April Mortgage Update: Still wrestling with next year’s money goals

Last month (March):

Balance: $82,617.28
Years left: 6.666666667
P =$881.26, I = $333.14, Escrow = 621.66

This month (April):

Balance: $81,065.97
Years left: 6.5
P =$887.38, I = $327.03, Escrow = 621.66

One month’s prepayment savings:  $2.62

So, as we’ve discussed, this past year we’ve been contributing $500/month to each of the DCs’ 529 funds.   DH and I have been contributing to various forms of IRAs (now all Roths) since we graduated from college.  We’ve been putting money in 403(b)s and 457s as well, and are now pretty much caught up to where we should have been retirement-wise had we not wasted our youth frittering away our time in graduate school.  We’ve also been paying around $600 extra each month on the mortgage (though that varies with our escrow).

All of that is going to stop being automatic next year, other than my mandatory 403(b) contributions (~12% of my salary if you include the match).

We will have some extra money on top of our emergency fund at the end of the summer because (in theory) I’m getting summer salary.  This will be somewhere between 18K and another number (depending on things like emergencies, whether/when DH gets consulting, and so on).

Last semester when DH was thinking about quitting his job, we wrote out a list of priorities of what to do with extra money above and beyond our emergency savings.  #1 was 529 plans.  #2 was DH’s Roth IRA, #3 was my Roth IRA, and so-on.

Now I’m questioning the wisdom of putting money in the 529 plans before funding the IRAs.  On our current path, our children may very well get financial aid, which is something we hadn’t been planning on when we started the 529 saving.  Mint tells me that DC1 has over 40K at this point and DC2 has over 4K.  Do we really need to keep putting 12K/year away in these funds?

Earlier when I talked about this, I suggested filling up DC1’s 529 and not doing much with DC2’s, even though we are planning on paying for four years of college for each.  The reason would be that if DC1 doesn’t use all of hir money, it could easily be transferred to DC2 and we could stop saving for DC2.   People didn’t like that because they didn’t want DC2 to feel like a lesser loved child.  I want to emphasize that we will be paying the full college tuition for both children to the schools of their choices, even if 529 pots are unequal sizes (which they will be, even if we contribute the same amount just because of the vaguaries of the stock market).

Also, I would love to just put money into the Roth IRAs now, but there’s always the chance that DH will make a full salary before the next fiscal year is out and push us over the limit.  Undoing that sounds like a hassle.  Though maybe that’s too unlikely a proposition to keep us from waiting until January.

Anyhow, here’s our dream list of savings:

$12K/year in 529 plans (6K/kid)
DH Roth IRA (5.5K)
My Roth IRA (5.5K)
Mortgage prepayment (up to the amount left)
My additional 403(b) (17.5K/year)
My 457 (17.5K/year)
A SEPA or other self-employment retirement vehicle for DH (up to the amount he earns or 51K whichever is smaller)
Taxable stocks (infinity!)

Keeping in mind that I already must contribute 12%  to my 403(b), that we’ve caught up with where we should be an our ages and income on retirement, that our mortgage is as described above, we want to pay full tuition to college for two children, we’re in the 25% tax bracket (we were also in that bracket before DH left his job), and we have a healthy emergency fund in cash, In what order would you put extra money and why?

48 Responses to “April Mortgage Update: Still wrestling with next year’s money goals”

  1. plantingourpennies Says:

    For us, it’s fund Roth IRAs while we’re still eligible, then max out 401Ks, and SEP IRA if/when eligible. I don’t think we’d do a 529 since I’ve heard that they count against the child’s financial aid dollar-for-dollar, whereas money in an account in your name would count against the financial aid only at 25%. But as we are kid-less, I could be misremembering that.

    Also – whatever happened to free college tuition for kiddos of the academic set? Is this no longer a given perk?

  2. NoTrustFund Says:

    I would also do retirement before 529s. Especially if you still have front door access to a Roth.
    We also put a little bit of money in a taxable account “before” 529s so all our money is not locked up. I put “before” in quote b/c right now we can do both, but we still think about this in terms of priorities.

    I’m guessing you work at a school the doest have or is doing away with reciprocity for kids of staff. I had a job that offered this once, but it was pre-kids. And even know my kids are so little, I doubt that school will still have it by the time my kids are in college.

    Does your school contribute 12% towards retirement without you having to make a contribution. I know a lot of colleges and universities do this and it’s such an amazing perk!

    • nicoleandmaggie Says:

      We’re not sure if we will be Roth eligible. It is going to depend on if DH makes any money in the next half of the year, so we’d have to wait until we did our taxes to find out.

      No, the college does not contribute 12% without us having to make a contribution. It just forces us to contribute 6% and matches 6%. We don’t have a choice. It’s actually pretty lousy (though better than nothing). I do have friends at private schools who get the full 12% on top of their nominal salaries. Not so here.

      When you say retirement, how MUCH retirement? Keep in mind we have:
      1. Mandatory retirement (12%)
      2. 403(b)
      4. 457
      5. IRAs (either the straight-up Roth or the back-door Roth)
      6. SEPA (if DH makes money)

      That adds up to a LOT of money. I think the individual limit on what you can contribute is 55K or thereabouts, but there are two of us. That means we could put away a ton of money for retirement without ever saving for college for our kids, and we won’t be old enough to access it when they’re in college. We could end up being super wealthy 55 year olds but have to take on student loans during the interim.

      It’s also ridiculous that our school doesn’t have reciprocity– you’d think they’d want faculty brats (if they can get in). Apparently not! Though in-state tuition is about what we pay for private school + daycamp for DC1. So it isn’t even that big a cost/benefit.

      • NoTrustFund Says:

        That is a lot of retirement. We max out both 401ks which includes one generous match and one ‘normal’ match. For you maybe just 1. and then college costs?

        I know some schools that offer reciprocity get a lot of push back from people who do not have college aged kids. It’s an EXTREMELY large benefit that only benefits a few. Probably made back sense back when people just had one job for life.

      • NoTrustFund Says:

        Sorry, 1. and the Roths if you are eligible.

      • nicoleandmaggie Says:

        Even if we’re not eligible, we can do the backdoor thing. It’s annoying to hold onto that money until January!

  3. The frugal ecologist Says:

    I would prioritize both roths over 529s for the kids. But it sounds like you can do both? I was just reading last night that Roth can be used for education prior to 59.5? I need to double check that, but if true would make you perhaps less worried about too much locked up in retirement?

    For us, we are also caught up on retirement for our ages now. We put 25-30% into retirement annually. My order of contributions each month is mandatory 3% (with 8% contributed by school) into 403b, fully fund Roths for spouse & me, $200 into taxable saving account for proto-children’s college, and anything left to max out 403b. (Currently there isn’t anything left – so right now 403b gets just 11%).

    • nicoleandmaggie Says:

      I don’t know if we’re going to be able to do both. Right now we’re looking at a surplus of 18K assuming no big emergencies and all my summer money comes through (this is subject to change). That won’t be a regular annual surplus, as I only have summer funding locked for this year. After that, the idea is that DH starts bringing in money, but as a consultant he won’t be bringing in regular money. It would be nice to know where to put that money before it starts coming in (assuming it starts coming in).

      I’ll check on if the Roth can be used for a kid’s education. I know that the principle can be withdrawn without penalty at any time, just not the earnings.

      It sounds like percentage-wise you’re funding kids’ educations before you finish maxing out retirement, but why taxable? Because they’re proto-children?

    • nicoleandmaggie Says:

      http://wiki.fool.com/What_Can_Roth_IRA_Money_Be_Used_For%3F

      The Motley Fool says yes.

      The concern is that if DH brings in money, we’re more likely to be able to afford a Roth IRA, but we’ll have to back-door fund it rather than actually funding it, so it will have to wait until we do our taxes next year. But I suppose this is something Vanguard can help us out with, and it won’t hurt to keep the extra money in savings while we wait.

  4. Leigh Says:

    I’m doing 401(k), HSA, Roth IRAs, I-Bonds, then mortgage pre-payment, and lastly taxable investments when the whole mortgage is paid off. I waited to do my 2012 Roth IRA until I did my taxes. It was kind of annoying, but oh well. I’ll do the 2013 one once I know if I will be over/under the income limit. I might be over the limit by the time I get my last bonus, so I’ll use that.

    My thing about the 529s is that you can pay for college out of ANY regular account or cash flow. So let’s say your mortgage is $1,000/month right now, but you pay it off before the kids go to college. That gives you $1,000/month to pay or save for college. If it was me, I would probably only fund the 529s up to a certain amount/age of the kid and then set aside any other “education” money in my regular accounts. How much will that $40k be worth in 12 years? Are you planning on paying for private school? How good is the tax break on the 529s?

    Hmmm. If you guys were going to be 59 1/2 when your kids go to college, putting money in your 403(b) instead of 529s might not be a bad idea, but I think you’re too young for that? If you plan on leaving your job, the 457 could be used for that too!

    • nicoleandmaggie Says:

      It is true that we should have more cash flow when college starts– if we stay here this mortgage will be paid off (if we move to Northern CA, though, all bets are off). We also won’t be paying for daycare or private K-12. How much to set aside is a good question. How much 40K will be worth in 12 years is another good question. We are planning on paying for private school. The tax break on the 529s is only as good as the tax laws when we take them out. (Right now I think it’s a 15% discount, but if capital gains laws change, that’ll go up.)

      We will not be 59 1/2.

      I think we’re just going to roll over DH’s 457 into an IRA this year. I don’t have one– the investment options in the 403(b) are better than those in the 457.

  5. investfourmore Says:

    Quite the plan you have! I personally am counting my rental properties for my retirement and childrens college. The flexibility fo the rental properties allows me to use the cash flow however and whenever I want without having to worry about what account the money is designated for.

  6. Debbie M Says:

    First priority–ask your employer to provide Roth 403(b)s.

    In answer to your question, my only opinion is to prioritize the Roth IRA over the 529 plans (if you’re allowed to contribute to the Roth IRAs at all). You can still use the money to fund their educations. And you can change your mind and take the money back out if you need it for living expenses due to joblessness.

    And, I think the SEPA over the 457 or additional 403(b) contributions, assuming your choices are better.

    • nicoleandmaggie Says:

      We have Roth 403(b)s. I currently have them set up for the 403(b) but not DH’s 457.

      It is my understanding that if we wait to find out we’re not eligible for Roth IRAs, we can get a traditional IRA with no deduction and then turn it right around into a Roth IRA paying only capital gains on the change in that brief moment (which could probably even be timed to be a loss). We need to talk to a professional about the back-door Roth, obviously. (But we did roll over all our Traditional IRAs back when the back-door Roth was first introduced.)

  7. rented life Says:

    Debt, emergency fund (which is currently titled “how we will pay for bills after May 2nd if Rented Life can’t secure immediate PT or FT employment”). If I find a job that that fund will be divided into 1) things we need to do but put off (cats to vet, etc), future house fund, and debt. I also need to sit down and properly research retirement options for myself. Husband has a 401k through his work, I’ve got nothing, and likely won’t given the career path I’m likely headed toward. I’m ok with my retirement not being tied to a job, but I need to research getting it going on my own. I went to a financial advisor once and they pretty much said I didn’t have enough for them to work with and that my budget wasn’t specific enough–more people who assumed a non-existent latte factor. Wouldn’t believe for a second that there wasn’t one. Occasionally if we have a little extra $ it’ll be a night out or a bottle of wine, but that’s minimal.

    Extra money usually comes from husband’s bonuses. Since the bonus amount depends on the entire team, not just him, it’s not income we can plan on, so I never include it in my budget it. Eventually the store will get stable and we will be able to “expect” something, but even then, I don’t aim to include it in our planned income. And when it is stable? I want to invest it so it works for us.

  8. mochimac Says:

    Debt
    Retirement
    Kids / Education
    Investing

    • nicoleandmaggie Says:

      It isn’t quite that simple.

      Our only debt is mortgage debt, and if we wanted, we could pay it off with our taxable stocks today (well, yesterday… I understand the market is down today). We don’t because we’re diversifying. Our retirement options are so large that we could way over-save for retirement and end up extremely wealthy at age 59 1/2 or whatever, but end up having to take out high interest loans for our kids’ colleges– loans we could pay with no problem once we tapped into our retirement. Taxable investing allows us to keep our cash reserves low as an additional emergency fund, though we have not been adding to this other than what the stock market provides on its own.

      So sure, debt, retirement, education, investing makes sense if you have high interest debt, you are limited in the amount you can put away for retirement, and you plan on getting some financial aid. Or if you make so much money you can easily fill out all those categories each year. It doesn’t make so much sense when you can put away 55K/year in retirement accounts (or 110K/year) but don’t have 55K/year to put in.

  9. MutantSupermodel Says:

    My gut says retirement first, college second. It’s heard to tell what the future of education is going to be for better or for worse. And it’s easier for a kid to go to college on a loan and repay it than for you to have a crisis in retirement and depend on your kids to take care of you. These are obviously worst case scenarios and I don’t think you guys are anywhere near that situation ever happening. But you’ve seen firsthand how you don’t like thinking about money and that’s definitely NOT going to change as you get older.

  10. Foscavista Says:

    “and are now pretty much caught up to where we should have been retirement-wise had we not wasted our youth frittering away our time in graduate school”

    If you don’t mind me asking, how did you calculate that? I want to do the same for me and DH, for we two went to graduate school. Thanks!

    • nicoleandmaggie Says:

      Oh, there isn’t a good way to do it. I used a bunch of internet calculators and pretended we’d been making the same salary since graduation to get the % of salary estimates. I also used the calculators where you put in how much you plan to spend and used our actual spending. We’re fine and better than fine under a lot of scenarios.

  11. bogart Says:

    I’d definitely prioritize Roths over saving for education, for the reasons you already know.

  12. Leah Says:

    I’d prioritize taking care of you first, even though you intend to take care of the kids. Look at it this way: what is your intended cash flow when the kids would be in college? You’ll be done paying for your mortgage, which is a huge burden relieved. Could you pay for tuition out of cash flow and general savings? My mom actually did that for us. They did not save for college but wanted to help us out. She paid all of my older brothers’ tuition (he went to our local state school, which happened to be flagship, and lived at home). She managed that easily, so she got ambitious with me and my other brother. We both went to SLAC and got decent aid (I had 50% or more reduced each year), and she paid for our tuition with cashflow. She did take on extra hours working, but, still, cashflow.

    If you think you could manage even part of tuition with cashflow, it’s worth considering doing that instead of saving in a specific vehicle. I’d still save in the 529, but I wouldn’t feel like you should save up every cent needed. If anything, I might bring DC2 up to parity or just put some in each year to each account, but I wouldn’t prioritize those as top considerations.

    • nicoleandmaggie Says:

      I don’t know if we’d be able to spend out of cash-flow. Currently tuition is 40-50K at most private schools. I don’t know how much financial aid our kids would be eligible for. I don’t know what our income is going to be in 12 years. Right now we couldn’t afford 40-50K out of cashflow, and who knows how much education will cost in the future– it is predicted to grow at a rate higher than inflation.

      Our mortgage isn’t that big a burden– only about 12K/year, and 12K won’t be worth as much in 12 years. Our property taxes will probably have gone up as well.

      We only have ~80K in general savings (that is, in taxable stocks), and no plans to add to that. We have much more than that in our retirement funds.

      Our parents didn’t have as many options for saving for college. They couldn’t put money away in 529s and the Coverdell is tiny. So college saving had to go into general saving. Working extra when the kids are in college can decrease financial aid pretty dramatically depending where they you are on their financial aid curves. They give aid at a decreasing rate with respect to incomes. (Just went to a talk on this topic.)

  13. chacha1 Says:

    I dunno. I have a feeling that if I were in that situation I would leave my current savings plans in place (that is, continue doing what you are doing) but instead of adding a new retirement savings vehicle I would take the “left over” or extra money and split it between mortgage prepayment and college accounts.

    And that said, I would cap the older child’s account at a certain point and then build up the second child’s account to match it, and then recalculate. I know college is a completely different animal now than it was when I went (a looooooong time ago) but my college cost, like, $5000 total for four years due to scholarships and choosing a local campus. So given that college for child 1 is *at least* ten years away (even though ze is a prodigy) I might cap that at $50K, build up the second account, and then contribute equally going forward if you want to.

    • nicoleandmaggie Says:

      The nice thing is that if DC1 doesn’t use it all up, it can go directly to DC2. But I understand people think that seems unfair. I dunno.

      But that’s a good idea of capping it at some point and moving the money to the house (which, incidentally, is not counted in financial aid). When to cap it is a good question. If only I could foresee the future! If we’re living on my salary for the rest of eternity, then they will be financial aid eligible and we won’t need the full inflated value of 160K for each kid. Maybe only 80K! (My college also didn’t cost much ‘cuz my parents didn’t make much and the private school I went to is loaded.) They won’t be going local, at least not for real college (they’ll probably take classes as students-at-large when they’re in high school like my sister and I did).

      • chacha1 Says:

        It’s a perception thing. No one wants to feel like all they’re getting is hand-me-downs or leftovers. If the playing field is level, as it were, you still end up with a ton of money saved that can be used according to need, and it obliterates a potential source of teenage angst. :-)

        Foreseeing the future: yeah, that’s the hard part!

      • nicoleandmaggie Says:

        They’re never going to be equivalent just because of the vagaries of the stock market, and if we put in the exact same amount, then DC2’s will be worth less because of inflation. But we are paying for 4 years full tuition, room, board, and supplies for each of them. They don’t even ever have to see the 529 contents, though they probably will. There’s also a five year gap between the two of them (not counting the accelerations), so even if we keep filling up both accounts the same amount, they will be different sizes when DC1 graduates from school because DC2 will have 5 years of filling left.

      • hush Says:

        Re: “fairness” – I also have two kids but my younger’s acct actually has slightly more $ in it due to when they were born/the vagaries of the market. Personally, even though they are technically two separate accts, and when I view the acct statements they are clearly separate, I choose to think of them both taken together as The Family College Fund. What does it matter if they’re not always even Steven? It’s a pool – I get to move the water around as required. They’ll both get what they need.

  14. Holly@ClubThrifty Says:

    It sounds like you are going to make a wonderful decision no matter what you decide! I don’t put anywhere near as much in my kid’s 529 plans as you do, so I don’t have the same concerns. But, like you, I have considered fully funding one kid’s plan and only partially funding the other’s. I think it makes perfect sense to do it that way. I will have to make that decision later when I have their accounts better funded.

    • nicoleandmaggie Says:

      ARGH. I wonder if I’m overthinking this and should just wait until we have more money! I mean, that 18K is going to have to go somewhere but maybe I should just dole it out to places I can put the money now, and hope that another 11K will appear for the Roths when we do next year’s taxes and know if we can contribute directly or have to go back door. Or maybe I should keep it all in savings and let it be autodeducted each month into the 529s and the 403(b) until the money runs out. Or maybe just lump sum it to the mortgage. Sigh. I dunno. But yes, FIRST WORLD PROBLEM!

  15. Carnival of Personal Finance #404, sunny edition - Reach Financial Independence Says:

    […] Nicole from Grumpy Rumblings reviews her and Maggie’s savings goals with uncertain self-employment income. […]


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