Investment thoughts (401k/Roth) & Staying home

brij2006 · September 2016

My H received a sizeable raise that will kick in this week. It's nothing insane, but will increase his income about $5-9k depending on his overtime. Which is a great raise for him considering what his current wage is.
They also let him know that in June when they transition to their new location it will come with a sizeable bonus and pay increase as well.

So we are trying to figure out what to do with it and we don't want it to just waste away in our budget.
Here are a few factors. He has a 401k through his employer that he puts 10% into. His employer matches .10 cents on the dollar, up to 10%. So he has maxed out the match.
We do have a Roth IRA for him that is fully funded for this year from my bonuses and commission income as well as his side job income.
We also fully fund my Roth IRA, which puts us at about 13% of my income into that.

We're trying to figure out if we should bump his 401k contribution up by 1% or if we should set up for his 2017 Roth to be auto deducted starting in January. The funding of his roth this year just worked out, but our extra income is very unpredictable.

The other thought is if we should continue funding things how we currently are and instead invest into mutual funds outside of retirement type tools. Reason being is that we would like to retire between 50-55. We're 28 and 30 now. It will mostly be retiring from our day to day jobs and probably doing something that we enjoy more instead, so still bringing in income.

Another factor, if/when we have a 2nd child we would like for me to come home. It may only be for a few years, but we will not be able to fund both of our Roth IRA's when I'm home. So we think that maybe we need to beef up our investing for now and be very aggressive with the understanding that we'll be less aggressive for a few years in the forseable future. We're TTC#2 right now but have been for 16 months with no luck. So we are actively trying and it's possible that I could come home sooner than later.

hoffse · September 2016

So there are ways to tap into 401(k)s etc. early, without penalty - however, that lowers your standard of living into retirement forever, which makes it not ideal.

If you don't want to tap those accounts early, you need some way to bridge the gap between when you stop working and when you draw on your retirement accounts.

When you count your total vested contributions in all retirement accounts for both of you combined, where does that land related to your combined gross income? If it is above 15% then you might have space to use that extra income to start taxable investments for that retirement gap.

Conventional wisdom says to max out all tax-advantaged space first... BUT (and this is a big but)... Maxing out tax-advantaged space currently requires a married couple to contribute $47,000 per year to retirement accounts, plus up to $6,650 per year in an HSA if the couple has access to one. The total is $53,650 per year without employer contributions, and it goes up each year. If we counted things like super-funded Roth 401(k)s and 529 accounts, you would need to contribute in excess of $140K per year to max all of these out. And every one of those accounts has rules about when you can withdraw the money, and they impose penalties if you don't follow the rules.

So obviously it's not realistic to max out tax-advantaged space for most people, and most people don't need to contribute anywhere near the max limits to maintain their standard of living in retirement. So instead, spend some time with retirement calculators and number crunch how much you really need to contribute in those accounts to maintain the standard of living you desire from age 60 forward. Fund your retirement accounts to that level first, and then divert the rest to taxable investments or other passive income streams that you can tap without penalty in your 50's. That builds your bridge.

In terms of funding retirement accounts when you stay home, I would say to continue making it a priority even if your contributions drop way down for a couple years. And if you anticipate that happening, then yes I would probably divert most of his added income to some blend of retirement and taxable investments to get ahead of those years.

brij2006 · September 2016

@hoffse Whenever we run the numbers in the retirement calculators it shows us that we're investing more than what we need to be in order to get the retirement we want, when we want it. So I guess that's at least good. It says $1,000/month. So we have $458.33/month x2 going into the Roths, then about $450/month going into his 401k, without the match.

The % into retirement is difficult for us to figure because our incomes fluctuate so much. This year we'll be about 17%. That's fully funding both Roth IRA's and 10% into his 401k.

AprilZ81 · September 2016

brij2006 said:

@hoffse Whenever we run the numbers in the retirement calculators it shows us that we're investing more than what we need to be in order to get the retirement we want, when we want it. So I guess that's at least good. It says $1,000/month. So we have $458.33/month x2 going into the Roths, then about $450/month going into his 401k, without the match.

The % into retirement is difficult for us to figure because our incomes fluctuate so much. This year we'll be about 17%. That's fully funding both Roth IRA's and 10% into his 401k.

@hoffse is more of an expert than I am, but if you are "ahead" of what the calculators are saying I would start doing some other investments to bridge that gap between when you want to retire and when you are able to tap into your retirement accounts. Even if that means you slow down the ROTHs (or even stop) for a few years when you are staying at home with kids.

hoffse · September 2016

Make sure you check a few calculators to be certain, because $1,000/month seems a little low, especially if what you are currently doing gets you to 17%.

Some calculators don't take into account things like taxes and health costs. You really have to estimate your spending and then back into it. A good benchmark is to save 25x your annual expenses, because that assumes a 4% withdrawal rate, which is sustainable for many years. That works great, as long as you include ALL expenses. Everybody seems to remember to include vacations, but then they forget taxes or account maintenance fees. But consider this: if your investment guy is charging 1% per year to maintain the account, you either have to save enough to cover a 5% withdrawal rate or lower your standing of living to a 3% withdrawal rate. So you have to really think through every expense that's reasonably foreseeable.

Here's a great explanation of different ways to project your budget in retirement:

https://www.bogleheads.org/wiki/Budget_models_of_retirement_spending

All that being said, most people either can't or won't figure out how much they need to save, and that's why the 15% benchmark exists. If you are saving at 15% you should be perfectly comfortable in retirement. You may not be fabulously wealthy or be able to leave a huge legacy, but you will be just fine and should be able to afford to take a vacation now and then and spoil the grandkids a bit.

Since you are at 17% right now, I would be inclined to leave it there for now and then divert all of the new money to taxable investments.

csuave · September 2016

I think you should set up to automatically fund the Roth. Funding the Roth seems to be in your continued retirement plans and it will make your budgeting easier to have it funded.

brij2006 · September 2016

@hoffse So I used the calculator on chrishogan360.com. According to that it says if we put aside $1,034/month that in 25 years we'll have $3.9 mil and be able to pull $10k/month. We do have a good lump sum in our retirement already so I know that's helping our figures.

I figured 25 more years is probably a more realistic age for retirement for us. If we can help it, we would much rather try and cash flow our childrens' college and use that fund toward our retirement. So we would likely be working to 55 in order to do that.

Gosh, it's so hard to try and figure out what we'll really need for income in retirement.

I just don't want to get 5 years down the road from now and our incomes have gone up yet we aren't contributing any more except the increase in H's 10% toward his 401k. If that makes sense.

hoffse · September 2016

Does his calculator account for inflation on the spending side? A lot of retirement calculators do not.

$10,000 today is equal to approx. $18,000 30 years from now.

$5500 today is equal to approx. $10,000 30 years from now. <-- This is what his calculator is showing you.

So figure out if you can live on $5500/month in today's dollars as your GROSS income after adjusting for increased health expenses and reduced child care expenses. You can also adjust down for the fact that you will no longer be saving for retirement once you are retired. And I would adjust up for taxes.

Social security likely gives you a boost too, but I always exclude it because who the heck knows. I figure if I get any social security that's going to be our travel fund.

brij2006 · September 2016

That I'm not sure.

I didn't even think of the fact that we would no longer be saving for retirement. That would give us a lot more to work with. ;-)

We've also said the same thing about social security. If its there when we retire, great. If not, we didn't account for it.

This gives us a lot to think about. We still have been toying with the rental property idea, especially for us to have to supplement the loss of my income when I stay home. So if we were to keep a few of those into retirement then they would be some income tools as well.

So many options.

short+sassy · September 2016

Just curious if this was an option for you. Since you work in insurance sales and are primarily on commissions, would it be possible to step down to a more flexible, part-time schedule? That might be a best of both worlds choice.

smerka · September 2016

Did you guys figure out what your income taxes look like with daughter on there? If this income increase bumps you into the next tax bracket, I'd up the 401k contributions to drop you back down.

brij2006 · September 2016

@short+sassy My plan is actually to discuss with my bosses, if/when I ever get pregnant again, to come back part time. I would prefer 2-3 days/week from 3 months until 1 year, then come back full-time after a year. That would be my favorite option. My position is definitely a full-time position though, so I'm doubting it will work. I tried to cut down to 4 days/week at the beginning of the year and was told I would have to step down from my role and become a secretary. That's very unfulfilling for me in this office.
So more than likely I will quit and then find something else when the time comes. In the meantime we'll probably buy 1 or 2 rental properties for me to manage and have a little bit of income from, and do a few side jobs.

vlagrl35 · September 2016

yeah if you could work part time that would be awesome too. I love how I can work and it doesn't affect staying at home. Although whenever we have another baby I will stop teaching for at least the first year.

brij2006 · September 2016

@vlagrl35 I never ever thought I would be one of those people who wanted to stay home, but part-time would be perfect for me. I absolutely love having a career and am a very driven person. Kids change ya though.

My biggest fear honestly is that I'll miss the accountability and passion I have while working. As well as the income. If we purely looked at the financials of things, it doesn't make sense for me to come home. Even after the expenses of me working and daycare for 2. But that first year with DD was hell. Utter hell. It's all too fresh. Everything was all good until I went back to work. Our house actually functioned when I was home for those first 3 months, even though I was sleep deprived. Once I went back to work, it was bad. Not sure an extra $1,000-1,500/month is worth our sanity.

vlagrl35 · September 2016

The way I look at it is that baby #2 will be our last. I want to really enjoy it and juggling newborn with 6 year old I think will be too much for me. By the time that would happen dhs business will be making so much more money we won't miss my teaching income on 8-10 students about$600 per month. He can easily supplement that with his studio. I will however still play gigs and maybe play even more since I won't juggle it with teaching. We already don't rely on my gig money for our monthly living expenses. I just want to enjoy that baby stage to its upmost potential:) not that I didn't with DD but I'm 5 years older priorities are different and I'm much more relaxed.

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