Here’s the lowdown from one of your fellow readers I’ll call Witherspoon:
- I am 43 and my wife 38. Two daughters 8 and 6 years old.
- My salary — $40,000. Wife just started substitute teaching and coaching part time now that both girls are in school. Likely salary–$6,000. Dividend income from our stocks — $10,000.
- Value of home: $165,000. Fixed 30-year mortgage at 8.25% on $85,000 with 27 years to go.
- Credit card paid off monthly. No other debt.
- Stock portfolio worth $620,000 (48 stocks and 3 mutual funds). The majority of this came from our parents reducing their estates though gifting and an inheritance from a grandmother. Stocks include $160,000 worth of Coca Cola with the rest a menagerie of phones, utilities, and growth stocks.
- My parents are likely to fund the Virginia Prepaid Tuition Program for our kids college tuitions. They have purchased life insurance which equates to $150,000 in proceeds to us in the future. In addition, my parents net worth is in the $2.3 million range. I have 2 siblings.
- My wife’s mother is worth slightly less than that and has one other child. She has set up a trust for our children that is worth $150,000.
- I have been terrible about funding my 401(k) because of trying to live on one salary after we had kids and due to being downsized 3 times. Balance $1,700.
- I have approx $200,000 life insurance on me and $80,000 on my wife. $1,000,000 umbrella policy also.
- I feel guilty about the 401(k). How important is it that I find a way to fund it?
- We have an additional $20,000 coming in from the inheritance. Do we use it to pay off part of the mortgage, invest in the market for additional income which would allow us to fund the 401(k) or some other idea that I have not thought of?
- Any other advice would be appreciated.
Well, free advice is worth what you pay for it, and I suspect some of your fellow readers may come up with far more perceptive suggestions than mine. That said:
- Feeling guilty about your 401(k), while completely justified, (you should feel terrible!) does you no good at all. Instead, you should stop feeling guilty and fully fund it, since money will grow faster tax-deferred than taxable, and particularly if your employer, like most, kicks in 25 cents or 50 cents — sometimes even more — for every $1 you contribute. Can you imagine the lines outside a bank that offered depositors not a toaster but free money — a free $500 for each $1,000 you deposited? Can you imagine the riots? Everyone in town would be trying to get into that bank and yet you, who have a private door and no riotous crowds to brook, are, in effect, saying, “Nah. Not interested.” For shame, Witherspoon! For shame! [Note to readers with no sense of humor, no small number of whom seem to have joined us in the last couple of months: I’m kidding. Witherspoon knows I mean him no disrespect.]
- It should be a snap for you to fund it. If nothing else, just sell a little stock each year if you have to. You may want to sell the stock on which you have the most modest capital gain, although if it weren’t for taxes, I’d suggest you’re awfully heavily weighted toward Coke. In fact, what the heck: given the new low capital gains rate, why not sell a little Coke? Given your modest income, made more modest by the mortgage-interest deduction and exemptions for two kids, etc., the tax rate on the gain will be minor.
- It sounds as if you will also both qualify for Roth IRAs, and I would definitely put $4,000 a year into these as well, funding this, if need be, with sales of stock from your taxable portfolio.
- Before paying down that $165,000 mortgage, look into refinancing it altogether, or all but this $20,000 of it, with an adjustable rate mortgage (ARM). Shop around — and be sure you fully understand the wrinkles of whatever you’re offered, since ARMs can sometimes be deceptive. But why should you pay someone to take the risk that interest rates will rise? That’s what you’re doing by paying for a 30-year fixed mortgage. Some people have to. They can’t afford the risk of rising rates. But you’ve got $620,000 in stocks to help you in an emergency. If your ARM had decent annual and lifetime caps, and you could be paying 7%, say, after figuring in all the costs, you’d be saving some nice money — something like $2,000 a year, thank you very much. Yes, the rate might rise — but it might fall, also. (From 1880 to 1965, home mortgages were almost never pegged above 6%.)
- Of course, if you know interest rates are headed back up, then this would be dumb — but if you know the direction of interest rates, it should be you, not me, dispensing the advice.
- (It would also be dumb to refinance if you think you might move any time soon, because of the closing costs you incur.)
- One place to start shopping around for a mortgage is www.quicken.com/mortgage. It includes a 15-minute “interview” that actually takes half an hour to run through, but is well worth it.
- At your ages, more term life insurance should be very cheap, and ordinarily I’d suggest with two young kids you buy more. But with fairly wealthy, loving grandparents, you may not need any at all. I also worry that you’ve bought some kind of overpriced life insurance. Your wife has $80,000? That’s not a very round number. The kind of people who sell $80,000 worth are not necessarily the kind who offer the best values. With annual renewable term insurance, it’s easy to shop around (on the Internet, even), and you may find you could get a lot more coverage for the same money.
- Forty-eight stocks and three mutual funds? On a total of $620,000? You’re even more ridiculously diversified than I am! Actually, it’s 47 stocks and 3 mutual funds on a total of $460,000 if you subtract the Coke. Talk about a lot of baskets! But I know how this can happen, and having happened, I wouldn’t rush to “clean things up” for the sake of appearance when taxes would be due on any sales.
- I’m sure you’ve already done this, but be sure your girls have a computer. And given that the holiday season is upon us, don’t you think you should also get each of them a copy of My Vast Fortune?I’m not saying they’re not a little young for it, but c’mon — we just saved $2,000 a year!
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