Personal Financial Review PFR Growing Family

[Beltway Explorers]

Background
Monthly Expense
Assets
Liabilities
Goals and Decisions

Our monthly spending is about 70 percent of our take home pay. Now that we've started a family we are spending money on luxuries like a cleaning service and take out so we can spend more time with the kiddo and get a good night's sleep. As much as I would love the financial independence earlier, it's more important for us to enjoy the moment today.

We max out our 401K accounts and Roth IRAs (although this year we are phased out of a full contribution); next year we'll be able to max out both due to my maternity leave. We plan to continue to do this until we no longer have incomes.

We are using our Roth IRA accounts as our emergency savings funds so we are just about at six months of current monthly expenses (although we can cut things like travel, eating out, and the cleaning service to stretch it).

We still have a few home renovations left. I hope to stop withdrawing at $60,000, but $75,000 is probably the safe number. I struggle between having money in checking/savings or keeping it low to reduce the HELOC balance since transfers to checking happen instantly.

We have talked about putting $4,000-5,000 per year into our children's 529 accounts. Talks are in the works for a third child in 2019. Virginia gives us a yearly state deduction for up to $8,000 per kid, but I don't see us getting anywhere near the maximum. This is where I'm the most confused about how to invest, especially since we want our kids to pay a portion of their tuition (how much is still unknown).

We have no immediate intentions of moving to a bigger house. Ideally I'm staying put until I can be mortgage free forever, but my husband sometimes wavers and thinks we'll need more space if we do have three kids.

Ultimately my goal would be to retire around 50, but I think it would be more likely for me to reduce my hours to part-time/part of the year while the kids are young (for instance taking summers off to do a Camp Mom like The Deal Mommy) and work longer. My husband wants a traditional career cycle, but I'd like to have financial coverage in case he burns out earlier.

Risk Tolerance/ Financial Savvy

I have no idea, but I lean more aggressive. Right now I put our retirement funds into target date funds for 5-10 years after we turn 60-65.

 

[Matt]

Hi @Beltway Explorers thanks for explaining the current situation. A couple more questions:

1. His student loan: the forgiveness will pay 100% of the remaining balance after 10 years of payments, when does the forgiveness kick in?
2. You mention spending about 70% of income, and pondering decisions to invest in 529 plans - how much net money do you have in excess every month/year and where is it going currently?
3. Do you both have life insurance (Beyond the typical $50K via work) and disability insurance?
4. Do you have access to a High Deductible Health Plan via either employer, with an associated HSA?
5. In your 529 plan discussions, have you come up with an amount that you feel you'd like to subsidize, like X value, X years, or X percent? Ideal schools would be Ivy league or other?

 

[Beltway Explorers]

1. I think we still have seven years before my husband's student loans are forgiven.

2. 13 percent of our take home pay goes to financial investments (Roth/Non-Deductible IRA accounts and kiddo's 529 (putting in $4,000 this year)). I changed jobs in July and used most of the salary bump to pay off student loans that were at a higher interest rate. The rest probably went into paying down the HELOC as we had extra money, and this is a good reminder that I need to do a better job of tracking that!

3. I have $500,000 in life insurance, and my husband has $200,000; we have plans to increase his to $500,000 in January. I have short and long term disability insurance through work. My husband has disability retirement (disability has to last at least one year). Looks like he has a gap for disabilities that last fewer than 12 months so we either need to build up a larger emergency fund or look into a private policy. He has almost two months of vacation and sick leave that could be used in the short term as well and at his current accrual rate it is hard for him to have less than a month of leave in reserve.

4. My employer has an HSA/HRA plan, but we are on my husband's government health insurance. The premium difference is $2,000, but we will only have to pay $175 out of pocket for the birth of the new baby next year so, at least for 2016, it's a better deal.

5. I think we'd like to cover at least 50 percent of college costs. Virginia has some fantastic public universities, but I went to a small private school so I understand a large university isn't the right fit for everyone. Unfortunately that means the tuition can vary greatly and I don't want money to get stuck in a 529 as we would prefer to only cover undergraduate/vocational school and have our kids finance their own graduate programs if they go that route.

 

[Matt]

Just to let you know I'm traveling today on route to the cruise tomorrow, but will get back to you on this soon!

 

[Sesq]

I think you are in great shape but clearly are in the heavy responsibility stage.

A few comments:

• Can you roll your Rollover IRA into your current employer's plan and open up the backdoor Roth IRA for you? Does your employer accept rollover contributions and are the investment choices worthwhile (e.g. low cost index funds)? Your husband can do a backdoor Roth since he does not have a traditional IRA. More of a 2017 issue if you expect to be below the phaseout limits in 2016.
• Its immaterial, but your tax adjusted HELOC rate may be less than the car loan. You could draw that and pay it off as long as you increased your HELOC payment to keep you paid off by the time the rate spikes.
• Are you using dependent care FSA's to pay the daycare pre-tax? Can you?
• If you think your kids will go to the Virginia state schools they do have a prepaid tuition plan that may be worth a look. Keep in mind I believe you must be VA residents when the kids enroll, so if you saw a move in your future it could be an issue.
• I would have a countdown till student loan forgiveness happens. Quite a perk.

 

[Beltway Explorers]

Thanks @Sesq! I didn't think about paying the car loan with the HELOC, but it's definitely a great idea to look into!

Yes, we're using the dependent care FSA. Unfortunately the $5,000 limit doesn't last very long in the DC area.

 

[Matt]

I've been giving this some thought over the week, and keep coming back to the same basic ideas:

As @Sesq mentioned, you are in the growth phase, and the way you are approaching this is heavily focused on future earnings. You're likely going to do 'just fine' as you have good incomes, and save pretty well. If anything, the weakness I see on the saving side is that you don't have enough in Taxable.

The notion of using a Roth as an emergency fund is fine, but it is also another way of saying you just don't have an emergency fund... if you are in growth, I understand the approach, but you should try to feel a bit of pressure (if that motivates you) to get a real fund.

Ideally, you should have an EF, a taxable brokerage, a Roth, and a deferred (401k et al). This does take time though.

If you are to use the Roth as the EF note the investments within it. They can easily lose 40% or more in value, which might mess with your numbers, when you think you have X months saved, but suddenly it is halved. Eyeballing your current position, I would say you are close to the level where they should be OK, but you may need a couple more years of contributions to them to make them a robust EF solution.

I think the biggest thing to look at is insurance. You are leaning heavily (and with good reason) on future earnings, if something should happen to either of you, the plan would be hit hard. $500K in life insurance would be bare minimum to cover the bulk of the debt, but you might want to think about more, so that you have other options (EG $500K doesn't help pay for the future college expenses, so things might be tight).

Disability insurance should be looked at in more depth, how long does it last, how much does it pay? (tends to be about 2/3 of salary at max, what does that do to your plan?)

For the HSA - just to double check, I've seen plans that offer 100% of birth costs, so I would look twice at your HSA option just in case it has a provision for that.

Lastly, I didn't see that many questions, other than the 529 questions.. personally, I might be inclined to back burner those plans and put the money into a taxable account for yourself. You would lose out on that state tax benefit, but it isn't a lot, and in exchange, you'd be reinforcing your current financial position. I would consider a real emergency fund account, followed by taxable brokerage. In about 7 years when you get the extra cashflow from the student loan forgiveness, you could funnel that into 529s (and supplement it further as desired)