Need advice with financial planning.
I have been debating about posting this for a while now, since it involves posting ballpark numbers about my current financial status (and doing that gives me sweaty palms), and I decided to do it today asking you folks for advice.
My current financial status is not bad and I have nothing to complain about. I just want to improve it and make it better, given that I have to start planning for a house at some point. Some backstory, I was a grad student till August of last year (technically only graduated this May), but I started working from October 1st. As a grad student, I used to get 2K a month for my stipend, which worked out well enough for me to live nicely, although it did not allow for too many savings and such.
I did have some CC debt and money that I borrowed from my father-in-law. I say did, because currently, I have no CC debt, having paid off everything. The only debt that remains is paying my father-in-law, which I continue to do right now. So, onto my current financial state:
Monthly Wages: approx 6000 USD after taxes and deductions
Monthly Expenses (everything bundled into this): 2500 USD
Monthly FIL Loan: 1000 USD (have 4000 USD remaining, should be paid off by September)
Off-shore Investments: 1000 USD (commodities, stable markets, for the next three months)
US Investments: 1000 USD (ETFs, Cryptocurrencies)
Roth IRA: 2500 USD
Grad Life 457(b): 8000 USD
Current Retirement Acct from work (no employer contribution and will not be for another year): 3000 USD
Current Crypto Investments (for the long haul): 2000 USD
Current ETFs: 600 USD
So there it is. That is my current financial picture and I would like some help planning for the future, especially putting money away for a downpayment on a home and such. Some observations:
1. FIL loan will end in 4 months, including June.
2. Off-shore investments will end in 3 months, including June.
Both these will hopefully free up another 2000 USD a month to put aside for things.
The questions I have (and the questions I know people are going to ask me) are this:
1. Income replacement fund: Can I treat my grad-life 457(b) as my income replacement fund? I never touched it for the entirety of my Ph.D life and after, thus allowing it to accumulate up to 8K. I am allowed to withdraw, roll it over, do whatever I want with it, except that if I choose to withdraw, I immediately lose 30% of it to taxes. Question is, do I consider that approx 5750 USD towards my income replacement fund, since I am still in the process of saving up for it? The ETFs are meant for this, but they will take time to build up. I contribute 300-500 USD a month towards them.
2. How do I plan for a downpayment towards a home? How much do I put in there? I don't know where I will be, what house I will buy, but I want to get started, so any advice in this regard will be helpful.
3. Any other investment/retirement/financial growth advice is most welcome.
P.S: I get paid at the end of the month, so June's paycheck has not yet come in. I am budgeted for June entirely. My credit cards are being used solely to pay for stuff that has been budgeted for, so no float there. I would consider myself on a pseudo-paycheck to paycheck cycle. I say that only because I have the means to budget into the next month, but for the time being, I am choosing to send that money elsewhere into investments.
P.P.S: If the question arises as to why I am choosing off-shore investments, there are some good reasons of the financial advisor I am dealing with and the portfolio they maintain. I am guaranteed good returns on them, albeit after a 3-year holding period. My judgment is that it is worth the risk at this point and over that time frame, I expect the returns to average out. My annualized rate of return could be anywhere between 20-30% over 3 years, which is much more than I can expect from any high yield savings account here.
nolesrule , Superbone , dakinemaui , WordTenor --> your thoughts and advice? For the most part of the years I have been YNABing, your words have helped, so I will take whatever you got now too. :)
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First of all, you’re starting early, so that’s great. Your monthly wages versus expenses is very good.
How much are you paying for your investment advisor? Is he getting a percentage of assets under management? Depending how interested you’re in it, you might think about managing it yourself. It’s actually quite easy.
Read A Simple Path to Wealth by JL Collins. I would also recommend Retire Before Mom and Dad by Rob Berger.
No, don’t treat your 457(b) as an income replacement fund. Roll it over into a retirement plan. Speaking of which, how good is your work retirement plan? How does it compare to your Roth IRA? What brokerage are you using? These questions help determine which account to roll over the 457(b) into. Don’t sleep on funding retirement. That’s going to be your biggest nest egg at the end of it all. Time in the market is paramount.
How far off for the home purchase? Determines whether you can invest these funds or not. Since you don’t know where you’ll be purchasing or how much you’ll need, figure out how much you can put away monthly and still fund your other priorities. You should probably fund at the minimum a 3 month Income Replacement fund before you even start saving for a house.
Since you get paid at the end of the month, use that pay to fund next month. Makes budgeting a whole lot easier when you can do it all at once.
That’s all I’ve got for now. Keep asking questions. You are off to a great start.
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Superbone Thank you for the kind words and for asking the pertinent and difficult questions. :) I was struggling to frame them. Let me try to answer them as best as I can.
1. I am not paying anything for my investment advisor. He is doing this as a favor, or more so in gratitude because my brother (and by extension me) helped him get through college and with his wealth management classes and training etc. This is his way of paying it back/giving it forward. My brother and I have checked out the portfolio, return streams, management and cash flow of his and he is doing pretty decently/well, if I may put it that way. We get good returns because as a favor, our investment gets lumped into his portfolio that he manages for bigger clients etc. As for the book, will definitely read that. Thanks for the pointer.
2. My work retirement plan is alright, not too great. Problem is that I am in academia and my employer does not contribute to this retirement plan until I have two years under my belt. This is all and good, in any case, since they for the most part have decided to pause all employer contributions through this fiscal year 2020-21 due to COVID's financial hits. That is the better way to do things without cutting jobs. It does not affect me because they weren't paying for mine anyway, so. Now coming to the difference between my ROTH IRA and 457(b), the 457(b) is definitely more stable. The Roth lost a lot of money in the market drop recently, but since the 457(b) is for state employees, the investment was predominantly in stable money markets, so it was not affected at all. That is the reason I am hesitant to roll it over into something without fully understanding the implications in terms of the portfolio. I did not know or care about any of this as a grad student, so over 5-6 years, it was a forced saving that just grew and grew. I was kinda shocked when I discovered I had that much available when I finished up. 😂
3. Home purchase, I would say is maybe a year or two off at the most. I think this can be done after 3-4 months, since I would have freed up enough money after my FIL loan payment and investment portfolio funding completion.
4. Point taken. Will focus on income replacement before that. These are the things that I needed some clarity about. :)
5. Yes, that is what is currently happening. June is funded through with May's paycheck and so on and so forth. June is going to go to July.
Thanks a ton once again for the suggestions. :)
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LoaferDude Just out of curiosity, where does the 30% tax hit on your 457(b) come from? Is that just your state taxes + the highest fed bracket you're in? The tricky thing with the amount in that account for you is that it's enough money to last you a few months, but not all year. When I had access to a 457(b), I kept it funded enough to last us an entire year (living frugally) if we wanted to take a sabbatical. I never rolled it over because as soon as you put it into an IRA, it loses some of it's flexibility.
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Orchid Leopard I was told by the folks at Empower Retirement, who handle the 457(b) for my school, that it was 20% + 10%, the 20 being the usual fed bracket plus state taxes and the extra 10% was because I was an international student, and not a US citizen. I called them multiple times to double check and have received conflicting pieces of information. I am still digging into it to try and figure out which is true, the 20 or the 30 percent.
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I'll leave the investment angle to others that are more qualified, but I will say that a lot of this stuff is iterative since all the demands on your money can't exceed your income. By making plans for every dollar -- including retirement contributions, house downpayment, income replacement, etc -- you will develop an understanding of your inner relative priorities. You've been doing this long enough to know that sometimes all you can do is make estimates (aka guesses).
On the house topic, pull up Zillow and look at what "suitable" houses are going for in the area(s) you might want to buy. Family (prospective family) or hobbies might influence both size and location. Estimate a timeline, figure 20% down, and there's your monthly contributions computed. (Also check if your income can support the subsequent payments, also include estimates for property taxes and insurance.) Budget that and see if you're OK with the effect that level of savings has on all the other things. If that's not OK, you gotta shift scope or timeline so more important things get funded. This you already know, but hopefully just hearing it again will help.
One very important thing on the house: this will not be your last. It is a stepping stone. Choose wisely and it both supports your immediate needs and equity builds (hopefully accelerated via appreciation), making your next step easier.
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dakinemaui Yes, that makes a lot of sense. The home buying part is what I am very apprehensive about, for the lack of a better word. I am forever reminding myself that just because I have home buying power of X USD, does not mean I NEED a home that is in the ballpark of X USD. I have looked at some properties on and off on Zillow/Redfin and with some adjustment, like you said, I should be able to pay the monthly costs, insurance and taxes included. The problem is with the down-payment, since I recently started working and I don't have anything saved up. So it might take a while to saving up 20% like you said.
Also, since we are on the topic, what are the downsides to a 10% or lesser than that downpayment, other than increased monthly costs, which I still may be able to absorb? Is there any effect of it on rates or such? I am extremely new to this, so sorry about silly questions.
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LoaferDude Anything less than 20% will incur an additional expense called Private Mortgage Insurance (PMI). This is money out of your pocket to the tune of 1-2% of the initial loan principle every year (varies by credit rating). I like to think of it as additional interest in that regard (money out the door).
It might be worth getting into a property earlier -- and therefore with less than 20% down -- if you think the appreciation will be worth it. You typically get out of paying PMI by refinancing when the loan-to-value ratio would be lower than 80%. Refinancing typically has a cost to it as well as the fact interest rates may have risen. I've heard some people have been successful just by asking to remove PMI when LTV < 80%, but I've never been able to do that. Even then, you're going to have to pay for an appraisal. (We paid PMI on our first home.)
And then yes, less down increases the ongoing payments as you point out and rates often depend on how much you put down. (More down == less lender risk == possibly better rate)
Edit: this article seems to summarize things pretty well.
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dakinemaui Thank you for that information. I read through the article and it was super helpful explaining things to a newbie. I am going to do some more reading up based on your points. Looks like I have a lot of information to digest from this thread. :) Your inputs are greatly appreciated.
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LoaferDude said:
I am forever reminding myself that just because I have home buying power of X USD, does not mean I NEED a home that is in the ballpark of X USD.This is very smart and the downfall of a lot of people. The less expensive house you buy under your home buying power, the more flexible you are to increase wealth and just be more flexible in general. You don't want to be what they call, house poor.
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Superbone I have made some staggeringly bad decisions when I moved here for grad school initially in 2008, but for the most part, seeing some sensible people around me drilled a good bit of economic sense into my head. I am really grateful to be out in the world, without any major debt, CC, student loans and to have a car that is paid off (probably the one sensible decision I made as a Ph.D student, even if it meant monthly payments) 😂. If I had been smarter, I would not even have needed to borrow that money from my father-in-law, but well, hindsight is 20-20 and you learn from the school of hard knocks.
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LoaferDude said:
My work retirement plan is alright, not too great. Problem is that I am in academia and my employer does not contribute to this retirement plan until I have two years under my belt. This is all and good, in any case, since they for the most part have decided to pause all employer contributions through this fiscal year 2020-21 due to COVID's financial hits. That is the better way to do things without cutting jobs. It does not affect me because they weren't paying for mine anyway, so. Now coming to the difference between my ROTH IRA and 457(b), the 457(b) is definitely more stable. The Roth lost a lot of money in the market drop recently, but since the 457(b) is for state employees, the investment was predominantly in stable money markets, so it was not affected at all. That is the reason I am hesitant to roll it over into something without fully understanding the implications in terms of the portfolio.This is actually not what I meant. When I asked how good they are, I meant how good are the investment options? Are there a lot of investment choices? Do they have low expense ratios? Do they have target date funds? These are the important things to know. Whether they're stable of not is something else entirely. Since you're just starting out, you shouldn't be worrying about stability. In fact, you should mostly be in stock funds which are the most volatile (and have the greatest returns). You have a long horizon in front of you. If you read nothing else, read A Simple Path to Wealth. It's an easy and fun read. If you have decent options in your work retirement fund, you most likely want to rollover your 475(b) into this fund. It's a lot easier to rebalance when the funds are in one account.
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Superbone Ah my bad. I misunderstood. I will read the book(s) you suggested and more importantly, look deeper into the investment options there. I just picked the default ones when I was signed up for it through work, since I did not have anything in it and did not know what portfolio to pick. To be honest, I was thinking along the lines that you suggested and did go with a "moderately aggressive" portfolio, since I was not too comfortable being fully aggressive with all my CC debt and other things (this is Oct 2019's story). Of course, the situation has changed now and I can look into it and re-allocate based on your suggestions. Thank you so much. :)
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You've got some real sound thinking here with respect to income/expense ratio, and about your home purchase. Re: the month to month, if you're paid at the end of the month and use it to budget the next month, you're buffered, as it were. I'd build up your income replacement fund, but I wouldn't worry about doing any more than budgeting June's paycheck into July. (End of month whole month paycheck is the standard for academe, so I'm speaking from my own practice as well as best practice.)
That you have an "investment advisor" who is suggesting offshore funds and not balking at the fact that you've got a significant portion of your net worth tied up in crypto is a red flag for me the size of Texas. Crypto is for fun. It's not there yet in terms of an investment; it's too risky. It should be the part of your portfolio you play with, while the rest is invested more conservatively. With your total, I wouldn't hold more than about 800 (5%) in crypto, and I wouldn't even do that until I had a solid income replacement fund. You'll also need to be saving for home emergencies, since that's a priority for you.
However, conservatively, as @Superbone pointed out, doesn't mean "stable." One rule of thumb espoused by many financial advisors is that you should carry your age in bonds. A less conservative model is your age minus 10. So if you are 30, you have 80 percent equities and 20 percent bonds. And you want to think about that balance across all your accounts--it might be that you have one account where the equities funds are crappy and the bond funds are great so you put the entirety of your bond investing in that one account. I'm agreed with @Superbone that you should roll over the 457(b). You *should* be able to do a Roth conversion on it. Pay cash for the taxes on that conversion. Once you've done that, I would hold your income replacement fund in cash, not in equities of any sort. Keep it in a HYSA, a money market fund, or I-Bonds.
Re: the house purchase, if your housing market supports it, a conservative rule of thumb is 2-2.5x your income, so you'll save 40-50% of your income as a downpayment. That doesn't work everywhere, but it's a good idea. I actually kept my downpayment in a bond fund because when I saved it, I knew buying was still at least 4 years away, and I was also willing to assess my whole picture and delay buying if necessary. If you really do want to buy in 1-2 years, I would just hold it in "cash" (cash being those same vehicles at the end of the past para)
Agreed on Simple Path to Wealth. I also really was impressed with I Will Teach You to be Rich. And when you really want to go bonkers with learning about investing, Bogleheads Guide is the cream of the crop.
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LoaferDude said:
The Roth lost a lot of money in the market drop recently, but since the 457(b) is for state employees, the investment was predominantly in stable money markets, so it was not affected at all.If you are going to be invested in the market (stocks, ETFs, mutual funds), you can't flinch at the kind of drop in the market we've seen lately. Especially if you are just starting out in your career. The fact that your Roth dropped recently does not mean that it isn't "good"; it just means that the market was down. My old 401(k) wasn't "good" because there were limited investment options for me to choose from and the ones that were available had high expense ratios. Employer changed things up a bit and while the expense ratios aren't as low as I would like, they are noticeably lower and the options available have increased.
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jenmas Oh no. I just made an observation about it. So the backstory to this Roth is that I worked for a year and a half in-between my Masters and my Ph.D, during which time I had an employer matched 401K (back in 2010-11). When I started grad school again, I decided to roll that 401K over into a Roth, since I would fall into the lower tax bracket as a student. The money in the Roth has been sitting like that ever since. :P (albeit a few thousand that I used to pay for my mandatory grad school fees over the years). That was always meant to be in for the long term. In any case, I am going to look into more options to rebalance like all of you have suggested. Thank you so much for all the advice. It has been sooooooo helpful. :)
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WordTenor said:
That you have an "investment advisor" who is suggesting offshore funds and not balking at the fact that you've got a significant portion of your net worth tied up in crypto is a red flag for me the size of Texas. Crypto is for fun. It's not there yet in terms of an investment; it's too risky. It should be the part of your portfolio you play with, while the rest is invested more conservatively. With your total, I wouldn't hold more than about 800 (5%) in crypto, and I wouldn't even do that until I had a solid income replacement fund. You'll also need to be saving for home emergencies, since that's a priority for you.So glad you brought this up, WordTenor . That stuck out to me too when I read the OP last night but I forgot to mention it. Yeah, that's not investing, that's gambling. I'd say 3% of your portfolio for crypto. And, hey, I have some too! But I took out my original funds so mine is all gravy.
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Superbone Hahaha, yes. Point taken. I am not putting all my eggs into that basket. From the snapshot I provided now, it looks that way, but the idea is to bring it down to your levels after a couple of months. Also, I provided some context for the decision of off-shore investments.
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WordTenor said:
That you have an "investment advisor" who is suggesting offshore funds and not balking at the fact that you've got a significant portion of your net worth tied up in crypto is a red flag for me the size of Texas. Crypto is for fun.WordTenor
This I will have to clear up a little bit and give you context. I apologize for using the term "financial advisor". He is definitely a wealth manager, but not in US. He is in my home country. He is not advising me of any investments outside of my home country. Now, the backstory to this is that my dad, who is 78 and alone back there, is also the epitome of charity, having used up all his savings to help people back home, without keeping much in the bank for himself, in case something happens.🙄 Since I was a student, I did not have any way to save for him and grow that money before this. So what I am doing (what I called the off-shore investments) is having this person invest this money in my home country. The returns I am going to get over the 3-year period are going to be enough to take care of my dad and his needs and anything I need it for in my home country. The person is in no way aware of my other investments and such. Hope that cleared up the red flag part. :)
Coming to crypto and my investment there, I am an engineer and along with one of my friends, who is big time into investing in general, we have been following the development of cryptocurrencies for some time. He has been doing it for the greater part of 7-8 years and we have developed a decent understanding and some models that work for us personally. I did not have a lot of spare money to invest in it up until this point, while his entire house down-payment was funded from his crypto investments, and they also factor in as a secondary, passive source of income, paying for a lot of monthly bills. Long story short, the models we have seem to be working out in the long run (>5 years), with the indicators that we are using. That is why I was comfortable putting that money in there, as opposed to stocks etc. I did not write this up in my initial post, since it was already getting too long. :)
The other thing was that once my FIL loan is done in the next few months, I will have 2K more to put into traditional investment portfolios like you have suggested, at which point my crypto investments will actually drop to the percentage that you have suggested. It is just that I got a head start on crypto as my long term plan as opposed to the other way around.
I am going to look into restructuring my investments like you and Superbone suggested, with rolling over my 457(b) too.
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LoaferDude I worry because of this statement
LoaferDude said:
The returns I am going to get over the 3-year period are going to be enough to take care of my dad and his needs and anything I need it for in my home country.This is an impossible guarantee for any investment. Other countries’ markets are regulated differently but they don’t really run differently. Any advisor who says “put your money here and it will for sure do x in three years” is not someone I’d suggest listening to. I know there are places with much lower COL than the USA but “$1000 will grow to take care of Dad!” is a dubious claim.
This is a red flag for me. You need to ask this guy MANY more questions.
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WordTenor said:
I'm agreed with @Superbone that you should roll over the 457(b). You *should* be able to do a Roth conversion on it. Pay cash for the taxes on that conversion. Once you've done that, I would hold your income replacement fund in cash, not in equities of any sort. Keep it in a HYSA, a money market fund, or I-Bonds.WordTenor
This is where I am a little confused. The 457(b) is already in a stable money-market account. What would be the reason to convert it to an IRA and then re-invest it into a similar portfolio? My current annualized rate of return on the 457(b) is 2.01%. I don't think I can find any HYSA that comes up to that. If you could please elaborate on that, would be much appreciated.
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LoaferDude These are retirement funds. You shouldn't be looking for stable values. They should mostly be invested in the stock market as we were saying earlier. You've got 30 or 40 years in front of you (and more) to invest. You shouldn't be worrying about volatility at this stage. Continue to invest which will result in dollar cost averaging. This is how you build wealth over many years.
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Superbone Thank you. I actually got confused with what WordTenor said because I misread it. I thought s/he was talking about the 457(b), but they were actually referring to my income replacement fund. I re-read their post again and things became clearer. Point taken. Thank you for all the advice. :)
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LoaferDude I was indeed talking about your 457. The 457 needs to be rolled into your Roth IRA and that should be invested aggressively because you are young.
Your income replacement fund needs to come *out* of ETFs, and be sitting somewhere stable. You are taking your nonretirement funds and risking them, and keeping your retirement funds in cash. It needs to be the other way around.
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The whole investing things is full of red flags. I would suggest reading JL Collins and Bogleheads.org for simple easy to follow investing advice. Keep the investing simple.
I would not trust an advisor who guarantees returns in any amounts.
WordTenor mentioned the Age in Bonds and Age - 10 rule of thumb, but I've found it's probably too conservative for most people early on in life. I've recently switched to 2*(Age - 40) in Bonds. That formula means no Bonds till Age 41, with a glide path that adds 2% in bonds every year after that. If you are more conservative, you can always set a floor percentage of bonds as a minimum, and a ceiling for a maximum.
I need more coffee before I can comment further. -
WordTenor Got it. Will do that. Thanks for the comprehensive breakdown and explanation. :)
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nolesrule LOL. You and your formulas! 😄I totally agree that the old rule of thumb is too conservative. Did you make that formula or did somebody else come up with it? I'm just curious. I hadn't seen anything like that before. I personally just decide how aggressive I want to be and I've always been on the aggressive side financially. I was at 80/20 (stocks/bonds) for a long time but switched to 75/25 a year or two ago. So, I'm more aggressive than your new fangled formula. 😉
Also, that formula won't work with the U path. I guess you could just use it one way.
https://retirementresearcher.com/use-rising-equity-glide-path-retirement/
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Superbone Someone suggested it on Bogleheads, and I like it better. I do have a MIN of 30% and a MAX of 60% that I have added to my formula, the MIN because I include most of my budget accounts as an invest-able asset counting as fixed income and the MAX because because Mrs. nolesrule has a pension so I don't see us needing to drop too low in retirement. We could stop working right now and we'd have $61k/year in SS and pension at FRA.
We'll address a post-retirement rising glidepath as the time comes. It's far enough away that I don't have an interest in trying to fit that into the IPS at this time. -
nolesrule I know you're the spreadsheet master so you'll appreciate this. I'm not but I'm starting to dabble and I was pretty proud that I was able to figure out how to modify my spreadsheet that I got elsewhere to do what I need to rebalance my overall stock/bond ratio in my 401k alone since that's where the bulk of my funds are and I can do it tax free. To rebalance my 401k, you have to give it percentages for each of your holdings. I was able to get it to spit out the percentages for this account that would balance me across all accounts including my Roth IRA, HSA, and taxable investments.
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Superbone This is going to take me a bit of time to digest all this information, look up relevant reading material and understand this. Thank you all for everything. You folks are the best. :)
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Hey, I also wanted to add that it's nice what you're doing for your dad.
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Superbone Thank you. :)
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Sounds like you are getting some great advice. By the way, the Bogleheads forum is also a great place for investing advice, so be sure to check it out.
