Just a 46-year-old mom of 2 in Northern California. My kids are Monkey Monkey(MM) and Drama Llama (DL). I am married to Monkey Hubby (MH). Knock on wood, but we have been doing remarkably well with our budget.
I have also been listening to too much Dave Ramsey.
I had been long planning to divert $215/month come summer, from preschool, to IRAs. Then assuming an extra $100/month each year for raises, and another good $300 monthly come 2010, when LM graduates preschool.
This would get us to ROTH max in 2010. $10k/year...
However, it has also been bugging me that we were a tad behind on our mid-term savings. We have some catching up to do.
Anyway, so I had a talk with dh about it. We have a bad habit of me making too many financial decisions, though I usually keep him abreast. It works for us. But not necessarily the best. So since I was struggling with what to do, we had a chat.
I was thinking maybe we should bulk up our cash savings a bit more and then work on retirement.
I also started thinking maybe we should only focus on 15% to retirement, before focusing on maxing out. There really is such thing as saving TOO MUCH for retirement. I worry if we will suffer in other ways. My goal is to never borrow another dime again, for one. Likewise, we need some more cash cushion to achieve this. Anyway, I have been listening to too much Dave Ramsey and started thinking about this. Since he recommends 15% to retirement, then college and mortgage (though I mostly don't agree with that plan).
Anyway, dh and I found some middle ground.
I was concerned because we have NEVER made retirement a priority. I have been trying, but it seems like there is always somthing. IT's kind of harsh to put it that way, because I don't think there is anything better we could have done financially than made it a priority to buy a home while it was really inexpensive. (Likewise, not wasting money on rents for much of our 20s/30s).
So I feel that was a good move to help us in retirement. We plan to have a paid off house in our mid 40s. Most of our peers have $500k mortgages/ARMs likewise. (Or just insane rents). So I am really pleased in the spot we are in and how we have kept our housing costs considerably down. (Keeping in mind this is just how it is in the area).
But it seemed like we put a LOT of effort to getting into a house with 20% down. A LOT of effort to being home with the kids. & the last 2 years was just a LOT of effort to build back up our cash savings.
We have always had 10% of my pay going to retirement, and usually thrown a few thousand into the IRAs every year. But it's always been an afterthought, or a tax savings strategy. OR just something we're s'posed to do...
Not a lot of thought to retirement.
So I found myself thinking I didn't want to put more to retirement this year (than the 12% we already are). That I really wanted to build up some more cash.
But I worry if this is how I will always feel. Seems like there is always, well, "let's do this first, then we'll hit retirement hard!"
So I discussed with dh and feel we came up with a good solid plan.
Dh agreed with my fears and felt with the efund in cash that I am way too focused on cash. & that we need to change our mindset about retirement. Just put it a priority.
I argue that we need some cash savings on top of the efund though. That I don't want to touch it.
The middle ground we came up with is to contribute 5% of my salary to retirement, as a goal starting in August when BM is done with preschool. On top of my employer's 10%, will put us at a good 15% contribution rate. I Am going to consciously set aside 5% of every raise and bonus as well. (As my boss will set aside 10%).
We'll go with that for this year. Next year we will put away 5% of my raise.
The year after that we will raise our contribution to 6%. & raise it 1% a year until we max out. (Or perhaps more if we feel it is feasible, like the year LM is done with preschool we can up it an extra couple of percentages). But it sets a minimum goal if other things come up.
So basically, all that cash is going to retirement, and we are making it a priority. We agreed to make it a priority to always put 15% minimum to retirement, going forward.
It's kind of what we have been averaging the last decade anyway, but the difference is we now have the commitment. If we had made this commitments sooner, we could be contributing much more today. That I certainly feel.
This also means if my job situation changes, we will have to come up with 15%. Which we should be able to do.
For now we are taking advantage of my boss's "match" and bulking up our cash savings. For the long-term we have no plans to rely on his 10%. But in the interim we will certainly use to our advantage. IT will allow us to freedom to bulk up our cash a bit.
We also set a limit for our cash savings, at $30k. That would be a good solid 3-month emergency and medical fund. & would be a good $15k liquid cash, in addition, for our next car purchase. Likewise, if I Was out of work for 6 months with no income? We could forego the nice car next time around. So it would be a good, solid emergency fund.
Anything above that we will start to invest. Starting with a balanced fund.
Likewise, as long as we are hitting 15% to retirement, any windfalls will go to bulk up our cash to the $30k level.
At that point our focus will shift more to retirement, though I would like to fund a good $3k/year or so to taxable investments for my future car and stuff around the house, etc. I mostly plan to fund that from my overtime though, and our situation should lend us to also be able to max out our ROTHs starting in late 2010.
So overall, our goals are the same. We are just kind of prioritizing them, and also fine tuning some things.
We still won't give the mortgage a second thought until our retirement is maxed out. But any windfalls/extras is pretty much earmarket to retirement up to the max, and then the mortgage. It's exciting for me to think of paying down the mortgage faster. We hit it so hard up front, and it will be nice to get to that again. We haven't been able to justify extra money to the mortgage since we have been down on one income. So it's nice to see it once again on the horizon. In the distance anyway...
Anyway, mostly with what I have been struggling with lately, is just how to best maximizie our financial situation. There are probably 100 different ways we could approach things that would be just dandy. I find the sheer amount of options to be mind boggling. So that's why I say this is where it gets tricky!!!!!
Dh and I have always been very careful with our money and mostly savvy savers. BUT we have never really planned for much beyond the next 5 years or so. Seems like coming out of college we had so many short-term goals. & that would be my biggest regret, not thinking more big picture. IF we had, we would be maxing out our IRAs today and have little money whoas. But anyway, I really look forward to this next stage in our lives, thinking more about the big picture and planning forward for it.
So that is our plan for now. VERY subject to change....
This is Where it Gets Tricky
March 8th, 2008 at 07:51 pm
March 8th, 2008 at 08:25 pm 1205007954
1. Make a plan WITH your spouse.
2. A commitment to a certain course of action is far better than just a general thought of "we'd like to do this."
3. All plans are subject to change. In fact, almost all plans will change over time as your circumstances, needs and priorities change. I can tell you that retirement is a much higher priority for me today at 43 than it was at 30.
By the way, not to burst your bubble, but you still won't be maxing the Roths in 2010 with 10k because the contribution limits will be going up each year starting in 2009, indexed for inflation. They will rise in $500 increments. So 2009 will be $5,000 plus an inflation adjustment. 2010 will be the 2009 limit plus another inflation adjustment.
March 9th, 2008 at 12:50 am 1205023854
I agree that it is perfectly normal for priorities to change as you get older, and to start thinking more and more about retirement the closer you get to it.
If I were you, I wouldn't fret to much about cash savings vs. retirement savings ... eventually, if the cash saving aren't needed elsewhere, they will end up as part of the retirement savings, won't they?
And I just want to say that I really admire how well you are doing balancing everything with kids. Jonathan Pond has joked that the only way to ensure financial security is to not take responsibility for anything that breathes. [He has daughters and dogs of his own, so obviously he's joking, but it's true that having children changes the financial picture so completely.]
March 9th, 2008 at 03:04 pm 1205075040
DS - are you sure on the ROTHs? How did I not know that? LOL. Actually, I probably knew that, just didn't know if the amounts had been set yet (didn't know it was $500?). I think mostly the tax profession doesn't count on any current tax rules - particularly with the new presidency coming. I don't remember hearing anything above $10k max and that is probably why. The "indexed to inflation" sounded familiar but I am not sure I knew it was $500.
It just bursts my mortgage bubble. I don't mind. It is just hard to invest paying down the mortgage or investing elsewhere when there is more tax-deferred options. But likewise bigger ROTH contributions is awesome for when my spouse returns to work. So my bubble won't be too busted!
March 9th, 2008 at 04:57 pm 1205081851
March 10th, 2008 at 03:20 pm 1205162441
On your mortgage payoff, how about picking a mutual fund and designating it your "home payoff fund"? Make your contributions to it, and when it reaches the value of your home, pay it off in a lump. You might actually get there quicker with this method, if the fund earns say 8% vs your 6% mortgage.
I'd love to see a post or article about how *you* pick your mutual funds.
March 11th, 2008 at 02:22 pm 1205245334
Actually I want to retire early or cut back my hours young so I have some aggressive goals. I also would like to put more in while young and healthy just because you never know what can happen.
As far as funds, mostly going for the boglehead angle. I am only contributing to our low-cost index funds right now because historically they have been the best. But likewise, I haven't been picking any mutual funds lately.
I don't think I could pay off the mortgage in a lump sum either. Not sure I would see the point. I like the idea of paying it off slowly and chipping away at the interest. But if I had a chunk in good mutual funds I think I would keep the investments.