mann, I need help.

You are going to get just a little from me. You see, your previous mode of operation left you with a disorganized mess. You are not in that bad of shape, just way behind and totally disorganized. The best that I can suggest right now is that you pick up a few books on personal financial planning and retirement, and do some reading. In the long run, nobody will care more about your situation that you will.

Sounds like you are on the right track, but way behind. Your totals should be in the quarter to half million range by now, not in the low 5 digits.

You make a ton of money. Where does it all go? Perhaps you are going to have to look at doing a budget for a few months to figure out what happens to all this cash. You see, you are a the very, very top of the scale for people who work for a living, yet you are little more than entry level for retirement savings. That is a huge disconnect. The money has to be going somewhere.

Take the $10K and pay off these bills and loans today. No sense paying interest when you are getting close to zero on savings.

Ding, ding, ding. You get it. That is your biological alarm clock going off. The problem with most people is that this alarm goes off too late in life so they don't have any time for the miracle of compound interest to help out.

The market goes up and down. Retirement money is long term money, so don't worry about short term yo-yos.

Unless you have a sub-prime loan, don't get focused on paying off your home. You get the small tax advantage, so the money does not cost that much. It is better to get your money into long term savings and let time work to your advantage.

Don't worry about equity. Partnerships rarely work. If you are the key person, make sure you keep getting paid that way, or find someone who will pay you right. Owning and running a business is a real nightmare, unless that is really where your passion is.

-john-

A simplistic scale is:

age: annual incomes saved:

30 one 40 two 50 four 60 eight 65 twelve

This makes a ton of assumptions about things, but is a good first cut (from NY Times). Suze Orman uses something very close to this when she denies people on her "Can I Afford it?" segment. That suggests about $330K for the OP and what John said too.

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1. "Big picture checklist," with higher priority higher on list: (a) Emergency fund (b) Pay off high interest rate debts (c) Contribute to tax advantaged retirement plans at least up to matching (d) Contribute more to retirement (both tax advantaged and not tax advantaged) (e) Consider life insurance to help your child should you die (f) Consider a tax advantaged college savings plan for your child

1. Budget: (a) Put expenses on a spreadsheet. Monthly bills, child support, recreation, anticipated major repairs, mortgage, and so forth. Some of these will be pared down. (b) Compute how much you need to retire. This will determine your saving and spending habits in the future.

Where you are with all this: (1a) Is $10k at least six months of expenses? If so, good enough. (1b) Pay off the CC debt now from your emergency fund, then start replenishing your emergency fund. Give the interest rate and monthly payments on your auto loan and mortgage, and we will talk more about them.

Move to 2. budget, since it determines how much can go towards the rest of the items in 1.

(2a) Assuming $90k is your net income from work, and assuming about $20k of child support each year, you have about $70k of income per year, or about $5.8k of income each month. (2b) Let's start getting some ideas about how much you need to save for retirement. Assume by retirement you have the house paid off, no debts, and can live easily on $40k per year of income (at today's prices, in today's dollars) in retirement. We will account for inflation momentarily. A crude rule of thumb for retirement years is to figure a drawdown of 4% from your retirement savings each year. So you need around $40,000/0.04 = one million dollars in today's dollars before you can safely retire (very crude guesstimate based on some conventional wisdom). You are 49. Figure you will work at least 15 more years. You need to save around $65k a year (scaled upwards each year for inflation). Now that will be pretty impossible for the next few years (unless you do as John Weeks advises, and you probably should, for peace of mind), but you should be able to get closer to that as you age and continue to work. The next free weekend you have, try experimenting with some of the tools linked at

to get a better idea of how much you need to retire. Next steps: Asset allocation among company retirement plan and IRAs. Do not worry about market ups and downs. Worry about asset allocation. Discussion of health insurance (now and in retirement). Discussion of job security.

Lurk here and consider googling for other financial planning fora and following them. Ask questions on individual points above, starting new threads with a focus on each point. I prescribe listening to and reading Clark Howard, Suze Orman, and Scott Burns as well. They do not all say exactly the same thing but they are very close in their advice, and the (generally small) variations will help focus you further. Pretty soon it will become repetitive and you can finely tune your plan.

Lastly, thanks to the net, you are not alone in your effort. It should not cost you a dime to get focus, as long as you remember the only stupid question is an unasked one. Most likely your choices will be some kind of average of what people say here, based on what I know of the high participation rate, and an average of a lot of thoughtful input (when it comes to numbers like these) typically yields a good choice.

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At $90K income level, one can expect approx. $27K from Social Security. So if $40K is the OP's replacement target, he has $13K to make up. From your 25X number (which I agree and endorse) that's $325K. This is not only doable for the OP, but at 49, he should be able to exceed this, and track his progress ahead of inflation. I like rick++'s rule showing X times income at given ages. It has the inflation adjustment built in. So for a retirement right now, OP needs less than four times his income at retirement. Note - that $325 figure is low enough that SS tax trap doesn't apply, and $13,000 income is mostly fit into STD deduction and exemption, the rest taxed at just 10%. Thus, I suggest he save all he can in pre-tax accounts.

SS numbers posted in an article by me at

my wildly popular spreadsheet backing up your and rick++'s numbers at Joe

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Pay off your credit card and auto debt is the first thing you should do. Depending on your mortgage, there is no real hurry to pay that off.

What are your IRA's invested in?

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"joetaxpayer" wrote Elle wrote

I agree the OP should go to the Social Security site and calculate how much he should receive, or review the annual statement he should be getting from SS a few months before his birthday. I'd just want to double check he's worked and paid into the SS system a minimum of ten years, or plans to do so. (Given the small savings, I do not want to assume. House spouse for awhile? Inherited and, uh, squandered?) Either way, you are certainly right to point this out. Though I would continue to argue we are trying to get him into the ballpark and with a decent safety net, given the uncertainty of health care in old age, speculation that the stock market may not see an average gain of 10% a year for the next 15 years (supposedly a fair assumption for the OP's timeframe), and so forth. The much batted about 4% drawdown is based on historical stock market gains of about 10%, after all.

snip

This also occurred to me after I posted, and I agree it's likely his best bet is his SEP-IRA. Roth IRA and taxable accounts should be filled last, if at all, with retirement assets. Plus at some point he may want to consider asset location in addition to asset allocation. For example, consider putting bond funds and REITs only in the SEP-IRA, not in any taxable accounts. The point is the OP is someone who should be particularly concerned about optimizing his tax advantages in the coming year, given his high income and so high tax bracket. All subject to the usual caveat that future tax rates are unknown.

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These things are always subject to discussion/debate, but if one has financial dependents - people whose day-to-day living and lifestyle depends on your income - then (e) life insurance - and also disability insurance - should probably be given higher consideration. If one hasn't saved enough for retirement, one can consider working longer (if not disabled). There is no such remedy for death or disability.

I'd ponder the order of a,b,c as well. I can make the case that c should be the priority as many companies offer a dollar for dollar match on first X% (5 in my case) and grabbing those free dollars should be the priority. Joe

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I agree.

Over having an emergency fund? If the guy loses his job, how is he going to keep paying the mortgage?

I agree that some consideration should be given to move (c) ahead of (b), though I would make it dependent on the type of debt being carried and other factors.

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...

How long does it take to process a separation-from-service withdrawal from a 401K? If he loses his job, he could cash out the part of the 401K that was funded at the expense of his emergency fund (including the amount arising from tax deferal). The matching funds would more than cover the

10% penalty, leaving him with more of an remaining emergency fund than he would have had he directly funded the emergency fund rather than the 401K. Am I missing something? While not completely eliminating an emergency fund, it seems like you could make do with a smaller one.

Xho

Regarding prioritizing 401(k) contributions up to the match over an emergency fund:

In my opinion, the importance of keeping money in tax advantaged retirement savings cannot be overstated. That money is for retirement--a whole other category of savings-- period. When withdrawing as you propose, you lose the tax advantage on the withdrawn amount forever; you may have to withdraw when the market is down, causing loss of historical returns; you lose 10% for the penalty (with some exceptions); and you lose the taxes you must pay on the distribution.

When one starts calling one's 401(k) (or IRA) one's emergency fund, then one is simply not saving enough, in my opinion, and is rationalizing bad financial behavior. If one insists on thinking of a part of one's 401(k) as one's emergency fund, then better invest that part in something mighty conservative. Meaning you lose returns.

I advise having a separate emergency fund.

Two cents.

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While I agree with you about the OP possibly not saving enough, I think you missed Xho's point (and maybe Joe's, too?) that when prioritizing, maybe the 401(k) should come before the emergency fund, at least up to the match. Of course, that doesn't address other emergencies that don't result in a separation of service...

-Will

william dot trice at ngc dot com

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"Will Trice" wrote

I suppose if the match is high enough; vesting is not a problem; one recognizes that one may have to put more into the 401(k) to realize (upon emergency withdrawal) the same s/he would realize if the money were not in the 401(k) (blah blah pre-tax and after tax effects); has the discipline to invest (the emergency amount) in a money market fund or short term bond fund within the 401(k) (is that usual?); and one can stand the administrative delays that seem often to go with getting money out of one's 401(k) pre-retirement, then I can tolerate Joe's, Xho's, and your argument. That's the extent of it for me. Too often a car breaks down; someone's AR mortgage adjusts up; someone loses a job; a parent has to go into a nursing home and $7000 is needed now as a deposit until say, Medicaid kicks in; a lawyer needs to be paid while you divorce your spouse etc. for me to put serious faith in this argument. It is a lovely academic exercise, though. :-)

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You are right about that. There's always some missing details about a given situation that means unknown variables. Not to mention one's 'feelings' about borrowing or risk level. Strictly choosing between the emergency account and the (matched)

401(k), I view it this way: Assuming 25% bracket (that's fair, no?), one can put $1500 in the emergency fund vs putting in the gross $2000 and having it matched up to $4000. Fired at the end of the year? $3000 after tax minus $400 penalty, leaves $2600. Yes, I propose the 401(k) loan substitute as the emergency fund, as you're able to borrow out half at a decent rate. I understand I am on thin ice with you when I go this way. I understand that. I just can't advise ignoring that match.

Joe

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"joetaxpayer" wrote

The only amendment I would offer is that it seems the most frequent rate of 401(k) matching is 50%. So "... matched to $3000. Emergency arises? $2250 after tax minus $300 penalty, leaves $1950." Though again, a person has to be braced for not being able to get the 401(k) loan/distribution immediately.

I dislike the inaccessibility. "Emergency" to me means one needs the money /now/. Yes, one can use a credit card to bridge some of the immediacy problem, but I do not like this. For someone under the gun, adding more for them to track is not helpful, and the credit card interest could steal away the remaining gain from the match.

No thin ice. For someone who is careful (e.g. checks the details of his/her 401(k), including matching amounts, vesting requirements, loans, and time required to get a distribution, plus is willing to juggle, say, credit card debt as a bridge), doing as Xho, Will, and you propose can make sense. A number of articles on the net suggest doing as you say. Other articles prioritize the emergency fund outside the 401(k). I think putting the emergency fund first is more helpful to the typical person who really has not much savings and is struggling to get a grip on his/her financial situation and job. That is, s/he is in precarious straits to start with, so confusing him/her with what I think is some pretty heavy minutiae on 401(k) plans is not helpful. Does s/he really have time to find out how quickly s/he can get a hold of her 401(k) money and document this somewhere so s/he can get right on it should that emergency arise? We do get some nasty reports on 401(k) delays, after all.

A truth halfway between your and my general guidance is perhaps worth contemplating: Something like fund both the

401(k) to the match while also having a 12-month plan to fill the emergency fund. This actually seems pretty common, from reports on the net. Orman and Ramsey often seem to lean this way. Burns, not so much.

Or, with all due respect, we are kind of splitting hairs. A lot of people happen to keep a buffer of cash of several thousand dollars, ISTM, just lying around.

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