Should Bret invest in a Traditional IRA or a Roth IRA?
If Amanda gets married, how will her child support be affected? What about her student loan forgiveness?
Joe is investing in bonds, which average a rate of return that’s equal to the interest rate on his mortgage. Should he switch to all-equities and redirect his bond investments into mortgage payoff, instead?
Taunia has a car loan, a 401k loan, a home improvement loan, a primary mortgage, and a second mortgage. She also has an emergency fund that only covers two months of expenses, and she’s trying to save for college for her two children. What should she prioritize?
Mickey has a six-month emergency fund. Should he leave it in a savings account or invest in bond ladders?
David made $10,000 from a side hustle last year. Can he open a Solo 401k or SEP-IRA for his side hustle business? If so, which one should he choose?
Should Andy invest in a Target Retirement Date fund, or should he split his money between a U.S. index fund and an international index fund?
Former financial planner Joe Saul-Sehy and I answer these seven questions in today’s episode.
Mickey asks:
I’m 25 years old and I have about six months of living expenses for an emergency fund. Most of that is in a savings account earning a little over 2% interest, and I’ve been laddering a small amount into Series I Savings Bonds, and the ones I do have are earning a little under 3% interest.
How useful are these bonds in a low interest environment? I saw in the early 2000s that these bonds were earning over 6% at one point. The difference today between the savings account and the bonds is pretty small.
Should I continue to ladder my emergency fund into Series I Savings Bonds, and when interest rates rise, sell the lowest interest bonds and buy new ones at a higher rate? Or should I wait until interest rates rise and buy then?
Andy asks:
My wife and I will be retiring in 2040 – I’m 39 and she’s 37. We will be maxing out our backdoor Roth IRAs this year ($6,000 each). My question is: should we max these out using index funds that mirror the S&P 500 and the Western European Pacific Rim Developed Nations Fund? Or should we invest in a targeted retirement fund for 2040?
The fees for the targeted retirement fund are slightly higher (0.15%) versus the index funds (.05% to 0.1%). We would be using index funds: 50% domestic / 50% international or the targeted retirement funds: 100%.
David asks:
My wife and I both have full-time corporate jobs where we contribute about 8% of our pay to our employer-sponsored 401(k)s, which ends up being short of the $18,000 maximum. We also both each fully fund our Roth IRAs. We save over half of our income each month, and most of that is going towards what will hopefully be our first home purchase this summer.
On top of this, we also have a side hustle together. In 2018, this business made just over $10,000 in net income.
Our problem is taxes. Last spring, we owed a few thousand dollars to both the state and the IRS. After that, I made sure my wife and I changed our withholdings so that our paychecks would withhold as much as possible for taxes.
Our tax professional told us that if we withheld $17,000 in Federal, we should be good, but I don’t think we got there.
Can I open a Solo 401(k) or a SEP IRA for myself based on that side hustle income to reduce our overall taxable income for 2018 and not have to pay in to the IRS this year? If so, which account would you recommend, and can I open it before taxes are due and deduct what I put in it for my 2018 income?
Amanda asks:
I’m calling to get your opinion on whether I should get married. I’ve been divorced for seven years, and I’ve been with my current partner for six. I have a 10-year-old son. My ex has been court-ordered to pay child support and half of all future college expenses.
However, my current partner earns double what I do, so we would be in a high income bracket. I was told by my ex that when/if I got married, they would refuse to help with future college expenses because college aid would be determined by the income of my current partner and I – if we got married – because my son lives in our household.
I’m also trying to obtain student loan forgiveness because I work in a non-profit field. I’m about four years away from that, so I believe that I would lose out on that if I were to get married.
I’m trying not to think of marriage in such a financially negative way, but I keep focusing on those aspects. Any advice?
Joe asks:
I’m 32 years old, my wife is 30, and we have a combined gross income of $118,000. Our mortgage is our only debt — it’s $248,000 at 3.1% interest rate for 25 years. In addition to our current investment strategy, which is through Vanguard ETFs with an allocation of 80% equity and 20% bonds, which accounts for $70,000 invested so far, I also contribute towards a pension plan which accounts for about 9% of my pay. My wife contributes 9% of her pay (which her employer matches) to an investment plan made up of index funds.
Instead of investing in bonds, should I use this money towards our house mortgage instead? Bonds are currently averaging a 3% rate of return, which is the same interest rate as my mortgage. Does it make sense to treat my house mortgage similar to a bond investment, as a fixed income portion of my investment portfolio?
Bret asks:
My wife and I always try to match out our 401(k) each year. But this year, I simulated what would happen if we maxed out a Traditional IRA rather than Roth. For this particular tax year, if I did that, I would actually get $2,210 more back. So, is it worth it to bypass the future tax benefits of the Roth?
Another option: I don’t have to make hers and mine both Traditional. I could do it with one account and get half ($1,105) back. What do you think?
Taunia asks:
My husband and I are 43 years old. We have a soon-to-be 16 year old and a 7 year old. We’ve saved $785,000. Additionally, my husband has a pension with a cash balance option of $89,000 and he’s 100% vested. We’ve also saved on-and-off in our children’s 529 plans for a total of $33,000.
Our major concerns are: low emergency funds (only 2 months’ worth) and our debt. We have one car note at 1.9% interest with 24 months left; one loan for replacement windows at 0% interest ($502/mo); and 3 loans related to our primary residence:
The first loan is against my husband’s 401(k) and matures in 2024.
A 15-year second-mortgage with a 7% fixed interest maturing in 2029.
A 30-year first mortgage with an interest rate of 4.25%.
We recently reduced our 401(k) contribution rates to the minimum amount where we get our employer match with the hopes of pushing the cash flow towards debt repayment.
I want to get us on track towards financial independence as soon as possible, and I’m feeling a little despondent at this prospect due to our debts.
How do you think we should proceed?
- Focus on paying off debts first, with $2,500/month going toward those repayments
- Contribute to our Roth 401(K) at work
- Focus on building up emergency savings, which we’re contributing about $550/mo to
Enjoy!
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