signing?

If your accountant is like most ... take a good look at the agreement you signed with him/her (you probably didn't read that one either did you?) Most of these agreements (I've seen about 8 over the last decade with the various accountants/CPAs/tax advisors) -- most of these completely absolve the accountant of any liability should things be screwed up. They basically say: "We're preparing these things for *you*, based upon information *you* provided, and it's all checked/double-checked/verified by *you* before

*you* sign the IRS forms ... therefore should there be any trouble ...*you* are responsible" (paraphrased, of course, but that's the gist of every one of 'em I've dealt with).

Please ... this year and in all future years, take an active interest in the forms your accountant has prepared and asked you to sign. You'll likely be glad you did and, at the minimum, you'll be that much more well informed about your financial/tax situation. ..

.
Reply to
Sgt.Sausage

Illinois State income taxes - 3%. Property Taxes: 3600.

Reply to
ChiSaver

I won't even comment on the personal attacks, but I will try and answer your concerns.

What good is it to have an accountant if they don't understand all the tax laws and represent you accurately to the IRS given that you have provided them with all the necessary information? If I have to research every tax law, every trigger for AMT, every break I may be missing, I might as well prepare them myself. My wife and I always read everything prior to signing (she's an attorney by trade) and we fully understand all material we are signing. Information that is not provided, either in the agreement, or on the forms, would not be something we could read, would it?

If you have suggestions as to how I can save for early retirement (my origninal question), please feel free to participate in this conversation. If not, then I suggest you go insult someone else on a message board that encourages that sort of thing.

Reply to
ChiSaver

I am kind of in the similar situation as you, therefore also have the same questions as those your have. Just one more thought in addition to all the other suggestions: maybe you can consider a bit more aggressive in your investment. What you want to achieve is maximized net-of-tax income. Surely you can to so by reducing tax, but you can also achieve the same thing by trying to increase your return.

Many Americans think, probably take for granted, that investing in foreign markets espcially emerging markets are much more risky than investing in US. This perception may not be true (supoorted by historical statistic). However, one thing is almost for sure is the return is higher than a pure US portfolio.

Reply to
My interest

Remember AMT is designed to catch people who don't pay a lot of regular tax. When you have $350k in salary income you're usually paying a lot of regular tax, unless you are in a high-tax state that generates those large itemized deductions that aren't deductible under AMT (like CA where they'd be paying a marginal 9.3% on income, plus CA property tax).

Another trigger is large capital gains. The gains themselves are still taxed at 15% federal under AMT but it can throw other income into the AMT rate of 26% or 28%. So back to the point about long-term tax planning...large CG distributions from mutual funds, or large CGs from having to sell Fund A that has turned into a dog since you bought it 12 years ago, can create these AMT problems where in effect you lose the

15% rate on your long-term gains (because of AMT triggered on other income).

-Tad

Reply to
Tad Borek

I'm sure the accountant would use a professional tax computation program which knows about AMT and, if appropriate, would calculate the additional AMT due (if any).

Reply to
John Richards

Replying to no one in particular,

Another thing to watch out for is that mutual funds pay out their capital gains for the year in December. If you buy into a fund late in the year, you may get a big taxable distribution right away.

I just sold a bunch of IBM stock, and I'm looking to reinvest the proceeds somewhere. There a couple of mutual funds I like, but I think I'm gonna park the money in DIA or SPY for a couple of months first so I don't get a nasty tax surprise.

In a tax deferred account, this is a non-issue.

Best regards, Bob

Reply to
zxcvbob

I finally did some of the number crunching I had been meaning to do for a long time anyway... turns out under 2005 tax law, for the OP's family situation (MFJ, two dependents) -- and assuming NO itemized deductions or any other AMT preference items -- the AMT only kicks in at a range of income in the mid-$200K range. Lower or higher than that, ordinary tax ends up being higher. When you graph the numbers, you see visually that the AMT impact, if any, is very small.

Even with AMT preference items, it's usually a matter of "pushing in here and popping out there". In other words, even if you reduce the amount of itemized deductions that trigger AMT, it just increases your ordinary tax.

-Mark Bole

Reply to
Mark Bole

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.